EXHIBIT 99
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT OPERATING STATISTICS AND PER UNIT AMOUNTS)
The historical financial information presented below for Williams Energy
Partners was derived from our audited consolidated financial statements as of
December 31, 2001 and 2000 and for the three years in the period ended December
31, 2001. The consolidated financial statements and notes have been restated to
reflect the results of operations, financial position and cash flows of Williams
Energy Partners and Williams Pipe Line combined throughout the periods
presented. All other amounts have been prepared from Williams Energy Partners
and Williams Pipe Line's financial records.
We define EBITDA as net income before income taxes plus interest expense
and depreciation and amortization expense less interest income. EBITDA provides
additional information as to Williams Energy Partners' ability to generate cash
and is presented solely as a supplemental measure. EBITDA should not be
considered as an alternative to net income, income before income taxes, cash
flows from operations or any other measure of financial performance presented in
accordance with generally accepted accounting principles. Williams Energy
Partners' EBITDA may not be comparable to EBITDA of other entities, and other
entities may not calculate EBITDA in the same manner as we do.
We derived the following table from, and it should be read together with
and is qualified in its entirety by reference to, the historical financials
statements and the accompanying notes filed herewith. The table should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" filed herewith.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Operating revenues .................................... $ 448,599 $ 426,846 $ 375,732 $ 424,561 $ 319,040
Operating expenses .................................... 160,880 144,899 121,599 100,271 99,398
Product purchases ..................................... 95,268 94,141 59,230 55,274 68,242
Affiliate construction expenses ....................... -- 1,025 15,464 101,924 --
Depreciation and amortization ......................... 35,767 31,746 25,670 25,465 25,257
General and administrative ............................ 47,365 51,206 47,062 44,195 31,545
----------- ----------- ----------- ----------- -----------
Total costs and expenses ........................... $ 339,280 $ 323,017 $ 269,025 $ 327,129 $ 224,442
----------- ----------- ----------- ----------- -----------
Operating profit ...................................... $ 109,319 $ 103,829 $ 106,707 $ 97,432 $ 94,598
Interest expense, net ................................. 12,366 25,329 18,998 11,328 12,967
Other (income) expense, net ........................... (431) (816) (1,511) 12,661 1,081
----------- ----------- ----------- ----------- -----------
Income before income taxes ............................ $ 97,384 $ 79,316 $ 89,220 $ 73,443 $ 80,550
Income taxes(a) ....................................... 29,512 30,414 34,121 28,250 31,271
----------- ----------- ----------- ----------- -----------
Income before extraordinary items ..................... $ 67,872 $ 48,902 $ 55,099 $ 45,193 $ 49,279
Extraordinary item - early extinguishment of debt ..... -- -- -- -- 3,583
----------- ----------- ----------- ----------- -----------
Net income ............................................ $ 67,872 $ 48,902 $ 55,099 $ 45,193 $ 45,696
=========== =========== =========== =========== ===========
Basic and diluted net income per limited partner unit . $ 1.87
===========
BALANCE SHEET DATA:
Working capital (deficit) ............................. $ (2,211) $ 17,828 $ (2,115) $ 18,064 $ 13,207
Total assets .......................................... 1,104,559 1,050,159 973,939 785,762 700,281
Long-term debt ........................................ 139,500 -- -- -- 40,000
Affiliate long-term note payable(b) ................... 138,172 432,957 406,022 251,179 178,215
Partners' capital ..................................... 589,682 388,503 339,601 284,596 272,816
CASH FLOW DATA:
Net cash flow provided by (used in):
Operating activities .............................. $ 135,333 $ 55,056 $ 84,472 $ 54,353 $ 75,459
Investing activities .............................. (87,502) (74,446) (277,906) (54,099) (47,404)
Financing activities .............................. (34,004) 19,390 193,435 (254) (28,055)
Cash distributions declared per unit(c) ............... $ 2.02
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
OTHER DATA:
Operating margin:
Williams Pipe Line system ................................... $ 143,711 $ 147,778 $ 153,686 $ 153,864 $ 139,050
Petroleum products terminals ................................ 38,240 31,286 17,141 3,599 3,568
Ammonia pipeline system ..................................... 10,500 7,717 8,612 9,629 8,782
EBITDA (d) .................................................... 145,517 136,391 133,888 110,236 118,774
Maintenance capital, net of amounts reimbursed to Williams
Energy Partners by affiliate ................................ 20,482 25,874 29,236 27,466 23,072
OPERATING STATISTICS:
Williams Pipe Line system:
Net transportation and capacity lease barrels
shipped (millions)........................................ 259.8 253.9 245.7 242.3 249.5
Transportation revenue per barrel shipped
(cents per barrel) ....................................... 90.8 89.1 91.4 87.9 81.1
Petroleum products terminals:
Marine terminal average storage capacity utilized per month
(million barrels) (e) ..................................... 15.7 14.7 10.1 N/A N/A
Marine terminal throughput (million barrels) (f) ............ 11.5 3.7 N/A N/A N/A
Inland terminal throughput (million barrels) ................ 56.7 56.1 58.1 26.8 21.3
Ammonia pipeline system:
Volume shipped (thousand tons) ............................ 763 713 795 896 893
</Table>
(a) Prior to our acquisition of Williams Pipe Line Company on April 11, 2002,
Williams Pipe Line Company was subject to income taxes. Prior to our
initial public offering on February 9, 2001, our petroleum products
terminals and ammonia pipeline system operations were also subject to
income tax. Following our initial public offering, the petroleum products
terminals and ammonia pipeline system were no longer subject to income
taxes as we are a partnership. Williams Pipe Line Company is no longer
subject to income taxes following its acquisition by us.
(b) At the time of our initial public offering, the affiliate note payable
associated with the petroleum products terminals operations was contributed
to us as a capital contribution by an affiliate of Williams. At the closing
of our acquisition of Williams Pipe Line Company, its affiliate note
payable was contributed to us as a capital contribution by an affiliate of
Williams.
(c) Cash distributions declared for 2001 include a pro-rated distribution for
the first quarter, which included the period from February 10, 2001 through
March 31, 2001. The cash distribution associated with the fourth quarter of
2001 was declared on January 22, 2002 and paid on February 14, 2002.
(d) The extraordinary expense in 1997, resulting from early extinguishment of
debt is not deducted from EBITDA.
(e) For the year ended December 31, 1999, represents the average storage
capacity utilized per month for the Gulf Coast marine terminal facilities
for the five months that we owned these assets in 1999. For the year ended
December 31, 2000, represents the average monthly storage capacity utilized
for the marine facilities (11.8 million barrels) and the average monthly
storage capacity utilized for the four months that we owned the New Haven,
Connecticut facility in 2000 (2.9 million barrels). For the year ended
December 31, 2001, represents the average monthly storage capacity utilized
for the marine facilities (12.7 million barrels) and the New Haven,
Connecticut facility (3.0 million barrels). All of the above amounts
exclude the Gibson, Louisiana facility.
(f) For the year ended December 31, 2000, represents four months of activity at
the New Haven, Connecticut facility, which was acquired in September 2000.
For the year ended December 31, 2001, represents a full year of activity
for the New Haven facility (9.3 million barrels) and two months of activity
at the Gibson, Louisiana facility (2.2 million barrels), which was acquired
on October 31, 2001.
2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of Williams GP LLC, General Partner of the Williams
Energy Partners L.P.
We have audited the accompanying consolidated balance sheets of Williams
Energy Partners L.P. as of December 31, 2001 and 2000, and the related
consolidated statements of income and partners' capital and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Williams Energy
Partners L.P. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
April 11, 2002
3
WILLIAMS ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Restated
Transportation and terminaling revenues:
Third party ..................................................................... $ 314,027 $ 294,617 $ 271,135
Affiliate ....................................................................... 6,867 23,504 15,972
Product sales revenues:
Third party ..................................................................... 40,302 15,849 1,607
Affiliate ....................................................................... 66,385 91,024 69,143
Affiliate construction and management fee revenues ................................. 1,018 1,852 17,875
--------- --------- ---------
Total revenues ............................................................... $ 448,599 $ 426,846 $ 375,732
Costs and expenses:
Operating ....................................................................... $ 160,880 $ 144,899 $ 121,599
Product purchases ............................................................... 95,268 94,141 59,230
Affiliate construction expenses ................................................. -- 1,025 15,464
Depreciation and amortization ................................................... 35,767 31,746 25,670
General and administrative ...................................................... 47,365 51,206 47,062
--------- --------- ---------
Total costs and expenses ..................................................... $ 339,280 $ 323,017 $ 269,025
--------- --------- ---------
Operating profit ................................................................... $ 109,319 $ 103,829 $ 106,707
Interest expense:
Affiliate interest expense ...................................................... 9,770 27,009 19,167
Other interest expense .......................................................... 5,089 -- --
Interest income .................................................................... (2,493) (1,680) (169)
Other income ....................................................................... (431) (816) (1,511)
--------- --------- ---------
Income before income taxes ......................................................... $ 97,384 $ 79,316 $ 89,220
Provision for income taxes ......................................................... 29,512 30,414 34,121
--------- --------- ---------
Net income ......................................................................... $ 67,872 $ 48,902 $ 55,099
========= ========= =========
Allocation of 2001 net income:
Portion applicable to the period January 1 through February 9, 2001 ............. $ 304
Portion applicable to partnership interests for the period after
February 9, 2001 ............................................................ 21,443
Portion applicable to Williams Pipe Line ........................................ 46,125
---------
Net income ................................................................... $ 67,872
=========
Portion of net income applicable to partnership interests .......................... $ 21,443
General partner's interest in income applicable to the period after
February 9, 2001 ................................................................ 226
---------
Limited partners' interest in income applicable to the period after
February 9, 2001................................................................. $ 21,217
=========
Basic and diluted net income per limited partner unit .............................. $ 1.87
=========
Weighted average number of units outstanding for the period after
February 9, 2001................................................................. 11,359
=========
</Table>
See accompanying notes.
