<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, 1998
-------------------------------------------------
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 April 30, 1998
- --------------------------------------- ------------------------------------
Common Stock, $1 par value 423,960,753 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 Ended March 31, 1998 and 1997 2
Consolidated Balance Sheet--March 31, 1998 and
December 31, 1997 3
Consolidated Statement of Cash Flows--Three Months
Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 4. Submission of matters to a vote of security holders 16
Item 6. Exhibits and Reports on Form 8-K
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, Inc.
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be achieved. Such statements
are made in reliance on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995. Additional information about issues
that could lead to material changes in performance is contained in The Williams
Companies, Inc.'s Current Report on Form 8-K filed April 27, 1998.
1
<PAGE> 3
The Williams Companies, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
(Millions, except
per-share amounts)
-------------------------------
Three months ended
March 31,
-------------------------------
1998 1997*
------------ ------------
<S> <C> <C>
Revenues:
Gas Pipelines (Note 3) $ 443.3 $ 441.7
Energy Services (Note 3) 1,215.5 1,335.5
Communications (Note 2) 387.8 216.6
Other 12.2 9.9
Intercompany eliminations (99.0) (75.1)
------------ ------------
Total revenues 1,959.8 1,928.6
------------ ------------
Profit-center costs and expenses:
Costs and operating expenses 1,423.1 1,425.6
Selling, general and administrative expenses 233.9 171.7
Other (income) expense--net (Note ___) 31.9 (4.2)
------------ ------------
Total profit-center costs and expenses 1,688.9 1,593.1
------------ ------------
Operating profit:
Gas Pipelines (Note 3) 195.0 181.0
Energy Services (Note 3) 92.8 160.7
Communications (Note 2) (20.1) (2.0)
Other 3.2 (4.2)
------------ ------------
Total operating profit 270.9 335.5
General corporate expenses (Note 4) (40.8) (17.1)
Interest accrued (118.0) (109.3)
Interest capitalized 8.2 2.3
Investing income 2.7 6.8
Gain on sale of assets (Note 5) -- 66.0
Minority interest in income of consolidated subsidiaries (2.3) (1.2)
Other income (expense)--net (2.3) .7
------------ ------------
Income before income taxes and extraordinary loss 118.4 283.7
Provision for income taxes (Note 6) 45.5 105.1
------------ ------------
Income before extraordinary loss 72.9 178.6
Extraordinary loss (Note 7) (4.8) --
------------ ------------
Net income 68.1 178.6
Preferred stock dividends 2.2 2.6
------------ ------------
Income applicable to common stock $ 65.9 $ 176.0
============ ============
Basic earnings per common share (Note 8):
Income before extraordinary loss $ .17 $ .43
Extraordinary loss (Note 7) (.01) --
------------ ------------
Net income $ .16 $ .43
============ ============
Average shares (thousands) 417,347 411,604
Diluted earnings per common share (Note 8):
Income before extraordinary loss $ .17 $ .42
Extraordinary loss (Note 7) (.01) --
------------ ------------
Net income $ .16 $ .42
============ ============
Average shares (thousands) 439,031 429,074
Cash dividends per common share $ .15 $ .13
</TABLE>
* Amounts have been restated to reflect the acquisition of MAPCO Inc., which
has been accounted for as a pooling of interests. (See Note 2 for additional
information.)
See accompanying notes.
2
<PAGE> 4
The Williams Companies, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
-------------------------------
March 31, December 31,
1998 1997*
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 173.2 $ 122.1
Receivables 1,358.1 1,584.5
Transportation and exchange gas receivable 128.0 130.4
Inventories (Note 9) 422.3 433.9
Commodity trading assets 232.3 180.3
Deferred income taxes 219.9 236.6
Other 155.3 176.2
------------ ------------
Total current assets 2,689.1 2,864.0
Investments 424.4 388.1
Property, plant and equipment, at cost 14,931.9 14,605.1
Less accumulated depreciation and depletion (3,181.9) (3,068.3)
------------ ------------
11,750.0 11,536.8
Goodwill and other intangible assets--net 605.5 600.6
Other assets and deferred charges 944.3 888.1
------------ ------------
Total assets $ 16,413.3 $ 16,277.6
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 10) $ 901.9 $ 693.0
Accounts payable 1,004.8 1,288.5
Transportation and exchange gas payable 62.7 67.7
Accrued liabilities 1,224.9 1,281.6
Commodity trading liabilities 233.6 182.0
Long-term debt due within one year (Note 10) 45.3 80.3
------------ ------------
Total current liabilities 3,473.2 3,593.1
Long-term debt (Note 10) 5,416.2 5,351.5
Deferred income taxes 2,036.1 2,009.1
Other liabilities 967.8 946.5
Minority interest in consolidated subsidiaries 173.4 144.8
Contingent liabilities and commitments (Note 11)
Stockholders' equity:
Preferred stock, $1 par value, 30 million shares authorized, 2.1 million shares
issued in 1998 and 2.5 million shares issued in 1997 119.5 142.2
Common stock, $1 par value, 960 million shares authorized, 427 million
shares issued in 1998 and 431.5 million shares issued in 1997 427.0 431.5
Capital in excess of par value 907.5 1,041.6
Retained earnings 2,986.9 2,983.3
Other (46.1) (54.1)
------------ ------------
4,394.8 4,544.5
Less treasury stock (at cost), 4 million shares of common stock in 1998
and 18.9 million shares of common stock in 1997 (48.2) (311.9)
------------ ------------
Total stockholders' equity 4,346.6 4,232.6
------------ ------------
Total liabilities and stockholders' equity $ 16,413.3 $ 16,277.6
============ ============
</TABLE>
* Amounts have been restated to reflect the acquisition of MAPCO Inc. which has
been accounted for as a pooling of interests. (See Note 2 for additional
information.)
See accompanying notes.
