The Williams Companies - Q2 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Williams Second Quarter Earnings 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Danilo Juvane, Vice President of Investor Relations, ESG, and Investment Analysis. Please go ahead.

Danilo Juvane (VP of Investor Relations, ESG, and Investment Analysis)

Thanks, Risa, 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 a 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 today are Michael Dunn, our Chief Operating Officer, Lane Wilson, our General Counsel, and Chad Zamarin, our Executive 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 reconcile 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.

Alan Armstrong (President and CEO)

Great. Well, thanks, Danilo, and thank you all for joining us today. The story that John and I get to lay out for you this morning is one of consecutive growth, as Williams continues to deliver on a long-term trend of per-share growth and resilience, regardless of the macro environment. In fact, we delivered record second quarter results driven by the strong performance of our transmission and storage business this quarter. Even our gathering and processing business held up very well, despite challenging natural gas prices. The good news is that a meaningful increase in natural gas demand that continues to exceed our expectations will take advantage of these abundant supplies, driving growth for years to come, and the supply side is poised to respond with over 1 BCF a day of volumes from delayed TILs and temporary shut-ins to return to our gathering systems.

Before we get deeper into the financial metrics, I want to hit on a few key themes from the quarter, namely, our crisp execution of key projects that are positioning us for continued earnings growth and the ongoing focus we have on optimizing our portfolio and ensuring sustainable operations. Starting here on slide two, our teams have executed on an extraordinary amount of strategic priorities, including placing projects into service in the Northeast, the West, and the Deepwater Gulf of Mexico. Just to run down the list quickly here, last week, we placed Transco's Regional Energy Access into full service ahead of schedule and under budget once again, ensuring clean and reliable natural gas is available to serve the Northeast region for the upcoming winter heating season.

While the D.C. Circuit Court did issue a decision last week to vacate the FERC certificate for REA, we believe the court's concerns about the FERC's process is once again flawed and will be fairly easy for the FERC to resolve. In the meantime, we are taking the necessary legal and regulatory steps to address the court's concerns and ensure that this much-needed, firm transportation capacity continues to be available to serve the needs of our customers without interruptions. I'll remind you that our industry has seen similar court rulings in the past with projects such as Sabal Trail, as well as Spire's expansion. With both of these projects operating today, we see limited risk to major interruptions to REA operations and are prepared to help the FERC in reaffirming the merits of this important project.

Other notable expansions we've recently completed include the Marcellus Gathering Expansion, that serves Southwestern's Rich Gas zone in the Marcellus, and the fully contracted MountainWest Uinta Basin Transmission Expansion. In the Deepwater, there are two new fields that will increase EBITDA in the third quarter on our Discovery system, which we now fully own. We're excited about the acquisition of the additional interest in Discovery, and we're really excited about the kind of growth that we're seeing, both here in the near term and the long term. First of all, Chevron's large Anchor development and Beacon's Winterfell five-well program are both fully connected and will drive a large increase in EBITDA for 2025, as well as for the balance of this year. Additionally, Hess brought on their Pickerel prospect on June 25th that will grow EBITDA on our Eastern Gulf assets.

We were also active on advancing construction for several key projects. We initiated construction activities on the Louisiana Energy Gateway Gathering, Treating, and Carbon Capture project, as well as Transco's Texas to Louisiana Energy Pathway project, which we call TLEP. TLEP project provides our anchor shipper, EOG Resources, with access to the LNG corridor and higher priced markets on the Transco pipeline, and specifically all the way into the Louisiana market. So we're excited about getting started on that fairly significant project for us. And then recently, we also signed a precedent agreement on Transco's Gillis West expansion. This will bring new, reliable, and low-cost supplies to CenterPoint Energy's Houston area markets from Louisiana, so this is effectively a backhaul on Transco, helping CenterPoint to reduce their dependence on the Texas intrastate gas pipeline systems.

Importantly, this quick-turn project will add meaningful EBITDA with very little capital required on our part to place that into service. I also want to call out the significant emissions reductions and cost savings accomplished this quarter as part of our system-wide modernization and emission reduction program. Thus far, we have replaced 57 transmission compressor units and are on track to meet our goal of 112 units to be replaced by the end of this year, so that we can begin recovering on these investments in our latest rates. And on that note, we will file our new rates on Transco at the end of this month, and the new rates will go into effect in March 2025. So incredible amount of work going on by the teams to replace a lot of these very old units with modern low-emission equipment on the system.

A lot of times, those kind of projects kind of get overlooked, but tremendous amount of effort and great execution going on by the teams on that front as well. Looking at the second column, we continue to take steps to optimize our asset portfolio. We sold our stake in the Aux Sable joint venture at an attractive gain and consolidated our ownership interest in the Gulf of Mexico Discovery system at an attractive value, given both the very near and long-term growth on this asset. From a financial perspective, we remain on track to achieve the top half of 2024 EBITDA guidance, and we also reaffirm our expectations for 2025, which translate into a 5-year EBITDA CAGR of 8%.

More importantly, the growth in our per-share metrics will be just as strong over this five-year period, with AFFO per share CAGR of 7% and our EPS CAGR of 12% over this five-year period. Of note, the fundamentals to sustain and even improve on this industry-leading earnings and cash flow growth beyond 25 actually continue to improve. Our Southeast- our SESE project is just the first of a few projects we expect from the secular trend of increased demand for power generation, and we remain in the best position to secure additional infrastructure solutions in and around our Transco pipeline footprint. And finally, we continue to prioritize being a responsible operator in all that we do. And this is clearly outlined in our 2023 sustainability report that we republished last week.

This report is really a deep dive on how we focus on doing business the right way, and one area I'll call out is our efforts in progressing on our decarbonization goals. We are focused on proving up that the natural gas industry can play an even more important role in providing affordable and reliable energy, while also continuing to reduce greenhouse gas emissions here at home and around the world. And so with that, I'll turn it over to John to walk through the second quarter financials. John?