4
WILLIAMS ENERGY PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
------------------------
2001 2000
---------- ----------
ASSETS Restated
Current assets:
Cash and cash equivalents ........................................................... $ 13,837 $ 10
Accounts receivable (less allowance for doubtful accounts - $510 in 2001
and $227 in 2000) ................................................................ 18,157 19,340
Other accounts receivable ........................................................... 10,754 19,657
Affiliate accounts receivable ....................................................... 6,386 22,144
Inventory ........................................................................... 21,057 8,283
Deferred income taxes - affiliate ................................................... 1,690 4,107
Other current assets ................................................................ 3,185 8,764
---------- ----------
Total current assets ............................................................. $ 75,066 $ 82,305
Property, plant and equipment, at cost ................................................. $1,338,393 $1,277,676
Less: accumulated depreciation ...................................................... 374,653 341,374
---------- ----------
Net property, plant and equipment ................................................ 63,740 $ 936,302
Deferred equity offering costs ......................................................... -- 2,539
Goodwill (less amortization of $145) ................................................... 22,282 --
Other intangibles (less amortization of $310) .......................................... 2,639 --
Long-term affiliate receivables ........................................................ 21,296 16,837
Long-term receivables .................................................................. 8,809 262
Other noncurrent assets ................................................................ 10,727 11,914
---------- ----------
Total assets ........................................................................ $1,104,559 $1,050,159
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable .................................................................... $ 12,636 $ 10,180
Affiliate accounts payable .......................................................... 10,157 8,485
Affiliate income taxes payable ...................................................... 8,544 5,465
Accrued affiliate payroll and benefits .............................................. 4,606 5,428
Accrued taxes other than income ..................................................... 9,948 10,308
Accrued interest payable ............................................................ 277 --
Accrued environmental liabilities ................................................... 8,650 8,131
Deferred revenue .................................................................... 5,103 4,722
Accrued product purchases ........................................................... 2,711 3,436
Accrued casualty losses ............................................................. 927 3,626
Other current liabilities ........................................................... 4,865 4,696
Acquisition payable ................................................................. 8,853 --
---------- ----------
Total current liabilities ........................................................ $ 77,277 $ 64,477
Long-term debt ......................................................................... 139,500 --
Long-term affiliate note payable ....................................................... 138,172 432,957
Long-term affiliate payable ............................................................ 1,262 --
Other deferred liabilities ............................................................. 1,127 1,230
Deferred income taxes - affiliate ...................................................... 147,029 156,984
Environmental liabilities .............................................................. 8,260 6,008
Minority interest ...................................................................... 2,250 --
Commitments and contingencies
Partners' capital:
Common unitholders (5,680 units outstanding at December 31, 2001) ................... 101,452 69,856
Subordinated unitholders (5,680 units outstanding at December 31, 2001) ............. 121,237 --
General partner ..................................................................... 366,993 318,647
---------- ----------
Total partners' capital ........................................................... 589,682 388,503
---------- ----------
Total liabilities and partners' capital ........................................ $1,104,559 $1,050,159
========== ==========
See accompanying notes.
5
WILLIAMS ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------- --------- ---------
Restated
Operating Activities:
Net income.................................................................... $ 67,872 $ 48,902 $ 55,099
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................... 35,767 31,746 25,670
Debt issuance costs amortization ........................................ 253 -- --
Minority interest expense ............................................... 229 -- --
Deferred compensation expense ........................................... 2,048 -- --
Deferred income taxes ................................................... 6,438 2,229 22,383
(Gain) loss on sale of assets ........................................... 249 -- (163)
Changes in components of operating assets and liabilities:
Accounts receivable and other accounts receivable ....................... 10,393 (9,726) (5,671)
Affiliate accounts receivable ........................................... 15,758 (1,943) 11,317
Inventories ............................................................. (12,919) 2,494 12,774
Accounts payable ........................................................ 2,456 (6,636) 5,271
Affiliate accounts payable .............................................. 1,175 (4,146) (1,166)
Affiliate income taxes payable .......................................... 3,079 2,570 (16,666)
Accrued affiliate payroll and benefits .................................. (822) (169) (3,370)
Accrued taxes other than income ......................................... (364) 1,756 (851)
Accrued interest payable ................................................ 277 -- --
Current and noncurrent environmental liabilities ........................ 2,669 4,511 1,631
Other current and noncurrent assets and liabilities ..................... 775 (16,532) (21,786)
--------- --------- ---------
Net cash provided by operating activities ............................ $ 135,333 $ 55,056 $ 84,472
Investing Activities:
Additions to property, plant & equipment ..................................... $ (38,093) $ (43,346) $ (44,491)
Purchases of businesses ...................................................... (49,409) (31,100) (223,300)
Advances on affiliate note receivable ........................................ -- -- (10,115)
--------- --------- ---------
Net cash used by investing activities ..................................... $ (87,502) $ (74,446) $(277,906)
Financing Activities:
Distributions paid ........................................................... $ (16,599) $ -- $ --
Borrowings under credit facility ............................................. 139,500 -- --
Capital contributions by affiliate ........................................... 1,792 -- --
Sale of Common Units to public (less underwriters' commissions and
payment of formation costs) ................................................ 89,362 -- --
Debt placement costs ......................................................... (909) -- --
Redemption of 600,000 Common Units from affiliate ............................ (12,060) -- --
Payments on affiliate note payable ........................................... (235,090) (12,679) (38,639)
Proceeds from affiliate note payable ......................................... -- 32,069 232,074
--------- --------- ---------
Net cash provided (used) by financing activities .......................... $ (34,004) $ 19,390 $ 193,435
--------- --------- ---------
Change in cash and cash equivalents ............................................. $ 13,827 $ -- $ 1
Cash and cash equivalents at beginning of period ................................ 10 10 9
--------- --------- ---------
Cash and cash equivalents at end of period ...................................... $ 13,837 $ 10 $ 10
========= ========= =========
Supplemental non-cash investing and financing transactions:
Contributions by affiliate of predecessor company deferred income tax liability $ 13,976 $ -- $ --
Contribution of long-term debt to partners' capital ........................... 59,695 -- --
Purchase of Aux Sable pipeline ................................................ 8,853 -- --
Deferred equity offering costs ................................................ -- 2,539 --
--------- --------- ---------
Total ....................................................................... $ 82,524 $ 2,539 $ --
========= ========= =========
See accompanying notes
6
WILLIAMS ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS, EXCEPT UNIT AMOUNTS)
<Table>
<Caption>
NUMBER OF LIMITED
PARTNER UNITS TOTAL
------------------------- GENERAL PARTNERS'
COMMON SUBORDINATED COMMON SUBORDINATED PARTNER CAPITAL
--------- ------------ --------- ------------ --------- -----------
Balances as previously
reported - Jan. 1,
1999 ................... -- -- $ 60,085 $ -- $ -- $ 60,085
Adjustment for Williams
Pipe Line
transaction ............ -- -- -- -- 224,417 224,417
--------- -------- --------- --------- --------- ---------
Balances as restated
Jan. 1, 1999............ -- -- 60,085 -- 224,417 284,502
Net income ............... -- -- 6,766 -- 48,333 55,099
--------- --------- --------- --------- --------- ---------
Balance-Dec. 31, 1999 .... -- -- 66,851 -- 272,750 339,601
Net income ............... -- -- 3,005 -- 45,897 48,902
--------- --------- --------- --------- --------- ---------
Balance-Dec. 31, 2000 .... -- -- 69,856 -- 318,647 388,503
Issuance of units to
public ................. 4,600,000 -- 89,362 -- -- 89,362
Contribution of net
assets of predecessor
companies .............. 1,679,694 5,679,694 (48,484) 118,762 2,326 72,604
Redemption of
common units ........... (600,000) -- (12,060) -- -- (12,060)
Distributions ............ -- -- (8,134) (8,134) (331) (16,599)
Portion of net income
applicable to period
Jan. 1, 2001 through
Feb. 9, 2001 ........... -- -- 304 -- -- 304
Portion of net income
applicable to
partnership interests .. -- -- 10,608 10,609 46,351 67,568
--------- --------- --------- --------- --------- ---------
Balance-Dec. 31, 2001 .... 5,679,694 5,679,694 $ 101,452 $ 121,237 $ 366,993 $ 589,682
========= ========= ========= ========= ========= =========
See accompanying notes.
7
WILLIAMS ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRESENTATION
Williams Energy Partners L.P. (the "Partnership") is a Delaware limited
partnership that was formed in August 2000, to acquire, own and operate: (a)
selected petroleum products terminals owned by Williams Energy Ventures, Inc.
("WEV"), and (b) an ammonia pipeline system, Williams Ammonia Pipeline Inc.,
owned by Williams Natural Gas Liquids, Inc. ("WNGL"). Prior to the closing of
the Partnership's initial public offering in February 2001, WEV was owned by
Williams Energy Services, LLC ("WES"). Both WES and WNGL are wholly owned
subsidiaries of The Williams Companies, Inc. ("Williams"). Williams GP LLC
("General Partner"), a Delaware limited liability company, wholly owned by
Williams, was also formed in August 2000, to serve as general partner for the
Partnership.
On February 9, 2001, the Partnership completed its initial public offering
of 4,000,000 common units representing limited partner interests in the
Partnership at a price of $21.50 per unit. The proceeds of $86.0 million were
used to pay underwriting discounts and commissions of $5.6 million and legal,
professional fees and costs associated with the initial public offering of $3.1
million, with the remainder used to reduce affiliate note balances with
Williams.
As part of the initial public offering, the underwriters exercised their
over-allotment option and purchased 600,000 common units, also at a price of
$21.50 per unit. The net proceeds of $12.1 million, after underwriting discounts
and commissions of $0.8 million, from this over-allotment option were used to
redeem 600,000 of the common units held by WES to reimburse it for capital
expenditures related to the Partnership's assets. The Partnership maintained the
historical costs of the net assets in connection with the initial public
offering. Following the exercise of the underwriters over-allotment option, 40
percent of the Partnership is owned by the public and 60 percent, including the
General Partner's ownership, is owned by affiliates of the Partnership. The
limited partners' liability in the Partnership is generally limited to their
investment.
On February 26, 2002, the Partnership formed a wholly owned Delaware
corporation named Williams GP Inc. ("GP Inc.") The Partnership then contributed
a 0.001 percent limited partner interest in Williams OLP, L.P. ("OLP") to GP
Inc. as a capital contribution. The OLP agreement was then amended to convert GP
Inc.'s OLP limited partner interest to a general partner interest and to convert
the General Partner's existing interest to a limited partner interest. The
General Partner then contributed its 1.0101 percent OLP limited partner interest
to the Partnership in exchange for an additional 1.0 percent general partner
interest in the Partnership.
On April 11, 2002, the Partnership acquired all of the membership
interests of Williams Pipe Line Company, LLC ("Williams Pipe Line") for
approximately $1.0 billion. Because Williams Pipe Line was an affiliate of the
Partnership at the time of the acquisition, the transaction was between entities
under common control and, as such, has been accounted for similarly to a pooling
of interest. Accordingly, the consolidated financial statements and notes of the
Partnership have been restated to reflect the historical results of operations,
financial position and cash flows throughout the periods presented. Williams
Pipe Line's operations will be reported as a separate operating segment of the
Partnership. The beginning equity balance of $224,417 and net income in the
amount of $48,333, $45,897 and $46,125 for the years ended December 31, 1999,
2000 and 2001, respectively, related to Williams Pipe Line have been included in
General Partner's equity for all periods presented.
