Edgar Filing: WILLIAMS COMPANIES INC

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018



¨	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.)

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ 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 þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨
		(Do not check if a smaller reporting 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 þ

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 29, 2018
Common Stock, $1 par value		1,210,542,031

The Williams Companies, Inc.

Index



		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Income – Three and Nine Months Ended September 30, 2018 and 2017		6
Consolidated Statement of Comprehensive Income – Three and Nine Months Ended September 30, 2018 and 2017		7
Consolidated Balance Sheet – September 30, 2018 and December 31, 2017		8
Consolidated Statement of Changes in Equity – Nine Months Ended September 30, 2018		9
Consolidated Statement of Cash Flows – Nine Months Ended September 30, 2018 and 2017		10
Notes to Consolidated Financial Statements		11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		46
Item 3. Quantitative and Qualitative Disclosures About Market Risk		71
Item 4. Controls and Procedures		71
Part II. Other Information		71
Item 1. Legal Proceedings		71
Item 1A. Risk Factors		73
Item 6. Exhibits		74

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;


•	Business strategy;


•	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 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 (including, but not limited to, the Tax Cuts and Job Acts of 2017 and Colorado Proposition 112), 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;


•	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 22, 2018, as supplemented by the disclosure in Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.

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

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, 2018, we account for as an equity-method investment, including principally the following:

Aux Sable: Aux Sable Liquid Products LP

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.

Laurel Mountain: Laurel Mountain Midstream, LLC

OPPL: Overland Pass Pipeline Company LLC

RMM: Rocky Mountain Midstream Holdings LLC

UEOM: Utica East Ohio Midstream LLC

Government and Regulatory:

EPA: Environmental Protection Agency

FERC: Federal Energy Regulatory Commission

SEC: Securities and Exchange Commission

Other:

ETE Merger Agreement: Merger Agreement and Plan of Merger of Williams with Energy Transfer Equity, L.P and certain of its affiliates

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

IDR: Incentive distribution right

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, and third-party transportation and fractionation

RGP Splitter: Refinery grade propylene splitter

Throughput: The volume of product transported or passing through a pipeline, plant, terminal, or other facility

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

The Williams Companies, Inc.

Consolidated Statement of Income

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Millions, except per-share amounts)
Revenues:
Service revenues	$	1,371		$	1,310		$	4,062		$	3,853
Service revenues – commodity consideration (Note 2)	121			—			316			—
Product sales	811			581			2,104			1,950
Total revenues	2,303			1,891			6,482			5,803
Costs and expenses:
Product costs	790			504			2,039			1,620
Processing commodity expenses (Note 2)	30			—			91			—
Operating and maintenance expenses	389			403			1,134			1,166
Depreciation and amortization expenses	425			433			1,290			1,308
Selling, general, and administrative expenses	174			138			436			452
Gain on sale of Geismar Interest (Note 4)	—			(1,095		)	—			(1,095		)
Impairment of certain assets (Note 12)	—			1,210			66			1,236
Other (income) expense – net	(6		)	24			24			34
Total costs and expenses	1,802			1,617			5,080			4,721
Operating income (loss)	501			274			1,402			1,082
Equity earnings (losses)	105			115			279			347
Other investing income (loss) – net (Note 5)	2			4			74			278
Interest incurred	(286		)	(275		)	(856		)	(842		)
Interest capitalized	16			8			38			24
Other income (expense) – net	52			23			99			124
Income (loss) before income taxes	390			149			1,036			1,013
Provision (benefit) for income taxes	190			24			297			126
Net income (loss)	200			125			739			887
Less: Net income (loss) attributable to noncontrolling interests	71			92			323			400
Net income (loss) attributable to The Williams Companies, Inc.	129			33			416			487
Preferred stock dividends (Note 11)	—			—			—			—
Net income (loss) available to common stockholders	$	129		$	33		$	416		$	487
Amounts attributable to The Williams Companies, Inc.:
Basic earnings (loss) per common share:
Net income (loss)	$	.13		$	.04		$	.47		$	.59
Weighted-average shares (thousands)	1,023,587			826,779			893,706			825,925
Diluted earnings (loss) per common share:
Net income (loss)	$	.13		$	.04		$	.46		$	.59
Weighted-average shares (thousands)	1,026,504			829,368			896,322			828,150
Cash dividends declared per common share	$	.34		$	.30		$	1.02		$	.90

See accompanying notes.

The Williams Companies, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Millions)
Net income (loss)	$	200		$	125		$	739		$	887
Other comprehensive income (loss):
Cash flow hedging activities:
Net unrealized gain (loss) from derivative instruments, net of taxes of $3 and $6 in 2018, and $2 and $1 in 2017	(5		)	(9		)	(19		)	(5		)
Reclassifications into earnings of net derivative instruments (gain) loss, net of taxes of ($2) and ($3) in 2018, and $1 and $1 in 2017	7			2			10			—
Pension and other postretirement benefits:
Amortization of prior service cost (credit) included in net periodic benefit cost (credit), net of taxes of $1 and $2 in 2017	—			—			—			(2		)
Net actuarial gain (loss) arising during the year, net of taxes of ($0) and ($1) in 2018	—			—			4			—
Amortization of actuarial (gain) loss and net actuarial loss from settlements included in net periodic benefit cost (credit), net of taxes of ($3) and ($5) in 2018, and ($2) and ($7) in 2017	4			4			14			13
Other comprehensive income (loss)	6			(3		)	9			6
Comprehensive income (loss)	206			122			748			893
Less: Comprehensive income (loss) attributable to noncontrolling interests	72			89			321			398
Comprehensive income (loss) attributable to The Williams Companies, Inc.	$	134		$	33		$	427		$	495

See accompanying notes.

The Williams Companies, Inc.

