Williams Cos Inc (WMB) — Q2 2017 Earnings Call Transcript

Thanks, Alicia. 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 press releases and related investor materials, including the slide deck that our President and CEO, Alan Armstrong, will speak to momentarily. Joining us today is our CFO, Don Chappel; and our Chief Operating Officer, Micheal Dunn. 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 reconciled with Generally Accepted Accounting Principles, and these reconciliation schedules appear at the back of today's presentation materials. So with that, I will turn it over to Alan Armstrong.

Great. Well thank you, John, and welcome everyone. I'm going to keep my remarks fairly brief this morning so we can move quickly to your questions. I'd like to start by thanking those of you who attended our recent Analyst Day event. It really was great to reengage with a lot of folks and to lay out our solid plans for Williams in the course we've charted to deliver on this low-risk, sustainable growth and a very focused and clear strategy that we continue to execute against. I was also pleased to introduce our new COO, Micheal Dunn, at Analyst Day. He's really hit the ground running and is making a big impact on our operations through his commitment to execution and accountability across the organization. Within Micheal's organization, we recently announced the appointment of Frank Ferazzi as Senior Vice President of Atlantic-Gulf. And Frank replaces Rory Miller, who announced his retirement earlier this year. Frank's previous role was running our Eastern Interstate, so we've got a nice continuity there of leadership in that area. More recently, we've added another key player to our leadership team. Chad Zamarin came onboard as Senior Vice President of Corporate Development in late June. Chad joined us from Cheniere and is focused squarely on the opportunities and larger strategic initiatives that we can drive from an enterprise level. We're excited to have Chad join us here and his energy level, and he's got a lot of wood to chop, and he's getting right after it. So excited about the new energy we've got here at the senior leadership team. We're also pleased with our efforts to drive costs out of the business, continually improve our project execution, and we've made some strides on further improving our operational safety metrics. On July 6, we completed the sale of Geismar to NOVA Chemicals. That sale, along with the sale of the Canadian assets last year, removed a significant amount of commodity risk from our business, as you're well aware. We now stand at around 97% of our gross margins coming from predictable fee-based sources aligned with natural gas volumes. This move also allows us to streamline the support services around the organization, as we have narrowed our lines of business, and we continue to grow scale within these fewer lines of business. We also used a portion of the proceeds in the quarter to pay off our $850 million term loan, further strengthening our balance sheet, which we've made tremendous progress on here in the last 12 months. The team executing on the Geismar sale did a great job, and I really want to recognize their tremendous efforts; I'm really excited about the way that transaction was executed by our team. We're also crisply executing on our 2017 project commitments. You'll remember, we talked about our key 5 projects that are coming online in 2017. Of course, that was Gulf Trace, Hillabee Phase I, Dalton, New York Bay, and the Virginia Southside II project. We're chipping away at all these important projects. As you know, Gulf Trace came into service in the first quarter. Hillabee Phase I, which provides all of the supply for Sabal Trail, came online in early July. And then just this week, on August 1, the Dalton capacity was placed in service to serve northern Georgia markets from supply points at the northern end of Transco. This is an exciting project as we are starting to provide capacity moving for the northern end into these growing southeast markets. Our line of sight for future growth is evident as we target the second half of '17. In-service dates coming up for Virginia Southside II, New York Bay, and also, we'll get Garden State Phase I in this year as well, it looks like. In summary, if you think about the $1.4 billion roughly in projects that we were going to be placing in service in full, about 20% of that came on in the first half of '17. Another roughly 55% is coming in this July/August timeframe. The balance will be in the second half of '17. Great job by our teams. That is a lot of work that's been going on to execute on that with plenty of resistance in a lot of these areas, but the team is doing a great job of executing in the face of that. Let's look at the results for the second quarter of '17 now. We met or exceeded our business performance expectations in all three remaining businesses. Although the results were somewhat offset by Geismar's continued outage and lower margins, the go-forward business, which excludes the NGL & Petchem, was up 6.6% over 2Q of '16 on an adjusted EBITDA basis. As you probably know, we will not have any continued operations or assets to be reported in the NGL-Petchem sector other than what will come through in the third quarter as we wrap up the closing for Geismar in the third quarter. Looking at our GAAP results, WPZ delivered $320 million in net income in the second quarter. Once again, we demonstrated the long-term benefits of our strategy, as we delivered year-over-year growth on our adjusted EBITDA measure for now the 15th consecutive quarter. WPZ's adjusted EBITDA of $1.1 billion was a $39 million increase over '16, primarily due to increased fee-based revenues and an increase in proportional EBITDA from joint ventures. Distributable cash flow for the quarter was $698 million, which was down over the second quarter of '16, primarily from the planned removal of $58 million in noncash deferred revenue amortization associated with our fourth quarter 2016 contract, where we restructured the Barnett Shale and some of the Mid-Continent region business. This is nothing new. We mentioned this reduction on our last quarter's call as well. Importantly, the WPZ coverage for the quarter came in at 1.22 and this puts us at 1.27 for the year-to-date. The cash retained due to this healthy coverage supports further investment in our leading growth portfolio. Now let's take a look at each of our segments, starting with the Atlantic-Gulf, where continued strong performance, coupled with expected growth for the balance of the year gives us confidence we'll achieve our prior guidance on both adjusted EBITDA and DCF. Our adjusted EBITDA for Atlantic-Gulf came in at $462 million, an increase of around $94 million or almost 26% over the first quarter of 2016. The increase was primarily driven by an $88 million higher fee-based revenue from increased volumes through our Gulfstar One due to the Gunflint tie-back, which happened in the third quarter of last year, and stronger volumes from Tubular Bells and other Transco expansions that just keep coming online. This is another proof point of our ability to deliver predictable, sustained growth from markets along Transco and further demonstrates our leading position out in the Gulf. In the West, gathered volumes were up approximately 4% versus the first quarter of 2017 after we adjusted for the Marcellus-Permian transaction. The seasonal issues experienced in the first quarter this year have lifted, and we continue to place a sharp focus on cost and operational discipline throughout our Western operations, which now includes what was previously the central area as well. For the quarter, our adjusted EBITDA came in at $372 million, down versus 2Q of '16, primarily due to the Barnett and Niobrara contract restructures, while declines were partially offset by a $14 million reduction in O&M and SG&A expenses. In the Northeast G&P, volumes increased in our Susquehanna and Ohio River Systems but declined on our rich Utica systems compared to 2Q '16. We talked last quarter about being at an inflection point on the Utica volume increases, and we continue to expect a pick-up through the rest of the year. Specifically, we've seen dramatic declines in the wet Utica over the last five quarters but expect that the Chesapeake rigs will move back in and begin to offset previous declines later this year and into 2018. However, it's important to remember that infrastructure constraints continue to limit Northeast volume growth. In the second quarter, Northeast adjusted EBITDA increased $26 million compared to the same period last year. Increased Bradford ownership resulting from the DBJV sale primarily drove the increase, with Marcellus volume growth offset by rich volume declines we talked about earlier. Fee-based revenues remained relatively stable through the period. As I wrap up, I emphasize that we're pleased with where we are in mid-2017, especially on our project execution. Our solid performance and focus on execution this year positions us very well going into '18.

