Williams Companies (WMB +0.41%) and its master limited partnership, Williams Partners (NYSE: WPZ) , announced today that they are reducing their 2016 growth capital plan by $1 billion, or roughly a third less than previously planned. That reduction is coming as a result of project deferrals, delays, and cancellations due to the currently weak commodity price environment as well as sharply higher cost of capital. It's a much-needed belt tightening from the midstream franchise given that it couldn't afford the alternative.
Details on the plan
Williams Companies and Williams Partners plan to spend about $2.1 billion on growth capital in 2016, with roughly $2 billion of that spending at the Williams Partners' level. Of that amount, $1.3 billion will be invested in Transco expansions or other interstate pipelines growth projects. The rest of the spending, or $700 million, will be invested primarily in gathering and processing systems. However, the companies made it clear that these gathering and processing expansions are being made to support known producer volumes such as wells that have already been drilled and are awaiting connecting infrastructure.
To support the spending plan, Williams' Transco subsidiary was able to raise $1 billion in senior notes to fund the bulk of its share of this capex. In addition to that, Williams Partners plans to fund the rest of its investments via asset sales, with plans to sell in excess of $1 billion in assets through the first half of the year. This will enable it to fund the entirety of its capex plan without issuing any public equity or debt in 2016, which should support its investment-grade credit rating.
What this means for Williams going forward
The revised 2016 capex plan will do a few things for Williams Partners. First and foremost, it will enable it to largely self-fund its capex without having to worry about accessing the fickle capital markets, which have been largely closed off to energy-related companies in recent months. Because it can self-fund this plan via asset sales and a subsidiary-level debt issuance, Williams Partners expects to be able to maintain its current distribution rate of $0.85 per unit. That alleviates a big worry for investors that it would need to reduce or suspend its distribution in order to use that cash to fund its growth investments. It is also worth noting that the investments it's funding are backed by firm contracts or production, meaning they'll deliver cash flow growth immediately after coming on line, which should support Williams Partners' ability to grow its distribution once the capital markets reopen.
This revised plan is also important for Williams Companies because the bulk of its income is derived from the distributions it receives from Williams Partners. It uses its income to support its own debt as well as its capex program and the dividend it pays to shareholders, which now also appears to be on solid ground. In solidifying this key income stream, Williams Companies has bolstered its case for completing its pending merger to Energy Transfer Equity without having to alter the deal terms. That should help ease the market's concerns that the merger might fall apart.
Investor takeaway
Normally, a big cut in growth capex would be bad news because it reduces future distribution growth potential. However, these are not normal times, and in this case, it's a sorely needed reduction because Williams Partners likely wouldn't be able to fund that spending without cutting its distribution, which would lead to reduced income at its parent, Williams Companies. In other words, this belt tightening not only supports future cash flow growth but it solidifies current income, which is critical given current market conditions and Williams' pending merger.
