Despite cutting its year-over-year losses significantly, Williams last week announced an unaudited 2003 net loss of $504.5 million, or a loss of $1.03 per share on a diluted basis, compared with a net loss of $754.7 million, or a loss of $1.63 per share, for 2002.

The company attributed the loss to a 1Q2003 after-tax charge of $761.3 million, or $1.47 per share, which reflects the cumulative effect of new accounting principles primarily associated with the adoption of Emerging Issues Task Force (EITF) Issue 02-3, “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities.”

The company also recorded a smaller loss in 4Q2003 of $66 million, or minus 13 cents per share, compared with a net loss of $219.2 million, or a loss of 44 cents per share, for the same period of 2002. The company noted that its 4Q2003 results included $66.8 million of pre-tax expense associated with the early retirement of debt.

Full-year income from continuing operations was $2.9 million, resulting in a loss of five cents per share on a diluted basis, which includes the effect of preferred stock dividends. For 2002, the company reported a loss of $611.7 million, or a loss of $1.35 per share, on a basis restated for discontinued operations related to assets sold or held for sale.

Williams officials said reasons for the improved full-year performance from continuing operations include a $759 million improvement in power segment profit, significantly reduced levels of asset and investment impairment charges, reduced losses associated with interest-rate swaps, and lower general corporate expenses.

“The improvement in our results is indicative of the significant steps we’ve taken to restructure our company,” said CEO Steve Malcolm. “In 2003, we made substantial progress in strengthening our finances, we refocused our business strategy around key natural gas assets, and we began executing on a plan toward achieving investment-grade credit characteristics. That plan includes making continued disciplined capital investments to grow our businesses.”

Recurring income from continuing operations in 2003 was $12 million, or two cents per share. In 2002, the recurring results from continuing operations reflected a loss of $221.7 million on a restated basis, or a loss of 43 cents per share.

In the company’s segment breakdown, Williams reported that its natural gas businesses, including pipelines, production and midstream operations, reported combined segment profit of $1.24 billion in 2003 versus the same level in 2002 on a restated basis.

Considered core to its strategy, these businesses reported combined segment profit of $244.4 million in the fourth quarter of 2003 versus $176.6 million for the same period in 2002.

During a conference call, Ralph Hill, senior vice president and head of Williams’ Exploration and Production segment, said 2003 production replaced at a ratio of 254%, noting that the year also saw a drilling success rate of 99%. Hill added that the company moved 412 Bcf from probable to proved reserves during the year. As of Dec. 31, 2003, the company had total reserves of 2.7 Tcf.

Malcolm added, “Our natural gas wells, pipelines and midstream assets are producing the solid results that we expected in what was a challenging environment of liquidity-driven divestitures and constrained capital investment.”

For the year, Williams’ Gas Pipeline segment reported segment profit of $554.9 million versus $545.1 million in 2002 on a restated basis. For the fourth quarter of 2003, Gas Pipeline reported segment profit of $148.4 million, compared with restated segment profit of $122.1 million for 4Q2002. The company noted that the quarter-over-quarter increase was due to completed expansion projects and the absence of a $17 million FERC-related charge in 2002.

Williams’ Exploration & Production segment reported 2003 profit of $401.4 million versus $508.6 million for the previous year on a restated basis. The company attributed lower levels of production in 2003 due to property sales and reduced drilling activities in the first half of the year as partial reason for the decline. For the fourth quarter of 2003, segment profit was $50.1 million, compared with $81.5 million a year ago on a restated basis.

The company’s Midstream Gas & Liquids segment recorded 2003 segment profit of $286 million versus a restated segment profit of $183.2 million for the previous year. For the fourth quarter of 2003, segment profit was $45.9 million versus a segment loss of $27 million on a restated basis in the same period a year ago.

The power segment, which manages more than 7,500 MW through long-term contracts, reported 2003 segment profit of $134.2 million versus a segment loss of $624.8 million for the previous year. Williams previously acknowledged that it is pursuing a strategy designed to result in substantially exiting the power business through sales of component parts of its portfolio or as a whole.

Because of the intricacy of power contracts and the fact that the current power market is depressed, Williams said it is unsure of the exact timing of its exit from the segment. For the fourth quarter of 2003, the power division reported a segment loss of $121.3 million, compared with a loss of $22.8 million in 2002.

On the whole, Williams said it reduced debt by $2 billion during 2003, including debt associated with discontinued operations and the early retirement of approximately $951 million of debt through tender offers. The company noted that it has already completed the majority of its planned asset sales except for certain midstream assets in 2004, such as its straddle plants in Western Canada. In addition, Williams also expects to complete the sale of its Alaska operations in the first quarter.

Williams’ growth plans call for 1,400 new natural gas wells in 2004, the construction of a previously announced 110-mile expansion of the Gulfstream Natural Gas System and the spring startup of Midstream’s Devils Tower floating production system in the deepwater Gulf of Mexico.

As for forecasts, the company said it expects enterprisewide segment profit in 2004 of $1.1-1.4 billion. In 2005 and 2006, Williams looks for enterprisewide segment profit of $1.3-1.6 billion and $1.4-1.7 billion, respectively.

During the call, Hill also set the company’s production forecast for the next three years. He estimated 500-550 MMcfe/d for 2004, 600-700 MMcfe/d for 2005 and 700-800 MMcfe/d for 2006.

While Williams’ earnings report sent stock prices lower Thursday, analyst Sam Brothwell of Merrill Lynch, said the report does not mean that the wheels have fallen off. “Our original thesis on Williams was a long-term turnaround and balance sheet restoration story, and that hasn’t changed,” Brothwell said.

“After El Paso’s Tuesday ‘revision’, all eyes were on [Williams’] E&P, but that is in fine shape — reserves grew to 2.7 Tcf, and the number has been well-scrubbed,” Brothwell added.

However, the analyst had trouble understanding why the margin outlook going forward was cut for the Pipelines and Midstream segments. “The former is embarrassing. How do you miss a forecast on a stuffed FERC regulated pipe by 10%?” Brothwell asked, referring to a major pipe replacement on Williams’ Northwest. He also questioned why Midstream was forecast to see “more capex and less margin when new projects are coming on stream and NGL economics are improving?”

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