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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
or
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________
Commission file number 1-4174
THE WILLIAMS COMPANIES, INC.
|
|
(Exact name of registrant as specified in its charter) |
|
| | | |
Delaware | | 73-0569878 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
One Williams Center | | |
Tulsa | Oklahoma | | 74172-0172 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (918) 573-2000
NO CHANGE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $1.00 par value | WMB | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | | | | |
Large accelerated filer | ☑ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
| | |
Class | | Shares Outstanding at October 28, 2019 |
Common Stock, $1.00 par value | | 1,212,048,836 |
The Williams Companies, Inc.
Index
The reports, filings, and other public announcements of The Williams Companies, Inc. (Williams) may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions, and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this report that address activities, events, or developments that we expect, believe, or anticipate will exist or may occur in the future, are forward-looking statements. Forward-looking statements can be identified by various forms of words such as “anticipates,” “believes,” “seeks,” “could,” “may,” “should,” “continues,” “estimates,” “expects,” “forecasts,” “intends,” “might,” “goals,” “objectives,” “targets,” “planned,” “potential,” “projects,” “scheduled,” “will,” “assumes,” “guidance,” “outlook,” “in-service date,” or other similar expressions. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management and include, among others, statements regarding:
| |
• | Levels of dividends to Williams stockholders; |
| |
• | Future credit ratings of Williams and its affiliates; |
| |
• | Amounts and nature of future capital expenditures; |
| |
• | Expansion and growth of our business and operations; |
| |
• | Expected in-service dates for capital projects; |
| |
• | Financial condition and liquidity; |
| |
• | Cash flow from operations or results of operations; |
| |
• | Seasonality of certain business components; |
| |
• | Natural gas and natural gas liquids prices, supply, and demand; |
| |
• | Demand for our services. |
Forward-looking statements are based on numerous assumptions, uncertainties, and risks that could cause future events or results to be materially different from those stated or implied in this report. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:
| |
• | Whether we are able to pay current and expected levels of dividends; |
| |
• | Whether we will be able to effectively execute our financing plan; |
| |
• | Availability of supplies, market demand, and volatility of prices; |
| |
• | Inflation, interest rates, and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on customers and suppliers); |
| |
• | The strength and financial resources of our competitors and the effects of competition; |
| |
• | Whether we are able to successfully identify, evaluate, and timely execute our capital projects and investment opportunities; |
| |
• | Our ability to acquire new businesses and assets and successfully integrate those operations and assets into existing businesses as well as successfully expand our facilities, and to consummate asset sales on acceptable terms; |
| |
• | Development and rate of adoption of alternative energy sources; |
| |
• | The impact of operational and developmental hazards and unforeseen interruptions; |
| |
• | The impact of existing and future laws and regulations, the regulatory environment, environmental liabilities, and litigation, as well as our ability to obtain necessary permits and approvals, and achieve favorable rate proceeding outcomes; |
| |
• | Our costs and funding obligations for defined benefit pension plans and other postretirement benefit plans; |
| |
• | Changes in maintenance and construction costs, as well as our ability to obtain sufficient construction related inputs including skilled labor; |
| |
• | Changes in the current geopolitical situation; |
| |
• | Our exposure to the credit risk of our customers and counterparties; |
| |
• | Risks related to financing, including restrictions stemming from debt agreements, future changes in credit ratings as determined by nationally recognized credit rating agencies, and the availability and cost of capital; |
| |
• | The amount of cash distributions from and capital requirements of our investments and joint ventures in which we participate; |
| |
• | Risks associated with weather and natural phenomena, including climate conditions and physical damage to our facilities; |
| |
• | Acts of terrorism, cybersecurity incidents, and related disruptions; |
| |
• | Additional risks described in our filings with the Securities and Exchange Commission (SEC). |
Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to update the above list or announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.
In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report. Such changes in our intentions may also cause our results to differ. We may change our intentions, at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.
Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with the SEC on February 21, 2019.
DEFINITIONS
The following is a listing of certain abbreviations, acronyms, and other industry terminology that may be used throughout this Form 10-Q.
Measurements:
Barrel: One barrel of petroleum products that equals 42 U.S. gallons
Bcf: One billion cubic feet of natural gas
Bcf/d: One billion cubic feet of natural gas per day
British Thermal Unit (Btu): A unit of energy needed to raise the temperature of one pound of water by one degree Fahrenheit
Dekatherms (Dth): A unit of energy equal to one million British thermal units
Mbbls/d: One thousand barrels per day
Mdth/d: One thousand dekatherms per day
MMcf/d: One million cubic feet per day
MMdth: One million dekatherms or approximately one trillion British thermal units
MMdth/d: One million dekatherms per day
Tbtu: One trillion British thermal units
Consolidated Entities:
Cardinal: Cardinal Gas Services, L.L.C.
Constitution: Constitution Pipeline Company, LLC
Gulfstar One: Gulfstar One LLC
Northwest Pipeline: Northwest Pipeline LLC
Transco: Transcontinental Gas Pipe Line Company, LLC
UEOM: Utica East Ohio Midstream LLC, previously a Partially Owned Entity until acquiring remaining interest in March 2019
Northeast JV: Ohio Valley Midstream LLC, a partially owned venture that includes our Ohio Valley assets and UEOM
WPZ: Williams Partners L.P. Effective August 10, 2018, we completed our merger with WPZ, pursuant to which we acquired all outstanding common units of WPZ held by others and Williams continued as the surviving entity.
Partially Owned Entities: Entities in which we do not own a 100 percent ownership interest and which, as of September 30, 2019, we account for as an equity-method investment, including principally the following:
Aux Sable: Aux Sable Liquid Products LP
Brazos Permian II: Brazos Permian II, LLC
Caiman II: Caiman Energy II, LLC
Discovery: Discovery Producer Services LLC
Gulfstream: Gulfstream Natural Gas System, L.L.C.
Jackalope: Jackalope Gas Gathering Services, L.L.C., which was sold in April 2019
Laurel Mountain: Laurel Mountain Midstream, LLC
OPPL: Overland Pass Pipeline Company LLC
RMM: Rocky Mountain Midstream Holdings LLC
Government and Regulatory:
EPA: Environmental Protection Agency
FERC: Federal Energy Regulatory Commission
SEC: Securities and Exchange Commission
Other:
Fractionation: The process by which a mixed stream of natural gas liquids is separated into constituent products, such as ethane, propane, and butane
GAAP: U.S. generally accepted accounting principles
LNG: Liquefied natural gas; natural gas which has been liquefied at cryogenic temperatures
MVC: Minimum volume commitment
NGLs: Natural gas liquids; natural gas liquids result from natural gas processing and crude oil refining and are used as petrochemical feedstocks, heating fuels, and gasoline additives, among other applications
NGL margins: NGL revenues less any applicable Btu replacement cost, plant fuel, transportation, and fractionation
WPZ Merger: The August 10, 2018, merger transactions pursuant to which we acquired all outstanding common units of WPZ held by others, merged WPZ into Williams, and Williams continued as the surviving entity
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
The Williams Companies, Inc.
Consolidated Statement of Income
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions, except per-share amounts) |
Revenues: | | | | | | | |
Service revenues | $ | 1,495 |
| | $ | 1,371 |
| | $ | 4,424 |
|
| $ | 4,062 |
|
Service revenues – commodity consideration | 38 |
| | 121 |
| | 158 |
| | 316 |
|
Product sales | 466 |
| | 811 |
| | 1,512 |
|
| 2,104 |
|
Total revenues | 1,999 |
| | 2,303 |
| | 6,094 |
|
| 6,482 |
|
Costs and expenses: | | |
| |
|
|
|
Product costs | 434 |
|
| 790 |
|
| 1,442 |
|
| 2,039 |
|
Processing commodity expenses | 19 |
|
| 30 |
|
| 83 |
|
| 91 |
|
Operating and maintenance expenses | 364 |
|
| 389 |
|
| 1,091 |
|
| 1,134 |
|
Depreciation and amortization expenses | 435 |
|
| 425 |
|
| 1,275 |
|
| 1,290 |
|
Selling, general, and administrative expenses | 130 |
|
| 174 |
|
| 410 |
|
| 436 |
|
Impairment of certain assets (Note 13) | — |
|
| — |
|
| 76 |
|
| 66 |
|
Other (income) expense – net | (11 | ) |
| (6 | ) |
| 30 |
|
| 24 |
|
Total costs and expenses | 1,371 |
|
| 1,802 |
|
| 4,407 |
|
| 5,080 |
|
Operating income (loss) | 628 |
|
| 501 |
|
| 1,687 |
|
| 1,402 |
|
Equity earnings (losses) | 93 |
|
| 105 |
|
| 260 |
|
| 279 |
|
Other investing income (loss) – net (Note 5) | (107 | ) |
| 2 |
|
| (54 | ) |
| 74 |
|
Interest incurred | (303 | ) |
| (286 | ) |
| (915 | ) |
| (856 | ) |
Interest capitalized | 7 |
|
| 16 |
|
| 27 |
|
| 38 |
|
Other income (expense) – net | 1 |
|
| 52 |
|
| 19 |
|
| 99 |
|
Income (loss) before income taxes | 319 |
|
| 390 |
|
| 1,024 |
|
| 1,036 |
|
Provision (benefit) for income taxes | 77 |
|
| 190 |
|
| 244 |
|
| 297 |
|
Net income (loss) | 242 |
|
| 200 |
|
| 780 |
|
| 739 |
|
Less: Net income (loss) attributable to noncontrolling interests | 21 |
|
| 71 |
|
| 54 |
|
| 323 |
|
Net income (loss) attributable to The Williams Companies, Inc. | 221 |
|
| 129 |
|
| 726 |
|
| 416 |
|
Preferred stock dividends | 1 |
| | — |
| | 2 |
| | — |
|
Net income (loss) available to common stockholders | $ | 220 |
| | $ | 129 |
| | $ | 724 |
| | $ | 416 |
|
Basic earnings (loss) per common share: | | | | | | | |
Net income (loss) | $ | .18 |
| | $ | .13 |
| | $ | .60 |
| | $ | .47 |
|
Weighted-average shares (thousands) | 1,212,270 |
| | 1,023,587 |
| | 1,211,938 |
| | 893,706 |
|
Diluted earnings (loss) per common share: | | | | | | | |
Net income (loss) | $ | .18 |
| | $ | .13 |
| | $ | .60 |
| | $ | .46 |
|
Weighted-average shares (thousands) | 1,214,165 |
| | 1,026,504 |
| | 1,213,943 |
| | 896,322 |
|
See accompanying notes.
The Williams Companies, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Net income (loss) | $ | 242 |
| | $ | 200 |
| | $ | 780 |
| | $ | 739 |
|
Other comprehensive income (loss): | | | | | | | |
Cash flow hedging activities: | | | | | | | |
Net unrealized gain (loss) from derivative instruments, net of taxes of $3 and $6 in 2018 | — |
| | (5 | ) | | — |
| | (19 | ) |
Reclassifications into earnings of net derivative instruments (gain) loss, net of taxes of ($2) and ($3) in 2018 | — |
| | 7 |
| | — |
| | 10 |
|
Pension and other postretirement benefits: | | | | | | | |
Net actuarial gain (loss) arising during the year, net of taxes of $1 and $1 in 2019, and ($0) and ($1) in 2018 | (5 | ) | | — |
|
| (5 | ) |
| 4 |
|
Amortization of actuarial (gain) loss and net actuarial loss from settlements included in net periodic benefit cost (credit), net of taxes of ($0) and ($3) in 2019, and ($3) and ($5) in 2018 | 4 |
| | 4 |
| | 9 |
| | 14 |
|
Other comprehensive income (loss) | (1 | ) | | 6 |
| | 4 |
| | 9 |
|
Comprehensive income (loss) | 241 |
| | 206 |
| | 784 |
| | 748 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | 21 |
| | 72 |
| | 54 |
| | 321 |
|
Comprehensive income (loss) attributable to The Williams Companies, Inc. | $ | 220 |
| | $ | 134 |
| | $ | 730 |
| | $ | 427 |
|
See accompanying notes.
The Williams Companies, Inc.
Consolidated Balance Sheet
(Unaudited)
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (Millions, except per-share amounts) |
ASSETS | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 247 |
| | $ | 168 |
|
Trade accounts and other receivables (net of allowance of $6 at September 30, 2019 and $9 at December 31, 2018) | | 875 |
| | 992 |
|
Inventories | | 129 |
| | 130 |
|
Other current assets and deferred charges | | 183 |
| | 174 |
|
Total current assets | | 1,434 |
| | 1,464 |
|
Investments | | 6,228 |
| | 7,821 |
|
Property, plant, and equipment | | 41,647 |
| | 38,661 |
|
Accumulated depreciation and amortization | | (12,034 | ) | | (11,157 | ) |
Property, plant, and equipment – net | | 29,613 |
| | 27,504 |
|
Intangible assets – net of accumulated amortization | | 8,041 |
| | 7,767 |
|
Regulatory assets, deferred charges, and other | | 965 |
| | 746 |
|
Total assets | | $ | 46,281 |
| | $ | 45,302 |
|
LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 602 |
| | $ | 662 |
|
Accrued liabilities | | 1,184 |
| | 1,102 |
|
Long-term debt due within one year | | 1,538 |
| | 47 |
|
Total current liabilities | | 3,324 |
| | 1,811 |
|
Long-term debt | | 20,719 |
| | 22,367 |
|
Deferred income tax liabilities | | 1,651 |
| | 1,524 |
|
Regulatory liabilities, deferred income, and other | | 3,728 |
| | 3,603 |
|
Contingent liabilities (Note 14) | |
| |
|
Equity: | | | | |
Stockholders’ equity: | | | | |
Preferred stock | | 35 |
| | 35 |
|
Common stock ($1 par value; 1,470 million shares authorized at September 30, 2019 and December 31, 2018; 1,247 million shares issued at September 30, 2019 and 1,245 million shares issued at December 31, 2018) | | 1,247 |
| | 1,245 |
|
Capital in excess of par value | | 24,310 |
| | 24,693 |
|
Retained deficit | | (10,664 | ) | | (10,002 | ) |
Accumulated other comprehensive income (loss) | | (266 | ) | | (270 | ) |
Treasury stock, at cost (35 million shares of common stock) | | (1,041 | ) | | (1,041 | ) |
Total stockholders’ equity | | 13,621 |
| | 14,660 |
|
Noncontrolling interests in consolidated subsidiaries | | 3,238 |
| | 1,337 |
|
Total equity | | 16,859 |
| | 15,997 |
|
Total liabilities and equity | | $ | 46,281 |
| | $ | 45,302 |
|
See accompanying notes.
The Williams Companies, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| The Williams Companies, Inc. Stockholders | | | | |
| Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Deficit | | AOCI* | | Treasury Stock | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| (Millions) |
Balance – June 30, 2019 | $ | 35 |
| | $ | 1,246 |
| | $ | 24,296 |
| | $ | (10,423 | ) | | $ | (265 | ) | | $ | (1,041 | ) | | $ | 13,848 |
| | $ | 3,233 |
| | $ | 17,081 |
|
Net income (loss) | — |
| | — |
| | — |
| | 221 |
| | — |
| | — |
| | 221 |
| | 21 |
| | 242 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
Cash dividends – common stock ($0.38 per share) | — |
| | — |
| | — |
| | (461 | ) | | — |
| | — |
| | (461 | ) | | — |
| | (461 | ) |
Dividends and distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18 | ) | | (18 | ) |
Stock-based compensation and related common stock issuances, net of tax | — |
| | 1 |
| | 16 |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
Changes in ownership of consolidated subsidiaries, net (Note 2) | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | 2 |
| | 1 |
|
Other | — |
| | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Net increase (decrease) in equity | — |
| | 1 |
| | 14 |
| | (241 | ) | | (1 | ) | | — |
| | (227 | ) | | 5 |
| | (222 | ) |
Balance – September 30, 2019 | $ | 35 |
| | $ | 1,247 |
| | $ | 24,310 |
| | $ | (10,664 | ) | | $ | (266 | ) | | $ | (1,041 | ) | | $ | 13,621 |
| | $ | 3,238 |
| | $ | 16,859 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance – June 30, 2018 | $ | — |
| | $ | 862 |
| | $ | 18,552 |
| | $ | (8,735 | ) | | $ | (293 | ) | | $ | (1,041 | ) | | $ | 9,345 |
| | $ | 6,102 |
| | $ | 15,447 |
|
Net income (loss) | — |
| | — |
| | — |
| | 129 |
| | — |
| | — |
| | 129 |
| | 71 |
| | 200 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | 1 |
| | 6 |
|
WPZ Merger (Note 1) | — |
| | 382 |
| | 6,112 |
| | — |
| | (3 | ) | | — |
| | 6,491 |
| | (4,629 | ) | | 1,862 |
|
Issuance of preferred stock (Note 12) | 35 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | 35 |
|
Cash dividends – common stock ($0.34 per share) | — |
| | — |
| | — |
| | (411 | ) | | — |
| | — |
| | (411 | ) | | — |
| | (411 | ) |
Dividends and distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (196 | ) | | (196 | ) |
Stock-based compensation and related common stock issuances, net of tax | — |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | 16 |
|
Changes in ownership of consolidated subsidiaries, net | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | (1 | ) | | — |
|
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
Other | — |
| | 1 |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | (1 | ) | | (1 | ) | | (2 | ) |
Net increase (decrease) in equity | 35 |
| | 383 |
| | 6,128 |
| | (283 | ) | | 2 |
| | — |
| | 6,265 |
| | (4,753 | ) | | 1,512 |
|
Balance – September 30, 2018 | $ | 35 |
| | $ | 1,245 |
| | $ | 24,680 |
| | $ | (9,018 | ) | | $ | (291 | ) | | $ | (1,041 | ) | | $ | 15,610 |
| | $ | 1,349 |
| | $ | 16,959 |
|
See accompanying notes.
The Williams Companies, Inc.
Consolidated Statement of Changes in Equity (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| The Williams Companies, Inc. Stockholders | | | | |
| Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Deficit | | AOCI* | | Treasury Stock | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| (Millions) |
Balance – December 31, 2018 | $ | 35 |
| | $ | 1,245 |
| | $ | 24,693 |
| | $ | (10,002 | ) | | $ | (270 | ) | | $ | (1,041 | ) | | $ | 14,660 |
| | $ | 1,337 |
| | $ | 15,997 |
|
Net income (loss) | — |
| | — |
| | — |
| | 726 |
| | — |
| | — |
| | 726 |
| | 54 |
| | 780 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | 4 |
|
Cash dividends – common stock ($1.14 per share) | — |
| | — |
| | — |
| | (1,382 | ) | | — |
| | — |
| | (1,382 | ) | | — |
| | (1,382 | ) |
Dividends and distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (86 | ) | | (86 | ) |
Stock-based compensation and related common stock issuances, net of tax | — |
| | 2 |
| | 43 |
| | — |
| | — |
| | — |
| | 45 |
| | — |
| | 45 |
|
Sale of partial interest in consolidated subsidiary (Note 2) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,333 |
| | 1,333 |
|
Changes in ownership of consolidated subsidiaries, net (Note 2) | — |
| | — |
| | (426 | ) | | — |
| | — |
| | — |
| | (426 | ) | | 568 |
| | 142 |
|
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 32 |
| | 32 |
|
Other | — |
| | — |
| | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
Net increase (decrease) in equity | — |
| | 2 |
| | (383 | ) | | (662 | ) | | 4 |
| | — |
| | (1,039 | ) | | 1,901 |
| | 862 |
|
Balance – September 30, 2019 | $ | 35 |
| | $ | 1,247 |
| | $ | 24,310 |
| | $ | (10,664 | ) | | $ | (266 | ) | | $ | (1,041 | ) | | $ | 13,621 |
| | $ | 3,238 |
| | $ | 16,859 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance – December 31, 2017 | $ | — |
| | $ | 861 |
| | $ | 18,508 |
| | $ | (8,434 | ) | | $ | (238 | ) | | $ | (1,041 | ) | | $ | 9,656 |
| | $ | 6,519 |
| | $ | 16,175 |
|
Adoption of new accounting standards | — |
| | — |
| | — |
| | (23 | ) | | (61 | ) | | — |
| | (84 | ) | | (37 | ) | | (121 | ) |
Net income (loss) | — |
| | — |
| | — |
| | 416 |
| | — |
| | — |
| | 416 |
| | 323 |
| | 739 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
| | (2 | ) | | 9 |
|
WPZ Merger (Note 1) | — |
| | 382 |
| | 6,112 |
| | — |
| | (3 | ) | | — |
| | 6,491 |
| | (4,629 | ) | | 1,862 |
|
Issuance of preferred stock (Note 12) | 35 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | 35 |
|
Cash dividends – common stock ($1.02 per share) | — |
| | — |
| | — |
| | (974 | ) | | — |
| | — |
| | (974 | ) | | — |
| | (974 | ) |
Dividends and distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (598 | ) | | (598 | ) |
Stock-based compensation and related common stock issuances, net of tax | — |
| | 1 |
| | 48 |
| | — |
| | — |
| | — |
| | 49 |
| | — |
| | 49 |
|
Sales of limited partner units of Williams Partners L.P. | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 46 |
| | 46 |
|
Changes in ownership of consolidated subsidiaries, net | — |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | (18 | ) | | (4 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
Deconsolidation of subsidiary (Note 5) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (267 | ) | | (267 | ) |
Other | — |
| | 1 |
| | (2 | ) | | (3 | ) | | — |
| | — |
| | (4 | ) | | (1 | ) | | (5 | ) |
Net increase (decrease) in equity | 35 |
| | 384 |
| | 6,172 |
| | (584 | ) | | (53 | ) | | — |
| | 5,954 |
| | (5,170 | ) | | 784 |
|
Balance – September 30, 2018 | $ | 35 |
| | $ | 1,245 |
| | $ | 24,680 |
| | $ | (9,018 | ) | | $ | (291 | ) | | $ | (1,041 | ) | | $ | 15,610 |
| | $ | 1,349 |
| | $ | 16,959 |
|
| |
* | Accumulated Other Comprehensive Income (Loss) |
See accompanying notes.
