OREANDA-NEWS. On Friday, June 24, a Delaware judge ruled that Energy Transfer Equity, L. P. (ETE; Issue Default Rating [IDR] 'BB'/Stable Outlook) had the right to terminate its merger with The Williams Companies, Inc. (WMB; IDR 'BB+'; Rating Watch Negative). The ruling can be appealed and Fitch Ratings anticipates that WMB will file for an appeal. The merger agreement terminates at midnight on June 28, 2016.

WMB sought to compel ETE to proceed with the acquisition of WMB as agreed upon in September 2015. In order for the merger to close, one of the conditions precedent was that ETE's counsel, Latham & Watkins, was to deliver a 721(a) tax opinion which would state that the merger 'should' qualify as a tax-free event under Internal Revenue Code 721. ETE argued that the transaction would likely result in a taxable event, something that was not discovered until March 2016. Once that occurred, Latham & Watkins stated it would be unable to deliver a 721(a) tax opinion. The judge has stated that Latham & Watkins acted in 'good faith' when it announced that it could not deliver the tax opinion and, therefore, one of the conditions to close the merger could not be met. WMB has the right to appeal Friday's decision and bring the legal battle before the Delaware Supreme Court.

Meanwhile, the WMB shareholder vote for the merger occurred and Fitch expects the majority of shareholders to vote in favor of the ETE acquisition.

Fitch plans to resolve WMB's Rating Watch if and when it becomes evident that the merger is not going to occur (e. g. if WMB does not pursue an appeal of Friday's ruling or if the ruling from an expected appeal is not in WMB's favor). At that juncture, Fitch would assess WMB's ratings on a standalone basis with the understanding that WMB intends to cut or eliminate dividends as early as third-quarter 20016 (3Q16) to improve the balance sheet. However, Fitch notes that the ultimate magnitude and duration of a potential dividend reduction are unknown. WMB's cash flows are reliant on distributions from its master limited partnership, Williams Partners, LP (WPZ; IDR 'BBB-'/Stable Outlook). Fitch would expect to maintain at least a one-notch separation between the general partner, WMB, and its limited partner, WPZ. The one-notch separation is based on WMB's cash flows from WPZ distributions to its standalone debt, which has historically been low. At the end of 2015, WMB's standalone debt of $4.8 billion to its $1.9 billion of distributions was 2.6x.

The other scenario that would resolve the Rating Watch would be if WMB is successful with a potential appeal and the merger with ETE occurs. In that situation, the Rating Watch would be resolved at or near the close of the merger. In this case, WMB's IDR would be equalized with ETE's which is currently 'BB'. WMB's senior unsecured rating is now 'BB+' and it would likely be rated the same as the IDR at 'BB'.

Fitch currently rates WMB as follows:

The Williams Companies, Inc.

--Long-Term Issuer Default Rating 'BB+';

--Senior unsecured notes at 'BB+'/Recovery Rating 'RR4';

--Junior subordinated notes at 'BB-'/'RR4'.

The ratings are on Rating Watch Negative.