Williams Cos Inc (WMB) — Q2 2022 Earnings Call Transcript

Thanks, Joanne, 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 Porter, will speak to this morning. Also joining us on the call are Micheal Dunn, our Chief Operating Officer; Lane Wilson, our General Counsel; and Chad Zamarin, our 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 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 material. So with that, I'll turn it over to Alan Armstrong.

Great. Thanks, Danilo, and thank you all for joining us today. While we're here today to talk about another quarter of steady, predictable growth, thanks to a long-term commitment to our natural gas-focused strategy and continued crisp execution against that strategy. We saw strong earnings growth in our core businesses and our upstream operations. The health of our businesses was also demonstrated by equally strong gathering and transportation volumes during the quarter. Importantly, we expect continued earnings growth in our core G&P and gas transmission businesses as our teams are delivering great execution on our expansion projects. We're also staying laser focused on doing what's right to ensure sustainable operational performance. We're pleased to share our progress in our 2021 sustainability report that was published just last week. I hope you'll take some time to read the report, as it really is a testament to the hard work of our entire organization and their passion for doing things the right way. I'll highlight a few things from the report in our key investor focus areas segment. But for now, let me turn things over to John for a review of our second quarter and our year-to-date results. John?

Thanks, Alan. Starting here on Slide 1 with a summary of our year-over-year financial performance. Overall, 2022 financial performance continues to be quite strong. Beginning with EBITDA, we saw a 14% year-over-year increase for the second quarter and a 10% increase for the first half of '22 versus the first half of '21. As we'll see on the next couple of slides, our EBITDA growth has been led by our core large-scale natural gas transmission and gathering and processing businesses, complemented nicely by growth in our upstream joint ventures. Our adjusted EPS increased 48% for the quarter and 29% year-to-date. Available funds from operations, or AFFO, grew more than EBITDA, continuing the trend of strong growth in this measure, up 23% year-over-year for the quarter or 19% year-to-date. Also, you see our dividend coverage on this page based on AFFO was 2.19x for the second quarter and slightly better at 2.24x year-to-date. Our debt-to-adjusted EBITDA metric continues to improve based on our strong growth in EBITDA and our capital investment discipline, now reaching 3.82x versus last year's 4.13x. So now let's move to the next slide and dig a little deeper into our EBITDA results for the quarter. Again, the second quarter built nicely on the strong start we've seen this year with 14% growth, reflecting the combined effect of the performance of our core business and upside from our upstream joint ventures. Walking now from last year's $1.317 billion to this year's $1.496 billion, we start with our upstream joint venture operations included in our Other segment, which were up $66 million. I will point out that we've added a new page to our analyst package for this segment. In that supplemental information, we've included our net upstream sales volumes, which were just under 200 million cubic feet a day for the Haynesville and Wamsutter properties for the second quarter of '22. Since our first new production in the Haynesville came online in April of this year, we've seen a rapid ramp in volumes that will continue through the remainder of the year. Shifting now to our core business performance, our Transmission & Gulf of Mexico business improved $4 million, primarily at Transco and largely from the Leidy South expansion project, which came online in phases last year. Operating and maintenance costs were higher, driven in part by an acceleration in maintenance work during the second quarter of this year. Overall, Transmission & Gulf of Mexico's $652 million of adjusted EBITDA was just over our business plan for this segment for the second quarter. Our Northeast G&P business increased $41 million or 10%, driven by top line gathering and processing revenue growth on slightly higher volumes. G&P rate growth was supported by a combination of factors, including higher commodity-based rates, annual fee escalations, and other expansion-related fee increases that more than offset the lower cost of service rates that we have in our Bradford franchise. We saw an expected sequential increase in Northeast volumes for the second quarter of 2022 versus the first quarter, and we expect continued quarterly increases for volumes for the remainder of the year. But ultimately, our plan for the Northeast in '22 continues to see higher EBITDA versus 2021 on pretty flat volume growth. However, we remain well-positioned to resume stronger volume and EBITDA growth in the Northeast in 2023, driven by several expansion and optimization projects underway that Alan will discuss in more detail. Shifting now to the West, which saw an impressive $73 million or 33% improvement over 2021. I'll mention that $20 million of that $73 million was attributed to our Trace Midstream acquisition, which closed on April 29. So even without Trace, the West still increased $53 million or 24%. In the West, we continue to see upside from our commodity price exposed rates, especially in the Barnett and Haynesville, as well as substantially higher volumes in the Haynesville that drove an 11% overall increase in volumes for the West, excluding the Trace acquisition. Also in the West, we see a strong quarter-over-quarter volume growth trajectory throughout the second half of the year, driven primarily by the Haynesville. Next, we saw a slight decrease for our Gas & NGL Marketing Services business, as was expected in our business plan. And as a reminder, the first quarter of each year is typically when this segment will create the majority of its EBITDA. Overall, our Marketing Services business is extremely well-positioned to take advantage of the recent natural gas price and location volatility we've seen in July. And so we expect them to exceed the high end of the $50 million to $70 million annual adjusted EBITDA contribution we discussed last quarter. So again, another strong quarter with 14% growth in EBITDA, driven by core business performance and upside in our upstream joint venture operations. Let's move to Slide 3 and take a look at our current thoughts for full year 2022 financial guidance. We are once again pleased to share a substantial improvement in our 2022 financial guidance, making this the second increase since our initial guidance in February of this year. I won't go through each of these metrics, but will offer some commentary on the most pivotal numbers. So let's start with adjusted EBITDA, where our midpoint is increasing another $200 million from our last guidance increase, moving from $6.05 billion to $6.25 billion. This second substantial raise in EBITDA guidance is grounded in our continued confidence in the growth of our core business and represents a nearly 8% increase from our initial guidance given in February. As we look to the second half of the year, we expect higher EBITDA than the first half for all of our segments, except perhaps the marketing business, and with an overall pick-up in sequential EBITDA growth for the fourth quarter over the third quarter. Although it's less certain, our Gas & NGL Marketing business could also match or exceed their first half performance during the last six months of the year, which is a bit unusual for this business. Their storage and transportation assets and trading capabilities are very well-suited for the volatility we are seeing in the natural gas markets. Continuing on with the other segments, we expect Transmission & Gulf of Mexico should finish the year strong with fourth quarter numbers more like their first quarter numbers. And we continue to expect growing quarterly EBITDA and volumes from our West and Northeast segments with some level of acceleration through the latter part of the year. With respect to our upstream operations, we are encouraged by the results we've seen thus far in 2022. In the appendix, you'll see that we're guiding to fourth quarter '22 gross production of approximately 250 million cubic feet per day for the Wamsutter operation and we have increased our expectations for Haynesville to an estimated fourth quarter '22 gross production rate of about 400 million cubic feet per day. Our appendix slides also provide information about the specific hedges we've currently placed against our forecasted net production volumes. No change to our CapEx assumptions from our previous guidance update in May on our first quarter earnings call, which had increased from the February guidance only to reflect the Trace acquisition capital spending. You see that our debt-to-adjusted EBITDA is now expected to be about 3.6x at midpoint. The remainder of the guidance items either changed in relation to the change in EBITDA just discussed or remain unchanged. So again, a second substantial increase in EBITDA guidance representing an almost 8% increase in our midpoint from our initial guidance provided in February of this year, driven by continued growth in our core business as well as contributions from our Trace acquisition and improved expectations for our upstream JV operations. So with that, I'll pass it back to Alan to review our key investor focus areas.

