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Williams Partners L.P. (NYSE:WPZ)

Credit Suisse MLP and Energy Logistics Conference Call

June 26, 2013 09:30 ET

Executives

Don Chappel - Chief Financial Officer

Analysts

Brett Reilly - Credit Suisse

Brett Reilly - Credit Suisse

Alright, next up we have Don Chappel from Williams Partners. I think the most of this focus will be on Williams Partners, but we will also be talking about WMB a little bit. So, with that, I will turn it over to Don.

Don Chappel - Chief Financial Officer

Thanks, Brett and good morning. And thanks for joining me this morning to talk about Williams Partners and Williams and I have got quite a few slides. So, I am going to get through them pretty quickly and we will cover a lot of ground and certainly keep it close to them, watch up. I will spend a little more time in the first couple of slides since it’s fairly new, but first to again point out, we have some forward-looking statements and you should read those and take that into account in your investment decisions.

Kind of on the newly developing front on June 13, we had an explosion and fire at our Geismar, Louisiana ethylene cracking facility tragic event. And we are now in the process of recovering from that and we certainly heard from the standpoint that we people were – two people were killed. A number of people were injured, and we are certainly very – feeling very helpless in that regard and very sorry that, that happened. I would say the plant had a very positive safety record over the number of years. So, we were shocked to see an occurrence that we had. But nonetheless, I will talk a little bit about what comes next, OSHA and the Chemical Safety Board which is kind of like the National Transportation Safety Board in the airline industry focused on safety are conducting a joint investigation to determine the cause and what action should be taken in our facility as well as any other facilities to reduce risk in future.

OSHA and the Chemical Safety Board really took control of the facility from day one of the accident to ensure that the facility was safe and also that evidence was undisturbed, so that again they could get to the root cause of the accident. And we have an interest in that as well too. We do want to know what happened and why it happened, so that it never happens again.

In terms of physical damage, there was a significant explosion and fire. Geismar is a very large facility. And while the explosion and fire was significant, it was a fairly modest size area within the facility, and obviously that area was pretty well heavily damaged. What is unknown is what damage maybe adjacent to that as a result of the explosion or fire. So, there could be some equipment that’s damaged, but it’s just not that visible, and we’ll have to do a full inspection of all of that equipment to have a better handle on it, but nonetheless we are in that assessment process, but it’s kind of walking before we can run given the OSHA and Chemical Safety Board in our own investigations into the root cause. The explosion originated in the propylene fractionator area of the plant. What we damaged was equipment adjacent to that propylene fractionator, obviously, piping, heat exchanger, sections of cable trays, pipe rack, and the like. So, again, extensive damage in a fairly modest area of the facility, but we are also going to be looking at adjacent areas to ensure there is no damage that is not detected and repaired.

So, again, we are working through that. Our teams through, I would say, much of last week were really focused on making the plant safe and dealing with injuries and employee issues. And this week while those are still top of mind to all of us really moving more so into the recovery effort in terms of determining what’s been damaged in bringing the plant as well as expansion back online, and we will do so as quickly as we safely can. We are unable to provide guidance in terms of the timing today, because we just don’t have enough information and we really don’t want to speculate.

We put on an 8-K yesterday evening in terms of some financial information. The estimated segment profit for the full year, and this is our most recent guidance that we issued back in May. Included in our NGL Petchem Services segment was $360 million of segment profit plus DD&A for 2013, which about $190 million from the date of the incident through the end of the year. That included a 50-day turnaround, plant turnaround in the mid-August to kind of mid-September excuse me, August-September timeframe. That would reduce that from a full operational period. We have an expansion coming online kind of at the end of that turnaround process, which I believe was in October.

In the insurance area, we have a syndicate of insurers led by London syndicate that provides us with business interruption and property damage insurance. And the coverages there we had a combined business interruption and property damage policy with $500 million per occurrence coverage with retention or deductibles of common language of $10 million per occurrence for property damage and a 60-day waiting period on business interruption. So, the first 60 days after the event on business interruption are not covered, and after that, they are in fact covered.