3
<PAGE> 5
The Williams Companies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
-------------------------------
Three months ended March 31,
-------------------------------
1998 1997*
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 68.1 $ 178.6
Adjustments to reconcile to cash provided from operations:
Extraordinary loss 4.8 --
Depreciation, depletion and amortization 155.3 140.6
Provision for deferred income taxes 37.8 25.4
Gain on dispositions of property (4.4) (69.5)
Minority interest in income of consolidated subsidiaries 2.3 1.2
Cash provided (used) by changes in assets and liabilities:
Receivables sold (17.2) 185.3
Receivables 280.8 269.7
Inventories 12.6 (46.9)
Other current assets 6.1 45.1
Accounts payable (275.6) (345.1)
Accrued liabilities (53.7) (8.6)
Current commodity trading assets and liabilities (.4) (10.8)
Non-current commodity trading assets and liabilities (2.4) .5
Other, including changes in non-current assets and liabilities (2.9) 18.8
------------ ------------
Net cash provided by operating activities 211.2 384.3
------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable 354.7 --
Payments of notes payable (646.2) (150.0)
Proceeds from long-term debt 1,450.1 384.0
Payments of long-term debt (926.7) (319.5)
Proceeds from issuance of common stock 41.6 18.7
Purchases of treasury stock -- (33.9)
Dividends paid (64.6) (52.5)
Other--net 20.0 (3.4)
------------ ------------
Net cash provided (used) by financing activities 228.9 (156.6)
------------ ------------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (374.9) (177.3)
Proceeds from dispositions 12.0 10.7
Changes in accounts payable and accrued liabilities (7.0) (17.9)
Acquisition of businesses, net of cash acquired -- (20.1)
Proceeds from sale of assets -- 66.0
Purchase of investments/advances to affiliate (14.8) (133.5)
Other--net (4.3) 17.3
------------ ------------
Net cash used by investing activities (389.0) (254.8)
------------ ------------
Increase (decrease) in cash and cash equivalents 51.1 (27.1)
Cash and cash equivalents at beginning of period 122.1 220.1
------------ ------------
Cash and cash equivalents at end of period $ 173.2 $ 193.0
============ ============
</TABLE>
* Amounts have been restated to reflect the acquisition of MAPCO Inc., which
has been accounted for as a pooling of interests. (See Note 2 for additional
information.)
See accompanying notes.
4
<PAGE> 6
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 Supplemental
Consolidated financial statements and notes thereto in Williams' Current Report
on Form 8-K filed April 27, 1998. The accompanying financial statements have not
been audited by independent auditors, but include all adjustments both normal
recurring and others which, in the opinion of Williams' management, are
necessary to present fairly its financial position at March 31, 1998, and its
results of operations and cash flows for the three months ended March 31, 1998
and 1997.
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
- --------------------------------------------------------------------------------
On March 28, 1998, Williams completed the acquisition of MAPCO Inc. by
exchanging shares of Williams common stock for outstanding MAPCO common stock
and employee stock options (see Note 4). The transaction has been accounted for
as a pooling of interests and, accordingly, the consolidated financial
statements and notes have been restated to reflect the results of operations,
financial position and cash flows as if the companies had been combined
throughout the periods presented. MAPCO is engaged in the NGL pipeline,
petroleum refining and marketing and propane marketing businesses, and has
become part of the Energy Services business unit. MAPCO's propane marketing
operations are included in Energy Marketing & Trading; its natural gas liquids
operations are included in Midstream Gas & Liquids; and its petroleum refining
and retail petroleum operations are included in Petroleum Services. Revenues and
operating profit amounts previously reported as Field Services are now included
in Midstream Gas & Liquids.
On April 30, 1997, Williams and Northern Telecom (Nortel) combined their
customer-premise equipment sales and service operations into a limited liability
company, Williams Communications Solutions, LLC (LLC), formerly WilTel
Communications, LLC. Communications' revenues and operating profit amounts for
1997 include the operating results of the LLC beginning May 1, 1997. If the
transaction had occurred on January 1, 1997, Williams' unaudited pro forma
revenues for the three months ended March 31, 1997 would have been $2.1 billion.
The pro forma effect of the transaction on Williams' net income is not
significant. Pro forma financial information is not necessarily indicative of
results of operations that would have occurred if the transaction had occurred
on January 1, 1997, or of future results of operations of the combined
companies.
3. Revenues and operating profit
- --------------------------------------------------------------------------------
Revenues and operating profit of Gas Pipelines and Energy Services for the
three months ended March 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
(Millions) Revenues Operating Profit
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gas Pipelines:
Central $ 45.6 $ 46.9 $ 18.0 $ 20.7
Kern River Gas
Transmission 41.2 39.7 29.0 29.0
Northwest Pipeline 71.2 67.2 34.1 29.2
Texas Gas Transmission 87.6 97.2 42.8 43.4
Transcontinental Gas
Pipe Line 197.7 190.7 71.1 58.7
-------- -------- -------- --------
$ 443.3 $ 441.7 $ 195.0 $ 181.0
======== ======== ======== ========
Energy Services:
Energy Marketing $ 139.1 $ 196.4* $ 14.2 $ 29.4*
& Trading
Exploration & 40.6 37.8 12.3 10.6
Production
Midstream Gas & 311.3 396.2* 66.3 86.0*
Liquids
Petroleum Services 724.5 705.1* 35.9 34.7*
Merger-related costs -- -- (35.9) --
-------- -------- -------- --------
$1,215.5 $1,335.5* $ 92.8 $ 160.7*
======== ======== ======== ========
</TABLE>
*Amounts have been restated as described in Note 2.
4. MAPCO Acquisition
- --------------------------------------------------------------------------------
On November 24, 1997, Williams and MAPCO Inc. announced that they had entered
into a definitive merger agreement whereby Williams would acquire MAPCO by
exchanging 1.665 shares of Williams common stock for each outstanding share of
MAPCO common stock. In addition, outstanding MAPCO employee stock options would
be converted into Williams common stock. The merger was consummated on March 28,
1998, with the issuance of 98.6 million shares of Williams common stock, valued
at $3.1 billion based on the closing price of Williams common stock on March 23,
1998. In connection with the merger, 8.4 million shares of MAPCO $1 par value
common stock previously held in treasury were retired. These shares had a
carrying value of $253.8 million.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Intercompany transactions between Williams and MAPCO
prior to the merger have been eliminated, and no material adjustments were
necessary to conform MAPCO's accounting policies.
