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Williams Partners Buys Cabot's Marcellus Gathering System

Williams Partners LP grabbed more business in the Marcellus Shale late Thursday after agreeing to pay Cabot Oil & Gas Corp. $150 million for 75 miles of gathering pipelines and two compressor stations in Susquehanna County, PA.

The midstream system, which the partnership would expand, now gathers about 230 MMcf/d of Cabot's natural gas production.

The partnership also obtained a 25-year dedicated gathering agreement for Cabot's gas output in northeast Pennsylvania. The agreement, which covers an area of mutual interest (AMI) that currently includes 138,000 gross acres, requires Williams Partners to:

During the term of the agreement the partnership would connect all of the AMI's drilling wells with eight-inch and 10-inch diameter gathering lines and deliver Cabot production to five interstate pipeline delivery points. As part of the arrangement Houston-based Cabot increased its firm takeaway capacity to Transco south of Susquehanna County to 350 MMcf/d, up from a previously announced commitment of 150 MMcf/d.

"This additional expansion in the Marcellus Shale is an ideal growth opportunity for Williams Partners," said Alan Armstrong, senior vice president of the partnership's midstream business. "We have the opportunity to serve another one of the biggest producers in the Marcellus with the type of large-scale solutions required for Cabot's rapidly expanding production."

To augment the acquisition, the Tulsa-based partnership is bumping up its 2011 capital spending by $150 million to fund the first phase of new construction, which would add more compression and dehydration systems, to deliver up to 1.2 Bcf/d over the next two to three years. Additional funds would be invested "beyond 2011," it said.

"With the exceptional well success we have seen in our Marcellus operations, we needed to adjust the way we thought about infrastructure and takeaway capacity going forward," said Cabot CEO Dan O. Dinges. Williams Partners, he said, is "one of the premier midstream providers that has the capabilities to help us make a significant step change in the way we develop this resource and execute our program."

The agreement "will displace roughly $75 million annually in planned infrastructure expenditures by Cabot during 2012-2015 along with eliminating the need for infrastructure investment in 2011," said Dinges.  "This planned level of investment by Cabot would not have provided us the takeaway capacity proposed under the Williams agreement."

The new Cabot assets would connect with Williams Partners' Springville gathering pipeline in Susquehanna County, which is expected to be operational by the middle of 2011.

"The previously announced Springville system and this [Cabot] expansion will provide significant takeaway capacity to multiple interstate gas pipelines, including Transco," Armstrong said. "In addition to our anchor customer agreement with Cabot, there will be future opportunities to help third-party producers grow their volumes and access large natural gas markets."

Potential producer customers, said Armstrong, include Williams Cos.' exploration and production business, which holds a "significant acreage position in northeast Pennsylvania." The corporation has accumulated close to 100,000 net acres in Pennsylvania in the past year and a half (see Daily GPI, May 26). It merged nearly all of its interstate gas pipeline and midstream affiliates into Williams Partners earlier this year, creating one of the largest master limited partnerships in the country (see Daily GPI, Jan. 20).

Williams Partners expects to complete the transaction in December and would pay for the agreement and subsequent capital projects with "cash on hand, borrowings from its credit facility and/or capital market transactions." The midstream purchase and the additional $150 million for expansions in 2011 were not included in previous capital expenditure guidance.

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