Williams(WMB) - 2022 Q4 - Annual Report

PART I Business The Williams Companies, Inc. is a major energy infrastructure company focused on safely delivering natural gas products General Overview Williams is a major energy infrastructure company focused on natural gas gathering, processing, transmission, and NGL services across the US - The company owns and operates over 33,000 miles of pipelines, 29 natural gas processing facilities, and 7 NGL fractionation facilities[9] - Key business variables include obstacles to expansion (permitting), producer drilling activity, customer retention, infrastructure growth, commodity prices, and disciplined growth[12] Service Assets, Customers, and Contracts Company assets include FERC-regulated interstate pipelines under long-term contracts and fee-based gathering/processing services - Most interstate natural gas transmission business is fully contracted under long-term firm reservation contracts. In 2022, the top three customers for Transco and Northwest Pipeline accounted for approximately 23% and 51% of their respective operating revenues[14][15] - Approximately 90% of NGL production volumes were under fee-based processing contracts in 2022, with the remaining 10% under noncash commodity-based contracts[17][18] - The top ten gathering and processing customers accounted for approximately 70% of related fee revenues and NGL margins in 2022[21] Business Segments Operations are managed through four segments: Transmission & Gulf of Mexico, Northeast G&P, West, and Gas & NGL Marketing Services - The company's operations are managed through four reportable segments: Transmission & Gulf of Mexico, Northeast G&P, West, and Gas & NGL Marketing Services[30] - The Transmission & Gulf of Mexico segment includes major interstate pipelines (Transco, Northwest Pipeline, MountainWest) and Gulf Coast assets[30] - The Northeast G&P segment focuses on midstream operations in the Marcellus and Utica Shale regions[31] - The West segment comprises gathering, processing, and treating operations in the Rocky Mountains and various Texas and Louisiana shale regions[32] Regulatory Matters Interstate gas pipeline transmission and storage are heavily regulated by FERC, PHMSA, and TSA, with state regulations also applying - Interstate gas pipeline activities are subject to FERC regulation under the Natural Gas Act of 1938, governing rates, facility construction, and abandonment[82] - PHMSA's 'Mega Rule' has expanded federal pipeline safety oversight to previously unregulated gas gathering pipelines, affecting thousands of miles of the company's pipelines[89] - The company estimates incurring approximately $126 million in 2023 for its Gas Integrity Management Plan and $10 million for its Liquid Integrity Management Plan to comply with PHMSA regulations[92][93] - The TSA has issued security directives requiring critical pipeline operators to implement TSA-approved Cybersecurity Implementation Plans, develop Incident Response Plans, and establish assessment programs[95] Environmental Matters Operations are subject to extensive environmental laws, creating potential liabilities for pollutant discharges and cleanup costs - Operations are subject to numerous environmental laws, with potential liability for unlawful discharge of pollutants and cleanup costs, including for damages caused by former owners[101][102] Competition Williams faces significant competition across all segments, based on reputation, fees, service reliability, and available capacity - Competition in gathering and processing is based on reputation, commercial terms, services provided, efficiency, and location[105] - The interstate natural gas pipeline business competes based on available capacity, rates, reliability, and proximity to customers, with significant barriers to entry for new pipeline construction[107][109] Human Capital Resources As of Feb 1, 2023, Williams had 5,043 employees, emphasizing safety, comprehensive rewards, and diversity and inclusion - As of February 1, 2023, the company had 5,043 full-time employees, with a voluntary turnover rate of 7.7% in 2022[113] - For 2022, safety and environmental goals comprised 15% of the employee annual incentive program[116] - The company promotes diversity and inclusion through a council, 10 Employee Resource Groups (ERGs), and required training for leaders, with 25% of the Board of Directors being women as of December 31, 2022[125][126] Risk Factors The company faces risks from natural gas supply/demand, commodity price volatility, project opposition, financial conditions, and extensive regulations Risks Related to Our Business Business risks include reliance on third-party production, volatile commodity prices, customer credit, project opposition, and operational hazards - Financial condition depends on the continued availability of natural gas supplies from third-party producers and the demand for those supplies in served markets[136] - The company faces opposition to the operation and expansion of its pipelines from governmental officials, environmental groups, and local advocates, which can delay or deny necessary permits[139] - Operational risks include aging infrastructure, uncontrolled releases of products, fires, explosions, and cybersecurity threats, potentially resulting in significant damage, reputational harm, and financial losses[151][154][155] Risks Related to Financing Our Business Financial stability is subject to credit rating downgrades, significant indebtedness, difficult market conditions, and restricted fossil-fuel investment - A downgrade of the company's credit ratings could increase borrowing costs, require posting collateral, and limit access to capital markets[161] - Total outstanding long-term debt was $22.6 billion as of December 31, 2022, and debt agreements contain restrictive covenants affecting financial and operating flexibility[161] - Some financial institutions have restricted or eliminated investment in fossil-fuel related businesses, which could make it more difficult for the company and its customers to secure funding[165] Risks Related to Regulations Operations are subject to extensive regulation by FERC and environmental laws, including climate change, impacting costs and profitability - Interstate pipeline transportation and storage are subject to comprehensive regulation by FERC, which affects rates, services, and facility construction, potentially impacting profitability[167] - Operations are subject to extensive environmental