Williams Companies, Inc. Form 10-Q Summary
Business context and reporting period
Williams Companies, Inc. reported unaudited results for the three and nine months ended September 30, 2009, compared with the corresponding 2008 periods. The company operates through Exploration & Production, Gas Pipeline, Midstream Gas & Liquids, Gas Marketing Services and Other. Results of certain former operations, including Venezuela operations expropriated in May 2009, are presented as discontinued operations.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Revenue | $2,098 million | $3,201 million | $5,929 million | $10,022 million |
| Operating income | $394 million | $689 million | $1,025 million | $2,300 million |
| Income from continuing operations | $192 million | $411 million | $362 million | $1,330 million |
| Net income attributable to Williams | $143 million | $366 million | $113 million | $1,303 million |
| Diluted EPS | $0.24 | $0.62 | $0.19 | $2.19 |
| Operating cash flow | Not separately reported | Not separately reported | $1,758 million | $2,606 million |
| Capital expenditures | Not separately reported | Not separately reported | $1,829 million | $2,591 million |
Calculated operating margins were approximately 18.8% in Q3 2009 versus 21.5% in Q3 2008, and 17.3% for the first nine months of 2009 versus 23.0% in the comparable 2008 period. Net income attributable to Williams represented approximately 6.8% of Q3 revenue and 1.9% of nine-month revenue.
- Cash and cash equivalents were $1,640 million at September 30, 2009, compared with $1,438 million at December 31, 2008.
- Long-term debt, including the current portion, was $8,277 million at September 30, 2009, compared with $7,701 million at year-end 2008. The filing reports long-term debt of $8,258 million plus $19 million due within one year.
- No loans were outstanding under the revolving credit facilities. Available liquidity, including cash and available credit capacity, was reported at $3,736 million; management targeted at least $1 billion of liquidity.
- The company issued $600 million of 8.75% senior unsecured notes due 2020, generating $595 million of net financing cash flow.
- Cash dividends declared were $0.11 per common share for the quarter and $0.33 per share year to date.
Material changes versus the prior comparable period
- Revenue declined 34% in Q3 and 41% for the first nine months, primarily because of lower natural gas, NGL, olefin and crude prices and lower marketing revenue.
- Operating income declined 43% in Q3 and 55% year to date. Exploration & Production operating income fell to $102 million in Q3 from $356 million, while Gas Marketing Services reported a $6 million loss compared with $16 million of profit.
- Exploration & Production’s nine-month segment profit fell 76% to $303 million. Domestic net realized prices declined 43% to $4.11 per Mcfe, partly offset by a 10% increase in average daily total production to 1,237 MMcfe.
- Midstream segment profit declined to $371 million from $737 million for the nine-month period, reflecting lower NGL and olefin margins and a $75 million impairment of the Accroven investment.
- Operating cash flow decreased $848 million to $1,758 million, while capital expenditures decreased $762 million to $1,829 million.
- Year-to-date net income attributable to Williams included a $153 million loss from discontinued operations, compared with $120 million of income in 2008. The 2009 loss primarily reflected Venezuela-related charges.
Guidance, outlook, risks and unusual items
- Management expected 2009 operating cash flow of $2.1 billion to $2.3 billion and 2010 operating cash flow of $2.15 billion to $2.9 billion, based on market assumptions.
- Projected 2009 capital and investment expenditures were $2.45 billion to $2.675 billion, with approximately $737 million to $962 million remaining after September 30. The 2010 range was $1.9 billion to $2.675 billion.
- Exploration & Production expected remaining 2009 capital expenditures of $221 million to $321 million, reduced drilling activity, and modest growth in full-year average domestic production, although fourth-quarter production was expected to be below the prior-year quarter.
- Significant unusual items included a $211 million impairment of Venezuelan property, a $75 million Accroven impairment, an $11 million impairment of another Venezuelan investment, $32 million of drilling-rig termination penalties, and the absence of a $148 million 2008 gain on the sale of Peru interests.
- The Venezuelan expropriation resulted in deconsolidation of the affected entities. Williams and secured lenders were pursuing contractual and international arbitration rights, but the value of any recovery remained highly judgmental and uncertain.
- Commodity prices, counterparty credit, access to capital, regulatory and environmental requirements, litigation, weather, hurricanes and reduced windstorm insurance coverage were identified as material risks. A downgrade below investment grade could have required up to $469 million of additional collateral.
- Contingencies included California energy-market refund proceedings, gas-index litigation, royalty disputes, environmental remediation, guarantees and other legal matters. Management did not expect these matters collectively to materially affect liquidity or financial position, although an unfavorable ruling could materially affect results in the period incurred.
- The company had $1,285 million of derivative assets and $1,172 million of derivative liabilities at September 30, 2009. A net derivative liability position, after master netting, was $154 million and was supported by $78 million of letters of credit.
Most important facts for investors to verify
- Whether lower commodity prices and weaker NGL and marketing margins continue to pressure earnings and operating cash flow.
- The sustainability of the company’s planned capital spending relative to projected operating cash flow and debt maturities.
- The outcome and recoverability of claims arising from Venezuela’s expropriation and the remaining Accroven investment.
- Available borrowing capacity after bank-participant reductions, covenant compliance and potential collateral requirements following a credit-rating downgrade.
- The effect of derivative valuation, hedge settlements and mark-to-market volatility on future revenue, earnings and liquidity.
- Potential exposure from environmental, royalty, regulatory and California-related litigation matters, including amounts that cannot currently be estimated.