Okay. Well, thanks, John. I'm going to move on here on Slide 5 to the key investor focus areas. So I know this may sound a little bit like a broken record, but without a doubt, we are the most natural gas-centric of the large-scale midstream companies. And there's a reason we've stuck with our natural gas-focused strategy for as long as we have. Not only is this strategy delivering in the current environment, but the signals coming from the market show that it's going to continue to deliver substantial growth for the long term as well. We continue to see strong fundamentals driving a great pipeline of growth opportunities, particularly increasing demand for U.S. LNG exports and power generation along the Transco corridor. Importantly, we continue to see strong demand for our services domestically as well, evidenced by a three-day peak summer delivery that we achieved on the Transco pipeline in early July this year as we continue to see weather-driven demand for cooling. So really seeing a lot of big pools, you're seeing some strong basis differentials setting up in these areas where we've got some strong peak demands during the heat wave that the Southeast experienced. And notably, we continue to see these record levels of demand for natural gas even with the Freeport LNG facility being out. So we see these as good indicators of the long-term health of our business, but I'll remind you that business on our Transco system is actually driven by contracted capacity and not the actual transported volumes. But obviously, when we see peaks like that, our customers are seeing those as well and know that the demand on our systems and the growth in demand on our system is needed and the contracts come with that. This demand growth continues to increase in the face of higher natural gas prices, which speaks to the continued inelastic demand for natural gas, both here and abroad, and the fact that natural gas remains a bargain versus alternative fuels. Our G&P business also continues to thrive in the current environment, allowing us to capture the upside benefit of pricing and inflation adjusters in our rates that have been sitting on their floor for many years. And recently, volumes on our systems have finally begun to respond to the higher prices that we've seen in the gas space. So moving on to financial strength and stability. As John just detailed, we increased our guidance midpoint beyond the high end of the previous range for the second time this year to $6.25 billion, and this was driven by the following items: first of all, strong base business performance with volumes in the Northeast G&P business expected to rebound for the balance of the year; increased volume outlook for our upstream JVs, especially in the Haynesville; the benefit of higher commodity prices in our upstream JVs; and finally, commodity volatility and strong pools for power generation that are currently driving our Gas & NGL Marketing business upside. With our recent updated guidance, we expect to achieve a five-year EBITDA CAGR of 7% and an impressive EPS CAGR of 22% at the midpoint of this recent guidance. Our business continues to fire on all cylinders, given our driving financial strength and to build impact from inflation to our business. So worth noting our business is well-positioned given the strong fundamentals today, and we don't expect much to change should a recession come to fruition. As you may recall, in 2020, Williams exceeded our pre-COVID guidance for that year despite facing challenges like key producer bankruptcies, declining commodity prices, and major hurricanes in the Deepwater Gulf of Mexico. So now looking over our position of growth. We recently announced that we reached a final investment decision on our Louisiana Energy Gateway project, a 1.8 Bcf per day gathering system that will help us advance our wellhead and water strategy while also positioning our customers with access to favorable pricing markets along Transco. Within our transmission business, the Gulfstream expansion is in service more than three months early, and I'm also pleased to announce that Williams has reached a rate case settlement in principle on our Northwest Pipeline system. This provides a win-win outcome for both ourselves and our long-term customers on the system. So we continue to execute as well on an attractive high-return backlog of growth projects, including six projects now in the Deepwater Gulf of Mexico; five Transco projects totaling 1.9 Bcf a day; four expansion projects in our Northeast G&P business that will really unlock some high-margin business for us in that area; and four in the Haynesville, which continues to grow at a pace well beyond our initial expectations. And as well on the Transco projects, just last week, the FERC issued the final EIS on our Regional Energy Access project, expanding takeaway from the Northeast PA area, which obviously helps us as well on our gathering systems up there and the volumes up there and serving growth in the New Jersey area as well. So really excited to see the progress with the FERC on bringing that project to fruition. And as well in the Haynesville, just another note here, we are really seeing that paying a lot of long-term dividends, not just because of the growth in the business but because the Trace acquisition, along