Williams Companies Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 14 speakers on the call.

Operator

Good day, everyone, and welcome to the Williams Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Mr. Danilo Giovanni, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thanks, Sameer. Good morning, everyone. Thank you for joining us and for your interest in The Williams Companies. Yesterday afternoon, we released our earnings press release and the presentation that our President and CEO, Alan Armstrong and our Chief Financial Officer, John Chandler, We'll speak to you this morning. Also joining us on the call are Michael Dunn, our Chief Operating Officer Lane Wilson, our General Counsel And Chad Zemarin, our Senior Vice President of Corporate Strategic Development.

Speaker 1

In our presentation materials, you'll find a disclaimer related to forward looking statements. This disclaimer is important and integral to our remarks, and you should review it. Also included in the presentation materials are non GAAP measures that we reconcile to generally accepted accounting principles and these reconciliation schedules appear at the back of today's presentation materials. So with that, I'll turn it over to Alan Armstrong.

Speaker 2

Great. And thanks, Danilo, and thanks to all of you for joining us today. We do have a lot of good news to share with you today, but let me just start by saying that our long term strategy of connecting the fastest growing natural gas markets with the best Our supply areas continue to deliver exceptional financial results as demonstrated by these higher than expected 3rd quarter financials. As John will walk through in just a moment, we achieved all time record results in the Q3 with our adjusted EBITDA up 12% compared And continued strong fundamentals, we are raising our 2021 EBITDA guidance midpoint for the 2nd time this year To a level that is now 8% above our realized 2020 results, which I'll remind you came in above expectations last year in a very challenging Backdrop. Not only did we deliver more on our financial performance this quarter than we expected, but we continue to make strides in executing on key projects and on key projects and transactions that give us a clear line of sight to sustain growth for many years to come.

Speaker 2

We'll talk a little bit about that But so for right now, let me turn it over to John to provide you some insight into the drivers of this all time record quarter for Williams. John? Thanks, Alan.

Speaker 3

First of all, just what an incredible quarter we had. At a very high level summer, the quarter benefited from nice increases in profitability From our Northeast Gathering Systems, an uplift in revenues on our Transco pipeline from new projects have been put into service over the last year, Significant contributions from our upstream operations in the Wamsutter and the benefit of higher commodity prices in our West segment. The positives were offset somewhat by slightly higher operating expenses resulting from increased incentive compensation expenses, Reflective of the strong performance that is unfolding for the year. And you can see that strong performance in our statistics on this page. In fact, once again, We saw improvements in all of our key financial metrics.

Speaker 3

First, our adjusted EBITDA for the quarter was up $153,000,000 or 12%, setting a new record. And we've seen a 10% increase in EBITDA year to date. We'll discuss EBITDA variances in more depth in a moment. Adjusted EPS for the quarter increased $0.07 a share For 26%. AFFO also grew significantly for the quarter, up $217,000,000 or 25%.

Speaker 3

And AFFO, I'll remind you, is essentially cash from operations, including JV cash flows and excluding working capital fluctuations. If you put our year to date AFFO of $3,000,000,000 up against capital investments year to date of $1,200,000,000 and dividends year to date of 1 point $5,000,000,000 You can see that we generated over $300,000,000 of excess cash year to date. Included in those capital investments I just mentioned were $307,000,000 of maintenance Also, you can see our dividend coverage based on AFFO divided by dividend is a healthy 2.17 times for the quarter. This strong cash generation and strong EBITDA for the quarter, along with continued capital discipline has led to our exceeding our leverage metric goal, Where we currently set at 4.04 times net debt to EBITDA. You'll see later in our guidance update in the deck We've moved our guidance for the year from where we were at less than 4.2 times for the year now to around 4 times at year end.

Speaker 3

So So really strong performance for the quarter and the year and the fundamentals are set up for a good Q4 and a very good 2022. So now let's go to the next slide and dig in a little deeper into our EBITDA results for the quarter. Again, Williams performed very well realizing $153,000,000 or 12 percent higher EBITDA. Our upstream operations added $55,000,000 to adjusted EBITDA this quarter. This is almost entirely from the Wamsutter Upstream acreage.

Speaker 3

Production from the combined assets, mostly from the Wamsutter, totaled 232,000,000 CFEs a day for the quarter net to our ownership. Again, the Haynesville Upstream acreage, but there's very little EBITDA given it has only a small amount of existing PDP reserves. And therefore, it will take a little time before we see new production and therefore EBITDA coming from those assets. Our Transmission Gulf of Mexico assets produced results $8,000,000 more than the same period last year. New transmission pipeline projects added $24,000,000 in revenue versus the Q3 of 2020, including the Southeastern Trails project that went into service in the Q4 of last year and a portion of the Leidy South project that also went into service in the Q4 of last year.

Speaker 3

And you can see this evidenced in the growth in our firm to reserve capacity, which is up 4% from the Q3 of last year. Offsetting this somewhat was Gulf of Mexico revenues that were down due to incremental impacts from hurricane shut ins during the quarter from Hurricane Ida In comparison to the hurricane impacts in the Q3 of last year, just so you have a number there, the incremental impact this year was a negative $5,000,000 versus the Q3 of last year In addition, the transportation revenue increases were offset somewhat by a slight increase in operating expenses, mostly due to employee related expenses, a large part of which can be attributed to higher incentive compensation accruals. The Northeast G and P segment continues to come on strong, contributing 40 $6,000,000 of additional EBITDA this quarter. Collectively, total Northeast gathering volumes grew $470,000,000 a day 5% this quarter versus the Q3 of 2020, while processing volumes grew 20%. The volume growth is Predominantly at our joint ventures in the Bradford Supply Hub, where we benefited from a gathering system expansion on that system in late 2019 And at our Marcellus South supply basin where we benefited from more productive wells at larger pad.

