WILLIAMS COMPANIES, INC. quarterly report, Q3 FY2017

Business Context and Reporting Period

The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. Williams is an energy infrastructure company focused on natural gas and NGL transportation, gathering, processing, fractionation and related midstream services, principally through its 74% interest in Williams Partners L.P. (WPZ). Williams reports one operating segment, Williams Partners, with remaining activities classified as Other.

Key Financial Metrics

Metric	Q3 2017	Q3 2016	Nine Months 2017	Nine Months 2016
Total revenues	$1.891 billion	$1.905 billion	$5.803 billion	$5.301 billion
Operating income	$277 million	$345 million	$1.091 billion	$119 million
Net income	$125 million	$131 million	$887 million	$(387) million
Net income attributable to WMB	$33 million	$61 million	$487 million	$(409) million
Diluted EPS	$0.04	$0.08	$0.59	$(0.55)
Net cash from operating activities	—	—	$1.837 billion	$2.097 billion
Capital expenditures	—	—	$1.700 billion	$1.577 billion

Q3 operating margin was approximately 14.6%, compared with 18.1% in the prior-year quarter. Nine-month operating margin was approximately 18.8%, compared with 2.2% in 2016. The filing does not provide a comparable consolidated net margin measure; net income attributable to WMB represented approximately 8.4% of nine-month revenue.

Williams Partners Modified EBITDA was $1.000 billion in Q3 and $3.208 billion for the first nine months, compared with $1.070 billion and $2.629 billion, respectively, in the prior-year periods.
Cash and cash equivalents were $1.172 billion at September 30, 2017, compared with $170 million at December 31, 2016.
Current liabilities exceeded current assets by $61 million, resulting in a working-capital deficit.
Debt consisted of $502 million due within one year and $20.567 billion of long-term debt. Fair value of total debt, including the current portion, was $22.979 billion versus a $21.069 billion carrying amount.
Available liquidity was reported at $5.772 billion, including cash, $1.100 billion available under WMB’s credit facility and $3.500 billion available under WPZ’s facility. No WPZ commercial paper was outstanding.
Quarterly dividends increased to $0.30 per share from $0.20 per share in the comparable prior-year period; $0.90 per share was declared during the first nine months of 2017.

Material Changes Versus the Prior Comparable Period

Nine-month revenue increased 9%, driven by higher service revenue from Transco expansions, eastern Gulf Coast volumes and contract-related deferred-revenue recognition, plus higher marketing and NGL prices. Q3 revenue was broadly flat because lower product sales offset higher service revenue.
Nine-month operating income improved by $972 million, primarily because of the $1.095 billion gain on the sale of the Geismar olefins interest, the absence of substantial 2016 Canadian-related impairments, higher service revenue and lower expenses.
Q3 operating income declined despite the Geismar gain because Williams recognized $1.210 billion of asset impairments, including a $1.019 billion impairment of certain Mid-Continent gathering operations and a $115 million impairment of Marcellus South gathering operations. Lower olefin margins also weighed on results.
The Geismar interest was sold in July 2017 for $2.084 billion in cash. Proceeds were used in part to repay WPZ’s $850 million term loan and are also intended to support growth capital and investment expenditures.
Williams exchanged its 50% DBJV interest for increased interests in Appalachia Midstream Investments and $155 million in cash, and sold its Ranch Westex interest for $45 million. These transactions generated a $269 million gain.
WPZ completed debt refinancing and repayments, including issuing $1.45 billion of 3.75% notes due 2027 and retiring $1.4 billion of 4.875% notes due 2023. Williams also completed a $2.1 billion equity offering to fund purchases of WPZ units as part of its financial repositioning.
Operating cash flow decreased $260 million year over year, primarily because of the absence of certain minimum-volume-commitment receipts following contract restructurings, partially offset by stronger operating results.

Guidance, Outlook, Risks and Unusual Items

2017 growth capital and investment expenditures were expected to be $2.1 billion to $2.8 billion, including $1.4 billion to $1.9 billion for Transco and other interstate pipeline projects. The filing states that management expected sufficient liquidity for 2017.
Management expected increased fee-based revenue from Transco expansions and Northeast and eastern Gulf Coast projects, generally steady gathering and processing volumes in 2017, and subsequent volume growth. Forward market prices at the time implied relatively comparable oil and natural gas prices and higher NGL prices versus 2016.
Key projects placed in service or progressing included Dalton, Hillabee Phase I, New York Bay Expansion, Atlantic Sunrise, Garden State and other Transco expansions. Project timing remains dependent on regulatory approvals and construction execution.
Constitution Pipeline remains subject to New York water-quality certification disputes. Williams reported $381 million of consolidated capitalized project costs at September 30, 2017; an unfavorable outcome could impair a significant portion of those costs. The anticipated in-service date was as early as the first half of 2019, assuming timely FERC authorization.
Management expected a fourth-quarter 2017 pretax, noncash pension settlement charge of approximately $70 million to $100 million from a deferred vested benefit payout program.
Material risks include lower commodity prices, reduced producer drilling and volumes, customer credit risk, project delays or permit denials, construction cost increases, interest-rate and credit-rating changes, operational disruptions, weather, cybersecurity, environmental liabilities and litigation.
Pending matters include natural-gas price-index litigation, Alaska sulfolane contamination claims, environmental proceedings, royalty-related cases and litigation involving Energy Transfer. Potential losses for several matters cannot currently be estimated; the filing states that some outcomes could be material.
Williams reported $40 million of accrued environmental liabilities at September 30, 2017. The filing also disclosed a $31 million maximum potential exposure under a WilTel lease guarantee and other guarantees with potentially uncapped indemnification exposure.
Management concluded that disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.

Facts Investors Should Verify

Whether the large 2017 earnings improvement is sustainable after excluding the Geismar gain, investment gains, tax valuation allowance release and other unusual items.
The carrying values and future cash-flow assumptions for impaired gathering assets and the $381 million Constitution Pipeline project costs.
Execution of the $2.1 billion to $2.8 billion capital program, project approvals and in-service dates, particularly Atlantic Sunrise, Constitution, Northeast Supply Enhancement and Hillabee Phase II.
WPZ’s ability to generate distributions after the permanent waiver of incentive distribution rights and Williams’ ability to sustain the $0.30-per-share quarterly dividend.
Debt maturities, refinancing needs, credit ratings and the effect of interest rates on the reported $20.567 billion of long-term debt.
Developments in pending litigation and environmental matters, including the Energy Transfer claims, natural-gas price-index cases, Alaska contamination claims and Constitution regulatory proceedings.