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

Good morning, everyone. We are extraordinarily excited to introduce Alan Armstrong, President and CEO of Williams Companies. Alan became President and Chief Executive Officer of Williams in January of 2011. Alan joined Williams in 1986 as an Engineer and has held level -- multiple positions of increasing responsibilities over time. With that, Alan, thank you very much for joining us. We're excited to hear about the Williams' story.

Excellent. Well, thank you, Jeremy. Really appreciate the intro and good morning, everyone. Excited to be presenting here. And actually, I'm in New York City today and had to go to a dinner last night with several other energy executives. So it was nice to see New York City kind of turning things back up and returning a little bit to normal here. So really excited to see that. And it's also kind of hot and muggy up here. So good demand for gas-fired generation going on up here at this time of the year. So let me start off. I'm here on Slide 2 and just talk very quickly about Williams' scale and our place. We are committed to and excited to continue to play an important role in natural gas, transmission of natural gas and gathering of natural gas. And today, we handle about 30% of the nation's natural gas and own and operate Transco, which just remains the nation's largest and fastest-growing major pipeline. And we're also excited about the big role that natural gas has played and will continue to play in reducing emissions here in the U.S. And so a lot of talk about what's going to happen in the future, but the U.S. is in one of the rare positions to have actually made a significant reduction in its emissions and that really has been on the backs of low-cost natural gas and our continued growth and use of natural gas here in the U.S. And we're extremely well positioned to help the rest of the world continue to reduce its emissions through the export of natural gas here as well. Williams has been very focused on this strategy for quite some time. And today, we operate in the most attractive and low-cost basins around the U.S. and enjoy serving 15 different key supply areas, and we'll take a little closer look at what those means in this presentation. And we also are proud of the fact that on our transmission business, we now more than doubled the -- fully contracted transmission capacity through the build-out of our systems to having doubled it since from 8.5 Bcf a day in 2008 to now almost 18 Bcf a day and again, that has not been through acquisition. That's been through the build-out of our systems, which serves some of the fastest-growing markets here in the U.S. So we'll continue to see that growth as natural gas continues to play an important role in removing both higher cost and higher carbon fuels here in the markets that we serve. Moving on to Slide 3. This is a picture of -- and a listing of what we've continued to accomplish and really impressed with the team's execution. Michael Dunn, our COO, has done a great job of driving both safety performance as well as higher efficiency in our operating. And you can see here some of the great improvements that we've done, both on what we call near miss incident ratio. So that's the ratio of the times we had near misses to the time we actually had an incident and obviously continuing to drive that up as a very positive thing. We've done a great job of that. And also, though, process safety incidents, which are really a great measure of how tight a ship we're running. We continue to drive that down and now down 74% in that measure from 2017 through 2020. And the operating margin ratio, which we track, we now are up in the top quartile amongst peers on operating efficiency. So great stats on the operating front. And of course, those have translated into great stats on the economics and the finances of the company as well. And just here recently, we did get the upgrade we've been looking from Moody's for quite some time when they operate -- they upgraded us up to Baa2. So we're now kind of across the board, BBB flat amongst the credit rating agencies. And we're also continuing to drive our dividend CAGR. We've seen an 8% compound annual growth rate in our dividend from '17 through '21. And today, we're trading at about a 6% yield. So -- and that's on a very well-covered dividend of about a 1.9 covered ratio. So a lot of great things to continue to talk about, again, with the operating performance allowing us to continue to improve on the financial metrics. Moving on to Slide 4 here. This really shows what this has produced for us in terms of reliable earnings and a very healthy balance sheet. You can see a 14% CAGR here in our adjusted earnings per share, and that's at the midpoint of our forecasted guidance now for '21. A 5% growth in adjusted EBITDA through the same period on the same basis and a continued strong dividend coverage there with a 6% CAGR on dividend through this '18 through '21 period. And then importantly and one of the things we've been most focused on from a capital allocation standpoint is to improve our credit metric, and you can see we've got that down to 4.2 now through