<PAGE> 1
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 June 30, 1996
--------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 of Incorporation) (IRS Employer Identification Number)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
- --------------------------------------- -----------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (918) 588-2000
--------------------------------------------------
NO CHANGE
- --------------------------------------------------------------------------------
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
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at July 31, 1996
- ------------------------------ ------------------------------
Common Stock, $1 par value 104,924,670 Shares
<PAGE> 2
THE WILLIAMS COMPANIES, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Income--Three Months and Six Months
Ended June 30, 1996 and 1995 2
Consolidated Balance Sheet--June 30, 1996 and
December 31, 1995 4
Consolidated Statement of Cash Flows--Six Months
Ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
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
</TABLE>
Portions of this document may constitute "forward-looking statements" as
defined by federal law. Although The Williams Companies, Inc. believes any
such statements are based on reasonable assumptions, there is no assurance that
actual outcomes will not be materially different. Additional information about
issues that could lead to material changes in performance is contained in The
Williams Companies, Inc.'s annual report on Form 10-K.
-1-
<PAGE> 3
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
---------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
----------------------- ------------------------
1996 1995 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Williams Interstate Natural
Gas Systems (Note 4) $402.7 $354.2 $ 858.4 $ 675.5
Williams Field Services Group 167.6 145.0 366.7 277.1
Williams Energy Services 23.5 11.7* 50.2 46.9*
Williams Pipe Line 136.3 69.1 262.8 133.5
WilTel 132.9 116.8 254.9 243.5
WilTech Group 28.6 10.7 47.2 18.6
Other 12.6 2.7 25.2 10.0
Intercompany eliminations (66.7) (46.3) (134.2) (98.8)
------ ------ -------- --------
Total revenues 837.5 663.9 1,731.2 1,306.3
------ ------ -------- --------
Profit-center costs and expenses:
Costs and operating expenses 493.9 400.1* 993.3 751.2*
Selling, general and administrative expenses 142.0 121.3 277.4 235.0
Other income--net (3.8) (1.9) (1.0) (2.0)
------ ------ -------- --------
Total profit-center costs and expenses 632.1 519.5 1,269.7 984.2
------ ------ -------- --------
Operating profit (loss):
Williams Interstate Natural
Gas Systems (Note 4) 124.0 89.8 288.1 186.4
Williams Field Services Group 40.1 34.4 93.3 70.8
Williams Energy Services 13.2 .3 29.6 25.3
Williams Pipe Line 25.8 15.7 44.1 30.5
WilTel 5.0 6.1 8.0 14.0
WilTech Group (3.9) (1.5) (4.1) (3.6)
Other 1.2 (.4) 2.5 (1.3)
------ ------ -------- --------
Total operating profit 205.4 144.4 461.5 322.1
General corporate expenses (7.1) (6.2) (18.2) (18.1)
Interest accrued (90.0) (68.2) (172.1) (136.8)
Interest capitalized .6 4.5 2.4 5.8
Investing income 3.6 23.7 8.1 67.9
Loss on sale of investment (Note 5) - (12.6) - (12.6)
Other expense--net (3.0) (4.2) (6.3) (14.0)
------ ------ -------- --------
Income from continuing operations
before income taxes 109.5 81.4 275.4 214.3
Provision (credit) for income taxes
(Notes 5 and 6) 29.1 (1.9) 90.1 47.8
------ ------ -------- --------
Income from continuing operations 80.4 83.3 185.3 166.5
Income from discontinued operations (Note 7) - - - 1,005.7
------ ------ -------- --------
Net income 80.4 83.3 185.3 1,172.2
Preferred stock dividends 2.6 3.4 5.2 5.5
------ ------ -------- --------
Income applicable to common stock $ 77.8 $ 79.9 $ 180.1 $1,166.7
====== ====== ======== ========
</TABLE>
*Reclassified as described in Note 2.
See accompanying notes.
-2-
<PAGE> 4
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME (concluded)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary earnings per common and
common-equivalent share:
Income from continuing operations $ .72 $ .79 $ 1.67 $ 1.65
Income from discontinued operations (Note 7) - - - 10.27
-------- -------- -------- -------
Net income $ .72 $ .79 $ 1.67 $ 11.92
======== ======== ======== =======
Average shares (thousands) 108,248 101,739 108,004 97,849
Fully diluted earnings per common and
common-equivalent share:
Income from continuing operations $ .71 $ .78 $ 1.65 $ 1.64
Income from discontinued operations (Note 7) - - - 10.12
-------- -------- -------- -------
Net income $ .71 $ .78 $ 1.65 $ 11.76
======== ======== ======== =======
Average shares (thousands) 112,154 104,518 112,033 99,330
Cash dividends per common share $ .34 $ .27 $ .68 $ .54
======== ======== ======== =======
</TABLE>
See accompanying notes.
-3-
<PAGE> 5
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
------------------------------------
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 65.5 $ 90.4
Receivables 631.4 525.0
Transportation and exchange gas receivable 126.7 152.3
Inventories 205.7 189.0
Deferred income taxes 235.5 213.9
Other 196.5 173.2
--------- ---------
Total current assets 1,461.3 1,343.8
Investments 149.5 307.6
Property, plant and equipment, at cost (Note 3) 10,793.1 9,478.7
Less accumulated depreciation and depletion (1,733.2) (1,464.0)
--------- ---------
9,059.9 8,014.7
Other assets and deferred charges 909.7 828.7
--------- ---------
Total assets $11,580.4 $10,494.8
========= =========
</TABLE>
See accompanying notes.
-4-
<PAGE> 6
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET (concluded)
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
-------------------------
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable (Note 10) $ 83.7 $ -
Accounts payable 439.5 472.0
Transportation and exchange gas payable 73.8 127.8
Accrued liabilities (Note 8) 1,016.7 1,130.2
Long-term debt due within one year (Note 10) 311.0 319.9
--------- ---------
Total current liabilities 1,924.7 2,049.9
Long-term debt (Note 10) 3,884.2 2,874.0
Deferred income taxes 1,594.7 1,568.2
Other liabilities 840.2 815.6
Contingent liabilities and commitments (Note 11)
Stockholders' equity:
Preferred stock, $1 par value, 30,000,000 shares
authorized, 3,244,752 shares issued in 1996 and 3,739,452
shares issued in 1995 161.1 173.5
Common stock, $1 par value, 240,000,000 shares
authorized, 106,376,432 shares issued in
1996 and 105,337,948 shares issued in 1995 106.4 105.3
Capital in excess of par value 1,086.3 1,051.1
Retained earnings 2,024.4 1,915.6
Unamortized deferred compensation (2.5) (2.3)
--------- ---------
3,375.7 3,243.2
Less treasury stock (at cost), 1,329,127 shares of
common stock in 1996 and 1,573,203 shares of
common stock in 1995, 401,600 shares of preferred
stock in 1995 (39.1) (56.1)
--------- ---------
Total stockholders' equity 3,336.6 3,187.1
--------- ---------
Total liabilities and stockholders' equity $11,580.4 $10,494.8
========= =========
</TABLE>
See accompanying notes.
