Williams Companies, Inc. (The)

Good day, everyone, and welcome to the Williams Company's fourth quarter and full year 2019 earnings call. Today's conference is being recorded at this time for opening remarks and introductions. I would like to turn today's call over to Mr. Brett Craig, Director of Investor Relations. Please go ahead, sir.

Thanks, Carrie. 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 on the call today are 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 Zamrin. In our presentation materials, you will find a disclaimer related to forward-looking statements. This disclaimer is important and integral to 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.

Okay, great. Thanks, Brett. Good morning, and thank you for joining us as we discuss our fourth quarter and the full year 2019 financial performance. and our key investor focus areas. So let's move right into the presentation and take a look at our strong year-end performance. Here on slide two, 2019 was another year of strong, predictable growth and solid execution. This is now the third year in a row we have exceeded the midpoint of our guidance range on key financial metrics. This highly reliable and predictable performance is a result of continuously improving execution by our operating teams on many fronts, capital project execution, reliable on-time services for our customers, safety performance, environmental stewardship, capital discipline, and operating efficiency. All of these efforts circle around a deliberate strategy to deliver long-term shareholder value by accomplishing the following. First is our focus on being the very best at providing infrastructure services for natural gas as an economically and environmentally superior energy source. is to reduce direct commodity margin exposure and basis risk to focus on highly predictable fee-based revenues. And certainly the reason that our business has become so predictable is largely focused on that one. And we've very much achieved what we'd hoped to accomplish in terms of that reduction. And third is to de-lever the balance sheet to provide flexibility and unquestioned financial stability. These efforts drove predictable record results in 2019 across key performance metrics. The company produced record annual adjusted EBITDA of 5.02 billion and growth of 8% over the record 2018 performance of 4.64 billion. Distributable cash flow, also a record, grew by an impressive 15% to an amount of 3.3 billion. And this financial performance was driven by continued growth in the very large volume of natural gas the company gathers from a diversified array of both supply basins and a variety of producing customers. Our record average daily gathering volume of 12.9 BCF a day for the full year of 19 was a 5% growth overall, and it was 15% in the Northeast. In fact, in the fourth quarter, On that comparison, we saw volume growth of over 10% up to 13.3 BCF per day against the whole gas gathering portfolio and a 12% growth in the northeast GMP segment. So the company also continued to realize growth in interstate gas transmission, driven by 11% growth in the long-term firm contract capacity on Transco, the nation's largest and fastest growing pipeline system. Turning now to slide three, I want to take a brief moment to acknowledge some of the key performance metrics we are using to manage the business and to measure our continuous improvement efforts. First of all, our financial performance along with the company's disciplined approach to capital investment and successful efforts to monetize assets brought our leverage ratio under 4.4 times, which is significantly inside our originally guided leverage ratio of under 4.75 times. but we are certainly well on our way to reaching our target of 4.2 in 2021. Also, as an enterprise, we are focused on improving our return on capital employed, or ROSI. While it is only a snapshot and is certainly not a perfect measure of long-term returns, measuring the year-to-year improvement keeps us very focused on preserving our precious capital, And a 13% compound annual growth rate on the very large capital base the company has employed is great improvement. But we look to continue bringing our OC up with our continued strong discipline around capital investment. Our operating margin ratio shows how much of our gross margin gets to the bottom line after operating administrative costs. And to improve on that, we have to utilize our scale to grow gross margin faster than our unit cost. We have improved this metric even in a slowing growth environment and dwindling commodity margins and target continued improvement here through both cost management and growth. And finally, our total recordable incident rate is a measure of our safety performance among several safety metrics we monitor. There has been a great improvement in our total recordable incident rate over the last several years as our safety culture continues to improve and our employees find and eliminate hazards from the workplace and protect the public while operating our assets. Every employee has full stop work authority and when they recognize a safety issue and are empowered to make it right. Our employees own this metric and are