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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone, and welcome to The Williams, Williams Partners' Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. John Porter, Head of Investor Relations. Please go ahead.
Thanks, Todd. Good morning and thank you for your interest in Williams and Williams Partners. Yesterday afternoon, we released our financial results and posted several important items on our website. These items include press releases and related investor materials, including the slide deck, that our President and CEO, Alan Armstrong, will speak to you momentarily. Also joining us today is our Chief Operating Officer, Michael Dunn; our CFO, John Chandler; and Chad Zamarin, our Senior Vice President of Corporate Strategic Development.
In our presentation materials, you will find an important disclaimer related to forward-looking statements. This disclaimer is important and integral to all of our remarks and you should review it. Also included in our presentation materials are various non-GAAP measures that we've reconciled to generally accepted accounting principles and these reconciliation schedules appear at the back of today's presentation materials.
And so, with that, I'll turn it over to Alan Armstrong.
Great. Well, thank you, John, and thanks, everybody, for joining us this morning. I'll get right into it here. This was another very predictable quarter for us from a financial metric perspective. It was just slightly above our internal plan for the quarter that was used to forecast our guidance that we've provided to you. However, the extraordinary thing about the quarter was the tremendous amount of progress on projects, planned expansions and new business that was contracted during the quarter that gives us even more confidence in our growth rate for years to come.
We are obviously looking forward to more dramatic growth in the second half of the year as Atlantic Sunrise project nears completion and producer activity on our systems in the Northeast and in Wyoming continues to ramp up. We're also excited about the transactions announced earlier this week. Selling assets in a very mature basin at attractive multiples and then redeploying that capital to higher growth basins allows us to capitalize on future growth opportunities without stretching the balance sheet or issuing equity.
It is also clear that the demand for natural gas that we have been saying is just around the corner has recently come to life in a very dramatic manner. In fact, all sectors of natural gas demand are up in 2018 compared to the equivalent 2017 time period. LNG exports are up 57% for the year-to-date versus 2017. Power is up as well, up about 9% versus 2017. Residential is up and industrial is up and growing very rapidly.
As a result, we have storage inventories now that are nearly 560 Bcf or 20% below the five-year average, yet price remains low, which is just creating another wave of investment in businesses poised to take advantage of this low pricing clean fuel. All of this spells higher production volumes and transmission throughput here in the U.S. to keep up with this rapidly growing U.S. and global demand. And as I think most of you appreciate, no one is better positioned to benefit from that growth in volumes without taking commodity price risk than Williams.
And now some quick financial highlights that I'm excited to share with you from the quarter, first of all, we are up quarter-over-quarter in net income for WMB by over 66% and up quarter-over-quarter in adjusted income per share by 31%. On the WPZ side, we were up about 33% in net income quarter-over-quarter.
So, for today's call, we're going to hit the following topics. First of all, the key driver behind our financial and operations metrics for 2Q and year-to-date, I'll highlight the major project contributions in 2Q and provide an update on other key achievements, also discuss the two strategic transactions that we announced earlier this week and finally highlight the value proposition to be created by the WPZ merger. And then, of course, as always we'll take questions.
But before we move on to slide 2, I want to publically welcome Vicki Fuller, our newest Independent Director on The Williams' board of director. Vicki most recently led the New York State Common Retirement Fund where she had tremendous success as an investor there and leading the organization on their investments. She brings a wealth of leadership skills and financial expertise. Her investment management insights will be invaluable in our ongoing efforts to expand our investor base and maintain crisp focus on creating long-term shareholder value.
Vicki will serve on the Audit Committee and the Nom. and Gov. Committee. Her appointment you may recall follows the June 4 appointment to the board of Nancy Buese. Nancy is currently Executive Vice President and CFO for Newmont Mining Corporation. Prior to that she was the CFO at MarkWest, now MPLX, and a key part of that leadership team that created tremendous shareholder values over the years and during her tenure there. We're already benefiting from her outstanding financial and energy leadership experience. And Nancy is serving on the board's Compensation and Management Development Committee as well as our EH&S Committee. I really am excited to welcome both Vicki and Nancy to our board of directors as we continue to build on what I think is the strongest board in the sector.
Going to move on to slide 2 now and first of all, net income on a GAAP basis is up at both WPZ and WMB quarter-over-quarter. This is primarily the result of an increase in operating income of about $68 million at WPZ. WMB's GAAP EPS was up $0.06 per share or 60% versus second quarter of 2017.
After adjustments for certain non-recurring items, WMB's adjusted EBITDA came in at $1.1 billion. Williams also delivered strong growth in EPS on an adjusted basis and adjusted income per share was up 31% over the second quarter 2017. As you can see on this slide, if you adjust for the sale of our olefins business and the impact of adopting new accounting standards for revenue recognition, our adjusted EBITDA for the quarter was up about 4%. This was a little above our quarterly plan, but both financials and operating stats were impacted by several plant outages, most notably the Mobile Bay and Echo Springs plant in Wyoming.