Speaker 3

And just to be clear, because we do not operate with the Racer Midstream, Those volumes are not included in the volume statistics I just quoted. As a result of these increased JV volumes, our EBITDA Equity method investments improved by $45,000,000 which also included the benefit of additional profits from Blue Racer Midstream, Again, due to our additional ownership we acquired in mid November of last year. Otherwise, in the Northeast, higher revenues from higher processing volumes We're offset by higher expenses again with a significant portion of those expenses being related to higher incentive compensation accruals. If you go to the West, that segment improved by $48,000,000 compared to prior year. Dollars 35,000,000 of this increase is related to higher commodity margins due to higher natural gas and higher NGL prices.

Speaker 3

Otherwise, the remainder of the uplift in EBITDA comes from lower operating costs due to lower maintenance fees and due to the absence of legal And revenues for the West were only up slightly compared to the same period last year. Now there are a number of big items that go opposite directions in revenues that I'd like to point out. First of all, for example, remember that we've lowered our gathering rates In the Haynesville this year in return for undeveloped upstream acreage from Chesapeake in the South Mansfield area in the Haynesville. The resulting gathering revenue decrease from this during this quarter was more than offset by rate increases in the Barnett and the Piaance Where our gathering contracts allow us to participate in the upside when prices are higher. Also last year, our partner on Overland Pass Pipeline Was paying us a deficiency fee to allow them to pull volume off of OPPL.

Speaker 3

Those deficiency fees do not exist this year. However, the assets of those fees are being offset by fees from higher gathering volumes otherwise. And to that point, overall gathering volumes in the West were up 1% With higher volumes in the Haynesville and the Peons being offset somewhat by lower volumes in the Wamsutter and the Barnett. And then finally, the Seqwit segment produced near flat adjusted EBITDA for the quarter. Seqwit traditionally makes a significant portion of its profit in the 1st couple of quarters of the year In the heart of the winter season and therefore did not realize profit for the quarter.

Speaker 3

Seguid does have a significant portion of their transportation capacity hedged With basis swaps as well as our storage inventory hedge with NYMEX positions, which of course led to the large $277,000,000 unrealized mark to market loss on those hedges this As prices increased and as basis differentials widened in some markets. This of course means that the intrinsic value of our storage and transportation positions Have gone up significantly as well. And again, you'll see a significant portion of that value realized in the first half of twenty twenty two. So now to go to the year to date results. Again, our year to date results showed strong growth of $383,000,000 or 10% in adjusted EBITDA.

Speaker 3

Many profitable things are happening across all of our segments. First, I'd point to Winter Storm Yuri, which added $55,000,000 in profits to the West, And it contributed $22,000,000 of incremental profits to our upstream results. In addition, our upstream operations Otherwise, have added an additional $83,000,000 year to date, almost entirely from the Wamsutter properties. Our transmission in Gulf of assets are up $30,000,000 or 2% better, with the increases being driven largely by additional transmission revenues from new projects that have been put into service And incremental revenues from Gulf of Mexico assets largely due to lower downtime this year versus last year. These positives were partially offset by lower revenues Due to a Transco rate case decline following the rate case final settlement in mid-twenty 20 related to just a few markets.

Speaker 3

And as a reminder, a majority of our transfer rates actually increased in 2019. In addition, expenses are Higher this year year to date due to higher incentive compensation expenses resulting again from our strong performance. The NorthEac G and P is at $124,000,000 for the year, almost entirely driven by profits from our JV investments, again, namely from the Bradford Supply Hub Gathering Systems And our Marcellus South Gathering Systems. In addition, we benefited from increased ownership in Blue Racer Midstream. In total, gathering volumes for the Northeast are up 8% Over the Q3 of last year, while processing volumes are up 22%.

Speaker 3

And then in the West, our West CMP is up to the end of the year that we earned from winter storm Yuri. The $71,000,000 increase is driven by higher commodity margins, higher gathering rates in the These positives were offset somewhat by lower Haynesville gathering rates, which again were exchanged for upstream acreage And lower Overland Pass Pipeline Profits from lower actual volume shipped and the elimination of the efficiency payments that we were receiving in 2020. And while we did see a 4% gathering volume decline year to date in the West, that was mostly offset by minimum volume commitment payments. Again, this is stacking up to be an incredible year for us. One other thing I do want to point out, we did pick up in some of the narratives from Some of the analysts last night, the view that our operating costs increased and we did ourselves a bit of a disservice by not providing more information on our other operating segment where our E and P Upstream operations reside.

Speaker 3

Actually, if you look on the face of our financial statements, our operating expenses went up $73,000,000 $12,000,000 of that came from Sequent, who by the way covered most of that with their profits. E and P went up $51,000,000 on cost, Of course, they're making significant EBITDA, so they're covering that with their revenues. And then the rest is related to bonus expenses. So our expenses actually, When you extract Sequent and E and P and the bonus costs are actually down otherwise. So we actually are not seeing a significant We're seeing expense increases and in fact the contrary is true other than the bonus related expenses.

Speaker 3

So I thought I'd clear that up. I'll now turn the call back over to

Speaker 2

Great. Well, thanks, John. And we'll move on here to Slide 4, Our natural gas focused strategy is delivering even better results than we expected in this high commodity price environment. Demand for natural gas in the 3rd quarter was surprisingly inelastic against this higher than expected pricing environment. And while we would prefer more moderate natural gas prices for our business over the long haul, the recent demand resilience highlights the near and long term role that natural gas will play as a complement to growing demand for renewable energy and emission reduction in general.

