WILLIAMS COMPANIES, INC. quarterly report, Q3 FY2018

Williams Companies, Inc. — Form 10-Q Summary

Business context and reporting period

Williams is a U.S.-focused energy infrastructure company operating natural gas pipelines, gathering and processing systems, NGL and natural gas marketing, storage, and related midstream assets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018.

Reportable segments beginning in the third quarter: Northeast G&P, Atlantic-Gulf, West, and Other.
On August 10, 2018, Williams completed its merger with Williams Partners L.P. (WPZ), issuing approximately 382 million Williams shares for approximately 256 million publicly held WPZ units. Williams remained the surviving entity.
Effective January 1, 2018, Williams adopted ASC 606 using the modified retrospective method, reducing opening total equity by $121 million and changing the presentation and timing of certain revenues and costs.

Key financial metrics

Metric	Q3 2018	Q3 2017	9M 2018	9M 2017
Total revenues	$2.303 billion	$1.891 billion	$6.482 billion	$5.803 billion
Operating income	$501 million	$274 million	$1.402 billion	$1.082 billion
Net income	$200 million	$125 million	$739 million	$887 million
Net income attributable to Williams	$129 million	$33 million	$416 million	$487 million
Diluted EPS	$0.13	$0.04	$0.46	$0.59
Cash flow from operations	Not separately provided	Not separately provided	$2.331 billion	$2.231 billion
Capital expenditures	Not separately provided	Not separately provided	$2.659 billion	$1.700 billion

Q3 revenue increased approximately 22% year over year; nine-month revenue increased approximately 12%.
Q3 operating margin was approximately 21.8%, compared with 14.5% in the prior-year quarter. Nine-month operating margin was approximately 21.6%, compared with 18.6%.
Q3 net margin was approximately 8.7%; nine-month net margin was approximately 11.4%. These margins are affected by nonrecurring items and the ASC 606 presentation change.
Nine-month operating cash flow increased $100 million year over year, while capital expenditures increased $959 million.
Cash and cash equivalents were $42 million at September 30, 2018, compared with $899 million at December 31, 2017.
Total debt consisted of approximately $21.442 billion of long-term debt, including current maturities, plus $823 million of commercial paper. The fair value of long-term debt was $22.532 billion.
Williams had a $4.5 billion revolving credit facility, with approximately $3.676 billion of capacity after commercial paper borrowings, producing reported available liquidity of approximately $3.718 billion including cash.
Working capital was negative $777 million. Williams was in compliance with its credit facility covenants at September 30, 2018.
Common dividends declared were $0.34 per share in Q3 and $1.02 per share for the first nine months, versus $0.30 and $0.90, respectively, in the comparable 2017 periods.

Material changes versus the prior comparable periods

Operating income improved primarily because 2017 included $1.236 billion of asset impairments, whereas 2018 included $66 million of impairments. The improvement also reflected higher Transco transportation fees, increased gathering volumes, and stronger NGL margins.
Q3 2018 did not include the $1.095 billion gain on the 2017 sale of the Geismar interest. The absence of that gain, together with higher taxes, contributed to lower nine-month net income attributable to Williams despite higher operating income.
Nine-month equity earnings declined $68 million, primarily because of lower results from Discovery following production declines, partially offset by stronger Appalachia Midstream results.
Other investing income declined $204 million because 2017 included a $269 million gain on dispositions of equity-method investments. In 2018, Williams recorded a $62 million gain from deconsolidating Jackalope and moving to equity-method accounting.
The WPZ merger increased Williams common shares and consolidated assets and liabilities, reduced noncontrolling interests, and changed segment reporting. Weighted-average diluted shares rose to approximately 1.027 billion in Q3 2018 from approximately 829 million in Q3 2017.
ASC 606 added $121 million of service revenue from commodity consideration and $30 million of processing commodity expenses in Q3 2018; these largely offsetting items make reported revenue and expense comparisons less comparable.
West segment Modified EBITDA increased to $412 million in Q3 from a $615 million loss in the prior-year quarter, primarily because the prior year included approximately $1.019 billion of impairments. Northeast G&P Modified EBITDA increased to $281 million from $115 million, while Atlantic-Gulf increased to $492 million from $430 million.

Guidance, outlook, commentary, risks, and unusual items

Management expects 2018 growth capital and investment expenditures of at least $3.9 billion, including approximately $1.8 billion for Transco and other interstate pipeline expansion projects. Funding is expected from retained cash flow, debt, and asset-sale proceeds.
Management expects operating results to benefit from Transco expansion projects, including Atlantic Sunrise, and continued Northeast growth. Atlantic Sunrise entered service in October 2018 and increased Transco capacity by approximately 1,700 Mdth/d.
Management expects higher oil and NGL prices but lower natural gas prices in 2018 based on forward markets. Commodity price, drilling activity, producer credit quality, and NGL margins remain important variables.
On October 1, 2018, Williams completed the sale of its Four Corners assets for $1.125 billion, subject to customary adjustments, and expects an approximately $600 million gain in Q4 2018. A $113 million deposit had been received by September 30.
Transco filed a general rate case with FERC. Certain rate reductions became effective October 1, 2018 and are expected to reduce revenue by approximately $2.5 million per month; other proposed rates were suspended subject to refund and further proceedings.
Tax Reform and FERC rate policy created regulatory uncertainty. Williams had recorded approximately $657 million of regulatory liabilities related to expected refunds or rate adjustments from lower tax rates.
Constitution Pipeline remains subject to unresolved water-quality certification and litigation. Approximately $377 million of capitalized project costs were recorded at September 30, 2018, and an unfavorable outcome could cause a significant impairment.
Williams committed up to an additional $177 million to its RMM investment to reach a 50% economic interest, subject to RMM funding needs.
Major contingencies include natural-gas price-index litigation with potentially material exposure that cannot currently be estimated, Alaska sulfolane contamination litigation, environmental matters with $36 million of accrued liabilities, and other indemnification obligations.
Colorado Proposition 112 was identified as a new risk because it could restrict oil and gas development and adversely affect Colorado operations and the RMM investment.
Unusual Q3 items included a $35 million charitable contribution of preferred stock, $15 million of WPZ merger costs, and preferred stock carrying a 7.25% non-cumulative dividend rate.

Most important facts for investors to verify

Whether the $3.9 billion-plus 2018 capital program, dividend commitments, and debt service can be funded while cash balances remain low.
The timing and economics of the Four Corners sale and the expected approximately $600 million Q4 gain.
Progress, permitting, and potential impairment exposure for Constitution Pipeline and other expansion projects.
The ultimate effect of FERC rate proceedings, Tax Reform regulatory liabilities, and the Transco general rate case on future revenue and cash flow.
The comparability of reported revenue, expenses, margins, and segment results after ASC 606 adoption and the WPZ merger.
Exposure to commodity prices, NGL margins, producer credit risk, drilling activity, regulatory changes, litigation, environmental obligations, and potential credit-rating changes.