Williams Partners CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.17.11 | About: Williams Partners (WPZ)

Williams Partners L.P. (NYSE:WPZ)

Q4 2010 Earnings Call

February 17, 2011 11:00 am ET

Executives

I. Sharna Reingold - Director, Investor Relations

Alan S. Armstrong - Chairman and Chief Executive Officer

Rory Miller - Senior Vice President and Director

Phillip Wright - Senior Vice President and Director

Donald R. Chappel - Chief Financial Officer and Director

Analysts

Kevin Smith - Raymond James

Theodore Durbin - Goldman Sachs

Craig Shere - Tuohy Brothers Investment Research

Sharon Lui - Wells Fargo Securities

Sean Wells - RBC Capital Markets

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Operator

Good day everyone, and welcome to the Williams Partners LP. Fourth Quarter 2010 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Sharna Reingold, Director of Investor Relations. Please go ahead, ma'am.

I. Sharna Reingold

Thank you, Carla, and good morning everyone. Welcome to the Williams Partners fourth quarter 2010 earnings call. As always, thank you for your interest in the Company.

We do have a few slides to go over in our presentation this morning. Alan Armstrong will be going through those in just a minute, and after Alan's remarks, we will open up the line for questions. Be aware that Don Chappel is in the room, Rory Miller, who recently took over the reigns of the Mid-Stream Company, and Phil Wright are available for any questions.

Also, you certainly saw the notice that Phil will take another role at Williams later this month and Randy Bernard is going to lead the gas pipelines. Randy is also with us today, as well. Before I turn it over to Alan for his remarks, please note that all the slides are available in a PDF format on our web site, williamslp.com.

Please read Slide 2. Within the presentation, there are forward-looking statements about future expectations and operations that are subject to various risks and uncertainties, which are disclosed on those slides. Also included in this presentation today are various non-GAAP numbers that have been reconciled back to measures included in the Generally Accepted Accounting Principles. Those reconciliations schedules and related information are included in the slides available on our web site, williamslp.com.

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

Alan S. Armstrong

Great. Thank you, Sharna, and good morning. Thanks for joining us this morning. And to many of you, thanks for joining us again this morning. And starting here on slide four, we lay out our topics to discuss for WPZ. First of all, I'll hit our 2010 financial results, then we'll talk about an exciting fourth quarter and the highlights from that and some recent developments, and then we'll talk in a little more detail than we have discussed previously on some of the growth potential, particularly around the Marcellus, as that is really starting to take shape for us.

We'll also spend a little time this morning on the business mix and be making a case to you around the lower risk profile of WPZ, then I think most people perceive, in particularly talking about the fact that all fees are not created equal. And then finally I'll be happy to you report, too, on our increase guidance, as well.

Moving onto slide 5, excited to report a 21% higher adjusted segment profit for 2010. And really, I would point you to this measure as the health of the business because our net income numbers are skewed by the fact that primarily, there's many things that are a little odd in them, but one of them that's probably most dramatic is the fact that when these assets were held at WMB, we weren't allocating any debt in there to 2009 so you see the business performance of these assets without debt from WMB being allocated.

And then in 2010, of course, we financed that transaction at PZ, and now -- so there is interest against that and we lay some of that out in our press release, but just caution you on making sure you're looking at that. But again, the segment profit does have that in there. And, of course, it does, though, recast our Piceance business is recast for '10, as well, and so our growth doesn't look as dramatic if it wouldn't look at otherwise we weren't recasting that.

So in terms of this 21% higher adjusted segment profit, currently, the drivers for that were higher NGL profits, both from a nice pick-up in margin from $0.39 per gallon to $0.57, and then we also had slightly higher volumes, which were driven mostly from a full-year for Willow and the Echo Springs plant that came online in late in the third quarter and then, of course, additional to that or offsetting that somewhat, we sold the Cameron Meadows plant in 2010 that did reduce our NGL production anyway.

On the acquisitions that we did, certainly the scale that we accomplished, getting a 500% increase in our distributable cash flow through the big dropdown that was done early in the year. And we maintained, despite a much lower risk of business in WPZ, to merge of WPZ, we still maintained a very strong coverage ratio of 1.3 for the year. And as you'll seeing here, we also de-risked the portfolio here in the fourth quarter by investing in quite a bit of fee-based, large fee-based business, namely the Piceance acquisition, as well as the Cabot acquisition that will grow to be significant over time.

