Edgar Filing: WILLIAMS COMPANIES INC

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2018



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

For the transition period from _____________ to _____________

Commission file number 1-4174

THE WILLIAMS COMPANIES, INC.

(Exact name of registrant as specified in its charter)



DELAWARE		73-0569878
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

ONE WILLIAMS CENTER
TULSA, OKLAHOMA		74172-0172
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (918) 573-2000

NO CHANGE

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨
		(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Shares Outstanding at April 30, 2018
Common Stock, $1 par value		827,610,837

The Williams Companies, Inc.

Index



		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Income – Three Months Ended March 31, 2018 and 2017		6
Consolidated Statement of Comprehensive Income – Three Months Ended March 31, 2018 and 2017		7
Consolidated Balance Sheet – March 31, 2018 and December 31, 2017		8
Consolidated Statement of Changes in Equity – Three Months Ended March 31, 2018		9
Consolidated Statement of Cash Flows – Three Months Ended March 31, 2018 and 2017		10
Notes to Consolidated Financial Statements		11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3. Quantitative and Qualitative Disclosures About Market Risk		55
Item 4. Controls and Procedures		55
Part II. Other Information		55
Item 1. Legal Proceedings		55
Item 1A. Risk Factors		57
Item 6. Exhibits		58

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:


•	Expected levels of cash distributions by Williams Partners L.P. (WPZ) with respect to limited partner interests;


•	Levels of dividends to Williams stockholders;


•	Future credit ratings of Williams, WPZ, and their affiliates;


•	Amounts and nature of future capital expenditures;


•	Expansion and growth of our business and operations;


•	Expected in-service dates for capital projects;


•	Financial condition and liquidity;


•	Business strategy;


•	Cash flow from operations or results of operations;


•	Seasonality of certain business components;


•	Natural gas and natural gas liquids prices, supply, and demand;


•	Demand for our services.

Forward-looking statements are based on numerous assumptions, uncertainties and risks that could cause future events or results to be materially different from those stated or implied in this report. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:


•	Whether WPZ will produce sufficient cash flows to provide expected levels of cash distributions;


•	Whether we are able to pay current and expected levels of dividends;


•	Whether WPZ elects to pay expected levels of cash distributions and we elect to pay expected levels of dividends;


•	Whether we will be able to effectively execute our financing plan;


•	Availability of supplies, including lower than anticipated volumes from third parties served by our business, and market demand;


•	Volatility of pricing including the effect of lower than anticipated energy commodity prices and margins;


•	Inflation, interest rates, and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on customers and suppliers);


•	The strength and financial resources of our competitors and the effects of competition;


•	Whether we are able to successfully identify, evaluate and timely execute our capital projects and other investment opportunities in accordance with our forecasted capital expenditures budget;


•	Our ability to successfully expand our facilities and operations;


•	Development and rate of adoption of alternative energy sources;


•	The impact of operational and developmental hazards, unforeseen interruptions, and the availability of adequate insurance coverage;

•

The impact of existing and future laws (including, but not limited to, the Tax Cuts and Job Acts of 2017), regulations (including, but not limited to, the FERC’s “Revised Policy Statement on Treatment of Income Taxes” in Docket No. PL17-1-000), the regulatory environment, environmental liabilities, and litigation, as well as our ability to obtain necessary permits and approvals, and achieve favorable rate proceeding outcomes;


•	Our costs and funding obligations for defined benefit pension plans and other postretirement benefit plans;


•	Changes in maintenance and construction costs;


•	Changes in the current geopolitical situation;


•	Our exposure to the credit risk of our customers and counterparties;


•	Risks related to financing, including restrictions stemming from debt agreements, future changes in credit ratings as determined by nationally recognized credit rating agencies, and the availability and cost of capital;


•	The amount of cash distributions from and capital requirements of our investments and joint ventures in which we participate;


•	Risks associated with weather and natural phenomena, including climate conditions and physical damage to our facilities;


•	Acts of terrorism, including cybersecurity threats, and related disruptions;


•	Additional risks described in our filings with the Securities and Exchange Commission (SEC).

Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to update the above list or announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.

In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report. Such changes in our intentions may also cause our results to differ. We may change our intentions, at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.

Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with the SEC on February 22, 2018, and in Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.

DEFINITIONS

The following is a listing of certain abbreviations, acronyms, and other industry terminology that may be used throughout this Form 10-Q.

Measurements:

Barrel: One barrel of petroleum products that equals 42 U.S. gallons

Bcf: One billion cubic feet of natural gas

Bcf/d: One billion cubic feet of natural gas per day

British Thermal Unit (Btu): A unit of energy needed to raise the temperature of one pound of water by one degree

Fahrenheit

Dekatherms (Dth): A unit of energy equal to one million British thermal units

Mbbls/d: One thousand barrels per day

Mdth/d: One thousand dekatherms per day

MMcf/d: One million cubic feet per day

MMdth: One million dekatherms or approximately one trillion British thermal units

MMdth/d: One million dekatherms per day

Tbtu: One trillion British thermal units

Consolidated Entities:

Cardinal: Cardinal Gas Services, L.L.C.

Constitution: Constitution Pipeline Company, LLC

Gulfstar One: Gulfstar One LLC

Jackalope: Jackalope Gas Gathering Services, L.L.C.

Northwest Pipeline: Northwest Pipeline LLC

Transco: Transcontinental Gas Pipe Line Company, LLC

WPZ: Williams Partners L.P.

Partially Owned Entities: Entities in which we do not own a 100 percent ownership interest and which, as of March 31, 2018, we account for as an equity-method investment, including principally the following:

Aux Sable: Aux Sable Liquid Products LP

Caiman II: Caiman Energy II, LLC

Discovery: Discovery Producer Services LLC

Gulfstream: Gulfstream Natural Gas System, L.L.C.

Laurel Mountain: Laurel Mountain Midstream, LLC

OPPL: Overland Pass Pipeline Company LLC

UEOM: Utica East Ohio Midstream LLC

Government and Regulatory:

EPA: Environmental Protection Agency

FERC: Federal Energy Regulatory Commission

SEC: Securities and Exchange Commission

Other:

Fractionation: The process by which a mixed stream of natural gas liquids is separated into constituent products, such as ethane, propane, and butane

GAAP: U.S. generally accepted accounting principles

IDR: Incentive distribution right

LNG: Liquefied natural gas; natural gas which has been liquefied at cryogenic temperatures

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

MVC: Minimum volume commitment

NGLs: Natural gas liquids; natural gas liquids result from natural gas processing and crude oil refining and are

used as petrochemical feedstocks, heating fuels, and gasoline additives, among other applications

NGL margins: NGL revenues less any applicable Btu replacement cost, plant fuel, and third-party transportation and fractionation

PDH facility: Propane dehydrogenation facility

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

PART I – FINANCIAL INFORMATION

The Williams Companies, Inc.