The Williams Companies, Inc.
Consolidated Statement of Cash Flows
(Unaudited) |
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
| (Millions) |
OPERATING ACTIVITIES: | |
Net income (loss) | $ | 780 |
| | $ | 739 |
|
Adjustments to reconcile to net cash provided (used) by operating activities: | | | |
Depreciation and amortization | 1,275 |
| | 1,290 |
|
Provision (benefit) for deferred income taxes | 268 |
| | 351 |
|
Equity (earnings) losses | (260 | ) | | (279 | ) |
Distributions from unconsolidated affiliates | 458 |
| | 507 |
|
Net (gain) loss on disposition of equity-method investments (Note 5) | (122 | ) | | — |
|
Impairment of equity-method investments (Note 13) | 186 |
| | — |
|
(Gain) loss on deconsolidation of businesses (Note 5) | 2 |
| | (62 | ) |
Impairment of and net (gain) loss on sale of certain assets | 76 |
| | 64 |
|
Amortization of stock-based awards | 44 |
| | 43 |
|
Cash provided (used) by changes in current assets and liabilities: | | | |
Accounts and notes receivable | 159 |
| | 75 |
|
Inventories | 7 |
| | (39 | ) |
Other current assets and deferred charges | (10 | ) | | (44 | ) |
Accounts payable | (76 | ) | | (76 | ) |
Accrued liabilities | 76 |
| | (62 | ) |
Other, including changes in noncurrent assets and liabilities | (161 | ) | | (176 | ) |
Net cash provided (used) by operating activities | 2,702 |
| | 2,331 |
|
FINANCING ACTIVITIES: | | | |
Proceeds from (payments of) commercial paper – net | (4 | ) | | 821 |
|
Proceeds from long-term debt | 736 |
| | 3,745 |
|
Payments of long-term debt | (904 | ) | | (3,201 | ) |
Proceeds from issuance of common stock | 10 |
| | 15 |
|
Proceeds from sale of partial interest in consolidated subsidiary (Note 2) | 1,330 |
| | — |
|
Common dividends paid | (1,382 | ) | | (974 | ) |
Dividends and distributions paid to noncontrolling interests | (86 | ) | | (552 | ) |
Contributions from noncontrolling interests | 32 |
| | 13 |
|
Payments for debt issuance costs | — |
| | (26 | ) |
Other – net | (11 | ) | | (46 | ) |
Net cash provided (used) by financing activities | (279 | ) | | (205 | ) |
INVESTING ACTIVITIES: | | | |
Property, plant, and equipment: | | | |
Capital expenditures (1) | (1,705 | ) | | (2,659 | ) |
Dispositions – net | (32 | ) | | (2 | ) |
Contributions in aid of construction | 25 |
| | 395 |
|
Purchases of businesses, net of cash acquired (Note 2) | (728 | ) | | — |
|
Proceeds from dispositions of equity-method investments (Note 5) | 485 |
| | — |
|
Purchases of and contributions to equity-method investments | (361 | ) | | (803 | ) |
Other – net | (28 | ) | | 86 |
|
Net cash provided (used) by investing activities | (2,344 | ) | | (2,983 | ) |
Increase (decrease) in cash and cash equivalents | 79 |
| | (857 | ) |
Cash and cash equivalents at beginning of year | 168 |
| | 899 |
|
Cash and cash equivalents at end of period | $ | 247 |
| | $ | 42 |
|
_____________ | | | |
(1) Increases to property, plant, and equipment | $ | (1,707 | ) | | $ | (2,482 | ) |
Changes in related accounts payable and accrued liabilities | 2 |
| | (177 | ) |
Capital expenditures | $ | (1,705 | ) | | $ | (2,659 | ) |
See accompanying notes.
The Williams Companies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – General, Description of Business, and Basis of Presentation
General
Our accompanying interim consolidated financial statements do not include all the notes in our annual financial statements and, therefore, should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018, in our Annual Report on Form 10-K. The accompanying unaudited financial statements include all normal recurring adjustments and others that, in the opinion of management, are necessary to present fairly our interim financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Unless the context clearly indicates otherwise, references in this report to “Williams,” “we,” “our,” “us,” or like terms refer to The Williams Companies, Inc. and its subsidiaries. Unless the context clearly indicates otherwise, references to “Williams,” “we,” “our,” and “us” include the operations in which we own interests accounted for as equity-method investments that are not consolidated in our financial statements. When we refer to our equity investees by name, we are referring exclusively to their businesses and operations.
WPZ Merger
On August 10, 2018, we completed our merger with Williams Partners L.P. (WPZ), our previously consolidated master limited partnership, pursuant to which we acquired all of the approximately 256 million publicly held outstanding common units of WPZ in exchange for 382 million shares of our common stock (WPZ Merger). Williams continued as the surviving entity. The WPZ Merger was accounted for as a noncash equity transaction resulting in increases to Common stock of $382 million, Capital in excess of par value of $6.112 billion, and Regulatory assets, deferred charges, and other of $33 million and decreases to Accumulated other comprehensive income (loss) (AOCI) of $3 million, Noncontrolling interests in consolidated subsidiaries of $4.629 billion, and Deferred income tax liabilities of $1.829 billion in the Consolidated Balance Sheet. Pursuant to its distribution reinvestment program, WPZ had issued 1,230,657 common units to the public in 2018 associated with reinvested distributions of $46 million.
Description of Business
We are a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. Our operations are located in the United States and are presented within the following reportable segments: Northeast G&P, Atlantic-Gulf, and West, consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources. All remaining business activities as well as corporate activities are included in Other.
Northeast G&P is comprised of our midstream gathering, processing, and fractionation businesses in the Marcellus Shale region primarily in Pennsylvania, New York, and West Virginia and the Utica Shale region of eastern Ohio, including a 66 percent interest in Cardinal Gas Services, L.L.C. (Cardinal) (a consolidated entity), as well as a 69 percent equity-method investment in Laurel Mountain Midstream, LLC (Laurel Mountain), a 58 percent equity-method investment in Caiman Energy II, LLC, and Appalachia Midstream Services, LLC, which owns equity-method investments with an approximate average 66 percent interest in multiple gas gathering systems in the Marcellus Shale (Appalachia Midstream Investments). Northeast G&P includes a 65 percent interest in Ohio Valley Midstream LLC (Northeast JV) (a consolidated entity). The Northeast JV includes our Ohio Valley assets and Utica East Ohio Midstream LLC (UEOM), a former equity-method investment in which we acquired the remaining ownership interest in March 2019 (see Note 2 – Acquisitions).
Atlantic-Gulf is comprised of our interstate natural gas pipeline, Transcontinental Gas Pipe Line Company, LLC (Transco), and significant natural gas gathering and processing and crude oil production handling and transportation assets in the Gulf Coast region, including a 51 percent interest in Gulfstar One LLC (Gulfstar One) (a consolidated entity), which is a proprietary floating production system, as well as a 50 percent equity-method investment in Gulfstream Natural Gas System, L.L.C., a 60 percent equity-method investment in Discovery Producer Services LLC, and a 41 percent interest in Constitution Pipeline Company, LLC (Constitution) (a consolidated entity), which is developing a pipeline project (see Note 4 – Variable Interest Entities).
West is comprised of our interstate natural gas pipeline, Northwest Pipeline LLC (Northwest Pipeline), and our gathering, processing, and treating operations in Colorado, Wyoming, the Barnett Shale region of north-central Texas, the Eagle Ford Shale region of south Texas, the Permian Shale region of west Texas, the Haynesville Shale region of northwest Louisiana, and the Mid-Continent region which includes the Anadarko and Arkoma basins. This segment also includes our natural gas liquid (NGL) and natural gas marketing business, storage facilities, an undivided 50 percent interest in an NGL fractionator near Conway, Kansas, a 50 percent equity-method investment in Overland Pass Pipeline Company LLC, a 50 percent equity-method investment in Rocky Mountain Midstream Holdings LLC, and a 15 percent equity-method investment in Brazos Permian II, LLC (Brazos Permian II). West also included our former natural gas gathering and processing assets in the Four Corners area of New Mexico and Colorado, which were sold during the fourth quarter of 2018, and our former 50 percent interest in Jackalope Gas Gathering Services, L.L.C. (Jackalope) (an equity-method investment following deconsolidation as of June 30, 2018), which was sold in April 2019.
Basis of Presentation
Significant risks and uncertainties
We believe that the carrying value of certain of our property, plant, and equipment and other identifiable intangible assets, notably certain acquired assets accounted for as business combinations between 2012 and 2014, may be in excess of current fair value. However, the carrying value of these assets, in our judgment, continues to be recoverable based on our evaluation of undiscounted future cash flows. It is reasonably possible that future strategic decisions, including transactions such as monetizing non-core assets or contributing assets to new ventures with third parties, as well as unfavorable changes in expected producer activities could impact our assumptions and ultimately result in impairments of these assets. Such transactions or developments may also indicate that certain of our equity-method investments have experienced other-than-temporary declines in value, which could result in impairment, or that the fair value of the reporting unit for our goodwill is less than its carrying amount, which would result in impairment.
Accounting standards issued and adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 “Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 establishes a comprehensive new lease accounting model. ASU 2016-02 modifies the definition of a lease, requires a dual approach to lease classification similar to prior lease accounting, and causes lessees to recognize operating leases on the balance sheet as a lease liability measured as the present value of the future lease payments with a corresponding right-of-use asset, with an exception for leases with a term of one year or less. Additional disclosures are required regarding the amount, timing, and uncertainty of cash flows arising from leases. In January 2018, the FASB issued ASU 2018-01 “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (ASU 2018-01). Per ASU 2018-01, land easements and rights-of-way are required to be assessed under ASU 2016-02 to determine whether the arrangements are or contain a lease. ASU 2018-01 permits an entity to elect a transition practical expedient to not apply ASU 2016-02 to land easements that exist or expired before the effective date of ASU 2016-02 and that were not previously assessed under the previous lease guidance in Accounting Standards Codification (ASC) Topic 840 “Leases.”
In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11). Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a
practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are present. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. We prospectively adopted ASU 2016-02 effective January 1, 2019, and did not adjust prior periods as permitted by ASU 2018-11 (see Note 10 – Leases).
We completed our review of contracts to identify leases based on the modified definition of a lease and implemented changes to our internal controls to support management in the accounting for and disclosure of leasing activities upon adoption of ASU 2016-02. We implemented a financial lease accounting system to assist management in the accounting for leases upon adoption. The most significant changes to our financial statements as a result of adopting ASU 2016-02 relate to the recognition of a $225 million lease liability and offsetting right-of-use asset in our Consolidated Balance Sheet for operating leases. We also evaluated ASU 2016-02’s available practical expedients on adoption and have generally elected to adopt the practical expedients, which includes the practical expedient to not separate lease and nonlease components by both lessees and lessors by class of underlying assets and the land easements practical expedient.
Accounting standards issued but not yet adopted
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans, and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. The guidance also requires increased disclosures. ASU 2016-13 is effective for us for interim and annual periods beginning after December 15, 2019. We plan to adopt as of January 1, 2020. We anticipate that ASU 2016-13 will primarily apply to our trade receivables. While we do not expect a significant financial impact, we have analyzed our historical credit loss experience and continue to develop and implement processes, procedures, and internal controls in order to make the necessary credit loss assessments and required disclosures upon adoption.
Note 2 – Acquisitions
UEOM
As of December 31, 2018, we owned a 62 percent interest in UEOM which we accounted for as an equity-method investment. On March 18, 2019, we signed and closed the acquisition of the remaining 38 percent interest in UEOM. Total consideration paid, including post-closing adjustments, was $741 million in cash funded through credit facility borrowings and cash on hand. As a result of acquiring this additional interest, we obtained control of and now consolidate UEOM.
UEOM is involved primarily in the processing and fractionation of natural gas and natural gas liquids in the Utica Shale play in eastern Ohio. The purpose of the acquisition is to enhance our position in the region. We expect synergies through common ownership of UEOM and our Ohio Valley midstream systems to create a more efficient platform for capital spending in the region, resulting in reduced operating and maintenance expenses and creating enhanced capabilities and benefits for producers in the area.
The acquisition of UEOM was accounted for as a business combination, which requires, among other things, that identifiable assets acquired and liabilities assumed be recognized at their acquisition date fair values. In March 2019, based on the transaction price for our purchase of the remaining interest in UEOM as finalized just prior to the acquisition, we recognized a $74 million noncash impairment loss related to our existing 62 percent interest (see Note 13 – Fair Value Measurements and Guarantees). Thus, there was no gain or loss on remeasuring our existing equity-method investment to fair value due to the impairment recognized just prior to closing the acquisition of the additional interest.
The valuation techniques used to measure the acquisition date fair value of the UEOM acquisition consisted of the market approach for our previous equity-method investment in UEOM and the income approach (excess earnings method) for valuation of intangible assets and depreciated replacement costs for property, plant, and equipment.
The following table presents the allocation of the acquisition date fair value of the major classes of the assets acquired, which are presented in the Northeast G&P segment, and liabilities assumed at March 18, 2019. The net assets
acquired reflect the sum of the consideration transferred and the noncash elimination of the fair value of our existing equity-method investment upon our acquisition of the additional interest. The fair value of accounts receivable acquired, presented in current assets in the table, equals contractual amounts receivable. After the March 31, 2019 financial statements were issued, we received an updated valuation report from a third-party valuation firm. Significant changes from the preliminary allocation disclosed in the first quarter to the final allocation reflect an increase of $169 million in goodwill, and decreases of $106 million in property, plant, and equipment and $61 million in other intangible assets.
|
| | | |
| (Millions) |
Current assets, including $13 million cash acquired | $ | 55 |
|
Property, plant, and equipment | 1,387 |
|
Other intangible assets | 328 |
|
Total identifiable assets acquired | 1,770 |
|
| |
Current liabilities | 7 |
|
Total liabilities assumed | 7 |
|
| |
Net identifiable assets acquired | 1,763 |
|
| |
Goodwill | 188 |
|
Net assets acquired | $ | 1,951 |
|
The goodwill recognized in the acquisition relates primarily to enhancing and diversifying our basin positions and is reported within the Northeast G&P segment. Substantially all of the goodwill is expected to be deductible for tax purposes. Goodwill is included within Intangible assets – net of accumulated amortization in the Consolidated Balance Sheet and represents the excess of the consideration, plus the fair value of any previously held equity interest, over the fair value of the net assets acquired. It is not subject to amortization but is evaluated annually as of October 1 for impairment or more frequently if impairment indicators are present that would indicate it is more likely than not that the fair value of the reporting unit is less than its carrying amount.
Other intangible assets recognized in the acquisition are related to contractual customer relationships from gas gathering, processing, and fractionation agreements with our customers. The basis for determining the value of these intangible assets is estimated future net cash flows to be derived from acquired contractual customer relationships discounted using a risk-adjusted discount rate. These intangible assets are being amortized on a straight-line basis over an initial period of 20 years which represents the term over which the contractual customer relationships are expected to contribute to our cash flows. Approximately 49 percent of the expected future revenues from these contractual customer relationships are impacted by our ability and intent to renew or renegotiate existing customer contracts. We expense costs incurred to renew or extend the terms of our gas gathering, processing, and fractionation contracts with customers. Based on the estimated future revenues during the current contract periods (as estimated at the time of the acquisition), the weighted-average period prior to the next renewal or extension of the existing contractual customer relationships is approximately 10 years.
The following unaudited pro forma Revenues and Net income (loss) attributable to The Williams Companies, Inc. for the three and nine months ended September 30, 2019 and 2018, are presented as if the UEOM acquisition had been completed on January 1, 2018. These pro forma amounts are not necessarily indicative of what the actual results would have been if the acquisition had in fact occurred on the date or for the periods indicated, nor do they purport to project Revenues or Net income (loss) attributable to The Williams Companies, Inc. for any future periods or as of any date. These amounts do not give effect to any potential cost savings, operating synergies, or revenue enhancements to result from the transaction or the potential costs to achieve these cost savings, operating synergies, and revenue enhancements.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Revenues | $ | 1,999 |
| | $ | 2,342 |
| | $ | 6,126 |
| | $ | 6,589 |
|
| | | | | | | |
Net income (loss) attributable to The Williams Companies, Inc. | $ | 221 |
| | $ | 138 |
| | $ | 804 |
| | $ | 434 |
|
Adjustments to pro forma Net income (loss) attributable to The Williams Companies, Inc. include the removal of the previously described $74 million impairment loss recognized in March 2019 just prior to the acquisition. There are no pro forma adjustments for the three months ended September 30, 2019 as UEOM was consolidated and reflected in our results during the entire quarter.
During the period from the acquisition date of March 18, 2019 to September 30, 2019, UEOM contributed Revenues of $104 million and Net income (loss) attributable to The Williams Companies, Inc. of $25 million.
Costs related to this acquisition are $4 million and are reported within our Northeast G&P segment and included in Selling, general, and administrative expenses in our Consolidated Statement of Income.
Northeast JV
Concurrent with the UEOM acquisition, we executed an agreement whereby we contributed our consolidated interests in UEOM and our Ohio Valley midstream business to a newly formed partnership. In June 2019, our partner invested approximately $1.33 billion (subject to post-closing adjustments) for a 35 percent ownership interest, and we retained 65 percent ownership of, as well as operate and consolidate, the Northeast JV business. The change in ownership due to this transaction increased Noncontrolling interests in consolidated subsidiaries by $568 million, and decreased Capital in excess of par value by $426 million and Deferred income tax liabilities by $142 million in the Consolidated Balance Sheet. Costs related to this transaction are $6 million and are reported within our Northeast G&P segment and included in Selling, general, and administrative expenses in our Consolidated Statement of Income.
