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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
WILLIAMS HOLDINGS OF DELAWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1455707
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE WILLIAMS CENTER, TULSA, OKLAHOMA 74172
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 918-588-2000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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None None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
(TITLE OF CLASS)
The registrant meets the conditions set forth in General Instruction
J(1)(a) and (b) of Form 10-K. To the extent that the items in Form 10 are
identical to items in Form 10-K, this registration statement on Form 10 has been
generally prepared with the reduced disclosure format specified in Instruction J
to Form 10-K.
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WILLIAMS HOLDINGS OF DELAWARE, INC.
FORM 10
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Williams Holdings of Delaware, Inc. (the "Company"), was incorporated under
the laws of the State of Delaware in July 1994. The principal executive offices
of the Company are located at One Williams Center, Tulsa, Oklahoma 74172
(telephone (918) 588-2000). Unless the context otherwise requires, references to
the Company herein include subsidiaries of the Company. The Company is a
wholly-owned subsidiary of The Williams Companies, Inc. ("Williams").
Except as noted below, virtually all of the Company's assets have been
transferred to the Company by Williams since January 1, 1995, and were
previously operated by subsidiaries of Williams. Williams acquired Williams Pipe
Line Company in 1966. Williams acquired the original gathering, processing and
production properties operated by Williams Field Services Company in 1983.
Williams acquired the original equipment business of Williams Telecommunications
Systems, Inc. in 1991. Other assets transferred to the Company by Williams have
also been operated by Williams' subsidiaries for various periods of time, as
described herein. The consolidated financial statements of the Company provided
herein include such subsidiaries for the periods presented.
On January 18, 1995, Williams acquired 60 percent of Transco Energy Company
("Transco"), in a cash tender offer. The remaining 40 percent of Transco's stock
was acquired through a merger, effective May 1, 1995. Also effective May 1,
1995, Williams transferred to the Company certain natural gas gathering,
processing and marketing assets, as well as certain other assets, previously
owned by Transco. The consolidated financial statements of the Company and the
financial and operating information for the nine months ended September 30,
1995, include the results of operations for these assets from January 18, 1995.
Transco's combined financial statements for the transferred assets for 1994 are
included separately herein. Unaudited pro forma financial statements for the
Company for 1994 and the nine months ended September 30, 1995, reflecting the
acquisition of the Transco assets are also included herein.
The Company is in the process of selling or liquidating certain assets
received from Transco. The largest of these assets, Transco Coal Company, was
sold in June 1995 for $65 million in cash and up to $23 million in preferred
stock of the purchaser. Sales of the remaining noncore companies or assets are
not expected to result in material proceeds to the Company.
In the third quarter of 1994, the Company entered into an agreement to sell
its telecommunications network services operations. On January 5, 1995, the
Company closed the transaction. The gain from the sale was reported as
discontinued operations in the 1995 first quarter financial statements. See Note
2 of the Notes to Audited Consolidated Financial Statements of the Company.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Item 13 -- Financial Statements and Supplemental Data.
(C) NARRATIVE DESCRIPTION OF BUSINESS
The Company, through subsidiaries, is engaged in natural gas gathering,
processing and production, the transportation of petroleum products, natural gas
trading activities, natural gas liquids marketing and provides a variety of
other products and services to the energy industry. The Company's
telecommunications subsidiaries offer data, voice and video-related products and
services and customer premise equipment nationwide. The Company also has certain
other equity investments.
Substantially all of the Company's operations are conducted through
subsidiaries. Williams performs management, legal, financial, tax, consultative,
administrative and other services for the Company and its subsidiaries. The
Company's principal sources of cash will be from external financings, dividends
and advances
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from its subsidiaries, advances from Williams, investments, and interest
payments from subsidiaries and Williams on cash advances. The amount of
dividends available to the Company from subsidiaries largely depends on each
subsidiary's earnings and capital requirements. Certain subsidiaries' debt
instruments with outside lenders limit the amount of dividend payments and
advances to the Company. See Note 11 of the Notes to Audited Consolidated
Financial Statements of the Company.
ENERGY
WILLIAMS FIELD SERVICES GROUP, INC. (WILLIAMS FIELD SERVICES)
Williams Field Services, through subsidiaries, owns and/or operates both
regulated and nonregulated natural gas gathering and processing facilities and
owns and operates natural gas leasehold properties. In 1994 and 1993, gathering
and processing activities represented 89 percent and 88 percent, respectively,
of Williams Field Services' operating profit. Natural gas production represented
the balance.
In 1994, Williams Field Services increased the capacity of its Manzanares
coal seam gas gathering systems in northwestern New Mexico to 750 MMcf* of gas
per day. Expansions completed in 1995 increased the capacity of the Manzanares
system to over 1 Bcf of gas per day. A 120 MMcf of gas per day processing plant
in the Wamsutter field of south-central Wyoming began operations in early 1994
and an expansion completed in the fourth quarter of 1995 doubled capacity. Also
in 1994, Williams Field Services completed the construction and acquisition of a
74 MMcf of gas per day processing complex in the Texas Panhandle.
GATHERING AND PROCESSING
Williams Field Services, through subsidiaries, owns and operates natural
gas gathering and processing facilities located in the San Juan Basin in
northwestern New Mexico and southwestern Colorado, southwestern Wyoming, and the
Rocky Mountains of Utah and Colorado. Williams Field Services, through
subsidiaries, also operates natural gas gathering and processing facilities
located in the Texas Panhandle and the Hugoton Basin in northwest Oklahoma and
southwest Kansas which are owned by Williams Natural Gas, an affiliated company,
but which are the subject of applications for orders permitting abandonment so
the facilities can be transferred to Williams Field Services. Gathering services
provided include the gathering of gas and the treating of coal seam gas. The
operating information below includes operations attributed to the facilities
when they were owned and operated by affiliated entities but do not include
operations for facilities currently owned by Williams Natural Gas but operated
by Williams Field Services.
Customers and Operations. Williams Field Services' facilities consist of
approximately 4,000 miles of gathering pipelines, three gas treating plants and
ten gas processing plants (one of which is 13 percent owned and one of which is
66 percent owned) which have an aggregate daily inlet capacity of 2.3 Bcf of
gas. Gathering and processing customers have direct access to interstate
pipelines, including affiliated pipelines, which provide access to multiple
markets.
During 1994, Williams Field Services gathered natural gas for 117
customers. The two largest gathering customers accounted for approximately 27
percent and 13 percent, respectively, of total gathered volumes. During 1994,
natural gas was processed for a total of 108 customers. The three largest
customers accounted for approximately 22 percent, 14 percent and 12 percent,
respectively, of total processed volumes. No other customer accounted for more
than 10 percent of gathered or processed volumes. Williams Field Services'
gathering and processing agreements with large customers are generally long-term
agreements with various expiration dates. These long-term agreements account for
the majority of the gas gathered and processed by Williams Field Services.
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* The term "Mcf " means thousand cubic feet, "MMcf " means million cubic feet
and "Bcf " means billion cubic feet. All volumes of natural gas are stated at
a pressure base of 14.73 pounds per square inch absolute at 60 degrees
Fahrenheit. The term "MMBtu" means one million British Thermal Units and
"TBtu" means one trillion British Thermal Units.
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Liquids extracted at the processing plants are ethane, propane, butane and
natural gasoline. Liquid products retained by Williams Field Services are
marketed by an affiliate for a fee. During 1994, liquid products were sold to a
total of 20 customers under short-term contracts. The three largest customers
accounted for approximately 33 percent, 13 percent and 10 percent, respectively,
of total liquid products volumes sold. No other customer accounted for more than
10 percent of volumes sold.
Operating Statistics. The following table summarizes gathering, processing
and natural gas liquid volumes for the periods indicated:
1994 1993 1992
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Gas volumes (TBtu, except where noted):
Gathering............................................. 679 588 471
Processing............................................ 392 323 * 283 *
Natural gas liquid sales (millions of gallons)........ 281 295 278
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* Restated to exclude treating volumes.
PRODUCTION
Williams Field Services, through a subsidiary, owns and operates producing
gas leasehold properties in the San Juan Basin.
Gas Reserves. As of December 31, 1994, 1993 and 1992, Williams Field
Services had proved developed natural gas reserves of 269 Bcf, 229 Bcf and 352
Bcf, respectively, and proved undeveloped reserves of 220 Bcf, 319 Bcf and 287
Bcf, respectively. As discussed below, Williams Field Services conveyed gas
reserves to the Williams Coal Seam Gas Royalty Trust in 1993. No major discovery
or other favorable or adverse event has caused a significant change in estimated
gas reserves since year end.
Customers and Operations. As of December 31, 1994, the gross and net
developed leasehold acres owned by Williams Field Services totaled 228,863 and
98,716, respectively, and the gross and net undeveloped acres owned were 29,369
and 13,669, respectively. As of such date, Williams Field Services owned
interests in 2,682 gross producing wells (369 net) on its leasehold lands. The
following table summarizes drilling activity for the periods indicated:
DEVELOPMENT
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COMPLETED GROSS NET
DURING WELLS WELLS
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1994........................................................ 66 19
1993........................................................ 39 5
1992........................................................ 95 11
The majority of Williams Field Services' gas production is currently being
sold in the spot market at market prices. Total net production sold during 1994,
1993 and 1992 was 22.6 TBtu, 16.3 TBtu and 23.4 TBtu, respectively. The average
production costs per MMBtu of gas produced were $.14, $.17 and $.17 in 1994,
1993 and 1992, respectively. The average sales price per MMBtu was $1.21, $1.44
and $1.14, respectively, for the same periods.
In 1993, Williams Field Services conveyed a net profits interest in certain
of its properties to the Williams Coal Seam Gas Royalty Trust. Trust Units were
subsequently sold to the public by Williams in an underwritten public offering.
The Company holds 3,568,791 Trust Units representing 36.8 percent of outstanding
Units. Substantially all of the production attributable to the properties
conveyed to the Trust was from the Fruitland coal formation and constituted coal
seam gas. Proved developed coal seam gas reserves at December 31, 1994,
attributed to the properties conveyed were 162 Bcf. Production information
reported herein includes Williams Field Services' interest in such Units.
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RECENT EVENTS
Effective May 1, 1995, Williams transferred to the Company the operation of
certain production area transmission assets and certain gathering and processing
assets which Williams had acquired as of such date from Transco.
The production area transmission assets consist of approximately 3,500
miles of pipeline located in gas producing areas offshore and onshore in Texas
and Louisiana which are currently classified by the Federal Energy Regulatory
Commission ("FERC") as interstate transmission lines. The gathering assets
consist of nonjurisdictional and intrastate gas gathering lines located offshore
and onshore in Texas. Such facilities consist of approximately 28 miles of
gathering pipelines.
The processing assets consist of two natural gas processing facilities. The
first is a 50 percent joint ownership interest in a processing facility with a
500 MMcf per day capacity located in southwestern Louisiana and the second is a
50 percent partnership interest in a 60 MMcf per day cryogenic extraction
facility located in south Texas.
In June 1995, Williams Field Services acquired the natural gas gathering
and processing assets of Public Service Company of New Mexico located in the San
Juan and Permian basins of New Mexico for $154 million. Williams Field Services
subsequently sold the southeastern New Mexico portion of the acquired assets for
$14.2 million. The assets retained consist of approximately 1,500 miles of
gathering pipelines and three gas processing plants which have an aggregate
daily inlet capacity of 300 MMcf of gas.
REGULATORY MATTERS
Historically, an issue has existed as to whether FERC has authority under
the Natural Gas Act to regulate gathering and processing prices and services.
During 1994, after reviewing its legal authority in a Public Comment Proceeding,
FERC determined that while it retains some regulatory jurisdiction over
gathering and processing performed by interstate pipelines, pipeline affiliated
gathering and processing companies are outside its authority under the Natural
Gas Act. Orders issued in 1994 which implement FERC's conclusion that it lacks
jurisdiction have been appealed to the United States Court of Appeals for the
District of Columbia Circuit. Williams Field Services cannot predict the
ultimate outcome of these proceedings.
As a result of these FERC decisions, several of the individual states in
which Williams Field Services operates may consider whether to impose regulatory
requirements on gathering companies. No state in which Williams Field Services
operates currently regulates gathering or processing rates or services.
COMPETITION
Williams Field Services competes for gathering and processing business with
interstate and intrastate pipelines, producers and independent gatherers and
processors. Numerous factors impact any given customer's choice of a gathering
or processing services provider, including rate, term, timeliness of well
connections, pressure obligations and the willingness of the provider to process
for either a fee or for liquids taken in-kind.
OWNERSHIP OF PROPERTY
Williams Field Services' gathering and processing facilities are owned in
fee. Gathering systems are constructed and maintained pursuant to rights-of-way,
easements, permits, licenses and consents on and across properties owned by
others. The compressor stations and gas processing and treating facilities are
located in whole or in part on lands owned by Williams Field Services or on
sites held under leases or permits issued or approved by public authorities.
ENVIRONMENTAL MATTERS
Williams Field Services is subject to various federal, state and local laws
and regulations relating to environmental quality control. Management believes
that Williams Field Services' operations are in substan-
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tial compliance with existing environmental legal requirements. Management
expects that compliance with such existing environmental legal requirements will
not have a material adverse effect on the capital expenditures, earnings and
competitive position of Williams Field Services.
WILLIAMS ENERGY SERVICES COMPANY (WESCO)
WESCO, through subsidiaries, offers a full range of products and services
to energy markets throughout North America. WESCO's core business includes
natural gas trading activities, energy-related risk management products and
services and computer-based information products. WESCO was incorporated in
1993.
NATURAL GAS TRADING
WESCO includes certain natural gas trading operations formerly conducted by
Transco as well as third party trading activities managed by an affiliate. WESCO
trades natural gas throughout North America, primarily serving local
distribution company markets in the eastern and midwestern United States. The
Operating Statistics presented below represent only previously existing
Williams' financial trading services coupled with third party trading services
provided by an affiliate and do not include operations previously conducted by
Transco.
WESCO serves a customer base of approximately 800 companies across its
natural gas trading operations, with the majority of revenues derived from sales
to approximately 75 local distribution companies under long-term contracts
extending through the year 2002 with variable volume commitments. The balance of
revenues arises from sales to end users under one- to two-year renewable terms,
coupled with sales to other gas marketers and traders occurring under spot, or
short-term agreements. No single customer accounts for more than 10 percent of
natural gas sales volumes. WESCO's gas trading activities are conducted on both
interstate and intrastate pipelines, with most sales activity coordinated with
transportation along pipeline systems owned by Williams.
FINANCIAL TRADING SERVICES
WESCO offers financial instruments and derivatives to producers and
consumers of energy as well as to financial entities participating in energy
price-risk management. WESCO also enters into energy-related financial
instruments to hedge against market price fluctuations associated with inventory
positions as well as natural gas sales and purchase commitments. The customer
base for these activities is comprised of other gas marketing companies,
energy-based entities and brokerages trading in energy commodities.
INFORMATION PRODUCTS
WESCO markets various computer-based trading and trader-match services
including Chalkboard, an electronic trader-match system for buyers and sellers
of liquid fuels, crude oil and refined products; Streamline, a physical cash
forward gas trading system located at five major U.S. hubs; and Capacity
Central, a natural gas pipeline capacity information system. These products are
utilized primarily by a customer base of approximately 181 energy-based
companies under short term service commitments. The information products
architecture was developed in 1993 and introduced to the marketplace in 1994.
These activities have not been profitable to date as costs of establishing
marketing liquidity and product usage still outpace the returns from this
developing market. Development efforts are also underway for a computer-based
electricity trader-match system.
Subject to certain closing conditions, effective January 1, 1996,
Streamline and Capacity Central will be contributed to a limited liability
company along with the energy-related information services of Panhandle
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Eastern Corporation's PanEnergy subsidiary. The new entity will be owned equally
by WESCO and PanEnergy.
OPERATING STATISTICS (DOLLARS IN MILLIONS, VOLUMES IN TBTU)
1994 1993 1992
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Operating profit (loss)............................................. $ .5 $ 7.9 $(2.6)
Natural gas sales volumes (physical)................................ 145.3 151.5 223.9
PRODUCER SERVICES
WESCO entered into a $100 million production payment credit facility with
NationsBank in August 1995, enabling joint participation with producers in oil
and gas reserve acquisitions, development and monetization. In addition, the
available production volumes outside of the facility are marketed by WESCO.
Transactions totaling $7.3 million have been consummated under the facility
since its establishment.
REGULATORY MATTERS
Management believes that WESCO's natural gas trading activities are
conducted in substantial compliance with the marketing affiliate rules of FERC
Order 497. Order 497 imposes certain nondiscrimination, disclosure and
separation requirements upon interstate natural gas pipelines with respect to
their natural gas trading affiliates. WESCO has taken steps to ensure it does
not share employees with affiliated interstate natural gas pipelines and does
not receive information from such affiliates that is not also available to
unaffiliated natural gas trading companies.
COMPETITION
WESCO's gas trading operations are in direct competition with large
independent gas marketers, marketing affiliates of regulated pipelines and
natural gas producers. The financial trading business competes with other
energy-based companies offering similar services as well as certain brokerage
houses. This level of competition contributes to a business environment of
constant pricing and margin pressure.
OWNERSHIP OF PROPERTY
The primary assets of WESCO are its employees and related technological
support. Costs to develop the information products and certain trading systems
have been capitalized.
ENVIRONMENTAL MATTERS
WESCO is subject to federal, state and local laws and regulations relating
to the environmental aspects of its business. Management believes that WESCO is
in substantial compliance with existing environmental legal requirements for its
business. Management expects that compliance with such existing environmental
legal requirements will not have a material adverse effect on the capital
expenditures, earnings and competitive position of WESCO.
WILLIAMS PIPE LINE COMPANY (WILLIAMS PIPE LINE)
Williams Pipe Line operates a petroleum products pipeline system which
covers an eleven-state area extending from Oklahoma in the south to North Dakota
and Minnesota in the north and Illinois in the east. The system is operated as a
common carrier offering transportation and terminalling services on a
nondiscriminatory basis under published tariffs. The system transports crude oil
and products, including gasolines, distillates, aviation fuels and LP-gases.
On September 30, 1994, Williams Pipe Line acquired 114 miles of pipeline in
Kansas, Missouri and Illinois from ARCO Pipe Line Company. In a related
transaction, Williams Pipe Line added a new offline delivery connection to serve
markets in northern Missouri and southern Iowa.
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SHIPPERS AND PIPELINE SYSTEM
At December 31, 1994, the system traversed approximately 7,000 miles of
right-of-way and included over 9,200 miles of pipeline in various sizes up to 16
inches in diameter. The system includes 81 pumping stations, 23 million barrels
of storage capacity and 47 delivery terminals. The terminals are equipped to
deliver refined products into tank trucks and tank cars. The maximum number of
barrels which the system can transport per day depends upon the operating
balance achieved at a given time between various segments of the system. Since
the balance is dependent upon the mix of products to be shipped and the demand
levels at the various delivery points, the exact capacity of the system cannot
be stated.
The operating statistics set forth below relate to the system's operations
for the periods indicated:
1994 1993 1992
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Shipments (thousands of barrels):
Refined products:
Gasolines........................................ 120,682 109,841 92,643
Distillates...................................... 61,129 51,508 45,920
Aviation fuels................................... 9,523 11,123 11,180
LP-Gases............................................ 10,849 9,778 11,362
Crude oil........................................... 1,062 3,388 4,481
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Total shipments............................. 203,245 185,638 165,586
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Daily average (thousands of barrels)................ 557 509 454
Average haul (miles)................................ 284 279 295
Barrel miles (millions)............................. 57,631 51,821 48,825
Revenues (millions):
Transportation...................................... $ 168.0 $ 153.0 $ 137.7
Nontransportation................................... 41.7 26.3 10.8
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Total revenues.............................. $ 209.7 $ 179.3 $ 148.5
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Average transportation revenue per barrel........... $.83 $.82 $.83
On December 1, 1993, Williams Pipe Line acquired a 300-mile pipeline, two
loading terminals and related storage from Sun Pipe Line Company. The pipeline
connects to Williams Pipe Line's systems in Oklahoma and adds a portion of
Arkansas to its market. Volumes originating on this system accounted for
approximately 10 percent of the shipments and transportation revenues in 1994.
In 1994, 75 shippers transported volumes through the system. The seven
largest shippers accounted for 55 percent of transportation revenues. The
highest revenue-producing shipper accounted for approximately 11 percent of
transportation revenues in 1994. Nontransportation activities accounted for 20
percent of total revenues in 1994. The increase in nontransportation revenues is
primarily due to expanded gas liquids and fractionator operations.
As of December 31, 1994, Williams Pipe Line was directly connected to, and
received products from, 11 operating refineries reported to have an aggregate
crude oil refining capacity of approximately 888,000 barrels per day. Eight of
these refineries are located in Kansas and Oklahoma, two in Minnesota and one in
Wisconsin. The system also received products through connecting pipelines from
other refineries located in Illinois, Indiana, Kansas, Louisiana, Montana, North
Dakota, Oklahoma and Texas. Crude oil is received through connections in Kansas
and Oklahoma. The refineries, which are connected directly or indirectly to the
system, have access to a broad range of crude oil producing areas, including
foreign sources. LP-gases are transported from gas producing and storage areas
in central Kansas through connecting pipelines in Iowa, Kansas, Missouri and
Illinois. In addition to making deliveries to company-owned terminals, the
system delivers products to third-party terminals and connecting pipelines.
The refining industry continues to be affected by environmental regulations
and changing crude supply patterns. The industry's response to environmental
regulations and changing supply patterns will directly affect
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volumes and products shipped on the Williams Pipe Line system. EPA regulations,
driven by the Clean Air Act, require refiners to change the composition of fuel
manufactured. A pipeline's ability to respond to the effects of regulation and
changing supply patterns will determine its ability to maintain and capture new
market shares. Williams Pipe Line has successfully responded to changes in
diesel fuel composition and product supply and has adapted to new gasoline
additive requirements. Reformulated gasoline regulations have not yet
significantly affected Williams Pipe Line. Williams Pipe Line will continue to
position itself to respond to changing regulations and supply patterns, but it
is not possible to predict how future changes in the marketplace will affect
Williams Pipe Line's market areas.
REGULATORY MATTERS
General. Williams Pipe Line, as an interstate common carrier pipeline, is
subject to the provisions and regulations of the Interstate Commerce Act. Under
this Act, Williams Pipe Line is required, among other things, to establish just,
reasonable and nondiscriminatory rates, to file its tariffs with FERC, to keep
its records and accounts pursuant to the Uniform System of Accounts for Oil
Pipeline Companies, to make annual reports to FERC and to submit to examination
of its records by the audit staff of FERC. Authority to regulate rates, shipping
rules and other practices and to prescribe depreciation rates for common carrier
pipelines is exercised by FERC. The Department of Transportation, as authorized
by the 1992 Pipeline Safety Reauthorization Act, is the oversight authority for
interstate liquids pipelines. Williams Pipe Line is also subject to the
provisions of various state laws which are applicable to intrastate pipelines.
Rate Proceeding. On December 31, 1989, a rate cap, which resulted from a
settlement with several shippers, effectively freezing Williams Pipe Line's
rates for the previous five years, expired. Williams Pipe Line filed a revised
tariff on January 16, 1990, with FERC and the state commissions. The tariff set
an average increase in rates of 11 percent and established volume incentives and
proportional rate discounts. Certain shippers on the Williams Pipe Line system
and a competing pipeline carrier filed protests with FERC alleging that the
revised rates are not just and reasonable and are unlawfully discriminatory. As
a result of these protests, FERC suspended the effective date of the tariff for
seven months (until September 16, 1990), at which time it became effective,
subject to refund. The revised intrastate tariffs filed with state commissions
were voluntarily withdrawn and refiled to be effective at the same time as the
interstate tariff.
Williams Pipe Line elected to bifurcate this proceeding in accordance with
the then-current FERC policy. Phase I of the FERC's bifurcated proceeding
provides a carrier the opportunity to justify its rates and rate structure by
demonstrating that its markets are workably competitive. Any issues unresolved
in Phase I will require cost justification in Phase II. FERC hearings in Phase I
were held before an administrative law judge in the summer of 1991. The judge's
decision, issued January 24, 1992, ruled solely on market power issues and
certain discrimination claims. This initial decision concluded that Williams
Pipe Line had sustained its burden of proof in demonstrating that it "lacks
significant market power" and is "workably competitive" in 22 of 32 of its
markets and that the alleged discrimination was justified by competitive
conditions. On July 27, 1994, FERC issued a Phase I decision, Order 391. The
Commission, while citing considerable agreement with the theoretical concepts
employed by the administrative law judge, reversed his initial decision
regarding the competitive nature of nine specific markets, thus finding that
Williams Pipe Line had sustained its burden of proof in showing that it is
workably competitive in 13 of 32 markets under investigation. In response to
this order, Williams Pipe Line filed a motion to stay Phase II along with a
request for reconsideration of nine markets on August 29, 1994. On September 28,
1994, FERC issued a tolling order granting Williams Pipe Line's request for
rehearing but denying its motion to stay the Phase II proceedings. On June 6,
1995, FERC issued its rehearing decision of the Phase I order. This order found
an additional seven markets to be workably competitive. This brings the total
number of Williams Pipe Line competitive markets to twenty. A shipper has
appealed this decision to the United States Court of Appeals for the District of
Columbia Circuit. Williams Pipe Line filed its direct evidence in Phase II on
January 23, 1995, and hearings began in December 1995. The current procedural
schedule forecasts an initial decision in Phase II in the first half of 1996.
While Williams Pipe Line cannot predict the final outcome of these proceedings,
it believes its revised tariffs will ultimately be found lawful.
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In June 1993, FERC ruled that Williams Pipe Line must file tariffs and cost
justification for transaction charges that are collected for certain bookkeeping
services, Product Transfer Orders and Product Authorizations. Williams Pipe Line
had previously considered these charges as nonjurisdictional. In order to comply
with the ruling, Williams Pipe Line immediately filed tariffs establishing these
charges in its tariff. Williams Pipe Line filed a request for rehearing on July
23, 1993. The FERC, on September 21, 1995, issued an Order on Rehearing,
reversing its previous decision. The FERC has now ruled that Williams Pipe
Line's Product Transfer Orders and Product Authorization charges are not
jurisdictional, do not require cost justification and need not be filed in
Williams Pipe Line's tariffs. Moreover, FERC now recognizes that "transportation
services are completed at the time the petroleum products enter the terminal."
This decision is subject to rehearing and judicial review.
On October 22, 1993, FERC issued a new rule making and two companion
Notices of Inquiry intended to establish "simplified and generally applicable
rate making" as well as procedural streamlining as mandated by the Energy Policy
Act of 1992. On July 27, 1994, FERC issued a final rule establishing a
"simplified and generally applicable rate making" methodology as mandated by the
Energy Policy Act of 1992. FERC has attempted to streamline the rate making
process via generic rules and a rate cap mechanism, or index, based on the
annual Producer Price Index for Finished Goods less one percentage point
("PPI-1"). The final rule, which became effective January 1, 1995, requires
pipelines to use indexing as their primary rate making methodology in markets
not determined to be workably competitive. The Association of Oil Pipelines has
filed an appeal of this order in the Court of Appeals for the District of
Columbia Circuit citing, among other things, the inadequacy of the PPI-1 index.
Williams Pipe Line has intervened in this proceeding.
On October 28, 1994, FERC released two additional rule makings. The first
established procedures for seeking "market-based" rates. The second sets forth
procedures for cost justifying rate increases which exceed the PPI-1 index and
establishes several changes in existing accounting and reporting requirements.
COMPETITION
Williams Pipe Line operates without the protection of a federal certificate
of public convenience and necessity that might preclude other entrants from
providing like service in its area of operations. Further, Williams Pipe Line
must plan, operate and compete without the operating stability inherent in a
broad base of contractually obligated or owner-controlled usage. Since Williams
Pipe Line is a common carrier, its shippers need only meet the requirements set
forth in its published tariffs in order to avail themselves of the
transportation services offered by Williams Pipe Line.
Competition exists from other pipelines, refineries, barge traffic,
railroads and tank trucks. Competition is affected by trades of products or
crude oil between refineries which have access to the system and by trades among
brokers, traders and others who control products. Such trades can result in the
diversion from the Williams Pipe Line system of volume which might otherwise be
transported on the system. Shorter, lower revenue hauls may also result from
such trades. Williams Pipe Line also is exposed to interfuel competition whereby
an energy form shipped by a liquids pipeline, such as heating fuel, is replaced
by a form not transported by a liquids pipeline, such as electricity or natural
gas. While Williams Pipe Line faces competition from a variety of sources
throughout its marketing areas, the principal competition is other pipelines. A
number of pipeline systems, competing on a broad range of price and service
levels, provide transportation service to various areas served by the system.
The possible construction of additional competing products or crude oil
pipelines, conversions of crude oil or natural gas pipelines to products
transportation, changes in refining capacity, refinery closings, changes in the
availability of crude oil to refineries located in its marketing area, or
conservation and conversion efforts by fuel consumers may adversely affect the
volumes available for transportation by Williams Pipe Line.
OWNERSHIP OF PROPERTY
Williams Pipe Line's system is owned in fee. However, a substantial portion
of the system is operated, constructed and maintained pursuant to rights-of-way,
easements, permits, licenses or consents on and across properties owned by
others. The terminals, pump stations and all other facilities of the system are
located on
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lands owned in fee or on lands held under long-term leases, permits or
contracts. Management believes that the system is in such a condition and
maintained in such a manner that it is adequate and sufficient for the conduct
of business.
ENVIRONMENTAL MATTERS
Williams Pipe Line's operations are subject to various federal, state and
local laws and regulations relating to environmental quality control. Management
believes that Williams Pipe Line's operations are in substantial compliance with
existing environmental legal requirements. Management expects that compliance
with such existing environmental legal requirements will not have a material
adverse effect on the capital expenditures, earnings and competitive position of
Williams Pipe Line.
Williams Pipe Line has been named by the EPA as a potentially responsible
party as defined in Section 107(a) of the Comprehensive Environmental Response,
Compensation, and Liability Act, for a site in Sioux Falls, South Dakota. This
site was placed on the National Priorities List in July 1990. In April 1991,
Williams Pipe Line and the EPA executed an administrative consent order under
which Williams Pipe Line agreed to conduct a remedial investigation and
feasibility study for this site. The EPA issued its "No Action" Record of
Decision in 1994 concluding that there were no significant hazards associated
with the site subject to two additional years of monitoring for arsenic in
certain existing monitoring wells.
WILLIAMS ENERGY VENTURES, INC. (WILLIAMS ENERGY VENTURES)
Another subsidiary of the Company, Williams Energy Ventures, is combined
for financial reporting purposes with Williams Pipe Line. Williams Energy
Ventures is engaged in the manufacturing and marketing of petroleum products and
oxygenates. Williams Energy Ventures also owns an approximate 70 percent
interest in a 25 million gallon per year ethanol plant in Nebraska that began
operations in November 1995. Williams Energy Ventures operates the facility and
markets the fuel ethanol output. In addition, on August 1, 1995, Williams Energy
Ventures purchased Pekin Energy Company in Pekin, Illinois for $167 million. The
Pekin Energy facility produces 100 million gallons annually of fuel-grade and
industrial ethanol and various coproducts.
