Williams Companies, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended December 31, 2017, filed February 22, 2018. Williams is a U.S.-focused energy infrastructure company, with substantially all operations conducted through Williams Partners L.P. (WPZ), in which Williams owned approximately 74% at year-end. Core activities include regulated interstate natural gas transportation and storage, gathering and processing, NGL production and logistics, crude oil transportation, and related midstream services.
Williams reported one operating segment, Williams Partners; remaining activities were included in Other. Transco and Northwest Pipeline operated approximately 13,600 miles of interstate pipelines with approximately 4,533 TBtu of annual throughput and 18.8 MMdth of peak-day delivery capacity.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $8.031 billion | $7.499 billion | +7% |
| Operating income | $904 million | $700 million | +$204 million |
| Net income | $2.509 billion | $(350) million | Favorable change |
| Net income attributable to Williams | $2.174 billion | $(424) million | Favorable change |
| Diluted EPS | $2.62 | $(0.57) | Favorable change |
| Net cash from operating activities | $2.556 billion | $3.680 billion | -$1.124 billion |
| Capital expenditures | $2.399 billion | $2.051 billion | +$348 million |
| Total assets | $46.352 billion | $46.835 billion | -$483 million |
| Total debt, including current portion | $20.935 billion | $23.409 billion | -$2.474 billion |
| Cash and cash equivalents | $899 million | $170 million | +$729 million |
Service revenue was $5.312 billion, up 3%, while product sales were $2.719 billion, up 17%, primarily because of higher marketing prices and volumes. Calculated operating margin was approximately 11.3%; reported net income attributable to Williams included substantial one-time and tax-related items and is not representative of underlying operating profitability.
Williams Partners Modified EBITDA was $3.616 billion, compared with $3.864 billion in 2016. The decrease primarily reflected $713 million of Tax Reform-related regulatory charges, asset impairments, and lower olefin margins after divestitures, partly offset by higher service revenue, cost reductions, and the gain on the Geismar sale.
Year-end liquidity totaled approximately $5.629 billion: $4.381 billion at WPZ and $1.248 billion at WMB. This included $899 million of cash and approximately $4.730 billion of unused credit-facility capacity, subject to applicable conditions. Working capital was a deficit of $467 million.
Williams declared dividends of $1.20 per common share during 2017, or $0.30 per quarter, compared with $1.68 in 2016. The board subsequently approved a quarterly dividend of $0.34 per share payable March 26, 2018.
Material changes versus the prior comparable period
- Revenue increased $532 million, driven by Transco expansion projects and higher marketing revenue, partly offset by lower gathering and processing revenue, western-region volume declines, and divestitures.
- 2017 net income benefited from a $1.923 billion income-tax benefit caused primarily by remeasurement of deferred taxes after the federal corporate tax rate was reduced from 35% to 21%.
- Williams recorded $674 million of operating regulatory charges, plus $102 million below operating income, for amounts expected to be returned to regulated pipeline customers because of Tax Reform.
- WPZ sold its 88.5% Geismar olefins interest for $2.084 billion in cash and recorded a $1.095 billion gain. Proceeds were used partly to repay debt and fund growth.
- Williams completed a financial repositioning: it permanently waived WPZ incentive distribution rights, converted its 2% general-partner interest to a noneconomic interest, and increased its WPZ limited-partner ownership to approximately 74%. Williams also issued approximately $2.1 billion of common stock to fund WPZ unit purchases.
- Asset impairments totaled $1.248 billion, including approximately $1.019 billion related to certain Mid-Continent gathering assets, $115 million related to Marcellus South gathering assets, and impairments of certain NGL and olefins pipeline assets.
- Debt declined through repayments and refinancing, including repayment of WPZ's $850 million term loan, retirement of $750 million of WPZ notes, and replacement of $1.4 billion of WPZ notes with $1.45 billion of notes due 2027.
- Operating cash flow declined despite higher reported earnings, primarily because 2016 included receipts from contract restructurings that did not recur.
Guidance, outlook, risks and unusual items
Management expected 2018 growth capital and investment expenditures of approximately $2.7 billion, including approximately $1.7 billion for Transco and other interstate pipeline projects. WPZ expected to fund growth primarily with retained cash flow and debt and did not expect to access public equity markets for several years. Management anticipated higher operating results from Transco expansions and Northeast growth, lower general and administrative expenses, and overall gathering and processing volume growth.
Management expected 2018 natural gas and NGL prices to be lower or comparable with 2017 based on forward markets, while oil prices were expected to be higher. Fee-based businesses and long-term firm transportation contracts are intended to reduce commodity-price exposure, but gathering and processing operations remain exposed to commodity prices, producer drilling activity, volume declines, and customer credit quality.
- Atlantic Sunrise was partially placed in service in 2017, with full service targeted for mid-2018 and expected total capacity expansion of 1,700 Mdth/d, subject to remaining approvals.
- Constitution Pipeline remained subject to significant permitting and litigation uncertainty. Capitalized project costs were approximately $381 million at year-end and could be impaired if required certification is not obtained or delays continue.
- The Southeast Market Pipelines, including Hillabee, faced court-directed environmental review and continuing FERC authorization matters.
- Chesapeake Energy and affiliates represented approximately 10% of 2017 consolidated revenue and $176 million of year-end receivables, creating customer-concentration and credit risk.
- Environmental, pipeline-safety, FERC rate proceedings, permitting, climate-related regulation, litigation, cybersecurity, extreme weather, operational failures, and competition could materially affect results.
- Williams had below-investment-grade ratings from the three rating agencies at filing, while WPZ ratings were investment grade. Downgrades could raise borrowing costs and collateral requirements.
- A pension benefit settlement generated a $71 million pre-tax noncash charge, and the company settled $261 million of pension liabilities.
- Adoption of ASC 606 on January 1, 2018 was expected to reduce opening total equity by approximately $255 million net of tax and increase certain reported revenue and cost amounts from noncash commodity consideration.
Most important facts for an investor to verify
- Underlying recurring cash flow and distributable cash after separating the $1.923 billion tax benefit, $1.095 billion Geismar gain, regulatory charges, and $1.248 billion of impairments.
- WPZ's future distributions to Williams, the effect of the IDR waiver, and the sustainability of the increased $0.34 quarterly dividend.
- Execution, permitting, contracting, and final in-service timing for Atlantic Sunrise and other Transco expansion projects.
- Resolution of Constitution Pipeline permitting and litigation, including potential impairment of the $381 million capitalized project costs.
- Debt maturities, refinancing needs, covenant compliance, credit ratings, and the ability to fund approximately $2.7 billion of 2018 growth spending.
- Exposure to Chesapeake and other producer customers, including receivable collectability and potential volume reductions.
- Impact of ASC 606, Tax Reform implementation guidance, FERC treatment of regulatory liabilities, and future rate proceedings.
- Status and potential exposure from pending environmental, gas-index, royalty, Energy Transfer-related, and other litigation; the filing does not provide a clear aggregate maximum exposure for several matters.