Consolidated Balance Sheet

(Unaudited)



	September 30, 2018			December 31, 2017
	(Millions, except per-share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	42		$	899
Trade accounts and other receivables (net of allowance of $9 at September 30, 2018 and $9 at December 31, 2017)	883			976
Inventories	153			113
Assets held for sale (Note 4)	664			7
Other current assets and deferred charges	242			184
Total current assets	1,984			2,179
Investments	7,427			6,552
Property, plant, and equipment	39,953			39,513
Accumulated depreciation and amortization	(11,279		)	(11,302		)
Property, plant, and equipment – net	28,674			28,211
Intangible assets – net of accumulated amortization	8,324			8,791
Regulatory assets, deferred charges, and other	744			619
Total assets	$	47,153		$	46,352
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	739		$	978
Liabilities held for sale (Note 4)	49			—
Accrued liabilities	1,117			1,167
Commercial paper	823			—
Long-term debt due within one year	33			501
Total current liabilities	2,761			2,646
Long-term debt	21,409			20,434
Deferred income tax liabilities	1,648			3,147
Regulatory liabilities, deferred income, and other	4,376			3,950
Contingent liabilities (Note 13)
Equity:
Stockholders’ equity:
Preferred stock (Note 11)	35			—
Common stock ($1 par value; 1,470 million shares authorized at September 30, 2018 and 960 million shares authorized at December 31, 2017; 1,245 million shares issued at September 30, 2018 and 861 million shares issued at December 31, 2017)	1,245			861
Capital in excess of par value	24,680			18,508
Retained deficit	(9,018		)	(8,434		)
Accumulated other comprehensive income (loss)	(291		)	(238		)
Treasury stock, at cost (35 million shares of common stock)	(1,041		)	(1,041		)
Total stockholders’ equity	15,610			9,656
Noncontrolling interests in consolidated subsidiaries	1,349			6,519
Total equity	16,959			16,175
Total liabilities and equity	$	47,153		$	46,352

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 – December 31, 2017	$	—	$	861	$	18,508		$	(8,434	)	$	(238	)	$	(1,041	)	$	9,656		$	6,519		$	16,175
Adoption of ASC 606 (Note 1)	—		—		—			(84		)	—			—			(84		)	(37		)	(121		)
Adoption of ASU 2018-02 (Note 1)	—		—		—			61			(61		)	—			—			—			—
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 11)	35		—		—			—			—			—			35			—			35
Cash dividends – common stock	—		—		—			(974		)	—			—			(974		)	—			(974		)
Dividends and distributions to noncontrolling interests	—		—		—			—			—			—			—			(598		)	(598		)
Stock-based compensation and related common stock issuances	—		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 3)	—		—		—			—			—			—			—			(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,
	2018			2017
	(Millions)
OPERATING ACTIVITIES:
Net income (loss)	$	739		$	887
Adjustments to reconcile to net cash provided (used) by operating activities:
Depreciation and amortization	1,290			1,308
Provision (benefit) for deferred income taxes	351			99
Equity (earnings) losses	(279		)	(347		)
Distributions from unconsolidated affiliates	507			602
Net (gain) loss on disposition of equity-method investments	—			(269		)
Gain on sale of Geismar Interest (Note 4)	—			(1,095		)
Impairment of and net (gain) loss on sale of assets	64			1,225
Amortization of stock-based awards	43			61
Cash provided (used) by changes in current assets and liabilities:
Accounts and notes receivable	75			118
Inventories	(39		)	(23		)
Other current assets and deferred charges	(44		)	(11		)
Accounts payable	(76		)	47
Accrued liabilities	(62		)	(161		)
Other, including changes in noncurrent assets and liabilities	(238		)	(210		)
Net cash provided (used) by operating activities	2,331			2,231
FINANCING ACTIVITIES:
Proceeds from (payments of) commercial paper – net	821			(93		)
Proceeds from long-term debt	3,745			3,013
Payments of long-term debt	(3,201		)	(5,475		)
Proceeds from issuance of common stock	15			2,130
Common dividends paid	(974		)	(744		)
Dividends and distributions paid to noncontrolling interests	(552		)	(636		)
Contributions from noncontrolling interests	13			15
Payments for debt issuance costs	(26		)	(14		)
Other – net	(46		)	(87		)
Net cash provided (used) by financing activities	(205		)	(1,891		)
INVESTING ACTIVITIES:
Property, plant, and equipment:
Capital expenditures (1)	(2,659		)	(1,700		)
Dispositions – net	(2		)	(27		)
Contributions in aid of construction	395			253
Proceeds from sale of businesses, net of cash divested	—			2,056
Proceeds from dispositions of equity-method investments	—			200
Purchases of and contributions to equity-method investments	(803		)	(103		)
Other – net	86			(17		)
Net cash provided (used) by investing activities	(2,983		)	662
Increase (decrease) in cash and cash equivalents	(857		)	1,002
Cash and cash equivalents at beginning of year	899			170
Cash and cash equivalents at end of period	$	42		$	1,172
_____________
(1) Increases to property, plant, and equipment	$	(2,482	)	$	(1,826	)
Changes in related accounts payable and accrued liabilities	(177		)	126
Capital expenditures	$	(2,659	)	$	(1,700	)

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, 2017, in Exhibit 99.1 of our Form 8-K dated May 3, 2018. 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), 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 non-cash 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) 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. Prior to the completion of the WPZ Merger and 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.

Financial Repositioning

In January 2017, we entered into agreements with WPZ, wherein we permanently waived the general partner’s incentive distribution rights and converted our 2 percent general partner interest in WPZ to a noneconomic interest in exchange for 289 million newly issued WPZ common units. Pursuant to this agreement, we also purchased approximately 277 thousand WPZ common units for $10 million. Additionally, we purchased approximately 59 million common units of WPZ at a price of $36.08586 per unit in a private placement transaction, funded with proceeds from our equity offering. According to the terms of this agreement, concurrent with WPZ’s quarterly distributions in February 2017 and May 2017, we paid additional consideration totaling $56 million to WPZ for these units.

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 principally in the United States. Prior to the WPZ Merger, we had one reportable segment, Williams Partners. Beginning in the third-quarter 2018, consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources, our operations are now presented within the following reportable segments: Northeast G&P, Atlantic-Gulf, and West. Prior period segment disclosures have been recast for the new segment presentation.

Notes (Continued)

Northeast G&P is comprised of our midstream gathering and processing businesses in the Marcellus Shale region primarily in Pennsylvania, New York, and West Virginia and the Utica Shale region of eastern Ohio, as well as a 66 percent interest in Cardinal Gas Services, L.L.C. (Cardinal) (a consolidated entity), a 62 percent equity-method investment in Utica East Ohio Midstream, LLC, a 69 percent equity-method investment in Laurel Mountain Midstream, LLC, 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 gathering systems in the Marcellus Shale (Appalachia Midstream Investments).

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, and various petrochemical and feedstock pipelines in the Gulf Coast region, as well as a 50 percent equity-method investment in Gulfstream Natural Gas System, L.L.C., a 41 percent interest in Constitution Pipeline Company, LLC (Constitution) (a consolidated entity), which is developing a pipeline project (see Note 3 – Variable Interest Entities), and a 60 percent equity-method investment in Discovery Producer Services LLC.

