Business Context and Reporting Period
The Williams Companies, Inc. filed its Form 10-K for the fiscal year ended December 31, 2010, including fourth-quarter 2010 results. Williams is an integrated natural gas company operating through Williams Partners, Exploration & Production, and Other. Its businesses include interstate gas pipelines, gathering and processing, NGL and crude transportation, natural gas and oil production, Canadian midstream operations, and domestic olefins.
Williams Partners became the principal infrastructure platform following a first-quarter 2010 restructuring. Williams owned approximately 75% of Williams Partners at year-end, compared with approximately 24% at year-end 2009.
Financial Performance and Key Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $9.616 billion | $8.255 billion | +16% |
| Operating income | $44 million | $1.481 billion | Significant decline |
| Income from continuing operations | $(916) million | $584 million | Declined $1.5 billion |
| Net loss attributable to Williams | $(1.097) billion | $285 million income | Unfavorable change |
| Diluted loss per share from continuing operations | $(1.87) | $0.75 | Declined |
| Cash flow from operations | $2.651 billion | $2.572 billion | +$79 million |
| Capital expenditures | $2.788 billion | $2.387 billion | Higher investment |
| Total assets | $24.972 billion | $25.280 billion | Down modestly |
| Long-term debt | $8.600 billion | $8.259 billion | Higher |
| Cash and cash equivalents | $795 million | $1.867 billion | Down $1.072 billion |
2010 results were heavily affected by a $1.003 billion Exploration & Production goodwill impairment, $678 million of impairments of producing properties and acquired unproved reserves, and $606 million of early debt-retirement costs. These items largely offset improved commodity prices and stronger Williams Partners results.
- Williams Partners: Revenue was $5.715 billion and segment profit was $1.574 billion, compared with $4.602 billion and $1.317 billion, respectively, in 2009. Higher NGL prices, NGL margins, fee revenues, equity earnings, and marketing activity supported results.
- Exploration & Production: Revenue was $4.042 billion, up from $3.684 billion, but segment loss was $1.343 billion versus $391 million of profit in 2009 because of the impairments. Average daily domestic production declined 4% to 1,132 MMcfe, while realized average price increased 8% to $5.23/Mcfe.
- Other: Revenue was $1.057 billion and segment profit was $240 million, compared with $780 million and a $2 million loss in 2009, primarily reflecting higher NGL and olefin margins and gains from the Accroven sale.
- Margins: The filing does not provide a single consolidated operating or net margin; reported profitability was distorted by the impairment and restructuring charges.
Material Changes Versus Prior Comparable Period
- Revenue increased 16% as natural gas, NGL, crude, and olefin prices improved from 2009 levels, although natural gas prices remained relatively weak.
- Williams Partners acquired an additional 49% of Overland Pass Pipeline for approximately $424 million, increasing ownership to 50%.
- Williams Partners acquired Piceance gathering and processing assets from Exploration & Production for $702 million in cash and approximately 1.8 million common units, and acquired Marcellus gathering assets for $150 million.
- Exploration & Production acquired Marcellus acreage for approximately $599 million, additional Marcellus leasehold for $164 million, and a Bakken oil business for approximately $949 million.
- Williams Partners issued $3.5 billion of senior notes, retired $3.0 billion of debt, and paid $574 million of related premiums as part of the restructuring. It also issued $600 million of 4.125% senior notes due 2020.
- Cash used in investing activities increased to $4.296 billion from $2.310 billion, driven by capital spending, acquisitions, and investments. Financing activities provided $573 million.
- Goodwill declined from $1.011 billion to $8 million following the Exploration & Production impairment. Stockholders’ equity declined from $8.447 billion to $7.288 billion, while noncontrolling interests increased from $572 million to $1.331 billion.
- Quarterly results were volatile: third-quarter 2010 included approximately $1.003 billion of goodwill impairment and $678 million of property and reserve impairments; fourth-quarter results included $19 million of depletion and $11 million of depreciation, depletion and amortization corrections.
Liquidity, Debt, Guidance, and Risks
- At December 31, 2010, reported liquidity included approximately $795 million of cash and $2.650 billion of available revolving credit capacity, for total available liquidity of approximately $3.445 billion. No loans were outstanding under the principal revolving facilities, and the company was in compliance with related covenants.
- Total debt, including the current portion and capital leases, was approximately $9.108 billion. Contractual obligations totaled $29.910 billion, including $9.141 billion of debt principal, $7.714 billion of interest, $6.421 billion of purchase obligations, and $6.051 billion of physical and financial derivatives.
- Management expected 2011 operating cash flow of $2.5 billion to $3.3 billion and consolidated capital and investment expenditures of $3.125 billion to $4.125 billion. Williams Partners planned $1.090 billion to $1.370 billion of expenditures; Exploration & Production planned $1.15 billion to $1.75 billion; and Other planned $380 million to $480 million.
- Exploration & Production expected 2011 domestic production to increase approximately 9% from 2010, with natural gas prices assumed to remain near 2010 levels. It planned three to five drilling rigs in the Williston Basin and $200 million to $300 million of related capital expenditures.
- Management announced plans to separate Exploration & Production into a separately traded company through an initial public offering of up to 20% in 2011, followed by a potential tax-free spinoff of the remaining interest in 2012. The timing and completion were discretionary and subject to market, tax, regulatory, financing, and board approvals.
- The company planned to increase the quarterly dividend 60% to $0.20 per share beginning with the first quarter of 2011, payable in June 2011.
- Principal risks include natural gas, NGL, crude oil, and olefin price volatility; reserve replacement and impairment risk; high capital requirements; counterparty and derivative exposure; debt covenants and refinancing risk; FERC rate proceedings; environmental and hydraulic-fracturing regulation; pipeline and offshore operating hazards; Gulf of Mexico permitting delays; litigation and royalty claims; and the uncertainty of the proposed corporate separation.
- Environmental remediation liabilities were approximately $49 million, with approximately $11 million of expected 2011 payments. Pipeline integrity assessments and remediation were estimated at $130 million to $170 million for Transco and Northwest Pipeline during 2011-2012.
- Named-windstorm insurance for offshore assets was limited to $75 million per occurrence and in the annual aggregate in the event of a material loss.
Important Facts for Investors to Verify
- Reconcile reported earnings with and without the $1.681 billion of Exploration & Production impairment charges and the $606 million early debt-retirement costs.
- Assess whether the planned Exploration & Production IPO and 2012 spinoff occurred on the proposed timetable and terms.
- Verify the sustainability of 2011 cash-flow and capital-spending guidance, particularly under lower natural gas prices.
- Review debt maturities, covenant headroom, credit ratings, and potential collateral requirements following a ratings downgrade.
- Evaluate Williams Partners’ fee-based cash flows versus commodity-sensitive NGL, marketing, and processing margins.
- Review reserve assumptions, including pricing, development timing, proved undeveloped reserves, and impairment sensitivity.
- Monitor Gulf of Mexico production and permitting delays, pipeline integrity spending, environmental obligations, royalty litigation, and other contingencies.
- Confirm the effect of the planned dividend increase on parent-level liquidity and distributions from Williams Partners.