Williams' Earnings Surge for Q4, Fall Slightly for 2006

Williams announced 2006 unaudited net income of $308.5 million, or 51 cents per share on a diluted basis, compared with net income of $313.6 million, or 53 cents per share on a diluted basis, for 2005.

Results for 2006 reflect record-high natural gas liquids (NGL) margins for the year, as well as the company's continued strong growth in natural gas production. Williams' average daily production from domestic and international interests increased 21 percent in 2006, surpassing 800 million cubic feet of gas equivalent (MMcfe).

These benefits were partially offset by lower net realized prices for natural gas, a $167.3 million charge associated with a securities litigation settlement, and higher operations and maintenance costs.

Results for 2006 also include unrealized mark-to-market losses of $22 million from the Power business, compared with $172 million of unrealized gains in 2005.

For fourth-quarter 2006, the company reported net income of $146.4 million, or 24 cents per share on a diluted basis, compared with net income of $66.8 million, or 11 cents per share on a diluted basis, for fourth-quarter 2005.

The net income improvement in the fourth quarter is primarily due to the absence of litigation accruals and certain impairments that occurred during the 2005 period, as well as the benefit of record-high NGL margins. Fourth- quarter 2006 also includes a $40 million favorable impact from the resolution of a federal income tax litigation matter, partially offset by a $16 million after-tax impairment charge related to an international Exploration & Production investment.

The company reported 2006 income from continuing operations of $332.8 million, or 55 cents per share on a diluted basis, compared with $317.4 million, or 53 cents per share on a diluted basis, in 2005.

For fourth-quarter 2006, the company reported income from continuing operations of $155.5 million, or 25 cents per share on a diluted basis, compared with $68.8 million, or 11 cents per share on a diluted basis, for fourth-quarter 2005.

Recurring Results Adjusted for Effect of Mark-to-Market Accounting

To provide an added level of disclosure and transparency, Williams continues to provide an analysis of recurring earnings adjusted to remove all mark-to-market effects from its Power business unit. Recurring earnings exclude items of income or loss that the company characterizes as unrepresentative of its ongoing operations.

Recurring income from continuing operations - after adjusting for the mark-to-market effect to reflect income as though mark-to-market accounting had never been applied to Power's designated hedges and other derivatives - was $707.8 million, or $1.17 per share, for 2006. In 2005, the adjusted recurring income from continuing operations was $512.8 million, or 86 cents per share.

For the fourth quarter of 2006, recurring income from continuing operations - after adjusting for the mark-to-market effect - was $180.4 million, or 30 cents per share, compared with $154.3 million, or 26 cents per share, for the same period in 2005.

A reconciliation of the company's income from continuing operations to recurring income from continuing operations and mark-to-market adjustments accompanies this announcement.

CEO Perspective

"Our portfolio of natural gas businesses continues to deliver strong performance," said Steve Malcolm, chairman, president and chief executive officer. "Record-level NGL margins in our Midstream business contributed significantly to our results. While natural gas prices were lower during 2006, oil and natural gas liquids prices were stronger. That helped to balance and strengthen our financial performance.

"We expect strong NGL margins once again will help support the company's performance, but at levels that are likely to be less than the record-high margins we experienced last year.

"We have a strong track record of growing our natural gas production while making significant additions to our reserves. For the fourth year in a row, we've replaced our reserves at a rate in excess of 200 percent. In the Piceance Basin, we are continuing to deploy high-tech, high-efficiency equipment and practices to support our accelerated development of production.

"For us, growing our segment profit and our natural gas reserves and production are major catalysts to deliver additional shareholder value. Other significant value drivers are higher rates for our interstate gas pipelines; more deals to sell power beyond 2010; additional midstream expansions; and the opportunity to raise more low-cost capital through dropdowns to Williams Partners."

Business Segment Performance

Consolidated results include segment profit for Williams' primary businesses - Exploration & Production, Midstream Gas & Liquids, Gas Pipeline and Power - as well as results reported in the Other segment.

For 2006, Williams' businesses reported consolidated segment profit of $1.47 billion, compared with $1.28 billion for 2005.

Higher results for 2006 were driven by extraordinary results in Midstream, along with the absence of certain impairment charges and litigation accruals in 2005. These benefits were partially offset by lower segment profit in Exploration & Production and Gas Pipeline.

