Williams swings to profit in quarter; vows $3 billion debt reduction this year

By Paul Deckelman

New York, May 6 - The Williams Cos. Inc. returned to profitability in the latest quarter, said that its strategy of overhauling its operations to focus on its core competencies had made "great progress" and was "in the backstretch" - and it reiterating its plans to have reduced its overall debt load by $3 billion total this year, and its intention of returning to an investment-grade credit rating sometime in 2006.

Whether or not the Tulsa, Okla.-based natural gas producer and pipeline operator can meet those ambitious goals will depend on a number of factors, chief among them the progress it makes in unloading its power-generation operations.

Williams reported that for the first quarter ended March 31, it showed net income of $9.9 million (two cents per diluted share), a marked turnaround from its year-ago net loss of $814.5 million ($1.59 per share).

The company reported income from continuing operations of $5.4 million (one cent per diluted share) in the latest quarter, versus a restated operating loss of $39.3 million (nine cents per share) in the year-ago quarter.

The year-ago net loss results were impacted by an after-tax charge of $761.3 million ($1.47 per share) to primarily reflect the cumulative effect of adopting newly mandated accounting standard for contracts involved in energy trading and risk-management activities.

The company's chief financial officer Don Chappel said on a morning-long conference call presentation to financial analysts following release of the figures that in the latest quarter Williams had retired $711 million of debt - $697 million of that through scheduled debt retirements and amortization, and the remaining $14 million via tendered debt retirements.

That reduction brought its overall debt burden down to $11.268 billion as of March 31, versus the $11.979 billion of debt the company had on its books as of the end of the 2003 fourth quarter last Dec. 31.

The effective rate on the debt load is 7.7%. $10.671 billion is fixed-rate debt, with an effective rate of 7.9%, and $597 million is floating-rate debt, carrying a 3.3% effective rate. The debt retirement led to a fall in interest expense to $239 million from $341 million a year earlier.

Besides the retirement of the $711 million of debt, Chappel noted that earlier in the year Williams had managed to reprice its RMT loan at a rate of 250 basis points over Libor - a 125 bps reduction that promises $6 million in annual interest savings. He also reminded the assembled analysts that Williams had recently closed on two credit facilities - first, a $500 million 5-year unsecured line of credit with Citibank, which was then syndicated to institutional investors; then, a $1 billion three-year revolving credit agreement secured by the assets of the company's Midstream Gas & Liquids division.

"These new facilities will enable us to use about $1 billion of our current cash to pay down debt, and will also provide ample long-term liquidity."

"Attractive" cost of new loans

Chappel said that the facilities have been put in place at "an attractive cost" - the unsecured facility has a cost of 360 bps, assuming Williams uses it for letters of credit. The CFO said the facility "allowed us to preserve traditional bank capacity - again, we're able to raise $1.5 billion of new capital, new liquidity, as a B credit."

Williams plans to use $1 billion from its credit facility borrowings toward its goal of paying down its current debt by some $3 billion by year's end - about $1 billion in scheduled debt maturities and another $2 billion in early retirement. Besides the credit facility funds, Williams - which has some $2 billion of cash on hand currently - plans to use between $700 million and $1 billion of excess cash, as defined by its borrowing agreements, and between $700 million and $1 billion of free cash flow. It expects to generate between $500 and $600 million from asset sales that would be earmarked for debt paydown.

Raises debt retirement projection

Williams raised the range of the amount it expects to spend on early debt retirement this year from its original projection of between zero and $150 million, to between $175 million and $225 million, reflecting both higher-than-expected premiums for early debt retirement and the fact that the company, said Chappel, " is committed to a higher level of debt reduction."

Chappel said the company - which has only a "modest" amount of debt maturing over the next few years, until 2007 - anticipates continued debt reduction and a return to investment-grade ratios by around 2006 - sooner or later, depending on the pace of its asset sales.

Steve Malcolm, the company's chairman, president and chief executive officer, said that Williams "is pleased" with the outcome restructuring effort so far, "but we're not satisfied - we recognized that we have more to do."

Still trying to exit generation

Chief among the things still undone which must be accomplished in order for Williams to return to full fiscal health, is the company's efforts to get out of the power-generating business, which he called "the only disappointment" in the strategy's execution so far.

While the company's interim strategy of trying to trim costs and reduce financial risks associated with power generation while continuing to meet established contractual obligations generating cash seems to be working well, for the moment, "we are disappointed in our efforts to exit the business through a sale. Certainly, the power market is depressed, and there are a limited number of parties that have the balance-sheet strength to complete such a transaction."

While the power generating portion of the company does produce a certain amount of cash flow, and staying in the business, if it has to, would enable Williams to keep that cash flow and retain the key personnel needed to run it, on balance, Malcolm said, there are more incentives to getting out, including the fact that the major ratings agencies remain highly critical of the debt associated with the power tolling contracts, and there would be continued adequate assurance requirements, and Williams would face higher costs of capital.

"Our access to capital, while not limited now, could be limited in an unfavorable market" if Williams is unable to sell the power assets and is forced by default to remain in the business, Malcolm warned.

Williams currently does not pay a dividend on its common stock, and Malcolm and Chappel told the analysts that it does not anticipate considering a change in that policy - or using extra cash for a stock buyback - until after it has returned to investment grade.

"From a corporate standpoint," Malcolm concluded, "our priority is de-levering the company."

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