Moving to slide 6, many transactions are fueling WPZ's growth in a very substantial way. And also, though, we also set several records operationally during the quarter. And so starting with some of those highlights, of course, we were excited to have a nice execution on raising $1 billion of debt and equity in the capital markets.

We also purchased the Piceance base and gathering and processing assets for $782 million. During the quarter, we announced the Cabot acquisition of their gathering assets and a large dedication from them in Susquehanna County, Pennsylvania. On the operational side, our NGL production volumes rebounded significantly in the fourth quarter from a weak third quarter. And, of course, we explained that in the third quarter and told you to have confidence that those would come back and they certainly did.

They were up 17% from the third quarter and in fact, set a record for WPZ's NGL production. On the gas pipe side, we also set some records there. And both on Transco and Gulfstream. Transco delivering 9.52 million dekatherms on December 14th and Gulfstream hitting a record of 1.5 million dekatherms on December 13th. Transco also set a three-day contiguous record, as well. So a lot of demand for the Transco system and that continues to fuel the expansion projects that you'll see listed in this presentation. We also increased our cash distribution and we expect a 6% to 10% annual distribution increase in 2011 and 2012, as we'll talk about.

Moving onto slide 7, look at what's going on in the Marcellus and we've got several slides on this. But, first of all, the Northeast Supply Link project, which is a 250,000 dekatherm expansion, picking up gas along the Leidy line, through the Marcellus play, and delivering that into both New Jersey and New York City. And we're happy to report that that capacity was completely subscribed.

And we were excited to see the combination of our businesses working together there so nicely between gas pipelines and Midstream, as the Midstream Springville lateral is one of the major supply points for – will now be for the Leidy lateral there, and so we're excited about that. And we're continuing, despite a lot of the information you're going to see here today, is just talking about our anchor customers in Midstream, both the Atlas and potentially Chevron business, as well as the Cabot business in Susquehanna County, being those major anchors. But as we build those systems out, we're seeing an opportunity to attract third parties, and we're also seeing opportunities to do business with new third parties, even in different parts of that place. So we are really getting ourselves well-positioned there and a lot of growth is coming to us from that.

Moving onto slide 8, looking at the Northeast Pennsylvania in a little more detail. As we mentioned, we did acquire the Cabot Midstream assets. Those represented about 75 miles of gathering pipelines, two compressor stations that were up and running, and that we got 138,000-acre dedication from this spot in the Marcellus that we think, alongside [WMBZ&T] operation, is some of the premiere acreage in the Marcellus play. And we obviously continue to build out the Springville lateral, and that is expected to be in service in July of 2011.

And we have – as we have announced earlier, we actually had upsized that project a bit given the demands for that system. And also we plan to spend $150 million in 2011 and $170 million in 2012 to further expand that business and, again, that is just for necessary to expand for Cabot's business up there. So we are hoping to be able to even go further with that. Ultimately, they're, right now, on the drawing books would be about 200 miles of large diameter gathering, many more small, if we do some other business like that up there, and about 60,000-horsepower in compression.

Well, that all sounds interesting to an engineer, but if you move to slide 9, you can see what this equates to in terms of volume. Well connects being the gray bars there, and the purple or magenta, whatever color, I would call that crimson, being from O.U., and you can see there we're going from about – in 2011 a little under half a BCF a day at the end of 2011, up to 2.75 BCF per day by 2015. And again, this is not pie in the sky kind of business; these are real drilling plans that we're in the business of hooking up. And again, this is primarily just from those existing base customers, so we could see this grow even further.

Moving on to slide 10 to talk about the business mix, and I mentioned earlier in the opening comments about all fees not being created equal, and so, very often people lump all fee business together. And I think one of the very distinguishing things about WPZ is the holdings of Transco, a portion of Gulfstream, and the Northwest Pipeline system, all of which have long dated contracts with demand revenues.

And so we're not at risk in an indirect way to commodities on that very solid demand, and we're very excited about having that in the portfolio. Then you see the fee-based revenue for Midstream, which is generally at risk to volume. Some of that is not, but a lot of that is at risk to volume. And then as we move on around the pie chart, we get to the riskier elements of the portfolio, but overall, you can see here that in 2010, of this $3.1 billion, 75% roughly in’10 and ’12 is from fee-based and over half of that, well over half of that, being from demand-based revenues, and so I think the very key issue for investors to take a look at.

