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Executives

Travis N. Campbell - Head of Investor Relations

Donald R. Chappel - Chief Financial Officer and Senior Vice President

Ralph A. Hill - President of Exploration & Production

Alan S. Armstrong - Chief Executive Officer, President, Director, President of Midstream Gathering & Processing, Chairman of Williams Partners GP LLC and Chief Executive Officer of Williams Partners GP LLC

Rory Miller - Senior Vice President of Midstream

Analysts

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Holly Stewart - Howard Weil Incorporated, Research Division

Kevin A. Smith - Raymond James & Associates, Inc., Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

Carl L. Kirst - BMO Capital Markets U.S.

Unknown Analyst -

Faisel Khan - Citigroup Inc, Research Division

Jason Gilbert - Goldman Sachs Group Inc., Research Division

Williams Companies (WMB) Q3 2011 Earnings Call November 2, 2011 9:00 AM ET

Operator

Good day, everyone, and welcome to the Williams Companies Third Quarter 2011 Earnings Release Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Travis Campbell, head of Investor Relations. Please go ahead, sir.

Travis N. Campbell

Thank you, and good morning, everybody. Welcome to our third quarter call. As always, thanks for your interest in the company. As you no doubt know, we released our results yesterday afternoon after the market closed. Also yesterday, Alan, using a few slides, had some commentary about our results, the new guidance and growth opportunities. That audio commentary and the slides are available on the website. So on our website, williams.com, you should be able to find a number of things that were posted yesterday afternoon. The earnings presentation with audio commentary and a podcast by Alan, the data book that contains our usual information we make available each quarter, the press release of our third quarter results and our analyst package. Also for your information, the third quarter 10-Q has been filed as well. Because we had commentary yesterday, this morning's call will be fairly brief. I know there are a number of other companies hosting called this morning, so we'll go quickly to your questions so this call should be fairly short.

In a minute Alan Armstrong, our President and CEO, will make some brief comments, after which we'll open the lines for questions. Be aware, as always, all of our business units heads are here and are available to respond to questions after Alan's remarks. Here with me today are Ralph Hill, who heads E&P Company; Rory Miller, who oversees Midstream; and Randy Barnard who heads our Gas Pipelines. Also, Don Chappel, our CFO, is here and available.

On yesterday's presentation, there were forward-looking statements on Slide #2 and #3 and the disclaimer, oil and gas reserves on Slide #4. Those also included in our data book. Those are important and integral to the company, so you should review those. There are also non-GAAP numbers included in various presentations. Those have been reconciled back to generally accepted accounting principles. Those reconciliation skids are also available and follow all of our presentations.

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

Alan S. Armstrong

Great. Thank you, Travis, and good morning, and thanks for joining us. First of all a great quarter, solid performance and significant growth in all of our segments. And certainly, we're excited that our continued better-than-expected cash flows in our infrastructure business have now provided us with the option to go directly to a spin without an IPO, if we don't see the markets become more stable and supportive of IPO.

In the quarter, certainly you started to see the benefit of a lot of our projects that we've invested in the last couple of years really starting to kick in. Really across-the-board, the -- certainly, the Bakken's kicking in for E&P. The Perdido Norte project really starting to pick up volumes and help to fill up our Markham facility and as well, our Echo Springs facility that's now just had its 1-year anniversary of the new train being built there. We actually hit a record in the quarter of 41,000 barrels a day and are now operating a little over that. So you should expect to see more of this to come as these projects we've been investing in continue to kick in. Finally, our business really is perfectly positioned to reap the benefits of this U.S. turning to natural gas. I think you're going to continue to hear more and more about that. Our infrastructure will be very well positioned to help arbitrage, the tremendous spread between natural gas and oil-based products and as well, is positioned there to provide services to get natural gas into the critical markets and provide critical access. We're certainly starting to see a lot of strains on the infrastructure in some of the growing basins like the Marcellus, where infrastructure has become critical to getting the production on. So we're very excited about where we're positioned right now and excited to talk to about -- to you about the quarter. So with that, I'll turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Jason Gilbert from Goldman Sachs.

