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spk07: 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.
spk01: 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.
spk03: 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.
spk02: And while our overall gathered volume in the West were down about 3.5% versus the second quarter of last year, this was more than offset by better gathering rates, where in the peon and the barnet, our contracted gathering rates are influenced by commodity prices.
spk03: So now moving to year-to-date results. Year-to-date, our results show growth of $230 million of EBITDA, or roughly a 9% growth of EBITDA, driven, of course, by the impact of Winter Storm URI in the first quarter and by many of the same positive factors that I just mentioned affecting second quarter growth. Combined between our commodity marketing activities and our upstream operations in the WAM Center, Winter Storm URI had a combined positive impact of $77 million. In addition, our upstream operations otherwise have added an additional $27 million year-to-date. Our transmission and Gulf of Mexico assets are at $22 million year-to-date, or about 2% better, with this increase 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 from one less billing day on a regulated transmission pipeline, and higher expenses, where last year expenses were delayed, some due to COVID, and because this year's expenses, again, are higher due to higher incentive compensation expenses resulting from our strong performance. Our North GMP assets are at $78 million, almost entirely driven by profits from our JV investments, namely from the Bradford Supply Hub Gathering System and our Marcellus South Gathering Systems. In addition, we benefited from the increased ownership of Blue Racer Midstreams. In total, gathering volumes for the Northeast are up 10% versus 2020, while processing volumes year-to-date are up 24%. And then finally, the West, West GSD is up $23 million versus year-to-date last year, and this is on top of the $55 million that we earned from Winter Storm URI. The $23 million increase is driven by higher commodity margins and slightly lower operating costs, offset by lower Barnett deferred revenues, lower Haynesville gathering rates, which were exchanged for upstream acreage, and lower OPPO deficiency revenues that I just mentioned in my two key remarks. Otherwise, we did see a 5% gathering volume decline year to date, but that, again, was more than offset by MVCs and higher gathering rates, as, again, I mentioned in my second quarter remarks. Again, this is stacking up to be a very good year for us. I'll now turn the call back over to Alan to cover a number of key investor focus areas. Alan? Great. Well, thanks, John. And we're moving on here to the key investor focus areas here on slide four. First of all, regarding our financial expectations, we are on track to generate EBITDA closer to the high end of our guidance range that we just increased at the last earnings call. The resilience of our business has supported our financial results and helped us recently overachieve against our previous leverage metric goal of 4.2 times. As a result, we recently received a Moody's upgrade to BAA2 and now have a BBB equivalent credit rating amongst the three key rating agencies. Our free cash flow outlook for 2021 remains intact. And in fact, the long-range plan unveiled during our most recent board strategy session forecasted continued steady growth in EBITDA and continued improvement in our credit metrics. Importantly, our long-range plan also shows that even after funding these many growth opportunities, our business is poised to generate significant excess free cash flows that will support a robust and multifaceted capital allocation approach that will enhance returns for our shareholders, including the potential for opportunistic share buyback. So stay tuned on this front. Next, looking at our recent transactions and project development. First of all, the upstream JVs. Great effort on the organization here. As we announced last month, we were able to finalize an upstream joint venture with Crowhart in the Wamsutter Basin, consolidating our legacy BP, Southwind, and Crowhart upstream assets into one contiguous footprint of more than 1.2 million acres. So as we've mentioned before, this acreage was great. very divided and checkerboarded out here. And so being able to consolidate these assets in a way that it can be developed at a low cost is really critical to the value of the upstream business important to us to the midstream business and taking advantage of the latent capacity we have out there today. And just recently, we inked a joint venture with Geo Southern in Hainesville that provides us with the following benefits. First, it unlocks significant midstream value for Williams through Geo Southern's obligation to develop the South Mansfield acreage. Under this agreement, Geo Southern will carry a portion of our drilling costs and will earn increased ownership in the leaseholds as they deliver on agreed-to development milestones. Second, it provides Williams with the opportunity to optimize all of the natural gas production in the area through fixed-fee agreements marketed by our Sequent business. And third, with South Mansfield being in close proximity to Transco, it provides Williams with future development opportunities, including the ability to source and deliver responsibly sourced natural gas into the growing LNG markets. Importantly, both of these recent JVs improved the value proposition in the Walmsutter and the Hainesville basins as we're partnering with well-positioned, high-performing local operators, and the deals require development of the properties driving volumes for our midstream and downstream assets. From a project execution standpoint, We continue to deliver on multiple fronts, including bringing online key projects such as Lighty South, which is on track for an early in-service now before the winter heating season. And importantly, Transco growth opportunities remain highly visible, and we've recently received customer commitments for two new market expansion projects in the mid-Atlantic region. Transco also has ample