I also tell you that this graph would probably look like a lot more dramatic shift away from commodity exposure in ‘12 if not for the two following reasons. First of all, as you'll see, we see an uptick in NGL margins from 2010 to 2012, and so that tends to grow that portion of the margin slide pretty handsomely. But in addition, for instance, the acquisition of the Piceance basin, which was all fee-based, that is also included in a full year of 2010, because for accounting reasons, we've recast that into 2010. If you really looked at it from a risk reduction basis for a WPZ investor, you'd see a much more dramatic shift here in higher fee-based revenues for WPZ investors.

Moving onto slide 11 here. Just talking about the commodity price assumptions that are embedded in our guidance here. The big shift was moving Nymex natural gas mid-point down to $4.25 from $5 in 2011, and raising the mid-point for WTI crude oil up to $87.50 from $80.

The gas is certainly in line with the current forward strip. And the crude oil is slightly conservative to the strip and that conservatism grows as we go into 2012, where we've got gas at $5 for Nymex gas and we've got WTI oil going from $82 to $89. And, of course, if you looked out there on the forward strip, you'd see that lifted quite a bit more.

Of course, the NGL margin moves up with these proposed – these assumption changes. And despite embedding a more conservative NGL to crude relationship than we saw in 2010, as actual NGL to crude relationship came in at 55% for 2010, and our mid-point assumption is 53% in 2011. Our belief, and I think fairly consistently as we've laid out these assumptions, is that NGL to crude relationships move inversely to crude to gas ratios and, of course, with the higher crude in 2011, we're seeing a higher crude to gas ratio, and therefore, we're letting that NGL to crude oil relationship slip.

Moving on to slide 12, and talking about our guidance here. First of all, you can see a nice increase here in our adjusted segment profit. And you see the way that's driving up, also our distributable cash flow, attributable to partnership operations, and you can see in both cases here, we came out ahead of our range for 2010 and right at the top for our cash distribution coverage ratio. And so we're excited to continue to see that.

Our CapEx was a little bit below. And you'll see our CapEx moving up a little bit. Some of that is just carry forward from 2010 into 2011.

Moving onto slide 13. We show the growth projects here, and you can see that the majority of our investment, obviously, is growth CapEx totaling about $2.1 billion in ‘11 and ‘12. And I would tell you, given the amount of prospects that we have, I'd be very surprised if we don't see that move even higher.

And if you’ll flip over to 14, I'll show you a picture of what – of our confidence in that. And you can see here, our in guidance picture on the right, as we've always shown. And at the WMB level and then you can see in the midstream areas here, you can see the mix of that. And, obviously, in guidance, we have a lot of Marcellus growth, as we've talked about. That is both Northeast Pennsylvania, as well as some major expansions on the Laurel Mountain system. And then as you move further to the left to more speculative projects, you see us start to add this things like a GulfStar and some of our deep water projects in the Gulf of Mexico, which we remain very excited about.

Moving onto slide 15. You can see here this is the gas pipes business and the amount of inventory growth projects. These assets are so well-positioned and it's demonstrated by the peak demands that we saw on them at the end of 2010. We're going to expect that to grow. We mentioned the Northeast Supply Link, and the thing I think you ought to take away from this slide is, despite the amount of growth we have in guidance, in our earnings of our business, most of this capital really doesn't come on until either late 2012 or even past the guidance period into 2013, in terms of delivering. Of course, additional rate cases in that timeframe will drive our 2013 earnings, as well. So we have a really good picture even beyond the guidance period here in terms of the growth in our gas pipelines business.

Moving to the closing slide here on 16, we certainly feel like WPZ is superior investment opportunity. And, you know, I see a lot of comparisons out there, but it's really hard for me to come up with one that has a better balance of such solid, high-quality cash flows at the pipeline level and supported by some very exciting growth projects at the midstream level.

Our premiere North American gas pipeline and structure business certainly continues to deliver value. And I'll tell you, we have a lot of competitive advantage. We are certainly not struggling for growth opportunities; we have a tremendous amount of those. On the execution side, we certainly have continued to execute cleanly on the financial side with the large transactions that we did early in 2010 and then the billion dollars of capital raise in the fourth quarter. And we also have a very long list of large-scale projects that we've delivered on budget and on time. And there's a lot of big MLPs out there that really can't speak to that. So, we continue to execute on both the financial transaction side and both the project development side.

On the resource side, our investment grade credit rating is going to continue to allow reliable access to this low cost to capital. It's going to fuel our growth. And we certainly have plenty of liquidity today in WPZ. On the discipline side, we are going to – we have sector leading returns and we always track that. We pay close attention to that. And we continue to lead our sector in that regard. And that is a direct result of our discipline around investments.