West is comprised of our interstate natural gas pipeline, Northwest Pipeline LLC (Northwest Pipeline), and our gathering, processing, and treating operations in New Mexico, Colorado, and Wyoming, as well as the Barnett Shale region of north-central Texas, the Eagle Ford Shale region of south Texas, the Haynesville Shale region of northwest Louisiana, and the Mid-Continent region which includes the Anadarko, Arkoma, Delaware, and Permian 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, and a 50 percent equity-method investment in Overland Pass Pipeline, LLC, a 50 percent interest in Jackalope Gas Gathering Services, L.L.C. (Jackalope) (an equity-method investment following deconsolidation as of June 30, 2018), a 43 percent equity-method investment in Rocky Mountain Midstream Holdings LLC (RMM), and our previously owned 50 percent equity-method investment in the Delaware basin gas gathering system (DBJV) in the Mid-Continent region (see Note 5 – Investing Activities).

All remaining business activities, including our former Williams Olefins, L.L.C., a wholly owned subsidiary which owned our 88.5 percent undivided interest in the Geismar, Louisiana, olefins plant (Geismar Interest) (see Note 4 – Divestitures and Assets Held for Sale), as well as corporate activities, are included in Other.

Basis of Presentation

Significant risks and uncertainties

We may monetize assets that are not core to our strategy which could result in impairments of certain equity-method investments, property, plant, and equipment, and intangible assets. Such impairments could potentially be caused by indications of fair value implied through the monetization process or, in the case of asset dispositions that are part of a broader asset group, the impact of the loss of future estimated cash flows.

Proposition 112

On November 6, 2018, citizens of Colorado will vote on Proposition 112, a ballot measure that could significantly increase setback distances from occupied structures or other vulnerable areas, as defined or designated, for any new oil and gas development in the state, critically restricting or banning such activities. If the measure is approved, it could still be subject to modification or amendment by the Colorado legislature. An unfavorable outcome could adversely impact the operations, and ultimately the value, of our businesses and investments in Colorado, notably our recent investment in RMM (see Note 5 – Investing Activities).

FERC Income Tax Policy Revision

On March 15, 2018, the Federal Energy Regulatory Commission (FERC) issued a revised policy statement (the March 15 Statement) regarding the recovery of income tax costs in rates of natural gas pipelines. The FERC found that an impermissible double recovery results from granting a Master Limited Partnership (MLP) pipeline

Notes (Continued)

both an income tax allowance and a return on equity pursuant to the discounted cash flow methodology. As a result, the FERC will no longer permit an MLP pipeline to recover an income tax allowance in its cost of service. The FERC further stated it will address the application of this policy to non-MLP partnership forms as those issues arise in subsequent proceedings. One of the benefits of the recent WPZ Merger is to allow our FERC-regulated pipelines to continue to recover an income tax allowance in their cost of service rates.

On July 18, 2018, the FERC issued an order dismissing the requests for rehearing and clarification of the revised policy statement. In addition, the FERC provided guidance that an MLP pipeline (or other pass-through entity) no longer recovering an income tax allowance pursuant to the revised policy may eliminate previously accumulated deferred income taxes (ADIT) from its cost of service instead of flowing these ADIT balances to ratepayers. This guidance, if implemented, would significantly mitigate the impact of the March 15 Statement. However, the FERC stated that the revised policy statement and such guidance do not establish a binding rule but are instead expressions of general policy intent designed to provide guidance by notifying entities of the course of action the FERC intends to follow in future adjudications. To the extent the FERC addresses these issues in future proceedings, it will consider any arguments regarding not only the application of the revised policy to the facts of the case, but also any arguments regarding the underlying validity of the policy itself. The FERC’s guidance on ADIT likely will be challenged by customers and state commissions, which would result in a long period of revenue uncertainty for pipelines eliminating ADIT from their cost of service. The WPZ Merger has the additional benefit of eliminating this uncertainty.

On March 15, 2018, the FERC also issued a Notice of Proposed Rulemaking proposing a filing process that will allow it to determine which natural gas pipelines may be collecting unjust and unreasonable rates in light of the recent reduction in the corporate income tax rate in the Tax Cuts and Jobs Act (Tax Reform) and the revised policy statement. On July 18, 2018, the FERC issued a Final Rule, retaining the filing requirement and reaffirming the options that pipelines have to either reflect the reduced tax rate or explain why no rate change is necessary. The FERC also clarified that a natural gas company organized as a pass-through entity and all of whose income or losses are consolidated on the federal income tax return of its corporate parent is considered to be subject to the federal corporate income tax and is thus eligible for a tax allowance. We believe this Final Rule and the previously discussed WPZ Merger allow for the continued recovery of income tax allowances in Transco’s and Northwest Pipeline’s rates. Further, Transco’s August 31, 2018 general rate case filing reflects a tax allowance based on this clarification, and the FERC’s September 28, 2018 order in the rate case proceeding finds that Transco is exempt from the Final Rule’s Form 501-G filing requirement. In addition, on October 19, 2018, Northwest Pipeline filed a petition requesting that the FERC waive its Form 501-G filing requirement under this Final Rule because the reduction in the corporate income tax in Tax Reform is already addressed in its settlement.

On March 15, 2018, the FERC also issued a Notice of Inquiry seeking comments on the additional impacts of Tax Reform on jurisdictional rates, particularly whether, and if so how, the FERC should address changes relating to ADIT amounts after the corporate income tax rate reduction and bonus depreciation rules, as well as whether other features of Tax Reform require FERC action. We are evaluating the impact of these developments on our interstate natural gas pipelines and currently expect any associated impacts would be prospective and determined through subsequent rate proceedings. We also continue to monitor developments that may impact our regulatory liabilities resulting from Tax Reform. It is reasonably possible that future tariff-based rates collected by our interstate natural gas pipelines may be adversely impacted.

Accounting standards issued and adopted

During the first quarter of 2018, we early adopted Accounting Standards Update (ASU) 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). As a result of Tax Reform lowering the federal income tax rate, the tax effects of items within accumulated other comprehensive income may not reflect the appropriate tax rate. ASU 2018-02 allows for the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Reform. The adoption of ASU 2018-02 resulted in the reclassification of $61 million from Accumulated other comprehensive income (loss) to Retained deficit on our Consolidated Balance Sheet.

Notes (Continued)

Effective January 1, 2018, we adopted ASU 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12). ASU 2017-12 applies to entities that elect hedge accounting in accordance with Accounting Standards Codification (ASC) 815. The ASU affects both the designation and measurement guidance for hedging relationships and the presentation of hedging results. ASU 2017-12 was applied using a modified retrospective approach for cash flow and net investment hedges existing at the date of adoption and prospectively for the presentation and disclosure guidance. The adoption of ASU 2017-12 did not have a significant impact on our consolidated financial statements.

