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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-20555
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WILLIAMS HOLDINGS OF DELAWARE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 73-1455707
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(State of Incorporation) (IRS Employer Identification Number)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
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(Address of principal executive office) (Zip Code)
Registrant's telephone number: (918) 588-2000
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NO CHANGE
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Former name, former address and former
fiscal year, if changed since last report.
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
----- -----
The number of shares of the registrant's Common Stock outstanding at May 15,
1998, was 1,000, all of which are owned by The Williams Companies, Inc.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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WILLIAMS HOLDINGS OF DELAWARE, INC.
INDEX
Part I. Financial Information Page
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Item 1. Financial Statements
Consolidated Statement of Income--Three Months Ended
March 31, 1998 and 1997 2
Consolidated Balance Sheet--March 31, 1998 and December 31, 1997 3
Consolidated Statement of Cash Flows--Three Months Ended
March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of the Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Williams Holdings of Delaware, Inc.
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be achieved. Such statements
are made in reliance on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995. Additional information about issues
that could lead to material changes in performance is contained in the Williams
Holdings of Delaware, Inc.'s Current Report on Form 8-K filed April 29, 1998.
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Williams Holdings of Delaware, Inc.
Consolidated Statement of Income
(Unaudited)
(Millions)
-------------------------
Three months ended
March 31,
-------------------------
1998 1997*
-------------------------
Revenues (Note 9):
Energy Services:
Energy Marketing & Trading $ 139.1 $ 196.4
Exploration & Production 40.6 37.8
Midstream Gas & Liquids 288.8 374.1
Petroleum Services 724.5 705.1
Communications (Note 2) 387.8 216.6
Other 12.2 9.9
Intercompany eliminations (88.5) (83.5)
-------- --------
Total revenues 1,504.5 1,456.4
-------- --------
Profit-center costs and expenses (Note 9):
Costs and operating expenses 1,225.2 1,198.0
Selling, general and administrative expenses 171.3 103.9
Other (income) expense--net (Note 2) 35.0 (.4)
-------- --------
Total profit-center costs and expenses 1,431.5 1,301.5
-------- --------
Operating profit:
Energy Services:
Energy Marketing & Trading 14.2 29.4
Exploration & Production 12.3 10.6
Midstream Gas & Liquids 63.0 82.5
Petroleum Services 35.9 34.7
Merger-related costs (Note 3) (35.9) --
Communications (Note 2) (20.1) (2.0)
Other 3.6 (.3)
-------- --------
Total operating profit 73.0 154.9
General corporate expenses (Note 3) (31.8) (13.9)
Interest accrued (Note 9) (34.3) (26.3)
Interest capitalized 7.4 1.3
Investing income (Note 9) 9.5 12.7
Gain on sale of assets (Note 4) -- 66.0
Minority interest in income of consolidated subsidiaries (2.3) (1.1)
Other (income) expense--net (Note 2) (4.2) 1.1
-------- --------
Income before income taxes and extraordinary loss 17.3 194.7
Provision for income taxes (Note 5) 6.8 69.7
-------- --------
Income before extraordinary loss 10.5 125.0
Extraordinary loss (4.8) --
-------- --------
Net income $ 5.7 $ 125.0
======== ========
* Amounts have been restated to reflect the acquisition of MAPCO Inc., which
has been accounted for as a pooling of interests. (See Note 2 for additional
information.)
See accompanying notes.
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Williams Holdings of Delaware, Inc.
