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Item 8. Financial Statements and Supplementary Data

2023-02-27 compared with 2022-02-28 · 538 added, 681 removed, 1406 unchanged (46% of the section changed)

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generally accepted accounting principles.

We did not audit the 2020 or 2019 financial statements of Gulfstream Natural Gas System, L.L.C.

We did not audit the 2020 financial statements of Gulfstream Natural Gas System, L.L.C.

(Gulfstream), a limited liability corporation in which the Company has a 50 percent interest.

In the consolidated financial statements, the Company’s investment in Gulfstream was $204 million as of December 31, 2020, and the Company’s equity earnings in the net income of Gulfstream were $77 million in 2020 and $74 million in 2019.

Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Gulfstream for 2020 and 2019, is based solely on the report of other auditors.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2023 expressed an unqualified opinion thereon.

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Opinion on the Financial Statements

We have audited the statement of financial position of Gulfstream Natural Gas System, L.L.C.

(the “Company”) as of December 31, 2020, and the related statements of earnings, comprehensive income, changes in members’ equity and cash flows for each two years in the period ended December 31, 2020, including the related notes (collectively referred to as the “financial statements”) (not presented herein).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

We have audited the statements of earnings, comprehensive income, changes in members’ equity and cash flows of Gulfstream Natural Gas System, L.L.C.

(the “Company”) for the year ended December 31, 2020, including the related notes (collectively referred to as the “financial statements”) (not presented herein).

In our opinion, the financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America.

We conducted our audit of these financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

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Product costs 3,369 3,931 1,545

Processing commodity expenses 101 68 105

Net processing commodity expenses 88 101 68

Operating and maintenance expenses 1,817 1,548 1,326

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— — ( 1,046 )

Other investing income (loss) – net (Note 9)

Other investing income (loss) – net 16 7 8

Interest incurred ( 1,167 ) ( 1,190 ) ( 1,192 )

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Other income (expense) – net 18 6 ( 43 )

Income (loss) from continuing operations before income taxes 2,073 277 1,064

Income (loss) before income taxes 2,542 2,073 277

Provision (benefit) for income taxes 425 511 79

Income (loss) from continuing operations 1,562 198 729

Income (loss) from discontinued operations — — ( 15 )

Net income (loss) 2,117 1,562 198

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Net income (loss) available to common stockholders $ 2,046 $ 1,514 $ 208

Amounts attributable to The Williams Companies, Inc.

available to common stockholders:

Income (loss) from continuing operations $ 1,514 $ 208 $ 862

Income (loss) from discontinued operations — — ( 15 )

Net income (loss) $ 1,514 $ 208 $ 847

Basic earnings (loss) per common share:

Income (loss) from continuing operations $ 1.25 $ .17 $ .71

Income (loss) from discontinued operations — — ( .01 )

Net income (loss) $ 1.25 $ .17 $ .70

Net income (loss) available to common stockholders $ 1.68 $ 1.25 $ .17

Weighted-average shares (thousands) 1,218,362 1,215,221 1,213,631

Diluted earnings (loss) per common share:

Income (loss) from continuing operations $ 1.24 $ .17 $ .71

Income (loss) from discontinued operations — — ( .01 )

Net income (loss) $ 1.24 $ .17 $ .70

Net income (loss) available to common stockholders $ 1.67 $ 1.24 $ .17

Weighted-average shares (thousands) 1,222,672 1,218,215 1,215,165

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Other comprehensive income (loss):

Cash flow hedging activities:

Designated cash flow hedging activities:

Net unrealized gain (loss) from derivative instruments, net of taxes of $ 1 , $ 14 , and $ — in 2022, 2021, and 2020, respectively

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Comprehensive income (loss) attributable to noncontrolling interests

45 ( 13 ) ( 136 )

Comprehensive income (loss) attributable to The Williams Companies, Inc.

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Accounts payable $ 2,327 $ 1,746

Accrued liabilities 1,201 944

Derivative liabilities 316 166

Accrued and other current liabilities 1,270 1,035

Commercial paper 350 —

Long-term debt due within one year 627 2,025

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Stock-based compensation and related common stock issuances, net of tax — 1 50 — — — 51 — 51

Sale of partial interest in consolidated subsidiary — — — — — — — 1,334 1,334

Changes in ownership of consolidated subsidiaries, net — — ( 426 ) — — — ( 426 ) 567 141

Contributions from noncontrolling interests — — — — — — — 7 7

Deconsolidation of subsidiary (Note 9) — — — — — — — ( 13 ) ( 13 )

Other — — ( 2 ) ( 16 ) — — ( 18 ) 4 ( 14 )

