威廉斯 (WMB) 2005 Q1 法說會逐字稿

We are about to begin. Good day, everyone. And welcome to the Williams Companies first quarter 2005 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Travis Campbell, Head of Investor Relations. Mr. Campbell, Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to our first quarter earnings call this morning. Just a couple of things very quickly before I turn it over to Steve. First, the slides are now available on our website, Williams.com, in the PDF format. I know earlier this morning we had a few glitches. But they are now available as is the analyst package.

Slide two of the package details various risk factors affecting our forward-looking statements. Please read that and be aware of that. Slide three -- please note slide three. It talks about our oil and gas reserves. That's important. Also be aware there is a detailed schedule reconciling income from continuing ops to recurring income from continuing operations, which is available on the web site at Williams.com and is also attached to our press release. So with that introduction, I'll turn it over to Steve Malcolm, our President.

Thanks, Travis. Welcome to our first quarter conference call. And thank you for your interest in our company. We are clearly very pleased with our financial results, and related commercial accomplishments achieved during the first quarter. Our strong results have been driven by our success in executing on our strategy of making disciplined investments in natural gas focussed businesses, that are located in growth areas where we have and enjoy competitive advantages.

Some of the highlights of the quarter are shown on slide number five. Clearly Midstream benefited again from above average margins and strong volume growth. Exploration and Production increased year-over-year production. And in fact, first quarter '05 average production was about $100 million a day higher than first quarter '04, which represents about a 22% year-over-year increase.

Gas Pipeline posted another solid quarter. From an operational standpoint, we're very pleased. That Transco was able to set a new three-day delivery record. Power continues to deliver positive cash flow. Stand alone CFFO was $61 million in the first quarter of '05. And consolidated cash flows continue to be strong, cash flow from operations, first quarter '05 was $304 million, which was about triple what was recorded in the first quarter of 2004.

Continuing with some of the growth-related headlines on slide number five, I've remarked on many occasions that we are opportunity rich in terms of our capital investment options. And that is certainly demonstrated in the first quarter. We're certainly picking up the pace to grow our Piceance space and production in part through our recent three-year 10-rig agreement with Helmerich and Payne.

We're expanding pipelines to meet market demand. Examples being the Transco Leidy to Long Island expansion. And completion of Gulf Stream's phase two expansion. Midstream continues to focus on deep water growth as we pursue expansion opportunities there. And Alan will mention new LOI's, new letters of intent on two new deep water projects.

Power enjoys continued success in signing new contracts as customers have reacted positively to our decision to retain Power. And I want to mention that in order to give you more background on our business' accomplishments, we're holding an overview on May 12, in New York City, where we will review our Power, Gas Pipeline and EMP Operations. We'll profile Midstream at a later date in compliance with the quiet period guidelines in advance of our IPO for Williams Partners.

Turning to slide seven, we have taken an important step forward regarding our Master Limited Partnership. On Monday of this week, Williams partners, LP, filed a form S1 registration statement with the Securities and Exchange Commission. At this stage in process, there is still very little that we can share about the MLP, because of the SEC rules that govern initial public offerings. Clearly the directive to share so little information is in stark contrast with the transparency that we strive for in the rest of our businesses.

That said, however, we intend to keep our communications about the IPO absolutely consistent with the SEC's rules. I ask that you bear with us on this issue. Beyond my few remarks in this venue today, we won't be providing any additional information about the MLP or taking any questions about the MLP until the registration statement is declared effective. Of course, you can view the full registration statement on the SEC's web site.

But here are some of the key points about the MLP as shown on this slide. First, the expected initial enterprise value is $270 million. There will be 100% equity capitalization at the time of the initial public offering. We would expect to complete the IPO in the third quarter. Williams expects to own a 2% general partner interest. and a 61% limited partnership interest. that's subject, of course, to adjustment if the over allotment is sold. In terms of cash, we would expect to receive about $85 million at closing of the IPO, and on a quarterly basis, we will see a $3.1 million minimum distribution. Lastly, Williams will account for the partnership on a consolidated basis, and then back out the minority obligation.

As shown on slide eight, these are the assets that Williams is contributing to the MLP. they are all part of our midstream gathering and processing business unit. and will continue to be operated by the same personnel under the same operational and commercial management. We have two assets in the Gulf of Mexico. The first is our 40% interest in Discovery. This system provides integrated, wellhead-to-market midstream services for producers in the Gulf. Offshore, Discovery consists of a gathering and transportation system with capacity of $600 million cubic feet per day. Onshore, Discovery has gas processing and fractionation facilities.

The other asset in the gulf is the Carbonate Trend Pipeline. The system gathers sour gas produced offshore, Alabama. Capacity is 120 million cubic feet a day. The remaining assets Williams is contributing are located in and around Conway, Kansas. The first is a storage facility with approximately 20 million barrels of capacity for multiple NGO products.

Conway is the main trading hub in the mid-continent, and this storage facility is the largest at Conway. As well, this facility is directly connected to Mid-America Pipeline. Williams also is contributing our 50% interest in a fractionator that is located adjacent to the Conway storage facility. Williams' share of the daily capacity is 53,500 barrels.

Shown on slide nine, are some off the benefits we expect the MLP to create. First, it provides a newer and lower cost source of equity capital for Williams. Assets operated in the MLP structure also receive a higher valuation. The MLP provides the framework for us to monitorize certain qualifying assets while retaining control over those same assets. Clearly we plan to redeploy the expected $85 million in proceeds from the IPO. Williams is opportunity rich. So I expect that we will readily invest the proceeds to grow shareholder value. Importantly, we expect the MLP to deliver increased equity value to Williams shareholders. and the fundamental economics of the structure makes sense.

