Good day, everyone, and welcome to the Williams First 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 Jubani, Vice President of Investor Relations. Please go ahead.
Thank you, Amitris, and 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, 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 Zammerin, our Senior Vice President of Corporate Strategic Development. In the 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. These reconciliation schedules appear at the back of today's presentation materials. So with that, I'll turn it over to Alan Armstrong.
Great. Well, thanks, Danilo, and thank you all for joining us today. Our natural gas focused strategy continues to deliver solid financial results and this past quarter was no different. Our base business performance was remarkably strong in the Q1 and the severe winter weather in February boosted marketing margins. But even without these weather benefit or those benefits, as John will detail later, our adjusted EBITDA was up reflecting strength in our base business.
Once again, well positioned assets and reliable operations came through as we delivered another quarter of growth in almost all of our key operating metrics Despite severe weather, in fact, average daily firm contracts of transmission capacity, Average daily transported volumes, average daily gathering volumes and average daily plant inlet volumes all increased on a quarter over Williams also stood out on this front as no firm service was cut on any of our gas transmission systems during Yuri. And in fact, our Northwest Pipeline hit another record peak day for throughput during the storm. It demonstrates that affordable and Attendant natural gas will be a very critical part of the energy mix as we work to support growing economies and meet the key challenges we face around climate Change both in the U. S. And abroad.
We truly believe Williams' existing infrastructure is key to tomorrow's clean energy economy. I'll talk more about how we're planning for the future when we get to the key focus areas. But in the meantime, John is going to go through our Financial Results. John? Thanks, Alan.
At a very high level summary, the quarter benefited from the impact of winter storm Yuri. And to be clear, we have collected all receivables relative to that event. But even beyond the winter storm impact, we saw 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 higher profits from our NGL marketing activity in our West segment. These positives were offset somewhat by higher bonus expense accruals, reflecting the solid year that is unfolding and lower Gulf of Mexico revenues due to some downtime issues during And you can see the strong performance in our statistics on this page. In fact, we saw improvements in all of our key financial metrics.
First, our adjusted EBITDA for the quarter was up $153,000,000 or 12%. But even after excluding the impact of winter storm Yuri, our adjusted EBITDA was up 6%. We will discuss EBITDA variances in more depth in a moment. Adjusted EPS for the quarter increased 35%, Simply reflecting the after tax impact of the higher EBITDA, AFFO grew for the quarter similarly to our growth in EBITDA. And again, AFFO is essentially cash from operations, including JV cash flows, but excluding working capital fluctuations.
If you put AFFO up against our capital investments for the quarter of $277,000,000 of which we consider roughly $47,000,000 of that to be maintenance capital And you put it up against our dividend of $498,000,000 you can see that we generated over $250,000,000 in excess cash for the quarter. Also, you see our dividend coverage on this page based on AFFO divided by dividends sets at a very strong 2.07x. This strong cash generation and strong EBITDA for the quarter, along with continued capital discipline has helped move us towards our leverage metric goal of 4.20x. You'll see later in our guidance update in this deck, we've moved our guidance now for the year from around 4.25x at the end of the year now to around 4.20x at the end of
the year, I'm really proud of
our success on this front. So now let's go to the next slide. Let's dig in a little deeper into our EBITDA results for the quarter. Again, Williams performed very well this quarter. But before we dive into each segment, we believe it's important to isolate a few items that are not part of our core business.
The first item is the net impact of Winter Storm Yuri on our operations in the West. That impact produced a $55,000,000 net benefit and included the positive impact on our operations offset somewhat by reduced revenues at our Pianx processing facility whose rates are impacted by net liquid margins. We also had slightly lower volumes in the Mid Continent Haynesville. And collectively, we estimate winter storm Yuri impacted our west volumes by about 70 Mcf a day during the quarter. In addition, we also realized a $22,000,000 storm Yuri uplift in profits from the Wamsutter upstream assets that we acquired from BP in February, And that is on top of the $8,000,000 from normal operations from these upstream assets.
So the total winter storm impact was about was a $77,000,000 benefit. Again, with that benefit, EBITDA was up 12% and even without the impact of winter storm Erie, EBITDA was up 6%. So digging into our core operations, our transmission and Gulf of Mexico assets produced results that are about $9,000,000 less than the same period last year. However, new transmission pipeline projects added $29,000,000 in incremental revenues for the quarter, including the Hillaby Phase 2 project that came into service in the Q2 Last year, the Southeastern Trails project that went into service during the Q4 of last year and a portion of the Leidy South project that went into service in the Q4 of last year. You can see this evidenced in the growth in our firm reserve capacity, which is up 5% from the Q1 of 2020.
