Q3 2020 Williams Companies Inc Earnings Call
Time for opening remarks, and introductions I would like to turn the call over to Mr. to mute your body, but.
Vice President Investor Relations. Please go ahead.
Thank you Carol and good morning, everyone.
Thank you for joining us and for your interest in the Williams company.
Yesterday afternoon, we released our earnings press release, and the presentation that a president and CEO Alan Armstrong.
Chief Financial Officer, John Gender Speaker this morning.
Joining us on the call today are Michael Dunn, Chief Operating Officer, Mike Wilson, Our General Counsel.
John Demeritt, our senior Vice President corporate studies the belt.
In our presentation materials, you find a disclaimer related to forward looking statements.
Disclaimer is important integral to our remarks and you should review it.
Also included in the presentation materials are non-GAAP measures that we reconciled generally accepted accounting principles and.
These reconciliation schedules appear at the back of this presentation materials.
So with that.
I'll turn it over an hour.
Great well, thank you and thank you all for joining US today, we are pleased to share the results from another strong third quarter.
Well he was once again exceeded its internal plans and investor expectations and show just how durable this business can be against several headwinds, including a very active hurricane season in the Gulf as you know, Louisiana bore the brunt of two significant hurricanes and Loren Delta and our operating teams in the area did a great.
But staying safe, while minimizing the impact on our operations.
As always I'm impressed but not surprised by the response effort to the region as Williams volunteers have donated supplies in man staging areas in critically hit areas and really helped out those that need.
Despite the hurricane impact record northeast gathering and processing growth allowed us to more than offset the financial impact of those multiple interruptions in the Gulf and produce the 19th consecutive quarter, where we met or exceeded street expectations.
Our 2020 results year to date illustrate the stability and predictability of our business across a wide range of external factors everybody's gotten used to us being able to continue to produce on a normal basis, but this environment has really allowed us to distinguish ourselves in this more difficult market.
Additionally, during this busy quarter Williams announced its commitment in highlighting its ability to help in the reduction of emissions in a right here and right now way by becoming the first U.S. Midstream company to set both near term and long term emission reduction goals I'll talk a bit more about our climate goals later, but first I want.
To highlight Rex limits in our northeast GMP segment, and then I'll turn it over to John to walk through our Q2 results.
So looking here on slide one we show that our northeast gathering and processing segment handled record volumes in the third quarter 20 were gathering volumes averaged over 9.4 Bcf per day across our operated assets in the North East. This was an 8.4% growth versus the Threeq you 19 compares.
And a 7% sequential growth over the second quarter of 2020.
Strong growth in the rich gas areas drove even more impressive growth in our processing volumes and our NGL production you can see here the processing up for the southwest Marcellus and Utica areas was up over 17% and NGL production was up nearly 24% each of these was record for.
Formats for northeast gathering and processing segment.
This strong performance is evidence of the attractive position of our ne business as gas market fundamentals begin to call on U.S. dry gas supply. We are the largest gather in the most important and prolific gas producing area the Appalachian basin and what in the Appalachian Basin, our dedications and.
Clearly the most attractive acreage operated by resilient producers that continue to demonstrate their ability to continuously improve on their cost structures. You can see this playing out as our northeast gathering volumes grew faster than the total northeast supply. So overall, if you looked at the information from Pointlogic you would see that.
The northeast wellhead natural gas production for all of the areas out even moving outside of William was up by 2.2% on a three to 20 to three to 19 comparison and hours as Weve shown was up by 8.4% in gathered volumes. So we really are.
Not only in the REIT basin, but we're also in the right parts of the basin in the Appalachian area. We expect this trend to continue in response to very favorable Ford strip pricing for 21, and a very well positioned group of customers in both the Marcellus and Utica.
We'll talk more about our GMP business, when we get to our Investor focus areas segment, but for now let me turn it over to John to highlight our Q3 results.
Thanks, Alan we're gonna go to slide two here and once again, we're very pleased with our results this quarter and it's an overall theme our cost reduction efforts, our new Transco projects brought into service in our incredibly strong results out of our northeast gathering and processing segment helped to offset some challenging conditions in the deepwater Gulf of Mexico from heightened hurricane activity.
You can see the strong performance in our statistics first.
First I am looking at adjusted EBITDA for the quarter, it was down $7 million or 1%. However, this is very misleading given that we expected and realized a $33 million stepped down a deferred revenue at our Gulf start deepwater platform this quarter.
In addition, the third quarter of last year included $28 million of incremental EBITDA from the Transco rate case settlement true up for periods prior to the third quarter of 2019. So.
So if you adjust for these items, our EBITDA was actually up 4% versus the third quarter of 2019, which is more indicative of the very strong quarter. We had and the same thing is playing out in our year to date results. Our adjusted EBITDA is up 1%, but adjusting for deferred revenue step downs and other noncash items our year to date adjusted EBITDA is actually up similarly at four.
Percent.
Well discuss EBITDA in more depth in a moment.
Our adjusted earnings per share for the quarter increased largely due to lower depreciation, but again just like adjusted EBITDA would have been up much more strongly had it not been for the non cash items I just mentioned.
Distributable cash flow was down for the quarter due to increased dividends and distributions to our non controlling interest owners primarily related to our new northeast JV, which is consolidated in our operating results and probably more so due to the timing of maintenance Capex, which was higher for the quarter, but down on a year to date basis.
Our distribute cash flow year to date is down slightly but the 2019 period included an $85 million cash tax refund that we have not benefited from this year.
Without that cash tax refund DCF is also up.
As we look towards the end of the year, we still see distribute cash flow performance coming in above the midpoint of our guidance and likely above last year's results.
On the capital spending front, our intentional capital discipline continues to drive capital spending down and free cash flow.
