Williams Cos Inc (WMB) — Q4 2015 Earnings Call Transcript

Thank you, everyone. 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. 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. We also have the five leaders of Williams' operating areas with us: Walter Bennett leads the West; John Dearborn leads NGL & 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. Also included in our presentation materials are various non-GAAP measures that we reconcile to generally accepted accounting principles. These reconciliation schedules appear at the back of the presentation materials. Over the past many months, we've taken many questions related to the merger between Williams and Energy Transfer. The focus of our call today is our fourth quarter results and business outlook. So we're not going to take questions on the pending merger or other related matters. However, before we discuss our fourth quarter and year-end 2015 results, I can provide a brief update on the transaction. Williams' Board of Directors is unanimously committed to completing the transaction with Energy Transfer Equity per the merger agreement executed on September 28, 2015, as expeditiously as possible and delivering the benefits of the transaction to Williams' stockholders. Completion of the pending transaction remains subject to the approval of Williams' stockholders and other customary closing conditions. Integration planning is underway. As previously discussed in Energy Transfer Corp. registration statement on S-4 filed November 24, 2015, ETE and Williams received a request for additional information and material from the FTC pursuant to the HSR Act review. On February 1, 2016, Energy Transfer Corporation received additional comments from the SEC related to the first amendment of the S-4. Certain requests made by the SEC relate to information that will be included in ETE and Williams' 10-Ks, which the companies expect to file the final week of February 2016, so next week. Therefore, the companies now expect to file a second amendment of the S-4 shortly after filing those 10-Ks. With that update, I want to reiterate that we won't be taking questions regarding the pending merger or other related matters. As always, please feel free to contact our Investor Relations teams for questions you may have. Thank you all in advance for your cooperation. And with that, I'll turn it over to Alan Armstrong.

