The Williams Companies, Inc. (WMB) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for day 2 of the JPMorgan Energy Power and Renewables Conference. This morning, we're very pleased to be joined by Williams' CEO, Alan Armstrong, who's going to start off with the presentation on Williams, after which, I will open it up to Q&A and the audience, and I will be asking some questions as well. With that, I'll turn it over to Alan.

Great. Good morning, Jeremy. And I'll just get started here on Slide 2. Good morning, and I'm not sure -- and that looks like I'm on now. Good morning and just starting off here on Slide 2. We've got quite a bit of information to get through here. So I'm going to move through pretty rapidly and hopefully save some time for questions. First of all, on -- here on Slide 2, lots of very great efforts around our organization, really have made the COVID situation or have really been able to see our organization shine, have not had any reliability issues related to COVID. And for the most part, the systems and even production has been better than -- held up better than we would have expected. So things are going very well, and I just want to credit our teams for really, very aggressively, very quickly getting our organization mobile. Even on our construction efforts, we very quickly adopted what we call bubble teams so that if we did have an incident that we would not take down an entire crew, but just very isolated. And so the good news on that, we've had very little impact even in our construction area. So a great job by our teams dealing with that, and business is remarkably reliable and normal for us here at Williams. Moving on to Slide 3. Just to go through some, I think, some really impressive stats here about the stability of our business and how our very focused strategy has allowed us to continue to execute extremely well and produce extremely predictable cash flows. On the safety side, which we continue to take very seriously and, I would say, is job 1 here at Williams and first, making sure that we're doing things right and doing it safely. We continue to put great pressure on our total recordable incident rate. We were down 50% versus 2017 here in '19. And on process safety incidents -- and process safety incidents basically measure how well we are running the system, how tight the ship is, for instance, and that is down 70%, '17 through '19. So Micheal Dunn, Chief Operating Officer, just continuing to do a fantastic job for us in driving discipline into the organization. And as well, impressively, our strategy by being so narrowly focused on the natural gas infrastructure and getting great scale at both the gathering, processing and transportation of natural gas has allowed us to improve our operating margin ratio by 17% since 2016. And you'll be able to see when I hit on a little harder here in a few minutes, that has produced a tremendous amount of cash flow for us, as we've sold off assets. That's been one of the great drivers for us in terms of being able to continue to grow cash flows in spite of over $5 billion in asset sales. On the -- in terms of predictability of our business, we have met or exceeded actually since -- after 2016, we have exceeded the midpoint of guidance now on all of our key financial metrics every year, '17, '18 and '19. So really impressive to have exceeded the guidance, midpoint of guidance range on all of those metrics. And another key thing, which obviously has become a hot topic, in 2019, we had free cash flow with the inclusion of our asset sales. This year, in '20, I'm very pleased to say we continue to be on track to have positive free cash flow even without the benefit of asset sales. And so when we talk about positive free cash flow, we mean after everything. So we're talking about the -- our DCF less dividends, less our growth capital as well. So all of our capital and all of our dividends out of that, we are going to be positive free cash flow, we believe, here in '20 as well. So really excited about the way we continue to perform on that. We continue -- even with a lot of downgrades across the space, we've been able to maintain our stable investment-grade ratings and have not seen any change from the rating agencies through that process. Again, I think, a testament to how solid our cash flows are. And in terms of predictability for both -- through both ourselves and The Street, we now have 17 consecutive quarters behind us where we have met or beat consensus EBITDA estimates across the space. And we've been able to continually grow here now 8 consecutive quarters of year-over-year operating cash flow growth despite a variety of commodity cycles going on. So again, very excited about that. And again, we -- as people are well aware, we continue to have great coverage over our dividend, even though we rose that -- we raised the dividend this year by 5.3%. Moving on to Slide 4 here. And this is -- now I'm on a position to succeed through volatile environment. And you can see here how we continued to have been able to improve on our credit metrics, down to 4.36 here in the first quarter of '20. We now are at 75% of the way towards reaching our 4.2 leverage target. And again, just very steady progress towards that. You can see we continue to maintain a healthy coverage ratio '18 -- through '18, '19 there. And importantly, I'll tell you this morning that even though in the -- at the 1Q '20 earnings release, we talked about coming in at the lower end of guidance for EBITDA, it does look like we are going to be at the midpoint right now on our DCF. So a couple of things helping that one is lower maintenance capital. And our EBITDA, I would tell you, is hanging in there very