Williams Companies, Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Williams is a U.S. energy infrastructure company focused on natural gas pipelines, gathering, processing, fractionation, storage, and related natural gas liquids activities. The filing covers the three months ended March 31, 2019, compared with the same period in 2018. Reportable segments are Northeast G&P, Atlantic-Gulf, and West. The August 2018 merger with Williams Partners materially changed the ownership and presentation of the business.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $2.054 billion | $2.088 billion | Down $34 million |
| Operating income | $561 million | $491 million | Up $70 million |
| Net income | $214 million | $270 million | Down $56 million |
| Net income attributable to Williams | $195 million | $152 million | Up $43 million |
| Net income available to common stockholders | $194 million | $152 million | Up $42 million |
| Diluted EPS | $0.16 | $0.18 | Down $0.02 |
| Operating cash flow | $775 million | $694 million | Up $81 million |
| Capital expenditures | $422 million | $957 million | Down $535 million |
| Modified EBITDA | $1.187 billion | $1.120 billion | Up $67 million |
Operating margin was approximately 27.3% in Q1 2019 versus 23.5% in Q1 2018. Net margin attributable to Williams was approximately 9.5% versus 7.3%; consolidated net margin was approximately 10.4% versus 12.9%.
- Service revenue increased 7% to $1.440 billion, primarily from Transco expansion projects and higher Northeast gathering volumes.
- Service revenue received as commodity consideration decreased 37% to $64 million, and product sales decreased 14% to $550 million, reflecting lower volumes and commodity prices.
- Interest incurred increased to $306 million from $282 million, primarily due to higher financing obligations associated with Transco’s Atlantic Sunrise project.
- Cash used in investing activities was $1.258 billion, including the $727 million acquisition of the remaining UEOM interest and $99 million invested in equity-method investments.
- Cash and cash equivalents declined to $43 million from $168 million at December 31, 2018. Working capital was negative $2.882 billion.
- Debt included $20.703 billion of long-term debt, $1.561 billion of current maturities, and $1.014 billion of commercial paper. The filing reports approximately $1.016 billion of commercial paper outstanding before unamortized discount.
- Available liquidity was $3.527 billion, consisting of $43 million of cash and $3.484 billion of availability under the credit facility after commercial paper borrowings. Williams was in compliance with its credit-facility covenants.
- The quarterly common dividend increased to $0.38 per share from $0.34, an approximately 12% increase.
Material changes versus the prior comparable period
- The WPZ merger reduced noncontrolling-interest allocations and increased Williams’ attributable earnings, shares outstanding, and consolidated ownership. Weighted-average diluted shares increased to approximately 1.214 billion from 830.2 million.
- Atlantic-Gulf Modified EBITDA increased to $560 million from $451 million, driven primarily by higher Transco transportation revenue from expansion projects.
- Northeast G&P Modified EBITDA increased to $299 million from $250 million, supported by higher gathering volumes, rates, and Utica activity.
- West Modified EBITDA declined to $332 million from $413 million, mainly because of the Four Corners divestiture, deconsolidations, adverse weather, lower NGL volumes, and weaker commodity margins.
- Per-unit NGL margins fell approximately 47%, reflecting a 19% decrease in non-ethane prices and an approximately 26% increase in natural gas feedstock prices.
- Williams acquired the remaining 38% of UEOM on March 18, 2019, for $740 million in cash and began consolidating the business. A $74 million noncash impairment of its previously held UEOM investment was recognized before closing.
- Williams adopted the new lease accounting standard prospectively on January 1, 2019, recognizing an approximately $225 million operating lease liability and offsetting right-of-use asset.
Guidance, outlook, risks, and unusual items
- Management expects 2019 growth capital and investment expenditures of $2.3 billion to $2.5 billion, funded through retained cash flow and available liquidity.
- Management expects operating results to benefit from Northeast growth, Transco expansion projects, higher fee-based revenue, and increased demand associated with LNG exports, industrial use, and power generation. Forward prices indicated lower oil, natural gas, and NGL prices than in 2018.
- Williams expects approximately $1.304 billion from a planned transaction in which a partner will acquire a 35% interest in a combined UEOM and Ohio Valley Midstream partnership. Closing remains subject to customary conditions and regulatory approvals.
- In April 2019, Williams sold its 50% Jackalope interest for $485 million in cash and expects to use the proceeds for capital expenditures and debt reduction.
- Constitution Pipeline remains subject to unresolved Section 401 water-quality certification issues. Approximately $376 million of capitalized project costs were on the balance sheet at March 31, 2019; an unfavorable resolution could result in a significant impairment.
- Transco rates became effective March 1, 2019, subject to refund and the outcome of a FERC hearing. Management believes its rate-refund reserve is adequate.
- Other notable contingencies include natural-gas price-index litigation, Alaska sulfolane contamination litigation, former Geismar olefins litigation, environmental matters, and regulatory and permitting risks. The filing states that certain potential exposures cannot currently be estimated; Alaska litigation exposure to a former purchaser is estimated at insignificant to $32 million, although it could be higher.
- Credit ratings were BBB with a negative outlook at S&P, Baa3 with a stable outlook at Moody’s, and BBB- with a positive outlook at Fitch. A downgrade could increase borrowing costs and collateral requirements.
Important facts investors should verify
- Whether the planned UEOM/OVM partnership closes on the expected terms and delivers the approximately $1.304 billion partner contribution.
- Use of the $485 million Jackalope sale proceeds and progress toward debt reduction.
- Execution, cost, and permitting status of the $2.3 billion–$2.5 billion 2019 growth-investment program.
- FERC resolution of Transco’s rate case, including any required refunds.
- FERC and state actions affecting the Constitution Pipeline and the potential impairment of its $376 million capitalized costs.
- Trend in West segment NGL margins, commodity prices, production volumes, and weather-related impacts.
- Liquidity, commercial paper balances, debt maturities, credit ratings, and covenant compliance given the low cash balance and working-capital deficit.
- Ultimate outcomes and potential financial exposure from disclosed litigation, environmental matters, guarantees, and indemnifications.