The Williams Companies, Inc. (NYSE:WMB) Q1 2024 Earnings Call Transcript May 7, 2024
The Williams Companies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to The Williams First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your first speaker today, Danilo Juvane, Vice President of Investor Relations, ESG and Investment Analysis. Please go ahead.
Danilo Juvane: Thanks, Andrea, and good morning, everyone. Thank you for joining us and for your interest in The Williams Companies. Yesterday afternoon, we released our earnings and press release and the presentation that our President and CEO, Alan Armstrong; and our Chief Financial Officer, John Porter, who will speak to this morning. Also joining us on the call are Micheal Dunn, our Chief Operating Officer; Lane Wilson, our General Counsel; and Chad Zamarin, our Executive Vice President of Corporate Strategic Development. 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 with generally accepted accounting principles. And these reconciliation schedules appear at the back of the day’s presentation material. And with that, I’ll turn it over to Alan Armstrong.
Alan Armstrong: Okay. Well, thanks, Danilo, and thank you all for joining us today. Well, another first quarter and another strong start for Williams. So let me begin here on Slide 2 by calling out a few operational financial and strategic achievements we saw this first quarter. Starting here on the left of this slide, Yet again, we’ve set a record for contracted transmission capacity led by Transco, the largest and fastest-growing natural gas pipeline. And in January, we closed on our acquisition of a portfolio of Natural Gas Storage assets from an affiliate of Hartree partners for approximately $1.9 billion. The transaction included 6 underground natural gas storage facilities located in Louisiana and Mississippi, making us the largest owner of storage on the Gulf Coast.
Demand for natural gas has greatly outpaced natural gas storage capacity since 2010. And our thesis of this underinvestment is now being realized as this newly acquired storage is being re-contracted at rates above our acquisition expectations. In fact, storage rates have reached the point of supporting Brownfield expansions, and we are gauging interest from customers willing to underwrite potential expansion of these facilities in the form of long-term contracts. Also in the first quarter, we announced the expansion of the Southeast Supply Enhancement project to roughly 1.6 Bcf a day of capacity, and we prefiled this project with the FERC on February 1. We expect to make the official FERC filing later this year. And I’ll remind you that this project will serve both the Mid-Atlantic and the Southeast markets.
These markets are experiencing increasing gas demand from power generation and the reshoring of industrial loads. Since the time of our open season, the large utilities that we serve in this area have come back and provided dramatic increases to their generation needs based on data centers to be built in the region, as well as reshoring of industrial markets. So we believe that we are in the early innings for expansions in these Mid-Atlantic and Southeast markets. Our project execution teams also delivered an impressive list of accomplishments this quarter. In total, we have 20 high-return projects in execution across our business, including approximately 3.1 Bcf per day of expansion on Transco, which equates to a 15% increase in fully contracted long-term capacity that will be coming online over the next few years.
Within these Transco opportunities, a few noteworthy accomplishments to hit. First, we placed the Carolina Market Link in service and now began receiving the full revenues in this quarter. Next, we commenced construction for the Southside Reliability Enhancement and the Southeast Energy Connector projects, and we received the FERC order for the Alabama-Georgia Connector and the Texas to Louisiana Energy Pathway projects. And finally, we’re advancing a number of modest but high-return expansion projects on our MountainWest Transmission System. This is a period where we have a tremendous amount of large projects and sometimes it’s easy to overlook things as large as even the well deepwater project but happy to report to you that great execution by our teams there in some pretty difficult environments has that project coming in quite a bit below our original capital estimate on that project, and we do expect now this project to start up towards the end of this year.
So congratulations to our deepwater team that have been working on that project for about 4 years now, and pretty remarkable accomplishments to get that project in on budget and actually below budget. And then finally, our teams are well on their way to replacing 112 mainline compressor units with state-of-the-art low-emission turbines and electric drive units on Transco and Northwest Pipe. As a reminder, these projects will generate an incremental regulated return realized through a rate case or a traction mechanism that will begin in 2025. So again, a huge body of work there to go in and replace this compression that is well past its useful life, but the team is doing a great job. You can imagine the efforts that go into replacing that scale of operations.
