Williams Companies, Inc. (The) (WMB)

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Williams Companies Inc (WMB)

2013 Analyst Day

May 21, 2013 8:45 am ET

Executives

John Porter

Alan S. Armstrong - Chief Executive Officer, President, Director, Chairman of Williams Partners GP LLC and Chief Executive Officer of Williams Partners GP LLC

John R. Dearborn - Senior Vice President of NGL & Petchem Services

Randy M. Newcomer - Executive Officer

Francis E. Billings - Senior Vice President of Northeastern G&P Operations

Allison G. Bridges - Vice President

Rory Lee Miller - Senior Vice President of Gulf & Atlantic Operations

Donald R. Chappel - Chief Financial Officer and Senior Vice President

J. Michael Stice - Chief Executive Officer and Member of The Board of Directors

David C. Shiels - Chief Financial Officer of Chesapeake Midstream GP L L C and Principal Accounting Officer of Chesapeake Midstream GP L L C

Analysts

Faisel Khan - Citigroup Inc, Research Division

Presentation

John Porter

All right, good morning. I think we'll go ahead and get started. I'd like to welcome you to the 2013 Williams and Williams Partners Analyst Day. My name is John Porter and I head up Investor Relations for both of these companies. Continues to be an exciting time for our industry, and particularly, for Williams, so we're really glad you could join us here in person or online on the webcast.

Flipping to Slide 2, we've got the agenda here. I won't take you through all the lines, I'll just point out a couple of things. We will have a break this morning. Alan will do the introduction, and then we'll have our NGL and Petchem Services presentation. We'll take a quick break. We're going to do Q&A at the end of each speaker's presentation. So we'll save time in each presentation for your questions and answers. Doing something a little this different this year in terms of lunch. The packed room, hope it works. We're going to have box lunches. We'll take a break. After Frank Billings, Northeast Gathering and Processing presentation, we'll go get those box launches. And then we'll do a lunchtime presentation, where Allison Bridges will review our Western operating area. And then we'll pick it back up after that with Rory in the Atlantic-Gulf area.

Slides 3 and 4 are the forward-looking statements. Important information in there, so you should take a look at that. Additionally, we have non-GAAP measures in the presentations and we reconcile those to the nearest GAAP measures in the back of the presentation materials. So again, I'll just say thank you for being here, and hope you have a great day.

And with that, I'm going to turn it over to our President and CEO, Alan Armstrong.

Alan S. Armstrong

Thank you. Well, good morning. Thank you, John. Before I get going, I just wanted to acknowledge the tragedy in Oklahoma. And let folks know that, of course, in Tulsa, we're about probably 100 miles away from that tragedy. But obviously, it's a big impact to our state, and certainly, to Access Midstream who's based in Oklahoma City, a lot of employees are impacted there. But anyway, I just wanted to acknowledge, I can't imagine a more horrible thing than having -- not knowing where your kids were in a moment like that. But anyway, I just wanted to acknowledge, the management's respective of our thoughts and prayers go out. And we'll certainly do our part as a corporate citizens to support the recovery of an important place in our state.

With that, we certainly are very pleased this morning to be here today. We have so much going on. It really becomes very challenging to present all of this information in such a succinct way. But I wanted to say again to John Porter and his team, how impressed I've been with their ability to pull all this information together, with all the various projects that we have going on and put it in front of you in a way that I hope answers a lot of the questions and really shares our excitement about the great future that's out in front of our company today. This really is an incredible time to be in this industry. I really don't know that there ever will be another moment like this in our career, certainly as a management team, to be able to see the incredible opportunities that are out there right now because there is so much demand for the kind of infrastructure that we are very good and very focused on getting in service and being able to help out to take advantage of these incredible amount of natural gas and natural gas products that we've been blessed with here domestically.

So we've continued to build out our organizational, I'll talk a little bit about that this morning. But this team is really excited to have the opportunity we have to play such a major role in this infrastructure build-out, and I think you'll see that as you hear from the team today.