NGL margins for the whole industry were extremely strong in the quarter, but our impact was limited by both NGL takeaway capacity as well as NGL hedges, which impacted us by about $7 million. In both cases, these plants were being modified to get ready for significant increases in volumes from the very liquid-rich new streams of gas. So, a lot of new opportunities coming on, including the Norphlet in the Eastern Gulf, and we are getting very near being completed with all of our work that readies our systems for that very large influx of very rich gas and as well in Wyoming in the Wamsutter field there, a lot of work going on and a lot yet to come in that area to ready for also a very large stream of new rich gas in that area.
So, a great job by our teams in executing these efforts in a well-planned and safe manner. We also accelerated a significant amount of pipeline integrity work that was planned for the second half of 2018 into this quarter. The maintenance cost shifted from the second half to the first half was to take advantage of the timing of outages associated with expansion, construction work and project work that's been going on along the Transco system. This timing of maintenance work minimizes the impact on our customers, while reducing future revenue interruptions.
Additionally, most of the increase in maintenance CapEx during the quarter was also on Transco and we fully expect to recover this capital investment via Transco's rate case.
Let's move on to slide 3 and look at our year-to-date results. Year-to-date net income is down on a GAAP basis for both WPZ and WMB. The absence of a large gain on asset sales in the first quarter of 2017 affected the results and this comparison for both entities.
Moving on to our non-GAAP results, which normalizes for non-recurring items like the 2017 gain on asset sales I mentioned earlier, our first half adjusted income per share attributable to WMB was up an impressive 33% over the first half of 2017 and WMB's adjusted EBITDA was $2.245 billion, again slightly ahead of our business plan that was used to create our guidance. And as you can see on this slide, if you adjust for the sale of our olefins business and the impact of adopting new accounting standards for revenue recognition, WMB's adjusted EBITDA for the quarter was up about $99 million or 5%.
So, now let's move on to slide 4, where you'll see a list of several accomplishments and projects that are in progress. Here on slide 4, as you can see, our second quarter results featured contributions from a number of recent achievements. First of all, the Transco team placed Phase 2 of the Garden State project in service during March. Our customer activity continued to grow in the Northeast, where our inlet gas processing volumes were up more than 37% in our Ohio Valley Midstream processing complex in looking at the second quarter of 2018 versus same period of 2017.
Our gathering volumes were up 160 million cubic feet per day quarter-over-quarter and up by approximately 250 million cubic feet per day on a year-to-date basis. Led by the Haynesville again, the West combined natural gas gathering volumes were up 270 million cubic feet per day on a year-to-date basis. And in the Atlantic Gulf, we saw Transco's transportation revenues up $114 million or 16% on a year-to-date basis and this was driven by fully contracted expansion projects.
There are several good updates listed here for our various projects, including our Southeastern Trail project, which filed its FERC certificate application in April. In Wyoming, we just announced an exciting expansion on our Jackalope Gas Gathering System and associated Bucking Horse gas processing facility in the Powder River Basin that will increase processing capacity to 345 million cubic feet per day by the end of 2019 to meet the growing customer demand in this under-served growth basin.
We also have begun construction activities on another major expansion of our G&P system in the Wamsutter field to serve Southland's fast growing production that was recently contracted.
We achieved key milestones on Northeast Gathering and Processing expansion projects, which were highlighted at Analyst Day. We've now executed final agreements supporting system expansions in Northeast Pennsylvania, which are expected to increase capacity by about 800 million cubic feet per day. So, this is another expansion on top of the one that we just completed here at the first part of this year up in the Susquehanna Supply Hub area and we also have another major expansion underway at our Oak Grove gas processing facility in West Virginia, which is also fully contracted and we'll expand that system dramatically as well.
The effects of these additions of supply are just now beginning to show as we complete key compressor facilities on our gathering systems that allow newly connected pads to begin flowing. So, we are really impressed with some of the production rates that we're seeing from some of the new pads that we're just now turning on. The number of projects that our teams are managing in the Northeast are way too numerous to mention here, but the fruits of their labor will begin to show later this year and into 2019.
As mentioned at the top, we are nearing completion on our Atlantic Sunrise project and are targeting full in-service towards the end of this month for that 1.7 billion cubic feet per day expansion on our Transco system. I'm going to pause here just a minute and tell you how proud I am of our project teams for their focus on doing the right thing, both from a safety perspective and an environmental compliance perspective.
They have been very thoughtful in listening to regulators and key stakeholders in the communities and their careful planning, engineering and patience is truly distinguishing our efforts as we near completion of this important project. They have dealt with very tough regulatory issues, religious orders, a very tight skilled labor market and record levels of rainfall with tremendous diligence, professionalism and integrity. And while we are still battling the impacts of major flooding in the area last week, we are pouring it on in order to bring this one over the finish line as the weather allows.
