威廉斯 (WMB) 2003 Q1 法說會逐字稿

Good morning. I'm Travis Campbell, the Investor Relations Officer with Williams, and I want to welcome you to our analyst call this morning.

The presentation today is available for download either in PDF or Power Point format on our web site, Williams.com.

Today we're going to cover our first quarter results, which were released this morning, update you on some of the progress on our liquidity management strategy and then talk about the direction of our company.

Steve Malcolm our President and CEO will present most of the material but we'll also hear from Don Chappel, our new CFO and our business unit leaders. We have one hour for the call. So we will, but we will leave time at the end for Q&A and at that time the operator will give instructions on how to ask a question over the few phone lines we do have and those that are listening on the web cast, on your screen there are instructions on how to ask a question on the web site.

Moving over to slide 2, today obviously the call will include some forward-looking statements. Please refer to the forward-looking statement information in this presentation and what's posted at Williams.com for further details on the risk factors.

Also, there are some non-GAAP numbers that will be presented. The reconciliation of those numbers is included on the web side and there's also an attachment to the press release that was issued this morning.

With those few comments let me turn it over to Steve Malcolm, our Chairman and President

Thanks, Travis. Good morning, and thank you for your continuing interest in Williams, and welcome to our conference call to discuss first quarter results.

Most of the Williams senior management team is assembled here in Tulsa and some will be presenting in the presentations and others will certainly be available to answer questions.

I'm now looking at slide 4, the agenda. There we go. Slide 4. As Travis mentioned, we will cover first quarter results in terms of earnings and liquidity.

And then continue the discussion around our comprehensive liquidity management plan and complementary commercial and financial strategies that we rolled out in February.

The business unit leaders will provide a very brief update on their respective businesses. Then again as Travis mentioned, we'll introduce Don Chappel who will offer some general comments on our financial strategy going forward.

And then we'll conclude with some thoughts about the future.

Page 5 now, slide 5, entitled first quarter 2003 results. While earnings declined year over year we're pleased to see continued strong performance in our core asset-based businesses.

But our results from continuing operations are down from a profit year over year, due mainly to a loss in EM and T. Impairment associated with the sale of Texas gas pipeline of 109 million dollars, and increased interest costs of 162 million due primarily to our RNT loan. Just to clarify, discontinued OPS consist of Kern River pipeline, Maple (inaudible), pipelines, soda ash, central pipeline, Memphis refinery, travel centers and bio energy.

Our after tax charge for the EITFO '02, '03 of 761 million dollars came in within our earlier estimated range, but Andrew will provide more detail around this change later in the call.

As a result, we have a total net loss of $1.59 per share or a loss of 815 million dollars. Excluding nonrecurring items, which includes, among other items, the Texas gas impairment, work force reduction costs at EM and T, we have a positive recurring earnings from continuing OPS of 22 million dollars, or four cents per share.

Now, I do want to make the point that a detailed schedule, which reconciles the loss from continuing operations to the recurring income from continuing operations, is available on the Williams web site at WWW.Williams.com.

Page 6, slide 6, turning to performance of our continuing operations, year-over-year we had a decrease of 156 million dollars in income from continuing operations.

Again, we're pleased to see continued strong performance in our core asset-based businesses, which excluding the 109 million dollar impairment charge related to the sale of Texas gas, increased 98 million dollars over last year.

We had a significant swing in performance from this year to last in our marketing and trading business, totaling 419 million dollars. Decreases were due to absence of origination activity in 2003, seasonality in power totaling results and mark movements against the portfolio.

Also, we had increased interest costs of 162 million dollars, due primarily to our R and T loan.

The increase in investing income primarily reflects the fact that we had a charge of 232 million dollars in the first quarter of 2002 related to our WCG investment.

The remainder of the difference is in taxes and other miscellaneous charges.

Go to slide 7, recurring income from continuing operations, I don't intend to spend any time on this. I referenced this reconciliation on one of the earlier slides. And this just again reconciles from loss from continuing operations to the recurring income from continuing operations, and it's just available for your review.

Slide eight, core business segment profit. As I said before, we had strong performance in our core asset-based businesses. Each of our business unit leaders will give you much more color later, but in general gas pipelines reported segment profit decreases year-over-year of 84 million dollars or 70 percent but more importantly on recurring basis without the 109 million dollars Texas gas impairment, recurring segment profit is 204 million dollars which is up about 14 percent.