In connection with the merger, Williams recognized approximately $59 million
in merger-related costs comprised primarily of outside professional fees and
early retirement and severance costs. Approximately $36 million of these
merger-related costs are included in Other (income) expense - net as a
component of Energy Services' operating profit (See Note 3) and approximately
$23 million is included in general corporate expenses. During 1997, payments of
$32.6 million were made for non-compete agreements. These costs will be
amortized over one to three years after the merger completion date.
The results of operations for each company and the combined amounts
presented in the Williams' Consolidated Statement of Income are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
(Millions) 1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Williams $ 1,137.3 $ 1,001.4
MAPCO 823.8 931.2
Intercompany eliminations (1.3) (4.0)
------------ ------------
Combined $ 1,959.8 $ 1,928.6
============ ============
Net income:
Williams $ 59.7 $ 105.9
MAPCO 8.4 72.7
------------ ------------
Combined $ 68.1 $ 178.6
============ ============
</TABLE>
5. Sale of assets
- --------------------------------------------------------------------------------
In January 1997, Williams sold its interest in the natural gas liquids and
condensate reserves in the West Panhandle field of Texas for $66 million in
cash. The sale resulted in a $66 million pre-tax gain on the transaction,
because the related reserves had no book value.
5
<PAGE> 7
Notes (continued)
6. Provision for income taxes
- --------------------------------------------------------------------------------
The provision for income taxes includes:
<TABLE>
<CAPTION>
Three months ended
(Millions) March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current:
Federal $ 5.6 $ 73.0
State 1.5 6.7
Foreign .6 --
------------ ------------
7.7 79.7
Deferred:
Federal 32.9 19.6
State 4.9 5.8
------------ ------------
37.8 25.4
------------ ------------
Total provision $ 45.5 $ 105.1
============ ============
</TABLE>
The effective income tax rate for 1998 and 1997 is greater than the federal
statutory rate due primarily to the effects of state income taxes. Partially
offsetting in 1997 were the effects of income tax credits from coal-seam gas
production.
6
<PAGE> 8
Notes (continued)
7. Extraordinary loss
- --------------------------------------------------------------------------------
The extraordinary loss in 1998 resulted from the early extinguishment of
debt. Williams paid $54.4 million to redeem higher interest rate debt for a $4.8
million net loss (net of a $2.6 million benefit for income taxes).
8. Earnings per share
- --------------------------------------------------------------------------------
Basic and diluted earnings per common share are computed for the three months
ended March 31, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
(Millions, except
per-share amounts)
-------------------------------
Three months ended
March 31,
-------------------------------
1998 1997*
------------ ------------
<S> <C> <C>
Basic earnings:
Income before extraordinary loss $ 72.9 $ 178.6
Extraordinary loss (4.8) --
------------ ------------
Net Income 68.1 178.6
Preferred stock dividends:
$2.21 cumulative preferred stock -- .4
$3.50 cumulative convertible preferred stock 2.2 2.2
------------ ------------
Income applicable to common stock $ 65.9 $ 176.0
============ ============
Basic shares:
Average number of common shares outstanding during the period 415,038 407,686
Common shares attributable deferred stock 2,309 3,918
------------ ------------
Total common shares 417,347 411,604
============ ============
Basic earnings per common share:
Income before extraordinary loss $ .17 $ .43
Extraordinary loss from early extinguishment of debt (.01) --
------------ ------------
Net income $ .16 $ .43
============ ============
Diluted earnings:
Income before extraordinary loss $ 72.9 $ 178.6
Extraordinary loss (4.8) --
------------ ------------
Net income 68.1 178.6
$2.21 cumulative preferred stock dividends -- .4
------------ ------------
Income applicable to common stock $ 68.1 $ 178.2
============ ============
Diluted shares:
Average number of common shares outstanding during the period 415,038 407,686
Shares attributable to options and deferred stock 12,846 9,669
Dilutive preferred shares 11,147 11,719
------------ ------------
Total common shares 439,031 429,074
============ ============
Diluted earnings per common share:
Income before extraordinary loss $ .17 $ .42
Extraordinary loss from early extinguishment of debt (.01) --
------------ ------------
Net income $ .16 $ .42
============ ============
</TABLE>
Note: Share and per-share amounts for 1997 have been restated to reflect the
effect of the December 29, 1997, two-for-one common stock split and
distribution and the acquisition of MAPCO Inc. which has been accounted
for as a pooling of interests.
7
<PAGE> 9
Notes (continued)
9. Inventories
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
------------ ------------
(Millions) 1998 1997
------------ ------------
<S> <C> <C>
Raw materials:
Crude oil $ 31.9 $ 30.5
Other 2.0 5.2
------------ ------------
33.9 35.7
Finished goods:
Refined petroleum products 145.4 122.3
Fertilizer and natural gas liquids 29.0 43.8
General merchandise &
communications equipment 88.8 90.0
------------ ------------
263.2 256.1
Materials and supplies 83.6 82.5
Natural gas in underground storage 39.9 57.8
Other 1.7 1.8
------------ ------------
$ 422.3 $ 433.9
============ ============
</TABLE>
10. Debt and banking arrangements
- --------------------------------------------------------------------------------
Notes payable
During 1998, Williams Holdings of Delaware, Inc. (Williams Holdings)
increased its commercial paper program to $1 billion. The commercial paper
program is backed by short-term bank-credit facilities totaling $1 billion. At
March 31, 1998, $696 million of commercial paper was outstanding under the
program. Interest rates vary with current market conditions.
Debt
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted-
average
interest March 31, December 31,
(Millions) rate* 1998 1997
-------- -------- --------
<S> <C> <C> <C>
The Williams Companies, Inc.
