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Williams Partners L.P. (NYSE:WPZ)

Raymond James Institutional Investors Conference

March 5, 2013 16:00 ET

Executives

Don Chappel - Chief Financial Officer

Unidentified Analyst

All right, well good afternoon, we’re going to go ahead and get started. It’s my pleasure to introduce Don Chappel, the CFO of Williams. Believe this is the first time they come to our Raymond James Conference maybe wrong on that, but it’s been a while, so very excited to have him here. This is really a company that doesn’t need much of an introduction, one of the premier midstream companies with industry leading dividend growth and a backlog I believe of over 11 billion of projects over the next three years. So, very tangible and amount of visibility and where they’re going to get that cash flow and where the cash flow growth is going to come from. And with that I’ll turn over the floor.

Don Chappel - Chief Financial Officer

Thank you, Kevin. Thanks to Raymond James for inviting us. We are delighted to be part of the conference and for you as investors to spend time with us here at Williams. So, I just like to run through some of the exciting developments we have in the company. For those of you they followed us carefully you could probably teach this class, but I’ll nonetheless run through it. For those of you little newer perhaps will get something it will cause you to crack the book a little bit more. So, but we’ll touch on the forward-looking statements and expect you to read those very carefully.

If you are in the midst of a natural gas super cycle you probably know this or heard this, but clearly the development of all the shale resources has opened up a whole new waive of development and we are right in the middle of it since we connect producers to markets and markets to producers. The need for our services is enormous and it couldn’t be any better and we would expect this is going to run for an extended period of time. Certainly we are in the early innings of this shale gas and shale oil development and we have great visibility to enormous amount of growth that which we’re contracting this year we’ll typically go into service in 2015 or 2016 and get a full-year of earnings in 2016 or 2017.

So, we currently see very strong earnings in cash flow of growth based on what the business we contract this year out for several years. So, we’ve got great visibility to our growth and we’ve got a great backlog signed business as well as businesses in the proposal stage or business that should come our way just given our position in these many markets.

Just to turn a little bit more and this was hard to really see on a map, but we’ve got a pretty big footprint in the country probably what’s most prominent here is the interstate natural gas pipelines, the largest of which was Transco that moves gas from the Gulf of Mexico up to the Northeast, but it also now moves gas from the Northeast down to the Mid-Atlantic area as well. So, it’s really become bidirectional, it’s a biggest pipeline system in the country, it’s the only pipeline system that’s really a major pipeline system that’s east of the Appalachian Mountains, which gives us an advantage in terms of doing business along the heavily populated Eastern Seaboard.

Transco is undergoing a pretty, the large array of expansions to provide more gas service to power companies that are repowering coal plants or building new gas plants and in lieu of coal or nuclear plants as well as to serve growing Petchem demand, steel demand, manufacturing demand as well as just the normal growth in residential and commercial business. So, a tremendous amount of growth around the Transco system with very low risk demand payment type contract structures and long-term contracts as well the red line here on the map and down into Florida is the Gulfstream pipeline, we have 50% interest in that pipeline and that grows, serves the growing Florida market, its been expanded five times over the last several years and we are looking at another potential large scale expansion.

In the Northwest, we’ve got the Northwest Pipeline system that sources gas in the San Juan Basin, in the Rocky Mountains as well as up in Canada it moves it to the prime Northwest markets. So, that comprises our interstate pipeline business and then we have a very large and rapidly growing midstream business. That’s a little harder to see on the map, but we have major positions in the Gulf of Mexico both onshore and offshore, major positions in the Rockies and the San Juan Basin area out here. We have positions up in Canada in the oil sands where we do a gas processing for the upgraders and then we have a very large for relatively new position in the Marcellus and now we are beginning to do business in the Utica as well.

And then finally we made an investment in Access Midstream Partners during the month of December we bought a 50% interest in the general-partner including the IDRs and we own 25% of the LP units and that exposes us to additional growth opportunities through Access’s portfolio of premier basins which include the Marcellus and Utica as well as the Haynesville, the Barnett and many positions in the Mid-continent area as well as in the Niobrara.

So a lot of ways to grow this portfolio and we are seeing many, many opportunities with producers and market customers to continue that prorate growth. We’re, we had a track record here over the last several years of increasing our dividend at Williams at a pretty rapid rate and our dividend growth rate guidance is 20% per year through our guidance period which is 2013 and 2014.

