The Williams Companies, Inc. (WMB) Q4 2011 Earnings Report, Transcript and Summary

Good day, everyone. I'm Travis Campbell, and I head up the Investor Relations team here at Williams. Before I turn it over to Alan Armstrong, let me go through a few housekeeping items. Today, we put on our website, williams.com, the slides that Alan will shortly be discussing. You can download those slides for viewing and a podcast of his remarks, if you desire. As always, we thank you for your interest in the company. In a minute, Alan Armstrong, our President and CEO, will review the slides that we have this quarter. Tomorrow, our business units heads and Don Chappel will be available to respond to questions on our analyst call in the morning at 9:30 Eastern Time. You'll notice that all the results and guidance in today's slides, including the EPS numbers, are presented excluding WPX. Be aware that this is different from the EPS guidance given on the third quarter slides. Don't let this confuse you because numbers on the Street have included the former E&P company and results presented today do not. At the beginning of the slide deck are the forward-looking statements which are included on Slide #2 and Slide #3. These are important and integral to all of our remarks. You should review those. Also included are various non-GAAP numbers that have been reconciled back to generally accepted accounting principles. Those reconciliation schedules are available and follow the presentation. So with that, I'll turn it over to Alan.

Great. Thank you, Travis, and good morning, everyone. A lot of great information to go through here this morning and glad we've got the context set clear here now . Some of the things I'll be hitting on this morning here, first of all, talking about our 2011 performance, and then I'll work through some of the rapidly expanding growth capital that we've got out there and a lot of the projects that are behind that capital expansion. And then I will move to the guidance for 2012 and '13, along with an updated commodity price deck that reflects our latest thinking about the commodities environment that we look forward to in '12 and '13. First of all though, before we get into that, I want to remind you, certainly, we could not be more excited about Williams going forward and the way we're positioned in what we think are definitely the right assets, great markets and we certainly are excited about the strategy and how that is performing for us. Also, our MLP structure continues to fuel our dividend growth at WMB and allows us to continue to raise capital in a very cost-efficient manner for Williams shareholders and our high-dividend payout expect an increase every quarter now as we go forward rather than either annual or semiannually. We now have laid out our policy to increase that and are going to be increasing that at a rate of about 7/8 of $0.01. And that equates to a December '11 number versus a December '12, will give us a 14% increase in our annual dividend growth from '11 versus '12. So we continue to be very excited about our ability to grow the dividend. We think it's extremely transparent where that growth is coming from. And as we continue…

Good day, everyone, and welcome to the Williams Companies Fourth Quarter 2011 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Travis Campbell, Head of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everybody. Welcome to the year-end 2011 call. As always, thanks for your interest in our company. As you no doubt know, we released our results yesterday afternoon after the market closed. Also yesterday, Alan, using a few slides, had some commentary about the results, our new guidance and growth opportunities. That audio commentary and the slides are available on our website. So on the website, williams.com, you should be able to find a number of things that were posted yesterday afternoon. The earnings presentation with the audio commentary by Alan, our normal data book with the usual information we make available each quarter, the press release of our results and our analyst package. As usual, because we had the commentary yesterday, this morning's call should be fairly brief, and we'll get very quickly to your questions. In a minute, Alan will -- Alan Armstrong, our President and CEO, will make some brief comments, after which we'll open the lines for questions. Be aware, as always, all of our business unit heads are here, and they'll be available to respond to any questions after Alan's remarks. With me here this morning are Rory Miller, who oversees Midstream; and Randy Barnard, who heads up our Gas Pipelines; as well as Don Chappel, our CFO. On yesterday's presentation and in the data book, there is a disclaimer on forward-looking statements. This is important and integral to our company. You should review those. Also, there are non-GAAP numbers included in the various presentations. These have been reconciled back to generally accepted accounting principles. Those reconciliation schedules are also available. So with that, I'll turn it over to Alan.

