Williams Companies, Inc. — 2011 First-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Operations comprise Williams Partners, Exploration & Production, Midstream Canada & Olefins, and Other. Prior-period segment information was recast to present Midstream Canada & Olefins separately.
Management announced a plan to separate Exploration & Production through an initial public offering of up to 20% of WPX Energy in 2011 and a potential tax-free spin-off of the remaining WPX interest in 2012. WPX filed an SEC registration statement on April 29, 2011; completion and timing remained discretionary and subject to various conditions.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $2.575 billion | $2.591 billion | Down $16 million |
| Operating income | $480 million | $479 million | Essentially flat |
| Income from continuing operations | $392 million | $(148) million | Improved $540 million |
| Net income attributable to WMB | $321 million | $(193) million | Improved $514 million |
| Diluted EPS | $0.54 | $(0.33) | Improved $0.87 |
| Cash flow from operations | $811 million | $617 million | Up $194 million |
| Capital expenditures | $526 million | $428 million | Up $98 million |
| Cash and cash equivalents | $923 million | $1.644 billion | Period-end balance |
| Debt, including current portion | $9.109 billion | $9.108 billion | Essentially flat |
Consolidated operating margin was approximately 18.6% in Q1 2011 versus 18.5% in Q1 2010. Net income attributable to WMB represented approximately 12.5% of revenue. The company declared a quarterly dividend of $0.125 per share for the quarter and subsequently approved a $0.20 per-share dividend payable in June 2011.
At March 31, 2011, total assets were $25.083 billion and total equity was $8.879 billion. Current assets were $2.505 billion versus current liabilities of $2.458 billion.
Segment performance and material changes
- Williams Partners: Revenue increased to $1.579 billion from $1.490 billion, while segment profit increased to $437 million from $424 million. Higher fee revenue, NGL margins, and marketing margins offset lower NGL volumes and higher operating costs.
- Exploration & Production: Revenue declined to $989 million from $1.157 billion and segment profit fell to $51 million from $153 million. Average daily total production increased 6% to 1,210 MMcfe, but realized production prices declined 7% to $5.34 per Mcfe and gas-management activity decreased.
- Midstream Canada & Olefins: Revenue increased to $316 million from $272 million and segment profit rose to $74 million from $20 million, primarily because of higher Canadian NGL, propane, propylene, and Geismar ethylene margins.
- Other: Segment profit increased to $20 million from $7 million, including an $11 million gain associated with receipt of a payment on the 2010 sale of Accroven SRL.
- The prior-year comparison benefited materially from the absence of $606 million of early debt-retirement costs and $39 million of restructuring transaction costs recorded in Q1 2010.
- Q1 2011 included a $124 million tax benefit from IRS settlements and a revised international tax assessment. The company expects approximately $140 million to $145 million of related net cash tax payments during 2011.
- Arkoma basin operations were classified as discontinued operations and included an $8 million loss in Q1 2011, including a $9 million impairment charge.
Cash flow, debt, liquidity, and outlook
- Operating cash flow was $811 million. Financing activities used $104 million and investing activities used $579 million, resulting in a $128 million increase in cash during the quarter.
- Available liquidity at March 31, 2011 was $3.573 billion, consisting of $923 million of cash and $2.650 billion of available revolving and credit-facility capacity. Management intends to maintain at least $1 billion of consolidated liquidity.
- Management forecast 2011 operating cash flow of $2.75 billion to $3.45 billion and total capital and investment expenditures of $3.275 billion to $3.975 billion.
- Williams Partners expected to spend $1.56 billion to $1.885 billion, Exploration & Production $1.3 billion to $1.6 billion, and Midstream Canada & Olefins $350 million to $450 million in 2011. Exploration & Production expected total production growth of approximately 9% over 2010.
- Management expected WPZ to fund $458 million of current-year debt maturities with new debt issuance. Substantially all long-term debt was publicly traded; carrying value, including current maturities, was $9.105 billion versus fair value of $10.101 billion at March 31, 2011.
- Management expected higher 2011 NGL margins and continued growth in gathering, processing, pipeline, and petrochemical infrastructure, while noting substantial commodity-price volatility.
Risks, contingencies, and unusual items
- Key risks include natural gas, NGL, and crude-price volatility; lower production or third-party volumes; drilling and operational hazards; counterparty credit risk; capital-market access; regulatory and environmental requirements; weather; and changes in interest rates and economic conditions.
- A downgrade below investment grade could require additional collateral of up to $506 million for WMB and $67 million for WPZ, according to management estimates.
- Derivative positions had gross assets of $468 million and liabilities of $299 million. Net credit exposure from derivatives was $195 million, primarily involving investment-grade counterparties.
- Management reported accrued environmental liabilities of $12 million for continuing operations, $7 million for storage-facility remediation, and $31 million related to former operations. Management did not expect these matters, in aggregate, to materially affect liquidity or financial position.
- Pending gas-price-index, royalty, environmental, and other litigation could result in future material charges, although potential exposure could not be reasonably estimated for certain matters.
- Liberty Gas Storage asserted a counterclaim for costs exceeding $200 million; the company stated that available information was insufficient to evaluate the merits or possible liability.
- The company implemented a new risk-management and evaluation system affecting derivative accounting and disclosures. Management concluded that disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- Progress, pricing, dilution, tax treatment, financing, and completion risk of the WPX IPO and planned spin-off.
- Whether Exploration & Production can offset lower realized gas prices through production growth, hedging, and a more oil- and NGL-weighted portfolio.
- Actual 2011 operating cash flow, capital spending, debt issuance, and liquidity relative to management’s stated ranges.
- Sustainability of higher NGL and olefin margins and the timing and economics of planned midstream and petrochemical expansions.
- Potential collateral requirements and liquidity effects from credit-rating changes or derivative-market movements.
- Developments in royalty, gas-index, Liberty Gas Storage, environmental, and other legal proceedings not fully quantified in the filing.