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Williams Sees Little Risk in Contract Exposure to Troubled Chesapeake

Williams CEO Alan Armstrong on Thursday downplayed Williams Partners LP's gathering contract exposure to troubled producer Chesapeake Energy Corp. and said Chesapeake has been paying its bills.

Even if Williams' gathering contracts with Chesapeake wind up being rejected in a potential bankruptcy proceeding, the pipeline assets behind them are in place and can't easily be replicated, Armstrong said. The fact that the producer -- or its creditors -- need to get production to market secures the Williams position, he told analysts during an earnings conference call.

"They are paying their bills in a timely manner as usual," Armstrong said of Chesapeake. "We just recently got paid for the minimum volume commitment (MVC) related to the Haynesville [Shale], and we fully expect them to pay the MVC invoice on the Barnett [Shale] when it's due.

"Nevertheless, we are mindful of the credit risk that these continued low prices pose for many producers, including Chesapeake. We have long-term dedications with strong contractual conveyances of any interest in unproduced gas. We like our argument that we hold the current real estate interest in unproduced gas and that our rights are covenant running with the land, not subject to the rejection of bankruptcy.

"Even if a court were to rule that we don't have such a legal right, our gathering lines are physically connected to Chesapeake's wellheads and pads, and we provide a very critical service, conditioning and connecting Chesapeake's production to points where they can best choose the best markets for long-haul transportation alternatives."

Chesapeake contracts with Williams in the Haynesville and Utica shales were renegotiated last year (see Shale DailySept. 8, 2015). Earlier this month, Chesapeake denied reports that it planned to pursue bankruptcy protection (see Daily GPIFeb. 8).

Williams Partners recently negotiated a new gathering agreement with another existing customer, the company said. The new agreement provides for a lower per-unit rate but with expected higher revenue as a result of additional expected production as well as additional acreage dedication and extended term. The partnership said it expects no change in revenue associated with the new agreement in 2016 and higher revenue in 2017 and beyond.

Earlier this year Williams Partners announced a one-third cut to its capital spending plan for 2016 (see Daily GPIJan. 26).

During the conference call Thursday, Williams executives did not take questions on the company's pending merger with Energy Transfer Equity (see Daily GPIFeb. 8Sept. 28, 2015). However, Williams did provide an update on the transaction, saying that the company's board is fully committed to the deal and that integration planning is in progress. Williams shareholders still must approve the deal.

Williams Partners reported $718 million in fourth quarter distributable cash flow (DCF), compared with $266 million in fourth quarter 2014. For the year, the partnership reported $2.82 billion in DCF, compared with $1.72 billion for 2014. The primary drivers of the growth in DCF for both the quarter and the year were the company's acquisition of Access Midstream (see Daily GPIMay 13, 2015June 16, 2014) and other increases in adjusted EBITDA, partially offset by higher interest expense. DCF for 2014 reflects Williams Partners' results prior to the merger with Access Midstream.

"Low natural gas prices continue to spur demand-based growth on Transco [Transcontinental Interstate Gas Pipe Line] and our other interstate pipelines," Armstrong said. "As a result, our 2016 growth investments are primarily focused on serving the long-term natural gas needs of local distribution companies, electric power generation, LNG [liquefied natural gas] and industrial loads."

Williams reported a fourth quarter net loss of $701 million (minus 94 cents/share) compared with net income of $193 million 26 cents/share) in the prior-year quarter. The decrease was driven by $2.1 billion of pre-tax impairment charges associated with goodwill, equity-method investments and other assets.

For the year, Williams reported a net loss of $557 million (minus 74 cents/share) compared with net income of $2.114 billion ($2.92/share) for 2014. The unfavorable change was mainly due to the absence of a $2.54 billion noncash re-measurement gain in 2014 related to the consolidation of an equity-method investment in Access Midstream as of July 1, 2014, as well as $2.6 billion of pre-tax impairment charges in 2015 associated with certain equity-method investments, goodwill and other assets.

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