Williams Partners L.P. (NYSE:WPZ)
2012 Barclays Capital CEO Energy-Power Conference Transcript
September 5, 2012 11:00 AM ET
Alan Armstrong - President and CEO
John Porter - Investor Relations
Don Chappel - Chief Financial Officer
Rick Gross - Barclays Capital
Rick Gross - Barclays Capital
Next on the agenda, its part of our part of the program we have Williams Companies. Williams over the last several years has dramatically restructured their operations, where they hold their assets, and they have significantly unlocked value in doing so.
While, they’ve come a long way in both of those areas, we continue to see evolution on both fronts. We continue to see the company migrate from historically being kind of Rocky-centric maybe commodity sensitive company, into more geographically dispersed fee-based company. We continue to see assets migrate from the parent found into the CMLP.
And over this period of time, as I said, we’ve had considerable amount of value created and we are very, very happy to have Alan Armstrong, the President and CEO of Williams, give us an update on how all of this is manifesting itself and continuing to create value for us.
Thanks, Rick, and good morning. We’ve got John Porter here this morning; and Don Chappel, our CFO will be joining us for the question session, after, he’s got a couple of phone calls to make right now.
Well, I’m going to go through today, first of all, hitting some of the industry fundamentals that we think are favorable for our business. Talk about how Williams is positioned up again some of those fundamentals and we’re kind of really take advantage of that.
Then I’ll highlight just a few of the areas. It’s really hard to pick, frankly, we’ve so many great growth opportunities going on throughout our business right now. It’s going to hard to pick a few but we did pick a few and I’ll hit some of those.
Also talk little about our overall capital budget and kind of the diversity of a lot of our big fee-based projects that are going on and as well provide some new information on our plans to drop down our Geismar facility, and some of the logic behind that. And then finally, I’ll pull this all together in terms of what that means to our continued growth and sustainable dividend forecast.
So, with that, the forward-looking statements, you have, those that you can read, it’s your pleasure there. And I’ll move into this first slide talking about the industry fundamentals little bit.
Firs of all, I don’t think its any secret today that the supply in our business and the supply growth is here. I don’t -- we’ve been perceiving that for quite a while as Williams just because we are in the E&P business. We saw how much cost for continuing to lower in our operations, but also those producers that we work alongside and that we provide a midstream services.
Today I would tell you that’s no secrete and I think broadly the market understands that. What’s changing I think though, that is perhaps not all that well understood is how much the demand side is starting to pick up and the kind of investments that are going in to the demand that people keep wondering where that demand is.
Now today you have this short-term phenomena and this is completely price driven where natural gas is budding its way into the short-term markets that its completely price sensitive on the coal side, on the power generating side that we’ve seen this summer that’s helped the balance the market a little bit.
But with the kind of demand growth that we are seeing is really based on big long-term capital investment and so its big power generation, its steel plant, its fertilizer plants and we are seeing a tremendous amount of interest and growth along our big interstate pipeline that we think is probably a couple years out from where they showing itself and once that capital and once all that capital investment that’s very sustainable demand growth.
So on one side we’ve got supply growth, on the other side we’re seeing a large increase in demand growth and in between that is going to come a lot of infrastructure. Not just in consuming all these great natural gas resources, but as well the natural gas liquids that are be coming off of this and as well petchem industry that’s expanding rapidly as well and we think Williams is extremely well-positioned to provide a lot of that large scale infrastructure that take advantage of this relatively low priced resource that we have here in U.S.
Certainly, we have a lot to be thankful for here and in North America in that regard and I think to often we don’t give enough credit to all the great independent producers that have gone out and found a way to continue to lower the cost and increase the productivity on the drilling operations and they really are presenting the U.S. today with the great value opportunity.
But it is going to take a lot of infrastructure and a lot of regulatory hurdles to get through get that infrastructure build out. We think Williams is good in both of spaces and we are very excited about the future as result of that.
This slide just then looks at are the industry, first, looking at the industry fundamentals that I just spoke about, but and I don’t think, I don’t hear much argument to that story that that the industry fundamentals are great and we are well-positioned.
But I do think there is a question around, well, who is going to win all the opportunities amongst the big midstream players, and I would just tell you I think Williams is extremely well-positioned.
We’ve had a long-term strategy for quite some time on the infrastructure space that we really believe that long-term it’s going to be the players that have the large scale, most efficient, most reliable assets that we are going to win in these basins, and there is couple of reasons for that.
One, of courses is which is fairly obvious, which is when you have large scale in basin you generally have the low unit cost, so you are able to continue to attract more and more business.
