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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-4174
THE WILLIAMS COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-0569878
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's Telephone Number:
(918) 588-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $1.00 par value New York Stock Exchange and the
Preferred Stock Purchase Rights Pacific Stock Exchange
$2.21 Cumulative Preferred Stock, New York Stock Exchange
$1.00 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's voting stock held by
nonaffiliates as of the close of business on March 22, 1996, was approximately
$5.1 billion.
The number of shares of the registrant's Common Stock outstanding at March
22, 1996, was 104,651,013, excluding 2,280,246 shares held by the Company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement prepared for the solicitation
of proxies in connection with the Annual Meeting of Stockholders of the Company
for 1996 are incorporated by reference in Part III.
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THE WILLIAMS COMPANIES, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
The Williams Companies, Inc. (the "Company" or "Williams") was incorporated
under the laws of the State of Nevada in 1949 and was reincorporated under the
laws of the State of Delaware in 1987. 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" and "Williams" herein include The Williams Companies, Inc. and its
subsidiaries.
On January 5, 1995, the Company sold the network services operations of
Williams Telecommunications Group, Inc., its telecommunications subsidiary, to
LDDS Communications, Inc. for $2.5 billion in cash, (the "WNS Sale"). The
Company retained Williams Telecommunications Systems, Inc., a telecommunications
equipment supplier and service company, and Vyvx, Inc., which operates a video
network specializing in broadcast television applications. The Company has
reported the network services operations as discontinued operations for
financial reporting purposes. See Note 3 of Notes to Consolidated Financial
Statements. The Company used the proceeds from the WNS Sale to pay off
short-term credit facilities, fund the acquisition of Transco Energy Company
discussed below, finance its ongoing capital program and for other uses.
On December 12, 1994, the Company entered into a merger agreement with
Transco Energy Company. Under the agreement, the Company acquired approximately
60 percent of Transco Energy Company's common stock through a cash tender offer
completed in January 1995. On April 28, 1995, the Transco Energy Company
stockholders approved an agreement and plan of merger whereby Transco Energy
Company became a wholly owned subsidiary of the Company effective May 1, 1995.
Total value of the transaction was more than $3 billion, including cash, stock
and the assumption of Transco Energy Company debt. As of May 1, 1995, the
Company caused Transco Energy Company to declare and pay as dividends to the
Company all of Transco Energy Company's interest in Transcontinental Gas Pipe
Line Corporation and Texas Gas Transmission Corporation. In addition, the
Company continued Transco Energy Company's program of disposing of noncore
assets. See Note 2 of Notes to Consolidated Financial Statements.
On January 16, 1996, the Company acquired a 49.9 percent interest from its
partner in Kern River Gas Transmission Company giving the Company 99.9 percent
ownership of this natural gas pipeline system. The purchase price was $205
million. See Note 5 of Notes to Consolidated Financial Statements.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Part II, Item 8 -- Financial Statements and Supplementary Data.
(C) NARRATIVE DESCRIPTION OF BUSINESS
The Company, through subsidiaries, is engaged in the transportation and
sale of natural gas and related activities, natural gas gathering, processing
and production activities, the transportation of petroleum products, natural gas
trading, natural gas liquids marketing and provides a variety of other products
and services to the energy industry and financial institutions. The Company also
is engaged in the telecommunications business. In 1995, the Company's
subsidiaries owned and operated: (i) four interstate natural gas pipeline
systems and had a 50 percent interest in a fifth; (ii) a common carrier crude
and petroleum products pipeline system; and (iii) natural gas gathering and
processing facilities and production properties. The Company also trades natural
gas and markets natural gas liquids. The Company's telecommunications
subsidiaries offer data, voice
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and video-related products and services and customer premises equipment
nationwide. The Company also has investments in the equity of certain other
companies. See Note 5 of Notes to Consolidated Financial Statements.
Substantially all operations of Williams are conducted through
subsidiaries. Williams performs management, legal, financial, tax, consultative,
administrative and other services for its subsidiaries. Williams' principal
sources of cash are from dividends and advances from its subsidiaries,
investments, payments by subsidiaries for services rendered by its staff and
interest payments from subsidiaries on cash advances. The amount of dividends
available to Williams from subsidiaries largely depends upon each subsidiary's
earnings and operating capital requirements. The terms of certain subsidiaries'
borrowing arrangements limit the transfer of funds to the Company. See Note 13
of Notes to Consolidated Financial Statements.
To achieve organizational and operating efficiencies, the Company's
interstate natural gas pipelines are grouped together and are referred to
internally as the interstate natural gas systems. All other operating companies
are owned directly by Williams Holdings of Delaware, Inc., a wholly-owned
subsidiary of the Company. Item 1 of this report is formatted to reflect this
structure.
WILLIAMS INTERSTATE NATURAL GAS SYSTEMS
The Company's interstate natural gas pipeline group owns and operates a
combined total of approximately 28,000 miles of pipelines with a total annual
throughput of approximately 3,500 TBtu* of natural gas and peak-day delivery
capacity of approximately 15 Bcf of natural gas. The interstate natural gas
pipeline group consists of Transcontinental Gas Pipe Line Corporation, Northwest
Pipeline Corporation, Texas Gas Transmission Corporation, Kern River Gas
Transmission Company and Williams Natural Gas Company, owners and operators of
interstate natural gas pipeline systems. As previously noted, Transcontinental
Gas Pipe Line Corporation and Texas Gas Transmission Corporation were acquired
by the Company in 1995. For the accounting treatment of the acquisition, see
Note 2 of Notes to Consolidated Financial Statements. Also as noted above, the
Company acquired an additional 49.9 percent interest in Kern River Gas
Transmission Company in January 1996. The results of operations included herein
only reflect the Company's previously-owned 50 percent ownership interest in
Kern River.
The interstate natural gas pipeline group's transmission and storage
activities are subject to regulation by the Federal Energy Regulatory Commission
("FERC") under the Natural Gas Act of 1938 ("Natural Gas Act") and under the
Natural Gas Policy Act of 1978 ("NGPA"), and, as such, their rates and charges
for the transportation of natural gas in interstate commerce, the extension,
enlargement or abandonment of jurisdictional facilities, and accounting, among
other things, are subject to regulation. Each pipeline holds certificates of
public convenience and necessity issued by FERC authorizing ownership and
operation of all pipelines, facilities and properties considered jurisdictional
for which certificates are required under the Natural Gas Act. Each pipeline is
also subject to the Natural Gas Pipeline Safety Act of 1968, as amended by Title
I of the Pipeline Safety Act of 1979, which regulates safety requirements in the
design, construction, operation and maintenance of interstate gas transmission
facilities.
There follows a business description of each company in the interstate
natural gas pipeline group. The discussion of certain items required to be
disclosed by Form 10-K are reported in generic form following the individual
company business descriptions.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION (TRANSCO)
Transco is an interstate natural gas transmission company which owns and
operates a natural gas pipeline system extending from Texas, Louisiana,
Mississippi and the offshore Gulf of Mexico through the states of Alabama,
Georgia, South Carolina, North Carolina, Virginia, Maryland, Pennsylvania and
New Jersey to the
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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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New York City metropolitan area. The system serves customers in Texas and the
eleven southeast and Atlantic seaboard states mentioned above, including major
metropolitan areas in Georgia, North Carolina, New York, New Jersey and
Pennsylvania. Effective May 1, 1995, the operation of certain production area
facilities were transferred to Williams Field Services Group, Inc., an
affiliated company.
Pipeline System and Customers
At December 31, 1995, Transco's system had a mainline delivery capacity of
approximately 3.7 Bcf of gas per day from production areas to its primary
markets. Using its Leidy Line and market-area storage capacity, Transco can
deliver an additional 2.7 Bcf of gas per day for a system-wide delivery capacity
total of approximately 6.4 Bcf of gas per day. Excluding the production area
facilities operated by Williams Field Services Group, Inc., Transco's system is
composed of approximately 7,300 miles of mainline and branch transmission
pipelines, 37 compressor stations and six storage locations. Compression
facilities at a sea level rated capacity total approximately 1.2 million
horsepower.
Transco's major gas transportation customers are public utilities and
municipalities that provide residential service to approximately 35 million
people and serve numerous commercial and industrial users. Shippers on Transco's
pipeline system include public utilities, municipalities, intrastate pipelines,
direct industrial users, electrical generators, marketers and producers.
Transco's largest customer in 1995 accounted for approximately 14 percent of
Transco's total operating revenues. No other customer accounted for more than 10
percent of total operating revenues. Transco's firm transportation agreements
are generally long-term agreements with various expiration dates and account for
the major portion of Transco's business. Additionally, Transco offers
interruptible transportation services under agreements that are generally short
term.
Transco has natural gas storage capacity in five underground storage fields
located on or near its pipeline system and/or market areas and operates three of
these storage fields and a liquefied natural gas (LNG) storage facility. The
total storage capacity available to Transco and its customers from such storage
fields and LNG facility is approximately 219 Bcf of gas. Storage capacity
permits Transco's customers to inject gas into storage during the summer and
off-peak periods for delivery during peak winter demand periods.
Major Expansion Projects
In August 1995, Transco announced its SeaBoard 97 Expansion Project. The
project is expected to provide an additional 115 MMcf of gas per day of firm
transportation capacity from points of receipt on Transco's Leidy Line to
Transco's northeastern market area by the 1997-1998 winter heating season. To
render this service, Transco will construct compression and pipeline looping
facilities at an estimated cost of $115 million. Transco plans to file in
mid-1996 for FERC approval of the project.
In October 1995, Transco filed for FERC approval of the SunBelt Expansion
Project. The project will provide additional firm transportation capacity to
markets in Georgia, South Carolina and North Carolina. The SunBelt Expansion
Project will provide a total of 146 MMcf of gas per day of firm transportation
capacity to existing and new Transco customers by the 1997-1998 winter heating
season. Transco's FERC application estimates the cost of the expansion to be
approximately $85 million.
In November 1995, Transco announced the filing for FERC approval of the
Pine Needle LNG storage project. The facility is to be constructed and owned by
Transco and several of its major customers and will be located near Transco's
mainline system in Guilford, North Carolina. The project will have 4 Bcf of
storage capacity and 400 MMcf of gas per day of withdrawal capacity. Transco
will operate the facility and have a 35 percent ownership interest. The project
is expected to be in service by the second quarter of 1999. The FERC application
estimates the cost of the project to be $107 million.
In December 1995, Transco and several major customers announced the
Cardinal Pipeline System project. The project involves the acquisition of an
existing 37-mile pipeline in North Carolina and construction of a 65-mile
pipeline extension. Construction of the pipeline extension is expected to be
completed by the end of 1999. Transco will operate the expanded pipeline system
and have a 45 percent ownership interest. Total costs of the acquisition and
extension are expected to be $97 million.
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Transco's 1994 Southeast Expansion Project was completed and placed into
service in November 1994, and provides 35 MMcf of gas per day of additional firm
transportation capacity to Transco's customers in the southeast. Phase I of
Transco's 1995/1996 Southeast Expansion Project was completed and placed into
service in December 1995, and provides 115 MMcf of gas per day of additional
firm transportation capacity to Transco's customers in the Southeast. Phase II
of such expansion will add an additional 55 MMcf of gas per day for the
1996-1997 winter heating season. Transco invested $63 million in these projects
in 1995 and expects to invest approximately $21 million in these projects in
1996.
Operating Statistics
The following table summarizes transportation data for the periods
indicated, including periods during which the Company did not own Transco:
1995 1994 1993
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System Deliveries (TBtu)
Market-area deliveries:
Long-haul transportation............................. 858.4 805.1 852.0
Market-area transportation........................... 467.3 453.6 387.4
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Total market-area deliveries.................... 1,325.7 1,258.7 1,239.4
Production-area transportation.......................... 165.9 185.9 177.5
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Total system deliveries................................. 1,491.6 1,444.6 1,416.9
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Average Daily Transportation Volumes (TBtu)............... 4.1 4.0 3.9
Average Daily Firm Reserved Capacity (TBtu)............... 5.2 4.9 4.8
Transco has expressed concerns to FERC that inconsistent treatment of
Transco and its competitor pipelines with regard to rate design and cost
allocation issues in production areas may result in rates which could make
Transco less competitive, both in terms of production-area and long-haul
transportation. On July 19, 1995, an administrative law judge (ALJ) issued an
initial decision finding that Transco's proposed production area rate design,
and its existing use of a system-wide cost of service and allocation of firm
capacity in production areas are unjust and unreasonable. The ALJ recommended
that Transco divide its costs between its production area and market area and
permit its customers to renominate their firm entitlements. The ALJ's decision
is subject to review by FERC. Should FERC issue an order consistent with the
ALJ's recommendations, such order would have prospective effect only.
NORTHWEST PIPELINE CORPORATION (NORTHWEST PIPELINE)
Northwest Pipeline is an interstate natural gas transmission company which
owns and operates a pipeline system for the mainline transmission of natural gas
extending from the San Juan Basin in northwestern New Mexico and southwestern
Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a
point on the Canadian border near Sumas, Washington. Northwest Pipeline provides
services for markets in California, New Mexico, Colorado, Utah, Nevada, Wyoming,
Idaho, Oregon and Washington, directly or indirectly through interconnections
with other pipelines.
Pipeline System and Customers
At December 31, 1995, Northwest Pipeline's system, having an aggregate
mainline deliverability of approximately 2.6 Bcf of gas per day was composed of
approximately 3,900 miles of mainline and branch transmission pipelines and 43
mainline compressor stations with a combined capacity of approximately 306,000
horsepower.
In 1995, Northwest Pipeline transported natural gas for a total of 127
customers. Transportation customers include distribution companies,
municipalities, interstate and intrastate pipelines, gas marketers and direct
industrial users. The three largest customers of Northwest Pipeline in 1995
accounted for approximately 18.5 percent, 12.2 percent and 10.2 percent,
respectively, of total operating revenues. No other customer
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accounted for more than 10 percent of total operating revenues. Northwest
Pipeline's firm transportation agreements are generally long-term agreements
with various expiration dates and account for the major portion of Northwest
Pipeline's business. Additionally, Northwest Pipeline offers interruptible
transportation service under agreements that are generally short term. Northwest
Pipeline's transportation services represented 100 percent of its total
throughput in 1995.
Northwest Pipeline completed mainline expansion projects that were placed
into service on December 1, 1995. These expansion projects increased system
capacity by an additional 144 MMcf of gas per day and added 14,820 horsepower of
new compression and 44 miles of pipeline loop line to Northwest Pipeline's
system.
As a part of its transportation services, Northwest Pipeline utilizes
underground storage facilities in Utah and Washington enabling it to balance
daily receipts and deliveries. Northwest Pipeline also owns and operates a
liquefied natural gas storage plant in Washington which provides a
needle-peaking service for the system. These storage facilities have an
aggregate delivery capacity of approximately 973 MMcf of gas per day.
Operating Statistics
The following table summarizes gas sales and transportation data for the
periods indicated:
1995 1994 1993
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Gas Volumes (TBtu):
Gas sales..................................................... -- -- 18
Transportation................................................ 826 679 606
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Total throughput...................................... 826 679 624
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Average Daily Transportation Volumes (TBtu)..................... 2.3 1.9 1.7
Average Daily Firm Reserved Capacity (TBtu)..................... 2.4 2.4 --
TEXAS GAS TRANSMISSION CORPORATION (TXG)
TXG is an interstate natural gas transmission company which owns and
operates a natural gas pipeline system originating in the Louisiana Gulf Coast
area and in east Texas and running generally north and east through Louisiana,
Arkansas, Mississippi, Tennessee, Kentucky, Indiana and into Ohio, with smaller
diameter lines extending into Illinois. TXG's direct market area encompasses
eight states in the South and Midwest, and includes the Memphis, Tennessee,
Louisville, Kentucky, Cincinnati and Dayton, Ohio, and Indianapolis, Indiana,
metropolitan areas. TXG also has indirect market access to the Northeast through
interconnections with unaffiliated pipelines.
Pipeline System and Customers
At December 31, 1995, TXG's system, having a mainline delivery capacity of
approximately 2.7 Bcf of gas per day, was composed of approximately 6,000 miles
of mainline and branch transmission pipelines and 32 compressor stations having
a sea level rated capacity totaling approximately 548,000 horsepower.
In 1995, TXG transported gas to customers in Louisiana, Arkansas,
Mississippi, Tennessee, Kentucky, Indiana, Illinois and Ohio and to customers in
the Northeast served indirectly by TXG. Gas was transported for 130 distribution
companies and municipalities for resale to residential, commercial and
industrial users. Transportation services were provided to approximately 200
industrial customers and processing plants located along the system. At December
31, 1995, TXG had transportation contracts with approximately 625 shippers.
Transportation shippers include distribution companies, municipalities,
intrastate pipelines, direct industrial users, electrical generators, marketers
and producers. The largest customer of TXG in 1995 accounted for approximately
11 percent of total operating revenues. No other customer accounted for more
than 10 percent of total operating revenues. TXG's firm transportation
agreements are generally long-term agreements with various expiration dates and
account for the major portion of TXG's business. Additionally, TXG offers
interruptible transportation services under agreements that are generally
short-term.
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TXG owns and operates natural gas storage reservoirs in ten underground
storage fields located on or near its pipeline system and/or market areas. The
storage capacity of TXG's certificated storage fields is approximately 177 Bcf
of gas. TXG's storage gas is used in part to meet operational balancing needs on
its system, and in part to meet the requirements of TXG's "no-notice"
transportation service, which allows TXG's customers to temporarily draw from
TXG's storage gas to be repaid in-kind during the following summer season. A
large portion of the gas delivered by TXG to its market area is used for space
heating, resulting in substantially higher daily requirements during winter
months.
Operating Statistics
The following table summarizes total system delivery data, which excludes
unbundled sales, for the periods indicated, including periods during which the
Company did not own TXG:
1995 1994 1993
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System deliveries (TBtu):
Sales..................................................... -- -- 52.8
Long-haul transportation.................................. 635.7 618.8 534.0
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Total mainline deliveries......................... 635.7 618.8 586.8
Short-haul transportation................................. 57.6 188.6 214.0
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Total system deliveries................................... 693.3 807.4 800.8
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Average Daily Transportation Volumes (TBtu)................. 1.9 2.2 2.0
Average Daily Firm Reserved Capacity (TBtu)................. 2.0 2.1 2.0
KERN RIVER GAS TRANSMISSION COMPANY (KERN RIVER)
Kern River is an interstate natural gas transmission company which owns and
operates a natural gas pipeline system extending from Wyoming through Utah and
Nevada to California. In 1995, Kern River was jointly owned and operated by
Williams Western Pipeline Company, a subsidiary of the Company, and a subsidiary
of an unaffiliated company. As previously indicated, the Company acquired an
additional 49.9 percent interest in Kern River in January 1996. See Note 5 of
Notes to Consolidated Financial Statements. The transmission system, which
commenced operations in February 1992 following completion of construction,
delivers natural gas primarily to the enhanced oil recovery fields in southern
California. The system also transports natural gas for utilities, municipalities
and industries in California, Nevada and Utah.
Pipeline System and Customers
As of December 31, 1995, Kern River's pipeline system was composed of 707
miles of pipeline and three mainline compressor stations having an aggregate
mainline delivery capacity of 700 MMcf of gas per day. The pipeline system
interconnects with the pipeline facilities of another pipeline company at
Daggett, California. From the point of interconnection, Kern River and the other
pipeline company have a common 219-mile pipeline which is owned 63.6 percent by
Kern River and 36.4 percent by the other pipeline company, as tenants in common,
and is designed to accommodate the combined throughput of both systems. This
common facility has a capacity of 1.1 Bcf of gas per day.
Gas is transported for others under firm long-term transportation contracts
totaling 682 MMcf of gas per day. In 1995, Kern River transported natural gas
for customers in California, Nevada and Utah. Gas was transported for five
customers in Kern County, California, for reinjection as a part of enhanced oil
recovery operations and for 28 local distribution customers, electric utilities,
cogeneration projects and commercial and other industrial customers. The five
largest customers of Kern River in 1995 accounted for approximately 14 percent,
14 percent, 12 percent, 12 percent and 10 percent, respectively, of operating
revenues. Three of these customers serve the enhanced oil recovery fields. No
other customer accounted for more than 10 percent of operating revenues in 1995.
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During 1995, a seasonal firm transportation contract was executed to
deliver natural gas into the Las Vegas, Nevada, market area during the winter
months. Deliveries of 10 MMcf of gas per day will be initiated in December 1997
and will escalate to 40 MMcf of gas per day on a seasonal basis in 1999.
Operating Statistics
The following table summarizes transportation data for the periods
indicated:
1995 1994 1993
---- ---- ----
Transportation Volumes (TBtu)................................... 286 278 272
Average Daily Transportation Volumes (TBtu)..................... .78 .76 .75
Average Daily Firm Reserved Capacity (TBtu)..................... .72 .74 .74
WILLIAMS NATURAL GAS COMPANY (WILLIAMS NATURAL GAS)
Williams Natural Gas is an interstate natural gas transmission company
which owns and operates a natural gas pipeline system located in Colorado,
Kansas, Missouri, Nebraska, Oklahoma, Texas and Wyoming. The system serves
customers in seven states, including major metropolitan areas of Kansas and
Missouri, its chief market areas.
Pipeline System and Customers
At December 31, 1995, Williams Natural Gas' system, having a mainline
delivery capacity of approximately 2.2 Bcf of gas per day, was composed of
approximately 6,300 miles of mainline and branch transmission and storage
pipelines and 41 compressor stations having a sea level rated capacity totaling
approximately 240,000 horsepower.
In 1995, Williams Natural Gas transported gas to customers in Colorado,
Kansas, Missouri, Nebraska, Oklahoma, Texas and Wyoming. Gas was transported for
77 distribution companies and municipalities for resale to residential,
commercial and industrial users in approximately 530 cities and towns.
