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

Good morning. I'd like to welcome everyone to our Annual Barclays CEO Energy Power Conference. My name is Christine Cho, and I am the midstream analyst here. Here to kick off the conference is The Williams Company, a premier natural gas infrastructure company. Please welcome Alan Armstrong, President and CEO.

Thank you, Christine, and good morning, everyone. And really excited to talk to you today about what's been going on at Williams. We announced a press release this morning, I'll talk a little bit about, but really encouraged with the environment we're in today and the financial strength of the company. So let me just start here with just a very quick overview of Williams. And as you -- a lot of you all know very well, we handle about 30% of the nation's natural gas. We continue to be an important part of the U.S. carbon reduction with the continued growth of use of natural gas in place of heavier hydrocarbons, and we have a very diverse business on the midst -- on the G&P side and serving about 14 different areas, and that diversity has proved us well with extremely predictable cash flows and very durable -- even through the pandemic in 2020 and in here 2021. And we also continue to grow our base business very dramatically. You can see on the transmission side, we've more than doubled our contracted capacity from 2008. And on the gathering volume side, we've almost tripled our gathering volume side on that same time period. So continued strong growth in our core business, and we do believe that natural gas is going to continue to be a very important part of a low-carbon economy here in the U.S. and actually around the globe, and we're very happy to be a part of that. Looking at why Williams and why we think it's such a great investment opportunity, we do provide, really, very strong financial stability. I'll talk a little bit more here in a moment about what we've continued to do in terms of reliable earnings. But we're into our 22nd quarter of either meeting or beating the Street consensus estimate. So -- and that really is through some fairly volatile times, low prices, high prices and as well as things like COVID-19 for 2020. So despite a lot of change and a lot of things that have gone on in that period, we continue to have a very durable business and our -- a very well-covered dividend and a healthy balance sheet. We also, though -- and I think starting to distinguish ourselves a bit amongst the crowd on this, really have a lot of growth within our sites right now, a lot of very well contracted growth, and we're very excited to see what that will continue to show. And there's really -- that's in 4 different areas that I'll talk through here in just a moment. And we are continuing to focus on long-term shareholder value. And when we think about long-term shareholder value, we think that's synonymous with sustainable. In fact, from our vantage point, having a great focus on sustainability is a really important thing for Williams because, one, we do have a product that we think is here for a very long time and a very big part of the low-carbon future. We also are going to continue to invest as transition opportunities present themselves on that front. But with that, basically, a focus on Sustainability means people are focused on the long term, and that is truly what we're here to be able to deliver on. So we're excited about where we're positioned today. We're excited about the growth forward, and we're excited about playing our part in transition opportunities as they continue to present themselves. And so looking at how we've continued to do on the financial side here on the first quadrant, a 14% growth in earnings per share on a CAGR and from '18 through '21, as you can see here. And that is just at the midpoint. As we announced at the last earnings call, we do intend to be at the high end of that range for both EBITDA and our EPS and so that might pick up a little bit. Again, on the adjusted EBITDA, we've grown from this period, we've grown at a little over 5% CAGR. And again, if you elevate that up to the high end of that range, that number comes up a little bit as well. And so continued nice growth and a nice set of opportunities in front of us that will continue to drive that growth. In addition to that, our dividend, we've had 6% dividend CAGR from '18 through '21. And you can see the improvement in the leverage metric, which resulted in us getting rated at BBB, effectively BBB, across the board with rating agencies now and that number is continuing to come down. And certainly, at the high end of the range, it will be well below that 4.20x number there. So really nothing but a very positive perspective. On the current financials and again, on the dividend and the dividend coverage, if we hit near the high end of the range that we're expecting to, we'll have almost a 2x coverage on our dividend based on AFFO. So really, a pretty powerful story here on a very secure and growing dividend. And one of the things that we think distinguishes us as well is how durable our business has been. And I really think this is a great graph to demonstrate that. There's 2 things to look at on here really. You can see the contracted transmission capacity and gathering volume in the red. And you can see how that's just had nice steady growth over this period from '15. And then in the blue is our continuing adjusted EBITDA, and you can see a nice correlation between those 2. Where you see a very poor correlation to is commodity prices. And you can see all the movement there in both crude and gas prices and really no correlation in our earnings for that. That is not by mistake, and it's very much the way we've invested in the business. We do have a little more exposure now with the benefit of some of the upstream