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Executives

Travis Campbell – Head, IR

Steve Malcolm – Chairman, President and CEO

Alan Armstrong – President, Midstream Gathering & Processing

Ralph Hill – President, Exploration and Production

Don Chappel – SVP and CFO

Phil Wright – President, Gas Pipeline

Analysts

Craig Shere – Tuohy Brothers Investment Research

Lasan Johong – RBC Capital Markets

Ted Durbin – Goldman Sachs

Carl Kirst – BMO Capital Markets

Jonathan Favreau – Wells Fargo Securities

Steve Maresca – Morgan Stanley

Faisel Khan – Citi

Holly Stewart – Howard Weil Incorporated

Kevin Smith – Raymond James

Yves Siegel – Credit Suisse

Williams Companies, Inc. (WMB) Q3 2010 Earnings Conference Call October 28, 2010 9:30 AM ET

Operator

Please stand by, we’re about to begin. Good day, everyone, and welcome to the Williams Companies’ Q3 2010 earnings release conference call. At this time for opening remarks and introductions I would like to turn the call over to Mr. Travis Campbell, Head of Investor Relations. Please go ahead, sir.

Travis Campbell

Thank you and good morning, everybody, and welcome to our Q3 call this morning. As always, thanks for the interest in the company. Steve Malcolm, our President and CEO, is going to review a few slides that we have prepared for this morning, but be aware though, as always, all of our business unit heads – Alan Armstrong, Ralph Hill, Phil Wright – as well as Don Chappel, the CFO, are here in the room ready for questions that we’ll take after Steve’s remarks.

This morning on our website, Williams.com, you should be able to find the slides, the data book, the press release which were all issued this morning. The Q3 10Q will also be available today and you’ll be able to access that on the website as well. At the beginning of the slide deck are the forward-looking statements and the disclaimer on oil and gas reserves. Those are both very important and integral to the remarks, so you should review those. Also there are various non-GAAP numbers that have been reconciled back to generally accepted accounting principles. Those schedules are available and they follow the presentation.

So with that I’ll turn it over to Steve.

Steve Malcolm

Thank you, Travis. Welcome to our Q3 earnings call and thanks for your interest in our company. Let’s just dive into the slides.

Slide 5 shows the key financial results. Of course adjusted earnings per share from continuing operations is $0.22 for the Q3; year to date of $0.86 is 28% higher than 2009. Our 2010 through ‘12 earnings guidance is relatively unchanged. We’ll go into some of the tweaks that we’ve made here a little later. And we did record a $1.7 billion non cash impairment due to the recent decline in natural gas prices.

Slide 6 please. Some of the major highlights from the quarter. We did reach agreement to sell our Piceance Basin gathering and processing assets to WPZ. I have a slide later that goes into more detail on that transaction.

Secondly, we’re very excited about the progress that we’re making to grow out businesses in the Marcellus Shale, and let me just offer some color on that. In the E&P space, we’re now operating three rigs. That number will be increasing to six by the Q4 of 2011. Current returns are greater than 30%. We have seen and expect significant continued improvements as Williams becomes operator and as we proceed with the large Susquehanna drilling program. As you know, we now have 100,000 net acres at an average cost of less than $7000 an acre, gross production near 20 million a day at the end of the Q3 and the Westmoreland County Slavic Trust wells have been the best performing to date.

As well, good growth in the mid-stream space. We’re rapidly expanding the Laurel Mountain mid-stream gathering system. Projects there will ultimately provide over 1.5 Bcf a day of gathering capacity, and 1400 miles of gathering lines including 400 new miles of large diameter pipe. As well construction has begun on our Shamrock Compressor Station, where we’ll have an initial capacity of 60 million a day, but is expandable to 350 million a day. And that Shamrock Station will likely be the largest central delivery point out of the Laurel Mountains System.

As well we have the Springville System and we now have all of the right of way. We expect to begin construction in the Q1 of 2011, in service in 2011. And given the demand from customers we’ve upped the project size from a 20-inch to a 24-inch diameter pipeline. So a lot of really exciting things going on in the Marcellus.

Moving back now to talk a little bit more about the highlights on the slide. We did close and finance the Overland Pass pipeline transaction, and there was strong demand for the WPZ share offering. We did complete the restructuring transaction with the PZMZ merger. We’re prepared for a November startup of Sundance Trail. We brought the new Echo Springs TXP4 into full operation at the end of the Q3. And just to remind you, the TXP4 plant adds about 350 million a day of processing and 30,000 barrels per day of natural gas liquids production and capacity, roughly doubling what we already had there at Echo Springs.

We increased the WPZ distribution by 1.5₵ and did announce as you well know the leadership secession plan effective January, 2011, which has Alan coming on board as President & CEO.

Slide 7 please. This slide just gives the guidance range and midpoints for Henry Hub and Rockies net gas prices, crude oil, and NGL margins and our assumed NGL to crude oil relationship. I think there are just two points I want to make here: one, these are unchanged from the commodity price assumptions that we gave you at Barclays; and I guess the second point is yes, we have seen natural gas prices fall since then but we’ve run the numbers. And if you used strip prices you would really see the minimalist impact on our earnings per share for ‘11 and ‘12.

Slide 8 please. Steady growth even on expected low nat gas prices. This shows adjusted EPS, adjusted segment profit, cash flow from operations and capital. And just the key points here: earnings per share reflects some tightening of ranges in ‘11 and ‘12. Segment profit reflects tightening in ‘11 and a slight increase in the range in ‘12. CFFO tightens the range consistent with earnings. 2011 CAPEX, we’re seeing some carryover from 2010; as well as PZ, with its Laurel Mountains and Piceance growth, that’s added a little capital. 2012 capital as well is up a little bit as a result of Laurel Mountains and Piceance growth.

Slide 9. Again, segment profit moving up even during a low nat gas price environment. That’s good stuff.

Slide 10, please. This is the slide that we have been showing the last couple of years, which shows the maintenance cap, the maintenance to maintain volumes, the growth projects by year and divided out by WPZ, E&P, and other.

