Williams Companies, Inc. (The)

Good day, everyone, and welcome to the Williams Company's third 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. Brett Craig, head of investor relations. Please go ahead, sir.

Thanks, Brittany. Good morning, and thank you for your interest in the Williams Company's. 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, our General Counsel, Lane Wilson, and our Senior Vice President of Corporate Strategic Development, Chad Zamarin. 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 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. Thanks, Brad, and good morning to everyone. Thank you for joining us. And as we discuss our third quarter financial performance, And we also will hit on the key investor focus areas of the day as we usually do. So let's move right into the presentation and take a look at our third quarter results. On slide two, we provided a clear view of our year-over-year financial performance. And as you can see, we continue to enjoy steady growth in our key measures despite the asset sales that we continue to execute on. And in fact, I'm very pleased to say that our third quarter saw records for our fee-based revenues for our adjusted EBITDA and of course these were driven by record operated gathering volumes which exceeded 13 BCF per day in the period and as well record contracted capacity on a regulated gas pipeline and these combined overwhelm the small amount of remaining NGL margin exposure that was certainly low and in fact about as low as I can remember that we've seen in terms of margin contribution from the quarter. So really nice to see our strategy of focusing on fee-based revenues and growing that coming through at a time where we had a low cycle on commodities. But again, we powered through that with the growth in fee-based revenues. So taking it from the top, you can see here our cash flow from operations, which increased 15% for the quarter and 16% year to date. And this continues to outpace our capex. And as you can see, on a year-to-date basis, our CFFO has exceeded our capex by over $630 million. On the next line, we show 7% and 8% year-to-date growth for adjusted EBITDA. And I'll have more to say about adjusted EBITDA performance on the next couple of slides. And then, as you can see, we posted continued growth in adjusted earnings per share. of 8% for the third quarter and 23% year-to-date, even stronger than our adjusted EBITDA increases. And on DCF, we were up about 8% and 16% year-to-date with growth in the per share calculation and continued strong dividend coverage ratio of 1.79. which continues to exceed both our 2018 coverage ratio as well as our guidance for 2019. And you can see our ending leverage metric for the quarter was 4.47, demonstrating that we are on target with the 4.5 guidance that we have for the year end. So overall nice improvement in our various earnings and cash flow metrics despite the impact of almost $2 billion in asset sales affecting the comparison and much lower commodity price environment that we had in 2018. So now let's move on to slide three to discuss the main business drivers of our year-over-year adjusted EBITDA growth. Here on slide three, where we compare 3Q19 to 3Q18, the adjusted EBITDA increased about 7% or almost 10% if you adjust for the bigger transactions that affect the year-over-year comparison. On the left side of the slide, you can see in gray that we have an unfavorable $47 million comparability adjustment, which includes removing the adjusted EBITDA from the various asset sale transactions completed during the last 12 months, And then netting out the $13 million favorable item reflecting the addition of the incremental 38% UEOM ownership interest. And so that's the additional interest that we're now consolidating in the UDIC East Ohio midstream business. And so normalizing for those items, you see adjusted EBITDA growing $112 million, or almost 10% on this comparison. So now moving over to look at the financial performance of our continuing business. Similar to the first two quarters of this year, the Atlantic Gulf led with a 28% increase in adjusted EBITDA driven by top line Transco revenue growth from new expansion projects. Of course, the Atlantic Sunrise and Gulf Connector were two that were powerful in this comparison. And additionally, our third quarter 2019 Transco results reflect about $44 million of adjustments related to the settlement we've reached in our Transco rate case. And, of course, this is recorded through both revenue and other income and expenses. I know there's a lot of questions on that. We look forward to being able to shed more light on that at our upcoming Annals Day. But I will have a little more to say here as we hit slide five. Lastly, we did see a temporary drop in our deepwater volumes associated with tropical storms and producers' maintenance activities, but deepwater production is back to normal for most producers now in the fourth quarter and, in fact, growing in the Gulf East due to new production from HUDAT and the Norfolk ramp-up that continues. But we continue to be very impressed with the activity and the deal flow around our assets in the deep water, and that's another item that, of course, we'll spend quite a bit of time on our upcoming analyst day on. Next up, looking at the Northeast GMP area, we see a 17% increase in year-over-year adjusted EBITDA, driven by an increase of about 1.3 BCF a day, or 17% higher gathering volumes. and higher gathering fees associated with expansion projects. Volume increases were led by the Susquehanna Supply Hub and the Bradford areas, which grew about 850 million cubic feet per day. And we also saw a double-digit growth rate in all of our other operated Northeast franchises. So overall, our operated assets in the Northeast continue to see very strong growth in volumes across the