Williams Companies (NYSE:WMB) recently released decent first-quarter results. The gas pipeline general partner reported that adjusted EBITDA rose 8.4% to $1.145 billion due primarily to rising earnings at its majority-owned MLP Williams Partners (NYSE: WPZ). Meanwhile, despite a dip in cash-flow metrics, the company's underlying business performed well during the quarter.

However, what really stood out in the company's earnings release was the significant improvement in its balance sheet. It's an improvement that's already paying dividends by significantly reducing borrowing costs for its MLP. 

A working walking past a pipeline open to the blue sky.

Image source: Getty Images.

Drilling down into the results

Of the $1.145 billion in adjusted EBITDA Williams reported during the first quarter, $1.117 billion came from its investment in Williams Partners. Overall, earnings at the MLP were up 5.4% versus last year. Fueling that growth, as the following chart shows, were the strong results within its Atlantic-Gulf segment and continued improvements in NGL & petchem services:

A chart showing the changes in Williams Partners Adjusted EBITDA by segment.

Data source: Williams Companies. Chart by author. In millions of dollars.

The Atlantic-Gulf segment benefited from the start-up of several recent growth projects, including the Rock Springs and Gulf Trace expansion on the Transco system. Those new additions, as well as an improvement in commodity margins, more than offset higher costs. Meanwhile, adjusted EBITDA in the NGL & petchem services segment benefited from a favorable change in other income and expenses from the company's former Canadian subsidiary. Those positives more than offset weakness in the western segment, where earnings dropped thanks to lower fee-based revenue as a result of some contract changes that took place last year as well as some extreme weather conditions in 2017.

Meanwhile, the rest of Williams Companies' adjusted EBITDA came from its "other" segment, which experienced a $32 million improvement in earnings mainly because of its increased ownership in Williams Partners.

Overall, Williams Companies generated $606 million of cash flow from operations during the quarter. While that was $177 million less than a year ago, that quarter benefited from the receipt of a $198 million cash payment associated with contract restructurings that occurred late last year as well as a $80 million milestone payment from the Hillabee expansion project. Meanwhile, after expenses, the company generated $380 million in cash flow available for dividends and other uses. Of that amount, the company returned $248 million to investors during the quarter, leaving it with $132 million in excess.

Pipelines underwater.

Image source: Getty Images.

The one number that really stood out

Williams Companies plans to use that excess cash to pay down debt. In fact, the company anticipates reducing debt at the corporate level by about $500 million this year solely through excess cash. That's on top of the eye-catching $1.623 billion of debt reduction it has quietly completed over the past year, which pushed total debt down to $21.8 billion. It's a noteworthy accomplishment because leverage has been a concern for both Williams Companies and Williams Partners over the past year.

Williams Companies' concerning debt was one of the drivers that caused its merger with Energy Transfer Equity (NYSE:ET) to blow up last year. Both companies already had junk-rated credit, which caused the market to grow gravely concerned by the fact that Williams and Energy Transfer were planning to tack on another $6 billion in debt to consummate that deal. It was debt that Energy Transfer's former CFO thought would cause "mutually assured destruction."

However, through a series of transactions, Williams Companies' finances are getting back on solid ground. As a result, the company expects its consolidated leverage ratio to be a more modest 5.25 times this year, while leverage at its MLP should be 4.5 times. Meanwhile, the recently announced sale of the Geismar plant will bring in $2.1 billion of cash for Williams Partners, which it can use to pay down debt and finance expansion projects. That transaction will bring such a meaningful improvement to the company's finances that at least one credit rating agency said it is in line for a two-notch credit rating upgrade.

That improving credit picture is important because it will allow both Williams and its MLP to raise capital at lower rates. For example, last January, the company's Transco subsidiary issued $1 billion in 10-year debt at a 7.85% interest rate to refinance lower-cost debt that was maturing and fund expansion projects. For perspective, that was well above the 5% that top-rated Magellan Midstream Partners (NYSE:MMP) paid for $650 million of 10-year debt around that same time. However, thanks to the significant improvement in Williams' financial situation over the past year, its Northwest Pipeline subsidiary recently issued $250 million in 10-year notes at just 4%, enabling the company to refinance some higher-cost debt that matured. The net result of Williams' improving financial picture is that less cash will flow to creditors, leaving more to create value for investors.

Investor takeaway

Williams Companies reported solid first-quarter results thanks to the steady growth of its MLP. However, the real story this quarter wasn't those ho-hum results, but the significant improvement to its balance sheet over the past year. Those efforts are already paying big dividends by enabling the company's subsidiaries to borrow money much cheaper than before.

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