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

Good morning, and welcome, everyone. With me today is Micheal Dunn, the EVP and Chief Operating Officer of Williams. Welcome, Micheal.

Thanks, Linda. I appreciate the opportunity to be here today for our virtual energy conference.

Thank you. Hopefully, next year, we can do this in person.

I sure hope so.

Well, in the interest of time, we don't have a lot of time. So I thought I'd jump into some questions that I have prepared, and the audience is teeing up questions as we speak. So I'll revert to that as they come in. Maybe we can just start with a high-level question. We've seen Williams take a leadership position towards adopting its Midstream business model for an ongoing energy transition. Can you characterize for us why you feel this is so strategic for the company? And potentially share where you feel the company could create a competitive advantage for itself by being a first mover?

Sure thing. Williams has been around for more than 100 years, and we've had to evolve and adapt our business many times before. And this transition is no different. Adapting to a potential energy transition is really strategic for Williams because it assures will remain relevant for the long term, and we believe we are incredibly well positioned to do so. I would first like to emphasize that we believe natural gas will remain a fuel of the future for a long time to come. And there's been a lot of bullish forecasters out there about growth in renewables, but natural gas has always been a part of that solution for the intermittent nature of renewable energy. Natural gas plays a critical role, partnering with renewables as a backup, but certainly will be a baseload power generation source as well as more and more coal in the United States comes off the grid. We'll continue to invest in our base business because we continue to see growing demand for natural gas, not only in our gathering and processing business, but in our transmission business. And natural gas has to be here to work alongside those renewables to fuel that clean energy economy that many are envisioning for the United States and the world. There is a continuing opportunity for natural gas to lower U.S. CO2 emissions as it's already done by replacing coal-fired and fuel oil power generation, which are certainly higher CO2 intensity than natural gas is today. So there are a lot of opportunities, we believe, to help facilitate the clean energy economy. And while we could gain a first-mover advantage, and that remains to be determined, we think it's very important for us to stay on the forefront of research and development opportunities. We're currently leveraging our solar power initiative to power our own gathering and processing business as well as some of our transmission facilities along our pipeline corridors. We've completed several renewable natural gas interconnects on our pipelines, and studying a lot of ways we can participate in the coming hydrogen economy as well. To the extent there are going to be fuels of the future such as renewable natural gas and hydrogen, we're certainly in the early stages of evaluating these opportunities. For example, in Wyoming, we recently suggested partnering with the state of Wyoming on some co-funding there that we've asked them to participate in, they've solicited for proposals, and we believe we've made the short list there and should hear very shortly about an opportunity to work with the state of Wyoming to evaluate hydrogen and transitioning their economy as well. So very excited about that potential opportunity there. And our Regional Energy Access project, a very large 800,000 dekatherm per day transmission project on the Transco system. We filed in support of using those assets, but we're transporting hydrogen in the coming clean energy economy as well. And certainly, all of our transmission assets can accommodate some portion of hydrogen in those facilities. And currently, we are working with our customers in close proximity to those assets to determine if there are pilot projects that we can participate with them on and their ambitions to also transition their utilization of a cleaner fuel source for their customers. So just a lot of opportunity we see there. But frankly, we are very confident that natural gas is going to be around for a long time, not only for the U.S., but for the world economies.

Yes. So you -- maybe switching gears a little bit. During the pandemic, we witnessed Williams emerged from certain difficult customer and contract issues with creative solutions and win-win outcomes for the company and the customer. And sometimes, we're seeing partnerships as well continue to evolve, as you mentioned. Do you feel that the interest of the customer, in particular, and the midstream companies have become closer aligned during the pandemic? And do you think this has the potential to change the look and feel of the typical Williams customer agreement going forward? And how might there be other ways that Williams can support its customers to help bring fees to its own assets, especially if societies transition to a lower carbon energy future? And I did prepare that question before your news flow this week, so...

