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Executives

Travis Campbell - Head, IR

Alan Armstrong - Chairman & CEO

Rory Miller - SVP - Midstream and Director of Williams Partners GP LLC and President of the Midstream Business Unit

Analysts

Stephen Maresca - Morgan Stanley

Ted Durbin - Goldman Sachs

Louis Shamie - Zimmer Lucas

Williams Partners L.P. (WPZ) Q4 2011 Earnings Call February 23, 2012 11:00 PM ET

Operator

Good day and welcome to the Williams Partners fourth quarter 2011 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 Mr. Travis Campbell. Please go ahead sir.

Travis Campbell

Thank you and good morning everybody. Welcome to our year end 2011 call. Thanks for your interest in the company. As you no doubt are aware, we released our results yesterday afternoon after the market closed. Also yesterday Alan using a few slides and some commentary about the results. That audio commentary and the slides are available on the website. So on the website williamslp.com you should be able to find the earnings presentation and the audio commentary, the podcast by Alan, the data book that we always provide, that contains the usual information, the press release and our analyst package.

Since we did the commentary yesterday, the call today should be fairly brief and we will get to your questions very quickly. In a minute, Alan Armstrong, the CEO and Chairman will make some brief comments after which we will open the lines for questions. Be aware though that all the business unit heads are here and available to respond to any questions.

With me is Rory Miller who oversees Midstream and Randy Bernard who heads up the Gas Pipes as well as Don Chappel the CFO. On yesterday’s presentation and in the data book there is a disclaimer on forward-looking statements that is important. Please read it. Also there are non-GAAP numbers included in the presentations, they've all been reconciled back to Generally Accepted Accounting Principles. Those reconciliations are available as well. So with that I will turn it over to Alan.

Alan Armstrong

Great, thank you Travis and good morning again to those of you who have joined us for the WMB call and first of all I would just like to point out another great quarter and certainly a great year for WPZ.

Segment profit plus DD&A growing in the fourth quarter from 574 million in 2010 to $671 million here in the fourth quarter of 2011. And of course our DCF for the full year growing from $1164 million in 2010 up to $1650 million here in 2011. So a great growth and as you can see from the scheduled opportunities that I spoke to in some of the slides and the slides from yesterday continue to increase our opportunity pipeline larger and larger. And I think probably the key note of our change in opportunities and capital guidance coming from our third quarter release to now, really a lot of that growth is coming in our Gas Pipeline segment as we are seeing a lot of demand for increased growth on the Transco system to take advantage of ample supplies of natural gas.

And certainly the industry in general is getting more and more convinced to that being the case and so we are very excited that we happen to have an asset that lay smacked out in the middle between great supply resources and great market demand. And so feeling very fortunate to have the capabilities and the assets that we have in this environment.

So a continued great growth story, you will notice that we have changed our guidance on the commodity prices and you will notice a very conservative I would say relative to our peers. In terms of our pricing forecast, we are going to a very high crude-to-gas ratio, but a very low NGL-to-crude ratio. And so the result of that is a slight increase in NGL margins in 2012 just because we had such low crude oil earlier but a slightly lower NGL margin expectation in 2013.

And we have got that NGL crude ratio in this guide. It’s all the way down to 45% at midpoint and I would just say that we certainly are impacted by kind of what we are seeing in the current market, but as well when you do have very high crude-to-gas ratios, you do tend to see that NGL-to-crude ratio is slipping and that is why that is in our guidance like that.

Having said all that, I would tell you that it's pretty impressive to see the kind of growth that we've got where we have got a slip of over 15%. In our NGL margin, yet we are showing this kind of continued growth in our cash flow. So I think it speaks to the resilience of our portfolio and as well the real strong increases in fee-based cash flows that we continue to pursue in our business.

So very excited about the opportunities and excited about how we performed in 2011 and our guidance into 2012 and 2013. And with that we will turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to Stephen Maresca with Morgan Stanley.

Stephen Maresca - Morgan Stanley

First question just a bigger picture and Alan just your views on how if at all concerned impactful the weak gas market is on your Marcellus development at all and may be some more just update on the Atlantic Access project, but just a bigger picture I mean, if we stay in this weak environment, does that change the opportunity set in that region for you guys?

Alan Armstrong

Yes great question. First of all, in the Susquehanna County area, continued strong drilling, the performance that Cabot in particular is getting out of their drilling there has got them spurred on and I think they are very confident of their ability to continue to make cash flow and returns on their drilling acreage. WPX is certainly excited about some of the results they’ve seen and are continuing to forge ahead there and then Carrizo is the other big customer in the area and as Rory said on the last call, that is backed by a contract drilling carry with Reliance and so we feel very good about those three particular producers and I will tell you anything, not beyond that that we get from third parties in the area would be in addition to what we have in guidance and so I feel very confident about those three. We’re not really relying on much of outside of what we know in some specific detail for the kind of growth we’re expecting there.

