Williams Cos. CEO Steve Malcolm said Friday the company is “prepared to do whatever it takes” to improve the company’s balance sheet, including selling more assets if the opportunity arises. However, he said the sale of the Kern River Gas Transmission system to a Berkshire Hathaway subsidiary — and an additional investment in Williams by the Warren Buffett-led company — affords it the opportunity to grow the business in the way it needs to grow.

“If you ever had liquidity concerns about the company,” Malcolm told analysts, “you can stop worrying about it now.”

As part of its efforts to shore up the bottom line, Williams reduced its earnings forecast for the first quarter of 2002, expecting to earn 40-45 cents — below the 59 cents expected by Thomson Financial/First Call analysts. Williams expects to make $2.15-$2.30 in 2002, also below analysts’ average estimate of $2.37 and also below a previous Williams’ forecast of $2.65-$2.75. Williams also will offer early retirement to 450 employees to cut another $50 million in 2002 alone.

With the steps announced, Malcolm expects Williams to be on track to deliver 15% year-over-year growth in earnings per share, using 2002 as the base year. Williams ended 2001 with a fully loaded debt-to-capital ratio of 71%, which included all of the Williams Communications Group (WCG)-related charges. Because of the steps that Williams already has taken and others announced during the last several weeks, Malcolm said the debt ratio is expected to improve by 14 percentage points to 57% by year-end 2002, and would be “well within the levels required to support growth initiatives and an investment-grade credit rating.”

Malcolm said, “In less than three months, we have met the challenge to conform to more conservative ratings standards and further strengthen our balance sheet. Once we complete all of the steps we’ve announced, we expect to reduce our fully loaded debt-to-capital ratio from approximately 71% at year-end 2001 to approximately 57% by the end of this year — no small feat for an asset-rich company like Williams.”

Malcolm said the pending sale of the Kern River system, “in addition to reducing debt and boosting free cash flow, allows us to direct the capital to other important expansion projects designed to increase the productive capacity of our assets. We have a lot of serious issues behind us. Now Williams can resume our focus on the future — growing our businesses, providing top service to our customers and building value for our shareholders.”

The Kern River sale was somewhat of a surprise — done quickly and with little fanfare. Williams agreed to sell the pipe system and 1.47 million shares of convertible preferred stock (each convertible to 10 WMB common shares) to Berkshire Hathaway Inc. subsidiary MidAmerican Energy Holdings Co.

The sale is expected to close by March 31, subject to bank consents and successful completion of Hart-Scott-Rodino review. Des Moines, IA- based MidAmerican is buying the 926-mile Kern River pipeline for $450 million in cash and assumption of $510 million in debt. As a result, Williams’ capital expenditure requirements will be reduced by $1.26 billion over the next one-and-a-half years.

MidAmerican CEO David L. Sokol called Kern River “one of the finest natural gas pipeline assets in North America.” Upon completion of the sale, Kern River will become a subsidiary of MidAmerican. Bob Sluder, senior vice president and general manager of the Kern River and Northwest pipeline systems, will become president of the new MidAmerican subsidiary.

Kern River extends from Opal, WY, to the San Joaquin Valley near Bakersfield, CA. It currently has a design capacity of 835 MMcf/d, but is expected to more than double capacity in May 2003. As part of the agreement, MidAmerican said it would continue the planned expansion, which received a favorable preliminary determination two weeks ago from federal regulators. It said the value of the pipeline, together with the planned expansion project, exceeds $2 billion.

Berkshire Hathaway agreed to do more than just pick up some energy assets from Williams. In another deal, MEHC Investment Inc., a MidAmerican Energy Holdings subsidiary, also agreed to buy $275 million of Williams’ 9.84% cumulative convertible preferred stock. The investment includes 1,466,667 shares of the security at a purchase price of $187.50 per share. Each share is convertible into 10 shares of Williams common stock and if converted would give MidAmerican about a 3% stake in Williams given the current number of outstanding Williams’ common shares. The transaction, which is subject to the Kern River deal closing, is expected to close before March 31.

“We believe this equity investment, along with the additional steps we’ve taken or are in the process of taking, gives us a level of financial strength and flexibility comparable to, or better than, that which was the basis for the rating agencies’ reaffirmation of our investment-grade credit ratings,” said Williams Chairman Keith Bailey. “The fact that our newest long-term stockholder is viewed by many as being the most astute value investor in the market today, represents a strong endorsement of our strategy and our future prospects for solid business performance.”

Berkshire Hathaway CEO Buffett, one of the most respected investors in the country, added, “Williams has all the fundamentals in place — solid assets, strong demand for its products and a reputation for excellent customer service.”

MidAmerican is a privately owned global energy provider. The company has 10,000 employees and provides electric and natural gas service to five million customers. It also has 10,000 MW of diversified power generation. The company includes CalEnergy Generation, MidAmerican Energy, and Northern Electric.