Consolidated Statement of Income

(Unaudited)



	Three Months Ended March 31,
	2018			2017
	(Millions, except per-share amounts)
Revenues:
Service revenues	$	1,351		$	1,261
Service revenues – commodity consideration (Note 2)	101			—
Product sales	636			727
Total revenues	2,088			1,988
Costs and expenses:
Product costs	613			579
Processing commodity expenses (Note 2)	35			—
Operating and maintenance expenses	357			371
Depreciation and amortization expenses	431			442
Selling, general, and administrative expenses	132			161
Other (income) expense – net	29			5
Total costs and expenses	1,597			1,558
Operating income (loss)	491			430
Equity earnings (losses)	82			107
Other investing income (loss) – net (Note 4)	4			272
Interest incurred	(282		)	(287		)
Interest capitalized	9			7
Other income (expense) – net	21			77
Income (loss) before income taxes	325			606
Provision (benefit) for income taxes	55			37
Net income (loss)	270			569
Less: Net income (loss) attributable to noncontrolling interests	118			196
Net income (loss) attributable to The Williams Companies, Inc.	$	152		$	373
Amounts attributable to The Williams Companies, Inc.:
Basic earnings (loss) per common share:
Net income (loss)	$	.18		$	.45
Weighted-average shares (thousands)	827,509			824,548
Diluted earnings (loss) per common share:
Net income (loss)	$	.18		$	.45
Weighted-average shares (thousands)	830,197			826,476
Cash dividends declared per common share	$	.34		$	.30

See accompanying notes.

The Williams Companies, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)



	Three Months Ended March 31,
	2018		2017
	(Millions)
Net income (loss)	$	270	$	569
Other comprehensive income (loss):
Cash flow hedging activities:
Net unrealized gain (loss) from derivative instruments, net of taxes of $0 in 2018 and ($1) in 2017	1		3
Pension and other postretirement benefits:
Amortization of prior service cost (credit) included in net periodic benefit cost (credit)	—		(1		)
Amortization of actuarial (gain) loss included in net periodic benefit cost (credit), net of taxes of ($1) in 2018 and ($3) in 2017	5		4
Other comprehensive income (loss)	6		6
Comprehensive income (loss)	276		575
Less: Comprehensive income (loss) attributable to noncontrolling interests	119		197
Comprehensive income (loss) attributable to The Williams Companies, Inc.	$	157	$	378

See accompanying notes.

The Williams Companies, Inc.

Consolidated Balance Sheet

(Unaudited)



	March 31, 2018			December 31, 2017
	(Millions, except per-share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	1,292		$	899
Trade accounts and other receivables (net of allowance of $10 at March 31, 2018 and $9 at December 31, 2017)	743			976
Inventories	160			113
Other current assets and deferred charges	204			191
Total current assets	2,399			2,179
Investments	6,513			6,552
Property, plant, and equipment	40,467			39,513
Accumulated depreciation and amortization	(11,620		)	(11,302		)
Property, plant, and equipment – net	28,847			28,211
Intangible assets – net of accumulated amortization	8,644			8,791
Regulatory assets, deferred charges, and other	649			619
Total assets	$	47,052		$	46,352
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	776		$	978
Accrued liabilities	887			1,167
Long-term debt due within one year	501			501
Total current liabilities	2,164			2,646
Long-term debt	21,379			20,434
Deferred income tax liabilities	3,196			3,147
Regulatory liabilities, deferred income, and other	4,410			3,950
Contingent liabilities (Note 12)
Equity:
Stockholders’ equity:
Common stock (960 million shares authorized at $1 par value; 862 million shares issued at March 31, 2018 and 861 million shares issued at December 31, 2017)	862			861
Capital in excess of par value	18,533			18,508
Retained deficit	(8,587		)	(8,434		)
Accumulated other comprehensive income (loss)	(294		)	(238		)
Treasury stock, at cost (35 million shares of common stock)	(1,041		)	(1,041		)
Total stockholders’ equity	9,473			9,656
Noncontrolling interests in consolidated subsidiaries	6,430			6,519
Total equity	15,903			16,175
Total liabilities and equity	$	47,052		$	46,352

See accompanying notes.

The Williams Companies, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)



	The Williams Companies, Inc., Stockholders
	Common Stock		Capital in Excess of Par Value		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
	(Millions)
Balance – December 31, 2017	$	861	$	18,508	$	(8,434	)	$	(238	)	$	(1,041	)	$	9,656		$	6,519		$	16,175
Adoption of ASC 606 (Note 1)	—		—		(84		)	—			—			(84		)	(37		)	(121		)
Adoption of ASU 2018-02 (Note 1)	—		—		61			(61		)	—			—			—			—
Net income (loss)	—		—		152			—			—			152			118			270
Other comprehensive income (loss)	—		—		—			5			—			5			1			6
Cash dividends – common stock	—		—		(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

See accompanying notes.

The Williams Companies, Inc.

Consolidated Statement of Cash Flows

(Unaudited)



	Three Months Ended March 31,
	2018			2017
	(Millions)
OPERATING ACTIVITIES:
Net income (loss)	$	270		$	569
Adjustments to reconcile to net cash provided (used) by operating activities:
Depreciation and amortization	431			442
Provision (benefit) for deferred income taxes	73			28
Equity (earnings) losses	(82		)	(107		)
Distributions from unconsolidated affiliates	140			190
Net (gain) loss on disposition of equity-method investments	—			(269		)
Amortization of stock-based awards	14			21
Cash provided (used) by changes in current assets and liabilities:
Accounts and notes receivable	238			29
Inventories	(40		)	(30		)
Other current assets and deferred charges	(4		)	18
Accounts payable	(197		)	32
Accrued liabilities	(166		)	(133		)
Other, including changes in noncurrent assets and liabilities	17			(63		)
Net cash provided (used) by operating activities	694			727
FINANCING ACTIVITIES:
Proceeds from (payments of) commercial paper – net	—			(93		)
Proceeds from long-term debt	2,048			470
Payments of long-term debt	(1,060		)	(2,000		)
Proceeds from issuance of common stock	10			2,122
Dividends paid	(281		)	(248		)
Dividends and distributions paid to noncontrolling interests	(165		)	(242		)
Contributions from noncontrolling interests	3			4
Payments for debt issuance costs	(18		)	—
Other – net	(40		)	(28		)
Net cash provided (used) by financing activities	497			(15		)
INVESTING ACTIVITIES:
Property, plant, and equipment:
Capital expenditures (1)	(957		)	(511		)
Dispositions – net	(1		)	(2		)
Contributions in aid of construction	190			131
Proceeds from dispositions of equity-method investments	—			200
Purchases of and contributions to equity-method investments	(21		)	(52		)
Other – net	(9		)	(9		)
Net cash provided (used) by investing activities	(798		)	(243		)
Increase (decrease) in cash and cash equivalents	393			469
Cash and cash equivalents at beginning of year	899			170
Cash and cash equivalents at end of period	$	1,292		$	639
_____________
(1) Increases to property, plant, and equipment	$	(934	)	$	(569	)
Changes in related accounts payable and accrued liabilities	(23		)	58
Capital expenditures	$	(957	)	$	(511	)

See accompanying notes.

