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Edited Transcript of WMB earnings conference call or presentation 31-Oct-19 1:30pm GMT

Q3 2019 Williams Companies Inc Earnings Call

TULSA Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Williams Companies Inc earnings conference call or presentation Thursday, October 31, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan S. Armstrong

The Williams Companies, Inc. - President, CEO & Director

* Brett Krieg

The Williams Companies, Inc. - Assistant Director IR

* John D. Chandler

The Williams Companies, Inc. - Senior VP & CFO

* Micheal G. Dunn

The Williams Companies, Inc. - Executive VP & COO

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Conference Call Participants

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* Alexis Stephen Kania

Wolfe Research, LLC - Utilities SVP

* Colton Westbrooke Bean

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research

* Craig Kenneth Shere

Tuohy Brothers Investment Research, Inc. - Director of Research

* Derek Bryant Walker

BofA Merrill Lynch, Research Division - VP

* Gabriel Philip Moreen

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Jean Ann Salisbury

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Praneeth Satish

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Good day, everyone, and welcome to The Williams Companies Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Brett Krieg, Head of Investor Relations. Please go ahead, sir.

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Brett Krieg, The Williams Companies, Inc. - Assistant Director IR [2]

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Thanks, Brittany. Good morning, and thank you for your interest in The Williams Companies. Yesterday, afternoon, we released our earnings press release and the presentation that our President and CEO, Alan Armstrong, will speak to momentarily. Joining us today is our Chief Operating Officer, Micheal Dunn; our CFO, John Chandler; our General Counsel, Lane Wilson; and our Senior Vice President of Corporate Strategic Development, Chad Zamarin.

In our presentation materials, you will find an important disclaimer related to forward-looking statements. This disclaimer is important and integral to all of our remarks, and you should review it. Also included in our presentation materials are non-GAAP measures that we reconcile to generally accepted accounting principles, and these reconciliation schedules appear at the back of today's presentation materials.

And so with that, I'll turn it over to Alan Armstrong.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [3]

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Great. Thanks, Brett, and good morning to everyone. Thank you for joining us and -- as we discuss our third quarter financial performance, and we also will hit on the key investor focus areas of today, as we usually do. So let's move right into the presentation and take a look at our third quarter results.

On Slide 2, we provide a clear view of our year-over-year financial performance. And as you can see, we continue to enjoy steady growth in our key measures despite the asset sales that we've continued to execute on. And in fact, I'm very pleased to say that our third quarter saw records for our fee-based revenues, for our adjusted EBITDA, and of course, these were driven by record operating gathering volumes, which exceeded 13 Bcf per day in the period, and as well record contracted capacity on a regulated gas pipeline. And these, combined, overwhelm the small amount of remaining NGL margin exposure that was certainly low and, in fact, about as low as I can remember that we've seen in terms of margin contribution from the quarter. So really nice to see our strategy of focusing on fee-based revenues and growing that, coming through at a time where we had a low cycle on commodities. But again, we powered through that with the growth in fee-based revenues.

So taking it from the top and look -- see here our cash flow from operations, which increased 15% for the quarter and 16% year-to-date. And this continues to outpace our CapEx. And as you can see, on a year-to-date basis, our CFFO has exceeded our CapEx by over $630 million. On the next line, we show 7% and 8% year-to-date growth for adjusted EBITDA, and I'll have more to say about adjusted EBITDA performance on the next couple of slides. And then as you can see, we posted continued growth in adjusted earnings per share of 8% for the third quarter and 23% year-to-date, even stronger than our adjusted EBITDA increases. And on DCF, we were up about 8% and 16% year-to-date with growth in the per share calculation and continued strong dividend coverage ratio of 1.79x, which continues to exceed both our 2018 coverage ratio as well as our guidance for 2019. And you can see our ending leverage metric for the quarter was 4.47x, demonstrating that we are on target with the 4.5x guidance that we have for the year-end. So overall, nice improvement in our various earnings and cash flow metrics despite the impact of almost $2 billion in asset sales affecting the comparison and much lower commodity price environment that we had in 2018.

So now let's move on to Slide 3 to discuss the main business drivers of our year-over-year adjusted EBITDA growth. Here on Slide 3, where we compare 3Q '19 to 3Q '18, the adjusted EBITDA increased about 7% or almost 10% if you adjust for the bigger transactions that affect the year-over-year comparison. On the left side of the slide, you can see in gray that we have an unfavorable $47 million comparability adjustment, which includes removing the adjusted EBITDA from the various asset sale transactions completed during the last 12 months, and then netting out the $13 million favorable item reflecting the addition of the incremental 38% UEOM ownership interest, and so that's the additional interest that we're not consolidating in the Utica East Ohio Midstream business. And so normalizing for those items, you see adjusted EBITDA growing $112 million or almost 10% on this comparison.

So now moving over to look at the financial performance of our continuing business. Similar to the first 2 quarters of this year, the Atlantic-Gulf led with a 28% increase in adjusted EBITDA driven by top line Transco revenue growth from new expansion projects. Of course, the Atlantic Sunrise and Gulf Connector were 2 that were powerful in this comparison. And additionally, our third quarter 2019 Transco results reflect about $44 million of adjustments related to the settlement we've reached in our Transco rate case. And of course, this was recorded through both revenue and other income and expenses. I know there's a lot of questions on that. We look forward to being able to shed more light on that at our upcoming Analyst Day. And -- but I will have a little more to say here on -- as we hit Slide 5.

