Williams Companies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Williams is a U.S.-focused energy infrastructure company connecting natural gas and natural gas liquids supply basins with demand centers. Its reportable segment is Williams Partners, which owns and operates interstate natural gas pipelines, gathering and processing assets, NGL infrastructure, and related investments. This unaudited filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial Performance and Liquidity
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Total revenues | $2.091 billion | $1.924 billion | $4.179 billion | $3.912 billion |
| Operating income | $410 million | $378 million | $901 million | $808 million |
| Net income | $269 million | $193 million | $539 million | $762 million |
| Net income attributable to WMB | $135 million | $81 million | $287 million | $454 million |
| Diluted EPS | $0.16 | $0.10 | $0.35 | $0.55 |
| Operating margin | 19.6% | 19.6% | 21.6% | 20.7% |
| Modified EBITDA | $1.058 billion | $1.059 billion | $2.178 billion | $2.209 billion |
Six-month net income attributable to WMB declined $167 million, primarily because 2017 included a $269 million gain from equity-method investment dispositions, while 2018 included no comparable gain. The decline was partly offset by higher fee-based service revenue, improved NGL and marketing margins, and a $62 million gain from deconsolidating Jackalope.
Operating cash flow increased to $1.585 billion from $1.526 billion. Capital expenditures rose to $1.890 billion from $1.056 billion, producing negative investing cash flow of $1.669 billion. Financing cash flow was negative $540 million, including $563 million of common dividends and $356 million of distributions to noncontrolling interests. Cash declined to $275 million from $899 million at December 31, 2017.
At June 30, 2018, long-term debt, including the current portion, was $21.315 billion, compared with $20.935 billion at year-end 2017. Working capital was negative $417 million. Available liquidity was reported at approximately $5.150 billion, consisting of cash and unused capacity under WMB and WPZ credit facilities. No commercial paper was outstanding under WPZ’s $3 billion program.
The quarterly dividend increased to $0.34 per share from $0.30 in 2017. The filing reports 827,973,071 common shares outstanding as of July 30, 2018.
Material Changes Versus the Prior Comparable Period
- Service revenue increased 5% in the quarter and 6% year to date, principally from Transco expansion projects placed in service and higher gathering and processing volumes.
- ASC 606 adoption introduced $94 million of quarterly and $195 million of year-to-date service revenue from commodity consideration, with largely offsetting processing expenses and product costs. The prior periods were not recast, limiting direct comparability.
- Product sales declined 6% year to date because the olefins operations sold in 2017 no longer contributed revenue; higher NGL and marketing revenues partially offset the decline.
- Williams Partners Modified EBITDA was broadly flat in the quarter and declined modestly year to date. NGL margin increased to $127 million from $93 million year to date, while olefin margin fell to zero from $124 million.
- A $66 million impairment of idle pipeline assets was recorded in the second quarter, compared with $26 million of asset impairments in the first six months of 2017.
- Equity earnings declined 25% year to date, primarily because of lower volumes at Discovery.
- Williams issued or refinanced debt during the period, including $800 million of WPZ notes and $1.0 billion of Transco notes, and retired $750 million of WPZ notes and $250 million of Northwest Pipeline notes.
- Jackalope was deconsolidated on June 30, 2018 and is now accounted for as an equity-method investment. The transaction generated a $62 million gain and resulted in a $310 million carrying value for the investment.
- The company adopted ASC 606, ASU 2017-07, ASU 2017-12, ASU 2016-15, and ASU 2018-02. ASC 606 reduced opening total equity by $121 million; ASU 2018-02 reclassified $61 million of tax effects from accumulated other comprehensive income to retained deficit.
Guidance, Outlook, 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 projects. Planned funding sources include retained cash flow, debt, and asset-sale proceeds. Management expects operating results to benefit from Transco expansions, Northeast growth, increasing LNG exports, industrial demand, and power generation.
Management expected the WPZ Merger to close in the third quarter of 2018. The stock-for-unit transaction would exchange approximately 256 million publicly held WPZ units for 1.494 WMB shares per unit, or 1.513 shares if closing occurred after the specified dividend record date. Certain termination scenarios could require a payment of up to $410 million to WPZ.
The Atlantic Sunrise project was expected to be fully placed in service in the second half of August 2018, subject to regulatory approvals and weather. The Constitution Pipeline remains subject to permitting and litigation uncertainty; approximately $377 million of capitalized project costs were at risk of impairment if the project is delayed or terminated.
FERC policy changes concerning income tax allowances for MLP pipelines and the Tax Cuts and Jobs Act could reduce future regulated pipeline rates. Williams had recorded $657 million of regulatory liabilities related to expected refunds or rate impacts from tax reform. The company stated that future tariff-based rates could be adversely affected.
In July 2018, the company announced a 40%-owned joint venture acquisition of a Colorado DJ Basin gathering and processing business for $1.173 billion, and an agreement to sell Four Corners assets for $1.125 billion. It also issued $35 million of preferred stock to its foundation, expected to be expensed in the third quarter.
Material contingencies include natural-gas price-index litigation and related indemnification obligations for which a potential loss range cannot be estimated, Alaska sulfolane contamination litigation, environmental liabilities, the Constitution Pipeline permitting dispute, counterparty credit risk, commodity-price volatility, regulatory proceedings, project delays, and cybersecurity or operational disruptions. Environmental liabilities accrued at June 30, 2018 totaled $38 million.
Most Important Facts for Investors to Verify
- Completion of the WPZ Merger, required approvals, share issuance, and any potential $410 million termination fee.
- Actual 2018 capital spending, funding mix, leverage, credit ratings, and post-merger liquidity.
- FERC treatment of income tax allowances, regulatory liabilities, and the outcome of Transco’s required rate case.
- Timing, cost, and regulatory status of Atlantic Sunrise and other major expansion projects.
- Resolution of the Constitution Pipeline permitting challenge and recoverability of its $377 million capitalized costs.
- Comparability of revenue and margin trends after ASC 606, particularly commodity consideration and deferred-revenue recognition.
- Potential impairments involving Discovery, idle pipeline assets, and other equity-method or infrastructure investments.
- Exposure from pending litigation, environmental matters, customer credit risk, and commodity-price changes.