A couple points here: you’ll note in 2010, the blue WPZ growth bar is a little larger, and that’s obviously associated with the bar gas transaction, the Piceance gathering and processing transaction that I spoke about earlier. As well you’ll notice the growth capital, the yellow bar in ‘10 and ‘11 and ‘12 continues to grow quite nicely. Of course that includes that yellow bar, the other category includes Canada where, due to our first mover technological advantage we continue to anticipate making significant, attractive investments over the next three years.

Slide 11. This is our familiar pie chart for WPZ midstream, and as you well know we’ve had success in moving projects. Due to our success from the left to the right we really see huge growth opportunities in the Marcellus, opportunities out west to expand on our already significant position out there, and we’re still excited about what the Gulf offers.

Slide 12, please. The WPZ gas pipeline, inventory of projects – $1.3 billion represented here. PZ franchise, or the gas pipeline franchise is a major segment of the nation’s energy infrastructure, transporting 12% of the country’s gas on any given day. And our gas pipeline enterprise produces consistent low risks of substantial free cash flow.

You know, we’ve talked about the base hit approach that we’ve used here. Most of our growth has been and will continue to be from market whole projects within our exiting footprint, as opposed to in my view the more risky producer-push pipes which are dependent on a given supply basin. I would say looking out into the future there’s a significant opportunity for expansions to serve power generation, particularly in the Southeast US.

Slide 13, please. I think you’re familiar with our Premier E&P portfolio, and we have talked in the past that the Marcellus will soon become our second largest producing basin. A couple other key points: our drilling returns remain strong and our major operating areas of the Piceance, Marcellus, and Powder River with returns ranging from 17% to near 40% – even in this low nat gas price environment. A major reason for this is our industry leadership position on low costs. And I think a great example here is in the Piceance for 2010 we’ve improved our well costs by 3% to 6% versus 2009.

We have a unique industry portfolio that allows us to flex up our drilling program, up or down, without losing value or losing leases. And as discussed in our September guidance update we decreased our rig counts for 2011 by nine rigs and 2012 by 17 rigs from our previous guidance, and simply put we can do that and yet preserve our value and leases while we wait for gas prices to improve. And we still expect to grow our production by 3% in 2011, 7% in 2012.

Slide 14. This is the drop down slide, so this is a large scale asset and you see the bullet points on the left there: 150 miles of large diameter pipe connects to 3300 wells, six aiming and treating facilities, 160,000 horsepower of compression, 1.2 Bcf a day of dew point processing capacity. These are significant assets. The attractive financial profile and some of the key points there: $105 million of WPZ segment profit in DD&A in 2011, immediately accretive to DCF for PZ. And as the general partner, Williams will receive a favored distribution increase. WPZ is acquiring fee business, that’s good stuff. Williams’ E&P segment retains liquids upside and we have a life of lease dedication from Williams E&P. And we expect closing to occur in November of 2010.

We still get a lot of questions and there’s a lot of dialog in the industry about what’s going to happen with NGLs and ethane and ethylene, and I’m certainly not going to read all of these bullet points but there are some points I want to make. And we’ve made these in the past and continue to believe in them. Short-term the fundamentals remain very strong for near-term ethane demand, as ethane is maintaining its favorable position in being the low cost feedstock for ethylene production. A lot of people are worried about the shale plays and the large supplies of ethane that are going to come on, but you have to remember – large supplies of ethane from the shale plays will require significant infrastructure and infrastructure takes time. The very strong ethylene markets will incent plants to invest in small plant expansions and WMB, Williams, has a low cost expansion investment ongoing at Geismar which is going to increase our capacity by 12%.

Longer-term, clearly the US right now holds a large advantage for being the next low cost traunch for ethylene production given the abundant natural gas supplies. The US should be in a strong position to export its ethylene derivative products at a lower cost than incremental production elsewhere in the world. And I think ultimately the big question is will ethylene capacity be expanded to keep pace with increased NGL supplies here in the US? And given the high ethane to ethylene spreads that exist, we think ultimately that conversions and low cost capacity increases will happen.

Slide 16 and 17 talk about the progress we have made for 2010 priorities for value creation, and you can see more and more of the boxes now have checkmarks. And so we’re pleased with the progress that we’re making there.

Slide 18, please. The “Why Williams is a Winning Investment,” no change here. We think that we have the assets, the people. We have proven that we can execute crisply around our strategies. We are committed to financial discipline and believe that we’re going to have very, very attractive results in the future.

Before we go to Q&A I’ve got a few comments and Alan will as well, but I wanted to address questions about my decision to retire. There’s no hidden intrigue or back story here. As Gwen and I were thinking about the next chapter in our life, and having been with Williams for 26 years, nine of those as CEO, we decided that again, started talking about it over the summer and ultimately decided that it made sense for us to retire at the end of 2010. And as you know, the requirements are such that once you make your final decision you need to make it public in four or five days. So it’s a decision that we’re very excited about.

But the board was well prepared for this decision. We’ve had an active and comprehensive secession planning process in place. The board and I are confident in the team and confident in Alan Armstrong, and believe that Alan will take the company to new heights. I’ve had the great opportunity to work with Alan, not only in his role as heading up our midstream group but I’ve worked closely with him back in the 1990s when I was running midstream.

And I don’t want to get too carried away here, but the experience and culture here at Williams is very unique and I’ve been proud to work here for the past 26 years. I truly believe the Williams experience, the Williams culture is a competitive advantage for us. So with that I’ll turn it over to Alan.

Alan Armstrong

Great. First of all, Steve, I want to make sure that we acknowledge the accomplishments that Steve brought forward. If you think back to the very difficult and tenuous circumstances that Steve was handed, and to where he’s brought us to today with a very strong, very stable company with tremendous potential to create shareholder value from where we sit today- We have that potential in terms of financial resources. We’ve got extremely well positioned assets in the markets they serve, and we’ve got tremendous organizational capabilities in terms of exploiting resource plays, both in our E&P group and in our midstream group. And our pipes are well positioned to serve the change in the markets today that’s associated with the resource plays.