Revolving credit loans -% $ - $ 383.0
Debentures, 8.875% - 10.25%,
payable 2012, 2020
and 2021 8.6 137.0 137.0
Notes, 5.1% - 9.625%, payable
through 2012** 6.5 1,691.4 1,042.1
Williams Gas Pipelines Central
Variable rate notes,
payable 1999 8.2 130.0 130.0
Kern River Gas Transmission
Notes, 6.42% and 6.72%,
payable through 2001 6.6 568.9 586.4
Northwest Pipeline
Debentures, 7.125% - 10.65%,
payable through 2025 8.3 151.4 151.6
Notes, 6.625%, payable 2007 6.6 250.0 250.0
Adjustable rate notes,
payable through 2002 9.0 6.7 8.3
Texas Gas Transmission
Debentures, 7.25%, payable
2027 7.3 99.0 99.0
Notes, 8.625%, payable 2004 8.6 152.3 152.4
Transcontinental Gas Pipe Line
Revolving credit loans -- -- 160.0
Debentures, 7.08% and 7.25%, payable
through 2026** 7.2 399.7 399.7
Notes, 6.125% - 8.875%, payable
2002 through 2008 7.0 426.4 128.2
Adjustable rate note, payable
2002 5.8 150.0 150.0
Williams Holdings of Delaware
Revolving credit loans 6.6 200.0 200.0
Debentures, 6.25% and 7.70%,
payable 2006 and 2027 5.5 351.8 351.8
Notes, 6.365% - 8.87%, payable
through 2022 7.7 572.3 625.3
MAPCO Inc.
Commercial paper and
bank money market lines -- -- 135.8
MAPCO Natural Gas Liquids, Inc.
Notes, 6.67% - 8.95%,
payable through 2022 7.5 165.0 165.0
Williams Communications Solutions, LLC
Revolving credit loans -- -- 125.0
Other, payable through 2005 7.6 9.6 51.2
-------- -------- --------
5,461.5 5,431.8
Current portion of long-term debt (45.3) (80.3)
-------- --------
$5,416.2 $5,351.5
======== ========
</TABLE>
* At March 31, 1998, including the effects of interest-rate swaps.
** $300 million, 5.95% notes, payable 2010; $200 million, 7.08% debentures,
payable 2026; and $240 million, 6.125% notes, payable 2012; are subject to
redemption at par at the option of the debtholder in 2000, 2001 and 2002,
respectively.
Under Williams' $1 billion credit agreement, Northwest Pipeline,
Transcontinental Gas Pipe Line, Texas Gas Transmission, and Williams
Communications Solutions, LLC will have access to varying amounts of the
facility while Williams and Williams Holdings have access to all unborrowed
amounts. Interest rates vary with current market conditions.
For financial statement reporting purposes at March 31, 1998, $198 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,
1998, the amount available on the $1 billion credit agreement of $800 million is
sufficient to complete these refinancings.
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 $345 million at March 31, 1998; 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, $379 million of revenues has been reserved for potential refund as of
March 31, 1998.
In 1997, the Federal Energy Regulatory Commission (FERC) issued orders
addressing, among other things, the authorized rates of return for three of the
Williams' interstate natural gas pipeline subsidiaries. All of the orders
involve rate cases that became effective between 1993 and 1995 and, in each
instance, these cases have been superseded by more recently filed rate cases. In
the three orders, the FERC continued its practice of utilizing a methodology for
calculating rates of return that incorporates a long-term growth rate component.
However, the long-term growth rate component used by the FERC is now a
projection of U.S. gross domestic product growth rates. Generally, calculating
rates of return utilizing a methodology which includes a long-term growth rate
component results in rates of return that are lower than they would be if the
long-term growth rate component were not included in the methodology. Each of
the three pipeline subsidiaries challenged its respective FERC order in an
effort to have the FERC change its rate of return methodology with respect to
these and other rate cases. In October 1997, the FERC voted not to reconsider an
order issued in one of the three pipeline proceedings, but convened a conference
on January 30, 1998, to
8
<PAGE> 10
Notes (continued)
consider, on an industry-wide basis, issues with respect to pipeline rates of
return.
In 1992, 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. Williams' gas pipelines subsidiaries implemented restructurings in
1993. Certain aspects of two of its pipeline companies' restructurings are
under appeal.
The only appeal challenging Northwest Pipeline's restructuring has been
dismissed. On April 14, 1998, all appeals concerning Transcontinental Gas Pipe
Line's restructuring were denied by the D.C. Circuit. 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.
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 Gas
Pipelines Central (Central) has made 11 filings to direct bill take-or-pay and
gas supply realignment costs. The total amount approved for direct billing, net
of certain amounts collected subject to refunds, is $68 million. An intervenor
has filed a protest seeking to have the FERC 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.
On September 30, 1997, the FERC, by a two-to-one vote, reversed the
administrative law judge and determined that a contract was imprudently entered
into in 1982. Central has filed for rehearing, and management plans to
vigorously defend the prudency of these contracts. An intervenor also filed a
protest seeking to have the FERC decide whether non-settlement costs are
eligible for recovery under Order No. 636. In January 1997, the FERC held that
none of the non-settlement costs could be recovered by Central if the costs were
not eligible for recovery under Order No. 636. This order was affirmed on
rehearing in April 1997. A FERC administrative law judge is holding in abeyance
an initial decision on eligibility pending FERC's final decision on the prudence
challenge discussed above. If the FERC's final ruling on eligibility is
unfavorable, Central will appeal these orders to the courts. Central will make
additional filings under the applicable FERC orders to recover such additional
costs as may be incurred in the future.
Because of the uncertainties pertaining to the outcome of these issues
currently pending at the FERC and the status of settlement negotiation and
various other factors, Central cannot reasonably estimate the costs that may be
incurred nor the related amounts that could be recovered from customers. Central
is actively pursuing negotiations with the producers to resolve all outstanding
obligations under the contracts. Based on the terms of what Central believes
would be a reasonable settlement, $94 million has been accrued as a liability at
March 31, 1998. Central also has an $88 million regulatory asset at March 31,
1998, for estimated recovery of future costs from customers. Central cannot
predict the final outcome of the FERC's rulings on contract prudency and cost
recovery under Order No. 636 and is unable to determine the ultimate liability
and loss, if any, at this time. If Central does not prevail in these FERC
proceedings or any subsequent appeals, and if Central is able to reach a
settlement with the producers consistent with the $94 million accrued liability,
the loss could be the total of the regulatory asset and the $40 million of
protested assets. Central continues to believe that it entered into the gas
purchase contracts in a prudent manner under FERC rules in place at the time.