Lastly, we did see a temporary drop in our deepwater volumes associated with tropical storms and producers' maintenance activities. But deepwater production is back to normal for most producers now in the fourth quarter and, in fact, growing in the Gulf East due to new production from Who Dat and the Norphlet ramp-up that continues. But we continue to be very impressed with the activity and the deal flow around our assets in the deepwater, and that's another item that, of course, we'll spend quite a bit of time at our upcoming Analyst Day on.

Next up, looking at the Northeast G&P area. We see a 17% increase in year-over-year adjusted EBITDA driven by an increase of about 1.3 Bcf a day or 17% higher gathering volumes and higher gathering fees associated with expansion projects. Volume increases were led by the Susquehanna Supply Hub and the Bradford areas, which grew about 850 million cubic feet per day. And we also saw a double-digit growth rate in all of our other operated Northeast franchises. So overall, our operated assets in the Northeast continue to see very strong growth in volumes across the board.

And finally, in the West, we saw about a 16% decline driven by about a $29 million decrease in revenues for our Barnett gathering business. This decrease was associated with the end of some minimum volume commitments in that area and a related step-down in deferred revenue amortization. So that was a onetime step-down that was associated with some cash that we had received earlier. And that cash was being amortized according to the volumes that -- or the revenues that we were receiving. And so once that MVC step-down kind of compounded, that stepped down. The Barnett MVCs expired at the end of June '19, and so once that did happen, the revenue recognition rate of the fixed payments we previously recorded began to be based on actual volumes rather than the MVC levels. So this was an expected step-down in Barnett revenue recognition for this area, and we have been forecasting it, but we also saw a $32 million lower NGL margins in the West as unit margins in the Rockies were down by almost 50%. Partially offsetting these impacts was the strong growth in the Haynesville, the Eagle Ford and the Rocky Mountain Midstream franchise in the DJ Basin. And in fact, adjusted for the Four Corners Area sale in 2018, our West gathering volumes actually increased by about 2% on this comparison. And finally, I want to mention our Conway frac and storage business, which continues to see strong year-over-year fee revenue growth on the back of NGL productions in the surrounding areas like the DJ and the Bakken.

So next, let's take a quick look at the adjusted EBITDA growth year-to-date. And so now on Slide 4, we show the year-to-date comparison. Adjusted EBITDA increased about 8% or about 12% if you adjust for the bigger transactions that affect the year-over-year comparison. Pretty similar story year-to-date as you heard for the third quarter, so I won't drag you back through that.

On year-to-date drivers, we see Atlantic-Gulf up 24% and the Northeast up about 19% driven by the same factors as we discussed. The West is down about 8%, reflecting much lower NGL margins and, again, the step-down at the Barnett revenue that we just discussed and the effects of severe winter weather this year on our Wyoming volumes during the first quarter of '19.

As with the third quarter comparison, our full year West results actually reflect strong growth in the Haynesville, Eagle Ford and the Rocky Mountain Midstream franchise in the DJ as well as our Conway storage and frac business. So very happy with the growth we continue to show in the Atlantic-Gulf and Northeast this year and the stability of our volumes in the West and the strong revenue growth, all leading to an 8% growth in adjusted EBITDA even considering the significant asset sales and low NGL margins and the onetime step-down in the Barnett revenue recognition. So overall, operationally, a really strong performance, overcoming a lot of those other structural issues.

As you look over the sequential comparison to the second quarter of 2019 here on Slide 5. I'd point out that overall gathering volumes increased sequentially just over 0.5 Bcf a day to now over 13 Bcf per day for the first time. And this was led by a 5% second quarter to third quarter increase in the Northeast and was somewhat negatively impacted by the deepwater production outages that we previously discussed. But the biggest driver 2Q to 3Q in the Atlantic-Gulf was the favorable impact of reaching settlement terms with shippers on Transco.

With respect to the lower West results, the onetime step-down in Barnett revenue recognition amortization and the MVC expiration drove the decrease from the second quarter, and the onetime Barnett step-down overshadows what was actually about 4% improvement in gathering volumes sequentially in the West. In fact, our West gathering volume trend continues to hold up well in a very tough commodity price environment, and now that we're past the revenue recognition transitions and the MVC expirations, the steady nature of our West operations will become increasingly more visible. The operational cash flows are holding up in the West, and the CapEx requirements are coming down, generating significant free cash flow from our West assets.

So overall, we're pleased with our operational performance in the third quarter, and it's very encouraging to see the kind of volume growth we continue to generate in the Northeast and the West G&P businesses. And in fact, it's the first time that I can recall that our fee-based business growth being able to overwhelm such a substantial decline in commodity prices, showing that our move towards a more sustainable and predictable cash flow is now really paying off for our long-term investors.

Now I'm going to move on to Slide 6 and take a look real quickly here at the key investor focus areas. First on financial guidance, we are reaffirming our current financial guidance for 2019. It's definitely been a challenging commodity price environment for natural gas and NGLs versus the market's original expectations and our own for 2019, but I'm pleased to say that it looks like we'll be able to deliver on our financial guidance once again this year in spite of this negative impact. As is reflected in our year-to-date results through September, 2019 has been a year of strong free cash flow generation. And I'm pleased with the way our teams have kept us on track with our original business plan from a year ago and how they continue to exceed expectations on project delivery, on generating new business, all while spending less capital than we had planned. In fact, despite losing about $100 million of our planned direct commodity margins, we are still on track, proving up the diversity of our cash flows and the power of crisp execution by our teams.

