01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
Williams Companies (WMB) closed 2006 with income from continuing operations of $332.8 milliona, up from $317.4 million in 2005, while net income was $308.5 million after a $24.3 million loss from discontinued operations.
Total revenues fell 6% to $11.81 billionb, driven mainly by lower trading volumes and gas prices at the Power segment, but segment profit rose $185.8 million to $1.47 billion. The improvement came from Midstream, where strong NGL margins and deepwater fees offset a $72.7 million Gulf Liquids litigation charge, and from Exploration & Production, where domestic production grew about 23% and 597 Bcfe of reserves were added. Power continued to post losses (segment loss of $210.8 million) as it wound down trading and worked through tolling-contract economics.
Balance sheet and liquidity improved. Stockholders' equity rose to $6.07 billionc, long-term debt was roughly flat at $7.62 billion, and cash rose to $2.27 billion. Operating cash flow reached $1.89 billion, which was supported by the 2006 liquidity profile and a $1.5 billion unsecured revolver.
Williams cut its dependence on secured debt, retired a $489 milliond secured term loan, and sold 25.1% and then 74.9% of Williams Four Corners to Williams Partners L.P. for about $1.58 billion, bringing in minority-interest capital. The company also raised its quarterly dividend 20% to $0.09 per share. Ratings were upgraded but remain below investment grade, which still raises collateral and financing costs.
Investors should weigh several legal and regulatory items. The company settled securities class-action litigation for $290 million, and the Gulf Liquids verdict could bring additional punitive exposure of about $199 million above the accrual if the trial court enters judgment against Williams.
Pipeline rate cases for Northwest Pipeline and Transco, with FERC approval of the Northwest settlement expected by mid-2007, are central to future Gas Pipeline earnings. The company also disclosed a Ninth Circuit ruling that could require partial refunds on about $89 million of California-related power contracts, and the FIN 48 adoption is expected to reduce retained earnings by $10 to $20 million.
02—Key points
Key Highlights
- Income from continuing operations rose to $332.8 million ($0.55 diluted EPS) from $317.4 million in 2005, while net income was $308.5 million after discontinued-operations losses.
- Total revenues declined 6% to $11.81 billion, mainly from lower Power trading volumes and natural gas prices, but segment profit increased $185.8 million to $1.47 billion.
- Exploration & Production grew domestic production about 23% year over year, added 597 Bcfe of net reserves, and ended 2006 with 3,701 Bcfe of proved reserves (67% in the Piceance basin).
- Midstream benefited from strong NGL margins and deepwater fee growth, but absorbed a $72.7 million Gulf Liquids litigation accrual; Williams Partners L.P. acquired Williams Four Corners for about $1.58 billion in total.
- Power posted a segment loss of $210.8 million, reflecting negative gross margin on tolling contracts and unrealized mark-to-market losses from falling forward power prices.
- Balance sheet strengthened: stockholders' equity rose to $6.07 billion, cash reached $2.27 billion, and the $1.5 billion unsecured revolver replaced the secured facility; the quarterly dividend was raised 20% to $0.09.
- Major legal overhangs include the $290 million securities settlement (largely paid), a possible additional ~$199 million Gulf Liquids punitive exposure, and FERC rate-case outcomes for Northwest Pipeline and Transco.
03—Questions
Frequently Asked Questions
Did Williams improve its underlying profitability in 2006?
Yes. Segment profit rose $185.8 million to $1.47 billion and income from continuing operations increased to $332.8 million. The gains came mainly from Midstream NGL margins, deepwater fee revenue, and higher Exploration & Production volumes, partly offset by the Gulf Liquids charge and Power losses.
What are the main risks to earnings in 2007?
The main risks are commodity price volatility, lower-than-expected cash flow, weaker drilling success at E&P, possible Gulf Liquids punitive damages of about $199 million above the accrual, and the outcome of the Northwest Pipeline and Transco rate cases. Williams also flagged a Ninth Circuit ruling that may require partial refunds on about $89 million of California-related power sales.
How is Williams funding its growth and what is the leverage position?
Williams is funding growth with operating cash flow (estimated $2.0 to $2.3 billion for 2007), debt issuance, and sales of Williams Partners L.P. units. Long-term debt was about $7.6 billion at year-end. Covenants require debt to capitalization below 65% (about 53% actual). The company has no investment-grade rating, which raises collateral costs, though ratings were upgraded during 2006.
Why did Williams Partners L.P. matter to the 2006 results?
Williams Partners L.P. acquired the San Juan Basin Four Corners gathering and processing business from Williams in two steps totaling about $1.58 billion. Because Williams controls the partnership's general partner, it is consolidated in Midstream, which adds debt and minority interest to Williams' consolidated balance sheet and gives Williams a lower-cost capital source for acquisitions.
What is the capital spending outlook for 2007?
Total capital and investment expenditures are expected to be $2.2 to $2.4 billion in 2007, including $1.3 to $1.4 billion for Exploration & Production drilling and $215 to $270 million for Gas Pipeline maintenance. Major growth projects include the Leidy to Long Island and Potomac expansions and the Perdido Norte deepwater project, estimated at about $480 million.
04—Continue