The Williams Companies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – General, Description of Business, and Basis of Presentation

General

Our accompanying interim consolidated financial statements do not include all the notes in our annual financial statements and, therefore, should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, in 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.

Financial Repositioning

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

Description of Business

We are a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. Our operations are located principally in the United States. We have one reportable segment, Williams Partners. All remaining business activities as well as corporate activities are included in Other.

Williams Partners

Williams Partners consists of our consolidated master limited partnership, WPZ, and primarily includes gas pipeline and midstream businesses.

WPZ’s gas pipeline businesses primarily consist of two interstate natural gas pipelines, which are Transcontinental Gas Pipe Line Company, LLC (Transco) and Northwest Pipeline LLC (Northwest Pipeline), and several joint venture investments in interstate and intrastate natural gas pipeline systems, including a 50 percent equity-method investment in Gulfstream Natural Gas System, L.L.C., and a 41 percent interest in Constitution Pipeline Company, LLC (Constitution) (a consolidated entity), which is developing a pipeline project (see Note 3 – Variable Interest Entities).

WPZ’s midstream businesses primarily consist of (1) natural gas gathering, treating, compression, and processing; (2) natural gas liquid (NGL) fractionation, storage, and transportation; (3) crude oil production handling and

Notes (Continued)

transportation; and (4) olefins production. WPZ sold its olefins operations in July 2017. The primary service areas are concentrated in major producing basins in Colorado, Texas, Oklahoma, Kansas, New Mexico, Wyoming, the Gulf of Mexico, Louisiana, Pennsylvania, West Virginia, New York, and Ohio, which include the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara, and Utica shale plays as well as the Mid-Continent region.

The midstream businesses include equity-method investments in natural gas gathering and processing assets and NGL fractionation and transportation assets, including a 62 percent equity-method investment in Utica East Ohio Midstream, LLC, a 69 percent equity-method investment in Laurel Mountain Midstream, LLC, a 58 percent equity-method investment in Caiman Energy II, LLC, a 60 percent equity-method investment in Discovery Producer Services, LLC, a 50 percent equity-method investment in Overland Pass Pipeline, LLC, and Appalachia Midstream Services, LLC, which owns equity-method investments with an approximate average 66 percent interest in multiple gathering systems in the Marcellus Shale (Appalachia Midstream Investments), as well as our previously owned 50 percent equity-method investment in the Delaware basin gas gathering system (DBJV) in the Mid-Continent region (see Note 4 – Investing Activities).

Basis of Presentation

Consolidated master limited partnership

As of March 31, 2018, we own 74 percent of the interests in WPZ, a variable interest entity (VIE) (see Note 3 – Variable Interest Entities). Pursuant to WPZ’s distribution reinvestment program, 576,923 common units were issued to the public in February 2018 associated with reinvested distributions of $22 million. This common unit issuance and WPZ’s quarterly distribution of additional paid-in-kind Class B units to us had the combined net impact of decreasing Noncontrolling interests in consolidated subsidiaries by $9 million, and increasing Capital in excess of par value by $7 million and Deferred income tax liabilities by $2 million in the Consolidated Balance Sheet.

WPZ is self-funding and maintains separate lines of bank credit and cash management accounts and also has a commercial paper program. (See Note 9 – Debt and Banking Arrangements.) Cash distributions from WPZ to limited partners, including us, are governed by WPZ’s partnership agreement.

Significant risks and uncertainties

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

On March 15, 2018, the Federal Energy Regulatory Commission (FERC) issued a policy statement regarding the recovery of income tax costs in rates of natural gas pipelines. The FERC found that an impermissible double recovery results from granting a Master Limited Partnership (MLP) pipeline both an income tax allowance and a return on equity pursuant to the discounted cash flow methodology. The FERC will no longer permit an MLP pipeline to recover an income tax allowance in its cost of service. The FERC further stated it will address the application of this policy to non-MLP partnership forms as those issues arise in subsequent proceedings. The FERC also issued a Notice of Proposed Rulemaking proposing a process that will allow it to determine which natural gas pipelines may be collecting unjust and unreasonable rates in light of the recent reduction in the corporate income tax rate in the Tax Cuts and Jobs Act (Tax Reform) and this policy statement. Furthermore, the FERC issued a Notice of Inquiry seeking comments on the additional impacts of Tax Reform on jurisdictional rates, particularly whether, and if so how, the FERC should address changes relating to accumulated deferred income tax amounts after the corporate income tax rate reduction and bonus depreciation rules, as well as whether other features of Tax Reform require FERC action. We are evaluating the impact of these developments on our interstate natural gas pipelines and currently expect any associated impacts would be prospective and determined through subsequent rate proceedings. We also continue to monitor developments that may impact our regulatory liabilities resulting from Tax Reform. It is reasonably possible that future tariff-based rates collected by our interstate natural gas pipelines may be adversely impacted.

Notes (Continued)

Accounting standards issued and adopted

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

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

Effective January 1, 2018, we adopted ASU 2017-07 “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07). ASU 2017-07 requires employers to report the service cost component of net benefit cost in the same line item or items as other compensation costs arising from employee services. The other components of net benefit cost must be presented in the income statement separately from the service cost component and outside Operating income (loss). Only the service cost component is now eligible for capitalization when applicable. The presentation aspect of ASU 2017-07 must be applied retrospectively and the capitalization requirement prospectively. In accordance with this adoption, we have conformed the prior year presentation, which resulted in an increase of $3 million to Operating and maintenance expenses with a corresponding decrease to Operating income (loss) and an increase of $3 million to Other income (expense) – net below Operating income (loss) in the Consolidated Statement of Income for the period ended March 31, 2017.

Effective January 1, 2018, we adopted ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). Among other things, ASU 2016-15 permits an accounting policy election to classify distributions received from equity-method investees using either the cumulative earnings approach or the nature of distribution approach. We have elected to apply the nature of distribution approach and have retrospectively conformed the prior year presentation within the Consolidated Statement of Cash Flows in accordance with ASU 2016-15. For the period ended March 31, 2017, amounts previously presented as Distributions from unconsolidated affiliates in excess of cumulative earnings within Investing Activities are now presented as part of Distributions from unconsolidated affiliates within Operating Activities, resulting in an increase to Net cash provided (used) by operating activities of $121 million with a corresponding reduction in Net cash provided (used) by investing activities.