responsible for this great improvement and I'm pleased to report on that group's improvement here. And in fact, in 2019, our TRIR came in at 0.55, which is well below the toughest of industry benchmarks. And finally, all this discipline and focus has culminated to drive an impressive 25% CAGR on our EPS from 17 through 19. Now we're going to move on to slide four. And here on slide four, we provided a clear view of our full year and fourth quarter 2019 financial performance relative to 2018 periods. And as you can see, we continue to enjoy steady growth across our key measures despite the impact of asset sales and much lower commodity margins on a full year basis. We covered some key annual performance metrics on the previous slide, but on this slide, from an annual perspective, I'll just point out that growth in our gap Cash flow from operations of 12% is right in line with the adjusted EBITDA and DCF performance we've already discussed. And the per share metrics, both DCF per share and adjusted EPS, showed equal or stronger growth, with DCF per share up 14% and adjusted EPS up that 25% again this year. Another key piece of 2019 performance is the improvement in an already strong coverage ratio Our DCF exceeded our dividend by 1.79 times, or nearly $1.5 billion. This healthy and growing coverage is one of the key items the management team and board evaluated as we raised our dividend here in 2020 by 5%. Our impressive performance on leverage was the result of strong operating performance that we've already discussed, but also, importantly, a disciplined approach to capital investments. in fact i think this is one of the great highlights here for the year and for the quarter that our total capital both growth and maintenance came in under 2.5 billion for 2019 and that was a 1.7 billion or 40 percent reduction from 2018 and well below our original guidance on both growth and maintenance so during 2019 we saw an environmental Sorry, we saw an environment shaping up that would challenge the growth plan some of our producer customers have laid out. We quickly responded to the realities we were seeing in the market by moderating our capital spend versus the budget we had created in late 2018. And in fact, in the Northeast alone, our total capital spend came in approximately $400 million under that original budget. So against the backdrop of a much lower commodity price environment that we had in 2018, the company produced strong growth in our various earnings and operating metrics and grew dividend coverage while also realizing over $1 billion in net proceeds from our portfolio optimization efforts and lowering leverage. We are certainly very pleased with the performance that we saw across many of these facets for the full year. So let's move on to slide five and discuss the main business drivers of our 4Q19 over 4Q18 on an EBITDA basis. And so here on slide five now, we compare fourth quarter 2019 to fourth quarter 2018. Adjusted EBITDA increased about 7% or 8% if you adjust to the bigger transactions that affect the year-over-year comparison. This 4Q growth came at a point in the year when GMP customers had already begun to talk about moderated growth plans and commodity price concerns. Our business showed growth against a tough comp where the prior year period already included contribution from the Atlantic Sunrise Project and the associated gathering volumes that grew dramatically in the fourth quarter of 18. On the left side of this slide, You can see a net unfavorable $7 million comparability adjustment in the gray bars, which includes removing the adjusted EBITDA from the various asset transactions netted against the favorable addition of 38% UEOM interest. Normalizing for those items, you see adjusted EBITDA growing 8%. Now moving over to the right side of the chart to focus on the financial performance of our continuing business, the Atlantic Gulf increased by 43 million, or 8%, from the fourth quarter of 18, driven by Transco revenue growth from the Gulf Connector and Rivervale South, the market expansion projects. Additionally, for fourth quarter of 19, results include the increased EBITDA from the Transco rate case settlement. And lastly, while total deepwater gas volumes were up 17%, we saw a decrease in revenues due to temporary producer operational issues on our GulfStar deepwater platform, And this issue appears to be corrected now as we've seen volumes come back very strong here in first quarter. Also, the Norfolk Pipeline, which serves Shell's Deepwater Appomattox Field in the Gulf East, continues to see volume increases after flowing first gas on the pipeline in the third quarter of 2019. Next, the Northeast GMP area led the fourth quarter performance with a 19% increase driven by an increase of about 970 million cubic feet per day, or 12% on higher gathering volumes and higher gathering fees that were associated with expansion projects and escalators that are built into those contracts. Volume increases were led by Susquehanna Supply Hub and Bradford Areas, which grew about 600 million cubic feet per day, but all our operated Northeast franchises saw volume growth over this time period, So overall, our operated assets in the Northeast