The historical results for Williams Pipe Line include income and expenses
and assets and liabilities that were conveyed to and assumed by an affiliate of
Williams Pipe Line prior to its acquisition by the Partnership. The assets
principally include Williams Pipe Line's interest in and agreements related to
Longhorn Partners Pipeline ("Longhorn"), a discontinued refinery site at
Augusta, Kansas and the ATLAS 2000 software system. The liabilities principally
include the environmental liabilities associated with the discontinued refinery
site in Augusta, Kansas and the current and deferred income taxes and affiliate
note payable. The current and deferred income taxes and the affiliate note
payable were contributed to the Partnership in form of a capital contribution by
an affiliate of Williams thereby increasing partnership capital by approximately
$200 million. As a result, the income and expenses associated with Longhorn and
Williams Pipe Line's blending operations will not be included in the future
financial results of the Partnership. In addition, general and administrative
expenses related to the Williams Pipe Line system that the Partnership will
reimburse to its General Partner will be limited to $30.0 million per year,
subject to an escalation provision.
2. DESCRIPTION OF BUSINESSES
The Partnership owns and operates a petroleum products pipeline system,
petroleum products terminals and an interstate ammonia pipeline system.
8
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
WILLIAMS PIPE LINE SYSTEM
Williams Pipe Line is a petroleum products pipeline system that covers an
11-state area extending from Oklahoma through the Midwest to North Dakota,
Minnesota and Illinois. The system includes a 6,700-mile pipeline and 39
terminals that provide transportation, storage and distribution services. The
products transported on the Williams Pipe Line system are largely refined
petroleum products, including gasoline, diesel fuels, LPGs and aviation fuels.
Product originates on the system from direct connections to refineries and
interconnects with other interstate pipelines for transportation and ultimate
distribution to retail gasoline stations, truck stops, railroads, airlines and
other end-users.
PETROLEUM PRODUCTS TERMINALS
The Partnership has 30 petroleum products terminals that are not part of
the Williams Pipe Line system. Most of these terminals are strategically located
along or near third party pipelines or petroleum refineries. The petroleum
products terminals provide a variety of services such as distribution, storage,
blending, inventory management and additive injection to a diverse customer
group including governmental customers and end-users in the downstream refining,
retail, commercial trading, industrial and petrochemical industries. Products
stored in and distributed through the petroleum products terminal network
include refined petroleum products, blendstocks and heavy oils and feedstocks.
The terminal network consists of marine terminal facilities and inland
terminals. The inland terminals are located primarily in the southeastern United
States. Four marine terminal facilities are located along the Gulf Coast and one
marine terminal facility is located in Connecticut near the New York harbor.
AMMONIA PIPELINE SYSTEM
The ammonia pipeline system consists of an ammonia pipeline and six
company-owned terminals. Shipments on the pipeline primarily originate from
ammonia production plants located in Borger, Texas and Enid and Verdigris,
Oklahoma for transport to terminals throughout the Midwest for ultimate
distribution to end-users in Iowa, Kansas, Minnesota, Missouri, Nebraska,
Oklahoma and South Dakota. The ammonia transported through the system is used
primarily as nitrogen fertilizer. Approximately 94 percent of the ammonia
pipeline system's revenues are generated from transportation tariffs received
from three customers, who are obligated under "ship or pay" contracts to ship an
aggregate minimum of 700,000 tons per year but have historically shipped an
amount in excess of the required minimum. The current ammonia transportation
contracts extend through June 2005. The tariffs charged by the interstate
ammonia pipeline are regulated by the Surface Transportation Board of the U.S.
Department of Transportation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Partnership, Williams Pipe Line and their subsidiaries. The petroleum products
terminal operations consist of 30 petroleum products terminal facilities and
associated storage, located across 12 states primarily in the southeastern and
Gulf Coast areas of the United States. For 11 of these petroleum products
terminals, the Partnership owns varying undivided ownership interests. From
inception, ownership of these assets has been structured as an ownership of an
undivided interest in assets, not as an ownership interest in a partnership,
limited liability company, joint venture or other form of entity. Marketing and
invoicing are controlled separately by each owner, and each owner is responsible
for any loss, damage or injury that may occur to their own customers. As a
result, the Partnership applies proportionate consolidation for its interests in
these assets.
9
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
REGULATORY REPORTING
Williams Pipe Line is regulated by the Federal Energy Regulatory
Commission ("FERC"), which prescribes certain accounting principles and
practices for the annual Form 6 Report filed with the FERC that differ from
those used in these financial statements. Such differences relate primarily to
capitalization of interest, accounting for subsidiaries as equity investments
and other adjustments and are not significant to the financial statements.
CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits and other
marketable securities with maturities of three months or less when acquired.
INVENTORY VALUATION
Inventory is comprised primarily of refined products, natural gas
liquids, and materials and supplies. Refined products and natural gas liquids
inventories are stated at the lower of average cost or market. The average cost
method is used for materials and supplies.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to operations in the period incurred.
Depreciation of property, plant and equipment is provided on the straight-line
basis. For petroleum products terminal and ammonia pipeline system assets, the
costs of property, plant and equipment sold or retired and the related
accumulated depreciation is removed from the accounts, and any associated gains
or losses are recorded in the income statement, in the period of sale or
disposition. For Williams Pipe Line, gains or losses from the ordinary sale or
retirement of property, plant and equipment are credited or charged to
accumulated depreciation under FERC accounting guidelines.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, which represents the excess of cost over fair value of assets
of businesses acquired, was amortized on a straight-line basis over a period of
20 years for those assets acquired prior to July 1, 2001. Beginning on January
1, 2002, goodwill is no longer amortized but must be evaluated periodically for
impairment. Other intangible assets are amortized on a straight-line basis over
a period of up to 25 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets of identifiable business
activities for impairment when events or changes in circumstances indicate, in
management's judgment, that the carrying value of such assets may not be
recoverable. The determination of whether an impairment has occurred is based on
management's estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets. If an impairment has
occurred, the amount of the impairment recognized is determined by estimating
the fair value for the assets and recording a provision for loss if the carrying
value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
10
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Judgments and assumptions are inherent in management's estimate of
undiscounted future cash flows used to determine recoverability of an asset and
the estimate of an asset's fair value used to calculate the amount of impairment
to recognize. The use of alternate judgments and/or assumptions could result in
the recognition of different levels of impairment charges in the financial
statements.
CAPITALIZATION OF INTEREST
Interest is capitalized based on the approximate average interest rate on
long-term debt. For FERC reporting, capitalization of interest is allowed only
when specific borrowing is directly associated with a capital project.
REVENUE RECOGNITION
Williams Pipe Line transportation revenues are recognized when shipments
are complete and estimated pipeline revenues are deferred for shipments in
transit. Ammonia pipeline revenues are recognized when shipments are initiated.
Injection service fees associated with customer proprietary additives are
recognized upon injection to the customer's product, which occurs at the time
the product is delivered. Leased storage, terminalling and other related
revenues are recognized upon provision of contract services. Other revenue,
principally blending and fractionation revenue, is recognized upon sale of the
product.
INCOME TAXES
Prior to February 9, 2001, the Partnership's operations were included in
Williams' consolidated federal income tax return. The Partnership's income tax
provisions were computed as though separate returns were filed. Deferred income
taxes were computed using the liability method and were provided on all
temporary differences between the financial basis and tax basis of the
Partnership's assets and liabilities.
Effective with the closing of the Partnership's initial public offering on
February 9, 2001 (See Note 1), the Partnership is not a taxable entity for
federal and state income tax purposes. Accordingly, for the petroleum products
and ammonia pipeline system operations after the initial public offering, no
recognition has been given to income taxes for financial reporting purposes. The
tax on Partnership net income is borne by the individual partners through the
allocation of taxable income. Net income for financial statement purposes may
differ significantly from taxable income of unitholders as a result of
differences between the tax basis and financial reporting basis of assets and
liabilities and the taxable income allocation requirements under the
Partnership's partnership agreement. The aggregate difference in the basis of
the Partnership's net assets for financial and tax reporting purposes cannot be
readily determined because information regarding each partner's tax attributes
in the Partnership is not available to the Partnership.
Williams Pipe Line was included in Williams' consolidated federal income
tax return. Deferred income taxes were computed using the liability method and
were provided on all temporary differences between the financial basis and the
tax basis of Williams Pipe Line's assets and liabilities. Williams Pipe Line's
federal provision was computed at existing statutory rates as though a separate
federal tax return were filed. Williams Pipe Line paid its tax liability to
Williams as per its tax sharing agreement with Williams. No recognition will be
given to income taxes associated with Williams Pipe Line for financial reporting
purposes for periods subsequent to its acquisition by the Partnership.
EMPLOYEE STOCK-BASED AWARDS
Williams' employee stock-based awards are accounted for under provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Williams' fixed plan common stock
options do not result in compensation expense because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant.
11
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The General Partner has issued incentive awards of restrictive units to
Williams employees assigned to the Partnership. These awards are also accounted
for under provisions of Accounting Principles Board Opinion No. 25. Since the
exercise price of the unit awards is less than the market price of the
underlying units on the date of grant, compensation expense is recognized by the
General Partner and directly allocated to the Partnership.
ENVIRONMENTAL
Environmental expenditures that relate to current or future revenues are
expensed or capitalized based upon the nature of the expenditures. Expenditures
that relate to an existing condition caused by past operations that do not
contribute to current or future revenue generation are expensed. Environmental
liabilities are recorded independently of any potential claim for recovery.
Receivables are recognized in cases where the realization of reimbursements of
remediation costs are considered probable. Accruals related to environmental
matters are generally determined based on site-specific plans for remediation,
taking into account prior remediation experience of the Partnership and
Williams.
EARNINGS PER UNIT
Basic earnings per unit are based on the average number of common and
subordinated units outstanding. Diluted earnings per unit include any dilutive
effect of restricted unit grants.
RECENT ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and amends Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The Statement retains the basic framework of SFAS No.
121, resolves certain implementation issues of SFAS No. 121, extends
applicability to discontinued operations and broadens the presentation of
discontinued operations to include a component of an entity. The Statement is to
be applied prospectively and is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Statement is not expected to
have any initial impact on the Partnership's results of operations or financial
position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs and amends FASB Statement No.
