Standard & Poor’s Ratings Service (S&P) on Friday affirmed its “B+ long-term corporate credit rating on The Williams Cos. Inc., and removed the company and its subsidiaries from CreditWatch with negative implications, where they were placed July 23, 2002. S&P kept its negative outlook on the company.
“The upgrade on Williams’ senior unsecured debt is based on the fact that the senior debt at the Williams companies is no longer materially subordinate to debt at the operating companies, after the recent asset sales,” said analysts. The S&P action followed a report that was issued Wednesday that forecast increasingly positive interest from creditors and investors toward energy merchants as regulatory issues are resolved (see Daily GPI, May 22).
Analysts found there is a “significant credit concern” to the company’s “ability to stem the cash drain from the energy marketing and trading (EM&T) business unit.” S&P said that for example, “EM&T was responsible for a $790 million cash drain in 2002 and for a $292 million cash drain in the first quarter of 2002.”
Because “EM&T performs all commodity risk management for Williams, less than 60% of the cash usage is actually for the EM&T trading operations. More than 40% is for Canadian and domestic midstream fuel and gas shrink requirements and for margin on hedged E&P gas contracts in the $4 area. However, Williams must demonstrate that this business unit will not be a significant user of cash in 2003.”
Removing the company from CreditWatch “reflects the high likelihood that Williams will have sufficient cash available to repay the $1.17 billion maturity due in July 2003 and that liquidity issues are no longer the primary credit concern.” Analysts noted that Williams successfully sold its Texas Gas Transmission Corp. to Loews Corp for $1.05 billion on May 16, and plans to pay off the existing $1.17 billion loan at Williams RMT with a $500 million secured term loan financing, plus additional available cash.
S&P added that “given the likelihood of closing on the Williams Energy Partners sale and the other announced deals closing in second-quarter 2003, Williams should have sufficient cash to repay the $1.4 billion Williams Communications Group note that matures in March 2004.”
S&P kept the negative outlook because of Williams’ “weak financial ratios for 2002 and continued expected weakness in 2003. For example, funds from operations (FFO) interest coverage ratios for 2002 were 1.4x, and FFO to debt was 5.6%, which is indicative of a rating at the lower end of the ‘B’ category. The expectation for 2003 does not show significant improvement. However, the projected ratios for 2004 are more in line with the current rating.”
If Williams is able to “stem the cash drain from EM&T and meet or exceed financial ratio expectations in 2003, the outlook could be revised. However, if financial ratios fall considerably below expectations, the rating could be lowered.”
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