well. And we also have a little bit lower interest payment due to some very healthy debt issuances that John Chandler led for us. So great news on that front. So the business continues to click away on a very stable basis. And we continue to grow our take-or-pay transmission capacity. You can see there, more than 10% growth here in '18 through the first quarter of '20. So really, everything is going extremely well across the business, and our financials are showing it. I move to -- here -- to Slide 5. Just a map that you're all very familiar with. And not a whole lot new to talk about on this, but I will say that we continue to see all 3 of our pipelines being 100% contracted under max rates. So no discounting required across any of our assets. Really hard for any other pipeline, any other company to compete with that or compare themselves to that. And we're pretty unique in that regard. And those are all contracted at 100% load. So things going very well -- continuing to go very well with the pipeline business. I also will say that given the locations that we have and the firm positions, we are continuing to see a lot of demand for new capacity for gas-fired generation across our system, and we still have about 90 gigawatts of coal capacity still operating just in the Transco-served states. And so still -- despite what you hear, still a lot of room for continued growth and capacity on our Transco system, and we're very excited about that. Moving on to Slide 6. And you've seen this similar presentation before. We just added the first quarter to this. And this is really an interesting picture, I think, because it shows the 2 primary drivers that drive our business today, both the contracted transmission capacity on our pipelines as well as the gathering volumes. And you can see the continued steady growth and that, despite asset sales at Four Corners and Jackalope, we continue to be able to grow those. And you can see how the EBITDA on the fee-based EBITDA has continued to come right along with that. And even with the commodity margin that we've invested away from continuing to erode there and certainly in the first quarter of '20, we actually had virtually no commodity margin helping us out in the first quarter just because of low NGL margins, but we continue to make improvement on a comparison on the prior year's quarter. So really excited about how this continues to look. And it is extremely consistent with our strategy that we've had to really focus on what we do best, and you can see how that's proving up for us here in terms of being able to grow our EBITDA despite selling over $5 billion in assets during this period. Moving on to Slide 7 here. And this is, as I mentioned earlier, our operating margin ratio. This is something we track very closely within the organization, and we track it down to what we call the franchise level or the level in the organization where there's no allocation of revenues. And so each of our operating teams is really challenged on both this and the return on capital within their area. And these are the primary things that we look at, at a high level to judge our management capabilities in each of these areas. And you can see here that we've continued to go from the 60% in 2016 up to 70% here in 2020. Now a lot of drivers behind that. One, of course, is the fact that we've continued to invest right alongside our existing assets. So we've grown scale within our existing assets. And that obviously is very powerful towards increasing the operating margin ratio. We've also gotten rid of assets where we didn't have scale in the industry, like, for instance, Geismar sale, which allows us to reduce overhead costs associated with the technical support and things that go -- that are unique to an asset like that. And in addition to that, though, we've just continued to put pressure on cost. Last year -- before everybody else had been doing it this year, last year, we took out about 8% of our head count last year and have reduced cost by right at $100 million as a result of that. Again, we took that action starting in June of last year. We took that action. So a little bit ahead of the curve on those efforts. But I would just tell you as well, we're not done. We still have room to improve and a lot of effort going into making sure that we are taking advantage of our scale, both on the gathering side and the transmission side. The teams continue to do a fantastic job of finding ways to reduce costs. And we are definitely seeing that show up here in both the first quarter and the second quarter, the benefits of cost reduction across our business. Now I'm going to move on to Slide 8 and show here a little bit about what's going on within the broader macroscale. There's no doubt that the big driver for our business is going to be natural gas demand, whether that's demand for capacity on our pipelines or whether that's demand for volumes through -- that show up as volumes on our gathering systems. And you can see here, and this is updated with both the COVID demand that you can see as well as the latest information on renewables. And you can see here still a very healthy growth on natural gas demand higher than -- coming in 3x higher than oil. So there is a reason we remain focused on that. Even with the low oil prices, gas remained much lower on a BTU basis. And obviously, it's cleaner, and we are going to continue to see strong demand for natural gas. And in fact, one of the things that people always ask about is around renewables and the impact of that on our business. And so if we turn here to Slide 9, you can see, really, this is a forecast looking forward. Again, this has been updated. And you can see here that natural