Q3 2021 Williams Companies Inc Earnings Call
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Good day, everyone and welcome to the Williams third quarter 2021 earnings Conference call. Today's conference is being recorded at this time for opening remarks, and introduction I would like to turn the call over to Mr. Dan Nemo, Giovanni Vice President of Investor Relations. Please go ahead.
Thanks, Samir 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 Shanda will speak to this morning.
Also joining us on the call are Michael Dunn, our Chief operating Officer, Lynn Wilson, Our General Counsel and Chad Zimmerman Senior Vice President of corporate strategic development.
In our presentation materials, you'll find a disclaimer related to forward looking statements.
This disclaimer is important and integral to our remarks and you should review it.
Also included in the presentation materials are non-GAAP measures have been reconciled to generally accepted accounting principles.
And these reconciliation schedules appear at the back of today's presentation materials, so with that I'll turn it over to Alan Armstrong.
Great and thanks, Danilo and thanks to all of you for joining US today, we do have a lot of good news to share with you today, but let me just start by saying that our long term strategy of connecting the fastest growing natural gas markets with the best supply areas continues to deliver exceptional financial results as demonstrated by these higher than <unk>.
<unk> third quarter financials.
As John will walk through in just a moment, we achieved all time record results in the third quarter with our adjusted EBITDA up 12% compared to the same period last year driven by growth across all three of our major business segments.
Given our robust performance to date and continued strong fundamentals, we are raising our 2021 EBITDA guidance midpoint for the second time this year to a level that is now 8% above our realized 2020 results, which I'll remind you came in above expectations last year in a very challenging.
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Not only did we deliver more on our financial performance this quarter than we expected, but we continue to make strides in executing on key projects and transactions that give us a clear line of sight to sustained growth for many years to come and talk a little bit about that today.
But so but right now let me turn it over to John to provide you some insight into the drivers of this all time record quarter for Williams, John Thanks, Alan first of all I'll, just what an incredible quarter, we had at a very high level summary of the quarter benefited from nice increases in profitability from our northeast gathering systems and uplift in revenues on our Transco pipe.
<unk> from new projects had been put into service over the last year significant contributions from our upstream operations into one center and the benefit of higher commodity prices in our west segment.
Deposits were offset somewhat by slightly higher operating expenses, resulting from increased incentive compensation expenses reflective of the strong performance that is unfolding for the year.
And you can see that strong performance in our statistics on this page in fact once again, we saw improvements in all of our key financial metrics.
First our adjusted EBITDA for the quarter was up $153 million or 12% setting a new record and we've seen a 10% increase in EBITDA year to date, we will discuss EBITDA variances in more depth in a moment.
Adjusted EPS for the quarter increased seven cents, a share or 26%.
<unk> also grew significantly for the quarter up $217 million or 25% and <unk>. Our mind you is essentially cash from operations, including J D cash flows and excluding working capital fluctuations.
If you put our year to date <unk> of $3 billion up against capital investments year to date of $1 2 billion and dividends year to date of $1 5 billion you can see that we generated over $300 million of excess cash year to date.
Included in those capital investments I, just mentioned with $307 million of maintenance capital.
Also you can see our dividend coverage based on <unk> divided by dividend dividend is a healthy 217 times for the quarter.
This strong cash generation and strong EBITDA for the quarter, along with continued capital discipline has led to our exceeding our leverage metric goal, where we currently set at 4.04 times debt net debt to EBITDA youll.
You'll see later in our guidance update in the deck that we have moved our guidance for the year from where we were at less than four two times for the year now to around four times at year end, So really strong performance for the quarter and the year and the fundamentals are set up for a good fourth quarter and a very good 2022.
So now let's go to the next slide and digging a little deeper into our EBITDA results for the quarter.
Again waste performed very well, realizing 100 $153 million or 12% higher EBITDA, our upstream operations added $55 million of adjusted EBITDA. This quarter. This is almost entirely from the warm set or upstream acreage.
<unk> from the combined assets, mostly from warm center totaled 232 million Cfe a day for the quarter net to our ownership again, the haynesville upstream acreage, but has very little EBITDA given it has only a small amount of existing PDP reserves and therefore, it will take a little time before we see new production and therefore EBITDA coming from those.
Assets.
Our transmission in Gulf of Mexico assets produced results that were $8 million more than the same period last year.
New transmission pipeline projects added $24 million in revenue versus the third quarter of 2020, including the southeastern Trail project that went into service in the fourth quarter of last year and a portion of the Leidy South project that also went into service in the fourth quarter of last year and you can see this evidenced in the growth in our firm reserve capacity, which is up 4% from the third quarter of <unk>.
Last year.
Offsetting this somewhat was Gulf of Mexico revenues that were down due to incremental impacts from hurricane shut ins during the quarter from hurricane Ida in comparison to the hurricane impacts from the third quarter of last year. Just so you have a number there the incremental impact this year was a negative $5 million versus the third quarter of last year on hurricane impacts.
In addition, the transportation revenue increases were offset somewhat by a slight increase in operating expenses, mostly due to employee related expenses, a large part of which can be attributed to higher incentive compensation accruals.
The northeast G&P segment continues to come on strong contributing $46 million of additional EBITDA this quarter.
Collectively total northeast gathering gathering volumes grew 470 million a day or 5% this quarter versus the third quarter of 2020, while processing volumes grew 20% the.
The volume growth was predominantly at our joint ventures 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 pad.
And just to be clear because we do not operate blue racer midstream those volumes are not included in the volume statistics I just quoted.
As a result of these increased JV volumes, our EBITDA from equity method investments improved by $45 million, which also included the benefit of additional profits from Blue Blue racer Midstream again due to our additional ownership we acquired in mid November of last year.
Otherwise in the northeast higher revenues from higher processing volumes were offset by higher expenses again with a significant portion of those expenses being related to higher incentive compensation accruals.
Go to the west that segment improved by $48 million compared to prior year $35 million of this increase is related to higher commodity margins due to higher natural gas and higher NGL prices.
