Williams put together a mega-deal last week that will not only pay the bills, but ensure its liquidity through this year and into the next, finalizing several cash and credit transactions that total about $3.4 billion. New credit agreements were secured giving Williams about $2 billion, but to make those deals, Williams sold or guaranteed some of its solid income-producing assets — interests in two pipeline companies, Seminole and Mid-American, for $1.2 billion; natural gas properties in Wyoming for $350 million; gas properties in the Anadarko Basin for $37.5 million; and the Cove Point liquefied natural gas (LNG) facility for $217 million. Williams also backed a secured credit agreement, which was put together by Warren Buffett’s Berkshire Hathaway Inc., with “substantially all” of the assets of subsidiary Barrett Resources.

Negotiations were apparently nonstop for almost a week before any transactions were completed, and Williams was bumping into deadlines last week to pay nearly $800 million in loans. With a dismal second quarter earnings report and bankruptcy rumored, the Tulsa-based company surprised Wall Street by announcing a $1.1 billion credit agreement for an amended $700 million secured revolving credit facility and a new $400 million line of credit. Citigroup Inc. led a consortium of banks in extending the loan, but Williams did not detail which assets secured it. Another transaction with Lehman Brothers and Berkshire Hathaway provides a $900 million senior secured credit agreement, backed by Barrett Resources, the Denver-based independent Williams purchased last year for $2.5 billion (see NGI, May 14, 2001). Williams’ purchase at the time was considered a coup; Royal Dutch/Shell Group had attempted to buy Barrett in a hostile takeover.

The latest deal with Berkshire Hathaway expands a partnership begun last March, when its subsidiary MidAmerican Energy Holdings Co., bought the Kern River pipeline, as well as 1.47 million shares of convertible preferred stock in Williams in a $960 million deal (see NGI, March 11). Buffet’s company also agreed just days ago to pay another cash-strapped energy marketer, Dynegy Inc., $928 million and assume $950 million in debt for its Northern Natural Gas Co. (see related story).

“Tough times require tough decisions,” Williams CEO Steve Malcolm said. “We are committed to repositioning Williams to compete effectively in the energy industry of the future.” Malcolm said Williams’ top priorities were to “improve our financial position and resolve regulatory issues facing the company.” Malcolm said the company’s board of directors had approved all of the transactions, as it works to reduce its financial commitment and exposure to its energy marketing and risk management business.

Williams continues to look for buyers of other assets that are non-strategic, said Malcolm. “At the same time, we are increasing our efforts to exceed our annual cost-savings goal of $150 million.” The company also is continuing its search for an investment-grade partner for its eroded energy marketing and trading business. Already, more than 40 potential investors have looked at the unit’s data room, but so far, there apparently have been no substantial offers.

The announced transactions Thursday include the following:

EnCana, which already held a stake in the U.S. Rockies, purchased all of subsidiary Williams Production Rocky Mountain Co.’s producing and non-producing assets in the Jonah field, including developed and undeveloped reserves and lands. EnCana also increased is interest in the field by 50%, and expects productive capacity there to increase by more than 400 MMcfe/d. Some of the assets are subject to third-party rights of first refusal.

EnCana estimates that the Jonah assets have approximately 600 Bcf of proven, plus one-half probable gas equivalent reserves. About 96% are natural gas, with the rest natural gas liquids. Discovered in 1993, the Jonah field contains about 3 Tcf of gas, and is one of the largest discoveries in North America. EnCana funded the purchase with cash on hand and available credit facilities, it said.

The Cove Point LNG import terminal, gasification plant and its associated 87-mile pipeline were sold to a subsidiary of Dominion Resources, and the sale is expected to close in 45 days. Williams said the Cove Point sale alone would reduce its capital expenditure requirements by $105 million for the remainder of this year and 2003. Cove Point is currently used for storage and to serve customers during peak periods of demand, while the pipeline is used to serve customers year-round. Twenty-five people are employed at the facility, which has the capacity to store 5 Bcf. The terminal is located on more than 1,000 acres of land on the western shore of the Chesapeake Bay in Maryland. With planned capital improvements ongoing, the facility is expected to be reactivated as the nation’s largest LNG import terminal.

Enterprise Products Partners’ agreement includes a 98% ownership interest in Mapletree LLC, which owns all of Mid-America Pipeline Co. and some propane terminals. Mid-America’s natural gas liquids (NGL) pipeline system has 7,226 miles of pipe and average transportation volumes of approximately 850,000 bbl/d.

