Williams Partners L.P. Q1 2009 Earnings Call Transcript

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 |  About: Williams Partners L.P. (WPZ)
by: SA Transcripts

Williams Partners L.P. (NYSE:WPZ)

Q1 2009 Earnings Call Transcript

April 30, 2009 11:00 am ET

Executives

Sharna Reingold – IR

Don Chappel – CFO

Alan Armstrong – COO

Analysts

Darren Horowitz – Raymond James

Gabe Moreen – Banc of America/Merrill Lynch

Andrew Gundlach – ASB

Sean Wells – RBC Capital Markets

Operator

Good day, everyone, and welcome to the Williams Partners L.P. first quarter 2009 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Sharna Reingold. Please go ahead, ma’am.

Sharna Reingold

Thank you, Andrea. Welcome to the Williams Partners first quarter 2009 earnings call. And as always, thank you for your interest in the company. Today we will be reviewing the first quarter 2009 results of Williams Partners. Don Chappel, our CFO, will review the financial of the company, and then we will open the line for any questions you have about the results. Alan Armstrong, our Chief Operating Officer, is here and available for questions. Also please remember that there will be an overview of Williams Partners at the Williams Analyst Day on May 12.

Before I turn it over to Don for his remarks, please note that all the slides are available in a PDF format on our website, williamslp.com. Please read slides two and three in this presentation. Within the presentation, there are forward-looking statements about the future expectations and operations that are subject to the various risks and uncertainties, which are disclosed on those slides.

Also included in this presentation today are various non-GAAP numbers that have been reconciled back to measures included in Generally Accepted Accounting Principles. Those reconciliation schedules and related information are included in the slides available on our website, williamslp.com.

With that, I'll turn it over to Don.

Don Chappel

Thank you, Sharna. Again, in light of the fact that we had a special call two weeks ago to announce Williams support to WPZ and we have an analyst day coming up in about two weeks. We will keep our comments relatively brief and expand on our business and the outlook during our May 12th Analyst Day meeting and webcast. So with that having been said, I’ll just dive right in.

Overall, we are very pleased with our performance during the first quarter, in light of these difficult economic conditions and the very depressed commodity price environment. We reported lower NGL margins as compared to 2008, as you would expect. We remain confident in our 2009 guidance that we announced back in mid-April. Our expected pricing environment is consistent with what we saw just a couple of weeks ago. And again, it provides us with that level of confidence as well as assets performance during the first quarter.

Our cash distribution coverage ratio was at 0.9%. And again, we think that’s quite attractive in light of the very difficult conditions. We had a solid quarter operationally. Again, we have terrific assets with a great track record that produced well despite the many challenges. Volumes were up in our West processing facilities. We actually had a record month at Wamsutter in terms of record volumes during the month of March.

Discovery is now fully repaired. We have significant new coming online in the second quarter, and we’ll talk more about that in just a moment. If we just turn to the next slide, slide number six, partnership results, again while net income is not the best measure of MLP results, this slide presents comparison of net income between years. Both net income and net income per LP unit fell significantly from last year. And again, the big story here is margins. Lower NGL margins in our Gathering and Processing business drove lower results for net income as well as DCF. Over the next couple of slides we’ll look closely at the drivers of these lower results.

First, let’s look at our DCF numbers on the next slide, slide number seven. For the first quarter, DCF per LP unit at $0.56 was down about 24% versus the prior year. I would also note that absent the Williams support in terms of waiting IDRs, the DCF per LP unit would have been about $0.53. So it was about $0.03 of support in the first quarter, and that was a waver of about $7.3 million of IDRs.

On the next slide, we’ll dive a little deeper into some of the business drivers, which contributed to the lower DCF. The slide number eight, please. Again, the big story is in margins. Six main drivers that I'll call to your attention. First, we received $23 million less during 1Q ‘09 from Wamsutter and Discovery.