runway to provide additional low-risk growth through rate-based modernization projects. In the Deepwater Gulf of Mexico, we'll continue to highlight the great growth that continues to show for us out here, and we've recently reached definitive agreements for both the Shenandoah and the Whale projects. These will contribute to significant EBITDA growth beginning in 2024. And then finally, on sustainability, I mentioned our sustainability report at the top of the call, and we also filed our carbon emissions disclosure with the carbon disclosure project last week. I'll just add that we continue to leverage our natural gas-focused strategy and today's technology to deliver on immediate opportunities to reduce emissions. At the same time, natural gas and our infrastructure are enabling the next generation of clean energy technologies. The next wave of renewable power generation will be up against two key constraints, both the transmission and the storage of energy. No other energy infrastructure system integrates a reliable delivery network into critical population centers with a massive storage solution on the scale that natural gas transmission does. We believe our infrastructure can be a critical part of both near and long-term solutions. We continue to advance our solar projects that were announced last year, and I'm pleased to share that we have six projects now awaiting approval from the grid operator with another 10 ready for the same regulatory approval by the end of 2021. In total, these 16 projects amount to about $250 million in capex that should start to generate cash flows beginning in 2023, and we have another approximately $150 million of these similar projects that are under development. 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, in fact, in a partnership with the University of Wyoming, we recently awarded a $1 million grant from the state of Wyoming to fund a feasibility study that would evaluate the creation of a green hydrogen hub near our operations in Wyoming. And this really is another example of how we continue to leverage our existing assets and footprint to drive clean energy solutions. In the WAM Center, we now have 1.2 million acres dedicated to our midstream assets through the Crowhart JV. But in addition to that, we have about 200,000 acres where we own or control the surface right, which we intend to leverage for clean energy development. So in closing, I'll reiterate that our intense focus on our 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. Our best-in-class long-haul pipeline Transco, Northwest Pipeline, and Gulfstream are in the right place and the right markets. And by design, our formidable gathering assets are in the low-cost basins that will be called on to meet gas demand as it continues to grow. We remain bullish on natural gas because we recognize the critical role it plays and will continue to play in both our countries and the world's pursuit of a clean energy future. Natural gas is an important component of today's fuel mix and should be prioritized as one of the most important tools to aggressively displace more carbon-intensive fuels around the world. Our networks are critical to serving both domestic and global energy demand in a lower carbon and economically viable manner. And with that, I'll open it up for your questions.
spk07: Ladies and gentlemen, at this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Again, it is star one. We'll pause for just a moment. Your first question comes from the line of Jeremy Tonnet, JP Morgan.
spk00: Hi, good morning.
spk03: Morning, Jeremy.
spk00: I was just wondering if you could start off a bit, expanding on your thoughts on the current gas macro outlook And whether that backdrop drives the higher end of guide expectation, how does this position your trajectory into 2022 at this point?
spk03: Yeah, sure. Jeremy, as you know, the pricing run-up that we've had more recently and the continued demand growth is really starting to obviously put pressure and kind of wake up the forward markets a bit. And certainly we are seeing responses from our producers looking to take advantage of that. The area that I would say that we'll see kind of the quickest response to is probably the Haynesville and tremendous amount of drilling activity that's gearing up in the Haynesville right now. But as well, you heard and probably followed the comments from Cabot on their earnings call. strong response there to price there as well. And, of course, in the southwest Marcellus and in the Utica as well, we're really seeing pretty strong response across all those areas. So I think it's important to note that this is not just a production issue. Demand continues to grow. And so if you're looking at 2Q comparisons today, We've seen against a 19 2Q, we saw demand grow by 9%. And against a 2Q of 20, we saw it grow about 5.6% or sorry, yeah, about 5.6%. So continued really strong growth going on on the demand front. And we're obviously seeing prices respond to that. But I think from our perspective, as we said all along, It really is demand that is going to drive our business, and price will fluctuate as required to balance that. But it really is this demand, continued steady demand growth that we're continuing to see. And obviously, as we saw last year, we don't expect the COVID or a resurgence of COVID really to have any impact on that. We're continuing to see steady, healthy growth coming on the natural gas market. So as we look into 2022, of hard to predict what gas demand will continue to do but right now certainly the fundamentals are looking strong and we are seeing a healthy producer response got it that's helpful thanks for that um and
spk00: I realize I'm probably getting a little bit ahead of myself here, but as it relates to buybacks, just wondering whether Williams has authorized a buyback plan, and if not, what would it take to authorize it? And as you think about if you were going to pursue buybacks, would something just generally opportunistic in nature make the most sense, or something systematic where a percentage of cash flow could be applied to that in a given year? Just wondering at this stage what your thoughts are on buybacks in those respects.
