Williams Partners, L.P Q1 2010 Earnings Call Transcript

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

Operator

Good day everyone and welcome to the Williams Partners L.P. first quarter 2010 earnings release conference call. Today’s call is being recorded. At this time for opening remarks and introductions I’d like to turn the call over to Sharna Reingold, Manager of Investor Relations. Please go ahead ma’am.

Sharna Reingold

Thank you and good morning. Welcome to the Williams Partners first quarter earnings call. Thank you for the interest in the company. We do have a few slides to go over in our presentation this morning, and Steve Malcomb will be going through those in just a minute. After Steve's remarks, we will open the line for questions. Be aware that Alan Armstrong, Don Chappel, and Phil Wright are available for any questions.

And before I turn it over to Steve for his remarks, please note that all the slides are available in a PDF format on our website, WilliamsLP.com. Please read Slide 2. Within the presentation there are forward-looking statements about future expectations and operations that are subject to 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.

Our prepared remarks today are rather brief because, as you know, we'll be hosting an Analyst Day in New York next Tuesday. At that time our senior management will be there to go into a much more robust look at our businesses. And with that, I'll turn it over to Steve.

Steven Malcomb

Thank you, Sharna, and welcome to our first quarter call. Thanks for your interest in our company. As Sharna said, this discussion here will be very crisp and brief, and we look forward to talking with you in much more detail next week in New York City, as we'll have a chance to talk more about our strategies and tactics and all of the wonderful growth opportunities that we see for us.

So if you would start on slide three, please, first quarter results and accomplishments. Probably the highlight of the quarter, higher NGL margins and midstream drove our very strong first quarter results. And that drove a 62% increase in recurring segment profit.

As usual, gas pipes delivered stable, steady earnings and cash flows. We increased our quarterly distribution by 3.5%, very strong cash distribution coverage ratio of 1.76. In February, we completed our transformational drop-down transaction, creating a much larger WPZ. We are increasing 2010 and 2011 segment profit guidance on higher expected NGL margins and lower gas prices.

And we now have a first look at 2012 guidance. We began startup operations at Perdido Norte in the western deepwater Gulf, and we brought Transco's Mobile Bay South expansion into service, which adds deliverability to southern markets. So we're proud of those accomplishments, pleased with our results, and look forward now to moving ahead and capturing some of these wonderful growth opportunities. And on page 4, some of those are shown on this map of some of the growth opportunities in the midstream space. I think the strategy that we focused on in midstream, where we want to create scale and scope and not have our assets scattered all over, is one that's worked well.

And so out West, you see that we will be getting a full-year impact from our Willow Creek facility, a 450-million-a-day gas processing plant. That will certainly be a positive. In late 2010, Echo Springs TXP4 should go in operation, adding about 350 million a day of processing capacity. In the Paradox Basin, we continue to work with the producers toward a large-scale, reliability-focused midstream solution for producers in that promising basin. In the Gulf area, Perdido Norte, as I mentioned earlier, startup operations began late first quarter 2010, so we'll look forward to the contributions to segment profit that that asset will offer.

And in the Marcellus, probably, we see some of the more exciting opportunities. In addition to our Laurel Mountain midstream partnership that we have, in addition to the Springville project that we announced at our last call, there are a lot of opportunities there. Producers are looking in many cases to outsource their midstream needs, and I think that represents some wonderful opportunities for our midstream business unit.

Turning to page five, it gives you an idea of the universe of projects in the gas pipeline space, and a lot of good base hits here. And as we always say, the outlook is excellent for steady, stable cash flows in the gas pipeline space, backed by customers with high-quality credit.

On page six, please, guidance 2010 through 2012, and I think the essence of this page, great growth in terms of distributable cash flows, strong coverage ratios throughout the period, and certainly an expectation that more growth projects will be captured during the period.

Before I close here, a couple of questions that have come up that I would want to address. We've had questions about the impact of the Gulf of Mexico oil slick and the BP situation, any potential exposure, any of our volumes needing to be curtailed or anything like that. And the simple answer is no, our assets have not been affected by the loss of production, by the spill, or any of the cleanup activities. We have no reason to believe they will be. BP's platform, it was a drilling platform not connected to any infrastructure, so we don't anticipate any problems related to the spill.