TELECOMMUNICATIONS
WILLIAMS TELECOMMUNICATIONS SYSTEMS, INC. (WILTEL)
WilTel provides data, voice and video communications products and services
to a wide variety of customers nationally. WilTel is strategically positioned in
the marketplace with more than 100 sales and service locations throughout the
United States, over 2,700 employees and over 1,300 stocked service vehicles.
WilTel employs more than 1,300 technicians and more than 400 sales
representatives and sales support personnel to serve an estimated 30,000
commercial, governmental and institutional customers. WilTel's customer base
ranges from Fortune 500 corporations and the Federal Government to small
privately-owned entities.
WilTel offers its customers a full array of network interconnect products
including digital key systems (generally designed for voice applications with
fewer than 100 lines), private branch exchange (PBX) systems (generally designed
for voice applications with greater than 100 lines), voice processing systems,
interactive voice response systems, automatic call distribution applications,
call accounting systems, network monitoring and management systems, desktop
video, routers, channel banks, intelligent hubs and cabling for all voice and
data applications. WilTel's services also include the design, configuration and
installation of voice and data networks and the management of customers'
telecommunications operations and facilities. In addition, WilTel possesses
multicustomer service capabilities, including three specialized functions that
provide customers with on-line order entry and trouble reporting services,
advanced technical assistance and training. Other service capabilities include
Local Area Network and PBX remote monitoring and toll fraud detection.
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In 1994, WilTel derived approximately 67 percent of its revenues from its
existing customer base and approximately 33 percent from the sale of new
telecommunications systems. The distribution of revenues for the periods
indicated are shown in the following table:
1994 1993 1992
---- ---- ----
REVENUES:
New System Sales....................................... 33% 39% 41%
System Modifications................................... 36% 30% 28%
Maintenance............................................ 24% 23% 25%
Other.................................................. 7% 8% 6%
The 1994 decrease in the percentage of revenue derived from the sale of new
telecommunications systems was attributed to the March 1994, acquisition of
BellSouth's customer premise equipment sales and service operations in 29 states
outside of BellSouth's local operating region in the nine southeastern most
states, and the October 1994, acquisition of Jackson Voice Data, a New York
City-based customer premise equipment company. The acquired companies generated
the vast majority of their revenue from their existing customer bases. The
acquisition of these businesses has allowed WilTel to capitalize on its existing
infrastructure, strengthen its national market presence and geographic customer
density and has provided more diversity in product offerings.
Although the percentage of revenue attributable to new system sales
continues to decline relative to total revenue, year end revenue backlog
continues to increase. Estimated year end revenue backlog balances, comprised of
new system sales and major system upgrades, were as follows: $92 million in
1994, $52 million in 1993 and $39 million in 1992.
The total number of ports maintained and served by WilTel at the end of
1994 increased to 4.1 million. The bulk of the increase from prior years is
attributable to the acquisitions of the BellSouth and Jackson Voice Data
customer bases. The two acquisitions contributed in excess of 1.0 million ports
to the total WilTel count. A port is defined as an electronic address resident
in a customer's PBX or key system that supports a station, trunk or data port.
The year end port counts were as follows: 4.1 million in 1994, 2.7 million in
1993 and 2.6 million in 1992.
WilTel's three largest suppliers accounted for 91 percent of equipment sold
in 1994. A single manufacturer supplied 80 percent of all equipment sold. In
this case, WilTel is the largest distributor of certain of this company's
products. About 70 percent of WilTel's active customer base consists of this
manufacturer's products. The distribution agreement with this supplier is
scheduled to expire in 1997. This agreement is expected to be renewed upon
expiration. Management believes there is minimal risk as to the availability of
product from suppliers.
Competition
WilTel has many competitors ranging from AT&T and the Regional Bell
Operating Companies to small individually owned companies which sell and service
customer premise equipment. Competitors include companies that sell equipment
that is comparable or identical to that sold by WilTel.
Regulatory Matters
The equipment sold by WilTel must meet the requirements of Part 68 of the
Federal Communications Commission ("FCC") rules governing the equipment
registration, labelling and connection of equipment to telephone networks.
WilTel relies on the equipment manufacturers' compliance with these requirements
for its own compliance regarding the equipment it distributes. A subsidiary of
WilTel, which provides intrastate microwave communications services for a
Federal agency, is subject to FCC regulations as a common carrier microwave
licensee. These regulations have a minimal impact on WilTel's operations.
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THE WILTECH GROUP, INC. (WILTECH)
WilTech, through subsidiaries, seeks to develop growth opportunities in the
telecommunications and technology industries. WilTech currently conducts its
business through two principal operating subsidiaries, Vyvx, Inc. and Williams
Knowledge Systems, Inc. In November 1995, WilTech acquired a 22 percent interest
in ITC, A Worldwide Telecommunications Company. The investment is expected to
expand WilTech's offerings in the videoconferencing, teleconferencing and
enhanced fax services markets. The total cost of the ITC investment, together
with the ICG Wireless and NUS Training acquisitions discussed below, is
approximately $50 million.
VYVX, INC. (VYVX)
Vyvx offers private line fiber-optic television transmission services
nationwide. It provides private line broadcast-quality, fiber-optic television
transmission services as an alternative to satellite and microwave television
transmissions. Vyvx primarily provides backhaul transmission of news and other
programming between two or more customer locations. For example, the Vyvx
network is used for the broadcast coverage of major professional sporting
events. Vyvx's customers include all of the major broadcast and cable networks.
Vyvx also provides videoconferencing/business television services.
Vyvx has announced the acquisition of four teleports (including satellite
earth station facilities) from ICG Wireless Services. The teleports are located
in Atlanta, Denver, Los Angeles and New York (Carteret, N.J.). The acquisition
will enable Vyvx to provide both fiber-optic backhaul and satellite distribution
services. The acquisition, which is subject to certain conditions, including the
receipt of regulatory approvals, is expected to close in the first quarter of
1996.
Regulatory Matters. Vyvx is subject to FCC regulations as a common carrier
with regard to certain of its existing and future transmission services and is
subject to the laws of certain states governing public utilities. Operation of
to-be acquired satellite earth stations and certain other related transmission
facilities are also subject to FCC licensing and other regulations. These
regulations do not have a significant impact on Vyvx's operations.
Competition. Competition for Vyvx's fiber-optic television transmission
operations is derived primarily from companies offering video transmission
services by means of satellite facilities and to a lesser degree from companies
offering transmission services via microwave facilities or fiber-optic cable.
Pending telecommunications reform legislation passed by both Houses of
Congress would increase competition in the long distance market by significantly
liberalizing current restrictions on market entry. In particular, Regional Bell
Operating Companies would be permitted to provide long distance services,
including, but not limited to, video transmission services, subject to certain
restrictions and conditions precedent. Moreover, public utilities would be
permitted to provide telecommunications services, including long distance
services, through separate subsidiaries. Whether and to what extent this reform
legislation will be enacted, and any impact it may have on Vyvx, cannot be
predicted at this time.
Ownership of Property. Vyvx's fiber-optic transmission facilities are owned
in part and leased in part. Vyvx carries signals by means of its own fiber-optic
facilities, as well as carrying signals over fiber-optic facilities leased from
third party interexchange carriers and the various local exchange carriers.
Environmental Matters. Vyvx is subject to federal, state and local laws and
regulations relating to the environmental aspects of its business. Management
believes that Vyvx's operations are in substantial compliance with existing
environmental legal requirements. Management expects that compliance with such
existing environmental legal requirements will not have a material adverse
effect on the capital expenditures, earnings and competitive position of Vyvx.
WILLIAMS KNOWLEDGE SYSTEMS, INC. (WILLIAMS KNOWLEDGE SYSTEMS)
Williams Knowledge Systems provides computer-based operator training
primarily to the energy industry. Williams Knowledge Systems has licensing
agreements with over 150 customers in the oil and gas pipeline, terminal and
trucking industries.
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In October 1995, Williams Knowledge Systems acquired NUS Training
Corporation. This acquisition gives Williams Knowledge Systems a large library
of video-based and multimedia training products for the chemical, refining and
utility industries plus an expanded customer base and sales force.
------------------------
The Company has approximately 6,045 full-time employees, of whom
approximately 728 are represented by unions and covered by collective bargaining
agreements. The Company considers its relations with its employees to be good.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no significant foreign operations.
ITEM 2. FINANCIAL INFORMATION
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following selected income statement data for the years 1994, 1993 and
1992 and balance sheet data for 1994 and 1993 have been derived from the
Company's audited consolidated financial statements appearing elsewhere herein.
The selected income statement data for the nine-month periods ended September
30, 1995 and 1994 and the balance sheet data for September 30, 1995, have been
derived from the Company's unaudited consolidated financial statements appearing
elsewhere herein. The selected income statement data for the years 1991 and 1990
and balance sheet data for 1992, 1991 and 1990 have been derived from the
Company's consolidated financial statements not appearing elsewhere herein. The
selected historical consolidated financial data shown below should be read in
conjunction with the consolidated financial statements of the Company and
related notes and the audit report appearing elsewhere herein.
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------------
1995(2) 1994 1994 1993 1992 1991 1990
-------- ------ -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT RATIO OF EARNINGS TO FIXED CHARGES)
INCOME STATEMENT
DATA:(1)(10)
Revenues:
Williams Field Services
Group................. $ 299.1 $240.9 $ 336.4 $ 386.5 $ 397.7 $ 295.5 $ 287.9
Williams Energy Services 65.6(3) 205.0 263.7 360.8 496.2 289.4 290.0
Williams Pipe Line...... 220.4 223.9 310.7 180.5 148.5 140.6 138.1
Williams
Telecommunications
Systems............... 364.2 276.1 396.6 302.8 271.1 212.8 --(8)
Other................... 43.5 13.8 20.0 13.5 9.5 6.2 1.7
Intercompany
eliminations.......... (48.8) (42.6) (63.1) (23.1) (39.8) (14.7) (11.9)
-------- ------ -------- -------- -------- -------- --------
Total revenues... 944.0 917.1 1,264.3 1,221.0 1,283.2 929.8 705.8
Income from continuing
operations.............. 158.8(4) 101.0(5) 125.5(5) 152.3(6) 46.9(7) 20.7 23.5
Income from discontinued
operations.............. 1,005.7 51.7 94.0 46.4 25.2 40.3 41.1
Net income................ 1,164.5 146.6 213.4 198.7 83.2 61.0 64.6
BALANCE SHEET DATA:(1)
Property, plant and
equipment -- net........ 2,123.5 1,585.1 2,151.1 2,157.3 1,651.8 1,532.2
Total assets.............. 3,812.4 3,440.1 2,989.4 2,869.9 2,316.2 2,089.0
Long-term debt............ 125.0 507.0 229.4 337.1 375.9 518.4
Stockholder's equity...... 2,119.0 1,739.9 1,818.0 1,614.6 1,262.0 943.2
RATIO OF EARNINGS TO FIXED
CHARGES(9).............. 4.84 6.71 14.10 2.86 1.60 2.47
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(1) In the third quarter of 1994, the Company signed a definitive agreement to
enter into the sale of its network services operations (the "WNS Sale"). On
January 5, 1995, the Company consummated the transaction and the gain from
the sale was reported as discontinued operations in the 1995 first quarter
consolidated financial statements. The selected historical consolidated
financial data has been prepared to present operating results of the
operations sold in the WNS Sale as discontinued operations. Prior period
balance sheets have not been restated. For additional information see Note
2 of the Notes to Audited Consolidated Financial Statements of the Company
appearing elsewhere herein.
(2) On January 18, 1995, Williams acquired 60 percent of the outstanding common
stock of Transco Energy Company (Transco) in a cash tender offer. On May 1,
1995, the remaining 40 percent of Transco outstanding common stock was
acquired through a merger, which involved the exchange of the remaining
Transco common stock for approximately 10.4 million shares of Williams
common stock. Williams then contributed the stock of all of Transco and
Transco's subsidiaries, except for subsidiaries holding the interstate
natural gas pipelines, to the Company. The consolidated financial
statements as of and for the nine months ended September 30, 1995, reflect
this contribution from Williams effective January 18, 1995.
(3) All natural gas trading activities are reported on a net margin basis in
1995.
(4) Includes a pretax loss on sales of investments of $12.6 million. See Note 4
of the Notes to Unaudited Consolidated Financial Statements of the Company
for the nine months ended September 30, 1995, appearing elsewhere herein.
(5) Includes a pretax gain on sales of assets of $22.7 million. See Note 4 of
the Notes to Audited Consolidated Financial Statements of the Company
appearing elsewhere herein.
(6) Includes a pretax gain on sales of assets of $97.5 million. See Note 4 of
the Notes to Audited Consolidated Financial Statements of the Company
appearing elsewhere herein.
(7) Includes a pretax gain on sales of assets of $14.6 million. See Note 4 of
the Notes to Audited Consolidated Financial Statements of the Company
appearing elsewhere herein.
(8) Williams Telecommunications Systems was acquired in January 1991.
(9) For the purpose of this ratio (i) earnings consist of income from
continuing operations before fixed charges and income taxes for the
Company, its majority owned subsidiaries and its proportionate share of 50
percent-owned companies, less undistributed earnings of less than 50
percent-owned companies; and (ii) fixed charges consist of interest and
debt expense on all indebtedness (without reduction of interest
capitalized) and that portion of rental payments on operating leases
estimated to represent an interest factor, plus the pretax effect of
preferred dividends of subsidiaries. The ratio of earnings to fixed charges
is higher in the years 1993 and 1994 as compared to the other years
presented primarily because of gains on sales of assets and higher
operating profit.
(10) On December 21, 1995, the Company announced plans to cancel the development
of an underground coal gasification project. The Company will record a
pretax charge in its fourth quarter 1995 financial results which is not
expected to exceed $42 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. NINE MONTHS ENDED SEPTEMBER 30, 1994
Williams Field Services Group's revenues increased $58.2 million or 24
percent due primarily to $28 million higher natural gas sales and $21 million
higher gathering revenues combined with $12 million increased revenues from the
Transco gulf coast operations, partially offset by $14 million lower leasehold
revenues. Natural gas sales increased due primarily to increased volumes
partially offset by lower average prices. Gathering revenues increased due
primarily to a 16 percent increase in volumes combined with an increase in
average prices. Costs and operating expenses increased $35 million or 25 percent
and selling, general and administrative expenses increased $19 million or 109
percent primarily resulting from increased natural gas volumes and expanded
facilities. Other income -- net included in operating profit includes $12
million from the net effect of two unrelated items. One was $20 million of
income from the favorable
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resolution of contingency issues involving previously regulated gathering and
processing assets. This was partially offset by an $8 million loss accrual for a
future minimum price natural gas purchase commitment. Operating profit increased
$16.6 million or 20 percent primarily from the $12 million in other
income -- net and the increase in gathering volumes, partially offset by lower
leasehold volumes. Operating profit in 1994 was favorably affected by an
adjustment to operating taxes of $4 million.
Williams Energy Services' revenues decreased $139.4 million or 68 percent
and operating costs decreased $164.7 million or 82 percent. The addition of
Transco's gas trading activities is offset by $142 million reduction related to
the reporting of all natural gas trading activities on a net margin basis.
Natural gas sales volumes were 525.1 TBtu's in 1995 compared to 110.4 TBtu's in
1994. The increase was primarily from the addition of Transco's gas trading
operations. Operating profit increased $25.3 million from $4.4 million. Trading
activities' operating profit increased $36 million which includes the first
quarter 1995 income recognition of $21 million from long-term natural gas supply
contracts and the addition of Transco's gas trading activities. Also included is
a price-risk management adjustment of $3.9 million from the initial market
valuation of certain natural gas supply and sales contracts previously excluded
from trading activities. These increases were partially offset by increased
costs of supporting information technology and business development of $4
million, additional costs associated with developing information products of $3
million, and non-recurring costs associated with merging Transco's marketing
operations. Included in 1994 operating profit was a $2.3 million favorable
contract-reformation settlement.
Williams Pipe Line's revenues decreased $3.5 million or 2 percent and costs
and expenses decreased $14 million or 8 percent primarily from a $40 million
decline as a result of discontinuance of certain petroleum-product services due
to adverse market conditions and a $13 million decrease in refined-product sales
due to the unavailability of certain refined-product supplies. Substantially
offsetting these revenue declines were $28 million of revenues from the
acquisition of Pekin Energy Company in August 1995 and higher transportation and
non-transportation revenues of $8 million and $14 million, respectively.
Shipments, while 7 percent higher than 1994, were reduced by the November 1994
fire at the Minneapolis terminal and loading facility and unfavorable weather
conditions in the first half of 1995. The average transportation rate per barrel
was approximately the same as 1994, while the average length of haul was
slightly shorter. Operating profit increased $10.4 million or 26 percent
primarily from increased shipments and increased demand for non-transportation
services. Results in 1994 also benefited from a $2.8 million insurance
settlement. Williams Energy Ventures contributed approximately $1 million to
operating profit during the third quarter, primarily from the Pekin ethanol
facilities acquisition. While the Company expects these operations will be
additive to operating profit and cash flow in the future, the effects are not
expected to be material to the Company's results of operations or financial
position.
Williams Telecommunications Systems' revenues increased $88.1 million or 32
percent due primarily to new systems and existing system enhancements and
acquisitions of BellSouth Communications Systems on March 31, 1994, and Jackson
Voice Data completed in October 1994. The number of ports in service at
September 30, 1995, has increased 18 percent as compared to September 30, 1994.
The 33 percent increase in cost of sales of $68.7 million and the 20 percent
increase in selling, general and administrative expenses (SG&A) of $10.7 million
is due primarily to increased sales activity. The increase in SG&A is due
primarily to increased revenues, although the SG&A expense to revenue percent
decreased due to the leveraging of the company's existing infrastructure.
Operating profit increased $8.9 million or 73 percent due primarily to the
increase in sales activity from the 1994 acquisitions.
Other revenues and the operating loss are primarily comprised of operating
results from the WilTech Group, Inc. (WilTech). WilTech's operations are largely
the results of Vyvx's switched fiber optic television transmission services
which generated revenues for the nine months ended September 30, 1995 and 1994
of $26 million and $13 million, respectively. Vyvx's operating losses for the
nine months ended September 30, 1995 and 1994 were $3.8 million and $6 million,
respectively. While Vyvx's operating losses have declined as volumes have
significantly increased over the last several years, its losses reflect the
early stages of this developing business.
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Allocated parent company expenses decreased $4.9 million due primarily to
the sale of the Company's network services operations. Interest accrued
increased $21.4 million due primarily to the approximately $770 million of
Transco outstanding debt assumed by the Company for the period January 17 to
April 30, 1995, as a result of the Transco acquisition. Effective May 1, 1995,
all debt resulting from the Transco acquisition was assumed by Williams.
Interest capitalized increased due primarily to increased capital expenditures
for gathering and processing facilities. Investing income increased $51.3
million due primarily to interest earned from the parent, Williams, on the
invested portion of the cash proceeds from the sale of the Company's network
services operations combined with an $11 million increase in the dividend from
Texasgulf Inc. and $5 million of dividends received on Williams common stock
held by Williams Holdings. The 1995 loss on sales of investments results from
the sale of the 15 percent interest in Texasgulf Inc. (see Note 4 of Notes to
Unaudited Consolidated Financial Statements for additional information). The
1994 gain on sales of investments results from the sale of 3,461,500 limited
partner common units in Northern Border Partners, L.P. Other income
(expense) -- net in 1995 includes approximately $5 million of dividends for
Transco preferred stock and minority interest common stockholders and $4 million
related to the wind down of Transco corporate activities. Other income
(expense) -- net in 1994 includes a credit of $4.8 million from the reversal of
previously accrued liabilities associated with certain Williams Coal Seam Gas
Royalty Trust contingencies which expired. Also included in 1994 is
approximately $4 million of expense related to the adoption of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," which related to postemployment benefits being paid to
employees of companies previously sold.
The effective income tax rate in 1995 is significantly less than the
federal statutory rate due primarily to the previously unrecognized tax benefits
related to the sale of Texasgulf Inc. (see Note 4 of Notes to Unaudited
Consolidated Financial Statements) and income tax credits from coal-seam gas
production, partially offset by the effect of state income taxes. The effective
income tax rate in 1994 is less than the federal statutory rate due primarily to
income tax credits from coal-seam gas production and a favorable prior-year
state income tax adjustment, partially offset by the effect of state income
taxes related to 1994.
On January 5, 1995, the Company sold its network services operations to
LDDS Communications, Inc. for $2.5 billion in cash. The sale yielded an
after-tax gain of approximately $1 billion, which is reported as income from
discontinued operations. Prior period operating results for the network services
operations are reported as discontinued operations (see Note 6 of Notes to
Unaudited Consolidated Financial Statements for additional information).
The 1994 extraordinary loss results from the early extinguishment of debt
(see Note 7 of Notes to Unaudited Consolidated Financial Statements for
additional information).
FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY
During June 1995, the Company became party to an $800 million bank-credit
facility entered into by its parent, Williams. Under this agreement, the Company
has access to $600 million of financing. Prior to this facility, the Company's
liquidity came primarily from Williams. All excess cash is transferred to
Williams under a centralized cash management program, and cash requirements to
finance working capital, investments and capital expenditures were obtained from
Williams either through capital contributions or intercompany note agreements.
During the nine months ended September 30, 1995 and 1994, the Company paid
dividends of $1 billion and $64 million, respectively, to Williams and received
capital contributions of $797 million and $38 million, respectively, from
Williams. The 1995 dividends were paid primarily from the proceeds from the sale
of the Company's network services operations. The 1995 capital contributions
were made in connection with the merger of Transco and were used to retire
and/or terminate various Transco borrowings, preferred stock and interest-rate
swaps.
The Company and its subsidiaries had amounts receivable from Williams
totaling $595 million, including $360 million of parent company debentures (see
Note 4 of Notes to Unaudited Consolidated Financial
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Statements for additional information), at September 30, 1995, compared to
amounts due to Williams of $390 million and $62 million at December 31, 1994,
and September 30, 1994, respectively. The increase in amounts receivable from
Williams at September 30, 1995, reflects the transfer of the remainder of the
proceeds from the sale of the Company's network services operations to Williams
in the first quarter. The Company and its subsidiaries had amounts receivable
from Williams of $56 million at December 31, 1993, and $76 million due to
Williams at December 31, 1992.
The Company believes its parent can meet its cash needs because Williams
had access to $765 million of liquidity at September 30, 1995, representing the
unborrowed portion of its $800 million bank-credit facility. This compares with
Williams liquidity of $495 million at December 31, 1994, and $375 million at
September 30, 1994. The increase in 1995 is due to a $200 million increase in
the capacity of the bank-credit facility (see Note 9 of Notes to Unaudited
Consolidated Financial Statements for additional information). Following the
negotiation of this bank-credit facility, the Company is no longer completely
dependent upon its parent for financing. Williams had access to $639 million of
liquidity at December 31, 1993, and $780 million at December 31, 1992.
Terms of certain borrowing agreements limit transfer of funds to the
Company from its subsidiaries. The restrictions have not impeded, nor are they
expected to impede, the Company's ability to meet its cash requirements in the
future.
The Company had a net working capital deficit of $326 million at September
30, 1995, compared to a net working capital of $523 million at December 31,
1994, and a $39 million net working capital deficit at December 31, 1993. The
decrease in working capital from December 31, 1994, reflects a $744 million
decrease in assets held for sale following the sale of the Company's network
services operations and additional income taxes payable of $544 million
primarily as a result of that sale, partially offset by the repayment of $398
million of bank notes payable from the proceeds of the network services
operations sale. The remaining proceeds were transferred to Williams and are
included in noncurrent affiliate receivables; therefore, the remaining proceeds
are not a part of net working-capital at September 30, 1995. The Company's funds
are automatically transferred to Williams under a centralized cash management
program.
In 1995 capital expenditures are estimated to be approximately $450
million. During 1995, the Company expects to finance capital expenditures,
investments and working-capital requirements through the use of the remaining
network services operations sale proceeds, the bank-credit facility, advances
from its parent or debt offerings.
FINANCING ACTIVITIES
The consolidated long-term debt-plus-equity ratio decreased to 5.6 percent
at September 30, 1995, from 22.6 percent at December 31, 1994. The decrease is
due to an increase in stockholder's equity resulting from net income and capital
contributions from its parent and a decrease in long-term debt due affiliates
resulting from cash proceeds from the sale of the Company's network services
operations.
Net assets held for sale at September 30, 1995, include certain Transco
businesses which the Company intends to sell within one year (see Note 3 of
Notes to Unaudited Consolidated Financial Statements for additional
information). Notes payable decreased reflecting their repayment from the
proceeds of the sale of the Company's network services operations. Accrued
liabilities increased due primarily to the income tax and other liabilities
associated with the sale of the Company's network services operations in
addition to the acquisition of Transco, excluding Transcontinental Gas Pipe Line
and Texas Gas. The increases in receivables, other noncurrent assets and
deferred charges, accounts payable and deferred income and other liabilities
primarily reflect the acquisition of Transco, excluding Transcontinental Gas
Pipe Line and Texas Gas.
OTHER
In April 1995, the Company sold its 15 percent interest in Texasgulf Inc.
for approximately $124 million in cash (see Note 4 of Notes to Unaudited
Consolidated Financial Statements for additional information).
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On May 1, 1995, Williams completed the acquisition of Transco. Following
the merger, Williams contributed the stock of Transco and all of Transco's
subsidiaries, except for its subsidiaries holding regulated interstate natural
gas pipelines, to Williams Holdings (see Note 3 of Notes to Unaudited
Consolidated Financial Statements for additional information).
On June 30, 1995, the Company acquired the Public Service Company of New
Mexico's natural gas gathering and processing assets in the San Juan and Permian
Basins for $154 million. The acquired natural gas gathering, treating and
processing assets in the Permian Basin (representing approximately 10 percent of
the acquired assets) were then sold to GPM Gas Corporation the same day.
In August, a subsidiary of the Company purchased Pekin Energy Company, the
nation's second largest ethanol producer, for $167 million in cash (see Williams
Pipe Line's interim management's discussion and analysis for additional
information).
Williams Field Services has been pursuing the development of a commercial
underground coal gasification venture in South-central Wyoming. On December 21,
1995, the Company announced its plans to cancel this project. While the
technology shows promise in other areas of the world, this project was abandoned
because of less than desired performance in the associated coal reserves
combined with a continuing surplus of conventional gas in the region making
economics much less attractive. The Company will record a pretax charge in its
fourth quarter 1995 financial results which is not expected to exceed $42
million. This estimate includes future costs to reclaim the site.
Based on a preliminary review, the Company does not expect that the
adoption of Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," to
have a material effect on the results of operations or financial position of the
Company.
SUBSEQUENT EVENT
During October 1995, Williams Holdings sold its remaining investment in
Williams common stock for $46.2 million in cash resulting in an $11 million
pre-tax gain.
RESULTS OF OPERATIONS
1994 VS. 1993
Williams Field Services' revenues decreased $50 million or 13 percent, due
primarily to lower natural gas sales, which decreased revenues by $71 million,
as a result of the March 1993 sale of Williams' intrastate natural gas pipeline
system and related marketing operations in Louisiana. Liquids volumes ($4
million) and prices ($5 million) and average processing prices ($7 million) also
decreased, but were more than offset by increased gathering ($21 million) and
processing ($8 million) volumes of 16 percent and 21 percent, respectively.
Costs and operating expenses decreased $69 million or 24 percent, due primarily
to lower natural gas purchases of $68 million and the effects of a favorable
adjustment of an accrual related to operating taxes, partially offset by higher
operations, maintenance and depreciation expenses at expanded gathering
facilities. Operating profit increased $17.6 million or 17 percent, due
primarily to higher gathering ($21 million) and processing ($8 million) volumes
and a favorable operating taxes adjustment ($5 million), partially offset by
lower per-unit liquids margins ($5 million), lower average processing prices ($7
million) and higher operations, maintenance and depreciation expenses associated
with expanded facilities.
Williams Energy Services' revenues decreased $97 million or 27 percent, due
primarily to lower natural gas sales volumes and prices ($45 million), lower
refined product trading margins and the effect of reporting these trading
activities on a "net margin" basis effective July 1, 1993 ($45 million). Costs
and operating expenses decreased 29 percent, due to lower natural gas purchase
volumes and prices ($46 million) and the effect of reporting refined product
trading activities on a "net margin" basis ($43 million), partially offset by
the cost of developing long-term energy industry businesses. General and
administrative expenses increased 44 percent, reflecting the costs of
establishing appropriate administrative and project support groups to serve
growing business activities. Operating profit was $.5 million in 1994 compared
to $7.9 million in 1993. Price-
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risk management services' results continued to be profitable but were lower by
$6 million in 1994 than 1993 because of reduced gasoline and distillate margins
and the effect of location pricing differentials in refined products trading
activities, partially offset by an improvement in natural gas trading margins
reflecting increased volumes. Costs to develop long-term energy industry
opportunities also adversely affected operating profit. Results from natural gas
marketing activities increased by $2 million in 1994 compared to 1993.
Williams Pipe Line's shipments increased 9 percent, due primarily to new
volumes resulting from the December 1993 acquisition of a pipeline system in
southern Oklahoma. Revenues increased $130 million or 72 percent, due primarily
to higher shipments and increased gas liquids and fractionator operations ($30
million) and newly established petroleum services activities ($106 million). The
slightly higher average transportation rate resulted primarily from longer hauls
into the northern region and overall increases in tariff rates, effective
December 1, 1994 and June 1, 1993, partially offset by lower rates on shorter
haul movements from new business. Costs and operating expenses increased $125
million or 94 percent, due primarily to gas liquids and fractionator operations,
additional operating expenses, newly established petroleum services activities
($104 million) and the cost of developing long-term energy industry businesses.
Operating profit increased $4.8 million or 10 percent, reflecting increased
shipments ($15 million) and a favorable insurance settlement, partially offset
by higher operating and maintenance expenses. Operating profit also includes $9
million of costs from developing long-term energy industry investment
opportunities. Included in 1994's other income -- net is approximately $5
million of costs for evaluating and determining whether to build an oil refinery
near Phoenix.
Williams Telecommunications Systems' revenues increased $94 million or 31
percent, due in large part to the March 31, 1994, acquisition of BellSouth's
customer equipment sales and service operations in 29 states, as evidenced by a
52 percent increase in the number of ports. Costs and operating expenses and
selling, general and administrative expenses increased 31 percent and 20
percent, respectively, due to the increase in volume of equipment sales and
services. Operating profit increased to $18.9 million in 1994 from $9.5 million
in 1993 primarily resulting from higher sales volumes, partially offset by an
increase in selling, general and administrative expenses. Margins were level
between 1994 and 1993, while selling, general and administrative expenses as a
percent of revenue decreased in 1994 compared to 1993.
