NEW YORK–(BUSINESS WIRE)–Fitch Ratings has downgraded the ratings for The Williams Companies, Inc. (WMB) by one notch. The Issuer Default Rating (IDR) and senior unsecured ratings are now ‘BB+’, down from ‘BBB-‘. WMB’s junior subordinated notes have been downgraded to ‘BB-‘ from ‘BB’. Both the senior unsecured debt and the junior subordinated notes have been assigned a Recovery Rating of RR4. WMB remains on Rating Watch Negative.
The ratings for Williams Partners L.P. (WPZ) have also been downgraded. The IDR and senior unsecured ratings are ‘BBB-‘, down one notch from ‘BBB’. WPZ’s short-term IDR and commercial paper (CP) rating have been downgraded to ‘F3’ from ‘F2’.
Williams Partners Finance Corporation’s (WPFC) senior unsecured rating has also been downgraded to ‘BBB-‘ from ‘BBB’. WPZ’s pipeline subsidiaries, Northwest Pipeline LLC (NWP), and Transcontinental Gas Pipe Line Company, LLC’s (TGPL) IDRs have also been downgraded, ‘BBB’ from ‘BBB+’. The Rating Outlook for WPZ and its two pipeline subsidiaries is Stable.
A full list of rating actions appears at the end of this release. Approximately $23.7 billion of debt is affected.
KEY RATING DRIVERS
WPZ’s rating was placed on Rating Watch Negative following Energy Transfer Equity, L.P.’s announcement in September 2015 that it will acquire all of the outstanding shares of WMB. The transaction is expected to close before the end of the second quarter of 2016 (2Q16). The transaction created uncertainty regarding the future direction of WPZ’s balance sheet and credit profile. While the merger has not yet closed, Fitch now expects WPZ’s adjusted leverage, defined by Fitch as debt-to-adjusted EBITDA (operating EBITDA less equity income plus distributions from affiliates) to remain above 4.5x for a sustained period of time; this has been Fitch’s trigger for a negative rating action. Furthermore, Fitch’s concern regarding WPZ’s significant exposure to Chesapeake Energy Corp. (CHK; IDR ‘B’/Negative Outlook) has increased.
WMB’s rating has been lowered one notch to ‘BB+’ and it remains on Rating Watch Negative. The rating of WPZ drives Fitch’s rating of WMB until the pending merger with ETE is closed. Debt at WMB is to be assumed by ETE and, once the transaction is complete, Fitch expects to equalize WMB’s rating with ETE’s. WMB’s junior subordinated convertible notes are expected to remain two notches below WMB’s IDR.
The ‘BBB’ rating for WPZ is supported by the partnership’s scale, diversity of assets, as well as geographic diversity. Over time, WPZ has grown through significant organic growth spending and the 2014 acquisition of Access Midstream Partners, L.P.
Approximately 90% of gross margins come from fee-based revenues although risks to cash flows still exist. Future growth projects are focused on assets backed by long-term fee-based revenues. WPZ estimates that through 2017, 96% of spending will be directed toward fee-based projects.
Rating concerns include the challenging capital market environment and the partnership’s plan for significant spending. Fitch estimates that WPZ had cash and committed liquidity of approximately $1.9 billion as of Sept. 30, 2015. WPZ has $375 million of debt maturities due by the end of 2Q16. WPZ has not provided guidance for capex since the announced ETE merger with WMB; however, its prior guidance averaged $3.3 billion a year through 2017, which would require accessing the capital markets to fund its spending needs even if spending was significantly reduced. Like other master limited partnership (MLPs), WPZ’s access to the capital markets is more restricted than in the past when commodity prices were stronger. With WPZ’s high cost of equity, Fitch does not anticipate that WPZ will access the equity markets until there is significant improvement in pricing.
Should WPZ’s liquidity and capital market access further deteriorate, WPZ would need to take steps to maintain adequate liquidity at or near current levels, through capital spending or distribution cuts to maintain the rating and Stable Outlook. Failure to do so would likely result in Fitch taking a negative rating action.