Also, growth CapEx could easily come in under the low end of our $2.3 billion to $2.5 billion guidance range, which, as you know, has already been reduced once this year. And our dividend coverage ratio continues to be better than our 1.7x guidance. Our 2019 results illustrate the steady and strong cash flow growth profile of our large-scale diversified natural gas-focused business and the excellent security of our dividend even in a very tough commodity price environment.

Moving on now to 2020 guidance. We're currently working through our 2020 operating and capital plan and intend to provide the 2020 financial guidance at our upcoming Analyst Day on December 5. At this event, we'll also provide our latest views on the sustainability of our natural gas-focused strategy and our unique positioning to grow alongside the continued expansion of natural gas as a preferred and vital fuel around the world.

Although we have great confidence in the long-term sustainability of our business strategy, the current low natural gas and NGL prices, which are exceeding the long-term growth of natural gas demand, had had a pretty significant impact on the forecasted near-term growth from our G&P business, particularly in the Northeast. And clearly, our producer-forecasted cash flow that they have available to drill with has been heavily impacted by much lower strip prices for gas and NGLs. And as a result, our 2020 Northeast gathering volume growth forecast had steadily drifted downward. As we said earlier in the year, we're committed to keeping our guidance up-to-date with our changes in our producer plans, and so we've continued -- as those forecasts have come in, we've continued to make those changes.

However, as we've said before, confidence in low-cost U.S. natural gas reserves will continue and is continuing to drive strong natural gas demand growth over the long term, and there will have to be a call on natural gas-focused supply areas given the continuous growth in demand and the stronger-than-ever capital discipline from the producer community. And of course, we will be extremely well positioned and are well positioned for the upside associated with that.

As a result, we believe that as long as we continue to see natural gas demand growth, that we should see the volume and capacity demand growth necessary to generate the 5% to 7% adjusted EBITDA CAGR that we've continued to talk about over the long term. To be clear, this does not mean that every year, we will be exactly in that range. Some can be slightly lower and others, like this year, will be above.

The 2020 financial guidance we'll provide in early December will be built off of low strip prices for natural gas and NGLs, and because of this, we view the guidance as having significant upside as the gas market rebalances. However, we're pleased to say that we have been taking measures to mitigate this risk, and our 2020 plan will show the discipline and resulting improvement that we've been putting on our cost structure. So we've been seeing and realizing we were going to have some risk associated with this. We've taken a big swipe at our cost, and team's been extremely effective on doing that. And so the benefit of that as well as some other continued growth, we believe, will continue to offset the reduction that we continue to see in the Northeast. So we will see reduced capital expenditures in the Northeast, but we also are very focused on the very strong dividend coverage that, that's providing us.

So speaking of growth capital, our 2020 capital budget will be dominated by regulated pipeline expansions as much of the major buildout of our G&P systems will be completed by the end of this year, writing even higher levels of free cash flow growth than we'd earlier expected. One of the areas that is beginning to be a big driver of free cash flow growth is the Northeast operating area, and we have been working hard to stay on top of the producer forecast changes in the Northeast. Our previous guidance for the Northeast G&P for 2019 remains intact, where we are currently forecasting gathering volume growth of about 13%. And this should result in adjusted EBITDA growth of 19% for a total of about $1.3 billion. So not a bad year given all the much more negative forecast provided by research and others. So year-to-date through the third quarter, we've generated about 17% gathering volume growth, but we do expect that overall annual growth to moderate here in the fourth quarter since our fourth quarter comparison will be up against the volumes that grew rapidly right after Atlantic Sunrise came online last October.

Looking toward 2020, our latest forecast informed by our planned producer activity shows about 3.5% gathering volume growth versus our previous expectation of 5.5%. The decline in expected G&P volume growth was driven primarily by lower forecasted -- sorry, lower customer-forecasted volume growth in the Bradford, Utica and the Susquehanna areas as producers continue to react to lower forecasted 2020 natural gas and NGL prices. And based on this forecast, we would still expect adjusted EBITDA growth of about 8% to get to about $1.4 billion, so $50 million lower than what we had for our second quarter expectation for '20 but still $100 million of growth here in -- from '19 to '20. So the decrease in expected adjusted EBITDA also included pretty significant reduction from the Blue Racer investment. So part of that $50 million reduction comes from the nonoperating investment we have in Blue Racer.

And then beyond 2020, we continue to see an opportunity for a stronger growth rate to resume in 2021 in the Northeast, and that, of course, will be dependent on better balance in the natural gas market. But we remain excited about how well we are positioned for that call on natural gas.

So overall, we remain encouraged to see the level of EBITDA growth our Northeast G&P business can continue to generate in a very weak natural gas and NGL price environment. And we remain very focused on cost reduction and capital discipline as we await long-term fundamentals to balance. We believe it won't take a large price recovery to quickly restore growth rates above 8% for our Northeast G&P footprint.

So now let's move on to discuss our Transco growth projects. First, I'll provide an update on the rate case. Very pleased that we have reached an agreement on the terms of a settlement. And as a result, we've produced the reserve we've established against the cash we've been receiving from the filed rates that went effective in March of this year, which along with other related accounting entries results in about $44 million in favorable adjustments. The agreement will resolve all issues in the rate case with no need for any hearing. Of course, final resolution of the rate case is subject to a filing to -- for us to file a formal stipulation in agreement with the FERC and final approval by the FERC. So a lot of process still in front of us to get final resolution on that rate case, but we're very pleased with the way that came out. The terms of the settlement are nonpublic until the stipulation and agreement has been filed with the FERC. We will provide an overview of the key terms of the settlement following the FERC filing. For now I'd just say we're pleased that we were able to reach agreement on the key terms with our customers and related regulators, and we await the final FERC approval of the settlement.