19, "Financial Accounting and Reporting by Oil and Gas Producing Companies." The
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. The
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Partnership plans to adopt this standard in
January 2003 and is evaluating its effect on the Partnership's results of
operations and financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes
accounting and reporting standards for business combinations and requires all
business combinations to be accounted for by the purchase method. The Statement
is effective for all business combinations for which the date of acquisition is
July 1, 2001 or later. SFAS No. 142 addresses accounting and reporting standards
for goodwill and other intangible assets. Under this Statement, goodwill and
intangible assets with indefinite useful lives will no longer be amortized, but
will be tested annually for impairment. The Statement becomes effective for all
fiscal years beginning after December 15, 2001. The Partnership will apply the
new rules on accounting for goodwill and other intangible assets beginning
January 1, 2002. Based on the amount of goodwill recorded as of December 31,
2001 application of the non-amortization provision of the Statement will result
in a decrease to amortization expense in future years of approximately $1.1
million.
12
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This was followed in June 2000 by the
issuance of SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," which amends SFAS No. 133. SFAS No. 133 and No. 138
establish accounting and reporting standards for derivative financial
instruments. The standards require that all derivative financial instruments be
recorded on the balance sheet at their fair value. Changes in fair value of
derivatives will be recorded each period in earnings if the derivative is not a
hedge. If a derivative qualifies for special hedge accounting, changes in the
fair value of the derivative will either be recognized in earnings as an offset
against the change in fair value of the hedged assets, liabilities or firm
commitments also recognized in earnings, or the changes in fair value will be
deferred on the balance sheet until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
recognized immediately in earnings. These standards were adopted on January 1,
2001. There was no impact to the Partnership's financial position, results of
operations or cash flows from adopting these standards.
The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Statement provides
guidance for determining whether a transfer of financial assets should be
accounted for as a sale or a secured borrowing and whether a liability has been
extinguished. The Statement is effective for recognition and reclassification of
collateral and for disclosures ending after December 15, 2000. The Statement
became effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The initial
application of SFAS No. 140 had no impact on the Partnership's results of
operations and financial position.
4. ACQUISITIONS AND DIVESTITURE
ACQUISITIONS
WILLIAMS PIPE LINE
On April 11, 2002, the Partnership acquired all of the membership
interests of Williams Pipe Line from WES for approximately $1.0 billion. The
Partnership remitted to WES consideration in the amount of $674.4 million and
WES retained $15.0 million of Williams Pipe Line's receivables. The $310.6
million balance of the consideration consisted of $304.4 million of Class B
units representing limited partner interests in the Partnership issued to the
General Partner and affiliates of WES and Williams' contribution to the
Partnership by the General Partner of $6.2 million to maintain its 2 percent
general partner interest. The Partnership borrowed $700.0 million from a group
of financial institutions, paid WES $674.4 million and used $10.6 million of the
funds to pay debt fees and other transaction costs. The Partnership retained
$15.0 million of the funds to meet working capital needs.
Williams Pipe Line primarily provides petroleum products transportation,
storage and distribution services and will be reported as a separate business
segment of the Partnership. Because of the Partnership's affiliate relationship
with Williams Pipe Line, the transaction was between entities under common
control and, as such, has been accounted for similarly to a pooling of interest.
Accordingly, the consolidated financial statements and notes of the Partnership
have been restated to reflect the historical results of operations, financial
position and cash flows as if the companies had been combined throughout the
periods presented.
The results of operations for the separate companies and the combined
amounts presented in the Consolidated Income Statement follow:
13
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
----------- ---------- ---------
Revenues:
Williams Energy Partners .......... $ 86,054 $ 72,492 $ 44,388
Williams Pipe Line .................. 362,545 354,354 331,344
----------- ---------- ---------
Combined $ 448,599 $ 426,846 375,732
=========== ========== =========
Net Income:
Williams Energy Partners ............ $ 21,747 $ 3,005 $ 6,766
Williams Pipe Line .................. 46,125 45,897 48,333
----------- ---------- ---------
Combined $ 67,872 $ 48,902 $ 55,099
=========== ========== =========
OTHER ACQUISITIONS
Petroleum products terminal facilities and partial ownership interests in
several petroleum products terminals were acquired for cash during the periods
presented and are described below. All acquisitions, except the Aux Sable
transaction, were accounted for as purchases of businesses and the results of
operations of the acquired petroleum products terminals are included with the
combined results of operations from their acquisition dates.
On December 31, 2001, the Partnership purchased an 8.5-mile, 8-inch
natural gas liquids pipeline in northeastern Illinois from Aux Sable Liquid
Products L.P. ("Aux Sable") for $8.9 million. The Partnership then entered into
a long-term lease arrangement under which Aux Sable is the sole lessee of these
assets. The Partnership has accounted for this transaction as a capital lease.
The lease expires in December 2016 and has a purchase option after the first
year. The minimum lease payments to be made by Aux Sable are $19.2 million in
total and $1.3 million per year over each of the next five years. Aux Sable has
the right to re-acquire the pipeline at the end of the lease for a de minimis
amount. The fair value of the lease at December 31, 2001, approximates its
carrying value.
In October 2001, the Partnership acquired the crude oil storage and
distribution assets of Geonet Gathering, Inc. ("Geonet") located in Gibson,
Louisiana. The Partnership acquired these assets with the intent to use the
facility as a crude storage and distribution facility with an affiliate company
as its primary customer. The purchase price was approximately $21.1 million,
consisting of $20.3 million in cash and $0.9 million in assumed liabilities. The
purchase price and allocation to assets acquired and liabilities assumed was as
follows (in thousands):
14
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
Purchase price:
Cash paid, including transaction costs ............... $20,261
Liabilities assumed .................................. 856
-------
Total purchase price ................................. $21,117
=======
Allocation of purchase price:
Current assets ....................................... $ 62
Property, plant and equipment ........................ 4,607
Goodwill ............................................. 13,719
Intangible assets .................................... 2,729
-------
Total allocation...................................... $21,117
=======
</Table>
Factors contributing to the recognition of goodwill are the market in
which the facility is located and the opportunity to enter into a throughput
agreement with an affiliate company, combined with the affiliate company's
ability to trade around those assets. Of the amount allocated to intangible
assets, $2.0 million represents the value of the leases associated with this
facility, which have amortization periods of up to 25 years. The remaining $0.7
million allocated to intangible assets represents covenants not-to-compete and
has an amortization period of five years. The total weighted average
amortization period of intangible assets is approximately 16 years. Of the
consideration paid for the facility, $1.0 million is held in escrow, pending
final evaluation of necessary repairs by the Partnership.
In June 2001, the Partnership purchased two petroleum products terminals
located in Little Rock, Arkansas from TransMontaigne, Inc. ("TransMontaigne") at
a cost of $29.1 million, of which $20.2 million was allocated to property, plant
and equipment and $8.9 million to goodwill and other intangibles. Goodwill
resulting from this acquisition is being amortized over a 20-year period. The
final purchase price allocation has not been determined pending assessment of
the environmental liabilities assumed.
In April 2001, the Partnership purchased a 6-mile pipeline for $0.3
million from Equilon Pipeline Company LLC, enabling connection of its existing
Dallas, Texas area petroleum storage and distribution facility to Dallas Love
Field. The acquisition was made in conjunction with an agreement for the
Partnership to provide jet fuel delivery services into Dallas Love Field for
Southwest Airlines. In December 2001, the Partnership completed construction of
additional jet fuel storage tanks at its distribution facility in Dallas to
support delivery of jet fuel to the airport. Total cost of the pipeline and
construction of the additional jet fuel storage tanks totaled $5.5 million.
In September 2000, a northeast petroleum products terminal facility in New
Haven, Connecticut was acquired from Wyatt Energy, Incorporated ("Wyatt") and
its affiliates for approximately $30.8 million.
In March 2000, a 50 percent ownership interest in CITGO Petroleum
Corporation's petroleum products terminal located in Southlake, Texas was
acquired for approximately $0.3 million.
In August 1999, three storage and distribution petroleum products
terminals and Terminal Pipeline Company ("TPC"), a wholly owned subsidiary of
Amerada Hess Corporation ("Hess"), were acquired from Hess for approximately
$212 million. The petroleum products terminals are located in Galena Park and
Corpus Christi, Texas and Marrero, Louisiana. TPC owned a common carrier
pipeline that began at a connection east of the Houston Ship Channel and
terminated at the Galena Park terminal. The pipeline acquired from Hess was
converted to private pipeline status during 2001.
In February 1999, an additional 10 percent ownership interest in eight
petroleum products terminals was acquired from Murphy Oil USA, Inc. for
approximately $3.4 million, which increased the Partnership's ownership interest
to 78.9 percent from 68.9 percent. The petroleum products terminals, which are
now operated by the Partnership, are located in Georgia, North Carolina, South
Carolina, Tennessee and Virginia.
15
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In January 1999, 11 petroleum products terminals owned by Amoco Oil
Company ("Amoco") were acquired. The petroleum products terminals, located in
Alabama, Florida, Mississippi, North Carolina, Ohio, South Carolina and
Tennessee, were acquired for approximately $6.9 million. In addition, Amoco's 60
percent interest in a twelfth petroleum products terminal, located in
Greensboro, North Carolina, was acquired for approximately $1.0 million.
The following summarized unaudited pro forma financial information for the
years ended December 31, 2001 and 2000, reflects the historical results of
Williams Pipe Line on a consolidated basis and assumes each other acquisition
had occurred on January 1 of the year immediately preceding the year of the
acquisition (in thousands):
<Table>
<Caption>
2001 2000
--------- ---------
Revenues:
Williams Energy Partners ...................... $ 448,599 $ 426,846
Acquired businesses ........................... 5,552 14,354
--------- ---------
Combined .................................... $ 454,151 $ 441,200
========= =========
Net income:
Williams Energy Partners ...................... $ 67,872 $ 48,902
Acquired businesses ........................... 659 1,083
--------- ---------
Combined .................................... $ 68,531 $ 49,985
========= =========
Basic net income per limited partner unit ........ $ 1.95
=========
The pro forma results include operating results prior to the acquisitions
and adjustments to interest expense, depreciation expense and income taxes. The
pro forma consolidated results do not purport to be indicative of results that
would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of results that will be obtained
in the future.
Except where stated above, the purchase prices of the above acquisitions
were allocated to various categories of property, plant and equipment and
liabilities based upon the fair value of the assets acquired and liabilities
assumed.
