Williams Companies, Inc. — First-Quarter 2017 Form 10-Q Summary
Business context and reporting period
Williams is an energy infrastructure company focused on natural gas and natural gas liquids transportation, gathering, processing, fractionation and related midstream services. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Williams has one reportable segment, Williams Partners L.P. (WPZ), which includes its principal gas pipeline and midstream operations. Williams owned approximately 74% of WPZ at March 31, 2017.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1.988 billion | $1.660 billion | +$328 million |
| Service revenue | $1.261 billion | $1.229 billion | +$32 million |
| Product sales | $727 million | $431 million | +$296 million |
| Operating income | $433 million | $262 million | +$171 million |
| Net income | $569 million | $(13) million | +$582 million |
| Net income attributable to Williams | $373 million | $(65) million | +$438 million |
| Diluted EPS | $0.45 | $(0.09) | +$0.54 |
| Cash dividends declared per share | $0.30 | $0.64 | Prior period included different distribution timing |
- Operating margin was approximately 21.8%, compared with approximately 15.8% in the prior-year quarter.
- WPZ Modified EBITDA increased to $1.132 billion from $955 million; consolidated Modified EBITDA increased to $1.150 billion from $918 million.
- Net cash provided by operating activities was $606 million, down from $783 million, primarily because the prior-year period included certain cash receipts that did not recur.
- Capital expenditures were $511 million, compared with $513 million. Investing cash flow was $(122) million, compared with $(346) million.
- Cash and cash equivalents increased to $639 million from $170 million at December 31, 2016.
- Long-term debt was $21.825 billion at March 31, 2017, compared with $22.624 billion at year-end 2016. Consolidated interest incurred was $287 million, compared with $306 million.
- Available liquidity was reported at approximately $5.044 billion, consisting of $639 million of cash and $4.405 billion of available credit capacity. WPZ had no commercial paper outstanding.
Material changes versus the prior comparable period
- Revenue growth reflected higher NGL and olefin prices, higher marketing activity, increased eastern Gulf Coast volumes and the absence of a prior-year rate-case refund adjustment.
- Operating income benefited from higher service revenues, improved NGL margins, cost-containment initiatives, lower labor costs, the absence of Canadian operations and lower project-development costs.
- Per-unit NGL margins increased approximately 120%, driven principally by a 108% increase in non-ethane prices, partially offset by approximately 65% higher natural gas feedstock prices.
- Q1 2017 included a $269 million gain from exchanging WPZ’s DBJV interest for interests in Appalachian gathering systems and cash, plus the sale of WPZ’s Ranch Westex interest. Q1 2016 included $112 million of equity-method investment impairments.
- Q1 2017 included a $30 million net gain from the early retirement of $750 million of WPZ senior notes.
- Income attributable to noncontrolling interests increased by $144 million because of higher WPZ earnings, limiting the benefit flowing to Williams shareholders.
- Williams issued approximately 74.75 million common shares in January and February 2017, generating approximately $2.1 billion of net proceeds used to purchase WPZ units as part of the financial repositioning.
- Williams permanently waived WPZ incentive distribution rights and converted its 2% general partner interest to a non-economic interest in exchange for newly issued WPZ units.
Guidance, outlook, risks and unusual items
- Management expects to maintain a $0.30 quarterly dividend, or $1.20 annually, throughout 2017.
- 2017 growth capital and investment expenditures are expected to total $2.1 billion to $2.8 billion, including approximately $1.4 billion to $1.9 billion for Transco expansions and other interstate pipeline projects.
- WPZ agreed to sell its Geismar olefins facility interest for $2.1 billion in cash, subject to closing conditions and regulatory approvals, with closing expected in summer 2017. Proceeds are expected to repay an $850 million term loan and fund growth investments.
- Management expects fee-based businesses to represent an increasing portion of the portfolio, but producer drilling activity, gathering volumes, commodity prices, customer credit quality and counterparty performance remain important risks.
- Atlantic Sunrise, Dalton and other pipeline projects depend on timely regulatory approvals and construction execution. Constitution Pipeline remains exposed to litigation and permitting uncertainty; approximately $381 million of capitalized project costs were recorded, and an unfavorable resolution could result in a significant impairment.
- Consolidated assets held for sale included approximately $999 million related to the Geismar disposal group, with $43 million of related liabilities.
- The company recorded a $127 million tax benefit from releasing a valuation allowance on a capital loss carryforward, substantially reducing the effective tax burden for the quarter.
- Pending matters include natural-gas price-index litigation, Alaska sulfolane contamination litigation and remediation, royalty litigation, shareholder and Energy Transfer-related litigation, and environmental proceedings. The company cannot estimate potential exposure for several matters; it reported $40 million of environmental liabilities.
- Williams estimates that a downgrade of WPZ below investment grade could require up to $403 million of additional collateral under existing contracts. A $2 million payment was proposed by the Department of Justice regarding alleged Clean Air Act violations at the Moundsville facility, and the company was evaluating the matter.
Important facts for investors to verify
- Completion, proceeds and use of funds from the $2.1 billion Geismar sale.
- Actual 2017 capital spending versus the $2.1 billion–$2.8 billion plan and the effect on debt reduction.
- Progress, permitting and impairment risk for Constitution Pipeline and other major expansion projects.
- Sustainability of the $0.30 quarterly dividend and expected distributions from WPZ after the IDR waiver.
- Underlying fee-based volumes, NGL margins, producer customer credit quality and commodity-price sensitivity.
- Resolution and potential financial exposure from pending litigation, environmental matters and indemnification obligations.
- Impact of the 2017 equity issuance and financial repositioning on per-share earnings, ownership economics and noncontrolling interests.