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 Juvane, Vice President of Investor Relations. Please go ahead.
WMB Williams Cos
Thank you, Amicus 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 Zamarin, our Senior Vice President of Corporate Strategic Development. In the presentation materials, you will find a disclaimer related to forward-looking statements. This disclaimer is important and integral to our remarks and you should review it. Also included in the presentation materials are non-GAAP measures that we reconcile to generally accepted accounting principles and these reconciliation schedules appear at the back of today’s presentation.
So with that, I will 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 first quarter 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-quarter basis. Extreme weather experienced in the first quarter really underscores the importance of having a resilient and reliable energy network. Williams also stood out on this front as no firm service was cut on any of our gas transmission systems during Uri. And in fact, our Northwest pipeline hit another record peak day for throughput during the storm. It demonstrates that affordable and dependable 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 will talk more about how we are 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 Uri. 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 the first quarter of this year. 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 million or 12%. But even after excluding the impact of winter storm Uri, 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 million, of which we consider roughly $47 million of that to be maintenance capital and you put it up against our dividend of $498 million, you can see that we generated over $250 million 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 will see later in our guidance update in this deck, we have 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 am 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 Uri on our operations in the West. That impact produced a $55 million net benefit and included the positive impact on our marketing operations offset somewhat by reduced revenues at our Piceance processing facility, whose rates are impacted by net liquid margins.
We also had slightly lower volumes in the Mid-Continent at Haynesville. And collectively, we estimate winter storm Uri impacted our West volumes by about 70 MCF a day during the quarter.
In addition, we also realized a $22 million storm Uri uplift in profits from the Wamsutter upstream assets that we acquired from BP in February and that is on top of the $8 million from normal operations from these upstream assets.
So, the total winter storm impact was about – was a $77 million benefit. Again, with that benefit, EBITDA was up 12%. And even without the impact of winter storm Uri, EBITDA was up 6%.
So, digging into our core operations, our Transmission & Gulf of Mexico assets produced results that are about $9 million less than the same period last year.
However, new transmission pipeline projects added $29 million in incremental revenues for the quarter, including the Hillabee Phase 2 project that came into service in the second quarter of last year, the Southeastern Trails project that went into service during the fourth quarter of last year, and a portion of the Leidy South project that went into service in the fourth quarter of last year.
You can see this evidenced in the growth in our firm reserve capacity, which is up 5% from the first quarter of 2020. These revenue increases were almost entirely offset by lower Gulf of Mexico revenues due to some production 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 1 less billing day this year than last year given last year was a Leap Year, which, believe it or not, has a $6 million impact on our transmission revenues.
So, the reduced EBITDA results for this segment 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 to 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&P segment continues to come on strong, contributing $32 million of additional EBITDA this quarter. Collectively, total Northeast gathering volumes grew 920 MCF a day or about 11% this quarter versus the first quarter 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 at larger pads.
As a result, our EBITDA from equity method investments improved by little over $33 million, 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&P segment, it was up $44 million compared to the prior year. And remember, again that this excludes the $55 million net benefit from winter storm Uri.
So, of this $44 million improvement, commodity margins from our marketing activities contributed a big part of that improvement and they were up $52 million versus the first quarter of 2020. And again, this excludes the $74 million 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 a gain on that inventory.
The second relates to transfers of propane and other NGLs to higher netback markets, where we saw some real market differentials during the quarter and we are able to take advantage of that.
For example, the differentials between Conway and Mont Belvieu. Offsetting the higher commodity margins were lower profits from our JVs. We did see a $5 million JV benefit from winter storm Uri on our [indiscernible] JV.
So if you exclude that, our JVs were down about $8 million and that can be mostly attributed to OPPO, where One Oak 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 explain the variance in the West. Otherwise, lower revenues were offset by lower expenses. Revenues were down $14 million when you exclude a negative $23 million impact tied to winter storm Uri on West revenues and again, mostly that was in the Piceance related to net liquid margins. Volumes in the West were down 250 MCF a day or if you exclude winter storm Uri, about – they were down about 180 MCF a day, with most of that reduction in the Haynesville and the Eagle Ford, which of course I will remind you in the Eagle Ford, we are protected by MVC, so that doesn’t have a revenue impact.
So really, the biggest impact on revenues was the rate reduction in the Haynesville and a slight volume reduction at Haynesville. And I will remind you that we traded that rate reduction in the Haynesville in part for receiving the South Mansfield acreage from Chesapeake earlier this year.