DIVESTITURE
In October 2001, the Meridian, Mississippi terminal, previously reported
with the petroleum products terminals business segment, was sold for $1.7
million. The Partnership recognized a gain of $1.1 million associated with the
sale of the terminal, which is included in other income.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<Table>
<Caption>
DECEMBER 31, ESTIMATED
---------------------------- DEPRECIABLE
2001 2000 LIVES
----------- ----------- -----------
Construction work-in-progress ........ $ 19,193 $ 20,084
Land and right-of-way ................ 30,033 29,848
Carrier property ..................... 905,144 882,050 6 - 59 years
Buildings ............................ 8,957 8,533 30 years
Storage tanks ........................ 169,066 154,580 30 years
Pipeline and station equipment ....... 58,157 47,982 30 - 67 years
Processing equipment ................. 124,945 113,335 30 years
Other ................................ 22,898 21,264 10 - 30 years
----------- -----------
Total ........................... $ 1,338,393 $ 1,277,676
=========== ===========
16
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Carrier property is defined as pipeline assets regulated by the FERC.
Other includes $18.6 million of capitalized interest at both December 31, 2001
and 2000. Depreciation expense for the years ended December 31, 2001, 2000 and
1999 was $35.2 million, $31.7 million and $25.7 million, respectively.
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Williams Energy Marketing & Trading, an affiliate customer, and Customer A
are major customers of the Partnership. No other customer accounted for more
than 10 percent of total revenues during 2001, 2000 or 1999. Williams Energy
Marketing & Trading is a customer of the petroleum products terminals segment
and the Williams Pipe Line system segment. The percentage of revenues derived by
customer is provided below:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
------ ------ ------
Customer A ........................................... 10% 10% 10%
Williams Energy Marketing & Trading .................. 18% 26% 22%
----- ----- -----
Total............................................ 28% 36% 32%
===== ===== =====
The accounts receivable balance of Williams Energy Marketing & Trading
accounted for 9 percent and 33 percent of total accounts receivable, including
affiliate receivables at December 31, 2001 and 2000, respectively.
Williams Pipe Line transports refined petroleum products for refiners
and marketers in the petroleum industry. The major concentration of Williams
Pipe Line's customers is located in the central United States. A prepayment
process authorized by tariffs filed with the FERC is employed for all petroleum
products shippers on Williams Pipe Line's system. Due to the prepayment process
employed, credit losses to shippers have been limited. Sales to petroleum
products terminal and ammonia pipeline customers are generally unsecured and the
financial condition and creditworthiness of customers are routinely evaluated.
The Partnership has the ability with many of its terminalling contracts to sell
stored customer products to recover unpaid receivable balances, if necessary.
Any issues impacting the petroleum refining and marketing and anhydrous ammonia
industries could impact the Partnership's overall exposure to credit risk.
Williams Pipe Line's labor force of 601 employees is concentrated in the central
United States. At December 31, 2001, thirty-eight percent of the employees were
represented by a union and covered by collective bargaining agreements that
expired in February 2002. Williams Pipe Line's union employees ratified a new
four-year collective bargaining agreement with WES in March 2002. The petroleum
products terminals operation's labor force of 195 people are concentrated in the
southeastern and Gulf Coast regions of the United States. Other than at the
Galena Park, Texas marine terminal facility, none of the terminal operations
employees are represented by labor unions. The employees at the Partnership's
Galena Park marine terminal facility are currently represented by a union, but
have indicated their unanimous desire to terminate their union affiliation.
Nevertheless, the National Labor Relations Board has ordered the Partnership to
bargain with the union as the exclusive collective bargaining representative of
the employees at the facility. The Partnership is appealing this decision. If
the Partnership's appeal is unsuccessful, the Partnership will bargain with the
union as ordered by the National Labor Relations Board.
Demand for nitrogen fertilizer has typically followed a combination of
weather patterns and growth in population, acres planted and fertilizer
application rates. Because natural gas is the primary feedstock for the
production of ammonia, the profitability of the Partnership's customers is
impacted by natural gas prices. To the extent they are unable to pass on higher
costs to their customers, they may reduce shipments through the pipeline.
17
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. EMPLOYEE BENEFIT PLANS
All employees dedicated to, or otherwise supporting, the Partnership are
employees of Williams. Williams Pipe Line maintains a separate non-contributory
defined-benefit pension plan, which covers union employees (union plan).
Substantially all remaining employees are covered by Williams' noncontributory
defined benefit pension plans and health care plan that provides postretirement
medical benefits to certain retired employees. Contributions for pension and
postretirement medical benefits related to the Partnership's participation in
the Williams' plans were $1.5 million, $1.2 million and $1.7 million in 2001,
2000 and 1999, respectively.
The following table presents the changes in benefit obligations and plan
assets for pension benefits for the union plan for the years indicated. It also
presents a reconciliation of the funded status of these benefits to the amount
recognized in the accompanying balance sheet at December 31 of each year
indicated (in thousands):
<Table>
<Caption>
2001 2000
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ...... $ 19,021 $ 17,125
Service cost ................................. 889 688
Interest cost ................................ 1,490 1,340
Actuarial loss ............................... 1,279 1,351
Benefits paid ................................ (1,082) (1,483)
-------- --------
Benefit obligation at end of year ............ $ 21,597 $ 19,021
Change in plan assets:
Fair value of plan assets at beginning of year $ 21,422 $ 23,341
Loss on plan assets .......................... (1,640) (436)
Benefits paid ................................ (1,082) (1,483)
-------- --------
Fair value of plan assets at end of year ..... $ 18,700 $ 21,422
-------- --------
Funded status .................................... $ (2,897) $ 2,401
Unrecognized net actuarial loss .................. 5,399 298
Unrecognized prior service cost .................. 420 473
Unrecognized transition asset .................... -- (126)
-------- --------
Prepaid benefit cost ............................. $ 2,922 $ 3,046
======== ========
Net pension benefit cost for the union plan consists of the following (in
thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Components of net periodic pension expense:
Service cost ............................ $ 889 $ 688 $ 801
Interest cost ........................... 1,490 1,340 1,346
Expected return on plan assets .......... (2,182) (2,075) (1,903)
Amortization of transition asset ........ (126) (135) (135)
Amortization of prior service cost ...... 53 53 53
Recognized net actuarial loss ........... -- -- 88
-------- -------- --------
Net periodic pension expense (income) ... $ 124 $ (129) $ 250
======== ======== ========
</Table>
2001 2000
-------- --------
Discount rate................................ 7.50% 7.50%
Expected return on plan assets .............. 10.00% 10.00%
Rate of compensation increase ............... 5.00% 5.00%
</Table>
Williams maintains various defined contribution plans in which employees
supporting the Partnership are included. The Partnership's costs related to
these plans were $2.4 million, $2.0 million and $1.8 million in 2001, 2000 and
1999, respectively.
18
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Partnership and Williams Pipe Line have entered into agreements with various
Williams subsidiaries. Agreements with Williams Energy Marketing & Trading
provide for sales of blended gasoline processed by Williams Pipe Line and sales
of pipeline inventory overages, as well as lease storage capacity. The
Partnership has several agreements with Williams Energy Marketing & Trading,
which provide for: (i) the access to and utilization of the inland terminals,
(ii) to provide approximately 2.5 million barrels of storage and other ancillary
services at the Partnership's marine terminal facilities and (iii) capacity
utilization rights to substantially all of the capacity of the Gibson, Louisiana
marine terminal facility. Williams Pipe Line has entered into agreements with
Mid-America Pipeline and Williams Bio Energy, both of which are affiliates of
Williams, to provide tank storage and pipeline system storage, respectively.
Historically, Williams Pipe Line also has been a party to an agreement
with Williams Refining & Marketing for sales of blended gasoline. (See Note 1 -
for more information about income and expenses associated with Williams Pipe
Line operations that will not be conducted by the Partnership). Also, both
Williams Energy Marketing & Trading and Williams Refining & Marketing ship
product on the Williams Pipe Line system. Additionally, the Partnership has
agreements with Williams Refining & Marketing for the access and utilization of
the Partnership's inland terminal facilities. The following are revenues from
various Williams subsidiaries (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
-------- --------- --------
Williams Energy Marketing & Trading ......... $ 81,999 $ 111,847 $ 81,481
Williams Refining & Marketing ............... 6,575 -- --
Williams Bio Energy ......................... 3,499 2,379 2,857
Mid-America Pipeline ........................ 285 282 282
Other ....................................... 894 20 495
-------- --------- --------
Total ................................... $ 93,252 $ 114,528 $ 85,115
======== ========= ========
Williams Pipe Line has various other transactions with Williams and its
subsidiaries in the ordinary course of business. Williams Pipe Line has also
entered into agreements with Williams Energy Marketing & Trading to purchase
product for blending activity, transmix for fractionation activity and product
to settle shortages. Mid-America Pipeline also leases storage space to Williams
Pipe Line. The following are costs and expenses from various affiliate companies
to Williams Pipe Line and the Partnership (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
WES - directly allocable expenses ............................... $ 18,970 $ 27,303 $ 25,253
Williams - allocated general corporate expenses ................. 18,123 15,380 5,045
Williams Energy Marketing & Trading - product purchases ......... 80,959 47,466 25,276
Mid-America Pipeline - operating and maintenance ................ 2,730 2,060 1,421
</Table>
The above costs are reflected in the cost and expenses in the accompanying
consolidated statements of income. In management's estimation the direct and
allocated expenses represent amounts that would have been incurred on a
stand-alone basis.
In addition, Williams allocates interest expense charges to its affiliates
based on their inter-company debt balances (see note 10). The Partnership
entities also participate in employee benefit plans and long-term incentive
plans sponsored by Williams (see notes 7 and 11).
Williams allocates both direct and indirect general and administrative
expenses to its subsidiaries. Direct expenses allocated by Williams are
primarily salaries and benefits of employees and officers associated with the
business activities of the subsidiary. Indirect expenses include legal,
accounting, treasury, engineering, information technology and other corporate
services. Williams allocates indirect expenses to its subsidiaries, including
the general partner, based on a three-factor formula that considers operating
margins, payroll costs and property, plant
19
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and a portion of the equipment. The Partnership reimburses the General Partner
and its affiliates for direct and indirect expenses incurred by or allocated to
them on the Partnership's behalf.
In connection with its initial public offering, and with respect solely to the
petroleum products terminal and ammonia pipeline assets held at the time of that
offering, the Partnership and our General Partner agreed that the general and
administrative expenses to be reimbursed to the General Partner by the
Partnership would not exceed $6.0 million for 2001, excluding expenses
associated with the Partnership's long-term incentive plan, regardless of the
amount of the direct and indirect general and administrative expenses actually
incurred by or allocated to the General Partner. The reimbursement limitation
will remain in place through 2011 and may increase by no more than the greater
of 7.0 percent per year or the percentage increase in the consumer price index
for that year. If the Partnership makes an acquisition, general and
administrative expenses may also increase by the amount of these expenses
included in the valuation of the business acquired. As a result of the
acquisitions made during 2001, the annual amount of general and administrative
expense reimbursement limitation increased to $6.3 million, excluding expenses
associated with long-term incentive plan. Based on the 7.0 percent escalation,
the Partnership's maximum reimbursement obligation for general and
administrative expenses in 2002, for the petroleum products terminals and
ammonia pipeline system operations, is $6.7 million before long-term incentive
plan charges and adjustments for acquisitions.