Transportation services were provided to approximately 350 industrial customers,
federal and state institutions and agricultural processing plants located
principally in Kansas, Missouri and Oklahoma. At December 31, 1995, Williams
Natural Gas had transportation contracts with approximately 203 shippers.
Transportation shippers included distribution companies, municipalities,
intrastate pipelines, direct industrial users, electrical generators, marketers
and producers.
In 1995, approximately 35 percent and 33 percent, respectively, of total
operating revenues were generated from gas transportation services to Williams
Natural Gas' two largest customers, Western Resources, Inc. and Missouri Gas
Energy Company. Western Resources sells or resells gas to residential,
commercial and industrial customers principally in certain major metropolitan
areas of Kansas. Missouri Gas Energy sells or resells gas to residential,
commercial and industrial customers principally in certain major metropolitan
areas of Missouri. No other customer accounted for more than 10 percent of
operating revenues during 1995.
A significant portion of the transportation services provided to Western
Resources is pursuant to a twenty-year transportation service agreement. After
the initial two-year period ending in November 1996, the contract allows Western
Resources, on twelve months prior notice, to reduce contracted capacity if
Williams Natural Gas does not meet the terms of a competing offer from another
natural gas pipeline to serve such capacity. Transportation services are
provided to Missouri Gas Energy under contracts primarily varying in terms from
two to five years. These contracts do not have "competitive out" provisions as
described in connection with the Western Resources' contract. During 1995, these
two customers entered into contracts with a competitor as part of a litigation
settlement. The Western Resources contracts are subject to state regulatory
approval and hearings before the Kansas Corporation Commission (KCC) which were
conducted in September 1995. A decision on whether to approve the contracts has
been stayed by the KCC in light of an October 1995 FERC ruling asserting federal
jurisdiction over the competitor. The competitor has appealed the FERC decision,
as well as the authority of the KCC to stay the contracts approval proceeding.
While the
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Missouri Gas Energy contracts with this competitor are not subject to Missouri
Public Service Commission approval, the exercise of FERC jurisdiction over the
project could cause the cancellation of the proposed pipeline project that
supports the contracts. Up to 25 percent of the firm capacity now transported by
Williams Natural Gas into the Kansas City market could be at risk if the
pipeline contemplated by the contracts is built. If FERC's decision to exercise
jurisdiction over the competing pipeline is upheld, the competitor will be
required to formulate rate structures under the same rules as Williams Natural
Gas and other interstate competitors.
Williams Natural Gas operates nine underground storage fields with an
aggregate working gas storage capacity of approximately 43 Bcf and an aggregate
delivery capacity of approximately 1.2 Bcf of gas per day. Williams Natural Gas'
customers inject gas in these fields when demand is low and withdraw it to
supply their peak requirements. During periods of peak demand, approximately
two-thirds of the firm gas delivered to customers is supplied from these storage
fields. Storage capacity enables the system to operate more uniformly and
efficiently during the year.
Operating Statistics
The following table summarizes gas sales and transportation data for the
periods indicated:
1995 1994 1993
---- ---- ----
Volumes (TBtu):
Resale sales..................................................... -- -- 50
Direct and gas processing plant sales............................ -- -- 1
Transportation................................................... 334 346 344
--- --- ---
Total throughput......................................... 334 346 395
=== === ===
Average Daily Transportation Volumes (TBtu)........................ .9 .9 .9
Average Daily Firm Reserved Capacity (TBtu)........................ 2.0 2.0 --
Certain of Williams Natural Gas' gathering and processing activities have
been or will be transferred to third parties, including subsidiaries of Williams
Field Services Group, Inc., an affiliated company, as discussed elsewhere
herein. Applications for orders permitting and approving abandonment of certain
natural gas facilities have been filed with FERC and final approval has been
granted by FERC on three of these filings. Preliminary approval on all other
systems has been granted by FERC.
REGULATORY MATTERS
In 1992, FERC issued Order 636 which required interstate pipelines to
restructure their tariffs to eliminate traditional on-system sales services. In
addition, the Order required implementation of various changes in forms of
service, including unbundling of gathering, transmission and storage services;
terms and conditions of service; rate design; gas supply realignment cost
recovery; and other major rate and tariff revisions. Williams Natural Gas
implemented its restructuring on October 1, 1993, and Transco, Northwest
Pipeline and TXG implemented their restructurings on November 1, 1993. Certain
aspects of each pipeline company's Order 636 restructuring are under appeal.
Each interstate natural gas pipeline has various regulatory proceedings
pending. Rates are established primarily through FERC's ratemaking process. Key
determinants in the ratemaking process are (1) costs of providing service,
including depreciation rates, (2) allowed rate of return, including the equity
component of the capital structure, and (3) volume throughput assumptions. The
allowed rate of return is determined by FERC in each rate case. Rate design and
the allocation of costs between the demand and commodity rates also impact
profitability. As a result of such proceedings, a portion of the revenues of
these pipelines may have been collected subject to refund. See Note 12 of Notes
to Consolidated Financial Statements for the amount of revenues reserved for
potential refund as of December 31, 1995.
Each interstate natural gas pipeline, with the exception of Kern River, has
undertaken the reformation of its respective gas supply contracts. None of the
pipelines has any significant pending supplier take-or-pay,
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ratable-take or minimum-take claims. For information on outstanding issues with
respect to contract reformation, gas purchase deficiencies and related
regulatory issues, see Note 17 of Notes to Consolidated Financial Statements.
COMPETITION
Competition for natural gas transportation has intensified in recent years
due to customer access to other pipelines, rate competitiveness among pipelines,
customers' desire to have more than one supplier and regulatory developments.
FERC's stated purpose for implementing Order 636 was to improve the competitive
structure of the natural gas pipeline industry. Future utilization of pipeline
capacity will depend on competition from other pipelines and alternative fuels,
the general level of natural gas demand and weather conditions. Electricity and
distillate fuel oil are primary competitive forms of energy for residential and
commercial markets. Coal and residual fuel oil compete for industrial and
electric generation markets. Nuclear power and power purchased from grid
arrangements among electric utilities also compete with gas-fired power
generation in certain markets.
As mentioned, when restructured tariffs became effective under Order 636,
all suppliers of natural gas were able to compete for any gas markets capable of
being served by the pipelines using nondiscriminatory transportation services
provided by the pipelines. As the Order 636 regulated environment has matured,
many pipelines have faced reduced levels of subscribed capacity as contractual
terms expire and customers opt to reduce firm capacity under contract in favor
of alternative sources of transmission and related services. This issue, known
as "capacity turnback" in the industry, is forcing the pipelines to evaluate the
consequences of major demand reductions on system utilization and cost structure
to remaining customers.
The Company is aware that several state jurisdictions have been involved in
implementing changes similar to the changes that have occurred at the federal
level under Order 636. Such activity, frequently referred to as "LDC
unbundling," has been most pronounced in the states of New York, New Jersey and
Pennsylvania. In New York and New Jersey, regulations regarding "LDC unbundling"
were enacted during the past year, and Pennsylvania is expected to act on an
"LDC unbundling" program in 1996. It is expected that these regulations will
encourage greater competition in the natural gas marketplace.
OWNERSHIP OF PROPERTY
The facilities of each interstate natural gas pipeline are generally owned
in fee. However, a substantial portion of each pipeline's facilities is
constructed and maintained pursuant to rights-of-way, easements, permits,
licenses or consents on and across properties owned by others. Compressor
stations, with appurtenant facilities, are located in whole or in part either on
lands owned or on sites held under leases or permits issued or approved by
public authorities. The storage facilities are either owned or contracted under
long-term leases or easements.
ENVIRONMENTAL MATTERS
Each interstate natural gas pipeline is subject to the National
Environmental Policy Act and federal, state and local laws and regulations
relating to environmental quality control. Management believes that, with
respect to any capital expenditures and operation and maintenance expenses
required to meet applicable environmental standards and regulations, FERC would
grant the requisite rate relief so that, for the most part, such expenditures
would be recoverable in rates. For this reason, management believes that
compliance with applicable environmental requirements by the interstate
pipelines is not likely to have a material effect upon the Company's earnings or
competitive position.
For a discussion of specific environmental issues involving the interstate
pipelines, including estimated cleanup costs associated with certain pipeline
activities, see "Environmental" under Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 17 of Notes to
Consolidated Financial Statements.
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WILLIAMS HOLDINGS OF DELAWARE, INC. (WILLIAMS HOLDINGS)
In 1994, the Company established Williams Holdings to be a holding company
for its assets other than its interstate natural gas pipelines and related
assets. Virtually all of Williams Holdings' assets have been transferred to it
by the Company since January 1, 1995, and were previously operated by
subsidiaries of the Company.
Williams Holdings owns all of the capital stock of four entities in the
energy industry and two entities in the telecommunications industry. Williams
Holdings' energy subsidiaries are engaged in natural gas gathering, processing
and production, the transportation of crude oil and petroleum products, natural
gas trading activities, natural gas liquids marketing and provide a variety of
other products and services to the energy industry. Williams Holdings'
telecommunications subsidiaries offer data, voice and video-related products and
services and customer premise equipment nationwide. Williams Holdings also has
certain other equity investments. See Note 5 of Notes to Consolidated Financial
Statements.
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 1995 and 1994, gathering
and processing activities represented 98 percent and 89 percent, respectively,
of Williams Field Services' operating profit. Natural gas production represented
the balance.
In 1995, Williams Field Services completed an expansion of its Manzanares
coal seam gas gathering systems in northwestern New Mexico increasing capacity
of the systems to over 1 Bcf of gas per day. A plant expansion in the Wamsutter
field of south-central Wyoming completed in the fourth quarter of 1995 increased
capacity of this field to 240 MMcf of gas per day. Also in 1995, Williams Field
Services completed the construction of a 75 MMcf of gas per day processing plant
in the Oklahoma Panhandle.
Effective May 1, 1995, the Company transferred to Williams Field Services
the operation of certain production area transmission assets and certain
gathering and processing assets which the Company had acquired as of such date
from Transco Energy Company. 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 owned by Transco and
classified by 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
immediately thereafter sold the southeastern New Mexico portion of the acquired
assets for $14.2 million. The assets retained consist of approximately 1,400
miles of gathering pipelines and three gas processing plants which have an
aggregate daily inlet capacity of 300 MMcf of gas.
Williams Field Services' first nonregulated merchant power plant is
scheduled to begin operation in New Mexico in 1996. The $53 million 62-megawatt
facility, powered by coal-seam gas, will produce electricity, which will be sold
under a long-term contract. Other areas on Williams Field Services' system hold
the potential for similar cogeneration investments.
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, southwest Wyoming, the Rocky
Mountains of Utah and Colorado, northwest Oklahoma, Louisiana and also in areas
offshore and onshore in Texas. Williams Field Services, through subsidiaries,
also operates natural gas gathering and processing facilities located in the
Texas Panhandle and the Hugoton Basin in northwest
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Oklahoma and southwest Kansas, which are owned by Williams Natural Gas, an
affiliated company, and operates natural gas gathering and processing facilities
located both onshore and offshore in Texas and Louisiana, which are owned by
Transco, an affiliated company. The facilities operated for affiliates 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 treating of coal seam gas.
Customers and Operations. Facilities owned and operated by Williams Field
Services consist of approximately 12,000 miles of gathering pipelines, 11 gas
treating plants and 14 gas processing plants (five of which are partially owned)
which have an aggregate daily inlet capacity of 6.7 Bcf of gas. Gathering and
processing customers have direct access to interstate pipelines, including
affiliated pipelines, which provide access to multiple markets.
During 1995, Williams Field Services gathered natural gas for 286
customers. The largest gathering customer accounted for approximately 18 percent
of total gathered volumes. During 1995, natural gas was processed for a total of
108 customers. The three largest customers accounted for approximately 26
percent, 12 percent and 11 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.
Liquids extracted at the processing plants are ethane, propane, butane and
natural gasoline. During 1995, liquid products were sold to a total of 52
customers under short-term contracts. The four largest customers accounted for
approximately 32 percent, 18 percent, 16 percent and 15 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. The information
includes operations attributed to facilities owned by affiliated entities but
operated by Williams Field Services:
1995 1994 1993
----- ---- ----
Gas volumes (TBtu, except where noted):
Gathering.................................................... 1,806 895 789
Processing................................................... 406 392 323
Natural gas liquid sales (millions of gallons)............... 298 281 295
Production
Williams Field Services, through a subsidiary, owns and operates producing
gas leasehold properties in Colorado, Louisiana, New Mexico, Utah and Wyoming.
Gas Reserves. As of December 31, 1995, 1994 and 1993, Williams Field
Services had proved developed natural gas reserves of 292 Bcf, 269 Bcf and 229
Bcf, respectively, and proved undeveloped reserves of 222 Bcf, 220 Bcf and 319
Bcf, respectively. Of Williams Field Services' total proved reserves, 96 percent
are located in the San Juan Basin of Colorado and New Mexico. 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.
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Customers and Operations. As of December 31, 1995, the gross and net
developed leasehold acres owned by Williams Field Services totaled 261,973 and
107,046, respectively, and the gross and net undeveloped acres owned were
152,977 and 44,296, respectively. As of such date, Williams Field Services owned
interests in 2,795 gross producing wells (496 net) on its leasehold lands. The
following table summarizes drilling activity for the periods indicated:
DEVELOPMENT
---------------
COMPLETED GROSS NET
DURING WELLS WELLS
----------- ----- -----
1995................................................................. 61 22
1994................................................................. 66 19
1993................................................................. 39 5
The majority of Williams Field Services' gas production is currently being
sold in the spot market at market prices. Total net production sold during 1995,
1994 and 1993 was 25.9 TBtu, 22.6 TBtu and 16.3 TBtu, respectively. The average
production costs per MMBtu of gas produced were $.14, $.14 and $.17 in 1995,
1994 and 1993, respectively. The average sales price per MMBtu was $.88, $1.21
and $1.44, 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, 1995,
attributed to the properties conveyed were 163 Bcf. Production information
reported herein includes Williams Field Services' interest in such Units.
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 currently regulates Williams Field
Services' 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.
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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 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 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 and energy commodity trading activities, energy-related price-risk
management products and services and computer-based information products. WESCO
was incorporated in 1993. See Note 15 of Notes to Consolidated Financial
Statements.
Trading Activities and Services
In addition to its own natural gas trading operations, WESCO conducts
certain natural gas trading operations formerly conducted by a subsidiary of
Transco Energy Company 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, for periods prior to 1995, represent
previously existing financial trading services conducted by Williams
subsidiaries, coupled with third-party trading services provided by an affiliate
and do not include operations previously conducted by the Transco Energy Company
subsidiary.
WESCO serves a customer base of approximately 700 companies across its
natural gas trading operations, with net revenues primarily derived from sales
to local distribution companies, other gas marketers and certain end-users.
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.
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 manage market price fluctuations. The customer base for these
activities is comprised of other gas marketing and trading companies,
energy-based entities and brokers trading in energy commodities. See Note 15 of
Notes to Consolidated Financial Statements.
Information Products
In 1995, WESCO marketed 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 seven U.S. hubs; and Capacity
Central, a natural gas pipeline capacity information system. These products are
utilized primarily by a customer base of approximately 200 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.
Effective January 1, 1996, Streamline and Capacity Central were contributed
to a limited liability company along with the energy-related information
services of a PanEnergy Corp. subsidiary. The new entity (Altra Energy
Technologies, L.L.C.) is owned equally by WESCO and PanEnergy.
Operating Statistics (dollars in millions, volumes in TBtu)
1995 1994 1993
----- ----- -----
Operating profit............................................ $30.0 $ .5 $ 7.9
Natural gas physical trading................................ 754 148 152
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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 term contracts, 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 crude oil and petroleum products pipeline
system which covers an 11-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
refined products, LP-gases, lube extracted fuel oil and crude oil.
Shippers and Pipeline System
At December 31, 1995, 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 82 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.
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The operating statistics set forth below relate to the system's operations
for the periods indicated:
1995 1994 1993
------- ------- -------
Shipments (thousands of barrels):
Refined products:
Gasolines........................................ 125,060 120,682 109,841
Distillates...................................... 61,238 61,129 51,508
Aviation fuels................................... 12,535 9,523 11,123
LP-Gases............................................ 12,839 10,849 9,778
Lube extracted fuel oil............................. 4,462 0 0
Crude oil........................................... 860 1,062 3,388
------- ------- -------
Total shipments............................. 216,994 203,245 185,638
======= ======= =======
Daily average (thousands of barrels)................ 595 557 509
Average haul (miles)................................ 269 284 279
Barrel miles (millions)............................. 58,326 57,631 51,821
Revenues (millions):
Transportation...................................... $177.0 $168.0 $153.0
Nontransportation................................... 65.7 41.7 26.3
------- ------- -------
$242.7 $209.7 $179.3
======= ======= =======
Average transportation revenue per barrel........... $.82 $.83 $.82
Williams Pipe Line began moving a new lube extracted fuel oil product in
1995 from an Oklahoma refinery to Toledo, Ohio, through a joint movement with
other carriers. Volume movements approximate 28 thousand barrels per day.
In 1995, 73 shippers transported volumes through the system. The seven
largest shippers accounted for 54 percent of transportation revenues. The
highest transportation revenue-producing shipper accounted for approximately 11
percent of transportation revenues in 1995. Nontransportation activities
accounted for 27 percent of total revenues in 1995. The increase in
nontransportation revenues is primarily due to expanded gas liquids operations.
At December 31, 1995, the system was directly connected to, and received
products from, 11 operating refineries reported to have an aggregate crude oil
refining capacity of over 900,000 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, Illinois, Nebraska and
South Dakota. 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 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.
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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.
Williams Pipe Line elected to bifurcate this proceeding in accordance with the
then-current FERC policy. Phase I of 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
require cost justification in Phase II.
The FERC's Phase I order, as modified by a rehearing decision, has found
that Williams Pipe Line lacks significant market power and is workably
competitive in 20 of the 32 markets under investigation. A shipper has appealed
this decision to the United States Court of Appeals for the District of Columbia
Circuit which has stayed the appeal proceedings until Phase II has been
completed. Williams Pipe Line filed its direct evidence in Phase II on January
23, 1995. In this filing, Williams Pipe Line departed from the more traditional
cost allocation methodology in lieu of an overall total system revenue
requirement and stand-alone cost ceiling in conjunction with incremental and
short-run marginal cost floors. The hearings began December 4, 1995, and
concluded January 19, 1996. The current procedural schedule forecasts an initial
decision in Phase II in mid-year 1996. While Williams Pipe Line cannot predict
the final outcome of these proceedings, it believes its revised tariffs will
ultimately be found lawful. See Note 17 of Notes to Consolidated Financial
Statements.
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
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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 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. Monitoring should be complete in the first
quarter of 1997.
WILLIAMS ENERGY VENTURES, INC. (WILLIAMS ENERGY VENTURES)
Another subsidiary of Williams Holdings, Williams Energy Ventures, is
combined for financial reporting purposes with Williams Pipe Line, although
Williams Energy Ventures' activities are not included in the Williams Pipe Line
operating statistics on page 15 herein. 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 30 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.
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 2,800 employees and over 1,200 stocked service vehicles.
WilTel employs more than 1,300 technicians and more than 400 sales
representatives and sales support personnel to serve an estimated 40,000
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 data, voice and video 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
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hubs and cabling. WilTel's services also include the design, configuration and
installation of voice and data networks and the management of customers'
telecommunications operations and facilities. WilTel's National Technical
Resource Center provides 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.
In March 1994, WilTel acquired 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 in October 1994, acquired
Jackson Voice Data, a New York City-based customer premise equipment company. In
1996, WilTel acquired Comlink, Incorporated, a Massachusetts-based data and
customer premise equipment company. 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.
Operating Statistics
The following table summarizes the results of operations for the periods
indicated (dollars and ports in millions):
1995 1994 1993
------- ------- -------
Revenues................................................. $ 494.9 $ 396.6 $ 302.8
Percentage of revenues by type of service:
New system sales.................................... 34% 33% 39%
System modifications................................ 39% 36% 30%
Maintenance......................................... 25% 24% 23%
Other............................................... 2% 7% 8%
Operating profit......................................... $ 28.3 $ 18.9 $ 9.5
Backlog.................................................. $ 85.0 $ 92.4 $ 52.0
Total ports.............................................. 4.7 4.1 2.7
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.
In 1995, WilTel derived approximately 66 percent of its revenues from its
existing customer base and approximately 34 percent from the sale of new
telecommunications systems. WilTel's three largest suppliers accounted for 89
percent of equipment sold in 1995. A single manufacturer supplied 76 percent of
all equipment sold. In this case, WilTel is the largest distributor of certain
of this company's products. About 64 percent of WilTel's active customer base
consists of this manufacturer's products. The distribution agreement with this
supplier is scheduled to expire at the end of 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. (See discussion of
telecommunications reform legislation below).
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
18
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microwave communications services for a Federal agency, is subject to FCC
regulations as a common carrier microwave licensee. These regulations have
minimal impact on WilTel's operations.
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
Learning Network, Inc. In October 1995, WilTech acquired a 22 percent interest
in ITCmediaConferencing 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
Services' assets and NUS Training Corporation acquisitions discussed below, is
approximately $51 million.
VYVX, INC. (Vyvx)
Vyvx offers fiber-optic television transmission services nationwide. It
provides these broadcast-quality services as an alternative to satellite and
microwave television transmissions. Vyvx primarily provides backhaul or
point-to-point 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.
In 1995, Vyvx 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
half 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.
Federal telecommunications reform legislation enacted in February 1996, is
designed to increase competition in the long distance market by significantly
liberalizing current restrictions on market entry. In particular, Regional Bell
Operating Companies are permitted to provide long distance services, including
but not limited to, video transmission services, subject to certain restrictions
and conditions precedent. Moreover, public utilities are permitted to provide
telecommunications services, including long distance services, through separate
subsidiaries. The legislation also calls for tariff forbearance and relaxation
of regulation over common carriers. Any impact such legislation may have on Vyvx
cannot be predicted at this time.