continue to see very strong growth across the board. Finally, even though we enjoyed an impressive 10% increase in total gathering volumes on our remaining assets during the fourth quarter comparison, the West EBITDA was relatively flat due primarily to a $31 million decrease in revenues for our Barnett Gathering business. As a reminder from our third quarter results, This decrease is associated with the end of a Barnett MDC or minimum volume commitment and a related step down in deferred revenue amortization. The Barnett MDCs expired at the end of June 2019, and once that happened, the revenue recognition rate of fixed payments that we've previously received began to reflect actual volumes rather than the MDC levels. We also overcame about 13 million of lower NGL margins in the West, which was a 45% decrease from the prior year fourth quarter. Now moving on to slide six, we'll look at the full year drivers of adjusted EBITDA, which increased about 8% or over 11% if you adjust for the bigger transactions that affect this full year comparison. Once again, on the left side in the gray bars, if you net these out, you'll see an unfavorable $110 million comparability adjustment from the various asset transactions that occurred during this time period. In 2019, Atlantic Gulf increased 20%, and the Northeast was up 19%, driven by the same factors discussed on the previous slide. With the addition of a full-year revenue impact of the Atlantic Sunrise project that came online in early October of 2018, the West is down about 6%, reflecting much lower NGL prices. Again, the step down of the Barnett revenue we talked about, offset by growth in the Haynesville, Eagle Ford, and DJ Basin. Also, our Conway Frac and Storage business, so that's our NGL services business, continues to see strong fee revenue growth on the back of NGL production that's been coming out of both the DJ and the Bakken areas. Our team's crisp execution drove the growth we've continued to show in the Atlantic Gulf and Northeast this year, leading to an overall 8% growth in adjusted EBITDA, despite the significant asset sales, the much lower NGL margins, and the one-time step down in the bar net revenue recognition. So now let's move on to slide seven to address the key investor focus areas. So first, let's set the scene a bit for 2020. As of January 1, 2020, our Northwest Pipeline business will be managed and reported with our other regulated interstate gas transmission systems in a segment we will call Transmission and Gulf of Mexico. This move will streamline the management and operations of the regulated gas transmission business, combine these businesses into a single reportable segment, and providing a clear picture of the very solid performance and predictable cash flow generation of these competitively advantaged assets. The deep water business will remain in this segment as well and become more important to our EBITDA and ROSI improvement as growth in this basin is coming back strong. Moving Northwest Pipeline out of the west segment will position the west of the gathering, processing, and NGL services business, providing a full suite of midstream services to producers from wellhead gathering all the way through NGL fractionation, storage, and NGL logistics, especially after the Bluestem NGL project is placed in service later this year. And the Northeast GMP segment will continue to provide all midstream services to the prolific Marcellus and Utica shales, the largest source of gas production in North America. We will continue to separately report the West and Northeast GMP segments, but combined management will allow us to take better advantage of our tremendous scale and continue to grow our operating margin in this producer-facing business. So I'd like to talk for a moment about how we see the GMP business both in the near term and the longer term and how we have positioned this business. We saw record gathering volumes in 2019 because of continued production successes by our upstream customers, continued growth in natural gas demand, and great execution by our teams. But over the last year, robust production growth has outpaced very healthy demand growth. And in fact, demand has grown significantly 21% over the last three years, but domestic production has grown even faster. This imbalance will be a near-term headwind of volumes and EBITDA in the GMP business, as current prices don't support investment in gas drilling in most cases. So producers, of course, are acting rationally, slowing their capital investment and reducing production growth. While some producers are still forecasting growth, others are focused on keeping production flat, and while lack of recent investment from the upstream will cause declines in other production areas. Some producer balance sheets are stressed. We have already seen some bankruptcy filings. While a customer bankruptcy filing is often disrupted to the normal course of business, it affects various midstream services and contracts very differently. After a very long time in this midstream business, I have seen and experienced many instances of producer stress and even bankruptcy, And it's very clear to me that the most protected service by far is that