Last year was particularly brutal on The Williams Companies, which reported massive net and recurring losses on Thursday and another $2.5 billion in anticipated asset sales, excluding the $1.9 billion that were previously initiated or announced. However, investor confidence in its liquidity and the performance of its core operations going forward was enough to lift its share price by 27% to $3.67 Thursday afternoon.

In an effort to reduce debt and boost liquidity, Williams is pursuing the sale of its general partnership position and 55% limited-partner investment in Williams Energy Partners (WEP), its midstream liquids transportation and marketing company. It also has targeted the sale of its 6,000-mile Texas Gas pipeline system and said it will pursue targeted asset sales amounting to less than 20% of the value of its exploration and production and its midstream businesses.

The assets sales and continued downsizing at its marketing and trading business, which takes most of the blame for its terrible 2002 financial results, will reduce its workforce by another 4,000 employees this year to a staff of just 6,000.

“We are a different company today than we were a year ago, and we are managing our company much differently today,” CEO Steve Malcolm admitted. “We are proactively managing our cash, reducing our costs, allocating capital with strict discipline and are balancing financial performance measures focused on cash, return on investment and earnings.

“We’ve made significant, well-considered changes in our company — all in recognition of our financial condition and the kind of company we believe will be in the best position to create value for shareholders again.”

Williams reported a net loss of $736.5 million ($1.60/share) last year compared with a restated net loss of $477.7 million (95 cents/share) in 2001. It also reported a loss from continuing operations for 2002 of $483.3 million ($1.11/share) compared with restated income from continuing operations of $802.7 million ($1.61/share) for 2001.

In addition, it reported a 2002 unaudited recurring loss from continuing operations of $84 million (16 cents/share) compared with restated recurring earnings of $1.033 billion ( $2.06/share) in 2001, and it reported a $253.2 million loss from discontinued operations, including asset impairments and gains or losses on the sale of a number of businesses, including Kern River Gas Transmission, the Central gas pipelines, two natural gas liquids pipeline systems, its Memphis refining operations, retail petroleum TravelCenters, the Colorado soda ash mining operation, and its ethanol operations that were announced this week.

Williams said Thursday that it signed a definitive agreement to sell Williams Bio-Energy LLC, its ethanol business, for $75 million to a new company formed by Morgan Stanley Capital Partners. The ethanol unit owns and operates a production plant in Pekin, IL, holds a 78.4% interest in another plant in Aurora, NE, and has various agreements to market ethanol from third-party plants. The sale is projected to close in the second quarter, and Williams expects to record an additional pre-tax loss in the fourth quarter of $51 million. Roughly 240 Williams employees support the ethanol operations.

Williams also announced Thursday its plans to sell its general partnership share and equity interest in WEP, a master limited partnership that transports, stores and distributes refined petroleum products and ammonia. Energy Partners expects to grow distributions to unitholders by at least 10% this year, and CEO Don Wellendorf said the “sale of Williams’ interests to another party could facilitate the partnership’s growth by improving our access to capital markets and lowering future financing costs.”

However, WEP reported lower segment profit in 2002 of $99.3 million versus restated segment profit of $101.2 million for the same period a year ago. The slight decrease resulted from higher transportation and terminal revenues, offset by increased general and administrative costs associated with the acquisition of Williams Pipe Line and higher environmental expense accruals, the company said.

As expected and in line with many of its peers, Williams intends to refocus this year on core gas pipeline operations, exploration and production and midstream and liquids activities, and will avoid the merchant energy business like the plague.

Its Energy Marketing & Trading unit reported a 2002 segment loss of $624.8 million versus a profit of $1.3 billion for the previous year. The segment loss resulted from the company’s inability to offset risk because of its weakened financial position and low credit rating. As a result, it was exposed to negative market conditions. It was negatively impacted by lower revenues from its natural gas and power portfolios, caused primarily by reduced spark spreads on certain power tolling positions, lower volatility and a significant decline in new origination activities.

The 2002 marketing and trading loss also includes charges of $249 million for losses related to reducing activities in a distributed power services business, impairments of goodwill, impairment loss of turbines for a power generation project, and the fourth-quarter impairment loss based on the terms from the February 2002 sale of a power facility in Worthington, IN. For the fourth quarter, the unit reported a segment loss of $22.8 million, compared with segment profit of $161.4 million for 2001.

Also, Williams expects to record an after-tax charge of $750-800 million in the first quarter of 2003 for the adoption of new accounting rules. A substantial portion of the energy marketing and trading activities previously reported on a fair-value basis will now be reflected under the accrual method of accounting.

Results from its other core operations in 2002 showed improvement. “Our core natural gas businesses are healthy and viable,” said Malcolm. “One example is our gas production business, which participated in drilling more than 1,300 wells in 2002 with a 99% success rate. Our gas wells, pipelines and midstream facilities generate substantial free cash flow, which is an important measure of our success as we execute our business strategy. These businesses are poised for growth in the years ahead.”

Its gas pipeline business showed improved results in 2002 with segment profit of $669.3 million versus $571.7 million on a restated basis for the previous year. Exploration and production operations in the Rocky Mountain and Midcontinent regions and the San Juan Basin of New Mexico and Colorado reported 2002 segment profit of $520.5 million versus $234.1 million in 2001. Significantly higher production volumes resulted from its purchase of Barrett Resources in August 2001 and the impact of a 99% success rate in the company’s drilling program. The sale of the company’s interest in the Jonah Field and Anadarko Basin natural gas properties also resulted in gains of $142 million for the year. For the fourth quarter of 2002, E&P showed a segment profit of $87 million compared with $68.7 million for 4Q2001.

Midstream gas and liquids operations reported 2002 segment profit of $189.3 million versus a restated segment profit of $171.9 million for 2001. Its petroleum services operations, which primarily includes Alaska refining, retail operations and investment in the Trans Alaskan Pipeline System — all of which are expected to be sold — reported 2002 segment profit of $40.8 million versus $145.7 million in 2001.

After falling to such depths in 2002 mainly due to downfall of the merchant energy business, Williams believes results can only go up in 2003. It expects recurring segment profit of $1.3-1.8 billion this year. Income for 2003 before the cumulative effect of the already noted accounting change is estimated at $250-400 million, resulting in estimated earnings per share of 40-75 cents. Including the cumulative effect of the accounting change, the company expects a 2003 net loss of 70 cents to $1.10 per share.

Williams also expects to have sufficient liquidity to meet its debt-retirement obligations and operate its businesses. With additional asset sales and financings, the company expects to have cash of $2.8 billion at year-end 2003 and $1.6 billion at year-end 2004. It expects year-end debt to be $11 billion in 2003 and $9.5 billion in 2004.

Williams said it plans to focus on assets within its exploration and production, midstream and pipeline businesses that provide opportunities to grow operating cash flow and earnings with limited-scale, near-term capital investment. In 2003, the company expects to invest $1 billion — primarily for maintenance and to satisfy existing commitments to customers — in core assets, which are generally located where it enjoys scale or cost-related market leadership. The company expects to invest another $500 million in these businesses in 2004.

“Our strategy for 2003 and beyond provides a clear, comprehensive plan designed to address ongoing liquidity needs, reduce debt and downsize our company to a portfolio of integrated natural gas businesses that we can grow in the future. We will accomplish this through asset sales — those we’ve previously announced plus others we’re announcing today — and cost-cutting,” Malcolm said.

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