Business Context and Reporting Period
The Williams Companies, Inc. filed an unaudited Form 10-Q for the three and nine months ended September 30, 2016. Williams is an energy infrastructure company focused primarily on natural gas pipelines, gathering and processing, NGLs, and olefins. Its principal reportable segments are Williams Partners and Williams NGL & Petchem Services. Williams owned approximately 60% of Williams Partners L.P. (WPZ), including its general partner and incentive distribution rights, at September 30, 2016.
In September 2016, Williams completed the sale of its Canadian operations and continued to reposition toward a more natural-gas-focused, fee-based portfolio.
Key Financial Metrics
| Millions, except per-share amounts | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $1,905 | $1,799 | $5,301 | $5,354 |
| Operating income (loss) | $345 | $356 | $119 | $975 |
| Net income (loss) | $131 | $(173) | $(387) | $23 |
| Net income (loss) attributable to Williams | $61 | $(40) | $(409) | $144 |
| Diluted EPS | $0.08 | $(0.05) | $(0.55) | $0.19 |
| Operating margin | 18.1% | 19.8% | 2.2% | 18.2% |
| Cash dividends declared per share | $0.20 | $0.64 | $1.48 | $1.81 |
Operating margin is calculated from reported operating income and revenue. The nine-month results were heavily affected by impairments and the Canadian divestiture loss.
- Q3 revenue increased 6%, led by higher product sales, while service revenue increased approximately 1%.
- Q3 Williams Partners Modified EBITDA increased to $1.070 billion from $1.021 billion. Nine-month Modified EBITDA declined to $2.629 billion from $2.891 billion.
- Q3 operating cash flow was not separately disclosed; nine-month operating cash flow was $2.082 billion, compared with $2.086 billion in 2015.
- Nine-month capital expenditures were $1.577 billion, down from $2.425 billion.
- Cash and cash equivalents were $77 million at September 30, 2016, versus $100 million at December 31, 2015.
- Total debt, including current maturities and commercial paper, was approximately $24.7 billion at September 30, 2016, compared with approximately $24.5 billion at year-end 2015. The filing reports fair value of debt at $25.8 billion.
- Available liquidity was approximately $2.995 billion, consisting of $2.336 billion at WPZ and $659 million at Williams. The company reported a working-capital deficit of $838 million, including $785 million of debt due within one year.
Material Changes Versus Prior Comparable Period
- Q3 net income attributable to Williams improved to $61 million from a $40 million loss, but nine-month attributable earnings declined to a $409 million loss from $144 million of income.
- Nine-month results included $811 million of long-lived-asset impairments, including approximately $747 million related to Canadian operations and $48 million related to certain Mid-Continent gathering assets. Nine-month 2015 impairments were $29 million.
- Williams recorded an additional $65 million loss upon completion of the Canadian sale in Q3, following the $747 million impairment recorded in Q2. Total consideration was $1.02 billion, including $712 million of cash proceeds, $243 million of escrowed proceeds, and $81 million of contingent consideration.
- The nine-month comparison also reflects the absence of $126 million of Geismar Incident insurance recoveries recognized in 2015 and higher interest expense.
- Equity earnings increased to $302 million for the first nine months from $236 million, while equity-method investment impairments declined to $112 million from $461 million.
- The regular quarterly dividend was reduced from $0.64 to $0.20 per share, a 69% reduction. Management stated that the reduction would support reinvestment in WPZ.
- Williams invested $250 million in WPZ common units in Q3 and planned an additional $250 million investment in Q4 through WPZ's distribution reinvestment program. Williams expected to reinvest approximately $1.7 billion into WPZ through 2017.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2016 growth capital and investment expenditures of approximately $1.9 billion, including approximately $1.3 billion for Transco expansions and other interstate pipeline projects.
- Management expected sufficient liquidity for 2016 requirements and retained flexibility to adjust capital spending. It expected additional Canadian-sale escrow proceeds by early 2017.
- Management expected 2016 natural gas prices to be lower than 2015, NGL prices to be broadly consistent, and olefins prices and margins to be lower. Nine-month NGL per-unit margins were approximately 18% below the prior-year period.
- Williams and Energy Transfer terminated the proposed merger after the required Section 721(a) tax opinion was not delivered by the June 28, 2016 outside date. Williams pursued damages; Energy Transfer asserted a potential $1.48 billion termination fee claim. The ultimate outcome was not determinable from the filing.
- The Constitution Pipeline's required New York water-quality certification was denied. Williams appealed and targeted service as early as the second half of 2018, subject to successful legal and regulatory resolution. Approximately $381 million of capitalized project costs were at risk of impairment if the project does not proceed.
- Williams identified potential future impairment risk for its $964 million DBJV investment because of changes involving customer contracts and related future cash-flow assumptions.
- Williams agreed to waive $150 million of WPZ incentive distributions otherwise payable in Q4 2016 in connection with the Canadian sale. It also continued to waive approximately $2 million per quarter related to WPZ's acquisition of an additional UEOM interest.
- Key risks included commodity-price and volume declines, customer credit risk, contract restructurings, regulatory and permitting delays, higher borrowing costs, credit-rating downgrades, project execution risk, environmental liabilities, litigation, cybersecurity, severe weather, and reduced insurance availability.
- WPZ was rated investment grade by the agencies reported in the filing, while Williams was below investment grade. A downgrade below investment grade for WPZ could have required up to $447 million of additional collateral.
- Significant contingencies included gas-price-index litigation, Geismar Incident litigation and environmental matters, Alaska sulfolane contamination claims, royalty litigation, the Energy Transfer dispute, and an investigation relating to the 2014 Opal facility incident. Several exposures could not be reasonably estimated.
Most Important Facts for Investors to Verify
- Whether the Canadian sale escrow and contingent consideration are ultimately received, and whether the recorded loss requires future adjustment.
- The status and potential financial impact of Williams's litigation against Energy Transfer and Energy Transfer's $1.48 billion termination-fee counterclaim.
- Whether the Constitution Pipeline receives the required permits and whether the $381 million of capitalized costs remain recoverable.
- The outcome of DBJV contract discussions or arbitration and the potential for additional impairment of the $964 million investment.
- WPZ's cash distributions, incentive distribution rights, DRIP funding, debt reduction, credit ratings, and collateral requirements.
- Progress against the approximately $1.9 billion 2016 capital-spending plan and management's ability to fund investment while maintaining liquidity and the reduced dividend.
- Potential liabilities from Geismar, environmental, royalty, gas-index, shareholder, and other litigation for which the filing does not provide a clear loss range.