WILLIAMS COMPANIES, INC. quarterly report, Q3 FY2019

Williams Companies, Inc. — 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 NGL and natural gas marketing activities. Reportable segments are Northeast G&P, Atlantic-Gulf, and West. This unaudited filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.

Key financial metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Total revenues	$1.999 billion	$2.303 billion	$6.094 billion	$6.482 billion
Operating income	$628 million	$501 million	$1.687 billion	$1.402 billion
Net income attributable to Williams	$221 million	$129 million	$726 million	$416 million
Net income available to common stockholders	$220 million	$129 million	$724 million	$416 million
Diluted EPS	$0.18	$0.13	$0.60	$0.46
Cash flow from operating activities	Not separately reported	Not separately reported	$2.702 billion	$2.331 billion

Q3 operating margin was approximately 31.4%, compared with 21.8% in the prior-year quarter. Nine-month operating margin was approximately 27.7%, compared with 21.6%. Net margin attributable to Williams was approximately 11.1% in Q3 and 11.9% for nine months.

Modified EBITDA was $1.253 billion in Q3 and $3.552 billion for nine months, compared with $1.191 billion and $3.369 billion, respectively, in the prior-year periods.
Capital expenditures were $1.705 billion for the first nine months, down from $2.659 billion in 2018.
Cash and cash equivalents were $247 million at September 30, 2019, versus $168 million at December 31, 2018.
Total debt, including the current portion, was $22.257 billion at September 30, 2019, compared with $22.414 billion at year-end 2018. Reported fair value was $25.234 billion.
Long-term debt due within one year increased to $1.538 billion from $47 million at year-end, while long-term debt declined to $20.719 billion from $22.367 billion.
The company reported a $1.890 billion working-capital deficit, including cash. Available liquidity was $4.747 billion, consisting of cash and $4.5 billion of undrawn credit-facility capacity; no commercial paper was outstanding.
Williams paid common dividends of $1.382 billion during the first nine months and paid a regular quarterly dividend of $0.38 per share in September 2019.

Material changes versus the prior comparable periods

Q3 revenue declined 13% and nine-month revenue declined 6%, primarily because lower NGL and natural gas prices reduced product sales and commodity consideration. Service revenue increased 9% in both periods, supported by Transco expansion projects, higher Northeast volumes, and consolidation of UEOM.
Q3 operating income increased 25% and nine-month operating income increased 20%, reflecting higher fee-based service revenue, lower merger-related and preferred-stock contribution charges, and lower costs associated with divested assets.
Net income attributable to Williams increased $92 million in Q3 and $310 million for nine months. Drivers included lower income allocated to noncontrolling interests following the 2018 WPZ merger, the absence of a 2018 foreign-tax-credit valuation allowance, and the $122 million gain on the 2019 sale of Jackalope.
West Modified EBITDA declined to $311 million in Q3 and $921 million for nine months, from $412 million and $1.214 billion, respectively, due to asset divestitures and deconsolidations, lower commodity margins, lower volumes, and a minimum-volume-commitment expiration.
Atlantic-Gulf Modified EBITDA increased to $599 million in Q3 and $1.683 billion for nine months, primarily from higher Transco transportation revenue. Northeast G&P Modified EBITDA increased to $345 million and $947 million, respectively, supported by UEOM and higher gathering volumes.
Per-unit NGL margins were approximately 51% lower for the first nine months, driven principally by a 32% decline in non-ethane prices and approximately 3% higher natural gas feedstock prices.

Guidance, outlook, commentary, risks, and unusual items

Management expected 2019 growth capital and investment expenditures of $2.3 billion to $2.5 billion, funded primarily with retained cash flow and available liquidity. Management retained flexibility to adjust spending.
Management expected operating results to benefit from Transco expansion projects, Northeast growth, LNG exports, industrial demand, and power generation. Lower 2019 forward prices for crude oil, natural gas, and NGLs were expected to pressure non-regulated commodity margins.
On March 18, 2019, Williams acquired the remaining 38% of UEOM for $741 million, began consolidating the business, and recognized a $74 million noncash impairment of its previously held interest. UEOM contributed $104 million of revenue and $25 million of Williams-attributable net income from acquisition through September 30.
In June 2019, a partner invested approximately $1.33 billion for a 35% interest in the Northeast JV; Williams retained and consolidated 65%. Williams also sold its Jackalope interest for $485 million in April, recognizing a $122 million gain.
Nine-month 2019 results included $186 million of impairments of equity-method investments, including Laurel Mountain, Appalachia Midstream Investments, Pennant, and UEOM, plus $76 million of impairments of certain assets.
Voluntary separation and related severance charges totaled $53 million for the first nine months, including $30 million in operating and maintenance expense and $23 million in SG&A.
Transco’s rate case settlement remained subject to FERC approval. Williams had accrued a $131 million reserve for potential rate refunds. Tax-reform-related regulatory liabilities totaled $609 million.
The Constitution Pipeline remained subject to regulatory and development uncertainty. Capitalized project costs were $376 million, and the company stated that further delays, higher costs, or unfavorable contract developments could result in impairment.
Material risks include commodity-price and volume volatility, customer credit risk, project permitting and construction delays, regulatory outcomes, higher interest rates or credit-rating downgrades, environmental liabilities, litigation, cybersecurity, severe weather, and physical damage to facilities.
Two natural-gas price-index class actions remained unresolved, with potential exposure that could be material but not reasonably estimable. Alaska sulfolane litigation also remained pending; reasonably possible exposure to a former purchaser was estimated from an insignificant amount up to $32 million, while other remediation exposure was not estimable.

Important facts for investors to verify

Confirm the final FERC approval and financial impact of the Transco rate-case settlement and any required refunds.
Monitor Constitution Pipeline permitting, construction costs, customer contracts, and potential impairment of the $376 million capitalized balance.
Assess sustainability of fee-based growth against lower NGL margins, commodity prices, and declining or divested West segment assets.
Review debt maturities, refinancing requirements, credit ratings, covenant compliance, and the company’s ability to fund $2.3 billion to $2.5 billion of planned growth spending while maintaining dividends.
Track further impairments of equity-method investments and the operating performance and integration benefits of UEOM and the Northeast JV.
Evaluate the potential financial effects of unresolved litigation, environmental remediation, rate refunds, and other indemnification obligations.