These revenue increases were almost entirely offset by lower Gulf of Mexico revenues due to some protection and downtime issues, lower revenues From lower rates in just a few Transco markets that went into effect upon closing the rate case last year and one less billing day this year than last year, given last year was a leap year, which believe it or not has a $6,000,000 impact on our transmission revenues. So the reduced EBITDA results for this Really have nothing to do with revenues and are largely due to higher operating expenses, which interestingly enough are being impacted by higher bonus accruals and equity compensation accruals given that we are off to such a strong start for the year. We traditionally do not increase those accruals until later in the year. In addition, we did see slightly higher compression expenses for this segment. Now moving to the Northeast, the G and P segment continues on strong contributing $32,000,000 of additional EBITDA this quarter.
Collectively, total Northeast gathering volumes grew 9 20 Mcf a day About 11% this quarter versus the Q1 of last year, while processing volumes grew 15%. 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 South supply basin where we benefited from more productive wells As a result, our EBITDA from equity method investments improved by a little over $33,000,000 Which also includes the benefit of additional profits from Blue Racer due to our increased ownership, which we acquired in mid November last year. Now moving to the West G and P segment, it was up $44,000,000 compared to the prior year. And remember again that this $55,000,000 net benefit from Winter Storm Yuri. So of this $44,000,000 improvement, commodity margins from our marketing activities contributed a big part of that And they were up $52,000,000 versus the Q1 of 2020.
And again, this excludes the $74,000,000 benefit from Winter Storm Uri Related just only to commodities. These increased commodity margins were the result of a few things, all driven by higher NGL prices during the quarter. The first and most significant is related to inventory in transit. Last year, we saw prices decline and had a small loss, while this year, we saw prices increasing during the quarter And realized the gain on that inventory. The second relates to transfers of propane and other EGLs to higher netback markets, where we saw some real market differentials during the quarter and we're able advantage of that, for example, the differentials between Conway and Mount Belvieu.
Offsetting the higher commodity margins were lower profits from our JVs. We did see a $5,000,000 JV benefit from Winter Storm Yuri on our Brazos JV. So if you exclude that, our JVs were down about $8,000,000 and that can be mostly attributed to OPPL where ONEOK has pulled much of their volume and moved it to their solely owned system. Those items, namely higher commodity margins offset by lower JV profits, again, mostly explained the variance in the West. Otherwise, lower revenues were offset by lower expenses.
Revenues were down $14,000,000 when you exclude a negative $23,000,000 impact Tied to Winter Storm Yuri on West revenues and again mostly that was in the Piazza related to net liquid margins. Volumes in the West were down 250 Mcf a day Or if you exclude Winter and Storm Uri, they were down about 180 Mcf a day, but most of that reduction in the Haynesville and the Eagle Ford, Which of course, I'll remind you that in Eagle Ford, we are protected by MVCs, so that doesn't have a revenue impact. So really the biggest impact on revenues The rate reduction in the Haynesville and a slight volume reduction in Haynesville. And I'll remind you that we traded that rate reduction in the Haynesville in part for receiving the South Mansfield acreage from Earlier this year. Now again, offsetting the lower revenues were lower cost, including lower compression cost And no bad debt expense, where during the Q1 of 2020, we did reserve for the Wamsutter MVC, but are now realizing those MVCs as part of the settlement with Southland.
I'll now turn the call back over to Alan to discuss several important investor focus areas and updates to our 2021 guidance. Alan? Thanks, John. And here moving on to
the key investor focus areas on Slide 3. We're increasing the midpoint of our 'twenty one EBITDA guidance range to $5,300,000,000 which is up $100,000,000 The increase in our guidance goes beyond the gains realized during the winter storm as it also reflects confidence in the strength of our base business. Achieving this new midpoint would produce a 3 year CAGR of about 4.5%, even while we have continued to improve our balance sheet and produce free cash flow after CapEx and dividends. Regarding the balance sheet, our deleveraging goal is now on an accelerated path as we've Hit the target of 4.2 this quarter, which obviously is earlier than we had forecasted earlier. And we're currently And we are now at Moody's and hope to see a credit upgrade soon.
Given the accelerated achievement of key milestones On our balance sheet, we will begin to evaluate various capital allocation alternatives. As you know, debt reduction has been our top Capital priority and now we will begin to evaluate the best use of free cash flow in 'twenty two and beyond. So next on the list here is a few thoughts about the Sequin acquisition. As we announced last night, we recently reached an agreement to And for several years, we have been evaluating the best way to enhance our marketing capabilities at Williams in a way that it could be well integrated, Culturally aligned and focused on driving fee based revenues across our network for several years. So this is something we've had in our strategic Capabilities and something we needed to build for several years and so we're really excited to be taking this step to fill what's been a strategic capability The addition of Sequent, including its talented workforce and industry leading platform, complements the current Geographic footprint of our core pipeline transportation storage business.
