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Gas Pipeline IPO Put on Ice After Court Thwarts Plan

By Rachel Adams-Heard and Michael Leonard

(Bloomberg) A potential initial public offering of a U.S. pipeline company faces a new hurdle after a Delaware court said its private equity backer must make changes before the share sale can proceed.In a decision Wednesday, the Delaware Court of Chancery said EnCap Flatrock Midstream can’t proceed with the IPO of Blue Racer Midstream LLC as currently structured.

It’s the latest in a battle between Williams Cos. and its partners on the Dallas-based natural gas pipeline venture. Williams has said the IPO plans envisioned by EnCap would “strip Williams of rights it currently has.” EnCap has argued that Williams is opposing the IPO because it wants to buy the pipeline system for itself.

Blue Racer is a joint venture between private equity firm First Reserve and Caiman Energy II, of which Williams is a partner alongside Oaktree Capital Management LP and EnCap Flatrock Midstream. Williams owns about 29% of Blue Racer.

A representative for Williams said the company is reviewing the decision. Representatives for EnCap Flatrock, Blue Racer and Oaktree Capital Management declined to comment. First Reserve didn’t immediately respond to a request for comment.

Blue Racer filed confidentially with the Securities and Exchange Commission in May, saying it aimed to go public as an “up-C,” a model in which a limited liability company undertakes a public offering through a newly formed corporation that is structured as a holding company that owns an interest in the LLC.

The company had previously considered an IPO as a master limited partnership, which would have allowed Williams to buy the general partner interests and control the public entity. But EnCap proposed a corporate structure after the MLP model largely fell out of favor with public investors.

The lawsuit concerns the meaning of an investment agreement clause giving EnCap the sole authority to approve a Blue Racer IPO and take any action “required or necessary” to facilitate it. EnCap wants to invert Blue Racer’s corporate structure to eliminate special approvals from Williams, which several parts of the offering would otherwise need.

The two sides disputed whether the “required or necessary” provision gives EnCap the power to override those special approval clauses in the operating agreements of Blue Racer and Caiman.

It doesn’t, Vice Chancellor J. Travis Laster found. Although EnCap alone can decide to approve an IPO, it must adhere to other relevant restrictions when structuring or implementing the deal, the judge said.

“EnCap can take action that the board otherwise could take, but cannot disregard mandatory requirements or amend them such that they are no longer meaningful,” Laster wrote.

IPOs of oil and gas pipeline operators have been few and far between recently as equity markets remain wary of much of the sector. Earlier this year, Diamondback Energy Inc. bucked the trend by taking its pipeline entity public. Rattler Midstream LP is up 4% from its offer price of $17.50 a share.

EnCap Flatrock was formed in 2008 as a partnership between private equity firms EnCap Investments LP and Flatrock Energy Advisors.

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