We expect the MLP to create positive EVA, which is a key driver for sustainable growth and shareholder value. Again, this is all of the information on the MLP that we can discuss. We won't be taking any questions on the issue today. If you want additional information, I direct you to our May 2 news release, and the form S1 on SEC's web site. With that, I'll turn it over to Don Chappel.

Thanks, Steve, and good morning. First, I would like to also state I'm very pleased with our first quarter performance, both operationally and financially. I'll quickly run through our results, beginning with slide 11, and we'll dive deeper throughout the presentation.

Slide 11 depicts a financial results in a summary fashion for the first quarter. Income from continuing operations of $202 million, up completely from the prior year. Net income of $201 million or $0.34 a share. Recurring earnings of $0.33. Lastly, but most importantly, earnings after the market-to-market adjustment of $0.22 as compared to $0.14 in the prior year, up $0.08, or 57%. And I would just also like to restate a reconciliation from GAAP to these non-GAAP measures is included in our package.

On the next slide, number 12, take a look at recurring income from continuing operations. First, we reconcile from income from continuing operations of 202 million. Adjusting out certain nonrecurring items, to an end result of recurring income of $198 million or $0.33 per share. I won't walk through the components of that, because they are relatively insignificant this quarter.

The next slide, number 13, a walk through the components of the adjustments to eliminate all mark-to-market effects to arrive at a non-GAAP measure we believe is the best indicator of our profitability. Let's start with the first line, recurring income from continuing operations of $198 million or $0.33 a share will make some mark-to-market adjustments first, reversing forward unrealized mark-to-market gains that were recorded in the quarter, totaling $221 million, as compared to gains in the quarter year ago of $24 million, and then we'll add back, realized gains, cash, from mark-to-market that was previously recognized, and that's $113 million this year. $136 million in the prior year.

The net of those two items is to reduce our earnings by $108 million this year, and it was additive last year to the total of $112 million. We tax effect that and end up with a $66 million deduction this year, and a $69 million add to last year's profits. Ad, again, the end result of all of that is the recurring earnings after mark-to-market of $132 million, $0.22 a share this year, compared to the 73 million or $0.14 cents last year.

As you know, we now qualify for and are implementing hedge accounting for qualifying derivatives. We now expect mark-to-market gains and losses to be sharply lower in future quarters. However, we will still experience mark-to-market gains and losses and the residual effect of prior mark-to-market accounting. Clearly, recurring earnings after mark-to-market adjustment is and will continue to be the best measure of our profitability.

Next slide, please, number 14. Let's review highlights of the summary income statement, first, segment profits up sharply from $268 million to $510 million on strength and volumes and prices, in our operating businesses as well as effects related to mark-to-market accounting. And again, we will analyze that further as we go through this presentation.

Net interest expense is down sharply, we reduced debt by $4 billion during 2004. And you can see the benefit of that with the $75 million reduction in interest expense during the quarter. I won't walk through the rest of that schedule.

Slide number 15, first quarter segment profit, by business unit. And you're going to hear more about this from each of our business unit leaders in just a few minutes. I'll focus on the total segment profit, reported 510 versus 268. Perhaps a better measure on recurring basis of 500 versus $275 million, and then the best measure is after the mark-to-market adjustment, $392 million versus $387 million.

Each business unit reported higher segment profits on both a reported and recurring basis. I would like to note that Powers results included mark-to-market effects, which we'll analyze further in the presentation. Stripping out all mark-to-market, power was on plan, profitable, and generating positive cash flow.

Next slide, number 16, analyzes the key drivers of change, year-over-year with respect to recurring segment profit after mark-to-market adjustments. Again our business unit leaders will review these drivers in more detail. It is here for your reference. I would like to note, again, the decline in Power resulted from an absence of net profits from trading, following decisions to reduce risk and the business, and Bill Hobbs will speak more to that point.

The next slide, number 17, let's review cash and the highlights of cash flows, beginning with unrestricted cash of $930 million, cash flow from operations of $304 million, good strong cash flow quarter. Proceeds from issuing common stock. That's in the final settlement of the FELINE PACS, we issued 11 million shares during the month of February, and the proceeds from that were $288 million.

We sold a WilTel note receivable, mortgage receivable for $54 million, and a customer on the northwest pipeline system terminated the contract. We received about $88 million of cash. and I'll just note that that will lower future Northwest Pipe segment profit but will have little, if any, effect on EVA or ROSI.

We retired $216 million of debt and maturity. We invested $223 million in our business, and we paid dividends of $29 million. Ending cash was $1,210,000,000. Restricted cash totalled $83 million, and current unrestricted cash balance is about $1,270,000,000.

I'd just like to note that our unrestricted cash balance includes about $200 million of international cash to support international operations. We've also earmarked about $180 million of potentially settle a matter related to the Alaska quality bank later this year, which is an issue that is still being litigated and negotiated.

The next slide, number 18, debt balance, I'll review debt and changes during the quarter. We started the year with $7.962 billion of debt at an average cost of 7.4%. As I mentioned we retired $216 million of debt as it matured to end up with $7.75 billion of debt, at an average cost of 7.4%.. The lion's share of our debt is fixed rate debt at 7.7%. The variable rate totalled 656 million, now at 5%. I would just note that during our February call, the cost of that debt was at 4.5%.

We've seen some increase, but it is a relatively small portion of our debt portfolio. With that, I'll turn it over to Ralph Hill.

Thank you. Flip one more slide, please. Don, thanks very much. it is a pleasure to report on E&P's strong first quarter results.