Right. Well, we feel very comfortable that we've always aligned well with our customers. There's been opportunities in the past where we've had to negotiate our contracts for the mutual benefit of our customer as well as ourselves on the gathering and processing side of the business. We've always been willing to do that where there's an opportunity to help them as well as help ourselves and make a contract that's more -- creates more opportunity for them to bring more product to market through our assets. And through the bankruptcy processes that we've gone through over the last year, we've always been very confident that our gathering and processing agreements would hold up through those, and we've come out on the back end of those bankruptcies as good or in better shape than we were before. And that really did come to fruition in 2020, where we actually negotiated some really win-win agreements with Chesapeake, for example, where we lowered our rates in the Haynesville for some of the properties that they had there. In exchange for that, we were given some of their upstream acreage that they weren't planning to develop in the near term. And now we can go partner with another entity there. And bring new supplies through our latent capacity that we have available there. So really created a great opportunity for Chesapeake to come out of their bankruptcy very strong and created our opportunity to go partner with someone else that has the capital ready, willing and able to deploy there in the Haynesville with us alongside. So I suspect we'll have something announced on that in the coming weeks as we're in the finalization of negotiations there with a couple of entities. But let's pivot to the Wamsutter where we had really opportunistic acquisition through the Southland bankruptcy, where we acquired some acreage there, alongside some adjacent BP acreage, where BP was wanting to sell-out of their Wamsutter position. And we were the likely buyer of that because it was clear to most parties that evaluated that situation that we were going to be the ultimate owner of the Southland acreage as they came out of bankruptcy. We've recently announced on Tuesday that we're partnering with Crowheart Energy to combine the Southland, BP and Crowheart acreage in the Wamsutter. And we have now over 3,500 operating wells in that joint venture. We have more than 3,000 potential development locations going forward and 1.3 million acres of upstream properties, some of which that we own in fee now. And what that means, basically, we avoid paying any royalties to any landowners there. So coming through those negotiations, we have the opportunity to market all of the commodities coming off that joint venture. So we'll be marketing via our Sequent entity, the natural gas, the NGLs as well as the crude that's coming off the production there. So a great opportunity to move more product through our OPPL pipeline on the NGL side, take advantage of the natural gas production coming from those properties and market that gas to downstream entities. So I would just say in closing on that discussion, we are not going to be an upstream holder of properties. That's not certainly what our mission in life is, we're there to be a midstream provider. But we took advantage of several opportunities here and acquired this acreage, and we have exit strategies for all of these situations. Ultimately, we want to properly have this acreage developed and drive new business through our assets. And that's what our goal is here, and we'll have more information coming out, as I said, on the Haynesville, hopefully very soon.

Thank you. Maybe switching gears a little bit on the policy front. We've seen some U.S. policymakers taking stand against using a bridging fuels like natural gas, and really believe U.S. energy policy and infrastructure spending should be entirely focused towards zero-emission sources like solar and wind and battery. What could this mean for the investment and regulatory environment for Williams going forward if that thought starts to prevail? And how might the company be promoting and educating the policymakers about the benefits of natural gas? And what policy decisions are you watching most closely at this point?

Well, we know that there's a transition underway. It's clear that there are needing -- there are opportunities that are needing to reduce CO2 emissions in this country as well as in the world. And I think the entire world needs to do their part in this effort. And I think Williams will be a part of that. I think the policy decisions that are being made need to take into consideration the costs of those policy decisions. And some of these renewable projects, the bulk of them are much more expensive than what customers and end users are currently paying. And we don't think we hear enough about that and about what the cost of the consumer will be through this transition. And that's why I truly believe natural gas will be here for the foreseeable future because it's clean, it's affordable, and it's incredibly abundant in this country, and we should take advantage of that resource that we have there. I think, ultimately, the infrastructure package that is being talked about in Washington has some conversation about natural gas being coupled with carbon capture as part of a multipronged clean energy future. And I think that's an area that we can certainly participate in. Obviously, transporting natural gas to any kind of power generation. But then transporting that CO2 that's captured off those facilities and ultimately, sequestering that in some kind of formation or some kind of technology change that can keep that carbon out of the atmosphere. So we do believe there are opportunities there. On the promotional side of the business, we've recently been a founder of an entity called natural allies, and this is a group of midstream and utility companies that are promoting the benefits of natural gas, natural gas usage as part of this clean energy economy. We're continuing to gain critical mass in this organization, and the goal is really to educate the public and policymakers on the merits of natural gas as a clean energy future, and that's one way we believe we can inform the public about the need for natural gas in our economy. So you'll hear a lot more about that from our peers that we're working with there and hopefully, continue to gain momentum in that. And then finally, on the FERC side, on the regulated transmission business, carefully watching any policy or potential changes that they have there and their evaluation of greenhouse gas issues on the transmission pipelines there. I would say, I think Williams has done a very good job of providing the documentation and information that FERC has requested and say that they need in order to properly evaluate these projects and feel very confident that we'll come out of that with some good decisions coming from the FERC. Finally, there are implications on the federal production on the upstream side of oil and natural gas and lease sale challenges there. I would say the good news is, on that front, there are a lot of private property onshore that are currently available for production. And on offshore, there are a number of permits that are already in place and producers are drilling against those permits. And successfully achieving additional permits in the Gulf of Mexico as we speak. So we've really not seen any hindrance of current permits in the Gulf of Mexico that would impede any of our customers' ability to continue to drill there.

