WILLIAMS COMPANIES, INC. annual report, FY2019

The Williams Companies, Inc. — 2019 Form 10-K Summary

Business context and reporting period

Williams is a U.S.-based energy infrastructure company providing natural-gas gathering, processing, transmission, storage, NGL fractionation and transportation, and related services. It operates more than 30,000 miles of pipelines, 28 processing facilities, seven fractionation facilities and approximately 23 million barrels of NGL storage capacity, serving more than 600 customers across 15 supply areas.

This Form 10-K covers the fiscal year ended December 31, 2019. Reportable segments were Atlantic-Gulf, Northeast G&P, West and Other. Effective January 1, 2020, Northwest Pipeline was moved from West to the Transmission & Gulf of Mexico segment, and Atlantic-Gulf was renamed Transmission & Gulf of Mexico.

Key financial metrics

Metric	2019	2018	Change
Revenue	$8.201 billion	$8.686 billion	Down $485 million
Operating income	$1.921 billion	$768 million	Up $1.153 billion
Net income	$714 million	$193 million	Up $521 million
Net income attributable to Williams	$850 million	$(155) million	Improved $1.005 billion
Net income available to common stockholders	$847 million	$(156) million	Improved $1.003 billion
Diluted EPS from continuing operations	$0.71	$(0.16)	Improved $0.87
Operating cash flow	$3.693 billion	$3.293 billion	Up $400 million
Capital expenditures	$2.109 billion	$3.256 billion	Down $1.147 billion
Dividends paid	$1.842 billion	$1.386 billion	Up $456 million
Total assets	$46.040 billion	$45.302 billion	Up $738 million
Debt, including current portion	$22.288 billion	$22.414 billion	Down $126 million

Revenue consisted primarily of $5.933 billion of service revenue, $203 million of service revenue received as commodity consideration and $2.065 billion of product sales. Operating margin was approximately 23.4% in 2019 versus 8.8% in 2018; the comparison was materially affected by asset impairments and gains on asset sales.

Modified EBITDA, the company’s non-GAAP segment measure, was $4.447 billion in 2019 versus $3.388 billion in 2018. Segment Modified EBITDA was $1.895 billion for Atlantic-Gulf, $1.314 billion for Northeast G&P, $1.232 billion for West and $6 million for Other.

Liquidity, debt and cash flow

Cash and cash equivalents were $289 million at December 31, 2019, compared with $168 million a year earlier.
Available liquidity was reported at $4.789 billion, consisting of cash and $4.5 billion of available credit capacity. No commercial paper was outstanding at year-end.
Working capital was negative $2.388 billion, primarily reflecting $2.140 billion of long-term debt due within one year.
Approximately $2.121 billion of long-term debt was scheduled to mature in 2020. The company identified refinancing, credit-facility borrowings, asset monetizations and other sources as potential funding sources.
The company was in compliance with its credit-facility covenants at year-end. Credit ratings were investment grade: S&P BBB, Moody’s Baa3 and Fitch BBB-, with Fitch on Rating Watch Positive.
Operating cash flow exceeded capital expenditures and common dividends in 2019, although the company also acquired the remaining UEOM interest for approximately $728 million and made $453 million of equity-method investment contributions.

Material changes versus the prior comparable period

Service revenue increased $431 million, primarily from Transco expansion projects, higher Northeast gathering and processing volumes, and consolidation of UEOM beginning in March 2019.
Product sales decreased $719 million, mainly because of lower NGL and natural-gas prices, lower equity NGL volumes and divestitures.
Operating income benefited from a reduction in asset impairments from $1.915 billion in 2018 to $464 million in 2019. The 2018 amount included a $1.849 billion Barnett Shale impairment.
2019 included a $354 million impairment of Constitution’s capitalized project costs, $186 million of equity-method investment impairments and a $122 million gain on the sale of Jackalope.
Williams acquired the remaining 38% of UEOM for $741 million of total consideration and subsequently formed the Northeast JV. A partner invested approximately $1.33 billion for a 35% interest, leaving Williams with 65% and control.
Williams sold its 50% Jackalope interest for $485 million in April 2019. The company also completed multiple Transco, Northwest Pipeline and gathering or processing expansions during the year.
Common dividends increased to $0.38 per share per quarter in 2019 from $0.34 per share in 2018; total dividends declared were $1.52 per share.

