Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Williams is an energy infrastructure company focused on natural gas pipelines, gathering and processing, NGLs, olefins, and related services. Reportable segments are Williams Partners, Williams NGL & Petchem Services, and Other. Williams owned approximately 60% of Williams Partners L.P. (WPZ), including its general partner interest and incentive distribution rights.
The February 2015 merger of Pre-merger WPZ and Access Midstream Partners materially expanded the consolidated operations and affects period-to-period comparability. Williams also agreed in May 2015 to acquire publicly held WPZ common units in exchange for Williams common stock.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $1.839 billion, versus $1.678 billion | $3.555 billion, versus $3.427 billion |
| Service revenues | $1.241 billion, up 50% | $2.438 billion, up 48% |
| Product sales | $598 million, down 30% | $1.117 billion, down 37% |
| Operating income | $392 million, versus $311 million | $619 million, versus $731 million |
| Net income | $183 million, versus $127 million | $196 million, versus $323 million |
| Net income attributable to Williams | $114 million, versus $103 million | $184 million, versus $243 million |
| Diluted earnings per share | $0.15, versus $0.15 | $0.24, versus $0.35 |
| Operating margin | Approximately 21.3%, versus 18.5% | Approximately 17.4%, versus 21.3% |
| Modified EBITDA | $1.046 billion, versus $648 million | $1.858 billion, versus $1.314 billion |
Six-month earnings attributable to Williams declined primarily because of higher depreciation and amortization, higher interest expense, lower NGL margins, lower insurance recoveries, and merger-related costs. Quarterly results benefited from the Geismar plant returning to service, higher fee-based revenues, and increased insurance recoveries.
- Six-month operating cash flow was $1.483 billion, compared with $759 million in the prior-year period.
- Capital expenditures were $1.654 billion, compared with $1.839 billion. The company also spent $112 million on an Eagle Ford gathering system and $483 million on equity-method investments.
- Cash and cash equivalents were $204 million at June 30, 2015, compared with $240 million at December 31, 2014.
- Total assets were $51.163 billion and total equity was $19.171 billion at June 30, 2015.
- Debt consisted of $21.285 billion of long-term debt, $378 million of current maturities, and $1.743 billion of commercial paper. The company reported a working-capital deficit of $2.342 billion, or $599 million excluding commercial paper.
- Available liquidity was approximately $3.111 billion, including cash and unused capacity under Williams and WPZ credit facilities.
- Cash dividends declared were $0.59 per share for the quarter and $1.17 per share for the six months, increases of approximately 39% and 41%, respectively, versus the comparable periods.
Material Changes Versus the Prior Comparable Period
- Service revenues increased substantially due to the Access Midstream acquisition, Gulfstar One, Transco expansion projects, and increased Northeast gathering and processing activity.
- Product sales and NGL margins declined because of lower energy commodity prices. Management stated that six-month NGL margins were approximately 59% lower, driven primarily by approximately 60% lower non-ethane prices.
- The Geismar olefins plant resumed operations in late March 2015 and contributed higher olefin sales and margins. Williams recorded $126 million of Geismar-related insurance recoveries in both the quarter and six-month period.
- Depreciation and amortization increased to $428 million for the quarter and $855 million for the six months, compared with $214 million and $428 million, respectively, primarily due to acquired operations and projects placed in service.
- Interest expense increased to $262 million for the quarter and $513 million for the six months, reflecting new debt and debt assumed in the Access Midstream acquisition.
- Equity earnings improved to $144 million for the six months from an $11 million loss, primarily because of acquired investments and the absence of 2014 losses related to discontinued Bluegrass Pipeline and Moss Lake projects.
- Williams Partners issued $3 billion of senior unsecured notes, retired $750 million of maturing notes and early-retired $750 million of notes due 2021.
- In June 2015, WPZ acquired an additional approximately 13% interest in UEOM for $357 million, increasing ownership to approximately 62%, while continuing to account for UEOM under the equity method.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management expected 2015 operating results to improve overall versus 2014, primarily from higher Geismar olefins volumes, the Access Midstream acquisition, new fee-based projects, and growth in transportation and gathering activities. These benefits were expected to be partly offset by lower NGL margins, lower commodity prices, and higher operating expenses.
- Planned 2015 consolidated capital investments were $3.96 billion to $4.59 billion; the filing also presents an estimate of $4.275 billion, including $490 million of maintenance and $3.785 billion of expansion capital.
- Management expected crude oil, NGL, and olefins prices to remain below 2014 average levels and warned that lower natural gas prices could reduce gathering and processing volumes.
- Major projects included Atlantic Sunrise, Constitution Pipeline, Leidy Southeast, Virginia Southside, Gulf Trace, Dalton, and other Transco expansions. Completion dates depend on regulatory approvals and project execution.
- The pending acquisition of WPZ public units would require approximately 275 million Williams shares. Under specified termination circumstances, Williams could owe WPZ a $410 million termination fee, settled through reductions in quarterly incentive distributions of up to $102.5 million per quarter.
- Williams rejected an unsolicited all-equity acquisition proposal and authorized a review of strategic alternatives, including a merger, sale, or continuation of its existing plan. Management identified potential disruption, expenses, employee retention issues, and transaction uncertainty as risks.
- Credit ratings were under review or watch at several agencies. A downgrade below investment grade could increase borrowing costs and require additional collateral, estimated at up to $1.1 million for Williams or $232 million for WPZ.
- Contingencies included Geismar litigation and regulatory matters, Alaska sulfolane contamination litigation, royalty-related lawsuits and government subpoenas, environmental obligations, and shareholder litigation concerning the WPZ transaction. Several exposures could not be reasonably estimated; environmental liabilities accrued at June 30 totaled $41 million.
- Unusual items included $20 million of second-quarter impairment charges for surplus equipment, a $14 million gain on early debt retirement, merger and transition costs, strategic-alternative advisory costs, and the $126 million Geismar insurance recovery.
Important Facts for Investors to Verify
- Whether the acquisition of publicly held WPZ units received required approvals and closed, and whether any termination fee became payable.
- The outcome of the strategic-alternatives review and its effect on management focus, capital allocation, financing, and dividends.
- The sustainability of WPZ distributions and incentive distribution rights supporting Williams' liquidity and dividend policy.
- Actual NGL, olefin, and natural gas prices, margins, volumes, and producer activity relative to management's 2015 assumptions.
- Progress, costs, regulatory approvals, and in-service dates for Atlantic Sunrise, Constitution Pipeline, and other major expansion projects.
- Debt maturities, commercial paper refinancing, credit ratings, covenant compliance, and available borrowing capacity.
- Developments in Geismar, environmental, royalty, Alaska contamination, and shareholder litigation matters, including insurance recoveries and potential losses.
- The extent to which reported earnings and cash flow benefited from nonrecurring insurance recoveries, working-capital changes, and other unusual items.