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Williams Energizes 2001 Earnings

January 8, 2001
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Williams Energizes 2001 Earnings

A successful transformation of its energy business brought a no-surprise expanded earnings forecast for 2001 last week from Tulsa-based Williams. The company expects to meet or beat Wall Street expectations of $1.26 per share for the entire company and $1.73 per share for its energy division, which has seen its marketing and trading earnings soar along with higher energy prices.

Two weeks ago, the company, responding to investor concerns about its stake in the topsy-turvy California energy crisis, said its fourth quarter earnings would be "well above" investor forecasts. Shares of the company had dropped to a 52-week low because of concern that California's utilities, some of Williams' biggest clients, might not be able to pay their bills.

Williams' 2001 capital budget is expected to provide about $2.4 billion for energy projects and $2.2 billion for its growing communications concerns, pending board approval later this month. Capital spending for this year within Williams Energy is now slightly higher while spending for Williams Communications is down from the $2.8 billion capital forecast released late last year by the company.

"What 2000 made clear is that we have successfully transformed our energy business to take greater advantage of opportunities that exist in unregulated or lightly regulated parts of the industry," said CEO Keith E. Bailey. "This now represents the majority of our income growth potential, even in light of the strong and continued improving performance of our natural gas pipeline group."

Bailey said the company's "shift toward higher growth potential lines of business" could lead to more volatility in the bottom line, but "barring significant shifts in our industry's business environment, we believe we have the potential to build on the success we enjoyed in 2000."

In its Energy Services division alone, the marketing and trading arm "can generate a minimum of $500 million per year in segment profit under most market conditions," said Steve Malcolm, CEO of Williams Energy Services. "And if we achieve our growth goals for our power portfolio, we have the potential to significantly exceed that level of performance."

Bailey said that the marketing and trading units' outstanding performance still could not overshadow the superior growth of "nearly all of our energy portfolio." He added that as Williams Communications Group moves toward becoming a separate company, it will work on two major objectives: completing a new, next-generation national fiber-optic network on time, and growing a "significant book of business to ride on it." Last July, the board of directors voted to split the energy and communications businesses, a job expected to take up to 18 months (see NGI, July 31, 2000). That split may occur this year.

Bailey, detailing developments for this year and beyond, said the Energy Services division is "actively working" to double its 8,900 MW electric power portfolio in 2001, with a five-year goal to manage up to 40,000 MW. In its Gas Pipeline division, Bailey said the company should begin construction in the first quarter on the MarketLink expansion, which will provide 296,000 Dth/d of additional firm natural gas transportation capacity to markets in the northeastern United States.

Within Williams Communications, the company expects to produce 2001 network-related revenue approaching $1.3 billion, more than double 2000 recurring network revenues. The network earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to be positive on a run-rate basis by the end of this year. (Its expanded earnings forecast for 2001 does not include the impact of the potential spinoff to shareholders.)

In response to Williams' upbeat forecast, UBS Warburg LLC analyst Ron Barone raised the forecast for the company, predicting "stronger than originally expected price realizations in its exploration and production segment," and "more conservative margin assumptions in the midstream gas & liquids."

UBS said its recurring 2000 Williams Energy Group estimate is now $2.05, up from $1.65. It also raised its recurring 2001 Williams Energy estimate to $1.65 from $1.55. Barone said that UBS also was raising the consolidated 2001 estimate to $1.00, up from $0.95. (The Wall Street consensus was a range of $0.95 to $1.65, with an average consensus of $1.23.)

Even though company continued to "pursue the full spin-off of its communications group," the decline in Williams Communications Group's stock price and its "sizable ongoing capital expense budget" could be a warning to Williams to "scrap such plans (or consider other alternatives) if the overall technology/telecom environment remains as inhospitable as it is today," said Barone. Carolyn Davis, Houston

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