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Williams Companies, Inc. (NYSE:WMB)

Q2 2014 Earnings Conference Call

July 31, 2014 9:30 AM ET

Executives

John Porter – Head, IR

Alan Armstrong – President and CEO

James Scheel – SVP, Northeast G&P

Donald Chappel – SVP and CFO

John Dearborn – SVP, NGL and Petchem Services

Analysts

Christine Cho – Barclays Capital

Shneur Gershuni – UBS

Brian Lasky – Morgan Stanley

Abhiram Rajendran – Credit Suisse

Theodore Durbin – Goldman Sachs Group Inc

Carl Kirst – BMO Capital Markets U.S.

Sharon Lui – Wells Fargo Securities, LLC

Craig Shere – Tuohy Brothers

Christopher Sighinolfi – Jefferies

Bradley Olsen – Tudor, Pickering, Holt & Co.

Operator

Good day everyone and welcome to the Williams and Williams Partners Second Quarter Earnings Release Conference Call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. John Porter, Head of Investor Relations. Please go ahead, sir.

John Porter

Thank you Rochelle. Good morning and welcome. As always, we thank you for your interest in Williams and Williams Partners. Yesterday afternoon, we released our financial results and posted several important items on our websites, williams.com and williamslp.com. These items include yesterday’s press releases with related schedules and the accompanying analyst packages, the slide deck that our President and CEO, Alan Armstrong, will speak to you momentarily and an update to our data books, which contain detailed information regarding various aspects of our business.

In addition to Alan, we also have the four leaders of our operating areas with us, Jim Scheel leads our Northeastern G&P operating area, Allison Bridges leads our Western operating area, Rory Miller leads our Atlantic Gulf area and John Dearborn leads our NGL & Petchem Services operating area. Additionally, our CFO, Don Chappel is available to respond to any questions.

In yesterday’s presentation and also in our data books, you will find an important disclaimer related to forward-looking statements. This disclaimer is important and integral to all of our remarks and you should review it. Also included in our presentation materials are various non-GAAP measures that we’ve reconciled to Generally Accepted Accounting Principles. Those reconciliation schedules appear at the back of the presentation materials.

So with that, I’ll turn it over to Alan Armstrong.

Alan Armstrong

Great. Good morning John and good morning everyone. Thanks for joining us. Certainly the second quarter was very exciting for Williams as we seized the opportunity to make an important acquisition that moved us closer to fulfilling our vision of being a premier provider of reliable large scale infrastructure that really has become very clear to everybody that this kind of large scale infrastructure is going to be absolutely critical to allow North America to take advantage of its fast natural gas resources. We also rapidly accelerated our earlier stated plans of establishing WMB as a pure-play G&P hold-co and continue to lead the space and dividend growth by very wide margin.

At WPZ, we had another strong quarter with operation performance being in line with our expectations and driving a 30% increase in distributable cash flow at WPZ. We also enjoyed great progress in execution on a number of very important projects in the second quarter, a tremendous amount of work going on in the organization on this front and just to name a few and you really only hear about the very largest projects, but a tremendous amount of efforts going on across the organization, but just to name a few Gulfstar, Keathley Canyon, the condensate stabilizer at Oak Grove and Ohio Valley Midstream area, the new ethane line which is being completed in the OVM area and we also started construction finally on the Rockaway Beach Lateral after a very long and drawn out permitting process.

So for those of you there in the New York you look at see some of that work going on in fact on the front of our slide you see some picture of that. So that’s going to allow us to bring that project in on schedule as well. So a lot of very big projects that we made tremendous progress on and remain on schedule on some of those major projects.

We also saw continued strong demand for our services with two significant new market pull projects on Transco that were fully contracted and I think it’s becoming pretty evident that Transco discontinues to line up these hits and I’ll tell you that’s not slowing down in terms of continued business development opportunities just keep coming at us in that business line.

The Marcellus area volumes continued their rapid growth as well with a 31% increase in gathered volumes as compared to last year’s 2Q volumes and we are on track once again to lead the industry on volume growth in the Marcellus this year.

Our Geismar E&C efforts were in line with plan and our rebuild was completed last week. Our final efforts on the expansion will be done by the end of next week. So our E&C team, our engineering and construction team is wrapping up and moving out as we now are turning that important solely over to our operations team.

Unfortunately and certainly this is something we’re all very disappointed around here with, but unfortunately did find a new concern there at Geismar that is going to require enhancement to our safety systems that we expect to cause about a six to eight week delay in the first sale at that point at Geismar.

As I mentioned this is certainly disappointing to us but as difficult as this is, I’ll tell you, I am proud of the fact that our organization will always put a safety of our people first and this is certainly just our organization following those words with action by having the courage to pause and do the right thing in terms of making sure that, that plan is as safe as possible.

So even though this is an out of the norm situation here, I know this is such a big issue, I really would like to take you back to the appendix and if you look back on, I believe it is slide 14 in this deck and we’ll move that on our webcast even though it is out of order here.

You will see that on slide 14, we show the incredible progress that has been made on the expansion and the rebuild and the pre-commissioning efforts which were all but complete and will be complete at the end of next week in terms of getting all of our systems turned over to operations. So what does that mean, it basically means systems like our steam systems, all of our auxiliary systems and we break those down in to about 62 different systems and as those are mechanically complete, we turn them over to our operations team for them to take control of those facilities.

And so we were finalizing some of the release valve study that was required as a result of the event of June 13th, we determined and were frankly a bit surprised but determined that there was another scenario that we needed to be prepared for in the event of a blow down or the event of an error at the plant and the malfunction of the plant.

And that assumption that we embedded has required us to do go back and study the press release system and we determine as we did that that we actually had to make some further modification to the relief valve system again certainly a tough decision to do that, but again I think absolutely the right line when it comes putting a safety ahead of anything else in our business.