Note 3 – Revenue Recognition
Revenue by Category
The following table presents our revenue disaggregated by major service line:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Northeast Midstream | | Atlantic- Gulf Midstream | | West Midstream | | Transco | | Northwest Pipeline | | Other | | Intercompany Eliminations | | Total |
| (Millions) |
Three Months Ended September 30, 2019 | | |
Revenues from contracts with customers: | | | | | | | | | | | | | | | |
Service revenues: | | | | | | | | | | | | | | | |
Non-regulated gathering, processing, transportation, and storage: | | | | | | | | | | | | | | | |
Monetary consideration | $ | 310 |
| | $ | 117 |
| | $ | 308 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (19 | ) | | $ | 716 |
|
Commodity consideration | 1 |
| | 7 |
| | 30 |
| | — |
| | — |
| | — |
| | — |
| | 38 |
|
Regulated interstate natural gas transportation and storage | — |
| | — |
| | — |
| | 601 |
| | 111 |
| | — |
| | (2 | ) | | 710 |
|
Other | 38 |
| | 8 |
| | 12 |
| | — |
| | — |
| | — |
| | (5 | ) | | 53 |
|
Total service revenues | 349 |
| | 132 |
| | 350 |
| | 601 |
| | 111 |
| | — |
| | (26 | ) | | 1,517 |
|
Product Sales: | | | | | | | | | | | | | | | |
NGL and natural gas product sales | 30 |
| | 34 |
| | 391 |
| | 41 |
| | — |
| | — |
| | (28 | ) | | 468 |
|
Total revenues from contracts with customers | 379 |
| | 166 |
| | 741 |
| | 642 |
| | 111 |
| | — |
| | (54 | ) | | 1,985 |
|
Other revenues (1) | 5 |
| | 2 |
| | — |
| | 3 |
| | — |
| | 7 |
| | (3 | ) | | 14 |
|
Total revenues | $ | 384 |
| | $ | 168 |
| | $ | 741 |
| | $ | 645 |
| | $ | 111 |
| | $ | 7 |
| | $ | (57 | ) | | $ | 1,999 |
|
| | | | | | | | | | | | | | | |
Three Months Ended September 30, 2018 |
Revenues from contracts with customers: | | | | | | | | | | | | | | | |
Service revenues: | | | | | | | | | | | | | | | |
Non-regulated gathering, processing, transportation, and storage: | | | | | | | | | | | | | | | |
Monetary consideration | $ | 219 |
| | $ | 139 |
| | $ | 409 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | (19 | ) | | $ | 749 |
|
Commodity consideration | 5 |
| | 19 |
| | 97 |
| | — |
| | — |
| | — |
| | — |
| | 121 |
|
Regulated interstate natural gas transportation and storage | — |
| | — |
| | — |
| | 457 |
| | 110 |
| | — |
| | (1 | ) | | 566 |
|
Other | 23 |
| | 4 |
| | 11 |
| | — |
| | — |
| | — |
| | (4 | ) | | 34 |
|
Total service revenues | 247 |
| | 162 |
| | 517 |
| | 457 |
| | 110 |
| | 1 |
| | (24 | ) | | 1,470 |
|
Product Sales: | | | | | | | | | | | | | | | |
NGL and natural gas | 69 |
| | 88 |
| | 720 |
| | 41 |
| | — |
| | — |
| | (117 | ) | | 801 |
|
Other | — |
| | — |
| | 12 |
| | — |
| | — |
| | — |
| | (3 | ) | | 9 |
|
Total product sales | 69 |
| | 88 |
| | 732 |
| | 41 |
| | — |
| | — |
| | (120 | ) | | 810 |
|
Total revenues from contracts with customers | 316 |
| | 250 |
| | 1,249 |
| | 498 |
| | 110 |
| | 1 |
| | (144 | ) | | 2,280 |
|
Other revenues (1) | 6 |
| | 5 |
| | 3 |
| | 3 |
| | — |
| | 9 |
| | (3 | ) | | 23 |
|
Total revenues | $ | 322 |
| | $ | 255 |
| | $ | 1,252 |
| | $ | 501 |
| | $ | 110 |
| | $ | 10 |
| | $ | (147 | ) | | $ | 2,303 |
|
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Northeast Midstream | | Atlantic- Gulf Midstream | | West Midstream | | Transco | | Northwest Pipeline | | Other | | Intercompany Eliminations | | Total |
| (Millions) |
Nine Months Ended September 30, 2019 |
Revenues from contracts with customers: | | | | | | | | | | | | | | | |
Service revenues: | | | | | | | | | | | | | | | |
Non-regulated gathering, processing, transportation, and storage: | | | | | | | | | | | | | | | |
Monetary consideration | $ | 840 |
| | $ | 366 |
| | $ | 1,007 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (54 | ) | | $ | 2,159 |
|
Commodity consideration | 9 |
| | 33 |
| | 116 |
| | — |
| | — |
| | — |
| | — |
| | 158 |
|
Regulated interstate natural gas transportation and storage | — |
| | — |
| | — |
| | 1,736 |
| | 335 |
| | — |
| | (4 | ) | | 2,067 |
|
Other | 104 |
| | 21 |
| | 32 |
| | 1 |
| | — |
| | — |
| | (12 | ) | | 146 |
|
Total service revenues | 953 |
| | 420 |
| | 1,155 |
| | 1,737 |
| | 335 |
| | — |
| | (70 | ) | | 4,530 |
|
Product Sales: | | | | | | | | | | | | | | | |
NGL and natural gas product sales | 114 |
| | 140 |
| | 1,300 |
| | 88 |
| | — |
| | — |
| | (132 | ) | | 1,510 |
|
Total revenues from contracts with customers | 1,067 |
| | 560 |
| | 2,455 |
| | 1,825 |
| | 335 |
| | — |
| | (202 | ) | | 6,040 |
|
Other revenues (1) | 15 |
| | 6 |
| | 12 |
| | 8 |
| | — |
| | 22 |
| | (9 | ) | | 54 |
|
Total revenues | $ | 1,082 |
| | $ | 566 |
| | $ | 2,467 |
| | $ | 1,833 |
| | $ | 335 |
| | $ | 22 |
| | $ | (211 | ) | | $ | 6,094 |
|
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2018 |
Revenues from contracts with customers: | | | | | | | | | | | | | | | |
Service revenues: | | | | | | | | | | | | | | | |
Non-regulated gathering, processing, transportation, and storage: | | | | | | | | | | | | | | | |
Monetary consideration | $ | 626 |
| | $ | 404 |
| | $ | 1,231 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | (55 | ) | | $ | 2,208 |
|
Commodity consideration | 14 |
| | 45 |
| | 257 |
| | — |
| | — |
| | — |
| | — |
| | 316 |
|
Regulated interstate natural gas transportation and storage | — |
| | — |
| | — |
| | 1,368 |
| | 330 |
| | — |
| | (2 | ) | | 1,696 |
|
Other | 65 |
| | 12 |
| | 35 |
| | 1 |
| | — |
| | — |
| | (10 | ) | | 103 |
|
Total service revenues | 705 |
| | 461 |
| | 1,523 |
| | 1,369 |
| | 330 |
| | 2 |
| | (67 | ) | | 4,323 |
|
Product Sales: | | | | | | | | | | | | | | | |
NGL and natural gas | 242 |
| | 232 |
| | 1,799 |
| | 96 |
| | — |
| | — |
| | (285 | ) | | 2,084 |
|
Other | — |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | (4 | ) | | 16 |
|
Total product sales | 242 |
| | 232 |
| | 1,819 |
| | 96 |
| | — |
| | — |
| | (289 | ) | | 2,100 |
|
Total revenues from contracts with customers | 947 |
| | 693 |
| | 3,342 |
| | 1,465 |
| | 330 |
| | 2 |
| | (356 | ) | | 6,423 |
|
Other revenues (1) | 16 |
| | 14 |
| | 6 |
| | 8 |
| | — |
| | 24 |
| | (9 | ) | | 59 |
|
Total revenues | $ | 963 |
| | $ | 707 |
| | $ | 3,348 |
| | $ | 1,473 |
| | $ | 330 |
| | $ | 26 |
| | $ | (365 | ) | | $ | 6,482 |
|
______________________________
Contract Assets
The following table presents a reconciliation of our contract assets:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Balance at beginning of period | $ | 17 |
| | $ | 39 |
| | $ | 4 |
| | $ | 4 |
|
Revenue recognized in excess of amounts invoiced | 14 |
| | 17 |
| | 53 |
| | 53 |
|
Minimum volume commitments invoiced | — |
| | — |
| | (26 | ) | | (1 | ) |
Balance at end of period | $ | 31 |
| | $ | 56 |
| | $ | 31 |
| | $ | 56 |
|
Contract Liabilities
The following table presents a reconciliation of our contract liabilities:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Balance at beginning of period | $ | 1,331 |
| | $ | 1,535 |
| | $ | 1,397 |
| | $ | 1,596 |
|
Payments received and deferred | 12 |
| | 58 |
| | 138 |
| | 269 |
|
Deconsolidation of Jackalope interest (Note 5) | — |
| | — |
| | — |
| | (52 | ) |
Significant financing component | 3 |
| | 4 |
| | 10 |
| | 11 |
|
Recognized in revenue | (77 | ) | | (112 | ) | | (276 | ) | | (339 | ) |
Balance at end of period | $ | 1,269 |
| | $ | 1,485 |
| | $ | 1,269 |
| | $ | 1,485 |
|
Remaining Performance Obligations
Remaining performance obligations primarily include reservation charges on contracted capacity for our gas pipeline firm transportation contracts with customers, storage capacity contracts, long-term contracts containing minimum volume commitments associated with our midstream businesses, and fixed payments associated with offshore production handling. For our interstate natural gas pipeline businesses, remaining performance obligations reflect the rates for such services in our current Federal Energy Regulatory Commission (FERC) tariffs for the life of the related contracts; however, these rates may change based on future tariffs approved by the FERC and the amount and timing of these changes are not currently known.
Our remaining performance obligations exclude variable consideration, including contracts with variable consideration for which we have elected the practical expedient for consideration recognized in revenue as billed. Certain of our contracts contain evergreen and other renewal provisions for periods beyond the initial term of the contract. The remaining performance obligation amounts as of September 30, 2019, do not consider potential future performance obligations for which the renewal has not been exercised and excludes contracts with customers for which the underlying facilities have not received FERC authorization to be placed into service. Consideration received prior to September 30, 2019, that will be recognized in future periods is also excluded from our remaining performance obligations and is instead reflected in contract liabilities.
The following table presents the amount of the contract liabilities balance as of September 30, 2019, expected to be recognized as revenue as performance obligations are satisfied and the transaction price allocated to the remaining performance obligations under certain contracts as of September 30, 2019.
|
| | | | | | | |
| Contract Liabilities | | Remaining Performance Obligations |
| (Millions) |
2019 (remainder) | $ | 70 |
| | $ | 762 |
|
2020 | 167 |
| | 3,028 |
|
2021 | 126 |
| | 2,873 |
|
2022 | 112 |
| | 2,705 |
|
2023 | 103 |
| | 2,244 |
|
Thereafter | 691 |
| | 19,840 |
|
Total | $ | 1,269 |
| | $ | 31,452 |
|
Accounts Receivable
The following is a summary of our Trade accounts and other receivables:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (Millions) |
Accounts receivable related to revenues from contracts with customers | $ | 791 |
| | $ | 858 |
|
Other accounts receivable | 84 |
| | 134 |
|
Total reflected in Trade accounts and other receivables | $ | 875 |
| | $ | 992 |
|
Note 4 – Variable Interest Entities
Consolidated VIEs
As of September 30, 2019, we consolidate the following variable interest entities (VIEs):
Gulfstar One
We own a 51 percent interest in Gulfstar One, a subsidiary that, due to certain risk-sharing provisions in its customer contracts, is a VIE. Gulfstar One includes a proprietary floating-production system, Gulfstar FPS, and associated pipelines which provide production handling and gathering services in the eastern deepwater Gulf of Mexico. We are the primary beneficiary because we have the power to direct the activities that most significantly impact Gulfstar One’s economic performance.
Constitution
We own a 41 percent interest in Constitution, a subsidiary that, due to shipper fixed-payment commitments under its long-term firm transportation contracts, is a VIE. We are the primary beneficiary because we have the power to direct the activities that most significantly impact Constitution’s economic performance. We, as operator of Constitution, are responsible for constructing the proposed pipeline, which will extend from Susquehanna County, Pennsylvania, to the Iroquois Gas Transmission and the Tennessee Gas Pipeline systems in New York. While we previously estimated the total remaining cost of the project to be approximately $740 million, this amount is expected to increase and the revised estimate is being developed. The project costs would be funded with capital contributions from us and the other equity partners on a proportional basis.
In December 2014, Constitution received approval from the FERC to construct and operate its proposed pipeline. However, in April 2016, the New York State Department of Environmental Conservation (NYSDEC) denied the necessary water quality certification under Section 401 of the Clean Water Act for the New York portion of the pipeline. In May 2016, Constitution appealed the NYSDEC’s denial of the Section 401 certification to the United States Court of Appeals for the Second Circuit, but in August 2017 the court issued a decision upholding NYSDEC’s denial. Constitution filed a petition for rehearing with the Second Circuit Court of Appeals, but in October 2017 the court denied our petition.
In October 2017, we filed a petition for declaratory order requesting the FERC to find that, by operation of law, the Section 401 certification requirement for the New York State portion of Constitution’s pipeline project was waived due to the failure by the NYSDEC to act on Constitution’s Section 401 application within a reasonable period of time as required by the express terms of such statute. By orders issued in January 2018 and July 2018, the FERC denied our petition, finding that Section 401 provides that a state waives certification only when it does not act on an application within one year from the date of the application.
Thereafter, we petitioned the D.C. Circuit for review of the FERC’s decision. In November 2018, the D.C. Circuit granted a motion filed by the FERC to hold our appeal in abeyance pending a decision by the court in the Hoopa Valley Tribe v. FERC case. In January 2019, the D.C. Circuit issued its decision in Hoopa Valley Tribe, finding that the applicant’s withdrawal and resubmission of a Clean Water Act Section 401 water quality certification request did not trigger new statutory periods of review for the state agencies, which resulted in the state agencies waiving their Section 401 authority regarding the hydropower project in question. As a result of the Hoopa Valley Tribe decision, the FERC filed a motion for voluntary remand of our appeal, and in February 2019, the D.C. Circuit granted the motion, sending our waiver case back to the FERC to determine whether or not NYSDEC waived its authority under Section 401.
On August 28, 2019, the FERC issued an order finding that NYSDEC waived its water quality certification authority under Section 401 with respect to Constitution. The FERC interpreted the Hoopa Valley Tribe decision to stand for the general principle that where an applicant withdraws and resubmits an application for water quality certification for the purpose of avoiding Section 401’s one-year time limit, and the state agency does not act within one year of the receipt of the original application, the state agency has “failed or refused to act under Section 401” and, therefore, has waived its Section 401 authority.
The equity partners are evaluating the next steps in connection with advancing the project.
At September 30, 2019, capitalized project costs total $376 million, of which we have funded our proportionate share, and are included within Property, plant, and equipment in the Consolidated Balance Sheet. Beginning in April 2016, we discontinued capitalization of development costs related to this project. It is possible that we could incur certain supplier-related costs in the event of a continued prolonged delay or termination of the project.
Cardinal
We own a 66 percent interest in Cardinal, a subsidiary that provides gathering services for the Utica Shale region and is a VIE due to certain risks shared with customers. We are the primary beneficiary because we have the power to direct the activities that most significantly impact Cardinal’s economic performance. Future expansion activity is expected to be funded with capital contributions from us and the other equity partner on a proportional basis.
Northeast JV
As a result of the June 2019 sale of a 35 percent interest in the Northeast JV (see Note 2 – Acquisitions), we now own a 65 percent interest in the Northeast JV, a subsidiary that is a VIE due to certain of our voting rights being disproportionate to our obligation to absorb losses and substantially all of the Northeast JV’s activities being performed on our behalf. We are the primary beneficiary because we have the power to direct the activities that most significantly impact the Northeast JV’s economic performance. The Northeast JV provides midstream services for producers in the Marcellus Shale and Utica Shale regions. Future expansion activity is expected to be funded with capital contributions from us and the other equity partner on a proportional basis.
The following table presents amounts included in our Consolidated Balance Sheet that are only for the use or obligation of our consolidated VIEs:
|
| | | | | | | |
| September 30, 2019 |
| December 31, 2018 |
| (Millions) |
Assets (liabilities): |
|
|
|
Cash and cash equivalents | $ | 90 |
| | $ | 33 |
|
Trade accounts and other receivables – net | 152 |
| | 62 |
|
Other current assets and deferred charges | 5 |
| | 2 |
|
Property, plant, and equipment – net | 6,167 |
| | 2,363 |
|
Intangible assets – net of accumulated amortization | 2,697 |
| | 1,177 |
|
Regulatory assets, deferred charges, and other | 13 |
| | — |
|
Accounts payable | (54 | ) | | (15 | ) |
Accrued liabilities | (100 | ) | | (115 | ) |
Regulatory liabilities, deferred income, and other | (268 | ) | | (264 | ) |
Nonconsolidated VIEs
Jackalope
At December 31, 2018, we owned a 50 percent interest in Jackalope, which provides gathering and processing services for the Powder River basin and was a VIE due to certain risks shared with customers. In April 2019, we sold our interest in Jackalope for $485 million in cash (see Note 5 – Investing Activities).
Brazos Permian II
We own a 15 percent interest in Brazos Permian II, which provides gathering and processing services in the Delaware basin and is a VIE due primarily to our limited participating rights as the minority equity holder. At September 30, 2019, the carrying value of our equity-method investment in Brazos Permian II was $197 million. Our maximum exposure to loss is limited to the carrying value of our investment.
Note 5 – Investing Activities
The following table presents certain items reflected in Other investing income (loss) – net in the Consolidated Statement of Income:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Impairment of equity-method investments (Note 13) | $ | (114 | ) | | $ | — |
| | $ | (186 | ) | | $ | — |
|
Gain (loss) on deconsolidation of businesses | — |
| | — |
| | (2 | ) | | 62 |
|
Gain on disposition of equity-method investments | — |
| | — |
| | 122 |
| | — |
|
Other | 7 |
| | 2 |
| | 12 |
| | 12 |
|
Other investing income (loss) – net | $ | (107 | ) | | $ | 2 |
| | $ | (54 | ) | | $ | 74 |
|
Jackalope Deconsolidation
During the second quarter of 2018, we deconsolidated our 50 percent interest in Jackalope. We recorded our interest in Jackalope as an equity-method investment at its estimated fair value, resulting in a deconsolidation gain of
$62 million. We estimated the fair value of our interest to be $310 million using an income approach based on expected future cash flows and an appropriate discount rate (a Level 3 measurement within the fair value hierarchy). The determination of expected future cash flows involved significant assumptions regarding gathering and processing volumes and related capital spending. A 10.9 percent discount rate was utilized and reflected our estimate of the cost of capital as impacted by market conditions and risks associated with the underlying business. The deconsolidated carrying value of the net assets of Jackalope included $47 million of goodwill.
Sale of Jackalope
In April 2019, we sold our 50 percent equity-method interest in Jackalope for $485 million in cash, resulting in a gain on the disposition of $122 million.
Note 6 – Other Income and Expenses
The following table presents, by segment, certain other items included in our Consolidated Statement of Income:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Selling, general, and administrative expenses | | | | | | | |
Other | | | | | | | |
Charitable contribution of preferred stock to The Williams Companies Foundation, Inc. (see Note 12) | $ | — |
| | $ | 35 |
| | $ | — |
| | $ | 35 |
|
WPZ Merger costs | — |
| | 15 |
| | — |
| | 19 |
|
| | | | | | | |
Other (income) expense – net within Costs and expenses | | | | | | | |
Atlantic-Gulf | | | | | | | |
Amortization of regulatory assets associated with asset retirement obligations | 1 |
| | 8 |
| | 17 |
| | 24 |
|
Net accrual (amortization) of regulatory liability related to overcollection of certain employee expenses | (9 | ) | | 5 |
| | (11 | ) | | 16 |
|
Adjustments to regulatory liabilities related to tax reform | — |
| | — |
| | — |
| | (10 | ) |
Amortization of regulatory liability associated with tax reform | (12 | ) | | — |
| | (19 | ) | | — |
|
Reversal of expenditures previously capitalized | — |
| | — |
| | 10 |
| | — |
|
Gain on asset retirement | — |
| | (10 | ) | | — |
| | (10 | ) |
| | | | | | | |
West | | | | | | | |
Adjustments to regulatory liabilities related to tax reform | — |
| | — |
| | — |
| | (7 | ) |
Regulatory charge per approved rates related to tax reform | 6 |
| | 6 |
| | 18 |
| | 18 |
|
Charge for regulatory liability associated with the decrease in Northwest Pipeline’s estimated deferred state income tax rates following WPZ Merger | — |
| | 12 |
| | — |
| | 12 |
|
| | | | | | | |
Other | | | | | | | |
Change to (benefit of) regulatory asset associated with Transco’s estimated deferred state income tax rate following WPZ Merger | — |
| | (37 | ) | | 12 |
| | (37 | ) |
| | | | | | | |
Other income (expense) – net below Operating income (loss) | | | | | | | |
Atlantic-Gulf | | | | | | | |
Allowance for equity funds used during construction | 9 |
| | 32 |
| | 21 |
| | 78 |
|
| | | | | | | |
Other | | | | | | | |
Income associated with a regulatory asset related to deferred taxes on equity funds used during construction | 3 |
| | 19 |
| | 7 |
| | 28 |
|
Net loss associated with early retirement of debt | — |
| | — |
| | — |
| | (7 | ) |
In conjunction with a previously announced organizational realignment and considering asset sales in recent years, we are evaluating our cost structure and have implemented a voluntary separation program (VSP) for certain eligible employees. Operating and maintenance expenses for the three and nine months ended September 30, 2019, reflect charges of $7 million and $30 million, respectively, and Selling, general, and administrative expenses for the three and
nine months ended September 30, 2019, reflect charges of $3 million and $23 million, respectively, for estimated severance and related costs, primarily associated with the VSP. The severance and related costs by segment are as follows:
|
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 |
| (Millions) |
Northeast G&P | $ | (3 | ) | | $ | 7 |
|
Atlantic-Gulf | 11 |
| | 30 |
|
West | 2 |
| | 16 |
|
Total | $ | 10 |
| | $ | 53 |
|
Note 7 – Provision (Benefit) for Income Taxes
The Provision (benefit) for income taxes includes:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Current: | | | | | | | |
Federal | $ | (10 | ) | | $ | (19 | ) | | $ | (25 | ) | | $ | (55 | ) |
State | — |
| | — |
| | — |
| | 1 |
|
Foreign | 1 |
| | — |
| | 1 |
| | — |
|
| (9 | ) | | (19 | ) | | (24 | ) | | (54 | ) |
Deferred: | | | | | | | |
Federal | 73 |
| | 188 |
| | 225 |
| | 312 |
|
State | 13 |
| | 21 |
| | 43 |
| | 39 |
|
| 86 |
| | 209 |
| | 268 |
| | 351 |
|
Provision (benefit) for income taxes | $ | 77 |
| | $ | 190 |
| | $ | 244 |
| | $ | 297 |
|
The effective income tax rates for the total provision for the three and nine months ended September 30, 2019, are greater than the federal statutory rate, primarily due to the effect of state income taxes.
The effective income tax rates for the total provision for the three and nine months ended September 30, 2018, are higher than the federal statutory rate primarily due to the effect of state income taxes and a $105 million valuation allowance associated with foreign tax credits, that expire between 2024 and 2027. This is partially offset by the impact of the allocation of income to nontaxable noncontrolling interests. The state income tax provisions include a $38 million provision related to an increase in the deferred state income tax rate (net of federal benefit) partially offset by a net decrease in valuation allowances of $31 million on state net operating losses, both primarily driven by the impact that the completion of the WPZ Merger (see Note 1 – General, Description of Business, and Basis of Presentation) had on income allocation for state tax purposes.
