WILLIAMS COMPANIES, INC. quarterly report, Q3 FY2012

Business Context and Reporting Period

The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. Williams is an energy infrastructure company focused on natural gas pipelines, gathering and processing, natural gas liquids, and olefins. Its principal reporting segments are Williams Partners and Midstream Canada & Olefins. Williams owned approximately 66% of Williams Partners L.P. at September 30, 2012. The former exploration and production business was spun off as WPX Energy on December 31, 2011 and is presented as discontinued operations.

Financial Performance and Position

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Revenue	$1,752 million	$1,972 million	$5,617 million	$5,827 million
Operating income	$373 million	$457 million	$1,232 million	$1,356 million
Income from continuing operations	$200 million	$321 million	$725 million	$920 million
Net income attributable to Williams	$155 million	$272 million	$710 million	$820 million
Diluted EPS	$0.25	$0.46	$1.15	$1.37
Operating cash flow	Not provided for the quarter	Not provided for the quarter	$1,289 million	$2,352 million

Q3 revenue declined 11%, while nine-month revenue declined 4%. Q3 operating income decreased 18%; nine-month operating income decreased 9%.
Calculated operating margin was approximately 21.3% in Q3 2012 versus 23.2% in Q3 2011, and 21.9% for the first nine months versus 23.3% in the prior-year period. Williams-attributable net margin was approximately 8.8% in Q3 versus 13.8%, and 12.6% for nine months versus 14.1%.
Williams Partners revenue was $1,527 million in Q3 and $4,795 million for nine months. Segment profit was $373 million and $1,200 million, respectively, compared with $471 million and $1,379 million in the prior-year periods.
Midstream Canada & Olefins revenue was $231 million in Q3 and $847 million for nine months. Segment profit was $72 million and $243 million, compared with $73 million and $219 million, respectively.
Cash and cash equivalents were $996 million at September 30, 2012, compared with $889 million at December 31, 2011. Total assets increased to $21.263 billion from $16.502 billion, substantially reflecting the Laser and Caiman acquisitions.
Long-term debt was $9.512 billion at September 30, 2012, compared with $8.369 billion at year-end 2011. The carrying amount of total long-term debt, including the current portion, was $9.511 billion; disclosed fair value was $11.258 billion.
Total equity increased to $5.991 billion from $2.586 billion, including $2.899 billion of noncontrolling interests, primarily from Williams Partners equity issuances and acquisition-related transactions.
Nine-month capital expenditures were $1.652 billion, compared with $1.833 billion. Investing cash outflow was $3.680 billion, including $2.049 billion for business purchases and $282 million of equity investment contributions.
Nine-month financing cash inflow was $2.498 billion, supported by debt and equity issuances. Dividends paid to common shareholders were $538 million, compared with $309 million in the prior-year period.
At September 30, 2012, available liquidity was reported at $4.296 billion, consisting of $996 million of cash and $3.300 billion of unused revolver capacity. The company stated that it maintained at least $1 billion of consolidated liquidity.

Material Changes Versus the Prior Comparable Period

Williams Partners results weakened primarily because average NGL prices and margins declined. Nine-month average NGL margins were approximately 17% below the prior-year period; Q3 equity NGL revenue declined $99 million, principally from a 36% reduction in average NGL prices.
Higher fee revenues, including increased Marcellus volumes and new volumes from acquired assets, partly offset lower commodity-related margins. Williams Partners nine-month fee revenue increased by approximately $110 million.
Williams Partners operating costs and SG&A increased because of acquired assets, depreciation and amortization, maintenance, employee-related costs, information technology spending, and acquisition-transition costs.
Midstream Canada & Olefins nine-month segment profit increased $24 million despite lower revenue, primarily because lower feedstock costs and higher Geismar ethylene margins offset weaker Canadian NGL and propylene margins.
Income from continuing operations attributable to Williams declined $152 million for the first nine months. The decline reflected lower Williams Partners operating income and the absence of approximately $201 million of favorable tax benefits recognized in 2011, partly offset by improved Midstream Canada & Olefins results, lower interest expense, and higher investing income.
Operating cash flow decreased $1.063 billion, largely because the prior-year period included cash flows from the former exploration and production business and because 2012 operating results were lower.
Williams Partners completed the $766 million Laser acquisition and the approximately $2.327 billion Caiman acquisition, expanding its Marcellus and Utica footprint. Caiman-related purchase accounting remained preliminary.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management expected total 2012 cash dividends of approximately $1.20 per share, about 55% above 2011, and stated an expectation for 20% dividend increases in both 2013 and 2014.
Management expected 2012 operating cash flow of $1.75 billion to $1.95 billion and capital and investment expenditures of $5.1 billion to $5.5 billion, excluding approximately $1 billion of Williams Partners equity issued in the Laser and Caiman acquisitions. Other portions of the filing cite total planned capital investments of approximately $6.513 billion, reflecting differing presentation scopes.
Management expected NGL margins to improve modestly through year-end and full-year 2012 average per-unit NGL margins to approximate the rolling five-year average, but remain below 2011 levels. Longer term, the company expects a greater proportion of fee-based earnings.
Williams hedged approximately 12% to 14% of anticipated remaining 2012 NGL sales volumes and a corresponding portion of shrink natural gas requirements. The hedged volumes were expected to provide a margin of $61 million.
In October 2012, Williams Partners agreed to acquire Williams’ 83.3% interest and operatorship of the Geismar olefins facility and related assets for consideration valued at approximately $2.364 billion, substantially funded with Williams Partners units. Closing was expected in November 2012.
Hurricane Isaac and related equipment and third-party pipeline issues reduced Midstream Canada & Olefins third-quarter profit by an estimated $9 million to $13 million. The company expected furnace repairs to be completed in Q4 with an insignificant additional profit impact.
The company recognized $138 million of income from discontinued operations for the first nine months, primarily including a $144 million gain on reconsolidation of Venezuelan entities following a settlement. The related note receivable had a $62 million carrying value and $67 million disclosed fair value at September 30, 2012.
Construction of the Gulfstar FPS project was underway, with $438 million of construction work in process and estimated remaining construction costs below $550 million. The project was expected to enter service in 2014.
Key risks include NGL and natural gas price volatility, lower producer drilling and gathering volumes, counterparty credit risk, access to capital, interest rates, regulatory and environmental requirements, operational hazards, severe weather, cybersecurity, litigation, and potential credit-rating downgrades. A downgrade below investment grade could require additional collateral of up to $47 million for Williams and $400 million for Williams Partners.
Material contingencies include environmental liabilities accrued at $44 million, possible losses related to California energy and gas-index litigation indemnifications, Alaska refinery contamination exposure estimated from an insignificant amount to $32 million, and a Liberty Gas Storage counterclaim exceeding $200 million that the company could not evaluate.

Most Important Facts for Investors to Verify

Reconcile the differing 2012 capital-investment figures and confirm which expenditures are included or excluded in each guidance measure.
Assess the sensitivity of cash flow, dividends, and debt-service capacity to NGL price and margin assumptions.
Review acquisition integration, preliminary Caiman purchase accounting, goodwill and intangible-asset impairment risks, and the financing of related expansion projects.
Confirm the closing, valuation, and funding structure of the subsequent Geismar asset transaction with Williams Partners.
Evaluate whether projected operating cash flow and available revolver capacity support the stated capital program and dividend-growth plans.
Monitor FERC rate cases, environmental remediation, litigation, WPX indemnification obligations, and the collectability of the Venezuelan-related note receivable.