Williams Companies Q4 2008 Earnings Call Transcript

| About: Williams Companies (WMB)

Williams Companies, Inc. (NYSE:WMB)

Q4 2008 Earnings Call

February 19, 2009 09:30 AM ET


Travis Campbell - Head of Investor Relations

Steven J. Malcolm - Chairman, President and Chief Executive Officer

Don R. Chappel - Senior Vice President and Chief Financial Officer

Ralph A. Hill - President, Exploration and Production

Alan Armstrong - President, Midstream Gathering and Processing

Phillip D. Wright - President, Gas Pipeline

Ted T. Timmermans - Vice President, Corporate Controller and Chief Accounting Officer


Faisel Khan - Citigroup

Carl Kirst - BMO Capital Markets Corp.

Sam Brothwell - Wachovia

Lasan Johong - RBC Capital Markets

Joseph Allman - JP Morgan

Rebecca Followill - Tudor Pickering & Co.

Sunil Jagwani - Catapult Capital


Good day, everyone and welcome to the Williams Companies' Fourth Quarter 2008 Earning 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 Mr. Travis Campbell, Head of Investor Relations. Please go ahead, sir.

Travis Campbell

Thank you and good morning everybody. Welcome to the Williams fourth quarter earnings call. As always, thanks for your interest in the company. After my remarks I'll turn it over to Steve Malcolm, our CEO, who will go through some thoughts, and then to our CFO, Don Chappel, who will talk about the fourth quarter results. Then Ralph Hill, Alan Armstrong and Phil Wright will speak to the E&P midstream gas pipeline businesses. After Phil's remarks, Don Chappel will review the consolidated guidelines and Steve will make a few brief remarks before we turn over and take your questions.

Please note that on the website, williams.com, you can find the slides that we'll talk from this morning. Also the fourth quarter press release and all the company's schedules are also on the website as well our press release regarding our proved reserves at year-end.

Slide number two, titled Forward-Looking Statements discloses various risk factors and uncertainties related to future operations and expectations. Actual results of course vary from our current expectations due to factors disclosed. Please review that information.

Slide four, Oil and Gas Reserve Disclaimer is very important and so please read that slide as well. Also included in the material are various non-GAAP numbers that have been reconciled back to Generally Accepted Accounting Principles. Those schedules are available and are integral to this presentation.

So with that, I will turn it over to Steve Malcolm.

Steven J. Malcolm

Okay, thank you, Travis. Welcome to our fourth quarter and full year 2008 earnings call and as always we always appreciate your participation in the call and interest in our company.

Turning to slide five please, Williams delivered very strong financial performance in 2008 largely on the strength of the first three quarters. Our full year performance drove a 24% increase in adjusted earnings per share. Other key and impressive operating highlights are shown on the slide.

Our development activities in the Piceance, Powder and Ft. Worth basins drove domestic production up 20% year-over-year. We grew reserves to 4.5 Tcf. We continue to be an industry leader in terms of F&D costs.

We continue to proactively manage our Rockies position and by that I'm referring to the fact that 81% of E&P's production captured higher than Rockies prices by using the pipeline capacity that we've contracted for to move the gas to higher price points. And our midstream business took advantage of the basis anomaly in terms of capturing higher margins.

Clearly however, fourth quarter financial results suffered from the effect of the global economic conditions as the rapid decline in commodity prices certainly had a significant effect on results. But, we did benefit from the cash generating gas pipe and sea-based midstream businesses that are insulated from commodity prices.

Next slide, slide six please. The business landscape has changed significantly, since our third quarter conference call on November 6th. In particular, we've seen much lower commodity prices.

We've seen crude oil prices drop 50%. I'm speaking now about spot prices. 50% from early November's $70 to a current price of around $35. Forward strip has fallen as well. In early November it was around $75 for '09. It's dropped 43% to $43 as well.

Natural gas spot prices dropped 36% from early November's $6.79 due currently about $4.34, and we have seen the forward strip fall as well. And certainly credit markets remain very difficult and are unreliable.

And so turning to the slide seven, what does this challenging business environment mean for Williams. We're taking appropriate steps to reduce our capital spending and are limiting expenditures to $1.3 billion below our '08 level, which is about 36% below '08 levels. The good news is the current cash and credit facilities are adequate to fund planned '09 CapEx and by 2010 we expect to fund CapEx from cash from operations.

Obviously, we're recalibrating expectations for earnings. We are expecting the weak commodity prices to push '09 sharply lower and you've seen that in our new guidance.

We do however, expect things to improve somewhat, as we see forward strip prices indicating some improvement in 2010.

I guess the third key point is that we are maintaining our current structure. We believe that it is best, it is the best structure to manage the risk and create value long-term. That value creating structural change is not actionable in this economy. And I'm referring to the effects of the very low commodity prices, the more severe recession that we're seeing, the fact that credit markets present extreme challenges and so bottom-line, the extraordinary costs, risks, and loss synergies outweigh the potential rewards. We do expect our mix of businesses, our investment grade credit rating and our strong liquidity to serve us well in this challenging environment and very weak commodity price environment.

Turning to slide eight. And so we're positioning Williams to prosper when the economy recovers. Again, I think the business mix, the investment grade credit rating; the strong liquidity positions us favorably. We characterize our capital spending as somewhat of a maintenance plus level of spending. We're bringing ongoing infrastructure projects into service, but by dialing down drilling activity, while deferring other investments until the economy recovers and returns improve.

Meanwhile, we're retaining our work force skills and capabilities. We're focusing on cost and not losing sight of the fact that our track record and I point you back to our '08 results. Our track record demonstrates a very strong value foundation.

Finally, on slide nine, we expect '09 to be a very challenging year in the industry, but WMB's liquidity is very strong. We have no significant debt payments until 2011. We're making significant reductions in our capital spending and all of these steps are designed to best position Williams to prosper as the economy recovers.

Our growth engine that has created significant shareholder value over the last four years is still in place, and I think you are well aware that, that growth engine is driven by the attractive organic investment opportunities that we have and we believe that will still be in place when commodity prices recover.

So we believe that we are well positioned when the economy recovers. And with that I'll turn it over to Don.