For perspective, we handle 30% of the nation's natural gas, Which is approximately 30 Bcf per day, this acquisition increases our natural gas transport and storage optimization capabilities Up to 8 Bcf per day from 1 Bcf per day that we were doing previously in here within Williams. So certainly bringing it more in line for a natural gas focused business as large as Williams. The scale of the combined company will not only allow for optimization of our existing assets, but it will also facilitate expansions into new markets with opportunities To reach incremental gas fired power generation, liquefied natural gas exports and future RNG opportunities. In discussion with both our existing and potential LNG focused customers, We are hearing a clear need to have wellhead to water natural gas supplies that can demonstrate and document Responsibly produced low carbon supplies. We see this acquisition as a way to more effectively aggregate, transport and market So we're really excited to welcome the Sequium team to Williams later this summer.
And finally, we don't the acquisition to have any dramatic impact on our current mix of business nor material impact for our 'twenty one EBITDA or CapEx guidance. So now moving on to project execution here on Slide 3 still. We continued our pace of strong project execution in the Q1, Placing our Southeastern Trail project into full service in early January and making great progress now on the Transco Lighting South project To bring additional gas from Appalachian area, particularly Northeast PA to growing demand centers along the Atlantic seaboard by next winter. We filed our FERC application for the Regional Energy Access Project, a low environmental impact project being designed in a manner that is Acceptable to future renewable energy sources like clean hydrogen and blend like clean hydrogen blending and RNG. So in today's environment, As we're all learning more and more, existing infrastructure is more important and more valuable than ever.
And the brownfield nature of regional energy And Leidy South and Southeastern Trails are all great examples to that. With the largest and most flexible gas transmission system in the nation, Williams can serve new demand primarily through brownfield expansions. This means maximizing the use of established transmission quarters and facilities And resulting in reduced community and environmental impact, while also enabling economic growth and the use of lower carbon fuels in those markets. Next on to the Gulf of Mexico opportunities here. We remain on track to executing on the 4 key Gulf of Mexico projects, which is Quail, Ballymore, Taggart and Anchor.
These projects are progressing very well and we look forward to these projects coming online here now over the next few years. We also have a number of other smaller projects, but those are the ones that we continue to focus your attention on. So next on the Northeast G and P project execution, certainly some of the producers in the Northeast remain in production maintenance mode, But our project execution team is busy trying to keep up with the increased demand for processing and fractionation services For the growing rich gas volumes in the Southwest Marcellus area. And as we have stated before, the rich gas volumes provide us with a much higher service fee and margin capture, so we're thrilled to see continued expansion in that area. And finally on sustainability here, We continue to focus on sustainable operations and I'll remind you that last year Williams became the 1st North American midstream company to issue a climate commitment Focusing on ready now solutions to address climate change.
And by setting a near term goal of a 56 percent reduction in greenhouse gas emissions by 2,030 as a part of our climate commitment, we are well in line The Biden administration's recently announced nationally determined contribution target of a 50% to 52% reduction We will continue to leverage our natural gas focused strategy and today's technology to focus on immediate opportunity At the same time, natural gas and our infrastructure are enabling the next generation of clean energy technology. There really is not another energy infrastructure system that integrates a reliable delivery network with a massive storage solution on the scale that the natural gas infrastructure across our nation does. We believe our infrastructure can be a critical part of both near and long term And on our near term efforts, we're focused on renewable natural gas, Solar energy and our footprint is ideal for bringing in renewable natural gas to markets and solar projects in a supply mix. On the solar front, we've currently identified 3 additional projects and now have a total of 16 solar project opportunities that should start operating Beginning in 2023, on the emerging fuels front such as green hydrogen and renewable natural gas, we certainly expect that play an increasing role in the clean energy future and both as a storage vehicle for excess renewable energy in the form of green hydrogen And as a net zero emitting form of natural gas in the renewable natural gas.
So we continue to make sure that We are on the front edges of those opportunities. We are looking forward and anticipating future innovations and technologies that we can use On our key energy network to deliver on this next phase of the energy transition. In fact, in a partnership with University of Wyoming, we are Currently pursuing a grant from the state of Wyoming to fund a feasibility study to pursue a pilot program that would evaluate the creation of near our operations in Wyoming. The study will be presented to the Wyoming Energy Authority and it could be an initial For Williams to better understand the workings of the hydrogen economy. I certainly want to keep that in context for you.
That Simply is us filing for a study there to determine if we want to pursue a pilot So that is perhaps something I don't want to see people getting out over our This is a step and we certainly are going to make sure that we stay in front of these kind of opportunities, but we're a long way from making any kind of big We also recently joined the Clean Hydrogen Future Coalition that was launched to advance clean hydrogen as a key path to achieving global de carbonization and U. S. Energy competitiveness. And finally, we are proud to be a founding sponsor of Houston's Greentown Labs, a Our intense focus on our natural gas based strategy has built a business that is steady and predictable with continued moderate growth, improving returns And an increasing amount of free cash flows. Our best in class long haul pipes, Transco, Northwest Pipeline and Gulf Springs are in the right And by design, our formal gathering assets are in the low cost basins that will be called on to meet gas demand as it As evidenced, on a year over year basis, the Lower 48 natural gas production here, of course, in the United States has declined by 5% here in the Q1.