A valuation allowance for deferred tax assets, including foreign tax credits, is recognized when it is more likely than not that some, or all, of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our sources of future taxable income, including available tax planning strategies, to determine whether a valuation allowance is required. The completion of the WPZ Merger decreased our deferred income tax liability by $1.829 billion at September 30, 2018. Increased tax depreciation from the additional tax basis will reduce taxable income in future years and may limit our ability to realize the full benefit of certain short-lived deferred tax assets.
During the next 12 months, we do not expect ultimate resolution of any unrecognized tax benefit associated with domestic or international matters to have a material impact on our unrecognized tax benefit position.
Note 8 – Earnings (Loss) Per Common Share |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Dollars in millions, except per-share amounts; shares in thousands) |
Net income (loss) available to common stockholders | $ | 220 |
| | $ | 129 |
| | $ | 724 |
| | $ | 416 |
|
Basic weighted-average shares | 1,212,270 |
| | 1,023,587 |
| | 1,211,938 |
| | 893,706 |
|
Effect of dilutive securities: | | | | | | | |
Nonvested restricted stock units | 1,790 |
| | 2,387 |
| | 1,809 |
| | 2,102 |
|
Stock options | 105 |
| | 530 |
| | 196 |
| | 514 |
|
Diluted weighted-average shares | 1,214,165 |
| | 1,026,504 |
| | 1,213,943 |
| | 896,322 |
|
Earnings (loss) per common share: | | | | | | | |
Basic | $ | .18 |
| | $ | .13 |
| | $ | .60 |
| | $ | .47 |
|
Diluted | $ | .18 |
| | $ | .13 |
| | $ | .60 |
| | $ | .46 |
|
Note 9 – Employee Benefit Plans
Net periodic benefit cost (credit) is as follows: |
| | | | | | | | | | | | | | | |
| Pension Benefits |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| (Millions) |
Components of net periodic benefit cost (credit): |
|
|
|
|
|
|
|
Service cost | $ | 11 |
|
| $ | 12 |
|
| $ | 33 |
|
| $ | 37 |
|
Interest cost | 13 |
|
| 12 |
|
| 38 |
|
| 35 |
|
Expected return on plan assets | (15 | ) |
| (16 | ) |
| (46 | ) |
| (47 | ) |
Amortization of net actuarial loss | 3 |
|
| 6 |
|
| 11 |
|
| 17 |
|
Net actuarial loss from settlements | 1 |
|
| 1 |
|
| 1 |
|
| 2 |
|
Net periodic benefit cost (credit) | $ | 13 |
|
| $ | 15 |
|
| $ | 37 |
|
| $ | 44 |
|
|
| | | | | | | | | | | | | | | |
| Other Postretirement Benefits |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Components of net periodic benefit cost (credit): | | | | | | | |
Service cost | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 2 |
| | 1 |
| | 6 |
| | 5 |
|
Expected return on plan assets | (3 | ) | | (2 | ) | | (8 | ) | | (8 | ) |
Amortization of prior service credit | — |
| | — |
| | — |
| | (1 | ) |
Reclassification to regulatory liability | — |
| | — |
| | 1 |
| | 1 |
|
Net periodic benefit cost (credit) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) |
The components of Net periodic benefit cost (credit) other than the Service cost component are included in Other income (expense) – net below Operating income (loss) in the Consolidated Statement of Income.
Amortization of prior service credit included in Net periodic benefit cost (credit) for our other postretirement benefit plans associated with Transco and Northwest Pipeline is recorded to regulatory assets/liabilities instead of Other comprehensive income (loss). The amount of Amortization of prior service credit recognized in regulatory liabilities was $1 million for the nine months ended September 30, 2018.
During the nine months ended September 30, 2019, we contributed $63 million to our pension plans and $4 million to our other postretirement benefit plans. We presently anticipate making additional contributions of approximately $1 million to our pension plans and approximately $1 million to our other postretirement benefit plans in the remainder of 2019.
Note 10 – Leases
We are a lessee through noncancellable lease agreements for property and equipment consisting primarily of buildings, land, vehicles, and equipment used in both our operations and administrative functions. We recognize a lease liability with an offsetting right-of-use asset in our Consolidated Balance Sheet for operating leases based on the present value of the future lease payments. As an accounting policy, we have elected to combine lease and nonlease components for all classes of leased assets in our calculation of the lease liability and the offsetting right-of-use asset.
Our lease agreements require both fixed and variable periodic payments, with initial terms typically ranging from one year to 15 years, but a certain land lease has a term of 108 years. Payment provisions in certain of our lease agreements contain escalation factors which may be based on stated rates or a change in a published index at a future time. The amount by which a lease escalates based on the change in a published index, which is not known at lease commencement, is considered a variable payment and is not included in the present value of the future lease payments, which only includes those that are stated or can be calculated based on the lease agreement at lease commencement. In addition to the noncancellable periods, many of our lease agreements provide for one or more extensions of the lease agreement for periods ranging from one year in length to an indefinite number of times following the specified contract term. Other lease agreements provide for extension terms that allow us to utilize the identified leased asset for an indefinite period of time so long as the asset continues to be utilized in our operations. In consideration of these renewal features, we assess the term of the lease agreements, which includes using judgment in the determination of which renewal periods and termination provisions, when at our sole election, will be reasonably certain of being exercised. Periods after the initial term or extension terms that allow for either party to the lease to cancel the lease are not considered in the assessment of the lease term. Additionally, we have elected to exclude leases with an original term of one year or less, including renewal periods, from the calculation of the lease liability and the offsetting right-of-use asset.
We used judgment in determining the discount rate upon which the present value of the future lease payments is determined. This rate is based on a collateralized interest rate corresponding to the term of the lease agreement using company, industry, and market information available.
When permitted under our lease agreements, we may sublease certain unused office space for fixed periods that could extend up to the length of the original lease agreement.
|
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 |
| (Millions) |
Lease Cost: | | | |
Operating lease cost | $ | 10 |
| | $ | 31 |
|
Short-term lease cost | — |
| | — |
|
Variable lease cost | 7 |
| | 21 |
|
Sublease income | — |
| | (1 | ) |
Total lease cost | $ | 17 |
| | $ | 51 |
|
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 10 |
| | $ | 30 |
|
| | September 30, 2019 |
| | (Millions) |
Other Information: | | |
Right-of-use asset (included in Regulatory assets, deferred charges, and other in our Consolidated Balance Sheet) | | $ | 213 |
|
Operating lease liabilities: | | |
Current (included in Accrued liabilities in our Consolidated Balance Sheet) | | $ | 23 |
|
Noncurrent (included in Regulatory liabilities, deferred income, and other in our Consolidated Balance Sheet) | | $ | 190 |
|
Weighted-average remaining lease term – operating leases (years) | | 13 |
Weighted-average discount rate – operating leases | | 4.60% |
As of September 30, 2019, the following table represents our operating lease maturities, including renewal provisions that we have assessed as being reasonably certain of exercise, for each of the years ended December 31:
|
| | | |
| (Millions) |
2019 (remainder) | $ | 8 |
|
2020 | 32 |
|
2021 | 33 |
|
2022 | 27 |
|
2023 | 21 |
|
Thereafter | 171 |
|
Total future lease payments | 292 |
|
Less amount representing interest | 79 |
|
Total obligations under operating leases | $ | 213 |
|
We are the lessor to certain lease agreements for office space in our headquarters building, which are insignificant to our financial statements.
Note 11 – Debt and Banking Arrangements
Long-Term Debt
Retirements
We retired approximately $32 million of 7.625 percent senior unsecured notes that matured on July 15, 2019.
Commercial Paper Program
At September 30, 2019, no commercial paper was outstanding under our $4 billion commercial paper program.
Credit Facilities
|
| | | | | | | |
| September 30, 2019 |
| Stated Capacity | | Outstanding |
| (Millions) |
| | | |
Long-term credit facility (1) | $ | 4,500 |
| | $ | — |
|
Letters of credit under certain bilateral bank agreements | | | 14 |
|
Note 12 – Stockholders’ Equity
Issuance of Preferred Shares
In July 2018, through a wholly owned subsidiary, we contributed 35,000 shares of newly issued Series B Non-Voting Perpetual Preferred Stock (Preferred Stock) to The Williams Companies Foundation, Inc. (a not-for-profit corporation) for use in future charitable and nonprofit causes. The charitable contribution of Preferred Stock was recorded as an expense in the third quarter of 2018. The Preferred Stock was issued for an aggregate value of $35 million and pays non-cumulative quarterly cash dividends when, as and if declared, at a rate of 7.25 percent per year. Our certificate of incorporation authorizes 30 million shares of Preferred Stock, $1 par value per shares.
AOCI
The following table presents the changes in AOCI by component, net of income taxes:
|
| | | | | | | | | | | | | | | |
| Cash Flow Hedges | | Foreign Currency Translation | | Pension and Other Postretirement Benefits | | Total |
| (Millions) |
Balance at December 31, 2018 | $ | (2 | ) | | $ | (1 | ) | | $ | (267 | ) | | $ | (270 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | — |
| | (5 | ) | | (5 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 9 |
| | 9 |
|
Other comprehensive income (loss) | — |
| | — |
| | 4 |
| | 4 |
|
Balance at September 30, 2019 | $ | (2 | ) | | $ | (1 | ) | | $ | (263 | ) | | $ | (266 | ) |
Reclassifications out of AOCI are presented in the following table by component for the nine months ended September 30, 2019:
|
| | | | | | |
Component | | Reclassifications | | Classification |
| | (Millions) | | |
Pension and other postretirement benefits: | | | | |
Amortization of actuarial (gain) loss and net actuarial loss from settlements included in net periodic benefit cost (credit) | | $ | 12 |
| | Note 9 – Employee Benefit Plans |
Income tax benefit | | (3 | ) | | Provision (benefit) for income taxes |
Reclassifications during the period | | $ | 9 |
| | |
Note 13 – Fair Value Measurements and Guarantees
The following table presents, by level within the fair value hierarchy, certain of our financial assets and liabilities. The carrying values of cash and cash equivalents, accounts receivable, margin deposits, and accounts payable approximate fair value because of the short-term nature of these instruments. Therefore, these assets and liabilities are not presented in the following table.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using |
| | Carrying Amount | | Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (Millions) |
Assets (liabilities) at September 30, 2019: | | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | | |
ARO Trust investments | | $ | 187 |
| | $ | 187 |
| | $ | 187 |
| | $ | — |
| | $ | — |
|
Energy derivatives assets not designated as hedging instruments | | 4 |
| | 4 |
| | 4 |
| | — |
| | — |
|
Energy derivatives liabilities not designated as hedging instruments | | (5 | ) | | (5 | ) | | (2 | ) | | — |
| | (3 | ) |
Additional disclosures: | | | | | | | | | | |
Long-term debt, including current portion | | (22,257 | ) | | (25,234 | ) | | — |
| | (25,234 | ) | | — |
|
Guarantees | | (42 | ) | | (29 | ) | | — |
| | (13 | ) | | (16 | ) |
| | | | | | | | | | |
Assets (liabilities) at December 31, 2018: | | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | | |
ARO Trust investments | | $ | 150 |
| | $ | 150 |
| | $ | 150 |
| | $ | — |
| | $ | — |
|
Energy derivatives assets not designated as hedging instruments | | 3 |
| | 3 |
| | 3 |
| | — |
| | — |
|
Energy derivatives liabilities not designated as hedging instruments | | (7 | ) | | (7 | ) | | (4 | ) | | — |
| | (3 | ) |
Additional disclosures: | | | | | | | | | | |
Long-term debt, including current portion | | (22,414 | ) | | (23,330 | ) | | — |
| | (23,330 | ) | | — |
|
Guarantees | | (43 | ) | | (30 | ) | | — |
| | (14 | ) | | (16 | ) |
Fair Value Methods
We use the following methods and assumptions in estimating the fair value of our financial instruments:
Assets and liabilities measured at fair value on a recurring basis
ARO Trust investments: Transco deposits a portion of its collected rates, pursuant to its rate case settlement, into an external trust (ARO Trust) that is specifically designated to fund future asset retirement obligations (ARO). The ARO Trust invests in a portfolio of actively traded mutual funds that are measured at fair value on a recurring basis based on quoted prices in an active market and is reported in Regulatory assets, deferred charges, and other in the Consolidated Balance Sheet. Both realized and unrealized gains and losses are ultimately recorded as regulatory assets or liabilities.
Energy derivatives: Energy derivatives include commodity-based exchange-traded contracts and over-the-counter contracts, which consist of physical forwards, futures, and swaps that are measured at fair value on a recurring basis. The fair value amounts are presented on a gross basis and do not reflect the netting of asset and liability positions
permitted under the terms of our master netting arrangements. Further, the amounts do not include cash held on deposit in margin accounts that we have received or remitted to collateralize certain derivative positions. Energy derivatives assets are reported in Other current assets and deferred charges and Regulatory assets, deferred charges, and other in the Consolidated Balance Sheet. Energy derivatives liabilities are reported in Accrued liabilities and Regulatory liabilities, deferred income, and other in the Consolidated Balance Sheet.
Reclassifications of fair value between Level 1, Level 2, and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. No transfers between Level 1 and Level 2 occurred during the nine months ended September 30, 2019 or 2018.
Additional fair value disclosures
Long-term debt, including current portion: The disclosed fair value of our long-term debt is determined primarily by a market approach using broker quoted indicative period-end bond prices. The quoted prices are based on observable transactions in less active markets for our debt or similar instruments. The fair values of the financing obligations associated with our Dalton lateral and Atlantic Sunrise projects, which are included within long-term debt, were determined using an income approach.
Guarantees: Guarantees primarily consist of a guarantee we have provided in the event of nonpayment by our previously owned communications subsidiary, Williams Communications Group (WilTel), on a lease performance obligation that extends through 2042. Guarantees also include an indemnification related to a disposed operation.
To estimate the fair value of the WilTel guarantee, an estimated default rate is applied to the sum of the future contractual lease payments using an income approach. The estimated default rate is determined by obtaining the average cumulative issuer-weighted corporate default rate based on the credit rating of WilTel’s current owner and the term of the underlying obligation. The default rate is published by Moody’s Investors Service. The carrying value of the WilTel guarantee is reported in Accrued liabilities in the Consolidated Balance Sheet. The maximum potential undiscounted exposure is approximately $28 million at September 30, 2019. Our exposure declines systematically through the remaining term of WilTel’s obligation.
The fair value of the guarantee associated with the indemnification related to a disposed operation was estimated using an income approach that considered probability-weighted scenarios of potential levels of future performance. The terms of the indemnification do not limit the maximum potential future payments associated with the guarantee. The carrying value of this guarantee is reported in Regulatory liabilities, deferred income, and other in the Consolidated Balance Sheet.
We are required by our revolving credit agreement to indemnify lenders for certain taxes required to be withheld from payments due to the lenders and for certain tax payments made by the lenders. The maximum potential amount of future payments under these indemnifications is based on the related borrowings and such future payments cannot currently be determined. These indemnifications generally continue indefinitely unless limited by the underlying tax regulations and have no carrying value. We have never been called upon to perform under these indemnifications and have no current expectation of a future claim.
Nonrecurring fair value measurements
The following table presents impairments of assets and equity-method investments associated with certain nonrecurring fair value measurements within Level 3 of the fair value hierarchy, except as specifically noted.
|
| | | | | | | | | | | | | | | | |
| | | | | | | | Impairments |
| | | | | | | | Nine Months Ended September 30, |
| | Segment | | Date of Measurement | | Fair Value | | 2019 | | 2018 |
| | | | | | (Millions) |
Impairment of certain assets: | | | | | | | | | | |
Certain gathering assets (1) | | West | | June 30, 2019 | | $ | 40 |
| | $ | 59 |
| | |
Certain idle gathering assets (2) | | West | | March 31, 2019 | | — |
| | 12 |
| | |
Certain idle pipeline assets (3) | | Other | | June 30, 2018 | | 25 |
| |
| | $ | 66 |
|
Other impairments and write-downs | | | | | | | | 5 |
| | — |
|
Impairment of certain assets | | | | | | | | $ | 76 |
| | $ | 66 |
|
Impairment of equity-method investments: | | | | | | | | | | |
Laurel Mountain (4) | | Northeast G&P | | September 30, 2019 | | $ | 242 |
| | $ | 79 |
| | |
Appalachia Midstream Investments (5) | | Northeast G&P | | September 30, 2019 | | 102 |
| | 17 |
| | |
Pennant (6) | | Northeast G&P | | August 31, 2019 | | 11 |
| | 17 |
| | |
UEOM (7) | | Northeast G&P | | March 17, 2019 | | 1,210 |
| | 74 |
| | |
Other | | | | | | | | (1 | ) | | |
Impairment of equity-method investments | | | | | | | | $ | 186 |
| | |
_______________
Note 14 – Contingent Liabilities
Reporting of Natural Gas-Related Information to Trade Publications
Direct and indirect purchasers of natural gas in various states filed individual and class actions against us, our former affiliate WPX Energy, Inc. (WPX) and its subsidiaries, and others alleging the manipulation of published gas price indices and seeking unspecified amounts of damages. Such actions were transferred to the Nevada federal district court for consolidation of discovery and pre-trial issues. We have agreed to indemnify WPX and its subsidiaries related to this matter.
In the individual action, filed by Farmland Industries Inc. (Farmland), the court issued an order on May 24, 2016, granting one of our co-defendant’s motion for summary judgment as to Farmland’s claims. On January 5, 2017, the court extended such ruling to us, entering final judgment in our favor. Farmland appealed. On March 27, 2018, the appellate court reversed the district court’s grant of summary judgment, and on April 10, 2018, the defendants filed a petition for rehearing with the appellate court, which was denied on May 9, 2018. The case was remanded to the Nevada federal district court and subsequently has been remanded to its originally filed court, the Kansas federal district court.
In the putative class actions, on March 30, 2017, the court issued an order denying the plaintiffs’ motions for class certification. On June 13, 2017, the United States Court of Appeals for the Ninth Circuit granted the plaintiffs’ petition for permission to appeal the order. On August 6, 2018, the Ninth Circuit reversed the order denying class certification and remanded the case to the Nevada federal district court.
We reached an agreement to settle two of the actions, and on April 22, 2019, the Nevada federal district court preliminarily approved the settlements, which are on behalf of Kansas and Missouri class members. The final fairness hearing on the settlement occurred August 5, 2019, and a final judgment of dismissal with prejudice was entered the same day.
Two putative class actions remain unresolved, and they have been remanded to their originally filed court, the Wisconsin federal district court.
Because of the uncertainty around the remaining pending unresolved issues, we cannot reasonably estimate a range of potential exposure at this time. However, it is reasonably possible that the ultimate resolution of these actions and our related indemnification obligation could result in a potential loss that may be material to our results of operations. In connection with this indemnification, we have an accrued liability balance associated with this matter, and as a result, have exposure to future developments.
Alaska Refinery Contamination Litigation
We are involved in litigation arising from our ownership and operation of the North Pole Refinery in North Pole, Alaska, from 1980 until 2004, through our wholly owned subsidiaries, Williams Alaska Petroleum Inc. (WAPI) and MAPCO Inc. We sold the refinery to Flint Hills Resources Alaska, LLC (FHRA), a subsidiary of Koch Industries, Inc., in 2004. The litigation involves three cases, with filing dates ranging from 2010 to 2014. The actions arise from sulfolane contamination allegedly emanating from the refinery. A putative class action lawsuit was filed by James West in 2010 naming us, WAPI, and FHRA as defendants. We and FHRA filed claims against each other seeking, among other things, contractual indemnification alleging that the other party caused the sulfolane contamination. In 2011, we and FHRA
settled the claim with James West. Certain claims by FHRA against us were resolved by the Alaska Supreme Court in our favor. FHRA’s claims against us for contractual indemnification and statutory claims for damages related to off-site sulfolane remain pending. The State of Alaska filed its action in March 2014, seeking damages. The City of North Pole (North Pole) filed its lawsuit in November 2014, seeking past and future damages, as well as punitive damages. Both we and WAPI asserted counterclaims against the State of Alaska and North Pole, and cross-claims against FHRA. FHRA has also filed cross-claims against us.
The underlying factual basis and claims in the cases are similar and may duplicate exposure. As such, in February 2017, the three cases were consolidated into one action in state court containing the remaining claims from the James West case and those of the State of Alaska and North Pole. Several trial dates encompassing all three cases have been scheduled and stricken. Trial commenced in October 2019. Due to the ongoing assessment of the level and extent of sulfolane contamination, the lack of an articulated cleanup level for sulfolane, and the lack of a concrete remedial proposal and cost estimate, we are unable to estimate a range of exposure to the State of Alaska or North Pole at this time. We currently estimate that our reasonably possible loss exposure to FHRA could range from an insignificant amount up to $32 million, although uncertainties inherent in the litigation process, expert evaluations, and jury dynamics might cause our exposure to exceed that amount.
Independent of the litigation matter described in the preceding paragraphs, in 2013, the Alaska Department of Environmental Conservation indicated that it views FHRA and us as responsible parties, and that it intends to enter a compliance order to address the environmental remediation of sulfolane and other possible contaminants including cleanup work outside the refinery’s boundaries. To date, no compliance order has been issued. Due to the ongoing assessment of the level and extent of sulfolane contamination, the ultimate cost of remediation and division of costs among the potentially responsible parties, and the previously described separate litigation, we are unable to estimate a range of exposure at this time.
