Williams Companies, Inc. (The)

Good day, everyone, and welcome to the Williams First Quarter 2020 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.

Thanks, Simon. Good morning, everyone. Thank you for joining us and 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 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 Zamarin. In our presentation materials, you'll 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 reconciled to generally accepted accounting principles. And these reconciliation schedules appear at the back of today's presentation materials. So with that, I'll turn it over to Alan Armstrong.

Great. Well, thanks, Brett, and good morning, everyone. Thanks for joining us today as we go through our first quarter 2020 financial performance. While the world around us has changed dramatically, some things have remained remarkably stable, and we should not take for granted the sacrifices and dedication required to keep the most essential of services available to us. So I'd like to start by thanking the frontline employees of Williams who have continued to operate our critical natural gas infrastructure during the coronavirus pandemic. We often take our warm and well-lit homes for granted, but it took great dedication extra effort and resourcefulness to keep our most basic energy needs available during these disruptive times. Thankfully, we have always maintained robust plans to ensure business continuity, and we've been able to successfully execute on these plans while staying aligned with federal and state guidelines to keep our employees healthy and safe. I'm glad to report we have not missed a beat, and this is a testament to the efforts of our employees across the country. Of course, the other big related news story that we are closely monitoring is the collapse in oil prices and the impact this is having on our upstream customers. With that said, let's get to the business at hand and talk about our strong 1Q20 performance. On slide one, we provided a clear view of our first quarter 2020 financial performance relative to 1Q19. And as you can see, this was a really good quarter. We continue to enjoy steady growth across our key measures despite the impact of much lower commodity margins and deferred revenue recognition stepdowns. From the top of the table, you'll see we continued a long trend of year-over-year growth in cash flow from operations. Our adjusted EBITDA also increased 4%. And while this is attractive growth, this growth rate would be 8% if you fill back some of the non-cash items related to stepdowns and deferred revenue amortization. and the impact of declining prices on our carried NGL inventories. I'll discuss the key business drivers and unique issues affecting adjusted EBITDA in more detail on the next slide. But DCF was up an impressive 10% on a year-over-year basis. And of course, all this continues to drive impressive growth in our per share metrics, adjusted EPS, and DCF as well. We also were very pleased to continue growing our strong coverage ratio by 5% on top of the 5.3% dividend growth that we established earlier this year. Our 1.78 times coverage ratio means DCF exceeded dividends paid by $376 million. Another strong data point driving our cash flow performance in the first quarter was a 45% or nearly $200 million reduction in growth capital expenditures. Taking all of these items into account, the strong DCF, the growth in the dividend, and disciplined growth capital spending, Williams generated real free cash flow of $144 million this quarter alone. A lot of different versions of free cash flow out there, but this is after all of our cash expenses, the dividend, and our growth capital expenditures as well. These financial results further reduced our debt to adjusted EBITDA ratio to 4.36 times for the first quarter. As a reminder, this ratio stood at 4.8 times at the end of 2018. And since then, we have moved this important ratio nearly 75% of the way to our longer term goal of the 4.2 times leverage that we've reminded you of several times. We are pleased with this performance. And we have intentionally built our business to be resilient through a variety of market cycles, and that strategy is certainly helping us navigate today's choppy waters. Our healthy dividend coverage and strong balance sheet leading into 2020 have put us in a very stable financial position and well-positioned to navigate the changes that we are experiencing across the industry. So let's move to slide two and discuss the main business drivers of our first quarter 2020 adjusted EBITDA results. Before we dive into the drivers for this quarter, I want to remind you that we have transitioned our business segment disclosures to align with our internal reorganization that took effect in January. Our transmission and Gulf of Mexico operating area now includes all of our regulated natural gas transmission pipelines, of course, Transco, Northwest, and Gulfstream, and our deepwater Gulf of Mexico assets that deliver supplies into Transco and Gulfstream. We will continue to evaluate and disclose the performance of the Northeast, GMP, and West operating areas separately, but those segments are now integrated from a senior leadership and overhead standpoint