Pipeline company Williams Companies (NYSE:WMB) and its affiliated MLP Williams Partners (NYSE: WPZ) received some unwelcome news earlier this week. That is, after the Federal Energy Regulatory Commission (FERC) decided to give landowners in Pennsylvania a couple more weeks to comment on their proposed Atlantic Sunrise pipeline project. This delay could lead to more down the road, which could push back Williams' ability to restart dividend growth as quickly as expected.
Atlantic Sunrise 101
The Atlantic Sunrise project is one of several expansions Williams Partners is undertaking on its Transco system:
The 200-mile project would extend its Transco pipeline into the northern Marcellus shale region, where it would connect gas supplies from that prolific shale play to customers along the east coast. The company currently expects the pipeline to be in service by the end of next year. It is of particular importance to natural gas producer Cabot Oil & Gas (NYSE:COG), which is the foundational shipper on the project after signing up for 850 million cubic feet per day of the pipeline's 1.7 billion cubic feet per day capacity. Cabot Oil & Gas is counting on the project to increase the takeaway capacity of the region because the current lack of capacity is keeping regional gas prices low, which is limiting the company's ability to create value for investors.
Why this project matters for Williams Companies
At a total cost of $3.1 billion, Atlantic Sunrise is the largest project in Williams Partners' current project backlog. Further, it's one of the company's highest-return projects according to comments by CEO Alan Armstrong on the company's second-quarter conference call, who said it is a "great project" with "great returns." In addition to the robust project-specific economics, Atlantic Sunrise would unleash some 700 million cubic feet per day of gathering volumes that are currently shut-in because of the lack of pipeline capacity in the region. In other words, not only is Atlantic Sunrise a great stand-alone project, but it will increase the returns the company can earn from its other assets. Because of that, the project is crucial to the future of Williams.
The timing of the project's completion is also important. While the company did build a six-month delay into its financial model to account for any potential roadblocks, the concern is that the delay could last longer than that and cause additional problems for the company. For example, it still needs to secure the funding for the project, which could get costlier with the added uncertainty. Further, if the in-service date gets pushed back more than six months, it would delay the start of the steady stream of cash flow Williams is set to collect from Cabot Oil & Gas and other customers on the system as well as the incremental cash flow from unlocking those shut-in gathering volumes.
That increasing supply of cash flow is central to Williams Companies' plans. The company made the difficult decision to cut its dividend earlier this year to support Williams Partners' ability to fund growth projects such as Atlantic Sunrise. The plan was to help get the MLP through that project so both companies could resume shareholder payout growth in 2018. However, if Atlantic Sunrise does not come online as expected, it could result in an even longer delay in dividend growth for both companies.
Williams Companies is banking on its ability to complete the Atlantic Sunrise project by mid-2018 at the latest. While the company is still on track to meet that deadline despite the current FERC delay, there is a concern that there could be further delays. This is certainly a risk investors need to keep an eye on, because a major delay or a rejection of the project could impact the company's ability to resume dividend growth in 2018 as planned.