General liability coverage totals $610 million annual aggregate limits with retentions of $2 million per occurrence workers’ comp, statutory limits, and retentions of $1 million per occurrence. And again, I just note that the receipt of insurance proceeds and the related income recognition maybe somewhat different than period of loss. Typically, there is somewhat of a lag will certainly keep you informed as to that element, but very typically, those come when the insurers agreed to a claim or when the cash is received, and we will continue to explore the timing and work to try to keep the reimbursement for those costs as tight as we can to the actual cash payment or loss of cash, cash income. So, again, we are working to bring the plant and plant expansion back inline as quickly as possible, but given that we haven’t been able to do a full damage assessment yet, we are really unable to speculate on timeline, but we will do everything in our power to bring it online safely as quickly as possible. We do plan to update our guidance on July 31 along with our normal quarterly earnings call and financial update.

Now, let me move more into for a normal business. Again, the company and this is Williams, Williams Partners has significant asset positions in virtually all of the important basins in North America natural gas and as well some significant positions in the oil or oil related activities in the Gulf of Mexico and then helping the Canadian oil sands, and we will talk more about these, but again, the area largest investment currently is the Northeast and Marcellus, Utica. We are also making significant investments in expanding Transco. Our operations – the Williams’ operations in Canada, I will point out those are undirected by Williams. WPZ’s Gulf of Mexico operations as well as the NGL petchem service business, which is largely in WPZ, but with heir bit of it in Williams directly.

This slide just depicts Wood Mackenzie’s recent views on natural gas supply growth, and obviously, demand have to match up with that, but moving from something that this year is in kind of the 60 BCF a day level, 60, 65 BCF a day level up to 100 BCF by 2030. Whether or not that actually plays out exactly as planned as way beyond what we can talk about today, but nonetheless a very strong and steady growth through the next couple of decades on the back of the abundant and relatively cheap and clean burning shale gas resource that we have here in North America.

You can see too that the growth is really spread across virtually all of the basins. And importantly, we see the Northeast there at the top with enormous growth during that period. So, we are still in the very early innings in terms of the Marcellus and Utica. It’s really an enormous hydrocarbon basin. And we are very well positioned to take full advantage of that. Right below that here on this slide, you can see the Rockies and while the Rockies is not an area of growth today or at least high growth today, and in some areas actually retreating a bit, you can see here that the Rockies are expected to grow as well. So, the demand for natural gas is expected to grow significantly, whether it’s for industrial use, power generation, vehicle fleets, and the like that again the differential between the cost of natural gas and the cost of crude oil and the cleanliness as compared to coal expected to drive gas demand up sharply. So, you can see all the basins here. And again we are participating in those. You can see off to the right here either directly or through our investment in ACMP, most of the basins that are of significance here in North America.

In terms of what’s going to drive our growth over the next couple of years, we have laid out this list of major projects. And you can see here in the Northeast, a number of projects that add up to several billion dollars in investment over this three-year guidance period. And with full details, the choppy line there that little dotted line in a number of those is it’s really not one big project, but it’s a lot of small projects, a compressor station, an extension to a gathering line, trunk line system processing plant that sort of thing that adds up to this several billion dollars of investment. And those are kind of going into service on a regular basis each month, each quarter, and in aggregated amounts to what we see here.

WPZ Atlantic/Gulf, some large projects, including some large projects on Transco, I’ll talk more about those in a couple of minutes as well as up in the Northeast with Constitution Pipeline, and a couple of deepwater projects in Gulfstar and Keathley Canyon. In the WPZ’s NGL and petchem services business, we are pursuing the Geismar expansion, which was now interrupted by this tragic accident we had at Geismar, but we’ll get back on that as we speak and we will update the market in terms of our exact timing as we have more information.