So here is a quick overview of what I'm -- what you're going to hear today. And first of all, in my presentation, you're going to hear about, a little bit about the new organization model that we have and some of the leadership changes that took place at the first of the year, really in an effort to go and address all of the changes that we've got going on. You'll also hear about our strategy and some of the strategic choices that we've made over the last several years and how that has positioned us extremely well for the extraordinary growth that we're experiencing today and the kind of growth that is leading to the dividend growth at WMB that we continue to enjoy and continue to build and deliver.

I'll also share a little bit of perspective on the commodity environment as it impacts our strategy. And then later, you're going to hear a more detailed explanation of the olefin market fundamentals from Randy Newcomer and John Dearborn, who I'll introduce in a moment. The number of opportunities that we've got going on are really causing a lot of capital allocation on our part. That's a good problem to have, but nevertheless, it requires a lot of discipline on our part. And I'll talk a little bit about our capital allocation that we've got going on and how we think about that. And then I also will provide a quick overview of the fundamentals that are driving the Bluegrass NGL pipeline and in a very rapidly growing resource play that is the Marcellus in Utica and how critical we think Bluegrass is to the continued development of that resource base.

And then many of the detailed explanations that are supporting the projected 62% growth in our distributable cash flow at WPZ between '13 and '15 will come from the business leaders today as they explain the various projects that are supporting that kind of dramatic growth as we continued to build up infrastructure in each of these 4 areas. Also included in that explanation, you're going to hear from Frank Billings on the -- some of the challenges that we've been facing in the Caiman acquisition at Ohio Valley Midstream and be able to explain exactly what we're up against there and exactly what we're doing to get that business on track. It's a good problem because there is plenty of resources there. It's just a matter of us getting the infrastructure really matched up to build and deliver against such an overwhelming amount of resource that's available there.

And then finally, Don Chappel's going to bring it all together in terms of what this is going to do for our financial performance and the powerful support for this 20% dividend growth that we continue to deliver at WB on an annual basis.

So next of all, let me talk about the new organization that we formed. And this really has developed all of last year. We worked on this, we thought about -- after we spun off WPX Energy, we thought about how we needed to form to be not just good, not just another midstream company because there's plenty of us out there, but really, somebody that establish themselves as great. And the areas that we really thought we needed to be great in and put the most effort into was in our project development and project execution space. And so you'll see that these organization is formed in a way to build and deliver on that. And I'm proud to tell you that we -- I would say we were pretty good. We certainly had a long history of developing a lot of complex projects, on time and on budget. But to take on the kind of capital program that we have, we thought we really need to step it up and even bring in more focus and more attention to that.

So we put this new organization into effect of the first of the year, and we now have 4 operating areas: the NGL & Petchem Services Group, the Northeast Gathering and Processing area, the Western basin and the Atlantic-Gulf. Now the West includes both Northwest Pipeline and all of our Western Gathering & Processing. And the Atlantic-Gulf includes Transco, Gulfstream. We'll include constitution, so those 3 major transmission systems and then the -- all of our Deepwater in our onshore gathering and processing in the Gulf Coast area.

The operations and the commercial efforts in each of these areas, so that means our field operations and the folks that go out and develop the business in and around those existing assets, all report into each of the leaders in these areas and that is a combination of John Dearborn and Randy Newcomer, and I'll explain that in just a second; Frank Billings, Allison Bridges out West, Rory Miller in the Atlantic-Gulf. And so those are the 4 operating area leads.

In addition, all of our project development and project execution for a major capital project is now led by a gentleman named Fred Pace. And Fred's been in this industry just a little longer than I have, and I've had the pleasure of working with him in and out of different roles within Williams. And also, he owns his own engineering construction firm for a number of years and was very successful with that. We were able to attract him back to run this portion of our company. He's been with us now about, been back where he's about 3 years now. And he's really making a difference in stepping up our game in terms of the way we manage these major projects on a professional basis.

Also supporting our very best operating practices and expertise is a gentleman named, Brian Perilloux. Brian -- neither Brian or Fred are here today. But Brian formerly headed up some of our Gulf Coast operations for us and is now leading the areas that include things like our EH&S, our asset integrity, all of the things that are really common to being a great operating company. It includes our control centers, all of the pipeline control centers and a lot of our areas of expertise like measurement and rotating equipment. So a lot of our centers of excellence are run by Brian. And he is a very can-do kind of guy. That was not an easy role to take all of our operations across all of these areas and make sure we're bringing the very best and not relearning the same lessons over and over, but being able to take things that we learn in one area and apply them to another. And that's a lot of what Brian's team does.

