Williams to Emerge As Smaller Company

Monday, August 26th 2002, 12:00 am

By: News On 6

TULSA, Okla. (AP) _ Williams Cos., which nearly tripled in size in the 1990s through ventures into telecommunications and energy trading, will emerge as a smaller company focused on its natural gas pipelines and energy services roots after it sells off much of its assets.

Analysts, shareholders and executives are praising the strategy as reshifting focus to profitable segments while reducing costs and increasing cash flow. It comes as Williams struggles to meet mounting debt payments.

``There is no question that Williams is undergoing what is likely the most dynamic restructuring in its history,'' chairman, president and chief executive Steve Malcolm said Wednesday. ``We're clearly moving toward a smaller, more focused company.''

Tulsa-based Williams spun off its hemorrhaging telecommunications subsidiary last year and is seeking a financially stronger partner or a buyer for its Enron-crushed energy trading business.

Since December, when executives began cutting costs and unloading properties to bolster its finances, Williams has sold more than 15 percent of its $12.9 billion in assets. More sales are planned.

``Their strategy is correct, but at the same time it's a strategy with which they have little flexibility because of a sizable debt load and imminent interest and principal payments,'' said Tulsa money manager Fred Russell, whose Fredric E. Russell Investment Management Co. owns 198,000 Williams shares. ``They are not in the most wonderful and luxurious bargaining position.''

Williams pipelines and energy services division combined for net earnings of $288.5 million in the second quarter, while energy trading, which had made up half the company's operating profit in 2001, lost $497.5 million.

``That's a core of a profitable company, particularly for Williams,'' Russell said Friday. ``It is pipelines with which Williams has had the most experience. That's where the company started.''

Indeed, brothers Miller and David Williams, construction workers from Fort Smith, Ark., founded the company in the early 1900s by building natural gas pipelines during Oklahoma's oil boom.

Williams became the nation's second largest pipeline company and nearly tripled in size in the late 1990s after two major acquisitions using proceeds from the sale of its first telecom venture.

Refocusing on more stable businesses reflects the company's need to increase cash flow, which has been draining into the volatile trading business, as payments come due on its roughly $15 billion debt.

``We're looking to minimize financial volatility not only in terms of the exposure to our (energy) marketing and trading activities, but also many of the businesses with the greater sensitivity to price movements are currently up for sale,'' Malcolm said, referring to refineries, ethanol and travel centers.

Major credit agencies have stripped Williams of its investment grade credit status in recent months, increasing the price Williams must pay to borrow and killing the company's ability to sign new trading contracts.

Jeff Wolinsky, a debt analyst at Standard & Poor's, said Williams is taking the right strategy in selling assets and returning to its historically core enterprises.

``We see those as being the less risky portions of the (energy) business, so from a credit standpoint that's a positive,'' said Wolinsky, adding that S&P is evaluating Williams' credit in light of the sales.

Williams, which in July obtained about $3.4 billion in cash and credit through loans and asset sales to meet immediate debt payments, is not safe yet.

Wolinsky and equity analysts have expressed concern that the asset sales will substantially reduce Williams future earnings. That could create a cycle where reduced revenues fall short of debt obligations, thus requiring more asset sales, they have said.

To quell that fear, Doug Whisenant, president and chief executive of Williams' gas pipeline unit, said this week that expansions to the company's remaining pipelines will more than offset any earnings losses.

Then there's the energy trading business, a problem whose resolution is second in importance only to completing more asset sales, Malcolm said.

Trading division president Bill Hobbs said this week that Williams will decide within 30 days whether it will create a joint venture. The company also said it has received bids on 40 percent of the division's assets, which have been valued at about $2.2 billion.

Williams has ``bought quite a bit of time,'' Russell said. ``They may not be out of the woods yet, but they are on their way to leaving the woods.''