With all of the positive news last week, Williams reported a 2001 net loss of $477.7 million, or 95 cents per share, including pre-tax charges of $2.05 billion in connection with the previously disclosed contingent obligations related to the company’s former telecommunications subsidiary, WCG. After tax, the charge is $1.31 billion, or $2.62 per share. Its debt obligations to its former communications unit are the main impetus behind its decision to sell Kern River. However, Williams, along with most other energy companies, also has had to meet tougher standards from credit rating agencies and have faced greater investor scrutiny since Enron’s collapse last December.

To deal with the WCG debt issue, Williams announced an agreement last week to make semiannual interest payments on $1.4 billion of debt and place the debt on its balance sheet this year. The deal removes the conditions under which Williams could have been obligated to come up with the entire $1.4 billion. Williams said it now expects that any change in the business condition of WCG — which is considering bankruptcy as a possible step in its financial restructuring — will have no impact on the note.

Under terms prior to the negotiations with noteholders, the notes were contingent liabilities of Williams with the full $1.4 billion due upon certain changes in the business condition of WCG or a trigger directly tied to Williams’ credit ratings. The restructured terms remove those triggers.

Williams’ poor financial results for 2001 included a net loss of $477.7 million, compared to prior year net income of $524.3 million. Income from continuing operations for 2001 was $835.4 million, or $1.67 per share on a diluted basis, compared with $965.4 million, or $2.15 per share on the same basis for 2000. The 2001 results from continuing operations include pre-tax charges related to WCG of $213 million, or 29 cents per share. Also included is a $37 million pre-tax charge, or 5 cents per share, for management’s estimate of the loss effect of a Feb. 21, 2002, decision by the Texas Supreme Court denying Transco’s 2001 petition for review of the WCG obligations. The company said it plans to seek a rehearing of that decision.

However, Williams said recurring earnings for 2001 were a record $2.35 per share, compared with recurring earnings of $2.33 per share for 2000. The total WCG-related charges of $2.05 billion, which includes the $213 million charge reported in income from continuing operations, effectively represents 80% of the total WCG-related guarantees and payment obligations, and the deferred payment for services provided to WCG. The amount also includes the write-off of the remaining balance of Williams’ investment in WCG common stock and a loss provision on the minimum lease payment receivable, based on an estimate of the fair value of the leased assets.

“Now that we’ve estimated the impact of our contingent obligations relating to Williams Communications, we’re ready to move forward with 2002 as a base year,” said Malcolm. “Williams has made a productive start to 2002. We’ve issued $1.1 billion of publicly traded units, completed some $50 million in asset sales, reduced planned capital expenditures by $1 billion and have committed to $50 million in other expense reductions. We’re continuing to do more, such as additional asset sales.

“Williams has a history of adapting to new realities and remaking itself always as a stronger company. That’s what we’re doing. We have made great strides toward putting these issues behind us.”

CFO Jack McCarthy referred to Williams’ announcements as a “perfect storm of issues [we have been] contending with…cash, capital, debt reduction…Timing was critical and selling Kern River was by far the best thing to do.”

Regarding questions about the sale of future assets, Malcolm said that Williams is “not married to any asset,” and said the company will “continue to evaluate all of the assets as we go forward. There’s a price out there at which we would sell,” but he added, “we’re not out to sell assets right now. Kern River was just one that was offered that we got a billion dollars for, basically,” allowing the company to move into a cash neutral position. The money Williams receives from the Kern River sale will be put toward other projects that Malcolm said are “key” to the company’s growth going forward.

Williams to date has completed the sale of $56 million in Texas gathering assets. In addition to selling $250 million to $750 million in various assets, Williams plans to sell its Midwest petroleum products pipeline. A potential buyer is Williams Energy Partners, a master limited partnership of which Williams is the general partner.

Williams’ reconciliation of the reported changes to recurring results schedule is available on the company’s web site at https://www.williams.com/investors/4Q01_analyst_packet.pdf.

Williams’ stock climbed through the week, jumping overall about 38%. Its “progress” in its balance sheet improvement program “points to a continued recovery to $26-$28 near term,” said Credit Suisse First Boston analyst Curt Launer. Credit Suisse estimates Williams will show 55-60% debt at year end 2002.

Reiterating a “strong buy,” Merrill Lynch analyst Carl L. Kirst noted Friday that “all in all, we believe the positives far outweigh the negatives” regarding Williams’ recent announcements. “As investor focus turns from the balance sheet to earnings, we believe Williams will continue to move forward.”

Moreover, said Kirst, “the transactions involved Wall Street’s arguably most notable value investor, Warren Buffett…we believe the backing of an American icon such as Mr. Buffet brings additional credibility and confidence to a somewhat bruised management team and story.”

UBS Warburg’s Ronald Barone also called the recent announcements positive steps. “Though management initially fumbled on handling the communications of its plans to deal with its WCG issues, we are pleased that the company has since taken dramatic steps to put these issues to rest, help appease the ratings agencies, and get back to focusing on the constructive growth of the company.” Barone said, “we continue to see attractive upside in this name over the next 12 months and as such are maintaining our ‘buy’ rating.”

In reaction to the Kern River sale, Fitch on Friday said Williams “has taken appropriate measures to mitigate the impact of consolidated debt leverage.” It said that Williams’ “credit profile and ratings will continue to stabilize over the next six to nine months pending the favorable resolution of other outstanding credit issues.”

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