John Porter (SVP and CFO)

Thanks, Alan. Starting here on slide 3 with a summary of our year-over-year financial performance. Beginning with adjusted EBITDA, we saw about a 3.5% year-over-year increase, despite low natural gas prices that fell about 5% versus 2Q-2023, averaging close to around $2 per second quarter of 2024. That 3.5% adjusted EBITDA growth is over a second quarter last year that had grown about 8%. In spite of low natural gas prices, once again, our resilient business continued to grow, even as producer customers employed pretty significant temporary production reduction measures, like not completing drilled wells and/or not turning inline wells that now stand ready to flow as prices improve.

As we'll see on the next slide, our adjusted EBITDA growth was driven by strong growth from our large-scale natural gas transmission and storage businesses, including the favorable effects of our recent acquisitions. Year to date, our adjusted EBITDA is now up 6%, so right in the middle of our long-term growth target of 5%-7%. For 2Q, our adjusted EPS was up 2%, and year-to-date EPS is up about 3%, so a bit slower EPS growth in 2024 as compared to the 19% five-year CAGR that we've seen through 2023. But as Alan mentioned, looking through 2025, we do see a five-year CAGR that will be in excess of 12%. For 2Q, available funds from operations, AFFO growth, was 3% and 4% year to date.

Similar story here with this slower 2024 growth is following an 8% five-year CAGR through 2023. And when you look through 2025, we see a five-year CAGR of 7%. Also, you see our 2Q dividend coverage based on AFFO was a very strong 2.16x on a dividend that grew 6.1% over the prior year and 2.38x coverage year to date. And our debt to adjusted EBITDA was 3.76x, which is in line with our expectations for slightly higher leverage in 2024, before dropping back down in 2025 to guidance of 3.6x or better. So before we move to the next slide and dig a little deeper into our adjusted EBITDA growth for the quarter, we'll provide an update to our financial guidance.

In general, our second quarter update is unchanged from what we provided in our first quarter earnings presentation. Based on our strong start to 2024, we guided to the upper half of our 2024 adjusted EBITDA range of $6.95-$7.1 billion, and we indicated that we were well positioned for upsides to drive toward the high end of this original guidance. We also shared that we remain well positioned to deliver on our 2025 adjusted EBITDA range of $7.2-$7.6 billion. And that based on our improved 2024 adjusted EBITDA outlook and some other changes, we saw our key per-share metrics, adjusted EPS and AFFO per share, coming in at the high end of their ranges for 2024....

So again, no major shifts to that first quarter update, except perhaps to say that we are increasingly comfortable that we can clear the $7 billion level for 2024 Adjusted EBITDA, while still not counting on any additional help from Sequent. And of course, we also wouldn't include the around $150 million gain we expect to have on the Aux Sable sale in there, as well as we exclude gains and losses on asset sales from our Adjusted EBITDA measure. So let's turn to the next slide and take a little closer look at our first quarter results.

Walking now from last year's $1.611 billion to this year's $1.667 billion, we start with our transmission and Gulf of Mexico business, which improved $64 million, or just over 8.5%, due to the combined effects of a full quarter contribution from the Hartree Gulf Coast storage acquisition, which is delivering as expected following a flawless integration effort. We also had higher Transco revenues, including partial in-service from the Regional Energy Access Project, and segment growth was unfavorably impacted by last year's Bayou Ethane divestiture and also some planned downtime in the Eastern Gulf of Mexico. Now, the $36 million unfavorable variance for the Northeast GMP business is really against a strong quarter last year that included the effect of a one-time $15 million favorable gathering revenue catch-up adjustment.

However, we did see lower Northeast gathering volumes that were driven by those temporary producer reductions that were basically roughly in line with our plan for the year. Partially, those volume reductions were partially offset by rate escalations across several franchises in the Northeast. Shifting now to the West, which increased about $7 million, benefiting from the DJ transactions that we completed in the fourth quarter of 2023. The increase in the DJ Basin results was about the same magnitude as the unfavorable loss of hedge gains we had in 2023. Segment performance was also favorably impacted by higher NGL Services results, including higher Overland Pass pipeline volumes, where low natural gas prices have supported greater ethane recoveries. Overall, West gathering volumes were also lower as a result of temporary producer reductions, primarily in the Dry Gas Haynesville area.

And then you see the $2 million lower marketing loss that was in line with our plan, based on the expectation that our natural gas marketing business will typically have a loss in the second quarter. Our upstream joint venture operations, included in our other segment, were up about $12 million from last year. So again, a second quarter that continued to beat our business plan, proving once again our ability to grow our business in spite of a challenging natural gas pricing environment, and also giving us further confidence in our ability to beat $7 billion of adjusted EBITDA in 2024. And with that, I'll turn it back to Al.

Alan Armstrong (President and CEO)

Okay. Well, thanks, John. Just a few closing remarks before we turn it over to your questions. I'll end where I started with my remarks, and that is to emphasize what Williams has been able to deliver in the current environment and how well positioned we are for the future as natural gas demand continues to grow. As we think about our long-term strategy, we are confident in the role our valuable natural gas infrastructure will play in meeting both today's energy demand as well as the projected growth from power generation and LNG exports. We are seeing demand grow at an unprecedented pace, and expansions of our uniquely placed infrastructure will demand a premium. Simply put, there is no other midstream company today that is set up better than Williams to capture this demand growth.

We are the most natural gas-centric, large-scale midstream company around today, and our natural gas-focused strategy continues to deliver growth on top of growth quarter after quarter. To that point, we've now seen 11 consecutive years of Adjusted EBITDA growth and an 8% compound annual growth rate of our Adjusted EBITDA since 2018. In addition, we have realized a 19.5% return on our invested capital during the last four years, and our steadfast project execution has led to record contracted transmission capacity and will continue to drive per share growth in 2024 and beyond. In fact, our current projects in execution have higher returns than this prior four years. In closing, we've built a business that is delivering record profitability and strong financial returns in the present, but is positioned for an even faster-growing future.

