Q2 2019 Earnings Call
This time for opening remarks, and introductions I would like to turn the call over to Mr., John Porter head of Investor Relations.
Please go ahead.
Thanks, Patrick.
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, Michael Dunn, Our CFO , John Chandler error, Senior Vice President corporate strategic development Chad Danbury.
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've reconciled to generally accepted accounting principles and these reconciliation schedules appear at the back of todays presentation materials.
And so with that I'll turn it over to Alan Armstrong.
Great well good morning, everyone. Thanks, John .
And thanks for everybody joining us know, it's a busy time right now.
As we discuss the second quarter financial performance and the key investor focus areas, we're going to hit.
As we have in the past some of the areas that weve questions Weve been hearing from.
Our investor base, So, let's move right into the presentation to take a look at our second quarter 2019 results here on slide two we provided a clear view of our year over year financial performance. As you can see we continue to enjoy a very healthy growth in all of our key measures in general all the metrics you want to go up went up by double digits and those we have been working to reduce went down. So this growth continues to reflect very little direct commodity exposure as we mine in June in fact.
Year to date, our 2019 gross margin is 98% fee based versus only 2% coming from direct commodity margin.
And I'll remind you with that is very predictable.
Set of cash flows, making this the 14th quarter in a row that we have.
Been in line or at or been at least in line with street consensus and our own guidance.
So let's take it from the top with our GAAP cash flow from operations, which increased 20% for the quarter and 16% year to date, our business continues to demonstrate significant free cash flow and as you can see our CFO exceeded capex by over 360 million.
And $625 million for the quarter and year to date periods.
On the next line, we show, 12% and 9% growth for adjusted EBITDA, which is impressive in the faces significant asset sales effect in the period and I'll have more to say about what drove the adjusted EBITDA performance here next couple of slides.
And you can see our continued strong growth in adjusted EPS metrics, posting excellent, 53% and 33% increases our EPS continues to be burdened with substantial noncash charges and I encourage you to take a look at slide 12 in the appendix to appreciate the true power of our cash flows underlying these earnings.
Our DCF was up about 36% and 21% with strong growth in per share calculation and the related dividend coverage ratio moving up above 1.8, with the second quarter being boosted by a cash tax item that we disclosed.
We're making great progress on bringing leverage down our original guidance was to finish the year at less than 4.75, and we currently sit at 4.43, and we'll discuss our revised leverage guidance in a moment.
And finally crisp execution on our projects continues keeping our capital spending in line with our expectations. So really nice improvement in our various earnings and cash flow metrics. Despite the impact of significant asset sales.
As we move on here to slide three.
For the quarter adjusted EBITDA increased just over 12% or 14% if you adjust for the bigger transactions that affect the year over year comparison on the left side of the slide in Gray you can see an unfavorable $37 million variability adjustment, which includes removing the adjusted EBITDA from the various asset sale transactions completed during the last 12 months and then taking out the 11 million favorable item, reflecting the addition of the incremental 38% USIO end ownership interest.
So normalizing for those items you see adjusted EBITDA growing about 14% now moving over to look at the financial performance of the continuing business similar to the first quarter of this year.
Atlantic Gulf led the increase with a 23% increase in adjusted EBITDA, driven by topline Transco revenue growth from new expansion projects, including Atlantic Sunrise and the Gulf connector.
Next up looking at the northeast GMP area, we had a 20% increase in year over year, adjusted EBITDA, driven by 17% higher gathering volumes and higher gathering fees associated with expansion projects.
Volume increases were led by the Susquehanna supply hub area, which grew about 23%, but we also saw double digit growth rates in all of our other operated northeast franchise area, except the smaller Laurel mountain JV that we have with Chevron probably one of the more impactful changes that we had there was the Utica.
Volumes up about 15% and so as we mentioned in the past the Encino transaction out there is really been important to us.
To see the volumes in the Utica really start to turnaround from what previously had been declines to now very healthy incline.
So overall, we continue to very nice start to the year in the northeast and finally, we have the west which is pretty flat to the prior year, where a sharp drop in NGL margins was offset by nice growth in fee based service revenues.
So and we're excited to see as well a new plant at Fort Lupton quickly fill up this quarter in the DJ basin as we exceed we've now exceeded about 200 million a day of new inlet volumes coming into that plant. So as we told you that just started up right around the end of the.
First quarter and ended the second quarter and that new train there has already filled up so great growth going on there in the DJ basin.
Moving on to slide four and looking at the year over year results.
Pretty similar story year to date as you heard for the second quarter. Once again on the left side of the slide in great. You can see that the unfavorable $78 million comparability adjustment from the various asset sale transactions, and then a $13 million favorable item, reflecting the pickup of an incremental 38%.
Interest again, and so normalizing for those items you see adjusted EBITDA growing about 13%.
For the first six months comparison.
Year to date, we see Atlantic Gulf up, 21% and the northeast up 20% driven by the same factors that we just discussed on the previous slide, namely Transco revenue growth and strong broad based volume growth across the northeast.
The west is down about 3% on this comparison, reflecting much lower NGL margins and the effect of severe winter weather. This year on volumes Q1 19, all in all very happy with our second quarter performance, which tracks well with our overall business plan from last fall. Despite the declines we've seen in natural gas and NGL pricing and we are very well positioned to continue this growth here in the last half of the year.
Next let's revisit a few of the key investor focus areas and before I dig into that.
The items on this slide I just want to.