So, Northeast Pennsylvania just happens to be a really sweet spot there, even though it’s dry gas. It happens to be a sweet spot in that basin, that just continues to be prolific. In Southwestern PA, most particularly Atlantic Access, that project is targeted at the rich part of the Marcellus and so a lot of value to be unlocked there, particularly up in Northwestern Pennsylvania, up there in the Butler area where that area is really away void of both gas pipeline infrastructure and processing infrastructure.

And so pretty excited about that area continuing to develop. So, we certainly have been studying very closely what we think the producer economics look like in these particular areas of Marcellus and we are very bullish on the continued development in both of those two areas.

Stephen Maresca - Morgan Stanley

My second and final one, I would agree you are in your guidance quite conservative, certainly, relative to some others and obviously relative to where the market is. Is the fact that you’re using lower NGL margin and a lower kind of NGL relationship to crude, is that just to be conservative so you want to have kind of an agnostic view on the commodity or what is your view of the NGL markets over the next couple of years; I mean, are we in a situation with all the supply that we may see a little bit of weakness from time-to-time or maybe a little bit more structurally?

Alan Armstrong

Yeah, I would a couple of things in that area. First for 2012 I would just say that certainly in ‘12 we are seeing current prices even though we’ve seen a little bit of rebound here recently in ethane. And current prices are being impacted by continued cracker outages and we certainly expect to see that rebound some in the last half of 2012.

On the propane side though it's kind of hard to get away from the warm winter and the impact that’s had on natural gas, it's kind of hard to get away from that end of the propane side and certainly a lot propane still in storage as we go into the shoulder months.

And so we certainly could see a lot of upside from where we are and where our numbers are, but we feel pretty good about being protected to the downside in that number. And I think what we're trying to convey is that even with a conservative viewpoint towards NGL margins we are very comfortable with continuing to generate kind of cash flows and distributions and with plenty of adequate coverage with that more moderate picture.

In 2013, much harder to call at this point, but I would just – I know and you know Steve there is a lot of new projects coming on particularly in the last half of ‘13, there is a lot of new projects coming on that will unlock a lot of NGL product that’s going to be working hard to find its way in the new markets. And so we think may be a bit of a transitional year there as we have a lot of new NGL supplies coming on in the market.

Operator

And we’ll go next to Ted Durbin with Goldman Sachs.

Ted Durbin - Goldman Sachs

It sounds like you’ve kind of deemphasized a little bit assuming your position in the Western part of the Marcellus; you talked about a little bit just on the last question. But I am wondering can you talk about your goal being the number one or number two player at basin; do you think about the Western Marcellus as a place where you can get there with your existing projects or do you need to buy your way in to get bigger some of what you just did (inaudible)?

Alan Armstrong

We certainly have our eyes wide open to any acquisition opportunities there and we know the Marcellus basin you are right, it’s pretty hard to think about that as a typical basin, just because it is so large and so certainly the Northeast area is acting very differently. It have a very different demand for infrastructure than the Southwest does and even in the Northwest part of the Marcellus does, because the Southwest has the benefit of some historic infrastructure in that area and the Northwest has very little infrastructure available.

And so I would say from our vantage point, it’s kind of emerging into those three areas and I would say in the Southwest though that’s where we’ll be able to bifurcate it further because we do have some dry gas in Southwestern Pennsylvania area and you also have the area out further to the West, where we are starting to have overlap with the Utica.

And so, pretty hard, pretty complicated I need to call that one basin, but we’ll continue to look for large scale opportunities, if that requires acquisition to do so, then we’ll certainly be pursuing those to the degree that it’s accretive to our business and continue to expect us to pursue this area pretty heavily.

Ted Durbin - Goldman Sachs

And if I could just come over to the NGL side of things; can you give us a sense of how your contracts might be shifting here in your guidance range and even beyond that sort of percentage of liquids keep whole fee based?

And then, talk also a little bit about your hedging strategy, it looks like you’re pretty well hedged for ‘12 on some of the heavier NGLs, I think you've left yourself open on ethane and propane and do you plan to continue with that strategy or might we see you adding some hedges on the later end?

Rory Miller

This is Rory, I’ll take that question. As far as processing contracts, the tide started to shift around 2006 prior to that with – had a lot of opportunities to keep whole deals; now those are pretty much gone away. So we are doing a lot more fee based deals. They are not always quite as lucrative, but they don't have any downside to them either and those fit very nicely with the overall objectives of the partnership. So you’ve got to kind of take what the other side of the deal the market will give you to negotiate the best deal that you can.

We’ve also done some POL contracting, particularly in the Gulf and we’ll continue to do some of that and that's still a very small percentage of our portfolio; most of the re-contracting is moving from the keep whole, the straight fee type of contract.

With that said though our equity barrels have held up very nicely and they’re looking to be flat going into ‘12 and NGL barrels total recoveries have gone up nicely. So we see that persisting in the future.