Now again, offsetting the lower revenues were lower cost, including lower compression cost and no bad debt expense, where during the first quarter of 2020, we did reserve for the Wamsutter MVC that are now realizing those MVCs as part of the settlement with south [ph]. I will now turn the call back over to Alan to discuss several important investor focus areas and updates to our 2021 guidance. Alan?
Great. Well, thanks John. And here, moving on to the key investor focus areas on Slide 3, we are increasing the midpoint of our ‘21 EBITDA guidance range to $5.3 billion, which is up $100 million. 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 produced free cash flow after CapEx and dividends.
Regarding the balance sheet, our de-leveraging goal is now on an accelerated path as we have hit the target of 4.2 this quarter, which obviously is earlier than we had forecasted earlier and we are currently on positive watch 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 ‘22 and beyond.
So, next on the list here is a few thoughts about the Sequent acquisition.
As we announced last night, we recently reached an agreement to purchase Sequent Energy Management and Sequent Energy Canada from Southern Company Gas for a purchase price of $50 million, plus working capital at close. 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 have had in our strategic capabilities and something we needed to build for several years.
And so we are really excited to be taking this step to fulfill what’s been a strategic capability gap. The addition of Sequent, including its talented workforce and industry leading platform, complements the current geographic footprint of our core pipeline transportation and storage business.
For perspective, we handled 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 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 these in-demand supplies.
So, we are really excited to welcome the Sequent team to Williams later this summer. And finally, we don’t expect the acquisition to have any dramatic impact on our current mix of business nor a material impact for our ‘21 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 first quarter, placing our Southeastern Trail project into full service in early January and making great progress now on the Transco Leidy 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 are all learning more and more existing infrastructure is more important and more valuable than ever and the Brownfield nature of regional energy access 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 corridors 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&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 are thrilled to see continued expansion in that area. And finally, on sustainability here, we continue to focus on sustainable operations. And I will remind you that last year, Williams became the first 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% reduction in greenhouse gas emissions by 2030 as a part of our climate commitment, we are well in line with the Biden administration’s recently announced nationally determined contribution target of a 50% to 52% reduction by 2030.
So, we are really excited that we are actually ahead of that here in what’s been said as an aggressive goal for the country.
We will continue to leverage our natural gas focused strategy and today’s technology to focus on immediate opportunity to reduce emissions. 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 solutions. And on our near-term efforts, we are 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 have 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 to 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 the 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 a green hydrogen hub near our operations in Wyoming. The study will be presented to the Wyoming Energy Authority and it could be an initial step for Williams to better understand the working 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 there.
So that is perhaps something I don’t want to see people getting out over our skis on here. This is a step, and we certainly are going to make sure that we stay in front of these kind of opportunities, but we are a long way from making any kind of big investment decisions on that.
We also recently joined the Clean Hydrogen Future Coalition that was launched for advanced clean hydrogen as a key pathway 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 green technology incubator to support climate tech start-ups.
So in closing, I will reiterate that 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 Gulfstream, are in the right place and right markets. And by design, our formable gathering assets are in the low cost basins that will be called on to meet gas demand as it continues to grow.
As evidence, 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 first quarter. 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 assets are irreplaceable and critical infrastructure within the natural gas value chain, and the importance of this infrastructure was proven in our recent ability to navigate two substantial customer bankruptcies in a way that actually improve the value proposition in the Wamsutter and the Haynesville basin. This is a crystal clear example that even in the most dire circumstances, our long-term approach and careful contracting allows us to turn negative such as producer bankruptcies into net positives for Williams. We remain bullish on natural gas because we have recognized 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.
So with that, we thank you very much for joining us today, and I will open it up for your questions.
[Operator Instructions] Your first question comes from the line of Praneeth 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 curious if you could elaborate on those comments?
Yes. Mike, can you take that one, please?
Yes. Good morning.
We are looking at this asset and the footprint that it encompasses on our exiting right away and talking to our customers about opportunities that they have to either bring renewable natural gas into that pipeline system or utilization of solar facilities that they are contemplating and expect can possibly produce hydrogen and close proximity to the pipeline.
And so that’s really the comment that you are seeing there. It’s no exotic metals or anything of that nature in the pipeline system. It will be typical of any existing pipeline system that’s in the country to be able to accommodate a hydrogen blend, but it’s accommodating the ability of our customers that are participating in that project to bring forward in partnership with us potentially hydrogen sources into that pipeline system.
Great. And then just turning to the Northeast, you have got your new Oak Grove processing plant expansion up and running. How long do you think it will take to still 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 opportunity to kind of integrate the Blue Racer and your other systems in the Northeast to give yourselves some synergies there?
