威廉斯 (WMB) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Williams Companies' first-quarter 2011 earnings release conference. 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. Good morning, everybody. Welcome to our first-quarter 2011 earnings call. As always, thanks for your interest in the Company.

As you no doubt know, we released our results yesterday after the market closed. Also yesterday, Alan, using a few slides, had some commentary about the results, our increased guidance, and our growth opportunities. That audio commentary and the slides are available on the website, and because of that review yesterday, we'll not be reviewing the slides again this morning.

So on our website, Williams.com, you should be able to find a number of things that were posted yesterday afternoon. First, the earnings presentation with the audio commentary by Alan. Second, the data book that contains the usual information we make available every quarter. Third, the press release of the first-quarter results. Fourth, our analyst package, and finally, a podcast of Alan's remarks yesterday. Also for your information, the first-quarter 10-Q will be filed today. Because we reviewed these items yesterday, I expect the call today will be fairly brief, and we'll get very quickly to your questions.

In a minute, Alan Armstrong, our President and CEO, will make some general comments, after which we'll open the lines for questions. Be aware, as always, all of our business unit heads are here and available to respond to your questions after Alan's remarks. Here with me are Ralph Hill, who heads up the E&P company; Rory Miller, who oversees the midstream company; and Randy Bernard, who heads up the gas pipelines. Also Don Chappel, the CFO, is here as well.

As most of you are aware, last Friday we announced that our wholly-owned subsidiary, WPX Energy, Inc., filed a registration statement relating to the proposed IPO of its common stock. Because of security law restrictions, we will not be commenting at all on WPX Energy, Inc., today.

There are forward-looking statements on slide two and three, and the disclaimer on oil and gas research on slide four of yesterday's presentation. Those are also included in the data book. They are important and integral to the Company, and you should review those.

Also, there are non-GAAP numbers included in the various presentations. Those have all been reconciled back to generally accepted accounting principles, and the reconciliation schedules are also available.

So with that, I'll turn it over to Alan.

Great. Good morning and thanks for joining us this morning. I'll just very briefly capture the highlights and key notes from what was put out as a recording yesterday and is in the slide material.

First of all, we're very excited to tell you we're raising guidance, and this is based on both higher crude price expectations. We're now at $95 midpoint for 2011 and 2012 crude, and of course, that's still well below the forward market and current pricing for crude. And current NGL margins, of course, are being lifted on that, and in fact, current NGL margins are actually just beyond the high end of the range of what we have posted right now.

Also, we have greater confidence on timing and performance on a number of new projects that are going to add to the balance of 2011. So, we are raising guidance for both 2011 and 2012, and you can see the details of that went out at our midpoint for 2011. It is now $1.55 per share on an adjusted earnings basis.

In the current quarter, we had mixed results that combined to produce a very solid quarter. Our gas gathering and production volumes were negatively impacted by severe winter weather, primarily in the Rockies and in the Bakken, with the Bakken receiving near-record snowfalls. And of course, low natural gas prices also drove low quarter-over-quarter results in E&P.

However, our Midstream Canada and olefins segment came through and posted a record quarter that helped to mitigate the weakness in the gas prices, and our gas pipe segment also came through with a strong quarter.

As we look into the second quarter, we are very excited about how our volumes have rebounded, and conditions are currently very good for a tremendous earnings result for the balance of 2011.

Looking to the balance of the year, we now expect our midpoint, as I stated earlier, EPS to be $1.55 and we're going to hit now just some of the key factors that we expect to drive this even better performance for the balance of the year. First of all, our operating volumes have really rebounded in all of our areas. We expect the balance of the year to be much better as the fruits of our labor in both the Marcellus and the Bakken begin to take hold, both on the E&P side and in the Marcellus on the WPZ midstream side. Also, we had some major maintenance to get through in the first quarter at our big Opal plant, which is the largest single contributor to our NGL equity volumes.

Secondly, new projects that we are expecting. First of all, the Perdido Norte project really will be a powerful contributor to earnings in the last half of the year, and not so really dependent on permitting out there as much as some continued topside work that Shell is doing on their big platform that feeds both our oil gathering, our gas gathering, and our Markham processing plant that -- and of all those facilities serving the western deepwater Gulf of Mexico, so we're really looking forward to seeing those volumes start to ramp up and we have confidence in that happening for the balance of the year.

