Why did revenues fall so sharply in 2004?

Revenues fell to $12.46 billion from $16.65 billion mainly because the Power segment's realized revenues dropped about $4 billion. Power reduced its physical power sales volumes by roughly 47% as it wound down long-term physical contracts that expired or were terminated, and it sold off its crude and refined products business. The decline partly reflected 2003 revenues that had been inflated by the adoption of EITF 02-3, which required gross reporting of certain transactions.

Is Williams' balance sheet getting healthier?

Yes, by most measures. The company reduced long-term debt from about $12 billion to about $8 billion during 2004, and debt-to-capitalization improved to 61.6% from 74.5%. Stockholders' equity rose to $4.96 billion from $4.10 billion, helped by the issuance of 33.1 million shares in the FELINE PACS exchange. Liquidity from cash and revolving facilities is targeted at a minimum of $1 billion. However, the company still carries speculative-grade credit ratings, so its borrowing costs and collateral requirements remain elevated.

What are the biggest legal and regulatory risks for investors?

The most significant items include the Department of Justice investigation into misreporting of natural gas prices to trade publications, where the company says material penalties are reasonably possible but cannot estimate the amount. Other exposures include numerous class actions tied to the California energy crisis, the ongoing FERC and state Quality Bank proceedings in Alaska (with about $134 million accrued and up to about $32 million of additional reasonably possible exposure), a Tax Court dispute over tax credit recapture that could add up to about $110 million, and securities and ERISA litigation. The company has directors' and officers' insurance but says some outcomes may not be fully covered.

What does the 2005 outlook look like?

Management plans to shift from restructuring to disciplined growth. It expects capital and investment spending of $1.0 to $1.2 billion in 2005, up from $787 million in 2004, with Exploration & Production drilling of $500 to $575 million and Gas Pipeline spending focused on maintenance and the Northwest Pipeline capacity replacement project (about $333 million net). Cash generated from operations is estimated at $1.3 to $1.6 billion. Exploration & Production expects daily domestic production to rise at least 10% from the fourth-quarter 2004 level of 566 MMcfe per day by the end of 2005.

WMB 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 11, 2005. Cited figures are marked; the original filing is the authoritative source.

Williams Companies (WMB) closed 2004 having largely completed its February 2003 restructuring plan, shifting its stated focus from restructuring to disciplined growth.

Revenues fell to $12.46 billion^a from $16.65 billion, driven by a roughly $3.9 billion decline at the Power segment as the company reduced its wholesale power and crude/refined products activity. Income from continuing operations was modest at $93.2 million, and net income was $163.7 million, or $0.31 per diluted share, compared with a net loss of $492.2 million in 2003. Results were helped by $800+ million of asset sales (including the Alaska refinery and Canadian straddle plants), roughly $4 billion of debt reduction, and a $93.6 million Gulf Liquids insurance arbitration award, but were offset by higher costs and hedge losses in Exploration & Production.

The company's debt-to-capitalization ratio improved to 61.6% at year-end 2004 from 74.5% in 2003, with total long-term debt falling to about $8 billion^b. Management guided to a 2005 debt-to-capitalization ratio of 59% to 60%, capital expenditures of $1.0 to $1.2 billion, and operating cash flow of $1.3 to $1.6 billion, and committed to maintaining at least $1 billion of liquidity.

Williams remains below investment grade (S&P B+, Moody's B1, Fitch BB), and the decision in September 2004 to keep the Power business exposes the company to ongoing legal and regulatory matters, including a Department of Justice investigation into natural gas price reporting where material penalties are reasonably possible. For investors, the filing shows a company that has materially deleveraged and is pivoting toward growth in natural gas pipelines, Exploration & Production, and deepwater Midstream assets, but with a still-speculative credit profile, meaningful contingent legal exposure, and a Power business whose results remain volatile.

02—Key points

Key Highlights

Revenues declined 25% to $12.46 billion in 2004 from $16.65 billion in 2003, mainly because Power's realized revenues fell by about $4 billion as the company reduced wholesale trading activity.
Net income of $163.7 million ($0.31 per diluted share) compared with a net loss of $492.2 million in 2003, and income from continuing operations was $93.2 million ($0.18 per share).
Debt was reduced by about $4 billion in 2004, bringing long-term debt to roughly $8 billion, and debt-to-capitalization fell to 61.6% from 74.5%, with a 2005 target of 59% to 60%.
Asset sales generated about $877.8 million in 2004, including the Canadian straddle plants for about $544 million and the Alaska refinery for about $304 million.
The company decided in September 2004 to retain the Power business rather than exit it, and the Gas Pipeline segment (14,700 miles of pipeline) generated segment profit of $585.8 million.
Credit ratings remain below investment grade at B+ (S&P), B1 (Moody's), and BB (Fitch), with a stated goal of returning to investment grade.
Material legal exposure remains, including a DOJ investigation into natural gas price misreporting where material penalties are reasonably possible, plus securities class actions, Quality Bank litigation (about $134 million accrued), and a possible tax exposure of up to about $110 million.

03—Questions

Frequently Asked Questions

Why did revenues fall so sharply in 2004?
Revenues fell to $12.46 billion from $16.65 billion mainly because the Power segment's realized revenues dropped about $4 billion. Power reduced its physical power sales volumes by roughly 47% as it wound down long-term physical contracts that expired or were terminated, and it sold off its crude and refined products business. The decline partly reflected 2003 revenues that had been inflated by the adoption of EITF 02-3, which required gross reporting of certain transactions.
Is Williams' balance sheet getting healthier?
Yes, by most measures. The company reduced long-term debt from about $12 billion to about $8 billion during 2004, and debt-to-capitalization improved to 61.6% from 74.5%. Stockholders' equity rose to $4.96 billion from $4.10 billion, helped by the issuance of 33.1 million shares in the FELINE PACS exchange. Liquidity from cash and revolving facilities is targeted at a minimum of $1 billion. However, the company still carries speculative-grade credit ratings, so its borrowing costs and collateral requirements remain elevated.
What are the biggest legal and regulatory risks for investors?
The most significant items include the Department of Justice investigation into misreporting of natural gas prices to trade publications, where the company says material penalties are reasonably possible but cannot estimate the amount. Other exposures include numerous class actions tied to the California energy crisis, the ongoing FERC and state Quality Bank proceedings in Alaska (with about $134 million accrued and up to about $32 million of additional reasonably possible exposure), a Tax Court dispute over tax credit recapture that could add up to about $110 million, and securities and ERISA litigation. The company has directors' and officers' insurance but says some outcomes may not be fully covered.
What does the 2005 outlook look like?
Management plans to shift from restructuring to disciplined growth. It expects capital and investment spending of $1.0 to $1.2 billion in 2005, up from $787 million in 2004, with Exploration & Production drilling of $500 to $575 million and Gas Pipeline spending focused on maintenance and the Northwest Pipeline capacity replacement project (about $333 million net). Cash generated from operations is estimated at $1.3 to $1.6 billion. Exploration & Production expects daily domestic production to rise at least 10% from the fourth-quarter 2004 level of 566 MMcfe per day by the end of 2005.

04—Continue

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