At the same time, Williams Natural Gas Gathering volumes were up by 5%, Indicating that our strategy of focusing on key low cost natural gas basins is working. These gathering That's our irreplaceable and critical infrastructure within the natural gas value chain and the importance of this infrastructure was proven in our recent ability to navigate 2 substantial customer bankruptcies in a way that actually improved the value proposition in the Walmsstutter and the Haynesville Basin. This is a crystal clear example that even in the most dire of circumstances, our long term approach And careful contracting allows us to turn negatives such as producer bankruptcies into net positives for Williams. 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 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.
So with that, we thank you very much for joining us today, and I'll open it up for your questions.
Please stand by while we compile the Q and A roster. Your first question comes from the line from Neet Satish with Wells Fargo.
Thanks. Good morning. I guess just First question on Regional Energy Access. You mentioned that it's being designed to accept hydrogen or RNG blending. Just curious, what does that mean exactly?
Are you taking any are you doing any different steps on this project? Can it take more hydrogen and other pipes? Just
We are looking at this asset and the footprint that It encompasses long term right away in talking to our customers about opportunities that they have to either bring renewable natural gas into that pipeline system So that's really the comment that you're seeing there. It's no exotic metals or anything of that nature in the pipeline system. It will be typical of any The existing pipeline system that's in the country to be able to accommodate a hydrogen blend, but it's accommodating the ability of our that are participating in that project to bring forward in partnership with us potentially hydrogen sources into that
Great. And then just turning to the Northeast, you've got your new Oak growth processing plant expansion up and running, how long do you think it will take to fill that expansion up? And maybe tied to that, where do you stand in terms of NGL volumes now versus frac capacity in the Northeast? Do you see the need to add any frac capacity? Maybe just one more to tie on to that.
Is there any to kind of integrate the Blue Racer and your other systems in the Northeast to kind of give yourself some synergies there?
This is Michael. I'll take that one again. So basically, the processing capacity is virtually full today. The Production that came on the line behind that processing facility was very robust. The pads were developed By our customers there, primarily EQT and Southwestern and very prolific ad development they had there Exceeding
your expectations. And so we
did an offload agreement with our customers there to make sure that we didn't impact any of their volumes in the Q1 While we were finishing our TXP-three mill growth, that's now online and like I said earlier, virtually full. So we are seeing full processing there for the most part. And our fractionation facility at Harrison is also And I suspect in the summer months, we will be at capacity on those facilities. And so we are contemplating Opportunities with our Blue Racer ownership there and where we can create crossover pipeline systems to be able to Some of those volumes over to them where they potentially have spare capacity, and that system can be utilized bidirectionally in the future Where either one of us potentially have a capacity situation and we can offload to the other. And so that's a longer term prospect project, but it's something we feel like we have online potentially this year, and it's a very low cost project in comparison to building either a new fractionation or processing facility.
Great. Thank you.
Thank you.
Your next question comes from the line of Christine Cho with Barclays.
Thanks. I'd like to start off with the guidance. If we adjust Q1 to take out the storm impact, it would imply some degradation in the future quarters to get to the midpoint of guidance. So just wanted to See if there's anything that we should be thinking about later in the year that would bring numbers down from here or is the guidance just somewhat conservative?
Yes, this is John Schaller. I'll take that. First of all, I'd say there
are a couple of other items in
the Q1 beyond winter storm Yuri I think you should think about. So let's start with the $1.5 which is what we made. The winter storm had a $77,000,000 impact. We did make, I would call it, outsized NGL margins during the Q1 relative to some of this inventory valuation. And just to put a number on that, I think We made probably $30,000,000 more than we would normally make in a quarter.
So if you remember in my commentary, I said we made $52,000,000 more in NGL marketing activity Outside of Winter Storm Uri, we usually make $20,000,000 to $30,000,000 a quarter. And so if you back $77,000,000 You backed $30,000,000 out for some outages, size, NGL margins. And then also we did book an $11,000,000 MVC accrual relative to Wamsutter That once we close in the Southland properties, we'll be our own customer and we'll be charging our subs in MVC. You take that out as well. If you take those three numbers out, You're a little under $1,300,000,000 for the quarter and if you normal if you take that times 4, add those items back, you'll get really close So kind of 5.3 midpoint.
Now of course, you might say the upstream will come in a little bit stronger too. We made out Without Winter Storm Uri, we made $8,000,000 on the upstream times 4, that's $32,000,000 And we've guided to Around a percent of our EBITDA for the year. So there's certainly some uplift on the upstream too. So I would say there's probably a little bit of conservatism in our number. I'm not I'm going to try to say there isn't to that.
I think we obviously want to be sensitive to if we have a tough hurricane season or other But I think you've got to take those three things out. You're going to get really close to guidance. Our forecast remains very strong. Our business performance remains really Strong for the remainder of the year.
Yes, that's helpful. And then I wanted to kind of touch on the purchase of Sequin. Your commentary to source responsible gas is notable. So wondering if you could talk about what this exactly entails, what you're thinking here. And then natural gas marketing was a business that was much bigger preshale and it's gotten much smaller over the last decade.
