Williams Companies, Inc. 2011 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three and six months ended June 30, 2011, with comparative periods ended June 30, 2010. Williams operates through Williams Partners, Exploration & Production, and Midstream Canada & Olefins. The company was pursuing a reorganization to separate Exploration & Production into WPX Energy through an initial public offering and subsequent tax-free spin-off.
Key Financial Metrics
| Metric | Three Months 2011 | Three Months 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Revenue | $2.669 billion | $2.289 billion | $5.244 billion | $4.880 billion |
| Operating income | $547 million | $416 million | $1.027 billion | $895 million |
| Income from continuing operations | $300 million | $225 million | $692 million | $77 million |
| Net income attributable to Williams | $227 million | $185 million | $548 million | $(8) million |
| Diluted EPS | $0.38 | $0.31 | $0.92 | $(0.01) |
| Operating margin | 20.5% | 18.2% | 19.6% | 18.3% |
| Cash flow from operations | Not separately provided | Not separately provided | $1.684 billion | $1.297 billion |
Six-month revenue increased 7%, while operating income increased 15%. Six-month operating cash flow increased $387 million, or approximately 30%. Capital expenditures were $1.094 billion versus $940 million in the prior-year period. Cash and cash equivalents were $1.166 billion at June 30, 2011, compared with $795 million at December 31, 2010.
Total debt, including the current portion, was $9.310 billion at June 30, 2011, consisting of $383 million due within one year and $8.927 billion of long-term debt. Reported debt carrying value including the current portion was $9.305 billion in the financial-instrument disclosure. Total equity was $9.045 billion, including $1.329 billion of noncontrolling interests.
Available liquidity totaled approximately $3.716 billion, including $1.166 billion of cash, $900 million of unused Williams revolving capacity, and $1.650 billion of unused Williams Partners revolving capacity. Management stated that it intended to maintain at least $1 billion of consolidated liquidity.
The quarterly dividend increased 60% to $0.20 per share from $0.125. Six-month dividends declared were $0.325 per share versus $0.235 in 2010.
Material Changes Versus the Prior Comparable Period
- Williams Partners' six-month segment profit increased to $908 million from $785 million, primarily due to higher NGL margins, stronger commodity prices, higher fee revenues, and growth in gathering and transportation activities.
- Exploration & Production six-month segment profit declined to $145 million from $226 million. Lower gas-management revenues and higher gathering, transportation, depreciation, exploration, operating, and SG&A costs more than offset higher production revenues and volumes.
- Midstream Canada & Olefins six-month segment profit increased to $146 million from $81 million, driven by higher NGL, ethylene, propane, and propylene margins, including benefits from the new butylene/butane splitter.
- The six-month comparison benefited materially from the absence of approximately $645 million of pre-tax 2010 restructuring costs, including $606 million of early debt-retirement costs and $41 million of transaction costs.
- First-quarter 2011 tax settlements and an international revised assessment produced an approximately $124 million net tax benefit. The company paid $82 million to the IRS in July 2011 and expected an additional $85 million to $90 million of related payments during 2011.
- Williams contributed a 24.5% Gulfstream interest to Williams Partners for $297 million of cash, partnership units, and general-partner capital. Williams Partners then held a 49% interest, while Williams retained an additional 1% interest.
- WPZ ownership declined to approximately 75% at June 30, 2011, from approximately 84% at June 30, 2010, increasing noncontrolling interests' share of consolidated earnings.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated 2011 operating cash flow of $2.825 billion to $3.425 billion and total capital and investment expenditures of $3.125 billion to $3.825 billion.
- Williams Partners expected $1.410 billion to $1.735 billion of expenditures, Exploration & Production expected $1.3 billion to $1.6 billion, and Midstream Canada & Olefins expected $350 million to $450 million.
- Exploration & Production expected 2011 production to increase approximately 9% from 2010 and planned $200 million to $300 million of Bakken spending and $200 million to $300 million of Appalachian spending.
- Williams Partners expected 2011 average per-unit NGL margins to exceed the rolling five-year average and hedged approximately 20% of anticipated remaining-2011 NGL sales volumes, with an estimated $129 million margin on hedged volumes.
- Key risks include commodity-price volatility, lower operating cash flow, counterparty credit risk, access to capital, drilling results, pipeline and processing volumes, regulatory changes, environmental liabilities, weather-related damage, and potential credit-rating downgrades.
- At June 30, 2011, WMB and WPZ were in compliance with their revolving-credit covenants. A downgrade below investment grade was estimated to require up to $545 million of additional collateral for WMB and $51 million for WPZ.
- Arkoma basin operations were classified as discontinued operations. The company recorded an $11 million six-month impairment loss in 2011 and was pursuing a divestiture.
- Material unresolved matters include natural-gas price-index litigation, royalty litigation, environmental remediation, the Gulf Liquids litigation, and a counterclaim exceeding $200 million related to Liberty Gas Storage. Management could not reasonably estimate some potential exposures and acknowledged that adverse outcomes could materially affect results, although it did not expect the matters collectively to materially affect future liquidity or financial position.
- An exploratory Marcellus well had approximately $8 million of capitalized costs under evaluation. If uneconomic, the company could expense the costs and potentially impair up to $40 million of related lease-acquisition costs.
- The company entered Oil Insurance Limited and obtained named-windstorm coverage of up to $150 million per occurrence, subject to deductibles, aggregate limits, and shared limits.
Important Facts for Investors to Verify
- Whether the WPX IPO and subsequent tax-free spin-off were completed on the proposed timetable and terms.
- Whether projected 2011 operating cash flow and capital-spending ranges were achieved, and whether liquidity remained above management's $1 billion target.
- The sustainability of higher NGL and olefin margins and the sensitivity of Exploration & Production earnings to natural-gas, crude-oil, and NGL prices.
- Debt reduction plans, including the effect of WPX financing and IPO proceeds, refinancing activity, interest costs, and credit-rating changes.
- Final outcomes and potential financial exposure from royalty, price-index, environmental, Gulf Liquids, Liberty Gas Storage, and other litigation.
- The operational performance and timing of major projects, including Marcellus gathering expansions, Gulfstar FPS, Mid-South, and the Ethane Recovery project.