Great. Good morning, and thank you, Travis. First of all, we certainly had very noisy result from the EPS as we spun off WPX. But really boiling it down and looking at the continuing operations, you'll see that our adjusted segment profit versus our third quarter guidance came in right in between our midpoint and high that we've given you for a guidance there, so our continuing operation is performing very well in the fourth quarter and throughout 2011. As we look forward, a tremendous amount of new growth and you'll see that built in to both our guidance and capital, as well as our opportunity pipeline that we continue to project. And one of the -- probably the biggest area of change that we had in that opportunity pipeline was a large number of increases coming from our gas pipe segment as major expansions, particularly on Transco, and a little -- to a lesser degree, on Gulfstream, really start to present themselves as the industry and power generation industry look to take advantage of continued low natural gas prices. So very excited about the way we're positioned in that space, and our opportunity pipeline certainly demonstrates that. On guidance, you'll note a raise in guidance for both '12 and '13, and this is an improvement in our adjusted segment profit plus DD&A of about $40 million and 12 at midpoint and $120 million in 2013. In '12, the drivers there are slightly higher NGL margins, the addition of Laser to our guidance, as well as some offsetting impact of lower volumes in some of our areas due to lower gas prices and our expectation of slow drilling in some of those areas. So overall, an improvement in '12, though. In '13, you'll see even lower NGL margins than we…

[Operator Instructions] And we will go first to Craig Shere with Tuohy Brothers.

A couple of quick questions. It looked like the Geismar olefin volumes were perhaps down a little sequentially in the fourth quarter. And I was wondering if you could discuss if that's accurate, what's driving that and prospects for the volume growth ahead of the expansion of the facility? And also, where you see potential weakness geographically in terms of gas processing and Midstream as producers pull back in this environment?

I'll take that. This is Rory. We had a 10-day shutdown at Geismar. We had a problem with a missed pad there and that accounted for the lower volumes there in the fourth quarter. So that's something, obviously, that we're not planning for in '12, so you shouldn't put too much stock in that. Prospects for volume growth ahead of the expansion of the facility, I expect -- or I suspect that you're talking about the major 600-pound expansion that we've announced. We do have some furnace upgrades that are ongoing. Those are being done one at a time. And so we will see some very slow volume growth across the period as those furnaces are reconfigured and brought back up. But the big jump will come in '13 when we bring up the major expansion.

Will we see some downtime ahead of that to prepare for that?

Yes, we have a turnaround planned, and our intent is that we would coordinate the activity as much as possible to limit any additional downtime associated with the expansion.

Great. And any slowdown geographically you could discuss in the Midstream area?

Yes, yes. Good question there. I think any of the slowdowns that we're seeing, I think, we already have priced into our guidance. I'll just note that upfront. Out West, we're not seeing massive pullbacks of drilling, but we are seeing some moderation in the drilling out there. We've got one rig that we've just heard of. It's being laid down in Wamsutter, but everything else is still moving ahead. Generally speaking, say, from quarter-to-quarter, we're seeing a little softening in the drilling. But I guess, that -- one point I would make is if we do see fewer well connects for the year, we'll also see less well connect costs. So we think, at least, from a PZ standpoint, any slowdowns near-term ought to be DCF-neutral to PZ, and of course, that impacts WMB directly as we get those distributions.

And we'll go next to Sharon Lui with Wells Fargo.

Just wondering if you could talk about maybe the cash flow contribution from the Laser acquisition and how you anticipate the cash flow to ramp-up over time.

Yes, the Laser system acquisition, which I'm sure you've heard, has closed, is being looked at as what I call an integrated system. I think we're, in fact, we're going to be disallowed from using that name shortly. But one of the big values from Laser is it's coming into our complex up there to be operated and run as part of an integrated, holistic system. And so we'll be referring to that area up there as the Susquehanna Supply Hub. The project was, I would say, was -- the purchase price was more like what you would typically see on acquisitions in the Midstream space. We're -- if you're looking at guidance just for PZ, that's probably going to contribute about $25 million of segment operating profit in '12 and about $50 million in '13. That's the net impact. There's a little other noise in there, but we see that as being a nice driver overall in terms of improving segment profit and a big help just in general to that overall complex in the area.

Okay, great. That's helpful. And I guess turning to the Constitution JV with Cabot, if you can maybe talk about the potential investment in terms of dollar costs and the expected returns for that project?

This is Randy Barnard. I'll be happy to answer that question. Sorry for my voice, it got a little froggy this morning. The stated investment for that project is around $700 million, actually $701 million, eight-eights if we build the 24-inch version. We've got an open season on that project. Now that may end up leading to upsizing on that project to 30-inch that would raise the capital by another $22 million or so. The joint venture between us and Cabot, us being Williams Partners, would be 75% owners. So that would be our share of the overall capital depending upon which version, the 24 or 30 inches built. Does that answer your questions?

And then maybe just the expected initial returns on that project?

Well, we haven't negotiated rates for the project. But they would be -- I would just say consistent with regulated pipeline returns.

And we will go next to Ted Durbin with Goldman Sachs.