Consolidated Balance Sheet
(Unaudited)
(Millions)
----------------------------
March 31, December 31,
1998 1997*
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 98.2 $ 96.0
Receivables:
Trade 1,223.6 1,419.0
Affiliates 41.3 43.8
Due from parent -- 93.0
Inventories (Note 7) 320.6 315.6
Commodity trading assets 232.3 180.3
Deferred income taxes - affiliates 86.2 86.1
Other 97.1 113.9
---------- ----------
Total current assets 2,099.3 2,347.7
Due from parent -- 181.3
Investments, primarily in affiliates 1,305.8 1,175.9
Property, plant and equipment, at cost 6,483.5 6,223.9
Less accumulated depreciation and depletion (1,732.3) (1,690.3)
---------- ----------
4,751.2 4,533.6
Goodwill and other intangible assets--net 605.5 600.6
Non-current commodity trading assets 168.5 141.4
Other assets and deferred charges 129.8 122.4
---------- ----------
Total assets $ 9,060.1 $ 9,102.9
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable (Note 8) $ 696.9 $ 701.0
Accounts payable:
Trade 904.1 1,143.7
Affiliates 79.3 69.2
Accrued liabilities 524.7 528.4
Commodity trading liabilities 233.6 182.0
Long-term debt due within one year (Note 8) 4.3 75.7
---------- ----------
Total current liabilities 2,442.9 2,700.0
Long-term debt (Note 8 and Note 9)
Affiliates 275.6 --
Other 1,294.3 1,525.5
Deferred income taxes - affiliates 860.1 807.8
Non-current commodity trading liabilities 226.5 201.7
Other liabilities 200.6 197.6
Minority interest in consolidated subsidiaries 173.4 144.8
Contingent liabilities and commitments (Note 10)
Stockholder's equity:
Common stock, $1 par value, 1,000 shares authorized and outstanding -- --
Capital in excess of par value 1,675.0 1,664.8
Retained earnings 1,605.5 1,616.6
Net unrealized gain on non-current marketable securities 308.3 244.1
Other (2.1) --
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Total stockholder's equity 3,586.7 3,525.5
---------- ----------
Total liabilities and stockholder's equity $ 9,060.1 $ 9,102.9
========== ==========
*Amounts have been restated to reflect the acquisition of MAPCO Inc., which has
been accounted for as a pooling of interests. (See Note 2 for additional
information.)
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Williams Holdings of Delaware, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
(Millions)
----------------------------
Three months ended March 31,
----------------------------
1998 1997*
----------------------------
OPERATING ACTIVITIES:
Net income $ 5.7 $ 125.0
Adjustments to reconcile to cash provided from operations:
Extraordinary loss 4.8 --
Depreciation, depletion and amortization 76.7 65.6
Provision for deferred income taxes 9.2 5.4
Gain on dispositions of property (1.0) (69.5)
Minority interest in income of consolidated subsidiaries 2.3 1.1
Cash provided (used) by changes in assets and liabilities:
Receivables sold -- 200.0
Receivables 234.5 209.5
Inventories (4.0) (4.5)
Other current assets 10.2 26.9
Accounts payable (238.8) (317.0)
Accrued liabilities (52.2) (9.2)
Receivables/payables with affiliates 11.7 59.8
Current commodity trading assets and liabilities (.4) (10.8)
Non-current commodity trading assets and liabilities (2.4) .5
Other, including changes in non-current assets and liabilities 8.7 3.6
-------- --------
Net cash provided by operating activities 65.0 286.4
-------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable 49.7 --
Payments of notes payable (197.2) (116.2)
Proceeds from long-term debt 197.4 284.0
Payments of long-term debt (364.3) (103.9)
Changes in parent company advances 275.6 --
Dividends (13.9) (49.6)
Capital contributions 8.2 4.2
Other--net 25.7 (3.9)
-------- --------
Net cash provided (used) by financing activities (18.8) 14.6
--------- --------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (299.6) (112.5)
Proceeds from dispositions 2.6 6.5
Acquisition of businesses, net of cash acquired -- (19.7)
Proceeds from sales assets -- 66.0
Purchase of investments/advances to affiliate (14.6) (131.4)
Changes in advances to parent company 274.3 (102.7)
Other--net (6.7) 17.0
-------- --------
Net cash used by investing activities (44.0) (276.8)
-------- --------
Increase in cash and cash equivalents 2.2 24.2
Cash and cash equivalents at beginning of period 96.0 149.2
-------- --------
Cash and cash equivalents at end of period $ 98.2 $ 173.4
======== ========
* Amounts have been restated to reflect the acquisition of MAPCO Inc., which
has been accounted for as a pooling of interests. (See Note 2 for additional
information.)
See accompanying notes.
