Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2013. Williams is an energy-infrastructure company focused on natural gas, natural gas liquids, and olefins. Its reportable segments are Williams Partners, Williams NGL & Petchem Services, and Access Midstream Partners. Williams owned approximately 68% of Williams Partners, including its general partner and incentive distribution rights, at March 31, 2013.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1.810 billion | $2.019 billion | Down $209 million |
| Service revenue | $706 million | $677 million | Up 4% |
| Product sales | $1.104 billion | $1.342 billion | Down 18% |
| Operating income | $426 million | $527 million | Down $101 million |
| Income from continuing operations | $231 million | $359 million | Down $128 million |
| Net income attributable to Williams | $161 million | $423 million | Down $262 million |
| Diluted EPS | $0.23 | $0.70 | Down $0.47 |
| Cash flow from operations | $495 million | $434 million | Up $61 million |
| Capital expenditures | $713 million | $329 million | Up $384 million |
Operating margin was approximately 23.5% in Q1 2013 versus 26.1% in Q1 2012. Net income attributable to Williams represented approximately 8.9% of revenue, compared with 20.9% in the prior-year quarter. The decline in net income was amplified by a $136 million gain from discontinued operations in Q1 2012, including a $144 million gain on reconsolidation of former Venezuela operations; Q1 2013 included a $1 million loss from discontinued operations.
- Cash and cash equivalents were $702 million at March 31, 2013, versus $839 million at December 31, 2012.
- Long-term debt, including the current portion, was approximately $10.611 billion at March 31, 2013, versus $10.736 billion at year-end 2012.
- Consolidated liquidity was $3.752 billion, consisting of $702 million of cash and $3.050 billion of available revolving-credit capacity. Management intended to maintain at least $1 billion of consolidated liquidity.
- Williams had no borrowings under its $900 million revolver. Williams Partners had $250 million outstanding under its $2.4 billion revolver and $2.150 billion of available capacity.
- Net cash used in investing activities was $808 million, primarily reflecting capital expenditures and $93 million of contributions to equity-method investments. Net cash provided by financing activities was $176 million.
- The quarterly dividend paid was $0.33875 per share, up 31% from Q1 2012 and 4% from the prior quarter.
Material Changes Versus the Prior Comparable Period
- Williams Partners segment profit declined to $456 million from $551 million, primarily because of lower NGL volumes and margins, higher natural gas costs, and increased operating and depreciation expenses.
- Equity NGL sales volumes fell 53% and NGL production volumes fell 34%, mainly because unfavorable ethane economics reduced ethane recoveries. Severe winter weather and a customer contract conversion to fee-based processing also reduced volumes.
- NGL margins were approximately 21% below Q4 2012, while average NGL prices and ethane prices remained under pressure. Olefin production margins improved by $44 million year over year, partly offsetting the NGL weakness.
- Service revenue increased because of higher gathering volumes from 2012 acquisitions, expansion projects, and new transportation rates. Product sales declined because of lower NGL volumes, lower commodity prices, and lower marketing volumes.
- Operating and maintenance expense increased to $260 million from $230 million, while depreciation and amortization increased to $210 million from $168 million, reflecting acquired and expanded operations and higher depreciation associated with Eminence storage assets.
- Other investing income declined to $13 million from $69 million because Q1 2012 included $63 million related to the sale of a former Venezuelan investment.
- WPZ completed equity issuances and received approximately $760 million of net proceeds, which were used to repay borrowings. Williams Partners' ownership structure increased noncontrolling interests in consolidated subsidiaries to $3.075 billion from $2.675 billion at year-end.
Guidance, Outlook, Risks, and Unusual Items
- Management forecast 2013 cash flow from operations of $2.0 billion to $2.2 billion and total capital and investment expenditures of $4.075 billion to $4.715 billion, including $360 million to $430 million of maintenance capital.
- Planned consolidated capital investment was approximately $4.4 billion. Management expected to fund capital spending primarily with operating cash flow, cash on hand, and Williams Partners debt and equity issuances.
- Management expected approximately $1.44 per share of 2013 cash dividends and approximately 20% annual dividend growth in 2013, 2014, and 2015, subject to cash availability and business conditions.
- Management expected lower 2013 NGL margins and equity NGL volumes because of ethane and propane economics, but anticipated higher average ethylene margins. Access Midstream Partners was expected to increase annual distributions by approximately 15% in 2013 and 2014; Williams forecast $88 million of 2013 distributions from that investment.
- Key growth projects include Three Rivers Midstream, Gulfstar FPS, Marcellus and Utica expansions, Constitution Pipeline, Geismar expansion, an Alberta propane dehydrogenation facility, and additional Canadian NGL infrastructure. Three Rivers Midstream was expected to require approximately $150 million of initial Williams capital and to enter service by the second quarter of 2015.
- Williams delayed the Parachute processing plant from 2014 to mid-2016 because of reduced drilling activity in the Piceance basin.
- The Eminence Storage Field abandonment was approved by FERC. Estimated total abandonment costs were approximately $93 million, of which $71 million had been incurred by March 31, 2013. Williams expected recovery through future rates, net of insurance proceeds, but the estimate could change.
- Material risks include commodity-price and margin volatility, lower producer drilling and volumes, counterparty credit risk, access to capital, project delays or cost overruns, regulatory and environmental matters, severe weather, offshore facility damage, and changes in credit ratings.
- Contingencies include potential exposure related to former WPX natural-gas reporting litigation, Alaska sulfolane contamination, the Liberty Gas Storage counterclaim, FERC rate refunds, environmental remediation, and guarantees. The filing states that certain potential losses cannot currently be estimated; environmental liabilities accrued at March 31, 2013 totaled $49 million.
- Management stated that disclosure controls were effective at a reasonable assurance level and that no material changes occurred in internal controls during the quarter.
Important Facts for Investors to Verify
- Whether the forecast $2.0 billion to $2.2 billion of 2013 operating cash flow can support the planned $4.075 billion to $4.715 billion of capital and investment spending and the targeted dividend growth.
- The sustainability of NGL margins, ethane recovery levels, commodity prices, and gathering and processing volumes.
- Execution, permitting, timing, and final costs of major projects, including Constitution Pipeline, Three Rivers Midstream, Gulfstar FPS, Geismar, and the Canadian PDH facility.
- Williams Partners' ability to access debt and equity markets while maintaining investment-grade credit ratings and required liquidity.
- Potential cash requirements from litigation, environmental remediation, FERC rate refunds, guarantees, and indemnification obligations, particularly matters for which the filing provides no reliable loss range.
- The effect of WPZ ownership changes and noncontrolling interests on the portion of consolidated earnings and cash distributions attributable to Williams shareholders.