The Williams Companies, Inc. — 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016. Williams is an energy infrastructure company focused primarily on natural gas, NGL and olefins transportation, gathering, processing, storage and production in the United States. Most operations were conducted through Williams Partners L.P. (WPZ), including Transco and Northwest Pipeline.
At December 31, 2016, Williams owned approximately 60% of WPZ, including its general partner interest and incentive distribution rights. The company reported approximately 5,604 full-time employees as of February 1, 2017.
Key financial metrics
| Metric | 2016 | 2015 | Change or comment |
|---|---|---|---|
| Total revenue | $7.499 billion | $7.360 billion | Up $139 million |
| Service revenue | $5.171 billion | $5.164 billion | Essentially flat |
| Product sales | $2.328 billion | $2.196 billion | Up 6% |
| Operating income | $700 million | $226 million | Improved primarily because 2015 included $1.098 billion of goodwill impairment |
| Net loss | $350 million | $1.314 billion | Improved year over year |
| Net loss attributable to Williams | $424 million | $571 million | Loss per diluted share was $(0.57) versus $(0.76) |
| Operating cash flow | $3.664 billion | $2.678 billion | Up $986 million |
| Capital expenditures | $2.051 billion | $3.167 billion | Down $1.116 billion |
| Cash and cash equivalents | $170 million | $100 million | Increased $70 million |
| Total debt, including current portion | $23.409 billion | $23.988 billion | Down $579 million |
| Total assets | $46.835 billion | $49.020 billion | Down $2.185 billion |
| Stockholders’ equity | $4.643 billion | $6.148 billion | Down $1.505 billion |
| Dividends declared per share | $1.68 | $2.45 | Reduced during 2016; board approved $0.30 quarterly beginning March 2017 |
Operating income margin was approximately 9.3% in 2016 versus 3.1% in 2015. Net margin attributable to Williams remained negative at approximately 5.7%.
Available liquidity at December 31, 2016 was approximately $4.302 billion, consisting of $170 million of cash, $725 million of available capacity under Williams’ credit facility and $3.407 billion of WPZ capacity after commercial paper borrowings. Williams reported a working-capital deficit of $1.487 billion, including $785 million of long-term debt due within one year.
Credit ratings were below investment grade for Williams: S&P BB, Moody’s Ba2 and Fitch BB+, all with stable outlooks. WPZ was rated investment grade by the agencies, generally BBB-/Baa3, with stable outlooks.
Material changes versus the prior comparable period
- Revenue increased modestly, supported by higher Geismar olefins production and marketing activity, while gathering and processing revenue was pressured by lower volumes in the Barnett Shale and Anadarko Basin.
- Operating results benefited from the absence of the $1.098 billion goodwill impairment recorded in 2015, lower merger-related and operating costs, and higher Geismar olefin margins.
- 2016 included $873 million of asset impairments, including a $747 million impairment of the Canadian operations and additional impairments of certain gathering, idle and other assets.
- Williams recorded $430 million of impairments of equity-method investments, compared with $1.359 billion in 2015.
- The company completed the sale of its Canadian operations in September 2016 for $1.020 billion of consideration, net of $31 million of cash divested. It recognized a $747 million impairment in the second quarter and an additional $66 million loss upon completion.
- WPZ received $820 million of upfront cash from restructuring Barnett Shale and Mid-Continent gathering contracts. Most of the proceeds were recorded as deferred income and will be recognized over future service periods.
- Williams’ Modified EBITDA declined to $3.322 billion from $3.891 billion, while WPZ Modified EBITDA declined to $3.864 billion from $4.003 billion. Modified EBITDA is a non-GAAP measure and should be read with the GAAP reconciliation.
- In June 2016, Energy Transfer terminated the proposed merger agreement. Williams continued litigation against Energy Transfer, while Energy Transfer asserted a potential $1.48 billion termination-fee claim.
Guidance, outlook, commentary and unusual items
- Management expects 2017 growth capital and investment expenditures of approximately $2.1 billion to $2.8 billion, including $1.4 billion to $1.9 billion for Transco and other interstate pipeline projects.
- Management expects more than $2.0 billion of after-tax proceeds from the planned monetization of the Geismar olefins facility and other non-core assets. Proceeds are expected to support debt reduction and capital expenditures, but completion and proceeds are not assured.
- In January 2017, Williams permanently waived WPZ incentive distribution rights and exchanged its general partner interest for 289 million WPZ common units. Williams also purchased additional WPZ units, including approximately $2.1 billion funded with a January and February 2017 equity offering. Its WPZ limited-partner interest increased to approximately 74% after the transactions.
- Management expects fee-based businesses to become a larger portion of the portfolio, reducing exposure to commodity-price volatility. It expects relatively steady gathering and processing volumes in 2017, with increases thereafter, but noted continued customer drilling restraint and credit concerns.
- The Constitution Pipeline remains subject to litigation after New York denied a required water-quality certification. The project had approximately $381 million of capitalized costs at year-end; an unfavorable resolution could result in a significant impairment.
- Significant risks include commodity-price volatility, producer volumes and credit quality, customer concentration, regulatory and permitting delays, environmental liabilities, operational incidents, cybersecurity, weather, competition, interest rates and access to capital.
- Chesapeake Energy and affiliates represented approximately 14% of 2016 consolidated revenue and $133 million of year-end trade receivables, creating material customer-concentration and credit exposure.
- Environmental liabilities accrued at year-end totaled $38 million. The company also disclosed ongoing Geismar incident litigation, Alaska sulfolane contamination matters, gas-price-index litigation and merger-related litigation; certain exposures cannot currently be estimated.
Most important facts for an investor to verify
- Whether planned asset monetizations, including Geismar, close on expected terms and generate more than $2.0 billion of after-tax proceeds.
- Whether WPZ’s cash flows and distributions support Williams’ higher $0.30 quarterly dividend and planned debt reduction.
- The effect of the financial repositioning on consolidated leverage, parent-level debt, WPZ ownership economics and future distributions after the IDR waiver.
- The outcome of Energy Transfer litigation, including the potential $1.48 billion termination-fee claim and Williams’ damages claims.
- The status and recoverability of the $381 million of capitalized Constitution Pipeline costs.
- Chesapeake’s financial condition, contract performance and potential effect on revenue, receivables and gathering volumes.
- Actual 2017 capital spending, project in-service dates, permitting outcomes and contracted capacity for Transco expansions.
- Future impairments of equity-method investments, property and equipment or intangible assets if commodity prices, volumes or discount rates deteriorate.
- Final outcomes and insurance coverage for Geismar, environmental, royalty, gas-index and other legal proceedings.