So, let's move on to slide 5 and talk about the two strategic transactions announced this week. Our ongoing business and project execution has become remarkably predictable, but we have also been working hard to manage our portfolio of assets in a way that maintains our platform for growth for many years to come.
I'm really pleased with our execution on the two big transactions we announced earlier this week. First of all, Williams, along with KKR as our joint venture partner, announced the acquisition of Discovery DJ Services for $1.173 billion, subject to the customary closing conditions and purchase price adjustments. Our initial contribution is 40% of the purchase price or said another way, Williams is responsible for approximately $470 million of that total purchase price and will be the operator of these very attractive assets in the DJ Basin.
The assets feature a total of 260 million cubic feet per day of gas processing capacity, which is expected to be in service by the end of this year and permitting underway for greater than 1 Bcf a day of gas processing that is required to service the 260,000 acres that are already under dedication.
In addition to the attractive growth opportunities we see just in gathering and processing, Williams also expects to generate additional value by integrating production from these assets with our existing footprint in our West segment, including our downstream NGL assets.
We expect the Discovery transaction to represent a 5 times to 6 times multiple and that's using The Williams' investment inclusive of the required growth CapEx based on the 2020 EBITDA forecast and the growth on the asset should continue to ramp well beyond 2020 and of course that multiple will get even better as that growth occurs.
Now we realize that this multiple seems higher than a competitive market would typically allow, but this is an example of when we can take unique downstream synergies being applied to a 50% upstream investment. So, said another way, we are enjoying 100% of those synergies, but they are being applied to a 50% upstream investment and that really is what drives that much higher-than-market multiple.
We like this strategy a lot and I would tell you that our team has been working hard to develop these kind of opportunities where we work with private dollars and really leverage those to take advantage of a lot of the great synergies that we have available to us from our large scale footprint across the U.S.
Concurrently, we announced the sale of the Four Corners asset for $1.125 billion in cash from Harvest Midstream Company, an affiliate of Hilcorp Energy Company. The cash proceeds will help fund the Discovery transaction in a portion of our extensive growth capital and investment expenditure portfolio.
The Four Corners Area has been an important part of Williams dating back to its acquisition in 1983. However, pressure on natural gas pricing from adjacent basins, like the Permian, demand a new basin model that consolidates and integrates upstream production with midstream operation in a way that optimizes throughput and lowers cost.
We believe that Harvest Midstream along with Hilcorp are ideally positioned to achieve this integration while Williams is able to redeploy the proceeds into improved opportunities for growth. This value and multiple on EBITDA of 13.7, we are receiving as a testament to the high-quality assets that Williams' employees have grown and maintained in the Four Corners Area for the past 35 years.
So, now, let's look at the next slide and discuss the CapEx guidance update. After consideration of the effects of both the purchase of the Discovery DJ Services and the divestiture of the Four Corners Area as well as several other forecast updates, our current guidance from a Analyst Day on May 17, 2018, remains unchanged except for our growth capital expenditure.
Growth CapEx has been revised for 2018 and 2019 to account for the inclusion of the purchase of the Discovery system and other projects included. In the 2019 figure are our planned Niobrara expansion and our various expansions in the Northeast G&P segment.
While CapEx is up due to the Discovery deal, it's important to note that the Four Corners transaction allows us to fully finance the initial Discovery DJ investment and its follow-on CapEx without issuing any equity or increasing our debt and we've generated additional cash flow beyond those needs to finance other growth projects.
So, while this transaction doesn't drive the metric shown on this page, the Harvest and swift deployment of capital into higher returning opportunities that take advantage of our downstream synergies is a terrific example of how we're focused on driving shareholder value through active portfolio management.
Now, let's look at the key investment benefits for Williams' shareholders following the rollup of WPZ. We look here at slide 7. Williams is certainly unique investment amongst the S&P 500 companies. The post-merger entity will provide a large scale entity, focused on natural gas with significant growth opportunities, low volatility and highly predictable fee-for-service cash flows.
After the WMB-WPZ merger closes, we'll have a much more simplified org structure and a highly liquid C-Corp with associated shareholder rights and impressive market capitalization. Our attractive dividend yield and growth along with our strong focus on improving ROCE will deliver significant advantages for shareholders. Williams fares extremely well when compared to other S&P 500 companies in dividend yield, adjusted EPS, adjusted EBITDA growth and dividend growth. In fact, Williams is so unique that you'd be hard pressed to find another S&P company whose consensus estimates meet or exceed Williams' outlook for these key measures.
Now, we're going to move on to slide 8 here to wrap up. So, as we wrap up the presentation here and prepare to take questions, this slide 8 really provides a good summation of Williams' attractive position. Our financial results are meeting expectation with solid results for our continuing businesses. Importantly, net income and adjusted EPS are both up substantially quarter-over-quarter. There's also clear visibility to future growth.
