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Here’s the entire text of the Q&A from Williams Companies’ (ticker: WMB) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections.

QUESTIONS AND ANSWERS

Operator

Thank you, gentlemen. The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS). Nicholas O'Grady (ph) from Sandell Asset Management.

Nicholas O'Grady - Sandell Asset Management - Analyst

Questions in regards to the dividend -- is there any plan, you know, over the long-term? Is there any sort of guideline that you have, how you want to grow it?

Don Chappel - The Williams Companies - CFO

Nicholas, we've certainly not provided any specific guidance but certainly it's our intention to continue to create value for shareholders in a variety of ways. Certainly, the dividend is one aspect of that. So, we will endeavor to maintain that competitive dividend and one that makes it interesting for shareholders. The absolute amount is a function of business opportunities, credit metrics, as well as what we're trying to achieve for our shareholders.

Operator

Faisal Kahn (ph) from Citigroup.

Faisal Kahn - Smith Barney Citigroup - Analyst

Good morning. On the E&P segment, what's the average basis differential assumptions in your model for your guidance going forward?

Ralph Hill - The Williams Companies - SVP Exploration & Production

In the 8.50 and the $7 range, those are slightly over $1 and slightly under $1.

Faisal Kahn - Smith Barney Citigroup - Analyst

Okay. Then on the production guidance, are your production from the Highlands area or the Trail Ridge, Ryan Gulch (indiscernible) midpoint, is that in your production guidance as well?

Ralph Hill - The Williams Companies - SVP Exploration & Production

Yes, we're now starting that development. But as you know, there's not much in the guidance yet for '06, because we've just drilled a handful of wells in all of those areas. But going forward '07, and then you'll see in '08 when we give out '08 guidance, really the full impact of more drilling in the Highlands.

Faisal Kahn - Smith Barney Citigroup - Analyst

Okay. On the liquidity, you talked about how, as of 9-30-05, you have to post $1.7 billion -- or $1.7 million in total letters of credit. Related to the E&P operation, it looks like you have $1.145 billion of letters of credit posted over there. What's the total volumes at E&P that are requiring those letters of credit to be posted?

Don Chappel - The Williams Companies - CFO

Just give us one second to find the slide; we have a slide on that in the Appendix.

Faisal Kahn - Smith Barney Citigroup - Analyst

Yes, Slide 92; I see that. (multiple speakers).

Don Chappel - The Williams Companies - CFO

We have a slide on the volume as well.

Faisal Kahn - Smith Barney Citigroup - Analyst

Oh, you do?

Don Chappel - The Williams Companies - CFO

Just give me a second and we will find the slide number here.

Ralph Hill - The Williams Companies - SVP Exploration & Production

Just looking for hedge volumes?

Don Chappel - The Williams Companies - CFO

Yes.

Ralph Hill - The Williams Companies - SVP Exploration & Production

383 and for 2005, they are 414 million a day in 2006 and 287 million a day in 2007 total.

Faisal Kahn - Smith Barney Citigroup - Analyst

Are the letters of credit only related to those volumes and nothing else?

Don Chappel - The Williams Companies - CFO

Yes, that's correct.

Faisal Kahn - Smith Barney Citigroup - Analyst

Okay. On the Power side, can you talk about, with regard to the deals, what kind of capacity payments are implied in some of these deals in the West and maybe on the East? What kind of fuel risk you might have with some of these deals?

Steve Malcolm - The Williams Companies - President, CEO

Yes, we really can't comment on the specific pricing of the deal. Basically, what Don was described earlier, we previously had for over-the-counter instruments that we used to hedge our position, sell power forward kind of block sales, buy gas forward. These hedges being resales of toll are the most effective hedge that we can put around our tolling agreements and that we basically just market a premium and sell it to the counterparty. So, we really have no fuel risk associated with the sales we made going forward.

Faisal Kahn - Smith Barney Citigroup - Analyst

Okay, thank you.

Operator

Scott Soler from Morgan Stanley.

