Williams Partners (NYSE: WPZ) continued to expand its footprint in the Marcellus shale this week as it reached an agreement to acquire Caiman Eastern Midstream LLC from Caiman Energy for $2.5 billion. The agreement, which also provides Williams Partners with an avenue to grow into the Utica shale, follows the company’s acquisition of the Laser Northeast Gathering System in the Marcellus from Delphi Midstream Partners last month.

The Caiman Eastern Midstream acquisition includes the Fort Beeler cryogenic natural gas processing plant near Cameron, West Virginia and the Moundsville processing and fractionation plant in Marshall County, West Virginia along with a related gathering system and a planned ethane pipeline.

“This acquisition continues to expand on Williams’ footprint in the Marcellus and we especially like that it is in the wet gas window of the play, allowing us to expand our NGL footprint. It’s a great opportunity for us because we like scale,” Frank Billings, vice president, Williams Partners, said at a press conference today at Hart Energy’s Marcellus Midstream conference in Pittsburgh, Pennsylvania.

He compared the potential for this acquisition with Williams Partners’ operations in the Picenace Basin. “We have large processing plants out west and we can bring that same operating capability to this play and help producers maximize their production through high reliability and over time lower costs because of our scale,” Billings said.

Williams Partners anticipates bolt-on acquisition opportunities related to the Caiman Eastern Midstream assets as the Marcellus continues to grow. “As this business grows over the next three to five years, we like our ability to increase our NGL production and as well as the potential for acquisitions for NGL handling facilities on top of the gathering and processing facilities that Caiman has started,” Billings said.

“The goal of every company is deciding where to go next and we realized that as the Marcellus and Utica shales began developing that we didn’t have the capability and capacity to do a lot of the necessary build-out such as long-haul pipelines, interstate pipelines and long-haul NGL facilities,” Jack Lafield, president and chief executive of Caiman Energy, stated during the press conference.

Caiman Energy was fortunate to enter the Marcellus at a time when the midstream wasn’t very active in the play because they would be building ahead of drilling by producers, according to Lafield. However, as the play has grown in size, the company realized it didn’t have the capability or capacity to complete much of the build-out left to complete, specifically long-haul pipelines, interstate pipelines and long-haul NGL facilities.

“Our focus became: who can we partner with? We looked at companies that had the necessary assets and capabilities on their side of the table. I think Williams can jump in and take on the NGL opportunity in the Marcellus and Utica shales. We’re turning these assets over to some very capable hands in Williams Partners. I think you’ll see them come in and be a very aggressive and major player here,” Lafield said.

Utica Joint Venture
In addition to acquiring the Caiman Energy Marcellus assets, Williams Partners also formed a joint venture with Caiman Energy and its private equity investors, including EnCap Flatrock Midstream, EnCap Investments LP and Highstar Capital. This joint venture will develop midstream infrastructure in the Utica shale.

“We like to operate as the front infantry by getting out into the field ahead of everybody and work with producers on midstream development and one of the keys to this deal was being able to do the same thing in the Utica,” Lafield said. Caiman has established an office for this joint venture in Canton, Ohio as it raises capital to become a major player in the region.  In addition, this joint venture will seek to utilize Williams Partners’ expertise and experience with NGLs throughout the country.

“We want to keep an entity that can move and respond. Williams Partners has great expertise in engineering and operating and we’ll be looking at all of the resources the partners can bring together, such as Transco expanding into the Utica, NGL lines and where they need to go. I keep saying that Padd I is getting ready to be bigger than Conway and you’re going to need someone that understands all the areas of the country relative to NGLs that can make this thing work correctly and get the ultimate value back to the producer,” Lafield added.

According to Billings, the midstream assets in the Marcellus shale may be used by the partners in the Utica. “You have to have speed to market, so having assets on the ground in the Marcellus is helpful to the Utica development. We can bring gas out of Ohio and process it in the facilities we already have,” he said.

Transaction Terms And Funding
Williams Partners plans to fund the purchase price of the acquisition with a combination of $1.78 billion in cash and the issuance to Caiman of approximately 11.8 million Williams Partners common units valued at approximately $720 million. The partnership expects to fund the cash portion of the transaction with a combination of equity, debt and available cash.

Williams (NYSE: WMB) intends to make an additional investment in Williams Partners of approximately $1 billion to facilitate the acquisition. Williams intends to purchase approximately 16.3 million Williams Partners limited-partner units at a price equal to the price of the units Williams Partners will issue to Caiman. Williams has also agreed to temporarily waive the general partner incentive distributions through 2013 with respect to the limited-partner units to be issued to Caiman and Williams. Williams estimates the foregone IDRs would have yielded approximately $26 million in 2012 and $42 million in 2013.