laws which may expose the company to significant costs, liabilities, and penalties for non-compliance[168] - Future climate change regulations or carbon taxes could result in increased costs to operate and maintain facilities, potentially making some activities uneconomic[168] Legal Proceedings The company is involved in legal proceedings, including an environmental matter with the DOJ and EPA for alleged Clean Air Act violations - The company has reached an agreement in principle with the DOJ to resolve alleged Clean Air Act violations at several facilities, which includes a proposed civil penalty of $3.75 million and injunctive relief[177] Information About Our Executive Officers This section details the company's executive officers as of February 27, 2023, including their names, ages, positions, and experience PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on NYSE under 'WMB', with a $1.5 billion stock repurchase program and a performance graph comparing returns - The company has a stock repurchase program authorized for up to $1.5 billion, with no expiration date, and no shares were purchased in Q4 2022[187] Cumulative Total Shareholder Return (2017-2022) | | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | The Williams Companies, Inc. | 100.0 | 74.5 | 85.1 | 78.7 | 108.9 | 144.8 | | S&P 500 Index | 100.0 | 94.8 | 124.7 | 147.6 | 189.9 | 155.5 | | Bloomberg Americas Pipelines Index | 100.0 | 83.8 | 113.4 | 89.7 | 120.3 | 139.0 | | Arca Natural Gas Index | 100.0 | 66.4 | 65.5 | 56.7 | 91.0 | 116.5 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2022 financial results, highlighting increased net income, recent acquisitions, and a positive 2023 outlook with planned capital expenditures Recent Developments and Company Outlook Recent strategic activities include MountainWest, NorTex, and Trace Midstream acquisitions, with a positive 2023 outlook and planned growth capital expenditures - Closed on the acquisition of MountainWest Pipelines Holding Company for $1.08 billion in cash and $430 million in assumed debt on February 14, 2023[203] - Acquired Haynesville Shale assets from Trace Midstream for $972 million in April 2022 and north Texas assets from NorTex for $424 million in August 2022[206][205] - 2023 growth capital and investment expenditures are expected to be between $1.40 billion and $1.70 billion, excluding the MountainWest Acquisition[209] Results of Operations Net income increased by $532 million to $2.049 billion in 2022, driven by higher service revenues and volume growth, partially offset by derivatives Consolidated Results of Operations (2022 vs. 2021) | Metric | 2022 (Millions) | 2021 (Millions) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $10,965 | $10,627 | +$338 | +3% | | Operating Income | $3,018 | $2,631 | +$387 | +15% | | Net Income Attributable to Williams | $2,049 | $1,517 | +$532 | +35% | - Service revenues increased by $535 million in 2022, primarily due to higher gathering and processing rates, higher volumes from the Trace and NorTex acquisitions, and the Leidy South expansion project[228] - Net loss on commodity derivatives increased by $239 million, reflecting higher net unrealized losses in the Gas & NGL Marketing Services segment[231] Financial Condition and Liquidity The company maintains strong liquidity with $3.55 billion available as of Dec 31, 2022, funding capital spending primarily with cash flow after dividends Available Liquidity as of Dec 31, 2022 | Source | Amount (Millions) | | :--- | :--- | | Cash and cash equivalents | $152 | | Available Credit Facility Capacity | $3,400 | | Total Available Liquidity | $3,552 | Cash Flow Summary | Cash Flow Category | 2022 (Millions) | 2021 (Millions) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $4,889 | $3,945 | | Net Cash from Financing Activities | $(3,042) | $(942) | | Net Cash from Investing Activities | $(3,375) | $(1,465) | - The company holds stable, investment-grade credit ratings: BBB from S&P, Baa2 from Moody's, and BBB from Fitch[293] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate and commodity price risks using derivatives, with VaR for trading and non-trading portfolios as of Dec 31, 2022 - The debt portfolio is primarily comprised of fixed-rate debt, which mitigates the impact of interest rate fluctuations[304] - Commodity price risk is managed with exchange-traded and OTC energy contracts, though these are generally not designated for hedge accounting treatment[306] - At December 31, 2022, the Value at Risk (VaR) for the integrated natural gas trading activity was $10 million, and the VaR for the non-trading hedging portfolio was $8 million[314][315] Financial Statements and Supplementary Data This section contains audited consolidated financial statements for 2022, with an unqualified opinion from Ernst & Young LLP on financials and internal controls - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[318][320] Consolidated Statement of Income Highlights (Year Ended Dec 31) | (Millions, except per-share) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $10,965 | $10,627 | $7,719 | | Operating Income | $3,018 | $2,631 | $2,202 | | Net Income Attributable to Williams | $2,049 | $1,517 | $211 | | Diluted EPS | $1.67 | $1.24 | $0.17 | Consolidated Balance Sheet Highlights (As of Dec 31) | (Millions) | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $48,433 | $47,612 | | Total Liabilities | $34,388 | $33,511 | | Total Equity | $14,045 | $14,101 | Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of Dec 31, 2022, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[639] - Management assessed internal control over financial reporting as effective based on the COSO 2013 framework, and the independent auditor, Ernst & Young LLP, concurred[644][647] PART III Part III incorporates by reference information from the company's definitive Proxy Statement for its 2023 Annual Meeting of Stockholders - Information regarding directors, executive compensation, security ownership, and related party transactions is incorporated by reference from the company's definitive Proxy Statement to be filed for the April 25, 2023, Annual Meeting of Stockholders[654][657][658][660] PART IV Part IV lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including consolidated financials - This section lists all financial statements, schedules, and exhibits filed with the annual report, including consents of independent auditors and certifications by the CEO and CFO[663][664]