Exploration and production improvement of 20 million dollars, or about 19 percent is due largely to higher gas prices on unhedged production. And midstream segment profit almost doubled year over year as you can see due to very strong NGL margins and the fact that some of our deep water projects began coming on line during 2002 and are contributing for the first time now.

Slide eight, cash. I think the key point on this slide is that although we appear to be a cash user there the first quarter, I would highlight the 228 million dollars associated with the Memphis escrow account. And this is due to some timing differences related to the Memphis asset sale.

Under the terms of our debt agreements, we had to put 228 million dollars of the 453 million of net proceeds into an escrow account.

Substantially all of this cash was released in April of 2003. So we'll see that cash in-flow in the second quarter of '03.

So without this escrow, we would have basically been cash neutral in the first quarter of 2003. But the highlights, of course, about 1.4 billion of cash in the door during the quarter.

And then cash out associated with debt payments, interest payments, working capital and other capital expenditures you see the Memphis escrow account. You see the cash ending number of at 331 of 1.5 billion.

I would close my comments on this slide by simply saying keep in mind that we have about two billion dollars of asset sales that will likely close in the second quarter.

Slide No. 10, entitled asset sales. I can't say enough about the great work by many people, Phil Wright (ph), Mark Wilson, Ralph Hill, Bill Hobbs and his crew, many are doing great things in terms of our asset sales activities. This slide simply shows those asset sales that have been completed in the first quarter of 2003, Worthington travel centers and Memphis refinery, just under 700 million dollars. And then we've listed here the asset sales that have been announced but not closed.

And I'm just going to go through here and give you my gut feel as to when these asset sales are going to close. And I know I'm going out on a limb in some cases here but this is based on the information that I have today. Bio energy appears that it will close the end of May. The Jackson C (ph), it's probably the most difficult asset sale to forecast. We would expect FERC (ph) approval to be received probably in mid May, but there is some uncertainty with respect to that. If we do get the approval on a timely basis then that should clearly close in the first quarter.

The E and P properties to cross timbers or XTO should close in late May or early June. The E&P sales, Brundij (ph) Canyon and Julesberg (ph), I would expect sometime in late June they would close. Texas gas I'm pleased to announce that we have a closing set for this Friday. WEG, based on the latest information, I would expect that asset sale to close in mid-June.

And the Memphis retained interest monetization, in fact we've already received that money. \ So that gives you a pretty good idea of asset sales that have closed that did close in the first quarter, and when we believe today, when we believe the asset sales that have been announced will close.

Clearly there are some additional assets that we continue to negotiate on. And I'm speaking of the major ones, midstream, Canada, a variety of swing assets in the midstream area. The Alaska refinery and soda ash, and we continue to, as I said, negotiate on the sales of those assets.

Slide No. 11 is entitled debt balances, first quarter, '03. This simply shows where we were at 12-31-'02 and then we make an adjustment for discontinued operations which gives us a number of 13.914 billion dollars as of 12-31 of '02.

The scheduled debt repayments of the quarter of 132 million, progeny debt repayments of 229 accrued capitalized interest, new debt issues primarily in this case Northwest pipe, that gives you the debt balance as of 3/31.13.7 billion, 228 million dollar change.

We highlight there that the remaining progeny debt is 437 million dollars as of the end of the first quarter. I would point out that in early April we made 206 million dollar payment toward the progeny debt. And would expect that the remaining progeny debt will be paid off shortly after we close on the Texas gas sale.

SG & A expenses, we continue to make progress on our efforts to reduce expenses. As this slide shows, and I'm now on slide 12, we are down about 14 percent since the first quarter of 2002. We're pleased with the progress that we're making but we need to do much more. And there will continue to be opportunities for us to continue to reduce expenses as we sell additional assets.

I'm now going to turn it over to Bill Hobbs and Andrew Sunderman, although we continue to pursue sales of our book and seek to ringfence (ph) or reduce the risks associated with the business, clearly the progress has been slower than I would have hoped. And so as I said last time, it's prudent for Bill and Andrew to address the accounting issues around the business and to review the business in general.

And so for that reason I'll turn it over to Mr. Hobbs and Mr. Sunderman.

This is Bill Hobbs as Steve said the Jackson sale is expected in the quarter.