our guidance here and really tremendous work on the team's part of continuing to drive that to a place where we're at BBB flat, which is where we've been trying to get to. And moving on to Slide 5 here. Just very quickly, you can see free cash flow that we're generating after dividends, after all of our capital expenditure, including both growth and maintenance capital. And you can see continued growth in our available funds from operations there, which is continuing to drive higher free cash flows. Moving on to Slide 6, really interesting picture here on how Williams has positioned up against utility type investments and the fact that we are at a self-funding position. And this is a picture over the last 5 years and obviously, as we saw on the last page, we're actually continuing to improve that, where we're in a completely self-funding picture. But really interesting way to look at this compared to the major utilities and the fact that we are not reliant on accessing the equity or debt markets to continue to drive a very attractive growth level and our earnings that's well above the growth levels for the utilities. And we do believe that this will continue as the higher returns that we have in our business and the higher allowed returns on invested capital will continue to drive us in a position where we can self-fund our growth for the future. Moving on to Slide 7. This is just looking back through this -- from '18 through '21, what the free cash flow yield looks like for Williams again versus the utility sector. And you can see there that this industry, particularly, Williams, are extremely well positioned from a free cash flow. Yield measure, which, frankly, we think is a really important measure if you're thinking about durable long-term coverage of the dividend and the ability to count on the coverage and the ability to invest at more attractive returns, we think this is a really important measure. And you can see that slight decline from '20 to '21, and that's not an indication which way the free cash flow is going. That's just the fact that much better pricing on stock here versus '20 when we had obviously a very low stock price in '20 associated with COVID. So moving on to -- not that, that had any impact on our earnings, by the way, but just a pullback in the broader stock market. Moving on to Slide 8 here. Just a picture of our guidance and how that was improved from our initial guidance that was provided in February of this year. And you can see all the key measures were raised at our 1Q '21 earnings call, which was in the release on May 3. And so everything really was raised. We did not raise the dividend growth rate. We do look at that annually, and we had just raised that in the first quarter of 2016. So we don't make a practice of raising that except annually. Other than that, all other financial measures that you can see here were improved. So -- and the raise -- the amount of the raise was equal -- it was driven by 2 things. One was first quarter performance being higher than expected, and the second part was some opportunistic acquisitions associated with bankruptcies that also allowed us to raise that guidance that we did not have built in there earlier. So off to a good start here in '21. And now let's look at the macro environment that really drives our performance. And as we look here on Slide 10, and looking at how resilient the gas demand was in 2020. And I will just remind you that over the long term, our business is driven by natural gas demand, and I always want to make sure people understand that it is not driven by crude oil or natural gas price and our business is very much geared to demand for both transmission capacity whether the gas actually gets burned or not for -- is -- or is not does not drive our transmission growth, but the volumes do drive our natural gas gathering volumes. And being in the right basins, obviously, is critical and being in the low-cost basins is critical. But you can see here that -- from this picture that 0.5% demand decline is the headline for '19 versus '20. So showing just going from 94.2 in '19, down to 93.8 in 2020. However, if you look deeper, the real driver was just a much warmer winter and a slight -- very slight impact on COVID manufacturing losses in the second quarter of '20. But we actually saw a 3% higher demand for power generation, even though we only had a 1% increase in cooling degree days or higher summer temperatures. And so actually, the picture is looking pretty good here on gas demand in '20 on a weather-adjusted basis. You can see the heating degree days in January through March was actually down 14% and really that's about the only weak spot that showed up. And again, that was just completely weather dependent. In fact, in 2020, we actually hit an all-time record for power demand, hitting 47.2 Bcf a day on July 27 last year, and this reached a record 45% of the total power demand here in the U.S. And so we're looking -- we're thinking the macro is looking pretty strong on gas demand. If we look on Slide 11, you can see this is a Wood Mackenzie forecast out through 2030. And if you look up there, you can see that in forecast, they