And then finally, in the result side, we certainly continue here in the present to deliver the results, strong coverage ratio. We've got the distribution growth, that's very identifiable in terms of where that's coming from through 2012, and as I've shown in these slides, I think even beyond that.

And then, you know, at the end of the day, there’s not very many people – not very many MLPs of this size that can speak to a 14% compound annual growth rate in cash distribution since our inception in 2005. So, we remain very excited about the prospects for WPZ.

And I will be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Kevin Smith with Raymond James.

Kevin Smith – Raymond James

Hi, good morning, gentlemen. Thank you for taking the question. Is there any update on Laurel Mountain drilling activity, with Atlas-Chevron deal pending? I mean, have you been able to gain any tangible data points saying that they're going to increase activity, drilling activity in that area?

Rory Miller

This is Rory Miller. I'll take that. We haven't gotten any indication yet that they're going to move off of their – the plans that Atlas had laid out. If you recall, Atlas had brought in Reliance out of India on a drilling carry deal, so that remains in place; Chevron bought the business with that in mind. So everything we've heard is that it's business as usual, that those 1,000 wells that we're planning on seeing the next five years, that that plan will not change. So, I think that deal is closing soon, and maybe there will be a little more clarity post-closing. But so far, we've heard nothing that suggests the rate of development is going to change.

Kevin Smith - Raymond James

Okay. Thank you. One other question. Obviously with the cold weather in early February, we saw some basis differentials that were kind of blowing out and some weird things with pricing. Was there any positive read-throughs, maybe on revenue from Transco or any other assets for WPZ?

Phillip D. Wright

This is Phil Wright. As Alan noted on his slide number 10, far and away the majority, greater than 90% of our revenues are generated from demand charges that are long-term contracts sold out at maximum rates. So we're relatively insensitive to through puts.

Kevin Smith - Raymond James

Okay. Thank you very much.

Operator

And now we'll move onto Ted Durbin with Goldman Sachs.

Theodore Durbin - Goldman Sachs

Thanks. First question is just around the Keystone Connector and the producer interest that you're seeing there. You've had a logjam here in terms of what the solution is going to be. And then maybe if you do get the project moving forward, what kind of returns would you be targeting there?

Phillip D. Wright

Well, again this is Phil Wright. As we've said in prior calls, the producers in the Marcellus are evaluating a wide array of alternatives and a lot of folks are presenting them with alternatives for transport of their gas. As you are no doubt aware, the gas in southwestern Pennsylvania tends to be Liquids Rich, the majority of which is the largest constituent being ethane. And ethane solutions are a bit hard to come by in scale in that basin just now. And, therefore, we think the Keystone Connector is a very elegant solution to that.

Having said that, though, folks are still holding their cards pretty close to the vest, weighing alternatives very, very carefully, and while we are cautiously optimistic about Keystone Connector, we're not ready to report that we've got that buttoned up. As to [Perns], I would just say that -- I would look to our past projects as a guidance in terms of return expectations. We have a very disciplined approach, particularly the large bolt-on projects like that, where we have return expectations that will fall pretty well within the bandwidth of historical levels.

Theodore Durbin - Goldman Sachs

Okay. Thanks. That's helpful. And if I could just come back to this, you know, this big ramp-up in the well connects. I guess I'm trying to understand how dependent on these -- are these volumes dependent on gas price, given where we are with the curve and the strip and what not. And then also what kind of fees should we be modeling there? I'm trying to figure out how much of this is dry versus wet gas overall in the Marcellus that you're planning on gathering and where the fees will come in.

Alan S. Armstrong

Yes. Well, the second question there on understanding the quality of the gas. Both the Atlas dedication and the Cabot dedication are squarely in the dry gas window. There's some -- there's a minor amount of the Atlas acreage that is in the wet gas window, but they're not actively pursuing that right now. So both of those customers and ourselves are probably a bit relieved right at this moment of trying to handle the ethane out of the area, just because it is squarely in the dry gas window.

In terms of sensitivity to gas price, I would say, as I mentioned earlier, when Atlas sold out to Reliance and put that drilling carry in place, fully 75% of their costs were carried by their partners. And there is a timeline on using that drilling carry. I think it has to be used up generally within five years. So we see the LMM or the Atlas wells as being rather insensitive to gas price.