I'm on slide 14 and as we continue to focus our efforts on lowering the liquidity requirements and reducing the risk of the M and T business within Williams, we've stopped speculative trading as I mentioned before our origination efforts are now solely focused on risk reducing transactions and sales of contracts within the book. We're certainly committed to honoring our contractual commitments that we still have.

And we still market our E and P production and we buy gas for the processing plants. You can see on this slide we have reduced head count by 70 percent over the last year. We are working with our treasury and the asset-based businesses to reduce liquidity needs and maximize cash, specifically around the hedge positions we have in various commodities across Williams.

We've also largely exited the petroleum trading business and we're working on exiting the majority of our third party gas contracts. A lot remains is basically an 8,000 megawatt merchant power company with roughly 75 percent hedge through 2007.

And that's a general business overview of where we're at and at this point I'll turn it over to Andrew. He'll walk through some accounting issues.

The next few slides will hopefully walk you through and explain in pretty good detail the change in accounting that has been required within Williams marketing and trading and most marketing and trading companies within our industry.

Slide 15 is designed to walk you from the year-end 2002 net asset value of 1.6 billion and once we adopt EITF 02-3 it shows you the accounting buckets that we had for our book. Starting on the left non-derivative bucket of 1.93 billion dollars that's the same number that you recognized that Steve has mentioned that on an after tax basis is the 761 million dollar charge to earnings that we took in the first quarter as a result of adopting EITF 02 -03.

The middle bucket is the hedge bucket it has very little money in it at this point. Mainly because of the fact that even though economically we continue to remain hedged and that the fair value continues to be locked in for the first quarter of 2003, because of the fact that we are trying to sell this business, we have chosen not to elect hedged accounting treatment.

So there's very little dollar associated with the hedge bucket. Then pickup get to the right-hand side you see mark-to-market derivatives of 438 million. Any derivative instruments that qualified under the GAAP accounting rules will be now in that bucket.

They will continue to be mark to marketed on a daily basis. And as long as they are not designated as a hedge for accounting purposes they will continue to create some earnings volatility on a quarter over quarter basis and we'll hopefully talk about that a little more in the near future.

One thing I still want to stress is that these are accounting requirements only. They do not change the economic value of the portfolio. They do not change the potential cash flows within the portfolio. This does, this accounting change will reduce the earnings volatility on a quarter over quarter basis but it will not reduce it as greatly as if everything were designated as a hedge and it does, the business as we're operating it right now, as Bill talked about has reduced the incremental liquidity needs to Williams for this business.

Now, turning to slide 16, I want to walk you through how we're going to look at each respective contract type that we have in our portfolio. As you can see, most of the contract types are in the non-derivative bucket. They will be accounted for on an accrual basis and for the most part the income statement and the cash flow statement will match.

One other change I want to note is that under the new accounting rules under FAS 133, any physical settlements in the commodity business have to be accounted for as far as revenues are concerned on a gross basis. This is a departure from the past. If you recall, Williams was one of the few energy merchant players that accounted for its mark-to-market activity on a net basis, but under the new accounting rules we're required to account for physical settlements.

On a gross basis you'll see a large increase in our revenues in the first quarter and going forward, because of that change. And then the bottom three lines you see are primarily our derivative products. They will continue to be mark to marketed.

The cash and income statement will have a divergence, much as they have in the past. And they will be accounted for from a revenue standpoint on both a gross and a net basis. Turning now to slide 17, walking you through a comparison of quarter over quarter, as Steve and Bill mentioned changes in the quarter are driven primarily by the fact that in the first quarter of last year we still had a balance sheet that allowed us to do origination activity.

We're no longer focused on origination activity except to either sell parts of the book or reduce risk within the portfolio so the origination earnings significantly drop. You also see that the mark-to-market change there from first quarter of last year to first quarter of this year.

That was primarily driven in the first quarter of this year by the tint rate book, interest rates continue to go against us for this quarter. You see a 37 million dollar charge in this quarter for additional subject to refund obligations resulting from the recent FERC ruling.

What you don't see is that below segment profit but included in net income for Williams M and T is 33 million dollars in interest income associated with the same ruling. So on a net income basis for EM and T there's very little charge resulting from the change in the FERC.

