Williams Cos Inc (WMB) — Q1 2015 Earnings Call Transcript

Thank you, Joshua. Good morning and thank you for your interest in Williams and Williams Partners. Yesterday afternoon, we released our financial results and posted several important items on our website, williams.com. These items include yesterday’s press releases and related investor materials, including the slide deck that our President and CEO, Alan Armstrong, will speak to momentarily. Our CFO, Don Chappel, is available to respond to questions and we also have the five leaders of Williams’ operating areas with us: Walter Bennett leads the West; John Dearborn leads NGL and Petchem Services; Rory Miller leads Atlantic Gulf; Bob Purgason leads Access Midstream; and Jim Scheel leads Northeast G&P. 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. Finally, I mentioned that we will webcast our annual Analyst Day on May 13, where we will provide an in-depth look at all of our businesses and our extensive backlog of in-progress and potential projects. We hope you will join us for that session. So, with that, I will turn it over to Alan Armstrong.

Great, thank you very much, John and good morning, everyone. Thanks for joining us and I will jump right in here on Slide 2 with a snapshot of our first quarter results. The highlight for the quarter was completing our merger of the two MLPs to create the new Williams Partners. And with this milestone achieved, we have created a leading natural gas-focused MLP that’s positioned to drive consistent long-term value for our investors. And this quarter’s results also show a very strong underpinning of growth in our fee-based revenues that will drive our growth for many years to come. In fact, all five of WPZ’s operating areas had fee-based revenue growth and four out of the five enjoyed double-digit percentage growth compared to the first quarter of ‘14. The Northeast Gathering and Processing segment delivered an impressive 43% growth in fee-based revenues despite an outage on one of our ethane pipelines in the area and the Atlantic Gulf posted a very impressive 22% gain due to the first of many new projects coming online during the quarter and a continued build on the strength of that business. Access Midstream fee-based revenues continued their steady upward march going 11% over the prior year 1Q. We expect this growth in fee-based revenues to continue as we had major projects like our Keathley Canyon only start to contribute very late in the first quarter and big projects like the Rockaway Lateral and Leidy Southeast will provide substantial growth in 2Q and beyond. The weak spot for the quarter was NGL margins being off by $105 million versus the first quarter of ‘14 and our Geismar plant did not start consistently producing ethylene until late March. Due to the strong growth in fee-based revenues and the strong contraction in commodity margins, actually 96% of our gross margin in the quarter came from fee-based revenues. Overall, our first quarter 2015 adjusted EBITDA was up 12% to $918 million and Williams received $515 million in distributions from Williams Partners, which is up from $455 million in the first quarter of last year. Overall coverage for WMB was at 1.14 times and this was after increasing our quarterly dividend per share up to $0.58, which was up from $0.40 last year. WPZ’s coverage was lower than we would have liked, but even with the major drop in NGL margins, if just the base Geismar volumes at the actual sales prices during the quarter had been producing we would have fully covered our distribution in the quarter. Again, that’s just the base Geismar volume, not the expanded volume and at the actual prices, so really shows, I think the strength that we are positioned for as we look forward to the Geismar volumes really starting to kick in here in the second quarter and then get to our full expanded growth volumes in June. I am also pleased that we are reaffirming our guidance today as it relates to WPZ distributions and WMB dividend. For Williams, our guidance is $2.38 per share in 2015 with 10% to 15% annual dividend growth through 2017 and all that with growing coverage. For Williams Partners, we are reaffirming our distribution guidance of $3.40 per share per unit in 2015 with 7% to 11% annual LP unit distribution growth through 2017, also with growing coverage. We also reaffirm our EBITDA and dividend and distribution growth for both Williams and Williams Partners, but we do expect that 2015 to be near the low end of our ranges as we communicated in our 2014 year-end conference call. This is really primarily due to three items: One, the planning assumption that we have changed on the ethylene prices that we think now from a planning assumption, we have got that built in at closer to the first quarter actual prices of about $0.38 a pound for the balance of the year. And we think there will be some upside to this, but we certainly want to be closer to current prices with our assumptions right now. Secondly, we have been informed by a couple of our Northeast producing customers that they will curtail Marcellus production as natural gas prices in the basin have been low and they will continue if they don’t see this