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Rating Action:

MOODY'S UPGRADES WILLIAMS' LONG-TERM DEBT RATINGS (SR. IMPLIED Ba3); OUTLOOK STABLE

08 Nov 2004
MOODY'S UPGRADES WILLIAMS' LONG-TERM DEBT RATINGS (SR. IMPLIED Ba3); OUTLOOK STABLE

Approximately $9.9 Billion of Debt Securities Affected

New York, November 08, 2004 -- Moody's Investors Service raised the long-term debt ratings of The Williams Companies, Inc. (Williams or WMB) and its natural gas pipeline subsidiaries. Moody's raised Williams' senior implied rating to Ba3 from B2 and its senior unsecured rating to B1 from B3. Moody's raised the senior unsecured ratings of Northwest Pipeline Corporation (Northwest) and Transcontinental Gas Pipe Line Corporation (Transco) to Ba2 from B1. Moody's affirmed Williams Production RMT Company's ratings. The outlook for Williams and its subsidiaries is stable. This concludes Moody's review of Williams' ratings, which had reflected progress the company had made in a number of areas including operating performance, leverage and liquidity. Moody's also affirmed Williams' SGL-2 speculative grade liquidity rating, which reflects our expectation of good liquidity for the 12 months ending September 30, 2005.

Williams has effectively completed the asset sales program and business restructuring it had carried out since early 2002, leaving it with three core natural gas businesses of regulated interstate gas pipelines, midstream gas gathering and processing, and exploration and production (E&P). Williams' operating cash flow and free cash flow (net of capex) have improved consistently through the first three quarters of 2004 and both are expected to continue improving through 2005 and 2006. Gas pipelines provide fairly stable operating cash flow, while capex is expected to increase $100 million in each of the next two years primarily for pipeline integrity and some expansion. Midstream has benefited from higher NGL prices and processing margins, as well as the installation of the Devil's Tower platform in the Gulf of Mexico (GOM). Continued improvement should come from higher volumes in the Rocky Mountains and the deepwater GOM. Williams' E&P segment has improved principally from an 18% increase in gas production year to date as a significant gas price hedge position has muted higher natural gas prices. Production is expected to continue growing at 15-20% over the next two years and revenue should increase as lower price hedges roll off. Overall, Williams' reported profit is impacted by a variety of issues unrelated to core operating performance, including the recent decision to remain in the power business and use hedge accounting, which will reverse prior income gains booked under mark-to-market accounting. However, Williams' cash flow from operations should more than double in 2004 compared to 2003 and is expected to increase 7-10% per year in 2005 and 2006. While capex is expected to increase as well over this period, annual free cash flow should be in the $300 to $400 million range.

Williams has made substantial progress in debt repayment during 2004, having repaid just under $3.9 billion of debt. Total funded debt is currently about $8.1 billion. WMB has accomplished this using cash on hand, about $1 billion in asset sales proceeds and the return of margin deposits and cash collateral replaced with letters of credit. Williams has repaid debt through normal debt maturities, debt tenders, open market redemptions and an exchange offer for most of its FELINE PACS. Moody's anticipates that Williams will continue to reduce its debt in 2005, albeit at a much more modest pace than during 2004. In addition to reducing the total amount of debt, Williams has extended its maturities such that it has no material maturities until 2011. Leverage, as measured by debt to cash flow, has improved markedly during 2004 from the combination of absolute debt reduction and improved operating cash flow. Leverage should continue declining over the near term from continued debt reduction and improving cash flow.

Williams has improved its liquidity significantly during 2004 by replacing its $800 million cash collateralized credit facility with new facilities totaling $1.775 billion. WMB currently has $500 million five-year unsecured credit facilities that are used to issue letters of credit to support its power business and enterprise risk management activities. The company has a $1.275 billion three-year secured facility, which was upsized in August, and is also used for letters of credit. Williams had total liquidity of about $1.8 billion at September 30, 2004, consisting of $1 billion of cash and about $800 million of capacity under its $1.275 billion revolving credit facility. This amount of liquidity is comfortably above Williams' stated goal of $1-1.3 billion of total liquidity. Moody's expects that Williams management will remain disciplined in maintaining significant liquidity going forward.

One of the challenges in assessing Williams' overall credit quality is its presence in the electric power generation business where it controls 7,700 MW of capacity. Williams in effect has created a virtual power company through a series of contracts. The most significant of these are tolling contracts, which provide the right, but not the obligation, to run an electric generation plant owned by another entity. The financial obligations associated with this tolling optionality are about $400 million per year, with some contracts extending to 2022. Williams has mitigated some of these obligations through another series of contracts, including resale of tolling, full requirements transactions, forward power sales and various hedges. Over the near term, the tolling obligations are effectively covered by these other sources of revenue but in the medium to long term the obligations become a net financial burden. A sensitivity analysis of the net present value of these cash flows indicates the implied obligation ranges from under $1 billion, giving full credit to offsetting contracted revenue, to over $3 billion, giving no credit to offsetting revenue. However, an expected case that risks the various revenue streams yields an obligation in the $1.5-2 billion range. By way of comparison, Williams should generate about $2 billion EBITDA and $1.4 billion cash flow from operations in 2005, which implies the net tolling obligations add a turn to a turn and a half of leverage to the overall company. Moody's believes that Williams' natural gas businesses -- pipelines, midstream and E&P -- have credit metrics that are more consistent with a Ba2 senior implied rating but the burden of the tolling obligations reduces the overall company's rating to the Ba3 level.

Williams' total secured debt is currently about $800 million or just under 10% of total funded debt. Most of this debt is the $0.5 billion Williams Production RMT term loan B. The other material piece of secured debt is the $1.275 billion revolving credit facility that is secured by Williams' midstream assets. This facility is currently unfunded and used for letters of credit. In a stress scenario where this facility became fully drawn, total secured debt would increase to about 20% of total funded debt. Given this level of secured debt and the possibility of structurally superior debt in the capital structure, we have upgraded the senior unsecured rating to B1 from B3 or one notch below the senior implied rating.

Williams' two interstate natural gas pipelines, Transco and Northwest, have strong credit metrics on a standalone basis that are more consistent with their investment grade peers. However, with Williams' corporate rating at Ba3 and the ability to extract cash or increase leverage at the pipelines we believe it is prudent to maintain the current one notch differential. Therefore, we have upgraded the pipelines' senior unsecured ratings to Ba2 from B1.

Williams' Ba3 senior implied rating reflects its integrated natural gas businesses including the stable cash flow from its regulated interstate gas pipelines and growing midstream and E&P businesses, declining leverage with no material debt maturities until 2011, strong liquidity and disciplined management. Williams' rating is restrained by its presence in the electric power generation sector, which adds to adjusted debt through net tolling obligations and increases liquidity demands related to its various hedge positions. The rating also considers Williams' absolute leverage, the relatively high percentage of proved undeveloped reserves in the E&P sector and commodity price volatility in the midstream. Williams' outlook could move to positive through a combination of continued improvement in operating cash flow, lower debt levels, and greater mitigation of the power tolling obligations. The outlook could move to negative as a result of deteriorating operating performance, negative free cash flow, weaker liquidity or greater volatility in enterprise risk management.

Ratings affected include those of The Williams Companies, Inc. and its rated subsidiaries.

The Williams Companies, Inc., headquartered in Tulsa, Oklahoma, is an integrated natural gas company with operations in interstate natural gas pipelines, midstream gas, E&P and electric power generation.

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

New York
Steven Wood
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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