With that, we'll open it up to your questions. Thank you.

Operator (participant)

Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit your questions to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Praneeth Satish of Wells Fargo. Your line is now open.

Praneeth Satish (Senior Equity Analyst)

Hi, all. Good morning. Maybe I'll start with data centers here. So you mentioned that you're looking that SESI is just the first in maybe a handful of other data center projects. I guess, you know, two questions here. Can you give us a sense of the size and scope of some of the other projects that you're looking at in the backlog? And then how do you think about the returns on future projects for SESI? I mean, we're estimating around a 5x EBITDA multiple. Do you think that some of the future data center projects that are in the backlog could earn similar types of returns?

Alan Armstrong (President and CEO)

Yeah. Well, first of all, Praneeth, thank you for the question and, you know, important issue. First of all, on SESI, actually, our return is, even better than that, probably, as we've mentioned, the best return we've ever seen on a large-scale project on Transco, and actually, any of our transmission expansions over the long history for Williams. So, a pretty extraordinary return opportunity there. You know, in terms of the data center load, we are, right in the throes of that. We have a very long backlog of projects. And I will tell you that, particularly in the Southeast and the Mid-Atlantic, those expansion opportunities that we have, we frankly are kind of overwhelmed with the number of requests that we're dealing with, and we are trying to make, sense of those projects.

Obviously, we're not going to start or announce another expansion project on the top of SESI, because, obviously, that would force a combination of projects. And so, it doesn't make any sense for us to be making any announcements when we've got a large project that, that we've committed to our customers to do everything we can to get that permitted cleanly and push that ahead. So extremely critical expansion for our utility customers there in the Mid-Atlantic and the Southeast, and we understand that, and, and we're going to make sure that, you know, we deliver on that first to our customers.

But despite the fact that there's a lot of attention there in the Southeast and the Mid-Atlantic, we're actually seeing strong demand response and a lot of projects that we're dealing with and trying to figure out how we can respond to in the Rocky Mountain states, particularly in Eastern Washington, in the Quincy area, in Idaho, in Salt Lake City region. So a lot of demand going on everywhere. And frankly, the big developers that we're working with are looking to find where they can—because the time is of the essence, probably more than we can even imagine in our business. And so they are looking to where the permitting regime is right, where there's access to abundant natural gas supplies, and frankly, where expansions on our systems are available.

And so, this has moved from being one where people have been very focused previously in cloud-based data centers. They've been very focused on the latency issue, or in other words, the connection into very fast and broadband networks, to where they are now focused on the latency being less of an issue. Not—I wouldn't say it's not an issue, but less of an issue, and the speed to market for power generation and gas resources being available to power that are coming front and center, along with the local air permitting issues associated with that. So I would just tell you, it is kind of an exciting time for us and even for me personally, to be in such a steep learning curve on how we are going to make the very best use of our assets.

But there certainly is not a dearth of opportunity for us in that regard. In fact, as I said, it's a little bit overwhelming, and we're going to have to just make sure we make the very highest use of our assets, because there obviously is, you know, as we expand the lower cost expansions, drive very high returns, but we only have so many of those, and those are precious, and we know that. So we're making sure that we make the various highest return associated with the expansion around our assets. So, you know, we're not going to put a number on it because I hear people putting a number on it, and frankly, that's a very large guess, and it's in a time frame, frankly, that that's out there so far that...

And if you're not speaking to the returns that you're making on the project, I'm not really the purpose of quoting those kind of numbers when you're not really talking about the economic or financial impact to your business, and we're not ready to lay that out. But I can tell you that if anybody else has more opportunity than we do, I wish them luck, because we're going to have a hard time keeping up with the opportunity in front of us right now. So, hopefully, that gives you some color, but I would tell you, I think it's not all that meaningful to quote volumes on expansions if you're not talking about returns and you're not talking about the time frame for those opportunities.

Praneeth Satish (Senior Equity Analyst)

Got it. No, that's helpful. That's, that's great. And maybe just switching gears, can you help us understand, you know, what the next steps are for REA, following the D.C. Circuit Court's decision? I guess, have you filed for an emergency petition to keep the pipeline in service? And is there gas flowing today? Just trying to understand, whether this impacts the early in-service, at all.

Alan Armstrong (President and CEO)

Yeah. Well, first of all, yes, gas is up and flowing, and kudos to our teams for being able to respond so quickly to that. Just incredible project execution on that project in a difficult area. And I'm going to turn it to Lane Wilson, our General Counsel, to speak to the legal proceeding.

Lane Wilson (SVP and General Counsel)

Yes, I think the next step will be seeking a temporary certificate. This is not new to FERC. They've dealt with this issue before. We fully anticipate they'll be defending this certificate. We'll be seeking rehearing on a timely basis, and that's probably about 35 days out at this point, maybe 37, 38. But we don't have any concerns that we're going to be able to continue to operate.... We don't have any concerns about getting a temporary certificate, and ultimately, don't have any concerns about defending what FERC has done in this—on this project.

Praneeth Satish (Senior Equity Analyst)

Got it. Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Jeremy Tonet of JPMorgan. Your line is now open.

Jeremy Tonet (Executive Director and Senior Equity Research Analyst)

Hi, good morning.

Michael Dunn (COO)

Morning, Jeremy.

Jeremy Tonet (Executive Director and Senior Equity Research Analyst)

Just wanted to look at the guidance here and see what the current thoughts are with regards to producer production expectations over the, I guess, the balance of the year and into 25 here. Is the expectation that we've kind of hit the lows, and there's kind of a growth from these points? Or just how you see, you know, production trending across your gathering assets.