Don R. Chappel

Thank you, Steven and good morning. I'm going to walk through a couple of slides here and discuss the results very briefly. They're well described in our press releases package and our business unit leaders will each spend a few minutes on their results.

So turning to slide number 11, financial results just focusing on the bottom-line for the quarter recurring income adjusted for mark-to-market effects of $0.33 down 44% from the prior year, as well as down from prior quarters in 2008. So it started to feel the effects of sharply declining commodity prices in the fourth quarter.

For the full year very strong results of $2.15. I think again that demonstrates the earning power of the company in the strong economy and we are eager to get back to that environment.

Just turning the page, slide number 12, fourth quarter segment profits and again the business unit leaders will talk about their results. I'll just touch on the bottom-line. Segment profit after mark-to-market adjustment our important measure here $402 million on a recurring basis for fourth quarter '08 versus $718 million in 2007. So again you can see the sharp decline in the fourth quarter. And you can also see as commodity prices roll back, the contributions from each of our primary businesses start to even out after a very, very strong performance by E&P and Midstream in prior periods.

Just turning the page to year-to-date results. Slide number 13, please again focusing on the bottom-line, recurring segment profit after mark-to-market adjustments of 2.819 up 16% from 2007, again very strong year despite the weaker fourth quarter.

At this, I'll turn it over to Ralph.

Ralph A. Hill

Thank you, Don. Today I'd like to cover our 2008 financial results, our production highlights, reserve update, caps on guidance.

First, I want to thank our E&P employees and support staff for a superb job in 2008. It was a record year for production, profit, and reserves. I also want to thank them for their ability to shift gears in a significant manner and responded this current recessionary environment while preserving our long-term value. And also I would like to thank our service providers and vendors.

Let's turn to slide 15. Fourth quarter '08 to fourth quarter '07 financial highlights, we had an 18% volume growth overall to total company. We did have a 30% decline in recurring segment profit, which I'll discuss in just a minute the reasons why and we had a net domestic average price realize of 12% lower.

In the fourth quarter, you will see two things there, first is the negative impact of our results on non-recurring items. First, legal contingencies, that relates to the unfavorable opinion we received from the Wyoming Supreme Court on our appeal of the State Regulatory decision on the allowance of certain tax deductions. The court ruling was for the period 2002... 2000 through 2002 and the accrual was made for that period plus remaining periods through 2008 and that was $34 million.

Second thing is a property impairment and this is in the Arkoma Basin, which is one of our non-core producing assets in South East Oklahoma. The fourth quarter impairment of $129 million resulted primarily from lower year-end reserves. The decline in reserves primarily resulted from using lower year-end prices as required by SEC guidelines. This caused the reserves to become economical and cause the non-cash write-down of $129 million or impairments.

On a year-to-date for the total year, you do see that we have a 19% volume growth overall 71% recurring segment proper growth, which shows the true earnings power of this unit in a normal commodity environment, and a net realized domestic average price did increase 28%.

Let's turn to slide 16. Accomplishments 71%, recurring segment profit as I mentioned. On the domestic side, our production growth was up 20%, I have a slide we'll go into that in just a few minutes. Domestic reserve replacement of 176% and three year F&D of $2.32 if you exclude the 2008 acquisitions and keep in mind our acquisitions, which were about $570 million last year.

Our strategy is weighted very heavily towards unproved properties. We think on a 3P basis, we brought all these acquisitions in about a $0.16 per Mcf basis on a 3P basis. We very rarely buy proved reserves and hence the $2.32 excluding 2008 acquisitions. And our team continues to be good citizens in various areas we are operate.

First, we would name the business of the year in Grand Junction, Colorado, that's where our Piceance operates, and we are also named the business of the year in Denton County, Texas for our Barnett operations and in the San Juan basin we won the BLM Good Steward award.

Slide 17, this portfolio, which increased profitability in 2008 by 71% also increased our production by 20%. It set up for a very strong future. Our growth won't be as much this year obviously with our capital budget, but you can see Piceance value was up 14%. The Highlands were up 24%, the Powder River was up 34%, Ft. Worth is up 66%, and San Juan basin almost mature asset continue to grind up at 3%.

Slide 18, looking at our reserves, we believe we had a strong reserve performance in 2008. Total reserves were about 4.5 trillion cubic feet. On a domestic side, we were up 5%. 148% domestic reserve replacement for a 602 Bcf net additions, greater than 99% growing success rate, and we added 714 Bcf to proved before the price related revisions.

Price related revision was a 112 Bcf essentially as 2008 year-end prices compared to 2007's were down in our various basins between $1.19 to $1.55 or 20% to 25% which impacted our reserves by this 112 Bcf. That's only about 2% of our total crude reserve portfolio.

From prior years, we've been asked, what if prices would decline, what would happen to our portfolio, and we say really very little would happen, and as you can see, with only 112 Bcf written down with a much lower prices, our portfolio is not really impacted, which shows the strength of our reserves.

Finally, in additions to this all, we moved about 1.9 Tcf of probables to proved again over the last three years, and our PDP Proved Valve Producing Percentage is now up to 57% up from 53% just a couple of years ago. I think that shows that we continue to increase our productive capacity while also increasing our proved reserve base.

Slide 19, is a reconciliation of reserves basically you can see where we start two years ago at 3.70 Ts and we're now up to 4.3 Ts on a domestic basis. Our reserve additions came in on a total basis at 791 Bcf, which is just a little less than 2007's additions. Revisions are down well over 220 Bcf which makes that net 571 Bcf that you see on the graph here. Out of that 51% or 112 Bcf is due to the low end price which I just previously discussed, the other 49% or about 100 Bcf is due to reservoir performance related issues.

Really all of that is in the slide tweaking at the models and primarily most of that was in the Piceance and what we do is as we look at it every year, we had a slight adjustment to the tail-end of our reserves primarily. And we look at and you multiply that slight adjustment times 3,100 wells, it turned out to be 100 Bcf, but really very slight adjustment in our reserves. We deduct our production of 406 Bcf which is up 21% as I mentioned from last year or 20% and we end up with our year-end reserves of 4.3 Tcf on a domestic basis.