Also, our Transco pipeline just recently placed into service two new projects that will combine to generate over $30 million of additional profits for the balance of the year.

And then, finally, the Marcellus, which is really infrastructure constrained on many fronts right now, will benefit from a lot of work that E&P did in getting a lot of small gathering systems in the field to serve new production in those areas, as well as the Laser Pipeline which -- and our very own Springville lateral, which we expect to begin in the third quarter. So, a lot of things going on in the Marcellus on the infrastructure front, some of which will directly impact our production and, of course, others that will drive earnings at the WPZ level.

Third, on margins, we anticipate continued strong unit NGL margins and olefins margins. Our current forecasted margins for NGLs are really below what we are currently experiencing, and if you've noticed, we've really seen a nice shift up in ethane and -- as well as the heavier products continue to provide really record level margins. However, we also know that things can change pretty fast in this arena, so we are only raising our oil price assumption to $95 and we are holding back on our NGL to crude ratio assumptions below what we're currently experiencing.

On the olefins margin side, we continue to expect robust margins on this, on the back of high crude oil, because the rest of the world is really dependent on olefin products that are produced from crude oil, of course, and we continue to see growing demands for olefin-derivative products outside the U.S.. So we're really -- in the past, the U.S. petchem market was fairly dependent on the U.S. economy, and it's really moved offshore right now in terms of what we're depending on.

We, of course, cannot say much at all about the spin-off of our E&P segment, to be known as WPX Energy. I can tell you that the recent S-1 filing is spot on with what we told you to expect at the last earnings call.

I can also speak to the positive impact that we expect to see at WMB. WMB is going to be one of the top -- infrastructure companies in the nation, and it is going to be better positioned than any that I'm aware of in delivering reliable growing dividends. It will be investment grade, and it will have the power of the increasing incentive distribution rights of the Williams Partners GP, and this is going to allow for continued growth in free cash flows and providing available -- for those to be available for dividends without dilution or financing expenses at the WMB level.

So the clear and transparent growth at WPZ should provide confidence regarding our continued ability to grow distributions at the PZ level, and we have already declared a 60% increase for the WMB June dividend and are targeting a 10% to 15% increase in dividend for the June 2012 WMB dividend. And of course, these targets were set before the latest increase in guidance at both PZ and MB.

So overall, we're very excited about the amount of value we expect to generate in the foreseeable future for our WMB shareholders. And we really are sitting at the right place at the right time with the right assets, the right experience, and a great financial position to rapidly expand our businesses' earnings power.

And with that, we'll turn this over to questions.

(Operator Instructions). Carl Kirst, BMO Capital Markets.

Nice results, and certainly appreciate the streamlined version here.

Alan, maybe if I could start just on the olefin margins, and certainly we've seen a good deal of new announcements, Dow, CPChem, Formosa, everyone looking to ramp ethylene production in the Gulf Coast. And I'm trying to figure out with respect to Geismar and you guys trying to get a larger market share. Is that something where their interest should help; whether there is more opportunity, maybe, to find someone with an off-take; or are you finding more sort of direct competition as overall ethylene expansion perhaps ramps?

Carl, for some reason we're having a really difficult time hearing you, but let me paraphrase what I thought I heard you asking, and then, hopefully, you can wind me out if I didn't hear that right. But for some reason, our audio on this end is breaking up.

I think the question was around the -- what we expect in terms of the increase for demand in the petchem space, and recognizing the new announcements from Dow and Chevron Phillips, and some of the new -- and now, Formosa, some of the new announcements on the petchem side. We are -- and I think another question around what we would do at Geismar.

First of all, on the ethane side, I think that we're pleased to see the big petchems continuing to see the same opportunity we see in terms of being able to export ethylene-derivative products and having a very low-cost feedstock here in the U.S. to continue to provide that. And so, I think it's really going to be a matter of timing in terms of when those facilities come up versus when the ethane shows up.