I remind you of a few things first of all we just recently announced a reorganization and some other cost reduction initiatives that we have going on at the company right. Now as you May have noted from our recent 8-K after more than 30 years of service, Jim Scheel will be leaving the company in December of this year and we're taking the opportunity to further reduce our operating areas to to one focused primarily on our FERC regulated gas pipeline business led by Scott, how and the other focused on our nonregulated business being led by Walt Bennett, who leads our west gathering business today.
I'll have more to say in recognition of the fine work Jim has done for Williams on the third quarter call, but for now I'll just say the reorganization to two operating areas represents another step toward becoming further simplified and centralized as we seek to.
The very best operator in the natural gas infrastructure business. So these moves are basically taking advantage of the scale that we have in these very similar businesses and.
And continuing to drive common processes in comm systems across our operations.
But we will continue to provide supplemental disclosures to assist in the modeling of our nonregulated business. So don't worry about losing any of that transparency is transparency that we provide today.
Our supplemental disclosure will provide at least as much visibility as you have today and we'll continue to highlight the northeast volume and EBITDA growth that continues to occur.
Beyond the consolidation of the operating areas. We have also initiated a voluntary separation program and are looking at other cost reduction opportunities given the five plus billion dollars of asset sales that we've had over the last three years and really narrowing our focus down.
To the natural gas infrastructure space is allowing us to take full advantage of the scale and I can tell you. The entire management team is very focused on us being having the very best operating margin ratio in the business.
And so we continue to push hard on that as a team and we really believe given the scale that we have we ought to be the very best in the industry on this measure and these efforts are taking us closer and closer to that point. So let's look now at the first item will be discussing which is our financial guidance and progress on de leveraging.
First off we are reaffirming our current financial guidance for 2019, and now guiding to a further improvement in our year end 2019 leverage target.
You can find the various elements of our 2019 financial guidance in the appendix of this presentation. Additionally, we're also affirming our longer term EBITDA growth rate of 5% to 7% per year.
Turning now to to our leverage we achieved a debt to adjusted EBITDA ratio of 4.43 at the end of the second quarter and we now expect our year end 2019 debt to adjusted EBITDA to be less than 4.5 as you'll recall our original guidance was less was to be less than 4.75.
For the same period.
The effects of our transactions along with our recently lowered capital expenditure forecast has allowed us to significantly improve our 2019 debt to adjusted EBITDA expectation for 2019.
There is no change to our long term target of 4.2 that we plan to hit by the end of 2021, and we continue to evaluate transactions that could potentially allow us to reach the 4.2 times at a faster rate.
As an affirmation that we are making the right moves on the leverage front. We recently saw some favorable rating agency actions were S&P improved its outlook to a triple B flat stable rating and Fitch put us on rating watch positive.
Shifting now to discuss the expected growth in our northeast GMP business.
We'd like to first emphasized that we still believe in the strong natural gas demand growth fundamentals that underpin our strategy.
We have seen continued delays in the startup of nearly all of the LNG terminals that were planned to come online in the first half of 19, but that just means we're going to see an even stronger pool on natural gas in the back half of this year.
It really is easy to see that the natural gas demand growth outlook remains very strong driven by LNG export growth continued power generation and major industrial investments that continue to come online trying to take advantage of low cost us natural gas and use low cost NGL prices.
Competence and low cost us natural gas reserves, we will continue to drive strong natural gas demand growth over the long term and as result, we believe that there will have to be a call on natural gas focus supply areas.
Given the continuous growth in natural gas demand and the stronger than ever capital discipline being demonstrated by the producer community.
However, near term, we continue to see commodity price headwinds for our producer customers in the area and we believe that producers are responding appropriately to the current market conditions continuing to plan around or hope for higher price wood prices would only exacerbate the linked in supply.
And we're also very focused on closely matching our capital programs with these latest forecast our northeast growth capital for 2020, probably ends up being about half of what it was in 19 due to this reduce.
To us pulling back capital as well as the synergies that we're realizing from the UEO IBM transaction.
While also making significant near term reductions in 19.
As we continue to respond to the producers dips disciplined approach.
So with that being said, let's take a closer look at our current expectations for the northeast GMP business through 2020 built on the backs of our most recent producer customer feedback.
Starting with 2019, you can see that we are currently forecasting gathering volume growth of about 13%, which should result in adjusted EBITDA growth of 19% for a total of about $1.3 billion.
Year to date, we have generated about 16% gathering volume growth, but we do expect that overall annual growth to moderate in the fourth quarter, mostly just since because our fourth quarter comparison will be up against volumes that grew rapidly after Atlantic Sunrise came on in the fourth quarter of 18.
Looking forward, our 2020 very latest forecast shows about a 5.5% gathering volume growth over 2019 generating about 11% adjusted EBITDA growth to get to about $1.45 billion I might just note that we had always expected a slowing in the growth rate for 2020 versus 19 with respect to our prior 10%, 15% gathering volume Cagar. It seems that folks may be missed the front end impact that was present in the CAGR and instead thought we were assuming more of an annual or equal annual growth rate.
That was never the case and the unequal growth rates across the 2018 to 2021 timeframe. We're indicated given the strong growth that we have been expecting and we are seeing 2019 beyond 2020, we do see an opportunity for stronger growth rate to resume in 2021, but that of course will be dependent on a better balance in the natural gas market.