Wamsutter’s past distribution in March was based on its results for December through February, which included heavy ethane rejection in December, and general speaking, the significantly NGL margins than that which we’ve seen in March and April. Additionally, Wamsutter’s fee-based volumes have continued to grow, reaching a new record in March. We reached no cash distribution from Discovery during the first quarter.

Discovery’s plant inlet volumes were only about half of what they were last year, including hurricane impacts. Additionally, the lower NGL pricing volumes caused sharply lower gross processing margins. As we mentioned earlier, Discovery is now fully repaired and looking forward to the startup of Tahiti in the second quarter, which will bring a major source with fee-based volumes.

Second, Four Corners NGL margins fell about $14 million. There was actually about a $2 million favorable volume variance, but pricing was down about $16 million. On average, Four Corners NGL margins fell from $0.74 in the first quarter of 2008 to $0.32 in the first quarter of 2009.

The third item, operating and maintenance expense was down about $7.2 million. Lower O&M expense was driven by unfavorable events in 2008. As you recall, weather conditions and the combination of the Ignacio fire led to higher operating system losses and product imbalance costs in the first quarter of 2008.

The fourth item, we received a $4 million business interruption insurance payment on our investment in Discovery, which goes partially to offset our loss of the distribution from Discovery in January. Fifth, maintenance capital expending was down about $3.4 million. And finally, Four Corners gathering and processing fee-based revenues was up about $3 million.

Turn to the next slide, number nine please, Recovering Segment Profit. And this slide presents the recurring segment profit amounts. Again, lower margins were the primary driver of the changes between periods. Lower half of the slide there, you can see breakdown by business segments. G&P – West down a moderate amount; GP – Gulf down steeply; and then NGL Services down only modestly.

Turning to slide number ten. This slide is the one we presented two weeks ago, updated to reflect actual first quarter results off to the right. So you have a reference as to how the first quarter results compare to our full year guidance range. We’ve included the commodity price assumptions and the expected range of results that we presented on our April 15th release as well as the first quarter information.

It’s important to remember the commodity price assumption we provided were for full year. And as we expected, the commodity prices from the first quarter fall at the low end of the full year range. Most importantly, based on these commodity prices, our financial performance was consistent with the forecast we provided. Notably, we generated a 0.9 coverage ratio in the first quarter, which allowed us to preserve the partnership’s cash and our distribution, as we expected. There is a number of graphs and other financial information in the appendix, which I encourage you to take a look at.

And with that, again, we are pleased with the WPZ performance in the first quarter, looking forward to the balance of the year and an even brighter future. So with that, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we’ll take our first question from Darren Horowitz with Raymond James.

Darren Horowitz – Raymond James

Hi, guys, good morning. Just a quick question for you. You mentioned the ethane rejection in December. Can you give us an update on what you’re seeing currently and your expectations for process (inaudible) Four Corners as we progress here to the second quarter?

Alan Armstrong

Sure. Ethane margins have rebounded very nicely and ethane is certainly producing nice margin in the Western, in both Wamsutter and Four Corners, a little bit lower in Gulf Coast but still very positive. And so here in April, we’ve seen things rebound. Ethane has firmed up a little bit, and gas prices have softened, which has given us quite a bit of margin over and above what we see in the first quarter.

Darren Horowitz – Raymond James

With any sort of incremental plant capacity coming online further, does it lead you to believe that things are going to improve at a more moderate pace or possibly a more significant pace than you had earlier expected?

Alan Armstrong

On ethane margins?

Darren Horowitz – Raymond James

Yes.

Alan Armstrong

I think – you know, obviously that’s pretty hard to read. I think our read of what’s going on in the pet chem industry is there was a lot of inventory that was pulled down towards the end of '08 and into the first quarter of ’09, lot of inventory. And those inventories have been pretty well consumed, not just in the ethylene inventory, but in the downstream derivative products. And I think those inventories have been soaked up pretty heavily. And the ethylene demand right now is actually pretty good.

Darren Horowitz – Raymond James

Okay. I appreciate it. Thanks.

Operator

And we’ll take our next question from Gabe Moreen with Banc of America/Merrill Lynch.