Speaker 2

The past 18 months have demonstrated the benefit of our high quality portfolio of contracts through which We've thoughtfully built a business that is durable in the down cycles, but exposed to upside potential when it is available. This quarter's results show how meaningful that upside can be even after excluding our upstream results. Along these lines, We also have contracted our business over the years to be protected from inflationary environments and we see additional upside potential In our GMP businesses due to contract terms that adjust our rate for inflation. In short, our business and its Actual portfolios are set up with the long term investor in mind and are positioned to drive through these cycles. And that is 8% higher than last year's strong $5,105,000,000 of EBITDA.

Speaker 2

And of course, that was A feat by itself in the environment that we are in. So we're really excited to show our durability in the down cycle And while the past few years have been characterized by lower commodity Prices and reduced producer customer activity among 'twenty one EBITDA and EPS Yes. Guidance, the midpoint translates into a 3 year CAGR 6% on the EBITDA and 17% on the EPS. So a 3 year CAGR on our EPS now at 17% And of course, this is proving up our ability to produce reliable and growing earnings under a variety of market conditions. Our financial results in 'twenty one continued to derisk our balance sheet, which is now at about 4.0 leverage.

Speaker 2

And also note, we recently issued $1,250,000,000 of 10 year and 30 year bonds at the most attractive interest rates ever issued here at Williams. This is significant because we are now positioned to allocate capital to a variety of options that will provide compounding value to our long term shareholder. To this end, we've continued to grow our stable quarterly dividend through our investors and remain steadfast in maintaining The long term security of the dividend. And most recently, we unveiled our long term capital allocation priorities, Including a $1,500,000,000 opportunistic share repurchase program that has the potential to enhance shareholder returns beyond the dividend. And perhaps most unique to Williams as we think about capital allocation is the option we have to grow Dependable earnings by investing in the modernization of our regulated transmission systems, which will both grow earnings and as well reduce submissions across our footprint.

Speaker 2

So next, here looking at growth. From a project execution point, we continue to deliver on multiple fronts, Including bringing online key projects such as Leidy South, which we are targeting to bring into full service Earlier than projected and importantly before the winter heating season. And while projects such as REA remain in the We continue to receive interest in demand for projects on the Transco system. Our 2 recently announced mid Atlantic Expansions will add a little more than $500,000,000 a day of capacity on the system. And in the coming weeks, we expect to secure precedent agreement For another system expansion, bringing a total of 3 incremental expansion projects on Transco just here in the last half of 'twenty one.

Speaker 2

Our natural gas fundamentals are not only supportive of our transmission assets, but also our GMP business We continue to grow at a rate of nearly 10% U. S. Gas production volumes. This, of course, was led by the Marcellus Growth where we are also growing a rate that is almost double that of our competitors. And you can see The layout of that and some slides we put in the appendix.

Speaker 2

With projects like Lighting South and REA providing takeaway out of the basin, We expect our gathering volumes in the Northeast, sorry, to remain resilient. In fact, we expect to announce the system expansion in the basin soon And finally, on sustainability. As we think about sustainability both today and into the future, our highly reliable natural gas infrastructure is extremely well positioned to We are looking forward and anticipating future innovations and technologies that we can use on our key energy networks to deliver on our country's clean energy future. And to this end, we are pursuing emerging opportunities like a hydrogen hub Our solar initiative continues to move forward as we now advance the execution of now 12 projects on our systems. And those are, as we've mentioned before, large solar arrays that will provide power for our fairly large loads on our compression and Processing Facilities.

Speaker 2

Now looking at our renewable natural gas efforts, we set a 2021 goal of adding an incremental 5,000,000 a day of renewable natural gas, and we now expect to exceed that goal. We recently signed an interconnect that should enable up to 10,000,000 cubic feet per day, the new source of RNG supply, bringing our entire RNG Portfolio close to 25,000,000 cubic feet per day with in service dates in the 2022 through 2023 timeframe. So A lot going on, on that front. The team is doing a great job of making sure that we're capturing opportunities in and around our assets there. We do remain steadfast in the view that natural gas will play a role in the world's clean energy future, and our latest efforts to advance responsibly sourced gas We're also pursuing sustainable investment opportunities and are pleased to be partnering on 2 strategies with Energy Impact Partners, An investment firm that makes venture and growth investments in companies that are optimizing energy consumption and improving Sustainable Energy.

Speaker 2

Williams is among the 1st midstream investors in the platform, and we're expecting to facilitate diverse investment opportunities That reduce emissions and advance our ESG goals. Finally, our ongoing focus on sustainable operations continues to deliver Strong results that are being recognized by our key rating agencies in this space. Williams sits in the top quartile for our industry with rankings that reflect the dedication So here in closing, A lot of really positive things to report on this quarter, demonstrating that our intense focus on natural gas based strategy Has built a business that is steady and predictable with continued growth, improving returns and significant free cash flows. This has translated into a strong balance sheet and a well covered and growing dividend. And our best in class long haul pipe like Transco, North basins that will be called on to meet gas demand as it continues to grow.

Speaker 2

The triple punch of benefits provided by American Source Natural Gas Must not be understated as we work to accelerate our clean energy future around the world. As we work to balance sustainability And climate goals with growing energy demand, natural gas will remain a key component of the fuel mix and should be prioritized as renewables complement To more aggressively display more carbon intensive fuels around the world. Natural gas does provide industry and manufacturing here at home. Williams Transmission and Storage Networks are extremely well positioned to aggregate and bring scale to multiple emission reduction So in closing, we produced tremendous 3Q results. But more importantly, we have an unmatched platform to continue to deliver growth and lower emissions at the same time.

Speaker 2

We look forward to helping our customers and stakeholders meet their goals in an environmentally and financially sustainable manner. And with that, I'll open it up for your questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Jeremy Tonet with JPMorgan. Your line is open.

