The Williams Companies, Inc. (NYSE:WMB) Barclays 2022 CEO Energy-Power Conference September 7, 2022 10:20 AM ET
Company Participants
Alan Armstrong – President and Chief Executive Officer
Unidentified Analyst
All right, if everyone could grab a seat. So, next up, we have The Williams Companies, one of the premier natural gas infrastructure providers in the U.S. With us from the company, we have Alan Armstrong, President and CEO.
Alan, thanks for joining us today. I’ll turn it over to you.
Alan Armstrong
Okay. Well, thank you, [Marc] [Ph], and thank you all for joining. Boy, it’s really, — I would say probably if you asked me, three or four years ago, if I would ever miss coming to these things I’d have probably said no way. But actually, it is really nice to be back and get to see so many people. So, the one thing’s changed since four years ago though is that I can’t read my notes anymore, so I’m going to have to put some glasses on here.
So, let me roll right into this, quite a bit of material to get through here. And I hope, when I get done, you’ll agree with me, we really are a unique investment opportunity even within the space. A lot of great peers and competitors in the space, but I think Williams really has distinguished itself, and I’m going to try to convince you of that here with the presentation this morning.
So, first of all, looking at our track record, which I think really does speak for itself here. And even, I think, in a couple of impressive things here, a 21% CAGR over this long period of time here, beginning in ’18, on our adjusted EPS, an 8% CAGR on our EBITDA and then that’s at our midpoint of guidance for this year. And you — I did not do that. And you can see the net debt to adjusted EBITDA continuing to make good progress, and that’s a big number we were working against initially but we made great progress on that by continuing to be very discipline and, importantly, the kind of coverage that we have against a 6% dividend CAGR as well.
And I think it’s a real opportunity for Williams to distinguish itself in terms of being amongst the very large-scale players about continuing to have very strong dividend growth, and plenty of coverage for a very secure dividend. So, we’re really excited about the way we’ve been able to continue to deliver on this. And one other note I would make I think that’s really important is even through 2020 we continued to grow this business, and not very many people can say that. And we, as well, that we met really towards the upper-end of our guidance that year, that was established well before COVID. So, an extremely durable business, a growing business, and one with a very healthy financial — or a very healthy balance sheet with a lot of opportunities to continue to accrete value to our shareholders.
We’re doing that with a very clear and focused strategy that we’ve had for a long time, very much centered around natural gas, we’ve been convicted to this for a long time. And one of the things that’s been very attractive to us in some of the durability is, one, the very high contracted nature of our three major natural gas pipeline systems, as well as the diversity of the various gathering basis that we serve as well. So, both of those continue to produce extremely reliable and predictable cash flows. And then looking at why we are so convicted, I would tell you the — we think natural gas is going to continue to be here for a long time. And this might surprise you, but so far, this year, we again have had two three-day average — we measure our peak periods typically in three-day averages.
And we met a three-day peak period on Transco, both in the winter time even though we didn’t have an extremely cold winter, we had — we hit a peak period on Transco for a three-day average in the winter. And we also, this year, hit a peak on the summer load as well, so — and that’s of all time. So, our demands continue to grow in the business for natural gas, and that was not — frankly, that really wasn’t driven by incremental LNG loads, that was driven by, obviously, winter heating loads, on the one hand, that continue to grow, and we’ll talk a little bit about some of those growth opportunities, as well as power generation growth, obviously, for the summertime.
And I’ll remind you right off the bat, because this is such an important concept to think about when you think about Williams. While we’re going to talk a lot today about natural gas demand growth, and when we’re talking about that we tend to talk about in terms of an annual average market growth, but what’s really important to understand about Williams is the services that we sell on our transmission systems; we sell in long-term capacity obligations, 15 to 25-year capacity obligations. And so, we’re not — we don’t really care what the actual volumes move. So, when you think about intermittent loads as renewable power generation comes, you might see the demand continuing to come down.
