Williams Companies (WMB -1.85%) has worked hard over the past few years to improve its financial profile and strategic position. The pipeline giant continued those efforts this week by forming a strategic partnership with a Canadian pension plan to optimize two of its midstream businesses in the Northeast. The transaction will reduce costs while at the same time providing the company with some cash to repay debt and fund high-return expansion projects so that it can continue growing its 5.5%-yielding dividend.
Drilling down into the latest deal
Williams Companies is forming a long-term partnership with the Canada Pension Plan Investment Board (CPPIB) to optimize its midstream operations in the western Marcellus and Utica shale region. CPPIB will invest $1.34 billion for a 35% stake in the joint venture, which will include Williams' Ohio Valley Midstream (OVM) and Utica East Ohio Midstream (UEO) systems. The transaction values those businesses at $3.8 billion.
Williams will use a portion of the cash proceeds to purchase the remaining 38% stake in UEO from another midstream company, taking full control of that entity. By assuming control of UEO and then combining it with OVM, Williams expects to save money by reducing operating costs and optimizing the expansion of both systems. After factoring out the purchase price of the increased UEO stake and the associated transaction costs, Williams expects to have about $600 million left over to repay debt and fund other expansion projects.
Check out the latest earnings call transcript for Williams Companies.
Partnering up to improve
This transaction is the latest in a string of partnerships forged by Williams Companies geared toward optimizing its operations, reducing debt, and enhancing its growth prospects. Last summer, for example, the company made a high-value trade. It sold its Four Corners Area business to another midstream company for $1.25 billion, giving it some of the cash needed to buy Discovery DJ Services, which it purchased along with private equity giant KKR (KKR -1.31%). The pair paid $1.173 billion for Discovery, with Williams initially owning a 40% stake and KKR taking the other 60%.
In addition to that, Williams pledged to invest $250 million to expand Discovery through 2020, which would boost its stake up to 50%. The company also has the option to buy out KKR's interest in phases over the next six years. Williams netted about $400 million of cash in this trade, which it used to pay down debt and finance expansion projects, including those on Discovery.
Meanwhile, the company formed a joint venture with Brazos Midstream last fall to enhance its Delaware Basin midstream business. It contributed its existing assets in the region for a 15% interest in the joint venture, which will expand its footprint and bolster its growth prospects.
On top of that, Williams Companies formed a partnership with Targa Resources (TRGP -3.88%) last month. As part of that deal, Williams will build the 188-mile Bluestem Pipeline to connect its natural gas liquids (NGLs) assets in Kansas to Targa's Grand Prix pipeline, which will open additional markets. The company also has the option to buy a 20% stake in an NGL facility Targa Resources has under construction. Overall, Williams expects to invest $350 million to $400 million in these projects.
These partnerships were all about making Williams Companies better. They either bolstered its growth prospects, enhanced its strategic position, or boosted its financial profile, which will combine to make Williams a stronger company in the long run.
A top-tier option for income seekers
Williams Companies has come a long way over the past few years. That has helped increase the long-term sustainability of its high-yield dividend, which the company appears poised to expand at a healthy pace in the future. That makes it an excellent stock for income-focused investors to consider buying for the long term.