Williams CEO Steve Malcolm said last week during a UBS Warburg energy conference in New York that his company plans to cut $50 million in annual expenses in an effort to strengthen its balance sheet and prepare for the possibility that it will have to assume all or a portion of the $2.2 billion in debt of its former communications subsidiary.

Malcolm said the company was expecting to release its fourth quarter and full year earnings later this month following an assessment of Williams’ contingent obligations related to Williams Communications Group (WCG), which was spun off to shareholders in April 2001.

“WCG has announced that it will provide a balance-sheet restructuring plan to its banks by Feb. 25 and…provided public guidance on its earnings expectations for the current year,” said Malcolm. “Both are important elements in our assessment. We are digesting the information provided [last week] and we’ll need to understand the impact of their restructuring plan before we can release our final 2001 earnings.

Williams, which has faced increasing scrutiny and credit tightening as a result of the Enron Corp. bankruptcy, has had the additional problem of dealing with its struggling former communications unit. The company already issued securities and plans to sell non-core assets and cut more than $1 billion in capital spending to survive stringent requirements by ratings agencies and the increasing scrutiny of investors.

Malcolm said the difficult situation has slowed the number of transactions the company has been able to complete with customers over the past few weeks. “The rate at which we are closing deals has been slowed and has been hampered by the fact that we’ve been contending with these issues over the past two weeks. But let me tell you, we will be successful. We will have good things to talk about at the end of this quarter.”

Malcolm said the company is continuously reviewing its balance sheet strengthening plan. “In addition, we are also moving to further reduce expenses and would expect annual reductions of $50 million from that effort. We are fully committed to make additional adjustments in any of these areas to ensure that we continue to operate as a solid investment-grade company.”

Analyst Curt Launer at Credit Suisse First Boston said last week he still regards WMB shares as attractive. He noted that recent news stories have presented the off-balance sheet financings of El Paso, Williams and [TXU] in a negative light with suggestions of similarities to vehicles used by Enron. “In our view, this is not ‘new news’ and the attempt at a negative connection does not stand up to analytical scrutiny.”

Launer also noted the merchant energy companies are in negotiations with credit rating agencies over the issue of “triggers” for credit downgrades and the issuance of equity to debt holders when share prices decline to certain levels. For El Paso, the implementation of a trigger at $36 per share for a $1.1 billion financing would occur if El Paso’s stock traded below $36/share for 10 trading days. Its debt also would be downgraded two steps. With El Paso’s balance sheet fix program, it is two steps above “junk” and not on credit watch.

At Williams, a different structure requires the issuance of about $1.4 billion in equity if the former WMB telecommunications unit defaults. This would result in the issuance of shares and dilute earnings by about 20%. “This factor impacted WMB valuation by over 20%, in our opinion, on Jan 29 when WMB delayed its 4Q’01 eps report,” said Launer. ” Separately, we assess a potential $1 billion, or $2 per share write-off for WMB related to WCG. This would result in a reduction of book value from $15 per share to $13. At 1.3x book value, we regard WMB as very attractive as well.”

TXU has one partnership for telecommunications assets totaling about $800 million that Launer regards as stable and solid and not in danger of activation through a debt rating action. El Paso is expected to discuss its plans for the elimination of the “triggers” at its annual analyst meeting next week. El Paso also expects to bring off-balance sheet vehicles onto its balance sheet, and Launer said he expects that to add $2 billion in debt to the company.

Launer expects the Williams Communications debt to result in additional charges of $1 billion for the Williams Companies. This would result in Williams’ book value being reduced by $2 per share to $13, he said.

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