Q2 2023 The Williams Companies Inc Earnings Call
What's the risk that known.
Please standby were about to begin.
Good day, everyone and welcome to the Williams second quarter 2023 earnings Conference call. Just a reminder, today's call is being recorded and now at this time for opening remarks, and introductions I would like to turn the call over to Mr. Geneva, Giovanni Vice President of Investor Relations ESG and investment analysis. Please go ahead Sir.
Thanks, Bob 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 quarter will speak to this morning.
Also joining us on the call today are Michael Dunn, our Chief operating Officer Lynn Wilson, Our General Counsel and Jack Zimmer Executive Vice President of corporate strategic development.
In our 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 at.
Also included in our presentation materials are non-GAAP measures that we 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.
Okay, well, thanks, Danilo and thank you all for joining US today, another positive story to share with you this quarter and you can see some of those highlighted here.
Called out on slide two first of all adjusted EBITDA up 8% adjusted earnings per share up 5% and our gathering volumes were up 6%.
And certainly while there is growth and beat is impressive our resiliency in the face of low commodity prices is even more impressive and gave us another opportunity to distinguish ourselves from the pack, which is largely posted declines this quarter.
And our growth continues to compound. Despite these price swings in natural gas. This quarter was a perfect example, where we saw an 8% EBITDA increase on the backs of our very strong 14% increase for the same period last year.
Jon will dive deeper into the numbers in a moment, but let me start out with a few highlights from the quarter.
Our financial performance is our track record, but it is the day to day focus on execution by our teams that drive these results and really does set us apart.
As an example, our teams have done a fantastic job of quickly integrating the mountain West acquisition into our core business and in fact, we're pleased to announce that we've already secured binding precedent agreements to support a significant expansion on the newly acquired Overthrust pipeline. This project was not even in our upside case for this <unk>.
<unk> and the team has identified even more growth to come that is beyond our original expectations. Much of this growth is centered around coal to natural gas conversions in the western states.
On Transco, we continue to advance our emission reduction program and recently completing completed our first large scale compressor replacement project in Virginia.
Our backlog of high return pipeline expansion opportunities continues to progress driven by a large wave of incremental demand that continues to exceed our expectations.
As evidence of this continued wave of increasing demand. We recently concluded a non binding open season to advance another large scale transco projects that will provide much needed capacity to serve our customers south of the station 165 in Virginia, our customers recently.
Customers requested capacity that has been well in excess of the 800000 deck of terms per day that we offered importantly, the minimum required term for this service offering was 20 years. This underscores our belief in the durable and fast growing demand for capacity and the market's confidence.
And our ability to deliver this capacity with the lowest environmental impact following the approval of the mountain Valley pipeline.
We're now working to find a way to serve as much of our customers' needs as possible and hope to have an update on this exciting project soon.
Moving on to financial performance as I stated earlier, despite a weak natural gas price environment, our financial results not only grew against the difficult comp in a difficult environment, but this quarter mark the 30th consecutive earnings print that either met or exceeded consensus estimates.
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Within our legacy base business in the northeast, we produced record EBITDA and record gathering volumes delivering growth that far outpaced the total production across the Marcellus our strategy to focus on connecting our producing customers to the best markets with the most reliable service available has grown.
This business to the point it is nearing $2 billion per year of EBITDA. The completion of the Mountain Valley pipeline, our regional energy access project and continued growth of gas fired generation in the local market, we will continue to provide market and volume growth well into the future.
In the West we also achieved record gathering volumes once again showing that our diverse geographic position is built to weather commodity price swings.
In our transmission in Gulf of Mexico segment, we are enjoying the beginnings of a long runway of growth in the deepwater gearing up for a long string of expansions on transco and enjoying better than expected growth in our mountain West acquisition, which speaks to our successful integration.
Importantly, the strength of our base business more than offset weaker E&P earnings and expected low seasonal cash flows from our marketing business.
The quarter's results continue to prove out the inherent stability and stubborn growth of our business.
However, when we see the market failed to appreciate our ability to deliver and lowest price environment. We will continue to execute on our authorized repurchase program much like we did during the second quarter.
And finally, a few notes on our sustainability efforts last week, we issued our 2022 sustainability report and completed our annual CDP climate question. Here. These are both important markers that detail our progress on key issues like environmental stewardship community sport and work.
<unk> development.
To us sustainability means running our business in a way that will create value for the perpetual shareholder. So we're proud to have also be also be providing our shareholders with industry, leading returns on invested capital and we expect our shareholders to further benefit from enhanced capital returns.
As we execute on our large growth backlog.
Which among others include seven out of nine major pipeline projects that are coming online in the fourth quarter of 'twenty four.
That will be stacked on top of a solid foundation of a sustainable base business and with that I'm going to turn things over to John to walk us through the financial metrics for the quarter John Thanks, Alan starting here on slide three with a summary of our year over year financial performance beginning with adjusted EBITDA, We saw another strong quarterly increase.
Of 8% over the prior year and this happens to coincide with an eight 6% CAGR over the last five years for this same measure.
And this strong performance included a new record for gathering volumes, which increased 6% year to date, our adjusted EBITDA is now up 13% driven by the growth of our core infrastructure businesses, which continued to perform very well, even as natural gas price decreased 61% for the first half of 2023.