As you know, we have a premier drilling inventory, our objective remains consistent. We're doing all we can to rapidly and efficiently develop this inventory.

Let's look at our results and turn to slide 21, please. First quarter '04 to first quarter ' 05 we had significant increases, our volumes went up 22% quarter-to-quarter. Our net realized price increased 31%. and our recurring profit increased 88%. We also had a gain on sale of assets in the second quarter, that's not in the recurring.

We sold some acreage to the east of the Piceance. This is acreage that was not included in any of our previous inventories that we talked about. Essentially the reason we sold that acreage, we believe it is on the geological margin of the basin and has a higher risk Profile than what we like, and sold it for a handsome gain.

On a sequential quarter, we looked at recurring profit increase 28%, and our volume increased by 1.5%, despite unprecedented wet winter weather, which I'll talk about in just a minute. The winter weather shut in about 20 million a day of our production during the quarter. Without that shut-in, we would have been up more like 4% for our volumes for the first quarter.

Let's look more at those volumes and turn to slide 22. This shows our domestic production growth really from when we got back in the game and were able to start securing rigs and arrested our production decline. If you recall in early 2004 we finally did level off our volumes after our asset sales and after not being able to drill during the latter part of 2003, and a good part of 2004.

Since 2004 our volumes have grown by over $125 million a day or more than 27% as you can see on this slide. You also see the slight blip I just talked about in the first quarter this year, due to the extreme wet winter weather, and some early plant maintenance in the San Juan basin that we anticipated would happen in the second quarter.

We did not anticipate this wet winter weather. Based on our research, the Piceance and the San Juan basis were hit with the wettest winter since the national weather service began tracking in 1948. This caused wells in the San Juan to be shut-in, since we couldn't access some of the wells where we haul water out of, and also delayed some fracking and other jobs in the Piceance basin.

Combined this affected our volumes by about $20 million a day, but as you can see from March and April, our volumes are growing very strongly again. we anticipate they will continue to do that as we go forward. Overall, the point of the slide, is our volumes are up over $125 million a day, more than 27% in this period, you see the impact we have as we get back and start drilling on a rapid basis.

Turning to slide 23, our first quarter in early 2005 accomplishments, as I mentioned, our volumes are up 22%, which reflects $113 million a day, since the first quarter of '04. The Piceance production is up 59%, we're up over 100 million a day in the Piceance, during the same period. Our current Piceance productions are over $280 million a day now.

We also contracted for higher activity in the Piceance. As you know, we announced the contract with Helmerich and Payne on March 23rd. It brings ten brand new rigs that are flexible and smaller footprints and can reach farther to our portfolio. The first well will be delivered in November of this year. We're anticipating one rig to be delivered each month, starting in November.

We also had additional Piceance ten acre spacing approved, about 6000, which 450 plus type locations. Again we continue to add to our locations in the Piceance. Trail Ridge and Ryan Gulch, we anticipate additional drilling this year. I'll get more update next week at the business unit update in New York, but we are encouraged with our results and do anticipate additional drilling there. The Big George, we he are encouraged on the Big George and the Powder River.

Our volumes continue to increase, we had our volumes in the first quarter up over 17% over the fourth quarter, of just last year. The Williams' Big George represents about 42% of the basin's production in the Big George. We're also seeing signs now that the Big George incline is offsetting the Wydek decline for the industry.

For our production we've seen that happen over the last 60 days, so we're very encouraged that Big George pilots are coming on very strong. In fact just in the last month, our big George volumes have climbed another 14% from April now versus March. We've also expanded our Arkoma basin. Our overall Arkoma basin volume's up 17%. And we've expanded our potential candy shell position in this area.

We have horizontally drilled two wells, two operated wells in this area. Overall in the basin, we have 118,000 net acres. And that's more for the coalbed methane that we've done quite a few wells on. But we also now believe we have about 68,000 net acres with candy shell potential.. To early to do any more than just report on that, but we have drilled a couple of well there, and we're very excited about the opportunity in the candy shell and the Arkoma.

Turning to slide 24, our guidance has not changed. When we updated in March 23rd, with the announcement on the Helmerich and Payne rigs, we did not update DD&A. As you can see here, we have now updated DD&A for the increased capital we added from the opportunity to be with Helmerich and Payne. Our guidance did go up at that time, March 23rd, spending went up $30 million in 2005, that is essentially all for facilities.

$200 million in '06. And $200 million in '07. In 2006, $85 million of that for additional drilling, $115 million for facilities. In 2007 virtually all of that is for additional drilling. We do expect to be able to drill more like 450 wells in Piceance in 2006, and almost 500 wells in 2007. So we're very encouraged and very excited about the opportunity with the new rigs coming on. You can also see our information on our fixed price edges and the collars that we have discussed before at the bottom of this slide.

Slide 25. Key points: we're achieving very strong volume growth, as you can see form our results, we're continuing to expand our development drilling activity. Piceance is a primary growth vehicle, but as you can see, our other basins are also inclining, and we're getting some encouraging results from the Big George. Long history of high drilling successes as you know, low finding costs.

Our investments continue to be short cycle time investments for fast returns. Our quartile efficiencies and cost maintain in the very top. This inventory is very long-term. As you can we're doing all we can to rapidly develop it. Our strategy does remain the rapid development of our premier inventory.

With that I will now turn it to Alan Armstrong.

Thanks, Ralph. Good morning. I'm pleased to report more good news from Midstream segment this quarter, we'll start with our segment profit.

Here you can see, we had a very clean quarterly comparison, no restatement, no recurring issues to explain, which we're pleased to say signals get into a lot of the asset sale and restructures that we've done within the Midstream group. We're glad to have ourselves at this point.