And to that point capital spending for the quarter and year to date is about one half of what it was last year of that maintenance capital year to date is about $70 million less and expansion capital spending is over $900 million less.
With expansion capital spending expected to come in the one to 1.2 billion range for the year and frankly, it's likely going to come in towards the low end of that range and looking at our EBITDA and DCF forecast, we still predicts that will produce excess free cash flow for this year above all dividends and all capital expenditures.
This strong cash generation and capital discipline has helped us move towards our goal of improving our leverage metrics and this quarter our debt to last 12 months EBITDA is at 4.42 times.
But we expect to end the year with that leverage metric being inside our guided gold at 4.4 times and we expect continued improvement on the leverage metric next year moving towards our goal of 4.2 times.
Now going to slide three and looking at adjusted EBITDA for the quarter and let's dig a little deeper into that again Williams performed very well this quarter. Despite an unusually active hurricane season that negatively impacted our Gulf of Mexico operations.
As you'll hear throughout each segment cost control has been a big benefit this year, even after realizing higher bonus accruals this quarter in recognition of our strong performance.
As I mentioned, a moment ago before we dive into each segment. We believe it's important to isolate a few unusual things to make the numbers more comparable and reflective of our ongoing performance of the business.
We've identified those unusual items on this slide which are shown on this chart as noncash comparability items my total $60 million.
They consist primarily of two things. The first is the $33 million reduction in noncash deferred revenue step downs in our transmission and Gulf of Mexico segment on our Gulf These franchise area as.
As a reminder, on deferred revenue, we received significant upfront cash payments several years ago from producer, but did not recognize revenue at that time, we have been amortizing those payments. We previously received into income over the last several years and that amortization has been shrinking.
The second item I point to is the $28 million rate case trip entry made in the third quarter of 2019.
I described earlier, so if you adjust for those items again, EBITDA was actually up over 4%.
So looking at our segments, the transmission and Gulf of Mexico assets without these non cash items produced results that were 3 million better than the same period last year.
New transmission pipeline projects added 14 million in revenues for the quarter, including the Hillabee Phase two project that came into service in the second quarter of this year and the Gateway project that came into service in the fourth quarter of last year.
While we did see lower operating cost during the quarter, they were offset somewhat by increased bonus accruals and higher insurance and property taxes.
Offsetting the positive revenues was about $15 million of lower Gulf of Mexico profits due to shut ins, resulting from the heightened hurricane activity.
The impact of the shut ins can be further scene and reduce deepwater gathering volumes, which were down about 15%.
Now going to the northeast GMP segment. It continues to come on strong producing record results and contributing $53 million of additional EBITDA this quarter.
Collectively total northeast gathering volumes grew 8% in the quarter and processing processing volumes were up 17%.
These higher volumes drove revenue growth and of course, we are realizing more revenue per gathered mcf due to additional revenues earned from processing transportation and fractionation of that gas and Ngls on the backs of some investments we've made over the last several years and its infrastructure.
Equity method investments also drove EBITDA, where we benefited from higher Bradford volumes due to gathering expansion on that system in the <unk> in late 2019, the Marcellus South system, where we benefited from several new wells coming online over the last year and to a lesser extent higher volumes on Laurel Mountain midstream.
Finally, the northeast also benefited from cost reduction efforts much of which began last year as well as from favorable maintenance expense savings.
As a final note adjusted EBITDA per gathered Mcf for ne operating asset. When you include the proportional loss volumes from our non operated assets averaged 52 cents per mcf in the third quarter of this year compared to 49 cents per Mcf. This same time last year, which is a 6% increase.
Now looking at the West that segment was flat to last year.
Overall revenues in the west were down slightly versus the third quarter of last year, but those decreases were offset by higher commodity margins and reduced expenses.
Revenues declined due to lower gathered volumes, which were down about 7% and more spread amongst many basins, but the biggest impact coming in the haynesville wamsutter and beyond.
Of course in two of these three basins, we have customer dealing with bankruptcy bankruptcies and would expect increased volumes as those producers move out of the bankruptcy.
Volume decline, however was muted somewhat by higher revenues in the Eagle Ford, where we agreed to a new contract with higher rates than an MVC in December of last year.
And just as with our other segment the west experienced lower costs again, as we keep a relentless focus on efficiency and cost control.
Now going to slide four looking at our year to date results. They show growth of 1% and adjusted EBITDA again, driven by many of the same factors affecting the third quarter growth.
The Barnett and Gulfstar noncash deferred revenue step downs totaled $85 million, while the net impact of commodity price fluctuations on our inventory line fill position created the 9 million non cash reduction in EBITDA. This year, so without those noncash comparability items year to date adjusted EBITDA was up similarly to the quarter and it was up 4%.
Again looking at segments, our transmission and Gulf of Mexico segment that those non cash items is delivered $16 million in growth with an uplift from expansion projects and expense reductions big offset somewhat by lower Gulf of Mexico volumes and the impact that has had on commodity margins.
In the Gulf of Mexico, the total impact of shut ins from cobot Hurricanes and the price collapse earlier this year has been $38 million.
The northeast is a huge part of our growth this year, adding $165 million in additional EBITDA over last year with overall volumes up 7% and incremental revenues being realized from processing transportation and fractionation gas and Ngls, while at the same time, we've been reducing costs and finally, the west is off by about 40.
$6 million versus last year, largely because of the Barnett MVC cash payments that ended last year and the four points cost to service true up payment that we received last year.
Otherwise in the west gathered volumes were down about 3%, but were offset largely by reduced cost and an increased revenues in eagle Ford due to the renegotiated contract in December of last year.
