Williams Companies, Inc. — 2015 Q3 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015, compared with the same periods in 2014. Williams is an energy infrastructure company focused on natural-gas pipelines, gathering and processing, NGLs, olefins and related midstream assets. Its principal reportable segments are Williams Partners and Williams NGL & Petchem Services.
Financial performance and condition
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total revenues | $1.799 billion, down from $2.069 billion | $5.354 billion, down from $5.496 billion |
| Service revenues | $1.239 billion, up 10% | $3.677 billion, up 33% |
| Product sales | $560 million, down 41% | $1.677 billion, down 38% |
| Operating income | $356 million, up from $307 million | $975 million, down from $1.038 billion |
| Net income attributable to Williams | $(40) million, or $(0.05) per diluted share | $144 million, or $0.19 per diluted share |
| Cash flow from operating activities | Not separately provided for the quarter | $2.086 billion, up from $1.104 billion |
| Capital expenditures | Not separately provided for the quarter | $2.425 billion, down from $2.943 billion |
Quarterly operating income improved despite lower revenue, reflecting higher fee-based transportation and gathering revenue, stronger olefin margins after the Geismar plant returned to service, and increased volumes. The quarter nevertheless included a $461 million impairment of equity-method investments and $263 million of interest expense.
Nine-month results were adversely affected by the absence of the $2.522 billion ACMP remeasurement gain recognized in 2014, $461 million of equity-method investment impairments, lower NGL margins, higher depreciation and amortization, higher interest expense, and lower Geismar insurance recoveries. Williams Partners Modified EBITDA increased to $2.891 billion from $2.147 billion; consolidated Modified EBITDA increased to $2.857 billion from $2.136 billion.
NGL margin declined to $118 million for the nine-month period from $304 million, primarily because non-ethane prices were approximately 60% lower. Olefin margin increased to $155 million from $82 million as Geismar operations resumed.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $125 million at September 30, 2015, compared with $240 million at December 31, 2014.
- Total assets were $50.819 billion; equity-method investments were $8.198 billion.
- Commercial paper outstanding was $1.530 billion. Long-term debt, including the current portion, was $22.182 billion based on the balance-sheet carrying amounts.
- Working capital deficit was $2.594 billion, or $1.064 billion excluding commercial paper.
- Reported available liquidity totaled $3.720 billion, consisting of $125 million of cash, $1.125 billion under Williams’ credit facility, $1.470 billion of remaining WPZ long-term facility capacity after commercial paper, and $1.0 billion under WPZ’s short-term facility.
- WPZ issued $3.0 billion of senior unsecured notes in March 2015 and retired or repaid debt during the year. WPZ had $1.530 billion of commercial paper outstanding at a weighted-average rate of 0.56%.
- Williams paid $1.356 billion of common-stock dividends during the first nine months and declared a quarterly dividend of $0.64 per share, 14% above the prior-year quarter.
Material changes versus the prior comparable period
- Service revenue growth from the ACMP operations, Gulfstar One, Transco expansion projects and higher gathering volumes more than offset lower product sales.
- ACMP operations were consolidated for a full nine months in 2015, versus only the second half of 2014.
- The Geismar olefins plant ramped up in the second quarter and reached full capacity in the third quarter of 2015. Williams received $126 million of Geismar-related insurance recoveries during the first nine months, compared with $175 million in 2014.
- Williams Partners completed or advanced multiple growth projects, including Virginia Southside, Northeast Connector, Rockaway Delivery Lateral, Mobile Bay South III, Bucking Horse and the Eagle Ford gathering acquisition.
- WPZ acquired an additional approximate 13% interest in UEOM for $357 million, increasing ownership to approximately 62%, while agreeing to waive approximately $2.4 million of quarterly incentive distributions through the third quarter of 2017.
- On September 28, 2015, Williams terminated its proposed acquisition of publicly held WPZ units and became obligated to pay WPZ a $428 million termination fee. The fee is to be settled through reductions in incentive distributions, including a $209 million reduction expected in November 2015.
Merger, outlook and risks
Williams entered into an agreement to merge with Energy Transfer Corp LP, a newly formed entity affiliated with Energy Transfer Equity. Williams stockholders may elect stock consideration of 1.8716 ETC shares, $43.50 in cash, or mixed consideration of $8.00 in cash plus 1.5274 ETC shares, subject to proration. A special one-time dividend of $0.10 per Williams share is contingent on closing. Management expected closing in the first half of 2016, subject to stockholder approval, regulatory approvals, effectiveness of an S-4 registration statement and other customary conditions.
If the merger is terminated in specified circumstances, Williams may owe Energy Transfer a $1.48 billion termination fee. The filing also identifies transaction-related disruption, integration risk, litigation, regulatory approvals, potential failure to achieve synergies and restrictions on Williams’ activities during the merger period as material risks.
Management expected 2015 consolidated capital investment of approximately $4.3 billion, including estimated maintenance capital of $490 million and expansion capital of $3.785 billion. Management expected fee-based growth and projects placed in service to improve operating results, but warned that lower commodity prices could reduce producer activity, gathering volumes, NGL and olefin margins, WPZ distributions and cash flow.
Other significant contingencies include natural-gas price-index litigation and indemnification obligations, Geismar-related personal-injury and environmental claims, Alaska contamination litigation, royalty matters, shareholder litigation concerning the WPZ transaction and Energy Transfer merger, and environmental liabilities. Environmental liabilities accrued at September 30, 2015 totaled $41 million. The filing states that several matters have potentially material exposure, but that ranges of loss cannot currently be estimated.
Most important facts for investors to verify
- Whether the Energy Transfer merger received required stockholder and regulatory approvals and closed on the anticipated timetable.
- The ultimate impact of the $428 million WPZ termination fee and the related reduction in Williams’ incentive distributions.
- Whether the $461 million equity-method investment impairment was a one-time adjustment or signals further deterioration in gathering assets; management estimated that a 50-basis-point increase in discount rates could have produced approximately $75 million of additional impairment.
- The sustainability of cash flow and dividends given the $4.3 billion capital-investment plan, $22.182 billion of debt, commercial paper exposure and working capital deficit.
- Whether lower NGL, olefin and natural-gas prices reduce producer activity, gathering volumes, margins and distributions from WPZ and equity-method investees.
- The status and potential cost of merger-related shareholder litigation, Geismar claims, natural-gas price-index litigation, royalty matters and environmental obligations.
- Progress, regulatory approvals and final costs for Constitution, Atlantic Sunrise, Leidy Southeast and other major expansion projects.