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Williams Partners L.P. (NYSE:WPZ)

Q2 2010 Earnings Call

July 29, 2010 11:00 a.m. ET

Executives

Sharna Reingold - IR

Steve Malcolm - CEO

Alan Armstrong - SVP, Midstream

Phil Wright - SVP, Gas Pipeline

Don Chappel - CFO

Analysts

Steve Maresca - Morgan Stanley

Ted Durbin - Goldman Sachs

Yves Seagal - Credit Suisse

Sharon Lui - Wells Fargo

Craig Shere - Tuohy Brothers Investment Research

Andrew Gundlach - ASB

Darren Horowitz - Raymond James

Mark Easterbrook - RBC Capital Markets

Operator

Good day, everyone and welcome to the Williams Partners L.P.'s Second-Quarter 2010 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Sharna Reingold, Manager of Investor Relations. Please go ahead, ma'am.

Sharna Reingold

Thanks, Becky, and good morning. Welcome to the Williams Partners second-quarter 2010 earnings call, and thanks as always for your interest in the Company. And we do have a few slides to go over in our presentation. Steve Malcolm 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 questions.

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 slides two and three within the presentation, they are forward-looking statements about future expectations and operations that are subject to various risks and uncertainties, which are disclosed on those slides.

And 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. And with that, I'll turn it over to Steve.

Steve Malcolm

Thank you, Sharna, and welcome to our call, and thanks for your continuing interest in our Company. Let's just dive into the slides, the slide on page four, please. Very strong quarter, higher NGL margins drove a 38% increase in our second-quarter net income per common units. We saw distributions grow to $0.6725 per unit. A very strong cash distribution coverage ratio of 1.43 times. Balanced growth in Midstream and Gas Pipe. A significant number of business development opportunities, well, probably, I would characterize it as extraordinary in nature in terms of the opportunities that we have to invest and that's underlined really by what's happening in the Marcellus. And I'll go into that in more detail in a minute.

Slide five, certainly the central thesis around the WPZ story has been organic growth and that's shown here in this slide, which is one that we've used before, which investors appreciate and which simply shows by -- for each of the three years of our guidance, where we're spending our money to maintain facilities, to maintain volumes and to grow our business, and this shows that we have about $2 billion in growth over that time frame and we've divided it up between Midstream and Gas Pipeline. Drilling down on those wonderful growth projects, if you'd look on slide six, which shows the Midstream capital-spending outlook and we've used the pie-chart approach in the past and the slices of the pie show where we will likely be spending our capital.

And on the far right-hand side, you see how we're going to spend our capital in terms of the projects that are in guidance and I would point out that the Overland Pass and Parachute projects again, which I'll talk more about in a minute, are now in guidance.

You see the potential spending associated with projects that we have under negotiation and then those that we have under negotiation and potential and you see the significant spending opportunity that we have here. So, the business development activity continues to be very robust and particularly in the Marcellus, but as well we're continuing to grow around our already significant position out west and we continue to believe that the deepwater Gulf represents a wonderful expansion opportunity for us.

The next page, page seven is a slide that you've seen, which demonstrates our [base kit] approach to investing in our Gas Pipeline space. These projects are all backed by long-term commitments with creditworthy customers. And you see the projects, they're bite-sized, but nevertheless some of them are fairly large, you've got the Northeast Supply Link project, which the capital for that is in excess of $300 million. You've got the Mid-South Expansion in excess of $200 million. So, some of these projects are fairly sizable.

Let me just go through a quick update on some of these. Projects that we've placed into service, 85 North Phase I and Mobile Bay South; projects under construction; Sundance Trail; FERC certificates received, Pascagoula Expansion and the Mobile Bay South II project; precedent agreements executed on the Mid-South Expansion on the remaining capacity and then with respect to the Cardinal Expansion project. And then we have an open season on the Opal Market Link project.

So, a lot of activity here and we all appreciate this stable, steady cash flow business represented by Gas Pipes. Let me now spend a few slides talking about and trying to respond to some questions that we've been getting from investors about various aspects of our business. I'm now looking at slide eight, which gives you kind of an outlook on what's happening in the Marcellus.

A lot of activity in the Marcellus, a lot of wonderful opportunities and that we certainly intend to take advantage of these opportunities over time. The opportunities in the Midstream space are special. We have the huge JV of course with Atlas. I think the recent deal that Atlas did with Reliance is clearly going to allocate more capital dollars for near-term drilling.

We've shown here for the first time on the map, the location of what we are naming the Shamrock compressor station. This is a central facility, will likely be the largest delivery point out of the system that we are constructing that will likely be made up of 11 compressor stations, all in support of Atlas' ultimate production targets and third-party growth opportunities as well. Springville project, which is shown there, kind of in the upper right-hand corner of the map, is proceeding.

