Williams Companies, Inc. Form 10-Q Summary
Business Context and Reporting Period
Williams filed an unaudited Form 10-Q for the three months ended March 31, 2023. The company operates U.S. natural gas infrastructure businesses across Transmission & Gulf of Mexico, Northeast G&P, West, Gas & NGL Marketing Services, and Other. Its operations include regulated interstate pipelines and storage, gathering and processing, NGL services, marketing, and upstream activities.
On February 14, 2023, Williams acquired MountainWest Pipelines Holding Company for $1.08 billion of cash and assumed $430 million of outstanding principal debt. MountainWest contributed $34 million of revenue and $20 million of Modified EBITDA from acquisition through March 31, 2023.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $3.081 billion | $2.524 billion | +$557 million |
| Operating income | $1.360 billion | $654 million | +$706 million |
| Net income | $957 million | $392 million | +$565 million |
| Net income attributable to Williams | $927 million | $380 million | +$547 million |
| Diluted earnings per share | $0.76 | $0.31 | +$0.45 |
| Modified EBITDA | $2.130 billion | $1.393 billion | +$737 million |
| Cash flow from operations | $1.514 billion | $1.082 billion | +$432 million |
| Capital expenditures | $545 million | $291 million | +$254 million |
Reported operating margin was approximately 44% and net margin was approximately 31%, compared with approximately 26% and 16%, respectively, in the prior-year quarter. The improvement was heavily influenced by a $506 million net gain on commodity derivatives, compared with a $194 million loss in Q1 2022, including a $332 million unrealized gain.
- Service revenue increased 10% to $1.694 billion, primarily from MountainWest, Trace, and NorTex assets and higher Northeast and West volumes.
- Product sales decreased 23% to $845 million, primarily because of lower natural gas and NGL marketing prices and volumes.
- Gas & NGL Marketing Services Modified EBITDA increased to $567 million from $13 million, largely from favorable derivative valuation changes and higher natural gas marketing margins.
- Segment Modified EBITDA was $715 million for Transmission & Gulf of Mexico, $470 million for Northeast G&P, $304 million for West, $567 million for Gas & NGL Marketing Services, and $74 million for Other.
- Operating cash flow exceeded capital expenditures by approximately $969 million before dividends, acquisitions, and other investing and financing activities.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $477 million at March 31, 2023, compared with $152 million at December 31, 2022.
- Total assets were $48.936 billion and total equity was $14.323 billion.
- Long-term debt, including the current portion, totaled approximately $24.412 billion at carrying value; $1.627 billion was due within one year.
- Williams issued $1.5 billion of senior unsecured notes in March 2023: $750 million at 5.40% due 2026 and $750 million at 5.65% due 2033.
- No commercial paper was outstanding at quarter-end. The company had $3.75 billion of available capacity under its long-term credit facility and reported total available liquidity of approximately $4.227 billion, including cash.
- Working capital was negative $1.3 billion, including cash and debt due within one year. Management stated that forecasted operating cash flow and other sources of liquidity should be sufficient for 2023 needs.
- Williams paid a quarterly common dividend of $0.4475 per share in March 2023 and approved the same quarterly dividend for payment in June 2023. It repurchased $74 million of common stock during the quarter.
Material Changes Versus the Prior Comparable Period
- Net income attributable to Williams increased 144%, primarily because of the favorable year-over-year change in commodity derivative gains and higher operating results.
- Modified EBITDA increased 53%, with significant contributions from Gas & NGL Marketing Services, Northeast G&P, West, and the newly acquired MountainWest assets.
- Operating cash flow increased 40%, aided by higher earnings and favorable working-capital changes, including a $1.269 billion improvement from accounts receivable.
- Investing cash use increased to $1.639 billion, primarily because of the $1.056 billion MountainWest acquisition and higher capital expenditures.
- Financing cash flow was positive $450 million, reflecting $1.502 billion of long-term debt issuance, partly offset by debt repayments, dividends, share repurchases, and commercial paper repayments.
- Northwest Pipeline rates declined effective January 1, 2023 under a FERC settlement, although the impact was partly offset by higher volumes and other transportation and storage revenue.
Guidance, Outlook, Risks, and Unusual Items
Management expects 2023 results to benefit from MountainWest, a full year of Trace and NorTex contributions, volume growth in Haynesville and Northeast G&P, and inflation-based rate increases. These benefits are expected to be partly offset by a lower commodity-price environment. Planned 2023 growth capital and investment expenditures are $1.6 billion to $1.9 billion, excluding the MountainWest acquisition. Management expects substantially all planned capital spending to be funded with cash available after dividends.
- Regional Energy Access received FERC approval; a portion is expected in service as early as Q4 2023 and the remainder during the 2024/2025 winter heating season, subject to regulatory approvals.
- Deepwater Shenandoah and Deepwater Whale are targeted for service in Q4 2024.
- West Louisiana Energy Gateway is targeted for service in Q4 2024 and is expected to gather 1.8 Bcf/d.
- Several additional Transco and gathering expansions are planned through 2025, subject to permits, approvals, construction, and other conditions.
- Derivative fair-value accounting can create substantial earnings volatility. At March 31, 2023, total commodity derivative fair value was a net liability of approximately $317 million before specified collateral and netting adjustments.
- Key risks include commodity-price and volume volatility, interest rates and refinancing, counterparty credit, inflation and construction costs, permitting and regulatory outcomes, environmental liabilities, cybersecurity, weather and operational disruptions, and climate-related physical and regulatory risks.
- Williams had accrued $40 million for environmental matters. The company also disclosed Alaska refinery contamination litigation, an appeal involving a judgment with estimated damages of up to $86 million, and an Energy Transfer matter in which Williams was awarded approximately $602 million plus additional interest, subject to appeal.
- Management identified no material change to the risk factors disclosed in the 2022 Form 10-K. Disclosure controls were concluded to be effective at a reasonable assurance level; MountainWest was excluded from the internal-control assessment for the permitted post-acquisition period.
Important Facts for Investors to Verify
- Whether the large Q1 derivative gains, particularly the $332 million unrealized gain, reverse or persist in future periods.
- The timing, cost, permitting status, and contracted economics of the $1.6 billion to $1.9 billion 2023 growth-capital program.
- MountainWest integration progress, final purchase-price allocation, acquired debt, and expected contribution to cash flow.
- Williams’ ability to refinance or repay the approximately $1.6 billion of debt due within one year while maintaining dividends and planned capital spending.
- Progress and regulatory approvals for Regional Energy Access and other major expansion projects.
- Potential outcomes and additional exposure from environmental, Alaska contamination, Energy Transfer, and other litigation matters.
- The sustainability of marketing margins and gathering volumes under lower commodity prices and changing producer activity.