First half versus the first half of 2022, once again, demonstrating the resiliency and strength of our natural gas focused strategy, our assets and our operational capability.
For second quarter, our adjusted EPS increased 5% for the quarter continuing the strong growth we've had in EPS over the last many years with our year to date EPS now at 23%.
Available funds from operations <unk> growth for second quarter was in line with adjusted EBITDA and you'll see our second quarter dividend coverage based on <unk> was a very strong two to three time growing about 2% despite growing our dividend by five 3%.
Our balance sheet continues to strengthen with debt to adjusted EBITDA now, reaching three five times versus last year's 382 times and that's even after closing the trade North, Texas and mountain West acquisition, and also repurchasing $139 million worth of.
Shares since last year.
On Capex do you see an increase primarily reflecting the progress we're making on some of our key growth projects, including regional energy access and Louisiana Energy Gateway.
For the full year, there is no change to our consolidated adjusted EBITDA guidance of $6 four to $6 8 billion or any of our other guidance metrics, but in a moment I'll provide a little color on our expectations for the remainder of the year versus the performance we've seen thus far in 2023.
So, let's turn to the next slide and take a little closer look at the second quarter results.
A strong 8% increase in EBITDA over prior year, even as average natural gas prices for the second quarter decreased 71%.
Walking now from last year's roughly one $5 billion to this year's $1 6 billion, we start with our upstream joint venture operations that are included in our other segment, which were down $43 million versus last year. Our haynesville upstream EBITDA was down about 14 million despite substantially higher production due to <unk>.
<unk> lower net realized prices and a lower working interest percentage on new wells beginning in January of 2023.
Our one center upstream EBITDA was down $29 million due primarily to lower realized prices, but production also continued to be impacted throughout April from the historically difficult Wyoming winter weather, we saw in the first quarter.
Shifting now to our core business performance, our transmission in Gulf of Mexico business improved $96 million or 15%, including about $52 million contribution from our mountain West pipeline in Nortek acquisition, but with other increases in our transmission and deepwater revenues as well our northeast G&P Biz.
<unk> performed extremely well with a $65 million or 14% increase driven by an $81 million increase in service revenues and we did have a onetime $14 million favorable gathering revenue catch up adjustment in that second quarter increase in service revenue.
But this revenue increase was really fueled by a 6% increase in total volumes in the northeast.
Shifting now to the west, which increased to $16 million or 5% benefiting from continued strong volume growth in the haynesville and positive hedge results that partially offset the impact of lower commodity base rate.
And then you see the $22 million decrease in our gas and NGL marketing business now the majority of this decline was actually related to lower NGL marketing result from inventory valuation changes, where we had a gain on NGL inventories last years, but a loss this year.
So again, the second quarter continued our strong start to 2023 with 8% growth in EBITDA driven by core infrastructure business performance in spite of natural gas prices that were 71% lower than second quarter of 2022, So let's turn the page and touch on the year to date comparison year to date, we've seen a 13.
<unk> increased over 22 walking now from last year's $3 billion to this year's $3 4 billion, we start with the upstream joint venture operations included in our other segment, which were down $39 million versus last year now year to date Haynesville is up nicely on very strong volume growth that has been significantly offset by lower <unk>.
Realized prices. However, the overall haynesville increase was offset by lower one set of results due primarily to the historically difficult winter weather, we saw in Wyoming This year.
Shifting now to our core business performance transmission in Gulf of Mexico business improved $127 million or 9% on really similar themes as our second quarter, namely the impact of the mountain West pipeline and <unk> acquisition.
However, we have seen other significant increases in our transmission and deepwater revenues as well.
Our northeast G&P business has performed very well with $117 million or 13% increase driven by a 154 million $8 increase in service revenue.
This revenue increase was fueled by a 7% increase in total volumes focused in our liquids rich areas, where we tend to have higher per unit margin than our dry gas areas and in the appendix Youll find a slide that compares our 7% volume growth to the overall base and growth of just under 2%.
Shifting now to the west, which increased $42 million or 8% benefiting from positive hedge results and the <unk> acquisition, but the west was significantly unfavorable impacted by the severe Wyoming weather in January processing economics at our Powell, Wyoming processing plant.
And then you see the $144 million increase in our gas and NGL marketing business caused by the strong first quarter that we had started the year.
So again, the continuation to the strong start to 2023 with 13% growth in EBITDA driven by core infrastructure business performance with strength from our marketing business that dramatically overcame weaker than expected results from the upstream joint ventures.
So as I mentioned earlier, there is no change to our consolidated adjusted EBITDA guidance of $6 4 billion to $6 8 billion or any of our other guidance metrics. We've definitely had a strong start to the year with $3 4 billion of EBITDA through the first half of the year and thanks to the performance of our base business, we have clear visibility to hitting.
At least the midpoint of our guidance even after a historic decline in natural gas prices and a historically difficult winter that continue to have impact through April .
So you may be wondering why we aren't raising our guidance on the back of such a strong start to the year and a bright future ahead first I will remind you that our guidance does include a range of $200 million above our midpoint.
