Business Context and Reporting Period
The Williams Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Williams is a U.S. energy infrastructure company focused on interstate natural-gas transmission, gathering, processing, fractionation, storage, and related marketing activities. Reportable segments are Transmission & Gulf of Mexico, Northeast G&P, and West, with remaining activities in Other. Segment presentation was recast following the January 1, 2020 organizational realignment that moved Northwest Pipeline into Transmission & Gulf of Mexico.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Total revenues | $1.781 billion | $2.041 billion | $3.694 billion | $4.095 billion |
| Operating income | $612 million | $498 million | $1.043 billion | $1.059 billion |
| Net income attributable to Williams | $303 million | $310 million | $(214) million | $505 million |
| Diluted EPS | $0.25 | $0.26 | $(0.18) | $0.41 |
| Operating margin | 34.4% | 24.4% | 28.2% | 25.9% |
| Net margin attributable to Williams | 17.0% | 15.2% | (5.8)% | 12.3% |
| Modified EBITDA | $1.246 billion | $1.112 billion | $2.499 billion | $2.299 billion |
| Cash flow from operating activities | Not separately provided | Not separately provided | $1.930 billion | $1.844 billion |
| Capital expenditures | Not separately provided | Not separately provided | $613 million | $919 million |
Six-month net loss was driven primarily by $938 million of impairments of equity-method investments and a $187 million goodwill impairment. These were largely noncash charges.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $1.133 billion at June 30, 2020, compared with $289 million at December 31, 2019.
- Total debt, including current maturities, was $22.949 billion at June 30, 2020, compared with $22.288 billion at year-end 2019. Reported fair value of debt was $26.387 billion.
- Williams had no commercial paper outstanding and had $4.5 billion of unused revolving credit capacity, resulting in reported available liquidity of $5.633 billion.
- The company was in compliance with its credit-facility financial covenants. Credit ratings were BBB from S&P, Baa3 from Moody’s, and BBB- from Fitch, all with stable outlooks.
- During the first half of 2020, Williams issued approximately $2.2 billion of long-term debt and retired approximately $1.5 billion. New issuances included $1 billion of Williams notes due 2030 and $1.2 billion of Transco notes due 2030 and 2050.
- Williams paid a quarterly common dividend of $0.40 per share in June 2020, increased from $0.38 per share in 2019. Six-month common dividends paid were $971 million.
- Management expected 2020 growth capital and investment expenditures of $1.0 billion to $1.2 billion and intended to fund substantially all planned capital spending with cash available after dividends.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 13%, primarily because of lower product sales, lower commodity consideration, reduced West volumes and rates, lower NGL prices, temporary production shut-ins, and lower deferred-revenue amortization.
- Six-month revenue declined 10%; service revenue was broadly stable, but product sales fell 31% and service revenue from commodity consideration fell 56%.
- Second-quarter operating income increased 23% because of the absence of 2019 asset impairments, lower employee and maintenance costs, higher Northeast JV volumes, and benefits from Transco expansions and the rate-case settlement.
- Six-month operating income decreased modestly because the 2020 goodwill impairment and lower commodity margins offset operating-cost reductions, higher Northeast JV volumes, the UEOM consolidation, and Transco-related improvements.
- Modified EBITDA increased 12% in the second quarter and 9% for the six-month period. Six-month results increased in Transmission & Gulf of Mexico and Northeast G&P, while West was flat.
- West segment Modified EBITDA was $253 million in the second quarter versus $212 million, but was $468 million for both six-month periods. Northeast G&P six-month Modified EBITDA rose to $739 million from $602 million.
- Non-ethane NGL margins declined approximately 40% per unit in the first six months, primarily because of a 40% decrease in per-unit sales prices, partially offset by lower natural-gas feedstock costs.
- Operating cash flow increased 5% to $1.930 billion, while capital expenditures decreased 33% to $613 million.
Guidance, Outlook, Commentary, and Risks
- Management stated that COVID-19 had not materially affected financial condition, results, or liquidity through June 30, 2020. It continued to monitor pandemic-related economic, commodity-price, demand, and operational risks.
- Management expected lower NGL margins, lower West and Eastern Gulf fee revenues, lower deferred-revenue amortization, and continued pressure from reduced drilling and temporary production shut-ins. Offsetting factors included higher Northeast G&P volumes, Transco and Northwest Pipeline expansion contributions, the Transco rate settlement, the full-year Norphlet contribution, and lower organizational costs.
- Hillabee Expansion Phase II entered service on May 1, 2020, bringing combined capacity additions from the first two phases to 1,025 Mdth/d.
- Northeast Supply Enhancement approvals were denied by New York and New Jersey. Approximately $217 million of project development costs remained capitalized, although capitalization ceased in May 2020. Further adverse developments could result in a substantial future impairment.
- Chesapeake Energy filed for Chapter 11 in June 2020. Williams had approximately $91 million of receivables due from Chesapeake and recorded no related credit-loss or impairment charge at quarter-end. Future bankruptcy developments could change that conclusion.
- Williams recorded a $284 million reserve for Transco rate refunds; the refunds were paid on July 1, 2020.
- Material contingencies include unresolved natural-gas price-index litigation, Alaska refinery contamination litigation, Energy Transfer litigation, former Geismar olefins-business claims, environmental matters, and customer bankruptcy exposure. The filing states that potential losses for the remaining gas-index litigation cannot currently be reasonably estimated and could be material.
- The company adopted a limited-duration shareholder rights agreement in March 2020, expiring March 20, 2021.
Investor Verification Items
- Verify the sustainability of the $1.930 billion first-half operating cash flow after adjusting for noncash impairments and working-capital movements.
- Assess leverage, refinancing needs, debt maturities, interest expense, and the effect of the planned $600 million early debt retirement in August 2020.
- Monitor Chesapeake’s bankruptcy proceedings, receivable collection, contract rejection risk, and effects on Williams’s gathering assets and equity-method investments.
- Reassess the carrying value of the $217 million Northeast Supply Enhancement project and the probability of required permits or future impairment.
- Evaluate whether lower NGL prices, reduced drilling, production shut-ins, and declining volumes could persist beyond management’s current assumptions.
- Review the $938 million equity-investment impairments and the sensitivity of valuations to discount rates, EBITDA multiples, commodity prices, and producer activity.
- Track litigation, environmental liabilities, rate-refund obligations, and the potential financial impact of unresolved contingencies.