Williams Companies, Inc. (The)

Good day, everyone, and welcome to the Williams Companies' second quarter 2019 earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. John Porter, Head of Investor Relations. Please go ahead.

Thanks, Patrick. Good morning, and thank you for your interest in the Williams Companies. Yesterday afternoon, we released our earnings press release and the presentation that our President and CEO, Alan Armstrong, will speak to 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 Thamery. 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 non-GAAP measures that we've reconciled to generally accepted accounting principles, and these reconciliation schedules appear at the back of today's presentation materials. And so with that, I'll turn it over to Alan Armstrong.

Great. Well, good morning, everyone. Thanks, John, and thanks for everybody joining us. I know it's a busy time right now. As we discuss the second quarter financial performance and the key investor focus areas, we're going to hit as we have in the past, some of the questions we've been hearing from our investor base. So let's move right into the presentation and take a look at our second quarter 2019 results. Here on slide two, we provided a clear view of our year-over-year financial performance, as you can see. We continue to enjoy very healthy growth in all of our key measures. In general, all the metrics we want to go up went up by double digits, and those we've been working to reduce significantly. went down. So this growth continues to reflect very little direct commodity exposures. We've reminded you. In fact, year to date, our 2019 gross margin is 98% fee-based versus only 2% coming from direct commodity margin. And I'll remind you with that is a very predictable set of cash flows, making this the 14th quarter in a row that we have been in line or been at least in line with street consensus and our own guidance. So let's take it from the top with our GAAP cash flow from operations, which increased 20% for the quarter and 16% year-to-date. Our business continues to demonstrate significant free cash flow, and as you can see, our CFFO exceeded CapEx by over $360 million and $625 million for the quarter and year-to-date periods. On the next line, we show 12% and 9% growth for adjusted EBITDA, which is impressive in the face of significant asset sales affecting the period. And I'll have more to say about what drove the adjusted EBITDA performance here in the next couple of slides. And you can see our continued strong growth in adjusted EPS metrics, posting excellent 53% and 33% increases. Our EPS continues to be burdened with substantial non-cast charges, And I encourage you to take a look at slide 12 in the appendix to appreciate the true power of our cash flows underlying these earnings. Our DCF was up about 36% and 21% with strong growth in the per share calculation and the related dividend coverage ratio moving up above 1.8 with the second quarter being boosted by a cash tax item that we disclosed. We're making great progress on bringing leverage down. Our original guidance was to finish the year at less than 4.75, and we currently sit at 4.43, and we'll discuss our revised leverage guidance in a moment. And finally, crisp execution on our projects continues, keeping our capital spending in line with our expectations. So really nice improvement in our various earnings and cash flow metrics despite the impact of significant asset sales. As we move on here to slide three, for the quarter adjusted EBITDA increased just over 12% or 14% if you adjust for the bigger transactions that affect the year-over-year comparison. On the left side of the slide in gray, you can see an unfavorable $37 million comparability adjustment, which includes removing the adjusted EBITDA from the various asset sale transactions completed during the last 12 months. taking out the $11 million favorable item, reflecting the addition of the incremental 38% UEOM ownership interest. So normalizing for those items, you see adjusted EBITDA growing about 14%. Now moving over to look at the financial performance of the continuing business. Similar to the first quarter of this year, Atlantic Golf led the increase with a 23% increase in adjusted EBITDA, driven by top-line Transco revenue growth from new expansion projects, including Atlantic Sunrise and the Gulf Connector. Next up, looking at the Northeast GMP area, we had a 20% increase in year-over-year adjusted EBITDA, driven by 17% higher gathering volumes and higher gathering fees associated with expansion projects. Volume increases were led by the Susquehanna Supply Hub area, which grew about 23%. But we also saw double-digit growth rates in all of our other operated Northeast franchise area except the smaller Laurel Mountain JV that we had with Chevron. Probably one of the more impactful changes that we had there was the Utica volumes up about 15%. And so as we've mentioned in the past, the Encino transaction out there has really been important to us. to see the volumes in the Utica really start to turn around from what previously had been declines to now a very healthy incline. So overall, we continued a very nice start to the year in the Northeast. And finally, we have the West, which is pretty flat to the prior year, where a sharp drop in