Williams Companies, Inc. — Form 10-Q Summary
Business context and reporting period
Williams is an energy infrastructure company focused on natural gas pipelines, gathering and processing, NGL and olefins services, and related investments. Its reportable segments are Williams Partners and Williams NGL & Petchem Services. This unaudited filing covers the three months ended March 31, 2016, compared with the corresponding 2015 period.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $1.660 billion | $1.716 billion | Down $56 million |
| Operating income | $262 million | $227 million | Up $35 million |
| Operating margin | 15.8% | 13.2% | Improved |
| Net income (loss) | $(13) million | $13 million | Down $26 million |
| Net income (loss) attributable to Williams | $(65) million | $70 million | Down $135 million |
| Diluted EPS | $(0.09) | $0.09 | Down $0.18 |
| Operating cash flow | $779 million | $669 million | Up $110 million |
| Capital expenditures | $513 million | $832 million | Down $319 million |
| Cash and cash equivalents | $164 million | $341 million | Prior-period comparison is year-end 2015 for balance sheet cash |
| Total debt | $24.812 billion | $23.988 billion | Increased from December 31, 2015 |
Service revenues increased 3% to $1.229 billion, while product sales declined 17% to $431 million. Equity earnings rose to $97 million from $51 million, but Williams recorded $112 million of impairment charges on equity-method investments. Interest incurred increased to $306 million from $273 million. Cash dividends declared increased to $0.64 per share from $0.58.
At March 31, 2016, current liabilities exceeded current assets by approximately $1.528 billion. Available liquidity totaled approximately $3.519 billion, comprising cash and unused credit capacity. WMB had $465 million available under its $1.5 billion facility; WPZ had $2.740 billion available under its facility after commercial paper and $150 million available under its short-term facility. Commercial paper outstanding was $135 million, and long-term debt due within one year was $976 million.
Material changes versus the prior comparable period
- Operating income improved despite lower revenue, primarily from higher fee-based transportation revenue, stronger olefins margins following the Geismar plant’s return to service, and lower merger-related costs.
- Williams Partners Modified EBITDA increased to $955 million from $817 million. Olefin margin increased to $71 million from $9 million, while NGL margin declined to $34 million from $44 million.
- Lower commodity prices and volumes reduced product sales, equity NGL revenue, and marketing revenue. Management reported that per-unit NGL margins were approximately 36% lower year over year.
- Net income attributable to Williams declined substantially because of the equity-investment impairments, higher interest expense, and reduced incentive distributions from WPZ related to the terminated WPZ merger agreement.
- Operating cash flow increased, while capital expenditures fell substantially. Financing cash flow changed to a $369 million use from a $188 million source, reflecting debt and commercial-paper repayments and higher dividends.
- Transco issued $1 billion of 7.85% senior unsecured notes due 2026 in January 2016. A $200 million tranche of 6.4% notes matured on April 15, 2016.
Guidance, outlook, risks and unusual items
- Management expected the proposed merger with Energy Transfer Corp LP to close in the second quarter of 2016, subject to stockholder, regulatory, registration and other closing conditions. The transaction provides for stock, cash or mixed consideration and a potential $0.10 special dividend if completed.
- Williams and Energy Transfer were involved in litigation concerning Energy Transfer’s private offering of Series A Convertible Preferred Units. Energy Transfer filed counterclaims; the filing states that Williams believes those claims are without merit.
- The 2016 plan contemplated approximately $2.2 billion of growth capital and investment expenditures and asset monetization proceeds in excess of $1 billion. Management also expected lower natural gas and olefins prices, challenging commodity conditions, and higher costs of capital.
- Williams recorded $59 million and $50 million of other-than-temporary impairment charges related to its Delaware basin gas gathering and Laurel Mountain equity investments. Management noted that a 50-basis-point increase in discount rates could have produced approximately $104 million of additional impairments on at-risk investments.
- New York denied a water-quality certification for the Constitution Pipeline after quarter-end. Williams intends to challenge the decision. The project’s target in-service date moved to as early as the second half of 2018; approximately $396 million of capitalized project costs were exposed to potential impairment if the project does not proceed.
- Canadian operations had approximately $1.7 billion of property, plant and equipment. No impairment was recorded at quarter-end, but management stated that a significant impairment could arise as early as the second quarter depending on asset-sale proceeds and updated assumptions.
- Development of the Canadian propane dehydrogenation facility was substantially slowed; Williams stopped capitalizing development costs and is pursuing a sale or partner. Approximately $136 million of project costs had been capitalized at March 31, 2016.
- Williams incurred $26 million of severance and related workforce-reduction costs, $34 million of Canadian PDH project-development costs, and $6 million of strategic-alternatives costs during the quarter.
- Contingencies include natural-gas price-index litigation, Geismar incident claims, Alaska environmental matters, royalty-related litigation, merger-related shareholder suits and other environmental obligations. The filing states that some exposures cannot currently be estimated and that certain matters could be material.
Important facts for investors to verify
- Whether the Energy Transfer merger closed, was amended, terminated or otherwise changed after the filing date, and the final consideration and litigation outcomes.
- Progress and legal resolution of the Constitution Pipeline certification dispute and the risk to the $396 million of capitalized project costs.
- Whether Canadian asset monetizations occurred and whether subsequent impairment charges were recorded.
- Changes in WMB and WPZ credit ratings, borrowing costs, collateral requirements and refinancing needs, particularly for the $976 million of debt due within one year.
- Actual asset-monetization proceeds, 2016 capital spending, WPZ distributions and the effect of the WPZ termination-fee reductions.
- Subsequent impairment charges or contract renegotiations related to low commodity prices, producer credit deterioration and lower gathering volumes.
- Developments in material litigation, environmental matters and indemnification obligations for which the filing does not provide a clear maximum exposure.