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Gas gathering contracts safe from customer credit woes, Williams CEO says

Williams Cos. Inc. President and CEO Alan Armstrong blasted investors' concerns that potential producer customer bankruptcies could imperil natural gas gathering contracts.

"This one really frustrates me because it seems like the perspective is so out of tune with reality on what a gathering contract is and what happens in bankruptcy," he said in response to a question about the company's contracts with embattled producer Chesapeake Energy Corp. during a Dec. 5 analyst and investor conference.

The CEO said he has never seen one of Williams' gathering contracts get rejected by a customer going through bankruptcy. "There is no other feasible way to move the commodity to the market and get paid than to own the gathering system, and so if you think about the opportunity to reject a contract you would have to believe that the avoided cost of building a brand new system ... is better than that current pricing."

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Still, Armstrong did note that he has "seen plenty of long-haul pipelines that have gotten stiffed" as well as "processing contracts where we don't own the hardware back to the wellhead."

With Marcellus and Utica shale volumes shrinking amid struggling commodity prices, analysts and credit rating agencies have warned that gathering and processing credit profiles could take a hit in 2020 as upstream spending cuts and potential bankruptcies jeopardize cash flow. Appalachia-focused producers such as EQM Midstream Partners LP and Antero Midstream Corp., for example, are already under pressure to trim distributions as primary customers EQT Corp. and Antero Resources Corp. explore contract renegotiations with their midstream providers to fend off further credit downgrades and default amid lackluster gas prices.

Williams has responded to Appalachian growth forecasts by lowering its expected Northeast gathering and processing spending for 2019 from $1.1 billion to $730 million, according to the Dec. 5 presentation.

Executive Vice President and COO Michael Dunn also said that the pipeline heavyweight recently decided to allocate zero construction capital to the Northeast Supply Enhancement project to extend Transcontinental Gas Pipe Line Co. LLC's system after New York Gov. Andrew Cuomo announced a settlement between the state and project customer National Grid USA.

"One of the things we still hear about is, 'Can you still … build projects in the Northeast?' And I can assure you, yes we can and yes we will," he said. "Once we receive our permits … then we'll reallocate capital back to this project."

The dispute between the state and utility stemmed from New York's refusal to grant a critical water permit to a proposed pipeline that would run through New York Bay as part of the expansion, or NESE project. The denial prompted National Grid to stop processing applications for gas hookups in its downstate territories until New York approved the pipeline, but the governor's office on Nov. 25 announced that National Grid will pay a $36 million penalty and lift its moratorium on gas service to new customers in parts of New York to help the utility avoid a potential loss of its license to operate there.

NESE's regulatory hurdles extend beyond New York. The New Jersey Department of Environmental Protection said in a Nov. 27 letter that Transco asked to withdraw each of the pending permit applications in the state in response to criticism from state regulators, including authorizations related to wetlands, flood hazards, waterfront development, water quality and coastal zone management.

While Williams' Armstrong said that the company is "disappointed" in the NESE project's delays, it does free up capital to help the company reach some of its key financial goals even faster.

"We certainly have other investment opportunities, but frankly we kind of like the outcome that we're getting out of that by being able to really show what free cash flow can do … and improving the credit metrics," he said.

Williams now expects the Northeast Supply Enhancement project to come online in 2021.