Since the sale of $9 billion in assets, massive layoffs throughout the company and a debt burden that shook it to its knees, Williams is on the mend, reporting Thursday that it not only beat Wall Street’s earnings forecast, but also raised its full-year 2004 guidance on near-record margins in its natural gas liquids (NGL) processing business.
Williams reported that third quarter earnings fell 7% compared with a year ago on one-time costs, with 3Q net income of $98.6 million (19 cents/share), compared with $106.3 million (20 cents) for 3Q2003. Excluding one-time charges that included $155 million for premiums, fees and expenses to retire more than $800 million in debt early, Williams earned 26 cents/share — far above analysts’ expectations of 12 cents.
CEO Steve Malcolm, who presided over a conference call with analysts, said the “road ahead…is very bright,” with restructuring “essentially completed or very close.” He added that Williams is “all about emerging as a focused, disciplined, integrated natural gas company.”
To underscore the news that the turnaround is near completion, Malcolm announced that Phillip D. Wright no longer will carry the title of “chief restructuring officer.” With asset sales done, said Malcolm, “we are now much more about looking at growth opportunities.”
CFO Brad Chappel said he was “delighted with our continued rapid recovery and our overall third-quarter and year-round results.” He noted that the “three primary natural gas businesses continued to grow profits.”
Malcolm noted that the two-year process “fundamentally transformed our company. We’re definitely ahead of schedule on our turnaround. We’ve strengthened our balance sheet, completed our asset sales, established an appropriate level of liquidity and taken the steps to drive down our costs in a sustainable fashion.
“Our decisiveness and discipline is apparent in our financial results. Our quarterly numbers are pointed in the right direction. Cash from operations is up. Segment profit is up. And we’ve significantly reduced our debt and interest expense.
Malcolm said Williams would “continue to use cash flow from operations as one of the key indicators of our overall financial performance and ability to provide resources for growth. This is important because our reported results will be impacted by the residual effect of mark-to-market accounting in the Power business.”
To date, Williams has reduced its debt by more than $1.6 billion, and in the third quarter, the company reduced long-term debt by approximately $816 million, primarily from the early repurchase of $793 million in senior notes that were due in 2010. At the beginning of the fourth quarter, Williams had cash and cash equivalents of $977 million. In addition to cash, Williams’ overall liquidity is supported by available capacity of $840 million through revolving credit facilities, which are used primarily for issuing letters of credit and for liquidity.
Williams’ primary businesses — Exploration & Production, Midstream Gas & Liquids, Gas Pipeline and Power — reported combined segment profit of $433.2 million, up from a combined segment profit of $314.8 million on a restated basis in 3Q2003.
Exploration & Production, which includes natural gas production and development in the U.S. Rocky Mountains, San Juan basin and Midcontinent, reported third-quarter 2004 segment profit of $70.1 million, versus $58.8 million a year ago. The quarterly results increased primarily due to the benefit of higher production volumes and higher net realized average prices for production sold, offset by higher operating costs.
Average daily production volumes have increased 18% since the beginning of 2004. In 3Q2004, average daily production from domestic and international interests was approximately 582 MMcfe, compared with 494 MMcfe at the beginning of 2004.
“In the Piceance basin where drilling activity has increased throughout the year, average daily production continues to rise,” and average daily production in the quarter was 242 MMcfe, a 15% sequential increase over the second quarter’s 210 MMcfe. Williams has also added drilling rigs in the San Juan, Arkoma and Powder River basins.
Midstream, which provides gathering, processing, natural gas liquids fractionation and storage services, reported quarterly profit of $105 million, up from $77.3 million on a restated basis from 3Q2003. The increase in segment profit reflected higher NGL margins and olefins fractionation margins, largely a result of 40% higher NGL sales prices and 36% higher average prices for olefins products. These factors were partially offset by the impact of Hurricane Ivan and a $16.5 million adjustment to correct how the company recognized 2Q2004 revenues for the services provided at the offshore Devils Tower facilities.
For the full year, Williams now expects $435-485 million in segment profit from Midstream, substantially higher than its previous forecast of $325-375 million. The increase in guidance is “based on strong performance this quarter and favorable natural gas liquids margin expectations.”
For the Gas Pipeline, quarterly profit was $148.8 million, up from $141.5 million on a restated basis a year ago. The increase came from an expansion project placed into service after 3Q2003 and higher equity earnings from Williams’ investment in the Gulfstream system, partially offset by lower short-term firm revenues and the absence of income in 2003 resulting from a reduction in accrued liabilities.
Power, which manages more than 7,700 MW through long-term contracts, reported quarterly earnings of $109.3 million, which included the benefit of $187 million in forward unrealized mark-to-market gains. In 3Q2003, Power’s earnings included a forward unrealized mark-to-market loss of $54 million and a realized gain of $126.8 million based on the terms of an agreement to terminate a derivative contract.
In September, Williams announced its decision to continue operating the Power business, which will be a scaled back version of its once heavyweight energy trading business, because it could not find a buyer. The Power segment now will focus on realizing expected cash flows, managing forward commodity risk and providing functions that support Williams’ natural gas businesses. For the full year, Williams now expects break-even to $100 million in segment profit, down from an expected break-even to $150 million.
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