Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
or
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¨ | 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
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THE WILLIAMS COMPANIES, INC. |
(Exact name of registrant as specified in its charter) |
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DELAWARE | | 73-0569878 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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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:
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| | |
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 þ 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 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.
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Large accelerated filer þ | | 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 þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | |
Class | | Shares Outstanding at April 29, 2019 |
Common Stock, $1.00 par value | | 1,211,770,224 |
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:
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• | Levels of dividends to Williams stockholders; |
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• | Future credit ratings of Williams and its affiliates; |
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• | Amounts and nature of future capital expenditures; |
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• | Expansion and growth of our business and operations; |
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• | Expected in-service dates for capital projects; |
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• | Financial condition and liquidity; |
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• | Cash flow from operations or results of operations; |
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• | Seasonality of certain business components; |
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• | Natural gas and natural gas liquids prices, supply, and demand; |
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• | 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:
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• | Whether we are able to pay current and expected levels of dividends; |
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• | Whether we will be able to effectively execute our financing plan; |
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• | Availability of supplies, market demand, and volatility of prices; |
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• | 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); |
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• | The strength and financial resources of our competitors and the effects of competition; |
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• | Whether we are able to successfully identify, evaluate and timely execute our capital projects and investment opportunities; |
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• | 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; |
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• | Development and rate of adoption of alternative energy sources; |
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• | The impact of operational and developmental hazards and unforeseen interruptions; |
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• | 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; |
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• | Our costs and funding obligations for defined benefit pension plans and other postretirement benefit plans; |
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• | Changes in maintenance and construction costs, as well as our ability to obtain sufficient construction related inputs including skilled labor; |
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• | Changes in the current geopolitical situation; |
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• | Our exposure to the credit risk of our customers and counterparties; |
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• | 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; |
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• | The amount of cash distributions from and capital requirements of our investments and joint ventures in which we participate; |
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• | Risks associated with weather and natural phenomena, including climate conditions and physical damage to our facilities; |
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• | Acts of terrorism, cybersecurity incidents, and related disruptions; |
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• | 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
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 March 31, 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.
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
The Williams Companies, Inc.
Consolidated Statement of Income
(Unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (Millions, except per-share amounts) |
Revenues: | | | |
Service revenues | $ | 1,440 |
|
| $ | 1,351 |
|
Service revenues – commodity consideration | 64 |
| | 101 |
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Product sales | 550 |
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| 636 |
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Total revenues | 2,054 |
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| 2,088 |
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Costs and expenses: |
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|
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Product costs | 525 |
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| 613 |
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Processing commodity expenses | 40 |
| | 35 |
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Operating and maintenance expenses | 340 |
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| 357 |
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Depreciation and amortization expenses | 416 |
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| 431 |
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Selling, general, and administrative expenses | 128 |
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| 132 |
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Other (income) expense – net | 44 |
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| 29 |
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Total costs and expenses | 1,493 |
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| 1,597 |
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Operating income (loss) | 561 |
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| 491 |
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Equity earnings (losses) | 80 |
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| 82 |
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Impairment of equity-method investments (Note 2) | (74 | ) | | — |
|
Other investing income (loss) – net | 1 |
| | 4 |
|
Interest incurred | (306 | ) |
| (282 | ) |
Interest capitalized | 10 |
|
| 9 |
|
Other income (expense) – net | 11 |
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| 21 |
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Income (loss) before income taxes | 283 |
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| 325 |
|
Provision (benefit) for income taxes | 69 |
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| 55 |
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Net income (loss) | 214 |
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| 270 |
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Less: Net income (loss) attributable to noncontrolling interests | 19 |
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| 118 |
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Net income (loss) attributable to The Williams Companies, Inc. | 195 |
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| 152 |
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Preferred stock dividends | 1 |
| | — |
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Net income (loss) available to common stockholders | $ | 194 |
| | $ | 152 |
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Basic earnings (loss) per common share: | | | |
Net income (loss) | $ | .16 |
| | $ | .18 |
|
Weighted-average shares (thousands) | 1,211,489 |
| | 827,509 |
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Diluted earnings (loss) per common share: | | | |
Net income (loss) | $ | .16 |
| | $ | .18 |
|
Weighted-average shares (thousands) | 1,213,592 |
| | 830,197 |
|
See accompanying notes.