with the LEG project, is going to allow us to bring integrated services and connect them to key markets for our customers. So the better markets those customers are connected to, the better margins and the more activity in drilling we see up there. And in fact, we're seeing significant well outperformance in our upstream JV operations with GeoSouthern, which continue to improve our upstream margins. And as well, recall that the reasoning behind our upstream JVs was to drive utilization of latent midstream capacity. This is exactly what's happening in the Haynesville right now, and we expect the same capture of midstream value in the Wamsutter as our JV drilling program ramps in the coming months as well. Now let's discuss our sustainable strategy. I want to provide some updates on what has been happening. As I mentioned at the beginning of the call, we released our 2021 Sustainability Report last week and submitted our Carbon Emissions Disclosure to the Carbon Disclosure Project. Both reports highlight our ongoing efforts to use our natural gas-focused strategy and current technology to take immediate steps toward reducing emissions. We have achieved a 47% reduction in our company-wide Scope 1 and 2 emissions since 2005, and we are progressing toward our 2030 goal of a 56% reduction from those 2005 levels. I am proud of the progress we have made and will continue to make, especially as our 2022 all-employee annual incentive program now includes a goal to reduce total methane emissions by 5% from our three-year average, which connects every employee to our commitment to safe, reliable, and environmentally friendly operations. Our efforts extend beyond immediate opportunities. We're also concentrating on advancing the next generation of clean energy technologies. I previously mentioned our LEG project, which is a crucial part of our low-carbon wellhead-to-water strategy. This project is highly integrated and supports our partnerships with Context Labs, Encino Environmental, and Satlantis, whose technology solutions will be incorporated into the project to facilitate the measurement of comprehensive verifiable and transparent emissions data, demonstrating the low carbon benefits of produced and delivered Haynesville natural gas. We're thrilled with the progress we've achieved on this project in the Haynesville, having recently completed the implementation of on-site monitoring and certification capabilities in our systems there. Many positive developments are coming together for us in the Haynesville, including significant growth in the area and our demonstration of new technologies that we plan to deploy for that region. We're also advancing our wellhead to burner tip strategy in the Northeast with anchor customers to be announced later this year in that area. So lots of tangible solutions we will be delivering in this space. All of these are positioned around supporting and enhancing our strong natural gas-focused strategy. So let me move on to closing here. I'll reiterate that we have built a business that is steady and predictable with continued growth, improving returns, and free cash flows. Our best-in-class long-haul pipes are in the right place, serving the right markets. Our formidable gathering assets are in the low-cost basins that will be called on to meet gas demand as it continues to grow for decades. Our Sequent platform is providing infrastructure optimization services that create value for Williams and our customers while mitigating downside risk in these volatile and fast-growing markets. You've heard me say before that we are bullish on natural gas because of the critical role it plays and will continue to play in both our country's and the world's pursuit of a clean energy future. But I'll go a step further here to say that we're also bullish on America's ability to lead on all fronts when it comes to clean, reliable, and affordable energy. The United States is positioned better than any other country to solve the energy crisis and the climate crisis that we're facing around the world. But access to our abundant and low-cost natural gas reserves is dependent on having the appropriate infrastructure to move energy where it is needed. The efforts to build out all forms of key infrastructure have been blocked by obstructionists who don't offer practical and sustainable solutions to serve these growing energy demands. The impacts of inadequate infrastructure are now finally front and center with consumers bearing the brunt of these actions in the form of high energy prices, high utility bills, and energy-driven inflation both here and around the world. The good news is that this is exactly the kind of catalyst that it takes to bring public awareness to these matters and the European prices are even highlighting the matter further. That is why we are strongly advocating for actionable energy policy solutions and permitting reform that will support global emissions reductions, keep energy costs affordable, and grow our nation's competitiveness. Enabling the efficient unobstructed build-out of our nation's energy infrastructure is foundational to the U.S.'s leadership on greenhouse gas emissions and energy security. We believe that support is building as we work towards just doing that. So with that, I'll open it up for your questions.

