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Executives

John Porter - IR

Alan Armstrong - Chairman & CEO

Rory Miller - SVP, Midstream

Frank Ferazzi - Vice President, Gas Pipeline, East Region

Analysts

Ted Durbin - Goldman Sachs

Faisel Khan - Citi

TJ Schultz - RBC Capital Markets

Kevin Smith - Raymond James

Williams Partners L.P. (WPZ) Q2 2012 Earnings Call August 2, 2012 11:00 AM ET

Operator

Good day everyone and welcome to the Williams Partners second quarter 2012 earnings release conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to John Porter, Head of Investor Relations. Please go ahead, sir.

John Porter

Thanks Brian. Good morning and welcome. As always, we thank you for your interest in Williams Partners. As you know, yesterday afternoon we released our financial results and posted several important items on our website, williamslp.com. These items include the press release of our results with related schedules and our analyst package; a presentation on our results and growth opportunities with related audio commentary from Williams Partners CEO, Alan Armstrong and an update to our quarterly data book, which contains detailed information regarding various aspects of our business.

This morning Alan will make a few brief comments and then we will open the discussion up for Q&A. Rory Miller is here from our Midstream business; Randy Bernard is here from our Gas Pipeline business and our CFO, Don Chappel is also available to respond to any questions.

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

So with that, I will turn it over to Alan.

Alan Armstrong

Great, thanks John, and good morning everyone. Thanks for taking the time to join us again if some of you all coming back from the WMB call. Well certainly despite a disappointing financial performance for the second quarter that we did pre-released on July 23rd,we are very pleased to continue to reaffirm our cash distribution growth of 8% here in ‘12 and growing to 9% in ‘13 and ‘14.

Our confidence in that cash distribution growth continues to be very strong based on the degree of growth that we have built in here as well as a fairly conservative price that we have built in here for ‘13 and ‘14 and as well the degree of growth we continue to see in our fee-based business and the way that all of our projects are going right now that will grow that fee-based business even further and fairly significantly.

In fact, we are showing that fee-based business growing 19% from 2Q of ‘11 to 2Q of ‘12 and from ‘11 to ‘14 we’re expecting an 89% increase in the fee-based business and again those are not – there is not a lot of speculation on our part in terms of the projects that support that, certainly the drilling volumes and so forth that continue to go on and will have to occur, but generally that growth is well contracted and we know exactly where it’s coming from.

So anyway, we are very pleased to reaffirm that guidance, I’ll talk a little bit about here briefly about second quarter performance and some other things that hit that. The rapid decline in NGL prices, certainly that we saw from first quarter to second quarter and then one thing I think is always for our investors to understand is that the way that our product in transit on our books work, whenever we see a price decline, we can attract that product in transit; it’s reprised to the lower pricing for the quarter and so from Q1 to Q2 that impact was about $22 million hit over and above which you could kind of see if you were following in our unit NGL prices. So it tends to accelerate itself both to the downside and then again to the upside.

Some other factors though beyond pricing, we did have some operational expenses. They were a bit higher particularly from a lot of maintenance on our Western plants as the third-party fractionator outage happened towards the end of the quarter and we took advantage of that to accelerate things like turbine overhauls and industrial maintenance that we are scheduled for later in the year.

And as well we also had quite a bit of additional O&M expense and depreciation expense in the second quarter that was previously unplanned as we closed on the Cayman acquisitions, now referred to as Ohio Valley and as well lot of continued startup expense for the Laser System as well.

The good news, as I mentioned is on fee-based expansion. We continue to see that move up in the right direction. And then I’ll also now comment a little bit on our prices and kind of what we’re seeing there. And first of all, first and second quarter pricing dropped about 20% on NGL margins, on the unit margin and the balance of the year forecast what we have in here right now is expected to be about 30% lower than what we saw in first quarter of ‘12 and that is really driven by much lower expectation on ethane and propane and that has dragged the NGL crude ratio down to about 40% versus historical average, 10-year historical average of 60% and in ‘11 that was almost 57%.

So it really is NGL-to-crude ratio and we certainly came out the first year expecting that to be relatively low; and I’ll just say we were conservative enough even though I think we were some of the lower and the market on that, we weren’t quite conservative enough on that in terms of the NGL crude ratio. The causes for that of course is we mentioned, I think is well known is the warm winter, because it’s rather drastic build in propane supplies and/or a lack of taking it out of storage I should say and as well the ethane business was impacted by cracker outages in the second quarter that went on quite a bit longer than we had expected originally.

For the balance of the year, I think the fundamentals should be improving in that space, but there is still quite a bit of storage to be worked off there and quite a bit of new supplies that will come on in the first and second quarter of 2013 from our estimation.

On the project side, a lot of great work going on. Our teams are working very hard to build out in a number of areas. The $9 billion of CapEx attained guidance through 2014 and that does include 2012 year in total with about $20 billion in prospective opportunities that are out in front of us.

So, great progress going on in there Gulfstar project is going along very well. The Keathley Canyon pipeline project is going on very well. Very excited about the kind of growth we're seeing in the deepwater and the number of opportunities and we remain very committed to be a major player there in the deepwater.