And you see an additional $12 million associated with costs from work force reductions that Bill mentioned. That walks you through to the segment profit for the first quarter of 136 million dollar loss. And I will turn it back to Doug Whisenant (ph) with our appliance to start the business units.

We'll now look at slide No. 19. The completion of several fully subscribed expansions and implementation of cost cutting measures largely made possible by efficiencies gained by adoption of best practices and common systems across our pipelines, has pushed our gas pipeline units recurring segment profit, that is, before the 109 million Texas gas impairment, up by 14 percent from 179 million last year to 204 million this year.

Again, I refer you to the reconciling schedule that reconciles recurring segment profit to the reported segment profit that's on the web site. Quarterly segment profit of Transco and Northwest is up 45 million over last year, a 31 percent increase, more than offsetting the loss of profit contributions of pipeline investments we have sold, including our investments in Coal Point (ph), Alliance and Northern Border.

As well as the significant earnings contribution last year by AFUDC, our allowance for funds during construction, booked during the construction of Gulf stream.

We're now very focused on cash generation. We also have good news here, too. This year we were pulling down a large backlog of committed expansions.

Capital expenditures are dropping, and we now begin to reap not only promised profit from these expansions but cash flow enhancements as well. In the first quarter, gas pipelines not only covered our 122 plus million dollars of capital expenditures, but we generated over 56 million of free cash flow to boot.

These expansions are not fully subscribed, but they're really needed. On January 23rd, Transco delivered 8.34 million decatherms (ph) of gas enough to heat more than 30 million homes on an average day. This bested Transco's previous record by over one million decatherms or 14%. In phase one of the momentum expansion, providing another 269 in decatherms into Transco South Atlantic markets was completed on time and on budget earlier this month giving us the wherewithal to best this year's delivery record in years to come.

In early March we closed 175 million dollar debt financing on Northwest pipeline, the proceeds of which are being used to fund Northwest expansions that will add 508 thousand decatherms of physical capacity to the Northwest system.

Indeed our gas pipeline business is emerging from a period of tremendous growth, requiring a tremendous amount of capital. As I indicated before the expansions on Transco and Northwest pipeline over the two years from December 2001 from November of this year increased segment operating earnings by just short of 100 million dollars in their first year. Effectively replacing the earnings of our Kern River and central pipelines that were sold last year.

As Steve mentioned we expect to close the sale of our Texas gas system later this week, providing 795 million of cash, in addition to the buyer's assumption of 250 million of debt.

Despite that, 2003 should be even better as Northwest, Ever green, Rocky Mountain and Columbia Gorge expansions are completed. By the sale of Texas gas and the investments I mentioned earlier means lower overall profit segment from our gas pipelines business this year. That is more half by the positive impact of our Transco and Northwest expansions. With its major expansions now complete, Transco is expected to generate substantial free cash flow going forward. As will Northwest pipeline once its expansions are completed this fall.

Alan will now discuss midstream.

Midstream Group had another great quarter. While the fact we almost doubled last year's segment operating profits speaks for itself it should also be noted including in this 7million dollars we had 22 million dollars of charges that were related to extraordinary items included in it, is included in 800 million dollar, sorry 600 million dollar expense in our Venezuela assets for a fire we had in our Perial (ph) facility and eight million dollar debt write off in Canada and an 8 million write off in our discovery adjustment that was related to some accounting errors that occurred at the time that Texaco was the operator of our discovery investment.

The strength in these numbers came from two primary areas. First we had strong net liquid margins in our Northwest where we gained [inaudible] over last year's quarter results and our deep water operating profit continues to ramp up and we gained over 19 million dollars against our first quarter last year deep water results as well.

In general, our investments over the last several years are paying off and offsetting the reductions in our profits due to the asset sales program where we have sold off 1.4 billion dollars in assets since this time last year.

But in addition to the great financial results, we also continue to execute our strategy of growing and leveraging our scale in the growth basins we operate in due to our low cost and our highly reliable operations we're able to track shells, Pine Dale Anakline, (inaudible) to our Wyoming plant.

As a result of this Willbrows (ph) will spend 18 million dollars to construct and own the fourth modern train at Opal and Williams will operate and share in the profits with Willbrows at this facility. This is a great example how we're operating on our strategy even though we have got restricted capital. This expansion will make Opal the largest PL producing plant when it comes on line.