Yes. This is Michael. I will 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 pad developments they have there, exceeding their 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 first quarter, while we were finishing our TXP3 and our 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 approaching the limits of capacity. And I suspect through 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 transport some of those volumes over to them when they potentially have spare capacity. And that system can be utilized bi-directionally in the future to 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 could have online potentially this year, and it’s a very low cost project in comparison to building it either a new fractionation or processing facility.
Great. Thank you.
Your next question comes from the line of Christine Cho with Barclays.
I would like to start off with the guidance. If we adjust first quarter 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 is 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 Chandler. I will take that.
First of all, I would say there are a couple of other items in the first quarter beyond Winter Storm Uri I think you should think about.
So, let’s start with the 1 4, 1 5, which is what we made. Winter storm had a $77 million impact. We did make, I would call it, outsized NGL margins during the first quarter relative to some of this inventory valuation. And just to put a number on that, I think we made probably $30 million more than we would normally make in a quarter.
So if you remember in my commentary, I said we made $52 million more in NGL marketing activity outside of Winter Storm Uri. We usually make $20 million to $30 million a quarter.
And so if you back $77 million out, you back $30 million out for some outside NGL margins and then also, we did book an $11 million MVC accrual relative to Wamsutter. That once we close in the southern properties, we will be our own customer and we will be charging ourselves an MVC, and you take that out as well.
If you take those 3 numbers out, we are under $1.3 billion for the quarter. And if you normal – if you take that times 4, add those items back, you will get really close to our 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 million on the upstream; times 4, that’s $32 million, and we have guided to around 1% of our EBITDA for the year.
So there is certainly some uplift on the upstream, too.
So, I would say there is probably a little bit of conservatism in our number. I am not going to try to say there isn’t to that. But I think we obviously want to be sensitive to – if we have a tough hurricane season or other things. But I think you have got to take those 3 things out, you are going to get really close to guidance.
Our forecast remains very strong, and our business performance remains really strong for the remainder of the year.
Okay. Got it. That’s helpful. And then I wanted to kind of touch on the purchase of Sequent.
Your commentary to source responsible gas is notable.
So, wondering if you could talk about what this exactly entails, what you are thinking here. And then natural gas marketing was a business that was much bigger pre shale, and it’s gotten much smaller over the last decade. But with utility – I know that you guys mentioned LNG customers. But with the utilities coming out with net zero requirements as well and maybe more volatility to materialize in natural gas flows on a daily basis rather than what has historically been a seasonal basis, could you talk about what this might mean for pipeline be contracting 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 a big business. We touched a lot of gas, have a lot of customers that could use services like gas marketing, but we have been very limited in our approach to that.
And so the Sequent opportunity basically gave us an opportunity to buy a platform and a set of contracts and asset management contracts 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 the 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 benefit of capacity management and risk management as it relate – for utilities as it relates to what happened during a Winter Storm Uri certainly has – make sure the space is wide weight relative to the risk around this issue. And we think this – the team at Sequent 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 could really use the service. And as you say, it’s really kind of faded away as the 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 is clearly on the list right now as the new opportunity for us to market to. And we certainly have the assets, but we really don’t have all of those contacts with people. We talk to customers about long-term capacity on a regular basis.
We are not out readily talking to them about how we manage the volatility in their business.
And so this really gives us a great opportunity to do that and look forward.
So thanks for the question, and I would just say e are – it’s become more and more evident to us that this is something we needed to add to our capabilities at some of the changes that you pointed out has occurred.
Alan, if I could add to that as well. The upstream properties that we now own were potentially loan once were bankruptcy court approved to Southland transaction in the Wamsutter. The BP acreage in the Wamsutter and the Haynesville acreage now gives us the ability to market that natural gas that’s coming from those properties.
And so we are going to by the way to work with our new Sequent ownership, ultimately, when that closes, to find a way to take those supplies, brand them as low carbon or net zero and then market those to utilities and LNG facilities that Alan mentioned.
Got it. Very helpful. Thank you.
Your next question comes from the line of Jeremy Tonet with JPMorgan.
Hi, good morning.
Just want to see, I might have missed it here. But as far as the E&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 are well into negotiations with two different parties, one in the Wamsutter, one in the Haynesville. And they are both local producers with adjacent acreage and very skilled operators in the area.
And so we are 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, make sure that we haven’t handed the keys over to that until the cash has been invested to increase the drilling acreage.
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 flows.
So, that’s exactly what we are looking to accomplish. And I will tell you our team and Chad Zamarin, who has been leading that for us, has just done a fantastic job of really coming up with win-win solutions with parties. And we are really excited about the way that’s going to turn out for 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 for that.