And certainly as Steve mentioned, our culture with one of the most passionate and committed workforces in the business today, leaves me with a tremendous amount of optimism about where we can take this. And I just want to say a big thanks to Steve for giving us such a tremendous platform to take the company from today.

So we are in a very enviable position. We’ve got all the tools necessary to really accelerate shareholder value. We’re going to be reviewing all alternatives and I’m charged up and can assure you that with the great platform, the well positioned assets, and organizational capabilities that we have today, we will not be sitting still. I don’t have any particular bias other than to assure ourselves that we are creating the most shareholder value that is enduring and allows our businesses to be the most successful they can be for the benefit of our investors.

And with that I will turn this over to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions.) Our first question today comes from Craig Shere with Tuohy Brothers Investment Research.

Craig Shere – Tuohy Brothers Investment Research

Hi, thanks for taking the questions. And Steve, congratulations on really rebuilding the company from some dire days early in the last decade, and good luck with your retirement.

Steve Malcolm

Thank you.

Craig Shere – Tuohy Brothers Investment Research

A couple questions here. Ralph, can you comment on how the commodity price assumptions underlying the guidance of 3% and 7% production growth the next couple years differs from the decision to write down some E&P properties? And at the current lower strips, is it reasonable to assume that gas production may be declining?

Ralph Hill

Well, the goodwill impairment and the impairment of primarily the Barnett area really is an accounting exercise that we work on, and it’s basically there’s several models there. It’s the fair value model, and gross cash flows are discounted against that. So as we look at that for example on the goodwill, the internal fair value was slightly less than the carrying value, and in that case it caused an impairment in our goodwill which was, the goodwill for us was associated with a 2001, almost a decade ago acquisition of Barrett. And it wasn’t cash out the door; it was really a deferred tax liability gross up if you will. And that became our goodwill, and over the course of the last decade as we looked at prices and all that, we really didn’t have any opportunities for impairment. And then with the poor price curve it’s gone down greater than 22% since the beginning of the year. That caused us to look at that and that caused that write down.

For the Barnett it was simply just a factor of the fair value again versus the carrying value. Our Ford prices have come down substantially and we have that impairment. That really doesn’t have anything to do with go forward on where we’re headed primarily in the Piceance and the Marcellus, where most of our draw is, and a lesser extension, the Powder. So those are just accounting exercises. You look at it, you understand the value of what you’re carrying versus the value of the fair value, and those are impaired from there.

And I don’t know if your last question is more about the industry or us. We know that the level of rigs, which we did drop a substantial amount of rigs in our forecast at the Barclays conference for ‘11 and ‘12, but we know that we believe our production wasn’t growing that much. I think the industry in general hopefully at some time we’ll see our competitors put on more of a return hat and finish drilling for holding leases, and finish drilling for holding JVs and we’ll see a more rational response to the gas prices. And therefore, at that point I would expect you would see some of the gas supply to decline.

Craig Shere – Tuohy Brothers Investment Research

Well, I guess what I’m trying to understand is, is the write down based on forward strips which are meaningfully below your midpoint guidance for the next two years? And if we incorporated that more conservative assumption, given the wide range of CAPEX guidance for the next couple of years, is it reasonable to assume that we trend towards the lower end is what I’m trying to get at.

Ralph Hill

It is based on, really what happened is the strips through 2025 is down about, as I mentioned, greater than 20%. And I would say at this point I would not trend towards the lower part. We feel confident that our drilling program, as I think Steve mentioned, our returns in the areas we’re drilling are going to be anywhere from 17% to near 40%. We have cut our drilling program substantially but at this point we feel that we’ll be… We don’t give out the exact but we give a pretty wide range, and I think most of you guys look at the middle part of that range and that’s kind of what you assume, and that’s generally where we try to come out. If prices would continue to come down substantially we always have the ability as Steve said to flex our portfolio down, our drilling program down, and to respond accordingly until prices come the right way.

Craig Shere – Tuohy Brothers Investment Research

Great. And one other quick question, guys. I don’t know if Don or Alan or Steve want to field this, but do I understand that the latest drop down to WPZ pretax to WMB may have been 7.5 times EBIDTA, and after tax may be 6.5 times? And does that seem a little low for fee-based business, and how does that correlate to maybe future drop downs in how you’d envision pricing?

Don Chappel

Craig, this is Don. I might just comment – you have to remember that Williams retains its GP interest, and with that we get a substantial, you could call it a royalty but we get a substantial profit participation in that asset despite the fact we dropped it down. So I think when you look at the GP interest on top of what we actually sold it for in terms of cash, I think you get a much higher valuation.

In terms of what’s left to drop down, you know, we have a 25.5% interest in Gullstream, which is eligible beginning late Q1. That’s not guidance in terms of what we may do but it would be eligible for drop down kind of late Q1, and beyond that we really haven’t earmarked any other assets.

Craig Shere – Tuohy Brothers Investment Research

Okay, thank you.

Operator

Our next question will come from Lasan Johong with RBC Capital Markets.

Lasan Johong – RBC Capital Markets

Thank you. Recently a couple of your competitors have decided to dance and leave you guys out of it, creating some new projects in the Marcellus and the Eagleford. Does this signal a change in how you would pursue the McMullen lateral expansion in the Eagleford and the Keystone Connector in the Marcellus?

Phil Wright

This is Phil Wright, let me tackle the Keystone Connector. It doesn’t change anything with respect to what we’re pursuing on that project and we continue to work with producers. As you know, the difficulty in achieving success on any of those large infrastructure projects is getting producers to a position where they have a clear enough vision of what their needs are going to be and what market they want to try to serve sufficient to sign a precedent agreement that would produce enough security around a project that would have an investment profile attractive enough to proceed. And I think that chicken and egg problem persists.

