Williams Reports Unaudited 2002 Net Loss of $737 Million

Core Natural Gas Business Earnings Grew; Co. Outlines Strategy to Address Liquidity Needs

TULSA, Okla. — Williams (NYSE:WMB) today announced an unaudited 2002 net loss of $736.5 million, or $1.60 per share, compared with a restated net loss of $477.7 million, or 95 cents per share, for the same period last year.

Loss from continuing operations for 2002 was $483.3 million, or $1.11 per share, compared with restated income from continuing operations of $802.7 million, or $1.61 per share, for 2001.

The company reported a 2002 unaudited recurring loss from continuing operations of approximately $84 million, or 16 cents per share, compared with restated recurring earnings of approximately $1.033 billion, or $2.06 per share, in the same period last year. A reconciliation of the company’s loss from continuing operations to its recurring loss accompanies this news release.

Consistent with previous guidance, the company’s core asset businesses continued to perform well in 2002, achieving approximately $1.5 billion in recurring segment profit, compared with approximately $1.1 billion in 2001. A significant factor in the overall 2002 results was a $353 million recurring segment loss in its energy marketing and risk management business, though the fourth-quarter results from that business were significantly improved from the previous two quarters.

“Our core businesses continued to grow earnings in what was one of the most difficult years this 95-year-old company has ever faced. Our overall results for 2002 reflect the challenges of the past year – and some of the steps we took to address those issues,” said Steve Malcolm, chairman, president and CEO.

“Our strategy for 2003 and beyond provides a clear, comprehensive plan designed to address ongoing liquidity needs, reduce debt and downsize our company to a portfolio of integrated natural gas businesses that we can grow in the future. We will accomplish this through asset sales – those we’ve previously announced plus others we’re announcing today – and cost-cutting,” Malcolm said.

“Our commitment to reduce the company’s risk and liquidity requirements related to energy marketing and trading is unwavering. We’ve made progress, which includes receipt earlier this month of $67 million cash for the sale of a power plant and termination of an associated contract. Proceeds from any future transactions in this business area, however, would only add to the measures specified in the company’s plan to meet liquidity needs,” he said.

Included in the 2002 $253.2 million loss from discontinued operations are the after-tax operating results, including asset impairments, and gains or losses on the sale of businesses. These include Kern River Gas Transmission and Central natural gas pipelines, two natural gas liquids pipeline systems, the Memphis refining operations, retail petroleum TravelCenters, ethanol operations and the Colorado soda ash mining operation.

2002 Results for Core Businesses

Gas Pipeline, which provides natural gas transportation and storage services through systems that span the United States, reported 2002 segment profit of $669.3 million vs. $571.7 million on a restated basis for the previous year.

Segment profit increased primarily due to higher revenues from new expansion projects and the benefit of new transportation rates at Transco, rate-refund liability reductions and other adjustments related to the finalization of rate proceedings during 2002, and higher equity earnings that resulted largely from a $27.4 million construction- completion fee received by an equity affiliate of Williams for the Gulfstream project.

For the fourth quarter of 2002, Gas Pipeline reported segment profit of $163.3 million, compared with restated segment profit of $135.7 million during the same period of 2001. The increase was due to the new transportation rates at Transco and the absence of an $18.3 million 2001 royalty-claims charge.

Exploration & Production, which includes natural gas production, development and exploration in the U.S. Rocky Mountains, San Juan Basin and Midcontinent, reported 2002 segment profit of $520.5 million vs. $234.1 million for the same period last year.

This business experienced significantly higher production volumes, primarily the result of Williams’ acquisition of Barrett Resources in August 2001 and the impact of a 99 percent success rate in the company’s drilling program. The sale of the company’s interest in the Jonah Field and Anadarko Basin natural gas properties also resulted in gains of approximately $142 million for the year.

For the fourth quarter of 2002, Exploration & Production reported segment profit of $87 million, compared with $68.7 million for 2001.

Midstream Gas & Liquids, which provides gathering, processing, natural gas liquids fractionation, transportation and storage services, and olefins production, reported 2002 segment profit of $189.3 million vs. a restated segment profit of $171.9 million for the same period last year.

The increase resulted primarily from higher natural gas liquids margins in both domestic and Canadian operations, higher fractionation margins realized in Canada and earnings from deepwater gathering, transportation and processing projects placed in service during 2002. Also contributing were increased equity earnings, primarily from an investment in the Discovery pipeline project that realized increased transportation and liquids volumes. These were offset by $115 million of fourth-quarter impairment charges associated with its Canadian assets.