So, dividend growth guidance of 20% 2013 over 2012 and 2014 over 2013. So that equates to about $1.75 in 2014 the 2012 dividend was a $1.20. So and we have great visibility to that growth and I’ll talk about that in just a minute. At the same time Williams has a controlling interest in Williams Partners large scale MLP and Williams Partners in turn has a 9% growth rate in distributions that we’ve offered to the market and that’s continuing the growth rate that we’ve had the last several years.

Again compel excuse me the growth and the distribution and the dividend is really propelled by the strong fundamentals and the many projects that I mentioned here and backlog and as well to extend that growth rate well beyond 2014 with many more such projects. WPZ is not enjoying the best coverage ratio this year cash coverage ratio after seeing NGL prices reduced. So we are forecasting the cash coverage ratio this year to be at about 0.89 times the distribution. So falling short by about $2 million but that’s after a couple of very strong years about 1.3 times coverage. And we expect coverage to come back to 1.02 by 2014.

So we see this as a speed bum something to be managed but we expect the commodities will have been flow we’ve had several years of very high commodity prices. We are now experiencing a much lower and I’ll be specific to propane and ethane. And we expect that will start to not improve all that much in the commodity price area but to see a bit of improvement there but really to see our fee-based business grow to the point that are just overwhelms the weakness we see in commodity prices.

At the Williams level that coverage is more 1.5 times coverage so very strong coverage at Williams as a result of a number of factors including lower cash tax rate drive by bonus depreciation and some other elements. So if I just turn the page here for a moment and take a look at a couple of commodities. So I know there is a lot of concerned over ethane. Ethane has been beat down pretty hard not because there isn’t demand for it but because there is an excessive supply until all these crackers come online.

So looking at this slide here and for anyone that’s on the website it’s the slide number seven illustrating the strength of Geismar’s natural ethane hedge. And this is a 2013 if we look at the gold on the slide that’s the ethane margin the blue is the ethylene margin. So you can see that at a where that diamond is that’s where our guidance is, so we are forecasting for 2013 a $0.6 ethane frac spread that equates to about $27 million of margin. So if ethane went to zero frac spread we lose $27 million of margin not a real big thing given the scale of WPZ and Williams but on the other hand if ethane goes cheaper this blue bar expands in fact so you’ll only see a fraction of the loss show up on the top line really the gross margin including the ethylene margin.

So this holds ethylene constant and changes the price of ethane. So ethane margin diminishes ethylene margin expands and then actually if we get to a negative $0.10 ethane margin which is possible and we’ve actually seen in the first quarter. We actually make more money. So we are actually we’ll put ourselves in an economically hedge position relative to ethane to where we have very little ethane exposure. By 2014 we are actually slightly short ethane because Geismar’s being expanded well it actually consume more ethane than we produce. So that’s the that’s good news on the ethane front and the ethylene we feel very confident that the margins in the ethylene business are going to be strong by a combination of low ethane cost and the fact that ethylene is still a favorite feedstock given this natural gas source and competes very, very well on the global market against crude oil based naphtha cracking.

To turn - turn the page to the next slide, which is slide number eight it really looks at our fee-based business as well as commodity and starting on the left side here I’ll just explain the bars. So, the first bar is fee-based gross margin. The dark blue is the Midstream part of the business. The light blue is the gas pipeline is part of the business and you can see in 2012 that totaled about $2.5 billion.

The next bar is commodity-based gross margin. In 2011 that was about $1 billion or $0.5 billion. And if you follow.2011 to 2014, that $2.5 billion of fee-based business grows to about $3.7 billion and we have specific projects that I’ll point out to drive that growth and that’s really what’s driving in large part our distribution growth at WPZ and the dividend growth at Williams.

And at the same time, you can see the commodity margin here went from about $1.5 billion to a little less than $1 billion or $0.5 billion was because as I mentioned earlier, the rollback in some of the NGL prices. So, you can see the NGLs and the Midstream business here diminishing a little bit and the NGL Petchem Service including the Geismar expanding a little bit.

So, NGLs in total down slightly, the actual margin decline was 58% offset little bit by some olefins growth. But the real story here is around the fee-based business growth, which gives us great confidence and ability to continue to raise the distribution at WPZ and the dividend at Williams. The third bar on the chart is just adjusted segment profit plus DD&A or proxy for EBITDA. Again you can see that growth from 2011 at about $2.7 billion up to now $3.7 billion by 2014.

