Williams Rides High with $437MM Second Quarter Profit



Williams announced second-quarter 2008 unaudited net income of $437 million, or $0.73 per share on a diluted basis, compared with net income of $433 million, or $0.71 cents per share on a diluted basis, for second-quarter 2007.

Year-to-date through June 30, Williams reported net income of $937 million, or $1.57 per share on a diluted basis, compared with net income of $567 million, or $0.93 per share on a diluted basis for the first six months of 2007.

Strong performances in the company's exploration & production and midstream businesses were the key drivers of the increase in the second-quarter and year-to-date results. Key factors were higher net realized average natural gas prices and strong natural gas production growth, as well as natural gas liquid (NGL) margins remaining at historically high levels. The results also benefited from a gain on the sale of certain international interests.

Lower income from discontinued operations partially offset these benefits to net income during the second-quarter and year-to-date periods. The lower results from discontinued operations in second-quarter 2008 primarily reflect the absence of income recognized in second-quarter 2007 related to the sale of the company's former power business.

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

Recurring income from continuing operations, after adjustments to remove the effect of mark-to-market accounting for certain hedges and other derivatives in Gas Marketing Services, was $406 million, or $0.68 per share for second-quarter 2008. On the same adjusted basis, recurring income from continuing operations was $264 million, or $0.43 per share, for second-quarter 2007.

For the first half of 2008, recurring income from continuing operations after mark-to-market adjustments was $747 million, or $1.25 per share; compared with $454 million, or $0.74 per share for the first half of 2007.
The significant increases in the recurring adjusted results reflect strong performances in the company's natural gas businesses driven by higher net realized average prices on increased production as well as strong NGL margins. Higher operating costs partially offset these benefits.

CEO Perspective

"Natural gas is playing an increasingly vital role in our nation's energy picture, and Williams operates a portfolio of natural gas assets that are best-in-class," said Steve Malcolm, Williams' Chairman, President and Chief Executive Officer.

"Our energy-producing businesses enjoy the competitive advantages of scale in established, growing production basins. Our pipelines connect those long-lived producing areas to fast-growing markets along the Eastern Seaboard, in Florida and in the Pacific Northwest.

"There are abundant growth opportunities across our businesses and we have a solid track record of crisp execution. Our focus continues to be delivering earnings growth and driving long-term value creation," Malcolm said.

Business Segment Performance: Consolidated Segment Profit Up 60% in Second Quarter

Consolidated results include segment profit for Williams' businesses - Exploration & Production, Midstream Gas & Liquids, Gas Pipeline and Gas Marketing Services as well as results reported in the Other segment.
For second-quarter 2008, Williams' businesses reported consolidated segment profit of $923 million, compared with $577 million for second-quarter 2007. Improved results in Exploration & Production and Midstream drove the 60-percent increase.

Year-to-date through June 30, Williams' businesses reported consolidated segment profit of $1.82 billion, compared with $1.04 billion for the same period in 2007. Strong results in Exploration & Production, Midstream and Gas Pipeline drove the significant increase in year-to-date consolidated segment profit. The year-to-date period also benefited from the previously noted gain on the sale of certain international interests.

On a basis adjusted to remove the effect of nonrecurring items and mark-to-market accounting, Williams' recurring consolidated segment profit was $902 million in second-quarter 2008, compared with $624 million for second-quarter 2007, an increase of 45 percent.

For the first half of 2008 on the same basis, Williams' recurring consolidated segment profit was $1.67 billion, compared with $1.12 billion for the first half of 2007.

Exploration & Production: Higher Net Realized Prices, Robust Production Growth Drive Higher Segment Profit
Exploration & Production 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.

 The business reported segment profit of $496 million for second-quarter 2008, compared with second-quarter 2007 segment profit of $209 million, an increase of 137 percent.

Year-to-date through June 30, Exploration & Production reported segment profit of $926 million, compared with $397 million for the first six months of 2007.

