Williams CEO Alan Armstrong said last week the company continues to “evaluate all options” in an attempt to merge with Southern Union Co. but questions about whether it will attempt to trump Energy Transfer Equity LP’s latest bid went unanswered.

Southern Union in July agreed to Energy Transfer Equity LP’s $5.7 billion cash-and-stock offer, which topped Williams’ last bid of $5.6 billion (see NGI, Aug. 8; July 25a). ETE launched its bid for Southern Union in June and has been vying with Williams since then to create the largest natural gas pipeline franchise in the United States.

Armstrong, who led a conference call with financial analysts to discuss the company’s second quarter performance, said he couldn’t discuss whether a higher bid from Williams was forthcoming and tried to “stick to a strict script” focused on quarterly earnings. However, when asked whether a higher bid possibly was forthcoming, he answered, “We’ll certainly be a disciplined buyer.”

Marcellus Shale production is strong and activity is high, but because it’s a “tough environment to construct in,” Williams plans to reduce its capital spending in the play through the rest of this year, midstream chief Rory Miller told analysts. The company’s gas output in the play was flat sequentially in 2Q2011 at 9 MMcfe/d, but up 125% year/year. To the end of this year tinfrastructure spending will be cut, he said.

“This is driven by two things,” Miller said. “About $100 million of that was a slowdown in the ability to get the capital employed in the Marcellus; nothing amiss there in terms of the production or the wells or the activity. It’s just a tough environment to construct in. It’s going a little slower than planned. The good news is the well performance is excellent either at or above our expectation. So the resource is good, it’s strong. We just had slower construction than we planned. In fact, the first five months we saw a lot of rain and that had a pretty significant impact on our construction.”

Miller explained that there’s not going to be a reduction in total spending in the Marcellus “but we’re just pushing about $100 million into the 2012 time period…” In addition, “we had another unidentified business development project for about $50 million that again still looks very favorable but that was pushed into 2012 as more likely the time of expenditure.”

In the Marcellus the company’s master limited partnership Williams Partners LP is building the Springville gas gathering pipeline, which ultimately is to have a capacity of 1.25 Bcf/d. The 24-inch diameter, 33-mile pipe when completed will connect to the partnership’s Transco interstate gas line in northeast Pennsylvania.

Williams also is awaiting completion of a gas pipeline under way by Laser Northeast Gathering Co. LLC, which began building the Pennsylvania portion of its Susquehanna Gathering System earlier this year (see NGI, Feb. 7). The first phase of the system, which is set to be online by the end of September, is to run about 30 miles from Susquehanna County to Millennium Pipeline in Broome County, NY (see NGI, July 25b).

Williams plans to run eight rigs in the Marcellus through 2012, Miller said. Production could be higher if the first phase of Laser’s project were completed. Another 30 MMcf/d is backed up in Westmoreland County, east of Pittsburgh.

“We have said the Marcellus will grow to around 20% of our volumes as we move forward,” said Armstrong. The shale plays are creating “a lot of emerging bottlenecks in a lot of different places” for pipelines. “A lot of infrastructure is required in the field and we are keeping our eye on that…As that grows, and we think it will, we continue to see the need for infrastructure” in some of the oily shale plays, including the Bakken “as well as on propanes and heavies [NGLs], the petrochemical business in general. There’s been a lot of shifting in light NGLs, [natural gas liquids], heavy NGLs, olefins products. It’s positioning us for a big shift.”

Randy Barnard, president of Williams gas pipeline business, said he has been “encouraged” by the buildout to date of infrastructure across the Marcellus. “Producer-driven projects are evolving to recognize the differing geographies of source and supply, timing, and various service needs,” he told analysts.

“As the Marcellus grows, the reversal of flows on Transco are within the plumbing there. Marcellus production is outstripping demand…and Atlantic access offers firm backhaul opportunities into Transco Zone 5, which is the fastest growing today. There’s lots of power generation coming on, firm backhaul opportunities into Transco Zone 5…and so it would be a firm transportation backhaul into Zone 5, with some secondary rights into Zone 6. And that would take their delivery points all the way down to the Georgia-South Carolina border at the end of Zone 5 Transco,” which could then pick up supplies from the liquefied natural gas (LNG) facilities at Elba Island LNG and Dominion Cove Point “and everything in between.”

Williams’ Northwest Pipeline, which serves the Pacific Northwest and Intermountain Region, hasn’t seen “any impacts” from El Paso Corp.’s Ruby Pipeline startup in July, said Barnard. Ruby also carries gas to West Coast markets from the Rockies.

Ruby, Barnard noted, “does not serve directly any Northwest Pipeline markets with the exception of the northern Nevada market. And right now, the…Northwest Pipeline customers telling us they do not plan on turning back any Northwest Pipeline capacity. So long-term impacts, we’re not seeing anything like that.

“What we are seeing is Canadian gas supplies that are priced to move right now, which brings up really the value to our customer in Northwest Pipeline, where they have multiple supply basins upon which to drop and if they find a bargain such as they’re finding with Canadian gas right now. It makes the capacity on Northwest Pipeline even more valuable to them because they can play that arbitrage versus the Rockies.”

Williams has seen “supplies from the Rockies drop, but we have seen supplies from Canada raise by an equal amount,” he said. “So it’s a matter of the customer sourcing from a different location and perhaps we’ll be soaking up some of that supply out of the Rockies. But it’s really all price sensitive and it could swing back the other way and we are equipped to handle it.”

The company also is “ready to go” with an initial public offering (IPO) of its exploration and production (E&P) business — to be named WPX Energy Inc. — “as soon as market conditions are cooperative,” said Armstrong. The Tulsa-based company plans to split itself into two standalone publicly traded corporations via an IPO of up to 20% of Williams’ interest in the E&P and in 2012 plans a tax-free spinoff to shareholders of the remaining interest (see NGI, Feb. 21). El Paso moved forward with its E&P spinoff last Thursday (see related story).

The Williams IPO still is scheduled to be launched before the end of September with the spinoff of the remaining interest in WPX in 1Q2012. However, CFO Don Chappel admitted that the timing “could change if market conditions remain challenging.”

Williams second quarter earnings jumped 23% to $227 million (38 cents/share) from $185 million (31 cents) a year ago. Management increased its 2011 earnings guidance per share to $1.35-1.85 (from $1.25-1.85) and reiterated the 2012 earnings forecast at $1.45-2.45. Williams expects to generate total adjusted operating profit of $2.27 billion to $2.90 billion in 2011 and $2.37 billion to $3.57 billion in 2012. Capital spending is expected to be $3.12-3.82 billion for 2011 and between $3.20 billion and $4.40 billion for 2012.

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