WPZ West, we slow down a little bit there. We do have an expansion in the Piceance to support the Piceance area activity, but that’s deferred and it’s out a little bit further. And then finally at the Williams level, we have a number of assets that we are making investments and as well that we think will attract very positive returns. Finally, on the slide at the bottom here, you will see it excludes the proposed Bluegrass project. We made an announcement yesterday close of market that the board, Williams’ board has approved or sanctioned the Bluegrass project, and that was as our confidence and the board’s confidence continued to grow in our ability to successfully make that investment, we felt that it was timely to seek that board approval and the board did approve. We felt that was important for customers to see that Williams was firmly support of the project. We are in the process of gaining those customer formal contractual commitments now and for customers to know that this project is real was important though I must say we are going to commit to the project, but Williams need to be committed as well. So, that was to evidence to our customers that the Williams’ board was fully supportive of moving forward.

To turn the page to the Northeast, again we are making significant investments in this area of very rapid growth and growing the importance again. We expect this to be the largest supply base in the North America and it’s quickly becoming that. And you can see here on the right, we have vast acreage dedications to Williams Partners as well as through Williams’ investment in ACMP and Blue Racer. So, you can see the total Marcellus Utica acres there at almost 4.7 million acres. In terms of assets that we have invested in today, our Northeast 100% owned Williams assets at $4.7 billion. And then you see our CapEx numbers there, in the Northeast business unit $3.2 billion during that guidance period and then the Atlantic/Gulf CapEx, which is really Transco’s participation in that segment of $900 million. So, a very significant area of development and investment and things are moving very, very rapidly, and we think we are extraordinarily well-positioned and Bluegrass will be a key element in that as Bluegrass will enable producers in the wet area of the Marcellus as well as in the Utica to have confidence if they can get to the best markets by getting their product to the Gulf Coast. And that will foster even more drilling activity.

In terms of where our investments are located up in the Northeast, here you can see the dry gas area kind of on the left side of the slide there and that would be Susquehanna County, where we had very rapid growth driven largely by Cabot’s extraordinary position and their extraordinary growth and to a lesser extent other producers and then Laurel Mountain Midstream, which was our original Marcellus investment, which is now anchored by Chevron. You can see the investment there at $1.1 billion over this guidance period about 35% of our dollars. The Blue Racer investment, we have 23% interest in Blue Racer. Again, we started as partners with the sellers of Caiman. They were doing the business development. We had an interest in the Utica and they were off to a running start and this was kind of a plus off our Caiman acquisition. And we quickly transacted with Dominion to form a 50-50 JV between Caiman II and Dominion. And so we’ve got a just under 50% interest in Caiman II. And Caiman II has a 50% partnership with Dominion. So, we’ve got that horse in the race, if you will, in the Utica and then as well over in the wet area in Ohio Valley and Three Rivers, the investments currently total about $1.7 billion during this three-year guidance period and we see very high growth in that area and in many more prospects.

This slide just depicts the fee-based volume growth by quarter, and this is right here and you can see it by area. We got off to a bit of a slow start here on Ohio Valley Midstream as we had some problems as a result of some of the assets that we acquired not being sufficiently capable of handling the very common say it rich, liquids-rich gas. And so we are really going through a redesign and construction of some assets will enable those liquids to flow without clogging up the pipeline, and we expect that most of that will be accomplished this year and that will enable us to get our volumes up. So, we expect volumes to ramp up considerably this year and in coming years. And then here is our expected volume growth during the guidance period and you can see that we actually have some capacity that has been or will be constructed that, that we can grow without investing a lot of capital.