We may even upside this project over time depending on business demand, a lot of other business around the system, talking with a lot of players. I think that this -- the fact that we're going forward, this project will clearly be a catalyst for some other deals. We've mentioned in the fact that we have identified 80 customer prospects. We've entered into 30 confidentiality agreements, a lot of deal activity; probably so much deal activity that we're going to add another Commercial General Manager up in Pennsylvania to be able to handle the level of activity that we're seeing today.

We continue to work with a number of large parties in northeast Pennsylvania, around some very significant gathering step-outs. As well we're dealing with producers to help them address their ethane issues and think that blending is a real and viable near-term opportunity and solution to some of those issues that they're facing.

You also see on the map from a Gas Pipeline standpoint that we have expansion opportunities, Keystone Connector and Northeast Supply Link are both real. They are viable projects and we continue to talk with shippers about those opportunities. On the next slide, I believe its page nine, slide nine.

We were getting a lot of questions obviously about our intentions with respect to Overland Pass NGL Pipeline and with our announcement this week, it's clear that we have exercised our option to increase our interest to 50%. Please recall that we do have the option to operate that system. This is a $425 million transaction, nearly full now, but the opportunities to expand are real and significant, as shown at the bottom of the slide, but let me tell you that I'd be disappointed if we don't see more expansions occur beyond what's shown in that chart.

Slide 10 we already have significant scale, scope, size in the Rockies and out West. And I think we hinted to you that we were intending to grow that we had additional equity gas, for example, to process. We thought at one point that it would be located at Willow Creek, but we see a much more efficient expansion opportunity at Parachute. And so we are planning to construct TXP1, which would be a 450 million a day cryo gas processing plant, which would have the capacity to handle 25,000 barrels per day of NGLs and would look forward to a 2013 in-service date.

Slide 11, there have been many questions about the estimated effect of the drilling moratorium on WPZ, and we expect for this moratorium to last no more than six months and we've shown the impact of an expected six-month moratorium, 2011 impact of about 2% of WPZ's segment profit and DD&A, so fairly de minimis. We've also, as a sensitivity, given you the impact of a one-year moratorium in 2011 and that impact is less than 4% of PZ's expected segment profit and DD&A.

Next slide, please, 12, lot of questions on NGLs and ethane and what's going on, and so I'll just organize my brief comments here in three categories, a lot of questions on what happened second quarter versus first quarter, clearly we saw a steep decline in ethane margins during the second quarter and in fact, ethane margins went from roughly $0.20 in May to just over $0.10 by the end of June.

The primary contributor toward these ethane margins were several outages that went longer than expected at ethylene plants, which clearly dramatically reduced ethane and EP mix consumption, particularly in the Midwest. And so the bottleneck for ethane was ethylene cracking capacity during the second quarter. The ethane price decline was not caused by lack of demand for ethylene.

In terms of our short-term outlook, the fundamentals we believe remain very strong for near-term ethane demand, as ethane is maintaining its favorable position in being the low-cost feedstock for ethylene production.

And now we're seeing storage at Conway being drawn down to more normal levels, as those Midwest ethylene plants have returned to service I think another point to keep in mind, as we think about the short term, a lot of people have been talking about the shale plays and the ethane that might be associated with those plays. Keep in mind that the large supplies of ethane from these shale plays require significant infrastructure and infrastructure takes time.

A great example is ONEOK's Bakken infrastructure project, which is nearly three years away from being in start-up. In terms of a longer-term outlook, again we believe that the U.S. right now holds a large advantage for being the next low-cost tranche of ethylene production, given the abundant natural gas supplies. I think the question that people will ask long-term is will ethylene capacity be expanded in the U.S. to keep pace with increased NGL supplies, and we believe again given the high ethylene to ethylene spreads that ultimately conversions and low-cost capacity increases will happen. The next slide just gives you a graphic representation of what happened in the second quarter. We did see NGL and ethane margins pull back, but our expectation is that margins will continue to be strong and higher than historical -- five year of historical margins.

Looking at slide 14, please, guidance for 2010-2012, just a couple of quick points. In terms of distributions, for all periods distributions are higher, primarily due to the $0.015 increase per unit that we announced.

The distributable cash flow in 2010, the lower NGL margins at Midstream result in lower segment profit, lower net income and thus lower DCF during 2010. 2011, we're seeing higher maintenance capital at pipes that results in lower DCF and no change in 2012. In terms of the coverage ratio, you see in 2010, higher distributions, lower DCF result in a lower coverage ratio.

In 2011, same as 2010, higher distributions, lower DCF result in a lower coverage ratio. And in 2012, really no change there.

So, with that, just summarizing, the outlook is very strong for PZ, so many wonderful, attractive, high-return growth opportunities, not only in the Piceance, but really throughout our system. So, we've seen growing distributions, a very strong cash distribution coverage ratio.