But with utility, I know that you guys mentioned LNG customers, but with utilities coming out with net zero requirements as well and maybe more volatility to materialize in natural gas on a daily basis rather than what has historically been a seasonal basis. Could you talk about what this might mean for pipeline recontracting and how Sequent may or may not play a role?
Yes, Christine, great question and very thoughtful. I would just say, first of all, we as I mentioned earlier, we have been for the last couple of years really And thinking, boy, this is an awfully big business. We touched a lot of gas, have a lot of customers that could use services LifeGas Marketing, but we have been very limited in our approach to that. And so the CECLent opportunity Basically gave us an opportunity to buy a platform and a set of contracts and asset management contract and a great team that really knows this business and has controlled risk extremely well. And so really allowed us to fulfill a strategic gap.
However, so I would just say that was out there as a need before The thought of low carbon fuels and the volatility and the value of volatility that just got exposed in this last quarter even came along. But I will tell you that we entered this with even greater confidence in both the need and the value associated with Because we do believe that the benefits of capacity management and Risk Management as it relates for utilities, as it relates to what happened during a winter storm, Yuri Certainly has made sure the space is wide awake relative to the risk around this issue and we think this The team at Sequium has done a great job of managing that risk by the way through this. And so we think there is value in Managing in a new value associated with managing that kind of risk. But we also just think just generally, we have a lot of customers that Really use the service and as you say it's really kind of faded away as a capability in a lot of companies, but we think it's really Going to be an important tool for us and being able to bring together low carbon supplies all the way from the wellhead And being able to document that and put that value chain together all the way to the water and to our utilities It's clearly on the list right now as a new opportunity for us to market to.
We certainly have the assets, but we really don't have all of those Contact with people, we talk to customers about long term capacity on a regular basis. We're not out regularly talking to them About how we manage the volatility in the business. And so this really gives us a great opportunity to do that and look for So thanks for the question. And I would just say we're it's become more and more evident to us that this is something we needed to add to our capabilities As some of the changes that you pointed out have occurred.
Alan, if I could add
to that as well. The upstream Properties that we now own or potentially will own once the bankruptcy quarter produced the Southland transaction in the Wamsutter, the BP acreage in the Wamsutter and Haynesville acreage now gives us the ability to market that natural gas coming from those properties. And so we're going to find a way to work with Our new sequence ownership ultimately when that closes to find a way to take those supplies, brand them as low carbon or net 0 And then market those to utilities and LNG facilities, as Alan mentioned.
Got it. Very helpful. Thank you.
Thanks, Christy.
Your next question comes from the line of Jeremy Tonet with JPMorgan.
Hi, good morning. Good
morning. Just wanted to
see, I might have missed it here, but as far as the E and P acreage sale process is concerned, would you be able to update us there, I guess, as far as timing? Is it still kind of July or has anything kind of changed in your thought process there?
Yes, Jeremy, thank you for the question. Yes, we are in the process of working through and I would say we're well into negotiations with 2 different parties, 1 in the Wamsutter and 1 in Haynesville, and they're both local producers with Acreage and very skilled operators in the area. And so we're moving along on that. And Probably the form of those transactions will be a situation where we retain an interest and part of that is for credit protection as you can imagine So you should think about that as over time those cash flows being reinvested in The drilling and building up of the business and then a dilution of our interest over time As that converts from upstream cash flows into midstream long life midstream cash flow, so that's exactly what we're Looking to accomplish and I'll tell you our team and Chad Zamoran who's been leading that for us has just done a fantastic job of Really coming up with win win solutions with parties and we're really excited about the way that's going to turn out. We're much, I would tell you much bigger value to us than even at very modest conditions, Much bigger value coming to us than we had ever kind of expected when we were preparing in the bankruptcy processes So Chad, I don't know if
you have anything to add to that.
Just on timing, I would expect
that we finalize those transactions over the next 30 to 60 We're pretty far along with the in both scenarios. And I think just to put emphasis on what Alan said, I mean those will be structures That bring in a strong well capitalized operator and the ownership structure that they'll Acquiring will be structured in a way that will require development of the asset and drive volumes to our midstream and And as Michael said, we will, as part of both of those transactions, have a marketing capability and the ability to Aggregate supply for the benefit of our gathering systems, our downstream pipeline systems and now with Sequent, our So we think a really great outcome for us and our partners, but I would expect to see something In both the WAM Center and Angel over the next 30 to 60 years.
Got it. Thanks for that. And then On the topic of energy transition, I was just wondering if Carbon Capture is on your radar. If you think that the current 45Q Is sufficient to make projects economic, specifically such as on processing plants given the purity of the CO2 stream there or Anywhere else, do you see that as a possibility for Williams here? Or do you see the potential for more, I guess, changes of support coming out of D.
