<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 13, 1998
------------------------------
The Williams Companies, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-4174 73-0569878
- --------------- ------------ -------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
One Williams Center, Tulsa, Oklahoma 74172
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 918/588-2000
----------------------------
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
Included herein are the consolidated financial statements of The
Williams Companies, Inc. for the year ended December 31, 1997, and related
report of its independent auditors.
Item 7. Financial Statements and Exhibits.
The Company files the following exhibits as part of this Report:
Exhibit 23. Consent of Independent Auditors
Exhibit 99. The Company's 1997 Audited Financial
Statements
2
<PAGE> 3
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 hereunto duly authorized.
THE WILLIAMS COMPANIES, INC.
/s/ GARY R. BELITZ
Date: February 20, 1998 -----------------------------------------
Name: Gary R. Belitz
Title: Controller and
Chief Accounting Officer
3
<PAGE> 4
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
EXHIBIT 23. Consent of Independent Auditors
EXHIBIT 99. The Company's 1997 Audited Financial Statements
4
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following registration
statements on Form S-3 and related prospectuses and in the following
registration statements on Form S-4 and on Form S-8 of The Williams Companies,
Inc. of our report dated February 13, 1998, with respect to the consolidated
financial statements of The Williams Companies, Inc. included in this Report
(Form 8-K) for the year ended December 31, 1997.
Form S-3: Registration No. 333-20929;
Registration No. 333-29185
Form S-4: Registration No. 333-44963
Form S-8: Registration No. 33-2442; Registration No. 33-24322;
Registration No. 33-36770; Registration No. 33-44381;
Registration No. 33-40979; Registration No. 33-45550;
Registration No. 33-43999; Registration No. 33-51539;
Registration No. 33-51543; Registration No. 33-51551;
Registration No. 33-51549; Registration No. 33-51547;
Registration No. 33-51545; Registration No. 33-56521;
Registration No. 333-03957; Registration No. 333-11151;
Registration No. 333-40721; Registration No. 333-33735;
Registration No. 333-30095
Ernst & Young LLP
Tulsa, Oklahoma
February 18, 1998
<PAGE> 1
EXHIBIT 99
Report of Independent Auditors
To the Stockholders of
The Williams Companies, Inc.
We have audited the accompanying consolidated balance sheet of The Williams
Companies, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Williams
Companies, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 13, 1998
<PAGE> 2
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(Millions, except per-share amounts) Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gas Pipelines (Note 4) $ 1,683.9 $ 1,675.2 $ 1,431.1
Energy Services (Note 4) 1,504.9 1,453.1 1,077.4
Communications (Note 2) 1,445.3 711.3 538.9
Other 38.4 48.0 17.4
Intercompany eliminations (Note 17) (262.9) (356.4) (209.1)
---------- ---------- ----------
Total revenues 4,409.6 3,531.2 2,855.7
---------- ---------- ----------
Profit-center costs and expenses:
Costs and operating expenses 2,664.5 2,064.1 1,700.7
Selling, general and administrative expenses 780.1 585.5 488.8
Other (income) expense--net (Note 6) 38.6 (19.8) (4.5)
---------- ---------- ----------
Total profit-center costs and expenses 3,483.2 2,629.8 2,185.0
---------- ---------- ----------
Operating profit:
Gas Pipelines (Note 4) 614.2 562.4 389.7
Energy Services (Note 4) 360.9 332.3 257.5
Communications (Notes 2 and 6) (55.7) 6.6 25.0
Other 7.0 .1 (1.5)
---------- ---------- ----------
Total operating profit 926.4 901.4 670.7
General corporate expenses (50.9) (41.4) (37.7)
Interest accrued (404.5) (359.9) (277.9)
Interest capitalized 15.9 6.9 14.5
Investing income (Note 5) 19.2 18.8 93.9
Gain on sale of interest in subsidiary (Note 2) 44.5 -- --
Gain (loss) on sales of assets (Note 6) -- 15.7 (12.6)
Write-off of project costs (Note 6) -- -- (41.4)
Minority interest in income of consolidated
subsidiaries (Note 2) (14.0) -- (10.0)
Other income (expense)--net (8.1) 3.9 1.9
---------- ---------- ----------
Income from continuing operations
before income taxes 528.5 545.4 401.4
Provision for income taxes (Note 7) 178.0 183.1 102.0
---------- ---------- ----------
Income from continuing operations 350.5 362.3 299.4
Income from discontinued operations (Note 3) -- -- 1,018.8
---------- ---------- ----------
Income before extraordinary loss 350.5 362.3 1,318.2
Extraordinary loss (Note 8) (79.1) -- --
---------- ---------- ----------
Net income 271.4 362.3 1,318.2
Preferred stock dividends (Note 15) 9.8 10.4 15.3
---------- ---------- ----------
Income applicable to common stock $ 261.6 $ 351.9 $ 1,302.9
========== ========== ==========
</TABLE>
See accompanying notes.