Michael Dunn (COO)

Morning, Jeremy, it's Michael. Yeah, I think right now we feel good about where we're at in regard to our current forecast for the production profiles coming from our customers. You know, and you've got to look at it between the rich basins and the dry gas, and obviously, the dry gas is challenged by pricing now. So producers are making up a month-by-month decision on gas volumes that they might shut in. I think you, you probably saw Coterra's announcement, where they were shutting in 300 million for the month of August. And it's really a month-by-month decision for all the producers out there. But right now, we've anticipated this, as you've probably seen through the first half of the year. The team did a really good job anticipating where the production shut-ins would occur and the delayed TILs and DUCs.

I would say right now, we've got over 1 BCF of delayed TILs in the queue right now between all of our customer base, meaning that the producers have drilled the wells and completed them, and we've connected to them, and they are ready to go when the price signals are there. And there's all over 1 BCF as well of DUCs, so they've been drilled but not completed on our system. So there's definitely a lot of opportunity to bring on gas as the producers see a price signal. And so I, I'd say our rich basins are still outperforming. We're seeing you know, good pricing netbacks for the producers there, and that certainly buffers the dry gas situation that we have right now. But all in all, we feel good about our end-of-year forecasts.

And certainly, 2025 is going to be price sensitive as well. The Golden Pass LNG facility, you probably saw the announcements yesterday that they're going to be at end of 2025 in service, it appears. And so that should have been anticipated already by the market, it looks like, with the forward curves. And producers will be making decisions on these curves. And you know, when prices elevate, obviously, they'll hedge into that and keep their volumes flowing, is what we anticipate. So we're really comfortable with where our current forecasts are.

Jeremy Tonet (Executive Director and Senior Equity Research Analyst)

Got it. That's very helpful. Thank you for that. Just wanted to pivot towards LEG, if I could, and just wanted to see your latest thoughts on moving forward there with regards to FERC requesting more information. Just wondering if you could update us there and how you think about that.

Lane Wilson (SVP and General Counsel)

Yeah, we've responded to the FERC data request, and we fully anticipate that FERC is either going to dismiss this matter or find that LEG is a gathering system. We don't really have any concerns there. And so there's really nothing for us to do right now except continue down the current road, which is in construction. So again, we feel pretty confident about where we are in this project.

Jeremy Tonet (Executive Director and Senior Equity Research Analyst)

Got it. Understood. Thank you for that.

Operator (participant)

One moment for our next question. Our next question comes from the line of Spiro Dounis of Citibank. Your line is now open.

Spiro Dounis (Director and Senior Equity Analyst)

Thanks, operator. Morning, everybody. Alan, wanted to go back to some of your, your closing comments there, and maybe if we could tie power generation demand with how you're thinking about the EBITDA outlook longer term. So one of your slides, slide 17, points to 10 times the amount of electricity demand growth over the next 10 years versus the last 10 years. And I think you mentioned in your comments there, you guys have been able to grow at about an 8% CAGR historically. So as you think about the go forward here, you know, you guys have that 5%-7% growth target out there. Is it time to start thinking about that as maybe potentially moving higher in this environment, which I don't think you contemplated when you sort of laid that out there?

Michael Dunn (COO)

Yeah, Spiro, it's a great question, actually, and I do think that there is plenty of potential, you know, even in the face of just the law of big numbers and continuing to put an absolute level of growth against a bigger and bigger number that's, you know, as you know, has grown faster than we've expected over the last three or four years. But I do think that given the strength of the return on our projects and the kinds of opportunities that are coming at us right now, I do think that that is a fairly high profitability that we could expand beyond that.

and, and particularly, you know, as we get into the 2027 and 2028 timeframe, and, and because I, I do think that people thinking that, for instance, data center load and power gen load, for us, that's going to result in capacity sales on, on our transmission systems. And that is gonna take time to, you know, we're completely contracted out on our existing capacity, and so that is going to take time to build that out. But I do think as we get into 2027 and 2028,

we're going to see a very strong impact from the kind of demand that we're seeing right now. The good news is, for us, and a little bit uniquely, I think, is the number of projects we already have coming on in 2025, 2026, and 2027, give us a great runway of growth. And, and I don't remember a time when we've looked out and thought we've got this kind of accelerating growth into that past the next three or four years. So I do think that, you know, we just got done with our long-range plan and strategic planning, and it was a very encouraging look at what our business looks like for the future with the kind of demand that we have coming in.

And frankly, I would say we've been pretty conservative in marking that into our plan at this point. So, yes, I do think that we certainly. There's a very high probability that we'll be able to exceed that over the next five years.

Spiro Dounis (Director and Senior Equity Analyst)

Great. That's a helpful color. Second question, just going to M&A. Was hoping for an update on the landscape, and if you're seeing the same value proposition you saw over the last two years, or maybe if we could expect you to look a little bit more inward now and consolidate some of these other JV positions?

Michael Dunn (COO)

Yes. I mean, there's certainly an inventory of opportunity. Obviously, the Discovery joint venture that we bought in here just recently is one of those that was important for us, and particularly where we're seeing the growth. And certainly, as we look at the free cash flow that this business generates, we are looking for places to make wise investments with that capital. And so that certainly represents, you know, a target opportunity for us in terms of the joint ventures. You know, I would say we're very fortunate to have great partners like the Canadian Public Investment Fund that helped us in the OVM area and helped us really expand that area pretty dramatically.

And we're excited to have them as partners, but, you know, there will be a time, perhaps, where they would want to monetize that. So good example of one where it worked out perfectly well and now provides an inventory of investment opportunity for us in the future. But I would say we're going to be patient about that, and we're going to have to have a, you know, a willing seller on the other side to want to go and execute those.

Spiro Dounis (Director and Senior Equity Analyst)

Got it. I will leave it there. Thanks as always.

Operator (participant)

One moment for our next question. Our next question comes from the line of Manav Gupta of UBS. Your line is now open.

Manav Gupta (Senior Equity Analyst)

Hi, quick follow-up, a little bit on, on the lines of Spiro. Looks like you bought some stuff from PSX, I know as a part of partnership of $170 million, you paid for it. So help us understand, the strategic thought rationally, you know, buying at this point and, and buying from PSX, and obviously, I think PSX is in market with some other assets. Would you be interested in those also?

