Q&A WITH WILLIAMS' FRANK M SEMPLE

Frank M. Semple is president of Williams Network, a communications subsidiary of natural-gas pipeline operator and electricity trader Williams Cos. With a network tracing 11,000 miles along its pipelines, Williams owns the fifth-largest fiber-optic communications network in the U.S. In January, three years after selling its WilTel Network Services long-distance business to WorldCom, Tulsa-based Williams resumed selling long-distance services to phone and internet companies including U S West Communications.

Semple recently spoke with Business Week Houston Bureau Manager Gary McWilliams about Williams' expanding new wholesale strategy, its plans for selling energy and communications services together, and its financial goals.

BW: Why is Williams returning to a market it exited only three years ago?

Semple: As you know, Williams' reentry into the carriers market coincides with the expiration of our noncompete agreement will WorldCom. It's exciting to point out that three years to the day after the sale of our network to WorldCom we could announce our reentry with a lot of positive statements. Such as: We're reentering with significant network capability, a strong reputation as a carrier focused on a purely wholesale set of network products and services.

What we see happening is tremendous regulatory change. Plus technology advances are driving capacity and demand at the desktop. That demand is creating some bottlenecks in the network infrastructure. The legacy players are at capacity and they're having a difficult time de-bottlenecking their networks quickly. That's creating opportunities for new entrants.

BW: Tell us about your network expansion plans.

Semple: We retained a single strand of fiber-optic cable from the network we sold to WorldCom. That existing, 11,000-mile network is being expanded with a five-year, $2.7 billion construction program. We will have 38,000 miles of [pipeline] right-of-ways once we close our acquisition of [pipeline company] Mapco. That's coast-to-coast, border-to-border, a tremendous competitive advantage.

BW: Is the plan to sell wholesale capacity to existing phone companies a way to get started in the business?

Semple: We're taking a little different tack than others in that we have focused on the wholesale market. We feel the best way to add shareholder value is to bring to market a set of wholesale products that complements those retail telecom companies I feel will be the winners in the future. We want to sell to those companies which understand the retail market, who have the processes, systems, and customers to survive in that competitive marketplace. These are the Regional Bell Operating Companies, the CLECs [an acronym for non-Bell phone companies] and CAPS [an acronym for network suppliers that link customers directly to long-distance services], even the energy companies that have a leg up on the retail market.

BW: Explain how your network fits into deregulation of the electricity and natural-gas markets?

Semple: My prediction is you'll see many more of the large energy companies -- folks that have the retail customers and billing systems -- offer communications to their customers. They can create huge new capabilities in their markets. In many of these cases, the local gas distributing company or electricity company is a Williams energy customer.

BW: Since Williams sold WilTel three years ago to concentrate on energy markets, is the new Williams Network another opportunistic venture?

Semple: Absolutely not. That's demonstrated by the fact we didn't spin off our other communications assets [call-center equipment supplier Williams Communications Solutions and video transmission Williams Network Applications]. We feel strongly as a company in the Williams family that the best way to build long-term shareholder value is as an energy and communications company. We're in this for the long haul. Energy and communications are complementary.

BW: Will your long-distance services also be made available to Williams Communications Solutions equipment customers?

Semple: We've not yet introduced a wholesale network product to [Williams Communications Solutions]. It's a huge opportunity for Williams Communication Solutions... The network is a very important component of their product set. We're going to do it. It's not an easy leap because of the processes and systems involved, billing systems, etc.

BW: Williams Communications businesses lost $55 million last year. You're investing significant amounts to expand the network. What are you telling Wall Street about the finanical returns in this business?

Semple: We've told the analyst community that Williams Communications will contribute $250 million of operating profit in the year 2000, from break-even last year [excluding one-time charges]. The network is going to be a key contributor to that $250 million target. We expect 20% annual growth after that.

We've got a couple years of building infrastructure and developing products. The year 2000 is the point the Williams Network begins to contribute significant net income and earnings per share to Williams. That's our strategy.