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The Williams Cos Transco bonds provide stability
admin | July 17, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
While Investment Grade Midstream bonds have rebounded considerably since the wides witnessed in March, the WMB Transcontinental Pipeline (Transco) bonds (Baa2/BBB) relative to parent (WMB – Baa3/BBB/BBB-) offer compelling stability. The Transco 2048 bonds did not gap as wide as the WMB 2048’s and are now trading tighter than they were at the start of the year. In fact, WMB’s strong first quarter performance was largely driven by the strength of the Transco asset, which is benefiting from good market fundamentals and strong demand for natural gas. The Transco asset is the “crown jewel” of the WMB credit and provides the best way to play the WMB credit given the lower risk involved in owning the operating company versus the parent.
Exhibit 1: WMB (Transco) 4.6% 2048 vs WMB 4.85% 2048 bonds (YTD)
Source: Bloomberg TRACE; Amherst Pierpont Securities (normalized as of 1/2/2020)
A “Premier” Asset
Transco is one of the leading natural gas pipelines in North America, stretching over 10,000 miles from Texas to New York, delivering 17.6 million dekatherms of natural gas per day to the eastern seaboard. The pipeline operates under long-term contracted transportation agreements, between 10-20 years, which provide for stable and predictable cash flows. Roughly 90% of contracts are with Investment Grade counterparties, with the largest percentage coming from utility companies (44%). Transco accounts for roughly 35% of WMB’s total EBITDA, and has largely been the driving factor behind WMB’s cash flow performance. WMB has posted 17 consecutive quarters of meeting or beating consensus EBITDA and 8 consecutive quarters of operating cash flow growth (year-over-year).
1Q Results Highlight Transco’s Strength
While WMB posted adjusted EBITDA growth of 4% for the quarter, we note that Transco witnessed adjusted EBITDA growth of just over 5%. The asset benefited from expansion projects that came into service as well as their successful rate case settlement with FERC. The rate case settlement provides for rate certainty for customers while allowing Transco to recover its costs. While approved in March, the settlement became effective on 6/1/20. Transco also witnessed favorable changes in the amortization of regulatory assets/liabilities due to the settlement terms of the rate case. Additionally, cost containment measures implemented in 2019 produced lower operating and administrative costs in the quarter. While WMB ended the quarter with total leverage of 4.4x, leverage at the Transco operating company was closer to 2.7x. Transco’s most recent debt issuance of $1.2 billion, will be used to fund development projects and brings leverage closer to 3.0x.
Exhibit 2. Transco Development Projects
Source: WMB Company Presentation (6/17/20)
Demand + Development = Long Term Growth
Natural gas remains the largest piece of the power generation mix with market share growth of roughly 8% since 2017. This compares favorably to wind & solar (up 3%), nuclear (up 1%), hydro (flat) and coal (down 13%). With natural gas demand growth expected to exceed oil demand by approximately 3x through 2040, and 70% of economic gas-directed reserves located in the Northeast, the Transco asset is poised for continued growth. As such, Transco has 8 projects alone in development to meet power generation needs coming online between 2024 and 2031. Management highlighted some of those projects at its most recent investor presentation, including a pipeline expansion to connect the robust Marcellus supplies with growing Northeast natural gas demand from residential, commercial and power companies. The project is expected to be completed by the 2023-2024 heating season. Furthermore, Transco commenced construction earlier this year on an expansion project to serve growing demand in the Mid-Atlantic and Southeastern US.
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