But the capacity requirements actually continue to come up when we have more [intermittent] [Ph] power loads the capacity for the power generation continues to increase, so, a really important point to ask and think about when you’re thinking about an investment in Williams. We also, I would just tell you, we have really got our heads looking to the future as well. We love the position we’re on in natural gas right now, but we have a very valuable network, we have irreplaceable infrastructure. And we are going to make sure that wherever the opportunities exist to help meet a decarbonized future energy that we are going to be smack-dab in the middle of it to the degree that we have competitive advantages that can add value. And our teams are doing a fantastic job of staying on top of that.
I’ll remind you, Williams is a 120-year-old business, and we didn’t start off in the natural gas transmission business. We’ve been in the fiber optics business; we’ve made a lot of really important moves. Today, I would tell you the future looks very bright, again in natural gas, but we are going to make sure that as new opportunities invest themselves, that we can deliver with high returns and competitive advantages, we’re going to be a part of that.
Don’t know where this receiver is, can you advance it for me? Oh, there we go. Thank you. Yes, I went on pause myself there for a minute, sorry about that.
Okay, so back at it here. And so, I would just say, again, it’s really remarkable even at the high prices that people are talking about here on natural gas today, natural gas continues to be a real bargain when it comes to energy use both at residential level and at the industrial level. And really continues to be, if you think about comparing it to fuel oil or propane or even electricity continues to be about a fifth of the cost — on a heated BTU in the house, about a fifth of the cost of electricity in most areas. So, even at these higher prices today, it continues to be a real bargain. And we think there’s going to be a lot of attention drawn to the fact that natural gas is clean and reliable here as people’s utility bills start to really show up. And I would tell you that in our discussions with the Biden administration, we are quick to let him know that while the focus has been on gasoline prices here from the administration for quite some time where the puck is going is actually going to be on people’s utility bills.
And the impact of high natural gas prices on power prices is about to poke its head through as well as people’s heating bills this summer. And we think there is going to be a lot of attention drawn to that issue. And we’re going to be quick to say this is not a lack of natural gas supply. We have plenty of low cost natural gas supplies here in the U.S. What we don’t have is infrastructure. And infrastructure is keeping us from being able to deliver on lower cost for consumers. And so, we are really positioning ourselves to make a real — take a real position on this with the administration. So, looking at some of the things that will drive demand and again this is a good thing to think about is to think about capacity. This is you can see that power generation we’re actually expecting to decline. And this is actually a Wood Mack read of it.
But we are actually showing power generation declining here on a total consumption level. That doesn’t mean again that during quite a bit of incremental demand for natural capacity to back that up and will show that a little bit more here. This is on an annual average use or consumption. And you can see really the drivers that are expected here are continuing to be LNG exports, Mexican exports. And importantly — and this is really — nobody is really being talking about this much.
But if you think about how high the prices in other manufacturing areas and other petrochemical areas around the world on the backs — and they have been on relying on natural gas for a lot of that manufacturing. You can imagine that with the U.S. having much lower gas prices available, we are going to bring home a lot of industrial loads here whether it is for fertilizer production, for anything that is heavy gas intensive, we are going to have a real opportunity to continue to bring manufacturing and industrial loads back here to the U.S.
Because of the price that it’s taking even if you got enough LNG capacity build out to catch up with the European prices, we’re still going have a big advantage in terms of both the liquefaction, the transport, and the degasification expenses on that gas. The U.S. is going to be well-positioned for a long time to grow its industrial base. And obviously, you can see the impact here from LNG that everybody is very well aware of.
And so, Williams I would just tell you is extremely well positioned up against this load. And this shows the 20.1 BCF of projects that are either already active or are in the execution mode within the Transco footprint. So that’s 20.1 against an existing about 13 BCF a day, and then another 20.4 BCF a day that are getting very close to FID. So, a lot of new capacity coming on, and importantly, all of the approved and proposed U.S. LNG export facilities are located within our Transco pipeline corridor which is going to create additional opportunities for expansions on our system.
So, we are really excited about the way we are going to be positioned up against this with both our transmission and our storage infrastructure being able to deliver that for a long time to come. So, the other area that’s a really big opportunity for us both in terms of expansions on Transco as well as emissions reductions is replacing coal within our corridor. And you can see here that there is 66 remaining coal plants with about 65 gigawatts of net summer capacity for generation.
