Williams Reports Unaudited Fourth-Quarter and Full-Year 2004 Financial

TULSA, Okla., Feb. 23 /PRNewswire-FirstCall/ -- Williams announced 2004 unaudited net income of $163.7 million, or 31 cents per share on a diluted basis, compared with a net loss of $492.2 million, or a loss of $1.01 per share, for 2003.

Results for 2003 were reduced by an after-tax charge of $761.3 million, or $1.47 per share, primarily to reflect the cumulative effect of adopting the mandated accounting standard for contracts involved in energy trading and risk management activities.

For fourth-quarter 2004, the company reported net income of $73.4 million, or 13 cents per share on a diluted basis, compared with a net loss of $53.7 million, or a loss of 10 cents per share, for fourth-quarter 2003.

The company reported 2004 income from continuing operations of $93.2 million, or 18 cents per share on a diluted basis, compared with a loss of $57.5 million, or a loss of 17 cents per share, in 2003 on a restated basis.

The improvement in continuing operations over last year reflects the benefit of higher operating results, particularly in Midstream, and lower levels of interest expense primarily reflecting reduced levels of debt. The improvement was partially offset by $282.1 million in pre-tax charges for costs associated with the early retirement of debt, compared with $66.8 million for similar charges in 2003. With regard to unrealized mark-to-market gains or losses from the Power business, 2004 included a pre-tax gain of $304 million vs. a pre-tax gain of $262 million in 2003.

For fourth-quarter 2004, the company reported income from continuing operations of $95.5 million, or 17 cents per share on a diluted basis, compared with a loss of $73.3 million, or a loss of 14 cents per share, for fourth-quarter 2003 on a restated basis.

Results for fourth-quarter 2004 include a $103 million pre-tax gain and related interest associated with an insurance arbitration award at Midstream, while the same period in 2003 includes impairment charges of $89.1 million at Power. With regard to unrealized mark-to-market gains or losses from the Power business, the 2004 quarter included a pre-tax gain of $23 million vs. a pre- tax gain of $85 million in the 2003 quarter.

Income from discontinued operations for 2004 was $70.5 million, or 13 cents per share on a diluted basis, compared with income of $326.6 million, or 63 cents per share, for 2003 on a restated basis. Results for both periods largely reflect net gains from asset sales.

For fourth-quarter 2004, the company reported a loss from discontinued operations of $22.1 million, or a loss of 4 cents per share on a diluted basis, compared with income of $19.6 million, or 4 cents per share, for fourth-quarter 2003 on a restated basis.

CEO Perspective

"The successful execution of our business plan is producing benefits that we'll realize for years to come," said Steve Malcolm, chairman, president and chief executive officer.

"Over the past year, we have rapidly increased our drilling and production, dramatically reduced our debt and nearly doubled our net cash provided by operating activities.

"These kinds of drivers enabled us to reward our shareholders with a five- fold dividend increase in the fourth quarter.

"Our financial discipline and our focus on natural gas have served us well and can take us even further. Williams is positioned for continued growth and value creation."

Recurring Results

Recurring income from continuing operations - which excludes items of income or loss that the company characterizes as unrepresentative of its ongoing operations - was $261.5 million, or 49 cents per share, for 2004. In 2003, recurring results from continuing operations reflected a loss of $15.8 million on a restated basis, or a loss of 3 cents per share.

For fourth-quarter 2004, recurring income from continuing operations was $68.0 million, or 12 cents per share, compared with recurring income of $57.5 million, or 11 cents per share, for fourth-quarter 2003 on a restated basis.

A reconciliation of the company's income from continuing operations - a generally accepted accounting principles measure - to its recurring results accompanies this news release.

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

With the company's September decision to retain the Power business, the unit qualified for and elected to apply hedge accounting on a prospective basis beginning Oct. 1, 2004, for certain qualifying derivative contracts. Not all of Power's derivative contracts will qualify for hedge accounting.

