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NGL Margins Dim Williams Outlook

Williams said last week its adjusted earnings per share will be "significantly lower" than first quarter results, primarily because of an unexpectedly sharp decline in natural gas liquids (NGL) margins in May and June at Williams Partners LP. To counter the effect of weak NGL prices the company is continuing to transition its business to fee-based operations.

Additional factors in the change include higher expenses at Williams Partners because of maintenance accelerated during a third-party fractionator outage; costs associated with recent acquisitions; normal seasonal demand changes and maintenance at Williams Partners' gas pipeline business; lower-than-expected volumes because of construction timing; lower Canadian sales volumes as a result of third-party outages and the effect of filling the company's new Boreal Pipeline, which went into service in late June.

Williams estimates its second-quarter adjusted earnings per share will be 21 cents, down from 39 cents in the first quarter and 29 cents in the second quarter last year. The company increased its 2014 outlook for adjusted earnings per share at a level 59% higher than in 2011 based on the strength of its fundamental business, growth and improvement in certain commodity prices driven by continued high crude oil-to-gas ratios.

Williams' revised guidance midpoints for adjusted earnings per share for full-year 2012 and 2013 are, respectively, $1.15 and $1.38.

The company referenced an NGL-to-crude-oil price ratio that was approximately 40% below the 10-year average during the second quarter but recently rebounded somewhat. Key factors in the NGL market weakness have been high propane inventories caused by the extremely warm winter and the effect of the propane oversupply on ethane inventories and pricing, Williams said.

"Williams continues to expect the influence of NGL prices on its earnings to diminish over the next few years as it transitions to a business mix that is increasingly fee-based in its Williams Partners segment," the company said. To that end, it has dropped down to Williams Partners ownership of a Louisiana olefins production facility.

"The company's 2013 and 2014 earnings expectations reflect that shift to greater fee-based business; the benefit of projects coming into service; and some improvement from current NGL market conditions as a result of additions to North American capacity for steam-cracking, propane dehydrogenation and exports, as well as more normal weather," it said.

For 2014, Williams increased is adjusted earnings per share to a range with a midpoint of $1.95 -- a level 59% higher than the $1.23 it reported in 2011 -- primarily due to an expectation that it will benefit from ethylene crack spreads similar to the first half of 2012 after spreads decline for the balance of this year and in 2013. The company said it expects continued high spreads between natural gas and ethylene due to the substantial pricing advantages over global ethylene derived from crude-oil based feedstocks.

Also last week Williams Partners and Williams said the partnership plans to acquire Williams' 83.3% interest in an olefins production facility in Geismar, LA. The partnership also would become the operator of the plant.

Williams Partners said the addition of olefins production to its business would be accretive to distributable cash flow on a per-unit basis. Williams Partners would fund the transaction largely with the issuance of limited-partner units to Williams.

The Geismar facility south of Baton Rouge, LA, is a light-end natural gas liquid (NGL) cracker with current volumes of 37,000 b/d of ethane and 3,000 b/d of propane and annual production of 1.35 billion pounds of ethylene. With the benefit of a $350-400 million expansion under way and scheduled for completion by late 2013, the facility's annual ethylene production capacity will grow by 600 million pounds to 1.95 billion pounds. The Geismar facility also produces propylene, butadiene and debutanized aromatic concentrate.

The partnership said it expects the addition of olefins production to its business would bring more certainty to cash flows that today are exposed to the market for ethane, which is projected to experience periods of volatility as demand infrastructure lags new supplies from shale gas production. Ethylene demand is expected to remain as strong as ethylene and is expected to be less expensive than crude oil-based feedstock.

"Adding the Geismar olefins production facilities to Williams Partners' portfolio would immediately reduce the partnership's exposure to the ethane market by nearly 70%, and it would nearly eliminate it by 2014," said Alan Armstrong, CEO of the general partner of Williams Partners. "The business is highly desirable because it would create greater consistency in our earnings and cash flows."

Williams owns 68% of Williams Partners, including the general partner interest.

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