Central also believes that the future recovery of these costs would be in
accordance with the terms of Order No. 636.
In September 1995, Texas Gas received FERC approval of a settlement regarding
Texas Gas' recovery of gas supply realignment costs. Through March 31, 1998,
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 $66 million, plus interest,
in gas supply realignment costs.
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.
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Notes (continued)
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,
1998, these subsidiaries had reserves totaling approximately $27 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. In addition, these
subsidiaries have incurred or are alleged to have incurred, various other
hazardous materials removal or remediation obligations under environmental laws.
Although no assurances can be given, Williams does not believe that these
obligations or the PRP status of these subsidiaries will have a material adverse
effect on its financial position, results of operations or net cash flows.
Transcontinental Gas Pipe Line, Texas Gas and Central 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 Central 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 Central, Texas Gas and Transcontinental
Gas Pipe Line. As of March 31, 1998, Central 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
Midstream Gas & Liquids unit of Energy Services (WES) had recorded an aggregate
liability of approximately $11 million, representing the current estimate of its
future environmental and remediation costs, including approximately $5 million
relating to former Central facilities. Texas Gas and Transcontinental Gas Pipe
Line likewise had recorded liabilities for these costs which are included in the
$27 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 Central have deferred these costs pending recovery as incurred
through future rates and other means.
WES also accrues environmental remediation costs for its retail petroleum
refining and propane marketing operations primarily related to soil and
groundwater contamination. At March 31, 1998, WES and its subsidiaries had
reserves, in addition to the reserves listed above, totaling approximately $23
million. WES recognizes receivables related to environmental remediation costs
from state funds as a result of laws permitting states to reimburse certain
expenses associated with underground storage tank problems and repairs. At
March 31, 1998, WES and its subsidiaries had receivables totaling $12 million.
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, 1998, Williams had approximately $12 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. The district court has
stayed all of the cases involving Northwest Pipeline until the plaintiffs
exhaust their remedies before the Southern Ute Indian Tribal Court. Some
plaintiffs filed cases in the Tribal court, but none named Northwest Pipeline as
a defendant.
OTHER LEGAL MATTERS
On April 7, 1992, a liquefied petroleum gas explosion occurred near an
underground salt dome storage facility located near Brenham, Texas and owned by
an affiliate of MAPCO Inc., Seminole Pipeline Company ("Seminole"). MAPCO Inc.,
as well as Seminole, Mid-America Pipeline Company, MAPCO Natural Gas Liquids
Inc., and other non-MAPCO entities were named as defendants in civil action
lawsuits filed in state district courts located in four Texas counties. Seminole
and the above-mentioned subsidiaries of MAPCO Inc. have settled in excess of
1,600 claims in these lawsuits. The only lawsuit remaining is the Dallmeyer case
which was tried before a jury in Harris County. In Dallmeyer, the judgment
rendered in March 1996 against defendants Seminole and MAPCO Inc. and its
subsidiaries totaled approximately $72 million which included nearly $65 million
of punitive damages awarded to the 21 plaintiffs.
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Notes (continued)
Both plaintiffs and defendants have appealed the Dallmeyer judgment to the Court
of Appeals for the Fourteenth District of Texas in Harris County. The defendants
seek to have the judgment modified in many respects, including the elimination
of punitive damages as well as a portion of the actual damages awarded. If the
defendants prevail on appeal, it will result in an award significantly less than
the judgment. The plaintiffs have cross-appealed and seek to modify the judgment
to increase the total award plus interest to exceed $155 million.
In February and March 1998, the Company entered into settlement agreements
involving 17 of the 21 plaintiffs to finally resolve their claims against all
defendants for an aggregate payment of approximately $10 million. These
settlements have satisfied and reduced the judgment on appeal by approximately
$42 million.
As to the remaining four plaintiffs, the Company is continuing with
settlement negotiations and believes that any final agreement reached with
these plaintiffs will significantly reduce the Company's liability under the
judgment.
Management believes that it has defenses of considerable merit and will
vigorously litigate the Dallmeyer appeal or seek a satisfactory settlement, but
is not able to predict the ultimate outcome of this matter at this time. The
Company has accrued a liability representing an estimate of amounts it expects
to incur to finally resolve all litigation.
In 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit against
Williams Production Company (Williams Production), a wholly-owned subsidiary of
Williams, 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. On July 16, 1997, the U.S.
Court of Appeals for the Tenth Circuit reversed the decision of the district
court, held that the Tribe owns the coal-seam gas produced from certain coal
strata on fee lands within the exterior boundaries of the Tribe's reservation,
and remanded the case to the district court for further proceedings. On
September 16, 1997, Amoco Production Company, the class representative for the
defendant class (of which Williams Production is a part), filed its motion for
rehearing en banc before the Court of Appeals. On December 4, 1997, the Tenth
Circuit Court of Appeals agreed to rehear the appeal, and on March 17, 1998, the
Court sitting en banc heard oral arguments. The parties await the Court of
Appeals' decision.
Williams Communications, Inc. filed suit on March 20, 1998, against WorldCom
Network Services, Inc. (WorldCom) in district court in Tulsa County in order to
prevent WorldCom from disconnecting any Williams' equipment on the WorldCom
network. This suit seeks a declaratory judgment that the single fiber retained
by Williams on the WorldCom network can be used for specified multimedia uses
and that WorldCom is required to permit Williams to purchase additional fiber
either acquired or constructed by WorldCom. WorldCom has denied Williams' claim
and has asserted various counter claims for monetary damages, recession and
injunctive relief.
In connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, Transcontinental Gas Pipe Line and
Texas Gas each entered into certain settlements with producers which may require
the indemnification of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. As a result of
such settlements, Transcontinental Gas Pipe Line is currently defending two
lawsuits brought by producers. In one of the cases, a jury verdict found that
Transcontinental Gas Pipe Line was required to pay a producer damages of $23.3
million including $3.8 million in attorneys' fees. Transcontinental Gas Pipe
Line intends to appeal. In the other case, a producer has asserted damages,
including interest calculated through December 31, 1997, of approximately $6
million.
