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Williams Partners, LP

Q3 2011 Earnings Call

November 2, 2011 12:00 pm ET

Executives

Alan Armstrong – President and Chief Executive Officer

Don Chappel – Chief Financial Officer

Rory Miller – President, Midstream

Sharna Reingold – Head, Investor Relations

Analysts

Bradley Olsen – Tudor Pickering & Co.

Ted Durbin – Goldman Sachs

T. J. Schultz – RBC Capital Markets

Craig Shere – Touhy Brothers

Operator

Good day, everyone and welcome to the Williams Partners L.P. Q3 2011 Earnings Release Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Sharna Reingold, Director of Investor Relations. Please go ahead.

Sharna Reingold

Alright, thanks Natasha. Thank you, and good morning. Welcome to the Williams Partners Q3 2011 earnings call. As always, thank you for the interest in the company.

As you know, we released our results yesterday after the market closed. Alan Armstrong, our Chairman and CEO had some commentary about these results. This audio commentary and slides are available on our web site www.williamslp.com . So we will not be reviewing our slides this morning.

In a minute, Alan Armstrong will make some brief remarks and we’ll open the line for questions. Be aware that Don Chappel, Rory Miller, and Randy Barnard are also available for any questions.

Before I turn it over to Alan, please note that all the slides are available on our website www.williamslp.com , please read slides two and three. 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 the presentation are various non-GAAP numbers that have been reconciled back to measures included in Generally Accepted Accounting Principles. Those reconciliations, schedules and related information are included in the slides available on our website www.williamslp.com .

With that, I’ll turn it over to Alan.

Alan Armstrong

Thank you Sharna, and good morning; thanks for joining us for WPZ’s Q3 Earnings call. First of all, great performance again here in Q3; the things I’m probably most pleased about in the quarter, we’re starting to see a lot of the big projects that we’ve been working on for the last several years really starting to kick in, as well as the quarter was certainly supported by very robust NGL fundamentals that we think continues to have some weight to it. So in terms of the projects kicking in, we certainly highlighted a lot of those; Perdido Norte beating both volumes on gas and oil transportation, volumes really starting to pick up.

Our Echo Springs plant, now a year old, after that expansion hit a new record on production there, and as well in the gas pipe segment, a lot of projects as demand for power generation in the Southeast continues to kick in, filling in. So nice to see a lot of the big efforts there at building out these projects, starting to kick in. And of course, we’ve got a very nice portfolio of similar projects in front of us. A couple of things I’d like to remind you about, I think that make WPZ continue to be a great investment opportunity. First of all, remind you since our Q4 2005, we’re at 114% of distribution growth from that period; that’s a 13% compound annual growth rate on that distribution growth, and we continue well above our peers in the distribution growth. Our most recent growth was 9% over last quarter for that distribution rate, and we continue to show a 6% o 10% forecast, well above our peers of the large integrated MLPs.

We continue, that growth continues to be well supported by growth projects that are identified and high return projects that we continue to invest in, and we continue to believe that the WPZ infrastructure and the people and the organization that we have is very well poised to continue to serve this growing demand for critical large scale infrastructure, which is what we’re all about. So we think we are both performing very well today, and we think we have a very bright future of growth in front of us. With that, I’ll turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions.) We’ll take our first question from the site of Bradley Olsen, with Tudor Pickering & Co. Please go ahead.

Bradley Olsen - Tudor Pickering & Co.

Hey guys, good quarter; just a quick question, and you may have hit this on your earlier call, sorry if that’s the case. As far as the outages that reduced your NGL volumes on kind of a one time basis, could you maybe just step through what specifically triggered the outage, and how that affected your upstream assets? And I guess on a more kind of general or broad theme, do you guys expect – even though this was a one time event, do you expect, given the high levels of demand for NGL transportation currently evident in the energy industry, that outages that have kind of, I guess, larger [knock on] effects will become an increasing phenomenon in the next few quarters?