Enterprise also purchased a 98% ownership interest in an affiliate of Williams, Oaktree LLC, which owns an 80% equity interest in Seminole Pipeline Co. The Seminole Pipeline, which is 1,281 miles long, transports mixed NGLs and NGL products from Hobbs, TX and the Permian Basin to Mont Belvieu, TX, which is the largest NGL market hub in the United States. The average volume transported on Seminole is approximately 260,000 bbl/d.

In a Thursday morning teleconference concerning the energy industry, Standard & Poor’s analyst Richard Cortwright said the transactions by Williams cut both ways. The deals gave it cash, but it was forced to sell assets. “It’s a good thing they got the money, but the long-term implications are being weighted.”

Meanwhile, Fitch Ratings analyst Hugh Welton revised Williams Cos. rating to “evolving” from “negative.” Welton said the transactions “are clearly positive and mitigate the near-term financial hurdles faced by WMB, including its ability to meet upcoming debt maturities and ongoing cash collateral calls from energy trading activities. However, the ongoing business, credit and cash flow profile…continues to evolve.” He said the announced divestitures “have historically been solid cash flow generators for WMB. In addition, the pledged collateral [Barrett Resources] for the new secured credit facilities…structurally subordinates WMB’s outstanding senior unsecured debt obligations.”

Generally, energy analysts overall appeared to favor the surprising moves. Recalling the announcement by Dynegy earlier in the week selling NNG, Credit Lyonnais Securities analyst Gordon Howald said, “If both of these companies look as though they’re going to be able to meet their cash requirements, they’re going to continue as ongoing entities for the foreseeable future. This is positive for the entire energy industry. Dynegy and Williams represent a significant portion of the counterparty exposure of utilities and other companies.”

Tulsa analyst Fred Russell said the cash infusion “was needed as badly as when a student goes into a final exam with a D average needing to get a C.” Russell’s Fredric E. Russell Investment Management Co. owns nearly 200,000 shares of Williams.”This was a very critical step, as you can see by the very positive reaction in the stock price.” Analyst Carl Kirst of Merrill Lynch said he believes Williams is “going back to its roots in ’03,” and estimates that in 2002, about 44% of the company’s earnings will come from interstate pipes.

Going back to its roots may be the wisest move, after Williams reported a net loss for the second quarter of $349.1 million, or 68 cents per share, compared with a net profit of $339.5 million, or 69 cents a share, for the same period a year ago. For the first six months, Williams posted a loss of $225.9 million, or 58 cents a share, against income of $695.7 million, or $1.42 cents share, for the six-month period in 2001. Excluding one-time charges, Williams said its loss for the second quarter from recurring operations was 34 cents a share, compared to a gain of 57 cents for the comparable period in 2001. Analysts surveyed by Thomson First Call had projected that the company would post a loss in the range of 45 cents to 34 cents, with an average estimated loss of 38 cents.

The biggest drain on earnings came from Williams energy marketing and trading business, which reported a second-quarter loss of $497.5 million, compared to a profit of $262.2 million a year ago.

Second-quarter results for the gas pipeline business were a bit more favorable, but still below a year ago. The sector posted a profit of $156.7 million compared to $181 million for the same period in 2001. During the quarter, Williams wrote off costs of approximately $20 million for its investments in the failed Independence Pipeline and Western Frontier gas pipeline projects and paid an additional $11.2 million for an early retirement program, but the write-downs were offset by a completion fee of $27.4 million that the company received for the Gulfstream gas pipeline, which went into operation in May.

The exploration and production sector, which was fueled by Barrett Resources, more than doubled its earnings for the quarter, posting a profit of $95.4 million compared to $45.2 million in the comparable period in 2001. Earnings for Williams midstream gas and liquids segment were up to $84.6 million compared to $64.5 million for the same period a year ago. The company credited the gain to higher equity earnings, primarily from its Discovery pipeline, the contribution of a Venezuelan gas compression facility that was put in service last year, and higher margins and volumes for natural gas liquids (NGL).

Finally, Williams on Friday closed on a previously announced sale of its Kansas Hugoton natural gas gathering system to FrontStreet Hugoton LLC for $100 million, and will net approximately $80 million cash after purchase price adjustments. FrontStreet Hugoton is an affiliate of FrontStreet Partners LLC and GE Structured Finance Group. Phil Wright, CEO of Williams’ energy services unit, said the sale “is consistent with our strategy to concentrate our midstream businesses on core growth basins.”

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