So Chad, I don’t know if you have anything to add on that.
Just on timing, I would expect that we finalized those transactions over the next 30 days to 60 days.
We are pretty far along with – in both scenarios. And I think just to put an 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 will be acquiring will be structured in a way that will require development of the asset and drive volumes to our midstream and downstream efforts. 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 marketing and optimization takeaway.
So we think a really great outcome for us and our partners, but I would expect to see something in both the Wamsutter and Haynesville over the next 30 days to 60 days.
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 – to 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?
Chad, do you want to take that?
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 both pipelines and storage facilities in areas where there may be the opportunity to aggregate significant carbon emissions and provide capture and storage. It’s early days. Much like with hydrogen, I would say we are trying to set the table for us to be able to participate in those opportunities as they mature. I wouldn’t expect to see something material with on hydrogen in Wyoming. I wouldn’t expect to see something material from an investment perspective in the near-term. But I would tell you that if it’s a viable opportunity, which we think is very well may be, we are looking at some actual projects today, but they are long-term in nature. And we require, I would say, a year plus of just evaluation before we even think about what an investment might look like. But we have multiple different opportunities that we are looking at across the carbon storage – capture and storage opportunity set.
Great, that’s very helpful. Thank you.
Your next question comes from the line of Shneur Gershuni with UBS.
Hi. Good morning, everyone. Alan, thank you today for the uptick on capital allocation, I have two follow-up questions.
First, just to go back to the upstream related assets, in terms of the JV structure that you are going to be setting up, are you seeing any of the learnings from the executing process that you just went through in terms of restructuring, gathering contracts with these new assets sort of protect Williams in the future? And as part of that, do you see it – do you see yourself retaining the assets on a very long-term basis or do you sort of see eventually selling it down the road?
Shneur, we vaguely heard your question.
You are cutting out quite a bit. Can you please repeat that?
Just to repeat.
So with the upstream assets and the JVs that you are looking to pursue at this point right now, are you going to be designing the midstream contracts to take advantage of the learnings that you had through the bankruptcy process to make sure that you are protected in a 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, and especially with some of the outcomes from the Delaware bankruptcy courts as it relates to gathering and whether those contracts on 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 supportive. But importantly, it is the physical nature of the asset, and being all the way back to the wellhead, it 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 interests until that – until those capital dollars have been invested to prove to ourselves that, that money is going to be spent. If it doesn’t get spent, we still own the acreage. And whether money they spent in developing we retain and increase interest in a more developed property.
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 have a very strong financial position.
So in this case, we feel really good about the situation. But I would say that we’ve got belt and suspenders on in terms of the form of the structure that we’re seeing. That is if effectively bankruptcy proved given our continued holdings until the dollars have been invested to develop the acreage.
I think it’s important to emphasize Alan that we didn’t have a meaningful contract projection 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 asset and 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 is absolutely critical. And without it, the upstream asset can’t deliver value.
You can’t deliver volume.
And so we have a very strong position across our footprint.
I think we proved it last year, not a single bankruptcy proceeding led to a rejection of one of our contracts because 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 is, we are again very focused on structuring these transactions in 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 that we retain from a long-term perspective, but we will likely only hold the ownership interest as long as it takes to make sure that development gets back into the properties and drive 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 the development that we think will drive value to our midstream assets.
Well, 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 capabilities 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 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 Alan said this earlier, we have 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 look at a lot of different opportunities in this space. And the reason we got so comfortable with this transaction is Southern companies have done a fantastic job of really keeping the screws turn 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 sale. 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 to that team as well in terms of new opportunities to work around our customers and assets as well off of those services.
So it really – this is really, I think, attractive transaction between two companies that know each other well and done a lot of business together, and we’re really excited about bringing this team.
I think you got it, really simply it was a pipeline and storage optimization platform owned by a utility.
We are a pipeline and storage company. And we’ll now own a pipeline and storage optimization platform. This is not speculative marketing and trading. This is taking – understanding pipeline and storage fundamentals and optimizing infrastructure. And when you think about the areas that we’ve just left an era of expansion in construction, and we move 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 capabilities 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 Sequent team.
Perfect. Thank you very much for that. Appreciate the color and have a great day.
Your next question comes from the line of Tristan Richardson with Truist Securities.
Hi, good morning guys.
Just a question on capital in 2022, I think in prior calls, Alan emphasized 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 are the priorities for capital allocation.