Rory Miller

This is Rory Miller; I’ll take that question, Bradley. If you look in comparison say our Q3 equity sales gallons around 274 million compared to Q2 ’11, we were down about 33 million and I think that’s close to what we flagged at the analyst day. That 33 million gallons of fall off was split pretty equally between an outage at the Bushton fractionator; that was scheduled for 10 days, I think it was actually down eight days, and we did quite a bit of work to mitigate the impact of that. I think that was a very successful effort. About half of that volume was due to the Bushton outage, and then about half of it was due to some Opal maintenance that we had in July and August. So those were the two major impacts; there were some other minor movements, but that’s the lion’s share of it.

Bradley Olsen - Tudor Pickering & Co.

Okay, and I think on the Analyst Day, when you guys kind of telegraphed that downtick in NGL volume, that you might have mentioned something about Texas NGL pipelines, or some downstream infrastructure on the Texas Gulf Coast. Do I just mis-remember that?

Rory Miller

Yeah, I’m not sure I recall what you’re referring to there.

Bradley Olsen - Tudor Pickering & Co.

Okay, fair enough. And so the Opal maintenance, was that more opportunistic maintenance, or was that that you used the outage to get some maintenance done, or was that just kind of a separate event?

Rory Miller

A little bit of all of that. We did have some planned maintenance for the quarter; we did everything we could to make sure that we were getting a maximum amount done with the Bushton Frac was down. The majority of it was planned, but we did have some unplanned maintenance as well. So it’s a little bit of all of those things, but we did mitigate that where we could, by taking advantage of the shut down.

Bradley Olsen - Tudor Pickering & Co.

Okay great, and just one more. I noticed that the CapEx number went up a couple of hundred million in 2012, and by about $100 million, at least the range went up $100 million in 2013. Is that all associated with the Keathley Canyon project moving out of the kind of speculative realm and into the planned, forecasted realm?

Rory Miller

That’s primarily what’s driving that. There are some other minor adjustments as we’re moving things between years, when we get a little more accuracy toward the end of the year, but by and large, that’s that proposed Keathley Canyon project.

Bradley Olsen - Tudor Pickering & Co.

Okay, and so that’s the Keathley, and then as far as the FPS goes, have you released an estimate of cost on the Gulf Star project?

Rory Miller

We have talked about the cost; I’m not sure we have the exact number released, but it’s under a billion dollars. If you look at the Gulf Star plus the connecting pipelines, it’s going to be under a billion dollars, but I’m not sure that we’ve released the exact number.

Bradley Olsen - Tudor Pickering & Co.

Okay great. That’s all for me, thanks for taking the questions.

Alan Armstrong

Bradley, the only thing I would add to the other part of the question you asked was continued outages as the infrastructure gets strained for NGL capacity. Now we just say that we think that will happen in terms of rationing pipelines; I think it will be very critical for people that have fixed capacity on their pipes, and into the fractionators. I think it will be very critical. We are very fortunate to have fixed and firm space available to us on both the transport fractionation out of most of our Rockies facilities that come into Overland Pass, but as facilities are expanded are being taken down, associated with expansions, I think you will see some outages like this, just as the industry is working to expand its existing facilities and have to take things down to do work with those interconnections. But I do think, separately, that there’s going to be a big distinction there as capacity gets rationed, if you don’t have firm capacity on some of these pipes. So I think we’re well positioned in that space, but I do think it will be an issue.

Bradley Olsen - Tudor Pickering & Co.

Okay, great. And just southbound out of Conway, you guys are confident that the capacity that you have over the next couple of years is sufficient to handle the growth in volumes further upstream, as you expand Overland Pass?

Alan Armstrong

That is right. For Williams Equity volumes, that is correct.

Bradley Olsen - Tudor Pickering & Co.

Okay great. Thanks a lot.

Operator

Our next question comes from the site of Ted Durbin with Goldman Sachs. Please go ahead.

Ted Durbin – Goldman Sachs

Thank you; just following up on Keathley, what kind of returns or EBITDA multiple are you targeting there? Is there volume risk here, or is this kind of committed all just reservation fees? I’d just like a little more detail on the contract you’ve got there; any cost sharing if there are cost overruns, etc.?