So you can see here in July 31, we are started on that relief valve system and modifications, we had a lot of this, the plant already buttoned up and in many cases lot of the systems were dried out, we haven’t open the system back up now and so that introduces moisture into the system.

So when you see that plant dry up, it’s basically backing up on some of the systems that we had already turned over. And so we think the relief valve system modifications will take about seven weeks and in parallel that as we start to complete, button up some of those systems will start to dry out and will start tuning up some of the cracking furnaces there and so that’s the second blue part that you see they are called plant dry out and hydrocarbon introduction.

And then finally moving us to a first week in October as we start to get into ethylene production and so one of the things I would like to clear here that is certainly our target. We think that is a very achievable target, but in terms of our financial projections, just given the number of issues we face there we have spread that contingency up and basically we have the range in our financials now just basically starting with that first ethylene production running through the end of the year and so that’s the range of outcomes that we’ve got to built into guidance now.

So we are building ourselves some additional contingencies in there beyond what our targeted date is there. So that’s our detail and we’ll be happy to take any questions on that later John Dearborn will be here to help address in that as well.

Moving on now to the rest of the presentation and on the Slide seven, it’s really a impressive growth numbers continue to be posted were both WPZ and ACMP and that continues to drive very impressive cash flow growth at Williams and this is especially impressive when you consider that in the second quarter, we only recognize about two months of business interruption coverage there Geismar.

And so our fee-based revenues in the quarter continue to steady march up into the right and despite a very mild second quarter in terms of any weather on our pipeline systems, we still continue to move that up about 7% over 2Q of last year on our fee-based revenues and I think also important were well over 80% of our reported net revenues were coming from fee-based services.

It also should be understood much of the big capital investments that we’ve been making here really over last two and half, three years, don’t start producing cash flow until the third quarter and fourth quarter of the year as Gulfstar, Keathley Canyon and our OVM or Ohio Valley Midstream investment really began to generate significant cash flow and earnings here in the last half of the year.

And then of course ACMP continues, it’s very steady progress up into the right as this group continues to benefit from its very tight focus on growing the gathering the compressions business in the nations very best natural gas basins. So I’m very pleased with the way the business is continuing to expand and we’ve got a really exciting last half of the year in front of it.

Now looking at some of these important growth drivers that we continue to focus on and report to our investors. One item of significance been added to this was you will see there at the bottom is the ACMP acquisition and in terms of results, pretty impressive work by our finance and legal teams this last second quarter moving from price agreement with GIP all the way to closure within a matter about five or six weeks. So very impressive work by that team and just continues to shine light on the kind of town we have around here and our commitment to continue to drive shareholder value here at Williams.

And so this was, the half year represents a tremendous amount of effort really across the whole organization and with the exception of Geismar we are very pleased with the results on the store card here as we pause here in first part of third quarter. Now there is certainly many E&C projects that are nearly complete and now we are beginning to turn our attention on the next waiver projects that just keep coming, things are very well positioned assets and the competitive advantages that we constantly focus on developing.

I’ll tell you that’s a very natural part of the way we run the business here at Williams and a lot of these major large scale projects that we take on and the challenges that we take on really are in support of making sure we maintain strong competitive advantages in our business.

So moving onto Slide nine and looking forward here to this next waiver project, we see that this list is long and it just keeps coming. The bulk of the large projects in 2015 come from our Atlantic Gulf region that continue to perform very well, Atlantic Gulf region continues to execute and continues to hit this number on a regular basis.

And we certainly are, as we look here at the projects in ‘15, many of these are really in the major projects are expansions of our Transco and our gas pipeline system in the Atlantic Gulf area, projects like Kodiak for instance really are capital led to tie back to an existing facility and we do have continued what we call program capital as we continue to build up northeast GMP but a bulk of our major projects have really in the northeast, a lot of that is getting out of the way this year and we’ve really set ourselves up for a lot of big fundamental growth looking forward beyond 2014 in the northeast.

The major projects in 2017 really come on light in the year but our backlog of projects beyond 2017 just keeps building and you really should expect this to continue for some time as we bring the combined strength of both WPZ and ACMP now and bring those resources together and the opportunities that they combination brings really is going to be critical as the nation here tries to get up on a 100 Bcf natural gas market. We think Williams and the combined entity is going to be very much at the forefront of reaching that 100 Bcf today gas market here in the U.S.

So moving to Slide 10, I’m kind of looking at the big picture of what this new MLP would be, we are, we couldn’t be more excited about, not only the size, the scale of this MLP, but the very consistent focus on being the player in the natural gas phase and natural gas products and derivatives they are coming out of this big road to natural gas and we think the combination of Williams access just continues to load us towards more and more growth, just some important things to note on here that are very impressive in 2015 and expected EBITDA of about $5 billion and in addition to that continued best in class growth distribution of 10% to 12%, which is really impressive when you consider the scale and what it takes to grow the cash distribution in this business and something of this scale.

And so continuing to be able to do that through 2017 and maintain strong coverage really provide an investment vehicle that we think is absolutely unmatched and is going to continue to give us the kind of firepower to continue to expand this business larger and larger.

So, couldn’t be more excited about the combination of this business and if you look on slide 11, this really conveys the breadth here that Williams has but it also shows really what ACMP is doing for us in the upstream piece of our business and if you think about the way, we have genuinely grown a lot of our businesses over the year, we basically have linked and levered either the market back into the upstream or we have taken the upstream and the gathering & processing business and move those opportunities downstream certainly nothing is more obvious about how we have done that in recent times, you know many times over the years nothing is more obviously than the way that’s is going for us up in the Susquehanna supply area and the ability that we have generated may large projects off of about brig upstream growing volumes there.