And that change allows us to improve efficiency, alignment, and cost savings across all of our onshore gathering and processing business. So now looking at the chart on slide two, we compare adjusted EBITDA in the first quarter of 2020 to the same period in 2019. I'll quickly remind you that 1Q19 represented a great period of growth for us. which was just following the Atlantic Sunrise startup and the associated Northeast Gathering volume growth that we said. So a nice, strong comp to compare ourselves to. But before we get into discussion of the key business drivers, I also want to talk about some of the things that affected the EBITDA number that I think obscure the underlying business performance. versus the impact of the lower deferred revenue recognition in the Barnett and our GulfStar Deepwater platform. These are both non-cash items totaling $21 million and are not reflective of the ongoing cash flow from these assets. We also saw $24 million of impact this quarter related to decreases in inventory values. This was due to decline in the value of NGL line fill and write downs of NGL commodities and storage. While NGL price exposure is clearly part of our business, these charges are driven by directional movement of market prices, and for this sort of charge to occur, recur, we would have to see a continual drop in NGL prices from the already very low prices that we marked these inventories at on March 31. So, of course, this does not include the actual NGLs. that we produced and the equity sales that we had in the quarter. This was just the inventories and the repricing of inventories from our line fill, our storage, and our marketing team's inventory. Another way of looking at this is to answer the question of what would the run rate be for the balance of the year with identical operations and pricing that we saw in 1Q of 20. The primary adjustment would be to add back the $24 million of inventory valuation write-downs to the $1.262 billion for the next three quarters, and this would provide us with an annual number above the midpoint of our guidance. To be fair, we had very low repair and maintenance costs this quarter, and we are not assuming that continues through the balance of the year. But I think this analysis highlights how pleased we were and are with our execution here in the first quarter. So after touching on those issues, let's dive into the key drivers. First of all, the primary drivers for the transmission and Gulf of Mexico segment was the decrease in recognized revenues on our Deepwater Golf Star platform, which was coupled with the end of fixed payments on platform space. And, you know, we've reminded you of that several times that actually that Fixed payments ended May of last year, and so this is, you'll hear a little bit about noise on this in second quarter, and then we'll have a normal comp past that. Beyond this change on GulfStar, the transmission in Gulf of Mexico was up $60 million from the first quarter of 2019. This was driven by Transco revenue growth from the Riverbilt South to market. Gateway Expansion Project and the Northwest Pipeline North Seattle project. Additionally, our first quarter 2020 results include increased EBITDA from the Transco Rate Case Settlement and the benefit of cost savings initiatives implemented in late 2019 by our operating teams there. Lastly, total deepwater gas volumes were up 8% year-over-year and mostly from the Norfolk Pipeline and HUDAC Gulf East projects that came online in the second half of 2019. And next, in the Northeast GMP adjusted EBITDA, we saw we were up $58 million, and this was driven by higher gathering, processing, and liquids handling revenue. A lot of new assets put in service in the second half of 2019 that drove this, and we are providing additional services to volumes that we are already gathering there. This along with a relentless focus on cost containment and efficiency drove adjusted EBITDA growth of 23% for the Northeast operating area. Total gathered volumes consolidated and non-consolidated grew by 4% with the primary contributors coming from the Marcellus South The Ohio Valley Midstream, I'll remind you that Ohio Valley Midstream is the Northeast JV that we have with the Canadian Pension Plan Investment Board. And then the Susquehanna Supply Hub also contributed to that growth. This EBITDA and gathering volume performance resulted in this segment realizing 52 cents of EBITDA per gathered MCF. So I'll remind you that's a measure that we talked about back at our 2017 analyst day when we laid out our long-term aspirations for the area. And so just to remind you, that range that we talked about then was 50 to 55 cents. So we wind up now in the middle of that range. So we're really, really thrilled to have achieved that important measure. And I think that moved from, as I recall, I think that was around 36 or 37 cents then so a really impressive move by the team as we've been able to continue to Increase our unit lower our unit cost and continue to drive efficiency in that basin Of course, there's a number of factors that have driven that and and we are really excited though to have the scale that we do have now in that area and This is going to allow us to continue to using our low