Higher net realized average prices and strong growth in domestic natural gas production volumes were the primary drivers of the significant increases in segment profit for both the second-quarter and year-to-date periods. Results for the second-quarter and year-to-date 2008 periods also benefited from pre-tax gains on the sale of certain international interests of $30 million and $148 million, respectively.

Increased development within the Piceance, Powder River and Fort Worth basins drove the growth in domestic production volumes, as the company surpassed 1.1 billion cubic feet equivalent (Bcfe) per day in domestic production during the second quarter. In the Piceance Basin of western Colorado -- the company's cornerstone for production and reserves growth -- average daily production increased 26 percent for the second quarter. In the Powder River Basin in Wyoming, the company's second-largest production area, average daily production increased 41 percent for the quarter.

During second-quarter 2008, Williams' net realized average price for U.S. production was $8.056 per thousand cubic feet of natural gas equivalent (Mcfe), which was 49 percent higher than the $5.39 per Mcfe realized in second-quarter 2007.

The benefits of higher net realized average prices and higher production volumes in the second-quarter and year-to-date periods were partially offset by increased depreciation, depletion and amortization, higher operating taxes, and higher lease operating expenses.

 Williams is updating Exploration & Production's segment profit guidance released on June 25 for 2008 and 2009. Increased expected production levels, including the effects of beginning the development of the company's recent acquisitions in the Piceance Basin and the Barnett Shale, are driving the updated forecast.
In 2008, Williams now expects recurring segment profit to range from $1.4 billion to $1.7 billion, updated from the June 25 guidance range of $1.35 billion to $1.7 billion. For 2009, the company now expects a range of $1.275 billion to $1.775 billion, updated from June 25 guidance of $1.250 billion to $1.75 billion.

The company is also updating its capital expenditure guidance ranges for Exploration & Production for both 2008 and 2009. The increase in capital expenditure guidance for both 2008 and 2009 are due to the previously announced acquisition in the Barnett Shale.

In 2008, Williams is now forecasting a range of $1.975 billion to $2.175 billion in capital expenditures, up from June 25 guidance of $1.8 billion to $2 billion. For 2009, the company now expects capital expenditures of $1.725 billion to $1.925 billion, up from June 25 guidance of $1.625 billion to $1.825 billion.

Midstream Gas & Liquids: Continued Solid Earnings Growth

Midstream provides natural gas gathering and processing, NGL fractionation and storage services and olefins production. For second-quarter 2008, the business reported segment profit of $295 million, compared with segment profit of $251 million for second-quarter 2007.

For the first six months of 2008, Midstream's segment profit was $556 million, compared with $405 million for the same time period in 2007.

Midstream's growth in segment profit during the second quarter is primarily due to greater contribution from the olefins business, higher NGL unit margins and higher fee-based revenues across all regions. The acquisition of an additional interest in the Geismar plant in July 2007 helped drive the greater contribution from the olefins business. Higher operating costs partially offset these benefits.

Higher NGL margins, associated with favorable market commodity pricing on NGLs, were the primary driver of the segment profit growth in the year-to-date period.

Williams markets NGLs via equity volumes the company retains as payment-in-kind under certain processing contracts. Midstream's 2008 NGL equity volumes for both the quarter and year-to-date periods are comparable to the same periods of 2007.

Gas Pipeline: New Transco Rates, Expansion Projects Drive Year-to-Date Segment Profit Growth

Gas Pipeline, which primarily delivers natural gas to markets along the Eastern Seaboard, in Florida and in the Pacific Northwest, reported second-quarter 2008 segment profit of $179 million, compared with $180 million for second-quarter 2007.

Year-to-date through June 30, Gas Pipeline reported segment profit of $359 million, compared with $330 million for the same period in 2008.

On a recurring basis, Gas Pipeline's second-quarter 2008 segment profit was $170 million, compared with $157 million for second-quarter 2007, an increase of 8 percent.

Increased revenues from two expansion projects placed into service in fourth-quarter 2007, partially offset by higher costs, contributed to the higher recurring segment profit in the second quarter.