improve. We have seen some price-related curtailment. We haven’t seen that fall into necessarily the drilling operations, but we have seen it in terms of just physical shut-ins of production. This is going to dampen some of the expected growth from our Northeast volumes. However, we continue to feel very strong about the overall health of that business as demand for natural gas picks up and some of the extreme bottlenecks that exist in the Northeast start to be relieved. Finally, we missed some revenues in the first quarter from Geismar and we are currently expecting to not get up to the full expanded plant rate until June. Earlier we were expecting that to come on at the full expanded rate in April. So those are the items driving us down towards the lower end of our range for EBITDA and DCF. With that, let’s move on to Slide 3. This list shows some of the large-scale assets that we are executing on. It’s a long list and you will see a tremendous amount of progress that occurred during the first quarter. An important trend you will see is that many of these projects are really on the demand side of the business. The natural gas market is continuing to expand. It was first driven by low gas prices on the supply side and now we are seeing the demand side start to pick up. We have several major projects that include the Rockaway Lateral, Mobile Bay South III, and Leidy Southeast, wherein the longer-term projects like Dalton Lateral and Virginia Southside II, the demand side of our network is really picking up and the requests for proposals continue to come in for many market-driven expansions. We have also put some of the mainline portions of our Virginia Southside and Leidy Southeast projects into service early. We have been busy at the FERC filing certificate applications for projects like Atlantic Sunrise, Dalton Lateral, Virginia Southside II, and Garden State project. We also are seeing the market into our NGL business coming to life with projects like Bayou Ethane in Texas Belle being placed into service this quarter. During the first quarter, we commissioned the Bucking Horse plant in the Niobrara area. We also commissioned the Keathley Canyon Connector project and have reached an agreement to acquire up to a 21% interest in the Utica East Ohio gathering system from Enervest. The Keathley Canyon Connector did receive first production from Anadarko’s Lucius platform about midway through the quarter, but then in late March, we began receiving a large volume of gas from Exxon's Hadrian field. The Lucius field is a deepwater oilfield and the Hadrian field is a gas field. The power of the Keathley Canyon project has been affected since the Hadrian field didn’t get turned on until towards the end of March. In the second quarter, that facility is ramping up nicely with strong volumes. This lengthy list testifies to our great teams who are working hard every day to execute on this aggressive growth plan. We are starting to see many of these projects come to fruition and beginning to gain the financial benefits from those efforts. Now, moving on to Slide 4. The ACMP-WPZ merger puts us in position as the natural gas MLP with strong cash distribution growth and investment-grade credit ratings. This merger is very interesting in the context of market growth for both natural gas and natural gas derivatives. We will remain focused on our strategy on that side. The merger has also built confidence in the synergies and cost reduction opportunities as the combination of our businesses has proceeded. We continue to commission and bring on these large-scale assets, and the first quarter is a great evidence of that. It will be exciting to see continued growth in our cash flows as these asset projects come online over the next few years. Approximately 88% of our WPZ gross margin is expected to come from fee-based revenues. As mentioned, the strong growth in fee-based revenues in the first quarter along with some very weak commodity margins drove that up to 96% in the first quarter. We anticipate 2015 will likely maintain a similar trend. About $9.3 billion of our 2015 through 2017 growth CapEx is focused on fee-based projects, with nearly $30 billion of committed and potential growth capital through 2020. Our strategy remains sound, and the backlog of projects to serve the demand side of the growing natural gas market continues to build. This gives us great confidence that we will continue to deliver high-quality, long-lived cash flows from our competitively advantaged assets. I want to remind you about our Analyst Day on May 13. You can find information related to this event on our website, as John pointed out. We look forward to sharing our great future with you. With that, we will open the line up for questions.

Good morning, guys.

Good morning.

I guess my first question is you sort of talk about a host of projects I think it’s about $9 billion worth of capital to be spent over the next couple of years. I was wondering if you can sort of talk about plans to finance these assets? Is there enough EBITDA coming in place in 2015 that your leverage ratios can support you investing mostly in debt or alternatively will you need to rely on the equity markets as well?