Jason Gilbert - Goldman Sachs Group Inc., Research Division

Just a quick question. Post the spin on WPX, you're going to be left with the Williams Hold Co. It's going to have very few assets other than the Canadian Midstream and Olefins, and then the ownership in the Emaltino [ph]. I was wondering, what's your ultimate vision for how this Hold Co. structure is going to look? And is there a need for Williams Hold Co. down the line, or could we expect that to be collapsed at some point?

Alan S. Armstrong

I'll take that. Well, certainly, Williams Hold Co. will hold the general partner obviously for WPZ, as well as a large number of units for WPZ. And as we've explained in the past, eliminating that would come with pretty significant tax realization. And so we really don't see much reason for doing that. We also see an ability to continue to incubate and use Williams Companies in acquisitions as well when things aren't a perfect fit. So we like having that vehicle there and there's certainly a lot of financial reasons for leaving the Hold Co. in place.

Operator

And we'll go next to Ted Durbin from Goldman Sachs.

Unknown Analyst -

Randy [ph] from Fangles [ph]. It looks like your CapEx in the Midstream, in Canada guidance, is up a decent amount for '12 and '13. You didn't really lower '11. The first may be a timing issue, but maybe just talk to -- I think these numbers are higher than what they were at the analyst day.

Rory Miller

Yes, I think most of that change -- this is Rory Miller -- most of that change a result of us having better definition on the capital projects. We've advanced some of the engineering on that and those particular projects that are in guidance are in this negotiation tables have been pushed out. We also have in that same set of pie charts the Geismar expansion, I know you asked specifically about Canada, but the Geismar expansion is in those numbers as well.

Unknown Analyst -

Right. So I was asking about the whole segment. So I guess, would you say most of the delta is just Geismar? Or is there other Canadian spend as well?

Rory Miller

Yes. I don't think we've added any new Canadian things; it's really just more of refining the cost estimates.

Donald R. Chappel

This is Don Chappel. I just, again note that on analyst day, we spoke the Geismar, but it was not yet included in our guidance. So this is the first time we've included the Geismar expansion in our guidance numbers.

Unknown Analyst -

Okay. And then if I could just shift over to a couple of questions on E&P. I think your last sort of release, you said you're planning to run 8 to 9 rigs in the Marcellus by year end 2012. You're now saying 6 to 7. Was that just lower rig count just a function of kind of your lowering your gas price forecast or is there anything else going on there?

Ralph A. Hill

This is Ralph. It's a function of a little bit lower gas price forecast and living within our means and also, we're much efficient with our new fit-for-purpose rigs than we thought we would be.

Unknown Analyst -

Okay, that's helpful. And then just thinking about the Bakken, as those volumes come up. How should we think about your, I guess your takeaway there? What kind of realized prices we should expect, maybe discount to WTI or what kind of realizations there?

Donald R. Chappel

We have planned for approximately about a $10 discount and what we're actually seeing is less than that and the last few months is more in the $5 range, but we continue to plan about $10 -- $9.80 I think is what's in the actual data book. And we are at this point through rail, through pipe, through trucking we are keeping up with our production. And we think we have sufficient capacity to continue with our build up of volumes.

Unknown Analyst -

Okay, that's great. And then last one for me. Kind of really to Jason's point was just -- do you anticipate making any incremental debt pay downs now that you're not doing the IPO at the WMB level? Or are you just -- you're comfortable with the debt balances that you have staying there at Hold Co.? I’d just be curious about that. And where do ratings agencies come out as well?

Alan S. Armstrong

We're continuing to look at potential debt pay down with proceeds from the notes offering that would be transferred up from Williams. And we're in regular communication with agencies regarding our plans and again, we expect to maintain our investment-grade ratings.

Operator

And we'll go next to Carl Kirst from BMO Capital Markets.

Carl L. Kirst - BMO Capital Markets U.S.

Actually, maybe the first question just for Ralph. There was a mention, perhaps, of cost pressure going on in the Bakken and that sort of your oil service relationships are helping to hold the line. But I was wondering if you could give us any additional color there.

Ralph A. Hill

Well we've established a relationship with Halliburton for our stimulation services dedicated to us. Also for our directional services, we've also contracted for a whole new fleet of rigs, fit-for-purpose rigs. And we've contracted for a rig moving company, so we've taken a lot of the model we had in the Piceance and applied it up there. So while there are cost pressures, since we were so new to basin we feel we've really started to overcome a lot of those and as that model kicks in, we'll continue to drive our costs down. So there is a lot pressure up there, no doubt. But we feel with our relationships with our vendors and our alliances with them, we'll be in good shape.