Maybe just turn the page and take a look at what’s happening in the Marcellus and the Utica. We’re probably investing somewhere close to 45% of our capital in the Marcellus Utica area over the next several years and for good reason. This is an enormous basin or basins and we’ve a very big footprint in the Northeast and we’re determined to be a leader in that market or markets. We established our first foothold their in 2009, when we bought 50% interest in Atlas’ Laurel Mountain gathering system and since then Atlas sold the E&P business to Chevron so Chevron is now our partner and our customer at Laurel Mountain.

And then we moved up sort of Cabot and WPX Energy and others up in Susquehanna County. And then we stepped into the Ohio Valley area down in West Virginia with an acquisition of the Caiman business about this time last year. And then in December, we announced a joint venture in the Utica, where we took the joint venture we had with the former Caiman owners and combine that with Dominion form of Blue Racer Midstream to compete in the Utica using a lot of Dominion’s existing assets and Williams and the Caiman teams’ capital and know-how.

So, that, that along with our very large scale Transco position and a couple of pipelines we’re building – expansion projects we’re bridling in the Northeast as well as along the Transco system to support the growth in the Northeast really is the key part of our strategy so just to kind of tick the boxes here.

Susquehanna Supply Hub again that business started up kind of 2010 by 2015, we expect to have 3 Bcf of takeaway capacity and volume so aggressively growing to meet that need. We’ve seen continuous expansions and our customers needs in Susquehanna County and we’re well positioned to meet those needs.

Very big wells, amazing wells out there and things are going quite well that also created the need for this Constitution Pipeline, which we mentioned over here. This pipeline will run from Susquehanna County up into the Northeast to that Iroquois Pipeline up there. So, that the production in this can access four major interstate pipelines to get to as many markets as possible and to get the best possible price for that gas. So, that - it’s a new project. It’s been commissioned.

A couple of our E&P customers are joint owners with us and that projects moving along and we expect that 2015 in-service date that’s currently sized to 650 million cubic feet a day. The Laurel Mountain Midstream I mentioned we joined the Atlas in that back in 2009 and then shortly after that Chevron bought out Atlas and so Chevron is our customer partner and we’ve got about 900 million takeaway capacity there by 2014 and the very big position with Chevron that dedication also extends up in the Northwest Pennsylvania which is an NGL-rich area and we expect to see the fruits of that in the coming years as well.

Ohio Valley Midstream as I mentioned is the Caiman acquisition and what we called since then we bought into that business last year and we indicated we had about 1.3 billion of expected capital investment following that acquisition and we’re busy building pipelines, processing plans, compression, fractionators and the like. The Gulfstream is very rich with NGLs and condensate and we’re working hard to, to try to keep up with the producers and that’s been the real challenge but nonetheless it’s a high-class prom to have because there is so much rich gas in the area that the drilling economics are very, very attractive.

So we see a great long-term growth there. we’ve started out a little bit slowly than we would have expected because it’s taken this longer to get things dealt then we’d like to see but again producers are eager to drill even faster. We’re also working on an NGL pipeline solution to bring NGLs from the northeast from the Marcellus and Utica to the Gulf Coast, we’ve not sanctioned such a project but we’re working hard to make that a reality not just for the investment we’re able to make but also to provide better drilling economics to producers in the Marcellus and the Utica such that drilling accelerates further for an extended period of time.

The Blue Racer Midstream JV I mentioned again joint venture where they came in developers, sellers as well as with dominion and we have high expectations based on that footprint as that footprint in our business plan. So again Marcellus and Utica and we think is a great place for Williams and we’re developing a very large position. Also in that area ACMP in which we have that major investment also has positioned and both the Marcellus and Utica so we have some other ways to win up there. Finally I mentioned Transco has got a couple of significant projects the northeast supply link going into service this year and a proposed Leidy Southeast project to go in service in 2015. So a lot of activity in the northeast and we think there much more to come.

Time to turn the page to Canada for a moment, often times our Canadian investment and business is overlooked so I just want to spend a couple of minutes. The oil sands upgraders produce a lot of off-gas that’s rich in NGLs and olefins they, when they superheat the bitumen it cracks the molecule on some cases and creates propylene and ethylene as well as that NGLs and they typically burn it as boiler fuel, there so they are burning a very valuable product and they are also releasing excess emissions. Some years ago we signed an agreement with Suncor to take their gas stream, extract all these NGLs and olefins and return the same BTUs and clean ethane that’s one gone very well when we signed that contract Suncor announced an overall reduction of emissions of about 20% from their facilities and that’s a big facilities so there is a lot of emissions and they received the some price from the Government of Alberta and Canada as well as from some environmental groups for doing it.

