OREANDA-NEWS. Fitch Ratings believes that Friday's Delaware Court of Chancery ruling that Energy Transfer Equity, LP is entitled to terminate its merger agreement with The Williams Companies, Inc. (WMB; 'BB+'/Rating Watch Negative) is neutral to ETE's ratings and Outlook. The court decision which indicated that the inability of Latham & Watkins, LLP to provide a '721(a) tax opinion', a condition precedent to closing the merger, was made in good faith provides ETE the right to terminate the merger on June 29, 2016. Fitch believes the ruling increases the likelihood that the ETE Williams merger will not happen as ETE is expected to terminate the deal even as WMB continues to press for a merger. The ruling and termination is expected to be met with further litigation from WMB. Fitch expects WMB shareholders to vote in favor of the merger and WMB, as per its public statements, "will take appropriate actions to enforce its rights under the merger agreement and deliver its benefits to Williams' stockholders."

Fitch believes that termination of the merger is marginally beneficial to ETE's near-term credit profile but not enough to impact current ratings. The merger failing to close will alleviate some of the balance sheet pressure that the merger would have placed on ETE given the addition of approximately $6.0 billion in merger debt and the roughly $5.1 billion in WMB level debt that ETE was expected to assume. Fitch primarily assesses ETE's stand-alone (not consolidated) financial characteristics to determine its ability to support its fixed obligations. In particular, for financial ratio analysis, Fitch assesses the amount and quality of ETE's cash flows derived from distributions from its underlying partnership subsidiaries relative to the amount of its direct debt and interest payments at the ETE level.

Pro forma for the WMB acquisition, ETE was expected to have roughly $17.2 billion in ETE/WMB level debt (and structurally subordinated to roughly $51 billion in subsidiary level debt). Recent commodity price weakness and capital funding needs at the major cash providing operating subsidiaries Energy Transfer Partners, LP (ETP; 'BBB-'/Stable Outlook) and Williams Partners, LP (WPZ; 'BBB-'/Stable Outlook) was expected to pressure distributions up to ETE, which had outlined a plan to forego distributions up to ETE and suspend ETE distributions in order to help alleviate capital funding needs at ETP and WPZ and protect ratings at the subsidiaries, as well as pay down ETE debt (primarily the $6.0 billion merger term loan). This pressure on distribution up to ETE will mean a flex out in stand-alone ETE leverage measures for 2016 through 2018 above Fitch's prior expectations with ETE management forecasting unconsolidated leverage of 6.8x for 2016 improving to 3.7x in 2018, assuming an ETE distribution cut following the merger.

In foregoing distributions, ETE will be strengthening the credit profile of its operating subsidiaries from which ETE receives the majority of its cash flow. Fitch has previously indicated its tolerance for leverage above its sensitivity of 4.5x on a sustained basis given ETE's manageable maturity schedule, adequate liquidity and provided the leverage pressure is only expected to be temporary as ETP and WPZ work through their capital spending programs. Fitch believes that the combined ETE/WPZ's standalone leverage will fall to below 4.5x by 2018.

In the case of no merger, ETE's credit metrics are expected to be within Fitch's 4.5x leverage sensitivity even with some Fitch assumed support to ETP, provided there are no significant financial penalties imposed upon ETE from any potential litigation around the merger dissolution. In both a merger and no merger case, a rise in ETE's leverage from temporarily forgoing distributions would not necessarily warrant a negative rating action at ETE provided any ETE action helps maintain the underlying subsidiary's current credit ratings, and any resulting increase in ETE leverage beyond Fitch's 4.5x standalone estimate is temporary. Weakening credit profiles or negative rating actions at ETE's underlying partnership subsidiaries could lead to a negative ratings action at ETE. Fitch would look to maintain at least a one-to-two notch separation between the Issuer Default Ratings (IDR) of ETE and the entities providing the majority of the cash needed to support ETE's structurally subordinated debt.

Fitch currently rates ETE as follows:

Energy Transfer Equity, L. P.

--Long-Term Issuer Default Rating (IDR) 'BB';

--Secured senior notes 'BB+';

--Secured term loan 'BB+';

--Secured revolving credit facility 'BB+'.

The Rating Outlook is currently Stable.