Williams Energy Partners
CRAIG R. RICH
February 17, 2003
Mr. Jonathan G. Katz
Dear Mr. Katz:
This letter is submitted on behalf of Williams Energy Partners L.P. ("Williams Energy Partners") in response to the invitation by the Securities and Exchange Commission (the "Commission") to comment on the proposed rules on standards relating to listed company audit committees (the "Proposed Rules"). As drafted, the Proposed Rules could have a dramatic impact on the composition of the boards of directors of general partners of master limited partnerships ("MLPs"), such as Williams Energy Partners because they potentially disqualify most current audit committee members from being considered "independent." We have included in this letter suggested amendments to the Proposed Rules, which we believe are consistent with the requirement that the members of an MLP's audit committee be truly independent of both the sponsor who formed the MLP (the "Control Person") and the MLP.
Williams Energy Partners is an MLP whose common units are traded on the New York Stock Exchange ("NYSE")under the ticker symbol "WEG". Williams Energy Partners was formed by its sponsor, The Williams Companies, Inc. ("Williams"), and is principally engaged in the storage, transportation and distribution of refined petroleum products and ammonia. WEG GP LLC, the General Partner of Williams Energy Partners (the "General Partner"), owns the general partner interest in Williams Energy Partners. Williams, directly or through its affiliates, owns 54.6% of Williams Energy Partners (including the 2.0% general partner interest) and public common unitholders own the remaining 45.4% interest as a limited partner interest. The membership interests of the General Partner are indirectly wholly owned by Williams.
Williams Energy Partners' business and operations are solely managed by the General Partner. As is the case with most MLPs, Williams Energy Partners is managed and operated by the officers and is subject to the oversight of the directors of the General Partner. The board of directors of the General Partner is comprised of seven directors, who are classified with respect to their terms of office into three classes. The directors were elected by the members of the General Partner, in accordance with the terms of the General Partner's limited liability company agreement. However, as a result of recent circumstances specific to Williams Energy Partners arising from debt covenants in Williams' credit agreements, the Williams Energy Partners' partnership agreement and the General Partner's limited liability company agreement have been amended to provide that unitholders will have the right to elect the board of directors of the General Partner beginning in 2003 with the election of a class consisting of two directors. By May 2005, the board of directors of the General Partner will be entirely composed of members elected by the unitholders. Prior to May 2005, however, we are concerned that the composition of the audit committee of the General Partner would not satisfy the requirement of the Proposed Rules that the audit committee of an issuer be comprised exclusively of persons who are "independent."
The Proposed Rules
Under the "independence" test set forth in the Proposed Rules, a member of an audit committee may not, among other things, be an affiliated person of the issuer or any subsidiary thereof. As set forth in the Proposed Rules, the term "affiliate" means "a person that directly, or indirectly through intermediaries, controls, or is controlled by, or is under common control with, an issuer". The rule further provides that an affiliate includes any "director, executive officer, partner, member, principal or designee of an affiliate".
In the typical MLP structure, the members of the board of directors of the general partner are elected by the Control Person. In the case of Williams Energy Partners, the current members of the board of directors of the General Partner were elected by members of the General Partner, who are affiliates of Williams. Given the concept of "control" in the definition of affiliate, the current directors of the General Partner may well be considered designees of Williams and, therefore, affiliates of Williams Energy Partners.1 Those directors will therefore be ineligible to serve on the audit committee of Williams Energy Partners.2 We do not believe the mere fact that a Control Person elects all of the members of the board of directors of an MLP's general partner should prevent a person who is not otherwise affiliated with the Control Person or the MLP from being eligible to serve on the audit committee of an MLP's general partner.
We believe that the word "designee" would likely include anyone nominated by, and elected, by the vote of a Control Person, regardless of whether the person elected is subject to the control and direction of that Control Person. However, it is the control and direction of the designee by the Control Person that should be the relevant factor in denying a person eligibility to serve on the audit committee of an MLP. We believe that the concept of "control" in the definition of "affiliate" will include any person acting under the control or direction of a Control Person.3 The inclusion of the word "designee" only serves to exclude a potential audit committee member who would be eligible to serve but for the designation by the Control Person.
The Proposed Rules acknowledge that many companies operate in a holding company structure in which both the parent and a number of subsidiaries may be publicly traded. Accordingly, the Commission has proposed to exempt from the definition of "affiliated person," as used in connection with determining independence of audit committee members of a publicly traded subsidiary that is majority owned by a NYSE listed company, an audit committee member that serves on the board of both a parent and a subsidiary if that member otherwise meets the independence requirements for both entities. This exemption does not solve the problem with respect to the General Partner because the independent directors who are members of the General Partner's board, three of whom constitute its audit committee, are not directors of Williams. These directors, who also constitute a conflicts committee to deal with issues that may arise in certain transactions between Williams Energy Partners and Williams (and its affiliates), purposefully are not directors or affiliates of Williams (the Control Person). In addition, if the Control Person has any business dealings with the MLP the listing requirements of the applicable exchange or the NASDAQ may very well prohibit the audit committee member of the Control Person from being considered independent for purposes of serving on the board of directors of the general partner of the MLP. We believe the concept introduced in the Proposed Rule's discussion of the exemption for listed parent entities that "if an audit committee member .... is otherwise independent"4 should be extended to apply to persons designated by, but otherwise independent of, a Control Person, whether that Control Person is listed on not.
The Proposed Rules also provide a safe harbor pursuant to which a person who is not an executive officer, director or 10% shareholder of the issuer will not be deemed to control the issuer. However, due to the ownership structure of MLPs in general and Williams Energy Partners specifically and the ongoing involvement of Williams as the Control Person, this safe harbor is not available to Williams. As a result, Williams will be an affiliate of the General Partner and Williams Energy Partners.
Suggested Amendments to Proposed Rules
In our view, the act of designation by a Control Person, such as Williams, should not by itself render a person ineligible to serve on the audit committee of an MLP. To address this, we suggest the Proposed Rules be amended to:
We believe that presuming a lack of independence in persons merely designated by Williams as a Control Person is too broad a presumption, the effect of which will be to prevent otherwise qualified, experienced, effective, and appropriate persons from serving on audit committees. Deleting "designee" from the definition of "affiliate," defining "designee" or creating an exemption for MLPs will allow those persons to appropriately serve.