Speaker 2

Hi, good morning. Hey, good morning, Jeremy.

Speaker 4

Just wanted to kind of touch on the strong results this quarter and how we should think about that going forward. If I look at the guidance range, it doesn't necessarily Seeing that all the benefits that materialize in 3Q fully translate into 4Q. And so just wondering how much of this is How much growth is this a level that could be built off of into 2022 EBITDA? Just trying to get a sense for what's recurring here in the strength this

Speaker 2

Yes, Jeremy, thanks for the great question. Maybe just speaking to a few Plus and minuses from 3Q. One of those that you heard John mention is we did take an accrual For bonuses for the year and both on our long term incentive comp as well. I see a lot of people adjusting that out of their EBITDA. We don't adjust that So our long term incentive comp, and we did take some accruals for that as well as our annual bonus, which And so those that was a hit To the quarter, that would be negative.

Speaker 2

On the other side of that, we had about $24,000,000 I believe, of Pricing increase on our NGLs and inventory. And so to the degree that, that doesn't increase again, that would offset against that Positive that shows up in the quarter. So that's kind of a non operational issue, if you will. We have Price that inventory up, but to the degree that NGL prices don't move again, then that wouldn't show up. So that's a couple of One positive, one negative.

Speaker 2

I would just say we pay attention to the Ford Strip When we think about our forecast and our guidance, and obviously, those are backdated As we sit here and so our expectations would be the same moving forward as it relates to the E and P business, I will say that that's not a huge driver of our business, obviously. It's pretty measured, as you can see. It will become larger in 'twenty two as we start as the Haynesville starts to get developed, that will be A net positive that where we will build larger sensitivity to gas prices in 'twenty two as the Haynesville starts to be developed. I would just say we're we know this was a good quarter in terms of pricing and we're not going to Build our business in a way that's just sustained off of high commodity prices and that's Hopefully, evident in how we forecast our business as well. So, nice to take the winnings that when they come to us, but We're not going to build we're not going to forecast our business around that.

Speaker 2

Obviously, if prices do stay high, then we'll Certainly see the rewards from that.

Speaker 3

And Jeremy, just as it relates to this year's guidance, obviously, I think by our nature, you probably know we're somewhat conservative How we do things, so that's probably a bit of that's embedded there. But also we left ourselves some flexibility as it relates to the Q4. If we wanted to accelerate, for example, Yes, to our foundation, we've that our strong results gives us flexibility to do some things like that. That would be expenses we'd otherwise incur Next year or the year after. And so we do have some flexibility and some capacity to do things like that.

Speaker 4

Got it. Moving along here, I guess, next question I have is in the build back better build here. Just wondering what implications do you see for your business here? It seems It could be different things, 45Q being higher, some other energy transition initiatives in the bill and at the same time 15% minimum tax. Just

Speaker 2

Yes. Well, certainly, we would keep our eyes on the alternative minimum tax, and I'll let John speak here in a minute I think as it relates to things like increasing the 45Q amount, obviously, that would be positive for us, Particularly as we think about utilizing our infrastructure for carbon capture and in places like Lots of positives, I think, in that area. On the methane emissions issue, we are really encouraging that to be done in a way that Rewards those who reduce methane emissions. We think it's smart to Continue to put focus on methane emissions reductions, and we're extremely well positioned for that. But we would much prefer one that rewards the good In that and not just pure tax, but one that does incent those that have been working To reduce their emissions and we think we stand out in that regard and we think that would be a net positive for us if it's positioned that Obviously, we think that makes sense when you're talking about the lowest carbon content hydrocarbon.

Speaker 2

It seems a little bit odd that you would just put a pure tax on that when it has such an ability to help reduce Admissions around the world. So we're hopeful that we'll get to a wise place on that, but We think that actually could be positioned in a way that could be somewhat of a positive for us. So we would look forward to that. So I think that's, I don't know, Chad or

Speaker 5

Yes, Jerry, this is Chad. Just on the last note on the hydrogen front, the hydrogen incentives that are currently drafted would be, I think a good complement to our current

Speaker 2

strategy and so we've been working closely on that front and think that that would be

Speaker 3

Just as it relates to the alternative minimum tax, there's still a lot left to be discovered there. I would tell you, I think on balance, obviously, we prefer a lower corporate Tax rate and an alternative in tax than the inverse. AMT is just timing of tax payments, higher tax rates forever and permanent. If that's where we land with AMT, that's not terrible for us. The question is going to really be around NOL usage against.

Speaker 3

And so under the old tax scheme, when we had an alternative minimum tax before, you could take up to 80% of your NOLs against your income for an alternative minimum That's not clear in the current legislation. As we've thought about it, we've seen let's say we could take 50% or take 50% of our income out through the Usage of our NOLs, that alternative minimum tax would be not that size before, so we'd probably be able to cover it with excess cash flow. So So that's how we look at it now. But just to be clear, there's still a lot of questions around the usage of NOLs going Can you use 50%, 80% or use them at all? And so that's still yet to be understood.

Speaker 3

And just you know, just an additional fact there, we're carrying forward $4,000,000,000 of net operating of NOLs.

Speaker 4

Understood. Thank you.

Operator

Your next question comes from the line of Christine Cho with Barclays. Your line is open. Thank you. Good morning. Maybe with the outperformance this year and

Speaker 6

leverage tracking below your target, How should we think about the execution of the buyback that you announced a couple of months ago?

Speaker 2

Yes, Christine, thank you for the question. I kind of expect that we would get that. And I would just say that we've been pretty clear about how we're thinking about that. And it is A multiple of the cost of our 10 year debt cost in the market for our 10 year debt cost. And so you can See that, that spread with price actually kind of widened or did widen and so that yield Continue to go down and therefore move away from that multiple during the period since we announced the buyback.

