Business Context and Reporting Period
The Williams Companies, Inc. filed an unaudited Form 10-Q for the three and nine months ended September 30, 2011, with comparative periods ended September 30, 2010. Operations comprised Williams Partners, Exploration & Production, Midstream Canada & Olefins, and Other. Management was pursuing the separation of Exploration & Production into WPX Energy through a planned tax-free spin-off by year-end 2011.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2011 | Three months ended Sept. 30, 2010 | Nine months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2010 |
|---|---|---|---|---|
| Revenue | $2.703 billion | $2.300 billion | $7.947 billion | $7.180 billion |
| Operating income (loss) | $494 million | $(1.290) billion | $1.521 billion | $(395) million |
| Operating margin | 18.3% | (56.1%) | 19.1% | (5.5%) |
| Net income attributable to WMB | $272 million | $(1.263) billion | $820 million | $(1.271) billion |
| Attributable diluted EPS | $0.46 | $(2.16) | $1.37 | $(2.17) |
| Cash from operating activities | Not separately presented | Not separately presented | $2.352 billion | $1.941 billion |
| Capital expenditures | Not separately presented | Not separately presented | $1.833 billion | $2.111 billion |
At September 30, 2011, cash and cash equivalents were $996 million, total assets were $26.146 billion, current liabilities were $2.439 billion, current debt was $361 million, and long-term debt was $9.024 billion. Reported debt, including current maturities, was $9.385 billion; fair value was $10.580 billion. Consolidated available liquidity, including cash and undrawn revolving facilities, was approximately $3.496 billion, although some cash was held by subsidiaries and international operations.
Declared dividends were $0.20 per share for the third quarter and $0.525 per share for the first nine months, compared with $0.125 and $0.360, respectively, in the prior-year periods.
Material Changes Versus Prior Comparable Period
- Revenue increased 18% in the third quarter and 11% year to date, primarily from higher commodity prices, NGL activity, marketing revenue, and fee revenue at Williams Partners and Midstream Canada & Olefins.
- Williams Partners operating income increased to $431 million in the third quarter from $347 million and to $1.278 billion year to date from $1.079 billion, supported by improved NGL margins, higher transportation and gathering fees, and equity earnings.
- Exploration & Production returned to operating income of $43 million in the third quarter and $177 million year to date, compared with losses of $1.635 billion and $1.419 billion, respectively. The improvement primarily reflects the absence of $1.003 billion of goodwill impairment and $678 million of property and reserve impairments recorded in 2010, as well as higher production and commodity prices.
- Midstream Canada & Olefins operating income increased to $73 million in the third quarter from $42 million and to $219 million year to date from $123 million, mainly due to higher per-unit NGL, ethylene, propylene, and related product margins.
- Cash from operations increased $411 million year to date. Investing cash use declined to $1.988 billion from $2.472 billion, while financing cash use declined to $163 million from $321 million.
- Debt activity included a $375 million Transco senior-note issuance, repayment of $300 million of Transco notes, and repayment of $150 million of WPZ notes. New five-year revolving facilities were established for WMB and WPZ in June 2011.
Guidance, Outlook, Risks, and Unusual Items
- Management expected full-year 2011 operating results and operating cash flow to exceed 2010 levels. Estimated 2011 operating cash flow was $3.0 billion to $3.2 billion, and total capital and investment expenditures were expected to be $2.825 billion to $3.425 billion.
- Exploration & Production expected 2011 capital expenditures of $1.35 billion to $1.55 billion and approximately 9% growth in average daily total production over 2010. Williams Partners expected $1.020 billion to $1.300 billion for capital projects and additional investments; Midstream Canada & Olefins expected $300 million to $400 million.
- Management announced a quarterly dividend increase to $0.25 beginning in December 2011 and anticipated annual dividend growth of 10% to 15%, subject to cash distributions from WPZ and other conditions.
- Commodity prices and the broader economy declined during the third quarter. Management identified risks from lower commodity prices and margins, weaker cash flow, counterparty credit, reduced drilling success, lower third-party volumes, regulatory changes, severe weather, and access to capital.
- Powder River producing properties with approximately $500 million of net book value required no impairment at September 30, 2011, but could be exposed to an impairment of at least $200 million if forward prices declined approximately 6% from September 30 levels, assuming other factors were unchanged.
- The Eminence Storage Field leak resulted in four caverns being retired or proposed for abandonment. Estimated abandonment costs were approximately $76 million, with $31 million incurred by September 30, 2011; management expected recovery through future rate filings, net of insurance proceeds.
- Arkoma basin operations were classified as discontinued operations, producing a $16 million loss for the first nine months of 2011. The filing also disclosed material uncertainty around certain royalty, natural-gas-index, environmental, and other litigation matters, including a Liberty counterclaim exceeding $200 million for which the company could not estimate potential liability.
- The planned WPX separation depended on market conditions, regulatory and tax approvals, financing, and other closing conditions. Failure or delay could adversely affect the company, and a taxable spin-off could create significant tax liabilities.
Investor Verification Priorities
- Verify completion, timing, financing, tax treatment, and post-separation liabilities of the WPX spin-off.
- Reconcile reported liquidity with the availability and restrictions of cash held at WPZ and other subsidiaries, and monitor debt maturities, covenant compliance, credit ratings, and potential collateral requirements.
- Test the sensitivity of Exploration & Production asset values and earnings to natural gas, NGL, and crude oil prices, including the identified Powder River impairment exposure.
- Assess whether projected 2011 operating cash flow and capital expenditures were achieved and whether WPZ distributions support the increased dividend policy.
- Review unresolved litigation, environmental obligations, royalty claims, the Liberty counterclaim, and the possible financial effects of the Eminence Storage Field abandonment.