Credit analyst: Williams may have topped out for now

By Ronda Fears

Nashville, Tenn., March 11 - The rally in Williams Cos. (Baa2/BBB) paper last week in response to the energy firm's advances in its deleveraging efforts was appropriate, said Gimme Credit director of research Carol Levenson, but there may not be much more upside to the credit.

"Renegotiation of its Williams Communications Group obligations and the imminent defusing of other off-balance-sheet specters, higher than expected proceeds from asset sales, further capital spending reductions and hybrid equity issuance appear to have saved the day," Levenson said in a report Monday.

"However, unless free cash flow from operations turns positive in a substantial way, we don't see much hope for additional improvement."

So glad was the financial world to see Williams make progress in strengthening its balance sheet, that the company's lowered 2002 earnings guidance was practically ignored, the analyst pointed out.

The sale of an attractive asset like the Kern River pipeline and expenses associated with the renegotiated WCG obligations will have negative financial consequences for Williams, she said. In addition, the company is seeing a falloff in its energy marketing and trading business in the first quarter, some apparently related to doubts about the company's credit quality, she added.

Although Williams announced a balance sheet strengthening plan last December, once the company realized it would be taking a material charge and assuming material obligations for WCG, it intensified these efforts. As a result, if all goes according to plan, Williams should lower its leverage from a scary 70% to just under 60% by the end of this year.

"The fact this improvement will come from asset sales and hybrid equity issuance, rather than from free cash flow, takes some of the bloom off the rose," Levenson said in the report.

"The truth is Williams hasn't generated free cash flow in years, and even with a drastic cut in capital spending plans for this year, it still won't."

Despite a lengthy discussion of liquidity, which should be adequate this year, assuming the announced asset sales take place as planned, the WCG lease payments can be stretched out over the course of the year and the company is able to draw upon its bank lines, Williams didn't really address the current state of its access to the short-term debt markets, Levenson said.

Cash on hand has been used to pay off some $700 million in maturing debt this quarter, which implies commercial paper rollover is not currently an attractive option for Williams, she noted. Other near-term maturities are expected to be met with a bridge loan for the pipeline sale to Williams Energy Partners, term debt issuance, the MidAmerican Energy investment and other asset sale proceeds.

Management said the company would soon begin renegotiating its $2.2 billion commercial paper backup line, which matures in July, and probably would be reducing its short-term lines and increasing its longer-term facilities. It's not exactly the most robust outlook for financial flexibility, the analyst said, but it is a great improvement.

"Williams paper rallied impressively Friday, by an amount we consider appropriate given the news of asset sales, further capital spending savings, and the equity investment," Levenson said in the report.

"However, with lingering uncertainties and little hope for further credit quality improvement, we don't see much additional upside in this name."

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