WMB

Business Context and Reporting Period

Company: The Williams Companies, Inc.
Reporting Period: Fiscal year ended December 31, 2003
Strategy: The company executed a refocused strategy to become a smaller, integrated natural gas company. Key initiatives included generating approximately $3 billion in asset sale proceeds, reducing debt by $3.2 billion, and exiting the wholesale power and energy trading business. The company adopted Emerging Issues Task Force (EITF) Issue No. 02-3, requiring gross reporting of revenues and costs for non-derivative contracts, significantly altering financial presentation compared to prior years.

Key Financial Metrics

Note: The significant increase in 2003 revenues is primarily due to the adoption of EITF 02-3, which requires gross reporting of revenues and costs rather than net reporting. Prior year amounts were not restated.

Material Changes vs. Prior Period

• Revenue Presentation: Revenues increased by $13.1 billion (353%) compared to 2002. This is largely a non-cash accounting change due to EITF 02-3 adoption, shifting costs from net revenue to gross expense. Power segment external revenues increased $11.4 billion and Midstream increased $1.8 billion due to this change.
• Asset Sales: The company generated approximately $3 billion in proceeds from asset sales in 2003, including the sale of Texas Gas Transmission ($1.045 billion), Williams Energy Partners ($512 million), and various exploration and production assets ($465 million).
• Debt Reduction: The company repaid $3.2 billion of debt through scheduled maturities and early extinguishment. This included prepaying a $1.15 billion RMT note and tendering approximately $951 million of other debt securities.
• Accounting Corrections: Results for 2003 included approximately $117 million of revenue related to the correction of accounting treatment for certain derivative contracts from 2001 and 2002. Without these corrections, the company would have reported a pretax loss from continuing operations.
• Discontinued Operations: Income from discontinued operations turned positive ($253.9 million) in 2003 compared to a loss in 2002, driven by gains on the sale of assets like Williams Energy Partners and Canadian liquids operations, offset by impairments on Texas Gas and Gulf Liquids.

Guidance, Outlook, and Risks

2004 Outlook:

• Capital Spending: Planned capital expenditures are estimated at $700 million to $800 million, expected to be funded by operating cash flow.
• Debt Reduction: The company plans to aggressively reduce debt, targeting scheduled maturities of approximately $1 billion and utilizing proceeds from asset sales (estimated at $800 million) and the release of cash collateral.
• Liquidity: The company expects to maintain cash/liquidity levels of at least $1 billion in excess of immediate needs.
• Power Segment: Continued efforts to exit the Power business are underway. The company anticipates further variability in earnings due to the difference in accounting treatment between derivative and non-derivative contracts.

Key Risks and Contingencies:

• Power Litigation: Ongoing investigations and litigation related to California energy crisis trading practices (2000-2001) remain a significant risk. While a settlement with the State of California was reached, final court approval is pending, and other investigations (e.g., CFTC, DOJ) continue.
• Asset Sales: Delays in closing planned asset sales or receiving lower proceeds than expected could impact liquidity and debt reduction goals.
• Commodity Prices: Volatility in natural gas, power, and oil prices affects earnings, particularly for the Exploration & Production and Midstream segments.
• Northwest Pipeline: A line break in Washington state in 2003 led to a pipeline segment being idled. Estimated costs to inspect, test, and potentially replace the capacity range from $365 million to $430 million.
• Credit Ratings: The company remains below investment grade, which increases the cost of doing business and requires higher collateral support for derivative contracts.

Important Facts for Investor Verification

• EITF 02-3 Impact: Verify the impact of the accounting change on revenue and cost figures; 2003 revenues are not directly comparable to 2002 or 2001 on a net basis.
• Power Segment Exit: Monitor the progress of the Power segment divestiture and the resolution of California-related litigation, as these significantly impact future cash flows and potential liabilities.
• Liquidity Position: Confirm the company's ability to maintain the targeted $1 billion liquidity buffer given the $1 billion in scheduled debt maturities in 2004.
• Asset Sale Closures: Track the closing of the Alaska refinery and related assets (announced Nov 2003) and other planned Midstream sales to ensure projected proceeds are realized.
• Northwest Pipeline Costs: Verify the final cost and regulatory approval for the restoration or replacement of the idled Northwest Pipeline segment.