I think over on the Cabot side, what they've got going forward over there is just the general reserve potential per well. The EURs there are over twice what we're seeing in the southwest part of the state. And the EURs are great in the southwest part of the state. So they've got a very low cut-off point in terms of price where that’s not economic and I think from Cabot's standpoint that's a big part of their company and their plans and so we see both of those areas as being relatively insensitive to gas price.

Theodore Durbin - Goldman Sachs

Okay, that’s helpful. And then if I could, just one more. How are you thinking about your hedging, do you have some pretty significant degradation in the curve for NGLs? What's sort of your view on how much you want to hedge here?

Alan S. Armstrong

Yes, I think looking forward right now at what’s available, our intention is to not hedge right now. We stand ready to do that if we see something that looks attractive, that's actually going to put us into a more comfortable spot. But given what the strip looks like now and what's available, we don't intend to act on that immediately.

Theodore Durbin - Goldman Sachs

That’s great. Those are my questions, thank you.

Operator

And now we'll go to Craig Shere with Tuohy Brothers Investment.

Craig Shere - Tuohy Brothers Investment Research

Hi. Picking up a little on Ted's question on hedging. Alan, you kind of referred to the possibility that the PetroChems might allow you to de-risk some of your ethane exposures with longer-term feed stock contracts. Do you have a sense for the potential timeframe of meaningful progress on that end, I assume we're talking about the 6% or 7% of the pie on slide 10. Is there the possibility of half of that being managed in some way in 2011 and/or 2012? And could you comment about the possible effects of distribution policy given the de-risking of the business? And I have another quick question on maintenance CapEx for Don.

Alan S. Armstrong

Well, first of all, on the question of de-risking the portfolio through downstream or contracting with the PetroChem space. We continue to work on those. I'll tell you unfortunately there's not very good blueprint out there, if you will, to go from a contracting standpoint and so the negotiations are pretty protracted.

But there is a lot of interest in the other side of the table. And we understand that through WMB, we understand the olefins business and if you're in the olefins business right now, you're making great margins in that business and your only concern is that really is that NGL prices fly up or with natural gas prices and start to eat into that margin. And so there's concern on the other side of the table about trying to lock that margin in as well. So that's driving some pretty intense discussions.

The timing of those, I’d really hate to give you much on that, other than I can tell you I would be very, very surprised if it's in the first quarter and even the second quarter, because they're just very complex transactions. And it doesn't really do us much good to do those for a short-term period. We don't think, we're not all that concerned about the risk in the short-term. And so we're looking to do longer dated deals that would really allow us to lower our coverage ratio, so that we can count on it for a longer-term period.

It is going to happen quick and it is pretty complex in terms of the percentage of that business, the ethane business, we would want to do, going to all of the trouble we were doing that, we would want to do something pretty meaningful. So I would hope that it would be at least half of that risk. The question on the distribution increase to Don here.

Donald R. Chappel

Just on the coverage ratio. Again while we have a strong coverage ratio, the good news is that excess cash is going back into very attractive growth projects, which reduces our need to issue equity and debt in the future. So we think that while we have strong coverage, strong coverage is being put to very good use. Craig, I'm not sure I understood your question clearly if you want to repeat what you had for me.

Craig Shere - Tuohy Brothers Investment Research

Sure. I mean, so let's say that by second half or early 2012 you guys are able to hedge away for multiple years, the risk on the ethane, say over half of your exposure as Alan was referring to. If you had that much reduced commodity exposure, how would that impact basically your distribution policy, that you would need less coverage to maintain in hard times the distribution, but then if there’s less volatility, you don't need that much protection.

Donald R. Chappel

Conceptually, you're on the right track, in terms of the actual numbers, I think it would be dependent on the facts and circumstances around the issue you discussed in terms of how much commodity risk we can take out of the business. And, just again the general economic conditions and the like, but clearly to the extent that we could reduce commodity risk, that would give us an opportunity to significantly lower the coverage. And again, the good news is, it's not as if we're just parking that cash idly, it’s going back into development projects, which will provide for strong growth.

Craig Shere - Tuohy Brothers Investment Research

Understood. I guess moving onto my second small question, Don. Speaking of CapEx, what is driving the lower maintenance CapEx in 2012 from ‘11 again and is 2012 a good base to move forward from?

Donald R. Chappel

Craig, I might let Phil speak to that, because I think it's principally a gas pipeline focus.

