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Williams Partners L.P. (NYSE:WPZ)

Q3 2012 Earnings Call

November 01, 2012, 11:00 am ET

Executives

John Porter - Head, IR

Alan Armstrong - Chairman & CEO

Analysts

Kevin Smith - Raymond James

Operator

Welcome to the Williams Partners Third 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 Mr. John Porter, Head of Investor Relations. Please go ahead.

John Porter

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, the 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 provision 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; Frank Ferazzi is here from our Gas Pipeline business and our CFO, Don Chappel, is also available to respond to any of your questions.

In yesterday's presentation and also in the 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. First let me wish everyone who has been affected by Hurricane Sandy the best of luck in their recovery efforts. As you know, given the disruptions that occurred in the financial markets, we decided to delay our earnings release and webcast by a day. We also know this concentrated a number of earnings calls into today and this morning. So thanks very much for taking the time to join us for WPZ’s morning webcast.

Hopefully, you had a chance to listen to my pre-recorded comments released yesterday afternoon. But just in case you didn't, I will quickly hit on some key things and then we will move to our Q&A session.

We have several very important items to communicate to you this week starting with, of course, a review of our third quarter performance. So I will quickly touch on the key themes from that discussion. For the third quarter WPZ's net income was up about 23% over the second quarter in spite of NGL frac spreads that continue to decline and were down about 18% on average lower than what we experienced in the second quarter. And of course, everybody knows that the second quarter was a dramatic decline from the first quarter of 2012. And as well, we also had some impact from Hurricane Isaac into our numbers, and we will speak a little bit more about that.

The drivers for the lower NGL frac spread were a 9% lower average NGL composite price against our barrel and then the natural gas shrink prices that we realized were also up about 26% on average. So the frac spread environment continues to be very challenging.

Turning to fee based revenues now for the third quarter, some great news here I think. This measure grew about 5% year over year for the third quarter, but importantly, WPZ Midstream, where we’ve been putting a lot of projects and capital to work there, grew at about a 12% rate. Our gathering volumes from third quarter ‘11 to third quarter of ‘12 are 17% higher, and volumes on both our Marcellus area and the Perdido Norte business more than doubled again from third quarter ‘11 to third quarter ‘12. So we continue to make some impressive strides there in our fee based business growth.

The main driver of growth was in the Marcellus area and of course, some of this was impacted by the Caiman acquisition and this generated, including other growth in the area generated about $30 million of increase in revenues, in our fee based business there for the third quarter of ‘12. Importantly, there were also a couple of other factors that really tended to limit this 12% growth rate that we had.

Hurricane Isaac reduced some of our Gulf Coast fee based revenues in the third quarter of 2012 as well and third quarter of ’11; we had some fairly significant contractual payments related to our Perdido Norte business that showed up in ‘11. So really, if you look at this on a normalized basis, we would see these fee based revenues actually growing at an even stronger clip than the 12% rate for the WPZ Midstream business.

Actually, most of our Hurricane Isaac impact, particularly on our offshore operations was really related to some extended outages from third parties where our systems tie into things like oil terminals and downstream NGL pipelines in the Gulf, and so those actually extended quite a bit longer than the downtime we incurred, which was actually pretty minimal in our offshore operations. So that’s a quick look at third quarter overall; pretty good operational performance for the third quarter, but bucking some headwinds in the NGL frac spread and as well the outages from Hurricane Isaac.

Moving to our guidance update, we have some important updates to provide you for ‘13 and ‘14 for WPZ. Included in these updates are the effect of the Geisma plant and associated pipeline dropdowns which we are going to be closing on here very soon, but we’ve also got some other adjustments including somewhat lower revenue growth rate assumptions that are embedded in the guidance now.

So first of all though I would certainly want to reaffirm our expectations for an 8% higher distribution growth in ‘12 and a 9% growth rate in each of ‘13 and ’14, which will produce a 3.14 distribution for ’12, 3.43 in ‘13 and $3.75 in 2014 respectively . So we are certainly very excited about the strengthening effect of the Geisma dropdown and what the impact that has on our WPZ cash distribution, and certainly I think shows the commitment that Williams has to sharing what is a nice natural hedge against continued decline in ethane prices.

