A leaner Williams Cos. has set its sights on its three core natural gas businesses, exploration and production (E&P), midstream and interstate gas pipelines, going forward, the head of the company told analysts Thursday. The company is trying to exit the power business, but it’s unlikely that it will be able to do so in the near term.

The Tulsa, OK-based energy firm has undergone a “fairly dramatic restructuring” over the past couple of years, shedding $6 billion in assets (a few small midstream assets may yet be sold), reducing its debt by about $3 billion in the first half of this year and reaching major settlements with California and several state utilities related to power refunds, said Williams CEO Steve Malcolm during Lehman Brothers CEO Energy/Power Conference in New York City.

Williams was “ahead of most of the pack” in reaching power settlements, he noted. The company also “has come a long way” in reducing its overall debt to $9.76 billion as of June from $14 billion a couple of years ago.

In the near term, production growth for Williams will primarily come from its holdings in the Piceance Basin in Colorado, but the company expects its holdings in other basins — San Juan, Powder River and Arkoma — to make key contributions over time, he said. Of Williams’ 2.7 Tcf of proved reserves at the end of 2003, Malcolm estimated that almost 60% were located in the Piceance Basin. He foresees Williams’ Piceance gas production increasing to 330 MMcf/d in 2006 from about 175 MMcf/d this year. The company currently has 12 rigs operating in the basin, and expects to add three more by mid-2005.

Williams is one of the few major producers still left in the Rocky Mountain region, which is dominated by smaller independent producers.

With respect to E&P, “our story here is all about long-life inventory, [and] high-return, low-risk drilling opportunities that have outstanding cash flow opportunities,” Malcolm told financial analysts. “We really like the fact that, for example in the Piceance Basin, you can drill a well and 45 days later you have cash coming in the door.” There is “very little ‘E’ in our E&P business,” he said. “This is all about production.”

In the midstream area, “we’re excited about our deepwater success, but as well we recognize we have significant scale positions in the Rocky Mountains, in the San Juan Basin and are looking to grow those…in the future,” he noted.

Williams currently is the largest gatherer in the San Juan Basin, and “[has] created a significant position…in the deepwater,” where it gathers 40% of the gas produced in the Western Gulf of Mexico, according to Malcolm.

Williams still owns three interstate gas pipelines: Transcontinental Gas Pipe Line, which delivers 8.3 Bcf/d of Gulf-sourced gas to eastern and Northeastern markets on a peak day; Northwest Pipeline, which delivers just under 3 Bcf/d on a peak day to the Pacific Northwest; and Gulfstream Natural Gas System, a 1.1 Bcf/d pipe that is jointly owned with Duke Energy and delivers Mobile Bay production across the Gulf of Mexico to the Florida market.

“We believe our pipelines are strategically located. They serve growth markets,” and have access to “prolific supplies.” With 3% gas demand growth anticipated in the Mid-Atlantic region, Malcolm said the addition of capacity on Transco’s system north of Dominion Resources’ Cove Point liquefied natural gas (LNG) facility in Maryland is a “logical expansion for us.”

Given the market’s growing emphasis on LNG, he said Williams regretted the sale of the Cove Point plant to Dominion a few years back. He called Cove Point “probably the premiere LNG facility” in the nation today.

Malcolm expects Transco to benefit from the market’s shift to LNG. “LNG will ultimately provide a new supply source for Transco because I believe most of the LNG will be landed in the Gulf Coast,” where Transco originates.

In Florida, gas demand growth is anticipated to be 8% — the highest in the nation, Malcolm said. “Although we’re not satisfied with our investment” in the Gulfstream pipeline system serving the state, “the future [is] only going to improve.” The phase two expansion of Gulfstream, which has begun, will increase the utilization of the pipeline to 65% from 25%, he noted.

With respect to power trading, Williams has sold “pieces of [its] book,” yielding $600 million for the company, according to Malcolm. “Our preference is to exit the business, but I’ve grown more and more pessimistic about our ability to do so in the near term,” he said. “The good news is that given the hedging that we’ve done, we will be cash flow positive over the next few years.”

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