MOODY'S DOWNGRADES THE WILLIAMS COMPANIES RATINGS (Baa3 SR. UNS.); OUTLOOK NEGATIVE
Approximately $13.0 Billion of Debt Securities Affected.
New York, June 07, 2002 -- Moody's Investors Service downgraded the ratings of The Williams Companies,
Inc. (WMB) 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
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
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
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.
Moody's Investors Service
Vice President - Senior Analyst
Moody's Investors Service