Prior to the adoption of hedge accounting, Power accounted for its derivatives portfolio, which includes economic hedges on underlying tolling and other structured non-derivative contracts, on a mark-to-market basis. As a result, changes in fair value of its derivative portfolio over this time period have been recognized in earnings.

As a result of applying hedge accounting Oct. 1, Power's future results associated with contracts in the derivative portfolio should be less volatile. However, the residual mark-to-market effects will negatively impact reported results in future periods, serving to increase the difference between reported results and cash flows for several years.

The expected cash flows and economic value of Power's portfolio are not affected by the accounting election.

To provide an added level of disclosure and transparency, Williams is providing an analysis of recurring earnings adjusted for all of Power's mark- to-market effects. This measure was first introduced in third-quarter 2004 results.

Recurring income from continuing operations - after adjusting for the mark-to-market impact to reflect income as though mark-to-market accounting had never been applied to Power's designated hedges and other derivatives - was $190 million, or 35 cents per share, for 2004. In 2003, recurring results from continuing operations reflected a loss of $170 million, or a loss of 33 cents per share, after adjusting for the impact of mark-to-market accounting.

For fourth-quarter 2004, recurring income from continuing operations - after adjusting for the mark-to-market impact to reflect income as though mark-to-market accounting had never been applied to Power's designated hedges and other derivatives - was $51 million, or 9 cents per share, compared with recurring income of $22 million, or 4 cents per share, for fourth-quarter 2003 after adjusting for the impact of mark-to-market accounting.

A reconciliation of the company's income from continuing operations on a recurring basis to its recurring results that have been adjusted for the impact of mark-to-market accounting accompanies this news release.

Cash and Debt: Company Ends 2004 with Available Liquidity of $1.8 Billion

Williams reduced its debt by approximately $4 billion in 2004 through scheduled maturities, early debt retirements and exchanges.

At Dec. 31, 2004, Williams' total outstanding debt was approximately $8 billion. Of this amount, approximately $247 million matures in 2005, $119 million matures in 2006, and $396 million matures in 2007. Williams has already retired $200 million of the 2005 maturities.

Williams had unrestricted cash and cash equivalents of approximately $930 million at year-end 2004. At Dec. 31, Williams also had $881 million in unused and available revolving credit facilities, which are used primarily for issuing letters of credit and for liquidity.

Net cash provided by operating activities for 2004 was approximately $1.5 billion, including $16 million from discontinued operations. For 2003, net cash provided by operating activities was $770 million, including $182 million from discontinued operations on a restated basis.

Business Segment Performance

Williams' primary businesses - Exploration & Production, Midstream Gas & Liquids, Gas Pipeline and Power - reported combined segment profit of $1.45 billion in 2004. A year ago, these businesses reported consolidated segment profit of $1.29 billion on a restated basis.

In the fourth quarter of 2004, the four major businesses reported combined segment profit of $419 million vs. $161.1 million for the same period in 2003 on a restated basis

Exploration & Production: Production Volume Growth Continues

Exploration & Production, which includes natural gas production and development in the U.S. Rocky Mountains, San Juan Basin and Midcontinent, and oil and gas development in South America, reported 2004 segment profit of $235.8 million.

A year ago, the business reported segment profit of $401.4 million. The decrease in segment profit is due primarily to the absence of $95 million in gains on the sale of assets in 2003, $24 million in lower income on derivative instruments that did not qualify for hedge accounting, and a $15.4 million loss provision in 2004 regarding an ownership dispute on prior period production. The benefit of higher production volumes was more than offset by decreased net realized average prices from hedging activities and increased operating expenses.

For the fourth quarter of 2004, Exploration & Production reported segment profit of $70.9 million vs. $50.1 million for the same period last year.

Fourth-quarter 2004 results increased primarily from the benefit of higher production volumes and higher net realized average prices.

Average daily production volumes have increased 25 percent since the fourth quarter of 2003. In the fourth quarter of 2004, average daily production from domestic and international interests was approximately 612 million cubic feet of gas equivalent, compared with 491 million cubic feet of gas equivalent during the fourth quarter of 2003.