Second while we usually experienced stronger third and fourth quarters, then second quarter. The third quarter does occasionally see hurricane outages for our deepwater business.
Finally, we could also still see downward shifts in natural gas prices for the balance of the year that could and favorably impact our upstream joint ventures in particular.
While we are not suggesting there is a high likelihood of realizing these impacts we do need to be prepared to overcome these scenarios. Therefore, it is too early to raise our full year guidance.
But once again, we are confident in the continued performance of our base infrastructure businesses, allowing us to once again meet or exceed the midpoint of our guidance range. We're setting our sights on continued growth in 'twenty four before another big growth step in 'twenty, five and with that I'll turn it back to al.
Okay. Thanks, Jon just a few closing remarks before we open it up for your questions here first I'll start by reiterating our belief that Williams remains a compelling investment opportunity. We are the most natural gas centric large scale midstream company around today and the integrated nature of our business from our best in class long haul.
<unk> two our formidable gathering assets, which are complemented by our sequel platform that delivers upside to our base business is unique and we have a track record to prove it.
Second our combination of proven resilience five year, EPS CAGR of 23% industry, leading coverage on our steadily growing dividend.
Our strong balance sheet and high visibility to growth. We think is unique amongst amongst the S&P 500 and unique within our sector.
Let me emphasize that our natural gas focused strategy has allowed us to produce a 10 year track record of growing adjusted EBITDA through a number of commodity and economic cycles and it is continuing to deliver significant growth in the current environment.
And we're now celebrating seven and half years of delivering in line or better quarterly results that is especially impressive when you consider the sector's ups and downs over this period and.
And the fundamentals are setting up stronger than ever for this long term predictable growth to continue.
And finally, as we think about our long term strategy, we see that U S. Natural gas infrastructure is key to meeting both today's energy demand as well as projected growth of electrification and renewables build out in the future simply put you cannot implement and accelerate wind solar and large scale Elektra.
Vacation without having natural gas as a reliable complementary partner to these big system changes.
In fact, despite continued growth in solar and wind capacity the country saw record natural gas power demand in July reaching as high as 53 Bcf per day last week to meet summer power loads. This tops the previous record set last July by 6% again compound.
Growth on top of compounding growth and so.
If we truly do want to meet our country's growing power demand for things like data centers, and Evs and accelerate wind and solar power generation, we must continue increasing natural gas infrastructure capacity. This fact has become evident to both the majority of our legislators and the biden.
<unk> as they came out with unprecedented support for mountain Valley pipelines completion.
Williams is here for the long haul and we are committed to leveraging our large scale natural gas infrastructure network with the benefit of generations to come and with that I'll open it up for your questions.
Thank you Mr. Armstrong, ladies and gentlemen at this time if you do you have any questions simply press the star one and if you do find your question has already been addressed key can remove yourself from the queue by pressing star one again, we'll take our first question. This morning from Spiro <unk> at Citi.
Thanks, operator, good morning, Jamie.
First question, maybe to start with with gas macro.
It looks like we're maybe approaching a trough here in some of the producer activity. So just curious to get your view on what your producer customers are seeing and doing and really just how youre thinking about the volume and price trajectory from here as we head into 'twenty, four and really wait for LNG volumes to pick up a lot of the slack.
Yes, well, certainly I Wouldnt say theres one.
The answer to that question, but maybe I'll try to summarize it a little bit I think the majority of producers see a pretty bright future for demand.
Right now and as a result of that they are making sure that they're not letting their systems fall into decline in a way that would be hard to recover from so I would say they are they're much like a cat kind of poised for.
Demand growth in the future, but really watching cost and.
And trimming out cost, where they can and kind of.
Proving up their capabilities.
In certain areas. So so I would say it feels to me like the producers are trying to maintain.
Level volumes as much as possible, but being poised for future demand growth, that's pretty evident down the road.
Okay. That's helpful. Second question, just maybe moving to leverage as you guys pointed out you're down to about three five times now this quarter. So certainly below your target on the year.
Curious, how youre thinking about utilizing that excess balance sheet capacity.
The plan or really maybe even thinking about operating at these lower levels.
Yes, I would just say I think we really enjoy.
The flexibility that we have right now and we've been pretty clear about capital allocation, it's nice to have a such.
Such a large pool of ability to invest in our rate base at some pretty decent returns and I think probably even some higher returns once we get through the next rate case, given the inflation and the cost of debt has gone up.
That will drive us to be able to earn even in higher return in our rate base. So that's really nice to have that pool of capital to available to invest in it.
And that really kind of sits at the bottom of our stack of capital allocation, but team's doing a great job.
Deploying that as I mentioned.
We completed our station $1 80, which is a very large compressor stations.
The team brought that in a little bit ahead of schedule and micron I actually got to go up there a few weeks ago and see that great effort by the team of modernizing our facilities there and so anyway I would just say to answer your question more directly we have places to place capital for nice return like that in.
And I think.
We will continue to do that but we certainly enjoy the flexibility that.
That we have at this level to be able to place capital towards those kinds of opportunities.
Great I'll leave it there thanks for the time guys.
Thank you we'll go next to Jeremy Tonet at Jpmorgan.
Hi, good morning.