-5-
<PAGE> 7
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
---------------------------
Six months ended
June 30,
---------------------------
1996 1995
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 185.3 $ 1,172.2
Adjustments to reconcile to cash provided from
operations:
Discontinued operations - (1,005.7)
Depreciation and depletion 219.0 173.4
Provision for deferred income taxes 2.3 26.9
Loss on sale of investment - 12.6
Changes in receivables sold (22.5) 27.5
Changes in receivables 43.2 136.3
Changes in inventories (12.2) 9.4
Changes in other current assets (5.6) 18.9
Changes in accounts payable (11.9) (107.9)
Changes in accrued liabilities (64.5) (40.9)
Net change in non-current unrealized trading assets
and liabilities (27.7) (26.1)
Other, including changes in non-current assets
and liabilities 30.8 (23.2)
-------- --------
Net cash provided by operating activities 336.2 373.4
FINANCING ACTIVITIES:
Proceeds from notes payable 304.8 -
Payments of notes payable (221.1) (507.0)
Proceeds from long-term debt 1,271.9 95.5
Payments of long-term debt (907.2) (808.4)
Proceeds from issuance of common stock 36.8 15.5
Dividends paid (76.5) (57.2)
Subsidiary preferred stock redemptions - (193.7)
Other--net (5.0) 2.5
-------- ---------
Net cash provided (used) by financing activities 403.7 (1,452.8)
-------- ---------
</TABLE>
See accompanying notes.
-6-
<PAGE> 8
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (concluded)
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
Six months ended
June 30,
--------------------------
1996 1995
---------- ------------
<S> <C> <C>
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures $(273.8) $ (349.5)
Proceeds from sales - 31.4
Changes in accounts payable and accrued liabilities (11.5) 19.0
Acquisition of businesses, net of cash acquired (236.7) (648.1)
Proceeds from sale of businesses - 2,570.4
Income tax and other payments related to discontinued
operations (220.8) (250.3)
Proceeds from sale of investment - 123.7
Purchase of note receivable - (75.1)
Purchase of investments (27.9) -
Other--net 5.9 4.7
------- --------
Net cash provided (used) by investing activities (764.8) 1,426.2
------- --------
Increase (decrease) in cash and cash equivalents (24.9) 346.8
Cash and cash equivalents at beginning of period 90.4 36.1
------- --------
Cash and cash equivalents at end of period $ 65.5 $ 382.9
======= ========
</TABLE>
See accompanying notes.
-7-
<PAGE> 9
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. General
The accompanying interim consolidated financial statements of The Williams
Companies, Inc. (Williams) do not include all notes in annual financial
statements and therefore should be read in conjunction with the financial
statements and notes thereto in Williams' 1995 Annual Report on Form 10-K. The
accompanying unaudited financial statements have not been audited by
independent auditors, but include all adjustments both normal recurring and
others which, in the opinion of Williams' management, are necessary to present
fairly its financial position at June 30, 1996, results of operations for the
three months and six months ended June 30, 1996 and 1995, and cash flows for
the six months ended June 30, 1996 and 1995.
Operating profit of operating companies may vary by quarter. Based on current
rate structures and/or historical maintenance schedules, Transcontinental Gas
Pipe Line and Texas Gas Transmission experience lower operating profits in the
second and third quarters as compared to the first and fourth quarters.
Note 2. Basis of presentation
Revenues and operating profit amounts for the three months and six months ended
June 30, 1995, include the operating results of Transco Energy Company since
its January 18, 1995, acquisition by Williams.
Williams Energy Services' revenues and costs and operating expenses for the
three months and six months ended June 30, 1995, have been reclassified to
report 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.
Note 3. Kern River Gas Transmission acquisition
On January 16, 1996, Williams acquired the remaining interest in Kern River Gas
Transmission Company (Kern River) for $206 million in cash. The acquisition is
accounted for as a purchase and the acquired assets and liabilities have been
recorded based on an allocation of the purchase price. Substantially all of
the purchase price in excess of the carrying value from the January acquisition
of Kern River has been allocated to property, plant and equipment. Revenues
and operating profit amounts for the three months and six months ended June 30,
1996, include the operating results of Kern River since the acquisition date.
Prior to this acquisition, Williams accounted for its 50 percent ownership in
Kern River using the equity method of accounting, with its share of equity
earnings recorded in investing income.
-8-
<PAGE> 10
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Williams Interstate Natural Gas Systems
<TABLE>
<CAPTION>
(Millions)
------------------------------------------------------------
Three months ended June 30,
Revenues Operating Profit
--------------------- -----------------------
1996 1995 1996 1995
------ ------ ------ -----
<S> <C> <C> <C> <C>
Northwest Pipeline $ 68.9 $ 59.0 $ 34.8 $26.8
Williams Natural Gas 45.2 39.3 9.6 8.2
Transcontinental Gas
Pipe Line 188.8 194.1 40.3 45.4
Texas Gas Transmission 63.0 61.8 11.8 9.4
Kern River Gas
Transmission 36.8 - 27.5 -
------ ------ ------ -----
$402.7 $354.2 $124.0 $89.8
====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
(Millions)
------------------------------------------------------------
Six months ended June 30,
Revenues Operating Profit
--------------------- -----------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Northwest Pipeline $136.5 $118.1 $ 67.0 $ 53.3
Williams Natural Gas 88.4 79.3 22.0 17.5
Transcontinental Gas
Pipe Line 392.2 347.6 93.1 83.7
Texas Gas Transmission 165.6 130.5 52.9 31.9
Kern River Gas
Transmission 75.7 - 53.1 -
------ ------ ------ ------
$858.4 $675.5 $288.1 $186.4
====== ====== ====== ======
</TABLE>
Note 5. Sale of investment
In the second quarter of 1995, Williams sold its 15 percent interest in
Texasgulf Inc. for approximately $124 million in cash, which resulted in a
second quarter after-tax gain of approximately $16 million because of
previously unrecognized tax benefits included in the provision (credit) for
income taxes.
