1) Evaluate the terms of the proposed $900 million financing from the perspective of both parties.

How would
you calculate the return to investors in the transaction?
Steven Malcolm was appointed the CEO of Williams Companies in January 2002 to take charge of the
problem at hand at Williams. The company was facing liquidity crisis and amidst the anxiety in the energy
markets and the losses of its subsidiary Williams Communication group, its credit ratings had tanked and was
unable to find a ready lender.
Berkshire Hathaway and Lehman brothers had proposed a short term financing option of $900 million for one
year with strings attached as laid in the terms and covenants. The two parties that are concerned here are
Williams Companies as debtors and Berkshire, Lehman et al as lenders or creditors.
From the perspective of lenders, it was an intelligent strategy to provide short term financing to Williams when
none was available with perks and rewards if Williams defaulted or breached any of its covenants. The
potential reward of the RMT assets of $2.8 billion dollars was definitely much more coveted than the potential
interest payments from Williams. Warren Buffet who was shopping in the crisis struck energy markets for
troubled assets had found one in Williams if things went sour for this troubled company. So making available
$900 million dollars as short term liquidity for Williams for sweet returns of almost $315 million in interest
payments or the big jackpot of the RMT assets of $2.8 billion was no brainer, in fact it was meticulously
carved out to take advantage of the situation.
From the perspective of the borrower that is Williams Companies, Malcolm was in a very tight spot to make
the decision regarding this proposed offer of $ 900 million loan. The payments required from Williams are
shown below:

Principal 900

Lender - Berkshire, Lehman et al

million

Required Payments
Cash interest @ 5.8 %

52.2

million

Additional interest 14% per annum

126
million

Deferred set up fee of 15 % assuming no sale of RMT assets

135
million

Total payment obligations to lenders after one year (34.8 % returns to lender)

313.2

million

Also, interestingly if Williams was still struggling and it had to sell some of its assets to make liquidity
available, the terms of the above financing would slap even more payments to Williams under its deferred set
Page 2 of 13
up fee clause. Lets assume hypothetically that Williams had to sell $2.0 billion of RMT assets and that the rate
applicable is 17% of the purchase price, then the company would be liable for an additional $187 million (17%
of $2 billion minus 900 million debt) which would bring the total payments to $365 million. So the return to
lenders is at minimum of $313 million in interest payments for $900 million debt which come to 34.8%
returns. If Williams has to sell any of its assets for $2 billion then the returns are approximately whopping 41%
to the lenders. The tax advantage from paying 313.2 million dollars in interests is $109.6 million, not enough
justification for committing to a loan with very restrictive covenants and especially if its a one year loan.
Williams might find itself struggling with a similar situation six months from now.
The question on return to the investors or stock holders is really interesting. The cash flows to the investors has
taken a hit very recently when dividends were slashed 95% to 1 cent per share and the share prices have tanked
to $2.95 per share as of July 2002. So most of the investments have evaporated the in the last year as stock
price started plummeting because of Williams credit crisis. Now whether this proposed $900 million short term
loan to help Williams be profitable again has to be seen in the following light.
At the end of 2001, the stock price of Williams was trading at $25.5 per share with 515,362 thousand shares
outstanding, equity made up 53% of the firm value.
In 2002, the stock price tanked to $ 2.95 per share bringing the stock holders equity down from $ 13 billion to
$1.5 billion, thereby the structure of the firm and its market value was completely changed too as shown below
with equity having 10% of the total firm value pie:

This changed situation alone made up for the distressing situation for the investors as the debt to equity ratio
was almost 9, meaning debt was 9 times the equity as compared to less than 1 before (0.88). When a firms
debt equity ratio is normal around or less than one, getting more debt is a signal to investors that the firms
value is in good shape. But in this situation, more debt is not exactly good news to the investors. So the
question of return to the investors here is definitely not a cash flow return in the short term(as dividends and
stock prices both have tanked), but rather a subjective question of whether this proposed finance of $ 900
million is going to help Williams survive and be profitable in the long run. If this proposed financing helps
Williams survive the credit crisis and gives it enough time to restructure itself for better poise, profit and
growth, then the investors would say yes, but if this additional debt creates more problems and compounds
Williams already bad situation then investors are in losing proposition. So the return to investors is more a
subjective answer and depends upon what the new management does with the short term liquidity of $900
million.

