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.
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 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: