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Rating Action:

MOODY'S AFFIRMS B1 RATING FOR WILLIAMS PRODUCTION RMT's AMENDED TERM LOAN B

23 Feb 2004
MOODY'S AFFIRMS B1 RATING FOR WILLIAMS PRODUCTION RMT's AMENDED TERM LOAN B

Approximately $647.5 Million of Debt Affected

New York, February 23, 2004 -- Moody's affirmed Williams Production RMT Co.'s (RMT) B1 rating for its amended $500 million first secured senior term loan, its B2 senior implied rating, and its B3 rating on the Barrett senior unsecured notes. The facility amendment principally reduces the term loan spread over Libor from 375 basis points to 250 basis points and extends the maturity by one year to May 30, 2008. RMT is indirectly wholly owned by The Williams Companies (WMB: B2 senior implied and B3 senior unsecured ratings). RMT holds roughly 68% of WMB's oil and gas reserves.

RMT's rating outlook is moved from developing to stable. This reflects reduced upgrade potential in 12 to 18 months. Visible potential for negative trends exist if 2004 proven developed (PD) reserves and production do not adequately grow (at suitable full-cycle cost) in response to increased 2004 capital spending. Restrained 2003 capital outlays, plus significant negative RMT reserve revisions, yielded a modestly smaller funded and productive PD reserve base relative to RMT debt. Already high proportions relative to PD reserves rose further after our mid-2003 RMT ratings and 4Q03 production fell 7% sequentially. For the outlook to solidify, RMT would need to: mount meaningful sequential quarter production gains starting with 1Q04; generate ample cash flow to fund growth and debt service; and 2004 PD reserves would need to rise materially relative to debt. RMT does expect materially higher 2004 production, beginning in 1Q04.

Volume moderation or declines had been expected due to RMT's restrained 2003 capital spending. However: (1) the negative reserve revisions, (2) the largely related fact that Powder River Basin results are expected to be less robust in the future than planned, (3) an improving but still suboptimal drilling permit pace, and (4) the fact that 100% of RMT's 2003 reserve growth came from proven undeveloped (PUD) reserves, may together delay the time by which adequate business progress relative to the debt burden can be confirmed. As of 4Q03, RMT was generating a healthy $8.47/boe of post-interest, pre-tax, pre-capex unit cash flow, significantly exceeding its historic unit reserve replacement costs. However, while RMT's unit full-cycle costs have been competitive, we expect the reserve replacement cost component to rise materially as RMT boosts capital spending on its large PUD base, plus natural gas price realizations will vary over the cycle

The negative revision to RMT's Powder River Basin coalbed methane (CBM) reserves was largely due to lower natural gas saturation in the Wyodak formation coals than previously estimated plus unexpected reservoir pressure decline. RMT's total PD reserves fell 4%, mostly due to the 69 bcfe negative revision of Wyodak reserves, partly on sharply reduced drilling activity (to conserve capital and due to drilling permit delays), and partly on other factors. RMT's 2003 reserve growth came solely from reserve bookings in the PUD reserve category that faces inherent substantial future funding needs and inherent drilling and productive risk.

In 2003, drilling activity in the Piceance was reduced to conserve cash flow to reduce prior bridge debt and Powder River Basin drilling was greatly slowed by ongoing drilling permit delays. While the permitting pace has improved and 2004 capital spending will rise substantially, it appears less certain what pace of 2004 production growth can reasonably be expected. Factors affecting the pace and volume impact of the migration of RMT's heavy PUD reserve component to producing status include a still suboptimal permitting pace, the less robust Wyodak prognosis, the still fairly early stage of RMT's Big George play, and inherent productive variability of PUD reserves.

RMT believes 4Q03 production was the bottom and that if will begin to show sequential gains in 1Q04. Production fell in the Piceance Basin during 2003 before recovering later in the year. Rig activity had fallen to one rig by early 2003 before beginning to rise in August 2003, reaching 8 rigs running by year-end 2003 and 10 running currently. During 2003, Powder River production was flat in spite of a 16% increase in the active well count to 4,150 wells. At least part of this was due to the fact that the majority of new wells were drilled in the Big George formation and are still in the dewatering phase. Wyodak wells have an inherently steep decline rate.

The ratings are supported by strong operating management; its long experience with its Piceance and Powder River Basin property bases; and reasonable prospects that the greater application of drilling capital to its PUD reserves will boost production delivered into likely a sound 2004 price environment. Importantly, the sector's historically wide negative Rocky Mountain price differentials have narrowed following the completion of the Kern River pipeline expansion.

The ratings are restrained by: high increased leverage on PD reserves; a below average PD reserve life (mostly due to Powder River Basin reserves); an especially high 64.4% of proven reserves in the PUD category, with attendant risk and more than $1.05 billion of future capital needs to bring to production; a relatively small PD reserve base; negative volume and value reserve revisions; and the fact that all RMT hedges remain with Williams' trading subsidiary.

Though RMT's total reserves grew 8.4% in 2003, 100% of that growth was in the higher risk, highly capital consuming, PUD category. PUD reserves rose from 167.0 mmboe to 195.1 mmboe, more than offsetting a decline in PD reserves from 112.1 mmboe to 107.6 mmboe. Debt divided by PD Reserves at 12/31/03 was a high $6.09/boe. Debt plus future development capital for non-producing proven reserves equates to a high $5.71/boe of total proven reserves.

With a stable rating outlook, Moody's:

i) Affirmed RMT's B1 rating for $500 million of amended first secured Term Loan B debt, now maturing May 30, 2008.

ii) Affirmed a B2 senior implied rating.

iii) Affirmed a B3 rating for RMT's $150 million of 7.55% senior unsecured notes.

The B1 Term Loan B rating is supported by a perfected first mortgage on substantially all of RMT's reserves. The B3 rating on the 7.55% senior unsecured notes reflects their material effective subordination to $497.5 million of senior secured debt.

Regarding RMT's Piceance Basin properties, the firm has been working these properties since its Parachute Creek discovery well in 1984. The Piceance is a 1,700 foot to 2,400 foot thick gas bearing horizon. While the horizon is predominantly characterized by low porosity and low permeability rock, embedded within are high numbers of layered tight lenticular sandstone reservoirs. Drilling targets multiple pay sand lenses at roughly 6,000 feet and 7,500 feet. Statistically, completion rates are high. The volumetric half-life of RMT's Piceance proven developed producing reserves is roughly 6 years.

Regarding RMT's Powder River CBM reserves, these properties are comparatively price and cost sensitive. Drilling, development and production had been concentrated in the Wyodak coals. In 2001, RMT's capital and activity began to migrate from the Wyodak to exploitation of the geologically deeper Big George coals, now beginning to produce for RMT. The Wyodak is increasingly mature, plus RMT negatively revised its Wyodak reserve estimates. At this point, while RMT's Big George production has risen to roughly 20 mmcfe/day, in Moody's view, it remains too early in the Big George's development to assign significant ratings value to the ultimate scale and economic contribution of those properties. It is also Moody's view that the volumetric half-life of RMT's Powder River PD reserves is roughly 2.5 years.

Williams Production RMT Company is headquartered in Tulsa, Oklahoma.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andrew Oram
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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