We've had great efforts from our discovery team. I'm proud to report that discovery has been an investment that caused us some losses over the last several years. Due to some great efforts by that group, they produced a record recurring net income in March of two and a half million dollars. However, we did take an eight million dollar charge on quarter in discovery due to some prior accounting.

So that team has really pulled together and it's the kind of effort that our organization continues to exert, even through all the challenges we've had at Williams.

For the remainder of 2003, we expect our profitability to reduce by approximately 20 million dollars as we sell a major portion of our Canadian NGL business and other relatively small assets here in the U.S.

Additionally, we don't expect strong margins we saw out West to continue for the balance of the year as the Kern River expansion has opened that gas to higher priced markets and so we've seen some increase in our feedstock expense out west. But we do expect our deep water profits to continue strengthening and these will get a strong boost in the first quarter of 2004 when our devil's tower (ph) and Gunison (ph) projects currently under construction will start up and provide substantial cash flows coming in in the first quarter of next year.

Thanks, I'll turn it over to Ralph Hill now

Thank you Alan. E and P had excellent quarter. Segment profit was 126 million versus the first quarter 2002 106 million. Production only declined 38 million a day, even though keep in mind in 2002 we sold approximately 152 million cubic feet a day of production. This is a testament to our successful drilling program in the year 2002, and I think bodes well for why ramp up drilling programs in 2004, and 2005 and beyond the opportunities we had to add volumes in a very real time fast cash generating basis.

We also benefited from a strong gas price environment. We produced 49 and a half BCF in the first quarter. Approximately eight and a half BCF of our production was unhedged and enjoyed the high gas prices the market saw in the first quarter.

Looking at accomplishments today for 2003, so far we have identified marketed and executed purchases and sale agreement for 483 million dollars. The E&P properties as part of 500 million dollar goal in year. Assets we've sold are miscellaneous San Juan (ph) non-operating properties, Raton and Houston properties to XTO for four hundred million. Uenda, (Inaudible) Canyon properties, to Berry Petroleum for 48.6 million, what we call our Northeast Colorado properties to Petrol and Development Cooperation for 28 million and we also have another miscellaneous rocky properties that we will sell, that will bring us up to the 483 million dollars that we should announce today, well on our way goal of 500 million.

A significant thing happened in the Piceance (ph) Basins. Ten acre spacing we applied for in February for 11,000 acres was approved April 21st. This is a first I know of ten acre space in the industry. It will add at least 550 new locations in this area. We have much more running room to go in the Piceance basin, as you know. We have 188 thousand total acres in that Basin and this first application was just for 11,000 acres.

Also the industry received a record decision on April 30th from the BLM on the Powder River Basin environmental impact study. This is after three years of work by the industry and many partners, we can now see federal reports for our tremendous resource potential which is Big George where it's going in the Powder River.

In 2003 the expectations for the rest of the year we need top continue to execute and finish the 500 million dollars of asset sales and in total he will sell about 400 BCF in this 500 million number. And about 90 million a day per production. The 400 BCF represented about 14 percent of 2002 year-end reserves. We continue to authorize 203 production with limited capital budget we have this year and continue our efforts to remain a low cost operator which we are doing and we are obviously focusing and preparing for 2004 drilling program in the remaining key Basins which are the Piceance, the powder, San Juan Basin and Arkoma Basin with some Green River opportunities also.

I'll now turn it over to Steve.

Thanks, Ralph, and I apologize for the confusion I caused relative to Nack's and obviously that will be closing in the first quarter. We do have good news that Bill Hobbs passed onto me as we've been talking here that the FERC has authorized the assignment of that contract to Progress Energy. So that's good news. And our expectations are that we will get cash in the door by May the 30th relative to that transaction.

I believe that the presentations that you've heard reflect that our core businesses are strong, are certainly thriving and I believe enjoy the characteristics consistent with our commercial strategy of owning natural gas assets in key growth markets.

I'm looking now at the slide No. 22 and this is just a restructuring score card. We rolled out to you on February 20th the things that were going to be important to us over the next few months and this is an update on the progress that we've made.

Clearly we built liquidity to address upcoming debt maturities. We announced agreements to sell 2.8 billion dollars of assets, completed 704 million of assets as of March the 30th. We de-levered by over 200 million dollars as of March 31st, and we reduced the work force by 28 percent or almost 3,000 employees as of April 30th.