You saw this is not only a Midstream story, although the Midstream story is fairly extraordinary right now, but Gas Pipes as well, a very significant $1.3 billion inventory of expansion projects. So, with that, we'll be happy to take your questions.

Question-and-Answer-Session

Operator

Thank you very much. (Operator Instructions) We'll take our first question from Steve Maresca with Morgan Stanley.

Steve Maresca - Morgan Stanley

Good morning again, everybody. My question this time is on ethane and the outlook in terms of NGL prices. Can you give us some more detail as to what is the demand driver that's soaking up the supply out there, there seems to be a lot of it in terms of inventory levels and increased E&P and production of liquids? How much longer do you think at least this temporary paying can last in terms of an oversupply or weak price situation?

Alan Armstrong

Well, again, I think Steve mentioned really the impact that we saw in the second quarter, and it really was just primarily towards the end of the second quarter. And most of that drop in June from about -- for our margin about $0.21, $0.22 down and about $0.12 to $0.14 and most of that drop was driven by the outages that occurred, not certainly the Midwest put a lot of pressure on the Conway pricing, which again we don't sell ethane at Conway.

But ultimately there was such an excess there that it started affecting Belvieu pricing as well. But there were also significant outages in ethylene cracking plants that extended longer than planned during the second quarter. And that's certainly impacted.

If you look now, if you look at demand right now and The Hodson Report just came out showing 919,000 barrels of demand. That is a pretty terrific demand and we think it -- and it certainly will be drawing down storage and we'll get back to about where we were in the fourth quarter of last year to where we're actually pulling on storage in excess of production.

I do think there is a lot of discussion and talk about there about all the incremental ethane coming on, but as Steve mentioned, most of these big ethane supplies are pretty far away in terms of timing, and if you look at the margins, for instance, at Williams, not Williams Partners, but Williams makes in its ethylene cracking business right now, those margins are very strong and they are incanting additional, what I would call a creep in terms of efficiency projects that are increasing consumption.

Williams has at Geismar there we have a project that will add about 12% to 15% increase in consumption there, it's a very low cost, hardly even worth mentioning on the capital side, but will increase the production there or the consumption of ethane.

So,, I think with the ethane, sorry, the ethylene margins that are existing in that space right now, that we'll continue to see incremental expansions, perhaps not large expansions, but continued creep in expansion. And meanwhile, we talk about a lot of incremental ethane production from these basins, but the infrastructure is just not in place today to be able to handle that increment and it will take some time for that to get there.

So,, the question, I think, which is a very legitimate question is, will there be additional petchem expansion in time to soak up that incremental supply that maybe three years down the road or in some cases two years down the road? So, I think that's a question and again I think as long as the margins continue to be strong on the ethylene side, I think we'll see people investing in the petchem space to be able to consume that.

Steve Maresca - Morgan Stanley

Thanks a lot for that detail. One quick follow-up on the Laurel Mountain in the Marcellus, I think, Steve, you mentioned that adding another General Manager in the area. With the Atlas and Reliance joint venture, what -- can you update us on your outlook for volumes, gathered volumes on that joint venture and how much needs to be spent to get there?

Alan Armstrong

This is Alan again. We certainly would look to Atlas to speak to their own volume production and they certainly have done that in their calls, but we'll let them speak to that. In terms of our capital and so forth, we've got at the growth partnership level, about $150 million a year with that ramping up somewhat in the next couple of years.

So, a lot of construction going on right now. A lot of permitting issues being overcome out there that take time to plan and we're getting over a lot of that right now and getting on with the construction. So, pretty significant volume increases, but again I would just look to Atlas' forecast there rather than speak to for them on that.

Steve Maresca - Morgan Stanley

Okay. Thank you very much.

Operator

Ted Durbin with Goldman Sachs has our next question.

Ted Durbin - Goldman Sachs

Yes. Thanks. This topic came up on your earlier call, but as you're looking at the cost of capital at WPZ, not just for acquisitions, but even just for internal growth projects, have you adjusted your hurdle rates at all and how are you thinking about your capital allocation given the really strong unit price at WPZ?

Steve Malcolm

It's a good question. I think, we clearly look for again good infrastructure projects, good projects in the two businesses. Cost of capital is a pretty complex subject, particularly in MLPs, but we're delighted where the yield is, the cost of capital overall. I think our cost of equity capital is quite attractive and we think our cost of debt capital is also very attractive. So, we think that we're well positioned. I'm not going to provide a number, but I know you all have the ability to calculate those kinds of things, but certainly if anyone wants to talk about that offline, you can give IR a call and we can chat.

Ted Durbin - Goldman Sachs

Okay. That's helpful and just a little more of a detailed question. We saw Transco earnings down year-over-year; can you maybe just give a little more detail on what you're seeing there?