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 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.
12. Adoption of accounting standards
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board issued two new accounting standards,
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." Both standards, effective for fiscal years beginning
after December 15, 1997, are disclosure-oriented
11
<PAGE> 13
standards. Therefore, neither standard will affect Williams' reported
consolidated net income or cash flows.
13. Comprehensive income
- --------------------------------------------------------------------------------
Comprehensive income for the three months ended March 31 is as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997
---------- ----------
<S> <C> <C>
Net income $ 68.1 $ 178.6
Other comprehensive income:
Unrealized gains on securities 13.3 --
Foreign currency translation
adjustments (2.1) --
---------- ----------
Comprehensive income before taxes 79.3 178.6
Income taxes 5.2 --
---------- ----------
Comprehensive income $ 74.1 $ 178.6
========== ==========
</TABLE>
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<PAGE> 14
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
MAPCO Acquisition
On November 24, 1997, Williams and MAPCO Inc. announced that they had
entered into a definitive merger agreement whereby Williams would acquire MAPCO
by exchanging 1.665 shares of Williams common stock for each outstanding share
of MAPCO common stock. In addition, outstanding MAPCO employee stock options
would be converted into Williams common stock. The merger was consummated on
March 28, 1998, with the issuance of 98.6 million shares of Williams common
stock. MAPCO is engaged in the NGL pipeline, petroleum refining and marketing
and propane marketing businesses, and became part of the Energy Services
business unit.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period financial information
presented has been restated to include the combined results of operations and
financial condition of MAPCO as though it had always been a part of Williams.
Results of Operations
First Quarter 1998 vs. First Quarter 1997
GAS PIPELINES
CENTRAL'S revenues decreased $1.3 million, or 3 percent. Total throughput
decreased 8.2 TBtu, or 7 percent, due primarily to lower firm transportation
volumes. Other (income) expense - net for both 1998 and 1997 includes gains from
the sale-in-place of natural gas from a decommissioned storage field of $3
million and $7 million, respectively. Operating profit decreased $2.7 million,
or 13 percent, due primarily to a lower gain in 1998 compared to 1997 from the
sale-in-place of natural gas, partially offset by lower operating and
maintenance expenses.
KERN RIVER GAS TRANSMISSION'S revenues increased $1.5 million, or 4
percent, due primarily to higher interruptible transportation revenues. Total
throughput increased 9.2 TBtu, or 14 percent, due primarily to higher firm
transportation volumes. Operating profit remained unchanged as increased
revenues were offset by higher general and administrative expenses, depreciation
and taxes other than income taxes.
NORTHWEST PIPELINE'S revenues increased $4 million, or 6 percent, due
primarily to a new rate design effective March 1, 1997, that enables greater
short-term firm and interruptible transportation volumes. Total throughput
increased 8.3 TBtu, or 4 percent. Operating profit increased $4.9 million, or 17
percent, due primarily to the new rate design, lower operating and maintenance
expenses and lower general and administrative expenses, slightly offset by
higher depreciation expense.
TEXAS GAS TRANSMISSION'S revenues decreased $9.6 million, or 10 percent,
due primarily to $4 million lower reimbursable costs passed through to customers
as provided in Texas Gas' rates and the effect of the favorable resolution in
1997 of certain contractual issues. Total throughput decreased 6.3 TBtu, or 3
percent, due primarily to a warmer 1998 winter heating season. Operating profit
decreased $600,000, or 1 percent, due primarily to the effect of favorable
resolutions in 1997 of certain contractual issues, substantially offset by lower
operating and maintenance expenses and general and administrative expenses in
1998. Because of its rate structure, Texas Gas typically experiences its
greatest profitability in the first and fourth quarters of the year.
TRANSCONTINENTAL GAS PIPE LINE'S (TRANSCO) revenues increased $7 million,
or 4 percent, due primarily to expansion projects placed into service during
1997, new services begun in late 1997 and new rates effective May 1, 1997,
partially offset by $5 million lower reimbursable costs passed through to
customers as provided in Transco's rates. Total throughput increased slightly.
Operating profit increased $12.4 million, or 21 percent, due primarily to the
new rates and services and lower operating and maintenance expenses, slightly
offset by higher depreciation expense of $2 million. Because of its rate
structure and historical maintenance schedule, Transco typically experiences its
greatest profitability in the first and fourth quarters of the year.
ENERGY SERVICES
ENERGY MARKETING & TRADING'S revenues decreased $57.3 million, or 29
percent, due primarily to the $47 million impact of lower average propane sales
prices as compared to 1997 when sales prices were unusually high. Revenues
associated with the natural gas and petroleum products price-risk management
business decreased $19 million due to unfavorable market movement against both
the natural gas and petroleum products portfolios, attributable in part to a
warmer than normal winter over much of the country, lower natural gas market
volatility and significant short-term market volatility for crude oil. In
addition, natural gas contract origination revenues declined. Partially
offsetting the decreases were
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<PAGE> 15
increases in natural gas and petroleum products physical and notional trading
volumes, $10 million higher revenues from increased propane sales volumes and
higher revenues from an increase in electric power marketing. Costs and
operating expenses decreased $51 million, or 34 percent, due primarily to lower
average propane purchase prices. Operating profit decreased $15.2 million, or 52
percent, due primarily to the net decline in revenues from price-risk management
and energy trading activities and a $10 million increase in general and
administrative expenses related to increased infrastructure, partially offset by
$7 million of higher propane margins.
EXPLORATION & PRODUCTION'S revenues increased $2.8 million, or 7 percent,
due primarily to the recognition of $8 million in deferred income resulting from
a transaction that transferred certain tax credits to a third party, and an
increase in both company-owned production volumes sold and marketing volumes
from Williams Coal Seam Gas Royalty Trust, partially offset by lower average
natural gas sales prices. Operating profit increased $1.7 million, or 16
percent, due primarily to the recognition of deferred income and increased
company-owned production, substantially offset by lower average sales prices,
higher depreciation and depletion and increased dry hole costs.
