Williams Companies (NYSE:WMB) continued growing its earnings and cash flow at a healthy rate during the third quarter. That gave the energy company plenty of fuel to pay a growing dividend, which has helped push its yield up to 6.6%. However, while the pipeline giant continued making progress on its strategic plan during the quarter, weakening conditions in the natural gas market appear poised to slow it down in 2020.

Drilling down into Williams Companies' third-quarter results

Metric

Q3 2019

Q3 2018

Change

Adjusted EBITDA

$1.274 billion

$1.196 billion

6.5%

Distributable cash flow

$822 million

$764 million

7.6%

Dividend coverage ratio

1.78 times

1.85 times

(3.8%)

Data source: Williams Companies.

Williams Companies grew both its earnings and cash flow by a mid-single-digit rate versus the year-ago period. That gave it the fuel to increase its dividend by nearly 12% over the past year while maintaining a healthy coverage ratio.

Driving the pipeline company's quarter was growth in its Atlantic-Gulf and Northeast gathering and processing (G&P) businesses:

Williams Companies earnings in the third quarter of 2018 and 2019.

Data source: Williams Companies. Chart by the author.

Earnings in the Atlantic-Gulf segment soared 27% year over year. Driving that growth was the completion of two major expansion projects on its key Transco pipeline as well as higher rates on that system, which are still pending regulatory approval.

The Northeast G&P segment's earnings, meanwhile, surged 22% versus the year-ago period. The company benefited from increased service revenues on three of its systems and the acquisition of Utica East Ohio Midstream. Those factors helped drive a 17% uptick in gas gathering volumes.

The lone weak spot was Williams' West business, where earnings declined 26%. Several factors impacted results, including lower natural gas liquids (NGLs) prices and the sale of the Four Corners and Jackalope assets. The company partially offset those headwinds with higher volumes in the Haynesville and Eagle Ford regions, which rose 18% and 19%, respectively.

A person holding a magnifying glass up to financial reports.

Image source: Getty Images.

What's ahead for Williams Companies

Williams Companies' solid showing during the third quarter kept it on track with its full-year forecast. That outlook anticipates that the gas pipeline company will produce between $4.85 billion and $5.15 billion of adjusted EBITDA -- up about 8% year over year at the midpoint -- and $2.9 billion to $3.3 billion of distributable cash flow.

The company also made excellent progress on the strategic front. It placed the Rivervale South to Market expansion project into service last month and commissioned the Keenesburg I gas processing plant, which will help boost results during the fourth quarter. It also received regulatory approval to build the Southern Trail expansion project, which it expects to finish in time for next winter's heating season. Finally, it filed for permission to construct the Leidy South project, which it hopes to complete in December 2021.

While Williams didn't put out official guidance for 2020, it did give a hint at what to expect. The company noted that the challenging natural gas market would likely impact its growth next year. Based on the current plans of its producing customers, gas gathering volumes in its Northeast G&P business should rise 3.5% next year, which is lower than its prior view that they'd increase by 5.5%. Because of that, the company's 2020 EBITDA forecast for that segment is currently tracking at $1.4 billion. While that's up 7.7% year over year, it's down from Williams' initial view that it would rise 11% to $1.45 billion.

The company also noted that it expects capital spending to be materially lower than 2019's budget of $2.3 billion to $2.5 billion. That positions the company to generate more free cash flow next year, which should improve its dividend coverage. Further, it noted that 2020's investment level would still drive growth in 2021, with the company reaffirming its view that adjusted EBITDA should grow at a 5% to 7% annual rate over the long term. Williams plans to provide more details on its 2020 guidance at its analyst day in December.

A slowdown seems to be up ahead

Williams Companies has done a solid job growing its earnings and cash flow this year, even as it has sold assets to improve its balance sheet. However, low natural gas prices this year are causing many of its producing customers to rethink their 2020 growth plans. Because of that, it appears as if the company's growth engine will slow in the coming year. While that's not the best news, the company still has an excellent financial profile, which should enable it to continue growing its dividend until earnings start reaccelerating again in 2021.