Maybe just more broadly, when looking at how your customers are approaching their business decisions. What do you feel is driving most of the customers' production plans right now? Are takeaway capacity considerations in the Northeast a primary concern? Are they looking for, do you think, stability in regional pricing, some combination? And when do you think the environment looks like in terms of both public and private producers starting to meaningfully deploy capital back into their business again?

Well, I would say, first, upstream plans are primarily driven by prices, pricing that they can achieve and then their access to capital. And right now, we have seen improvement of pricing. Henry Hub natural gas pricing has been very strong this year and predicted to stay that way with the production [ make ] down really year-over-year as well as demand being up. And you're seeing a lot of demand for power generation, and you're seeing storage levels that are quite a bit lower than they have been in previous years. And so I think that's going to bode well for pricing for upstream producers. And across the board, you're hearing that producers are going to remain in maintenance mode. It's what we heard coming into the year. And certainly, pricing was much different coming into the year than what we're seeing now, and that obviously will be reevaluated by the producers. In the Marcellus, in particular, we see some medium-term constraints for takeaway out of the basin. Fortunately, Williams has some relief with our Leidy South project that's coming on this year. We're currently in construction on that project. That's almost 600,000 decatherms of new capacity out of Northeast Pennsylvania. And then our Regional Energy Access project that we filed earlier this year with the FERC adds 830,000 additional decatherms of takeaway capacity out of that same area. So we'll continue to unlock the takeaway constraints via these projects. And we're positioned very well on the Transco system to be able to do that with our existing footprint that we have. We can do many of these projects with very small looping and compression additions along our project, which are primarily brownfield. They've been previously disturbed areas. And so we feel very confident we'll continue to achieve success in being able to continue these bolt-on takeaway expansion opportunities there in the Northeast. I would say we've had a lot of success with private producers, and Sino has been very active over in the southwest part of the Marcellus and the dry as well as the rich natural gas-producing basins there. They acquired that acreage from Chesapeake a number of years ago. And we recently completed in the first quarter, our third processing train at our Oak Grove facility in West Virginia. That's virtually full now. Basically, it came online and it was full almost from day 1. So we have a lot of growth that is occurring in that basin and very pleased with the fact that we own more of the Blue Racer Midstream asset today as well, which we're seeing a lot of growth there on their side of the house. So continuing to see meaningful production increases in some parts of the Marcellus. And I think the pricing is only going to help drive additional growth in our business there.

Thank you for that update. Recognizing that you are influencing policy, how are you thinking that changes over time in clean energy policy as well as on other fronts, like corporate taxes in the U.S. evolve and affect both your existing business or how you invest potentially in the future?

Sure. We certainly believe that energy -- any clean energy policy that comes out of the current administration will not deter our long-term growth story for Williams. As I said earlier, our belief is natural gas is when you get necessary fuel. And we'll be around with a very long runway to continue to supply -- natural gas supplies for home heating, water heating, cooking as well as power generation. We have many opportunities to invest, not just in growth projects, but in modernization projects on our transmission assets, which certainly are kind of off-the-shelf things that we can continue to deploy there, to continue our growth. There definitely is a need to continue to modernize our compression fleet, and we've contemplated that through some negotiations with our Transco customers, for example, and we'll be talking more about that, I'm sure, in the coming years. Regarding taxes, I would say that we currently have a net operating loss that will preserve our noncash tax payments until at least 2025. And I would say any changes in the corporate tax rates from the current administration would not change that trajectory. What could change the outlook for taxes is if there is an implementation of an AMT, Alternative Minimum Tax, the most recent proposal was to tax companies with a minimum pretax book income of $2 billion. And I think Williams book income is significantly lower than that threshold to not be a risk for the foreseeable future. So right now, we look to be in pretty good shape with the proposals that are floating around out there.