Chad Zamarin (EVP of Corporate Strategic Development)

Yeah, this is Chad Zamarin. I'd say, you know, again, we owned 60% of the Discovery joint venture with Phillips 66, and they've been a great partner for us. But you've heard a lot about our offshore growth, and so certainly a core part of our business and a very attractive growth profile ahead. And so, you know, very core for us, I think you'd probably hear not core for PSX. So, you know, as Alan mentioned, where we have joint venture interests, we understand the operations of those facilities. It's a low-risk investment for us. We see growth coming.

In this quarter, if you think about Discovery, we were able to acquire that at what we think is a low multiple on a go-forward basis, as you'll see the growth in Discovery really ramp up through the remainder of this year and even more impressively into 2025 and beyond. And Aux Sable, on the other hand, again, an asset that we've owned for a long time, had a great relationship there, but not core to our business. And Pembina has been consolidating their ownership in Aux Sable and the Alliance Pipeline system. And so we, you know, we're able to sell that at what we saw as a pretty high multiple.

You know, you think about the difference in those cash flows. Aux Sable is a more volatile commodity-exposed set of cash flows. Discovery is a highly contracted asset that's going to grow. So, I don't think that that should be translated to other assets that PSX may own. It really is us, I think, rotating and optimizing our portfolio in a way that's going to create incremental value. And that's really the strategy when we look at any transaction. Where do we have a unique opportunity to turn something into more value by owning or consolidating that interest?

Manav Gupta (Senior Equity Analyst)

Perfect. My quick follow-up is, obviously, we get a lot of questions on storage. So what is your thought process on current storage rates and, you know, expansion opportunities, if you could talk about the set of opportunities as it specifically relates to storage? Thank you.

Chad Zamarin (EVP of Corporate Strategic Development)

Sure, yeah. This is Chad again. You know, we've only owned the Peachtree storage assets for just you know six seven months, and we've already seen really attractive recontracting of storage at rates that have exceeded our expectation. We have been in the market to test whether or not we're seeing those rates and the tenor of terms approach expansion economics. And we've seen the storage market certainly growing in value. It's why we acquired NorTex, the Gulf Coast Storage, and we acquired Clay Basin, the largest storage asset in the Rockies as part of the MountainWest acquisition. And in all cases, we've seen an increase in value in storage over the last few years. I'd say that we're still climbing the curve towards what we think makes sense from an expansion perspective.

We are, I think, approaching the rates that are required for both brownfield and potentially greenfield expansion, but we're still needing to see a bit more depth in the term of contracts for us to put, you know, large capital to work in expanding those facilities. But all signs are—we've shown the fundamentals. We haven't grown storage as a country at all over the last 10 years, while gas demand has been and will continue to grow significantly, and importantly, will grow in more volatile markets. And so we have a lot of confidence that storage will continue to increase in value, and we will, at some point, reach the point at which expansion is it makes a lot of sense.

Manav Gupta (Senior Equity Analyst)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Neal Dingman of Truist Securities. Your line is now open.

Neal Dingmann (Analyst)

Thanks for getting me in. My first question, just on the GOM, especially, could you talk about the continued upside there? Specifically, you know, it's interesting, it seems like you have a lot of opportunities for additional projects, and I think you all mentioned the two zero CapEx tiebacks that you announced after winning that Acre dedication. So just wondering, for not even for the remainder of this year, but in 2025, how are you sort of looking at upside potential there?

Alan Armstrong (President and CEO)

Yeah, great, great question. A lot of exciting things going on in the Deepwater. And you know, again, we've got so much activity going on, I think it's easy to overlook the amount of execution that's gone on, on projects like Whale, which, you know, Shell is working away at. Most of our work is retired on that at this point, and so there's a little bit of remaining commissioning, but for the most part, our work there and the risk of our work has been retired. So we're excited about seeing that project come on. And that, by far, is the largest. The second largest is Chevron's Ballymore project, and that's actually been accelerated a little bit from our original plans in terms of the timing on that.

It will take a shutdown on their Blind Faith platform that feeds into us here in the back half of this year. But exciting project coming on there as well. And a great example of one where very large project, kind of like Anchor, but no capital required on our part. Those are our very favorite projects in terms of adding incremental value on the business. And there's a lot of drilling activity going on and in and around our assets that we think is gonna continue to drive value.

One of the things that's really changed in the Deepwater is, you know, if you roll the clock back 15, 20 years ago, people were building these mammoth platforms, floating platforms, Deepwater platforms, that were incredible engineering feats, but and took a long time, a lot of uncertainty, and a lot of risk. Today, what we're seeing is producers working hard to find reserves and develop reserves around their asset base and their existing infrastructure. And with that, comes extremely high incremental returns for us because we're not having to build out to that new infrastructure. And so I would say in the Deepwater, that is one of the really powerful things for us, is the fact that we built a lot of this infrastructure with latent capacity in it.

But just because it costs so much to lay a line in that depth of water anyway, and as that latent capacity fills up, we're getting very high incremental cash flows off of that. So, we are continuing to see a lot of activity, and the producers happen to be... We're very fortunate that a lot of the activity happens to be centered around our asset base in the Deepwater. And it really goes not just in the Western Gulf, where there's a lot of activity, the Central Gulf, which we've talked about today, with both Anchor and Winterfell and Shenandoah, is the next to come on next year.

We spent a lot of time and effort getting prepared for Shenandoah because it is a fairly large prospect that'll be coming onto our Discovery system that'll be coming on next year. And then in the Eastern Gulf, of course, you heard me mention the Hess Pickerel project. It's a tieback to Gulfstar, as well as the Chevron's Ballymore prospect. So a lot of activity going on. We couldn't be happier to have the really strong competitive advantages that we have there in Deepwater.

Neal Dingmann (Analyst)

Fantastic details. And then just one quick one on West. Specifically, you've been, you know, there's been quite a bit going on in the DJ with the around the acquisitions there. I'm just wondering, can you talk about potential near-term upside around what you see post those acquisitions?