So we are very pleased with the progress that we have made thus far.

Now I'd like to turn it over to Don Chappel, our new CFO. He joined our team in late March, was it? I think it was late March, early April. Don has had a lot of experience with restructurings and transformations, has a fresh perspective that we need and so let me turn it over to Don.

Thanks, Steve. I actually joined on April 16th. So today marks my, I think my four week anniversary with the company. So good morning to all of those who have joined us on the call. As this is my first quarterly call here at Williams I would like to speak to some of my current focus areas and some aspects of William's financial strategy.

First in the area of communications. I am accessible. I will take your calls. I just ask that you coordinate through our IR team that Travis leads.

I'll focus on continuing to improve Williams communications to you and the transparency in our reports to you. I intend to focus on business unit reporting both to sharpen the focus internally and to enhance our external reporting.

In the area of efficiency and controls, I'm kicking off a project to build on the work that the company has already done and to further drive a streamlining of business process and then to work with our IT team to tightly link IT support, thereby effectively and efficiently supporting our new redesign processes.

I expect the results of this initiative will be reduced costs and better information faster for timely and effective decision making.

On the subject of enterprise risk management, excuse me one second here. In the area of discipline, I'll increase our already sharp focus on cost reduction as the business down sizes and we reinforce our new and already disciplined capital allocation process. I expect to work with Steve and the senior steam to continue and enhance the implementation of metrics to support capital decision making as we move forward, as well as to linking incentives that would drive best behavior.

On the subject of liquidity I intend to assure that adequate liquidity is available to support the business. I plan to work closely with the senior team to support the acquisition of planned asset sales.

I'll be working with our treasury team to ensure we have access to the capital markets necessary to support our business objectives and create value as well as ensure that our liquidity hurdles are cleared.

I think I got out of order here but on the subject of enterprise risk management, where the company has already many good tools and techniques in place, I plan to work with the leadership team to manage more effectively manage the enterprise risk on a more comprehensive basis, thereby managing our liquidity and managing for cost efficiency.

In the area of the capital structure, I will concur with Steve and the board's strategy to de-lever the company and to drive to financial characteristics and ratios that characterize an investment grade credit.

Finally our capital structure needs to provide the support necessary to create value in our three business units.

With that I'll turn it back to you, Steve

Thanks, Don. I guess I need to fly through the next few slides so we'll have time for Q&A but I do believe it is important for us to review the commercial financial strategies that we've rolled out in February.

You'll recall that we are a balanced integrated natural gas company with world class assets and E&P pipes midstream. Commercial strategy is to own and manage natural gas assets in key growth markets where we enjoy the competitive advantages of scale or being the low cost service provider or simply being a market leader. And we have complementary financial strategies and the essence of those are to create and maintain adequate liquidity.

To de-lever the company over time and to create and build a balance sheet that is capable of supporting and growing our high return assets.

This next slide I'm now looking at slide No. 28. What we will be, this simply shows on the map where our assets will be located after we're finished with the asset sales program that we have embarked upon. And it talks about what we will be, that we will be a significant player in the E&P business.

Certainly one of the top Rockies producers and the fact that we have a 10-year plus inventory of low risk high return kinds of development drilling opportunities. Midstream, 70 plants, 8,500 miles of gathering lines, certainly many of those assets are highly coveted assets in the gathering and proceed assessing sector.

And even though we've sold significant assets in the interstate pipeline area but we believe that Transco, Northwest coast pipeline by many measures are the premier pipelines in the U.S. and they're still responsible for transporting 12 percent of the gas used in the U.S.

Over the next 18 months this is what we will be focusing on. We will continue to execute on our liquidity management plan, which will allow us to de-lever the company. We intend to continue to be aggressive pursuing cost reductions. We will retain sufficient attractive assets to support long-term earnings and debt repayment. And in the area of M and T we'll continue to look to reduce risk to limit liquidity requirements and continue to pursue the sale and wind down of the business.

In terms of 2003 guidance, the only change here, and clearly as the year progresses and there's more clarity concerning our company's performance, we will be revising our guidance, and the revisions that we are making this quarter relate to the fact that we don't expect M and T to be quite as strong as we had earlier predicted and as well SG&A is not declining as rapidly as expected because of the time of some of the asset sales.

And for those reasons we have change and modified the guidance for 2003 as shown on this slide.