Again, all in all despite a tough market and a tough hurricane season, Weve had a really good year on the back of cost reductions northeast performance and new pipeline projects coming into service on Transco.
Ill now turn the call back over to Allen to discuss some of the key investor focus areas Alan.
Great well, thanks, John and two is starting here again on slide five.
We have a listing of what we believe are key areas of focus for investors and so first I'll discuss our expectations for the 21 financial performance.
We expect to provide our 2021 financial guidance during our fourth Q earnings release in February, but we offer the following insights to what we expect for 21 as follows.
First continued production of reliable and highly predictable cash flow with modest growth and improving returns.
Second we expect to again generate discretionary free cash flow comfortably covering both our dividend and our growth Capex and third we expect our adjusted EBITDA to continue showing growth driven by the following first of all gas supply demand setup favoring our various strong.
Long positions on gas.
And so again, we would just tell you that gas demand will be driving our business and the forward market certainly is driving many of our customers to make plans for growth.
Across a lot of our systems and transmission projects like southeastern trail early in service of lighting, South as well and then finally we.
We no longer dealing with the downward pressure due to the noncash deferred revenue step downs that you just heard John talk about and we don't expect.
To have the degree of deepwater shut ins that we experienced this year from a number of different issue. So lots of nice growth drivers that are very predictable at this point.
And and we feel very confident about how those will shape up for 21 at this point.
We really expect only a couple of small items have worked to park, partially offset these growth drivers first we expect a small amount of overall cost increases that are really driven by both gathering volume growth and transmission the transmission capacity expansions that we've spoken too, but thanks to our operating teams continuous improvement.
Mindset, we do expect our operating margins to expand again for the fifth consecutive year in 21, and so again, our revenues are going to be outpacing any expansion in expenses. So really tremendous efforts by our teams continuing to focus on the operating margin rate.
So across our businesses, we also expect.
Modest declines in the West segment.
From lower short term NGL services that we enjoyed this last year. So we did have some opportunistic revenues in our NGL services business that we don't expect to enjoy again next year and weaker NGL margins from higher gas prices.
In next year course, with those higher gas prices working against our people more.
On the capital allocation thought.
First our dividend is a key source of value for our investors and we believe the reliability and predictability of our dividend is key to achieving appropriate valuation relative to other growth in income stocks, but beyond our dividend and planned growth Capex, we will have discretionary free cash flow to allocate one of the highest.
Priorities for 21 of course will be to complete our deleveraging plan and I'm proud to say we are on target to reach our 4.2 debt to EBITDA towards the goal. The goal that we've talked about a lot towards the end of 21 and this should drive the triple B flat ratings across all three agencies that we've been seeking.
Okay.
Obviously, we think the strong balance sheet and higher credit ratings will continue to bring contraction in our yield driving stock price appreciation for our investors as we continue to attract value investors outside of the energy sector.
Once we reach our leverage target, we will have a variety of options to consider which the board away with a focus on generating long term sustainable value for our investors and of course, you all know these.
Various options cores, one would be additional de levering another would be stock buybacks, if our valuation doesn't improve from where we are today and incremental investments in our regulated pipeline expansions and rate base.
And so plenty of alternatives plenty of things to utilize those free cash flows to drive additional value for our investors and now turning to look at our longer term growth outlook.
First of all in the gathering and processing business. The nice growth that we've seen in our volumes bird versus the broad market is evidence of the strong position across our GMP footprint you can see on slide nine in our appendix slides that the total wellhead production of natural gas is down slightly for 2012.
Many on a year to date basis.
So thats just looking across all of the domestic gas supplies, while Williams gathered volumes have grown by over 3% in even in the face of the Gulf of Mexico disruptions that were exposed to.
There really isn't another public company with a comparable gathering and processing footprint. Our business is resilient and produces reliable cash flow because of our focus on low cost gas basins are contracting practices. The wellhead connectivity that we have and the very broad portfolio.
Gathering systems that we operate.
Single basin businesses or those with a single customer or small number of dominant customers are just not be appropriate comps, where our GMP portfolio.
Our more diverse asset base is driven by demand for low cost natural gas as weve spoken to many times. So let's look at this driver for a moment.
First of all domestic demand and exports has been resilient this year down less than a half a percent on a year to date basis and you certainly wouldn't know it from the news, but the biggest single contributor to this decline was a nearly 14% decline in heating degree days from January through March of this year, which were.
As a key driver of the Reds calm demand weakness this year not the co with 19 pandemic.
In fact, if 2000 Twentys winter weather looks like 2000 Nineteens January through March weather. The total lower 48 total gas demand would be up by 2% year to date.
Exports, both LNG and pipeline exports to Mexico are up this year, even after dealing with a very warm winter in Europe, resulting in summer of low LNG exports and we're now as you are well aware I am sure are now seeing LNG float rebounding near the highs that we saw earlier in the year.
As we've said before demand is truly the key to our business and this demand picture is driving the price response, we are seeing continued price increases could be into demand growth. So you should certainly watch closely for how producers spawn to these price signals. However, we have confidence that producers.
See this is an attractive market and we'll be able to respond very effectively to the increasing call on gas supplies, particularly in the very best of the Marcellus Utica and Haynesville shale, which we're so fortunate to serve.
Looking at the deepwater Gulf of Mexico, the competitive advantages of our existing footprint and unique operating expertise is bringing new business to our existing capacity and we have been fortunate to contract for some very large and exciting new developments. These really began ramping up as early as 2022 four.
The Taggart pro.
Prospect and this growth will continue for several more years as the more impactful opportunities like well and bowed work come online.
And as we have mentioned in the past the capital required for this next tranche of large projects is very low relative to the EBITDA growth and so we're really excited to see the kind of incremental returns that we're going to see and the growth we're going to see in the deepwater Gulf of Mexico and of course, our natural gas transmission systems remain.