Slide 20, just to show what we've done in the last several years and the strength that we believe we have in our portfolio they are the ones increasing deliverability over the last four years we're up at compound average growth rate of 21% in production. We think that growth rate is truly remarkable given that one it's really organic. It's not done through acquisitions and also given the initial high decline rate of most of all our wells where we're operate in tight sands, coal-bed methane and shale. And then also, this base get you the organic growth rate.

Panel two shows our growth in proved reserves. The compound average growth rate of over 9% and also shows a relative ratio of proved reserves between the PDs and puds and the proved developed in the puds and that proportion continues to increase and again as our reserve base is increasing, our productive capacity increases. And the last line shows our reserve replacement ratio over the last four years and this year without the price adjustment, that 148% would have been 176%.

Turning now on slide 21, and our strategy continues to be aggressively in moving our gas away from the Rockies. And in the fourth quarter we had about 19% priced at the Rockies and 81% not priced to the Rockies. But let's break that down a little bit. The fourth quarter production is 1.156 Bcf a day. 37% of that is at Rockies prices before hedging and 63% of that is taken away. So we have about 425 million a day at Rockies prices. Then we take away the 200 million a day, they were hedged and we have only about 19% that's priced in the Rockies.

Then Midstream consumed about 174 million cubic feet a day as fuel and shrink in that further reduces our Rockies exposure totaling about 51 million a day only about 4% of our entire portfolio. 2009 Rockies exposure is expected to be less than that at about 12% on an E&P only basis and obviously Midstream continues to consume fuel and shrink so our exposure will be very minimal in 2009.

Looking at capital budget on slide 22, please recall last time I walked you through a decrease in our expected budget from 2.3 billion to 1.7 billion. That was a cut of about 607 million and we now cut another 700 million by dropping 13 more rigs. Since the ten rigs that we had dropped in the Piceance, three in the Ft. Worth basin we are doing quite a fewer wells in the Powder River associated facilities primarily the Piceance were down from $65 million and our cost savings on land we've have cut by $95 million.

On the last call I mentioned in those $75 million of cost savings that we had, so we had significant cost savings. That brings us into our current guide point middle of $1 billion. We are seeing declines in all of our costs across the border, tubulars are down 10 to 21%, directional services down 12%, bids are down 35%, frac service is down 30%, work over rigs down 25% and many other things are down. And we think we'll continue to see additional cost savings.

Our growth is predicted at 2% to 4% growth in volumes now most of that growth is in the first quarter as you would expect. So we summarize all this, our joined economic still remain very favorable at forward prices. But our capital program has been cut back significantly due to this global economic crisis. We're still opportunity rich for the future and if you look at our expected rig count, in the Piceance we expect to be at nine to ten, down from about 28 rigs and Ft. Worth we've about two down from about seven rigs.

Slide 23, is our guidance you can see, we continue to ratchet it down our capital as you can see on the slide and also our price deck that you've seen in the appendix basically returns on recurring segment profit this year estimated to be between $325 million and $575 million depending on the price that you apply to that.

Finally slide 24, I want to say a couple of things here, first of all I can't lose sight of our teams efforts for 2008 record year for reserves production and segment profit in a normal economic climate that would continue for many, many years.

Second our premiere joint inventory as we've always said provides flexibility, we can ratchet it up or ratchet it down, we are now ratcheting it down almost all of those portfolios held by production, we can decrease our activity and we've done that and we'll preserve in a long-term value for the future growth.

And the last point on the slide, there's no time to talk about today but we believe our new opportunities are very promising in other areas. Thank you. I'll turn it over to Alan now.

Alan Armstrong

Great, thanks Ralph.

I'm going to start here on slide 26. I'm pleased to report that Midstream had another successful year earning $926 million in segment profit on a recurring basis. Our well positioned assets and a very dedicated teams, once again allow us to take full advantage of a robust Midstream environment for most of 2008.

Of course in the fourth quarter results were certainly affected by the dramatic downward movement in NGL prices which impacted not only our domestic natural gas processing margins but also hurt co-developments and Canadian margins and imposed lower valuations of our inventories in many areas. While falling commodity prices negatively impacted some of our business, our fee-based revenues increased to over $215 million for the quarter reflecting the addition of Bass Lite volumes to our Devils Tower infrastructure. This fee-based number represented a 15% increase over the same period last year.

The temperate momentum in the fourth quarter provided us a recurring segment profit for fourth quarter '08 which was $250 million lower than our fourth quarter of '07. The domestic NGL margins from our fully owned plants were $125 million lower. But we also incurred $78 million marketing loss in the fourth quarter compared to $6 million gain in that same area in the same quarter of '07. This $84 million variance is driven by dropping prices on products and transit, and I'll show them in more detail on this later in the presentation. Also our olefins business was hit hard by lowering commodity prices and took some significant lower cost to market adjustments on inventory evaluations.

Moving on to slide 27, sure quickly here you can see that our margins there on the green line shows that we actually saw a $0.59 of margin in the fourth quarter, that's probably higher than a lot of people are expecting and still well above the $0.37 for our domestic plant. So then I'll explain on the next slide on 28 I'll show the drivers that show that NGL margin being higher.

On 28 here, here is what we did in the third quarter, we showed the impact of ethane rejection, inventory shifts and collars on our fourth quarter NGL margin and our equity sales gallons. If you refer to this illustration, starting on the left side we depict our estimated equity NGL gallons that we normally would have sold during the quarter.

And then next we subtract the estimated volumes that were lost due to ethane rejection. This adjustment is followed by adding the equity gallons from the prior to 930, so prior to the beginning of our fourth quarter inventory that we sold actually in the fourth quarter. So the result is our reported equity NGL sales volume of 285 million gallons.

On the right side of the graph here, we talk about price and we depict the estimated normalized margin per gallon for the fourth quarter which is significantly lower than our reported margin. The normalized margin would have fallen below our five-year average margin of $0.37 as seen in the previous slide. There were three main drivers benefiting the per unit margin that we actually reported.

First, in the blue stripe segment, we add the margin impact from the heavier product mix this quarter that increased our per unit margin. Because of the ethane rejection that we experienced, the NGL product mix that we sold was approximately 46% ethane and 54% propane. Our reported margin reflects the heavier mix of NGL sold and would have been reduced had we sold that usual 50 - 50 ethane to propane mix, so basically this richer mix with higher price products in it drove the price up.

