Williams’ common stock price dropped 22% Tuesday, amid a general market downturn, after the company estimated earnings, but said it would not have a complete and final earnings report until it assessed contingent liabilities related to Williams Communications Group (WCG), which was spun off last year.

The company said the assessment “was initiated in light of Williams’ previously announced intention to eliminate credit-rating and equity-price triggers as part of contingent financial commitments associated with the 2001 spin-off of WCG, and because of recent developments within the telecommunications industry. Company officials in a webcast cited the recent downgrade of WCG by Standard & Poor’s and the Chapter 11 bankruptcy filing of Global Crossing, a major communications carrier, on Monday, which sparked another downturn in telecommunications stocks.

Within the next few weeks, Williams said it expects to be able to estimate the financial effect, if any, regarding its ultimate obligation related to WCG’s $1.4 billion debt and a network lease agreement covering assets that cost $750 million. Any financial impact would likely be classified as discontinued operations in Williams’ final 2001 consolidated income statement.

Later in the day a law firm announced it had launched a class action lawsuit against Williams and its communications spin-off, alleging that up until Tuesday the companies failed to reveal the true financial situation of WCG and Williams’ potential liabilities connected with it (see related story).

The announcement from Williams, along with ChevronTexaco’s massive fourth quarter loss (see related story), continuing revelations about Enron and fears that similar accounting mischief could exist throughout corporate America, were credited with leading a overall stock market drop of more than 200 points on Tuesday.

Williams said it expects to show recurring 2001 earnings of $2.35/share, which includes a 12 cents/share fourth quarter charge for credit exposure related to Enron’s bankruptcy. This compares with recurring earnings of $2.33/share in the previous year. The company said 2001 earnings were bolstered by “substantially improved performance of its energy marketing & trading and exploration & production units.”

Income from the trading unit is expected to increase. Steve Malcolm, Williams’ new president and CEO, told analysts Williams Energy Marketing & Trading (WEMT) has 140 deals in the works, and expects to close on several large ones in the first quarter. In addition, new pipeline projects will come on-line in 2002 and the company’s E&P division will be continuing development of its newly acquired Barrett Resources. Malcolm reaffirmed the previous 2002 recurring earnings guidance of from $2.65 to $2.75 per share, saying the company expects to show 12-15% growth a year going forward.

Malcolm described the lineup of potential deals for WEMT as “spectacular,” ranging from small 50 MW deals to several thousand MW, with terms varying from a year up to 15 to 20 years. “We haven’t seen margins deteriorate,” he said, in the type of long-term firm deal that Williams specializes in. “There is an interest in our risk management skills,” since counterparties are concerned about uncertainties in the market, and “we are a risk management company.”

Nevertheless, Malcolm said most fourth quarter gains were in proprietary trading. He blamed the lack of large structured deals in the third and fourth quarters on hesitation brought on by the Enron meltdown. “Certain counterparties were wondering if we would all melt down.” Malcolm noted the difference between Williams and Enron. “We have been viewed as anti-Enron,” he said pointing to the company’s significant assets behind its marketing and trading operations and the fact that it operates on a different business plan.

Williams’ new CEO withstood a tough grilling from securities analysts who questioned over and over the company’s mark-to-market accounting and the ramifications of the financial connections with WCG. Malcom confirmed that 60% of the trading company’s $1.3 billion net income is in unrealized gains. Treasurer Jim Ivey said the company’s debt-to-capital ratio in 2002 is about 55%, which is the level the ratings agencies were looking for.

He said he expects to see less volatility in prices in 2002, and “if the economy recovers, we expect gas to firm up at the earliest in April or May.”

The dogged persistence and tough questions of the analysts in the Williams webcast matched the rigorous questioning directed at the energy industry that was going on at the same time Tuesday on Capitol Hill (see separate story).

In its earnings pre-release Williams’ estimated unaudited income from continuing operations is $2.01 per share on a diluted basis for 2001 versus $2.15 per share in 2000.

The company showed a substantial drop in fourth quarter recurring earnings, which are expected to be 34 cents per share versus 89 cents for the same quarter of 2000. Williams estimated fourth quarter 2001 income from continuing operations to be 13 cents on a diluted basis versus 80 cents per share for the previous year.

The major fourth quarter 2001 non-recurring item is the previously announced pre-tax impairment charge related to the company’s investment in a soda ash business, which is $170 million ($153 million net of minority interest).

WEMT showed $1.3 billion in recurring segment profit in 2001 versus $1.1 billion for the previous year. The improvement was primarily due to increased origination of price risk management services and structured risk management solutions, which also served to reduce natural gas and power portfolio risk. Recurring results include fourth quarter charges totaling $91 million for credit exposure related to Enron’s bankruptcy.

At year-end, approximately 70% of the value recognized in WEMT’s power structured risk management portfolio is expected to be realized over the next five years. In addition, approximately 80% of the power structured risk management portfolio volumes are fully hedged for the first 10 years, Williams said.

Estimated 2001 WEMT segment profit of $1.3 billion includes the previously disclosed $23 million loss from the writedown of certain marketable equities, while segment profit of $1 billion in 2000 included $65.5 million in impairments and loss accruals.

WEMT’s recurring profit for the fourth quarter of 2001 is estimated to be $169.9 million versus $547 million for the same period of 2000. The decline primarily was due to lower spark spreads recognized in the fourth quarter of 2001.

Williams’ gas pipeline business showed $710.9 million in recurring profit in 2001 versus $750.7 million for the previous year. The benefit in 2000 of rate refund liability reversals and rate surcharges totaling $74 million are partially offset in 2001 by a $15.1 million favorable regulatory adjustment, higher earnings from investments in joint venture projects of $19 million and increased natural gas transportation revenues on the Transco system.

Estimated 2001 pipeline profit of $738.4 million includes a $27.5 million gain on the sale of a portion of Williams’ investment in Northern Border Partners. Pipeline profit in 2000 was $741.5 million. For the fourth quarter of 2001, recurring pipeline profit is estimated to be $189.7 million, which includes a $4.5 million charge related to Enron credit exposure, versus $175.6 million for the same quarter a year ago.

Williams’ Energy Services business reported $715.5 million in recurring profit in 2001 versus $615.7 million during the previous year. Estimated 2001 Energy Services profit before non-recurring items is $569.9 million versus $564.9 million during 2000.

Williams Exploration & Production activities showed $218.7 million in recurring profit in 2001 versus $66.9 million for the previous year. The improvement primarily was due to the mid-year acquisition of Barrett Resources, increased production from the San Juan Basin and the Jonah Field and higher realized natural gas production prices. Full-year 2001 production volumes of 130 Bcfe were double those of 2000.

For the fourth quarter of 2001, estimated recurring E&P profit is $70.9 million versus $29 million for the same period a year ago, the first full quarter after the close of the Barrett acquisition.

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