Williams

(WMB) - Get Report

-- the self-proclaimed "anti-

Enron

" -- could soon confront credit issues reminiscent of those that toppled the Houston energy trading giant, some observers say.

In a regulatory filing Tuesday, Tulsa, Okla.-based Williams issued warnings about possible short-term liquidity and long-term credit problems that may arise for the company because of mounting instability within the energy trading sector.

The credit questions are especially pertinent as the company seeks to sharpen its focus on the highly lucrative energy trading business. The trading business, which accounts for a hefty share of Williams' profits, thrives on cheap access to capital. With investors perceiving the energy sector as increasingly risky, Williams' continued access to cheap financing is at stake, some people say.

To be sure, there's no sign that Williams is facing the kind of dire straits that Enron endured on the way to becoming the nation's largest-ever bankruptcy filing. Williams says it is in good health and that it will do what it needs to retain its investment-grade ranking. But with the stock 75% off its 52-week high, investors will be watching the company's situation closely in coming weeks.

Turnabout

As recently as last month, Williams reassured investors that it had roughly $4 billion in cash and revolving credit available to meet its business obligations. But the company also acknowledged that its revolving credit facility -- accounting for three-fourths of that liquidity -- was slated to mature in a matter of weeks.

With a July 24 deadline looming, Williams began this week negotiating with lenders to renew that revolver. But the casual conviction the company expressed in May -- "that (renewal) should be rolling out sometime in the June-July time frame," said Andrew Sunderman, chief financial officer of energy marketing and trading, in a conference call with investors -- has lost the ring of certainty.

Up and Down
Williams gives back
boom-era gains

In its filing Tuesday, Williams raised more dire possibilities.

"If we are unable to renew or replace this facility," the company stated, "we will need to find alternative sources of liquidity for which we may have to pay substantially higher rates of interest than we have paid in the past. If our ability to access capital on attractive terms becomes significantly constrained, our cash flow could be materiallyadversely affected."

Peter Adamson, managing partner of Adams Hall Investment Management in Tulsa, said he believes the banks will come through. Both Adamson and some of his clients hold long positions in Williams stock.

"I see the reports being issued, saying that Williams is a 'strong buy' and forecasting solid earnings for the company," Adamson said. "As long as the bankers believe that, they'll loan them money -- although the cost for that money may go up."

Williams said Wednesday that it foresees no problems renewing its credit line "at this point."

Lending a Hand

But the company is entering those negotiations in a far weaker position than it did last time around. During the past year, Williams' long-term debt has soared from $6.9 billion to more than $12 billion. And instead of buying assets, as it did last summer with Barrett Resources Group, it's scrambling to shed assets in a buyer's market flooded with $10 billion in pipelines and related offerings from its competitors.

In addition, Williams could be negotiating with some of the same lenders that face possible subpoenas over past dealings with the company. Unsecured creditors of Williams Communications Group, a former Williams subsidiary that recently filed for Chapter 11 bankruptcy protection, have received court authority to subpoena several firms -- including J.P. Morgan Chase, Lehman Brothers and Boston Consulting Group -- that advised Williams on its spinoff last year of Williams Communications. The creditors are questioning whether Williams acted improperly by spinning off what they call an overleveraged company with limited chances of survival.

Williams didn't respond to a question about whether any of these firms are involved in the company's current credit-line negotiations.

Bigger Issues

In addition to short-term credit issues, Williams and its peers are facing an industrywide risk of losing long-term investment-grade ratings -- a rating that's crucial in the energy trading sector. Standard & Poor's has already downgraded Williams to its lowest notch above junk status and has placed the company on a negative credit watch; Moody's, which has recently questioned whether energy trading companies deserve investment-grade ratings, is expected to revisit Williams' rating any day.

The situation reminds some of Enron, which spiraled into bankruptcy after suffering a series of downgrades that triggered debt repayment orders.

"That essentially forced Enron to come up with money it didn't have," said Peter Cohan, a Massachusetts author and investment specialist who has no position in Williams stock. "The very survival of a public company can depend on the specifics inits

lending contracts."

The company says the slope's not as slippery for it, though. Even should it endure a downgrade, Williams said it faces none of the devastating payback triggers that led to Enron's downfall. The company described two triggers, which could force some debt repayment, as immaterial.

"Both triggers

together represent less than $200 million," a Williams spokeswoman said. "The ratings agencies consider these sums insignificant for the size company of Williams."

The greater Enron-like risk Williams faces is losing customers who are unwilling to conduct business with junk-rated companies. Energy traders rely heavily on credit to guarantee their transactions. Without an investment-grade rating, Williams' ability to compete against more highly rated companies could diminish.

"At junk, the cost to borrow could double or even triple," Adamson said. "Then you can't compete with companies that have better ratings -- which could take you out of the market."

Risk Premium

Already, bond yields for both Williams and competitor

Dynegy

(DYN)

have soared to junk levels in recent weeks, signaling investor conviction that both companies will soon lose their investment-grade ratings. Increasingly, Moody's and other agencies are reserving their higher ratings for companies like

Duke Energy

(DUK) - Get Report

, which boasts a healthy portfolio of solid assets.

Last week, Moody's recommended that companies like Williams seek out creditworthy partners -- perhaps in the financial services industry -- if they hope to maintain their investment-grade ratings.

Asked this week about the potential for such a partnership, Williams said the company does not discuss such matters publicly.

For Williams, the trading business is critical to bottom-line profits. Although it generated less than 20% of the company's $11 billion in revenue last year, it accounted for roughly half of the company's operating income. Williams has repeatedly stressed that it will take significant steps -- including the planned sale of $3 billion worth of assets -- to protect its credit rating and remain a competitive player in the energy trading business.

But Williams must first satisfy questions from federal regulators about its role in the Western power crisis two years ago. The Federal Energy Regulatory Commission this week

threatened to yank rate-setting authority from four companies -- including Williams -- because of what it called inadequate responses to the agency's investigation. Williams has since issued a response, saying it did not drive up electricity prices, but the FERC has yet to bless that submission as satisfactory.

In the meantime, Williams has responded only vaguely to rumors that it's already scaling back its Western trading staff. Asked to identify the number of employees on its Western trading desk -- and compare that to a month and a year ago -- the company said it didn't know the answer "offhand."

Instead, Williams said, "The overall floor can seat about 300 traders."

It did not say how many of those seats remain filled.