New York, June 10, 2002 — Moody’s Investors Service on Friday downgraded the ratings of The Williams Companies Inc. and its affiliates (senior unsecured debt from Baa2 to Baa3).
The rating outlook is negative. These rating actions end a review for possible downgrade begun on May 8, 2002.
The downgrades reflect weak cash flow generation relative to WMB’s debt and business risks and low asset returns. Despite the steps taken to date, WMB’s net debt reduction has been minimal, because the debt paid down has been largely offset by certain obligations that WMB recently assumed from its former subsidiary, Williams Communications Group, Inc. (WCG, Ca senior unsecured).
Furthermore, WMB’s capacity to support debt has decreased as its cash flows have become increasingly variable.
Although the company owns a variety of assets (pipelines, E&P, midstream, and petroleum services) that could generate relatively stable cash flows, its total cash flow from operations has been relatively weak and uneven.
One reason for this is WMB’s large energy marketing and trading (EM&T) operation, which is working-capital intensive and difficult to forecast.
These actions follow an analysis of WMB’s recently announced plan to reduce its debt by $3 billion through a combination of $1 to $1.5 billion of additional asset sales and a $1 to $1.5 billion common stock issuance. The company may also reconsider its common dividend rate. This plan is a second round in WMB’s ongoing efforts to strengthen its financial position in order to maintain an investment grade rating. Since last December, WMB has so far raised over $1.7 billion from asset sales and raised $2.6 billion of long-term capital, and has applied those proceeds to pay down debt and to boost liquidity.
WMB’s investment grade rating reflects the substantial value of its hard assets, in particular its gas pipelines. WMB has a leading business position as the second largest pipeline operator in the US. The gas pipeline segment is stable and consistently generates excess cash. WMB’s total retained cash flow should sufficiently cover a reasonable minimal level of capital expenditures needed to sustain its business. Other businesses (e.g., E&P, midstream, pipelines, EM&T) benefit from vertical integration with one another, and, through hedging and entering into long-term contracts, have shown relatively steady earnings growth.
Moody’s believes that a full implementation of WMB’s new plan would help to mitigate the recent increase in its debt and fixed charge obligations, and improve the company’s position within the Baa3 rating category.
However, the negative outlook reflects a number of uncertainties that WMB faces in the near term – including execution risk, financing risk, and litigation event risk – which could materially affect its cash flow and financial position. Moody’s will continue to monitor WMB’s debt reduction efforts and may take further rating action if WMB is not successful in implementing its plan in a timely manner, changes the plan materially, or fails to improve its recurring cash flows.
Moody’s recognizes that WMB’s management has endeavored to respond quickly to a changing and often difficult business environment by raising large amounts of capital and rapidly selling assets. WMB’s new debt reduction plan would result in lower leverage that is more in line with its expected cash flows and business risk. However, reaching the $1 to $1.5 billion debt reduction target may be a challenge.
The asset sales’ timing, proceeds, and cash flow impact are uncertain. In regards to financing risk, Moody’s will watch for the consummation of a common stock issuance in the range of $1 to $1.5 billion (expected this fall) and the application of those proceeds to debt reduction.
WMB has litigation event risk stemming from WCG’s bankruptcy and WMB’s energy trading activities during the California power crisis two years ago. Along with other energy traders, WMB’s trading practices and contracts are being investigated by the FERC. Ratings may be affected should any of these contingencies result in a material financial liability.
The energy trading sector is undergoing an upheaval as a result of legal and regulatory challenges, adverse financial market conditions, and retreat by some major players. These developments could rapidly alter the competitive landscape and have a negative impact on the business prospects of WMB, which draws a significant amount of its earnings from EM&T.
The full implementation of WMB’s new plan would restore its cash flow coverages to near their 2001 levels if WMB is successful in offsetting cash flow lost from asset sales with cash flow from organic growth. There are a number of pipeline expansion projects coming on-line, which would account for much of that growth. However, its cost of borrowing may be higher than before, so that its fixed charge obligations may change little despite a big drop in leverage. Debt reduction will enhance WMB’s retained cash flow-to-debt and capitalization ratios. Moody’s notes, however, that cash flow measures for 2002 are expected to be unusually weak because of numerous non-recurring items related to assuming WCG’s obligations.
WMB’s ratings are lowered as follows:
The Williams Companies, Inc. – Commercial paper from P-2 to P-3, senior unsecured debt from Baa2 to Baa3, senior unsecured/subordinated/preferred shelf from (P)Baa2/(P)Baa3/(P)Ba1 to (P)Baa3/(P)Ba1/ (P)Ba2;
Williams Capital I – Preferred stock from Baa3 to Ba1, preferred shelf from (P)Baa3 to (P)Ba1;
Williams Capital II – Preferred shelf from (P)Baa3 to (P)Ba1;
MAPCO Inc. – Senior unsecured debt from Baa2 to Baa3;
Northwest Pipeline Corporation – Senior unsecured debt from Baa1 to Baa2, senior unsecured shelf from (P)Baa1 to (P)Baa2;
Texas Gas Transmission Corporation – Senior unsecured debt from Baa1 to Baa2, senior unsecured shelf from (P)Baa1 to (P)Baa2;
Transco Energy Company – Senior unsecured debt from Baa2 to Baa3;
Transcontinental Gas Pipe Line Corporation – Senior unsecured debt from Baa1 to Baa2, senior unsecured shelf from (P)Baa1 to (P)Baa2;
Williams Holdings of Delaware, Inc. – Senior unsecured debt from Baa2 to Baa3;
Barrett Resources Corporation – Senior unsecured debt and issuer rating from Baa2 to Baa3;
Williams Communications Group Note Trust – Senior secured debt from Baa2 to Baa3.
Headquartered in Tulsa, Oklahoma, the Williams Companies, Inc. is a diversified energy services company.