WILLIAMS LEARNING NETWORK, INC. (Williams Learning Network)
Williams Learning Network, formerly Williams Knowledge Systems, provides
computer-based operator training primarily to the energy industry. Williams
Learning Network has licensing agreements with over 150 customers in the oil and
gas pipeline, terminal and trucking industries.
In October 1995, Williams Learning Network acquired NUS Training
Corporation. This acquisition gives Williams Learning Network 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.
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21
OTHER INFORMATION
Williams believes that it has adequate sources and availability of raw
materials to assure the continued supply of its services and products for
existing and anticipated business needs. Williams' pipeline systems are all
regulated in various ways resulting in the financial return on the investments
made in the systems being limited to standards permitted by the regulatory
bodies. Each of the pipeline systems has ongoing capital requirements for
efficiency and mandatory improvements, with expansion opportunities also
necessitating periodic capital outlays.
A plant site in Pensacola, Florida, that was previously operated by a
former subsidiary of Williams, has been placed on the National Priorities List.
This former subsidiary has also been identified as a potentially responsible
party at a National Priorities List cleanup site in Michigan. A third site,
located in Lakeland, Florida, which was formerly owned and operated by this
subsidiary, is under investigation by the Florida Department of Environmental
Protection and cleanup is anticipated. Williams does not believe that the
ultimate resolution of the foregoing matters, taken as a whole and after
consideration of insurance coverage, contribution or other indemnification
arrangements, will have a material adverse financial effect on the Company. See
Note 17 of Notes to Consolidated Financial Statements.
At December 31, 1995, the Company had approximately 10,000 full-time
employees, of whom approximately 1,350 were represented by unions and covered by
collective bargaining agreements. The Company considers its relations with its
employees to be generally good.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. Such statements are made in
reliance on the "safe harbor" protections provided under the Private Securities
Litigation Reform Act of 1995.
As required by such Act, the Company hereby identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in
forward-looking statements: (i) risks and uncertainties impacting the Company as
a whole primarily relate to changes in general economic conditions in the United
States, changes in laws and regulations to which the Company is subject,
including tax, environmental and employment laws and regulations, the cost and
effects of legal and administrative claims and proceedings against the Company
or its subsidiaries or which may be brought against the Company or its
subsidiaries and conditions of the capital markets utilized by the Company to
access capital to finance operations; (ii) for the Company's regulated
businesses, risks and uncertainties primarily relate to the impact of future
federal and state regulation of business activities, including allowed rates of
return; and (iii) risks and uncertainties associated with the Company's
nonregulated businesses primarily relate to the ability of such entities to
develop expanded markets and product offerings as well as maintaining existing
markets. In addition, future utilization of pipeline capacity will depend on
energy prices, competition from other pipelines and alternate fuels, the general
level of natural gas and petroleum product demand and weather conditions, among
other things. Further, gas prices which directly impact transportation and
gathering and processing throughput and operating profits may fluctuate in
unpredictable ways. It is also not possible to predict which of many possible
future products and service offerings will be important to maintaining a
competitive position in the telecommunications business or what expenditures
will be required to develop and provide such products and services.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Williams has no significant foreign operations.
ITEM 2. PROPERTIES
See Item 1(c) for description of properties.
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ITEM 3. LEGAL PROCEEDINGS
Other than as described under Item 1 -- Business and in Note 17 of Notes to
Consolidated Financial Statements, there are no material pending legal
proceedings. Williams is subject to ordinary routine litigation incidental to
its businesses.
With respect to the Dakota litigation described in Note 17, certain parties
have subsequently filed a motion with FERC requesting that FERC establish an
additional proceeding to consider claims for additional refunds. The claimed
additional refunds pertain to amounts paid Dakota from November 1, 1988, through
April 30, 1993. Net to Transco's interest, the claimed additional refunds
approximate $90 million. Transco has filed documents with FERC opposing the
motion for additional refunds. The administrative law judge's initial decision
in this case pertained only to periods after April 30, 1993, and, if sustained,
would require Transco to refund to ratepayers approximately $75 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF WILLIAMS
The names, ages, positions and earliest election dates of the executive
officers of Williams are:
HELD
OFFICE
NAME AGE POSITIONS AND OFFICES HELD SINCE
- ------------------------------ --- ----------------------------------------------- --------
Keith E. Bailey............... 53 Chairman of the Board, President, Chief 05-19-94
Executive Officer and Director (Principal
Executive Officer)
John C. Bumgarner, Jr. ....... 53 Senior Vice President -- Corporate Development 01-01-79
and Planning
James R. Herbster............. 54 Senior Vice President -- Administration 01-01-92
J. Furman Lewis............... 61 Senior Vice President and General Counsel 07-15-86
Jack D. McCarthy.............. 53 Senior Vice President -- Finance (Principal 01-01-92
Financial Officer)
Gary R. Belitz................ 46 Controller (Principal Accounting Officer) 01-01-92
Stephen L. Cropper............ 46 President -- Williams Pipe Line, Williams 01-22-86
Energy Services and Williams Energy Ventures
Lloyd A. Hightower............ 61 President -- Williams Field Services 05-11-93
Henry C. Hirsch............... 53 President -- Williams Telecommunications 08-21-92
Systems
Howard E. Janzen.............. 41 President -- The WilTech Group, Inc. 12-01-94
Brian E. O'Neill.............. 60 President -- Transco, Northwest Pipeline, Kern 01-01-88
River, TXG and Williams Natural Gas
All of the above officers have been employed by Williams or its
subsidiaries as officers or otherwise for more than five years and have had no
other employment during such period.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Williams' Common Stock is listed on the New York and Pacific Stock
Exchanges under the symbol "WMB." At the close of business on December 31, 1995,
Williams had 11,933 holders of record of its Common Stock. The daily closing
price ranges (composite transactions) and dividends declared by quarter for each
of the past two years are as follows:
1995 1994
------------------------------ -----------------------------
QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- -------- ------- ------- -------- ------- ------- --------
1st................................ $30-7/8 $24-7/8 $.27 $27-1/4 $22-3/4 $.21
2nd................................ $35-3/8 $30-1/4 $.27 $30-1/8 $22-1/8 $.21
3rd................................ $39-1/8 $34-5/8 $.27 $32-7/8 $28-3/8 $.21
4th................................ $44-1/2 $37-5/8 $.27 $30-1/4 $24-1/8 $.21
In January 1996, the Board of Directors of the Company approved a 25.9
percent increase in the Common Stock dividend. The dividend approved for the
first quarter of 1996 was $.34 per share.
Terms of certain subsidiaries' borrowing arrangements limit transfer of
funds to Williams. These terms have not impeded, nor are they expected to in the
future, Williams' ability to meet its cash obligations. See Note 13 of Notes to
Consolidated Financial Statements.
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24
ITEM 6. SELECTED FINANCIAL DATA
The following financial data are an integral part of, and should be read in
conjunction with, the consolidated financial statements and notes thereto.
Information concerning significant trends in the financial condition and results
of operations is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages F-1 through F-9 of this report.
1995 1994 1993 1992 1991
--------- -------- -------- -------- --------
(MILLIONS, EXCEPT PER-SHARE AMOUNTS)
Revenues*............................. $ 2,855.7 $1,751.1 $1,793.4 $1,983.5 $1,704.5
Income from continuing operations*.... 299.4 164.9 185.4 103.1 69.7
Income from discontinued
operations**........................ 1,018.8 94.0 46.4 25.2 40.3
Fully diluted earnings per share:
Income from continuing operations... 2.76 1.52 1.71 .97 .69
Income from discontinued
operations....................... 9.72 .92 .45 .28 .48
Cash dividends per common share....... 1.08 .84 .78 .76 .70
Total assets at December 31........... 10,494.8 5,226.1 5,020.4 4,982.3 4,247.4
Long-term obligations at December
31.................................. 2,874.0 1,307.8 1,604.8 1,683.2 1,541.9
Stockholders' equity at December 31... 3,187.1 1,505.5 1,724.0 1,518.3 1,220.0
- ---------------
* See Notes 5 and 6 of Notes to Consolidated Financial Statements for
discussion of significant asset sales and write-off of project costs.
** See Note 3 of Notes to Consolidated Financial Statements for discussion of
the gain on the sale of discontinued operations.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1995 vs. 1994
Northwest Pipeline's revenues increased $16.7 million, or 7 percent, due
primarily to the $16 million reversal of a portion of certain rate refund
accruals and increased transportation rates put into effect in November 1994,
partially offset by the completion in 1994 of billing contract-reformation
surcharges. Mainline throughput increased 22 percent; however, revenues were not
significantly affected due to the effects of the straight-fixed-variable rate
design prescribed by the Federal Energy Regulatory Commission (FERC). Operating
profit increased $11.6 million, or 11 percent, due primarily to higher
transportation rates and the approximate $11 million net effect of two reserve
accrual adjustments, partially offset by $5 million, or 13 percent, higher
operations and maintenance expenses. The reserve accrual adjustments involved a
$16 million adjustment to rate refund accruals because of favorable rate case
developments, partially offset by a loss accrual (included in other
income -- net) in connection with a lawsuit involving a former transportation
customer.
Williams Natural Gas' revenues decreased $57 million, or 25 percent, and
costs and operating expenses decreased $62 million, or 40 percent, due primarily
to $36 million lower direct billing of purchased gas adjustments and lower
contract-reformation recovery of $21 million. Operating profit decreased $3.8
million, or 8 percent, due primarily to the absence of the 1994 reversal of
excess contract-reformation accruals of $7.4 million and $3.2 million from lower
1995 average firm reserved capacity, partially offset by $4.6 million resulting
from higher average firm reserved capacity rates, effective August 1, 1995, and
higher storage revenues of $3.7 million.
Transcontinental Gas Pipe Line's revenues were $725.3 million in 1995,
while costs and expenses were $560 million and operating profit was $165
million. Throughput was 1,410.9 TBtu in 1995 (for the period subsequent to the
acquisition date). Transcontinental Gas Pipe Line placed new, higher rates into
effect September 1, 1995, subject to refund. Market-area deliveries in 1995 and
1994 were approximately the same.
F-1
25
Texas Gas Transmission's revenues were $276.3 million in 1995, while costs
and expenses were $212 million and operating profit was $64 million. Throughput
was 653.4 TBtu in 1995 (for the period subsequent to the acquisition date).
Texas Gas placed new, higher rates into effect April 1, 1995, subject to refund.
Williams Field Services Group's revenues increased $216.1 million, or 58
percent, due primarily to $172 million higher gathering revenues in addition to
higher natural gas sales. Gathering revenues increased due primarily to a 102
percent increase in gathering volumes, including $131 million attributable to
Transco Energy's Gulf Coast gathering operations, combined with an increase in
average gathering prices, excluding Gulf Coast operations. Natural gas sales
increased due to higher volumes, partially offset by lower average prices.
Liquids and processing volumes increased 6 percent and 4 percent, respectively.
Costs and operating expenses increased $171 million, or 79 percent, and selling,
general and administrative expenses increased $28 million, or 89 percent, with
Transco Energy's activities contributing $102 million and $13 million,
respectively. In addition, costs and operating expenses increased from higher
natural gas purchase volumes and expanded facilities. Other income -- net
includes $12 million in operating profit from the net effect of two unrelated
items. One was $20 million of income from the favorable resolution of
contingency issues involving previously regulated gathering and processing
assets. This was partially offset by an $8 million accrual for a future minimum
price natural gas commitment. Operating profit increased $28.3 million, or 22
percent, primarily resulting from the $12 million in other income and a doubling
of gathering volumes, primarily a result of Transco Energy's gathering
activities. Partially offsetting these increases was the effect of lower natural
gas prices. Operating profit in 1994 included approximately $12 million in
favorable settlements and adjustments of certain prior period accruals,
including income of $4 million from an adjustment to operating taxes.
Williams Energy Services' revenues and costs and operating expenses
decreased $177.9 million and $238 million, respectively. The addition of Transco
Energy's gas trading activities was more than offset by the reporting of 1995
natural gas marketing activities on a net-margin basis (see Note 15). Natural
gas physical trading volumes increased to 753.8 TBtu in 1995 compared to 147.8
TBtu in 1994, primarily from the effect of the Transco Energy acquisition.
Operating profit increased $29.5 million from $500,000 in 1994. Trading
activities' operating profit increased $34 million, attributable primarily to
income recognition from long-term natural gas supply obligations and no-notice
service provided to local distribution companies. Included in trading activities
is a price-risk management adjustment of $4 million from the valuation of
certain natural gas supply and sales contracts previously excluded from trading
activities. These increases were partially offset by $6 million of loss
provisions, primarily accruals for contract disputes, and increased costs of
supporting its information services business. As a result of Williams Energy
Services' price-risk management and trading activities, it is subject to risk
from changes in energy commodity market prices, the portfolio position of its
financial instruments and credit risk. Williams Energy Services manages its
portfolio position by making commitments which manage risk by maintaining its
portfolio within established trading policy guidelines.
Williams Pipe Line's revenues (including Williams Energy Ventures)
increased $39.5 million, or 13 percent, due to an increase in transportation and
non-transportation revenues of $9 million and $30.5 million, respectively.
Shipments, while 7 percent higher than 1994, were reduced by the November 1994
fire at our truck-loading rack and unfavorable weather conditions in the first
half of 1995. The average transportation rate per barrel and average length of
haul were slightly below 1994 due primarily to shorter haul movements. The
increase in non-transportation revenues reflects $84 million from the
acquisition of Pekin Energy in August 1995 and increased gas liquids operations
of $16 million, largely offset by $62 million related to lower petroleum-product
services due to adverse market conditions and a $15 million decrease in refined-
product sales due to the unavailability of certain refined-product supplies.
Costs and expenses increased $22 million, or 8 percent, due primarily to
increased operating expenses associated with transportation and
non-transportation activities. Operating profit (including Williams Energy
Ventures) increased $17.8 million, or 34 percent, due primarily to higher
transportation revenues of $9 million and non-transportation activities of $8.8
million. Non-transportation includes $3 million related to the acquisition of
Pekin Energy and the absence of $5 million of costs in 1994 for evaluating and
determining whether to build an oil refinery near
F-2
26
Phoenix. Williams Energy Ventures' results improved in 1995 with a $400,000
operating loss compared to an $8.1 million operating loss in 1994.
WilTel's revenues increased $98.3 million, or 25 percent, due primarily to
$30 million from new systems, $28 million from existing system enhancements and
$37 million from contract maintenance, moves, adds and changes. These amounts
include the effect of the acquisitions of BellSouth Communications Systems in
March 1994 and Jackson Voice Data, completed in October 1994. The number of
ports in service at December 31, 1995, has increased 14 percent as compared to
December 31, 1994. Costs and operating expenses increased $79 million, or 26
percent, due primarily to the increase in volume of sales and services. While
the $11 million, or 15 percent, increase in selling, general and administrative
expenses is due primarily to higher revenues, the selling, general and
administrative expense to revenue percent declined from 19.2 percent to 17.7
percent, reflecting better leveraging of the company's existing infrastructure.
Operating profit increased $9.4 million, or 50 percent, due primarily to
increased activity in new system sales, enhancements to existing systems,
maintenance and the full-year 1995 impact of two 1994 acquisitions and cost
control efforts.
WilTech Group's revenues increased $24 million, or 120 percent, due
primarily to $15 million in higher occasional and dedicated digital television
services revenues and the effect of an acquisition during 1995. Billable minutes
from occasional service increased 110 percent and dedicated service voice grade
equivalent miles at December 31, 1995, increased 50 percent as compared with
December 31, 1994. The $6 million, or 22 percent, increase in cost of sales and
the $10 million increase in selling, general and administrative expenses
reflects the overall increase in sales activity and higher expenses for
developing additional products and services. Operating loss decreased $8
million, or 71 percent, due to higher demand for WilTech Group's digital
television services, which produced volumes sufficient to result in operating
profit for the fourth quarter.
General corporate expenses increased $9.7 million, due primarily to a $6.4
million increase in charitable contributions, including $5 million to The
Williams Companies Foundation. Interest accrued increased $132.1 million, due
primarily to the $2 billion outstanding debt assumed as a result of the Transco
Energy acquisition. Interest capitalized increased $8.5 million, due primarily
to increased expenditures for gathering and processing facilities and Northwest
Pipeline's expansion projects. Investing income increased $44.3 million, due
primarily to interest earned on the invested portion of the cash proceeds from
the sale of Williams' network services operations in addition to an $11 million
increase in the dividend from Texasgulf Inc. The 1995 loss on sales of assets
results from the sale of the 15 percent interest in Texasgulf Inc. (see Note 5).
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 1995 write-off of
project costs results from the cancellation of an underground coal gasification
project in Wyoming (see Note 6). Other income (expense) -- net in 1995 includes
approximately $10 million of minority interest expense associated with the
Transco Energy merger, $4 million of dividends on subsidiary preferred stock and
$4 million of losses on sales of receivables, partially offset by $11 million of
equity allowance for funds used during construction (AFUDC). Other income
(expense) -- net in 1994 includes a credit for $4.8 million from the reversal of
previously accrued liabilities associated with certain Royalty Trust
contingencies that expired. Also included is approximately $4 million of expense
related to Statement of Financial Accounting Standards (FAS) No. 112,
"Employers' Accounting for Postemployment Benefits," which relates to
postemployment benefits being paid to employees of companies previously sold.
The $20.3 million increase in the provision for income taxes on continuing
operations is primarily a result of higher pre-tax income, partially offset by a
lower effective income tax rate resulting from $29.8 million of previously
unrecognized tax benefits realized as a result of the sale of Texasgulf Inc.
(see Note 5) and an $8 million income tax benefit resulting from settlements
with taxing authorities. The effective income tax rate in 1995 is significantly
less than the federal statutory rate, due primarily to the previously
unrecognized tax benefits realized as a result of the sale of the investment in
Texasgulf Inc., income tax credits from coal-seam gas production and recognition
of an $8 million income tax benefit resulting from settlements with taxing
authorities, partially offset by the effects of state income taxes and minority
interest. 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 (see Note 7).
F-3
27
On January 5, 1995, Williams 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 3).
The 1994 extraordinary loss results from the early extinguishment of debt
(see Note 8). Preferred stock dividends increased $6.5 million as a result of
the May 1995 issuance of 2.5 million shares of Williams $3.50 cumulative
convertible preferred stock in exchange for Transco Energy's $3.50 cumulative
convertible preferred stock (see Note 14) in addition to the $3.5 million
premium on exchange of $2.21 cumulative preferred stock for debentures.
1994 vs. 1993
Northwest Pipeline's revenues decreased $38 million, or 14 percent, as
expanded firm transportation service was more than offset by the absence of
natural gas sales following the fourth-quarter 1993 implementation of FERC Order
636 and $10 million resulting from the 1994 completion of contract-reformation
surcharges. Total mainline throughput increased 9 percent. Firm transportation
service increased due to a mainline expansion, supported by 15-year firm
transportation contracts, being placed into service on April 1, 1993. Northwest
Pipeline placed new, increased transportation rates into effect on November 1,
1994, and April 1, 1993, subject to refund. The April 1, 1993, rates reflected
the new mainline expansion and straight-fixed-variable rate design that
moderates seasonal swings in operating revenues. Costs and operating expenses
decreased $43 million, or 32 percent, due primarily to the absence of natural
gas purchase volumes of $41 million and the completion of contract-reformation
amortization, slightly offset by increased operating expenses primarily related
to the full-year effect on 1994 of the mainline expansion. Operating profit
increased $5.3 million, or 5 percent, due primarily to expanded firm
transportation service related to the company's mainline system expansion.
Williams Natural Gas' revenues decreased $62.8 million, or 21 percent,
primarily as a result of the absence of natural gas sales resulting from
implementation of FERC Order 636 on October 1, 1993. The decrease in revenues
was partially offset by the implementation of new rates required by the Order,
direct billing of net purchased gas cost adjustment amounts of approximately $40
million and higher direct billing of recoverable contract-reformation costs of
approximately $17 million. Costs and operating expenses decreased $67 million,
or 30 percent, primarily as a result of approximately $120 million lower gas
purchase costs resulting from the implementation of FERC Order 636, partially
offset by the costs that were direct billed as discussed above. Operating profit
increased $7.8 million, or 19 percent, primarily as a result of the full-year
effect of new rates, implementation of Order 636 and the reversal of excess
contract-reformation accruals recorded in other income -- net ($7.4 million in
1994 and $2.5 million in 1993), partially offset by the absence of the
regulatory accounting effect of an income tax rate increase in 1993 (which was
offset in income tax expense). FERC Order 636 utilizes a straight-fixed-variable
rate design that is applied to each customer's annual firm contract demand for
transportation.
Williams Field Services Group's revenues decreased $56.5 million, or 13
percent, due primarily to $71 million in lower natural gas sales revenues as a
result of the March 1993 sale of Williams' intrastate natural gas pipeline
system and related marketing operations in Louisiana, $9 million in lower
liquids revenues and lower average processing prices. Partially offsetting were
higher gathering and processing revenues of $22 million and $8 million,
respectively, from increased volumes of 13 percent and 21 percent, respectively.
Increased other revenues in 1994 were offset by a 1993 favorable settlement
involving processing revenues from prior periods. Costs and operating expenses
decreased $59 million, or 21 percent, due primarily to lower natural gas
purchases of $66 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 $2.6 million, or 2 percent, due primarily to higher gathering and
processing volumes and a $4 million favorable operating taxes adjustment,
partially offset by $5 million of lower per-unit liquids margins, lower average
processing prices and higher operations, maintenance and depreciation expenses
associated with expanded facilities.
F-4
28
Williams Energy Services' revenues decreased $97.1 million, or 27 percent,
due primarily to lower natural gas sales volumes and prices of $45 million,
lower refined-product trading margins and the $45 million effect of reporting
these trading activities on a "net margin" basis, effective July 1, 1993. Costs
and operating expenses decreased 29 percent, due to lower natural gas purchase
volumes and prices of $46 million and the $43 million effect of reporting
refined-product trading activities on a "net margin" basis, 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 $500,000 in 1994 compared to
$7.9 million in 1993. Price-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 (including Williams Energy Ventures) increased
$130.2 million, or 72 percent, due primarily to higher shipments, increased gas
liquids and fractionator operations of $30 million and petroleum services
activities of $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, petroleum services activities of $104 million and the cost of
developing long-term energy industry businesses. Operating profit (including
Williams Energy Ventures) increased $4.8 million, or 10 percent, reflecting $15
million from increased shipments 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.