Just thinking about the pace of the dividend raise here. It sounds like with what you're going to hit for 2012, you're going to be above your -- the midpoint of your range, the 12.5%. I'm just wondering if you're thinking you can hit the high end of the range, maybe now that you're adding more of the fee-based earnings from WPZ with Laser and some of the new pipeline projects, or are you still thinking the midpoint is a reasonable way to think about the raise?

Ted, this is Don Chappel. Again, we'll stand with the range we've put out but certainly, our bias is to target the high end of the range.

Okay. So the mix shift at -- I'm assuming PZ is going to be moving more fee-based here given that you are fairly call it conservative on your NGL margin. Does that change your thinking at all?

Right. I think we look at the whole portfolio and clearly, the fact that WPZ is building more and more fee-based business, gives us more confidence in support for distribution increases. So I think we're on the same page there in terms of -- we think the outlook is very strong. I think, as Alan said, the business prospects have never been better. So we're adding a lot of great assets. I think Rory spoke to Laser, and that's kind of the early innings for Laser. We think that '14 and beyond are even brighter.

Okay. And then just sticking with dividends, and I realize it's a little early to think about it, but we do have potential change in tax law here coming at the end of the year. I mean, how does that inform your thoughts about capital allocation, whether it's dividends, buybacks, things like that?

Well, I think it's way too soon to think that the tax law is can be changed. We certainly are mindful of the possibilities. We certainly are educating those that make those decisions, but I don't know that we want to speculate on what we might see or what we might do. But again, I think at this point, we think it's pretty low probability that anything happens.

Okay. The -- you mentioned a little bit about expecting stronger ethylene margins. Can you just talk about what you're expecting for '12 and '13 there? And then is it a function more of lower ethane prices, or is it just increases in ethylene prices or maybe a combination?

Well, I would say a couple things here. One, most of the driver in '13 from our previous guidance is lower ethane prices. And so that's a big chunk of that. For '12, I would just say the current experience that we have out there is that because there are outages and that's driving these -- on the cracker side that is driving some of the lower ethane prices. But it's also increasing ethylene prices because those crackers are out as well. So we're on both sides of that coin. And -- but I would say generally, most of the driver that we're seeing in a longer-term despite this kind of current period that we're in with high ethylene is really driven by lower ethane prices.

And we will go next to Bradley Olsen with Tudor Pickering. Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: I think my question is really kind of a follow-up to Ted's. It looked as though the NGL pricing that you have in the February slide deck has declined over 20% at the midpoint from the November NGL pricing. And at the same time, the bump up for segment margin in MC&O in 2013 seems relatively conservative. Is there any of the, I guess, ethane price decline that -- or anything about the contractual structures that you guys might have with ethane suppliers that would prevent you from realizing all of the favorable impact of a decline in spot ethane prices?

I'll take that. This is Rory. If you look at '13 and focus on that, we're down about $0.11 on our ethane assumption and up about $0.04 on our ethylene, which is driving about a $50 million increase in segment profit there. That's kind of the long and short of it. I don't know if that's helpful but we... Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Yes, that's helpful. And then there's nothing in terms of contractual structures. It's reasonable to think about segment margin in the olefins business as really being determined by just -- by spot prices?

Yes, I think the good news there is if -- and I'm not going to get into a lot of contractual detail on our offtake agreements, but right now, we have a pretty high percentage of our agreements that do have collars on them, and so we're not getting full exposure to that pure spot market margin, which today, is around EUR 40 -- maybe even a little more than GBP 0.40. Most of those are rolling off, and so we'll have contracting flexibility in '13. And we'll -- we haven't made those decisions yet, exactly how we're going to play that, but at the end of the day, you want exposure to that margin and you want certainty of takes. So that's kind of the trade-off there. Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay, great. And then I guess just as far as why the 2012 MC&O margin didn't move, that's more associated with the collars that you referred to?

That's definitely part of it. We've got a much smaller percentage of our offtake that's purely exposed to that at spot margin without some kind of limiting collar. Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Great, and just one question on the Midstream side of things. As you think about the current low ethane price environment, when you think about some of your customers in the Piceance specifically, but in, let's say, kind of a variety of Rockies plays in the Green River and the Piceance where maybe you see anywhere from 1 to 3 gallons per Mcf on average so not extremely liquids rich, do you think of those rigs as being in danger of being laid down as you think of, perhaps, ethane prices on the Gulf Coast not being high enough to justify shipping ethane all the way from the Rockies down to the Gulf Coast and incurring those transportation costs versus just selling that, the BTU, locally as methane?