Alan Armstrong

Maybe I can just make some general comments about our strategy for contracting in the deep water. That project is still a proposed project, but I think I can make some general statements that will be helpful for the kind of deal we would do on a project like that. In general, we’re looking for risk adjusted returns that are probably a little bit higher than what we would see onshore. We are using contracting type provisions that we think balance a fair sharing of the risk between the producers, the contractors that we employ ourselves, and typically we have been getting fixed payments associated with those kind of projects. And that’s probably what we would look for in the future as well, when we’re taking on large projects like that. So I don’t know if that’s exactly what you were looking for, but in general, there is a little more risk there. I think it’s important to take that into consideration when you’re contracting and we probably are looking for a little higher rate of return than what we took for onshore.

Ted Durbin – Goldman Sachs

That’s very helpful; thank you. And then my other question – just think about Markham, it sounds like you’re now filling up there, now that you’ve got Perdido coming on better volumes. Would you ever consider an expansion there? I’m just thinking about as the Eagleford ramps and then again, what kind of cost contracting, etc., would you look for, if you did expand it?

Alan Armstrong

We’re always looking to expand our plants. We think the Markham location is an excellent one, not only for the growing deep water volumes, but as an onshore destination as well, for some of the South Texas gas, the Eagleford, those types of supplies. So we’re really close to being full today; we do have some options where we can probably, as we get higher GPM gas coming into the plant, we’ve got some lower GPM gas that we’d probably turn away. But the plant is generally full now and we’re still out looking for new business and we’ve got plenty of land there at that site for an expansion, if we choose to do so.

Ted Durbin – Goldman Sachs

That’s great; and then if I could just shift over to financing. You’ve got obviously a very strong cost of capital at WPZ here; are you considering maybe even pre-funding some of your growth projects? Given how strong your equity is trading, with potential that obviously things could go badly at a time that you know you have all this CapEx that is coming in the next two or three years?

Don Chappel

Ted, this is Don. We certainly look at that, but obviously pre-funding is expensive, so we’ll continue to weigh the opportunities and risk and make decisions along the way. So I think it’s a possibility, but there is a cost to pre-funding.

Alan Armstrong

And certainly with the high coverage ratios that we’ve got right now, we are getting a head start on a lot of that funding, and that’s been very helpful to us.

Ted Durbin – Goldman Sachs

Fair enough. That’s it for me, thanks guys.

Operator

Our next question comes from the site of T. J. Schultz, with RBC Capital Markets. Please go ahead.

T. J. Schultz - RBC Capital Markets

Hey guys, good morning; just a couple of things. On the Marcellus expansions, it looks like initial capacity coming on line here in Q4; can you just give a timeframe for some of the capacity expansions on Springville, and then on the gathering assets that are tied into Laser, that you mentioned in the slides?

Alan Armstrong

Yeah, maybe starting with Laser, because that’s – I think they took initial deliveries about a week ago from (inaudible), our wellhead gathering system up there that feeds into Springville and other pipes, was the first delivery into Laser. So I don’t know exactly what the total volume today on the system is, but a couple of days ago there were moving about 20 million a day. So that’s good news. On Springville, I think we’ve noted this in some of the slide decks, but we’re still shooting for December startup at Springville, and we’ve got compression coming on in several [tronches] and I think we do have a capacity curve in the deck. It might be in the analyst data book. So in the data book, I think we’ve got all that, and you can see sort of over time how those volumes ramp up, because there’s a lot of moving parts there.

T. J. Schultz - RBC Capital Markets

Okay great; just sticking to the Marcellus, on the ethane blending proposal, given that there appears to be some support for takeaway to the Gulf Coast here, which would potentially be ready by 2014, just how does that impact your thought process on your large scale blending solution?

Alan Armstrong

I think it’s complementary; I don’t know all of the details, obviously, behind their announcement. But the push of our confluence project is to get the heavies out of the gas, get the gas, the ethane rich gas aggregate to a central point, so that we’re ready to strip the ethane out when there’s a use for it; whether that use is to ship to Sarnia through a pipeline, go to the Gulf Coast through a pipeline, or to support a local cracker. So generally speaking, I think the announcement’s a positive thing and we’ll certainly be making sure that we have connections into that pipe to move customer’s ethane load.

T. J. Schultz - RBC Capital Markets

Okay, any view there, right now on the Utica and potential to tie those volumes into confluence?