Good morning. Right now, we're looking at three primary permits to finalize the permitting process. One is the 404 permit that the Corps of Engineers is processing. The other two are from PDEP for the Pennsylvania Department of Environmental Protection. Those are 102 and 105 permits as they're designated. All of these are water-related type permits, and we've obviously finished all the public comment periods for all of these. We expect these permits to be in hand in August, allowing us to start construction shortly thereafter. What will happen after we receive those permits is we would go back to the FERC and ask for a notice to proceed. At that point, we would be able to begin construction on the project.

They're a little bit ahead, but part of those obligations they had was a certain number of wells turned in line. What's been surprising to us is not the number but really the performance they’ve had on those wells; they’ve continued to do better on those. We do have a new piece of capacity coming on our Springridge system, which will add about 150 million a day of capacity. That is needed because there are volumes stacking up behind that. So we are excited to be turning that on in the very near future to unleash some volumes in that area. We have noticed an uptick in the West, mostly recovery from production and freeze-offs in general. In the Barnett, we’re starting to see Total; remember they had about a $40 million a year obligation for drilling dollars in the area.

I appreciate the update on Southeastern Trail. I wonder if you can give a little more sense of how much capacity you're marketing there, the type of capital you might be deploying, and what kind of returns you're looking at on that project, please?

Just a clarification on the Petchem segment. So there will be just that first week when Geismar was still technically before it was finally sold in that first week of July? And then, the RGB Splitter, that was sold, is that correct?

We do not expect a cash tax drag related to the Geismar sale. There could be a modest amount, but right now, it's expected to be zero or a very modest amount.

I just have one question. We've seen some consolidation among producers in the Northeast. Are you seeing any initial signs of any of these guys wanting to monetize? What do you think we need to see for the opportunity for some of your partners wanting to get out of the JVs they're in with you?

We continue to expect something coming out of the Second Circuit. We are very encouraged by the D.C. circuit ruling on Millennium, which told that the New York DC had waived and that they should go to the FERC for their permit. That was very instructive relative to Constitution. We continue to push on that. Nothing moves very fast on that front, but we remain optimistic about the pathway.