Mean advantage versus competitors with a lot of signals for growth in this area as well.
The brownfield nature of the expansions that we have causes less environmental impact and thus lower regulatory risk.
Capital cost risk is also lower when expanding across our existing footprint and because of this and the great work by our project execution team, we see projects on or ahead of schedule. So let me just walk through a few. These this is really impressive work by our project execution teams.
First of all southeastern Trail now has 150 million a day of its totaled 296 million today of incremental Transco capacity placed into service as of November one. So this kind of may be slipped up on people, but we've been working towards an early in service in an addition.
And of that we have 80 million a day, possibly in service by the by year end. So 230 of our 296 million today will be placed on service by year end well ahead of what we had expected. The final 66 million today will be placed in service during Q1 of 21 so great.
Hi, there on an even more impressive schedule b.
Due to customer demand and great work by our teams are working on the lighting South project, we have 125 million a day of the lights out $582 million. They have total capacity that we expect to be on.
By here online in the next month or so of full year ahead of the original project expectations and of course. This is important because is also provides additional gathering capacity out of our northeast PA area.
The integration of our customer relationships across the gathering and transmission businesses allowed us to recognize and then meet accelerated customer need providing unexpected value for both Williams and the customer.
Even as we look forward on additional projects that are not yet in execution mode. Regional energy access is a project that is going very well on both the commercial and regulatory front and we have 100% survey permission that we've achieved obviously this is a very critical milestone for the regulatory.
Process today, and we do expect to file for FERC application here in the next three months so great work going on there as well that will be another project that will expand capacity out of the northeast PA area.
Expectations of sustained demand growth are truly the drop of our transmission business and we've said before our expansions are underwritten by 15 years or longer take or pay contracts and as you can see this continues to show the confidence that our customers have in.
The long term need for gas and gas transmission to serve growing gas demand.
And so we really are continuing to see a lot of great expansion opportunities along the transco system that will be fairly sizable and continue to drive growth on that business for years to come.
On sustainability front in all.
August we became the first us midstream company to issue a climate commitment, we announced a near term goal of a 56% absolute reduction from our 2005 levels in companywide greenhouse gas emissions and we would achieve that by 2030, putting the company on a positive trajectory to be net zero carbon emission.
By 2015.
We will continue to invest in environmental stewardship, and reduce our carbon footprint, while meeting the clean energy needs of our communities and delivering long term value to our stakeholders. Our transmission networks are extremely well positioned to aggregate and bring scale to multiple emission reduction opportunities, including taking out higher carb.
In fuels and other near term efforts will focus on exploring renewable energy opportunities, including renewable natural gas and solar energy and we've established an internal team to explore and manage emerging opportunities like renewable natural gas further deployment of solar across our systems hydrogen.
And carbon capture across our entire footprint.
But to be clear these opportunities will compete alongside all other investment opportunities in our capital allocation process.
So we are proud to lead the midstream space and meeting the growing demand for American made energy, while outlining clear steps towards a clean energy future, we hope to challenge others to establish similar goals based on what we can reduce right here right now.
So in closing I'll reiterate that weve intentionally built a business that is steady and predictable our natural gas focused strategy positions us well to capitalize on continued natural gas growth our existing transmission infrastructure offers growth advantage and our low cost basins that we serve provide predictable cash.
Cash flow and position us to grow in a wide range of supply and demand scenarios.
Second of course today is election day, and there's been a lot of debate during this political cycle about the future of our industry I will just say that at Williams, we remain bullish on natural gas because we recognize the critical role. It plays and we will continue to play in our countries and our world's pursuit of the clean energy.
Future irrespective of the political backdrop, thanks to natural gas use continues to see significant reductions in C. O two emissions lower consumers utility bills and enhanced opportunities for investments in renewable energy.
And then finally as we continue to navigate COVID-19 pandemic I want to once again recognized the tremendous efforts of our entire workforce and ensuring the delivery of natural gas the American cities and communities often I think we take for granted the great reliability. That's provided by the great operating.
Companies of our nation and ours is no exception in that in terms of reliable service that we provide.
For our industry and I'm extremely proud of our employees for their efforts to keep our operations running smoothly, while also going the extra mile to keep themselves and their coworkers healthy and with that I'll open it up for your questions.
Thank you if you would like to ask a question. Please press star one on your telephone.
Our first question comes from Jeremy Tonet from JP Morgan. Please go ahead. Your line is open.
Hello, Good morning.
Good morning, Jeremy.
I wanted to start off on capital allocation I know you touched on a bit in your prepared remarks, there, but just wondering if you had any more clarity on where 2021 capex might land given now project timing could potentially move around a bit and how this level of capex could approach could impact your approach to de leveraging and any potential.
Hi back trying to get a feel for how that interplays within 2021 itself.
Yes, Great question, Jeremy obviously, we havent laid out that guidance firmly yet, but we do have a pretty good idea I think one of the things that you know helping on that end is these projects are being finished earlier than we expected. So.
That's a real positive and obviously because our capital has come down this year a lot of that is cost reduction as well. So I would just say we are seeing really positive signs on the cost as we've gone out for bid.
The construction market is a little bit slow right now.
And as a result of that the bids that we've been seeing coming in for our projects are coming in below our budget. So I would say little.
A little too early to call that but right now I think we're feeling pretty good about.
Being able to manage to that to a capital budget that is.
Somewhere in the same range as what we saw this year. So so.
I don't know Michel if you have anything to add to that on the cap I would just say.
I'll talk about in the opening remarks, we will cover all of our capital and dividend.
Next year and and be free cash flow positive in regard to our overall company performance as Alan said, we're seeing great bids from our contractors. Our teams are doing an incredible job executing our projects.