In the fourth quarter of 2004, average daily production in the Piceance basin was 255 million cubic feet of gas equivalent. This was an increase of 5 percent vs. third-quarter average daily production of 242 million cubic feet of gas equivalent in the Piceance.

Overall, Piceance production has increased 61 percent since the fourth quarter of 2003, when average daily production was 158 million cubic feet of gas equivalent. Williams considers the Piceance basin to be its cornerstone property for production growth.

Earlier today, Williams announced year-end 2004 proved U.S. natural gas reserves of 3.0 trillion cubic feet equivalent, up 10.5 percent from year-end 2003. Including its international interests, Williams has total proved natural gas and oil reserves of 3.2 trillion cubic feet equivalent.

Domestic reserve net additions of 451 billion cubic feet equivalent exceeded last year's 408 billion cubic feet in net additions.

In 2004, Williams had a drilling success rate of approximately 99 percent. The company drilled 1,395 gross wells, of which 1,384 were successful. In 2003, Williams also achieved a 99 percent success rate, drilling 900 gross wells, of which 891 were successful.

Williams plans to invest $500 million to $575 million in capital spending in Exploration & Production in 2005; $525 million to $625 million in 2006; and $525 million to $675 million in 2007.

These investments are focused on increasing production from the company's large portfolio of undeveloped reserves and pursuing expansion opportunities in existing and new basins.

For 2005, Williams expects $400 million to $475 million in segment profit from Exploration & Production.

Midstream Gas & Liquids: Strong Margins Drive Record Quarter

Midstream, which provides gathering, processing, natural gas liquids fractionation and storage services, reported 2004 segment profit of $549.7 million.

A year ago, Midstream reported segment profit of $197.3 million on a restated basis. The increase in segment profit for 2004 reflects the benefit of significantly higher natural gas liquids production volumes and margins, higher olefins fractionation margins, a $93.6 million gain from a fourth- quarter insurance arbitration award associated with Gulf Liquids and the absence of $108.7 million of impairment charges in 2003 related to these same assets.

In the fourth quarter, Midstream reclassified Gulf Liquids results for current and prior periods to continuing operations after considering recently issued accounting guidance for the reporting of discontinued operations. Williams has previously announced its intention to divest Gulf Liquids.

For the fourth quarter of 2004, Midstream reported segment profit of $235.7 million vs. a restated $63.8 million for the same period last year.

The increase in fourth-quarter 2004 segment profit primarily is due to higher natural gas liquids and olefins production margins, as well as the $93.6 million gain on the insurance arbitration award.

In 2004, Williams completed more than 500 well connections to the company's natural gas gathering systems in Wyoming and New Mexico.

Williams plans to invest $120 million to $140 million in capital spending in Midstream in 2005; $110 million to $130 million in 2006; and $100 million to $130 million in 2007.

These investments are focused on attracting new volumes to the company's assets and further expanding Midstream's systems in existing basins.

For 2005, Williams expects $350 million to $430 million in segment profit from Midstream Gas & Liquids. The projected decline vs. 2004 results reflects an assumption that 2005 natural gas liquids margins will not reach the record levels achieved in 2004.

Gas Pipeline: Unit Posts Best Quarter for all of 2003 and 2004

Gas Pipeline, which provides natural gas transportation and storage services primarily in the Northwest and along the Eastern Seaboard, reported 2004 segment profit of $585.8 million.

A year ago, Gas Pipeline reported segment profit of $555.5 million on a restated basis. The increase in 2004 segment profit reflects higher equity earnings from Williams' investment in the Gulfstream system and the absence of a 2003 charge of $25.6 million to write-off certain capitalized software development costs.

The benefit of increased revenues associated with expansion projects was offset by lower commodity and short-term firm revenues, increased maintenance expense and costs to comply with new pipeline safety requirements and a $9 million charge in 2004 to write-off previously capitalized costs associated with an idled segment of the Northwest Pipeline system.

