Williams Cos Inc (WMB) — Q3 2019 Earnings Call Transcript

Thanks Britney. Good morning and thank you 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 today is our Chief Operating Officer, Micheal 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 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 non-GAAP measures that we reconcile 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.

Great, thanks Brett. And good morning to everyone and thank you for joining us. As we discuss our third quarter financial performance, we also will touch on the key investor focus areas of the day as we usually do. So let's move right into the presentation and take a look at our third quarter results. On Slide 2, we provided a clear view of our year-over-year financial performance and as you can see, we continue to enjoy steady growth in our key measures despite the asset sales that we continue to execute on. In fact, I'm very pleased to say that our third quarter records for our fee-based revenues, our adjusted EBITDA were driven by record operated gathering volumes which exceeded 13 Bcf per day in the period and as well record contracted capacity on a regulated gas pipeline. These combined overwhelm the small amount of remaining NGL-margin exposure that we have seen in terms of margin contribution from the quarter. It's really nice to see our strategy of focusing on fee-based revenues and growing that are coming through at a time where we had a low cycle on commodities. But again, we powered through that with the growth in fee-based revenues. Taking it from the top, our cash flow from operations increased 15% for the quarter and 16% year-to-date, which continues to outpace our CapEx. Our CFFO has exceeded our CapEx by over $630 million year-to-date. We show 7% and 8% year-to-date growth for adjusted EBITDA, and I'll have more to say about adjusted EBITDA performance in the next couple of slides. We posted continued growth in adjusted earnings per share of 8% for the third quarter and 23% year-to-date, even stronger than our adjusted EBITDA increases. On DCF, we were up about 8% and 16% year-to-date with growth in the per share calculation and continued strong dividend coverage ratio of 1.79, exceeding both our 2018 coverage ratio as well as our guidance for 2019. Our ending leverage metric for the quarter was 4.47 demonstrating that we are on target with the four or five guidance we have for the year-end. So overall, nice improvement in our various earnings and cash flow metrics despite the impact of almost $2 billion in asset sales affecting the comparison and much lower commodity price environment that we had in 2018. Moving on to Slide 3, we discuss the main business drivers of our year-over-year adjusted EBITDA growth. Here on Slide 3, you can see that the adjusted EBITDA increased about 7% or almost 10% if you adjust for the bigger transactions that affect the year-over-year comparison. The adjusted EBITDA increased about 7% or almost 10% if you adjust for the bigger transactions that affect the year-over-year comparison. On the left side of the slide, we have unfavorable $47 million comparability adjustment, which includes removing the adjusted EBITDA from the various asset sale transactions completed during the last 12 months and then netting out the $13 million favorable item reflecting the addition of the incremental 38% UEOM ownership interest. Normalizing for those items, you see adjusted EBITDA growing $112 million or almost 10% on this comparison. Moving over to financial performance of our continuing business. Atlantic Gulf led with a 28% increase in adjusted EBITDA driven by topline Transco revenue growth from new expansion projects. Additionally, our third quarter 2019 Transco results reflect about $44 million of adjustments related to the settlement regarding our Transco rate case. I know there's a lot of questions on that and we look forward to shedding more light on that at our upcoming Analyst Day. Lastly, we did see a temporary drop in our Deepwater volumes associated with tropical storms and producer maintenance activities, but Deepwater production is back to normal for most producers now in the fourth quarter and actually growing in the Gulf East due to new production from Hudak to Northwood ramp up continuing. Next, looking at the Northeast G&P area, we see a 17% increase in year-over-year adjusted EBITDA, driven by an increase of about 1.3 Bcf a day were 17% higher gathering volumes. Volume increases were led by the Susquehanna Supply Hub and the Bradford areas which grew about 850 million cubic feet per day. Overall, our operated assets in the Northeast continue to see very strong growth in volumes across the board. And finally, in the West, we saw about a 16% decline driven by a $29 million decrease in revenues for our Barnett gathering business. This decrease was associated with the end of some minimum volume commitments in that area. Next, let's take a quick look at the adjusted EBITDA growth year-to-date. On year-to-date drivers, we see Atlantic Gulf up 24% and the Northeast up about 19% driven by the same factors as discussed. The West is down about 8% reflecting much lower NGL margins. Our full year West results reflect strong growth in the Haynesville, Eagle Ford and the Rocky Mountain Midstream franchise as well as our Conway storage