With respect to the McMullen Lateral. I know Alan will have some thoughts probably from the midstream perspective, but from the pipeline perspective I can tell you that as more drilling is done out there and as the lenses of liquids-rich and oil-rich finds sort of move northward, we’re seeing a higher level of interest in dry gas but nonetheless a very high level of interest in the McMullen Lateral.

Alan Armstrong

All I would add to that in terms of the, first of all in terms of the Marcellus is we have a tremendous joint venture in our Atlas joint venture with Atlas, Laurel Mountain. Outstanding growth alternatives coming out of that and we’ve got some exiting developments going on on the north end of our Springville Lateral. And so I don’t feel like we’re being left out in any way, shape or form. In fact I would tell you we probably have one of the strongest JVs in the Marcellus from a midstream perspective in terms of creating shareholder value going up there. So I’m very excited about that position.

In terms of the Eagleford, the Markham plant, which is primarily positioned to serve the deepwater Gulf of Mexico, does stand ready. It’s got great liquids outlets and we just basically want to make sure that we don’t sell out that capacity too cheaply. There’s not a whole lot of that existing capacity and a great liquids market available, and we’re going to make sure we get a premium for having that space available.

Lasan Johong – RBC Capital Markets

I see. In terms of the transition of management team, I’m assuming this is more of a, I think Alan said this is more of the same as opposed to a signaling of a strategic break in how Williams looks going forward?

Alan Armstrong

Are you asking a question there, Lasan? I’m sorry.

Lasan Johong – RBC Capital Markets

Yeah, I’m asking do you expect to do anything majorly different than what Steve has laid in terms of foundations for going forward with WMB?

Alan Armstrong

Well, I would just say this. I think the integrated model from my vantage point of being in the business and working with our E&P group and our gas pipe group has absolutely created a lot of value. However, I think we’ve certainly got to look to see the markets fully appreciate that value, and that’s certainly going to be an important consideration as we look at our alternatives going forward. So I think it’s very early for you to conclude or anybody to conclude really where we stand on that because we will be looking at our alternatives, but I can assure you that everything is on the table and we will be not looking to sit still. And we’re looking to create rapidly accelerate shareholder value.

Lasan Johong – RBC Capital Markets

I see. One last question. If Ford curves materially improve, let’s say, 20% from where it is today how much more ramp up do you have in terms of E&P spending that you think you can do within a six month period?

Ralph Hill

This is Ralph. We had a previous forecast that had I think our growth was going to be 12% next year and then 16% the year after, and what we did is we essentially dropped about 10 rigs in 2011 and about I think it was 17 rigs in 2012’s forecast. So you know, we have the ability to go out… And that wouldn’t all happen in six months but we have the ability to rapidly ramp it back up if price signals would show that. And obviously as Don would point out, that as our cash flows would grow then that’s when we try to live within our means. So I don’t know how much would happen in six months, but I can tell you a few months ago we were planning on, with a different price deck, to have a substantially higher level of growth and we dialed that back due to prices.

Lasan Johong – RBC Capital Markets

So instead 12% and 16%, you’re going to keep doing 3% to 7%.

Ralph Hill

Correct. Yeah, 3% in ‘11 and 7% in ‘12. And that’s down from what was 12% and 16%.

Lasan Johong – RBC Capital Markets

So that means in theory you could ramp up about 9% or 10%.

Ralph Hill

We could at some point. We’d have to get the rigs and do all that, but we’ve been very successful in always being able to get good rigs, good crews. Our alliances with our vendors who pays out very handsomely in times of ramp up and it also helps when we ramp down.

Lasan Johong – RBC Capital Markets

That’s great, thank you very much.

Ralph Hill

Thank you.

Operator

We’ll move on to our next question from Ted Durbin with Goldman Sachs.

Ted Durbin – Goldman Sachs

Thanks, guys, and Steve, congratulations on your career and best of luck in the future.

Steve Malcolm

Thank you.

Ted Durbin – Goldman Sachs

I wanted to ask first question, just in terms of the drop down itself on the gathering assets, what drove the decision to take cash versus units, kind of the split that you took there? Why did you take one, why not take all of one or all of the other?

Don Chappel

This is Don. I’ll just note we had some tax considerations.

Ted Durbin – Goldman Sachs

Okay. We can follow up offline. Maybe Ralph, then, just on the rig count, where do you see the rig count going by basin? And over time, how many rigs do you plan on running in each one given the new CAPEX budget?

Ralph Hill

In 2011 we are now, we’re projecting about where we are today in the Piceance. We’ll have 11 rigs running, nine in the valley and two in the highlands. In the Barnett we’ll be down to one rig, and in the Marcellus, it’s going to, as Steve mentioned it goes from three and ultimately ends up at six at the end of the year. So on average in the Marcellus it’s more like, I hate to do this but it’s 4.75 rigs in the Marcellus. That’s more than the four rigs we had planned earlier. And as I said the Piceance is down five rigs and the Barnett is down two rigs.

Ted Durbin – Goldman Sachs

Got it, got it. Okay. That’s helpful. And then again just on E&P, it looks like you’re (inaudible) on a lot of expansion opportunities. You mentioned on one of the slides I think Marcellus, Eagleford, even Bachan. How are you thinking about each of those opportunities? How do those fit in with your expertise, your footprint, etc.?

Ralph Hill

I think they fit in well. Obviously the Eagleford and the Bachan bring a different look to our portfolio in the sense of liquids and/or condensate oil, which we’d like to have that. But expertise wise we’ve drilled hundreds and hundreds of horizontal wells. We understand how to do that so each of those areas work for us. Now we have a substantial position in the Marcellus of 100,000 acres. We’d like to continue to evaluate opportunities there and we are. Eagleford’s had some great looking opportunities out there and obviously there’s other areas such as the Bachan. We think they fit right in with what our expertise is.

