Credit analyst sees Williams "skating on the edge," more downside there

By Ronda Fears

Nashville, Tenn., July 23 - Carol Levenson, director of research at Gimme Credit, said the timing of the earnings bombshell from Williams Cos. Inc. (Baa3/BBB-) on Monday couldn't have been worse.

"We're not just talking about Williams warning of a substantial second quarter loss, instead of the expected profit, amid the continuing decline in the overall stock market," Levenson said in a report Tuesday.

"Bond investors were hoping for some good news from Williams on perhaps an even more important front than its earnings, the renewal of its $2.2 billion bank line, which expires tomorrow. Now the bank negotiations are up for grabs and liquidity has moved to the top of our lengthy list of concerns regarding this credit."

Even after listening to the company's conference call early Tuesday, the analyst said she was not sure exactly what went wrong in the last month of the second quarter.

"After all, the company had already lowered its earnings guidance early in June as a result of cutting back its commitment to its "risk management" business," she said.

"At the same time, concerns about Williams' credit quality have shut it out of the market for long-term energy contracts. By some strange alchemy this led to the company having to report its first loss in this business, primarily related to the valuation of its 'mark-to-market' trading portfolio."

The company will post a $200 million loss, excluding nonrecurring items, in the second quarter instead of a profit of $100 million as previously expected.

As Williams' other businesses were said to be performing according to plan, she said this implies that the risk management business lost considerably more than $200 million.

Although a "negative curve shift" was cited, the analyst said, "surely this is nothing new in the wild and wooly world of energy trading."

"So we can only assume the recent stagnation of Williams' portfolio growth leaves it more vulnerable to energy market swings," Levenson said.

Williams' stock fell an astounding 62% on Monday from already deeply depressed levels and naturally the bonds fell as well.

"True, the company also eliminated all but a penny of its dividend to preserve cash, but this couldn't have been much of a surprise to the stock market and was actually good news for bondholders," the analyst said.

Another baffling element is the cash flow impact, she added.

Williams assured investors only 20% of the trading loss would affect cash flow, Levenson noted, yet when pressed, management admitted even the dividend cut, which will save nearly $100 million per quarter, will not offset the anticipated drop in cash flow.

"Williams intends to temper its capital spending to match its operating cash flow and the company retains some flexibility in this regard," the analyst said.

"According to management, everything was going swimmingly with the bank negotiations before the impending loss became apparent."

Now Williams intends to seek a secured bank loan, although management "pooh-poohed" any suggestion of secured borrowing last month.

"Obviously, this won't be accomplished before the expiration of the old bank line," Levenson said.

"Frankly, we wouldn't have been surprised if Williams had drawn down and termed out this line while negotiations proceeded, following in the illustrious footsteps of Xerox, Tyco, Qwest, Nortel and, yes, WorldCom."

The company's liquidity position has worsened by nearly $3 billion since late May and cash has dwindled, leaving little margin for maturities and potential additional cash needs if it gets downgraded.

"Even if the company is successful in obtaining a new bank line, it's likely to be both more costly and more restrictive, and could weaken the position of unsecured creditors," Levenson said.

"The promised equity offering seems a pipe dream today. We fear Williams is skating close to the edge, and we see additional downside."

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