Otherwise the remainder of the uplift in EBITDA comes from lower operating costs due to lower maintenance fees and due to the absence of legal cost and small asset write offs that occurred in the third quarter of last year.
Revenues for the West were only up slightly compared to the same period last year. Another a number of big items that go opposite directions in revenues that I would like to point out first of all for example, remember that we lowered our gathering rates in the Haynesville. This year in return for undeveloped upstream acreage from Chesapeake in the South Banfield pet area.
The resulting gathering revenue decrease from this during this quarter was more than offset by rate increases in the Barnett and the piceance, where our gathering contracts allow us to participate in the upside when prices are higher.
Also last year, our partner on Overland pass pipeline was paying us a deficiency fee to allow them to pull volume off of oppo those deficiency deficiency fees do not exist this year.
However, the absence of those fees are being offset by fees from higher gathering volumes, otherwise and to that point overall gathering volumes in the west were up 1% with higher volumes in the haynesville in the piceance being offset somewhat by lower volumes and the warm setter in the Barnett.
And then finally, the secret segment produced near flat adjusted EBITDA for the quarter secret traditionally makes a significant portion of its profit in the first couple of quarters of the year and the heart of the winter season, and therefore did not realize profit for the quarter.
<unk> does have significant portion of their transport transportation capacity hedged with basis swaps as well as our storage inventory hedged with Nymex positions, which of course led to the large $277 million unrealized mark to market loss on those hedges this quarter as prices increased and as basis differentials widened in some markets.
This of course means that the intrinsic value of our storage and transportation positions have gone up significantly as well and again youll see a significant portion of that value realized in the first half of 2022.
So now to go to the year to date results.
Year to date results showed strong growth of $383 million or 10% and adjusted EBITDA.
Many profitable things that are happening across all of our segments first I'd point to winter storm, Yuri which added $55 million in profits to the west and it contributed $22 million of Intercontinental profits to our upstream results.
In addition, our upstream operations otherwise have added an additional $83 million year to date almost entirely from the warm center properties.
Our transmission in Gulf of Mexico assets are up $30 million or 2% better with the increase is being driven largely by additional transmission revenues from new projects that have been put into service and incremental revenues from Gulf of Mexico assets, largely due to lower downtime this year versus last year. These.
These positives were partially offset by lower revenues due to a transco rate case declined following the rate case final settlement in mid 2020 related to just a few markets and as a reminder, a majority of our transfer rates actually increased in 2019.
In addition expenses are higher this year year to date due to higher incentive compensation expenses, resulting again from our strong performance.
The northeast G&P is up $124 million for the year almost entirely driven by profits from our JV investments again, namely from the Bradford supply hub gathering systems, and our Marcellus South gathering systems. In addition, we benefited from increased ownership in Blue racer midstream.
In total gathering volumes for the northeast are up 8% over the third quarter of last year, while processing volumes are up 22%.
And then in the west or West G&P is up $71 million and this was on top of the $55 million that we earned from winter Storm Europe. The $71 million increase was driven by higher commodity margins higher gathering rates in the Barnett and Piceance, where we participate in the commodity upside and lower operating cost. These positives were offset somewhat by lower deferred revenue in the barn.
Net lower Haynesville gathering rates, which again were exchanged for upstream acreage and lower overland pass pipeline profits from lower actual volume shipped and the elimination of the deficiency payments that we were receiving in 2020.
And while we did see a 4% gathering volume decline year to date in the west that was mostly offset by minimum volume commitment payments.
Again, this is stacking up to be an incredible year for us.
The thing I do want to point out we did pick up in some of the narratives from some of the analysts last night the view that our operating cost increased we did ourselves a bit of a disservice by not providing more information on our other operating segment, where our E&P upstream operations reside actually if you look on the face of our financial statements. Our operating expenses went up 73 million.
$12 million that came from sequent to battle a covered most of that.
Their profits.
E&P went up $51 million on cost but of course, they are making significant EBITDA for the coming that their revenues.
And then the rest was related to bonus expenses. So our expenses actually so when you extract sequent and E&P.
And the bonus costs are actually down otherwise. So we actually are not seeing a significant or seeing expense increases and the fact that the contracts through other than the bonus related expenses, So I thought I'd clear that.
I'll now turn the call back over to Alan to cover a number of key investor focus areas Allen great well, Thanks, John and I will move on here to slide four.
During key investor focus areas.
Our natural gas focused strategy is delivering even better results than we expected in this high commodity price environment demand for natural gas during the third quarter was surprisingly inelastic against this higher than expected pricing environment and while we would prefer a more moderate net natural gas prices for our business over the long haul.
All the recent demand resilience highlights the near and long term role that natural gas will play as a complement to growing demand for renewable energy and emission reduction in general.
The past 18 months have demonstrated the benefit of our high quality portfolio of contracts.
Which we have thoughtfully built a business that is durable in the down cycles, but exposed to upside potential when it is available. This quarter's results show how meaningful that upside could be even after excluding our upstream results.
Along these lines. We also have contracted our business over the years to be protected from inflationary environment, and we see additional upside potential in our G&P businesses due to contract terms that adjust our rates for inflation.
In short our business and its contractual portfolios are setup with a long term investor in mind and are positioned to thrive through these cycles.
So looking at our financial strength and focus on long term shareholder value here, we are increasing our 'twenty one financial guidance for the second time this year as we've mentioned.
With our EBITDA midpoint now residing at 555 billion and that is 8% higher than last year's strong $5 $105 billion of EBITDA.
And of course that was.
Feat by itself in the environment that we're in so we're really excited to show our durability in the down cycle and our exposure here on the positive side as well coming through.
And while the past few years have been characterized by lower commodity prices and reduced producer customer activity. Among other challenges our updated 21, EBITDA and EPS guidance.
The midpoint translate into a three year CAGR of 6% on the EBITDA and 17% on the EPS. So a three year CAGR on our EPS now at 17%.