Scott Soler - Morgan Stanley Dean Witter - Analyst

Good morning. I had a few questions across a couple of businesses. The first question is high-level, but I wanted to understand, Steve and Don. The three businesses are performing exceptionally well, and the balance sheet looks very good, the cash balance over $1 billion. As we model out cash flow out through '07 and '08, the cash balance is going to build into '07 and '08. So I guess my question is, in terms of return of capital and just a little bit too Nick's question at the beginning is how much cash is going to have to be maintained as long as you have the power business in order for you guys to feel satisfied that you have enough assurance? In other words, as also a lot of these risk-minimizing transactions get done in Power, does that free up any cash that might be able to be returned to shareholders?

Don Chappel - The Williams Companies - CFO

I would say that the cash balances and the liquidity needs are primarily a function of our E&P hedges, more so than the power requirements. Certainly, when we return to investment grade, the cash and liquidity requirements will be reduced sharply. But you know, that isn't something that's on the near-term horizon. We also -- as you modeled, you see a very substantial build in cash balances; we also see it -- I think, as we mentioned, a very substantial set of opportunities in front of us for reinvestment in our core business that we believe has attractive returns and moderate to low risk. So we're very much focused on putting that cash back to work to create EVA and further value for shareholders.

Scott Soler - Morgan Stanley Dean Witter - Analyst

So, Don, is it fair to say that the majority of the free cash -- I mean, the free cash before growth CapEx is very high; we had modeled probably $2.50 per share as you get into these out years. But it sounds like a lot of that will be going back into projects where you feel you have a return on capital in excess of your cost of capital, more so that necessarily returning cash.

Don Chappel - The Williams Companies - CFO

That would be the primary focus. Again, we have enormous E&P reserves; we like to drill them up even faster. We've made great progress there. We have terrific opportunities, both in Midstream and interstate gas pipelines, and we think we can see some really terrific opportunities in those areas as well, so that would be first and foremost. From a credit standpoint, that would do a lot more for our credit as well than returning cash to shareholders. We need to continue to drive higher and higher operating cash flows in order to return to investment grade.

Scott Soler - Morgan Stanley Dean Witter - Analyst

Okay, I understand it better now. On E&P, Ralph, I had a few questions. You talked about F&D costs. When you look at the increase in the cap budget -- CapEx budget for the next few years -- is you guys are becoming more efficient in the Piceance and so your drill times have come down and your unit costs, per-unit costs are actually doing pretty well in spite of all of the inflation out in the oilfield. But how much of the capital spending increase is due to anticipated inflation? If you were to quantify that on F&D costs as you buildout into '06 through '08, what are you guys modeling the anticipation of Finding and Development cost inflation per-unit?

Ralph Hill - The Williams Companies - SVP Exploration & Production

Well, on the CapEx increase, of the roughly 200 million that we're going up, about half of that was due to increased industry costs in '06 and not quite half in '07. Modeling going out -- there will be an increase but it's slight and I don't have that exact answer to you, Scott, but I think I can give it to Travis and we can give you some modeling numbers for that. But it's not increasing substantially at all.

Scott Soler - Morgan Stanley Dean Witter - Analyst

Okay, and just a second short question is regarding some of the deeper sands and the Piceance. Has there been any update on any discussions with private owners of those deeper sands down on the Cozette (ph) and the Corcoran?

Ralph Hill - The Williams Companies - SVP Exploration & Production

No. I mean, obviously, we are interested in them. We know they are productive to the North and potentially productive in some of areas in the Piceance. They're not present in all the Valley but there's no real update. It's just that is probably an additional opportunity out there, as you know.

Scott Soler - Morgan Stanley Dean Witter - Analyst

Okay, and a real quick question for Alan. Alan, when you talked about more fee-based contracts, could you just give an update on percentage of contracts or whatever you think is the best way to frame it -- or percentage of revenues that are now less keep-hole (ph) sensitive and more fee-based or contract-based?

