Williams

National University of Singapore

NUS Business School

BMA5312 Advance Corporate Finance

Case Analysis: Williams

Submitted By:

Bansal, Ankur HT065019M

Kaushik, Anshuman HT065025R

Lucman, Christian Ade HT065048B

Plange, Victor NT070696J

Vardrup, Kasper NT070681E

INTRODUCTION:

William is a Tulsa based company that is into the energy related businesses including the exploration and production, pipelines, energy trading and telecommunications. It is suffering from a decline in the energy markets owing to the crash of Enron, pressure on margins in the telecommunications business owing to oversupply and inquiries by the regulators into alleged financial improprieties.

Oversupply in the telecommunications business has led to a decline in profits and margins in the industry forcing many players to back out of this sector. This goaded the Williams enterprise to guarantee an indirect credit support for $1.4 billion of WCG's debt. At the same time, the deterioration of the energy industry resulted in more stringent requirements for the credit rating of investment grade companies. In response to those requirements, Williams initiated, at the end of 2001, a number of initiatives to "bolster its balance sheet" in order to maintain the company's investment grade credit rating. These initiatives included large asset-sales (to be used to reduce outstanding debt), reduction of capital expenditures and reduction of quarterly dividends paid on the company's common stock. Additionally, the company completed the sale of $1 billion equity based securities called "FELINE PACS". But despite these initiatives, Williams' credit rating was downgraded to B1 in July 2002 (Source: Case - Exhibit 4).

The decline in the credit rating has hampered William's ability to raise cash from the market. This is expected to severely affect its energy marketing and trading business which is highly dependent upon the ability to obtain the available credit in the market. Hence with a loss of rating and with a large amount of maturing debt, Williams is facing an imminent liquidity crisis.

The dramatic fall of more than 90% in Williams' stock price within a period of only 12 months, presents further evidence of financial distress because it reflects a declining belief in Williams' future cash flows.

Even though it is difficult to gauge the level of financial distress a firm is facing but it indicates the handicap on the part of a firm to meet its current liabilities via the operating cash flows. Part II will explore this question by conducting an analysis of William' liquidity crunch.

II. Analysis of Williams' liquidity

After thorough analysis of the Williams operating history and capital structure (Source: case - Exhibit 3) and by forecasting of its significant cash transaction for the next 18 months, we come to a conclusion that the company's core business is healthy in general but the overall business is currently facing a liquidity crisis. The bullets below sum up some of the main factors causing this crisis:

Firstly, the critical factors of Williams' liquidity are initially identified and shown below.

* With the loss of the investment grade it is going to be almost impossible for Williams to access the public capital markets - hence it has to rely on private lenders which are more expensive. This is evident from the harsh terms offered by the Lehman Brothers and Berkshire Hathaway combine.

* The loss of the investment grade rating makes it much more harder to operate as some counterparties will be wary of accepting credit anymore.

* Williams has a total of $800 million long-term and short-term debt to mature on July 31 and August 1, 2002. Additional dept of $1547 million is expected to mature before June 2003.

* The first half of 2002 has resulted in large negative cash flows both from operations as well as the investment. If this trend continues in Q3 and Q4, it will require around $1 to $1.5 billion in additional financing.

Financial indicators have been calculated for the last five accounting periods in order to capture the financial development within the last 18 months. In order to accurately benchmark William's performance financial ratios for the competitors have been worked out in table 2. Reflecting upon these results we find that the ratios of Williams are at par with the competitors for the 1998 to 2001 period. These findings thereby support the claim of Warren Buffet that Williams has all the fundamentals in place (source: case p. 7).

As the firm is looking to raise cash, hence it is important to find out if the firm can meet its debt obligations. Hence it is pertinent to evaluate the firm's current ratio (for short term debt credibility) and the debt ratio, interest coverage ratio (Long term debt credibility).

Even the market value of its equity is valued consistently higher than its book value, which indicates that during this time, the market still value them somewhat favorably.

Table 1: Williams's financial indicators

Williams financial indicators 1998 1999 2000 2001 June 30, 2002

Net income after extraordinary /revenue 0.02 0.02 0.05 -0.04 -0.07

EBIT /revenue 0.11 0.10 0.18 0.23 0.06

EBIT / interest expense (interest coverage) 1.62 1.31 1.82 3.29 0.55

cash / total asset 2.7% 10.0% 4.0% 3.3% 2.1%

gearing ratio (liabilities : equity) 3.38 3.39 5.61 5.44 5.69

market value of equity / book value of equity 3.13 2.31 2.89 2.24 0.27

Current