But I want to make it really clear on one point here. I would caution you from thinking that this reserve adjustment provides you with a clear picture of the annual run rate impact for 2020. And we certainly look forward to being able to show you the full impact once those filings are completed.

So let's touch on the status of Transco's major growth projects, starting with the Northeast Supply Enhancement project. Lots of headlines out there related to this very important project for the residents and businesses of New York City. We are still awaiting the state water quality certification permits required for the project from both the New York DEC and the New Jersey DEP. At this point, the risk to our targeted in-service date is increasing, although we are going to do everything we can to meet our targeted in-service date for the fourth quarter of 2020. It is quite challenging to bring the onshore compression facility portion of the project, which is there in New Jersey. Really challenging to get that done within a year's time frame, and that is the current critical path that we'll be up against. But currently, we still feel that we can help support the peak loads for the '20 and '21 winter. So a lot of great work by our team that's been going on, on that. I can tell you there's been an impressive amount of work in working with the various agencies and the various stakeholders on that, and I remain confident in our ability to bring that one across the line.

So next, I'm very pleased that we're able to place our Rivervale South to Market project into full service ahead of schedule. The project is a Transco expansion of 190 million cubic feet per day to service additional customers in New Jersey and New York City.

We also received FERC approval for our important Southeastern Trail expansion. The Southeastern Trail project adds about 295 million cubic feet per day to the Transco pipeline system, and this is designed to bring gas from -- to serve growing markets in both the mid-Atlantic and Southeastern states by November 2020.

In fact, all of our Transco projects that have been permitted for construction are progressing well. And finally, our most recently announced Transco project, the Regional Energy Access project, is now headed for approval at our upcoming November Board meeting, so great work by the teams in pulling that project together as well. And I'll remind you that one of the chief benefits of that project is being able to utilize our existing right of ways for that project.

Now moving on to Slide 7 here. Just to conclude, taking a quick look at our third quarter performance and our high-level review of our key investor topics. We look forward to our upcoming Analyst Day on December 5, and this is going to give us an opportunity to dive deeper into a lot of the really key issues that are out in front of us right now and a lot of the drivers for growth that we are really excited to share about with you both for 2020 and beyond 2020.

So I would -- just in closing, I'll remind you, we do live in a world that will continue to need more energy. There's a growing need for that energy to be as clean burning as possible. Renewables are certainly going to play an increasingly important role, but their growth requires a partnership with natural gas to meet the energy needs of the world while also reducing emissions over time. Natural gas does have the lowest CO2 emissions, the heat content ratio when compared to other fuels and provide superior economics versus other fuel types. And as an example, between 2005 and 2018, CO2 emissions from electricity fell 27% due to replacing coal and oil with natural gas power generation.

So while low-cost natural gas also facilitate costly investments in renewables, it is paving the way around the world to be the fuel of choice. We have benefits from having ideally situated existing pipes in the ground, and we continue to see expanse -- demand for expansion for the long -- for both the near term and the long term. And despite a pretty tough current commodity price and regulatory permitting environment, the future remains very bright for Williams, as we demonstrated here in the third quarter, and for strategically placed natural gas-focused assets like we are so fortunate to operate. And we look forward to discussing that future with you in December.

So with that, let's go ahead and transition to our Q&A session. And thank you again for your time today.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Colton Bean with Tudor, Pickering, Holt & Co.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [2]

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

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [3]

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Well, Colton, I think it's obviously been a lot of focus on Chesapeake and the Haynesville, and certainly, they've had a strong year of growth. But our teams have been out contracting with other customers and have been very successful with other customers in the area. And so as we're -- we likely will start to see some reduction in the growth we've enjoyed from the Chesapeake volumes. We're now starting to see that picked up by third parties, and we're really excited to be working with some of those. And we've got some very collaborative ideas about the way to grow the Haynesville volumes out there. So we're actually pretty encouraged about what we've been able to work with, with other producers that surround and integrate with the Chesapeake acreage.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [4]

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Got it. And in terms of those agreements, are those consistent with maybe some of the legacy terms? Or are those -- should we think about those as newly caught agreements that are more current market?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [5]

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Well, I would say there is a combination there, obviously, depends on what the market is in the area. And so I'm not going to comment on specifically what those rates are, but obviously, this depends on what kind of market power we have in the area.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [6]

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Got it. And then just maybe transitioning over to West. Can you characterize some of your discussions with producers around the Piceance and Southwest Wyoming footprints? Maybe more specifically, have the reductions to bank commodity decks, are those having an impact at all for the private producers there?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [7]

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That's a great question. I would say that in the Piceance, we've been -- we've seen just -- very steady volumes there in the Piceance, and so that's been a real positive, and it is mostly private money driving that. A lot of those folks, as you know, put hedges out in front, and so they're just drilling up against those hedges.

And then in Wyoming and places like the Wamsutter, we have seen some slowing of what was some very robust growth. But we are still seeing some nice growth there in the Wamsutter. Probably the area that I would expect to see more decline on in volumes would be the gathering upstream of our Opal processing plant would be the area. So a lot of that gas, we don't gather. That's gathered by third parties, but we do the processing on it. So that's probably the biggest decline we're seeing in the Rockies right now, its pullback in that area.

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Operator [8]

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Our next question comes from Gabe Moreen with Mizuho.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [9]

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Just had a quick question on the Northeast capital spend guide. And I know you'll probably get into this at the Analyst quite -- Day quite a bit. But relative to what looks like to be a Northeast G&P run rate spend of about $550 million-ish plus or minus this year, can you maybe talk about just how low that could potentially go next year order of magnitude and to what degree there might be some mandatory capital spend you still have to finish up next year?