-9-
<PAGE> 11
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Provision (credit) for income taxes
The provision (credit) for income taxes from continuing operations includes:
<TABLE>
<CAPTION>
(Millions)
--------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
----------------------- --------------------
1996 1995 1996 1995
----- ------ ----- -----
<S> <C> <C> <C> <C>
Current:
Federal $28.2 $(16.8) $72.9 $10.9
State 6.4 (1.3) 14.9 10.0
----- ------ ----- -----
34.6 (18.1) 87.8 20.9
Deferred:
Federal (5.4) 14.1 .8 29.4
State (.1) 2.1 1.5 (2.5)
----- ------ ----- -----
(5.5) 16.2 2.3 26.9
----- ------ ----- -----
Total provision (credit) $29.1 $ (1.9) $90.1 $47.8
===== ====== ===== =====
</TABLE>
The effective income tax rate in 1996 is less than the federal statutory rate
due primarily to income tax credits from coal-seam gas production, partially
offset by the effects of state income taxes. In addition, both 1996 periods
include recognition of favorable adjustments totaling $10 million related to
research credits and previously provided deferred income taxes on certain
regulated capital projects.
The effective income tax rate in 1995 is less than the federal statutory rate
due primarily to income tax credits from coal-seam gas production, partially
offset by the effects of state income taxes and minority interest. In
addition, both 1995 periods include the previously unrecognized tax benefits
related to the sale of Texasgulf Inc. (see Note 5) and recognition of an $8
million income tax benefit resulting from settlements with taxing authorities.
Cash payments for income taxes for continuing and discontinued operations for
the six months ended June 30, 1996 and 1995, are $314 million and $279 million,
respectively.
Note 7. 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. 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 and satellite
transmission.
-10-
<PAGE> 12
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Accrued liabilities
<TABLE>
<CAPTION>
(Millions)
---------------------------------
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Rate refunds $ 237.1 $ 180.6
Income taxes payable 151.6 371.6
Employee costs 152.6 135.9
Interest 91.1 72.9
Taxes other than income taxes 63.3 51.2
Other 321.0 318.0
-------- --------
$1,016.7 $1,130.2
======== ========
</TABLE>
Note 9. Adoption of accounting standard
Effective January 1, 1996, Williams adopted Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Adoption of the standard had no effect
on Williams' financial position or results of operations.
-11-
<PAGE> 13
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Long-term debt
Long-term debt consists of the following amounts:
<TABLE>
<CAPTION>
(Millions)
------------------------------
Weighted average June 30, December 31,
interest rate* 1996 1995
---------------- -------- ------------
<S> <C> <C> <C>
The Williams Companies, Inc.
Revolving credit loans 8.3 $ 200.0 $ 50.0
Debentures, 8.875% - 10.25%,
payable 2012, 2020, 2021
and 2025 9.6 587.6 587.7
Notes, 7.5% - 9.625%,
payable through 2001 8.8 829.4 842.4
Northwest Pipeline
Debentures, 7.125% - 10.65%,
payable through 2025 9.0 360.0 369.2
Adjustable rate notes,
payable through 2002 9.0 10.0 11.7
Williams Natural Gas
Variable rate notes,
payable 1999 5.9 130.0 130.0
Transcontinental Gas Pipe Line
Revolving credit loans 5.9 100.0 -
Debentures, 9.125%, payable
1998 through 2017 9.1 152.8 153.0
Notes, 8.125% - 9%,
payable 1996, 1997 and 2002 8.7 379.0 381.1
Adjustable rate notes,
payable 2000 - - 125.1
Texas Gas Transmission
Notes, 9.625% and 8.625%,
payable 1997 and 2004 9.0 254.6 255.9
Kern River Gas Transmission
Notes, 6.42% and 6.72%,
payable through 2001 6.6 631.2 -
Williams Holdings of Delaware
Revolving credit loans 6.0 175.5 150.0
Debentures, 6.25%, due 2006 6.3 248.7 -
Williams Pipe Line
Notes, 8.95% and 9.78%,
payable through 2001 9.3 110.0 110.0
Williams Energy Ventures
Adjustable rate notes,
payable through 2002 8.1 20.6 21.0
Other, payable through 1999 7.9 5.8 6.8
-------- --------
4,195.2 3,193.9
Current portion of long-term debt (311.0) (319.9)
-------- --------
$3,884.2 $2,874.0
======== ========
</TABLE>
*At June 30, 1996.
-12-
<PAGE> 14
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 1996, Williams entered into a $205 million short-term borrowing
agreement to finance the purchase of the remaining interest in Kern River Gas
Transmission Company (See Note 3). During June 1996, Williams repaid all
amounts outstanding under this agreement with borrowings under the credit
agreement noted below.
Under Williams' $800 million credit agreement, Northwest Pipeline,
Transcontinental Gas Pipe Line, Texas Gas Transmission, Williams Pipe Line and
Williams Holdings of Delaware, Inc. (Williams Holdings) have access to varying
amounts of the facility while Williams (parent) has access to all unborrowed
amounts. Interest rates vary with current market conditions. The available
amount at June 30, 1996, is $325 million.
During March 1996, the Kern River floating-rate bank loan was refinanced
through the issuance of 6.42 percent and 6.72 percent fixed-rate notes.
Interest-rate swap agreements entered into by Kern River in prior years which
effectively converted floating-rate debt to a fixed 9.1 percent remain
outstanding. Concurrent with the refinancing, Kern River entered into
additional interest-rate swap agreements which effectively offset the original
interest-rate swaps and adjust the new fixed-rate notes to an effective
interest rate of 8.7 percent.
In April 1996, Williams Holdings entered into an interest-rate swap agreement
which effectively converted its 6.25 percent fixed rate debentures to
floating-rate debt (4.46 percent at June 30, 1996).
Cash payments for interest (net of amounts capitalized) for the six months
ended June 30, 1996 and 1995, are $173 million and $133 million, respectively.
Note 11. 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 $213 million at June 30, 1996; 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 8 for the amount of revenues reserved for potential refund
as of June 30, 1996.
In 1992, the FERC issued Order 636, Order 636-A and Order 636-B. These orders,
which were challenged in various respects by various parties in proceedings
recently ruled on by 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. Kern River Gas Transmission implemented its restructuring on August
1, 1993, Williams Natural Gas implemented its restructuring on October 1, 1993,
and Northwest Pipeline, Texas Gas and Transcontinental Gas Pipe Line implemented
their
-13-
<PAGE> 15
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
restructurings on November 1, 1993. Certain aspects of each pipeline company's
restructuring have been under appeal.
