The Williams Companies, Inc. (NYSE:WMB) Barclays CEO Energy-Power Conference September 6, 2023 9:45 AM ET

Company Participants

Alan Armstrong - President and Chief Executive Officer

Conference Call Participants

Theresa Chen - Barclays

Theresa Chen

Testing, okay. Good morning, everyone. It is my pleasure to welcome our next presenter, Williams Companies. From Williams' we have Alan Armstrong, CEO.

Alan Armstrong

Thank you, Theresa. And good morning everyone. It's a great time to be here in New York City, even with finally some of the heat we've been having in Oklahoma being shared with New York finally. I've got a lot of comments to make this morning, that's going to start off with the -- what we've accomplished financially from a track record standpoint. We can get in a little bit of the fundamentals that are driving our business. And then looking at the kind of growth opportunities that we have that are off the backs of those fundamentals.

So, let me start with, first of all, our growth has been pretty extraordinary here, this is looking back the last five years, you can see, a lot of different metrics that we have on here. The 17.5% return on invested capital that we produced -- and by the way that absorbed, that's not just looking at project, project, project, that's looking at our entire portfolio. So that's projects and also offsets decline of the businesses. So very healthy ROIC.

And we test -- it's something we pay a lot of attention to as a management team, and partially because we're compensated on our ROIC for the business and our growth in ROIC, and so it's something we pay a lot of attention to. But that number is pretty impressive in a mature business, but I can tell you, it's about to get stronger even than that as we've got a lot of projects that are coming on here over the next couple of years that are very low capital-intensive project with very high returns. So we're really excited about that particular number.

You also see here that we've had now 30 quarters in a row over on the predictability side, 30 quarters in a row that we met or beat our consensus estimates. And we haven't gotten there by lowering guidance, in fact through that period we've been raising guidance -- annual guidance through most of those years. And so, we've continued to have a very predictable business.

And the good news is, I would tell you that we have a lot more of this growth to go on and a lot more of the return. So if we study a little closer, the financial metrics that we've been able to produce, this is a look-back five years, and you can really see the signs of a very healthy company here, with a lot of great growth, 23% CAGR on our EPS has been pretty impressive, and as well though really helped across-the-board, including very strong improvement on our credit metrics for the business.

And probably one of the things that I think sometimes is most undervalued is the kind of coverage that we've continued to build on a growing dividend. So, we've grown our dividend at a 6% CAGR over this period. But you can also see the coverage has continued to expand during this period as well, giving us a lot of opportunities to return value to our shareholders.

And we've done -- what this has really accomplished with all that help has been the amount of free cash flow generation that we've done during the same five-year period. And you can see the kind of value that this business is producing. And now as we've gotten to a point where credit metrics are in line, you're going to see even more free cash flow generation growth here in our business, because our returns in our business, believe it or not, even though they've been pretty good, they're -- as I mentioned earlier, they're actually getting higher.

And this is a look at how -- why our business has been so predictable. So this is our base business. So this does not include Sequent, it does not include our E&P business. It's 92% of our business on a '23 guidance basis. This is a 92% of our business. And the thing that I -- this is one of my favorite slides to explain our business and our company, because if you look at how we trade, a lot of times we trade with commodity price. And you can see there's hardly any correlation there of EBITDA with price on either gas or oil. The tight correlation you can see is the capacity on our systems, on our big transmission systems as well as the gathering volume, and that's what you see in orange is the annual or the quarterly average volume and the capacity that we have to sell and the sold-out capacity on our transmission system.

So if you want to be a long-term investor, this is what you ought to pay attention to, it's what drives this. And it is natural gas demand and demand for capacity. I'm going to get to that point here in a minute. But it's not just an annual average volume of gas that we sell, we sell capacity. So for instance, on our transmission systems, we really don't care what the renewable generation is in a market that we serve, because the utilities have to buy back-up capacity to be able to back that up.