cost to drive competitive advantages and further growth in that basin. Moving on to the west, the real story here is a steady business. Volume remains relatively flat, and setting aside the non-cash Barnett issue and NGL inventory write-down, the west adjusted EBITDA was down about $13 million. The decline is mostly attributable to lower commodity margins driven by substantially lower NGL prices realized on our sold equity barrels during the quarter. So now I'm going to move on to looking at the natural gas demand picture. We talked a little bit about this on our March 25th call, and I just wanted to update folks. A lot of different stories out there in the markets around natural gas demand, and so I wanted to give you the direct viewpoint that we have as Williams-Onds. Overall, we're seeing natural gas demand has remained strong, both broadly across the market and on our systems. In fact, we're seeing evidence that natural gas is not only holding up nicely, but even exceeding recent historical norms. And while it's hard to predict very far into the future right now, we have seen demand for natural gas in the U.S., including the exports to Mexico and via LNG exports, remaining strong. It's a vastly different picture than what we were seeing in crude oil demand. Demand in the continental U.S. has generally been above the three-year historical average in comparable weeks for natural gas. We have strong demand in the power sector. Industrial is down slightly. ResCom has held in very well despite mild weather. And LNG and Mexico exports have driven demand up over the prior year averages. One thing I do want to make sure you can see in this chart on the left is that the week-over-week behavior of demand is a seasonal impact. The sequential declines we have seen in weekly demand since January are the normal behavior we see when we move out of cold winter months and into the shoulder months of more temperate weather before the heat of summer starts to drive electrical load due to air conditioning demand. So we only mention that. We know a lot of that. That is very obvious to most people, but we've certainly seen a lot of headlines coming out talking about lower natural gas demand. And if you read through the headlines that go with that, you'll notice that a lot of that is just normal demand associated with weather. Looking at the right-hand side, which reflects flow data right off our gas transmission systems, We continue to see normal behavior with deliveries generally staying within the normal range when compared to last year. And while the EBITDA generated by our regulated gas transmission systems is not impacted by volume fluctuations, thanks to the fully contracted capacity payments we receive, we do monitor these volumes to get a sense for demand in the markets we serve and the gathering volumes that serve those markets as well. As we have consistently said over the last several years, our business is driven primarily by natural gas demand. Current and near-term future demand drives revenue on our gathering and processing systems as the various sources of U.S. production meet this demand. And long-term demand growth drives the opportunities to expand our gas transmission system. As more and more people see the benefits of consuming low-cost, abundant, clean natural gas, End users will continue to invest in gas consumption and the transportation capacity they need to access this reliable energy source. We will keep monitoring demand as we plan for the rest of this year and for 21 and beyond. One thing we are seeing right now is extremely low international prices for LNG. European gas storage is very high right now after an even milder winter than what we experienced here in the U.S., And while this may affect demand for U.S. gas over the summer, we see this pricing issue as cyclical and not secular. As we look further out, we remain extremely confident in U.S. natural gas production as a low-cost supply to a world hungry for reliable, abundant, clean energy, and in our business strategy to provide long-term value based on that demand for natural gas. So now let's turn to some of the key areas we believe investors are focused on now and how our business looks through the lens of some of these risks and opportunities we know our investors are trying to assess. I'll start with the market environment we find ourselves in now. I won't dive into all of the current and extending drivers of the oil price collapse, but we'll lay out the distinctions between the drivers of low natural gas price and the drivers of low oil price. Low natural gas prices have existed here for a few years now, driven by supplies growing even faster than the growing demand we have enjoyed. The latest oil price collapse we have seen has been primarily driven by tremendous demand destruction. When you are in the business of moving these commodities, this distinction is everything. Confidence in abundant, clean, and low-cost natural gas supplies have driven consistent demand growth of 24% over the last three years, and that growth in demand will continue. On the other hand, lower demand for refined products ultimately means lower oil prices and lower volumes. So what does that mean for domestic supplies? With