spk03: Yeah, Jeremy, thank you. I might as well get this out of the way. I knew that question was coming, so I'll square up on this. So, first of all, we did have a really important discussion with the board last week, and I think probably what was most remarkable about that was the degree of free cash flows that continue to exist on top of funding growth capital on top of continued deleveraging that comes with that growth in EBITDA and being able to fund both rate-based investments and new energy venture investments, allowing for all of that, we still are showing a pretty significant excess amount of free cash flow. And so I think that's probably the biggest takeaway. In terms of a program, we are in the process of detailing that out with our board and putting some specific parameters around that. But I can tell you that the recommendation will be that it will be somewhat opportunistic, but it will have some framework to it in terms of what appropriate pricing levels and what those drivers will be. And I can tell you from my perspective, that will likely be a multiple of wherever our debt is trading. And, you know, if you think about that, our debt has continued to stay very steady while stock prices whipped around. And certainly there will be those times where the market runs into its scares like we saw in uh march and april of last year but um but in reality the you know the debt markets have been very steady and yet prices whipped around quite a bit and so we think that'll point to when the right opportunities are uh to acquire stock so it will have parameters around it it won't just be uh perfect it won't be random and uh it will have parameters around it in both in terms of size and the drivers for that. We likely won't announce those specific multiples on the debt multiples, but that is how we're thinking about it right now. And we will be announcing, we do intend to, I should say, announce the program once we get the details of that squared away with our board.
spk02: And Jeremy, I'm self-evident here, but what Alex really referred to is our dividend yield in relative comparison to where our debt trade is.
spk00: Thank you, John. Got it. That's very helpful. Thank you.
spk07: Your next question comes from the line of Shanier Gershani with UBS.
spk04: Hi. Good morning, everyone. You know, maybe just to follow up on Jeremy's question there a little bit. You know, Alan, in your prepared remarks, you put a comment out there about how your projections to the board showed steadily increasing EBITDA and steadily declining leverage. Should we think about this as there's a new leverage target that needs to be achieved, or should we think about it as this excess cash flow is going to – a component of it is going to go towards leverage reductions that will continue to decline, and then a portion will be available for the buybacks, whether it's 50-50 or to be opportunistic? Is that the way we should be thinking about this and trying to square those comments together?
spk03: Yeah, well, I think the easiest way to think about it, Shanur, is that we, you know, with our EBITDA continuing to grow and we hold our debt where it is, obviously that metric continues to improve. And so really should think about it in that fashion. And so that's the primary driver of that improved credit metric. And I would just say that, you know, we will be able to balance that and make decisions on that as we see fit through the process, but there is such a significant amount of excess cash flow coming off that we really feel like we can hit all of those things that we'd like to in terms of both continued dividend growth continued credit metric improvement, investment in our rate base and driving earnings through investment in our rate base, and new energy ventures. We can do all of that, and we still have pretty significant firepower left for businesses. share buybacks when the opportunity is right. So, really, the message folks ought to be getting is that the cash flow is very significant, and it allows us to invest in all of those measures to continue to drive shareholder value.
spk04: I appreciate the clarification there. Maybe to pivot a little bit, I was recently reading your sustainability report. You're talking about evaluating hydrogen, and you sort of talked about that a little bit here. I'm just wondering where you see Williams' role in the hydrogen value chain, because you talked about both blue and green in the comments there. Do you sort of see, William, is really just in the transportation aspect of it, and is that where you expect to invest? Will it be on the reformation side, or do you actually see yourself participating capital-wise on electrolysis? I'm just trying to get a sense of how you're thinking about it, because as I sort of think about your position in the Haynesville, it kind of seems like a blue hydrogen strategy would be very interesting where you could you know, participate in creation and in the transportation to industrial centers in the Gulf Coast. So just kind of curious of where you feel Williams will be, let's say, in three to five years from now on the hydrogen strategy.