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

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

Notes (Continued)

For each revenue contract type, we conducted a formal contract review process to evaluate the impact of ASC 606. The adjustment to Total equity upon adoption of ASC 606 is primarily comprised of the impact to the timing of recognition of deferred revenue (contract liabilities) associated with certain contracts which underwent modifications in periods prior to January 1, 2018. Under the provisions of ASC 606, when a contract modification does not increase both the scope and price of the contract, and the remaining goods and services are distinct from the goods and services transferred prior to the modification, the modification is treated as a termination of the existing contract and the creation of a new contract. ASC 606 requires that the transaction price, including any remaining contract liabilities from the old contract, be allocated to the performance obligations over the term of the new contract. The contract modification adjustments are partially offset by the impact of changes to the timing of recognizing revenue which is subject to the constraint on estimates of variable consideration of certain contracts. The constraint of variable consideration will result in the acceleration of revenue recognition and corresponding de-recognition of contract liabilities for certain contracts (as compared to the previous revenue recognition model) as a result of our assessment that it is probable such recognition would not result in a significant revenue reversal in the future. Additionally, under ASC 606, our revenues will increase in situations where we receive noncash consideration, which exists primarily in certain of our gas processing contracts where we receive commodities as full or partial consideration for services provided. This increase in revenues will be offset by a similar increase in costs and expenses when the commodities received are subsequently sold. Financial systems and internal controls necessary for adoption were implemented effective January 1, 2018. (See Note 2 – Revenue Recognition.)

Accounting standards issued but not yet adopted

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans, and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. The guidance also requires increased disclosures. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The standard requires varying transition methods for the different categories of amendments. Although we do not expect ASU 2016-13 to have a significant impact, it will impact our trade receivables as the related allowance for credit losses will be recognized earlier under the expected loss model.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 establishes a comprehensive new lease accounting model. ASU 2016-02 modifies the definition of a lease, requires a dual approach to lease classification similar to current lease accounting, and causes lessees to recognize operating leases on the balance sheet as a lease liability measured as the present value of the future lease payments with a corresponding right-of-use asset, with an exception for leases with a term of one year or less. Additional disclosures will also be required regarding the amount, timing, and uncertainty of cash flows arising from leases. In January 2018, the FASB issued ASU 2018-01 “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (ASU 2018-01). Per ASU 2018-01, land easements and rights-of-way are required to be assessed under ASU 2016-02 to determine whether the arrangements are or contain a lease. ASU 2018-01 permits an entity to elect a transition practical expedient to not apply ASU 2016-02 to land easements that exist or expired before the effective date of ASU 2016-02 and that were not previously assessed under the previous lease guidance in ASC Topic 840 “Leases.” ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We expect to adopt ASU 2016-02 effective January 1, 2019. ASU 2016-02 currently requires a modified retrospective transition for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements.

In January 2018, the FASB proposed an ASU titled “Leases (Topic 842): Targeted Improvements,” which is an update to ASU 2016-02 allowing 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.

We are in the process of reviewing contracts to identify leases based on the modified definition of a lease, implementing a financial lease accounting system, and evaluating internal control changes to support management in the accounting for and disclosure of leasing activities. While we are still in the process of completing our implementation

Notes (Continued)

evaluation of ASU 2016-02, we currently believe the most significant changes to our financial statements relate to the recognition of a lease liability and offsetting right-of-use asset in our consolidated balance sheet for operating leases. We are also evaluating ASU 2016-02’s currently available and proposed practical expedients on adoption.

Note 2 – Revenue Recognition

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

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

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

Service Revenues

Gas pipeline businesses

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

Notes (Continued)


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


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

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

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

Midstream businesses

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

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

We generally earn a contractually-stated fee per unit for the volume of product transported, gathered, processed, or stored. The rate is generally fixed; however, certain contracts contain variable rates that are subject to change based on commodity prices, levels of throughput, or an annual adjustment based on a formulaic cost of service calculation. In addition, we have contracts with contractually-stated fees that decline over the contract term, such as declines based on the passage of time periods or achievement of cumulative throughput amounts. For all of our contracts, we allocate the transaction price to each performance obligation based on the relative standalone selling price. The excess of consideration received over revenue recognized results in the deferral of those amounts until future periods based on a units of production or straight-line methodology. Certain of our gas gathering and processing agreements have minimum volume commitments (MVC). If a customer under such an agreement fails to meet its MVC for a specified

Notes (Continued)

period (thus not exercising all the contractual rights to gathering and processing services within the specified period, herein referred to as “breakage”), it is obligated to pay a contractually determined fee based upon the shortfall between the actual gathered or processed volumes and the MVC for the period contained in the contract. When we conclude it is probable that the customer will not exercise all or a portion of its remaining rights, we recognize revenue associated with such breakage amount in proportion to the pattern of exercised rights within the respective MVC period.

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

Product Sales

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

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

Notes (Continued)

Revenue by Category

The following table presents our revenue disaggregated by major service line:



	Northeast Midstream		Atlantic- Gulf Midstream		West Midstream		Transco		Northwest Pipeline		Other		Intercompany Eliminations			Total
	(Millions)
Three Months Ended 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		—		—		8		(6		)	40
Total service revenues	227		158		501		461		112		8		(25		)	1,442
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		8		(110		)	2,073
Other revenues (1)	5		2		5		3		—		—		—			15
Total revenues	$	330	$	228	$	1,031	$	489	$	112	$	8	$	(110	)	$	2,088

(1)

We provide management services to operated joint ventures and other investments for which we receive a management fee that is categorized as Service revenues in our Consolidated Statement of Income. These 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.

Contract Assets

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

Notes (Continued)

The following table presents a reconciliation of the beginning and ending balances of our contract assets for the period ended March 31, 2018:



	2018
	(Millions)
Balance at January 1	$	4
Revenue recognized in excess of cash received	20
Minimum volume commitments invoiced	—
Balance at March 31	$	24

Contract Liabilities

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

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

The following table presents a reconciliation of the beginning and ending balances of our contract liabilities for the period ended March 31, 2018:



	2018
	(Millions)
Balance at January 1	$	1,596
Payments received and deferred	92
Recognized in revenue	(114		)
Balance at March 31	$	1,574

The following table presents the amount of the contract liabilities balance as of March 31, 2018, expected to be recognized as revenue in each of the next five years as performance obligations are expected to be satisfied:



	(Millions)
2018 (remainder)	$	251
2019	252
2020	120
2021	100
2022	94
2023	88
Thereafter	669

Notes (Continued)

Remaining Performance Obligations

The following table presents the transaction price allocated to the remaining performance obligations under certain contracts as of March 31, 2018. These primarily include long-term contracts containing MVCs associated with our midstream businesses, fixed payments associated with offshore production handling, and reservation charges on contracted capacity on our gas pipeline firm transportation contracts with customers, as well as storage capacity contracts. Amounts included in the table below for our interstate natural gas pipeline businesses reflect the rates for such services in our current FERC tariffs for the life of the related contracts; however, these rates may change based on future tariffs approved by the FERC and the amount and timing of these changes is not currently known. As a practical expedient permitted by ASC 606, this table excludes variable consideration as well as consideration in contracts that is recognized in revenue as billed. It also excludes consideration received prior to March 31, 2018, that will be recognized in future periods (see above for Contract Liabilities and the expected recognition of those amounts within revenue). As noted above, certain of our contracts contain evergreen and other renewal provisions for periods beyond the initial term of the contract. The remaining performance obligation as of March 31, 2018, does not consider potential future performance obligations for which the renewal has not been exercised. The table below also does not include contracts with customers for which the underlying facilities have not received FERC authorization to be placed into service.