Ted Durbin – Goldman Sachs

Okay, thanks. And then since you issued the guidance a month and a half ago, gas prices are obviously lower, NGL prices are higher. Are you thinking any differently now about capital allocation between E&P and midstream? Or kind of how are you thinking about that going forward given where the prices have moved?

Don Chappel

This is Don. We’ve asked our E&P business largely to live within its means, so to the extent it generates cash flows we would expect that they would likely consume those cash flows to reinvest in the business, again with a bias towards liquids-rich areas like the Piceance. In fact, we do get a lot of liquids out of the Piceance. And I would say the WPZ midstream and gas pipeline assets are well capitalized with a very low cost of capital, so we really don’t see too much in the way of corporate capital moving back into that business for the foreseeable future.

Ted Durbin – Goldman Sachs

Okay, thank you very much.

Operator

We’ll move on to Carl Kirst with BMO Capital.

Carl Kirst – BMO Capital Markets

Hey, good morning, everybody, and I’d also like to throw in my congratulations, Steve, you and Alan. Alan, actually let me ask a question just on the Marcellus with respect to projects. With the curve coming down, the conversations with 40 some odd producers I guess continuing, should we think about these as more incremental projects or do you still see sort of more Laurel Mountain-ish type of potential, singular, large scale projects that may come over the end zone some time in 2011 for instance?

Alan Armstrong

Well, certainly we are pursuing those that give us a large scale position up there and I’ve got pretty high hopes that we’ll be able to deliver on something of a similar nature to what we had in the Laurel Mountain area. On top of that, however, there are a tremendous amount of those producers that we’re talking to that infill into those assets that we’re developing, and things like the Laurel Mountain JV and other alternatives up in the Northeast Pennsylvania area, we think are going to give us first mover advantage to allow us to serve those remaining producers that we’re talking to. So we’re out there aggressively pursuing large anchor customers and then we’ll be in a position to better serve the balance of those customers.

Carl Kirst – BMO Capital Markets

Okay, so the back end of the curve coming down hasn’t necessarily eliminated or drastically slowed down talks around these large scale projects then, just to confirm.

Alan Armstrong

I’m sorry, I think we dropped you there for just a moment.

Carl Kirst – BMO Capital Markets

Just paraphrasing what you said there, it doesn’t sound like the back end of the curve coming down – again, just because of the better marginal returns in the Marcellus – it doesn’t sound like that has necessarily jettisoned or eliminated the potential for large scale projects in the Marcellus.

Alan Armstrong

The Marcellus is well positioned to survive a very low gas price environment and we’re certainly not seeing any signs of people backing off in the most prime parts of the Marcellus.

Carl Kirst – BMO Capital Markets

Fair enough. Maybe if I could kind of go further north to Redwater, what do you think has to happen? The returns are there. Clearly given all the rhetoric we’ve seen with Congress and the left on the environmental with the oil sands, there seems to be a lot of driving factors that would continue to get you guys more business up there. What has to happen to kind of break that logjam?

Alan Armstrong

Well, I would just tell you that the process of negotiating – these are very long-term, obviously those reserves are very long life. And so the contracts for them are fairly complex because they’re meant to be very enduring. And so it just takes a while to get through the contracting stage, but we are making very good progress on those fronts and look forward to making some announcements on that in the not very distant future. So don’t assume lack of us announcing anything is lack of progress. We’ve got actually quite a bit of progress that’s gone on in the last quarter up there.

Carl Kirst – BMO Capital Markets

I appreciate those comments. Maybe one other question if I could for Ralph. Recognizing this is always a bit of a moving target, but in conjunction with the back end of the curve coming down as you guys are looking to potentially deploy more capital outside of the Rockies, what should we think about what you guys are using for sort of a long-term clearing price for oil and gas? I mean should we be using the strip or you know, if you guys were to say for instance to deploy $1 billion somewhere, what do we take as far as ‘Boy, this is where they ultimately think gas and oil prices are going to trend out in the…’ call it 2020 area for instance?

Ralph Hill

Well, we have obviously several things we do. We have a point of view that past 2012 we haven’t published. We also have the market that we look at closely and we monitor what’s going on in the market at all times. And then we run low cases and we run high cases and we run stress cases. So I’m sorry I can’t give you an exact answer because we run a number of cases. Typically our point of view from time to time is pretty close to what the market’s doing. That just happens, it’s just the way it works out. But we look at so many different scenarios it’s hard to tell you exactly, but I can tell you when we do look at all these we severely stress test them to understand what it means in a low price environment, both for the oil side and the gas side.

Carl Kirst – BMO Capital Markets

Okay. Thank you.

Operator

And we’ll move on to our next question from Jonathan Favreau with Wells Fargo Securities.

Jonathan Favreau – Wells Fargo Securities

Thanks, and let me start by congratulating Steve on his retirement, and Alan as well. Just most of my questions have been touched, just wanted to ask the announcement to sell the midstream assets to PZ, I mean it sounds like you want to deploy capital into more E&P assets. How do you weigh that against potentially doing a share repurchase?

Don Chappel

This is Don. I would say we’re looking at capital redeployment at very attractive after tax rates of return using kind of the price scenario that Ralph laid out with we think a reasonable view of prices, and then also stress testing that and say “How bad could it be and would we still earn a return that’s worthwhile?” And if we have terrific opportunities, and particularly if we can do so in a way that broadens our footprint and perhaps also broadens our commodity mix, that would be interesting to us.

In terms of stock buyback, I think our view to date has been in this very low price environment and in a very uncertain economy we just don’t have much in the way of firepower to buy back stock without facing ratings downgrade. So as Alan said, all the options are on the table. We continue to look at all the options but to date we have not chosen to go down that path, but as Alan indicated we continue to look at all the options and we’ll do that whenever we make a decision on redeploying net capital.

Jonathan Favreau – Wells Fargo Securities

But if I hear you correctly the preference is to do an E&P acquisition versus share buybacks.

Don Chappel

I think, I mean clearly we think that the share price is an attractive one but we certainly don’t want to face a downgrade in order to do that because that has broader implications. So we’ll look at all the options, we’ll look at the potential consequences and benefits and make a decision that we think is in the best interest of the company and the shareholders.

