Williams stock fell to a 20-year low in trading Monday after the Tulsa-based energy company reported plans to post a recurring loss for the second quarter, largely due to failing conditions related to its energy marketing and trading business, sparking speculation that cash-strapped Williams could become the target of a takeover. 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.

In a separate announcement, Williams late Monday said it was considering selling its natural gas processing and liquids extraction assets in Western Canada. “We have received unsolicited expressions of interest in these 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 assets include a total of approximately 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,

After an initial halt to the stock’s trading on Wall Street, Williams shares lost more than 60% of their value throughout the day, falling by $3.15 to $2.01 in late-day trading. The company’s stock, which sold at nearly $33 a year ago, has been drained of 94% of its value. A recent report by Credit Suisse First Boston named Williams as a possible take-over 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 Daily GPI, July 9)

Williams said it expected 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.

In response, Fitch Ratings Monday downgraded the rating for Williams’ senior unsecured debt to ‘BB+,’ a non-investment grade rating, from ‘BBB,’ and its short-term rating to ‘B’ from ‘F2.’ It also lowered the unsecured debt rating for Williams’ three pipelines — Northwest Pipeline Corp., Texas Gas Transmission Corp., and Transcontinental Gas Pipe Line Corp. — to ‘BBB-‘ from ‘BBB+.’ The company has been placed on Rating Watch Negative.

The ratings downgrade followed Williams announcement that it was negotiating to arrange new secured financing to replace its existing unsecured credit facilities, which consist of a $2.2 billion, 364-day unsecured revolver. Fitch said that based on prior meetings with the company it had expected Williams to renew the revolver on an “unsecured basis at the $1-$1.5 billion range.” The fact that Williams was not able to access the bank market on an unsecured basis “is indicative of a level of financial flexibility that is not consistent with an investment grade credit profile.”

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 “is 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 call Monday, Williams executives told financial analysts that they still are 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 are 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.

As part of this effort, Williams said it hopes to complete within a week to 10 days a new secured financing arrangement to replace a $2.2 billion facility that expires on Tuesday. It abandoned earlier efforts at unsecured financing.

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