Effective January 1, 2018, we adopted ASU 2017-07 “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07). ASU 2017-07 requires employers to report the service cost component of net benefit cost in the same line item or items as other compensation costs arising from employee services. The other components of net benefit cost must be presented in the income statement separately from the service cost component and outside Operating income (loss). Only the service cost component is now eligible for capitalization when applicable. The presentation aspect of ASU 2017-07 must be applied retrospectively and the capitalization requirement prospectively. In accordance with this adoption, we have conformed the prior year presentation, which resulted in increases of $3 million and $9 million to Operating and maintenance expenses with corresponding decreases to Operating income (loss) and increases of $3 million and $9 million to Other income (expense) – net below Operating income (loss) in the Consolidated Statement of Income for the three- and nine-month periods ended September 30, 2017, respectively.

Effective January 1, 2018, we adopted ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). Among other things, ASU 2016-15 permits an accounting policy election to classify distributions received from equity-method investees using either the cumulative earnings approach or the nature of distribution approach. We have elected to apply the nature of distribution approach and have retrospectively conformed the prior year presentation within the Consolidated Statement of Cash Flows in accordance with ASU 2016-15. For the period ended September 30, 2017, amounts previously presented as Distributions from unconsolidated affiliates in excess of cumulative earnings within Investing Activities are now presented as part of Distributions from unconsolidated affiliates within Operating Activities, resulting in an increase to Net cash provided (used) by operating activities of $394 million with a corresponding reduction in Net cash provided (used) by investing activities.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 establishing ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606). ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services and requires significantly enhanced revenue disclosures. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (ASU 2015-14). Per ASU 2015-14, the standard became effective for interim and annual reporting periods beginning after December 15, 2017.

We adopted the provisions of ASC 606 effective January 1, 2018, utilizing the modified retrospective transition method for all contracts with customers, which included applying the provisions of ASC 606 beginning January 1, 2018, to all contracts not completed as of that date with the cumulative effect of applying the standard for periods prior to January 1, 2018, as an adjustment to Total equity, net of tax, upon adoption. As a result of our adoption, the cumulative impact to our Total equity, net of tax, at January 1, 2018, was a decrease of $121 million in the Consolidated Balance Sheet.

For each revenue contract type, we conducted a formal contract review process to evaluate the impact of ASC 606. The adjustment to Total equity upon adoption of ASC 606 is primarily comprised of the impact to the timing of recognition of deferred revenue (contract liabilities) associated with certain contracts which underwent modifications in periods prior to January 1, 2018. Under the provisions of ASC 606, when a contract modification does not increase both the scope and price of the contract, and the remaining goods and services are distinct from the goods and services transferred prior to the modification, the modification is treated as a termination of the existing contract and the creation of a new contract. ASC 606 requires that the transaction price, including any remaining contract liabilities from the old contract, be allocated to the performance obligations over the term of the new contract. The contract modification adjustments are partially offset by the impact of changes to the timing of recognizing revenue which is subject to the constraint on

Notes (Continued)

estimates of variable consideration of certain contracts. The constraint of variable consideration will result in the acceleration of revenue recognition and corresponding de-recognition of contract liabilities for certain contracts (as compared to the previous revenue recognition model) as a result of our assessment that it is probable such recognition would not result in a significant revenue reversal in the future. Additionally, under ASC 606, our revenues will increase in situations where we receive noncash consideration, which exists primarily in certain of our gas processing contracts where we receive commodities as full or partial consideration for services provided. This increase in revenues will be offset by a similar increase in costs and expenses when the commodities received are subsequently sold. Financial systems and internal controls necessary for adoption were implemented effective January 1, 2018. (See Note 2 – Revenue Recognition.)

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 interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The standard requires varying transition methods for the different categories of amendments. Although we do not expect ASU 2016-13 to have a significant impact, it could impact our trade receivables as the related allowance for credit losses will be recognized earlier under the expected loss model.

In February 2016, the FASB issued 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 current 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 will also be 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 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 non-lease 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. Early adoption is permitted. We will adopt ASU 2016-02 effective January 1, 2019.

We are in the process of finalizing our review of contracts to identify leases based on the modified definition of a lease and identifying 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. While we are still in the process of completing our implementation evaluation of ASU 2016-02, we currently believe the most significant changes to our financial statements relate to the recognition of a lease liability and offsetting right-of-use asset in our Consolidated Balance Sheet for operating leases. We are also evaluating ASU 2016-02’s available practical expedients on adoption, which we generally expect to elect.

Notes (Continued)

Note 2 – Revenue Recognition

Customers in our gas pipeline businesses are comprised of public utilities, municipalities, gas marketers and producers, intrastate pipelines, direct industrial users, and electrical generators. Customers in our midstream businesses are comprised of oil and natural gas producer counterparties. Customers for our product sales are comprised of public utilities, gas marketers, and direct industrial users.

A performance obligation is a promise in a contract to transfer a distinct good or service (or integrated package of goods or services) to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue, when, or as, the performance obligation is satisfied. A performance obligation is distinct if the service is separately identifiable from other items in the integrated package of services and if a customer can benefit from it on its own or with other resources that are readily available to the customer. An integrated package of services typically represents a single performance obligation if the services are contained within the same contract or within multiple contracts entered into in contemplation with one another that are highly interdependent or highly interrelated, meaning each of the services is significantly affected by one or more of the other services in the contract. Service revenue contracts from our gas pipeline and midstream businesses contain a series of distinct services, with the majority of our contracts having a single performance obligation that is satisfied over time as the customer simultaneously receives and consumes the benefits provided by our performance. Most of our product sales contracts have a single performance obligation with revenue recognized at a point in time when the products have been sold and delivered to the customer.

Certain customers reimburse us for costs we incur associated with construction of property, plant, and equipment utilized in our operations. For our rate-regulated gas pipeline businesses that apply ASC 980. "Regulated Operations" (Topic 980), we follow FERC guidelines with respect to reimbursement of construction costs. FERC tariffs only allow for cost reimbursement and are non-negotiable in nature; thus, the construction activities do not represent an ongoing major and central operation of our gas pipeline businesses and are not within the scope of ASC 606. Accordingly, cost reimbursements are treated as a reduction to the cost of the constructed asset. For our midstream businesses, reimbursement and service contracts with customers are viewed together as providing the same commercial objective, as we have the ability to negotiate the mix of consideration between reimbursements and amounts billed over time. Accordingly, we generally recognize reimbursements of construction costs from customers on a gross basis as a contract liability separate from the associated costs included within property, plant, and equipment. The contract liability is recognized into service revenues as the underlying performance obligations are satisfied.