The Williams Companies, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (Millions) |
Net income (loss) | $ | 214 |
| | $ | 270 |
|
Other comprehensive income (loss): | | | |
Cash flow hedging activities: | | | |
Net unrealized gain (loss) from derivative instruments | — |
| | 1 |
|
Pension and other postretirement benefits: | | | |
Amortization of actuarial (gain) loss included in net periodic benefit cost (credit), net of taxes of ($1) in 2019 and 2018 | 3 |
| | 5 |
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Other comprehensive income (loss) | 3 |
| | 6 |
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Comprehensive income (loss) | 217 |
| | 276 |
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Less: Comprehensive income (loss) attributable to noncontrolling interests | 19 |
| | 119 |
|
Comprehensive income (loss) attributable to The Williams Companies, Inc. | $ | 198 |
| | $ | 157 |
|
See accompanying notes.
The Williams Companies, Inc.
Consolidated Balance Sheet
(Unaudited)
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| | March 31, 2019 | | December 31, 2018 |
| | (Millions, except per-share amounts) |
ASSETS | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 43 |
| | $ | 168 |
|
Trade accounts and other receivables (net of allowance of $9 at March 31, 2019 and $9 at December 31, 2018) | | 929 |
| | 992 |
|
Inventories | | 129 |
| | 130 |
|
Other current assets and deferred charges | | 186 |
| | 174 |
|
Total current assets | | 1,287 |
| | 1,464 |
|
Investments | | 6,544 |
| | 7,821 |
|
Property, plant, and equipment | | 40,541 |
| | 38,661 |
|
Accumulated depreciation and amortization | | (11,460 | ) | | (11,157 | ) |
Property, plant, and equipment – net | | 29,081 |
| | 27,504 |
|
Intangible assets – net of accumulated amortization | | 8,096 |
| | 7,767 |
|
Regulatory assets, deferred charges, and other | | 962 |
| | 746 |
|
Total assets | | $ | 45,970 |
| | $ | 45,302 |
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LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 620 |
| | $ | 662 |
|
Accrued liabilities | | 974 |
| | 1,102 |
|
Commercial paper | | 1,014 |
| | — |
|
Long-term debt due within one year | | 1,561 |
| | 47 |
|
Total current liabilities | | 4,169 |
| | 1,811 |
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Long-term debt | | 20,703 |
| | 22,367 |
|
Deferred income tax liabilities | | 1,601 |
| | 1,524 |
|
Regulatory liabilities, deferred income, and other | | 3,772 |
| | 3,603 |
|
Contingent liabilities (Note 13) | |
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Equity: | | | | |
Stockholders’ equity: | | | | |
Preferred stock | | 35 |
| | 35 |
|
Common stock ($1 par value; 1,470 million shares authorized at March 31, 2019 and December 31, 2018; 1,246 million shares issued at March 31, 2019 and 1,245 million shares issued at December 31, 2018) | | 1,246 |
| | 1,245 |
|
Capital in excess of par value | | 24,703 |
| | 24,693 |
|
Retained deficit | | (10,270 | ) | | (10,002 | ) |
Accumulated other comprehensive income (loss) | | (267 | ) | | (270 | ) |
Treasury stock, at cost (35 million shares of common stock) | | (1,041 | ) | | (1,041 | ) |
Total stockholders’ equity | | 14,406 |
| | 14,660 |
|
Noncontrolling interests in consolidated subsidiaries | | 1,319 |
| | 1,337 |
|
Total equity | | 15,725 |
| | 15,997 |
|
Total liabilities and equity | | $ | 45,970 |
| | $ | 45,302 |
|
See accompanying notes.
