On the heels of a quarterly earnings report that, although negative, still enthused more buyers than sellers last week, Williams’ annual shareholder meeting Thursday gave the CEO an opportunity to share the company’s vision for a “new” integrated natural gas company that he promised would be “viable, sustainable and value creating.”

CEO Steve Malcolm, who at last year’s meeting had been asked to resign by several irate shareholders, appeared renewed last week as he presided over what he said was a smaller and more simplified company. However, the once embattled CEO noted that Williams, nearly 100 years old, had transformed itself in the past, and he believes the Tulsa-based company’s gas assets form a solid platform for profitability and cash-flow generation into the future.

“Today, there are many reasons to once again be confident in Williams,” Malcolm said. “We are managing the company differently to fit what is a very different business environment. We’re building liquidity and cutting costs. We’re generating cash by selling assets that don’t fit our new, sharply defined business focus. We’re exercising a new discipline in capital spending. We’re strengthening our balance sheet by reducing debt.” Malcolm added that the company also has taken steps to further formalize its commitment to running the business with “integrity and openness that is at the heart of our core values and beliefs.”

Basically, Malcolm blamed two businesses for Williams’ fall last year: energy marketing and telecommunications, which were “each caught in an unprecedented market collapse.”

With a new direction set after being besieged with problems, Malcolm said management decided that it wanted to own and manage natural gas assets in “key” growth markets where the company enjoys the competitive advantages of scale, such as its Opal gas processing plant in Wyoming; where it enjoys the advantages of being a low-cost service provider, as it is with its Transco pipeline; or where it is a market leader, as it is in the Rocky Mountains, where it is the largest operator in the Piceance and Powder River basins.

“There’s no doubt that on the financial side, we still have some challenges. But I can assure you that we are meeting the challenges and moving well beyond the financial crisis we experienced last July,” he said.

Executing the financial strategy required some tough decisions, he said, including selling assets that had served the company well. Besides selling assets and implementing workforce reductions, Williams also has discontinued its national television advertising, and shut down its energy news web site. It also is renegotiating some sporting event sponsorships.

“These cost-reduction efforts — and many others — have resulted in a significant reduction in our selling, general and administrative costs,” he said. “We’ve gone from spending almost a billion dollars in 2002 to an estimated $600 million this year. We’re making progress. In the first quarter, we reduced these expenses by 16% over a year ago.”

Although it has substantially exited energy marketing and trading, Malcolm admitted it has been more difficult than simply pulling the plug. “We are selling individual contracts as fair offers come in, such as the sale earlier this year of two significant, long-term contracts and a power facility for approximately $255 million,” he said. “And we will continue our efforts to sell more contracts. But there’s still a perception of uncertainty around this sector, which makes it more difficult to resolve than other asset sales.”

In the next 18 months, Malcolm said a top priority is in meeting debt obligations. “The first significant obligation is the 364-day loan backed by our Rocky Mountain reserves, which is due in July. The other obligation in that league is a $1.4 billion note related to our former telecom subsidiary that is due in March 2004.” However, by the time of the next annual shareholder meeting in a year, “we expect liquidity-related issues to be largely behind us.”

For the first quarter, Williams reported Tuesday a loss from continuing operations of $57.7 million (minus 13 cents per share), compared with restated income from continuing operations of $98.4 million (5 cents) for the same period last year. Income from discontinued operations alone was $4.5 million (1 cent), compared with restated income from discontinued operations of $9.3 million (2 cents) a year ago. Discontinued operations include a refinery and retail travel centers, both of which Williams sold in the first quarter; a bio-energy business that the company expects to complete the sale of in the second quarter; and a soda ash mining operation.

The 2002 amounts have been restated for discontinued operations, which also include the Kern River, Central, Mid-America and Seminole pipelines that were divested last year.

Overall, Williams reported an unaudited first quarter 2003 net loss of $814.5 million (minus $1.59 per share), compared with net income of $107.7 million (7 cents) for the same period last year. What also affected the first quarter was an after-tax charge of $761.3 million ($1.47), to reflect the cumulative effect of new accounting principles that Williams adopted Jan. 1 on Emerging Issues Task Force (EITF) Issue 02-3, “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities.”

By segment, Williams’ Gas Pipeline reported quarterly profit of $94.6 million compared with a restated $179.3 million for the same period last year. Exploration & Production reported segment profit of $126.1 million versus $106.3 million for the same period last year. Midstream Gas & Liquids reported profit of $106.9 million compared with a restated segment profit of $54.3 million for the same period last year. And Energy Marketing & Trading reported a loss in the quarter of $136.4 million, compared with a profit of $283.1 million for the same period last year.

The company noted that total liquidity as of April 30 was $1.8 billion, consisting of $1.4 billion in cash and $400 million in available credit. In addition, the company expects to realize $2 billion in cash during May and June from the closing of asset sales it already has announced. Approximately $560 million of the proceeds are contractually required to reduce debt.

Since the beginning of 2002, Williams has sold or agreed to sell more than 20 assets, resulting in the divestiture of petroleum pipelines, natural gas and natural-gas liquids pipelines, retail convenience stores, ethanol plants and two of three refineries. Going forward, Williams’ natural gas asset portfolio will include 14,000 miles of interstate gas pipelines, including the 4,000 mile Northwest system and the 10,000 mile Transco system. Williams also owns a 50% interest in the 581 mile Gulfstream system. Altogether, the pipes deliver roughly 12% of the natural gas used in the United States.

The portfolio also includes an extensive E&P business, which focuses on producing natural gas from tight-sands formations and coalbed methane reserves in the Piceance, San Juan, Powder River, Arkoma and Green River basins. In 2003, net production — including the effect of properties in the process of being sold — is expected to average 470 MMcf/d. At year-end 2002, Williams had proved reserves of 2.8 Tcfe. In 2003, Williams has sold or agreed to sell roughly 400 Bcfe of its 2002 year-end proved reserves.

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