Royalty Matters
Certain of our customers, including one major customer, have been named in various lawsuits alleging underpayment of royalties and claiming, among other things, violations of anti-trust laws and the Racketeer Influenced and Corrupt Organizations Act. We have also been named as a defendant in certain of these cases filed in Pennsylvania based on allegations that we improperly participated with that major customer in causing the alleged royalty underpayments. We believe that the claims asserted are subject to indemnity obligations owed to us by that major customer. That customer has reached a tentative settlement to resolve substantially all Pennsylvania royalty cases pending, which settlement would apply to both the customer and us. The settlement as reported would not require any contribution from us.
Litigation Against Energy Transfer and Related Parties
On April 6, 2016, we filed suit in Delaware Chancery Court against Energy Transfer Equity, L.P. (Energy Transfer) and LE GP, LLC (the general partner for Energy Transfer) alleging willful and material breaches of the Agreement and Plan of Merger (ETE Merger Agreement) with Energy Transfer resulting from the private offering by Energy Transfer on March 8, 2016, of Series A Convertible Preferred Units (Special Offering) to certain Energy Transfer insiders and other accredited investors. The suit seeks, among other things, an injunction ordering the defendants to unwind the Special Offering and to specifically perform their obligations under the ETE Merger Agreement. On April 19, 2016, we filed an amended complaint seeking the same relief. On May 3, 2016, Energy Transfer and LE GP, LLC filed an answer and counterclaims.
On May 13, 2016, we filed a separate complaint in Delaware Chancery Court against Energy Transfer, LE GP, LLC, and the other Energy Transfer affiliates that are parties to the ETE Merger Agreement, alleging material breaches of the ETE Merger Agreement for failing to cooperate and use necessary efforts to obtain a tax opinion required under the ETE Merger Agreement (Tax Opinion) and for otherwise failing to use necessary efforts to consummate the merger under the ETE Merger Agreement wherein we would be merged with and into the newly formed Energy Transfer Corp LP (ETC) (ETC Merger). The suit sought, among other things, a declaratory judgment and injunction preventing Energy Transfer from terminating or otherwise avoiding its obligations under the ETE Merger Agreement due to any failure to obtain the Tax Opinion.
The Court of Chancery coordinated the Special Offering and Tax Opinion suits. On May 20, 2016, the Energy Transfer defendants filed amended affirmative defenses and verified counterclaims in the Special Offering and Tax Opinion suits, alleging certain breaches of the ETE Merger Agreement by us and seeking, among other things, a declaration that we were not entitled to specific performance, that Energy Transfer could terminate the ETC Merger, and that Energy Transfer is entitled to a $1.48 billion termination fee. On June 24, 2016, following a two-day trial, the court issued a Memorandum Opinion and Order denying our requested relief in the Tax Opinion suit. The court did not rule on the substance of our claims related to the Special Offering or on the substance of Energy Transfer’s counterclaims. On June 27, 2016, we filed an appeal of the court’s decision with the Supreme Court of Delaware, seeking reversal and remand to pursue damages. On March 23, 2017, the Supreme Court of Delaware affirmed the Court of Chancery’s ruling. On March 30, 2017, we filed a motion for reargument with the Supreme Court of Delaware, which was denied on April 5, 2017.
On September 16, 2016, we filed an amended complaint with the Court of Chancery seeking damages for breaches of the ETE Merger Agreement by defendants. On September 23, 2016, Energy Transfer filed a second amended and supplemental affirmative defenses and verified counterclaim with the Court of Chancery seeking, among other things, payment of the $1.48 billion termination fee due to our alleged breaches of the ETE Merger Agreement. On December 1, 2017, the court granted our motion to dismiss certain of Energy Transfer’s counterclaims, including its claim seeking payment of the $1.48 billion termination fee. On December 8, 2017, Energy Transfer filed a motion for reargument, which the Court of Chancery denied on April 16, 2018. The Court of Chancery previously scheduled trial for May 20 through May 24, 2019; the court struck the trial setting and has re-scheduled trial for June 8 through June 11 and June 15, 2020.
Former Olefins Business
SABIC Petrochemicals, the other interest owner in our former Geismar, Louisiana, olefins facility we sold in July 2017, is seeking recovery from us for losses it allegedly suffered, including its share of personal injury settlements in which it was a co-defendant, as well as amounts related to lost income, defense costs, and property damage associated with an explosion and fire at the plant in June 2013. Due to the complexity of the various claims and available defenses, we are unable to reliably estimate any reasonably possible losses at this time. Trial began on October 14, 2019, as scheduled, but on October 21, 2019, the Court declared a mistrial due to the conduct of an officer of SABIC Petrochemicals and SABIC Petrochemicals’ expert witness. No new trial date has been set. We believe that certain losses incurred arising directly from the explosion and fire will be covered by our general liability policy and any uninsured losses are not expected to be material.
Other
On August 31, 2018, Transco submitted to the FERC a general rate filing principally designed to recover increased costs and to comply with the terms of the settlement in its prior rate proceeding. The new rates became effective March 1, 2019, subject to refund and the outcome of a hearing. In October 2019, we reached an agreement on the terms of a settlement with the participants that would resolve all issues in the rate case without the need for a hearing. Final resolution of the rate case is subject to the filing of a formal stipulation and agreement with, and subsequent approval by, the FERC. As of September 30, 2019, we have provided a $131 million reserve for rate refunds which we believe is adequate for any refunds that may be required.
Environmental Matters
We are a participant in certain environmental activities in various stages including assessment studies, cleanup operations, and/or remedial processes at certain sites, some of which we currently do not own. We are monitoring these sites in a coordinated effort with other potentially responsible parties, the U.S. Environmental Protection Agency (EPA), or other governmental authorities. We are jointly and severally liable along with unrelated third parties in some of these activities and solely responsible in others. Certain of our subsidiaries have been identified as potentially responsible parties at various Superfund and state waste disposal sites. In addition, these subsidiaries have incurred, or are alleged to have incurred, various other hazardous materials removal or remediation obligations under environmental laws. As of September 30, 2019, we have accrued liabilities totaling $33 million for these matters, as discussed below. Estimates of the most likely costs of cleanup are generally based on completed assessment studies, preliminary results of studies,
or our experience with other similar cleanup operations. At September 30, 2019, certain assessment studies were still in process for which the ultimate outcome may yield different estimates of most likely costs. Therefore, the actual costs incurred will depend on the final amount, type, and extent of contamination discovered at these sites, the final cleanup standards mandated by the EPA or other governmental authorities, and other factors.
The EPA and various state regulatory agencies routinely promulgate and propose new rules and issue updated guidance to existing rules. These rulemakings include, but are not limited to, rules for reciprocating internal combustion engine maximum achievable control technology, air quality standards for one-hour nitrogen dioxide emissions, and volatile organic compound and methane new source performance standards impacting design and operation of storage vessels, pressure valves, and compressors. The EPA previously issued its rule regarding National Ambient Air Quality Standards for ground-level ozone. We are monitoring the rule’s implementation as it will trigger additional federal and state regulatory actions that may impact our operations. Implementation of the regulations is expected to result in impacts to our operations and increase the cost of additions to Property, plant, and equipment – net in the Consolidated Balance Sheet for both new and existing facilities in affected areas. We are unable to reasonably estimate the cost of additions that may be required to meet the regulations at this time due to uncertainty created by various legal challenges to these regulations and the need for further specific regulatory guidance.
Continuing operations
Our interstate gas pipelines are involved in remediation activities related to certain facilities and locations for polychlorinated biphenyls, mercury, and other hazardous substances. These activities have involved the EPA and various state environmental authorities, resulting in our identification as a potentially responsible party at various Superfund waste sites. At September 30, 2019, we have accrued liabilities of $5 million for these costs. We expect that these costs will be recoverable through rates.
We also accrue environmental remediation costs for natural gas underground storage facilities, primarily related to soil and groundwater contamination. At September 30, 2019, we have accrued liabilities totaling $8 million for these costs.
Former operations
We have potential obligations in connection with assets and businesses we no longer operate. These potential obligations include remediation activities at the direction of federal and state environmental authorities and the indemnification of the purchasers of certain of these assets and businesses for environmental and other liabilities existing at the time the sale was consummated. Our responsibilities relate to the operations of the assets and businesses described below.
| |
• | Former agricultural fertilizer and chemical operations and former retail petroleum and refining operations; |
| |
• | Former petroleum products and natural gas pipelines; |
| |
• | Former petroleum refining facilities; |
| |
• | Former exploration and production and mining operations; |
| |
• | Former electricity and natural gas marketing and trading operations. |
At September 30, 2019, we have accrued environmental liabilities of $20 million related to these matters.
Other Divestiture Indemnifications
Pursuant to various purchase and sale agreements relating to divested businesses and assets, we have indemnified certain purchasers against liabilities that they may incur with respect to the businesses and assets acquired from us. The indemnities provided to the purchasers are customary in sale transactions and are contingent upon the purchasers incurring liabilities that are not otherwise recoverable from third parties. The indemnities generally relate to breach of
warranties, tax, historic litigation, personal injury, property damage, environmental matters, right of way, and other representations that we have provided.
At September 30, 2019, other than as previously disclosed, we are not aware of any material claims against us involving the indemnities; thus, we do not expect any of the indemnities provided pursuant to the sales agreements to have a material impact on our future financial position. Any claim for indemnity brought against us in the future may have a material adverse effect on our results of operations in the period in which the claim is made.
In addition to the foregoing, various other proceedings are pending against us which are incidental to our operations, none of which are expected to be material to our expected future annual results of operations, liquidity, and financial position.
Summary
We have disclosed our estimated range of reasonably possible losses for certain matters above, as well as all significant matters for which we are unable to reasonably estimate a range of possible loss. We estimate that for all other matters for which we are able to reasonably estimate a range of loss, our aggregate reasonably possible losses beyond amounts accrued are immaterial to our expected future annual results of operations, liquidity, and financial position. These calculations have been made without consideration of any potential recovery from third parties.
Note 15 – Segment Disclosures
Our reportable segments are Northeast G&P, Atlantic-Gulf, and West. All remaining business activities are included in Other. (See Note 1 – General, Description of Business, and Basis of Presentation.)
Performance Measurement
We evaluate segment operating performance based upon Modified EBITDA (earnings before interest, taxes, depreciation, and amortization). This measure represents the basis of our internal financial reporting and is the primary performance measure used by our chief operating decision maker in measuring performance and allocating resources among our reportable segments. Intersegment revenues primarily represent the sale of NGLs from our natural gas processing plants to our marketing business.
We define Modified EBITDA as follows:
•Net income (loss) before:
◦Provision (benefit) for income taxes;
◦Interest incurred, net of interest capitalized;
◦Equity earnings (losses);
◦Other investing income (loss) – net;
◦Depreciation and amortization expenses;
◦Accretion expense associated with asset retirement obligations for nonregulated operations.
| |
• | This measure is further adjusted to include our proportionate share (based on ownership interest) of Modified EBITDA from our equity-method investments calculated consistently with the definition described above. |
The following table reflects the reconciliation of Segment revenues to Total revenues as reported in the Consolidated Statement of Income and Total assets by reportable segment.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Northeast G&P | | Atlantic-Gulf | | West | | Other | | Eliminations | | Total |
| (Millions) |
Three Months Ended September 30, 2019 |
Segment revenues: | | | | | | | | | | | |
Service revenues | | | | | | | | | | | |
External | $ | 340 |
| | $ | 718 |
| | $ | 433 |
| | $ | 4 |
| | $ | — |
| | $ | 1,495 |
|
Internal | 13 |
| | 13 |
| | — |
| | 3 |
| | (29 | ) | | — |
|
Total service revenues | 353 |
| | 731 |
| | 433 |
| | 7 |
| | (29 | ) | | 1,495 |
|
Total service revenues – commodity consideration | 1 |
| | 7 |
| | 30 |
| | — |
| | — |
| | 38 |
|
Product sales | | | | | | | | | | | |
External | 22 |
| | 66 |
| | 378 |
| | — |
| | — |
| | 466 |
|
Internal | 8 |
| | 10 |
| | 11 |
| | — |
| | (29 | ) | | — |
|
Total product sales | 30 |
| | 76 |
| | 389 |
| | — |
| | (29 | ) | | 466 |
|
Total revenues | $ | 384 |
| | $ | 814 |
| | $ | 852 |
| | $ | 7 |
| | $ | (58 | ) | | $ | 1,999 |
|
| | | | | | | | | | | |
Three Months Ended September 30, 2018 |
Segment revenues: | | | | | | | | | | | |
Service revenues | | | | | | | | | | | |
External | $ | 236 |
| | $ | 595 |
| | $ | 533 |
| | $ | 7 |
| | $ | — |
| | $ | 1,371 |
|
Internal | 11 |
| | 12 |
| | — |
| | 3 |
| | (26 | ) | | — |
|
Total service revenues | 247 |
| | 607 |
| | 533 |
| | 10 |
| | (26 | ) | | 1,371 |
|
Total service revenues – commodity consideration | 6 |
| | 18 |
| | 97 |
| | — |
| | — |
| | 121 |
|
Product sales | | | | | | | | | | | |
External | 59 |
| | 46 |
| | 706 |
| | — |
| | — |
| | 811 |
|
Internal | 10 |
| | 85 |
| | 26 |
| | — |
| | (121 | ) | | — |
|
Total product sales | 69 |
| | 131 |
| | 732 |
| | — |
| | (121 | ) | | 811 |
|
Total revenues | $ | 322 |
| | $ | 756 |
| | $ | 1,362 |
| | $ | 10 |
| | $ | (147 | ) | | $ | 2,303 |
|
| | | | | | | | | | | |
Nine Months Ended September 30, 2019 |
Segment revenues: | | | | | | | | | | | |
Service revenues | | | | | | | | | | | |
External | $ | 925 |
| | $ | 2,102 |
| | $ | 1,384 |
| | $ | 13 |
| | $ | — |
| | $ | 4,424 |
|
Internal | 34 |
| | 36 |
| | — |
| | 9 |
| | (79 | ) | | — |
|
Total service revenues | 959 |
| | 2,138 |
| | 1,384 |
| | 22 |
| | (79 | ) | | 4,424 |
|
Total service revenues – commodity consideration | 9 |
| | 33 |
| | 116 |
| | — |
| | — |
| | 158 |
|
Product sales | | | | | | | | | | | |
External | 87 |
| | 169 |
| | 1,256 |
| | — |
| | — |
| | 1,512 |
|
Internal | 27 |
| | 57 |
| | 46 |
| | — |
| | (130 | ) | | — |
|
Total product sales | 114 |
| | 226 |
| | 1,302 |
| | — |
| | (130 | ) | | 1,512 |
|
Total revenues | $ | 1,082 |
| | $ | 2,397 |
| | $ | 2,802 |
| | $ | 22 |
| | $ | (209 | ) | | $ | 6,094 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Northeast G&P | | Atlantic-Gulf | | West | | Other | | Eliminations | | Total |
| (Millions) |
Nine Months Ended September 30, 2018 |
Segment revenues: | | | | | | | | | | | |
Service revenues | | | | | | | | | | | |
External | $ | 677 |
| | $ | 1,769 |
| | $ | 1,599 |
| | $ | 17 |
| | $ | — |
| | $ | 4,062 |
|
Internal | 30 |
| | 37 |
| | — |
| | 9 |
| | (76 | ) | | — |
|
Total service revenues | 707 |
| | 1,806 |
| | 1,599 |
| | 26 |
| | (76 | ) | | 4,062 |
|
Total service revenues – commodity consideration | 14 |
| | 45 |
| | 257 |
| | — |
| | — |
| | 316 |
|
Product sales | | | | | | | | | | | |
External | 214 |
| | 131 |
| | 1,759 |
| | — |
| | — |
| | 2,104 |
|
Internal | 28 |
| | 198 |
| | 63 |
| | — |
| | (289 | ) | | — |
|
Total product sales | 242 |
| | 329 |
| | 1,822 |
| | — |
| | (289 | ) | | 2,104 |
|
Total revenues | $ | 963 |
| | $ | 2,180 |
| | $ | 3,678 |
| | $ | 26 |
| | $ | (365 | ) | | $ | 6,482 |
|
| | | | | | | | | | | |
September 30, 2019 | | | | | | | | | | | |
Total assets | $ | 15,445 |
| | $ | 16,888 |
| | $ | 13,550 |
| | $ | 928 |
| | $ | (530 | ) | | $ | 46,281 |
|
December 31, 2018 | | | | | | | | | | | |
Total assets | $ | 14,526 |
| | $ | 16,346 |
| | $ | 13,948 |
| | $ | 849 |
| | $ | (367 | ) | | $ | 45,302 |
|
The following table reflects the reconciliation of Modified EBITDA to Net income (loss) as reported in the Consolidated Statement of Income.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Modified EBITDA by segment: | | | | | | | |
Northeast G&P | $ | 345 |
| | $ | 281 |
| | $ | 947 |
| | $ | 786 |
|
Atlantic-Gulf | 599 |
| | 492 |
| | 1,683 |
| | 1,418 |
|
West | 311 |
| | 412 |
| | 921 |
| | 1,214 |
|
Other | (2 | ) | | 6 |
| | 1 |
| | (49 | ) |
| 1,253 |
| | 1,191 |
| | 3,552 |
| | 3,369 |
|
Accretion expense associated with asset retirement obligations for nonregulated operations | (8 | ) | | (8 | ) | | (25 | ) | | (26 | ) |
Depreciation and amortization expenses | (435 | ) | | (425 | ) | | (1,275 | ) | | (1,290 | ) |
Equity earnings (losses) | 93 |
| | 105 |
| | 260 |
| | 279 |
|
Other investing income (loss) – net | (107 | ) | | 2 |
| | (54 | ) | | 74 |
|
Proportional Modified EBITDA of equity-method investments | (181 | ) | | (205 | ) | | (546 | ) | | (552 | ) |
Interest expense | (296 | ) | | (270 | ) | | (888 | ) | | (818 | ) |
(Provision) benefit for income taxes | (77 | ) | | (190 | ) | | (244 | ) | | (297 | ) |
Net income (loss) | $ | 242 |
| | $ | 200 |
| | $ | 780 |
| | $ | 739 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
We are an energy infrastructure company focused on connecting North America’s significant hydrocarbon resource plays to growing markets for natural gas and NGLs through our gas pipeline and midstream business. Our operations are located in the United States.
Our interstate natural gas pipeline strategy is to create value by maximizing the utilization of our pipeline capacity by providing high quality, low cost transportation of natural gas to large and growing markets. Our gas pipeline businesses’ interstate transmission and storage activities are subject to regulation by the FERC and as such, our rates and charges for the transportation of natural gas in interstate commerce, and the extension, expansion, or abandonment of jurisdictional facilities and accounting, among other things, are subject to regulation. The rates are established through the FERC’s ratemaking process. Changes in commodity prices and volumes transported have limited near-term impact on these revenues because the majority of cost of service is recovered through firm capacity reservation charges in transportation rates.
The ongoing strategy of our midstream operations is to safely and reliably operate large-scale midstream infrastructure where our assets can be fully utilized and drive low per-unit costs. We focus on consistently attracting new business by providing highly reliable service to our customers. These services include natural gas gathering, processing, treating, and compression, NGL fractionation and transportation, crude oil production handling and transportation, marketing services for NGL, crude oil, and natural gas, as well as storage facilities.
Our operations are presented within the following reportable segments: Northeast G&P, Atlantic-Gulf, and West, consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources. All remaining business activities as well as corporate activities are included in Other. Our reportable segments are comprised of the following businesses:
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• | Northeast G&P is comprised of our midstream gathering, processing, and fractionation businesses in the Marcellus Shale region primarily in Pennsylvania, New York, and West Virginia and the Utica Shale region of eastern Ohio, including a 66 percent interest in Cardinal (a consolidated entity), as well as a 69 percent equity-method investment in Laurel Mountain, a 58 percent equity-method investment in Caiman II, and Appalachia Midstream Services, LLC, which owns equity-method investments with an approximate average 66 percent interest in multiple gas gathering systems in the Marcellus Shale (Appalachia Midstream Investments). Northeast G&P includes a 65 percent interest in the Northeast JV (a consolidated entity), which includes our existing Ohio Valley assets and UEOM (see Note 2 – Acquisitions of Notes to Consolidated Financial Statements). |
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• | Atlantic-Gulf is comprised of our interstate natural gas pipeline, Transco, and significant natural gas gathering and processing and crude oil production handling and transportation assets in the Gulf Coast region, including a 51 percent interest in Gulfstar One (a consolidated entity), which is a proprietary floating production system, as well as a 50 percent equity-method investment in Gulfstream, a 60 percent equity-method investment in Discovery, and a 41 percent interest in Constitution (a consolidated entity), which is developing a pipeline project (see Note 4 – Variable Interest Entities of Notes to Consolidated Financial Statements). |
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• | West is comprised of our interstate natural gas pipeline, Northwest Pipeline, and our gathering, processing, and treating operations in Colorado, Wyoming, the Barnett Shale region of north-central Texas, the Eagle Ford Shale region of south Texas, the Permian Shale region of west Texas, the Haynesville Shale region of northwest Louisiana, and the Mid-Continent region which includes the Anadarko and Arkoma basins. This segment also includes our NGL and natural gas marketing business, storage facilities, an undivided 50 percent interest in an NGL fractionator near Conway, Kansas, a 50 percent equity-method investment in OPPL, a 50 percent equity-method investment in RMM, and a 15 percent equity-method investment in Brazos Permian II. West also included our former natural gas gathering and processing assets in the Four Corners area of New Mexico and Colorado, which were sold during the fourth quarter of 2018, and our former 50 percent interest in Jackalope (an equity-method investment following deconsolidation as of June 30, 2018), which was sold in April 2019. |
Management’s Discussion and Analysis (Continued)
Dividends
In September 2019, we paid a regular quarterly dividend of $0.38 per share.