Then Jim Scheel leads our Corporate Development Group. And these are large business development project like the Caiman acquisition, the laser acquisition last year, the Bluegrass project, just to name a few. So as you can imagine, Jim and his team has been extremely busy. And then Robyn Ewing leads our HR communications and IT functions. And she's been with the company for about the same time I have, and it came us through the MAPCO acquisition, does a great job keeping things stable there on those important fronts.

And then finally, Craig Rainey is our General Counsel. Craig's with us today, and he's been our General Counsel for about 18 months. And prior to that, led our Midstream business. He was the head of our General Counsel for our Midstream business for many years before that. So thrilled to have Craig in that role.

So that pretty well rounds out the corporate support there. And so now, let me introduce some of the management team here that's with us this morning. And I'll ask them to stand up and wave. In the case of John since he's already standing. But I will tell you, I am very excited to introduce you this morning, John Dearborn. John Dearborn came to us from SABIC. And before he had a long career at Union Carbide, Dow. And really the kind of international experience that we were looking for in the olefins segment is knowing how to connect all of these great resources that we have here in the U.S. to these markets that are really, really looking for these lower cost feedstock and these lower cost resources. And so we were really thrilled to have John's talent and experience with us. And he'll be talking a little bit about our strategy this morning in that area, and I think has some very important information to share with you. I do want to be very clear on this front though. We are not going into this business to be big in the petrochemical space. That is not our angle. We are focused on serving the petrochemical space, and we think it's going to take a tremendous amount of infrastructure to serve this petrochemical space that, as you're going to see, has got an opportunity to build out in a very, very large way. And so bringing somebody in from that side that knows the needs and knows how the business will build out and also knows those markets is really key for us and very excited about that.

Also, Randy Newcomer is with us this morning as well. Randy has been serving as the Interim Lead for our NGL & Petchem Services. And I've been trying to get him to stay for many years, but he's been, -- he and particularly his wife, have been working hard to trying to get him into this position and retire. And so Randy has served the company in a very, very important way, and certainly, wish him well in whatever he and [indiscernible] will decide to do here in the future. So Randy, thank you very much for your long service to the company.

John and Randy are going to tag team that NGL Petchem story. Frank Billings, who has, a lot of you all know, has a very big role in developing and operating our fastest growing segment in the Northeast Gathering and Processing business. So you're going to hear a lot of information from Frank, but he's certainly going to be hitting head-on the OBM operational issues that you've heard about and we've discussed in the past. But particularly as well, showing the power of the growth in this exciting area.

And then Allison Bridges, who has formally led our Northwest pipeline operations which continues to be very successful, and Allison did a great job in leading that for us. And now she is leading all of our Western operations, which includes, as I mentioned earlier, a gathering and processing all out in the Rockies. So a lot of very stable cash flows continue to come out of that area. Despite much lower margins, we still are enjoying tremendous free cash flows out of that business.

Rory Miller, who previously is running a Midstream operation, is now running Atlantic-Gulf, which includes both Transco and our Midstream operations. And Rory is bad in cleanup. For the way you're seeing this morning and I'll tell you that he's really in a somewhat envious position this morning or enviable position this morning because he is showing the strength that you got when you got great position, very powerful competitive advantages in the markets that you're serving. And you happen to be sitting on great growth areas, those are the Deepwater oil development in the Gulf of Mexico, and as well, the gas demands that Transco in our interstate pipelines on the East coast are enjoying. You're going to see a pretty powerful story there of both free cash flow and growth in that area.

And then Don Chappell, of course, you all know, and Don, very pleased to continue to have gone managing so much of this important growth from a finance standpoint and appreciate his great leadership to the company as we continue to push through all of this great growth.

And then finally, I'm very honored to have Mike Stice with us this morning, who leads Access Midstream. Thank you, Mike. And you're going to hear a great story from Access Midstream as well, and I'll remind you. We own 50% of the general partner of Access Midstream and about 24% of the LP units. And so you're going to hear from Mike what we were so excited about that. I'll tell you, that is a great strategic fit for us today, but it is also a really powerful financial position as we get on the very terrific spot, from my perspective, on the IDR runup on the GP that we own there. But very sound business and very well aligned, frankly, with our strategy of having large-scale positions in the right basins.