Thank you, John, and good morning, everyone. Thanks for joining us. This is going to be a fairly brief presentation; we do want to look at the fourth quarter results and also drivers for the full year. We'll offer our perspective this morning on one of our very important customers, Chesapeake, and a lot of concerns have been raised there. We'll look at upcoming drivers that'll drive 2016 along with our 2016 capital plan. Finally, some thoughts on the strength of our strategy in this difficult commodity price environment. We're very pleased with the way our business is holding up and the kind of opportunities that continue to come our way in our effort to connect these low-price natural gas supplies to growing demand markets. So with that, let's look on slide two here. We recorded another strong quarter demonstrating our continued project execution, reliable operating performance, and the resilience of our business to grow despite sharply lower commodity prices and what turned out to be a very mild start to the winter here in the fourth quarter. Even with the reduced producer activities in the supply areas, we enjoyed continued growth in fee-based revenues, primarily from demand-driven projects and expansions that were brought into service during the year. Our continued focus on a clear strategy, project execution, and cost management are evident in our results. Very importantly, despite the pressures impacting the industry, we once again saw dramatic growth in our fee-based revenues offset the impact of continued lower commodity prices. In fact, our adjusted EBITDA was up 25% over 4Q 2014, and our full-year adjusted EBITDA was up a total of 26% despite very low NGL and olefins margins. I think those are impressive statistics across all of our systems. Just on our gas gathered volumes, we were up off a very big number in terms of our total gathered volumes. We were up 6% on total gathered volumes for the year despite lower producer activities and very significant curtailments that continue to exist. Looking directly at the fourth quarter, the WPZ DCF of $718 million produced a coverage ratio of 0.99x. This is before we would, if you were to include the substantial impact of the $209 million IDR waiver, which would lift our coverage up to 1.39x. This is not insignificant and certainly provides support for funding our 2016 growth capital program. Highlights for the fourth quarter of 2015 compared to the fourth quarter of 2014 include the following: first of all, fee-based revenues were up $139 million or 12%, driven primarily by Atlantic-Gulf, with many fee-based assets that came online during the year as well as growth at Access. Our olefins margins were up $43 million to $71 million, and this was strong operating performance at our Geismar plant, with low per-unit margins due to low olefins prices. So, great results on the operating side at Geismar and across all of our NGL & Petchem Services during the quarter, though we faced relatively low olefins margins there in the fourth quarter. The proportional EBITDA of equity method investments were up $37 million or 22%, most of that was from our Discovery asset where the Keathley Canyon Connector continues to perform excellently. There was a little bit of maintenance during the period, but those volumes remain very strong out there on that system. NGL margins were down $45 million or 52%, and NGL prices in the fourth quarter were at a 13-year low. The full-year 2015 NGL margin was only $160 million, which represents less than 4% of our consolidated EBITDA during 2015. I do want to note a significant impairment we took in the fourth quarter, largely due to the dramatic decline in the market value of WPZ and some tests required against the full market value. As you'll recall, the impaired equity method investments and certain of the impaired goodwill primarily relate to the acquisition of Access Midstream Partners, which we were required to book a significant $2.5 billion gain in 2014, reflecting our purchase price allocation to these assets. A few thoughts on the results by segment: Atlantic-Gulf had another great quarter, up $122 million all on fee-based revenues, very impressive growth continued there in the Atlantic-Gulf. For the full year, Atlantic-Gulf was actually up $453 million, with many of these projects stemming from Gulfstar One, as well as the Transco expansion projects and again the Keathley Canyon Connector on our Discovery system, resulting in significant growth in our fee-based revenues. This was offset slightly by lower NGL margins; however, overall, we achieved very impressive performance. You might have noticed that Atlantic-Gulf had a little bit of higher costs in the fourth quarter, primarily related to repairs on the Leidy Line as well as additional testing required by regulators due to a rupture on that line earlier in the year. On Access, which will now be known as the Central OA, we reported fourth-quarter 2015 adjusted EBITDA of $351 million compared to $325 million, driven by continued business growth, coupled with an increased ownership interest in the Utica East Ohio Midstream joint venture. On Northeast G&P, it was flat from fourth quarter 2015 to fourth quarter 2014, but it represents 30% growth year-over-year, moving from $276 million to $356 million in 2015. This was driven by increased service fees at Ohio Valley Midstream and higher overall volumes, offset by higher operating expenses, including some line repairs that were necessary earlier in the year. A critical note here: we signed a new gathering agreement with an existing customer recently, which is exciting as it involves a lower rate for the customer but also includes incremental volumes and larger acreage dedications. We are not counting on any new drilling anticipated here for 2016; even without that new drilling, we expect our revenues to remain flat for 2016, thanks to the new volumes from this transaction and some new production tie-ins. A lot of similar stories in the Northeast where we continue to focus on tying in production that's already been drilled, rather than relying on new drilling rigs. The critical force will be when we see takeaway projects coming to fruition, as that will alleviate bottlenecks, rather than new rigs running. On the NGL & Petchem side, our operating results have been strong, yet we faced lower unit margins during the period. While we’ve seen great operational performance in Canada and Geismar, our unit margins faced challenges. To recap, for the year, we were down $216 million, mainly due to the absence of insurance proceeds and approximately $89 million lower commodity margins. Moving on to slide three, we wanted to address the relationship with Chesapeake, given investor concerns about credit risk. We want to highlight that we have a strong relationship with Chesapeake; they operate excellent assets in the nation's best shale resources with some of the top acreage in large contiguous blocks. We are consistently impressed by their ability to lower costs and work out creative solutions. They are paying their bills timely, including our minimum volume commitment related to the Haynesville, and we confidently expect them to handle the MVC invoice on the Barnett when it becomes due. While we do remain mindful of the credit risk posed for producers due to lower prices, we have long-term contracts with robust conveyances of interest in unproduced gas. We're well aware of the ongoing bankruptcy cases like Sabine, but our unique contractual position minimizes exposure. Our gathering lines are physically connected to Chesapeake's wellheads. We have invested capital to build these lines specifically for their needs and size, making replication costly for others. The rates of return we generate from these investments are typical for midstream providers. Moreover, because our gathering lines have been in place for a while, the reserves behind them are partially produced. Thus, Chesapeake will need to utilize our gathering lines to continue producing gas and generating revenue. In summary, we maintain high confidence in Chesapeake's management capabilities and operational strategies going forward. Moving on to slide four, I want to reiterate that the demand side of the natural gas market is very influential in our capital investments. The Transco Leidy expansion, for instance, began operations on December 8, and we've been progressively bringing segments into service. The Transco Gulf Trace project, which serves Cheniere's Sabine Pass LNG facility, is underway with a 2017 in-service target. As for the Marcellus and Utica volumes, we are observing both available production growth and price-related shut-ins in the quarter, causing a bottleneck that needs to be addressed to allow for moving gas through our systems. Currently, we have over 33% of the gathered volumes in the area. So overall, while producer capital is limited, we find ourselves in a favorable situation without the need for extra drilling capital. Lastly, with our Geismar plant, we've surpassed production expectations and are optimistic about forthcoming revenues from the Horizon project and other tieback initiatives.

Christine, this is Don. Good morning. Great question. We've been in regular dialogue with S&P and the other agencies. I can't speak for the agencies specifically, but I think we've had constructive conversations and I think they appreciate the strength of our business, as well as some of the challenges we face, and we look forward to their decision. We are very focused on maintaining our investment-grade rating, but it's ultimately their decision.