But I think something that lot of people tend to over look and we think is extremely critical is that when you have large scale operations you have enough volume to attract new market and to build the infrastructure for new markets and so, if you think about in a historic fashion, if you think about Opal, Wyoming where Williams is the largest processor there at Opal.
We didn’t get there by just all the sudden having all the supply show up on top of the processing plant, we there by providing the best market access for both gas and liquids for that basin and it continue to attract volumes into our system and that continue to propel our growth.
The same story is happening now in the Marcellus and (inaudible) where the producers are going to have to have the best market access and the lowest cost services there to continue to propel that basin and we think Williams is extremely well-positioned to offer that kind of service there.
So one of the think you’d notice if you went through each of these areas is that we are the number one and number two player in each of these basins that’s not by accident and we firmly believe that you compete not on a nationwide basin, but you really compete in the market that’s you are in and you complete in the basins that you are in, when it comes producer.
So if you think about our assets like Transco, are extremely well positioned along the Eastern Seaboard. Most of those pipeline, most of are out there. It always shows up on a map like this is one pipeline. But I think it’s critical to understand that in that corridor, in most of those areas we have at least five pipelines in those corridors.
And what that means if you are a power generator is that we’ve got better reliability than about anybody else and we are right in the population center. So, we are not having to build across into the population centers with Transco, we are already right there. With the farthest east pipeline, along the Seaboard of any scale and we will continue to be that pipeline.
In the Northwest area as well, we are the only pipeline that serves, that goes across the Cascade Range there and serves the Northwest. So again, in that market we are the player in that market as well and then as you move into the producing areas, you will see that we are, in some cases like Canada, really, we’re the only off-gas processor in Canada. We’re certainly the number one or two player in the deepwater Gulf of Mexico and certainly in the Rockies, in many of the different basins in the Rockies and we are rapidly growing that position in the Marcellus.
Speaking of the Marcellus, then I'll move on to this slide and just talk here about what's really driving our business here. And first of all, great fee-based volume growth and it’s very significant.
You can see here this is kind of growth we've seen since first quarter of 2011 and from second quarter ’11 to second quarter ’12, I think this is about 146% growth for the Susquehanna Supply Hub. And so that's largely in our work there with Cabot as well as Carrizo and WPX and few other producers. But the vast majority of that growth has come by working very closely with the Cabot and being able to continue to expand their operation.
We are very proud to be in a position to help somebody like Cabot to be as successful as they have in that area and it’s a great story for both us and Cabot in that area. On the Laurel Mountain system, they are below. That’s our joint venture with Chevron and that looks like really, really flat growth. It only looks flat because it’s up against the growth there on the Susquehanna system, even that growth is a 26% increase in growth on Laurel Mountain.
And then you can see on top now, we’ve added the Ohio Valley Midstream. That’s our Caiman acquisition and we are very pleased with the way we are seeing our volumes grow on that business as well. So it is not easy up here. We’ve learned a lot of lessons. We started up here with our acquisition in April of ‘09.
Our acquisition of Atlas’, little gathering system up here, that’s now Laurel Mountain Midstream and that was flowing about 60 million a day of production when we acquired that. And today we are at little over 1.2 Bcf a day. Our charts can't quite keep up with how quick our growth is. But here presently, we are flowing a little over 1.2 Bcf a day in our Marcellus operations and we have over 1.2 million acres dedicated in this region and so very exciting growth area for us.
We continue to be very impressed with the economics to the producers in this area and frankly, the real challenge up here continues to be getting the infrastructure. It is not getting the wells drilled up here that’s the challenge. It is getting the infrastructure build out in any of the producers up here, that have been up here in operating would tell you that.
One of the things, we are really proud of and I think distinguishes a bit, is we haven't really built this kind of from a grounds-up basis. We've been building out very large scale facilities, planning on the future. If you're building at just one stick at the time, one well at the time, you continually you build one system. It pressures off the next well. You drill another well. It pressures off those two wells. We are outbuilding very large scale facilities well in advance when it's needed to.
So for instance, at our Shamrock compressor station, even though the initial need there was only about 4,000 horsepower, we designed and installed air permitting and capacity to put in about 30,000 to build a handle of about 1.5 Bcf a day there at that facility. So a lot of the big capital that we've been investing over the last couple of years there really positions us for tremendous growth. And now the job we have to do is connecting the wells into this large backbone of infrastructure we’ve build, not constantly having a loop and recompressed because we’ve got a lot of that big expansion already doing.