2) What is the purpose of each of the terms of the proposed financing?

Page 3 of 13
The proposed financing offered $ 900 million now when Williams needed cash most and was payable back
after one year with interest payments. Basically it is the much needed grease or solvency to keep the firm
operating and give it enough time until it restructures itself to more optimal size and structure which would
profitable in the long run. The proposed financing is an offer in a tight credit market that Williams must decide
whether it wants to accept to prevent from defaulting on obligations and going to bankruptcy.
Purpose of the covenants:

1) Maintain an interest coverage ratio of 1.5 to 1

Interest coverage ratio if EBIT / Interest expense.
If we look at Williams interest expenses and EBITs in last three years we find:
The ratio shows long term solvency of the firm, it shows how well a company has its interest obligations
covered, the higher the better. So the covenant wants that the EBIT earnings should be at least 1.5 times of the
interest obligation for that period, to make sure there is no default. Considering that Williams interest coverage
ratio was 1.38 in the first half year 2002, it is not surprising that lenders want a better ratio.
2) Maintain a fixed charge coverage ratio of 1.15 to 1
This ratio measures the companys ability to meet its fixed financing expenses like leases. Williams still had
some lease agreement guarantees to Williams Communication group and had taken a $ 507 million hit as
extraordinary item in cash outflow from operations (Exhibit3). This covenant makes sure that all such
obligations were covered and there was cash flow left over after such payments.
3) Limit certain restricted payments (redemption of capital stock of Williams) This covenant tries to prevent
using temporary cash flow increases towards repurchase of stocks thereby putting liquidity in danger.
4) Limit capital expenditures in excess of $ 300 million
Obviously Williams has a liquidity crisis and in such times, wasteful capital expenditures that are for long term
growth and strategy might kill the company if solvency is not maintained, hence the restriction on capital
expenditures. Williams has had capital expenditures of 2 to 4 billion dollars in the past.
5) Give lenders attendance rights to BoD meetings.
2000
2001
2002
EBIT
1841
2591
666
interest expense
1010

787
483
Interest coverage ratio
1.82
3.29
1.38
Page 4 of 13
This provision tries to get some transparency into the decisions and operational status of the Williams company
which is important for the lenders.
6) Limit intercompany indebtedness
Williams had landed into the cash crunch crisis, first by bailing out its own subsidiary WCG in which the debt
that was outstanding to Williams was converted to equity similar to DIP financing. This covenant tries to keep
the books clean and make sure Williams is healthy by its own virtue and neither borrowing from or lending
debt to its own subsidiaries.
7) Maintain parent liquidity of $ 600 million.
This covenant from lenders demands that short term cash be always available for meeting short term liabilities
and debt obligations. Williams may not agree with these stipulations and may consider them too restrictive, but
nevertheless the lenders want these provisions for their own safety.