Good morning, Shneur. This is Don. I think the beauty of it is those projects come in fairly ratably during this period. So, I think you can look at it as a continuation of the kind of organic growth that we have seen over the last several years. We have a lot of that built into our near-term plans for 2015 as it stands. Not to say that there couldn’t be some additions, but we think the capital additions would be relatively modest. It could require some additional debt and/or equity, but we think that will be pretty modest in 2015. Certainly, as you can see in our guidance, the capital falls off somewhat in ‘16 and ‘17 and that will be filled with some of these organic projects as they are contracted and/or sanctioned, and we would expect a combination of debt and equity to finance those in the future.

Okay, great. And just a follow-up to some of your prepared remarks, you talked about the potential for drilled uncompleted wells in the Northeast. Is this a scenario where we would see those volumes really manifest itself in the second half of this year after the summer smoothing gas prices that we typically see or is this something that could take longer to play out? And then, if you can also talk about what the impact would be on the legacy access assets as well too in terms of the fee of service rate structure that you have in place?

Yes, sure. I will take that in two parts. First of all, just to clarify, what we are seeing is actual shut-in of existing flowing production. My comment around the drilling operations was comprehensive to both the drilling and the completion. So, we are not seeing a lot of drilled wells not being completed, we are just seeing actual decisions to shut-in production because of extremely low netbacks in some of the constrained areas up in the far Northeast part of the Marcellus. Regarding the second part of that question, yes, the areas that we see that we would see that pick up to the degree lower volume coming in, we would see that affect the cost of service calculations for the future if those volumes didn’t flow. We will have Bob Purgason giving a nice tutorial at the Analyst Day, providing more detail around the way some of those contracts work in this environment.

Cool. And one last follow-up, I was wondering if you can just talk about the Canadian oil fields business for a minute, margins have been challenged and so forth. What steps is Williams taking to try and improve that or is it really just going to be dependent on the macro environment?

Yes, great question. I would say that first of all, pricing in the quarter on propane was extremely low. We actually saw Edmonton propane lower than the value of natural gas, which certainly did hamper results. The long-term solution to that is our PDH project, which will provide great markets for those captive propane barrels there. The propylene market remains strong and we are railing that out of the area as part of our PDH project, as we’re excited about that. To the degree we go ahead with that project, it will open markets for propane through conversion to propylene and also provide a new market for propylene via the downstream facility. We are working to open up markets for those stranded products and that’s our ongoing effort. We also have structural contracts that will buffer the value of our products and reduce the volatility we have seen.

Great. Thank you very much, guys.

Thanks.

Good morning, everyone.

Good morning.

I just wanted to touch on the acquisition of the 21% equity interest in UEOM. Given it was immediately accretive, you guys still are or at least WMB is waiving $43 million of IDRs between now and ‘17. Is this because the JV is reinvesting its cash flow back into the business or is there something else going on?

Christine, this is Don. Good morning. Williams chose to waive the IDRs because it’s a business that also has quite a bit of growth. The cash flows in the first year or two are not nearly as robust as they are a few years out. That’s why it’s immediately accretive is the willingness of Williams to support the acquisition, as we think it’s strategic and we expect it will provide attractive returns. Does that answer your question?

I guess just a follow-up – actually, I will follow-up offline. Pricing for Geismar at least for the existing facility, I know that you have numerous contracts, but from what I understand at a high level, the reference pricing is Mont Belvieu, but I think you are actually selling it in Louisiana. So, are the contracts structured so that it’s Mont Belvieu plus some fixed number on top of that, maybe $0.02 or $0.03, because that’s what the customer would have to pay for transport if they were physically bringing it from Texas? And then it’s – some of the expansion capacity that will be exposed to the actual spot pricing in Louisiana, which is currently $0.10 to $0.15 higher than Belvieu. Is that kind of how I should be thinking about it?

Yes. Christine, actually those contracts are swaps back to the Mont Belvieu market. There are exchanges between parties that have product in the river versus those that have demand at Belvieu, and those are actually set up as swaps. You shouldn’t build anything on top of that. The way the business is structured is, of course, there are different contracts, and there is quite a bit of complexity to it. The right way to think about it is that we have customers who have a call on about 80% of our production at Geismar. Sometimes they take all of that, sometimes they won’t. If they don’t take all of that, then we have the 20% plus whatever they leave for us to sell into the physically highest value market.

