Williams Companies, Inc. 2012 Q1 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2012. Williams is an energy infrastructure company focused on natural gas pipelines, gathering and processing, natural gas liquids, and olefins. Continuing operations are organized primarily into Williams Partners and Midstream Canada & Olefins. The former exploration and production business was spun off to shareholders as WPX Energy on December 31, 2011 and is presented as discontinued operations.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $2,019 million | $1,871 million | +8% |
| Operating income | $527 million | $439 million | +20% |
| Income from continuing operations | $359 million | $360 million | Broadly flat |
| Net income attributable to Williams | $423 million | $321 million | +32% |
| Diluted EPS | $0.70 | $0.54 | +30% |
| Cash flow from operations | $434 million | $811 million | -$377 million |
| Capital expenditures | $329 million | $526 million | -$197 million |
| Cash and cash equivalents | $1,100 million | $923 million | Up from year-end 2011 cash of $889 million |
Operating margin was approximately 26.1% in Q1 2012 versus 23.5% in Q1 2011. Net income attributable to Williams represented approximately 20.9% of revenue versus 17.2% in the prior-year quarter; these comparisons are affected by discontinued operations and unusual items.
- Williams Partners revenue increased to $1,685 million from $1,579 million, while segment profit increased to $488 million from $437 million.
- Midstream Canada & Olefins revenue increased to $345 million from $316 million, and segment profit increased to $103 million from $74 million.
- Income from continuing operations attributable to Williams was $287 million, or $0.47 diluted EPS, compared with $300 million, or $0.50, in Q1 2011.
- Cash dividends declared were $0.25875 per common share, compared with $0.125 in Q1 2011.
- Total debt was approximately $8.7 billion, including $329 million due within one year. The filing reports $8.366 billion of long-term debt and no borrowings under the company’s or WPZ’s revolving credit facilities.
- Available liquidity was reported at $4.0 billion, consisting of $1.1 billion of cash and $2.9 billion of unused revolving credit capacity. Of reported cash, $614 million was held by subsidiaries and international operations and was not considered available for general corporate purposes.
Material changes versus the prior comparable period
- Operating income improved by $88 million, principally from higher fee revenues and stronger NGL and ethylene margins.
- Williams Partners benefited from higher gathering, processing, transportation, and NGL margins, partly offset by higher marketing purchases, SG&A, and lower NGL marketing margins.
- Midstream Canada & Olefins benefited from higher ethylene prices and volumes.
- Continuing-operations earnings were essentially unchanged because Q1 2011 included an approximately $124 million tax benefit from federal settlements and an international revised assessment; Q1 2012 recorded a $133 million tax provision.
- Q1 2012 included $136 million of income from discontinued operations, primarily a $144 million gain from reconsolidating Venezuelan entities following a settlement. Q1 2011 included $24 million from the former exploration and production business.
- Operating cash flow declined because the company no longer received operating cash flows from the spun-off exploration and production business and experienced unfavorable working-capital changes.
- WPZ completed the $325 million cash and $465 million equity Laser Acquisition in February 2012, expanding its Marcellus Shale gathering platform.
- After quarter-end, WPZ completed the approximately $1.72 billion cash and $720 million equity Caiman acquisition. Williams invested approximately $1 billion in additional WPZ units and issued 29.9 million Williams shares, generating approximately $887 million of net proceeds.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2012 cash flow from operations of $1.925 billion to $2.425 billion and consolidated liquidity of at least $1 billion.
- Planned 2012 capital and investment expenditures were approximately $6.4 billion to $6.8 billion, including approximately $1.2 billion of WPZ equity consideration associated with acquisitions. Maintenance capital was expected to be $520 million to $600 million.
- Management expected 2012 dividends of approximately $1.20 per share, nearly 55% above 2011, with stated plans for 20% dividend increases in both 2013 and 2014.
- Williams Partners expected 2012 capital investment of $5.3 billion to $5.5 billion and projected average NGL margins comparable to 2011. Midstream Canada & Olefins expected higher ethylene margins but comparable Canadian propylene and NGL margins.
- Key risks include commodity-price volatility, lower producer drilling and gathering volumes, access to capital, counterparty credit risk, regulatory and environmental matters, construction and operating hazards, severe weather, cybersecurity, and potential credit-rating downgrades.
- The company disclosed a material weakness in internal control over financial reporting related to deferred income taxes on its investment in WPZ. Management concluded that disclosure controls were not effective as of March 31, 2012 and began enhancing tax-accounting oversight.
- Environmental liabilities accrued at March 31, 2012 totaled $46 million. Notable contingencies included potential WPX-related indemnification exposure, Alaska refinery contamination litigation with reasonably possible exposure estimated from an insignificant amount to $32 million, and a WPX-related guarantee exposure estimated at approximately $245 million.
- The Eminence Storage Field cavern leak and retirements were expected to require approximately $76 million of abandonment costs through the first half of 2013; approximately $44 million had been incurred by March 31, 2012. Management expected recovery through future rates, net of insurance proceeds.
Most important facts for investors to verify
- Whether the reported earnings improvement is sustainable after excluding the Venezuelan reconsolidation gain, Accroven-related investing income, discontinued operations, and prior-year tax benefit.
- The funding, leverage, cash-flow impact, and integration results of the Caiman acquisition and related WPZ and Williams equity issuances.
- Progress in remediating the disclosed material weakness and the impact of deferred tax accounting on future reported equity and earnings.
- Actual 2012 operating cash flow, capital spending, dividend funding, and maintenance of the targeted liquidity level.
- Exposure to natural gas and NGL prices, producer drilling activity, counterparty performance, regulatory approvals, and environmental and litigation outcomes.
- Whether Williams and WPZ maintain investment-grade credit ratings and avoid additional collateral requirements following any downgrade.