Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. Williams operates U.S. natural gas infrastructure, including interstate transmission, gathering and processing, NGL services, marketing and trading, and upstream activities. Reportable segments are Transmission & Gulf of Mexico, Northeast G&P, West, Gas & NGL Marketing Services, and Other.
Effective January 1, 2022, the company reorganized its NGL and natural gas marketing activities into Gas & NGL Marketing Services and recast prior-period segment information. Natural gas marketing revenues are generally presented net of related costs following integration of the legacy and Sequent marketing operations.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $2.490 billion, versus $2.283 billion | $5.014 billion, versus $4.895 billion |
| Operating income | $472 million, versus $600 million | $1.126 billion, versus $1.339 billion |
| Net income attributable to Williams | $400 million, versus $304 million | $780 million, versus $730 million |
| Diluted EPS | $0.33, versus $0.25 | $0.64, versus $0.60 |
| Net cash from operating activities | Not separately presented | $2.180 billion, versus $1.972 billion |
| Capital expenditures | Not separately presented | $606 million, versus $685 million |
Operating margin was approximately 19.0% for the quarter and 22.5% for the six months, compared with approximately 26.3% and 27.4%, respectively, in the prior-year periods. Net margin attributable to Williams was approximately 16.1% for the quarter and 15.6% for the six months, versus approximately 13.3% and 14.9%.
- Modified EBITDA was $1.247 billion in the second quarter and $2.640 billion for the six months, compared with $1.306 billion and $2.716 billion, respectively.
- Second-quarter Modified EBITDA by segment: Transmission & Gulf of Mexico $652 million; Northeast G&P $450 million; West $288 million; Gas & NGL Marketing Services $(282) million; Other $139 million.
- Cash and cash equivalents were $133 million at June 30, 2022, compared with $1.680 billion at December 31, 2021. The decline primarily reflected debt repayments, the Trace acquisition, capital investments, dividends and equity-method investment contributions.
- Total debt was approximately $22.715 billion, consisting of $876 million of current long-term debt, $1.039 billion of commercial paper, and $20.800 billion of long-term debt.
- The company had a $3.750 billion revolving credit facility with no borrowings, $48 million of letters of credit, and approximately $2.843 billion of stated available liquidity including cash. Available borrowing capacity under the credit facility was $2.712 billion as of July 28, 2022.
- Working capital was negative $2.051 billion at June 30, 2022.
- Common dividends paid during the first six months totaled $1.035 billion. The quarterly dividend increased to $0.425 per share from $0.41 in 2021. No shares were repurchased under the $1.5 billion authorization through June 30, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue increased 9% in the second quarter and 2% for the six-month period, driven by higher service revenues, commodity-based gathering and processing rates, volumes, product prices, Transco’s Leidy South expansion, and the Sequent acquisition.
- Net income attributable to Williams increased 32% in the quarter and 7% for the six months, despite lower operating income. Results benefited from higher equity earnings, upstream results, commodity margins, lower interest expense, and a $134 million tax benefit from valuation allowance releases and federal tax settlements.
- Operating income declined because higher revenues were more than offset by a $299 million unfavorable quarterly change and a $457 million unfavorable six-month change in net gains or losses on commodity derivatives, along with higher operating, depreciation, and selling, general and administrative expenses.
- Net losses on commodity derivatives were $313 million in the quarter and $507 million for the six months, compared with losses of $14 million and $50 million in the prior-year periods. The six-month results included a $356 million unfavorable change in net unrealized derivative losses.
- Gas & NGL Marketing Services reported Modified EBITDA of $(282) million in the quarter and $(269) million for the six months, compared with $8 million and $101 million. The decline primarily reflected unrealized derivative losses, the Sequent acquisition, and the absence of favorable Winter Storm Uri results in 2021.
- Transmission & Gulf of Mexico, Northeast G&P, and West Modified EBITDA increased for the six-month period to $1.349 billion, $868 million, and $548 million, respectively, from $1.306 billion, $811 million, and $445 million.
- Cash from operations increased to $2.180 billion from $1.972 billion, but investing cash use increased to $1.652 billion from $700 million, primarily due to the Trace acquisition.
- On April 29, 2022, Williams acquired Trace Midstream’s Haynesville gathering assets for $972 million. The acquired operations contributed $37 million of revenue and $20 million of Modified EBITDA from closing through June 30, 2022.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects 2022 earnings and cash flow to benefit from higher commodity prices, volume growth in the Haynesville and Ohio Valley Midstream areas, Transco expansion projects, upstream development, and the Trace acquisition. Expected offsets include the absence of Winter Storm Uri benefits, lower expected Bradford Supply Hub results, and higher costs.
- 2022 growth capital and investment expenditures are expected to range from $2.25 billion to $2.35 billion. Management expects to fund substantially all additional planned capital spending with cash available after dividends, while retaining flexibility to adjust spending or repurchase shares.
- Major expansion initiatives include Regional Energy Access, Southside Reliability Enhancement, and West Louisiana Energy Gateway. These projects remain subject to regulatory approvals, construction execution, customer demand, and other risks.
- Derivative accounting creates substantial earnings volatility. Management states that unrealized derivative gains and losses generally offset changes in the economic value of underlying transportation, storage, marketing, and production contracts that are recognized later.
- Key risks include commodity price and volume volatility, counterparty credit risk, permitting and regulatory delays, inflation and interest rates, construction and labor costs, operational interruptions, weather, cybersecurity, climate-related risks, geopolitical developments, and changing environmental regulations.
- Two putative class actions concerning alleged manipulation of published natural gas price indices remain unresolved. Class certification was granted in June 2022, and the potential exposure cannot currently be reasonably estimated; a material loss is reasonably possible.
- Environmental liabilities accrued at June 30, 2022 totaled $30 million. The company also has pending Alaska refinery contamination litigation, environmental proceedings, indemnification obligations, and other contingencies.
- The company recorded an $88 million release of tax valuation allowances and reduced unrecognized tax positions by approximately $46 million from IRS settlements. These items materially reduced the reported tax provision.
- The company’s senior unsecured debt ratings were investment grade with stable outlooks: BBB from S&P, Baa2 from Moody’s, and BBB from Fitch.
Most Important Facts for Investors to Verify
- Confirm the sustainability of operating cash flow and dividend coverage given only $133 million of cash, a $2.051 billion working capital deficit, and substantial near-term debt and commercial paper obligations.
- Assess the recurring, cash-based performance of the marketing business separately from large unrealized derivative losses and gains.
- Evaluate execution, permitting, funding, and contracted capacity for the $2.25 billion to $2.35 billion 2022 growth capital program and announced expansion projects.
- Review the financial contribution, integration progress, and purchase-price accounting for the $972 million Trace acquisition and the 2021 Sequent acquisition.
- Determine the extent to which the $134 million tax benefit and other unusual items affected year-over-year earnings and are nonrecurring.
- Monitor unresolved litigation, environmental matters, potential indemnification exposure, derivative collateral requirements, and the effect of any credit-rating downgrade on liquidity.