Williams Companies, Inc. — 2014 First-Quarter Form 10-Q
Business context and reporting period
Williams Companies is an energy-infrastructure company focused on natural-gas pipelines, gathering and processing, natural gas liquids, olefins, and related midstream services. Reportable segments are Williams Partners, Williams NGL & Petchem Services, and Access Midstream Partners. The filing covers the three months ended March 31, 2014; results are unaudited and compared with the three months ended March 31, 2013.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $1.749 billion | $1.810 billion | Down 3% |
| Service revenue | $819 million | $706 million | Up 16% |
| Product sales | $930 million | $1.104 billion | Down 16% |
| Operating income | $420 million | $426 million | Down 1% |
| Net income attributable to Williams | $140 million | $161 million | Down 13% |
| Diluted EPS | $0.20 | $0.23 | Down $0.03 |
| Operating cash flow | $446 million | $495 million | Down $49 million |
| Capital expenditures | $793 million | $713 million | Up $80 million |
- Operating margin was approximately 24.0%, compared with 23.5% in the prior-year quarter. Net margin attributable to Williams was approximately 8.0%, compared with 8.9%.
- Net income included $56 million attributable to noncontrolling interests. Equity earnings and losses changed from $18 million of earnings to a $48 million loss, primarily because of Bluegrass Pipeline and Moss Lake project write-offs.
- Cash and cash equivalents increased to $1.064 billion from $681 million at December 31, 2013. Total current assets were $2.178 billion versus current liabilities of $2.549 billion, producing a $371 million working-capital deficit.
- Debt consisted of $751 million due within one year and $12.099 billion of long-term debt, or approximately $12.850 billion total. WPZ issued $1.0 billion of 4.3% notes due 2024 and $500 million of 5.4% notes due 2044.
- Available liquidity was reported at approximately $5.064 billion, including cash and unused parent and WPZ credit facilities. No borrowings were outstanding under those facilities at March 31, 2014, and WPZ had no commercial paper outstanding.
- The quarterly dividend was $0.4025 per share, up 19% from the prior-year quarter and 6% from the preceding quarter.
Material changes versus the prior comparable period
- Service revenue increased due to higher transportation fees, new pipeline projects, new Transco rates, and greater Northeast gathering volumes.
- Product sales and operating results were pressured by the Geismar olefins-plant outage, lower NGL volumes, reduced NGL margins, and an outage at a third-party storage facility affecting the RGP splitter.
- Geismar-related insurance recoveries produced a net benefit of $119 million in costs and expenses, reflecting $125 million of recoveries less $6 million of covered expenses above retentions.
- Equity losses included approximately $67 million from the Bluegrass Pipeline project and $4 million from Moss Lake, principally from writing off capitalized development costs. Management discontinued further Bluegrass funding at that time because sufficient customer commitments had not been obtained.
- The Canada Dropdown transferred certain Canadian operations to WPZ for $25 million of cash, WPZ Class D units, and related general-partner capital-account adjustments. The assets were thereafter reported in Williams Partners.
- Capital investment and equity-method contributions increased, while operating cash flow declined by $49 million. Financing cash flow increased primarily because of WPZ debt issuance.
Guidance, outlook, risks, and unusual items
- Management planned approximately $4.1 billion of consolidated 2014 capital investment; the broader liquidity discussion gave a range of $3.76 billion to $4.44 billion, including $360 million to $440 million of maintenance capital.
- Management expected approximately 20% annual dividend growth in 2014 and 2015 and approximately $1.75 per common share of 2014 cash dividends, subject to available cash and distributions from WPZ and ACMP.
- Management expected 2014 operating results to improve overall, driven by fee-based businesses, olefins, Canadian midstream operations, and infrastructure growth, partially offset by lower NGL margins and higher operating expenses.
- The Geismar plant was expected to begin start-up in the latter half of June 2014 after repair and expansion. Management estimated future Geismar insurance recoveries of approximately $430 million for business interruption and $70 million for plant repair, in addition to amounts already received; actual timing and amounts remained uncertain.
- An April 23, 2014 explosion and fire at the Opal, Wyoming processing facility occurred after quarter-end. Initial assessment indicated damage was largely limited to one of five processing units; the other four units were expected to have sufficient capacity for available gas. Insurance was expected to mitigate the financial impact, but the full effect had not been determined.
- Key risks include commodity-price and NGL-margin volatility, lower volumes, project delays or cost increases, regulatory approvals, counterparty and customer credit risk, access to capital, insurance recoveries, operational incidents, environmental liabilities, litigation, weather, cybersecurity, and potential credit-rating downgrades.
- Material contingencies include Geismar-related regulatory proceedings and lawsuits, California energy-crisis and natural-gas-index litigation indemnification for former affiliate WPX, Alaska sulfolane contamination matters, environmental obligations, and other legal proceedings. Several exposures could not be reasonably estimated; environmental liabilities accrued were $46 million.
Most important facts for investors to verify
- Timing, production impact, repair costs, and insurance recoveries associated with the Geismar and subsequent Opal incidents.
- Whether the planned 2014 capital program, major pipeline projects, and Geismar restart remain on schedule and within budget.
- Sustainability of dividend growth relative to operating cash flow, WPZ and ACMP distributions, debt service, and capital requirements.
- Progress on Bluegrass Pipeline discontinuation and any additional write-offs or funding obligations for related projects.
- Changes in NGL and olefin prices, margins, volumes, and customer commitments.
- Resolution and potential financial exposure from environmental matters, litigation, regulatory proceedings, and indemnification obligations.
- Debt maturities, credit ratings, covenant compliance, and available liquidity after subsequent financing and operating developments.