Okay. I guess in that context, you stated at least $1 billion of asset sales in the first half of 2016 in your original press release. What kind of asset sales are you assuming? And I'm curious to know if you started this process and the types of parties you're speaking with?

I would say that we're preparing for the asset sales. We've not launched anything yet but remain confident that we can sell the assets and generate the liquidity previously outlined in the second quarter. However, we aren't identifying the assets at this point, as we have several assets we could monetize. We will keep our options open and remain confident in our ability to do so. The merger does not have to close for us to execute on that; it will depend on the timing of the merger.

Yeah, to clarify, those contracts are comprehensive, so it would be all or nothing. Even if a bankruptcy court were to say they cannot be rejected, it’s still pertinent that they’ll either accept or reject the contract entirely.

Great. Thank you so much.

Good morning, gentlemen.

Good morning.

Good morning.

Alan, I’ll start off on a bright note. Transco expansion projects look like they're on track for a multi-year period. Would you care to compare Transco’s projects with other projects in the queue and their likelihood of moving forward?

We do not have those risks in our projects right now. They are fully contracted and have secured credit backing. We don’t face such risks that other projects might have. We are confident in our position.

Is there any chance of incremental counterparts on projects that may not move forward? Would that eventually benefit Transco?

There would have to be expansions likely since our projects are fully backed by contracted volumes.

Understood. On the gathering and processing CapEx more than halved, is there a risk that the $700 million might get reduced further in 2016?

To some degree. We’re reliant on the operators’ indicated capital spending which continues to change. In areas like Marcellus or Utica, we manage that closely.

Can we expect to see any increase in volumes from shut-ins returning as winter demand increases in the first quarter?

We have seen a bit of an uptick as producers are starting to bring back online some of the shut-in volumes. However, regional demand is tied to pipeline capacity and driven by weather. We expect to see some movement based on colder temperatures.

Thanks. I appreciate the details on the Chesapeake contract. However, are you willing to renegotiate? There’s a notion that contracts are impacted by the current commodity prices. What are your thoughts?

There's been no change in our tone; we continue our relationship with Chesapeake strongly and are navigating any potential negotiations based on the current market situation. Our rates are set based on our capital investment and are in line with market returns.

Can you provide us with the returns you're currently earning in Barnett and Haynesville, as well as Chesapeake’s contribution to your EBITDA?

It’s about 20%, give or take. Recent figures indicate it’s approximately 18%.

Great. My last question is about the Transco bond you did. Is that a tool you may use as a stand-alone leverage relative to other financing sources?

We plan to keep Transco in a position that's favorable for its rate-making purpose. We're cautious about adding additional leverage to Transco, though naturally it will absorb some as projects grow.

Good morning. I have a few questions for you. Can you quantify the lower operating expenses targeted for 2016? Also, about the recently renegotiated contracts, are you looking to do more of those with other customers that aren't Chesapeake?

We haven’t shared an exact figure yet for operational cost reductions. Improvements are ongoing and will continue until the merger date, with further reductions anticipated post-merger.

We will continue to seize win-win opportunities in negotiations around lower rates, particularly when it drives gas flows that would otherwise be idle.

Thank you. Good morning. Can you clarify when you expect a decision from the credit rating agencies?

I can’t provide timing; that depends on the agency's processes. We’re providing anything needed to aid their rating decisions.

As we entered the fourth quarter, we had just under 1 Bcf a day shut-in primarily due to lower pricing and takeaway capacity issues. As we begin the year, approximately 1.1 Bcf a day is still shut-in as producers throttle production due to price, compared to our system's capacity. If that flows, we could see a significant increase in EBITDA.

You mentioned projects set for in-service in the first half of 2016. Can you specify the potential cash program for these tie-ins?

We haven’t specified cash figures, but you can infer they’ll be significant based on revenues from facilities like Devil's Tower and Gulfstar One. Operational volumes will see substantial increases as projects become operational.

Lastly, your thoughts on a potential reduction of distributions to support your investment-grade rating? Is that something you would consider?

We have various options available, including cost reductions and asset sales, but we remain mindful of cash flow pressures from distributions. While it's a possibility, we don’t have specific guidance at this time.

Just to follow up on the Chesapeake situation regarding MVCs. In bankruptcy, would they stay or are they treated separately from contracts?

MVCs are included in the contracts, and the decision lies with the creditors whether to accept or reject the entire contract. It’s all or none.

That's helpful. Thank you.

Thank you all for your participation today. We appreciate your interest in our company.