But I will tell you that it is going to take a lot of the ethane projects, and ethane supplies aren't going to show up tomorrow either. There's a lot of infrastructure required to get that ethane in place as well. So I think it's going to be a matter of how those things show up. But on balance, it looks pretty good from our vantage point in terms of the demand picking up with the available supply.

And I would tell you that there is also going to be a lot of interim small projects. We announced our own small project there that we had at Geismar. I think we spent $18 million and got a small, I think, a 3,000- to 5,000-barrel a day increase in ethane demand there. And there's going to be a lot of those kind of projects that continue to come out, and what used to be referred to as refinery creep, we're going to see in the petchem space as well because the margins are absolutely there. So I think those short-term kind of increases that people can squeeze out of their facilities, they're going to be doing.

So I think, hopefully, that answered your question. I apologize. We couldn't quite hear it on this end.

Mainly, I was trying to figure out if the increase from the big petchem guys would be an opportunity for Geismar, i.e., they would be an offtake of Geismar or if it's direct competition to Geismar?

Those plants really are, at least what's been announced, for the most part, in direct competition with Geismar in terms of producing ethylene.

But I would tell you that beyond the ethylene, obviously, is derivatives like polyethylene and ethylene oxide, ethylene glycol. And those derivatives are a lot less capital intensive. The facilities required for that are a lot less capital intensive, and we're pretty well positioned there at Geismar. There's a lot of growing derivative demand there at Geismar, and we are very well positioned to be able to deliver against that, and we certainly have a lot of conversations going with folks that are wanting to expand the offtake there.

Great. And then, one other question, if I could. Just with respect to natural gas liquids production, I know there was mention of a keep-whole contract that shifted to percent of proceeds, so I could understand why your equity production may have been down slightly. But from sort of the gross NGLs produced, I was surprised to see that sequentially off from fourth quarter and didn't know if you could maybe comment as to where you saw that going for the rest of the year?

I'm going to have Rory Miller take that one.

Carl, that is true. We are down first quarter. Other than the Exxon -- excuse me, the -- some of the contracting issues that we had out there, that's a big part of the step down in production, but the other items, I would say, were part of severe winter weather.

We were down significantly at Opal in our volumes, Echo Springs, in the fourth quarter. So, that had a pretty big impact on our total production and, of course, our equity NGL gallons as well. We also had some major maintenance that was underway at Opal, and that has been finished, and so we expect to see volumes in the second quarter back on the growth trajectory that we had planned and we were forecasting.

Ted Durbin, Goldman Sachs.

First question is just on some of your Canadian spending. You talked about additional upgrader processing potentially adding a lot more project spending there. You've identified some spending. But I'm just wondering if you would expect to see the same returns on that or what the variability might be on the returns if you were to add some of that upgrader processing?

The opportunities there and full returns there probably will remain the same.

I would tell you that I would kind of put them into maybe four different baskets of opportunities up there. And if you look at our slide, I think it's slide 18 in our package, you'll see there we've got some of the segment profit -- first-year segment profit to those projects versus the capital shown there, and you'll see, for instance, the first category I would put as an optimization projects, like our BB splitter, and you'll see there that's about a three times cash flow kind of project. We invested $52 million, and our range is $15 million to $20 million of segment profit for the first year there. And so, that's -- those kind of projects will be very high returns like that.

The Boreal Pipeline, you'll see, is quite a bit lower return, and part of that is just because we were building for capacity for the future, and all you see there is just the first year of volumes before these additional projects come on. But I would expect those kind of projects to be in the low teens kind of returns for those pipeline kind of projects.

And then the upgrader projects, where we actually are going in and building new upgraders, will be a matter of negotiation, but are driven by very high propylene margins, so there's quite a bit of opportunity there for us to capture, and it really boils down to how much we share with the upgrader. We're in a very good competitive position there in that we've got the pipeline now and the fractionator there at Redwater. But those would be probably in the high teens kind of returns.

And then, the ethane recovery project that we did with NOVA, not going to comment on that in terms of where that return is, but you can see what we expect for our first year of profit on that versus the capital investment on that, and you'll see that's about a little over a five multiple in terms of what we're getting from that project. So, I think that gives you a pretty good range of our expectations in that area, and we're certainly anxious to get more of that business up there.