The Williams Companies, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | — |
| | — |
| | — |
| | 195 |
| | — |
| | — |
| | 195 |
| | 19 |
| | 214 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
|
Cash dividends – common stock ($0.38 per share) | — |
| | — |
| | — |
| | (460 | ) | | — |
| | — |
| | (460 | ) | | — |
| | (460 | ) |
Dividends and distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (41 | ) | | (41 | ) |
Stock-based compensation and related common stock issuances, net of tax | — |
| | 1 |
| | 10 |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Other | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Net increase (decrease) in equity | — |
| | 1 |
| | 10 |
| | (268 | ) | | 3 |
| | — |
| | (254 | ) | | (18 | ) | | (272 | ) |
Balance – March 31, 2019 | $ | 35 |
| | $ | 1,246 |
| | $ | 24,703 |
| | $ | (10,270 | ) | | $ | (267 | ) | | $ | (1,041 | ) | | $ | 14,406 |
| | $ | 1,319 |
| | $ | 15,725 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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) | — |
| | — |
| | — |
| | 152 |
| | — |
| | — |
| | 152 |
| | 118 |
| | 270 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | 1 |
| | 6 |
|
Cash dividends – common stock ($0.34 per share) | — |
| | — |
| | — |
| | (281 | ) | | — |
| | — |
| | (281 | ) | | — |
| | (281 | ) |
Dividends and distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (187 | ) | | (187 | ) |
Stock-based compensation and related common stock issuances, net of tax | — |
| | 1 |
| | 18 |
| | — |
| | — |
| | — |
| | 19 |
| | — |
| | 19 |
|
Sales of limited partner units of Williams Partners L.P. | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 22 |
| | 22 |
|
Changes in ownership of consolidated subsidiaries, net | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | 7 |
| | (9 | ) | | (2 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
|
Other | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Net increase (decrease) in equity | — |
| | 1 |
| | 25 |
| | (153 | ) | | (56 | ) | | — |
| | (183 | ) | | (89 | ) | | (272 | ) |
Balance – March 31, 2018 | $ | — |
| | $ | 862 |
| | $ | 18,533 |
| | $ | (8,587 | ) | | $ | (294 | ) | | $ | (1,041 | ) | | $ | 9,473 |
| | $ | 6,430 |
| | $ | 15,903 |
|
| |
* | Accumulated Other Comprehensive Income (Loss) |
See accompanying notes.
The Williams Companies, Inc.
Consolidated Statement of Cash Flows
(Unaudited) |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (Millions) |
OPERATING ACTIVITIES: | |
Net income (loss) | $ | 214 |
| | $ | 270 |
|
Adjustments to reconcile to net cash provided (used) by operating activities: | | | |
Depreciation and amortization | 416 |
| | 431 |
|
Provision (benefit) for deferred income taxes | 75 |
| | 73 |
|
Equity (earnings) losses | (80 | ) | | (82 | ) |
Distributions from unconsolidated affiliates | 172 |
| | 140 |
|
Impairment of equity-method investments (Note 2) | 74 |
| | — |
|
Amortization of stock-based awards | 14 |
| | 14 |
|
Cash provided (used) by changes in current assets and liabilities: | | | |
Accounts and notes receivable | 97 |
| | 238 |
|
Inventories | 1 |
| | (40 | ) |
Other current assets and deferred charges | (6 | ) | | (4 | ) |
Accounts payable | (39 | ) | | (197 | ) |
Accrued liabilities | (142 | ) | | (166 | ) |
Other, including changes in noncurrent assets and liabilities | (21 | ) | | 17 |
|
Net cash provided (used) by operating activities | 775 |
| | 694 |
|
FINANCING ACTIVITIES: | | | |
Proceeds from (payments of) commercial paper – net | 1,014 |
| | — |
|
Proceeds from long-term debt | 708 |
| | 2,048 |
|
Payments of long-term debt | (864 | ) | | (1,060 | ) |
Proceeds from issuance of common stock | 6 |
| | 10 |
|
Common dividends paid | (460 | ) | | (281 | ) |
Dividends and distributions paid to noncontrolling interests | (41 | ) | | (165 | ) |
Contributions from noncontrolling interests | 4 |
| | 3 |
|
Payments for debt issuance costs | — |
| | (18 | ) |
Other – net | (9 | ) | | (40 | ) |
Net cash provided (used) by financing activities | 358 |
| | 497 |
|
INVESTING ACTIVITIES: | | | |
Property, plant, and equipment: | | | |
Capital expenditures (1) | (422 | ) | | (957 | ) |
Dispositions – net | (4 | ) | | (1 | ) |
Contributions in aid of construction | 10 |
| | 190 |
|
Purchases of businesses, net of cash acquired | (727 | ) | | — |
|
Purchases of and contributions to equity-method investments | (99 | ) | | (21 | ) |
Other – net | (16 | ) | | (9 | ) |
Net cash provided (used) by investing activities | (1,258 | ) | | (798 | ) |
Increase (decrease) in cash and cash equivalents | (125 | ) | | 393 |
|
Cash and cash equivalents at beginning of year | 168 |
| | 899 |
|
Cash and cash equivalents at end of period | $ | 43 |
| | $ | 1,292 |
|
_____________ | | | |
(1) Increases to property, plant, and equipment | $ | (418 | ) | | $ | (934 | ) |
Changes in related accounts payable and accrued liabilities | (4 | ) | | (23 | ) |
Capital expenditures | $ | (422 | ) | | $ | (957 | ) |
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 576,923 common units to the public in February 2018 associated with reinvested distributions of $22 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. 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. 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, 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. Northeast G&P also includes Utica East Ohio Midstream, LLC (UEOM), which is now a consolidated entity after the remaining ownership interest was acquired 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, 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) (see Note 15 – Subsequent Event regarding the sale of our Jackalope interest), 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 was sold during the fourth quarter of 2018.
