Business Context and Reporting Period
The Williams Companies, Inc. filed its Form 10-K for the fiscal year ended December 31, 2015. Williams is an energy infrastructure company focused on natural gas pipelines, gathering and processing, NGLs, crude oil transportation, and olefins. Its principal operations are conducted through Williams Partners L.P. (WPZ), in which Williams owned approximately 60% at year-end, including the general partner interest and incentive distribution rights.
The filing includes consolidated fiscal-year results and unaudited quarterly data. The financial statements received an unqualified audit opinion, and management and Ernst & Young concluded that internal control over financial reporting was effective.
Key Financial Metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $7.360 billion | $7.637 billion |
| Service revenue | $5.164 billion | $4.116 billion |
| Product sales | $2.196 billion | $3.521 billion |
| Operating income | $226 million | $1.569 billion |
| Net income attributable to Williams | $(571) million | $2.114 billion |
| Diluted EPS from continuing operations | $(0.76) | $2.91 |
| Cash flow from operations | $2.678 billion | $2.115 billion |
| Capital expenditures | $3.167 billion | $4.031 billion |
| Total debt, including current portion | $23.988 billion | $20.784 billion |
| Cash and cash equivalents | $100 million | $240 million |
| Dividends declared per share | $2.45 | $1.9575 |
Operating income represented an approximate 3.1% revenue margin, compared with approximately 20.5% in 2014. The net loss attributable to Williams reflected substantial noncash impairment charges and other unusual items. Management reported 2015 Modified EBITDA of $3.891 billion, including $4.003 billion from Williams Partners, $(83) million from Williams NGL & Petchem Services, and $(29) million from Other. Modified EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings.
At December 31, 2015, total assets were $49.020 billion, stockholders’ equity was $6.148 billion, and equity-method investments totaled $7.336 billion. The company reported a $970 million working-capital deficit, or $471 million excluding commercial paper. Available liquidity was approximately $2.791 billion, consisting of $100 million of cash and approximately $2.691 billion of available credit capacity.
Material Changes Versus the Prior Comparable Period
- Revenue declined 4%, as a 25% increase in service revenue was more than offset by a 38% decrease in product sales.
- Net income attributable to Williams declined by $2.685 billion, primarily because 2014 included a $2.544 billion noncash gain from remeasuring the prior ACMP investment at fair value.
- 2015 included $1.098 billion of goodwill impairment, $1.359 billion of impairment charges on equity-method investments, and approximately $209 million of impairments on certain other assets and project costs.
- NGL margins fell to $159 million from $388 million, primarily because non-ethane NGL prices declined approximately 58%. Olefin margin increased to $226 million from $110 million as the Geismar plant returned to operations.
- Cash flow from operations increased 27%, while capital expenditures declined 21%.
- Debt increased by approximately $3.204 billion, largely reflecting WPZ financing activity and growth investments.
- Williams increased its quarterly dividend from $0.57 in the fourth quarter of 2014 to $0.64 in the fourth quarter of 2015. However, WPZ distributions to Williams were reduced by $209 million in November 2015 and February 2016 to satisfy a $428 million termination fee related to the terminated WPZ merger agreement.
- The ACMP merger was completed in February 2015, resulting in a larger consolidated WPZ and a full year of related operations in 2015.
Guidance, Outlook, Risks, and Unusual Items
Williams expected the proposed Energy Transfer merger to close in the first half of 2016, subject to stockholder, regulatory, antitrust, registration, and other conditions. The proposed consideration consisted of cash, ETC shares, or a combination, with elections subject to proration, plus a contingent one-time dividend of $0.10 per Williams share if the transaction closed. If the transaction failed in specified circumstances, Williams could owe Energy Transfer a $1.48 billion termination fee.
For 2016, management expected challenging commodity prices and higher capital costs. Growth capital and investment expenditures were projected at approximately $2.2 billion, $1.5 billion below previous plans, with approximately $1.3 billion allocated to Transco and other interstate pipeline projects. Management also expected asset monetization proceeds in excess of $1 billion and stated that WPZ did not plan to issue public equity or public debt in 2016.
Management expected lower natural gas, ethane, non-ethane NGL, and olefin prices, lower gathering volumes from financially stressed producers, and increased fee-based earnings from Transco projects and a full year of Geismar operations. The company reported that its fee-based businesses reduced, but did not eliminate, commodity-price exposure.
- Credit ratings were under pressure. Williams had sub-investment-grade ratings from the three major agencies as of the filing date, while WPZ retained investment-grade ratings. Williams estimated potential additional collateral requirements of up to $235 million, and a WPZ downgrade could require up to $271 million.
- Chesapeake Energy and affiliates represented approximately 18% of 2015 consolidated revenue and $364 million of receivables at year-end, creating customer concentration and counterparty risk.
- Further declines in WPZ’s market value could trigger additional goodwill and equity-investment impairments. Management specifically identified potential future impairments of investments.
- Proposed projects remained subject to regulatory approvals, including Atlantic Sunrise, Constitution Pipeline, and other Transco expansions. The Constitution project continued to require New York Clean Water Act Section 401 certification.
- Environmental liabilities accrued at year-end were approximately $40 million, while certain natural-gas-index litigation, Geismar-related claims, shareholder merger litigation, royalty matters, and Alaska contamination matters could produce additional losses that were not reliably estimable.
- The company had approximately $24.0 billion of contractual long-term debt principal and $13.4 billion of related interest obligations under its contractual-obligations table.
Important Facts for Investors to Verify
- Verify the final status, consideration, financing effects, and termination provisions of the Energy Transfer merger.
- Assess whether additional goodwill or equity-method investment impairments were recorded after December 31, 2015.
- Review WPZ distributions, the remaining $428 million termination-fee settlement, and dividend coverage at the parent level.
- Reconcile reported cash flow from operations and Modified EBITDA with maintenance capital spending, interest, taxes, and noncontrolling interests.
- Evaluate refinancing and covenant capacity given approximately $24 billion of debt, sub-investment-grade Williams ratings, and potential collateral requirements.
- Monitor Chesapeake’s credit condition and the effect of producer drilling reductions on gathering volumes and contract economics.
- Review regulatory approvals, construction costs, and in-service timing for major pipeline and Canadian projects.
- Read the detailed notes for litigation, environmental contingencies, insurance recovery limits, and assumptions supporting impairment valuations.