The Williams Companies, Inc. — Fiscal 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 27, 2013. The filing presents annual results and unaudited quarterly data. Williams is an energy-infrastructure company focused on natural-gas pipelines, gathering and processing, NGLs, olefins and related midstream assets, principally through Williams Partners L.P. (WPZ).
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $7.486 billion | $7.930 billion | Down 6% |
| Service revenue | $2.729 billion | $2.532 billion | Up 8% |
| Product sales | $4.757 billion | $5.398 billion | Down 12% |
| Operating income | $1.612 billion | $1.867 billion | Down 14% |
| Income from continuing operations | $929 million | $1.078 billion | Down 14% |
| Net income attributable to Williams | $859 million | $376 million | Up from $376 million |
| Diluted EPS from continuing operations | $1.15 | $1.34 | Down 14% |
| Cash flow from operating activities | $1.835 billion | $3.439 billion | Down $1.604 billion |
| Capital expenditures | $2.529 billion | $2.796 billion | Down 10% |
| Long-term debt, including current portion | $10.736 billion | $8.722 billion | Up $2.014 billion |
| Cash and cash equivalents | $839 million | $889 million | Down $50 million |
Approximate 2012 margins were 21.5% operating margin, 12.4% consolidated net margin and 9.6% continuing-operations margin, based on reported amounts. The filing does not present a company-defined consolidated EBITDA margin.
- Segment revenue was $7.320 billion and segment profit was $1.812 billion for Williams Partners, compared with $7.714 billion and $2.035 billion in 2011.
- Williams NGL & Petchem Services generated $279 million of revenue and $99 million of segment profit, versus $341 million and $157 million in 2011.
- Access Midstream Partners was acquired in December 2012; its contribution to 2012 equity earnings was insignificant because the investment was held only briefly.
- At year-end, total assets were $24.327 billion, stockholders’ equity was $4.752 billion and total equity, including noncontrolling interests, was $7.427 billion.
- Available liquidity was reported at $3.764 billion, comprising $839 million of cash and $2.925 billion of unused revolver capacity. The filing states that $531 million of cash was held primarily by international entities for Canadian growth and was not generally available for corporate purposes.
- Williams’ $900 million revolver had no borrowings; WPZ’s $2.4 billion facility had $375 million outstanding at December 31, 2012. Both Williams and WPZ were in compliance with applicable covenants.
Material changes versus the prior comparable period
- Service revenue increased because of higher gathering and processing volumes, particularly in the Marcellus Shale, acquired Ohio Valley assets, the Susquehanna Supply Hub and western deepwater operations.
- Product sales declined primarily because of lower NGL and olefin prices. Average NGL per-unit margins declined approximately 23% year over year, and Williams Partners’ NGL margins decreased by $229 million.
- Operating income declined because lower NGL and marketing margins, higher maintenance and depreciation costs, and higher corporate and acquisition-related expenses outweighed growth in fee revenue and olefin margins.
- Operating cash flow fell substantially because 2012 no longer included operating cash flows from the former exploration and production business spun off as WPX Energy at the end of 2011, in addition to lower operating results.
- Williams completed the $2.3 billion Caiman acquisition and the $766 million Laser acquisition through WPZ, expanding its Marcellus and Utica gathering and processing platform.
- Williams invested approximately $2.19 billion in Access Midstream Partners, obtaining approximately 25% economic ownership, including a 50% indirect interest in the general partner and incentive distribution rights.
- Debt increased to fund growth and the Access investment. Williams issued $850 million of 3.7% senior notes due 2023, while WPZ and Transco issued additional debt. Williams also raised approximately $2.5 billion through common-stock offerings.
- Quarterly dividends increased from $0.25 per share in the fourth quarter of 2011 to $0.325 in the fourth quarter of 2012; annual dividends declared were approximately $1.196 per share versus $0.775 in 2011.
Guidance, outlook, risks and unusual items
- Management expected 2013 total dividends of approximately $1.44 per share, representing approximately 20% growth over 2012, with a first-quarter 2013 dividend of $0.33875 per share. Management also stated an expectation for $1.75 of dividends in 2014.
- 2013 consolidated capital and investment expenditures were expected to range from $3.975 billion to $4.575 billion, including $355 million to $430 million of maintenance capital and $3.62 billion to $4.145 billion of expansion capital. A separate outlook discussion cited planned consolidated capital investment of approximately $4.275 billion.
- Management estimated 2013 operating cash flow of $2.075 billion to $2.55 billion and expected consolidated liquidity of at least $1 billion.
- Management expected 2013 NGL margins to be below the five-year average and 2012 levels because of anticipated lower ethane and propane prices and higher natural-gas prices. Ethylene margins were expected to improve, although major maintenance was expected to reduce 2013 ethylene volumes.
- Growth projects include the Constitution Pipeline, Marcellus and Ohio Valley expansions, Geismar olefins expansion, Gulfstar FPS, Northeast Supply Link and other pipeline and processing projects.
- Unusual 2012 items included a $144 million gain on reconsolidation of former Venezuelan entities, $63 million of investment-related income associated with Accroven, $26 million of reorganization costs and $23 million of Caiman and Laser acquisition and transition costs. No early debt-retirement costs were recorded in 2012, compared with $271 million in 2011.
- The Eminence Storage Field leak resulted in four cavern retirements. Estimated total abandonment costs were approximately $92 million, of which $69 million had been incurred by year-end 2012; management expected recovery through future rates, net of insurance proceeds.
- Key risks include commodity-price and margin volatility, producer drilling and throughput levels, dependence on WPZ distributions, substantial capital requirements, leverage and refinancing risk, FERC rate proceedings and refunds, environmental and pipeline-safety regulation, project delays or cost overruns, counterparty credit risk, severe weather, cybersecurity and litigation.
- Potential contingencies include indemnification of WPX matters, environmental remediation, Alaska contamination litigation with an estimated reasonably possible exposure of up to $32 million, and other matters for which the filing states that a loss range cannot currently be estimated. Environmental liabilities accrued at year-end totaled $46 million.
Most important facts for an investor to verify
- Whether fee-based growth and WPZ and Access Midstream distributions can offset lower NGL and olefin margins.
- The sustainability of the planned dividend increases given operating cash flow of $1.835 billion in 2012 versus $742 million of dividends paid and materially higher projected capital spending.
- Actual leverage, debt maturities, covenant headroom and access to capital markets after the 2012 debt-funded acquisitions and investments.
- Progress, permitting, costs and in-service dates for Constitution Pipeline, Geismar, Gulfstar FPS, Marcellus expansions and other major projects.
- The collectability and timing of the Venezuelan settlement receivable and the outcome of WPX indemnification, regulatory, environmental and litigation matters.
- Whether the 2012 results are being compared consistently after the WPX spin-off and the recasting of Geismar operations into Williams Partners.