Williams Companies, Inc. (The)

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

Thank you, Lashana, and good morning, everyone. Thank you for joining us and for your interest in the Williams Company. Yesterday afternoon, we released our earnings press release in a presentation that our President and CEO, Alan Armstrong, and our Chief Financial Officer, John Chandler, will speak to this morning. Also joining us on the call today are Michael Dunn, our Chief Operating Officer, Lane Wilson, our General Counsel, and Chad Zimmern, our Senior Vice President of Corporate Security 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 reconcile the 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.

Great, and thanks, Danilo, and thank you all for joining us today. Our long-term strategy of connecting the fastest-growing natural gas markets with the best supply areas continues to deliver solid financial results, as demonstrated by our strong second quarter financials across our key metrics. Our stellar results this year were supported by equally strong fundamentals that demonstrate how sticking to this strategy has put us in an enviable position. As evidence, Williams gas gathering volume grew 6% in the first half of 2021, while the U.S.' 's natural gas production volumes actually declined by 0.4%, continuing to prove that our assets are in the low-cost basins. We expect a constructive natural gas macro backdrop to continue to drive significant value for our business and Recent commitments to Transco market area expansions, coupled with producer commentary on Transco projects, such as our Lighting South and regional energy access projects, are clear pathways to growth for our Northeast gathering volumes for years to come. We will walk through more details of our business in just a moment, but I want to first call attention to our 2020 sustainability report, which we just published last week. As this report details, we are making headway on critical ESG-related fronts, for example, becoming the first North American midstream company to set a near-term climate goal based on right here, right now emission reduction opportunities and making steady progress on developing our leaders for the future. We're also looking to the future as our nationwide infrastructure footprint is well-suited and adaptable to renewable energy sources like clean hydrogen and RMG blending. Williams' ongoing focus on sustainable operations positions us well to meet clean energy demand for generations to come. In fact, we are now up to seven renewable natural gas sources flowing into our gas transportation systems, and we have nine more that are in progress. I hope you can find some time to visit our website and read our new sustainability report. But right now, let me turn things over to John Chandler for a view of our 2Q and year-to-date results. John? Thanks, Alan. In a very high-level summary, the quarter benefited from nice increases in profitability from our Northeast Gathering Systems, an uplift in revenues on our Transco pipeline from new projects that have been put into service over the last year, and contributions from our upstream operations in the WAM Center. The positives were offset somewhat by slightly higher operating expenses, resulting from increased incentive compensation expenses, reflective of the strong performance that is unfolding this year. And you can see the strong performance in our statistics on this page. In fact, once again, we saw improvements in all of our key financial metrics. First, our adjusted EBITDA for the quarter was up $77 million, or 6%. And we have seen a 9% increase in EBITDA year-to-date. We will discuss EBITDA variances in more depth in a moment. Adjusted EPS for the quarter increased 2 cents a share, or 8%. And AFFO grew for the quarter similar to our growth in EBITDA. AFFO is essentially cash from operations, including JV cash flows and excluding working capital fluctuations. If you put our year-to-date AFFO of $1.948 billion up against our capital investments year-to-date of $737 million and our dividends of $996 million, we have generated about $250 million of excess cash year to date. Included as a side note, included in the capital investments is about $160 million of maintenance capital. Also, you can see our dividend coverage based on AFFO divided by dividends is a healthy 1.96 times year to date. 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're currently set at 4.13 times debt diva dot. You will see later in our guidance update in this desk that we've moved our guidance for the year from being around 4.2 times by the end of the year to now less than 4.2 times debt diva dot for the year. So really strong performance for the quarter and the year, and the fundamentals are set up for a good second half of the year. So now let's dig a little deeper into our EBITDA results for the quarter. Again, Williams performed very well this quarter. Our upstream operations added $19 million of incremental EBITDA this quarter. And this EBITDA was entirely from a WAMSetter upstream acreage. Remember that we owned the BP WAMSetter acreage the entire quarter, but only owned the Southerly acreage for one month during the quarter. Production from the combined WAMSetter assets totaled 6.9 DCF for the quarter. The Hainesville upstream acreage produced very little EBITDA, given it has only a small amount of PDP reserves, and therefore it will take some time before we see new production and therefore new EBITDA coming from these assets. Now moving to our transmission and Gulf of Mexico assets, they produced results that were $31 million more than the same period last year. New transmission pipeline projects added $25 million in incremental revenues versus the second quarter last year. including the Southeastern Trails project that went into service during the fourth quarter of last year, as well as a portion of the Illini South project that also went into service in the fourth quarter of last year. And you can see this evidenced in the growth in our firm reserve capacity, which is up 5% from the second quarter of 2020. In addition, our Gulf of Mexico revenues were up somewhat due to less shut-in issues compared to the second quarter of last year. In addition, commodity margins for processing volumes for processing the Gulf of Mexico gas were up about $5 million due to higher NGL prices and higher volumes. These revenue increases were offset somewhat by a slight increase in operating expenses, again, mostly due to employee-related expenses, a large part of which can be attributed to higher incentive compensation accruals. The Northeast GNP segment continues to come on strong, contributing $46 million of additional EBITDA this quarter. Collectively, total Northeast gathering volume grew 750 MCF a day, or 9% this quarter versus the second quarter of last year, while processing volumes grew 33% and set a new record. The volume growth was predominantly at our JVs in the Bradford Supply Hub, where we benefited from a gathering system expansion on that system in late 2019, and at our Marcellus Stout Supply Basin, where we benefited from more productive wells with larger pads. And just to be clear, because we do not operate Blue Racer Midstream, those volumes are not included in our volume statistics. As a result of this volume growth, though, our EBITDA from our equity method investments improved by a little over $36 million, which also includes the benefit of additional profits that we do receive from Blue Racer Midstream due to the additional ownership we acquired in mid-November last year. Now moving to the West GMP segment, it was down $21 million compared to the prior year. However, remember that first we did agree to reduce gathering rates in the Haynesville in return for receiving upstream acreage in this South Mansfield area of the Haynesville. Again, as I mentioned, we are not yet seeing the benefit of those upstream assets, but we have just named an operating partner to begin developing that acreage. The impact of the gathering rate reduction was about a negative $15 million for the quarter. In addition, this quarter we also saw $9 million left EBITDA due to a deficiency fee that One Oak paid us last year related to OPPL, which allowed them to pull volume that they had otherwise committed to OPPL last year. One Oak does not have that volume obligation to OPPL this year, and therefore we did not see the deficiency revenue this year. And finally, we did see a $9 million decline in deferred revenue from our Barnett Shale Gathering assets, which is a non-cash step down in revenues. So other than those three negatives, namely the lack of efficiency revenue on OPPL, the Haynesville rate decline, and the deferred revenue step down in the Barnett, our West assets were otherwise up $12 million versus the second quarter of last year. And this is in large part due to higher MGL margins, where once again our commodity marketing group is realizing more profit from elevated MGL prices.