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Williams Holdings of Delaware, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
Williams Holdings of Delaware, Inc. (Williams Holdings) is a wholly-owned
subsidiary of The Williams Companies, Inc. (Williams). The accompanying interim
consolidated financial statements of Williams Holdings do not include all notes
in annual financial statements and therefore should be read in conjunction with
the supplemental consolidated financial statements and notes thereto for
Williams Holdings' Current Report on Form 8-K filed April 29, 1998. The
accompanying financial statements have not been audited by independent auditors,
but include all adjustments, both normal recurring and others, which, in the
opinion of Williams Holdings' management, are necessary to present fairly its
financial position at March 31, 1998, and its results of operations and cash
flows for the three months ended March 31, 1998 and 1997.
2. Basis of presentation
On March 28, 1998, Williams Holdings completed the acquisition of MAPCO Inc.
by exchanging shares of Williams common stock for outstanding MAPCO common stock
and employee stock options (see Note 3). Upon completion of the merger,
Williams transferred its interest in MAPCO to Williams Holdings, and MAPCO
became part of the Energy Services business unit. The transaction has been
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements and notes have been restated to reflect the results of
operations, financial position and cash flows as if the companies had been
combined throughout the periods presented. MAPCO is engaged in the NGL pipeline,
petroleum refining and marketing and propane marketing businesses, and has
become part of the Energy Services business unit. MAPCO's propane marketing
operations are included in Energy Marketing & Trading; its natural gas liquids
operations are included in Midstream Gas & Liquids; and its petroleum refining
and retail petroleum operations are included in Petroleum Services. Revenues and
operating profit amounts previously reported as Field Services are now included
in Midstream Gas & Liquids.
On April 30, 1997, Williams and Northern Telecom (Nortel) combined their
customer-premise equipment sales and service operations into a limited liability
company, Williams Communications Solutions, LLC (LLC), formerly WilTel
Communications, LLC. Communications' revenues and operating profit
amounts for 1997 include the operating results of the LLC beginning May 1, 1997.
If the transaction occurred on January 1, 1997, Williams Holdings' unaudited
pro forma revenues for the three months ended March 31, 1997 would have been
$1.6 billion. The pro forma effect of the transaction on Williams Holdings' net
income is not significant. Pro forma financial information is not necessarily
indicative of results of operations that would have occurred if the transaction
had occurred on January 1, 1997, or of future results of operations of the
combined companies.
3. MAPCO acquisition
On November 24, 1997, Williams and MAPCO Inc. announced that they had
entered into a definitive merger agreement whereby Williams would acquire MAPCO
by exchanging 1.665 shares of Williams common stock for each outstanding share
of MAPCO common stock. In addition, outstanding MAPCO employee stock options
would be converted into Williams common stock. The merger was consummated on
March 28, 1998, with the issuance of 98.6 million shares of Williams common
stock.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Intercompany transactions between Williams Holdings
and MAPCO prior to the merger have been eliminated, and no material adjustments
were necessary to conform MAPCO's accounting policies.
In connection with the merger, Williams Holdings recognized approximately
$52 million in merger-related costs comprised primarily of outside professional
fees and early retirement and severance costs. Approximately $36 million of
these merger-related costs are included in other (income) expense-net as a
component of Energy Services' operating profit and approximately $16 million is
included in general corporate expenses. During 1997, payments of $32.6 million
were made for non-compete agreements. These costs will be amortized over one to
three years after the merger completion date.
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Notes (continued)
The results of operations for each company and the combined amounts
presented in Williams Holdings' consolidated statement of income are as follows:
Three Months Ended March 31,
----------------------------
(Millions) 1998 1997
-------- --------
Revenues:
Williams Holdings $ 682.0 $ 529.2
MAPCO 823.8 931.2
Intercompany eliminations (1.3) (4.0)
-------- --------
Combined $1,504.5 $1,456.4
======== ========
Net income (loss):
Williams Holdings (2.7) 52.3
MAPCO 8.4 72.7
-------- --------
Combined $ 5.7 $ 125.0
======== ========
4. Sale of assets
In January 1997, Williams Holdings sold its interest in the natural gas
liquids and condensate reserves in the West Panhandle field of Texas for $66
million in cash. The sale resulted in a $66 million pre-tax gain on the
transaction, because the related reserves had no book value.