So while we've actually seen demand continuing to grow, as we can see on this slide, this is a picture in the blue bar there is the average annual demand for gas power generation alone here. And you can see the blue bar showing how that's continuing to grow at a 6% clip -- sorry 6% here in '22 versus '23, but also the peak, so the peak day demand is growing, it grew -- it was about 50 Bcf a day of peak last year and everybody was kind of really impressed by that.

And we did have a very hot summer in the heavily populated areas last year. This year we actually even though you hear all the talk about the heat, the heat within the markets that really have a lot of population like here in New York City really has been pretty mild summer comparing -- and that's leaving out this week. But so far in terms of what's produced this number is really -- we really haven't had that hot. But yet we had a 53 Bcf a day this year, and we've actually seen five days so far over 50 Bcf a day. So pretty impressive set up.

Another point to be made from this slide though is the fact that the forecasters have continued to miss this, the EIA that continue to show -- you can see that in the dots there that that's their year ahead forecast and they've consistently missed this. And frankly, it is almost all on the backs of expectation for more power generation from renewable capacity, that hasn't shown up has been the primary reason that they've continued to miss it. It's not -- it is not that it's not getting installed, it's just the utilization rate of the capacity that's being installed, that's been missed and as we've gone through and studied these numbers.

And so good news, I would tell you for our business and for natural gas demand, and this is really before the current wave of electrification takes hold. And there is so much money being spent right now at ports, at airport all in grant money from DOE to electrify all kinds of equipment in and around that's just going to continue to drive more and more both annual average demand for power as well as peak demand to capacity. And natural gas is going to be and particularly pipelines and storage capacity are going to be the beneficiaries of that continued electrification.

The other area that will affect this on top of electrification is the shift from gas to coal. And this just looks at the power plants within the states that we operate and the areas that we have an opportunity to serve. And you can see here it's 74 coal plants that have net capacity of 79 gigawatts. And that is about 4.6 Bcf per day of natural gas capacity, just put that in perspective, our Transco system today is right at 20 Bcf a day. So pretty nice growth and we are -- a lot of this conversion due ERP that just came out here a couple of weeks ago calls for a lot more gas capacity in their areas, as they convert from coal. And we certainly are seeing the response to that move towards gas in the open seasons that we've been operating in the Mid-Atlantic region and down into the Carolinas to Georgia.

The other area of obvious growth, and this isn't so hard to predict, because it's such a long-lead item is the LNG side. And so, we today at about 12 Bcf to 13 Bcf a day of active projects that are going, but there's 26 Bcf per day of both current active projects or facilities, as well as those that are in execution now. And we are extremely well-positioned to serve a lot of this. We already serve a quarter of the existing operating plants, and we are in negotiations on several others to continue to serve LNG. And particularly finding ways to get both Haynesville gas and Marcellus gas into these markets.

In addition to that though, there's another 15 Bcf a day of new supply. So the fundamentals now are better than they have ever been for gas. I know that doesn't fit a lot of people's narrative, around what's really going on. But the truth is we've really kind of capitulated -- everybody has been something else to happen, some other solution, some other technical solution as a backup for renewables. But the point is, we've kind of gotten to the point where there really isn't too many alternatives, and we're going to have to start really building out capacity and relying on natural gas to back-up our power generation. And obviously, the LNG will put demands on our systems as well.

So, Transco is, we have three major pipelines, we operate Transco and Northwest Pipeline and we own half of Gulfstream with Spectra. And you can see here the Transco is by far the most valued pipeline in the U.S. And just some stats on that, 44% more throughput than the next largest natural gas pipeline, that's pretty impressive in terms of its size and scale, and it's continuing to rapidly grow.

You can see the five-year EBITDA CAGR at 13%. And that's really impressive when you realize that we have a rate case that we just started the test period for here recently. So a lot of the capital investment that we've been making on emission reduction project has not yet been captured in that earnings growth, and we've been at -- we're coming on the tail-end of a rate case. So we've got another step-up in earnings coming from the rate case for that business as well.

