<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 March 31, 1997
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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 1-4174
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THE WILLIAMS COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 73-0569878
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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
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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 April 30, 1997
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Common Stock, $1 par value 158,520,538 Shares
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The Williams Companies, Inc.
Index
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Income--Three Months
Ended March 31, 1997 and 1996 2
Consolidated Balance Sheet--March 31, 1997 and
December 31, 1996 3
Consolidated Statement of Cash Flows--Three Months
Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
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>
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although The Williams Companies 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 Reform Act of 1995. 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
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The Williams Companies, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
(Millions, except
per-share amounts)
----------------------------
Three months ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Williams Interstate Natural Gas Systems (Note 3) $ 441.7 $ 455.7
Williams Energy Group (Note 3) 384.2 366.9
Williams Communications Group 216.6 140.6
Other 9.9 12.6
Intercompany eliminations (51.0) (82.1)
------------ ------------
Total revenues 1,001.4 893.7
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Profit-center costs and expenses:
Costs and operating expenses 581.3 499.4
Selling, general and administrative expenses 161.0 135.4
Other (income) expense--net (4.2) 2.8
------------ ------------
Total profit-center costs and expenses 738.1 637.6
------------ ------------
Operating profit:
Williams Interstate Natural Gas Systems (Note 3) 181.0 164.1
Williams Energy Group (Note 3) 88.5 87.9
Williams Communications Group (2.0) 2.8
Other (4.2) 1.3
------------ ------------
Total operating profit 263.3 256.1
General corporate expenses (8.1) (11.1)
Interest accrued (97.1) (82.1)
Interest capitalized 2.2 1.8
Investing income 5.9 4.5
Other expense--net (3.0) (3.3)
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Income before income taxes 163.2 165.9
Provision for income taxes (Note 4) 57.3 61.0
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Net income 105.9 104.9
Preferred stock dividends 2.6 2.6
------------ ------------
Income applicable to common stock $ 103.3 $ 102.3
============ ============
Earnings per common and common-equivalent share (Note 8):
Primary $ .64 $ .63
Average shares (thousands) 162,045 161,639
Fully diluted $ .63 $ .62
Average shares (thousands) 168,410 167,867
Cash dividends per common share $ .26 $ .227
</TABLE>
See accompanying notes.
2
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The Williams Companies, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
--------------------------
March 31, December 31,
1997 1996
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 79.6 $ 115.3
Receivables (Note 5) 585.1 952.9
Transportation and exchange gas receivable 114.6 117.7
Inventories 246.9 204.6
Commodity trading assets 118.8 147.2
Deferred income taxes 196.9 199.5
Other 109.3 152.9
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Total current assets 1,451.2 1,890.1
Investments 258.5 190.6
Property, plant and equipment, at cost 11,344.8 11,212.3
Less accumulated depreciation and depletion (1,932.2) (1,826.0)
----------- -----------
9,412.6 9,386.3
Other assets and deferred charges 985.5 951.8
----------- -----------
Total assets $ 12,107.8 $ 12,418.8
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 235.7 $ 269.5
Accounts payable 470.4 683.3
Transportation and exchange gas payable 77.6 73.7
Accrued liabilities 966.8 975.3
Commodity trading liabilities 98.7 137.9
Long-term debt due within one year (Note 6) 57.8 59.6
----------- -----------
Total current liabilities 1,907.0 2,199.3
Long-term debt (Note 6) 4,236.4 4,376.9
Deferred income taxes 1,648.3 1,626.6
Other liabilities 802.2 795.0
Contingent liabilities and commitments (Note 7)
Stockholders' equity:
Preferred stock, $1 par value, 30,000,000 shares authorized, 3,241,039 shares
issued in 1997 and 3,241,552 shares issued in 1996 161.0 161.0
Common stock, $1 par value, 240,000,000 shares authorized, 161,149,288
shares issued in 1997 and 160,214,163 shares issued in 1996 161.1 160.2
Capital in excess of par value 1,077.2 1,047.7
Retained earnings 2,181.7 2,119.5
Unamortized deferred compensation (2.6) (2.2)
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3,578.4 3,486.2
Less treasury stock (at cost), 2,706,954 shares of common stock in 1997
and 2,737,337 shares of common stock in 1996 (64.5) (65.2)
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Total stockholders' equity 3,513.9 3,421.0
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Total liabilities and stockholders' equity $ 12,107.8 $ 12,418.8
=========== ===========
</TABLE>
See accompanying notes.
