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Executives

Travis Campbell - Head of IR

Don Chappel - Senior Vice President, CFO

Steve Malcolm - Chairman, President and CEO

Alan Armstrong - President, Midstream Gathering & Processing

Ralph Hill - President, Exploration and Production

Analysts

Carl Kirst - Bmo Capital

Faisel Khan - Citigroup

Rebecca Followill - Tudor Pickering Holt

Xin Liu - JPMorgan

Williams Companies Inc. (WMB) Q1 2009 Earnings Call April 30, 2009 9:30 AM ET

Operator

Good day everyone and welcome to The Williams Companies first quarter 2009 Earnings Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Travis Campbell, Head of Investor Relations. Please go ahead sir.

Travis Campbell

Thank you and good morning everybody. Welcome to our first quarter call. As always, thank you for your interest and support of the Company. As you have no doubt noticed there are significantly fewer slides in the presentation this morning. Steve Malcolm will be going through those slides in just a minute. Be aware though that all of our business Heads are here and available for questions. Also beginning this quarter, we have put together a data book that includes most of the data using included in our slides and in the appendix.

So available this morning on our website, www.williams.com are four things, first the slides for the call, second the data book, third the press release and all the accompanying schedules detailing the results of the quarter, and fourth the first quarter 10-Q which was also filed this morning.

Also there are couple of other press releases you should be aware of and are available; one is the announcement that went out yesterday, talking about the impairment of our Venezuelan operations and the other which went out this morning, announces our plans to build an NGL pipeline in Canada. Steve will talk a bit about that last one this morning.

I also want to remind you that we have planned our analyst day for May 12 in New York. On that day each of the business leaders and their teams will spend some time reviewing their businesses strategies and drivers. At the beginning of the slide deck this morning are the forward looking statements and the disclaimer on oil and gas reserves. Those are important and it will go through our remarks, so please review those. Also included are various non-GAAP numbers that have been reconciled back to Generally Accepted Accounting Principles. Those schedules are available and the presentation.

So, with that, I will turn it over to Steve, our CEO.

Steve Malcolm

Thank you, Travis. Welcome to our first quarter 2009 earnings call. We always appreciate your participation in our calls and interest in our company. As Travis mentioned, given the fact that we are conducting an investor day in New York on May 12, we are offering this morning a somewhat streamlined earnings call. I will be the only presenter for the slides but our entire team is present to answer any questions.

Starting with slide four please, certainly the recession and related lower commodity prices impacted our first quarter profitability. The $0.22 adjusted earnings per share is 61% below year-ago level. The average net realized price per US production was 36% lower and per unit NGL margins dropped 69% from a year-ago. The good news is that we continue to record stable, steady earnings in cash flows from gas pipelines.

Looking a little more closely at the numbers on side five, first quarter financial results, for our reported results the story is obviously lower energy prices and significant non-recurring items. Those non-recurring items include first non-cash impairments of 241 million related to our Venezuelan operations and details were in a press release that we issued yesterday. Also we didn’t enjoy the benefit in this year's first quarter of a $118 million gain on the sale of our Peruvian interests which we recorded first quarter '08.

The other significant non-recurring item was $34 million in penalties related to early termination of rig contracts and this is clearly in line with our reduced CapEx program in our E&P segment. So our adjusted first quarter earnings per share of $0.22 is off 33% from fourth quarter '08 and down 61% from first quarter '08 when we enjoyed a very robust energy commodity price environment.

Turning to slide six, shown is reported and recurring segment profit, first quarter '08 versus first quarter '09. I have already talked about the major nonrecurring items. But in E&P, the decline in segment profit was due to much lower net realized average prices for natural gas and higher expenses; I'm referring here to depletion, depreciation and amortization; somewhat offset by higher production volumes. The average daily US production in first quarter '09 was 21% greater than first quarter '08 and 6% higher than fourth quarter '08.

In midstream, the decline on a recurring basis was primarily due to significantly lower NGL margins as well as Venezuela profits not recognized; in the gas pipe area, again steady, stable and predictable.

Slide seven, although the economic environment created quite a challenge and you can see at the bottom of this slide the energy commodity price comparison versus last year, we are pleased that we are making significant progress with respect to executing on our strategy and some of the highlights are shown. The fact that we entered into the Marcellus Shale, announced plans to expand our Canadian operations with the new NGL pipeline demonstrated increased liquidity with our $600 million debt issue. Additional support for Williams Partners produced 4% more gas in the US versus the last quarter; received approval to expand our Northwest pipeline system to transport additional Piceance gas and continued progress toward bringing strategic infrastructure projects into service.