Phil Wright

This is Phil Wright. Excuse me. Yes, primarily if you'll recall in 2009, we had a rather prosperous year on park and loan, which is in essence an insurance policy for some of our shippers against seasonal swings in pricing.

We were able to capitalize on that to the tune of $20 million. And as supplies began increasing, the shippers began to get a little more comfortable that they wouldn't need that market area, park and loan and additional storage along the system and so that flattened out to the extent that we're basically looking at that almost totally diminishing in 2010.

In other words, pricing not being able to support seasonal swing, so that was the lion's share of it, as well I guess I should point out we had with the addition of a pretty substantial source of supply coming into the system at Station 85, some of the interruptible volume on what we call our IT feeder system had to find other markets. And so, as that sorts itself out, we had some diminishment of IT feeder revenue.

Ted Durbin - Goldman Sachs

Okay. That's actually very helpful. Thanks and if I could just ask one more question, just coming back to the ethylene side of things. We had some down in the second quarter; I mean is your outlook for the second half of the year that you'll see that really pick back up the utilization rates? And how are you thinking about, is there kind of an upper limit on where crack, the utilization hits for these guys?

Steve Malcolm

Well, we keep blowing through the number that we think is the limit on that. But to answer your question, you asked we expect utilization rates to be very high through the balance of the year. It is based on what the current ethylene margin looks like. And so we don't see much slowing that down other than unplanned planned outages that might come along.

Right now, I would say, speaking from an ethylene crackers perspective that you've taken in all the ethane you can and putting out all the ethylene you can. So, I don't see anything that would deter that right now. And certainly seeing that in the very current forecasting of demand right now.

Ted Durbin - Goldman Sachs

Okay, that's helpful. Thanks very much.

Operator

Yves Seagal with Credit Suisse has our next question.

Yves Seagal - Credit Suisse

Thanks. Just a few follow-ups. One, what -- how much ethane is currently being consumed at Geismar?

Steve Malcolm

Our interest, remember we're about 10, 12s there. Our interest is a little over 30,000 barrels a day.

Yves Seagal - Credit Suisse

Okay, thanks. And then when you think of Overland Pass, what kind of benefits could you derive if you took over operating that pipeline?

Alan Armstrong

Well, I think one of the challenges -- one of the opportunities Overland Pass has is that it's the next cheapest way for any incremental capacity out of the area. And so certainly being in a position of operator ship gives us a vantage point into growth opportunity. Much like ONEOK's Bakken project, for instance. And so it puts you in the nose so to speak in terms of where those opportunities exist. That's certainly valuable to us.

But in addition to that, we are very, very dependent on that link from our Rockies plants, which produce a lot of our income. And so being in a position to make sure that the facility is reliable is possible and that the pressures are held at a level that allows us to get into those pipes each and every day is extremely important to us.

Yves Seagal - Credit Suisse

Could you also just speak to your ability to get liquids all the way down to Mont Belvieu and with the increase in volumes that you're going to see on Overland Pass, how you see that -- how well positioned you are to get that down there?

Alan Armstrong

Well, first of all, as to our volumes, we have a fixed amount in terms of the contract that PZ has for exchange. We have a very substantial portion of that existing capacity contracted to move our own volumes down. So, -- and we haven't -- we've got quite a ways before we fill that piece up.

So, from a Williams' perspective, we've got quite a bit that is up to ONEOK to deliver on in terms of volumes between Conway and Belvieu. In excess of that, as I said on the Williams call, we think there's been a consistent large spread there between Conway and Belvieu and as we look at the various infrastructure alternatives that will present themselves with that kind of long-term spread, we think there is plenty of alternatives that will be pursued either by us or somebody else to overcome that.

Yves Seagal - Credit Suisse

Okay. Thanks, Alan. Just two other quick ones, can you arbitrage that opportunity? Are you taking advantage of that today since you have excess capacity to try to arbitrage the differential between Conway and Mont Belvieu?

Alan Armstrong

I won't get into the details of our Con frac there, but generally the opportunities exist for product that we own or control at our plants in Wyoming -- or sorry that feed into Overland Pass.

Yves Seagal - Credit Suisse

Okay. Then the last question is, in the Marcellus with the ethane and blending that into the natural gas, getting that – the waivers that allow you to get that into the Gas Pipeline. Could you just describe, is there any -- in terms of the waivers, is there any deadline on when that may expire and can you just help me how to think about the ability of – to continue to put ethane into the pipelines?

Alan Armstrong

Well, first of all, Laurel Mountain and particularly the Atlas production for the most part, that production is lean production. And so, Atlas is in a very favorable position there with their production and Laurel Mountain is as well, in that it's got a very nice feedstock or a large amount of dry gas available in that market. And so from an Atlas and a Laurel Mountain perspective, both of us are very advantaged for having a lot of dry gas and we've certainly run a lot of various analysis on how much ethane can be absorbed by that stream and other dry streams in the area.

