Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2015. Williams is an energy infrastructure company focused on natural gas pipelines, gathering, processing, NGLs, olefins and related services, principally through Williams Partners L.P. and Williams NGL & Petchem Services.
On February 2, 2015, Williams completed the merger of Pre-merger Williams Partners and Access Midstream Partners. Williams owns approximately 60% of the combined Williams Partners, including its general partner interest and incentive distribution rights. The filing recasts prior-period segment information for comparability.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $1.716 billion | $1.749 billion | Down $33 million |
| Service revenues | $1.197 billion | $819 million | Up $378 million |
| Product sales | $519 million | $930 million | Down $411 million |
| Operating income | $227 million | $420 million | Down $193 million |
| Net income | $13 million | $196 million | Down $183 million |
| Net income attributable to Williams | $70 million | $140 million | Down $70 million |
| Diluted EPS | $0.09 | $0.20 | Down $0.11 |
| Cash dividends per share | $0.5800 | $0.4025 | Up 44% |
| Cash flow from operations | $669 million | $446 million | Up $223 million |
| Capital expenditures | $832 million | $793 million | Up $39 million |
Operating margin was approximately 13.2% in Q1 2015 versus 24.0% in Q1 2014. Net income attributable to Williams represented approximately 4.1% of revenue versus 8.0% in the prior-year period.
At March 31, 2015, cash and cash equivalents were $341 million, total assets were $50.457 billion, current liabilities exceeded current assets by $708 million, and total debt, including current maturities, was approximately $22.491 billion. Long-term debt was $21.690 billion and current maturities were $801 million.
Available liquidity was reported at approximately $4.966 billion, consisting of $341 million of cash, $1.125 billion of available capacity under Williams’ $1.5 billion credit facility, and $3.5 billion of Williams Partners credit-facility capacity after considering its commercial paper program. Williams and Williams Partners were in compliance with applicable financial covenants.
Modified EBITDA increased to $812 million from $666 million. Williams Partners Modified EBITDA increased to $817 million from $708 million, while Williams NGL & Petchem Services improved to a $5 million loss from a $100 million loss.
Material Changes Versus the Prior Comparable Period
- Service revenue increased primarily from the Access Midstream acquisition, Gulfstar One, new well connections, gathering and processing expansions, and Transco projects placed in service.
- Product sales declined because of lower NGL and crude oil prices and lower crude oil volumes, partially offset by higher NGL volumes.
- Operating results were adversely affected by the absence of the $125 million Geismar insurance recovery recorded in Q1 2014, approximately $62 million of lower NGL margins, and approximately $19 million of lower olefin product margins.
- Operating and maintenance, depreciation and amortization, and selling, general and administrative expenses increased largely because of the acquired Access Midstream operations and newly placed projects. SG&A included $35 million of merger and transition-related costs.
- Equity earnings improved from a $48 million loss to $51 million of income, primarily because Q1 2014 included losses related to discontinued Bluegrass and Moss Lake projects, while the acquired Access Midstream investments contributed in 2015.
- Interest expense increased by approximately $111 million, reflecting debt issued in 2014 and 2015 and debt assumed or consolidated through the Access Midstream transaction.
- Operating cash flow increased despite lower net income, aided by depreciation and amortization and favorable working-capital changes.
Guidance, Outlook, Risks and Unusual Items
Management expects 2015 operating results to improve overall versus 2014, primarily from higher Geismar olefins volumes and increased fee-based activity following the Access Midstream acquisition. This improvement is expected to be partly offset by lower NGL margins and higher operating expenses.
Management expects crude oil, NGL and olefin prices to remain below 2014 average levels. Lower commodity prices may reduce NGL margins, producer drilling economics, gathering volumes and cash flows, although fee-based transportation and gathering businesses provide some mitigation.
Planned 2015 consolidated capital investments were stated at $3.96 billion to $4.59 billion. The filing also presents a $4.275 billion estimate, consisting of $490 million of maintenance capital and $3.785 billion of expansion capital. Q1 capital investments were $821 million on the estimate basis.
- Geismar operations resumed consistently in late March 2015; full expanded production was expected to be achieved through June. Williams expects total property damage and business interruption losses to exceed its $500 million policy limit. Approximately $126 million of insurance proceeds was expected in Q2 2015, with approximately $20 million of limits remaining.
- WPZ completed a $3 billion senior-notes offering in March 2015 and used proceeds for debt repayment, capital expenditures and general purposes. It redeemed $750 million of 5.875% notes on April 15, 2015 for $783 million including a premium.
- WPZ announced an agreement to acquire an additional interest in Utica East Ohio Midstream for approximately $575 million, subject to participation rights of the other member.
- Material risks include commodity-price volatility, lower producer activity, project delays or cost overruns, regulatory approvals, access to capital markets, credit-rating downgrades, counterparty risk, operational incidents, environmental liabilities, litigation, weather and cybersecurity threats.
- Pending matters include indemnification exposure related to natural-gas price-index litigation involving former affiliate WPX, Geismar-related litigation and regulatory matters, Alaska sulfolane contamination proceedings, royalty disputes and environmental remediation. The filing states that several exposures cannot currently be estimated reliably.
Most Important Facts to Verify
- Whether the Access Midstream merger produces the anticipated full-year fee-based revenue, cash flow and cost synergies.
- Whether Geismar reaches planned expanded production rates and whether remaining insurance recoveries are collected.
- The sustainability of the $0.58 quarterly dividend given planned capital spending, debt service and distributions from Williams Partners.
- Actual 2015 capital expenditures versus the stated $3.96 billion to $4.59 billion range and the additional $575 million potential UEOM investment.
- Exposure to continued NGL, crude oil and olefin price weakness and its effect on margins and gathering volumes.
- Progress and regulatory approvals for major projects, including Atlantic Sunrise, Constitution, Leidy Southeast, Gulf Coast expansions and Canadian projects.
- Debt maturity, refinancing and credit-rating developments, including potential collateral requirements following a downgrade.
- Developments in Geismar, environmental, royalty and WPX-related litigation, for which certain potential losses are not reliably estimable.