Point.
And of course, this is proving up our ability to produce reliable and growing earnings under a variety of market conditions.
Our financial results in 'twenty, one continues to Derisk, our balance sheet, which is now at about four point of leverage now also of note. We recently issued one in a quarter billion of 10 year and 30 year bonds at the most attractive interest rates ever issued here at Williams.
This is significant because we are now positioned to allocate capital to a variety of options that will provide compounding value to our long term shareholders to this end we've continued to grow our stable quarterly dividend to our investors and remain steadfast in maintaining the long term security of the dividend and both.
Recently, we unveiled our long term capital allocation priorities, including a $1 5 billion opportunistic share repurchase program that has the potential to enhance shareholder returns beyond the dividend and perhaps most unique to Williams as we think about capital allocation is the option we have to grow.
Dependable learning by investing in the modernization of our regulated transmission systems, which will both grow earnings and as well to reduce emissions across our footprint.
Next here looking at growth.
From a project execution point, we continue to deliver on multiple fronts, including bringing online key projects such as Leidy, South, which we are targeting to bring into full service earlier than projected and importantly, before the winter heating season.
And while projects such as <unk> remain in the execution phase, we continue to receive interest and demand pull projects on Transco system.
Our two recently announced mid Atlantic expansions will add a little more than 500 million a day of capacity on the system and in the coming weeks, we expect to secure a precedent agreement for another system expansion, bringing a total of three incremental expansion projects on Transco just here in the latter half of 'twenty one.
Our natural gas fundamentals are not only supportive of our transmission assets, but also our G&P business and.
And our gathering volumes continue to grow at a rate of nearly 10 times the lower 48 U S gas production volume. This of course was led by the Marcellus growth growth, where we are also running a rate that is almost double that of our competitors and you can see.
The layout of that and some slides we put an index.
With projects like Leidy, South and RDA, providing takeaway out of the basin, we expect our gathering volumes in the northeast northeast story can remain resilient in fact, we expect to announce the system expansion in the basin soon underscoring that we don't see takeaway constraints in the near term return to volume growth in our system.
They're in our northeast gathering area.
And finally on sustainability as we think about sustainability, both today and into the future our highly reliable natural gas infrastructure is extremely well positioned to continue replacing higher carbon fuels, while supporting the growth of renewable energy and responsibly sourced natural gas for LNG export.
We are looking forward and anticipating future innovations and technologies that we can use on our key energy networks to deliver on our country's clean energy future.
And to this end, we are pursuing emerging opportunities like our hydrogen hub near our assets in southwestern Wyoming and are evaluating a large scale co development of wind energy electrolysis and synthetic gas methanation and the state and the state of Wyoming as part of our recently announced Mou with <unk>.
First it.
Our solar initiative continues to move forward as we now advance the execution of now 12 projects.
Our systems and those are as we've mentioned before large solar array that will provide.
Our four are fairly large loads on our compressed.
Processing facilities.
Now looking at our renewable natural gas effort, we set a 2021 goal of adding an incremental 5 million a day of renewable natural gas and we now expect to exceed that goal. We recently signed an interconnect that should enable up to 10 million cubic feet per day of a new source of <unk>.
RMG supply, bringing our entire R&D portfolio close to 25 million cubic feet per day with in service dates in the 'twenty two 'twenty three time frame. So a lot going on on that front. He is doing a great job of making sure that we're capturing opportunities in and around our assets there.
We do remain steadfast in the view that natural gas will play a role in the world's clean energy future and our latest efforts to advance responsibly sourced gas through the value chain will provide transparency on the sustainability of our operations and helped to solidify the role of natural gas and reducing emissions.
We're also pursuing sustainable investment opportunities and are pleased to be partnering on two strategies with energy impact partners and investment firm that makes venture and growth investments in companies that are optimizing energy consumption and improving sustainable energy Williams is among the first midstream <unk>.
<unk> in the platform and we're expecting to facilitate diverse investment opportunities that reduce emissions and advance our ESG goals.
Finally, our ongoing focus on sustainable operations continues to deliver strong results that are being recognized by our key rating agencies in this space William sits in the top quartile for our industry with rankings that reflect the dedication of our team towards doing the right thing from an ESG perspective.
So we're hearing closing a lot of really positive things to report on this quarter demonstrating that our intense focus on natural gas based strategy has built a business that is steady and predictable with continued growth improving returns and significant free cash flows.
This has translated into a strong balance sheet and are well covered and growing dividend and our best in class long haul pipes like Transco northwest pipeline and Gulfstream are in the right place and in the right markets.
And by design, our formidable gathering assets are in the low cost basins that will be called on to meet gas demand as it continues to grow.
The triple punch of benefits provided by American source natural gas, but not be understated as we work to accelerate our clean energy future around the world.
As we work to balance sustainability and climate goals with growing energy demand and natural gas will remain a key component of the fuel mix and should be prioritized as renewables complement to more aggressively displace more carbon intensive fuels around the world.
Natural gas does provide a right here right now emissions reduction solution that is economically viable and can keep industry and manufacturing here at home.
The transmission and storage networks are extremely well positioned to aggregate and bring scale to multiple emission reduction opportunities taking out higher carbon fuels, while supporting renewable energy in emerging opportunities like hydrogen and carbon capture.
So in closing we produce tremendous <unk> results, but more importantly, we have an unmatched platform to continue to deliver growth and lower emissions at the same time, we look forward to helping our customers and stakeholders to meet their goals.
<unk> mentally and financially sustainable manner and with that I'll open it up for your questions.
Thank you we will now begin the question and answer session to ask a question you will need to press star one on your telephone.
Sorry, your question press the pound or has key please standby, while we compare the Q&A roster.
Your first question comes from the line of Jeremy Tonet with Jpmorgan. Your line is open.
Hi, good morning.
Hey, good morning, Jeremy.
Just wanted to kind of touch on the strong results this quarter and how we should think about that going forward. If I look at the guidance raise it doesn't necessarily seen that.