5. Provision for income taxes
The provision for income taxes includes:
Three months ended
(Millions) March 31,
----------------------
1998 1997
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Current:
Federal $ (3.5) $ 59.8
State .8 4.5
Foreign .3 --
------- -------
(2.4) 64.3
Deferred:
Federal 8.8 2.8
State .4 2.6
------- -------
9.2 5.4
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Total provision $ 6.8 $ 69.7
======= =======
The effective income tax rate for 1998 and 1997 is greater than the federal
statutory rate due primarily to the effects of state income taxes. Partially
offsetting in 1997 were the effects of income tax credits from coal-seam gas
production.
6. Extraordinary loss
The extraordinary loss in 1998 resulted from the early extinguishment of
debt. Williams Holdings paid $54.4 million to redeem higher interest rate debt
for a $4.8 million net loss (net of a $2.6 million benefit for income taxes).
7. Inventories
March 31, December 31,
--------- ------------
(Millions) 1998 1997
---- ----
Raw materials:
Crude oil $ 31.9 $ 30.5
Other 2.0 5.2
------- -------
33.9 35.7
Finished goods:
Refined petroleum products 145.4 122.3
Fertilizer and natural gas liquids 29.0 43.8
General merchandise &
communications equipment 88.8 90.0
------- -------
263.2 256.1
Materials and supplies 19.5 19.0
Other 4.0 4.8
------- -------
$ 320.6 $ 315.6
======= =======
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Notes (continued)
8. Debt and banking arrangements
Notes Payable
During 1998, Williams Holdings increased its commercial paper program to $1
billion. The commercial paper program is backed by short-term bank-credit
facilities totaling $1 billion. At March 31, 1998, $697 million of commercial
paper was outstanding under the program. Interest rates vary with current market
conditions.
Weighted-
average
interest March 31, December 31,
(Millions) rate* 1998 1997
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Williams Holdings of Delaware, Inc.
Revolving credit loans 6.6% $ 200.0 $ 200.0
Debentures, 6.25% and 7.7%,
payable 2006 and 2027 5.5 351.8 351.8
Notes, 6.365%-8.87%, payable
through 2002 7.7 572.3 572.3
MAPCO Inc. and subsidiaries
Commercial paper and bank
money market lines -- -- 135.8
MAPCO Natural Gas Liquids, Inc.
Notes, 6.67% - 8.95%, payable
through 2022 7.5 165.0 165.0
Williams Communications Solutions, LLC
Revolving credit loans -- -- 125.0
Other, payable through 2005 7.6 9.5 51.3
-------- --------
1,298.6 1,601.2
Current portion of long-term debt (4.3) (75.7)
-------- --------
$1,294.3 $1,525.5
======== ========
* At March 31, 1998, including the effects of interest-rate swaps.
Under Williams $1 billion credit agreement, Williams Communications
Solutions, LLC has access to varying amounts of the facility, while Williams
(parent) and Williams Holdings (parent) have access to all unborrowed amounts.
Interest rates vary with current market conditions.
For financial statement purposes at March 31, 1998, current debt
obligations of $61 million have been classified as non-current obligations based
on Williams Holdings' intent and ability to refinance on a long-term basis. At
March 31, 1998, the amount available on the $1 billion credit agreement of $800
million is sufficient to complete these refinancings.
9. Related party transactions
Williams Holdings and its subsidiaries maintain promissory notes with
Williams for both advances from and advances to Williams depending on the cash
position of each subsidiary. Investing income includes $8.2 million and $7.7
million for the three months ended March 31, 1998 and 1997, respectively, from
advances to affiliates.
Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Central, Northwest Pipeline, Texas Gas Transmission, and
Transcontinental Gas Pipe Line. Energy Marketing & Trading's revenues include
natural gas sales to affiliates of $90.9 million and $105.5 million for the
three months ended March 31, 1998 and 1997, respectively. Energy Marketing &
Trading also incurred costs and operating expenses, including transportation
and certain other costs, from affiliates of $28.8 million and $29.4 million for
the three months ended March 31, 1998 and 1997, respectively. These sales and
costs are included in Energy Marketing & Trading's revenues consistent with a
"net" basis of reporting these activities. Transactions with affiliates are at
prices that generally apply to unaffiliated parties.