In the next bar, we had the impact on NGL margins from the collars that were put on in the beginning of 2008 and you can see, we got a nice lift there from our collars about $0.16 across all of our barrels. And then we had the margins recognizing the fourth quarter on the 930 inventory and so these are products that we sold out of inventory that had been produced in the third quarter. And we end up with our reported NGL margin of $0.59 per gallon.

The difference between the normalized and reported equity volumes and reported margin are much smaller for the entire year as you can see on the total year slide that we have put into the appendix for you.

Moving on to slide 29, I spoke earlier the $78 million marketing loss in the fourth quarter and this was driven by price movements during the quarter and inventory levels. And you can see on this graph here in the line above is the pricing levels and in the dark blue bar on the top graph there is the levels of inventory. You could see how that inventory rose dramatically.

And now in the bottom you can see how that the marketing margin that we've reported since first quarter of '06 and you can see it's been fairly limited up until this quarter. Our NGL marketing group buys products from the plants at opus prices and then wears the risk of valued of that product in transit. Our normal transit times are three weeks but of course this is continuous over the whole quarterly period.

The inventory that NGL marketing hold built throughout the year for several reasons, first of all during most of 2007 we've sold almost all of our NGLs in the Wyoming plants to a third-party, this arrangement expired in February of 2008 and therefore we had to build line pack inventory for our own account on the main American pipeline system.

Secondly, we got product held up behind enterprise fractionator in Bellevue due to their frac being out of service due to the hurricanes late in the third quarter. And then finally, we had to build line pack inventory on the Overland Pass pipeline to begin shipping on this pipeline as we filled that previously unfilled pipe.

So about the same time, our inventories were at their peak, NGL at their peak our NGL prices tumbled rapidly throughout the quarter. And then you can see from our graphic that normally this impact is very small and in fact it was positive to the tune of $17 million in 2007 so it provided a $95 million variance from year-to-year.

Moving on to slide 30, our fourth quarter benefited from an increase in our fee-based business compared to our 2007 as we've seen consistently in 2008. Our fee-based revenues were up same quarter year-over-year and in each quarter of 2008.

For the year, fee-based revenues increased 10% or $75 million over our 2007 fee base. Our return on average assets for the year was 21.4%. We calculated that return by using our segment profit, less general corporate expenses and other income expenses below the line and then we take that over our net assets which is net PP in a year long-term investments and our working capital.

As we touched on in the third quarter, we'll continue to benefit from the start of the Overland Pass. Although the start-up was painful due to delays we incurred, our Wyoming and eventually Piceance plants will be in a unique position of being able to pick the better of either Conway or Mount Bellevue NGL prices. And we also enjoy dramatically reduced transportation of fractionation expenses and we've significantly improved our take away reliability. So far during the first quarter, we believe we've improved our propane net bag prices by almost $0.15 per gallon due to Overland Pass from our Wyoming plants.

We also made significant accomplishment in the of fourth quarter on major projects. Bass Lite began flowing at full volumes in the fourth quarter and contributed about $19.7 million of operating profit in 2008 when coupled with some of the earlier production from there.

We also help Bill Barrett Corporation deliver the first Paradox basin production in the Northwest pipeline in December. And as a result we received a significant acreage dedication in the heart of this basin that looks to be very prolific. And we continue to solidify our position in this new shale play.

Our E&P group helped us gain this first mover advantage through their knowledge and ownership interest in the basin and our Willow Creek plant construction in the Piceance is progressing in line and with its schedule and we continue to project substantial completion during the third quarter of 2009. Our large deepwater projects Perdido Norte is expected to start-up in the fourth quarter. And the final connection for the Tahiti lateral is expected to be completed in March, and Chevron is still showing that as a third quarter start-up.

Moving on to guidance very quickly here, with reduction in our commodity price outlook 2009 segment profit guidance has been lower to range of 400 million to 700 million, while we're expecting lower earnings in 2009 due to the pricing environment, new expansion projects are expected to contribute approximately $50 million of incremental profit compared to 2008.

In looking at 2009 capital spending, we also note that we have $50 million reduction on our capital spending and that actually is $100 million lower spending because we actually transferred out $50 million of spending that didn't get completed in '08. So our '08 spending was actually lower and so our net is actually $100 million.

Moving on to our key points here on slide 32. As we touched on briefly in the accomplishment slide, 2008 continues to show a high return on average assets at 21.4%. In fact, this measure has averaged 22% over the last three years. We believe that we remain at the top of our sector of the industry on this important measure due to our capital discipline, and are very focused and effective group of employees that remain very committed to driving both our strategy and our return for our shareholders.

We haven't grown the most, but we have grown in a very profitable manner, and in a way that should benefit both our near-term and long-term shareholders.

Our fee-based revenues grew $75 million from 2007 to 2008, and we anticipate our fee-based revenues will grow in 2009 as the new major projects that I listed begin to contribute and certainly grow into 2010 as Perdido Norte starts up at the end of this year. One key growth area in our entry is Paradox basin and we continue looking into similar large scale basins for other opportunities.

And with that I will turn it over to Phil Wright.

Phillip D. Wright

Thanks Alan. We're very pleased to report another strong year in 2008 from our gas pipeline segment.

Can I have slide 34 please. In spite of a $24 million head-win pun not intended from reduced IT fee revenue on Transco due to Hurricane Ike, our revenues were up $50 million from 2007 on a strength of a full year of our new rate structure on Transco versus only three quarters in 2007. Incremental contributions from our major expansion projects including our Leidy to Long Island, Potomac, and Gulfstream projects, and higher short-term firm sales on Northwest Pipeline.

Slide 35 please. In addition to solid financial performance, 2008 was also a year of significant operating accomplishments. Among some of the highlights, we placed Phase I of our Sentinel expansion in service on December 22nd. We expect to have Phase II in service in November of this year. And when complete this project will add 142,000 decatherms a day of capacity on Transco to the Northeast.

It's noteworthy, I believe that this project Leidy to Long Island expansion and our Potomac project all demonstrate that our team has the skill sets, the footprint, and the resources to grow and protect the coveted Transco franchise.

In another market driven expansion, our Jackson Prairie deliverability enhancement and Northwest Pipeline was brought online in November. As well and in an another indication of the value of Northwest as the backbone of the gas delivery infrastructure of the Pacific Northwest, we set a new record for peak day deliveries and annual throughput.