For the fourth-quarter of 2004, Gas Pipeline reported segment profit of $156.8 million vs. a restated $148.2 million for the same period last year. The increase reflects the benefit of expansion projects and higher equity earnings from the Gulfstream investment. The 2004 period represents the highest quarterly segment profit for Gas Pipeline in 2003 and 2004.

In November, Williams completed a new natural gas pipeline lateral near Everett, Wash., on Northwest Pipeline. The new 9-mile segment, known as the Everett Delta project, provides an additional 113,000 dekatherms per day of natural gas to a customer.

In December, the Transco system established a one-day throughput record of 8.73 million dekatherms. The previous high of 8.34 million dekatherms occurred in 2003.

Williams also filed an application with the Federal Energy Regulatory Commission in the fourth quarter to construct a $333 million project in western Washington in 2006. This is designed to permanently replace most of the 360,000 dekatherms per day of capacity on the Northwest system that was idled in December 2003. Approximately 131,000 dekatherms per day of service were restored on a temporary basis during the second quarter of 2004.

Williams plans to invest $370 million to $420 million in capital spending in Gas Pipeline in 2005; $475 million to $550 million in 2006; and $250 million to $325 million in 2007.

These investments are focused on maintenance, regulatory compliance, the capacity replacement project on Northwest Pipeline, and incremental expansions in growing markets.

For 2005, Williams expects to generate $545 million to $585 million in segment profit from Gas Pipeline.

Power: Keeps Producing Positive Cash Flow

In September 2004, Williams announced its decision to continue operating the Power business and cease efforts to exit the business.

Power is focused on realizing expected cash flows, managing forward commodity risk and providing functions that support Williams' natural gas businesses.

Power, which manages more than 7,700 megawatts of power through long-term contracts, reported 2004 segment profit of $76.7 million. This includes the benefit of $304 million in forward unrealized mark-to-market gains.

A year ago, Power reported segment profit of $135.1 million on a restated basis, which included forward unrealized mark-to-market gains of $262 million, and approximately $208 million in gains on the sale of assets and contracts.

The 2004 decrease in segment profit is due primarily to reduced realized gross margin in power and natural gas, largely reflecting lower sales volumes. Also contributing to the decrease was the absence of gains on the 2003 sale of assets and contracts, partially offset by higher unrealized mark-to-market gains and significantly lower selling, general and administrative costs associated with staff reductions. The absence of certain impairment charges and loss accruals totaling approximately $143 million recorded in 2003 further offset the decline.

For the fourth quarter of 2004, Power reported a segment loss of $44.4 million vs. a segment loss of $101 million for the same period last year on a restated basis. The 2004 period includes forward unrealized mark-to- market gains of $23 million vs. gains of $85 million in 2003.

In 2004, Power generated approximately $565 million in cash flow from operations, largely from reductions in working capital used for credit and collateralization requirements. The unit also benefited from positive cash flows from its power and natural gas commodity portfolios. In 2003, Power generated approximately $162 million in cash flow from operations.

For 2005, Williams expects a segment loss of $150 million to $250 million from Power. The loss is due to the approximate $300 million negative residual effect of having recognized mark-to-market gains on certain Power derivatives contracts in 2003 and 2004. Prior to October 2004, the unit did not qualify for hedge accounting due to Williams' previous intent to exit the business. On a basis adjusted for the residual impact of mark-to-market accounting, Power expects segment profit of $50 million to $150 million.

Power expects cash flow from operations of $50 million to $150 million in 2005.

Other

In the Other segment, the company reported a 2004 segment loss of $41.6 million. A year ago, Other reported a segment loss of $50.5 million.

The segment losses for both 2004 and 2003 are largely the result of impairment charges and equity losses associated with an investment in a Texas pipeline project.

For the fourth quarter of 2004, Other reported a segment loss of $21.0 million vs. a segment loss of $7.7 million for the same period last year.

The increase in quarterly segment loss is primarily due to increased equity losses associated with the Texas pipeline project and an $11.8 million accrual for environmental remediation at the Augusta refinery site.

Guidance Through 2007

In 2005, Williams expects consolidated segment profit of $1.05 billion to $1.35 billion; cash flow provided from operating activities of $1.3 billion to $1.6 billion; and recurring income from continuing operations of 31 cents to 56 cents per share.