Our unit NGL margins rose by about $0.10 in the first quarter of '04, to $0.15 in the first quarter of '05 which result in $19 million of improvement. Our equity NGL barrels increased from about $330 million gallons in the first quarter of '04 to nearly 400 million gallons, yielding about a $7 million improvement.

This increase was driven by the OPAL expansion which was brought on at about this time last year, and then also richer gas showing up at Markham and Mobile Bay, which serve the deepwater Gulf of Mexico.

We did experience several outages that bridled our performance in the quarter. First of all, in our Olefin segment, we saw some nice performance from pricing and offgas recovery business that serves the tar sands in Fort McMurray, Canada, but we did see the result of a fire from Suncor that cut our volumes drastically and actually , below half from what we would have seen. We would have actually had a much better quarter there, we did have a $6 million improvement. That would have been much better had we not been dealing with the fire that Suncor experienced at their facility there.

Also our Canyon Station platform missed out on about $4 million of revenue. This was due to a producer line that comes up on to our Canyon Station platform. It was actually damaged during Hurricane Ivan from some anchor draggage, but that didn't reveal itself until the first quarter of '05.

Finally not mentioned here, but significant, we did lose about 7 BCF of cumulative throughput during the first quarter. It was largely due to the wet weather and the mud that you heard Ralph mention out in the western areas. We also had a larger mountain of maintenance work we got through in the first quarter in our western areas. So that was a cumulative number of about 7BCF a day that we feel like our throughput was reduced.. We're glad to say those volumes have come back now and we expect to see those continue throughout the year.

Moving on to our first quarter in 2005 accomplishments here. First of all, we offer up our gathering volumes. We're up about 8.4 trillion BTU's, again in spite of the outages we saw out west. Our fee-based processing volumes were also up about 3%, and the amount of barrels we sell for our own account, for our gas processing business increased by 22%. So three key operating statistics there that are good indicators of the demand for our services, and those are all looking very good. .

We also entered into advanced negotiations on two deep water prospects. These prospects are not large in terms of capital, but they are large in terms of revenue, and if finalized, should provide nice support to our deep water growth, just beyond our current guidance time frame. So seeing some nice support for growth coming to our deep water business continuing there.

We also completed the acquisition of ENI's 17% interest in Discovery. That was at a price tag of $35 million. That brings our ownership in Discovery up to 67%. We're also nearing the completion of the sale of our Gulf Liquids refinery offgas business, and we expect this to close in the second quarter. And then finally, a lot of great effort across the corporation went into clearing the way for, and preparing the Williams partners filing.

Moving on to our guidance, we're pleased to once again raise our guidance for the current year. This is a $20 million increase, as you can see there, going from $350 to $430 range. to a $370 to $450 range, primarily due to the better than expected margins in the first quarter from both our NGL and our Olefins business. Our forecast for the balance of the year is showing about $0.09 per gallon and slightly lower than first quarter Olefin margins as we try to forecast the balance of the year..

Our capital spending remains unchanged. We're on track to keep our maintenance capital low, as we have continued to predict. As always, I'll remind you, that we don't try to predict any major deep water capital in these numbers. and of course no income is included from them either in this forecast.

Finally moving to key points, of course we want you to note the increased guidance for '05. The continued strong demands for our services are yielding growth in our key operating statistics that we spoke about, even despite the three significant outages that we had this quarter. And then also, we are also seeing from this demand some nice high return investment opportunities in and around Wyoming, the Four Corners, and the deep water.

We look forward to updating our guidance with these projects as they become better developed. Some of these opportunities I'm speaking off, they are not embedded into our guidance, and are some basic organic growth projects out West. so we're excited about seeing those projects continue to develop.

This business continues to impress us with the very pure free cash flow that we saw in the first quarter and continue to see. Our segment profit plus DD&A and then reducing that for our Capex during the quarter was nearly $160 million from this business. The deep water opportunities also continue to show themselves, and we look forward to Dominion and Pioneer bringing on the Goldfinger and Triton prospects to our Devil's Tower infrastructure in the later part of '05.

That work is ongoing, and those commitments have been made. And that will be a nice edition to the fourth quarter of '05 as well as into '06 and '07. We're excited about seeing that realization happen at our Devil's Tower facility. Of course we continue on course with our strategy. We have the right assets in the right places with the right organization focused on attracting customers by providing the most reliable service in our sector.

With that, I'm going to turn it over to Phil Wright to talk about our gas pipelines.

Thank you, Alan. If you would, please, slide 32. This slide shows reported and recurring profits for the gas pipeline segment, which includes the results of nOrthwest Pipeline, Transco and our 50% ownership interest in Gulfstream.

The $167 million of reported segment profit for the quarter is $20 million higher in the same period in 2004. Included in the 2005 results is a nonrecurring item of $13 million, which is the result of prior period adjustments following additional analysis of transportation and exchange balances and certain other balance sheet accounts.

Excluding this item, a recurring segment profit of $154 million was $7 million ahead of last year's first quarter results. The $7 million increase and recurring segment profit is mainly due to higher earnings from Gulfstream, and lower expenses partially offset by the termination of the Gray's Harbor contract on Northwest Pipeline which contributed $6 million revenue in 2004.

Turning to slide 33, we had another outstanding quarter of accomplishments for Williams Gas Pipelines in 2005. In January, Transco set a three-day delivery record with an average of 8.4 million decatherms, surpassing the previous high, set two years ago.

This record follows the new single-day peak of 8.7 million decatherms set in December of 2004, while it won't materially impact earnings, it does demonstrate the operational capability and flexibility of our system, and the dedication and operating expertise of our people.

