By Jim Polson (Bloomberg) – Williams Cos., the U.S. gas company whose output jumped ninefold in the past decade, plans to merge two affiliated partnerships and sell them most of its pipeline assets to cut debt as exploration spending climbs.
Williams Partners LP, the surviving partnership, will pay $3.5 billion in cash for assets including the Transcontinental Gas Pipe Line to the U.S. Northeast and stakes in lines that run to the Pacific Northwest and Florida, Tulsa, Oklahoma-based Williams said today in a statement. The affiliate will assume $2 billion of pipeline debt and issue 203 million units, representing an 80 percent stake, to Williams.
The transaction will make Williams, whose founding brothers started building pipelines in 1908, more focused on natural-gas production. That business grew from 16 percent of earnings in 2004 to between 36 percent and 45 percent the following four years as production and prices rose.
“Williams’ stock price suffered from being both an exploration and production and a pipeline business, and this puts each in a separate pocket for those who want to invest in them,” said Jim Halloran, an energy consultant at Financial America Securities in Cleveland. He said the deal also will cut capital costs for pipeline operations, lifting profit for Williams and Williams Partners.
Williams climbed $2.22, or 10 percent, to $23.59 at 10:15 a.m. in New York Stock Exchange composite trading, and its bonds rose to the highest since March 2005. Williams Partners, also based in Tulsa, jumped $5.02, or 16 percent, to $35.81. Williams Pipeline Partners LP, the partnership that will merge with Williams Partners, gained $3.45, or 15 percent, to $26.80.

Debt Reduction

In anticipation of the transaction, Williams offered today in a separate statement to buy back $3 billion of debt with interest rates as high as 8.75 percent. The company said it and Williams Partners will probably have investment-grade credit ratings when the transaction is completed.
Williams Partners debt is rated BBB-, the lowest investment grade, by Standard & Poor’s and Ba2, two levels below investment grade, by Moody’s Investors Service. Williams has the lowest investment grades from S&P and Moody’s.
Fitch ratings said in a statement today that it expects to upgrade Williams Partners to BBB-, the lowest investment grade, once the transaction is completed. Williams Cos. will remain at BBB-, Fitch said.

Cash for Gas

Williams Partners will increase quarterly payouts to owners 3.5 percent to 63.5 cents a unit, according a filing today with the U.S. Securities and Exchange Commission. The partnership plans to spend as much as $1.1 billion this year on maintenance and expansion.
As a so-called master limited partnership, or MLP, Williams Partners is exempt from federal income taxes and pays out most of its cash flow to unit holders.
Williams Cos. expects $755 million in cash distributions from the pipeline business this year and will use the cash to expand gas production, according to the filing. The company produced the equivalent of 1.2 billion cubic feet of gas a day in the 2009 third quarter, up 4.9 percent from a year earlier.
Williams is the biggest gas producer in Colorado’s Piceance Basin. The company jump-started its output of the heating and power-plant fuel with its 2001 acquisition of Barrett Resources Corp.

Credit Risk Declined

In addition to full ownership of the Transco pipeline, Williams Partners will own 65 percent of Northwest Pipeline in the Pacific Northwest and 24.5 percent of the Gulfstream Pipeline to Florida, a joint venture with Spectra Energy Corp.
Williams has $9.39 billion of bonds and loans due by 2032, including payments due this year, in 2011 and in 2012, according to data compiled by Bloomberg. Investors have become more confident over the past six months in the ability of Williams to pay its debts, credit-default swaps indicate.
Swaps covering the company’s bonds fell to 69.5 basis points as of yesterday from 118.7 basis points on July 20, data compiled by CMA Datavision showed. That means it costs $69,500 a year for an investor to protect against default on $10 million of Williams debt for five years.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. Investors use them to speculate on a borrower’s creditworthiness.

Debt Sale

Barclays Capital and Citigroup Inc. advised Williams on the transaction. Tudor, Pickering, Holt & Co. advised the conflicts committee of Williams Partners.
Williams Partners will raise the cash to pay Williams by selling debt in a private placement, the partnership said. Citigroup and Barclays agreed to underwrite a three-year, $1.5 billion credit line for the partnership.
El Paso Corp., owner of the longest U.S. natural-gas pipeline system and producer of 852 million cubic feet of gas a day in the third quarter, may follow the lead of Williams, said John M. White, who helps manage $28 million at Triple Double Advisors LLC in Houston.
El Paso Chief Executive Officer Doug Foshee said in a May 2006 interview that performance of the company’s stock over the coming three years would dictate whether the company split its production and pipeline businesses. The shares have dropped 31 percent since that time. Spokesman Richard Wheatley couldn’t immediately reached today for comment.

(Williams began a conference call to discuss the transaction with investors, starting at 10 a.m. New York time. To listen, access a broadcast at www.williams.com.)

–With assistance from Katarzyna Klimasinska in Houston, Wes Goodman in Singapore and Chris Peterson in London. Editors: Tony Cox, Kim Jordan.

To contact the reporter on this story: Jim Polson in New York at +1-212-617-5293 or jpolson@bloomberg.net.

To contact the editor responsible for this story: Tony Cox at +1-713-353-4873 or acox3@bloomberg.net.

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