So now just a few notes about the Geisma dropdown and there is quite a bit of content and a prerecorded information and as well. There is quite a bit in the data book that we have put on this, so but I will just hit the highlights here. I can’t confirm for you that the IRS private letter ruling that was released on March ‘12 was requested by Williams, and if you have seen that private letter ruling you will probably notice that Geisma dropdown will generate qualified income without any complex organizational or contractual structures that we had been contemplating.

We certainly were anxious to have the benefit that was held at Williams in terms of that hedge against ethane have some of the benefits of that accrued of WPZ and we were looking at all kinds of different complex structures but with that private letter owning that makes it very simple and very transparent for investment. So we are now having agreement in place and the transaction is worth about $2.36 billion with about $2.25 billion of that being to the Geisma in plant and about another $100 million being to the pipeline. This a being financed with about $42.8 million WPZ LP units issued at WMB.

And WPZ will finish up the 600 million pound expansion and it is sub to about 1.9 will lower 1.9 billion pound cracker at Geisma and that should be, that expansion should beyond late in 2013. Additionally WMB is agreeing to waive $16 million per quarter in IDR payments for what is expected to be about five quarters, and of course that's really the expected amount of additional IDR that would be coming from that business.

So that’s incremental and we are not cutting into our existing IDR payments that would have been seen on the status quo basis. Again we are very excited about the natural hedge, the Geisma dropdown will bring WPZ and we think it’s well understood and there’s lot of graphs in the data book to demonstrate this. And the ethane to crude relationship has been breaking down, as ethane continues to be grow more and more as producers drill in to lot of these new resource basins.

And importantly I think here, towards the end of this year and into ‘13, a lot of new infrastructure that is coming on, that is unlocking a lot of that things price and places like the Permian Basin and the Mid Continent that we think will continue to put down and pressure on ethane here in ‘13. However, the ethylene to crude relationships are likely to be much more resilient given the dynamics of the global ethylene production, and certainly history has been proving that up for us.

While the Geisma dropdown represents a very exciting commodity based business, the WPZ revenue story is clearly about a tremendous fee based revenue growth backbone that is continuing to increase every year. We certainly got the growth to show that. In fact a vast majority of our growth capital spending for 2012 through 2014 is related to projects that are backed by fee based revenues.

Additionally as I previously mentioned, we have some other updates to our guidance for ’13 and ’14, including lower revenue growth rates across most of our operating areas for producers drilling lower. A lot of the producers in our basins have lowered their capital available for drilling next year, and of course this is in response to lower natural gas prices in some cases and in some cases part of that is the fact that from WPZ perspective we have a lot of [keep hole] agreements out there so the benefit of the NGL uplift is some of that is coming to WPZ and of course that declines the producer’s net back and recover some interest in drilling in those areas and you might say well, why don't you just give that value back and let them drill and we certainly are looking at a number of cases like that. But as we do that as you can imagine, so goes our margin. So you can't, its not a zero some game there in terms of trading off volume for the very high margins that we continue to experience on our keep hole on track.

I do want though, even though we have a relatively low gas price relevant to the current market embedded in our ’13 and ’14, particularly in ’13 case, I want to make sure that the market understands we are still very bullish on the natural gas market in the long-term demand that we see building in and around our business and tremendous amount of new capital that we are seeing going into place for both the natural gas and the natural gas liquids and certainly a lot of that capital takes a lot of time with moving out petchem expansion, whether its building out power generation or whether its building agriculture and steel plants that consume natural gas and take advantage of it, that capital takes some time and we are seeing that capital would be invested but again we don't expect that to have a whole lot of impact on demand in ’13 and therefore, we are relatively bearish for the short-term on natural gas prices there.