3
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The Williams Companies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
-----------------------------
Three months ended March 31,
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 105.9 $ 104.9
Adjustments to reconcile to cash provided from operations:
Depreciation and depletion 115.9 112.8
Provision for deferred income taxes 26.6 7.8
Changes in receivables sold 185.3 (5.1)
Changes in receivables 179.7 (62.2)
Changes in inventories (42.0) (14.8)
Changes in other current assets 38.9 16.3
Changes in accounts payable (196.7) 45.5
Changes in accrued liabilities (27.5) (28.0)
Changes in current commodity trading assets and liabilities (10.8) (18.1)
Changes in non-current commodity trading assets and liabilities .5 2.2
Other, including changes in non-current assets and liabilities 24.9 23.2
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Net cash provided by operating activities 400.7 184.5
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FINANCING ACTIVITIES:
Proceeds from notes payable -- 221.1
Payments of notes payable (33.8) (16.1)
Proceeds from long-term debt 178.0 971.9
Payments of long-term debt (318.7) (785.8)
Proceeds from issuance of common stock 15.0 26.3
Dividends paid (43.7) (38.2)
Other--net -- (2.6)
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Net cash provided (used) by financing activities (203.2) 376.6
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INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (155.6) (115.6)
Proceeds from dispositions 10.6 --
Changes in accounts payable and accrued liabilities (17.9) (11.1)
Acquisition of businesses, net of cash acquired (7.3) (215.0)
Income tax and other payments related to discontinued operations (1.0) (217.4)
Purchase of investments (80.3) (5.0)
Other--net 18.3 .2
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Net cash used by investing activities (233.2) (563.9)
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Decrease in cash and cash equivalents (35.7) (2.8)
Cash and cash equivalents at beginning of period 115.3 90.4
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Cash and cash equivalents at end of period $ 79.6 $ 87.6
========== ==========
</TABLE>
See accompanying notes.
4
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The Williams Companies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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' 1996 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 March 31, 1997, and results of operations and
cash flows for the three months ended March 31, 1997 and 1996.
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 higher
operating profits in the first and fourth quarters as compared to the second
and third quarters.
2. Basis of presentation
Williams Energy Group is comprised of four units. Field Services includes
Williams' natural gas gathering and processing activities previously reported
in Williams Field Services Group. Merchant Services includes Williams' energy
commodity trading and price-risk management activities previously reported in
Williams Energy Services. Certain natural gas and natural gas liquids marketing
operations formerly reported in Williams Field Services Group are also included
in Merchant Services. Petroleum Services includes Williams' interstate
petroleum products pipeline, ethanol-producing facilities and petroleum
terminals previously reported in Williams Pipe Line. Exploration & Production
includes exploration for and production of hydrocarbons previously reported as
a component of Williams Field Services Group. Williams Communications Group is
a combination of WilTel and WilTech Group, previously reported separately.
Certain revenues, operating profit and cash flow amounts for the three
months ended March 31, 1996, have been reclassified to conform to current-year
classifications for these reorganizations and certain other matters.
Revenues and operating profit amounts for the three months ended March 31,
1996, include the operating results of Kern River Gas Transmission Company
since its January 16, 1996, acquisition by Williams of the
remaining interest.