On July 16, 1996, the U.S. Court of Appeals for the D.C. Circuit issued an
order which in part affirmed and in part remanded Order No. 636. However, the
court stated that Order No. 636 would remain in effect until FERC issued a
final order on remand after considering the remanded issues. With the issuance
of this decision, the stay on the appeals of individual pipeline's
restructuring cases will be lifted.
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. In May 1995, the FERC issued orders granting the requisite approvals.
One party requested rehearing of the decision regarding abandonment of the
gathering system and in April 1996, the FERC affirmed its May 1995 decision,
and on July 23, 1996, FERC issued an order denying rehearing.
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 previously mentioned July 16, 1996, D.C. Circuit Court of Appeals decision
concerning Order No. 636 has remanded to FERC the issues of whether pipelines
should absorb any portion of Order No. 636 transition costs and whether 10
percent of such costs should have been allocated to interruptible transportation
services.
Pursuant to a stipulation and agreement approved by the FERC, Williams Natural
Gas has made five 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 gas supply realignment costs, and provided
for an offset of $3 million. The remaining filings covered additional costs of
$17 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 filings made subsequent to the first
filing. On July 31, 1996, the administrative law judge issued an initial
decision rejecting the intervenor's prudency challenge on the second filing. As
of June 30, 1996, this subsidiary had an accrual of $81 million for its
then-estimated remaining contract-reformation and gas supply realignment costs.
Williams Natural Gas will make additional filings under the
-14-
<PAGE> 16
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
$81 million for estimated future recovery of the foregoing costs.
In September 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 June 30, 1996, Texas Gas has
paid approximately $64 million for gas supply realignment costs, primarily as a
result of contract terminations, and has accrued a liability of approximately
$16 million for its estimated remaining gas supply realignment costs. Texas
Gas has recovered approximately $52 million plus interest in gas supply
realignment costs, and in accordance with the terms of its settlement has a
regulatory asset recorded at June 30, 1996, of approximately $15 million for the
estimated future recovery of such costs, which is expected to be collected from
customers prior to December 31, 1997. 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.
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 June
30, 1996, these subsidiaries had reserves totaling approximately $43 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.
-15-
<PAGE> 17
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 with certain environmental authorities and other
programs concerning investigative and remedial actions relative to potential
mercury contamination at certain gas metering sites have been commenced by
Williams Natural Gas, Texas Gas and Transcontinental Gas Pipe Line. As of June
30, 1996, Williams Natural Gas had recorded a liability for approximately $24
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 $43 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 June 30, 1996, 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 in May 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. In June 1994, the
lawsuit was dismissed for failure to join an indispensable party over which the
state court had no jurisdiction. This decision was appealed by the plaintiffs
and in February 1996, the Colorado court of appeals affirmed the dismissal.
Since June 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
In December 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. 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
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<PAGE> 18
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Circuit. Williams Production agreed to indemnify the Williams Coal Seam Gas
Royalty Trust (Trust) against any losses that may arise in respect of certain
properties subject to the lawsuit. In addition, if the Tribe is successful in
showing that Williams Production has no rights in the coal-seam gas, Williams
Production has agreed to pay to the Trust for distribution to then-current
unitholders, an amount representing a return of a portion of the original
purchase price paid for the units. While Williams 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. In September 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 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.
In March 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. In October 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. In
December 1995, the administrative law judge issued an initial decision in which
he rejected the settlement agreements, finding that they were not prudent, and
he ordered the pipeline companies to refund to their customers amounts
collected since May 1993, in excess of the amounts he determined were
appropriate. At the time of the ruling, Transcontinental Gas Pipe Line
estimated that its share of the refunds the administrative law judge would
require was approximately $75 million. The pipelines would be entitled to
collect the amount of any such customer refunds from Dakota. The
administrative law judge's decision is subject to review by the FERC. In
February 1996, certain parties filed with the FERC a motion requesting that the
FERC establish an additional proceeding to consider claims for additional
refunds. Transcontinental Gas Pipe Line's share of these claimed additional
refunds is $90 million and pertain to amounts paid to Dakota from November 1,
1988, to May 1, 1993. The pipelines have opposed this motion. By order dated
July 17, 1996, the FERC set this case for oral argument to take place before
the FERC on September 25, 1996.
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
-17-
<PAGE> 19
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 were named as
defendants in, respectively, six and two lawsuits. Five of the eight lawsuits
have been settled for cash payments aggregating approximately $8.5 million, all
of which have previously been accrued, and of which approximately $3 million is
recoverable as transition costs under Order 636. Damages in excess of
$31 million have been asserted in the remaining cases. In addition, in July
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 the remaining lawsuits. 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 Order 528.
In November 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 June 30,
1996, HFMC 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. In March 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. The Partnership
recently negotiated favorable buyouts of its power purchase agreements with two
electric utilities. The buyouts are subject to Bankruptcy Court and
Pennsylvania Public Utility Commission approvals.
On July 18, 1996, an individual filed a lawsuit in the United States District
Court for the District of Columbia against 70 natural gas pipelines and other
gas purchasers or former gas purchasers. All of the Williams' natural gas
pipeline subsidiaries are named as defendants in the lawsuit. The plaintiff
claims, on behalf of the United States under the False Claims Act, that the
pipelines have incorrectly measured the heating value or volume of gas
purchased by the defendants. The plaintiff claims that the United States has
lost royalty payments as a result of these practices. The pipelines intend to
vigorously defend against these claims.
In addition to the foregoing, various other proceedings are pending against
Williams or its subsidiaries which are incidental to their operations.
-18-
<PAGE> 20
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Note 12. Subsequent event
Subsequent to June 30, 1996, the Williams' board of directors authorized the
open-market purchase of up to $800 million of Williams common stock.
-19-
<PAGE> 21
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Second Quarter 1996 vs. Second Quarter 1995
NORTHWEST PIPELINE'S revenues increased $9.9 million, or 17 percent, due
primarily to increased transportation rates, effective February 1, 1996,
associated with the expansion of mainline capacity placed into service on
December 1, 1995. Total throughput increased 12.5 TBtu, or 7 percent.
Operating profit increased $8 million, or 30 percent, due primarily to
increased rates associated with the expansion of mainline capacity.