gas continues to make huge inroads into the electric market space, and it really has come at the expense of coal. And you can see, despite tremendous investment and very sizable subsidies being invested in the wind and solar business, you can see it really isn't making that much of a difference on an absolute basis and that it really is natural gas that is continuing to gain market share on power generation. And we are certainly seeing that come through in our systems. And one thing I would -- I always remind people about, as it relates to our pipeline business, where we just sell capacity, what we need to do is make -- as long as natural gas is going to be seen as a backup, and it continues to be very clear that it's going to be for any renewables that are installed, that means that the pipeline capacity has to be built. So you can't just have temporary capacity or something that you're going to rely on as your backup. And so even if the gas volume gets reduced by wind and solar in a market, the demand for the pipeline capacity has to be there. And so we're continuing to see a lot of interest and a lot of RFPs serving power generation in our markets. And so you hear a lot of different versions of this. There was a report that came out a couple of weeks ago saying that when -- that renewables had overtaken coal and that they were taking all the space. And really, what was missing in that article was the fact that it really was just coal's reduction, but natural gas continues to grab the, by far, the largest portion of the market share here. And it will continue. And we're certainly not opposed to renewables continuing to come. In fact, we're very supportive of renewables continuing to come in the market, and we'll take advantage of those where they make sense for ourselves. But the notion that they are somehow taking market share away from natural gas, right now, it's really just not accurate when you look at the facts. And we think that gas is going to continue to enjoy that. And in fact, if you looked at the renewables and you look forward over a long period of time, out through 2040, even with an assumption that renewables grow at a rate of 233%, we still will see natural gas actually continue to increase the amount of BTUs or quadrillion BTUs that are coming out of natural gas. So the margin over and above renewables continues to grow as an -- on an absolute basis, not on a percentage, but on an absolute basis, continues to grow even through a period of 233% growth in renewables. So gas demand is solid. We expect it to remain solid. You hear a lot of stories lately about LNG demand falling off, and it certainly has done that in the Gulf Coast. Most of that, obviously, was due to a very warm winter in Europe and storage levels reaching all-time highs. But the fundamentals have not changed for the business. And we think the low-cost and clean nature of natural gas will continue to lead in the market. If we go to Slide 10, this is now looking at the supply side of our business. And obviously, the decline in oil prices was a very positive thing for the dry natural gas basins. And this is a forecast you can see here from Wood Mackenzie, and I'll explain this graph a little because it's pretty interesting. The red dash line that you see on this slide was the previous forecast. So that was a December '19 forecast. And it was showing that on an exit rate basis, so exit rate '19 to exit rate '21, that the supplies from the Marcellus and the Utica would decline by 0.6 Bcf per day. So running about 32 or so now, and they were saying that it was going to decline a little bit during that period. What is now the latest forecast that came out in May is now saying that we're going to see growth from what was a very strong December '19 exit rate in the Marcellus and Utica are now growing by 3.2 Bcf a day. So a delta in just 6 months of 3.8 Bcf a day, exit rate to exit rate. And I can tell you that we're going to have to get really busy in the Appalachia and Utica to meet that demand. But certainly, our producers are up to that. And they're being very prudent, I would say, and appropriately cautious about gas prices. And I think that's the appropriate thing to do, but the forecasting is showing that that's going to have to bring a call on natural gas. You can see in the Haynesville as well, that was only going to grow at about 1.2 Bcf a day, now forecasted to grow at 2.1 Bcf a day. So about 1 Bcf a day of increase. And then in the Permian, you can see what was going to grow at 2.8 Bcf a day is now -- even -- this is even with a 7% growth rate between end of '19 to end of '21, we still have a 7% growth rate in here. And that now goes to a 0.8 Bcf a day growth. So still, this forecast is still assuming growth from the end of '19 into the end of '21 in the Permian. And even with that, these dry gas basins are going to be called on. So we're very excited about the way we're positioned. And Williams is operating in the very best spots in both the Haynesville and the Marcellus. And so a lot of the reserves that are less than 250 are going -- are the reserves going to get called on, and we just happen to be the gatherer for the majority of those very low-cost reserves in the Marcellus, Utica and the Haynesville. And if you turn to Slide 11, you can see how we're doing against the -- in the basin, and this is a measure that we had rolled out quite some time ago in terms of EBITDA per Mcf. And you can see that we continue to make really good strides on this, and we were up to -- in the first quarter of '20, we were up to $0.52 on an adjusted EBITDA per Mcf, and we're going to continue to see that. We also are going to continue to see better and better capital