3. Revenues and operating profit
Revenues and operating profit of Williams Interstate Gas Systems and
Williams Energy Group for the three months ended March 31, 1997 and 1996, are
as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
(Millions) Revenues Operating Profit
---------------------------------------------
1997 1996 1997 1996
---------------------------------------------
<S> <C> <C> <C> <C>
Williams Interstate Natural
Gas Systems:
Northwest Pipeline $ 67.2 $ 67.6 $ 29.2 $ 32.2
Williams Natural Gas 46.9 43.2 20.7 12.4
Transcontinental Gas
Pipe Line 190.7 203.4 58.7 52.8
Texas Gas Transmission 97.2 102.6 43.4 41.1
Kern River Gas
Transmission 39.7 38.9 29.0 25.6
--------- --------- --------- ---------
$ 441.7 $ 455.7 $ 181.0 $ 164.1
========= ========= ========= =========
Williams Energy Group:
Field Services $ 178.6 $ 159.1 $ 47.0 $ 47.7
Merchant Services 39.8 69.5 16.5 21.8
Petroleum Services 128.0 118.4 14.4 17.8
Exploration & Production 37.8 19.9 10.6 .6
--------- --------- --------- ---------
$ 384.2 $ 366.9 $ 88.5 $ 87.9
========= ========= ========= =========
</TABLE>
4. Provision for income taxes
The provision for income taxes includes:
<TABLE>
<CAPTION>
Three months ended
(Millions) March 31,
---------------------
1997 1996
---------------------
<S> <C> <C>
Current:
Federal $ 25.7 $ 44.7
State 5.0 8.5
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30.7 53.2
Deferred:
Federal 21.6 6.2
State 5.0 1.6
--------- ---------
26.6 7.8
--------- ---------
Total provision $ 57.3 $ 61.0
========= =========
</TABLE>
The effective income tax rate in both 1997 and 1996 approximates the
federal statutory rate as the effects of state income taxes are offset by
income tax credits from coal-seam gas production.
Net refunds of income taxes of $1 million were received for the three
months ended March 31, 1997. Cash payments, net of refunds, for income taxes
for the three months ended March 31, 1996, were $232 million.
5
<PAGE> 7
5. Sale of receivables
In January 1997, Williams expanded its revolving receivables facilities and
sold $200 million of receivables. The Financial Accounting Standards Board has
issued FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," effective for transactions occurring after
December 31, 1996. The adoption of this standard has not had a material
impact on Williams' consolidated results of operations, financial position or
cash flows.
6. Long-term debt
<TABLE>
<CAPTION>
Weighted
average
interest March 31, December 31,
(Millions) rate* 1997 1996
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<S> <C> <C> <C>
The Williams Companies, Inc.
Debentures, 8.875% -
10.25%, payable 2012,
2020, 2021 and 2025 9.6 $ 587.5 $ 587.5
Notes, 7.5% - 9.625%, pay-
able 1998 through 2001 8.8 816.5 817.5
Northwest Pipeline
Debentures, 7.125% - 10.65%,
payable through 2025 9.0 360.0 360.0
Adjustable rate notes,
payable through 2002 9.0 8.3 10.0
Williams Natural Gas
Variable rate notes,
payable 1999 8.2 130.0 130.0
Transcontinental Gas Pipe Line
Debentures, 7.25% and
9.125%, payable 1998
through 2026 8.1 352.3 352.4
Debentures, 7.08%, payable
2026 (subject to debt-
holder redemption in
2001) 7.1 200.0 200.0
Note, 8.875%, payable
2002 8.9 128.6 227.7
Texas Gas Transmission
Notes, 9.625% and 8.625%,
payable 1997 and 2004 9.0 253.1 253.6
Kern River Gas Transmission
Notes, 6.42% and 6.72%,
payable through 2001 6.6 602.8 617.7
Williams Holdings of Delaware
Revolving credit loans 5.9 475.0 500.0
Debentures, 6.25%,
payable 2006 4.6 248.8 248.8
Williams Pipe Line
Notes, 8.95% and 9.78%,
payable through 2001 9.4 100.0 100.0
Williams Energy Ventures
Adjustable rate notes,
payable through 2002 8.1 25.6 25.6
Other, payable through 1999 8.0 5.7 5.7
- -----------------------------------------------------------------------
4,294.2 4,436.5
Current portion of long-term debt (57.8) (59.6)
- -----------------------------------------------------------------------
$ 4,236.4 $ 4,376.9
========= =========
</TABLE>
*At March 31, 1997, including the effects of interest-rate swaps.