I'd also just mentioned that as we think about the northeast pricing environment. It's important to remember that even at todays pricing environment producer Netbacks are still better than they were in the 15 and 16 timeframe. When production was constraining them and commodity prices were more a function of the basis differential than Henry hub prices. Since then incremental gas takeaway capacity has come online improving realized prices in the region and the producers have become significantly more efficient and disciplined with their capital during this time frame.
So overall, we are encouraged to see the level of EBITDA growth, our northeast GMP business can continue to generate even in the weak natural gas price environment. We're currently experiencing and we remain very focused on cost reduction and capital discipline as we as we await long term fundamentals to balance.
Now, let's move on to our to discuss our Transco growth projects first let me give a quick update on the Transco rate case, although not a lot of new information to pass along here.
As our confidential settlement process continues.
We've now had five conferences and we continue to work the issues like our OE with our customers last quarter. We stated that the settlement negotiations, we're likely to continue for many months.
They have done that and resolution could extend into next year. We are cautiously optimistic that a settlement can ultimately be reached without the need for litigation and the settlement would include the $1.2 billion emissions reduction tracker that will allow transco to significantly reduce emissions from our existing compression fleet along the eastern seaboard.
And as always I'll remind you that we don't have any upside from the rate case reflected in our financial guidance.
So lets touch on the status of Transcos major growth projects, starting with the northeast supply enhancement project.
This quarter, we quickly reapply for the four one water quality certification in New York, and New Jersey and promptly received notice of complete application from New York and New Jersey has indicated that our application is administratively complete these are very important milestones.
In the re filing of this and taking on some of the.
Technical issues that were raised by both of those states.
Obtaining both of these four one certifications is essential to begin construction. This fall in order to meet the project in service dates the enhancement of the existing infrastructure is critical and connecting much needed natural gas supplies to.
Folks in New York, and while improving the air shed and system reliability in New York and New Jersey.
In may our customer national grid had two announced that they will not be able to process, new gas service request and it service Terry in Brooklyn, Queens and long Island. This means they will not provide any additional connections for 44 from service until there's certainty that the nessie project can move ahead.
Local commercial residential and political support for the project as strong as the need for gas on both an economic and environmental improvement basis is clear and compelling we fully expect a positive decision will come in time for us to maintain our in service date, just ahead of the 2021 winter peaks.
Next I want to touch on a couple of key milestones that were met recently for a couple of our Transco projects. We recently applied for a FERC certificate for our lighting South project. As reminder, lighty South is a proposed 580 million cubic feet per day expansion of Williams existing Pennsylvania infrastructure.
That will further connect Appalachian gas with growing demand centers, along the Atlantic Seaboard in time for the 20 122 heating season.
Also our FERC certificate for Southeastern Trail project is pending approval and the southeastern Trail project is a 295 million cubic feet per day expansion of the Transco pipeline system designed to provide additional pipeline capacity to serve growing markets in the mid Atlantic and southeastern state by November of 2020.
And Additionally, we received permission in June to place a portion of the river Bell South to market project into early service. This project to Transco expansion of 190 million cubic feet per day to service additional customers in New Jersey, and New York City facilities required to provide a 140 million cubic feet per day have already been completed and the remaining facilities are ahead of schedule targeting a September in service date two months ahead of schedule.
Also our most recently announced Transco project regional energy access concluded its open season, and our team is finalizing negotiations with this customer base.
So all in all continued tremendous amount of activity on that.
Transco, both in terms of.
Completing existing projects that we've got underway like Hillabee phase two which is also ahead of schedule.
And a long list of projects that we have in the permitting phase so lots of great effort going on by our.
Engineering construction teams, but with both the permitting and the construction and continued great performance on the capital execution efforts here.
And lastly, let's move on to the deepwater Gulf of Mexico, where we're seeing a pickup in activity and significant new discoveries in and around our assets that has us positioned for significant free cash flow growth for years to come.
Beginning in the third quarter of 19, you will start seeing contributions from our Norphlet deepwater gathering system investment Norphlet delivers gas into Williams Transco system located on one of our Gulf of Mexico platforms and from there the gas will be transported to our recently expanded mobile Bay processing facility first gas production on the system began in late June and we acquired the $200 million Norphlet pipeline in early July the Norphlet deepwater gas gathering system is extremely well positioned for even more growth than the existing anthematic system with approximately 50% of the pipelines contractual capacity remaining available for future produce tie ins of existing discoveries in that area. Today. So this our discovery system is also seeing new volumes from the Hadrian, North and buckskin tie backs, which achieved first production is on our systems and during the second quarter the Hadrian north.
Buckskin liquids rich production flows to our discovery system via the Keathley Canyon connector and ultimately to our LOE rose processing plant and our parity fractionator these tie back.
Opportunities our high return projects and are example of many more to come in the deepwater looking forward. We are very active right now discussing multiple tieback prospects around Devils tower, our deepwater platform, where production could begin as early as 2021.
And on the near Blind Faith, we continue to be excited about chevron in totality ballymore dedication to us where first production could be seen as early as 2023.
And in the very active western golf.
Facility planning for shales, well prospect is on a fast track and we could see f. I'd for our system expansions here in the fourth quarter of this year.
So we continue to see opportunities for significant incremental cash flow in the 2022 2023 timeframe from our deepwater operations.
And we are really excited about the very substantial growth that we're seeing both on acreage that's already dedicated to us and as well new acreage that we're very confident that we're going to be able to pick up given our expansive network.
So with that we will transition to our Q and a session. Thank you again for your time today, we're pleased to share with you our very strong second quarter performance and continued focus on de leveraging and the progress we've made on our many growth opportunities and so with that operator, I'll turn it over to you.