efficiency as our volumes are continuing to grow. But our capital demands have slackened off dramatically in the area just because our major systems are built out now. And so we're really excited about that. And we're really finding some great ways to optimize our -- between our various systems and to be able to offload volumes between our various systems up there. So team is doing a great job of squeezing the cost out of this business and making it look very mature after about now -- about 6 or 7 years of just dramatic growth going on in the basin. We're now going into a more mature stage where we've got the scale and we're taking the cost and the capital out of this business. So really couldn't be more excited about the way we're positioned and the way our teams are operating up here as well. We go to next slide here on 12. This is looking at our projects and execution. And you can see here we just placed Hillabee Phase 2 in service. That was a great project for us, and that is an expansion along the Transco system to serve the Sabal Trail system into Florida. And again, that's all on a -- that's 100% of that capacity sold out on a fixed basis. And so no risk remaining on that project with the construction now completed. Southeastern Trail is going extremely well. We've gotten all of our water crossings done there. So no risk on the NWP 12 issue there because we are -- completed all of our constructions on water crossings. Team did a great job of getting those done on a timely basis. We received our EA on Leidy South. That project is going full steam ahead. And Gulfstream Phase 6, which you probably haven't heard much about, is an expansion on our Gulfstream system, and we did receive an EA in January of '20 on that. Regional Energy Access as well is going well. And we just filed -- did our pre-filing on June '20 for that project as well. And that's a project that takes great advantage of our existing right-of-ways and existing facilities to continue to serve both residential, commercial and power demand in New Jersey, Maryland and Eastern Pennsylvania. So things are going well. Really no hiccups. Obviously, NESE was a disappointment to us. You don't see that on the list here. And frankly, we think that's a very serious mistake by both the city and the state there, but we have a feeling that may come back around. But I can tell you, as far as we're concerned right now, we have shut down efforts on that project. Moving on to projects in development. And you can see here, our portfolio of projects in development continues to be very strong. And this is really just the projects along our Interstate pipelines. This doesn't include the gathering and processing business. This is just our projects in development along the Transco system, and the pipeline remains very full. And a lot of demand for services, a lot of -- right now, a lot of the focus on power generation. But we do have a couple of exciting work -- pieces of work going on, on the LNG servicing side as well. Moving on to Slide 14. Continue to see good news here in the deepwater Gulf of Mexico. We just announced this morning that we reached agreement with LLOG for their Taggart prospect, which will come across our Devils Tower platform. And so obviously, when it comes across the platform, that's really good margin for us, when it comes across an existing platform. We're really excited about that. If you add all these up together -- and again, these are either already under dedication or under a new contract. We announced the Anchor agreement. We've signed definitive agreement. That was not under dedication, but we were able to secure that business earlier this year. If you add all these together, this is about $300 million of EBITDA on an annual basis if all these projects came on at the same time. And so we're really excited about the kind of growth in EBITDA that we're going to see coming out of the deepwater Gulf of Mexico. And these projects all appear to be moving ahead. So we're very excited about that continues. And then finally, here on the last slide on 15, just a really good and I think compelling argument around why Williams is so extremely undervalued relative to other investment opportunities. And we compare here how Williams stands up against both REITs and utility index. First, on a yield basis, and you can see there that a really almost unexplainable spread here between the current yield and the utilities index and the REIT index. You can also see on the valuation that we're somewhere near half on the REIT valuation on an EV-to-EBITDA basis and well below -- several turns below on the utilities index. Then you look at, well, there must be some explanation for why you'd be off of that so far. And of course, you would think, well, it's got to be cash flow volatility or high leverage. You can see we're actually lower than this group on leverage. And you can see that we're actually, on a cash flow volatility, we're much improved as well. And so that's the range of outcomes from 2018 through the 2020 consensus estimates that are out there. And you can see on any of these that we measure very well. So that's the presentation for today. We really think Williams continues to show very predictable cash flows. And we think this downturn in the space is going to really make Williams shine amongst the field because we're going to be able to prove up how durable and predictable our cash flows are even in an environment that's as severe as the one we're going through right now. So we're excited to let that shine through. And we think the coming quarters will demonstrate that to both income investors as well as the rating agencies. So with that, I'll turn it back to you, Jeremy.