So, if you look at that and think about ACMP today on a operated gathering volumes PZ and ACMP are every close to the same number and if you look it on a capacity basis WPZ is larger part of that just because of the legacy large scale assets that we have had out in the Western basins.

But nevertheless very impressive position in the gathering space upstream and our ability continue to deliver services and link that to service opportunities for our customers downstream this basically just reloads our set of opportunities in continuing to grow that, I can tell you didn’t feel like we needed a lot of that but nevertheless I have got a lot of confidence in not just the assets but the combination of the people of ACMP and Williams, there is some incredible strengths at ACMP that frankly we are very excited to have hitched to our wagon and a lot we can learn frankly from expanding the upstream gathering business and a great job they have done there and what PZ brings to that of course is the ability to continue to expand opportunities beyond that. So, tremendous strategic fit as well as a great financial for Williams and WPZ.

So, moving on to slide 12 here, really couldn’t be more excited about how we are positioned strategically right now and thrilled to see the ACMP piece come along, it further fills our hand out and this scale and the opportunity set that we have and the growth that we have, we think is unmatched.

And we have a very fired up organization I can tell you right now, very excited to take on these new opportunities both at the ACMP level and at the Williams level. So, very excited about the quarter, disappointed with Geismar but extremely excited about the second half of this year and the kind of growth we are going to get to witness here in the second half of the year.

And with that, I’ll turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And first we’ll hear from Christine Cho with Barclays.

Christine Cho – Barclays Capital

Good morning everyone.

Alan Armstrong

Good morning Christine.

Christine Cho – Barclays Capital

Your other fee revenues in the Northeast doubled quarter-over-quarter even though NGL production didn’t change that much. I am assuming that this is the condensate handling that came on during the quarter. When did that come on and how much of the 6,000 barrels per day capacity are you using currently?

Alan Armstrong

Jim can you take that please?

James Scheel

Sure, Christine good to talk to you again. That’s correct, that’s the stabilizer fee revenue and the stabilizer came on, it was 50% of the stabilizer I should say came on you can see we have the first phase of 6,000 barrels a day come on in April of this year.

Christine Cho – Barclays Capital

And that how much of that capacity are you currently using?

James Scheel

We are using about half of that today and that’s growing as additional wells come online. We have got about 73 wells coming online for the balance of the year.

Christine Cho – Barclays Capital

And then if you’re GPM of the gas is 8 or something like that how much of that is condensate is 10% is a fair assumption?

James Scheel

I am not 100% sure on that Christine I had to get back with you but I think that’s pretty close, it is probably in the 8% to 12% but I don’t know exactly that number.

Christine Cho – Barclays Capital

Okay, that’s fine. Also the de-ethanizer getting moved up by a quarter. Did this impact volumes in second quarter at all meaning did anyone have to shut in wells because the gas wouldn’t meet pipeline respect with ethane in it?

James Scheel

No, we haven’t had any of those issues right now although that continues to be concern a Christine. The de-ethanizer had no impact in the second quarter, actually even if it had been online we wouldn’t have had the opportunity to move ethane because of some other downstream issues, we are right now working to commission that asset and it should be up during the third quarter.

Christine Cho – Barclays Capital

Okay, great. And then Alan or Don I think you have told in on a prior call that you guys have – your first refusal came into – it came in energy too JV position but what about on the ACMP side you know there are some partners who are backed by private equity in E&P companies who may or may not want to a minority owner in such assets in the longer term and I would think that they would want to monetize at some point with the combined ACMP/WPZ MLP have any first rates there?

Alan Armstrong

You know I am not sure what the confidentially terms are for ACMP on that issue. So, we’d rather not comment on what their rights are there I would just simply say that we do feel like we are very well positioned to consolidate a lot of those assets in the Utica there I am pretty excited about Blue Racer – what our opportunities to consolidate look like there?

Christine Cho – Barclays Capital

Okay, great. And then while I think its consensus opinion that the first part of the deal of ACMP is accretive I think there is some confusion in the market as to whether or not the second part of the deal adds to that accretion or chips away a little from that accretion is there any clarification you can provide?

Donald Chappel

Christine its Don. Since the merger is currently being negotiated or about to be negotiated between the two partnerships I don’t want to go too far on this. But certainly the way we styled it Williams would take reduced cash flow in the early period and enjoy higher cash flows, higher growth beyond so, likely mildly dilutive initially and then turning around pretty quickly.

Christine Cho – Barclays Capital

Okay, perfect. Thank you so much.

Operator

And we’ll next move to Shneur Gershuni with UBS.

Shneur Gershuni – UBS

Hi, good morning guys.

Alan Armstrong

Good morning.

Shneur Gershuni – UBS

Alan in your prepared remarks you talked about market pull of projects and so forth it seems to have come to fruition during the quarter. I think in your slides you had said that you got about a backlog of 25 billion at WPZ and another 4 billion at Access. Any sense on how large this backlog could potentially grow in terms of order of magnitude, are we talking in the neighborhood of 10% to 20% or are we talking to something significantly higher assuming you are able to commercially negotiate some projects and so forth?

Alan Armstrong

Yeah, you know I think a couple of thoughts on that. One, we may actually see a lot of opportunities that come to us that require less capital so, higher earnings and better return but less capital as we look at opportunities between the two. So I would just say the opportunities may not be measured in capital and will be measured in earnings growth.