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Stock-based compensation and related common stock issuances, net of tax — 2 78 — — — 80 — 80

Purchase of partial interest in consolidated subsidiary (Note 8)

— — — — — — — ( 3 ) ( 3 )

Contributions from noncontrolling interests — — — — — — — 9 9

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Stock-based compensation and related common stock issuances, net of tax — 3 93 — — — 96 — 96

Purchase of partial interest in consolidated subsidiary (Note 9)

— — — — — — — ( 3 ) ( 3 )

Contributions from noncontrolling interests — — — — — — — 18 18

Purchase of treasury stock — — — — — ( 9 ) ( 9 ) — ( 9 )

Other — — — ( 12 ) — — ( 12 ) — ( 12 )

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Equity (earnings) losses ( 637 ) ( 608 ) ( 328 )

Distributions from unconsolidated affiliates 757 653 657

Gain on disposition of equity-method investments (Note 9)

(Gain) loss on deconsolidation of businesses (Note 9)

Distributions from equity-method investees (Note 8) 865 757 653

Impairment of goodwill (Note 15)

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Net unrealized (gain) loss from derivative instruments 249 109 —

Inventory write-downs 161 15 17

Amortization of stock-based awards 73 81 52

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Accounts payable 410 643 ( 7 )

Accrued liabilities 58 ( 309 ) 153

Accrued and other current liabilities 209 58 ( 309 )

Changes in current and noncurrent derivative assets and liabilities 94 ( 277 ) ( 4 )

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FINANCING ACTIVITIES:

Proceeds from (payments of) commercial paper – net 345 — —

Proceeds from long-term debt 1,755 2,155 3,899

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Proceeds from issuance of common stock 54 9 9

Proceeds from sale of partial interest in consolidated subsidiary (Note 3)

Common dividends paid ( 2,071 ) ( 1,992 ) ( 1,941 )

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( 933 ) ( 151 ) —

Proceeds from dispositions of equity-method investments (Note 9)

Purchases of and contributions to equity-method investments (Note 8)

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When we refer to our equity investees by name, we are referring exclusively to their businesses and operations.

Share Repurchase Program

In September 2021, our Board of Directors authorized a share repurchase program with a maximum dollar limit of $ 1.5 billion.

Repurchases may be made from time to time in the open market, by block purchases, in privately negotiated transactions, or in such other manner as determined by our management.

Our management will also determine the timing and amount of any repurchases based on market conditions and other factors.

The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended or discontinued at any time.

This share repurchase program does not have an expiration date.

There were $ 9 million and no repurchases under the program in 2022 and 2021, respectively.

Description of Business

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Our operations are located in the United States and are presented within the following reportable segments:

Transmission & Gulf of Mexico, Northeast G&P, West, and Sequent, consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources.

Transmission & Gulf of Mexico, Northeast G&P, West, and Gas & NGL Marketing Services, consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources.

All remaining business activities, including our upstream operations, as well as corporate activities are included in Other.

Transmission & Gulf of Mexico is comprised of our interstate natural gas pipelines, Transcontinental Gas Pipe Line Company, LLC (Transco) and Northwest Pipeline LLC (Northwest Pipeline), as well as natural gas gathering and processing and crude oil production handling and transportation assets in the Gulf Coast region, including a 51 percent interest in Gulfstar One LLC (Gulfstar One) (a consolidated variable interest entity, or VIE), which is a proprietary floating production system, a 50 percent equity-method investment in Gulfstream Natural Gas System, L.L.C.

Transmission & Gulf of Mexico is comprised of our interstate natural gas pipelines, Transcontinental Gas Pipe Line Company, LLC (Transco) and Northwest Pipeline LLC (Northwest Pipeline), and their related natural gas storage facilities, as well as natural gas gathering and processing and crude oil production handling and transportation assets in the Gulf Coast region, including a 51 percent interest in Gulfstar One LLC (Gulfstar One) (a consolidated variable interest entity, or VIE), a 50 percent equity-method investment in Gulfstream Natural Gas System, L.L.C.

(Gulfstream), and a 60 percent equity-method investment in Discovery Producer Services LLC (Discovery).

Transmission & Gulf of Mexico also includes natural gas storage facilities and pipelines providing services in north Texas.

Northeast G&P is comprised of our midstream gathering, processing, and fractionation businesses in the Marcellus Shale region primarily in Pennsylvania and New York, and the Utica Shale region of eastern Ohio, as well as a 65 percent interest in Ohio Valley Midstream LLC (Northeast JV) (a consolidated VIE) which operates in West Virginia, Ohio, and Pennsylvania, a 66 percent interest in Cardinal Gas Services, L.L.C.