Under Williams' $1 billion 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.
For financial statement reporting purposes at March 31, 1997, $105 million
in current debt obligations have been classified as non-current obligations
based on Williams' intent and ability to refinance on a long-term basis. At
March 31, 1997, the amount available on the $1 billion credit agreement of $525
million is sufficient to complete these refinancings.
Cash payments for interest (net of amounts capitalized) for the three
months ended March 31, 1997 and 1996, are $113 million and $97 million,
respectively.
7. 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 $267 million at March 31, 1997; 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, $328
million of revenues has been reserved for potential refund as of March 31,
1997.
In 1992, the Federal Energy Regulatory Commission (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 restructurings on
November 1, 1993. Certain aspects of four pipeline companies' restructurings
are 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 636. However, the court
stated that Order 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. The only appeal challenging Northwest Pipeline's restructuring
has been dismissed. On February 27, 1997, the FERC issued Order No. 636-C which
dealt with the six issues remanded by the D.C. Circuit. In that order, the FERC
reaffirmed that pipelines should be exempt from sharing gas supply realignment
costs. Requests for rehearing have been filed for the Order.
6
<PAGE> 8
Contract reformations and gas purchase deficiencies
As a result of FERC Order 636, which requires interstate gas pipelines to
change the way they do business, each of the natural gas pipeline subsidiaries
has undertaken the reformation or termination of its respective gas supply
contracts. None of the pipelines has any significant pending supplier
take-or-pay, ratable take or minimum take claims.
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, 636-B
and 636-C costs incurred to comply with these rules are permitted to be
recovered in full, although a percentage of such costs must be allocated to
interruptible transportation service.
Pursuant to a stipulation and agreement approved by the FERC, Williams
Natural Gas (WNG) has made seven 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 third filing covered $6.5
million in gas supply realignment costs. The remaining filings covered
additional costs of approximately $15 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 these
filings. On July 31, 1996, the administrative law judge issued an initial
decision rejecting the intervenor's prudency challenge. As of March 31, 1997,
this subsidiary had an accrual of $74 million for its then-estimated remaining
contract-reformation and gas supply realignment costs. An intervenor has filed a
protest seeking to have the FERC decide whether non-settlement costs covered by
certain of WNG's recent filings were eligible for recovery pursuant to Order No.
636. In January 1997, the FERC held that 100 percent of such prudent non-settled
costs would be recovered by WNG if such costs were eligible for recovery under
Order No. 636. The FERC also held that none of the non-settled costs could be
recovered by WNG if these costs were not eligible for recovery under Order No.
636. This Order was affirmed on rehearing in April 1997. WNG has appealed these
FERC orders. WNG will make additional filings under the applicable FERC orders
to recover such further costs as may be incurred in the future. WNG has recorded
a regulatory asset of approximately $72 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. Through March 31, 1997, Texas Gas
has paid approximately $76 million and expects to pay no more than $80 million
for gas supply realignment costs, primarily as a result of contract
terminations. Texas Gas has recovered approximately $63 million, plus interest,
in gas supply realignment costs and has recorded a regulatory asset of
approximately $4 million for the estimated future recovery of such costs, most
of which will 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
under way 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 March
31, 1997, these subsidiaries had reserves totaling approximately $28 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.
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
7
<PAGE> 9
March 31, 1997, Williams Natural Gas had recorded a liability for approximately
$17 million, representing the current estimate of future environmental cleanup
costs to be incurred over the next six to ten years. The Field Services unit of
Williams Energy Group has recorded an aggregate liability of approximately $15
million, representing the current estimate of their future environmental and
remediation costs, including approximately $5 million relating to former
Williams Natural Gas facilities. Texas Gas and Transcontinental Gas Pipe Line
likewise had recorded liabilities for these costs which are included in the $28
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. Such costs have exceeded this amount. At March
31, 1997, Williams had approximately $11 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. The Colorado court of appeals has
affirmed the dismissal and remanded the case to Colorado district court for
action consistent with the appeals court's decision. Since June 1994, eight
individual lawsuits have been filed against Northwest Pipeline and others in
U.S. district court in Colorado, making essentially the same claims. Northwest
Pipeline is vigorously defending these lawsuits.