As well, with respect to the WMZ exchange offer, there have been questions about timing, when's the closing going to occur? And so I would just offer that representatives of Williams and WPZ have commenced discussions with representatives of the Conflicts Committee of the Board of Directors of the WMZ general partner regarding the proposed exchange offer at the fixed exchange ratio that we talked about earlier. And the parties are also considering structural alternatives with respect to the completion of the exchange in a single transaction, which could include without limitation a potential merger transaction. So those discussions continue. We believe it's likely that it will close yet in the second quarter, could slip into the third, but it will get done.

So the final slide, Slide 7, WPZ is clearly a winning, long-term investment. WPZ is one of the largest diversified MLPs, with premier interstate natural gas pipeline and midstream assets, some of the best in the lower 48, certainly. We have investment grade ratings with strong access to capital markets. That's why we did the deal. We're committed to financial discipline as we grow. We have size, we have scale, we have stable cash flows that provide us strategic flexibility for our projects or acquisitions, and if ever there was a time when we're seeing some wonderful growth opportunities, it's now. Williams has been all about being blessed with wonderful organic growth opportunities over the last few years, and we're seeing it even to a greater degree now.

So a very bright future. We look forward to talking with you next week at our Investor Day. And with that, we'll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we'll hear first from Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities

I just wondered if you could give a little bit more detail on the Marcellus growth opportunity. In particular, what was the outcome for the Northeast Supply Link project?

Phil Wright

We had, as we mentioned previously, secured a precedent agreement with a foundation shipper on Northeast Supply Link for 200,000 dekatherms a day. We got a favorable response from the market on the open season and are in the process of working with those shippers to right-size the project.

Sharon Lui - Wells Fargo Securities

So in terms of your CapEx budget, is that project already included?

Phil Wright

Is Rick Rodekohr on the line?

Rick Rodekohr

Yes, Phil, and that project is included in the guidance that we've given for the years 2011 and 2012, the capital piece of it is.

Sharon Lui - Wells Fargo Securities

Okay, great.

Phil Wright

But we don't have the segment profit in there.

Sharon Lui - Wells Fargo Securities

Okay. And I guess, just looking at the expenditures for the Laurel Mountain JV, what percentage or what's the breakout between that spending?

Phil Wright

I'm not sure exactly what you're looking at, but we have about $160 million focused on Laurel Mountain for the expansions just this year, and really, that is practically limited by the amount of permits that we can get and how quickly we can get that system built out. And so we're obviously very excited about the new joint venture that Atlas has and the money that they have to invest in that area. And we think it's going to continue to add both acreage and drilling locations to our already very robust acreage dedication from Atlas there. And really, at this point, it's just a matter of how fast we can get the infrastructure built out and get the pipeline particularly, and a little bit of compression built out.

Sharon Lui - Wells Fargo Securities

And Alan, would you consider, I guess, some NGL projects in the Marcellus in terms of processing or fractionation?

Alan Armstrong

We certainly would, and we certainly have a long history of building out large-scale processing out West and probably have built as many large-scale plants as anybody in the industry, probably quite a bit more, actually. And so we certainly are engaged in looking at opportunities up there. There's a lot of gas today that's either unprocessed or lightly processed. As you're well aware, there's a lot of NGL infrastructure constraints and bottlenecks right now that we're looking at various ways of overcoming at this point.

Operator

Thank you. And we'll now hear from Ted Durbin with Goldman Sachs.

Ted Durbin - Goldman Sachs

I wanted to just ask maybe in terms of the NGL prices themselves, ethane prices in particular. We saw a spike in the first quarter and then weakness. If you could just talk about the dynamics that are going on with NGL prices and what your outlook is, how you're seeing things shape up?