But I will just tell you that the number of opportunities that just keep coming at us along the Transco system and on the northwest pipeline system as the market continues on the demand side to try to figure out how to take advantage of all this low cost gas and continued confidence in low cost gas is pretty impressive that given what a deficit we had in storage this year and we are sitting in sub 4 gas price really tells you the confidence that the demand side has and the supply capabilities, the long-term supply capabilities of the gas basins. But what that’s developing is a lot major downstream project

And so I would tell you, I think a lot of our growth is actually going to come from that and our ability to connect the supplies into those opportunities and of course all of that new gas supply leads in to both natural gas liquids and olefins as well as we produce that gas we got to something with the liquids and find market to those liquid.

So, I would tell you rather than the ACMP combination driving a lot of capital increases, I would say it’s slightly going to drive in the northeast, it will drive some higher earnings but perhaps I don’t know that it will reduce our capital but I would say a lot of it would be just higher earnings in here.

Shneur Gershuni – UBS

Great a couple of quick follow ups, we saw some ramps in volumes in the northeast and you didn’t have any change to your 2015 guidance, is it fair to say that the way the northeast acted in the second quarter is exactly the way you wanted it to, it is running according your plan and you would expect to see a significant acceleration in 3Q and 4Q. I was wondering if you can sort of walk us through the ramp as to how we go from 1Q and 2Q of this year as to how we end up with kind of the guidance for 2015 in terms of where you expect the big pick up in ramp acceleration to…?

Alan Armstrong

That’s an excellent question and I’ll tell you I am very excited what we are seeing there in the engagement I’m going to ask Jim Scheel to provide a little more color on that, thank you for asking the question.

James Scheel

Yeah I’ll answer that in a couple of phases. I think we are very excited about the progress we are making in the Susquehanna supply hub or ABA area. We are right on target and actually probably a little bit ahead of where we wanted to be. We have a lot of projects coming online during the third and fourth quarters of this year, they will be on time-on budget. We’re growing those volumes by about 34% versus prior year as we come out of the year and quarter-over-quarter this year we’re up 8%.

So obviously we’ve always wanted to do better up there and smash more gas in to the system but we’re right on target with where we want to be. OBM has been a bit of a different story, it’s very consistent with the last analyst day in the last earnings call.

You can actually see on page 20 of the book that we’ve lowered our average volumes for the year, that’s primarily due to a number of producers having some challenges at the front end of the year and so we are seeing the way on wells coming online.

But we will actually end the year higher, we adjusted the number for the year end at 420 and again as I’d mentioned a bit earlier, we have a number of wells, we have lots of visibility on getting ready to come online.

We have 73 wet Marcellus and in addition to that some dry Utica wells that’s not included in that overall number that could actually add to some of the volume but obviously that will be at a bit of a lower rate. Our biggest issues right now as we look into the third quarter are commissioning the assets that will drive some incremental fee revenue, you’ll see our fee revenues increasing and then just seeing when the producers tie those lines in.

L&M is on target with where we expect for the most part and will end the year about 25% higher than last year as well. So, although there are challenges in the northeast that we’ve been seeing around OVM on the producer side; the good news is unlike past discussions the assets seem to have the reliability in order to move the gas and we’ll be able to meet our customers’ needs as we go through the third and fourth quarter with the incremental processing options for them.

Shneur Gershuni – UBS

Great one last question if I may. Just if we can turn the Geismar obviously a disappointment that it wasn’t able to start up on time so forth. I was just wondering if you can sort of elaborate a little bit on the safety issues, did it come up in the inspection process and sort of prevent a permit from being issued or is this something that you’ve just decided to do over and above the process in all permits and everything is in place. I was just wondering if you can give us a little bit of color around the safety measures that are being enhanced?

Alan Armstrong

Yeah let me have John Dearborn take that, he’s been right, square in the middle of that.

John Dearborn

And thanks for the question, very insightful question the way you ask it. And to take on the first part of your question as to whether it had something to do with the permits. I would say no not at all it rather to put it into some context for you, the overall – and in the overall plant there were more than 750 pressure safety valves throughout that plant and on a regular basis you go through and you study all the pressure scenarios on these various pieces the equipment and how these valves are expected to control over pressure circumstances and prior to the incident and then of course as a result of the incident we were doing over pressure studies and they were being done in a very prioritized way and a very careful way as well.

We have to be very deliberate, very disciplined in how we go about doing this work. And the work, it progressed extremely well, some of the valves just to give you an idea, some of the valves get studied and we said okay the valve is fine and you put the documentation to the file about how the valve has been restudied and no further work was needed.

In the prioritization we left several studied valves towards the end of the study and it until early in July as the study was finishing up the team came to learn of a particular scenario that truly required mitigation.

So as we came to learn of that, the team considered several strategies that could have potentially worked in the circumstance and determine that the best solution we could have applied was to install several new PSVs and just so you understand the number of several is really about 12 PSVs are being installed and to replace several sections of piping.

Now it happens that the full impact of this essentially new work on our schedule is not known until earlier this week and frankly it’s what resulted in this disappointing disclosure today but I just want to reiterate once again that we’re taking this extra precaution here to enhance the safety of our workers and the public and I hope that provides some adequate colors everyone on the phone about this entire issue that we’re grappling with as we move forward toward the safe and sustainable restart the plant.

Shneur Gershuni – UBS

Great that was extremely helpful. Thank you very much.

Operator

And we’ll move next to Brian Lasky with Morgan Stanley.

Brian Lasky – Morgan Stanley

Hi good morning. Just kind of following up on Geismar there really quick. I was just wondering if you guys can discuss a little more at length kind of what the drivers of your range is in terms of for first ethylene production and what could possibly delay this further?

John Dearborn

Sure glad to bring some color to that. So let’s reflect again about what happened at the time of the incident, this plant went down in a very unusual and a hard way right. We had to take some unusual precautions and go through certain procedures in order to clean it out.

And so certainly there could be some potential risks related to some of the equipment as a result of way it had gone down. Secondarily I would say there’s always a concern that exists around restart of a plant especially when it’s been extended.