Alan Armstrong (President and CEO)

Oh, sorry. Excuse me, on Cureton and our Rock-

Neal Dingmann (Analyst)

Yes.

Alan Armstrong (President and CEO)

Chad, you want to take that?

Chad Zamarin (EVP of Corporate Strategic Development)

Yeah, I would just say that area continues to perform and frankly outperform. We really like the positioning that we have. You know, we've got not only are we seeing more integration value in being able to optimize processing and gathering in basin, but because we

market and transport the NGLs, we see a lot of margin from that growth further downstream. And so, yeah, I think you're already seeing some of the important contributions, and we do expect that to continue to grow for a long time to come. So we do expect our performance to go out this year.

Neal Dingmann (Analyst)

Thank you so much.

Operator (participant)

One moment for our next question. Our next question comes from the line of Zack Van Everen of TPH & Co. Your line is now open.

Zack Van Everen (Director of Infrastructure Research)

Hey, guys. Thanks for taking my question. Just shifting to the Northeast, you mentioned rates on the Susquehanna and Bradford ticked up this quarter. I know you have cost of service contracts, at least on the Bradford side. Was that part of the dynamic, or was this something else? And is this kind of a good run rate going forward, or was this kind of a one-time revenue makeup like we saw last year?

Michael Dunn (COO)

Well, this is Michael. With the cost of service agreement we had in the Bradford has reverted to a fixed fee per the contract terms. So that has been finished and completed and negotiated with all the customers on the Bradford. And so I would just say we did have a one-time drop last year that obviously affected the comparable for this year. But other than that, you should expect to see this as a run rate fee with obviously escalation being the variable there going forward. And then any expansions that we do would be negotiated as well through the capital that would be invested in those expansion opportunities there in the Bradford.

Alan Armstrong (President and CEO)

Probably the main thing that you see in the numbers you're looking at is the fact that when we see more and more activity in the rich gas, like we've been seeing, you know, our margins in the rich gas are almost, almost double what they are in the dry gas, and sometimes more than that. And so as the drilling moves into some of these rich gas developments, like in the Utica and in Southwestern PA and West Virginia, you will see our average rate increase as more and more of the mix moves into the rich gas. In addition to that, though, we have the inflation adjuster that, you know, hits every spring as well, and so that picks up those rates as well. So a lot of positive momentum on rates.

Importantly, you know, as we've said in the past, when the dry gas area is challenged, typically we see the rich gas respond, and we make so much higher margin on the rich gas because of all the services we provide on it, that tends to offset declines in the dry gas.

Zack Van Everen (Director of Infrastructure Research)

Gotcha, that makes sense. Thank you for that. And then maybe shifting to the Rockies. You know, one of your peers announced they'd be converting their crude pipe out of the Bakken that flows into Wyoming into NGL service. Probably a little bit far out, but, you know, is there space on Overland, and would you guys be interested and, you know, able to take those volumes if they were to approach you on that?

Michael Dunn (COO)

Yeah, do you want to take that?

Chad Zamarin (EVP of Corporate Strategic Development)

Yeah, sure. This is Chad. There is space on Overland Pass, and we do see that as an opportunity, and I think good, frankly, for the Bakken producers, that there's some takeaway diversity. And, you know, we're certainly focused on making sure we'd be a good option to receive NGLs from the Bakken and from the Powder River Basin. So yeah, we do think there's an opportunity there. We're not gonna get, you know, too far ahead of that, but we're hopeful to see those barrels heading south. And yes, we've got capacity in Overland Pass that would be available. Awesome. Thanks, guys.

Operator (participant)

One moment for our next question. Our next question comes from the line of Robert Catellier of CIBC Capital Markets. Your line is now open.

Robert Catellier (Executive Director and Energy Infrastructure Analyst)

Hey, good morning, everybody. Understanding that you'll file rates by the end of the month on Transco, could you give us any insight into the progress you're making there and the likelihood of a settlement? And also, your interpretation of shipper appetites to support modernization investments in light of your new methane intensity targets.

Michael Dunn (COO)

Yeah, thanks for the question. Yeah, we would love to see a settlement there. We'll obviously get our rate case filed at the end of the month and then, work on, seeing if we can get to a settlement. We've obviously been talking to the customers for quite some time about the modernization efforts that we have underway, and there should be no surprise, to them when we make our filing and they see the, the amount of investment that we've made there. And so we do think that will help possibly grease the skids for some type of modernization tracker with them, so that we can smooth out some of these increases going forward on the Transco assets, just like we've done on, on the Northwest Pipeline rates with our last rate case that we settled there.

So that is the intent going in, is hopefully we can get a modernization tracker, not just for our emissions reduction program, but for some of our pipe replacements that are needed in some of the growing population centers there. We have a significant amount of pipe that we've derated over the last several years and decades that we could upgrade, and we will be doing that, but it would be better to do that through a modernization tracker as well. So that is the intent, but we've had a pretty good opportunity to discuss and alert the customers as to what to expect in this rate case. Once we get it filed, we'll start the settlement opportunities.

But as you probably well know, the rates will go into effect on March 1st of next year, subject to refund once we either get a settlement or fully litigate the outcome of the rate case.

Robert Catellier (Executive Director and Energy Infrastructure Analyst)

Okay, and then, next question here is just on the, what's going on, in the legal realm.... How does the D.C. Circuit decision on the REA and also the Chevron deference case reversal impact how you're approaching permitting?

Alan Armstrong (President and CEO)

Lane, you want to take that?

Lane Wilson (SVP and General Counsel)

Yeah, it's Lane Wilson. On REA, well, let me first address Chevron deference. I don't think anybody really knows for certain how that's going to play out, except that it will likely force the administration and subsequent administrations to stick more closely to what Congress has set out in the laws, and probably means fewer pendulum swings. I think that's probably good for the industry on the whole. And in terms of REA, what was your specific question?

