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Williams Eyeing More Northeast Expansions on Appalachian Natural Gas Surge

Williams is looking to expand its Ohio Valley Midstream processing facility in the heart of Appalachia by an additional 400 MMcf/d after volumes in 2017 increased 9% year/year, CEO Alan Armstrong said Thursday.

Armstrong, who discussed quarterly and full-year results during a webcast, said the expansion, which would bring total processing capacity to 1.1 Bcf/d, is supported by “strong customer volume commitments” and driven by continued Marcellus Shale drilling.

The Ohio Valley Midstream system includes a gathering system and processing facility in northern West Virginia, southwestern Pennsylvania and eastern Ohio, in the heart of the natural gas liquids-rich portion of the Marcellus Shale.

Williams also has discussions underway for a sixth major expansion of the Susquehanna Supply Hub, a major natural gas hub being built to serve producers in northeastern Pennsylvania. The hub’s fifth expansion is expected to be completed by the end of March, with volumes forecast to grow further once William unit Transcontinental Gas Pipe Line Co.’s Atlantic Sunrise expansion project goes into service later this year.

Much of the most recent Susquehanna expansion is already online, “but we do have one remaining compressor station in the fuel loops we're putting online there,” Armstrong said during a call to discuss earnings.

“Big Five” Expansions Set Delivery Record

Transco in December brought online the last of its “Big Five” expansion projects when its Virginia Southside II successfully entered service.

The five, fully contracted expansion projects (Gulf Trace, Hillabee Phase 1, Dalton, New York Bay and Virginia Southside II) combine to add more than 2.8 million Dth/d of firm transportation capacity to the Transco pipeline system, increasing the mega pipe’s design capacity by nearly 25%, “which is saying something given the size of Transco to start with,” Armstrong said.

The recent capacity expansions on Transco enabled the pipeline to set one-day and three-day delivery records in January, the CEO added. Transco delivered a record-breaking 15.58 million Dth/d on Jan. 5, a peak-day mark that surpassed the previous high set just four days earlier. Transco also established a three-day market area delivery record, averaging 14.90 million Dth/d from Jan. 4-6.

Construction also continues on Phase 2 of Transco’s Garden State Expansion project. Phase 1 was placed in service last September, and the pipeline is targeting an in-service date of 2Q2018 for Phase 2, which includes a compressor station on the Transco Trenton Woodbury Lateral in Burlington County, NJ. When placed into full service, this fully contracted expansion project would be able to deliver up to 180,000 Dth/d of additional capacity to New Jersey Natural Gas Co.

Williams has seven fully contracted projects that are scheduled to go into service in 2019 and beyond, including Transco’s Northeast Supply Enhancement project. The nearly $1 billion project would allow Transco to increase gas deliveries to National Grid, the largest gas distributor in the Northeast. The expansion is designed to create 400,000 Dth/d of incremental firm capacity to Northeast markets, primarily to feed growing demand for gas in New York City, which plans to phase out the use of No. 4 fuel oil by 2030 to help curb emissions.

The project includes installing about 10 miles of 42-inch diameter pipeline in Lancaster and Chester counties, constructing four access roads and adding a 21,902 hp compressor station.

Meanwhile, FERC is working to prepare an environmental assessment for Transco’s proposed Gateway Expansion Project, which would provide an additional 65,000 Dth/d of firm transportation service to PSEG Power LLC and UGI Energy Services LLC to serve their incremental supply needs beginning with the 2020-2021 winter heating season.

Transco has said it executed binding precedent agreements with project shippers for 100% of the firm transportation service to be provided through the project. Transco requested Federal Energy Regulatory Commission approval of the project by this November to meet a targeted in-service date of Nov. 1, 2020.

Transco has also filed for a FERC certificate to construct its Rivervale South to Market project, a 190,000 Dth/d expansion of its system in New Jersey. The $127 million project proposes constructing a 0.61 mile, 42-inch diameter loop along Transco's Mainline A in Bergen County, NJ. The project would also upgrade 10.35 miles of the existing 24-inch diameter North new Jersey Extension Pipeline to allow for additional pressure.