Now as to whether the systems as designed and as reinstalled work, take for instance rotating equipments, sometimes you have to go in and look at the rotating equipment a second time. Now that’s historically happened to us, from time to time it doesn’t, we don’t know anything today that says we should have an unusual worries on the startup, so I have nothing that I know of at the moment but with an abundance of caution we thought it was appropriate to guide that, that the start-up is not risk free once we are through this next round of installation of pressure safety release valves and that’s the entirety of the story behind the contingency range that we put around that start-up.

Brian Lasky – Morgan Stanley

Got it, and Don I was just wondering if you could just update us on your discussions with the insurance companies and your recovery expectations and kind of once we get into this outer period where you be above your business interruption, insurance, how you are kind of thinking about that and how that’s kind of baked into guidance?

Donald Chappel

Let’s say that now that the plant is substantially complete from a construction standpoint and we’re moving very quickly and toward the start-up most the facts are now very well-known and obviously we’ll continue to update our claim as we move through start-up.

We’ve retained some expert consultants, if you will that are doing studies to support our claim. We plan to present those studies and conclusions to the insurers in the fall and we would be hopeful that, that would then start the next round of settlement discussions.

Brian Lasky – Morgan Stanley

And in terms of I think you mentioned previously that you expected to use your ATM kind of in 2014 to be largely at the equity markets and ‘15 at PZ I mean you put out kind of share count applying some meaningful equity issuance in the back half of the year. I just want to make sure that was kind of still your expectation that you do any incremental equity on the ATM this year and you’d be largely out of the markets at PZ next year?

John Dearborn

Brian that in fact is the case again our car financing plans is pretty well unchanged obviously the drop down of the Williams owned assets is another factor and we’re looking to do that ideally post merger in the late ‘14 early ‘15.

Brian Lasky – Morgan Stanley

And then finally just I mean I think Cabot mentioned on their call some infrastructure issues that they were having which impacted their production in the quarter. I was wondering if you guys could just elaborate from your perspective what some of the issues were and kind of how the event resolves going forward?

James Scheel

This is Jim Scheel I’ll comment on that again I listen to the earnings call too and I want to just reiterate, our performance quarter-over-quarter were 8% more than we were previous quarter and first quarter’s 4% more than the year end.

So we’ve been continuing to grow volumes obviously, we have to do a fantastic job in coordinating volumes into this system. I think Cabot is probably relating more to the opportunities missed just by some coordination on scheduling gas because actually we were moving more than we have and again as the additional horsepower comes online during the third and fourth quarter this year, we’re going to see a rather rapid ramp up so that we finish the year about 34% more. So again I appreciate the concerns of the shippers but we continue to put some more gas through that system and are only accelerating that as we end the year.

Brian Lasky – Morgan Stanley

And just finally from me, in terms of any update in terms of timing on the ACMP/WPZ negotiations, is there any update from most recent disclosure?

Alan Armstrong

Nothing new I would just tell you, the complex companies are working hard and have got, are very well advised and I think everybody understands the importance of moving ahead with it and with some diligence and that’s exactly what’s going on right now.

Brian Lasky – Morgan Stanley

Thank you gentlemen.

Operator

And next we’ll move on to Abhi Rajnandan with Credit Suisse.

Abhiram Rajendran – Credit Suisse

Hi good morning guys.

Alan Armstrong

Good morning Abhi.

Abhiram Rajendran – Credit Suisse

In your data book outlook for WMB you show a revised outlook at the excess cash flow available you went after the dividend step up which is around 28% for year through 2016. And it sounds like the remaining part of the deal will be may be modestly dilutive upfront and accretive beyond that so I guess how should we think about the current and potentially more excess coverage being brought down overtime once the entire deal is done?

Alan Armstrong

Abhi again yes, we would expect some of that excess coverage to come off because one of the big considerations that Williams is making here is moving the distributions we received really took the ACMP schedule in terms of those ISR. So Williams is making I’d call a concession there to enable the merger and we think that that’s going to drive significant value long-term but certainly with some near term reduction in cash flows. However by ‘17 that really turns around we would expect to have a nice increase in accretion if you will, cash flow accretion on a per share basis. I hope that answers your question.

Abhiram Rajendran – Credit Suisse

Yeah I know, that helps. And then just a couple of other quick ones, at WPZ you have a shortfall this year of about 400 million between the DCF and distribution. So I guess how should we think about how you make this up is this just with capital raises or do you need any sort of support from WMB, any color there would be helpful?

Alan Armstrong

We expect that WPZ’s financing plan is largely intact. I think at midpoint here, we moved the cash flow about $150 million and as well we do have, and anticipate the litigation settlement that we would expect would largely offset that in terms of cash so we think not a lot of change there.

Going back to the cash flow, your first question, I would point out that our 2017 to 2019 cash tax guidance is an assumed rate of 14% and we would expect that to come down somewhat as we continue to add to our capital spending, as you can see our capital spending is about $4 billion this year and it declines to 2 billion unchanged by 2016, it’s because what we have in guidance is really sanctioned projects and we have a lot of projects, organic projects that we’re working on, those are added to guidance and those projects are placed in service that will continue to press that cash tax rate down somewhat, so just consider that as building your models.

Right now, our run rate seems to be about in the $4 billion range and if you take that 25 billion and divide it by the six years you get about $4 billion a year and that’s pre-ACMP and they have been spending about $1 billion a year. So you can think about that as you think about our cash tax rate and while the rate looks to be fairly low remember that, that’s based on cash distributions received and if you look at it on a percent of pre-tax income which is more conventional, you’ll see the rates quite a bit higher.