As far as hedging goes, I think we are about 37% of our total butanes and gasoline are hedged right now and we are continuing to add to that. We think those are attractive places to lock-in. On ethane and propane right now we've not locked-in anything.

We think things are probably look to forward strips probably about as bad as it’s going to get there and we are not really reducing much risk by locking-in. So we will continue to opportunistically hedge those heavies and in total that's probably about 6% of our total NGL equity barrels hedged right now.

Ted Durbin - Goldman Sachs

And then a last one for me is just on the Gulfstar and kind of how you are progressing on the existing project, what’s the producer interest for maybe a second one? And then you talked historically about looking for a JV partner and just any update there?

Alan Armstrong

The Gulfstar One project is going extremely well. We had the benefit on that project of having a long runway. We started the engineering piece probably three years ago on that, so we had to kind of a project definition, scope definition that we rarely get in this business and given the complexity of that it’s a good thing that we did have that timing. We’ve got all of the major construction contracts, all negotiated, are in place and signed. We started cutting steel months ago, down on the Ingleside. Everything is moving along nicely. Those contracts came in at our below what we had in our cost estimates. So, we really haven’t capped in to our potential on that project. So, we’re feeling very good about it.

In terms of other producer interest, we got a fairly long list of people interested in that. I think the idea that there is a better mouse trap, a better way to accelerate the first well on some of these mid-size type projects, I think that’s really starting to get home and so I am confident that we will have opportunities to make additional Gulfstar investments in the next ’12 and ’13 time period.

As to our JV partner we will continue to explore that. We look at that as part of our overall capital allocation decision process and I think in general, we’ve talked for a while in separate quarters about being very open to that and I think we’ll continue to take a look as to whether or not that makes sense.

Operator

(Operator Instructions) And we will go next to Louis Shamie with Zimmer Lucas.

Louis Shamie - Zimmer Lucas

Just wanted to ask about the assumption, the financing assumption underlying your guidance. What kind of equity issuances do you anticipate in kind of underlying the guidance numbers that you put out?

Alan Armstrong

I think you will see some detail on our guidance to 2012 and 2013. I would refer you to think of slide number 89 and we have some WPZ financing included in that. We’ve got about $2 billion in 2012 and the midpoint about $1billion in 2013 based on our current capital spend and current cash flow forecast. That will be a combination of debt and equity and at this point I think we prefer not to be more specific about that equity mix but we committed to maintain investment grade rating.

Operator

Okay great thank you very much. And we will go next to [Helen Rue] with Barclay’s Capital.

Unidentified Analyst

One of my question is regarding your West GNP spending, your updated growth capital spending outlook, the piechart indicates that roughly about $630 million will be spent on Western GNP this year and next year and just wondering, outside of the TXP-1 processing plant that’s in progress what are the other areas that you are spending capital out there?

Rory Miller

Probably one of the biggest is our efficiency project [inaudible0 basin. We’ve seen some slight declines in volumes out there and its actually shut down our Lybrook plant and rerouted volumes up to Ignacio and we will have much higher load factors now at our highest recovery plants and we have got some compression that we are changing out with fuel savings there and a pretty big increase in reliability. So that is probably the other biggest project.

We've got some smaller although they add up projects Piceance Basin as well with some new production that's coming on there but it’s a big area, its probably a lot of smaller items in there that are adding up to that total but I think the two largest ones are that Efficiency Project which is by the way a very nice payout for us in the San Juan basin and then the TXP-1 that you mentioned.

Unidentified Analyst

And then on Marcellus I guess 50% of the next year spending will be allocated to that region and with about 1.6 billion implied in that number out of the 750, which is I guess you know the Laser acquisition costs, the remaining 830 or so would you say would be spent equally between northeast and southwest.

Rory Miller

I think that's pretty close I think for this level of discussion, we've got obligations for well connections and general infrastructure build out in the northeast in the Susquehanna supply area and then in our LMN asset if Chevron continues to have a robust drilling program down there, so we continue to build out the infrastructure in the major compression stations along with the well connect. So that's what's driving a majority of that.

Unidentified Analyst

And then the final on the Midstream CapEx you know you increased that by about 825 this year and about 100 next year I guess the majority of that 825 this year and about 100 next year I guess the majority of that 825 is major cost but you’re putting in is this that correct.

Rory Miller

Yes.

Unidentified Analysts

Okay. Have you talked about the Laser on acquisition multiple?

Rory Miller

No, we haven’t talk about that.

Operator

That does conclude today’s question and answer session at this time I will turn the conference back to our speakers for any additional or closing remarks.

Alan Armstrong

Great, thank you very much. Thanks for joining us today and as you can see we continue to have a number of opportunities that we were pursuing out there and very excited about our position in this space and lot of continued strength in our cash distribution capabilities. So thanks again for joining us and we look forward to talk to you next time.

Operator

That does conclude today’s conference. We appreciate your participation. You may now disconnect.

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