I'd also note that we were successful in extending contract terms for capacity on Northwest totaling approximately 360,000 decatherms a day during 2008 for an average extension of 13 years.

Since 2006 we worked with our customers on Northwest to extend 1.5 billion a day, 1.5 billion cubic feet a day of firm transportation capacity and over 800,000 decatherms a day of storage and peaking services.

And lastly our Gulfstream Phase IV expansion began flowing in November to serve the strong and growing power generation markets in Florida.

Slide 36, turning now to our guidance. We're slightly lowering our segment profit range due largely to higher property insurance and pension expenses. There are some non-recurring maintenance expenditures we have to do including repairs to damaged caused by Hurricane Ike for which we don't expect to get some of the recoveries until 2010 and major replacements of two compressor stations.

On our expansions, we provided detailed descriptions in the appendix, I won't cover them here, but I would observe that the expansions included are high quality, market driven projects with high credit quality customers. They aren't exposed to the year six and 11 turn back risk, producer driven projects have to contend with.

So summing up on slide 37, gas pipes once again delivered solid predictable cash flow to our portfolio in 2008 greater than $1 billion in segment profit plus DD&A. We've affirmed our gas pipeline teams' ability to execute quality expansion projects in the highest growth regions in the country. All underpinned with long-term market driven contracts with high credit quality customers.

And we have more on the way with $470 million to $575 million in expansions in our guidance for construction during the 2009 - 2010 timeframe. The outlook is great for gas pipes to continue to generate strong predictable free cash flow for Williams.

I will turn it back to Don.

Don R. Chappel

Thank you, Phil.

Let's turn to slide number 39 and will take a look at some summarized guidance information. This slide walks through the changing commodity price landscape as well as our changing CapEx earnings guidance. Column in the left was our assumptions as of November 6th and I think most of you agree that the price environment at that time was down sharply from what we saw earlier in the year was likely something viewed as fairly normal as $60 to $90 crude oil range, a $6 to $8 gas range something in line with what most consultants and EIA might call a more normal long-term environment, at that time we had a CapEx budget around $3 billion and expect to deliver about a $1.25 to $2.05 in EPS with a midpoint of about a $1.65.

As we move forward as Steve mentioned earlier prices are down sharply, you can see them there but oil is down about 43%, gas was down about 40% from the time of our November call until this date. And as a result we throttled back our capital spending by about $650 million at the midpoint and also down $1.3 billion from 2008 levels and that resulted in a range of $0.60 to a $1.10. Certainly, a sharply lower level and one that we don't think is normal but one that will prepare to endure during 2009.

I think if you look to the right, our 2008 actuals reflect our earnings power during a strong economy and a strong price environment so as we think about the future, I think we can look for a much better times ahead and much higher levels of earnings, I would note in our 2009 of price assumptions or excuse me earnings assumptions today while we're seeing many, many cost decline pretty sharply, there is a couple I'd just like to note, we are seeing sharp increases in our pension cost as a result of the sharp decline in the value of investments. We are also seeing a sharp increase in insurance costs as a result of hurricane effects and large claims in the Gulf Coast area. So just things to think about as you model the future and those are built into our numbers.

Our 2009 forecast guidance on slide 40, again just details the components of that guidance role in the comparison to November 6th.

Slide 41, again, summarizes what you saw from the business units before but E&P at Midstream down sharply and sharply lower commodity volume and prices and gas pipeline very steady given its long-term contracts with high quality credits.

Overall, recurring earnings after mark-to-market adjustments again down sharply. And then finally, gas marketing at the bottom of the page after eliminating mark-to-market effects moving to about a expected breakeven level as the legacy issues diminish.

Turning to page to slide 42, this just graphically depicts our natural gas position and I will just walk through how the slide works, the one on the left is our consolidated natural gas position, as you know E&P produces over Bcf a day, netting out fuel and shrink production taxes, we get down to a number of, I believe it's around 940.

The green area is hedged principally with collars and you can see this the hedges for 2009 on slide number 62. I think we have about $600 million a day hedged and then the yellow would be the unhedged E&P volume. Below the line is the Midstream short position to produce NGLs and the dot, the diamond in the center would be our net natural gas position.

So although we produce over a Bcf a day you can see that net long position is closer to a 100 million a day, about 10% of our total production. And again there is some variability because of the fact that many of the hedges were collars.

As we take a look at the Rockies for the same period, again the lion's share of our E&P production is in the Rockies. Again we back off the production taxes, fuel and shrink. And into the purple burgundy colored area is the gas it's transported out of the Rockies to other price points. So what remains in the Rockies, sold in the Rockies would be the green which is hedged and the yellow which is unhedged.

Again the blue represents the Midstream short position and the diamond would represent our enterprise position which is short Rockies gas very slightly. I'll just also note that we have about $300 million a day of hedges on it in 2010, natural gas hedges and that's detailed again on slide number 62. The Midstream area we have no hedges in 2009 or beyond on NGLs.

Just turning the page please to capital spending, and you can see our capital spending detail here again down sharply from 2008 and down sharply from our November 6th guidance with the E&P off of about $700 million and the others being some fairly minor adjustments.

Turning the page, think about cash flow and liquidity. I'll just hit a couple of highlights here. Cash flow from operations at a $1.9 billion to $2.2 billion, less dividend, minority interest payments to our MLP, investors. Other represents cash that would come out of the pocket of the MLP or international operations to fund.

Some of the items included on the schedule, whether it be CapEx or minority interest payments and the like. The capital expenditure midpoint, $2.3 billion leaves us with a change in cash of about call it $500 million to $700 million negative beginning on restricted cash solely unrestricted not MLP cash, not international cash of $800 million.

Plus the change from above, plus assumed borrowings of about $500 million yields an ending cash balance somewhere in the range of $600 million to $900 million. Capacity, remaining capacity under our credit agreements at the end of 2009 would be a $1.350 billion yield. So total at year-end 2009 ending liquidity estimated at $2 billion to $2.2 billion.

Turning to slide 45, just a few other thoughts. Again we think a lot about capital allocations. In this environment, the capital is scarce and expensive. We'll allocate capital to our highest risk adjusted returns, but we also think about strategic issues and those are many both from a defensive standpoint as well as from an offensive standpoint and we think we have some opportunity to play offense in this environment.