WilTel's revenues increased $93.8 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.
WilTech Group's revenues and operating losses for 1994 and 1993 are
primarily from Vyvx, Inc.'s switched fiber-optic television transmission
services. Results of Vyvx's operations improved significantly in 1994; however,
the operations in both periods were not profitable as sufficient volumes had not
been achieved to support the infrastructure in place. Revenues increased $6.5
million, or 48 percent, in 1994 reflecting higher occasional and dedicated
digital television services, which helped reduce operating losses 34 percent
from $17 million in 1993 to $11.3 million in 1994.
General corporate expenses decreased $10.4 million, reflecting lower
supplemental retirement benefits (see Note 9) and incentive compensation
accruals. Interest accrued decreased $5.4 million, primarily because of lower
effective interest rates, partially offset by higher average borrowing levels.
Interest capitalized decreased $4.4 million, reflecting the completion of
Northwest Pipeline's mainline expansion, which was placed in service April 1,
1993. Investing income decreased $15.6 million, due primarily to lower
investment levels and lower equity earnings for Apco Argentina Inc., in addition
to the sale of a portion of Williams' interest in Northern Border Partners, L.P.
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 6). Other income
(expense)-- net
F-5
29
in 1994 includes a credit for $4.8 million from the reversal of previously
accrued liabilities associated with certain Royalty Trust contingencies that
expired. Also included is approximately $4 million of expense related to FAS No.
112, "Employers' Accounting for Postemployment Benefits," which relates to
postemployment benefits being paid to employees of companies previously sold.
Other income (expense)-- net in 1993 includes $6 million of expense accruals for
certain costs associated with businesses previously sold, offset by $6 million
of equity AFUDC related to the Northwest Pipeline mainline expansion.
The $30.9 million decrease in the provision for income taxes on continuing
operations is primarily a result of lower pre-tax income and the $15.8 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 7).
The network services operations of Williams have been presented in the
Consolidated Financial Statements as discontinued operations (see Note 3).
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 long-expected removal of traffic from Williams' 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 loss results from early extinguishment of debt (see Note
8). Preferred stock dividends decreased, reflecting the redemption of 3,000,000
shares of outstanding $3.875 convertible exchangeable preferred stock during the
second quarter of 1993 (see Note 14).
FINANCIAL CONDITION AND LIQUIDITY
Liquidity
Williams considers its liquidity to come from two sources: internal
liquidity, consisting of available cash investments, and external liquidity,
consisting of borrowing capacity from available bank-credit facilities, which
can be utilized without limitation under existing loan covenants. At December
31, 1995, Williams had access to $726 million of liquidity representing the
available portion of its $800 million bank-credit facility plus cash-equivalent
investments. This compares with liquidity of $495 million at December 31, 1994,
and $639 million at December 31, 1993. The increase in 1995 is due primarily to
a $200 million increase in the capacity of the bank-credit facility (see Note
13). In January 1996, Williams Holdings of Delaware, Inc., a wholly owned
subsidiary of Williams, filed a $400 million shelf registration statement with
the Securities and Exchange Commission and subsequently issued $250 million of
debt securities. During 1993, Williams filed a $300 million shelf registration
statement with the Securities and Exchange Commission, increasing the total
amount available to $400 million. The registration statement may be used to
issue Williams common or preferred stock, preferred stock purchase rights, debt
securities, warrants to purchase Williams common stock or warrants to purchase
debt securities. Williams does not anticipate the need for additional financing
arrangements; however, Williams believes such arrangements could be obtained on
reasonable terms if required.
Williams had a net working-capital deficit of $706 million at December 31,
1995, compared with $17 million at December 31, 1994. Williams manages its
borrowings to keep cash and cash equivalents at a minimum and has relied on
bank-credit facilities to provide flexibility for its cash needs. As a result,
it historically has reported negative working capital. The increase in the
working-capital deficit at December 31, 1995, as compared to the prior year-end
is primarily a result of higher 1995 levels of accounts payable and accrued
liabilities (see Note 12) and the effect of the 1994 net assets of discontinued
operations (see Note 3).
F-6
30
Terms of certain borrowing agreements limit transfer of funds to Williams
from its subsidiaries. The restrictions have not impeded, nor are they expected
to impede, Williams' ability to meet its cash requirements in the future.
Subsequent to December 31, 1995, Williams entered into a $205 million
short-term borrowing agreement to finance the purchase of the remaining interest
in Kern River Gas Transmission (see Notes 5 and 13). During 1996, Williams
expects to finance capital expenditures, investments and working-capital
requirements through cash generated from operations and the use of its $800
million bank-credit facility or public debt/equity offerings.
Operating Activities
Cash provided by continuing operating activities was: 1995 -- $829 million;
1994 -- $180 million; and 1993 -- $187 million. Accrued liabilities increased,
due primarily to the income tax and other liabilities associated with the sale
of the network services operations in addition to the acquisition of Transco
Energy. The increases in receivables, inventory, other current assets, property,
plant and equipment, other noncurrent assets and deferred charges, payables,
long-term debt, deferred income taxes, and other liabilities primarily reflect
the acquisition of Transco Energy. In addition, the increase in receivables was
partially offset by a $56 million increase in the level of receivables sold.
Cash provided by discontinued operations was: 1994 -- $169 million; and
1993 -- $162 million.
Financing Activities
Net cash provided (used) by financing activities was: 1995 -- ($1.4)
billion; 1994 -- $50 million; and 1993 -- ($220) million. Notes payable
decreased, reflecting the repayment of these notes with the proceeds from the
sale of the network services operations. Long-term debt principal payments net
of debt proceeds were $610 million during 1995. Long-term debt proceeds, net of
principal payments and early extinguishment of debt were $24 million during
1994. Long-term debt principal payments totaled $192 million during 1993.
On January 18, 1995, Williams acquired 60 percent of Transco Energy's
outstanding common stock in a cash tender offer for $430.5 million. Williams
acquired the remaining 40 percent of Transco Energy's outstanding common stock
on May 1, 1995, through a merger by exchanging the remaining Transco Energy
common stock for approximately 10.4 million shares of Williams common stock
valued at $334 million. Additionally, $2.3 billion in preferred stock and debt
obligations of Transco Energy was assumed by Williams. Williams made payments to
retire and/or terminate approximately $700 million of Transco Energy's
borrowings, preferred stock, interest-rate swaps and sale of receivable
facilities. As part of the merger, Williams exchanged Transco Energy's $3.50
cumulative convertible preferred stock for Williams' $3.50 cumulative
convertible preferred stock (see Note 2). The cash portion of the acquisition
and the payments to retire and/or terminate various Transco Energy facilities
were financed with the proceeds from the sale of Williams' network services
operations (see Note 3).
During 1995, Williams exchanged 2.8 million shares of its $2.21 cumulative
preferred stock with a carrying value of $69 million for 9.6 percent debentures
with a fair value of $72.5 million (see Note 14).
The 1995 proceeds from issuance of common stock includes $46.2 million from
the sale of 1.2 million shares of Williams common stock, held by a subsidiary of
Williams and previously classified as treasury stock in the Consolidated Balance
Sheet, in addition to certain Williams benefit plan stock purchases and exercise
of stock options under Williams' stock plans. The majority of the proceeds from
issuance of common stock in 1994 and 1993 resulted from certain Williams benefit
plan stock purchases and exercise of stock options under Williams' stock plan
(see Note 14).
During 1994, Williams and one of its subsidiaries purchased 13.8 million
shares of Williams common stock on the open market for $407 million.
Substantially all of the purchases were financed with a $400 million bank-credit
agreement. In 1995, the outstanding amounts under the credit agreement were
repaid from the proceeds of the sale of Williams' network services operations,
and the credit agreement was terminated.
F-7
31
Williams also repurchased 258,800 shares of its $2.21 cumulative preferred stock
on the open market for $6 million in 1994.
During 1993, Williams called for redemption of its 3,000,000 shares of
outstanding $3.875 convertible exchangeable preferred stock. Substantially all
of the preferred shares were converted into 7,600,000 shares of Williams common
stock.
Long-term debt at December 31, 1995, was $2.9 billion, compared with $1.3
billion at December 31, 1994, and $1.6 billion at December 31, 1993. The
increase in long-term debt is due primarily to the $2 billion outstanding debt
assumed as a result of the Transco Energy acquisition. The long-term debt to
debt-plus-equity ratio was 47.4 percent at year-end, compared with 46.5 percent
and 48.2 percent at December 31, 1994 and 1993, respectively. Included in
long-term debt due within one year at December 31, 1994, was $350 million
outstanding under Williams' revolving credit loan.
See Note 8 for information regarding early extinguishment of debt by
Williams and one of its subsidiaries during 1994.
Investing Activities
Net cash provided (used) by investing activities was: 1995 -- $585 million;
1994 -- ($427) million; and 1993 -- ($277) million. Capital expenditures of
pipeline subsidiaries, including gathering and processing facilities, primarily
to expand and modernize systems, were $734 million in 1995; $272 million in
1994; and $405 million in 1993. Capital expenditures for discontinued operations
were $143 million and $101 million in 1994 and 1993, respectively, primarily to
expand and enhance Williams' network services operations network. Expenditures
in 1995 include Transcontinental Gas Pipe Line and Northwest Pipeline's
expansions as well as expansion of gathering and processing facilities.
Expenditures in 1994 include Northwest Pipeline's additional mainline expansion
and the expansion of various gathering and processing facilities. Expenditures
in 1993 include the completion of Northwest Pipeline's first mainline expansion
and the expansion of various gathering and processing facilities. Budgeted
capital expenditures and acquisitions for 1996 are approximately $1.3 billion,
primarily to expand pipeline systems and gathering and processing facilities,
expand the telecommunications network and acquire the remaining interest in Kern
River Gas Transmission.
During 1995, Williams received proceeds of $124 million from the sale of
its 15 percent interest in Texasgulf Inc. (see Note 5). During 1994, Williams
received net proceeds of $80 million from the sale of limited partner units in
Northern Border Partners, L.P. During 1993, Williams received net proceeds of
$113 million from the sale of 6.1 million units in the Williams Coal Seam Gas
Royalty Trust. In addition, Williams sold its intrastate natural gas pipeline
system and other related assets in Louisiana for $170 million (see Note 6).
During 1995, in addition to the Transco Energy acquisition (see Note 2),
Williams acquired the Gas Company of New Mexico's natural gas gathering and
processing assets in the San Juan and Permian basins for $154 million (including
approximately 10 percent of which was immediately sold to a third party) and
Pekin Energy Co., the nation's second largest ethanol producer, for $167 million
in cash.
EFFECTS OF INFLATION
Williams has experienced increased costs in recent years due to the effects
of inflation. However, approximately 55 percent of Williams' property, plant and
equipment was acquired or constructed during 1995, while the remainder was
purchased or constructed since 1982, a period of relatively low inflation. A
substantial portion of Williams' property, plant and equipment is subject to
regulation, which limits recovery to historical cost. While Williams believes it
will be allowed the opportunity to earn a return based on the actual cost
incurred to replace existing assets, competition or other market factors may
limit the ability to recover such increased costs.
F-8
32
ENVIRONMENTAL
Williams is a participant in certain environmental activities in various
stages involving assessment studies, cleanup operations and/or remedial
processes. The sites, some of which are not currently owned by Williams (see
Note 17), are being monitored by Williams, other potentially responsible
parties, U.S. Environmental Protection Agency (EPA), or other governmental
authorities in a coordinated effort. In addition, Williams maintains an active
monitoring program for its continued remediation and cleanup of certain sites
connected with its refined products pipeline activities. Williams 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 $86 million, all of which is
accrued at December 31, 1995. Williams expects to seek recovery of approximately
$72 million of the accrued costs through future rates. Williams 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.
SUBSEQUENT EVENTS
In January 1996, the Williams Board of Directors increased the quarterly
cash dividend on Williams common stock to $.34 per share, a 25.9 percent
increase over the previous amount.
F-9
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Report of Independent Auditors........................................................ F-11
Consolidated Statement of Income...................................................... F-12
Consolidated Balance Sheet............................................................ F-14
Consolidated Statement of Stockholders' Equity........................................ F-15
Consolidated Statement of Cash Flows.................................................. F-16
Notes to Consolidated Financial Statements............................................ F-17
Quarterly Financial Data (Unaudited).................................................. F-43
F-10
34
REPORT OF INDEPENDENT AUDITORS
To The Stockholders of
The Williams Companies, Inc.
We have audited the accompanying consolidated balance sheet of The Williams
Companies, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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
The Williams Companies, Inc. at December 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 9, 1996
F-11
35
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994* 1993*
-------- -------- --------
(MILLIONS, EXCEPT PER-SHARE AMOUNTS)
Revenues:
Williams Interstate Natural Gas Systems (Note 4)............. $1,431.1 $ 469.8 $ 570.6
Williams Field Services Group................................ 591.8 375.7 432.2
Williams Energy Services (Note 15)........................... 85.8 263.7 360.8
Williams Pipe Line........................................... 350.2 310.7 180.5
WilTel....................................................... 494.9 396.6 302.8
WilTech Group................................................ 44.0 20.0 13.5
Other........................................................ 17.4 -- --
Intercompany eliminations (Note 16).......................... (159.5) (85.4) (67.0)
-------- -------- --------
Total revenues....................................... 2,855.7 1,751.1 1,793.4
-------- -------- --------
Profit-center costs and expenses:
Costs and operating expenses................................. 1,700.7 1,187.7 1,283.9
Selling, general and administrative expenses................. 488.8 229.2 203.2
Other income -- net.......................................... (4.5) (8.1) (7.8)
-------- -------- --------
Total profit-center costs and expenses............... 2,185.0 1,408.8 1,479.3
-------- -------- --------
Operating profit (loss):
Williams Interstate Natural Gas Systems (Note 4)............. 389.7 152.9 139.8
Williams Field Services Group................................ 157.6 129.3 126.7
Williams Energy Services..................................... 30.0 .5 7.9
Williams Pipe Line........................................... 69.8 52.0 47.2
WilTel....................................................... 28.3 18.9 9.5
WilTech Group................................................ (3.3) (11.3) (17.0)
Other........................................................ (1.4) -- --
-------- -------- --------
Total operating profit............................... 670.7 342.3 314.1
General corporate expenses..................................... (37.7) (28.0) (38.4)
Interest accrued............................................... (277.9) (145.8) (151.2)
Interest capitalized........................................... 14.5 6.0 10.4
Investing income (Note 5)...................................... 93.9 49.6 65.2
Gain (loss) on sales of assets (Notes 5 and 6)................. (12.6) 22.7 97.5
Write-off of project costs (Note 6)............................ (41.4) -- --
Other income (expense) -- net.................................. (8.1) (.2) .4
-------- -------- --------
Income from continuing operations before income taxes.......... 401.4 246.6 298.0
Provision for income taxes (Note 7)............................ 102.0 81.7 112.6
-------- -------- --------
Income from continuing operations.............................. 299.4 164.9 185.4
Income from discontinued operations (Note 3)................... 1,018.8 94.0 46.4
-------- -------- --------
Income before extraordinary loss............................... 1,318.2 258.9 231.8
Extraordinary loss (Note 8).................................... -- (12.2) --
-------- -------- --------
Net income..................................................... 1,318.2 246.7 231.8
Preferred stock dividends (Note 14)............................ 15.3 8.8 11.8
-------- -------- --------
Income applicable to common stock.............................. $1,302.9 $ 237.9 $ 220.0
======== ======== ========
- ---------------
* Reclassified as described in Note 1.
See accompanying notes.
F-12
36
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME -- (CONCLUDED)
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
------- ----- -----
Primary earnings per common and common-equivalent share
(Notes 1, 3 and 8):
Income from continuing operations.................................. $ 2.78 $1.52 $1.74
Income from discontinued operations................................ 9.99 .92 .46
------- ----- -----
Income before extraordinary loss................................... 12.77 2.44 2.20
Extraordinary loss................................................. -- (.12) --
------- ----- -----
Net income......................................................... $ 12.77 $2.32 $2.20
======= ===== =====
Fully diluted earnings per common and common-equivalent share
(Notes 1, 3 and 8):
Income from continuing operations.................................. $ 2.76 $1.52 $1.71
Income from discontinued operations................................ 9.72 .92 .45
------- ----- -----
Income before extraordinary loss................................... 12.48 2.44 2.16
Extraordinary loss................................................. -- (.12) --
------- ----- -----
Net income......................................................... $ 12.48 $2.32 $2.16
======= ===== =====
See accompanying notes.
F-13
37
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
----------------------
1995 1994
--------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER-SHARE AMOUNTS)
Current assets:
Cash and cash equivalents............................................ $ 90.4 $ 36.1
Receivables less allowance of $11.3 ($7.9 in 1994)................... 525.0 443.1
Transportation and exchange gas receivable........................... 152.3 9.2
Inventories (Note 10)................................................ 189.0 112.3
Net assets of discontinued operations (Note 3)....................... -- 743.6
Deferred income taxes (Note 7)....................................... 213.9 57.1
Other................................................................ 173.2 55.4
--------- --------
Total current assets......................................... 1,343.8 1,456.8
Investments (Note 5)................................................... 307.6 379.1
Property, plant and equipment -- net (Note 11)......................... 8,014.7 3,124.0
Other assets and deferred charges...................................... 828.7 266.2
--------- --------
Total assets................................................. $10,494.8 $5,226.1
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 13).............................................. $ -- $ 507.0
Accounts payable (Note 12)........................................... 472.0 205.8
Transportation and exchange gas payable.............................. 127.8 16.7
Accrued liabilities (Note 12)........................................ 1,130.2 361.4
Long-term debt due within one year (Note 13)......................... 319.9 383.0
--------- --------
Total current liabilities.................................... 2,049.9 1,473.9
Long-term debt (Note 13)............................................... 2,874.0 1,307.8
Deferred income taxes (Note 7)......................................... 1,568.2 662.9
Other liabilities...................................................... 815.6 276.0
Contingent liabilities and commitments (Note 17)
Stockholders' equity (Note 14):
Preferred stock, $1 par value, 30,000,000 shares authorized,
3,739,452 shares issued in 1995 and 4,000,000 shares issued in
1994.............................................................. 173.5 100.0
Common stock, $1 par value, 240,000,000 shares authorized,
105,337,948 shares issued in 1995 and 104,401,819 shares issued in
1994.............................................................. 105.3 104.4
Capital in excess of par value....................................... 1,051.1 991.0
Retained earnings (Note 13).......................................... 1,915.6 716.5
Unamortized deferred compensation.................................... (2.3) (1.3)
--------- --------
3,243.2 1,910.6
Less treasury stock (at cost), 1,573,203 shares of common stock in
1995 and 13,516,994 shares of common stock in 1994, 401,600 shares
of preferred stock in 1995 and 258,800 shares of preferred stock
in 1994........................................................... (56.1) (405.1)
--------- --------
Total stockholders' equity................................... 3,187.1 1,505.5
--------- --------
Total liabilities and stockholders' equity................... $10,494.8 $5,226.1
========= ========
See accompanying notes.
F-14
38
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CAPITAL
IN UNAMORTIZED
PREFERRED COMMON EXCESS OF RETAINED DEFERRED TREASURY
STOCK STOCK PAR VALUE EARNINGS COMPENSATION STOCK TOTAL
--------- ------ --------- -------- ------------ -------- -------
(MILLIONS)
Balance, December 31, 1992........... $ 250.0 $ 92.3 $ 755.4 $ 421.3 $ (.7) $ -- $1,518.3
Net income -- 1993................... -- -- -- 231.8 -- -- 231.8
Cash dividends --
Common stock ($.78 per share)...... -- -- -- (77.6) -- -- (77.6)
Preferred stock (Note 14).......... -- -- -- (11.8) -- -- (11.8)
Issuance of shares -- 3,174,439
common............................. -- 3.2 55.2 -- (1.7) -- 56.7
Conversion of preferred stock (Note
14)................................ (150.0) 7.6 141.8 -- -- -- (.6)
Tax benefit of non-qualified stock
option exercises................... -- -- 6.7 -- -- -- 6.7
Amortization of deferred
compensation....................... -- -- -- -- .5 -- .5
-------- ------ --------- -------- ------ -------- --------
Balance, December 31, 1993........... 100.0 103.1 959.1 563.7 (1.9) -- 1,724.0
Net income -- 1994................... -- -- -- 246.7 -- -- 246.7
Cash dividends --
Common stock ($.84 per share)...... -- -- -- (85.1) -- -- (85.1)
Preferred stock (Note 14).......... -- -- -- (8.8) -- -- (8.8)
Issuance of shares -- 1,596,409
common............................. -- 1.3 30.1 -- (1.3) 8.1 38.2
Purchase of treasury stock --
Common 13,790,089.................. -- -- -- -- -- (406.8) (406.8)
Preferred 258,800.................. -- -- -- -- -- (6.4) (6.4)
Tax benefit of non-qualified stock
option exercises................... -- -- 1.8 -- -- -- 1.8
Amortization of deferred
compensation....................... -- -- -- -- 1.9 -- 1.9
-------- ------ --------- -------- ------ -------- --------
Balance, December 31, 1994........... 100.0 104.4 991.0 716.5 (1.3) (405.1) 1,505.5
Net income -- 1995................... -- -- -- 1,318.2 -- -- 1,318.2
Cash dividends --
Common stock ($1.08 per share)..... -- -- -- (107.2) -- -- (107.2)
Preferred stock (Note 14).......... -- -- -- (11.9) -- -- (11.9)
Issuance of shares --
12,879,920 common.................. -- .9 58.8 -- (1.7) 352.7 410.7
2,500,000 preferred................ 142.5 -- -- -- -- -- 142.5
Exchange of shares for debentures --
2,760,548 preferred (Note 14)...... (69.0) -- (3.5) -- -- -- (72.5)
Purchase of treasury stock --
142,800 preferred.................. -- -- -- -- -- (3.7) (3.7)
Tax benefit of non-qualified stock
option exercises................... -- -- 4.8 -- -- -- 4.8
Amortization of deferred
compensation....................... -- -- -- -- .7 -- .7
-------- ------ --------- -------- ------ -------- --------
Balance, December 31, 1995........... $ 173.5 $105.3 $ 1,051.1 $1,915.6 $ (2.3) $ (56.1) $3,187.1
======== ====== ========= ======== ====== ======== ========
See accompanying notes.