As a result of the acquisition of Williams Pipe Line, general and
administrative expenses that had previously been incurred by or allocated to
Williams Pipe Line will be charged to the General Partner. In connection with
the acquisition, the Partnership and the General Partner agreed that the general
and administrative expenses to be reimbursed to the General Partner by the
Partnership for charges related to the Williams Pipe Line system would be $30.0
million for 2002, prorated for the actual period that the Partnership owns the
Williams Pipe Line. In each year after 2002, these expenses may increase by the
lesser of 2.5 percent per year or the percentage increase in the consumer price
index for that year. The additional general and administrative costs incurred by
the General Partner, but not charged to the Partnership, totaled $10.4 million
for the period February 10, 2001 through December 31, 2001.
Williams Pipe Line had contributed $0.9 million to Longhorn in exchange
for a 0.3 percent ownership interest. Williams Pipe Line also had an agreement
to construct a pipeline, terminals and stations and charge a fee for these
services to Longhorn. Under this agreement, Williams Pipe Line paid for
construction costs and was reimbursed by Longhorn. The agreement allowed
Longhorn to defer payment of certain construction costs until it generated
break-even cash flows and allowed Williams Pipe Line to charge interest on the
outstanding receivable balance. Williams Pipe Line also had an agreement to
manage the pipeline for Longhorn for an agreed-upon monthly fee. The total
amount receivable from Longhorn at December 31, 2001 and 2000 was $16.8 million
and $20.0 million (which includes $3.1 million classified as current),
respectively. (See Note 1 - for more information about income and expenses
associated with Williams Pipe Line operations that will not be conducted by the
Partnership).
9. INCOME TAXES
The provision for income taxes is as follows (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal ........................... $ 19,405 $ 24,779 $ 10,466
State ............................. 3,669 3,406 1,272
Deferred:
Federal ........................... 5,597 1,743 19,379
State ............................. 841 486 3,004
-------- -------- --------
$ 29,512 $ 30,414 $ 34,121
======== ======== ========
Reconciliations from the provision for income taxes at the U.S. federal
statutory rate to the effective tax rate for the provision for income taxes are
as follows (in thousands):
20
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
-------- -------- --------
Income taxes at statutory rate for corporations................. $ 34,084 $ 27,760 $ 31,227
Less: income taxes at statutory rate on income applicable
to partners interest ......................................... (7,504) -- --
Increase resulting from:
State taxes, net of federal income tax benefit ............ 2,931 2,529 2,780
Other ..................................................... 1 125 114
-------- -------- --------
Provision for income taxes ..................................... $ 29,512 $ 30,414 $ 34,121
======== ======== ========
Significant components of deferred tax liabilities and assets as of
December 31, 2001 and 2000, are as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
--------------------------
2001 2000
--------- ---------
Deferred tax liabilities:
Property, plant and equipment ................ $ 147,775 $ 182,662
Other ........................................ 841 650
--------- ---------
Total deferred tax liabilities .......... $ 148,616 $ 183,312
Deferred tax assets:
Net operating loss carryforward .............. $ -- $ 25,270
Other ........................................ 5,266 7,154
--------- ---------
Total deferred tax assets ............... $ 5,266 $ 32,424
Valuation allowance ............................... 1,989 1,989
--------- ---------
Net deferred tax assets ................. $ 3,277 $ 30,435
--------- ---------
Net deferred tax liabilities ....... $ 145,339 $ 152,877
========= =========
The Partnership recognized a pre-initial public offering federal net
operating loss for income tax purposes of $3.9 million and $57.0 million for the
years 2001 and 2000, respectively. The $3.9 million federal net operating loss
expires in 2021. The $57.0 million federal net operating loss carryforward
expires in 2020. Payments to Williams in lieu of income taxes were $2.3 million
in 1999.
As a result of the initial public offering and the concurrent transactions
on February 9, 2001 (see Note 1), the net deferred tax liability on that date of
approximately $14.0 million was assumed by Williams, in exchange for an
additional equity investment in the Partnership.
10. LONG-TERM DEBT
Long-term debt and available borrowing capacity for the Partnership at
December 31, 2001, were $139.5 million and $35.5 million, respectively. At
December 31, 2001, the Partnership had a $175.0 million bank credit facility.
The credit facility was comprised of a $90.0 million term loan facility and an
$85.0 million revolving credit facility, which includes a $73.0 million
acquisition sub-facility and a $12.0 million working capital sub-facility. On
February 9, 2001, the OLP borrowed $90.0 million under the term loan facility
and $0.1 million under the acquisition sub-facility. The $0.1 million borrowed
under the acquisition sub-facility was repaid in July 2001. In June 2001, the
Partnership borrowed $29.5 million under the acquisition facility to fund the
purchase of two terminals in Little Rock, Arkansas from TransMontaigne. In
October 2001, the Partnership borrowed $20.0 million to fund the acquisition of
the Gibson, Louisiana terminal from Geonet. In January 2002, the Partnership
borrowed $8.5 million to finance the acquisition of a pipeline from Aux Sable.
The Partnership entered into a long-term lease arrangement with Aux Sable under
which Aux Sable is the sole lessee of these assets. The transaction will be
accounted for as a capital lease.
The credit facility's term extends through February 5, 2004, with all
amounts due at that time. Borrowings under the credit facility carry an interest
rate equal to the Eurodollar rate plus a spread from 1.0 percent to 1.5 percent,
depending on the OLP's leverage ratio. Interest is also assessed on the unused
portion of the credit facility at a rate from 0.2 percent to 0.4 percent,
depending on the OLP's leverage ratio. The OLP's leverage ratio is defined
21
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
as the ratio of consolidated total debt to consolidated earnings before
interest, income taxes, depreciation and amortization for the period of the four
fiscal quarters ending on such date. Closing fees associated with the initiation
of the credit facility were $0.9 million, which are being amortized over the
life of the facility. Average interest rates at December 31, 2001 were 3.1
percent for the term loan facility and 3.3 percent for the acquisition
sub-facility. The fair value of the long-term debt approximates its carrying
value, because of the floating interest rate applied to the debt facility.
Long-term affiliate debt for the Partnership consists of the following (in
thousands):
<Table>
<Caption>
DECEMBER 31,
----------------------
2001 2000
-------- --------
WES Affiliate Note ............................ $138,172 $386,731
Williams Pipe Line Affiliate Note ............. - 46,226
-------- --------
$138,172 $432,957
======== ========
Williams Pipe Line was a participant in an inter-company note between WES
and Williams. Terms of the affiliate note required payment on demand; however,
Williams had no plans or intentions to demand payment within the next 12 months
at any time the note was outstanding. Under WES' cash management practices,
Williams Pipe Line shared banking arrangements with other WES subsidiaries.
Interest expense charges from Williams to WES were allocated to Williams Pipe
Line based on WES subsidiaries inter-company balances. Interest rates varied
with current market conditions (2.83 percent at December 31, 2001 and 7.57
percent at December 31, 2000). (See Note 1 - for more information about income
and expenses associated with Williams Pipe Line operations that will not be
conducted by the Partnership).
At December 31, 2000, Williams Pipe Line had an affiliate note payable to
Williams. This note was repaid during 2001. Interest was calculated and paid
monthly. Interest rates varied with current market conditions (7.57 percent at
December 31, 2000).
Prior to February 9, 2001, the petroleum products terminals and ammonia
pipeline business segments of the Partnership were participants in Williams'
cash management program. As of December 31, 2000, the affiliate note payable
associated with these segments consisted of an unsecured promissory note
agreement with Williams for advances from Williams. The advances were due on
demand; however, in February 2001, a portion of the advances was refinanced with
debt and equity offerings (see Note 1). Williams contributed the remaining
advances in exchange for equity of the Partnership. Therefore, the affiliate
note payable was classified as noncurrent at December 31, 2000.
Prior to the initial public offering, affiliate interest income or expense
charged or credited to the petroleum products terminals and ammonia pipeline
operations was calculated at the London Interbank Offered Rate ("LIBOR") plus a
spread based on the outstanding balance of the note receivable or note payable
with Williams. The spread was equivalent to the spread above LIBOR rates on
Williams' revolving credit facility. The interest rate of the note with Williams
was 7.6 percent at December 31, 2000. As the interest rate on the affiliate note
payable was variable, the carrying value of the affiliate note payable at
December 31, 2000 approximated its fair value.
During years ending December 31, 2001, 2000, and 1999, cash payments for
interest, net of amounts capitalized, were $9.3 million, $11.3 million and $13.7
million, respectively.
11. LONG-TERM INCENTIVE PLAN
In February 2001, the General Partner adopted the Partnership's Long-Term
Incentive Plan for Williams' employees who perform services for the Partnership
and directors of the General Partner. The Long-Term Incentive Plan consists of
two components, restricted units, which are also referred to as phantom units,
and unit options. The Long-Term Incentive Plan permits the grant of awards
covering an aggregate of 700,000 common
22
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
units. The Long-Term Incentive Plan is administered by the compensation
committee of the General Partner's board of directors.
In April 2001, the General Partner issued grants of 92,500 phantom units
to certain key employees associated with the Partnership's initial public
offering in February 2001. These one-time initial public offering phantom units
will vest over a 34-month period ending on February 9, 2004, and are subject to
forfeiture if employment is terminated prior to vesting. These units are subject
to early vesting if the Partnership achieves certain performance measures. The
Partnership recognized $0.7 million of compensation expense associated with
these grants in 2001. The fair market value of the phantom units associated with
this grant was $2.7 million on the grant date. On February 14, 2002, one-half of
these phantom units vested, resulting in additional compensation of $1.0 million
to the Partnership (see Note 15 - Distributions).
In April 2001, the General Partner issued grants of 64,200 phantom units
associated with the annual incentive compensation plan. The actual number of
units that will be awarded under this grant will be determined by the
Partnership on February 9, 2004. At that time, the Partnership will assess
whether certain performance criteria have been met and determine the number of
units that will be awarded, which could range from zero units up to a total of
128,400 units. These units are also subject to forfeiture if employment is
terminated prior to February 9, 2004. These awards do not have an early vesting
feature. The Partnership recognized $1.3 million of deferred compensation
expense associated with these awards in 2001. The fair market value of the
phantom units associated with this grant was $5.4 million on December 31, 2001.