Service Revenues

Gas pipeline businesses

Revenues from our interstate natural gas pipeline businesses, which are included within the caption “Regulated interstate natural gas transportation and storage” in the revenue by category table below and are subject to regulation by certain state and federal authorities, including the FERC, include both firm and interruptible transportation and storage contracts. Firm transportation and storage agreements provide for a reservation charge based on the pipeline or storage capacity reserved, and a commodity charge based on the volume of natural gas delivered/stored, each at rates specified in our FERC tariffs or based on negotiated contractual rates, with contract terms that are generally long-term in nature. Most of our long-term contracts contain an evergreen provision, which allows the contracts to be extended for periods primarily up to one year in length an indefinite number of times following the specified contract term and until terminated generally by either us or the customer. Interruptible transportation and storage agreements provide for a volumetric charge based on actual commodity transportation or storage utilized in the period in which those services are provided, and the contracts are generally limited to one-month periods or less. Our performance obligations related to our interstate natural gas pipeline businesses include the following:


•	Guaranteed transportation or storage under firm transportation and storage contracts—an integrated package of services typically constituting a single performance obligation, which includes standing ready to provide such services and receiving, transporting or storing (as applicable), and redelivering commodities;

Notes (Continued)


•	Interruptible transportation and storage under interruptible transportation and storage contracts—an integrated package of services typically constituting a single performance obligation, which includes receiving, transporting or storing (as applicable), and redelivering commodities upon nomination by the customer.

In situations where we consider the integrated package of services as a single performance obligation, which represents a majority of our interstate natural gas pipeline contracts with customers, we do not consider there to be multiple performance obligations because the nature of the overall promise in the contract is to stand ready (with regard to firm transportation and storage contracts), receive, transport or store, and redeliver natural gas to the customer; therefore, revenue is recognized at the completion of the integrated package of services which represents a single performance obligation.

We recognize revenues for reservation charges over the performance obligation period, which is the contract term, regardless of the volume of natural gas that is transported or stored. Revenues for commodity charges from both firm and interruptible transportation services and storage services are recognized when natural gas is delivered at the agreed upon delivery point or when natural gas is injected or withdrawn from the storage facility because they specifically relate to our efforts to provide these distinct services. Generally, reservation charges and commodity charges in our interstate natural gas pipeline businesses are recognized as revenue in the same period they are invoiced to our customers. As a result of the ratemaking process, certain amounts collected by us may be subject to refund upon the issuance of final orders by the FERC in pending rate proceedings. We record estimates of rate refund liabilities considering our and other third-party regulatory proceedings, advice of counsel, and other risks.

Midstream businesses

Revenues from our midstream businesses, which are included in the caption titled “Non-regulated gathering, processing, transportation, and storage” in the revenue by category table below, include contracts for natural gas gathering, processing, treating, compression, transportation, and other related services with contract terms that are generally long-term in nature and may extend up to the production life of the associated reservoir. Additionally, our midstream businesses generate revenues from fees charged for storing customers’ natural gas and NGLs, generally under prepaid contracted storage capacity contracts. In situations where we provide an integrated package of services combined into a single performance obligation, which represents a majority of this class of contracts with customers, we do not consider there to be multiple performance obligations because the nature of the overall promise in the contract is to provide gathering, processing, transportation, storage, and related services resulting in the delivery, or redelivery in the context of storage services, of pipeline-quality natural gas and NGLs to the customer. As such, revenue is recognized at the daily completion of the integrated package of services as the integrated package represents a single performance obligation. Additionally, certain contracts in our midstream businesses contain fixed or upfront payment terms that result in the deferral of revenues until such services have been performed or such capacity has been made available.

We also earn revenues from offshore crude oil and natural gas gathering and transportation and offshore production handling. These services represent an integrated package of services and are considered a single distinct performance obligation for which we recognize revenues as the services are provided to the customer.

We generally earn a contractually stated fee per unit for the volume of product transported, gathered, processed, or stored. The rate is generally fixed; however, certain contracts contain variable rates that are subject to change based on commodity prices, levels of throughput, or an annual adjustment based on a formulaic cost of service calculation. In addition, we have contracts with contractually stated fees that decline over the contract term, such as declines based on the passage of time periods or achievement of cumulative throughput amounts. For all of our contracts, we allocate the transaction price to each performance obligation based on the relative standalone selling price. The excess of consideration received over revenue recognized results in the deferral of those amounts until future periods based on a units of production or straight-line methodology. Certain of our gas gathering and processing agreements have minimum volume commitments (MVC). If a customer under such an agreement fails to meet its MVC for a specified period (thus not exercising all the contractual rights to gathering and processing services within the specified period, herein referred to as “breakage”), it is obligated to pay a contractually determined fee based upon the shortfall between the actual gathered or processed volumes and the MVC for the period contained in the contract. When we conclude it

Notes (Continued)

is probable that the customer will not exercise all or a portion of its remaining rights, we recognize revenue associated with such breakage amount in proportion to the pattern of exercised rights within the respective MVC period.

Under keep-whole and percent-of-liquids processing contracts, we receive commodity consideration in the form of NGLs and take title to the NGLs at the tailgate of the plant. We recognize such commodity consideration as service revenue based on the market value of the NGLs retained at the time the processing is provided. The current market value, as opposed to the market value at the contract inception date, is used due to a combination of factors, including the fact that the volume, mix, and market price of NGL consideration to be received is unknown at the time of contract execution and is not specified in our contracts with customers. Additionally, product sales revenue (discussed below) is recognized upon the sale of the NGLs to a third party based on the sales price at the time of sale. As a result, revenue is recognized both at the time the processing service is provided in Service revenues – commodity consideration and at the time the NGLs retained as part of the processing service are sold in Product sales. The recognition of revenue related to commodity consideration has the impact of increasing the book value of NGL inventory, resulting in higher cost of goods sold at the time of sale. Given that most inventory is sold in the same period that it is generated, the impact of these transactions is expected to have little impact to operating income.

Product Sales

In the course of providing transportation services to customers of our gas pipeline businesses and gathering and processing services to customers of our midstream businesses, we may receive different quantities of natural gas from customers than the quantities delivered on behalf of those customers. The resulting imbalances are primarily settled through the purchase or sale of natural gas with each customer under terms provided for in our FERC tariffs or gathering and processing agreements, respectively. Revenue is recognized from the sale of natural gas upon settlement of imbalances.