For the fourth quarter of 2002, Midstream reported a segment loss of $20.7 million, compared with segment profit of $45.5 million for the same quarter of 2001. Excluding the $115 million impairment charges previously noted, results for the quarter reflected significant benefit from improved natural gas liquids margins.

Williams Energy Partners (NYSE:WEG), which includes the company’s investment in the master limited partnership whose corporate structure is independent of Williams, reported 2002 segment profit of $99.3 million vs. restated segment profit of $101.2 million for the same period a year ago.

The slight decrease results from higher transportation and terminal revenues, offset by increased general and administrative costs associated with the acquisition of Williams Pipe Line and higher environmental expense accruals.

“These businesses achieved remarkable results in the face of overwhelming challenges throughout the year,” Malcolm said. “This is a telling commentary about the spirit of our people, the quality of our assets and the company’s ability to work through adversity.”

2002 Results for Other Investments and Businesses

Energy Marketing & Trading reported a 2002 segment loss of $624.8 million vs. segment profit of $1.3 billion for the previous year.

The segment loss resulted in large part from this unit’s continued limited ability to manage market risks for operations that were exposed to negative market conditions. The decline in 2002 reflects the impact of lower revenues from the natural gas and power portfolios, caused primarily by reduced spark spreads on certain power tolling positions, lower volatility and a significant decline in new origination activities.

Additionally, the 2002 loss includes charges totaling approximately $249 million for losses related to reducing activities in a distributed power services business, impairments of goodwill, impairment loss of turbines for a power generation project, and the fourth-quarter impairment loss based on the terms from the February 2003 sale of a power facility in Worthington, Ind.

For the fourth quarter of 2002, Energy Marketing & Trading reported a segment loss of $22.8 million, compared with segment profit of $161.4 million for 2001. The 2002 quarterly results include approximately $99 million from the impairments and writedowns noted above. Segment profit for 2002 also includes a favorable fourth-quarter net effect of approximately $85 million that resulted from a settlement with the state of California, the restructuring of associated energy contracts and the related improved credit situation during the quarter.

Also, Williams expects to record an after-tax charge of approximately $750 million to $800 million in the first quarter of 2003 for the adoption of new accounting rules under EITF 02-03. A substantial portion of the energy marketing and trading activities previously reported on a fair-value basis will now be reflected under the accrual method of accounting.

Petroleum Services, which primarily includes Alaska refining, retail operations and the investment in the Trans Alaskan Pipeline System, reported 2002 segment profit of $40.8 million vs. restated segment profit of $145.7 million for the same period a year ago.

The decline in segment profit is primarily attributed to the absence of a $75.3 million gain that was recorded in 2001 for the sale of certain convenience stores and lower refining and marketing profits resulting from narrowing crack spreads – the price difference between refined and unrefined products. Also included in 2002 results are impairment losses of approximately $23 million, reducing the carrying cost of the Alaska facilities and certain other investments to management’s estimate of fair market value.

Williams has previously announced that it is pursuing the sale of a significant portion of the assets in this business segment. In October 2002, Williams reached an agreement to sell its retail petroleum TravelCenters business to Pilot for approximately $190 million cash in a transaction that is expected to close by the end of February. In November, Williams announced it had reached an agreement to sell its Memphis refining operations to Premcor Inc. for approximately $465 million, with closing expected in March. Earlier today, Williams announced that it has signed an agreement to sell its ethanol business for $75 million. In addition, Williams is currently engaged in negotiations toward the sale of its Alaska operations.

2003 Guidance

The company today also provided segment-profit guidance for 2003. Williams expects recurring segment profit of $1.3 billion to $1.8 billion for 2003. Income for 2003 before the cumulative effect of the EITF 02-03 accounting change is estimated at $250 million to $400 million, resulting in estimated earnings per share of 40 cents to 75 cents. Including the cumulative effect of the accounting change, the company expects a 2003 net loss of 70 cents to $1.10 per share.

Williams expects its core businesses to generate segment profit at these levels for 2003: Gas Pipeline, $500 million to $600 million; Exploration & Production, $300 million to $400 million; and Midstream Gas & Liquids, $200 million to $300 million.

Energy Marketing & Trading is expected to generate segment profit of between $200 million to $350 million.

“Our core natural gas businesses are healthy and viable. One example is our gas production business, which participated in drilling more than 1,300 wells in 2002 with a 99 percent success rate,” Malcolm said. “Our gas wells, pipelines and midstream facilities generate substantial free cash flow, which is an important measure of our success as we execute our business strategy. These businesses are poised for growth in the years ahead.”