Certain employees of Williams dedicated to or otherwise supporting the
Partnership receive stock-based compensation awards from Williams. Williams has
several plans providing for common-stock-based awards to employees and to
nonemployee directors. The plans permit the granting of various types of awards
including, but not limited to, stock options, stock-appreciation rights,
restricted stock and deferred stock. Awards may be granted for no consideration
other than prior and future services or based on certain financial performance
targets being achieved. The purchase price per share for stock options and the
grant price for stock-appreciation rights may not be less than the market price
of the underlying stock on the date of grant. Depending upon terms of the
respective plans, stock options generally become exercisable in one-third
increments each year from the date of the grant or after three or five years,
subject to accelerated vesting if certain future Williams' stock prices or
specific Williams' financial performance targets are achieved. Stock options
expire 10 years after grant.
The following summary reflects activity for options to purchase shares of
Williams common stock for 2001, 2000 and 1999, for those employees principally
supporting the Partnership operations:
<Table>
<Caption>
2001 2000 1999
--------------------- ----------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- ---------- --------- --------- ---------
Outstanding - beginning of year.......... 371,502 $31.92 306,307 $28.05 233,374 $22.22
Granted.................................. 102,584 34.96 82,887 43.16 117,494 36.54
Forfeited ............................... (3,000) 30.14 (109) 34.54 - -
Exercised................................ (9,291) 22.59 (17,583) 17.76 (44,561) 19.87
-------- -------- --------
Outstanding - ending of year............. 461,795 32.80 371,502 31.91 306,307 28.05
======== ======== ========
Exercisable at end of year............... 316,483 31.85 328,774 31.59 263,470 27.00
======== ======== ========
The following summary provides information about outstanding and
exercisable Williams' stock options, held by employees principally supporting
the partnership's operations, at December 31, 2001:
23
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
EXERCISE CONTRACTUAL
RANGE OF EXERCISE PRICES OPTIONS PRICE LIFE
----------------------------------------------- --------- ---------- ------------
$12.22 to $17.31................................ 38,599 $15.19 4.5 years
$20.83 to $30.00................................ 102,704 25.14 6.0 years
$31.56 to $46.06................................ 320,492 37.36 8.1 years
--------
Total...................................... 461,795 32.79 7.3 years
========
The estimated fair value at the date of grant of options for Williams'
common stock granted in 2001, 2000 and 1999, using the Black-Scholes option
pricing model, is as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Weighted-average grant date fair value of options for
Williams' common stock granted during the year ............................. $11.08 $15.44 $11.90
Assumptions:
Dividend yield ............................................................ 1.9% 1.5% 1.5%
Volatility ................................................................ 34.5% 31.0% 28.0%
Risk-free interest rate ................................................... 4.8% 6.5% 5.6%
Expected life (years) ..................................................... 5.0 5.0 5.0
</Table>
Pro forma net income, assuming the Partnership had applied the fair-value
method of SFAS No. 123, "Accounting for Stock-Based Compensation" in measuring
compensation costs beginning with 1999 employee stock-based awards, are as
follows (in thousands, except per unit amounts):
<Table>
<Caption>
2001 2000 1999
------------------------- -------------------------- -------------------------
PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA REPORTED
------------ ---------- ------------ ---------- ----------- ----------
Net income........................ $ 67,710 $ 67,872 $ 48,167 $ 48,902 $ 54,171 $ 55,099
=========== ========== ============ ========== =========== ==========
Net income per limited partner
unit ........................... $ 1.86 $ 1.87
=========== ==========
Pro forma amounts for 2000 include the total compensation expense from the
awards made in 2000, as these awards fully vested in 2000 as a result of the
accelerated vesting provisions. Pro forma amounts for 1999 include the remaining
total compensation expense from Williams' awards made in 1998 and the total
compensation expense from Williams' awards made in 1999 as a result of the
accelerated vesting provisions. Since compensation expense from stock options is
recognized over the future years' vesting period for pro forma disclosure
purposes, and additional awards generally are made each year, pro forma amounts
may not be representative of future years' amounts.
12. SEGMENT DISCLOSURES
Management evaluates performance based upon segment profit or loss from
operations, which includes revenues from affiliate and external customers,
operating expenses, depreciation and affiliate general and administrative
expenses. The accounting policies of the segments are the same as those
described in Note 3 - Summary of Significant Accounting Policies. Affiliate
revenues are accounted for as if the sales were to unaffiliated third parties.
The Partnership's reportable segments are strategic business units that
offer different products and services. The segments are managed separately
because each segment requires different marketing strategies and business
knowledge.
24
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------
WILLIAMS PETROLEUM AMMONIA
PIPE LINE PRODUCTS PIPELINE
SYSTEM TERMINALS SYSTEM TOTAL
---------- ---------- --------- ----------
(IN THOUSANDS)
Revenues:
Third party customers .................. $ 284,174 $ 55,611 $ 14,544 $ 354,329
Affiliate customers .................... 78,371 15,899 -- 94,270
--------- --------- --------- ----------
Total revenues ....................... $ 362,545 $ 71,510 $ 14,544 $ 448,599
Operating expenses ..................... 123,566 33,270 4,044 160,880
Product purchases ...................... 95,268 -- -- 95,268
Depreciation and amortization .......... 24,019 11,099 649 35,767
General and administrative expenses .... 38,410 7,641 1,314 47,365
--------- --------- --------- ----------
Segment profit ......................... $ 81,282 $ 19,500 $ 8,537 $ 109,319
========= ========= ========= ==========
Total assets ........................... $ 705,115 $ 368,409 $ 31,035 $1,104,559
Goodwill ............................... $ -- $ 22,282 $ -- $ 22,282
Additions to long-lived assets ......... $ 24,232 $ 64,590 $ 330 $ 89,152
</Table>
Non-cash charges for incentive compensation costs, included in 2001
general and administrative expenses, were $1.7 million for the petroleum
products terminal operations and $0.3 million for the ammonia pipeline
operations.
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
------------------------------------------------------------
WILLIAMS PETROLEUM AMMONIA
PIPE LINE PRODUCTS PIPELINE
SYSTEM TERMINALS SYSTEM TOTAL
---------- ---------- --------- ----------
(IN THOUSANDS)
Revenues:
Third party customers .................. $ 255,389 $ 43,367 $ 11,710 $ 310,466
Affiliate customers .................... 98,965 17,415 -- 116,380
--------- --------- --------- ----------
Total revenues ....................... $ 354,354 $ 60,782 $ 11,710 $ 426,846
Operating expenses ..................... 111,410 29,496 3,993 144,899
Product purchases ...................... 94,141 -- -- 94,141
Affiliate construction expenses ........ 1,025 -- -- 1,025
Depreciation and amortization .......... 22,413 8,688 645 31,746
General and administrative expenses .... 39,243 10,351 1,612 51,206
--------- --------- --------- ----------
Segment profit ......................... $ 86,122 $ 12,247 $ 5,460 $ 103,829
========= ========= ========= ==========
Total assets ........................... $ 731,654 $ 296,819 $ 21,686 $1,050,159
Additions to long-lived assets ......... $ 32,697 $ 41,348 $ 401 $ 74,446
</Table>
25
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------
WILLIAMS PETROLEUM AMMONIA
PIPE LINE PRODUCTS PIPELINE
SYSTEM TERMINALS SYSTEM TOTAL
---------- ---------- --------- ---------
(IN THOUSANDS)
Revenues:
Third party customers ............................ $ 235,273 $ 25,330 $ 12,139 $ 272,742
Affiliate customers .............................. 96,071 6,919 -- 102,990
--------- --------- --------- ---------
Total revenues ................................. $ 331,344 $ 32,249 $ 12,139 $ 375,732
Operating expenses ............................... 102,964 15,108 3,527 121,599
Product purchases ................................ 59,230 -- -- 59,230
Affiliate construction expenses .................. 15,464 -- -- 15,464
Depreciation and amortization .................... 21,060 3,969 641 25,670
Affiliate general and administrative expenses .... 41,604 3,915 1,543 47,062
--------- --------- --------- ---------
Segment profit ................................... $ 91,022 $ 9,257 $ 6,428 $ 106,707
========= ========= ========= =========
Total assets ..................................... $ 690,600 $ 261,425 $ 21,914 $ 973,939
Additions to long-lived assets ................... $ 40,173 $ 227,234 $ 384 $ 267,791
</Table>
13. COMMITMENTS AND CONTINGENCIES
The Partnership leases land, tanks and related terminal equipment at the
Gibson terminal facility. Minimum future lease payments for these leases as of
December 31, 2001, are $0.1 million for each of the next five years and $1.7
million thereafter. The lease payments can be canceled after 2006 and include
provisions for renewal of the lease at five-year increments which can extend the
lease for a total of 25 years.
WES has agreed to indemnify the Partnership against any covered
environmental losses, up to $15.0 million, relating to assets it contributed to
the Partnership that arose prior to February 9, 2001, that become known within
three years after February 9, 2001, and that exceed all amounts recovered or
recoverable by the Partnership under contractual indemnities from third parties
or under any applicable insurance policies. Covered environmental losses are
those non-contingent terminal and ammonia system environmental losses, costs,
damages and expenses suffered or incurred by the Partnership arising from
correction of violations of, or performance of remediation required by,
environmental laws in effect at February 9, 2001, due to events and conditions
associated with the operation of the assets and occurring before February 9,
2001.
In connection with the Partnership's acquisition of Williams Pipe Line on
April 11, 2002, WES agreed to indemnify the Partnership for losses and damages
related to breach of environmental representations and warranties and the
failure to comply with environmental laws prior to closing in excess of $2.0
million up to a maximum of $125.0 million. This environmental indemnification
obligation applies to liabilities that result from conduct prior to the closing
of the Partnership's acquisition of the Williams Pipe Line and that are
discovered within six years of closing.
Estimated liabilities for environmental remediation costs were $16.9
million and $14.1 million at December 31, 2001 and 2000, respectively.
Management estimates that expenditures associated with the accrued environmental
remediation liabilities will be paid over the next two to five years.
Receivables associated with these environmental liabilities of $5.1 million and
$0.3 million at December 31, 2001 and 2000, respectively, have been recognized
as recoverable from affiliates and third parties. These estimates, provided on
an undiscounted basis, were determined based primarily on data provided by a
third-party environmental evaluation service. These liabilities have been
classified as current or non-current based on management's estimates regarding
the timing of actual payments. (See Note 4 - Acquisitions for more information
about liabilities associated with Williams Pipe Line operations that were
conveyed to and assumed by an affiliate of Williams prior to the acquisition of
Williams Pipe Line by the Partnership).
