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Williams leaning on Marcellus pipeline project to snag investment-grade credit

Williams Cos. Inc. expects a boost to investment-grade credit once the Atlantic Sunrise natural gas pipeline project produces a steady cash flow, executives said.

"With the spending on Atlantic Sunrise and the various other projects, our leverage will pick up somewhat as we get to the end of 2018, and then once we get the full benefit of Atlantic Sunrise, it will come back down again," CFO John Chandler said during Williams' Feb. 15 conference call to discuss fourth-quarter 2017 earnings. "And so as I think about investment grade ... we are really talking about mid-level investment grade, not BBB-, but a solid BBB ratio."

S&P Global Ratings pegs Williams' credit a notch below investment grade at BB+, while Williams Partners LP is already rated BBB. Transcontinental Gas Pipe Line Co. LLC, a subsidiary of the midstream master limited partnership, is building the 1.7-Bcf/d Atlantic Sunrise pipeline project, which the Federal Energy Regulatory Commission authorized in February 2017. According to Williams CEO Alan Armstrong, the pipeline, which will connect Marcellus Shale supplies to various markets along the Transco system, is more than 30% complete and the compressor station is over 40% complete. Still, the project continues to face opposition from state public service commissions disputing the pipeline's FERC-approved 15.34% pretax return.

With Transco preparing for the next Natural Gas Act Section 4 rate case, which will be filed by the end of August, Armstrong reassured investors that recent federal tax legislation will not affect existing contracts. "I want everyone to understand that the negotiated-rate contracts Transco has are not subject to change with this rate case. Tax reform will have no impact on these contracts," he said. "Those are firm, fixed contracts, and both parties agree on a fixed rate on the front end for the term of those contracts. Most of our major expansions are covered by negotiated-rate contracts."

The Tax Cuts and Jobs Act of 2017 lowered the corporate tax rate to 21% from 35% and created a 20% pass-through income deduction for some business types, including pipeline MLPs. Under pressure from pipeline customer advocates to prevent companies from over-collecting for their cost of service, FERC responded by asking developers to provide an adjusted cost of service and to recalculate the initial incremental rates tied to the cost of expansion.

Armstrong also noted that Williams has "achieved full self-funding" and said neither the company nor its MLP need to issue public equity. The company's strategy to avoid capital markets is in line with similar efforts by its midstream peers to retain more cash at the partnership level for reinvesting in the business. Williams in January 2017 also announced an $11.4 billion restructuring deal to own about 72% of Williams Partners' outstanding common units and get rid of the MLP's incentive distribution rights payments.

With the potential for even further consolidation, Chandler outlined what a share buyback program could entail. "If [Williams] appears undervalued, maybe we buy back [Williams] shares. If [Williams Partners] seems undervalued, maybe buy back [Williams Partners] shares. Or maybe we co-invest in projects," he explained. "Now that the tax reform is understood. ... we'll have to take a look at how the MLP space is doing in general."

Williams on Feb. 14 reported fourth-quarter 2017 adjusted EBITDA of $1.16 billion, an increase from $1.12 billion a year earlier. The company's distributable cash flow in the quarter was $349.0 million, a drop from $518.0 million a year earlier. For the full year, the company posted adjusted EBITDA of $4.53 billion, up from $4.44 billion in 2016, and distributable cash flow of $1.44 billion, a decrease from $1.82 billion in the previous year.

Williams Partners separately reported fourth-quarter adjusted EBITDA of $1.15 billion, an increase from $1.11 billion a year earlier, and distributable cash flow during the period was $702 million, up from $699 million in the fourth quarter of 2016. For the full year, the partnership reported adjusted EBITDA of $4.47 billion, an increase from $4.43 billion a year prior. Distributable cash flow for the year was $2.82 billion, a decrease from $2.97 billion in 2016.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.