of wellhead gathering. Wellhead gathering is absolutely essential to any reserves that are going to be produced. Gas cannot get to market and cash flow cannot be realized if wellhead gas gathering is not available. While counterparty credit is important, the physical nature of the service is even better security. We believe that supply-demand imbalance is only a near-term concern, as last week's storage was only 215 BCF above the five-year average. We see continued demand growth bringing supply and demand back in balance, and our long-term strategy is, as we've told you many times before, is predicated on the belief that the economic and environmental benefits of natural gas will support continued long-term demand growth, both domestically and internationally, and that U.S. domestic supply is well positioned to grow its share of global demand as well. In the long term, whatever demand is, supply will grow or decline to meet that demand. And importantly, we expect low-cost gas basins to continue to be the majority of supply that will meet this demand. Associated gas will be important, no doubt, but gas-directed drilling, the source of approximately 65% of today's gas supply, will remain the bedrock of domestic gas production. So we feel confident in the long-term position of our assets and strength of our strategy, but the current price environment is a reality. that the market will navigate through here in the near term. And we have built a very resilient GMP business that can succeed in a wide range of market environments. The dramatic growth we've seen over the last three years and the currently challenging price environment for our producing customers. We built this business very intentionally, not by accident. We've been at this a long time and we have moved away from direct commodity exposure and from reliance on marketing and basis spread for profit. We have taken strategic action to broadly diversify our sources of EBITDA, both in the 15 different supply areas our GMP businesses serve and the very wide variety of customers we contract with to provide those services. Another thing I want to point out is that it continues to demonstrate our ability to work with a wide range of stakeholders is that the free cash flow produced by our onshore GMP businesses grows dramatically when drilling activity pulls back. Capital spends decline significantly, driving near-term ROCE improvement and tremendous free cash flow growth. So as we've said before, when we do see investment pull back on the drilling side, we see tremendous continued increase in free cash flow growth from the GMP business Our West is a great example of that. And with regard to our 2020 guidance, we are reaffirming the guidance we provided at Analyst Day in December. While the largest near-term uncertainty is producer activity, we feel comfortable with our 2020 guidance. We will keep a keen focus on capital spending and cost management as the year evolves. And importantly, we are expecting to fund dividends and CapEx with internally generated cash flow, which benefits the company as we look toward our long-term goal of reaching a net debt to adjusted EBITDA leverage ratio of 4.2 or lower. And so I just want to comment a little bit more here on the guidance for 2020. First of all, the volumes that we saw in the last half of the year, certainly in the Northeast, and the rates that we enjoyed there, along with what we're seeing here in January and February, in terms of volume, as well as some pretty significant cost cuts that we made late in the fourth quarter of 2019, all compiled to continue to give us confidence on our guidance for 2020, despite the challenging pricing environment that's out there today. So now let's move on to discuss some of the key issues around our transmission and Gulf of Mexico business. First, we're pleased that we have filed our Transco rate case settlement with FERC on December 31. We had only supporting comments from shippers to FERC. Since the rate settlement was filed with FERC, we are pleased to have reached this settlement that we expect to provide a $76 million benefit to adjusted EBITDA in 2020 versus the last full year of 2018, which was the last time we had a period with no rate case impact. I also want to point out the successes we are having on our portfolio of transmission expansion projects. Since September, we've placed the Riverville South and Gateway projects in service. Both of these were in New Jersey, and our Northwest Pipeline commenced service on the North Seattle lateral expansion. These are two areas with extremely rigorous permitting processes and a politically active local minority opposing natural gas infrastructure, in short, challenging places to build gas pipelines. Williams continues to demonstrate our ability to work with a wide range of stakeholders in a constructive manner to address these regulatory, political, and community concerns while still getting important infrastructure expansions permitted and built. We plan to continue that track record on the over $3 billion of pipeline expansion projects that are currently in execution mode, and we are achieving key milestones on each of these projects. First of all, Hillaby Phase 2 