On a recurring basis adjusted for the impact of mark-to-market accounting, Williams expects earnings of 63 cents to 88 cents per share for 2005.

In 2006, Williams expects consolidated segment profit of $1.2 billion to $1.5 billion and cash flow provided from operating activities of $1.45 billion to $1.75 billion.

In 2007, Williams expects consolidated segment profit of approximately $1.4 billion to $1.8 billion and cash flow provided from operating activities of $1.6 billion to $1.9 billion.

The company has an overall capital budget of $1.0 billion to $1.2 billion for 2005; $1.15 billion to $1.35 billion for 2006; and $900 million to $1.1 billion in 2007.

Today's Analyst Call

Williams' management will discuss the company's fourth-quarter and year-end 2004 financial results during an analyst presentation to be webcast live at 10 a.m. Eastern today.

Participants are encouraged to access the presentation and corresponding slides via http://www.williams.com/ . A limited number of phone lines also will be available at (800) 811-7286. International callers should dial (913) 981- 4902. Callers should dial in at least 10 minutes prior to the start time.

The webcast replay - audio and slides - for the year-end presentation will be available at http://www.williams.com/ later today. Audio-only replays of the presentation will be available at approximately 3 p.m. Eastern today through midnight on March 1. To access the replay, dial (888) 203-1112. International callers should dial (719) 457-0820. The replay confirmation code is 404873.

Form 10-K Filing Schedule

The company plans to file its Form 10-K with the Securities and Exchange Commission in March. The document will be available on both the SEC and Williams' websites. A financial highlights package that is immediately available accompanies this news release.

About Williams

Williams, through its subsidiaries, primarily finds, produces, gathers, processes and transports natural gas. The company also manages a wholesale power business. Williams' operations are concentrated in the Pacific Northwest, Rocky Mountains, Gulf Coast, Southern California and Eastern Seaboard. More information is available at http://www.williams.com .