board. And finally, in the West, we saw about a 16% decline driven by about a $29 million decrease in revenues for our Barnett Gathering business. This decrease was associated with the end of some minimum volume commitments in that area and a related step down in deferred revenue amortization. So that was a one-time step down that was associated with some cash that we had received earlier. and that cash was being amortized according to the volumes or the revenues that we were receiving, and so once that MVC stepped down, it kind of compounded that step down. The Barnett MVCs expired at the end of June 19, and so once that did happen, the revenue recognition rate of the fixed payments we previously recorded began to be based on actual volumes rather than MVC levels. So this was an expected step down in Barnett revenue recognition for this area, and we have been forecasting it, but we also saw $32 million of lower NGL margins in the West as unit margins in the Rockies were down by almost 50%. Partially offsetting these impacts was a strong growth in the Haynesville, the Eagleford, and the Rocky Mountain midstream franchise in the DJ Basin. And in fact, adjusted for the Four Corners area sale in 2018, our West gathering volumes actually increased by about 2% on this comparison. And finally, I want to mention our Conway fracking storage business, which continues to see strong year-over-year fee revenue growth on the back of NGL productions in the surrounding areas like the DJ and the Bakken. So next, let's take a quick look at the adjusted EBITDA growth year-to-date. And so now on slide four, we show the year-to-date comparison. Adjusted EBITDA increased about 8% or about 12% if you adjust for the bigger transactions that affect the year-over-year comparison. Pretty similar story year-to-date as you heard for the third quarter, so I won't drag you back through that. On year-to-date drivers, we see Atlantic Gulf up 24%, and the Northeast up about 19%, driven by the same factors as we discussed. The West is down about 8%, reflecting much lower NGL margins, and again, the step down of the Barnett revenue that we just discussed, and the effects of severe winter weather this year on our Wyoming volumes during the first quarter of 2019. As with the third quarter comparison, our full year West results actually reflect strong growth in the Hainesville, Eagle Ford, and the Rocky Mountain Midstream franchise and the DJ, as well as our Conway storage and practice. So very happy with the growth we continue to show in the Atlantic Gulf and Northeast this year and the stability of our volumes in the West and strong revenue growth, all leading to an 8% growth in adjusted EBITDA even considering the significant asset sales and low NGL margins and the one-time step down in the Barnett revenue recognition. So overall, operationally, really strong performance overcoming a lot of those other structural issues. As you look over the sequential comparison to the second quarter of 2019 here on slide five, I'd point out that overall gathering volumes increased sequentially just over a half a BCF a day to now over 13 BCF per day for the first time. And this was led by a 5% second quarter to third quarter increase in the northeast and was somewhat negatively impacted by the deepwater production outages that we've previously discussed. But the biggest driver, 2Q to 3Q in the Atlantic Gulf, was the favorable impact of breaching settlement terms with shippers on Transco. With respect to the lower West results, the one-time step-down in Barnett revenue recognition amortization and the MVC expiration drove the decrease from the second quarter. The one-time Barnett step-down overshadows what was actually about a 4% improvement in gathering volume sequentially in the West. In fact, our West gathering volume trend continues to hold up well in a very tough commodity price environment, and now that we're past the revenue recognition transitions and the MVC expirations, the steady nature of our West operations will become increasingly more visible. The operational cash flows are holding up in the West, and the CapEx requirements are coming down, generating significant free cash flow from our West assets. So overall, we're pleased with our operational performance in the third quarter, and it's very encouraging to see the kind of volume growth we continue to generate in the Northeast and the West GMP businesses. And in fact, it's the first time that I can recall their fee-based business growth being able to overwhelm such a substantial decline in commodity prices, showing that our move towards a more sustainable and predictable cash flow is now really paying off for our long-term investors. Now I'm going to move on to slide six and take a look real quickly here at the key investor focus areas. First on financial guidance, we are reaffirming our current financial guidance for 2019. It's definitely been a challenging commodity price environment for natural gas and NGLs versus the market's original expectations and our own for 2019. But I am pleased to say that it looks like we'll be able to deliver on our financial guidance once again this year in spite of this negative impact. As is reflected in our year-to-date results through September 2019 has been a year of strong free cash flow generation. And I'm pleased with the way our teams have kept us on track with our original business plan from a year ago and how they continue to exceed expectations on project delivery, on generating new business, all while spending less capital than we had planned. In fact, despite losing about 100 million of our planned direct commodity margins, we are still on track proving up the diversity of our cash flows and the power of crisp execution by our teams. Also, growth capex could easily come in under the low end of our 2.3 to 2.5 billion guidance