But I will tell you that this area is right with bottlenecks. Last summer, you saw the Tennessee Gas Pipeline to the North, gas was trading well under a dollar there as capacity was constrained. The Leidy pipeline that Transco has that runs right through the middle of the state is the next I will tell you and that in terms of being constrained.
And we have two major expansions now, one which has been - is under both permitting and starting construction, include the Northeast Supply Link project is coming on. And the next one, the Leidy expand -- the second Leidy expansion is about 800 million a day and we are in the process of firming up the contracts with the shippers for that project. So a lot of bottlenecks though continued to be built out here and Williams is extremely well-positioned to capture the growth in the Marcellus.
Moving to another project, I'll highlight real quickly. We haven’t spoken much about this. This is a PDH project and so what that means is a Propane Dehydrogenation project. And basically, we are taking excess propane there and captive propane in the Canadian market and converting it into polymer-grade propylene. And so this is about a 450 kiloton annual production facility, and it pretty well matches our existing propane demand that we think we will have when this facility comes online here.
But I'll tell you this is not about getting further into the Petchem business. This is about taking advantage of what is somewhat stranded propane and I'll give you a couple of facts and figures around that that I think make this very compelling and really explain our logic around this.
In June, Edmonton propane, which is where our Redwater facility, was trading at about $39.5 under Mont Belvieu Propane and so that's a very widespread. And while we don't expect that spread to continue, we do expect to be that high and certainly we don’t need that to be that high to make this project make sense. But we do expect the fundamentals to keep Canadian propane under a lot of pressure, couple of reasons for that.
One of those is of course that we did win some traditional markets for Canadian propane within the U.S., the Northeast U.S. markets as well as the Midwest. A lot of those markets today are being served by the new Bakken supplies from propane and is well of course the Marcellus and Utica propane as well. And so some of those markets that Canada has additionally relied on for its excess propane are starting to be supplied by our own natural resources here in the U.S.
In addition to that, the Cushing pipeline which is traditionally served as the outlet for the propane, coming out of the Edmonton area is being reversed now. And so that will no longer be available to ship propane out of that area and therefore, most of the -- lot of the capacity will convert to rail shipments out of there. So we think there is going to be continued to lot of propane, coming out of the oil sands off-gas production as we show here on this slide.
But we think that it is much better served being converted into polymer-grade propylene, where it can either be shipped into the Gulf Coast or even ultimately, perhaps converted in the polypropylene. A lot of Asian customers are very interested in converting it to poly propylene here in Canada and rolling it out of Vancouver into the Asian markets where propylenes gone pretty tight. That would be a tremendous upside to the project economics that we've got built into this today. But we certainly are hopeful for that.
Today, we already market a lot of polymer-grade propylene because a lot of the propylene -- the business that we have in the Canadian oil sand, is taking that polymer-grade propylene and shipping it in the Gulf Coast. So this is not a new business for us. It’s not something we don’t know a lot about. We’re really already in the business and marketing the PGP there today.
And so, a little more information here. This is new information that we haven’t shown before around Geismar and very similar logic here at Geismar in terms of our expansion and our dropdown of the Geismar facility is that we will admit -- we cannot call what we think ethane margins are going to look like for the next several years because there is an oversupply more and more ethane coming into the market, new infrastructures coming online. It’s bringing a lot of that ethane in the Mont Belvieu via a pipeline out of the Mid-Continent and Permian.
And the capacity for the ethylene crackers is not getting built out fast enough. So while, we are seeing the markets eventually grow and we’re seeing that demand grow is cracker capacity comes up overtime. In the meantime, we don’t think those two things are going to be matched up pretty -- very well and we think there are liable to be periods where we are oversupplied on ethane.
The good news for us for Williams is and for Williams Partners after this dropdown is completed, is this really puts us neutral to ethane. And so our real exposure will be gas to ethylene as opposed to gas to ethane. And if you look at that over the long-term, if you look on a five year basis, ethane has gone from about 45% of crude oil, so on a price-to-price basis, its gone from about 45% down to 20% over the last five years. And ethylene has stayed relatively flat at about 70%, little over 70%, about 73%. It certainly it’s moved around, but if you look at on a five-year basis, it’s trended fairly flat.
And we expect that to continue, because ethylene, of course, on an international basis competes up against naphtha-based ethylene production. So we think that’s a lot better place to be and what we think is going to be a pretty volatile market on the ethane side. And so this is a way for Williams to really share that natural hedge with WPZ via this dropdown.