This slide really depicts a view of liquids coming out of the Marcellus and Utica. And you can see here in 2013, we are call it, 300 million, excuse me, 300,000 barrels a day ramping up to in this slide kind of 1.4 million a day. So, very, very significant increase in the liquids expected come out of the Marcellus and Utica and that’s only by 2020. It’s not that far out and even if we just look a few years out, the growth is quite considerable. At the bottom, you can see local propane demand, Mariner East ethane, ATEX ethane, or perhaps that’s ATEX wide grade, but nonetheless there is a huge amount of unmet need for infrastructure to bring that product to market. And our Bluegrass pipeline has targeted just that. We felt and we also feel that if Bluegrass is not built or something like Bluegrass and it will take other solutions as well, the drilling in the Northeast would slow, because netbacks to producers will become less attractive. So, we are enabling producers to get attractive prices for their product and therefore to have attractive netbacks and make this basin all that it can in fact be.

This next slide here again, this is a Williams’ investment, but I would note that WPZ may have an opportunity to participate in this investment as well. This pipeline, the Bluegrass pipeline will connect the Marcellus Utica to the Gulf Coast really targeting landing down in Louisiana with large scale fractionator in an export capacity as well. So, we are in the process of detailed designs, right-away acquisition, and gaining formal customer commitments and more to come on that project. I mentioned a little bit about Caiman II and Blue Racer. I won’t spend much time in this slide, but again it’s another horse in the race in the Utica, where we can capture significant cash flows and customers and over time benefit Williams Partners and Williams significantly.

Turning the page to Transco, Transco has enormous number of growth projects, a lot of what I would call base hits, from a project like the Leidy expansion, which at $600 million is perhaps more than a base hit, but pretty low capital risk on that project and the nice attractive growth and rate of return to a number of projects that are supported by growing demand for natural gas up in the Northeast and growing supply as well. So, a lot of opportunity there and many more projects that are in the hopper, we would expect that kind of consisting series of expansion opportunities to be continued before it’s coming from the Transco customer base and supplier base.

Turning the page to the Southern market, more of the same utilities and industrial users continue to have greater and greater needs for natural gas and are committing to the expansions, and these are typically demand charges 15-year type contracts that offer a very nice return, particularly relative to the cost of capital on a interstate natural gas pipeline system like Transco. So, again, great opportunities, in Transco, it was the only major interstate pipeline and the use out of the Appalachian. So, therefore, it’s closest to the East Coast market and has seen the greatest growth in Transco setting peak day records almost every year as the demand for natural gas continues to grow.

The Constitution Pipeline, this is coming out of the dry Marcellus area going up to connect with Iroquois and allow producers to get to better markets that are less congested. And we have seen our customers commit to this project. They really started out with just one customer and we have had a couple of others join in. So, WPZ now owns 41% of this project. We are building it and operating the project, but we had customers that wanted to make the investment in this project as well, because they were so excited about the opportunity. So, the target in-service date is March 2015, capacity is 650 million a day, and the projected CapEx is just under $300 million.

Turning the page to the deepwater Gulf of Mexico, we are one of the few players in the deepwater Gulf of Mexico other than producers themselves we are really providing infrastructure services. So, we have undersea pipelines for natural gas and crude oil and platforms that provide production handling services and transportation services to producers. Our natural gas pipelines go to our processing plants in the Gulf and so we also see onshore revenues from those – from these contracts as well. The first one here is Keathley Canyon. We signed that a couple of years ago 400 million a day deepwater pipeline, expect that to bring in service at mid 2014 and that we expect will also have follow-on customers. So, as the field that we are attached to starts to deplete a bit, it will be in a very rich neighborhood, where we would expect other production to woke up to this pipeline and keep it as a real cash flowing asset for an extended period of time with little in the way of capital investment.

Gulfstar is our trademark brand for our floating production system. We have a contract to deliver the first Gulfstar in 2014. The construction is well along the way and we expect this to be a sale that we can make again and again. And since this is now a standard design that is pre-engineered and has been built using fairly common components, we think the project development risk is pretty modest and the returns on capital, particularly with the risk mitigation that we work through with producers is quite attractive. So, we are very excited about this project and we have a 51% interest, economic interest in the project and we have a partner, Marubeni, who signed on to this project about six months ago. We have been in the development for a couple of years. I think we announced early on that we expected to bring on the partner. We took our time to bring on the partner, because we wanted to de-risk the project and bring a partner in at an attractive cost of capital. And we think we did so in this case. So, we laid-off some risk. We laid-off some of the capital burden, and we think that’s pretty good model for some of these very large deepwater investment. This one is about $1 billion for the platform and the Subsea pipelines that bring the product ashore.