Alan Armstrong - The Williams Companies - SVP Midstream Gathering & Processing

Sure. The main adjustment -- and you can kind of see the increase primarily in the processing fee and the primary driver for that in the third quarter was we've recontacted our Cameron Meadows facility to almost all fee-based now, so that drove a lot of that. In the fourth quarter, you'll see some of that drop, perhaps, because of that facility being out now. But overall, and that is really one of the primary drivers in terms of the amount of our business moving to fee-based. You know, it's a big number, so it's moving up pretty slowly, but we continue to be at the average margin level; we continue to be at that 80/20 kind of range. Given the fact we are converting some contracts to more fee-based and obviously the deepwater fees are very large and continue to increase that, I think that will probably keep pace with some of the increased margins that we got, for instance, at the Opal facility. I would continue to see that move up very, very slightly because of those two balancing issues there.

Operator

Anatol Feygin from Banc of America Securities.

Anatol Feygin - Banc of America Securities - Analyst

Ralph, if I could hit you again on the basis issues, I think, in the appendix, you guys are assuming 3 to 360 in the fourth quarter as basis, and then I think you said you see that coming down to around $1 in '06/'07. Can you just go through the drivers there, what you think will bring that down in the short and medium-term?

Ralph Hill - The Williams Companies - SVP Exploration & Production

Well, I think the $3 or so that we are modeling in the fourth quarter is due to $13 gas prices. What we've seen historically and what we've seen currently even this year, when the prices are more in the $8, $7 range, we see the basis coming down into that $7 range. So it's just our experience and what we've seen. I don't have any updated gas flows or anything like that for you, but currently, the basis we've modeled for the fourth quarter is off of actual markets. The basis for next year and the year after is based on an assumed market, which would drop substantially below what really is going on right now. So, to the extent the market doesn't drop, then we would assume the basis would stay also high.

Anatol Feygin - Banc of America Securities - Analyst

I got it. One thing you mentioned I think in your prepared remarks is I think you mentioned booking 100 Bcf. Was that just related to the Highland properties, or is that kind of an early estimate of the overall adds?

Ralph Hill - The Williams Companies - SVP Exploration & Production

That is only Highlands; that has not nothing to do with the core portfolio.

Anatol Feygin - Banc of America Securities - Analyst

I got it. Great. If I could just move onto Don, maybe, just to comment on the collateral slide beyond the 1.8 billion or so that you have posted now -- if there's a follow-up slide that says, under certain stress conditions, there might be another 900 million that's looking to be posted. I think you guys said 1% chance of that. Can you just add some color around that?

Don Chappel - The Williams Companies - CFO

I'll ask Andrew to speak to the color.

Andrew Sunderman - The Williams Companies - VP Finance & Accounting, Power

It is Andrew. What that would look like, probably as of 9-30, would be a gas price in the fourth quarter around 23 to $25 in the front month and then that would have a correlated price decline over the period of our hedges that are marginable out into the future. So, as we've stated in quarters in the past, you take that front-month equivalent number in that range and then you kind of -- that might equal a number in the next month of 18 to $20. That's just a historical correlation -- so from extreme price volatility but you're starting on a basis at the end of September of $14 gas. So that's why the number is so high.

Anatol Feygin - Banc of America Securities - Analyst

To ask that another way, is the collateral that's posted now kind of substantially lower as gases pull back into this mid-$11 range?

Andrew Sunderman - The Williams Companies - VP Finance & Accounting, Power

We would expect to receive collateral back as gas prices come back down, yes.

Anatol Feygin - Banc of America Securities - Analyst

Okay. While I have you, maybe if we could just go through some more detail on the power business. If I noticed correctly, there was a $378 million gain that didn't flow through the income statement but went straight to OCI. I think, Don, you mentioned that the Power book -- part of the driver of the mark-to-market hit was a short gas position. Can you just talk about that? Is that a recent position you guys have entered into, hedging out the gas that perhaps you are now estimating you won't be using? Is the 378 on the OCI side a function of kind of legacy positions that you have on that gas book within Power?