Yes, well, it certainly doesn't help. The Rockies barrel does have a fairly decent percentage of ethane in it. But I think what I would say generally speaking, the lack or the slowdown in drilling that we expect to see, we've already got in our guidance. I think that impact has already been accounted for. I think the uptick or the strengthening that we're likely to see for ethane in the second half of '12 will help. And -- but I think generally speaking, we've got that impact and that effect already dialed into our guidance. Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: And you don't think that will affect utilization on the new capacity on the Parachute Plant coming online in 2014 or kind of similar deep-cut processing facilities?

I think that in the Piceance basin in general, there will be some drilling slowdown there. I think WPX, in particular, has already made some comments about that. The good news I think there is we do have some Mancos acreage under contract out there, and that's kind of where I see a lot of the backfill coming and some of the interest building out there. There's some rich gas windows and possibly even some crude oil Windows in the Mancos and Piceance. And if we do have any slowdown here in the front-end, I think we've got a chance to backfill that eventually with Mancos rich gas production.

And we will go next to Carl Kirst with BMO Capital Markets.

A lot of my questions had been hit, maybe just a few others if I could, though. And maybe, Randy, on the pipeline side, going back to Constitution, just noting that it's -- it looked like it was sort of an in-service date for early 2015, and we think a 120-mile pipe that could kind of be done in 1 season. Is there a reason why that's taking that long, or am I not perhaps thinking about it correctly?

Well, the timing, generally speaking, is the whole permitting process and FERC certification process. This would be a interstate-regulated pipeline. So we have to go through all the prefiling, public meetings, all the environmental studies, all the FERC certification and that generally chews up 1.5 years to even sometimes 2. So the actual in-service state that we're quoting on the project is fairly aggressive, believe it or not, from the perspective of the development cycle, typical development cycle of regulated pipe.

Great. So it's really all the regulatory issues, not necessarily waiting for more contracts, for instance?

No, sir. No, sir. The Cabot commitment to that pipeline is sufficient to anchor the construction of that pipe.

No, that's great. And then just a question maybe on the further investment potential in Transco on the gas-fired power generation and, I guess, Alan even mentioned to a lesser extent, the Gulfstream. So as we think about that, and you guys have your wedge pie charts over the next 5 years, do you see that sort of developing as far as perhaps leading to announced projects, something that might be nearer term of the first half of that 5-year outlook, or is it more in the back half? Is there any sense of color on that?

Maybe I would cop out by saying about the middle half. Transco, in particular, is pursuing over 20 projects right now that are largely driven by power gen growth. And it's up and down the Eastern Seaboard. There is a slide in our packets that I'm trying to find so I can direct you to it. Slide 57 in the data book, we've just touted some future potential expansions on Transco largely -- either along the Leidy Line or in the Southeastern U.S. and in Gulfstream as well. All those is because of our view of potential power gen growth. And there's something -- and some of it would be actual growth, and some of it is driven by coal plant conversions. There's over 30 gigawatts within -- of potential either conversion or new power build within 50 miles of Transco. And we could see -- we are pursuing about the equivalent of 3 Bcf a day or about $2.5 billion of investment associated with -- or close to Transco right now. Now I'm not saying we're going to get all that. We're in competition for that, but it's a pretty positive outlook for Transco.

That's great. And then maybe one final question, if I could, either for Rory or maybe for Alan. And this kind of turns up to Canada and just thinking about Williams 10 years ago. You guys had a pretty large Midstream presence in Canada. You obviously have a growing oil sands franchise right now. There's been a lot of shifting landscape up in Canada, claims to BP assets, Pembina Provident, et cetera. And I guess, my question is, do you guys, with all of the liquids-rich structures that they're finding out there, do you guys see an opportunity beyond the oil sands franchise, or is it more just to kind of develop that key area?

Yes, that is a great question. I would tell you that first of all, first and foremost, we are going to make sure that we monetize -- we take full advantage of the great competitive advantage that we have in the oil sands area first. And I would tell you there's a tremendous amount of opportunity to not only capture that existing business but to grow that business further and be able to optimize the value of those streams even better. Our BB splitter that we did in August '10 is a great example of that where we're further optimizing the value of those streams. I would tell you that from our vantage point, that a lot of the oil sands operations are fairly immature in terms of optimizing the value of those resources. And so things like hydrogen that is in big demand out there and will continue to be in big demand. Helium transfer, we think there's a lot of services up there that we have a lot of room to grow that business in. And so I would tell you, we're going to seek out those areas where we have the largest competitive advantages and provide us the highest return. And I would say some of those more competitive areas are going to have a hard time competing with those opportunities. Having said that, we certainly keep our eyes open if we think that some of those projects could demand a return that's competing with our other opportunities that we have both in the U.S. and in Canada.

