A successful transformation of its energy business brought ano-surprise expanded earnings forecast for 2001 yesterday fromTulsa-based Williams. The company expects to meet or beat WallStreet expectations of $1.26 per share for the entire company and$1.73 per share for its energy division, which has seen itsmarketing and trading earnings soar along with higher energyprices.

Just last week the company, responding to investor concerns aboutits stake in the topsy-turvy California energy crisis, said its fourthquarter earnings would be “well above” investor forecasts (see DailyGPI, Dec. 27, 2000). Shares of thecompany had dropped to a 52-week low because of concern thatCalifornia’s utilities, some of Williams’ biggest clients, might notbe able to pay their bills.

Williams’ 2001 capital budget is expected to provide about $2.4billion for energy projects and $2.2 billion for its growingcommunications concerns, pending board approval later this month.Capital spending for this year within Williams Energy is nowslightly higher while spending for Williams Communications is downfrom the $2.8 billion capital forecast released late last year bythe company.

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

Bailey said the company’s “shift toward higher growth potentiallines of business” could lead to more volatility in the bottomline, but “barring significant shifts in our industry’s businessenvironment, we believe we have the potential to build on thesuccess we enjoyed in 2000.”

In its Energy Services division alone, the marketing and tradingarm “can generate a minimum of $500 million per year in segmentprofit under most market conditions,” said Steve Malcolm, CEO ofWilliams Energy Services. “And if we achieve our growth goals forour power portfolio, we have the potential to significantly exceedthat level of performance.”

Bailey said that the marketing and trading units’ outstandingperformance still could not overshadow the superior growth of “nearlyall of our energy portfolio.” He added that as Williams CommunicationsGroup moves toward becoming a separate company, it will work on twomajor objectives: completing a new, next-generation nationalfiber-optic network on time, and growing a “significant book ofbusiness to ride on it.” Last July, the board of directors voted tosplit the energy and communications businesses, a job expected to takeup to 18 months (see Daily GPI, July 25,2000). That split may occur this year.

Bailey, detailing developments for this year and beyond, saidthe Energy Services division is “actively working” to double its8,900 MW electric power portfolio in 2001, with a five-year goal tomanage up to 40,000 MW. In its Gas Pipeline division, Bailey saidthe company should begin construction in the first quarter on theMarketLink expansion, which will provide 296,000 Dth/d ofadditional firm natural gas transportation capacity to markets inthe northeastern United States.

Within Williams Communications, the company expects to produce2001 network-related revenue approaching $1.3 billion, more thandouble 2000 recurring network revenues. The network earnings beforeinterest, taxes, depreciation and amortization (EBITDA) areexpected to be positive on a run-rate basis by the end of thisyear. (Its expanded earnings forecast for 2001 does not include theimpact of the potential spinoff to shareholders.)

In response to Williams’ upbeat forecast, UBS Warburg LLCanalyst Ron Barone raised the forecast for the company, predicting”stronger than originally expected price realizations in itsexploration and production segment,” and “more conservative marginassumptions in the midstream gas & liquids.”

UBS said its recurring 2000 Williams Energy Group estimate isnow $2.05, up from $1.65. It also raised its recurring 2001Williams Energy estimate to $1.65 from $1.55. Barone said that UBSalso 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 ofits communications group,” the decline in Williams CommunicationsGroup’s stock price and its “sizable ongoing capital expensebudget” could be a warning to Williams to “scrap such plans (orconsider other alternatives) if the overall technology/telecomenvironment remains as inhospitable as it is today,” said Barone.

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