were expecting almost flat 2019 for '21 and a very small amount of growth from '20 to '21. But in reality, what we're actually seeing right now is actually quite a bit stronger than that. This forecast was expecting the 2021 power demand to be off by almost 5 Bcf a day, but that is not occurring and the expectation was that high gas prices would cause switching back to coal and so far, we have not seen that. And here in the second quarter, we're actually seeing a really nice pull-through on gas demand from power. And so I would just tell you, I think the macro setup here is looking a lot better than this forecast -- this earlier forecast would indicate. And the strong LNG exports as well as Mexico exports, combined with a recovered industrial market and power generation is setting up for a pretty nice year here for 2021 demand growth. And looking forward, as we look on to Slide 12 here, we can see that LNG demand is going to be one of the big drivers for growth here as we look forward. And the -- our Transco system, as you can see, is extremely well positioned to serve these markets, particularly given the fact that we connect the lowest cost resources in the nation in the Marcellus to this growing demand for LNG. And so we're really excited about the way both our gathering systems and our transmission systems are set up to serve LNG exports. As we move on to Slide 13, you can see how dependent the U.S. natural gas demand is on the Marcellus and Utica and Haynesville drilling activity. And you can see those really have been the areas that provide most of the gas directed drilling resources and so we're excited to be in those basins. And if you look at the next slide, here on 14, you can see that we have way outperformed the volume on our systems. You can see first quarter '20 to first quarter '21, a 4.6% reduction in wellhead gas -- natural gas wellhead production versus Williams was up 5.1%. And so if we look on Slide 15, we see a little closer look at what's driving that and the fact that Williams really is positioned in the low-cost resource basins. And in fact, 80% of our operated gathering volumes are in the 3 lowest cost and largest basin, which is the Marcellus, the Utica and the Haynesville. And so we think we've gotten ourselves positioned in the absolute right basins for the environment that we're in, and that is showing up with us outperforming the broader market in terms of gathering volume growth, and we expect that to continue, given the low-cost resources that are in those basins. If we look at Slide 17, this shows how correlated our earnings growth have been to our contracted transmission capacity and our gathering volumes. There, you can see in the orange line across the top. And there in the dark blue bar, you can see how our fee-based earnings have continued to grow over the period. That pullback that you see there in '21 was driven by a -- some freeze-offs in the gathering areas in the first quarter of '21, and coupled with a pullback on the gathering rate that we traded Haynes -- sorry, we traded Chesapeake and the Haynesville for taking over their upstream production. That has turned in to be even a much better deal than we expected it to be and is going to translate itself into even higher long-term fee-based revenues coming out of the Haynesville due to increased drilling activity in that basin as well. So our business is not driven by crude and gas prices. If you translated this and you showed commodity prices back here in the background, you would see that our earnings are really not, in any way, shape or form correlated to crude or gas, but they are tightly correlated to our contracted transmission capacity and the gathering volume on our business. This growth has been very deliberate and steady, and it's really come with our focus on improving our return on capital employed and that we've been focused on very tightly for the last 5 years. And so really healthy picture of growth here and very deliberate as part of our strategy. We move on to Slide 18, just looking to see the projects that are continuing. We continue to enjoy on the Transco system. And Southeastern Trail was brought on earlier this year. Gulfstream is -- the Gulfstream expansion Phase 6 is well into execution mode. Leidy South is well into execution mode and doing extremely well. So we are down to finalizing construction at the compressor stations for that and most of the looping work or pipeline work is well underway, and some of it is nearing completion. So we're really excited about how well that project has gone from both the permitting standpoint and an execution standpoint. And we're really excited about regional energy access and the way that will also open up new capacity avenues for our folks that we gather gas for in the area as well as serving the utilities that continue to see growth for low-cost and clean burning natural gas in their market. So Transco is very healthy in terms of our expansion projects and our execution is going very well. If we look at Slide 19, it shows the continued growth of backlog of projects that we have on the Transco system. And I would just tell you, we continue to be surprised with how