On slide eight, we are delighted with our entry into the Marcellus Shale. Please note the key bullet points on the left side of this slide. But generally speaking, this transaction provides Williams with the gathering systems and a very large acreage dedication in the heart of the Marcellus that gives us a couple of year head start in the development of a large scale, highly-reliable system which provides needed midstream services to both Atlas Energy and other producers in the region.

Both our partner and our anchor customer are aligned with our growth expectations and the gathering service inquiries and expressed demand by other area producers is meeting our expectations.

As shown on slide nine, we are excited about our plans to construct a new NGL pipeline in Canada. Again, please review some of the key points on the left side of the slide, but this new investment in critical infrastructure will help enable sustainable development of the Canadian oil sands. Our investment is low risk as it is anchored by the existing tariffs being paid to Suncor currently, yet positions us to increase our volumes by almost 10 fold and provides existing upgraders the opportunity to dramatically reduce their greenhouse gas emissions. Clearly the transaction supports our strategy of providing highly reliable, large-scale services in key growth basins.

Importantly, note the third bullet there, the $283 million of capital will be funded from our international cash reserves. Slide 10 reflects summarized guidance information. The first column shows revised guidance based on our current assumptions. The second column shows guidance on February 19, the date of our fourth quarter call, and the third column shows 2008 actuals and is a reminder of our strong earnings power in a better price environment.

So as shown, for the full year we're expecting slight improvement in crude prices, continued downward pressure on nat gas prices and looking for some improvement in NGL margins.

CapEx is up about $100 million because of the Marcellus deal. The dip in segment profit is largely within E&P. So our current earnings per share guidance range is $0.55 to $0.95, the drivers of change being lower nat gas prices, Venezuela, additional support for WPZ and higher debt costs associated with the $600 million debt offering.

Slide 11 discusses progress on our top 2009 priorities. I'm not going to spend much time here because we have already highlighted some of these points earlier. But just a reminder that maintaining a strong balance sheet and liquidity, exercising cost discipline, bringing key infrastructure projects online, and I'm talking about projects like Willow Creek, Paradox, Perdido Norte, Sentinel, Colorado Hub, right-sizing capital spending and seizing opportunities as we have done with the Marcellus transaction. These priorities are critical to our success in 2009.

Slide 12 describes the key points that we have been making to investors as we have been on the road over the past 60 days. We think that Williams offers strength and stability with our strong financial position, the $3 billion of liquidity, the investment-grade credit rating, the fact that we have no significant debt maturities until 2011 and that primary credit facilities don't expire until 12' and 13'. We've demonstrated great flexibility to adjust capital spending in response to market conditions and I think we offer a stable foundation of cash flows. I think the key bullet point, being the fourth one, which shows that we are expecting $1.2 billion to $1.4 billion of cash flows in 2009 from price risk insulated businesses, and I'm speaking here obviously about gas pipes and our fee-based midstream revenues and as well the fact that 62% of E&P production revenue is hedged in 2009.

So concluding with the key takeaways on slide 13, we believe we are well positioned to weather the economic storm because of our strong financial position, because of our stable foundation of cash flows, our ability to adjust spending and our belief that the integrated model is best suited for success in the current environment. We offer substantial upside to our current valuation. Significant expansion projects are coming online, substantial probable and potential low-risk reserves. We expect expansion of valuation multiples as the markets improve and all of the above I think translate into a very attractive risk reward balance.

So with that, we have gone through the slides, the team is assembled here to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Carl Kirst with BMO Capital.

Carl Kirst - Bmo Capital

If I could start with the Marcellus and not necessarily to steal any thunder in front of May 12, but Steve can you give us any sense of what you are thinking? We know you're only going to go into an area if you can get big. You mentioned being large scale. Do you have a sense of the capital investment dollars you are thinking in this region over the next three years? Two, with respect to looking at it as far as how should we think of returns in the current environment, only noting that I saw in the midstream section that you guys had converted some of the keep-whole volumes to fee-based. I don't know how material that was but I didn't know as you were looking into the Marcellus if you're thinking about this more in kind of a fee structure or if it's just kind of the same model in the Rockies sort of placed on top of the Marcellus.