But we have so much going on. It’s kind of easy to miss. So and we’re excited to see the earnings from that show up in ’25. So now turning to the highlights of our first quarter financial performance. We delivered quarterly EBITDA of $1.934 billion, which was 8% higher than last year, an impressive feat given the tough comp we were up against and the 25% year-over-year decline in natural gas prices and the lack of severe winter weather in most of our markets. An important takeaway from the quarter is that our outperformance occurred despite year-over-year lower earnings in the marketing and upstream segments, which reaffirms the strength and resilience of our underlying business, no matter the commodity price environment. To this end, we expect to deliver our EBITDA in the top half of our earlier guidance.
And to be clear, we think we can accomplish this with continued soft gas prices and without any further earnings contributions from our Marketing segment. Due to the ongoing steady growth and resilience of our business, we recently raised the 2024 dividend by 6.1% underscoring our confidence in our ability to continue this strong record of per share growth through even extreme low commodity price environments and with the slate of high-return growth projects under execution right now and in development. Williams remains well positioned to grow at this rate for many years to come. And with that, I’ll turn it over to John to walk through the quarter and year-to-date financials. John?
John Porter: All right. Thanks, Alan. Starting here on Slide 3 with a summary of our year-over-year financial performance. Beginning with adjusted EBITDA, we saw an 8% year-over-year increase despite natural gas prices that averaged less than $2 for the first quarter of 2024. Now included in that 8% overall growth is almost 13% growth from our primarily fee-based infrastructure businesses, excluding marketing and the upstream JV. As we’ll see on the next slide, our adjusted EBITDA growth was driven by strong growth from our core large-scale Natural Gas Transmission, Gathering and Processing and Storage businesses, including the expected favorable effects of our recent acquisitions. And it also included strong performance from our Sequent Marketing business, which had another strong start to the year despite falling a bit short of the extraordinary start they had to 2023.
Our adjusted EPS increased 5% for the quarter, continuing to grow off of the 19% ,5-year CAGR we’ve had for EPS for 2018 through 2023. And available funds from operations growth was just over 4%. Also, you see our dividend coverage based on AFFO was a very strong 2.6x on a dividend that grew 6.1% over the prior year. And our debt to adjusted EBITDA was 3.79x in line with our expectations for slightly higher leverage in 2024 before dropping back down in 2025 to guidance of 3.6x. So before we move to the next slide and dig a little deeper into our adjusted EBITDA growth for the quarter. We’ll provide a few updates to our financial guidance. Overall, based on our strong start to 2024, we are now guiding to the upper half of our 2024 adjusted EBITDA range of $6.95 billion to $7.1 billion and we are also well positioned for upside to drive towards the high end of this original guidance.
We also remain well positioned to deliver on our 2025 adjusted EBITDA range of $7.2 billion to $7.6 billion. Additionally, based on our improved adjusted EBITDA outlook and other changes, including interest expense and income assumption shifts, we now see our key per share metrics, adjusted EPS and AFFO per share coming in at the high end of their ranges for 2024, which in the case of AFFO per share would lead to a higher overall dividend coverage ratio as well. Now specifically for 2024, our transmission in Gulf of Mexico business is tracking a bit ahead of plan with a good first quarter and expectations of continued best-in-class execution on our many key high-returning organic projects, as well as immediate results from our Gulf Coast storage acquisition with strong performance expected going forward.
Our Northeast Gathering and Processing business was basically right on plan for first quarter with drilling in the higher-margin wet gas areas and inflation adjusters offsetting lower volumes in some dry gas areas. The West got off to a strong start in the first quarter, where DJ performance following our recent transactions along with all the hard work our teams did in preparing for winter allowed for excellent execution, especially across our Rocky’s assets. We see the West also tracking a bit ahead of plan, although we’re also embedding a bit more conservatism around Haynesville volume assumptions. For both the Northeast and West G&P assets, our guidance update today provides room for additional volume reductions and for upside movement toward the higher end of the range if those don’t occur.
For the Marketing business, we’ve had a strong overall start to 2024. But again, beating the midpoint of our full year 2024 guidance doesn’t rely on any additional help from Sequent at this point. And then finally, nice to see our upstream joint ventures off to a strong start versus our plan, again, supported by the preparation our team made for winter weather. So we expect our upstream joint ventures to perform well against their plan this year as well. So let’s turn to the next slide and take a little closer look at the first quarter results. Again, it was a strong start to the year with 8% growth over the prior year. Walking now from last year’s $1.795 billion to this year’s record $1.934 billion, we start with our Transmission in Gulf of Mexico business, which improved $111 million or 15% due to the combined effects of nearly a full quarter contribution from the Hartree Gulf Coast Storage acquisition, which is delivering as expected, following a flawless integration effort thus far.