Other revenues and operating losses for 1994 and 1993 are primarily from
Vyvx switched fiber-optic television transmission services. Vyvx's operations
are not profitable at this time, as sufficient broadcast volumes have not been
achieved to support the infrastructure currently in place. Dedicated and
occasional television services revenues increased $6 million in 1994 which
helped reduce operating losses from $17 million in 1993 to $10 million in 1994.
Interest accrued increased 74 percent primarily because of significantly
higher levels of intercompany debt and higher average external borrowing levels,
partially offset by lower effective interest rates. Investing income decreased
due primarily to lower equity earnings for Apco Argentina Inc. and the sale of a
portion of the interest in Northern Border Partners, L.P., partially offset by
dividends on Williams' common stock (see Note 3 of Notes to Audited Consolidated
Financial Statements for additional information). The 1994 gain on sales of
assets results from the sale of 3,461,500 limited partner common units in
Northern Border Partners, L.P. The gain on sales of assets in 1993 results from
the sale of 6.1 million units in the Williams Coal Seam Gas Royalty Trust and
the sale of the intrastate natural gas pipeline system and other related assets
in Louisiana (see Note 4 of Notes to Audited Consolidated Financial Statements
for additional information).
The decrease in the provision for income taxes on continuing operations is
primarily a result of lower pretax income and the $9 million cumulative effect
in 1993 of the 1 percent increase in the federal income tax rate. The effective
income tax rate in 1994 is lower than the statutory rate, primarily because of
income tax credits from coal seam gas production, partially offset by state
income taxes. The effective income tax rate in 1993 is higher than the statutory
rate, primarily because of the effect of the federal income tax rate increase
and state income taxes, partially offset by income tax credits from coal seam
gas production (see Note 5 of Notes to Audited Consolidated Financial Statements
for additional information).
The network services operations of the Company have been presented in the
Consolidated Financial Statements of the Company as discontinued operations (see
Note 2 of Notes to Audited Consolidated
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Financial Statements for additional information). Income from discontinued
operations more than doubled to $94 million. The increase reflects a 93 percent
increase in switched services minutes and a 24 percent increase in private line
billable circuits. These increases more than offset a major carrier's removal of
traffic from the Company's system to the carrier's expanded network. Income was
also impacted by a decrease in interest accrued, due to the early extinguishment
of network services' long-term debt. The effective income tax rate for both 1994
and 1993 is greater than the federal statutory rate, due to the effect of state
income taxes.
The extraordinary credit (loss) results from early extinguishment of debt
(see Note 6 of Notes to Audited Consolidated Financial Statements for additional
information).
1993 VS. 1992
Williams Field Services' revenues decreased $11 million or 3 percent, due
primarily to lower natural gas sales ($202 million), offset by increased
revenues from gathering ($99 million), liquids products ($73 million) and
processing activities ($21 million). Gathering volumes increased 293 percent,
natural gas liquids volumes increased 355 percent and processing volumes
increased 111 percent when compared with volumes from the prior year. The lower
natural gas sales volumes were due to the March 1993 sale of Williams'
intrastate natural gas pipeline system and related marketing operations in
Louisiana. The increased gathering, processing and natural gas liquids volumes
were primarily due to the transfer of the gathering and processing operations
from Northwest Pipeline Corporation, another wholly-owned subsidiary of
Williams, on December 31, 1992. Including the transferred operations in 1992 for
comparative purposes, gathering, natural gas liquids and processing volumes
increased 25 percent, 11 percent and 21 percent, respectively. Costs and
operating expenses decreased by $64 million or 18 percent, due primarily to
lower natural gas purchases of $189 million, partially offset by higher gas
costs associated with the liquids extraction process ($31 million), increased
operating and maintenance expenses at expanded gathering and processing
facilities and expenses from transferred gathering and processing operations
($96 million). Operating profit increased $52.6 million or 101 percent, due
primarily to the transfer of gathering and processing operations, increased
volumes at expanded facilities, partially offset by decreased gas sales volumes,
lower liquids margins and increased operating costs from expanded facilities.
Williams Energy Services' revenues decreased approximately $135 million or
27 percent, due to lower natural gas sales volumes of $128 million and to
reporting refined product trading activities on a "net margin" basis effective
July 1, 1993. Increased natural gas sales prices favorably impacted revenues by
$34 million. Costs and operating expenses decreased $146 million or 30 percent,
due to lower natural gas purchases of $98 million and the change in reporting
trading activities. Selling, general and administrative expenses increased 60
percent from costs associated with establishing this company's operations,
pursuing new business development and equipping the company to pursue a growing
range of financial and information-based opportunities in the energy industry.
Operating profit increased $10.5 million to $7.9 million in 1993 from a loss of
$2.6 million in 1992 as improved results from price-risk management activities
($5 million) and improved natural gas sales margins ($3 million) more than
offset the expense associated with the development and marketing of new
information-based products. Improved results in price-risk management activities
relate to increases in marketing of commodities and derivatives products, in
addition to increased refined product trading volumes. Operating profit in 1993
also includes a favorable settlement of a marketing contract.
Williams Pipe Line's revenues increased $32 million or 22 percent, due
primarily to 12 percent ($17 million) higher shipments, increased other revenues
primarily related to gas liquids, fractionator operations and newly established
petroleum services, partially offset by a slightly lower transportation rate per
barrel. The lower average transportation rate per barrel reflects a 5 percent
decrease in the length of the average haul, partially offset by increased tariff
rates for portions of both 1992 and 1993. Costs and operating expenses increased
$18 million or 15 percent, due primarily to gas liquids, fractionator operations
and newly established petroleum services. Operating profit increased $14.2
million or 43 percent, primarily as a result of higher shipments and lower
general and administrative expenses. During the fourth quarter 1993, Williams
Pipe Line completed the acquisition of a 300-mile pipeline that connects with
the southern portion of its system in Oklahoma. The additional pipeline has
provided more direct access to key refining areas and opened new markets.
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Williams Telecommunications Systems' revenues increased $32 million or 12
percent, due primarily to higher equipment sales and services. Costs and
operating expenses increased 9 percent, due primarily to the increased volume of
equipment sales and services. Selling, general and administrative expenses
decreased 9 percent as 1992 was negatively impacted by the costs associated with
restructuring this business. Operating profit increased to $9.5 million in 1993,
compared with an operating loss of $9.8 million in 1992 due to increased margins
and volumes and a decrease in selling, general and administrative expenses.
Other revenues and operating losses for 1993 and 1992 are primarily from
Vyvx switched fiber-optic television transmission services. Vyvx's operations
are not profitable during these periods because sufficient broadcast volumes
have not been achieved to support the infrastructure currently in place. The $4
million, or 42 percent, increase in revenues from 1992 to 1993 had the effect of
helping reduce the operating loss from $18 million to $17 million.
Interest accrued decreased 27 percent primarily because of lower average
external borrowing levels and lower levels of intercompany debt. Interest
capitalized increased primarily because of increased capital expenditures on
gathering and processing facilities. The gain on sales of assets in 1993 results
from the sale of 6.1 million units in the Williams Coal Seam Gas Royalty Trust
and the sale of the intrastate natural gas pipeline system and other related
assets in Louisiana. The 1992 gain on sales of assets results from the sale of a
tract of land in Florida that had been retained from the assets of Agrico
Chemical Company, which was sold in 1987 (see Note 4 of Notes to Audited
Consolidated Financial Statements for additional information).
The increase in the provision for income taxes is primarily a result of
higher pre-tax income and the $9 million cumulative effect of the 1 percent
increase in the federal income tax rate. The effective income tax rate in 1993
is higher than the statutory rate, primarily because of the effect of the
federal income tax rate increase and state income taxes, partially offset by
income tax credits from coal-seam gas production. The effective income tax rate
in 1992 is lower than the statutory rate, primarily because of income tax
credits from coal-seam gas production, partially offset by state income taxes
(see Note 5 of Notes to Audited Consolidated Financial Statements for additional
information).
Income from discontinued operations related to the Company's network
services operations increased 84 percent to $46.4 million in 1993 (see Note 2 of
Notes to Audited Consolidated Financial Statements for additional information).
The increase is due primarily to a 122 percent increase in switched services
minutes, a 32 percent increase in private line billable circuits and lower
provisions for bad debt expense, partially offset by a decrease in the weighted
average price per circuit. The effective income tax rate for both 1993 and 1992
is greater than the federal statutory rate due to the effect of state income
taxes.
FINANCIAL CONDITION AND LIQUIDITY
OPERATING ACTIVITIES
Cash provided (used) by continuing operating activities was: 1994 -- $125
million; 1993 -- ($21) million; and 1992 -- $70 million. Accounts receivable
increased because of expanded activities of Williams Energy Services and
acquisitions made by Williams Telecommunications Systems, partially offset by
the reclassification of the Company's network services receivables to net assets
of discontinued operations (see Note 2 of Notes to Audited Consolidated
Financial Statements for additional information). Accounts payable and accrued
liabilities also declined as a result of the network services reclassification.
Net cash provided by discontinued operations was: 1994 -- $169 million;
1993 -- $163 million; 1992 -- $113 million. The increases during the periods
reflect improved operating results.
FINANCING ACTIVITIES
Net cash provided (used) by financing activities was: 1994 -- $428 million;
1993 -- ($162) million; 1992 -- ($11) million. Long-term debt principal payments
during 1994, 1993 and 1992 were $142 million, $34 million and $90 million,
respectively.
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23
During 1994, the Company purchased approximately 13.4 million shares of
Williams common stock on the open market for $395 million. Substantially all of
the purchases were financed with a $400 million short-term credit agreement.
Subsequent to December 31, 1994, the outstanding amounts under the credit
agreement were repaid from the proceeds of the sale of the Company's network
services operations, and the credit agreement was terminated.
Long-term debt at December 31, 1994, was $507 million, compared with $229
million at December 31, 1993, and $337 million at December 31, 1992. The
consolidated long-term debt to debt-plus-equity ratio was 22.6 percent at year
end, compared with 11.2 percent and 17.3 percent at December 31, 1993 and 1992,
respectively. If short-term notes payable and long-term debt due within one year
are included in the calculations, these ratios would be 34.5 percent, 12.7
percent and 18.8 percent, respectively.
The Company received capital contributions from Williams of $73 million,
$75 million and $50 million in 1994, 1993 and 1992, respectively, and paid
dividends to Williams of $336 million and $71 million in 1994 and 1993,
respectively.
INVESTING ACTIVITIES
Net cash provided (used) by investing activities was: 1994 -- ($718)
million; 1993 -- $25 million; 1992 -- ($167) million. Capital expenditures for
discontinued operations were $143 million in 1994; $101 million in 1993; and $60
million in 1992 primarily to expand and enhance the Company's network.
Expenditures in all years include the expansion of various gathering and
processing facilities, and expenditures in 1993 also include the expansion of
product pipeline facilities. Estimated capital expenditures for 1995 are
approximately $500 million, primarily to expand gathering and processing
facilities, develop an underground coal gasification project in Wyoming and
acquire certain gathering and processing assets in New Mexico.
During 1994, limited partner units in Northern Border Partners, L.P. were
sold for $80 million. During 1993, 6.1 million units in the Williams Coal Seam
Gas Royalty Trust were sold for $113 million. In addition, an intrastate natural
gas pipeline system and other related assets in Louisiana were sold for $170
million (see Note 4 of Notes to Audited Consolidated Financial Statements for
additional information).
EFFECTS OF INFLATION
The Company has experienced increased costs in recent years due to the
effects of inflation. However, approximately one-half of the Company's property,
plant and equipment has been purchased in the last six years, a period of
relatively low inflation.
OTHER
The Company is a participant in certain environmental activities in various
stages involving assessment studies, cleanup operations and/or remedial
processes. The sites are being monitored by Williams, other potentially
responsible parties, the U.S. Environmental Protection Agency (EPA), or other
governmental authorities in a coordinated effort. In addition, the Company
maintains an active monitoring program for its continued remediation and cleanup
of certain sites connected with its refined products pipeline activities. The
Company has both joint and several liability in some of these activities and
sole responsibility in others. Current estimates of the most likely costs of
such cleanup activities, after payments by other parties, are approximately $6
million, all of which is accrued at December 31, 1994. The Company will fund
these costs from operations and/or available bank-credit facilities. The actual
costs incurred will depend on the final amount, type and extent of contamination
discovered at these sites, the final cleanup standards mandated by the EPA or
other governmental authorities, and other factors. See Note 7 of Notes to
Audited Consolidated Financial Statements for the effects of a new accounting
standard on post-employment benefits; Note 12 of Notes to Audited Consolidated
Financial Statements for fair value and off-balance-sheet risk of financial
instruments; and Note 15 of Notes to Audited Consolidated Financial Statements
for contingencies.
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SUBSEQUENT EVENTS
Subsequent to December 31, 1994, the Company completed the sale of the
Company's network services operations for $2.5 billion in cash. The after-tax
gain of $1 billion was recorded in the first quarter of 1995 (see Note 2 of
Notes to Audited Consolidated Financial Statements for additional information).
Net proceeds from the sale were used to reduce the Company bank debt previously
incurred to purchase Williams common stock in the open market, with the
remainder going to its parent. Williams used these proceeds to acquire 60
percent of Transco's outstanding common stock on January 18, 1995 for $430.5
million, retire certain Transco borrowings and preferred stock, to reduce
certain bank debt and finance a portion of the 1995 capital expenditures
program.
On May 1, 1995, Williams completed the acquisition of Transco. Following
the merger, Williams contributed the stock of Transco and all of Transco's
subsidiaries, except for its subsidiaries holding regulated interstate natural
gas pipelines, to the Company.
ITEM 3. PROPERTIES.
See Item 1(c) for a description of properties.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Not applicable.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
Not applicable.
ITEM 6. EXECUTIVE COMPENSATION.
Not applicable.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 8. LEGAL PROCEEDINGS.
Other than as described under Item I. -- Business, in Note 15 to the
Company's Consolidated Financial Statements included elsewhere herein and in
Note D to the Transco Energy Company -- Contributed Assets Combined Financial
Statements included elsewhere herein, there are no material pending legal
proceedings. The Company is subject to ordinary routine litigation incidental to
its business.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
There is no market for the Company's common stock. All outstanding shares
of the Company's common stock are owned by Williams.
ITEM 10. RECENT SALE OF UNREGISTERED SECURITIES.
The Company has not sold any of its securities, registered or unregistered,
since its incorporation, other than the original subscription for common stock
by Williams.
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ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
DESCRIPTION OF COMMON STOCK
The Company is authorized to issue 1,000 shares of Common Stock, $1.00 par
value per share. As of December 15, 1995, all 1,000 shares of Common Stock were
issued and outstanding and were held by Williams. Holders of Common Stock are
entitled to dividends only as may be declared by the Board of Directors of the
Company.
Common stockholders are entitled to one vote for each share held and have
no preemptive or subscription rights upon the issuance of additional shares of
the Company's Common Stock. Upon liquidation or dissolution of the Company, the
holders of Common Stock are entitled to share ratably in the assets of the
Company available for distribution after provision for creditors and holders of
preferred stock, if any. All of the issued and outstanding Common Stock is duly
authorized, validly issued, fully paid and will not be subject to further calls
or assessments.
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company, a Delaware corporation, is empowered by Section 145 of the
General Corporation Law of the State of Delaware, subject to the procedures and
limitations stated therein, to indemnify any person against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any threatened, pending or
completed action, suit or proceeding in which such person is made party by
reason of their being or having been a director, officer, employee or agent of
the Company. The statute provides that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to which a person
may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors, or otherwise. The By-laws of the Company provide for
indemnification by the Company of its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware. In
addition, Williams has entered into indemnity agreements with its directors and
certain officers, including certain directors and officers of the Company,
providing for, among other things, the indemnification of and the advancing of
expenses to such individuals to the fullest extent permitted by law, and to the
extent insurance is maintained, for the continued coverage of such individuals.
Policies of insurance are maintained by Williams under which the directors
and officers of the Company are insured, within the limits and subject to the
limitations of the policies, against certain expenses in connection with the
defense of actions, suits or proceedings, and certain liabilities which might be
imposed as a result of such actions, suits or proceedings, to which they are
parties by reason of being or having been such directors or officers.
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ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
DESCRIPTION PAGE
- -------------------------------------------------------------------------------------- ----
WILLIAMS HOLDINGS OF DELAWARE, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS.......... 26
Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31,
1994............................................................................. 27
Notes to Unaudited Pro Forma Combined Statement of Income for the Year Ended
December 31, 1994................................................................ 28
Unaudited Pro Forma Statement of Income for the Nine Months Ended September 30,
1995............................................................................. 29
Notes to Unaudited Pro Forma Statement of Income for the Nine Months Ended September
30, 1995......................................................................... 30
WILLIAMS HOLDINGS OF DELAWARE, INC. UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Unaudited Consolidated Statement of Income for the Nine Months Ended
September 30, 1995 and 1994...................................................... 31
Unaudited Consolidated Balance Sheet at September 30, 1995 and December 31, 1994.... 32
Unaudited Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1995 and 1994...................................................... 33
Notes to Unaudited Consolidated Financial Statements -- September 30, 1995 and
1994............................................................................. 34
WILLIAMS HOLDINGS OF DELAWARE, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors...................................................... 41
Consolidated Statement of Income for the Years Ended December 31, 1994, 1993 and
1992............................................................................. 42
Consolidated Balance Sheet at December 31, 1994 and 1993............................ 43
Consolidated Statement of Stockholder's Equity for the Years Ended
December 31, 1994, 1993 and 1992................................................. 44
Consolidated Statement of Cash Flows for the Year Ended December 31, 1994, 1993 and
1992............................................................................. 45
Notes to Audited Consolidated Financial Statements.................................. 46
Unaudited Quarterly Financial Data.................................................. 63
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS COMBINED FINANCIAL STATEMENTS*
Report of Independent Public Accountants............................................ 64
Combined Balance Sheet at December 31, 1994......................................... 65
Combined Statement of Operations for the Year Ended December 31, 1994............... 67
Combined Statement of Cash Flows for the Year Ended December 31, 1994............... 68
Combined Statement of Common Stockholders' Deficit for the Year Ended December 31,
1994............................................................................. 69
Schedule of Segment Information for the Year Ended December 31, 1994................ 70
Notes to Combined Financial Statements.............................................. 71
- ---------------
* These financial statements are presented in accordance with Rule 3-05 of
Regulation S-X.
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WILLIAMS HOLDINGS OF DELAWARE, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
UNAUDITED PRO FORMA STATEMENTS OF INCOME
The Unaudited Pro Forma Statements of Income are prepared for the year
ended December 31, 1994, and the nine months ended September 30, 1995, and
illustrate the effects of Williams' acquisition of Transco as it relates to the
Transco entities contributed by Williams to Williams Holdings, including the
capital contributions that Williams made to Transco, as if they had occurred on
January 1, 1994.
On January 18, 1995, Williams acquired 60 percent of Transco's outstanding
common stock in a cash tender offer for $430.5 million. Williams acquired the
remaining 40 percent of Transco's outstanding common stock on May 1, 1995,
through a merger in which the remaining Transco common stock was exchanged for
approximately 10.4 million shares of Williams common stock valued at $334
million. Also effective May 1, 1995, Transco's $3.50 preferred stock was
exchanged for Williams $3.50 preferred stock valued at $142.5 million. Transco's
stockholders' equity at the acquisition date was $480 million. The acquisition
is accounted for as a purchase, and all of the cost in excess of Transco's
historical carrying amounts has been allocated to the property, plant and
equipment of Transco's natural gas transmission companies, Transcontinental Gas
Pipe Line Corporation and Texas Gas Transmission Corporation. In addition to the
above described consideration paid, the following significant items are included
in the purchase price allocated to Transcontinental Gas Pipe Line and Texas Gas:
the write-down to estimated net realizable value of certain Transco operating
assets that have been sold or will be sold within one year of the date of
acquisition, unfavorable natural gas marketing and transportation contracts and
deferred income taxes on differences between the financial and tax basis of
assets and liabilities created by the stock purchase.
On May 1, 1995, Transco dividended to Williams all of Transco's interests
in Transcontinental Gas Pipe Line and Texas Gas. Also effective May 1, 1995,
Williams made a capital contribution of its interest in Transco and Transco's
subsidiaries, except Transcontinental Gas Pipe Line and Texas Gas, to Williams
Holdings. The transfer of Transco and Transco's subsidiaries, except
Transcontinental Gas Pipe Line and Texas Gas, to Williams Holdings reflects the
purchase price allocation from the acquisition; therefore, these transferred
entities, as recorded on Williams Holdings financial statements, have a new
adjusted cost basis. The purchase price allocation resulted in a decrease to
Williams Holdings equity of $478 million as of September 30, 1995, primarily
from the estimated net realizable value of certain operating assets that have
been sold or will be sold within one year of the date of acquisition,
unfavorable natural gas marketing and transportation contracts, long-term debt
redemptions and revaluations to reflect current interest rates and
contingencies. During 1995, Williams has made capital contributions to Transco
sufficient to eliminate intercompany debt owed to affiliates, short-term
borrowing facilities, interest rate swaps, all external debt and all preferred
stock.
The Unaudited Pro Forma Statements of Income should be read in conjunction
with the historical financial statements of Williams Holdings and Transco Energy
Company -- Contributed Assets, which are included herein, and the Notes to the
Unaudited Pro Forma Statements of Income. The pro forma adjustments are based on
purchase price allocations that will continue to be adjusted during the one year
allocation period. However, the management of Williams Holdings believes that
any further adjustments to the purchase price will not be material, that the
assumptions made in preparing the Unaudited Pro Forma Statements of Income
provide a reasonable basis for presenting the significant effects of the
acquisition of Transco and the capital contributions from Williams to Transco
and that the pro forma adjustments give appropriate effect to those assumptions
and are properly applied in the pro forma financial information. The Unaudited
Pro Forma Statements of Income are not intended to be indicative of actual
operating results had the transactions occurred as of the dates indicated above,
nor do they purport to indicate operating results which may be attained in the
future.
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WILLIAMS HOLDINGS OF DELAWARE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(MILLIONS)
TRANSCO ENERGY
COMPANY -- PRO FORMA
WILLIAMS CONTRIBUTED ------------------------
HOLDINGS ASSETS ADJUSTMENTS COMBINED
--------- -------------- ----------- --------
Revenues..................................... $ 1,264 $1,293 $(219)(1) $2,338
Costs and expenses........................... 1,082 1,388 (284)(1) 2,186
-------- ------ ----- ------
Operating profit (loss)...................... 182 (95) 65 152
Allocated parent company expenses............ (20) -- (20)
Interest accrued -- net...................... (21) (125) 125(2) (21)
Investing income............................. 15 9 (4)(2) 20
Gain on sales of assets...................... 23 -- 23
-------- ------ ----- ------
Income (loss) from continuing operations
before income taxes........................ 179 (211) 186(3) 154
Provision (credit) for income taxes.......... 53 (80) 28(1) 49
48(4)
-------- ------ ----- ------
Income (loss) from continuing operations..... 126 (131) 110 105
Preferred stock dividends.................... -- 23 (23)(2) --
-------- ------ ----- ------
Income (loss) from continuing operations
after preferred stock dividends............ $ 126 $ (154) $ 133 $ 105
======== ====== ===== ======
See the accompanying Notes to Unaudited Pro Forma Combined Statement of Income.
27
29
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
The adjustments to the Unaudited Pro Forma Combined Statement of Income do
not give effect to any costs directly associated with the acquisition of Transco
that might be incurred within the next twelve months. The pro forma financial
data also do not give effect to any potential cost savings and synergies that
could result from the acquisition of Transco.
1. These adjustments eliminate historical results of operations for Transco
operations which the Company intends to sell within one year from the January
18, 1995 acquisition of Transco. Earnings or losses from operations that
Williams Holdings intends to sell are not reported in the Williams Holdings'
Consolidated Statement of Income, included herein, during the holding period.
Therefore, their results of operations have been excluded from the Pro Forma
Combined Statement of Income consistent with the assumption that the
acquisition of Transco occurred at the beginning of the period. For the year
ended December 31, 1994, Transco's costs and expenses include a charge of $45
million from the write-down of capitalized costs in excess of the ceiling
limitation from a nonoperating interest in certain coalbed methane
properties, asset write-downs of $18 million and a charge of $4 million for a
litigation settlement. These historical expense charges are included in the
pro forma adjustments eliminating Transco's operations to be sold from
historical amounts (see Note 3 below).
2. Prior to contributing Transco and its subsidiaries, other than its
subsidiaries holding natural gas pipelines, to the Company and during 1995,
Williams made capital contributions to Transco sufficient to eliminate
intercompany debt owed to affiliates, short-term borrowing facilities,
interest rate swaps, all external debt and all preferred stock. This
adjustment eliminates interest expense and debt costs, investing income and
preferred stock dividends related to these items.
3. The following is a summary of the adjustments to income from continuing
operations before income taxes (in millions):
Eliminate losses from Transco operations to be sold................... $ 65
Eliminate interest expense and investing income....................... 121
----
$186
====
4. This adjustment records the income tax effects of the pro forma adjustments
at a 40 percent tax rate.
28
30
WILLIAMS HOLDINGS OF DELAWARE, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1995
(MILLIONS)
PRO FORMA
WILLIAMS ------------------------
HOLDINGS ADJUSTMENTS ADJUSTED
-------- ----------- --------
Revenues..................................................... $944 $ 4(1) $948
Costs and expenses........................................... 747 1(1) 748
------ --- ------
Operating profit............................................. 197 3 200
Allocated parent company expenses............................ (10) (10)
Interest accrued -- net...................................... (29) (6)(1) (2)
33(2)
Investing income............................................. 63 9(2) 72
Loss on sales of investments................................. (12) (12)
Other income(expense) -- net................................. (10) (1)(1) (4)
7(2)
------ --- ------
Income from continuing operations before income taxes........ 199 45(3) 244
Provision for income taxes................................... 40 (1)(1) 56
17(4)
------ --- ------
Income from continuing operations............................ $159 $29 $188
====== === ======
See the accompanying Notes to Unaudited Pro Forma Statement of Income.
29
31
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1995
The adjustments to the Unaudited Pro Forma Statement of Income do not give
effect to any costs directly associated with the acquisition of Transco that
might be incurred within the next twelve months. The pro forma financial data
also do not give effect to any potential cost savings and synergies that could
result from the acquisition of Transco.
1. These adjustments combine the results of operations of Williams Holdings and
Transco as if the acquisition of Transco occurred on January 1, 1994.
2. Prior to contributing Transco and its subsidiaries, other than the natural
gas pipelines, to the Company and during 1995, Williams made capital
contributions to Transco sufficient to eliminate intercompany debt owed to
affiliates, short-term borrowing facilities, interest rate swaps, all
external debt and all preferred stock. This adjustment eliminates interest
expense and debt costs and preferred stock dividends related to these items.
3. The following is a summary of the adjustments to income from continuing
operations before income taxes (in millions):
Effect of purchase occurring January 1, 1994........................... $(4)
Eliminate interest expense and preferred stock dividends............... 49
---
$45
===
4. This adjustment records the income tax effects of the pro forma adjustments
at a 40 percent tax rate.
30
32
WILLIAMS HOLDINGS OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1994
-------- ------
(MILLIONS)
Revenues (Note 10):
Williams Field Services Group......................................... $ 299.1 $240.9
Williams Energy Services.............................................. 65.6 205.0
Williams Pipe Line.................................................... 220.4 223.9
Williams Telecommunications Systems................................... 364.2 276.1
Other................................................................. 43.5 13.8
Intercompany eliminations............................................. (48.8) (42.6)
-------- ------
Total revenues................................................ 944.0 917.1
-------- ------
Profit-center costs and expenses (Note 10):
Costs and operating expenses.......................................... 601.0 681.9
Selling, general and administrative expenses.......................... 159.9 103.3
Other income -- net................................................... (14.3) (2.8)
-------- ------
Total profit-center costs and expenses........................ 746.6 782.4
-------- ------
Operating profit (loss):
Williams Field Services Group......................................... 101.4 84.8
Williams Energy Services.............................................. 29.7 4.4
Williams Pipe Line.................................................... 50.5 40.1
Williams Telecommunications Systems................................... 21.1 12.2
Other................................................................. (5.3) (6.8)
-------- ------
Total operating profit........................................ 197.4 134.7
Allocated parent company expenses....................................... (10.4) (15.3)
Interest accrued (Note 10).............................................. (36.3) (14.9)
Interest capitalized.................................................... 7.4 3.3
Investing income (Note 10).............................................. 62.7 11.4
Gain (loss) on sales of investments (Note 4)............................ (12.6) 22.7
Other income (expense) -- net........................................... (9.6) 2.0
-------- ------
Income from continuing operations before income taxes................... 198.6 143.9
Provision for income taxes (Note 5)..................................... 39.8 42.9
-------- ------
Income from continuing operations....................................... 158.8 101.0
Income from discontinued operations (Note 6)............................ 1,005.7 51.7
-------- ------
Income before extraordinary loss........................................ 1,164.5 152.7
Extraordinary loss (Note 7)............................................. -- (6.1)
-------- ------
Net income.............................................................. $1,164.5 $146.6
======== ======
See accompanying notes.
31
33
WILLIAMS HOLDINGS OF DELAWARE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(MILLIONS)
Current assets:
Cash and cash equivalents........................................ $ 40.8 $ 17.9
Receivables:
Trade......................................................... 408.7 305.6
Affiliates.................................................... 26.3 2.4
Inventories...................................................... 116.0 84.6
Net assets held for sale (Notes 3 and 6)......................... 33.9 743.6
Deferred income taxes -- affiliates.............................. 79.6 33.3
Other............................................................ 50.6 43.7
---------- ----------
Total current assets..................................... 755.9 1,231.1
Due from parent.................................................... 232.1 --
Investments:
Parent company debentures (Note 4)............................... 411.2 --
Williams common stock............................................ 46.7 336.3
Other............................................................ 79.2 199.7
Property, plant and equipment, at cost............................. 2,714.9 2,113.5
Less accumulated depreciation and depletion........................ (591.4) (528.4)
---------- ----------
2,123.5 1,585.1
Other assets and deferred changes.................................. 163.8 87.9
---------- ----------
Total assets............................................. $ 3,812.4 $ 3,440.1
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable.................................................... $ -- $ 398.2
Accounts payable:
Trade......................................................... 174.7 145.7
Affiliates.................................................... 59.3 3.5
Accrued liabilities (Note 8)..................................... 835.6 147.4
Long-term debt due within one year (Note 9)...................... 12.8 13.0
---------- ----------
Total current liabilities................................ 1,082.4 707.8
Long-term debt (Note 9):
Affiliates....................................................... 1.0 389.9
Other............................................................ 124.0 117.1
Deferred income taxes -- affiliates................................ 102.1 356.2
Deferred income and other liabilities.............................. 383.9 129.2
Contingent liabilities and commitments (Note 11)
Stockholder's equity:
Common stock, $1 par value, 1,000 shares authorized and
outstanding................................................... -- --
Capital in excess of par value................................... 1,683.4 1,531.4
Retained earnings................................................ 398.0 244.3
Net unrealized gain (loss) on non-current marketable
securities.................................................... 37.6 (35.8)
---------- ----------
Total stockholder's equity............................... 2,119.0 1,739.9
---------- ----------
Total liabilities and stockholder's equity............... $ 3,812.4 $ 3,440.1
========== ==========
See accompanying notes.