spk03: Yeah, I would just say, and I'll let Chad examine and follow up with some comments here if he likes, but I would just start and say that what will be most obvious to you is that we're going to invest where we have competitive advantages. around our assets. And so obviously that points to transportation, but we do believe that in places like Wyoming, where we've got such big land mass available and we have the transportation and we have the processing capabilities and the systems already set up, we don't think that's a stretch for us to at least study. So a couple of things. One, it is going to, we're only going to be doing it where we're making decent returns And that means that we're going to have to be using competitive advantages to get returns that are over and above kind of what the market's allowing today on that kind of investment. And then secondly, you know, you should think about it in terms of us always making sure that we are not leaving an opportunity where we have a competitive advantage. We're not going to let one pass us by, so we're not going to be taking any strikes at the plate and making sure that as we see opportunities that we're attacking those very quickly. So, Chad, I don't know what you might add to that. Yeah, I think you said it in your remarks. You know, we operate – an incredible energy transmission and storage infrastructure and we're very focused on ensuring that that infrastructure is part of the solution for the next generation of energy. And so that's our primary focus. I would say it's early in the days of hydrogen and we are working with the hydrogen production side of the equation to ensure that it can be economic and that it can drive volumes to our infrastructure. So I think we will participate in a small way initially to ensure that that technology develops in a way that complements our infrastructure. And then we'll evaluate whether or not, you know, we would invest on an ongoing basis. You know, we're working on, you mentioned the Hainesville. We permanent our regional energy access project in a way that we've defined and compatible with hydrogen blending, and we're working on a hydrogen project, a pilot project on our regional energy access project that will involve us participating in the production of hydrogen. It'll be a very small scale, but it'll demonstrate that we can leverage our infrastructure, and we will earn an attractive return on that kind of investment. We're looking at that across our entire footprint, and as that scales up, I think it'll be exactly what Alan said. It'll be do our strategic capabilities and assets provide us with an advantage and should we leverage that advantage into investing in hydrogen production or just be prepared to support that development and drive those volumes to our assets and infrastructure. But I can tell you we're looking at it and we're at the table across our footprint to make sure that we're driving forward the right solutions to support our business.
spk04: Okay, I really appreciate all the details today. Thank you very much, and have a great day. Thank you.
spk07: You have a question from the line of Parnit Satish with Wells Fargo.
spk05: Thanks. Good morning. So now that you've executed on the WAM Center and Hainesville JVs, I was just wondering if you could help provide some clarity into the incremental midstream EBITDA you could pick up in 22 and 23 versus the upstream cash flow that's lost. I guess I'm just trying to figure out how accretive these transactions will be.
spk03: Yeah, I would start off with they are surprisingly powerful anytime you start you know, adding volumes to mostly latent capacity in an area that obviously comes on fast. So there's not, you know, any midstream permitting. Facilities are sitting there ready to go. So it is very powerful, and that's why we've been so focused on this. So I think we're all very excited about that. I'll let Chad speak to kind of the metrics on what we look like for growth in those areas. And I'll give a little more color on the Hainesville structure that I think will help folks derive how much value that's going to contribute. But with GeoSouthern, we're thrilled to announce that partnership. They're a well-proven operator with a long track record of successful development. And with GeoSouthern, there is a drilling commitment of over 400,000 lateral feet that they will be pursuing. And, you know, you think about our acreage, it's highly contiguous. And you see a map. There's a map in our appendix that shows how it's complementary with GeoSouthern's footprint. So there's a lot of long lateral inventory at very economic returns. And so we expect them – they're incentivized. There are – penalties if they don't beat those drilling commitments. But beyond that, we expect them to outperform the drilling commitment because it's highly economic opportunities. And as they perform, the initial economic splits have Geo Southern at 30% of the economics, Williams at 70% of the upstream economics, but they will carry us our capital for upstream development up to a cap of $50 million. And once that cap is achieved, they will revert to having 75% of the upstream economics, and Williams will have 25% of the upstream economics. So they're highly incentivized to continue that development. To give you an idea of how powerful that is for our midstream systems, that development we would expect to drive somewhere around 400,000 to 500,000 decatherms a day of volume to our midstream assets. That's incremental volume from what we have today, and that ramp occurs relatively quickly. fast over the next 18 to 24 months. And all of that gas is committed to our midstream system at a fee of 32 cents for gathering and treating. And as Alan mentioned, that is primarily available capacity that would be, you know, extremely high margin for us. And on top of that, we then have the ability to market that gas and drive that gas towards downstream opportunities, including integration with Transco. We talked about marketing through our newly acquired Sequent platform. We're going to be working on a wellhead-to-water responsibly sourced gas solution that we can offer to customers. And so, you know, just the base business alone, there's a lot of value to be driven to our midstream assets in that area. And if you do the math, it will rapidly outpace what we gave up from a from a fee reduction perspective with Chesapeake. That gives you a picture of the Hainesville. In the Wamsutter, similar structure, a little bit different because it's a very big asset that we were working on. Again, thrilled with Crowhart as our partner. They have been in the basin for several years. If you look at the map in our appendix, you can really see the industrial logic, again, of