Phillip D. Wright

Yeah, Craig. We, as you're recall, have set a goal for ourselves to have internally inspected all of our larger than 8-inch diameter onshore systems by the end of 2018. We're making great progress in that. Our inline inspections have actually as we look, it's kind of hard to do a company-by-company comparison with our peers, but in terms of aggregated data that the Interstate National Gas Association provides, we are actually ahead of the average by quite a bit on our internal inspection program.

We would say that in 2011, we've got a kind of a hump, if you will, that we hope will get accomplished a great deal of the maintenance and inspection work. And as we've reflected in the guidance, we're going to be able, therefore, to have caught up on a bunch of the inspection and remediation work that will be required associated with those inspections.

Craig Shere - Tuohy Brothers Investment Research

And, Phil, do you think this is going to basically cover conservatively the – increase the sensitivity in the industry to inspection and maintenance, given some of the multiple non-disastrous or fatal problems, but also fatal problems that happened in the industry?

Phillip D. Wright

Well, let me, first of all, obviously say that that's very hard to predict what potential legislative reaction there might be. So with that caveat, I would say this as well that a lot of the recent incidents have been unfortunately, all of them are unfortunate, but they have been in and among local distribution company networks for the most part with the exception of the one that occurred last week.

Having said that, those folks are well underway now on the downstream end with what is known as the DIMP rule under the Pipeline Safety Improvement Act, where its distribution integrity management plans, where they're going to be remediating their systems and the interstate industry has been at that for quite a long time. So I would just say that we are in good shape in terms of what we know about our systems as we track incidents of leaks, they have gone down pretty sharply since we implemented the inspection programs and the remediation programs.

And, yeah, we do think that trend is going to continue. Are we out in front of what may be forthcoming from legislative reaction to these incidents? Hard to say, but I would as well tell you that our approach to remediation of anomalies that we discover in our inline inspections is pretty conservative. We treat every anomaly in the same way as though we’re in what's called a high consequence area. It doesn't matter if it's out in a tobacco field in North Carolina, we treat it the same way and dig it out and fix it, as though it were in an HCA. And I think that will put us somewhat ahead of the game.

Craig Shere - Tuohy Brothers Investment Research

Great, thank you.

Operator

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

Sharon Lui - Wells Fargo Securities

Hi there, good morning. I have a question in regards to Laurel Mountain. I guess Atlas and some of its filings put out a forecast in terms of what the cash flows may look like and what the projected volumes may look like. Essentially, probably half would be in 2012 with EBITDA of $40 million, ramping up to like 1.2 Bcf by 2015. Just wondering if these figures are consistent with what your forecast is?

Rory Miller

Yeah, this is Rory. That sounds a little bit different than the forecast that we’re using. It’s directionally the same kind of slope. The numbers do sound a little bit different, but again I don't know how much conservatism is creeping into those.

Sharon Lui - Wells Fargo Securities

Okay. So their forecast sounds more conservative?

Rory Miller

Yes, who did you say?

Sharon Lui - Wells Fargo Securities

That was put out by Atlas.

Rory Miller

By Atlas, okay.

Sharon Lui - Wells Fargo Securities

Okay. I guess the second question that I had was in terms of the spinoff at the WMB level, in the press release, it sort of indicated that management was looking to dropdown Gulfstream to the partnership as part of the transaction. What are the thoughts in terms of dropping down the rest of the midstream assets, including I guess the Canadian midstream assets?

Donald R. Chappel

This is Don Chappel. I'll just note the comment in the press release was that 25.5% interest in Gulfstream that Williams owns is earmarked for dropdown at a future date. We didn't give anytime table associated with that, but it's earmarked for a dropdown, it is quite a natural. And you saw what Spectra did with a similar-sized interest just back in December.

As to the Canadian business, our view is it's just way too soon to even consider that. I think it is all qualifying. There's some international, there's some tax issues associated with, paying tax in Canada and repatriating dollars, that sort of thing, but it is qualifying. But right now, Williams has about $500 million of cash that's been earned internationally that we've not repatriated. And that cash is being used to grow that business. Beyond that those assets have no debt and we have some debt capacity to grow those assets. So we think we have several years of growth that's in effect to pre-funded. And so I would say that's a longer-term consideration, but certainly it's possible.

Sharon Lui - Wells Fargo Securities

Okay. Great. Thank you.

Operator

And now we'll hear from Sean Wells with RBC Capital Markets.

Sean Wells - RBC Capital Markets

Good morning. I was wondering with your new coverage guidance, it seems to go down from the previous guidance from the third quarter. Is that just fully a function of your new distribution guidance of 5% to 10% increases annually?