32
34
WILLIAMS HOLDINGS OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1994
-------- -------
(MILLIONS)
OPERATING ACTIVITIES:
Net income........................................................... $1,164.5 $ 146.6
Adjustments to reconcile to cash provided from operations:
Discontinued operations........................................... (1,005.7) (51.7)
Extraordinary loss................................................ -- 6.1
Depreciation and depletion........................................ 67.9 58.5
Provision for deferred income taxes............................... 34.0 8.0
(Gain) loss on sale of investments................................ 12.6 (22.7)
Changes in receivables............................................ 22.8 (38.4)
Changes in inventories............................................ (25.7) (14.6)
Changes in other current assets................................... (7.7) (17.2)
Changes in accounts payable....................................... (29.7) 7.6
Changes in accrued liabilities.................................... (11.1) (27.1)
Changes in balances with affiliates............................... (143.9) (1.3)
Other, including changes in non-current assets and liabilities.... (71.2) 17.8
-------- -------
Net cash provided by continuing operations................... 6.8 71.6
Net cash provided by discontinued operations................. -- 152.8
-------- -------
Net cash provided by operating activities.................... 6.8 224.4
-------- -------
FINANCING ACTIVITIES:
Payments of notes payable............................................ (398.2) --
Proceeds from notes payable.......................................... -- 91.9
Payments of long-term debt........................................... (398.9) (140.9)
Proceeds from long-term debt......................................... 26.9 --
Dividends paid to parent............................................. (1,010.8) (63.7)
Changes in parent company advances................................... (474.6) 119.4
Capital contributions from parent.................................... 797.4 37.7
Subsidiary preferred stock redemptions............................... (144.0) --
Other -- net......................................................... 8.0 --
-------- -------
Net cash provided (used) by financing activities............. (1,594.2) 44.4
-------- -------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures:
Continuing operations........................................... (266.6) (134.1)
Discontinued operations......................................... -- (93.5)
Proceeds from sales............................................... 15.2 3.2
Acquisition of businesses, net of cash acquired...................... (321.5) (47.1)
Proceeds from sales of businesses.................................... 2,572.8 --
Income tax and other payments related to discontinued operations..... (263.5) (.1)
Purchase of investments.............................................. (3.0) (108.4)
Proceeds from sales of investments................................... 125.1 80.6
Changes in advances to parent company................................ (243.1) --
Other -- net......................................................... (5.1) 21.1
-------- -------
Net cash provided (used) by investing activities............. 1,610.3 (278.3)
-------- -------
Increase (decrease) in cash and cash equivalents............. 22.9 (9.5)
Cash and cash equivalents at beginning of period....................... 17.9 13.5
-------- -------
Cash and cash equivalents at end of period............................. $ 40.8 $ 4.0
======== =======
See accompanying notes.
33
35
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
Williams Holdings of Delaware, Inc. (Williams Holdings) is a wholly-owned
subsidiary of The Williams Companies, Inc. (Williams). The accompanying interim
consolidated financial statements of Williams Holdings do not include all notes
in annual financial statements and therefore should be read in conjunction with
the annual financial statements and notes thereto for Williams Holdings
presented herein. The accompanying unaudited financial statements have not been
audited by independent auditors but include all adjustments both normal
recurring and others which, in the opinion of Williams Holdings' management, are
necessary to present fairly its financial position at September 30, 1995, and
results of operations and cash flows for the nine months ended September 30,
1995 and 1994. The 1995 after-tax gain from the sale of the Company's network
services operations and its related 1994 results are presented as discontinued
operations (See Note 6). On January 18, 1995, Williams acquired 60 percent of
Transco Energy Company's (Transco) outstanding common stock and on May 1, 1995,
acquired the remaining 40 percent of Transco's outstanding common stock (See
Note 3).
NOTE 2. ORGANIZATION AND BASIS OF PRESENTATION
On May 1, 1995, Transco dividended to Williams all of Transco's interests
in two Transco subsidiaries, Transcontinental Gas Pipe Line Corporation and
Texas Gas Transmission Corporation. Also effective May 1, 1995, Williams made a
capital contribution of its interest in Transco and Transco's subsidiaries,
except Transcontinental Gas Pipe Line and Texas Gas, to Williams Holdings.
Revenues and operating profit amounts include the operating results of the
Transco entities contributed to Williams Holdings since the January 18, 1995,
acquisition (See Note 3). Transco's gas gathering operations (except those
related operations of Transcontinental Gas Pipe Line and Texas Gas) are included
as part of Williams Field Services Group, and Transco's gas marketing operations
are included as a part of Williams Energy Services.
NOTE 3. TRANSCO ACQUISITION
On January 18, 1995, Williams acquired 60 percent of Transco's outstanding
common stock in a cash tender offer for $430.5 million. Williams acquired the
remaining 40 percent of Transco's outstanding common stock on May 1, 1995,
through a merger in which the remaining Transco common stock was exchanged for
approximately 10.4 million shares of Williams common stock valued at $334
million. The acquisition is accounted for as a purchase. The results of
operations of the Transco entities contributed to Williams Holdings beginning
January 18, 1995, are included 100 percent in Williams Holdings' Consolidated
Statement of Income for the nine months ended September 30, 1995, due to the
losses from these entities. An allocation of the purchase price was assigned to
the assets and liabilities of the Transco entities contributed to Williams
Holdings based on their estimated fair values.
Williams Holdings has sold a significant portion of Transco's coal
operations and coalbed methane properties and intends to sell, within one year,
other Transco assets including certain pipeline and gathering operations and
other assets, all of which are recorded at estimated net realizable value in net
assets held for sale. Estimated results of operations and changes in the
carrying amount of these businesses during the holding period are reflected in
the purchase price and are not material for the nine months ended September 30,
1995.
Williams made capital contributions during 1995 of approximately $612
million to Transco primarily to retire and/or terminate certain Transco
borrowings, $4.75 preferred stock and interest-rate swaps and to advance funds
to Transcontinental Gas Pipe Line and Texas Gas to terminate sale of receivables
facilities. Effective on the May 1, 1995 merger, Transco's $3.50 preferred stock
was exchanged for Williams' $3.50
34
36
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
preferred stock, Williams assumed all Transco external debt, except
Transcontinental Gas Pipe Line and Texas Gas debt, and assumed all amounts
payable by Transco to Transcontinental Gas Pipe Line and Texas Gas. These
transactions totaled approximately $1.1 billion and were capital contributions
by Williams to Williams Holdings.
The following unaudited pro forma information combines the results of
operations of Williams Holdings and the Transco entities contributed to Williams
Holdings as if the purchase occurred on January 1, 1994.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1994
-------- ------
UNAUDITED
(MILLIONS, EXCEPT
PER-SHARE AMOUNTS)
Revenues............................................. $ 948.0 $969.9
Income from continuing operations.................... 187.7 102.0
Income before extraordinary loss..................... 1,193.4 153.8
Net income........................................... 1,193.4 147.7
Pro forma financial information is not necessarily indicative of results of
operations that would have occurred if the acquisition had occurred on January
1, 1994 or of future results of operations of the combined companies.
NOTE 4. INVESTMENTS
In the second quarter of 1995, Williams Holdings sold its 15 percent
interest in Texasgulf Inc. for approximately $124 million in cash, which
resulted in a second quarter after-tax gain of approximately $16 million because
of previously unrecognized tax benefits included in the provision for income
taxes.
In April 1995, Williams Holdings exchanged 12.2 million shares of Williams
common stock for Williams convertible debentures each having a fair value of
$360 million at the time of the exchange, with no gain or loss recognized. The
convertible debentures bear interest at 6 percent, mature in 2005 and are
convertible into 9.3 million shares of Williams common stock at $38.58 per
share. Williams Holdings also received warrants to purchase 7.5 million shares
of Williams common stock at $46.67 per share for which no value was assigned. In
October 1995, Williams Holdings sold its remaining investment in Williams common
stock for $46.2 million in cash resulting in a pre-tax gain of approximately $11
million which will be recognized in the fourth quarter.
In the second quarter of 1994, 3,461,500 limited partner common units were
sold in Northern Border Partners, L.P. Net proceeds from the sale were
approximately $80 million and the sale resulted in a pre-tax gain of $22.7
million. As a result of the sale, Williams Holdings' original 12.25 percent
interest in the Northern Border partnerships has been reduced to 3.2 percent.
35
37
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 5. PROVISION FOR INCOME TAXES
The provision (credit) for income taxes from continuing operations
includes:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1994
----- -----
(MILLIONS)
Current:
Federal.......................................................... $(2.3) $26.7
State............................................................ 8.1 8.2
----- -----
5.8 34.9
----- -----
Deferred:
Federal.......................................................... 34.7 8.2
State............................................................ (.7) (.2)
----- -----
34.0 8.0
----- -----
Total provision.................................................... $39.8 $42.9
===== =====
The effective income tax rate in 1995 is significantly less than the
federal statutory rate due primarily to the previously unrecognized tax benefits
related to the sale of Texasgulf Inc. (See Note 4) and income tax credits from
coal-seam gas production, partially offset by the effect of state income taxes.
The effective income tax rate in 1994 is less than the federal statutory
rate due primarily to income tax credits from coal-seam gas production and a
favorable prior-year state income tax adjustment, partially offset by the effect
of state income taxes related to 1994.
Cash payments to Williams and certain taxing authorities for income taxes
for the nine months ended September 30, 1995 and 1994 are $254 million and $81
million (before refunds of $5.7 million in 1994), respectively.
NOTE 6. DISCONTINUED OPERATIONS
On January 5, 1995, the Company's network services operations were sold to
LDDS Communications, Inc. (LDDS) for $2.5 billion in cash. The sale yielded a
gain of $1 billion (net of income taxes of approximately $724 million) which is
reported as income from discontinued operations. Prior-period operating results
for the network services operations are reported as discontinued operations. The
assets and liabilities that were transferred to LDDS in the sale of the network
services operations are included in net assets held for sale at December 31,
1994. Under the terms of the agreement, Williams Holdings retained Williams
Telecommunications Systems, Inc., a national telecommunications equipment
supplier and service company, and Vyvx, Inc., which operates a national video
network specializing in broadcast television applications.
NOTE 7. EXTRAORDINARY LOSS
The 1994 extraordinary loss results from early extinguishment of debt. A
subsidiary of Williams Holdings paid approximately $137 million to redeem higher
interest rate debt for a $6.1 million after-tax loss (net of $3.9 million
benefit for income taxes).
36
38
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 8. ACCRUED LIABILITIES
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(MILLIONS)
Income taxes payable.............................. $ 544.1 $ 2.8
Employee costs.................................... 46.2 26.2
Taxes other than income taxes..................... 24.4 29.1
Other............................................. 220.9 89.3
------- ------
$ 835.6 $147.4
======= ======
NOTE 9. LONG-TERM DEBT
Long-term debt consists of the following amounts:
WEIGHTED AVERAGE SEPTEMBER 30, DECEMBER 31,
INTEREST RATE* 1995 1994
---------------- ------------- ------------
(MILLIONS)
Revolving credit
loans -- Williams................. -- $ -- $389.9
Affiliates.......................... -- 1.0 --
------- ------
$ 1.0 $389.9
======= ======
Williams Pipe Line
Notes, 8.95% and 9.78%, payable
through 2001................... 9.3 $ 110.0 $120.0
Williams Energy Ventures
Adjustable rate notes, payable
1996 through 2002.............. 8.3 18.9 --
Other, payable through 1999......... 8.0 7.9 10.1
------- ------
136.8 130.1
Current portion of long-term debt... (12.8) (13.0)
------- ------
$ 124.0 $117.1
======= ======
- ---------------
* At September 30, 1995.
During first quarter 1995, Williams replaced its $600 million credit
agreement, which was scheduled to terminate in December 1995, with a new $800
million agreement. Under the new credit agreement, Williams Holdings' and
Williams Pipe Line's maximum borrowing availability, subject to borrowings by
other affiliated companies, is $600 million and $100 million, respectively.
Williams Holdings and Williams Pipe Line had no borrowings under this facility
at September 30, 1995.
The amount available under the facility at September 30, 1995 was $765
million. Interest rates vary with current market conditions.
Cash payments for interest (net of amounts capitalized) for the nine months
ended September 30, 1995 and 1994 are $52 million and $27 million, respectively,
including payments to Williams and affiliates of $25 million and $14 million,
respectively.
37
39
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 10. RELATED PARTY TRANSACTIONS
Williams Holdings and its subsidiaries maintain credit agreements with
Williams for both advances from and advances to Williams depending on the cash
position of the subsidiary. Investing income includes $32.8 million for the nine
months ended September 30, 1995, from advances with affiliates, while interest
accrued includes $3.4 million and $4.7 million for the nine months ended
September 30, 1995 and 1994, respectively.
Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Williams Natural Gas, Northwest Pipeline, Transcontinental
Gas Pipe Line and Texas Gas. Revenues include transactions with affiliates of
$65.1 million and $3.6 million for the nine months ended September 30, 1995 and
1994, respectively. Costs and operating expenses include transactions with
affiliates of $133 million and $14.4 million for the nine months ended September
30, 1995 and 1994, respectively.
NOTE 11. CONTINGENT LIABILITIES AND COMMITMENTS
Rate and regulatory matters
Williams Pipe Line has various regulatory proceedings pending. As a result
of rulings in certain of these proceedings, a portion of its revenues has been
collected subject to refund. Such revenues were $159 million at September 30,
1995. In an order issued on May 31, 1995, the FERC found that 20 of 32 of
Williams Pipe Line's markets are workably competitive. This order has been
appealed to the U.S. Court of Appeals for the D.C. Circuit. As a result of this
order and price rulings in other cases, Williams Pipe Line does not expect that
the amount of any refunds ordered would be significant. Accordingly, no portion
of these revenues has been reserved for refund.
Environmental matters
Certain Williams Holdings' subsidiaries have been named as potentially
responsible parties (PRP) at various Superfund waste disposal sites. In
addition, these subsidiaries have incurred or are alleged to have incurred
various other hazardous materials removal or remediation obligations under
environmental laws. Although no assurance can be given, Williams Holdings does
not believe that these obligations or the PRP status of these subsidiaries will
have a material adverse effect on its financial position, results of operations
or net cash flows.
Other legal matters
On December 31, 1991, the Southern Ute Indian Tribe (the Tribe) filed a
lawsuit against Williams Production Company, a wholly-owned subsidiary of
Williams Holdings, and other gas producers in the San Juan Basin area, alleging
that certain coal strata was reserved by the United States for the benefit of
the Tribe and that the extraction of coal-seam gas from the coal strata was
wrongful. The Tribe seeks compensation for the value of the coal-seam gas. The
Tribe also seeks an order transferring to the Tribe ownership of all of the
defendants' equipment and facilities utilized in the extraction of the coal-seam
gas. On September 13, 1994, the court granted summary judgment in favor of the
defendants. The Tribe sought a certification of an interlocutory appeal from the
court which was denied. Nevertheless, the Tribe has lodged an interlocutory
appeal with the U.S. Court of Appeals for the Tenth Circuit. Williams Production
agreed to indemnify the Williams Coal Seam Gas Royalty Trust (Trust) against any
losses that may arise in respect of certain properties subject to the lawsuit.
In addition, if the Tribe is successful in showing that Williams Production has
no rights in the coal-seam gas, Williams Production has agreed to pay to the
Trust for distribution to then-current unitholders, an amount representing a
return of a portion of the original purchase price paid for the units. While
Williams Holdings believes that such a payment is not probable based on the
summary judgment
38
40
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
granted in the defendants' favor, it has reserved a portion of the proceeds from
the sale of the units in the Trust.
In October 1990, Dakota Gasification Company (Dakota), the owner of the
Great Plains Coal Gasification Plant (Plant), filed suit in the U.S. district
court in North Dakota against Transcontinental Gas Pipe Line and three other
pipeline companies alleging that the pipeline companies had not complied with
their respective obligations under certain gas purchase and gas transportation
contracts. On September 8, 1992, Dakota and the Department of Justice on behalf
of the Department of Energy filed an amended complaint adding as defendants in
the suit, Transco, Transco Coal Gas Company and all of the other partners in the
partnership that originally constructed the Plant and each of the parent
companies of these entities. Dakota and the Department of Justice sought
declaratory and injunctive relief and the recovery of damages, alleging that the
four pipeline defendants underpaid for gas, collectively, as of June 30, 1992,
by more than $232 million plus interest and for additional damages for
transportation services and costs and expenses including attorneys fees. On
March 30, 1994, the parties executed definitive agreements which would settle
the litigation subject to final non-appealable regulatory approvals. The
settlement is also subject to a Federal Energy Regulatory Commission (FERC)
ruling that Transcontinental Gas Pipe Line's existing authority to recover in
rates certain costs related to the purchase and transportation of gas produced
by Dakota will pertain to gas purchase and transportation costs Transcontinental
Gas Pipe Line will pay Dakota under the terms of the settlement. On October 18,
1994, the FERC issued an order consolidating Transcontinental Gas Pipe Line's
petition with petitions pending relative to two of the other three pipeline
companies (the third pipeline having entered into a settlement) and setting the
matter for hearing before an administrative law judge. The hearing commenced on
June 20, and ended on July 14, 1995. In the event that the necessary regulatory
approvals are not obtained, Transcontinental Gas Pipe Line, Transco and Transco
Coal Gas Company intend to vigorously defend the suit.
In connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, Transcontinental Gas Pipe Line and
Texas Gas have each entered into certain settlements which may require the
indemnification by Transcontinental Gas Pipe Line or Texas Gas of certain claims
for additional royalties which the producers may be required to pay as a result
of such settlements. In October 1992, the U.S. Court of Appeals for the Fifth
Circuit and the Louisiana Supreme Court, with respect to the same issue under
Louisiana law, determined that royalties are due on take-or-pay payments under
the royalty clauses of the specific mineral leases reviewed by the courts. As a
result of these and related developments, Transcontinental Gas Pipe Line and
Texas Gas have been named as defendants in, respectively, six and two lawsuits
in which damages aggregated in excess of $133 million. Transco Energy Company
and Transco Gas Supply Company have also been named as defendants in certain of
these lawsuits. On July 17, 1995, a judge in a Texas state court granted a
motion by Transcontinental Gas Pipe Line for partial summary judgment, rejecting
a major portion of the plaintiff's claims in one of these lawsuits. Producers
may receive other demands which could result in additional claims against
Transcontinental Gas Pipe Line and Texas Gas pursuant to the indemnification
provisions in their respective settlements. Indemnification for royalties will
depend on, among other things, the specific lease provisions between the
producer and the lessor and the terms of the settlement between the producer and
either Transcontinental Gas Pipe Line or Texas Gas. Texas Gas may file to
recover 75 percent of any such amounts it may be required to pay pursuant to
indemnities for royalties under the provisions of Order 528.
On November 14, 1994, Continental Energy Associates Limited Partnership
(the Partnership) filed a voluntary petition under Chapter 11 of the Bankruptcy
Code with the U.S. Bankruptcy Court, Middle District of Pennsylvania. The
Partnership owns a cogeneration facility in Hazleton, Pennsylvania (the
Facility). Hazleton Fuel Management Company (HFMC), a subsidiary of Williams
Holdings, formerly supplied natural gas and fuel oil to the Facility. As of
September 30, 1995, it had current outstanding receivables from the Partnership
of approximately $19 million, for which HFMC has established a reserve of $18
million. The
39
41
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
construction of the Facility was funded by several banks that have a security
interest in all of the Partnership's assets. HFMC has asserted to the Bankruptcy
Court that payment of its receivables is superior to the lien of the banks and
intends to vigorously pursue the collection of such amounts. HFMC has also filed
suit against the lead bank with respect to this and other matters, including the
alleged tortious interference with HFMC's contractual relations with the
Partnership and other parties. On March 21, 1995, the Bankruptcy Court approved
the rejection of the gas supply contract between the Partnership and HFMC. HFMC
has in turn asserted force majeure under a contract with a producer under which
HFMC purchased natural gas for the Facility.
In addition to the foregoing, various other proceedings are pending against
Williams Holdings or its subsidiaries incidental to their operations.
Summary
While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements, will have a materially adverse effect upon Williams Holdings'
future financial position, results of operations or cash flow requirements.
40
42
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Williams Holdings of Delaware, Inc.
We have audited the accompanying consolidated balance sheet of Williams
Holdings of Delaware, Inc. as of December 31, 1994 and 1993, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1994. Our audits also
included the financial statement schedule listed in the Index at Item 15. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Williams Holdings of Delaware, Inc. at December 31, 1994 and 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma
July 14, 1995
41
43
WILLIAMS HOLDINGS OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(MILLIONS)
Revenues (Note 13):
Williams Field Services Group.............................. $ 336.4 $ 386.5 $ 397.7
Williams Energy Services................................... 263.7 360.8 496.2
Williams Pipe Line......................................... 310.7 180.5 148.5
Williams Telecommunications Systems........................ 396.6 302.8 271.1
Other...................................................... 20.0 13.5 9.5
Intercompany eliminations (Note 14)........................ (63.1) (23.1) (39.8)
-------- -------- --------
Total revenues..................................... 1,264.3 1,221.0 1,283.2
-------- -------- --------
Profit-center costs and expenses (Note 13):
Costs and operating expenses............................... 939.4 951.8 1,114.9
Selling, general and administrative expenses............... 142.7 121.8 114.7
Other income -- net........................................ -- (4.8) (.6)
-------- -------- --------
Total profit-center costs and expenses............. 1,082.1 1,068.8 1,229.0
-------- -------- --------
Operating profit (loss):
Williams Field Services Group.............................. 122.2 104.6 52.0
Williams Energy Services................................... .5 7.9 (2.6)
Williams Pipe Line......................................... 52.0 47.2 33.0
Williams Telecommunications Systems........................ 18.9 9.5 (9.8)
Other...................................................... (11.4) (17.0) (18.4)
-------- -------- --------
Total operating profit............................. 182.2 152.2 54.2
Allocated parent company expenses (Note 13).................. (20.0) (17.7) (17.3)
Interest accrued (Note 13)................................... (25.8) (14.8) (20.3)
Interest capitalized......................................... 4.7 5.4 2.9
Investing income (Note 3).................................... 15.0 22.6 21.1
Gain on sales of assets (Note 4)............................. 22.7 97.5 14.6
Other income (expense) -- net................................ .3 (.3) (2.1)
-------- -------- --------
Income from continuing operations before income taxes........ 179.1 244.9 53.1
Provision for income taxes (Note 5).......................... 53.6 92.6 6.2
-------- -------- --------
Income from continuing operations............................ 125.5 152.3 46.9
Income from discontinued operations (Note 2)................. 94.0 46.4 25.2
-------- -------- --------
Income before extraordinary credit (loss).................... 219.5 198.7 72.1
Extraordinary credit (loss) (Note 6)......................... (6.1) -- 11.1
-------- -------- --------
Net income................................................... $ 213.4 $ 198.7 $ 83.2
======== ======== ========
See accompanying notes.
42
44
WILLIAMS HOLDINGS OF DELAWARE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
---------------------
1994 1993
-------- --------
(MILLIONS)
Current assets:
Cash and cash equivalents............................................. $ 17.9 $ 13.5
Receivables:
Trade less allowance of $7.2 million ($9.4 million in 1993)........ 305.6 273.2
Affiliates (Note 13)............................................... 2.4 1.1
Inventories (Note 8).................................................. 84.6 73.7
Net assets of discontinued operations (Note 2)........................ 743.6 --
Deferred income taxes -- affiliates (Note 5).......................... 33.3 21.7
Other................................................................. 43.7 22.2
-------- --------
Total current assets.......................................... 1,231.1 405.4
Due from affiliates (Note 13)........................................... -- 56.4
Investments (Note 3).................................................... 536.0 257.8
Property, plant and equipment -- net (Note 9)........................... 1,585.1 2,151.1
Other assets and deferred charges....................................... 87.9 118.7
-------- --------
Total assets.................................................. $3,440.1 $2,989.4
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable (Note 11)............................................... $ 398.2 $ --
Accounts payable:
Trade (Note 10).................................................... 145.7 214.6
Affiliates (Note 13)............................................... 3.5 1.8
Accrued liabilities (Note 10)......................................... 147.4 193.7
Long-term debt due within one year (Note 11).......................... 13.0 34.0
-------- --------
Total current liabilities..................................... 707.8 444.1
Long-term debt (Note 11):
Affiliates............................................................ 389.9 --
Other................................................................. 117.1 229.4
Deferred income taxes -- affiliates (Note 5)............................ 356.2 356.7
Deferred income and other liabilities................................... 129.2 141.2
Contingent liabilities and commitments (Note 15)
Stockholder's equity:
Common stock, $1 par value, 1,000 shares authorized and outstanding... -- --
Capital in excess of par value........................................ 1,531.4 1,450.8
Retained earnings (Note 11)........................................... 244.3 367.2
Net unrealized loss on noncurrent marketable equity securities (Note
3)................................................................. (35.8) --
-------- --------
Total stockholder's equity.................................... 1,739.9 1,818.0
-------- --------
Total liabilities and stockholder's equity.................... $3,440.1 $2,989.4
======== ========
See accompanying notes.
43
45
WILLIAMS HOLDINGS OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
CAPITAL IN NET
COMMON EXCESS OF RETAINED UNREALIZED
STOCK PAR VALUE EARNINGS LOSS TOTAL
-------- ---------- --------- ---------- --------
(MILLIONS)
Balance, December 31, 1991..................... $ -- $1,105.8 $ 156.3 $ -- $1,262.1
Net income -- 1992............................. -- -- 83.2 -- 83.2
Capital contributions --
Cash......................................... -- 50.0 -- -- 50.0
Transfer of subsidiary from parent........... -- 219.3 -- -- 219.3
-------- -------- -------- ------- --------
Balance, December 31, 1992..................... -- 1,375.1 239.5 -- 1,614.6
Net income -- 1993............................. -- -- 198.7 -- 198.7
Cash dividends................................. -- -- (71.0) -- (71.0)
Capital contributions --
Cash......................................... -- 75.3 -- -- 75.3
Other........................................ -- .4 -- -- .4
-------- -------- -------- ------- --------
Balance, December 31, 1993..................... -- 1,450.8 367.2 -- 1,818.0
Net income -- 1994............................. -- -- 213.4 -- 213.4
Dividends --
Cash......................................... -- -- (335.8) -- (335.8)
Other........................................ -- -- (.5) -- (.5)
Contributions --
Cash......................................... -- 73.4 -- -- 73.4
Other........................................ -- 7.2 -- -- 7.2
Net unrealized loss on noncurrent marketable
equity securities............................ -- -- -- (35.8) (35.8)
-------- -------- -------- ------- --------
Balance, December 31, 1994..................... $ -- $1,531.4 $ 244.3 $(35.8) $1,739.9
======== ======== ======== ======= ========
See accompanying notes.
44
46
WILLIAMS HOLDINGS OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
(MILLIONS)
OPERATING ACTIVITIES:
Net income.................................................. $ 213.4 $ 198.7 $ 83.2
Adjustments to reconcile to cash provided from operations:
Discontinued operations.................................. (94.0) (46.4) (25.2)
Extraordinary (credit) loss.............................. 6.1 -- (11.1)
Depreciation and depletion............................... 80.0 70.0 51.0
Provision (credit) for deferred income taxes............. 15.4 .6 (15.9)
(Gain) loss on sales of property, plant and equipment.... .6 (100.9) (15.1)
Gain on sale of investment............................... (22.7) -- --
Changes in receivables sold.............................. -- (74.7) 29.6
Changes in receivables................................... (72.3) 4.6 (66.8)
Changes in inventories................................... (3.3) (5.2) (6.8)
Changes in other current assets.......................... (31.5) (14.0) (5.0)
Changes in accounts payable.............................. 22.1 (39.5) 49.0
Changes in accrued liabilities........................... (.3) (11.3) 11.8
Other, including changes in non-current assets and
liabilities............................................ 11.5 (2.7) (8.4)
------- ------- -------
Net cash provided (used) by continuing operations...... 125.0 (20.8) 70.3
Net cash provided by discontinued operations........... 169.4 162.6 112.7
------- ------- -------
Net cash provided by operating activities.............. 294.4 141.8 183.0
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from notes payable................................. 398.2 -- --
Proceeds from long-term debt................................ -- -- 2.0
Payments of long-term debt:
Continuing operations.................................... (13.7) (11.7) (44.6)
Discontinued operations.................................. (128.0) (22.6) (45.1)
Capital contributions from parent........................... 73.4 75.3 50.0
Changes in parent company advances.......................... 433.6 (132.1) 23.6
Dividends paid to parent.................................... (335.8) (71.0) --
Other -- net................................................ -- -- 3.6
------- ------- -------
Net cash provided (used) by financing activities....... 427.7 (162.1) (10.5)
------- ------- -------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures:
Continuing operations.................................. (223.5) (190.3) (123.4)
Discontinued operations................................ (142.8) (100.8) (59.6)
Proceeds from sales...................................... 3.3 293.6 22.4
Changes in accounts payable and accrued liabilities...... 18.0 17.2 2.5
Purchase of investments..................................... (398.1) -- (8.8)
Acquisition of businesses................................... (56.5) -- --
Proceeds from sale of investments........................... 80.6 8.8 --
Other -- net................................................ 1.3 (3.5) (.2)
------- ------- -------
Net cash provided (used) by investing activities....... (717.7) 25.0 (167.1)
------- ------- -------
Increase in cash and cash equivalents.................. 4.4 4.7 5.4
Cash and cash equivalents at beginning of year................ 13.5 8.8 3.4
------- ------- -------
Cash and cash equivalents at end of year...................... $ 17.9 $ 13.5 $ 8.8
======= ======= =======
See accompanying notes.
45
47
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and basis of presentation
Williams Holdings of Delaware, Inc. (Williams Holdings) is a wholly-owned
subsidiary of The Williams Companies, Inc. (Williams). Williams has made capital
contributions based on historical carrying amounts to Williams Holdings of its
ownership interests in all subsidiaries, excluding its interstate natural gas
pipelines and related subsidiaries, effective April 1, 1995. The consolidated
financial statements of Williams Holdings include the subsidiaries contributed
by Williams for all periods presented.
Principles of consolidation
The consolidated financial statements include the accounts of Williams
Holdings and majority-owned subsidiaries. Companies in which Williams Holdings
and its subsidiaries own 20 percent to 50 percent of the voting common stock, or
otherwise exercise sufficient influence over operating and financial policies of
the company, are accounted for under the equity method.