Guidance, outlook and unusual items

Management’s 2020 plan emphasizes earnings and cash-flow growth, leverage improvement and operating-cost discipline. Growth capital and investment expenditures are expected to be $1.1 billion to $1.3 billion, funded substantially with cash available after dividends. Planned spending includes contracted Transco expansions and the Bluestem NGL pipeline project.

Management expects 2020 results to benefit from Transco projects placed in service, the Transco general-rate-case settlement, a full-year contribution from Norphlet and higher Northeast gathering and processing volumes.
Management expects lower West results from reduced Barnett deferred-revenue amortization and lower Haynesville revenue, partially offset by higher DJ Basin and Eagle Ford activity.
The Transco rate-case settlement remained subject to FERC approval. Williams had accrued a $189 million rate-refund reserve at December 31, 2019 and anticipated approval in the second quarter of 2020.
Constitution’s greenfield pipeline development was no longer supported by the members because its risk-adjusted return had declined. Williams impaired the project, deconsolidated Constitution at year-end and recorded a $27 million deconsolidation loss.
Pipeline integrity spending for 2020 was estimated at approximately $133 million for gas pipelines and $2 million for liquid pipelines.
Environmental remediation liabilities were approximately $31 million at year-end, with expected 2020 payments of approximately $8 million.

Principal risks and contingencies

Lower natural-gas, NGL and oil prices, reduced producer drilling and declining basin production could reduce volumes, margins, cash flow and asset values.
FERC and other regulatory proceedings could affect rates, refunds, permitted projects and recovery of operating or capital costs.
Expansion projects face permitting delays, legal challenges, public opposition and construction-cost or execution risks. The Northeast Supply Enhancement project remained dependent on approvals from New York and New Jersey agencies.
High leverage and significant 2020 debt maturities could constrain dividends, capital spending and financial flexibility if refinancing or operating performance deteriorates.
Customer and counterparty concentration creates credit risk. Chesapeake Energy and affiliates represented approximately 6% of 2019 consolidated revenue.
Operational hazards include pipeline failures, releases, fires, explosions, offshore weather events, cybersecurity incidents and third-party infrastructure outages.
Environmental, climate-change and greenhouse-gas regulation may increase compliance costs, limit operations or reduce demand for hydrocarbon infrastructure.
Two putative class actions concerning alleged manipulation of published gas-price indices remained unresolved; the company stated that potential exposure could be material but could not reasonably estimate a range.
Alaska refinery contamination litigation resulted in a January 2020 decision adverse to Williams and others, with estimated damages of $86 million. A final judgment had not been entered, and Williams expected to appeal.
Litigation involving Energy Transfer was scheduled for trial in June 2020. The company also faced claims related to the former Geismar olefins facility, for which potential losses could not be reliably estimated.

Most important facts for an investor to verify

Whether FERC approved the Transco rate-case settlement and whether the $189 million reserve was sufficient.
The refinancing or repayment plan for approximately $2.121 billion of 2020 debt maturities.
Actual 2020 growth capital spending, operating cash flow, dividend coverage and leverage trends.
Whether Transco expansion projects and Bluestem were completed on schedule and within budget.
UEOM and Northeast JV operating performance, including the effect of consolidation and the partner’s 35% ownership.
Further impairments or volume declines in the Barnett, Haynesville, Appalachia and other exposed basins.
Developments in the Constitution, Alaska contamination, gas-index litigation, Energy Transfer and Geismar matters.
Exposure to commodity prices, producer drilling activity, customer credit deterioration and regulatory or climate-related restrictions.