Williams' reports, filings, and other public announcements might contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are "forward-looking statements" within the meaning of Private Securities Litigation Reform Act of 1995. You typically can identify forward-looking statements by the use of forward-looking words, such as "anticipate," believe," "could," "continue," "estimate," "expect," "forecast," "may," "plan," "potential," "project," "schedule," "will," and other similar words. These statements are based on our intentions, beliefs, and assumptions about future events and are subject to risks, uncertainties, and other factors. Actual results could differ materially from those contemplated by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors could cause our actual results to differ materially from the results expressed or implied in any forward- looking statements. Those factors include, among others: changes in general economic conditions and changes in the industries in which Williams conducts business; changes in federal or state laws and regulations to which Williams is subject, including tax, environmental and employment laws and regulations; the cost and outcomes of legal and administrative claims proceedings, investigations, or inquiries; the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by various factors, including our credit ratings and general economic conditions; the level of creditworthiness of counterparties to our transactions; the amount of collateral required to be posted from time to time in our transactions; the effect of changes in accounting policies; the ability to control costs; the ability of each business unit to successfully implement key systems, such as order entry systems and service delivery systems; the impact of future federal and state regulations of business activities, including allowed rates of return, the pace of deregulation in retail natural gas and electricity markets, and the resolution of other regulatory matters; changes in environmental and other laws and regulations to which Williams and its subsidiaries are subject or other external factors over which we have no control; changes in foreign economies, currencies, laws and regulations, and political climates, especially in Canada, Argentina, Brazil, and Venezuela, where Williams has direct investments; the timing and extent of changes in commodity prices, interest rates, and foreign currency exchange rates; the weather and other natural phenomena; the ability of Williams to develop or access expanded markets and product offerings as well as their ability to maintain existing markets; the ability of Williams and its subsidiaries to obtain governmental and regulatory approval of various expansion projects; future utilization of pipeline capacity, which can depend on energy prices, competition from other pipelines and alternative fuels, the general level of natural gas and petroleum product demand, decisions by customers not to renew expiring natural gas transportation contracts; the accuracy of estimated hydrocarbon reserves and seismic data; and global and domestic economic repercussions from terrorist activities and the government's response to such terrorist activities. In light of these risks, uncertainties, and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time that we have described. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Reconciliation of Income (Loss) from Continuing Operations to Recurring Earnings (UNAUDITED) 2003 (Dollars in millions, except for per-share amounts) 1st Qtr *2nd Qtr *3rd Qtr *4th Qtr * Year * Income (loss) from continuing operations(1) ($52.2) $50.0 $18.0 ($73.3) ($57.5) Preferred stock dividends 6.8 22.7 - - 29.5 Income (loss) from continuing operations available to common stockholders ($59.0) $27.3 $18.0 ($73.3) ($87.0) Income (loss) from continuing operations - diluted earnings per share ($0.12) $0.05 $0.03 ($0.14) ($0.17) Nonrecurring items: Power Accelerated compensation expense associated with workforce reductions 11.8 - - - 11.8 Severance accrual - 0.6 - - 0.6 Impairment of investment in Aux Sable - 8.5 5.6 - 14.1 Loss accrual for regulatory issues(2) - 20.0 - - 20.0 Prior period item correction(3) (13.7) (93.1) (1.0) (9.0) (116.8) Gain on sale of Jackson EMC power contracts - (175.0) (13.0) - (188.0) Gain on sale of crude contracts and pipeline - (7.1) - - (7.1) Gain on sale of eSpeed stock - - (13.5) - (13.5) Impairment of goodwill(2) - - - 45.0 45.0 Hazelton impairment - - - 44.1 44.1 California rate refund and other accrual adjustments(4) - - - 33.3 33.3 Total Power nonrecurring