Up in Canada, we have a large scale gas processing operation that takes gas. This is at Williams, so just note that here. It takes gas from the oil sands producers and strips out the NGLs and the olefins returns natural gas at same BTU to the producers, and we get the uplift typically from the differential value from NGLs and the olefins. So, it’s been quite profitable for us. We count Suncor as a customer for many years and that finally was an operation. We signed a contract in the latter half of last year with Canadian Natural Resources, or CNRL to do the same for them and we are in the marketing negotiation phase with Syncrude to do something similar for Syncrude. We have a pipeline that takes these NGLs and olefins from the oil sands down to processing complex we have in Redwater near Edmonton through our own pipeline. So, we have some competitive advantages. And thus we have been able to capture all of the business up in the oil sands of this type. The PDH project was really related to lab as a result of all the NGLs and olefins we have. We have a lot of propane, so we have about – expect to have about 13,000 barrels a day of equity propane by 2015.

And any deal that follow Canadian propane or the Canadian propane is trading at pretty big discount to U.S. propane, because we are launching propane here in the U.S. So, that’s the pretty cheap feedstock for us. So, the propane that’s already under our control plus some propane that we believe we can acquire in the local market at still a very advantage cost gives us cost advantage and we would expect to use that cost advantage to run a very attractive return on PDH facility. And the investment here is about $900 million and again we will be funding that largely with international cash flows and some international cash that we have on hand. And we are also looking to derisk this project by working with potential partners to perhaps move from commodity price to perhaps more fee-based arrangements, so stay tuned on that front.

I mentioned again this is aggregating more liquids from the oil sands, I won’t spend much time on this, but to see on the rail project again we’re investing $500 million to $600 million, expect to be in service by mid 2015 and again adding about 15,000 barrels a day of NGL/olefins production and then increased utilization on our pipeline. Then finally on Canada, we are also building an ethane recovery facility again to recover to ethane from this NGL stream. And we have a long-term contract with another chemical to supply them with ethane up to 17,000 barrels a day and we expect to be in service in the second half of 2013 with a project cost in the mid 400s. And we have a contract with NOVA that sets the floor price on ethane. So, even with what we’re saying now and in terms of ethane prices we would have a positive margin on ethane on that contract and are in a base level return that we think makes us attractive with all the upside.

In the Petchem services business again all of this NGL/olefins growth that we’re seeing is going take a lot of infrastructure in the Gulf Coast to move NGLs around the Gulf Coast to various plans and terminals as well as the olefins products that come out of the cracker. So, we’ve been quietly building a network of pipelines down here to supplement what we already had, pipelines in storage and we will continue to expand that and we are beginning to provide services today and we expect quite a bit of growth in this area as all this new investment in NGL processing and petchem processing occur in the Gulf Coast over the next several years.

Finally, at the Williams’ level late last year we made an investment in ACMP. We think we made the right investment at the right time. This provided Williams with exposure to many new basins and significantly increased position in the Marcellus and Utica. We think we bought in at a very attractive cost. We have a 50% interest in ACMP’s general partner as well as 23% interest in the limited partner units. And we think combined that that investment is already paying great dividends and we expect tremendous growth from this business and a lot of growth in distributions directed to Williams particularly with the IDRs that the Williams will enjoy out of ACMP. So, stay tuned on this one, but I think lot of exciting developments yet to come and I think if you had looked at ACMP’s unit price and you saw where we bought in relative towards trading today, I think the value is already becoming quite evident.

