Williams (WMB +0.74%) is having a big year. The natural gas pipeline giant has gone on a shopping spree and recently unveiled its third acquisition to enhance its gas pipeline network. These deals will boost the company's cash flow, giving it more fuel to sustain and expand its 5.1%-yielding dividend.
Here's a look at Williams' latest deal and how it will help put its high-yielding dividend on an even firmer foundation.
NYSE: WMB
Key Data Points
Expanding to the Rockies
Williams recently agreed to acquire MountainWest Pipelines from Southwest Gas (SWX 0.06%). It's paying $1.07 billion in cash and assuming $430 million of MoutainWest's debt. MountainWest comprises a roughly 2,000-mile interstate natural gas pipeline system that runs across Utah, Wyoming, and Colorado. It has 8 billion cubic feet per day of transmission capacity and 56 billion cubic feet of natural gas storage.
The acquisition will expand Williams' services in the Rockies region. It will also supply the company with steady cash flow backed by government-regulated rate structures. The company also sees upside potential as it integrates the system into its existing assets, which could allow it to offer additional services to shippers.
Meanwhile, the sale will enable Southwest Gas to simplify its structure as it seeks to enhance value for its investors. Upon completing the sale, Southwest Gas plans to split into two separate and focused companies. Southwest Gas will become a regulated natural gas utility. Meanwhile, it will form and spin-off Centuri to focus on utility infrastructure services.
NYSE: SWX
Key Data Points
Getting bigger and better
The MountainWest deal follows Williams' acquisitions of NorTex Midstream and Trace Midstream's Haynesville gathering and processing assets earlier this year. Williams paid $423 million in cash to buy NorTex at the end of August, acquiring pipeline and storage assets that supply gas to the Dallas-Fort Worth area under long-term contracts. That deal enhanced its core gas pipeline and storage strategy and will provide it with steady income.
Meanwhile, the company paid $950 million for the Trace Midstream assets. That transaction more than doubled its gathering capacity in Haynesville. It will supply the company with growing cash flow as volumes in the region expand. This acquisition also allowed the company to sanction its Louisiana Energy Gateway project to transport more gas to premium markets, including for LNG exports. Williams expects that project to start service in late 2024.
Williams has been able to utilize its improving balance sheet to take advantage of opportunities to expand its natural gas infrastructure platform. Thanks to a combination of earnings growth and excess cash generation, Williams' debt-to-EBITDA ratio was down to 3.68 times at the end of the third quarter, an improvement from 4.04 times in the prior-year period. That's a low level for a pipeline company. It allowed the company to use its balance sheet capacity to make these three deals. They'll supply it with additional free cash flow that it can use to fund other growth opportunities and enhance its dividend sustainability.
The company generated enough cash in the third quarter to cover its high-yielding payout by 2.4 times. That's an 11% improvement from the year-ago period, even after factoring in a 4% dividend increase earlier this year. Because of that, the company has retained more cash to finance capital projects and acquisitions while maintaining a strong balance sheet. Those growth-related investments should continue expanding its cash flow, positioning Williams to give investors another raise next year.
Plenty of gas to keep this dividend going
Williams' acquisition binge this year added three stable cash-flowing assets to its natural gas infrastructure portfolio. These new additions will enhance its ability to sustain and grow its rock-solid dividend in the future. Because of that, Williams looks like an even more attractive option for investors seeking a low-risk passive income stream.
