Williams Companies, Inc. (The)

Please stand by as we're about to begin. Good day, everyone, and welcome to the Williams Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. John Porter, Head of Investor Relations, and please go ahead, sir.

Thanks, Amy. Good morning, and thank you for your interest in the Williams Company. Yesterday afternoon, we released our financial results and posted several important items on our website. These items include press releases and related investor materials, including the slide deck that our President and CEO, Alan Armstrong, will speak to you momentarily. Joining us today is our Chief Operating Officer, Michael Dunn, our CFO, John Chandler, and our Senior Vice President of Corporate Strategic Development, Chad Zamarin, is with us as well. In our presentation materials, you will find an important disclaimer related to forward-looking statements. This disclaimer is important and integral to all of our remarks, and you should review it. Also included in our presentation materials are various non-GAAP measures that we've reconciled to generally accepted accounting principles. And these reconciliation schedules appear at the back of today's presentation material. And so with that, I'll turn it over to Alan Armstrong.

Great. Good morning, everyone. Thank you, John. I'm going to start a little bit with the macro conditions that continue to support our strategy so well. If you think about our continued focus on natural gas demand and how that's driving our strategy and you look at actually what's occurring, we really saw this start to accelerate in 2018 as we saw an 11% increase in overall natural gas demand. I'll remind you that's on top of a big demand that we had in 2017 as well. We also have another expected 5% increase by most of the forecasters now for North America. demand growth on top of demand growth on top of demand growth. But if I put that in perspective for you, it really is starting to – what has happened is what we expected to happen, which is not just the U.S., but all of the world is really starting to try to take advantage of the U.S.' 's ability to get gas out of the ground at such a low cost. So just to think about that 11% increase that we had this year – I think it's helpful to put that in perspective as something we can all relate to, and that is that 11% increase was greater than all of the dry gas production from the Permian in 2018. So just here in one year, we've had an increase that's greater than all of the dry gas production coming out of the Permian today. So the demand growth is very important to our strategy, and we continue to see that be very supportive. So with this backdrop, I'm happy to report that our portfolio of indispensable natural gas infrastructure performed even better than expected this past year as we once again came in at the top of our guidance ranges for key financial metrics. In fact, we achieved an all-time record for adjusted EBITDA in 2018, even in the face of asset sales totaling more than $4.6 billion over the past two and a half years. And these transactions continue to reduce our commodity exposure and can continue to improve our leverage metrics for WMB. And all the while, we funded growth over the past two years without the need for equity issuance. So as you may recall, we started 2018 setting delivery records on Transco, which we've now in 2019 eclipsed once again during the record cold snap that impacted our markets last week. And in 2018, Northwest Pipeline also hit an all-time record for annual throughput, eclipsing the prior record by 5%. So we are seeing the impact of all this increased demand showing up on our pipelines, obviously. We had a timely and crisp execution on the critically important WPZ roll-up transaction, reestablishing Williams as a simplified C-Corp with investment-grade credit. We continue to make great progress overcoming a highly challenging regulatory and permitting environment, placing critical new Transco projects in service like Garden State, Atlantic Sunrise, and just recently the Gulf Connector. And we continue to make progress advancing the extensive next generation of Transco fully contracted projects like Southeastern Trail, Rivervale South to Market, Lighty South, Northeast Supply Enhancement, Gateway, and several other Transco projects that we've not gone public with yet. Late in the year, we saw the beginnings of the accelerated Northeast GMP growth. We expect to continue for many years to come as the takeaway cloud finally has begun to lift for this basin. We expanded our ESG disclosures on our website, kicked off a project to further expand our ESG disclosures in 2019, and further strengthen our exceptional board of directors with two new appointments. We continue to exercise capital discipline, passing up many opportunities but executing on others like our entry into the D.J. Basin, which was funded through our exit from our legacy Four Corners position, and we are now set for continued value creating portfolio optimization here as we begin 2019. And once again, despite increasing commodity price volatility in the liquids