WILLIAMS COMPANIES, INC. quarterly report, Q2 FY2014

Williams Companies, Inc. — Form 10-Q Summary

Business context and reporting period

Williams Companies is an energy infrastructure company focused on natural gas transmission, gathering, processing, natural gas liquids and olefins. Its principal segments are Williams Partners, Williams NGL & Petchem Services and Access Midstream Partners. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.

The filing reflects Williams’ continued shift toward fee-based infrastructure and significant investment in the proposed acquisition of Access Midstream Partners, L.P. (“ACMP”), which closed on July 1, 2014, after the reporting date.

Key financial metrics

Metric	Three months ended June 30, 2014	Three months ended June 30, 2013	Six months ended June 30, 2014	Six months ended June 30, 2013
Total revenue	$1.678 billion	$1.767 billion	$3.427 billion	$3.577 billion
Service revenue	$825 million	$721 million	$1.644 billion	$1.427 billion
Product sales	$853 million	$1.046 billion	$1.783 billion	$2.150 billion
Operating income	$311 million	$350 million	$731 million	$776 million
Income from continuing operations attributable to Williams	$99 million	$149 million	$239 million	$311 million
Net income attributable to Williams	$103 million	$142 million	$243 million	$303 million
Diluted earnings per share	$0.15	$0.21	$0.35	$0.44
Cash flow from operating activities	Not separately provided	Not separately provided	$759 million	$1.163 billion

Operating margin was approximately 18.5% in the second quarter and 21.3% for the six-month period, compared with approximately 19.8% and 21.7%, respectively, in the prior-year periods. Net income attributable to Williams margin was approximately 6.1% for the quarter and 7.1% year to date, compared with 8.0% and 8.5% in 2013.

Cash flow, debt and liquidity

Cash and cash equivalents were $860 million at June 30, 2014, compared with $681 million at December 31, 2013. An additional $5.995 billion was held for the ACMP acquisition and paid on July 1, 2014.
Six-month operating cash flow was $759 million, down from $1.163 billion in 2013.
Capital expenditures were $1.839 billion, compared with $1.530 billion in the prior-year period. Investing cash outflows totaled $7.936 billion, primarily due to the $5.995 billion deposited for the ACMP acquisition.
Total debt, including current maturities, was approximately $16.290 billion at June 30, 2014, compared with approximately $11.354 billion at December 31, 2013. The fair value of long-term debt, excluding capital leases, was $17.684 billion.
Williams had $1.2 billion of unused capacity under its $1.5 billion credit facility. Williams Partners had $2.5 billion of capacity under its credit facility after consideration of commercial paper. Reported available liquidity was approximately $4.560 billion, excluding the cash held for the ACMP acquisition.
Working capital was negative $277 million. Williams had $300 million outstanding under its credit facility; Williams Partners had no credit-facility borrowings or commercial paper outstanding at quarter-end.
The quarterly dividend was $0.425 per share, up 21% from the second quarter of 2013 and 6% from the prior quarter.

Material changes versus the prior comparable period

Service revenue increased 14% in the quarter and 15% year to date, driven by higher gathering volumes, new projects and increased natural gas transportation fees.
Product sales declined 18% in the quarter and 17% year to date, primarily because the Geismar olefins facility was not producing following the June 2013 explosion and fire, and because of lower NGL volumes.
Operating income declined $39 million in the quarter and $45 million year to date. The principal unfavorable factors were lower Geismar olefin margins, lower NGL margins, higher depreciation, development costs and a $17 million impairment charge for equipment held for sale.
Geismar-related insurance recoveries provided a net benefit of $42 million in the second quarter and $161 million for the first six months, including $50 million and $175 million of gross recoveries, respectively, partly offset by covered expenses above deductibles.
Six-month equity earnings changed to a loss of $11 million from earnings of $56 million, primarily because of $79 million of equity losses related to Bluegrass Pipeline and Moss Lake development-cost write-offs.
Williams issued 61 million common shares for net proceeds of $3.378 billion and issued $1.9 billion of senior notes. These proceeds were used to fund the ACMP acquisition.
Williams contributed certain Canadian operations to Williams Partners in February 2014 in exchange for cash, Class D partnership units and an increase in its general-partner capital account.