In February, we placed our Gulfstream phase two expansion project into service. This 110-mile, 30-inch extension to Florida Power & Light's Martin plant began first flow the morning of February 2. This is a significant milestone for the Gulfstream in that it enables us to serve customers on both the east and west coast of Florida and adds firm long-term commitments that raise the level of capacity subscriptions from roughly 22% to 66% of the 1.1BCF a day capacity of the system.

Also in February, FERC announced, or approved our Central New Jersey project. This $13 million expansion propping will provide 105,000 decatherms a day to South Jersey Gas. We plan to have it in service in November of this year. Our Leidy to Long Island expansion project is moving along smoothly. As noted in our last call in February, we received an executed precedent agreement from Keyspan Energy Delivery, to transport 100,000 decatherms a day from the Leidy Pennsylvania storage hub to markets in the Northeast.

The estimated capital cost for the project has been reduced from $143 million to $103 million by incorporating existing capacity, made available through a reverse open season process. Upon its first full year of operation, this expansion is anticipated to contribute between $14 5 to $15.5 million of operating profit.

The first quarter could not have ended on a better note. In March, Mastio & Co. released its annual opinion research, demonstrating again, that Williams Gas Pipeline remains among the best pipelines in customer satisfaction. Both Transco and Northwest Pipeline received number one rankings for their respective market areas.

Turning to slide 34, Guidance. in general, any material changes in year-over-year earnings of our regulated pipeline companies are driven principally by either new incrememental expansion projects which go into service. or new rate cases which become effective during a particular year. We're expecting neither of these during 2005 or 2006, and with general inflationary pressures on our costs and higher DD&A, and operating taxes due to recent capital expenditures, we expect that our earnings will be flat, slightly down in each of these two years. The only changes in our guidance from the last analyst call is in segment profit.

We're increasing the lower end of our 2005 guidance, to account for the strong first quarter we just reported, and we're moving the low end of the range in 2006 and 2007 downward to reflect the termination of the Gray's Harbor contract and to also reflect the anticipated leverage we plan on placing at Gulfstream.

We plan to capitalize on an opportunity to increase leverage to at least $600 million by the year end, as supported by the long-term firm contracts I noted previously. This will provide a benefit of $150 to $200 million of cash for the corporation. There will be a reduction in earnings at the Gulfstream level, however, as a result of the additional interest expense that will vary depending on the actual loan amount and interest rate. The significant increase in segment profit in 2007 from the 2006 level is due to the rate case filings that will be made at both Transco and Northwest Pipeline in early 2007.

Turning to slide 35, capital projections for all three years have not changed from the last analyst call. Higher levels in our maintenance spending in 2005 are attributable to expenditures to comply with the Clean Air and Pipeline Safety Improvement acts. These compliance expenditures begin winding down toward the end of 2006. We believe we'll be allowed to recover all costs under both of these acts following the effective dates of our 2007 rate cases.

The expansion category includes a center New Jersey project in 2005, and the Leidy to Long Island project expenditures are included in 2006 and 2007. This level of capital is well within our EBITDA and cashflow from operation projections and will allow Williams Gas Pipelines to flow substantial free cash for each of the three years projected on this slide.

Wrapping up with slide 36, I'm pleased to say we've experienced another strong quarter operationally and financially, the gas pipeline segment continues to provided strong free cash flow to the corporation, we're constantly focussed, first and foremost, on providing both safe and reliable gas transportation and storage.

We're pleased to continue to be recognized by our customers as top performers in our markets and continually strive to enhance customer satisfaction and work closely with them to identify expansions to serve their growing needs. The achievement of new peak-day milestones demonstrates the flexibility of our system and dedication of our people, and we have our top commercial focus on maintaining our status as the low-cost provider to the markets that we serve.

With that, I'll turn it to Bill Hobbs.

Good morning.

We're now in slide 38, where we'll discuss segment profit for the first quarter. You can see, on a year-over-year recurring basis, we're up 157 million, largely due to mark-to-market gains which I'll discuss in a minute. And I would like to point out the expenses related to prior period adjustments of $11 million is discussed in the queue on page 24.

Turning to slide 39, we now walk from segment profit to cash flow. As Steve indicated in his comments, Power stand alone cash flow for the quarter was $61 million. Also, if you look at segment profit after mark-to-market adjustments of $6 million compared to the first quarter of 2004 of $81 million, that difference is due to $91 million of gains in legacy gas positions that were realized in the first quarter of 2004. These legacy positions have largely been realized or liquidated and should have a minimal impact going forward, and as Don pointed out, the base business is performing as expected.

Turning to slide 40, this is a revised guidance slide where we're walking you through giving you the first quarter impacts in mark-to-market earnings, how we get to revised guidance going forward. You'll notice the top line is the previous guidance we've offered. Then we adjust that for the impacts of mark-to-market in the first quarter, which brings us to revised segment profit guidance. Most importantly, you'll notice segment profit after mark-to-market in cash flow from operations are unchanged.

In summary of the quarter, we did have a positive cash flow quarter in what we would term a shoulder quarter where there is low demand for power, that is due to the hedges we have in place. We do expect our cash flow to remain positive throughout the guidance period. As Steve and Don both indicated we are having success in executing contracts which we'll discuss more in the business unit update on May 12.

During the guidance period, we continue to expect to see improving market liquidity, spark spread improving, and our credit position in the marketplace improving as well. We're excited about the activity that Ralph Hill discussed. that's bringing additional gas volumes for our gas marketing effort. As always, the factors impacting guidance are spark spreads, development and capacity markets, and as we're successful in negotiating new longer term contracts.