F-15
39
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- ------- -------
(MILLIONS)
Operating Activities:
Net income................................................... $ 1,318.2 $ 246.7 $ 231.8
Adjustments to reconcile to cash provided from operations:
Discontinued operations................................... (1,018.8) (94.0) (46.4)
Extraordinary loss........................................ -- 12.2 --
Depreciation and depletion................................ 369.4 150.3 137.8
Provision for deferred income taxes....................... 125.4 25.8 8.1
Write-off of project costs................................ 41.4 -- --
(Gain) loss on sales of property, plant and equipment..... (2.1) .9 (102.0)
(Gain) loss on sale of investments........................ 12.6 (22.7) --
Changes in receivables sold............................... 55.9 -- (94.7)
Changes in receivables.................................... 33.2 (175.0) 99.9
Changes in inventories.................................... 11.9 10.2 (.8)
Changes in other current assets........................... (10.2) (2.8) (16.9)
Changes in accounts payable............................... (6.5) 20.7 (37.6)
Changes in accrued liabilities............................ (3.3) 8.1 (43.2)
Net change in non-current unrealized trading assets and
liabilities............................................. (72.9) (2.4) --
Other, including changes in non-current assets and
liabilities............................................. (25.5) 1.6* 50.9
--------- ------- -------
Net cash provided by continuing operations........... 828.7 179.6 186.9
Net cash provided by discontinued operations......... -- 169.4* 162.6
--------- ------- -------
Net cash provided by operating activities............ 828.7 349.0 349.5
--------- ------- -------
Financing Activities:
Proceeds from notes payable.................................. 116.8 507.0 --
Payments of notes payable.................................... (623.8) -- --
Proceeds from long-term debt................................. 399.0 480.0 --
Payments of long-term debt................................... (1,009.4) (456.5) (192.2)
Proceeds from issuance of common stock....................... 78.1 26.4 63.4
Purchases of treasury stock.................................. (3.7) (413.2) --
Dividends paid............................................... (119.1) (93.9) (89.4)
Subsidiary preferred stock redemptions....................... (193.7) -- (1.9)
Other -- net................................................. (3.5) -- (.2)
--------- ------- -------
Net cash provided (used) by financing activities..... (1,359.3) 49.8* (220.3)
--------- ------- -------
Investing Activities:
Property, plant and equipment:
Capital expenditures:
Continuing operations................................... (827.5) (325.5) (428.3)
Discontinued operations................................. -- (142.8) (100.8)
Proceeds from sales....................................... 28.2 1.6 295.4
Changes in accounts payable and accrued liabilities....... (5.2) 19.1 (48.4)
Acquisition of businesses, net of cash acquired.............. (858.9) (56.5) --
Proceeds from sales of businesses............................ 2,588.3 -- --
Income tax and other payments related to discontinued
operations................................................ (350.4) (1.5) (1.9)
Proceeds from sales of investments........................... 125.1 80.6 8.8
Purchase of investments...................................... (49.7) (3.3) --
Purchase of note receivable.................................. (75.1) -- --
Other -- net................................................. 10.1 1.3 (2.0)
--------- ------- -------
Net cash provided (used) by investing activities..... 584.9 (427.0) (277.2)
--------- ------- -------
Increase (decrease) in cash and cash equivalents..... 54.3 (28.2) (148.0)
Cash and cash equivalents at beginning of year................. 36.1 64.3 212.3
--------- ------- -------
Cash and cash equivalents at end of year....................... $ 90.4 $ 36.1 $ 64.3
========= ======= =======
- ---------------
* Reclassified to conform to current classification.
See accompanying notes.
F-16
40
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
The Williams Companies, Inc. (Williams) operations are located in the
United States and consist primarily of the following: five interstate natural
gas pipelines located in the eastern, midsouth, Gulf Coast, midwest and
northwest regions; natural gas gathering and processing facilities in the rocky
mountain, midwest and Gulf Coast regions; energy trading throughout the United
States; petroleum products pipeline in the midwest region; and national data,
voice and video communication products and services. Additional information
about these businesses is contained throughout the following notes.
Basis of presentation
Revenues and operating profit amounts include the operating results of
Transco Energy Company (Transco Energy) since its January 18, 1995, acquisition
by Williams (see Note 2). The transportation operations from Transco Energy's
two interstate natural gas pipelines are reported separately within Williams
Interstate Natural Gas Systems (see Note 4). Transco Energy's gas gathering
operations are included as part of Williams Field Services Group, and Transco
Energy's gas marketing operations are included in Williams Energy Services.
Revenues and operating profit amounts for 1994 and 1993 have been
reclassified to conform to current year classifications. Commodity price-risk
management and trading operations and energy-related information services
operations are included in Williams Energy Services. Liquid fuels operations are
reported as part of Williams Pipe Line and continue with the Williams Energy
Ventures name. In addition, certain natural gas marketing operations formerly
reported as part of Williams Field Services Group are included in Williams
Energy Services. The WilTech Group, which owns a national fiber-optic network,
was previously reported in other revenues and operating profit.
Principles of consolidation
The consolidated financial statements include the accounts of Williams and
its majority-owned subsidiaries. Companies in which Williams 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.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
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.
Transportation and exchange gas imbalances
In the course of providing transportation services to customers, the
natural gas pipelines may receive different quantities of gas from shippers than
the quantities delivered on behalf of those shippers. Additionally, the
pipelines and other Williams subsidiaries transport gas on various pipeline
systems which may deliver different quantities of gas on their behalf than the
quantities of gas received. These transactions result in gas transportation and
exchange imbalance receivables and payables which are recovered or repaid in
cash or
F-17
41
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through the receipt or delivery of gas in the future. 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. Transcontinental Gas Pipe Line's imbalances predating
August 1, 1991, are being recovered or repaid in cash or through the receipt or
delivery of gas upon agreements of allocation.
Inventory valuation
Inventories are stated at cost, which is not in excess of market, except
for those held by Williams Energy Services which are stated at market.
Inventories of natural gas are determined using the last-in, first-out (LIFO)
method by Transcontinental Gas Pipe Line and the average-cost method by other
subsidiaries. Except for Williams Energy Services, inventories of petroleum
products are determined using average cost. The cost of materials and supplies
inventories is determined using the first-in, first-out method (FIFO) by WilTel
and principally using the average-cost method by other subsidiaries.
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
regulated pipeline subsidiaries are credited or charged to accumulated
depreciation; other gains or losses are recorded in net income.
Treasury stock
Treasury stock purchases are accounted for under the cost method whereby
the entire cost of the acquired stock is recorded as treasury stock. Gains and
losses on the subsequent reissuance of shares are credited or charged to capital
in excess of par value using the average-cost method.
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. Williams
interstate natural gas pipelines recognize revenues based upon contractual terms
and the related transportation volumes through month-end. These pipelines are
subject to Federal Energy Regulatory Commission (FERC) regulations and,
accordingly, certain revenues are subject to possible refunds pending final FERC
orders. Williams records rate refund accruals based on management's estimate of
the expected outcome of these proceedings.
Commodity price-risk management activities
Williams Energy Services enters into energy-related financial instruments
(forward contracts, futures contracts, option contracts and swap agreements) to
provide price-risk management services to its third-party customers. This
subsidiary also enters into short- and long-term energy-related purchase and
sale commitments as part of its trading business. All of these investments and
commitments are valued at market and are recorded in other current assets, other
assets and deferred charges, accrued liabilities and other 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 are subject to change in
the near term and 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.
Williams Energy Services reports sales of natural gas, refined products and
crude oil net of the related costs to purchase such items, consistent with
mark-to-market accounting for such trading activities.
F-18
42
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Williams operations enter into energy-related financial instruments
(primarily futures contracts, option contracts and swap agreements) to hedge
against market price fluctuations of certain commodity inventories and sales and
purchase commitments. Unrealized and realized gains and losses on these hedge
contracts are deferred and recognized in income when the related hedged item is
recognized. These contracts are evaluated to determine that there is a high
correlation between changes in the market value of the hedge contract and fair
value of the hedged item.
Capitalization of interest
Williams capitalizes interest on major projects during construction.
Interest is capitalized on borrowed funds and, where regulation by the FERC
exists, on internally generated funds. The rates used by regulated companies are
calculated in accordance with FERC rules. Rates used by unregulated companies
approximate the average interest rate on related debt. Interest capitalized on
internally generated funds is included in other income (expense) -- net.
Income taxes
Williams includes the operations of its subsidiaries in its consolidated
federal income tax return. 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' assets and liabilities.
Earnings per share
Primary earnings per share are based on the sum of the average number of
common shares outstanding and common-share equivalents resulting from stock
options and deferred shares. Fully diluted earnings per share for 1995 assumes
conversion of the $3.50 convertible preferred stock into common stock effective
May 1, 1995. Shares used in determination of primary earnings per share are as
follows (in thousands): 1995 -- 102,046; 1994 -- 102,470; and 1993 -- 99,911.
Shares used in determination of fully diluted earnings per share are as follows
(in thousands): 1995 -- 104,853; 1994 -- 102,502; and 1993 -- 103,171.
NOTE 2 -- TRANSCO ENERGY ACQUISITION
On January 18, 1995, Williams acquired 60 percent of Transco Energy's
outstanding common stock in a cash tender offer for $430.5 million. Williams
acquired the remaining 40 percent of Transco Energy's outstanding common stock
on May 1, 1995, through a merger by exchanging the remaining Transco Energy
common stock for approximately 10.4 million shares of Williams common stock
valued at $334 million. The acquisition is accounted for as a purchase with 60
percent of Transco Energy's results of operations included in Williams'
Consolidated Statement of Income for the period January 18, 1995, through April
30, 1995, and 100 percent included beginning May 1, 1995. The purchase price,
including transaction fees and other related costs, is approximately $800
million, excluding $2.3 billion in preferred stock and debt obligations of
Transco Energy. The acquired assets and liabilities have been recorded based on
an allocation of the purchase price with substantially all of the cost in excess
of Transco Energy's historical carrying amounts allocated to property, plant and
equipment of the two interstate natural gas pipeline systems. The cash portion
of the acquisition was financed with the proceeds from the sale of Williams'
network services operations (see Note 3).
Transco Energy was engaged primarily in the natural gas pipeline and
natural gas marketing businesses. Williams has sold substantially all of Transco
Energy's coal operations, coalbed methane properties and certain pipeline and
gathering operations. Results of operations and changes in the carrying amount
of these businesses during the holding period and from the ultimate dispositions
are reflected in the purchase price and are not material.
F-19
43
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition, Williams made payments to retire and/or
terminate approximately $700 million of Transco Energy borrowings, preferred
stock, interest-rate swaps and sale of receivable facilities. As a part of the
merger, Williams exchanged Transco Energy's $3.50 preferred stock for Williams'
$3.50 preferred stock.
The following unaudited pro forma information combines the results of
operations of Williams and Transco Energy as if the purchase of 100 percent of
Transco Energy occurred January 1, 1994.
UNAUDITED
--------------------
1995 1994
-------- --------
(MILLIONS, EXCEPT
PER-SHARE AMOUNTS)
Revenues........................................................ $2,916.4 $2,660.3
Income from continuing operations............................... 314.4 191.0
Income before extraordinary loss................................ 1,333.2 285.0
Net income...................................................... 1,333.2 272.8
Primary earnings per share:
Income from continuing operations............................. 2.93 1.77
Income before extraordinary loss.............................. 12.92 2.69
Net income.................................................... 12.92 2.57
Fully diluted earnings per share:
Income from continuing operations............................. 2.90 1.77
Income before extraordinary loss.............................. 12.62 2.69
Net income.................................................... 12.62 2.57
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 3 -- DISCONTINUED OPERATIONS
On January 5, 1995, Williams sold its network services operations 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 $732 million) which is reported
as income from discontinued operations. Prior period operating results for the
network services operations are reported as discontinued operations. Under the
terms of the agreement, Williams retained Williams Telecommunications Systems,
Inc. (WilTel), a national telecommunications equipment supplier and service
company, and Vyvx, Inc. (included in WilTech Group), which operates a national
video network specializing in broadcast television applications.
Summarized operating results of discontinued operations are as follows:
1994 1993
------ ------
(MILLIONS)
Revenues............................................................ $921.8 $663.8
Operating profit.................................................... 163.1 97.0
Provision for income taxes.......................................... 60.9 32.2
Income from discontinued operations................................. 94.0 46.4
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
other liabilities ($66.7 million).
F-20
44
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- WILLIAMS INTERSTATE NATURAL GAS SYSTEMS
REVENUES OPERATING PROFIT
---------------------------- --------------------------
1995 1994 1993 1995 1994 1993
-------- ------ ------ ------ ------ ------
(MILLIONS)
Northwest Pipeline................ $ 255.2 $238.5 $276.5 $115.7 $104.1 $ 98.8
Williams Natural Gas.............. 174.3 231.3 294.1 45.0 48.8 41.0
Transcontinental Gas Pipe Line.... 725.3 -- -- 165.0 -- --
Texas Gas Transmission............ 276.3 -- -- 64.0 -- --
-------- ------ ------ ------ ------ ------
$1,431.1 $469.8 $570.6 $389.7 $152.9 $139.8
======== ====== ====== ====== ====== ======
NOTE 5 -- INVESTING ACTIVITIES
1995 1994
------ ------
(MILLIONS)
Investments:
Kern River Gas Transmission Company, at equity (50%).............. $178.6 $179.4
Texasgulf Inc. (15%).............................................. -- 150.0
Other, at equity (varying ownerships from 3.2% to 50%)............ 84.2 49.7
Other, at cost.................................................... 44.8 --
------ ------
$307.6 $379.1
====== ======
At December 31, 1995, certain equity investments, with a carrying value of
$30.8 million, have a market value of $81.5 million.
In 1995, Williams sold its 15 percent interest in Texasgulf Inc. for
approximately $124 million in cash, which resulted in an after-tax gain of
approximately $16 million because of previously unrecognized tax benefits
included in the provision for income taxes.
Subsequent to December 31, 1995, Williams acquired the remaining interest
in Kern River Gas Transmission Company for $205 million in cash. The acquisition
will be accounted for as a purchase in 1996, and the excess purchase price will
be allocated to property, plant and equipment.
Summarized financial position and results of operations for Kern River Gas
Transmission Company are presented below.
1995 1994 1993
------- -------- --------
(MILLIONS)
Current assets......................................... $ 55.4 $ 98.3 $ 80.1
Non-current assets, principally natural gas
transmission plant................................... 994.5 1,026.3 1,028.7
Current liabilities.................................... (47.3) (86.9) (62.1)
Long-term debt......................................... (620.5) (643.2) (662.9)
Other non-current liabilities.......................... (124.1) (109.5) (66.9)
------- -------- --------
Partners' equity....................................... $ 258.0 $ 285.0 $ 316.9
======= ======== ========
Revenues............................................... $ 187.0 $ 179.0 $ 176.8
Costs and expenses..................................... 65.7 54.9 48.7
Net income............................................. 38.0 38.1 42.1
F-21
45
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investing income from continuing operations:
1995 1994 1993
----- ----- -----
(MILLIONS)
Interest...................................................... $37.2 $ 5.5 $10.0
Dividends..................................................... 16.1 4.5 5.6
Equity earnings............................................... 40.6 39.6 49.6
----- ----- -----
$93.9 $49.6 $65.2
===== ===== =====
Dividends and distributions received from companies carried on an equity
basis were $44 million in 1995; $43 million in 1994; and $39 million in 1993.
NOTE 6 -- ASSET SALES AND WRITE-OFF OF PROJECT COSTS
In the fourth quarter of 1995, the development of a commercial coal
gasification venture in south-central Wyoming was canceled, resulting in a $41.4
million pre-tax charge. This amount includes what management believes to be a
reasonable estimate of future costs of $4 million to reclaim the site, of which
it is expected that 60 percent to 70 percent will be incurred during 1996 and
the remainder over a five-year period. Williams will perform the reclamation of
the site in coordination with various governmental agencies and expects to
receive necessary environmental releases and approvals upon completion of the
reclamation.
In 1994, Williams sold 3,461,500 limited partner common units 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' original 12.25 percent interest in Northern Border partnerships
has been reduced to 3.2 percent.
In a 1993 public offering, Williams sold 6.1 million units 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.
In March 1993, Williams sold its intrastate natural gas pipeline system and
other related assets in Louisiana for $170 million in cash, resulting in a
pre-tax gain of $45.9 million.
NOTE 7 -- PROVISION FOR INCOME TAXES
The provision (credit) for income taxes from continuing operations
includes:
1995 1994 1993
------ ----- ------
(MILLIONS)
Current:
Federal................................................. $(26.5) $45.8 $ 84.1
State................................................... 3.1 10.1 20.4
------ ----- ------
(23.4) 55.9 104.5
------ ----- ------
Deferred:
Federal................................................. 114.2 23.7 15.8
State................................................... 11.2 2.1 (7.7)
------ ----- ------
125.4 25.8 8.1
------ ----- ------
Total provision........................................... $102.0 $81.7 $112.6
====== ===== ======
F-22
46
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations from the provision for income taxes attributable to
continuing operations at the statutory rate to the provision for income taxes
are as follows:
1995 1994 1993
------ ------ ------
(MILLIONS)
Provision at statutory rate................................ $140.5 $ 86.3 $104.3
Increases (reductions) in taxes resulting from:
Increase in statutory tax rate on beginning of year
deferred tax balances................................. -- -- 15.8
State income taxes....................................... 13.5 8.0 8.2
Coal-seam tax credits.................................... (18.7) (14.9) (12.8)
Decrease in valuation allowance for deferred tax
assets................................................ (29.8) -- --
Reversal of prior tax accruals........................... (8.0) -- --
Other -- net............................................. 4.5 2.3 (2.9)
------ ------ ------
Provision for income taxes................................. $102.0 $ 81.7 $112.6
====== ====== ======
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.
Significant components of deferred tax liabilities and assets as of
December 31 are as follows:
1995 1994*
-------- -------
(MILLIONS)
Deferred tax liabilities:
Property, plant and equipment.................................. $1,669.2 $ 704.6
Investments.................................................... 96.9 81.9
Other.......................................................... 248.1 74.7
-------- -------
Total deferred tax liabilities......................... 2,014.2 861.2
Deferred tax assets:
Deferred revenues.............................................. 23.5 40.0
Investments.................................................... 31.3 55.9
Rate refunds................................................... 70.7 32.0
Accrued liabilities............................................ 226.4 64.2
Minimum tax credits............................................ 93.9 --
Other.......................................................... 220.5 93.1
-------- -------
Total deferred tax assets.............................. 666.3 285.2
Valuation allowance for deferred tax assets............ 6.4 29.8
-------- -------
Net deferred tax assets................................ 659.9 255.4
-------- -------
Net deferred tax liabilities..................................... $1,354.3 $ 605.8
======== =======
- ---------------
* Reclassified to conform to current classification.
The valuation allowance for deferred tax assets decreased $23.4 million and
$1.7 million during 1995 and 1994, respectively.
Cash payments for income taxes are as follows: 1995 -- $348 million, before
refunds of $9 million; 1994 -- $113 million, before refunds of $6 million; and
1993 -- $129 million.
F-23
47
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- EXTRAORDINARY LOSS
The extraordinary loss in 1994 resulted from early extinguishment of debt.
Williams and one of its subsidiaries paid $316.7 million to redeem higher
interest rate debt for a $12.2 million net loss (net of a $7.7 million benefit
for income taxes).
NOTE 9 -- EMPLOYEE BENEFIT PLANS
Pensions
Williams maintains non-contributory defined-benefit pension plans covering
the majority of 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 consists of the following:
1995 1994 1993
------- ------ ------
(MILLIONS)
Service cost for benefits earned during the year.......... $ 19.5 $ 13.9 $ 10.9
Interest cost on projected benefit obligation............. 40.1 21.8 21.1
Actual return on plan assets.............................. (120.3) 3.1 (28.3)
Amortization and deferrals................................ 82.0 (24.2) 8.2
Settlement loss........................................... -- -- 5.7
------- ------ ------
Net pension expense....................................... $ 21.3 $ 14.6 $ 17.6
======= ====== ======
Net pension expense:
Continuing operations................................... $ 21.3 $ 10.0 $ 14.9
Discontinued operations................................. -- 4.6 2.7
------- ------ ------
$ 21.3 $ 14.6 $ 17.6
======= ====== ======
Included in net pension expense at December 31, 1995, is approximately $8.9
million for the Transco Energy plans' participants.
During 1993, certain supplemental retirement plan participants elected to
receive lump-sum benefits, which resulted in a settlement loss of $5.7 million.
The following table presents the funded status of the plans:
1995 1994
---- ----
(MILLIONS)
Actuarial present value of benefit obligations:
Vested benefits..................................................... $422 $191
Non-vested benefits................................................. 21 10
---- ----
Accumulated benefit obligations..................................... 443 201
Effect of projected salary increases................................ 137 58
---- ----
Projected benefit obligations....................................... 580 259
Assets at market value................................................ 550 251
---- ----
Assets less than projected benefit obligations........................ 30 8
Unrecognized net loss................................................. -- (12)
Unrecognized prior-service cost....................................... (11) (10)
Unrecognized transition asset......................................... 4 5
---- ----
Pension liability (asset)............................................. $ 23 $ (9)
==== ====
F-24
48
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, assets of two pension plans exceeded the projected
benefit obligations with assets at market value of $103 million and projected
benefit obligations of $57 million. At December 31, 1994, assets of two other
pension plans exceeded the projected benefit obligations with assets at market
value of $238 million and projected benefit obligations of $233 million.