and frac business. So, very happy with the growth we've continued to show in the Atlantic Gulf and Northeast this year and the stability of our volumes in the West. Operationally, a really strong performance is overcoming structural issues. As we look over the sequential comparison to the second quarter of 2019, I'd point out that overall gathering volumes increased sequentially just over 0.5 Bcf a day to now over 13 Bcf per day for the first time. This was led by a 5% second quarter to third quarter increase in the Northeast, with somewhat of a negative impact from the Deepwater production outages that we discussed. In fact, our West gathering volume trend continues to hold up well in a very tough commodity price environment. Now, we’re past the revenue recognition transitions, the steady nature of our West operations will become increasingly visible. Overall, we’re pleased with our operational performance in the third quarter and it's very encouraging to see the kind of volume growth we continue to generate in the Northeast and West G&P businesses. In fact, it’s the first time that I can recall our fee-based business growth being able to overcome a substantial decline in commodity prices, showing that our move towards a more sustainable and predictable cash flow is now really paying off for our long-term investors. Now, I'm going to move on to Slide 6 and take a look at the key investor focus areas. First, on financial guidance. We are reaffirming our current financial guidance for 2019. It has definitely been a challenging commodity price environment for natural gas and NGLs versus the market's original expectations and our own for 2019. But I am pleased to say that it looks like we'll be able to deliver on our financial guidance once again this year, despite this negative impact. So our 2019 results illustrate the steady and strong cash flow growth profile of our large-scale diversified natural gas-focused business and the security of our dividend even in a very tough commodity price environment. Moving on now to 2020 guidance, we're currently working through our 2020 operating and capital plan and intend to provide the 2020 financial guidance at our upcoming Analyst Day on December 5. We will also provide our latest views on the sustainability of our natural gas-focused strategy and our unique positioning to grow alongside the continued expansion of natural gas as a preferred fuel worldwide. Although we have confidence in the long-term sustainability of our business strategy, the current low natural gas and NGL prices have had a significant impact on the forecasted near-term growth from our G&P business, particularly in the Northeast. And clearly, our producers' forecasted cash flow has been heavily impacted by much lower strip prices for gas and NGLs. As a result, our 2020 Northeast gathering volume growth forecast has steadily drifted downward. However, as we mentioned earlier in the year, we are committed to keeping our guidance updated with our producers' plans and we've continued to make those changes as forecasts come in. Overall, we remain encouraged to see the level of EBITDA growth our Northeast G&P business can continue to generate in a very weak natural gas and NGL price environment. We believe it won't take a large price recovery to quickly restore growth rates above 8% for our Northeast G&P footprint. Let's transition to discuss our Transco growth projects. First, I'll provide an update on the rate case. We're very pleased that we have reached an agreement on the terms of the settlement and as a result, we've reduced the reserve we established against the cash received from the filed rates that went effective in March of this year. This, along with other related accounting entries, results in about $44 million in favorable adjustments and resolves the rate case with no need for hearings. The terms of the settlement are non-public until we file a stipulation agreement with the FERC and receive their final approval. So, we await the final FERC approval of the rate case but we're very pleased with the way it came out. Moving on to the status of Transco's major growth projects, we are still waiting for the State Water Quality Certification permits required for the Northeast Supply Enhancement project. At this point, the risk to our targeted in-service date is increasing. Although we will do everything we can to meet our targeted in-service date for the fourth quarter of 2020, it is quite challenging. We remain confident about bringing it across the line and are pleased that we were able to place our Rivervale South to Market project in full service ahead of schedule. The project expands Transco's capacity by 190 million cubic feet per day to service additional customers in New Jersey and New York City. We also received FERC approval for our important Southeastern Trail expansion. This project adds about 295 million cubic feet per day to the Transco pipeline system and is designed to serve growing markets in both Mid-Atlantic and Southeastern states by November of 2020. All of our Transco projects that have been permitted for construction are progressing well. We look forward to our upcoming Analyst Day on December 5th, which will give us the opportunity to dive deeper into the key issues and drivers for growth ahead of us for 2020 and beyond.