Steven Malcomb

Sure. Overall, we still see the fundamentals for ethane to be very strong. We did see, and at the end of the first quarter, we saw several of the large ethane crackers down for maintenance; some planned, some unplanned. And that certainly softened the ethane demand right towards the end of March and into April. And more recently, we've seen the market tightening a little bit, and we're seeing demand on the ethylene side. We're seeing continued strong demand on the ethylene side through our viewpoint at WMB's Geismar facility. So right now, we still feel very good about fundamentals for ethane supply and demand.

Ted Durbin - Goldman Sachs

And then if I could ask about, we keep hearing that NGL pipeline capacity and frac capacity is pretty tight. Is there any impact to you all in terms of your realizations recontracting? How are you thinking about prices for getting frac capacity, etcetera?

Steven Malcomb

Actually, we're on the positive side of that, because when we did our deal for Overland Pass, we got plenty of capacity through both the transport and fractionation from our western production, which is a large portion of our overall NGL production for WPZ. And in the Gulf Coast, we generally have our own fractionation, or we have plenty of contracted capacity. For instance, Mobile Bay, we have our own Mobile Bay fractionator. At Discovery, we have our own fractionator there. And at Markham, we have a long-term contract there that gives us ample capacity well above our current production levels. And so overall we're very well positioned for capacity and optionality around product sales.

Ted Durbin - Goldman Sachs

And if I could just ask one more in terms of, first of all, into the Transco and how you're thinking about bigger opportunities to take Marcellus shale gas away from there. We've had a lot of proposals, but what do you think, what do you see as the opportunity there?

Steven Malcomb

As you know, we are working with Dominion on marketing a project that we have labeled Keystone Connector. We are in constant conversation with producers in the region. But as well, both we and Dominion are connected to some pretty attractive markets, who are looking for how exactly they're going to gain access to Marcellus supply. And so I'm not at a point where I can put a concrete proposal on the table and say, "This is exactly the size and scope of the project," but we're finding keen interest. And I suspect as producers continue to drill up their positions, we're going to have a clearer picture of exactly the size and scope of the Keystone Connector. And I think that's going to be a winning project out there. So that's one way that we think we'll participate. That, for Transco, will connect roughly, at our Station 210, which is in the process, actually, 195. But we're also, another way we're participating is like the Northeast Supply Link, we'll look at expansions along our Leidy pipeline to capture incremental expansion opportunities out there.

Operator

Thank you, Mr. Durbin. We'll now go to Andrew Gundlach with ASB Holdings.

Andrew Gundlach - ASB Holdings

A couple of quick questions, Alan and Steven. In your data book, the gathering volumes over the last five quarters have stayed flat to up, I would say. And there's a lot less drilling in some of your basins, as you know. Is that because of new additions, new laterals? Or I'd also heard in things like the old Burlington Resources area that with less drilling, they actually found better flow rates. They didn't affect it over drilling. Can you comment on that for a moment?

Steven Malcomb

Sure. I would say the area that we've seen that continued drilling and within our onshore production area is in the Wamsutter Basin. And while we saw that dip here in the first quarter due to some freeze-off, and we also had a similar issue in the San Juan Basin, where producer outages, no outages on our system, but producer outages due to their inability to get their water hauled off out there because of the road conditions. And unfortunately, that's a fairly recurring situation when we have very wet or severe winters.

So we saw volumes down a little bit in those two areas that I would say we are already seeing return back to normal. And so I think we'll continue to see our gathering volumes pick up through the year as we get those anomalies out of the way. But bottom line, as we've said in the past, we're in big, large-scale basins, and many of the declines, like in the San Juan Basin, are just not subject to that real heavy decline when the drilling lays off, because we're at the tails on the drilling and we've got in the San Juan Basin, I think we have 85% of our wells out there that are five years or older. And so we're just not susceptible to the heavy declines that you might see in a newer basin where rigs lay down and you see the impact of that very immediately.

Andrew Gundlach - ASB Holdings

The stability of (inaudible) has been great. And just going to Wamsutter for a second, in the new Williams structure, in the past there was some sharing between WMB and WPZ as to the growth to build out Wamsutter. Is that now gone and all of the CapEx growth spending will be within the WPZ?