Other legal matters
In 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit against
Williams Production, 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
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 connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, Transcontinental Gas Pipe Line and
Texas Gas each entered into certain settlements with producers which may
require the indemnification of certain claims for additional royalties which
the producers may be required to pay as a result of such settlements. As a
result of such settlements, Transcontinental Gas Pipe Line and Texas Gas were
named as defendants in, respectively, six and two lawsuits. Six of the eight
lawsuits have been settled for cash payments aggregating approximately $9
million, all of which have previously been accrued, and of which approximately
$3 million is recoverable as transition costs under Order 636. Damages,
including interest calculated through December 31, 1996, of approximately $29
million, have been asserted in the remaining cases. 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 Hazelton, Pennsylvania (the
Facility). Hazelton Fuel Management Company (HFMC), a subsidiary of Transco
Energy, formerly supplied natural gas and fuel oil to the Facility. As of March
31, 1997, HFMC had current outstanding receivables from the Partnership of
approximately $20 million, all of which has been reserved. A Plan of
Reorganization (the Plan) acceptable to most creditors and the debtor has been
filed with the court. Under the Plan, all litigation involving HFMC will be
fully settled, and a net payment in some amount to HFMC is possible. It is not
possible to predict with certainty whether the Plan as filed will be approved
or the amount of any such payment to HFMC.
On July 18, 1996, an individual filed a lawsuit in the U.S. District Court
for the District of Columbia against 70 natural gas pipelines and other gas
purchasers or former gas purchasers. All of 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 court recently dismissed the
8
<PAGE> 10
claims against Williams' natural gas pipelines and most of the other
defendants.
In addition to the foregoing, various other proceedings are pending
against Williams or its subsidiaries which are incidental to their operations.
Summary
While no assurances may be given, Williams does not believe that the
ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage, recovery from customers
or other indemnification arrangements, will have a materially adverse effect
upon Williams' future financial position, results of operations or cash flow
requirements.
8. Adoption of accounting standard
The Financial Accounting Standards Board has issued FAS No. 128, "Earnings
per Share," effective for fiscal years ending after December 15, 1997. Earnings
per share calculated under this standard would not differ significantly from
amounts reported in the Consolidated Statement of Income.
9. Subsequent event
On April 10, 1997, Williams Communications Group, a wholly-owned
subsidiary of Williams, and Northern Telecom (Nortel) agreed to combine their
customer premise equipment sales and services operations into a new company to
be called WilTel Communications, LLC. The transaction closed in the second
quarter of 1997 and will be accounted for as a purchase by Williams. Williams
Communications Group owns 70 percent of the new company, with Nortel owning the
remaining interest. The new Company will have net assets of approximately $800
million.
9
<PAGE> 11
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
First Quarter 1997 vs. First Quarter 1996
NORTHWEST PIPELINE'S revenues decreased $400,000, or 1 percent, due
primarily to the 1996 sale of the south-end facilities offset by new
transportation rates that became effective March 1 of this year. Total
throughput decreased 36.9 TBtu, or 16 percent. Operating profit decreased $3
million, or 9 percent, due primarily to adjustments to rate refund accruals and
the impact of the sale of the south-end facilities not reflected in rates until
March 1, 1997, when new transportation rates went into effect.
WILLIAMS NATURAL GAS' revenues increased $3.7 million, or 8 percent, and
costs and operating expenses increased $3 million, or 15 percent, due primarily
to the recovery of gas supply realignment costs. Total throughput decreased 8.1
TBtu, or 7 percent, due primarily to lower interruptible transportation
volumes, partially offset by increased firm transportation volumes. Other
income includes a $7 million gain from the sale-in-place of natural gas from a
decommissioned storage field. Operating profit increased $8.3 million, or 67
percent, due primarily to the gain on sale of natural gas.