Just wanted to get your views on that versus further de-levering 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 – look – 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 when you start down that road, obviously. But we certainly up until the time that we take a look at those investment opportunities against the whatever price of our stock is and where we think the best value is. But the good news is we’re sitting here in ‘22 with a modest amount of free cash flow that gives us flexibility, but as we get into ‘22, the – take rocket science to run math and realize that, that starts to build on us.
And so we will have quite a bit of opportunity there. And I wouldn’t say that we’re committed to making those emission reduction projects happen 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 with 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 ‘22 and beyond.
It’s helpful. And then just a quick follow-up, just with the activity you’re seeing on both G&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 2022 in both of the G&P businesses, where we sit today?
Well, I would say things are looking pretty favorable right now. I mean look the gas prices, NGL prices here through the summer months and starting to look out into the four markets. Certainly, the market is starting to put a call on gas in these areas, whether it’s the Northeast PA, the Southwest PA, the Utica or the Haynesville, they’re all well positioned to make pretty good margin in this kind of pricing environment that you’re seeing now almost $3 summer gas price.
So yes, if that continues, that will drive activity on those assets and will drive growth.
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, but 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 customers that drives those decisions.
And so they will start to look at what the forward 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. Thank you, Alan.
Your next question comes from the line of Alex Kania with Wolfe Research.
Hi. Good morning. Maybe just a follow-up on the Sequent questions, just looking back on Southern’s comments 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 has that might try to minimize some of the parental guarantees that might be required maybe relative to Southern? And the other one that’s just talking about overall, the volatility there, on average, about maybe $40 million of net income, I think, is what they said. But is there a – maybe a sense that you may be able to kind of make that more kind of stable and predictable under the kind of the broader platform that you have?
Well, yes, this is John Chandler.
First on the guarantees, I think you need to understand we guarantee a lot of our subsidiaries, too, and 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 billion 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 there was a guarantee in their subsidiary, just like we guaranteed one of our subsidiaries. That’s $400 million to $500 million of guarantees.
And so that number was a little bit flashy, but it’s not anything of substance. It’s not like 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 invest grade.
If you’re investment grade, you don’t have any requirements. But if you fall below investment grade, you have obligations, but they’re only 90 days.
So that’s a much smaller part of that guarantee.
So again, I would just say, really, $600 million to $700 million of that guarantee number that you may have heard Southern talk about, we are just simple monthly or quarterly guarantees – for monthly guarantees of their rate with very little risk, because there is really no changes to that. That’s just the normal course business activity. One thing we haven’t talked much about EBITDA generation. I mean we see a pretty consistent in their history – a pretty consistent, I think, Southern talked about this, EBITDA generation of $20 million to $30 million 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 million to $30 million 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 million to $30 million.
So hopefully, that answers your question. But there’s not huge credit exposure for us as a company other than the just normal ongoing business activities of Sequent.
Great. That was helpful. Thanks.
Your next question comes from the line of Gabriel Moreen with Mizuho.
Hey, good morning everyone. Most of my questions have been asked or answered. I’m just curious on the additional solar projects that were identified, just kind of where you think you are in the $400 million, I think, bogey that you put out there during the ESG Day? Does that – how much closer that takes you to that?
Yes. Yes. This is 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 advance beyond day 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 are 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 million of investment opportunities. We would expect and we have a goal for at least half of those projects to achieve what we’re considering FID this year. That – 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 strong line of sight to the kind of scale that we identified during our Investor Day.
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 quite 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 a – an expiration of that certificate that was upcoming.
And so through just the normal 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 that extension. And other than that, we’re not working with projects with the exception of having conversations with our customers at this time. We still think there is a great need for natural gas in that market. There is still a great opportunity to take fuel oil out of that market and improve the emissions profile in the Northeast. And we’re still ready to serve that market when the customer and or the regulatory jurisdictions see fit to allow us to do that.
But we have no capital allocated to the project at this time, just to be clear.
Got it. Thank you.
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 talked at the beginning that you’re beginning to review how to allocate capital given that you’ve reached your leverage target. Will you make that the capital allocation decisions or some type plan public maybe in 2022 when you finish that review?
Becca, I think it will probably just come out in, for instance, if we commit to emission reduction projects that drive our capital budget for ‘22 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 for buybacks of shares as another alternative.
So I think as we start to formulate our 2022 CapEx budget and our strategy sessions with the Board, which then rotate into budget meetings towards the end of the year, that’s really when we’ll be making the decisions on whether that money will go to investments in new CapEx or left those other two 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 capital investment.
Great. Thank you, that’s all I had.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating.
You may now disconnect.
Thank you, Amicus.
Thank you. Have a nice day.