WMB

Business Context and Reporting Period

Company: The Williams Companies, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Williams is a natural gas company engaged in finding, producing, gathering, processing, and transporting natural gas. Operations are concentrated in the Pacific Northwest, Rocky Mountains, Gulf Coast, Eastern Seaboard, and Alberta, Canada. The company operates through four primary segments: Exploration & Production, Gas Pipeline, Midstream Gas & Liquids, and Gas Marketing Services.

Key Financial Metrics (2008)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 18% to $12.35 billion, driven by higher production volumes and net realized prices in Exploration & Production, and higher olefin/NGL prices in Midstream.
• Profitability: Net income rose 43% to $1.42 billion. Income from continuing operations increased 58% to $1.33 billion.
• Segment Performance:
  • Exploration & Production: Segment profit increased to $1.26 billion (from $756 million) due to a 20% increase in production and a 28% increase in net realized prices. However, the segment recorded a $143 million impairment charge related to Arkoma basin properties.
  • Gas Pipeline: Segment profit increased slightly to $689 million (from $673 million), benefiting from new rates and expansion projects.
  • Midstream: Segment profit decreased to $963 million (from $1.07 billion) due to a sharp decline in commodity prices in Q4 and hurricane-related disruptions.
  • Gas Marketing: Segment profit improved significantly to $3 million (from a $337 million loss) due to favorable derivative price movements and the absence of a legacy contract loss recognized in 2007.
• Unusual Items:
  • Recorded a $148 million gain on the sale of a contractual right to a production payment in Peru.
  • Incurred approximately $60–$85 million in reduced segment profit due to Hurricanes Gustav and Ike.
  • Completed a $1 billion stock repurchase program.

Guidance, Outlook, and Risks

2009 Outlook: Management expects operating results and cash flows to be sharply reduced in 2009 compared to 2008 due to the economic recession and lower energy commodity prices. The company plans to transition from significant growth to sustaining current operations and reducing costs. Capital expenditures are estimated between $2.15 billion and $2.45 billion for 2009.

Liquidity: As of December 31, 2008, the company held $1.44 billion in cash and cash equivalents with approximately $2.5 billion in available credit capacity. Management expects to maintain at least $1 billion in liquidity.

Key Risks:

• Commodity Price Volatility: Sustained lower natural gas and NGL prices could materially impact results, particularly for Exploration & Production and Midstream segments.
• Goodwill Impairment: The company holds approximately $1 billion in goodwill. A decline in market capitalization below stockholders' equity could trigger an interim impairment evaluation.
• International Operations: Assets in Venezuela face risks of nationalization and payment delays from the state-owned oil company (PDVSA).
• Regulatory and Litigation: Ongoing proceedings regarding California energy crisis refunds, royalty payments, and environmental compliance.

Investor Verification Checklist

• Commodity Hedging: Verify the extent of 2009 production hedging (approx. 106 MMcf/d fixed price and 490 MMcf/d in collars) to assess downside protection.
• Goodwill Valuation: Monitor market capitalization relative to the $8.44 billion stockholders' equity to assess the risk of a goodwill impairment charge.
• Venezuela Exposure: Review the status of the $57 million receivable from PDVSA and the risk of asset nationalization.
• Capital Expenditures: Confirm the reduction in 2009 capital spending plans versus the $3.3 billion invested in 2008.
• Debt Covenants: Verify compliance with debt-to-capitalization covenants (currently ~40%) given the projected decline in cash flows.