Good morning, Jeremy.
Just wanted to start off with the Appalachia, if I could northeast G&P quite a quite a good quarter Theyre recognized there is a little bit of timing with that.
Revenue catch up there, but just wondering if you could talk a bit more about what's a normalized EBITDA level in the northeast G&P right now and are you seeing kind of a shift in production wet versus dry and is that impacting margins just trying to get a bit of color for what the trajectory is here.
Yes.
Definitely think we saw.
Producers, focusing where they have it available we saw producers focusing on wet wear.
Where there are producers that have that ability to shift.
But at the same time, I think keeping themselves poised for markets to open up.
And so I would say that's kind of what we've seen.
In terms of normalized EBITDA.
I think the first two quarters of pretty good sign of that I think anytime.
Average that out over a couple of quarters I think thats pretty good.
Kind of a normalized number but I do think as.
Markets open up through both mountain West and regional energy access and continued industrial and power generation demand in the local markets.
I think we're going to see that PJM certainly found itself very short.
<unk> labs.
Year.
During the wintertime as well and I think we're going to continue to see people build out power generation to take advantage of that so I'm pretty encouraged frankly about in terms of the market outlook over the next couple of years for the northeast I do think that we will see them.
North East have an opportunity to take back some of the market share.
Across the U S. As a result of some of these markets opening up.
That's very helpful and just to clarify when you say new markets opening up as this regional energy that the kind of priming the pump for MVP or others.
Well, it's really there's really three.
<unk> issues.
Issues there.
Mountain Valley pipeline certainly.
And it'll be competing there's been some confusion out there I think in the market. We have plenty of capacity pool, all that mountain west can deliver it's just a question of how it is going to compete with the Haynesville gas coming in at station 85 on the system and so.
But there is it's just going to be a question of.
Producers competing for those markets, but I will say that market and particularly south of station 165 as was demonstrated by our recent open season is going to continue to grow pretty rapidly and last winter and got caught in a very short situation on natural gas and so.
We're going to continue to see.
The markets in the Carolinas, there in Virginia, and the southeast continue to expand Mountain Valley pipeline is going to be that connection. In addition to that regional energy access is also going to provide new market and.
That'll take some time, it's not going to.
Snap your fingers, and we'll see that kind of growth pulled out of that area, but it will it will open up new markets and new demand and then finally as I mentioned regional loads.
In the area as well and people taking advantage of low price natural gas.
And in fact, the shell Cracker there just one good example of the industry growth, but as well, we're seeing power generation load to continue.
To build there as well and in the PJM area. So I think really three pretty.
Clear examples of market growth for the northeast.
Got it very helpful and just one more on gas if I could.
I think.
<unk>.
Stakeholder conversations across various states, we're starting to see guest speakers come back into integrated resource planning that we had not seen in recent years or maybe it fallen out in recent years and just wondering if youre seeing this trend as well, particularly as it relates to transco and its unique positioning.
And could this lead to incremental opportunities beyond kind of what's in the slides today.
Yes, I think as we mentioned the open season that we had for capacity south of 165 really kind of caught our attention frankly.
Far exceeded our expectations and so when we say that it exceeded what we had to offer and it was a very large.
A very large multiple versus what we had to offer there.
So yes, we definitely are seeing the signs of.
<unk>.
People, taking advantage of low price natural gas and importantly.
This is something that gets missed too often Jeremy I know you follow this but I think sometimes the broader investor base misses is that what we have <unk> capacity. It doesn't mean that that's going to be an annual average increase in volume as much as it does mean that people are absolutely going to have to buy capacity.
For those <unk> and for base load and we actually I think we're going to see quite a bit of baseload pickup as well because the amount of data centers the amount of electrification load that's going on is well in excess of what our <unk>.
Increasing wind and solar generation can keep up with and so we're not only going to see peaking we're going to see base load increase as well.
But again all of that boils down, whether it's peaking or its baseload people still have to buy the full amount of capacity on our pipelines and that certainly coming through in these open seasons that we've been having on in that area.
Got it alright makes sense coal to gas Baseload conversion clearly there but.
Peaking needs.
It seems a bit underappreciated so very helpful color. Thank you for that.
Thank you.
Thank you we'll go next to Jean Ann Salisbury of Bernstein.
Hi, Good morning, I just wanted to follow up on the comment that was just made earlier about there being plenty of capacity on transco and it kind of being a competition between the haynesville producers any Appalachian producers I think that for the open season for the 800000 that timeline is kind of set for 2027. So is it accurate to say.
That capacity is there, but it certainly needs to be a lot to be visible over the next few years.
Okay.
Well.
Also G&A and you have to realize I think we have six projects along that exist along that corridor or five along that corridor, excluding regional energy access.
That are also expansions in that same area that we're we're not dependent on mountain valley pipeline supplies coming into that area.
And so.
There is a number of projects that.
And we've got them listed Darrin our materials.
So that is.
Obviously those come on before this latest open season.
But those those are incremental to serve increasing demand for.
For power generation in the Virginia, North Carolina, South Carolina, and Georgia areas.
Okay.
They're kind of I guess, maybe my broader question is like.
There need to be projects that Williams does that are kind of negotiated rate.
And criminal.
