Williams Reduces '02 Forecast, Drops Debt from 71% to 57%

Williams Cos. CEO Steve Malcolm said Friday the company is "prepared to do whatever it takes" to improve the company's balance sheet, including selling more assets if the opportunity arises. However, he said the sale of the Kern River Gas Transmission system (see Daily GPI, March 8) now will put the company in a cash neutral position, affording it the opportunity to grow the business in the way it needs to grow.

"If you ever had liquidity concerns about the company," Malcolm told analysts, "you can stop worrying about it now."

As part of its efforts to shore up the bottom line, Williams reduced its earnings forecast for the first quarter of 2002 to 40-45 cents -- below the 59 cents expected by Thomson Financial/First Call analysts. Williams expects to make $2.15-$2.30 in 2002, also below analysts' average estimate of $2.37 and also below a previous Williams' forecast of $2.65-$2.75. Williams also will offer early retirement to 450 employees to cut another $50 million in 2002 alone.

With the steps announced, Malcolm expects Williams to be on track to deliver 15% year-over-year growth in earnings per share, using 2002 as the base year.

"In less than three months, we have met the challenge to conform to more conservative ratings standards and further strengthen our balance sheet," Malcolm said. "Once we complete all of the steps we've announced, we expect to reduce our fully loaded debt-to-capital ratio from approximately 71% at year-end 2001 to approximately 57% by the end of this year -- no small feat for an asset-rich company like Williams."

Malcolm said the pending sale of the Kern River system, "in addition to reducing debt and boosting free cash flow, allows us to direct the capital to other important expansion projects designed to increase the productive capacity of our assets. We have a lot of serious issues behind us. Now Williams can resume our focus on the future -- growing our businesses, providing top service to our customers and building value for our shareholders."

CFO Jack McCarthy referred to Williams' announcements as a "perfect storm of issues [we have been] contending with...cash, capital, debt reduction...Timing was critical, and selling Kern River was by far the best thing to do."

Regarding questions about the sale of future assets, Malcolm said that Williams is "not married to any asset," and said the company will "continue to evaluate all of the assets as we go forward. There's a price out there at which we would sell," but he added, "we're not out to sell assets right now. Kern River was just one that was offered that we got a billion dollars for, basically," allowing the company to move into a cash neutral position. The money Williams receives from the Kern River sale will be put toward other projects that Malcolm said are "key" to the company's growth going forward.

Williams to date has completed the sale of $56 million in Texas gathering assets. In addition to selling $250 million to $750 million in various assets, Williams also said Friday it would sell Williams Pipe Line to Williams Energy Partners LP, its master limited partnership, for at least $900 million. The sale is expected to occur before the end of the second quarter.

The oil pipeline subsidiary is comprised of 6,747 miles of active pipe that delivers petroleum products to 11 midwestern states. Last year, the system transported approximately 260 million bbl. Thirty-nine storage and distribution terminals connected to Williams Pipe Line are included in the purchase. The facilities have an aggregate storage capacity of 26.5 million bbl. Williams originally purchased the pipeline from Great Lakes Pipe Line Co. in 1966 for $287.6 million.

Malcolm and his executive team spent Friday reviewing for analysts and the media the comprehensive steps the company has taken to remain financially flexible and capture significant business opportunities during 2002 and into 2003. Williams ended 2001 with a fully loaded debt-to-capital ratio of 71%, which included all of the Williams Communications Group (WCG)-related charges.

Williams also has assumed semiannual interest payments on the $1.4 billion WCG Note Trust. The debt, which matures in March 2004, will be reflected on Williams' balance sheet in 2002. Any change in the business condition of telecommunications spinoff WCG will have no impact on this obligation, Malcolm said.

Because of the steps that Williams already has taken and others announced during in the last several weeks, Malcolm said the ratio is expected to improve by 14% percentage points to 57% by year-end 2002, and would be "well within the levels required to support growth initiatives and an investment-grade credit rating."

Late last year, Williams had planned a $4 billion capital expenditure budget for 2002, the largest in the company's history. As the economy changed, and then with the Enron Corp. bankruptcy, Williams announced a $1 billion reduction from the plan. The sale of the Kern River pipeline system further reduces budgeted capital requirements to $2.3 billion. About $1 billion of Williams 2002 capital expenditures will provide for system maintenance; the balance will be used primarily for expansion of existing assets.

Williams' reconciliation of the reported changes to recurring results schedule is available on the company's web site at http://www.williams.com/investors/4Q01_analyst_packet.pdf.

Williams' stock was up 9% on Thursday, and overall up 38% for the week. Its "progress" in its balance sheet improvement program "points to a continued recovery to $26-$28 near term," said Credit Suisse First Boston analyst Curt Launer. Credit Suisse estimates Williams will show 55-60% debt at year end 2002.

Reiterating a "strong buy," Merrill Lynch analyst Carl L. Kirst noted Friday that "all in all, we believe the positives far outweigh the negatives" regarding Williams' recent announcements. "As investor focus turns from the balance sheet to earnings, we believe Williams will continue to move forward."

Moreover, said Kirst, "the transactions involved Wall Street's arguably most notable value investor, Warren Buffet (of Berkshire Hathaway)...we believe the backing of an American icon such as Mr. Buffet brings additional credibility and confidence to a somewhat bruised management team and story."

Analyst Ronald Barone of UBS Warburg was also enthusiastic about Buffet's participation, noting, "given than Williams has been a company with real assets and a decent level of management credibility, there was a good chance that objective investors would conclude that dealing with its WCG contingent liabilities would be painful, but not a company breaker. That has and continues to be our position and is likely the view of Warren Buffet, who has invested $275 million to take an investment in the company."

In reaction to the Kern River sale, Fitch on Friday said Williams "has taken appropriate measures to mitigate the impact of consolidated debt leverage." It said that Williams' "credit profile and ratings will continue to stabilize over the next six to nine months pending the favorable resolution of other outstanding credit issues."

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