Also on a recurring basis, Gas Pipeline's segment profit for the first half of 2008 was $350 million, compared with $307 million for the first half of 2007.

Increased revenues from new rates on the Transco system and the two expansion projects were the primary drivers of the higher recurring segment profit in the year-to-date period. Higher costs partially offset these benefits.

Gas Marketing Services: Supporting Natural Gas Businesses with Marketing, Risk Management

Gas Marketing Services is responsible for supporting Williams' natural gas businesses by providing marketing and risk management services. These services primarily include marketing and hedging the gas produced by Exploration & Production, and procuring fuel and shrink gas and hedging natural gas liquids for Midstream.

In addition, Gas Marketing manages various natural-gas related contracts, such as transportation, storage, and related hedges, and proprietary trading positions, and provides marketing services to third-parties, such as producers. The segment also manages certain legacy natural gas contracts and positions that previously were reported in the former power business, which have been reduced to a minimal level.

Gas Marketing reported a second-quarter 2008 segment loss of $46 million, compared with a segment loss of $63 million in second-quarter 2007.

For the first six months of 2008, Gas Marketing reported a segment loss of $25 million, compared with a segment loss of $93 million for the same period in 2007.

The reduction in segment loss for both the second-quarter and year-to-date periods was primarily due to reduced mark-to-market losses associated with derivative contracts with a future delivery date that are not accounted for using hedge accounting. The favorable change was largely the result of reduced losses in 2008 from legacy contracts that are no longer outstanding. This benefit was partially offset in both periods by a decrease in accrual gross margin.

Although not significant for second-quarter or year-to-date 2008 results, the company expects in the future to have some level of mark-to-market volatility in Gas Marketing Services, primarily from natural gas storage and transportation hedging.

Williams is adjusting its guidance for Gas Marketing in 2008 and 2009. The company now expects Gas Marketing's 2008 recurring segment results, adjusted for the effect of mark-to-market accounting, to range from a loss of $50 million to a loss of $30 million. Previous guidance was a loss of $30 million to breakeven.
For 2009, Williams' new guidance for recurring segment results, adjusted for the effect of mark-to-market accounting, is a loss of $20 million to a profit of $20 million. Previous guidance was a loss of $40 million to breakeven.

Segment Profit, Capital Expenditure Guidance Updated

Guidance for consolidated segment profit includes results for Exploration & Production, Midstream and Gas Pipeline, as well as Gas Marketing and the Other segment. All consolidated segment profit and earnings per share ranges are presented on a recurring basis adjusted for the effect of mark-to-market accounting.

For 2008, Williams has updated its consolidated segment profit guidance to a range of $3.15 billion to $3.65 billion and earnings per share of $2.35 to $2.80. The previous ranges were $3.1 billion to $3.65 billion in consolidated segment profit and earnings per share of $2.30 to $2.80. The updated range for 2008 reflects the previously referenced update in Exploration & Production.

For 2009, Williams has updated its consolidated segment profit guidance to a range of $2.925 billion to $3.825 billion and earnings per share of $2.10 to $2.95. The previous ranges were $2.9 billion to $3.8 billion for consolidated segment profit and earnings per share of $2.05 to $2.90. The updated range for 2009 reflects the previously referenced update in Exploration & Production.

Williams is updating its capital expenditure guidance for 2008 and 2009, reflecting the previously referenced increases in Exploration & Production.

The new range for 2008 is $3.2 billion to $3.55 billion, up from the previous range of $3.025 billion to $3.375 billion.

For 2009, the new range is $2.725 billion to $3.125 billion, up from the previous range of $2.625 billion to $3.025 billion.

As noted in its June 25 guidance update, Williams is now providing capital expenditure expectations for potential future projects it is investigating that are not yet included in capital expenditure guidance. The inclusion of potential future project expectations is designed to provide investors with Williams' current views on total potential capital in the given year.

The company has identified $100 million to $300 million in potential future projects for 2008 and $200 million to $500 million in potential future projects for 2009.
 


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