Well.
The point I think its misunderstood Jean Ann is that we have the physical capacity to move that gas from station 165 <unk>.
And incentives is not not very complicated we have plenty of capacity to move from that point. The piece I think they've got missed by some of the market consultants was the fact that the how much would actually move from that point because people are already buying supplies from station. It went to 80 or sorry station 85.
And moving it north but those same shippers have the ability to pick their gas up at 165, if they choose to so it's just going to be a matter of where they decided to pick their asset, but we have plenty of capacity to move gas out of station. The two Bcf a day out of 165, so the physical capacity exit.
The shippers actually are the ones to decide how we operate the system and where we move the gas from and if they decide they want to buy it at 165 85 will get backed off and 165 will get picked up for supplies.
Got it that makes sense.
Thanks.
And then as a follow.
There was a big tick up in NGL and crude volumes that you classify as overland pass and Rocky Mountain Midstream this quarter what was driving.
That.
Jean Ann This is Michael some of that with Bakken volumes coming in on the <unk> line from a third party as well as some ethane volumes it picked up in the quarter.
Great. That's all for me thank you.
Next year.
Thank you we'll go next to Brian <unk> at UBS.
Hi, good morning, everyone, maybe to start off in the 'twenty three outlook Johnny talked in the prepared remarks about year to date outperformance, which supports at least the midpoint, but just kind of curious if you can give some commentary around uncertainty around these hurricanes in Nat gas pricing is that baked in to your confidence over the mid point and thus just assuming constructive are normal.
Second half fundamentals just kind of curious if you could sensitize the upper end of the range as well.
Yes, I think we want to have a lot of confidence in hitting our mid point. So we do account for things that could happen around the hurricane season, and perhaps additional weakness that could come as I mentioned from.
Further decline in natural gas prices. So we've built in some ability to handle those kinds of downside relative to making sure that we can hit our midpoint. So I think Conversely, the things that would move us higher in the range would just be better.
Better than than forecasted performance in the underlying gathering and processing systems in the base business, which is always possible.
And it is also possible that we could have a stronger marketing resolved.
Fourth quarter, sometimes we have fairly strong.
For example in November and December but that is unpredictable.
Most of that performance comes in the first quarter. So we don't want to overly depend on any kind of a marketing result.
To make the numbers and said we've got a lot of confidence just from the base business around hitting the midpoint of our guidance and certainly think we could exceed it as well, but it's still fairly early in the year just weren't comfortable yet in raising the guidance.
Great.
Yes, I would just add to that on the natural gas or sorry, our.
Marketing.
Is this that I think it's really important to the <unk>.
Recognize that really what drove the negative and there was primarily just the markdown on NGL inventory.
So that's just that's not really cash moving through the books. It's just a change in price on the inventory that we hold and so on.
Les you if we were to Mark that book right now, obviously, you'd see a pretty big step up in that.
Just because ethane prices have come up so much but.
But I think that's really important for the street to understand relative to the.
Balance of the year.
I appreciate that that makes a lot of sense as my follow up great to see the environmental assessment for the Texas, Louisiana Energy pathway project to bring Nat gas from Texas into Louisiana border Elena.
LNG demand continues to be a theme, particularly on gas E&P E&P calls this quarter. So just kind of curious if you could just discuss perhaps further greenfield opportunities beyond T lab that Williams could pursue to bring even more natural gas from Texas across to LNG to support that future demand.
Yes, Thanks, Brian .
I would tell you we are.
Engaged in a number of projects there.
And.
We're not in a position to build to disclose those at this point, but we are involved in some pretty large scale projects that that we're excited about and we think will add a lot of value.
To to our shareholders as well as the industry in general and much needed. So we're pretty excited about that but we're not in a position yet to disclose exactly what's going on there.
Great makes sense I'll leave it there and Joe the rest of your morning. Thanks.
Right.
Thank you and good X now two <unk> Satish Wells Fargo.
Good morning, I guess on southeast supply enhancement.
Do you think that the project can be Upsized, given you noted a very strong open season.
Then I guess I'm still confused maybe a little bit on the lead time and lead time for the project teams.
Pretty long it has an in service date of Q4 2007.
There anything in particular, causing the timeline to be that long or is there maybe.
Maybe a contingency in there for for permitting.
Hi, good morning pretty this Michael.
Yes.
These results were a pleasant surprise and we're currently working through the scenarios with the various customers that requested capacity there. It definitely can be upsized from the 100 thousands will be published.
In the open season notice.
And we're just working through that today. So hopefully we'll have some more information on that in the very near future in regard to the outcome of those negotiations, but it's really just a combination of looping and compression editions.
Alongside our brownfield Transco pipeline corridor.
And just getting the hydraulic modeling done and developing the proper scenarios and then ultimately giving the rates to the customers that would be identified by the looping and compression on those scenarios. So it's a little bit of an iterative process, which we're going through right now, but it can definitely be upside from the 800000 a day.
I'd say the schedule right now a lot of that's driven by the customers' desire to service dates.
So a lot of this capacity is for new gas fired power generation.
Anticipating when those new power plants come online is the expectation that the customers laying out there for us I do think there may be an opportunity to accelerate the project at some point, but obviously, we have to have customer agreements in place before we can start designing.