Donald R. Chappel

Sean, I think that's a major factor in that.

Sean Wells - RBC Capital Markets

Okay. And as we see the coverage coming down a little bit over time based on the new guidance, and it looks like it's becoming a little more normalized. What do you expect is the long-term target for coverage?

Donald R. Chappel

Sean, this is Don again. I'd say it's a function of facts and circumstances and certainly commodity prices. So when we're in a fairly strong part of the cycle on commodities, you would expect to have relatively high coverage. If we saw some weakness in margins, you'd see that coverage ratio come down. So at this point we're experiencing very strong margins. We have reason to believe that margins will remain strong for the next couple of years.

But, nonetheless, there's always some risk that margins retreat somewhat. So we've got again some coverage to cover that risk. And as well as I mentioned earlier, that cash is not sitting idle. It's being reinvested in the business. Therefore, we avoid having to issue debt and equity to the extent that we have that excess cash, which helps grow the distribution to a greater extent in future periods.

Sean Wells - RBC Capital Markets

Yes. So like for 2011, it looks like the guidance for coverage is between 1.0 and 1 1.3. I take it you guys are fairly comfortable, at least given the current conditions of increasing the distribution between 6% to 10%, even if you bump up against that 1.0 coverage for 2011?

Donald R. Chappel

That’s correct.

Sean Wells - RBC Capital Markets

Okay. And I want to follow-up on Sharon's question. In ramping up the Marcellus gathering capacity up to 2.75 Bcf by 2015. How much of that is associated with the Laurel Mountain JV? I know that we were talking about the estimate from Atlas of 1.2, but what do you guys think it is?

Alan S. Armstrong

Yeah. Just slightly more than half of that 2.75 is attributable to Laurel Mountain. And again, I mentioned it a little earlier, but if you look at the EURs between the two areas, even though the acreage is smaller in the Cabot area and the number of total wells that are being drilled are smaller, the reserves per well in some instances are more than twice as much as what we're seeing in the Southwest Pennsylvania.

So it’s not overly intuitive unless you have all of the assumptions to build that up. I think the difference between the forecast that we were using for Atlas and maybe what they've published and I wasn't familiar with that, I apologize for that, but I don't know if those are net of fuel burned, net of royalties, I mean, I don't know if it's a sales number or if that's a raw well head number. There could be some adjustments in there as well for those types of things.

Sean Wells - RBC Capital Markets

And so to get to that 2.75, I mean how much spending do you think that will require incrementally?

Alan S. Armstrong

Yeah, let's see. James, have you got that?

James J. Bender

Are you asking over the five-year period?

Sean Wells - RBC Capital Markets

Yeah.

Alan S. Armstrong

Yeah, hang on just a second. Let us look that up. I would just comment that while we don't have any large third-party volumes built into the Laurel Mountain as I mentioned earlier, there is a lot of working interest in JV gas that would be coming to us, that if you were just looking at Atlas production, you would actually see higher volume. And we do have some kind much given third-party business that is embedded in there as well. It's just we don't have any big build-outs for third party. So there may be some distinction between our numbers and theirs on that basis.

James J. Bender

Just coming back to that capital question. We've got just shy of $1 billion in Marcellus for 2011 and 2012. And that includes both of these two contracts we've been talking about as well as some business development activity in that area. And that's what's loaded up into those slides that I think Alan talked about on slide 14.

Sean Wells - RBC Capital Markets

Okay. But that's for 2011 and 2012?

James J. Bender

Right.

Sean Wells - RBC Capital Markets

Okay. That’s all I have. Thank you.

Operator

And now we'll go to Andrew Gundlach with Arnhold Bleichroeder.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Good morning. Can I ask a follow-up on that last question? When you say $1 billion of WPZ spend and the slide on page nine, are these numbers net to WPZ or is it gross to Laurel Mountain?

Alan S. Armstrong

On slide nine, those are all 100% numbers.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Those are 100%. So 2015, 2.75 Bcf per day that would be some 51% to WPZ. Obviously I guess you're mixing in the Cabot numbers there. So 2015 is what WPZ would gather or there is a percentage that would go to whoever owns the other half of Laurel?

Alan S. Armstrong

Yeah, from an operated standpoint, the 2.75 Bcf a day target in 2015 would be accurate. If you're really looking at it more on a revenue interest, you'd have to deduct out that 49% interest in LMM.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Okay. But the $1 billion that you referred to is net to WPZ spend?