	(Millions)
2018 (remainder)	$	1,927
2019	2,410
2020	2,210
2021	1,891
2022	1,758
2023	1,566
Thereafter	11,679
Total	$	23,441

Accounts Receivable

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

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



	March 31, 2018
	(Millions)
Accounts receivable related to revenues from contracts with customers	$	704
Other accounts receivable	39
Total reflected in Trade accounts and other receivables	$	743

Impact of Adoption of ASC 606

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

Notes (Continued)



	As Reported			Adjustments resulting from adoption of ASC 606			Balance without adoption of ASC 606
	(Millions)
Consolidated Statement of Income
Three Months Ended March 31, 2018
Service revenues	$	1,351		$	5		$	1,356
Service revenues – commodity consideration	101			(101		)	—
Product sales	636			10			646
Total revenues	2,088			(86		)	2,002
Product costs	613			(55		)	558
Processing commodity expenses	35			(35		)	—
Operating and maintenance expenses	357			(1		)	356
Depreciation and amortization expenses	431			1			432
Total costs and expenses	1,597			(90		)	1,507
Operating income (loss)	491			4			495
Interest incurred	(282		)	3			(279		)
Interest capitalized	9			(2		)	7
Income (loss) before income taxes	325			5			330
Net income (loss)	270			5			275
Less: Net income (loss) attributable to noncontrolling interests	118			2			120
Net income (loss) attributable to The Williams Companies, Inc.	152			3			155

Consolidated Statement of Comprehensive income
Three Months Ended March 31, 2018
Net income (loss)	$	270		$	5		$	275
Comprehensive income (loss)	276			5			281
Less: Comprehensive income (loss) attributable to noncontrolling interests	119			2			121
Comprehensive income (loss) attributable to The Williams Companies, Inc.	157			3			160

Consolidated Balance Sheet
March 31, 2018
Inventories	$	160		$	(8	)	$	152
Other current assets and deferred charges	204			(20		)	184
Total current assets	2,399			(28		)	2,371
Investments	6,513			(1		)	6,512
Property, plant, and equipment	40,467			(2		)	40,465
Property, plant, and equipment – net	28,847			(2		)	28,845
Intangible assets – net of accumulated amortization	8,644			63			8,707
Regulatory assets, deferred charges, and other	649			(4		)	645
Total assets	47,052			28			47,080
Deferred income tax liabilities	3,196			27			3,223
Regulatory liabilities, deferred income, and other	4,410			(125		)	4,285
Retained deficit	(8,587		)	87			(8,500		)
Total stockholders’ equity	9,473			87			9,560
Noncontrolling interests in consolidated subsidiaries	6,430			39			6,469
Total equity	15,903			126			16,029
Total liabilities and equity	47,052			28			47,080

Consolidated Statement of Changes in Equity
March 31, 2018
Adoption of ASC 606	$	(121	)	$	121		$	—
Net income (loss)	270			5			275
Net increase (decrease) in equity	(272		)	126			(146		)
Balance - March 31, 2018	15,903			126			16,029

Note 3 – Variable Interest Entities

WPZ

We own a 74 percent interest in WPZ, a master limited partnership that is a VIE due to the limited partners’ lack of substantive voting rights, such as either participating rights or kick-out rights that can be exercised with a simple majority of the vote of the limited partners. We are the primary beneficiary of WPZ because we have the power, through our general partner interest, to direct the activities that most significantly impact WPZ’s economic performance.

Notes (Continued)

The following table presents amounts included in our Consolidated Balance Sheet that are for the use or obligation of WPZ and/or its subsidiaries, and which comprise a significant portion of our consolidated assets and liabilities.



	March 31, 2018			December 31, 2017			Classification
	(Millions)
Assets (liabilities):
Cash and cash equivalents	$	1,268		$	881		Cash and cash equivalents
Trade accounts and other receivables – net	718			972			Trade accounts and other receivables
Inventories	160			113			Inventories
Other current assets	198			176			Other current assets and deferred charges
Investments	6,513			6,552			Investments
Property, plant, and equipment – net	28,547			27,912			Property, plant, and equipment – net
Intangible assets – net	8,643			8,790			Intangible assets – net of accumulated amortization
Regulatory assets, deferred charges, and other noncurrent assets	528			507			Regulatory assets, deferred charges, and other
Accounts payable	(755		)	(957		)	Accounts payable
Accrued liabilities including current asset retirement obligations	(682		)	(857		)	Accrued liabilities
Long-term debt due within one year	(501		)	(501		)	Long-term debt due within one year
Long-term debt	(17,011		)	(15,996		)	Long-term debt
Deferred income tax liabilities	(15		)	(16		)	Deferred income tax liabilities
Noncurrent asset retirement obligations	(987		)	(944		)	Regulatory liabilities, deferred income, and other
Regulatory liabilities, deferred income, and other noncurrent liabilities	(3,221		)	(2,809		)	Regulatory liabilities, deferred income, and other

The assets and liabilities presented in the table above also include the consolidated interests of the following individual VIEs within WPZ:

Gulfstar One

WPZ owns a 51 percent interest in Gulfstar One LLC (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. WPZ is the primary beneficiary because it has the power to direct the activities that most significantly impact Gulfstar One’s economic performance.

Constitution

WPZ owns 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. WPZ is the primary beneficiary because it has the power to direct the activities that most significantly impact Constitution’s economic performance. WPZ, as operator of Constitution, is 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 WPZ 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

Notes (Continued)

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. 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 the court denied our petition.

In October 2017, WPZ filed a petition for declaratory order requesting the FERC to find that, by operation of law, the Section 401 certification requirement for the New York State portion of Constitution’s pipeline project was waived due to the failure by the NYSDEC to act on Constitution’s Section 401 application within a reasonable period of time as required by the express terms of such statute. In January 2018, the FERC denied WPZ’s 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.