TRANSCONTINENTAL GAS PIPE LINE'S revenues decreased $12.7 million, or 6
percent, and costs and operating expenses decreased $16 million, or 13 percent,
due primarily to lower transportation costs charged to Transco by others and
passed through to customers as provided in Transco's rates. Total throughput
decreased 42.9 TBtu, or 9 percent, due primarily to lower firm long-haul
transportation volumes resulting from a warmer winter heating season as
compared to the first quarter of 1996. Operating profit increased $5.9 million,
or 11 percent, due primarily to lower general and administrative expenses,
lower operation and maintenance expenses and the effects of a mainline
expansion placed into service in late 1996. Because of its rate structure and
historical maintenance schedule, Transco typically experiences its greatest
profitability in the first and fourth quarters of the year.
TEXAS GAS TRANSMISSION'S revenues decreased $5.4 million, or 5 percent,
and costs and operating expenses decreased $7 million, or 15 percent, due
primarily to lower transportation costs charged to Texas Gas by others and
passed through to customers as provided in Texas Gas' rates. Total throughput
decreased 24.9 TBtu, or 10 percent, due primarily to a warmer 1997 winter
heating season as compared to the first quarter of 1996. Operating profit
increased $2.3 million, or 6 percent, due primarily to favorable resolutions in
1997 of certain contractual issues, partially offset by a 1996 adjustment to
rate refund accruals. Because of its rate structure, Texas Gas typically
experiences its greatest profitability in the first and fourth quarters of the
year.
KERN RIVER GAS TRANSMISSION'S (KERN RIVER) revenues increased $800,000, or
2 percent. Total throughput increased 7.8 TBtu, or 13 percent, due primarily to
a full quarter of operations in 1997 compared to a partial quarter in 1996. The
first quarter of 1996 reflected operations from January 16, 1996, when Williams
acquired the remaining interest in Kern River. Operating profit increased $3.4
million, or 13 percent, due primarily to a full quarter of operations in 1997
compared to the partial quarter in 1996, partially offset by higher general and
administrative expenses.
FIELD SERVICES' revenues increased $19.5 million, or 12 percent, due
primarily to higher natural gas liquids sales revenues of $21 million and
cogeneration revenues of $4 million, partially offset by lower gathering
revenues of $10 million resulting primarily from an 8 percent decrease in
gathering volumes. Natural gas liquids sales revenues increased due to higher
average natural gas liquids prices combined with a 26 percent increase in
natural gas liquids volumes. Costs and operating expenses increased $24
million, or 25 percent, due primarily to higher fuel and replacement gas
purchases and the cost of cogeneration operations which began during the second
quarter of 1996. Other (income) expense - net in 1996 includes a $3 million
environmental remediation accrual. Operating profit decreased $700,000, or 2
percent, due primarily to lower gathering volumes and higher fuel and
replacement gas purchases, substantially offset by higher natural gas liquids
volumes and margins and the effect of the 1996 environmental remediation
accrual.
MERCHANT SERVICES' revenues decreased $29.7 million, or 43 percent, and
costs and operating expenses decreased $27 million, or 73 percent, due
primarily to the reporting of certain natural gas and gas liquids marketing
operations previously reported in Field Services on a net margin basis (see
Note 2). Higher price-risk management revenues and higher volumes and margins
from liquid petroleum trading activities were more than offset by lower
margins on natural gas trading activities and lower natural gas physical
trading volumes. Operating profit decreased $5.3 million, or 24 percent, due
primarily to the decrease in net revenues and the expense of adding support and
infrastructure to compete for a broader share of the emerging energy markets.