Again we will give a more thorough update on May 12 at the business unit update in New York. With that, I will turn it back to Don Chappell.

Thanks, Bill. Let's turn to slide 43 and review updated 2005 guidance. First thing, let's start at the bottom line, you can see the last line of the page, diluted EPS, recurring after mark-to-market adjustments, the new guidance is $0.65 - $0.90, as compared to $0.63 - $0.88 that we provided on February 23rd.

Starting back at the top, segment profit before mark-to-market adjustment. Reported segment profit is up $225 million, principally as a result of the mark-to-market gains we experienced in the first quarter. Those are eliminated going down to the bottom line that I just spoke to as well our Midstream and Gas Pipeline segment have increased their guidance somewhat.

Moving to the second line, that interest expense, that's up slightly as a result of increased rates on the variable component of our debt, which is relatively small, but nonetheless there is a cost to that, and then other general corporate expenses are down somewhat. We had planned to implement the stock option accounting FAS guidelines effective July 1, however, with the recent change in requirement date to January 1 of 2006, we're now planning to implement on January 1, 2006, as a result our cost will be reduced by about $8 million, representing about six months of expense.

Again, coming down to the bottom line, an increase in EPS after mark-to-market of 2 cents to a new level of $0.65 to $0.90. I would also like to state there is no revision to include the MLT, and we'll provide appropriate revisions at a later date.

The next slide, number 44 summarizes guidance presented by the business unit leaders. I won't speak to those, but again on the total, you can see segment profit after mark-to-market has moved up somewhat, up $25 million in 2005, principally driven by my Midstream results, and up $25 million in 2006, and $50 million in 2007, driven largely by increased E&P production and profits.

The next slide, number 45, review other key areas of guidance. We've already looked at segment profit. I'll move next to cash flow from operations. The guidance is unchanged, but it continues to grow. Billion three, billion six in 2005, moving up to a billion six to a billion nine by 2007. Capital spending of 1.025 billion to 1.225 billion in 2005 is up somewhat from earlier guidance as a result of that EMP accelerated drilling program, principally related to facilities later this year, little in the way of segment profit associated with this year's spending, it follows in later periods.

And then the $200 million increase in '06 and '07 that we announced on March 23 related to that accelerated drilling program which Ralph talked to earlier today. Free cash flows as a result of the increase spending are reduced somewhat from a range of $275 to $375 million this year, from $300 to $400 million this year, and then you can see a reduction of about $200 million in each of '06 and '07 associated with the increased drilling program offset by some increased profitability. But much of that profitability and cash flow comes -- lags somewhat to capital investment. Again, I would just like to point out there is no assumption related to formation of the MLT in this guidance.

The next slide, number 46 is a summary of capital spending by business unit for your reference. I won't speak to any of these numbers. and the next slide, number 47, breaks out growth capital and maintenance capital for each of the business units, and maintenance capital is defined as the dollars required to maintain our assets and to maintain volumes, and growth capital is strictly focused on growth.

To look at the bottom section, there, the shaded section, you can see we're spending $420 to $500 million on growth this year, increasing to $585 to $690 million in 2006. And then $615 million to $785 million by 2007. Very significant capital investment in growth, and we view these to be low-risk, high-return projects.

The next slide, number 48, just graphically depicts our progress and our planned path forward. Increasing cash flows and reducing debt-to-cap as we continue to strive to return to investment grade ratings.

Slide number 49, graphically depicts our planned path relative to a couple of other metrics. the segment profit after mark-to-market adjustment continues to move up, while capital spending in our plan peaks in 2006 as a result of the Northwest Pipeline replacement project which would be completed in 2006, and then down to more -- I'll call them normalized levels by 2007. I would also like to say that as we continue to look at the opportunities that we see in the business, that we would be delighted to announce some increases in capital spending in future quarters. as we are able to see such opportunities.

Slide number 50, once again, just sharing some of our key guiding principles, will continue to drive to create growth, improvement, sustainable growth and EVA and shareholder value. We'll maintain cash and liquidity of about $1 billion plus in order to manage our commodity price risk and have a sufficient cushion for unplanned events. We'll continue to steadily improve our credit ratios and ratings, ultimately achieving investment grade ratios. We'll continue to reduce risk in our Power segment.

We'll increase our focus on disciplined EVA-based investments in our natural gas businesses, and you've seen some of those, most notably our accelerated drilling program in the Piceance. We'll optimize the use of free cash flow, really balancing opportunities and risks, and the combination of growth and operating cash flows and the reduction in interest cost will create value for shareholders. Steve, back to you.

Thanks, Don. I'm sure you've noticed that we've offered a much shorter and succinct presentation this morning. We felt that that was appropriate given the meetings that we have scheduled for next week, where we will provide a deeper dive.

Looking at the last slide, these are the key points to take away from today's conference call. I believe we are hitting on all cylinders. we recorded another strong quarter. We've raised our earnings guidance. In fact, in terms of consolidated segment profit, up by $225 million. We're seizing rich opportunities to grow shareholder value, the most exciting of which currently are the investments to grow the Piceance basin production. Williams Partners LP filed its registration statement earlier this week, and I certainly want to remind you again of our business overview set for May 12 in New York, where we'll be providing a deeper dive on Power, Gas, Pipe and E&P operations. so finally, our momentum is strongly positive.

Our team is energized and confident in its ability to thriver superior, sustainable growth and shareholder value. With that, we will be happy to take questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. For our first question, we go to Yves Siegel from Wachovia.

Good morning. Two quick ones. One, can you just repeat how much cash will be freed up from Gulfstream? The second question is just on the pipeline expansion project. How do you think about return in that business? Are you thinking about leveraged return, or unleveraged return?

