WMB

Business Context and Reporting Period

This Form 10-Q covers The Williams Companies, Inc. for the quarterly period ended September 30, 2001. The company operates in three primary segments: Energy Marketing & Trading, Gas Pipeline, and Energy Services. The reporting period includes significant structural changes, most notably the April 2001 tax-free spinoff of Williams Communications Group, Inc. (WCG), which is now reported as discontinued operations. Additionally, the company completed the acquisition of Barrett Resources Corporation in August 2001, which is now consolidated into the Energy Services segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 21% in the third quarter and 33% for the nine-month period compared to 2000. This was driven by higher gas and electric power trading margins, the Barrett acquisition, and the reclassification of certain petroleum sales from "net" to "gross" reporting.
• Profitability: Operating income rose 55% in the quarter and 51% year-to-date. The Energy Marketing & Trading segment saw a 143% increase in segment profit, largely due to favorable trading margins and the recognition of power sales previously deferred.
• Investment Write-downs: The company recorded a $94.2 million charge in the third quarter for declines in the value of certain investments, including a $70.9 million write-down of its retained interest in WCG, deemed "other than temporary."
• Discontinued Operations: The spinoff of WCG resulted in a loss from discontinued operations of $179.1 million for the nine months ended September 30, 2001, compared to a loss of $29.2 million in the prior year period.
• Acquisition Impact: The acquisition of Barrett Resources added significant assets and revenues to the Exploration & Production segment, contributing to the overall growth in the Energy Services division.

Guidance, Outlook, and Risks

• California Power Market: Significant uncertainty remains regarding the California power crisis. The FERC has ordered potential refunds for prices charged in excess of proxy prices, with a potential liability estimated at $30 million (though Williams calculates it at $11 million). The company faces ongoing investigations by the DOJ and California Grand Jury regarding market manipulation allegations.
• Regulatory and Litigation: The company is subject to various FERC proceedings regarding pipeline rates of return and potential refunds. Environmental liabilities are accrued at approximately $84 million across subsidiaries for remediation costs.
• Liquidity and Capital: Capital expenditures for the fourth quarter of 2001 are estimated at approximately $1 billion. The company maintains $700 million in available bank credit and $2.1 billion in commercial paper availability. Management expects to fund requirements through operations, credit facilities, and public offerings.
• WCG Separation: Williams retains a commitment to dispose of its retained WCG shares within five years. It also provides indirect credit support for $1.4 billion of WCG's structured notes, contingent on specific credit rating or default events.

Investor Verification Checklist

• California Exposure: Verify the collectibility of the $477 million in net accounts receivable from California power entities (ISO and CPEC) and the final outcome of FERC refund orders.
• Investment Valuation: Confirm the status of the $94.2 million investment write-down and the remaining carrying value of the WCG investment ($25 million).
• Barrett Integration: Review the preliminary purchase price allocation for the Barrett acquisition and the performance of its natural gas reserves.
• Debt Structure: Assess the impact of the increased debt load (totaling over $10.5 billion) on interest coverage ratios and future refinancing needs.
• Environmental Liabilities: Monitor the resolution of ongoing environmental litigation and the adequacy of the $84 million accrued remediation liability.