10. Contingent liabilities and commitments
Rate and regulatory matters
Williams Pipe Line has various regulatory proceedings pending. As a result
of rulings in these proceedings, a portion of its revenues has been collected
subject to refund. Such revenues were $345 million at March 31, 1998. As a
result of various Federal Energy Regulatory Commission (FERC) rulings in these
and other proceedings, Williams Pipe Line does not expect that the amount of any
refunds ordered would be significant. Accordingly, no portion of these revenues
has been reserved for refund.
Environmental matters
Certain Williams Holdings' subsidiaries have been identified as potentially
responsible parties (PRP) at various Superfund and state waste disposal sites.
In addition, these subsidiaries have incurred or are alleged to have incurred
various other hazardous materials removal or remediation obligations under
environmental laws. Although no assurances can be given, Williams Holdings does
not believe that these obligations or the PRP status of these subsidiaries will
have a material adverse effect on its financial position, results of operations
or net cash flows.
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The Midstream Gas & Liquids unit of Energy Services (WES) has recorded an
aggregate liability of approximately $11 million, representing the current
estimate of its future environmental and remediation costs, including
approximately $5 million relating to former Williams Gas Pipelines Central.
WES also accrues environmental remediation costs for its retail petroleum,
refining and propane marketing operations primarily related to soil and
groundwater contamination. At March 31, 1998, WES and its subsidiaries had
reserves, in addition to the reserves listed above, totaling approximately $23
million. WES recognizes receivables related to environmental remediation costs
from state funds as a result of laws permitting states to reimburse certain
expenses associated with underground storage tank problems and repairs. At
March 31, 1998, WES and its subsidiaries had receivables totaling $12 million.
Other legal matters
On April 7, 1992, a liquefied petroleum gas explosion occurred near an
underground salt dome storage facility located near Brenham, Texas and owned by
an affiliate of MAPCO Inc., Seminole Pipeline Company ("Seminole"). MAPCO Inc.,
as well as Seminole, Mid-America Pipeline Company, MAPCO Natural Gas Liquids
Inc., and other non-MAPCO entities were named as defendants in civil action
lawsuits filed in state district courts located in four Texas counties. Seminole
and the above-mentioned subsidiaries of MAPCO Inc. have settled in excess of
1,600 claims in these lawsuits. The only lawsuit remaining is the Dallmeyer
case, which was tried before a jury in Harris County. In Dallmeyer, the judgment
rendered in March 1996 against defendants Seminole and MAPCO Inc. and its
subsidiaries totaled approximately $72 million, which included nearly $65
million of punitive damages awarded to the 21 plaintiffs.
Both plaintiffs and defendants have appealed the Dallmeyer judgment to the
Court of Appeals for the Fourteenth District of Texas in Harris County. The
defendants seek to have the judgment modified in many respects, including the
elimination of punitive damages as well as a portion of the actual damages
awarded. If the defendants prevail on appeal, it will result in an award
significantly less than the judgment. The plaintiffs have cross-appealed and
seek to modify the judgment to increase the total award plus interest to exceed
$155 million.
In February and March 1998, the Company entered into settlement agreements
involving 17 of the 21 plaintiffs to finally resolve their claims against all
defendants for an aggregate payment of $10 million. These settlements have
satisfied and reduced the judgment on appeal by approximately $42 million.
As to the remaining four plaintiffs, the Company is continuing with
settlement negotiations and believes that any final agreement reached with these
plaintiffs will significantly reduce the Company's liability under the judgment.
Management believes that it has defenses of considerable merit and will
vigorously litigate the Dallmeyer appeal or seek a satisfactory settlement, but
is not able to predict the ultimate outcome of this matter at this time. The
Company has accrued a liability representing an estimate of amounts it expects
to incur to finally resolve all litigation.
In 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit against
Williams Production Company (Williams Production), a wholly-owned subsidiary of
Williams Holdings, 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. In September 1994, the court granted summary judgment in favor of the
defendants, and 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 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. On July 16, 1997, the
U.S. Court of Appeals for the Tenth Circuit reversed the decision of the
district court, held that the Tribe owns the coal-seam gas produced from certain
coal strata on fee lands within the exterior boundaries of the Tribe's
reservation, and remanded the case to the district court for further
proceedings. On September 16, 1997, Amoco Production Company, the class
representative for the defendant class (of which Williams Production is a part),
filed its motion for rehearing en banc before the Court of Appeals. On December
4, 1997, the Tenth Circuit Court of Appeals agreed to rehear the appeal, and on
March 17, 1998, the Court sitting en banc heard oral arguments. The parties
await the Court of Appeals' decision.