transactions that came out of some of the bankruptcies in '19 and '20 that position us extremely well for this environment that we're in with higher prices right now. But make no mistake, our long-term focus is to have a durable, predictable business built around fee-based revenues. And really the upstream pieces were just very opportunistic for us. And the timing, obviously, couldn't have been much better for us as well because it does give us some exposure to the upside here with these high prices right now. If we move on to -- looking at what our business looks like. This is a really important slide for a part of this presentation. And I want to stress that this is not guidance. But what this is, is looking back at what's happened with the same level of capital investment that we're looking at going forward and seeing what that means for us in terms of cumulative excess cash flow. And so you can see here with a growth rate between 3.5% to 5%, which is based on the 3-year and the 4-year levels of growth that we had in the period, that would generate about $6 billion to $9 billion of cumulative excess cash flow over that period. And so a lot of excess free cash flow really starting to build now with the business. And we -- while -- again, while this is certainly not based on -- it is certainly not guidance. This is a very clear picture of what if the history were to repeat itself on the EBITDA growth with our current financial situation, the kind of excess free cash flow that we would have. So a powerful picture here in terms of what this business is capable of even at a modest level of capital growth. And I will tell you that given the very high return projects that we're seeing right now on both Transco, the Deepwater, the Northeast continuing to grow and some very high return now in the Wamsutter and Haynesville areas associated with the development of those upstream resources I talked about. Those returns are actually going to be better than the kind of returns that we've had available to us for the last several years. And so we feel really good about the platform that we're sitting on to be able to develop this kind of growth. And so, big question, obviously, that we've been getting for the last year or so as close investors continue to follow this picture, and know that the model is showing that we would have quite a bit of excess free cash flow coming. We've gotten the question quite a bit lately about well, what are you going to do with the excess free cash flow? So here is our capital allocation priorities. And first and foremost, the health of our balance sheet and maintaining that BBB rating that we have today is first and foremost. And so that is -- no doubt in our mind about what's #1 on that. Right behind that then is dividends. And as I mentioned earlier, we have really strong coverage on that dividend. We intend to maintain that by continuing to grow our dividend in line with our AFFO growth just as we have been doing. And so that pretty well keeps the rest of the model in balance by keeping the dividend growing at that same rate. And then on top of that, then we'd be reinvesting about $1.2 billion annually in high-return growth CapEx. And we do have, just with our organic growth opportunities around the business. We have a very clear line of sight to those investment opportunities. And then the fourth item here, Emission Reductions & Renewables. The $300 million that you see there for emissions reduction projects will come off of investing in our regulated assets like Transco and Northwest Pipeline on -- mostly on emissions reduction projects with some modernization opportunities. That's barely predictable. We know what projects we need to execute on to lower our emissions on the system, and we know how to file rate cases to gain recovery for those investments. The other $250 million here for additional renewables project, we know where the first $400 million of that is likely going to go. But I would say that of this model that we're looking at right now, that $250 million, once we get beyond the first $400 million in the solar projects that we've talked about, that is the most speculative with our model. We've got a team out working hard to develop opportunities in and around our assets that generate returns that will be at least as good as investing in our rate base on our pipelines. And that really will be the hurdle for those depending on the risk. If there's more risk, obviously, we'd expect higher returns. But we're not going to be investing in renewables without decent returns for that. And so that team is out working hard to make sure that we are pulling up opportunities where we have competitive advantages around our assets. And then finally, on the investor returns, we made a press release this morning talking about our desire or our share buyback approval that we got from the Board here recently, and that is a $1.5 billion buyback. That is on an opportunistic basis. And it basically is looking at the arbitrage between the cost of our 10-year debt or what the market is for our 10-year bonds versus the yield on our dividend. And when that multiple is such that our yield on the equity is high enough that, that makes more sense to buy that back, we'll be buying that back. And if not, it will be naturally continuing to reduce or improve our credit metrics. And along with that, would go down the cost of our bonds as well. So we're really excited about rolling out this plan. And we think that this really makes it clear for our investors how we're thinking about capital allocation and what that opportunity looks like in front of us. So that's the story on capital allocation. Pretty simple, actually, and I think very sensible in terms of whether the best buy for our investors is further debt reduction or whether it is buying back our equity