A year ago, the Williams Companies Inc. and Energy Transfer Equity LP were locked in a decidedly unwelcome embrace. Today, they're still dealing with the messy break-up.
Their problems are acute but fit with chronic conditions afflicting other older master limited partnerships: high leverage and unbalanced payout policies.
Late on Monday, Williams Cos. announced a plan to rejigger its general partner interest in its MLP subsidiary and primary earner, Williams Energy Partners LP.
The general partner runs the show at an MLP and often enjoys "incentive distribution rights." These are bonus payments to the general partner that escalate as distributions to limited partners -- ordinary investors -- rise.
In that way, these rights encourage growth -- until distributions rise beyond a certain point, which happens when you go through, say, a shale-fueled pipeline boom. At that point, the rights just become a tax on ordinary investors' payouts.
Consider: If Williams Energy Partners pays out $3.40 per unit to ordinary investors per year, then it has to kick up another $1.54 to the parent. The result: An effective cost of equity of almost 13 percent, which sort of negates the whole point of having an MLP in the first place.
That is why, less than six months after announcing a different plan to relieve the burden, Williams Cos. will now just convert its general partner interest and get rid of those incentive distribution rights in exchange for a bigger ordinary stake in Williams Energy Partners -- which is also cutting its own dividend for good measure.
Only last week, Marathon Petroleum Inc. announced a similar move for its subsidiary, MPLX LP. Kinder Morgan Inc. and Targa Resources Corp. collapsed their general partner structures a while ago. And although Plains GP Holding LP didn’t get rid of its general partner, its MLP bought out the incentive rights for similar reasons.
The simpler life doesn’t come without complications. Monday evening's analyst call announcing the news, with no Q&A, had an unseemly haste. Moreover, Williams Cos. is getting a low multiple of just 12 times for its incentive payments and also sold $1.9 billion of its own stock -- at a steep 9 percent discount -- to inject more cash into its MLP.
The parent having to infuse cash into the subsidiary is the surest sign a drastic reset was needed.
Which brings us to Energy Transfer Equity LP. With a corporate structure that, if you squint, resembles a subway map, Energy Transfer could use a collapse of its own. But its high leverage makes this hard to do, even if it was so inclined.
In late November, it announced a partial collapse, merging two of its subsidiaries. There followed some intrigue, with news reports just before Christmas that Blackstone LP might invest $5 billion in one of those subsidiaries, Energy Transfer Partners LP.
That ended on Monday, when another report said the deal was off, blaming the original leak for pushing up Energy Transfer Partners. One look at this chart suggests this is not a terribly convincing rationale:
Regardless, that potential check now appears to be gone. And Monday also saw parent Energy Transfer Equity mainline some cash to its MLP. Again, this inverts the usual relationship. And, importantly, Energy Transfer Equity raised the money via a private placement, not in the public market.
So the Energy Transfer complex continues to live up to its name in full. For Williams and others, collapse is the first, painful step in getting back to their feet.
Besides addressing leverage, a simpler structure could lend itself to something else that often comes in the bust after a long boom: M&A.
Last summer, Enterprise Products Partners LP sounded Williams out on a potential takeover, to no avail. Now that Williams has capitulated on its earlier strategy, and is cleaning itself up, consolidation of a different kind could come back into focus.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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