Williams Communications, Inc. filed suit on March 20, 1998, against WorldCom
Network Services, Inc. (WorldCom) in district court in Tulsa County in order to
prevent WorldCom from disconnecting any Williams Holdings' equipment on the
WorldCom network. This suit seeks a declaratory judgment that the single fiber
retained by Williams Holdings on the WorldCom network can be used for specified
multimedia uses and that WorldCom is required to permit Williams Holdings to
purchase additional fiber either acquired or constructed by WorldCom.
WorldCom has denied Williams Holdings' claims and has asserted various
counterclaims for monetary damages, recession and injunctive relief.
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. Transco Energy
Company and Transco Gas Supply Company (wholly-owned subsidiaries of Williams
Holdings) have also been named as defendants in certain of these lawsuits. As a
result of such settlements, Transcontinental Gas Pipe Line is currently
defending two lawsuits brought by producers. In one of the cases, a jury verdict
found that Transcontinental Gas Pipe Line was required to pay a producer damages
of $23.3 million including $3.8 million in attorneys' fees. Transcontinental Gas
Pipe Line intends to appeal. In the other case, a producer has asserted damages,
including interest calculated through December 31, 1997, of approximately $6
million.
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Notes (continued)
Producers have received and 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 FERC Order 528.
In addition to the foregoing, various other proceedings are pending against
Williams Holdings or its subsidiaries incidental to their operations.
Summary
While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements, will have a materially adverse effect upon Williams Holdings'
future financial position, results of operations or cash flow requirements.
11. Adoption of accounting standards
The Financial Accounting Standards Board issued two new accounting
standards, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," and SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." Both standards, effective for fiscal years
beginning after December 15, 1997, are disclosure-oriented standards. Therefore,
neither standard will affect Williams' reported consolidated net income or cash
flows.
12. Comprehensive income
Comprehensive income for the three months ended March 31 is as follows:
(Millions) 1998 1997
------- -------
Net income $ 5.7 $ 125.0
Other comprehensive income:
Unrealized gain on debentures 93.4 85.8
Unrealized gains on securities 13.3 --
Foreign currency translation
adjustments (2.1) --
------- -------
Comprehensive income before taxes 110.3 210.8
Income taxes 42.5 34.3
------- -------
Comprehensive income $ 67.8 $ 176.5
======= =======
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ITEM 2.
Management's Narrative Analysis of
the Results of Operations
MAPCO Acquisition
On November 24, 1997, Williams (Williams Holdings' parent) and MAPCO Inc.
announced that they had entered into a definitive merger agreement whereby
Williams would acquire MAPCO by exchanging 1.665 shares of Williams common stock
for each outstanding share of MAPCO common stock. In addition, outstanding MAPCO
employee stock options would be converted into Williams common stock. The merger
was consummated on March 28, 1998, with the issuance of 98.6 million shares of
Williams common stock. MAPCO is engaged in the NGL pipeline, petroleum refining
and marketing and propane marketing businesses. Upon completion of the merger,
Williams transferred its interest in MAPCO to Williams Holdings, and MAPCO
became part of the Energy Services business unit.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period financial information
presented has been restated to include the combined results of operations and
financial condition of MAPCO as though it had always been a part of Williams
Holdings.
Results of Operations
First Quarter 1998 vs. First Quarter 1997
ENERGY MARKETING & TRADING'S revenues decreased $57.3 million, or 29
percent, due primarily to the $47 million impact of lower average propane sales
prices as compared to 1997 when sales prices were unusually high. Revenues
associated with the natural gas and petroleum products price-risk management
business decreased $19 million due to unfavorable market movement against both
the natural gas and petroleum products portfolios, attributable in part to a
warmer than normal winter over much of the country, lower natural gas market
volatility and significant short-term market volatility for crude oil. In
addition, natural gas contract origination revenues declined. Partially
offsetting the decreases were increases in natural gas and petroleum products
physical and notional trading volumes, $10 million higher revenues from
increased propane sales volumes and higher revenues from an increase in electric
power marketing. Costs and operating expenses decreased $51 million, or 34
percent, due primarily to lower average propane purchase prices. Operating
profit decreased $15.2 million, or 52 percent, due primarily to the net decline
in revenues from price-risk management and energy trading activities and a $10
million increase in general and administrative expenses related to increased
infrastructure, partially offset by $7 million of higher propane margins.