WILLIAMS NATURAL GAS' revenues increased $5.9 million, or 15 percent, due
primarily to new tariff rates that became effective August 1, 1995, and $6
million related to the collection of gas supply realignment costs, partially
offset by lower interruptible transportation revenue due primarily to increased
discounting. Costs and operating expenses increased $4 million, or 19 percent,
due primarily to amortization of gas supply realignment costs. Operating
profit increased $1.4 million, or 17 percent, due primarily to new tariff rates
that became effective August 1, 1995, partially offset by the lower
interruptible transportation revenue. Total throughput decreased 5.3 TBtu, or
8 percent, due primarily to lower off-system volumes.
TRANSCONTINENTAL GAS PIPE LINE'S revenues decreased $5.3 million, or 3 percent,
due primarily to lower transportation costs charged to Transco by others and
recovered in Transco's rates. Operating profit decreased $5.1 million, or 11
percent, due primarily to increased operating expenses related to accelerated
maintenance scheduled to take advantage of potential market opportunities
during peak demand periods. Total throughput increased 21.3 TBtu, or 6
percent, due primarily to increased firm long-haul transportation volumes.
Because of its rate structure and historical maintenance schedule, Transco
typically experiences lower operating profit in the second and third quarters
as compared to the first and fourth quarters.
TEXAS GAS TRANSMISSION'S revenues increased $1.2 million, or 2 percent, due
primarily to the recovery of gas supply realignment costs. Operating profit
increased $2.4 million, or 26 percent, due primarily to lower operating
expenses. Total throughput increased 9 percent. Because of its rate
structure, Texas Gas typically experiences lower operating profit in the second
and third quarters as compared to the first and fourth quarters.
KERN RIVER GAS TRANSMISSION (KERN RIVER) operates a natural gas pipeline system
extending from Wyoming through Utah and Nevada to California. On January 16,
1996, Williams acquired the remaining interest in Kern River. Revenues were
$36.8 million in the second quarter of 1996, while costs and expenses were $9
million and operating profit was $27.5 million. Prior to the acquisition,
Williams accounted for its 50 percent ownership in Kern River using the equity
method of accounting, with its share of equity earnings recorded in investing
income. Equity earnings for the second quarter of 1995 was $7 million.
Throughput was 72.5 TBtu in the second quarter of 1996. Throughput for the
second quarter of 1996 is comparable to second quarter 1995.
WILLIAMS FIELD SERVICES GROUP'S revenues increased $22.6 million, or 16
percent, due primarily to higher gathering and natural gas liquids sales
revenues of $9 million and $14 million, respectively. Gathering and natural
gas liquids volumes increased 21 percent and 59 percent,
-20-
<PAGE> 22
respectively. Costs and expenses increased $18 million, or 16 percent, due
primarily to expanded facilities and increased operations. Operating profit
increased $5.7 million, or 16 percent, due primarily to higher gathering
revenues and increased gas liquids margins, partially offset by higher costs
and operating expenses associated with expanded facilities and increased
operations.
WILLIAMS ENERGY SERVICES' revenues increased $11.8 million, or 100 percent, due
primarily to higher price-risk management and new contract origination revenues
of $9 million and $5 million, respectively, slightly offset by lower natural
gas physical trading revenues. The natural gas physical trading volumes
increase of 41 percent from growth in west and mid-continent trading activity
was more than offset by lower margins of $5 million. Operating profit
increased $12.9 million from $300,000 in 1995 due primarily to the increase in
revenues.
WILLIAMS PIPE LINE'S revenues (including Williams Energy Ventures) increased
$67.2 million, or 97 percent, due primarily to an increase in
non-transportation revenues combined with a 14 percent increase in shipments.
Shipments increased due primarily to new business and the impact during 1995 of
unfavorable weather conditions and a November 1994 fire at a truck-loading
rack. The increase in non-transportation revenue is due primarily to Williams
Energy Venture's ethanol sales following the 1995 acquisition of Pekin Energy
and construction of the Nebraska Energy plant combined with higher product
marketing and services revenues. Costs and expenses increased $57 million, or
120 percent, due primarily to ethanol production activities. Operating profit
(including Williams Energy Ventures) increased $10.1 million, or 64 percent,
due primarily to increased transportation revenues and favorable insurance
settlements of $2 million. Williams Energy Ventures' operating profit improved
$2.3 million to a $1.6 million operating profit in 1996 due primarily to higher
ethanol sales margins.
WILTEL'S revenues increased $16.1 million, or 14 percent, due primarily to
increased business activity resulting in an $8 million revenue increase in new
systems and new system enhancements combined with increased revenues of $6
million resulting from the January 1996 acquisition of ComLink, Inc. The
number of ports in service at June 30, 1996, increased 12 percent compared to
June 30, 1995. Costs and operating expenses increased $12 million, or 14
percent, due primarily to increased business activity and the ComLink
acquisition. Selling, general and administrative expenses increased $5
million, or 23 percent, due primarily to the impact of the ComLink acquisition
and costs related to management information systems, system integration and
Internet capabilities combined with increased business activity. Operating
profit decreased $1.1 million, or 18 percent, due primarily to higher selling,
general and administrative expenses largely offset by increased business
activity.
WILTECH'S revenues increased $17.9 million, or 167 percent, due primarily to
$13 million from the acquisitions of Global Access Telecommunications Services,
a reseller of worldwide satellite video transmission services, NUS Training and
the teleports of ICG Wireless Services, in addition to greater demand for
Vyvx's core digital television services. A $20 million increase in costs and
expenses reflects the overall increase in sales activity and higher expense for
developing additional products and services, including the cost of integrating
its most recent acquisitions. The operating loss increased $2.4 million, or
152 percent, due primarily to the expense of developing additional products and
services along with integrating the most recent acquisitions.
21
<PAGE> 23
INTEREST ACCRUED increased $21.8 million, or 32 percent, due primarily to
higher borrowing levels including $643 million of debt assumed with the
acquisition of Kern River (see Note 3), partially offset by lower average
interest rates. Interest capitalized decreased $3.9 million, or 86 percent,
due primarily to lower capital expenditures for gathering and processing
facilities, in addition to adjustments of amounts previously capitalized.
Investing income decreased $20.1 million, or 85 percent, due primarily to the
absence of interest earned in 1995 on the invested portion of the cash proceeds
from the sale of Williams' network services operations combined with $7 million
lower equity earnings from Williams' 50 percent ownership in Kern River. Kern
River's 1996 operating results are included in operating profit (see Note 3).