well the execution is going on the projects on both Transco and Northwest. And of course, that one expansion project that we showed there on Gulfstream, but most of this is driven about -- 85% of this is driven by projects on Transco. And projects keep coming off of this as they go into execution, but they keep getting backfilled with new projects. So really healthy picture. And one of the drivers for that is shown on Slide 20, which shows the number of coal plants still in the markets that we serve and our ability to continue to reduce CO2 emissions in the markets that we serve and the growing demand from natural gas from both the cost and a carbon reduction standpoint. So this picture hasn't changed. We continue to take out a lot of the coal-fired generation capacity and the need for backup. And the one thing I would remind people because there's always a question around renewables and the impact on that. I would just remind you that we sell capacity when it comes to Transco. We don't really care what the demand rate is or the utilization rate is on that gas-fired generation facility, but you can't just buy partial capacity on our system. You have to buy for the full growth rate and so that is driving the capacity demands on our pipeline system. And so as the coal-fired generation comes off and people need reliable backup, that is driving a lot of continued growth on our Transco system. We also have nice growth in the deepwater, and you can see the 4 primary projects on that. And as we've mentioned in the past there, the 4 major projects that we have, we expect to double our EBITDA growth in the deepwater. And I'll move on quickly to Slide 23 here. A number of significant accomplishments that we continue to deliver on our effort to lead on the ESG front within the Midstream space. We think there is a lot more work to be done on this on -- in moving this from just Bloomberg banners to actually driving a bunch of -- a lot of change in the ESG, including the monitoring, validation and reporting front, which is a lot of what our MoU with Microsoft that we just recently signed here in June is focused on. Because, frankly, there's a lot of work to be done to actually get to the point where we can certify emissions reductions across the space, and we think that's going to be critical to the natural gas space moving forward. If we move on to Slide 24, you can see here our efforts to drive down emissions. And this is in spite of the fact that we have doubled our transmission capacity during this time frame and we've tripled our gathering volumes, and yet you can see the dramatic reduction of about 44% in our emissions -- greenhouse gas emissions coming off of this business. So we are making a difference, and we will make -- continue to make a difference both in our direct operations as well as in the communities that we serve in terms of reducing emissions. And we're excited as an organization to be a big contributor to that. If you look on Slide 25, you can see how we will get to our goal for a 56% reduction. So that's going to take us from that 22.6 million down to 10 million metric tons of CO2 that our operations generate today. And so we have a very clear path on how we're going to get there. And in fact, probably the biggest challenge that we have actually in meeting this goal is the amount of growth that is coming on our asset base and -- but we certainly fully expect to continue to find ways to reduce this even in spite of the great growth that we're seeing on our systems today. Slide 26. Just to remind you, really, we are very committed. We think natural gas is one of the few right here, right now opportunities to reduce emissions in a way that is economic and sustainable, and it doesn't rely on technology that has not been developed yet. And so we really think that if people are serious around reducing emissions that we have got to turn hard to natural gas as one of the key solutions to do that, and we're excited to be a part of that. On Slide 27. Just to recap here, a very solid macro environment, continued very strong execution by our operations team, a very strong financial position with well-covered dividend and clear drivers of growth across the asset base that will not need any access to capital markets to drive that growth, which is producing a very safe and reliable and growing dividend for our shareholders. So with that, we thank you very much for your interest, and we'll turn it to questions. Thank you.

Great. Thank you very much. We can answer -- enter any questions, the audience. So please feel free to do that. But maybe as we await any questions queue here, Alan, a very helpful presentation. Obviously, natural gas has a long future here for the reasons that you noted, particularly to decarbonize. But just wondering more on energy transition as you laid out there, what do you think is kind of realistic in kind of the near-term and also the later term, I guess, as far as what energy transition means for Williams, be it hydrogen, carbon capture, renewables for your compressors or any other angle? I guess, what do you think is a realistic 1 to 2 years? And what do you think could be possible longer term?