We are leveraging advantaged assets and approaching our expected in-service date for the Atlantic Sunrise project. We expect Northeast volume growth to accelerate into the end of 2018 and continue to grow at 2019. The West portfolio is also gaining attractive growth opportunities and we have plenty of great high-return investment opportunities to invest the proceeds from the sale of our Four Corners Area business.
Finally, The Williams and Williams Partners merger is on track and as a reminder, our special Williams stockholder meeting to vote on the proposed merger of WPZ and to WMB will be held on August 9 at 10:00 AM in the morning, Central Time, at our Tulsa headquarters. Williams' stockholders of record as of the close of business on July 9, 2018, are entitled to vote. I would remind those who haven't yet voted to please do so.
Assuming a successful vote when the merger is completed, Williams simplified structure, investment-grade credit ratings, growth opportunities and cash flow available to fund that growth, all contribute to positioning Williams as a uniquely attractive investment opportunity compared to almost any sector or equity across the broad universe of investments.
So, with that, we thank you very much for your time today and operator, let's take our first question.
Thank you. We'll take our first question from Jeremy Tonet with JPMorgan.
I just want to touch on the transactions in the West here that you completed. And just wondering if there is any more to read into this as far as looking to kind of diversify into – more into liquids-rich areas or kind of grow the presence in more basins, bigger presence of the basins inside the Northeast. How did this factor into your thought-process here?
Yeah. Well, thank you. Great question. And I would just say that, we're always looking for basins where we have a lot of downstream synergies to be able to apply and it's really a unique situation when we can take private dollars and invest a smaller slice of our own capital and do something, but enjoy the downstream of synergies and drive downstream synergies into our existing asset base.
And so, I think that's really the clue that you ought to be looking for is really where we can drive synergistic value and that unique competitive advantage that we have in a process like that is really where our efforts are focused. And so, I wouldn't see this as wide scale outside of areas where we've got the ability to drive quite a bit of synergies with either existing assets in the basin or with downstream assets that we could develop.
That's helpful. Thanks. And just wondering, Bluebonnet, if there's anything new to report there.
Yeah. I'm going to ask Chad Zamarin to take that. Chad?
Sure. Thanks. I would just say that we continue to advance that project and we strongly believe that Permian volumes are going to want to access Transco markets, which are truly second to none. So, we do see a lot of momentum towards a build-out from the Permian towards Transco markets. I would just say that we're going to remain disciplined in how we contract that project. It's certainly an active area to competitive market. We've got a great inventory of projects across our footprint.
So, we're confident that, that infrastructure will be available for us to build to bring those volumes into Transco markets, but at the same time, we're going to be thoughtful about how we contract. I would say we've seen one project fully contracted for a Permian takeaway and we fully expect that there will be multiple additional projects over time. And so, we've continued to see good momentum on the BMX project and we'll continue to work it as we move forward.
That's helpful. Thanks. And then, in Appalachia outside of Northeast PA, I was just wondering if you could give us a feel for producer activity and focus on drivers as you see in your areas there and how you see volumes trending. And then, NESE as well, just wondering if you could add any new updates there. Thanks.
Okay. This is Michael Dunn. I'll take that question. In the Northeast, we are seeing our volumes grow really significantly in the Ohio River Supply area with the richer gas that's coming into our Oak Grove processing facilities. So, we're anxiously awaiting the in-service date of our second train there at Oak Grove to process this gas and we think we'll be at capacity on Train 1 that's already in-service there by mid next year, which is when we expect Train 2 to come online.
So, really seeing a lot of good growth there. We saw about 30% growth in the Marcellus South year-to-date compared to last year at the same time and so really excited to see those volumes coming on. And also in Susquehanna and Bradford, we're seeing volumes grow there as well, but overall, we'd expect volume to continue to grow in Northeast Pennsylvania after Atlantic Sunrise comes online and we see some of those volumes continue to grow from our customers there.
As far as NESE goes, on the NESE project, I think you've probably seen the updates that we've had there in regard to our permits that we've been working through with New York and New Jersey on the 401 certifications under the Clean Water Act and both of those permits have been resubmitted to New York and New Jersey. And we're working with both of those states to continue to process the permits, the data requests there. We have a draft EIS that's out on the project as well and continuing to work with the Federal Energy Regulatory Commission, the core of engineers in the states to process those permits, but we have anticipated now that will slide the in-service date out to the end of 2020.
And I will tell you and remind you that we typically do risk-adjust our revenues in our guidance and our balance plans and so that will closely align with where we anticipated our revenue in the first place with the projects. So, we've had a shift of capital out of 2019 and more closely aligned with the 2020 and service date on NESE.
That's helpful. I'll stop there. Thanks for taking my question.
Thank you.
Thank you. We'll take our next question from Christine Cho with Barclays.