partnering with Crowhart. We put together over a million acres of now continuous acreage. And with Crowhart, there is a drilling commitment of over 500,000 lateral feet. And as we have announced, there's a 75-25% initial split with Crowhart at 75% and Williams at 25%. But as they achieve performance across that 500,000 lateral feet of development, they have the ability to earn up to a 50-50 split. And so they're highly incentivized to drive volume growth. And in the Wamsutter Basin, again, we have latent capacity that's very high margin gathering and processing. It's dedicated to us. We gather and process for approximately 60 cents a decatherm, so very high margin business in that basin. And we have today around 300 million cubic feet a day of volumes. That system has over 700 million cubic feet a day of capacity. So, you know, on top of the gathering and processing, we are now having – we've dedicated all of the NGLs to Williams at a fixed margin to Mount Belvey pricing, and so we don't wear commodity price risk, and we cover significant revenues for Overland Pass Pipeline, for Bluestem, and our downstream partnership with Targa. So that hopefully gives a little bit of color on how those will draw value to our midstream and downstream assets. But maybe just to give you a couple of numbers here real quick, because, you know, the Hainesville is different to the Wompsteader. The Wompsteader has very significant PDPs today, and where the Hainesville acreage doesn't. So, you know, we'll need to be drilling that up to produce the midstream value and the upstream value, and that will really start coming on in 2022 and early into 2023. That WAMSA, on the other hand, with gas prices being quite a bit higher, is significantly paying for itself. I'm not going to give you exact numbers here, but I can tell you what we paid for the acreage from Southland and from BP will be completely paid for in less than two years with where we see gas prices and just PDP production. Of course, that development will occur, and you're going to see uniquely the dollar uplifts coming in the future, beyond 2022, those new wells and drills and that production comes on. So in the WAMFetter, you can get a sense of the return there just simply because of the PVP production and the gas prices will return our capital in a very significant way in a very short time frame. In the Hainesville, as we look at total NPV value, yes, we did give up rates with Chesapeake and the northern part of our system. They're bringing more rigs to work. And that part of the system, but the value of that acreage as it's developed, when we look at that, we won't give you the exact number, but when we look at MPB 10s, you know, the value generation is at least $300 million, actually higher than that, over the life of this. And that's a combination of the upstream value and the midstream value uplift from the South Mansfield acreage. Yeah, I think that's well said, John. It's, I think, also a great example of creating a win-win for us and our customer. Chesapeake has been able to increase activity. You know, when we, this time last year, Chesapeake was still not running rigged in the Hainesville. With the fee reduction that we offered, they now have three rigs running in their spring ridge area. And so the fee reduction has incentivized significant activity that will show up on its own as incremental earnings over time. But also, as John mentioned, the South Mansfield transaction, we see that as virtually tripling the value of that give from an NPD perspective. So really, with Chesapeake, made the pie much larger, and we were both able to benefit from that transaction.
spk05: Great. Super helpful. Thank you. Just kind of switching gears for a second. I was wondering if you could comment broadly on the RNG business. I know in the past you've been a little reluctant to invest in the actual RNG facilities, but now some of your peers are moving more aggressively into the space. So I'm just curious whether your views or strategy on RNG have changed at all. Thanks.
spk03: Yeah, this is Chad again. I think, you know, we've said that we are willing to invest in RNG aggregation and processing if it makes sense from an economic perspective. And, again, you know, similar to what we talked about, we have a strategic advantage. We have been looking at our footprint. We've been identifying sites that have potentially attractive economics from an RNG capture, processing, and delivery standpoint. perspective, we think that that opportunity set is attractive economically, but relatively small in scale. You know, we've talked about a couple hundred million dollars of potential investment. We have, you know, a few projects that we are evaluating where we could invest in the actual, you know, aggregation and processing of those volumes. The project that we've done so far has primarily been just interconnecting to our existing infrastructure, but The technology required for those investments is relatively straightforward. I will say it's one of the areas that we look at that is heavily dependent upon LCFS credits and RINs, and that is an area where, again, we're going to be disciplined in our investment. We're not going to develop our entire business strategy around areas that require heavily subsidized economics. And so, you know, I think there's a place for it where we can drive significant value because of our strategic footprint. And I think we can invest at a level that's modest and will, and I would tell you because of those LCFS credits and the dependency on those credits, we're identifying those opportunities in areas where we would have pretty rapid payback of those investments. So very attractive returns that would, you know, provide us with the confidence in those structures. Yeah, I would just chime in on and supplement the comment on the subsidies there. And certainly the LCFS, the low-carbon fuel standards, and the RINs are really the big driver in those projects. And if you start looking at the weight on the LCFS program to California in particular, you know, I think that's something we certainly are going to be paying attention to is the degree of sustainability of some of these credits and subsidies that are out there and making sure that we're not over-investing against that risk. So it's not to say that we won't find ways to monetize that on the front end and let somebody else take that risk, but I do think that's a risk worth keeping your eye on, given that if you add up all of the various projects where there's CO2 carbon capture on, on ethanol, the load that that's putting on there, and the load that RNG starts to put on there. It starts to be a pretty big number, so I think that's an important thing to keep your eye on as an investor.