The 1995 loss on sale of investment results from the sale of the 15 percent
interest in Texasgulf Inc. (see Note 5). The effective income tax rate in 1996
is less than the federal statutory rate due primarily to income tax credits
from coal-seam gas production, partially offset by the effects of state income
taxes. In addition, 1996 includes recognition of favorable adjustments
totaling $10 million related to research credits and previously provided
deferred income taxes on certain regulated capital projects. The effective
income tax rate in 1995 is less than the federal statutory rate due primarily
to income tax credits from coal-seam gas production, partially offset by the
effects of state income taxes and minority interest. In addition, 1995
includes the previously unrecognized tax benefits related to the sale of
Texasgulf Inc. (see Note 5) and recognition of an $8 million income tax benefit
resulting from settlements with taxing authorities.
Six Months Ended June 30, 1996 vs. Six months Ended June 30, 1995
NORTHWEST PIPELINE'S revenues increased $18.4 million, or 16 percent, due
primarily to increased transportation rates, effective February 1, 1996,
associated with the expansion of mainline capacity placed into service on
December 1, 1995. Total throughput increased 41.8 TBtu, or 11 percent.
Operating profit increased $13.7 million, or 26 percent, due primarily to
increased transportation rates associated with the expansion of mainline
capacity.
WILLIAMS NATURAL GAS' revenues increased $9.1 million, or 11 percent, due
primarily to new tariff rates that became effective August 1, 1995, and $6
million related to the collection of gas supply realignment costs. Costs and
operating expenses increased $5 million, or 11 percent, due primarily to
amortization of gas supply realignment costs. Operating profit increased $4.5
million, or 26 percent, due primarily to new tariff rates that became effective
August 1, 1995. Total throughput increased 10.3 TBtu, or 6 percent.
TRANSCONTINENTAL GAS PIPE LINE'S revenues and operating profit increased $44.6
million, or 13 percent, and $9.4 million, or 11 percent, respectively, due
primarily to a full year of operations in 1996 compared with 1995, which
reflected operations from January 18, 1995, when Williams acquired majority
interest in Transco Energy. Revenues associated with the period January 1
through January 17, 1995, were $35.8 million. Also, 1996 results benefited from
a system expansion placed into service in late 1995. Total throughput increased
153.7 TBtu, or 23 percent, due primarily to a full year of operations in 1996
compared to a partial year in 1995. Because of its rate structure and
historical maintenance schedule, Transco typically experiences lower operating
profit in the second and third quarters as compared to the first and fourth
quarters.
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<PAGE> 24
TEXAS GAS TRANSMISSION'S revenues and operating profit increased $35.1 million,
or 27 percent, and $21 million, or 66 percent, respectively, due primarily to
new rates that became effective April 1, 1995, and an adjustment to rate refund
accruals based on a recent rate-case settlement. Also, the first quarter of
1995 reflected operations from January 18, when Williams acquired majority
interest in Transco Energy. Revenues associated with the period January 1
through January 17, 1995, were $16 million. Total throughput increased 32
percent due primarily to a full year of operations in 1996 compared to a
partial year in 1995. Because of its rate structure, Texas Gas typically
experiences lower operating profits in the second and third quarters as
compared to the first and fourth quarters.
KERN RIVER'S remaining interest was acquired by Williams on January 16, 1996.
Revenues and operating profit amounts for the six months ended June 30, 1996,
include the operating results of Kern River since the acquisition date. Kern
River's revenues were $75.7 million for the six months of 1996, while costs and
expenses were $22 million and operating profit was $53.1 million. Prior to the
acquisition, Williams accounted for its 50 percent ownership in Kern River using
the equity method of accounting, with its share of equity earnings recorded in
investing income. Equity earnings for the six months of 1996 includes $2
million for the period prior to the acquisition date, compared to $16 million
for the first six months of 1995. Throughput was 131.1 TBtu for the first six
months of 1996 (for the period subsequent to the acquisition date). Throughput
for the first six months of 1996 is comparable to 1995.
WILLIAMS FIELD SERVICES GROUP'S revenues increased $89.6 million, or 32
percent, due primarily to higher gathering, processing and natural gas liquids
sales revenues of $26 million, $8 million and $24 million, respectively,
combined with increased natural gas sales volumes. Gathering, processing and
natural gas liquids volumes increased 29 percent, 30 percent and 36 percent,
respectively. Costs and expenses increased $64 million, or 31 percent, due
primarily to higher natural gas purchase volumes and expanded facilities.
Other income--net includes a $3 million environmental remediation accrual.
Operating profit increased $22.5 million, or 32 percent, due primarily to
higher gathering and processing revenues and increased natural gas and gas
liquids margins, partially offset by higher costs and operating expenses
associated with expanded facilities and the first quarter 1996 environmental
remediation accrual.
WILLIAMS ENERGY SERVICES' revenues increased $3.3 million, or 7 percent, due
primarily to higher price-risk management and physical trading revenues of $15
million and $2 million, respectively, largely offset by lower new contract
origination revenues of $14 million. Natural gas physical trading volumes
increased 33 percent, due primarily to a full first quarter of Transco Energy's
gas trading activities and increased trading activity in the west and
mid-continent regions. This volume increase was partially offset by lower
physical trading margins. Operating profit increased $4.3 million, or 17
percent, due primarily to the increase in revenues combined with the absence of
costs of supporting information products activities, partially offset by higher
new business development expenses.
WILLIAMS PIPE LINE'S revenues (including Williams Energy Ventures) increased
$129.3 million, or 97 percent, due primarily to an increase in
non-transportation revenues combined with a 14 percent increase in shipments.
Shipments increased due primarily to new business and the impact during 1995 of
unfavorable weather conditions and a November 1994 fire at a truck-loading
rack.
-23-
<PAGE> 25
Average length of haul and transportation rate per barrel decreased 4 percent
and 2 percent, respectively, due primarily to shorter haul movements. The
increase in non-transportation revenue is due primarily to Williams Energy
Ventures' ethanol sales following the 1995 acquisition of Pekin Energy and
construction of the Nebraska Energy plant combined with higher product
marketing and services revenues. Costs and operating expenses increased $113
million, or 124 percent, due primarily to ethanol production activities.
Operating profit (including Williams Energy Ventures) increased $13.6 million,
or 44 percent, due primarily to increased transportation revenues. Williams
Energy Ventures' results improved $1.4 million to a $500,000 operating loss in
1996 due primarily to higher refined-product sales margins and lower business
development costs.