(Cardinal) (a consolidated VIE) which operates in Ohio, a 69 percent equity-method investment in Laurel Mountain Midstream, LLC (Laurel Mountain), a 50 percent equity-method investment in Blue Racer Midstream LLC (Blue Racer) (we previously effectively owned a 29 percent indirect interest in Blue Racer through our 58 percent equity-method investment in Blue Racer Midstream Holdings, LLC (BRMH) (previously named Caiman Energy II, LLC) until acquiring a controlling interest of BRMH in November 2020 and the remaining interest in September 2021) (see Note 9 – Investing Activities), and Appalachia Midstream Services, LLC, a wholly owned subsidiary that owns equity-method investments with an approximate average 66 percent interest in multiple gas gathering systems in the Marcellus Shale region (Appalachia Midstream Investments).

West is comprised of our gas gathering, processing, and treating operations in the Rocky Mountain region of Colorado and Wyoming, the Barnett Shale region of north-central Texas, the Eagle Ford Shale region of south Texas, the Haynesville Shale region of northwest Louisiana, and the Mid-Continent region which includes the Anadarko and Permian basins.

This segment also includes our natural gas liquid (NGL) and natural gas marketing business (excluding the activities within the Sequent segment described below), storage facilities, an undivided 50 percent interest in an NGL fractionator near Conway, Kansas, a 50 percent equity-method investment in Overland Pass Pipeline Company LLC (OPPL), a 50 percent equity-method investment in Rocky Mountain Midstream Holdings LLC (RMM), a 20 percent equity-method investment in Targa Train 7 LLC (Targa Train 7) (a nonconsolidated VIE), and a 15 percent interest in Brazos Permian II, LLC (Brazos Permian II).

Sequent includes 100 percent of the operations of Sequent Energy Management, L.P.

and Sequent Energy Canada, Corp.

acquired on July 1, 2021 (Sequent Acquisition).

Sequent focuses on risk management and the marketing, trading, storage, and transportation of natural gas for a diverse set of natural gas utilities, municipalities,

(Cardinal) (a consolidated VIE) which operates in Ohio, a 69 percent equity-method investment in Laurel Mountain Midstream, LLC (Laurel Mountain), a 50 percent equity-method investment in Blue Racer Midstream LLC (Blue Racer), and Appalachia Midstream Services, LLC, a wholly owned subsidiary that owns equity-method investments with an approximate average 66 percent interest in multiple gas gathering systems in the Marcellus Shale region (Appalachia Midstream Investments).

West is comprised of our gas gathering, processing, and treating operations in the Rocky Mountain region of Colorado and Wyoming, the Barnett Shale region of north-central Texas, the Eagle Ford Shale region of south Texas, the Haynesville Shale region of east Texas and northwest Louisiana, and the Mid-Continent region which includes the Anadarko and Permian basins.

This segment also includes our NGL storage facilities, an undivided 50

The Williams Companies, Inc.

Notes to Consolidated Financial Statements – (Continued)

power generators, and producers, and moves gas to markets through transportation and storage agreements on strategically positioned assets, including our Transco system.

(See Note 3 – Acquisitions.)

percent interest in an NGL fractionator near Conway, Kansas, a 50 percent equity-method investment in Overland Pass Pipeline Company LLC (OPPL), a 50 percent equity-method investment in Rocky Mountain Midstream Holdings LLC (RMM), a 20 percent equity-method investment in Targa Train 7 LLC (Targa Train 7) (a nonconsolidated VIE), and a 15 percent equity-method investment in Brazos Permian II, LLC (Brazos Permian II) (a nonconsolidated VIE).

Gas & NGL Marketing Services is comprised of our NGL and natural gas marketing and trading operations, which includes risk management and transactions related to the storage and transportation of natural gas and natural gas liquids (NGLs) on strategically positioned assets.

Basis of Presentation

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Key areas of that evaluation include:

• Determining whether an entity is a VIE;

• Determining whether an entity is a VIE (see Note 2 – Variable Interest Entities);

• Determining whether we are the primary beneficiary of a VIE, including evaluating which activities of the VIE most significantly impact its economic performance and the degree of power that we and our related parties have over those activities through our variable interests;

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We apply the equity method of accounting to investments over which we exercise significant influence but do not control.

Distributions received from equity-method investees are presented in our Consolidated Statement of Cash Flows according to the nature of the distributions approach, which classifies distributions received from equity-method investees as either returns on investment (cash inflows from operating activities) or returns of investment (cash inflows from investing activities) based on the nature of the activities of the equity-method investee that generated the distribution.

Equity-method investment basis differences

Differences between the cost of our equity-method investments and our underlying equity in the net assets of investees are accounted for as if the investees were consolidated subsidiaries.