2009 again our plant CapEx exceeds our cash flow, some where in the range of $500 million to $800 million. Again available cash and credit facilities will fund the excess investment. We have many mid-streaming gas pipeline projects that both Phil and Alan detailed in their remarks as well as are listed in the appendix to our presentation. We will finish those projects.

E&P has reduced sharply to a $1 billion level, yet expects a slight increase in production during 2009. And we'll continue to preserve the many investment opportunities that we have for periods when prices are higher and capital is more available.

In 2010, we would expect that the CapEx will have match assumed cash flows. The bulk of the change there is many of the projects in midstream and gas pipelines will be completed and while we have some new projects we would expect that overall we would match our CapEx with our expected cash flows and we'll remain flexible so that we can live within our means even with low prices.

The forward strip shows an expectation by the market of somewhat improved prices, oil in the range of about $10 at this moment and gas in a range of about a $1.25. So that would certainly be helpful if that were to come true. And we'll retain the flexibility to adjust our spending.

As I mentioned earlier, we would expect to play some strategic offence and we are very attuned to value creating opportunities that are created by this economic and financial market crisis as well as low prices. We'll be very focused, opportunistic, prudent, aware and disciplined.

With that I'll turn it to Steve.

Steven J. Malcolm

I have no further comments, why don't we just move right into Q&A.

Question-and-Answer Session


Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions). Our first question comes from Faisel Khan from Citigroup. Please go ahead, sir.

Faisel Khan - Citigroup

Good morning, guys. Just a couple of questions, how extreme were the issues presented in the credit markets that they caused you to look at the risk associated with the potential structural change in the company. Can you give some more color around that?

Steven Malcolm

Well, probably not as much color as you would like, but there is no question that the changes that we've seen over the last few months certainly had an impact on our decision. And I mean, because of the unprecedented financial and commodity market uncertainty and we don't know where commodity prices are headed. We're heartened by the fact that strip prices are a little better in 2010.But on the other hand there are forecasts out that we are going to see Henry Hub prices at 250.

So unprecedented uncertainty and so I think it's fairly clear that the market values more highly companies that are larger, that are more financially diverse, that have stronger balance sheets, that have stronger credit ratings. And then so those are some of the reasons that we've decided, what we've decided.

Faisel Khan - Citigroup

Okay, fair enough. And in your whole presentation today, put me to '09 guidance and you guys talked about some of the headwinds from higher cost from pension and insurance. But is there any way to cut cost out of the system too. There's been fair amount of cost inflation kind of across the board at all three of your segments over the last couple of years, is there any way to kind of reduce the cost structure of the company over the next 12 to 18 months?

Steven Malcolm

Well, there is a great tension between simply taking or steer cost saving steps versus staying positioned for the future. And we do anticipate that at some point there will be a recovery and there will be stronger commodity prices that will translate into good things for our company. And we spend a lot of time building the appropriate organization so that we can best take advantage of those opportunities.

Having said that, we're looking at, obviously looking at taking steps to reduce cost and we're right now I would call at more of the low hanging fruit. We gave up our apartment in New York City for example. Not that big a deal but I think inappropriate step. We're cutting back travel, where it make sense for us to do so. We've negotiated hard and will continue to negotiate hard with third-party vendors. So I can assure you that we're looking very closely at our cost structure.

Faisel Khan - Citigroup

One last question. In your, I think Don in your last comments you talked about playing offence. I guess does that mean also looking at opportunities for small acquisitions or is there some other or is it just talking about keeping the capital budget kind of a little bit above operating cash flow is that considered playing offensive?

Steven Malcolm

I think from a strategic standpoint, we're talking about the fact that... I mean we viewed the Paradox basin for example, as an offensive opportunity for us. The fact that we have an E&P presence there and a growing midstream footprint. That's good to stop and I think will create wonderful opportunities for us in the future. As well we will continue to look at strategic opportunities but they would have to be compelling in today's market.

Don do you have any follow on comment?

Faisel Khan - Citigroup

Steve, thanks for the time, I appreciate it.


Our next question comes from Carl Kirst with BMO Capital. Please go ahead, sir.

Carl Kirst - BMO Capital Markets Corp.

Hi, good morning, everybody, Steve just perhaps asking a restructuring question differently, just to make sure I am understanding kind of the results of the review. Is this something that is really just reflective of the reality today, the current market or was this more of a longer term managing risk in both good cycles and bad cycles, I guess what we are all trying to come to is this sort of a review that gets reignited; if and when commodity prices get back up to where they were in the third quarter?

Steven Malcolm

An excellent question Carl and a fair question. But again I'll probably disappoint here. We are going to continue to assess all of the options to enhance shareholder value but I am not going to speculate today on any future actions we might take in that regard. I think I have been pretty clear on the environmental changes, the economic landscape changes, the commodity price changes that impacted our decision and while we think it's very prudent to go forward and to continue with the current mix of businesses. But Carl I'm not going to speculate on well what does that mean for the future.

Carl Kirst - BMO Capital Markets Corp.

Fair enough. Two other quick questions if I could Ralph, just on the, the proved reserves, if and this may be a difficult question to answer but if we were undertaking the review again today at current gas prices, I guess we are trying to figure out where the line sort of all of a sudden stops being linear and you have a sensitivity or some education of what perhaps negative price related revisions would be under the current price deck?

Ralph Hill

I don't, we'll add sense to that if you look at our cash cost in a number of basins are below $1, other basins are well below $2. And then if you look at the new rules this year we are... you are probably going to be allowed to do more with your probable and possible in areas of Titans that we have. It's just too early to speculate on that, and we probably feel the new rules are going to be favorable for us and there could be some areas that have offsets in the prices, if prices stay low for the year. But, we've actually met with our auditors and talked about that a little bit, but -- I think it's way too early to talk about either side about how much more will add because of new rules and then what could happen in a price environment. But I can tell you that we're competitive in all various, and we have very low cost in our areas and that will help us quite a bit.

Carl Kirst - BMO Capital Markets Corp.

