WMB

Business Context and Reporting Period

This Form 10-Q covers The Williams Companies, Inc. for the quarterly and six-month periods ended June 30, 2001. The company operates primarily in the energy sector through two main segments: Gas Pipeline and Energy Services. A significant corporate event during this period was the tax-free spinoff of Williams Communications Group, Inc. (WCG) on April 23, 2001, which is now reported as discontinued operations. Additionally, the company acquired 50% of Barrett Resources Corporation in June 2001, with the remaining 50% acquired in August 2001.

Key Financial Metrics

Segment Performance (Six Months 2001):

• Gas Pipeline: Revenues of $884.1 million; Segment Profit of $411.0 million.
• Energy Services: Revenues of $5,434.9 million; Segment Profit of $1,125.3 million.

Material Changes vs. Prior Period

Compared to the six months ended June 30, 2000:

• Revenues: Increased by $1,659.6 million (39%) to $5,908.6 million. Growth was driven by higher petroleum and natural gas prices/volumes, Canadian operations acquired in late 2000, and a change in accounting presentation for certain terminal sales (reported "gross" in 2001 vs. "net" in 2000).
• Operating Income: Increased by $495.3 million (50%) to $1,488.8 million. Key drivers included a $72.1 million pre-tax gain from the sale of 198 convenience stores, higher refining margins, and a $27.5 million gain from the sale of a limited partnership interest in Northern Border Partners.
• Net Income: Increased to $538.7 million from $451.5 million. This includes a $179.1 million loss from discontinued operations (WCG) in 2001, compared to $26.2 million income from discontinued operations in 2000.
• Costs: Segment costs and expenses rose $1,155 million (36%), largely due to higher commodity costs and volumes, partially offset by the aforementioned asset sale gains.

Guidance, Outlook, Risks, and Unusual Items

Unusual Items:

• Asset Sales: Recognized a $72.1 million gain on the sale of convenience stores and a $27.5 million gain on the sale of a partnership interest.
• Impairments: Recorded a $10.9 million impairment charge for South Texas gathering assets and an $11 million impairment for a mobile computing business.
• Discontinued Operations: The spinoff of WCG resulted in a $179.1 million after-tax loss for the six-month period.

Risks and Contingencies:

• California Power Market: Significant regulatory and legal exposure exists regarding power sales in California. The FERC has ordered potential refunds (estimated at $30 million by FERC, $11 million by Williams) for prices charged in early 2001. The company faces ongoing investigations by the DOJ and state authorities regarding market manipulation allegations.
• California Receivables: Approximately $302 million in receivables from the California ISO and CPEC are outstanding. While management believes collection is likely, the bankruptcy of CPEC and PG&E introduces uncertainty.
• Environmental Liabilities: Accrued liabilities for environmental remediation totaled approximately $75 million ($35 million for pipelines, $40 million for Energy Services) as of June 30, 2001.
• Regulatory Rate Cases: Ongoing FERC proceedings regarding rate-of-return methodologies for interstate pipelines could impact future revenues.

Outlook: Capital expenditures for 2001 (excluding the Barrett acquisition) are estimated at $2.3 billion. The company expects to fund these through operating cash flow, credit facilities, and potential debt/equity offerings.

Investor Verification Checklist

• California Exposure: Verify the status of the $302 million receivable from California power entities and the final determination of FERC refund liabilities.
• Barrett Acquisition: Confirm the final accounting treatment and integration progress of the Barrett Resources acquisition (50% acquired in June, 50% in August).
• Discontinued Operations: Review the final tax implications and any remaining liabilities associated with the WCG spinoff.
• Debt Structure: Assess the impact of the $1.2 billion short-term credit facility used for the Barrett acquisition and the company's plan to refinance it before year-end.
• Environmental Provisions: Monitor updates on the DOJ civil action regarding waste management practices and the adequacy of the $75 million accrued environmental liability.