Abhiram Rajendran – Credit Suisse

Okay got it that’s helpful and then just last quick one from me. On the Canadian projects, can you talk a little bit about what’s driving the shift back in CapEx and this is at the WMB and Petchem segment level, are these delays in locking down customers or just a slower than expected construction schedule, any color there would be helpful.

Alan Armstrong

Yeah great question and particularly the PDH project is what I assume you’re referring to primarily and the other being the Syncrude and I would just tell you that, given the kind of increases that we are seeing in the Petchem space on engineering and construction side and the kind of demand we’re seeing on labor and we expect to continue to press forward we are working very hard to not get ourselves in a difficult situation relative to schedule and to make sure that we are pushing away from that risk as much as possible in terms of overruns because we do, as we look forward we see a lot of pressure on the skilled labor that it’s going to take the build out this infrastructure and so I would just tell you that we are making sure as we move forward in that we don’t get ourselves in a position where we’re relying upon thinner and thinner resources and lower and lower productivity and so that’s the primary cause.

Abhiram Rajendran – Credit Suisse

Okay got it thanks very much.

Operator

And we’ll move on to Ted Durbin with Goldman Sachs.

Theodore Durbin – Goldman Sachs Group Inc

Thanks. Just sticking with sort of Petchem and I guess bigger picture, do you see being in the petrochemical business as a core competence for you or do you think it is maybe distracting you from some of the maybe bigger midstream activities that you have, should we read in6to this PDH, maybe delay something around there, there’s some questions around what constitutes qualifying income I am just wondering if you can just talk about the value chain a bit more?

Alan Armstrong

Yeah sure. We continue to see the petrochem business as not, for William not being in the petrochem business for the sake of being in the petchem business frankly but really as a pull through and the market outlook for these NGL supplies and so certainly I would say it’s a little bit different between Canada and the Geismar facility because in Canada really we pursued that many years ago because mostly that’s a processing business we’re not actually reforming any molecules there that’s being done that the upgrades were simply above extracting that through typical cryogenic processing and then fractionating it just like we do in other sectors of our business.

So in Canada I would tell you the competencies if you will are not very different and we have certainly got very strong competitive advantage there. But in both cases, Geismar and as we would move in the PDH, we continue to look at that as an outlook for products in a way for us to continue to provide market access for our customers that otherwise isn’t showing up.

So I would tell you that’s how we think about it, and we certainly think about it in terms of being more fee based business. I think it is a very good question that you raised and certainly given the great number of opportunities that we have in front of us that’s always an issue of capital allocation for us.

And as part of the reason that as I just answered before, part of the reasons that we’re making sure we don’t get ourselves into a difficult spot there in that piece of business because we do see a lot of pressure in getting that business built out particularly on the PDH facility.

So in the end I would just tell you we continue to look at it as a place for us to expand market for us and for our customers I think it’s very nice complement to the ethane link that we’ve had for years and it’s a good place to provide market for our customers. And that’s kind of the extent of it in terms of how we look at it, we don’t look it at as being in the petchem business to be a petchem player.

Theodore Durbin – Goldman Sachs Group Inc

Understood that’s very helpful. If I can just shift back to the Northeast, I am just wondering if you’re seeing any reaction by the producers to some of the gas price volatility and sort of that the price decline that you have seen recently. And especially some of the regional basis issues that clearly people are still have in there. It sounds like the issues have been more sort of physical and tie-in challenges and what not, but is there any sort of bigger reaction from producers from the gas we are seeing in the Northeast.

Alan Armstrong

Yeah, no and to be fair I would say that given the kind of recent push down in price that’s just really just happened here, we’ve had we’ve doubts with it but it’s really just push down here over the last month or so I would say it’s a little bit early to call that frankly, but certainly the activities that we saw in the first half of the year are just now coming to fruition and there has been quite a flurry of activity on the drilling side both in the wet Marcellus to the dry Marcellus up in the North East and now starting with some of the dry Utica in the OVM area.

And so in the first half of the year I would tell you that that’s been pretty strong. I think it’s a little bit early to call with this more recent weakness in natural gas if that’s going to slow much of that down. But so far we certainly haven’t seen any signs of that. And I would tell you I think the producers are getting, particularly in their OVM area are getting better and better at understanding what they’ve got there and are more and more excited about it. So we’ll see what happens, but I think it’s a little bit early to say we have seen any kind of reaction at this point.

Theodore Durbin – Goldman Sachs Group Inc

Okay. And then just last one from me on constitution, any update on sort of the regulatory and permitting process there?

Alan Armstrong

Not much to add there. I think we are very pleased with the way the FERC has continued to press forward on that and we are working hard to work with the New York DEC and communicate to them the importance of this infrastructure and the need to deal with the some of the water quality excuse me water crossing permits that the New York DEC has in their hands. So really kind a remains focused on that issue and I would say we’ve made progress but we haven’t solved that problem.

Alan Armstrong

Okay, thanks. That’s it from me.

Operator

And next we move onto Carl Kirst with BMO Capital.

Carl Kirst – BMO Capital Markets U.S.

Thanks good morning everybody. I think I’ve just got two questions left and then now on understanding and appreciating your comments around the Canadian PDH facility and labor inflation like. I think prior we were thinking that maybe this could come to a hit by year end and so just trying to kind of getting a little bit more color on what you were saying earlier. Is this something that we should just kind a think of now as more just on the back burner more of kind of on hold or is that still progressing?

Alan Armstrong

Yeah not at all. There is tremendous amount of work, we have made great progress with the polypropylene take contract if you will that takes a quite a bit of price risk out of it. And I would just say both parties, both us and the party that have the polypropylene take are working diligently to make sure that we’ve got great confidence in our estimates and the work plan it would take constructed in a low risk manner.