Perfect if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
We are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach or equipment. Once again press star one to ask a question.
We'll take.
Our first question from Spyros Tunis with credit Suisse. Please go ahead.
Hey, Good morning, everyone. First question, just around the financial guidance and being able to reiterate the 5% to 7% long term growth I think we're a little surprise there just given the slight haircut on the northeast volume outlook and.
Alan totally understand your point on the expected slowdown in embedded in that 10% to 15% CAGR.
But it still seems like something isn't there maybe offsetting some of that so maybe just walk us through some of the drivers on how you are able to.
Maintaining the 5% to 7% and if you're able to maybe even pull forward some demand driven projects as an offset.
Yes, Thanks, Mark well I would just say you know obviously when we laid that out.
We were that 5% to 7% we were counting on a certain level of returns from our projects and I would just say that.
Some of those things have gone better than that so in other words, we've had quite a bit of improvement. If you think about it since we laid out that 5% to 7% we've had quite a bit improvements in areas like the Utica within CNO.
And the EU OEM transaction that gives us some synergies and ability to keep our costs, even more under control there in the northeast. So we've actually we said that 5% to 7% some time ago and just like in any big.
The company like Williams, there has been some things that go down a little bit, but there's also things.
That go up and of course.
And we're continuing to put pressure on our cost.
As we talked about so.
You know I would say, we are being agile and responsive to those changes and we're also picking up advantages like bluestem like.
You might have noticed our Conway NGL Frac business was up pretty significantly this quarter, which was on the backs of us building up for some of those bluestem volumes and so.
We're continuing to take advantage, where the opportunities exist and those tend to offset things where things change a little bit to the negative just the benefit of having a big portfolio.
Got it that's helpful. And then just on the faster than expected de leveraging obviously the asset Monetizations played a big part in that.
And it sounds like you expect that to continue.
I guess, if you just look at some of the announcements made by some of your MP customers in northeast recently, just curious if you've seen any shift or reduction in appetite there from potential buyers of JV partners are they still looking like they want to invest more.
Yes, I would just say.
With that has not slowed down a bit I think the you know the distinction out there that's becoming more clear to us is that there. The interest rates are so low out there and they and so much available to that money up against these very certain cash flows and very predictable cash flows that we have.
And so as long as you have the predictability of those cash flows that kind of low cost money is going to be available and we continue to be impressed by that in terms of various transactions that were involved in but it's clear to us that thats people just are being out these very low interest rates against these very.
Very predictable cash flows and I think we're going to continue to see that with with lower interest rates.
Got it Thats also helpful last quick housekeeping one we've got a few inbounds on this lately, but just with respect to Chesapeake and Haynesville contracts, you've got there could you just remind us again, when those contracts roll and what your appetite is at all to renegotiate anything here.
Thus far this is Michael Dunn those contracts are dedicated to us and.
We.
I don't have the exact timeframe on when when you your language about when they might roll, but all that acreage is dedicated to us and.
We are continuing to work with Chesapeake there and.
No they have been active in there and we've been bringing on additional production from them, but we've also been very successful in capturing other business.
In the Haynesville, besides Chesapeake that those coming into our systems there so.
Volume in the Haynesville is up for us and we're pretty pleased with what we're seeing there right now.
Yes, I would just say they're in the Haynesville when we renegotiated that several years ago. There. We did extend the life of that contract and I believe that contract extends out into 2000 Thirtys.
So that was one of the benefits we got out of that transaction. When we renegotiated that a couple of years ago. So and the Eagle Ford is is similar long term timeframe. So theres not any re ups coming in and.
Either of those areas.
Got it appreciate all that color thanks, guys.
We'll take our next question from Gabe Moreen with Mizuho. Please go ahead.
Hey, good morning, everyone. I was wondering if you can talk a little bit overall about the ability to flex capex higher or lower in response, so very young natural gas pricing environment, and you gave a preliminary outlook for capex guidance for.
2020.
The gas prices go maybe sub $2 as or even more ability to flex dot downward.
Maybe you can speak to that or is that kind of 50% reduction sort of workovers, regardless of the environment.
Yes, good question.
Yes, I would just say there are the capital that we have out there.
Today is backed by rate increases or mdcs.
And so if there was.
Further pullback that occurred.
We today I would just say that a lot of that capital that we're talking about really wouldnt move all that much unless there was some kind of renegotiation because most of its underpinned by.
Obligations on on the other side so.
So I really wouldn't expect it to move too much I would tell you that the outside of the northeast obviously these demand pull projects, which will be the bulk of our capital in 2020.
Of course, our AR.
Just further improved by low gas prices, so don't really see any change there and then we've still got capital going in to the DJ Basin.
And the Wamsutter area and those are mostly getting driven off of oil prices. So.
Don't see much change going on there and of course the deepwater.
You know is such a long term play that is really driven by the shift short term shifts in commodity prices.
Thanks, Alan and I guess as it related follow up I was wondering if you can comment a little bit on the.
Headlines that across on the Blue racer system over the last couple of weeks.
I think related to that there was a fairly substantial Marcellus gathering transaction that happened about a month ago and I think Williams.
Ownership and a couple of those systems was there an opportunity to maybe piggyback on that transaction.
Can you speak to that as well.
Yes, no that the interest we have just entered the simple part of that first and then I'll turn it over to our general counsel to answer the more complex question you started with.