Speaker 2

But I would say as we don't make investment in that or if we continue to invest in earnings, Either one of those will continue to drive our credit metrics to a more positive place, which will drive down the 10 year debt, which then will So I think it's pretty natural in terms of how that will occur. If

Speaker 5

We will now begin the Q1

Operator

of 2019. We will now

Speaker 2

begin the Q1 of 2019. You would expect our 10 year And if that price moves into that zone, we'll be anxious to be taking advantage of that if that occurs. So nothing has really changed from our perspective on that other than the fact that our amount of free cash flow

Speaker 6

And you would be okay with just having your leverage trend below 4x if the opportunity to buyback stock didn't present itself?

Speaker 2

That's right. And I would just say though, as we've mentioned before, obviously, the one kind of unique option We have is continued investment in the rate base in a way that modernizes and reduces submissions on our system. And That's not a hair trigger, so to speak, because we have to plan for that And that's a permitting process that we don't snap our fingers at. So that's something that takes time, but that's obviously another place that money will flow

Speaker 6

So that actually was my follow-up question around the modernization program. Can you just remind us how this works? How much You spend per year, the returns, how quickly you can earn on the spend and then I guess just sort of as you mentioned, what kind of regulatory process we're looking

Speaker 7

Hi, Christine. It's Michael. We're working

Speaker 5

on both fronts with Northwest Pipeline customers as

Speaker 7

well as Transco customers and working To enact a tracker, if we can get to a position with them. And if we can't, we would go through our normal rate case process to We believe we've got worth of about $2,000,000,000 or so We could invest between both Northwest and Transco on those projects, and that could be A very long term program over maybe 6 years or so. And so if you start doing the math on that, that's $300,000,000 to $500,000,000 a year We could deploy there depending on the spend profile and how many projects we want to take on at a time.

Speaker 6

And if you don't come to In agreement with your customers, would you have to recover it through a rate case? Or is there something

Speaker 2

No, we wouldn't have to go

Speaker 7

through the rate case process. And that's obviously one of the reasons why we would like to have a tracker to accelerate that recovery and Not have to go through the thrash of the rate case and the disruption that occurs with the customer base there.

Speaker 5

But we're prepared Do that if

Speaker 7

we need to, but we would certainly like to do it through a tracker mechanism, very similar to what many of our customers are doing in their jurisdictions.

Speaker 6

And the returns?

Speaker 7

Returns would be very similar to what our regulated returns would be on either Transco or Northwest Pipeline once Those rate case outcomes are known.

Operator

Okay, great. Thank you.

Speaker 2

And Christine, I would just add there just to remind Folks, when we do file those rate case, we still we do go ahead and raise our rates. We don't have to wait for the settlement in rate case once we file So that as you'll recall that we hold that in reserve sometimes pending that settlement, but we do have Authority to go ahead and charge the higher rates.

Operator

Right. Thank you. Your next question comes from the I'm Shneur Gershuni with UBS. Your line is open.

Speaker 8

Hi, good morning guys. I just kind of wanted to start off a little bit here. You've had a strong performance last year, strong performance this year or heading into the end of the year, you should be based on your guidance. You've had a growth target kind of in the 5% to 7% range. Kind of the question I have is, does any of The performance in this year kind of take away from next year, but at the same time, you've announced several Mid Atlantic projects.

Speaker 8

You intimated that there's another one potentially coming In your prepared remarks, I was just wondering if you can share some detail about the return expectations of these new projects and are they high enough to help Drive growth forward. And is there a backlog of more of these projects that we can see more announced over time?

Speaker 2

Yes, Shneur, thank you. First to the projects, I would just say our returns generally continue to improve. And one that's kind of been, as we've said many times, there's kind of a double edged sword about the difficulty of building projects. It Certainly has, I think, been detrimental to the country and the industry overall, But to the degree that you're the incumbent with PIPE in place and you can expand those via Brownfield, it effectively expands your return opportunity in So I would just say that the returns in general, not That's what we're mentioning are at least as good as Atlantic Sunrise was better. And so that's kind of the way to think about that REA And the question of how many do you have, we keep the Slide updated in there about the number of projects in development in our appendix.

Speaker 2

And it always looks like it's the same old slide, but in reality, We are moving projects from development into execution, and we have new projects flowing in there that are keeping that pipeline Very full. So I would just tell you, we don't see much backing off in the way of opportunity for Expansions of our transmission systems and with that obviously we'll flow gas from the low cost Producing areas and we're well positioned to capture that on the gathering side as well. So despite what You might think when you listen to the media and the rhetoric, it's certainly not showing up in people's Reluctance to make long term commitments to our transmission systems for supplies

Speaker 3

that they know they're going to

Speaker 2

need, Whether that's the backup renewables or whether it is baseload, people And our customers certainly understand that it takes time to build these projects and that it takes long term commitments to get them built and that's what we're

Speaker 8

Great. Really appreciate the color there. Maybe if we can return to the return of capital priorities. In your response to Christine's question, I think you were fairly clear in terms of you were looking for the opportunities to execute. But At the same time, your balance sheet is obviously doing better than expected.

Speaker 8

There's a priority over growth kind of how we discussed in the last question here. Just kind of curious if one of the other arrows in the quiver, shall we say, would be around the dividend. Is there any thoughts around A dividend step up or specials or is there a dividend payout ratio that we should be thinking about as part of your Return of capital strategies.

Speaker 2

Yes. I would never say never, but I would say right now we We continue to maintain that steady growth and continue And you maintain that high level of coverage of the dividend there. So don't expect we don't expect anything special if we did Special or some kind of structure that delivered a bunch of cash, then we would consider that. But right now, there's I think you should Expect steady growth in our dividend. That's well covered and very durable.