Steve Malcolm

I will offer a few comments and then turn it over to Alan, but you're right. You have been listening to me that we have talked about the fact that an important part of our midstream strategy is creating these large-scale positions where we can exercise some market power and that has certainly been the case with all of the basins that we have moved into. That is our game plan with Marcellus. Many producers have said that the midstream challenges are daunting. We have had several calls already from producers asking for help. So we are very excited and expect to be able to create the same kind of system that we've created in other growth basins. Alan, any other thoughts?

Alan Armstrong

Carl, I would just add that the majority of the business there, there's really not very much that we are counting on anyway in terms of processing revenues there, I think the majority of our business will be fee-based business there and somewhat exposed to gas price there which is a nice upset to our midstream business obviously.

So I think there will be a mix of that kind of business. I would just add to Steve's comment about the infrastructure and the need for it up there. As we see it, there's a lot of pipelines crisscrossing the Marcellus area today. But the degree of volumes that we think are going to build very rapidly out of that area are going to cause need for a system that can get producers the very best price rather than being dedicated to one particular pipe in an area that may be overloaded. So, we think there is a good opportunity for some large-scale infrastructure up that set some supply hubs in the Marcellus and we are excited to be talking to a lot of interested producers. As soon as we made that announcement, we saw a lot of interest in that kind of project.

Carl Kirst - Bmo Capital

Sure, but no sense or at least that you can kind of indicate at this point as far as potential investment dollars we're talking about over the next few years?

Alan Armstrong

I would say this. We have a pretty good idea of what it will take to keep up with the Atlas production but I would just say that that is certainly not the limit of our desire and appetite up there. We didn't go up there just to do that. It's a very important customer and we want to make sure we get that business right. But our desires are beyond that. So I would hate to quote a number because the rest of that investment is fairly speculative at this point.

Carl Kirst - Bmo Capital

Okay, fair enough. And just shifting really quickly to the Canadian NGL pipeline and just to make sure I understand this correctly, certainly understand the volumes that are going to be coming over the next 10 years. Sort of as we sit here today should we be thinking about as far as what is contracted, if you will, basically just the Suncor volumes? That looks to be about 15,000 a day over a 43 initial capacity. So that's only about 35% contracted and that you're going to kind of ramp that up as we move to in-service date or how should we think about that?

Alan Armstrong

Well, very interesting project because we were shipping on OSPL which is the oilsands pipeline with Suncor and we were shipping those NGLs and as a result of that, we were taking up space in that crude oil pipeline. They needed us out of that space to make room for their expanded upgraders up there. So part of the negotiation was them basically buying us out of that position to move barrels and we were paying a very high tariff on that pipeline. So the minimum volume, if you will, as Steve mentioned, the project is very low risk because we get to a low but reasonable return with just that base volume of business that we have up there today. So anything above that is upside to us.

Operator

The next question comes from Faisal Khan with Citigroup.

Faisel Khan - Citigroup

Just a quick question. I just want to clarify this. What is your production growth target for this year? And I guess how do you foresee that kind of (inaudible)

Ralph Hill

This is Ralph. What we said before and continue to say, we think overall our production guidance range has been a growth of about 2% to 4% for the year. So you can see that our rapid growth quarter-over-quarter, first quarter '09 versus first quarter '08 will taper off as the year progresses.

Faisel Khan - Citigroup

Then given your guys' focus on EVA metrics, you obviously chose to make an acquisition in the Appalachian Basin, but how are you looking at the allocation of capital as we get into the summer here in this low gas price environment. I guess your assumptions have changed for gas and commodity prices in this quarter versus last quarter. So how is your allocation of capital changing within the different segments?

Don Chappel

Again, we look at our costs and our expectations of future profit. We certainly have a point of view on commodity prices in the future. We also have financial markets as an indicator and we take all of that into consideration as well as risks and make decisions. I think in the case of the Atlas investment, we saw a very substantial opportunity relative to the risk profile and expect very attractive returns in that basin over time. So I would say a typical way that we always look at things is just that the variables perhaps are more variable than they have been in the past.

Faisel Khan - Citigroup

If I'm looking at your overall kind of cost structure in the midstream business, also in the E&P business, what sort of efforts are you guys making to reduce that cost structure over time? Because over the last three years, the midstream cost structure has kind of moved up along with your expansion opportunities. So, I was trying to figure out if there's room for that cost structure to move down over time.