The benefits that materialized in <unk> fully.
Translate into <unk> and so just wondering how much of this is sustainable how much growth is.
Is this a level that can be built off of into 2022, EBITDA just trying to get a sense for what's recurring here and the strength this quarter.
Yes, Jeremy Thanks for the Great question, maybe just speaking to few plus and minuses from <unk>.
<unk> Q1.
One of those that you that you heard John mentioned is we did take an accrual.
For bonuses for the year in both on our long term incentive comp as well and I see a lot of people were adjusting that out of their EBITDA, we don't adjust that out of our EBITDA. So.
Long term incentive comp.
And we did take some accruals from that as well as our annual bonus, which obviously with this kind of performance we'll be paying now.
And so those that was a hit to the quarter.
That would be on the other side of that we had about $44 million I believe of pricing increase on our Ngls and inventory and so to the degree that that does increase again that would offset against that.
Positively is that shows up in the quarter. So that's kind of.
Non operational issues, if you will have to price the inventory up to the degree that NGL prices don't move again and that wouldn't show up.
That's a couple of.
One positive one negative.
I'd just say we will.
Pay attention to the forward strip and we think about.
When we think about our forecast and in our guidance and obviously.
Those are backward dated.
As we sit here and so our expectations would be the same.
Moving forward as it relates to the E&P business.
I will say that.
<unk>.
Not a huge driver of our business, obviously, it's pretty measured as you can see it will become larger in 'twenty two as we start as the haynesville start to develop that would be a net positive, but where we will build larger sensitivity to gas prices in 'twenty. Two is the haynesville starts.
The developed so I would just say we're we know this was a good quarter in terms of pricing in and we're not going to build.
Build our business in a way that it is just sustained off of high commodity prices.
And that's hopefully evident in how we forecast our business as well so.
Nice to take the winnings that when they come to us but.
We're not going to forecast our business around that obviously if prices do stay high then.
<unk> certainly seen the rewards.
And Jeremy just as it relates to this year's guidance, obviously I think by our May choose probably now we're somewhat conservative on how we did.
Two things so that's probably.
A bit of that is embedded there, but also we left ourselves some flexibility as it relates to the fourth quarter. If we wanted to accelerate for example gifts to our foundation.
Our strong results gives us flexibility to do some things like that that would be expenses, we would otherwise incur next year the year after and so we do have some flexibility and some capacity to do things like that.
Got it.
Moving along here I guess next question I have is in the build back.
Better deal here, just wondering what implications you see for your business here. It seems like it could be different things that 45, <unk> being higher.
Other energy transition initiatives and the bill and at the same time, 50% minimum tax I'm. Just wondering if you could walk us through some of the pluses and minuses that GT.
Passed as written and how it would impact WMD.
Yes.
Certainly we would keep our eyes on the alternative minimum tax and I'll, let John speak to that.
I think as it relates to.
<unk>.
Things like increasing to 45, SKU amount, obviously that would be positive for us, particularly as we think about utilizing our infrastructure.
For carbon capture and in places like the Gulf Coast, where we have a pretty sizeable.
Footprint that extends out to some of those water drive reservoir.
Key targets.
Four.
Carbon sequestration so.
Lots of positives I think in that area on the methane emissions issue, we are really encouraging that to be done in a way that rewards those who reduce methane emissions. We think we think it's smart to.
Continue to put focus on methane emissions reductions and we're extremely well positioned for that but we would much prefer one that rewards the good actors in that and not just a pure task, but one that.
Those that have been working to reduce our emissions and we think we stand out.
In that regard and we think that would be a net positive for us positioned that way obviously.
That makes sense when you are talking about the lowest.
Carbon content hydrocarbon.
It seemed a little bit odd that you would put a pure tax on that when it has such an ability to help produce.
Emissions around the world So.
So we're hopeful that we'll get to why is placed on that right.
We think that actually could be positioned in a way that could be somewhat of a positive for us. So.
We would look forward to that so I think thats I don't know chatter, yes, Terry this is Chad.
That note on the hydrogen front the hydrogen incentives currently drafted would be.
A good complement to our current strategy. So we've been working closely.
On that front.
That would be supportive as well as our.
It's supportive of our goals on that.
Go ahead, Jeff.
As it relates just as it relates to the alternative minimum tax here, there's still a lot left to be discovered there I would tell you I think on balance obviously, we prefer a lower corporate tax rate and an alternative minimum tax and the inverse A&P is just timing of cash tax payments higher tax rates forever permanent so.
That's where we land with A&P, that's not terrible for US. The question is going to really be around that NOL usage against and so under the old tax scheme, and we had an alternative minimum tax before you could take up to 80% of your Nols against your income for the alternative minimum tax calculation that is not clear in the current legislation.
Thought about it we've seen let's say, we could take 50% or take 50% of our income out.
Usage of our Nols that.
That alternative minimum tax.
That would be not not that sizable force, we'd probably be able to coupled with excess cash flow. So that's how we look at it now but just to be clear there is still a lot of questions around.
The usage of its Nols.
Going forward can you use 50%, 80% or use them at all and so that's still yet to be understood.
Okay.
It just it just.
There is an additional factor we're carrying four 4 billion.
Net operating of the Nols.
Understood. Thank you.
Your next question comes from the line of Christine Cho with Barclays. Your line is open.
Thank you good morning.
Maybe what the outperformance this year and lots of tracking below your target.
How should we think about the execution of the buyback that you announced a couple of months ago.
Yes, Christine. Thank you for your question or kind of expected we would get that.
And I would just say that we've been pretty clear about how we're thinking about that entity as a.
A multiple of the cost of our 10 year debt cost in the market currently and your debt cost and so.
You can see that that spread with price actually kind of why did widen.
And so that.
That yield.
We need to go down there.
Multiple peer.
Since we announced the buyback.
But I would say as we as we don't make investment in that or if we continue to invest in earnings.