In certain instances, we purchase NGLs, crude oil, and natural gas from our oil and natural gas producer customers. In addition, we retain NGLs as consideration in certain processing arrangements, as discussed above in the Service Revenues - Midstream businesses section. We recognize revenue from the sale of these commodities when the products have been sold and delivered. Our product sales contracts are primarily short-term contracts based on prevailing market rates at the time of the transaction.

Notes (Continued)

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, 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

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

______________________________

(1)

Service revenues in our Consolidated Statement of Income include leasing revenues associated with our headquarters building and management fees that we receive for certain services we provide to operated joint ventures and other investments. The leasing revenues and the management fees do not constitute revenue from contracts with customers. Product sales in our Consolidated Statement of Income include amounts associated with our derivative contracts that are not within the scope of ASC 606.

Notes (Continued)

Contract Assets

Our contract assets primarily consist of revenue recognized under contracts containing MVC features whereby management has concluded it is probable there will be a short-fall payment at the end of the current MVC period, which typically follows the calendar year, and that a significant reversal of revenue recognized currently for the future MVC payment will not occur. As a result, our contract assets related to our future MVC payments are generally expected to be collected within the next 12 months and are included within Other current assets and deferred charges in our Consolidated Balance Sheet until such time as the MVC short-fall payments are invoiced to the customer.

The following table presents a reconciliation of our contract assets:



	Quarter-to-Date September 30, 2018		Year-to-Date September 30, 2018
	(Millions)
Balance at beginning of period	$	39	$	4
Revenue recognized in excess of cash received	17		53
Minimum volume commitments invoiced	—		(1		)
Balance at end of period	$	56	$	56

Contract Liabilities

Our contract liabilities consist of advance payments primarily from midstream business customers which include construction reimbursements, prepayments, and other billings for which future services are to be provided under the contract. These amounts are deferred until recognized in revenue when the associated performance obligation has been satisfied, which is primarily based on a units of production methodology over the remaining contractual service periods, and are classified as current or noncurrent according to when such amounts are expected to be recognized. Current and noncurrent contract liabilities are included within Accrued liabilities and Regulatory liabilities, deferred income, and other, respectively, in our Consolidated Balance Sheet.

Contracts requiring advance payments and the recognition of contract liabilities are evaluated to determine whether the advance payments provide us with a significant financing benefit. This determination is based on the combined effect of the expected length of time between when we transfer the promised good or service to the customer, when the customer pays for those goods or services, and the prevailing interest rates. We have assessed our contracts for significant financing components and determined that one group of contracts entered into in contemplation of one another for certain capital reimbursements contains a significant financing component. As a result, we recognize noncash interest expense based on the effective interest method and revenue (noncash) is recognized when the underlying asset is placed into service utilizing a units of production or straight-line methodology over the life of the corresponding customer contract.

The following table presents a reconciliation of our contract liabilities:



	Quarter-to-Date September 30, 2018			Year-to-Date September 30, 2018
	(Millions)
Balance at beginning of period	$	1,535		$	1,596
Payments received and deferred	62			280
Deconsolidation of Jackalope interest (Note 3)	—			(52		)
Recognized in revenue	(112		)	(339		)
Balance at end of period	$	1,485		$	1,485

Notes (Continued)

The following table presents the amount of the contract liabilities balance as of September 30, 2018, expected to be recognized as revenue in each of the next five years as performance obligations are expected to be satisfied:



	(Millions)
2018 (remainder)	$	191
2019	257
2020	129
2021	110
2022	103
2023	100
Thereafter	595
Total	$	1,485

Remaining Performance Obligations

The following table presents the transaction price allocated to the remaining performance obligations under certain contracts as of September 30, 2018. These primarily include long-term contracts containing MVCs associated with our midstream businesses, fixed payments associated with offshore production handling, and reservation charges on contracted capacity on our gas pipeline firm transportation contracts with customers, as well as storage capacity contracts. Amounts included in the table below for our interstate natural gas pipeline businesses reflect the rates for such services in our current 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 is not currently known. As a practical expedient permitted by ASC 606, this table excludes variable consideration as well as consideration in contracts that is recognized in revenue as billed. It also excludes consideration received prior to September 30, 2018, that will be recognized in future periods (see above for Contract Liabilities and the expected recognition of those amounts within revenue). As noted above, 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, 2018, do not consider potential future performance obligations for which the renewal has not been exercised. The table below also does not include contracts with customers for which the underlying facilities have not received FERC authorization to be placed into service.



	(Millions)
2018 (remainder)	$	624
2019	2,465
2020	2,274
2021	2,106
2022	1,830
2023	1,650
Thereafter	12,471
Total	$	23,420

The table above excludes remaining performance obligations associated with the Atlantic Sunrise expansion project for which we received FERC authorization to place into service in October 2018. We anticipate annual performance obligations of approximately $420 million associated with Atlantic Sunrise over the term of the contracts.

Accounts Receivable

We do not offer extended payment terms and typically receive payment within one month. We consider receivables past due if full payment is not received by the contractual due date. Interest income related to past due accounts receivable is generally recognized at the time full payment is received or collectability is assured.

Notes (Continued)

The following is a summary of our Trade accounts and other receivables as it relates to contracts with customers:



	September 30, 2018		January 1, 2018
	(Millions)
Accounts receivable related to revenues from contracts with customers	$	795	$	958
Other accounts receivable	88		18
Total reflected in Trade accounts and other receivables	$	883	$	976

Impact of Adoption of ASC 606

The following table depicts the impact of the adoption of ASC 606 on our 2018 financial statements. The adjustment to Intangible assets – net of accumulated amortization in the table below relates to the recognition under ASC 606 of contract assets for MVC-related contracts associated with a 2014 acquisition. The recognition of these contract assets resulted in a lower purchase price allocation to intangible assets. The adoption of ASC 606 did not result in adjustments to total operating, investing, or financing cash flows.