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 also 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 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. We prospectively adopted ASU 2016-02 effective January 1, 2019, and did not adjust prior periods as permitted by ASU 2018-11 (see Note 9 – 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 non-lease 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 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 are currently developing additional processes, procedures and internal controls in order to make the necessary credit loss assessments and required disclosures.
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 for $740 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 (OVM) system 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 non-cash impairment loss related to our existing 62 percent interest (see Note 12 – 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 preliminary 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. The allocation is considered preliminary because the valuation work has not been completed due to the ongoing review of the valuation results and validation of significant inputs and assumptions.
|
| | | |
| (Millions) |
Current assets, including $13 million cash acquired | $ | 52 |
|
Property, plant, and equipment | 1,493 |
|
Other intangible assets | 389 |
|
Total identifiable assets acquired | 1,934 |
|
| |
Current liabilities | 4 |
|
Total liabilities assumed | 4 |
|
| |
Net identifiable assets acquired | 1,930 |
|
| |
Goodwill | 19 |
|
Net assets acquired | $ | 1,949 |
|
The goodwill recognized in the acquisition relates primarily to enhancing and diversifying our basin positions and was allocated to the reporting units representing the Utica region 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 34 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 months ended March 31, 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 March 31, |
| 2019 | | 2018 |
| (Millions) |
Revenues | $ | 2,086 |
| | $ | 2,121 |
|
| | | |
Net income (loss) attributable to The Williams Companies, Inc. | $ | 273 |
| | $ | 155 |
|
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.
During the period from the acquisition date of March 18, 2019 to March 31, 2019, UEOM contributed Revenues of $6 million and Net income (loss) attributable to The Williams Companies, Inc. of $2 million.
Costs related to this acquisition are $3 million and are reported within our Northeast G&P segment and included in Selling, general, and administrative expenses in our Consolidated Statement of Income.
UEOM and OVM Venture
Concurrent with the UEOM acquisition, we executed an agreement whereby we will contribute our consolidated interests in UEOM and our OVM business to a newly formed partnership later this year. Our partner will invest approximately $1.304 billion (subject to closing adjustments) for a 35 percent ownership interest, and we will retain 65 percent ownership of and operate the combined business. The closing of this transaction is subject to customary closing conditions, including regulatory approvals.
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 March 31, 2019 | | |
Revenues from contracts with customers: | | | | | | | | | | | | | | | |
Service revenues: | | | | | | | | | | | | | | | |
Non-regulated gathering, processing, transportation, and storage: | | | | | | | | | | | | | | | |
Monetary consideration | $ | 239 |
| | $ | 128 |
| | $ | 344 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (18 | ) | | $ | 693 |
|
Commodity consideration | 5 |
| | 13 |
| | 46 |
| | — |
| | — |
| | — |
| | — |
| | 64 |
|
Regulated interstate natural gas transportation and storage | — |
| | — |
| | — |
| | 570 |
| | 114 |
| | — |
| | — |
| | 684 |
|
Other | 32 |
| | 4 |
| | 11 |
| | — |
| | — |
| | — |
| | (4 | ) | | 43 |
|
Total service revenues | 276 |
| | 145 |
| | 401 |
| | 570 |
| | 114 |
| | — |
| | (22 | ) | | 1,484 |
|
Product Sales: | | | | | | | | | | | | | | | |
NGL and natural gas product sales | 47 |
| | 58 |
| | 479 |
| | 24 |
| | — |
| | — |
| | (58 | ) | | 550 |
|
Total revenues from contracts with customers | 323 |
| | 203 |
| | 880 |
| | 594 |
| | 114 |
| | — |
| | (80 | ) | | 2,034 |
|
Other revenues (1) | 5 |
| | 4 |
| | 4 |
| | 3 |
| | — |
| | 7 |
| | (3 | ) | | 20 |
|
Total revenues | $ | 328 |
| | $ | 207 |
| | $ | 884 |
| | $ | 597 |
| | $ | 114 |
| | $ | 7 |
| | $ | (83 | ) | | $ | 2,054 |
|
| | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 |
Revenues from contracts with customers: | | | | | | | | | | | | | | | |