range, which, as you know, has already been reduced once this year. and our dividend coverage ratio continues to be better than our 1.7 guidance. Our 2019 results illustrate the steady and strong cash flow growth profile of our large-scale diversified natural gas-focused business and the excellent security of our dividend, even in a very tough commodity price environment. Moving on now to 2020 guidance, we're currently working through our 2020 operating and capital plan and intend to provide the 2020 financial guidance at our upcoming analyst day on December 5th. At this event, we'll also provide our latest views on the sustainability of our natural gas focus strategy and our unique positioning to grow alongside the continued expansion of natural gas as a preferred and vital fuel around the world. Although we have great confidence in the long-term sustainability of our business strategy, the current low natural gas and NGL prices, which are seeding the long-term growth of natural gas demand, have had a pretty significant impact on the forecasted near-term growth from our GMP business, particularly in the Northeast. And clearly, our producer forecasted cash flow that they have available to drill with has been heavily impacted by much lower strip prices for gas and NGLs. And as a result, our 2020 Northeast gathering volume growth forecast had steadily drifted downward. As we said earlier in the year, we're committed to keeping our guidance up to date with our changes in our producer plans. And so we've continued, as those forecasts have come in, we've continued to make those changes. However, as we've said before, confidence in low-cost U.S. natural gas reserves will continue and is continuing to drive strong natural gas demand growth over the long term, and there will have to be a call on natural gas-focused supply areas given the continuous growth in demand and the stronger-than-ever capital discipline from the producer community. And, of course, we will be extremely well-positioned and are well-positioned for the upside associated with that. As a result, we believe that as long as we continue to see natural gas demand growth, that we should see the volume and capacity demand growth necessary to generate the 5% to 7% adjusted EBITDA CAGR that we've continued to talk about over the long term. To be clear, this does not mean that every year we will be exactly in that range. Some could be slightly lower, and others like this year will be above. The 2020 financial guidance we provide in early December will be built off of low strip prices for natural gas and NGLs, and because of this, we view the guidance as having significant upside as the gas market rebalances. However, we're pleased to say that we have been taking measures to mitigate this risk, and our 2020 plan will show the discipline and resulting improvement that we've been putting on our cost structure. So we've been seeing and realizing we were going to have some risk associated with this. We've taken a big swipe at our cost, and the team's been extremely effective on doing that. And so the benefit of that, as well as some other continued growth, we believe will continue to offset the reduction that we're continuing to see in the Northeast. So we will see reduced capital expenditures in the Northeast, but we also are very focused on the very strong dividend coverage that that's providing us. So speaking of growth capital, our 2020 capital budget will be dominated by our regulated pipeline expansions, as much of the major build-out of our GMP systems will be completed by the end of this year, driving even higher levels of free cash flow growth than we had earlier expected. One of the areas that is beginning to be a big driver of free cash flow growth is the Northeast operating area, and we have been working hard to stay on top of the producer forecasts changes in the Northeast. Our previous guidance for the Northeast GMP for 2019 remains intact, where we are currently forecasting gathering volume growth to about 13%. This should result in adjusted EBITDA growth of 19% for a total of about $1.3 billion. So, not a bad year given all the much more negative forecasts provided by research and So year-to-date through the third quarter, we've generated about 17% gathering volume growth, but we do expect that overall annual growth to moderate here in the fourth quarter since our fourth quarter comparison will be up against the volumes that grew rapidly right after Atlantic sunrise came online last October. Looking toward 2020, our latest forecast informed by our planned producer activity shows about 3.5% gathering volume growth, versus our previous expectation of 5.5%. The decline in expected GMP volume growth was driven primarily by lower forecasted, sorry, lower customer forecasted volume growth in the Bradford, Utica, and Susquehanna areas as producers continue to react to lower forecasted 2020 natural gas and NGL prices. And based on this forecast, we would still expect adjusted EBITDA growth of about 8%. to get to about $1.4 billion, so $50 million lower than what we had for our second quarter expectations for 20, but still $100 million of growth here in 2000 from 19 to 20. So the decrease in expected adjusted EBITDA also includes a pretty significant reduction from the Blue Racer. So part of that $50 million reduction comes from the non-operated investment we have in Blue Racer. And then beyond 2020, we continue to see an opportunity for a stronger growth rate to resume in 2021 in the Northeast. And that, of course, will be dependent on better balance in the natural gas market. But we remain excited about how well we are positioned for that call on natural gas. So overall, we remain encouraged to see the level of EBITDA growth. Our Northeast GMP business can continue to generate in a very weak natural gas and NGL price environment, and