Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for The Williams Companies, Inc., covering the period ended September 30, 1996. The company operates primarily in natural gas transportation, field services, energy services, and communications. A significant event during the period was the full acquisition of Kern River Gas Transmission on January 16, 1996, for $206 million, shifting its accounting from the equity method to full consolidation.
Key Financial Metrics
| Metric (Millions) | Q3 1996 | Q3 1995 | 9 Months 1996 | 9 Months 1995 |
|---|---|---|---|---|
| Total Revenues | $842.2 | $712.4 | $2,573.4 | $2,018.7 |
| Operating Profit | $197.8 | $161.4 | $659.3 | $483.5 |
| Net Income | $71.0 | $68.5 | $256.3 | $1,240.7* |
| Income to Common Stock | $68.4 | $61.4 | $248.5 | $1,228.1* |
| Diluted EPS (Continuing Ops) | $0.63 | $0.58 | $2.27 | $2.20 |
| Cash Flow from Operations (9mo) | $511.8 (1996) vs $551.8 (1995) | |||
| Total Debt (Long-term + Current) | $4,491.6 (Sep 30, 1996) vs $3,193.9 (Dec 31, 1995) | |||
| Cash and Equivalents | $40.5 (Sep 30, 1996) vs $90.4 (Dec 31, 1995) |
*Note: 1995 nine-month net income includes a $1.0 billion gain from discontinued operations (sale of network services to LDDS).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 18% year-over-year for the nine months ended September 30, 1996. This was driven by the consolidation of Kern River Gas Transmission, growth in Williams Communications Group (due to acquisitions), and increased volumes in Williams Field Services.
- Operating Profit: Operating profit rose 36% for the nine-month period ($659.3M vs $483.5M). The Williams Interstate Natural Gas Systems segment saw a 50% increase in operating profit, largely due to the inclusion of Kern River results.
- Debt Levels: Long-term debt increased significantly to $4,137.3 million (up from $2,874.0 million at year-end 1995) due to the assumption of $643 million in debt from the Kern River acquisition and new borrowings to finance capital expenditures.
- Discontinued Operations: The 1995 comparative period was heavily skewed by a $1.0 billion after-tax gain from the sale of network services. Excluding this, continuing operations showed steady growth in 1996.
Guidance, Outlook, and Risks
- Capital Expenditures: Management estimates 1996 capital expenditures (excluding acquisitions) to be approximately $800 million, financed through operating cash flow, the $800 million bank credit facility, or additional debt/equity offerings.
- Stock Repurchase: The Board authorized an open-market repurchase of up to $800 million of common stock. As of September 30, 1996, $31.2 million had been spent to repurchase 638,500 shares.
- Liquidity: Available liquidity (cash plus unused credit facility) stood at $499 million at September 30, 1996, down from $656 million at year-end 1995 due to increased borrowings.
- Regulatory and Legal Risks:
- FERC Order 636: Ongoing appeals and regulatory proceedings regarding cost recovery for gas supply realignment and transition costs. The company has recorded regulatory assets for estimated recoveries.
- Environmental: Reserves of approximately $42 million exist for potential remediation costs at various sites (e.g., PCB contamination, toxic substances). Additional liabilities of $9 million are accrued for indemnification related to the former Agrico Chemical Company.
- Litigation: Pending lawsuits include claims regarding coal-seam gas rights (Southern Ute Indian Tribe), gas purchase contract disputes (Dakota Gasification), and False Claims Act allegations regarding gas measurement.
- Unusual Items: Williams Energy Ventures suspended ethanol production in Q3 1996 due to record high corn prices, resulting in an operating loss for that segment. The company expects corn prices to normalize in Q4 1996.
Investor Verification Checklist
- Verify the sustainability of operating margins in the Williams Communications Group, where operating profit dropped 68% in Q3 due to integration costs of recent acquisitions.
- Monitor the resolution of FERC Order 636 appeals and the recoverability of the $81 million regulatory asset recorded by Williams Natural Gas for contract reformation costs.
- Assess the impact of environmental liabilities and potential increases in remediation costs, particularly regarding PCB and mercury contamination at compressor stations.
- Review the debt service coverage given the increase in total debt to nearly $4.5 billion and the reliance on the $800 million credit facility for liquidity.
- Confirm the outlook for Williams Energy Ventures ethanol operations following the Q3 suspension and the recent acquisition of petroleum terminals in the Southeast.