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Micheal G. Dunn, The Williams Companies, Inc. - Executive VP & COO [10]

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This is Micheal Dunn. We will have a capital program up there. We have expansions that are ongoing in the Bradford that we'll continue to spend money on that are coming online in the second quarter. So we do still have a pretty significant program there and also some well-connect activity as well. So I don't think you would see as robust as what we're spending this year by any means, but we will still have some capital investment going on in the Northeast.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [11]

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And then, Alan, maybe I could ask just bigger picture in terms of the EBITDA growth trajectory. I appreciate that some years will be up, some years will be a little lower EBITDA growth. But to what extent do you think different growth may need to move in lockstep or not in lockstep with projected EBITDA growth? Just your latest thoughts around that.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [12]

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Yes. That's an excellent question, Gabe. And I would just tell you that the free cash flow growth, as you can see by the increasing coverage that we've got this year against it, we don't see any change in getting outside of that range, that steady 5% to 7% range that we've talked about for dividend growth because the cash flow growth in a year where the capital spending might be lower is just that much stronger. And so -- and obviously, we can see the growth coming because most of our capital, despite -- we will have some capital and -- most of our capital next year is going -- as I mentioned in my notes, most of our capital is going into regulated projects. And therefore, that cash flow growth is highly predictable to us in terms of when that's coming on. And so we're not having to guess about what that growth in the prior years will be around that.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [13]

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I appreciate we'll get more on the Transco rate case settlement with FERC approval. But can you at all speak to whether or not the emissions tracker, reductions tracker wasn't approved or as part of the settlement?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [14]

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Yes. We cannot speak to that at this point. So I would just say there's a number of trade-offs around that, but we cannot speak to that at this point.

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Operator [15]

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Our next question comes from Spiro Dounis with Crédit Suisse.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [16]

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Maybe just starting off or keeping on with the 2020 CapEx. Alan, sounds like you've indicate a little bit of this on directionality year-over-year. But you also mentioned 2019 coming in potentially below the low end. So just curious, with that bar sort of getting even lower, how should we think about the magnitude and direction of CapEx coming down next year? Obviously, you mentioned G&P is gearing towards the low end, of course. But you also talked about regulated asset spending, and I guess, that's where maybe I'm unsure. Do we assume flat, higher year-over-year? Does that offset a lot of the G&P decline?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [17]

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Yes. I would just say certain projects, like for instance, the Regional Energy Access project, which will be taken to the Board, so we'll see increase perhaps from what we've seen -- what we have forecasted earlier on the regulated side but a decrease in -- particularly in the G&P area. Oh, and as we've talked about, a lot of the growth that we have in the deepwater Gulf of Mexico doesn't require much capital relative to its growth. And so we're going to enjoy some pretty attractive -- there are -- there is one project in particular there that is going to require some capital, and that started to get very clear for us in terms of what that's going to require in the deepwater. But a lot of the projects that we're working on there the producer is providing the capital for.

So I would just say for '20, as I mentioned, the '20 CapEx is definitely going to be dominated between the regulated gas pipeline and the NGL -- long-haul NGL pipeline that we're doing, the Bluestem pipeline. Those -- that's going to dominate the 2020 CapEx. There is some -- as Micheal mentioned, there's some cost of service capital still going into place in places like Bradford, but the majority in 2020 is going to be on the transmission side. And it looks like, based on the continued demand for the regulated pipe, that we're going to continue to see some growth there. And then as we get into '21 and '22, we will start to see the -- some of the impact of one of the deepwater projects that I talked about, start to impact our capital for '21 and '22. So I think that's about all I can give you right now short of what we're going to show at Analyst Day.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [18]

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Yes. I can appreciate that. And then just on NESE, you mentioned the headlines, and certainly, I don't want to put too much emphasis on those. But I guess what we're struggling with is just given what some of the government officials have said, it just seems like some of those statements are maybe hard to walk back to get them to a point where they can approve the pipeline. So maybe just extra color on what we're not appreciating in that dynamic. And to the extent that NESE does get delayed or maybe mothballed from here, is there another regulated project out there that you can sort of fast track to get it to the front of the stack and as a replacement? And then ultimately, what does that do to CapEx in '20? You got to think that NESE is a big part of that right now.

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Micheal G. Dunn, The Williams Companies, Inc. - Executive VP & COO [19]

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Yes. I'll take that. This is Micheal. We're still confident that NESE is going to have some approvals this fall that allow us to start construction in order for us to meet that winter of '20-'21 time frame. And why we're confident is because of the significant emissions reduction opportunities that the project allows our customer and the customers of our customer in their service territory in Brooklyn and Long Island. But also the economic development impact is very significant if this project does not get built. And so that's why it gives us a lot of confidence that this will happen.

And obviously, you see the headlines, and we have been very responsive to the regulators in regard to what their concerns were with our permitting application, that we'd remedy those, we believe. And we do have full expectations that we will have permits in place so that we can start construction this fall.

And our teams do a great job of getting projects done on time, and we certainly have developed contingency plans to accelerate construction if we get crunched on our schedule. But we certainly believe we can make the December of '20 time frame so that our customer can meet their peak load requirements that are occurring in the next winter season after this winter.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [20]

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And just in regard to other projects in the queue, I would just tell you we have about $3 billion of capital that we're actively working that's just on the Transco system, including NESE and Regional Energy Access and the other projects that we've talked about. And certainly, I'll provide a lot more information on this at Analyst Day. But we have great confidence in this $3 billion of CapEx, about 2.5 Bcf of capacity increase alone on the Transco system. And these are the ones that we have very high confidence in. And I can tell you we're working on another couple of billion dollars of capital investment just for the Transco system now that certainly, out into the future, we're talking maybe a 2024 time frame as to when those projects will be in service. But there's a long runway of projects just on the Transco system that we're actively working now and we have high confidence in.

