Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Williams is an energy infrastructure company focused on natural gas, NGL and olefins pipelines, gathering, processing and related services. Its reportable segments are Williams Partners and Williams NGL & Petchem Services; remaining activities are reported as Other.
Williams owned approximately 60% of Williams Partners L.P. (WPZ), including its general partner and incentive distribution rights, at June 30, 2016. The Canadian midstream and NGL/Petchem operations were classified as held for sale.
Key Financial Metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $1.736 billion | $1.839 billion | $3.396 billion | $3.555 billion |
| Operating income (loss) | $(488) million | $392 million | $(226) million | $619 million |
| Net income (loss) | $(505) million | $183 million | $(518) million | $196 million |
| Net income (loss) attributable to Williams | $(405) million | $114 million | $(470) million | $184 million |
| diluted EPS | $(0.54) | $0.15 | $(0.63) | $0.24 |
| Cash dividends declared per share | $0.64 | $0.59 | $1.28 | $1.17 |
- Six-month operating margin was approximately negative 6.7%, compared with approximately 17.4% in the prior-year period. Six-month net margin attributable to Williams was approximately negative 13.8%, compared with approximately 5.2%.
- Six-month Modified EBITDA was $1.092 billion, down from $1.858 billion. Williams Partners Modified EBITDA was $1.559 billion versus $1.870 billion; Williams NGL & Petchem Services reported $(467) million versus $(8) million, primarily because of impairments.
- Cash provided by operating activities was $1.464 billion, compared with $1.483 billion. Capital expenditures were $1.069 billion, compared with $1.654 billion.
- Cash and cash equivalents were $135 million at June 30, 2016, versus $100 million at December 31, 2015. The company reported a working-capital deficit of $395 million.
- Total debt, including current maturities and commercial paper, was approximately $25.4 billion; this includes $24.394 billion of long-term debt, $786 million due within one year and $196 million of commercial paper.
- Available liquidity was approximately $2.540 billion, consisting of $410 million for Williams and $2.130 billion for WPZ. Williams and WPZ were in compliance with their credit facility covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined 3% in the second quarter and 4% for the first six months. Service revenue was broadly stable for the six-month period, while product sales declined 14%, reflecting lower NGL, crude oil and natural gas prices and lower volumes.
- Second-quarter and six-month results included $802 million and $810 million, respectively, of long-lived asset impairments, versus $24 million and $27 million in the prior-year periods. The 2016 charges included $747 million related to Canadian operations classified as held for sale and $48 million related to certain Mid-Continent gathering assets.
- The six-month period included $112 million of impairments of equity-method investments in the Delaware basin gas gathering system and Laurel Mountain.
- Results no longer benefited from the $126 million of Geismar Incident insurance recoveries recognized in the second quarter and first six months of 2015.
- Interest expense increased by $76 million for the six-month period, primarily because of higher debt balances and lower capitalized interest.
- Operating and general and administrative costs benefited from workforce reductions and cost-containment efforts, partly offset by $26 million of severance and related costs, $45 million of Canadian propane dehydrogenation project costs and $19 million of strategic-alternatives costs during the six months.
- NGL per-unit margins declined approximately 24% for the first six months, although second-quarter margins improved approximately 29% from the first quarter. Olefin margins increased to $145 million from $70 million for the six-month comparison, supported by higher Geismar production.
- Net cash from investing activities improved to an outflow of $746 million from $2.002 billion, primarily because of lower capital spending and equity-investment contributions. Financing activities changed to an outflow of $669 million from an inflow of $483 million, reflecting net commercial-paper repayments and higher dividends.
Guidance, Outlook, Commentary and Risks
- 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 challenged commodity prices and higher costs of capital for the remainder of 2016, and expected proceeds from the planned sale of the Canadian operations during 2016.
- On August 1, 2016, Williams announced that it expected to reduce its quarterly dividend to $0.20 per share, or $0.80 annually, beginning with the third quarter. Williams also planned to reinvest approximately $1.7 billion into WPZ through 2017, including approximately $500 million in 2016, primarily through a distribution reinvestment program.
- The Energy Transfer merger was terminated after Energy Transfer stated that the required tax opinion was unavailable by the outside date. Williams intended to pursue monetary damages and other remedies; Energy Transfer asserted counterclaims, including a claimed $1.48 billion termination fee. The litigation outcome and related costs were uncertain.
- The Constitution Pipeline’s required New York water-quality certification was denied. The project’s target in-service date moved to as early as the second half of 2018, subject to successful legal and regulatory resolution. Approximately $389 million of capitalized project costs remained exposed to potential impairment.
- Lower producer activity, contract-restructuring requests, customer credit risk, lower gathering volumes, commodity-price declines and higher discount rates could result in additional impairments. Management stated that a 50-basis-point increase in discount rates could have produced approximately $104 million of additional impairment charges on certain at-risk equity-method investments.
- Other significant exposures included Geismar-related litigation and regulatory matters, Alaska sulfolane contamination litigation, royalty-related litigation, environmental obligations, the Opal facility subpoena and shareholder or unitholder litigation.
- Credit ratings were below investment grade for Williams and investment grade but negative or under review for WPZ. A WPZ downgrade below investment grade could require up to approximately $455 million of additional collateral; Williams estimated current ratings could require up to $56 million.
Most Important Facts to Verify
- Whether the planned Canadian asset sale closed, and whether actual proceeds differed from the estimates used for the $747 million impairment.
- The status and expected financial exposure of litigation against Energy Transfer, including the asserted termination fee and any damages claims.
- Whether the $0.20 quarterly dividend and planned WPZ reinvestment program were implemented as described.
- Constitution Pipeline permitting and litigation developments, including recoverability of the $389 million capitalized balance.
- Current Williams and WPZ credit ratings, borrowing capacity, collateral requirements and debt maturities.
- Subsequent changes in producer volumes, contract restructurings, commodity prices and impairment indicators affecting gathering assets and equity-method investments.