We since built a NGL pipeline of 260 mile pipeline from Fort McMurray down to Redwater two big fractionator complex we have to handle all those liquids and we’ve expanded that complex as well since that time we signed an agreement with NOVA to supply NOVA with ethane we have a full price on that but we have commodity price upside and NOVA is interested in taking all the ethane that we can produce and then that earlier this year we announced I guess it was late last year we announced a deal with CNRL to process their off-gas as well. So we’re building facilities to process their off-gas and then finally we’ve targeted Syncrude and we’re in discussions with Syncrude to process their off-gas as well.

So, if you take a look at this chart the blue is the volume that we’re actually processing in 2012, the green is the amount of off-gas that’s been produced and the green parts what’s being burked and creating the excess emissions on the loss value. So that doesn’t rely on any expansions of upgraders so that’s just a business that’s currently available today that we process. The grey is the ethane that will come off once we get our facilities and we selling to NOVA. And then the green would represent that the remaining business are CNRL and Suncor, CNRL is under contract so that will be a little less than half of that green that we’ll have captured within a couple of years there we go and then the remainder is primarily Suncor. And again we think the economics are compelling and the environmental benefits are compelling and we expect to win that business as well, it just take a little time to get that developed.

The yellow on the slide over here is announced expansions by the upgraders so again we’d be delighted to get through the 80,000 barrels a day which is the existing business out there but we think longer term there is plenty of room for even more opportunity. We’re the only company providing this service out there but where it stands, we are pretty high so we think that’s really our business to win.

In terms of visibility into to those 2014 growth in fee-based business (indiscernible), and cash flows you can see this slide depicts the principal projects that are driving that so that big green bar at the top of the slide is really our investments in the Northeast and the Marcellus and Utica 6 billion of capital between 12 to 14 and we believe likely something more than that over that period and beyond.

The next slide and that’s based on a number of smaller projects not to say small but it’s a lot of projects $300 million, $50 million, $20 million a couple of large acquisitions. The next one here is the CNRL Upgrader up in Canada I mentioned and by the way the blue are direct investments by Williams, and green are WPC. So and they rank the order by size of capital investments so $500 million to $600 million on the CNRL Upgrader in Canada and again that’s going to be commodity based with some ethane price support through the NOVA agreement but that goes into service you can see out there kind of in the second quarter is 2015 so really first full year of cash flow at the end of 2016 so really not doing anything for us over the next couple of years so we got to carry on that but really seeing that driving 16 and beyond.

This is a Transco project Leidy Southeast $600 million going into service late 15 so really driving 16. So we’ve got plenty of things going to drive long term growth. The next project here is Gulfstar, this is a floating production system deepwater Gulf of Mexico really serving in oil discovery but lastly some gas coming off that. We saw over 49% interest in Marubeni that was announced about a month ago so it’s about a $1 billion capital project that we’re developing, Marubeni is now an investor at 49% so our share is about $500 million that goes into service second quarter 14 so we’ll see first full year is cash flow in 15.

A number of miscellaneous Pipeline and Petchem were old projects and these are some pipelines and storage facilities down around the Gulf Coast to move NGLs to Petchem facilities so to move Petchem products like propylene and ethylene from Petchem facilities to derivative plants. So we think there is a nice fee-based business there so that’s all fee based. Some additional investments we’ll be making again within in-service date of kind of late 14 full year and 15. Keathley Canyon Connector it’s a $660 million project that which we own 60% an operate at that’s a $200 million excuse me 200 mile 24-inch undersea pipeline a gas pipeline that will go to our gas processing plants onshore and that again in service mid 14 so I want to run through those but those were some of the larger projects that we’re investing in and you can see a lot of those projects don’t really go into service until 14 and 15 and won’t really see full year cash flows until 15 or 16. So we have a lot of visibility to growth.

We also have a fair amount of execution whereas we’re going to have to get a lot of things built, we’ve had a great track record of building things on time and on budget not to say that everything will come in on time and on budget but we have to – we like the track record we have and we think that these projects are well managed.

In December we announced a major investment in Access Midstream Partners those you don’t know remember too much about Access, Chesapeake Energy formed an – formed a Midstream company to provide exclusively provide the midstream service needs as a capitals if you will, such a thing can move very quickly and have them needs met to their expectations.