Clear, Straightforward Strategy

Williams is executing on these key objectives of its strategy to address liquidity needs, reduce debt and narrow the focus of its business:

· Maintaining adequate liquidity to execute the company’s business strategy. Williams expects to have sufficient liquidity to meet its debt-retirement obligations and operate its businesses. With additional asset sales and financings, the company expects to have cash of approximately $2.8 billion at year-end 2003 and approximately $1.6 billion at year-end 2004.

· Completing the sale of assets previously announced. Williams estimates gross proceeds, including assumption of debt, of approximately $1.9 billion for asset sales that have already been initiated or announced for sale. These businesses include the Memphis refinery operations, North Pole refinery and related Alaska operations, retail petroleum TravelCenters, ethanol, Canadian midstream operations and soda ash.

· Identifying and selling additional assets. Williams today announced it intends to sell an additional $2.5 billion in assets, properties and investments. The company is pursuing the sale of its general partnership position and limited-partner investment in Williams Energy Partners. In addition, Williams has targeted the sale of its 6,000-mile Texas Gas pipeline system. Williams also will pursue targeted asset sales amounting to less than 20 percent of the value in Exploration & Production and Midstream Gas & Liquids.

· Restructuring debt to create greater financial flexibility, while making progress on overarching goal to reduce debt. Williams expects year-end debt to be approximately $11 billion in 2003 and approximately $9.5 billion in 2004. Williams is exploring issuing subsidiary debt of $150 million to $300 million and also refinancing its Rocky Mountain reserves for $300 million to $800 million.

· Narrowing its business focus to a smaller portfolio of domestic natural gas operations. Williams plans to focus on assets within its Exploration & Production, Midstream Gas & Liquids and Gas Pipeline businesses that provide opportunities to grow operating cash flow and earnings with limited-scale, near-term capital investment. In 2003, the company expects to invest approximately $1 billion – primarily for maintenance and to satisfy existing commitments to customers – in core assets, which are generally located where Williams enjoys scale or cost-related market leadership. The company expects to invest another $500 million in these businesses in 2004.

· Continuing progress toward sales of parts or all of the energy marketing and trading business. The objective is to reduce Williams’ risk and liquidity requirements and recognize the value of this book of business.

· Continuing to reduce its cost structure. This includes reducing the size of its work force to align with the changing size of its asset base. Williams closed 2002 with a work force of about 10,000. The divestiture of businesses already identified for sale is expected to decrease the work force to about 6,000. Sales of additional assets announced today will further reduce the work force size and related support structure.

· Favorably resolving investigations and litigation. Williams achieved a broad settlement of matters with the state of California and others at the end of 2002. The company also continues to work toward resolution of other matters that include a class-action shareholder lawsuit and an investigation related to the reporting of inaccurate information to a publication that publishes energy price indexes.

Malcolm concluded by saying, “We are a different company today than we were a year ago, and we are managing our company much differently today. We are proactively managing our cash, reducing our costs, allocating capital with strict discipline and are balancing financial performance measures focused on cash, return on investment and earnings.

“We’ve made significant, well-considered changes in our company – all in recognition of our financial condition and the kind of company we believe will be in the best position to create value for shareholders again.”

Analyst Call

Williams’ management will discuss the company’s 2002 earnings and 2003 guidance during an analyst webcast from 10 a.m. to 1 p.m. Eastern today.

A live audio webcast and copies of the presentation slides will be available on www.williams.com. The slides will be available for downloading and printing at least one hour before the discussion.

Analysts also may participate via a live audio broadcast that can be accessed by dialing (800) 562-8369. International callers should dial (913) 981-5581. Callers should dial in at least 10 minutes prior to the start of the discussion.

Audio replays of the conference call will be available at 5 p.m. Eastern today through midnight on Feb. 26. To access the replay, dial (888) 203-1112. International callers should dial (719) 457-0820. The replay confirmation code is 215748.

About Williams (NYSE: WMB)

Williams, through its subsidiaries, primarily finds, produces, gathers, processes and transports natural gas. Williams’ gas wells, pipelines and midstream facilities are concentrated in the Northwest, Rocky Mountains, Gulf Coast and Eastern Seaboard. More information is available at www.williams.com.

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Portions of this document may constitute “forward-looking statements” as defined by federal law. Although the company believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. Any such statements are made in reliance on the “safe harbor” protections provided under the Private Securities Reform Act of 1995. Additional information about issues that could lead to material changes in performance is contained in the company’s annual reports filed with the Securities and Exchange Commission.

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