And achieving under budget performance on all of our major projects. This year and we have high expectations to continue that next year with where the market is in regard to construction activity.
That's very helpful. Thanks, and I know you have a number of comments you provided on renewable energy there and you talked about RMG interconnections in solar installations, just trying to dig in a little bit more there if you could expand on how big the Capex dollar opportunity set for you could get the renewables front I figure it's big.
Other than a bread basket, but trying to figure out how big that is.
Yes, let me, let me have Chad Samaras, who is leading that emergency up circuits that emerging opportunities group, Jeff. Thanks, Jeremy It in that space, It's still early days, but we.
We I think we announced today, we just connected our six R&D project, we see a pretty good pipeline of opportunities in that space I'd say, the near term still modest capital investment over the next couple of years, probably less than $100 million in R&D project on the solar front we have.
Through 12 projects that have advanced through what we would call our gate one cap.
Capital allocation process those projects forget to full investment decision, but those projects constitute around $2 million to $300 million investment in solar installations. So those projects will continue to move through our process over the next several months and I would just say I'd.
We spent a lot of time building up talent and capabilities and we view ourselves as an energy infrastructure company and we are very focused on as you can also see be a part of the clean energy solutions for our country and for the rest of World. We see natural gas is really the most impactful.
Energy source in that regard, but we're very committed to making sure our infrastructure and capabilities are part of any solution with respect to to kind of the future clean energy. So we've also set up a team that is now focused on hydrogen and other carbon capture technology, but I'd say that's very.
Early days will probably not be a lot of capital investment in the very near term, but we'll continue to look to be a part of the solution those in those areas as well.
Got it that's very helpful. I'll stop there thanks.
Thank you and our next question comes from Preneed cities from Wells Fargo. Your line is open.
Thanks, Good morning.
Your partner on overland pass so that they plan to move their volumes on to their wholly owned pipeline.
Just wondering if you could still get paid if they move volumes and then if not what's what's kind of the plan there to try and backfill those volumes.
Good morning. This is Michael I'll take that in regard to.
Our partner on Overland pass pipeline, we've we've anticipated the movement of those volumes for some time now with their construction of their pipeline from the Bakken.
And they've taken the volumes, but continue to pay us this year and.
In partnership with our agreement that we've had in place for them and so this has been an expectation that we've had we've built this into our plans for next year, but we've also got our Rocky Mountain midstream entity in Colorado that we do anticipate having additional volumes coming from that entity and that.
Where weve anticipated those volumes coming in and Backfilling. Some of the volumes that are leaving us from our partner.
Okay.
Hello.
Okay great.
And then just on the renewables Brian.
I think so far most or all of your investments tied to RMG have can consisted of a building out laterals, what's the appetite to maybe push further upstream.
And invest in the actual facilities in landfills or dairy farms at the capture and process the methane.
Yeah, you know I would just say, we're going to we're going to invest where we think our we have the biggest competitive advantage and can generate the highest returns and some of those projects that are.
Our backed by quite a few tax credits and subsidies.
Generally have quite a bit of financing and fairly low returns on them. So we're going to focus on the part of those investments where we can make a return to compete within our capital allocation front. So.
As I'm sure everyone is aware that.
The.
Yes.
And returns in that space or have have narrowed considerably with all the popularity around that so we're going to stick to the areas, where we have really strong competitive advantage.
To create better returns.
Our footprint.
The point us towards areas of opportunity I would say an R&D project a lot of the info.
Restructure required for bringing R&D to market is the kind of infrastructure that we're very familiar with its primarily treating processing.
A lot of natural gas.
Gas by product, it's relatively small scale.
But again I think down point, we're very capable of investing further upstream into those facilities, but we're going to make sure. We focus on where those returns would be most attractive and this is John channels last thing I'd say is seen we remain.
Cash and noncash taxpayer at least through 2024 in our projections and so therefore of tax credits, it's tough for us to make value that we've got to find partners to co invest to take advantage of those tax credits in many cases, so some of the things that make the returns more attractive that stream really aren't that are as valuable to us.
That's helpful I'll stop there thanks.
Thank you and.
In the interest of fairness to all people could you. Please limit your yourself to one question and one follow up question.
Our next question comes from Shneur Gershuni from you.
Your line is open.
Hi, good morning, everyone and congrats the military new role.
Just to start off here, a little bit here I'm.
You intimated in your prepared remarks that you expect EBITDA to be above higher next year versus this year I was wondering if you can walk us through the pluses and minuses.
Directionally, yes Robbie.
But our giving a specific number as to.
The support of that view.
Are you seeing some more activity potentially in the Haynesville is that offsetting.
Your question about the overland pass volume loss, just wondering if you can just sort of give us the ledger of pluses and minuses to directionally.
What underpins the expectation for EBITDA to be higher next year versus this year.
Yes, sure Shneur ill.
And I'll just kind of go back through the notes that I laid out there.
First of all as I mentioned, the gas supply and demand situation.
Is turning out to be a very favorable position for gas focus basins, obviously with associated gas continuing decline and demand hanging in there and starting to grow again.
We really feel good about the way we are positioned within our gathering and processing basins. Obviously, those lower cost basins are best positioned for that but if you really look at how that's going to get balanced it's hard for the market to balance itself without drawing on the basins that we serve and serve.
In with some concentration.
Secondly, the transmission projects like southeastern trail and early in service for Lighty South.
We'll drive growth as well in 2021, and then of course the.
One of the things that we normally have had some downward pressure like we overcame this year from some of the noncash items that John talked about and so we're not having to overcome some of those headwinds this year and then finally of course.
The 38 million dollar impact and deepwater Gulf of Mexico. This year.