Alan S. Armstrong

That's correct.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Is that correct?

Alan S. Armstrong

That's correct.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

So it's a little bit apples and oranges here, but I understand the point. We can follow up later. One other question on this page. Is this a substantial source of volume for the Keystone Connector? Is that why you have confidence in that project, which I think is a fabulous project by the way?

Alan S. Armstrong

Yeah. If you look at where the Keystone Connector lays, it certainly is well suited to access gas in Southwest Pennsylvania. And so really I think any volumes that are in that area are very well suited to help underwrite that project.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

I see. Okay. Next question is for Don. There's a gap between your cash sources and cash uses, including the growth CapEx. And I'm just curious how you see yourself financing that? Is the balance sheet “optimized” or can you use more debt than equity as you execute on those plans?

Donald R. Chappel

Andrew, I would look for a balanced approach between debt and equity for the next couple of years here in our outlook.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Okay. And then with respect to the question was asked on Canada, not only on this call, but the previous call. Isn't the likely outcome for Canada not to be part of the MLP, which as you pointed out would be very confusing, not to mention a tax nightmare. Isn't the likelihood if the growth CapEx warrants it and obviously will warrant it, because you have great assets up there. Is the likelihood that IPO-ed in Canada, where midstream companies trade at higher multiples than midstream companies in this country do. In other words, as a WPZ shareholder, should we really be worrying about how Canada gets funded?

Donald R. Chappel

Again, this is Don. I would just say, only Williams has all the options. So again that's a Williams' assets. Williams has all the options. One of the options is the potential dropdown to WPZ at some future date. Other options include the option that you just mentioned. So I think that's a longer term issue, not one that we're spending much time on today, because again we're still in the early innings there.

The cash flows of that asset base were still pretty modest, relative to what we expect the cash flows to be in five years and again we've got a lot of that prefunded. So we've got a tremendous opportunity in Canada at the Williams level. And there may or may not be an opportunity for WPZ.

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Okay. And then want to ask just one last question. With the announcement today, the WMB will in effect be a publicly traded GP a couple of other assets, right? And as a WPZ holder, with the EMP Company attached, there were always multiple sources of protection for that LP dividend and you used all of those sources in '08 and of course, early ‘09 that benefits WPZ unit holder.

But even with your strong fee business and even with the potential for PetroChem seeing hedging and things like that, the tools available to WMB to help the WPZ shareholder obviously reduced with out the E&P business. And I'm just curious how you think about that over your long-term plans, in other words, have you in effect gone back to a model where you're very dependent on the capital markets on access to capital markets to grow and maintain dividends? I'm just curious how you've put all that together, I understand the near-term has been taken care of, but the bigger picture, how do you see it?

Alan S. Armstrong

It sounds like a Williams’ question, is that a Williams’ question?

Andrew Gundlach - Arnhold and S. Bleichroeder Advisers, LLC

Well, it’s WPZ question, to the point that we depend on WMB to use every tool that it has to protect the dividend or the distribution?

Alan S. Armstrong

We don't see a big change there and certainly WPZ is self-sufficient. Williams’ certainly provides the management, but on the other side of that is, WPZ is very self-sufficient. So I'm not sure that we see an issue there that where the risk profile or the growth profile is anything less than it was before and in fact, we think that the growth profile is as strong or stronger than it was before. So if you want to give IR a call, they'd be glad to have a chat with you on that.

Donald R. Chappel

Andrew, the only other thing that I'd add to that is that despite the support that WMB provided by relaxing the IDRs in 2009, if you look at the full year, it really wasn't required to do that. And in terms of actual performance, we maintained the coverage ratio, even if we would have made that IDR distribution. So we did that and WMB did that in an abundance of support given a very shaky and concerned market. But at the end of the day, we would have weathered that storm even without that being required. So I think that's very key to note.

Operator

And that is all the time that we have for questions today. I would like to turn it back to our speakers for any closing or additional remarks.

Alan S. Armstrong

Okay. Great. Thank you all very much. As you can tell, we are very excited about WPZ’s future and we're able to lay out a little more color and detail into what's going on in the Marcellus and the kind of strength that we’ve got there. And as well, continue to talk about the strength of our gas pipes business in a very, very solid and quality of earnings that we have coming from that business that I think distinguishes us very much amongst the large integrated MLPs. And so anyway, we remain very excited. We thank you for your interest and for joining us this morning.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Again, thank you for your participation.

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