Alan Armstrong

It’s possible, and there’s still a little bit of question around where the rich versus dry demarcation line is, and it’s going be a little ways from confluence, but it’s still a little early to say, there. Again, I think we need a few more wells down before we can figure out how that will fit in, but obviously there’s no reason we wouldn’t be interested in doing that.

T. J. Schultz - RBC Capital Markets

Okay, just one last thing; moving over to the western GNP assets, just looking for a little more color on some of the Mancos Shale potential there. I guess are you taking any Mancos volumes now? And then what kind of liquid uplift can we expect from potential development of the Mancos?

Alan Armstrong

That’s a great question; I’m not sure I have a great answer for it. But we are seeing Mancos Shale wells flow down in the San Juan basin. Our E&P company actually drilled some – I think it was six or seven months ago, but they’ve been flowing for a while now, and it’s very encouraging. They are in a dry gas portion of the Mancos Shale play, there’s also thought to be a rich gas window and maybe even an oil window; so we’re certainly looking to get our fair share of that business. It’s the same situation in the Piceants, and we do have WPX’s Mancos’ exposure all under contract, and we have some other contracts that we’ve recently done that would add Mancos Shale gas to our system. So far, what we’ve seen has been mostly dry gas, but some of the new things we’re looking at are in that wetter window. So it’s really too early to say about processing uplift, but like many of these Shales, we think the Mancos and Piceants and the San Juan are going to have dry gas opportunities and rich gas opportunities.

T. J. Schultz - RBC Capital Markets

Okay great, thanks guys.

Operator

Thank you, our next question comes from the site of Craig Shere, with Touhy Brothers. Please go ahead.

Craig Shere – Touhy Brothers

Hi, you touched on this a little bit with the equity pre-funding question, but could you give some additional color; given the large and expanding set of growth CapEx opportunities how you think about funding levers from seeking JV partners, as in the Gulf of Mexico, maintaining above average coverage ratios, even as the base contributions rise, and equity is showing. Can you talk through the interplay of those choices?

Don Chappel

Sure, there are many, many considerations, of course. Obviously we have a coverage ratio that’s out, and that does two things; one, it provides a buffer regarding margins and other risks in the business, as well as that retained cash is quickly reinvested in these attractive growth projects. So that mitigates risk as well as very efficient source of funding. Obviously debt financing is the cheapest source of new capital; we’re limited there by credit matrix and credit ratings, and beyond that, really the equity capital is quite attractive, but certainly more expensive than debt. And then beyond that, we will clearly look at other sources of capital; typically it’s going to be more expensive than WPZ equity, so we use that selectively when we think there’s a need or a purpose to that.

Craig Shere – Touhy Brothers

I was thinking a little more in terms of the equity funding of the growth CapEx, and if we talk, for example, about the coverage ratio, Don you’ve done a great job explaining how that’s both a buffer against commodity fluctuations and fortuitous use of funds with all these projects. But you’re also going to be growing disproportionately on the fee based side. So over time, if this pipeline growth CapEx project is sustained, but the proportion of commodity sensitive contributions falls, should we expect the coverage ratio to remain stout as a funding vehicle? How should we think about that?

Don Chappel

I think clearly, as the percentage of fee business goes up, the coverage ratio will likely diminish. So that’s a kind of a natural evolution as we continue to add more and more fee business relative to the amount of commodity business we have. But that trends, I’ll call it debt to longer term, that will be something that will evolve year over year versus how we make a decision next month, next quarter, or next time we raise capital.

Craig Shere – Touhy Brothers

Would you consider JV partners, to defray some of the capital commitments, even outside of the Gulf? Or is that just for large projects that might be a little riskier?

Don Chappel

I’d say we keep all of our options open, and we’ll continue to evaluate the course that we think is most effective and most efficient, based on facts and circumstances in terms of the pace of growth and what the relative cost of capital is.

Craig Shere – Touhy Brothers

Okay, thank you.

Operator

It appears we have no further questions in queue. Mr. Armstrong, do you have any closing comments?

Alan Armstrong

Okay, great. Well thank you all very much for the good questions as always, and thanks for joining us and we look forward to continuing to talk about the growth of this company. Thanks.

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