Service revenues: | | | | | | | | | | | | | | | |
Non-regulated gathering, processing, transportation, and storage: | | | | | | | | | | | | | | | |
Monetary consideration | $ | 202 |
| | $ | 137 |
| | $ | 408 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (18 | ) | | $ | 729 |
|
Commodity consideration | 4 |
| | 15 |
| | 82 |
| | — |
| | — |
| | — |
| | — |
| | 101 |
|
Regulated interstate natural gas transportation and storage | — |
| | — |
| | — |
| | 461 |
| | 112 |
| | — |
| | (1 | ) | | 572 |
|
Other | 21 |
| | 6 |
| | 11 |
| | — |
| | — |
| | — |
| | (3 | ) | | 35 |
|
Total service revenues | 227 |
| | 158 |
| | 501 |
| | 461 |
| | 112 |
| | — |
| | (22 | ) | | 1,437 |
|
Product Sales: | | | | | | | | | | | | | | | |
NGL and natural gas | 98 |
| | 68 |
| | 521 |
| | 25 |
| | — |
| | — |
| | (85 | ) | | 627 |
|
Other | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
|
Total product sales | 98 |
| | 68 |
| | 525 |
| | 25 |
| | — |
| | — |
| | (85 | ) | | 631 |
|
Total revenues from contracts with customers | 325 |
| | 226 |
| | 1,026 |
| | 486 |
| | 112 |
| | — |
| | (107 | ) | | 2,068 |
|
Other revenues (1) | 5 |
| | 2 |
| | 5 |
| | 3 |
| | — |
| | 8 |
| | (3 | ) | | 20 |
|
Total revenues | $ | 330 |
| | $ | 228 |
| | $ | 1,031 |
| | $ | 489 |
| | $ | 112 |
| | $ | 8 |
| | $ | (110 | ) | | $ | 2,088 |
|
______________________________
| |
(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 equity-method 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, “Revenue from Contracts with Customers.”
Contract Assets
The following table presents a reconciliation of our contract assets:
|
| | | |
| Year-to-Date March 31, 2019 |
| (Millions) |
Balance at beginning of period | $ | 4 |
|
Revenue recognized in excess of amounts invoiced | 19 |
|
Minimum volume commitments invoiced | (1 | ) |
Balance at end of period | $ | 22 |
|
Contract Liabilities
The following table presents a reconciliation of our contract liabilities:
|
| | | |
| Year-to-Date March 31, 2019 |
| (Millions) |
Balance at beginning of period | $ | 1,397 |
|
Payments received and deferred | 33 |
|
Noncash interest expense for significant financing component | 4 |
|
Recognized in revenue | (99 | ) |
Balance at end of period | $ | 1,335 |
|
The following table presents the amount of the contract liabilities balance as of March 31, 2019, expected to be recognized as revenue in each of the next five years as performance obligations are expected to be satisfied:
|
| | | |
| (Millions) |
2019 (remainder) | $ | 200 |
|
2020 | 148 |
|
2021 | 124 |
|
2022 | 111 |
|
2023 | 101 |
|
Thereafter | 651 |
|
Total | $ | 1,335 |
|
Remaining Performance Obligations
The following table presents the transaction price allocated to the remaining performance obligations under certain contracts as of March 31, 2019. These primarily include long-term contracts containing Minimum Volume Commitments (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 Federal Energy Regulatory Commission (FERC) tariffs, net of estimated reserve for refund, 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. 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 March 31, 2019, that will be recognized in future periods (see above for Contract Liabilities and the expected recognition of those amounts within revenue). 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 March 31, 2019, 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) |
2019 (remainder) | $ | 2,214 |
|
2020 | 2,831 |
|
2021 | 2,704 |
|
2022 | 2,408 |
|
2023 | 2,149 |
|
Thereafter | 18,161 |
|
Total | $ | 30,467 |
|
Accounts Receivable
The following is a summary of our Trade accounts and other receivables:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (Millions) |
Accounts receivable related to revenues from contracts with customers | $ | 794 |
| | $ | 858 |
|
Other accounts receivable | 135 |
| | 134 |
|
Total reflected in Trade accounts and other receivables | $ | 929 |
| | $ | 992 |
|
Note 4 – Variable Interest Entities
Consolidated VIEs
As of March 31, 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 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. 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 Court 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. The court also recognized that Section 401 does not preclude a finding of waiver prior to the passage of a full year. As in Hoopa Valley Tribe, Constitution withdrew and resubmitted the same Section 401 application, which appears to be the arrangement the D.C. Circuit Court finds violates Section 401. 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.
