OREANDA-NEWS. Fitch Ratings has affirmed Energy Transfer Equity, LP's (ETE) ratings, resolving the Positive Rating Watch, as follows:

Energy Transfer Equity, L.P.
--Long Term Issuer Default Rating (IDR) at 'BB';
--Secured senior notes at BB+';
--Secured term loan at 'BB+';
--Secured revolving credit facility at 'BB+'.

The Rating Outlook is Stable.

ETE was placed on Rating Watch Positive following the announcement that ETE would be acquiring Williams Companies (WMB; 'BB+'/ Rating Watch Negative) in a $37.7 billion transaction including the assumption of $4.2 billion of WMB debt. The removal from Rating Watch reflects Fitch's downgrade of WMB and of its operating partner Williams Partners, LP (WPZ, to 'BBB-'/Stable Outlook from 'BBB'/Rating Watch Negative) and WPZ's pipeline operating subsidiaries.

Fitch primarily assesses ETE's stand-alone (not consolidated) financial characteristics to determine the company's 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. The prior Positive Watch reflected Fitch's expectation that WPZ (which will provide roughly 50% of distributions up to ETE) would continue to be rated 'BBB', resulting in the majority of total distributions up to ETE coming from 'BBB' rated entities, WPZ and Sunoco Logistics Partners, LP (SXL; 'BBB'/Stable Outlook), leading to an improved credit profile at the ETE level. With the WPZ downgrade as well as increased uncertainty as to WPZ's counterparty risk and financing plans, Fitch no longer expects any positive near-term rating actions at ETE.

The affirmation and Stable Outlook reflect ETE's size, scale, asset quality, manageable maturity schedule, and structural subordination to its operating subsidiaries. Fitch expects that following the merger, ETE's operating and financial profile will remain consistent with its 'BB' IDR, two notches below the IDRs of the subsidiaries providing the majority of ETE's earnings and cash flow. Fitch expects ETE stand-alone leverage to be roughly 4.5x for 2016 before moving back toward its recent historical 3.0x to 4.0x range in 2018 and beyond. ETE's capital needs at the ETE level are limited and maturities are manageable in the near term.

Fitch continues to believe that the merger of WMB is generally positive for ETE, which should benefit from the acquisition of WMB and the controlling ownership interest in WPZ and WPZ's operating pipelines. The combined ETE/WMB group of companies will become the largest energy infrastructure group in the U.S. It will have a significant amount of geographic diversity, as well as an advantageous focus on the northeastern U.S., where there remains demand for midstream service solutions. From an operational standpoint, Fitch believes WMB and WPZ's addition to the ETE family of partnerships will have many strategic positives. The merger could provide significant benefits on projects and existing assets from all the affiliated entities, as well as operational and financial synergies.

The WMB transaction is expected to be funded by a combination of $6.05 billion in cash (generated from an already committed 364-day term loan) and equity in a newly created up-C corporation, Energy Transfer Corp (ETC). The transaction is expected to close in the first half of 2016, subject to WMB shareholder vote and receipt of regulatory approvals; no ETE unitholder vote is required.

KEY RATING DRIVERS

Increased Scale and Diversity: Pro forma for the WMB merger the Energy Transfer group is expected to become the largest energy infrastructure conglomerate, which should offer increased advantages of scale and the potential for a fair amount of synergy savings. Additionally, on a consolidated basis, the percentage of contractually supported fee-based margins has gradually increased and will continue to rise pro forma for the merger as WPZ's gross margin profile is over 80% fixed fee. With WPZ being downgraded, ETE's largest providers of cash flow will be from 'BBB-' rated entities (WPZ and Energy Transfer Partners, LP (ETP; 'BBB-'/Stable Outlook)), warranting the removal from Rating Watch Positive.