WILTEL'S revenues increased $11.4 million, or 5 percent, due primarily to the
January 1996 acquisition of ComLink, Inc. Nonacquisition related revenues
remained unchanged as increased business activity during the second quarter of
1996 was offset by the effects of inclement weather in the northeastern and
central parts of the country in the first quarter of 1996. The number of ports
in service at June 30, 1996, increased 12 percent compared to June 30, 1995.
Costs and operating expenses increased $8 million, or 4 percent, due primarily
to the acquisition of ComLink. Selling, general and administrative expenses
increased $10 million, or 22 percent, due primarily to the impact of the
ComLink acquisition and costs related to management information systems, system
integration and Internet capabilities. Operating profit decreased $6 million,
or 43 percent, due primarily to costs related to management information
systems, system integration and Internet capabilities.
WILTECH'S revenues increased $28.6 million, or 154 percent, due primarily to a
$17 million increase from the acquisitions of Global Access Telecommunications
Services, a reseller of worldwide satellite video transmission services, NUS
Training and the teleports of ICG Wireless Services. In addition, revenues
increased $7 million due to greater demand for Vyvx's core digital television
services. Billable minutes from occasional service increased 2 percent and
dedicated service voice grade equivalent miles increased 17 percent. A $29
million increase in costs and expenses reflects the overall increase in sales
activity and higher expense for developing additional products and services,
including the cost of integrating its most recent acquisitions. The operating
loss increased $.5 million, or 13 percent, due primarily to the expense of
developing additional products and services along with integrating the most
recent acquisitions.
GENERAL CORPORATE EXPENSES increased slightly due primarily to higher employee
compensation expense, substantially offset by the absence of a $4 million
contribution in 1995 to The Williams Companies Foundation. Interest accrued
increased $35.3 million, or 26 percent, due primarily to higher borrowing
levels including $643 million of debt assumed with the acquisition of Kern
River (see Note 3), partially offset by lower average interest rates. Interest
capitalized decreased $3.4 million, or 59 percent, due primarily to lower
capital expenditures for gathering and processing facilities, in addition to the
completion of a Northwest Pipeline mainline expansion in 1995. Investing
income decreased $59.8 million, or 88 percent, due primarily to the absence of
a 1995 $15 million dividend from Texasgulf Inc. and interest earned in 1995 on
the invested portion of the cash proceeds from the sale of Williams' network
services operations, in addition to $14 million lower equity earnings from
Williams' 50 percent ownership in Kern River. Kern River's 1996 operating
results are included in operating profit since the acquisition date (see Note
3). The 1995 loss on sale of investment results from the sale of the 15
percent interest in Texasgulf Inc. (see Note 5). Other
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<PAGE> 26
expense--net decreased $7.7 million, or 56 percent, due to the absence of $10
million of 1995 minority interest expense associated with the Transco merger.
The effective income tax rate in 1996 is less than the federal statutory rate
due primarily to income tax credits from coal-seam gas production, partially
offset by the effects of state income taxes. In addition, 1996 includes
recognition of favorable adjustments totaling $10 million related to research
credits and previously provided deferred income taxes on certain regulated
capital projects. The effective income tax rate in 1995 is less than the
federal statutory rate due primarily to income tax credits from coal-seam gas
production, partially offset by the effects of state income taxes and minority
interest. In addition, 1995 includes the previously unrecognized tax benefits
related to the sale of Texasgulf Inc. (see Note 5) and recognition of an $8
million income tax benefit resulting from settlements with taxing authorities.
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 (see Note 7).
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 June 30, 1996, Williams
had access to $334 million of liquidity representing the available portion of
its $800 million bank-credit facility plus cash-equivalent investments. This
compares with liquidity of $656 million at December 31, 1995, and $1.1 billion
at June 30, 1995. The decrease in 1996 is due to additional borrowings under
the bank-credit facility. Liquidity at June 30, 1995, included a portion of
the cash proceeds from the sale of the network services operations.
In 1996, capital expenditures (excluding acquisition of businesses) are
estimated to be approximately $1 billion. During 1996, Williams expects to
finance capital expenditures, investments and working-capital requirements
through cash generated from operations, the use of its $800 million bank-credit
facility or public debt/equity offerings.
Financing Activities
On January 16, 1996, Williams acquired the remaining interest in Kern River Gas
Transmission Company for $206 million in cash and entered into a $205 million
short-term borrowing agreement to finance the purchase (see Note 3). During
June 1996, Williams repaid all amounts outstanding under this agreement with
borrowings under its $800 million bank-credit facility.
The consolidated long-term debt to long-term debt-plus-equity ratio increased
to 53.8 percent at June 30, 1996, from 47.4 percent at December 31, 1995. The
increase is due primarily to the assumption
25
<PAGE> 27
of Kern River's debt, combined with the issuance of $250 million of debentures
by Williams Holdings under a $400 million shelf registration statement filed
with the Securities and Exchange Commission in January 1996.
During March 1996, the Kern River floating-rate bank loan was refinanced
through the issuance of 6.42 percent and 6.72 percent fixed-rate notes.
Interest-rate swap agreements entered into by Kern River in prior years which
effectively converted floating-rate debt to a fixed 9.1 percent remain
outstanding. Concurrent with the refinancing, Kern River entered into
additional interest-rate swap agreements which effectively offset the original
interest-rate swaps and adjust the new fixed-rate notes to an effective
interest rate of 8.7 percent.
In April 1996, Williams Holdings entered into an interest-rate swap agreement
which effectively converted its 6.25 percent fixed-rate debentures to
floating-rate debt (4.46 percent at June 30, 1996).
Subsequent to June 30, 1996, Transcontinental Gas Pipe Line issued $200 million
of 7.08 percent debentures due 2026, subject to a repayment option in 2001. A
portion of the proceeds were used to repay $100 million of borrowings under the
bank-credit facility.
The increase in receivables from December 31, 1995, is due primarily to
increased trading activities by Williams Energy Services. The increase in
property, plant and equipment primarily reflects the consolidation of Kern
River following the January 1996 acquisition.
Other
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.
26
<PAGE> 28
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on May 16, 1996. At
the Annual Meeting, four individuals were elected as directors of the Company
and two directors retired from the Board. Nine individuals continue to serve
as directors pursuant to their prior election. In addition, the 1996 Stock
Plan and the 1996 Stock Plan for Non-Employee Directors were approved, and the
appointment of Ernst & Young LLP as the independent auditor of the Company for
1996 was ratified.