And then in addition to that, we've got 2 Bcf a day that will get us to 21 Bcf a day here in by '25. And so that'll be at 20% of nation's natural gas capacity in one pipeline system. It also is fully contracted, a lot of people think sometimes that we will be impacted by whether it's hot or it's cold. The truth is, these pipelines are completely sold out 100%. And so very predictable cash flow. I -- the thing you always have to account, you're accounting for the period and you just have to remember how many days that are in that quarter, so that's kind of the variability in that business, so it's pretty steady business for us.

This is though a picture -- the growth that we have ahead. So we've talked about our track record, we've talked about the strong fundamentals that set us up for the future. This is the projects that we have coming online. And you can see here the ones in blue that are going to be completed here in either '23 or early '24, that will -- that will give us a lift in '24. And then you can see in '25, and I would tell you, a lot of these projects in '25 that are (Technical Difficulty) in '25 are very large-scale project.

Some of them are not requiring a lot of capital, because the producers are putting the capital in, in places like the deepwater Gulf of Mexico. But our deepwater EBITDA from this will double through 2025. And in fact with the projects that we have coming online, we're probably going to (Technical Difficulty) because we've had a few more projects come on recently. So the deepwater has got a lot of growth for us with pretty limited capital investment required on our part. And then you can see a number of transmission projects there in the purple that will come on towards the end of next year and into '25 that are Transco expansions.

And the good news is, I will tell you, there are more projects to come. So as we look at our -- so that -- those are projects in execution. This is the pipeline ahead of us. And if you've followed us closely, you've seen this number of 30 projects be there for a long time and you might say well, you guys ever going to move any of those into execution? The truth is that we've been moving about nine over of this, whilst if you went back and look at last couple of years and two years before that here, we're moving about four to five projects a year of our pipeline into execution. And we've had a really good track record of moving these projects from potential projects into execution.

I would also say though that the fundamentals that we're seeing are actually just now showing up. And I expect this portfolio, given the number of things that we're pursuing with customers right now, are actually for the first time in quite some time for this pipeline of projects actually expand a bit on it, just given the number of requests for services that we're getting particularly on the pipeline side of our business.

And so, we also been able to grow the business with bolt-on expansions, and I would just tell you, you can't look at our acquisitions and find one that we haven't had some very strong competitive advantages. In other words, we're not out just looking for what the cost of capital in the market is, we're looking to make some outsized returns. And in each of these cases, we have some very strong competitive advantages that we knew about going into the transaction. And I'm proud to say the team has done a fantastic job of executing on those opportunities.

And in the case of MountainWest, which we just did earlier this year, that is going up with a lot more growth already and some projects we've already executed, fully executed projects that were not even in our upside case for that project originally. So a lot of demand going on out west, particularly in coal conversion. So if you look in Wyoming, you've got a couple of very large specific coal plants out there that are now converting from coal to gas and we will be serving those projects as well.

So a lot of -- a lot of great growth showing up. The storage assets that we bought in and around the Dallas area, part of that project was, we to our Sequent operation already held about 30% of that capacity. And we realized it could be priced up pretty substantially versus what we were paying for it. And we would still be willing to pay it. And so, we bought that, we've been able to almost double the rates across the business there that was on for what we got the contracts. And in addition to that, we've now built a new transmission project that we're in the process of commissioning as we speak. And so, that will come online here in the third quarter. And so that's a transmission line that will bypass some of the local pipeline systems and go directly into the power generators in that area, those are really high-margin project for us on that as well.

And then on the Trace Midstream deal, we've always had a big relationship with Chevron. And we knew they had a pretty large package of gas to the south of trade system that we thought we could win with the addition of this asset, and we've been able to do that. And so we've now -- we'll track that [Technical Difficulty] and are expanding that by 400 million a day. And in addition to that, we got a large commitment to the Louisiana Energy Gateway for Rock Clip Producer on Trace system. So really, it's hard to look at any deal that we're doing that don't have not something that we bring to the table that adds value over and above what that value would be market.