and the market will tell us when one is a better buy than the other. Moving on to looking at our growth. And you heard me mention these 4 areas a while ago, but on the transmission side, we have 5 projects on our transmission systems right now that are in execution, and we have 25-plus projects that are in project development right now, and we continue to roll those projects out of development and into execution. And as I mentioned at our earnings call, we did recently contract for 2 new expansion projects in the Mid-Atlantic. And those projects we're really excited about and serving some great customers in that area. So we're really excited to get those projects rolling. And our Leidy South project is ahead of schedule. It's going extremely well. And the team has done a great job of controlling both cost on that, keeping our cost below budget and bringing that in a little bit ahead of schedule. So great job by our teams on that. And REA, Regional Energy Access, is also going very well from a permitting standpoint and cost forecast right now. On the Deepwater side, really a powerful piece of our growth because it requires fairly little capital. And so when I talked earlier about the $1.2 billion being maybe even more powerful as a growth tool than it was for the last 3 years. A lot of it is because in the Deepwater, most of those projects are not requiring capital. And even the one that is, which is Whale, has a tremendous return to it on an incremental basis. So we expect that to double our EBITDA in the area, and we also have actually added 2 projects since we talked about this. And so we could actually see it more than double. And I'll just remind you that's about $300 million of EBITDA at our current levels of profitability in the Deepwater. On the Northeast G&P area, continued growth there. And really, that area is getting exposed to some very nice pricing right now, and we are extremely well positioned with our -- to keep up with our customers' growth there. And we have a lot of projects that are going on right now to be able to keep up with that growth. So over the past 4 years is close to 14% growth rate in the area. And we think, obviously, with this kind of pricing level on gas that we've got the momentum to continue that. That will depend on takeaway capacity out of the Northeast. Leidy South is an important element of that as well as Regional Energy Access. And then in the Southwest area, the Equitrans Mountain Valley Pipeline coming on would also open up throughput to the South. And there remains capacity to get out on the western end into both Rover and Nexus. And so producers there are still able to grow volumes in that area without takeaway constraints. And then finally, one of the areas that's kind of really new for us in terms of growth is the Haynesville and the Wamsutter areas, and this is driven by the upstream transactions that we did through the bankruptcy process to take control of those assets, and we have now established joint ventures to rapidly develop those volumes and those are going to be really powerful for us as well because a lot of that capacity and midstream capacity is already in place. And so it allows us to have high incremental growth in our cash flows in those areas with very little capital reinvestment in that area. So really, if you look across the board here, these are highly competitively advantaged projects that are producing returns well above what the M&A space has to offer today, and so we're really excited that we've got this host of strong projects for the next 3 or 4 years here to drive our growth. If you look at the transmission side, this is just showing what's going on in execution here. I've mentioned most of these. But about $1.5 billion of capital investment in the area, and I would just say our teams continue to over-deliver on the capital side of that in terms of bringing down the capital. And because those are fixed rates, if they do, the multiple will actually be better than that 6x multiple that's shown there. So continued a lot of growth, not just on what we're showing on this map, but in terms of our development projects, a lot of continued demand for natural gas. We look at the Deepwater, this area, we mentioned the 4 projects before. We've now added over there the Shenandoah project, which we just signed up in a couple of months ago that now has FID just recently by the customer. So that project, we are in full execution mode on that project as well. And we are continuing to see a very attractive situation in the Deepwater Gulf of Mexico in terms of opportunity. And our assets are extremely well positioned to be able to capture a lot of that without a lot of incremental capital, so very high incremental returns continue to show up in the Deepwater. So looking a little bit at the macro piece of this, you can see that we're really impressed with the resilience nature of natural gas demand. Now this slide was really produced to represent what we saw in 2020. And you can see how resilient things were with actual growth in power gen load from '19 to '20 despite COVID, and the LNG and Mexican exports grew very dramatically as well. Industrial did flatten off a little bit due to COVID from our perspective and actually declined a little bit from '19 to '20. And the [ Res/Com ] though, you can look at the [ Res/Com ] and think it really went down. And in reality, it actually stayed a little bit stronger on a weather-adjusted basis because you can see there that the weather adjustment was a 14% change in heating degree days during that period, but the [ Res/Com ] volumes were down 9.6%. So really, nothing went wrong with the natural gas demand market in 2020. But as we roll that forward to looking at a longer-term forecast, we see here that there was an expectation that with higher prices in 2020 that we