PETROLEUM SERVICES' revenues increased $9.6 million, or 8 percent, due
primarily to an $11 million increase in product sales associated with
transportation activities, partially offset by a 4 percent decrease in
shipments and lower average transportation rates. Costs and operating expenses
increased $11 million, or 12 percent, due
10
<PAGE> 12
primarily to an increase in product sales. Operating profit decreased $3.4
million, or 19 percent, due primarily to lower transportation shipments and
average transportation rates and higher operating expenses within the products
pipeline business, partially offset by a $1.5 million improvement in ethanol
operations from an operating loss of $2 million to an operating loss of
$500,000.
EXPLORATION & PRODUCTION'S revenues increased $17.9 million, or 90
percent, due primarily to higher natural gas sales prices received from the
marketing of company-owned production and Williams Coal Seam Gas Royalty Trust
(Royalty Trust) natural gas. Costs and operating expenses increased $9 million,
or 55 percent, due primarily to higher Royalty Trust natural gas purchase
prices. Operating profit increased $10 million, from $600,000 in 1996, due
primarily to the increase in average natural gas sales prices.
WILLIAMS COMMUNICATIONS GROUP'S revenues increased $76 million, or 54
percent, to $216.6 million, due primarily to acquisitions which contributed
revenues of $40 million. Additionally, increased business activity resulted in
a $21 million revenue increase in new systems sales and an $8 million increase
in system enhancement revenues. The number of ports in service at March 31,
1997, increased 5 percent and fiber billable minutes from occasional service
increased 81 percent. Dedicated service voice-grade equivalent miles at March
31, 1997, decreased 17 percent as compared with March 31, 1996, which in part
reflects a shift to occasional service. Costs and operating expenses increased
$56 million, or 53 percent, and selling, general and administrative expenses
increased $25 million, or 77 percent, due primarily to the overall increase in
business activity. The increase in selling, general and administrative expenses
also reflects the commitment by management to expand the infrastructure of this
business for future growth. Operating profit decreased $4.8 million to a $2
million operating loss, due primarily to the costs of expanding the
infrastructure.
GENERAL CORPORATE EXPENSES decreased $3 million, or 27 percent, due
primarily to lower employee compensation expense. Interest accrued increased
$15 million, or 18 percent, due primarily to higher borrowing levels under the
$1 billion bank-credit facility. The effective income tax rate in both 1997 and
1996 approximates the federal statutory rate as the effects of state income
taxes are offset by income tax credits from coal-seam gas production.
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 March 31,
1997, Williams had access to $548 million of liquidity representing the
available portion of its $1 billion bank-credit facility plus cash-equivalent
investments. This compares with liquidity of $550 million at December 31, 1996,
and $714 million at March 31, 1996. At March 31, 1997, $105 million in current
debt obligations have been classified as non-current obligations based on
Williams' intent and ability to refinance on a long-term basis. At March 31,
1997, the amount available on the $1 billion bank-credit facility of $525
million is sufficient to complete these refinancings.
In 1997, capital expenditures (excluding acquisitions of businesses) are
estimated to be approximately $1.4 billion. During 1997, Williams expects to
finance capital expenditures, investments and working-capital requirements
through cash generated from operations, the use of the available portion of its
$1 billion bank- credit facility, short-term uncommitted bank lines and/or
public debt/equity offerings.
Financing Activities
In January 1997, Williams expanded its revolving receivables facilities
and sold $200 million of receivables. The proceeds were used primarily for the
repayment of long-term debt.
In January 1997, Williams filed a $200 million shelf registration
statement with the Securities and Exchange Commission to issue trust preferred
securities. In April 1997, Williams Holdings of Delaware, Inc., a wholly-owned
subsidiary of Williams, filed a $350 million shelf registration with the
Securities and Exchange Commission to issue debt securities or preferred stock.
No securities have been issued under these registration statements.
The consolidated long-term debt to debt-plus-equity ratio decreased to
54.7 percent at March 31, 1997, from 56.1 percent at December 31, 1996. The
decrease is due primarily to lower borrowing levels at March 31, 1997.
The decrease in receivables from December 31, 1996, is due primarily to an
increase in the level of receivables sold and lower natural gas sales prices.
The decrease in accounts payable is due primarily to lower natural gas purchase
prices.