And you can see here the kind of cash flows that we’re expecting off of the Geismar and then the expanded Geismar facility in 2014. And so you can see this is a very sizable dropdown for WPZ and I also tell you that its going to provide a pretty nice boost to the coverage ratio, because of course with these kind of business we want to make sure we’ve got plenty of coverage built into that. And so we will have quite a bit of coverage built in for WPZ when we dropdown.
So, this is a really great transaction. We’ve been talking about this for 2.5 years about how do we get this natural hedge built into WPZ. So that we keep WPZ healthy as well. And low and behold, we found a way to do that. It’s a very elegant and low-risk way and keeps a qualified income for WPZ.
This has been a bigger picture of all the various projects that we have and the key notes that I will tell you here, as we have a lot of big projects and we are doing -- our teams are doing a great job of keeping these projects on track and continue to keep them on budget. And so one of our biggest projects that we have going right now is the Gulfstar project, and that’s a very good large scale project that we’re building in Ingleside Texas.
And as far as this [barge] is being built and the production platform being built around the Gulf Coast as well and as you can see that will go into service in mid year '14.
So, even know our -- look on here lot of these big projects are coming in, in mid '14 or later. And even with that, you will see that our cash flows are growing that support and then some our 20% dividend forecast that we have here. And I will tell you, I have a lot of confidence in our ability to maintain that dividend well beyond the guidance, that kind of growth in our dividend well beyond the guidance period, because we’ve got so much of this big capital list going on right now that provide cash flow well into the future.
So, a lot of big exciting projects that are underway right now, a lot of capital on the drawing board. You can see this pie represents about $11.5 billion of capital spend from '12 to '14 and a lot of this -- then starts producing income until '14 and beyond.
The next picture here and we’ve already talked about the pie on the left and the projects are there. The two other pies here are now looking a little more into our perspective pipelines, so we start to with the $16 billion. Those are projects that are both in guidance and under negotiation and we basically think those there are projects to lose and so we’ve got business that -- and negotiations going on to support that greater projects.
And then on the right is the $24 billion and again that’s through 2017 that’s really a six year to look. It is about $24 billion and why we won’t win all of these projects, we are certainly win our fair share of it and I will tell you there will be a lot projects that will continue to come on in this that aren’t in here today and that pie will continue to grow for us overtime, if this environment that we have today and all the demand for infrastructure continues.
Looking towards what this is a amounting to in terms of gross margin, you can see in '11 with pretty high margin environment about $4 billion of gross margin, you can see by 2014 that’s growing to $5.4 billion. And again, these are not -- this is not speculation on our part. These are projects that are underway, known projects that were out instructing right now better developing this. So, there is very little speculation about where this income is coming from, of course other than the risk around the margins on the commodities.
And you will see here that we have a pretty dramatic drop in the NGL margin as a percentage of our overall business. In fact, you can see it going from about 25% in 2011 down to 13% in 2014. So, I am adding there the non-ethane margin which is basically to propanes and heavies along with the ethane margin there. So the 18% and the 7% in 2011 that goes down to 13% in 2014. Most of that is just due to the rest of our business growing on a relatively basis, but it also has about 20% decline in NGL margin during that period as well.
The piece that you see that are growing there for us is the big fee-based growth, the 24% fee-based growth growing upto 35% in our midstream sector. Much of that growth is coming out of the big Marcellus build out and the gathering volumes building up there. And as well, you can see the MC&O revenues, commodity margin that 10% going to 17% is growing pretty dramatically and some of that of course is coming off the backs of lower NGL margins, but as well some of that is coming from the expansion that Geismar that I just showed you in terms of that amount of increasing in cash flow there.
The good news is overall with all of those changes, we’re growing from about 63% of this margin being fee-based to about 70% of the fee-based being, sorry, about 70% of this overall gross margin being fee-based during this period. So, a lot of continued growth and as you look here and beyond in the '15 and '16, we can see that even growing more as we continue to grow out our interstate pipeline business and that 31% starts to grow pretty rapidly, lot of our big pipeline project come into service.
So what does this mean to us in terms of dividend, really a terrific story here. Sometimes I think that the market evidently doesn’t have the confidence that we do in this growth story because if it did, I would expect our yield to be trading down even much slower than it is on our dividend today but this shows a 55% growth in our dividend over the last couple of years with a projected 20% growth in dividend here through the balance of our guidance period.
And you can see over on the right there than the amount of coverage that we have against at the WMB level. And so you can see that being at about 1.24% and this is basically on an after tax -- taking our cash flows on an after-tax basis after we paid out maintenance capital and all the required capital it takes to maintain the business other than the growth capital. And then you can see that growing to 1.48 in terms of coverage.
