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May 17, 2015

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WPZ: Back to the Future

I hit the road with the Williams Companies (WMB) management team in August 2005 on the IPO roadshow for Williams Partners (WPZ), an MLP with a plan to start small and grow by acquiring assets from its parent company (see original prospectus here).  WPZ was one of the first MLPs to explicitly launch with a long-term drop-down strategy, and the first to hold back such a massive dowry of assets.

The IPO went very well, pricing above the range at 6.51% yield, at the time a record low yield for an MLP IPO (US 10 year yielded 4.25% at the time).  By comparison, the latest record low IPO yield for an MLP is Antero Midstream at 2.72%, achieved in late 2014.  Less than 10 years later, WPZ would announce its exit from the MLP sector entirely to rejoin its parent company.

WPZ was WMB’s second MLP.  WMB had spun out Williams Energy Partners (WEG), now known as Magellan Midstream (MMP), in 2001.  Williams then ran into financial difficulties in 2002 and nearly went bankrupt, before obtaining an emergency loan from Lehman Brothers and Berkshire Hathaway.  Then Williams began shedding assets, including the Mid-America Pipeline Company and Seminole Pipeline to Enterprise Products for $1.2bn (at a 6.7x EBITDA multiple) in 2002, and its GP and LP interests in WEG to private equity funds Madison Dearborn and Carlyle/Riverstone in 2003.

Once WMB stabilized again, plans began to establish another MLP.  I took my first ever business trip down to Tulsa in early 2005, and spent many hours developing the financial and tax shield model for the newly formed partnership.  The summer and fall of 2005 was a very busy and innovative period in the MLP capital markets, and the busiest time for me in my brief investment banking career.  See below for a list of key deals during that 6 month period.

  • June 2005: Inergy Holdings (NRGP) priced the first GP IPO structured as a partnership with its $76.5mm IPO at a 4.00% yield
    • This was the first IPO where I traveled with management on the roadshow, Lehman Brothers was the lead bookrunner
  • August 2005: Williams Partners (WPZ) priced its $123.6mm IPO at 6.51% yield
    • Lehman Brothers was lead bookrunner, I traveled on the roadshow
  • August 2005: Enterprise GP Holdings (EPE) priced its GP IPO, raising $352.8mm at a 3.57% yield
    • I wasn’t on this deal, but Lehman Brothers was the lead bookrunner
    • 8 GP IPOs would follow suit in 2006
  • August 2005: Natural Resource Partners (NRP) priced the first (and only ever) IPO of its subordinated units under a separate ticker (NSP) than the MLP
    • I worked on this deal, which required me to travel on a 3 day roadshow almost like a real IPO
  • November 2005: Boardwalk Pipeline Partners (BWP) priced its $336.4mm IPO at a 7.18% yield, with a novel concept of putting FERC regulated natural gas pipelines into an MLP
    • Instead of creating a manufactured drop-down story, BWP put its assets into the MLP from day one
    • This was the largest MLP IPO ever at the time
    • Lehman Brothers was joint bookrunner on this deal, and I traveled on the roadshow, staying at the Loews Hotel in Hollywood, rather than the Beverly Wilshire Hotel where we stayed on previous IPOs
  • December 2005: DCP Midstream Partners (DPM) priced its $222.5mm IPO at 6.51% yield (matching WPZ’s lowest ever IPO yield)
    • DPM was set up in a very similar manner to WPZ, designed as a drop down story

Drop Downs by Design

Williams Partners marked a new era of growth MLPs spun off from much larger corporations.  Large companies had spun off midstream assets before, including GulfTerra (from El Paso), Kinder Morgan (from Enron), Sunoco Logistics (from Sunoco), Holly Energy (from Holly), NuStar (from Valero).  But those deals had been from companies with either smaller pools of future drop downs or companies seeking to put slow growth assets in their entirety into an MLP.

WPZ was designed to start small and grow via a very large pool of drop-down acquisitions.  This model would be replicated many times since then and in increasingly aggressive ways (Dominion Midstream, for example, started with $50mm of EBITDA at the MLP, with more than $1.5bn of EBITDA to drop down).  The reason for starting small is to grow the GP value over time, while providing growth visibility for L.P. investors, which perpetuates a premium valuation for the MLP over time.

WPZ Proves the Model

WPZ’s model worked very well initially.  In its first 3 years, WPZ grew distributions per unit at an annual rate of 22.0%, second only to GEL as the fastest growth rate among MLPs that existing when WPZ went public.  That high growth period was immediately followed by 5 straight quarters of no distribution growth at all, which coincided with the financial crisis.
WPZ Growth Rates
WPZ emerged able to grow its distribution in the 8-9% range annually for another 3 years starting in 2010, after the acquisition of WMB’s third MLP, Williams Pipeline Partners.  Distribution growth slowed considerably in 2013-2015 when higher IDRs and some aggressive acquisition efforts failed to play out well for WPZ.  Over the last few years, WPZ has continued to evolve, and was actually acquired by Access Midstream last year, although the partnership name and its assets live on.

WPZ’s notable contributions to the modern MLP model and the MLP financial engineering playbook:

  • Super drop down MLP strategy
    • Big company with lots of qualifying MLP assets starts small MLP
    • WPZ was the forerunner to others who have perpetuated similar strategy (TLLP, WES, VLP, MPLX, DM, SHLX, many others)
  • Large-scale consolidation within its MLP family whereby higher multiple MLP buys out cheaper one
    • In 2010, WPZ acquired WMZ to simplify its structure and drive accretion for the acquiring MLP
    • This was long before ETP acquired RGP (2015), WPZ was acquired by ACMP (2014),
  • Put chemical plant into an MLP to combine with traditional midstream assets
    • EPD and SXL are still pursuing PDH plants and following in WPZ’s footsteps to some extent
  • Established conventions for IDRs
    • Prior to the WPZ IPO, the IDRs were set in an arbitrary way
    • Starting with WPZ, almost all MLPs have IDR tiers set at a specific percentage increase over the minimum quarterly distribution (MQD), such that:
      • Tier 1 is 15% higher than the MQD
      • Tier 2 is 25% higher than the MQD
      • Tier 3 is 50% higher than the MQD
    • DPM and BWP followed that convention later in 2005, and the convention was established that remains the standard today
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