But I’ll tell you the work is probably at all-time high in terms of making sure that we are very confident of where we stand with the estimate and we do very much expect to conclude and have it pinned down by the end of the year. And so in no way you should consider it’s on the back turn or it’s just us absolutely making sure we de-risk it is as much as possible before we move forward.

Carl Kirst – BMO Capital Markets U.S.

Understood. Appreciate the clarification. And then just last question and maybe this is on Geismar with respect to the pressure scenarios that were studied. Clearly ethylene plants are not like processing plans. So I guess it’s not exactly a cookie-cutter approach here and what I am wondering is, is that to the extent that this plant has been rebuilt or perhaps studied now maybe with all the different scenarios that are out there from the safety standpoint, does this in anyway make Geismar, I hesitate to call it best-in-class because of what we have gone through, but as we kind of look forward from this point today, does that anyway help you distinguish yourself from other plants and then how ultimately does that perhaps help our hinder Geismar 2?

Alan Armstrong

Yes, Carl good question. I would say we certainly are coming out of this much stronger than we went into it both from an operational focus and reliability and we have worked hard to really improve the older plant as well as making sure that those learnings were built into the new plant as well.

I would tell you that probably the fact that we’ve got a team that’s been a right in the middle of a major construction project like this that’s also looking at Geismar 2. And so it’s not some distant memory of the lessons learned it’s kind of real and available, puts us in a very knowledgeable position to push forward with Geismar 2 if that’s what we choose to do.

So I would say I am very thankful that we’ve got a team that is, and this has been a really tough project if you think about it, if you’re managing this major expansion project in the first place in and around a plant and then have the major explosion that isolates us from being able to complete the plant right in the middle of a project, that’s a project managers worse nightmare. And yet they have hung with it.

So I would just say we’ve got a team that’s very schooled on what it takes to be successful as we look forward into Geismar 2 and certainly we all have a lot of confidence in pushing forward as we look to Geismar 2 opportunity.

Carl Kirst – BMO Capital Markets U.S.

Great, appreciate the comments. Thanks guys.

Operator

And next we move onto Sharon Lui with Wells Fargo.

Sharon Lui – Wells Fargo Securities, LLC

Hi good morning.

Alan Armstrong

Good morning Sharon.

Sharon Lui – Wells Fargo Securities, LLC

John I guess with regards to the dividend illustration you provided. Those tax rates do you anticipate those cash tax rates to change materially if the ACMP/WPZ transaction occurs?

Alan Armstrong

No Sharon, we do not. So we don’t expect that to change. The distributions will change somewhat so there will be some effect. But we wouldn’t expect any material change in those tax rates as a result of that. I think right now they are driven largely by the placing assets and service.

And we are in the middle of appraisal for both accounting and tax purposes. So there will be some adjustment of estimates along the way as we conclude both the accounting and tax appraisals to really key in this process.

Sharon Lui – Wells Fargo Securities, LLC

Okay. And then I guess just trying to gauge the potential for the exchange ratio to be renegotiated. Maybe if you could provide some color on some of the key factors, management considers when you determine the proposed exchange ratio?

Alan Armstrong

Sharon we did some extensive modeling and really trying to come to a transaction that we thing was value adding both ACMP and WPZ unit holders for let trying to balance the considerations there. So obviously a lot goes into it, but that really was the design criteria we wanted it to be a transaction that we thought would be beneficial to both partnerships, really trying to strike that balance and that’s really what we put forth in our proposal.

Sharon Lui – Wells Fargo Securities, LLC

Okay. And just the last question. I guess given the IRS’s scrutiny on some of the non-core – activities in PLRs. At this juncture, is there any concern regarding the PLR for Geismar?

Alan Armstrong

Not here, not at all.

Sharon Lui – Wells Fargo Securities, LLC

Okay, great. Thank you.

Alan Armstrong

You’re welcome.

Operator

And we’ll we move on to Craig Shere with Tuohy Brothers.

Craig Shere – Tuohy Brothers

Good morning guys.

Alan Armstrong

Good morning.

Craig Shere – Tuohy Brothers

So back to Geismar 2 prospects. Any further updates around the markets capacity to provide long-term fixed return contracting versus commodity exposed returns?

Alan Armstrong

Don you want to take that.

Donald Chappel

Yeah. I am glad to take that. Thanks very much. Not much has changed since Analyst Day, so just to reiterate where we are there we’ve got a very warm reception when we put our RFP out to the marketplace and our interest was oversubscribed quite significantly. What we are doing with this particular investment is we’re essentially trading off that commodity margin to the buyer of gasoline to our joint venture partner in exchange for a fee for service opportunity for WPZ in total concert with our strategy. And certainly the markets appetite given recent and current ethylene prices is quite warm to a provider that’s willing to provide on a fee per service basis. So we’re seeing very, very warm reception both on the JV side and on the ethylene purchase side or fee-for-service type arrangements.

Craig Shere – Tuohy Brothers

Great. When do you see that, is that like a 2015 really 2015 period to try to true up some of those negotiations?

Donald Chappel

Yeah, we’re going to work those negotiations through this year and into the early part of the next year I am sure. But I think the bigger emphasis here is very much aligned with Alan’s comments earlier about the PDH unit at the strategic level. So until we’re absolutely that we’ve got the right commercial deals lined up here and until we’re absolutely certain we know how we’re going to execute and derisk the capital project on an investment of this magnitude, we’re going to hesitate to rush our way into a sanction if I could call it that. So we will sanction only when we’re absolutely ready for both commercial and the project side.

Craig Shere – Tuohy Brothers

Got it. And Don if I could return to the insurance recovery question. If I remember when I asked at the Analyst Day the comment was made that debates about recoveries has less to do with debates about what true commodity price should be versus taking best care in not only being safe but also being appropriately efficient and starting up again. Could the fact that you are now delaying start-up comfortably beyond the recovery period basically obviate that issue a little bit and make it to easier to achieve recoveries since you are kind of taking some of the dime on your own accord?