Okay. Thanks. That's helpful. And then, my other question was just if you look at the dividend at WMB, and I appreciate the language that you expect strong increases beyond 2012. You raised guidance at WPZ olefins in Canada are all doing well. I feel like there's a lot of cash that's going to be coming up to WMB. I'm just wondering if you can comment on where you might see the growth of the dividend, whether it's -- it would be higher even in 2012 or as we go past 2012.

Ted, this is Don Chappel. Good morning. I'll take a stab at it first here again. A lot of the upgrade in our guidance is related to very strong commodity price, and we certainly don't count on that when we set the WPZ distribution and count on that for a Williams dividend.

So, we really look at a much lower price margin environment as we think about WPZ distributions and the Williams dividend. So, that will really guide our thinking. But even at that level, I think the 10% to 15% that we provided for guidance in 2012 and strong growth beyond still, we believe, is a conservative view of what we can accomplish.

So, we'll continue to look at it. We certainly appreciate that our stock price will, in large part, be driven by our ability to pay an increase of dividend, and we'll remain very focused on that. So, I'd say stay tuned beyond that.

So I guess, and it's probably early to talk about this, if you did have, let's say, excess returns on margins for, let's say, the next couple, three years, would you then flip over to a buyback or what would you do with the excess cash?

Ted, I think stock buyback would certainly be in the cards. I think, again, we are blessed with a lot of very attractive investment opportunities, so I think it'll be continuously weighing the potential reinvestment opportunities versus stock buyback. And again, if it was a more sustainable cash flow stream, then dividend would be the likely outcome.

(Operator Instructions). Timm Schneider, Citi.

Good morning, it's Faisel Khan from Citigroup. Alan, on the -- going back to the Canadian business for a second, how do you guys go about capturing some of this existing barrels in operation in Canada? So you guys have put together this slide where you show the barrels that you guys are currently recovering right now in the NGL and olefins volumes in Canada and the future barrels that are coming online. But there is this large kind of yellow sliver that still needs to be captured. What's your status of negotiation in kind of capturing some of those barrels and moving some of those projects forward? Where are you in that kind of timeline?

Great question, Faisel. That yellow is -- basically represents the barrels from the existing upgraders, as you picked up on, which is C&RL and Syncrude, and we're pretty far along. These are big projects and complicated and things don't move real briskly on that front.

But we're confident in ultimately the liquids being lifted from those streams. It really doesn't make any sense at all not to because it produces higher emissions in the area, which is obviously a critical issue as well. There's a tremendous amount of value being burnt there as that gas today is being consumed in boilers. So, there is a real big opportunity to get that, and then the real question just boils down to who gets it and extracts it. So I have great confidence in that yellow being captured.

And I would just tell you I think we are very well positioned to capture that, and negotiations are ongoing on both punts. I would tell you the C&RL negotiations are ahead of the Syncrude negotiations. That's about as much as I would care to share with you on that at this point.

Okay. Got you. And then, can you give us an update on your dry-tree spar product in the deep Gulf, like where are you with negotiations with customers on that particular product or on that solution?

This is Rory Miller. I'll take that question. That's actually a wet-tree spar that we are calling the GulfStar project.

I think there was an announcement that came out last week from Gulf Marine that mentioned they had entered into an agreement with us to build a spar hole in the Gulf of Mexico, and that is correct. We have a letter of agreement signed with a couple of producers in the Gulf. We're not at liberty right now to reveal who those players are, but that is in place.

The letter of agreement includes a reimbursement provision. So, we can start spending money today on long lead-time items, on major construction contracts, supplier contracts, in anticipation of signing the definitive agreements. We're looking at probably a third-quarter signing of those definitive agreements.

So, that is moving ahead. That would be our first GulfStar project. I think we mentioned in the last call, with the connection pipelines, those are around $1 billion apiece. And on this particular project, we're looking at bringing in a JV partner. So, I think in all the guidance numbers that we're getting, the capital is about half of that number.

So, that project has been in the works for a long time. We've been able to get much of the engineering, much of the design work, and much of the critical thinking done on that product done ahead of time so that we're not parallel pathing a lot of engineering and construction at the same time. So, we think that's going to reduce a lot of the construction risk on that project. And we're very excited about that.