And that would equate to about 10.2 BCF a day of new transportation capacity. Put that in perspective for you that’s about a 52% increase in the existing Transco capacity. And that’s about a 10% increase in the amount of the current U.S. demand, so, a lot of opportunity. But why we would go replace perfectly good coal plants? And I would tell you that that is the equivalent — replacing those with gas is the equivalent of taking 30% of the U.S. cars off the road today.
So, it’s something that we can do economically; something that we have the technology to do, something that we don’t have to wait on for a long time, so, a huge opportunity to continue to replace coal with gas here in the U.S. And so, we think this is a big opportunity. And we certainly are seeing this through our RFPs from our customer, the continued the effort to replace these. And that is driving some of our pipeline of opportunity on Transco and Gulfstream System right now. So, this is a really interesting picture because note what this says. And there is so much misunderstanding within this space. But note the title of this, U.S. Installed Power Capacity Mix. So, that’s capacity. That is not power generation — total power generation. That is capacity to generate power.
And you can see that it looks like we’ve got a whole lot of new power generation on the solar and wind. And, we do. But that is going to take a lot of backup because that’s total capacity installed. The actual utilization of that averages about 26%. So, the incremental load from that is either going to have to come from storage which you can see it’s picked up there, or it’s going to have to come from continued natural gas demand. And right now, people are leaning pretty heavy into that being natural gas in terms of the request for services on our system. But, I think it’s a really important thing to understand when we talk about capacity additions that that is on a basis that is what the total deliverable capacity of those facilities are. And we are in a really strong position in the gas space to help back that up.
And we think because of that our pipeline capacity in serving the heavily populated areas is going to continue to be extremely important for the future of de-carbonized power generation market. So, on the global side, the U.S. is certainly going to get called on. We know there is a lot of activity on the LNG side. And so where is all that gas going to come from? There is a notion — there is a notion sometimes in Washington that we should restrict LNG exports because we don’t have enough supply.
That couldn’t be further from the truth. We have a tremendous amount of long-term long-lived supplies below the $5 mark even below the $4 mark. And so, we have plenty of supplies here in the U.S. Our challenge is infrastructure period. And so, as we look about where the gas is going to come from, you can see the northeast remains by far the largest. And the only reason that that isn’t growing faster than it is on this forecast is because of the lack of infrastructure.
And so, this is beginning to catch a lot of attention when people start to look to the future. You can see the Permian obviously is going to be an important gas supply for the future here as the flare gas is captured as well as the continued growth in the Permian and as well as the factors in the fact that that field is becoming gassier with the gas to oil ratio is actually increasing on the older wells there.
So a lot of incremental gas comes up the Permian. And then you can see the Haynesville which I will tell you has been carrying the load of things like stopping the Mountain Valley pipeline and that gas not being available in the short term. The Haynesville growth is really surprising us. I think by the end of the year, it’s going to surprise a lot of people how fast gas supplies have grown in the Haynesville. And that’s not going to be stopping anytime soon.
And I’ll show you a little bit of how we are positioned there in a moment. But, this is really where the gas supply is. Again, plenty of long-term supply is available in the areas. But, really the infrastructure is going to be the key. This is now just a picture of the three key — just focusing in on those three key areas. And you can see here the amount of growth about 3.8 BCF a day in Marcellus and Utica. I think if MBP gets a built and expanded, our regional energy access project which is about 840 million a day of new capacity is going very well and is actually before the FERC at their certificate hearing process right now. We should probably hear on that in the next 30-40 days. That’s gone extremely well through the permitting process because most of it is on our existing write away. And so, we are seeing some signs of increase coming from that area. You can also see here again the strong growth coming out of the Permian. I would remind that’s oil directed. So, it’s not going to be all that sensitive to gas prices one way or the other. But, the areas that are sensitive to gas price, the Marcellus, the Utica, and the Haynesville is an area that Williams is extremely focused on and is very well-positioned.
And in fact, if you look at the amount of remaining reserves here, getting up on almost 350 TCF of remaining reserves that are under $5, so, in other words that can be economically produced at $5. You can see here that the Marcellus, the Utica and the Haynesville have 86% of the remaining gas reserves here in the U.S., and thankfully, Williams is very well-positioned in that. In fact, 84% of our gathered volumes come out of these three critical basins that are going to be here for a long time to come and will continue to serve long after the Haynesville peak that we’re seeing will be relying more heavily on the Marcellus and Utica to keep up with the LNG growth that, that we’re beginning to see occur.