would actually see things fall and into '21. The reality is prices have gone up dramatically, in fact, almost doubling in kind of the current price to a year ago current price. But yet, we really haven't seen the volumes and demand back off. We're really, frankly, a little bit surprised by that, and we may still see that if prices remain very stubbornly high like they are right now, we may see some impact to the power gen market and would fully expect that. But I'll remind people that what we sell as Williams on our pipelines is we sell capacity. And so we're not sensitive to the immediate fluctuations in power gen load nor are we really impacted by the utilization of the gas plant. What we are impacted by is the utilities buying -- continuing to buy capacity. And if you look at the very latest integrated resource plan from Duke, you'll show -- you'll see what is a very common theme, which is an accelerated effort to get off of coal and to use renewables with backup from natural gas. And again, despite -- regardless of kind of what that utilization rate is, as long as there is a need to have that backup with natural gas, the full capacity for that generation will have to be bought, and that is going to continue to drive a lot of growth on our regulated system. So really excited to see how strong natural gas demand is standing up right now with this pricing environment, but we also think the way our business is structured makes us not really very sensitive to the amount of renewables that get installed to the degree that the backup is being done with natural gas. And we think that is and will be the solution for quite some time. LNG export, the rest of the world, that's no secret. The rest of the world is continuing to utilize natural gas as a low cost and clean fuel. And so we think the export business is going to continue to grow pretty dramatically, seeing an incremental 14 Bcf a day of gas demand through 2030. So we've seen some really nice growth here over the last couple of years that has been very powerful and continue to drive demand, but we think we're in for another raise of LNG exports and nobody is better positioned than our Transco system to be able to deliver on that, given its scale and access to the lowest-cost resources in the nation on the supply side. And so looking at that, one of the things that, I think, is really powerful to look at is how we did in the first half of '20 versus '21. And you can see here that across the U.S., we saw a 0.4% decline in production in the lower 48. However, on the Williams side, we actually saw a 5.9% increase over that same time period. And that should be no surprise because if we look at where -- here on Slide 18, we look at where the low-cost gas supply is, you can see it is the Marcellus, the Utica and the Haynesville. Those are the areas where Williams is by far the strongest. And in fact, 80% of our volumes -- gathered volumes, which is about 14 Bcf a day on an operated basis comes out of those 3 areas. And so that's going to continue to be the areas that we're going to get called on to meet this continued rise in demand in natural gas, and we are absolutely in the right spot to be able to take advantage and help deliver -- continue to deliver these very low-priced resources into the market. We also, though, have made really great progress on ESG and our ESG scores. And I think this is a really impressive list here of accomplishments that we had in '19 through '20, and we continue to get nice increases in these ratings. And so in May of this year, the MCSI increased our rating from a BB to a BBB, and Sustainalytics placed Williams in the top 4% within the broader industry for our sector. So we're really excited about that. And on the Dow Jones Sustainability Indices, we're now ranked in the top 7% of industry peer group. And we think with our very latest sustainability report that we just published, we actually think that we're going to continue to see really nice improvement in these scores because we are continuing to lead in terms of disclosure and improvement on our disclosure as we continue to be -- want to be a very important part of a lower carbon economy here in the U.S. as well as continuing to be a great community citizen. That's always been something that we've done, and we're excited to be able to show the kind of impact we have in the communities that we operate. So finally, we really think Williams is really beginning to distinguish ourselves. We've always -- we've had this predictability that we've built over time. Our cash flows remain very durable. I think really impressive here is this is 8 consecutive years of adjusted EBITDA growth. And so not much reason, especially given the kind of 4 facets of growth that I talked about, no reason to think that, that growth is going to disappear from us. So the business is healthy, and there's a lot of great growth out in front of us. But we also are continuing to have -- we want to have a dividend that people have great confidence in. And so the coverage on our dividend, we think it's very important and distinguishes us in the market, along with the growth in our dividend. And we think now with the opportunity with all this excess free cash flow to continue to invest that in bringing returns to our shareholders, either through further debt reduction or through share buybacks as we're now proved to do. We think this is really a turning point for Williams, and we're excited about the future right now on both what we can do as part of -- being part of a low-carbon economy in the future and as well as what our base business continue to generate with the benefit of some of the things like the upstream transactions that we had last year. So with that, thank you all very much for joining us, and we really appreciate the continued interest in the company.