Williams Companies, Inc. — 2013 Second-Quarter Form 10-Q
Business context and reporting period
The filing covers the three and six months ended June 30, 2013. Williams is an energy infrastructure company focused on natural gas, natural gas liquids and olefins, with reportable segments comprising Williams Partners, Williams NGL & Petchem Services and Access Midstream Partners. Operations are principally in the United States, with Canadian operations also included.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenues | $1.767 billion | $1.846 billion | $3.577 billion | $3.865 billion |
| Service revenues | $721 million | $667 million | $1.427 billion | $1.344 billion |
| Product sales | $1.046 billion | $1.179 billion | $2.150 billion | $2.521 billion |
| Operating income | $350 million | $332 million | $776 million | $859 million |
| Income from continuing operations | $200 million | $166 million | $431 million | $525 million |
| Net income attributable to WMB | $142 million | $132 million | $303 million | $555 million |
| Diluted EPS | $0.21 | $0.21 | $0.44 | $0.90 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.163 billion | $858 million |
Calculated operating margin was approximately 19.8% in Q2 2013 versus 18.0% in Q2 2012, and approximately 21.7% for the first six months versus 22.2% in the prior-year period. Six-month earnings were affected by the absence of a $144 million 2012 gain related to reconsolidation of former Venezuelan operations and by weaker NGL margins.
At June 30, 2013, cash and cash equivalents were $824 million, total assets were $25.657 billion, commercial paper outstanding was $710 million, long-term debt was $10.359 billion and total debt including current debt was approximately $11.070 billion. Available consolidated liquidity was $3.414 billion, comprising cash and unused revolver capacity; $443 million of cash was primarily held for Canadian growth and was not considered generally available. The company reported at least $1 billion of targeted consolidated liquidity and compliance with applicable credit-facility covenants.
Capital expenditures were $1.530 billion in the first six months, compared with $922 million in the prior-year period. Cash dividends declared were $0.3525 per share for the quarter, up 17.5% year over year and 4% sequentially.
Material changes versus the prior comparable period
- Service revenue increased 8% in Q2 and 6% year to date, driven by higher gathering volumes, new well connections, acquired businesses, pipeline expansions and updated transportation rates.
- Product sales decreased 11% in Q2 and 15% year to date, primarily because of lower NGL volumes and prices, reduced ethane recoveries and lower crude and olefin volumes.
- Williams Partners’ second-quarter segment profit increased to $403 million from $391 million, but first-half segment profit declined to $859 million from $942 million. Lower NGL margins and higher operating costs outweighed higher fee revenues and olefin margins.
- NGL production volumes declined 29% and NGL equity sales volumes declined 48% in the first six months because unfavorable ethane economics reduced ethane recovery. NGL margins were approximately 48% lower year over year.
- Operating income increased in the second quarter despite lower revenue, aided by lower product costs, higher fee revenues, improved olefin margins and lower corporate expenses. First-half operating income declined because of weaker NGL performance and higher operating and depreciation costs.
- Net income attributable to WMB increased in Q2, but declined substantially for the six-month period because 2012 included the $144 million discontinued-operations gain and 2013 included a $12 million discontinued-operations charge related to a former Alaska refinery matter.
- Cash flow from operations increased $305 million year over year, while investing cash use declined because 2012 included significant business acquisitions. Financing cash flow declined as 2012 included larger equity proceeds, although 2013 included commercial paper proceeds and WPZ equity financing.
Guidance, outlook, risks and unusual items
- Management expected 2013 capital and investment expenditures of $4.145 billion to $4.795 billion, including $365 million to $435 million of maintenance capital and $3.780 billion to $4.360 billion of expansion capital.
- Management projected 2013 operating cash flow of $1.925 billion to $1.975 billion and annual dividends of approximately $1.44 per share, representing expected dividend growth of 20% over 2012. Management also expected 20% annual dividend increases in 2014 and 2015, subject to cash availability and business conditions.
- The June 13, 2013 explosion and fire at the Geismar olefins plant caused two fatalities, injuries and a temporary shutdown. Management expected the repaired facility and expansion to return to service in April 2014, estimated repair costs at $102 million and forecast approximately $384 million of insurance cash recoveries. Timing and recoverability remained uncertain; $6 million of insurance deductibles had been expensed through June 30.
- Geismar-related lawsuits, regulatory investigations and potential environmental penalties could not yet be reasonably estimated. Insurance does not cover potential agency fines and penalties.
- The Eminence storage-field abandonment was expected to cost approximately $95 million through the first half of 2014; $76 million had been incurred by June 30. The company recorded a $6 million expense for costs not expected to be recovered through rates and recognized $12 million of probable insurance recoveries.
- Major growth projects included Gulfstar FPS, Constitution Pipeline, Bluegrass Pipeline, Marcellus and Utica expansions, and Canadian petrochemical projects. Remaining construction costs were estimated at less than $450 million for Gulfstar and less than $650 million for Constitution.
- On July 31, 2013, after the reporting date, WMB amended its revolver to $1.5 billion and extended maturity to July 31, 2018. WPZ amended its revolver to $2.5 billion with the same maturity date.
- Principal risks include commodity-price and NGL-margin volatility, lower producer activity and volumes, capital-market access, project delays or cost overruns, counterparty risk, regulatory and environmental matters, severe weather, offshore damage, cybersecurity and the timing of Geismar insurance recoveries.
- Potentially material contingencies include indemnification obligations related to former WPX matters, unresolved natural-gas price-index litigation, Alaska environmental remediation, Geismar litigation and regulatory actions, and other environmental liabilities. The filing states that certain exposures cannot presently be estimated.
Most important facts for investors to verify
- Actual Geismar repair timing, repair costs, operating losses and timing and amount of insurance recoveries.
- Whether NGL prices, ethane-recovery decisions and natural-gas prices continue to pressure NGL margins and volumes.
- Progress, final approvals, costs and in-service dates for Constitution, Bluegrass, Gulfstar and other expansion projects.
- Cash flow coverage of planned capital expenditures, debt service and the projected dividend-growth program.
- Commercial paper refinancing, revolver availability, credit ratings and any collateral requirements following a downgrade.
- Resolution and potential financial impact of Geismar claims, Alaska remediation, WPX indemnification matters, environmental proceedings and other litigation.
- Whether distributions from Williams Partners and Access Midstream Partners meet management’s expectations and support parent-level liquidity and dividends.