Business Context and Reporting Period
The Williams Companies, Inc. is a U.S. energy infrastructure company focused on natural gas pipelines, gathering, processing, storage, fractionation, and related midstream services. Its reportable segments are Northeast G&P, Atlantic-Gulf, and West. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the same periods in 2018.
The August 2018 merger with Williams Partners L.P. affects comparability, including substantially lower noncontrolling interests and a larger common-share base in 2019.
Key Financial Metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenues | $2.041 billion | $2.091 billion | $4.095 billion | $4.179 billion |
| Service revenues | $1.489 billion | $1.340 billion | $2.929 billion | $2.691 billion |
| Operating income | $498 million | $410 million | $1.059 billion | $901 million |
| Net income attributable to Williams | $310 million | $135 million | $505 million | $287 million |
| Diluted earnings per share | $0.26 | $0.16 | $0.41 | $0.35 |
| Operating margin | 24.4% | 19.6% | 25.9% | 21.6% |
| Net margin attributable to Williams | 15.2% | 6.5% | 12.3% | 6.9% |
Modified EBITDA was $1.112 billion in the second quarter and $2.299 billion for the first six months, compared with $1.058 billion and $2.178 billion, respectively, in the comparable 2018 periods. Six-month segment Modified EBITDA increased at Northeast G&P and Atlantic-Gulf but declined at West.
Net cash provided by operating activities was $1.844 billion for the six months ended June 30, 2019, compared with $1.585 billion in 2018. Capital expenditures were $919 million, down from $1.890 billion. Investing activities used $1.424 billion, while financing activities provided $218 million. Cash and cash equivalents increased from $168 million at year-end 2018 to $806 million at June 30, 2019.
At June 30, 2019, total debt, including the current portion, was $22.274 billion, consisting of $1.563 billion due within one year and $20.711 billion of long-term debt. The fair value of debt was $25.118 billion. Williams had no commercial paper outstanding and had $4.5 billion available under its credit facility, resulting in reported available liquidity of approximately $5.306 billion including cash. Working capital was negative $1.361 billion.
The company paid a quarterly common dividend of $0.38 per share in June 2019, up from $0.34 per share in 2018. Six-month common dividends paid totaled $921 million.
Material Changes Versus the Prior Comparable Period
- Service revenues increased 11% in the second quarter and 9% for the first six months, primarily from Transco expansion projects, higher Northeast gathering volumes, and the consolidation of UEOM.
- Total revenues declined 2% for both the quarter and six-month period because lower commodity consideration and product sales more than offset service-revenue growth.
- Operating income increased 21% in the quarter and 18% year to date. Williams-attributable net income increased $175 million in the quarter and $218 million year to date, aided by lower income allocated to noncontrolling interests following the Williams Partners merger.
- West Modified EBITDA declined to $278 million in the quarter and $610 million year to date, primarily because of lower NGL and natural gas commodity margins, asset divestitures, lower volumes, and $64 million of second-quarter asset impairments.
- NGL per-unit margins were approximately 51% lower for the first six months, driven primarily by lower non-ethane prices and higher natural gas feedstock prices.
- On March 18, 2019, Williams acquired the remaining 38% of UEOM for $740 million, obtained control, and began consolidating the business. A $74 million noncash impairment was recognized on the previously held interest.
- In June 2019, a partner invested approximately $1.33 billion for a 35% interest in the Northeast JV; Williams retained 65% and continues to operate and consolidate the venture.
- In April 2019, Williams sold its 50% interest in Jackalope for $485 million and recognized a $122 million gain.
- The company recorded approximately $43 million of severance and related charges, primarily associated with a voluntary separation program, and $76 million of asset impairments during the first six months.
Guidance, Outlook, Risks, and Unusual Items
Management expects 2019 operating results to benefit from Transco expansion projects, continued Northeast growth, and increased fee-based revenues. It expects lower commodity prices than in 2018, with lower West-segment commodity margins partly offset by growth in contracted pipeline and gathering businesses.
2019 growth capital and investment expenditures are expected to range from $2.3 billion to $2.5 billion. Management expects to fund planned growth capital through retained cash flow and available liquidity, while retaining flexibility to adjust spending.
- Key projects include Transco expansions, Northeast gathering and processing expansions, the Bluestem NGL pipeline, and other infrastructure projects. Several projects depend on timely regulatory approvals and are subject to in-service-date uncertainty.
- The Constitution Pipeline project remains subject to unresolved Section 401 water-quality certification issues. Williams had $376 million of consolidated capitalized project costs at June 30, 2019; an unfavorable outcome could impair a significant portion of those costs.
- Transco rates became effective subject to refund and the outcome of a hearing. Williams recorded an $86 million reserve for potential rate refunds.
- Regulatory liabilities related to tax reform totaled $650 million at June 30, 2019, with the timing and amount of future customer refunds subject to regulatory proceedings.
- Pending litigation includes natural-gas price-index matters, Alaska refinery contamination claims, former olefins-business litigation, and other environmental and regulatory matters. Certain exposures cannot currently be estimated; the natural-gas-related litigation could result in a material loss.
- Environmental liabilities accrued at June 30, 2019 totaled $34 million. Alaska contamination exposure remains uncertain, with a potential exposure to one counterparty estimated from insignificant amounts up to $32 million.
- Credit ratings remained investment grade: BBB from S&P, Baa3 from Moody’s, and BBB- from Fitch. Management cautions that a downgrade could increase borrowing costs and collateral requirements.
- The company identifies commodity-price volatility, customer credit risk, production-volume changes, interest rates, project delays, permitting, operational hazards, severe weather, cybersecurity, and environmental regulation as material risks.
Most Important Facts for Investors to Verify
- Reconcile earnings growth with the effects of the Williams Partners merger, the UEOM acquisition, the Northeast JV transaction, and the Jackalope sale.
- Assess whether fee-based Transco and Northeast growth can offset lower NGL margins and West-segment weakness.
- Monitor execution of the $2.3 billion-$2.5 billion 2019 growth-capital program against operating cash flow, debt maturities, and dividends.
- Review debt levels, credit-facility availability, covenant compliance, credit ratings, and the company’s negative working capital.
- Track Constitution Pipeline permitting and potential impairment of the $376 million capitalized balance.
- Evaluate the potential effects of the $86 million Transco rate-refund reserve and $650 million of tax-reform-related regulatory liabilities.
- Follow pending litigation and environmental matters for changes to currently unestimable or potentially material exposures.