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Operator [21]

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Our next question comes from Jean Ann Salisbury with Bernstein.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [22]

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What, if anything, would cause Williams to renegotiate contracts with shippers? Are there win-win outcomes that you could see via contract extensions or new dedications?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [23]

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Yes. Sorry, Jean Ann, are you talking about gathering contracts, I assume?

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [24]

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Yes, mostly.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [25]

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Yes. Because I was going to say there's not really any. I wouldn't think of anything that would bring anything on that on the pipeline side. Very standard tariff, and obviously, you have to treat everybody the same on the regulated pipelines.

On the gathering stuff, I would just say we always have our eyes open to ways we can add value on that. But there's really not anything we're aware of out there that would motivate us to lower any rates that are out there other than, on a short-term basis, to increment volumes in an area to spur drilling. But I can't -- I really don't know of anything that would motivate us to lower rates from our existing rates out there other than for the increment, sometimes, that we do to incent drilling in an area.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [26]

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Got it. That makes sense. And then just one more on NESE. If it does not go forward, would the ultimate outcome of that from New York's perspective be more oil burning to meet demand? Or is there anything else out there that they've kind of proposed as an alternate solution?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [27]

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Yes, I think the only thing else we've heard is trucking LNG or Bohemian propane. So I think that's the options other than more oil burning. So I mean it is interesting because there is so much growth going on, it surprises us, so I think when we realize how much real demand growth there is going and how fast the growth is going on in the Brooklyn and Bronx area there. And that is what's really putting pressure on this issue is not just the conversion but as well the growth that's going on there. So it's pretty overwhelming as we studied there what's really driving the growth there. And so as Micheal said, I think that really gives us a lot of confidence, both the ability to help reduce emissions in the area but to also -- there's got to be support for economic development there in a sustainable way, and therefore, that gives us a lot of confidence.

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Operator [28]

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Our next question comes from Jeremy Tonet with JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [29]

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Just want to start off with the 2020 EBITDA guidance and recognize that this is something for the Analyst Day and don't want to parse your words too much here. But when you talk about 2020, the headwinds you noted, growth could be a bit less that year than the normal 5% to 7% range. And when you say it would be a bit less, just trying to get a feeling for that. Does that mean growth could be 0%? Could it be negative? Or is it just below 5%? Or is there any other color that you could provide on what you mean by a little bit less there?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [30]

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Yes. Jeremy, thank you. And I'm really glad you brought that question forward because I think there might be some confusion brewing on this issue. We really were just trying to remind people because we do have so much growth going on across the business and particularly with this Transco rate case, which, again, we can't lay out the details on that, but we really are trying to remind people as they start to see all these positives that they don't pile that on to the level that gets inappropriately high growth rate. But we certainly expect significant growth next year. We just want to make sure people don't get too far ahead of us and that they're taking those issues into account as people are really starting to form their model for 2020. And we just want to make sure that they're taking all these other variables into account because I think if you start piling all these positive things on top of each other, you'd actually get to a pretty high growth rate if you're not taking into account things like the Barnett and the Gulfstar step-down. So that's really what we're trying to do there is just remind people to build that into our model. And so perhaps our conservatism on that overdid that a little bit, but that was what we were trying to accomplish there.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [31]

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That's helpful. And just want to go back to a topic that's been talked about in prior calls and you guys have taken strong actions on the capital discipline side. As far as portfolio optimization is concerned, do you still see opportunities to take actions there? Or any related thoughts you can provide?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [32]

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Well, I would just say the thing that we've really done well, and I'll credit Micheal and his very engaged oversight on this, is we have just been making sure that we're not putting capital out in front of the growth. And so we have really reigned that in, and so we've really made sure that any growth capital that we're investing in most of these areas comes with some -- either an MVC or a rate increase that supports it so that we're not out on a limb building out in front of a bunch of growth. And so that's the -- and as a result of that, if people are not willing to make those commitments, we're pulling the capital back. And so that is really what's -- provide a lot of opportunity.

As well in the UEO, the synergies there, the UEOM is a great example there, where we had capital expansions we were going to have to make for fractionation there. And by doing that deal, we were able to eliminate that. We also have been able to work with some of the other processors in the area and take overflow volumes rather than seeing capital being invested in the area. So we really -- and it's nice to see the whole industry really trying to bring that capital discipline across the space because I think that makes us all healthier. And so we're seeing a lot of discipline that is showing up as higher returns and better free cash flow for us here in 2020 and beyond.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [33]

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It is good to see guys kind of swim in their lanes there. I think that's good for the industry. But was also just curious, I guess, on the joint venture side or asset sales side if there are any other thoughts on potential future actions there that you guys could share.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [34]

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Yes. I would just say we are -- we still see very significant opportunity along those fronts, and we're really excited. I think one of the things that we have going for us is that we -- where our assets are, we tend to have very well-positioned assets with very strong contracts behind them and very long-lived contracts behind them. And as a result of that, that gives a lot of surety of the cash flows that we have. And that's exactly what the private-side investor, not necessarily your typical private equity but the private funds, pension funds, and so forth, is that's exactly what they're looking for. And so we make a great joint venture partner with those folks because we're a safe, reliable and conservative-minded operator, and so we make a great partner for those folks. And so yes, to answer to your question, we see some pretty significant opportunities there, and we are working that angle pretty hard.

