01—Abstract
Summary
Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.
Williams Companies (WMB) enters 2004 in a far stronger position than a year earlier, though still in transition.
In 2003 the company executed its refocusing plan: it generated roughly $3 billiona from asset sales (including Texas Gas Transmission, Williams Energy Partners, the Memphis refinery, and E&P properties), repaid $3.2 billion of debt, and cut SG&A by 28% and general corporate expenses by 39%. Reported results were still weak: loss applicable to common stock was $521.7 million, driven by a $761.3 million cumulative-effect charge from adopting EITF 02-3, while income from continuing operations was only $15.2 million. Revenue of $16.8 billion is inflated by gross-basis reporting under EITF 02-3 and does not reflect a change in underlying economics.
The core businesses look healthier. Gas Pipeline (Transco and Northwest Pipeline) produced segment profit of $554.9 millionb on stable, FERC-regulated revenues, and Midstream and Exploration & Production continued to grow, especially in deepwater Gulf of Mexico infrastructure. Balance-sheet risk remains elevated: long-term debt was about $12.0 billion, the company is below investment grade, and it must post substantial collateral.
The Power segment, which the company is exiting, still carries large non-derivative tolling obligations (about $6.7 billionc of fuel conversion commitments over 19 years) and faces ongoing California refund, FERC, and shareholder litigation. Northwest Pipeline's 26-inch line was idled after stress corrosion cracking breaks, with remediation estimated at $365 million to $430 million.
For investors, the central question is whether management can keep reducing debt (targeting about $1 billiond of 2004 maturities), complete roughly $800 million of additional asset sales, exit Power at acceptable values, and regain investment-grade status. Results in 2004 will depend heavily on those outcomes and on the resolution of legal and regulatory matters.
02—Key points
Key Highlights
- Asset sales generated about $3.0 billion of net proceeds in 2003, and management expects roughly $800 million more in 2004 (including the Alaska refinery sale for about $265 million).
- Debt was reduced by $3.2 billion in 2003 through maturities and early retirements, including the $1.15 billion RMT note; long-term debt was $11.0 billion (long-term portion) with total long-term debt including current portion of $12.0 billion.
- Reported net loss applicable to common stock was $521.7 million, mainly due to a $761.3 million cumulative-effect charge from EITF 02-3 adoption; income from continuing operations was only $15.2 million.
- SG&A from continuing operations fell 28% and general corporate expenses fell 39%, reflecting cost-reduction efforts and Power downsizing.
- Gas Pipeline segment profit rose to $554.9 million on 14,600 miles of interstate pipeline with FERC-regulated revenues, while E&P had proved reserves of 2.7 Tcfe and Midstream benefited from new deepwater Gulf infrastructure.
- Power remains a major risk: the company still holds about 7,700 MW of tolling rights, has large accrual losses on non-derivative contracts, and faces open California refund, FERC, and class-action matters.
- The 26-inch Northwest Pipeline line was idled after two stress corrosion cracking breaks in 2003, with estimated remediation and replacement costs of $365 million to $430 million through 2006.
03—Questions
Frequently Asked Questions
Why did Williams report a net loss in 2003 even though it sold about $3 billion of assets?
The net loss of $492.2 million (loss applicable to common of $521.7 million) was driven mainly by a $761.3 million cumulative-effect charge from adopting EITF 02-3, which removed fair-value accounting for non-derivative energy contracts. Income from continuing operations was only $15.2 million, and asset-sale gains were largely offset by impairments and Power-related charges. Asset sales reduced debt and improved liquidity rather than producing a profit on their own.
How much debt does Williams still carry, and when does it come due?
Long-term debt including the current portion was about $12.0 billion at year-end 2003 (long-term debt of $11.0 billion plus $936 million due within one year). Management expects about $1 billion of scheduled maturities in 2004, including the $679 million remaining on the 9.25% notes due March 2004 that it has the cash to repay. Roughly $1.1 billion of FELINE PACS notes are subject to remarketing in 2004.
What is the outlook for the Power segment and its exit?
Power is being wound down, but the process is slow and the outcome uncertain. The company generated over $600 million from Power contract sales and liquidations in 2003, yet some tolling agreements have negative fair value that is not recorded and may produce future accrual losses. Power's segment profit of $154 million in 2003 was driven largely by a $401 million mark-to-market gain, while accrual losses were $268 million. Sales may occur below carrying value, and litigation including California refunds and FERC investigations remains unresolved.
Is Williams likely to regain investment-grade credit ratings soon?
Not in the near term. The company was downgraded to below investment grade in 2002 and remained there through 2003. Management expects to satisfy an indenture fixed-charge coverage covenant by the end of 2005 and is targeting investment-grade status through debt reduction and exiting Power. Rating agencies also impute the tolling commitments as debt, which could further delay an upgrade. Below-investment-grade status increases collateral requirements, which is why the company is seeking to replace its cash-collateralized $800 million letter-of-credit facility.
04—Continue