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Update: Fitch rates Transco

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World Pipelines,

Fitch Ratings has assigned a 'BBB' rating to Transcontinental Gas Pipe Line Company, LLC's (Transco) issuance of senior unsecured notes. The notes are to rank pari passu with the pipeline's existing and future senior unsecured debt. Proceeds are to be used to repay debt and to fund capital expenditures.

The new notes do not allow Transco to assume, guarantee or become liable for any debt other than Transco's or a Transco subsidiary. This provision would prohibit Transco from putting cross-guarantees in place with Williams Partners L.P. (Williams).

Transco is a wholly-owned pipeline operating subsidiary of Williams. The Williams Companies holds a 60% interest in Williams through its 58% stake in the limited partnership and the 2% general partnership interest.

Transco has a strong operating and financial profile, which is offset by its structural and functional, ties with its parent, Williams. Fitch rates Transco one notch above its parent, Williams.

Transco pipeline

Transco is one of the nation's premiere interstate natural gas pipelines, as evidenced by its strong market position, low cost structure and above average growth in high-demand mid-Atlantic and Northeast markets. The physical reach of the system allows the pipeline to compete effectively for incremental volumes in its key markets through expansions, laterals, and access to shale basins. Its major customers are utilities and municipalities.The pipeline's leverage for the LTM ending 30 September 2015 was 1.75x, down from 1.92x at the end of 2014.

Leverage was reduced due to the pipeline's EBITDA growth. For the LTM, EBITDA was US$817 million vs. US$743 million in 2014 and US$694 million in 2013.

Transco's parent, Williams, has a 'BBB-' rating, which is supported by the partnership's scale, diversity of assets, as well as geographic diversity. Over time, Williams has grown through significant organic growth spending and the 2014 acquisition of Access Midstream Partners, L.P.


Approximately 90% of Williams' 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. Williams estimates that through 2017, 96% of spending will be directed toward fee-based projects.

Rating concerns for Williams include the challenging capital market environment and the partnership's plan for significant spending. Fitch estimates that Williams had cash and committed liquidity of approximately US$1.9 billion as of 30 September 2015. Williams has US$375 million of debt maturities due by the end of 2Q16. WPZ has not provided guidance for capex since the announced ETE merger with the Williams Companies. However, its prior guidance averaged US$3.3 billion a year through 2017, which would require it to access the capital, markets to fund its spending needs even if capex was significantly reduced.

Like other master limited partnership (MLPs), Williams’ access to the capital markets is more restricted than in the past when commodity prices were stronger. With Williams’ high cost of equity, Fitch does not anticipate that the company will access the equity markets until there is significant improvement in pricing.

Fitch taking action

Should Williams' liquidity and capital market access further deteriorate, Williams 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 ratings action.

Other concerns for Williams include significant counterparty exposure to Chesapeake Energy Corp. (CHK). Approximately 20% of Williams’ revenues are from CHK for gathering and processing. Fitch's rating for CHK was downgraded two notches in December 2015.

Edited from source by Stephanie Roker

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