Either one of those will continue to drive our credit metrics to more positive place, which will drive down to 10 year debt, which then will.
Improved price on that or that would lower the yield at which we would invest in so I think it's pretty natural in terms of how that will occur.
Moneys.
Flowing in a way that is improving our credit metrics you would expect our 10 year.
Right to continue to improve which will continue to lower the yield and eventually we would had appointed.
Buying back, but we certainly stand ready.
And if that.
Price moves of that zone.
Be anxious to be taking advantage of that if that occurs so.
Nothing has really changed from our perspective on that other than the fact that our.
A free cash flow continues to expand.
To accelerate but other than that nothing's really changed here.
Since we announce them.
And.
You would be okay, with just having your leverage trend below four times is the.
The opportunity to buy back stock can present itself.
That's right and I would just say, though as we've mentioned before obviously the one kind of unique option. We have is continued investment in the rate base in a way that modernizes and reduced submissions on our system and so.
That's it that's not.
<unk>.
A hair trigger so to speak because we have to plan for that.
Sure.
And.
That's the permitting process that we don't snap your fingers at so that's something that takes time, but thats, obviously in other places that mining more flow.
Through our capital allocation process.
So that actually was my follow up question around the modernization program can you just remind us how this works how much you're spending per year. The return cap quickly you can earn on the stand and then I guess just sort of as you mentioned.
What kind of regulatory process, we're looking at.
Yes, Hi, Christine it's Michael.
Working on both fronts with northwest pipeline customers as well as transco customers and working to enact a tracker.
We can get to a position with them and if we can't we would go through our normal rate case process to seek recovery.
Of those emissions reduction projects.
We believe we've got north of about $2 billion or so that we can invest between both northwest.
Transco on those projects and that could be a very long term program in over maybe six years or so.
So if you start doing the math on that that's $3 million to $500 million a year potentially that we can deploy there depending on the spend profile and how many projects we want to take on at a time.
And if you don't come to that getting agreement with your customers.
Would you have to recover it through a rate case or is there something.
Yes.
No we would have to go through the rate case process.
Thats, obviously, one of the reasons why we would like to have a tracker to accelerate that recovery.
Not have to go through the thrash of a rate case.
The disruption that occurs well with the customer base there.
We're prepared to do that if we need to but we would certainly like to do it through a tracker mechanism very similar to what many of our customers are doing in their jurisdictions.
And the returns.
Returns would be very similar to what our regulated returns would be on either transco and northwest pipeline.
Those rate case outcomes are known.
Great. Thank you.
And Kristina I would just add there just to remind folks on when we do file a rate case, we still we do go ahead and raise our rates, we don't have to wait for the settlement.
In rate case, once we file those rate so.
As Youll recall that we hold that in reserve, sometimes spending that we do have.
Okay.
Authorities go ahead.
Great.
Alright, thank you.
Your next.
<unk> comes from the line of <unk> <unk> with UBS. Your line is open.
Hi, good morning, guys.
It's Carolyn.
To start off a little bit here you had a strong performance last year's strong performance this year or.
Heading into the end of the year you should be based on your guidance.
<unk> had a growth target kind of in the 5% to 7% range.
Kind of a question I have is just.
The performance in its share kind of takeaway from next year, but at the same time, you've announced several mid Atlantic projects, you intimated that theres, another one potentially coming.
In your prepared remarks I was just wondering if you can share some detail about the return expectations of these new projects.
And are they high enough to to help drive growth forward.
Is there a backlog of more of these projects that we can see more announced overtime.
Yes, shneur. Thank you first to the projects I would just say our our returns generally continue to improve.
And one of its kind of been as we've said many times, it's kind of a double edged sword about the difficulty of building projects.
It certainly has.
Been detrimental to the country and the industry overall.
But to the degree that you are the incumbent with pipe in place and you can expand those via brownfield is effectively expand here return opportunity in that regard so.
So I would just say that.
The returns in general not Senate, they always will be that way, but in general these returns that for these.
The mid Atlantic projects that were mentioned or at least as good as Atlantic Sunrise was better.
The way to think about that.
That.
Return projects as well.
And the question of how many you have and we keep the slide up David in there about the number of projects in development in our appendix and it always looks like it's the same old slides, but in reality there were moving projects from development into execution and we have new projects.
Following in there that are keeping pipeline very full so I would just tell you that we don't see much backing off in the way of opportunity.
For expansions of our transmission systems.
And with that obviously will flow gas.
Gas from the low cost producing areas and we're well positioned to capture that on the gathering side as well so despite what.
You might think.
When you listen to the media and the rhetoric is certainly not showing up in peoples.
Reluctance to make long term commitments to our transmission systems.
For supplies that they know they're going to need.
Whether thats the backup renewables or whether it is baseload.
Okay.
People people.
And our customers certainly understand that it takes time to build these projects and then it takes a long term commitment to build and that's what we'll continue to see.
That's great really appreciate the color there.
Maybe if we can return to the return of capital priorities.
Any response to Christine's question I think you were fairly clear.
In terms of if you were looking for the opportunities to execute but at the same time your balance sheet is obviously doing better than expected.
There is a priority over growth kind of how.
We discussed on the last question here, just kind of curious if one of the other arrows in the quiver shall we say.
Would be around the dividend is there any thoughts around.
A dividend step up.
Or specials or is there a dividend payout ratio that we should be thinking about as part of Europe.
Return of capital strategy.
Yes.
Say never but I would say right now we intend to continue to maintain that.
Steady growth and continue to maintain the growth of our business, that's commensurate with our cash flow growth.
So and obviously to continue to maintain that high level of coverage.
Of the dividends. So don't don't expect we don't expect anything special that we did.
Some kind of.
Asset sale and by the way don't run off with that one because there is no intent behind that.
Was something special or some kind of structure that that delivered a bunch of cash that we would consider that but right now there is.
I think you should just expect steady growth in our dividend.
That's well covered and very durable.