we remain very focused on cost reduction and capital discipline as we await long-term fundamentals to balance. We believe it won't take a large price recovery to quickly restore growth rates above 8% for our Northeast GMP footprint. So now let's move on to discuss our Transco growth projects. First, I'll provide an update on the rate case. Very pleased that we have reached an agreement on the terms of a settlement, and as a result, we've reduced the reserve we've established against the cash we've been receiving from the file rates that went effective in March of this year, which along with other related accounting entries results in about $44 million in favorable adjustments. The agreement will resolve all issues in the rate case with no need for any hearings. Of course, final resolution of the rate case is subject to a filing for us to file a formal stipulation in agreement with the FERC and final approval by the FERC. So a lot of process still in front of us to get final resolution on that rate case, but we're very pleased with the way that came out. The terms of the settlement are non-public until the stipulation and agreement has been filed with the FERC. We will provide an overview of the key terms of the settlement following the FERC filing. For now, I just say we're pleased that we were able to reach agreement on the key terms with our customers and related regulators, and we await the final FERC approval of the settlement. But I want to make it really clear on one point here. I would caution you from thinking that this reserve adjustment provides you with a clear picture of the annual run rate impact for 2020. And we certainly look forward to being able to show you the full impact once those filings are completed. So let's touch on the status of Transco's major growth projects, starting with the Northeast Supply Enhancement Project. Lots of headlines out there related to this very important project for the residents and businesses of New York City. We are still awaiting the state water quality certification permits required for the project from both the New York DEC and the New Jersey DEP. At this point, the risk to our targeted in-service date is increasing, although we are going to do everything we can to meet our targeted in-service dates for the fourth quarter of 2020. It is quite challenging to bring the onshore compression facility portion of the project, which is there in New Jersey, really challenging to get that done within a year's timeframe. And that is the current critical path that we'll be up against. But currently we still feel that we can help support the peak loads for the 20 and 21 winters. So a lot of great work by our team that's been going on. On that, I can tell you there's been an impressive amount of work in working with the various agencies and the various stakeholders on that, and I remain confident in our ability to bring that one across the line. So next, I'm very pleased that we're able to place our Rivervale South to Market project into full service ahead of schedule. The project is a Transco expansion of 190 million cubic feet per day to service additional customers. in New Jersey and New York City. We also received FERC approval for our important Southeastern Trail expansion. The Southeastern Trail project adds about 295 million cubic feet per day to the Transco pipeline system, and this is designed to bring gas to serve growing markets in both the Mid-Atlantic and Southeastern states by November of 2020. In fact, all of our Transco projects that have been permitted for construction are progressing well. And finally, our most recently announced Transco project, the Regional Energy Access project, is now headed for approval at our upcoming November board meeting. So, great work by the teams in pulling that project together as well. And I'll remind you that one of the chief benefits of that project is being able to utilize our existing right-of-ways for that project. Now moving on to slide seven here, just to conclude, taking a quick look at our third quarter performance and our high-level review of our key investor topics, we look forward to our upcoming Annals Day on December 5th. And this is going to give us an opportunity to dive deeper into a lot of the really key issues that are out in front of us right now. And a lot of the drivers for growth that we are really excited to share about with you both for 2020 and beyond 2020. So I would just in closing, I'll remind you, we do live in a world that will continue to need more energy. There's a growing need for that energy to be as clean burning as possible. Renewables are certainly going to play an increasingly important role, but their growth requires a partnership with natural gas to meet the energy needs of the world while also reducing emissions over time. Natural gas does have the lowest CO2 emissions to heat content ratio when compared to other fuels and provides superior economics versus other fuel types. And as an example, between 2005 and 2018, CO2 emissions from electricity fell 27% due to replacing coal and oil with natural gas power generation. So while low-cost natural gas also facilitates costly investments in renewables, it is paving the way around the world to be the fuel of choice. Williams benefits from having ideally situated existing pipes in the ground, and we continue to see demand for expansion for both the near term and the long term. And despite a pretty tough current commodity price and regulatory permitting environment, the future remains very bright for Williams, as we demonstrated here in the third quarter. and for strategically placed natural gas-focused assets like we are so fortunate to operate. And we look forward to discussing that future with you in December. So with that, let's go ahead and transition to our Q&A session. And thank you again for your time today.