Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Williams is a U.S.-focused energy infrastructure company operating primarily through Williams Partners L.P. (WPZ), which owns interstate natural gas pipelines and midstream gathering, processing, NGL, crude oil and olefins businesses. Williams owned approximately 74% of WPZ at June 30, 2017.
During the period, Williams completed a financial repositioning that permanently waived WPZ incentive distribution rights, converted its general partner interest to a noneconomic interest, and increased Williams' limited partner ownership. Williams also issued approximately 74.75 million common shares for approximately $2.1 billion of net proceeds, primarily to fund purchases of WPZ units.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Total revenues | $1.924 billion | $1.736 billion | $3.912 billion | $3.396 billion |
| Operating income (loss) | $381 million | $(488) million | $814 million | $(226) million |
| Net income (loss) | $193 million | $(505) million | $762 million | $(518) million |
| Net income (loss) attributable to Williams | $81 million | $(405) million | $454 million | $(470) million |
| Diluted earnings (loss) per share | $0.10 | $(0.54) | $0.55 | $(0.63) |
| Operating margin | 19.8% | Not meaningful | 20.8% | Not meaningful |
| Williams Partners Modified EBITDA | $1.076 billion | $604 million | $2.208 billion | $1.559 billion |
Service revenues increased 7% in the quarter and 5% year to date. Product sales increased 20% in the quarter and 42% year to date, primarily reflecting higher marketing prices and volumes and stronger NGL pricing. Product costs increased 34% in the quarter and 55% year to date, largely offsetting the higher product sales.
Net cash provided by operating activities was $1.268 billion for the six months, compared with $1.469 billion in the prior-year period. Capital expenditures were $1.056 billion, compared with $1.069 billion. Cash and cash equivalents increased to $1.918 billion from $170 million at December 31, 2016.
At June 30, 2017, total debt consisted of $1.951 billion of current maturities and $21.325 billion of long-term debt. Long-term debt at fair value was approximately $24.786 billion, compared with a carrying amount of $23.276 billion. Available liquidity was reported at approximately $6.373 billion, including cash and available credit facilities, although a portion of WPZ cash was subsequently used to repay debt.
Williams declared cash dividends of $0.30 per common share for the quarter and $0.60 per share for the six-month period. The quarterly dividend represented a 50% increase from the $0.20 per share paid in December 2016.
Material Changes Versus the Prior Comparable Period
- Operating income improved by $869 million in the second quarter and by $1.040 billion for the six months, driven largely by the absence of substantial 2016 impairments, higher fee-based service revenue and expansion-project contributions.
- 2016 included $802 million of second-quarter asset impairments and $810 million for the six months, principally related to Canadian operations and certain gathering assets. 2017 included $25 million and $26 million, respectively, including an $18 million impairment of an olefins pipeline project.
- Six-month results included a $269 million gain from exchanging WPZ's DBJV interest for increased interests in Appalachian Midstream Investments and cash, plus the sale of Ranch Westex JV LLC.
- Williams' six-month tax provision was $102 million compared with a $143 million benefit in 2016. The 2017 provision benefited from a $127 million release of a valuation allowance on a capital loss carryforward.
- Noncontrolling-interest income increased to $308 million from a $48 million loss, primarily because of improved WPZ operating results and the changed ownership and distribution economics resulting from the financial repositioning.
- Operating cash flow declined despite the return to profitability, primarily because 2017 lacked certain minimum-volume-commitment receipts associated with contract restructurings.
Guidance, Outlook, Risks and Unusual Items
- Management projected 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 expansion projects.
- Management expected fee-based businesses to become a larger part of the portfolio, reducing exposure to commodity-price volatility. Forward prices at the reporting date implied generally comparable oil and natural gas prices and slightly stronger NGL prices for the balance of 2017.
- Management expected additional 2017 revenue from regulated pipeline projects placed in service or scheduled for service, while gathering volumes were expected to remain broadly steady in 2017 and increase thereafter.
- WPZ completed the sale of the Geismar olefins interest on July 6, 2017 for $2.084 billion in cash, subject to a working-capital adjustment. Williams expected to record an approximately $1.1 billion gain in the third quarter. Proceeds were used in part to repay WPZ's $850 million term loan.
- Constitution Pipeline remains subject to the New York State water-quality certification dispute. The target in-service date was revised to as early as the first half of 2019. Williams had $381 million of consolidated capitalized project costs at June 30, 2017 and stated that an unfavorable resolution could impair a significant portion of those costs.
- Key risks include permitting and regulatory delays, opposition to infrastructure projects, commodity-price and margin volatility, lower producer volumes, customer and counterparty credit risk, construction-cost increases, interest rates, weather, operational incidents, cybersecurity and environmental liabilities.
- Pending contingencies include natural-gas price-index litigation, Geismar Incident claims, Alaska sulfolane contamination litigation, royalty matters, Energy Transfer-related litigation and environmental proceedings. The filing states that certain potential losses cannot be reasonably estimated; environmental liabilities accrued at June 30, 2017 totaled $39 million.
- Williams estimated potential additional collateral requirements of up to $38 million under existing contracts; a downgrade of WPZ below investment grade could require up to $379 million of additional collateral.
Most Important Facts for Investors to Verify
- Verify the accounting and cash-flow effects of the January 2017 financial repositioning, including the permanent IDR waiver, WPZ ownership percentage and increased noncontrolling interests.
- Verify the closing proceeds, final gain and debt repayment associated with the July 2017 Geismar sale.
- Assess whether the reported earnings improvement is sustainable after excluding prior-year impairments, the $269 million investment-disposition gain and the $127 million tax valuation-allowance release.
- Compare actual 2017 capital spending and project in-service dates with management's $2.1 billion to $2.8 billion outlook.
- Monitor Constitution Pipeline permitting and litigation developments and the potential impairment of the $381 million carrying value.
- Review WPZ and Williams debt maturities, credit-facility availability, ratings and potential collateral requirements after the July debt repayment.
- Track producer volumes, NGL margins, customer credit quality and the effect of commodity prices on non-fee-based operations.