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Operator [35]

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Our next question comes from Alex Kania with Wolfe Research.

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Alexis Stephen Kania, Wolfe Research, LLC - Utilities SVP [36]

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Just a question on your thoughts around the Meade Pipeline sale that was announced earlier this fall. I believe that you guys had a right of first refusal on the transaction, so I'm just wondering what your thoughts were with respect to not going forward to exercise that. Was it price? Were there any other benefits or something like that with respect to the lease that may have kind of made you sort of okay with not exercising that option? Just curious.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [37]

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Yes. I mean part of it certainly was price. If you look at the cash flow relative to the price paid and kind of ignore the structuring around that, it's a pretty low return. And so that was certainly a piece of it. And then there was some consideration that we received in exchange for that, and we're not going to discuss the details of that. So we certainly took a look at it, but it just didn't make sense really for our -- given our other investment opportunities that we have, it really just didn't stack up against our other investment opportunities.

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John D. Chandler, The Williams Companies, Inc. - Senior VP & CFO [38]

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This is John Chandler. Just if you think about that, that, in many ways, would be something like debt on our books. We're paying lease payments against that Meade interest. We looked at that long and hard. To actually buy that interest in, we would have incurred an additional $400 million in debt basically to do that, and that's thinking of our leverage the wrong way. So our leverage focus came into play in that decision as well.

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Alexis Stephen Kania, Wolfe Research, LLC - Utilities SVP [39]

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Great. That makes sense. And then just, again, respecting that you can't really say much on the settlement, just in thinking about how the accounting on that necessarily had worked, when you're able to give more details on that, would that then end up to you recognizing kind of revenue for this year? And would that already be included in your -- in the guidance that you've reaffirmed? Or would that be kind of another variable that might affect that going to the end of the year?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [40]

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Yes. Great question. I would just say that the -- our guidance -- affirmance of our guidance certainly takes in -- that into account. And it's just one of those things that, just like we've seen the negative impact, the below-cycle NGL margins is just one of those things that offsets that. It's the beauty of having a big diversified business to be able to see some positives and some negatives during the year. So it definitely is considered as we think about the guidance affirmation for the year.

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Operator [41]

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Our next question comes from Praneeth Satish with Wells Fargo.

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Praneeth Satish, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [42]

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I just have one question. I guess one of your large utility customers just proposed a large offshore wind farm near Virginia. So I'm just curious how you think about renewables in general and then whether you've thought about investing jointly in this type of projects.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [43]

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Yes. It's a good question. I would just say we have so much investment opportunity already that are at higher returns than what we've seen have been realized in those projects, that given our continued focus on balance sheet as well as the higher return investment opportunities that we have, that just they wouldn't make sense right now. And obviously, there's always learnings when you venture into something new, and we think there's risk obviously associated with that. And bottom line is sticking to our knitting right now, we think, is going to add a lot of value and is the right approach for us.

Having said that, there are things like our right of ways and things like that, that can be very valuable when it comes to renewables. But we are very convinced after studying this issue a lot that the natural gas generation that has to go along with the renewables effort is going to continue to be a big driver of growth for us. And it is showing up in very real ways in terms of RFPs and negotiations with customers even beyond the visibility that we've provided the date on that. And so until that were to end or we could start to see that starting to end, I just don't think we've got the capital or risk appetite to venture into something new given the opportunities in front of us today.

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Operator [44]

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Our next question comes from Craig Shere with Tuohy Brothers.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [45]

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If the 2020 strip remains below 250 and Cabot and other customers move to maintenance-only investment, would it be reasonable to use the third quarter Northeast G&P run rate as a steady-state level?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [46]

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I don't really think so just because there's some MVCs and so forth that are getting built in to some of the capital that's going in right now, so I really don't think that would be a real good assumption. It's a good question, but I don't think -- it certainly might be for certain areas as we get towards the end of the year here. I mean we're already seeing volumes, obviously, here in the fourth quarter that show us continued growth, so -- on an actual basis here. So I don't know that, that would be a very fair assessment given what we're seeing here in October. And then there's other areas that -- like in the Bradford, where we have real capital. But it's going into place and that cost of service will step up as a result of that. So good question, but I would tell you, right now, I kind of doubt that would be the case.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [47]

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Fair enough. And one last question. Apologies if I missed it. Would like some good clarification about the impact of the Barnett MVC step-down in the third quarter. Was there any specific figures around the Gulfstar One deferred revenue recognition impact as we head into 2020?

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John D. Chandler, The Williams Companies, Inc. - Senior VP & CFO [48]

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Yes. This is John Chandler. As you think about 2020, actually, there is a small additional Barnett step-down if you think about it this year with that 2 quarters of higher levels of deferred revenue that stepped down in the third quarter. So we have, call it, $20 million to $30 million of additional step-down at the Barnett amortization next year just because you've got 4 quarters of that step-down in 2020. And in addition, somewhere around $70 million to $80 million of -- probably around $70 million step-down in the Gulfstar amortization as we come out of the exclusivity period for that platform.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [49]

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And is that $70-plus million for Gulfstar in 2020, does that impact the full year? Or does some of that...

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John D. Chandler, The Williams Companies, Inc. - Senior VP & CFO [50]

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Yes. No, that's a full year number because that exclusivity period ends in November. The last payment's around that of this year.