Equity earnings (losses) in our

The Williams Companies, Inc.

Notes to Consolidated Financial Statements – (Continued)

Consolidated Statement of Income includes our allocable share of net income (loss) of investees adjusted for any depreciation and amortization, as applicable, associated with basis differences.

investment (cash inflows from investing activities) based on the nature of the activities of the equity-method investee that generated the distribution.

Use of estimates

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• Environmental remediation obligations;

• Depreciation and/or amortization of long-lived assets;

• Depreciation and/or amortization of long-lived assets, which are comprised of property, plant, and equipment, and intangible assets;

• Depreciation and/or amortization of equity-method investment basis differences;

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nonregulated operations are only allowed to capitalize the cost of debt funds related to construction activities, while a component for equity is prohibited.

The components of our regulatory assets and liabilities relate to the effects of deferred taxes on equity funds used during

The Williams Companies, Inc.

Notes to Consolidated Financial Statements – (Continued)

construction, AROs, shipper imbalance activity, fuel and power cost differentials, depreciation, negative salvage, pension and other postretirement benefits, customer tax refunds, and rate allowances for deferred income taxes at a historically higher federal income tax rate.

Our current and noncurrent regulatory asset and liability balances for the years ended December 31, 2021 and 2020 are as follows:

components of our regulatory assets and liabilities relate to the effects of deferred taxes on equity funds used during construction, AROs, shipper imbalance activity, fuel and power cost differentials, depreciation, negative salvage, pension and other postretirement benefits, customer tax refunds, and rate allowances for deferred income taxes at a historically higher federal income tax rate.

Our current and noncurrent regulatory asset and liability balances at December 31, 2022 and 2021 are as follows:

Current assets reported within Other current assets and deferred charges

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Total regulated assets

Current liabilities reported within Accrued liabilities

Current liabilities reported within Accrued and other current liabilities

Noncurrent liabilities reported within Regulatory liabilities, deferred income, and other

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$ 1,434 $ 1,380

Cash and cash equivalents

Cash and cash equivalents in our Consolidated Balance Sheet consist of highly liquid investments with original maturities of three months or less when acquired.

Accounts receivable

Accounts receivable are carried on a gross basis, with no discounting, less an allowance for doubtful accounts.

We estimate the allowance for doubtful accounts, considering current expected credit losses using a forward-looking “expected loss” model, the financial condition of our customers, and the age of past due accounts.

The majority of our trade receivable balances are due within 30 days.

We monitor the credit quality of our counterparties through review of collection trends, credit ratings, and other analyses, such as bankruptcy monitoring.

Financial assets from our natural gas transmission business, gathering and transportation business, marketing business, and upstream operations are segregated into separate pools for evaluation due to different counterparty risks inherent in each business.

Changes in counterparty risk factors could lead to reassessment of the composition of our financial assets as separate pools or the need for additional pools.

We calculate our allowance for credit losses incorporating an aging method.

In estimating our expected credit losses, we utilize historical loss rates over many years, which include periods of both high and low commodity prices.

Commodity prices could have a significant impact on a portion of our gathering and processing and upstream counterparties’ financial health and ability to satisfy current obligations.

Our expected credit loss estimate considers both internal and external forward-looking commodity price expectations, as well as counterparty credit ratings, and factors impacting their near-term liquidity.

In addition, our expected credit loss estimate considers potential contractual, physical, and commercial protections and outcomes in the case of a counterparty bankruptcy.

The physical location and nature of our services help to mitigate collectability concerns of our gathering and processing producer customers.

Our gathering lines in many cases are physically connected to the customers’ wellheads and pads, and there may not be alternative gathering lines nearby.

The construction of gathering systems is capital intensive and it would be costly for others to replicate, especially considering the depletion to date of the associated reserves.

As a result, we play a critical role in getting customers’ production from the wellhead to a marketable condition and location.

This tends to reduce collectability risk as our services enable producers to generate operating cash flows.

Commodity price movements generally do not impact the majority of our natural gas transmission businesses customers’ financial condition.

We also provide marketing and risk management services to retail and wholesale gas marketers, utility companies, upstream producers, and industrial customers.

These counterparties utilize netting agreements that enable us to net receivables and payables by counterparty upon settlement.

We also net across product lines and against cash collateral received to collateralize receivable positions, provided the netting and cash collateral

The Williams Companies, Inc.

Notes to Consolidated Financial Statements – (Continued)

agreements include such provisions.

While the amounts due from, or owed to, our counterparties are settled net, they are recorded on a gross basis in our Consolidated Balance Sheet as accounts receivable and accounts payable.