I see. That’s very helpful. And then what about the expansion capacity? Is that going to be the same way, or that’s going to be actually exposed to spot pricing in Louisiana?

Well, as you can think about a lot of the actual expansion, we are running at about 70% of total expanded, which is very close to base rate. The number I quoted at 80% is up to about 80% of our production. So at the base rate, we don’t have any excess provided that people call on their volumes.

I see. Okay, that was very helpful. Thank you. Could you also talk about expectations for the ethylene market, maybe near-term and medium-term? It sounds like worldwide supply demand is pretty tight for the year and maybe is short in the U.S. next year, but any insight would be helpful?

Yes. I am going to ask John Dearborn to pick up on that, please.

Yes. Thanks, Christine, and thanks for the lead-in on the subject as well. From our perspective, we would be a bit bullish on ethylene as the year wears on, but we don’t want to set unrealistic expectations. If we look at steadily increasing oil prices, strong demand, and strong margins in the derivatives market here in North America, we will be filling some underutilized assets in the Louisiana market. We came into the year with relatively low inventories, and all of that would lend credibility to a positive outlook for the year. Of course, how the market performs is yet to be proven.

Great, thanks so much.

Thank you. Good morning, everybody. John, can we just kind of keep on the thread of the ethylene price for a second? I am trying to reconcile thinking that we would be on a gradual strengthening through the year versus it sounds like Alan, what you said for planning purposes is we are keeping it more flat at this $0.38 level. What’s going to have to happen to kick the ethylene price back into the higher paradigms? Is there a gating event we should be watching or is it something as simple as just global GDP?

Thanks for the follow-on question. There are several factors that could influence prices moving up. This is a natural tightening of the market as these uses of ethylene grow year on year globally at around 2-3% a year. This market continues to grow and supply has been relatively stable without high new supplies coming in. You could imagine there will be continual pressure on demand. We are going to un-restrict the market a bit here but from Louisiana and Texas, that should help the Gulf Coast market. If there are accidents in some of the crackers around the system in the Gulf Coast, that could cause a negative supply shock to the market, impacting prices. Overall, it’s a general growth in the ethylene building markets where we can enjoy positive pressure.

That’s very helpful. Thank you. Alan, I understand you guys are going to be doing a deep dive here shortly, but is there any additional color to share on Appalachian Connector at this point, whether it’s on a slow burn or anything incremental to add?

Not much to add at this point, Carl. I would simply say the market is trying to act around that. We are seeing a mix of producer push and market pull, trying to find the right balance of that. One of our primary goals there is to ensure we have the very best market outlets available for our upstream assets from OVM. We have been focused very tightly on that.

Would it be fair to say that the last timing update is potentially late 2018 for service? To meet that date, you would likely need to get contracts by the end of 2015, correct?

Yes. I would say that’s getting pretty late if it pushes back that far. I think people will learn some lessons on that effort in trying to get built through tough areas.

Hey, Alan. How are you?

Great. How are you doing?

I'm great. I just had a couple of questions. I’m not sure if this is for you or for Don, but looking at the project calendar, it looks like the CapEx on Atlantic Sunrise came down by about $200 million from the time you reported Q4. What drove that?

Yes, sure. That’s pretty exciting news. With all the resources around massive drilling in the U.S. and the fact those are slacking, we are starting to see that translating into our sector. That reduction was based on a number of things, one was a firm that we now acquired, and the pipe is purchased at lower prices, with the price of steel down. We are also seeing softer prices on contractor rates for construction practices as well. The team is looking for every opportunity on that. We had a lot of contingency built into that. We are just taking some of that out now.

So Alan, is that something we are likely to see on some of the other projects you are advancing?

Absolutely. We are seeing significant relief on major equipment and steel prices and availability of engineering resources. The actual construction costs are coming down. However, we need to leave some contingency for the regulatory environment which continues to get more difficult.

