Duff & Phelps Credit Rating Co. Takes Action on Williams' Acquisition of Transco Energy Company

Strategic Insights -

Williams Companies, Inc. has completed its tender for Transco Energy Company, resulting in a significant shift in the business and financial risk profile of the company. Duff & Phelps Credit Rating Co. has taken rating action, assigning a "BBB-" (Triple-B-Minus) rating to Williams and Transco, reflecting the increased financial risk associated with the acquisition. The purchase has resulted in a 55% on-balance sheet leverage ratio for Williams, negatively impacting interest coverages. However, the association with Williams' stronger financial position is expected to mitigate this risk.

Key Takeaways:

  • The acquisition of Transco Energy Company by Williams Companies, Inc. has resulted in a significant shift in the business and financial risk profile of Williams.
  • The "BBB-" (Triple-B-Minus) rating assigned to Williams recognizes the increased financial risk associated with the assumption of approximately $2 billion in fixed obligations of Transco and its subsidiaries.
  • The on-balance sheet leverage ratio for Williams has increased to 55%, negatively impacting interest coverages.
  • The purchase of Transco and the sale of the WilTel subsidiary has changed the business risk profile of Williams, with more than 50% of its operating income derived from its four regulated gas transmission subsidiaries.
  • Duff & Phelps views the change in business risk profile as somewhat mitigating the increase in financial risk associated with the acquisition.
  • An equivalent "BBB-" (Triple-B-Minus) rating has been assigned to Transco based on the financial strength of parent Williams.
  • The rating upgrades of Transco's two pipeline subsidiaries, Transcontinental Gas Pipe Line and Texas Gas Transmission, recognize the removal of the large Transco debt burden that had limited the pipelines' financial flexibility.
  • Association with the stronger Williams Companies will allow the pipelines to increase market expansion and compete more aggressively for incremental demand.
  • Williams intends to maintain conservative capital structures at the pipelines, with new rate filings based on more conservative capitalization.
  • Financial measures of the pipelines have been good, and any change in regulated capital structure would further strengthen both pipelines' operating numbers.

Statistics:

  • Approximately $3.5 billion of securities are affected by the rating action.
  • The on-balance sheet leverage ratio for Williams has increased to 55%.
  • The acquisition of Transco has resulted in approximately $2 billion in fixed obligations being assumed by Williams.
  • Over 50% of Williams' operating income will be derived from its four regulated gas transmission subsidiaries.
  • The removal of the Transco debt burden has improved the financial flexibility of Transco's pipeline subsidiaries.

Sources:

  • PRNewswire (Feb. 3, 1995)
  • Duff & Phelps Credit Rating Co.