items (1.9) (246.1) (21.9) 113.4 (156.5) Gas Pipeline Write-off of Oneline information system project - 25.5 - 0.1 25.6 Severance accrual - 0.9 - - 0.9 Write-off of previously- capitalized costs - idled segment of Northwest's pipeline - - - - - Total Gas Pipeline nonrecurring items - 26.4 - 0.1 26.5 Exploration & Production Gain on sale of certain E&P properties - (91.5) - - (91.5) Loss provision related to an ownership dispute - - - - - Total Exploration & Production nonrecurring items - (91.5) - - (91.5) Midstream Gas & Liquids La Maquina depreciable life adjustment - - 4.2 - 4.2 Gain on sale of Louisiana Olefins assets - - - - - Gain on sale of West Texas LPG Pipeline, L.P. - - (11.0) - (11.0) Gain on sale of wholesale propane - - - (16.2) (16.2) Gulf Liquids arbitration award (Winterthur) - - - - - Impairment of Discovery - - - - - Gulf Liquids impairment - 92.6 (0.3) 16.4 108.7 Devil's Tower revenue correction - - - - - Total Midstream Gas & Liquids nonrecurring items - 92.6 (7.1) 0.2 85.7 Other Impairment of Longhorn and Aspen project(5) - 49.6 - - 49.6 Gain on sale of butane blending inventory - - (9.2) - (9.2) Augusta environmental reserve - - - - - Longhorn recapitalization fee - - - - - Total Other nonrecurring items - 49.6 (9.2) - 40.4 Nonrecurring items included in segment profit (loss) (1.9) (169.0) (38.2) 113.7 (95.4) Nonrecurring items below segment profit (loss) Convertible preferred stock dividends(2)(Preferred stock dividends - Corporate) - 13.8 - - 13.8 Impairment of cost-based investments(6) (Investing income (loss) -Various) - 19.1 2.3 - 21.4 Severance accrual (General corporate expenses) - 3.0 - - 3.0 Impairment of Algar Telecom investment (Investing income (loss) - Other) 12.0 - 1.2 - 13.2 Write-off of capitalized debt expense (Interest accrued - Corporate) - 14.5 - - 14.5 Premiums, fees and expenses related to the debt repurchase and debt tender offer (Other income (expense) - net - Corporate and Exploration & Production) - - - 66.8 66.8 Gulf Liquids arbitration award (Winterthur) - interest income - (Investing income loss) - Midstream) - - - - - Loss provision related to an ownership dispute - interest component (Interest accrued - Exploration & Production) - - - - - 12.0 50.4 3.5 66.8 132.7 Total nonrecurring items 10.1 (118.6) (34.7) 180.5 37.3 Tax effect for above items 3.9 (73.3) (14.2) 49.7 (33.9) Recurring income (loss) from continuing operations available to common stockholders ($52.8) ($18.0) ($2.5) $57.5 ($15.8) Recurring diluted earnings per common share ($0.10) ($0.03) $- $0.11 ($0.03) Weighted-average shares - diluted (thousands) 517,652 524,546 524,711 518,502 518,137 2004 (Dollars in millions, except for per-share amounts) 1st Qtr *2nd Qtr* 3rd Qtr* 4th Qtr Year Income (loss) from continuing operations(1) $0.0 ($18.5) $16.2 $95.5 $93.2 Preferred stock dividends - - - - - Income (loss) from continuing operations available to common stockholders $0.0 ($18.5) $16.2 $95.5 $93.2 Income (loss) from continuing operations - diluted earnings per share $- ($0.03) $0.03 $0.17 $0.17 Nonrecurring items: Power Accelerated compensation expense associated with workforce reductions - - - - - Severance accrual - - - - - Impairment of investment in Aux Sable - - - - - Loss accrual for regulatory issues(2) - - - - - Prior period item correction(3) - - - - - Gain on sale of Jackson EMC power contracts - - - - - Gain on sale of crude contracts and pipeline - - - - - Gain on sale of eSpeed stock - - - - - Impairment of goodwill(2) - - - - - Hazelton impairment - - - - - California rate refund and other accrual adjustments(4) - - - - - Total Power nonrecurring items - - - - - Gas Pipeline Write-off of Oneline information system project - - - - - Severance accrual - - - Write-off of previously- capitalized costs - idled segment of Northwest's pipeline - 9.0 9.0 Total Gas Pipeline nonrecurring items - 9.0 - - 9.0 Exploration & Production Gain on sale of certain E&P properties - - - - - Loss provision related to an ownership dispute - 11.3 - 4.1 15.4 Total Exploration & Production nonrecurring items - 11.3 - 4.1 15.4 Midstream Gas & Liquids La Maquina depreciable life adjustment - - 6.4 1.2 7.6 Gain on sale of Louisiana Olefins assets - - - (9.5) (9.5) Gain on sale of West Texas LPG Pipeline, L.P. - - - - - Gain on sale of wholesale propane - - - - - Gulf Liquids arbitration award (Winterthur) - - - (93.6) (93.6) Impairment of Discovery - - - 16.9 16.9 Gulf Liquids impairment - - - - - Devil's Tower revenue correction - (16.5) 16.5 - Total Midstream Gas & Liquids nonrecurring items - (16.5) 22.9 (85.0) (78.6) Other Impairment