C. That could enhance economics and make these projects more viable for Williams.
Yes, I would tell you that we are looking at every Opportunity to leverage our capabilities and infrastructure and Carbon Capture is one of those. We do have assets in Again, carbon emissions and provide capture and storage. It's early days much With hydrogen, I would say we're trying to set the table for us to be able to participate in those opportunities as I wouldn't expect to see something material. I think Alan mentioned on hydrogen in Wyoming. I wouldn't expect to see material from an investment perspective in the near term, but I would tell you that if it's a viable opportunity, which we think it very well may be, we are looking at some actual projects Dave, as they are long term in nature and require, I'd say, a year plus of just evaluation before we even think about But we have multiple different opportunities that we're looking at across
the carton
Your next question comes from the line of Shneur Gershuni with UBS.
Hi, good morning, everyone. Alan, thank you for the update on capital allocation. I have Two follow-up questions. First, just to go back to the upstream related assets.
In terms of
the JV drawstring that You're going to be setting up or any of the learnings from the legacy process that you just went through in terms of contract with these new assets to protect Williams in the future. And it's part of that, you see it do you see yourself retaining the assets on a very long term basis? Or do you So to see eventually selling this down the road.
So we vaguely heard your question. You cut now quite a bit. Can you Please repeat that.
Sure. Just to repeat. So with the upstream assets and the JVs that you're looking to pursue at to make sure that you're protected in the long term basis. And do you plan to hold the assets for a very long term Or is the whole period more of a medium term?
Yes, great question, especially with some of the outcomes from the Delaware Bankruptcy courts as it relates to gathering and whether those contracts run with land or not. So we certainly Are doing everything we can to improve our position on those. As we've said many times before and it kind of proved Out in these cases, it's not just the law or I mean, certainly your contracts need to be good and But importantly, it is the physical nature of the asset and being all the way back to the wellhead that gives you a lot of economic Protection in that situation. Having said all that, the one thing that we are really depending on in these transactions is the fact that
The other party is going
to invest the dollars to develop the acreage and we're cutting the bargain on that basis. And so to get right to the point, We're going to retain those interest until that until those capital dollars have been invested to prove to ourselves that that money is going If it doesn't get spent, we still own the acreage and whatever money they spent in developing, we retain an increased interest in a more developed So I would say we certainly don't expect that. We know the partners that we're talking to here pretty well. And they both are in very strong financial position. So in this case, we feel really good about the situation.
But I would say that we've got belts and suspenders on in terms of the form of the structure that we're That is effectively bankruptcy proof given our continued holdings until the dollars have been invested to develop the agency.
Yes, I think it's important to emphasize that we didn't have a meaningful contract rejection through all of the bankruptcies that occurred Last year, we have been very deliberate in investing in infrastructure that is absolutely critical to the upstream So both in Haynesville and Wamsutter, at the end of the day, the bankruptcy process really wasn't all that relevant. What was relevant was that our infrastructure Absolutely critical. Without it, the upstream asset can't deliver value, can't deliver volume. And We have a very strong position across our entire footprint. I think we proved it last year, not a single bankruptcy proceeding led to a rejection of 1 of our contracts.
We've invested in critical infrastructure that just by its nature protects against that risk. And then on the long term investment, I think Alan may want to add to this. We are again very focused on structuring these transactions a way that brings development back to high quality acreage upstream of areas where we have existing Available midstream capacity. And so we're going to see in these structures a near term investment in these properties that will deliver the ownership From a long term perspective, primarily to our JV partner, we may have a small ownership interest We retain from a long term perspective, but we will likely only hold the ownership interest as long as it takes to make sure the development It's back into the property and drives the volume to our midstream assets. So that's we are laser focused on that as Our strategy, not to just own upstream properties forever, it's to own them in a way that drives
Very thoughtful. Thank you for that. And maybe just as a follow-up to the Sequent acquisition, appreciate Everything that you've already laid out with respect to today. I'm trying to understand the capabilities that come with the acquisition. Are you basically buying a team that is laser focused on capacity management and so forth?
Or does it come with are they data scientists and come with algorithms and technology that can do something that is well beyond your current Just given the fact that you've been in this business in the past.
Yes. No, I would just say and I'll let Chad. I would say This is kind of a team that's really skilled at blocking, tackling and risk control and the positions they're taking are nothing exotic. It is simply looking to manage basis differential, manage contracts, reimburse contracts through Asset management agreements with utilities. So this is a very low risk approach, But it does involve a lot of customer contact and a lot of opportunity to serve customers in the space, but it's basically Basis and time value on storage versus physical inventory.
So it's nothing exotic and Market leading or market making kind of activities.
And Shneur, we and Tim, and Alan said this earlier, we had intentionally been Focused on expanding our capabilities on that for the last couple of years and our team has done a great job. They've been growing their capabilities. So we grew from a very, very small level to still a very small level, but it's still been a lot of work on the team. This gets us much Quicker to a larger scale capability on the back of more sophisticated systems. They have a more we have a quality risk control Process internally within Williams, they have a very high quality risk control system.