Structural Subordination: ETE's ratings consider that, pro forma for the merger transaction, ETE/WMB's parent-level debt (roughly $17.7 billion pro forma at Sept. 30, 2015) is structurally subordinate to significant subsidiary-level debt and reliant on subsidiary distributions to support ETE/WMB-level obligations. Fitch expects ETE to generate over $4 billion in standalone adjusted EBITDA in 2016, pro forma for the acquisition and largely absent any merger synergies, consisting primarily of distributions from its subsidiaries with the majority coming from ETP and WPZ. The distributions should be stable in later years as ETE's three largest cash flow providers (ETP, WPZ, and SXL) all have operations supported by mostly stable cash flow assets (pipelines) and are expected to generate growing cash distributions over the long term as they work through large growth-spending backlogs. Much of this spending backlog is expected to be implemented despite low commodity prices. These projects are largely focused on transportation assets and are generally backed by capacity reservation (i.e. fixed fee take-or-pay)-type contracts with solid investment-grade counterparties.

ETE's current operating affiliates do have some flexibility with regard to funding and liquidity, with ETP having previously raised $2.2 billion in equity from an asset sale to Sunoco, LP (SUN; 'BB'/Stable Outlook). Fitch expects each subsidiary will be able to fund its planned growth with capital market transactions, without negatively affecting their credit metrics on a sustained basis. In the near term, distribution and distribution growth from ETE's underlying partnership subsidiaries could slow, given the current constricted capital market environment and continued commodity price weakness.

While not currently expected, Fitch believes there is room, given the current environment, for ETE to forgo some of the distribution growth it expects to receive in order to support its underlying partnerships' capital spending needs. 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 bump up in ETE leverage beyond Fitch's 4.5x standalone estimate is temporary. We continue to believe that a material weakening in leverage metrics beyond 4.5x on a sustained basis could result in a negative rating action and continue to believe this leverage target is appropriate longer term.

Maturities Manageable: Pro forma for the transaction, ETE/WMB maturities remain manageable, with the combined entity having no significant parent-level debt maturities until 2018. In late-October 2015, ETE entered into a senior secured credit facility for $6.05 billion in order to fund the cash portion of the WMB Merger. Under the terms of the facility, the banks have committed to provide a 364-day secured loan that can be extended at ETE's sole option for an additional year. The interest rate on the facility is capped at 5.5%.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for ETE include:
--Fitch assumes the WMB transaction will close as currently proposed, including ETE's assumption of WMB's debt.
--Balanced funding of projected growth capital spending at subsidiaries with both debt and equity funding and acquisitions aimed at maintaining leverage and coverage metric profiles consistent with current ratings.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--ETE parent company debt-to-EBITDA below 2.0x on a sustained basis provided the majority of distributions are coming from 'BBB-' rated subsidiaries; that target could be higher if subsidiaries are rated higher than 'BBB-';
--Improving credit profiles at underlying partnerships.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Increasing ETE parent company leverage above 4.5x on a sustained basis. With no immediate 2016 maturities, Fitch could tolerate standalone leverage rising in the near term (2016-2017) if it is temporary and done in support of maintaining investment-grade credit profiles at operating subsidiaries;
--Weakening credit profiles or negative rating actions at underlying partnerships. If this occurs, Fitch would seek to maintain a one-to-two-notch separation between ETE and the entities providing the majority of the cash needed to support ETE's structurally subordinated debt.

LIQUIDITY

Liquidity Adequate: ETE has access to a $1.5 billion secured revolving credit facility that matures in December 2018. Potential uses of the revolver include: funding share buybacks, future acquisitions, and to initiate organic growth projects not financed at the master limited partnerships (MLPs). Approximately $930 million was drawn under ETE's revolver as of Sept. 30, 2015, leaving $570 million in availability. The ETE revolver and term loans have two financial covenants: a maximum leverage ratio of 6.0x to 1.0x and 7.0x to 1.0x during a specified acquisition period, and fixed charge coverage ratio of 1.5x. ETE notes, term loan, and credit facility are secured by a first-priority interest in all tangible and intangible assets of ETE, including ownership interests in its subsidiary partnerships. ETE was in compliance with all of its covenants as of Sept. 30, 2015. Pro forma for the transaction ETE is expected to be well within compliance of its covenants. As mentioned, ETE also has a $6.05 billion senior secured facility to be used to finance the WMB transaction.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Energy Transfer Equity, L.P.
--Long-term Issuer Default Rating (IDR) at 'BB';
--Secured senior notes at BB+';
--Secured term loan at 'BB+';
--Secured revolving credit facility at 'BB+'.

The Rating Outlook is Stable.