Alan Armstrong

I will speak to the midstream piece there. In this quarter actually we did see our unit cost move down a little bit on the O&M side. So we are seeing some backing off of cost on both the O&M side and the capital side as a matter of fact. So we are being able to put some pressure on those costs. Albeit minor in the first quarter, but we certainly have seen that inflection point.

Ralph Hill

This is Ralph. Our cost structure, as you know, is usually in the top three or four in the country. So we continue to drive those efficiencies. On May 12, you'll see some slides from some independent analysis that shows we remain in the top two or three. So we don't have any major cost efforts underway except what we always do everyday and every year.

Faisel Khan - Citigroup

Last question; on Venezuela, is this an issue where their credit is constrained and they can't pay you or is this an issue where you have to walk away from the assets because you don't think there's going to be any recovery there?

Alan Armstrong

I would just say that evidently it's hard for us to have an internal read obviously into Petrowayu's finances. But it certainly makes sense for them to be paying us and continuing to service there. And for whatever reasons, they haven't been able to make those payments and so we have rights under our contracts and we intend to exercise those rights.

Operator

(Operator Instructions) The next question comes from Rebecca Followill with Tudor Pickering Holt.

Rebecca Followill - Tudor Pickering Holt

On the E&P side, commodity prices particularly natural gas prices continue to decline, low three handle on them right now. Do you at some point say prices are just too low or just going to shut it down? How do you think about commodities right now?

Don Chappel

We continue to look at that. We have a very low cash breakeven price, as you know. It's $1 or less in some areas and less than $2 in other areas. So we just monitor that and the question will be if the prices get very low this summer, some of that will shut in, but obviously if that cash flows [somewhat]. So we will just have to look at that and continue to balance it.

Rebecca Followill - Tudor Pickering Holt

But is there a strip or a price level where you say, we just don't want to do it or is it sub $2, sub $3, any kind of feel?

Don Chappel

You'll see May 12 what you think our returns are based on current strip and I think you'll be impressed with those.

Operator

The next question comes from Xin Liu from JPMorgan.

Xin Liu - JPMorgan

My question is regarding the IDRs you gave up and the [G&E] credit that you gave for the WPZ. Do you get anything in return?

Don Chappel

This is Don Chappel. I think what we get in return is the value of our LP units goes up. We think in time, the value of our GP will go up as well. We also have currency, an MLP currency that's more useful at very high yields that WPZ was at as a result of investor concerns about distribution maintenance. The currency was not very useful to us. So as that yield comes down, we have again an alternate source of equity capital that we can tap for some of these very attractive projects. So, that is what we get in return. So I view it as strategic.

Xin Liu - JPMorgan

Okay and another question regarding the drilling program at the Piceance. How many rigs do you have over there and what have you seen in terms of production in the Rockies in general?

Alan Armstrong

We have seven rigs in the valley and one in the highlands. So that's a total of eight, down from 28 fourth quarter of last year. We have seen prices continue to come down for all services. We also believe that Rockies production has probably peaked in the region, not peaked permanently but peaked for this year. If it hasn't already, it will very quickly. And thus we feel that as we move on down the road that with the infrastructure in place, it is already in place, an infrastructure that will be built in the next couple of years; the Rockies could possibly turn into an advantage transportation outlet versus some of the other areas of the country.

Operator

(technical difficulty)

Unidentified Analyst

Just a couple of quick follow-ups. On Venezuela, is there any way to get upside down there? If you guys are continuing to operate but Petrowayu is not paying its bills, is there a risk that we are not just putting the profit in kind of the nonrecurring box that we could actually go negative?

Don Chappel

No, we have a set date for the way the agreements work that we would discontinue operations and that's in the very near future.

Unidentified Analyst

Okay and then just lastly, Ralph, you had mentioned of the production growth of 2% to 4% this year. Are we still kind of targeting an exit rate for the year of roughly a 5% decline or has that been pushed up?

Ralph Hill

We still think a 5% decline although first quarter production as you saw was higher than we what we thought it would be. We still see a decline for the year and then flattening out next year.

Operator

We have no further questions. I would like to turn the conference back over to Mr. Steve Malcolm for closing remarks.

Steve Malcolm

Great. Here we are. It looks like we're getting through this call in less than 30 minutes. We look forward to seeing you on May 12 and see you then. Thanks.

Operator

Thank you. That does conclude today's conference. We thank you all for your participation.

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