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.

Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted.

We do not have a material amount of significantly aged receivables at December 31, 2021 and 2020.

Inventories in our Consolidated Balance Sheet primarily consist of natural gas in underground storage, NGLs, and materials and supplies and primarily are stated at the lower of cost or net realizable value.

The cost of inventories is primarily determined using the average-cost method.

Property, plant, and equipment

Property, plant, and equipment is initially recorded at cost.

We base the carrying value of these assets on estimates, assumptions, and judgments relative to capitalized costs, useful lives, and salvage values.

As regulated entities, Northwest Pipeline and Transco provide for depreciation using the straight-line method at FERC-prescribed rates.

Depreciation for nonregulated entities is provided primarily on the straight-line method over estimated useful lives, except for certain offshore facilities that apply an accelerated depreciation method.

We follow the successful efforts method of accounting for our undivided interest in upstream properties.

Our oil and gas producing property costs are depreciated using a units of production method.

Gains or losses from the ordinary sale or retirement of property, plant, and equipment for regulated pipelines are credited or charged to accumulated depreciation.

Gains or losses from the ordinary sale or retirement of property, plant, and equipment for nonregulated assets are primarily recorded in Other (income) expense – net included in Operating income (loss) in our Consolidated Statement of Income.

Ordinary maintenance and repair costs are generally expensed as incurred.

Costs of major renewals and replacements are capitalized as property, plant, and equipment.

We record a liability and increase the basis in the underlying asset for the present value of each expected future ARO at the time the liability is initially incurred, typically when the asset is acquired or constructed.

For our upstream properties, the ARO is recorded based on our working interest in the underlying properties.

As regulated entities, Northwest Pipeline and Transco offset the depreciation of the underlying asset that is attributable to capitalized ARO cost to a regulatory asset as we expect to recover these amounts in future rates.

We measure changes in the liability due to passage of time by applying an interest rate to the liability balance.

This amount is recognized as an increase in the carrying amount of the liability and as a corresponding accretion expense included in Operating and maintenance expenses in our Consolidated Statement of Income, except for regulated entities, for which the increase in the liability results in a corresponding increase to a regulatory asset.

The regulatory asset is amortized commensurate with our collection of those costs in rates.

Measurements of AROs include, as a component of future expected costs, an estimate of the price that a third party would demand, and could expect to receive, for bearing the uncertainties inherent in the obligations, sometimes referred to as a market-risk premium.

The Williams Companies, Inc.

Notes to Consolidated Financial Statements – (Continued)

Intangible assets

Our intangible assets included within Intangible assets – net of accumulated amortization in our Consolidated Balance Sheet are primarily related to gas gathering, processing, and fractionation customer relationships.

Our intangible assets are generally amortized on a straight-line basis over the period in which these assets contribute to our cash flows.

We evaluate these assets for changes in the expected remaining useful lives and would reflect any changes prospectively through amortization over the revised remaining useful life.

Impairment of property, plant, and equipment, intangible assets, and investments

We evaluate our property, plant, and equipment and intangible assets for impairment when, in our judgment, events or circumstances, including probable abandonment, indicate that the carrying value of such assets may not be recoverable.

When an indicator of impairment has occurred, we compare our estimate of undiscounted future cash flows attributable to the assets to the carrying value of the assets to determine whether an impairment has occurred and we may apply a probability-weighted approach to consider the likelihood of different cash flow assumptions and possible outcomes, including selling the assets in the near term or holding them for their remaining estimated useful life.

If an impairment of the carrying value has occurred, we determine the amount of the impairment to be recognized in our consolidated financial statements by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.

This evaluation is performed at the lowest level for which separately identifiable cash flows exist.

For assets identified to be disposed of in the future and considered held for sale, we compare the carrying value to the estimated fair value less the cost to sell to determine if recognition of an impairment is required.

Until the assets are disposed of, the estimated fair value, which includes estimated cash flows from operations until the assumed date of sale, is recalculated when related events or circumstances change.

We evaluate our investments for impairment when, in our judgment, events or circumstances indicate that the carrying value of such investments may have experienced an other-than-temporary decline in value.

When evidence of loss in value has occurred, we compare our estimate of fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred.

If the estimated fair value is less than the carrying value and we consider the decline in value to be other-than-temporary, the excess of the carrying value over the fair value is recognized in our consolidated financial statements as an impairment charge.

Judgment and assumptions are inherent in our estimate of undiscounted future cash flows and an asset’s or investment’s fair value.

Additionally, judgment is used to determine the probability of sale with respect to assets considered for disposal.

Contingent liabilities

We record liabilities for estimated loss contingencies, including environmental matters, when we assess that a loss is probable, and the amount of the loss can be reasonably estimated.

