FINA 5290 Derivatives Analysis
Case 2: Williams Company
1. In July 2002, Williams faces a tough time.
Williams engaged in many different types of energy activities, including the purchase, sale, transportation, transmission of energy-traded commodities (natural gas and liquids, crude oil, refined products, and electricity), and exploration and refining. It also involved in the telecommunications service by running optical fiber throug old natural gas pipelines. The company grew impressively from its beginnings. For instance, it posted high profits between 1998 and early 2001, and as late as January 2001. The net income grew from $140 million in 1998 to $835 million in 2001. Williams predicted that its marketing and trading subsidiary would generate a minimum of $500 million in profits “under most market conditions”. However, Williams’s problems began soon after the spinoff of the communication group, WCG. Because of the collapse of its telecommunications business, softness in the energy markets and ongoing inquiries from regulators about its reporting and energy trading had put Williams under financial stress. Over the first six months in 2002, Williams had cut back on capital spending, planned more than a billion dollars worth of asset sales, slashed the firm’s dividend by 95% and raised financing in a variety of forms. Williams’ priority was acknowledged to be “raising cash and access to cash”. In the summer of 2002, Malcolm, CEO of Williams, was considering the latest in a series of decisions facing the beleaguered firm: whether to accept a secured credit agreement from Lehman Brothers and Berkshire Hathaway. The new agreement would provide Williams with funding of $900 million for one year. This one-year funding was backed by the assets of the former Barrett Resources Corporation and was subject to a number of conditions. But the financing was not cheap. Malcolm pondered whether it was worth it.
2. If William honors the deal but not sell RMT...
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