In what was surely expected to be another long weekend for Williams Cos. Inc., FERC said Friday it will send staffers to the company’s Tulsa headquarters on Wednesday to examine its California natural gas trading data. Meanwhile, after the market closed Friday, Moody’s Investor Services downgraded Williams to one notch above “junk” status, noting that the company is failing to generate enough cash despite its asset sales, and faces more business risks ahead.

On June 3, during a conference call to cast doubt on a story in the New York Times that appeared the day before, Williams invited the Federal Energy Regulatory Commission to inspect all of its trading information for the period of December 2000 and January 2001. The Times had reported an alleged attempt by a former Williams employee to corner California’s natural gas market in December 2000, which Williams officials vehemently denied (see Daily GPI, June 4).

FERC’s Donald Gelinas, associate director for the agency’s office of markets, issued a seven-page memorandum detailing the trading data that Williams would need to provide to FERC staff when they visit the company, a meeting now scheduled for Wednesday (June 12). FERC said it expects Williams to follow through on an offer to cooperate and to give the agency its daily profit and loss reports by location, trader and product.

The information requested by FERC includes the following:

Besides coping with the voluminous material requested by FERC, executives also have to continue looking for ways to upgrade the company’s credit after Moody’s downgraded its senior unsecured debt one notch to “Baa3,” its lowest investment grade, from “Baa2.” The outlook is “negative,” and the action affects about $13 billion of Williams’ debt.

“The downgrades reflect weak cash flow generation relative to…debt and business risks and low asset returns,” Moody’s reported. The action follows a downgrade by Standard & Poor’s on May 28, which cut the rating to “BBB”, two notches above “junk.” The Moody’s downgrade ups the stakes on a commitment by Williams to refinance a $2.2 billion 364-day credit line that matures July 24.

Since the beginning of the year, Williams has raised more than $1.7 billion through asset sales and another $2.6 billion of long-term capital, using the proceeds to pay down debt and boost liquidity in an effort to retain investment-grade credit ratings. However, Moody’s said Williams’ actions so far had only resulted in a “minimal reduction” of net debt after it assumed more than $2 billion in debt from its bankrupt former communications subsidiary, Williams Communications Group.

Moody’s also noted Williams’ weak cash generation in its large energy marketing and trading business, which requires lots of working capital. Moody’s plans to take “further rating action” if Williams is “unable to implement its plans in a timely manner.”

In response to Moody’s downgrade, Williams officials said they were “disappointed but not surprised,” reiterating that they are “taking steps to improve the company’s financial strength [that] should help resolve lingering credit-quality issues.”

Steve Malcolm, Williams’ chairman and CEO, said, “We’ve already proven that Williams delivers proactively, swiftly and decisively on market demands with steps we implemented earlier this year to strengthen our balance sheet. We will continue strengthening our balance sheet in a thoughtful and disciplined manner. We expect to deliver what should end up being $8 billion in financial improvements over the next 12 months.”

UBS Warburg lowered its 2002 and 2003 earnings estimates and stock price projections on Williams last week based on expectations of much lower energy marketing and trading activity, significant asset sales, higher borrowing costs and an equity issuance in the latter part of the year.

“Barring any further developments, we would then expect Williams to be given a window by the [credit rating] agencies to execute ‘Phase III’ of its restructuring plan,” said UBS Warburg analyst Ronald J. Barone, “including asset sales and potential equity issuance. Likely asset sales include its ethanol business, travel centers, refineries and possible additional pipelines.

“As an investment grade rating is essential to maintaining long-dated deal flow in [energy marketing and trading], we would expect Williams to more seriously consider joint venturing this business with a stronger credit player if the rating was threatened to go below investment grade.”

UBS lowered its earnings projections on the company to $1.60/share from $1.85 for 2002 and to $1.50/share from $1.90 in 2003. The Street consensus is $1.97 in 2002 and $2.15 in 2003.

“Though we have incorporated significantly lower [energy marketing and trading] assumptions in these projections, if — for whatever reason — this business was to be materially impaired on an ongoing basis, further material reductions would be necessary,” Barone said. UBS also lowered its 12-month share price projections on Williams to $17 from $23.

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