spk01: Great. Thank you.
spk07: Your next question comes from the line of Christine Cho with Barclays.
spk09: Thank you. Maybe if I could just get a clarification on the leverage. What is the long-term ownership percentages for both Hainesville and the WAM Center? What sort of timelines are we thinking about? And how should we think about how the upstream contributions are factored into the leverage calculation? Is 4-2 still the right target? And is there any change to how the rating agencies do that?
spk03: I don't think there's any change. I would just tell you, Christine, that the metrics are coming down again pretty naturally, and the cash flows start to roll from the upstream to the midstream pretty rapidly over the next three years. It does take a little bit longer in the Walmsteader. The development in the Hainesville is pretty quick. So it rolls over to that pretty quickly, and certainly the rating agencies are well aware of our strategies and design on how we get there. So, John, anything to add? No, I think that's right. Again, the Hainesville, both deals are designed, both structures in the Hainesville and the Walmsteader are designed for us to reduce our interest
spk02: And as Alex points out, the wants that are such a more sizable position, you know, our interest would be bigger for longer there. And so whether that, you know, ultimately transfers to our partner or gets bought out, who knows? You know, we don't have a long-term intent to be in the upstream business and intend just to do this to drive value in the midstream. So not sure exactly how the wants are ultimately going to play out over the long term, and the Haynesville is pretty clear that that, you know, as long as the drilling occurs like we expect, as Alan said, you know, in a two- or three-year timeframe, it did converge over to midstream value.
spk03: I mean, in the meantime, our credit metrics are so strong right now, our coverage of our dividend and coverage of cash flows, you know, we've talked to the rating agencies about this, and I don't sense a concern at all about it. Okay.
spk02: Right. But again, as Alan pointed out in his opening comments,
spk03: We do see growth coming in our business from EBITDA, which creates natural deleveraging and allows us to do a lot of incremental things in addition to what we're doing today and still see those metrics improve. The rating agencies have seen numbers that show that as well. It is a good question. I think to really understand how that transitions, if you look at the cash margin that we make on the midstream side versus the cash margin on the the E&P side, you can see that there's so much value driven to the cash flows on the midstream side that that's really what makes this work and kind of transitions us out of the upstream piece of it and into the midstream cash flows pretty quick. So as we've said all along, our goal is to get those developed rapidly and get the cash flows moving on that. In the Hainesville, that's a shorter-term issue and the long-term issue just because it's such an enormous field that has such a tremendous amount of inventory in that area. But it really is the cash margin off the midstream business that is really powerful for us. Our cost side of that doesn't move very much at all on the midstream side, but cash flows go up pretty dramatically.
spk09: Okay. Got it. And then if I'm to just move over to the northeast, your processing volumes jumped quite a bit there, quarter over quarter. Do you guys benefit from some short-term volumes with a competitor outage, or is that a new run rate we should go off of?
spk03: No, Christine, this is Michael. Those outages that occurred, they were very short-lived, and Ironically, we were both the big operators up there were having some operator challenges at the same time that were quickly resolved. So we didn't really benefit, nor did our competitors at that same time. But I would say it is a new run rate for us just because our Oak Grove TXP3 project came online in the first quarter. And obviously, we have filled that up in the second quarter and are running at full tilt there on our OVM processing for the most part. And so we are looking at opportunities to interconnect with our Blue Racer facilities and take advantage of some potential latent capacity that they may have. But there's an opportunity to round rob a lot of gas there through our own facilities, our UEO facilities that we acquired a couple of years ago, as well as the Blue Racer facilities now that we are going to take full advantage of. But I would say we're seeing very active producer activity up there from EQT and Southwestern. as well as seeing them as a private operator. And they are chasing those liquid-rich well pad drill outs right now. And that's why we're seeing a lot of activity there. And I'm really pleased that our processing capacity is now full.