So I guess first thing, I just wanted to ask is really about the permitting legislation that is being proposed by Manchin. I guess a question specific for you guys is, are there any projects that maybe you took off the Board previously that could come back if this legislation actually passes? And then as a follow-up to that, if this legislation does get passed, could you maybe talk about the puts and takes as we think about gas being sourced between the Permian, Marcellus, and Haynesville if this does get passed?

Yes. Thank you. Great question. Well, first of all, the actual language for that proposed bill is not out. So it's kind of hard to comment on. But I would say that we've been working hard on our government affairs front and really the whole executive team in trying to influence the policy and the legislation that would come out on that. So we're hopeful that this will be very meaningful. If it does, I would think that it would try to address the situation where we've had states abusing the 401 water quality certificate that are blocking projects. That certainly would open up some opportunities for us as we've had some projects blocked on that basis. So I would say we're optimistic, but a lot can happen in the world of politics and we're just not really certain exactly how that bill will come out at this point. But relative to the Haynesville, the Permian, and the Marcellus, certainly, the Marcellus has been the basin that has decades of low-cost gas as well. But really, if we're going to get up on planes and be a large exporter of natural gas, we're going to need the Marcellus for the long term because that is where a lot of our very low-cost reserves are impacted. The basin by that will be the Marcellus because things like in Louisiana, for instance, that infrastructure, a lot of that is being expanded within the state. It is up against some of those same challenges and is certainly more supported by politics in those areas. So we are very hopeful. We think the Marcellus and the Utica both would benefit significantly from the kind of permitting reform that we're looking for.

All right. It makes sense. I appreciate that, Alan. As a quick follow-up, your Northeast G&P volumes were a bit flat in Q2. I guess, kind of wondering if there's anything specific going on there. And also in the press release, you talked about advancing multiple gas gathering projects in the Northeast. So maybe could you talk about the timing of bringing some of those gas gathering projects online and whether this is targeting more rich gas areas?

Yes. We do have some pretty exciting projects. I'll let Micheal Dunn talk about some of those that will unlock some of that capacity in the area.

Sure. Thanks, Alan. Our gathering volumes were up slightly in the second quarter compared to last year. That's really meeting our expectations. Most of our producers are in maintenance mode there and expecting some growth to occur in '23. But also in the latter half of '22, as we've been talking about in the previous call, we would expect to see some volume increases there coming online before the end of the year. So stay tuned, we do expect to see some additional volumes coming our way. In regard to our expansion projects, we do have a number that we've outlined in the presentation materials that are going on in the Northeast, some in the Northeast PA area. But that's targeting dry gas there in the Northeast PA area. That one would come online in the second half of '23. Then we've got several in the rich gas areas in Southwest PA and West Virginia. The bulk of those will come online in '23 as well, as outlined in the material. But we do have an interconnect that we're working between our West Virginia processing areas and the Blue Racer system that would come online this year. That would unlock some additional processing capacity access for our West Virginia properties where we are currently at capacity in West Virginia on processing. That will help alleviate some of that constraint by moving that volume over to the Blue Racer system. That will be online within the next several months. But we'll unlock some additional opportunity there. But all in all, the bulk of the expansion will come online in '23 and our producers are gearing up for that.