Robert Catellier (Executive Director and Energy Infrastructure Analyst)

Yeah, I'm just wondering if that decision changes how you approach future permitting activities?

Lane Wilson (SVP and General Counsel)

Yeah, I don't think so. I mean, I think we feel like FERC drafted a certificate order that was very defensible. It's the decision is unfortunate, but the D.C. Circuit did what it generally does in this situation. It kind of laid out a path for the FERC to fix the certificate, and that's what we expect to happen. I don't think that the Chevron case, Loper, has any real impact on the way we'll approach certificates in the future.

Robert Catellier (Executive Director and Energy Infrastructure Analyst)

Okay, thanks very much.

Operator (participant)

One moment for our next question. Our next question comes from the line of Tristan Richardson of Scotiabank. Your line is now open.

Tristan Richardson (VP and Equity Research Analyst at Scotiabank)

Hi, good morning, guys. Just a question on the Gillis West project. A small project, but can you talk about maybe some of the key differences between this project as a Transco expansion versus, say, a leg from a permitting standpoint, right of way standpoint? It seems like this is certainly a smaller project, but offers quite a few efficiencies from a capital and permitting perspective.

Alan Armstrong (President and CEO)

Yeah, Tristan, thanks for the question. And, you know, the reason this is important is because that, you know, CenterPoint's been plagued with a number of very high price spikes in the Texas intrastate market for various reasons. And this allows them access to gas supplies that are more associated with the Henry Hub from a pricing point, and gives them reliable access to supplies from Louisiana without being dependent on the volatility that some of the Texas intrastate, pipes and markets have imposed on, them, both for power generation and for normal residential loads. So we think it's a great project for CenterPoint, and important for us. Really, all we need to do there is primarily just an interconnect, and that will allow for us to provide gas supplies coming into the Louisiana market.

Places like Gillis, which is becoming obviously an important pooling point for supplies, and this will allow them access to those supply points from places like the Haynesville and diversifies their supply and again, kind of moves them away from the volatility. So for us, it's a great project because it's effectively we're getting paid for transportation capacity flowing back to, you know, back to Texas, and requires very little capital on our part, mostly just the interconnect there. So exciting and I think, you know, a meaningful improvement for Texas and the volatility they've had to deal with there from some of the suppliers into that market.

But in terms of, you know, this is just basically transmission-quality gas coming out of Gillis that will help supply directly to their markets there down the Transco corridor. So pretty simple on one hand, but pretty important on the other.

Tristan Richardson (VP and Equity Research Analyst at Scotiabank)

I appreciate it, Alan. And then maybe just on the last line of questioning, a broader question about the regulatory environment. You know, it's been two years since we've had a full board of commissioners, but and we're here at a time where you're seeing meaningful demand in the Southeast Mid-Atlantic. Can you talk about, you know, what you would like to see on the permitting side from a streamlining or just anything to be able to better accommodate the demand you're seeing?

Alan Armstrong (President and CEO)

Yeah, it's a great question. I think, you know, the primary issue with the permitting is not really the FERC. FERC, I think, has been a very responsible agency, particularly under Chairman Phillips' leadership. And I think they're trying to do their very best to see responsible infrastructure get developed, and they realize it's very clear to them, the kind of challenges that we're gonna have on the grid if we don't have natural gas supplies available to provide incremental power supplies on the one hand, and backing up renewables on the other. That is not lost on them at all. They, you know, they face that responsibility as a commission and an agency, and I think they take it very seriously. So that's not really where the problem.

The problem really revolves around the NEPA process and the handles that it gives to environmental opposition to take up issues that have very little to do with the pipeline construction, but have to do with their own fight against fossil fuels. And because the NEPA process allows them to kind of grab hold of projects inappropriately, the NEPA reform is probably the most important thing and really excited. Everybody's been talking about the-

Chevron deference, which we think is important, but you also saw that the Supreme Court agree to take up a review of the NEPA process as well. And I'm actually really excited to see that. That could really reform permitting in a way that's meaningful, and really stop people from being able to just arbitrarily stop projects in their tracks and cause lawsuits in the process, which is the NEPA process that we know today. And so anyway, that's important to us. The 401 Water Quality Certificate that the states are allowed, you know, that gives them a right to just stop projects, is important to see that turned around, and as well as the judicial standard for the way that a court would review a complaint against the permit.

So those are really the three primary things that we're looking for. And I actually, you know, I'm pretty normally not very optimistic about seeing anything happening on the permitting reform, but really excited to see the Supreme Court taking on the NEPA review. So we could see some. It's not going to be quick, but we could see some relief there down the road.

Tristan Richardson (VP and Equity Research Analyst at Scotiabank)

I appreciate it. Thank you, Alan, very much.

Alan Armstrong (President and CEO)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Theresa Chen of Barclays. Your line is now open.

Theresa Chen (Managing Director and Senior Equity Analyst)

Morning. Based on what we've seen in the market very recently, as far as the, you know, data center related or data center-driven brownfield expansion on natural gas transmission, the implied rates seem to be, you know, far above several multiples of existing tariff and economics. Is that consistent with your expectations as you move through the process of addressing the sheer number of requests you have? And is that a key hurdle in getting these projects done in addition to speed to market?

Michael Dunn (COO)

Hey, Theresa, this is Michael. Yeah, I would say, we're still going to be seeing negotiated rate contracts as we've been doing on our transmission businesses that are in excess of our base tariff rates. I believe that's what your question was. And, as Alan said, there's a lot of opportunities that we're exploring, not just on Transco, but on Northwest Pipeline, on MountainWest Pipeline, and Overthrust Pipeline, that we're considering. And allocating resources to all of these projects to analyze has been a bit of a challenge. And so, redeploying some of our engineers and our project development teams to really focus on this has been a critical activity over the last several months. But I would say, we're gonna see, I think, really good multiples on our projects.