the oil price collapse, we expect associated gas from oil-producing basins like the Permian, Bakken, the Scoopstack, and Eagle First to decline, and we expect gas-directed basins to gain market share. as producers begin shutting in some flowing oil production to avoid filling storage and selling their production at unacceptable prices. We'll see reductions in associated gas accelerate. This decline will continue as the void in drilling and completions of oil wells begins to show the underlying decline in the large number of new wells supplying the market. At the same time, as I mentioned earlier, we see natural gas demand has remained strong And over the long term, we expect that strength to continue. So what does this all mean, this rapidly changing market environment? What does this all mean for Williams? We do expect the gas gathering we do in the oil bases to be impacted by the oil price shock, both near-term shut-ins and longer-term, the impact of lower prices for longer that will likely reduce capital available for U.S. shale oil production. The largest impact will be the reduced growth in the Permian and DJ basins business, including the associated NGL volumes from the DJ. In 2019, the Permian, DJ, and Mid-Continent basins were approximately 2% of our EBITDA just to keep those declines in perspective. The Eagleford is our single largest onshore shallow oil facing business at 5%. of our 2019 EBITDA. We recently renegotiated the contracts with Chesapeake, our largest customer in the Eagle Ford from a cost of service contract with rates that vary by year as volumes vary to a fixed fee contract which has minimum volume commitment. This contract, which was negotiated and executed in late 2019, became effective on January 1 of 2020 and is It is designed to insulate us from volume fluctuations in the Eagleford. It also includes language which makes it abundantly clear that our contractual rights are linked directly to the minerals in the ground. Our Gulf of Mexico business is driven primarily by oil economics and is not immune to oil price risk. However, it is uniquely positioned versus onshore oil business. The deepwater business requires a very long-term view given the multi-year, multi-billion dollar investments required by producers to bring on very large-scale reserves. The customer base is primarily international integrated oil companies or large-scale independents with significant expertise in the deepwater or whom existing assets provide synergies for future investments. With regards to future project opportunities, our producer customers in the offshore business will clearly be looking at oil prices, but it will be with a long-term vision for where prices will be in the next three to four years. Williams will be impacted in the near term by some Gulf of Mexico production shut-in from small producers, but we do not expect that to be a significant volume. Also, remember that producers bear significant fixed costs when operating deepwater production, most of which don't go away during a shut-in. So therefore, we expect offshore shut-ins, if they do occur, to be some of the shortest duration oil production shut-ins that we'll see here in the U.S. Along with the dramatically lower oil and NGL prices has come well-deserved concern about our counterparty exposure with our customers. So let's focus for a moment on our customer base and the practical risk of not getting paid per the terms of our contracts. From our perspective, it's very important to look beyond a simple credit rating breakdown and really look at the services being provided and the essential nature of the assets that we utilize to serve our customers. We think about our counterparty exposure much differently in the GMP business than we do in the gas transmission business. Counterparty credit quality is extremely important in any long-haul business where there are a number of different ways to get gas to a wide variety of markets. In gas transmission, you rely heavily on the ability of your counterparty to pay you for the capacity over a very long term that the assets were designed and built for. We watch our gas transmission counterparty exposure carefully and have built a portfolio of contracts dominated by demand pool investment-grade rated counterparties. customers who need to have capacity to be able to meet their peak demands rather than customers who are trying to find a market for their gas. The gathering and processing business, due to the universe of E&P companies, includes smaller, less capitalized counterparties. These are very accomplished operators. These are the independent producers who have led the charge in creating energy independence here in the U.S., but often with lower credit ratings or no credit ratings at all. We do value high credit quality amongst all our counterparties and closely monitor the credit quality of our portfolio of GMP customers, but we also mitigate the credit risk we necessarily take on in the GMP business with scale and with wellhead or wellpad connectivity. A large-scale system that connects directly into producers' reserves is difficult to reproduce and our customers will honor our contracts and utilize our services even when they are in financial distress. We