Steven Malcomb

That is correct, and PZ got the benefit of quite a bit of capital spending that had already taken place by MB on that asset. And there is continued capital spending to be done, which PZ is picking up to complete the TXP4 train. But you are correct in your assumption that all of the growth and all of the opportunity in Wamsutter is now PZ's.

Andrew Gundlach - ASB Holdings

Okay, and then just two quick questions on the Marcellus. A lot of announcements this last quarter, Buckeye, Enbridge, Kinder, and of course you just spoke about Dominion. Should we assume that these are all in competition with each other or not?

Steven Malcomb

I think over time, there's quite a bit of NGL productive capacity in the Marcellus, and so it may take multiple projects over time. But I think in the immediate term, I think you should consider that they're certainly in competition with each other. But as I said, if you really look at the productive capability there in the basin, you might expect there to be multiple projects as time goes by.

Phil Wright

With respect to Dominion, this is Phil, I wanted to clarify. We are operating under a Memorandum of Understanding with Dominion to jointly market the Keystone Connector project. That's not a competing project.

Andrew Gundlach - ASB Holdings

I understand. But of the others that have been announced thus far as I mentioned, Buckeye, Enbridge, Kinder, and I think there's this private one, I think Cumberland are any of those competing with the Keystone Connector?

Phil Wright

Not to my knowledge.

Andrew Gundlach - ASB Holdings

Okay, that's fine. And then with respect to the Laurel JV, the Atlas Energy announcement, they're going to spend quite a bit of money, as you know, I think almost $2 billion, and they have to do it over five years. And if I do the math and assume an average gathering rate and assume that you get all the gathering, that could add up to the hundreds of millions of dollars in revenues.

And I'm just curious if you can comment on that math, if you're able to, or even just give us some guidance as to how that might grow.

Alan Armstrong

We certainly expect to see rapid growth, and there's certainly a strong incentive for Atlas to go spend and accelerate the drilling rapidly on that investment. And that acreage is dedicated to us. And so, really, as I mentioned earlier, the constraint we have right now in terms of exposing ourselves to that revenue, really, is being able to build the system out fast enough. And there's certainly a lot of permitting issues to deal with that we're certainly dealing with right now.

But the question really isn't, at this point, in fact, I wouldn't put a whole lot of risk on whether those revenues show up. It's a matter of how quickly we can get the infrastructure in place to receive that revenue.

Andrew Gundlach - ASB Holdings

And now that's like 200 wells if you do the math. I'm sure you've done it. So how much capital do you need to spend to add up to the $1.8 billion that they are committed to spending?

Alan Armstrong

We have a plan that the way the agreement and I'm not really privy to getting into all the details, or not really able to get into all the details in the agreement. But there's basically a time that's called for them to lay out a drilling plan, and we then respond to that with infrastructure requirements and lay out a plan to address that. And so it's very much an iterative process, and it's very much a partnering process between the two of us to come to the best solution between both the drilling and the gathering.

Those two things are very important to getting production online. But just this year, we have $160 million that we intend to spend that puts in some large backbones in the southern part of the acreage play in Fayette County, mostly. And so that's our initial investment, but that's going to rapidly expand. We have not disclosed the overall capital, because until they lay out exactly where they intend to drill, we won't know exactly what our capital plans are for that.

Andrew Gundlach - ASB Holdings

I've got you. And $160 million is the JV or your 50%?

Alan Armstrong

Sorry, that is for the joint venture.

Andrew Gundlach - ASB Holdings

Okay. The last question, I think, is for Don. 2012 guidance, thank you for putting it out. That slide has a coverage ratio which I assume is done off of the current dividend pay. Do you intend to be an MLP, which runs such a strong coverage ratio and in effect funds itself internally and only modestly from the capital markets? Or do you see that changing in some way?