Gabe Moreen – Banc of America/Merrill Lynch

Good morning, everyone. In terms of the bump-up in fee-based volumes for Discovery I think you are expecting in the second quarter. I wonder if you can kind of discuss what your expectations are numbers-wise for the volume bump-up.

Alan Armstrong

Yes, sure. We are awaiting Tahiti startup, will probably be the most significant of those. Our line is fully commissioned and awaiting startup there. And we think that should commence in the not-too-distant future. So that’s one of the primary. There's some other smaller projects that have started up as well out there, that are items like Valley Forge and some of the other prospects that are tie-ins to some of the existing platforms that we have coming in to us today. So we are seeing a nice rebound of volumes there. And we do – the Tahiti volume we expect to be between 50 to 70 BBtus per day.

Gabe Moreen – Banc of America/Merrill Lynch

Thanks, Alan. And Don, I’m not sure if I caught it, in terms of the maintenance CapEx being lower, the reason behind that, I guess we've seen lower maintenance CapEx going forward given fewer wells connects at Wamsutter and Four Corners?

Don Chappel

That is primarily the driver, yes.

Gabe Moreen – Banc of America/Merrill Lynch

Okay. Thanks.

Don Chappel

Four Corners.

Operator

And we’ll take our next question from Andrew Gundlach with ASB.

Andrew Gundlach – ASB

Hi, good morning. Congratulations. A big – just a big picture question and a few smaller ones. Is the way to understand the dividend coverage here that had Discovery been in a normal operating environment, in other words, not the hurricanes, not the financial crisis, that the – and let’s say, the current business as you see it in the second half of the year with the 520 or so a day that you are running, plus all the new projects, is it fair to say that the dividend would be then one or above on a coverage basis? Is it Discovery that’s holding it at 0.9? Is that the way to look at it?

Alan Armstrong

Well, in the first quarter, I would tell you that Discovery did get some support because we had the $4 million business interruption insurance. And so while we did not receive a cash distribution from Discovery in the first quarter, we did have that $4 million that was added into DCF. So it wasn't as punitive, if you will, or there shouldn't be such a sharp contrast between this quarter and future quarters because we did get that BI in there. But it certainly – compared to last year’s volumes, certainly that cash distribution being lower certainly had quite a bit of impact. I think we had about roughly $16 million cash distribution in the period last year, so a pretty sharp difference.

Andrew Gundlach – ASB

So the delta is then 16 to 12? In other words, zero plus four of insurance?

Alan Armstrong

That’s correct.

Andrew Gundlach – ASB

I see. Okay. So then you would be above one?

Alan Armstrong

Right. But that – obviously that had the benefit of high margin environment.

Andrew Gundlach – ASB

I understand. I understand. And lower – okay. And then just another big picture question related somewhat to an earlier question. You talk about the demand for ethylene and the good environment now. How do you weigh that against the inventories of propane and ethane in the system? Do you see them being worked out over time with a demand that seems to be strong or are you little concerned what happens to margins here?

Alan Armstrong

Yes. I think propane is a little harder to call obviously, and certainly exports and import of propane will drive some of that. But as to the ethane, the light in the crackers are going at it pretty hard right now and a lot higher I think than we would have expected. And again I think that’s just trying to replenish some of the inventory on the downstream – the ethylene and the downstream derivatives that were chewed up. So I think it’s a little early to call any kind of economic recovery at this point obviously, but if you were to see that, then we might see the positive trend we see here in April and end of March continue.

Andrew Gundlach – ASB

Okay. Any update on the Paradox?

Alan Armstrong

Paradox, well –

Andrew Gundlach – ASB

From the midstream perspective?

Alan Armstrong

Sure. Just to remind, it sounds like, based on how you asked the question, you understand that. But Paradox is, even though we operate that from the Four Corners area, the initial capital investment in that business is within the WMB ranks. The reason we talked about it in the past, relative to WPZ, is because to the degree those volumes build to the point where it would make sense to bring it down to Ignacio that would add a lot of value to WPZ with little or no capital investment. And so that’s the reason that we’ve talked about that. Drilling is continued there. I think there is a couple wells that are (inaudible) here in the not-too-distant future. We have five wells. Our BBC [ph] and Williams E&P have about five wells down. And we continue to be excited about the performance of that production and look forward to gas prices being supportable of drilling that acreage up.

