The Williams Companies, Inc. — 2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018, with quarterly data for fourth-quarter 2018. Williams is a U.S. energy infrastructure company focused on natural gas and NGL gathering, processing, transportation, storage, fractionation, marketing, and related services. Reportable segments are Northeast G&P, Atlantic-Gulf, and West.
On August 10, 2018, Williams completed its merger with Williams Partners L.P. (WPZ), issuing approximately 382 million Williams shares for the publicly held WPZ units. The transaction simplified the corporate structure and eliminated public WPZ noncontrolling interests.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $8.686 billion | $8.031 billion | +8% |
| Operating income | $768 million | $927 million | -17% |
| Net income | $193 million | $2.509 billion | Down substantially |
| Net income attributable to Williams | $(155) million | $2.174 billion | Down substantially |
| Diluted EPS | $(0.16) | $2.62 | Down substantially |
| Cash flow from operating activities | $3.293 billion | $3.089 billion | +7% |
| Capital expenditures | $3.256 billion | $2.399 billion | +36% |
| Long-term debt, including current portion | $22.414 billion | $20.935 billion | +7% |
| Cash and cash equivalents | $168 million | $899 million | Down $731 million |
Operating margin was approximately 8.8% in 2018 versus approximately 11.5% in 2017. Net margin attributable to Williams was approximately negative 1.8%. Segment Modified EBITDA was $3.388 billion, compared with $3.466 billion in 2017; Atlantic-Gulf improved to $2.023 billion, Northeast G&P improved to $1.086 billion, while West declined to $308 million.
At December 31, 2018, total assets were $45.302 billion, stockholders’ equity was $14.660 billion, and working capital was negative $347 million. Available liquidity was approximately $4.508 billion, consisting of $168 million of cash and $4.340 billion of unused credit capacity after commercial paper considerations. The company reported investment-grade ratings from S&P, Moody’s, and Fitch.
Williams paid $1.386 billion of common dividends in 2018, or $1.36 per share, compared with $1.20 per share in 2017. The quarterly dividend was increased from $0.34 to $0.38 per share in February 2019.
Material changes versus the prior comparable period
- Revenue increased primarily from Transco expansion projects, higher Northeast gathering volumes, and higher NGL prices and margins.
- Operating income declined because asset impairments increased by $667 million and gains on asset sales were lower than in 2017.
- 2018 included a $1.849 billion impairment of Barnett Shale assets, reflecting lower forward natural gas prices and reduced producer drilling activity.
- 2018 included gains of approximately $591 million on the sale of Four Corners assets, $101 million on Gulf Coast pipeline assets, and $141 million from deconsolidating contributed Delaware basin assets into Brazos Permian II.
- 2017 benefited from a $1.923 billion income-tax benefit related to Tax Reform, a $1.095 billion gain on the Geismar sale, and other significant items; those benefits did not recur in 2018.
- Williams adopted ASC 606 revenue recognition in 2018. Reported revenue and related costs increased for noncash commodity consideration, with limited expected impact on operating income. Adoption reduced opening total equity by $121 million.
- Cash flow from operations increased, but higher capital spending, equity-method investment contributions, dividends, and debt activity reduced cash by $731 million during the year.
Fourth-quarter 2018 and unusual items
Fourth-quarter revenue was $2.204 billion and net loss attributable to Williams was $571 million, or $(0.47) diluted EPS. The quarter included the $1.849 billion Barnett impairment, partly offset by the Four Corners, Gulf Coast, and Brazos Permian II gains noted above.
The 2018 outlook called for continued growth from Transco expansions and Northeast gathering and processing projects, with 2019 growth capital and investment expenditures expected at $2.7 billion to $2.9 billion. Management expected higher fee-based results and gathering volumes, partially offset by West segment divestitures and lower forward commodity prices. All identified Transco expansion projects were described as fully contracted with firm transportation agreements.
Guidance, risks, and contingencies
- Transco filed a general rate case seeking an overall rate increase. Certain rate decreases became effective October 1, 2018, reducing revenue by approximately $2 million per month; other proposed rates were suspended subject to refund and further proceedings.
- Constitution Pipeline remains subject to significant permitting and litigation uncertainty. Capitalized Constitution project costs were approximately $377 million, and an unfavorable outcome could impair a significant portion of that balance.
- The company had $657 million of regulatory liabilities related to expected future customer refunds associated with Tax Reform.
- Constitution’s remaining project cost was estimated at approximately $740 million, subject to proportional funding by the equity partners.
- Environmental liabilities accrued at year-end were approximately $35 million. The filing also describes unresolved gas price-index litigation, Alaska refinery contamination litigation, environmental proceedings, and other indemnification matters.
- Key operating risks include natural gas and NGL price volatility, producer drilling activity, customer concentration and credit risk, competition, project permitting delays, construction cost overruns, FERC rate decisions, environmental regulation, severe weather, operational incidents, cybersecurity, and access to capital.
- Debt agreements contain financial and operating covenants. Total contractual obligations were approximately $40.260 billion, including principal, interest, leases, purchase obligations, and other obligations.
Most important facts for investors to verify
- Reconcile the 2018 loss attributable to Williams and fourth-quarter loss to the Barnett impairment, tax effects, asset-sale gains, and other nonrecurring items.
- Assess recurring fee-based cash flow and segment performance separately from commodity marketing results and divestiture gains.
- Review the sustainability of the $0.38 quarterly dividend against operating cash flow, $2.7–$2.9 billion of expected 2019 growth spending, debt service, and available liquidity.
- Evaluate debt maturities, covenant headroom, credit ratings, refinancing needs, and the effect of interest rates on liquidity.
- Monitor the Transco rate case, Tax Reform regulatory liabilities, and any potential refund obligations.
- Verify the permitting and litigation status of Constitution Pipeline and the recoverability of its $377 million capitalized balance.
- Review the sensitivity of Barnett and other midstream assets to commodity prices, producer drilling plans, and impairment assumptions.
- Confirm the final exposure from gas price-index litigation, Alaska contamination claims, environmental matters, and divestiture indemnifications.