So moving on now to a little perspective on the commodity prices, real quickly here. First of all, the commodity prices that we're currently experiencing certainly had some negative influence against our guidance. As we've seen NGL margins get cut in half from first quarter of '12 to first quarter of '13. And then again, we saw then fall from fourth quarter of '12 to first quarter of '13, that even in that period, they fell 21%. So we've continued to see a pretty major decline going on there in our NGL margins. Now there's 2 drivers to that, and I'll also tell you there's really 2 sides to that. First of all, the gas price has run up here, which actually, while it may seem like a negative in the short term, actually I think that's a very positive long term for our business model. Because it is going to take some more sustainable gas price to develop the kind of supplies that we think are going to be needed to meet the demand that is growing. I would tell you, I keep telling people this, but I don't think the whole market really is listening, and certainly, I'm not sure investors are listening to this. There is a tremendous amount of demand that is building up in this country for natural gas. There is capital rolling in all over the place trying to take advantage of our low-cost energy prices here in the U.S. It's coming from international, and it is really going to work to take advantage. The concern I have is that it's all going to show up at once. If it's not showing up today on people's radar screen, I think it's not happening. But I'll tell you there is a lot of capital that's going in the ground that's going to take advantage of that. And if we were sitting here with $3 gas prices today, I would be very concerned that we were going to be on the wrong side of this when that demand finally hit, and we weren't keeping the supplies building on the gas side. Thankfully, I think, at this kind of pricing level, I think we're going to see a healthy market develop, both on supply side and the demand side as well. And so I think we're very well positioned for our strategy because our strategy is very focused on volumes. We are really moving away from being a spread-based business, but we are very exposed and continue to position ourselves to be exposed to volume growth, both on the natural gas side and on the NGL and NGL product side. So we think that's a great place to be, and we think this market situation where we've got first gas, low-priced gas attracted all this demand, I'm telling you that's going to show up. And then eventually, this low-priced NGLs that we have are now attracting a lot of capital on the petchem side. And we're going to see that demand show up. It's lagging, but it's going to be there, and it's going to be there in big volumes. And you'll see some support today from that.

So in the short term, I think the commodity price environment, certainly, the ethane price is going down as fast as it did caught us a little bit by surprise, even though we've been forecasting lower ethane margins for some time. But I'll tell you, it hit a little faster and has been more prolonged than we would have expected. You can see in our guidance today, we're expecting no ethane margin, no ethane recovery on our facilities all the way through '15. Now I'll tell you, one thing I do know is there will be periods in there where we are recovering ethane, but it will be very short lived, and it's going to be low margins to be had because there is plenty of supply out there to meet the current capital demand. Beyond '15 and the '16 and '17, I think you'll see that demand start to pick up. And again, it's going to drive volume, and that's exactly where we want to be. We really want to be somewhat indifferent to price, but we want to be very exposed to the volume growth.

So one of the things -- first, you'll hear on our strategy. One of the things that I think we actually can be accused of and I'd fully admit, is that perhaps, we've been a little too strategic. We're very focused on building a model here that has competitive advantages, that are very sustainable for the long term. And to do that, it's required that we go into some pretty bold positions and that we certainly pressured our short-term cash flows and our distribution ability at WPZ. But we're doing that because we are convinced that we need to gain these major positions now while those opportunities exist. And certainly, we're working to balance that, but I'll tell you, there's not going to be very many opportunities come along like this to get these major positions in these new resource plays. And we are committed to that strategy.

One of the questions I get around our strategy is what do we mean by premier, and I'll be very clear on this. We don't go into a basin, we're not interested in going into a basin unless we have very strong and unique competitive advantages. And one of the best ways we know of the gain, good competitive advantage in areas that have very large scale, so that we can be connected to the very best markets and so that we can operate at a very low unit cost. We've seen plenty of advantages come to us over the years, particularly out in the Western area, by having that kind of large scale position. And so we're not going to be everywhere, but where we are, we are going to be large scale. And so when we say premier, we're really talking about in the market or the basin that we're serving, particularly. And we really see that we have really 3 strategic groupings today. We have areas where we're developing into that #1 or 2 position and so the Marcellus and Utica is a good example of that. Or we have areas where we're taking advantage of an already very established competitive advantage. And the Canadian position's a great example of that, where we have a very unique competitive advantage that we continue to grow off of. And then finally, maximizing returns in mature established markets. And so in areas like out in the West, where we've got an ability to continue to see great free cash flows from those businesses, that's exactly what we built those businesses for, was to enjoy tremendous free cash flows in return, and that's exactly what we're enjoying today.