Donald Chappel

Craig good question. Certainly the claim – our claim continues to get somewhat larger because we believe we’ve worked prudently to bring the plant back into service. Obviously insurers who have the money in their pockets argue against that but we think we have a very solid claim, we think that our outside experts will help us present our claim in a way that is compelling and we’re optimistic that we will receive a very substantial additional payments perhaps as early as late third and fourth quarter.

Craig Shere – Tuohy Brothers

Okay. So you think that much of those could be resolved by the time the plant is actually up and running?

Donald Chappel

No I think more likely it’s fourth quarter.

Craig Shere – Tuohy Brothers

Okay.

Donald Chappel

Yes the plant being up and running in the fourth quarter but with the target of October date it could take a bit longer than that is I guess my comment.

Craig Shere – Tuohy Brothers

I got you. And last question kind of a little broad spectrum and big picture. But we’ve got a couple of things going on with potentially a competing NGL line from the northeast to Belvieu maybe looking a little better prospect at the moment and also condensate exports looking more realistic than ever before. There is obviously competitive pressures for new business opportunities from all these types of events across your system I wonder if you all could just comment on any net positives or negatives from these types of events?

Alan Armstrong

Well I guess if you are just asking generally about the competitive environment that we see out there I think we continue to see not see much impact from competition frankly we just have so many opportunities coming at us that, that’s probably why I want to say it’s the least of our worries, it’s certainly low on the list. And really if you think about some of the larger risk to the business it’s more around the macro environment and one thing we do compete for frankly we’ve become very aware obviously we comment for rigs from one basin to the next. And so I think having ACMP alongside gives us a little bit better diversification to that in terms of being exposed on big gas basins.

But I would say that really the issue that keeps us focused on getting great market access for our customers and keeps us aligned with them frankly is that we desperately want to see good market access for the basins we’ve invested in and that’s obviously a service we would like to provide as well and providing better market access and better long-term markets for their products and so that’s how we’re continuing to go about that. But I would say on the competitive front that we’ve just got our hands so full with the opportunities that are coming to us and we’re uniquely positioned to win that we’re not having to stretch very far beyond that.

Craig Shere – Tuohy Brothers

Great. I appreciate it.

Alan Armstrong

Thanks.

Operator

And our next question we will hear from Chris Sighinolfi with Jefferies.

Christopher Sighinolfi – Jefferies

Hey guys thanks a lot for taking my question. Don just curious I’d see the guidance for WMB effectively DCF but I don’t think that’s something that you reported along with quarter reports, so I am just curious if you could either for the second quarter sort of provide on the same schedule of how you would guide it. What the DCF or WMB entity was and is that something that on a go forward you are plan to report as part of the financial.

Donald Chappel

Chris great question. We have not done that yet but we certainly expect to, so you can look for that next quarter.

Christopher Sighinolfi – Jefferies

And any broad framework as to what it might have been for the quarter?

Donald Chappel

I don’t have that number off hand and I don’t know if John has it but we can get it to you or we could post it on our website.

Christopher Sighinolfi – Jefferies

Okay, great. That would be helpful. Thanks guys.

Donald Chappel

I’ll just comment here again we’re going through a transition here with ACMP and that our acquisition of the additional interest will know cause us to consolidated ACMP beginning in the third quarter which will create some differences in reporting. Obviously we’ve done reporting on equity basis will be fully consolidated, we will be looking to gain significant gain in the third quarter to revalue our initial investment in ACMP, we will be looking some substantial and tangible assets and we will have some additional depreciation, amortization related to those assets as well.

So just kind of a heads up and look forward to quite a bit different presentation you still get to the same bottom-line here in terms of cash flow but from a balance sheet than earning standpoint there will be some changes in the basis of presentation.

Christopher Sighinolfi – Jefferies

Okay. Great, thanks Don.

Donald Chappel

Welcome.

Operator

And our last question today will come from Bradley Olsen with TPH.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Hey, good morning guys. Thanks for fitting me in I know we’re running a little bit late, so I really only got one question. Now that you’ve closed the ACMP general partner acquisition, can you comment on any ongoing efforts to retain key personnel from Access and kind of broadly speaking how successful those efforts have been?

Alan Armstrong

Sure. That’s certainly something we very much value that organization and their capabilities and that was high on our list of things to accomplish. And so we did move swiftly and aggressively to do so and I think we’re with comfortable with where we’re right now on that front. And so what a great work by our teams here at Williams and the team at Access to really address where any of those issues might be and take care of them swiftly. So, I’d say we feel very good about where we stand today and I am you know particularly proud of both the organization coming together and work that so quickly.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Okay, great. So, broadly speaking I guess it’s fair to say that in the Utica and the northeast where Access is maybe most their capital is being deployed that he team is kind of largely in fact for a post acquisition?

Alan Armstrong

That is correct.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Great, thanks guys.

Operator

And will conclude today’s question and answer session I would like to turn the call back to Alan Armstrong for any additional or closing remarks.

Alan Armstrong

Great, thank you. Thank you for all the great questions. As you can see, we are very excited about the future we have got in front of us and this team as you know I think just continues to generate momentum towards this vision that we have of really being de-premier player in this natural gas super cycle and very excited about the opportunities that keep coming at us and we keep executing on to accomplish that and we look forward to reporting to you in the third quarter with great continued progress and certainly at the balance of the year. Thanks for joining us today.

Operator

And that will conclude today’s call. We thank you for your participation.

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Source: Williams Companies' (WMB) CEO Alan Armstrong on Q2 2014 Results - Earnings Call Transcript
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