This – these three pies here kind of depict what’s in our growth to the last year this is what’s in our guidance over the three year period. The bulk of this is really WPZ but just call about $9 billion at midpoint during ‘15, ‘16 and ‘17 and I think that tends to understate the amount of investment that we will likely make during that three-year period, because typically we have some under contract and some that are under negotiation. This is kind of what’s in guide that’s plus what was under negotiation. And then this would include things that are more in the proposal stage where we are – we won’t win all of those, but there will be some new things. Some will fallout. Some new things will come in, but nonetheless and this is over a 5-year period. So, if you take 22 and divide it by 5, you get $4 billion a year more or less as investment. I think that’s probably a pretty good way to think about it, which is probably in line with our investment this year.

So, if you go back to the beginning, natural gas is cheap, natural gas is abundant, but it needs a huge amount of infrastructure to move the natural gas process to natural gas liquids, get them to market, and we are right in the middle of that and we have great visibility to tremendous number of growth projects. We did – blue graph is the most perfect piece and that will now likely move into guidance. The next time we provide guidance, so we will see the in guidance capital move up and move out of the proposals around the negotiation area.

So, that wraps up the slides, but again we are in the middle of the natural gas growth super cycle driven by technology, the technology that really enabled us to take all of this natural gas and natural gas liquids that has been under the ground and known to be there, but just never economic to recover and make that a commercial reality. And it’s going to take an enormous amount of large scale infrastructure to really bring all that product to market and get producers of the best netbacks and get customers the natural gas, the natural gas product that they need to run their factories, run their power plants and the like. As a result, we have a deep and diverse set of opportunities that we are excited about. At WPZ, which is still the lion’s share of Williams Holdings as well as great opportunities in the other areas that Williams participates and we have great visibility to our growth. And again, we also believe we continue to have sector leading both distribution and dividend growth for an extended period of time. So, with that, I will just pause, take any questions, and we will be doing a breakout and some one-on-ones. Yes, sir.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Don Chappel

How much will we have to contribute to the project? Yeah, we haven’t provided clear guidance on that, but it’s in the zip code of a couple billion dollars plus more or less over a several year period with most of the capital really being in second half of ‘14 and ‘15. So, there is some capital this year and then it starts to ramp up ‘14 and ‘15 with the end of ‘15 in-service date is when that capital is largely being invested. And again, right now we are holding that project to Williams, but it is under consideration that WPZ may have an opportunity to participate alongside Williams. Yes sir.

Unidentified Analyst

(Question Inaudible)

Don Chappel

Yeah, I didn’t see that news. I mean, I will take a look for it, but I mean we clearly have been in a position to call it be a blender if you will of dry and wet gas to the extent that you have got the plumbing to do it. So, I think that’s the key and it’s really very locational, but we have a growing system in the Northeast and I think we will have some ability to do that blending as the market needs, dictates. So, I think it tends to be pretty locational specific. So, but that was one of the aspects of the Atlantic Access pipeline that we mothballed. It was a big Transco extension. It was targeting kind of that rich gas area. And knowing that to the extent that we had pretty rich gas in that Atlantic Access pipe and by the time it got blended with Transco’s drier gas supply, it would meet spec. That project has been pushed out a bit. So, it’s by work and that we are hopeful that we would be able to bring that back in time, but that will take some time to develop. So, that’s a longer term solution to what you are talking about. In the near-term, I think it will just be kind of location specific, but thanks for the question. We’ll go over here.

Unidentified Analyst

For the NOVA transaction that you are considering, what is the minimum ethane price that leads Williams’ return for those?

Don Chappel

I just describe it, the way we describe it I think the ethane price we get from NOVA provides us with kind of a single-digit return on capital. So, it’s not the reason we invested, but it at least provides the floor that is not tremendously attractive, but approximates cost of capital. And then the upside really comes from the fact that we get the ops. We are done like we are out of time. Thank you very much.

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