Fitch Ratings has assigned a 'BBB' rating to The Williams Companies, Inc.'s (WMB) proposed offering of senior unsecured notes.
Proceeds will be used for general corporate purposes. The Rating Outlook is Stable.
WMB's ratings reflect its extensive geography and fee-based contracts, among other merits. The long-term take-or-pay contracts in its 'Transmission & Gulf of Mexico' segment are a significant source of strength. WMB benefits from a focused strategy, and the natural gas it transports underpins the U.S. electric power sector's historic reduction in carbon emissions while maintaining almost continuous service. A rating concern is the volumetric risk for certain of the gathering pipelines.
Key Rating Drivers
Leverage: Solid operational execution and a strategy to focus on natural-gas-producing regions allowed WMB to lower its leverage in FY21 to approximately 4.4x (the ratio of total debt with equity credit to operating EBITDA). WMB's ratings are partly based on a Fitch forecast of FY22 leverage of approximately at or under 4.8x. The potential to achieve lower leverage is high given commodity price realizations to date being much in excess of the Fitch price deck. (WMB's small amount of volumes that garner commodity prices rather than fees bulk large at times of very high prices.)
In a constructive disclosure this week, the company guided (mid-point) that its leverage in 2022 will be 3.6x, lower than its 3.8x guidance three months ago. (Fitch calculates leverage differently than WMB.) Importantly, the company has beaten its own publicly disclosed beginning-of-the-year leverage guidance in recent years.
In September 2021 WMB announced a $1.5 billion share re-purchase authorization, which stipulated that it would not jeopardize the company's current credit ratings and that share price dislocations would be the target of implementation. Relevant to the possibility of dislocations, the commodity price backdrop for WMB and peers is constructive for equity.
Execution Under Regulation: Approximately half of WMB's EBITDA flows from natural gas pipelines with regulated rates and various permit requirements by the U.S. Federal Energy Regulatory Commission (FERC). This half of WMB's business has the lowest-business risk. FERC is one of the most supportive bodies among the dozens of state and federal government regulators that oversee the electricity and other energy infrastructure industries. WMB has shown a high level of execution under FERC regulation.
Two recent 'wins' were FERC's approval of the general rate case in 2020 of Transcontinental Gas Pipe Line Company, LLC (Transco; BBB+/Stable) and FERC's permit authorization to enable WMB to construct the Atlantic Sunrise expansion project in in 2017-2018 so as to bring Marcellus formation natural gas to a location on the Transco trunkline just west of Wilmington, Delaware.
Low Counterparty Credit Risk: WMB has the lowest long-term contract counterparty credit risk in the sector due, in part, to its diverse and typically high credit-quality customer base. In particular, the markets served by Transco and Northwest Pipeline are highly attractive to shippers, which has resulted in a shipper group populated by large and high credit-quality companies.
Focused Strategy: Among the large midstream companies, WMB is one of the most strategically focused with a strong emphasis on natural gas services. In September 2021 Fitch increased its Henry Hub price deck assumption for natural gas by 12%. WMB benefits by the steady growth of both the U.S. gas burn by electric power plants and LNG exports. These demand factors have helped improve credit quality for WMB and its peers, as well as driven gathering system volumes higher.
WMB's gathering customers, in aggregate, have made strategy changes that make it easier for WMB to plan its own growth. At the current phase of the cycle, WMB has been able to moderate its capex spending. In 2021, the company posted substantial positive FCF.
The best comparable for WMB is Kinder Morgan, Inc. (KMI; BBB/Stable), as both companies have a nationwide presence in both long-haul pipelines and gas gathering and processing. KMI has slightly less business risk than WMB. (Fitch views KMI's CO segment through the lens of the company's five-year programmatic laddered hedging program, reducing a large part of the segment's commodity risk, which would otherwise add considerable risk to the consolidated enterprise.) KMI has more segmental diversity than WMB.
Fitch's forecast for WMB's 2022 leverage is approximately 4.8x vs. approximately 5.0x for KMI. Fitch calculates these forecast leverage metrics in the typical fashion. Each company has levered joint ventures, but KMI has more than WMB. If both companies were converted to a proportional consolidated leverage view, the difference between their leverage would increase.
Fitch price deck for natural gas, e.g., 2023 Henry Hub natural gas at $3.25 per thousand cubic feet (mcf);
EBITDA increases over the forecast period;
Capex reflects a continuation of the trough period of the capex cycle;
Dividend growth at approximately the same rate as recent annual increase. Share re-purchase activity is for an immaterial amount, reflecting current markets.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Total debt with equity credit to operating EBITDA (consolidated) forecast on a sustained basis to be below 4.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Total debt with equity credit to operating EBITDA (consolidated) forecast on a sustained basis to be above 4.8x;
An acquisition or other investment that significantly increases business risk.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Ample Liquidity: As of June 30, 2022, WMB had over $2.8 billion of available liquidity. Cash on the balance sheet was $133 million, and the company's $3.75 billion revolving credit facility had no outstanding borrowings. WMB's revolving credit facility matures in October 2026.
The credit agreement's leverage covenant requires the company to have a debt to EBITDA ratio lower than 5.0x, or lower than 5.5x for three fiscal quarters following one or more acquisitions for $25 million or more. WMB's maturities are manageable with $876 million of long-term debt due within one year.
The Williams Companies, Inc. is a U.S. natural gas-focused midstream company.
Summary of Financial Adjustments
With respect to unconsolidated affiliates, Fitch calculates midstream energy companies' EBITDA by use of cash distributions from those affiliates, rather than by use of equity in earnings or ratable EBITDA of those affiliates. Fiscal year 2021 cash distributions are disclosed in WMB's 10-K Note 9 to its financial statements, among other places.
Regarding joint ventures, although this document does not contain any leverage numbers that have been calculated under proportional consolidation, such values were internally compared, as a supplement to consolidated leverage. Among other purposes, this comparison was made by Fitch among WMB and peers in arriving at the judgments found in the Derivation Summary.
With respect to deferred revenue, Fitch removes this flow from EBITDA. Fitch removes from WMB's EBITDA the net income attributable to non-controlling interests. Debt includes certain financing obligations related to the construction of certain Transco expansions/extensions; these obligations are included in WMB's long-term debt total.
Date of Relevant Committee
01 November 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg