TEXT-S&P affirms the Williams Cos. ratings
Overview -- U.S. diversified energy company The Williams Cos. Inc. announced it will acquire a 50% general partner interest and a 25% limited partner interest in U.S. midstream gatherer and processor Access Midstream Partners L.P. for $2.4 billion. -- We are affirming our 'BBB' corporate credit ratings on Williams and its operating subsidiaries Williams Partners L.P., Transcontinental Gas Pipe Line Co. LLC, and Northwest Pipeline G.P. -- The stable rating outlook reflects our expectations that Williams will execute its growth plans and lower consolidated financial leverage at or below 4x by year-end 2014. Rating Action On Dec. 12, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' corporate credit rating on The Williams Cos. Inc.. At the same time, we affirmed our 'BBB' corporate credit ratings on operating subsidiaries Williams Partners L.P. (WPZ), Transcontinental Gas Pipe Line Co. LLC (Transco), and Northwest Pipeline G.P. The outlook is stable. Rationale We affirmed our corporate credit ratings on Williams based on our view that the investment in Access will add significant resource potential and geographic diversity to Williams' midstream footprint, enhancing the consolidated business risk profile. We believe this benefit will balance weaker consolidated financial leverage measures and indirect exposure to weaker counterparty Chesapeake Energy Corp. (BB-/Negative/--), which will represent 70% to 75% of Access' EBITDA during the next several years. In our view, the Access investment broadens the midstream segment's geographic reach and scale into 10 unconventional producing basins, including liquids-rich areas of the Mid-Continent region and the Eagle Ford, Utica, and Niobrara Shale resource plays. Contract terms support a high-degree of cash flow certainty in 2013 and 2014 due to various protections for risks to volume and capital deployed. For example, Access' contracts in the Eagle Ford region, which account for more than 25% of the partnership's estimated 2013 EBITDA), feature a fee-tier component that enhances cash flow stability by essentially locking in revenue for 2013 and 2014 across a very wide band of volumes. However, debt to EBITDA will increase on a consolidated basis because of the incremental debt to fund the transaction and our estimate that distributions will not materially contribute to Williams' consolidated cash flow until 2014. For year-end 2013, we expect consolidated debt to EBITDA to increase to 4.4x compared with our previous expectations of 4x. We expect consolidated leverage to decrease to about 4x in 2014, mainly due to a ramp-up of cash flow from organic growth projects and prior acquisitions. A key risk to Access' cash flow relates to its exposure to its primary customer, Chesapeake. In our opinion, Chesapeake could try to pressure Access to renegotiate contract terms in a distressed scenario. In a more extreme case, a Chesapeake bankruptcy would create substantial uncertainty to Access' business, but we believe potential buyers would likely consider the contracts reasonable. We base our rating on the consolidated credit profile of Williams and its related operating subsidiaries. The company's "strong" business risk profile (as our criteria define the term) reflects highly competitive pipeline assets and a midstream business that generate predictable cash flows (about 70% of 2013 EBITDA). The remaining 30% of cash flow comes from sources that are exposed to volume risk and commodity prices, primarily natural gas liquids (NGL). Williams currently owns the 2% general partner interest and 68% limited partner interest in master limited partnership (MLP) WPZ. WPZ is the growth vehicle for the consolidated enterprise and where we expect most of the growth and debt financing to occur over time. We believe Williams will continue to invest in assets and drop them down into WPZ and the portion of the company's Canadian midstream and olefins assets that do not qualify for the MLP will remain at the general partner level. The midstream segment is riskier than the pipeline segment and thus we would likely assess its stand-alone business risk profile as "fair". This segment generates the largest portion of Williams' consolidated cash flow, which we estimate at about 55% of EBITDA in 2013. We view Williams' midstream segment's high portion of fee-based cash flows (60% in 2013) as providing some cash flow predictability. However, this segment does have mostly keep-whole and other commodity-sensitive contracts that can affect segment cash flow. In our view, Williams' drop-down of the Geismar olefins plant to WPZ should reduce the partnership's cash flow volatility and benefit credit quality, because the plant effectively gives Williams a natural hedge for volatile ethane prices (ethane is the feedstock used to make ethylene). In 2013, we estimate that the pipeline segment will generate 40% of consolidated EBITDA. The pipeline assets have an "excellent" business risk profile due to predictable cash flows these assets generate. Operating subsidiaries Transco and Northwest and a 50% joint-venture interest in Gulfstream Natural Gas System LLC get support