Williams Companies, Inc. — 2010 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2010, compared with the recast prior-year periods. Reportable segments were Williams Partners, Exploration & Production, and Other following the February 2010 strategic restructuring. Williams owned approximately 77% of Williams Partners L.P. at quarter-end.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $2,304 million | $2,098 million | $7,192 million | $5,929 million |
| Operating income (loss) | $(1,291) million | $394 million | $(398) million | $1,025 million |
| Net income (loss) attributable to Williams | $(1,263) million | $143 million | $(1,271) million | $113 million |
| Basic EPS | $(2.16) | $0.24 | $(2.17) | $0.19 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $1,941 million | $1,758 million |
- Revenue increased 10% in the quarter and 21% year to date, primarily from higher natural gas, NGL, crude oil, and olefins prices.
- Operating margin was approximately negative 56% in Q3 2010 versus approximately 19% in Q3 2009, driven by $1,681 million of impairment charges.
- Exploration & Production generated revenue of $1,012 million in Q3 and $3,090 million for nine months, but reported operating losses of $1,608 million and $1,369 million, respectively.
- Williams Partners reported operating income of $319 million in Q3 and $1,026 million for nine months, compared with $317 million and $833 million in the comparable periods.
- Cash and cash equivalents were $1,015 million at September 30, 2010, down from $1,867 million at December 31, 2009.
- Long-term debt, including the current portion, was $8,510 million at September 30, 2010, compared with $8,276 million at year-end 2009. Reported fair value was $9,681 million.
- Available liquidity totaled approximately $3,592 million, consisting of $1,015 million of cash and $2,577 million of available revolving credit capacity. Management targeted at least $1 billion of consolidated liquidity.
- Capital expenditures were $2,111 million for the first nine months, compared with $1,829 million in 2009. Investing cash outflows were $2,472 million, while financing cash outflows were $321 million.
- Cash dividends declared increased to $0.125 per share from $0.11 per share.
Material changes versus the prior comparable period
- Exploration & Production recorded a $1,003 million full impairment of goodwill and $678 million of impairments related to producing properties and acquired unproved reserves. The charges followed a significant decline in forward natural gas prices.
- The impairments included $503 million for Barnett Shale properties and $175 million for acquired Piceance Highlands reserves. Management stated that approximately 15% of other reviewed assets could be at risk if forward prices declined another 7% to 15%.
- The strategic restructuring contributed businesses to Williams Partners, issued $3.5 billion of Williams Partners senior notes, retired $3.0 billion of corporate debt, and generated $606 million of early debt retirement costs and approximately $45 million of transaction costs.
- Williams Partners completed its merger with Williams Pipeline Partners L.P. and completed a $380 million equity offering. Williams retained approximately 77% of Williams Partners.
- Williams increased its interest in Overland Pass Pipeline Company to 50% for approximately $424 million and acquired Marcellus Shale acreage for approximately $597 million, including closing adjustments.
- Other segment results improved, including a $43 million gain recognized from the sale of the Accroven investment in Venezuela, compared with a $75 million impairment in 2009.
- Cash flow from operations increased $183 million year over year, but total cash declined $852 million because investing and financing uses exceeded operating cash generation.
- A $346 million presentation error related to the allocation between capital in excess of par and noncontrolling interests was corrected. Management stated that it did not affect total equity, earnings, cash flow measures, or financial covenants.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2010 operating cash flow to be generally consistent with 2009 and estimated full-year operating cash flow of $2.4 billion to $2.7 billion.
- Expected 2010 capital and investment expenditures were $3.425 billion to $3.825 billion, including $1.9 billion to $2.1 billion for Exploration & Production and $1.375 billion to $1.545 billion for Williams Partners, excluding the announced Piceance acquisition.
- Exploration & Production projected remaining 2010 capital expenditures of $425 million to $625 million and expected full-year domestic production to be consistent with 2009 levels.
- Williams Partners expected 2010 capital projects and additional equity investments of $1.860 billion to $2.000 billion, including the announced $782 million acquisition of Piceance gathering and processing assets from Exploration & Production.
- Management cited weak natural gas demand, increasing supply, commodity-price volatility, production and drilling risks, counterparty credit risk, regulatory changes, environmental liabilities, weather, and access to capital as key risks.
- The Gulf of Mexico drilling moratorium was expected to reduce 2010 volumes and have a more significant impact in 2011; management estimated a $10 million unfavorable impact to 2010 Williams Partners segment profit.
- At September 30, 2010, no loans were outstanding under the principal revolving credit facilities, and the company was in compliance with applicable financial covenants.
- A downgrade below investment grade could require additional collateral of up to $516 million for Williams and $60 million for Williams Partners.
- Environmental accruals included $4 million for Transco matters, $7 million for Northwest Pipeline matters, $6 million for underground storage matters, and $29 million for former operations. Future costs could exceed accrued amounts.
- Potential contingencies included California energy refund proceedings, natural gas price-index litigation, royalty litigation, environmental claims, guarantees, and divestiture indemnifications. Management did not expect the matters collectively to materially affect future liquidity or financial position, although an adverse ruling could materially affect results in a particular period.
- Dodd-Frank implementation could increase collateral and working-capital requirements for derivatives and could reduce the availability or increase the cost of hedging.
Most important facts for investors to verify
- Whether natural gas prices and reserve assumptions support the carrying values of remaining Exploration & Production assets and whether additional impairments are required.
- Progress and final consideration for the announced $782 million Piceance asset transfer to Williams Partners.
- Actual 2010 operating cash flow, capital spending, liquidity, and debt maturities relative to management’s forecasts.
- Williams Partners’ distributions to the parent and the company’s ability to sustain the increased dividend while funding capital expenditures and debt obligations.
- Effects of Gulf of Mexico production delays, the drilling moratorium, third-party operational disruptions, and commodity-price changes on Williams Partners’ volumes and margins.
- Potential collateral requirements from credit-rating changes, derivative-market regulation, and commodity-price movements.
- Developments in environmental, royalty, California energy, and other legal proceedings, including costs that may exceed recorded accruals.