And it's pretty large, but in effect that needs to be done -- as it exists today, it needs to be done outside of the interstate pipeline grid, in other words the blending and so forth would need to be done prior to going into those interstate lines. And so a large system like a Laurel Mountain system, for instance, really holds a lot of advantage in that regard.

In terms of how long those waivers will exist on those existing pipelines up there, pretty hard to say. We certainly are very aware in -- given our operations in the area up there that there is a lot of pipeline outages that have been occurring here and there due to pigging on the pipelines and of course that's because what were you building up in the pipeline.

And so I would suspect that the pipelines are going to be clamping down tighter and tighter. And so it's kind of operational upsets occur up there. But certainly it's going to be up to each individual pipeline operator to deal with them there.

Yves Seagal - Credit Suisse

Thanks, Alan

Operator

Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo

Hi, good morning. Alan, maybe if you could just comment on some of the NGL production volumes in the Gulf? I saw that it decreased sequentially. Do you see that being bottomed?

Alan Armstrong

Really what that was driven by was due to our tie-in on the Perdido system. We had formed a hydrate on the Boomvang, Nansen on -- sorry coming off of the Boomvang platform.

We formed a hydrate on that riser and that shut in the Boomvang production and so that was by far the biggest impact in terms of reduced volumes here. Also though there was some turnaround work at the Mobile Bay plant, where Exxon was doing some work upstream at their facilities that impacted that a little bit towards the end of the quarter as well. So, it's not really a trending downward. It's just a couple of significant outages that really affected us there.

Sharon Lui - Wells Fargo

Okay. And maybe the status of some of the projects in the Gulf?

Alan Armstrong

Well, the largest project that we have, the biggest needle mover by far out there is the Perdido Norte project. Our systems -- our pipeline systems are complete and they had started production up on the Perdido -- the producers had started production up on the Perdido platform and then chose to take that down for some further commissioning issues that we would certainly let them speak to just because we're not exactly certain.

But they're working quickly to get those resolved and we would expect production to come back on Perdido in the third quarter there.

But basically we got virtually no revenues from that system during the second quarter, but we would expect those to come back during the third quarter. So, that's the largest project that we have out there in terms of current expansion projects.

In terms of other items that we might expect out there, we certainly had several wells that were – that producers were set up on, that were feeding into our systems that they pulled off of with the moratorium. And so some of the growth in volumes that we were expecting on the Discovery system and on our Canyon Station system and even to a smaller degree on our Devils Tower system, those are being delayed by the moratorium, and so some growth that we were hoping to see in the second half of the year will not be occurring now.

Sharon Lui - Wells Fargo

Okay. And I guess turning to the Marcellus, I guess Atlas had a conference call yesterday that -- and indicated a significant ramp-up in their cash flows, primarily due to Laurel Mountain. I guess they indicated that return to be in excess of 25%, can you just comment on the type of returns that you've budgeted in your guidance?

Steve Malcolm

We certainly wouldn't argue with that. I can't imagine why our return would look any different than theirs. And certainly they have both the production side to have a vantage point of how fast things will ramp up, as well as the gathering side. But we certainly agree that our margins -- sorry, our return opportunities there are very high and on the incremental dollars invested in that play. And we're very excited about both the growth and the kind of return on capital that we're going to see there in that play, certainly in the top quartile, many opportunities for that kind of business that we have available to us right now.

Sharon Lui - Wells Fargo

Okay. Great. Thank you.

Operator

Next we'll hear from Craig Shere with Tuohy Brothers Investment Research.

Craig Shere - Tuohy Brothers Investment Research

Hi, guys. Couple more questions. The first one, Don, you've really done a great job kind of helping the marketplace think about the after-tax cash flows that's been off from WPZ to WMB. But there's an investor tendency perhaps to keep whatever discount supplied on those distribution static over time.

Even though the incremental cash tax rate on cash flows from a couple of billion dollars in growth initiatives will clearly be much lower -- a lower cash tax rate than that of WMB's legacy WPZ interest. Can you speak to the trend of this over time and how meaningful it might be in terms of the aggregate?

Don Chappel

Craig, I think that's a question I'd prefer to talk about offline in that that's really a Williams question and this is a Williams Partners call if you don't mind.

Craig Shere - Tuohy Brothers Investment Research

Understood.

Don Chappel

Okay. Thank you.

Craig Shere - Tuohy Brothers Investment Research

Okay. I can come back to that. And maybe Don or Steve, either of you could kind of respond to the next question. On the last -- earlier call for Williams, there were a couple of questions that you've referred to currently also, about using WPZ equity for currency and for accretive acquisitions and strategic steps that might be taken help transmit some of the WPZ value over.