of Longhorn and Aspen project(5) - 10.8 - - 10.8 Gain on sale of butane blending inventory - - - Augusta environmental reserve - - - 11.8 11.8 Longhorn recapitalization fee 6.5 - - - 6.5 Total Other nonrecurring items 6.5 10.8 - 11.8 29.1 Nonrecurring items included in segment profit (loss) 6.5 14.6 22.9 (69.1) (25.1) Nonrecurring items below segment profit (loss) Convertible preferred stock dividends(2)(Preferred stock dividends - Corporate) - - - - - Impairment of cost-based investments(6) (Investing income (loss) - Various) - - 15.7 2.3 18.0 Severance accrual (General corporate expenses) - - - - - Impairment of Algar Telecom investment (Investing income (loss) - Other) - - - - - Write-off of capitalized debt expense (Interest accrued - Corporate) - 3.8 - - 3.8 Premiums, fees and expenses related to the debt repurchase and debt tender offer (Other income (expense) - net - Corporate and Exploration & Production) - 96.7 155.1 29.7 281.5 Gulf Liquids arbitration award (Winterthur) - interest income - (Investing income loss) - Midstream) - - - (9.6) (9.6) Loss provision related to an ownership dispute - interest component (Interest accrued - Exploration & Production) - 1.9 - 2.1 4.0 - 102.4 170.8 24.5 297.7 Total nonrecurring items 6.5 117.0 193.7 (44.6) 272.6 Tax effect for above items 2.5 44.8 74.1 (17.1) 104.3 Recurring income (loss) from continuing operations available to common stockholders $4.0 $53.7 $135.8 $68.0 $261.5 Recurring diluted earnings per common share $0.01 $0.10 $0.26 $0.12 $0.49 Weighted-average shares - diluted (thousands) 519,485 521,698 529,525 586,497 535,611 (1) Includes $126.8 million positive valuation adjustment associated with agreement to terminate contract with Allegheny in second quarter 2003. (2) No tax benefit. (3) Power recognized $116.8 million of revenue in 2003 from a correction of the accounting treatment previously applied to certain third party derivative contracts during 2002 and 2001. (4) For $5.6 million, no tax benefit. (5) For $20.2 million, no tax benefit in 2nd Qtr 2003. (6) For $21.4 million in 2003, no tax benefit. * Amounts have been restated from 3rd Quarter 2004 to reflect Gulf Liquids as continuing operations. Note: The sum of earnings (loss) per share for the quarters may not equal the total earnings (loss) per share for the year due to changes in the weighted-average number of common shares outstanding. Adjustment to remove MTM impact Dollars in millions except for per share amounts 2004 1Q 2Q 3Q 4Q Year Recurring income from cont. ops available to common shareholders $4 $54 $136 $68 $261 Recurring diluted earnings per common share $0.01 $0.10 $0.26 $0.12 $0.49 Mark-to-Market (MTM) adjustments: Reverse forward unrealized MTM gains/losses (24) (70) (188) (23) (304) Add realized gains/losses from MTM previously recognized 136 11 45 (6) 186 Total MTM adjustments 112 (59) (143) (29) (118) Tax effect of total MTM adjustments (at 39%) 44 (23) (56) (11) (46) After tax MTM adjustments 69 (36) (87) (17) (72) Recurring income from cont. ops available to common shareholders after MTM adjust. $73 $18 $49 $51 $190 Recurring diluted earnings per share after MTM adj. $0.14 $0.03 $0.09 $0.09 $0.35 weighted average shares - diluted (thousands) 519,485 521,698 529,525 586,497 535,611 Dollars in millions except for per share amounts 2003 1Q 2Q 3Q 4Q Year Recurring income from cont. ops available to common shareholders $(53) $(18) $(2) $58 $(16) Recurring diluted earnings per common share $(0.10) $(0.03) $(0.00) $0.11 $(0.03) Mark-to-Market (MTM) adjustments: Reverse forward unrealized MTM gains/losses 1 (232) 54 (85) (262) Add realized gains/losses from MTM previously recognized (17) 45 (45) 25 8 Total MTM adjustments (15) (187) 9 (60) (253) Tax effect of total MTM adjustments (at 39%) (6) (73) 4 (23) (99) After tax MTM adjustments (9) (114) 5 (37) (155) Recurring income from cont. ops available to common shareholders after MTM adjust. $(62) $(132) $3 $22 $(170) Recurring diluted earnings per share after MTM adj. $(0.12) $(0.25) $0.01 $0.04 $(0.33) weighted average shares - diluted (thousands) 517,652 524,546 524,711 518,502 518,137 Note: Recurring income from continuing operations available to common stockholders has been restated to reflect the reclassification of Gulf Liquids to continuing operations Adjustments have been made to reverse estimated forward unrealized MTM gains/losses and add estimated realized gains/losses from MTM previously recognized, i.e. assumes MTM accounting had never been applied to designated hedges and other derivatives.

FIRST AND FINAL ADD -- FINANCIAL HIGHLIGHTS -- TO FOLLOW