Great. Thank you very much for that, Alan. We do have a few questions from the field here that we're going to touch on. There's a couple with regards to counterparty risk and just want to get your thoughts with regards to Chesapeake and others, if there's bankruptcy or financial strain there, how that would impact volumes. How do you think about that?

Yes. We've addressed this, obviously, quite a bit. It's always kind of a top-of-mind issue, it seems like, for investors. And we just remind people that there really isn't a way to duplicate the systems that we have out there, where we gather back at the wellhead for Chesapeake. And I would just tell you, we have a great relationship with Chesapeake. They continue to pay their bills on time. And we think the way that we've restructured the contracts with them over the years and worked with them really makes those contracts extremely durable. And so we're really not expecting risk there. We actually think, if that did occur, we actually think it could be a net positive for us because it would free up capital against the great acreage that Chesapeake has. So frankly, we want that team to maintain and have Dominion. We think it actually, from a financial perspective, could be a positive for us on that front.

That's helpful. And then there's another question from the field with regards to kind of turmoil in Midstream right now and what that could mean for gathering systems in the Northeast? Does this present an opportunity for Williams to kind of consolidate in that area? Or any thoughts on that?

Yes. I think we're very clear about what our capital use is, and we've continued to focus on getting our debt, our credit metrics down. And so to the degree that something could help meet that, that would be great. But I'd generally say that there's not a whole lot of those kind of opportunities out there. But we obviously keep our eyes open. But right now, I would just say, we've got good growth in the business. The business is growing very steady. And so we'll keep our eyes open. It's going to have to be accretive, and it's going to have to be debt-reducing for us at the same time. So that's the kind of transaction we can focus on.

Great. Maybe if I could just sneak one last one in. Williams was able to reaffirm EBITDA guidance where so many others in the Midstream space had to retract or lower guidance. What do you think has made Williams different in this regard and was able to reaffirm there?

Yes. I think the primary issue for us is, one, we don't have much exposure to oil basins. So that's probably the #1 benefit to us. We've been very clear about focusing on natural gas. Natural gas prices have been low, and the producers have learned to endure that. And really, the very competitive nature there has brought the very best out in those -- in that producer basins. But I'd say that's number one. And number two, I would just say we're very cautious about the way we contract. And we contract more for the long term. We don't try to do supply and logistics business around our assets. And so we don't capture the high margins when those come around, but we also don't suffer the low margins when there's an excess capacity. So I think it's those 2 primary features.

That's very helpful. That's all the time we have. I want to say thank you very much, Alan, for joining us. And hopefully, we can do it all again next year in person.

Okay. Sounds great. Thank you, Jeremy. Good seeing you. Thanks.

Thanks.