So, looking at specifically — at where Williams is going to be growing. And this is really exciting to me to see kind of the breadth of growth opportunities that we have. And these aren’t — this is not speculative. This is ongoing execution projects. And you can see here we have five projects in execution on the — on our transmission systems, the vast majority of that is Transco and these are sizable transmission expansion projects, six high return expansion projects in the Deepwater and really only two of those are we actually expending any incremental capital on and that will amount to here in 25 will amount to doubling our EBITDA that we had in ’21 in Deepwater so and that — this isn’t — this is not a whole lot of speculation around this as well. These are proven developed reserves. And this is a matter of them getting connected into us at this point.
So, we’re really excited about what we’re going to see out here in the Deepwater and I’ll tell you, it continues to grow. So that’s just what we have today in execution, but the opportunity list out there continues to grow as well. In the northeast, we have four major expansion projects that are underway. One of those is to connect; we have excess volumes that we can’t process at our West Virginia processing complex. And we’re in the process of making an interconnect to our 50% own Blue Racer system. And so that should be done here probably in November. And so that’ll open up some new processing capacity for us in that area, as well as we have a major expansion for Coterra up in Susquehanna, some expansion for Chesapeake and their partners in the Bradford and a very large project for Encino in the Utica that we’re continuing to work on as well, so, really exciting growth going on in the Northeast as well.
And then, I will tell you that the horse that came fast out of the gate this year on us was the Haynesville, it is growing much faster than we expected. And we are frankly having a really hard time keeping up with the amount of growth because the drilling success is kind of well beyond what everybody expected out of there actually is, you haven’t heard this term in a while, but there is actually gas curtailed now back behind our gathering systems and actually a lot of our peers as well, because the drilling success has been so big out there, so lots of gas waiting on these expansions to occur in that area.
On looking a little deeper at our transmission business, you can see here that this is the portfolio of projects that we have on our transmission system, and again about 10 BCF a day of incremental capacity. And that would be at 52% increase on the nation’s largest pipeline. So very significant and I am just continue to be really surprised about how quickly our team is moving these projects from being an RFP to being a contracted capacity. And again, we have five projects that are in execution right now and several more that are going to be following behind that very quickly. And we’re having pretty, really good luck on the permitting process most — almost all of these projects are within our existing corridor. So we’re not — I don’t think anybody in the right mind would try to build a Greenfield pipeline these days.
But that requires FERC and approval. And so, I think that’s kind of not something I would expect to occur anytime soon. But the expansion projects along these existing right away allow us to charge a much higher than the regulated costs of service. So, people always say, “Well, why are you excited about these projects? Are these regulated projects?” We are allowed to charge because nobody can force us to expand our system. We are allowed to charge whatever the market will bear for those expansions. And so, this allows us to get much higher rates of return on these expansion projects.
And so, the difficulty of building new pipeline capacity actually accrues to our benefit when it comes to the margin and the pricing that we can establish for pipeline business. That’s not — by the way, that’s not a really good thing for our country. And I don’t sit here and tell you that’s real positive for our country, but the fact is building infrastructure is costing us all as consumers in the nation and hopefully we’ll get that resolved. But for the time being, that is a very positive thing for us from a pricing standpoint.
If you look at what we’re doing on New Energy ventures, I would tell you a lot of exciting work going on. Probably the biggest challenge is an interesting thing that you wouldn’t really think about maybe, but one of the interesting things for us is that we’re challenged with keeping our talent, our human resource talent within the company. Focused on the old business because particularly a lot of the younger population in the company wants to go work on the new energy venture stuff, it’s new and exciting. And so, we are seeing a lot, that’s probably one of our biggest challenges is keeping our focus tight to those things that we can add a competitive advantage. We’re not going to go out and compete on competitive merchant solar rays.