Carl L. Kirst - BMO Capital Markets U.S.

Is there anyway to quantify that as far as what your expectation is on cost pressure, if you will, maybe 2012, just over today in that region?

Ralph A. Hill

I think our data book -- basically, we're talking about $9.5 million wells. We initially planned on those to be less than that. Some people were talking about their well costs are over $10 million, $11 million and we don't think we'll see that. So, I guess -- and we'll be able to hold -- we think we'll be able to hold flat at the $9.5 million, is where we are now and we hope to -- we'd like to see that driven down, but we're not sure yet. But we've been able to reach the $9.5 million. We've already got a couple of new rigs up there. We also have the alliance with our stimulation services.

Carl L. Kirst - BMO Capital Markets U.S.

Great. And then just a question, if I could, on Midstream Canada. Kind of continuing to get our arms around it. I know this is kind of a smaller piece of the business but one thing we noticed that excluding depreciation, the operating cost had a bit of a spike. And again, this is small part of the business, but I didn't know if there was any additional color to be had there.

Ralph A. Hill

Yes, we did have more planned maintenance, both in the North and down at Redwater. So I think it was around $10 million of additional maintenance capital that we had in the quarter. So that's probably accounting for what you're seeing.

Carl L. Kirst - BMO Capital Markets U.S.

And then last question and, Alan, you knew it was coming, so just to go ahead and ask it. With respect to the Kinder-El Paso M&A, the things we've seen in other company filings. Is there any additional commentary to add to the whole Southern Union situation or should we just kind of take prior comments as is?

Alan S. Armstrong

Well, I'll clarify but they're not going to be different than prior comments. We continue to be very excited about the infrastructure play here as the U.S. starts to really take advantage of natural gas. And we think that the infrastructure assets are going to play an important role in that, so we continue to be very interested in that and we think we're very well positioned as a company to grow in that space and we'll continue to look aggressively at any opportunity we see out there to do that. So I think you should expect to see us to be continue to be aggressive in that space.

Operator

[Operator Instructions] We'll go next to Craig Shere from Tuohy Brothers.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Just following up a little on Carl's question about the M&A environment. Perhaps Alan or Don, a, if you all could take a step back and just talk about the broader competition in the market for assets; and b, the potential impact on your near-term capacities now that perhaps you might have, give or take, maybe $1 billion plus less cash because you may not do the IPO.

Alan S. Armstrong

Craig, this is Alan. I'd say that lack of IPO proceeds has certainly been something we knew was a possibility during this entire period, so we're not at all surprised by that. And obviously it does make a difference, but I don't think it's going to make any strategic difference in terms of what we pursue. But obviously it is a factor but beyond that, we'll continue to look as assets. I think as Alan has said before, we're disciplined in our approach. Obviously it's a market where there's a lot of competition for assets and where we have unique advantages and we have a lot of such advantages and we'll look to use those.

Craig Shere - Tuohy Brothers Investment Research, Inc.

It seems that most are looking at acquisition as being, if not immediately accretive on the cash flow basis, at least neutral and then accretive very soon thereafter. From a strategic standpoint in terms of the M&A environment, are you all willing to look at things that, perhaps in the first year, may not help with dividend distributions?

Donald R. Chappel

Well I think certainly, there are assets that would be large growth assets in areas that would fit that profile. But for the most part, those are going to be smaller kind of assets that are emerging assets that we would pursue. But we certainly will look to those kind of growth assets in basins like the Marcellus where we feel like we've got great opportunities moving forward and we think we can build a great business there and a great franchise there. So we look at those kind of investments in those areas.

Operator

And we'll go next to Holly Stewart from Howard Weil.

Holly Stewart - Howard Weil Incorporated, Research Division

First, just kind of following up on the M&A. Sorry to beat a dead horse here. But we did notice, in one of the ETE filings that you were having some conversations to buy some of Southern Union's assets. Is that door now closed?

Donald R. Chappel

I wouldn't say that the door is closed, but I would certainly say sub [ph] has been clear in terms of their position on that and in the immediate term. So I think in the immediate term that may be the case, but I don't think for the longer term necessarily. But I would just tell you we continue to be very disciplined on that, and we think we know what they're worth, we think we're the right buyer for a certain portion of those assets and we'll just see where that falls out ultimately.

