Business Context and Reporting Period
Company: The Williams Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: Williams operates through three primary reportable segments: Gas Pipeline, Energy Services, and Communications. The company is heavily invested in natural gas transportation, energy marketing and trading, petroleum services, and the construction of a national fiber-optic communications network.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 1999 |
Three Months Ended June 30, 1998 |
Six Months Ended June 30, 1999 |
Six Months Ended June 30, 1998 |
|---|---|---|---|---|
| Total Revenues | $1,986.3 | $1,774.3 | $3,970.3 | $3,733.1 |
| Operating Income | $181.8 | $221.9 | $404.1 | $449.3 |
| Net Income | $17.0 | $60.7 | $67.3 | $128.8 |
| Income Applicable to Common Stock | $16.1 | $59.1 | $64.8 | $125.0 |
| Diluted EPS | $0.04 | $0.14 | $0.15 | $0.29 |
| Cash Provided by Operating Activities | N/A | N/A | $668.7 | $352.8 |
| Cash and Cash Equivalents (End of Period) | $200.1 | $135.5 | $200.1 | $135.5 |
| Total Debt (Current + Long-term) | $8,594.7 | N/A | $8,594.7 | N/A |
Note: Total Debt calculated as Notes Payable ($1,685.6M) + Long-term debt due within one year ($719.4M) + Long-term debt ($6,189.7M) as of June 30, 1999.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 12% ($212 million) for the quarter and 6% ($237 million) for the six months compared to 1998. Growth was driven by Communications' dark fiber capacity leases, Gas Pipeline rate refund liability reductions, and Energy Services expansion.
- Profit Decline: Net income applicable to common stock dropped significantly, falling 73% for the quarter and 48% for the six months. This was primarily due to a $64 million decrease in Communications operating income and a $26.7 million asset impairment charge.
- Segment Performance:
- Gas Pipeline: Segment profit increased 14% ($22.2 million) due to regulatory rate refund liability reductions totaling $38.2 million.
- Energy Services: Segment profit increased 13% ($13.2 million) driven by higher net revenues in electric power services and natural gas liquids.
- Communications: Segment loss widened to $76.1 million (from a $11.8 million loss in 1998) due to infrastructure growth costs, international venture losses, and a $26.7 million impairment charge related to the decision to sell network application businesses.
- Cash Flow: Net cash provided by operating activities for the six months ended June 30, 1999, was $668.7 million, a significant increase from $352.8 million in the prior year period, aided by a $321 million federal tax refund.
Guidance, Outlook, and Risks
- Communications IPO: The company filed for an initial public offering (IPO) of its communications business, expecting proceeds of $500 million to $750 million. Agreements are in place with SBC Communications, Intel, and Telefonos de Mexico for investments totaling up to $725 million. The IPO is expected to close in October 1999.
- Capital Expenditures: Estimated capital expenditures and investments for 1999 are approximately $5 billion, funded by operating cash flow, the Communications IPO, and debt facilities.
- Regulatory Risks: Significant ongoing proceedings with the Federal Energy Regulatory Commission (FERC) regarding rate-of-return methodologies and gas supply realignment costs. While recent settlements have reduced refund liabilities, future outcomes remain subject to regulatory approval.
- Legal and Environmental:
- Environmental: The DOJ intends to file a civil action against Transco regarding waste management practices; potential liability is not quantifiable. Total environmental reserves are approximately $75 million across subsidiaries.
- Litigation: Various pending lawsuits, including the Southern Ute Indian Tribe coal-seam gas case (recently ruled in Williams' favor by the Supreme Court) and the Dallmeyer explosion case (substantially settled).
- Year 2000 Compliance: The company estimates total project costs of $49 million. Critical systems are planned to be compliant, but risks remain regarding third-party non-compliance and potential service interruptions.
- Foreign Currency: Investments in Brazilian telecommunications ventures ($362 million) face volatility due to the devaluation of the Brazilian Real. A further 20% reduction in the Real could reduce fair value by up to $72 million.
Investor Verification Checklist
- Communications IPO Timing: Verify the closing date and final proceeds of the Communications business IPO and the associated debt issuance.
- Asset Impairment Finalization: Confirm the completion and final sale price of the network application businesses (audio/video conferencing) to validate the $26.7 million impairment charge.
- FERC Settlements: Monitor the final approval of the Williams Gas Pipelines Central settlement regarding take-or-pay and gas supply realignment cost recovery.
- Environmental Liability: Track the status of the DOJ civil action against Transco to assess potential unquantified penalties.
- Year 2000 Contingency: Review post-year-end reports for any service interruptions or cost overruns related to the Year 2000 compliance project.