MGL margins was offset by nice growth in fee-based service revenues. So, and we're excited to see as well a new plant at Fort Lupton, quickly fill up this quarter in the DJ Basin, as we now exceeded about 200 million a day of new inlet volumes coming into that plant. So, as we told you, that just started up right around the end of the first quarter and into the second quarter, and that new train there has already filled up. So, great growth going on there in the DJ Basin. Moving on to slide four and looking at the year-over-year results, Pretty similar story year-to-date as you heard for the second quarter. Once again, on the left side of the slide in gray, you can see that the unfavorable $78 million comparability adjustment from the various asset cell transactions, and then a $13 million favorable item reflecting the pickup of an incremental 38% UEO interest again. And so normalizing for those items, you see adjusted EBITDA growing about 13% for the first six Year-to-date, we see Atlantic Gulf up 21% and the Northeast up 20%, driven by the same factors that we just discussed on the previous slide, namely Transco revenue growth and strong broad-based volume growth across the Northeast. The West is down about 3% on this comparison, reflecting much lower NGL margins and the effect of severe winter weather this year on volumes in 1Q of 19. All in all, very happy with our second quarter performance, which tracked well with our overall business plan from last fall, despite the declines we've seen in natural gas and NGL pricing. And we are very well positioned to continue this growth here in the last half of the year. Next, let's revisit a few of the key investor focus areas. And before I dig into the items on this slide, I just want to remind you of a few things. We just recently announced the reorganization and some other cost reduction initiatives that we have going on at the company right now. As you may have noted from our recent 8K, after more than 30 years of service, Jim Schill will be leaving the company in December of this year, and we're taking the opportunity to further reduce our operating areas to two. One focused primarily on our FERC regulated gas pipeline business. led by Scott Hallam, and the other focused on our non-regulated business being led by Walt Bennett, who leads our West Gathering business today. I'll have more to say in recognition of the fine work Jim has done for Williams on the third quarter call, but for now I'll just say the reorganization to two operating areas represents another step toward becoming further simplified and centralized as we seek to be the very best operator in the natural gas infrastructure business. So these moves are basically taking advantage of the scale that we have in these very similar businesses and continue to drive common processes and common systems across our operations. But we will continue to provide supplemental disclosures to assist in the modeling of our non-regulated business. So don't worry about losing any of the transparency that we provide today. Our supplemental disclosures will provide at least as much visibility as you have today and will continue to highlight the Northeast volume and EBITDA growth that continues to occur. Beyond the consolidation of the operating areas, we have also initiated a voluntary separation program. and are looking at other cost reduction opportunities, given the $5-plus billion of asset sales that we've had over the last three years, and really narrowing our focus down to the natural gas infrastructure space is allowing us to take full advantage of the scale. And I can tell you the entire management team is very focused on us having the very best operating margin ratio in the business, And so we continue to push hard on that as a team, and we really believe, given the scale that we have, we ought to be the very best in the industry on this measure, and these efforts are taking us closer and closer to that point. So let's look now at the first item we'll be discussing, which is our financial guidance and progress on deleveraging. First off, we are reaffirming our current financial guidance for 2019 and now guiding to a further improvement in our year-end 2019 leverage target. You can find the various elements of our 2019 financial guidance in the appendix of this presentation. Additionally, we are also affirming our longer-term EBITDA growth rate of 5% to 7% per year. Turning now to our leverage, we achieved a debt-to-adjusted EBITDA ratio of 4.43 at the end of the second quarter, and we now expect our year-end 2019 debt-to-adjusted EBITDA to be less than 4.5. As you'll recall, our original guidance was to be less than 4.75 for this same period. The effects of our transactions along with our recently lowered capital expenditure forecast has allowed us to significantly improve our 2019 debt to adjusted EBITDA expectations for 2019. There is no change to our long-term target of the 4.2 that we plan to hit by the end of 2021, and we continue to evaluate transactions that could potentially allow us to reach the 4.2 times at a faster rate. As an affirmation that we are making the right moves on the leverage front, we recently saw some favorable rating agency actions where S&P improved its outlook to a BBB flat stable rating and Fitch put us on rating watch positive.