Jonathan Favreau – Wells Fargo Securities

Thanks so much and thanks for the time.

Don Chappel

You’re more than welcome.

Operator

Our next question comes from Steve Maresca with Morgan Stanley.

Steve Maresca – Morgan Stanley

Hey, good morning everybody, and Steve, I’d also like to wish you thorough enjoyment of your retirement.

Steve Malcolm

Thank you.

Steve Maresca – Morgan Stanley

So a couple questions. I see you got cash on this drop down, and I know you’ve discussed and I’ve read under review Bachan, Eagleford evaluating. How imminent is something? How available are properties in these areas? Some color on that maybe.

Ralph Hill

This is Ralph. I wouldn’t comment at all on the imminent side of the world, but I can tell you as you probably know there are a number of opportunities in all these basins. There always are but there appear to be more than normal at this time. So there’s just a lot of opportunities there. But as Don has said, Steve has said and Alan said that there are a number of things we take into account when we look at that. So we evaluate continuously, my group and the rest of the groups here at Williams, opportunities. We see one that we think creates value we bring it to the table and we talk about it, and we try to see if that’s something we want to do. So there’s just a lot out there right now but there typically is in this industry.

Steve Maresca – Morgan Stanley

Okay. And then looking at your guidance, I don’t think you changed production guidance for this year which would sort of imply pretty significant sequential growth in the Q4 from the Q3. One, am I accurate in looking at it that way? And I guess two, what would be driving that?

Ralph Hill

Well, it’s just the- Yes, you are accurate in looking at it that way. And it’s just we, the rest of the decline that we had, when you’re coming off of for example 28 rigs in the Piceance and you’re going down to what we went down to was then and now we’re at 12, that’s a huge decline that you overcome when you just look at the way these (inaudible) wells come on, or any kind of wells that we drill now.

So we’ve overcome that decline from the number of rigs that we’ve dropped, and now that we’ve done that the volumes are starting to tweak back up. You see that we had a 2% growth I believe company-wide sequentially and in the Q3 versus Q2 I think Piceance itself was up 5%. So the big driver will be the Piceance and then also we have the new basin where we’re starting to get a little traction on in the Marcellus. But you are seeing it correctly that we have arrested the decline, we’re actually growing again and we’d expect a decent growth in the Q4.

Steve Maresca – Morgan Stanley

Okay. And then my final question is, so you updated guidance a month ago and gross CAPEX went up at WPZ and obviously some of that has to do with this recent drop. Is there anything else that was added in the past month or is it all because of the new assets coming in?

Alan Armstrong

There is some additional capital in there from the midstream side associated with the more rapid expansion of our Laurel Mountain System, and so that’s one of the primary drivers of additional capital in there.

Steve Maresca – Morgan Stanley

Okay. Alright, well thanks a lot guys, and again, best of luck, Steve, and thanks.

Steve Malcolm

Thank you.

Operator

Our next question comes from Faisel Khan with Citi.

Faisel Khan – Citi

Good morning. Steve, congratulations on your retirement and we wish you all the best here.

Steve Malcolm

Thank you.

Faisel Khan – Citi

Alan, on the liquids volumes for the Q3, they were down sequentially versus the Q2. Can you comment on any outages or what was going on there? Maybe main rejection?

Alan Armstrong

Sure. Really there was two primary issues there that did effect it, and you are right – it’s actually a pretty substantial reduction in our equity gallons. First of all in the Mobile Bay area, we had Exxon, who is the big producer into Mobile Bay, had some outages on one of their offshore pipelines completely unrelated to the drilling moratorium that reduced input coming into the plant substantially. In addition to that, though, we also, the way those contracts work, they have rights to take their liquids for a certain number of months over the year, and it just so happened that that piled up, their option piled up in this quarter. It’s actually our election and so with their outage we elected to give them the liquids in that period when there was an outage. So that was by far the largest.

And then out west we had reduction related to a forced measure that we got from One Oak at their Bushton fractionator, and that backed up all of our plants in the west. They had some difficulties maintaining with the volumes ramping up so rapidly coming out of the west. They’ve had some difficulties keeping their infrastructure out in front of that, and that resulted in a forced measure that did impact our western volume. So all in all we are really well positioned right now with our Echo plant being now up, which just really got spinning here towards the end of September. And we’ve gotten some of the line problems resolved that we had on the Perdito tie in, which were effecting our Markham volumes as well. So going into the Q4 here we are really well positioned to get back on track on our liquids production and grow that pretty rapidly.

Faisel Khan – Citi

Okay, great. On the E&P side, Ralph, is there any point in time when you look at price that you maybe look at shutting in production?

Ralph Hill

We’d done that a little bit last year and the primary was in the Powder. And so we look at it from time to time, but at this point we’re not contemplating any of that. We’re about 56%, 60% hedged. We have a number of things that go into that; if you’re shutting in it’ll complicate that. So it would need to be for a substantial period of time – we don’t see a reason to do that.

Faisel Khan – Citi

Okay, gotcha. And if you look at these kind of more liquids-rich opportunities, do you think that given all the transactions that are taking place the prices are too high? Or do you think they’re still reasonable?

Alan Armstrong

Well, it depends on where you’re looking and if you’re in the sweet spots or not, but we think in the- Generally we think we know where the market is in our areas of interest. We feel we know what it takes to win in certain areas, so to the extent we find something we think from a technical standpoint hits our sweet spot then I think that’s when we’d try to move something forward. So, so many transactions are out there it’s hard to say which ones are good or bad, but we look at it first from the technical standpoint. If our exploration team likes it, our engineer likes it, it hits in what we evaluate, what we call the sweet spot, then that’s something we’ll be more aggressive in looking at than other fringe areas.

Faisel Khan – Citi

Okay, gotcha. And then with the write down that you guys took, is there going to be any impact to DD&A or reserves?

