S&P Cuts Williams (WMB) to 'BB+', Outlook Stable

Standard & Poor's Ratings Services said it has taken the following rating actions on the corporate family of U.S. diversified midstream energy company The Williams Cos. (NYSE: WMB)
zCos. Inc (NYSE: WMB).:

• We lowered our corporate credit rating on Williams to 'BB+' from 'BBB'. The outlook is stable.
  
• We also lowered our issue-level rating on Williams' senior unsecured debt to 'BB+' from 'BBB-' and assigned a '3' recovery rating to this debt, and we lowered our rating on the subordinated debt to 'BB-' from 'BB+' and assigned a recovery rating of '6'.
  
• We placed the 'BB+' corporate credit rating and senior unsecured ratings on Access Midstream Partners L.P. on CreditWatch with positive implications.

We affirmed the 'BBB' corporate credit rating and the 'A-2' short-term rating on Williams Partners L.P. (WPZ) and the 'BBB' ratings on its operating subsidiaries Transcontinental Gas Pipe Line Co. LLC (Transco) and Northwest Pipeline LLC. The outlook is stable."Williams' intention to become a pure-play general partnership upon completion of this transaction results in a weaker credit profile," said Standard & Poor's credit analyst Michael Grande. "Although Williams has heretofore been largely reliant on distributions from WPZ, it still owned some assets directly. Now, given its strategy as a pure-play general partnership, it will be fully reliant on subordinated distributions from WPZ to service its debt obligations."

Furthermore, a significant portion of these cash flows come from incentive distributions rights that add risk because they essentially represent a leveraged cash flow stream that can increase or decrease disproportionately as WPZ changes its distribution rate. With its transition to a general partnership holding company structure, we believe Williams will be more likely to finance large, organic spending projects at WPZ rather than at Williams, which in our opinion will provide less direct asset coverage for Williams' creditors.

We have reviewed the transaction and do not expect Williams' stand-alone financial leverage to increase materially as the company seeks financing for the acquisition.

At the WPZ level, we believe the partnership's pro forma credit profile will benefit from the increased scale and diversity that the acquisition will bring, but that the benefit will not be sufficiently material to warrant a positive rating action. The partnership will enhance its competitive position in emerging shale plays in the Marcellus and Utica regions and extend its reach into new plays such as the Barnett, Haynesville, and Niobrara regions.

We view Williams' stand-alone liquidity as "adequate," as defined in our criteria. For the next 12 months, we expect Williams' sources of liquidity to exceed uses by about 1.8x. Although this ratio would normally warrant a "strong" liquidity assessment, Williams' liquidity is largely dependent on upstream distributions from WPZ, which has adequate liquidity. Furthermore, qualitative factors suggest an "adequate" assessment.

We view WPZ's combined pro forma liquidity also as "adequate." For the next 12 months, we expect liquidity sources to exceed uses by about 1.2x.

We expect to resolve the positive CreditWatch on Access Midstream at the close of the proposed merger with WPZ, currently expected at the end of 2014 or beginning of 2015. We expect to raise our corporate credit rating on Access Midstream to 'BBB', in line with that on WPZ.

The stable rating outlook on Williams reflects our expectation that it will become a pure-play general partner with relatively low financial leverage and consistent distribution payments from the larger and more geographically diverse WPZ. We could lower the ratings on Williams if its stand-alone debt-to-EBITDA ratio is consistently above 2x, and it does not have a clear path of deleveraging. We could also lower the ratings if we lowered the ratings on WPZ. We do not envision raising the ratings on Williams unless we also raised the ratings on WPZ.

The stable rating outlook on WPZ reflects our view that the combined partnership will fund its sizable organic spending program in a disciplined manner while maintaining adequate liquidity and financial leverage of about 4x. Higher ratings are unlikely without increased business diversity, consistent distribution coverage of at least 1.2x, and a notably more conservative financial policy. We could lower our ratings on WPZ if lower gathering volumes and NGL prices hurt cash flow or if the partnership does not execute its growth plans favorably such that consolidated debt to EBITDA remains at more than 4.75x.

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