Andrew Gundlach – ASB

Is it your estimation that the Paradox, if it develops the way your upstream colleagues and the BBG folks think that it will, that the Four Corners will turn into a growth area again, at least for your midstream assets?

Alan Armstrong

Well, it certainly increased the volumes dramatically. And it is a material amount of gas, just the acreage that is dedicated to us would be a material increase in our volumes in the Four Corners. Certainly it would put us into a growth trend for a while. But there is also some other favorable trends that we’ve got our eye on underlying the existing assets in Four Corners. And we’re not ready to go public with that, but we are looking forward to, again, gas prices that encourage the development of some of those reserves as well.

Andrew Gundlach – ASB

Okay. Last, technical question if I can. How come in Conway operating expenses were up year-over-year and quarter-over-quarter?

Alan Armstrong

I think that has the recording of a loss that we had on our cavern coming in. We have one of our feed – raw make feed caverns. We took a loss of products. And when we empty one of those caverns, we have to measure it against what we had on our books. And so we took a loss on our books associated with having a loss there.

Andrew Gundlach – ASB

I see. Is that a cash loss really or is that just an accrual change?

Alan Armstrong

Well, to the degree that we thought that we had that much cash or inventory on hand, it’s real dollars.

Andrew Gundlach – ASB

Fair enough. Okay. Okay, great. Well, thank you. Thanks for answering all the questions.

Alan Armstrong

You bet. Thanks.

Operator

(Operator instructions) And moving on over to Sean Wells with RBC Capital Markets.

Sean Wells – RBC Capital Markets

Good morning, guys. I have a question about Wamsutter. In the past, you guys have described Wamsutter is having a lower unit [ph] in terms of DCF of $70 million. I’m wondering if that $70 million still applies for 2009 or if that’s changed/

Alan Armstrong

Yes. Just to be clear on that, the $70 million is the point at which income of course [ph] being shared between WPZ and WMB. So WPZ gets the first $70 million of that business. So anything above $70 million gets split. And therefore there is the matter of support obviously once you get down to the $70 million mark. And so there is certainly not a floor there of $70 million, but it starts getting 100% of the cash when it gets to that level.

Sean Wells – RBC Capital Markets

I mean, I thought I saw the one slide that describes the Wamsutter operations. It basically depicted up to $70 million and most of that being supported by fixed fee businesses. Is that not correct? I mean, all the amount up to the $70 million or most of it was supported or buoyed by fixed fee?

Alan Armstrong

I’m not sure exactly which slide you’re referring to.

Sean Wells – RBC Capital Markets

It was in past presentations. I didn’t see it in this presentation.

Alan Armstrong

Okay. The way that works is, again, we have a certain amount of fee-based business. I think one of the slides we have shown is, as the BP [ph] volumes grow out there, which they are continuing to grow, all of the BP business is fee-based. And so to the degree that we get up to the volume that is supporting the new plant that’s being built by WMB right now, then we have enough fee-based business at that volume level. We have enough fee-based business to completely cover that $70 million. So maybe that’s the slide. I have to look and get back with you on what you are looking at to be able to answer that question a little better.

Sean Wells – RBC Capital Markets

Okay. Well, I think you basically answered my question. You said $70 million is not a number that applies in terms of a floor for 2009 at least [ph]. Thank you.

Alan Armstrong

Thank you.

Operator

And it appears there are no further questions. At this time, I would like to turn the call back over to Mr. Alan Armstrong for any additional or closing remarks.

Alan Armstrong

Great. Again, thanks for your interest this morning. And we are excited to continue to see the business supported, both from the fee-based business that we have and the great support from WMB, and look forward to seeing you all on May 12.

Operator

That now concludes today's conference. We thank you for your participation.

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