Don, you commented that WPZ was definitely viewed as a more strategic move in terms of the major dropdown. And that all of you see a significant, but over time bottom line academic benefits unfolding in the years ahead driven by the greater Midstream investment and M&A flexibility.

I guess what I just want to get a sense of is, if you all view any incremental strategic shift in the relationships as a possibility that's on the table, or do we have a good game plan and we just need to work it out and the market will catch on sooner or later?

Don Chappel

Again, Craig, it sounds like a Williams question versus the WPZ question. And again, I think if it's a Williams question just given that this is a PZ call, I'd like to stay with PZ. So, if there's a PZ question in that maybe you can help frame that for me.

Craig Shere - Tuohy Brothers Investment Research

Well, I guess, I'm trying to get a sense if there is any potential that might be evaluated to change WPZ's relationship to WMB, I guess that's…

Don Chappel

Yes, and I think that's really a Williams question. I think PZ is an entity that's controlled by Williams and I think, as Steve mentioned before, we're always looking at strategic alternatives, but we think that this is the right structure at this point in time. We'll continue to look at the options.

Craig Shere - Tuohy Brothers Investment Research

Understood. And you've got a very large coverage ratio that is partly there because you've got a lot of investment opportunities at WPZ. On the one hand, there's huge long-term opportunities from the uplift of accretive investments that you obviously have the flexibility to pursue at this point.

On the other hand, there might be additional nearer-term benefits from kind of expediting or turbo-charging the distribution increases over time.

Can you speak to those issues and are you just comfortable that the best thing to do is to keep investing for the long term given the accretion?

Don Chappel

Well, I think it's always a balancing act. Again, we have many opportunities to reinvest that retained capital, that's good news. And two, we do have commodity exposure in the business. So, we want to ensure that we never put the distribution at risk or even have the market perceive that the distribution is at risk.

So,, we think a strong coverage ratio in periods of strong margins makes a lot of sense and certainly if we were in a period, albeit even a brief period where margins pull back, that we wouldn't be perceived as being at risk.

So,, I think it's really balancing a lot of factors and we're comfortable with kind of where we're at and kind of keeping things such that we balance, we have a use for the excess cash too, the very strong margins, it provides a nice buffer so that there's no perception that that's ever going to be a problem.

Craig Shere - Tuohy Brothers Investment Research

Understood. Thanks for the color.

Don Chappel

You're welcome.

Operator

Andrew Gundlach with ASB.

Andrew Gundlach - ASB

Good morning and a couple of quick questions. On the dividend, I was surprised that there was variability in the amount that you increased that dividend, so $0.0225, two quarters ago $1.50, yesterday or two days ago. How should one think about the dividend increases that you're targeting?

Don Chappel

Andrew, good question. I think the first dividend increase or distribution increase was an initial increase post the transformational transaction and we view this more a recent one as being a normal quarterly increase. I'd say that without providing any guidance as to what we might do next quarter and the quarter after that.

But we're certainly mindful that the market has a great appreciation of continuous improvement in distribution. So, again I'd just look back and say the one earlier this year was call it a reset post the transaction and this one was a normal increase for the quarter.

Andrew Gundlach - ASB

I understand. So, then just a couple other quick questions in no particular order. Is Geismar actually in WPZ?

Steve Malcolm

No, it is not.

Alan Armstrong

I was simply referring to that earlier, Andrew, as where our vantage point comes from in terms of the ethylene market.

Andrew Gundlach - ASB

Understand. Is it MLPable?

Alan Armstrong

No. Well, it is not qualifying income.

Andrew Gundlach - ASB

I understand, okay. The second thing is the Gas Pipeline $1.3 billion of spend over quite a few years. Should we think of that as -- that's probably all FERC-regulated projects, right? So, should we think about that as like a 12% type of return?

Phil Wright

Well, certainly. This is Phil Wright. Certainly you can sort of look back over our historical bandwidth on return on equity. But you're in the right ZIP code.

Andrew Gundlach - ASB

Okay. And the Transco, just two press releases the other day, the Transco, the Gulf LNG thing, is that Pascagoula? Is that the same thing?

Phil Wright

Yes, yes. And, Andrew, Don had a clarification he wanted to…

Don Chappel

I'm just going to mention that return on equity that you mentioned and Phil said was fairly typical is really at the regulated pipeline level with regulated pipeline capitalization, which tends to be equity heavy. So, at the PZ level, return on equity is probably somewhat stronger given the fact that there's more leverage on PZ?

Andrew Gundlach - ASB

A fair point. Okay, thank you. Okay, so do you actually own that LNG facility down there or do you have some kind of agreement, which gives it's almost kind of effective ownership or?