MIDSTREAM GAS & LIQUIDS' revenues decreased $84.9 million, or 21 percent,
due primarily to a $17 million impact from the shutdown of the Canadian
marketing operations, lower liquids sales from processing activities of $11
million, $8 million lower pipeline transportation revenues resulting from
decreased shipments, and a decline in revenues from liquids marketing of $49
million. These decreases were slightly offset by $6 million higher gathering
revenues due to higher average gathering rates. The $11 million decrease in
liquids margins from processing activities reflects lower average liquids
prices, partially offset by 13 percent higher volumes. The $49 million decrease
in liquids marketing revenues reflects significantly lower average sales prices
combined with decreased volumes. Costs and operating expenses decreased $63
million, or 21 percent, due primarily to lower liquids marketing purchases and
the shutdown of the Canadian marketing operations. Operating profit decreased
$19.7 million, or 23 percent, due primarily to $11 million lower per-unit
liquids margins from processing activities, decreased pipeline shipments and
higher operating, maintenance and depreciation expenses, partially offset by
higher gathering revenues.
PETROLEUM SERVICES' revenues increased $19.4 million, or 3 percent, due
primarily to revenues of $13 million from energy information management
operations not present in 1997, a $10 million increase in convenience store
merchandise sales following the May 1997 EZ-Serve acquisition and $6 million
from higher ethanol sales, partially offset by a $10 million decrease in retail
gasoline and diesel fuel sales reflecting lower average prices. The ethanol
sales increase reflects 33 percent higher ethanol sales volumes partially offset
by lower average ethanol sales prices. A $176 million revenue increase from
refining operations due to increases in processed and purchased barrels sold was
offset by significantly lower average sales prices. Costs and operating expenses
increased $17.1 million, or 3 percent, due primarily to $16 million in operating
costs of energy information management operations not present in 1997, a $12
million increase in merchandise purchases and convenience store operating costs
following the May 1997 EZ-Serve convenience stores acquisition, $6 million
associated with increased ethanol production, and increased maintenance and
production costs of $5 million at the Memphis refinery, partially offset by $19
million lower crude and refined product purchases. The decrease in crude
purchases reflects a $191 million decrease due to lower average purchase prices,
substantially offset by a $172 million increase due to increased volumes
purchased. Operating profit increased $1.2 million, or 3 percent, due primarily
to a $17 million increase in margins from refining operations reflecting
increased volumes sold and $2 million lower transportation operating expenses,
substantially offset by $5 million higher maintenance and production costs at
the Memphis refinery, $8 million from lower per-unit margins from refining
operations and $3 million of operating loss associated with the new energy
information management operations.
COMMUNICATIONS
COMMUNICATIONS' revenues increased $171.2 million, or 79 percent, primarily
because first-quarter 1998 includes $147 million of revenue from the customer
premise equipment sales and services operations of Northern Telecom (Nortel)
which were combined with Williams in the second quarter of 1997. The number of
ports in service at March 31, 1998, more than doubled from March 31, 1997, while
fiber billable minutes from occasional service decreased 10 percent from the
first quarter 1997. Dedicated service voice-grade equivalent miles at March 31,
1998, increased 32 percent as compared with March 31, 1997. Costs and operating
expenses increased $135 million, or 84 percent, due primarily to the combination
with Nortel and increased business activity. Selling, general,
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<PAGE> 16
and administrative expenses increased $55 million, or 96 percent, due primarily
to the combination with Nortel, increased business activity and the expansion of
the infrastructure in support of the development of a new national digital
fiber-optic network. Operating profit decreased $18.1 million to a $20.1 million
operating loss, due primarily to the increased costs of substantially expanding
the infrastructure.
GENERAL CORPORATE EXPENSE increased $23.7 million, or 139 percent, due
primarily to MAPCO merger-related costs. An additional $35.9 million of such
costs are included in other (income) expense - net as a component of Energy
Services' operating profit (see Note 3). Interest accrued increased $8.7
million, or 8 percent, due primarily to higher borrowing levels including
Williams Holdings' commercial paper program, partially offset by lower average
interest rates following the recent debt restructuring. Interest capitalized
increased $5.9 million to $8.2 million, due primarily to capital expenditures
for Communication's fiber-optic network and the Discovery pipeline project.
Investing income decreased $4.1 million, or 60 percent, due primarily to a $2
million decrease in equity earnings. The $66 million 1997 gain on sale of assets
results from the sale of Williams' interest in the liquids and condensate
reserves in the West Panhandle field of Texas (see Note 5). Other income
(expense) - net is $3 million unfavorable as compared to 1997 due primarily to a
1997 gain of $4 million on the termination of interest rate swap agreements.
The $59.6 million, or 57 percent, decrease in the provision for income
taxes is primarily a result of lower pre-tax income. The effective income tax
rate in 1998 and 1997 exceeds the federal statutory rate due primarily to the
effects of state income taxes. Partially offsetting in 1997 were income tax
credits from coal-seam gas production.
The $4.8 million 1998 extraordinary loss results from the early
extinguishment of debt (see Note 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 and
Williams Holdings' commercial paper program, which can be utilized without
limitation under existing loan covenants. At March 31, 1998, Williams had access
to $1.2 billion of liquidity representing $800 million available under its $1
billion bank-credit facility, $301 million of commercial paper availability and
cash-equivalent investments. This compares with liquidity of $166 million at
December 31, 1997, and $589 million at March 31, 1997. The lower level at
December 31, 1997 reflected the use of the $1 billion bank-credit facility to
provide interim financing related to the debt restructuring program. This
restructuring program was completed during the first quarter of 1998 and a
significant portion of the $1 billion bank-credit facility was repaid. In
addition, Williams Holdings' commercial paper program, begun in mid-1997, was
expanded to $1 billion in March 1998. At March 31, 1998, $198 million of current
debt obligations have been classified as non-current obligations based on
Williams' intent and ability to refinance them on a long-term basis with the
remaining amount available under the $1 billion bank-credit facility.
In 1998, capital expenditures and investments are estimated to be
approximately $3.1 billion. During 1998, Williams expects to finance capital
expenditures, investments and working-capital requirements through cash
generated from operations and the use of the available portion of its $1 billion
bank-credit facility, a commercial paper program, short-term uncommitted bank
lines and debt or equity public offerings.