So, in terms of more details, though, as to the counterparties, that's probably going to be more of a third-quarter type of announcement.

Okay, got you. And I wondered if I could ask a question on the E&P operations. Is that a possibility or is that off-limits right now?

Go ahead and ask your question. We'll let you know.

Sure. I was wondering if you could kind of give us an update on what's going on with APCO oil and gas, kind of what's going on with the operations there, what kind of opportunities do you see down in South America, specifically in Argentina. That seems to be a lot of the focus right now in terms of resource potential, and I just want to get you guys' idea of how that's taking place.

This is Ralph. We've got several things we're doing. Obviously, we're with APCO in the Entre Lomas concession. We continue to do well in our major concessions down there, which is the Entre Lomas, the Bajada del Palo, and Agua Amarga.

We also are in the process of testing some recompletions in that area of the [Bakken Norte] shale. And we are just in the early stages of that. Those are old vertical wells that we're testing, and we have a substantial amount of acreage that is exposed to the Bakken Norte and we look forward to continuing to test that acreage as we move through. Early on, we'll just be testing some vertical wells and ultimately we'll do some horizontal drilling also as we find the areas that we like.

Holly Stewart, Howard Weil.

First, a couple of questions for Ralph. Ralph, the Marcellus volumes are, I think, still a little bit light. Can you just walk us through the infrastructure constraints? Is it just the Laser Pipeline? And then, maybe some specifics on where those five rigs are currently working right now.

Holly, basically it's a combination of waiting on Laser and also some waiting on infrastructure in the Westmoreland/Centre counties, and those, the Westmoreland/Centre counties, are in the process -- that will be fixed here, most of that, in the very near future. So, about half of our 30-some wells that we are waiting on completion are in that area. So we look forward to those coming on, and in fact had two wells come on in what's called a [U shack] area just over the weekend.

So, we do believe, as we said in our slides, that production should ramp up rapidly as we alleviate the concerns of the transportation. Particularly when Laser pipeline comes on, I think we put that we would have total volumes in just Susquehanna by the end of the year of 70 million a day, so we look for a rapid ramp-up. Our wells -- our rigs right now are operating in the -- one in Susquehanna and the others are one in Columbia County and the rest are in Westmoreland and Centre/ Clearfield counties.

Is there a well backlog number that you have, you know, maybe the number of wells that have been drilled and not fracked, or drilled and just awaiting hook-up, that we can kind of continue to model this ramp?

Yes, we have about a total of, I believe, 25 wells that are waiting on completion, and a total of in the 30s waiting on either an addition to the completion or waiting on pipeline facilities. So when I say waiting on completion, even if we completed them, there's a lot that we have to do on the facility side. So, the total backlog currently is 31 wells.

Okay. Perfect. And then, just maybe a bigger-picture question for Alan. Do you guys have an internal forecast at this point of what you expect the ramp in ethane supplies, say maybe between now and 2014?

We don't have a specific number. We watch that and we watch that balance very closely. But we do not have a specific volume forecast for that. So the answer to your question is no.

I would tell you that we remain pretty confident in, as I said earlier, in the creep that will go on in all of these facilities that are either heavy crackers continuing to convert to light, and there is still a lot of efficiency being gained in that area, and I think we'll see that for the next couple of years, and again, as I mentioned, projects like our own at Geismar, and so I think we'll continue to see that. And then, I think those big projects in the three- to four-year timeframe, those big projects, will start to kick in. Some of those projects that have been announced are very large-scale projects and will take a long time.

In between those two things, there's also going to be, I think, expansions to existing facilities that will be rather significant, and I think the current margin environment and the confidence in crude to gas right now is going to continue to have people investing in that space as well.

And so, I think it's rare that we have on the ethane and ethylene side -- ethylene cracking, it's rare that we see the two things build at the same time, but because the margins in this environment, the margins are so strong in both spaces, I think we'll continue to see the ethane supplies build and I think we'll continue to see the ethane-cracking capabilities build as well. There may be a few rocky steps here and there, but right now the trajectory looks pretty good.

Craig Shere, Tuohy Brothers.

