After seeing its corporate credit rating downgraded to “junk status” and its stock fall to 78 cents at one point last week, embattled Williams Cos. Inc. got some much-needed good news on Friday. First, it announced it had reached a deal in principle with California and other parties, including Oregon and Washington, to resolve all outstanding litigation/claims and the hotly disputed issue of refunds for power overcharges, and then FERC signaled it probably would not strip the company of its license to sell electricity at unregulated rates

The news of the agreement in principle, which is to be filed at FERC on Aug. 5-6, and the Commission’s seemingly favorable letter to the company addressing its market-based rate authority came too late in the day Friday to have any measurable effect on Williams’ sagging stock price. The company’s stock closed at $1.06 per share, up 20% for the day.

In June, FERC had threatened to revoke Williams’ authority to sell power at market rates if it failed to fully submit expanded information on its selling practices in California and other western markets. “By this letter, I advise you that I have reviewed all of your supplemental responses, and I conclude that they respond” to the agency’s initial request in its investigation, wrote Donald J. Gelinas of FERC’s Office of Markets, Tariffs and Rates to Williams on Friday. The letter did not specifically say the Commission would not revoke Williams’ market-based rate authority, but that appeared to be the implication. A Williams spokeswoman said the company was viewing the letter in a positive light.

The Tulsa, OK-based energy company’s stock, which has been drained of 97% of its year-ago value, had been battered daily throughout the week as Standard & Poor’s Ratings Service and Moody’s Investors Services downgraded its corporate credit rating and other ratings to two levels below “junk status” amid concerns about the company’s liquidity and Williams’ ability to close on a $1.6 billion secured line of credit to replace an unsecured $2.2 billion credit arrangement that expired last Tuesday. The company said last Monday it hoped to complete the secured financing arrangement within a week to 10 days. It had abandoned earlier efforts at unsecured financing.

The ratings agencies swung into action after Williams last Monday reported it planned to post a recurring loss for the second quarter, largely due to failing conditions related to its energy marketing and trading business. The company said it would slash its dividend by 95% to one cent a share from 20 cents to conserve cash, and was “moving quickly” to complete a new secured financing arrangement to shore up its balance sheet. Williams will announce its second-quarter earnings today (July 29).

The news added fuel to speculation that Williams could be the target of a takeover. A recent report by Credit Suisse First Boston named Williams as a possible acquisition target, noting that the value of its pipelines exceeded the value of shares outstanding which then were running at a unit price above $5 (See NGI, July 12),

Separately, Williams late Monday said it was considering selling its natural gas processing and liquids extraction assets in Western Canada in an effort to stay afloat financially. “We have received unsolicited expressions of interest in these [Western Canadian] assets. In light of our balance sheet strengthening plan, we believe we must consider selling them to parties for whom they may be a better strategic fit,” said Phil Wright, CEO of Williams’ energy services unit.

The Western Canadian assets, which were acquired from TransCanada in October 2000, include a total of 6 Bcf of gas processing capacity, an estimated 225,000 barrels per day (b/d) of natural gas liquids production capacity, a gas liquids pipeline system and more than 5 million b/d of gas liquids storage capacity, according to the company. “A sale would allow us to concentrate our resources on our core midstream positions in Wyoming, Colorado, New Mexico and the deepwater Gulf of Mexico,” said Wright.

Expects 35-40 Cent Loss for 2Q

Williams expects to report a recurring loss from operations of 35-to-40 cents per share for the second quarter, down considerably from its previous earnings’ projection for the quarter of 20-to-25 cents a share. Including up to $240 million in non-recurring charges, the company estimated its quarterly loss would be 63-to-73 cents a share. Final results for the quarter will be announced July 29.

Merrill Lynch analysts Carl Kirst and Peter Staples quickly lowered their outlook for Williams stock to “neutral/neutral” from “buy/strong buy,” saying that “liquidity appears to be much worse than expected,” and that they believed a credit downgrade to junk “[was] not only probable, but highly likely” for the energy company. “We are remaining on the sidelines” until there is a recovery in Williams stock, which the analysts predicted was at least three-to- six months away.

Williams officials estimated the recurring loss from the company’s energy marketing and trading business alone would be close to 40 to 45 cents a share for the second quarter. The officials said less than 10% of revenues lost were cash, with the rest being non-cash or losses attributed to mark-to-market in the forward market. Of its overall profit loss, the company labeled 18% of that as cash, with the rest being forward market losses. Officials said the losses were predominantly non-cash in the outer years. Less than 20 % of the loss is attributed to first five years, with 80% coming in the outer 15 years.

Excluded from recurring results, but expected to be part of Williams’ second quarter reported results, will be an estimated pre-tax charge of $210 million to $240 million, according to the company. The bulk will comprise a $115 million non-recurring charge related to its energy marketing and trading business, including $50 million for the sale of turbines, $34 million related to marketing and risk management’s goodwill resulting from deteriorating market conditions, and $30 million stemming from the degradation of the value of assets in its distributed generation business.

Also included in the pre-tax charge will be write-offs associated with two pipeline projects — Western Frontier and the failed Independence Pipeline — and an anticipated further write-down of receivables and claims associated with Williams Communications bankruptcy, the company said. Williams’ Western Frontier Pipeline project, which had not received any approvals from FERC, would have transported 540,000 Dth/d of gas from the Rocky Mountains to markets in the Midcontinent region. Williams and two other sponsors called it quits on the ill-fated Midwest-to-East Coast Independence line in late June.

The write-offs and impairments are the result of expected assets sales and reductions in capital spending to strengthen the company’s balance sheet, Williams officials said. The additional write-down of receivables and claims associated with the Williams Communications Group bankruptcy represents the company’s best estimate of the effects of a restructuring plan that is expected to be filed with the bankruptcy court.

In a conference last Monday, Williams executives told financial analysts that they still were pursuing a joint venture deal for the energy marketing and trading business, saying that this “makes the most sense in the near term.” However, “we’re not committed to that approach forever,” and the company needs to do “something quickly” with respect to that business. The company officials said there were about 60 companies interested in the marketing and trading business. Williams is pursuing a joint venture with a company that can provide the necessary credit, and if possible, has some energy background. William Hobbs, who heads up Williams energy and marketing division, said if they are unsuccessful in finding a joint venture partner, they would have to consider selling all or part of the business. They expect to produce results in 30-to-60 days.

Williams estimated its trading book at $2.2 billion, down from a previous estimate of $2.5 billion.

Williams said it currently has $450 million in cash on hand and $700 million left in a revolving loan. To improve its liquidity position, the company said it was reviewing the hedges in its exploration and production business, and was evaluating its projected capital expenditure budget of $1.5 billion for 2003. “We continue to look at [the] capex program,” and may consider cutting it to $700-$800 million as they go into 2003, the company said.

“We are going to live within our means” in the future, said Williams CEO Steve Malcolm. “That’s a critical part of our balance sheet strengthening plan.”

“Reducing our common stock dividend is one of a series of prudent and realistic steps we have taken and are taking to address our current business environmental. We will continually review our dividend policy, but for the foreseeable future, [this step] represents the best course of action as we reposition the company and strengthen its finances,” said Malcolm.

Amid deteriorating market liquidity and credit concerns, he noted the best path for Williams is to strengthen its finances and limit its exposure to the marketing and risk management business.

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