So we always get questions about our capital allocation, and I would tell you, I think the questions will get louder on this frankly because this free cash flow is starting to pile up. And we are -- we continued over the last several years just to let our credit mix grow. We're at a point where we're trading like we're BBB-plus on our debt. We really don't see a whole lot of value, going a whole lot lower than that.

And so, that bucket has gotten pretty full. That balance sheet strength that we've been pursuing, and we're right now for the first part of the year we're at 3.5, and we've got guidance at 3.65 for the entire year. And that's frankly kind of right where we want to be. We don't think there's a whole lot of value, we can go in much lower than that given the predictability of our cash flows and given where our debt trades today.

On the dividend side, we have maintaining, you know we've said for a number of years now, probably five years now, we've said that we thought $1.5 billion to $2 billion of capital would generate about 5% to 7% of growth for us. Obviously, that has a lot bigger numbers going on with it, and 5% to 7% gets larger. But the good news is we've gotten better and better returns on our projects. And so, that 5% to 7% growth in EBITDA remains. And we've been able to raise our dividend right in line with our core business. And the value -- top of that being our E&P business has driven that [Technical Difficulty]

Excuse me, on the -- on new investments, I'm happy to tell you that we have a number of good investment opportunities. We high-grade these all the time. We -- it's the very lowest part there on item number four is our emissions reduction project. So let me explain that very quickly. Our -- within our Transco and our Northwest Pipeline systems, we have plenty of room in our -- in the rates that we charge, our regulated part of our business in that, that we charge our customers, we have plenty of room we can keep investing at about 12.5% return on a cash-on-cash basis before tax.

And so, that's very much, it's like a lot of utilities that you would otherwise invest in. That investment is allowed to us, that is at the bottom of the barrel for us in terms of return. But it's a very large opportunity for us. And so, when we get to the bottom of the stack and we have something left, we continue to use that because that's not an opportunity that will escape us, it's an opportunity that sits there. And so that's a place for us to invest excess capital. And we are investing pretty heavily right now in our emission reduction project investments, which will drive a very successful rate case outcome for us in '25.

So that -- and by the way that just -- the test period just started. We'll have a pace period and we'll be filing rate in March '25. Couldn't be a better time to go in for a rate case with debt costs coming up across sector, equity price up against the sector, inflation in cost, easy to argue that, that will continue. And those are the kinds of things that drive a successful rate case that we'll be up against. So we're pretty pleased with the timing that we're going to get in front.

And then finally on the financial flexibility, we have been doing, we've done about -- we've got a $1.5 billion buyback approved, stock buyback approved by our Board. And we've got another $130 million this year of buybacks. And the way we think about that like we have overcompensated this. We've been delivering this 6% CAGR around dividend growth. And so, when our -- and [Technical Difficulty] bottom barrel of returns for us is around 12% to 12.5% on that rate case, which is a very low-risk investment. And so when we hit a yield plus growth with a 6% -- assuming a 6% growth, when we hit a 6% yield, that's the point that we've been opportunistically buying in the market. And that number will change as we raise our dividend, it's pretty easy math, and probably the way we think about where and when we buy shares back.

And then finally, I would just tell you, we continue to have our eyes out for bolt-on transactions that we can do much like the ones that we've done, and we're very happy today. Some of the things that are [Technical Difficulty] for that today are a lot of private equity jobs have got a lot of floating rate exposure. And so there's getting to be a pretty big spread in cost of capital between the private equity side that hold assets in and around -- some of those with us strengthen know the assets very well.

So being very patient of them and what opportunities come to us at a price that we're excited about. And so we do have some remaining opportunity that we think we can pick up at very attractive prices. So -- and certainly, we would only do that if it winds up being better than that rate case investment opportunity to 12.5% level.

So with all that, I would tell you, it is a great time to be continuing our strategy that we've been on for quite some time. we believe natural gas has so much in cable results in our most critical problems, both here at home and around the world. And we are really happy as a company to be a part of the solution and be a part of driving down emissions in a dramatic fashion with the use of natural gas taking on heavier fuels. We've been on this -- we've been on this strategy for quite some time, and it is really paying off very well for us, as you can see.

And the good news is, is I really think we've got even better days ahead for us right now. as really the markets has run itself in those situations. It doesn't have very many alternatives if you want to lower emissions and you want to have reliable energy stores, they're just not very many options that are on the table for us here in the U.S. and around the world, and we're excited to be in the position we are to provide the infrastructure to help deliver that gas.

And with that, I will open it up for any questions you might have.

Question-and-Answer Session

Q - Theresa Chen

So we have time for a few questions. Mic is coming around. Sir, please.

Unidentified Analyst

Alan, could you comment on yesterday's acquisition announcement, Enbridge buying Dominion's discos. Were those assets that you looked at, could we see gas discos in your portfolio at some point?

Alan Armstrong

Yes, I would just say that, from our perspective, we always have to look at a deal like that, and way how our currency is valued up against our discounted cash flow of our own operation, and I would just say that when we would look at asset like that, the use of equity in a transaction like that, just really wouldn't make much sense for us, just because we've got some good growth that is undervalued as a currency there today. And we have this rate base that's investable at a higher return than those LDCs offer in terms of incremental returns. So just -- that kind of lower return doesn't make a whole lot of sense for us. So -- and I'm not knocking it all. It probably makes a lot of sense for Enbridge.

Unidentified Analyst

Thank you. Just two quick ones Alan. Can you comment on the impact that MVP could have on Williams? And the second question is, given the outlook for LNG exports and everybody is talking about the Permian, Haynesville supporting most of that. What do you think needs to happen or do you think will happen to unlock the potential of Northeast gas to fill more of the LNG exports than perhaps people are forecasting now.

Alan Armstrong

Yeah, it's great question. These -- so first of all on, as to MVP, if you think about MVP, we own a lot of the gathering, we're the largest gatherer by far in the Marcellus and Utica. So, we own a lot of the gathering business. And so, as that market opens up and that takeaway capacity opens up, our main incremental volumes flowing out on the upstream side for us where it's very-high margin. But in addition to that, we just had an open season here about a month and a half ago that meant really kind of surprised us and we don't get surprised very often because we usually kind of who the targeted customers are. And we kind of have a prearranged understanding of who's into the open season.

In this case the open season was oversubscribed by multiples, not by percentages, but by multiples of the capacity we had to offer. And it is because people knowing that there is going to be low-cost supplies available at 165, and so that open season really showed the power of bringing those new supplies into Transco, and our ability to now serve a lot of that Mid-Atlantic and Carolinas market with that low-price Marcellus gas.

Now, will that -- so people get very fixated on physical molecules and how they flow and where they flow. And the truth is, Transco is a very large header. So that's going to be another supply point just like Station 85 as a supply point today. We have 2.5 Bcf a day today, even without all these expansions that you saw from that area, we have 2.5 Bcf a day of capacity north, we have 2.5 Bcf a day of capacity south, and we have 700 million a day of physical capacity on the Virginia lateral that goes east towards the coast in Virginia. And so, we have plenty of physical capacity, but we don't have the ability to deliver for all of the growing market there. And particularly [Indiscernible] in the Carolinas market area.

So we've been fighting hard to get MVP approved at such -- even though we don't own it, it's such an important project for unlocking, get new volume potentials in West Virginia, Ohio area. And as well new capacity that we are going to be able to make a very high return projects off of because we were going to have to build all the way from Northeast PA and serve those markets. Now the pricing level that the customer pays is the same. So in other words, these are not -- everybody who thinks what's the regulated pipeline, how it could be just got a regulated rate of return. That's not the way it works. Nobody can force us to do an expansion. So we're pricing up against the avoided cost. So the harder it is to build project, build new expansion projects more valuable or capacity is on that expansion.

So our ability to expand along our existing lines is going to allow us extremely high returns. And previously, it was going to be big projects, but lower returns. We're going to have a lot of projects that are going to be ordinary high returns. So MVP is a very positive thing for us, and we're really excited to get it approved.

Theresa Chen

Thank you very much.

Alan Armstrong

Yes, thank you, Theresa.