Williams Companies, Inc. — Form 10-Q Summary
Business context and reporting period
Williams Companies, Inc. is an energy infrastructure company focused on natural gas, natural gas liquids and olefins. Its principal segments are Williams Partners, Access Midstream Partners and Williams NGL & Petchem Services. This unaudited filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
On July 1, 2014, Williams acquired control of Access Midstream Partners, L.P. (ACMP) and began consolidating it. Accordingly, reported 2014 results are not directly comparable with 2013 results for periods before the acquisition.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenues | $2.069 billion | $1.623 billion | $5.496 billion | $5.200 billion |
| Service revenues | $1.127 billion | $736 million | $2.771 billion | $2.163 billion |
| Operating income | $307 million | $336 million | $1.038 billion | $1.112 billion |
| Net income attributable to Williams | $1.678 billion | $141 million | $1.921 billion | $444 million |
| Diluted EPS | $2.22 | $0.20 | $2.68 | $0.65 |
| Operating margin | 14.8% | 20.7% | 18.9% | 21.4% |
| Cash dividends per share declared | $0.56 | $0.36625 | $1.3875 | $1.0575 |
The filing does not provide a single consolidated adjusted EBITDA or free-cash-flow measure. Net income includes a $2.522 billion non-cash gain from remeasuring the previously held ACMP investment to fair value.
- Cash flow from operating activities was $1.104 billion for the first nine months of 2014, down from $1.702 billion in 2013.
- Capital expenditures were $2.943 billion, compared with $2.542 billion in 2013. Investing cash outflows totaled $9.010 billion, including $5.958 billion for the ACMP acquisition.
- Financing activities provided $7.527 billion, including debt and equity proceeds used to fund the ACMP acquisition and growth investments.
- Cash and cash equivalents declined to $302 million at September 30, 2014, from $681 million at December 31, 2013.
- Total debt was approximately $20.9 billion, consisting of $19.922 billion of long-term debt, $754 million of current long-term debt and $265 million of commercial paper.
- Total assets increased to $49.807 billion from $27.142 billion at December 31, 2013, primarily because of the ACMP acquisition and consolidation.
- Available liquidity was reported at approximately $5.001 billion, including cash and unused capacity under Williams, Williams Partners and ACMP credit facilities.
Material changes versus the prior comparable period
- Service revenue increased 53% in the quarter and 28% year to date, primarily from consolidating ACMP and growth in gathering and transportation activities.
- Operating income declined 9% in the quarter and 7% year to date. Higher service revenue was more than offset by higher operating and maintenance costs, depreciation and amortization, the absence of comparable 2013 Geismar insurance recoveries in the quarter, and lower NGL and olefin margins.
- Year-to-date product sales declined 10%, primarily because the Geismar olefins facility was out of operation following the 2013 explosion and fire, and because of lower NGL volumes.
- NGL margins were approximately 22% lower year to date, driven by lower volumes and higher natural gas prices, partially offset by favorable non-ethane prices.
- The ACMP acquisition added $300 million of third-quarter service revenue and $37 million of net income attributable to Williams. Acquisition-related costs and higher acquisition-date asset values also increased depreciation, amortization and interest expense.
- Williams issued 61 million common shares for net proceeds of $3.378 billion and incurred substantial new debt to finance the ACMP acquisition. Long-term debt increased materially from year-end 2013.
- Williams recorded $78 million of equity losses year to date related primarily to the write-off of Bluegrass Pipeline and Moss Lake development costs. The projects were discontinued because of insufficient customer commitments.
Guidance, outlook, risks and unusual items
- Management expected 2014 capital and investment expenditures of $10.485 billion to $11.265 billion, 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 cash dividends, representing approximately 36% growth from 2013, and stated an expectation of approximately 15% annual dividend growth from the higher third-quarter 2014 base through 2017.
- Management expected 2014 operating results to improve overall because of higher fee-based and Canadian midstream activity, partially offset by lower olefin and NGL margins and higher operating expenses.
- The Geismar facility was expected to return to operation in the fourth quarter of 2014 following repair and expansion. Through September 2014, total insurance receipts were $225 million; insurers were evaluating remaining claims, and mediation was scheduled for late November 2014. Recovery of the remaining policy limits was uncertain.
- On October 26, 2014, WPZ and ACMP announced a merger expected to close in early 2015, subject to customary conditions and an effective Form S-4 registration statement. Williams expected to own approximately 60% of the merged partnership.
- Williams had a working capital deficit of $1.033 billion at September 30, 2014, including $750 million of WPZ debt due in February 2015. Management nevertheless stated that liquidity was sufficient for expected requirements.
- Key risks include dependence on distributions from WPZ and ACMP, ACMP’s dependence on major customers including Chesapeake Energy, commodity-price and volume volatility, access to capital markets, project execution, regulatory approvals, environmental liabilities, litigation, insurance recoveries and merger-integration risks.
- Contingencies include Geismar-related regulatory and civil claims, unresolved natural-gas price-index litigation indemnification exposure, Alaska sulfolane contamination matters, environmental remediation obligations of $43 million accrued at September 30, 2014, and other legal proceedings. Some potential exposures could not be reasonably estimated.
- Williams stated that its disclosure controls were effective at a reasonable assurance level. Internal-control changes primarily reflected the acquisition and consolidation of ACMP.
Most important facts for investors to verify
- Whether ACMP and WPZ complete the proposed merger on the announced terms and timetable.
- The final purchase-accounting allocation for ACMP, including goodwill, customer-related intangible assets, depreciation and amortization.
- The amount and timing of remaining Geismar insurance recoveries and the facility’s actual return to service.
- Whether WPZ and ACMP generate sufficient cash distributions to support planned dividend growth and capital spending.
- Debt maturities, covenant compliance, credit ratings and the effect of increased leverage on borrowing costs and liquidity.
- Trends in NGL and olefin volumes and margins, including the effects of commodity prices, ethane recovery decisions and the Geismar outage.
- Regulatory approvals and execution risks for major pipeline and midstream projects, including Constitution, Atlantic Sunrise and other expansions.
- Developments in environmental, litigation and indemnification matters whose ultimate losses were not estimable at the filing date.