Included in the net pension liability at December 31, 1995, is
approximately $32 million for the participants of the Transco Energy plans.
Williams has retained all liabilities and obligations of its network
services operations' plan participants up to the date of sale (see Note 3).
The discount rate used to measure the present value of benefit obligations
is 7 1/4 percent (8 1/2 percent in 1994); 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.
Postretirement benefits other than pensions
Williams sponsors health care plans that provide postretirement medical
benefits to retired Williams' employees who were employed full time, hired prior
to January 1, 1992 (January 1, 1996 for Transco Energy employees), have worked
five years, attained age 55 while in service and are a participant in the
company pension plans. In addition, two Transco Energy plans provide certain
health care and life insurance benefits to retired employees of Transcontinental
Gas Pipe Line, Texas Gas and other subsidiaries of Transco Energy.
The plans provide for retiree contributions and contain other cost-sharing
features such as deductibles and coinsurance. The accounting for the plans
anticipates future cost-sharing changes to the written plans that are consistent
with Williams' expressed intent to increase the retiree contribution rate
annually, generally in line with health care cost increases, except for certain
retirees whose premiums are fixed. A portion of the cost has been funded in
trusts by Williams' FERC-regulated natural gas pipeline subsidiaries to the
extent recovery from customers can be achieved. Plan assets consist of assets
held in two master trusts and money market funds. One of the master trusts was
previously described and the other consists primarily of domestic and foreign
common stocks, commercial paper and government bonds.
Net postretirement benefit expense consists of the following:
1995 1994 1993
------ ----- -----
(MILLIONS)
Service cost for benefits earned during the year............. $ 7.4 $ 3.9 $ 3.7
Interest cost on accumulated postretirement benefit
obligation................................................. 23.9 7.8 8.2
Actual return on plan assets................................. (17.9) (.6) (.7)
Amortization of unrecognized transition obligation........... 5.0 5.1 5.2
Amortization and deferrals................................... 23.1 .1 (3.5)
------ ----- -----
Net postretirement benefit expense........................... $ 41.5 $16.3 $12.9
====== ===== =====
Net postretirement benefit expense:
Continuing operations...................................... $ 41.5 $14.7 $11.4
Discontinued operations.................................... -- 1.6 1.5
------ ----- -----
$ 41.5 $16.3 $12.9
====== ===== =====
Net postretirement benefit expense at December 31, 1995, includes
approximately $26 million for the Transco Energy plans' participants.
F-25
49
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the funded status of the plans:
1995 1994
---- ----
(MILLIONS)
Actuarial present value of postretirement benefit obligation:
Retirees............................................................ $227 $ 55
Fully eligible active plan participants............................. 24 11
Other active plan participants...................................... 85 34
---- ----
Accumulated postretirement benefit obligation....................... 336 100
Assets at market value................................................ 124 16
---- ----
Assets less than accumulated postretirement benefit obligation........ 212 84
Unrecognized net gain................................................. 25 19
Unrecognized prior-service cost....................................... (6) --
Unrecognized transition obligation.................................... (71) (78)
---- ----
Postretirement benefit liability...................................... $160 $ 25
==== ====
Included in the postretirement benefit liability at December 31, 1995, is
approximately $139 million for the Transco Energy plans' participants,
substantially all of which is classified as non-current. The amount of
postretirement benefit costs deferred as a regulatory asset at December 31,
1995, is $133 million and is expected to be recovered through rates over the
next 17 years.
The discount rate used to measure the present value of benefit obligations
is 7 1/4 percent (8 1/2 percent in 1994). The expected long-term rate of return
on plan assets is 10 percent (6 percent after taxes). The annual assumed rate of
increase in the health care cost trend rate for 1996 is 10 to 13 percent,
systematically decreasing to 5 percent by 2006. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rate by 1 percent in each year would increase the
aggregate of the service and interest cost components of postretirement benefit
expense for the year ended December 31, 1995, by $5 million and the accumulated
postretirement benefit obligation as of December 31, 1995, by $50 million.
Other
Williams maintains various defined-contribution plans covering
substantially all employees. Company contributions are based on employees'
compensation and, in part, match employee contributions. Company contributions
are invested primarily in Williams common stock. Williams' contributions to
these plans were $19 million in 1995, $14 million in 1994 and $13 million in
1993. Contributions to these plans made by discontinued operations were $3
million in both 1994 and 1993.
Effective January 1, 1994, Williams adopted Statement of Financial
Accounting Standards (FAS) 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.
F-26
50
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INVENTORIES
1995 1994
------ ------
(MILLIONS)
Natural gas in underground storage:
Transcontinental Gas Pipe Line (LIFO)............................ $ 21.4 $ --
Williams Energy Services......................................... 6.0 8.7
Other............................................................ 2.2 9.9
Petroleum products:
Williams Energy Services......................................... 12.8 13.5
Other............................................................ 27.4 19.2
Materials and supplies:
WilTel........................................................... 28.2 28.6
Other............................................................ 87.8 32.4
Other.............................................................. 3.2 --
------ ------
$189.0 $112.3
====== ======
Inventories valued on the LIFO method at December 31, 1995, approximate
current average cost.
NOTE 11 -- PROPERTY, PLANT AND EQUIPMENT
1995 1994
--------- ---------
(MILLIONS)
Cost:
Northwest Pipeline........................................... $ 1,403.5 $ 1,275.4
Williams Natural Gas......................................... 761.6 745.0
Transcontinental Gas Pipe Line............................... 2,756.7 --
Texas Gas Transmission....................................... 917.3 --
Williams Field Services Group................................ 2,324.9 1,273.2
Williams Pipe Line........................................... 1,023.3 809.6
WilTel....................................................... 55.2 32.1
WilTech Group................................................ 90.7 69.5
Other........................................................ 145.5 106.3
--------- ---------
9,478.7 4,311.1
Accumulated depreciation....................................... (1,464.0) (1,187.1)
--------- ---------
$ 8,014.7 $ 3,124.0
========= =========
Commitments for construction and acquisition of property, plant and
equipment are approximately $256 million at December 31, 1995.
The Financial Accounting Standards Board has issued a new accounting
standard, FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," effective for fiscal years beginning
after December 15, 1995. The standard, which will be adopted in the first
quarter of 1996, is not expected to have a material effect on Williams'
financial position or results of operations.
F-27
51
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- 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
$136 million at December 31, 1995, and $41 million at December 31, 1994.
1995 1994
-------- ------
(MILLIONS)
Accrued liabilities:
Income taxes payable............................................ $ 371.6 $ 38.0
Rate refunds.................................................... 180.6 83.8
Employee costs.................................................. 135.9 51.7
Interest........................................................ 72.9 39.9
Taxes other than income taxes................................... 51.2 41.8
Other........................................................... 318.0 106.2
-------- ------
$1,130.2 $361.4
======== ======
NOTE 13 -- DEBT, LEASES AND BANKING ARRANGEMENTS
Notes payable
During 1994, a subsidiary of Williams entered into a $400 million
short-term credit agreement to finance the acquisition 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 outstanding short-term borrowings at December 31, 1994, was
6.75 percent.
F-28
52
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt
WEIGHTED
AVERAGE
INTEREST RATE* 1995 1994
-------------- -------- --------
(MILLIONS)
The Williams Companies, Inc.
Revolving credit loans................................ 6.2% $ 50.0 $ 350.0
Debentures, 8.875% -- 10.25%, payable 2012, 2020, 2021
and 2025........................................... 9.6 587.7 379.7
Notes, 7.5% -- 9.625%, payable through 2001........... 8.8 842.4 363.8
Capital lease obligations, 11.1%...................... -- -- 31.0
Northwest Pipeline
Debentures, 7.125% -- 10.65%, payable through 2025.... 9.0 369.2 293.0
Adjustable rate notes, payable through 2002........... 9.0 11.7 13.3
Williams Natural Gas
Variable rate notes, payable 1999..................... 6.3 130.0 130.0
Transcontinental Gas Pipe Line
Debentures, 9.125%, payable 1998 through 2017......... 9.1 153.0 --
Notes, 8.125% -- 9%, payable 1996, 1997 and 2002...... 8.7 381.1 --
Adjustable rate notes, payable 2000 (subject to
remarketing in 1996)............................... 6.2 125.1 --
Texas Gas Transmission
Notes, 9.625% and 8.625%, payable 1997 and 2004....... 9.0 255.9 --
Williams Holdings of Delaware
Revolving credit loans................................ 6.3 150.0 --
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 21.0 --
Other, payable through 1999............................. 8.0 6.8 10.0
-------- --------
3,193.9 1,690.8
Current portion of long-term debt....................... (319.9) (383.0)
-------- --------
$2,874.0 $1,307.8
======== ========
- ---------------
* At December 31, 1995.
During 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, Northwest Pipeline, Transcontinental Gas Pipe
Line, Texas Gas Transmission, Williams Pipe Line and Williams Holdings of
Delaware, Inc. have access to various amounts of the facility while Williams
(parent) has access to all unborrowed amounts. Interest rates vary with current
market conditions. Certain amounts outstanding at December 31, 1995, under this
facility do not reduce amounts available to Williams in the future. The
available amount at December 31, 1995, is $670 million.
In January 1996, Williams Holdings of Delaware, Inc., a subsidiary of
Williams, issued $250 million of 6.25 percent debentures due 2006.
In January 1996, Williams entered into a $205 million short-term borrowing
agreement to finance the purchase of the remaining 50 percent interest in Kern
River Gas Transmission Company (see Note 5).
F-29
53
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the issuance of $130 million of variable rate debt by
Williams Natural Gas in November 1994, Williams entered into an interest-rate
swap agreement under which Williams pays a 7.78 percent fixed rate in exchange
for a variable rate (5.88 percent at December 31, 1995). The difference between
the fixed and variable rate is included in interest expense.
Terms of certain subsidiaries' borrowing arrangements with institutional
lenders limit the transfer of funds to Williams. At December 31, 1995,
approximately $933 million of net assets of consolidated subsidiaries was
restricted. Undistributed earnings of companies and partnerships accounted for
under the equity method of $62 million are included in Williams' consolidated
retained earnings at December 31, 1995.
Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments, for each of the next five years are as follows:
(MILLIONS)
----------
1996.............................................................. $319
1997.............................................................. 222
1998.............................................................. 341
1999.............................................................. 313
2000.............................................................. 405
Cash payments for interest (net of amounts capitalized) related to
continuing operations are as follows: 1995 -- $266 million; 1994 -- $143
million; and 1993 -- $144 million. Cash payments for interest (net of amounts
capitalized) related to discontinued operations are as follows: 1994 -- $6
million and 1993 -- $16 million.
Leases
Future minimum annual rentals under non-cancelable operating leases related
to continuing operations are $52 million in 1996, $47 million in 1997, $42
million in 1998, $39 million in 1999, $37 million in 2000 and $186 million
thereafter.
Total rent expense from continuing operations was $78 million in 1995, $26
million in 1994 and $22 million in 1993. Total rent expense from discontinued
operations was $70 million in 1994 and $59 million in 1993.
NOTE 14 -- STOCKHOLDERS' EQUITY
In connection with the May 1, 1995, merger with Transco Energy, Williams
exchanged all of Transco Energy's outstanding $3.50 cumulative convertible
preferred stock for 2.5 million shares of Williams' $3.50 cumulative convertible
preferred stock. These shares are redeemable by Williams beginning in November
1999, at an initial price of $51.40 per share. Each share of $3.50 preferred
stock is convertible at the option of the holder into 1.5625 shares of Williams
common stock. Dividends per share of $2.33 were recorded during 1995.
During 1995, Williams exchanged 2.8 million shares of its $2.21 cumulative
preferred stock with a carrying value of $69 million for 9.6 percent debentures
with a fair value of $72.5 million. The difference in the fair value of the new
securities and the carrying value of the preferred stock exchanged is recorded
as a decrease in capital in excess of par value. This amount did not impact net
income, but is included in preferred stock dividends on the income statement and
in the computation of earnings per share. The 837,852 outstanding shares of
$2.21 cumulative preferred stock are redeemable by Williams at a price of $25
beginning in September 1997. Dividends per share of $2.21 were recorded each
year during 1995, 1994 and 1993.
F-30
54
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, Williams called for redemption of its 3,000,000 shares of
outstanding $3.875 convertible exchangeable preferred stock. Substantially all
of the preferred shares were converted into 7.6 million shares of Williams
common stock. Dividends per share of $.97 were recorded during 1993.
Subsequent to December 31, 1995, the board of directors adopted a
Stockholder Rights Plan (the "Rights Plan") to replace its existing rights plan
which expired on February 6, 1996. Under the Rights Plan, each outstanding share
of common stock has one preferred stock purchase right attached. Under certain
conditions, each right may be exercised to purchase, at an exercise price of
$140 (subject to adjustment), one two-hundredth of a share of junior
participating preferred stock. The rights may be exercised only if an Acquiring
Person acquires (or obtains the right to acquire) 15 percent or more of Williams
common stock; or commences an offer for 15 percent or more of Williams common
stock; or the board of directors determines an Adverse Person has become the
owner of 10 percent or more of Williams common stock. The rights, which do not
have voting rights, expire in 2006 and may be redeemed at a price of $.01 per
right prior to their expiration, or within a specified period of time after the
occurrence of certain events. In the event a person becomes the owner of more
than 15 percent of Williams common stock or the board of directors determines
that a person is an Adverse Person, each holder of a right (except an Acquiring
Person or an Adverse Person) shall have the right to receive, upon exercise,
common stock having a value equal to two times the exercise price of the right.
In the event Williams is engaged in a merger, business combination or 50 percent
or more of Williams assets, cash flow or earnings power is sold or transferred,
each holder of a right (except an Acquiring Person or an Adverse Person) shall
have the right to receive, upon exercise, common stock of the acquiring company
having a value equal to two times the exercise price of the right.
During 1995, the board of directors approved the Stock Plan for Non-officer
Employees (the 1995 Plan). The 1995 Plan along with the 1990 Stock Plan (the
1990 Plan) permits granting of various types of awards including, but not
limited to, stock options, stock-appreciation rights, restricted stock and
deferred stock. The 1995 Plan provides for granting of awards to key non-officer
employees. The 1990 Plan is used for granting of awards to executive officers of
Williams. Such awards may be granted for no consideration other than prior and
future services. The purchase price per share for stock options and
stock-appreciation rights may not be less than the fair-market value of the
stock on the date of grant. Another stock option plan provides for the granting
of non-qualified options to non-employee directors. Options under the 1990 Plan
generally become exercisable in three annual installments beginning within one
year after grant. Options under the 1995 Plan generally become exercisable after
five years, subject to accelerated vesting if certain stock prices are achieved.
The options expire 10 years after grant.
The following summary reflects option transactions during 1995.
OPTION PRICE
----------------------
SHARES PER SHARE TOTAL
--------- --------- ----------
(MILLIONS)
Shares under option:
December 31, 1994..................................... 2,884,008 $ 11- 30 $ 65
Granted............................................... 2,261,058 30- 40 80
Canceled or surrendered............................... (81,892) 14- 40 (2)
Exchanged options from Transco Energy
acquisition -- net................................. 1,024,250 21-172 35
Exercised............................................. (841,491) 11- 40 (25)
--------- ----
December 31, 1995..................................... 5,245,933 $ 11-172 $153
========= ====
Shares exercisable December 31, 1995.................... 4,421,447
=========
Under the plans, Williams granted 65,445, 127,706 and 97,504 deferred
shares in 1995, 1994 and 1993, respectively, to key employees. Deferred shares
are valued at the date of award and are generally charged to
F-31
55
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense in the year of award. Williams issued 70,122, 45,298 and 191,007 of
previously deferred shares in 1995, 1994 and 1993, respectively. Williams also
issued 55,300, 44,800 and 62,000 shares of restricted stock in 1995, 1994 and
1993, respectively. Restricted stock is valued on the issuance date, and the
related expense is amortized over varying periods of three to 10 years.
During November 1994, Williams entered into a deferred share agreement (the
Agreement) in connection with the sale of its network services operations. Under
the terms of the Agreement, Williams will distribute up to approximately 2.6
million shares of Williams common stock to key employees of the network services
operations over various periods through 1998, less amounts necessary to meet
minimum tax withholding requirements. Williams distributed 314,405 and 273,095
shares during 1995 and 1994, respectively.
At December 31, 1995, 9,849,891 shares of common stock were reserved for
issuance pursuant to existing and future stock awards, of which 2,698,799 were
available for future grants (1,835,014 at December 31, 1994).
The Financial Accounting Standards Board has issued a new accounting
standard, FAS No. 123, "Accounting for Stock-Based Compensation," effective for
fiscal years beginning after December 15, 1995. As provided for in the standard,
Williams will not adopt the recognition provisions and will provide the pro
forma net income and earnings-per-share disclosures required by the standard in
its 1996 annual financial statements.
Williams currently follows Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees." Under this standard, because the
exercise price of Williams' fixed plan common stock options equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
NOTE 15 -- FINANCIAL INSTRUMENTS
Fair-value methods
The following methods and assumptions were used by Williams 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 and other non-current receivables: 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.
Long-term debt: The fair value of Williams' long-term debt is valued
using indicative year-end traded bond market prices for publicly traded
issues, while private debt is valued based on the prices of similar
securities with similar terms and credit ratings. At December 31, 1995 and
1994, 85 percent and 59 percent, respectively, of Williams' long-term debt
was publicly traded. Williams used the expertise of an outside investment
banking firm to estimate the fair value of long-term debt.
Interest-rate swaps: Fair value is determined by discounting estimated
future cash flows using forward interest rates implied by the year-end
yield curve. Fair value was calculated by the financial institution that is
the counterparty to the swap.
Energy-related trading and hedging: Includes forwards, futures,
options, swaps and purchase and sales commitments. Fair value reflects
management's best estimate of market prices considering various
F-32
56
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
factors including closing exchange and over-the-counter quotations, the
terms of the contract, credit considerations, time value and volatility
factors underlying the positions.
Carrying amounts and fair values of Williams' financial instruments
Asset (liability)
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(MILLIONS)
Cash and cash equivalents................ $ 90.4 $ 90.4 $ 36.1 $ 36.1
Notes and other non-current
receivables............................ 25.7 25.8 63.1 62.3
Investment in Texasgulf Inc.............. -- -- 150.0 150.0
Notes payable............................ -- -- (507.0) (507.0)
Long-term debt, including current
portion................................ (3,193.1) (3,476.7) (1,657.6) (1,679.9)
Interest-rate swaps...................... (.4) (10.4) (.3) 1.4
Energy-related trading:
Assets................................. 102.5 102.5 22.7 22.7
Liabilities............................ (283.1) (283.1) (15.8) (15.8)
Energy-related hedging:
Assets................................. 2.9 4.5 .3 .3
Liabilities............................ (.6) (3.2) (8.5) (8.5)
The above asset and liability amounts for energy-related hedging represent
unrealized gains or losses and do not include the related deferred amounts.
The 1995 average fair value of the energy-related trading assets and
liabilities is $57.3 million and $144.6 million, respectively. The 1994 average
fair value of the energy-related trading assets and liabilities is $9.2 million
and $8.5 million, respectively.
Williams has recorded liabilities of $24 million and $27 million at
December 31, 1995 and 1994, respectively, for certain guarantees that qualify as
financial instruments. It is not practicable to estimate the fair value of these
guarantees because of their unusual nature and unique characteristics.
Off-balance-sheet credit and market risk
Williams 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 sold, with limited recourse, certain receivables. The aggregate
limit under these receivables facilities was $190 million at December 31, 1995,
and $80 million at December 31, 1994 (1994 balance all related to discontinued
operations). Williams received $196 million of proceeds in 1995, $110 million in
1994 and none in 1993. At December 31, 1995 and 1994, $166 million and $80
million (1994 balance all related to discontinued operations) of such
receivables had been sold, respectively. Based on amounts outstanding at
December 31, 1995, the maximum contractual credit loss under these arrangements
is approximately $28 million, but the likelihood of loss is remote. Williams had
no risk of credit loss for the amount sold at December 31, 1994, because amounts
outstanding related to discontinued operations (see Note 3).
In connection with the sale of units in the Williams Coal Seam Gas Royalty
Trust (Trust), Williams indemnified the Trust against losses from certain
litigation (see Note 17) and guaranteed minimum gas prices through 1997. At
December 31, 1995 and 1994, Williams has a recorded liability of $10 million for
these
F-33
57
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
items, representing the maximum amount for the first guarantee and an estimate
of the gas price exposure based on historical operating trends and an assessment
of market conditions. While Williams' maximum exposure from this guarantee
exceeds amounts accrued, it is not practicable to determine such amount because
of the unique aspects of the guarantee.
In connection with the sale of Williams' network services operations,
Williams has been indemnified by LDDS against any losses related to retained
guarantees of $180 million at December 31, 1995, for lease rental obligations.
LDDS has advised that it is negotiating with the guaranteed parties to remove
Williams as guarantor.
Williams has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $8 million and $9 million at
December 31, 1995 and 1994, respectively. Williams 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, option contracts, swap agreements and purchase and sale commitments.
See Note 1 for a description of the accounting for these trading activities.
Williams Energy Services enters into forward contracts and purchase and
sale commitments which involve physical delivery of an energy commodity. Prices
under these contracts are both fixed and variable. 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 option 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.
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.