A tabulation of the voting at the Annual Meeting with respect to the matters
indicated is as follows:
Election of Directors:
<TABLE>
<CAPTION>
Name For Withheld
- ---- --- --------
<S> <C> <C>
Robert J. LaFortune 90,212,879 2,619,140
Jack A. MacAllister 90,237,150 2,594,869
Peter C. Meinig 90,243,036 2,588,983
Kay A. Orr 90,210,510 2,621,509
</TABLE>
Approval of the 1996 Stock Plan:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
71,554,844 19,777,742 1,499,433
</TABLE>
Approval of the 1996 Stock Plan for Non-Employee Directors:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
88,963,887 2,876,456 991,676
</TABLE>
Ratification of Appointment of Independent Auditor:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
90,597,720 1,081,470 1,152,829
</TABLE>
To the best of the Company's knowledge, there were no broker nonvotes with
respect to the election of directors, the approval of the Stock plans or the
ratification of the Auditor.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed below are filed as part of this report:
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
(b) During the second quarter of 1996, the Company did not file
a Form 8-K.
27
<PAGE> 29
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.
THE WILLIAMS COMPANIES, INC.
---------------------------------------
(Registrant)
/s/ Gary R. Belitz
---------------------------------------
Gary R. Belitz
Controller
(Duly Authorized Officer and
Chief Accounting Officer)
August 14, 1996
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
Exhibit 11.a Computation of Earnings Per Common and Common-equivalent Share
Exhibit 11.b 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 27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11.a
THE WILLIAMS COMPANIES, INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON-EQUIVALENT SHARE
Three months ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
(Thousands, except
per-share amounts)
---------------------
1996 1995
--------- -------
<S> <C> <C>
Primary earnings:
Net income $80,400 $83,300
Preferred stock dividends:
$2.21 cumulative preferred stock 400 1,900
$3.50 cumulative convertible preferred stock 2,200 1,500
------- -------
Income applicable to common stock $77,800 $79,900
======= =======
Primary shares:
Average number of common shares outstanding during the period 104,860 98,282
Common-equivalent shares attributable to options and deferred stock 3,388 3,457
------- -------
Total common and common-equivalent shares 108,248 101,739
======= =======
Primary earnings per common and common-equivalent share $.72 $.79
======= =======
Fully diluted earnings:
Net income $80,400 $83,300
$2.21 cumulative preferred stock dividends 400 1,900
------- -------
Income applicable to common stock $80,000 $81,400
======= =======
Fully diluted shares:
Average number of common shares outstanding during the period 104,860 98,282
Common-equivalent shares attributable to options and deferred stock 3,388 3,588
Dilutive preferred shares 3,906 2,648
------- -------
Total common and common-equivalent shares 112,154 104,518
======= =======
Fully diluted earnings per common and common-equivalent share $.71 $.78
======= =======
</TABLE>
<PAGE> 2
Exhibit 11.b
THE WILLIAMS COMPANIES, INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON-EQUIVALENT SHARE
Six months ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
(Thousands, except
per-share amounts)
-------------------------
1996 1995
-------- ----------
<S> <C> <C>
Primary earnings:
Income from continuing operations $185,300 $ 166,500
Preferred stock dividends:
$2.21 cumulative preferred stock 800 4,000
$3.50 cumulative convertible preferred stock 4,400 1,500
-------- ----------
Income from continuing operations, net of preferred stock dividends 180,100 161,000
Income from discontinued operations - 1,005,700
-------- ----------
Income applicable to common stock $180,100 $1,166,700
======== ==========
Primary shares:
Average number of common shares outstanding during the period 104,601 94,648
Common-equivalent shares attributable to options and deferred stock 3,403 3,201
-------- ----------
Total common and common-equivalent shares 108,004 97,849
======== ==========
Primary earnings per common and common-equivalent share:
Income from continuing operations $ 1.67 $ 1.65
Income from discontinued operations - 10.27
-------- ----------
Net income $ 1.67 $ 11.92
======== ==========
Fully diluted earnings:
Income from continuing operations $185,300 $ 166,500
$2.21 cumulative preferred stock dividends 800 4,000
-------- ----------
Income from continuing operations, net of preferred stock dividends 184,500 162,500
Income from discontinued operations - 1,005,700
-------- ----------
Income applicable to common stock $184,500 $1,168,200
======== ==========
Fully diluted shares:
Average number of common shares outstanding during the period 104,601 94,648
Common-equivalent shares attributable to options and deferred stock 3,526 3,366
Dilutive preferred shares 3,906 1,316
-------- ----------
Total common and common-equivalent shares 112,033 99,330
======== ==========
Fully diluted earnings per common and common-equivalent share:
Income from continuing operations $ 1.65 $ 1.64
Income from discontinued operations - 10.12
-------- ----------
Net income $ 1.65 $ 11.76
======== ==========
</TABLE>
<PAGE> 1
Exhibit 12
THE WILLIAMS COMPANIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(Dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
----------------
<S> <C>
Earnings:
Income from continuing operations before income taxes $275.4
Add:
Interest expense - net 169.7
Rental expense representative of interest factor 13.3
Interest accrued - 50 percent owned company 1.3
Other 2.4
------
Total earnings as adjusted plus fixed charges $462.1
======
Fixed charges and preferred stock dividend requirements:
Interest expense - net $169.7
Capitalized interest 2.4
Rental expense representative of interest factor 13.3
Pretax effect of dividends on preferred stock of
the Company 7.8
Interest accrued - 50 percent owned company 1.3
------
Combined fixed charges and preferred stock dividend
requirements $194.5
======
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements 2.38
======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 65,489
<SECURITIES> 0
<RECEIVABLES> 559,173
<ALLOWANCES> (15,630)
<INVENTORY> 205,697
<CURRENT-ASSETS> 1,461,313
<PP&E> 10,793,134
<DEPRECIATION> (1,733,197)
<TOTAL-ASSETS> 11,580,423
<CURRENT-LIABILITIES> 1,924,654
<BONDS> 3,884,208
<COMMON> 106,376
0
161,119
<OTHER-SE> 3,069,071
<TOTAL-LIABILITY-AND-EQUITY> 11,580,423
<SALES> 0
<TOTAL-REVENUES> 1,731,206
<CGS> 0
<TOTAL-COSTS> 1,269,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (765)
<INTEREST-EXPENSE> 172,102
<INCOME-PRETAX> 275,390
<INCOME-TAX> 90,138
<INCOME-CONTINUING> 185,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 185,252
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.65
</TABLE>