The desired schedule for the customers as well as our capital cash flow. So that's really what we're looking at right. Now I think 2027 is probably the outside date that we'd be looking at and we will try to pull that in where we can.
Okay that makes sense.
And then I guess, just looking at the futures curve for natural gas.
And contango is pretty wide winter summer spread right now.
Wondering if you could kind of talk to your ability to capture that.
That sequence I guess, how much storage capacity does it have right now and how much of that is open and able to take advantage of these wider spreads.
Yes, absolutely.
<unk> has a very large storage portfolio I don't know that we actually disclosed the aggregate size of it is but it is a very large storage portfolio and we would expect them to be able to.
Lock in the intrinsic value of that of that storage and they also have a lot of deliverability capabilities out of that storage in and can optimize around that storage position is well I don't think we've given a lot of the specifics about the.
The aggregate size of that storage position, but it is a strong storage position that we would expect them to be able to lock in a lot of value around.
Yes, I would just add to that the way we would book those earnings we actually would not book those earnings.
Until we deliver and so that's really that's really why our fourth sorry, our first quarter is usually pretty sizable for us is that when you see the pricing and the most value for that storage is usually offered in that period and so that's a great example of why our first quarter tends to be so large some of them.
Like we said may come in the fourth quarter, depending on what pricing looks like and if we can cycle that storage twice, but we do have to cycle to be able to take the earnings on that.
Got it thank you.
We'll go next now to Colby.
<unk> company.
Good morning, just following up on the question on the northeast saw pretty significant sequential increase in GNP revenue.
I know you mentioned the $14 million benefit from a catch up payment there, but even after adjusting for that it seems like the year on year increase is still well above what we would've expected from inflation escalators alone.
I guess are there any other contractual provisions that are pushing unit rates higher across the basin there.
No I think really.
As was asked earlier question of rich versus lean obviously, when the when there is more rich gas drilling there is a lot more services that we offer around that and so that does that that shift.
Richard gas does tend to drive our margin our unit margin up across the space.
Okay, and Thats, primarily showing up in gathering I think on a processing basis volumes.
Pretty consistent.
Yes right.
Got it Okay, and then two related questions on cost control I think we look at the transmission segment. It looks like Opex is roughly flat to your pre acquisition levels. After adjusting for the transaction experience expenses there. So.
Seeing mountain West synergies materialized earlier than expected or should we expect some degree of cost increase moving forward and then just more broadly it looks like pretty impressive cost control across all segments expenses flat to down in the year over year basis. So if you could just comment more broadly on your cost control initiatives and expectations through the balance of the year.
Yes, so thanks for that recognition the teams did a great job controlling our costs even in this inflationary environment. We have found some ways to actually continue to take cost out of the business.
As you've indicated the mountain West acquisition is really the cost increase that we're seeing there on the <unk> side of the business and so I think going through the balance of the year.
We would have an expectation that we can continue that cost control theres always a lot of variability throughout the.
The second and third quarters with our.
Maintenance activities in our overhauls that are recurring.
That would be the only variance that we would see there.
Really coming up between the second and third quarter, but other than that testing is doing a great job controlling costs. This year.
Great. Thank you.
We'll go next now to Neel Mitra of Bank of America.
Hi, Thanks for taking my question I wanted to clarify on <unk> question.
Available capacity on Transco, So if I understood. It right are you, saying that there is available capacity on Transco from MVP. If you were to back off volumes from zone four.
So it essentially would be shifting volumes from one area to another to accommodate the existing utility demand and then I.
Yes, the follow on to that would be to accommodate new growth and new demand from utilities, there where it needs to be transco expansions in my thinking about that the right way.
Yeah, Neil let me try and explain one more time.
The way the.
Most of the system rates work on there.
The shippers have pay.
Pay the same price they pay us no matter, where the gas is moving from generally that those utilities in that corridor have the ability to pick up gas and they have.
A volume available that they can pull from at various receipt points.
So they basically are out trying to buy the lowest priced gas on the system that they can have delivered into their meters every day and when we talk about system capacities, we're actually talking about kind of the delivery capacity to those locations and it says.
Particularly path that somebody buys capacity from on the system, but but the big long haul system in the original base system. The shippers have the ability to choose where they want to pull their supply and from.
And so.
Even if we have a number of expansions going on but even if you just looked at it in a static environment. If somebody today was buying gas station 85 that gas is likely coming in from either system gas on and the off shore or haynesville or gas its made its way in from there.
Permian, but station 85, or 65 would be a place that customers would be nominating their supplies from and they'd be buying gas from maybe a haynesville producer at <unk> 85.
If they if somebody from the Marcellus decides they want to sell their gas cheaper at 165, then that customer is going to be able to say well I'm going to nominate from station 106 at the 165 location. Instead of 85 same amount of gas eventually flows to their delivery points.
But it's just a matter of where they source their supply from so so so.
It's going to be a question of.
Where producers decide to sell their gas that and who wants to compete the most for those supplies as we build out the system and the demand and matches backup to that supply.
Then the system will be back in balance and but that's the way it always work Theres always.
