Kern River’s new delivery facility on the
outskirts of Las Vegas increased its access
to that rapidly growing market in 1997.

Kern River’s operating profit improved 6 percent in 1997, primarily due to a full year of Williams ownership in 1997, increased transportation revenues, and lower operations and maintenance expenses. These gains were partially offset by the impact of our levelized rate design. Lower operating expenses resulting from more efficient practices also contributed to the excellent performance.

Key Points
* Under terms of our last rate-case settlement, we do not plan to seek new rates until 2000 or later. Kern River’s ability to maximize capacity while covering associated cost increases plays a major role in its rate stability.

* We are focused on further penetrating industrial markets and enhancing our system’s value to prospective customers by providing direct access to gas basins through incrementally priced lateral facilities. This strategy also will foster rate stability for existing customers. For example, our Blue Diamond delivery facility went into service in May 1997, providing a new outlet and increasing our access to the Las Vegas market. The 50 to 250 MMcf of natural gas flowing daily through this delivery point exceeded our expectations. In addition, we signed a second seasonal firm transportation contract with a Las Vegas local distribution company that will increase delivery by 40 MMcfd to this market, whose projected growth rate is three times greater than the national average.

* Kern River and Northwest systems combined activities as part of Williams’ move to a national pipeline. The organizational alignment allowed Kern River to reduce general and administrative costs somewhat, with greater impact expected for 1998. In addition, performance improvement initiatives contributed to reducing operating and maintenance expenses by 18 percent, or $1.7 million.

Outlook
* We expect 1998 operating profit to be slightly lower than 1997 results, primarily due to our levelized rate design. Also, opportunities to capture interruptible and short-term transportation volumes are expected to decrease relative to 1997. This is because of anticipation of more normal supply-basin price differentials; a return to normal operations of nuclear and hydropower operations; and an absence of scheduled pipeline maintenance by our competitors.

*  Kern River can serve some of the fastest growing areas in the nation, allowing it to capture new market share and access incremental supplies. For example, our mainline’s proximity to the Elk Hills Reserve in California positions it to provide an outlet for this mostly new gas supply, which is expected to triple in volumes to 300 MMcfd in 1998.

*  Delivery through our Las Vegas area Blue Diamond facility will provide 50 percent of the 77 to 120 MMcfd fuel requirements of the proposed El Dorado Power project, a 420-megawatt merchant power plant near Boulder City, Nev. We anticipate starting this service in 1999.

*  Kern River has long-term firm transportation contracts into the year 2007 for most of the system’s design capacity. Our system has operated at full capacity since shortly after it was commissioned in 1992.