The project’s sponsors remain committed to the project. On April 1, 2019, we filed a supplemental pleading with the FERC explaining why we believe the Hoopa Valley Tribe decision requires the FERC to find that NYSDEC waived its authority to issue a Section 401 water quality certification for the Constitution project. An unfavorable resolution of Constitution’s claim for waiver could result in the impairment of a significant portion of the capitalized project costs, which total $376 million on a consolidated basis at March 31, 2019, 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:
|
| | | | | | | | | |
| March 31, 2019 |
| December 31, 2018 |
| Classification |
| (Millions) |
|
|
Assets (liabilities): |
|
|
|
|
|
Cash and cash equivalents | $ | 26 |
| | $ | 33 |
|
| Cash and cash equivalents |
Trade accounts and other receivables – net | 50 |
| | 62 |
| | Trade accounts and other receivables |
Other current assets | 1 |
| | 2 |
| | Other current assets and deferred charges |
Property, plant, and equipment – net | 2,333 |
| | 2,363 |
|
| Property, plant, and equipment – net |
Intangible assets – net | 1,166 |
| | 1,177 |
| | Intangible assets – net of accumulated amortization |
Regulatory assets, deferred charges, and other noncurrent assets | 1 |
| | — |
| | Regulatory assets, deferred charges, and other |
Accounts payable | (15 | ) | | (15 | ) |
| Accounts payable |
Accrued liabilities including current asset retirement obligations | (115 | ) | | (115 | ) | | Accrued liabilities |
Noncurrent asset retirement obligations | (107 | ) | | (105 | ) | | Regulatory liabilities, deferred income, and other |
Regulatory liabilities, deferred income, and other noncurrent liabilities | (137 | ) | | (159 | ) |
| Regulatory liabilities, deferred income, and other |
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. At March 31, 2019, the carrying value of our investment in Jackalope was $358 million. In April 2019, we sold our interest in Jackalope (see Note 15 – Subsequent Event).
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 March 31, 2019, the carrying value of our investment in Brazos Permian II was $190 million. Our maximum exposure to loss is limited to the carrying value of our investment.
Note 5 – Other Income and Expenses
The following table presents, by segment, certain other items included in our Consolidated Statement of Income:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (Millions) |
Other (income) expense – net within Costs and expenses | | | |
West | | | |
Impairment of certain assets | $ | 12 |
| | $ | — |
|
| | | |
Other | | | |
Change in regulatory asset associated with Transco’s estimated deferred state income tax rate | 12 |
| | — |
|
| | | |
Other income (expense) – net below Operating income (loss) | | | |
Atlantic-Gulf | | | |
Allowance for equity funds used during construction | 7 |
| | 20 |
|
| | | |
Other | | | |
Net loss associated with early retirement of debt | — |
| | (7 | ) |
Note 6 – Provision (Benefit) for Income Taxes
The Provision (benefit) for income taxes includes:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (Millions) |
Current: | | | |
Federal | $ | (6 | ) | | $ | (19 | ) |
State | — |
| | 1 |
|
| (6 | ) | | (18 | ) |
Deferred: | | | |
Federal | 61 |
| | 64 |
|
State | 14 |
| | 9 |
|
| 75 |
| | 73 |
|
Provision (benefit) for income taxes | $ | 69 |
| | $ | 55 |
|
The effective income tax rate for the total provision for the three months ended March 31, 2019, is greater than the federal statutory rate, primarily due to the effect of state income taxes.
The effective income tax rate for the total provision for the three months ended March 31, 2018, is less than the federal statutory rate. This is primarily due to the impact of the allocation of income to nontaxable noncontrolling interests, partially offset by the effect of state income taxes.