Periods, where supply builds up because you have more supply of locations than you have delivery and then eventually you build out the delivery market like we're doing in all of these projects and then more supply is needed which is kind of a situation at station sorry at at zone five right now people got caught short there.
The winter because it was not enough supply.
<unk> again, there so MVP will provide that needed supply that was missing this last winter.
Yes, I think maybe.
The confusion is whether if all things are static and you didn't back anything often zone four.
How much could you move south on.
Transco down from 165 with MVP volumes that are coming in.
Well it doesn't have to just move south it can move north and south so I.
I think that's maybe the missing concept there is the gas can and will move wherever the market is but we certainly have more demand on the system in both directions from $1 65 to two Bcf a day.
Got it got it okay perfect. Thank you.
Yes.
We'll go next now to Tristan Richardson of Scotiabank.
Hey, Good morning, guys just curious your views on that.
Transmission M&A landscape and it seems like the funnel of assets in the market is really only growing and clearly we've seen a lot of transactions clear the past 12 months, even if their passive steaks have you guys seen more opportunities that would potentially be a strategic fit and then.
Where do you see these multiples as attractive and transmission with some of the transactions we've seen clear.
Yes. Good question, Tristan I would just say we were really pleased with.
The multiple we are able to pick up the mountain west assets pretty sell them that you get assets that are that wells contracted that have that much growth around them, which frankly has been more than we even expected pretty rare to see that kind of multiple I think the issue there that kind of dams.
The market was the concerns over Hart, Scott Rodino that had been raised earlier.
And.
Berkshire Hathaway and Dominion transaction that involved those assets and I think that at the market a little bit spooked on that.
So maybe thats why we were able to bridge over that in.
In that case, but yes, so I would say, we're going to keep looking for those anomalies like that and where we have confidence in our ability to add value to assets, but.
I think it is going to be rare circumstances that we see those kind of multiple there is usually a reason in this case I think a lot of the issue was the risk around Hart Scott Rodino that had already surfaced itself on those on those assets earlier.
That's helpful. Alan and then and then maybe just a question on mountain West I mean with the over overthrust expansion sounded like that was may be incremental to your expectations or at least what you saw as the opportunity set for the acquisition at the time of close maybe curious.
One of potentially other expansions that could occur and then maybe if there's anything on the scale and timing of that project that you didn't already mentioned.
Yes.
That was not in our in our pro forma pro forma economics for the acquisition. So it was certainly up.
Well as an upside there with the mountain West acquisition. This is about an 11% increase in the overthrust capacity for.
For the 325000, <unk> expansion and its a pretty simple expansion into two compressors that were adding at existing compression facilities on that system, but there's definitely more upside opportunity. There there seems to be a desire to get more gas westbound toward the old Pal pricing point, that's been a pretty solid.
Pricing point for a number of years now and even this summer we've seen gas trading at $4. There at the hotel even higher than that just driven by California economics with the EPS hit, California. This summer and gas fired generation thats picking up there. So I would expect to see a lot of desire for customer.
To get to that hotel price employee and that certainly bodes well for over thrust is a direct connection into that into the hub.
Yes.
And as far as the rest of the mountain West system, we see a lot of opportunity there for our coal to gas switching theres a number of very large coal fired power plants.
In Wyoming, and Utah that do have opportunities for conversion to natural gas and some of those we've already acquired and were actually building expansions for our view of the overthrow system today, Jim Bridger units, one and two in Wyoming on the Pacific <unk> system are converting to gas.
We are building a pipeline over to the.
<unk>. This year. So we'll continue to see opportunities like that in the mountain West system and those are certainly upside opportunities not only for us, but gas resource out of the <unk> field with our upstream production and we're driving that gas to those markets as well with the sequel platform.
That's great appreciate it thank you Mike.
Okay.
Thank you we'll go next now to Gabriel Moreen at Mizuho.
Hey, good morning, everyone.
Just to get a lot of lot of E&P E&P hedges since your last update and <unk> I was just wondering if you can.
Not to beat a dead horse on 'twenty, three guidance, which I know I'm doing but just what the exposure is at this point on the E&P side and then also as you think about hedging 24 on the E&P side Whats your thinking and maybe in light of also potentially doing some transactions around E&P with the gas curve, having creeped up a little bit here.
John you want to take the first part of that in Opex, Yes, absolutely. We have continued to add hedges on the on the expected upstream JV production.
We generally don't go too far in hedging.
Like to have a comfortable spread between what's hedge and what's not hedged just to account for the potential for any kind of production upset. So there is a fairly significant portion.
That remains unhedged, we do provide in our materials all of the current hedges that we have outstanding against the upstream business and Thats in the appendix.
And Gabe I would just add to that I think in terms of our approach to hedging.
On the E&P side.
We have been putting on some April through October hedges.
Four.
For gas and 24.
And.
And as John said large large so part of that is driven by the fact that.
We don't really want to get caught short.
In an up market I think everybody experienced that a couple of years ago, and so we tend to not.
Get ourselves in a position, where we could get caught short on production, particularly since we don't operate that production.
So that's that's how we think about hedging on the E&P side.
But in terms of.
The broader scheme of things in terms of transactions around the E&P I would just say we continue to entertain a lot of interest in that and I would just say.