And so we picked up the benefits of a very well thought out Structure from risk control, accounting systems, trade marketing systems, we just It helps move us forward that much quicker and something that we would have probably spent the next 4 or 5 years trying to build, we get there more quickly.
Yes. And I would just say in addition to that, We looked at a lot of different opportunities in this space. And the reason we got so comfortable with this transaction is Southern Companies has done a fantastic job of really keeping the screws turned down from a risk control standpoint and really building a culture around that. And so this is a very well controlled business and we've been very impressed with the time and effort that Southern Companies has invested in making this a heavily controlled business. But at the end of the day, Southern Companies Doesn't have all the big long term external customers on both the upstream and the downstream the way we do.
And so this is a great fit for us. I totally understand where they're coming from in terms of their sell, but for us, this is really an important capability for a company that Handles 30% of the nation's natural gas, really complementary. And I think we've got a lot to offer that team as well in terms of new opportunities To work around our customers and assets as well and offer those services. So it really this is a really, I think attractive transaction between 2 Companies that know each other well and have done a lot of business together and really excited about bringing this team.
Yes, I think about it really simply. It was a pipeline and storage optimization platform owned by utility. We are a pipeline storage company and will now own the pipeline and storage optimization platform. This is not speculative marketing and trade. This is taking Understanding pipeline and storage fundamentals and optimizing infrastructure.
And when you think about the area that just left an era of expansion and construction. We moved into an era of realizing the value of existing infrastructure, A platform focused on optimization of the existing infrastructure is going to be really valuable. And so we see it as an accelerator of across our core business and we're going to be exploring a lot of different ways I think to create opportunity with the addition of the Sequium
Your next question comes from the line of Tristan Richardson with Tuohy Securities.
Hi, good morning guys. Just a question on capital in 2022. I think in prior calls, Alan, you Emphasize that once the leverage is at the long term target, priorities like further investing in the rate base and emissions reduction projects Or the initiatives or the priorities for capital allocation. Just wanted to get your views on that versus further delevering or As you suggested in prepared comments, thinking about returning cash to shareholders?
Yes. Thank you very much. I would just say we are we remain and we'll look at all those options as we enter into next year. Obviously, Once we've committed to capital projects, then that option has been eliminated once you start down that road, obviously. We certainly up until the time that we take a look at those investment opportunities up against wherever price of our stock is and wherever we The best value is, but the good news is we're sitting here in 'twenty two with a modest amount of free cash Well, that gives us flexibility.
But as we get into 'twenty two, it's going to take a rocket Science to run the math and realize that that starts to build on us. And so we will have quite a bit of And I wouldn't say that we're committed to making those emission reduction projects Happened yet until we get down to seeing what stock price is, what returns look like, But that is certainly one of the options. And I think on the further debt reduction, obviously, if we become convinced that further Debt reduction would add value to our shareholders, then that's a lever we could continue to pull on as well. And So I would just say, it's hard to predict what the markets will look like 9 months from now, but we certainly are To the point now as we continue to engage the Board on this discussion, this is becoming a More prevalent topic, if you will, at board meetings in terms of what's the best use of the extra free cash flow As we get into 'twenty two and beyond.
That's helpful. And then just
a quick follow-up. I think just with the activity you're seeing on both G and P segments, Possibly looking stronger in the second half and combined with some of the Northeast projects like Oak Grove, should we be optimistic for growth in 2020 In both of
the G and P businesses, where we sit today?
Well, I would say things are looking pretty favorable Right now, I mean, if you look at gas prices, NGL prices here through the summer months And starting to look out into the 4 markets, certainly the market is starting to put a call on gas and these areas whether it's The Northeast PA, the Southwest PA, the Utica or the Haynesville, they're all well positioned You make pretty good margin in this kind of pricing environment that you're seeing now within almost $3 summer gas price. So Yes. If that continues, that will drive activity on those assets and will drive So I like our setup for the balance of the year. Obviously, as John said, we're being reserved in how we're putting that into guidance, That looks good. And I would say, obviously, if you think about really what drives some of those decisions, a lot of times it is the forward market for a lot of our That drives those decisions.
And so they will start to look at what Ford strip looks like and start to lay in hedges. And that's going to drive the activity, frankly, in terms of how much how many drilling commitments they make in an area. So I would just say keep your eyes focused on kind of the Forward markets for both gas and NGLs, and that'll be a pretty good indicator of what kind of activity we should expect across those areas.
Appreciate it. Thank you, Alan. Thank you.
Your next question comes from the line of Alex Kanai with Wolfe Research.
Hi, good morning. Maybe just
a follow-up on the Sequent questions. Just looking back on Southern's comments on it on their call, They did talk about it having a significant amount of balance sheet or parental guarantee support required, As well as maybe some volatility in terms of the results there. I guess, maybe my questions are just are there going to be any synergies that maybe the company That might try to minimize some of the parental guarantees that might be required maybe relative to Southern. And the other one is just talking about overall the volatility there, on average about maybe Under the kind of the broader platform that you have.