3) Conduct an analysis of Williams sources and uses of funds during the first half of 2002. How do you expect
these numbers to evolve over the second half of 2002? What is the problem facing Williams? How did it get
into this situation? How has it tried to address the problem it is facing?
In the first half of 2002 (ending March 31, 2002) Williams had receivables of $2.15 billion from WCG.
Williams affirmed its payment obligation on $1.4 billion worth of WCG Note Trust Notes and payed $754
million under the WCG lease agreement. Williams also had $363 million of previous receivables. Williams
acknowledged that WCGs debt burden might prevent it from raising new funds. In March 2001, Williams
converted a $975 million promissory note from WCG into 24.3 million newly issues shares of WCG equity,
thereby replacing a debt obligation in WCG with an additional equity stake. In addition, Williams provided
indirect credit support for $1.4 billion of WCGs debt. These were treated as OBS activities. After disclosing
that it may reorganize under U.S. bankruptcy code Williams wrote off its investment in WCG.
Because of the collapse of major energy companies in the early 2000s, energy trading was an uncertain market
as many companies were unsure of their exposure. Even one of its competitors, El Paso Corp., announced that
it would curtail investment in energy trading. Also, many telecommunications companies (an industry
Williams is also involved in) were facing difficulties. There were also inquiries from regulators about its
reporting and energy trading.
Malcolm designed a four pronged plan to address the continuing financial problems of Williams. Malcolm
wanted to (1) sell assets (2) reach a resolution on its energy and trading book (3) managing and monitoring
cash and businesses (4) and right-sizing Williams to reflect the new scope of operation. Malcolm wanted
Williams to live within its means.
Page 5 of 13
In 2002 Williams wanted to sell between $250 and $750 million assets. In actuality they ended up selling
upwards of $1.7 billion in assets. They also announced their intention to sell an additional $1.5 billion to $3
billion over the next 12 months. These announced asset sales cause Williams stock to drop over 10% on the
day of announcement. Capital expenditures were also a major use of Williams cash and Malcolm attempted to
reduce them. In 2002 Williams proposed cutting capital spending by 25% or $1 billion, to a total of $3 billion.
Williams also took steps to bolster its balance sheet. It issued $1 billion of the equity-linked security called
FELINE PACS. Williams sold preferred stock to Berkshire Hathaway. Williams hoped to create a joint-venture
for its Williams Energy Marketing and Trading division, estimated to be worth $2.2 billion. Williams also cut
its dividend by 95%, from 20 cents a share to 1 cent a share. The cut was to give Williams approximately $95
billion in the third quarter. Williams had a $2.2 billion commercial paper program that was back by a short
term credit facility. As of March 31, 2002 $378.4 million of commercial paper was outstanding. Williams
inventories increased from December 31, 2001 to March 31, 2002 by approximately 100 million, from $813
million to $908 million. Earnings per share (EPS) dropped from .77 to .10 from December 31, 2001 to March
31, 2002. Investing income dropped from $34 million to $16.1 from December 31, 2001 to March 31, 2002.
Over the second half of 2002 these numbers are projected to get worse based on a financial analysis of the
operating cash flows of the company. Williams is facing a problem of not having enough money to continue
operations, liquidity crisis. Some operations that it is running are sapping money from the rest of the company
and even had to sell off Williams Communication group. Credit has dried up and there is a lack of investment
in the energy sector because of recent problems in the energy company (with companies including Enron).

There is also a curve shift and the write off of certain assets is definitely not helping the situation. Williams
was also reeling from WCGs debt burden. It got into this situation because of problems in its asset-based
businesses and the energy market as a whole.
The Williams Companies, Inc. Consolidated Balance Sheet
(Unaudited)
(Dollars in millions, except per-share amounts)
ASSETS Current assets:
Cash and cash equivalents
March 31, 2001*
-----------$ 1,703.0
December 31,
2002 --------$ 1,291.4
Page 6 of 13
Accounts and notes receivable less allowance of $193.2 ($256.6 in 2001)
Inventories
Energy risk management and trading assets
Margin deposits
Assets of discontinued operations -- Deferred income taxes 391.3 Other 485.5 520.7
--------- --------Total current assets 13,991.8 12,938.0
Investments 1,718.8
Property, plant and equipment, at cost

Less accumulated depreciation and depletion

Energy risk management and trading assets
Goodwill, net
Assets of discontinued operations
Receivables from Williams Communications Group, Inc. less allowance of
$2,038.8 ($103.2 in 2001)
Other assets and deferred charges
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
343.1 1,017.2
Notes payable
Accounts payable
Accrued liabilities
Liabilities of discontinued operations
Energy risk management and trading liabilities
Guarantees and payment obligations related to Williams Communications Group, Inc. Long-term debt due
within one year 1,938.6 1,014.8
--------- --------Total current liabilities 13,443.7 13,494.5
--------- 17,048.1
(5,199.6)
4,209.4
137.2 1,019.5
908.3 256.8

