July 22, 2002 — The Williams Companies, Inc.’s (WMB) senior unsecured debt rating has been downgraded to ‘BB+’ from ‘BBB’ and its short-term rating to ‘B’ from ‘F2’ by Fitch Ratings.
In addition, the senior unsecured debt rating for WMB’s three pipeline issuing subsidiaries, Northwest Pipeline Corp., Texas Gas Transmission Corp., and Transcontinental Gas Pipe Line Corp., are lowered to ‘BBB-‘ from ‘BBB+’.
All outstanding ratings have been placed on Rating Watch Negative. The rating action follows the announcement by WMB recently that it has entered into negotiations to arrange a new secured bank financing to replace its existing unsecured credit facilities which consist of a $2.2 billion 364-day unsecured revolving credit facility expiring on July 23, 2002 and a $700 million three-year line due July 2005.
Based on prior discussions with WMB management, Fitch had expected the company to renew the maturing 364 day revolver on an unsecured basis at the $1?1.5 billion range.
The pledged collateral, which WMB has initially indicated will consist of interests in its domestic oil and gas reserves, will potentially secure more than $1 billion of borrowing capacity that will become structurally senior to WMB’s outstanding senior unsecured debt obligations.
Moreover, the inability of WMB to access the bank market on an unsecured basis is indicative of a level of financial flexibility that is not consistent with an investment grade credit profile.
In addition to a previously revealed balance sheet enhancement program which included up to $3 billion of asset sales and the potential issuance of $1 billion to $1.5 billion of common equity, WMB recently announced a significant cut to its third quarter 2002 dividend in order to further preserve its cash position.
However, Fitch believes that the probability of WMB completing the aforementioned equity issuance in the near-term has declined significantly due to the ongoing deterioration in WMB’s equity valuation.
Therefore, WMB’s efforts to strengthen its balance sheet will likely become more dependent on asset sales. While the pending sale of WMB’s refinery assets and Williams Gas Pipeline Central transmission system will boost WMB’s liquidity position and should allow for meaningful de-leveraging by year-end 2002, the potential sale of these physical assets removes a more stable cash flow source from WMB’s credit profile.
Fitch plans to meet with WMB management to further discuss the details of the pending secured bank financing, WMB’s near-term liquidity position, and the status of pending asset sales.
In addition, as part of its review Fitch will assess WMB’s revised energy marketing and trading strategy, particularly the impact of reduced origination activity on WMB’s unhedged exposure under existing long-term power tolling arrangements.