So maybe just to start on the upward guidance revision, could you frame up the puts and takes at the upper and lower end of the revised range? Any kind of just tying on to that, for the unhedged portion of remaining 2022 production volumes, had your pricing assumptions around Henry Hub changed at all from your Analyst Day or if the current strip holds, would that be upside?

Yes, we won't provide excessive detail on that, as it could lead to endless discussions regarding pricing. However, I can say there is potential for improvement at the current strip, and there is potential compared to our midpoint, which could bring us closer to the high end of the range if the current strip for natural gas remains stable. We don’t adjust our oil projections as frequently, so there is some minor impact on both NGLs and oil, which would be lower than previous expectations.

Got it. Appreciate the color there. And then costs generally ticked up on a sequential basis, particularly in the Northeast and Transmission segments. Wondering if you could give a little more color on the drivers there? Was that just a factor of timing or general cost inflation that you're seeing? Or were there any discrete factors that we should be thinking about as we think about the trajectory through the remainder of the year?

Sure. This is Micheal. I'll take that. So in the Transmission Gulf of Mexico business, we did see some cost increases there, and this was primarily driven by maintenance activities that we accelerated into the second quarter. We did anticipate some significant volume demand on the Transco system and seeing that expectation out there, we did accelerate some work to get that out of the way before the summer air conditioning loads on the power generation side. And so we accelerated that work. We also had some unforeseen integrity work that we undertook in the second quarter, and we obviously didn't anticipate that, but that impacted our expenses there. I would just say, in rounding that out, though, we did exceed our EBITDA expectations and our plan for the Transmission Gulf of Mexico business in the quarter and year-to-date. So those expenses didn't impact our planned numbers and our expectations there. And in the Northeast, a very similar story there. We're just working on various maintenance overhauls and things of that nature in the second quarter. So costs are up slightly there, some of that’s driven by activity that we've expected to do in the second quarter. Really nothing unforeseen there against our budget though, I would say.

It seems like Mountain Valley Pipeline could actually happen. There's been a soft start before, but it may actually happen this time. Would that starting up have any material impact on your EBITDA?

Yes, it would. There's quite a bit of gas supply back in the gathering systems upstream of that. Recall that EQT bought out Chevron's acreage, which is a lot around our West Virginia assets. Some of our high-margin business in that area from that original dedication from Chevron, which actually came originally from Atlas. And so some pretty nice pull on our gathering systems and as well on a longer-term basis that will enable us to be able to continue to provide lower, call it, less capital investment in expansions on our Transco system with bringing supplies into that area, which is becoming more and more in demand. So yes, we would see Mountain Valley Pipeline as very positive to us in the immediate term around increased gathering flows on our system and processing and fractionation. But as well, provides lower cost, lower capital expansion opportunities on Transco that, of course, allow us to make higher returns and better margin on our Transco business. So we're certainly pulling for Mountain Valley Pipeline to get built.

And then how large of an operational impact, if any, could this EPA turbine emissions will create for Williams? Can you give some color on how you see the way forward from here?

Yes, Jean Ann, I'll take this. This is Micheal. We don't anticipate that having any impact on our business and the requirements to go out and do the testing is underway, and we're seeing the results such that it will have no impact on our business.

So leverage is down to 3.6% this year and EBITDA is growing at a double-digit rate. So I'm just wondering with the strong backdrop, how you think about capital return for the balance of the year and into 2023? And it feels like you've raised guidance twice this year. So maybe you have some more flexibility to return capital? So curious on your thoughts.