Hi. If I could also start with the acquisition, could you provide any additional information about your option to acquire a portion of the KKR interest at the predetermined, agreed-to terms?
Sure, Christine. I'll ask John Chandler to take that.
Sure. First, I want to say just generally about the structure, we find KKR to be an excellent partner in this project. This is unlike maybe some of the traditional partner investments you've seen with private money in that this isn't a preferred investment. So, there is preferred coupon or anything like that between joint venture partners in this transaction. Even though it's an initial 40%, 60% investment, 40% Williams, 60% KKR, we do have voting control and governance control in the partnership from day one.
And over the next year-and-a-half, we will bring our equity interest up. We invest first dollars in the growth projects over the next year-and-a-half, which will bring our economic interest up to 50%, 50% interest. And as it relates to the buyout option, we do have a buyout option in the future with KKR, but we're able to call their interest as – I'm not going to give you the exact return, but it's a low to mid-teen type return.
We believe these assets on their own just the gathering assets produce a return higher than that. So, we think that's going to be a very attractive economic option for us in the future. But it's at our option to call that interest for a limited period of time and in the future. And in doing that, we did give up something to them. We gave them a liquidation preference in the event there was ever a meltdown of the investment, which is highly unlikely. And so, they did receive that return for us getting the right to call their interest and also the right not to be drug if they did sell their interest and we didn't want to participate in that.
That answered your question?
Yes. Thanks. And then, can you talk about how the contracts are structured for the Discovery asset? Is it fear of pop (30:53) and will you be offering a bundled service for the gathering processing, Overland Pass and frac? And also would you have to loop Overland to accommodate those volumes?
Yeah. Christine, thank you. The business is almost all fee-based there in the DJ Basin and there are downstream contracts for the NGL services that are separate for that. And in terms of whether we would have to loop OPPL, I think that's dependent on other actions from players, but unlikely I think, given ONEOK's Elk Creek facility and the White Cliffs conversion, I think it's unlikely that, that would be required. But – so, we don't really expect that to occur.
So, I think, we see a lot of opportunity under our existing contracts and business to really help the DJ Basin producers and get access to attractive markets and we think we're well positioned to do that and that's where a lot of those synergies come from.
Okay. And then, up in the Northeast, just in your prepared remarks, you had mentioned the Oak Grove expansion is being contracted. Can you remind us what those are? There were some contracts that you announced and the acreage had turned over from some of the original producers to ETT and Southwestern. But just curious if there were any additional signed subsequent to that.
No. Christine, this is Michael again. Those are the primary contracts we have there, but we're obviously talking to a lot of different producers up there that are bringing in rigs at least anticipated and we'll continue to have new contracting opportunities to continue to fill that, but, right now, we have, like I said earlier, Oak Grove TXP Train 2 under construction and we're actually under construction with a portion of the civil work on Train 3 as well, which we think will probably need by the end of 2019, early 2021, once Train 2 fills up.
So, we expect Train 2 to rapidly fill in 2019 and be at capacity by the end of the year. That's why we're currently building Train 3 as well and even talking to our internal parties and some of our producers up there about a need for Train 4 after that. So, there's a lot of activity up there and we're pretty excited about it.
And I would just add to that, Christine. In addition to the Oak Grove or to the Ohio Valley Midstream area proper, we also have some expansion ongoing with Chevron on the LMM system as well. That's new business to us. And so, really kind of across the board right now with the one exception being the Utica, we're seeing pretty substantial growth and, of course, we're excited about the new investor in the Utica replacing Chesapeake there who is going to bring a lot of new capital to that area. So, while Utica has really been kind of the slower growing piece of our Northeast position, we're really excited about their plans there in the Utica now.
Very helpful. Thank you.
I should have also talked about our NGL pipeline that we announced at Analyst Day as well that we're well on our way to having that project completed probably in the second quarter next year from our Oak Grove facility up to the Harrison Hub as well. So, we've made great progress there. We've got all the right-of-way acquired. We've cut the majority of the trees along the right-of-way and we'll start construction on that this fall.
Thank you. We'll take our next question from Colton Bean with Tudor, Pickering, Holt Company.
Good morning. So, it looks like the Northeast unit operating expenses were relatively flat versus Q1. So, just given the volume trajectory you guys expect in the second half of the year and then particularly moving into 2019, should we expect that rate to continue to decline or I guess, definitely, how are you thinking about the potential margin expansion you've highlighted in the past?
Yeah. Colton, great question. I would say, yes, we are expecting as volumes continue to grow and we continue to take cost down. The second quarter is always a – and particularly this second quarter where we had a lot of rainfall in the area, so there was a lot of pipe slips in the area and even a lot of road damage in the area that we had to contend with up there tends to drive our operating costs higher. As well, it's also the time when we come out of a thaw period there in the Northeast and we start doing a lot of our maintenance work in overhauls.
