Despite the beating taken by Williams in the second quarter with a reported net loss of $18.2 million, (loss of 3 cents per share) compared with net income of $269.7 million, or 46 cents/share in 2Q2003, ongoing results and recent positive comments from credit rating agencies indicate the company is turning the corner. WMB shares gained nearly 2% Thursday to $11.98 on a favorable outlook from company officials.

“We did deliver solid second quarter performance,” said CEO Steve Malcolm. “Although our reported earnings were negative due to significant debt retirement expenses, our quarter-to-quarter recurring earnings showed significant improvement with a recurring [earnings per share] of 12 cents in the second quarter of 2004 versus a loss of 2 cents in 2Q03.” Recurring earnings beat analysts estimates of 7 cents/share.

Malcolm said the company’s pipelines continued to generate steady earnings. The gas pipeline division reported higher second quarter segment profit of $132.8 million, compared to $115.5 million a year earlier, on the restoration of partial service on the Northwest Pipeline.

Midstream operations were boosted by new deepwater expansions coming online and improved results in Williams olefins business. Midstream reported segment profit of $98.6 million, compared to $45.1 million a year earlier and Williams increased midstream guidance and announced plans to form a master limited partnership to hold some of those assets by the second quarter of next year.

Exploration and production (E&P) results were substantially lower because of a highly hedged position that has capped the upside and because of some higher variable costs, said Malcolm. The company also lowered 2004 guidance on E&P, but maintained 2005 and 2006 guidance because many hedges will end over the next two years. For the full year, Williams now expects $235 million to $260 million in segment profit from E&P, compared to previously expected $275 million to $300 million.

E&P, which includes operations in the Rocky Mountains, San Juan Basin and Midcontinent, reported second quarter 2004 segment profit of $43.3 million, compared to $178.7 million in 2Q2003, which included the benefit of a $91.5 million gain on the sale of certain properties. Recurring operating income from E&P was $54.6 million compared to $51.5 million in the first quarter of this year driven by 11% production growth (555 MMcfe/d, compared with 502 MMcfe in the first quarter of 2004). Williams is 80% hedged at $4.03/Mcf thus limiting the benefits of higher commodity prices.

The company said its production has now surpassed levels that were reached prior to last year’s asset sales. In the Piceance Basin where drilling activity has increased throughout the year, average daily production continues to rise. In the second quarter, average daily production was 210 MMcfe/d, a 19% increase. Year-to-date, Piceance production has increased 33%.

Malcolm said the company is still seeking to exit the power business but no change in status was reported because of depressed market conditions. As an alternative to a complete exit from the power business, Williams is evaluating whether the benefits of realizing the positive cash flows expected to be generated by this business through continued ownership exceed the benefits of a sale at a depressed price. If this alternative is pursued, Williams expects to continue the current program of managing the business to minimize financial risk, generate cash and manage existing contractual commitments.

Power, which holds more than 7,500 MW of generation, reported second quarter 2004 segment profit of $44.7 million, compared to profit of $348 million in 2Q2003, which included a $175 million gain on the sale of an energy contract and the benefit of $93 million in revenues from the correction of prior period amounts for certain third-party derivative contracts. The balance of the decrease in segment profit primarily results from lower unrealized mark-to-market gains associated with natural gas derivative contracts. For the full year, Williams continues to expect break-even results of $150 million in segment profit from power.

Power represents the last major business the company plans to sell. “As a result of asset sales, new credit facilities and strong cash flow from operations, we have reduced debt by over $2 billion through the second quarter and announced another $800 million tender today,” said Malcolm. The company reduced its debt in the second quarter alone by $1.5 billion.

Williams also negotiated enhanced and new credit facilities during the quarter with a $500 million unsecured facility which will be used primarily for issuing letters of credit and a three year $1 billion secured revolving credit facility. It also entered into a long-term agreement with IBM to outsource portions of its accounting, finance, and IT groups, which will eliminate much of the risks associated with cost reduction plans. Williams also settled California refund cases with the major utilities in the state during the quarter, receiving $104 million from the utilities in July.

For the full year, Williams now expects recurring earnings of $0.20 to $0.40 per share. Analysts are expecting 36 cents, according to Thompson Financial. On a restated basis, the company previously expected recurring earnings of $0.14 to $0.37 per share.

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