is mechanically complete and ready for in-service. The Southeastern Trail Project has all of its federal permits and began construction in January of this year with an in-service targeted by year-end. The Leidy South and Gulfstream sixth expansion now both received favorable environmental assessments. which is a key step in the FERC certificate process, and each project remains on track for scheduled in service. Lighty South by the end of 2021 and the Gulf Stream Phase 6 expansion by the end of 2022. Our regional energy access project is looking more attractive as time goes on. We have a project that will be between 800 million to 1 billion cubic feet per day. And once we've settled on the appropriate size of the project, we'll move to complete the work to apply for a FERC certificate. So we're in the final stages of tidying up contracts there with our customers, but we do have a project. At this point, it's a matter of the size of that project. We also continue to feel very confident about the prospects for Northeast Supply Enhancements completion. and we look forward to the conclusion of National Grid's process to assess alternatives for serving Brooklyn and Long Island's growing energy needs. We continue to see this project as the most reliable, most environmentally beneficial, and most economically friendly alternative. At full load, the fuel oil to natural gas substitution for this project would enable an emissions reduction of that's equivalent to taking 500,000 cars off the road. So that, along with the savings to the customers and the residents in those areas, we think are powerful motives for getting that project approved, despite the very noisy minority around that. And we certainly know that this is by far the best solution for the area. Beyond these projects in execution, we continue to make good progress on our backlog of projects in development, and we expect several of these to move into execution mode this year. Transco is well-positioned to continue growing our contracted volumes in a well-established corridor serving a large portion of the U.S. population. The forces you see working in the market today are only increasing the competitive advantages of Transco. low prices continue to incent demand in all sectors and our access to many geographies and types of demand is unmatched lng industrial power residential commercial are all growing along transco difficulties seen by greenfield pipeline projects will also benefit transco in the long run as transco is uniquely positioned to meet new capacity demand by expanding along its existing rights of way, which are irreplaceable and unmatched in terms of their proximity to demand. Our Gulf of Mexico assets are similarly positioned against a growing market opportunity. Chevron made a positive final investment decision on their anchor project in December of 19. Anchor is near our Discovery Keithley Canyon connector. and we are excited to be finalizing the definitive agreements to provide a full range of services for this very rich gas to be produced by the Anchor project. Anchor represents continued realization of the strategy that supported the original Keithley Canyon connector investment, capturing new volumes from significant nearby deepwater prospects. Given its proximity and our pre-planning, we will not have to invest any significant capital for this new business. Williams will continue to pursue similar connections as other nearby prospects move towards FID and first production, including the El Log operated Shenandoah, Yucatan, Leon, and Moccasin, the Equinor operated Monument, and the Total operated North Platte. The Shell operated Well project is an even larger opportunity for us, and the services we expect to provide to this dedicated field include gas transportation, gas processing, and importantly, the crude oil transportation as well. Shell continues to make progress on this very large-scale project and expects to make their FID decision this year. And in fact, in November of 19, Shell awarded Singapore's SEMS Corp Marine the contract to build the well floater. In addition, Williams has executed a reimbursement agreement with the well owners to cover commitments in 2020 to keep the project on schedule for first production Williams will secure several long lead items, including the line pipe, valves, and fittings, and the installation contract, and ongoing engineering costs. Quail and anchor would represent a significant increase in the volumes we are currently handling on our consolidated assets, but these are just two of the many opportunities our deepwater assets are competitively positioned to win as producers in the area are looking to align new development with existing infrastructure to lower cost and decrease time to market. We believe our business is very well positioned to benefit from continued demand growth in natural gas over the long term, and that our strong competitive position and conservative financial model makes us a resilient business that can deal with the near-term challenges in the market while positioning ourselves for the strong growth that's ahead. So with that, let's go ahead and transition to our Q&A session, and thank you again for your time today.