The on the pennant investment that we have with rivers midstream up there that is.
Really small interest and there's not really any opportunity there for us so there's really nothing on that front.
We do think there is some good consolidation opportunity up there that we think will likely come our way even with that asset we think theres. Some good opportunity around the liquids that come off of that plant that do come over to you Jim.
But.
But again I just say we were impressed with another high multiple being paid in the space out there and I think we continue to see that and so.
We continue to see our businesses mark well below that.
Those kind of multiples that are being paid so we were impressed by it and we are obviously, we're paying close attention to that I'm going to have Wayne Wilson, Our general counsel respond to you on the Blue racer request.
Hey, guys.
I assume you're talking about the news lately regarding litigation in Delaware.
I think about.
All we want to say there is that we are cooperating and supportive of the efforts.
The IPO the blue racer business.
That said there are a number of rights around the structure and scope certain filings that we have.
Related to that IPO effort.
And the litigation is really just an effort our protective rights beyond that I think we just wait for the court to rule, which we anticipate.
Will probably occur sometime in August .
Thanks, Wayne ill, let the rest and last one for me as it seems like a little bit of.
Push it out to the right on timing on some of the.
Rockies processing expansions I think Alan you mentioned oil being a function of oil prices. It seems like the processing picture is pretty dynamic out there in the DJ can you maybe speak to that and the timing going on there.
Yes, we're really pretty encouraged by the continued steady growth rate.
That we're working with on producers out there we did push out.
Our.
The kings bird to plant and our.
Milton.
Train, we did push those out in our schedule.
But we are really impressed with the growth that we're seeing out there and the fact that we've already filled up just here in one quarter, we filled up that one new train we placed in service.
First part of April .
And so.
We're really pleased with the way that's going.
Actually I would tell you that one of the risks I didn't like about that basin was the peaky nature of the production growth and so that flattening out a little bit with the same amount of reserves back we actually picked up a very large dedication in east Greeley from extraction sense. Since we did that deal earlier and so we continue to build dedicated acreage behind the system and a little slower growth rate with less capital going in wouldn't hurt my feelings at all in terms of the long term return on capital that we would.
See out of that area. So overall, despite all the regulatory concerns which is not to be dismissed.
We actually think the the basins doing very well and the producers are doing a nice job of following through on the permits and a lot of which were already grandfathered.
In the area, so I would be contrarian, perhaps but I am pretty.
Great. Thanks Al.
If you find that your question has been answered you may remove yourself from the queue by pressing star two we'll take our next question from Chris Sighinolfi with Jefferies. Please go ahead.
Hey, good morning, Alan.
Thanks for all the moving out so thats really helpful.
I did want to follow up on a couple of areas.
The leverage guidance change last night I noticed obviously it came down a touch without any sentiment change in EBITDAR Capex ranges. So im just wondering is that.
Is that sort of a feeling that youre going to be at the higher end of EBITDA range or the lower end of the Capex range for both.
Or is it some other cash flow item like that working capital change or something like that we should pay attention to.
Yeah, Great question and very fair one.
I would just say that.
And as well I would just say we've got more confidence around.
The way the quarter is gone and when things pretty interesting. If you think about it we always show our Capex and Thats, a gross capex number and so when we when we for instance, the the JV we have now with CPP. That's our growth gross capex. That's embedded there as that is our gross but our capital burden, obviously is less with the with CPP picking up some of that capital load from us and so that actually helps that as well a little bit.
Okay, No I think maybe I had not quite pay attention to that latter part so I appreciate that.
Also pivoting a little bit I wanted to follow up on sparrows earlier question around your gathering contracts, perhaps frame it more broadly than he did.
As you had referenced you renegotiate some agreements in select areas and with select Counterparties and the 2015 16 timeframe.
I think an often instances you received an upfront cash payment and then subsequently lowered the rate to spur activity and.
Preserve I think in total your NPV I'm, just wondering given the pullback now and the intense focus on producer activities.
If you are having similar conversations with anybody anywhere.
No not not that I'm aware of.
Chris I am not.
See anything out there right now there are certainly a lot of desire.
As we always have theres always desires with our producers to further streamline and align our interest out there and so they are certainly on that but I don't know of anything where there would be an upfront payment.
Kind of situation out there right now.
And really the only thing.
As we had that really was the.
Was the Barnett the Totalgaz now the operator on and so we're constantly working with total in alignment and especially in a low gas price environment. We work closely with them on reducing cost between the two of us out there very healthy relationship and a very positive one.
With total there in the Barnett.
Okay, Great and then a final question from me Alan It's obviously pay attention to.
What you guys are are seeking.
In Texas with the Exco situation feels like ours, he is going to make a decision here.
Next week and I'm, just curious if I could get a little bit more color from you on.
Hey, the background, there and if that's.
A situation that might.
Be replicated elsewhere.
If you haven't producer that's flaring on a system that already exists and how that maybe dovetailing onto some of your DSG efforts.
Yes.
Yes, great question when it truly is one of those things were just doesnt frankly from our perspective make a lot of sense, but it is very complex background that was originally.
That that acreage was dedicated under the Chesapeake agreement.
Chesapeake sold their men mineral interest.
To exco it didnt move the dedication and so those are the cost of that those assets.
Remains in that cost of service calculation under the Chesapeake agreement and so just because they sold it didn't mean it changed the nature of that the gas was physically connected to our system and had previously flowed and so this isn't a situation, where we're saying hey, our pipelines sitting out there and we could connect it to you. It literally is connected and so from a given that this is sour gas.