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 7 – Earnings (Loss) Per Common Share |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (Dollars in millions, except per-share amounts; shares in thousands) |
Net income (loss) available to common stockholders | $ | 194 |
| | $ | 152 |
|
Basic weighted-average shares | 1,211,489 |
| | 827,509 |
|
Effect of dilutive securities: | | | |
Nonvested restricted stock units | 1,845 |
| | 2,095 |
|
Stock options | 258 |
| | 593 |
|
Diluted weighted-average shares | 1,213,592 |
| | 830,197 |
|
Earnings (loss) per common share: | | | |
Basic | $ | .16 |
| | $ | .18 |
|
Diluted | $ | .16 |
| | $ | .18 |
|
Note 8 – Employee Benefit Plans
Net periodic benefit cost (credit) is as follows: |
| | | | | | | |
| Pension Benefits |
| Three Months Ended March 31, |
| 2019 |
| 2018 |
| (Millions) |
Components of net periodic benefit cost (credit): |
|
|
|
Service cost | $ | 11 |
|
| $ | 14 |
|
Interest cost | 12 |
|
| 11 |
|
Expected return on plan assets | (15 | ) |
| (16 | ) |
Amortization of net actuarial loss | 4 |
|
| 6 |
|
Net periodic benefit cost (credit) | $ | 12 |
|
| $ | 15 |
|
|
| | | | | | | |
| Other Postretirement Benefits |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (Millions) |
Components of net periodic benefit cost (credit): | | | |
Interest cost | $ | 2 |
| | $ | 2 |
|
Expected return on plan assets | (2 | ) | | (3 | ) |
Amortization of prior service credit | — |
| | (1 | ) |
Reclassification to regulatory liability | — |
| | 1 |
|
Net periodic benefit cost (credit) | $ | — |
| | $ | (1 | ) |
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 three months ended March 31, 2018.
During the three months ended March 31, 2019, we contributed $1 million to our other postretirement benefit plans. We presently anticipate making additional contributions of approximately $63 million to our pension plans and approximately $4 million to our other postretirement benefit plans in the remainder of 2019.
Note 9 – 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 non-lease 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 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.
We sublease unused office space when permitted under our lease agreements for fixed periods that extend up to the length of the original lease agreement.
|
| | | |
| Three Months Ended March 31, 2019 |
| (Millions) |
Lease Cost: | |
Operating lease cost | $ | 10 |
|
Short-term lease cost | — |
|
Variable lease cost | 6 |
|
Sublease income | (1 | ) |
Total lease cost | $ | 15 |
|
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 9 |
|
| March 31, 2019 |
| (Millions) |
Other Information: | |
Right-of-use asset (included in Regulatory assets, deferred charges, and other in our Consolidated Balance Sheet) | $ | 223 |
|
Operating lease liabilities: | |
Current (included in Accrued liabilities in our Consolidated Balance Sheet) | $ | 25 |
|
Noncurrent (included in Regulatory liabilities, deferred income, and other in our Consolidated Balance Sheet) | $ | 198 |
|
Weighted-average remaining lease term – operating leases (years) | 12 |
Weighted-average discount rate – operating leases | 4.62% |
As of March 31, 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) | $ | 27 |
|
2020 | 32 |
|
2021 | 32 |
|
2022 | 27 |
|
2023 | 19 |
|
Thereafter | 165 |
|
Total future lease payments | 302 |
|
Less amount representing interest | 79 |
|
Total obligations under operating leases | $ | 223 |
|
We are the lessor to certain lease agreements for office space in our headquarters building, which are insignificant to our financial statements.
Note 10 – Debt and Banking Arrangements
Commercial Paper Program
At March 31, 2019, approximately $1.016 billion of Commercial paper, exclusive of unamortized discount, at a weighted-average interest rate of 2.9 percent was outstanding under our $4 billion commercial paper program. At April 30, 2019, $337 million of commercial paper was outstanding.