Phil Wright

No, Andrew. Again, it's Phil Wright here. That's a lateral pipeline to connect that LNG terminal into the Transco system. And I guess I should point out that it is under long-term contract, as Steve mentioned, with creditworthy counter-parties. And it's the capacity reservation is paid to us regardless of whether any gas moves.

Andrew Gundlach - ASB

I understand. So, it's just a lateral. Okay. And then with the Keathley Canyon projects, which discoveries in the Gulf are you going after there? Is that like Davy Jones and some of these others, like ultra-deep?

Alan Armstrong

Yes, it is ultra-deep in the Keathley Canyon and it's an extension of that lower tertiary play for the most part. There are several producers there that we're in discussion with. And I'd shown some strong interest and we were broadening the net – widening the net, so to speak, in terms of making sure any other parties that were in the area that might have interest in a project that those were identified so that we can make sure that we scale that project appropriately to the broader interest in the area.

Andrew Gundlach - ASB

I understood. Okay. And then Alan, the 9% decrease quarter-over-quarter in NGL equity volumes includes inventory, as you stated. What does that mean exactly and what is the normal number in any for WPZ? I always think it's kind of 320 a quarter. But how should, I didn't -- I was a little unprepared for the variability. Can you explain that a little bit?

Alan Armstrong

Yes. It's just the timing of sales issue, so we would only record equity sales there for a product that we actually cleared out of the system and sold. So, any shift in line pack or line fill I should say or storage or just the timing of when we actually sold the product as opposed to it went into storage for a period of time.

So, there is always some shift in that it was fairly large in this period. And so you should -- about half of that was that and the other half was just changes in like our deepwater production volume, which I mentioned earlier, was primarily driven by the Boomvang and Nansen outages. So, about half of that…

Andrew Gundlach - ASB

So, that inventory is not foregone profit, you'll just see it come back in the third quarter. Is that the way to think about it?

Andrew Gundlach - ASB

That's right. It's either that or like I said earlier also can be and I actually can't pin that down for you, as we speak. It also could be -- well, it would be primarily inventory that would show up in the third quarter. That's correct.

Andrew Gundlach - ASB

In the third quarter at higher NGL spreads hopefully, I mean we don't know -- but well, it could be, is that correct? It's tied to the spot market.

Andrew Gundlach - ASB

That's right. It's whatever it, so I wouldn't suggest that pricing has moved up on a lot of those products from second to third quarter.

Andrew Gundlach - ASB

Right. I understand. Okay. And just two other quick questions, following up on, I guess it was Sharon's question on Laurel. Is Laurel cash in, but no cash out, in other words, is your growth requirements there that whatever cash is generated at these high returns just stays in and keeps on growing the Laurel JV and maybe even have to put in some CapEx. Or is -- when does Laurel become a source of cash?

Alan Armstrong

I would tell you, the growth trajectory on Laurel is so tremendous that I would not expect, I don't know the exact break over date on that, but I do know we've got a lot of capital investment opportunity, very high returns for the next two to three years. And so I wouldn't expect that to be a cash generating facility for sometime just because of the amount of growth opportunity we have there.

Andrew Gundlach - ASB

I understand. That makes sense, okay. Last question on Eagle Ford, if I remember correctly when Copano was trying to buy that McMullen Lateral, my numbers might be after it, but you'll number them. I think including what they were going to pay you, I think they were going to invest like $140 million and they thought it was like a five times EBITDA. So, call it $25 million, $30 million of EBITDA. Are the economics for you different in any way? I mean is that the ballpark or how should we think about it differently?

Alan Armstrong

Well, first of all, the Copano deal would be quite different because they were looking at the unregulated transportation on there. Obviously, McMullen Lateral remains regulated and so that rate really isn't going to change quite frankly, it's in the rate base and we'll get it, perhaps we would see some incremental revenues there.

But really the value that'll be driven for WPZ out of that is by utilizing processing capacity at Markham, which we are very fortunate to have some capacity available because we invested in redundant capacity at Markham at the request of the deepwater producers to win the Perdido business.

And so we're sitting there with some excess capacity today that that is, it can very quickly be absorbed by the market, the matter of using the Markham system -- or sorry the McMullen system to be able to get that very rich production in the Eagle Ford over to the Markham plant. But that's really where the upside will be. I don't know Phil may have a different explanation about it.

Phil Wright

I think Alan said it very well. As you heard me mentioned earlier, we had seen some diminishment of our IT feeder volume and at least at the outset that transportation will in fact as he pointed out be moving under regulated service on an IT feeder basis. And so --

Andrew Gundlach - ASB

How much excess capacity do you have at Markham?

Phil Wright

How much?

Alan Armstrong

How much? Today with Perdido up and running, we'll have about 180 million a day or so of excess capacity there, which matches up ultimately what we think we could -- that the McMullen system is capable of with some moderate expansions.