Williams' businesses reported consolidated segment profit of $367.3 million in the fourth quarter of 2006, compared with $311.9 million in the fourth quarter of 2005.

The fourth-quarter 2006 results are primarily attributable to strong profitability in Midstream, as well as the absence of certain impairment charges and litigation accruals recorded in fourth-quarter 2005. These benefits were offset by a segment profit decrease in Exploration & Production.

On a basis adjusted to remove the effect of nonrecurring items and mark- to-market accounting, Williams had recurring consolidated segment profit of approximately $1.84 billion in 2006, compared with $1.58 billion for 2005 - an increase of 16 percent. The improvement in 2006 on an adjusted basis is primarily due to Midstream's extraordinary results, along with significant improvement in Power's recurring after-mark-to-market adjustment results.

On a basis adjusted to remove the effect of nonrecurring items and market- to-market accounting, Williams had recurring consolidated segment profit of $407 million in fourth-quarter 2006, compared with $448 million in fourth- quarter 2005. The reduction in consolidated segment profit on an adjusted basis is attributed to lower segment profit in Exploration & Production and Gas Pipeline, partially offset by improved Midstream results.

For 2006, net cash provided by operating activities was approximately $1.9 billion, compared with approximately $1.45 billion for the same period in 2005. Net cash generated in 2006 was primarily reinvested in the form of capital expenditures, which totaled approximately $2.5 billion in 2006.

Exploration & Production: U.S. Production Up 23% in 2006 From Development

Activities

Exploration & Production, which includes natural gas production and development in the U.S. Rocky Mountains, San Juan Basin and Mid-Continent, and oil and gas development in South America, reported 2006 segment profit of $551.5 million. A year ago, the business reported segment profit of $587.2 million.

The substantially higher production volumes in 2006 were more than offset by lower average realized prices, higher operating costs, and the absence of $29.6 million of gains from the sale of certain properties in 2005. Higher operating costs reflect an increased number of producing wells and higher well service and industry costs.

For 2006, combined average daily production from U.S. and international interests was up 21 percent to approximately 803 million cubic feet of gas equivalent (MMcfe), compared with 662 MMcfe for the same period in 2005.

Daily production solely from interests in the United States increased 23 percent to approximately 752 MMcfe in 2006 from 612 MMcfe in 2005.

For the fourth quarter of 2006, Exploration & Production reported segment profit of $139.6 million, compared with $206.4 million for the same period last year.

The significant increases in production volumes in the fourth quarter were more than offset by lower average realized prices and higher operating costs.

During the fourth quarter of 2006, Williams' U.S. production realized net average prices of $4.45 per thousand cubic feet of gas equivalent (Mcfe) - 21 percent lower than the $5.66 per Mcfe realized in the same period a year ago.

In a separate announcement today, Williams reported year-end 2006 proved U.S. natural gas reserves of 3.7 trillion cubic feet equivalent, up 9.5 percent from year-end 2005 reserves. Including its international interests, Williams had total proved natural gas and oil reserves of 3.9 trillion cubic feet equivalent at year-end 2006.

Williams' activities in 2006 resulted in the total addition of 597 billion cubic feet equivalent in net reserves. Over the past three years, Williams has added over 1.6 trillion cubic feet equivalent in domestic net reserves from drilling activity. For the fourth consecutive year, Williams has replaced more than 200 percent of its reserves.

U.S. Proved Reserves Reconciliation

Figures in billion cubic feet equivalent of natural gas. May not add due to rounding.

    Proved reserves Dec. 31, 2005                      3,382
     Acquisitions                                         41
     Divestitures                                         (1)
     Additions and revisions                             557
     Production                                         (277)
    Proved reserves Dec. 31, 2006                      3,701

In 2006, Williams continued to have a drilling success rate of approximately 99 percent. The company drilled 1,783 gross wells, of which 1,770 were successful. In 2005, Williams also achieved a 99 percent success rate, drilling 1,629 gross wells.

Williams currently has 25 rigs operating in the Piceance Basin of western Colorado - the company's cornerstone for production and reserves growth.

