Williams Companies Earnings Call Insights: Northeast Segment and 2015 Dividend Guidance

Williams Companies Inc (NYSE:WMB) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Northeast Segment

Bradley Olsen – Tudor, Pickering: Could you provide maybe some kind of breakdown of what is driving the CapEx growth in the Northeast segment particularly, is that the result of regulatory hurdles, labor, materials or another factor?

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Frank E. Billings – SVP, Northeastern Gathering and Processing: This is Frank Billings. The majority of the capital increase in the Northeast that we’re seeing and forecasting for really ’13 and ’14 and a little bit of ’15 is really targeted toward additional capacity requirements to support the drilling programs for our customers in Northeast Pennsylvania. We are actually expanding market outlets to support those drilling programs and increasing our takeaway capacity to the current pipeline connections that we have, as well as setting up for constitution coming on as well. The other things we have is – the other piece of that is we do have our Three Rivers investment in that time period as well.

Bradley Olsen – Tudor, Pickering: And when you talk about increasing takeaway alternatives is that focus more on gathering or is there a specific long-haul pipeline that you are delivering into more than you expected or you are building more capacity?

Alan S. Armstrong – President and CEO: It’s spread out across the current delivery points that we have today, so we have our deliveries into Transco, Tennessee, Millennium will have constitution and those are the primary ones that we’re going to continue to focus on. And those are the options that our producer customers’ are wanting us to focus on as well.

Bradley Olsen – Tudor, Pickering: Is there an update at this point on Bluegrass how the contracting in that pipeline is coming along? If Bluegrass does proceed, do you believe that it reduces the demand for local market fractionation in the Northeast?

James E. Scheel – SVP, Corporate Strategic Development: This is Jim Scheel. Bluegrass negotiations are going very well right now. We have operations, legal and commercials folks working to finalize the agreements. It’s my hope that we’ll be finalized sometime during this month so that we can go out to customers with tariff proposals early next month. Going to the next part of the question, yes I do believe the Bluegrass will provide a great opportunity for wide range product to move to the Gulf Coast in order to meet the customer demand for NGL’s in the largest scale fractionations facilities in that area of the country.

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Bradley Olsen – Tudor, Pickering: Just one last question from me. In 2014, there was a revision to the Atlantic and Gulf segment EBITDA, it looked a little bit larger than just commodity impacts alone and I was wondering if you could comment on that and that’s all for me? Thank you.

Rory L. Miller – SVP, Atlantic – Gulf Operating Area: Alan, do you want me to take that?

Alan S. Armstrong – President and CEO: Yes, please, Rory.

Rory L. Miller – SVP, Atlantic – Gulf Operating Area: Yeah, just a couple of things going on there. Effective March 1st, 2013, we have set a new reserve rates and rates subject to refund, and the main driver was we round off the little lower rate base to work against than we were forecasting in earlier periods where we had little lower maintenance capital spending, and so that drove the rate base down, which brought that kind of forward-looking base down a bit. And then there is an impact on Gulfstar, we’re probably looking at a couple of months, potentially a delay there and that matter of fact is kind of amplified because the accounting treatment that we’re using with the Marubeni buy end of the project. As you will recall, we sold half of that project to Marubeni and due to the accounting treatment, it shows the full impact of segment profit but the impact on DCF is only about half of that. Don, you may have a little more clear accounting explanation of that, but let’s say it in a nutshell.

Don R. Chappel – SVP and CFO: Just to follow-up on Rory’s comments, again we consolidate the Gulfstar project, so we show a 100% of it despite that the fact that our ownership is 51% and our partner Marubeni’s interest shows up as non-controlling interest. So, you see segment profit move down as we’ve pushed the startup of that project back by a quarter, but the net effect of that is about half of what shows up in the segment profit change because of the non-controlling interest change that offsets it.