markets, our low-cost natural gas-based business strategy has us positioned well for further predictable growth here in 2019. And importantly, today we are reaffirming the 2019 guidance that we provided in May of last year. So with that quick look back at a very busy 2018, let's move to slide two and take a closer look at our financial performance versus 2018 versus our guidance. Here on slide two you see that we've shown how we finished the year relative to our 2018 guidance ranges. Although our gap net income was affected by a large impairment on our Barnett gathering system, you can see that adjusted net income exceeded the midpoint of guidance, and our adjusted EPS, which was at the high end of guidance, showed strong growth in 2018 of 25% over the 2017 EPS. Despite selling $1.3 billion in assets that was not accommodated for in our plan back when we made that guidance, our adjusted EBITDA, DCF, and dividend coverage ratio all reflected strong performance at the high end of our guidance range. You can see that our grow cap expending came in about $300 million under guidance, and that was primarily driven by shifts of capital out of 18 and now into 19. So when we get to our 19 guidance, you'll see an uptick, which was just the timing of that $300 million moving from 18 to 19. And finally, with respect to leverage, you can see a nice outperformance with year-end leverage at 4.8. So once again, as was the case in 2017, our financial performance was quite good as compared to our guidance. It was another year where we delivered on expectations, including steady, predictable, and growing cash flows while improving the balance sheet. On the next couple of slides, we'll quickly break down the major drivers of our financial performance for the fourth quarter. and the full year, so let's move on to slide three. First, looking at the fourth quarter gap numbers on the upper portion of the slide, we see that the year-over-year comparisons were affected by some large accounting entries, which have been adjusted out of our non-gaps. Specifically, in 2017, we had some large positive accounting entries related to tax reform, and this year we have a large revaluation on our Barnet gathering system somewhat offset by gains on asset sales. Looking at adjusted EBITDA in the lower portion of the slide, we see that the nearly $1.2 billion of adjusted EBITDA was up a little more than 3% versus 2017, but up 9% if you normalize for revenue recognition changes and the sale of our four-corner system. Looking at the bridge then, once adjusted for the revenue recognition changes and the loss of four corners, which are shown in gray, you can see that our adjusted EBITDA increased almost $100 million, where strong increases in our Northeast and Atlantic Gulf segments were somewhat offset by a lower quarter in the West. So it's really great to see the Northeast and Atlantic Gulf adjusted EBITDA numbers growing by 28% and 22%, respectively. Atlantic Sunrise was the big driver, of course, for Atlantic Gulf, and the Northeast saw about a 13% increase in volumes led by increases in northeast Pennsylvania area, but also we saw good growth in southwestern Marcellus and the Utica area as well. So as we look at the results for the west, you have to be mindful of the pretty dramatic effect that the cell of four corners had on our reported gathering volumes. So specifically, if you look at our analyst package, you'll see that the west gathering volumes are down about 22% sequentially from 3Q, and that our full year 2018 volumes are down about 4% from 2017. However, if you exclude the Four Corners volumes, then we are flat year to year and down only 3% versus the third quarter of 2018. And of course, that was impacted. We did have some freeze-offs in Wyoming here in the fourth quarter of 2018. Additionally, another big driver for the West in the fourth quarter of 2018 related to about $25 million unfavorable swing in the epitaph of our NGO marketing business, which was driven by the drop in the value of the inventory that we hold for line fill primarily out west. The value of this near constant inventory changes every quarter as we mark this product to market prices from one quarter to another. So now let's turn to the full year 2018 results and go to slide four. Starting with our graph results in the upper portion of the slide, we see that the large accounting entries we discussed on the prior slide are also driving the year-over-year comparisons. So again, tax reform entries, gains on sales of assets, and impairment entries make it a little tough to see the performance of the ongoing business. So let's look at the adjusted numbers where these items have been excluded. First off, I just highlight again that the 25% growth in adjusted EPS, which grew from 79 cents which grew $2.79 from $0.63 in the prior year. Looking at the bridge on adjusted EBITDA, you see in gray the effects of lost EBITDA from the Geismar assets we sold in 2017, the changes in revenue recognition accounting rules, and the loss of EBITDA from the Four Corners assets we sold in 2018. So once again, adjusted for revenue