 Keith E. Bailey |
As shown on the cover of this report, 1997 was another very good year for Williams shareholders as our company stock again outperformed a strong market. Indeed, the most gratifying aspect of the year came from excellent stock performance — in the face of earnings that fell well short of our objective — and our ability to add to the future earnings base through expansion initiatives and strategic acquisitions. Total shareholder return was 55 percent, boosting our total return for the seven-year period ending at the close of 1997 to 729 percent. We attribute Williams’ 1997 growth in shareholder return to: *First, the market apparently agrees that our earnings plateau is temporary and we will return to double-digit earnings growth in 1998. *Second, and perhaps more important, the market apparently is beginning to recognize the tremendous potential of our company in general and that of our communications business in particular. Today, we are on the verge of greatly increasing the size and potential of another business group — Energy Services — through the pending $3 billion acquisition of MAPCO. Announced in November and expected to close in the first quarter of 1998, this acquisition should immediately add to ongoing earnings from operations and open new opportunities across a broad spectrum of Williams activities. At Williams, we tend to cut to the chase. In keeping with this approach, I will skip the traditional business-unit-by-business-unit review of past-year accomplishments — they’re available in considerable detail elsewhere in this report — and will go straight to what we have set out to achieve in 1998 and beyond. GoalsEach year, we re-evaluate the potential of every business unit and determine the action needed to transform potential into reality. Last summer, our strategic plan indicated that Williams’ businesses collectively had the potential to double 1997 earnings per share by the year 2000, provided that we work smart, major projects come into play as expected, and the economy and demand for our services stay reasonably strong. Today, our potential for reaching that goal is greater, due in part to the pending MAPCO acquisition. Consisting of a 10,000-mile natural gas liquids pipeline, propane distribution, two refineries and more than 250 convenience stores, MAPCO complements Energy Services’ portfolio with virtually no overlap — a terrific fit. Now, what action needs to occur to transform potential into reality? First, we need to achieve solid, across-the-board performance in 1998, since it will be the platform from which we build the future. Beyond that dictum, here is a look at the major goals within each of our three business groups. Gas Pipelines*Demonstrate a sustained ability to grow earnings at two to three times the country’s growth in end-use demand for natural gas. Although squeezing out operational and organizational efficiencies is important, no company can save its way to prosperity. We must grow the business. *Work to improve and to reverse the current rate-of-return policy which, if allowed to remain in place, would make future pipeline investments unattractive to our shareholders. In January 1998 we participated in Federal Energy Regulatory Commission (FERC) hearings focusing on this critical issue. If the commission responds favorably to our concerns and moves to more closely align a pipeline’s earning capacity with its business risk, our gas pipelines will be positioned to continue contributing to Williams’ success. We are not asking for a regulatory environment that moves us up from the kind of returns we were able to deliver in actual 1997 results. But, we are asking for the opportunity to produce at least at that level. Conversely, if Williams’ gas pipelines can’t get higher return expectations than those currently proposed by the FERC, we will be forced to pull back from the wide range of expansion investment opportunities we enjoy in this business. Plainly put, the capital would be more wisely spent elsewhere. Such an outcome is neither in the best interest of the country nor one that we want. Energy Services*Grow the group’s operating profit in the 15 percent range year in and year out. *Quickly and effectively assimilate MAPCO, and begin developing its attendant growth opportunities. *Prove our thesis that increased levels of physical trading can be leveraged to create more financial trading. The MAPCO assets bring a substantial presence in the level of physical business in crude oil, refined products and natural gas liquids. Now, it’s up to our Energy Marketing & Trading business to demonstrate the full earnings potential that comes with these assets. This business unit also must continue growing our presence in traditional gas and emerging electric markets. *Provide an Exploration & Production encore performance, delivering the level of returns that back up our increased capital commitments to this activity in recent years. *Push several major expansion projects in the Gulf Coast region and Texas to or near completion by year-end in our Field Services and Petroleum Services units. Getting these high-volume projects constructed on time and on budget is a primary goal in 1998, since they will set up future earnings. In alignment with this, continue to extend Petroleum Services’ footprint through projects like Longhorn Partners Pipeline and expansion of our off-system terminal operations. *Build on the ethanol business’ strong 1997 finish and deliver a full year of solid earnings. Communications We believe our Communications group could provide 15 to 20 percent of Williams’ total operating profit by the year 2000. To move toward that goal, the group needs to do three things in 1998 — and do them well. *Deliver earnings in Communications Solutions that fully live up to the potential we envisioned when we combined our equipment distribution and network integration unit with Nortel’s. That merger was far more complicated than most, in part because the two organizations mirrored one another at all levels. Now that the assimilation issues are largely behind us, this business must drive earnings to the next level. That’s possible, because this unit is ideally positioned to become the first true nationwide provider of integrated voice, data and video services for America’s businesses. *Make solid progress toward profitability in the Network Applications unit, which recorded substantial losses in 1997. If this suite of leading-edge businesses can greatly narrow the gap toward profitability in 1998, earnings from the Communications Solutions unit alone should push our overall communications business to solid operating profit in 1998 — a year before substantial income is expected from the Network unit. *Deliver more than 7,000 miles of new network on schedule and on budget in 1998 while building a book of significant future business to reassert Williams’ position as the wholesale communications network of choice. Our current plans call for the progressive expansion of the network to 32,000 miles by the end of 2001. We re-entered the wholesale network services business in January 1998 as the non-compete agreement expired with the company that had purchased our national fiber-optic network three years earlier. Just as the breakup of AT&T provided us with the opportunity to become the wholesale carrier of choice in the 1980s, we believe the shortage of existing network capacity, coupled with exploding demand, provides a similar or greater opportunity today. But this time around, our network capacity is greater, our menu of services is larger, and market demand is heavier. Our decade-long reputation in the wholesale market for integrity, low cost and high quality, combined with our commitment to under promise and over deliver, should serve us well. Enthusiasm and PassionThere’s an excitement growing every day at Williams. It’s part enthusiasm, part passion. Enthusiasm, to reach high goals and set new ones. Passion, to be the best. We believe that Williams’ primary businesses — energy and communications — are the businesses to be in for now. And for the future. That’s because each is an essential building block of an industrialized society. Our financial capacity to accelerate the growth inherent
to our businesses through expansions and selective acquisitions has never been greater.
Estimated 1998 capital expenditures and investments, including those planned for the MAPCO
assets, are a record When a company provides a total shareholder return of 729 percent in a seven-year time frame, a prudent stockholder may ask: When is this train going to slow down or stop? For all of the reasons previously mentioned, as well as others detailed in the business unit narratives, we are confident that the growth opportunities ahead of us are at least as good as those we have experienced in the past. We firmly believe we have the organization and leadership in place to develop full value from those businesses as we do what we do best — deliver operating performance. We are pleased with our performance at Williams, but we aren’t satisfied. We believe the best is yet to come. |
 |
|
| Keith E. Bailey Chairman, president and chief executive officer Feb. 13, 1998 |