The expected cash is in the range of $150 to $200 million depending on how much leverage we put at that level, and I didn't catch the second part of your question.

I was just trying to back into what type of return you're going to get on the Leidy expansion. and I'm just wondering if I should lever it up to really get a realistic type of return?

we don't normally like to discuss our return levels on those, in this context. And I think you can understand as we're preparing for rate cases that we don't want to go into a great deal of detail on that.

okay. well, great. thank you.

For our next question, we go to Scott Soler with Morgan Stanley.

Good morning. I had two quick questions for Don, and then two for Alan. Don, on --you all are now sitting on $1.2 billion of cash. I don't know if Andrew is in the room. I would presume you're going to need much less than that now to support your power business.

I guess I was curious as you look at share buybacks and dividends, how are conversations going with the rating agencies regarding their comfort level to allow you to be able to possibly buy back stock or increase your dividend? that was my first question.

Scott, let me just again point out that the $1.2 billion in cash, about $200 million is tied up internationally. And about $200 million, we have earmarked for the quality bank settlement which could occur later this year. Certainly we're hopeful of prevailing on that, but again that gets the domestic cash balance down to $800 million, which is a bit above our planned level of cash.

However, we do have some pretty significant reinvestment opportunities just ahead of us. so we carefully review our cash position, and the opportunities we have, but really looking forward at the future and the timing of spending and cash flows, but we're very mindful of the opportunities with respect to the ratings agencies.

I think their view continues to improve quarter after quarter as we continue to demonstrate that we can deliver a sustainable and improving cash flows. I think over time that our flexibility will continue to increase over the very near future. Something substantial in the way of a share repurchase would be negative on a rating agency basis.

Okay, and then Don your discretionary capex is rising. I know that your return on capital, particularly in E&P right now is probably above 40% on your incremental projects. Could you talk just maybe generally about the Company's return on capital, incremental capex? the free cash flow is very high for the next three years. you're spending more money on growth projects. Can you just kind of frame what general returns you are anticipating on incremental capital spent?

I think our overall returns on incremental capital are very strong, but there is a lag between the time that the capital is spent that the time that the returns match up with that, I think in E&P the lag is very short. And some of our other capital projects, most notably in the gas pipeline business, or in the deepwater business, there's a significant lag.

As you know, we have a fair amount of spending occurring there as well, in the gas pipeline business, we have significant Clean Air Act, Pipeline Safety Act spending for which we don't get any return until we file a rate case. So we've had some lags on when those returns show up relative to spending, but I think again, we believe that the reinvestments we're making are well above our cost to capital.

But on E&P, our model would tell us even with locking up these [Homer] rigs even at a little bit higher day rates, you're still making probably 40% incremental returns on E&P. Is that the right general area that you all are also looking at, or?

it is a very strong return. I think we've said historically, between 25 and 75% depending on the specific property. but it is a very high-rate of return. we would like to do more of it.

Okay. And then, Alan, I've got two questions. On Midstream guidance, I notice you had your guidance for the next few years is premised on a five-year average. It's the same for propane, and propane's five-year average is something $0.55 a gallon, and current strip on propane prices are $0.82 a gallon. Am I using the correct number on my five year average? Is that close to what you all are modeling when you're guiding people?

What we're actually modeling, there, Scott, we're talking the -- we look at it two different ways. We look at our financial margin, which is probably -- even though it is something we look at, because we have changes that come in our contract mix on a regular basis, it is probably not the most accurate predictor of the future, so we do look at that.

And then we look at the frac spread on average, against all of our individual contracts. So you can't just look at price for a large portion of our barrel. you have to look at the spread between the gas and that component NGL, and so that's how we look at.

Of course the basis differential and our forecast.for the basis differential particularly to our western production is a variable we have to look at as well. So I think it is pretty risky to take the past on just the financial basis and forecast it to the future because we do have a changing of contract mix out there.

We go next to Faisel Khan, with Citigroup Smith Barney

Just a few questions here, given your liquidity situation, do you have any desire to go back into the trading business? Gas, power, marketing trading business? I know you kind of shy away from like giving your credit profile right now, but is that something you would look at going forward given the increased liquidity in the market?

This is Steve Malcolm. No, we've been pretty clear that the strategy that we will pursue is unchanged from that. We're all about the last two and a half years. we will continue to look to maximize cash, reduce risk and place megawatts long-term. So that will still be our focus.

And then on your philosophy for your E & P production, is that changed, or is that out to '07 and '08, as your hedges roll out? What do you think --

What we've said is that given the natural hedges that we have internally, and looking at the E & P business, we expect to be somewhere between 40 and 60% hedged in a normal year. But that we will always look to take advantage of opportunities that the market offers us.

If you can just comment on the Big George production, I believe your partner talked about the production up in the Big George almost 100% year-over-year. Is that the same thing you're seeing, or how do you see that going forward? Can you see those type of increases in the Big George?

Hi, this is Ralph Hill. we have seen production go up a little over 100 million a day, year-over-year. We operate all the pilots. We--Williams that are producing today. We do -- I'm not going to predict another 100 million increase. We're optimistic that our pilots we have that had dewater that inclining volumes will continue. and that we have additional pilots we believe will start producing. And we anticipate our partner has additional pilots we'll start producing. so what we're seeing is the Big George incline is overcoming the decline from the [Wyodak] production.

Our volume should be growing. but we have not predicted yet a tremendous increase for '06. Most of the increase is much more in the '07 time frame on an overall Powder River basin volume. We see increases coming on, some for '06 and more in '07. We haven't quite given that out yet. But we'll probably give a little more update on that, and we'll give more as the year progresses, and the pilots continue to dewater.