	As Reported			Adjustments resulting from adoption of ASC 606			Balance without adoption of ASC 606
	(Millions)
Consolidated Statement of Income
Three Months Ended September 30, 2018
Service revenues	$	1,371		$	5		$	1,376
Service revenues – commodity consideration	121			(121		)	—
Product sales	811			44			855
Total revenues	2,303			(72		)	2,231
Product costs	790			(48		)	742
Processing commodity expenses	30			(30		)	—
Depreciation and amortization expenses	425			1			426
Total costs and expenses	1,802			(77		)	1,725
Operating income (loss)	501			5			506
Interest incurred	(286		)	4			(282		)
Interest capitalized	16			(2		)	14
Income (loss) before income taxes	390			7			397
Provision (benefit) for income taxes	190			1			191
Net income (loss)	200			6			206
Less: Net income (loss) attributable to noncontrolling interests	71			(1		)	70
Net income (loss) attributable to The Williams Companies, Inc.	129			7			136
Basic earnings (loss) per common share	$	0.13		$	0.01		$	0.14
Diluted earnings (loss) per common share	$	0.13		$	0.01		$	0.14

Nine Months Ended September 30, 2018
Service revenues	$	4,062		$	16		$	4,078
Service revenues – commodity consideration	316			(316		)	—
Product sales	2,104			86			2,190
Total revenues	6,482			(214		)	6,268
Product costs	2,039			(143		)	1,896
Processing commodity expenses	91			(91		)	—
Operating and maintenance expenses	1,134			3			1,137
Depreciation and amortization expenses	1,290			2			1,292
Total costs and expenses	5,080			(229		)	4,851

Notes (Continued)



	As Reported			Adjustments resulting from adoption of ASC 606			Balance without adoption of ASC 606
	(Millions)
Operating income (loss)	$	1,402		$	15		$	1,417
Equity earnings (losses)	279			1			280
Other investing income (loss) - net	74			(9		)	65
Interest incurred	(856		)	11			(845		)
Interest capitalized	38			(6		)	32
Income (loss) before income taxes	1,036			12			1,048
Provision (benefit) for income taxes	297			1			298
Net income (loss)	739			11			750
Net income (loss) attributable to The Williams Companies, Inc.	416			11			427
Basic earnings (loss) per common share	$	0.47		$	0.01		$	0.48
Diluted earnings (loss) per common share	$	0.46		$	0.01		$	0.47

Consolidated Statement of Comprehensive Income
Three Months Ended September 30, 2018
Net income (loss)	$	200		$	6		$	206
Comprehensive income (loss)	206			6			212
Less: Comprehensive income (loss) attributable to noncontrolling interests	72			(1		)	71
Comprehensive income (loss) attributable to The Williams Companies, Inc.	134			7			141

Nine Months Ended September 30, 2018
Net income (loss)	$	739		$	11		$	750
Comprehensive income (loss)	748			11			759
Comprehensive income (loss) attributable to The Williams Companies, Inc.	427			11			438

Consolidated Balance Sheet
September 30, 2018
Inventories	$	153		$	(8	)	$	145
Other current assets and deferred charges	242			(53		)	189
Total current assets	1,984			(61		)	1,923
Investments	7,427			(1		)	7,426
Property, plant, and equipment	39,953			(6		)	39,947
Property, plant, and equipment – net	28,674			(6		)	28,668
Intangible assets – net of accumulated amortization	8,324			63			8,387
Regulatory assets, deferred charges, and other	744			(4		)	740
Total assets	47,153			(9		)	47,144
Deferred income tax liabilities	1,648			27			1,675
Regulatory liabilities, deferred income, and other	4,376			(159		)	4,217
Retained deficit	(9,018		)	95			(8,923		)
Total stockholders’ equity	15,610			95			15,705
Noncontrolling interests in consolidated subsidiaries	$	1,349		$	28		$	1,377
Total equity	16,959			123			17,082
Total liabilities and equity	47,153			(9		)	47,144

Notes (Continued)



	As Reported			Adjustments resulting from adoption of ASC 606			Balance without adoption of ASC 606
	(Millions)
Consolidated Statement of Changes in Equity
September 30, 2018
Adoption of ASC 606	$	(121	)	$	121		$	—
Net income (loss)	739			11			750
Deconsolidation of subsidiary	(267		)	(9		)	(276		)
Net increase (decrease) in equity	784			123			907
Balance at September 30, 2018	16,959			123			17,082

Note 3 – Variable Interest Entities

Consolidated VIEs

As of September 30, 2018, 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 connecting its gathering system in Susquehanna County, Pennsylvania, to the Iroquois Gas Transmission and the Tennessee Gas Pipeline systems. The total remaining cost of the project is estimated to be approximately $740 million, which 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 and in August 2017, the court issued a decision denying in part and dismissing in part Constitution’s appeal. The court expressly declined to rule on Constitution’s argument that the delay in the NYSDEC’s decision on Constitution’s Section 401 application constitutes a waiver of the certification requirement. The court determined that it lacked jurisdiction to address that contention and found that jurisdiction over the waiver issue lies exclusively with the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit). As to the denial itself, the court determined that NYSDEC’s action was not arbitrary or capricious. 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. In January 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. We filed a request for rehearing of the FERC’s decision, but in July 2018 the FERC denied our request.

Notes (Continued)

The project’s sponsors remain committed to the project, and in September 2018 we filed a petition with the D.C. Circuit for review of the FERC’s decision. An unfavorable resolution could result in the impairment of a significant portion of the capitalized project costs, which total $377 million on a consolidated basis at September 30, 2018, 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 also 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.

The following table presents amounts included in our Consolidated Balance Sheet that are for the use or obligation of our consolidated VIEs:



	September 30, 2018			December 31, 2017 (1)			Classification
	(Millions)
Assets (liabilities):
Cash and cash equivalents	$	32		$	881		Cash and cash equivalents
Trade accounts and other receivables – net	57			972			Trade accounts and other receivables
Inventories	—			113			Inventories
Other current assets	1			176			Other current assets and deferred charges
Investments	—			6,552			Investments
Property, plant, and equipment – net	2,398			27,912			Property, plant, and equipment – net
Intangible assets – net	1,189			8,790			Intangible assets – net of accumulated amortization
Regulatory assets, deferred charges, and other noncurrent assets	—			507			Regulatory assets, deferred charges, and other
Accounts payable	(16		)	(957		)	Accounts payable
Accrued liabilities including current asset retirement obligations	(98		)	(857		)	Accrued liabilities
Long-term debt due within one year	—			(501		)	Long-term debt due within one year
Long-term debt	—			(15,996		)	Long-term debt
Deferred income tax liabilities	—			(16		)	Deferred income tax liabilities
Noncurrent asset retirement obligations	(104		)	(944		)	Regulatory liabilities, deferred income, and other
Regulatory liabilities, deferred income, and other noncurrent liabilities	(189		)	(2,809		)	Regulatory liabilities, deferred income, and other

_________________


(1)	Includes WPZ, which was a consolidated VIE at December 31, 2017 (see Note 1 – General, Description of Business, and Basis of Presentation).