Speaker 2

And we think This is the kind of business we've built for long term durable business as I think we've proven out. And we think that our yield on our dividend We continue to trade down to reflect the durability and the growth in our dividend. And I think it's a Pretty hard dividend to compete with frankly, given its security and the growth in it by both utility sector and within our peer group, And we think eventually we'll be rewarded for that.

Speaker 8

So all else equal, buybacks is probably the preferred avenue at this point if you hit the Investor return section.

Speaker 2

Well, again, I mean, we've laid out the options. The market will tell us whether we need to buy back shares because it's

Speaker 8

Perfect. Thank you very much. Really appreciate the color today.

Speaker 2

We will now take the

Operator

line of Praneeth Satish with Wells

Speaker 9

You touched on this earlier, but if we assume that the Biden administration passes regulations on emission, What exactly could that mean for your business? I guess, how further ahead are you than peers? And do you think this will help you win new customers or pull volumes from

Speaker 2

Yes. I don't know exactly where we stand up against peers. I know where we stand on the 1 future measures, and We're almost orders of magnitude lower than what's required for our elements of the sector. So again, that one future is a 1% all the way from the E and P All the way from the E and P space all the way through the LDC or delivery to Vernerton. So we're excited to be a part of that, but there's a certain percentage of that 1% that's allocated to our sectors of the And in those cases, we are way below and as I said, it works in So we think we stand well, but we really don't know exactly where other Competitors might stand on that.

Speaker 2

We need good, reliable operators We really made it clear that, hey, I love this industry. I think it has a lot to offer from an emission production standpoint, But you guys have got to get your methane emissions. That's going to be your Achilles, if you We don't go after this. And so we've been on a mission to reduce that. I think we're extremely well positioned if the Methane emissions are positioned right.

Speaker 2

And I frankly think it's a real positive to make sure that we're reducing flaring, We're reducing emissions and DOCs from tanks in the field. I think all these things are very positive for our industry, and we certainly

Speaker 9

And I'm wondering if you could just give us a sense of how large on with as part of that JV or MOU, Either on a tons per day basis or absolute dollar cost basis, just trying to get a sense of how big the projects are. And then just tied to that, Is the hydrogen subsidies that are part of your hydrogen development plan?

Speaker 5

Yeah. Hey. This is Chad. Thanks for the question. Maybe starting with with your last question.

Speaker 5

Yes. The incentives will be supportive in accelerating project opportunity incentive structure and really needs an incentive structure to help support getting projects jump started. And and

Speaker 10

I would also say that

Speaker 5

it is Still, you know, early days on the hydrogen front. We're at the the, The pilot stage on I would characterize those and if things prove out, As costs continue to come down, which we expect they would, the incentives get passed. In Wyoming, for example, Develop an energy hub in Wyoming in partnership with Orsted and others, you could We envision a very large wind power production facility, 300 megawatts to 500 megawatts, If not larger, there's a tremendous wind resource in Wyoming that hasn't been fully developed because it's not easy to build Electric infrastructure to deliver that to other parts of the country. So we could build a very substantial wind power Generation platform tied to several 100 megawatts of hydrogen production that we can move through we believe we could move through our existing infrastructure to customers across our footprint. So, you know, those are those are big ambitions.

Speaker 5

And I would tell you again, it's very early innings, but The pieces are coming together, and we're very look where we walk and put some projects online that I think will demonstrate. Gives you just one example, and we're looking at others across our footprint, but that's one example of where we think we can get

Speaker 4

Great. Thank you.

Operator

Your next question comes from the line of Spiro Dounis with Credit Suisse. Your line is open.

Speaker 11

Hey, good morning team. First question just on inflation from 2 different angles. First, and then alternatively, imagine a lot of your I'd probably have some sort of escalators in there tied to CPI or PPI, Sort of upward pressure on fees as we get into next year in this environment.

Speaker 7

Good morning. This is Michael. We're watching the supply chain issue. We got in front of the supply chain Early on with treating chemicals and lube and things of that nature to make sure that we

Speaker 5

had what we need to operate We

Speaker 7

are seeing price increases, fuel, diesel, gasoline prices are up. It's really a small component of what our overall As you mentioned, the bulk of our gathering and processing agreements do have And so we've been in very good shape for a number of years in managing that, and I suspect our teams will continue You do a great job at that going forward here

Speaker 3

and take advantage of opportunities where

Speaker 7

we can to control our costs. But we will see some increased costs And there's no doubt about that. And the escalators that we have, there's various escalators that we use Gathering and processing agreements, and I believe it would definitely cover the expense increases that we'll see.

Speaker 3

Got it. Thanks for

Speaker 11

that color, Mike. Second question, just switching gears slightly to the Permian. I know you're all focused on gas basins and that certainly served Well, I know at one point you had sort of considered Bluebonnet as sort of a pipeline out of And obviously, I think we're seeing that basin tighten a lot faster than we all expected with some of your peers talking about another pipeline potentially as early as 2024. So just curious on any Interest levels in the Permian general and how you're thinking about Bluebonnet and your competitive nature there?

Speaker 2

Yes. We've certainly positioned ourselves well there to take part in projects that come up.