We’re not going to go out in the business and compete on areas where we don’t have a very significant competitive advantage. But even within — even with that restriction, we have a lot of opportunities. One of the areas that you’re going to be seeing some press here on the not too distant future is on next gen gap. And this is a certification process where we’re using Coterra — sorry, we’re, using context labs, and working with some of our key producers to be able to actually certify their gas all the way from the wellhead, all the way into where we deliver into the utilities. And we’re going to be able to certify that is very low gas with third-party certification, not with our own certification, but with third-party certification, and we’re actually using our Sequent energy marketing team to actually buy that gas and then find premium markets for that gas based on that certification.
So you’ll hear some more about that in the not too distant future. But we’re really excited about the way that project is going. This is our wellhead to water strategy and very focus today on the Haynesville, we hope to expand that to the northeast, but today it’s very focused on the Haynesville and you can see we have today about 4 BCF a day of gathering now in the Haynesville and that’s growing rapidly, but we intend to be able to make that delivered on to ship in a next gen certified gas. And we are working with again a lot of excited customers on that effort as well and really have all of the things coming together on this including a carbon capture project that we’ve announced that would be off the tail end of our treater for the leg. Obviously, the 45Q announcement in the Inflation Reduction Act is a really nice tailwinds for that project as well.
So, if you look and see this a little more details on that project and what’s going on with that, but this is a target in service for fourth quarter of ’24. It is not — it does not require the typical permitting process because we’re expanding this as a gathering system. And so, this does not require the typical permitting process. And it all is within the state of Louisiana.
Moving on to the financial strength and flexibility, first of all, another look at kind of what’s driving the capital allocation opportunities that we have right now, which is decreasing capital expenditures, improving balance sheets and fast growing adjusted EBITDA. And so you can see that this is moving up.
One of the things you’ll notice there in 2022 is the $2 billion of total capital. Of course, that has also got the emission reduction project, which is an added expense on our Transco system for that will go into the rate base. So a lot of times when you hear the term maintenance capital has been invested at the bad thing because that’s just money out the door maintaining facilities. In Williams’ case, a lot of our maintenance capital actually goes to increase our rate base, just like a utility, and we’re actually — and it gives us additional earnings power. So, for us, once we get above about the $300 million or $400 million maintenance capital, the remainder of that maintenance capital typically goes towards growing our rate base.
And so, this is our capital allocation proprieties. I’m going to skip over this because I’m about to run out of time; nothing new on this sheet. What is new and I’m really happy to show you is we have nothing to apologize when it comes to how we’ve been investing our capital. This is a look-back over the last four years, and this is something we constantly are required by our Board to keep in front of them. And this is the return on invested capital that we produced over this period. So, you can see a 21.4% return on invested capital. And that’s working against decline. So, that’s not just taking the good parts of our business, that’s working across any areas that we have in decline, and actually developing it on top of that. So, that’s total incremental EBITDA that we’ve grown on about $8 billion worth of capital.
So, really excited to be posting these kind of numbers. And I would tell you the future looks like we’ve got more of the same of this kind of return on our projects. The Inflation Reduction Act, I would tell, overall, is good for us. We are already well below the methane intensity levels, so the methane fee is not going to be impacting us. On the book minimum tax, we expect to not be a cash taxpayer for 2023, and some of the 45Q tax credits and some of the tax credits for the hydrogen hubs we are well-positioned to take advantage of. So, net-net, it’s actually a good thing for us. We wish that it would have come with better permitting reform language, but we’ll — the jury is still out in terms of whether that will occur or not.
So, overall, I hope you agree with me, Williams is a unique investment opportunity. We’ve got the financial strength and stability. We’ve got tremendous line of sight to growth that we’re currently executing on. And we are focused on the very long-term shareholder value through the way that we both look to today’s opportunities and to tomorrow’s opportunities. And we’re going to be running a business that’s sustainable. We are on our way to having a 56% reduction in our carbon emissions from our business between 2005 and 2030, so — and we are well on our way to doing that, and the organization is excited about being able to deliver on that promise.
So, with that, I’m done. And I don’t know if we have any time for questions, Marc.
Unidentified Analyst
Yes, I think we’re up on time.
Alan Armstrong
Okay.
Unidentified Analyst
So, thank you, everyone, for coming. Thank you, Alan, for joining us today.
Question-and-Answer Session
End of Q&A
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