The project’s sponsors remain committed to the project. In February 2018, we filed a request with the FERC for rehearing of its finding that the NYSDEC did not waive the Section 401 certification requirement. If the FERC denies such request, we will file a petition for review with the D.C. Circuit Court of Appeals. In January 2018, we filed a petition with the United States Supreme Court to review the decision of the Second Circuit Court of Appeals that upheld the merits of the NYSDEC’s denial of the Section 401 certification. However, on April 30, 2018, the Court denied our petition. This decision is separate and independent from (and thus has no impact on) our request for rehearing (or appeal) of the FERC’s decision that the NYSDEC did not waive the Section 401 certification requirement.

Should any court or FERC decision determine that the NYSDEC waived the Section 401 certification requirement, we estimate that the target in-service date for the project would be approximately 10 to 12 months following any such determination. An unfavorable resolution could result in the impairment of a significant portion of the capitalized project costs, which total $379 million on a consolidated basis at March 31, 2018, and are included within Property, plant, and equipment in the Consolidated Balance Sheet. Beginning in April 2016, we discontinued capitalization of development costs related to this project. It is also possible that we could incur certain supplier-related costs in the event of a prolonged delay or termination of the project.

Cardinal

WPZ owns a 66 percent interest in Cardinal Gas Services, L.L.C. (Cardinal), a subsidiary that provides gathering services for the Utica Shale region and is a VIE due to certain risks shared with customers. WPZ is the primary beneficiary because it has 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 WPZ and the other equity partner on a proportional basis.

Jackalope

WPZ owns a 50 percent interest in Jackalope Gas Gathering Services, L.L.C. (Jackalope), a subsidiary that provides gathering and processing services for the Powder River basin and is a VIE due to certain risks shared with customers. WPZ is the primary beneficiary because it has the power to direct the activities that most significantly impact Jackalope’s economic performance. Future expansion activity is expected to be funded with capital contributions from WPZ and the other equity partner on a proportional basis.

Note 4 – Investing Activities

Acquisition of Additional Interests in Appalachia Midstream Investments

During the first quarter of 2017, WPZ exchanged all of its 50 percent interest in DBJV for an increased interest in two natural gas gathering systems that are part of the Appalachia Midstream Investments and $155 million in cash. This transaction was recorded based on our estimate of the fair value of the interests received as we have more insight

Notes (Continued)

to this value as we operate the underlying assets. Following this exchange, WPZ has an approximate average 66 percent interest in the Appalachia Midstream Investments. We continue to account for this investment under the equity-method due to the significant participatory rights of our partners such that we do not exercise control. WPZ also sold all of its interest in Ranch Westex JV LLC for $45 million. These transactions resulted in a total gain of $269 million reflected in Other investing income (loss) – net in the Consolidated Statement of Income.

The fair value of the increased interests in the Appalachia Midstream Investments received as consideration was estimated to be $1.1 billion using an income approach based on expected cash flows and an appropriate discount rate (a Level 3 measurement within the fair value hierarchy). The determination of estimated future cash flows involved significant assumptions regarding gathering volumes, rates, and related capital spending. A 9.5 percent discount rate was utilized and reflected our estimate of the cost of capital as impacted by market conditions and risks associated with the underlying business.

Note 5 – Other Income and Expenses

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



	Three Months Ended March 31,
	2018		2017
	(Millions)
Williams Partners
Gains on contract settlements and terminations	$	—	$	(13	)

Additional Items

Certain additional items included in the Consolidated Statement of Income are as follows:

•

Other income (expense) – net below Operating income (loss) includes income of $20 million and $18 million for the three months ended March 31, 2018 and 2017, respectively, for allowance for equity funds used during construction primarily within the Williams Partners segment. Other income (expense) – net below Operating income (loss) also includes income of $5 million and $28 million for the three months ended March 31, 2018 and 2017, respectively of income associated with a regulatory asset related to deferred taxes on equity funds used during construction.

•

Other income (expense) – net below Operating income (loss) for the three months ended March 31, 2018, includes a $7 million net loss associated with the March 28, 2018, early retirement of $750 million of 4.875 percent senior unsecured notes that were due in 2024. The net loss within the Williams Partners segment reflects $34 million in premiums paid, partially offset by $27 million of unamortized premium. For the three months ended March 31, 2017, Other income (expense) – net below Operating income (loss) includes a net gain of $30 million associated with the February 23, 2017, early retirement of $750 million of 6.125 percent senior unsecured notes that were due in 2022. The net gain within Williams Partners reflects $53 million of unamortized premium, partially offset by $23 million in premiums paid. (See Note 9 – Debt and Banking Arrangements.)

Notes (Continued)

Note 6 – Provision (Benefit) for Income Taxes

The Provision (benefit) for income taxes includes:



	Three Months Ended March 31,
	2018			2017
	(Millions)
Current:
Federal	$	(19	)	$	3
State	1			6
	(18		)	9
Deferred:
Federal	64			15
State	9			13
	73			28
Provision (benefit) for income taxes	$	55		$	37

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.

The effective income tax rate for the total provision for the three months ended March 31, 2017, is less than the federal statutory rate primarily due to releasing a $127 million valuation allowance on a capital loss carryover and the impact of nontaxable noncontrolling interests, partially offset by the effect of state income taxes. The sale of the Geismar olefins facility in 2017 generated capital gains sufficient to offset the capital loss carryover, thereby allowing us to reverse the valuation allowance in full.

On December 22, 2017, Tax Reform was enacted. Under the guidance provided by Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we recorded provisional adjustments related to the impact of Tax Reform in the fourth quarter of 2017. We consider all amounts recorded related to Tax Reform to be reasonable estimates. The amounts recorded continue to be provisional for the reasons disclosed in our Annual Report on Form 10-K filed February 22, 2018, as our interpretation, assessment, and presentation of the impact of the tax law change may be further clarified with additional guidance from regulatory, tax, and accounting authorities. We are continuing to gather additional information to determine the final impact and should additional guidance be provided by these authorities or other sources, we will review the provisional amounts and adjust as appropriate.

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.

Notes (Continued)

Note 7 – Earnings Per Common Share



	Three Months Ended March 31,
	2018		2017
	(Dollars in millions, except per-share amounts; shares in thousands)
Net income attributable to The Williams Companies, Inc. available to common stockholders for basic and diluted earnings per common share	$	152	$	373
Basic weighted-average shares	827,509		824,548
Effect of dilutive securities:
Nonvested restricted stock units	2,095		1,305
Stock options	593		623
Diluted weighted-average shares	830,197		826,476
Earnings per common share:
Basic	$	.18	$	.45
Diluted	$	.18	$	.45

Note 8 – Employee Benefit Plans

Net periodic benefit cost (credit) is as follows:



	Pension Benefits
	Three Months Ended March 31,
	2018			2017
	(Millions)
Components of net periodic benefit cost (credit):
Service cost	$	14		$	13
Interest cost	11			15
Expected return on plan assets	(16		)	(20		)
Amortization of net actuarial loss	6			7
Net periodic benefit cost (credit)	$	15		$	15



	Other Postretirement Benefits
	Three Months Ended March 31,
	2018			2017
	(Millions)
Components of net periodic benefit cost (credit):
Interest cost	$	2		$	2
Expected return on plan assets	(3		)	(3		)
Amortization of prior service credit	(1		)	(3		)
Reclassification to regulatory liability	1			1
Net periodic benefit cost (credit)	$	(1	)	$	(3	)

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.

