Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2022. Williams operates U.S. natural gas transportation, storage, gathering, processing, fractionation, upstream, and natural gas and NGL marketing businesses. Reportable segments are Transmission & Gulf of Mexico, Northeast G&P, West, and Gas & NGL Marketing Services. Prior-period segment information was recast for the January 1, 2022 organizational realignment.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $2.524 billion | $2.612 billion | Down $88 million |
| Operating income | $654 million | $739 million | Down $85 million |
| Net income | $392 million | $435 million | Down $43 million |
| Net income attributable to Williams | $380 million | $426 million | Down $46 million |
| Diluted EPS | $0.31 | $0.35 | Down $0.04 |
| Net cash provided by operations | $1.082 billion | $915 million | Up $167 million |
| Capital expenditures | $291 million | $260 million | Up $31 million |
| Modified EBITDA | $1.393 billion | $1.410 billion | Down $17 million |
Service revenue increased 6% to $1.537 billion, while product sales declined 4% to $1.104 billion. Net losses on commodity derivatives were $194 million, compared with a $36 million loss in the prior-year quarter. Operating margin was approximately 25.9%, compared with 28.3% in Q1 2021. Net income attributable to Williams represented approximately 15.1% of revenue, compared with 16.3% in the prior period.
Segment Modified EBITDA was $697 million for Transmission & Gulf of Mexico, $418 million for Northeast G&P, $260 million for West, $13 million for Gas & NGL Marketing Services, and $5 million for Other. Gas & NGL Marketing Services declined from $93 million, primarily because of derivative losses and the absence of favorable Winter Storm Uri results.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Cash and cash equivalents were $604 million at March 31, 2022, down from $1.680 billion at December 31, 2021.
- Long-term debt was $20.801 billion, with $1.625 billion due within one year. Total debt, including the current portion, was $22.426 billion at carrying value.
- Williams early retired $1.25 billion of 3.6% senior unsecured notes in January 2022. It expected to retire an additional $750 million of 3.35% notes in May 2022.
- The company had no commercial paper or credit facility borrowings outstanding. Available liquidity was approximately $4.354 billion, consisting of cash and $3.750 billion of unused revolving credit capacity.
- Operating cash flow was $1.082 billion. Financing uses included $1.256 billion of debt repayments, $518 million of common dividends, and $37 million of distributions to noncontrolling interests. Investing uses included $291 million of capital expenditures and $56 million of equity-method investment contributions.
- Working capital was negative $1.154 billion, including current debt maturities.
- The quarterly dividend increased to $0.425 per share from $0.41 per share in 2021. No share repurchases occurred through March 31, 2022.
Material Changes Versus the Prior Comparable Period
- Higher service revenue reflected favorable commodity-based gathering and processing rates, contractual escalations, and the Transco Leidy South expansion placed in service in the second half of 2021.
- Results were adversely affected by $123 million of net unrealized commodity derivative losses and the absence of a $77 million favorable Winter Storm Uri impact included in Q1 2021.
- Depreciation and amortization increased by $60 million, primarily from amortization of Sequent Acquisition intangible assets and higher Transco depreciation. Selling, general, and administrative expense increased by $31 million, primarily from Sequent-related employee costs.
- Modified EBITDA increased in Transmission & Gulf of Mexico, Northeast G&P, and West, but declined sharply in Gas & NGL Marketing Services and Other.
- Net cash from operations increased despite lower net income, primarily due to favorable changes in margin requirements, working capital, and higher distributions from unconsolidated affiliates.
Guidance, Outlook, Risks, and Unusual Items
Management expects 2022 earnings and cash flow growth, supported by higher commodity prices and volumes in the Haynesville, Ohio Valley Midstream, and Cardinal areas; recently completed Transco expansions; upstream development; and the Trace Acquisition. These benefits are expected to be partially offset by the absence of Winter Storm Uri-related results and lower expected Bradford Supply Hub results.
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 and consider share repurchases.
In April 2022, Williams completed the approximately $950 million acquisition of Trace Midstream gas gathering assets in the Haynesville Shale. The acquisition closed on April 29, 2022 and was funded with short-term liquidity; purchase price accounting was incomplete at the filing date.
- Commodity prices and volumes remain volatile, and derivative fair-value accounting can create significant earnings volatility. At March 31, 2022, commodity derivative liabilities recognized on the balance sheet were $477 million net of counterparty and collateral netting.
- Potential risks include project permitting and regulatory delays, counterparty credit risk, customer drilling changes, inflation and higher interest rates, cybersecurity incidents, weather and operational disruptions, climate-related risks, COVID-19 impacts, and geopolitical effects from the Russian invasion of Ukraine.
- Two putative class actions alleging manipulation of published natural gas price indices remain unresolved. The company cannot reasonably estimate potential exposure, and a material loss is reasonably possible.
- Williams has accrued $30 million for environmental matters, including $18 million related to former operations. An Alaska refinery contamination judgment involved estimated incurred and potential future damages of $86 million; the company has accrued its estimate of probable loss and continues to pursue an appeal.
- Environmental and other regulatory proceedings remain ongoing, including negotiations with the Department of Justice regarding alleged Clean Air Act leak-detection violations.
- Williams maintained investment-grade ratings with stable outlooks: BBB from S&P and Fitch and Baa2 from Moody’s. A downgrade below investment grade could increase borrowing costs and collateral requirements.
Important Facts for Investors to Verify
- Confirm the effect of the Trace Acquisition on leverage, liquidity, capital spending, and future segment results.
- Assess whether derivative losses are primarily timing-related and whether underlying transportation, storage, and production economics offset future fair-value changes.
- Monitor the $1.625 billion of current debt maturities, the planned $750 million note retirement, and refinancing execution.
- Evaluate whether the $2.25 billion to $2.35 billion capital program can be funded while maintaining the $0.425 quarterly dividend.
- Review unresolved litigation, environmental contingencies, permitting requirements, and potential indemnification exposure.
- Reconcile Modified EBITDA and other non-GAAP measures to GAAP results and consider the impact of the 2022 segment and revenue-presentation changes on comparability.