<PAGE> 13
Investing Activities
During the first quarter of 1997, Williams purchased a 20 percent interest
in a foreign telecommunications business for $65 million in cash.
Subsequent Event
On April 10, 1997, Williams Communications Group, a wholly-owned
subsidiary of Williams, and Northern Telecom (Nortel) agreed to combine their
customer premise equipment sales and services operations into a new company
called WilTel Communications, LLC. The transaction closed in the second quarter
of 1997 and will be accounted for as a purchase by Williams. Williams
Communications Group will own 70 percent of the new company, with Nortel owning
the remaining interest. The new company will have net assets of approximately
$800 million.
11
<PAGE> 14
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 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 first quarter of 1997, the Company filed a Form
8-K on January 2, 1997, which reported a significant event
under Item 5 of the Form and included the exhibits required
by Item 7 of the Form.
12
<PAGE> 15
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)
Gary R. Belitz
---------------------------------
Controller
(Duly Authorized Officer and
Principal Accounting Officer)
May 15, 1997
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
11 Computation of Earnings Per Common and Common-equivalent Share
12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11
The Williams Companies, Inc.
Computation of Earnings Per Common and Common-Equivalent Share
<TABLE>
<CAPTION>
(Thousands, except
per-share amounts)
---------------------
Three months ended
March 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Primary earnings:
Net income $ 105,900 $ 104,900
Preferred stock dividends:
$2.21 cumulative preferred stock 400 400
$3.50 cumulative convertible preferred stock 2,200 2,200
--------- ---------
Income applicable to common stock $ 103,300 $ 102,300
========= =========
Primary shares:
Average number of common shares outstanding during the period 157,903 156,512
Common-equivalent shares attributable to options and deferred stock 4,142 5,127
--------- ---------
Total common and common-equivalent shares 162,045 161,639
========= =========
Primary earnings per common and common-equivalent share $ .64 $ .63
Fully diluted earnings:
Net income $ 105,900 $ 104,900
$2.21 cumulative preferred stock dividends 400 400
--------- ---------
Income applicable to common stock $ 105,500 $ 104,500
========= =========
Fully diluted shares:
Average number of common shares outstanding during the period 157,903 156,512
Common-equivalent shares attributable to options and deferred stock 4,648 5,496
Dilutive preferred shares 5,859 5,859
--------- ---------
Total common and common-equivalent shares 168,410 167,867
========= =========
Fully diluted earnings per common and common-equivalent share $ .63 $ .62
</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>
Three months ended
March 31, 1997
--------------
<S> <C>
Earnings:
Income before income taxes $ 163.2
Add:
Interest expense - net 94.9
Rental expense representative of interest factor 7.6
Other 1.2
----------
Total earnings as adjusted plus fixed charges $ 266.9
==========
Fixed charges and preferred stock dividend requirements:
Interest expense - net $ 94.9
Capitalized interest 2.2
Rental expense representative of interest factor 7.6
Pretax effect of dividends on preferred stock of
the Company 4.0
----------
Combined fixed charges and preferred stock dividend
requirements $ 108.7
==========
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements 2.46
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 79,609
<SECURITIES> 0
<RECEIVABLES> 708,791
<ALLOWANCES> 9,165
<INVENTORY> 246,853
<CURRENT-ASSETS> 1,451,249
<PP&E> 11,344,806
<DEPRECIATION> 1,932,189
<TOTAL-ASSETS> 12,107,763
<CURRENT-LIABILITIES> 1,907,001
<BONDS> 4,236,423
0
161,035
<COMMON> 161,149
<OTHER-SE> 3,191,753
<TOTAL-LIABILITY-AND-EQUITY> 12,107,763
<SALES> 0
<TOTAL-REVENUES> 1,001,436
<CGS> 0
<TOTAL-COSTS> 738,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 708
<INTEREST-EXPENSE> 97,052
<INCOME-PRETAX> 163,211
<INCOME-TAX> 57,281
<INCOME-CONTINUING> 105,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,930
<EPS-PRIMARY> .64
<EPS-DILUTED> .63
</TABLE>