These liabilities are calculated based upon our assumptions and estimates with respect to the likelihood or amount of loss and upon advice of legal counsel, engineers, or other third parties regarding the probable outcomes of the matters.

These calculations are made without consideration of any potential recovery from third parties.

We recognize insurance recoveries or reimbursements from others when realizable.

Revisions to these liabilities are generally reflected in income when new or different facts or information become known or circumstances change that affect the previous assumptions or estimates.

Cash flows from revolving credit facility and commercial paper program

Proceeds and payments related to borrowings under our revolving credit facility are reflected in the financing activities in our Consolidated Statement of Cash Flows on a gross basis.

Proceeds and payments related to borrowings under our commercial paper program are reflected in the financing activities in our Consolidated Statement of Cash Flows on a net basis, as the outstanding notes generally have maturity dates less than three months from the date of issuance.

(See Note 13 – Debt and Banking Arrangements.)

The Williams Companies, Inc.

Notes to Consolidated Financial Statements – (Continued)

Treasury stock

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as Treasury stock, at cost in our Consolidated Balance Sheet.

Gains and losses on the subsequent reissuance of shares are credited or charged to Capital in excess of par value in our Consolidated Balance Sheet using the average-cost method.

Derivative instruments and hedging activities

We are exposed to commodity price risk.

We utilize derivatives to manage a portion of our commodity price risk.

These instruments consist primarily of swaps, futures, and forward contracts involving short- and long-term purchases and sales of energy commodities.

We purchase natural gas for storage when the current market price paid to buy and transport natural gas plus the cost to store and finance the natural gas is less than an estimated, forward market price that can be received in the future.

Additionally, we enter into transactions to secure transportation capacity between delivery points in order to serve our customers and various markets.

Commodity-based exchange-traded futures contracts and over-the-counter (OTC) contracts are used to capture the price differential or spread between the locations served by the capacity in order to substantially protect the natural gas revenues that will ultimately be realized when the physical flow of natural gas between receipt and delivery points occurs.

Some commodity-related derivative contracts require physical delivery as opposed to financial settlement, and this type of derivative is both common and prevalent within the natural gas marketing operations.

These contracts generally meet the definition of derivatives and are typically not designated as hedges for accounting purposes.

When a commodity-related derivative contract is settled physically, any cumulative unrealized gain or loss is reversed, and the contract price is recognized in the respective line item in our Consolidated Statement of Income representing the actual price of the underlying goods being delivered.

Unrealized gains and losses on physically settled commodity-related derivative contracts are recognized in Net gain (loss) on commodity derivatives in our Consolidated Statement of Income.

Realized and unrealized gains and losses on non-designated commodity-related derivative contracts that are financially settled are reported in Net gain (loss) on commodity derivatives in our Consolidated Statement of Income.

We experience significant earnings volatility from the fair value accounting required for the derivatives used to hedge a portion of the economic value of the underlying transportation and storage portfolio.

However, the unrealized fair value measurement gains and losses are generally offset by valuation changes in the economic value of the underlying transportation and storage portfolio, which is not recognized until the underlying transportation and storage transaction occurs.

(See Note 18 – Derivatives.)

We report the fair value of derivatives, except those for which the normal purchases and normal sales exception has been elected, in Other current assets and deferred charges;

Regulatory assets, deferred charges, and other;

Accrued liabilities ;

or Regulatory liabilities, deferred income, and other in our Consolidated Balance Sheet.

These amounts are presented on a net basis and reflect the netting of asset and liability positions permitted under the terms of master netting arrangements and cash held on deposit in margin accounts that we have received or remitted to collateralize certain derivative positions.

We determine the current and noncurrent classification based on the timing of expected future cash flows of individual trades.

The accounting for the changes in fair value of a commodity derivative can be summarized as follows:

Derivative Treatment Accounting Method

Normal purchases and normal sales exception Accrual accounting

Designated in a qualifying hedging relationship Hedge accounting

All other derivatives Mark-to-market accounting

The Williams Companies, Inc.

Notes to Consolidated Financial Statements – (Continued)

We may elect the normal purchases and normal sales exception for certain short- and long-term purchases and sales of physical energy commodities.

Under accrual accounting, any change in the fair value of these derivatives is not reflected in our Consolidated Balance Sheet after the initial election of the exception.

We may also designate a hedging relationship for certain commodity derivatives.

For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and we must maintain appropriate documentation.

We establish hedging relationships pursuant to our risk management policies.

We evaluate the hedging relationships at the inception of the hedge and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged.

We also regularly assess whether the hedged forecasted transaction is probable of occurring.