Good quarter. A couple of quick questions about derisking from a commodity risk standpoint. Alan, you've been talking for some months about the possibility of finding long-term ethane offtakers with the petrochems. But in some of the more recent earnings calls, industry peers have kind of commented something similar to what you've just said, that it's not overly tight, it's not overly loose, but the petrochems see sufficient supply at this time with no immediate need for long-term bilateral contracting. Can you comment on this and whether you see a different line of thinking from the petrochems as some of them contemplate some of these larger greenfield construction projects of world-scale crackers?

I certainly think the folks that we talk to, and of course we have our own vantage point to be our own petchem space there, but I certainly think that the investors in that space recognize that there's very high margins right now available to them, and I think they are leery of seeing the demand gets overheated in the space right now.

And so, I can just tell you folks that we continue to talk to and continue to work towards some structured arrangements like that are obviously very concerned about the long-term supplies, and I think the effort that I think is the smart decision for the industry to look at is to look to the total pie between gas and crude, and that comes back to gas to polyethylene or other ethylene derivatives, and to figure out how they can assure themselves a portion of that margin that allows them to invest in infrastructure going forward that's got more stable earnings behind it, rather than a winner and a loser across that chain, but figuring out how that margin can be shared in a way that allows both parties to invest going forward in a very adequate return that exists out there.

And I hope -- I certainly think that the current margin environment in both those sectors doesn't lead to arrogance that will cause people to forget the past, and certainly right now, the folks we're talking to, anyway, and are interested in working with, I don't think that's the case.

In terms of a timeline, I think the last call or the one before, you may have mentioned that it certainly wouldn't be before second half this year, possibly into early next year, that we see some long-term agreements, if it came. Is that timeline still there or is it maybe being pushed out a little bit?

You know, I would say we're up against those discussions, and it's kind of hard to call the counterparties' moves on those. I can tell you there's nothing imminent at this point in time, and we would certainly like for it to be there, but there's nothing imminent at this point in time.

But, again, I think the motives are strong for the players, and we'll continue to push in that direction. Obviously, one of the options we have is to do similar arrangements with our own ethylene cracking and look to margin sharing at the MB level, and so, those are the kind of things that keep us from being too soft in our negotiations is our ability to do it ourselves there at our Geismar facility.

Understood. Last question. Given the international demand and competitive global pricing versus global opportunities in the olefins space, do you have the ability to derisk pricing volatility for the olefins business as well?

You know, that's starting to be explored by folks. You're starting to see a lot of people that are exploiting their contacts in India and China and places like that where the demand continues to grow, and so, I would keep tuned to that space.

It's a great question, and I'll tell you that's where a lot of the air traffic is right now is between India and China in the petchem space, and a little bit of South America as well, with people wanting to make sure that they can shore up those markets and have some risk reduction in those forward-looking markets out there. So there is a lot going on, but it's brand new, and most of those -- a lot of the buyers on that end aren't used to doing those longer-term structured contracts, so even though there is a desire and a need there, there really hasn't been a blueprint there in the past, and so there is some new ground being broken in that area. But you're spot on with where the thinking is going in that area.

[Christoph Seifert], [Kingston Capital].

First question relates to the Midstream Canada business. Saw the $111 million in gross profit, and obviously the volumes coming out of Geismar are a lot higher than out of Canada, but just wondered if you could in any -- just general rough numbers, how much the gross profit is from Canadian propylene versus Canadian NGLs and versus Geismar?

This is Rory. You were breaking up a little bit there. But I think what I heard is that you were looking at the breakout between the Canadian and the Geismar plant. Is that correct?

Yes, exactly.

I don't think we're -- we didn't include that in the book, and I think at this point we're not prepared to provide that. We've got a small number of contracts at this point and we feel like that's probably a little too much transparency.

Okay. Maybe just kind of directionally, then, how margins compare at -- just very broadly between an ethylene cracker on the Gulf Coast and a Canadian olefins business.

I think there is a slide in here that does a pretty good job of that. It's titled the Canadian operations hold the same feedstock cost advantage, and that's in the book, but it kind of shows the difference between the margin processing, the off-gas up in Canada, versus buying ethane and cracking it, which is the business that we're doing down in Geismar. So, the total uplift is about, and this is a rough estimate, about two-thirds -- well, that [conflict], let's say 150% better than what we would see down in Geismar.