And therefore puts off lot of H two S has what age to us component in it.
And would put off Esso too and but we think there is a lot of good reasons to be making sure that thats going on I will say that our team has worked in a very positive manner out there with ESCO. Despite the conflict we've been working with them in a positive way to try to contain the gas and be buying the gas from them and so we are working on continuing to improve that relationship and be constructive as we always would so I do think we're going to wind up at a constructive place on that but it is a complex issue because that that actually was is under an old Chesapeake agreement and the cost of those facilities that we installed we're under that cost of service agreement. So.
It's about as far as I'm going to take that one, but but we are I would say.
Our move out there was just one of protecting our rights.
And the the contract.
For the Chesapeake acreage out there prohibits flaring. So you shouldnt assume that this gets extended.
Two two.
To further actions in the area because it specifically prohibits that so don't really see any follow on from us.
Okay.
Well, thanks again for the time and congrats on the steady execution, it's certainly not been lost on us.
Thank you very much appreciate it.
We'll take our next question from Jeremy Tonet with JP Morgan. Please go ahead.
Hi, Good morning wanted to pick up on the balance sheet situation here. It seems like you guys have been quite busy as been noted on the call with asset sales and strategic JV is really accelerating the deleveraging process. Here I was just wondering if you could expand a bit more on how you see leverage kind of progressing here I mean, if you're bringing in 2020 capex coming down as you noted.
I wanted to see the potential to continue to maybe divest assets in the west that don't have that are not contiguous and can't have value chain integration.
And possibly the ability of moving forward hitting that four to leverage target.
If things come together there.
Yes.
Jeremy Good question I would just say, we're always looking at that and I would say another driver for that which is more value than just deleveraging because I think we're on a very clear path in our mind to get there anyway, and so we feel pretty confident just on the natural path Ron to getting there. However.
Given the value spread between what the private.
Space is willing to pay for these cash flow these very certain cash flows versus what the public.
Equity is value Matt. It just continues to provide an opportunity for us to gain value for our shareholders and so.
I would say, even if it wasn't for that.
For the de leveraging benefit that comes from that we would be looking at those kind of opportunities anyway, just because we don't feel like our gathering and processing assets are valued appropriately impact I would question, where we are today I would question if our pipeline assets are being valued appropriately so.
So we'll continue to take advantage of that spread.
And of course, it does have the benefit of continued de lever pretty rapidly as well.
That's helpful. Thanks and.
Just turning over to Reno regional energy here I appreciate that you're at a kind of commercially sensitive point in the development, but just wondering if you could expand a bit more as far as kind of a shipper interest and how you see that progressing.
Yes, Michael done here, we had a lot of interest in that project, we are working through those scenarios of delivery points and supply points and.
Our optimistic that will ultimately have a very nice project. There there were several past that were available there to shippers submitting under the open season, and we're just evaluating the submissions that we received and configuring various scenarios to.
Ultimately make a great project for Transco and our customers there.
That's helpful. That's it for me thanks.
Thanks, Jeremy.
We'll take our next question from Shneur Gershuni with DBS. Please go ahead.
Hi, good morning, guys.
Maybe to start off on the northeast guidance just to come back to it a little bit here.
If there is sort of a delta in the CAGR between the volume metric growth rate versus EBITDA growth rate and I think my understanding is that it's a function of timing with respect to the contracts and the contract structure and so forth in a hypothetical scenario, where 2021 lets say with zero percent growth with there still be some EBITDA carry over that would roll into 2021 in a scenario of zero growth.
Sure I don't know that we have evaluated that I would tell you we run a pretty precise model that gets us to that but I I don't know for certain so I don't want to speak out of school on that we have confidence in model, we have but I don't want to get out on the land without without the benefit of the detailed model behind me on that answer so I'm not saying it doesn't I'm just I'm not certain as we sit here.
Okay that that makes sense and then secondly on on the northeast.
If if I read your tone correctly.
It sort of sounds like you're trying to shift towards a harvesting cash flows from the northeast in kind of a just in time kind of capex approach.
Is that in fact correct and.
No as you sort of think about projects or new drilling.
Where do you expect to spend the majority of your Capex kind of on a go forward basis.
Yes, I would say I think we've always been on a just in time mode. There in the northeast for many years now and making sure that we're staying aligned with the the customers and producers up there that are coming to us wanting additional capacity and we'll still continue to do that we're finishing up some pretty significant projects this year with the.
DXP to installation at Oak Grove that now online. This will have a checkmark pipeline, our monarch pipeline, which is an NGL pipeline that goes to our Harrison.
Fractionation complex. So we've got a lot of capital that.
We are deploying this year that will be rapidly filling.
So I guess in future years, I would say, we are going to be very responsive to the customers. There we are still talking to them about expansions and.
On the Cardinal in Flint systems, and evaluating their new acreage there that they bought from Chesapeake and we're excited to work with them on that as well. So I think we've got a lot of opportunities there to continue to look for expansions and it's certainly going to be dependent upon price with many of those producers up there very.
Great and maybe one final question.
I'm really not sure how much you can say about the pending rate case, but if I sort of think about the double the lens play the landscape out there.
It's increasingly getting extremely difficult to build.
Greenfield projects.
I'm sure you're aware of everything that's going on and so forth and so I'm sort of thinking about an outcome where.
Your customers or Interveners are pushing for.