Great, that’s helpful. My second question concerns the ACMP side of the business. I think you guys have reiterated the CapEx plan there, roughly 21% of the $9.3 billion. Is the CHK CapEx reduction already anticipated in that number or is there downside to how much CapEx might put in the ACMP side in conjunction with Chesapeake’s slowdown?

Yes. I think what you are seeing is the big build-out on our systems has largely already occurred, so even though we are seeing a current decrease in capital, you are not going to see something significant, because the infrastructure has been built out.

Understood. So, in terms of the cost of service modeling that we had done historically on ACMP, the major driver of that is how much you could deploy in any time period? What visibility do you have on that side moving past 2015?

Yes. I think we will talk some more about this at the Analyst Day. In fact, I have good examples of how the cost of service models respond in this environment. However, remember, the bulk of that build-out was in the early years and we had planned for capital to tail off in the out years, along with adjustments for some contractual growth that occurs as a result.

Great, thank you. I look forward to more color on the 13th.

Thank you.

Good morning, guys.

Good morning, Craig.

Don, to start with your answer to the equity issuance question didn’t exactly sound like what I thought I heard on the last call. Are you more agnostic as you see how commodity pricing shakes out and how does CapEx deflation pressure reflect on those kinds of decisions?

Craig, thanks for the follow-up. Again, I was commenting on the modest amount of equity required to execute plans in our guidance. There’s a lot of projects, and I was commenting that those would require additional financing, a combination of equity and debt. The guidelines will really be maintaining our credit metrics and ratings.

Got it. So, the base plant hasn’t changed at all in terms of funding despite some of the Q2 headwinds you’ve described?

Yes, there are some modest changes obviously, the UEO was not part of the plan.

Any further thoughts on ACMP WPZ merger-related commercial opportunities and CapEx savings over the $50 million in cost synergies?

The commercial opportunities continue to be exciting, particularly in West Virginia and Southwest PA. The combination of our joint venture and Liquid Clearing outlets for that business is attractive to us. The opportunities have probably been better than we expected, because we have Access providing greater reach and capabilities in connecting and compressing in that area.

Great, that’s helpful. And last question, any color on PDH and Geismar 2 opportunities?

As I mentioned, we enjoy cost reductions on pipeline projects, and we also see that on heavy equipment costs for projects like PDH. We are getting refined estimates on PDH as we move closer towards a final investment decision on that.

Good morning, guys.

Good morning.

Alan, looking at your project backlog, it seems you have rolled forward a year and added $5 billion. Is that a function of rolling forward or are there quite a few new incremental projects?

There are a few incremental projects, along with firming up some medium-term projects that just came in unexpectedly. Several market-type expansions on Transco and sizeable opportunities from LNG exports and Mexico have come into focus. Our successful open seasons are adding new projects.

Okay, that’s helpful. Are we moving from a supplier-driven project query to demand-driven projects?

We absolutely are, and I’m very excited to see that. The natural gas market growth has been supply-led, putting lower prices out, which has encouraged demand.

Thank you, I appreciate the color.

Thanks.

Good morning. I was wondering if there is building conservatism to your maintenance CapEx guidance of $430 million? Roughly $15 million this quarter seems to be seasonality or some hint of built-in conservatism?

No, I wouldn’t say that; that’s seasonality. We have winter weather and crews would be tied up meeting peak demands. We typically see that in the first quarter. You will see those dollars increase over the summer months.

And then on the Canadian PDH facility, is that included in the CapEx guidance you gave for the MB side?

No, it is not included in guidance. It’s in that potential pie, the $30 billion, but not in the $9.3 billion guidance.

I am trying to understand your capital spend in relation to the projects coming online. It looks like Horizon upgrader comes on in Q4 ‘15, and what are you spending in 2016 with a $185 million plan? What’s going on there?

Great question. We are excited about being on the tip of the iceberg for building out infrastructure for the Petchem expansion. A lot of capital in ‘16 focuses on expanding some of these pipelines we bought a few years ago. This capital is making interconnections and pushing into markets.

Okay, thank you!

You can see some of those projects on what I believe is Slide 37, and we will provide more detail on them at Analyst Day.

Good morning. Alan has alluded to some challenges in receiving permits. Could you walk us through the process of bringing Constitution into service in the second half of 2015 and what variables could lead to an in-service date at the front end versus the latter part of the year?

