Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2010. The company operates through Williams Partners, Exploration & Production, and Other. On February 17, 2010, Williams completed a strategic restructuring that contributed most domestic midstream and gas pipeline businesses to Williams Partners L.P. and revised segment reporting. Williams owned approximately 84% of Williams Partners at March 31, 2010.
Financial Performance and Position
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $2,596 million | $1,922 million | +35% |
| Operating income | $478 million | $280 million | +$198 million |
| Operating margin | 18.4% | 14.6% | Improved |
| Income from continuing operations attributable to Williams | $(195) million | $2 million | Unfavorable |
| Net loss attributable to Williams | $(193) million | $(172) million | Unfavorable |
| Basic and diluted loss per share | $(0.33) | $(0.30) basic; $(0.29) diluted | Unfavorable |
| Net cash provided by operating activities | $617 million | $512 million | +$105 million |
| Capital expenditures | $428 million | $612 million | -$184 million |
Revenue growth primarily reflected higher NGL, crude oil, olefin, and natural gas prices and related marketing activity. Williams Partners generated $1,458 million of revenue and $388 million of operating income; Exploration & Production generated $1,168 million of revenue and $157 million of operating income; and Other generated $278 million of revenue and $18 million of operating income.
The reported loss was driven principally by $606 million of early debt retirement costs and approximately $39 million of restructuring transaction costs. These items were partly offset by improved commodity prices, higher operating income, and the absence of significant 2009 impairment charges. The company recorded a $2 million gain from discontinued operations in Q1 2010 versus a $243 million loss in Q1 2009.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $1.644 billion at March 31, 2010, compared with $1.867 billion at December 31, 2009.
- Total assets were $25.129 billion; total equity was $8.962 billion.
- Long-term debt, including the current portion, was $8.625 billion based on the balance-sheet presentation; reported carrying value including the current portion was approximately $8.622 billion in the financial-instrument disclosure.
- Williams Partners issued $3.5 billion of senior unsecured notes, retired $3.0 billion of debt, and paid $574 million of debt-retirement premiums. The weighted-average interest rate on unsecured fixed-rate notes declined from 7.7% at year-end 2009 to 6.6% at March 31, 2010.
- Available capacity under revolving and letter-of-credit facilities was approximately $3.056 billion, consisting of $1.642 billion at Williams Partners and $1.414 billion at the parent level. Including cash, total stated available liquidity was approximately $4.7 billion.
- Management expected to maintain at least $1 billion of consolidated liquidity. The company reported compliance with applicable credit-facility covenants.
Material Changes Versus the Prior Comparable Period
- Operating income increased 71%, led by higher NGL production margins at Williams Partners, improved natural gas production results, higher olefin margins, and the absence of 2009 drilling-rig termination penalties.
- Williams Partners segment profit increased to $414 million from $252 million, primarily because of higher NGL margins and equity earnings.
- Exploration & Production segment profit increased to $162 million from $76 million. Realized domestic production prices increased 19%, while average daily total production declined 10%.
- Other segment profit improved to $27 million from a $60 million loss, primarily because the prior-year period included a $75 million impairment of the Accroven investment.
- Operating cash flow increased despite the reported net loss, partly because the $606 million early debt retirement cost was noncash for operating-cash-flow reconciliation purposes.
- Cash decreased by $223 million during the quarter, reflecting $405 million of net financing outflows and $435 million of investing outflows, partly offset by operating cash flow.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2010 operating results and cash flows to improve from 2009 levels, assuming higher energy commodity prices and continued economic improvement.
- Management estimated 2010 operating cash flow of $2.225 billion to $2.8 billion and total capital and investment expenditures of $2.325 billion to $2.925 billion.
- Williams Partners expected to spend $660 million to $870 million on capital projects and additional equity investments; Exploration & Production projected remaining 2010 capital expenditures of $900 million to $1.2 billion.
- The company expected Exploration & Production’s 2010 average daily domestic production to be consistent with 2009 levels, with fourth-quarter volumes potentially higher year over year.
- Commodity prices, drilling activity, demand, counterparty credit, access to capital, regulatory developments, environmental liabilities, weather, and facility damage remain material risks. A downgrade below investment grade could require additional collateral of up to $546 million for Williams and $46 million for Williams Partners.
- Management stated that lower forward natural gas prices could trigger an interim goodwill impairment review during 2010, potentially resulting in a material impairment.
- Legal and contingent matters include California energy-market refund proceedings, natural-gas price-index litigation, environmental remediation, royalty litigation, and other divestiture indemnifications. Management did not expect these matters, after recorded accruals and other recoveries, to materially affect future liquidity or financial position, but acknowledged that an unfavorable ruling could materially affect results in the period incurred.
- In April 2010, the board approved a quarterly dividend of $0.125 per share, a 14% increase from the prior $0.11 dividend.
Most Important Facts for Investors to Verify
- Whether the restructuring produces the expected lower cost of capital, growth, distributions from Williams Partners, and improved access to financing.
- The sustainability of higher NGL and natural gas margins amid volatile commodity prices and narrowing regional price differentials.
- Progress against the 2010 operating-cash-flow and capital-expenditure ranges, including the funding needs of Williams Partners and Exploration & Production.
- Debt maturities, covenant compliance, refinancing needs, and the effect of credit-rating changes on collateral requirements and liquidity.
- Potential goodwill or long-lived-asset impairments if forward natural gas prices decline materially.
- Developments in California refund proceedings, royalty and gas-index litigation, environmental matters, and other contingent obligations.