Won't be there and we've had a number of tie ends.
This year in the Gulf of Mexico that will produce higher revenues next year. So those are some of the primary drivers, but I would just say, we're feeling really good about the way we're seeing volumes in the northeast right now and if we didnt see anything but volumes stay flat.
From where they are here in the fourth quarter through.
2021, we would see a really nice growth in terms of.
Our earnings and EBITDA.
In the northeast so.
Hard to say that we won't see some growth somewhere because somehow mark mark is going to have bounced around so.
And we certainly are seeing a lot of producers, making plans for that but we're really early to call a whole lot of growth there and we have pretty modest growth built in but but very modest growth with keeping our cost relative flat really is pretty powerful for us and our EBITDA. So men.
And I don't want to get people out ahead of where we are Weve, certainly mentioned that our growth would be modest.
But I would just say, there's just a number of things that make that give us quite a bit of confidence and not really anything all that exciting happening across.
Across our business to drive growth next year.
Well that makes perfect sense and really do appreciate that color and maybe.
A follow up question.
In the prepared remarks, you sort of talked about being free cash flow positive after dividends next year.
Buybacks is one of the arrows in the quiver and it certainly.
Becoming a all the rage as of late with everybody announcing off locations.
Just wondering.
How is the board thinking about.
Approaching it do you have to actually hit the leverage target or exceed the target before you authorized and start buying back stock or given that you are already on a trajectory your clothes that it's something that you can start sprinkling in sooner than actually hitting the target just kind of wondering your thoughts.
On the topic.
Yes, no I would just say that you know this is a very deliberate and disciplined board and we've been very clear about this goal and.
And I don't think Theres any.
The thing that I can foresee right now anyway that would waiver, obviously, we saw stock price collapse or something like that that might.
Change that mine and be opportunistic, but I would just say, we're we've been pretty clear pretty disciplined and I see us continuing to push forward on that goal as the top priority. So I really don't see much.
And if we did do buybacks just it would be a sprinkling in and while it might be you know.
Popular.
I would just tell you that we're going to focus on what we think fundamental value is and right now we think that fundamental values getting our debt down to those targets and and gaining the credit rating across all three agencies.
Perfect. Thank you very much and that does it for me guys.
Thank you and next question comes from Gene and Salisbury from Bernstein. Your line is open.
Good morning, and aggressive renewable the adoption scenario, where utility gas demand goes down dramatically.
Do you still need gas availability to meet peak demand how would you see contract structures and gas pipelines changing if at all in either currently examples on your pipeline of very high and the kids and parents did they retire require different types of contracts.
Yes, Jason I would just say, we havent seen anything resembling.
Resembling that at all in our markets the capacity that we have is highly valued.
And the last time, we had any capacity come up available that got turned that the only thing that we could distinguish the bid on was on term and that this was last year in the term was 84 years was successful bid on that so we're not really seeing any need to discount or.
Would see need to provide any discount in our markets because our rates are so low compared to what the avoided cost or the alternatives are so we really don't see obviously you know we're always working with our customers to provide the very best service, but I think from a pricing stay.
Endpoint.
There's just not any pressure on the pricing within our means always say thats. The good news the bad news about our regulated pipelines is the bad news is the rates captain and the rate we can expand that rate.
But.
The good news is that's that's really hard to compete with.
In those markets and so.
Really don't see but I would just tell you we're not despite the talk on this issue we are not seeing the utilization come down on our system on the gas fired generation. Despite a lot of renewables being interjected into the market and of course as long as we still have the high degree of coal fired generation in a lot of our markets.
We're going to continue to see expansions of capacity demand for our services. So Michael I don't know if you debt.
I think you are right on there Alan I would say that based on the demand that we're continuing to see on the Transco and other transmission pipelines, we have we don't anticipate.
Having to negotiate any kind of peaking agreements there is an opportunity to provide a peaking service that we can charge a rate for that.
It is desirable for us and we will actively pursue that but at this point in time.
Customers are continuing to see demand, we're long term here recruiting around contracting.
That's what we'll continue to pursue.
Net.
I think an interesting here I think an interesting derivation of that question is when are the utility is going to start charging the independent AD that renewables that developers.
Backup charge for the power, but they are backing up the interruption interruptible power coming from the renewables resource and that's not happening today.
Yes, no. That's really helpful. I meant kind of 10 plus years from now you're at your answers.
Helpful. Thank you.
And then is it possible to separate out how much of this year's growth Capex went so well connect even just roughly.
Well I can tell you in total from a capital spending standpoint.
The northeast total capital spend for this year is probably going to be.
Little bit south of $300 million in the west it's less than 100 million. So when you and Thats a combination of maintenance and expansion capital spending so.
And embedded within that is some processing works I don't want to say Thats welcome all well connect capital, but it's it's fairly insignificant now.
Great and that's okay.
You then it's gotten to be that's gotten to be a pretty difficult thing in areas like the northeast PA, where were building big pipelines into these well pads and so you might call that a well connect but its a 20 inch pipeline a lot of time, sometimes even larger because the producers are effectively.
By drilling these laterals out of these single locations. They are effectively are.
Providing what used to be a welcome that by bringing that all into one location there for us and so what we see actually rather than us having to go connect those individual wells. We're seeing the producer just continue to drill out those pads over time and keep the volumes full on those fairly large lines that we've built to them.
So it's gotten really fuzzy, particularly in the northeast with these very large volume pad, it's gotten pretty fuzzy.
To think about.
Something being well connect a lot of these pads are delivering more gas than a single gathering system does in a lot of parts of the country. So.
So its really gotten kind of fuzzy on that front, but well connected in the west are probably place that's a little easier to keep track of.