Cash and cash equivalents
Cash and cash equivalents include demand and time deposits, certificates of
deposit and other marketable securities with maturities of three months or less
when acquired.
Inventory valuation
Inventories are stated at cost, which is not in excess of market, except
for those held by Williams Energy Services (see Commodity price-risk management
activities accounting policy). Williams Pipe Line's inventories of petroleum
products are principally determined using average cost. The cost of materials
and supplies inventories is determined principally using the first-in, first-out
method by Williams Telecommunications Systems and the average-cost method by
other subsidiaries.
Investments
Williams Holdings' investment in common stock of Williams is classified as
"available for sale" and is recorded at current market value with unrealized
gains and losses reported net of income taxes as a component of stockholder's
equity. Average cost is used to determine realized gains and losses. Williams
Holdings' investment in Texasgulf Inc. is at cost.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Depreciation is provided
primarily on the straight-line method over estimated useful lives. Gains or
losses from the ordinary sale or retirement of property, plant and equipment for
Williams Pipe Line are credited or charged to accumulated depreciation; other
gains or losses are recorded in net income.
Revenue recognition
Revenues generally are recorded when services have been performed or
products have been delivered. Williams Pipe Line bills customers when products
are shipped and defers the estimated revenues for shipments in transit.
Commodity price-risk management activities
Williams Energy Services enters into energy-related financial instruments
(primarily futures contracts, options contracts and swap agreements) to hedge
against market price fluctuations of certain refined products
46
48
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
inventories and natural gas sales and purchase commitments. Gains and losses on
these hedge contracts are recognized in income when the related hedged item is
recognized.
Williams Energy Services also uses energy-related financial instruments
(forward contracts, futures contracts, options contracts and swap agreements)
and physical inventory to provide price-risk management services to its
customers. These investments are valued at market and are primarily recorded in
other current assets and other accrued liabilities in the Consolidated Balance
Sheet. The resulting change in unrealized market gains and losses is recognized
in income currently and is recorded as revenues in the Consolidated Statement of
Income. Such market values reflect management's best estimate of market prices
considering various factors including closing exchange and over-the-counter
quotations, the terms of the contract, credit considerations, time value and
volatility factors underlying the positions.
Capitalization of interest
Williams Holdings capitalizes interest on major projects during
construction. Interest is capitalized on borrowed funds at rates that
approximate the average interest rate on related debt.
Income taxes
Williams Holdings and subsidiaries are included in Williams' consolidated
federal income tax return. The provision for income taxes is computed on a
separate company basis for Williams Holdings. Payments are made under the same
timing and minimum amount requirements as if the payments were being made
directly to the taxing authorities. Deferred income taxes are computed using the
liability method and are provided on all temporary differences between the
financial basis and the tax basis of Williams Holdings' assets and liabilities.
Related party transactions
Williams charges its subsidiaries, including Williams Holdings'
subsidiaries, for certain corporate general and administrative expenses which
are directly traceable or allocable to the subsidiaries and other general
corporate expenses utilizing a combination of revenues, property at cost and
payroll for the allocation base. The Company, as a separate corporate entity,
does not receive such an allocation because it has no revenues, property or
employees. Management believes that the method used for these allocations is
reasonable.
NOTE 2 -- DISCONTINUED OPERATIONS
In August 1994, a definitive agreement was signed to sell the Company's
network services operations to LDDS Communications, Inc. (LDDS) for $2.5 billion
in cash. The sale closed January 5, 1995, yielding an after-tax gain of
approximately $1 billion, which was recorded in the first quarter of 1995. Under
the terms of the agreement, Williams Holdings retained Williams
Telecommunications Systems, Inc., a national telecommunications equipment
supplier and service company, and Vyvx, Inc., which operates a national video
network specializing in broadcast television applications. The Consolidated
Financial Statements have been prepared to present operating results of network
services as discontinued operations, with prior-period operating results
restated.
Summarized operating results of discontinued operations are as follows:
1994 1993 1992
------ ------ ------
(MILLIONS)
Revenues......................................... $921.8 $663.8 $494.2
Operating profit................................. 163.1 97.0 58.6
Provision for income taxes....................... 60.9 32.2 16.2
Income from discontinued operations.............. 94.0 46.4 25.2
47
49
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assets and liabilities that were transferred to LDDS in the sale of the
network services operations are presented in the Consolidated Balance Sheet on a
net basis at December 31, 1994. Net assets consist of current assets ($86.5
million), net property, plant and equipment ($797.8 million), other assets and
deferred charges ($144.3 million), less current liabilities ($218.3 million) and
deferred income and other liabilities ($66.7 million).
NOTE 3 -- INVESTING ACTIVITIES
1994 1993
------ ------
(MILLIONS)
Investments:
Williams common stock.................................... $336.3 $ --
Texasgulf Inc. (15%)..................................... 150.0 150.0
Northern Border Pipeline partnerships (3.2% in 1994 and
12.25% in 1993)* (Note 4)............................. 20.0 78.6
Other*................................................... 29.7 29.2
------ ------
$536.0 $257.8
====== ======
- ---------------
* Accounted for on the equity method.
During April 1995, the 15 percent interest in Texasgulf Inc. was sold for
approximately $124 million in cash, which resulted in a second quarter after-tax
gain of approximately $16 million because of previously unrecognized tax
benefits included in the provision for income taxes.
At December 31, 1994, the investment in common stock of Williams had a cost
basis of $395 million, a gross unrealized loss of $59 million and a net
unrealized loss of $36 million. Subsequent to December 31, 1994, the value of
the investment changed such that the unrealized loss was eliminated.
At December 31, 1994, other investments carried at $30 million have a
market value of $73 million.
Investing income from continuing operations:
1994 1993 1992
----- ----- -----
(MILLIONS)
Interest.......................................... $ 1.0 $ 1.1 $ .9
Dividends......................................... 6.6 5.6 5.3
Equity earnings................................... 7.4 15.9 14.9
----- ----- -----
$15.0 $22.6 $21.1
===== ===== =====
Dividends and distributions received from companies carried on an equity
basis were $11 million in 1994; $14 million in 1993; and $10 million in 1992.
NOTE 4 -- SALES OF ASSETS
In 1994, 3,461,500 limited partner common units were sold in Northern
Border Partners, L.P. Net proceeds from the sale were approximately $80 million
and the sale resulted in a pre-tax gain of $22.7 million. As a result of the
sale, Williams Holdings' original 12.25 percent interest in Northern Border
partnerships has been reduced to 3.2 percent.
In a 1993 public offering, 6.1 million units were sold in the Williams Coal
Seam Gas Royalty Trust (Trust), which resulted in net proceeds of $113 million
and a pre-tax gain of $51.6 million. The Trust owns defined net profits
interests in the developed coal-seam properties in the San Juan Basin of New
Mexico and Colorado, which were conveyed to the Trust by Williams Production
Company. Ownership of an additional 3.6 million units remains with Williams
Holdings.
48
50
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1993, the intrastate natural gas pipeline system and other related
assets in Louisiana were sold for $170 million in cash, resulting in a pre-tax
gain of $45.9 million.
The 1992 gain of $14.6 million resulted from the sale of a tract of land in
Florida that had been retained from the assets of Agrico Chemical Company, which
was sold several years ago.
NOTE 5 -- PROVISION FOR INCOME TAXES
The provision (credit) for income taxes from continuing operations
includes:
1994 1993 1992
----- ----- ------
(MILLIONS)
Current:
Federal.......................................... $28.9 $70.5 $ 17.7
State............................................ 9.3 21.5 4.4
----- ----- ------
38.2 92.0 22.1
----- ----- ------
Deferred:
Federal.......................................... 14.0 7.4 (14.7)
State............................................ 1.4 (6.8) (1.2)
----- ----- ------
15.4 .6 (15.9)
----- ----- ------
Total provision.................................... $53.6 $92.6 $ 6.2
===== ===== ======
The 1993 provision for income taxes includes the effect of a 1 percent
increase in the federal income tax rate, which was made retroactive to January
1, 1993. The effect of adopting Statement of Financial Accounting Standards
(FAS) No. 109, "Accounting for Income Taxes," was not material. Williams
Holdings previously accounted for deferred income taxes under FAS No. 96.
Reconciliations from the provision for income taxes attributable to
continuing operations at the statutory rate to the provision for income taxes
are as follows:
1994 1993 1992
------ ------ -----
(MILLIONS)
Provision at statutory rate....................... $ 62.7 $ 85.7 $18.1
Increases (reductions) in taxes resulting from:
Increase in statutory tax rate on beginning of
year deferred tax balances................... -- 9.0 --
Dividends received deduction.................... (1.1) (1.4) (4.3)
State income taxes.............................. 6.9 9.6 2.1
Income tax credits.............................. (14.3) (10.0) (9.5)
Other -- net.................................... (.6) (.3) (.2)
------ ------ -----
Provision for income taxes........................ $ 53.6 $ 92.6 $ 6.2
====== ====== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial purposes
and the amounts used for income tax purposes.
49
51
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of deferred tax liabilities and assets as of
December 31 are as follows:
1994 1993
------ ------
(MILLIONS)
Deferred tax liabilities:
Property, plant and equipment............................ $427.0 $405.3
Investments.............................................. 34.0 80.5
Other.................................................... 22.6 13.6
------ ------
Total deferred tax liabilities...................... 483.6 499.4
------ ------
Deferred tax assets:
Deferred revenues........................................ 38.9 46.9
Investments.............................................. 76.8 80.2
Regulatory liabilities................................... 8.4 9.4
Accrued liabilities...................................... 30.1 26.1
State deferred taxes..................................... 10.8 10.5
Minimum tax credits...................................... -- 4.8
Other.................................................... 27.7 20.2
------ ------
Total deferred tax assets........................... 192.7 198.1
Valuation allowance for deferred tax assets......... 32.0 33.7
------ ------
Net deferred tax assets............................. 160.7 164.4
------ ------
Net deferred tax liabilities............................... $322.9 $335.0
====== ======
The valuation allowance for deferred tax assets decreased $1.7 million and
$.7 million during 1994 and 1993, respectively.
Cash payments to Williams and certain state taxing authorities for income
taxes are as follows: 1994 -- $108 million; 1993 -- $117 million; and
1992 -- $38 million.
NOTE 6 -- EXTRAORDINARY CREDIT (LOSS)
The extraordinary items in 1994 and 1992 result from early extinguishment
of debt. During 1994, a subsidiary of Williams Holdings paid approximately $137
million to redeem higher interest rate debt for a $6.1 million net loss (net of
a $3.9 million benefit for income taxes). In 1992, a subsidiary of Williams
Holdings paid approximately $34 million to redeem debt resulting in an $11.1
million gain.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
Pensions
Williams Holdings is included in Williams' non-contributory defined-benefit
pension plans covering the majority of employees. Williams Pipe Line has a
separate plan for its union employees. Benefits are based on years of service
and average final compensation. Pension costs are funded to satisfy minimum
requirements prescribed by the Employee Retirement Income Security Act of 1974.
Net pension expense related to Williams Holdings participation in the
Williams' plan was as follows:
1994 1993 1992
---- ---- ----
(MILLIONS)
Continuing operations.................................. $1.3 $ .5 $ .9
Discontinued operations................................ 4.6 2.7 2.3
---- ---- ----
$5.9 $3.2 $3.2
==== ==== ====
50
52
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension expense for the Williams Pipe Line plan consists of the
following:
1994 1993 1992
----- ----- -----
(MILLIONS)
Service cost for benefits earned during the year.... $ .5 $ .4 $ .4
Interest cost on projected benefit obligation....... 1.1 1.1 1.0
Actual return on plan assets........................ .7 (1.6) (1.1)
Amortization and deferrals.......................... (2.2) .1 (.3)
----- ----- -----
Net pension expense................................. $ .1 $ -- $ --
===== ===== =====
The following table presents the funded status of the Williams Pipe Line
plan:
1994 1993
----- -----
(MILLIONS)
Actuarial present value of benefit obligations:
Vested benefits............................................ $11.2 $12.1
Non-vested benefits........................................ .3 .3
----- -----
Accumulated benefit obligation............................. 11.5 12.4
Effect of projected salary increases....................... 2.5 3.5
----- -----
Projected benefit obligation............................... 14.0 15.9
Assets at market value....................................... 14.6 16.0
----- -----
Assets in excess of projected benefit obligation............. .6 .1
Unrecognized net loss........................................ 2.4 2.4
Unrecognized prior-service cost.............................. .8 .9
Unrecognized transition asset................................ (.9) (1.1)
----- -----
Pension asset................................................ $ 2.9 $ 2.3
===== =====
For the Williams Pipe Line plan, the discount rate used to measure the
present value of benefit obligations is 8 1/2 percent (7 1/4 percent in 1993);
the assumed rate of increase in future compensation levels is 5 percent; and the
expected long-term rate of return on assets is 10 percent. Plan assets consist
primarily of commingled funds and assets held in a master trust. The master
trust is comprised primarily of domestic and foreign common and preferred
stocks, corporate bonds, United States government securities and commercial
paper.
Williams Holdings has retained all liabilities and obligations of the
Company's network services operations' plan participants up to the date of sale
(see Note 2).
Postretirement benefits other than pensions
Williams Holdings is included in Williams' health care plan that provides
defined postretirement medical benefits to retired employees who were employed
full time, hired prior to January 1, 1992, have worked five years, attained age
55 while in service with Williams and are a participant in the Williams' pension
plans.
Net postretirement benefit expense related to Williams Holdings
participation in the Williams' plan was as follows:
1994 1993 1992
---- ---- ----
(MILLIONS)
Continuing operations.................................. $5.5 $5.6 $3.6
Discontinued operations................................ 1.6 1.5 1.0
---- ---- ----
$7.1 $7.1 $4.6
==== ==== ====
51
53
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1993, Williams Holdings prospectively adopted FAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Application of the standard reduced 1993 net income by approximately $2 million.
Other
Williams Holdings is included in Williams' defined-contribution plans
covering substantially all employees. Williams Holdings contributions are
invested primarily in Williams common stock and are based on employees'
compensation and, in part, match employee contributions. Williams Holdings'
contributions to these plans were $10 million in 1994, $8 million in 1993 and $7
million in 1992. Contributions to these plans made by discontinued operations
were $3 million in 1994 and 1993, and $2 million in 1992.
Effective January 1, 1994, Williams Holdings adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," which requires the accrual of benefits provided to former or inactive
employees after employment but before retirement. Adoption of the standard
reduced 1994 net income by approximately $2 million and is not reported as a
change in accounting principle due to immateriality.
During November 1994, Williams Holdings entered into a deferred share
agreement (the Agreement) in connection with the sale of the Company's network
services operations. Under the terms of the Agreement, Williams Holdings will
distribute up to approximately 2.6 million shares of Williams common stock to
key employees over various periods through 1998. During 1994, the initial stock
distribution of 273,095 shares was made.
NOTE 8 -- INVENTORIES
1994 1993
----- -----
(MILLIONS)
Natural gas in underground storage........................... $ 1.5 $ --
Petroleum products:
Williams Pipe Line......................................... 15.5 13.0
Williams Energy Services................................... 22.2 19.3
Other...................................................... 3.6 5.7
Materials and supplies:
Williams Telecommunications Systems........................ 28.6 22.6
Other...................................................... 13.2 13.1
----- -----
$84.6 $73.7
===== =====
52
54
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- PROPERTY, PLANT AND EQUIPMENT
1994 1993
-------- --------
(MILLIONS)
Cost:
Williams Field Services Group......................... $1,173.3 $1,020.2
Williams Pipe Line.................................... 809.6 754.8
Williams Energy Services.............................. 4.1 3.7
Williams Telecommunications Systems................... 32.1 25.3
Discontinued operations (Note 2)...................... -- 1,052.8
Other................................................. 94.4 52.9
-------- --------
2,113.5 2,909.7
Accumulated depreciation................................ (528.4) (758.6)
-------- --------
$1,585.1 $2,151.1
======== ========
Commitments for construction and acquisition of property, plant and
equipment are approximately $49 million at December 31, 1994.
NOTE 10 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Under Williams' cash-management system, certain subsidiaries' cash accounts
reflect credit balances to the extent checks written have not been presented for
payment. The amounts of these credit balances included in accounts payable are
$31 million at December 31, 1994, and $44 million at December 31, 1993.
1994 1993
------ ------
(MILLIONS)
Accrued liabilities:
Employee costs........................................... $ 26.2 $ 25.2
Deferred revenue......................................... 24.5 54.8
Income taxes payable..................................... 2.8 6.5
Taxes other than income taxes............................ 29.1 28.8
Other.................................................... 64.8 78.4
------ ------
$147.4 $193.7
====== ======
NOTE 11 -- LONG-TERM DEBT, LEASES AND BANKING ARRANGEMENTS
Notes payable
During 1994, Williams Holdings entered into a $400 million short-term
credit agreement to finance the purchase of Williams common stock. Notes payable
totaling $398 million were outstanding under this agreement at December 31,
1994. These notes were repaid in January 1995.
The weighted average interest rate on the $398 million outstanding
short-term borrowings at December 31, 1994, was 6.79 percent. There were no
short-term borrowings outstanding at December 31, 1993.
53
55
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt
WEIGHTED
AVERAGE
INTEREST
RATE* 1994 1993
-------- ------ ------
(MILLIONS)
Company
Revolving credit loans -- Williams (Note 13).......... $389.9 $ --
====== ======
Williams Pipe Line
Notes, 8.95% and 9.78%, payable through 2001.......... 9.3 $120.0 $130.0
Williams Field Services Group
Other, payable through 1999........................... 8.0 5.7 --
Williams Telecommunications Systems
Other................................................. 7.9 4.4 5.9
Discontinued operations (Note 2)
Notes at 9.61% and 9.81%.............................. -- -- 127.5
------ ------
130.1 263.4
Current portion of long-term debt....................... (13.0) (34.0)
------ ------
$117.1 $229.4
====== ======
- ---------------
* At December 31, 1994.
Williams Holdings (effective June 15, 1995) and Williams Pipe Line
participate in Williams' $800 million credit agreement. Williams Holdings and
Williams Pipe Line's maximum borrowing availability, subject to borrowings by
other affiliated companies, is $600 million and $100 million, respectively.
Williams Pipe Line had no borrowings under this facility at December 31, 1994.
Interest rates vary with current market conditions. The amount available under
the facility at December 31, 1994 was $495 million. The agreement terminates in
2000.
Terms of borrowings require maintenance of certain financial ratios, limit
the sale or encumbrance of assets and limit the amount of additional borrowings.
Terms of certain subsidiaries' borrowing arrangements limit the transfer of
funds to Williams Holdings. At December 31, 1994, approximately $200 million of
net assets of consolidated subsidiaries was restricted. Undistributed earnings
of companies and partnerships accounted for under the equity method of $14
million are included in Williams Holdings' consolidated retained earnings at
December 31, 1994.
Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments, for each of the next five years are as follows:
(MILLIONS)
----------
1995.............................................. $ 12
1996.............................................. 12
1997.............................................. 12
1998.............................................. 12
1999.............................................. 10
The aggregate minimum maturities and sinking-fund requirements exclude the
revolving credit loans due Williams as the date of repayment is uncertain (see
Note 13).
Cash payments for interest (net of amounts capitalized) related to
continuing operations are as follows: 1994 -- $28 million; 1993 -- $19 million;
and 1992 -- $21 million, including payments to Williams of $17 million, $11
million and $7 million, respectively. Cash payments for interest (net of amounts
capitalized)
54
56
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to discontinued operations are as follows: 1994 -- $9 million;
1993 -- $16 million; and 1992 -- $18 million, including payments to Williams of
$3 million in 1994.
Leases
Future minimum annual rentals under non-cancelable operating leases are as
follows:
OFFICE SPACE-
AFFILIATES OTHER TOTAL
------------- ----- -----
(MILLIONS)
1995............................................. $ 4 $13 $17
1996............................................. 4 9 13
1997............................................. 4 7 11
1998............................................. 3 4 7
1999............................................. 3 2 5
Thereafter....................................... 36 3 39
--- --- ---
Total minimum annual rentals..................... $54 $38 $92
=== === ===
Total rent expense from continuing operations was $16 million in 1994, $10
million in 1993, and $11 million in 1992, including $4 million, $2 million and
$2 million in 1994, 1993 and 1992, respectively, paid to Williams and
affiliates. Total rent expense from discontinued operations was $72 million in
1994, $61 million in 1993 and $50 million in 1992, including $2 million in 1994,
1993 and 1992 paid to Williams.
NOTE 12 -- FINANCIAL INSTRUMENTS
Fair-value methods
The following methods and assumptions were used by Williams Holdings in
estimating its fair-value disclosures for financial instruments:
Cash and cash equivalents and notes payable: The carrying amounts
reported in the balance sheet approximate fair value due to the short-term
maturity of these instruments.
Notes receivable: For those notes with interest rates approximating
market or maturities of less than three years, fair value is estimated to
approximate historically recorded amounts. For those notes with maturities
beyond three years and fixed interest rates, fair value is calculated using
discounted cash flow analysis based on current market rates.
Investment in Williams common stock: The fair value of Williams
Holdings' investment is based on quoted market prices.
Revolving credit loans -- Williams: The loans bear interest rates
approximating market, therefore, fair value is estimated to approximate
historically recorded amounts.
Long-term debt: The fair value of Williams Holdings' long-term debt,
all private, is valued based on the prices of similar securities with
similar terms and credit ratings. Williams Holdings used the expertise of
an outside investment banking firm to estimate the fair value of long-term
debt.
Energy-related futures, swaps and options: Fair value reflects
management's best estimate of market prices considering various factors
including closing exchange and over-the-counter quotations, the terms of
the contract, credit considerations, time value and volatility factors
underlying the positions.
55
57
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Carrying amounts and fair values of Williams Holdings' financial instruments
1994 1993
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
ASSET (LIABILITY) AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(MILLIONS)
Cash and cash equivalents................... $ 17.9 $ 17.9 $ 13.5 $ 13.5
Notes receivable............................ 6.2 6.0 9.5 9.8
Investment in Williams common stock......... 336.3 336.3 -- --
Notes payable............................... (398.2) (398.2) -- --
Revolving credit loans -- Williams.......... (389.9) (389.9) 56.4 56.4
Long-term debt, including current portion... (127.9) (132.1) (260.1) (279.6)
Energy-related trading:
Futures................................... (2.0) (2.0) 2.0 2.0
Swaps and options:
Assets................................. 22.7 22.7 7.0 7.0
Liabilities............................ (13.8) (13.8) (6.3) (6.3)
Energy-related hedging:
Futures................................... (3.3) (3.3) (.9) (.9)
Swaps and options:
Assets................................. .3 .3 -- --
Liabilities............................ (5.2) (5.2) -- --
The above asset and liability amounts for energy-related hedging represent
unrealized gains or losses and do not include the related deferred amounts.
The 1994 average fair value of the energy-related trading futures contracts
is a liability of $1.5 million. The 1994 average fair value of the trading swaps
and options assets and liabilities are $9.2 million and $7 million,
respectively.
Off-balance-sheet credit and market risk
Williams Holdings is a participant in the following transactions and
arrangements that involve financial instruments that have off-balance-sheet risk
of accounting loss. It is not practicable to estimate the fair value of these
off-balance-sheet financial instruments because of their unusual nature and
unique characteristics.
Williams Holdings sold, with limited recourse, certain receivables. The
aggregate limit under receivables facilities in which Williams Holdings
participated was $80 million at December 31, 1994 and $35 million at December
31, 1993 (all related to discontinued operations). Williams Holdings received
$45 million of additional net proceeds in 1994, none in 1993 and $123 million in
1992. At December 31, 1994 and 1993, $80 million and $35 million (all related to
discontinued operations) of such receivables had been sold, respectively. Under
a different arrangement, one of Williams Holdings' subsidiaries sold $18 million
of receivables with limited recourse in 1992. Williams Holdings has no risk of
credit loss because amounts outstanding relate to discontinued operations (see
Note 2).
In connection with the sale of units in the Williams Coal Seam Gas Royalty
Trust (Trust), Williams Holdings indemnified the Trust against losses from
certain litigation (see Note 15), guaranteed certain minimum ownership interests
based on natural gas reserve volumes through 1993 only and guaranteed minimum
gas prices through 1997. At December 31, 1994 and 1993, Williams Holdings has a
recorded liability of $10 million and $15 million, respectively, for these
items, representing the maximum amounts for the first two guarantees and an
estimate of the gas price exposure based on historical operating trends and an
assessment of market conditions. While Williams Holdings' maximum exposure from
this guarantee exceeds
56
58
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts accrued, it is not practicable to determine such amount because of the
unique aspects of the guarantee.
In connection with the sale of the Company's network services operations,
Williams has been indemnified by LDDS against any losses related to retained
guarantees of $200 million for lease rental obligations. LDDS is negotiating
with the guaranteed parties to remove Williams as guarantor. Williams Holdings
could be impacted if Williams has to perform under the guarantee.
Williams Holdings has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $5 million and $7 million at
December 31, 1994 and 1993, respectively. Williams Holdings believes it will not
have to perform under these agreements because the likelihood of default by the
primary party is remote and/or because of certain indemnifications received from
other third parties.
Commodity price-risk management services
Williams Energy Services provides price-risk management services associated
with the energy industry to its customers. These services are provided through a
variety of financial instruments, including forward contracts, futures
contracts, options contracts and swap agreements. See Note 1 for a description
of the accounting for these trading activities. The net gain for 1994 from all
trading activities was $14.2 million and is reported as revenues in the
Consolidated Statement of Income.
Williams Energy Services manages risk from financial instruments by making
various logistical commitments which manage profit margins through offsetting
financial instruments. As a result, price movements can result in losses on
certain contracts offset by gains on others.
Williams Energy Services takes an active role in managing and controlling
market and counterparty risks and has established formal control procedures
which are reviewed on an ongoing basis. Williams Energy Services attempts to
minimize credit-risk exposure to trading counterparties and brokers through
formal credit policies and monitoring procedures. In the normal course of
business, collateral is not required for financial instruments with credit risk.
57
59
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional quantities and average prices for natural gas related swap
agreements, options contracts and futures contracts at December 31, 1994, are as
follows:
PAYOR RECEIVER
----- --------
Trading:
Fixed-price swaps:
Quantities (TBtu)............................................... 86.0 100.9
Average price (per MMBtu)....................................... $2.01 $ 1.86
Location differential swaps:
Quantities (TBtu)............................................... 85.0 136.3
Average price (per MMBtu)....................................... $1.42 $ 1.43
Options:
Quantities (TBtu)............................................... 15.1 17.9
Average strike price (per MMBtu)................................ $1.91 $ 2.19
Futures:
Quantities (TBtu)............................................... 80.3 60.7
Average price (per MMBtu)....................................... $1.91 $ 1.92
Hedging:
Fixed-price swaps:
Quantities (TBtu)............................................... 28.4 4.1
Average price (per MMBtu)....................................... $2.21 $ 2.16
Options:
Quantities (TBtu)............................................... 5.5 3.7
Average strike price (per MMBtu)................................ $2.07 $ 2.05
Futures:
Quantities (TBtu)............................................... 21.3 3.1
Average price (per MMBtu)....................................... $1.90 $ 1.91
At December 31, 1993, Williams Energy Services was the payor and receiver
under natural gas fixed-price swap agreements having notional quantities of 44.1
TBtu and 43.9 TBtu, respectively. Average prices are $2.24 and $2.18,
respectively. In addition, Williams Energy Services was the payor and receiver
under location differential variable-priced swap agreements having notional
quantities of 26.3 TBtu and 38.8 TBtu, respectively, at December 31, 1993. The
average price under these agreements was $1.77.
The swap agreements call for Williams Energy Services to make payments to
(or receive payments from) counterparties based upon the differential between a
fixed and variable price or variable prices for different locations. The
variable prices are generally based on either industry pricing publications or
exchange quotations. Williams Energy Services buys and sells options contracts
which give the buyer the right to exercise the options and receive the
difference between a predetermined strike price and a market price at the date
of exercise. The market prices used for natural-gas-related contracts are
generally exchange quotations. Williams Energy Services also enters into futures
contracts which are commitments to either purchase or sell a commodity at a
future date for a specified price and are generally settled in cash, but may be
settled through delivery of the underlying commodity. The market prices for
futures contracts are based on exchange quotations. The swap agreements extend
for various periods through 2000; option contracts and futures contracts extend
for various periods through 1996. Average prices are based on weighted averages
for contracts outstanding at December 31, 1994 and 1993. Average prices for
location differential swaps incorporate forward prices based on the appropriate
index.
Williams Energy Services enters into energy-related financial instruments
to hedge against market price fluctuations of certain refined products
inventories and natural gas sales and purchase commitments. Net deferred losses
at December 31, 1994, on anticipated sales and purchase commitments were $9
million. It is
58
60
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected that substantially all of these deferred amounts will be recognized in
income during 1995. See Note 1 for a description of the accounting for these
hedging activities.
Concentration of credit risk
Williams Holdings' cash equivalents consist of high quality securities
placed with various major financial institutions with high credit ratings.
Williams Holdings' investment policy limits the company's credit exposure to any
one financial institution.
At December 31, 1994 and 1993, approximately 44 percent and 56 percent,
respectively, of receivables are for telecommunications, approximately 30
percent and 32 percent, respectively, of receivables are for the sale of natural
gas and related products or services and approximately 23 percent and 7 percent,
respectively, of receivables are for petroleum products and related services.
Natural gas customers include pipelines, distribution companies, producers, gas
marketers and industrial users primarily located in the western and central
United States. Telecommunications customers include numerous corporations.
Petroleum products customers include refiners and marketers primarily in the
central United States. As a general policy, collateral is not required for
receivables, but customers' financial conditions and credit worthiness are
evaluated regularly.
NOTE 13 -- RELATED PARTY TRANSACTIONS
Williams charges its subsidiaries, including Williams Holdings and its
subsidiaries, for certain corporate general and administrative expenses which
are directly traceable or allocable to the subsidiaries and other general
corporate expenses utilizing a combination of revenues, property at cost and
payroll for the allocation base. Details of such charges for continuing
operations are as follows:
(MILLIONS)
------------------------
1994 1993 1992
------ ------ ------
Direct costs.................................................. $ 11.2 $ 8.2 $ 6.5
Allocated general corporate expense........................... 20.0 17.7 17.3
Interest accrued -- net....................................... 8.2 .2 3.4
The majority of the above costs, except for interest accrued, are reflected
in selling, general and administrative expenses.
Direct costs charged to discontinued operations were $7 million, $7 million
and $6 million for 1994, 1993 and 1992, respectively.
Williams Holdings and its subsidiaries maintained credit agreements with
Williams for both advances from and advances to Williams depending on the cash
position of each subsidiary. Amounts outstanding are payable on demand, however,
any amounts outstanding have been classified as long-term inasmuch as there has
been no expectation for Williams or the subsidiaries to demand payment in the
next year. The agreements do not require commitment fees. Interest is payable
monthly and rates vary with market conditions. The interest rates were 6.69
percent and 6 percent at December 31, 1994 and 1993, respectively. At December
31, 1994, Williams Telecommunications Systems' borrowings under the credit
agreement are limited to $175 million and Williams Pipe Line's are limited to
$100 million.
Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Williams Natural Gas and Northwest Pipeline. Revenues
include $4 million, $35 million and $28 million for 1994, 1993 and 1992,
respectively, of transactions with affiliates, primarily natural gas sales.
Costs and operating expenses include $18 million, $9 million and $14 million for
1994, 1993 and 1992, respectively, of transactions with affiliates, primarily
transportation costs. Transactions with affiliates are at prices that generally
apply to unaffiliated parties.
59
61
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OTHER FINANCIAL INFORMATION
Intercompany revenues (at prices that generally apply to sales to
unaffiliated parties) are as follows:
(MILLIONS)
------------------------
1994 1993 1992
------ ------ ------
Williams Field Services Group......................................... $ 30.0 $ 14.3 $ 19.5
Williams Pipe Line.................................................... 16.7 1.4 --
Williams Energy Services.............................................. 16.3 7.3 20.2
Other................................................................. .1 .1 .1
------ ------ ------
$ 63.1 $ 23.1 $ 39.8
====== ====== ======
Information for business segments is as follows:
(MILLIONS)
------------------------------
1994 1993 1992
-------- -------- --------
Identifiable assets at December 31:
Williams Field Services Group................................ $1,017.2 $ 942.0 $ 958.2
Williams Pipe Line........................................... 678.4 586.0 533.5
Williams Energy Services..................................... 96.4 84.7 62.6
Williams Telecommunications Systems.......................... 251.0 165.5 155.9
Investments.................................................. 536.0 257.8 264.8
Other........................................................ 117.5 58.2 45.1
Discontinued operations...................................... 743.6 895.2 849.8
-------- -------- --------
Consolidated......................................... $3,440.1 $2,989.4 $2,869.9
======== ======== ========
Additions to property, plant and equipment:
Williams Field Services Group................................ $ 158.0 $ 110.8 $ 86.0
Williams Pipe Line........................................... 46.6 62.9 26.9
Williams Energy Services..................................... 3.5 1.1 .2
Williams Telecommunications Systems.......................... 4.9 1.9 5.0
Other........................................................ 10.5 13.6 5.3
-------- -------- --------
Consolidated......................................... $ 223.5 $ 190.3 $ 123.4
======== ======== ========
Depreciation and depletion:
Williams Field Services Group................................ $ 41.8 $ 37.9 $ 21.7
Williams Pipe Line........................................... 22.4 21.4 21.2
Williams Energy Services..................................... .5 .5 .4
Williams Telecommunications Systems.......................... 5.3 4.7 3.7
Other........................................................ 10.0 5.5 4.0
-------- -------- --------
Consolidated......................................... $ 80.0 $ 70.0 $ 51.0
======== ======== ========
- ---------------
NOTE 15 -- CONTINGENT LIABILITIES AND COMMITMENTS
Rate and regulatory matters
Williams Pipe Line has various regulatory proceedings pending. As a result
of rulings in certain of these proceedings, a portion of its revenues has been
collected subject to refund. Such revenues were $111 million at December 31,
1994. In an order issued on May 31, 1995 the FERC found that 20 of 32 of
Williams Pipe Line markets are workably competitive. This order has been
appealed to the United States Court of Appeals for the D.C. Circuit. As a result
of this order and prior rulings in other cases, Williams Pipe Line does not
expect that
60
62
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the amount of any refunds ordered would be significant. Accordingly, no portion
of these revenues has been reserved for refund.
Environmental matters
Certain Williams Holdings' subsidiaries have been named as potentially
responsible parties (PRP) at five Superfund waste disposal sites. In addition,
these subsidiaries have incurred or are alleged to have incurred various other
hazardous materials removal or remediation obligations under environmental laws.
Although no assurances can be given, based upon information available to
Williams Holdings, Williams Holdings does not believe that these obligations or
the PRP status of these subsidiaries will have a material adverse effect on its
financial position, results of operations or net cash flows.
Other legal matters
On December 31, 1991, the Southern Ute Indian Tribe (the Tribe) filed a
lawsuit against Williams Production Company, a wholly owned subsidiary of
Williams Holdings, and other gas producers in the San Juan Basin area, alleging
that certain coal strata was reserved by the United States for the benefit of
the Tribe and that the extraction of coal-seam gas from the coal strata was
wrongful. The Tribe seeks compensation for the value of the coal-seam gas. The
Tribe also seeks an order transferring to the Tribe ownership of all of the
defendants' equipment and facilities utilized in the extraction of the coal-seam
gas. On September 13, 1994, the court granted summary judgment in favor of the
defendants. The Tribe sought a certification of an interlocutory appeal from the
court which was denied. Nevertheless, the Tribe has lodged an interlocutory
appeal with the U.S. Court of Appeals for the Tenth Circuit. Williams Production
agreed to indemnify the Williams Coal Seam Gas Royalty Trust (Trust) against any
losses that may arise in respect of certain properties subject to the lawsuit.
In addition, if the Tribe is successful in showing that Williams Production has
no rights in the coal-seam gas, Williams Production has agreed to pay to the
Trust for distribution to then-current unitholders, an amount representing a
return of a portion of the original purchase price paid for the units. While
Williams Holdings believes that such a payment is not probable based on the
summary judgment granted in the defendants' favor, it has reserved a portion of
the proceeds from the sale of the units in the Trust.
On December 21, 1994, Williams Natural Gas Company, an affiliated company,
received a civil investigative demand from the Antitrust Division of the
Department of Justice concerning certain gathering activities of Williams
Natural Gas and other companies, including Williams Field Services Group, Inc.,
a wholly-owned subsidiary of Williams Holdings. A response was filed and
Williams Natural Gas has been informed that the investigation has been closed.
Relative to a certain Agreement and Plan of Merger, dated December 12,
1994, among Williams, a subsidiary of Williams and Transco Energy Company
(Transco), seven class action lawsuits were filed on December 12, 1994, and
later, in the Chancery Court of Delaware, challenging the transaction and
alleging a breach of fiduciary duties by Transco's directors. In six of the
lawsuits, Williams was named as a party defendant, the plaintiffs alleging that
Williams aided and abetted the alleged breach of duty. On January 6, 1995, the
parties to all of the lawsuits entered into an agreement in principle and on
January 9, 1995, a stipulation and agreement of compromise, settlement and
release was executed subject to approval of the Court. On May 11, 1995, the
settlement was approved by the Court.
In addition to the foregoing, various other proceedings are pending against
Williams Holdings or its subsidiaries incidental to their operations.
Summary
While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage or other
61
63
WILLIAMS HOLDINGS OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indemnification arrangements, will have a materially adverse effect upon
Williams Holdings' future financial position, results of operations or cash flow
requirements.
NOTE 16 -- TRANSCO AND OTHER ACQUISITIONS
Subsequent to December 31, 1994, Williams acquired all of Transco's
outstanding common stock.
Transco was engaged primarily in the natural gas pipeline and natural gas
marketing businesses. Effective May 1, 1995: (1) Transco dividended to Williams
all of Transco's interests in its subsidiaries which operated interstate natural
gas pipelines and (2) Williams made a capital contribution of the outstanding
common stock of Transco and Transco's remaining subsidiaries to Williams
Holdings. Williams Holdings plans to sell certain other Transco operations, such
as coal mining and coalbed methane extraction in 1995. The acquisition will be
accounted for as a purchase in 1995.
Williams Field Services Group purchased from Public Service Company of New
Mexico in June 1995 its natural gas gathering and processing assets in the San
Juan and Permian Basins of New Mexico for approximately $154 million.
In August, a subsidiary of Williams Holdings purchased Pekin Energy
Company, the nation's second largest ethanol producer, for $167 million in cash.
62
64
WILLIAMS HOLDINGS OF DELAWARE, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1994
Revenues................................................... $ 272.8 $ 311.2 $ 333.1 $ 347.2
Costs and operating expenses............................... 234.0 258.2 290.2 299.7
Income before extraordinary loss........................... 39.8 64.8 48.1 66.8
Net income................................................. 39.8 58.7 48.1 66.8
1993
Revenues................................................... $ 374.0 $ 295.4 $ 272.2 $ 279.4
Costs and operating expenses............................... 330.6 253.3 234.8 250.1
Net income................................................. 91.3 44.2 26.5 36.7
Second-quarter 1994 includes a $23 million gain from the sale of assets
(see Note 4 of Notes to Consolidated Financial Statements). Fourth-quarter 1994
includes $5 million of costs for evaluating and determining whether to build an
oil refinery. Fourth-quarter 1994 discontinued operations includes favorable
adjustments of approximately $15 million relating to bad debt recoveries and
accrual reversals.
First-quarter 1993 includes gains totaling $95 million from the sales of
assets (see Note 4 of Notes to Consolidated Financial Statements). Third-quarter
1993 net income was reduced $9 million related to the cumulative effect of the 1
percent increase in the federal income tax rate. Fourth-quarter 1993 includes an
$11 million favorable settlement involving processing revenues from prior
periods. Fourth-quarter 1993 discontinued operations includes favorable
adjustments of approximately $6 million relating to bad debt recoveries and
accrual reversals.
63
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Transco Energy Company:
We have audited the accompanying combined balance sheet of Transco Energy
Company -- Contributed Assets (a Delaware corporation and effective May 1, 1995,
a wholly-owned subsidiary of Williams Holdings of Delaware, Inc.) as described
in Note A, as of December 31, 1994, and the related combined statements of
operations, cash flows and common stockholders' deficit for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
As further discussed in Notes A and C, the combined financial statements
have been prepared on the historical-cost basis of accounting and do not reflect
any allocation of the purchase price to the Company's assets that was recorded
in 1995 by The Williams Companies, Inc. (Williams) as a result of its
acquisition of Transco Energy Company (Transco). Transco's business strategy
contemplated continued operation of a number of assets which Williams has stated
are non-core assets which Williams has sold or stated its intention to dispose
of during 1995. In connection with the allocation of the total purchase price of
Transco, such non-core assets will be recorded by Williams at their estimated
fair value, reflecting Williams' disposition strategy, which is below the
historical cost basis of such assets recorded by Transco.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Transco Energy
Company-Contributed Assets, as described in Note A, as of December 31, 1994, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1995 (except with respect
to the matters discussed in Notes A and C,
as to which the date is July 25, 1995)
64
66
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
COMBINED BALANCE SHEET
DECEMBER 31, 1994
(NOTES A, B AND M)
(THOUSANDS OF DOLLARS)
ASSETS
Current Assets:
Cash and temporary cash investments............................................. $ 29,830
Receivables --
Trade, net (Note B).......................................................... 98,320
Affiliates................................................................... 27,717
Advances to Affiliates (Note O).............................................. 1,768
Other........................................................................ 9,267
Transportation and exchange gas receivable --
Affiliates................................................................... 1,337
Other........................................................................ 7,606
Inventories --
Gas in storage, at LIFO...................................................... 6,107
Coal, at average cost........................................................ 7,261
Materials, supplies and other, at average cost............................... 7,381
Deferred income tax benefits (Note J)........................................... 4,578
Other........................................................................... 11,782
--------
Total current assets.................................................... 212,954
--------
Investments, at cost plus equity in undistributed earnings (Note K)............... 18,602
--------
Property, Plant and Equipment, at cost:
Natural gas gathering and liquids separation and fractionation plant............ 212,974
Less -- Accumulated depreciation and amortization............................... 35,036
--------
Natural gas gathering and liquids separation and fractionation plant, net....... 177,938
--------
Coal properties................................................................... 413,951
Less -- Accumulated depreciation, depletion and amortization.................... 152,686
--------
Coal properties, net............................................................ 261,265
--------
Other property, plant and equipment............................................... 10,646
Less -- Accumulated depreciation and amortization............................... 4,921
--------
Other property, plant and equipment, net........................................ 5,725
--------
Total property, plant and equipment, net................................ 444,928
--------
Other Assets:
Nonoperating interest in coalbed methane properties, net (Note L)............... 86,334
Deferred income tax benefits (Note J)........................................... 59,319
Notes receivable (Note K)....................................................... 13,000
Other........................................................................... 25,021
--------
Total other assets...................................................... 183,674
--------
$860,158
========
The accompanying notes and schedule of segment information are an
integral part of these combined financial statements.
65
67
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
COMBINED BALANCE SHEET
DECEMBER 31, 1994
(NOTES A, B AND M)
(THOUSANDS OF DOLLARS)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Short-term debt (Note F)...................................................... $ 27,000
Current maturities of long-term debt (Note F)................................. 150,102
Payables --
Trade...................................................................... 88,170
Affiliates................................................................. 28,906
Advances from affiliates (Note O).......................................... 143,936
Other...................................................................... 30,602
Transportation and exchange gas payable --
Affiliates................................................................. 17,375
Other...................................................................... 1,399
Accrued liabilities --
Federal income taxes....................................................... 10,594
Other taxes................................................................ 9,688
Interest................................................................... 28,422
Employee benefits (Note I)................................................. 24,664
Other...................................................................... 14,970
Other......................................................................... 16,738
----------
Total current liabilities............................................. 592,566
----------
Advances From Affiliates (Note O)............................................... 124,000
----------
Long-Term Debt, less current maturities (Note F)................................ 894,896
----------
Other Liabilities and Deferred Credits:
Accrued pension cost (Note I)................................................. 12,496
Payables to affiliates........................................................ 981
Other......................................................................... 35,898
----------
Total other liabilities and deferred credits.......................... 49,375
----------
Commitments and Contingencies (Notes D, E and F)
Convertible Preferred Stock -- non-redeemable (Note G).......................... 273,995
Less -- Issue expense......................................................... 8,673
----------
265,322
----------
Common Stockholders' Deficit:
Common stock $0.50 par value: authorized 150,000,000 shares; 41,431,419 shares
issued and outstanding..................................................... 20,716
Premium on capital stock and other paid-in capital............................ 507,448
Accumulated deficit........................................................... (1,584,473)
Less -- Treasury stock, at cost, 514,444 shares............................... 7,695
Restricted stock, 87,689 shares (Note H) --
Deferred compensation.................................................... 1,997
----------
Total common stockholders' deficit.................................... (1,066,001)
----------
$ 860,158
==========
The accompanying notes and schedule of segment information are an
integral part of these combined financial statements.
66
68
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(NOTES A AND B)
(THOUSANDS OF DOLLARS)
Operating Revenues:
Natural gas sales and transportation........................................... $1,019,874
Coal sales..................................................................... 215,089
Other sales.................................................................... 58,227
----------
Total operating revenues............................................... 1,293,190
----------
Operating Costs and Expenses:
Cost of natural gas sales...................................................... 898,484
Cost of natural gas transportation............................................. 113,546
Cost of coal sales............................................................. 182,099
Cost of other sales............................................................ 24,532
Operation and maintenance...................................................... 2,331
Administrative and general..................................................... 43,833
Depreciation, depletion and amortization....................................... 30,431
Taxes -- other than income taxes............................................... 5,725
Provision for costs in excess of ceiling limitation (Note L)................... 45,000
Provision for asset impairments (Notes D, K and M)............................. 41,055
----------
Total operating costs and expenses..................................... 1,387,036
----------
Operating Loss................................................................... (93,846)
----------
Other (Income) and Other Deductions:
Interest expense:
Affiliates.................................................................. 16,544
Other....................................................................... 104,831
Interest income................................................................ (5,283)
Equity in earnings of unconsolidated affiliates (Note K)....................... (3,415)
Miscellaneous other (income) and deductions, net............................... 4,072
----------
Total other (income) and other deductions.............................. 116,749
----------
Loss Before Income Taxes......................................................... (210,595)
Benefit of Income Taxes (Note J)................................................. (79,217)
----------
Net Loss......................................................................... (131,378)
Dividends on Convertible Preferred Stock......................................... 22,904
----------
Common Stock Equity in Net Loss.................................................. $(154,282)
==========
The accompanying notes and schedule of segment information are an
integral part of these combined financial statements.
67
69
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(NOTES A AND B)
(THOUSANDS OF DOLLARS)
Cash flows used in operating activities:
Net Loss....................................................................... $(131,378)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization.................................... 34,269
Deferred income taxes (Note J).............................................. (27,768)
Equity in earnings of unconsolidated affiliates (Note K).................... (3,415)
Dividends and distributions from unconsolidated affiliates.................. 4,952
Tran$tock compensation expense (Note I)..................................... (76)
Provision for costs in excess of ceiling limitation (Note L)................ 45,000
Provision for asset impairments (Notes D, K and M).......................... 41,055
Changes in operating assets and liabilities:
Receivables............................................................... 11,753
Inventories............................................................... 5,326
Payables.................................................................. (31,492)
Transportation and exchange gas payable, net.............................. (16,650)
Accrued liabilities....................................................... 14,973
Other, net................................................................ 6,875
---------
Net cash used in operating activities.................................. (46,576)
---------
Cash flows used in financing activities (Notes F, G and H):
Repayment of advances from affiliates.......................................... (41,238)
Retirement of long-term debt................................................... (9,479)
Net increase in short-term debt................................................ 27,000
Dividends on common stock...................................................... (24,634)
Dividends on preferred stock................................................... (22,831)
Other, net..................................................................... (3,072)
---------
Net cash used in financing activities..................................... (74,254)
---------
Cash flows used in investing activities:
Property, plant and equipment and investment in unconsolidated affiliates...... (14,838)
Net proceeds from sales of assets.............................................. 9,282
Acquisition of companies....................................................... (12,500)
Other, net..................................................................... 6,614
---------
Net cash used in investing activities..................................... (11,442)
---------
Net decrease in cash and temporary cash investments............................ (132,272)
Cash and temporary cash investments at beginning of period..................... 162,102
---------
Cash and temporary cash investments at end of period........................... $ 29,830
=========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest (net of amount capitalized)........................................ $ 99,582
Income tax refunds, net..................................................... (37,321)
The accompanying notes and schedule of segment information are an
integral part of these combined financial statements.
68
70
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
COMBINED STATEMENT OF COMMON STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
SHARES AMOUNT
------ ----------
Common Stock:
Balance at beginning of period....................................... 41,387 $ 20,693
Issued under restricted stock plan................................ 44 23
------ ----------
Balance at end of period............................................. 41,431 20,716
======
----------
Premium on Capital Stock and Other Paid-In Capital:
Balance at beginning of period....................................... 511,797
Redemption of 9.25% preferred stock............................... (1,140)
Challenger litigation settlement.................................. 7,108
Tran$tock market value adjustment................................. (11,570)
Issued under restricted stock plan................................ 771
Other............................................................. 482
----------
Balance at end of period............................................. 507,448
----------
Accumulated Deficit:
Balance at beginning of period....................................... (1,405,738)
Net loss.......................................................... (131,378)
Dividends on common stock at $0.60 per share...................... (24,453)
Dividends on convertible preferred stock at required amounts...... (22,904)
----------
Balance at end of period............................................. (1,584,473)
----------
Less Treasury Stock:
Balance at beginning of period....................................... 15 207
Forfeitures from restricted stock plan............................ 12 177
Issued under restricted stock plan................................ (28) (403)
Issued under stock option plan.................................... (15) (219)
Challenger litigation settlement.................................. 482 7,108
Other purchases and sales......................................... 48 825
------ ----------
Balance at end of period............................................. 514 7,695
======
----------
Less Common Stock Held by Tran$tock:
Deferred compensation
Balance at beginning of period.................................... 317 14,395
Compensation expense............................................ (317) (2,825)
Market value adjustment......................................... -- (11,570)
------ ----------
Balance at end of period.......................................... -- --
======
----------
Receivable from Tran$tock
Balance at beginning of period.................................... 207 9,383
Repayment....................................................... (207) (9,383)
------ ----------
Balance at end of period.......................................... -- --
======
----------
Less Restricted Stock:
Deferred compensation
Balance at beginning of period.................................... 92 1,775
Awarded, earned or forfeited, net............................... 19 1,539
Compensation expense and market value adjustment................ (23) (1,317)
------ ----------
Balance at end of period.......................................... 88 1,997
======
-----------
Total Common Stockholders' Deficit..................................... $(1,066,001)
===========
The accompanying notes and schedule of segment information are an
integral part of these combined financial statements.
69
71
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
SCHEDULE OF SEGMENT INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1994
(NOTES A AND B)
(THOUSANDS OF DOLLARS)
GAS GAS
DESCRIPTION MARKETING COAL GATHERING OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ --------- -------- --------- -------- ------------ ------------
Revenues:
Unaffiliated companies........................ $ 950,419 $215,089 $ 7,442 $ 25,423 $ -- $1,198,373
Affiliated companies.......................... 107,837 -- 173 66 (13,259) 94,817
--------- -------- -------- -------- ---------- ----------
Total revenues.......................... 1,058,256 215,089 7,615 25,489 (13,259) 1,293,190
--------- -------- -------- -------- ---------- ----------
Operating Costs and Expenses:
Cost of sales and transportation.............. 1,023,579 182,099 1,186 25,056 (13,259) 1,218,661
Depreciation, depletion and amortization...... 1,589 23,845 3,911 1,086 -- 30,431
Provision for asset impairments............... 18,394 -- 3,520 19,141 -- 41,055
Provision for costs in excess of ceiling
limitation.................................. -- -- -- 45,000 -- 45,000
Other operating costs and expenses............ 25,431 9,092 4,244 13,122 -- 51,889
--------- -------- -------- -------- ---------- ----------
Total operating costs and expenses...... 1,068,993 215,036 12,861 103,405 (13,259) 1,387,036
--------- -------- -------- -------- ---------- ----------
Operating Income (Loss)......................... $ (10,737) $ 53 $ (5,246) $(77,916) $ -- $ (93,846)
========= ======== ======== ======== ========== ==========
Equity in Earnings (Loss) of Unconsolidated
Affiliates.................................... $ (646) $ -- $ 414 $ 3,647 $ -- $ 3,415
========= ======== ======== ======== ========== ==========
Assets:
Identifiable assets at year-end............... $ 138,956 $299,363 $161,599 $177,836 $ -- $ 777,754
========= ======== ======== ======== ========== ==========
Equity in net assets of unconsolidated
affiliates.................................. $ 11,296 $ -- $ 5,730 $ 1,576 $ -- 18,602
========= ======== ======== ======== ==========
Other corporate assets........................ 63,802
----------
Total Assets............................ $ 860,158
==========
Capital Expenditures, Acquisition of Companies
and Investment in Unconsolidated Affiliates... $ 910 $ 12,946 $ 37 $ 13,445 $ -- $ 27,338
========= ======== ======== ======== ========== ==========
The accompanying notes to combined financial statements are an integral part of
this schedule.
70
72
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS
A. ORGANIZATION AND CONTROL
BASIS OF PRESENTATION
Upon completion of The Williams Companies, Inc.'s (Williams) acquisition of
Transco Energy Company and subsidiaries (Transco), as discussed below, Transco
dividended Transcontinental Gas Pipe Line Corporation (TGPL) and Texas Gas
Transmission Corporation (Texas Gas) to Williams and Williams contributed the
remaining Transco operations (Transco's Contributed Assets) to Williams Holdings
of Delaware, Inc., a wholly-owned subsidiary of Williams. Transco's Contributed
Assets' operations primarily consist of natural gas and liquids marketing,
natural gas gathering and processing, coal mining and marketing and Transco's
coalbed methane investment. Certain of these assets are non-core assets which
Williams has sold or stated its intention to dispose of during 1995 (see Note
C). These combined financial statements represent the financial position,
results of operations and cash flows of Transco's Contributed Assets. As used
herein, the terms "Transco's Contributed Assets" or the "Company" refer to the
Transco assets contributed by Williams to Williams Holdings of Delaware.
Transco's Contributed Assets' combined financial statements have been
prepared on the historical cost basis and do not reflect any allocation of the
purchase price to the Company's assets that was recorded in 1995 by Williams as
a result of the acquisition discussed below.
WILLIAMS ACQUISITION OF TRANSCO ENERGY COMPANY
On December 12, 1994, Transco and Williams announced that they had entered
into a merger agreement (Merger Agreement) pursuant to which Williams agreed to
commence a cash tender offer to acquire up to 24.6 million shares, or
approximately 60%, of the outstanding shares of Transco common stock for $17.50
per share and common stock purchase right. The cash offer was then followed by a
stock merger (Merger) in which each share of Transco common stock not purchased
in the tender offer was exchanged for 0.625 share of Williams common stock and
0.3125 attached Williams preferred stock purchase right. Pursuant to the Merger
Agreement, on January 18, 1995, Williams accepted for payment 24.6 million
shares of Transco common stock for $17.50 per share. Also pursuant to the Merger
Agreement, shortly before Williams' acceptance for payment, all of the common
stock purchase rights attached to the Transco common shares were redeemed by
Transco for $0.05 per right (see Note H). The remainder of the outstanding
shares of Transco common stock were converted to Williams common stock on May 1,
1995, the effective date of the Merger.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Transco's
Contributed Assets. Intercompany sales are at market prices and all significant
intercompany accounts and transactions have been eliminated. The equity method
of accounting is used for investments in affiliates in which 50% or less of the
voting interest is owned.
DEPRECIATION, DEPLETION AND AMORTIZATION
Natural gas gathering and liquids separation and fractionation plant.
Depreciation of natural gas gathering facilities is based on the
units-of-production method over the estimated life of the reserves associated
with the facility or at straight-line rates over a 20 to 38-year life.
Depreciation of liquids separation and fractionation plant is primarily based on
the straight-line method over a 16 to 22-year life.
Coal properties. Mineral rights often are acquired through royalty
payments. Royalty payments representing prepayments recoupable against future
production are included in other assets in the accompanying Combined Balance
Sheet, with amounts expected to be recouped within one year classified as a
current asset.
71
73
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As mining occurs on these leases, the prepayment is amortized and included in
the cost of coal mined. Amounts determined to be nonrecoupable are charged to
expense.
Cost of coal lease rights, including costs related to the purchase of the
coal properties by Transco and mine development costs, are capitalized and
amortized by the units-of-production method over the estimated recoverable
reserves. Coal production machinery and equipment are depreciated principally by
the straight-line method over a three to five-year life.
Coalbed methane properties. As described in Note L, Transco's Contributed
Assets have an investment in a nonoperating interest in certain coalbed methane
properties. The properties are operated by TECO Coalbed Methane, Inc. (TECO).
All future development costs will be borne by TECO. Transco's Contributed
Assets' remaining investment will be amortized using the future gross revenue
method based on future revenues to be received through Transco's Contributed
Assets' nonoperating interest in the underlying proved coalbed methane
properties.
INCOME TAXES
Tax policy. Transco and its wholly-owned subsidiaries, including TGPL and
Texas Gas, file a consolidated federal income tax return. It is Transco's policy
to charge or credit each subsidiary with an amount equivalent to its federal
income tax expense or benefit computed as if each subsidiary had a separate
return, but including benefits from each subsidiary's losses and tax credits
that may be utilized only on a consolidated basis.
Accounting for income taxes. Transco's Contributed Assets use the liability
method of accounting for deferred taxes, which requires, among other things,
adjustments to the existing deferred tax balances for changes in tax rates,
whereby such balances will more closely approximate the actual taxes to be paid.
REVENUE RECOGNITION
The Company's subsidiaries recognize revenues for the sale of their
respective commodities in the period of delivery.
ALLOWANCES FOR DOUBTFUL RECEIVABLES
Due to its customer base, Transco's Contributed Assets have not
historically experienced recurring credit losses in connection with its
receivables. As a result, receivables determined to be uncollectible are
reserved or written off in the period of such determination. At December 31,
1994, Transco's Contributed Assets' allowance for doubtful accounts was $22.3
million, of which $17.2 million were receivables from Continental Energy
Associates Limited Partnership as discussed in Note D.
CASH FLOWS FROM OPERATING ACTIVITIES
Transco's Contributed Assets use the indirect method to report cash flows
from operating activities, which requires adjustments to net income to reconcile
to net cash flows provided by operating activities. The Company includes
short-term, highly-liquid investments that have a maturity of three months or
less as cash equivalents.
RESTRICTED DEPOSITS
At December 31, 1994, the Company had approximately $4 million of
restricted deposits that are included in the accompanying Combined Balance Sheet
in other current assets. These restricted deposits serve as collateral for
various standby letters of credit, regulatory trusts and legal proceedings.
72
74
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
GAS IN STORAGE
The Company utilizes the last-in, first-out (LIFO) method of accounting for
inventory gas in storage. The current replacement cost of the inventory gas in
storage at December 31, 1994 was $6.1 million.
GAS IMBALANCES
The Company's gas marketing subsidiaries transport gas on various pipeline
systems, including TGPL and Texas Gas, which may deliver different quantities of
gas on behalf of the Company than the quantities of gas received from the
Company. These transactions result in gas transportation and exchange imbalance
receivables and payables which are recovered or repaid in cash or through the
receipt or delivery of gas in the future and are recorded in the accompanying
Combined Balance Sheet. Imbalances have become of greater significance to the
pipeline and gas marketing industries generally, since the implementation of
open access transportation by the FERC in 1985, as a result of the substantial
increase in the number of shippers on pipeline systems. Settlement of imbalances
requires agreement between the pipelines and shippers as to allocations of
volumes to specific transportation contracts and timing of delivery of gas based
on operational conditions. All imbalances have been classified as current assets
or current liabilities at December 31, 1994.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has been a party to interest rate swap agreements to manage
interest rate risks and is a party to various futures contracts and option and
commodity price swap agreements used to manage price volatility in its natural
gas and natural gas liquids marketing activities. See Note M for a discussion of
the Company's accounting policy for the recognition of gains and losses in
connection with these financial instruments.
C. SUBSEQUENT EVENT -- ACTIONS BY WILLIAMS SUBSEQUENT TO CONSUMMATION OF THE
MERGER
Transco's business strategy contemplated the continued operation of a
number of assets which Williams has identified as non-core assets. As a result
of Williams' business strategy, Williams has sold a significant portion of the
Company's coal operations and the Company's interests in the coalbed methane
properties and intends to sell during 1995 other operations of Transco's
Contributed Assets including certain gathering operations and other assets. In
connection with the allocation of the total purchase price of Transco, such non-
core assets were recorded by Williams at their estimated fair value, reflecting
Williams' disposition strategy, which is below the historical cost basis of such
assets recorded by Transco.
In connection with the merger, Williams made capital contributions to the
Company of approximately $1.7 billion that were primarily related to the
retirement of debt and preferred stock, termination of interest-rate swap
agreements, transfer of the Company's remaining debt (including all advances
payable to TGPL and Texas Gas) to Williams and the exchange of the Company's
$3.50 preferred stock for Williams $3.50 preferred stock (see Notes F and G).