have a strong track record of seeing the contracts for our wellhead gathering services survive a wide range of corporate actions or restructuring processes, even bankruptcy, and by our producing customers. In fact, we see the real risk of gathering gas for financially distressed counterparties as a risk to growth rather than a risk to the revenue we earn on the flowing reserves. A distressed customer will not be able to fund the sort of drilling capital necessary to grow their production and their gathering revenues. So we hear a lot of concerns out there about bankruptcy, but I would just tell you that the real issue for us is we've got a lot of great acreage dedicated to us, and what we want are adequately capitalized customers being able to drill on the great debt acreage that's dedicated to us. And that's the real impact that we see during this financial distress. The picture we have been painting through this discussion so far and through our financial performance is one of stability and predictability. That stability and predictability is a bedrock on which we build a conservative financial policy and capital allocation process that drives the return of value to our shareholders. We pay a very attractive dividend based on our 40 cent quarterly dividend, which annualizes to $1.60, and yesterday afternoon's close of $19.13. That $1.60 dividend offers an 8.4% yield. This very attractive yield is well covered, and WMB is one of the very few large infrastructure players that is also more than covering its growth capital spending as well. We have been reining in our growth capital very tightly over the last couple of years as we have been working hard to improve our balance sheet. Many of our peers have talked about significant cuts to CapEx budgets as they are now scrambling to cut this year. And we've already traveled much of this road making significant cuts to our capital spending year over year for the past several years. In fact, our total capital expenditures growth and maintenance in 2019 was $2.4 billion, which was 40% below the 2018 total capital expenditures of $4.2 billion. And with our latest thoughts on growth and maintenance capex here for 2020, we are now positioned to see another 40% reduction in total capital here for 2020. Our stable cash flow and disciplined capital spending have driven down our leverage. Maintaining a strong, flexible balance sheet and investment-grade credit metrics is very important to us, both financially and operationally. We believe an investment-grade credit rating keeps our cost of debt down, but also reduces the risk of the company in the eyes of equity investors, both current and prospective equity investors. And while we focus mostly on the long-term positioning of the company on this slide, I do want to reiterate our 2020 guidance ranges remain unchanged, but we do expect to come in at the lower end of the range for adjusted EBITDA and both our growth and maintenance capex as well. Regarding adjusted EBITDA coming in toward the lower end of our guidance range, we see that being at the lower end of the range is being driven by lower than expected volumes from the oil basins that we talked about earlier, primarily the DJ basin, and the much lower NGL margins we are currently experiencing. We have not assumed prolonged shut-ins in our oil basins, nor have we assumed increased dry gas drillings. We also, on the other hand, we don't assume that we will continue to enjoy the same degree of low maintenance and repair expenses that we enjoyed in the first quarter of this year. And so, as we think about the, here for 2020, a number of variables laying out there. As we talked about, one, prolonged shut-ins. I would tell you, so far, we see those as fairly minimal. But we do want to make sure you understand we are not expecting wide-scale or prolonged shut-ins in our guidance right now. We also, as we mentioned, don't have the uplift that we might see in the last half of the year as well. Moving on to CapEx expectations, we've been able to reduce CapEx due to lower-than-budget performance on our projects and execution requirements. as well as lower producer activity, which has reduced the need for CapEx in a lot of our gathering operations. As a result, we now could see total capital spending come in below the low end of our guidance range. However, as previously mentioned, we only had a very small amount of capital in our forecast for our NSSE project since we were not going to allocate capital to the project until we received necessary permits. We remain confident that NSSE will ultimately be approved, and if this happens as soon as June, the other reductions mentioned will allow us to still be at the low end of our CapEx guidance range. So just to clarify that, we do expect we would be still at the low end of the range for CapEx if we are fortunate enough to get NSSE moving here as soon as June. On the other hand, if we don't, we actually would come in below the current CapEx guided trains that we have out there. In closing, 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 near-term challenges in the market while positioning us very well for the long term and 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 joining us today.