Alan Armstrong

The reserves report will come out at the end of the year. We don’t, the reserves are based on different things. The reserves are basically on the average of the first month prices for twelve months and the gas prices this year are higher than last year if you average that in. So that’s not really an impact on reserves. On DD&A, yes, we do see an impact to our DD&A. It’s probably going to go down about $0.10 to $0.15 company-wide for 2011 and about $0.10 again in 2012. That has been baked into the guidance. Basically as you can see the previous guidance, at that time we owned what we call the Piceance gathering assets, we also called that Bargatt. We owned those, they were previously in our guidance – not it’s out of our guidance. But we did get some DD&A pickup on the other side, so in general you see our guidance didn’t really change – they kind of offset each other.

Faisel Khan – Citi

Okay, gotcha. And last question on (inaudible). I notice you guys put a couple slides into your data book on Echo, Argentina, specifically I guess some of the exploration plays you have in Columbia. I guess are those sort of prospects pretty substantial or how are you guys looking at that?

Alan Armstrong

Well, the activity around us, the other operators around us, they’ve had great successes there. So it’s, we’ve bought into those concessions. We’re excited that in one of them we’ll start drilling next year and the other one we’re still doing seismics on. But the operators in that area have done very, very well so we think it’s time to make sure everybody understands that we have interest in those areas.

Faisel Khan – Citi

Okay, great. Thanks for the time.

Alan Armstrong

Thank you.

Operator

We’ll take our next question from Holly Stewart with Howard Weil.

Holly Stewart – Howard Weil Incorporated

Good morning, guys. Congratulations to Steve and Alan, both of you.

Alan Armstrong

Thank you.

Holly Stewart – Howard Weil Incorporated

Most of my questions have actually been answered at this point, but Ralph, I know it’s still very early in the Marcellus for you guys but you’ve outlined some particular areas in your presentation. So can you just talk about well results to date? I know you referenced in the slides some of your best wells being the Westmoreland County. Can you just kind of talk about that from a bigger picture standpoint?

Ralph Hill

Yeah, the Westmoreland County area, and again, we took over operations just a few months ago but what we’re seeing in our first handful, our first several wells there is that 90-day flows in some of the areas are still above or at the 3.5 million a day tide flows, so we’re impressed with that, we like that. So we’re just still learning, understanding, but we like all the areas we’re in. And obviously we’re excited to do a lot more in Susquehanna County. We’re only running one rig up there now and obviously we have some completions that we’re backing up on because of the delay in the Laser Pipeline.

But in general all the Clearfield, Westmoreland and Centre Counties are doing very well; Westmoreland’s doing slightly better. And I think Susquehanna as you know will do much better than any of those once we get there. So we’re excited. We’ve brought in a fit for purpose Patterson rig, we’ve brought in a rig from H&P from the Rockies, so we’re happy to have at least two of those rigs that are fit for purpose. We’ve contracted for some more. And again, it’s just kind of like what we see happening in the Piceance – when you get the right crews, the right equipment, and get the opportunity to move it into more of a scale operation we think the efficiencies will come like we’ve seen in the Piceance.

Holly Stewart – Howard Weil Incorporated

Any test rates on the Susquehanna wells?

Ralph Hill

Not from us, but we’re intermixed with, for example, Cabot and others, and you’ve seen their results. And we’re right in the middle of all that so we’re anxious to have it when that comes on. And hopefully Laser will come on mid next year so we’ll start completing before that, and have some good results for you.

Holly Stewart – Howard Weil Incorporated

Okay. And given the delays that you’ve seen with Laser and then your pullback with capital, what’s your kind of expected timeframe now to achieve this goal of the Marcellus being the second largest producing basin for you guys?

Ralph Hill

Well, we said that would happen by I think within this, when we gave our kind of longer-term forecast which I think went through 2015. And based on the four rigs averaging in the Marcellus going up to, in 2012 we currently have a build up to ten rigs and it goes up a little bit more after that. We still can easily make that in the next four years or so.

Holly Stewart – Howard Weil Incorporated

Next four years.

Ralph Hill

Yeah.

Holly Stewart – Howard Weil Incorporated

Okay, and then finally just from an integrated model standpoint, how can that help you alleviate the delays you’re seeing in the Marcellus from an infrastructure standpoint?

Ralph Hill

Well, at this time the only delay we have is with Laser and we’ve got our other facilities in what we call the Shannon Compression Station and the other gathering facilities and all that, and the other areas in Clearfield County and Westmoreland – they’re in good shape. The Laser is not part of us or our midstream group so that doesn’t help us in that particular area. However, as you know, Laurel Mountains has really more of an outlet to the south, what it’s got there, and there is- As LMM continues to grow and expand maybe there’s opportunities in the future – who knows – for consolidations. And that would be great if LMM would be out there being a consolidator and being able to take over some of those things.

Holly Stewart – Howard Weil Incorporated

But you feel like you’re pretty set in terms of- You’re growing production or you’re anticipating growing production in a pretty meaningful way here in the Marcellus. Do you feel like you’re pretty set from an infrastructure standpoint over the next couple of years?

Ralph Hill

We think we will be, yes.

Holly Stewart – Howard Weil Incorporated

Okay. Great, thanks guys.

Ralph Hill

Thank you.

Operator

Our next question comes from Kevin Smith with Raymond James.

Kevin Smith – Raymond James

Hi, good morning, gentlemen. What do you think your rates of returns are now in the Piceance Valley and Highlands on the drill bed?

Alan Armstrong

We’re showing in the Piceance Valley we believe our returns are, I’ll just give you a range – 35% to 40%, and in the Highlands they’re more upper teens, so 17%, 18% type returns. And the Highlands next year all we’re going to drill at this point will be in the Ryan Gulch area. Obviously we pulled that capital so those returns are really focused in the Ryan Gulch, although that still is kind of a combination of what we would call Ryan Gulch/Trail Ridge wells. So Ryan Gulch would have a slightly higher net; the number I gave you in the upper teens is really kind of a hybrid of the Trail Ridge and the Ryan Gulch.

