Faced with mounting concerns from investors and credit-rating agencies, energy giant Williams Cos. announced a $3 billion-plus plan last Tuesday to improve the company’s flailing balance sheet over the next 12 months. However, Williams’ strategy drew mixed reactions from the major ratings’ agencies and failed to stem its stock losses.

The package calls for Williams to issue $1-1.5 billion in common equity; sell an additional $1.5-3 billion in non-core assets; reduce annual costs by $100 million, which is double its previous goal; fund base-level capital expenditures with cash flow from operations, and fund additional growth opportunities from a mix of follow-on equity and debt; and use all net proceeds from sales of assets and initial equity to pay down debt or increase liquidity.

Standard & Poor’s, the largest credit ratings agency, responded by downgrading Williams’ rating for senior unsecured debt to BBB-minus, as well as placing its corporate-wide credit rating at BBB. The company’s ratings were removed from CreditWatch, where they have been since February. Fitch Ratings called Williams’ plan to boost credit quality a “positive development,” and rated the company’s senior unsecured notes and debentures at ‘BBB’ and its commercial paper at ‘F2.’ The ratings outlook for Williams by both agencies was negative.

Late Tuesday, Williams said it was “disappointed in but not surprised” by S&P’s rating. It believes, however, the company’s lingering credit-quality issues will be resolved once its plan is successfully executed.

Williams’ stock price continued on a downward path last week following the company’s announcement, falling to as low as $14 per share at one point. It began to pick up some strength Friday as it rose to $14.45 in mid-day trading. The 52-week high for Williams’ stock is $41.29.

The new plan is central to the success of Williams, a major energy trader and pipeline operator, in a post-Enron environment, company officials said. Williams currently is at the center of the growing controversy over bogus “wash” trade transactions, and is among the scores of energy suppliers being investigated for price manipulation in western energy markets (see NGI, May 27).

In an affidavit filed at FERC Friday, Williams denied engaging in any round-trip or “wash” trades to inflate volumes or revenues in western energy markets. “…[W]e have denied under oath that we intentionally engaged in a transaction to sell electricity to another company, and simultaneously buy it back at the same price,” said Chairman and CEO Steve Malcolm in a prepared statement. And in a separate affidavit submitted earlier, Williams said it did not use deceptive pricing practices in the western energy markets.

“This is the right thing to do,” Malcolm said. “We must take these steps so that our company can reach its long-term growth potential. We believe we have significant growth opportunities, and we are committed to doing what it takes to realize that potential.” The company has decided on an “effective, decisive response rather than deny the market reality, fight it or wait for others to define it,” he noted. “We are determined to put the industry’s issues of credit quality and financial strength behind us and get on with our business.”

Williams’ leaders were in New York City recently to meet with the credit agencies, which had placed the company on negative credit watch in the wake of the drop-off in the company’s stock price. “Our plan is designed to put our financial metrics squarely on top of the agencies’ guidelines…for mid-range investment-grade credit quality. Recognizing there is certain risk in achieving our plan, however, some of the agencies may adopt a ‘wait and see’ attitude before giving full recognition to all that we intend to accomplish,” said Malcolm.

He noted that issuing common equity was not Williams’ first choice, “but we believe it is absolutely essential to build a stronger capital base to underpin our business.”

In addition to the $3 billion-plus growth package, Williams said it has formed an internal team within its energy marketing and trading business to evaluate potential “joint venture” or other alternative solutions to boost the financial outlook of that unit. William Hobbs, president of Williams Energy Marketing and Trading, said the company was in “early discussions with various parties.”

Eager to avoid the stock free fall suffered by El Paso Corp. last week following its announcement that it would lay off half of its trading staff and limit spending on the business, Williams issued a statement confirming its commitment to energy trading and risk management despite its plan to find a partner to buy 50% of its operation. “Williams firmly believes it is possible for the company to operate a robust energy marketing and risk management business and maintain a strong investment-grade rating,” said Malcolm. “The market, the media and the world need to know that it is entirely possible to run an honest, profitable energy marketing and risk management business, using a dose of prudence and legitimate accounting procedures.”

Malcolm said Williams takes a different approach to many aspects of the trading business and shouldn’t be tossed in the barrel with all of the other bad apples. It is more focused on risk management and trading around its assets rather than on maintaining an active speculative trading book. He said Williams also has a different trading philosophy than most other energy merchants. In contrast to many other trading companies, Williams employs a conservative model in its risk assessment, preferring to lock in long-term structured transactions over one, 10 or even 20 years, rather than trying to live on day-to-day margins. Its business is not driven by volume either. “Just look at the rankings,” he said. “We have a different business model that is dependent on long-term arrangements rather than daily trading volume.”

When combined with other financial enhancement plans announced so far, Williams said the latest package brings the total expected improvement to about $8 billion. So far this year (not including the latest actions), Williams has sold $1.1 billion in publicly traded equity-linked securities; completed transactions covering $1.7 billion in assets; and issued $1.5 billion in bonds and reduced planned capital spending by nearly $2 billion. The company noted it also has eliminated nearly all of the so-called “triggers” from its major on- and off-balance sheet financial structures, including the resolution of more than $2 billion in liabilities related to its former telecommunications subsidiary. The remaining triggers have a maximum exposure of less than $190 million and will mature next year, according to Williams.

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