So we do believe that our strategy is very well suited for this predicted commodity environment. We've certainly, as I mentioned early, we've certainly seen the ethane margins disappear rapidly, but we've been positioning ourselves and had already committed to the guys in ethylene expansion and knowing that we need to move very quickly, we pushed ahead with that one, very thrilled with that project. The project's coming on very nicely. And we're excited about the kind of the terms that, that project would deliver for us, and particularly, the kind of balance that it puts to our position. At the end of the day, again, we're going to be focused on volumes, and we're going to be focused on being a great market outlook for our producers.

Additionally, we've been positioning on -- to be more dependent on volumes and not on prices, as I've said. And we're now forecasting that our fee-based business will grow 51% between 2012 and 2015. And that's against now -- and this is in our guidance. At a midpoint, our NGL margin will decline from $752 million down to $332 million during that period. So you can see the kind of growth that 62% Bcf growth that we have is not dependent on margin decline in our NGL business. And it's actually about a 10% decline in the margin that we saw on the olefins business from the first quarter of 2013. And so, we're not really looking for big margin expansion, in fact, we're working against that headwinds. Because so much of our capital is going to be in fee-based projects, we're able to continue to grow nevertheless.

Finally, I would tell you, this is all underpinned by what we think is a massive arbitrage between these very low cost U.S. prices for natural gas and natural gas products and a continued high price around the world that is dependent on higher-priced oil businesses. And we think that gas, even if oil were to drop tomorrow in a fairly large way, gas still got a big advantage. And I think it'll take some time because I think the U.S. consumers and demand has been convinced that we have the ability to continue to deliver gas and gas products at a low cost. And that competence is building the capital that's going to move the volumes ultimately that we're going to be dependent on.

So I'm not going to spend much time on this. Don's actually going to hit this in a minute, but real quickly here, you can just -- remind you, our annual growth that WMB through 2015 is 20%. And I think as you'll see today, we're building the firepower to continue that kind of annual dividend growth for many years. And then as well at Williams Partners, 9% growth on cash distributions in '13 and still in '14 and '15 at a very healthy 7%.

And with that, I'm going to move that on to disposition. First of all, I told you I would talk a little bit about capital allocation and how we think about that. And I'll tell you, I've just never seen a situation where we've been turning down so many good projects as we have been lately. But it's just because the huge amount of opportunities that our competitive advantage has given to us. So the way we think about it, first of all, we think about it on a very typical risk-adjusted return. So obviously, things that have commodity weighting, require a very large return in our portfolio, things that are more fee based and don't have construction risk, so we still have projects in our pipeline business where we don't have to take the construction risk and make them with 20-year contracts. Those kinds of things deserve a lower return, and so that was kind of the 2 ends of the spectrum there, and we're very, we're fairly sophisticated about the way we weight the risk on these various projects. But one of the things that we think about though is we remain very committed to our strategy. And so, while we all measure the risk-adjusted return, we don't ever forget what we've set out as a strategy on an area. And so we're still looking for those premium returns, but we are certain that building on investments that continue to build into other assets will continue to pay dividend.

And what do I mean specifically by that? You think about a GulfStar project in the Deepwater. We make a nice return on putting that floater in place. I think the fact that we bought Marubeni alongside as they partner, and we kept a lot of the upside on that project from future tie back is evident of the solid return just from that 1 project. But what we enjoy, in addition to that, is we enjoy the downstream revenues in our pipelines, in our processing plants downstream of that. So our incremental return on a project like that is much higher. So when we think about our strategy, we remain committed to thinking about having that kind of scale where more and more investments pile along and provide higher and higher incremental return. And that really gives us a long-term advantage out there.

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