Don Chappel

Andrew, I think it's a function of NGL margins largely, in terms of that very high coverage ratio. So we're certainly prepared to weather lower margins if at some point those margins were to slide backwards as a result of either gas price going up or NGL prices coming down. So I would look at it that way. I would foresee that WPZ would have a competitive increase in distributions over time, and perhaps among the leaders in this distribution increase. So we're not providing guidance today on the rate of distribution increase, but you can expect that we'll be among the large cap industry leaders in that regard. So we would expect the coverage ratio would decline somewhat as we raise distributions in the future, but NGL margins will be a factor in how far we take that.

Operator

Thank you. And we'll take a follow-up question from Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities

Hi. I guess just going back to the Laurel JV spending, how much can it actually ramp up in 2011 from the $160 million budget for this year?

Alan Armstrong

Sharon, this is Alan. As I mentioned earlier, we won't know exactly what infrastructure will be required for the 2011 drilling plan from Atlas until we see that drilling plan. And so it's pretty hard for us to predict the actual capital until we actually know where those wells are. I will say this, that we are putting quite a bit of large-scale facilities in here on the front end, or in this 2010 plan, that are in excess. In other words, we'll have latent capacity in those assets that could handle additional volumes. And so while I expect the drilling to increase through 2011, I think that would be our assumption at this point, and we'd see both volumes and drilling expanding quite a bit in '11. Our capital may be even more efficient in 2011 because we'll have a lot of the larger-scale backbone installed once we get done with our '10 capital plan.

Sharon Lui - Wells Fargo Securities

And any thoughts in terms of the Overland Pass option?

Alan Armstrong

We continue to evaluate it. Very excited about the volumes and the prospects in the area and feel like it's by far the lowest-cost transportation alternative right now from any of the emerging NGL production areas, and so we're very excited about how that asset is positioned. But we'll continue to evaluate that up until we exercise or don't exercise our option.

Operator

Thank you. We'll take our next question from Mark Easterbrook with RBC Capital.

Mark Easterbrook - RBC Capital

Just a quick question. A lot of my questions have been already answered. But the increase in guidance for 2011, it was increased by about 14%. What drove that? Is that just pricing, or were there some extra projects that came into that?

Phil Wright

That is mostly pricing, but remember that we also have, in terms of a quarter-to-quarter comparison, we have Willow Creek up and running. And, of course, Perdido did start up in the quarter, but that one did not produce any impact at all in the first quarter. We would expect that to provide impact through the balance of the year. And as well, PXT4 at Echo in the fourth quarter of this year will be coming online. So we do have some pretty dramatic increases from some of these big capital projects that are being completed this year.

Mark Easterbrook - RBC Capital

And so that's just impacting, that's rolling over into the 2011 numbers, is what you're saying?

Phil Wright

It will affect '10 in terms of an improvement over the first quarter of this year, but it also would affect '11 on a full-year basis. Willow Creek came on in the third quarter of last year, and so if you were looking at a first-quarter-to-first-quarter analysis, Willow Creek would have been a substantial improvement over last year's.

Mark Easterbrook - RBC Capital

I guess I'm looking at the $1.3 billion in 2011 that got moved up to $1.5 billion in terms of distributed cash flow guidance.

Phil Wright

Okay, sure. In terms of the guidance, that is basically following up the price signals in the foreign market for crude oil.

Mark Easterbrook - RBC Capital

Okay, so it's mainly pricing that was set up. Okay.

Don Chappel

This is Don Chappel. I'll just note a clarification as well. Our prior guidance for 2010 for DCF was $1.225 billion. Our current guidance is $1.225 billion. But I would point out that our prior guidance was a pro forma full year from January, assuming the transforming transaction took place on January 1. The $1.225 billion you're seeing today is our projection of the actual, assuming about 11 months of the large-scale WPZ in one month over a small scale. So we actually raised the 2010 guidance by about $145 million despite the fact that the number didn't change.

Operator

Thank you. Ladies and gentlemen, we have no additional questions. I'll turn things back over to our speakers for any additional or closing remarks.

Steven Malcomb

Yes, this is Steve. Thank you for your interest today, and please join us next week at our Investor Day. We'll have lots of good things to talk about. So we'll see you there. Thanks.

Operator

Thank you. Ladies and gentlemen, once again, that does conclude today's presentation. Thanks for your participation.

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