Williams Companies (NYSE: WMB) and its majority-owned MLP Williams Partners (NYSE: WPZ) seemed to take a step back in the third quarter. That's because it was the first time in the last 15 quarters that Williams Partners failed to increase adjusted EBITDA, which declined $88 million to $1.101 billion.
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However, one thing CEO Alan Armstrong made clear on the accompanying conference call was that the company didn't see the decline as a step back. Instead, it was all part of the significant leap forward the company has taken this year to strengthen its financial situation and growth prospects. Overall, he pointed out three things on the call that show just how far the company has come since it started on this journey.
Our underlying business has improved dramatically
The first thing Armstrong pointed out on the call is that:
The large-scale advantage positions we've established continue to generate growth as evidenced by our strong results, with the year-to-date adjusted EBITDA up versus year-to-date 2016 despite the sale of over $3 billion of assets that generated $110 million of EBITDA in the nine months ended September 30, 2016, and the impact of two hurricanes that shut-in volumes from offshore producers. We substantially reduced our direct exposure to commodities. And as a result, our current business' steady growth is both predictable and transparent as it is being driven by consistent fee-based revenue growth under long-term contracts.
Armstrong noted two things that demonstrate its improvement over the past year. First, he said that Williams' year-to-date earnings have risen versus the same period of 2016 despite selling $3 billion in assets and battling two hurricanes. This result shows that the company's underlying business has continued to grow even if earnings slipped last quarter due to the timing of asset sales. He also pointed out that those sales reduced the company's direct exposure to commodity price volatility, which should enable Williams to generate steadier cash flow growth in future quarters. In fact, the percentage of earnings coming from fees has increased from around 90% to 97% thanks to a combination of asset sales and its investments in new fee-based assets.
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Our growth projects are producing results
Next, Armstrong turned his attention to what's fueling the company's growth, stating that:
Our strategic focus on natural gas volumes continues to deliver results. So far in 2017, we placed four of our Big 5 Transco expansion projects into service...with the fifth of the Big 5...expected to be placed in service during the fourth quarter of this year. The incremental capacity from our fully contracted Transco expansion projects going in service so far this year reflects a 25% increase in Transco's design capacity. And year to date, Transco's transportation revenues have increased $74 million, a 7% increase over last year, and this is even though most of those 2017 projects are being placed into service in the last half of this year.
While Williams Partners operates a diverse set of midstream assets, its crown jewel is the Transco system, which is a natural gas pipeline that runs along the East Coast from Texas to New York City. Thanks to growing gas demand in those regions, the company has steadily expanded the pipeline to meet that need. Meanwhile, the most recent expansions have already had a notable impact on the company's earnings, which should continue next year given that the bulk of the projects only recently started service.
We've significantly strengthened our balance sheet
In addition to spending money on expanding Transco, Armstrong stated that:
I'm also pleased with how we've strengthened our balance sheet and credit profile, significantly reducing our debt and lowering our overhead expenses. In fact, year to date, in 2017 Williams Partners has reduced long-term debt by $2 billion and increased cash by over $1 billion. This reduced debt level and increased cash balance has positioned us to self-fund our attractive slate of growth projects using cash on hand, retained operating cash flow and debt without the need to issue public equity, all while maintaining solid investment grade credit metrics and coverage. At the corporate level, WMB has paid down $372 million in debt.
One of the things Williams Partners did with the asset sale proceeds was to shore up its balance sheet. Because of that, the company now has the financial flexibility it needs to fund its current growth project backlog without issuing any more equity. By eliminating that risk, the company has one less issue that could prevent it from delivering on its growth plan.
It all adds up to steady income growth for investors
The central theme of Armstrong's comments is that the transformation of Williams Companies and Williams Partners is taking shape. Williams Partners' ability to self-fund growth, when combined with increasing cash flow visibility and a stronger balance sheet, suggests that it's on a sustainable path. Because of that, it's becoming increasingly likely that the MLP can achieve the 5% to 7% annual distribution growth it promised investors, which would in turn fuel 10% to 15% yearly dividend growth for Williams Companies. Because of that, income seekers should have increasing confidence in both companies.
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