Overview of Nine Months Ended September 30, 2019
Net income (loss) attributable to The Williams Companies, Inc., for the nine months ended September 30, 2019, increased $310 million compared to the nine months ended September 30, 2018, reflecting $362 million of increased service revenues primarily associated with expansion projects, a $269 million decrease to Net income (loss) attributable to noncontrolling interests primarily due to the WPZ Merger, a $122 million gain on the second-quarter 2019 sale of our 50 percent interest in Jackalope, and the absence of a 2018 charge for a valuation allowance on foreign tax credits. These increases are partially offset by $186 million of impairments of equity-method investments in 2019, lower commodity margins, the absence of the Four Corners area business which was sold in October 2018, higher interest expense, the absence of a prior year $62 million gain on deconsolidation of Jackalope, lower Transco allowance for equity funds used during construction (AFUDC), and current year severance charges. Long-lived asset impairments in the current year were substantially offset by similar levels of impairments in the prior year.
The following discussion and analysis of results of operations and financial condition and liquidity should be read in conjunction with the consolidated financial statements and notes thereto of this Form 10‑Q and our Annual Report on Form 10-K dated February 21, 2019.
Acquisition of UEOM
As of December 31, 2018, we owned a 62 percent interest in UEOM which we accounted for as an equity-method investment. On March 18, 2019, we signed and closed the acquisition of the remaining 38 percent interest in UEOM. Total consideration paid, including post-closing adjustments, was $741 million in cash funded through credit facility borrowings and cash on hand. As a result of acquiring this additional interest, we obtained control of and now consolidate UEOM. (See Note 2 – Acquisitions of Notes to Consolidated Financial Statements.)
Northeast JV
Concurrent with the UEOM acquisition, we executed an agreement whereby we contributed our consolidated interests in UEOM and our Ohio Valley midstream business to a newly formed partnership. In June 2019, our partner invested approximately $1.33 billion (subject to post-closing adjustments) for a 35 percent ownership interest, and we retained 65 percent ownership of, as well as operate and consolidate, the Northeast JV business.
Sale of Jackalope
In April 2019, we sold our interest in Jackalope for $485 million in cash, resulting in a gain on the disposition of $122 million.
Expansion Project Update
Rivervale South to Market
In August 2018, we received approval from the FERC to expand Transco’s existing natural gas transmission system to provide incremental firm transportation capacity from the existing Rivervale interconnection with Tennessee Gas Pipeline on Transco’s North New Jersey Extension to other existing Transco locations within New Jersey. The project was placed into partial service on July 1, 2019. The remaining portion of the project was placed into service on September 1, 2019. The full project increased capacity by 190 Mdth/d.
Ohio River Supply Hub Expansion
We agreed to expand our services for certain customers to provide additional rich gas processing capacity in the Marcellus and Upper Devonian Shale in West Virginia and Pennsylvania. Associated with these agreements, we have expanded the inlet processing capacity of our Oak Grove facility to 400 MMdf/d. We have also constructed
Management’s Discussion and Analysis (Continued)
a new NGL pipeline from Moundsville to the Harrison Hub fractionation facility to provide an additional outlet for NGLs. These expansions are supported by long-term, fee-based agreements and volumetric commitments.
Norphlet Project
In March 2016, we announced that we reached an agreement to provide deepwater gas gathering services to the Appomattox development in the Gulf of Mexico. We completed modifications to install an alternate delivery route to our Main Pass 261 Platform, as well as modifications to our onshore Mobile Bay processing facility. The project went in service early in July 2019, at which time we also purchased a 54-mile-long, 16-inch-diameter pipeline (the Norphlet Pipeline) for $200 million. This pipeline transports gas from the Appomattox development to our Main Pass 261 Platform.
Filing of Rate Case
On August 31, 2018, Transco filed a general rate case with the FERC for an overall increase in rates. In September 2018, with the exception of certain rates that reflected a rate decrease, the FERC accepted and suspended our general rate filing to be effective March 1, 2019, subject to refund and the outcome of a hearing. The specific rates that reflected a rate decrease were accepted, without suspension, to be effective October 1, 2018, as requested by Transco, and will not be subject to refund. In March 2019, the FERC accepted our motion to place the rates that were suspended by the September 2018 order into effect on March 1, 2019, subject to refund. In October 2019, we reached an agreement on the terms of a settlement with the participants that would resolve all issues in the rate case without the need for a hearing. Final resolution of the rate case is subject to the filing of a formal stipulation and agreement with, and subsequent approval by, the FERC. We have provided a reserve of $131 million for rate refunds which we believe is adequate for any refunds that may be required.
Commodity Prices
NGL per-unit margins were approximately 51 percent lower in the first nine months of 2019 compared to the same period of 2018 primarily due to a 32 percent decrease in per-unit non-ethane prices and an approximate 3 percent increase in per-unit natural gas feedstock prices.
NGL margins are defined as NGL revenues less any applicable Btu replacement cost, plant fuel, and third-party transportation and fractionation. Per-unit NGL margins are calculated based on sales of our own equity volumes at the processing plants. Our equity volumes include NGLs where we own the rights to the value from NGLs recovered at our plants under both “keep-whole” processing agreements, where we have the obligation to replace the lost heating value with natural gas, and “percent-of-liquids” agreements whereby we receive a portion of the extracted liquids with no obligation to replace the lost heating value.
The potential impact of commodity prices on our business for the remainder of 2019 is further discussed in the following Company Outlook.
Company Outlook
Our strategy is to provide large-scale energy infrastructure designed to maximize the opportunities created by the vast supply of natural gas and natural gas products that exists in the United States. We accomplish this by connecting the growing demand for cleaner fuels and feedstocks with our major positions in the premier natural gas and natural gas products supply basins. We continue to maintain a strong commitment to safety, environmental stewardship, operational excellence, and customer satisfaction. We believe that accomplishing these goals will position us to deliver safe and reliable service to our customers and an attractive return to our shareholders.
Our business plan for 2019 includes a continued focus on growing our fee-based businesses, executing growth projects, including through joint ventures, and accomplishing cost discipline initiatives to ensure operations support our strategy. We anticipate operating results will increase through organic business growth driven by Transco expansion projects and continued expansion in the Northeast region.
Management’s Discussion and Analysis (Continued)
Our growth capital and investment expenditures in 2019 are expected to be in a range from $2.3 billion to $2.5 billion. Growth capital spending in 2019 includes Transco expansions, all of which are fully contracted with firm transportation agreements, and continuing to develop our gathering and processing infrastructure in the Northeast G&P and West segments. In addition to growth capital and investment expenditures, we also remain committed to projects that maintain our assets for safe and reliable operations, as well as projects that meet legal, regulatory, and/or contractual commitments.
As a result of our significant continued capital and investment expenditures on Transco expansion projects and fee-based gathering and processing projects, fee-based businesses are a significant component of our portfolio and serve to reduce the influence of commodity price fluctuations on our operating results and cash flows. We expect to benefit as continued growth in demand for low-cost natural gas is driven by increases in LNG exports, industrial demand, and power generation. For 2019, current forward market prices indicate crude oil, natural gas, and NGL prices are expected to be lower compared to 2018. We continue to address certain pricing risks through the utilization of commodity hedging strategies.
In 2019, our operating results are expected to include increases from our regulated Transco fee-based business, primarily related to projects placed in-service beginning early 2018 and 2019, as well as the favorable impact from Transco’s agreement on the terms of a settlement in its general rate case as previously discussed. For our non-regulated businesses, we anticipate increases in fee-based revenue in the Northeast G&P segment driven by expansion projects, partially offset with a decrease in the West segment primarily due to the absence of results of our former sold or deconsolidated assets, lower commodity margins and commodity-based gathering and processing rates, and reduced recognition of deferred revenue associated with the end of a contractual MVC period. We expect overall gathering and processing volumes to grow in 2019 for our continuing businesses. Additionally, we believe our expenses will be impacted by the changes in our asset portfolio, including the UEOM acquisition and asset divestitures, as well as severance charges and other costs associated with our previously announced organizational realignment.
Potential risks and obstacles that could impact the execution of our plan include:
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• | Opposition to, and legal regulations affecting, our infrastructure projects, including the risk of delay or denial in permits and approvals needed for our projects; |
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• | Unexpected significant increases in capital expenditures or delays in capital project execution; |
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• | Counterparty credit and performance risk; |
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• | Unexpected changes in customer drilling and production activities, which could negatively impact gathering and processing volumes; |
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• | Lower than anticipated demand for natural gas and natural gas products which could result in lower than expected volumes, energy commodity prices, and margins; |
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• | General economic, financial markets, or further industry downturn, including increased interest rates; |
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• | Physical damages to facilities, including damage to offshore facilities by named windstorms; |
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• | Other risks set forth under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 21, 2019. |
We seek to maintain a strong financial position and liquidity, as well as manage a diversified portfolio of energy infrastructure assets which continue to serve key growth markets and supply basins in the United States.
Management’s Discussion and Analysis (Continued)
Expansion Projects
Our ongoing major expansion projects include the following:
Northeast G&P
Susquehanna Supply Hub Expansion
We continue to expand the gathering systems in the Susquehanna Supply Hub that are needed to meet our customers’ production plans by 2020. This next expansion of the gathering infrastructure includes an additional 40,000 horsepower of new compression and gathering pipelines to bring the capacity to approximately 4.5 Bcf/d.
Atlantic-Gulf
Constitution Pipeline
We currently own 41 percent of Constitution with three other parties holding 25 percent, 24 percent, and 10 percent, respectively. We are the operator of Constitution. The 126-mile Constitution pipeline is proposed to connect our gathering system in Susquehanna County, Pennsylvania, to the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in New York, as well as to a local distribution company serving New York and Pennsylvania. For further discussion on the status of this project, see Note 4 – Variable Interest Entities of Notes to Consolidated Financial Statements.
Gateway
In December 2018, we received approval from the FERC to expand Transco’s existing natural gas transmission system to provide incremental firm transportation capacity from PennEast Pipeline Company’s proposed interconnection with Transco’s mainline south of Station 205 in New Jersey to other existing Transco meter stations within New Jersey. We plan to place the project into service in the first half of 2020, assuming timely receipt of all necessary regulatory approvals. The project is expected to increase capacity by 65 Mdth/d.
Hillabee
In February 2016, the FERC issued a certificate order for the initial phases of Transco’s Hillabee Expansion Project. The project involves an expansion of Transco’s existing natural gas transmission system from Station 85 in west central Alabama to a new interconnection with the Sabal Trail pipeline in Alabama. The project is being constructed in phases, and all of the project expansion capacity is dedicated to Sabal Trail pursuant to a capacity lease agreement. Phase I was completed in 2017 and it increased capacity by 818 Mdth/d. The in-service date of Phase II is planned for the second quarter of 2020, and together Phases I and II are expected to increase capacity by 1,025 Mdth/d.
Northeast Supply Enhancement
In May 2019, we received approval from the FERC to expand Transco’s existing natural gas transmission system to provide incremental firm transportation capacity from Station 195 in Pennsylvania to the Rockaway Delivery Lateral transfer point in New York. Approvals required for the project from the New York State Department of Environmental Conservation and the New Jersey Department of Environmental Protection remain pending, with each such agency having denied, without prejudice, Transco’s applications for such approvals. We have refiled our applications for those approvals and have addressed the technical issues identified by the agencies. We plan to place the project into service in the fourth quarter of 2020, assuming timely receipt of these remaining approvals. The project is expected to increase capacity by 400 Mdth/d.
Southeastern Trail
In October 2019, we received approval from the FERC to expand Transco’s existing natural gas transmission system to provide incremental firm transportation capacity from the Pleasant Valley interconnect with Dominion’s Cove Point Pipeline in Virginia to the Station 65 pooling point in Louisiana. We plan to place the project into
Management’s Discussion and Analysis (Continued)
service in late 2020, assuming timely receipt of all remaining necessary regulatory approvals. The project is expected to increase capacity by 296 Mdth/d.
Leidy South
In July 2019, we filed an application with the FERC for approval of the project to expand Transco’s existing natural gas transmission system and also extend its system through a capacity lease with National Fuel Gas Supply Corporation that will enable us to provide incremental firm transportation from Clermont, Pennsylvania and from the Zick interconnection on Transco’s Leidy Line to the River Road regulating station in Lancaster County, Pennsylvania. We plan to place the project into service in the second half of 2022, assuming timely receipt of all necessary regulatory approvals. The project is expected to increase capacity by 582 Mdth/d.
West
North Seattle Lateral Upgrade
In July 2018, we received approval from the FERC to expand delivery capabilities on Northwest Pipeline’s North Seattle Lateral. The project consists of the removal and replacement of approximately 5.9 miles of 8-inch diameter pipeline with new 20-inch diameter pipeline. We plan to place the project into service during the fourth quarter of 2019. The project is expected to increase delivery capacity by approximately 159 Mdth/d.
Wamsutter Expansion
We have expanded our gathering and processing infrastructure in the Wamsutter region of Wyoming in order to meet our customers’ production plans. We have completed construction of new compressor stations and modifications to our processing facilities, which are now in service. The expansion added approximately 20 miles of gathering pipelines and approximately 15,000 horsepower of compression. Additional expansion is expected in 2020, subject to the level of production activity in the area.
Project Bluestem
We are expanding our presence in the Mid-Continent region through building a 188-mile pipeline from our fractionator near Conway, Kansas to an interconnect with a third-party NGL pipeline system in Oklahoma, providing us with firm access to Mt. Belvieu pricing. As part of the project, the third-party intends to construct a 110-mile pipeline extension of their existing NGL pipeline system that will have an initial capacity of 120 Mbbls/d. Further, during the first quarter of 2019, we exercised an option to purchase a 20 percent equity interest in a Mt. Belvieu fractionation train developed by the third party. The pipeline and extension projects are expected to be placed into service during the first quarter of 2021.
Critical Accounting Estimates
Constitution Pipeline Capitalized Project Costs
As of September 30, 2019, Property, plant, and equipment in our Consolidated Balance Sheet includes approximately $376 million of capitalized project costs for Constitution, for which we are the construction manager and own a 41 percent consolidated interest. As a result of the events discussed in Note 4 – Variable Interest Entities of Notes to Consolidated Financial Statements, we have evaluated the capitalized project costs for impairment and determined that no impairment was necessary. Our evaluation considered probability-weighted scenarios of undiscounted future net cash flows, including scenarios assuming construction of the pipeline, as well as a scenario where the project does not proceed. It is reasonably possible that future unfavorable developments, such as failure to successfully renegotiate associated customer contracts, increased estimates of construction costs, or further significant delays, could result in a future impairment.
Regulatory Liabilities Resulting from Tax Reform
In December 2017, the Tax Cuts and Jobs Act (Tax Reform) was enacted, which, among other things, reduced the corporate income tax rate from 35 percent to 21 percent. Rates charged to customers of our regulated natural gas
Management’s Discussion and Analysis (Continued)
pipelines are subject to the rate-making policies of the FERC, which have historically permitted the recovery of an income tax allowance that includes a deferred income tax component. Due to the reduced income tax rate from Tax Reform and the collection of historical rates that reflected historical federal income tax rates, we expect that our regulated natural gas pipelines will be required to return amounts to certain customers through future rates. As a result, we established regulatory liabilities during 2017 and at September 30, 2019, these liabilities total $609 million. The timing and actual amount of such return related to Transco will be subject to the final outcome of the rate case discussed in Overview while the amount of such return related to Northwest Pipeline will be subject to future negotiations regarding this matter and many other elements of cost-of-service rate proceedings, including other costs of providing service.
Equity-Method Investments
We continue to monitor our equity-method investments for any indications that the carrying value may have experienced an other-than-temporary decline in value. When evidence of a loss in value has occurred, we compare our estimate of the fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. We generally estimate the fair value of our investments using an income approach where significant judgments and assumptions include expected future cash flows and the appropriate discount rate. In some cases, we may utilize a form of market approach to estimate the fair value of our investments. During 2019, we have recognized impairments totaling $186 million related to our equity-method investments. (See Note 13 – Fair Value Measurements and Guarantees of Notes to Consolidated Financial Statements.)
Management’s Discussion and Analysis (Continued)
Results of Operations
Consolidated Overview
The following table and discussion is a summary of our consolidated results of operations for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018. The results of operations by segment are discussed in further detail following this consolidated overview discussion.
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| Three Months Ended September 30, | | | | | | Nine Months Ended September 30, | | | | |
| 2019 | | 2018 | | $ Change* | | % Change* | | 2019 | | 2018 | | $ Change* | | % Change* |
| (Millions) | | | | | | (Millions) | | | | |
Revenues: | | | | | | | | | | | | | | | |
Service revenues | $ | 1,495 |
| | $ | 1,371 |
| | +124 |
| | +9 | % | | $ | 4,424 |
| | $ | 4,062 |
| | +362 |
| | +9 | % |
Service revenues – commodity consideration | 38 |
| | 121 |
| | -83 |
| | -69 | % | | 158 |
| | 316 |
| | -158 |
| | -50 | % |
Product sales | 466 |
| | 811 |
| | -345 |
| | -43 | % | | 1,512 |
| | 2,104 |
| | -592 |
| | -28 | % |
Total revenues | 1,999 |
| | 2,303 |
| | | | | | 6,094 |
| | 6,482 |
| | | | |
Costs and expenses: | | | | | | | | | | | | | | | |
Product costs | 434 |
| | 790 |
| | +356 |
| | +45 | % | | 1,442 |
| | 2,039 |
| | +597 |
| | +29 | % |
Processing commodity expenses | 19 |
| | 30 |
| | +11 |
| | +37 | % | | 83 |
| | 91 |
| | +8 |
| | +9 | % |
Operating and maintenance expenses | 364 |
| | 389 |
| | +25 |
| | +6 | % | | 1,091 |
| | 1,134 |
| | +43 |
| | +4 | % |
Depreciation and amortization expenses | 435 |
| | 425 |
| | -10 |
| | -2 | % | | 1,275 |
| | 1,290 |
| | +15 |
| | +1 | % |
Selling, general, and administrative expenses | 130 |
| | 174 |
| | +44 |
| | +25 | % | | 410 |
| | 436 |
| | +26 |
| | +6 | % |
Impairment of certain assets | — |
| | — |
| | — |
| | — |
| | 76 |
| | 66 |
| | -10 |
| | -15 | % |
Other (income) expense – net | (11 | ) | | (6 | ) | | +5 |
| | +83 | % | | 30 |
| | 24 |
| | -6 |
| | -25 | % |
Total costs and expenses | 1,371 |
| | 1,802 |
| | | | | | 4,407 |
| | 5,080 |
| | | | |
Operating income (loss) | 628 |
| | 501 |
| | | | | | 1,687 |
| | 1,402 |
| | | | |
Equity earnings (losses) | 93 |
| | 105 |
| | -12 |
| | -11 | % | | 260 |
| | 279 |
| | -19 |
| | -7 | % |
Other investing income (loss) – net | (107 | ) | | 2 |
| | -109 |
| | NM |
| | (54 | ) | | 74 |
| | -128 |
| | NM |
|
Interest expense | (296 | ) | | (270 | ) | | -26 |
| | -10 | % | | (888 | ) | | (818 | ) | | -70 |
| | -9 | % |
Other income (expense) – net | 1 |
| | 52 |
| | -51 |
| | -98 | % | | 19 |
| | 99 |
| | -80 |
| | -81 | % |
Income (loss) before income taxes | 319 |
| | 390 |
| | | | | | 1,024 |
| | 1,036 |
| | | | |
Provision (benefit) for income taxes | 77 |
| | 190 |
| | +113 |
| | +59 | % | | 244 |
| | 297 |
| | +53 |
| | +18 | % |
Net income (loss) | 242 |
| | 200 |
| | | | | | 780 |
| | 739 |
| | | | |
Less: Net income (loss) attributable to noncontrolling interests | 21 |
| | 71 |
| | +50 |
| | +70 | % | | 54 |
| | 323 |
| | +269 |
| | +83 | % |
Net income (loss) attributable to The Williams Companies, Inc. | $ | 221 |
| | $ | 129 |
| | | | | | $ | 726 |
| | $ | 416 |
| | | | |
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* | + = Favorable change; - = Unfavorable change; NM = A percentage calculation is not meaningful due to a change in signs, a zero-value denominator, or a percentage change greater than 200. |
Management’s Discussion and Analysis (Continued)
Three months ended September 30, 2019 vs. three months ended September 30, 2018
Service revenues increased primarily due to higher transportation fee revenues at Transco associated with expansion projects placed in service in 2019 and 2018, from UEOM, which is now a consolidated entity after the remaining ownership interest was purchased in March 2019, and from higher volumes at the Susquehanna Supply Hub. These increases are partially offset by the absence of revenues associated with asset divestitures and deconsolidations during 2018, including our former Four Corners area operations, and lower deferred revenue recognition in the Barnett Shale associated with the end of a contractual MVC period.