Yes. Well, first of all, I'm really proud of the way our team is continuing to have this intense focus on our existing business and driving better and better efficiency on our existing business on the one hand. And on the other hand, that's intense focus. And sometimes you can get so focused that it's hard to kind of keep your -- turn your eye to any new changes that might be coming around the corner. And I would just tell you, I'm really proud of the way the team is balancing this issue. We certainly are finding ways to decarbonize our existing operations in a way that is economically feasible and drives value for our shareholders in terms of the capital returns. So we're going to continue to do that. But I also think there's a lot of things that Williams is uniquely positioned, and one of the most important things, I think, that we can contribute is on the monitoring, validation side and reporting side and that really is going to take a lot of work. I think people, when they see emissions and they think about carbon trading and carbon emissions and the value of carbon reduction, there is an expectation that there's this perfect measuring and certification system that's out there and the fact is there really isn't today across the industry. With Williams huge amount of access to the data that it takes to measure the gas volumes today as well as the focus that we've been putting on monitoring our own emissions reductions, we think that, combined with the capabilities of a group like Microsoft, really will allow us to offer a lot to both the end users that are looking for responsibly produced natural gas as well as offer a service to the industry that is definitely going to need it. If we're going to get serious about carbon reduction and being able to trade and putting a value on that, we're going to have reliable, auditable certification of that information. And so we're excited to play a role in that. Relative to the other areas, I mean, certainly, putting solar system -- putting solar arrays in our existing assets that use a large amount of electricity in areas that are confined by air permitting regulation. So the Transco system, a lot of our gathering systems in the Northeast, use a lot of electrical power and converting that over to solar, while having the benefit of backup of gas-fired generation in those same markets is a perfect opportunity for us. And we have both the land, the electrical transmission connections and the full rate industrial load to make those good economic investments. So we'll take advantage of those. On the hydrogen front, that is a very long-dated issue. We're not going to get left behind on that. We're going to be at the forefront of understanding where those opportunities exist. And in fact, if you read our filing for the Regional Energy Access Project, you'll notice that we are designing that, and we are working with the local utility for their ability to be able to bring hydrogen into that if they so choose to. But today, it is not economic relative to natural gas. And I don't think anybody should kid themselves on that, and it's a much lower energy content fuel. And so for instance, if you think about 5% blending on a natural gas pipeline, that's only about 1.7% actual energy content, in other words, because hydrogen is only about 383 Btus per cubic foot. So it's only 38% of the same amount of energy for volume. So as we add hydrogen, we're going to have to add a transmission capacity on these systems because the pipelines are designed for 1,000 Btus. So a lot's going to happen on that. We're going to be at the forefront of that, but there's a long ways to go to make hydrogen a part of our economy. It's not going to be easy, and it's not going to be tomorrow by any stretch of imagination.

That's very helpful. And I know we're in overtime here, but we did get a question from the audience that I really want to work in just real quickly if possible. Do you anticipate generating discretional free cash flow in coming years or will investment opportunities equal investable cash? Otherwise, would you grow beyond self-funding ability? If so, what type of investment would that entail?

Yes. I would say that we are very much geared right now to be able to fund our capital and maintain an attractive growth rate in our business with that investment. And so that's really what we're planning on right now. So we're not planning on having to access any capital markets either on the debt or equity side for our growth trajectory that we have out there today. A lot of our projects like in the deepwater that provide a lot of growth are very low on capital intensity. And so we're going to get some nice growth without the need for a lot of new capital there. So I would just say right now, we're not intending to do that and -- but we do have the rate base to be able to invest in on both Transco and Northwest pipeline kind of as the lowest return in our capital allocation portfolio that we have today. And so that's nice to have because it's kind of a window of opportunity for us, and we'll -- and I expect to see us take advantage of that when -- as any excess capital available or the alternative to that would be share buybacks, obviously. So those are going to be the 2 alternatives probably at the bottom of our capital allocation pool.

Thank you so much for that very helpful presentation. Thank you for joining us at the conference today. And everyone, have a great day.

Thank you, Jeremy. Always appreciate it. Good day.