Holly Stewart - Howard Weil Incorporated, Research Division

Perfect. And then maybe one for Ralph. Ralph, kind of just looking at my previous notes, I think you thought that Marcellus would get to 25% of production within the next couple of years. You had some delays on the infrastructure side and you've tweaked your rig count. What's kind of a latest thought process there, in terms of Marcellus?

Ralph A. Hill

I think we'll still get to that level in a couple of years. We feel very confident, especially there are -- our results are just starting in Susquehanna because laser's still in the start up phase. But even with a lower rig count, we think we'll be at those levels. I think we're going to be very pleased with the Susquehanna joining, in particular. And our Westmoreland and Clearfield and Centre Counties are also doing better than we thought.

Holly Stewart - Howard Weil Incorporated, Research Division

If you had to break rig count out today up in the Marcellus, where are those rigs distributed?

Ralph A. Hill

They're going to be probably -- well we'll get to 4 in Susquehanna, it'll be -- it's rising from 2 to 4. And then the Clearfield -- or the Westmoreland County will have 2 but we may move one down from time to time to the Clearfield and Centre County areas. So really 4 in the Northeast area and 2 in the Centre part.

Operator

And we'll go next to Jusco Yellow [ph] with Tallenger [ph].

Unknown Analyst -

It's actually John Kiani [ph]. Can you talk a little bit about your level of comfort or confidence in eventually moving up to investment-grade rating at the Williams Legacy or stub company post the spin with the leverage you see there versus what you would have expected in an IPO scenario? And then second part to that question is, with the spin being what the current plan is, is there a range or certain area of the growth rate range we should expect for the dividend that's 10% to 15% in the spin scenario, based on what balance sheet and leverage you see versus the original IPO plans?

Ralph A. Hill

I'll start with the latter part of your question. Again, the 10% 15% is our guidance on dividend growth, regardless of spin versus IPO. We don't think that, that really moves the needle. In terms of credit rating targets, we're committed to maintain investment-grade ratings. The actual ratings will obviously be determined by the ratings agencies. But we think in terms of business risk and the quality of assets as well as the leverage and the like, we can conserve ourselves to be in a very strong position. But obviously the ratings agencies will decide where they come out based on their own views. But again, we're committed to those ratings. We've seen continuous improvement and we'll see where we go from here.

Unknown Analyst -

I appreciate that. On the dividend growth rate range of 10% to 15%, my question was really does the spin put you in a different area of that range than the IPO would have?

Alan S. Armstrong

No. No, it does not.

Unknown Analyst -

Okay. So you feel pretty comfortable with the midpoint in either of the spin or the IPO scenario?

Alan S. Armstrong

Yes, we do.

Operator

And we'll go next to Kevin Smith from Raymond James.

Kevin A. Smith - Raymond James & Associates, Inc., Research Division

With laser pipeline starting up, is all of your Marcellus shut-in production essentially online now? Or where are we at within that space?

Ralph A. Hill

No. This is Ralph. Only a couple of wells are online and we have a number of other wells that will be coming online as we prepare our facilities and they prepare the start up. So we actually just are in the process of turning our second well. So we have, I think -- we reported, we think we have about 80 million a day of production that will be coming on over the next several weeks to months as the laser goes to full start up.

Kevin A. Smith - Raymond James & Associates, Inc., Research Division

Okay, fair enough. Maybe by year end, are you expecting to essentially know or shut-in volumes other than just maybe the normal amounts from joining completion?

Ralph A. Hill

Yes, absolutely. We think will we all -- it'll be normal during completion like you said.

Operator

And we'll take our last question from Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

It looks like Enterprise has secured the commitments for ethane pipeline at the Marcellus. Maybe Alan, if you could talk to how maybe this project would impact the need for blending projects that Williams is contemplating. And also support for the Atlantic access project.