In that regard and as John mentioned, we spent less than $100 million this year in the west.
Okay. That's that's certainly helpful.
Great. Thank you so much.
Thank you and our next question comes from Christine Cho from Barclays. Your line is open.
Good morning.
Maybe if I can ask.
2021, callback question a little differently.
And I understand its game changing out in the next couple of months, but I can think of wells connect our northeast and Haynesville, maybe a project on Transco materializing from the cancellation of BCP.
Small residual spending on lighting, south and southeast same trail and maybe some additional Gulf of Mexico tie back would you say those are the main pieces of the Capex program next year as it stands right now.
The only thing I might add to that.
Christine I am going to Mike has probably got a little CRISPR list in his head, but the one thing that is notably missing from your list there would be the build out for the oil prospect in the deepwater Gulf of Mexico.
And so thats, a pretty sizeable project and so that.
Probably and remember that is.
Reimbursable.
If they were to cancel that for some reason, but thats getting pretty far along for anybody to think about canceling at this point.
Michael Yes that was the one that was the sticking out for me we ordered the pipe for that project based on the reimbursement agreement that we have with the producer customers there and that's a pretty substantial order in order for us to be that pipe on time for the project and regional energy access will be another one that will ramp up next year as well as.
Obviously, the likely south construction, which we have full notice to proceed now on lighting south for our compressor station constructions and so those are underway. That's the gating item on that project and we will start construction on our pipelines for lighting sales in January just pretty small component of that project was some brownfield.
Compressor stations are really the bulk of the work barrel lights out and.
And maybe.
Just one other thing and its not sizable but we may need to do a little bit processing work in the northeast expansion as we're filling the fill in the system.
Got it.
And as well we are.
Our Oak Grove processing complex, we actually stopped construction on PXP three there and we ramp that back up now so we had a wall there about six or eight months, where we had idle to that construction work and now we're up above capacity there on the processing complex and we've accelerated network now anticipate.
That third trade at Oak Grove being online sometime in the first quarter of 21.
Got it and just.
A clarification on the regional energy assets I didn't think that project came on line on for like 23. So is there really going to be that much spending on that next year.
Well there won't be interesting you're right, that's a 2023 and service, but it is another component of our Transco.
Expansion opportunities and it will it will initiate some uptick in spending next year, but we've been pretty careful about spending too much on those projects into we have permits in hand, so you're right that would accelerate really until 2022 in 2023.
Got it and then as a follow up on Alan you mentioned the different ways to drive additional value and you mentioned that pay down stock buyback from investing.
Investing in Pasok, assuming you've got to the 4.2 times laterals on our comfortably on Triple B flat territory, what return thresholds with on each onto our projects need to clear in order for it to be a better use of capital than buybacks at this juncture.
Yeah. That's a good question I think obviously, that's going to determine how we see the stock market and how much value. We think there is two investor for additional debt.
Debt reduction, obviously, that's something that theres not a bright line on will have to use their own best judgment around how much value thing, we think there would be to the shareholder through further debt reduction. So that's the answer to that part of the question. The second piece is what stock price going to be at that point in time and and that'll set.
Effectively what the return threshold would have to be for those incremental projects and I. Just tell you. There's there's all kinds of places that.
That make good.
And very proper rate base investment on the Transco systems in terms of modernization of the systems and mission production opportunities and it really is just going to depend how that those return.
Look and obviously weve been in the process of negotiating.
What that would look like in terms of the emission reduction projects and until we know what that return would be.
And we know what the value we would assess at that point in time to debt reduction and stock price that will determine that but there is really the good news is we don't have to predetermine that and see what the markets look like when we get to that point and a 21, andas and I'm very confident in our board's ability to make a great decision.
For the benefit of the shareholders when we get to that.
Fair enough. Thank you.
Thank you and our next question comes from Gabe Moreen from Ms.
Please go ahead your line is open.
Hey, guys I have a two prong question on the northeast Theres been some customer consolidation I think in the Appalachian wondering if theres any impacts or opportunities from that and then also.
Assuming the forward curve holds or does even better from here would there be any significant capex increases if your customers decide to go beyond let's call it maintenance to modest growth mode.
Mike.
Yes, I would say you t. coming in and buying into the assets and Appalachian that we are a partnership with Chevron on there is only a positive for us.
UTI is a great operator, certainly getting their cost under control on their on their drilling in their completions and really to an admirable job there we have the.
The opportunity to bring additional volumes in there with model a lot of capital deployment in regard to possibly UTI deploying more money there via the drill bit. So I think thats, just a great opportunity and upside for us there with Laurel Mountain midstream and there will be a partner with us on the midstream assets there.
That acquisition owning 31% of that.
Entity with us so we're looking forward to working that relationship that we've already built with them even even more so.
Great and then as a follow up closed in a lot of consolidation on the upstream side of things in the past you've talked about asset sales done a lot of portfolio shaping yourself both.
Are those discussions still ongoing do you think those those perhaps happen in 2021, just curious for thoughts there.
Yes, good question.
Yeah, We're certainly will continue to pursue that I think.
We do believe that the cash flows that our west GMP asset and the free cash flow the tremendous amount of free cash flow. They generate is very valuable and we think the predictability that we've seen this year along with the way that we've been able to manage through the.
Bankruptcy concerns around these assets.
We think that really is going to position these well for having a better value.
In 21, and what exactly path that takes his team.
TBD, but we certainly are continuing to look for opportunities to make sure that those are more fairly valued within within our stock price one way or the other so.
Yes, we're still working on it.
And I think some of the the clouds that existed over that or.
Certainly lifting pretty rapidly.
With with the way some of the concerns, particularly around the Chesapeake bankruptcy in the way those concerns of.