Okay, and I appreciate that. And then just lastly Phil just a clarification; the 24 million of headwinds that you said with respect to hurricane Ike, that was a fourth quarter revenue impact, i.e., excluding hurricane Ike, EBIT in pipes would have been essentially 24 million higher?

Phillip Wright

It was a reduced IT feeder revenues incurred during that period of time and so you -- we just dropped that out of the revenue line. And so as we go forward, we would expect ITP to revenue to pick back up.

Carl Kirst - BMO Capital Markets Corp.

Okay, helpful. Thank you.


Our next question comes from Mr. Sam Brothwell from Wachovia. Please go ahead sir.

Sam Brothwell - Wachovia

Hi, good morning guys. Question on the E&P side on midstream. Can you just clarify -- did you cut by 10 rigs or did you cut two 10 rigs in the Piceance, Ralph?

Ralph Hill

Well actually it works out both ways. We cut by 10 and that ends up being for the average for the year, we should be around between 9 and 10.

Sam Brothwell - Wachovia


Phillip Wright

We originally were at 28, 27 or 28 in the fall of last year. We cut down to approximately 20 in the last call and that we cut another 10 down to between 9 and 10.

Sam Brothwell - Wachovia

Got you. Okay. And can you give us some sense of this kind of a backlog of wells that you still got awaiting completion up there?

Unidentified Analyst

We haven't done that yet but we expect in this budget we have this year, we'll have about 75 or so wells that we won't complete to manage around this budget. So it would sort of huge number but we do -- we will have 65 to 75 wells, that we're at this point would not complete to manage within that budget.

Sam Brothwell - Wachovia

Okay. And can you give us some sense of kind of the price you need in the various basins particularly the Piceance to earn cost of capital?

Unidentified Analyst

We never given the cost of capital, for say, I can tell you that our cost -- and cost capital appears by this market to be a moving target. But -- we believe that even at the prices you would see today, we would clear our cost of capital in these basins.

Sam Brothwell - Wachovia

Right. And Alan, just kind of high level question, clearly got a lot of pressure on the U.S. petrochemical industry demand. Do you see -- looking forward do you think we'll return to -- ever return to normalized conditions or are we really seeing a secular change particularly with some of the petrochemical capabilities coming on in the Middle East?

Alan Armstrong

I think that mostly what we've seen today is just driven by worldwide recession. Actually I think the U.S. could be pretty well positioned long-term particularly with the gas supplies that we have. I think we could wind up being a fairly low cost supplier again as we were fairly optimistic about the petchem market just, because I think we've proven that we've got amble feedstock here and I think that'll keep people here. I think certainly what we have right now is just recession and I don't think its so driven by lack of exports at this point.

Sam Brothwell - Wachovia

Okay. Thank you very much.


(Operator Instructions). We'll take our next question from Lasan Johong. Please go ahead.

Lasan Johong - RBC Capital Markets

Thank you. Ralph any chance you can give us exit rates for the first quarter and the fourth quarter of this year?

Ralph Hill

I don't have the first quarter with me. I think if you look at it, we expect our exit rate at the end of the year would be down about 4% to 5%, say around 5% from the beginning of the year. So most of our growth in the first quarter -- is in the first quarter is probably 10% to 12%, maybe slightly more and then it tapers off during the year. I can't say that every year if you look at 2010, and we're not giving that 2010 guidance yet, but if you look at the efficiencies we grind out every year for example we've drilled some wells in the Piceance in five days or less. We've taken Ryan Gulch wells and average wells in 2008 were better than the best while we drill in 2007. In fact all the efficiencies in, we believe 2010 even with the lower rate of capital we're using and I assume flat level capital in 2010. We do expect the decline would be rest and we'd be flat to what we see in 2009. So its not an ongoing decline, but there will be a decline this year.

Lasan Johong - RBC Capital Markets

If you stop drilling entirely and just kept your production on line, could we assume a 15 maybe 20% decline rate overall of your E&P business?

Ralph Hill

I haven't done that for a while. For now, we'll just need to get back to you on that. I do not know that answer, but that's probably a decent assumptions, I have to play -- I have to look at the numbers.

Lasan Johong - RBC Capital Markets

Okay, Steve considering the potential for the economic crisis to kind of remain sluggish and the fore curve measured against that economic scenario seems to be bullish. Any chance you're going to put on lot more hedges going forward to, but kind of take advantage of that for planning fore curve?

Steven Malcolm

Yes, we always look at what the market is offering. We'd had as you know a corporate strategy to have 40% to 60% of our production hedged. That obviously was influenced by the enterprise position particularly that position in the Rockies, but we look at hedging opportunities always weekly and I can assure you that we will take advantage of opportunities as we see them.

Lasan Johong - RBC Capital Markets

My final question, do you anticipate big impacts from potential LNG flows into the U.S.?

Steven Malcolm

That's a -- I still think. The answer to that is somewhat uncertain. Certainly demand in Asia and Europe for LNG is somewhat diminished, it would appear, whether that finds its way to the U.S. is somewhat questionable and I guess I don't have a crisp answer for you today.

Lasan Johong - RBC Capital Markets

Okay. Thanks Steve.


We'll take our next call from Joe Allman. Please go ahead, sir. Your line is open.

Joseph Allman - JP Morgan

Yes, thank you. A follow up on the rig question. So the rig drops that you plan are already done for this year or there is more rigs that are getting dropped?

Steven Malcolm

They're almost all done. There are a few rigs that are finishing up on various pads and its more efficient to let them finish those pads, but we have significantly dropped rigs, since the beginning of the year, almost all of them have been dropped.

Joseph Allman - JP Morgan

Got you. And then another question on the restructuring. In the review process what were some of the benefits that you saw for separating of the different businesses.

Steven Malcolm

Well, as we described during our last call it was all driven toward finding a way to enhance shareholder value and that was the part of goal that we were looking for. So, that we'll continue to asses as I mentioned earlier, we'll continue to assess all of the options that are available to enhance shareholder value in the future.

Joseph Allman - JP Morgan

When you look at the value of your -- say your different businesses I know it's hard to separate it out, but do you think that your E&P business is undervalued relative to other more peer E&P companies?

Unidentified Analyst

That's again. It would be depended on the various assumptions that you might make for how you would value what multiples do apply in today's very uncertain market. So again, I don't have a crisp answer for you there, it's something that we continue to evaluate and look at.