The Ohio Valley which was the Caiman acquisition that's going very well. A lot of volumes, lot of wells waiting on our infrastructure to be completed out there, and we are working very quickly to expand out both gathering systems and particularly well connects there and as well the processing and fractionation capacity there to build to handle that.

Our Laurel Mountain Midstream build out after couple of years of limited growth in capacity all the big work that we've been putting into place there is really starting to come into fruition and we are really starting to see the volumes built much more rapidly there as really the constraints are moving away from being the infrastructure and now we will start to be out in front of the production there.

And then finally, on the gas pipeline space a lot of great work going on there as well. The Northeast Supply Link project, the Rockaway Lateral and the Constitution Pipeline are all, a lot of work going on in that space, the Rockaway Lateral is still waiting and I am unhappy to report, it is still waiting for a active congress to approve that project as it does crossing national park there at Rockaway Beach in New York.

And then as well a lot new projects going on, the Utica JV , the Leidy expansion that we announced this year this week and which is the second Leidy expansion I will remind you Northeast Supply Link is the first, I think its about 250 million a day of cubic feet a day of capacity expansion and then the Leidy expansion we are expecting to be around 800, I will tell you the demand for that capacity is very strong and it provides both market access back into the Marcellus and it also is a very attractive option from producers who want to get directly into the markets along Transco. So, a lot of demand for that space and certainly a nice position for us to be to have and exploit there.

The Dalton lateral in Georgia, that's proceeding nicely and as well the Mobile Bay South project seeing a lot of demand for services there as well. So a lot going on all really across the board, and certainly our backlog continues to mount and as well as our confidence in this infrastructure strategy we have and the growth, and then finally, I would just comment very quickly on the guidance more proposed [guidance] were drop down.

We are very excited about that and we think it does a great job of transferring some of the benefit that WMB has today of being able to take up put of the some natural hedge on between ethane and ethylene and transfer that to WPZ, we are very excited about that and we remain very confident about the tax treatment of that, and we certainly continue to get a lot of questions on that and I will just tell you we are not going to say anymore on that other than tell you that we remain very confident in that and that we think for competitive reasons it doesn't make sense for our shareholders for us to disclose what does boost our confidence in that.

And with that I will turn it over for questions

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Ted Durbin with Goldman Sachs.

Ted Durbin - Goldman Sachs

On the Leidy project, the update there, I am just wondering if you can I don’t think you will go into the capital dollars, maybe just talking about the tariff that you will be charging on that for list of producers to get their volumes all the way down to the south?

Frank Ferazzi

This is Frank Ferazzi. Since this is a new incremental expansion project, it requires that we charge rates that are based on the costs of facilities themselves and so until we finish negotiations with the shippers that expressed a desire in participating in the project, we are not going to know the exact capital costs or the rates associated with the project but they will be based on the actual costs in the volumes that we end up signing up with shippers.

Ted Durbin - Goldman Sachs

And then can you talk about on the midstream side if you are seeing much ethane rejection kind of in your footprint and I am thinking particularly in the west where it maybe tougher to get Belvieu pricing?

Rory Miller

We have seen a little bit over the last quarter. Some of it may have been price related from time-to-time but it's also been a function of producers being allocated on takeaway NGL pipes. So in some instance, we've had the ability to take advantage for that for our own account but I think the main driver there out west has been related to allocation on NGL long haul pipelines.

Ted Durbin - Goldman Sachs

And then last one from me is just on the Utica since we have had some mixed well results there I am just wondering what you are hearing there in terms of the activity level demand for your infrastructure?

Rory Miller

I would just say the knowledge we have there is that the sweet spot there is being better and better defined and we think there is lot of confidence in certain areas and obviously it’s a big area to test out and that will continue just as it always does in a large basin like that, but I do think there is starting to be a better definition of where the sweeter spots in that play are.

Ted Durbin - Goldman Sachs

And how does that then connect into kind of where you guys are with the new JV?

Rory Miller

We think we are very well positioned and particularly we think we have an advantage there with having an existing fractionator up and running and the ability to expand that so we think that gives us an advantage up there.

Operator

And we will take our next question from Faisel Khan with Citi.

Faisel Khan - Citi

I had a more broader question on the gathering and processing business piece looking at crude oil gathering and processing versus natural gas gathering and processing it seems like a lot of the midstream companies continue to build out to gathering and processing associated with wet natural gas and NGLs and natural gas but it seems like when it comes to crude oil production a lot of producers feel more comfortable controlling that part of the infrastructure.

So what I am trying to figure out is there a rationale for that or is there a reason why more producers that are increased their drilling programs for crude oil and feel more comfortable putting that on their own rather than using someone like you or another midstream company?

Rory Miller

I will take that and may be just start it out with a bit of a strategic response. I think from our standpoint, we are really focused on natural gas and NGL infrastructure and then kind of the downstream petchem opportunities that come with that.