If a derivative ceases to be or is no longer expected to be highly effective, or if we believe the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative are recognized currently in Net gain (loss) on commodity derivatives in our Consolidated Statement of Income.

For commodity derivatives designated as a cash flow hedge, the change in fair value of the derivative is reported in Accumulated other comprehensive income (loss) (AOCI) in our Consolidated Balance Sheet and reclassified into earnings in the period in which the hedged item affects earnings.

Gains or losses deferred in AOCI associated with terminated derivatives, derivatives that cease to be highly effective hedges, derivatives for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings.

If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in Net gain (loss) on commodity derivatives in our Consolidated Statement of Income at that time.

The change in likelihood of a forecasted transaction is a judgmental decision that includes qualitative assessments made by us.

As of December 31, 2021, we are not applying hedge accounting to any commodity derivative instruments.

Revenue recognition

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thus, in our judgment, the construction activities do not represent an ongoing major and central operation of our gas pipeline businesses and are not within the scope of ASC Topic 606, “Revenue from Contracts with Customers”.

Accordingly, cost reimbursements are treated as a reduction to the cost of the constructed asset.

Accordingly, cost reimbursements are treated as a reduction to the cost of the constructed asset, which are referred to as Contributions in aid of construction in our Consolidated Statement of Cash Flows.

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.

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The contract liability is recognized into service revenues as the underlying performance obligations are satisfied.

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Notes to Consolidated Financial Statements – (Continued)

Service Revenues

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Revenues from our regulated interstate natural gas pipeline businesses, which 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 fixed 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.

Firm transportation and storage agreements provide for a daily or monthly reservation charge based on the pipeline or storage capacity reserved, and a commodity charge

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Notes to Consolidated Financial Statements – (Continued)

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.

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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

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Notes to Consolidated Financial Statements – (Continued)

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.

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.

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Notes to Consolidated Financial Statements – (Continued)

We generally earn a contractually stated fee per unit for the volume of product transported, gathered, processed, or stored.

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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

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In certain instances, we purchase NGLs, crude oil, and natural gas from our oil and natural gas producer customers which we remarket.

In addition, we retain NGLs as consideration in certain processing arrangements,

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Notes to Consolidated Financial Statements – (Continued)

as discussed above in the Service Revenues - Midstream businesses section.

In addition, we retain NGLs as consideration in certain processing arrangements, as discussed above in the Service Revenues - Midstream businesses section.

We also market natural gas and NGLs from the production at our upstream properties.

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Commodity-based exchange-traded futures contracts and OTC contracts are used to sell natural gas at that future price to substantially protect the natural gas revenues that will ultimately be realized when the stored natural gas is sold.

Commodity-based exchange-traded futures

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Notes to Consolidated Financial Statements – (Continued)

contracts and over-the-counter (OTC) contracts are used to sell natural gas at that future price to substantially protect the natural gas revenues that will ultimately be realized when the stored natural gas is sold.

Additionally, we enter into transactions to secure transportation capacity between delivery points in order to serve our customers and various markets.

The physical purchase, transportation, storage, and sale of natural gas are accounted for on a weighted-average cost or accrual basis, as appropriate, rather than on the fair value basis utilized for the derivatives used to mitigate the natural gas price risk associated with the storage and transportation portfolio.

The physical purchase, transportation, storage, and sale of natural gas are accounted for on a weighted-average cost or accrual basis, as appropriate, unlike the fair value basis utilized for the derivatives used to mitigate the natural gas price risk associated with the storage and transportation portfolio.

Monthly demand charges are incurred for the contracted storage and transportation capacity and payments associated with asset management agreements, and these demand charges and payments are recognized in our Consolidated Statement of Income in the period they are incurred.

As we are acting as an agent for our natural gas marketing customers, our natural gas marketing revenues are presented net of the related costs of those activities.

As we are acting as an agent for our natural gas marketing customers and engage in energy trading activities, our natural gas marketing revenues are presented net of the related costs of those activities.

Prior to the 2022 integration of our legacy gas marketing operations with the acquired Sequent Acquisition operations (see Note 3 – Acquisitions), our legacy gas marketing operations were reported on a gross basis.

Contract Assets

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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.

Current and noncurrent contract liabilities are included within Accrued and other current 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.

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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.

Derivative instruments and hedging activities

We are exposed to commodity price risk.

We utilize derivatives to manage a portion of our commodity price risk.

These instruments consist primarily of swaps, futures, and forward contracts involving short- and long-term purchases and sales of energy commodities.

We purchase natural gas for storage when the current market price paid

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Notes to Consolidated Financial Statements – (Continued)

to buy and transport natural gas plus the cost to store and finance the natural gas is less than an estimated, forward market price that can be received in the future.