Transco said it has firm transportation agreements with Direct Energy Business Marketing LLC and UGI Energy Services LLC for the capacity on the Rivervale project [CP17-490].

The company also is moving forward with three interstate transmission projects after securing customer commitments. The projects are part of a list of more than 20 that Transco expects to  use to unleash “the power of the gas reserves in the Marcellus and the Utica,” Armstrong said.

Growth Comes With Cost

All this growth has not come cheap, however. Although Williams has been able to fund all of its recently completed and projected capital projects without issuing public equity, the company has seen higher operating costs.

Williams Partners LP’s COO Michael Dunn said in the Northeast, in particular, the company is seeing significant growth, adding a number of facilities that require additional employees but that also include costs related to operations, like electricity.

As another example, Dunn said WIlliams had work in West Virginia dealing with long walk coal mines, which are underground coal mines “that we actually have to go out and mitigate the pipelines that are above those coal mines, so that we don't have any operational issues.” While the company worked with the coal mine companies to do this, the work increased the expenses, he said.

“So growth is driving costs higher, but certainly we're watching very closely the operating margin associated with each one of those franchises,” Dunn said.

Meanwhile, ongoing operating costs, especially for a pipeline the size of Transco, is also a consideration. For example, hydro testing on pipelines and repairs are expenses that come up frequently on the Transco system, which operates in highly populated areas.

“We're going to spend money to make sure pipes are safe,” Armstrong said. “And so that kind of cost, even though some might consider that maintenance of the system, is really what's been driving our cost up here recently. And we've got a lot work to do on that front. So those costs will continue for quite some time.”

As for earnings, Williams reported net income in 4Q2017 of $1.7 billion ($2.03/share), up from a $15 million loss (minus 2 cents) in 4Q2016. The gain was largely attributed to the remeasuring deferred tax liabilities to reflect lower future tax payments expected because of the Tax Cuts and Jobs Act of 2017.

For 2017, Williams reported net income of $2.174 billion ($2.62/share), up from a $424 million loss (minus 57 cents) reported in 2016. The nearly $2.6 billion gain was driven primarily by the net impact of the tax reform, a $1.1 billion gain associated with the sale of ownership interest in the Geismar olefins facility, the absence of impairments of equity-method investments and higher revenues from Williams Partners' Atlantic-Gulf business. Partially offsetting the improvement was a net increase in impairments of certain assets and the absence of results associated with the Geismar olefins facility, which was sold July 6, 2017.

Distributable cash flow (DCF) was reported to be $349 million in 4Q2017, down from $518 million in 4Q2016. For 2017, DCF was $1.44 billion, compared with $1.82 billion in 2016.

Williams set dividend growth rate guidance at 10-15% annual growth rate, or $1.35/share.

Williams Partners reported a net loss in 4Q2017 of $342 million (minus 35 cents/share), a $487 million decrease from 4Q2016 earnings of $145 million (24 cents). The loss was largely attributed to the impact of charges at Transco and Northwest Pipeline related to tax reform.

For the full year, Williams Partners reported net income of $871 million (90 cents/share), from a 2016 loss of $431 million (minus 17 cents), mostly on the sale of assets, the absence of impairments of equity-method investments and higher revenues for the Atlantic-Gulf segment.

The partnership’s DCF was $702 million in 4Q2017 from $699 million in 4Q2016. For 2017, DCF was $2.82 billion, compared with $2.97 billion in 2016. The lower DCF in 2017 was attributed largely to deferred revenue amortization associated with contract restructurings and prepayments. To a lesser extent, to the tune of $42 million, an increase in maintenance capital expenditures (capex) also negatively impacted DCF.

Williams Partners set guidance for 2018 at $1.5-1.7 billion for net income; at $2.90-3.20 for DCF; at $2.7 billion for total growth capex and at $1.7 billion for Transco growth capex.

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