We think this is the kind of business, we build for the long term durable business as I think we've proven out.
And we think that our yield on our dividend.
I need to trade down.
<unk> and the growth in our dividend and I think.
Pretty hard.
Dividend to compete but frankly, given the security of the growth minute by both utility sector and within our peer group and we think eventually will be rewarded.
So all else equal buybacks is probably the preferred equity at this point if you.
Industrial transaction.
Well again, I mean, we've laid out the options the market will tell us whether we need to buy back shares because it is presenting an opportunity or not.
If it presents itself, we'll be all over it.
If it does the value will continue to generate through these other models.
Perfect. Thank you very much really appreciate the color today.
Okay.
Your next question comes from the line of for need expertise with Wells Fargo. Your line is open.
Thanks. Good luck you touched on this earlier, but if we assume the bite into administration passage of regulations.
What exactly could that mean here. So I guess, how further ahead our unit than peers and do you think that helped you win new customers or pull volumes from competitors.
Yes, I don't know exactly where we stand up against peers, I know, where we stand on the one future measures and we're almost orders of magnitude lower than what's required for our elements of the sector. So again that <unk> future is a 1% all the way from.
The E&P space, all the way through the LDC.
<unk>.
Burner tips.
And so we're we're excited to be a part of that but there is a certain percentage of that 1% that's allocated to our sectors of the business and in those cases, we are way below and as I said orders of magnitude below that so we think we stand well, but we really don't we don't know.
Exactly where other competitors might expand on that.
And therefore, what kind of advantage might flow through but I do believe.
That we need good.
Honest reliable operators in this space that are going to be focused on methane emissions reductions.
Ernest <unk> back with EBIT Secretary of energy really made it clear to the gas industry that Hey, I Love. This industry I think it has a lot to offer from an emissions reduction standpoint, but you guys have got to get to your methane emissions that's going to be your <unk>.
If you don't if you don't go after this and so we've been on a mission to reduce that I think we're extremely well positioned if the methane emissions our position drive.
And then frankly think it's a real positive to make sure that we're reducing flaring, we're reducing emissions and voc's from tanks in the field I think all these things are very positive for our industry and we certainly intend to continue to be a leader in that space.
Got it and I'm wondering if you could just give us a sense of how large the projects are that youre working on with with our stat as part of that.
JV or Mou, either on a tons per day basis or absolute dollar cost basis, just trying to get a sense of how big the projects are and then just tied to that.
If the if the hydrogen subsidies that are part of the reconciliation bill passed would that accelerate your hydrogen development plans.
Yes, Hey, this is Chad thanks for the question.
Maybe starting with your last question, yes, the incentives will be supportive of it accelerating project opportunities.
As we've discussed hydrogen.
Without an incentive structure and really needs an incentive structure to help support getting projects jumpstarted.
And I would also say that it is still early days on the hydrogen front.
We're at.
Yeah.
The pilot stage.
I would characterize project opportunities, but as far as our ambition.
If things prove out as costs continue to come down, which we expected would.
The incentives get passed.
In Wyoming for example, aylwin talked about the potential to develop an energy hub in Wyoming in partnership with <unk> and others.
You can envision a very large.
Wind power production facility.
To 500 megawatts, if not larger theres, a tremendous wind resource in Wyoming that hasnt been fully developed.
Not.
Easy to build electric infrastructure to deliver that power to markets outside Wyoming, we have pipeline infrastructure that can deliver that energy to other parts of the country. So we can build a very substantial wind power generation platform tied to <unk>.
Several hundred megawatts of hydrogen production that we can move through we believe we can move through our existing infrastructure to customers across our footprint. So those are those are big ambition and I would tell you again, it's very early innings, but.
The pieces are coming together and we're <unk>.
Hopefully, we're going to we're going to start by crawling before we walk in and put some projects online that I think will demonstrate the feasibility but that gives you. Just one example of where we're looking at others across our footprint, but that's one example of where we think we can get to scale.
Great. Thank you.
Your next question comes from the line of Spiro <unk> with Credit Suisse. Your line is open.
Hey, good morning team.
First question just on inflation come from two different angles first just curious if you guys are seeing or do you expect to see any sort of impact on the cost side and then alternatively imagine allow your contracts, especially on the E&P side.
Probably have some sort of escalators in there tied to CPI or PPI. So curious how should we think about any sort of upward pressure on fees as we head into next year in this environment.
Hi, Good morning, this is Michael.
We are watching the supply chain issue than the inflation issues very closely we got in front of the supply chain concerns early on with treating chemical and lube and things of that nature to make sure that we have what we need to operate the business.
And as you would expect we are seeing price increases fuel diesel gasoline prices are up.
Small component of what our overall expenses are in the business and we could like it can be managed appropriately.
As you mentioned the bulk of our gathering and processing agreements do have escalators in them that we're protected there on the gathering and processing side.
And on the transmission side, we could obviously take advantage of rate cases, if we need to but we've done a really good job managing our costs for several years now.
So we've been in very good shape for a number of years in managing that and I suspect. Our teams will continue to do a great job of that going forward here.
Advantage of opportunities, where we can to control our costs, but we will see some increased cost.
And there's no doubt about that.
The escalators that we have there is various escalators that we used in the gathering and processing agreement.
I believe it would definitely cover of the expense increases that we'll see.
Got it thanks for that color Mike second question, just switching gears slightly to the Permian I know you are all focused on gas basins and Thats certainly serve you well.
And at one point, you had sort of.
Considered blue bought it as sort of a pipeline out of the basin and obviously I think we're seeing that base and tighten a lot faster than we all expected with some of your peers talking about another pipeline potentially as early as 2024. So just curious on any interest levels in the Permian in general and how Youre thinking about bluebonnet and your competitive nature there.
Yes.
Certainly positioned ourselves where well there to take part.
And projects that come up and I would just failure so far.
We like the.
Risk mitigation that we get out of the kind of projects that we do which are more market oriented and not 710 year kind of contracts that are existing basis differential pipeline that once that basis differential slides.