Thanks, Puneet. This is John Porter, I will take that. Yes, so relative to capital allocation, I might just sort of restate our current priorities and guidelines remain unchanged with the focus on our balance sheet strength and our growing dividend with very strong coverage, our strategic organic investments, including investments in modernizing our regulated assets and making disciplined new energy investments. Beyond these priorities, we maintain excellent financial flexibility to manage debt refinancing through the volatile debt capital markets we've been seeing lately, pursuing bolt-on transactions that can add scale to our core natural gas-based strategy like the Trace acquisition or to pursue stock repurchases. I might just say a little more on the stock repurchases since I know it's an important topic out there. As you'll recall, we previously discussed initiating share repurchases based on reaching an undisclosed spread between our equity yield and our 10-year debt cost. Now obviously, since then, we've seen significant increases in our 10-year debt cost, which really would have made it increasingly unlikely that share repurchases would be triggered. So we did recently revisit those principles, and we're not only considering the current equity yield now, but we're also considering a level of expected growth in the business given the solid growth we've seen in the business now for many, many years. The effect of this change will provide us more flexibility to be opportunistic around share repurchases should we see a significant pullback from current valuation levels. And this might be the case if a recession gains strength and energy macro conditions were to deteriorate. We have more confidence than ever in our ability to perform very well even through a severe recession, and we feel like our performance in 2020 during the heart of the pandemic really proved this to be true. So our current share buyback principles will allow us to act opportunistically if we see a valuation dislocation. By the way, the strong free cash flows coming off our upstream JVs would be a great source of capital to affect share repurchases under these circumstances. So I hope that provides an overview on the capital allocation question. I think relative to the leverage, in particular, the 3.6 that we're guiding to now is obviously well below the 4.2 metric, which we believe is more of the ceiling for maintaining our strong BBB credit rating. We do continue to believe a BBB credit rating remains optimal for our business, and we are also mindful that our current metrics are benefiting from a pretty strong commodity price backdrop. But in any case, we are pleased with the financial flexibility we have had under the present circumstances and excited about our future prospects really no matter where the synergy cycle goes next.

And then switching gears, can you talk about what you're seeing in the Eagle Ford? I think, drilling activity has been picking up. I know you have some MVCs there. Do you think volumes could move above MVCs at some point in the coming years? Or do you think they'll kind of stay below MVCs?

Yes, I would add that we have a contract with Chesapeake and are also engaging with other customers, which is leading to new business due to some renewed activity. We're pleased to witness this development. Regarding the contract with the MVCs, there is still progress to be made to exceed the MVC levels, which will require proactive responses from the producers. Nevertheless, we are enthusiastic about the ongoing activity and the additional business we are securing from other producers that is supporting us.

Just want to come back to the Inflation Reduction Act a little bit, if I could. I just wanted to see, I guess, what are some of the things you're watching there that could positively influence your business specifically as it relates to the tax credits? If some of those do come to fruition, how that might impact your view of CCS, hydrogen, or other?

Yes. Let me have Chad Zamarin address that, Chad?

Sure. Yes. Thanks. I'd say we have announced potential projects in the CCUS arena. We're very active in exploring the hydrogen potential. We've been publicly discussing the fact that we're participating in four potential hydrogen hubs that were a part of the Infrastructure Act, the funding through DOE was part of the Infrastructure Act. So we've been actively pursuing multiple opportunities to prove out those areas. The proposed tax credit would be supportive of our strategy. Certainly, the 45Q credits would be very supportive of our CCUS project in the Haynesville, which would be a project that will be built alongside our lake system that would decarbonize that project and production in Haynesville. So we're very excited to see that forward. Hydrogen has still got a long way to go. The projects that we think are being discussed are primarily in support of green hydrogen, and we've got great opportunities across our footprint to complement our infrastructure with green hydrogen production. But also, seeing the CCUS credits and the hydrogen credits together, would be the most impactful for supporting kind of natural gas production moving forward. So we're encouraged with those. As we spoke on previous earnings calls, those projects are in line with our expectations, and we would see projects that will move forward based on those credits. So I'd say stay tuned.

That's helpful. And just want to pivot towards Haynesville a little bit here. You gave some good color, but wondering if you could provide a little bit more with regards to Trace performance versus expectations? And specifically, incremental expansion projects there. Just wondering how you see the cadence of Haynesville growth on your systems and how long the runway is?

Thanks, Jeremy, this is Micheal. Yes, Trace is performing as we expected. So, so far, so good. We've integrated the team there very well, taking hold of what the culture is here at Williams. So very pleased with what we're seeing there so far. On the rest of the Haynesville, we are seeing some great improvements year-over-year in regard to our gathering volumes there. So very pleased with that and across a great array of different producer customers. We do have a number of expansions underway in the North part of the system. Some of that will come online later this fall, but we also have some in our South Haynesville system that we are anticipating bringing on as well. So a lot of activity and associated expansion opportunities. We’re at a number of different producers there, both public and private, and we've outlined that in the presentation materials, but these expansions are pretty reasonable costs from a capital investment standpoint just because of the backbone nature of the systems that we have built out there. We've talked about GeoSouthern driving a lot of new capacity through our systems that we had already built out a long time ago, and we're seeing the benefits of that now with these low capital investment opportunities that are driving very significant volume growth out of the Haynesville.

First question, I really want to just follow up on some of the capital allocation commentary previously. I appreciate the color. But as a follow-up, you talked about the spread between the equity yield and credit. I'm just kind of curious, just given Williams is heading towards a sub 3.5 leverage. Just wondering if there’s a point where Williams will consider sub-optimal leverage as another consideration in terms of the capital allocation framework in case Williams does not see that potential equity pullback alluded to?