Well, yes, no, this is John Chandler. First on the guarantees, I think you need to understand, we guarantee a lot of our subsidiaries too. A big part of that number they were talking about is just simply the guarantees They make for monthly transactions at Sequent. I think if you look at Sequent, their revenues are somewhere in the $7,000,000,000 range. And if you divide that by 12, I mean, all that's happening is the parent was guaranteeing its subsidiary who was doing purchase transactions under the AMA or just General marketing activities with very low risk.
They have a very tight risk control process, so there's not risk on those trades. So they were just guaranteeing their subsidiary just like we would guarantee 1 of our That's $400,000,000 to $500,000,000 of guarantees. And so that number was a little bit flashy, but it's not anything of substance. It's not Guaranteeing some risk asset, hopefully that makes sense. And so beyond that, really the transport fees, Most regulated pipelines have maximum of 90 days requirements.
If you fall below investment grade, if you're investment grade, you don't have any requirements. But if you follow the investment grade, you have obligations, but they're only 90 days. So that's a much smaller part of that So again, I would just say, dollars 5,000,000 to $600,000,000 to $700,000,000 of that guarantee number that you may have heard Southern talk about or just simple Monthly or quarterly guarantees for monthly guarantees of their sincerity with very little risk. Because there's really no changes to that. That's just the normal course business activity.
One thing we haven't talked much about, EBITDA generation. We see a pretty consistent in their history, a pretty consistent, I think Southern talked About this EBITDA generation of $20,000,000 to $30,000,000 from this business and we expect it to stay somewhere under our There will be an occasional market dislocation like we just saw, but generally $20,000,000 to $30,000,000 of EBITDA generation. That doesn't mean the earnings will be consistently that way. We will be doing adjustments to our EBITDA Where some quarters it may be quite a bit bigger, some quarters less, but over a year it would average out to that $20,000,000 to $30,000,000 So Hopefully that answers your question, but there's not huge credit exposure for us as a company other than just normal ongoing business Activities. Great.
That was helpful. Thanks.
Your next question comes from the line of Gabriel Maureen with Mizuho.
Hey, good morning, everyone. Most of
my questions have been asked or answered. I was just curious on the additional solar projects that were identified, just kind of where you think you are in the $400,000,000 I think bogey that you put out there during the ESG Day, does that how much closer that takes you to that?
Yes. Thanks, Chad. We've got pretty in line of sight to what we showed in our ESG Investor Day and Potentially even more than that. Of the 13 projects that had what we consider Advanced Beyond Gate 1, over half of those are now filed with Utility regulators in order for us to advance those projects, which means we've locked in scope, we've locked in land, We have a commercial construct that we're comfortable with and those will go beyond what we call gate 2 In the near term, which is effectively in FID stage. So of the 16 now projects that we have, it's over $250,000,000 Investment opportunity, we would expect and we have a goal for at least half of those projects to achieve what we're considering I'm pretty confident that all those projects will get where we need to be, but the primary Initial gating item is making sure we've got sufficient land and that's really what drives the Ultimate size and scope of the project.
And so that's what we're spending the most time on, on the front end here. But I'd say we still have pretty
Thanks, Chad. And then maybe just a quick follow-up. I noticed that I think Northeast Supply Enhancement filed for an extension at the FERC. Is that project still being worked? I mean, I'm just Curious kind of how that project fits in the portfolio now, if at all, considering regional energy access?
Hi, Gabe. It's Michael. Yes, we had an expiration of that certificate that was upcoming. And so through just a normal Of course, requested an extension on that. We still have a proceeding agreement, basically a contract with our customer there.
They have not canceled the project as yet. And obviously, they are still struggling getting their other projects off the ground from a permitting standpoint that we're
going to supplement in
the near term. Their ability to serve their customers increased usage of natural gas. So we thought it was prudent to go ahead and ask Extension and other than that, we're not working the project with the exception of having conversations with our customers at this time. We still think there's a great need for natural gas in that market. There's still a great opportunity to take fuel oil out of that market and improve the emissions But we have no capital allocated to the project at
Our final question for the day comes from the line of Becca Followill with U. S. Capital Advisors.
Just following up on Tristan's question, you decision decisions or some kind of plan public maybe in 2022 when you finish that review?
Becky, I think it will
probably just come out in for instance, if we commit to emission reduction projects That drive our capital budget for 'twenty two higher, then that's kind of where we would announce that. And If we haven't done that, then it would then the two options to that would be Further debt reduction just naturally or buybacks of shares as another alternative. So think as we start to formulate our 2022 CapEx budget and our Strategy sessions with the Board and then which then rotate into budget meetings towards the end of the year. That's when really when we'll be making the decisions on whether that money will go to investments in new CapEx or less those alternatives. And I would think that by the first of the year, then we would be in a position to say what we would expect to do if it wasn't going towards further