Speaker 5

But I would just tell you, So far,

Speaker 2

We like the risk mitigation that we get out of the kind of projects that we did, which were more market oriented So I would just say it's always Issue of risk adjusted return and those are big risks on the back end of the pipeline that are easy to We're on the front end, but hard to ignore on the back end. And we think about our business on a very long And so longer term contracts and ones that we know that the I'm not telling you that We won't be looking to take part, but the returns would certainly have to

Speaker 5

be within our capital stack. And we have been expanding the capability for Transco to receive volumes From the Permian. If you think about our project strategy, if you look at the projects that have been approved, the projects we focus on, We connect directly to demand, and that is a very, you know, strong, sustainable, I think, strategy. As Alan mentioned, typically the demand contracts are very long tenure, and, you know, we'll keep an eye on the Permian that he mentioned. You know, unless we can tie those projects Got it.

Speaker 5

Appreciate the color guys. And John congrats on the Thanks.

Operator

Your next question is Tudor Pickering Holt. Your line is

Speaker 10

Good morning. So just circling back briefly on the Wyoming Energy Hub, Is that an area where Williams would look to own a stake in the wind and electrolysis facilities? Would you prefer to lease the surface acreage to Orsted and then participate downstream on the transportation side.

Speaker 5

Yeah. I think it's, we're evaluating a lot of different I mean, clearly, we're going to focus on where we have strength and capabilities. The strategy there is to Demonstrate that our infrastructure can be a part of the energy systems for not just the next 10, 20 years, but for the next 100 years. And So we're going to stick to what we're good at. We're going to partner with really strong, capable partners like And so I think we'll we certainly think we have a very unique set of skills and infrastructure to make these projects Possible, so we're

Operator

going to

Speaker 5

want to make sure that we participate where it makes sense. But I'd say it's a little bit early on to Understand exactly where we're going to be putting our investment. Clearly, I mean, your We're not going to we're not a wind power company. We're not an electrolysis company, and we're going to need technology providers Whether or not we invest in those parts of the value chain, I think we will stand prepared to do that if it's a smart place to invest. It's What we're doing on the solar front, it's what we're doing in certain RNG opportunities.

Speaker 5

But it's still pretty early on to figure out how all those pieces come together, but we're Got it.

Speaker 10

And then just briefly, in the West, it looks like NGL transportation volumes stepped up a bit more than NGL production, are you seeing a rebound in volumes coming into Overland Pass from the north or anything else to point to there?

Speaker 7

Yes. Well, we're seeing some production increases from our assets out there. And I'm Not going to talk too much about the 3rd parties coming in there, but we are seeing some really good uplift from our processing plants and ethylene recovery It's been off and on throughout the summer and coming into the fall here. So we're seeing an opportunity to bring in additional ethane into the

Speaker 2

And we were able in the Wyoming area, even though this should have showed up in the production volumes Now on the C3, I think it's always a good thing to pay attention to the C3 plus volumes because obviously the ethane In and out based on pricing and C3 plus is kind of a better indicator of What's available on a regular basis? But I would say that the passage draw facility In Wyoming that we picked up earlier in the year, which was an adjacent plant to Echo Spring shutdown, we were able to Those volumes up and those volumes came directly into our system as well. And so we also picked up Some volumes off of the competitor pipeline there during the bankruptcy process from Southland, and so those volumes flowed So there at Echo Springs, our Wamsutter facility, we've really been able to pick up the equity volumes that Are coming to us. So some of that equity would have gotten produced, some of it would have gone on the competitive pipeline. All of that is now coming into our pipeline.

Speaker 2

And so

Operator

Your next Question comes from the line of Chase Mulvehill with BofA. Your line is open.

Speaker 12

Hey, good morning, everybody. I guess, you spoke briefly about responsibly sourced natural gas during the prepared remarks, but just a quick follow-up here. And I'd like to ask if you're seeing kind of more interest from LNG liquefaction operators or really kind of more interest Utility customers. And then I guess if you look at this responsibly sourced natural gas, Like what's really the constraint to seeing kind of quicker market adoption of responsibly sourced natural gas? Yes.

Speaker 5

Hey, this is Chad. Thanks for the question. What I would say is that we are seeing strong interest from both LNG Off Takers and Utility Customers, we have a wellhead to water and a wellhead to burn tip strategy with respect to Responsibly sourced gas. We haven't been extremely explicit on our plans in this area because We've been working very hard and want, as Alan mentioned, to have a very credible solution in place. And I will tell you that we're Clearly seeing a need within the marketplace to demonstrate not only within our footprint, but to work with our upstream partners and to work with our Our downstream customers to really track the full life cycle emissions footprint of the gap that flows through our systems.

Speaker 5

And so We will be announcing several solutions that we are going to be Focused on delivering for our customers. We have been in discussions with several of our customers where we think we can marry the solutions that we're developing with Our producing partners' effort as well as our LNG customers and our utility customers, and we want to be able to shine a very credible light on the And just circling back to Alan's comments also, the Transco system is the largest, most flexible Pipeline system in the United States. We have the benefit of having multiple lines in our right of way. We can do a lot with that system to Demonstrate a lower emissions footprint today and to show a continually decreasing emissions footprint over time, we want to make sure we can do that Very credible manner. And so and I do truly believe we're working with the Sequium team to make sure we can market That gas is a credible responsibly sourced product, and we are seeing a real intense focus On that front, to the point where we've even had meetings with utility customers that have told us they are looking at Midstream providers to understand the emissions footprint of their potential gas supply, and they're going to factor that into their decisions with With respect to how they source their gas, we think that sets up very well for us, again, because we've got, I think the most modern, most efficient system in the United States.

Speaker 12

And so quick follow-up on Sequin. I guess, first on responsibly sourced natural gas, you probably got a better view than most people. Are you seeing responsibly sourced natural Get a premium out in the market today? And if not, what do you think will be the catalyst Where responsibly sourced natural gas will actually start getting a premium out in the market?

