Williams shares were volatile last week, as investors weighed the potential impact of its former communications subsidiary, Williams Communications (WCG), considering filing for voluntary Chapter 11 bankruptcy reorganization. WCG said it was considering bankruptcy as one potential option in its financial restructuring effort. Williams already is examining the possibility that it will be obligated to cover WCG’s $2.2 billion in debt if the communications company defaults on its loans.
The company also is facing a series of class action lawsuits from shareholders who say Williams’ management failed to provide adequate disclosure of the company’s potential obligations to its former communications unit.
UBS Warburg analyst Ron Barone said that credit concerns by trading partners also will result in Williams losing long-term contracts to rivals until it arranges to pay its share of the communications company’s debt. Barone cut his 2002 earnings forecast for Williams to $2.10 from $2.50 a share. Williams was expected to earn $2.47 a share, the average estimate of analysts surveyed by Thomson Financial/First Call.
“Though we do not yet know what combination of financial tools Williams will actually use (in addition to already announced asset sales/CAPEX reductions) to address its potential WCG exposure, the revisions reflect preliminary model adjustments for the growing likelihood of incremental equity issuance to shore-up its balance sheet while simultaneously maintaining investment grade rating,” Barone said. “Moreover…, the revision also reflects the likelihood that Williams will not be able to close sufficient volumes of long-term structured transactions in its [energy marketing and trading business] during this high-profile period of uncertainty.”
However, Barone is maintaining a “Buy” rating on Williams based on the fact that Williams is an asset-rich company and based on his belief that the market reaction has been exaggerated and that resolution of this problem could result in a “moderate-to-substantial upward valuation in its share price.”
Williams Communications said although bankruptcy now is a potential option, it has $1 billion in cash to fund its business plan through 2003 and is current on all of its financial obligations. “Williams Communications continues to have a productive dialogue with its banks. We firmly believe that this dialogue will enable us to meet the current challenges of the telecommunications marketplace and, ultimately, to thrive,” said Howard Janzen, CEO for Williams Communications.
The company, along with its bank group, is pursuing a comprehensive resolution to restructure its balance sheet. It may choose bankruptcy if it believes it will allow for a more orderly process that maximizes enterprise value. Its decisions could result in substantial shareholder dilution, WCG said. As part of any restructuring the company undertakes, it plans to reduce its current controllable cost structure by 25%, which will include workforce reductions. Williams Communications operates the largest network in North America, connecting 125 U.S. cities and reaching five continents.
Moody’s Investors Service last Wednesday confirmed the ratings of Williams Cos. at Baa2 senior unsecured and its subsidiaries but changed the outlook to negative from stable. The ratings agency cited the potential bankruptcy and contingent liabilities of WCG, but noted Williams is negotiating to take over payments for WCG debt and “eliminate certain trigger events.”
Moody’s noted “near-term pressure” on earnings and cash flow. However, Williams “has a substantial and diverse asset base that provides strong support for its credit. Its businesses are well integrated down the natural gas value chain.” Williams’ pipelines, “which account for about a quarter of its operating income, provide a stable base for further expansion of its pipelines as well as for investments in Williams’ unregulated businesses.”
Moody’s said Williams is examining alternative actions should WCG file for bankruptcy, including “working with the WCG Share Trust noteholders by pursuing a consent solicitation to confirm Williams’ obligation to pay interest and principal under the current schedule and to eliminate certain trigger events. If approved, this would be a favorable development,” Moody’s said.
“Our current expectation is that Williams’ initiatives to reduce debt and to improve liquidity will be substantially completed in the near-term, and that they should help stabilize Williams’ debt protection measurements at levels commensurate with an investment grade rating,” Moody’s said.
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