Come out of the money there is a number of pipelines in the market.
<unk> already been written down or struggling.
Subscription not yet in the Permian, but so I would just say.
It's always.
Issue.
Risk adjusted return and those are.
Risks on the vacuum of pipeline that are using it more on the front end, but market nor on the backend.
And we think about our business on a very long term sustainable basis, so tend to drive us towards longer term contracts and ones that we know that.
He will be here and there for the transportation for the long haul so so.
Telling you that we won't be looking to take part, but the returns with certain efficacy better than our other projects within our capital stack.
This strategy and we have been expanding the capability for Transco.
Receipt volumes from the Permian.
Think about our project strategy.
Look at the projects that have been approved projects.
Connect directly to the demand and that is a very.
Strong.
Sustainable strategy as Alan mentioned typically the demand contracts are very long tenure and.
We will keep an eye on Herman you mentioned unless we can tie those projects are long term contracts for the demand that we know will be sustainable.
Then we will probably look towards other parts of the system.
Fits that bill.
Got it I appreciate the color guys and John Congrats on your upcoming retirement.
Thanks.
Your next question comes from the line of Colton Bean with Tudor Pickering Holt Your line is open.
Good morning.
Circling back briefly on the Wyoming energy hub is that an area, where Williams would look to own a stake in the wind and electrolysis facilities would you prefer to lease the surface acreage source that and then participate further downstream on the transportation side.
Yes, I think.
We're evaluating a lot of different possibilities I mean, clearly we're going to focus on where we have strength and capabilities in strategic advantage in.
The strategy there is to demonstrate that our infrastructure can be a part of the energy systems for not just for the next 10 20 years, but for the next 100 years. So.
Going to stick to what we're good at we're going to partner with really strong.
Capable partners like horse dead, and others and so I think we'll we certainly think we have a very unique set of skills and infrastructure to make these projects possible. So we're going to want to make sure that we participate where it makes sense, but I would say, it's a little bit early on.
To.
To understand exactly where we're going to be putting our investments.
And so clearly in Europe that announcements, we're not going to we're not a wind power company we're not.
And electrolysis company, and we're going to need technology providers to work with us whether or not we invest in those parts of the value chain I think we will and prepared to do that.
Smart place to invest and what we're doing on the solar front, it's what we're doing in certain R&D opportunities, but it's still pretty early on to figure out how all those pieces coming together, but we're constantly evaluating that.
Got it and then just briefly in the west it looks like NGL transportation volumes stepped up a bit more than <unk>.
NGL production are you seeing a rebound in volumes coming into overland pass from the north or anything else to point to you today.
Yes, well we are seeing.
Production increases from our from our assets out there.
Not going to talk too much about third party coming in there, but we are seeing some really good uplift from our processing plants in ethane recovery.
That's been off and on throughout the summer.
Coming into the fall here, so we're seeing an opportunity to bring in additional ethane into the systems as well.
And we were able in the Wyoming area, even though this should have showed up.
Production volumes coming out on the Ctrip I think it's always good thing to pay attention to the Ctrip plus volumes because obviously the ethane comes in and out based on pricing.
C III plus as kind of a better indicator.
What's available.
On a regular basis, but I would say that Patrick draw facility.
In Wyoming that we picked up earlier in the year.
Which was an adjacent plant to Echo Springs shut down and we were able to pick those volumes and those volumes came directly in to our system as well.
And so we also picked up some volumes off a competitor pipeline there during the bankruptcy process in south London, So those volumes flowed into us as well so they're at Echo Springs of our warm center facility.
We've been able to pick up the equity volumes that are coming to us. So some of that equity would've gotten produced some of it would have gone on a competitor pipeline all of that is now coming into our pipeline.
Some of that pickup here soon.
I appreciate that.
Your next question comes from the line of Chase.
<unk> with Bofa Your line is open.
Hey, good morning, everybody.
I guess yeah.
You spoke.
If we about responsible source natural gas during the prepared remarks, but just a quick follow up here.
And like to ask if you're seeing kind of more interest from.
LNG liquefaction operators are really kind of more interest from utility customers.
And then.
I guess, if you look at it.
And responsibly sourced natural gas like what's really the constraint.
We're seeing kind of quicker.
Market adoption of responsibly sourced natural gas.
Yeah, Hey, this is Chad thanks for the question.
What I would say is that we are seeing strong interest from both.
LNG off takers and utility customers and we have a wellhead to water in a wellhead to burner tip strategy with respect to responsibly source gap we haven't.
And extremely explicit on our plans in this area because we've been working very hard and locked down mentioned to have a very credible solution in place.
And I would tell you that we're clearly seeing a need in the marketplace to demonstrate not only within our footprint, but to work with our upstream partners and to work with our downstream customers to really track the full lifecycle emissions footprint.
The GAAP that flows through our systems and so we will be announcing several solutions that we are going to be.
Focused on delivering for our customers we have been in discussions with several of our customers, where we think we can marry the solutions that we're developing with our producing partners efforts as well as our LNG customers in our utility customers and we want to be able to shine a very credible.
On the emissions footprint of the products that we move the gas that we moved versus and then show how we are going to drive down those admissions overtime and just circling back to Alan's comments also the Transco system is the largest most flexible pipeline system in the United States, we have the benefit of having multiple.
The lines in our right of way, we can do a lot with that system, demonstrating a lower emissions footprint today and to show that continually decreasing emissions footprint over time, we want to make sure. We can do that in a very credible manner, and so and I do truly believe we're working with the <unk>.
Sequined team to make sure we can market that.
That gap is a credible responsibly sourced product.
We are seeing a.
Real intense focus on.
On that front to the point, where we've even had meetings with utility customers that have told us. They are looking at the midstream providers to understand the emissions footprint of <unk>.
They are potential gas supply and theyre going to factor that into their decision with respect to how they source their gas, we think that sets up very well for US again, because we've got I think the most modern most efficient system.