Notes (Continued)

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 amounts of Amortization of prior service credit recognized in regulatory liabilities were $1 million and $2 million for the three months ended March 31, 2018 and 2017 respectively.

During the three months ended March 31, 2018, we contributed $2 million to our pension plans and $1 million to our other postretirement benefit plans. We presently anticipate making additional contributions of approximately $84 million to our pension plans and approximately $5 million to our other postretirement benefit plans in the remainder of 2018.

Note 9 – Debt and Banking Arrangements

Long-Term Debt

Issuances and retirements

On March 5, 2018, WPZ completed a public offering of $800 million of 4.85 percent senior unsecured notes due 2048. WPZ used the net proceeds for general partnership purposes, primarily the March 28, 2018 repayment of $750 million of 4.875 percent senior unsecured notes that were due in 2024.

On March 15, 2018, Transco issued $400 million of 4 percent senior unsecured notes due 2028 and $600 million of 4.6 percent senior unsecured notes due 2048 to investors in a private debt placement. Transco intends to use the net proceeds to retire $250 million of 6.05 percent senior unsecured notes due June 2018, and for general corporate purposes, including the funding of capital expenditures. As part of the issuance, Transco entered into a registration rights agreement with the initial purchasers of the unsecured notes. Transco is obligated to file and consummate a registration statement for an offer to exchange the notes for a new issue of substantially identical notes registered under the Securities Act of 1933, as amended, within 365 days from closing and to use commercially reasonable efforts to complete the exchange offer. Transco is required to provide a shelf registration statement to cover resales of the notes under certain circumstances. If Transco fails to fulfill these obligations, additional interest will accrue on the affected securities. The rate of additional interest will be 0.25 percent per annum on the principal amount of the affected securities for the first 90-day period immediately following the occurrence of a registration default, increasing by an additional 0.25 percent per annum with respect to each subsequent 90-day period thereafter, up to a maximum amount for all such registration defaults of 0.5 percent annually. Following the cure of any registration defaults, the accrual of additional interest will cease.

Other financing obligation

During the first quarter of 2018, Transco received an additional $19 million of funding from a co-owner related to the construction of the Dalton expansion project. This additional funding is reflected as Long-term debt in the Consolidated Balance Sheet.

Commercial Paper Program

As of March 31, 2018, no commercial paper was outstanding under WPZ’s $3 billion commercial paper program.

Notes (Continued)

Credit Facilities



	March 31, 2018
	Stated Capacity		Outstanding
	(Millions)
WMB
Long-term credit facility	$	1,500	$	200
Letters of credit under certain bilateral bank agreements			13
WPZ
Long-term credit facility (1)	3,500		—
Letters of credit under certain bilateral bank agreements			1


(1)	In managing our available liquidity, we do not expect a maximum outstanding amount in excess of the capacity of WPZ’s credit facility inclusive of any outstanding amounts under its commercial paper program.

Note 10 – Stockholders’ Equity

AOCI

The following table presents the changes in Accumulated other comprehensive income (loss) (AOCI) by component, net of income taxes:



	Cash Flow Hedges			Foreign Currency Translation			Pension and Other Postretirement Benefits			Total
	(Millions)
Balance at December 31, 2017	$	(2	)	$	(1	)	$	(235	)	$	(238	)
Adoption of ASU 2018-02 (Note 1)	—			—			(61		)	(61		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			—			5			5
Balance at March 31, 2018	$	(2	)	$	(1	)	$	(291	)	$	(294	)

Reclassifications out of AOCI are presented in the following table by component for the three months ended March 31, 2018:



Component	Reclassifications			Classification
	(Millions)
Pension and other postretirement benefits:
Amortization of actuarial (gain) loss included in net periodic benefit cost (credit)	$	6		Note 8 – Employee Benefit Plans
Income tax benefit	(1		)	Provision (benefit) for income taxes
Reclassifications during the period	$	5

Notes (Continued)

Note 11 – 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, 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, 2018:
Measured on a recurring basis:
ARO Trust investments	$	145		$	145		$	145		$	—		$	—
Energy derivatives assets designated as hedging instruments	2			2			2			—			—
Energy derivatives assets not designated as hedging instruments	4			4			4			—			—
Energy derivatives liabilities designated as hedging instruments	(3		)	(3		)	(3		)	—			—
Energy derivatives liabilities not designated as hedging instruments	(4		)	(4		)	(1		)	—			(3		)
Additional disclosures:
Other receivables	7			7			7			—			—
Long-term debt, including current portion	(21,880		)	(23,061		)	—			(23,061		)	—
Guarantees	(43		)	(30		)	—			(14		)	(16		)

Assets (liabilities) at December 31, 2017:
Measured on a recurring basis:
ARO Trust investments	$	135		$	135		$	135		$	—		$	—
Energy derivatives liabilities designated as hedging instruments	(3		)	(3		)	(2		)	(1		)	—
Energy derivatives liabilities not designated as hedging instruments	(3		)	(3		)	—			—			(3		)
Additional disclosures:
Other receivables	7			7			7			—			—
Long-term debt, including current portion	(20,935		)	(23,005		)	—			(23,005		)	—
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.

Notes (Continued)

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, 2018 or 2017.

Additional fair value disclosures

Other receivables: Other receivables consist of margin deposits, which are reported in Other current assets and deferred charges in the Consolidated Balance Sheet. The disclosed fair value of our margin deposits is considered to approximate the carrying value generally due to the short-term nature of these items.

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.

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 $30 million at March 31, 2018. 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 agreements 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.

Note 12 – 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

Notes (Continued)

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.

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, and the appeal is now pending.

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. A trial encompassing all three cases was originally scheduled to commence in May 2017 but has been continued. A new trial date has not been scheduled. 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 intended 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.

Notes (Continued)

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. Due to the preliminary status of the cases, we are unable to estimate a range of potential loss at this time.

Shareholder Litigation

On March 7, 2016, a purported unitholder of WPZ filed a putative class action on behalf of certain purchasers of WPZ units in U.S. District Court in Oklahoma. The action names as defendants us, WPZ, Williams Partners GP LLC, Alan S. Armstrong, and former Chief Financial Officer Donald R. Chappel and alleges violations of certain federal securities laws for failure to disclose Energy Transfer Equity, L.P.’s (Energy Transfer) intention to pursue a purchase of us conditioned on us not closing the May 2015 agreement for a unit-for-stock transaction whereby we would have acquired all of the publicly held outstanding common units of WPZ in exchange for shares of our common stock (WPZ Merger Agreement) when announcing the WPZ Merger Agreement. The complaint seeks, among other things, damages and an award of costs and attorneys’ fees. The plaintiff filed an amended complaint on August 31, 2016. On October 17, 2016, we requested the court dismiss the action, and on March 8, 2017, the court dismissed the complaint with prejudice. On April 7, 2017, the plaintiff filed a notice of appeal. We cannot reasonably estimate a range of potential loss at this time.

