Last year was one Williams Companies (WMB 2.48%) is glad to put behind it. While the midstream company and its MLP Williams Partners (NYSE: WPZ) delivered solid financial results, it was hampered by outside drama due to a botched merger that caused a cloud of uncertainty. However, the company seems to have put that all behind it after finally settling on a new strategic vision that it expects will enable the Williams franchise to deliver sustainable growth for years to come.
Drilling down into the numbers
For the fourth quarter, Williams Companies reported adjusted EBITDA of $1.1 billion, up 5.3% from the year-ago quarter. Williams Partners was nearly the sole driver of those results, as Williams Companies only reported $10 million of adjusted EBITDA from other sources during the quarter, after factoring in a loss from its natural gas liquids (NGL) and petrochemical segment. However, adjusted EBITDA from sources other than its MLP is up from $2 million in the year-ago quarter.
Because the bulk of Williams Companies' earnings comes from its MLP, it's important to drill down into those results. Here's a snapshot of the quarter:
Data source: Williams Partners. Chart by author. Note: In millions of dollars.
The primary driver of William Partners growth last quarter was its Atlantic-Gulf segment, where adjusted EBITDA rose 15% thanks to higher fee-based revenue from offshore projects and recent Transco expansion projects as well as higher NGL margins. Speaking of NGL, Williams Partners' NGL and petrochemical services segment was also strong during the quarter, with segment adjusted EBITDA rising 21% thanks to lower costs and higher commodity margins. Finally, earnings in the northeast G&P segment edged up by 1% during the quarter thanks to lower expenses and higher fee-based revenue.
Offsetting the positive results of those three segments was weakness in the company's central region, where adjusted EBITDA slumped 11% due to volume declines in the Barnett and Anadarko areas, as well as lower rates in those two regions and the Eagle Ford. That said, the company was able to partially offset those weak spots with an improvement in volumes and higher rates in the Haynesville thanks to its restructured contract with Chesapeake Energy (CHKA.Q). Another factor weighing on results in the central region was the restructuring of Chesapeake's Barnett agreement, which allowed the natural gas giant to sell that asset. Finally, Williams' west segment was also weaker during the quarter, with adjusted EBITDA slipping 2% due to lower fee-based revenue.
Image source: Getty Images.
What lies ahead
While 2016 had its ups and downs, the future appears to be much brighter for Williams. CEO Alan Armstrong said:
The demand for natural gas for clean-power generation, heating, industrial use and LNG continues to increase as highlighted last month when Transco established record high one-day and three-day delivery volumes. We have construction under way on a number of Transco-expansion projects. And just this month, we successfully placed into service our Gulf Trace project, a 1.2 million dekatherm per day expansion of the Transco pipeline system to serve Cheniere Energy's Sabine Pass Liquefaction export terminal in Louisiana. Gulf Trace is just one of the five Transco projects that are planned to be completed this year. This project was also brought in under budget and nearly six months ahead of its original planned in-service date.
As Armstrong notes, Williams has several important growth projects under way, which should drive its results higher in the future. That's why the company has worked hard to reposition both entities to capture this growth, including completing a comprehensive restructuring earlier this year. Those moves, which consolidated Williams' ownership in its MLP, strengthened its financial position and lowered its "cost of capital to match up with our peer-leading, high-quality, low-risk growth portfolio."
Williams believes that the clearly visible growth projects it has under way will enable its MLP to increase distributions will by 5% to 7% annually over the next few years from the recently reset level even as it also retains cash to finance growth. Those rising distributions should fuel 10% to 15% annual dividend growth over the next several years at Williams, while still providing the company with excess cash to pay down debt.
Investor takeaway
Williams Partners' fourth-quarter results remind investors that the company has a solid foundation of assets that generate rather consistent cash flow. Where the company has run into trouble in the past is financing expansion partially because it has typically paid out nearly all its cash flow to investors. However, it has ditched that unsustainable model and replaced it with a new strategic vision that should allow both companies in the Williams family to deliver sustainable growth for the foreseeable future.