Yes, I think we are really focused on maintaining our BBB credit rating as really being optimal for the business. We've got to stay mindful of the amount of tailwind that's coming from the very strong commodity prices right now. So we're taking a long-term view of the business cycles and the commodity price cycles and continue to think about leverage, what leverage target makes the most sense. But really, we're focused on the strong BBB credit ratings and being durable through many different business cycle iterations and having dry powder along the way too for bolt-on transactions that might really help our natural gas scale.

Great. As a follow-up, I appreciate the commentary on the tax credits. Could you provide more insights on the corporate minimum tax proposals? What initial comments do you have on the potential impacts to Williams? Also, regarding NOLs, I understand there's a difference between book earnings and the impact on your financials. What are your initial thoughts on how this may affect Williams?

Yes. Thanks, Brian. Yes, my response will be pretty general given that we're still tracking the continued development of the legislation and a lot of the more important specifics will probably be a result of work getting done by the IRS or the treasury department down the road. But based on what we know today, we'd offer the following comments. Under the current tax code, we resumed paying some cash taxes in '25, but with a more significant step-up in '26. So this policy change would really just mean that we start paying cash taxes in '23. However, this appears to just be a timing issue and not a permanent increase in tax. In other words, we would be able to claim a credit for the book minimum taxes paid against our future regular corporate tax. So from a valuation perspective, it's pretty immaterial versus the status quo scenario. In other words, the impact is really just the equivalent of advancing the government a fairly immaterial noninterest-bearing loan that might grow for three to four years and then start to decline as we utilize the credit against our regular taxes, which again become more significant in the 2026 timeframe. Now additionally, as Chad mentioned, we would also be able to use green energy credits against the book minimum tax, but not until those projects are placed into service. As you know, Williams is enjoying a lot of financial strength and flexibility right now with our 2.29x dividend coverage. So we feel like we remain very well-positioned to absorb the impact of this minimum book tax which, in our case, again, is just essentially in advance to the government of the taxes that were likely coming due in a few years anyway. And one last comment, we don't expect the book minimum tax to affect our regulated rate-based assets either.

A couple of questions. I just want to maybe ask about the backlog and the projects in development slide. It shifted a little bit since 1Q. It seems like maybe some projects have dropped off from LNG, but also been added to the industrial backlog. Just wondering if there's any larger reads there from that as far as either competition or just demand for more infrastructure?

Yes, Gabe, I'm looking at Micheal here to see if he had any insight on that. I don't know what would have dropped off of there, other than maybe we pulled the LNG, the LEG project off and moved that into execution. So that probably occurred is that the only thing because that was slated as an LNG project. I expect that move. But other than that, I would tell you that we just continue to be impressed with the amount of demand for increased services on our Transco system, particularly in kind of the traditional parts of our market as well as a lot of opportunities for serving LNG in the Gulf. But I don't think there's been any shift in our business other than LEG project getting pulled from pipeline into execution.

And then I know it's not a huge driver for Williams, but clearly a full-time in the Conway NGL markets over the last couple of weeks. I was wondering if you can just maybe speak how your assets are positioned there and whether there's been any upside to Williams, given some...?

Gabe, this is Micheal. Yes, I think we'll see some opportunity there to work that issue for the benefit of both ourselves and the third party there, one of them that had the issue. But right now, we are working to make sure we can accommodate volumes into our systems, but it looks like we'll be able to accomplish that and certainly helping the industry out in that regard. But there will be some upside in Williams for the business that we'll take on there.

Thank you for taking my question; I have two. First, you've received a lot of inquiries today about capital allocation. I'm interested in your progress on new projects, and I want to congratulate you on Regional Energy Access and EIS, as well as LEG. How are you approaching growth CapEx for next year and the following year? I understand you won't disclose specific numbers, but can you provide some direction? With many projects in the pipeline, should we anticipate that growth CapEx in the upcoming years will be slightly higher than what you expect this year?

Yes, Michael. Not really. Much of that has already been included in our forecasts, and a significant portion of that budget has already been allocated. For instance, we've spent money on the pipeline, prefabricated work, and very costly deepwater specialty products for interconnection. Most of that expenditure is behind us. Work for the later phases of the project will begin this year and is accounted for in our capital budget. Therefore, even though it might seem like there's a potential for increased spending, when you look at the timing of expenses for these projects, it remains quite consistent over the timeline. We are not seeing any significant increase beyond the typical spending rate at this time regarding capital. We are enthusiastic about these projects. One unique aspect of Williams that we should mention is our capacity to adjust our investments in modernization and emission reduction initiatives on the Transco system.