26
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In conjunction with the 1999 acquisition of the Gulf Coast marine
terminals from Hess, Hess has disclosed to the Partnership all suits, actions,
claims, arbitrations, administrative, governmental investigation or other legal
proceedings pending or threatened, against or related to the assets acquired by
the Partnership, which arise under environmental law. Hess agreed to indemnify
the Partnership through July 30, 2014 against all known and required
environmental remediation costs at the Corpus Christi and Galena Park, Texas
marine terminal facilities from any matters related to pre-acquisition actions.
In the event that any pre-acquisition releases of hazardous substances at the
Partnership's Corpus Christi and Galena Park and Marrero, Louisiana marine
terminal facilities are identified by the Partnership prior to July 30, 2004,
the Partnership will be liable for the first $2.5 million of environmental
liabilities, Hess will be liable for the next $12.5 million of losses, and the
Partnership will assume responsibility for any losses in excess of $15.0
million. Hess has indemnified the Partnership for a variety of pre-acquisition
fines and claims that may be imposed or asserted against the Partnership under
certain environmental laws. At both December 31, 2001 and December 31, 2000, the
Partnership had accrued $0.6 million for costs that may not be recoverable under
Hess' indemnification.
During 2001, the Partnership recorded an environmental liability of $2.6
million at its New Haven, Connecticut facility, which was acquired in September
2000. This liability was based on third-party environmental engineering
estimates completed as part of a Phase II environmental assessment, routinely
required by the State of Connecticut to be conducted by the purchaser following
the acquisition of a petroleum storage facility. The Partnership will complete a
Phase III environmental assessment at this facility during the second or third
quarter of 2002, and the environmental liability could change materially based
on this more thorough analysis. The seller of these assets agreed to indemnify
the Partnership for certain of these environmental liabilities. In addition, the
Partnership purchased insurance for up to $25.0 million of environmental
liabilities associated with these assets, which carries a deductible of $0.3
million.
WNGL will indemnify the Partnership for right-of-way defects or failures
in the Partnership's ammonia pipeline easements for 15 years after the initial
public offering closing date. WES has also indemnified the Partnership for
right-of-way defects or failures associated with the marine terminal facilities
at Galena Park and Corpus Christi, Texas and Marrero, Louisiana for 15 years
after the initial public offering closing date. In addition, WES has indemnified
the Partnership for right-of-way defects or failures in Williams Pipe Line's
easements for 10 years after the closing date of its acquisition by the
Partnership up to a maximum of $125.0 million with a deductible of $6.0 million.
This $125.0 million amount will also be sjubect to indemnification claims made
by the Partnership for breaches of other representations and warranties.
The Partnership is party to various other claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, the ultimate resolution of all claims, legal actions and complaints
after consideration of amounts accrued, insurance coverage or other
indemnification arrangements will not have a material adverse effect upon the
Partnership's future financial position, results of operations or cash flows.
27
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows (in thousands, except
per unit amounts).
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- --------
2001
- ----
Revenues ........................................... $107,676 $108,890 $118,201 $113,832
Total costs and expenses ........................... 84,818 75,376 89,871 89,215
Net income ......................................... 13,053 22,887 18,150 13,782
Basic and diluted net income per limited partner
unit .............................................. 0.31 0.64 0.49 0.42
2000
- ----
Revenues ........................................... $ 94,819 $104,532 $ 99,900 $127,595
Total costs and expenses ........................... 66,987 74,013 73,465 108,552
Net income ......................................... 13,170 14,681 13,440 7,611
</Table>
Basic and diluted net income for the first quarter of 2001 is calculated
on the Limited Partners' interest in net income applicable for the period after
February 9, 2001, through the end of the quarter. Revenues and expenses in 2001
were impacted by the acquisition of two terminals from TransMontaigne in June
2001 and the Gibson terminal from Geonet in October 2001. See Note 4 -
Acquisitions. First quarter 2001 costs and expenses included $0.9 million of
casualty losses. Second quarter 2001 revenues were impacted by a $1.0 million
throughput deficiency billing to an ammonia pipeline customer. Operating
expenses included a $0.8 million reduction of environmental expense associated
with insurance settlement and net income included a $0.9 million gain on the
sale of the Aurora, Ohio terminal. Fourth quarter 2001 net income included a
gain of $1.1 million on the sale of the Meridian, Mississippi terminal. Interest
expense for 2001 reflects the payment and forgiveness of the predecessor
company's affiliate debt and new borrowings by the Partnership. Net income was
also impacted by incentive compensation costs of $2.0 million during 2001.
Revenues and costs and expenses in 2000 were impacted by the Southlake
terminal acquisition in March 2000 and the marine terminal acquisition from
Wyatt in September 2000. A throughput revenue deficiency billing related to the
August 1999 acquisition of certain assets from Hess resulted in adjustments to
revenues of $0.7 million impacting the first and second quarters of 2000. Second
quarter 2000 expenses included a $0.5 million charge from the write-off of an
unsuccessful business transaction and a $0.5 million charge for legal costs.
Third quarter 2000 costs and expenses included a $1.5 million environmental
accrual. Fourth quarter 2000 costs and expenses included an increase in product
purchases of $25.0 million due to increased product prices, $4.4 million of
environmental charges, $1.9 million for casualty losses and a $1.0 million
charge associated with a customer dispute settlement.
15. DISTRIBUTIONS
On May 15, 2001, the Partnership paid cash distributions of $0.292 per
unit on its outstanding common and subordinated units to unitholders of record
at the close of business on May 1, 2001. This distribution represented the
minimum quarterly distribution for the 50-day period following the initial
public offering closing date, which included February 10, 2001 through March 31,
2001. The total distributions paid were $3.4 million.
On August 14, 2001, the Partnership paid cash distributions of $0.5625 per
unit on its outstanding common and subordinated units to unitholders of record
at the close of business on August 2, 2001. The total distributions paid were
$6.5 million.
On November 14, 2001, the Partnership paid cash distributions of $0.5775
per unit on its outstanding common and subordinated units to unitholders of
record at the close of business on November 1, 2001. The total distributions
paid were $6.7 million.
28
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total distributions paid during 2001 were as follows (in thousands except
per unit amounts):
<Table>
<Caption>
AMOUNT DISTRIBUTION
PER UNIT AMOUNT
---------- ------------
Common Unitholders ...................... $1.43 $ 8,134
Subordinated Unitholders ................ $1.43 8,134
General Partner ......................... $1.43 331
----------
Total .............................. $ 16,599
==========
On February 14, 2002, the Partnership paid cash distributions of $0.59
per unit on its outstanding common and subordinated units to unitholders of
record at the close of business on February 1, 2002. The total distribution,
including distributions paid to the general partner on its equivalent units, was
$6.9 million.
With the payment of the $0.59 per unit distribution on February 14, 2002,
the first early vesting performance measure of the one-time initial public
offering grants to key employees was achieved, and 46,250 units associated with
this grant vested on that date. The Partnership recognized additional
compensation expense of $1.0 million with the vesting of these units in February
2002.
16. NET INCOME PER UNIT
The following table provides details of the basic and diluted earnings
per unit computations (in thousands, except per unit amounts):
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2001
---------------------------------------------
INCOME UNITS PER UNIT
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------
Limited partners' interest in income applicable to the
period after February 9, 2001 ......................... $ 21,217
Basic earnings per common and subordinated unit .......... $ 21,217 11,359 $1.87
Effect of dilutive restricted unit grants ................ - 11 -
---------- ------- -----
Diluted earnings per common and subordinated unit.......... $ 21,217 11,370 $1.87
========== ====== =====
Units reported as dilutive securities are related to restricted unit
grants associated with the one-time initial public offering award (see Note 11).
17. PARTNERS' CAPITAL
Of the 5,679,694 common units outstanding at December 31, 2001, 4,600,000
are held by the public, with the remaining 1,079,694 held by affiliates of the
Partnership. All of the 5,679,694 subordinated units are held by affiliates of
the Partnership.
During the subordination period, the Partnership can issue up to 2,839,847
additional common units without obtaining unitholder approval. In addition, the
General Partner can issue an unlimited number of common units as follows:
o Upon conversion of the subordinated units;
o Under employee benefit plans;
o Upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of the General
Partner;
29
WILLIAMS ENERGY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
o In the event of a combination or subdivision of common units;
o In connection with an acquisition or a capital improvement that
increases cash flow from operations per unit on a pro forma basis;
or
o If the proceeds of the issuance are used exclusively to repay up to
$40.0 million of the Partnership's indebtedness.
The subordination period will end when the Partnership meets certain
financial tests provided for in the partnership agreement but it generally
cannot end before December 31, 2005.
The limited partners holding common units of the Partnership have the
following rights, among others:
o Right to receive distributions of the Partnership's available cash
within 45 days after the end of each quarter;
o Right to transfer common unit ownership to substitute limited
partners;
o Right to receive an annual report, containing audited financial
statements and a report on those financial statements by the
Partnership's independent public accountants within 120 days after
the close of the fiscal year end;
o Right to receive information reasonably required for tax reporting
purposes within 90 days after the close of the calendar year;
o Right to vote according to the limited partners' percentage interest
in the Partnership on any meeting that may be called by the General
Partner. However, if any person or group other than the General
Partner and its affiliates acquires beneficial ownership of 20
percent or more of any class of units, that group or person loses
voting rights on all of its units; and
o Right to inspect the Partnership's books and records at the
unitholders' own expense.
Net income, excluding amounts attributable to Williams Pipe Line, is
allocated to the General Partner and limited partners based on their
proportionate share of cash distributions for the period. Cash distributions to
the General Partner and limited partners are made based on the following table:
<Table>
<Caption>
PERCENTAGE OF DISTRIBUTIONS
ANNUAL DISTRIBUTION ---------------------------------
AMOUNT (PER UNIT) UNITHOLDERS GENERAL PARTNER
----------------- ----------- ---------------
Up to $2.31 98 2
Above $2.31 up to $2.62 85 15
Above $2.62 up to $3.15 75 25
Above $3.15 50 50
</Table>
In the event of a liquidation, all property and cash in excess of that
required to discharge all liabilities will be distributed to the partners in
proportion to the positive balances in their respective tax-basis capital
accounts.
18. REGISTRATION STATEMENT
In March 2002, the Partnership filed a shelf registration statement to
register $1.8 billion of common units representing limited partner interests and
debt securities, including guarantees. The Partnership, exclusive of its
investment in its wholly owned operating limited partnerships and subsidiaries,
has no independent assets or operations. If a series of debt securities is
guaranteed, such series will be guaranteed by all of the Partnership's
subsidiaries on a full and unconditional and joint and several basis.
30