1,164.3
4,834.2 1,164.3
--------- ========= =========
--------$40,117.5 $38,906.2
-935.9
$ 678.4 $ 1,424.5 2,847.7 2,885.9
1,841.7 1,957.1
-- 40.9
3,232.5
813.2
7,014.4 6,514.1
213.8 25.6
440.6
3,118.6
1,563.1
22,318.1 22,138.4
(5,270.0)
--------- 16,938.8
6,086.1
5,525.7 51.2
Page 7 of 13

645.6
Long-term debt
Deferred income taxes
Liabilities of discontinued operations
Energy risk management and trading liabilities
Guarantees and payment obligations related to Williams Communications Group, Inc.
-- 488.0 3,242.4
Other liabilities and deferred income
Contingent liabilities and commitments (Note 10) Minority interests in consolidated subsidiaries Preferred
interests in consolidated subsidiaries Stockholders' equity:
Preferred stock, $1 per share par value, 30 million shares authorized, 1.5
million issued in 2002, none in 2001
Common stock, $1 per share par value, 960 million shares authorized, 519.5
million
issued in 2002, 518.9 million issued in 2001
272.3
519.5 Capital in excess of par value 5,086.1
Retained earnings 134.4 Accumulated other comprehensive income
Other
(54.9)
--------- --------12,233.5 9,012.7 3,541.7 3,689.9
2,936.6
-- 1,120.0

943.1
201.0 976.4
-518.9 5,085.1
199.6
124.2 345.1
(65.0)
983.6
201.3 428.8
6,081.6 6,083.7 Less treasury stock (at cost), 3.3 million shares of common stock in
2002
and 3.4 million in 2001
Total stockholders' equity
Total liabilities and stockholders' equity
The Williams Companies, Inc. Consolidated Statement of Cash Flows
(Unaudited)
(39.1) (39.7) ------------------------========= =========
6,042.5 6,044.0 --------$40,117.5 $38,906.2
Page 8 of 13

(Millions)
OPERATING ACTIVITIES:
Income from continuing operations
Adjustments to reconcile to cash used by operations:
Three months ended March 31, ---------------------------Depreciation, depletion and amortization
Provision for deferred income taxes
Payments of guarantees and payment obligations related to Williams Communications
Group, Inc. (753.9) -Estimated loss on realization of amounts due from Williams Communications Group, Inc. 232.0 -- Preferred
returns and minority interest in income of
consolidated subsidiaries
Tax benefit of stock-based awards 1.9 Cash provided (used) by changes in assets and liabilities:
Accounts and notes receivable (62.3)
Inventories (95.0) Margin deposits (43.0)
75.2
(67.8)
Other current assets Accounts payable Accrued liabilities
(157.0) (25.7)
66.3 71.5
(241.7)
Changes in current energy risk management and trading assets and liabilities 60.1 (358.6)
Changes in noncurrent energy risk management and trading assets and liabilities (319.0)
(517.1)

Changes in noncurrent deferred income

Other, including changes in noncurrent assets and liabilities
-------- Net cash used by operating activities of continuing operations
(20.1) 9.3 (40.0)
(1,040.4) 30.2
30.7
(240.7) 31.5
-------- Net cash provided by operating activities of discontinued operations
Net cash used by operating activities
FINANCING ACTIVITIES:
Payments of notes payable
Proceeds from long-term debt
Payments of long-term debt
Proceeds from issuance of common stock
-------- --------------- (1,010.2)
-------(1,337.5) 3,083.7
(277.2)
(209.2)
(2,012.7) 1,187.8
2002 -------2001* --------