Rory Miller

Yes, this is Rory, I'll take that. And our strategy I think, as you alluded to in the Marcellus, is to actively use blending in the basin, particularly with the pipes project that we've got close Atlantic access. We see that as probably the most cost-effective way to do things but we do have a project, I think we've talked about it some at the analyst day, our confluence pipeline that we are proposing is a Williams ethane solution. And that's something that would build a runway to a more complete answer, be it some petrochemical crackers up in the Northeast or be it an alliance such as the one that Enterprise proposed itself. Getting those kind of solutions up there, we see generally is a good thing. If there's a way to unlock value on the ethane commodity for producers out there, they're going to be drilling more. And as they gather and future processor up there, that's good to get the drilling going. So I think any of the solutions up in the Northeast is just a positive from herein.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And I guess based on your volume projections, do you think there's room or necessity for 2 or more of these projects actually get completed?

Rory Miller

For the long haul? Ethane pipelines, is that your question?

Sharon Lui - Wells Fargo Securities, LLC, Research Division

That's correct.

Donald R. Chappel

Yes. Well right now, I think one is a big first step, but probably the pipeline to Sarnia. I think that MarkWest is working on is probably the first tranche of ethane that gets cleared from the area. If we get one of these long haul pipes to the Gulf Coast, that's probably a bigger tranche of ethane that's cleared. If you do the math, if you look at the Penn State study where they were forecasting I think up to 17.5 Bcf a day in 2020. Yes, you can start doing the math and you probably could get to 2 pipeline projects, but I think that's a long ways down the road and probably so far out in the future that that's not much of a concern right now.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. Any update, I guess in terms of securing commitments for the confluence pipeline?

Rory Miller

We are talking to a number of producers right now. As with any new project, we don't have any definitive agreements signed. We are getting a lot of interest. It's something that, I guess I would say generally is being well received, producers community out there. So we'll report on that.

Operator

And we did get additional question, it comes from Tim Schneider with Citi.

Faisel Khan - Citigroup Inc, Research Division

It's Faisel from Citi. Just a quick question on the -- do you have any well results at all, from some of the activities in South America?

Ralph A. Hill

We haven't done any Vaca Norte [ph], if that's what you're asking. We're doing our standing drilling in our 3 concessions in Entre Lomas, but we do not have -- we have a couple of vertical tests we're going to do in the Vaca Norte [ph] type but there's no other -- they're not done yet, so not yet.

Faisel Khan - Citigroup Inc, Research Division

Okay. And Ralph, when will all those tests be done, you think?

Ralph A. Hill

We'll do some in early next year I believe. But we're actually kind of monitoring the -- since we have all the acreage already, we're monitoring the progress of other producers and trying to learn from what they're doing and then we'll enter into our program probably at a later date in a more robust program. So we have a couple of vertical wells we'll test probably early next year.

Faisel Khan - Citigroup Inc, Research Division

Okay, got you. And then I think previously guys had talked about kind of the target production rate in the Bakken of sort of 20,000 barrels equivalent a day. Where do you think you guys are in that sort of ramp up?

Ralph A. Hill

What was -- in what time frame? I'm sorry.

Faisel Khan - Citigroup Inc, Research Division

I think it was 2013 or so. I think when you guys first made the transaction it was something along those lines, but maybe I'm mistaken.

Alan S. Armstrong

I think that was it. I think we would -- currently, we're slightly behind due to delay, with the weather we had, and the start up from all that. But we would expect to gain on that and get close to that level. I don't know the exact date of that, but we feel confident in our production profile going forward.

Faisel Khan - Citigroup Inc, Research Division

Okay, understood. And then just a question on GulfStar, you're now with that -- with the tubular belts kind of being sanctioned. I mean, how does that project kind of move forward for you guys? And is there any sort of update on what that will cost and what kind of contribution that could bring to the Midstream business?

Rory Miller

Yes, this is Rory, I'll take that question. Well we had a reimbursement agreement in place with a customer many months before the definitive documents were signed. So the project is well underway, all of the major contracts for fabrication and heavy lift, and installation on the pipelines, those contracts are all signed and in place. We're well on our way, steel is in the yards, things are progressing nicely. So that total cost I want to say is under $1 billion with the pipeline interconnections. I think as we noted, we are still looking at taking on partner for that. So that's probably something that we just want to reiterate, but I don't know if we got anything else on that.

Operator

And we have no further questions at this time. I'll turn it back to you for any closing remarks.

Alan S. Armstrong

Okay, great. Well thank you for joining us this morning and appreciate the great questions you voiced and the interest in our company. And we look forward to telling you about our growth next quarter. Thank you for joining us.

Operator

That concludes our call for today. Thank you for your participation.

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