So maybe moving on evolving your partnership approaches, you're applying that on the ESG front as well. So how might the ones like you recently announced with Microsoft advance your ESG priorities? And can you maybe elaborate a little bit on the strategic rationale for partnering with Microsoft, including the technological solutions that Microsoft proposes to use as part of the MOU?

Sure. The partnership with Microsoft will allow us to leverage their technological capabilities and allow us to optimize our operations with -- in both our G&P and pipeline assets. And we would expect through this partnership, we'll be able to improve our methane leak detection capabilities, for example. We'll be able to gain real-time efficiencies in our operations, which we've already been able to do working with Microsoft in previous years. And I think, ultimately, we're going to work with them to develop strategies that can track carbon neutrality of the natural gas molecule along our footprint. So there's been a lot of demand, for example, in Europe for responsibly sourced natural gas. And you hear this a lot in a conversations with the LNG liquefaction facilities where their competitive advantage will start to be being able to portray that the natural gas that they're sourcing for their LNG customers and European countries, for example, is responsibly sourced. And that means less flaring, for example, coming out of the Permian. That means making sure that the producers on the upstream side are doing everything they can with leak detection, make sure the midstream businesses are doing the same thing. And I think that's going to be a competitive advantage for us, and we're working with Microsoft today to be able to implement tools like that to help our customers on the downstream side, not only in the LNG facilities, but in the utilities here in the United States, to show and prove that they are responsibly sourcing their natural gas from good responsible upstream as well as midstream providers.

Okay that's helpful. Utility customers are bigger constituent, I think sometimes of your system than some people realize. Can you maybe comment on how contracting with utility customers along your Transco system specifically compared to a producer and other agreements and beyond responsibly [ for gap ], can you share what the biggest motivators are for this customer type? And how Williams is best suited to serve them?

Sure. The bulk of our customers on the Transco system, for example, our utilities and marketing companies. We have a very small component of that, that is an upstream producer. And there really aren't too many differences in our contract structures between our utility customers and our producer customers. In most respects, one key difference is credit. Utilities typically have better credit profiles than an upstream operator. And we appreciate both our utility and producer customers on our pipeline systems, but the better utility credit profile on the utility side allows us to potentially be more advantageous to participate with these customers on our transmission systems, but we're really suited to serve either of those customers well on our Transco and our other interstate natural gas pipeline systems. And I would say every negotiation is typically different. We have minimum volume commitments, oftentimes on our G&P business. We have different credit mechanisms to be able to minimize that credit risk. And so I would just say they are all different, but we typically work hand-in-hand with our upstream producer customers to have a win-win situation on those either dedications of those MVCs or those commitments to continue to grow our system and lock set with them.

That's helpful. Well, we're almost out of time, but maybe I'll just close with asking you what part of the Williams story do you think is least understood by investors that we haven't already discussed already that you wanted to share with the audience?

Sure. There's a couple of concepts that pulled around out there when we do talk to investors and we hear more and more about terminal value, I think, in our entire industry space. And that's one that we [indiscernible] down when we hear that, we believe strongly that natural gas is going to be here for a long time. There's a lot of conversation out there about energy transition and renewables. But the renewables are intermittent. And certainly, battery storage can help alleviate some of that, but those are very costly endeavors. And we do believe that when people start recognizing and realizing what the cost of this energy transition possibly can be that natural gas will still be a continuing part of that story for a long time to come. So I think the concern that the rapid growth of renewables will skip natural gas fired electric generation straights, renewables is something that likely won't come to fruition. There's a lot of coal out there that still has the opportunity to come off the grid. And we feel very confident that reliability is going to win the day, and natural gas will be a strong component of that reliable story. I would say the other thing that we'd like to talk about and make sure that investors understand is the diversity of our gathering and processing business. We have a lot of geographic diversity. We have a lot of customer diversity. And so we're not highly dependent upon any one geographic area or any one customer on our gathering and processing business. And some years, the Northeast might be growing stronger than the West. And vice versa, we would see large growth come out of the Haynesville. And we have a great geographic diversity there across our business, and I think it really does help us fill those peaks and valleys in years when one area may be less in favor than others. And we've been able to take advantage of that over the last several years and had good strong continuing growth in our gathering and processing business really across the board.

Well, thank you for that insight, Micheal, and thank you for your time. And thank you to the audience as well for your attention, and have a great rest of the day and all the best.

All right. Great. Thank you for allowing me to attend today. I really appreciate it.

Thanks for you time.