Steve.
And so a quick follow up on all secret.
I guess first on responsibly sourced natural gas.
You've probably got a better view than most people are you seeing.
Responsibly sourced natural gas premium outlet market today.
And if not what.
Do you think will be the catalyst.
We're responsibly sourced natural gas will actually start getting a premium on the market.
I wouldn't think of it in terms of premium I think of it in terms of the demand for our.
Space is going to continue to drive I think the responsibly sourced gas whether that whether you consider that to be a premium more at some point it becomes.
<unk>.
And a competitive cost to play I think it will reflect.
Natural gas prices and demand for natural gas.
There have been a few marketed RFG products out there that.
Maybe attractive a small premium I would also say that I don't know that anyone no one has yet truly tag.
RSV product from wellhead to water wellhead to burner tip in a way that I think.
Can be privately marketed but we don't think of it in terms of premium.
In terms of different differentiator for what we can provide our customers and therefore.
The port their goals as well as orange.
Yes.
In the current environment, you should think about it in the context of if somebody is going to sign up for a long term supply.
That is an indexed price supply that's competitive in the market theyre going to want to know that they are the types of supply that is not going to have.
Negative connotation with it and so I would say when it comes to long term contracts at index pricing that people are going to be asking those questions is tight right now with the same type of kind of go into runner so to speak.
The responsibly Swartz gap strikes that they are on a path to be able to.
Prove that so I think thats about as far as it's gone at this point, but.
<unk>.
I think it's certainly something I think it's pretty strong support across the year.
Industry.
For making that more of a determinant.
In the marketing space, and we certainly want to be a part of that but it's got incredible reliable and something Thats got good strong data behind it.
Ultimately, perhaps even trade.
So that's that's what we're focused.
Currently all makes sense I appreciate the color I'll turn it back over.
And our final question comes from the line of Sunil Sibal with Seaport Global Your line is open.
Yes, hi, good morning folks and thanks for squeezing me in so my first question related to the $1 2 billion of Hydro <unk>.
Projects that you highlighted in your capital allocation framework.
I was just kind of curious I think you've talked about some big.
Projects in Gulf of Mexico, and then obviously on the gas side. The Atlantic projects are there any other big buckets, we should be thinking of that.
I would think about that $1 2 billion annual expense.
Yes, I think.
I think that.
Pretty well got a captured I think the.
The $1 2 billion on normal capital spend is going to go first to the big projects on Transco, some of which we've mentioned today are continued gathering system expansions.
Even though those more limited we're really excited about dollars, we're investing right now in the deepwater Gulf of Mexico to support.
Bye bye for well prospect.
So the deepwater Gulf of Mexico is going to be a real driver of growth as you look out three years.
And and then beyond that as we've mentioned many time investing in the modernization of our rate base, which will come with emissions reduction.
Along our systems and about $400 million.
Solar projects that we are moving rapidly through the development stage right now.
And starting to move towards execution on those projects. So.
Those are the kind of the primary drivers that hasn't really changed a whole lot I would say some of the projects on Transco are moving from our development list into execution list, but other than that really is not a whole lot has changed since we laid out the capital allocation.
Okay got it and then one thing related to that is PMA.
Half the Forex.
This leverage level.
Think about that just started that.
But come with those kind of capital spend.
I would just say our depending on what happens with the price of our stock versus the cost of our debt will dictate a little bit of that said another way if the.
Price of the stock came down.
And are the yields yields came up in a way that.
Net this multiple of our tenured debt than money with.
Go towards buying.
Buying back stock and we would be running at the higher end of that range.
If that doesn't occur.
See that drift down depending on how much we allocate towards the modernization projects that we've talked about.
And so those are kind of the immediate variables that will be.
Navigating between but but if we.
I would just say, it's pretty strong multiplying effect as our EBITDA continues to grow and continuing to invest in earnings projects and our EBITDA continues to grow that move down on the on the debt metric because it starts to move pretty fast.
<unk>.
So that as you see it's not that's not just in forecast, but youre seeing any real time here as we continue to over perform on our debt metrics.
<unk> done.
Okay got it and then one again related to that so when they think about.
10 year bonds, you listed that dividend.
Obviously this year, it's kind of been a bit.
But.
When you think about historically, it's been probably.
And then obviously its by when you think about comparing it to say you have to calculate.
Segregated utilities or <unk>.
Indexes. So I was kind of curious you know how do you think about that metrics.
We then do what's his 10 year bond yields.
Right.
And how does what do you think is a normalized kind outfit.
That they can look at when you think about your stock buyback decision. Thanks.
From a debt yield standpoint, it feels like we're probably going to be hovering in this.
Two and half to maybe 3% range for a while on one hand feels like treasury rates starting to move a little bit now. So we'll have to see what happens on that front credit spreads, though think we're performing obviously very well and I think the sector's performance fairly well. So you see credit spreads tighten a little bit we just saw that in our recent bond deal just incredible demand for our.
For mid for our papers so.
I don't think I don't think we expect long term rates 10 year rates will be in the two 5% range, but does it feel like theyre going to be $3 five 4%.
The first part of your question, how do we see rates probably 3%. The other part of your question might be getting at what is the multiple and we're not disclosing that if that if that's your question on dividend yield relative to that 10 year rate.
Please don't tell smart really the signal to the market with that point is.
Got it I thought I would try.
Anyways, Thanks for all the color.
Fair enough.
Thank you I will now turn the call back over to Alan Armstrong for closing remarks.
Okay, well great. Thank you all very much for joining us really excited too.
<unk> for the.
The benefits of all the hard work of our employees around the company that are co produce such a terrific quarter both through.
Continued great operations as well as a lot of the transactions that we've executed on this year that are driving some of this and so.
It's a real pleasure to get to two.
Talk about the great performance at the organizations produced.
And we look forward to doing that in the future. Many times more so thanks, all very much for joining us.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Yes.
Okay.
Okay.