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As turmoil sweeps through the energy-trading business,


(WMB) - Get Williams Companies, Inc. Report

maintains its embattled operation is "poised to do great things."

But some observers wonder if Williams is simply taking on a great risk. The company, whose shares have hemorrhaged more than two-thirds of their value in the last year as investors have lost confidence in the industry's bookkeeping, has said it will seek to sell assets to raise $3 billion and shore up its balance sheet. In doing so, the company is increasingly betting on the capital-intensive trading business.

But some analysts and investors point out that the nation's energy business is awash in pipeline assets for sale, a glut that could reduce Williams' return on any transactions. Moreover, they say, the company must do a better job explaining its business to an increasingly skeptical Wall Street, which is demanding more and more clarity in the wake of the



Williams shares rose 26 cents to $11.21 Tuesday after plunging 25% Monday on a report that questioned the company's practices.

"We would like to trust Williams, and we would like to trust their numbers," says Tulsa money manager Fredric E. Russell, whose firm is long Williams stock. "But we need clear, unconfused, uncompromised language."

Risk Management

The Tulsa company has strongly defended its books and its business practices, and says Wall Street's apprehension surrounding energy trading eventually will dissipate. And when it does, the company's leadership in risk management -- its primary focus in energy trading -- will deliver added value for shareholders.

"We've proven we can run a profitable risk management business on the up and up," a Williams spokeswoman said Tuesday. "There is demand for the risk management services we provide, in the United States and abroad."

But that commitment to energy trading, made clear in a Monday conference call otherwise riddled with vagueness, could prove costly, some experts say. With the company facing potential debt downgrades and needing to raise cash to stanch investor concerns about its liquidity, some observers question whether Williams is in a good position to make such a switch.¿

"Williams is selling assets when it's desperate," says Peter Cohan, a Massachusetts investment adviser and author who doesn't hold the stock. "In a time of stress like this, buyers can pay lower than market prices."


Some people would say that buyers already have. Two months ago, Williams sold its crown jewel -- the Kern River pipeline -- to

Berkshire Hathaway

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for less than $1 billion, a sum described as a "mere pittance" by one hedge fund manager on Tuesday.

Williams disagreed, saying the deal was good for the company. It generated $450 million in cash and will save the company $1.26 billion in capital expenditures over an 18-month period. The transaction also wiped $510 million in debt from Williams' heavily leveraged balance sheet, providing temporary relief from credit rating agencies threatening a downgrade.

Today, the situation appears bleaker in some ways. Williams hopes to sell an additional $3 billion in assets in a buyer's market where nearly $10 billion worth of¿ pipelines and related equipment is being peddled by competitors. Moreover, Williams' balance sheet is already in worse shape than some of its troubled peers, Cohan points out.

During the first three months of 2002, Williams saw its long-term debt swell by a third, climbing to more than $12 billion, Cohan says. At the same time, total equity remained at around $6 billion, causing the company's debt-to-equity ratio -- an important metric for some investors -- to climb from about 1.5 to 2. That's roughly double the debt-to-equity ratio of competitors such as






, Cohan says.

Meanwhile, Standard & Poor's already has cut Williams' credit rating to BBB-minus -- the last stop before junk -- and Moody's has questioned whether energy trading operations deserve investment-grade ratings at all. Without such ratings, considered crucial in the energy trading business, Williams could see the length and number of its contracts decline, dragging revenue and profits down as well.

Given the current environment, Williams' decision to focus on energy trading -- an industry that's credibility-poor -- over its core pipeline business seems "less than prudent," Cohan says.

No Worries

Williams has declined to make public which assets it might sell and who the potential buyers might be. The company, however, said Tuesday it's not concerned about selling into a so-called buyer's market.

"We expect to sell niche assets that have a strong value to other companies," Williams said.

At the very least, if Williams plans to focus primarily on energy trading, the company must learn to better explain that business -- particularly how revenue and profits are booked -- if it hopes to win over investors, Russell says. Russell questioned Williams about such transactions during Monday's conference call, but received only roundabout answers from the company, he says.

"I'd like to see them do both," Russell says, discussing the prospect that Williams could maintain both its pipeline and trading businesses. "But with the cynical, distrusting attitude that's gripping the marketplace, I'm not sure they can pull that double hat trick."