Guidance, outlook and management commentary

Management expected 2014 operating results to improve overall versus 2013, supported by fee-based and Canadian midstream growth, partly offset by lower olefin and NGL margins and higher operating expenses.
Management forecast approximately $10.485 billion to $11.265 billion of 2014 capital and investment expenditures, including the $5.995 billion ACMP acquisition. Maintenance capital was expected to be $425 million to $505 million.
Management expected approximately $1.96 per common share of 2014 dividends, representing approximately 36% growth over 2013. It also expected a 32% increase from the second-quarter dividend to the third-quarter dividend and 15% annual growth through 2017 over the annualized third-quarter 2014 amount.
Following the ACMP acquisition, Williams expected to consolidate ACMP, receive higher distributions and recognize a significant non-cash gain estimated at $2.5 billion to $3.0 billion in the third quarter of 2014. The acquisition was also expected to increase depreciation and amortization due to the higher acquisition basis.
Williams proposed merging Williams Partners into ACMP at an initially proposed exchange ratio of 0.85 ACMP units per Williams Partners unit. The proposal remained subject to conflicts committee, board and unitholder approvals, and the terms could change.
Management expected the Geismar plant to return to service in the fourth quarter of 2014 after repairs and expansion, but noted that startup timing, repair costs and insurance recoveries remained uncertain.

Risks, contingencies and unusual items

Geismar insurance claims remained under review. Williams had received $225 million through June 2014 and was pursuing the remaining $275 million of the applicable $500 million limits; insurers had made a partial payment while evaluating business-interruption assumptions.
Geismar-related litigation, regulatory investigations, environmental claims and potential penalties could not be reasonably estimated. The incident involved two fatalities and reported injuries.
Environmental liabilities accrued at June 30, 2014 totaled $45 million. The Alaska refinery contamination matter had an estimated reasonably possible exposure ranging from insignificant to $32 million, although the company stated the ultimate exposure could exceed that amount.
Williams had $13 million accrued for Gulf Liquids litigation, with trial scheduled for October 2014. The company also disclosed potential material exposure from indemnification of former affiliate WPX in natural-gas price-index litigation, although no loss range could be estimated.
The proposed Bluegrass Pipeline was not sufficiently supported by executed customer commitments; Williams discontinued further funding and recognized related development-cost losses.
ACMP was substantially dependent on Chesapeake Energy and other producers, creating customer concentration, producer activity and counterparty-credit risks. The acquisition could also trigger debt repurchase obligations or a credit-facility event of default if specified rating conditions occurred.
Standard & Poor’s lowered Williams’ senior unsecured and corporate credit ratings to BB+, one notch below investment grade, with a stable outlook. Williams Partners retained investment-grade ratings, and Moody’s and Fitch affirmed Williams’ investment-grade ratings.
Additional risks included commodity-price volatility, project delays, regulatory approvals, access to capital markets, interest rates, weather, operational hazards, cybersecurity, environmental compliance and the ability of Williams Partners and ACMP to sustain expected distributions.

Most important facts for investors to verify

Whether the $2.5 billion to $3.0 billion estimated ACMP acquisition gain and subsequent consolidation accounting were recorded as expected.
The actual impact of ACMP consolidation on revenue, EBITDA, debt, leverage, distributions, depreciation and amortization.
Geismar’s actual return-to-service date, operating performance, final repair and expansion costs, and the amount and timing of remaining insurance recoveries.
Whether the proposed Williams Partners–ACMP merger was approved, and the final exchange ratio, special payment or other terms.
Progress and spending on major expansion projects, including Constitution, Transco expansions, Gulfstar, Geismar and Marcellus/Utica projects.
Changes in Williams’ credit ratings, leverage covenant compliance and access to liquidity following the acquisition.
Resolution and potential financial effects of the Geismar, environmental, WPX indemnification and other disclosed legal proceedings.
Whether projected dividend growth and 2014 capital-spending plans were supported by operating cash flow and sustainable distributions from Williams Partners and ACMP.