Really eroded as we havent been listed as any rejection.
And very confident in our ability to preserve the value in our in our contracts there.
Great. Thanks I'll.
Thank you.
Thank you.
Next question comes from Alex Kania from Wolfe Research Your line is open.
Thanks.
A question maybe to put it a bad about the elephant in the room I guess Doug.
From today, but just are there any.
Elections or statewide races that you're particularly focused on.
Core EPS.
He kind of latest comments or thoughts you might have just in terms of maybe any shift and energy policy in the us based on a button or or or kind of the trump election.
Yes.
As I mentioned in my opening comments I think we're.
We feel like that natural gas.
So over less polarized moment.
Is going to be a really important tool to continue to utilize renewables at a cost effective in a cost effective manner and to continue to decarbonise.
Energy use here in both the U.S. and around the world for that matter and we think it's going to be a powerful tool and so.
The U.S. is the more serious we get about decarbonization.
The better it is for our business and so if the focus is just around eliminating fossil fuels. That's a different story, but if the if we really get serious about decarbonization, we think.
We think our business is extremely well positioned in that environment, Secondly, I would say on a more tactical level.
I think probably one of the.
Higher near term profitability. So if there was of BYD administration win.
Would be.
The.
A corporate tax rate and actually that works out to be a positive for us within our regulated assets because that would allow us to raise the rates back on northwest pipeline that we had to lower the corporate tax rate was lower we do have a writer within those within that.
Then those rates and as well on Transco, we would we had lower where we had to accept and EPS.
Impact to our rate case.
This last time around because of a lower corporate tax rate and we would get those back now of course, we're not paying those cash taxes, but the way that the rate case process actually works.
We get to recover for whatever that corporate tax rate is so in the near term we would see probably one of the few energy companies that would see kind of a near term positive coming out of that and longer term. We think if we really are constructive and really get serious about going after de carbonization. We think we can play.
A very important role in that process.
Great. Thanks very much.
So we got one more question.
Sure.
And our next question comes from Travis Miller from Morningstar. Please go ahead. Your line is open.
Good morning, Thanks for taking my question.
Just wondering as a follow up to the hydrogen conversation what types of projects would you be looking at and what's the timing on those specific projects or not the timing in terms of when you'd start but once you started what kind of timing would.
Wouldn't when those projects take.
To be to go from first investment in service.
Yeah, Travis say, thank you very much for the question and thanks for joining us this morning.
I would just say first of all it is long dated so we're looking at a number of opportunities, but whatever we do we're going to be looking to do it in a serious manner and the scale that we can bring to hydrogen is probably second to none.
In terms of the utilization I think it's important to note when you think about hydrogen.
And to the degree that were burning hydrogen in place of another carbon.
Carbon based fuel, we do get emissions reduction and that doesn't make any difference whether it's blended in with the natural gas worth that separated the emission reduction opportunity is exactly the same and so.
Our ability to blend in hydrogen into the existing systems is really powerful tool here in in accelerating the use of hydrogen to reduce carbon emissions and so our ability to take excess renewable power in markets.
And both be able to help with the transmission of that energy via tram and be a.
Converting the excess renewables power, which I think most people would agree that theres going to be a good chance that we're overinvesting in renewables in certain pockets relative to the ability for that that generated power to meet demand. So there will be a need to transport that as well as.
There will be a need to store that and if you think about the way our systems are set up once you've converted that excess power generation once you've converted that end hydrogen now we've got the already systems in place a bill the ability to both transport and store that with the existing says.
Dims without incremental capital investment and we think thats going to be really powerful as we emerge into that.
Secondly, I would say in markets, where there is a really big push on reducing and.
Emissions and starting to to accelerate the use of hydrogen we're extremely well positioned with our systems in those areas as well to be able to help utilize carbon our hydrogen.
Both as a technical tool and a political tool for the permitting of our of our assets and so.
We're really excited about the role we can play in that and we can play it in a way that's not just a novelty not just.
Pilot project, but.
But one that truly gets us on the road towards.
Towards utilizing hydrogen more capably and without waiting on long system development.
In long infrastructure developments in the market. So that's how we intend right now to go after it.
And.
We will certainly be looking for opportunities along those lines.
Oh, that's great I appreciate that and then just a real quick follow up to the capital allocation discussion.
What's your thought around if the stock price stays here and the returns.
Then stays up above 8% or so.
What's your thought around foregoing, perhaps a dividend increase and instead directing that capital back into some of the options youve talked about stock buybacks or or incremental investment just thinking about the dividend growth element of that yes.
I think we as we've mentioned before we intend to keep our.
Dividend growth.
In line with our cash flow growth and and we think the predictability and reliability of continuing to do what we say we're going to do is valuable and we certainly have.
The capabilities to do that ultimately that's a board decision.
In terms of that but I would say from a policy standpoint in the company.
We continue to expect to match that up with our.
Cash flow growth and free cash flow growth so.
It's great question I would just say that the.
A board level decision, but as we sit here today, we would expect to continue to grow alongside the degree of cash flow growth that we've got.
Business right now, which obviously is modest and we've talked about that.
So that's the kind of expectation I think should be.
Okay, Great I appreciate it.
Yeah.
Shirley we're ready to wrap up the call. Please.
Thank you that concludes our Q an aid for today I'll turn the call back to Alan Armstrong for closing remarks.
Thank you Cheryl.
Thanks, everybody for joining us we really are excited to be able to prove out the us the way our business is continuing to stand up in it.
With a lot of external headwinds and looking forward to continuing to see these predictable cash flows continue to grow and really appreciate all the interest in the company in the great questions. Today, So have a nice day. Thank you.
Thank you for joining us ladies and gentlemen, this concludes our call and you may now disconnect.
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