2003, 2005 outlook I'm now looking at slide 31, you'll recall last time we talked about we completed a three-year strategic plan. The reverse of that plan are shown on this slide and we're pleased that we're showing significant growth in terms of cash flow from operations and free cash flow over the next three years.

Our last, almost lastly, slide No. 32, the blueprint for success that we have talked with our employees about not only addresses our immediate challenges but also addresses the future and the bullets on this slide simply talk about the issues that we are addressing with our employees today.

Lastly, our plan is designed to address all near term and medium term liquidity issues. It allows us to de-lever the company over time with the objective returning to investment grade in 2005 and a result of portfolio of appropriately capitalized businesses. I believe as I've said before that our plan is very achievable. It's comprehensive. It's straightforward and it allows us to clearly address our near term challenges and build for the future.

So with that, I will turn it over for Q&A.

Our question and answer session will be conducted electronically. If you would like to ask a question to our speakers today, you do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're joining with a speaker phone please release your mute function to get your signal to our equipment. That's star 1.

Give me a minute to assemble the roster.

While we're waiting for the roster to assemble let's take one question off the web. And the question is what progress have you made in restructuring and/or extending the Burcher Leeman (ph)loan and if extended will they extend beyond WCG 1.4 billion dollar note?

This is Don Chappel. We have access to capital markets today and we're looking at the term B structure to replace a good portion of the Burcher Hathaway (ph) note and we're looking at a four-year maturity on a piece of it then, we're looking at some other options as well and we'll expect to close on that refinancing during the month of May, with perhaps a portion in the month of June

Do we have any questions on the phone?

Yes, we do. Actually our first question will come from Scott Soler with Morgan Stanley

Good morning, Steve. I had two questions. The first question was regarding cash flow outlook for 2004 and 2005. When you look at your free cash flow of 850 million to a billion one five. Does that include all working capital? Does it include interest expense? I mean that seems like a very large number relative -- and your cap ex was pretty flat. I think I'm also trying to grow your reserve base in E&P, could you color that in real quick, please?

Let me let Mark Wilson who is probably most familiar with those numbers address that. Mark.

The answer to the question, yes, it is inclusive of all the items that you described. It's inclusive of interest. And it incorporates as best we can estimate now changes in working capital required what you see, what creates the large increases through time is really the return of the E and P drilling program. Capital expenditures stay flat largely because of what Don mentioned earlier, in terms of our capital allocation. We believe for the next few years we can maintain relatively splat spending in gas pipelines and midstream while putting more disregulars KRI dollars towards the E&P business. And it grows very rapidly once we reevaluate and once we reengage the drilling program.

My second question is recalling your TOLS (ph). I was hoping that Bill or Andrew could comment on these it's a couple questions. First of all, when you guys look at your annual capacity payments your annual tolls, what's the current run rate on your annual payments made to those who you were leasing those power plants from. That's the first part of my question.

It will be between 350 and 400 million dollars on an annual basis

When you guys are talking about being 75 percent hedged on that book, what is being hedged? Is it the actual power price? Is it the gas price, are you hedging your gross margin or your cash flow or your volumes, could you just color there what exactly you're all specifically hedging

We're basically hedging the [inaudible], its both gas and power and we are locking in cash flows and we are bumping in primarily through non-marketable hedges which would be our full requirement contracts. So the majority of those hedges don't require liquidity to maintain

You all are hedged out for several years. Sounds like it's pretty hard to get power hedged out past 18 months. How do you all get power hedged up further than a year and a half.

Contractually as I indicated through full required contracts we have hedges that move along the whole length as it moves throughout time. It's through long-term contracts not through counter instruments.

I see. Thank you

Moving on we'll hear from Jeff Dietert with Simmons.

)) Jeff Dietert: This is Jeff Dietert with Simmons. Can you hear me? . I'd argue that your stock price is not getting a lot of credit for the trading book and I was wondering if you would consider having a third draw the [inaudible] numbers and secondly some of your peers have said that contracts are selling at a discount to fair value and I wondered if you can give us an idea of what you think you can trade these contracts relatively to fair market value?