You know, we aren't doing 6x multiple projects on any of our transmission businesses, and in fact, none of them have a 5 handle anymore. So, I think that trend will continue because, as Alan said, the speed to market is incredibly important for these data center loads. And the fact that they need to be online quickly is their biggest priority as opposed to what their energy costs are, it appears to us. And so that does certainly give us some leverage in the marketplace, and especially with where our assets are located, I think it gives us an incredible opportunity to serve these new loads.

Theresa Chen (Managing Director and Senior Equity Analyst)

Got it. A follow-up on the regulatory front. As we approach the election season in the fall, what are your latest thoughts around that as it pertains to assets within your business? Any key considerations on your mind as we move through the next few months on this front?

Michael Dunn (COO)

Yeah, well, that's a big, hairy topic, but, I'll just try to address it quickly. First of all, the, you know, the taxes is probably, are the most important thing, and it's very real to us in terms of the ability to continue to invest in these high return projects that we have as an opportunity in front of us, is, you know, how the, the tax impact, on our business and, and the, the amount of free cash flow. So it's pretty obvious to us, you know, that, that delta and something we're keeping a close eye on.

You know, beyond that, I will tell you that, and I, you know, have to remind people this, that even during the prior Trump administration, we had major projects get stopped, like Constitution and NESE, because of the 401 Water Quality Certificate that allowed a state to stop a project without really an ability for the federal government to, to solve that. And so, you know, I, I think, I think it's great that, that, you know, there will be a bigger push. I actually think paying more attention to, how Congress turns out and, and the legislative front is actually a bigger push, because that's actually where we might see some, reform in the law in a way that allows us to build out the pipeline infrastructure that we need.

And so we, you know, we saw recently the Manchin-Barrasso bill did really nothing for the pipeline industry. And while we, you know, are very thankful for both Senator Manchin and Senator Barrasso, and what they've done for our industry, in this case, you know, that was really a throw to the transmission side of the business and really didn't do much for pipelines. And so we think there's got to be some... And, and, you know, we get that. That's a-

state of the current, Congress and the way the numbers stack up in there today, I think they both would like to do more, obviously, for pipelines, if they thought that was possible. And so we, we do think that, you know, watching to see how the legislature turns out could be an opportunity to see some serious reform on, on the permitting front. So I would say we're paying a little more attention to that, frankly.

Theresa Chen (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of John McKay of Goldman Sachs. Your line is now open.

John Mackay (VP of Equity Research)

Hey, good morning, everyone. I wanted to go back to the conversation quickly, if we can, around data centers, just on the comments around speed to market. I was just wondering if you could flesh that out a little bit more for us, what that would actually look like. Is that co-location on Transco? Is that something non-FERC jurisdictional? Anything you can frame up there would be helpful.

Alan Armstrong (President and CEO)

Yeah. Well, John, thanks for the question. I would just say that, you know, what we're seeing is a shift, because I think that the, you know, the big developers are realizing that they're kind of up against a brick wall right now in terms of extracting more, generation off the grid. They, they realize that that's pretty well exhausted, and so they're gonna look to areas where, both natural gas resource is available, the capacity for it is available, and as well as the permitting environment, allows them to go build out some very significant power generation, behind the meter.

On the one hand, we still are seeing a lot of growth on the utilities as well, more for the conventional data centers and the cloud-based data centers, a lot of growth continuing, as well as just general electrification of load, sorry, that is driving that as well. But in terms of, you know, the hyperscaler and their approach right now, we are seeing them look all the way back into areas where the gas resource is abundant and the permitting allows for getting on with developing the infrastructure that they need to have reliable and affordable power into those markets. But as Michael pointed out, I think and I, in my earlier comment, the speed to market seems to be the thing that is most top of mind for the big data, big hyperscaler developers.

And so, that's where we think there's gonna be opportunity in places like Wyoming, where we have a lot of gas resource available and a lot of wind resource available as well. And so I think we're gonna see that. But we're also gonna get a lot of indirect load from our utilities in these other areas as both the conventional data centers and electrification continues to grow in those markets.

John Mackay (VP of Equity Research)

I appreciate that, and acknowledge we're at the top of the hour. We'll squeeze one more in. Gillis West is relatively small, but actually pretty interesting. I guess we've had a lot of conversations around trying to get gas out of Texas into Louisiana, given the LNG ramp. I guess I'd just be curious, your perspective, is this a macro trend kind of shifting? Is this kind of more of a, maybe one-off with this customer? Anything you can kind of frame up from a, kind of, Louisiana demand ramp perspective would be interesting.

Alan Armstrong (President and CEO)

Yeah. Well, I would just say, if you think about all of the supply that the Haynesville has available and some of the resources even south of Haynesville that we think will get developed in a pricing environment that's coming forward right now, we, we think that having access to those Louisiana supplies and diversity of supply is really important. And again, as I mentioned in my comments, if you think about the pain that has been inflicted on some of the Texas utilities from the Texas intrastate market, where they didn't have access to a more diverse supply, we think this is a trend. I mean, it only makes sense that they're gonna look back to see what's been imposed on them from a pricing standpoint and look for more reliable low-cost supplies to be available.

To me, that's the important thing about this, is them recognizing that that fluctuation did not occur in places like Louisiana. It really only occurred on the Texas intrastate markets, and this gives them access to a more diverse supply. So that, to me, is the keynote to take away from that project.

John Mackay (VP of Equity Research)

Interesting. Thanks for that, Alan. Appreciate the time.

Operator (participant)

This concludes the question and answer session. I would now like to turn it back over to Alan Armstrong, President and CEO, for closing remarks.

Alan Armstrong (President and CEO)

Okay. Well, thank you all very much for joining us today. An exciting time for us here at Williams, as we continue to deliver the long list of projects that we have in execution, and that continues to mount growth for us. And importantly, how strong the future is in terms of the demand that we are excited that we're going to have an opportunity to help address. But an exciting challenge for the organization that we're excited to show what we're made of on that front. So, with that, thank you very much for joining us today.

Operator (participant)

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.