recognition changes and the lost EBITDA from sold assets, you can see that our adjusted EBITDA increased a little more than $300 million, driven by strong increases in our Northeast and Atlantic Gulf segments. Growing volumes in the Northeast Pennsylvania and Southwest Marcellus and the Utica areas all drove the higher Northeast segment results. The Atlantic Gulf segment growth was again driven by Atlantic sunrise, but a number of other projects that came on for a partial year in 2017 also drove higher results in 2018. So now let's move on to slide five and quickly recap some of the more significant and recent business developments. This slide showcases our recent accomplishments demonstrating strong project execution, continued permitting successes, operational excellence, and strategic transactions at the corporate level. Our teams have done an outstanding job of bringing key expansion projects into service like Transco's Atlantic Sunrise and Gulf Connector projects, One other project that I'll highlight on the list is our Norfolk project in the Deepwater Gulf of Mexico. It's great to see some major new deepwater volumes coming mid-year as our Norfolk project serving shells, Appomattox fields in the Eastern Gulf gets up and running. With the completion of these three projects, the majority of our project execution risk that is behind our growth drivers from 19 have been squared away. So on the permitting front, we have also seen great progress despite the difficult environment. Northeast Supply Enhancement received its FERC at the IS. This was a critical permitting step for a project that will support the conversion of heating oil to clean burning natural gas for New York City and the Long Island areas. Transco's Gateway expansion was another project that hit a key milestone, receiving FERC approval to expand existing pipelines to help New York and New Jersey meet growing natural gas demand needs in time for the 2021 winter. And most recently, our Southeastern Trails project cleared the environmental assessment hurdle at Perth. This is another example of Transco's tremendous advantage of having existing right-of-ways in all of the right places. Operationally, our Northeast GMP segment increased gathering volumes by 13%. from fourth quarter of 17 to fourth quarter of 18, and this was driven primarily by several gathering expansions of our Susquehanna system, as well as incremental takeaway capacity for Northeast Pennsylvania. We will continue to see volume growth on our Northeast systems into 2019 and beyond. Our Transco expansions help Transco deliver a record amount of natural gas, setting its peak day mark of 15.68 million decatherms on January 21st of this year. Transco also set a new three-day mark from January 30th to February 1st. The recent frigid conditions across the country are an important reminder of the vital role transmission pipelines play in delivering natural gas to keep millions of Americans safe and secure, and I want to take a moment to recognize the great employees that are there working behind the scenes to make that happen. It's not a simple task, and it takes a lot of dedication, and we certainly have that from our employees here at Williams. And speaking of records, our Northwest Pipeline also hit an all-time annual record delivery of 820 trillion BTUs versus the previous annual record of 781 trillion BTUs. So a tremendous job by our Northwest team as well as they overcome some major supply outages in Canada from third-party pipelines coming in, and we're able to manage around that and keep the heat on for our residents in the Northwest as well. Looking down the list, you'll see our Bluestem project, which we announced yesterday afternoon. Let's move to slide six to take a closer look at the newly announced project, Bluestem. We've got some good detail on this slide about this exciting new project, which will provide all new connectivity between vast western NGL supplies and premium Gulf Coast markets. This strategic partnership provides for a great opportunity to really strengthen and expand our NGL transportation and fractionation business. We're pleased to partner with Target on this NGL infrastructure solution that creates an integrated solution and a platform for growth for both parties. Expanding our NGL pipeline business to interconnect the target strategically positioned Grand Prix pipeline will provide Williams and our customers with access to Mont Bellevue while opening up additional markets for Conway, attracting new volumes to both our Oberlin Pass pipeline system and to Conway fractionation and storage assets. and will provide Williams with 80,000 to 120,000 barrels a day of firm access to Montbelgium. Additionally, this delivers a long-term infrastructure solution for NGLs from our OPAL, Echo Springs, Willow Creek, and our new Rocky Mountain midstream systems in the DJ Basin, while also creating a platform for growth, offering us the opportunity to gain incremental downstream revenues as we expand our GMP business. We're targeting an in-service date of the first quarter of 2021 for this project. Additionally, I