Credit Facilities
|
| | | | | | | |
| March 31, 2019 |
| Stated Capacity | | Outstanding |
| (Millions) |
| | | |
Long-term credit facility (1) | $ | 4,500 |
| | $ | — |
|
Letters of credit under certain bilateral bank agreements | | | 14 |
|
| |
(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. |
Note 11 – Stockholders’ Equity
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 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 3 |
| | 3 |
|
Balance at March 31, 2019 | $ | (2 | ) | | $ | (1 | ) | | $ | (264 | ) | | $ | (267 | ) |
Reclassifications out of AOCI are presented in the following table by component for the three months ended March 31, 2019:
|
| | | | | | |
Component | | Reclassifications | | Classification |
| | (Millions) | | |
Pension and other postretirement benefits: | | | | |
Amortization of actuarial (gain) loss included in net periodic benefit cost (credit) | | $ | 4 |
| | Note 8 – Employee Benefit Plans |
Income tax benefit | | (1 | ) | | Provision (benefit) for income taxes |
Reclassifications during the period | | $ | 3 |
| | |
Note 12 – 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, commercial paper, 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 March 31, 2019: | | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | | |
ARO Trust investments | | $ | 173 |
| | $ | 173 |
| | $ | 173 |
| | $ | — |
| | $ | — |
|
Energy derivatives assets not designated as hedging instruments | | 2 |
| | 2 |
| | 2 |
| | — |
| | — |
|
Energy derivatives liabilities not designated as hedging instruments | | (9 | ) | | (9 | ) | | (6 | ) | | — |
| | (3 | ) |
Additional disclosures: | | | | | | | | | | |
Long-term debt, including current portion | | (22,264 | ) | | (24,449 | ) | | — |
| | (24,449 | ) | | — |
|
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 three months ended March 31, 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 $29 million at March 31, 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.
|
| | | | | | | | | | | | | | | |
| | | | | | | | | Impairments |
| | | | | | | | | Three Months Ended March 31, |
| Classification | | Segment | | Date of Measurement | | Fair Value | | 2019 | | 2018 |
| | | | | | | (Millions) |
Impairment of assets (1) | Property, plant, and equipment – net | | West | | March 31, 2019 | | $ | — |
| | $ | 12 |
| | |
| | | | | | | | | | | |
Equity-method investments (2) | Investments | | Northeast G&P | | March 17, 2019 | | $ | 1,209 |
| | $ | 74 |
| | |
_______________
| |
(1) | Reflects impairment of assets that are no longer in use for which the fair value was determined to be lower than the carrying value. This impairment is reported in Other (income) expense – net within Costs and expenses in the Consolidated Statement of Income. |
| |
(2) | Relates to Northeast G&P’s equity-method investment in UEOM. The estimated fair value was determined by a market approach based on the transaction price for the purchase of the remaining interest in UEOM as finalized just prior to the signing and closing of the acquisition in March 2019 (see Note 2 – Acquisitions). This impairment is reported in Impairment of equity-method investments in the Consolidated Statement of Income. |
Note 13 – 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 has been remanded to the Nevada 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 court preliminarily approved the settlements, which are on behalf of Kansas and Missouri class members.
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. Currently, a four-week trial is scheduled to commence on October 7, 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 has stricken the trial setting and indicated that it will be re-scheduled for a later date.
Former Olefins Business
The other interest owner in our former Geismar, Louisiana, olefins facility, which 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 is currently scheduled to begin in October 2019. 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. We have provided a 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 March 31, 2019, we have accrued liabilities totaling $34 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 March 31, 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 March 31, 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 March 31, 2019, we have accrued liabilities totaling $7 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 March 31, 2019, we have accrued environmental liabilities of $22 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 March 31, 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 14 – 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);
◦Impairment of equity-method investments;
◦Other investing income (loss) – net;
◦Depreciation and amortization expenses;
◦Accretion expense associated with asset retirement obligations for nonregulated operations.
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• | 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.
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| | | | | | | | | | | | | | | | | | | | | | | |
| Northeast G&P | | Atlantic-Gulf | | West | | Other | | Eliminations | | Total |
| (Millions) |
Three Months Ended March 31, 2019 |
Segment revenues: | | | | | | | | | | | |
Service revenues | | | | | | | | | | | |
External | $ | 266 |
| | $ | 697 |
| | $ | 473 |
| | $ | 4 |
| | $ | — |
| | $ | 1,440 |
|
Internal | 10 |
| | 12 |
| | — |
| | 3 |
| | (25 | ) | | — |
|
Total service revenues | 276 |
| | 709 |
| | 473 |
| | 7 |
| | (25 | ) | | 1,440 |
|
Total service revenues – commodity consideration | 5 |
| | 13 |
| | 46 |
| | — |
| | — |
| | 64 |
|
Product sales | | | | | | | | | | | |
External | 36 |
| | 52 |
| | 462 |
| | — |
| | — |
| | 550 |
|
Internal | 11 |
| | 30 |
| | 17 |
| | — |
| | (58 | ) | | — |
|
|