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Williams 4Q Earnings Drop on Gas Reporting Legal Bills, Impairment Charges

Tulsa-based Williams reported that its net income for the fourth quarter of 2005 fell 10% from the company's 4Q2004 report due to $64 million in litigation accruals to resolve legacy issues associated with natural gas price reporting and $61 million of impairment charges associated with two noncore equity investments. The company posted 4Q2005 net income of $66.8 million, or 11 cents per share on a diluted basis, compared with net income of $73.4 million, or 13 cents per share on a diluted basis, for 4Q2004.

For full-year 2005, the producer and pipeline company announced unaudited net income of $313.6 million, or 53 cents per share on a diluted basis, compared with net income of $163.7 million, or 31 cents per share on a diluted basis, for 2004. The results for 2005 reflect the benefit of increased natural gas production and higher net realized average prices for production sold, along with reduced levels of interest expense. Results for 2004 included $282.1 million in costs associated with the early retirement of debt. Results for 2005 also include unrealized mark-to-market gains of $172 million from the Power business, compared with $304 million in 2004.

"In 2005, we more than doubled our performance on a key financial measure -- our recurring earnings exclusive of the effect of mark-to-market accounting," said CEO Steve Malcolm. "We took critical steps last year to increase the pace of proving up natural gas reserves and increasing production in the United States. Our efforts paid off with significant increases in both production and reserves through drilling activity."

Williams said it experienced significant production growth in 2005 primarily due to increased volumes from the Piceance Basin. Domestic natural gas production increased 18% for 2005. The company said it currently has 19 rigs operating in the Piceance Basin of western Colorado -- the company's cornerstone for production and reserves growth.

For 2005, average daily production from domestic and international interests was 662 MMcfe, compared with 564 MMcfe for the same period in 2004 -- an increase of 17%. Production solely from domestic interests totaled 612 MMcfe in 2005, up from 519 MMcfe in 2004.

The jump in natural gas prices in 2005 helped add to the company's bottom line in 4Q2005, however, Williams said hedging activities limited the extent of the company's ability to capture a higher benefit from market prices. During the 4Q2005, Williams realized net domestic average prices of $5.66/Mcfe, compared with $3.16/Mcfe in the fourth quarter a year ago, an increase of 79%.

Williams also reported Tuesday that it replaced 277% of 2005 U.S. natural gas production. Its year-end 2005 proved U.S. natural gas reserves were up to 3.4 Tcfe, up 13.3% from year-end 2004 reserves of 3.0 Tcfe. More than 99% of Williams' U.S. proved reserves are natural gas.

Williams said it plans to invest $950 million to $1.05 billion of capital in Exploration & Production in 2006. These investments are primarily focused on increasing domestic production by 15 to 20% during the year. For 2006, Williams expects $650 million to $725 million in segment profit from Exploration & Production.

"This year, we are deploying still more drilling rigs. These rigs are designed to drill more efficiently and effectively. And we are continuing to expand our drilling horizon within the Piceance Basin of the Western Rockies, doubling the number of wells we drill in the comparatively undeveloped Highlands, where we drilled 25 wells last year," Malcolm said. "We clearly expect these continued efforts to yield proportional growth in financial performance in 2006 and beyond."

Looking at 2006, Williams said it expects $1.52 billion to $1.86 billion in consolidated segment profit and earnings per share of 78 cents to $1.03, both on a recurring basis adjusted for the effect of mark-to-market accounting. The projected increase over 2005 is primarily the result of expected increases in natural gas production volumes and anticipated pricing for those volumes.

The company's overall capital budget is $1.95 billion to $2.15 billion for 2006; $1.6 billion to $1.8 billion for 2007; and $1.5 billion to $1.75 billion for 2008.

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