Additionally, we enter into transactions to secure transportation capacity between delivery points in order to serve our customers and various markets.

Commodity-based exchange-traded futures contracts and OTC contracts are used to capture the price differential or spread between the locations served by the capacity in order to substantially protect the natural gas revenues that will ultimately be realized when the physical flow of natural gas between receipt and delivery points occurs.

These contracts generally meet the definition of derivatives and are typically not designated as hedges for accounting purposes.

Unrealized gains and losses on physically settled commodity-related derivative contracts for commodity sales transactions are recognized in Net gain (loss) on commodity derivatives in our Consolidated Statement of Income.

Realized and unrealized gains and losses on non-designated commodity-related derivative contracts for commodity sales transactions that are financially settled are reported in Net gain (loss) on commodity derivatives in our Consolidated Statement of Income.

Net gains and losses on derivatives for shrink gas purchases for processing plants are reported in Net processing commodity expenses in our Consolidated Statement of Income.

However, the unrealized fair value measurement gains and losses are generally offset by valuation changes in the economic value of the underlying production or transportation and storage contracts, which is not recognized until the underlying transaction occurs.

(See Note 16 – Derivatives.)

We report the fair value of derivatives, except those for which the normal purchases and normal sales exception has been elected, in Derivative assets;

Regulatory assets, deferred charges, and other;

Derivative liabilities ;

or Regulatory liabilities, deferred income, and other in our Consolidated Balance Sheet.

We determine the current and noncurrent classification based on the timing of expected future cash flows of individual trades.

The accounting for the changes in fair value of a commodity derivative can be summarized as follows:

Derivative Treatment Accounting Method

Normal purchases and normal sales exception Accrual accounting

Designated in a qualifying hedging relationship Hedge accounting

All other derivatives Mark-to-market accounting

We may elect the normal purchases and normal sales exception for certain short- and long-term purchases and sales of physical energy commodities.

Under accrual accounting, any change in the fair value of these derivatives is not reflected in our Consolidated Balance Sheet after the initial election of the exception.

We may also designate a hedging relationship for certain commodity derivatives.

For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and we must maintain appropriate documentation.

We establish hedging relationships pursuant to our risk management policies.

We also regularly assess whether the hedged forecasted transaction is probable of occurring.

If a derivative ceases to be or is no longer expected to be highly effective, or if we believe

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Notes to Consolidated Financial Statements – (Continued)

the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative are recognized currently in Net gain (loss) on commodity derivatives in our Consolidated Statement of Income.

The change in likelihood of a forecasted transaction is a judgmental decision that includes qualitative assessments made by us.

As of December 31, 2022 and 2021, we are not applying hedge accounting to any commodity derivative instruments.

Interest capitalized

We capitalize interest during construction on major projects with construction periods of at least 3 months and a total project cost in excess of $ 1 million.

Interest is capitalized on borrowed funds and, where regulation by the FERC exists, on internally generated funds (equity AFUDC).

The latter is included in Other income (expense) – net below Operating income (loss) in our Consolidated Statement of Income.

The rates used by regulated companies are calculated in accordance with FERC rules.

Rates used by nonregulated companies are based on our average interest rate on debt.

We include the operations of our domestic corporate subsidiaries and income from our subsidiary partnerships in our consolidated fed e ral income tax return and also file tax return s in various foreign and state jurisdictions as required .

Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis of our assets and liabilities.

Our judgment and income tax assumptions are used to determine the levels, if any, of v aluation allowances associated with deferred tax assets.

Earnings (loss) per common share

Basic earnings (loss) per common share in our Consolidated Statement of Income is based on the sum of the weighted-average number of common shares outstanding and vested restricted stock units.

Diluted earnings (loss) per common share in our Consolidated Statement of Income primarily includes any dilutive effect of nonvested restricted stock units and stock options.

Diluted earnings (loss) per common share is calculated using the treasury-stock method.

Cash and cash equivalents

Cash and cash equivalents in our Consolidated Balance Sheet consist of highly liquid investments with original maturities of three months or less when acquired.

Accounts receivable

Accounts receivable are carried on a gross basis, with no discounting, less an allowance for doubtful accounts.

The majority of our trade receivable balances are due within 30 days.

We monitor the credit quality of our counterparties through review of collection trends, credit ratings, and other analyses, such as bankruptcy monitoring.

Financial assets from our natural gas transmission and storage business, gathering, processing and transportation business, marketing

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Notes to Consolidated Financial Statements – (Continued)

business, and upstream operations are segregated into separate pools for evaluation due to different counterparty risks inherent in each business.