Williams will split itself into two standalone publicly traded corporations, the Tulsa-based company said Wednesday, in a move aimed at value enhancement that has been on the minds of company executives for a while.

The Williams board has approved a plan to split into an exploration and production (E&P) unit via an initial public offering in the third quarter of up to 20% of Williams' interest in the business and, in 2012, a tax-free spin off to Williams shareholders of the remaining interest.

Following the spin off, shareholders will own a stake in Williams, an owner/operator of North American midstream infrastructure and natural gas pipeline assets; and, separately, a large-scale, independent North American diversified E&P company with interests in South America. Williams said both the growth potential and overall valuation of its assets will be enhanced as a result of separating its businesses, a move that has been contemplated since at least late 2008 (see Daily GPI, Nov. 7, 2008).

"We have a clear, specific plan to maximize shareholder value while strengthening Williams' investment-grade credit profile," said Williams CEO Alan Armstrong. "Williams has generated significant value by operating as an integrated natural gas company. As we look to the future, though, we are convinced that the capital efficiency created by separating into two distinct investment opportunities will allow shareholders to realize greater value.

"Williams will focus on meeting the robust demand for infrastructure created by the new, abundant supplies of domestic natural gas. The new E&P company will focus on competitively developing and producing these gas and oil resource plays."

Following the spin off, Williams will be a large-scale infrastructure company with a business focus on enabling producers and end-users to optimize the value of North America's significant resource plays, Williams said.

The company said it expects to continue to have investment-grade credit ratings. Williams' largest component will be its ownership interests in Williams Partners LP. Williams also will continue to hold and grow its Canadian midstream and U.S. olefins businesses. Williams also owns a 25.5% interest in Gulfstream, which it likely will drop down to Williams Partners in the future in exchange for cash and/or additional partnership interests, the company said.

Williams Partners will continue to be a diversified master limited partnership with expected continuing investment-grade credit ratings. The partnership has an asset portfolio that includes large-scale interstate natural gas pipelines and geographically diverse midstream assets.

The new E&P company is expected to be one of the largest independent producers of natural gas in the United States. At year-end it had approximately 4.5 Tcfe of proved reserves and 15.9 Tcfe of proved, probable and possible reserves, Williams said. The new E&P will have new, relatively undeveloped acreage positions in the Marcellus Shale and North Dakota's Bakken oil play, as well as positions in key Rockies basins, including the Piceance, Powder River, San Juan and Green River.

The new E&P company will have positions in the Barnett Shale and Arkoma Basin and, through its controlling 69% interest in Apco Oil and Gas International Inc., will have South American reserves and production in Argentina as well as E&P contracts in Colombia.

Standard & Poor's Ratings Services (S&P) placed its "BBB-" corporate credit rating on Williams and its operating subsidiaries Williams Partners, Transco and Northwest on CreditWatch with positive implications.

"The CreditWatch listing reflects our view that Williams' consolidated credit profile will improve following the spin off of the E&P business," S&P said. "We view the E&P business as notably riskier than Williams' pipeline and midstream segments due to its cash flow volatility and the significant capital requirements needed to maintain production levels and reserves. As a result, we believe the pro forma business profile will likely improve to strong because we estimate that about two-thirds of the company's cash flows will come from relatively stable fee-based sources.

"The remaining one-third has exposure to commodity prices, primarily natural gas liquids. Pro forma financial ratios will worsen. However, the remaining businesses can tolerate more aggressive financial leverage due to the inherently more stable cash flows. We do not maintain ratings on the E&P company and are not commenting on its standalone creditworthiness..."

Armstrong will continue as Williams CEO; Frank MacInnis will continue to serve as non executive chairman of the Williams board of directors. Williams said it will determine and announce new E&P board and management positions in conjunction with the initial public offering process.

The separation of Williams into two companies will not require a shareholder vote but will be subject to regulatory approvals, the receipt of a tax opinion from counsel and/or IRS rulings, the execution of intercompany agreements, finalization of the capital structure of the two corporations, final approval of the Williams board and other customary matters.

The board also said it plans to boost the quarterly dividend, with an initial increase of 60% to 20 cents/share for 1Q2011. The company said it is targeting an additional 10-15% increase in the quarterly dividend beginning with the dividend payable in June 2012.

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