Service revenues – commodity consideration decreased primarily due to lower NGL prices, and lower volumes due to the absence of our former Four Corners area operations and ethane rejection. These revenues represent consideration we receive in the form of commodities as full or partial payment for processing services provided. Most of these NGL volumes are sold within the month processed and therefore are offset in Product costs below.
Product sales decreased primarily due to lower NGL and natural gas prices associated with our marketing and equity NGL sales activities. This decrease also includes lower volumes from our equity NGL sales primarily reflecting the absence of our former Four Corners area operations and lower system management gas sales, partially offset by higher marketing volumes. Marketing revenues and system management gas sales are substantially offset in Product costs.
Product costs decreased primarily due to lower NGL and natural gas prices associated with our marketing and equity NGL production activities. This decrease also includes lower volumes acquired as commodity consideration for NGL processing services reflecting the absence of our former Four Corners area operations and lower system management gas costs, partially offset by higher volumes for marketing activities.
Operating and maintenance expenses decreased primarily due to the absence of our former Four Corners area operations and a decrease in Transco’s contracted services mainly due to the timing of required engine overhauls and integrity testing, partially offset by the consolidation of UEOM, and by an accrual for estimated severance and related costs primarily associated with our voluntary separation program (VSP) (see Note 6 – Other Income and Expenses of Notes to Consolidated Financial Statements).
Depreciation and amortization expenses increased primarily due to the consolidation of UEOM and new assets placed in service, substantially offset by the 2018 impairment of certain assets in the Barnett Shale region.
Selling, general, and administrative expenses decreased primarily due to the absences of a charge for a 2018 charitable contribution of preferred stock to The Williams Companies Foundation, Inc. and fees associated with the WPZ Merger.
The favorable change in Other (income) expense – net within Operating income (loss) includes net favorable changes to charges and credits to regulatory assets and liabilities, partially offset by the absence of a 2018 gain on asset retirement (see Note 6 – Other Income and Expenses of Notes to Consolidated Financial Statements).
The favorable change in Operating income (loss) includes an increase in Service revenues primarily associated with Transco projects placed in-service and higher gathering volumes in the Northeast region, the absence of a charge for a charitable contribution of preferred stock to the Williams Foundation, Inc., and the absence of fees associated with the WPZ Merger, partially offset by unfavorable commodity margins primarily reflecting lower NGL sales prices and lower volumes.
The unfavorable change in Other investing income (loss) – net is primarily due to 2019 impairments to our equity-method investments, including Laurel Mountain (see Note 13 – Fair Value Measurements and Guarantees of Notes to Consolidated Financial Statements).
Interest expense increased primarily due to an increase in financing obligations associated with Transco’s Atlantic Sunrise project and lower capitalized interest due to projects placed in service.
Management’s Discussion and Analysis (Continued)
The unfavorable change in Other income (expense) – net below Operating income (loss) is primarily due to a decrease in equity AFUDC associated with reduced capital expenditures on projects and 2019 charges for loss contingencies associated with former operations.
Provision (benefit) for income taxes changed favorably primarily due to the absence of a $105 million 2018 valuation allowance on certain deferred tax assets that may not be realized following the WPZ merger, partially offset by higher pre-tax income attributable to The Williams Companies, Inc. See Note 7 – Provision (Benefit) for Income Taxes of Notes to Consolidated Financial Statements for a discussion of the effective tax rate compared to the federal statutory rate for both periods.
The favorable change in Net income (loss) attributable to noncontrolling interests is primarily due to our third- quarter 2018 acquisition of the publicly held interests in WPZ associated with the WPZ Merger.
Nine months ended September 30, 2019 vs. nine months ended September 30, 2018
Service revenues increased primarily due to higher transportation fee revenues at Transco associated with expansion projects placed in service in 2019 and 2018 and the consolidation of UEOM, as well as higher volumes at the Susquehanna Supply Hub, and higher rates and volumes from new wells in the Utica Shale region. These increases are partially offset by the absence of revenues associated with asset divestitures and deconsolidations during 2018, including our former Four Corners area operations, and lower deferred revenue recognition in the Barnett Shale associated with the end of a contractual MVC period.
Service revenues – commodity consideration decreased due to lower NGL prices and lower volumes primarily due to the absence of our former Four Corners area operations. These revenues represent consideration we receive in the form of commodities as full or partial payment for processing services provided. Most of these NGL volumes are sold within the month processed and therefore are offset in Product costs below.
Product sales decreased primarily due to lower NGL and natural gas prices associated with our marketing and equity NGL sales activities and lower volumes from our equity NGL sales primarily reflecting the absence of our former Four Corners area operations and lower system management gas sales, partially offset by higher marketing volumes. Marketing revenues and system management gas sales are substantially offset in Product costs.
Product costs decreased primarily due to lower NGL and natural gas prices associated with our marketing and equity NGL production activities. This decrease also includes lower volumes acquired as commodity consideration for NGL processing services reflecting the absence of our former Four Corners area operations and lower system management gas costs, partially offset by higher volumes for marketing activities.
Operating and maintenance expenses decreased primarily due to the absence of our former Four Corners area operations, partially offset by the consolidation of UEOM, and by an accrual for estimated severance and related costs primarily associated with our VSP.
Depreciation and amortization expenses decreased primarily due to the 2018 impairment of certain assets in the Barnett Shale region and the absence of our former Four Corners area operations, partially offset by new assets placed in service and by the consolidation of UEOM.
Selling, general, and administrative expenses decreased primarily due to the absences of a charitable contribution of preferred stock to the Williams Foundation, Inc. and fees associated with the WPZ Merger, partially offset by an accrual for estimated severance and related costs primarily associated with our VSP, and transaction expenses associated with the acquisition of UEOM and the formation of the Northeast JV.
The unfavorable change in Impairment of certain assets includes a second-quarter 2019 impairment of certain Eagle Ford Shale gathering assets and a first-quarter 2019 impairment of certain idle gathering assets, partially offset by the absence of a 2018 impairment of certain idle pipelines.
The unfavorable change in Other (income) expense – net within Operating income (loss) includes the absence of a 2018 gain on asset retirement, a 2019 charge for the reversal of expenditures previously capitalized, and net unfavorable
Management’s Discussion and Analysis (Continued)
changes to charges and credits to regulatory assets and liabilities (see Note 6 – Other Income and Expenses of Notes to Consolidated Financial Statements).
The favorable change in Operating income (loss) includes an increase in Service revenues primarily associated with Transco projects placed in-service and higher gathering volumes in the Northeast region, the favorable impact of acquiring the additional interest of UEOM, the absence of a charitable contribution of preferred stock to the Williams Foundation, Inc., and the absence of fees associated with the WPZ Merger. These favorable changes were partially offset by the impact of asset divestitures and deconsolidations during 2018, including our former Four Corners area operations, unfavorable commodity margins primarily reflecting lower NGL sales prices and lower volumes, an accrual for estimated severance and related costs primarily associated with our VSP, and transaction expenses associated with the acquisition of UEOM and the formation of the Northeast JV.
The unfavorable change in Other investing income (loss) – net reflects noncash impairments to equity method investments (see Note 13 – Fair Value Measurements and Guarantees of Notes to Consolidated Financial Statements) and the absence of a 2018 gain on deconsolidation of our former Jackalope operations, partially offset by a 2019 gain on sale of our equity-method investment in Jackalope.
Interest expense increased primarily due to an increase in financing obligations associated with Transco’s Atlantic Sunrise project.
The unfavorable change in Other income (expense) – net below Operating income (loss) is primarily due to a decrease in equity AFUDC associated with reduced capital expenditures on projects.
Provision (benefit) for income taxes changed favorably primarily due to the absence of a $105 million 2018 valuation allowance on certain deferred tax assets that may not be realized following the WPZ merger, partially offset by higher pre-tax income attributable to The Williams Companies, Inc. See Note 7 – Provision (Benefit) for Income Taxes of Notes to Consolidated Financial Statements for a discussion of the effective tax rate compared to the federal statutory rate for both periods.
The favorable change in Net income (loss) attributable to noncontrolling interests is primarily due to our third- quarter 2018 acquisition of the publicly held interests in WPZ associated with the WPZ Merger and lower results at Gulfstar.
Period-Over-Period Operating Results - Segments
We evaluate segment operating performance based upon Modified EBITDA. Note 15 – Segment Disclosures of Notes to Consolidated Financial Statements includes a reconciliation of this non-GAAP measure to Net income (loss). Management uses Modified EBITDA because it is an accepted financial indicator used by investors to compare company performance. In addition, management believes that this measure provides investors an enhanced perspective of the operating performance of our assets. Modified EBITDA should not be considered in isolation or as a substitute for a measure of performance prepared in accordance with GAAP.
Management’s Discussion and Analysis (Continued)
Northeast G&P
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Service revenues | $ | 353 |
| | $ | 247 |
| | $ | 959 |
| | $ | 707 |
|
Service revenues – commodity consideration | 1 |
| | 6 |
| | 9 |
| | 14 |
|
Product sales | 30 |
| | 69 |
| | 114 |
| | 242 |
|
Segment revenues | 384 |
| | 322 |
| | 1,082 |
| | 963 |
|
| | | | | | | |
Product costs | (29 | ) | | (69 | ) | | (114 | ) | | (245 | ) |
Processing commodity expenses | (1 | ) | | (3 | ) | | (6 | ) | | (7 | ) |
Other segment costs and expenses | (117 | ) | | (100 | ) | | (348 | ) | | (279 | ) |
Proportional Modified EBITDA of equity-method investments | 108 |
| | 131 |
| | 333 |
| | 354 |
|
Northeast G&P Modified EBITDA | $ | 345 |
| | $ | 281 |
| | $ | 947 |
| | $ | 786 |
|
| | | | | | | |
Commodity margins | $ | 1 |
| | $ | 3 |
| | $ | 3 |
| | $ | 4 |
|
Three months ended September 30, 2019 vs. three months ended September 30, 2018
Northeast G&P Modified EBITDA increased primarily due to higher Service revenues due to increased gathering volumes and the favorable impact of acquiring the additional interest of UEOM, which is a consolidated entity after the remaining ownership interest was purchased in March 2019.
Service revenues increased primarily due to:
| |
• | A $50 million increase associated with the consolidation of UEOM, as previously discussed; |
| |
• | A $24 million increase associated with higher gathering revenues at Susquehanna Supply Hub reflecting 18 percent higher gathering volumes due to increased production from customers; |
| |
• | An $18 million increase at Ohio Valley Midstream primarily due to higher gathering and processing revenues; |
| |
• | A $9 million increase in gathering revenues in the Utica Shale region due to volumes from new wells and higher rates. |
Product sales decreased primarily due to lower non-ethane prices and volumes within our marketing activities. The changes in marketing revenues are offset by similar changes in marketing purchases, reflected above as Product costs.
Other segment costs and expenses increased primarily due to expenses associated with the consolidation of UEOM.
Proportional Modified EBITDA of equity-method investments decreased primarily due to the consolidation of UEOM.
Nine months ended September 30, 2019 vs. nine months ended September 30, 2018
Northeast G&P Modified EBITDA increased primarily due to higher Service revenues due to increased gathering volumes and the favorable impact of acquiring the additional interest of UEOM, partially offset by 2019 severance and related costs.
Management’s Discussion and Analysis (Continued)
Service revenues increased primarily due to:
| |
• | A $98 million increase associated with the consolidation of UEOM; |
| |
• | An $89 million increase associated with higher gathering revenues at Susquehanna Supply Hub reflecting 22 percent higher gathering volumes due to increased production from new wells and higher rates; |
| |
• | A $28 million increase in gathering revenues in the Utica Shale region due to volumes from new wells and higher rates; |
| |
• | A $21 million increase at Ohio Valley Midstream primarily due to higher gathering and processing volumes; |
| |
• | A $12 million increase in compression revenues for services charged to an affiliate driven by higher volumes. |
Product sales decreased primarily due to lower non-ethane volumes and prices within our marketing activities. The changes in marketing revenues are offset by similar changes in marketing purchases, reflected above as Product costs.
Other segment costs and expenses increased due to multiple factors, including:
•A $35 million increase associated with the consolidation of UEOM;
| |
• | A $10 million increase related to transaction expenses associated with the acquisition of UEOM and the formation of the Northeast JV; |
•A $7 million accrual in 2019 for estimated severance and related costs primarily associated with our VSP;
| |
• | A $14 million increase due to higher allocated corporate costs and higher costs related to various maintenance and repairs. |
Proportional Modified EBITDA of equity-method investments decreased $37 million as a result of the consolidation of UEOM. This decrease was partially offset by a $20 million increase at Appalachia Midstream Investments, reflecting higher volumes.
Atlantic-Gulf
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Service revenues | $ | 731 |
| | $ | 607 |
| | $ | 2,138 |
| | $ | 1,806 |
|
Service revenues – commodity consideration | 7 |
| | 18 |
| | 33 |
| | 45 |
|
Product sales | 76 |
| | 131 |
| | 226 |
| | 329 |
|
Segment revenues | 814 |
| | 756 |
| | 2,397 |
| | 2,180 |
|
| | | | | | | |
Product costs | (75 | ) | | (134 | ) | | (226 | ) | | (332 | ) |
Processing commodity expenses | (2 | ) | | (3 | ) | | (12 | ) | | (10 | ) |
Other segment costs and expenses | (182 | ) | | (176 | ) | | (606 | ) | | (556 | ) |
Proportional Modified EBITDA of equity-method investments | 44 |
| | 49 |
| | 130 |
| | 136 |
|
Atlantic-Gulf Modified EBITDA | $ | 599 |
| | $ | 492 |
| | $ | 1,683 |
| | $ | 1,418 |
|
| | | | | | | |
Commodity margins | $ | 6 |
| | $ | 12 |
| | $ | 21 |
| | $ | 32 |
|
Management’s Discussion and Analysis (Continued)
Three months ended September 30, 2019 vs. three months ended September 30, 2018
Atlantic-Gulf Modified EBITDA increased primarily due to higher Service revenues.
Service revenues increased due to a $143 million increase in Transco’s natural gas transportation revenues primarily driven by a $116 million increase related to expansion projects placed in service in 2018 and 2019, as well as an adjustment associated with Transco’s reserve for rate refunds. This increase was partially offset by $21 million lower gathering and processing fees primarily due to maintenance downtime at Gulfstar, lower volumes at our Perdido Norte system in the Western Gulf of Mexico, and the sale of certain Gulf Coast pipeline assets in the fourth quarter of 2018. Additionally, certain of Transco’s natural gas transportation revenues, which decreased due to lower rates effective October 2018, were substantially offset by higher revenue related to reimbursable power and storage expenses.
The net sum of Service revenues – commodity consideration, Product sales, Product costs, and Processing commodity expenses comprise our commodity product margins. Our commodity product margins associated with our equity NGLs decreased $7 million driven by unfavorable NGL prices. Additionally, the decrease in Product sales includes a $44 million decrease in commodity marketing sales due to lower NGL prices and volumes. Marketing sales are substantially offset in Product costs and therefore have little impact to Modified EBITDA.
Other segment costs and expenses increased primarily due to a $23 million unfavorable change in equity AFUDC due to lower construction activity, an $11 million accrual in 2019 for estimated severance and related costs primarily associated with our VSP (see Note 6 – Other Income and Expenses of Notes to Consolidated Financial Statements), the absence of a $10 million 2018 gain on asset retirements, and higher reimbursable power and storage expenses at Transco. These unfavorable changes were partially offset by $33 million of net favorable changes to charges and credits associated with regulatory assets and liabilities, which were significantly driven by the previously mentioned agreement to the terms of a settlement in Transco’s general rate case (see Note 6 – Other Income and Expenses of Notes to Consolidated Financial Statements), and a $21 million decrease in Transco’s contracted services compared to 2018 mainly due to the timing of required engine overhauls and integrity testing.
Nine months ended September 30, 2019 vs. nine months ended September 30, 2018
Atlantic-Gulf Modified EBITDA increased primarily due to higher Service revenues, partially offset by higher costs and expenses.
Service revenues increased primarily due to a $361 million increase in Transco’s natural gas transportation revenues primarily driven by a $335 million increase related to expansion projects placed in service in 2018 and 2019, as well as an adjustment associated with Transco’s reserve for rate refunds. Partially offsetting these increases were lower gathering and processing fees of $40 million primarily due to maintenance downtime at Gulfstar and the sale of certain Gulf Coast pipeline assets in the fourth quarter of 2018. Additionally, certain of Transco’s natural gas transportation revenues, which decreased due to lower rates effective October 2018, were substantially offset by higher revenue related to reimbursable power and storage expenses.
The net sum of Service revenues – commodity consideration, Product sales, Product costs, and Processing commodity expenses comprise our commodity product margins. Our commodity product margins associated with our equity NGLs decreased $12 million driven by unfavorable NGL prices, partially offset by higher volumes. Additionally, the decrease in Product sales includes a $74 million decrease in commodity marketing sales due to lower NGL prices and volumes and an $19 million decrease in system management gas sales. Marketing sales and system management gas sales are substantially offset in Product costs and therefore have little impact to Modified EBITDA.
Other segment costs and expenses increased primarily due a $55 million unfavorable change in equity AFUDC due to lower construction activity, a $30 million accrual in 2019 for estimated severance and related costs primarily associated with our VSP, a $15 million increase in reimbursable power and storage expenses, $15 million of expense in 2019 related to the reversal of expenditures previously capitalized, and the absence of a $10 million 2018 gain on asset retirements. These unfavorable changes were partially offset by $43 million of net favorable changes to charges and credits associated with regulatory assets and liabilities, which were significantly driven by the previously mentioned
Management’s Discussion and Analysis (Continued)
agreement to the terms of a settlement in Transco’s general rate case, and a $41 million decrease in Transco’s contracted services compared to 2018 mainly due to the timing of required engine overhauls and integrity testing.
West
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Service revenues | $ | 433 |
| | $ | 533 |
| | $ | 1,384 |
| | $ | 1,599 |
|
Service revenues – commodity consideration | 30 |
| | 97 |
| | 116 |
| | 257 |
|
Product sales | 389 |
| | 732 |
| | 1,302 |
| | 1,822 |
|
Segment revenues | 852 |
| | 1,362 |
| | 2,802 |
| | 3,678 |
|
| | | | | | | |
Product costs | (382 | ) | | (730 | ) | | (1,294 | ) | | (1,813 | ) |
Processing commodity expenses | (13 | ) | | (26 | ) | | (63 | ) | | (76 | ) |
Other segment costs and expenses | (175 | ) | | (219 | ) | | (531 | ) | | (637 | ) |
Impairment of certain assets | — |
| | — |
| | (76 | ) | | — |
|
Proportional Modified EBITDA of equity-method investments | 29 |
| | 25 |
| | 83 |
| | 62 |
|
West Modified EBITDA | $ | 311 |
| | $ | 412 |
| | $ | 921 |
| | $ | 1,214 |
|
| | | | | | | |
Commodity margins | $ | 24 |
| | $ | 73 |
| | $ | 61 |
| | $ | 190 |
|
Three months ended September 30, 2019 vs. three months ended September 30, 2018
West Modified EBITDA decreased primarily due to the absence of EBITDA of certain of our former sold or deconsolidated assets, lower service revenues associated with the expiration of a certain MVC, and lower commodity margins due to unfavorable commodity prices related to our ongoing operations.
Service revenues decreased primarily due to:
| |
• | A $62 million decrease associated with asset divestitures and deconsolidations during 2018, including our former Four Corners area assets and certain Delaware basin assets that were contributed to our Brazos Permian II equity-method investment; |
| |
• | A $29 million decrease driven by lower deferred revenue amortization and MVC deficiency fee revenues associated with the expiration of a certain MVC agreement in the Barnett Shale region; |
| |
• | A $23 million decrease associated with lower rates primarily driven by lower commodity pricing in the Piceance and Barnett Shale regions and the transition from a cost-of-service to fixed-fee rate for a certain customer contract in the Mid-Continent region. |
These decreases were partially offset by a $17 million increase associated with higher other MVC deficiency fee revenues, higher volumes, and higher other fee revenues.
The net sum of Service revenues – commodity consideration, Product sales, Product costs, and Processing commodity expenses comprise our commodity product margins. Our commodity product margins associated with our equity NGLs decreased $44 million primarily due to:
| |
• | A $35 million decrease associated with lower sales volumes primarily due to $21 million associated with the absence of our former Four Corners area assets and $14 million related to 70 percent lower ethane sales volumes due to ethane rejection; |
| |
• | A $22 million decrease associated with lower sales prices primarily due to 40 percent and 82 percent lower average net realized per-unit non-ethane and ethane sales prices, respectively; partially offset by |
Management’s Discussion and Analysis (Continued)
| |
• | A $13 million increase related to a decrease in natural gas purchases associated with lower equity NGL production volumes and lower natural gas prices. |
Additionally, the decrease in Product sales includes a $263 million decrease in marketing sales, which is due to lower sales prices, partially offset by higher sales volumes, a $14 million decrease related to the sale of other products, and a $7 million decrease in system management gas sales. These decreases are substantially offset in Product costs. Marketing margins decreased by $12 million primarily due to unfavorable changes in pricing.