Now, that’s pretty impressive but what’s even more impressive is that doesn’t even include the coverage we’re holding at WPZ. So in other words, what the coverage that we have at WPZ is not modeled in here. We start with the WPZ distributions and then so the coverage that you actually see here is just from MC&O business or in other words, our Midstream Canadian & Olefins business is the amount of coverage there.
So strong coverage to our dividend even at that growth and if you looked at the business, it start to peak into 15. You would see that our credit metrics are pretty outstanding giving us a lot of capacity to continue to fund our growth with that rather than equity as lot of these big, long dated capital list that we've been doing really start to produce tremendous cash flows.
So a great story both strategically and that's certainly finding its way into our dividend and our coverage on our dividend. So we certainly believe that Williams is a premier energy infrastructure investment. We are very excited about the financial model that we've got in the way that sets up against our strategy.
We are very confident in our ability to continue to capture our pressure of the business out here in this great industry that we happen to be in right now. And we think we've got some things that are going to add quite a bit of value both in the near-term and in terms of the Geismar dropdown but as well. And I think even more importantly, the long-term large-scale investments that we’re making that will not be a flash in the pan in terms of value.
These are going to be big, long-term essential infrastructure to the U.S. as the U.S. continues to build out its ability to use its great natural resources and particularly natural gas and natural gas liquids. So very excited about our future and we hope that with conversations with our company, you’ll continue to earn and gain the confidence that we have in our dividend and our dividend growth model that’s out there.
And with that, I'll be happy to take just a few questions and then I think we’re going to our breakout room for any more questions, we might have.
Yeah. Go ahead.
(inaudible) and the Geismar dropdown benefits to WPZ a little better, does it effectively make WPZ and ethane consumer rather than producer and is that why you view it as so much more of a low-risk business model?
Yeah. Great. Thank you for giving me the opportunity to make that point a little better. Yeah, today we produced on our equity basis. We produced about just about 48,000 barrels a day of ethane and we consume a Geismar today about 33,000 to 35,000 barrels a day of ethane.
When we get done with the expansion, we’ll consume right at about 50,000 barrels a day. And so [BM] was completely neutral to ethane and so that natural hedge that we got.
In addition to that, I will tell you that one thing that I didn't mention but I think is very important also with that comes an ethane transportation and storage system that we’re building out that allow us to connect ethane supplies. And so that's all fee-based business that’s today built into that Geismar asset as well when we think we will have a lot of future port as well.
So it comes with in the addition to the track, it comes with the nice ethane transport storage business. Thank you. Very good question. Yeah.
Hi Alan. I had a question about the Geismar drop in dividend policy at the WMB level. I think if I look at your guidance almost all of your 2014 $1.75 dividend at the WMB parent company is supported by distributions going upstairs from WPZ as a small payout from MC&O. As you dropdown the Geismar asset, the cash flow contribution from WPZ I think would potentially significantly exceed the guidance for dividend policy at WMB.
Can you talk about what your plans are with that excess cash flow? In the past, you’ve talked about paying out all the WPZ cash flow. Do you intend to continue that policy or are you intending to build an even higher coverage ratio at the WMB parent company?
Yeah. That’s a great question. Well, first of all, I would say with the dropdown of Geismar, we’d probably will increase our coverage quite a bit at WPZ. And so that’s for some of that will contained. The good news is that we've got plenty of places to invest that capital rapidly and high return projects was not like its capital. It’s getting stranded on the balance sheet for a long period of time.
So I think -- we think there is an efficient use immediately for that capital with WPZ and it’s not being stranded there. But in terms of the -- yes we intend to continue to payout the full amount of the WPZ distributions and so it's really just a matter of how much coverage we hold at WPZ. Sure.
That's correct. Any other questions.
(Inaudible) in the new Geismar information, I think it was slight eight. What is your ethane projection, the price of ‘13 and ‘14 there?
For ‘13 and ‘14. Thank you, John.
The good news is it will be somewhat indifferent. So whatever that is from a PZ standpoint. If for long, the prices are higher, the cash flows at PZ from the ethane business will be higher. We’re really going to be depended on what the ethylene price is.
Okay. I think that it’s a good place to break. We’re going -- we'll be in the breakout room next door and Rick, do you know where that is.
Rick Gross - Barclays Capital
The breakout room is the riverside ball room. So we’ll have plenty of room.
Great. Thank you very much for joining us this morning.