Don Chappel - The Williams Companies - CFO

This is Don. I will say a few words and then I will have Andrew or Bill follow-up. Again, overall Power seeks to maintain a balanced book of derivatives. However, the intricacies of FAS 133 oftentimes don't allow some of those hedges to qualify for hedge accounting. As we noted in our press release, if you look in the Power section of the press release, in anticipation of some of these new multiyear deals, we canceled out some of the prior Power sale hedges, the forward hedges and the related gas purchases. Those cancellations of some of the prior hedges did not qualify. So again, the book was not short gas in total, from an economic standpoint, but in terms of the hedges that did not qualify, those positions which canceled out prior gas purchases did not qualify. So again, we have an apples-and-oranges situation here as a result of the intricacies of FAS 133. We work to continue to qualify such transactions for hedge accounting, but in the third quarter, as a result of changes in positions to accommodate these new deals, we were unable to qualify all those economic hedges under FAS 133. Andrew, any --?

Andrew Sunderman - The Williams Companies - VP Finance & Accounting, Power

No, that's right. I think the important point to note is that the overall book -- if you take the OCI deferral plus the mark-to-market, you're talking about the overall economic book of hedges, so we wouldn't look at it as some were legacy, some were new; these are ongoing business to manage the forward Power sales we have around all of our tolls. That position changes, as Don described, on a daily basis as we manage to reduce the risk within the portfolio.

So the overall book went up $200 million or more in value on the gas hedges. It's just that the accounting rules required some of that to be deferred and some of that to go through income, because of the reasons that Don talked about.

Anatol Feygin - Banc of America Securities - Analyst

All right, so if I'm -- well, just to follow-up, Don, you're basically saying that the overall book, from a gas supply position standpoint, is still net long and that is partially flowing through the OCI gain and not through the income statement and then a portion of that, if you will, legacy long position, has been closed out as you guys enter these other resale of tolling-type contracts?

Don Chappel - The Williams Companies - CFO

Anatol, That's correct.

Operator

Matthew Jones (ph) from Catalyst Fund.

Matthew Jones - Catalyst Fund Management & Research - Analyst

This is a question for Steve. Steve, we've been shareholders of the Company for a long time and through the financial trouble earlier in the decade and, you know, now looking at three of the four businesses growing pretty spectacularly. Looking specifically at the E&P business, the true value of this business, through my numbers, looking forward, is absolutely spectacular. I believe that some of this value and the true value of the reserves are being masked by obvious issues in the Power business. Have you and management and the Board ever looked specifically or discussed specifically at some sort of value asset spinoff of the E&P business to unlock the value or some sort of transaction to that nature, so that the true value of what I see and the NAV of the Company looking forward can be unlocked?

Steve Malcolm - The Williams Companies - President, CEO

Yes, thanks for the question. We have looked at that in some detail. You know, we have -- particularly given where we've been, we have looked at the options of selling each of our businesses and in some detail. At this point in time, I believe very strongly that most shareholder value can be created over time by continuing with the integrated model. So, who while we remain open-minded and we will continue to evaluate the issue and question, at this point in time, we like the model that we are pursuing today.

Matthew Jones - Catalyst Fund Management & Research - Analyst

Thank you.

Operator (OPERATOR INSTRUCTIONS).

Shinur Gershuni (ph) from UBS Securities.

Shinur Gershuni - UBS Securities - Analyst

Good morning, guys. I actually had most of my questions answered, but I had one left. I was wondering if it was possible if you could provide a little bit of color with respect to market interest in tolling resales beyond 2010 in the Power business.

Bill Hobbs - The Williams Companies - SVP Power

Well, currently, we don't have any resale to polls going beyond 2010. We have our offtake agreements off to mask Alabama position with the Georgia EMCs. Currently, the market is most active between now and 2010. My own perception of that is, when you move into 2007 and 2008, people will be contracting out to 2012 and 2013. We are always pushing to try to sell beyond 2010, but obviously we can only do what our customers are anxious to do.

Shinur Gershuni - UBS Securities - Analyst

All right, thank you.

Operator

It appears there are no further questions at this time. Mr. Malcolm, I'd like to turn the conference back over to you for any additional or closing remarks.

Steve Malcolm - The Williams Companies - President, CEO

Well, thank you for your interest and your patience today as we went through our slides and our story. We are very excited about the progress that we've made, the growth that we've generated, and are excited about the future and look forward to talking with you next time. Thank you.

Operator

Thank you. That concludes today's conference. You may now disconnect.

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