Williams, 2002
Identification of the Problems:
Founded in 1918, Williams engaged in many types of energy activities, including the purchase, sale, transportation, and transmission of energy-related commodities. Telecommunications business was also a big contributor to Williams’ growth during the 1990s due to its profitability.
However, Williams’ distressfully financial problems were also trigged by telecommunications business. Prior to the spinoff of Williams Communication Group (WCG), the telecommunication subsidiary of Williams, Williams converted a $975millon promissory note from WCG into 24.3million newly issued shares of WCG equity to strength its balance sheet. In addition, Williams provided indirect “credit support” for $1.4 billion of WCG’s debt to make available proceeds of an equity issuance in the event of a WCG default or WCG’s inability to raise financing to replace maturing debt. This guarantee later cost Williams $1.3 billion following a disclosure by WCG that it might seek to reorganize under the U.S. bankruptcy code.
Ties to its former telecommunications business were not Williams’ only problem. After the collapse of Enron in late 2000 and early 2001, some of Williams’ competitors began to withdraw their exposure to energy trading business. In the second quarter of 2002, Williams Energy Marketing and Trading, which posted high profits between 1998 and 2000, recorded its first loss in the three years.
To reflect the firm’s financial health, credit ratings on Williams’ bond were downgraded and yields on its publicly traded bond skyrocketed. Such situation further limited Williams’ ability to participate in the energy marketing and trading business, especially in terms of long dated trading.
Together with an inquiry by SEC about Willia ...