EXPLORATION & PRODUCTION'S revenues increased $2.8 million, or 7 percent,
due primarily to the recognition of $8 million in deferred income resulting from
a transaction that transferred certain tax credits to a third party, and an
increase in both company-owned production volumes sold and marketing volumes
from Williams Coal Seam Gas Royalty Trust, partially offset by lower average
natural gas sales prices. Operating profit increased $1.7 million, or 16
percent, due primarily to the recognition of deferred income and increased
company-owned production, substantially offset by lower average sales prices,
higher depreciation and depletion and increased dry hole costs.
MIDSTREAM GAS & LIQUIDS' revenues decreased $85.3 million, or 23 percent,
due primarily to a $17 million impact from the shutdown of the Canadian
marketing operations, lower liquids sales from processing activities of $11
million, $8 million lower pipeline transportation revenues resulting from
decreased shipments, and a decline in revenues from liquids marketing of $49
million. These decreases were slightly offset by $6 million higher gathering
revenues due to higher average gathering rates. The $11 million decrease in
liquids sales from processing activities reflects lower average liquids prices,
partially offset by 13 percent higher volumes. The $49 million decrease in
liquids marketing revenues reflects significantly lower average sales prices
combined with decreased volumes. Costs and operating expenses decreased $64
million, or 23 percent, due primarily to lower liquids marketing purchases and
the shutdown of the Canadian marketing operations. Operating profit decreased
$19.5 million, or 24 percent, due primarily to $11 million lower per-unit
liquids margins from processing activities, decreased pipeline shipments and
higher operating, maintenance and depreciation expenses, partially offset by
higher gathering revenues.
PETROLEUM SERVICES' revenues increased $19.4 million, or 3 percent, due
primarily to revenues of $13 million from energy information management
operations not present in 1997, a $10 million increase in convenience store
merchandise sales following the May 1997 EZ-Serve acquisition and $6 million
from higher ethanol sales, partially offset by a $10 million decrease in retail
gasoline and diesel fuel sales reflecting lower average prices. The ethanol
sales increase reflects 33 percent higher ethanol sales volumes partially offset
by lower average ethanol sales prices. A $176 million revenue increase from
refining operations due to increases in processed and purchased barrels sold was
offset by significantly lower average sales prices. Costs and operating expenses
increased $17.1 million, or 3 percent, due primarily to $16 million in operating
costs of energy information management
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operations not present in 1997, a $12 million increase in merchandise purchases
and convenience store operating costs following the May 1997 EZ-Serve
convenience stores acquisition, $6 million associated with increased ethanol
production, and increased maintenance and production costs of $5 million at the
Memphis refinery, partially offset by $19 million lower crude and refined
product purchases. The decrease in crude purchases reflects a $191 million
decrease due to lower average purchase prices, substantially offset by a $172
million increase due to increased volumes purchased. Operating profit increased
$1.2 million, or 3 percent, due primarily to a $17 million increase in margins
from refining operations reflecting increased volumes sold and $2 million lower
transportation operating expenses, substantially offset by $5 million higher
maintenance and production costs at the Memphis refinery, $8 million from lower
per-unit margins from refining operations and $3 million of operating loss
associated with the new energy information management operations.
COMMUNICATIONS' revenues increased $171.2 million, or 79 percent, primarily
because first-quarter 1998 includes $147 million of revenue from the customer
premise equipment sales and services operations of Northern Telecom (Nortel)
which were combined with Williams in the second quarter of 1997. The number of
ports in service at March 31, 1998, more than doubled from March 31, 1997, while
fiber billable minutes from occasional service decreased 10 percent from the
first quarter 1997. Dedicated service voice-grade equivalent miles at March 31,
1998, increased 32 percent as compared with March 31, 1997. Costs and operating
expenses increased $135 million, or 84 percent, due primarily to the combination
with Nortel and increased business activity. Selling, general, and
administrative expenses increased $55 million, or 96 percent, due primarily to
the combination with Nortel, increased business activity and the expansion of
the infrastructure in support of the development of a new national digital
fiber-optic network. Operating profit decreased $18.1 million to a $20.1 million
operating loss, due primarily to the increased costs of substantially expanding
the infrastructure.