D. LEGAL PROCEEDINGS
Dakota Gasification litigation. In October 1990, Dakota Gasification
Company (Dakota), the owner of the Great Plains Coal Gasification Plant (Plant),
filed suit in the United States District Court in North Dakota against TGPL and
three other pipeline companies alleging that TGPL and the other pipeline
companies had not complied with their respective obligations under certain gas
purchase and gas transportation contracts. Specifically at issue is the proper
price to be paid by TGPL and the other pipelines for synthetic gas since August
1989, the proper rate to be charged by Dakota for transportation through the
Great Plains
73
75
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
pipeline since October 1987, and the proper quantity of synthetic gas required
to be taken-or-paid for by TGPL and the other pipelines.
On September 8, 1992, Dakota and the United States Department of Justice on
behalf of the Department of Energy (DOJ) filed a Third Amended Complaint in the
U.S. District Court in North Dakota naming as defendants in the suit, in
addition to TGPL and the other pipelines, Transco and Transco Coal Gas Company,
the subsidiary of Transco that was the partner in Great Plains Gasification
Associates (Partnership), the partnership that originally constructed the Plant.
In addition, Dakota and DOJ named as defendants all of the other partners in the
Partnership and each of the parent companies of these entities. In the Third
Amended Complaint, Dakota and DOJ charged: (i) the pipeline defendants with
breach of contract for failure to pay for volumes of gas tendered but not taken,
for underpayment for gas purchased and for failure to pay for transportation
services; (ii) all defendants with breach of representations and warranties,
misrepresentation and breach of an implied covenant of good faith and fair
dealing; and (iii) all parent company defendants and the affiliated partner
defendants of each of the pipeline defendants with intentional interference with
contractual relations. Dakota and DOJ are seeking declaratory and injunctive
relief; the recovery of damages, alleging that the four pipeline defendants have
underpaid for gas, collectively, as of June 30, 1992, by more than $232 million
plus interest and for additional damages for transportation services; and costs
and expenses, including attorneys' fees. On October 30, 1992, Dakota invoiced
TGPL $70.5 million for "all synthetic gas costs" Dakota claims are due from
TGPL. Because the proper gas price under TGPL's gas purchase contract with
Dakota is derived from a formula involving the weighted average prices paid for
certain natural gas purchased by TGPL, and is further the average of each of
such prices calculated for each of the four pipeline purchasers, it is not
feasible at this time for TGPL to determine if it, in fact, has underpaid for
gas.
On March 30, 1994, the parties executed definitive agreements which would
settle the litigation subject to final non-appealable regulatory approvals. The
settlement is also subject to a FERC ruling that TGPL's existing authority to
recover in rates certain costs related to the purchase and transportation of gas
produced by Dakota will pertain to gas purchase and transportation costs TGPL
will pay Dakota under the terms of the settlement. On June 23, 1994, TGPL filed
a petition with the FERC seeking approval of the settlement provisions and the
contract amendment including pass-through of all costs to TGPL's customers. On
October 18, 1994, the FERC issued an order consolidating TGPL's petition with
the petitions filed by the other three pipeline companies and setting the matter
for hearing before an ALJ. The hearing will be limited to the issues of (i)
whether the revised agreements are prudent, and (ii) the level of Dakota costs
to be recovered in the proceeding. The FERC directed the ALJ to issue an initial
decision by December 31, 1995 in order that final FERC approval may take place
by December 31, 1996. On November 7, 1994, the ALJ convened a prehearing
conference and adopted a procedural schedule to govern the hearing. Under that
procedural schedule, the hearing is scheduled to commence on June 20, 1995. In
the event that the necessary regulatory approvals are not obtained, TGPL,
Transco and Transco Coal Gas Company intend to vigorously defend the suit.
Although no assurances can be given, TGPL and Transco believe that TGPL has
substantially complied with its obligation under the contracts with Dakota and
that Transco and Transco Coal Gas Company have not breached representations,
warranties or implied covenants and have not intentionally interfered with the
parties' contractual relations. Although no assurances can be given, Transco
does not believe that the ultimate resolution of this litigation, whether
settled or not, will have a material adverse effect on the Company's financial
position, results of operations or net cash flows.
Royalty claims. In connection with TGPL's renegotiations with producers to
resolve take-or-pay and other contract claims and to amend gas purchase
contracts, TGPL has entered into certain settlements which may require the
indemnification by TGPL of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. In October
1992, the United States Court of Appeals for the Fifth Circuit (Fifth Circuit
Court) and the Louisiana Supreme Court, with respect to the same litigation in
74
76
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
applying Louisiana law, determined that royalties are due on take-or-pay
payments under the royalty clauses of the specific mineral leases reviewed by
the courts. Thereafter, the State Mineral Board of Louisiana passed a resolution
directing the state's lessees to pay to the state royalties on gas contract
settlement payments. As a result of these and related developments, TGPL has
been made aware of demands on producers for additional royalties and such
producers may receive other demands which could result in claims against TGPL
pursuant to the indemnification provisions in its settlements. Indemnification
for royalties will depend on, among other things, the specific lease provisions
between the producer and the lessor and the terms of the settlement between the
producer and TGPL.
In October 1991, a lawsuit was filed in the 32nd Judicial District Court
for the Parish of Terrebonne, State of Louisiana (Betty Duplantis Brown, et al
vs. Mobil Oil Exploration and Producing U.S. Inc., et al (Duplantis)), in which
royalty owners alleged that they were third party beneficiaries of the original
gas purchase contract between TGPL and the producers and that the settlement
agreement entered into between TGPL and such producers is not valid without the
royalty owners' consent. Additionally, in a separate lawsuit consolidated with
the Duplantis lawsuit, allegations were made that Transco Exploration Company
(TXC) and TXP Operating Company (TXPO) and other defendant-producers were
entitled to make claims for breach of gas purchase contracts but failed to
either make claims or receive compensation for such breaches. On October 6,
1994, all parties in the Duplantis lawsuit, including TXC and TXPO, reached a
settlement in principle, which closed on January 20, 1995. TXC and TXPO paid, in
total, approximately $2.5 million, which represents TXC and TXPO's portion of an
$8.4 million settlement to be paid by all of the defendant-producers. The
settlement also released TGPL from any liability to the plaintiffs and the
defendant-producers.
In December 1992, a lawsuit was filed in the United States District Court
for the Southern District of Texas (Vaquillas Ranch Company, Ltd., et al vs.
Texaco Exploration and Production, Inc. (Vaquillas Ranch)) in which royalty
owners have made allegations against the producer for breach of express
obligations under the leases; breach of the covenant to reasonably market gas;
breach of the covenant to reasonably develop; breach of the covenant to protect
against drainage; and failure to deal in good faith. In August 1993, a lawsuit
was filed in the United States District Court for the Southern District of Texas
(Floyd C. Billings, et al vs. Texaco Exploration and Production Inc., et al
(Billings)), in which the royalty owners' claims are virtually identical to the
ones made in the Vaquillas Ranch lawsuit. However, the royalty owners did not
claim that the producer breached any covenant to develop or protect against
drainage. In addition, in the Billings lawsuit the royalty owners have sued the
parent and an affiliate of the producer and TGPL for allegedly conspiring to
tortuously interfere with their lease. The producer defendants in each of the
Billings and Vaquillas Ranch lawsuits have cross-claimed against TGPL. While the
two complaints do not specify monetary damages, the royalty owners have verbally
alleged that their claims against the producers could approximate $100 million.
Both of the Vaquillas Ranch and the Billings lawsuits have been remanded to
state court. No trial dates have been set.
On July 5, 1994, the plaintiffs in the Vaquillas Ranch lawsuit filed a
separate lawsuit in the 111th Judicial District Court of Webb County, Texas
(Vaquillas Ranch Company, Ltd., et al vs. Transcontinental Gas Pipe Line
Corporation and Transco Gas Supply Company) in which the plaintiffs contend that
TGPL tortuously interfered with the plaintiffs' lease by inducing the producer
to enter into certain agreements that reduced TGPL's take-or-pay obligations and
the price TGPL was obligated to pay for the gas it purchased. The plaintiffs are
requesting an unspecified amount of actual and punitive damages for the alleged
tortuous interference. It is likely that this lawsuit will be consolidated with
the Vaquillas Ranch lawsuit that has been remanded to state court.
On January 14, 1994, a lawsuit was filed in the 4th Judicial District Court
of Rusk County, Texas (Marathon Oil Company vs. Transcontinental Gas Pipe Line
Corporation and Transco Energy Company (Marathon)) and, on March 15, 1994, a
lawsuit was filed in the 189th Judicial District Court of Harris County, Texas
(Texaco, Inc. vs. Transcontinental Gas Pipe Line Corporation (Texaco)). In the
Marathon
75
77
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and Texaco lawsuits, the respective plaintiffs each have made claims against
TGPL for reimbursements of settlement amounts paid to royalty owners. In the
Marathon and Texaco lawsuits, the respective plaintiffs seek to recover
approximately $3.6 million and approximately $14.7 million, respectively. In the
Marathon lawsuit, trial has been set for July 31, 1995.
Each of these lawsuits is in the discovery process. TGPL has denied
liability in the litigation and believes that it has meritorious defenses to the
claims which it intends to pursue vigorously. TGPL believes at this time that
its exposure, if any, under the provisions of its settlements with the producers
is substantially less than the amounts claimed by the royalty owners. TGPL has
not provided a reserve for these lawsuits. Although no assurances can be given,
Transco believes that the ultimate resolution of TGPL's royalty claims and
litigation will not have a material adverse effect on Transco's Contributed
Assets' financial position, results of operation or net cash flows.
Coal Litigation. In April 1985, a lawsuit was filed in the Clay Circuit
Court of the 41st Judicial Circuit of the Commonwealth of Kentucky (Spurlock,
Stewart, Allen, et. al. vs. Leeco, Inc.) in which the plaintiffs alleged
intentional trespass and the wrongful taking of coal from their property by
Leeco, Inc., a subsidiary of Transco Coal Company (TCC). In July 1992, the
Special Judge of the Clay Circuit Court awarded the plaintiffs approximately
$3.5 million in damages, with interest accruing post-judgment. Leeco appealed
the judgment, based on advice of counsel that the lower court had committed
reversible error. In September 1994, the Kentucky Court of Appeals affirmed the
earlier judgment for the plaintiffs, although the court remanded an award of
attorneys' fees for reconsideration by the trial court. In December 1994, the
parties entered into a settlement that resulted in Leeco recording a charge of
$4.0 million pretax, $2.6 million after-tax.
Continental Energy Associates. On November 14, 1994, Continental Energy
Associates Limited Partnership, a Massachusetts limited partnership (the
Partnership), filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code with the United States Bankruptcy Court, Middle District of Pennsylvania
(the Bankruptcy Court). The Partnership owns a cogeneration facility in
Hazleton, Pennsylvania (the Facility).
Hazleton Fuel Management Company (HFMC), a subsidiary of Transco, supplies
natural gas and fuel oil to the Facility. As of December 31, 1994, it had
current outstanding receivables from the Partnership of approximately $17.2
million, for which Transco has established a reserve in the same amount.
The construction of the Facility was funded by several banks that have a
security interest in all of the Partnership's assets. HFMC has asserted to the
Bankruptcy Court that payment of its receivables are superior to the lien of the
banks and intends to vigorously pursue the collection of such amounts. The
Bankruptcy Court has authorized the prepayment to HFMC of all future gas
deliveries to the Facility subject to the Bankruptcy Court's review of the
prices of such gas deliveries. In February 1995, the Partnership filed a motion
requesting the Bankruptcy Court to reject the gas supply contract with HFMC. In
addition, in February 1995, the Bankruptcy Court appointed a "responsible
officer" to assume control of the Facility in place of the debtor.
Although no assurances can be given, Transco believes that the ultimate
resolution of the Partnership's reorganization proceeding will not have a
material adverse effect on Transco's Contributed Assets' financial position,
results of operations or net cash flows.
E. ENVIRONMENTAL MATTERS
Transco's Contributed Assets are subject to extensive federal, state and
local environmental laws and regulations which affect the Company's operations
related to the construction and operation of gas gathering facilities and coal
mining. Appropriate governmental authorities may enforce these laws and
regulations with a variety of civil and criminal enforcement measures, including
monetary penalties, assessment and remediation requirements and injunctions as
to future compliance. The Company's use and disposal of hazardous materials are
subject to the requirements of the federal Toxic Substances Control Act (TSCA),
the federal Resource
76
78
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Conservation and Recovery Act (RCRA) and comparable state statutes. The
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
also known as "Superfund," imposes liability, without regard to the fault or the
legality of the original act, for release of a "hazardous substance" into the
environment. Because these laws and regulations change from time to time,
practices that have been acceptable to the industry and to the regulators have
to be changed and assessment and monitoring have to be undertaken to determine
whether those practices have damaged the environment and whether remediation is
required. Since 1989, the Company has had studies underway to test facilities
for the presence of toxic and hazardous substances to determine to what extent,
if any, remediation may be necessary. At December 31, 1994, the Company does not
believe that there is any significant remediation required related to Transco's
Contributed Assets.
TXC, for itself and as managing general partner of Transco Exploration
Partners, Ltd., has been named as a potentially responsible party (PRP) in three
Superfund sites and in two Louisiana state sites. Based on present volumetric
estimates, TXC's estimated exposure at three of the Superfund sites where it has
been named as a PRP is less than $400,000 and TXC's estimated individual
exposure at each of the two Louisiana state sites where they have been named as
a PRP is less than $100,000 per site. Liability under CERCLA (and applicable
state law) can be joint and several with other PRPs. Although volumetric
allocation is a factor in assessing liability, it is not necessarily
determinative; thus, the ultimate liability could be substantially greater than
the amounts described above. Although no assurances can be given, the Company
does not believe that the PRP status of TXC will have a material adverse effect
on Transco's Contributed Assets' financial position, results of operations or
net cash flows.
Magnolia Methane Corp. has been named as a PRP in one Superfund waste
disposal site and has negotiated a de minimis buyout for $11,000. Magnolia
Methane Corp. does not anticipate future exposure at this site to exceed
$100,000.
F. FINANCING
Long-term debt. At December 31, 1994, long-term debt issues were
outstanding as follows (in thousands):
Transco Energy Company:
Debentures:
9 7/8% due 2020..................................................... $ 125,000
----------
Notes:
9 1/2% due 1995..................................................... 150,000
9 1/8% due 1998..................................................... 200,000
11 1/4% due 1999.................................................... 300,000
9 5/8% due 2000..................................................... 125,000
9 3/8% due 2001..................................................... 150,000
----------
Total notes.................................................... 925,000
----------
Transco Coal Company:
Other due 1995-2000.................................................... 251
----------
Total long-term debt issues.................................... 1,050,251
Less:
Unamortized debt premium and discount.................................. 5,253
Current maturities..................................................... 150,102
----------
Total long-term debt, less current maturities.................. $ 894,896
==========
77
79
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Sinking fund or prepayment requirements for the years 1995 through 1999
applicable to long-term debt outstanding at December 31, 1994, are $150.1
million, $0.1 million, none, $200.0 million and $300.0 million, respectively.
No property is pledged as collateral under any of the long-term debt
issues.
Short-term debt. As of December 31, 1994, $27 million of short-term debt
was outstanding under Transco's Amended Bank Credit Facility. As of December 31,
1993, no short-term debt was outstanding. The weighted average interest rate on
short-term debt during 1994 was 8.9%.
Recapitalization. In connection with the Merger, in January 1995, the
Boards of Directors of Transco and Williams approved a proposed recapitalization
plan for Transco under which Williams will advance or contribute to Transco up
to an estimated $950 million to execute the proposed plan. The following actions
were completed in January and February 1995 in connection with the
recapitalization plan:
- Termination of Transco's Amended Bank Credit Facility dated December 31,
1993, and the repayment of the outstanding balance of $36 million,
replacing it with new credit agreements described below;
- Termination of Transco's interest rate swaps that had effectively
converted $450 million of fixed-rate debt into floating-rate debt; and
- Termination of Transco's Reimbursement Facility dated December 31, 1993,
replacing it with letters of credit obtained pursuant to a Standby Letter
of Credit Facility between First Interstate Bank of California and
Williams.
Transco's Amended Bank Credit Facility was replaced with a Credit Agreement
among Williams, Transco, and TCC (Credit Agreement). Under the Credit Agreement,
Williams may advance to Transco and TCC up to an aggregate of $950 million, not
exceeding $50 million to TCC. Interest on advances under the Credit Agreement is
paid at the London Interbank Offer Rate (LIBOR), which at December 31, 1994 was
5.94%, plus an applicable margin, which at December 31, 1994 was 0.625%.
In addition, the recapitalization plan includes a tender offer initiated by
Transco on February 10, 1995, to acquire any and all of its outstanding 11 1/4%
Notes due July 1, 1999. The offer expired on February 17, 1995. In February
1995, Transco acquired approximately $284 million, or 94%, of the 11 1/4% Notes.
The price paid for the 11 1/4% Notes tendered was computed using a yield to call
equal to a fixed spread of 30 basis points over the yield to maturity of the
U.S. Treasury Note due August 15, 1997, at the time the 11 1/4% Notes were
tendered. The remaining outstanding 11 1/4% Notes are first callable on July 1,
1997, at a price of 101.875%.
Restrictive covenants. As a result of the termination of the Amended Bank
Credit Facility and the Reimbursement Facility, as discussed above, the
restrictive covenants contained in those agreements were terminated. Prior to
the initiation of the tender offer for the 11 1/4% Notes discussed above,
holders of a majority in principal amount of the 11 1/4% Notes agreed to waive
certain provisions of the Indenture dated as of July 1, 1992 (Indenture), under
which the 11 1/4% Notes were issued, that restricted the disposition of certain
Transco assets. The holders of the majority in principal amount of the 11 1/4%
Notes also agreed to certain amendments to the Indenture that eliminated certain
restrictive covenants in the Indenture. The amendments eliminated the
restrictive covenants which limited, among other things, the incurrence of new
debt by Transco or its material subsidiaries (as defined) and Transco's ability
to make restricted payments, including dividends.
G. PREFERRED STOCK
Transco has authorized 15,000,000 shares of cumulative first preferred
stock and 2,000,000 shares of cumulative second preferred stock, both without
par value. There are two issues of cumulative first preferred
78
80
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
stock outstanding at December 31, 1994, the $3.50 Series and the $4.75 Series.
None of the second preferred had been issued at December 31, 1994.
$4.75 Series. At December 31, 1994, 2,979,900 shares of Transco's $4.75
Series Cumulative Convertible Preferred Stock were issued and outstanding. The
$4.75 Series provides for no sinking fund or mandatory redemption and the stated
value is $50 per share. The $4.75 Series is convertible into common stock of
Transco, at the option of the holder at any time, at the conversion rate of
0.894 share of common stock for each share of preferred stock.
Transco has given notice to holders that it plans to redeem all of the
outstanding shares of the $4.75 Series. The redemption is to be effective March
20, 1995, at a redemption price of $50.475 per share plus accrued dividends.
$3.50 Series. In November 1993, Transco issued 2,500,000 shares of $3.50
Series Cumulative Convertible Preferred Stock, all of which were outstanding at
December 31, 1994. The $3.50 Series provides for no sinking fund or mandatory
redemption and the stated value is $50 per share. The $3.50 Series is
convertible into common stock of Transco, at the option of the holder at any
time, at the conversion rate of 2.5 shares of common stock for each share of
preferred stock.
Effective with the date of the Merger, each issued and outstanding share of
Transco's $3.50 Series will be converted into the right to receive one share of
preferred stock of Williams' which will be designated the Williams' $3.50 Series
Cumulative Convertible Preferred Stock. Each share of Williams' $3.50 Series
will be initially convertible into 1.5625 shares of Williams' common stock and
will have the designation, preferences and rights set forth in the Merger
Agreement. The conversion ratio of Williams' $3.50 Series into Williams' common
shares represents the conversion ratio of Transco $3.50 Series into Transco
common shares multiplied by 0.625, the conversion ratio of Transco common shares
into Williams' common shares.
In the event of a change in control of Transco (as defined in the
Certificate of Designation, Preferences and Rights), each holder of the stock
has the right, at the holder's option, to require Transco to redeem all or any
part of the holder's shares out of funds lawfully available unless such change
in control is approved by Transco's continuing directors. Holders do not have
such redemption rights in connection with the tender offer or the Merger which
was approved by Transco's Board of Directors.
H. COMMON STOCK
Merger Agreement. As discussed in Note A, Williams commenced a tender offer
which began on December 16, 1994 and expired on January 17, 1995. On January 18,
1995, Williams accepted for payment 24.6 million shares, or approximately 60%,
of Transco's common stock for $17.50 per share and common stock purchase right.
The remainder of the outstanding shares of Transco's common stock will be
converted into the right to receive 0.625 of a share of Williams' common stock
and 0.3125 attached Williams' preferred stock purchase rights for each share of
Transco's common stock.
Reserved shares. At December 31, 1994, there were 75,524,740 shares of
common stock of Transco reserved for issuance under various employee incentive
and benefit plans, for conversion of Transco's convertible securities and for
issuance in the event common stock purchase rights are exercised.
Challenger litigation settlement. In May 1992, TGPL and Challenger Minerals
Inc. entered into a Settlement Agreement to settle all matters in Challenger's
lawsuit. Part of the settlement included issuing Transco common stock with a
market value of $15 million to Challenger in 1994. TGPL had placed 1,500,000
shares of Transco common stock in escrow. In February 1994, 1,017,771 shares of
Transco common stock were released to Challenger from escrow, which was
determined by dividing $15 million by Transco's average stock price during
January 1994. The remainder of the shares were returned to Transco and recorded
as treasury shares.
79
81
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase rights. In January 1986, Transco declared a dividend distribution
of one common share purchase right on each outstanding share of common stock.
When exercisable, each right entitles its holder to buy one share of Transco's
common stock at a price of $150 per share. The rights become exercisable 10 days
after a person or group acquires 20% or more of Transco's voting stock or makes
an offer, the consummation of which would result in such person or group owning
30% or more of Transco's common stock. On January 17, 1995, prior to Williams'
acceptance for payment of 24.6 million shares, or 60%, of Transco's common stock
pursuant to its tender offer, Transco redeemed all of the outstanding common
stock purchase rights for $0.05 per right. Pursuant to the terms of the Merger
Agreement and the tender offer, all rights to the proceeds of such redemption
with respect to Transco's common stock and associated common stock purchase
rights accepted for payment pursuant to the tender offer were assigned to
Williams.
Incentive plans. A total of 3,250,000 shares of common stock has been
authorized for grants of stock options, awards of restricted stock and awards of
other stock compensation. Shares available for future grants at December 31,
1994 were 1,487,567.
Stock options. Stock options under Transco's stock option plans entitle
employees to purchase shares of common stock directly from Transco at the market
price of Transco's common stock on the date of grant. Each option becomes
exercisable in such amounts and at such intervals as the Compensation Committee
of the Board of Directors may determine in granting such option, but cannot be
exercisable until at least six months after the date of grant. The expiration
date of an option is determined by the Compensation Committee at the time of
grant, but cannot be later than 10 years from the date of grant. The following
table summarizes the activity that occurred in the plans during 1994 (in
thousands, except per share amounts):
OPTION PRICE NUMBER OF
PER SHARES UNDER
SHARE RANGE OPTION
--------------- ------------
Balance at beginning of year............................. $ 13.125-56.375 2,454
Granted.................................................. 14.375-15.875 1,006
Exercised................................................ 13.125-14.625 (15)
Cancelled................................................ 13.125-53.000 (453)
------
Balance at end of year................................... 13.125-56.375 2,992
======
Total shares exercisable at year-end..................... 1,511
======
As a result of the tender offer by Williams, certain unvested stock options
vested upon the completion of the tender offer. The remaining unvested options
will vest at the effective time of the Merger. If the stock options are not
exercised prior to or at the effective time, the options will be cancelled and
holders of the options will have the choice to receive an amount in cash to the
extent the option price is below $17.50, or to receive replacement options from
Williams.
Restricted stock. Awards of restricted shares of common stock to certain
employees are based on terms and conditions established by the Compensation
Committee of the Board of Directors, but cannot be exercisable until at least
six months after the date of grant. The restricted stock may not be sold,
exchanged, transferred or assigned or otherwise encumbered by the recipient
until the satisfaction of all of such terms and conditions set by the
Compensation Committee.
80
82
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity in restricted stock shares
during 1994 (in thousands):
Balance at beginning of year................................... 168
Awarded........................................................ 73
Earned......................................................... (12)
Forfeited...................................................... (42)
---
Balance at end of year......................................... 187
===
Of the 187,287 shares outstanding at December 31, 1994, 85,575 shares and
87,125 shares are applicable to performance measurement and vesting periods
ending during the years 1995 and 1996, respectively. In January 1995, 14,587
shares were earned that were applicable to the performance measurement period
ending December 31, 1994. Differences between the restricted stock share
balances above and the balances included in Common Stockholders' Deficit in the
accompanying Combined Balance Sheet reflect the proportional number of
restricted shares for which compensation expense has been recognized.
In conjunction with certain of the restricted stock shares described above,
restricted stock units were issued to holders of restricted stock. A restricted
stock unit represents one share of common stock to be issued in the future upon
the determination by the Compensation Committee that Transco and its
subsidiaries had achieved specified performance goals in excess of the goals set
for a corresponding grant of restricted stock. At December 31, 1994, 72,025
restricted stock units were outstanding.
As a result of the tender offer by Williams, the performance measurement
periods scheduled to end December 31, 1995 and 1996 ended one day prior to the
expiration of the tender offer. The number of shares of common stock earned and
issuable to employees for these performance measurement periods in exchange for
restricted stock and restricted stock units totaled 192,565 shares and were paid
in cash at a price of $17.50 per share during the first quarter of 1995. Under
the Merger Agreement, 18,650 shares of non-performance-based restricted stock
will become vested at the consummation of the Merger and will be converted into
the right to receive unrestricted shares of Williams' common stock based upon
the exchange rate in the Merger.
I. EMPLOYEE BENEFIT PLANS
Retirement plans. Substantially all of the Company's employees are covered
under a retirement plan offered by either Transco (Transco Retirement Plan) or
Transco Coal Company (TCC Retirement Plan). Additionally, substantially all of
TGPL's employees are covered under the Transco Retirement Plan.
The benefits under the Transco Retirement Plan are determined by a formula
based on the employee's highest 36 consecutive months of earnings out of the
last 60 months of service prior to actual retirement date and years of
participation in the plan. The TCC Retirement Plan benefit formula considers the
employee's earnings for the last 60 months of service. Both plans provide for
the vesting of employees after five years of credited service. Transco's funding
policy is to contribute an amount at least equal to the minimum funding
requirements actuarially determined by an independent actuary in accordance with
the Employee Retirement Income Security Act of 1974. The plans' assets, which
are managed by external investment organizations, include cash and cash
equivalents, corporate and government debt instruments, preferred and common
stocks, commingled funds, international equity funds and venture capital limited
partnership interests.
81
83
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status of the Transco and TCC
Retirement Plans at October 1, 1994 and the amount of accrued pension costs of
Transco's Contributed Assets and TGPL as of December 31, 1994 (in thousands).
The funded status and the amount of accrued pension costs, as set forth below,
include amounts related to TGPL due to these amounts not being readily separable
from Transco's Contributed Assets' amounts. At December 31, 1994, the Transco
and TCC Retirement Plans included approximately 4,880 participants, of which
approximately 2,825 were associated with TGPL.
Actuarial present value of accumulated benefit obligation, including
vested benefits of $113,398 at October 1, 1994....................... $ (130,482)
===========
Actuarial present value of projected benefit obligation................ $ (173,341)
Plan assets at fair value.............................................. 135,711
-----------
Projected benefit obligation in excess of plan assets.................. (37,630)
Unrecognized net loss.................................................. 14,057
Unrecognized net asset................................................. (5,249)
Unrecognized prior service cost........................................ (2,498)
Activity subsequent to measurement date................................ 2,504
-----------
Accrued pension cost................................................... $ (28,816)
===========
The following table sets forth the components of pension cost for both
plans for the year ended December 31, 1994 (in thousands).
Service cost -- benefits earned during the period...................... $ 12,484
Interest cost on projected benefit obligation.......................... 17,822
Actual return on plan assets........................................... (6,662)
Net amortization and deferral.......................................... (17,343)
--------
Pension cost........................................................... $ 6,301
========
The projected unit credit method is used to determine the actuarial present
value of the accumulated benefit obligation and the projected benefit
obligation. The various assumptions used to determine the projected benefit
obligation for the plans for 1994 were a discount rate of 7.5%, a rate of
increase in future compensation levels of 5.0% and an expected long-term rate of
return on assets of 10%. Pension costs are determined using the assumptions as
of the beginning of the year. The funded status is determined using the
assumptions as of the end of the year.
Tran$tock. In January 1987, the Board of Directors approved an employee
stock ownership plan called Tran$tock, which subsequently purchased 3,966,942
shares of newly issued Transco common stock at $45 3/8 per share. Tran$tock was
funded by a $180 million loan which was extinguished at year-end 1994. Tran$tock
used $120 million of the funds received from the restructuring of Transco's
retirement plan, tax-deductible dividends paid on the common stock held in the
plan and contributions by Transco to service the loan. The final allocation of
shares was made to eligible participants in January 1995.
Compensation expense of $7.7 million, related to Tran$tock has been
recognized in 1994. As a result of reductions in dividends on Transco's common
stock in 1987 and 1991, Transco was required to make tax-deductible
contributions to the plan to service interest and principal on the remaining
loan balance. Included in compensation expense related to Tran$tock in 1994 is
$7.5 million related to these contributions and $0.2 million in tax-deductible
dividends on unallocated, unleveraged Tran$tock shares.
Postretirement benefits other than pensions. Transco has two plans that
provide certain health care and life insurance benefits for retired employees of
Transco Coal Company (TCC Plan) and all other subsidiaries of the Company, and
TGPL (Transco Plan).
82
84
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Transco Plan provides medical and life insurance benefits to the
Company's employees who retire under the Transco Retirement Plan with at least
ten years of participation in Transco's group insurance plans and the retirement
plan immediately preceding retirement. Effective January 1, 1994, the Transco
Plan was amended to require monthly contributions by retirees and to increase
annual deductibles, out-of-pocket limits and lifetime maximum benefits per
individual.
The TCC Plan provides medical and dental benefits to TCC employees who
retire under the TCC Retirement Plan with at least ten years of service and
ceases such coverage when retirees attain age 70. Life insurance benefits are
not provided to TCC retirees. The TCC Plan is contributory whereby TCC retirees
pay premiums to TCC to continue their benefits. Effective July 1, 1993, TCC
implemented annual deductibles and out-of-pocket limits for retirees which were
further increased effective January 1, 1994.
The medical benefits for all retired Transco employees are currently funded
at a specified amount per month through a trust established under the provisions
of section 501(c)(9) of the Internal Revenue Code. The benefits for retired TCC
employees are currently funded on a pay-as-you-go basis.
The following table sets forth the plans' combined funded status at
December 31, 1994 reconciled with the accrued postretirement benefits of
Transco's Contributed Assets and TGPL as of December 31, 1994 (in thousands). At
December 31, 1994, the Transco and TCC Plans included 4,894 participants
associated with Transco's Contributed Assets and TGPL, of which 2,885
participants were associated with TGPL.