Okay, and then, with respect to the growth in Canada, do you expect that entity to be able to fund itself or the need to divert cash from WMB to pay for it?

Yes, the business up there, as you can see by the numbers, is performing really well. I think at this point our cash demands aren't going to be totally funded by cash flow up there, but a very large portion of it is going to be paid out of current earnings. We also have some offshore accounts that we could use to fund international investments like Canada, and so for the most part, we think, we're going to be able to handle that load with dollars that probably wouldn't be available for the dividend anyway.

Okay. And I guess just lastly, maybe a broader question related to WPZ and the coverage ratio. I just wondered if you could comment broadly on how you see that evolving over time, and to the extent you have excess cash at PZ, because you set the dividend based on lower commodity assumption, if you do a special dividend or how -- or you continue to fund your growth through stock and debt at PZ as you've historically done.

This is Don Chappel. I would say that we just don't foresee a situation in which it's likely that PZ is going to build cash since we have such abundant growth opportunities. I think the excess earnings will just be reinvested, which will reduce our needs to go to the capital markets to raise capital at PZ.

So, I would say with the high margins, PZ becomes more self-funding, not to say that the plan won't require outside financing, but all that excess cash, to the extent that it's at a level -- it's based on margins that are a level that we don't think are prudent to build into distributions, will just be reinvested. So we don't see idle cash sitting at PZ at all.

Then with respect to whatever your view is on normalized commodity margins, what kind of distribution ratio, or coverage ratio, rather, do you think is appropriate to target at PZ over time?

I'd say it's a function of business mix, and we're continuing to slowly add more and more fee business in the midstream business. Not to say that we're not adding commodity exposure as well, but proportionately, we are adding -- focused on adding a bit more on the fee side than we are on the commodity side, so we would expect our fee business to creep as a percentage of the total, which will enable us to, over time, have a lower coverage margin. Then it's a function of how comfortable are we with margins.

So I think it depends where we are in the range and at what moment in time, but we'd certainly like to see that drift down. I think right now we're kind of looking at a kind of 1.2 times coverage under something that might have been more like the beginning-of-the-year margins versus what we're seeing today.

Harry Mateer, Barclays Capital.

Thanks, guys. I think this relates to the prior questions on uses of cash, but can you just talk about what you view as the optimal capital structure up at the WMB level? I think given all the cash you have coming in there, you could certainly take out a lot of debt, and I know you stated publicly you do plan to take out debt, but how much debt reduction should we be thinking about versus other uses of cash up at the WMB entity?

Craig, I don't think we want to speak to the -- our thoughts on that, given that we have some pending transactions, including the WPX transaction. But I would say, again, we're targeting capital structure that would put us at that BBB-minus level. So, investment grade, with PZ being a bit higher, as we announced back in February, and the ratings agencies gave some guidance on as well. So that's the capital structure, and I think you can probably do the modeling to figure out what band that puts us in.

And in terms of other uses of cash?

We'll been more clear on that after the IPO.

Okay, and then, in terms of other uses of cash, are acquisitions possible at WMB in the future? How should we think about other calls on cash down the road, besides just a high dividend yield?

I would say that acquisitions are possible, but certainly they'll be competing against a very clear and transparent dividend value uplift. But nonetheless, again, we think that we have plenty of opportunities or potential opportunities, at least, to look at, but right now we have nothing particular in our sights, other than some modest investment opportunities around the U.S. olefins business.

It does appear that there are no further questions at this time. I'll now turn the conference over to Alan Armstrong for any additional or closing remarks.

Okay, great. Thank you for the great questions this morning, and appreciate the folks tuning in and being prepared from the information we put out last night. We look forward to your feedback on this different format and see if that was helpful to you or not.

And so, I just want to, again, say thanks for your interest in the Company. We're very excited about where we're positioned right now, really across all fronts, and are looking forward to being a little more transparent with you obviously once the WPX Energy IPO is concluded and we'll be in a position to be a lot clearer around dividend and corporate structure at that point. So, with that, thank you and have a great day.

Once again, that does conclude our conference for today. Thank you, again, for your participation.