Litigation Against Energy Transfer and Related Parties

On April 6, 2016, we filed suit in Delaware Chancery Court against Energy Transfer and LE GP, LLC (the general partner for Energy Transfer) alleging willful and material breaches of the Agreement and Plan of Merger (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 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 Merger Agreement, alleging material breaches of the Merger Agreement for failing to cooperate and use necessary efforts to obtain a tax opinion required under the Merger Agreement (Tax Opinion) and for otherwise failing to use necessary efforts to consummate the merger under the 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 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 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.

Notes (Continued)

On September 16, 2016, we filed an amended complaint with the Court of Chancery seeking damages for breaches of the 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 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 scheduled trial for May 20 through May 24, 2019.

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, 2018, we have accrued liabilities totaling $39 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, 2018, 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. More recent rules and 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. On October 1, 2015, the EPA issued its rule regarding National Ambient Air Quality Standards for ground-level ozone, setting a stricter standard of 70 parts per billion. We are monitoring the rule’s implementation as the reduction 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, 2018, we have accrued liabilities of $7 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, 2018, we have accrued liabilities totaling $10 million for these costs.

Former operations, including operations classified as discontinued

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

Notes (Continued)

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, 2018, 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, 2018, 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 13 – Segment Disclosures

We have one reportable segment, Williams Partners. All remaining business activities are included in Other. (See Note 1 – General, Description of Business, and Basis of Presentation.)

Our segment presentation of Williams Partners, which includes our consolidated master limited partnership, is reflective of the parent-level focus by our chief operating decision-maker, considering the resource allocation and governance provisions associated with the master limited partnership structure. This partnership maintains capital and cash management structures that are separate from ours. It is self-funding and maintains its own lines of bank credit and cash management accounts. These factors serve to differentiate the management of this entity as a whole.

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

Notes (Continued)

performance measure used by our chief operating decision maker in measuring performance and allocating resources among our reportable segments.

We define Modified EBITDA as follows:

•Net income (loss) before:

◦Income (loss) from discontinued operations;

◦Provision (benefit) for income taxes;

◦Interest incurred, net of interest capitalized;

◦Equity earnings (losses);

◦Gain on remeasurement of equity-method investment;

◦Impairment of equity-method investments;

◦Other investing income (loss) – net;

◦Impairment of goodwill;

◦Depreciation and amortization expenses;

◦Accretion expense associated with asset retirement obligations for nonregulated operations.


•	This measure is further adjusted to include our proportionate share (based on ownership interest) of Modified EBITDA from our equity-method investments calculated consistently with the definition described above.

Notes (Continued)

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.



	Williams Partners		Other		Eliminations			Total
	(Millions)
Three Months Ended March 31, 2018
Segment revenues:
Service revenues
External	$	1,346	$	5	$	—		$	1,351
Internal	—		3		(3		)	—
Total service revenues	1,346		8		(3		)	1,351
Total service revenues – commodity consideration (external only)	101		—		—			101
Product sales
External	636		—		—			636
Internal	—		—		—			—
Total product sales	636		—		—			636
Total revenues	$	2,083	$	8	$	(3	)	$	2,088

Three Months Ended March 31, 2017
Segment revenues:
Service revenues
External	$	1,256	$	5	$	—		$	1,261
Internal	—		3		(3		)	—
Total service revenues	1,256		8		(3		)	1,261
Product sales
External	727		—		—			727
Internal	—		—		—			—
Total product sales	727		—		—			727
Total revenues	$	1,983	$	8	$	(3	)	$	1,988

March 31, 2018
Total assets	$	46,575	$	541	$	(64	)	$	47,052
December 31, 2017
Total assets	$	45,903	$	589	$	(140	)	$	46,352

Notes (Continued)

The following table reflects the reconciliation of Modified EBITDA to Net income (loss) as reported in the Consolidated Statement of Income.



	Three Months Ended March 31,
	2018			2017
	(Millions)
Modified EBITDA by segment:
Williams Partners	$	1,107		$	1,132
Other	13			18
	1,120			1,150
Accretion expense associated with asset retirement obligations for nonregulated operations	(8		)	(7		)
Depreciation and amortization expenses	(431		)	(442		)
Equity earnings (losses)	82			107
Other investing income (loss) – net	4			272
Proportional Modified EBITDA of equity-method investments	(169		)	(194		)
Interest expense	(273		)	(280		)
(Provision) benefit for income taxes	(55		)	(37		)
Net income (loss)	$	270		$	569

Item 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

General

We are an energy infrastructure company focused on connecting North America’s significant hydrocarbon resource plays to growing markets for natural gas and NGLs. Our operations are located principally in the United States. We have one reportable segment, Williams Partners. All remaining business activities and corporate operations are included in Other.

Williams Partners

Williams Partners consists of our consolidated master limited partnership, WPZ, which includes gas pipeline and midstream businesses. The gas pipeline businesses include interstate natural gas pipelines and pipeline joint project investments; and the midstream businesses provide natural gas gathering, treating, and processing services; NGL production, fractionation, storage, marketing, and transportation; deepwater production handling and crude oil transportation services; and are comprised of several wholly owned and partially owned subsidiaries and joint project investments. As of March 31, 2018, we own 74 percent of the interests in WPZ.

Williams Partners’ gas pipeline businesses consist primarily of Transco and Northwest Pipeline. The gas pipeline business also holds interests in joint venture interstate and intrastate natural gas pipeline systems including a 50 percent equity-method investment in Gulfstream and a 41 percent interest in Constitution (a consolidated entity), which is developing a pipeline project (See Note 3 – Variable Interest Entities of Notes to Consolidated Financial Statements). As of December 31, 2017, Transco and Northwest Pipeline owned and operated a combined total of approximately 13,600 miles of pipelines with a total annual throughput of approximately 4,533 Tbtu of natural gas and peak-day delivery capacity of approximately 18.8 MMdth of natural gas.

Williams Partners’ midstream businesses primarily consist of (1) natural gas gathering, treating, compression, and processing; (2) NGL fractionation, storage, and transportation; (3) crude oil production handling and transportation; and (4) olefins production. WPZ sold its olefins operations in July 2017. The primary service areas are concentrated in major producing basins in Colorado, Texas, Oklahoma, Kansas, New Mexico, Wyoming, the Gulf of Mexico, Louisiana, Pennsylvania, West Virginia, New York, and Ohio which include the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara, and Utica shale plays as well as the Mid-Continent region.