Finally in the pre-recorded podcast, we provided additional information on our end guidance capital projects, most of which are fee based and this really continues to demonstrate how WPZ is perfectly positioned to take advantage of this long-term super cycle as a trusted name in the development, construction and operation of exactly the types of infrastructure that are going to be needed to realize the full potential for producers and end users of natural gas, NGLs and now olefins as this country learns to take advantage of this great low cost natural resource that we have and so with that I'll open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to the site of Kevin Smith [Raymond James]. Please go ahead, your line is open.

Kevin Smith - Raymond James

You guys have been busy, congrats on the job done. Just first question is a bit of follow-on from [Becca’s] question on WMB call, but I was surprised to see Transco’s revenue fall this quarter on a year-over-year basis. Would you mind talking a little bit about the drivers of that net decline? How we should think about going forward?

Unidentified Company Representative

Yeah, Rick (inaudible), on the revenue side, we really have two different types of revenues. We had revenues that we booked that are directly offsetting cost. So they have no bearing on segment profits and then we have our traditional fee based revenues. What you really saw a decline on in the third quarter was our management gas costs. Those were down a little over $20 million year-over-year and those are directly offset in our expenses. So you will see a corresponding result or a decrease in the expenses. So that was really the big driver. Beyond that, we had some higher revenues related to some recent expansion projects that we had placed in service both in 2011 and 2012, and those contributed in the neighborhood of about $5 million of higher revenue. So netting those together gave you the decrease. But really the decrease was offset in expenses.

Kevin Smith - Raymond James

Okay very helpful. And then you talked about guiding down for gathering volumes. Do you have a breakout for how much that is offshore and onshore? I am guessing the majority of it is Marcellus volumes but just wanted to verify?

Alan Armstrong

Yeah, we have not provided that detail on that. I will tell you it’s really across the board with obviously substantial portion coming out West as well as the Northeast Pennsylvania. Again, really if you just focus on the areas that where the producers netback is focused primarily on natural gas those are the areas that we are seeing the most impact. But we have not provided any detail. We are really still pulling together some additional detail on that and in that planning process is pretty fresh in terms of the kind of information we have been gathering from producers out there.

Kevin Smith - Raymond James

And then lastly, if I could, I just want to clarify something you said on the Williams call, is it correct, if you realized any cash flow weakness to be your preference to maybe cut GP payments versus lower the WPZ distribution growth rate?

Alan Armstrong

Well, we certainly, certainly the first thing obviously would be the coverage ratio, but I think we feel very good about being able to maintain that growth rate at WPZ given the environment that we are forecasting, and as would not have to cut the GP IDRs if that environment that we are forecasting comes out within the range we are forecasting. But obviously things could change, this year is a great example and we have seen ethane prices falling the way they have and so dramatically from really over 50% from last year to now and even from the first of the year.

So hard to predict with all the changes that are going on in this environment what the cash price will do, but again I think as long as things stay within what we are forecasting there, we would be able to stay right on there, but yes, we do, one of the tools that we have that Williams has and obviously this would be Williams’ decision but one of the tools Williams has would be to if the markets change dramatically from what we have got out there would be to wave some of the IDRs.

Operator

And there are no further questions in queue.

Alan Armstrong

Okay, well great. Well thank you all very much. A lot going on for WPZ right now, very excited about the Geismar drop down and our ability to bring a lot better balance if you will and move away from some of the ethane exposure. So, we have been talking about that for a long time. We also as we mentioned in the Williams call as well we have a lot of infrastructure going in to build out, to handle this large wave of NGLs coming into the Gulf Coast area and we are excited about to growth that’s going to provide us as well as the continued great build out and great response for seeing in the Marcellus area.

So growth really across the board and certainly our lowering of our growth rate on our gathering volumes is really response to our relatively bearish respective in 2013 prices where we’ve got a $3.25 natural gas price. So, anyway thank you very much for joining us and look, hope all of you that were affected by Hurricane Sandy, we wish you the best in recovery. Thank you.

Operator

This concludes today's conference call. You may disconnect at this time and enjoy the rest of your day.

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