The Williams Cos. Inc.’s consolidated credit measures have”deteriorated” due to an aggressive capital investment program,ever-widening losses from its communications business and weakenergy prices throughout 1998 and earlier this year, but Fitch IBCAnevertheless gave the company a credit rating of ‘BBB’ basedlargely on the stability of its interstate gas pipelines and thegrowth potential of its diversified energy businesses.
Williams’ interstate gas pipelines are well poised to grow inthe near term, according to a corporate analysis that was performedby Fitch and released this week. The company’s pipelines arefinancially sound, competitively positioned and expect to have onlya minimal amount of capacity turned back to their systems duringthe next couple of years, it said.
In fact, the international rating agency predicts the gaspipeline sector and the energy marketing and trading segment willbe the only Williams’ business units to report increased profitsthis year compared to fiscal 1998, with pipes reporting $624million and marketing and trading expected to almost double itsprofits to $77 million.
In fiscal 1998, the gas pipelines reported earnings beforeinterest, taxes, depreciation and amortization (EBITDA) of $897.4million, or about 60% of the corporation’s consolidated EBITDA.Williams has targeted a 6% annual growth in operating profits forthis sector based on “ongoing cost reductions and increased incomefrom expansion projects,” such as Transcontinental Gas Pipe Line’sMarketLink project and its one-third investment in the IndependencePipeline project.
Williams’ gas pipelines, Fitch said, are “competitivelywell-positioned in most markets” that they serve. Transco “remainsone of the nation’s premiere long-line systems serving majorgas-consuming regions located in eastern and southeastern states.”Gas Pipeline-West, which includes Kern River Gas Transmission andNorthwest Pipeline Corp., “is the lowest cost provider in three outof four major markets it serves.” And although Texas GasTransmission and Williams Gas Pipelines Central “operate in thehighly competitive Midcontinent corridor, [their] operatingbenchmarks, including system capacity utilization, remainrelatively strong,” said the rating agency.
The gas pipelines also are at “only moderate” risk for capacityturnbacks in the near term, Fitch noted. “Transco, Kern River and[Northwest] are fully subscribed through 2005, with averagecontract lives exceeding eight years. The vast majority of contractexposure is concentrated on the Texas Gas and [Williams GasPipelines] Central systems, where average contract maturities rangebelow five years. However, initial re-marketing results have beenfavorable.”
Williams expects big things from its energy services segment aswell, which includes four areas-midstream gas and liquids,petroleum services, energy marketing and trading, and explorationand production (E&P). The company invested more than half ofits energy capital budget in 1999 in this area, and hopes to growit by 15% annually. Although Williams’ midstream business wasrocked by “severe margin compression” in the gas processing sectorin 1998, Fitch noted the company still tended to perform betterthan its rivals because “it operates nearly one-half of itscapacity under fee-for-service contracts,” which are generallyinsulated from commodity-price fluctuations.
The energy trading activities of Williams Energy Services Co.(WESCO) “have remained profitable despite volatile markets andhigher costs related to increased staffing and infrastructureinvestment necessary to support [its] expanding business base,”Fitch said. WESCO trades all major commodities, including naturalgas, power, crude oil, natural gas liquids and refined products.The power marketing aspect of WESCO’s business grew sharply in1998 as a result of an electricity tolling arrangement with AESCorp. to provide 4,000 MWs of gas-fired capacity in the Los Angelesbasin, according to Fitch. But the “volumes are expected to be downsignificantly in 1999 due to significantly cooler summer weather insouthern California.” Earnings for this sector nevertheless areprojected to rise to $77 million, up from $39 million last year.
Although its E&P business accounts for only a small portionof the corporate profits, the company “has outlined aggressivegrowth targets for this segment,” according to Fitch. “E&P’sstated goal is to become a top 20 U.S. independent oil and gasproduction company by growing its proved reserve base to 1.5trillion cubic feet and increasing production from 161 millioncubic feet per day in 1998 to 360 MMcf/d.” At year-end 1998,Williams had 708 Bcf of proved reserves, the majority of which weregas.
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