After taking a step back in the third quarter, Williams Companies (NYSE:WMB) and its MLP Williams Partners (NYSE: WPZ) returned to growth mode in the fourth quarter. Overall, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) at Williams Partners rose 3% to $1.15 billion, while distributable cash flow crept up 0.4% to $702 million. That cash flow was enough to cover Williams Partners' 5.9%-yielding distribution by a comfortable 1.22 times. Meanwhile, as the largest investor in Williams Partners, Williams Companies benefited as this growing earnings stream flowed its way. Overall, the company pulled in $349 million of cash available for dividends, which supported its 4%-yielding payout by a healthy 1.41 times.
Those strong results pushed Williams Partners' full-year adjusted EBITDA to $4.47 billion, which was above the high-end of its guidance range. It's an impressive result considering that the company sold more than $3 billion in assets since the latter part of 2016.
Drilling down into the numbers
Those asset sales played a significant role in shaping Williams Partners' fourth-quarter results:
Earnings in the Atlantic-Gulf region slipped 4.6% year-over-year due to a couple of issues. First, the company's Discovery joint venture reported a $20 million drop in EBITDA due to significant declines from the Hadrian field in the Gulf of Mexico. In addition to that, Williams benefited from an additional $22 million of income in the year-ago period due to an outage at a third-party system, which didn't repeat in the most recent quarter. As such, the company was only able to partially offset these differences with incremental revenue from new projects on its Transco system.
Segment earnings from the west rose 22.1% thanks to a $54 million boost from higher fee-based revenues in the Haynesville Shale due to rising volumes and a $24 million positive impact in the Barnett Shale thanks to a contract restructuring and prepayment. The company also benefited from higher margins and lower operating expenses. These improvements more than offset the $10 million of income the company lost when it sold the interest in some of its Delaware Basin assets to Western Gas Partners earlier in the year.
Northeast G&P earnings increased 8.7% versus last year's fourth quarter, mainly driven by the increased ownership in two Marcellus Shale gathering systems that the company acquired as part of its transaction with Western Gas Partners.
Finally, earnings in the company's NGL & petchem service segment fell because the company sold off these assets, and therefore, didn't generate any income from this segment in the fourth quarter.
A look at what's ahead
Williams Partners expects to keep growing in 2018 thanks mainly to the continued expansion of its Transco pipeline system. Recently completed and upcoming projects on that system lead the company to believe that adjusted EBITDA can grow to a range of $4.45 billion to $4.65 billion this year, up 1.7% at the midpoint. Meanwhile, distributable cash flow should grow at a faster pace of 8.1% to a range of $2.9 billion to $3.2 billion. That rising cash flow should support the company's ability to increase its distribution by 5% to 7% this year while still covering it by a comfortable 1.2 times. Williams Partners expects a similar distribution growth rate in 2019. That forecast should support 10% to 15% dividend growth at Williams Companies over the next two years, with it anticipating even stronger coverage of 1.35 times, providing it with some excess cash to pay down debt.
Exactly what income investors want to see
As Williams Partners' fourth-quarter results demonstrate, the company's turnaround strategy is working as planned. Williams sold $3 billion of assets in recent years to improve its balance sheet so it could pursue higher return growth projects that are now starting to pay dividends. That's evident by the company's outlook, with it expecting to deliver steady distribution growth over the next two years, which will fuel even faster income growth for investors in Williams Companies.