It sounds like Haynesville volume growth was fairly robust through Q3. Can you share your thoughts on how that's progressing here in Q4 and maybe what the outlook looks like for 2020?

I think there's obviously been a lot of focus on Chesapeake in the Haynesville, and certainly they've had a strong year of growth. Our teams have been out contracting with other customers and have been very successful. We will likely see some reduction in the growth we've enjoyed from Chesapeake volumes, but we’re excited about working with other producers to grow the Haynesville volumes.

In terms of those agreements, are those consistent with legacy terms or should we think about them as newly cut agreements that are more current market?

It's a combination. It depends on the market conditions in the area.

Can you characterize some of your discussions with producers around the Piceance and Southwest Wyoming footprints, and more specifically, have reductions in bank commodity impacted the private producers there?

We've seen steady volumes in the Piceance, which is a positive. Most of those producers are private funds with hedges in place, so they're drilling against those. In Wyoming, we've seen some slowing of growth but still some nice progress there. The biggest decline would be in the gathering upstream of our old power processing plant.

Could you talk about the Northeast capital spend? Relative to what looks like a Northeast G&P run rate spend of about $550 million this year, how low could that potentially go next year?

We will have a capital program, and there are expansions ongoing in Bradford that will continue into the second quarter. Capital investment in the Northeast won't be as robust next year compared to this year, but we will still have some spending.

Alan, I'd like to get your thoughts on the EBITDA growth trajectory. How do you think dividend growth may need to move in lockstep with projected EBITDA growth?

We don't see any change in getting outside of the steady 5% to 7% range for dividend growth. The cash flow growth is quite strong, and most of our capital, which is going into regulated projects, means the cash flow growth is highly predictable.

Can you shed some light on the Transco rate case settlement with FERC approval?

We cannot speak to that at this point. There are a number of trade-offs involved that we cannot discuss right now.

Can you discuss the 2020 CapEx? You've indicated directionality year-over-year and mentioned 2019 potentially going under the low end. How should we think about that magnitude and direction of CapEx?

We see some increases in regulated projects but decreases in the G&P area. The 2020 CapEx will be dominated by regulated gas pipeline and long haul NGL pipeline projects.

What about NESE? Given the statements from government officials, what do you think about its future and are there regulated projects you might be able to fast track in case?

We still have confidence that NESE will receive approvals this fall due to its significant emissions reduction opportunities and economic development impact. Our teams are prepared to fast track construction if needed.

What could cause Williams to renegotiate contracts with shippers?

On the pipeline side, we must treat everyone the same due to standard tariffs. For gathering contracts, we are always looking for ways to add value, but don't see much motivation to lower existing rates except to incentivize drilling.

Can you clarify guidance for 2020? You mentioned growth could be a bit less than normal 5% to 7% range.

We expect significant growth next year but want to remind people not to build models that overlook other variables. We want to set accurate expectations given various headwinds.

Can you discuss leverage? Are you still looking for opportunistic transactions to improve leverage metrics further?

The path we are on gets us to our leverage target. If there are opportunities that add value, we will pursue them. However, our primary focus is on using excess cash to improve our leverage. Overall, we remain very excited about the future and look forward to sharing more details in our upcoming Analyst Day.