Other concerns include significant counterparty exposure to Chesapeake Energy Corp. (CHK; IDR ‘B’/Negative Outlook). Approximately 20% of WPZ’s revenues are from CHK for gathering and processing. Fitch’s rating for CHK was downgraded two notches in December 2015.
KEY ASSUMPTIONS
Fitch’s key assumptions within the rating case for WMB and WPZ include:
–The transaction will close as currently proposed including Energy Transfer’s assumption of WMB’s debt and the WMB revolver being retired;
–WPZ will continue to operate as a standalone MLP with sufficient liquidity.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
WMB
–Fitch does not expect positive rating action for WMB given the plans for the debt to be assumed by lower-rated ETE.
WPZ
–Should Fitch forecast adjusted leverage (Fitch defined) to trend down to 4.5x or lower on a sustained basis, favorable rating action may occur.
TGPL, NWP and WPFC
–Favorable actions would be directly linked to positive rating action at WPZ.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
WMB
–Fitch expects to equalize WMB’s rating with ETE at or near merger close.
WPZ
–Should Fitch forecast adjusted leverage (Fitch defined) of 5.25x or higher on a sustained basis, negative rating action could occur.
–Reduced liquidity or lack of access to capital markets may also result in negative rating action.
TGPL, NWP and WPFC
–Negative actions would be directly linked to WPZ.
LIQUIDITY
As of Sept. 30, 2015, WMB had cash of $125 million on the balance sheet including $110 million of cash which is held at WPZ. WMB has approximately $1.1 billion of availability on its $1.5 billion senior unsecured revolver which extends through 2018.
As of Sept. 30, 2015, WPZ had $110 million of cash on the balance sheet. It also had $1.53 billion of CP outstanding on its $3 billion CP program. After accounting for outstanding CP and $503 million outstanding revolver borrowings, WPZ had $1.5 billion of availability on its $3.5 billion revolver which matures in 2020. WPZ also has a one-year $1 billion short-term credit facility which expires in August 2016. This facility was reduced to $150 million with the issuance of the $850 million three-year term loan in December 2015.
WPZ has near-term debt maturities: $200 million of Transco notes are due on April 15, 2016 and Northwest has $175 million of notes due on June 15, 2016. Beyond then, there are $785 million of notes due in 2017 and $1.35 billion due in 2018.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
The Williams Companies, Inc.
–Long-term IDR to ‘BB+’ from ‘BBB-‘;
–Senior unsecured debt to ‘BB+/RR4’ from ‘BBB-‘;
–Junior subordinated convertible debentures downgraded to ‘BB-‘/RR4 from ‘BB’.
Ratings for The Williams Companies, Inc. remain on Rating Watch Negative.
Williams Partners L.P.
–Long-term IDR to ‘BBB-‘ from ‘BBB’;
–Senior unsecured debt to ‘BBB-‘ from ‘BBB’;
–Short-term IDR and CP to ‘F3’ from ‘F2’.
Williams Partners Finance Corporation
–Senior unsecured debt to ‘BBB-‘ from ‘BBB’.
Transcontinental Gas Pipe Line Company, LLC
–Long-term IDR to ‘BBB’ from ‘BBB+’;
–Senior unsecured debt to ‘BBB’ from ‘BBB+’.
Northwest Pipeline LLC
–Long-term IDR to ‘BBB’ from ‘BBB+’;
–Senior unsecured debt to ‘BBB’ from ‘BBB+’.
Williams Partners L.P., Williams Partners Finance Corporation, Transcontinental Gas Pipe Line Company, LLC, and Northwest Pipeline LLC have been removed from Rating Watch Negative.
Williams Partners L.P., Transcontinental Gas Pipe Line Company, LLC and Northwest Pipeline LLC all have a Stable Outlook.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997717
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997717
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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