Kevin Smith – Raymond James

Okay, so are you going to be having enough activity now in the Highlands to keep production flat and then slightly grow it in the valley? Is that the right way to look at it?

Ralph Hill

Well the valley will clearly grow, and the Highlands has been growing. It’ll be a challenge to keep it flat but the teams, we probably would need to, with two rigs it’ll be tight. We may decline in the Highlands some.

Kevin Smith – Raymond James

Okay. And outside the Marcellus is there any other areas you’re actually expecting to grow production?

Ralph Hill

Production generally will be flat in the San Juan and it’ll be slightly declining in the Barnett.

Kevin Smith – Raymond James

Okay.

Ralph Hill

We have a number of completions we’re backed up on in the Barnett that’ll keep that so it can remain- It will go down but it won’t go down as much as you think by dropping to one rig.

Kevin Smith – Raymond James

Are we still seeing takeaway activities backed up in the Barnett or is that just sort of timing of when you decide to do the projects?

Ralph Hill

Really Barnett is much more of a permitting side of the world, which basically is somewhat strange, but it’s on the compression facilities and water facilities. It’s not the takeaway capacity for us as much as it is on just permits in some of the areas we operate in, on trying to do what we think is the best practice – build centralized water facilities and larger compressor areas just to be more efficient.

Kevin Smith – Raymond James

Fair enough. All my other questions have been answered, thank you.

Ralph Hill

Thank you.

Operator

Our next question comes from Yves Siegel with Credit Suisse.

Yves Siegel – Credit Suisse

Thanks. Just some quick follow up questions. One, on the E&P side do you think of asset dispositions at all? I mean does it make sense to maybe exit the Barnett shale and redeploy cash flow elsewhere?

Alan Armstrong

Yeah, I think we look at all options like that and that is an option that’s out there. It depends on what’s going on in the marketplace but Barnett has been frustrating simply from a standpoint of a lot of what we saw was just a complete delay in the opportunities to get the facilities we needed to. It wasn’t the drilling permits – just actually to get the facilities done to get our gas to market, and that caused a chain link or chain reaction in losing value.

Yves Siegel – Credit Suisse

Did you have discretion in terms of the timing of the write down? Could you have waited until you reported year end to do that or was it something that you were required to do at this time?

Alan Armstrong

Well, it’s something yeah – we’re required to do. And really in this aspect it’s something we actually look at all the time and in last year’s queue we basically talked about that there are certain triggers we would look at. One would be if the forward market price, and again this is the forward market price through 2025, would happen to decline by more than 20% we would have to take a look at this. And it did, but we look at it every quarter anyway, but for this particular quarter the forward market price is down substantially and it’s just an automatic check. We don’t have the opportunity to pick when we want to do that.

Yves Siegel – Credit Suisse

And then if I could, just two other quick ones. Do you have an opinion on using shale plays as storage type of facilities at all? Do you have an opinion on that one way or the other?

Ralph Hill

This is Ralph. I do not. I don’t know if any other team does here. No.

Yves Siegel – Credit Suisse

Okay, that was just an off the wall question. And then the last question is when you look at potential growth CAPEX, it looks like there’s a real big chunk of opportunity in the Gulf of Mexico. Could you elaborate on how you think about that going forward?

Alan Armstrong

Sure. A lot of continued opportunity out there. The (inaudible) Canyon area continues to be a very active area and certainly underserved from an infrastructure standpoint, and we think we’re very well positioned to capture some of that business out here, and as well continuing to grow the infrastructure out of the Eastern Gulf area out of our Devil’s Tower facility as well. So we continue to see a lot of opportunity out there. And our GulfStar generic platform, basically, that is now well designed and really ready to be deployed we think can add a tremendous amount of value to producers out there, and we’re continuing to have a lot of interest in that. I think all that has to really change out there, and I’m not predicting how rapidly this will change, but I do think that what’s going to be required is for the producers to gain confidence that even though the moratorium is lifted that permits will actually be processed in a timely basis and in a reasonable fashion. And I think everybody’s waiting to see on that front. But if that does happen then there is a tremendous resource out there and it’s going to need a lot of infrastructure, and we’re very well positioned to serve that.

Yves Siegel – Credit Suisse

And just from the realization of cash flow, is that a long lead time? Would you be able to do it incrementally or would there be a big lag between dollars invested and the start of incremental cash?

Ralph Hill

I think generally from the time that we really start investing dollars on many of those projects to the time we’ve got cash flow is about, the smaller projects would maybe be a year and a half and the longer projects would be three years. So the answer to your question is yes, in terms of that capital, those large capital dollars being deployed; however, as you know where we’ve got infrastructure already there and production gets tied into that, that comes on pretty rapidly for us. And so there’s a mix of that, but in terms of the capital, those large chunks of capital that you see in our potential pie there, most of that would be probably in the 2.5 year range from the time that we would be investing heavily to the time we’d see cash flows come back.

Yves Siegel – Credit Suisse

Got it. Thanks so much.

Don Chappel

This is Don. Just on your impairment question, I’ll just remind everyone that in 2008. 2009 many, many companies across the industry took very large write downs. We did not, so while we took a write down this quarter we hadn’t had any large write downs back in the ‘08/’09 period when many, many other write downs were taken.

Alan Armstrong

Yeah, Don, just to follow up on that. The 20 peers that we track, I think they took write downs of approximately $52 billion those two years.

Operator

That concludes the question-and-answer session for today. At this time I’d like to turn things over to Mr. Steve Malcolm for any additional or closing remarks.

Steve Malcolm

Well thanks for tuning in. We’re excited about the future. Our best of class assets, a strong balance sheet, significant inventory of growth opportunities and a talented and dedicated workforce we think will translate into significant shareholder value growth in the future. So thank you very much. Bye.

Operator

Ladies and gentlemen that does conclude today’s conference. Thank you for your participation.

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