On August 4, Williams Partners (NYSE: WPZ) announced second quarter earnings that seemed troubling.
Revenues declined 8.3% to $1.616 billion, which is 12.8% below analyst estimates. Meanwhile, earnings were down 65% from last year and 70% below analyst expectations.
Williams Companies (WMB 0.68%), the general partner of Williams Partners, did a little better but still fell short of expectations, with revenues declining 5% to $1.68 billion, 11% below analyst expectations. Earnings per share of $0.23/share met expectations.
On July 1, Williams Companies announced it would be acquiring the rest of Access Midstream Partners' (NYSE: ACMP) general partner interest from Global Infrastructure Partners for $6 billion. It eventually plans to merge Williams Partners into a subsidiary of Access Midstream, so I'll also cover Access Midstream's latest results in order to help investors in Williams Partners and Williams Companies gain a better understanding of what the future holds.
The good news
At first glance, these results seem to indicate that something is amiss with this family of MLPs; however, when dealing with capital intensive industries such as this, earnings are often worth ignoring entirely in favor of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), which give a better idea of how a company's operating units are doing. Williams Companies uses a measure called adjusted segment profit+DD&A to approximate this metric. Distributable cash flow (DCF), which pays the distributions investors care about, is also an important factor to consider. From these perspectives the Williams family is doing great.
For example, Williams Partners actually reported a 30% increase in DCF this quarter, as well as a 16% increase in adjusted segment profit +DD&A and 7% increase in fee based revenue.
The coverage ratio was still a bit short this quarter, 0.87, yet Williams Partners raised its distribution 6.3% and reiterated its guidance for 6% annual distribution growth in 2014-2015, and 4.5% growth in 2016. Why would an MLP that isn't covering its distribution do such a thing? The answer lies in its long-term guidance.
During its earnings release Williams Partners offered the following guidance through 2016:
- Segment profits to grow from $2.01 billion in 2014 to $3.225 billion in 2016 -- growth of 60%
- DCF to grow from $1.95 billion in 2014 to $3.085 billion in 2016 -- growth of 59%
- Capital expenditures to decline from $3.73 billion to $2.228 billion in 2016 -- a decline of 40%
Meanwhile, Williams Companies recorded 15% growth in adjusted segment profit+DD&A and 16% growth in cash distributions from Williams Partners. In fact, Williams Companies expects to receive $509 million in cash distributions from its MLPs this quarter alone. This will help Williams Companies execute on its guidance of a 32% dividend increase in the third quarter -- upon the closing of its Access Midstream acquisition. The company is guiding for 15% dividend growth in 2015 due to continued strong growth at Access Midstream.
Speaking of which, Access Midstream had a wonderful quarter:
- Adjusted EBITDA rose 33.2%
- DCF up 31.2%
- Coverage ratio a rock-solid 1.45
- Volumes up 6.8%
- Fee based revenues up 18.5%, 23.3% when revenue from equity investments is included
- Distribution raised 22.7%
Long-term prospects remain bright
Source: Williams Partners/Companies 2nd Quarter Earnings Presentation
What to watch going forward
First, the merger will greatly improve Williams' presence in fast growing shale gas formations such as the Marcellus/Utica shales. This is due to Access's presence in almost every major shale and oil formation in America.
Source: July 2014 Access Midstream Partners Investor Presentation
