Williams CEO Steve Malcolm said Thursday he remains concerned about the “noise” from the ongoing energy merchant industry investigations by FERC, the Department of Justice and the Securities and Exchange Commission, and the “uncertainty as to where those might lead.” Malcolm made the comments during a conference call to discuss the company’s third quarter earnings.
“We’re certainly aware of the extraordinary political pressure those guys are under to find the ‘bad guys,'” Malcolm said of the investigators. “And we are exasperated at times with all that is going on. We would have hoped that all of this would be behind us by now, but it appears it is going to last a while. That is what is of most concern to me at this time.”
In October, the Federal Energy Regulatory Commission released a list of 12 energy companies, which included Williams subsidiary Williams Energy Marketing & Trading Co., that are targets of continuing investigations in the alleged manipulation of natural gas and power prices (see Daily GPI, Oct. 20).
The allegations against Williams and others stem from federal inquiries since Enron Corp.’s bankruptcy into the manipulation of gas and power markets on the West Coast, reporting false information on gas trades to published price indices and improper bidding behavior and practices in western energy markets.
Malcolm and his management team did not dwell on the investigations during the conference call. The CEO said he was “sincerely excited about the progress we are making” to turn the company around after coming close to bankruptcy last year.
Following a $294 million loss in the third quarter of 2002, Williams swung to a quarterly profit this go round on significantly lower mark-to-market losses, reduced operating expenses and income associated with an agreement to terminate a derivative contract. The Tulsa-based company still expects to report a year-end loss, and also sees slow growth in 2004 before a strong turnaround begins in 2005.
The company reported quarterly unaudited net income of $106.3 million (20 cents/share), compared with a net loss of $294.1 million (minus 58 cents/share) for the same period of 2002. In the first nine months of this year, Williams recorded net losses of $438.5 million (minus 89 cents/share), versus a net loss of $535.5 million (minus $1.20/share) for the same period a year ago.
Quarterly net income from continuing operations was $22.8 million (4 cents/share), compared with a loss of $171.2 million (minus 34 cents) for the third quarter of 2002. Last year, Williams restated discontinued operations related to assets sold or held for sale.
“Our efforts this year to restructure Williams into a financially stronger company with natural gas businesses that provide sustainable earnings are bearing fruit,” said Malcolm. “We’ve made significant progress through asset sales, early debt retirements, refinancings and cost reductions. Clearly, our focus this year has been on executing this strategy to strengthen our finances and narrow our business focus. It should not be lost that in the midst of this restructuring, our core businesses have continued to report solid performance and we have seen positive results from our efforts to reduce the financial impact of our non-core power business.”
Malcolm reiterated that the company is “committed to sustaining the discipline to continue our restructuring success.” Since the close of the third quarter, Williams has retired nearly $1 billion of debt through cash tender offers, which will help it toward its goal of once again attaining investment-grade ratios by the end of 2005, he said. “And while our success in exiting the power business is going slower than we had anticipated, we have made progress — $315 million in cash this year from sales of and agreements to terminate certain contracts — as we manage this business to reduce risk, generate cash flow and meet our contractual obligations.”
Williams’ integrated natural gas businesses, which the company considers core to its strategy, reported combined segment profit of $274.5 million in the quarter, compared with $487 million in the same period last year on a restated basis.
Last year’s third quarter included a $143.9 million gain on the sale of exploration and production properties. Results this year also reflect the absence of production volumes from the properties that were sold during the 12-month period, lower gathering-and-processing margins and absence of the $26 million benefit from reversal of a rate-refund liability.
Gas Pipeline, a second core segment, which provides natural gas transportation and storage services, reported quarterly segment profit of $141.4 million, down from $147.2 million a year ago. The most recent quarter reflects the benefit of higher average transportation rates and expansion projects on the Transco system and lower general and administrative expenditures.
Exploration & Production, its third core segment, includes natural gas production and development in the U.S. Rocky Mountains, San Juan Basin and Midcontinent. This segment reported profit of $58.8 million versus $228.2 million a year ago.
“A significant difference between performance in the most recent quarter and the same period a year ago is a $143.9 million gain on the sale of certain properties that was included in third quarter 2002 results,” the company said. “Results from the most recent quarter also reflect the impact of lower levels of production and lower net average realized sales prices, including the effect of hedge positions. Net domestic production volumes for the quarter were 13% lower than same quarter of 2002, primarily attributable to the sales of properties and reduced drilling activity during January through August as a result of capital constraints.”
Another core segment, Midstream Gas & Liquids, which provides gathering, processing, natural gas liquids fractionation and storage services, reported quarterly profit of $74.3 million versus a restated segment profit of $111.6 million for the same period last year. The decrease “reflects lower processing margins in the United States and Canada, a result of natural gas prices increasing more than natural gas liquids prices and lower olefins margins because of higher feedstock costs.” Losses were partially offset by the benefit of increased operations in the deepwater Gulf of Mexico.
Williams is exiting the power business, even though its Power segment, which manages more than 7,500 MW through long-term contracts reported significantly higher segment profit for the third quarter compared with the same period last year: $43.9 million versus a segment loss of $387.6 million. This year’s results reflect the application of a different accounting treatment (EITF Issue No. 02-3), under which non-derivative, energy-related trading contracts are accounted for on an accrual basis. In 2002, all energy-related contracts, including tolling and full-requirements contracts, were marked to market.
Performance in Power also includes a $127 million valuation increase associated with an agreement to terminate a long-term derivative contract to supply power and $26.5 million of gains from other contract and asset sales. Last year’s loss included significant mark-to-market losses from narrowed spark spreads on certain power-tolling portfolios.
Williams is in the process of selling component parts of the Power portfolio or as a whole, and plans a web-based tutorial for the investment community later this month. In the interim, Williams’ strategy is to manage the business to reduce risk, generate cash and continue to meet contractual obligations.
“We’ve taken actions that have reduced our interest expense and we are reducing our debt at a meaningful level,” Malcolm said. “We have a lot of work yet to do in further reducing our debt over the next two years, but our liquidity continues to be strong and our plan allows for both adequate liquidity and significant debt reduction.”
A significant factor in the company’s increased net cash is the $3.1 billion in net proceeds from asset sales and the sale and/or agreement to terminate certain marketing and trading contracts. Net cash provided by operating activities was $695 million in the first nine months of 2003. In the same period a year ago, the company’s operating activities used approximately $1.4 billion in net cash.
Going forward, Williams expects to see a net loss this year of $1.15-to-60 cents per share. Williams expects segment profit of $1.38 billion to $1.64 billion and results from continuing operations in the range of a $50 million loss to income of $150 million.
The company also provided updated segment-profit guidance, including unusual items of income or loss, for the current year: $530-$560 million for Gas Pipeline; $400-$430 million for Exploration & Production; $330-$390 million for Midstream Gas & Liquids; $150-$300 million for Power; and a loss of $50 million-break-even for Other.
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