New York, November 22, 2002 — Moody’s Investors Service downgraded the ratings of The Williams Companies, Inc. (WMB, the parent) and its subsidiaries.
WMB’s senior implied rating has been lowered from Ba3 to B3; its senior unsecured rating, from B1 to Caa1. WMB’s pipeline subsidiaries’ senior unsecured debt ratings have been downgraded from Ba2 to B3. The rating outlook is negative.
Moody’s notes that WMB’s $700 million revolver due July 25, 2005 and Transco Energy Company’s $27 million of 9.875% debentures due 2020 were recast from an unsecured to a secured basis and, consequently, their ratings have been recalibrated from B1 to B3. In addition, Williams Gas Pipeline Central’s senior unsecured rating has been downgraded from Ba2 to B3 and withdrawn following its sale to Southern Star Central Corp.
The withdrawal is due to the assumption of Central’s $175 million of debt by an unrated buyer and the expectation that Central will continue not to make public filings of its financial statements by which Moody’s can monitor its credit.
These rating actions reflect concerns about the company’s ability to generate sufficient cash flow from operations to meet its ongoing obligations absent asset sales. Poor market conditions are likely to hamper near-term improvement in WMB’s cash flow, and the company will face formidable challenges in reaching its targets of $1.7 billion of cash flow from operations (before interest expense) and $700 to $800 million of capital expenditures in 2003.
These targets compare with operating cash flow deficit of $1.3 billion (after interest expense) and capital expenditures and investments of $1.7 billion for the nine months ended September 30, 2002. While there is a measure of durability in the businesses that the company recently designated as core to its future operations (pipelines, exploration and production, midstream, and the investment in Williams Energy Partners, L.P.), its overall results remain depressed and well below our previous expectations, particularly in its energy marketing and trading, but also in its petroleum and international businesses.
WMB continues to rely on asset sales proceeds to meet its large cash deficit, and plans to sell at least $1 billion more than what has already been closed or announced. It is uncertain whether such asset sales will be timed and generate adequate proceeds to meet its ongoing debt repayments and capital needs.
Moody’s notes that the major assets that WMB is in the process of selling include its trading book and refining assets. Reliance on asset sales is risky, given the current unfavorable industry environment and a glut of assets being sold by other companies.
WMB’s financial flexibility is being squeezed by much higher interest costs, acceleration of mandatory debt repayments, and tightened covenants under various of its new and amended bank and debt agreements. The high interest rates under these agreements, in particular the $900 million loan of its subsidiary Williams Production RMT Company (RMT), caused the interest accrued in the first nine months ended September 30 to increase to $849 million (a 67% increase over the same period in the prior year), well exceeding the operating income of $155 million for the period.
WMB’s debt covenants impose onerous requirements that reduce credit availability and could accelerate debt repayment. The amended agreements require the company to use proceeds from asset sales to ratably reduce outstanding debt under these agreements and commitment under WMB’s $700 million revolver.
Under this requirement, the commitment under the revolver is soon expected to be reduced to $400 million. The RMT loan further requires that WMB maintain cash and unused borrowing capacity under its credit facilities at certain thresholds. If WMB defaults on this liquidity requirement, the company is required to satisfy its obligations through the sale of RMT.
Moody’s is uncertain whether WMB will continue to meet its various debt covenants. Its ability to do so will depend on its ability to continue to sell its hard assets as well as all or a significant portion of its trading book, or to implement some other alternative to stanch the cash drain from its energy marketing and trading business.
The rating outlook is negative, reflecting the considerable execution risk that WMB faces in the near-term. Further rating action may be taken if 1) WMB is unable to meet its debt repayment obligations ($4 billion scheduled through first quarter of 2004, the largest single maturity being the $1 billion repayment of the RMT loan in July 2003); 2) WMB is unable to maintain sufficient liquidity resources to accommodate its needs and to comply with its debt covenants; 3) WMB does not sell sufficient assets to meet its cash shortfall; 4) WMB fails to improve its cash flow from operations and to reduce its capital expenditures as targeted; and 5) significant legal and regulatory contingencies materialize.
WMB’s ratings were lowered as follows:
The Williams Companies, Inc. — Senior implied rating from Ba3 to B3, senior unsecured issuer rating from B1 to Caa1, revolving credit facility from B1 senior unsecured to B3 senior secured, senior unsecured debt from B1 to Caa1, senior unsecured/subordinated/preferred shelf from (P)B1/(P)B2/(P)B3 to (P)Caa1/(P)Caa3/(P)Ca;
Williams Capital I — Trust preferred stock from B2 to Caa3, trust preferred shelf from (P)B2 to (P)Caa3;
Williams Capital II — Trust preferred shelf from (P)B2 to (P)Caa3;
MAPCO Inc. – Senior unsecured debt from B1 to Caa1;
Northwest Pipeline Corporation – Senior unsecured debt from Ba2 to B3, senior unsecured shelf from (P)Ba2 to (P)B3;
Texas Gas Transmission Corporation – Senior unsecured debt from Ba2 to B3, senior unsecured shelf from (P)Ba2 to (P)B3;
Transco Energy Company — Debt from B1 senior unsecured to B3 senior secured;
Transcontinental Gas Pipe Line Corporation – Senior unsecured debt from Ba2 to B3, senior unsecured shelf from (P)Ba2 to (P)B3;
Williams Gas Pipeline Central — Senior unsecured debt from Ba2 to B3 and withdrawn;
Barrett Resources Corporation – Senior unsecured debt and issuer rating from B1 to Caa1.
Headquartered in Tulsa, Oklahoma, the Williams Companies, Inc. is a diversified energy services company.