Then on the Midstream business, the margin per gallon -- I heard $0.15 in the quarter, it came down when I look at the fourth quarter of '04. My understanding that frac spreads and NGL and the liquids prices were just as robust as the fourth quarter. Can you talk about why that margin came down?

I think across the board, I think margins did come down particularly as we got into March, those came down. And I think as I've reviewed some of our peers, I think that's consistent with what they saw as well. It is just the $0.15 is still a very nice and robust number, for us, and in the exposure we have to the western barrels, we saw very strong, probably stronger than our peers in the fourth quarter of '04.

So the $0.15 cents again is still a nice, robust number. so I certainly wouldn't apologize for those margins. but it was about $0.08 lower than what was a very strong peak, and I think we have provided an appendix. I know in our MD&A you can see some detail of how those margins look over time there, it kind of shows what a spike we saw in fourth quarter of '04.

Great. thanks very much.

We go next to Fai Lee with RBC Capital Markets.

Thank you. I just have two questions. In respect to the potential to return to investment grade rating, and just wanted to get a sense, based on your discussion with the credit rating agencies, where you see reaching that target, in timeframe?

It is a good question, we're not putting a time line on it, we're striving to get there as quickly as we can given the opportunities we have. As example, we think the reinvesting in the business, particularly our recent decision to reinvest in the Piceance basin since is one that is a far better decision than taking those same dollars and paying down debt, which might get us back to investment grade faster, but in the long run limit our opportunities.

So we're weighing creating value for equityholders is the principal goal here, at the same time also believing getting back to investment grade will create value for equity holders. but doing it at a more moderate pace. I think our continued strong performance will get the attention of the ratings agencies. and I think we'll see -- continue to get credit from them. As you know, we're rated at a B plus level, so we still have quite a few steps to go to get back to investment grade.

Would you say it served a medium term goal?

I think medium term is a good way to think about it.

Just turning to power in terms of your guidance for the year, after mark-to-market adjustments, I just wonder if you can provide some sort of direction in the quarterly outlook, just in general terms of where you expect the profit to fall into the next three quarters?

We have been clear in past calls, that due to the power business and the volatility around it, that quarterly predictions are difficult to make, and we try to stay focused on annual results. But the power, just the natural cycle of the power industry, you expect the second and third quarters to be your stronger quarters. and the first and fourth to be your weaker quarters. That's probably about as far as I can go with that.

Okay. Thank you.

We go next to Pearce Hammond with Simmons and Company, International.

A couple of questions for the midstream business for Alan. If you could provide a little bit of color around the letter of intent you signed in the deep water Gulf of Mexico.

I provide a little more, they are under confidentiality, so I have to be cautious about going too far. One of them is an extension of one of our key deepwater assets, to a very large prospect that certainly has got a lot of press in terms of its size.

The other is a smaller prospect but one that would bring a lot of value into our Devil's Tower facility. and that would actually come in in late '07 or early '08. And actually, the thing that is really delaying the second project is availability of drilling rigs. So it all makes sense from an economic perspective. but it is difficult for the producer to commit due to lack of availability of drilling rigs to go back and complete the wells that they did find.

You mentioned the CapEx would be small. Any quantification there?

One the one, it would be an extension. our net interest would be less than there $50 million. On the second one, it would be less than $10 million net to us.

Okay. And the fire on the Canadian oil sands facility, you mentioned in the 10-K and previously, it supplied Williams with offgas feed stock. Do you expect that to continue through late 2005?

We are planning for that to come back up in September.

then the last question I have, just for Bill, I was wondering if you would provide any sort of a quantification around California spot market exposure this summer, your thoughts there, given the Pacific northwest hydrosituation. I know it is wet. And the hydrosituation is very good in sort of the Pacific SouthWest. But just your thoughts on the L.A. basin and how that might play out, and how Williams could benefit potentially.

Sure. We still believe California has a relatively balanced supply demand given normal weather. Given extreme weather, it certainly gets much tighter. so I think fundamentally, we're still bullish on this summer and next summer. We do have a lot of our megawatts committed, but we still have megawatts available to take into the hourly markets. I think the dampening effect you'll see is the price mitigation they currently have in place. That's clearly going to dampen any upward volatility, but there is still certainly potential for upside out there.

So how many megs do you have to take to the hourly market? And I thought as far as the mitigation was concerned, you're talking about a $1000 a megawatt-hour.

Without getting into a lot of detail which could take awhile, the mitigation kind of works in reverse. Based on previous hours' pricing. It can have an overall dampening of the peak hours. The cap is 250 as it stands today. They are looking to lift that. But we're about two thirds' hedge. So we still have a sizable position of megawatts that we'll be taking into the hourly markets this summer. Thank you.

And for our next question, we return to Scott Soler of Morgan Stanley.

Alan, I had one other question. I don't know if ya'll can talk about this or not. It's not specifically to the MLT other than just one thing you said. Are you going to have right of first refusal? Will the Williams MLT, in terms of Williams Midstream Assets or will those assets potentially be, in other words there's about $4 billion we estimate of Midstream asset value at least at Williams Corp. I was curious if the MLT would be able to purchase those assets or is there no right of first refusal on the new MLT?

Scott, this is Steve, that's a question we can't address.

Okay. Thanks.

With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Malcolm, I'll turn the conference back over to you for any closing remarks.

Thank you for your interest in our company. And we look forward to seeing you next week in New York City. Thank you very much.

This concludes first quarter 2005 earnings conference call. We appreciate your participation. You may disconnect at this time.