Williams and the Venezuelan Pokey (WMB)

Williams Companies, Inc. (NYSE: WMB) is getting to disclose just how fun it can be in dealing with a volatile regime in Latin America.  Venezuela is front and center, and now the company plans to post non-cash charges to net income of about $241 million in the first-quarter of 2009.  In Venezuela, Williams’ midstream business has investments in and operates entities that provide compression, gas injection, extraction, and other services to Petroleos de Venezuela S.A. (PDVSA) under long-term agreements. The company’s initial investment in Venezuela began in November 1997  before all the shenanigans started being pulled by Hugo Chavez when he was elected in 1998.

Williams is recording a reserve for uncollectible accounts receivable and impairing the associated long-lived assets and equity and cost-based investments to an estimate of their fair value.  There is an interesting notion when you consider the degree that this will impact the company.  Williams has a market cap north of $7.7 billion, but the company said that it will now report a net loss in the first quarter as a result of the charges.

Williams expects a loss of earnings from its Venezuela operations to reduce its full-year 2009 recurring results by approximately $0.04 per share.  After the adjustments and as of March 31, Williams’ carrying value associated with its Venezuela operations is primarily comprised of $67 million of restricted cash, $106 million of property, plant and equipment, and $161 million of secured debt that is non-recourse to Williams.

The company had already described the uncertainty of collecting its Venezuela receivables because PDVSA had ceased its regular payments to many service providers, but ultimately the company expected that the amounts would ultimately be paid.  That no longer appears to be the case.  It has issued notices of default to PDVSA, and continues to operate the assets.

Williams says it will pursue all rights available to it under its agreements if these defaults are not cured, including international arbitration.  Doing business in Latin America for Gringos has always been challenging, but under dictatorships and under rapidly changing rules it takes on a new life of its own.  The joke in America is that even an ironclad contract signed today is just a starting point for less of a deal down the road.  NAFTA and CAFTA have not been able to change anything about human nature nor to change any cultural differences.

So far, shareholders seem to not care about the losses.  Before items, the company is expected to report earnings at $0.19 EPS for the first quarter.  Shares are up 2% at $13.42, and the 52-week trading range is $9.52 to $40.75.

JON C. OGG