Higher Transco revenues, including partial and service from the Regional Energy Access project, and also a full quarter contribution from the MountainWest Pipeline acquisition, which closed mid-February in 2023. The Segment growth was unfavorably impacted by last year’s Bayou Ethane divestiture and also some planned maintenance at Discovery. Our Northeast G&P business performed well with the $34 million or 7% increase driven by a $22 million increase in service revenues. This revenue increase was fueled by rate escalations that occurred after the first quarter of last year. Overall Northeast Gathering volumes performed roughly in line with our plan, down about 2% versus the prior year, with those decreases focused in the dry gas areas. Shifting now to the West, which increased $42 million or 15%, benefiting from a great start for the DJ transactions we completed in the fourth quarter of 2023.
Now the increase in the DJ Basin results was about the same magnitude as the unfavorable loss of hedge gains that we had in the first quarter of 2023. Additionally, last year, the West was significantly unfavorably impacted by the severe Wyoming weather and January processing economics at our Opal, Wyoming processing plant. As I mentioned a moment ago, much work was done by our teams to prepare for winter weather this year, and those preparations proved effective in getting us off to a great start for the West and also for our upstream operations in Wyoming. Overall, West gathering volumes performed roughly in line with our plan, up 5% on the benefits of our DJ transaction and better Wyoming volumes, which more than offset declines primarily in the Haynesville area.
And then you see the $41 million or 18% decrease in our Gas and NGL marketing business. As I mentioned a moment ago, it was another strong start to the year, but it did come up a bit short of the extraordinary 2023 start. Our upstream joint venture operations included in our Other segment were down about $9 million or 15% from last year. Our Wamsutter upstream EBITDA was actually up about $8 million with strong volume growth that was substantially offset by lower net realized prices. However, the Wamsutter increase was more than offset by lower Haynesville results from both lower net production volumes and net realized prices. So again, a strong start to 2024 with 8% growth in EBITDA, driven by core infrastructure business performance with continued strength from our marketing business.
And with that, I’ll turn it back to Alan.
Alan Armstrong: Okay. Thanks, John. And so just a few closing remarks before we turn it over to your questions. First of all, natural gas demand is not just growing now, it is accelerating. This period of low natural gas prices is reaffirming the great bargain that natural gas offers as a practical low-cost, clean energy solution and the power hungry world we live in is rapid turning to natural gas to generate this power. This compounded with the hard to miss growth in LNG exports and data centers as well as the continued drumbeat of electrify everything and resort it is accelerating demand and the expansions of our uniquely placed infrastructure will demand a premium. We have been betting on and setting our strategy around the benefits of natural gas for many years and have focused our investments in this space.
So if you want to invest in natural gas infrastructure, no one is more concentrated than Williams. We are the most natural gas-centric large-scale midstream company around today, and our natural gas-focused strategy will be relevant for decades to come, thanks to the accelerating natural gas demand we are seeing today. Our strong conviction of the strategy led us to the bolt-on acquisitions of strategic assets like MountainWest Pipeline, Hartree Storage and NorTex Storage. A couple of points on these acquisitions. First, these deals were quickly — sorry, these deals were directly in line with our strategy based on where we thought the puck was going. The synergies and commercial opportunities we expected are already being realized, thanks to clear plans and decisive actions.
And finally, I’ll reiterate our belief that Williams remains a compelling investment opportunity. Our conservative but distinct strategy continues to deliver steady, predictable growth and value to our shareholders and checks all the boxes that a long-term investor looks for in a durable and winning portfolio. We’ve now seen 11 consecutive years of adjusted EBITDA growth and an 8% CAGR of adjusted EBITDA since 2018 and I’ll remind you that, that is without issuing equity to drive this growth. In addition, we have recognized a 19.5% return on our invested capital during the same period, and our steadfast project execution has led to record contracted transmission capacity and will continue to drive growth in 2024 and beyond. On the predictability front, we have met or beat analyst estimates for 33 quarters in a row now and beat the estimate 2/3 of the time over this 8-year period.
And this year marks the 50th year in a row that The Williams Companies has paid a dividend. In closing, we’ve built a business that is delivering record profitability and strong financial returns in the present, but is positioned even better for the future. And with that, I’ll open it up for your questions.
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