Nonconsolidated VIEs

Jackalope

We own a 50 percent interest in Jackalope, which provides gathering and processing services for the Powder River basin and is a VIE due to certain risks shared with customers. Prior to the second quarter of 2018 we were the primary beneficiary of Jackalope. During the second quarter of 2018, the scope of Jackalope’s planned future activities changed,

Notes (Continued)

resulting in a VIE reconsideration event. Upon evaluation, we determined that we are no longer the primary beneficiary, most notably due to changes in the activities that most significantly impact Jackalope’s economic performance and our determination that we do not control the power to direct such activities. These activities are primarily related to the capital decision making process. As a result, we deconsolidated Jackalope on June 30, 2018 and now account for our interest using the equity method of accounting as we exert significant influence over the financial and operational policies of Jackalope (see Note 5 – Investing Activities). At September 30, 2018, the carrying value of our investment in Jackalope was $316 million. Our maximum exposure to loss is limited to the carrying value of our investment. Jackalope is undertaking an expansion project that is estimated to cost up to approximately $400 million, which will be funded on a proportional basis.

Note 4 – Divestitures and Assets Held for Sale

Divestment of Four Corners Assets

On October 1, 2018, we completed the sale of our natural gas gathering and processing assets in the Four Corners area of New Mexico and Colorado for total consideration of $1.125 billion, subject to customary working capital adjustments, of which a $113 million deposit was received in the third quarter. At September 30, 2018, these assets were designated as held for sale within the West segment. As a result of this sale, we expect to record a gain of approximately $0.6 billion in the fourth quarter of 2018.

The following table presents the carrying amounts of the major classes of the Four Corners area assets and liabilities, which are presented within Assets held for sale and Liabilities held for sale in the Consolidated Balance Sheet:



	Carrying Amount
	September 30, 2018
	(Millions)
Assets:
Current assets	$	23
Property, plant, and equipment – net	539
Other noncurrent assets	12
	$	574

Liabilities:
Current liabilities	$	22
Other noncurrent liabilities	23
	$	45

The following table presents the results of operations for the Four Corners area:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Millions)
Income (loss) before income taxes of Four Corners area	$	25	$	14	$	52	$	31
Income (loss) before income taxes of Four Corners area attributable to The Williams Companies, Inc.	23		10		43		23

Other Assets Held for Sale

Certain assets and operations from our former petchem services are designated as held for sale within the Atlantic-Gulf and Other segments as of September 30, 2018. Included as part of the disposal group and presented within Assets held for sale and Liabilities held for sale in the Consolidated Balance Sheet, are Current assets and Property, plant, and equipment - net, of approximately $2 million and $84 million, respectively, and Current liabilities and Noncurrent

Notes (Continued)

liabilities of approximately $1 million and $3 million, respectively. Assets held for sale also includes certain other insignificant assets unrelated to these disposal groups.

Divestment of Geismar Interest

In July 2017, we completed the sale of Williams Olefins, L.L.C., a wholly owned subsidiary which owned our Geismar Interest for total consideration of $2.084 billion in cash. We received a final working capital adjustment of $12 million in October 2017. Upon closing of the sale, we entered into a long-term supply and transportation agreement with the purchaser to provide feedstock to the plant via our Bayou Ethane pipeline system. As a result of this sale, we recorded a gain of $1.095 billion in the third quarter of 2017 in our Other segment. Following this sale, the cash proceeds were used to repay our $850 million term loan. Proceeds were also used to fund a portion of the capital and investment expenditures that were a part of our growth portfolio.

The following table presents the results of operations for the Geismar Interest, excluding the gain noted above:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Millions)
Income (loss) before income taxes of the Geismar Interest	$	—	$	1	$	—	$	26
Income (loss) before income taxes of the Geismar Interest attributable to The Williams Companies, Inc.	—		1		—		19

Note 5 – Investing Activities

RMM Equity-Method Investment

During the third quarter of 2018, our joint venture, RMM, purchased a natural gas and oil gathering and natural gas processing business in Colorado’s Denver-Julesburg basin. Our initial economic ownership was 40 percent, which is expected to increase to 50 percent as we provide additional capital contributions. At September 30, 2018, our carrying value was $569 million reflecting our 43 percent economic ownership. We are committed to fund up to an additional $177 million to reach 50 percent economic ownership, to the extent RMM needs funding for capital expenditures. We account for this investment under the equity method of accounting.

Jackalope Deconsolidation

During the second quarter of 2018, we deconsolidated our interest in Jackalope (see Note 3 – Variable Interest Entities). We recorded our interest in Jackalope as an equity-method investment at its estimated fair value, resulting in a deconsolidation gain of $62 million reflected in Other investing income (loss) – net in the Consolidated Statement of Income. 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.

Acquisition of Additional Interests in Appalachia Midstream Investments

During the first quarter of 2017, we exchanged all of our 50 percent interest in DBJV for an increased interest in two natural gas gathering systems that are part of the Appalachia Midstream Investments and $155 million in cash. This transaction was recorded based on our estimate of the fair value of the interests received as we have more insight to this value as we operate the underlying assets. Following this exchange, we have an approximate average 66 percent interest in the Appalachia Midstream Investments. We continue to account for this investment under the equity method of accounting due to the significant participatory rights of our partners such that we do not exercise control. We also

Notes (Continued)

sold all of our interest in Ranch Westex JV LLC for $45 million. These transactions resulted in a total gain of $269 million reflected in Other investing income (loss) – net in the Consolidated Statement of Income.

The fair value of the increased interests in the Appalachia Midstream Investments received as consideration was estimated to be $1.1 billion using an income approach based on expected cash flows and an appropriate discount rate (a Level 3 measurement within the fair value hierarchy). The determination of estimated future cash flows involved significant assumptions regarding gathering volumes, rates, and related capital spending. A 9.5 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.

Note 6 – Other Income and Expenses

The following table presents certain gains or losses reflected in Other (income) expense – net within Costs and expenses in our Consolidated Statement of Income:



	Three Months Ended September 30,							Nine Months Ended September 30,
	2018			2017				2018			2017
	(Millions)
Atlantic-Gulf
Amortization of regulatory assets associated with asset retirement obligations	$	8		$	8			$	24		$	25
Accrual of regulatory liability related to overcollection of certain employee expenses	5			5				16			16
Project development costs related to Constitution (see Note 3)	1			4				4			12
Adjustments to regulatory liability related to Tax Reform	—			—				(10		)	—
Gain on asset retirement	(10		)	(5		)		(10		)	(5		)
West
Gains on contract settlements and terminations	—			—			<