Speaker 5

I wouldn't think of it in terms of premium. I'd think of it in terms of the demand for our Space is going to continue to drive, I think, responsibly sourced gas. Whether that whether you consider that to be a premium or at some point, it becomes the, kind of competitive cost of play. I think it will reflect in in natural gas prices and in demand for Yes. There have been a few marketed RSG products out there.

Speaker 5

They haven't they they maybe attractively small premium. I

Speaker 2

would also say, though, I don't

Speaker 5

know that anyone no one has yet truly tagged, an RSG product from wellhead to Well, I think, you know, can be incredibly marketed, but we don't think of it in terms of premium. We think of

Speaker 2

Yes. I think in the current environment, you should think about it in the context that somebody is going to sign up for a long term Why? Even that is an indexed price supply that's competitive in the market, they're going to want to know that they are that that's a Supply that is not going to have negative connotation with it. And so I would say when it comes to doing long term contracts at index Pricing that people are going to be asking those questions and the tide right now, as we say, the tide is going to go to the runner, so to speak. The responsibly source gap to If somebody can prove that up or demonstrate that they're on a path to be able to prove that up.

Speaker 2

So I think that's about as far as it's Don, at this point, but I think it's certainly something I think it's pretty strong support across the industry For making that more of a determinant in the marketing space and we certainly want to be a part of that. But it's got to be credible, reliable and something that's Got good strong data behind it that ultimately could perhaps be even traded. And so that's what we're focused on.

Speaker 12

All right. All makes sense. Appreciate the color. I'll turn it back over.

Operator

And our final question comes from the line of Sunil Siebel with Seaport Global. Your line is open.

Speaker 13

Yes, hi. Good morning, folks, and thanks for squeezing me in. So my first question related to the $1,200,000,000 of high return growth projects that you highlighted in your capital allocation framework. I was just kind of curious, I think you talked about some big projects in Gulf of Mexico and then obviously on the gas side, Mid Atlantic Projects, are there any other big buckets we should be thinking of when we think about that $1,200,000,000 annual spend?

Speaker 3

Yes. I think that's pretty well got

Speaker 2

it captured. I think The $1,200,000,000 on normal capital spend is going to go first to the big projects on Transco, some of which we've mentioned today, Our continued gathering system expansions, even though those are more limited, we're really excited about the We're investing right now in the Deepwater Gulf of Mexico to support big finds like the well prospect. And so the Deepwater Gulf We've mentioned many times investing in the modernization of our rate base, which will come with emissions reduction Along our systems and about $400,000,000 of solar projects that we are moving rapidly through the Development stage right now and starting to move towards execution on those projects. So those are kind of the primary drivers. That hasn't Really changed a whole lot.

Speaker 2

I would say some of the projects on Transco are moving up from our development list into But other than that, really, not a whole lot has changed since we laid out that capital allocation program.

Speaker 13

Okay, got it. And then one thing related to that. So is 3.5x to 4x kind of leverage level the right way to think about the additional debt, Which could come with those kind of capital spend?

Speaker 2

I would just say our depending on what happens with Price of our stock versus the cost of our debt will dictate a little bit of that. Said another way, if the Price of the stock came down or the yields came up in a way that met This multiple of our 10 year debt and money would go towards buying back stock and We would be running at the higher end of that range. If that doesn't occur, you'll see that drift down depending on how much we Allocate towards the modernization projects that we talked about. And so those are kind of the immediate variables That will be navigating between. But if we I would just say it's pretty strong multiplying effect as our EBITDA We continue to invest in earnings projects and our EBITDA continues to grow.

Speaker 2

That move down on the Debt metric, it starts to move pretty fast. And so that is as you're seeing, it's not just In forecast, but you're seeing it in real time here as we continue to overperform on our debt metrics as there have been done.

Speaker 13

Okay, got it. And then one again related to that. So when I think about your 10 year bond yield versus that dividend yield, Obviously, this year, it's kind of come in a fair bit. But when you think about historically, it's still probably Wide and then obviously it's wide when you think about comparing it to say, regulated utilities or even S and P Indexes, so I was kind of curious how do you think about that metrics dividend yield versus 10 year bond yield Spread and how does what do you think is a normalized kind of a metric to look at When you think about your stock buyback decisions? Thanks.

Speaker 3

Look, from a debt yield

Speaker 2

standpoint, it feels like

Operator

you're probably going

Speaker 3

to be hovering in this. It feels like we're probably going to be hovering in this 2.5% to maybe 3% range for a while. On the one hand, it feels like treasury rates are starting to move a little bit now. So we'll have to see what happens on that front. Credit spreads though, I think, and we're performing obviously very well, and I think this sector is performing fairly well.

Speaker 3

So you've seen Credit spreads tightened a little bit. We just saw that in our recent bond deals, incredible demand for our paper. I don't think we expect long term rates, 10 year rates to be in the 2.5% range, but it doesn't feel like they're going to be 3.5% to 4%. So That's the first part of your question, how do we see rates, probably 3%. The other part of your question might be getting at what's the multiple and we're not disclosing that, if that's your question on dividend Relative to that 10 year rate, that's these don't feel smart really to signal to the market what that point is.

Speaker 13

Got it. I thought I would try anyways. Thanks for all the color.

Speaker 7

Fair enough. Fair

Operator

enough. Thank you. I will now turn the call back over to Alan Armstrong for closing remarks. Okay. Well, great.

Operator

Thank you, John for closing remarks.

Speaker 2

Okay. Well, great. Thank you all very much for joining us. Really excited to present for The benefit of all the hard work of our employees around the company that have helped produce such a terrific quarter, both through Continued great operations as well as a lot of the transactions that we've executed on this year that are driving Some of this and so it's a real pleasure to get to talk about the great performance that the organization has produced And we look forward to doing that in the future many times more. So thanks all very much for joining us.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Williams Companies Q3 2021
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