Accumulated postretirement benefit obligation:
Retirees............................................................. $ (65,185)
Fully eligible active plan participants.............................. (39,557)
Other active plan participants....................................... (14,986)
----------
(119,728)
Plans assets at fair value............................................. 32,372
----------
Accumulated postretirement benefit obligation in excess of plan
assets............................................................... (87,356)
Unrecognized net gain.................................................. (10,662)
Unrecognized transition obligation..................................... 99,222
----------
Prepaid postretirement benefit cost.................................... $ 1,204
==========
The following table sets forth the components of the net periodic
postretirement benefit cost, for both postretirement benefit plans for the year
ended December 31, 1994 (in thousands).
Service cost -- benefits earned during the period...................... $ 3,131
Interest cost on accumulated postretirement benefit obligation......... 8,498
Actual return on plan assets........................................... (894)
Amortization of transition obligation.................................. 5,512
Net amortization and deferral.......................................... (526)
--------
Net periodic postretirement benefit cost............................... $ 15,721
========
The annual expense is subject to change in future periods as a result of,
among other things, the passage of time, changes in participants, changes in
plan benefits and changes in assumptions upon which the estimates are made.
For measurement purposes as of December 31, 1994, the initial annual rate
of increase in the per capita cost of covered health care benefits was assumed
to be 11.4%. The rate was assumed to decrease gradually to 6% for the year 2004
and remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rate by
83
85
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
one percentage point in each year would increase the accumulated postretirement
benefit obligation for health care benefits as of January 1, 1995 by 12% and the
aggregate of the service and interest cost components of the net periodic
postretirement health care benefit cost for 1995 by 14%.
To determine the accumulated postretirement benefit obligation, both plans
used a discount rate of 7.75% and a salary growth assumption of 5.0% per annum.
Plan assets are managed by external investment organizations and include cash
and cash equivalents, commingled funds, preferred and common stocks,
international equity funds and government and corporate debt instruments. The
expected long-term rate of return on plan assets was 7% after taxes. Realized
returns on plan assets are subject to federal income taxes at a sliding scale
that reaches a 39.6% tax rate.
J. INCOME TAXES
Following is a summary of the benefit of income taxes for 1994 (in
thousands):
Federal:
Current................................................................. $(49,068)
Deferred................................................................ (27,620)
--------
(76,688)
--------
State and municipal:
Current................................................................. (2,381)
Deferred................................................................ (148)
--------
(2,529)
--------
Benefit of income taxes................................................... $(79,217)
========
Following is a reconciliation of the statutory federal income tax rate to
the effective tax rate for 1994 (in thousands):
PERCENT OF
AMOUNT PRETAX INCOME
-------- -------------
Taxes computed by applying statutory rate.................... $(72,823) (35.0)%
Statutory depletion in excess of cost depletion on coal
properties................................................. (2,596) (1.2)
Other, net................................................... (1,269) (0.6)
-------- -----
Benefit of federal income taxes.............................. $(76,688) (36.8)%
======== =====
84
86
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes result from temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future years, or
temporary differences resulting from events that have been recognized in the
financial statements that will result in taxable or deductible amounts in future
years. The tax effect of each type of temporary difference and carryforward
reflected in deferred income tax benefits and liabilities as of December 31,
1994 are as follows (in thousands):
(ASSETS) LIABILITIES
Unused alternative minimum tax credits.................................... $(99,755)
Asset impairments expensed for financial purposes but deferred for tax
purposes................................................................ (14,369)
Oil and gas exploration and development costs expensed for financial
purposes but deferred for tax purposes, net............................. (13,936)
Depreciation differences on gas gathering and liquids separation and
fractionation plant, net................................................ 6,363
Depreciation, depletion and amortization differences related to coal
operations, net......................................................... 36,850
Differences between tax and book basis of partnership interests........... 15,566
Other, net................................................................ 5,384
--------
Net deferred income tax asset............................................. $(63,897)
========
At December 31, 1994, Transco had, for federal income tax purposes,
estimated alternative minimum tax credits of $99.8 million with no expiration
date. These credits have been recognized for financial statement purposes.
K. INVESTMENT IN UNCONSOLIDATED AFFILIATES AND NOTES RECEIVABLE
Investment in unconsolidated affiliates. As of December 31, 1994, the
Company had investments consisting of a 50% or less ownership interest in
various companies that are constructing and operating natural gas gathering and
processing facilities, liquids separation facilities, intrastate pipelines
located onshore and offshore Texas and Louisiana and the Liberty Pipeline in the
states of New York and New Jersey; and providing compressed natural gas vehicle
fueling services in the states of California, Arizona, Nevada and Texas. Of the
net investments shown in the table below, $7 million are in partnerships in
which the Company is a general partner. The Company's credit risk exposure in
the event of nonperformance by the investees is the book value of the investment
and the obligations that may be incurred as a general partner. The remaining
investments are in joint ventures in which the Company's credit risk exposure in
the event of nonperformance by the investees is limited to the book value of the
investment. In the fourth quarter of 1994, a $4.2 million pretax charge was
recorded to establish a reserve for the Company's investment in the Liberty
Pipeline general partnership following the indefinite delay of the project. Also
in the fourth quarter of 1994, TXG Gas Marketing Company recorded a $3.5 million
pretax charge to establish a reserve for its investment in certain gas
processing facilities. In December 1994, the Company sold an indirect 12.5%
interest it held in its headquarters building through its investment in the Post
Oak/Alabama Partnership.
85
87
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the Company's net investment in unconsolidated
affiliates as of December 31, 1994 and equity on earnings (losses) for the year
ended December 31, 1994 (amounts in thousands):
EQUITY IN
PERCENT NET EARNINGS
SEGMENT/INVESTMENT OWNERSHIP INVESTMENT (LOSSES)
------------------------------------------------------- --------- ---------- ---------
Gas Marketing:
Cameron Meadows Processing Plant..................... 50.00% $ 9,624 $ (234)
Other................................................ various 1,672 (412)
-------- -------
11,296 (646)
-------- -------
Gas Gathering.......................................... various 5,730 414
-------- -------
Other:
Liberty Pipeline Company............................. 36.21% -- 296
Post Oak/Alabama Partnership......................... 50.00% -- 3,521
Other................................................ various 1,576 (170)
-------- -------
1,576 3,647
-------- -------
Combined............................................... $ 18,602 $ 3,415
======== =======
Notes Receivable. In connection with the sale of Petro Source Corporation
(Petro Source) in September 1988, the Company holds subordinated notes of $11
million due in 1998 from Petro Source Investments, Inc. Petro Source is based in
Texas and markets crude oil, natural gas liquids and petroleum products
throughout the Gulf Coast states, East Coast states and Nevada. These notes are
secured by the common stock of Petro Source.
In connection with the sale of Transco Exploration and Production Company
(TEPCO) in July 1992, the Company received an unsecured promissory note of $2
million due in 1997 from Forest Oil Corporation.
The Company's credit risk exposure in the event of nonperformance by the
borrowers is limited to the book value of the notes. The Company's policy for
collateral on these notes is to take a mortgage if the note is related to real
property or to take a security interest if the note is related to personal
property.
L. INVESTMENT IN NONOPERATING INTEREST IN COALBED METHANE PROPERTIES
In 1989, Transco began investing in certain coalbed methane properties in
the Black Warrior Basin in Alabama. The coalbed methane project has not
performed up to the original expectations and encountered costs that were higher
than originally anticipated. Transco, through its subsidiary Magnolia Methane
Corp. (Magnolia), assumed operatorship of the coalbed methane project in
February 1992. In order to eliminate the need for future capital investments by
Magnolia and to eliminate losses incurred in the operation of these properties,
in July 1993, Magnolia and TECO, a subsidiary of TECO Energy Inc., agreed to
transfer Magnolia's interest in 500 wells in the Black Warrior Basin of Alabama
to TECO. In exchange for the transfer of its interest, Magnolia received $15.5
million in cash plus future production payments based on various percentages of
net proceeds, as defined, generated from gas production from the properties and
tax credits under Section 29 of the Internal Revenue Code of 1986. The $15.5
million of proceeds were treated as a recovery of capitalized costs with no gain
or loss recognized.
Under the terms of the agreement, before Magnolia begins to receive
payments for its nonoperating interest, TECO is entitled to recover its initial
cash investment and a return thereon. Magnolia is entitled to receive production
payments until the termination date which is the earlier of (i) December 31,
2005, or (ii) such date as it is determined that 85% of the economically
recoverable reserves existing at July 1, 1993 have been recovered from the
transferred properties. As of December 31, 1994, Magnolia had not received any
payments pursuant to the agreement. Although all future development costs will
be borne by TECO, TECO is
86
88
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
under no obligation to invest in or develop any gas production from the coalbed
methane properties. Magnolia has agreed to indemnify TECO from certain
liabilities (including environmental liabilities) relating to Magnolia's coalbed
methane properties. Transco has guaranteed performance of Magnolia's obligations
under the agreement and Transco Energy Marketing Company's (TEMCO) obligation to
purchase gas from certain of the coalbed methane properties.
At December 31, 1994, 500 wells had been drilled on the coalbed methane
properties transferred to TECO, of which 325 were completed and 139 were
producing gas at a combined rate of approximately 14 million cubic feet per day
(MMcf/d) (unaudited). Based on reserve engineering studies prepared by
independent petroleum engineers, the Company estimates that proved gas reserves
net to TECO and the Company's interest are approximately 74 billion cubic feet
(Bcf) as of January 1, 1995 (unaudited). There are significant uncertainties
inherent in estimating quantities of proved reserves and in projecting rates of
production and the timing and amount of future costs. Oil and gas reserve
engineering must be recognized as a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way and
estimates of other engineers might differ materially from the estimate discussed
above. The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of drilling, testing and production subsequent to the date of the
estimate may justify revision of such estimate, and, as a general rule, reserve
estimates based upon volumetric analysis are inherently less reliable than those
based on lengthy production history. Accordingly, reserve estimates are often
different from the quantities of oil and gas that ultimately are recovered.
The Company's remaining investment is subject to a ceiling test that limits
the investment to the aggregate of the present value of future net revenues of
proved properties and the lower of cost or fair value of unproved properties.
The Company's ceiling test at December 31, 1994, was calculated using estimated
future production payments to be received from TECO based on year-end gas prices
and the total cost of proved and unproved properties. Based on that calculation,
in December 1994, the Company recorded a non-cash charge of $45.0 million, $29.3
million after-tax, to reduce the book value of its nonoperating interest in the
coalbed methane properties.
At December 31, 1994, the Company's investment in its nonoperating interest
in the coalbed methane properties totaled $86 million (after the effects of the
$45 million charge in 1994). The ultimate recovery of the Company's remaining
investment depends on production from the properties and future gas prices. The
Company cannot predict at this time the ultimate results of these operations or
the amounts of reserves that may ultimately be recoverable. If future
development operations do not result in establishing sufficient reserves to
recover the Company's remaining coalbed methane investment, or if other factors
cause the Company's evaluation of its investment to diminish, additional
reductions in the book value of the Company's investment would be required in
future periods through non-cash charges to earnings (see Note C).
At December 31, 1994, the Company's investment in the Magnolia Pipeline
totaled $67 million. The ultimate recovery of the Company's investment in the
Magnolia Pipeline is dependent on transportation of gas produced in the Black
Warrior Basin, including production from the properties transferred to TECO, as
well as transportation of gas from other sources (see Note C).
M. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
TGPL has a 20-year lease agreement with Transco Tower Limited, with annual
minimum lease payments of $27 million, for the Transco headquarters building
which expires in 2004. TGPL has an option to renew and extend the existing lease
term under the same provisions for three successive renewal terms of five years
each. TGPL's Transco Tower lease agreement covers substantially all space
occupied by Transco and its
87
89
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries. The Company reimburses TGPL for its share of the building lease
expense. In 1994 Transco's Contributed Assets' share of TGPL's Transco Tower
lease was $1.6 million.
The Company's total combined lease expense was $4.5 million during 1994
which includes Transco's Contributed Assets' share of TGPL's Transco Tower lease
discussed above. The future minimum lease payments under the Company's various
operating leases are $1.1 million in 1995 and $0.7 million in 1996.
LONG-TERM GAS PURCHASE AND TRANSPORTATION CONTRACTS
At December 31, 1994, TEMCO had no minimum purchase commitments under
long-term gas purchase contracts with pricing provisions that are not variable
market based or at a significant premium to market prices.
TEMCO has entered into sales agreements with customers that provide for
above-spot-market gas sales prices and expects such sales agreements will be
adequate to permit TEMCO to recover its gas purchase costs. However, because
certain of its gas purchase contracts contain floor price provisions, a spot
market price environment of approximately $1.50 per MMbtu or less may expose
TEMCO to financial risks of not fully recovering its gas costs.
In addition, TEMCO is a party to firm transportation contracts with third
parties in which monthly demand charges are paid for pipeline capacity in order
to transport Canadian gas to markets in the United States. During 1994, TEMCO
substantially recovered the cost of its firm transportation capacity under those
contracts through various business alternatives. TEMCO's current annual
commitment for such firm transportation capacity is approximately $56 million
under contracts that substantially expire in 2002. To the extent TEMCO is unable
to continue to find business alternatives for potentially underutilized
transportation capacity or receive sales prices at or near its cost, Gas
Marketing's results of operations could be negatively impacted. However, TEMCO
believes that the aggregate cost of the firm transportation capacity will be
recovered and, therefore, will not have a material adverse effect on Transco's
Contributed Assets' financial position, results of operations or net cash flows.
The Company's basic business policy is to perform under the terms and
conditions of its contractual obligations. To achieve this objective, an
operating plan is utilized to monitor the current status of contractual
obligations under each gas purchase agreement, whereby the obligation-to-date is
matched against the performance-to-date. Any overperformance or underperformance
is corrected by appropriate adjustments to the operating plan over the remainder
of the period of the agreement. Deliverability tests, actual takes and prices
paid are some of the factors reviewed at least monthly, and in some cases
weekly, in order to ensure that performance is proceeding according to plan.
Since the Company has been and expects to continue to be able to perform in
accordance with its contract terms and expects to recover all material contract
costs from customers, no provision has been recorded for future loss. Although
no assurances can be given, the Company does not believe that financial risks
associated with its long-term gas purchase contracts will have a material
adverse effect on its financial position, results of operations or net cash
flows.
ROYALTY COMMITMENTS
TCC has various coal lease agreements which require minimum annual royalty
payments. Royalties on actual production from these leases are available to
offset the minimum annual obligation. These minimum royalties total $6.5
million, $7.2 million, $7.2 million, $6.9 million and $5.1 million for the years
1995 through 1999, respectively, and $23.6 million for all years thereafter.
WORKERS' COMPENSATION RESERVES
Coal mining subsidiary companies of TCC are liable under the Federal Coal
Mine Health and Safety Act of 1969, as amended, to pay pneumoconiosis (black
lung) benefits to eligible employees and former
88
90
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
employees, and their dependents. The subsidiaries also are liable under various
state statutes for black lung and for other types of workers' compensation
claims (traumatic claims). A self-insurance program is maintained for all black
lung claims. Traumatic claims are self-insured up to certain limits and
independent insurance carriers cover those claims not self-insured.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Trade receivables. As of December 31, 1994, approximately $83 million or
85% of the Company's trade receivables was associated with the operations of the
Gas Marketing segment. These trade receivables primarily are due from local
distribution companies and other pipeline companies predominantly located in the
eastern and midwestern United States. Approximately $13 million or 13% of the
Company's trade receivables was associated with the operations of the Coal
segment and primarily is due from electric utilities and industrial customers
throughout the eastern United States. The Company's credit risk exposure in the
event of nonperformance by the other parties is limited to the face value of the
receivables. No collateral is required on these receivables. The Company has not
historically experienced significant credit losses in connection with its trade
receivables.
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements. In July 1992 and January 1994, Transco
executed five-year interest rate swap agreements with a group of banks that
effectively converted $300 million and $150 million, respectively, of Transco's
fixed-rate debt into floating-rate debt. Under the swap agreements, Transco paid
a floating rate of interest based on the six-month LIBOR and the banks paid
Transco fixed rates of interest. The difference paid or received was charged or
credited to interest expense with a cumulative net pretax interest savings to
Transco of approximately $15 million through December 31, 1994. In conjunction
with the recapitalization plan and the Merger, these agreements were terminated
in January 1995 at a cost of approximately $29 million.
The nominal amounts at December 31, 1994 of each agreement and rates of
interest paid and received during the year ended December 31, 1994 were as
follows:
NOMINAL AMOUNT RATES PAID RATES RECEIVED
---------------- ---------------- ----------------
$300,000,000 5.82% 6.37%
$150,000,000 4.31% 5.23%
Other derivative financial instruments. The Company has been a party to
various futures contracts and option agreements traded on the New York
Mercantile Exchange and various option and commodity price swap agreements made
in the over-the-counter market (derivatives) in the management of price
volatility in its natural gas and natural gas liquids marketing activities. The
Company does not use derivatives for trading purposes. Derivatives designated as
hedges are carried at market value with gains and losses deferred until the
hedged marketing activity is included in current net income or loss. In
connection with open contracts on natural gas and natural gas liquids marketing
activity designated as hedges, the Company recorded a net deferred loss of
approximately $1.2 million at December 31, 1994, based on the market value of
the open contracts calculated using the applicable year-end closing prices. The
December 1994 open contracts are expected to be closed from January 1995 through
October 1998. As of December 31, 1994, open contracts on natural gas and natural
gas liquids activity had an absolute notional quantity of 56 Bcf and 132.6
million barrels, respectively. The total net cash flow requirement related to
these contracts at December 31, 1994 was $4.2 million.
The Company is exposed to market risk on these contracts to the extent of
changes in the market prices for natural gas and liquids between December 31,
1994, and the date the contracts are closed. However,
89
91
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
market risk exposure on hedged transactions is offset by the gain or loss
recognized upon the sale of the products that are hedged. While market values
are used to express the amounts of derivatives, the amounts potentially subject
to credit risks, in the event of nonperformance by third parties, are
substantially smaller. The Company minimizes such risk exposure by limiting the
third parties to companies whose long-term credit ratings are at the minimum
investment grade, and, in the majority of cases, they possess at least a single
A Standard & Poor's Corporation designation. Therefore, the Company does not
expect to record any losses as a result of third party default.
RESERVE FOR ASSET IMPAIRMENTS
In addition to the asset impairments discussed in Notes D and K, in the
fourth quarter of 1994, the Gas Marketing segment recorded a $14.9 million
pretax charge to establish an impairment reserve for its investment in certain
gas processing facilities and a liquids pipeline and separation plant and the
Gas Gathering segment recorded a $3.5 million pretax charge to establish an
impairment reserve for its investment in certain gas gathering assets.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1994 are as follows (in thousands):
CARRYING AMOUNT FAIR VALUE
--------------- ----------
Financial assets:
Cash and short-term financial assets.................. $ 73,639 $ 73,639
Long-term notes receivable............................ 13,000 13,000
Receivables (derivatives)............................. 1,595 1,595
Financial liabilities:
Short-term financial liabilities...................... 408,968 407,271
Long-term debt, less current maturities............... 900,149 879,349
Payables (derivatives)................................ 2,767 33,420
CASH AND SHORT-TERM FINANCIAL ASSETS AND LIABILITIES
For short-term instruments, the carrying amount is a reasonable estimate of
fair value due to the short maturity of those instruments. For current
maturities of long-term debt which is publicly traded, the estimated fair value
is based on quoted market prices at year end, less accrued interest.
LONG-TERM NOTES RECEIVABLE
The carrying amount for all long-term notes receivable is a reasonable
estimate of fair value since these notes earn an appropriate rate of interest
for the risk involved.
DERIVATIVE FINANCIAL INSTRUMENTS
The amounts shown as receivables and payables (derivatives) relate to the
Company's interest rate swaps and natural gas and natural gas liquids futures,
options and commodity price swaps.
The carrying amount of these derivatives approximates fair value for all
periods except for certain commodity price and interest rate swaps which are not
included in the accompanying Combined Balance Sheet as of December 31, 1994. The
estimated fair value of these derivative financial instruments is based on the
estimated consideration that would be received to terminate those agreements and
contracts in a gain position and the estimated cost that would be incurred to
terminate those agreements and contracts in a loss
90
92
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
position. In conjunction with the recapitalization plan and the Merger,
discussed in Note F, the interest rate swap agreements were terminated in
January 1995 at a cost of approximately $29 million.
LONG-TERM DEBT
Effectively all of the Company's debt is publicly traded; therefore,
estimated fair value is based on quoted market prices at year end, less accrued
interest.
O. TRANSACTIONS WITH AFFILIATES
Natural gas sales revenues. Prior to 1993, TGPL and Texas Gas were
responsible for all jurisdictional gas sales to their pipeline customers and
TEMCO and TXG Gas Marketing Company were responsible for all non-jurisdictional
gas sales. After FERC approval in January 1993, Transco realigned its gas
marketing businesses under the common management of Transco Gas Marketing
Company (TGMC). These changes were needed to more closely coordinate gas
marketing operations to improve efficiencies, reduce costs and improve
profitability. During 1993, TGMC began to manage all jurisdictional merchant gas
sales of TGPL and Texas Gas. Under this agency agreement, TGMC bills TGPL and
Texas Gas for the cost of managing their merchant gas sales service and receives
all margins associated with such business. During 1994, TGMC received agency
fees of $26.3 million which has been included in Other Sales in the Combined
Statement of Operations.
Included in Transco's Contributed Assets' gas sales revenues for 1994 is
$93.6 million and $58.5 million for sales to TGPL and Texas Gas, respectively.
All gas sales are made at market or contract prices.
Cost of natural gas sales and transportation. Included in the Company's
costs of natural gas sales and transportation for 1994 is $45.1 million related
to gas purchases from and transportation services by Texas Gas and $209.4
million related to gas purchases from and transportation services by TGPL. All
gas purchases with affiliates are made at market or contract prices. The rates
charged to provide transportation services to affiliates are the same as those
that are charged to similarly-situated nonaffiliated customers.
Management services. Prior to the Merger, Transco had a policy of charging
subsidiary companies, including TGPL and Texas Gas, for management services
provided by the parent company and other affiliated companies. During 1994,
$22.3 million was charged to TGPL and Texas Gas for management services provided
by the Company. Management considers the cost of these services reasonable.
Advances from affiliates. For consolidated cash management purposes, TGPL
and Texas Gas have made interest-bearing advances to Transco and/or received
interest-bearing advances and capital contributions from Transco. The advances
are represented by demand notes. At December 31, 1994, Transco's Contributed
Assets had net advances payable to TGPL and Texas Gas of $266.2 million. These
advances which Transco's Contributed Assets expects to repay within the next
twelve months, have been reflected as current in the accompanying Combined
Balance Sheet. As general corporate policy, the interest rate on intercompany
demand notes is 1 1/2% below the prime rate of Citibank, N.A.
91
93
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The financial statements and schedules listed in the accompanying index
to consolidated financial statements are filed as a part of this
Registration Statement.
(b) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
3.1 -- Certificate of Incorporation of the Company, as amended (filed as
Exhibit 3.1 to the Company's Form 10, dated October 18, 1995).
3.2 -- By-laws of the Company (filed as Exhibit 3.2 to the Company's Form
10, dated October 18, 1995).
4.1 -- Form of Senior Debt Indenture (filed as Exhibit 4.1 to the Company's
Form 10, dated October 18, 1995).
4.2 -- Form of Subordinated Debt Indenture (filed as Exhibit 4.2 to the
Company's Form 10, dated October 18, 1995).
4.3 -- Form of Floating Rate Senior Note (filed as Exhibit 4.3 to the
Company's Form 10, dated October 18, 1995).
4.4 -- Form of Fixed Rate Senior Note (filed as Exhibit 4.4 to the Company's
Form 10, dated October 18, 1995).
4.5 -- Form of Floating Rate Subordinated Note (filed as Exhibit 4.5 to the
Company's Form 10, dated October 18, 1995).
4.6 -- Form of Fixed Rate Subordinated Note (filed as Exhibit 4.6 to the
Company's Form 10, dated October 18, 1995).
4.7 -- U.S. $800,000,000 Credit Agreement, dated as of February 23, 1995,
among the Company and certain of its subsidiaries, and the lenders
named therein and Citibank, N.A., as agent (filed as Exhibit 4(d) to
the Williams Form 10-K for the year ended December 31, 1994).
4.8 -- First Amendment, dated as of June 15, 1995, to Exhibit 4.9 above
(filed as Exhibit 4.9 to the Northwest Pipeline Corporation
Registration Statement on Form S-3 No. 33-62639, filed September 14,
1995).
12 -- Computation of Ratio of Earnings to Fixed Charges.
24.1 -- Power of Attorney (filed as Exhibit 24.1 to the Company's Form 10,
dated October 18, 1995).
24.2 -- Certified copy of resolution authorizing signatures pursuant to power
of attorney (filed as Exhibit 24.2 to the Company's Form 10, dated
October 18, 1995).
- ---------------
Exhibits have heretofore been filed with the Securities and Exchange Commission
as part of the filing indicated and are incorporated herein by reference with
the exception of Exhibit 12 which is filed herein.
92
94
WILLIAMS HOLDINGS OF DELAWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 15(A)
PAGE
----
NOT COVERED BY REPORT OF INDEPENDENT AUDITORS:
WILLIAMS HOLDINGS OF DELAWARE, INC.
Unaudited Pro Forma Financial Statements......................................... 26
Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31,
1994............................................................................ 27
Notes to Unaudited Pro Forma Combined Statement of Income for the Year Ended
December 31, 1994............................................................... 28
Unaudited Pro Forma Statement of Income for the Nine Months Ended September 30,
1995............................................................................ 29
Notes to Unaudited Pro Forma Statement of Income for the Nine Months Ended
September 30, 1995.............................................................. 30
Unaudited Consolidated Statement of Income for the Nine Months Ended
September 30, 1995 and 1994.................................................... 31
Unaudited Consolidated Balance Sheet at September 30, 1995 and December 31,
1994............................................................................ 32
Unaudited Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1995 and 1994.................................................... 33
Notes to Unaudited Consolidated Financial Statements -- September 30, 1995 and
1994............................................................................ 34
Quarterly Financial Data (unaudited)............................................. 63
COVERED BY REPORT OF INDEPENDENT AUDITORS:
WILLIAMS HOLDINGS OF DELAWARE, INC.
Consolidated Statement of Income for the Years Ended December 31, 1994, 1993 and
1992............................................................................ 42
Consolidated Balance Sheet at December 31, 1994 and 1993......................... 43
Consolidated Statement of Stockholder's Equity for the Years Ended
December 31, 1994, 1993 and 1992............................................... 44
Consolidated Statement of Cash Flows for the Year Ended December 31, 1994, 1993
and 1992........................................................................ 45
Notes to Audited Consolidated Financial Statements............................... 46
Schedule for the Three Years Ended December 31, 1994
II -- Valuation and Qualifying Accounts........................................ 94
TRANSCO ENERGY COMPANY -- CONTRIBUTED ASSETS COMBINED FINANCIAL STATEMENTS*
Combined Balance Sheet at December 31, 1994...................................... 65
Combined Statement of Operations for the Year Ended December 31, 1994............ 67
Combined Statement of Cash Flows for the Year Ended December 31, 1994............ 68
Combined Statement of Common Stockholders' Deficit for the Year Ended December
31, 1994........................................................................ 69
Schedule of Segment Information for the Year Ended December 31, 1994............. 70
Notes to Combined Financial Statements........................................... 71
- ---------------
* These financial statements are presented in accordance with Rule 3-05 of
Regulation S-X.
All other schedules have been omitted since the required information is
not present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the financial
statements and notes thereto.
93
95
WILLIAMS HOLDINGS OF DELAWARE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(A)
ADDITIONS
-------------------
CHARGED
TO COSTS
BEGINNING AND ENDING
BALANCE EXPENSES OTHER DEDUCTIONS(B) BALANCE
--------- -------- ----- ------------- -------
(MILLIONS)
Allowance for doubtful accounts:
1994..................................... $ 9.4 $ 4.0(c) $ -- $ 6.2(d) $ 7.2
1993..................................... 15.5 .3(e) -- 6.4 9.4
1992..................................... 9.2 16.5 -- 10.2 15.5
- ---------------
(a) Deducted from related assets.
(b) Represents balances written off, net of recoveries and reclassifications.
(c) Excludes $5.7 million related to discontinued operations.
(d) Includes the discontinued operations beginning balance reclassification of
$3.6 million.
(e) Includes $4.1 million reversal of amounts previously accrued.
94
96
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
WILLIAMS HOLDINGS OF DELAWARE, INC.
By /s/ DAVID M. HIGBEE
-------------------------------
David M. Higbee
Secretary
Dated: December 21, 1995
95
97
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------
3.1 -- Certificate of Incorporation of the Company, as amended (filed as
Exhibit 3.1 to the Company's Form 10, dated October 18, 1995).
3.2 -- By-laws of the Company (filed as Exhibit 3.2 to the Company's Form 10,
dated October 18, 1995).
4.1 -- Form of Senior Debt Indenture (filed as Exhibit 4.1 to the Company's
Form 10, dated October 18, 1995).
4.2 -- Form of Subordinated Debt Indenture (filed as Exhibit 4.2 to the
Company's Form 10, dated October 18, 1995).
4.3 -- Form of Floating Rate Senior Note (filed as Exhibit 4.3 to the
Company's Form 10, dated October 18, 1995).
4.4 -- Form of Fixed Rate Senior Note (filed as Exhibit 4.4 to the Company's
Form 10, dated October 18, 1995).
4.5 -- Form of Floating Rate Subordinated Note (filed as Exhibit 4.5 to the
Company's Form 10, dated October 18, 1995).
4.6 -- Form of Fixed Rate Subordinated Note (filed as Exhibit 4.6 to the
Company's Form 10, dated October 18, 1995).
4.7 -- U.S. $800,000,000 Credit Agreement, dated as of February 23, 1995,
among the Company and certain of its subsidiaries, and the lenders
named therein and Citibank, N.A., as agent (filed as Exhibit 4(d) to
the Williams Form 10-K for the year ended December 31, 1994).
4.8 -- First Amendment, dated as of June 15, 1995, to Exhibit 4.7 above (filed
as Exhibit 4.9 to the Northwest Pipeline Corporation Registration
Statement on Form S-3 No. 33-62639, filed September 14, 1995).
12 -- Computation of Ratio of Earnings to Fixed Charges.
24.1 -- Power of Attorney (filed as Exhibit 24.1 to the Company's Form 10,
dated October 18, 1995).
24.2 -- Certified copy of resolution authorizing signatures pursuant to power
of attorney (filed as Exhibit 24.2 to the Company's Form 10, dated
October 18, 1995).
- ---------------
Exhibits have heretofore been filed with the Securities and Exchange Commission
as part of the filing indicated and are incorporated herein by reference with
the exception of Exhibit 12 which is filed herein.