Within that fleet are 10 new-generation, high-efficiency drilling rigs specifically designed for conditions in the Piceance Basin. Williams deployed those rigs during 2006.

Williams plans to invest $1.3 billion to $1.4 billion of capital in Exploration & Production this year. These investments focus primarily on activity designed to increase domestic production by 15 to 20 percent during the year.

For 2007, Williams expects $700 million to $975 million in segment profit from Exploration & Production. The wide range in guidance reflects the potential volatility of natural gas prices and an assumption of unhedged natural gas prices ranging from $7 to $8.30 (Henry Hub), adjusted for basis differential.

Midstream Gas & Liquids: Segment Profit Jumps 40% for Year, 46% in Fourth

Quarter

Midstream, which provides natural gas gathering and processing services, along with natural gas liquids fractionation and storage services and olefins production, reported 2006 segment profit of $658.3 million, compared with $471.2 million in 2005, an increase of 40 percent.

For the fourth quarter of 2006, Midstream reported segment profit of $163.9 million, compared with $112.4 million for the same period in 2005, an increase of 46 percent.

The improvement in both year-over-year and quarter-over-quarter results in 2006 primarily reflects increased NGL sales margins; significantly higher production handling volumes and revenues in the deepwater Gulf of Mexico; and higher fee-based gathering and processing revenues. The year-over-year increases were partially offset by approximately $72.7 million in litigation accruals related to a contractual dispute surrounding certain natural gas processing facilities known as Gulf Liquids.

During 2006, Williams' sales of NGL equity volumes in the United States generated margins of $441.5 million - 121 percent higher than margins of $199.9 million for 2005. The extraordinary margins during 2006 primarily reflect the gap between higher liquids prices - which typically track closely to crude oil prices - and lower natural gas prices.

Also for the year, Midstream sold 1.35 billion gallons of NGL equity volumes, compared with equity sales of 1.27 billion gallons in 2005. These equity volumes are retained and subsequently marketed by Williams as payment- in-kind under the terms of certain processing contracts. Total production of NGLs from operated domestic plants also reached record levels, moving from 2.35 billion gallons in 2005 to 2.60 billion gallons in 2006.

During 2006, Williams installed the fifth cryogenic processing train at our existing gas plant in Opal, Wyo. The plant is currently being commissioned and should be in full operating mode in March 2007. The expansion is designed to boost the plant's processing capacity by more than 30 percent to 1.45 billion cubic feet per day and produce approximately 67,000 barrels per day of NGLs.

Williams plans to invest $430 million to $470 million of capital in Midstream in 2007. These investments focus primarily on expanding Williams' gathering and processing systems in the deepwater Gulf of Mexico and in the western United States. We will continue construction on the extension of our Discovery system to the Tahiti prospect and the 37-mile extension of our oil and gas pipelines from our Devils Tower spar to the Blind Faith prospect located in Mississippi Canyon. In 2007, we will continue working on our Perdido Norte project, which includes oil and gas lines that expand the scale of our existing infrastructure in the western deepwater of the Gulf of Mexico.

For 2007, Williams expects $450 million to $750 million in segment profit from Midstream. The wide range in guidance reflects the potential market volatility in both natural gas and NGL prices during the year and assumptions of NGL margins consistent with an oil-to-gas price ratio of 7.4 to 9.6 (West Texas Intermediate crude to Henry Hub gas).

Gas Pipeline: Earnings Expected to Increase as New Rates Go Into Effect

Gas Pipeline, which primarily delivers natural gas to markets along the Eastern Seaboard, in Florida and in the Northwest, reported 2006 segment profit of $467.4 million, compared with the $585.8 million for 2005.

Results for 2006 were reduced by approximately $77 million in selling, general and administrative cost increases, which stemmed primarily from higher costs for personnel, property insurance and information systems support. In addition, 2005 benefited by $14 million from the resolution of Transco's fuel- tracker filings.

For the fourth quarter of 2006, Gas Pipeline reported segment profit of $101 million compared with $92.8 million for the same period in 2005. The increase is primarily due to the absence of fourth-quarter 2005 prior-period accounting and valuation corrections related to inventories, though that benefit was offset somewhat by higher selling, general and administrative expenses in the most recent quarter.