spk09: Thank you.
spk07: Your next question comes from the line of Tristan Richardson with Truist Securities.
spk03: Hey, good morning, guys. Really appreciate all the comments around board level capital allocation, but just thinking about the cash flow build next year against some of the project opportunities you've talked about, particularly rate-based investment, the new energy projects awaiting approval, Gulf of Mexico FIDs. Should we think CapEx in 2022 could look similar to this year as some of these opportunities kick off and dollars start to be put to work? Simple answer is yes. One of the things that's driving capital expense this year has been some of the upstream acquisitions as well as the sequent acquisition. And so we've had some acquisitions that are still included in that range that we've put out. So that's driving this. Next year, Lighting South will be completed. in fourth quarter of this year. Most of the capital spending obviously will occur prior to that. And then as we get into next year, hopefully we'll start spending towards the end of the year on regional energy access. If we're fortunate on the permitting process, most of that spending will be in 23. But in addition to that, as we get into 23, the spending per whale will hit as well. So, you know, it's looking pretty levelized, frankly, with this year being driven a little bit higher than we would have expected with some of the acquisitions that we've done. But next year, continued expansion in a lot of these projects that we've mentioned. So, you know, it's... It looks like a pretty relatively steady run at kind of the current rate in capital spending. I appreciate it. I just say that the math is obviously pretty straightforward. If you look at our – if you use our guidance midpoints as a starting point, other than capital, we'll be at the higher end of the range in capital. We're generating – we're spending, let's say, $1.2 billion at the high end on expansion capital, $500 million on maintenance this year. So that's $1.7 million still deleveraging. Next year we see EBITDA growth. We're not giving explicit guidance on that today. But, you know, if you think about it, if we just put a four times multiple against any EBITDA growth, that still allows for deleveraging from a 4.13 level today. And so, you know, any kind of reasonable amount of EBITDA growth adds substantially on top of that $1.7 billion that we're spending this year. So that's what you hear this kind of confidence on our part that, you know, we've got to –
spk02: You know, we see EBITDA growth coming, and with that comes, obviously, an expansion of that investable cash capital and still allowing for ID leverage from a ratio standpoint.
spk03: I appreciate it, John. It's helpful. And then I guess just a quick follow-up on really the acquisition opportunity side. You guys have talked about capital allocation across CapEx and the balance sheet and even the potential for repurchase. Curious on asset packages out there. We've seen some activity in transmission and storage over the past year. Are there small bolt-on opportunities out there, either in the Northeast or in the West? Are there things that are attractive or even transactable when you look out across the landscape? You know, I would say we certainly keep our eyes on that. And so far, I think folks that are more... dependent on those acquisitions for growth or making those acquisitions. And so, you know, from our vantage point, we've got better investment opportunities right now than that. And hopefully that will continue for a long period of time. We're certainly looking that way right now. But I think, you know, that's kind of what's driving that market right now is whether people have growth or not. And for us, we have, you know, very substantial growth within our investments that are better return opportunities than what we've seen the broader M&A at auction M&A market produced right now. So we'll certainly keep our eyes open, but it's going to be deals where we have a tremendous amount of synergies that can make those investment opportunities compete with our other investment opportunities, including share buybacks as well. So So all of those go into that calculus. But as we have demonstrated, we're going to be very patient, and we're going to do deals that are competitively advantaged to get a much higher return than the broad market would be able to realize. Thanks, Alan. Appreciate the perspective.
spk07: Your next question comes from the line of Spiro Dunas with Credit Suisse.
spk02: Hey, morning team. Alan, first one for you. In the past, you've expressed interest and a willingness to work with the current administration on energy transition and emissions goals. Curious what receptivity you've had early on in demonstrating natural gas's role in the transition process. And what you see is maybe still some of the hurdles or areas where there's a gap of opinion on how you approach reducing emissions over the long term.
spk03: Yeah, you know, I think it's an interesting time right now because there is this big drive to everybody is, you know, very focused on emissions reduction. They're starting to be a sobering, if you will, and a realization of what that means from a cost standpoint to consumers. And as a result of that, people are kind of pivoting back to, okay, well, what is sensible and what can we do that makes sense? And, you know, enter the likes of Senator Manchin with a great focus on natural gas for the benefit of the state of West Virginia and for our country and jobs, I would say, and a strong recognition on his part that we have to do this in a globally sustainable manner. And it has to be economic, otherwise we're just shipping jobs and industry off to other countries. And so I would just say there's kind of a reconciling going on, if you will, between, and no pun intended there, by the way, between the intense focus of on carbon reductions and tackling that issue on the one hand and on the other issue doing it in a way that it actually is sustainable and we as the U.S. can stay in control of our own destiny from an economic perspective. And so I think natural gas is extremely well positioned as those two things start to grind against each other and start to look for sensible, intelligent solutions that we can really deliver on today. And so I would say I have seen some recognition start to go on as people start to actually think about what the cost of some of these solutions means, both in terms of direct cost to consumer and in terms of reliability. And so the issues are starting to sober up a little bit as people really start to solutions. So I think natural gas is an even better position right now than I kind of thought it would be because I am noticing that people are starting to pay attention to the impact on consumers.