F-34
58
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional quantities for all trading financial instruments at December
31, 1995, and December 31, 1994, are as follows:
1995 1994
------------------- ------------------
PAYOR RECEIVER PAYOR RECEIVER
------ -------- ----- --------
Fixed price:
Natural gas (TBtu)............................ 873.2 847.3 181.4 179.5
Refined products and crude (MMBbls)........... 15.9 14.9 11.2 12.5
Variable price:
Natural gas (TBtu)............................ 1,841.2 1,517.2 85.0 136.3
Refined products and crude (MMBbls)........... 2.8 2.5 2.5 2.5
The net cash flow requirement related to these contracts at December 31,
1995, was $215 million. At December 31, 1995, the average remaining life of the
trading fixed-price portfolio is approximately two years and four years for the
trading variable-price portfolio.
In 1995, certain gas marketing operations of Williams Energy Services,
along with gas marketing operations from Transco Energy, were combined with the
commodity price-risk management and trading activities of Williams Energy
Services. Such combination in 1995 involves managing the price and other
business risks and opportunities of such physical gas trading activities and any
related financial instruments previously accounted for as hedges in common-risk
portfolios with Williams Energy Services' other financial instruments. These
former marketing activities, consisting of buying and selling natural gas,
through 1994 were reported on a "gross" basis in the Consolidated Statement of
Income as revenues and profit-center costs. Concurrent with completing the
combination of such activities with the commodity price-risk management
operations in the third quarter of 1995, the related contract rights and
obligations along with any related financial instruments previously accounted
for as hedges, were recorded in the Consolidated Balance Sheet on a
current-market-value basis and the related income statement presentation was
changed to a net basis. Such revenues reported on a gross basis through the
first two quarters of 1995 were reclassified to a net basis concurrent with this
change in the third quarter of 1995. Following is a summary of Williams Energy
Services' revenues:
1995 1994
------- ------
Financial instrument and physical trading market gains -- net.... $ 65.8 $ 14.2
Gross marketing revenues......................................... 617.7* 249.2
Gross marketing costs............................................ (599.2)* --
Other............................................................ 1.5 .3
------- ------
$ 85.8 $263.7
======= ======
- ---------------
* Through June 30, 1995.
Concentration of credit risk
Williams' cash equivalents consist of high quality securities placed with
various major financial institutions with high credit ratings. Williams'
investment policy limits its credit exposure to any one financial institution.
At December 31, 1995 and 1994, approximately 62 percent and 40 percent,
respectively, of receivables are for the sale or transportation of natural gas
and related products or services. Approximately 27 percent and 30 percent of
receivables at December 31, 1995 and 1994, respectively, are for
telecommunications and related services. Natural gas customers include
pipelines, distribution companies, producers, gas marketers and industrial users
primarily located in the eastern, northwestern and midwestern United States.
Telecommunica-
F-35
59
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tions customers include numerous corporations. As a general policy, collateral
is not required for receivables, but customers' financial condition and credit
worthiness are evaluated regularly.
NOTE 16 -- OTHER FINANCIAL INFORMATION
Intercompany revenues (at prices that generally apply to sales to
unaffiliated parties) are as follows:
1995 1994* 1993*
------ ----- -----
(MILLIONS)
Northwest Pipeline............................................ $ 1.8 $ 3.4 $ 3.6
Williams Natural Gas.......................................... 9.5 14.2 5.4
Transcontinental Gas Pipe Line................................ 34.2 -- --
Texas Gas Transmission........................................ 37.7 -- --
Williams Field Services Group................................. 9.2 30.5 14.5
Williams Energy Services...................................... 34.0 20.2 42.1
Williams Pipe Line............................................ 32.8 16.7 1.4
Other......................................................... .3 .4 --
------ ----- -----
$159.5 $85.4 $67.0
====== ===== =====
- ---------------
* Reclassified as described in Note 1.
Williams Natural Gas had sales to a natural gas distributor that accounted
for 15 percent in 1993 of Williams' revenues.
F-36
60
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for business segments is as follows:
1995 1994* 1993*
--------- -------- --------
(MILLIONS)
Identifiable assets at December 31:
Northwest Pipeline.................................. $ 1,147.5 $1,028.0 $1,032.6
Williams Natural Gas................................ 709.2 719.8 697.0
Transcontinental Gas Pipe Line...................... 3,159.5 -- --
Texas Gas Transmission.............................. 1,151.8 -- --
Williams Field Services Group....................... 2,116.5 1,093.6 967.8
Williams Energy Services............................ 351.9 96.5 84.6
Williams Pipe Line.................................. 870.5 680.4 588.3
WilTel.............................................. 263.0 255.5 169.1
WilTech Group....................................... 138.0 60.2 26.6
Investments......................................... 307.6 379.1 437.1
General corporate and other......................... 279.3 169.4 122.1
Discontinued operations............................. -- 743.6 895.2
--------- -------- --------
Consolidated................................ $10,494.8 $5,226.1 $5,020.4
========= ======== ========
Additions to property, plant and equipment:
Northwest Pipeline.................................. $ 130.5 $ 62.6 $ 175.7
Williams Natural Gas................................ 43.5 32.9 54.9
Transcontinental Gas Pipe Line...................... 238.7 -- --
Texas Gas Transmission.............................. 32.1 -- --
Williams Field Services Group....................... 247.7 163.5 116.7
Williams Pipe Line.................................. 87.9 46.6 62.9
WilTel.............................................. 24.1 4.9 1.9
WilTech Group....................................... 8.3 8.0 6.9
General corporate and other......................... 14.7 7.0 9.3
--------- -------- --------
Consolidated................................ $ 827.5 $ 325.5 $ 428.3
========= ======== ========
Depreciation and depletion:
Northwest Pipeline.................................. $ 34.9 $ 33.9 $ 30.7
Williams Natural Gas................................ 27.3 27.2 27.3
Transcontinental Gas Pipe Line...................... 109.1 -- --
Texas Gas Transmission.............................. 38.9 -- --
Williams Field Services Group....................... 110.2 46.7 43.5
Williams Pipe Line.................................. 26.4 22.4 21.4
WilTel.............................................. 5.9 5.3 4.7
WilTech Group....................................... 8.3 7.4 4.0
General corporate and other......................... 8.4 7.4 6.2
--------- -------- --------
Consolidated................................ $ 369.4 $ 150.3 $ 137.8
========= ======== ========
- ---------------
* Reclassified as described in Note 1.
F-37
61
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- CONTINGENT LIABILITIES AND COMMITMENTS
Rate and regulatory matters and related litigation
Williams' interstate pipeline subsidiaries, including Williams Pipe Line,
have various regulatory proceedings pending. As a result of rulings in certain
of these proceedings, a portion of the revenues of these subsidiaries has been
collected subject to refund. As to Williams Pipe Line, revenues collected
subject to refund were $179 million at December 31, 1995; it is not expected
that the amount of any refunds ordered would be significant. Accordingly, no
portion of these revenues has been reserved for refund. As to the other
pipelines, see Note 12 for the amount of revenues reserved for potential refund
as of December 31, 1995.
In 1992, the FERC issued Order 636, Order 636-A and Order 636-B. These
orders, which have been challenged in various respects by various parties in
proceedings pending in the U.S. Court of Appeals for the D.C. Circuit, require
interstate gas pipeline companies to change the manner in which they provide
services. Williams Natural Gas implemented its restructuring on October 1, 1993,
and Northwest Pipeline, Texas Gas and Transcontinental Gas Pipe Line implemented
their restructurings on November 1, 1993. Certain aspects of each pipeline
company's restructuring are under appeal.
Contract reformations and gas purchase deficiencies
Each of the natural gas pipeline subsidiaries has undertaken the
reformation of its respective gas supply contracts. None of the pipelines has
any significant pending supplier take-or-pay, ratable take or minimum take
claims.
In 1994, Williams Natural Gas and a producer executed a number of
agreements to resolve outstanding issues. Portions of the settlement were
subject to regulatory approvals, including the regulatory abandonment of a
certain Williams Natural Gas gathering system on terms acceptable to Williams
Natural Gas. On May 2, 1995, the FERC issued orders granting the requisite
approvals; however, one party has requested rehearing of the decision regarding
abandonment of the gathering system.
Current FERC policy associated with Orders 436 and 500 requires interstate
gas pipelines to absorb some of the cost of reforming gas supply contracts
before allowing any recovery through direct bill or surcharges to transportation
as well as sales commodity rates. Under Orders 636, 636-A and 636-B, costs
incurred to comply with these rules are permitted to be recovered in full,
although 10 percent of such costs must be allocated to interruptible
transportation service.
The FERC initially approved a method for Northwest Pipeline to direct bill
its contract-reformation costs, but when challenged on appeal, sought a remand
to reassess such method. Northwest Pipeline has received an order from the FERC
that requires a different allocation of such costs and has rebilled its
customers accordingly. While certain customers continue to challenge the FERC
methodology, Northwest Pipeline does not expect the reallocation or the
challenge to result in a significant financial impact upon the company.
Pursuant to a stipulation and agreement approved by the FERC, Williams
Natural Gas has made three filings to direct bill take-or-pay and gas supply
realignment costs. The first provided for the offset of certain amounts
collected subject to refund against previous take-or-pay direct-billed amounts
and, in addition, covered $24 million in new costs. This filing was approved,
and the final direct-billed amount, taking into consideration the offset, was
$15 million. The second filing covered $18 million in additional costs, and
provided for an offset of $3 million. The third filing covered additional costs
of $8 million which are similar in nature to the costs in the second filing. An
intervenor has filed a protest seeking to have the Commission review the
prudence of certain of the costs covered by the second and third filings.
Williams Natural Gas believes that the second and third filings will most likely
be approved. As of December 31, 1995, this subsidiary had an accrual of $87
million for its then estimated remaining contract-reformation and gas supply
F-38
62
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realignment costs. This accrual was increased in December 1995 as a result of a
ruling by the U.S. Court of Appeals for the Tenth Circuit regarding the terms of
certain contracts with producers. Williams Natural Gas will make additional
filings under the applicable FERC orders to recover such further costs as may be
incurred in the future. Williams Natural Gas has recorded a regulatory asset of
approximately $84 million for estimated future recovery of the foregoing costs.
On September 18, 1995, Texas Gas received FERC approval of a settlement
regarding Texas Gas' recovery of gas supply realignment costs. The settlement
provides that Texas Gas will recover 100 percent of such costs up to $50
million, will share in costs incurred between $50 million and $80 million, and
will absorb any such costs above $80 million. The settlement also extends Texas
Gas' pricing differential mechanism to November 1, 1996, and beyond that date
for contracts in litigation as of that date. Through December 31, 1995, Texas
Gas has paid approximately $53 million for gas supply realignment costs,
primarily as a result of contract terminations, and has accrued a liability of
approximately $27 million for its estimated remaining gas supply realignment
costs. Texas Gas has recovered approximately $44 million in gas supply
realignment costs, and in accordance with the terms of its settlement has
recorded a regulatory asset of approximately $23 million for the estimated
future recovery of such costs, which will be collected from customers over the
next two years. Ninety percent of the cost recovery is collected through demand
surcharges on Texas Gas' firm transportation rates; the remaining 10 percent is
recoverable from interruptible transportation service.
In 1983, the FERC issued Order 94-A, which permitted producers to collect
certain production related costs from pipelines on a retroactive basis. Pursuant
to FERC orders, Texas Gas and Transcontinental Gas Pipe Line direct billed their
customers for such costs paid to producers. In 1990, the U.S. Court of Appeals
for the D.C. Circuit overturned the FERC's orders authorizing direct billing for
such costs. In December 1995, Texas Gas entered into a settlement by which it
resolved its final refund obligations as to these costs. Transcontinental Gas
Pipe Line has resolved its refund obligations except for an amount of
approximately $7 million. Transcontinental Gas Pipe Line has refunded that
amount, reserving the right to recover the amount paid if the ruling is reversed
on appeal.
The foregoing accruals are in accordance with Williams' accounting policies
regarding the establishment of such accruals which take into consideration
estimated total exposure, as discounted and risk-weighted, as well as costs and
other risks associated with the difference between the time costs are incurred
and the time such costs are recovered from customers. The estimated portion of
such costs recoverable from customers is deferred or recorded as a regulatory
asset based on an estimate of expected recovery of the amounts allowed by FERC
policy. While Williams believes that these accruals are adequate and the
associated regulatory assets are appropriate, costs actually incurred and
amounts actually recovered from customers will depend upon the outcome of
various court and FERC proceedings, the success of settlement negotiations and
various other factors, not all of which are presently foreseeable.
Environmental matters
Since 1989, Texas Gas and Transcontinental Gas Pipe Line have had studies
underway to test certain of their facilities for the presence of toxic and
hazardous substances to determine to what extent, if any, remediation may be
necessary. Transcontinental Gas Pipe Line has responded to data requests
regarding such potential contamination of certain of its sites. The costs of any
such remediation will depend upon the scope of the remediation. At December 31,
1995, these subsidiaries had reserves totaling approximately $45 million for
these costs.
Certain Williams subsidiaries, including Texas Gas and Transcontinental Gas
Pipe Line, have been identified as potentially responsible parties (PRP) at
various Superfund and state waste disposal sites. Although no assurances can be
given, Williams does not believe that the PRP status of these subsidiaries will
have a material adverse effect on its financial position, results of operations
or net cash flows.
F-39
63
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1995, Transcontinental Gas Pipe Line was served as a defendant
in a lawsuit filed in U.S. District Court in Virginia by three individuals for
alleged violations of several provisions of both federal and state laws. Since
1991, Transcontinental Gas Pipe Line has worked with the appropriate Virginia
authorities to resolve certain emissions issues also raised by the individuals.
On October 13, 1995, the court dismissed the lawsuit but provided that the
plaintiffs could amend and refile their complaint to allege a state law nuisance
claim and they have done so. Transcontinental Gas Pipe Line believes the amended
complaint is without merit and is prepared to vigorously defend the suit.
Transcontinental Gas Pipe Line, Texas Gas and Williams Natural Gas have
identified polychlorinated biphenyl (PCB) contamination in air compressor
systems, soils and related properties at certain compressor station sites.
Transcontinental Gas Pipe Line, Texas Gas and Williams Natural Gas have also
been involved in negotiations with the U.S. Environmental Protection Agency
(EPA) and state agencies to develop screening, sampling and cleanup programs. In
addition, negotiations concerning investigative and remedial actions relative to
potential mercury contamination at certain gas metering sites have commenced
with certain environmental authorities by Williams Natural Gas and
Transcontinental Gas Pipe Line. As of December 31, 1995, Williams Natural Gas
had recorded a liability for approximately $26 million, representing the current
estimate of future environmental cleanup costs to be incurred over the next six
to ten years. Texas Gas and Transcontinental Gas Pipe Line likewise had recorded
liabilities for these costs which are included in the $45 million reserve
mentioned above. Actual costs incurred will depend on the actual number of
contaminated sites identified, the actual amount and extent of contamination
discovered, the final cleanup standards mandated by the EPA and other
governmental authorities and other factors. Texas Gas, Transcontinental Gas Pipe
Line and Williams Natural Gas have deferred these costs pending recovery as
incurred through future rates and other means.
In connection with the 1987 sale of the assets of Agrico Chemical Company,
Williams agreed to indemnify the purchaser for environmental cleanup costs
resulting from certain conditions at specified locations, to the extent such
costs exceed a specified amount. It appears probable that such costs will exceed
this amount. At December 31, 1995, Williams had approximately $7 million accrued
for such excess costs. The actual costs incurred will depend on the actual
amount and extent of contamination discovered, the final cleanup standards
mandated by the EPA or other governmental authorities, and other factors.
A lawsuit was filed on May 14, 1993, in a state court in Colorado in which
certain claims have been made against various defendants, including Northwest
Pipeline, contending that gas exploration and development activities in portions
of the San Juan Basin have caused air, water and other contamination. The
plaintiffs in the case sought certification of a plaintiff class. On June 28,
1994, the lawsuit was dismissed for failure to join an indispensable party over
which the state court had no jurisdiction. This decision is being appealed by
the plaintiffs. Since June 28, 1994, eight individual lawsuits have been filed
against Northwest Pipeline in U.S. District Court in Colorado, making
essentially the same claims. Northwest Pipeline is vigorously defending these
lawsuits.
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, and other gas producers in the San Juan Basin area, alleging that
certain coal strata were 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 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
F-40
64
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 believes that such a payment is not probable, 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 Energy Company, Transco Coal Gas Company (Transco Energy
Company and Transco Coal Gas Company being wholly owned subsidiaries of
Williams) 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 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 for
approval of the settlement with similar 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. On December 29, 1995, the administrative law judge issued an initial
decision in which he concluded that the settlement was imprudent. If the
decision is upheld on appeal, Transcontinental Gas Pipe Line and the other two
pipelines would be required to refund to their customers amounts collected in
excess of the amounts deemed appropriate by the administrative law judge. The
pipelines would be entitled to collect the amount of any such customer refunds
from Dakota. The administrative law judge's decision will be appealed; however,
in the event that the necessary regulatory approvals are not ultimately obtained
and Dakota elects to continue the litigation, Transcontinental Gas Pipe Line,
Transco Energy Company 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 each entered into certain settlements with producers which may require
the indemnification of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. As a result of
such settlements, Transcontinental Gas Pipe Line and Texas Gas have been named
as defendants in, respectively, six and two lawsuits in which damages claimed
aggregate in excess of $133 million. Texas Gas has settled its two lawsuits for
a total cost of $3.7 million, all but $700,000 of which is recoverable as
transition costs under Order 636. 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 its
lawsuits. Producers may receive other demands which could result in additional
claims. 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 additional
amounts it may be required to pay pursuant to indemnities for royalties under
the provisions of Order 528.
F-41
65
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
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 Transco
Energy, supplies natural gas and fuel oil to the Facility. As of December 31,
1995, it had current outstanding receivables from the Partnership of
approximately $20 million, all of which has been reserved. 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 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 or its subsidiaries incidental to their operations.
Summary
While no assurances may be given, Williams does not believe that the
ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage, recovery from customers or
other indemnification arrangements, will have a materially adverse effect upon
Williams' future financial position, results of operations and cash flow
requirements.
F-42
66
THE WILLIAMS COMPANIES, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (millions, except
per-share amounts). Revenues and costs and operating expenses for the six months
ended June 30, 1995, have been reclassified to report natural gas sales net of
related gas purchase costs.
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
---- -------- ------- ------- -------
Revenues......................................... $ 642.4 $ 663.9 $ 712.4 $ 837.0
Costs and operating expenses..................... 351.1 400.1 438.9 510.6
Net income....................................... 1,088.9 83.3 68.5 77.5
Primary earnings per common and common-equivalent
share.......................................... 11.57 .79 .58 .70
Fully diluted earnings per common and common-
equivalent share............................... 11.55 .78 .58 .69
1994
----
Revenues......................................... $ 386.6 $ 419.9 $ 467.3 $ 477.3
Costs and operating expenses..................... 248.5 274.0 335.4 329.8
Income before extraordinary loss................. 52.8 74.0 55.6 76.5
Net income....................................... 52.8 62.9 55.6 75.4
Primary earnings per common and common-equivalent
share:
Income before extraordinary loss............ .48 .69 .51 .77
Net income.................................. .48 .58 .51 .76
Fully diluted earnings per common and common-
equivalent share:
Income before extraordinary loss............ .48 .69 .51 .77
Net income.................................. .48 .58 .51 .76
The sum of earnings per share for the four quarters may not equal the total
earnings per share for the year due to changes in the average number of common
shares outstanding.
First-quarter 1995 net income includes the after-tax gain of $1 billion on
the sale of Williams' network services operations (see Note 3 of Notes to
Consolidated Financial Statements). The second quarter of 1995 includes a $16
million after-tax gain from the sale of Williams' 15 percent interest in
Texasgulf Inc. (see Note 5 of Notes to Consolidated Financial Statements) and an
$8 million income tax benefit resulting from settlements with taxing
authorities. Northwest Pipeline's third-quarter 1995 operating profit includes
the approximate $11 million net favorable effect of two reserve accrual
adjustments. In third-quarter 1995, Williams Field Services Group recorded $20
million of income from the favorable resolution of contingency issues involving
previously regulated gathering and processing assets, partially offset by an $8
million accrual for a future minimum price natural gas purchase commitment.
Second-quarter 1994 includes a $23 million gain from the sale of assets
(see Note 6 of Notes to Consolidated Financial Statements).
F-43
67
THE WILLIAMS COMPANIES, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED) (CONCLUDED)
Selected comparative fourth-quarter data are as follows (millions, except
per-share amounts). Certain 1994 amounts have been restated as described in Note
1 of Notes to Consolidated Financial Statements.
1995 1994
------ ------
Operating profit (loss):
Williams Interstate Natural Gas Systems:
Northwest Pipeline............................................ $ 25.1 $ 22.7
Williams Natural Gas.......................................... 15.5 15.1
Transcontinental Gas Pipe Line................................ 47.4 --
Texas Gas Transmission........................................ 28.6 --
Williams Field Services Group.................................... 43.2 40.4
Williams Energy Services......................................... .3 (3.9)
Williams Pipe Line............................................... 19.3 11.9
WilTel........................................................... 7.2 6.7
WilTech Group.................................................... .8 (4.5)
Other............................................................ (.2) --
------ ------
Total operating profit................................... 187.2 88.4
General corporate expenses......................................... (12.1) (7.0)
Interest expense -- net............................................ (69.7) (39.1)
Investing income................................................... 12.7 10.8
Write-off of project costs......................................... (41.4) --
Other income (expense) -- net...................................... 5.2 (2.5)
------ ------
Income from continuing operations before income taxes.............. 81.9 50.6
Provision for income taxes......................................... 17.5 16.4
------ ------
Income from continuing operations.................................. 64.4 34.2
Income from discontinued operations................................ 13.1 42.3
------ ------
Income before extraordinary loss................................... 77.5 76.5
Extraordinary loss................................................. -- (1.1)
------ ------
Net income......................................................... $ 77.5 $ 75.4
====== ======
Primary earnings per common and common-equivalent share............ $ .70 $ .76
====== ======
Fully diluted earnings per common and common-equivalent share...... $ .69 $ .76
====== ======
Williams Energy Services' fourth-quarter 1995 operating profit includes
loss accruals of approximately $6 million, primarily related to contract
disputes. In fourth-quarter 1995, the development of a commercial coal
gasification venture in south-central Wyoming was canceled, resulting in a $41.4
million pre-tax charge (see Note 6 of Notes to Consolidated Financial
Statements). Fourth-quarter 1995 income from discontinued operations reflects
the after-tax effect of the reversal of accruals established at the time of the
sale of the network services operations (see Note 3 of Notes to Consolidated
Financial Statements).
