WILLIAMS COMPANIES, INC. quarterly report, Q3 FY2020

Williams Companies, Inc. — Form 10-Q Summary

Business context and reporting period

Williams is a U.S. energy infrastructure company focused on interstate natural gas transmission, gathering, processing, fractionation, storage, marketing, and related midstream services. This unaudited report covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Reportable segments are Transmission & Gulf of Mexico, Northeast G&P, West, and Other. Northwest Pipeline was moved from West to Transmission & Gulf of Mexico effective January 1, 2020, and prior periods were recast.

Key financial metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Total revenues	$1,933 million	$1,999 million	$5,627 million	$6,094 million
Operating income	$641 million	$628 million	$1,684 million	$1,687 million
Net income attributable to Williams	$309 million	$221 million	$95 million	$726 million
Diluted EPS	$0.25	$0.18	$0.08	$0.60
Net cash from operating activities	Not separately provided	Not separately provided	$2,382 million	$2,702 million
Capital expenditures	Not separately provided	Not separately provided	$938 million	$1,705 million

Q3 operating margin was approximately 33.2%, compared with 31.4% in Q3 2019. Nine-month operating margin was approximately 29.9%, compared with 27.7% in 2019.
Q3 net margin attributable to Williams was approximately 16.0%; nine-month net margin was approximately 1.7%, reflecting major impairment charges.
Modified EBITDA was $1,243 million in Q3 and $3,742 million for the nine months, versus $1,253 million and $3,552 million, respectively, in the comparable periods.
At September 30, 2020, cash and cash equivalents were $70 million, total assets were $44.3 billion, and total equity was $14.9 billion.
Total long-term debt, including the current portion, was $22.343 billion at September 30, 2020, compared with $22.288 billion at December 31, 2019. Commercial paper outstanding was $40 million.
Available liquidity was approximately $4.530 billion, consisting of $70 million of cash and $4.460 billion of available credit-facility capacity after commercial paper borrowings. The company was in compliance with its credit-facility covenants.
The company paid $1.456 billion of common dividends during the first nine months, including a quarterly dividend of $0.40 per share in September 2020.

Material changes versus the prior comparable period

Nine-month revenue declined 8% to $5.627 billion, primarily from lower commodity prices, lower NGL and natural gas sales, reduced West volumes, lower deferred revenue amortization, and the expiration of a Barnett Shale minimum-volume-commitment agreement. Q3 revenue declined 3%.
Nine-month net income attributable to Williams fell $631 million. The principal drivers were $938 million of equity-method investment impairments, a $187 million Northeast G&P goodwill impairment, the absence of a $122 million 2019 gain from the Jackalope disposition, and lower equity earnings. These impacts were partly offset by lower taxes, operating and maintenance expenses, and SG&A.
Nine-month operating cash flow decreased $320 million, primarily due to unfavorable working-capital changes, including Transco rate-refund payments and the absence of a 2019 income-tax refund.
Modified EBITDA increased 5% for the first nine months. Northeast G&P Modified EBITDA rose to $1.126 billion from $947 million, while Transmission & Gulf of Mexico increased modestly to $1.893 billion and West was broadly stable at $715 million.
Capital expenditures fell to $938 million from $1.705 billion. The company reduced the pace of growth spending in response to weak commodity prices and producer activity.
Williams issued approximately $2.2 billion of long-term debt during the first half of 2020 and retired approximately $1.5 billion, including $600 million of notes retired early in August. New issuances included $1 billion of 3.5% notes due 2030 and Transco notes due 2030 and 2050.

Guidance, outlook, commentary, risks, and unusual items

Management expected 2020 growth capital and investment expenditures of $1.0 billion to $1.2 billion, primarily for Transco expansions and the Bluestem NGL pipeline. Substantially all planned capital spending was expected to be funded with cash available after dividends.
Management expected higher Northeast G&P results, contributions from Transco and Northwest Pipeline expansion projects, the Transco rate settlement, and a full-year contribution from the Norphlet project. Expected offsets included lower West fee revenues, lower deferred revenue amortization, and reduced Gulf of Mexico results due to production losses and storm-related repairs.
COVID-19 had not materially affected financial condition, results, or liquidity through September 30, 2020, according to management. However, continued recession, commodity-price weakness, financial-market volatility, and reduced customer drilling remain risks.
Chesapeake Energy filed for Chapter 11 bankruptcy in June 2020. Williams had $88 million of pre-filing Chesapeake receivables outstanding at September 30. No expected credit-loss or impairment charge was recorded, but future bankruptcy developments could affect collectability and related asset valuations.
Williams recorded $938 million of other-than-temporary impairments of equity-method investments and $187 million of goodwill impairment in the first quarter. These charges were driven by lower commodity prices, reduced producer activity, lower valuation multiples, and higher discount rates.
Approximately $215 million of Northeast Supply Enhancement project costs remained capitalized. Required New York and New Jersey environmental approvals were denied, capitalization ceased in May 2020, and further adverse developments could result in a substantial impairment.
Material contingencies include natural-gas price-index litigation, Alaska refinery contamination litigation, Energy Transfer merger-related litigation, former-operations claims, environmental liabilities of $34 million, and other indemnification obligations. The filing states that potential exposure in some matters cannot be reasonably estimated and could be material.
The Transco rate-case settlement became effective June 1, 2020, and approximately $284 million of rate refunds were paid in July 2020.
A limited-duration shareholder rights agreement adopted in March 2020 expires March 20, 2021 and is subject to consolidated shareholder litigation, with trial scheduled for January 2021.
Projects under development included Southeastern Trail, with portions targeted for service in the fourth quarter of 2020 and first quarter of 2021; Leidy South, with portions targeted for service in the fourth quarter of 2020 and remaining capacity as early as the fourth quarter of 2021; and Bluestem, expected to operate by the end of the fourth quarter of 2020.

Important facts for investors to verify

Whether Chesapeake’s bankruptcy proceedings affect contract continuity, receivable recoveries, producer activity, or Williams’ equity-method investments.
Whether commodity prices, NGL margins, producer drilling reductions, and Gulf of Mexico disruptions lead to additional impairments or lower volumes.
The status, permitting, and recoverability of the Northeast Supply Enhancement project costs.
Progress, costs, and in-service timing for Southeastern Trail, Leidy South, Bluestem, and other expansion projects.
Debt maturities, refinancing needs, credit ratings, covenant compliance, and the company’s ability to sustain the $0.40-per-share quarterly dividend.
Developments in the Energy Transfer, natural-gas price-index, Alaska contamination, environmental, and other litigation matters.
Management’s non-GAAP Modified EBITDA measure and its reconciliation to GAAP results, particularly given the substantial 2020 impairment charges.