Great question, I’ll ask Rory to provide more detail on the Constitution project.

We got our FERC certificate for the Constitution project a while back. However, some permitting was delegated to the state of New York. We have most everything we need except for the final New York DEC permit. We have secured our land and right-of-way. We are finalizing details on wetlands issues and the New York DEC is working closely with us. We are optimistic about getting the permit in the next couple of months and also expect a Corp of Engineers permit will follow.

So, the DEC is taking comments until May 14. Do you think they could issue the permit in June?

I do think so. This latest re-filing we did with New York DEC was procedural. They emphasized that we have addressed all previous comments in our application. The additional comments period is for potential new input, which I feel has been adequately addressed. This doesn’t introduce new risk into the timeline.

And can you talk about the air title permit related to the compression station upgrade?

I think we have that covered; the water issue is really the key point we need to get through.

Okay great. Thank you for the color.

You bet.

Good morning. Just curious on the shut-in volumes. Can you quantify the impact of that for the quarter or the magnitude going forward?

I’m sorry, could you repeat that?

The shut-in volumes, can you quantify that?

One of the more obvious pieces is that Cabot has made some announcements. We expect that to translate to about $300 million to $500 million of shut-in volumes over the next several months. Most of that we expect will affect the second quarter, during the shoulder months.

Got it. Would you characterize what you are seeing thus far in the first quarter as consistent with what you are planning in your guidance?

Yes.

Absent the shut-ins?

Yes. Very close to it, staying right in line with expectations.

One last question. You talked about the dry gas Utica, and one of your competitors is discussing opportunities there. Can you talk about competitive dynamics with the increase in number of MLPs up in the region?

Yes. Whoever has got the pipe in place with best market outlets is likely to win that business up there, and we have positioned ourselves well. It's always possible for anyone to come in and buy business. We are set to make a nice return by capturing the business we are positioned to capture.

What could help you in that market?

A multitude of market outlets should be in place, not just one, but multiple market connections. Our efforts in making sure we have the best market outlets is ongoing.

Thanks, Alan.

Thank you.

Hi guys, good morning.

Good morning.

Now that the commodity backdrop has stabilized, do you have an update on the drop-down of the remaining NGL Petchem projects at WMB level?

Abhi, this is Don. No update right now, but we will talk more at Analyst Day. There is no urgent need to move it particularly when equities are trading better.

Looking ahead to Analyst Day, are you thinking about reintroducing segment-level guidance?

Yes, I’d just say stay tuned for Analyst Day.

Hey, good morning guys. Most of my questions have been answered. I have a macro question for you, how do you see the Northeast NGL scenario play out? One of your peers mentioned running at 90% utilization just firing NGLs into the base as we get into shoulder season.

Yes, Timm, we’ve been concerned about this. We believe the clearing of liquids out of the area will occur by rail. Despite expanding our rail capacity, our inbound at Conway is fully contracted for summer. I think that reflects that NGLs are moving out by rail and going to any location where they are needed.

Can you tell us how much of it is going to rail from Conway?

I don’t have the specifics on that.

In terms of building additional storage in the Northeast, specifically above-ground storage, do you have any sense of how much more expensive it is versus in the Gulf Coast?

Building storage in the Northeast is very expensive because we don’t have salt formations. There are a few projects we are looking at with Access, but they are limited due to lack of suitable geological formations.

So your view is that Northeast needs another export solution in the next couple of years?

Yes.

Good morning, guys.

Good morning.

Good morning. Thanks for all the color this morning, it’s been very helpful. I just wanted to touch base. There has been chatter in the marketplace for potential family level consolidation to improve the family’s cost of capital. Our impression has been that there is not really a rush to do that. Could you provide any thoughts on your cost of capital and your thoughts on this consolidation?

Jeremy, this is Don. We believe WPZ is positioned to improve its cost of capital. We have discussed this periodically in the past, but we can certainly talk about it at Analyst Day.

Okay, fair enough. Thanks.

Great. Thank you all very much. Appreciate all the great questions. We are excited about bringing all of these projects online, and we really look forward to talking to you in more depth here on May 14. Thank you for joining us.