Andrew Gundlach - ASB

I see. And how long does it take you to fill that excess capacity with what's going on in the Eagle Ford today?

Alan Armstrong

There's a lot of demand out there. But there's a lot of rigs have got to get -- turn in to get that up. So, plenty of demand from producers out there and we've got a limited amount of capacity, so we're just making sure that we capture the best margin we can out of that opportunity.

Operator

Next we'll take a question from Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James

Hey, guys. Alan, just two quick questions for me. First, back to the point where you mentioned 919,000 barrels a day of demand. When you look at the current feedstock for ethylene production, that would probably suggest and NGLs are about 85% of the mix, maybe I'm saying it's 55% or north of that of the mix.

Can NGLs take more share versus the heavy source in a situation where co-product value support suggests that where things are running today is about the right mix?

And then secondly, when you look at incremental NGL supply at Conway coming into that market relative to how long it's going to take for infrastructure build to materialize. Do you care to benchmark where you think the dif versus Belvieu is going to trend over the next year?

Alan Armstrong

Yes. Well, first of all, on the ethylene, the feedstock question -- the feedstock slate question. You are absolutely on target with the issue around the heavies or sorry, on the co-products and how much that may drive.

But as we look at that today, we see continued conversion going on and it's not going to be big announced conversions, it's going to be a lot of subtle increases and tweaks here and there at plants to be able to take a wider mix. And sometimes it might still be NGLs, in other words it may be butane, something it can crack butane today shifting to ethane and propane.

But we think we're going to continue to see that just because the economics are very compelling on that. Butadiene is really the one item that'll get tight and -- bit, it doesn't take very long to satisfy that demand. And so I think, well, CP will swing in and out to satisfy that demand.

But that's the primary component that we'll tend to force some parties to go after that co product. Propylene side, there's a lot of new propylene sources, some of that in Canada from our operations that we think is keeping that market fairly well in balance today. So, we think it's mostly going to be butadiene that will drive that co-product. And I'm sorry, on your question on the differential, was that Conway to Belvieu differential?

Darren Horowitz - Raymond James

Yes.

Alan Armstrong

Yes. Today there is just limited takeaway capacity out of the Conway Bushton area. On the ethane side, you certainly have the Maple system connected to the Midwest plants in the Illinois area and then of course you've got the Sterling system and – with the capacity to take ethane into Belvieu and then you have the Maple system and Seminole system combined that can get some ethane out of the area, but have to batch and therefore not a consistent source of capacity.

And so that's really the options out of there and as more and more products come into that area via Overland Pass and Granite Wash kind of production, we've pretty well taxed out the frac capacity in the Mid-Continent and everything is having to run as hard as it can to keep ethane cleared out of the area.

And so when we had the outage of the plants in the second quarter in the Midwest, that really showed how tight that balance was. And so we had a lot of ethane and EP mix building in the Mid-Continent during that period. And so I think people are very aware of the situation. I think the margin is justified because the infrastructure bottlenecks exist, but I don't think that this industry will sit around with as much capital availabilities it's got right now and let that margin continue to exist for a long period of time.

Darren Horowitz - Raymond James

Thanks, Alan. I appreciate it.

Operator

Our last question today will come from Mark Easterbrook with RBC Capital Markets.

Mark Easterbrook - RBC Capital Markets

Hey, good afternoon, guys. Two really quick questions, one, has there been any change in the hedging of the NGLs relative to WPZ?

Alan Armstrong

They're not significant, we added on some additional hedges, about half of our heavies or sorry when I say heavies, I mean propane and heavier NGL components are hedged through the balance of the year. And a very attractive pricing and that is in that will be in the Q information that comes out. But not any dramatic change from what was reported, but basically what you see is about half of our total sales on the heavies are hedged out and at very attractive prices relative to current pricing.

Mark Easterbrook - RBC Capital Markets

And that is mainly for this year; do you have anything beyond 2011?

Alan Armstrong

That's exactly right. We do not have any significant hedges that roll past 2010, that is correct.

Mark Easterbrook - RBC Capital Markets

And then so last question, any change in the drilling from BP (inaudible)?

Alan Armstrong

We have not seen any of that, we certainly are keeping our eye on that, but we haven't seen anything, but continued strong efforts there today.

Mark Easterbrook - RBC Capital Markets

Okay. Thanks.

Operator

At this time, I'll turn things back over to our presenters for any additional or closing remarks.

Steve Malcolm

Yes. Thank you for your interest, appreciate your questions. I think you would agree that we have a very exciting future here at PZ and we look forward to talking to you again. Thank you very much.

Operator

And that does conclude today's teleconference. Thank you all for joining.

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Source: Williams Partners L.P. Q2 2010 Earnings Call Transcript

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