spk02: Understood. Helpful. Second question, just to follow up on Sequent. I know you've talked about EBITDA generation and sort of the $20 to $30 million range annually, but I don't imagine that contemplates the uplift Sequent could provide to the entire asset network as a whole. So curious, am I right in that assumption? And is there any way you can sort of help us quantify the potential benefit overall as Sequent starts to ramp up and integrate into the system?
spk03: Yeah, unfortunately, I don't think we're going to be able to provide you any specific numbers on that, but you are correct. And that is really the purpose of that acquisition was to drive further value and benefit. And I would tell you so far, we are even more excited than when we were looking at the acquisition originally. in terms of synergies between what our Williams existing customers want and we can provide services for and what Sequent and that team has to offer. So tremendous synergies, really excited to see the team starting to work together, and they're identifying a lot of opportunities here very rapidly. So the honeymoon continues, I guess I would say, and we continue to be very excited about what we're seeing from the Sequent team and their ability to drive value across our asset base.
spk02: Great. That's all I had. Thanks for the time, team.
spk07: Your last question comes from the line of Michael Lapidus with Goldman Sachs.
spk06: As two-parter here, one, can you remind us, what's the capital investment required for the deepwater projects for the two that you're kind of disclosing should come online by 2024? That's the first question. Second question is, what's the next step in terms of approval process for regional energy access?
spk03: Yeah, I'll take the first part of that on the capital. We haven't disclosed specifics on that capital, but I would just tell you it's just south of a half a billion dollars. And so we haven't laid out anything in terms of detail on that. But we're really, really excited about the way that project's come together and the capital team and the projects team has continued to find ways to take costs out of that project as well. And that, by the way, that includes an expansion for our gas system and a connection of that, a significant expansion for the oil side system of that, which will pay benefit for the future. and as well an expansion of our Markham facility to be able to handle all of this rich gas. So lots of lines of profits between the gas transportation, the oil transportation, and the processing of that gas. And so we're really excited about the returns and the way that area is paying off. And I would also add there's several other large prospects out there that are looking very fruitful as well. And so the story could get even better out there in terms of growth over time. So that has turned into be a great project. And our deep water construction team has really done a nice job. We're well into that project at this point. As you know, we had a reimbursable agreement with Shell. So we're well into the details of engineering and, in fact, have already bought and have had all delivered all of the deep water pipe for that project is now what was built in the UK, but it's now here in the US. So... great efforts by the team. Mike, do you want to take the regional energy access? Sure, Alan. Just as a reminder, on regional energy access, we made that FERC filing back in March for the project. Initially expected an environmental assessment to be completed for the project, but with the changing atmosphere at FERC, they're basically pushing all of the new projects that come in the door and even some that were already there prior to Chairman Glitz becoming the chairman. to go to an environmental impact statement, which takes a little bit longer for us. It shouldn't have an appreciable impact on the overall project schedule. We would still expect to have a FERC certificate next year in 2022, and then could begin construction later that year.
spk01: We still plan for a Q4 2023 in-service date for the project as we stand today.
spk03: Got it. Thanks, guys. Much appreciated. And, Michael, I would just add on the deep water on the well project, that pipe and a lot of the engineering that's gone into that and a lot of the specialty fabrication is already in this year's capital budget. So a lot of the materials and pipe has already been paid for or is included in this year's budget. So don't pile it on to the next couple years. Got it.
spk06: Thank you.
spk07: At this time, there are no additional questions. I'll turn the call back over to Alan Armstrong from Williams.
spk03: Okay, well, thank you all very much. Continued great success here in 21. Teams continue to hit on all cylinders. And importantly, even though we've got great growth here in 21, what we're really excited about is how we're positioned now for the future with a number of very important drivers for growth here in the future that will show up in 22 and beyond. really setting a nice platform for growth for our business for years to come. So we thank you for your attention today and the great questions, and we'll speak to you again soon.
spk07: Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.
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