from a strong competitive position, investment-grade shipper profiles, and generally long-term contracts. We also believe these pipelines are well positioned to weather persistent low natural gas basis spreads and changing flows for transporting natural gas. Transco and Gulfstream provide gas to the Northeast, Southeast, and Florida markets, all areas with strong gas demand. We believe Northwest's strong competitive position makes it well situated to move Rockies gas to key end markets for local distribution companies in Seattle and Portland. Williams' Canadian midstream and olefins business segment is not a key ratings influence at this time. Cash flows from this segment account for about 5% of consolidated EBITDA, but we expect it to grow over time due to several large organic projects. Williams will mainly fund these projects with its large international cash position. Williams' consolidated financial risk profile is "significant," in our view. Under our base-case forecast, we expect debt to EBITDA will increase on a consolidated basis mainly because of incremental debt and the cash flow lag associated with organic growth projects and acquisitions, and lower NGL prices. For 2013, we expect consolidated debt to EBITDA to increase to about 4.4x compared with our previous expectations of about 4x. We believe WPZ's stand-alone pro forma debt to EBITDA will be about 4.2x. Under our base-case forecast we assume a 5% increase in gathering volumes, a fee-based gathering and processing gross margin of 60%, and a net NGL margin of 66 cents per gallon (using our NGL price assumptions). We also assumed 1% volume growth on Transco and Northwest as a result of several new projects in 2012. Given WPZ's significant keep-whole exposure, consolidated financial measures could improve if the NGL to natural gas pricing differential widens further, or worsen if it narrows. We estimate WPZ's distribution coverage ratio to have minimal cushion at about 1.05x. Liquidity We view Williams' consolidated liquidity as "adequate" under our criteria, and project sources divided by uses of 1.4x for the next 12 months. Key sources include our assumptions for funds from operations of about $2.3 billion, cash of $996 million, and full availability of Williams' $900 million credit facility and WPZ's $2.4 billion credit facility due in June 2016. Primary cash uses include estimated maintenance and long lead-time projects of about $3.8 billion (although total spending could be higher related to discretionary projects) and dividends and distributions in the $1.4 billion area. Williams and WPZ do not have any meaningful debt maturities until 2015. In addition, Williams posted a minimal amount (in the form of letters of credit) of collateral to counterparties to support its net derivative liability, which in our view does not hurt liquidity. Williams' liquidity and cash generation are adequate to fund the company's operations and maintenance capital spending requirements, and to meet its debt service and distributions. However, the company must preserve access to the debt and equity markets to raise funds for growth-oriented capital spending. A key assumption underlying our assessment of Williams' liquidity is that the company would scale back discretionary capital spending if it could not raise sufficient funds. We estimate consolidated maintenance capital spending to be $475 million to $500 million. We expect Williams to remain in compliance with its financial covenants. The covenants include a maximum debt to EBITDA ratio of 4.5x (5x following acquisitions of $50 million or more) at Williams and 5x (5.5x following acquisitions of $50 million or more) at WPZ and a debt to capitalization ratio of no greater than 65% at pipeline subsidiaries Transco and Northwest. As of Sept. 30, 2012, there was a significant cushion in the leverage covenants for Williams (80%) and WPZ (about 40%). Outlook The stable outlook reflects our view that Williams will maintain adequate liquidity, successfully integrate its acquisitions, execute on its 2013 organic capital spending, and lower consolidated financial leverage at or below 4x by year-end 2014. Higher ratings are unlikely absent increased scale and business diversity and a notably more conservative financial policy. We could lower the ratings if lower gathering volumes and NGL prices pressure cash flow, or recent acquisitions underperform such that consolidated debt to EBITDA remains above 4.5x on a sustained basis. Related Criteria And Research -- Standard & Poor's Revises Its Natural Gas Liquids Price Assumptions For 2012, 2013, And 2014, June 11, 2012 -- Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Ratings Affirmed The Williams Cos. Inc. Corporate Credit Rating BBB/Stable/-- Senior Unsecured BBB- Junior Subordinated BB+ Preferred Stock BB+ Williams Partners L.P. Corporate Credit Rating BBB/Stable/-- Senior Unsecured BBB Transcontinental Gas Pipe Line Co. LLC Corporate Credit Rating BBB/Stable/-- Senior Unsecured BBB Northwest Pipeline G.P. Corporate Credit Rating BBB/Stable/-- Senior Unsecured BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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