Financing Activities
In January 1998, Williams issued $300 million of 6.125 percent notes due
2001 and $100 million of floating rate notes due 2000. In February 1998,
Williams issued $240 million of 6.125 percent debt remarketable in 2002 and $300
million of 5.95 percent debt remarketable in 2000. In January 1998,
Transcontinental Gas Pipe Line issued $200 million of 6.125 percent notes and
$100 million of 6.25 percent notes due 2005 and 2008, respectively. The proceeds
of these issuances were used for general corporate purposes, including the
repayment of outstanding debt.
The consolidated long-term debt to debt-plus-equity ratio was 55.5 percent
at March 31, 1998, compared to 55.8 percent at December 31, 1997. If short-term
notes payable and long-term debt due within one year are included in the
calculations, these ratios would be 59.4 percent at March 31, 1998, and 59.1
percent at December 31, 1997.
The decrease in receivables and accounts payable is due primarily to lower
natural gas prices experienced by Energy Marketing & Trading.
Market Risk Disclosures - Interest Rate Risk
During the quarter ended March 31, 1998, the percent of Williams fixed rate
debt increased to targeted levels as Williams completed issuing long-term debt
under the restructuring program and reduced its variable rate interim
financings. Williams issued $1.1 billion of fixed rate debt at a weighted
average interest rate of approximately 6.1 percent (see Financing Activities
above). Williams also entered into an interest rate swap of $240 million
converting fixed rate debt into variable rate debt. The interest rate swap
matures in 2002.
Year 2000 Compliance
Williams initiated an enterprise-wide project in 1997 to address the year
2000 compliance issue for all technology hardware and software, external
interfaces with customers and suppliers, operations process control, automation
and instrumentation systems, and facility items. The assessment phase of this
project as it relates to traditional information technology areas has been
substantially completed. The assessment phase for non-traditional information
technology areas has been completed for certain business units and is expected
to be substantially completed in mid-1998 for the other business units.
Necessary conversion, replacement and testing activities have begun and will
continue throughout the process. Williams has initiated a formal communications
process with other companies with which Williams' systems interface or rely on
to determine the extent to which those companies are addressing their year 2000
compliance. Where necessary, Williams will be working with those companies to
mitigate any material adverse effect on Williams.
Williams expects to utilize both internal and external resources to
complete this process. Existing resources will be redeployed and previously
planned system replacements will be accelerated during this time. For example,
implementation of previously planned financial and human resources systems is
currently in process. These systems will address the year 2000 compliance
issues in certain areas. In addition, one of Williams' subsidiaries, MAPCO, has
replaced or is replacing six major applications. Costs incurred for new
software and hardware purchases will be capitalized and other costs will be
expensed as incurred. For the regulated pipelines, Williams considers costs
associated with the year 2000 compliance to be prudent costs incurred in the
ordinary course of business, and, therefore, recoverable through rates.
While the total cost of Williams' enterprise-wide project is still being
evaluated, Williams estimates that future costs, excluding previously planned
system replacements, necessary to complete the project within the schedule
described will total at least $30 million. Williams will update this estimate
as additional information becomes available. The costs of the project and the
completion dates are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party year 2000 compliance
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from
these estimates.
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PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of Stockholders of the Company was held on February 26, 1998.
At the Special Meeting, proposals to increase the authorized number of shares of
Common Stock to 960 million shares and subsequent issuance of the Company's
Common Stock in exchange for shares of Common Stock and options of MAPCO Inc.
pursuant to the merger in which MAPCO became a wholly-owned subsidiary of the
Company were approved.
A tabulation of the voting at the Special Meeting with respect to the matters
indicated is as follows:
Approval to amend Restated Certificate of Incorporation
- -------------------------------------------------------
For Against Abstain
- ----------- --------- ---------
252,181,673 1,315,207 1,024,150
Approval of issuance of Common Stock
- ------------------------------------
For Against Abstain
- ----------- ------- ---------
252,680,055 783,449 1,057,526
To the best of the Company's knowledge, there were no broker nonvotes with
respect to such proposals.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed below are filed as part of this report:
Exhibit 12--Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
(b) During the first quarter of 1998, the Company filed a Form 8-K
on February 20, 1998, which reported a significant event under
Item 5 of the Form and included the exhibits required by Item 7
of the Form.
<PAGE> 18
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
Principal Accounting Officer)
May 15, 1998
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
12 -- Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements
</TABLE>
<PAGE> 1
Exhibit 12
The Williams Companies, Inc.
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividend Requirements
(Dollars in millions)
<TABLE>
<CAPTION>
Three months ended
March 31, 1998
----------------
<S> <C>
Earnings:
Income before income taxes and extraordinary loss $ 118.4
Add:
Interest expense - net 109.8
Rental expense representative of interest factor 10.6
Minority interest in income of consolidated subsidiaries 2.3
Other (.6)
--------------
Total earnings as adjusted plus fixed charges $ 240.5
==============
Fixed charges and preferred stock dividend requirements:
Interest expense - net $ 109.8
Capitalized interest 8.2
Rental expense representative of interest factor 10.6
Pretax effect of dividends on preferred stock of
the Company 3.6
--------------
Combined fixed charges and preferred stock dividend
requirements $ 132.2
==============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements 1.82
==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 173
<SECURITIES> 0
<RECEIVABLES> 1,510
<ALLOWANCES> 24
<INVENTORY> 422
<CURRENT-ASSETS> 2,689
<PP&E> 14,932
<DEPRECIATION> 3,182
<TOTAL-ASSETS> 16,413
<CURRENT-LIABILITIES> 3,473
<BONDS> 5,416
0
120
<COMMON> 427
<OTHER-SE> 3,800
<TOTAL-LIABILITY-AND-EQUITY> 16,413
<SALES> 0
<TOTAL-REVENUES> 1,960
<CGS> 0
<TOTAL-COSTS> 1,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> 118
<INCOME-TAX> 46
<INCOME-CONTINUING> 73
<DISCONTINUED> 0
<EXTRAORDINARY> (5)
<CHANGES> 0
<NET-INCOME> 68
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
