Williams continues to cut debt, aims for investment-grade rating

By Paul Deckelman

New York, Feb. 23 - The Williams Cos., Inc. turned in another strong quarter to finish off 2004, swinging to a profit from a year-earlier net loss and announcing a rise in the Tulsa, Okla.-based energy company's proven gas reserves. Along the way, Williams continued to aggressively reduce debt as it worked toward its goal of eventually regaining the investment-grade credit ratings it lost in July 2002.

On a conference call Wednesday following the release of the company's numbers for the fourth quarter ended Dec. 31 2004 and for the full 2004 year, Williams' chief financial officer, Don Chappel, noted that Williams had sharply cut its debt balance in 2004, from $11.978 billion at the beginning of the year to $7.962 billion as of this past Dec. 31.

The 2004 debt cutting included $2.991 billion face amount of debt taken out through tender offers, $831 million of scheduled debt retirements and amortizations, and $269 million of open market purchases, partly offset by the issuance of $75 million of new floating-rate notes due 2008 issued by the company's Transcontinental Gas Pipeline Corp. subsidiary in mid-December.

Among the debt issues taken out via tenders were $793 million of Williams' 8 5/8% notes due 2010 in an offer which was completed in August, and $1.34 billion total amount of seven different series of notes in an offer which was completed in early June. The company also took out over $820 million of its Feline PAC convertible notes in a stock-and-cash exchange offer completed in October.

Williams also closed on a new $400 million credit facility in April and on a $1 billion revolving credit facility the following month; the revolver was later increased by $275 million. Besides the Transco notes issued in December, Williams also issued another $500 million of new certificates in two transactions in April.

The upshot of the various transactions was that the average interest rate Williams paid on its debt fell to 7.4% by year-end from 7.7% a year earlier, and "net interest expense was sharply lower," Chappel said, at $828 million for the year, down from $1.248 billion in 2003, due to the company's "aggressive" debt reduction. In the fourth quarter, interest expense fell to $170 million from $240 million a year earlier.

Williams thus came in more toward the low end of its own expectations, released in early November, which projected total net interest expense for the year somewhere between $810 million and $860 million. For 2005, the company expects $625 to $660 million of net interest costs.

And Chappel said that after this year began, Williams retired another $200 million of debt in January, bringing the debt balance further down to $7.762 billion by January 30. Of that sum, $47 million matures in 2005, taking into account the $200 million retired in January. Looking ahead, $119 million matures in 2006, and $396 million matures in 2007.

Williams, like many other companies in the energy generation, transmission or trading business, had to struggle for several years after the collapse of energy trading leader Enron Corp. in late 2001 threw the entire industry into a tailspin, but it has managed to dig itself out of its hole without having to restructure through the courts like some sector peers such as Mirant Corp. or NRG Energy Inc. did. Williams has shed some non-core operations, generating cash in the process. It toyed with the idea last year of selling its power business - its biggest revenue producer - to focus solely on its natural gas production and pipeline distribution businesses, but abandoned the scheme due to unfavorable market conditions.

Debt to capitalization heading down

The cash flow that Williams has been able to generate from its various operations, such as gas gathering, storage, processing and transportation, as well as oil and gas exploration and production and power generation, have given it the wherewithal to bring down its overall debt-to-capitalization ratios by retiring debt.

That ratio has fallen from 75% in 2003 to 62% in 2004, and Williams anticipates being able to lower it further - to between 59% and 60% this year, between 57% and 59% next year, and between 54% and 56% in 2007. Cash flow has meanwhile grown from $598 million in 2003 to $1.473 billion last year. For 2005, the company projects cash flow of $1.3 billion to $1.6 billion. It expects that to grow to somewhere between $1.45 billion and $1.75 billion in 2006, and to a range of $1.6 billion to $1.9 billion by 2007.

Williams had unrestricted cash and cash equivalents of approximately $930 million at year-end 2004, as well as $881 million in unused and available revolving credit facilities, which are used primarily for issuing letters of credit and for liquidity.

$1 billion cushion

Chappel said that the company would continue to maintain a cash and liquidity cushion of at least $1 billion, and would continue to steadily improve its credit ratios and ratings, with an eye toward ultimately returning to investment-grade status. Both Moody's Investors Service and Standard & Poor's lowered the company's ratings to junk status on July 23 and 24, 2002, citing then-existing liquidity problems. Currently, Moody's rates Williams' senior debt at B1 and S&P has it at B+.

The CFO also said that Williams intended to "optimize" its use of free cash flow, and named further debt repurchases as one possible use for its cash.

Rising interest rates shouldn't be too much of a problem for Williams, which as of Dec. 31 had just $662 million of variable-rate debt on its books at an average cost of 4.5% versus $7.3 billion of fixed-rate debt at an average price of 7.6%.

In the fourth quarter, Williams reported net income of $73.4 million (13 cents per diluted share), a sharp turnaround from the year-ago net loss of $53.7 million (a loss of 10 cents per share).

For the full year 2004, Williams posted unaudited net income of $163.7 million (31 cents per diluted share), compared with a net loss of $492.2 million (a loss of $1.01 per share) in 2003.

Separately, Williams announced Wednesday that its proved U.S. natural gas and oil reserves grew 10.5% to 3 trillion cubic feet equivalent in 2004. Including its international interests, Williams has total proved natural gas and oil reserves of 3.2 trillion Tcfe.

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