Let's see a lower ROI, we authorization wouldn't that disincentive voice you to build any further I mean, they can't force you to actually expand Transco and does that factor into the process of negotiations about coming to a win win scenario because.
It's difficult to build and at the same time.
You have a system in place, but if the in force a low return on you then you have no incentive to actually build and just wondering if you can sort of comment about that and whether thats something that comes into the discussion process.
Yes, I would just say, it's a pretty complex issue, but maybe to bring it home to something pretty simple.
The the emissions reduction program that we have which is a 1.2 billion dollar program that benefits, everybody and including directly our customers in those areas because we reduce emissions in the areas, which allows for further expansions.
Businesses in the area by reducing emissions and so for their power plants for instance, so there's a lot of positives that come out of emissions reduction project and obviously a lot of those customers have been making those similar investments in methane.
Leak prevention, and so forth so they spend a lot of money on their systems under their Pcs to reduce greenhouse gas emissions and I think everybody is in favor of us doing that.
Getting a low return up against our portfolio of other opportunities.
Doesn't really get us very far on that because we need to have the economic incentive to make those investments and so.
And to your point, we have these other items and really where that Nexus comes together.
Is up against project expansions and so if we have high return opportunities for expansion projects because things are so difficult to build that is going to get the money up against a lower our OE.
We will we will have negotiated rates that generally get us to a higher rate, but that of course, then just puts pressure on the capital allocation process on opportunities for those kind of investments and as well things like cyber security and everything else that we need to invest on so we've got to make sure for the health of this industry. We've got to make sure that those are always are in line with the the investment opportunities across the space and if we don't.
We're not we're not really the FERC really is veering away from its responsibility to make sure that those returns are attractive enough to incentive investment into space and so that's that's certainly a key issue as weak as we go into those negotiations.
I think it's clear to say as part of that.
Discussion and negotiation.
The difficulty with building new pipe risk that Companys pipeline companies bear to build buildings new assets certainly goes into the reality that this isn't a super low return environment I mean, we need we need an appropriate return to go along with the risk.
Some of the timing delays and other things that go into construction pipelines today. So.
That's certainly part of the argument.
Okay perfect guys really appreciate the color. Thank you very much.
We'll take our next question from Christine Cho with Barclays. Please go ahead.
Good morning.
So good morning, Chris.
The lower northeast guidance now isn't that surprising just given recent commentary out of producers, but can you talk about how you came to the lowering of your guidance. Some of your producers have publicly talked down numbers, but others less. So so can you just help.
Let me reconcile how much of that is your own estimates on what you think producers are going to do and how much of it is what producers told you that they're going to do.
You know there are certainly small pieces in there, but I would tell you the vast majority of our.
Information is directly in line with detailed work that we do with our producers they can't.
They can't surprise us and want.
Production brought online we have to plan well in advance with them and so while there may be little pieces here and there.
It's pretty detailed and we keep that model up to date with the very latest work that we're doing with producers. So Michael I don't know if you'd add anything to that yes, Christine we do detailed analysis with each one of our producers some of the producers we meet with a weekly to plan our projects and planned activities associated with their either their well connects that are coming online are there future expansion opportunities. So.
We have a very robust planning process with nearly every one of our producers up there and that's what we desire with every one of them and we strive for.
So we do a lot of work with them in order to make sure that we're not getting out in front of them, but we're also meeting their needs and we worked really hard to to scale back a lot of our capital investment.
Immediately with the producers when they told us that they were scaling back some of their third turn in lines for their wells.
And so we were able to very quickly take a lot of capital out of our northeast investments that we had planned for therefore torbert edging toward the lower end of our growth capital guidance, just because of that activity downturn.
Okay helpful. Thank you.
And then given the changes.
At HCP and other customer can you just remind us how your contract that doesn't work if their volume commitments or acreage dedication.
And if you could confirm that tenor left on that contract and whether or not you expect does that change is that that might be an opportunity or more neutral.
Well I would just say that the contracts are long term in nature and they do come with an MVC.
And it's a MVC that has that ramped up over time. So we do have that I'm not going to get into a whole lot more detail beyond that.
And I would also just add that a lot of the acreage that they are that the new management group is very focused on is in the west Virginia area, where we have a lot of.
Existing infrastructure in the area. So were encouraged to be working with them. We've got a lot to offer them, but our existing contracts our MVC based and they are long term.
Okay, and then last one from me.
Can you just.
Walk us through what when do you need all your approval is by far the northeast the by enhanced that project in order to hit the winner 2020 2021 in service date.
Yeah Christine Thanks for the question we are working through the four one certifications with both New York and New Jersey right now we would hope to have those in hand this summer.
In order for us to be able to then achieved the four for permit from the corps of engineers.
And then we intend to start construction. This fall on the project, primarily the compressor station construction what would occur first.
That is the really the long lead pacing item here and with all the environmental Windows that are associated with the offshore construction.
We slaughtered that construction in for next summer so the real pacing item here as the compressor station that would be on the critical path because it's a longer duration construction. So we would expect to have in hand for Olin certifications. This summer and then shortly after that deferral for permit.
Would have a very small public comment period that would open up and we would have that well for permit so that we could go to the FERC and then ask for a notice to proceed.
And then begin construction in the fall.
We'll take our next question from Dan Sorry, Dinallo Juvane with BMO capital. Please go ahead.
Caller your line is open.
Good morning, Thank you for squeezing me in.
I wanted to start with the northeast and thank you for providing guidance for for the segment for next year.
To the extent that you have provided this information.