GENERAL CORPORATE EXPENSE increased $17.9 million, or 129 percent, due
primarily to MAPCO merger-related costs. An additional $35.9 million of such
costs are included in other (income) expense - net as a component of Energy
Services' operating profit. Interest accrued increased $8 million, or 30
percent, due primarily to higher borrowing levels including Williams Holdings'
commercial paper program, partially offset by a lower average interest rate. The
lower average interest rate reflects the impact of lower rates on commercial
paper borrowings. Interest capitalized increased $6.1 million to $7.4 million
due primarily to capital expenditures for Communications' fiber-optic network
and the Discovery pipeline project. Investing income decreased $3.2 million, or
25 percent, due primarily to a decrease in equity earnings. The $66 million 1997
gain on sale of assets results from the sale of Williams Holdings' interest in
the liquids and condensate reserves in the West Panhandle field of Texas (see
Note 4). Other income (expense) - net is $5.2 million unfavorable as compared to
1997 due primarily to a 1997 gain of $4 million on the termination of interest
rate swap agreements.
The $62.9 million, or 90 percent, decrease in the provision for income taxes
is primarily a result of lower pre-tax income. The effective income tax rate in
1998 and 1997 exceeds the federal statutory rate due primarily to the effects of
state income taxes. Partially offsetting in 1997 were income tax credits from
coal-seam gas production.
The $4.8 million 1998 extraordinary loss results from the early
extinguishment of debt (see Note 6).
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Year 2000 Compliance
Williams and its wholly-owned subsidiaries, which includes Williams Holdings,
initiated an enterprise-wide project in 1997 to address the year 2000 compliance
issue for all technology hardware and software, external interfaces with
customers and suppliers, operations process control, automation and
instrumentation systems, and facility items. The assessment phase of this
project as it relates to traditional information technology areas has been
substantially completed. The assessment phase for non-traditional information
technology areas has been completed for certain business units and is expected
to be substantially completed in mid-1998 for the other business units.
Necessary conversion, replacement and testing activities have begun and will
continue throughout the process. Williams Holdings has initiated a formal
communications process with other companies with which Williams Holdings'
systems interface or rely on to determine the extent to which those companies
are addressing their year 2000 compliance. Where necessary, Williams Holdings
will be working with those companies to mitigate any material adverse effect on
Williams Holdings.
Williams Holdings expects to utilize both internal and external resources to
complete this process. Existing resources will be redeployed and previously
planned system replacements will be accelerated during this time. For example,
implementation of previously planned financial and human resources systems is
currently in process. These systems will address the year 2000 compliance issues
in certain areas. In addition, one of Williams Holdings' subsidiaries, MAPCO,
has replaced or is replacing six major applications. Costs incurred for new
software and hardware purchases will be capitalized and other costs will be
expensed as incurred.
While the total cost of Williams' enterprise-wide project is still being
evaluated, Williams Holdings estimates that future costs, excluding previously
planned system replacements, necessary to complete the project within the
schedule described will total at least $25 million. Williams Holdings will
update this estimate as additional information becomes available. The costs of
the project and the completion dates are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third party year 2000
compliance modification plans and other factors. There can be no guarantee that
these estimates will be achieved and actual results could differ materially
from these estimates.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed below are filed as part of this report:
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges
(b) During the first quarter of 1998, Williams Holdings did not file a
Form 8-K.
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SIGNATURE
Pursuant to the requirements 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.
WILLIAMS HOLDINGS OF DELAWARE, INC.
(Registrant)
/s/ Gary R. Belitz
----------------------------------------
Gary R. Belitz
Controller
(Duly Authorized Officer and
Principal Accounting Officer)
May 15, 1998
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
12 Computation of Ratio of Earnings to fixed charges.