Asset Sales, Accounting Changes Impact Williams 1Q Results

With the sale of several assets and by adjusting its accounting methods, Williams reported Tuesday a loss in the first quarter from continuing operations of $57.7 million (minus 13 cents per share), compared with restated income from continuing operations of $98.4 million (5 cents) for the same period last year.

Income from discontinued operations alone was $4.5 million (1 cent), compared with restated income from discontinued operations of $9.3 million (2 cents) a year ago. Discontinued operations include a refinery and retail travel centers, both of which Williams sold in the first quarter; a bio-energy business that the company expects to complete the sale of in the second quarter; and a soda ash mining operation.

The 2002 amounts have been restated for discontinued operations, which also include the Kern River, Central, Mid-America and Seminole pipelines that were divested last year.

Overall, Williams reported an unaudited first quarter 2003 net loss of $814.5 million (minus $1.59 per share), compared with net income of $107.7 million (7 cents) for the same period last year. What also affected the first quarter was an after-tax charge of $761.3 million ($1.47), to reflect the cumulative effect of new accounting principles that Williams adopted Jan. 1 on Emerging Issues Task Force (EITF) Issue 02-3, "Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities."

Recurring income from continuing operations in the first quarter was approximately $22 million (4 cents per share), compared with a restated $240.2 million (46 cents) in the same period last year.

Williams' core businesses in natural gas production, gathering and processing, and pipeline transportation produced combined segment profit of $327.6 million, compared with a restated $339.9 million for the same period last year. The first quarter results include a $109 million pre-tax impairment charge related to terms of an April agreement to sell Texas Gas Transmission Corp.

"We've already made a lot of headway this year in terms of executing our business plan," said CEO Steve Malcolm during a conference call Tuesday. "We have actively managed and increased our liquidity, aggressively transformed our business focus and led the company with determined financial discipline."

Malcolm said Williams has made "clear progress" toward a company "that is defined once again by our businesses and the value they create. Of Williams' core businesses, Midstream and Exploration & Production performed significantly better in the first quarter than a year ago. While the operating results of Gas Pipeline were reduced by a charge for an asset sale, performance from both the Transco and Northwest pipelines was higher than the first quarter of last year."

Malcolm said the Tulsa-based company's core businesses remained healthy and profitable, and would "define Williams' future."

By segment, Williams' Gas Pipeline reported quarterly profit of $94.6 million compared with a restated $179.3 million for the same period last year. Results followed higher demand revenues from new expansion projects; higher rates on the Transco system in connection with rate proceedings that became effective in late 2002; and reduced operating and general and administrative expenses.

Exploration & Production, which includes natural gas production and development in the U.S. Rocky Mountains, San Juan Basin and Midcontinent, reported segment profit of $126.1 million versus $106.3 million for the same period last year. The nearly 19% increase is primarily the result of realizing higher net-average prices for unhedged natural gas production. Williams showed a 6% decline in net domestic production volumes, which reflected its sale of some properties last year. However, nearly 75% of the sold daily production was replaced by new production, Williams added.

Midstream Gas & Liquids, which provides gathering, processing, natural gas liquids fractionation, transportation and storage services, reported profit of $106.9 million compared with a restated segment profit of $54.3 million for the same period last year. The unit profited from higher natural gas liquids margins, primarily from the company's processing plants in the western United States. Also contributing to Midstream's increased segment profit was the contribution of new deepwater operations.

Energy Marketing & Trading reported a loss in the quarter of $136.4 million, compared with a profit of $283.1 million for the same period last year. "On a comparative basis, the decline primarily reflects the absence of significant power and natural gas origination activities and is impacted by the application of new required accounting pronouncements that became effective Jan. 1, 2003," the company said in a statement.

The company noted that total liquidity as of April 30 was $1.8 billion, consisting of $1.4 billion in cash and $400 million in available credit. In addition, the company expects to realize approximately $2 billion in cash during May and June from the closing of asset sales it already has announced. Approximately $560 million of the proceeds are contractually required to reduce debt.

"The timeliness of our asset sales and the market values we're receiving are providing the liquidity we expected to stabilize our finances," Malcolm said. "Our financial strategy is to create and maintain sufficient liquidity from all available sources, deleverage our company through the asset sales we have already outlined, refinance upcoming debt maturities where financially prudent to manage liquidity, and continue to cut costs."

Williams has begun the process of refinancing the 364-day loan maturing in July that is backed by the company's Rocky Mountain gas reserves. The company plans to refinance a substantial portion of the original $900 million loan at market rates and terms.

"Reducing our interest expense is a priority. Refinancing at market rates will substantially lower interest expense while maintaining an appropriate level of liquidity," Malcolm said. At the end of the first quarter, the company had total debt of approximately $13.8 billion, compared with $14 billion at the end of 2002.

Since the beginning of 2002, Williams has sold or agreed to sell more than 20 assets, resulting in the divestiture of petroleum pipelines, natural gas and natural-gas liquids pipelines, retail convenience stores, ethanol plants and two of three refineries.

"Each asset sale provides a better, clearer view of a new Williams that is stronger and focused on key assets that provide some of the very best opportunities in the natural gas arena," Malcolm said.

Going forward, Williams' natural gas asset portfolio will include 14,000 miles of interstate gas pipelines, including the 4,000 mile Northwest system and the 10,000 mile Transco system. Williams also owns a 50% interest in the 581 mile Gulfstream system. Altogether, the pipes deliver roughly 12% of the natural gas used in the United States.

The portfolio also includes an extensive E&P business, which focuses on producing natural gas from tight-sands formations and coalbed methane reserves in the Piceance, San Juan, Powder River, Arkoma and Green River basins. In 2003, net production -- including the effect of properties in the process of being sold -- is expected to average approximately 470 MMcf/d. At year-end 2002, Williams had proved reserves of 2.8 Tcfe. In 2003, Williams has sold or agreed to sell roughly 400 Bcfe of its 2002 year-end proved reserves.

"We are focused on running our natural gas businesses in the long-term interests of the company, our investors and the communities in which we operate," Malcolm said. "Disciplined cash management still allows us to make disciplined investments in our core businesses."

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