WILLIAMS COMPANIES, INC. quarterly report, Q3 FY2013

Williams Companies, Inc. — 2013 Third-Quarter Form 10-Q Summary

Business context and reporting period

Williams is an energy infrastructure company focused on natural gas, natural gas liquids and olefins infrastructure. Its reportable segments are Williams Partners, Williams NGL & Petchem Services and Access Midstream Partners. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the same periods in 2012.

Key financial metrics

Metric	Three months ended Sept. 30, 2013	Three months ended Sept. 30, 2012	Nine months ended Sept. 30, 2013	Nine months ended Sept. 30, 2012
Total revenue	$1.623 billion	$1.752 billion	$5.200 billion	$5.617 billion
Operating income	$336 million	$373 million	$1.112 billion	$1.232 billion
Income from continuing operations	$198 million	$200 million	$629 million	$725 million
Net income attributable to Williams	$141 million	$155 million	$444 million	$710 million
Diluted earnings per share	$0.20	$0.25	$0.65	$1.15
Cash flow from operations	Not separately provided	Not separately provided	$1.702 billion	$1.289 billion

Approximate operating margin was 20.7% in the quarter and 21.4% year to date, versus 21.3% and 21.9% in the comparable periods.
Approximate net margin attributable to Williams was 8.7% in the quarter and 8.5% year to date, versus 8.8% and 12.6%, respectively.
Capital expenditures were $2.542 billion for the first nine months, compared with $1.652 billion in 2012. Total investing cash outflow was $2.903 billion.
Cash and cash equivalents were $732 million at September 30, 2013, versus $839 million at December 31, 2012.
Long-term debt was $10.359 billion, commercial paper was $371 million, and total debt including current maturities was approximately $10.731 billion. Debt fair value was $11.026 billion.
Consolidated available liquidity was reported at $4.361 billion, including cash and unused revolving capacity. Williams had a $1.5 billion revolver and WPZ had a $2.5 billion revolver, with no borrowings outstanding under either facility; WPZ had $371 million of commercial paper outstanding.
Cash dividends declared were $0.36625 per share for the quarter and $1.0575 per share for the first nine months, compared with $0.3125 and $0.87125 in 2012.

Material changes versus the prior comparable period

Total revenue declined 7% in both the quarter and first nine months. Service revenue increased 9% in the quarter and 7% year to date, but product sales declined 18% and 16%, respectively.
Williams Partners’ nine-month segment profit declined to $1.264 billion from $1.371 billion. Lower NGL volumes and margins, reduced ethane recoveries, lower NGL prices, higher natural gas prices and the Geismar outage more than offset higher fee revenue.
NGL production volumes declined 29% and equity NGL sales volumes declined 46% in the first nine months, principally because of unfavorable ethane economics, reduced ethane recoveries and contract changes.
The June 13, 2013 explosion and fire at the Geismar olefins plant materially reduced production. Ethylene sales volumes declined 96% in the quarter and 41% year to date.
Williams NGL & Petchem Services reported a quarterly segment loss of $2 million versus $16 million of profit, primarily because of a scheduled shutdown and ethane-recovery project tie-in. Nine-month segment profit declined to $56 million from $72 million.
Access Midstream Partners contributed $35 million of segment profit for the first nine months, including $26 million of noncash gain from its equity issuance, compared with no contribution in the 2012 comparable period.
Year-to-date net income attributable to Williams was reduced by the absence of a $144 million 2012 gain related to reconsolidation of former Venezuela operations and by a $15 million 2013 charge related to a former Alaska refinery matter.
Noncontrolling interests increased to $3.998 billion from $2.675 billion at year-end 2012, primarily reflecting WPZ equity issuances and related ownership changes.

Guidance, outlook, commentary and unusual items

Management maintained a 2013 capital and investment expenditure outlook of $4.1 billion to $4.6 billion, including $345 million to $405 million of maintenance capital and $3.755 billion to $4.195 billion of expansion capital. The company also described planned consolidated capital investment of approximately $4.4 billion.
Management estimated 2013 operating cash flow of $2.11 billion to $2.15 billion and expected approximately $1.44 per share of cash dividends, representing approximately 20% annual dividend growth. Management also stated an expectation of 20% annual dividend increases in 2014 and 2015, subject to the stated risks and cash availability.
The Geismar plant was expected to return to operation by April 2014 following repair and expansion. The company estimated $102 million of repair costs and approximately $343 million of total cash insurance recoveries related to business interruption losses. Through September 30, $50 million of insurance recoveries had been recognized.
Management expects NGL margins to remain below the prior year because of lower NGL prices, higher natural gas prices and continued ethane rejection. The company expects its business mix to become increasingly fee-based.
On October 30, 2013, WPZ announced its intent to pursue an acquisition of certain Williams Canadian operations. The transaction remained subject to definitive agreements, Conflicts Committee review and board approvals.
The company expects approximately $200 million of deferred tax expense in the fourth quarter of 2013 if the proposed Canadian transaction proceeds; approximately $140 million is expected to become a current tax liability upon consummation.
Eminence storage-field abandonment costs were estimated at approximately $103 million, of which approximately $92 million had been incurred by September 30. The company recognized $15 million of expense for amounts not expected to be recovered through rates and $15 million of related insurance recoveries year to date.
Material contingencies include Geismar-related regulatory investigations, environmental claims and lawsuits, indemnification obligations for former affiliate WPX, Alaska refinery remediation and litigation, and the Gulf Liquids litigation. For several matters, the filing states that a reasonably possible loss range cannot be estimated.
Management stated that disclosure controls were effective at a reasonable assurance level and that there were no material changes to internal controls during the quarter.

Most important facts for an investor to verify

Timing, final repair costs, insurance recoveries and uninsured losses associated with the Geismar plant incident.
Whether lower NGL volumes, continued ethane rejection and commodity-price weakness persist and further pressure margins.
Funding of the extensive capital program, WPZ distributions, dividend growth and the company’s ability to maintain at least $1 billion of consolidated liquidity.
Completion terms, financing structure and tax consequences of the proposed WPZ acquisition of Canadian operations.
Potential exposure from Geismar litigation and regulatory actions, WPX indemnification matters, environmental remediation and other contingencies for which the filing does not provide a reliable loss range.
Debt maturities, commercial-paper refinancing, credit ratings and any collateral requirements resulting from a downgrade below investment grade.