Other segment costs and expenses decreased primarily due a $37 million reduction associated with the absence of our former Four Corners area assets and the absence of a 2018 unfavorable charge of $12 million for a regulatory liability associated with a decrease in Northwest Pipeline’s estimated deferred state income tax rate following the WPZ Merger.
Proportional Modified EBITDA of equity-method investments increased primarily due to the addition of the RMM equity-method investment during the third quarter of 2018, partially offset by the absence of the Jackalope equity-method investment sold in April 2019.
Nine months ended September 30, 2019 vs. Nine months ended September 30, 2018
West Modified EBITDA decreased primarily due to the absence of EBITDA of certain of our former sold or deconsolidated assets, 2019 impairments of certain assets, lower commodity margins due to unfavorable commodity prices and lower volumes associated with equity NGL production related to our ongoing operations, and lower service revenues associated with the expiration of a certain MVC.
Service revenues decreased primarily due to:
| |
• | A $201 million decrease associated with asset divestitures and deconsolidations during 2018, including our former Four Corners area assets, certain Delaware basin assets that were contributed to our Brazos Permian II equity-method investment, and our Jackalope assets which were deconsolidated in second-quarter 2018; |
| |
• | A $29 million decrease driven by lower deferred revenue amortization and MVC deficiency fee revenues associated with the expiration of a certain MVC agreement in the Barnett Shale region; |
| |
• | A $19 million decrease driven by lower gathering volumes primarily in the Mid-Continent, Barnett Shale, and Wamsutter regions; |
| |
• | An $18 million decrease associated with lower rates primarily driven by lower commodity pricing in the Piceance region and the transition from a cost-of-service to fixed-fee rate for a certain customer contract in the Mid-Continent region; partially offset by |
| |
• | A $26 million increase in other fee revenues driven by higher fractionation and storage fees; |
| |
• | An $11 million increase associated with the expected resolution of a prior period performance obligation; |
| |
• | An $11 million increase related to higher other MVC deficiency fee revenues. |
The net sum of Service revenues – commodity consideration, Product sales, Product costs, and Processing commodity expenses comprise our commodity product margins. Our commodity product margins associated with our equity NGLs decreased $114 million primarily due to:
| |
• | A $79 million decrease associated with lower sales volumes, consisting of $54 million related to the absence of our former Four Corners area assets and $25 million due to 11 percent lower non-ethane volumes and 17 percent lower ethane sales volumes primarily due to well freeze-offs and temporary shut-ins associated with more severe weather conditions in first-quarter 2019, natural declines, and ethane rejection; |
Management’s Discussion and Analysis (Continued)
| |
• | A $48 million decrease associated with lower sales prices primarily due to 29 percent and 41 percent lower average net realized per-unit non-ethane and ethane sales prices, respectively; partially offset by |
| |
• | A $13 million increase related to a net decrease in natural gas purchases associated with lower equity NGL production volumes partially offset higher lower natural gas prices. |
Additionally, the decrease in Product sales includes a $332 million decrease in marketing sales, which is due to lower sales prices, partially offset by higher sales volumes, a $31 million decrease related to the sale of other products, and a $26 million decrease in system management gas sales. These decreases are substantially offset in Product costs. Marketing margins decreased by $15 million primarily due to unfavorable changes in pricing.
Other segment costs and expenses decreased primarily due to a $124 million reduction associated with the absences of our former Four Corners area assets and from the Jackalope deconsolidation in second-quarter 2018, as well as the absence of a 2018 unfavorable charge of $12 million for a regulatory liability associated with a decrease in Northwest Pipeline’s estimated deferred state income tax rate following the WPZ Merger as previously discussed. These decreases were partially offset by an unfavorable accrual in 2019 for estimated severance and related costs of $16 million primarily associated with our VSP (see Note 6 – Other Income and Expenses of Notes to Consolidated Financial Statements) and the absence of a $7 million favorable adjustment to the regulatory liability associated with Tax Reform at Northwest Pipeline in first-quarter 2018.
Impairment of certain assets increased primarily due to the $59 million impairment of certain Eagle Ford Shale gathering assets and a $12 million impairment of certain idle gathering assets in 2019 (see Note 13 – Fair Value Measurements and Guarantees of Notes to Consolidated Financial Statements).
Proportional Modified EBITDA of equity-method investments increased primarily due to the additions of the RMM and Brazos Permian II equity-method investments in the second half of 2018.
Other
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (Millions) |
Other Modified EBITDA | $ | (2 | ) | | $ | 6 |
| | $ | 1 |
| | $ | (49 | ) |
Three months ended September 30, 2019 vs. three months ended September 30, 2018
Other Modified EBITDA decreased primarily due to:
| |
• | The absence of a $37 million benefit from establishing a regulatory asset associated with an increase in Transco’s estimated deferred state income tax rate following the WPZ Merger in the third quarter of 2018; |
| |
• | A $16 million decrease in income associated with a regulatory asset related to deferred taxes on equity funds used during construction; |
| |
• | A $9 million accrual in the third quarter of 2019 for loss contingencies associated with former operations. |
These decreases were partially offset by:
| |
• | The absence of a $35 million charge associated with a charitable contribution of preferred stock to The Williams Companies Foundation, Inc. (a not-for-profit corporation) in the third quarter of 2018 (see Note 12 – Stockholders’ Equity of Notes to Consolidated Financial Statements); |
| |
• | The absence of $15 million in costs associated with the WPZ Merger in the third quarter of 2018. |
Management’s Discussion and Analysis (Continued)
Nine months ended September 30, 2019 vs. nine months ended September 30, 2018
Other Modified EBITDA increased primarily due to:
| |
• | The absence of the $66 million impairment of certain idle pipelines in the second quarter of 2018 (see Note 13 – Fair Value Measurements and Guarantees of Notes to Consolidated Financial Statements); |
| |
• | The absence of a $35 million charitable contribution charge in the third quarter of 2018 as detailed above; |
| |
• | The absence of $19 million in costs associated with the WPZ Merger in 2018; |
| |
• | The absence of a 2018 loss on early retirement of debt of $7 million in the first quarter of 2018. |
These increases were partially offset by:
| |
• | The absence of a $37 million benefit associated with a regulatory asset in the third quarter of 2018 as detailed above; |
| |
• | A $21 million decrease in income associated with a regulatory asset related to deferred taxes on equity funds used during construction; |
| |
• | A $12 million unfavorable change to a regulatory asset associated with an estimated deferred state income tax rate in the first quarter of 2019; |
| |
• | A $9 million accrual in the third quarter of 2019 for loss contingencies as detailed above. |
Management’s Discussion and Analysis (Continued)
Management’s Discussion and Analysis of Financial Condition and Liquidity
Outlook
Fee-based businesses are a significant component of our portfolio and serve to reduce the influence of commodity price fluctuations on our cash flows. We expect to benefit as continued growth in demand for low-cost natural gas is driven by increases in LNG exports, industrial demand, and power generation.
As previously discussed in Company Outlook, our growth capital and investment expenditures in 2019 are currently expected to be in a range from $2.3 billion to $2.5 billion. Growth capital spending in 2019 includes Transco expansions, all of which are fully contracted with firm transportation agreements, and continuing to develop our gathering and processing infrastructure in the Northeast G&P and West segments. In addition to growth capital and investment expenditures, we also remain committed to projects that maintain our assets for safe and reliable operations, as well as projects that meet legal, regulatory, and/or contractual commitments. We intend to fund our planned 2019 growth capital with retained cash flow and certain sources of available liquidity described below. We retain the flexibility to adjust planned levels of growth capital and investment expenditures in response to changes in economic conditions or business opportunities.
We funded the $741 million total consideration paid, including post-closing adjustments, for our March 2019 acquisition of the remaining interest in UEOM with credit facility borrowings and cash on hand. In June 2019, we received approximately $1.33 billion from our partner upon closing the sale of a 35 percent interest in the Northeast JV. Also in April 2019, we received $485 million from the sale of our 50 percent interest in Jackalope. These proceeds are being used to reduce debt and fund capital growth.
Liquidity
Based on our forecasted levels of cash flow from operations and other sources of liquidity, we expect to have sufficient liquidity to manage our businesses in 2019. Our potential material internal and external sources and uses of liquidity for 2019 are as follows:
|
| |
Sources: | |
| Cash and cash equivalents on hand |
| Cash generated from operations |
| Distributions from our equity-method investees |
| Utilization of our credit facility and/or commercial paper program |
| Cash proceeds from issuance of debt and/or equity securities |
| Proceeds from asset monetizations |
| Contributions from noncontrolling interests |
| |
Uses: | |
| Working capital requirements |
| Capital and investment expenditures |
| Quarterly dividends to our shareholders |
| Debt service payments, including payments of long-term debt |
| Distributions to noncontrolling interests |
Potential risks associated with our planned levels of liquidity discussed above include those previously discussed in Company Outlook.
Management’s Discussion and Analysis (Continued)
As of September 30, 2019, we had a working capital deficit of $1.89 billion, including cash and cash equivalents. Our available liquidity is as follows:
|
| | | |
Available Liquidity | September 30, 2019 |
| (Millions) |
Cash and cash equivalents | $ | 247 |
|
Capacity available under our $4.5 billion credit facility, less amounts outstanding under our $4 billion commercial paper program (1) | 4,500 |
|
| $ | 4,747 |
|
| |
(1) | In managing our available liquidity, we do not expect a maximum outstanding amount in excess of the capacity of our credit facility inclusive of any outstanding amounts under our commercial paper program. We had no commercial paper outstanding as of September 30, 2019. Through September 30, 2019, the highest amount outstanding under our commercial paper program and credit facility during 2019 was $1.226 billion. At September 30, 2019, we were in compliance with the financial covenants associated with our credit facility. |
Dividends
We increased our regular quarterly cash dividend to common stockholders by approximately 12 percent from the previous quarterly cash dividends of $0.34 per share paid in each quarter of 2018, to $0.38 per share for the quarterly cash dividends paid in March, June, and September 2019.
Registrations
In February 2018, we filed a shelf registration statement as a well-known seasoned issuer. In August 2018, we filed a prospectus supplement for the offer and sale from time to time of shares of our common stock having an aggregate offering price of up to $1 billion. These sales are to be made over a period of time and from time to time in transactions at then-current prices. Such sales are to be made pursuant to an equity distribution agreement between us and certain entities who may act as sales agents or purchase for their own accounts as principals at a price agreed upon at the time of the sale.
Distributions from Equity-Method Investees
The organizational documents of entities in which we have an equity-method investment generally require distribution of their available cash to their members on a quarterly basis. In each case, available cash is reduced, in part, by reserves appropriate for operating their respective businesses.
Credit Ratings
The interest rates at which we are able to borrow money are impacted by our credit ratings. The current ratings are as follows:
|
| | | | | | |
Rating Agency | | Outlook | | Senior Unsecured Debt Rating | | Corporate Credit Rating |
S&P Global Ratings | | Stable | | BBB | | BBB |
Moody’s Investors Service | | Stable | | Baa3 | | N/A |
Fitch Ratings | | Rating Watch Positive | | BBB- | | N/A |
In July 2019, S&P Global Ratings changed its Outlook from Negative to Stable.
These credit ratings are included for informational purposes and are not recommendations to buy, sell, or hold our securities, and each rating should be evaluated independently of any other rating. No assurance can be given that the credit rating agencies will continue to assign us investment-grade ratings even if we meet or exceed their current criteria for investment-grade ratios. A downgrade of our credit ratings might increase our future cost of borrowing and would require us to provide additional collateral to third parties, negatively impacting our available liquidity.
Management’s Discussion and Analysis (Continued)
Sources (Uses) of Cash
The following table summarizes the sources (uses) of cash and cash equivalents for each of the periods presented (see Notes to Consolidated Financial Statements for the Notes referenced in the table):
|
| | | | | | | | | |
| Cash Flow | | Nine Months Ended September 30, |
| Category | | 2019 | | 2018 |
| | | (Millions) |
Sources of cash and cash equivalents: | | | | | |
Operating activities – net | Operating | | $ | 2,702 |
| | $ | 2,331 |
|
Proceeds from sale of partial interest in consolidated subsidiary (see Note 2) | Financing | | 1,330 |
| | — |
|
Proceeds from credit-facility borrowings | Financing | | 700 |
| | 1,680 |
|
Proceeds from dispositions of equity-method investments (see Note 5) | Investing | | 485 |
| | — |
|
Proceeds from long-term debt | Financing | | 36 |
| | 2,065 |
|
Contributions in aid of construction | Investing | | 25 |
| | 395 |
|
Proceeds from commercial paper – net | Financing | | — |
| | 821 |
|
| | | | | |
Uses of cash and cash equivalents: | | | | | |
Capital expenditures | Investing | | (1,705 | ) | | (2,659 | ) |
Common dividends paid | Financing | | (1,382 | ) | | (974 | ) |
Payments on credit-facility borrowings | Financing | | (860 | ) | | (1,950 | ) |
Purchases of businesses, net of cash acquired (see Note 2) | Investing | | (728 | ) | | — |
|
Purchases of and contributions to equity-method investments | Investing | | (361 | ) | | (803 | ) |
Dividends and distributions paid to noncontrolling interests | Financing | | (86 | ) | | (552 | ) |
Payments of long-term debt | Financing | | (44 | ) | | (1,251 | ) |
Payments of commercial paper – net | Financing | | (4 | ) | | — |
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| | | | | |
Other sources / (uses) – net | Financing and Investing | | (29 | ) | | 40 |
|
Increase (decrease) in cash and cash equivalents | | | $ | 79 |
| | $ | (857 | ) |
Operating activities
The factors that determine operating activities are largely the same as those that affect Net income (loss), with the exception of noncash items such as Depreciation and amortization, Provision (benefit) for deferred income taxes, Equity (earnings) losses, Net (gain) loss on disposition of equity-method investments, Impairment of equity-method investments, (Gain) loss on deconsolidation of businesses, and Impairment of and net (gain) loss on sale of certain assets. Our Net cash provided (used) by operating activities for the nine months ended September 30, 2019, increased from the same period in 2018 primarily due to the net favorable changes in net operating working capital in 2019, including the collection of Transco’s filed rates subject to refund and the receipt of an income tax refund, as well as higher operating income (excluding noncash items as previously discussed) in 2019, partially offset by the impact of decreased distributions from unconsolidated affiliates in 2019.
Off-Balance Sheet Arrangements and Guarantees of Debt or Other Commitments
We have various other guarantees and commitments which are disclosed in Note 4 – Variable Interest Entities, Note 11 – Debt and Banking Arrangements, Note 13 – Fair Value Measurements and Guarantees, and Note 14 – Contingent Liabilities of Notes to Consolidated Financial Statements. We do not believe these guarantees and commitments or the possible fulfillment of them will prevent us from meeting our liquidity needs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our current interest rate risk exposure is related primarily to our debt portfolio and has not materially changed during the first nine months of 2019.
Item 4. Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934, as amended) (Disclosure Controls) or our internal control over financial reporting (Internal Controls) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our Internal Control over Financial Reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Environmental
Certain reportable legal proceedings involving governmental authorities under federal, state, and local laws regulating the discharge of materials into the environment are described below. While it is not possible for us to predict the final outcome of the proceedings which are still pending, we do not anticipate a material effect on our consolidated financial position if we receive an unfavorable outcome in any one or more of such proceedings.
On June 13, 2013, an explosion and fire occurred at our formerly owned Geismar olefins plant and rendered the facility temporarily inoperable (Geismar Incident). On October 21, 2013, the EPA, Region 6, issued an Inspection Report pursuant to the Clean Air Act’s Risk Management Program following its inspection of the facility on June 24 through June 28, 2013. The report notes the EPA’s preliminary determinations about the facility’s documentation
regarding process safety, process hazard analysis, as well as operating procedures, employee training, and other matters. On June 16, 2014, we received a request for information related to the Geismar Incident from the EPA under Section 114 of the Clean Air Act to which we responded on August 13, 2014. We have worked with the agency to resolve these matters and recently entered into a Stipulation of Settlement, which includes a penalty of $750,000 that will be due within thirty days of the Court’s entry of the settlement. The Court set a fairness hearing on the settlement for December 11, 2019.
On February 21, 2017, we received notice from the Environmental Enforcement Section of the United States Department of Justice (DOJ) regarding certain alleged violations of the Clean Air Act at our Moundsville facility as set forth in a Notice of Noncompliance issued by the EPA on January 14, 2016. The notice includes an offer to avoid further legal action on the alleged violations by paying $2 million. In discussion with the DOJ and the EPA, the EPA has indicated its belief that additional similar violations have occurred at our Oak Grove facility and has expressed interest in pursuing a global settlement. On July 23, 2018, we received an offer from the DOJ to globally settle the government’s claim for civil penalties associated with the alleged violations at both the Moundsville and the Oak Grove facilities for $1.6 million. We are continuing to work with the agencies to resolve this matter.
On May 5, 2017, we entered into a Consent Order with the Georgia Department of Natural Resources, Environmental Protection Division (GADNR) pertaining to alleged violations of the Georgia Water Quality Control Act and associated rules arising from a permit issued by GADNR for construction of Transco’s Dalton expansion project. Pursuant to the Consent Order, we paid a fine of $168,750 and agreed to perform a Corrective Action Plan, the completion of which is pending.
On March 19, 2018, we received a Notice of Violation from the EPA, Region 8, regarding certain alleged violations of the Clean Air Act at our former Ignacio Gas Plant in Durango, Colorado, following a previous on-site inspection of the facility. We were subsequently informed that this matter has been referred to the DOJ for handling. The Notice of Violation does not contain an initial penalty assessment. We have responded to the alleged violations and continue to work with the agencies to resolve this matter.
On March 20, 2018, we also received a Notice of Violation from the EPA, Region 8, regarding certain alleged violations of the Clean Air Act at our Parachute Creek Gas Plant in Parachute, Colorado, following a previous on-site inspection of the facility. We were informed that this matter has been referred to the DOJ for handling. The Notice of Violation does not contain an initial penalty assessment. We have responded to the alleged violations and continue to work with the agencies to resolve this matter.
On August 27, 2018, Northwest Pipeline LLC received a Notice of Violation/Cease and Desist Order from the Colorado Department of Public Health & Environment (CDPHE) regarding certain alleged violations of the Colorado Water Quality Control Act and its General Permit under the Colorado Discharge Permit System related to its stormwater management practices at two construction sites. On March 4, 2019, the CDPHE provided us with its initial penalty calculation, proposing a penalty of $81,000 in settlement of all violations alleged in its notice. On July 2, 2019, we entered into a Compliance Order on Consent with CDPHE, which includes a penalty amount of $81,000, to fully resolve the matter.
Other environmental matters called for by this Item are described under the caption “Environmental Matters” in Note 14 – Contingent Liabilities of Notes to Consolidated Financial Statements included under Part I, Item 1. Financial Statements of this report, which information is incorporated by reference into this Item.
Other litigation
The additional information called for by this Item is provided in Note 14 – Contingent Liabilities of Notes to Consolidated Financial Statements included under Part I, Item 1. Financial Statements of this report, which information is incorporated by reference into this Item.
Item 1A. Risk Factors
Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, includes risk factors that could materially affect our business, financial condition, or future results. Those risk factors have not materially changed.
Item 6. Exhibits
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Exhibit No. | | | | Description |
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2.1+ | | — | | |
2.2 | | — | | Amendment No 1. to Agreement and Plan of Merger dated as of May 1, 2016, by and among The Williams Companies, Inc., Energy Transfer Corp LP, Energy Transfer Corp GP, LLC, Energy Transfer Equity, L.P., LE GP, LLC and Energy Transfer Equity GP, LLC (filed on May 3, 2016 as Exhibit 2.1 to The Williams Companies, Inc.’s current report on Form 8-K (File No. 001-04174) and incorporated herein by reference). |
2.3+ | | — | | Agreement and Plan of Merger dated as of September 28, 2015, by and among The Williams Companies, Inc., Energy Transfer Corp LP, Energy Transfer Corp GP, LLC, Energy Transfer Equity, L.P., LE GP, LLC and Energy Transfer Equity GP, LLC (filed on October 1, 2015 as Exhibit 2.1 to The Williams Companies, Inc.’s current report on Form 8-K (File No. 001-04174) and incorporated herein by reference). |
3.1 | | — | | |
3.2 | | — | | |
3.3 | | — | | |
3.4 | | — | | |
31.1* | | — | | |
31.2* | | — | | |
32** | | — | | |
101.INS* | | — | | XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH* | | — | | XBRL Taxonomy Extension Schema. |
101.CAL* | | — | | XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF* | | — | | XBRL Taxonomy Extension Definition Linkbase. |
101.LAB* | | — | | XBRL Taxonomy Extension Label Linkbase. |
101.PRE* | | — | | XBRL Taxonomy Extension Presentation Linkbase. |
104* | | — | | Cover Page Interactive Data File. The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document (contained in Exhibit 101). |
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§ | Management contract or compensatory plan or arrangement. |
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+ | Pursuant to item 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| THE WILLIAMS COMPANIES, INC. |
| (Registrant) |
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| /s/ TED T. TIMMERMANS |
| Ted T. Timmermans |
| Vice President, Controller and Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer) |
October 31, 2019