I have a follow-up question that might be a bit detailed, and I apologize for that. I'm curious about your gas production assets in Wamsutter and the Haynesville. Do you have a specific hedging philosophy that you and the Board adhere to? Specifically, how much of next year's production do you plan to hedge in relation to your production levels?

Yes, Michael, that's a great question. When we identify opportunities and observe market volatility that affects prices, we tend to take advantage of that. However, we are not actively trying to hedge cash just for the sake of securing cash flow; it really comes down to a value proposition. If we believe there is significant upside in capturing hedges or notice that the market is a bit overheated at times, we will try to take advantage of those situations. There isn't a strict corporate policy on this; we simply aim to be opportunistic when we see valuable market opportunities that align with our cash flows.

To add to that, in the Wamsutter, we want to be careful. We have a situation where we have a physical flow issue to three knobs. We will be pretty careful in Wyoming as well to what we hedge up there going into the winter months.

First, John mentioned prospective, more accretive bolt-on opportunities in terms of potential uses of free cash flow. Can you opine on where you still see low-hanging fruit there, specifically with opportunities in the Northeast G&P as well as across the West?

Yes. As far as strategic or bolt-on acquisitions that expand natural gas scale in Northeast and Haynesville, I don't know, Chad, do you want to talk about the landscape that you're seeing there?

Yes. I would just say that we remain very disciplined when it comes to bolt-on transactions. We are always looking for places where we can leverage our footprint, our scale. We do see bolt-on transaction opportunities in the Northeast and continued consolidation in the Haynesville, and virtually across kind of our footprint, including some potential opportunities that complement our transmission and storage businesses. So we'll continue to evaluate those. But I would say, I think you'll see more of the same where we've been very disciplined in making sure that anything that we do has real synergies and leverages our strength. So we continue to feel like there may be opportunities there.

And the increased guidance was not unexpected, but I think a little more than The Street was anticipating. Some of that clearly driven by some volumes that are very attractive and you all mentioned are ramping into the end of the year. If I just annualize the implied second half, I get very close to a $6.5 billion EBITDA run rate. But The Street is under $6.4 billion and volumes are ramping. I realize there's issues of commodity pricing year-over-year. But would it be fair to say that you all are pretty comfortable that you're looking good relative to Street expectations heading into next year?

Yes, Craig, I think you described that actually very well. We do have continued growth in the next year, but I would say that that's offset by kind of the current strip obviously in terms of pricing on the E&P space, but we do have growth in that as well. So yes, we're positioned for an attractive '23. But obviously, we don't have guidance out there, and that will be somewhat dependent on how prices actually realize next year on the E&P business. But certainly, a lot of volume growth to be coming on the E&P business through the balance of the year that will extend itself into '23. The gathering volumes in the Northeast are going to be very durable. The growth that we're seeing in the Haynesville will continue. There are many positive factors working in our favor right now for the remainder of 2022 as well as for a promising 2023. Looking ahead to 2024 and 2025, the transmission projects we are currently working on, along with developments in the Deepwater Gulf of Mexico, contribute significantly to a solid growth foundation. We are optimistic about the upcoming three years, anticipating clear growth opportunities across the business.

Alan, you've discussed this quite a bit, but could you provide a bit more detail on your spending plans? Specifically, I'm interested in an update on your CapEx guidance. You mentioned it briefly during the Q&A, so I was hoping you could share any additional insights on that updated guidance.

Yes on sort of '22 or beyond '22 on CapEx?

Yes, more for beyond, again, I kind of obviously get what you're doing this year and so more is expectations and kind of you've got a lot of exciting projects. So I'm just trying to get an idea of maybe sort of organic versus these other projects and as you said more in the sort of beyond?

Yes. Okay. Sorry, I understand your question a little better now. Well, I would just say kind of as you lay out kind of the puts and takes right now, a lot of money being spent right now in the Deepwater Gulf of Mexico, as I mentioned, particularly on the well prospect and for the balance of the year. That will kind of wane off as we get into '23 as well a lot of expansion projects in our Gathering and Processing areas that will also start to wane off as we get into '23, and those will be somewhat replaced by executing on some of our transmission projects. That group of five that we're executing on right now for 1.9 Bcf a day of new capacity. So that's kind of how I would stack that up as Deepwater, and Gathering and Processing driving that quite a bit through the balance of this year and into the first part of next year, and then that starts to be replaced with execution around our transmission projects. I think that's a good set-up. I would say we continue to see these demand pulls on the gathering systems, while we're not building that growth in right now. Certainly potential for some of that to continue. But again, pretty efficient capital investment projects in our gathering systems relative to the growth, as Micheal pointed out earlier.