In fourth-quarter 1994, Williams Natural Gas recorded a $7 million reversal
of excess contract-reformation accruals. Williams Pipe Line's fourth-quarter
1994 operating profit includes $5 million in 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.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
F-44
68
THE WILLIAMS COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 14(A) 1 AND 2
PAGE
----
Covered by report of independent auditors:
Consolidated statement of income for the three years ended December 31, 1995........ F-12
Consolidated balance sheet at December 31, 1995 and 1994............................ F-14
Consolidated statement of stockholders' equity for the three years ended December
31, 1995......................................................................... F-15
Consolidated statement of cash flows for the three years ended December 31, 1995.... F-16
Notes to consolidated financial statements.......................................... F-17
Schedules for the three years ended December 31, 1995:
I -- Condensed financial information of registrant.............................. F-46
II -- Valuation and qualifying accounts.......................................... F-51
Not covered by report of independent auditors:
Quarterly financial data (unaudited)................................................ F-43
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.
F-45
69
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME (PARENT)
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- ------ ------
(MILLIONS, EXCEPT PER-SHARE
AMOUNTS)
Investing income............................................ $ 50.7 $ 29.4 $ 27.3
Interest accrued............................................ (189.9) (91.8) (95.8)
Gain on sales of assets (Note 3)............................ -- -- 51.6
Other income (expense) -- net............................... (12.9) 2.9 (16.9)
-------- ------ ------
Loss from continuing operations before income taxes and
equity in subsidiaries' income............................ (152.1) (59.5) (33.8)
Equity in consolidated subsidiaries' income................. 376.5 195.0 189.8
-------- ------ ------
Income from continuing operations before income taxes....... 224.4 135.5 156.0
Credit for income taxes..................................... (75.0) (29.4) (29.4)
-------- ------ ------
Income from continuing operations........................... 299.4 164.9 185.4
Income from discontinued operations (Note 2)................ 1,018.8 94.0 46.4
-------- ------ ------
Income before extraordinary loss............................ 1,318.2 258.9 231.8
Extraordinary loss from early extinguishment of debt........ -- (12.2) --
-------- ------ ------
Net income.................................................. 1,318.2 246.7 231.8
Preferred stock dividends................................... 15.3 8.8 11.8
-------- ------ ------
Income applicable to common stock........................... $1,302.9 $237.9 $220.0
======== ====== ======
Primary earnings per common and common-equivalent share:
Income from continuing operations......................... $ 2.78 $ 1.52 $ 1.74
Income from discontinued operations....................... 9.99 .92 .46
-------- ------ ------
Income before extraordinary loss.......................... 12.77 2.44 2.20
Extraordinary loss........................................ -- (.12) --
-------- ------ ------
Net income................................................ $ 12.77 $ 2.32 $ 2.20
======== ====== ======
Fully diluted earnings per common and common-equivalent
share:
Income from continuing operations......................... $ 2.76 $ 1.52 $ 1.71
Income from discontinued operations....................... 9.72 .92 .45
-------- ------ ------
Income before extraordinary loss.......................... 12.48 2.44 2.16
Extraordinary loss........................................ -- (.12) --
-------- ------ ------
Net income................................................ $ 12.48 $ 2.32 $ 2.16
======== ====== ======
See accompanying notes.
F-46
70
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
BALANCE SHEET (PARENT)
ASSETS
DECEMBER 31,
---------------------
1995 1994
-------- --------
(MILLIONS)
Current assets:
Cash and cash equivalents............................................. $ 57.6 $ 16.5
Due from consolidated subsidiaries.................................... 131.6 138.4
Receivables........................................................... 28.9 65.3
Investment in discontinued operations (Note 2)........................ -- 743.6
Other................................................................. 15.0 4.9
-------- --------
Total current assets.......................................... 233.1 968.7
Investments:
Equity in consolidated subsidiaries (Note 1).......................... 5,551.4 1,634.8
Receivables from consolidated subsidiaries............................ 68.7 387.8
-------- --------
5,620.1 2,022.6
Other................................................................. -- 44.0
-------- --------
5,620.1 2,066.6
Property, plant and equipment--net...................................... 20.6 36.3
Other assets and deferred charges....................................... 23.9 14.8
-------- --------
Total assets.................................................. $5,897.7 $3,086.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable......................................................... $ -- $ 73.8
Due to consolidated subsidiaries...................................... 291.9 137.6
Accounts payable and accrued liabilities.............................. 100.2 84.1
Long-term debt due within one year (Note 4)........................... 20.0 361.5
-------- --------
Total current liabilities..................................... 412.1 657.0
Long-term debt (Note 4)................................................. 1,460.0 763.0
Long-term debt due to consolidated subsidiary (Note 4).................. 360.0 --
Due to consolidated subsidiaries........................................ 440.5 --
Other liabilities....................................................... 38.0 160.9
Stockholders' equity:
Preferred stock....................................................... 173.5 100.0
Common stock.......................................................... 105.3 104.4
Capital in excess of par value........................................ 1,051.1 991.0
Retained earnings..................................................... 1,915.6 716.5
Unamortized deferred compensation..................................... (2.3) (1.3)
-------- --------
3,243.2 1,910.6
Less treasury stock (Notes 4 and 5)................................... (56.1) (405.1)
-------- --------
Total stockholders' equity.................................... 3,187.1 1,505.5
-------- --------
Total liabilities and stockholders' equity.................... $5,897.7 $3,086.4
======== ========
See accompanying notes.
F-47
71
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
STATEMENT OF CASH FLOWS (PARENT)
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- ------- -------
(MILLIONS)
Operating activities:
Net income............................................. $ 1,318.2 $ 246.7 $ 231.8
Adjustments to reconcile to cash provided from
operations:
Equity in subsidiaries' income, net of cash
dividends......................................... 732.7 153.1 (60.0)
Discontinued operations............................. (1,018.8) (94.0) (46.4)
Extraordinary loss.................................. -- 12.2 --
Depreciation........................................ 4.2 4.3 4.2
Provision (credit) for deferred income taxes........ 13.0 20.8 (1.7)
Gain on sales of property, plant and equipment...... -- -- (52.1)
Changes in receivables.............................. 33.3 (59.5) 5.0
Changes in other current assets..................... 5.0 (7.1) 1.4
Changes in accounts payable......................... (2.7) 3.0 (.7)
Changes in accrued liabilities...................... (.2) (12.1) (18.7)
Other, including changes in non-current assets and
liabilities....................................... (7.2) (2.5)* 58.5
--------- ------- -------
Net cash provided by operating activities...... 1,077.5 264.9 121.3
--------- ------- -------
Financing activities:
Proceeds from notes payable............................ 53.4 73.8 --
Payments of notes payable.............................. (127.2) -- --
Proceeds from long-term debt........................... 85.0 350.0 --
Payments of long-term debt............................. (549.2) (181.7) (128.8)
Proceeds from issuance of common stock................. 32.0 26.4 63.4
Purchase of treasury stock............................. (3.7) (18.4) --
Dividends paid......................................... (119.0) (93.9) (89.4)
Other -- net........................................... (3.7) -- (.6)
--------- ------- -------
Net cash provided (used) by financing
activities................................... (632.4) 156.2* (155.4)
--------- ------- -------
Investing activities:
Property, plant and equipment:
Capital expenditures................................ (2.8) (1.1) (1.6)
Proceeds from sales of property, plant and
equipment......................................... 1.0 -- 115.1
Purchase of note receivable............................ (75.1) -- --
Investments in consolidated subsidiaries............... (1,248.1) (71.2) (75.3)
Changes in advances to subsidiaries.................... 914.7 (354.4) 1.0
Other -- net........................................... 6.3 (4.0) (.6)
--------- ------- -------
Net cash provided (used) by investing
activities................................... (404.0) (430.7) 38.6
--------- ------- -------
Increase (decrease) in cash and cash
equivalents.................................. 41.1 (9.6) 4.5
Cash and cash equivalents at beginning of year......... 16.5 26.1 21.6
--------- ------- -------
Cash and cash equivalents at end of year............... $ 57.6 $ 16.5 $ 26.1
========= ======= =======
See accompanying notes.
- ---------------
* Reclassified to conform to current classification.
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THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
NOTES TO FINANCIAL INFORMATION (PARENT)
NOTE 1. TRANSCO ENERGY ACQUISITION
On January 18, 1995, Williams acquired 60 percent of Transco Energy's
outstanding common stock in a cash tender offer for $430.5 million. Williams
acquired the remaining 40 percent of Transco Energy's outstanding common stock
on May 1, 1995, through a merger by exchanging the remaining Transco Energy
common stock for approximately 10.4 million shares of Williams common stock
valued at $334 million. The acquisition is accounted for as a purchase with 60
percent of Transco Energy's results of operations included in Williams'
Consolidated Statement of Income for the period January 18, 1995, through April
30, 1995, and 100 percent included beginning May 1, 1955. See Note 2 of Notes to
Consolidated Financial Statements for additional information on the Transco
Energy acquisition.
NOTE 2. DISCONTINUED OPERATIONS
On January 5, 1995, Williams sold its network services operations 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 $732 million) which is reported
as income from discontinued operations. Prior period operating results for the
network services operations are reported as discontinued operations. See Note 3
of Notes to Consolidated Financial Statements for additional information on
discontinued operations.
NOTE 3. SALES OF ASSETS
In a 1993 public offering, Williams sold 6.1 million units 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 a subsidiary
of Williams.
NOTE 4. LONG-TERM DEBT AND LEASES
During 1995, Williams issued $360 million in convertible debentures and
warrants to a wholly-owned subsidiary in exchange for 12.2 million shares of
Williams common stock held by that subsidiary (see Note 5). 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. The warrants
give the subsidiary the right to purchase 7.5 million shares of Williams common
stock at $46.67 per share.
Long-term debt due within one year at December 31, 1994 includes $350
million of borrowings under Williams' credit agreement. Amounts were repaid in
January 1995.
Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments, for each of the next five years are as follows: 1996 -- $20 million;
1997 -- none; 1998 -- $310 million; 1999 -- $150 million; and 2000 -- $175
million. See Note 13 of Notes to Consolidated Financial Statements for
additional information on long-term debt.
NOTE 5. STOCKHOLDERS' EQUITY
In connection with the May 1, 1995, merger with Transco Energy, Williams
exchanged all of Transco Energy's outstanding $3.50 cumulative convertible
preferred stock for 2.5 million shares of Williams' $3.50 cumulative convertible
preferred stock. See Note 14 of Notes to Consolidated Financial Statements for
additional information on this exchange.
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73
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONCLUDED)
NOTES TO FINANCIAL INFORMATION (PARENT)
During 1995, Williams exchanged 2.8 million shares of its $2.21 cumulative
preferred stock with a carrying value of $69 million for 9.6 percent debentures.
See Note 14 of Notes to Consolidated Financial Statements for additional
information on this exchange.
For financial reporting purposes, treasury stock of $394.8 million held at
December 31, 1994, by a wholly-owned subsidiary of Williams has been presented
as a reduction of stockholders' equity. A portion of this treasury stock was
used in the acquisition of Transco Energy (see Note 1).
The Financial Accounting Standards Board has issued a new accounting
standard, FAS No. 123, "Accounting for Stock-Based Compensation," effective for
fiscal years beginning after December 15, 1995. As provided for in the standard,
Williams will not adopt the recognition provisions and will provide the pro
forma net income and earnings-per-share disclosures required by the standard in
its 1996 annual financial statements.
Williams currently follows Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees." Under this standard, because the
exercise price of Williams' fixed plan common stock options equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
NOTE 6. DIVIDENDS RECEIVED
Cash dividends from subsidiaries and companies accounted for on an equity
basis are as follows: 1995 -- $1,110.2 million; 1994 -- $354.2 million; and
1993 -- $142.6 million.
NOTE 7. INCOME TAX AND INTEREST PAYMENTS
Cash payments for income taxes are as follows: 1995 -- $326 million;
1994 -- $112 million; and 1993 -- $118 million.
Cash payments for interest are as follows: 1995 -- $127.9 million;
1994 -- $90 million; and 1993 -- $96.6 million.
NOTE 8. FINANCIAL INSTRUMENTS
Disclosure of financial instruments for the parent company are included in
the consolidated disclosures. See Note 15 of Notes to Consolidated Financial
Statements.
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THE WILLIAMS COMPANIES, 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:
1995.............................. $ 7.9 $3.8 $1.6 (c) $ 2.0 $11.3
1994.............................. 10.2 4.2(d) -- 6.5(e) 7.9
1993.............................. 17.3 .5(f) -- 7.6 10.2
- ---------------
(a) Deducted from related assets.
(b) Represents balances written off, net of recoveries and reclassifications.
(c) Relates primarily to acquisition of businesses.
(d) Excludes $5.7 million related to discontinued operations.
(e) Includes the discontinued operations beginning balance reclassification of
$3.6 million.
(f) Includes $4.1 million reversal of amounts previously accrued.
F-51
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Directors and nominees for Director of
Williams required by Item 401 of Regulation S-K is presented under the heading
"Election of Directors" in Williams' Proxy Statement prepared for the
solicitation of proxies in connection with the Annual Meeting of Stockholders of
the Company for 1996 (the "Proxy Statement"), which information is incorporated
by reference herein. A copy of the Proxy Statement is filed as an exhibit to the
Form 10-K. Information regarding the executive officers of Williams is presented
following Item 4 herein, as permitted by General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item
405 of Regulation S-K is included under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement, which
information is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K regarding executive
compensation is presented under the headings "Election of Directors" and
"Executive Compensation and Other Information" in the Proxy Statement, which
information is incorporated by reference herein. Notwithstanding the foregoing,
the information provided under the headings "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation" in the
Proxy Statement are not incorporated by reference herein. A copy of the Proxy
Statement is filed as an exhibit to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding the security ownership of certain beneficial
owners and management required by Item 403 of Regulation S-K is presented under
the headings "Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement, which information is incorporated by reference herein. A
copy of the Proxy Statement is filed as an exhibit to the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no information regarding certain relationships and related
transactions required by Item 404 of Regulation S-K to be reported in response
to this Item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. The financial statements and schedules listed in the
accompanying index to consolidated financial statements are filed as part of
this annual report.
(a) 3 and (c). The exhibits listed below are filed as part of this annual
report.
Exhibit 2 --
*(a) Agreement and Plan of Merger, dated as of December 12, 1994,
among Williams, WC Acquisition Corp. and Transco (filed as Exhibit
(c)(1) to Schedule 14D-1, dated December 16, 1994).
*(b) Amendment to Agreement and Plan of Merger, dated as of
February 17, 1995 (filed as Exhibit 6 to Amendment No. 8 to Schedule
13D, dated February 23, 1995).
Exhibit 3 --
*(a) Restated Certificate of Incorporation of Williams (filed as
Exhibit 4(a) to Form 8-B Registration Statement, filed August 20, 1987).
F-52
76
*(b) Certificate of Designation with respect to the $2.21
Cumulative Preferred Stock (filed as Exhibit 4.3 to the Registration
Statement on Form S-3, filed August 19, 1992).
*(c) Certificate of Increase of Authorized Number of Shares of
Series A Junior Participating Preferred Stock (filed as Exhibit 3(c) to
Form 10-K for the year ended December 31, 1988).
*(d) Certificate of Amendment of Restated Certificate of
Incorporation, dated May 20, 1994 (filed as Exhibit 3(d) to Form 10-K
for the fiscal year ended December 31, 1994).
*(e) Certificate of Designation with respect to the $3.50
Cumulative Convertible Preferred Stock (filed as Exhibit 3.1(c) to the
Prospectus and Information Statement to Amendment No. 2 to the
Registration Statement on Form S-4, filed March 30, 1995).
(f) Certificate of Increase of Authorized Number of Shares of
Series A Junior Participating Preferred Stock.
*(g) Rights Agreement, dated as of February 6, 1996, between
Williams and First Chicago Trust Company of New York (filed as Exhibit 4
to Williams Form 8-K, filed January 24, 1996).
*(h) By-laws of Williams (filed as Exhibit 3 to Form 10-Q for the
quarter ended September 30, 1993).
Exhibit 4 --
*(a) Form of Senior Debt Indenture between the Company and Chemical
Bank, Trustee, relating to the 10 1/4% Debentures, due 2020; the 9 3/8%
Debentures, due 2021; the 8 1/4% Notes, due 1998; Medium-Term Notes
(8.50%-9.31%), due 1996 through 2001; the 7 1/2% Notes, due 1999, and
the 8 7/8% Debentures, due 2012 (filed as Exhibit 4.1 to Form S-3
Registration Statement No. 33-33294, filed February 2, 1990).
*(b) U.S. $800,000,000 Credit Agreement, dated as of February 23,
1995, among Williams and certain of its subsidiaries and the banks named
therein and Citibank, N.A., as agent (filed as Exhibit 4(b) to Form 10-K
for the fiscal year ended December 31, 1994).
Exhibit 10(iii) -- Compensatory Plans and Management Contracts
*(a) The Williams Companies, Inc. Supplemental Retirement Plan,
effective as of January 1, 1988 (filed as Exhibit 10(iii)(c) to Form
10-K for the year ended December 31, 1987).
*(b) Form of Employment Agreement, dated January 1, 1990, between
Williams and certain executive officers (filed as Exhibit 10(iii)(d) to
Form 10-K for the year ended December 31, 1989).
*(c) Form of The Williams Companies, Inc. Change in Control
Protection Plan between Williams and employees (filed as Exhibit
10(iii)(e) to Form 10-K for the year ended December 31, 1989).
*(d) The Williams Companies, Inc. 1985 Stock Option Plan (filed as
Exhibit A to Williams' Proxy Statement, dated March 13, 1985).
*(e) The Williams Companies, Inc. 1988 Stock Option Plan for
Non-Employee Directors (filed as Exhibit A to Williams' Proxy Statement,
dated March 14, 1988).
*(f) The Williams Companies, Inc. 1990 Stock Plan (filed as Exhibit
A to Williams' Proxy Statement, dated March 12, 1990).
(g) The Williams Companies, Inc. Stock Plan for Non-Officer
Employees.
*(h) The Williams Companies, Inc. 1996 Stock Plan (filed as Exhibit
A to Williams' Proxy Statement, dated March 27, 1996).
*(i) The Williams Companies, Inc. 1996 Stock Plan for Non-Employee
Directors (filed as Exhibit B to Williams' Proxy Statement, dated March
27, 1996).
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77
*(j) Indemnification Agreement, effective as of August 1, 1986,
between Williams and members of the Board of Directors and certain
officers of Williams (filed as Exhibit 10(iii)(e) to Form 10-K for the
year ended December 31, 1986).
Exhibit 11 -- Computation of Earnings Per Common and Common-equivalent
Share.
Exhibit 12 -- Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividend Requirements.
Exhibit 20 -- Definitive Proxy Statement of Williams for 1996.
Exhibit 21 -- Subsidiaries of the registrant.
Exhibit 23 -- Consent of Independent Auditors.
Exhibit 24 -- Power of Attorney together with certified resolution.
Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Williams with the Securities and
Exchange Commission during the fourth quarter of 1995.
(d) The financial statements of partially-owned companies are not presented
herein since none of them individually, or in the aggregate, constitute a
significant subsidiary.
- ---------------
* Each such exhibit has heretofore been filed with the Securities and Exchange
Commission as part of the filing indicated and is incorporated herein by
reference.
F-54
78
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE WILLIAMS COMPANIES, INC.
(Registrant)
By: /s/ DAVID M. HIGBEE
-----------------------------
David M. Higbee
Attorney-in-fact
Dated: March 27, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
/s/ KEITH E. BAILEY* Chairman of the Board, President, Chief
- --------------------------------------------- Executive Officer (Principal Executive
Keith E. Bailey Officer) and Director
/s/ JACK D. MCCARTHY* Senior Vice President -- Finance (Principal
- --------------------------------------------- Financial Officer)
Jack D. McCarthy
/s/ GARY R. BELITZ* Controller (Principal Accounting Officer)
- ---------------------------------------------
Gary R. Belitz
/s/ HAROLD W. ANDERSEN* Director
- ---------------------------------------------
Harold W. Andersen
/s/ RALPH E. BAILEY* Director
- ---------------------------------------------
Ralph E. Bailey
/s/ GLENN A. COX* Director
- ---------------------------------------------
Glenn A. Cox
/s/ THOMAS H. CRUIKSHANK* Director
- ---------------------------------------------
Thomas H. Cruikshank
/s/ ERVIN S. DUGGAN* Director
- ---------------------------------------------
Ervin S. Duggan
/s/ PATRICIA L. HIGGINS* Director
- ---------------------------------------------
Patricia L. Higgins
/s/ ROBERT J. LAFORTUNE* Director
- ---------------------------------------------
Robert J. LaFortune
/s/ JAMES C. LEWIS* Director
- ---------------------------------------------
James C. Lewis
II-1
79
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
/s/ JACK A. MACALLISTER* Director
- ---------------------------------------------
Jack A. MacAllister
/s/ JAMES A. MCCLURE* Director
- ---------------------------------------------
James A. McClure
/s/ PETER C. MEINIG* Director
- ---------------------------------------------
Peter C. Meinig
/s/ KAY A. ORR* Director
- ---------------------------------------------
Kay A. Orr
/s/ GORDON R. PARKER* Director
- ---------------------------------------------
Gordon R. Parker
/s/ JOSEPH H. WILLIAMS* Director
- ---------------------------------------------
Joseph H. Williams
*By /s/ DAVID M. HIGBEE
----------------------------------------
David M. Higbee
Attorney-in-fact
Dated: March 27, 1996
II-2