Beyond 2020, or how should we think about volume metrics sensitivity.
As it relates to EBITDA for instance for 8% change in the growth rate what does that translate to.
From an EBITDA standpoint going forward.
Yes, I think obviously, it's dependent on what the growth is not perfectly linear obviously, but.
I would just say that the ability to continue.
Two.
Have a higher EBITDA growth rate.
Than volume growth rate will continue just because our.
Our cost structure is more and more efficient our unit cost continues to lower over time.
And so as volumes go up so so that relationship.
There's not really any reason that that would stop for us some of the.
Pretty significant increase that we've got here in the front end is based on some higher rates associated with the capital we placed and so when you you wouldn't see.
Continuing increase to that rate, but the basic fundamental piece of lower unit cost with higher volume will continue to benefit that relationship.
Thanks, and then Alan.
Second one from me the long term, 5% to 7% growth rate.
To the extent that.
Can we still sort of hit that that growth rate going forward, how should we think about that.
I'm, sorry, I didn't know I didn't quite understand which growth rate, you're talking about 5% to 7% correct. The 5% to 7%. If there are any additional delays, it's an easy Francis from a timing standpoint.
Is that something thats still kind of is intact going forward.
Yes, we've got I would just say you know a lot of other variables to consider other than just.
Nesting season, very attractive project for us.
But there are a number of other things, but I would certainly say that we are confident right now and thats occurring in that is included as we think about that 5% to 7% growth rate out there right now that is included in that but.
As we mentioned we have a lot of other things that.
Our variables in that as well and and we tend to find a way to offset.
If we did have a negative surprise on that if some time, but I would just tell you. We as a team are very confident right now in that going ahead, just because we know how critical it is to that area that it does go ahead.
Thank you those are my questions.
Thanks.
We'll take our next question from Jean Ann Salisbury with Bernstein. Please go ahead.
Good morning over the past year, you, Dan gathering market share in the northeast and driven by Atlantic Sunrise and your 20, 25.5% growth number can you do you know if you're kind of expecting to gain market share or is that the same rate that you would expect the basin Integra and you're just in line with that.
Yeah, we're not counting on any new customers out there in that number so thats just off our existing base of customers.
If thats your question obviously.
Different.
Producers have different mode is in different activities that go on out there so its not perfectly ratable across the space. Obviously, so I don't really know what the.
The broad base.
No estimation is but I can tell you that's just from our existing customer base that we have out there in terms of our growth rate.
Okay that makes sense and then just as a quick follow up I think in 2020, there are some Gulf of Mexico, NBC or left related to gunflint and can you just give any range that you have.
The EBITDA decline that might be associated with that.
Yes.
I don't we don't have any mdcs out there and we do have we do have some deferred revenue step downs that occur.
And we had some fixed payments that actually decline so.
Recall that in the tune of.
75 million roughly in that range of the step down between 19, 2019 and 2020.
Okay perfect. That's all for me.
Thank you.
We'll take our next question from Becca Followill with US capital Advisors. Please go ahead.
Good morning, guys.
Following up on that the northeast gathering so if I'm looking at page 10 with your growth projects.
Is it fair to say that when you referenced the Mbcs that you have on this gathering that the Susquehanna gathering for 19, and 20 and then the Brad for gathering.
Those are going forward, regardless that those have mbcs associated with them.
Well just to be clear the most of the Susquehanna gathering doesnt have mbcs. It has higher gathering rate. So the gathering rates applied across all of the volumes not across there theres not mdcs to be clear in Susquehanna Bradford on the other hand is a cost of service agreement. So that is dependent on the capital being placed in once the capital as requested and that goes into the rate of return calculation.
So so said another way, it's not volume sensitive once the capital has been put in place.
So with the pullback in producer activity. These projects are still going forward.
No change at this point and then on.
On the Gulf of Mexico can you quantify on the Norphlet pipeline that you acquired and then the incremental discovery volumes from Hadrian Northern Buckskin tie backs.
What kind of EBITDA those contribute.
I don't believe we've provided that detail I think we have said that the norphlet was a five to six multiple project for us. So you can do the math on that 200 million.
And that is just against the base field out there. So there are some other nice discoveries in the area that that we are very well serve very well positioned to serve but that is going to come on to the next.
In the next couple of years that will be beyond that period.
And then finally, you talked about will possibly be an f. aidid at the end of this year.
But on the page 10, it shows that as a 2022 plus so was that if it's if I did this year is it still 2022 plus.
Yes, just to be clear my comment was our infrastructure. So our system not speaking for the producers on that but given our work with the producer we would be.
Looking at by the hour work in our expansion associated the dedications already there and so we would be.
Taking action on our part based on the dedication so just to be clear on that so yes, we're not going to get ahead of shell and chevron on their on their timing on on the project out there, but I would tell you. It is on a very fast track within both shops.
But it would still be 20 to 2022 plus per page 10.
Yes, EBITDA, yes, yes, okay that takes into that that pages intended represent when we believe project really will come into full service yes.
Okay got you. So we've got we've got a lot of we've got a lot of work to do out there and so RF ideas necessary to to make sure that we're not on the critical path.
Gotcha. Thank you.
That concludes today's question and answer session Mr. Armstrong at this time I will turn the conference back to you for your closing remarks.
Across transco across northeast the deepwater and.
Excited to see the DJ start contributing as well we appreciate all the interest and continued support for the company. Thank you.
The conference has now ended thank you for your participation you may now disconnect.