[Operator Instructions] And we will go next to Becca Followill with U.S. Capital Advisors.

For you, one, on the gathering side, there's lots of moving pieces with the acquisition of Laser and the Springville lateral coming online and some declining volumes elsewhere. Do you guys have guidance for us on percent change in volumes in that segment in 2012 and 2013?

Hang on just a second. Let me check on that.

Okay. And then while you're looking, do you want me to ask the next one, or do you want me to wait?

Yes, you can go ahead and ask another question...

Okay. The other is on NGL market. You guys lowered your NGLs as a percentage of crude. What was -- we all know that prices are low right now. So is it a function of what you're seeing today, or is there something else that's changed in the market that causes you -- caused you to change your guidance?

Yes, I'll take that second question, Becca while. Rory's gathering his info for your first one. I would say that certainly, the current environment has got us a little bearish on that. But I'll also tell you that if you just look historically, if you look at the gas-to-crude ratio or crude-to-gas ratio, and you realize how high that is relative to historical, there is an inverse relationship, generally, that occurs between high crude-to-gas ratio and the NGL-to-crude number. And so even though it seems unprecedented low number on that NGL to crude, we also are unprecedented crude-to-gas ratios as well. And so if you look at the overall margin, I'm not sure that it's that far out of line. And so -- but certainly, the current environment, the very warm winter that we're having, certainly is impacting propane storage. And propane is just as exposed to that as natural gas is. And so that could be a hangover certainly in '12. I think, '13 it's a little early to call, frankly, and we may be a little bit conservative in '13. But I think as we look for both ethane for the balance of this first half of '12 and propane for the balance of the year, that we could see some pressure there just because of what we're seeing in storage volumes on propane right now.

Becca, just getting back to your question, and you stated it real accurately that there are a lot of moving parts up there on Laser and Springville and the way that they're priced. It gets a little confusing, too. But I think that the thing that we have given some guidance on is kind of where our total capacity is going with Springville. Right now, we're in the 300 range. We'll be going up to 625, 650 over the course of the year on Springville. Laser is going to be up around 1.3 billion a day of capacity. And then Randy talked about the $500 million in a Constitution project. And we also have about $500 million a day of inter-connectivity with Tennessee Gas Pipeline in that field. So that kind of adds up to that 3 Bcf a day of takeaway capacity. And maybe what you ought to keep in mind is that, that is one of the limitations out there. So producers are out scrambling to get takeaway capacity and then drilling to fill that, evidenced by Cabot's willingness to take the full 500 on the Constitution project. So it does take time to build. I think we exited the year, just say on our Springville assets, for instance, and '11 at around $600 million a day. That will be going up by well over 50% by the end of '13. And the Laser -- the whole Laser story is one that's unfolding. It obviously just started up. So volumes are building there. The earning potentials in '12 and '13 are just a shadow of what they're going to be. So we've got a real strong producer group right now behind those assets, and they're going to be ramping up quickly. Cabot, I think, has been pretty transparent about their plans. This is one of WPX's key areas, and they've been having good results out there. And the Carrizo volumes are backed by a drilling carry from reliance. So we're very excited about the opportunities up there, and I think you'll see these producers working hard to take advantage of that takeaway capacity.

But no specific number for 2012 or 2013 on percent changes?

No, we haven't offered that up.

Okay. And just one more data point on the 1.3 Bcf a day capacity on Laser, is -- where is it now? Just so we can get some kind of sense of how we can ramp it up.

Yes, it's a little over 100 million a day now and that's a pretty dynamic number. But we're obviously in the early days of starting that out.

Capacity of that.

Did you say the capacity of that?

No, no, the current throughput. I think you answered it, what I was looking for.

And at this time, there are no further questions. I'd like to turn the conference back to our speakers for any additional or closing remarks.

Okay, great. Well, thank you very much. As we said, we think we continue to have rock solid growth, and it's certainly not dependent on a rising commodity price environment. And if we get some of that and we start to see that at the back half of '12 or '13, we certainly will improve beyond these numbers considerably that we've got it guided for. We're very comfortable with what we have out there, and we think this is great growth in both the cash flows and the dividend that we can continue to produce. And so we're excited about what we have before us, and it's going to be a matter of prioritizing all of these great opportunities to continue to make sure we're executing as well as we have to date. So, thank you again for joining us, and we look forward to talking to you in the future.

And this concludes today's conference. We do thank you for your participation.