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Operator [51]

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Our next question comes from Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [52]

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A lot of my questions have been asked and answered, but I was wondering if we can just circle back a little bit on the rate case a little bit. First, just to confirm one of the comments you made in the prepared remarks that we can't really rely on any of your reserve adjustments, should we just think of it as an accounting movement from a reserve to the income statement and it's just a journaling entry and it really has no tell about what is going on with the rate case? Is that an inaccurate reflection?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [53]

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Yes. I mean obviously, if you think about the way that works, we have this -- record our best available information that comes through in that. But the rate case has a lot of complex issues to be dealt with, and I would just say that not all of those are reflected in the change that you saw. And so that's why I know everybody wants to jump ahead. We would rather have not had to show anything on that, honestly, but from an accounting rule standpoint, we have to. But it is not the whole picture, and we look forward to being able to share that whole picture with you.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [54]

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That's fair, and appreciate that. And I realize you can't sort of talk about the case itself, but I was wondering if you can talk about the back-and-forth between you and the counterparties in the negotiations. Do you feel that both sides concluded that they've got some of what they wanted?

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Micheal G. Dunn, The Williams Companies, Inc. - Executive VP & COO [55]

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Yes. This is Micheal. I would say it was actually a very good negotiation with our shippers as we always have with the Transco organization. And we have a great relationship there with the shippers and the regulators over those customers as well. And there's always a contentious issue that somebody wants to make sure that they have success on, and I would say both sides walked away from that pleased with the outcome, and we are happy to get it behind us and not to go through the litigation of the rate case. And so there's always some issue that can be contentious, but I think both sides dealt with it very professionally.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [56]

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All right. Perfect. And then one final question. I know there's been a lot of back-and-forth about NESE, and who knows when it comes to the regulators and so forth. But in a scenario where NESE is delayed longer and you have to move the in-service date by at least a year, let's say, do you see an opportunity to potentially deploy kind of the budgeted CapEx towards buybacks? Do you feel that, that's an option or an arrow in the quiver at this point that you can potentially use just given where your stock is trading at?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [57]

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Yes. I would just say that, first of all, we remain confident on that and so really don't see that as something that we'd be looking at to trade up. I think as we get further out and we get down below -- down to the credit metrics that we want to, I definitely think that, that will be on the table as the debate. But right now, the -- I don't know that we see a big hole in our capital coming up just because -- while there might be little changes here and there, in the grander scheme of things, I don't really see a big change coming there. And anything that would present itself here in the very near term as a surprise, excess cash available would just go -- that would be taking the credit metric down very quickly.

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Operator [58]

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Our next question comes from Derek Walker with Bank of America Securities.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [59]

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Just a quick one on the leverage. Alan, I believe you said you're expecting to hit kind of 4.5x by the end of the year. And there's a long-term target of the 4.2x number. Can you just talk about -- I think you're evaluating some opportunistic transactions to improve leverage metrics further. Is that what's needed to hit the 4.2x? Or is that mostly just coming from an EBITDA ramp? And I mean are you still looking to make transactions to go below that 4.2x number?

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [60]

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Yes. Great question. Well, certainly, the path we're on gets us to the 4.2x. It's a question of if there's additional value-added transactions that we could do. In other words, that would add value to the equity side as well rather and -- rather than just taking down the debt.

And so some of the transactions that we've done to date, we think, are very valuable to shareholders, where we've been able to sell assets at 14 to 15x and redeploy that capital into higher-return investment opportunities. And so we think as long as that continues to be available to us, that that's really good value for our shareholders, and we'll continue to pursue that.

But the first thing we would do -- it's just a matter of how fast we get there really. The first thing we would do with excess cash would be to take it down to 4.2x. And I'll just remind you, in terms of the '19, we are already below the 4.5x here for '19. And so we're making great progress towards that. But it really is just a question of rate or acceleration of that goal. But we certainly are on that trajectory. It's just that it's a big number, and we can move it a lot quicker if we were to do some transactions.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [61]

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Got it. Maybe just one on the operational side. I believe you just commissioned the Keenesburg I processing facility. I think it has capacity of 225. Can you just talk about the utilization on that plant? And I believe you're also sort of targeting a second Keenesburg plant in '21. And you mentioned sort of the step-down in CapEx for next year. Can you just talk about how you're thinking about that second plant as well?

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Micheal G. Dunn, The Williams Companies, Inc. - Executive VP & COO [62]

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Yes. This is Micheal. I'll take that question on the Keenesburg plant. Yes, we commissioned that on time and on budget. Our team did a great job following up our Fort Lupton plant, the 200 million a day plant that we commissioned back in April. And we're able to balance volumes between those 2 plants. And right now, we're doing so and catching a lot of additional volume from spillover customers that have other arrangements that aren't being met with our competitor peer group in the DJ Basin. And so we're actually attracting a lot of additional business there.

Our Fort Lupton plant was at full capacity already, and our Keenesburg plant was at about 50% capacity pretty darn quick there. And right now, we're balancing between those 2 plants based on deliverability of NGLs off the plants as well as residue gas. So pretty good load factor on both those plants right now considering they just came online this year.

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Operator [63]

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Thank you, everyone. This concludes today's question-and-answer session. I will now turn the conference back over to Mr. Alan Armstrong for closing remarks.

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Alan S. Armstrong, The Williams Companies, Inc. - President, CEO & Director [64]

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Okay. Well, great. Thank you all for the really good questions, and we really look forward to sharing the growth that we've got ahead of us within the Analyst Day. So we look forward to seeing you there. Thanks again.

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Operator [65]

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Thank you, everyone. This concludes today's teleconference. You may now disconnect.