$ 123.2
211.6 73.3
174.3 127.1
15.2 25.3 15.0
175.3 (434.1)
$ 366.9
(680.4)
19.2 1,362.4
Page 9 of 13
Proceeds from issuance of preferred stock
Dividends paid (103.5) Proceeds from sale of limited partner units of consolidated partnership Payments of
debt issuance costs
Payments/dividends to preferred and minority interests
Other--net (.3)
272.3 -- (72.5)
-------Net cash provided (used) by financing activities of continuing operations
(150.4)
Net cash provided (used) by financing activities of discontinued operations
Net cash provided by financing activities
INVESTING ACTIVITIES: Property, plant and equipment:
Capital expenditures
Proceeds from dispositions
Purchases of investments/advances to affiliates Proceeds from sales of businesses

Other--net
-------- --------------- 1,541.7
-------(431.4) 86.5
-------- Net cash used by investing activities of continuing operations
Net cash used by investing activities of discontinued operations -------(81.0)
(48.6) (1,449.3)
-------(129.6) (1,834.4)
Net cash used by investing activities
Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period**
Cash and cash equivalents at end of period**
Source Williams 10-Q statements
--------------- ========
--------------(8.3) (4.8) -------(95.4)
-- 92.5 (20.2)
(14.0) (7.3) --

(307.2) 14.5
1,547.3 (5.6)
1,167.2
1,317.6
(151.0) (87.6) 423.2 --------- ========
401.9 1,301.1
(876.4) 1,210.7
$ 334.3
$1,703.0
Page 10 of 13
(385.1)

4) Some might describe Williams as financially distressed. What evidence is there that Williams business
may be compromised as a result of its previous financial decisions?
Williams could definitely be described as financially distressed and its business has been compromised as a
result of its previous financial decisions. In the first quarter of 2002 Williams has an estimated loss on
realization of amounts due from Williams Communications Group, Inc. of $232 million. Williams also has to

make payments of guarantees and payment obligations related to Williams Communications Group, Inc. of
$753.9 million. Moreover, Williams used more net cash for operating activities in the first quarter of 2002 then
the first quarter of 2001, $1 billion versus $209 million. Its capital expenditures in the first quarter were also
significant, $431 million. Additionally, its plummeting stock price added additional financial distress to the
company.
Williams Financial Condition and Liquidity
Williams had available cash equivalent investments of $1.5 billion as of March 31, 2000 versus $1.1 billion
on December 31, 2001.
Williams had $208 million available through Williams $700 million bank credit facility on March 31, 2002
versus $700 million on December 31, 2001.
The company had $1.8 billion from its $2.2 billion commercial paper program on March 31, 2002 versus
$769 million on December 31, 2001.
Williams also had cash on hand generated from operations and from short term uncommitted bank lines of
credit
Credit Ratings
Williams had preferred interest and debt obligations that had provisions required accelerated payment of the
obligation of the assets in the event of specified levels of declines in Williams credit ratings set by Moodys,
Standard & Poors, and Fitch. Therefore, Williams was in quite a precarious situation. Williams rating was
likely to fall due to its financial problems. Williams energy marketing and trading business relies upon the
investment grade ratings of Williams senior unsecured long term debt to satisfy the credit support
requirements of many parties. If its credit rating did in fact decline below investment grade, its ability to
continue in energy marketing and trading activity would be significantly limited. In May 2002 Williams faced
further trouble when Moodys Investor Services notified it that it would be reviewing Williams to determine if
a credit rating downgrade should be initiated. On Williams unsecured long term debt it carries ratings of
Standard and Poors BBB (negative watch) to Moodys Baa2 (a negative outlook).
Operating Activities
Page 11 of 13
Williams paid $754 million related to WCGs purchase of assets. In Q1 2002 Williams was assessed an
additional (pre tax) charge of $232 million.
Financing Activities
On January 14, 2002 Williams sold 44 million units of FELINE PACS. The proceeds were $1.1 billion which
were used mostly to strengthen its balance sheet. In March Williams also issues $850 million 30-year notes
with an interest rate of 8.75% and $650 million in 10-year notes with an interest rate of 8.125%. The proceeds
were used to repay commercial paper and to provide capital for general uses.