As we look at the landscape and the demand that's building.
For not everybody is very focused on LNG, and we think obviously thats going to continue to be.
A big driver for demand.
But the macro picture, we're seeing around electrification.
And the amount of power demand increase that continues to build in this country is pretty impressive and we're also seeing a lot of industrial demand pick up in and around our assets as well and things that were previously powered by either fuel oil or coal or oil.
Onshoring ammonia production here in the U S through shifting a lot of demand building and we have a pretty good insight to that so it's kind of kind of it seems.
Short sided to get in a hurry to sell out.
Particularly like the Haynesville, where we're the.
<unk>.
G O southern team has done a great job there and they continue to find ways to lower cost and increase production. There. So we think both from their operational capabilities, which we're enjoying and.
Macro fundamentals around gas, which is not really a compelling reason to liquidate in this environment.
Thanks, Alan and then maybe if I could just ask a follow up on the ERP spend of Transco and I recognize it.
Okay got it awfully big rate base to it but as you think about having to file the rate case of Transco.
And its upcoming how do you think about ERP spend within that context does it matter at all with the rate case coming up as far as accelerating it are refraining from doing that.
Hey, Gabe, it's Michael Yes.
Just put in service at station 180 replacement, we've replaced 14 units there with two.
New state of the art turbines that we've got three more stations that will be very similar fashion coming on before the test period closes on the rate case, and so that's the anticipated bid curve there similar to what we did on $1 80, and it's really highly dependent after that.
The rate case outcome, and whether we get an emissions tracker, which we certainly hope to achieve all the transco rate case similar to what we were able to do on northwest pipeline.
And that would really drive our decision, making in the near term on spending beyond 2024% to 25 timeframe and we layer that into what our next rate case tranche looks like on the Transco system and really try to balance that spending curve, but where we think those cases are going to line out there in the future.
But obviously, hoping to go into this one with an emissions tracker modernization type tracker coming out of the negotiated settlement that we hope to achieve with the Transco customers and we'll see how that turns out.
Got it thanks Michael.
We'll go next now to Neal Dingmann at tourists.
Yes.
Hi, This is Jake <unk> on for Neil just.
Quick one on cap allocation I think you guys might have covered it but I just want to make sure that I heard it correctly.
Just in regards to distribution growth I mean, you guys are pretty well covered even after that 5% boost. This year are you looking and you might have covered this already but are you looking to accelerate that at some point in the near term I am just curious how you guys are thinking about that.
Yes really good question.
I would say that we've said all along that we.
Expect this business to generate in the 5% to 7% growth on EBITDA and that we would expect that to.
To keep our dividend somewhat in line with that.
And so I think as we think about afford.
<unk> per share really is.
The number I think to keep your eye on that will drive our decisions on dividend.
Looking forward and so I think thats, a really good number for you to focus on but yes, we certainly have plenty of room plenty of capacity.
And in terms of that dividend increase and it's just going to be driven by.
What we're seeing is a kind of a slow.
Long term sustainable.
<unk> per share is really what's going to drive our dividend decisions.
Got you Okay. That's it for me thank you.
Thank you.
And we go next now to Robert Cadillac <unk> at CIBC capital markets.
Sorry, Rob can tell you I just wanted to follow up on the capital allocation. This time on M&A.
So understanding that you've been quite active in the last 18 months or so can you comment on the company's appetite for additional acquisitions and maybe on the state of the M&A market understanding that.
Maybe mountain.
Mountain West was a little.
<unk>.
So just how the low commodity prices and higher interest rates are impacting.
The bid ask spreads.
Yes.
I would say that's not completely clear to us yet it's a good question and you would think it would ultimately have some impact, particularly people that are exposed to floating rates.
That certainly would drive some transactions but.
I would say, we haven't seen great evidence of that occurring just yet.
I would just say we're going to peak.
We have been hanging around the hoop looking for things, where we have a unique competitive advantage.
That drive really strong accretion in value to our shareholders and so far that patience has paid off really well for us.
And I don't see any reason, we would change that patients to keep kind of looking for those things that are very unique.
And that we have a unique competitive advantage on.
So that's that's what I would.
Tell you to expect more of but im not sure that that.
Yet see the market being.
Flooded or depressed with with assets yet from people that might be sitting on floating rate capitalization. So.
We're very fortunate where we stand from both the debt capacity and a.
And an interest rate standpoint without floating rate exposure. So we're really excited about where we stand, but there may be some businesses and assets that get.
A little bit.
Damaged and have to look for transactions to solve their problems, but thats not evident to us just yet.
Okay that was the color I was looking for thank you.
Thank you we do have no further questions. This morning, Mr. Armstrong I'd like to turn things back to you for closing comments.
Okay well. Thank you all for the great questions. This morning. Thank you for your continued interest in the company and we just want to reiterate how excited we are about our continued growth on top of growth.
Here in the business and our ability to demonstrate our resilience this quarter and we appreciate your confidence in our company. Thank you.
Thank you again, ladies and gentlemen that will conclude the Williams' second quarter of 2023 earnings conference call. Thank you all so much for joining us and wish you all a great day Goodbye.
Please wait the conference will begin shortly.
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