Northwest Pipeline's new, higher rates went into effect, subject to refund, on Jan. 1, 2007. During the first quarter of 2007, Williams announced that Northwest Pipeline had filed a stipulation and settlement agreement that resolves all outstanding issues in its pending rate case, subject to Federal Energy Regulatory Commission (FERC) approval.

The settlement between Northwest Pipeline and the intervening parties in the case, including Northwest's customers, is supported by the FERC staff and is expected to be uncontested. Williams anticipates the process will be concluded by mid-2007.

Williams' Transco system also will benefit from new, higher rates, which go into effect, subject to refund, on March 1, 2007. Transco filed its rate case with the FERC on Aug. 31, 2006. The filing reflects, among other things, current levels of operating costs and rate base.

Since the beginning of the fourth quarter 2006, Williams has announced the status of a variety of Gas Pipeline projects - most significantly the completion and placement into service of its capacity replacement project in Washington state.

Williams plans to invest $425 million to $535 million of capital in Gas Pipeline in 2007. About half of these investments are planned for expansion projects, with the majority dedicated to the Leidy-to-Long Island and Potomac projects on the Transco system and the Parachute project on the Northwest Pipeline system. The majority of our non-expansion investments are tied to pipeline integrity projects.

For 2007, Williams expects $585 million to $655 million in segment profit from Gas Pipeline. The projected increase over 2006 results is principally because of new, higher rates for both the Northwest Pipeline and Transco systems.

Power: Contracting Megawatts Past 2010 Power manages a portfolio of more than 7,000 megawatts and provides services that support Williams' natural gas businesses.

Power reported a 2006 segment loss of $210.8 million, compared with a segment loss of $256.7 million in 2005. These unadjusted results include the non-cash effect of forward unrealized mark-to-market gains and losses. Power reported a fourth-quarter 2006 segment loss of $39 million, compared with a segment loss of $69.4 million in fourth-quarter 2005. These unadjusted results include the non-cash effect of forward unrealized mark-to-market results. The improvement in the fourth quarter of 2006 is primarily the result of the absence of litigation accruals and an impairment charge that occurred during the fourth quarter of 2005, as well as an increase in accrual earnings. These benefits were partially offset by lower unrealized mark-to-market gains and the sale during the fourth-quarter of 2005 of certain accounts receivable. For the fourth quarter of 2006, Power reported a recurring segment loss adjusted for the effect of mark-to-market accounting of $2.1 million, compared with a loss of $0.1 million in 2005.

In 2006, Power generated approximately $93 million in cash flow from operations, largely reflecting positive portfolio cash flows net of selling, general and administrative expenses. In 2005, Power generated approximately $188 million in cash flow from operations, largely the result of positive portfolio cash flows and the return of margin dollars. Guidance Through 2008

In 2007, Williams expects $1.9 billion to $2.4 billion in consolidated segment profit and earnings per share of $1.10 to $1.50. Both ranges are presented on a recurring basis adjusted for the effect of mark-to-market accounting and assume natural gas prices and NGL margins as previously referenced for Exploration & Production and Midstream. The ranges also contain an assumption for crude oil pricing in the range of $53 to $73 per barrel. Actual 2006 average market price for crude oil was approximately $66.

The updated consolidated segment profit guidance is approximately $75 million lower than what the company shared in November 2006. The change reflects Williams' expectation that NGL margins will be stronger than historical levels, but lower than record-high levels in 2006. Also, the change reflects the company's expectation that the Exploration & Production business will continue to experience costs that are higher, but that remain more favorable than industry averages.

In 2008, Williams expects consolidated segment profit of $2.20 billion to $2.88 billion on a recurring basis adjusted for the effect of mark-to-market accounting. The projected improvement over 2007 is primarily the result of expected increases in natural gas production.

Guidance for consolidated segment profit includes results for the four primary businesses, as well as the Other segment.

The company's overall capital budget is $2.23 to $2.43 billion for 2007 and $1.85 billion to $2.13 billion for 2008.

Williams, through its subsidiaries, primarily finds, produces, gathers, processes and transports natural gas. The company also manages a wholesale power business. Williams' operations are concentrated in the Pacific Northwest, Rocky Mountains, Gulf Coast, Southern California and Eastern Seaboard.

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