Faced with a sharp drop-off in company stock and severe credit crunch, Williams Cos. is considering bring in an outside partner for its marketing and trading arm, a company official said last Wednesday.

The company is “certainly evaluating” all options, said William Hobbs, president and CEO of Williams Energy Marketing & Trading. “One possibility would be a partner with a stronger balance sheet that brings a large energy presence to the table,” he noted, adding that the “tradeoff” would probably require Williams’ trading unit to give up some of the value in the deals that it’s currently doing.

Hobbs said Williams was “in early discussions with various parties,” although the company’s “preference is to solve [its credit and financial issues] internally” before the credit rating agencies take any further action against it. He noted that top Williams officials were in New York last week to address the concerns of credit agencies, which have placed Williams on “negative watch.” The company is optimistic that it “will maintain not barely investment rating, but solid investment grade ratings.”

“I think the direction that we’re heading, which we are getting interested in, is more [deals] like Berkshire [Hathaway] with the MidAmerican folks, equity infusions for participation in deals with us. But we’re also in discussions with potential joint venture partners. It’s a matter of getting folks comfortable with what we do,” he said during a conference call in which he fielded questions from analysts about Williams’ trading activities in western energy markets. Berkshire Hathaway, which owns MidAmerican, purchased Kern River Gas Transmission from Williams earlier this year and acquired an equity share in the company.

So far, “the feedback that we’re getting [from parties] is ‘Yeah, we certainly want to talk.’ No one is shutting the door,” said Hobbs. “I think many folks are feeling…the stocks have been driven so low,” making Williams and other energy companies attractive investment targets.

The options disclosed by Hobbs do not represent a “major strategy change” for Williams, said analysts with UBS Warburg last week, noting that they have been suggested by the company in the past. “What was new was management’s suggestion — albeit under lower odds — for acquisitions that would strengthen [its] balance sheet.”.

On a corporate-wide basis, Williams is examining potential acquisitions that “would fit very strategic[ally] with us” and improve the company’s financial situation, according to Hobbs. In addition, it plans to announce several asset sales over the next 12-15 months. The company estimated its current liquidity at $3.8-$4 billion, and noted that it was currently in negotiations to redo a five-year $700 million revolver.

In a report filed at the Federal Energy Regulatory Commission last Wednesday, Hobbs said Williams “emphatically denied” that it used Enron-like strategies to manipulate energy prices in western markets.

“We sell power in California that’s produced in California, so we don’t need to employ complicated strategies to compete. Our primary business is long-term management of energy supply risk and price risk,” said Williams President and CEO Steve Malcolm in a prepared statement. Williams is a “different company” than other suppliers to western markets, noted Hobbs, adding that it was not a “revenue or volume-driven company.” Moreover, he said the company’s trading practices “by their very nature are very conservative.”

During the 2000-2001 time period, “we closely monitored the evolving market and made every effort to participate in a way that was fair and legal,” Malcolm said, adding that Williams “does not have and it never has had strategies to engage in illegal or improper market behavior.” He noted the company expressly prohibited its traders from selling power outside California for resale into the state for the purpose of evading price caps.

A report, which was filed at FERC, did identify Williams-specific transactions that “have some of the characteristics described in the Enron memo but which were engaged in for entirely different reasons” other than to game western energy markets, he said. These transactions accounted for a “fraction of a percent of its overall trading volumes” during that period, according to Malcolm (See Related Story).

Although Williams disavowed any role in deceptive activities in western markets, the company said it was unable to “admit or deny” exporting power that was purchased from the California Power Exchange to out-of-state markets due to the “difficulty of determining actual physical flows of every megawatt hour of energy.” In any event, Williams said it did not engage in power exports to the “detriment of meeting its commitments in the California power market,” Malcolm said

Amid the charges of large-scale price manipulation and phony trading transactions by suppliers, Hobbs said Williams has not been contacted by customers in California or other western markets seeking to renegotiate contracts. Nor, he added, does he anticipate “those kinds of calls” in the future.

“As far as I am aware, the SEC has not initiated any kind of formal investigations” into the trading activities of Williams, said Hobbs. “I’m sure the SEC is concerned and aware of these issues, and probably there could certainly be dialogue going on between our legal counsel and the SEC. But so far our focus has been around the FERC,” he noted.

Despite the highly charged climate in the energy industry and credit issues facing Williams, Hobbs said its energy customers still are interested in doing deals with Williams. However, he said he was concerned that the “credit issues” may be driving customers to seek only short-term transactions.

Williams said it retained outside investigative experts to review its power transactions during the past two years — a period during which it estimated it bought and sold hundreds of millions of megawatt hours of energy in California.

Williams’ report was in response to the Commission’s May 8 order directing more than 100 energy suppliers to “admit or deny” they engaged in gaming strategies that were patterned after those used by Enron. FERC’s action was part of its three-month investigation into charges that Enron and possibly other energy sellers manipulated prices for electricity and natural gas in western states [PA02-2].

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