We are not afraid of pursuing crude oil gathering and if we do it as a natural part of our business in the Gulf of Mexico, but right now we are not actively pursuing new launch or crude oil gathering systems. I think in terms of why some producers might choose to do their own, it is a little messier ramp up than say the decision to build a natural gas gathering system.

You don’t have any trucking options with natural gas. If you have it, you have to do some thing with it, but crude oil, particularly if there is smaller wells, it makes sense to truck and we are seeing that that’s the approach that many producers are taking. If they get the per well production up to a certain level and they get the field density up to a certain level, then you can at some point transition into a crude oil gathering system. But it's much less of a default answer than what you might get on the natural gas side.

Faisel Khan - Citi

And the reason why you are kind of staying away from that part of the infrastructure, is there more risk associated with it or is this your overall strategy is more than natural gas and natural gas liquid side?

Rory Miller

I would just say that we feel like we've got more value to offer the producers and providing large scale infrastructure on the gas side than we do on the crude side. As Rory said, trucking is always an option for producers on the oil side and the barrier to entry is pretty low in that regard. So it's that certainly not a business that we've contemplated being in. It's not a way to really take advantage of your scale and that business is much as it is on the GAAP side.

Secondly, I would just say we feel like there is a whole lot of promise associated with natural gas here domestically as we continue to see the demand build up on systems like Transco and Gulfstream and we continue to realize that that infrastructure that connects all these supply resources with that demand resources going to grow when we really feel like there is probably better upside for our skillset in that space and our capital than there is on the oil side.

Operator

We will take our next question from TJ Schultz with RBC Capital Markets.

TJ Schultz - RBC Capital Markets

Just on the accelerated O&M costs into the quarter and Eastern GMP specifically, I think from your prepared remarks, there was $18 million due to higher O&M from starting up Caiman and Laser. I guess did you reference this as something that was unexpected or accelerated, just kind of looking for what these type of startup costs pertain to and what we should view as kind of non-recurring?

Alan Armstrong

Well, it really was a matter of referencing if you were comparing second quarter to second quarter or first quarter to second quarter. So it's kind of an -- if you are running a trendline or our operating cost, you'd see that bump up and so this is really responding to that increase that we saw in there. Certainly when we started the year out, we didn’t have Cayman cost built in to our guidance. And so that was certainly a spread to guidance on the Caiman or Ohio Valley system.

TJ Schultz - RBC Capital Markets

Okay, got it and I guess Laurel Mountain, it sounds like capacity is close to catching up to volumes, can you just remind me where capacity is now and then what's the timing for some of those compressor expansions to reach that 400 million a day?

Rory Miller

Well, that's a pretty detailed response needed to answer that. We've got probably over 20 compressor stations that we are working on, but the big stations there at Shamrock and Cantarell for instance are online and are no longer impediments to the production.

So my answer is going to be a little more general than the one you asked, but we felt like this summer it was going to be a transition period for us. Prior to the summer we had been part of the hold up. The production was waiting in many instances on infrastructure. As we go through the summer, we've brought on some new big facilities that have additional capacity as well as some smaller facilities and so for the balance of the year, we feel like we will be ahead of the producer and the bottlenecks if there are any we will move a little further upstream.

Operator

(Operator Instructions) And we will take our next question from Kevin Smith with Raymond James.

Kevin Smith - Raymond James

You've already touched a little bit about this, but how should we think about what's baked into the guidance for the Utica JV, I mean clearly you've updated your CapEx, but is that dependent on well results or is that already kind of planned projects that you already have a lot of certainty overall in the cash spending side?

Alan Armstrong

Well, I guess what I would say on that, that the projects for the Utica JV are not is well defined as probably you might like them to be -- to give you a real clear answer to that, but we do have some estimates in there and it’s certainly subject to more refinement as we get to discrete projects, better scoped and cost estimates better nail down. So it’s a little spongy right now, we do have some place holders in there, but I can’t represent that those are super accurate at this point.

Kevin Smith - Raymond James

Got you. And then I assume there is probably minimal credit for it in your earnings and cash flow guidance, is that fair?

Alan Armstrong

Yeah we don’t have anything built into our guidance there for earnings in that capital.

Kevin Smith - Raymond James

Okay. And do you have any plan from the Utica JV that’s going to impact CapEx and like 2013 or is it more really second half of 2013, early 2014 at this time frame?

Alan Armstrong

Yeah there is a little bit in there right now, there is little bit in ‘12 but most of that is split between ‘13 and ‘14.

Operator

And it appears there are no further questions at this time. Mr. Armstrong I would like to turn the conference back over to you for any additional or closing remarks.

Alan Armstrong

Great, thanks Brian. Again thanks for joining us this morning, we really are excited about the growth in this business, excited to be in the right place at the right time with having a lot of infrastructure capability in a market that is going to be demanding infrastructure all the way from the wellhead services in terms of gathering through the processing, all the way through the petchem space and we think our teams are extremely well positioned to serve that market. And look forward to continuing to rapidly grow out our fee-based business associated with that. So thank you again for joining us this morning.

Operator

Ladies and gentlemen that does conclude today’s conference call. We thank you for your participation.

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