So, typically, the second quarter gets a lot of those kind of incremental cost. So, even though we were able to hold it flat, I think if you normalize for those, you'd start to see a trend towards even better unit margin than you're picking up on. So, we're really excited about that.
The team is very focused on that and I would tell you, as an organization, we focus on and in our goals is the operating margin ratio for each of these areas, which is very close to the EBITDA unit margin that you're looking at. And so, we pay very close attention to that. The teams are measured on that and the executive team is compensated on that. So, you'll continue to see us really pushing on those numbers and the teams are extremely focused on that.
Yeah. I'll just add to that, Alan. We do have variable cost up there that are driven by our electrical power costs. We do have a lot of electrical compression in the Northeast. And so, when we have volumes ramp up, those power prices – those power costs are translated into our operating expense, which for the most part are reimbursed, but it's not netted against our operating expense, it comes in other revenue. And so, you wouldn't see that as a net to our operating expense.
Yeah. That's helpful. And I guess, could you just update us on where you stand with the proposed Leidy Project that I think you guys highlighted the Leidy to Zone 6, I think at that point in time, you had a precedent transaction agreed to and were in negotiations with a couple of other producer counterparties there?
Yeah. We're still making progress on that. Really nothing new to update from Analyst Day with the exception of the fact that we're just making progress there and hoping to conclude those negotiations soon. And the team is working on the applications that we will need to make for the FERC filings on that, but still making progress there and expect to have an exciting project to talk about in the near future.
Okay. And just last one for me here, in the past, you've noted the Hutchinson rail terminal, the loading capabilities there near the Conway assets. Just given the spread that we're seeing between Conway and Bellevue, does that asset have any value to you guys in terms of arbitrage capture?
Yeah. We're seeing a lot of activity actually there. We're taking in lot of barrels from the Bakken, which is because of some impacts, probably short-term impacts, with takeaway capacity there, but we are seeing some new contracts that actually go out a little further than you would expect in regard to when those constraints are relieved. So, we're actually pleased with that. It's new business for us that we're capturing there and I think we'll continue to be able to do that.
All right. Well, thank you very much.
Thank you. We'll take our next question from Sharon Lui with Wells Fargo.
Good morning. Just wondering if you can comment on the key drivers and maybe the pace of growth to get to that five to six multiple for Discovery DJ and if you can maybe just talk about the potential to add processing capacity, I think you mentioned that there is a space or permitting for 1 Bcf.
Yeah. Chad, if you'll take that.
Sure. Yeah, yeah, thanks for the question. First, I'll take that in reverse. As part of the acquisition, the Discovery system already owns sufficient property or has under lease sufficient property to support the over 1 Bcf a day of capacity that's expected to be required to service the existing dedications and from a growth perspective, it is a growth asset. There's a lot of activity already underway on the acreage that dedicated to the system. There's a really attractive portfolio of producers that make up that 260,000 acres of dedication. And we've modeled a fairly conservative expectation around ongoing activities.
So, we're not expecting a tremendous amount of new activity to have to move into the area to support the growth that the Discovery system is poised for. So, we're really excited about the fact that we've got a very stable strong producer base that we fully expect to be moving a lot of volumes through the system over the next several years.
I think it's also fair to say, given – I think you're trying to mathematically look at the ramp of the EBITDA, we didn't change our guidance in 2019. Clearly, the Four Corners assets have gone away and they historically produced an EBITDA in the range of $80 million to $85 million. We're not saying these assets will produce that level, but it's certainly close enough that -we aren't adjusting our guidance. So, there is a ramp through 2019 and into 2020 to that five to six times multiple.
Okay. Great. That's helpful. And then, I guess just on constitution, any thoughts in terms of potential timing for FERC rehearing or any updates on that front?
Lane, do you want to take that?
Yeah. This is Lane Wilson. The FERC denied rehearing. And so, we're now clear to pursue that case in the D.C. Circuit. We're evaluating that right now, but we anticipate doing that at some point before the deadline.
Okay. Great. Thank you.
Thanks, Sharon.
Thank you. We'll take our next question from Chris Sighinolfi with Jefferies.
Hey, good morning, Alan.
Good morning, Chris.
Couple questions for me. I was just curious if there was any update on either the timing or the components of the pending Transco rate case. I know, you've talked about August 31 as the filing date, at least – as the last date. But you had mentioned sort of the acceleration of some of the maintenance work into the first half of the year to coincide with the outage there. It sounded like that might have been a bigger amount of maintenance than you had initially planned, probably small in the margin, but just wondering if there's any changes we should anticipate with regard to that case?
Mike, do you want to take that?
I will. Hi, Chris. We permanently took advantage on those outages of getting the work done before ASR came online. There was a significant amount of activity that has been planned for quite some time with our in-line integrity work. This is primarily the smart pigging that we've been performing on the Transco system as well as the number of hydro tests that were going back in pressure testing, the older pipeline system components of Transco.