In 2009, Chesapeake needed some cash and sold 50% interest in that to GIP and in 2012 Chesapeake again had a need for some cash and was prepared to sell down the remaining interest in Access which is a public company. And Williams is able to participate in that transaction, it wasn’t auctioned, it was a negotiation, Chesapeake was interested in Williams is being a strategic service provider knowing that this was a long-term relationship and they want to make sure that the company this could provide service to them was large scale and reliable. So, Williams aligned with Access and GIP we’re able to make the balance of the investment. So, we made a $2.2 billion investment, we own 50% of the Access’ general partner and including all the IDR rights and we own 25% of the L.P. Units.

We think that there will be tremendous growth in this investment and it really be a big driver of earnings and cash flows in 2015 and beyond, we think we’re kind of in the very early innings here. You can see Access has almost $2 billion capital program here in 2013 and you can see the EBITDA growth rate at the bottom of this slide 2011 at $349 million and by 2014 over $1 billion and again with the IDRs good bit of that will accrue to the General Partners of which we own 50%. So, we’re very excited about that investment as well as the other growth opportunities that I mentioned.

This slide just depicts our dividend growth history as well as the guidance that we provided. On the last side you can see back in 2010 we weren’t as focused on paying out a big dividend, we are paying $0.49, we also owned an E&P Company in 2010 and 2011. We separated our E&P Company through a spin-off at the end of 2011 as WPX Energy today. And we boosted the dividend 2012 to $1.20; we are guiding to $1.44 this year and $1.75 by 2014 in terms of excess cash flow. The right side of the slide we depict that and I describe that as upside and cushion because we’ve got a forecast of 1.54 times cash flow relative to the dividend this year and 1.46 times cash flow relative to dividend for 2014. So, again, good cash flow coverage. We think that helps to secure that 20% growth rate and provide for some upside through reinvestment of the excess cash flow in the more of those fee-based projects.

So, we think very exciting opportunity set in front of us, the fundamentals couldn’t be any better. And with that I’ll just close, again Williams and Williams Partners I think combined and together we think have a phenomenal opportunity here and we think we have the track record to back that up. We are in the middle of an infrastructure supercycle driven by these great fundamentals, low cost bundled natural gas is driving huge increases in demand and there is tremendous amount of supply that can really supply that demand. Williams has large scale competitive positions, again our strategy is not to be everywhere but to be in places, that are very large scale basins with lot of growth and that’s what we are.

We are – we have a lot of depth and breadth to our investment grade and our intention is to remain investment grade at the current levels that we operate at and we have great visibility to not just the 2013, 2014 growth but growth well beyond that. And again I think our cash flow dividend and distribution growth rate is top of class. So, with that just close and take any questions and then we’ll do a breakout session in just a few minutes.

Question-and-Answer Session

Unidentified Analyst

Any questions from the audience?

Unidentified Analyst

I have one question, when you look into natural gas equation one thing that we are all explaining is trying to figure out (inaudible) slowing down or maybe what your customers are telling you as far as (inaudible)?

Don Chappel

Okay. The question for anyone that couldn’t hear, anyone on the phone was what we do see as development pace in the Marcellus from our customers. I would say its mixed, I’d say some areas it was red hot a couple of years ago has cooled down and that tends to be in the dryer areas where the well results aren’t quite as powerful as some of the other areas up in Susquehanna County however. We are seeing tremendous well results and tremendous growth.

So, it’s a dry area, but its growing very, very rapidly. So, I would say in the Laurel Mountain the well economics here are good but not quite as strong as we see in Susquehanna County and as well we’ve been behind that infrastructure. So I think some of the drilling activity there is slowed it still growing but slower growth and we saw previously and I think part of that is until we catch up there is no point of drilling wells and having that capital stranded until those well can be connected to markets. So, some of it is infrastructure constraint. So and then if we move to the Wet Gas side then we are seeing a red hot and we can build the pipeline and processing fast enough to keep up for the producers.

So and that looks like it’s going to go on for a while. So we are really constrained by our own ability to move fast and we are pulling out all the stuffs to move as fast as we can but nonetheless it’s the pace of the development is just red hot. And we see a very hot pace of development as well in the Utica. So, dry Marcellus a little mix depending on what kind of wells you have and then the wetter areas just moving above as fast as they can be built up.

Unidentified Analyst

Alright feel free to join me in thanking Don for presenting and break-out room will be downstairs. Thank you.

Don Chappel - Chief Financial Officer

Thank you.

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