would point out that in connection with this project, Williams will also have an option to purchase initially a 20% equity interest in one of Targa's recently announced new fractionation trains, train 7 or 8 in Mont Bellevue. Our goal is to be well aligned with Targa in maximizing the value of our collective assets in Conway and Mont Bellevue and the piping in between, and to offer attractive service offerings to our processing customers in the West. We expect our investment in these NGL logistics projects to be $350 to $400 million, with most of that spending that will occur in 2020. And now let's move on to the next slide to review our 2019 financial guidance. As we previously discussed, we are reaffirming our 2019 financial guidance with the exception of growth capital expenditures. Of course, much has changed since we originally issued 2019 guidance last May. Specifically, we sold our large-scale Four Corners system and entered into the DJ Basin where the system there that we now operate was still in the early stages of its continuing expansion and development. And we and our producing customers, of course, saw a 28% decrease in crude and NGL prices from August until year end. Really the key point here is that the stability and predictability of our natural gas infrastructure focus strategy has allowed our 2019 guidance to hold in there very well, even as we've continued to optimize the portfolio and have seen a lower pricing environment for our producing customers. As a result, our 2019 guidance for financial performance remains unchanged, and much of the project execution risk for 2019 is already put crisply behind us. ASR, Gulf Connector, and our Norfolk facilities, as I mentioned earlier, are all now completed. So as I previously mentioned, we are revising growth capital expender guidance from 2.6 to a range of 2.7 to 2.9 billion. And that's really just the timing shift of some of the amounts we didn't spend in 2018 that got shifted into 2019. The last thing I will say about 2019 is that we remain very focused on improving our credit metrics. To that end, we will continue to exercise capital discipline and to pursue portfolio optimization transactions, much like you saw in 2018. And of course, our strong cash flows and continued string of asset sales has allowed us to fund the equity side of our growth capital needs. So with that update, let's move on to the last slide, slide number eight, and wrap up, and then we'll take your questions. On this last slide, we again just laid out a few of the highlights from 2018, which was a very important year for Williams. It was a year where we beat guidance, returned to a simplified C-Corp investment-grade infrastructure company, completed the largest project ever on Transco, progressed on deleveraging the company, and made continued progress in optimizing our portfolio. Also on this last slide, we've summarized some of the things on our minds here for 2019. We look forward to another year of strong natural gas demand growth. We also look forward to showing how our business can deliver cash flow stability and predictability during times when the crude markets are volatile and saggy. We continue to be pleased with the opportunities we are closing on in the DJ Basin, thanks to the great work of our Rocky Mountain midstream team that has done a great job of establishing themselves in the area as well with our customers up there. As an example, we just executed a new gas gathering and processing agreement for an additional 5,200-acre dedication that is fully permitted in the DJ. To support this development, we'll be expanding our gathering and compression services in the basin as we expect to open up additional near and long-term opportunities for our midstream services in the DJ. And we will have two new processing trains starting up this year as well, one of which is entering the commissioning stage and the other at Kingsburg where construction activities is progressing according to plan. We look forward to another year of advancing the important Transco projects that you are aware of. and to introducing you to new opportunities for the nation's largest and fastest growing natural gas pipeline, and we look forward to another year of strong northeast GMP volume growth. And last but not least, we will continue to de-lever. We will do this through solid execution of our business plan, which allows us to reinvest excess cash flows into new growth opportunities, but we will also continue to vigorously pursue portfolio optimization activities in support of this effort to de-lever. And finally, I also want to let you know that we've taken a look at the timing of our annual analyst day and we'll be making a shift from the May timeframe to something later in the year. The major driver of this move is to really make sure that our analyst day follows up our annual board strategy session, which is in August. So we think that's a nice move to governance and simplifying our internal process to be able to roll right from our annual board strategy session into guidance. So with that, let's go ahead and turn it over for Q&A.