So, that's – really what we were doing was taking advantage of the shoulder season here in the second quarter primarily. So, I would think you would see a different thing you've seen in the past in regard to our maintenance CapEx and our OpEx on the Transco system, where we really had to flip it this year and a lot of that was driven by ASR coming online later this year, where the Transco system is going to be operated much tighter than it has in the past. And so, we really wanted to get that work done before ASR came online.
And, Chris, I would just add to that. Obviously the maintenance capital, which also you saw was high during the quarter, obviously that does – that will affect the rate case through May obviously. And so, we fully intend to build or recover the maintenance capital portion of that through the rate case.
So, I would say we're looking forward to getting that rate case out on the table and getting on with that. So, there has been a lot of changes obviously on the FERC side that have kept people hopping on a tax treatment there, but we feel very good and team has done a terrific job of keeping up with all those changes and is ready to follow through with the rate case here in August.
Okay. Great. Thanks for that. If I could pivot and I apologize if I missed it, but was curious, John, if you could let us know or if you had outlined what the cash tax expectations were in association with your Four Corners sale. You had put the sale proceeds number in the release, I just didn't know sort of on a post-tax basis what we should anticipate?
Obviously with the step-up from the roll-up, there will be not be a tax consequence. We'll be recreating a significant net operating loss through that. So, we don't anticipate cash outflow relative to the transaction.
Okay. That's what I anticipated, I just wanted to confirm. And then finally, I guess dovetailing back on a question earlier from Jeremy about the appetite to enter new basins or make step-out investments that might not be entirely homegrown, particularly, Alan, as you've mentioned where you have sort of capability for downstream synergy. I think it's obvious to a lot of people as they look at the pro forma WPZ merged Williams, there's a lot of capacity to spend money.
And so, just wondering – you had mentioned in prior calls, probably last year, about potential consolidation in the Northeast partnerships. There is at least one third-party entity in the Northeast that might be coming out in a more independent fashion. I'm just curious, the appetite you might have and then also geographic focus for that appetite.
Yeah. I would just tell you, I think this team is extremely disciplined. There are a lot of opportunities out there, but we recognize that our cost of capital relative to the private cost of capital right now is strangely enough. We're going through a period right now as an industry where it's very obvious to us that the private infrastructure fund money is much lower cost than the public dollars are. And particularly given the growth rate in our public equity that I would argue is not being reflected in our price, it really pushes us to recognize we've got a very high cost of capital outside of what we can – of the cost we can internally generate obviously.
And so, we have to think about the other uses of that cash whether that is dividend or share buyback or whatever that might be, that's alternative use of that capital. So, yes, we have some great high-return investment opportunities as a result of our big footprint. And we will take advantage of those where we can and if we can use other people's money, that is lower cost than ours, to help capture some of that like we are doing on the DJ transaction, then we will certainly pursue that. But I would tell you we're going to remain very disciplined around capital allocation and look at it broader than just to our assets, but what it means ultimately to shareholder value.
Okay. Yeah. That's helpful. We've obviously noticed the same cost differential and I don't know if you have views on it, but perhaps perversely, it might be good rising rates, which I think historically were thought to be negative for midstream equity values as given that they had a dividend component might actually be a positive, but they drive off the cost with some of this private competition.
Yeah.
(47:47)
Yeah. No. That's a very interesting thought, Chris. I would just say, I think, right now it appears to us is there continues to be a lot of money trying to flow in to the infrastructure funds and private equity and I think, we see a lot of money, anxious to go to work and we think there's great places that are aligned with us that we can put that money to work and that's exactly what the team has been working on. And I think, again the transaction we just did is a great example of that.
Great. Well, I appreciate all the added thoughts.
Thank you, Chris.
Thank you. We'll take our next question from Derek Walker with Bank of America Merrill Lynch.
Good morning, guys.
Good morning.
I have just a quick one on the merger. With the shareholder vote on August 9, how should we think about – assuming that there is a successful process there, should we expect that to close shortly thereafter or are there some other items we should be watching out for?
No. You should expect it to close very shortly thereafter.
Okay. Great. And then, Alan, you mentioned a new customer in the Utica. I just want to confirm is that related to the Chesapeake sale that was recently announced? And then, just want to also confirm, do those contracts roll with the new customer and have there been any discussions yet from that customer to perhaps renegotiate any of those terms?
The answer is yes. Those contracts roll. And no, there hasn't been any discussion of restructuring those contracts. As far as I'm aware of, I don't think there is any expectation of that. I think the new customer knows. Obviously, we're always open to value-added transactions. And teams are always very aware of how value can be added.
But right now, those contracts roll with the acreage and we think there's a lot of value. I would just tell you that to the degree there's capital available, obviously Chesapeake has been capital constrained. They've had a lot of great opportunities, including the Utica, but they've been capital constrained. If you think about the nature of those cost of service contracts, like we have on the Cardinal Gathering System there that services the rich Utica, if somebody can come in and apply the capital and get the volumes up, they naturally take the rate down.