 Williams issued 1.5 million shares of 9.875 cumulative preferred stock for $275 million (which dividends
are to be paid quarterly).
Williams Energy Partners L.P., a subsidiary of Williams, borrowed close to $700 million to purchase
Williams Pipe Line.
Williams longer term debt to debt plus equity ratio was 67.8% as of March 31, 2002 versus 59.8% on
December 31, 2001. If short term notes and long term debt due in one year are included the ratios would shift
to 71.1% on March 31, 2002 and 65.5% on December 31, 2001. The long term debt to debt-plus-equity ratio
for covenants was 61.8% on March 31, 2002 as compared to 61.5% on December 31, 2001.
Investing Activities
Williams spent $122 million to the development of the Gulfstream joint venture project.
Proceeds from the sale of businesses exceed $400 million. $450 million was made alone from the sale of a
Kern River company. These sales reduced the need for Williams to fund capital expenditure requirements in
the near future.

5) Tough times demand tough decisions. As the CEO of Williams, would you recommend accepting the
proposed $900 million financing offer? If not, what alternatives would you pursue?
As the CEO of Williams I would recommend accepting the proposed $900 million financing offer. Williams
was in the need of new financing and it had substantial amounts of short-term and long-term debt maturing in
the second half of 2002 and its credit and paper facilities (held in reserve to raise additional short term
financing) needed to be renewed later in the. The terms of the loan were rigorous though and Williams should
explore other options using Berkshires $900 million financing as an example/leverage that their balance sheet
would be strong in 10-20 years. This would make other credit companies wonder if Buffett is putting up this
money why shouldnt we?

Page 12 of 13
Buffetts strong record is known. Buffett is an investor known to target companies he believes are undervalued
and known on the market to have great skills in knowing when companies are not being given their fair credit.
On the flip side Lehmans and Berkshires bid is no guarantee. Furthermore, Williams would have to pay 5.8%
interest quarterly, a 14% principal payment at maturity, and a deferred setup fee of at least 15%. These terms
raise some doubts about the strength of Lehman and Berkshires offer (they were quite aware of an
impending rating drop). Also, it would be important for Williams to sell the Barrett assets or the fee would
drastically increase. Moreover, Williams would most likely be unable to find a joint venture partner in its
Energy Marketing and Trading division. In the next 5 years Williams has over $7 billion in debt coming due.
While large, well capitalized companies in other industries might not be facing problems securing credit is a
problem. Williams could go to regulators for funds contending that its services are vital to the public and also
ask for changes in the industry which would help them survive. They could also ask the State where they are
based (Oklahoma, having been a part of the Tulsa community since 1918) for assistance. Equity investments
from energy development corporations are another option. An interesting alternative is for Williams to turn
away from an excessive reliance on mathematical models to predict the future. There are qualitative and
judgment issues which these capital models may not address. These risks can only be understood through
intuitive means. Also, there are underlying deficiencies in the financial systems ability to process, view, trade,
and analyze complex financial products (as shown by the recent financial crisis). Sudden liquidity evaporation
as in the case of Williams is an added burden. Financial analysts do not have all the tools to dynamically
measure liquidity. Furthermore, there is a lack of contingency plans by Williams that identify extreme changes
that can occur in any market. Williams could provide more intuitive information to its potential lenders
thereby enticing others to bid even more. Williams liquidity problem was unforeseen but one important
Williams should ask itself is, what contingencies will they put in place to prevent our counter act such events?
Williams should improve the transparency of its risks exposure and ascertain equal parameters for qualitative
parameters for risk assessment. Williams should also explore Monte Carlo methods, computational algorithms
used for situations in which there is uncertainty in inputs.