2015 Dividend Guidance

Faisel Khan – Citigroup: I appreciate the additional guidance on the dividend for 2015, but I just wanted to ask a few questions on the assumptions in order to get that number for dividend growth for ’15. I guess, if I look at the analyst package and look at your coverage ratio for the dividend payout for ’13 and ’14, it seems like you have enough coverage, but it looks like that the assumption is based on a very low cash tax rate, it’s also based on ethylene prices kind of holding up where they are and I guess it also assumes that ethane rejection kind of continues for the foreseeable future. I’m just wondering what gets you comfortable that you have enough wriggle room over the next few years to increase that dividend all the way to 2015 by 20%. I mean the cash tax rate looks a little bit aggressive and the ethylene assumption also seems – it seems decent now, but there doesn’t seem to be a lot of wriggle room?

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Don R. Chappel – SVP and CFO: Faisel, this is Don. I’ll just take the first part of the question on the cash tax rate and then I’ll turn it over to Alan. But you’re correct; cash tax rate through ’14 is fairly low and even in the ’15 it’s less than probably the long-term rate. However, we have a forecast that goes out well beyond ’15 and we do account for the fact that our cash tax rate will be moving up over time and despite that we’re comfortable that we have the coverage, the capacity and the underlying growth projects to sustain that dividend growth through 2015 and again, I think we feel comfortable that we have strong growth beyond, despite that we’re not providing guidance out in that beyond ’15 period…

Alan S. Armstrong – President and CEO: Faisel, I’ll take the question on the pricing, particularly on the ethane and ethylene. At the WMB level, which I assume your question is pointed to relative to the dividend. (Don’t predict) that we do have ethane exposure, positive ethane exposure in Canada that is not captured in a lot of that (PZ) analysis that we’ve shown in terms of our sensitivity of ethane to ethylene such that if you add back in that exposure and I remember the way that contract is structured we have a floor that to cost to service basis for negative ethane. But when ethane goes positive then that’s long barrels that would offset that otherwise short position that we have against ethane. So, at the WMB level, we’re actually fairly neutral there. In addition to that we also have the impact and it actually showed up pretty significantly in these numbers as we went to full ethane rejection from our Overland Pass business where we’re showing full ethane rejection throughout this period. So, even though that doesn’t show up as direct commodity exposure, it’s pretty significant in terms of its impact over this two-year period. So, if you really look at the full balance of our exposure there, I would tell you, from a cash flow standpoint, we are pretty well neutral relative to that ethane assumption at the WMB level. And as to the ethylene and propylene margin, we are certainly showing that reducing by about 10% from what we saw here in the first quarter of 2013. So, I certainly wouldn’t suggest that that’s not without risk. But frankly, we’re seeing a lot of pull-through on the ethylene side right now – on the demand side for ethylene. So at this point in time, we think that’s a sound assumption on our part.

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Faisel Khan – Citigroup: Alan, just to make sure I understand the guidance going forward for ’13, ’14 and ’15, the ethylene equity sales that we saw in the first quarter and the ethane production numbers we saw in this first quarter, are we to assume that those numbers kind of continue at the same first quarter numbers kind of going forward, which will be a drastic sort of reduction in volumes over the fourth quarter of last year and all of last year for that matter. So I just want to make sure I understand that number in the guidance?

Alan S. Armstrong – President and CEO: That is and I will tell you, no, even though we’ve said we will expect – our pricing is down on a – in terms of what we put out, it’s down on an annual average basis and I’ll tell you it won’t be that smooth and there will be periods where we have recovery and there will be a short period in there as prices inch up, and then we will see the rejection turnaround. So when we say full rejection, we mean that in the sense that the pricing signal on an annual average basis will keep that. But we will see spotty, in fact I think we had some periods of recovery here recently, here in the second quarter as well. So, we will see periods where we go in and out of recovery in rejection. But, we think there’s plenty of supply to hit that bid very quickly out there in the markets and I think one of the things that’s kind of reset that market a little bit from what we would’ve seen maybe five or ten years ago is there’s a lot of ship-or-pay kind of contracts out there such that the variable expense to a producer is higher than what it used to be. So they are making a decision against the ship-or-pay contract which is kind of lowering the point at which people will go into rejection. And we as Williams really don’t have that. And so we are right on the edge there and really looking at variable expense with the exception of the little bit of impact benefit we get from the past transportation. So, I think that’s keeping that pricing level down below where you normally would see it for to encourage ethane recovery.