So, there's a way to fix and get a lower rate just through the investment of drilling capital. And so, that's kind of what I would expect to happen, given the availability of capital that, that team is going to have to apply to those assets. So, I would just say that's been a challenge for Chesapeake to take advantage of that opportunity just because they've been capital constrained.
So, I think this is a good example of the market working and new capital being brought in against attractive return opportunities in terms of drilling on that acreage and that's fully what we expect to see and volumes will go up and rate eventually will go down be it a cost of service model associated with them.
Got it. Thank you, Alan. Appreciate it.
Thank you.
Thank you. We'll take our next question from Becca Followill with U.S. Capital Advisors.
Good morning, guys. Back on the DJ Basin, the downstream synergies that you talked about, what are those?
Becca, there are multiple synergies. I would just tell you we have some fairly complex contractual relationships downstream that I'm not going to get into that relate to our existing Rockies business, but we're not going to divulge the details of that, but I would just say there's quite a bit of opportunity in that. And as well obviously, we have a downstream infrastructure in terms of both OPPL and Conway fractionator as well. So, I would say there is multiple opportunities around that and a lot of it relates to our contracts that we have for our existing NGL volumes coming out of the Rockies.
Thank you. And then, you talked earlier in your remarks about some constraints on NGL takeaway, maybe dampening a little bit EBITDA. Will you have the ability to flow volumes from these processing plants, especially when you're at the 200 million a day on OPPL since it's full?
Yeah. Good question. First of all, I would say the NGL constraints are in multiple locations as you know, I think you're well aware that the two ways out of the Rockies are either on the MAPL System, which unfortunately flows through the Permian to ultimately get to the Bellevue. So, that path previously has been an open path, but with all the Permian congestion, the route south on MAPL out of the Rockies has been constrained.
And so, the San Juan Basin asset, as an example of that, has been on allocation for quite some time. And so, when ethane margins become available, that's very difficult to capture, given the allocations going to South. And of course, the other option out of the Rockies is on Overland Pass and that has been on curtailment for, I don't know, maybe 13 or 14 months now. It has been on curtailment and has limited our ability to extract the ethane margin out of the region as well.
So, that's the constraints that I spoke about earlier. In terms of things that are changing obviously on that, as I mentioned to Christine earlier, of course the Elk Creek pipeline that ONEOK is building along with the more near-term transformation of the White Cliffs System from crude to NGLs as well as another major expansion out of the DJ Basin in the way of the Front Range system, all are providing quite a bit of relief for that particular area that will provide relief for both the Bakken and the DJ and the Rockies ethane molecules. And so, that's where a lot of that uplift will come from as those systems all are expanded out there.
Thank you. And then, last question is there have been more roadblocks put out in front of pipelines, a lot of surprising wins by the Sierra Club, the FERC now going to take into account or looking at taking into account the larger greenhouse gas emissions, how is that playing into how you're projecting your timing for new pipes – new gas pipes?
Well, I would say, for instance, on the NESE project even though that's been delayed from what we had in our capital in terms of our internal projections, we had a delay built into that. So, I would say, unfortunately, we're pretty accustomed to the delays and I think have done a good job of predicting them.
I also though – and so, I really – I would tell you that I think that, that opposition has been very effective on a number of fronts. And I think we've got to continue to do things the right way as an industry. We've got to improve discipline across the industry on our construction practices and how we deal with the public. I would tell you, I think Williams is a leader on that. I think Atlantic Sunrise is a good example of that.
But we have to build in quite a bit extra time in the Northeast. I think it's yet to be determined if that opposition spreads outside – dramatically outside of the Northeast. Obviously, the attack on Sabal Trails is an example of it spreading out of the Northeast. And so, we may see that expand other areas as well.
And so, I think everybody better have eyes wide open when you think about greenfield or long-haul pipeline construction. I think everybody better be eyes wide open and they need to sharpen their skill sets both in terms of regulatory compliance and the engineering that goes into building these pipelines in a way that stays well within the bounds of the regulators and the communities that we serve.
So, I would tell you we've been attuned to that issue for a long time just because a lot of our construction has been in the Northeast. But I have a feeling that, that is going to spread outside the Northeast. And I'm hopeful that the rest of the industry really starts to pay attention to those issues.
Thank you. That's all I had.
Thanks. Thank you, Becca.
Thank you. We are out of time for questions. I'll turn the call back to the speakers for closing remarks.
Okay. Thank you very much. Thanks everybody for joining us. Again a very predictable quarter from a financial metric standpoint, but a tremendous platform being built and a lot of work that went on this quarter that positions us for even greater growth here in the second half of 2018 and certainly in a big way into 2019 and beyond. So, really excited about the great work by the company during the quarter and we look forward to sharing that with you in the future.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.