Thanks for asking that question, because it [inaudible] we have brought up Lehman to help Steve and the board evaluate what action we should be taking with our book. And they're certainly going to go through that type of analysis and so far it's going extremely well. As far as the contract selling at a discount as we indicated, our most recent deal, which was Jackson, was dollar for dollar. We certainly would expect to probably take some discounts as we move forward with other sales, but I don't think we're in a mold of taking any dramatic discounts.

Is that the work [inaudible] Will that be released sometime publicly?

At this point, I'm not sure. It's in very early stages and it's primarily for internal reasons and I guess that will be between Steve and Lehman Brothers to decide how they want to handle that externally.

Thank you.

We'll hear from Raymond Niles with Smith Barney.

Thank you. A question I have is looking at shareholders equity, do you have a sense as to where that might stabilize by the end of '03 as you kind of take additional charges related to asset sales and other items?

Let us take another question. We'll look through our various analysis and endeavor to answer that question for you before the call is over.

Thanks. I guess just kind of related to this, what's your sense when and when it reaches stability. And if I can just ask another question, while I have you on the line here. In terms of trading, I guess it's a similar question, just for '03 over the balance of the year. Maybe a sense as to how much more recurring losses do you expect to take again before we see that stabilized?

All right, Ray, thanks

We'll now hear from James Yannello with UBS Warburg.

Management appears to be very confident of the value of the book you have Leeman in there now. We will some false starts before breaking up material pieces of the book. I realize you had some pieces go recently what's the biggest impediment as we stand here today to selling larger portions of the book or JVing it is it lack of demand because of counter party issues or what's the biggest issue there right now

The biggest issue initially was California. I think the settlement is playing well there in several areas. I think we'll end up much better from a refund standpoint through the FERC proceedings because of the settlement. More importantly it's allowed counter parties to come in and start looking at our west position.

So really when I think you look across our books we have TO*LS under water so we'll be taking steps to work with counter parties to exit those positions or if we do a much larger transaction they can be included. As far as the west book, we do have several interested parties that are actively looking at those positions and we hope we'll be putting forth some offers that would be reasonable. But that's been primarily the biggest thing is really California. And now that door is open and people are in looking at our west book

Can you characterize what type of parties are looking at? Is it other energy companies or financial institutions? What's the latest profile of who is in there looking at it?

It's a combination. I would say it's primarily financial player, bank types seem more prominent but we also have large energy players looking at it

My next question is slide 30, income from continuing operations, guidance. There's a lot of definitions of income in the release. I presume that's recurring income from continuing operations guidance. Is that true? Slide 30? Where it says loss of 100 million to 50 million. Is that a recurring number?

Yes

I know you'll be loathe to provide any flavor on this, but looking out into 2004, there's a lot of moving pieces particularly below the line it's a little difficult to figure out timing of repaying things and refinancing things. Do you have any 5,000 foot view on what that might look like now, based on your visibility of how you'll be able to refinance things? And let's assume a flat commodity price outlook, with no super liquid margins and gas prices where they are right now, do you have any range of where that might look like in '04?

Is your question what do we believe total debt will be down to?

No, actually, my question is incorporating that, the pay down of debt, the various moving pieces of asset sales and acknowledging that we're real early here, looking at '04, but when you incorporate the pay down of debt you incorporate let's say a fairly steady current commodity price outlook you incorporate the various asset sales you have planned right now you're coming up with cash flow from operations of '04 incorporating the working capital changes and everything.

I'm wondering kind of going up the further food chain there, what are you seeing on an earlier call here of recurring net income from continuing operations in '04?

As you suggested, it's probably premature for us to answer that question and to give guidance in that kind of detail. But hopefully by next meeting we will endeavor to address that question in some more detail

Okay.

Let me go back to Ray Niles's question relative to shareholder equity.

This is Don chapel we're looking at a shareholder equity number at the end of the year in the ballpark of 4.4 billion, up from, I think we're at 1.4 billion at the end of the first quarter this year. And I think there was another question related to that in terms of impairments and at that point in time we're not expecting any further impairments of any substantial dollars.

I believe that is the last question and it's good that it is because we are out of time. I appreciate your interest in the company. We are pleased with the progress that we have made to date with respect to our liquidity management plan. We recognize that we have much more to do and I can assure you that we are focused on those things that we've talked about today as needing to get done. I appreciate your interest and we look forward to speaking with you again. Thank you.

Thank you, that does conclude today's teleconference. Thank you for your participation. At this time you may disconnect from our conference.