Joseph Allman - JP Morgan

Great. And then for your guidance for NGL margins $0.22 to $0.35, does that bake in an improvement in the second half of '09 for frac spreads?

Alan Armstrong

There is not much movement during the year from what we are seeing right now actually on that the percent of NGL crude particularly on the ethane does improve during the year. But the base commodity prices are held pretty flat but we do see it improving percent of ethane crude for instance.

Joseph Allman - JP Morgan

Got you. And then the tax benefit for this quarter, is that a true up for yearly taxes or?

Don Chappel

The tax adjustment is just an annual detail review of the effective state tax rates. Our earnings have been growing in areas with either lower or no state income tax since result. Our view of our state tax rate has declined somewhat so we have reduced that and we made that calculation in the fourth quarter that get supplied to bulk earnings for the period in deferred tax balances. And that's what you saw roll through the fourth quarter in a less.

Joseph Allman - JP Morgan

I'm sorry we are going to say the last.

Don Chappel

That was all.

Joseph Allman - JP Morgan

Okay. Thank you. And then lastly on pensions, what's the unfunded status and what will be additional cash contribution to the pensions?

Don Chappel

Ted Timmermans is our controller, Chief Accounting Officer will take that question.

Ted Timmermans

Thank you, Don. As to the unfunded status we'll be publishing that in the 8-K. And as you could imagine given the returns on plant assets over the course of 2008, you will some decline and we'll also be posting what our funding expectations would be for 2009 as well, so stay tuned.

Joseph Allman - JP Morgan

Okay, I appreciate that, thank you.


We will take our next question from Mr. Shaun Grant (ph) from Zimmer Lucas. Please go ahead.

Unidentified Analyst

Hi, good morning. Just a quick question on your CapEx, does the budget assumes that you exercise the option on Overland?

Don Chappel

No, it does not.

Unidentified Analyst

Okay. That's it, thank you.


We will take our next question from Becca Followill with Tudor Pickering & Co.

Rebecca Followill - Tudor Pickering & Co.

Good morning, just to clarify, you'd said that 2010 production would be flat is that assuming continued $1 billion CapEx?

Don Chappel

I was just saying, if we ran about that level billion and with the efficiencies we have, we would not expect this decline it we'll see to continue on.

Rebecca Followill - Tudor Pickering & Co.

Okay. And then on E&P at what point... at what price do you say I'm going to reassess and off my CapEx budget?

Steven Malcolm

Well I ask for that everyday, no sorry Becca. Well, I think this it's really just going to be a function of it, as Don mentioned to the extend we have additional cash flow and the prices would come up. I think we would be allowed to be the first mover to come in and spend additional dollars. So really this is our cash flow would come up. I think it be the time you see us do that. Don do you want talk?

Don Chappel

The range of prices we provided, I think were fairly good within their range. Certainly if prices were to decline below the bottom and to the range that we laid out which was 450 Henry Hub, we'd certainly take another look at where we are, but we certainly already looked at the kind of the $4.50 to $6 range within that spending plan. But clearly, if things move sharply lower, there is a difference again but we're hopeful that we won't have to see that. But obviously we, none of us know.

Rebecca Followill - Tudor Pickering & Co.

And then just to once again, ask a question that's been asked a couple of times, you said on a conference call a couple of times the word strategic offense and its got people wondering. Really what that means is that I've got something in mind I think that prices for assets are going to fall or what, I don't understand what you mean.

Don Chappel

Sorry to not be clear, but I think all we're saying here is that in the case of the Paradox for example, we are seeking to expand our footprint both from an E&P and midstream perspective. So what we were trying to convey is this isn't only about playing defense. We are able to make investments that expand our footprints. And we'll continue to look at strategic opportunities that make sense. But don't in anyway conclude that we have something in mind or we're about to ready to announce something.

Rebecca Followill - Tudor Pickering & Co.

Okay, thank you.

Ralph Hill

We drilled four verticals and one is in way on its completion and five horizontals and two wait on completion. We had planned to drill seven horizontals this year and now it looks like we'll drill more like 14. So we're just, those are some areas we are playing offense and there is some other land opportunities that we have out there that we kept in the budget to continue to expand positions in various areas.

Rebecca Followill - Tudor Pickering & Co.

Thank you.


Our next question comes from Sunil Jagwani with Catapult. Please go ahead. Your line is open.

Sunil Jagwani - Catapult Capital

Hi, good morning. I'm just trying to reconcile a couple of different statements. I guess firstly you have talked about being able to make good return even at current prices on the E&P side. The DD&A rate on the E&P income statement that flows through is $1.80 or $1.90 somewhere around there. And then the reported at least the way I calculated the finding and development costs are over $3 given that you spend 2.5 billion in the E&P last year. So I'm just trying to reconcile those three statements and if you can help me that would be great? Thanks.

Unidentified Analyst

Well first of all, we don't look at a one year finding cost ever, but we could, we give that out, and I think the way our portfolio is set up, there are some years where you're going to see us work very low, and some years a little higher.

In that $3 calculation, you have about $528 million that was spent on acquisitions, which were almost with exception maybe 20 Bcf or maybe 30 Bcf that was entirely for 3P reserves. So we just look at on a three year basis. Our three year basis is now up to about 232. It was about $1.80. Cost were up some. Areas we drilled this year were up some, those kind of things, but then if you look at it, well I think its going to happen this year, I think you'll see that drop significantly, because where we're drilling, how we're dealing, and the CapEx that we have, and the costs that are coming down. And then just on the cash side of the world, our cash breakeven is well below $1 and you take that and you take what isn't a normal environment and I believe that we see our returns were all 15%, 16% or higher in our -- on our drilling program.

Sunil Jagwani - Catapult Capital

Wonderful, thank you. That's all I needed. Thanks.


This concludes today's question-and-answer session. At this time, I would like to turn the call back over to Mr. Steve Malcolm.

Steven Malcolm

Well, thank you. I would just conclude by saying what I said earlier. We expect our mix of businesses, our investment grade rating, our strong liquidity to service well in this very, very challenging economy and very weak energy market. So thank you very much for tuning in this morning.


This concludes today's Williams Companies conference call. Thank you for joining us and have a wonderful day.

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