1
<PAGE> 3
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME (CONCLUDED)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Basic earnings per common share (Notes 1 and 9):
Income from continuing operations $ 1.06 $ 1.10 $ .94
Income from discontinued operations (Note 3) -- -- 3.36
-------- -------- --------
Income before extraordinary loss 1.06 1.10 4.30
Extraordinary loss (Note 8) (.25) -- --
-------- -------- --------
Net income $ .81 $ 1.10 $ 4.30
======== ======== ========
Diluted earnings per common share (Notes 1 and 9):
Income from continuing operations $ 1.04 $ 1.07 $ .92
Income from discontinued operations (Note 3) -- -- 3.25
-------- -------- --------
Income before extraordinary loss 1.04 1.07 4.17
Extraordinary loss (Note 8) (.24) -- --
-------- -------- --------
Net income $ .80 $ 1.07 $ 4.17
======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions, except per-share amounts)
December 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 81.3 $ 115.3
Receivables less allowance of $19.3
($9.7 in 1996) 1,200.5 952.9
Transportation and exchange gas receivable 130.4 117.7
Inventories (Note 11) 300.5 204.6
Commodity trading assets 180.3 147.2
Deferred income taxes (Note 7) 224.6 199.5
Other 138.3 152.9
---------- ----------
Total current assets 2,255.9 1,890.1
Investments (Note 5) 291.4 190.6
Property, plant and equipment--net (Note 12) 10,055.6 9,386.3
Goodwill and other intangible
assets--net (Notes 1 and 2) 435.2 198.1
Other assets and deferred charges 840.9 753.7
---------- ----------
Total assets $ 13,879.0 $ 12,418.8
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 5
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET (CONCLUDED)
<TABLE>
<CAPTION>
(Dollars in millions, except per-share amounts)
December 31,
----------------------------
1997 1996
--------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 14) $ 693.0 $ 269.5
Accounts payable (Note 13) 886.3 683.3
Transportation and exchange gas payable 67.7 73.7
Accrued liabilities (Note 13) 1,157.3 975.3
Commodity trading liabilities 182.0 137.9
Long-term debt due within one year (Note 14) 41.1 59.6
---------- ----------
Total current liabilities 3,027.4 2,199.3
Long-term debt (Note 14) 4,565.3 4,376.9
Deferred income taxes (Note 7) 1,718.9 1,626.6
Other liabilities 878.6 787.5
Minority interest in consolidated subsidiaries
(Note 2) 117.1 7.5
Contingent liabilities and commitments (Note 18)
Stockholders' equity (Note 15):
Preferred stock, $1 par value, 30,000,000 shares
authorized, 2,497,472 shares issued in 1997 and
3,241,552 shares issued in 1996 142.2 161.0
Common stock, $1 par value, 480,000,000 shares
authorized, 325,065,668 shares issued in 1997 and
320,428,326 shares issued in 1996 325.1 320.4
Capital in excess of par value 957.6 887.5
Retained earnings 2,209.4 2,119.5
Other (4.5) (2.2)
---------- ----------
3,629.8 3,486.2
Less treasury stock (at cost), 4,879,127
shares of common stock in 1997 and 5,474,674
shares of common stock in 1996 (58.1) (65.2)
---------- ----------
Total stockholders' equity 3,571.7 3,421.0
---------- ----------
Total liabilities and stockholders' equity $ 13,879.0 $ 12,418.8
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 6
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in millions, Capital in
except per-share amounts) Preferred Common Excess Retained Treasury
Stock Stock Par Value Earnings Other Stock Total
--------- ------- --------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 100.0 $ 313.2 $ 782.2 $ 716.5 $ (1.3) $ (405.1) $ 1,505.5
Net income--1995 -- -- -- 1,318.2 -- -- 1,318.2
Cash dividends--
Common stock ($.36 per share) -- -- -- (107.2) -- -- (107.2)
Preferred stock (Note 15) -- -- -- (11.9) -- -- (11.9)
Issuance of shares--
38,639,762 common -- 2.8 56.9 -- (1.7) 352.7 410.7
2,500,000 preferred 142.5 -- -- -- -- -- 142.5
Exchange of shares for debentures--
2,760,548 preferred (Note 15) (69.0) -- (3.5) -- -- -- (72.5)
Purchase of treasury stock--
142,800 preferred -- -- -- -- -- (3.7) (3.7)
Tax benefit of stock-based awards -- -- 4.8 -- -- -- 4.8
Amortization of deferred compensation -- -- -- -- .7 -- .7
------ ------ ------ -------- ------ ------ --------
Balance, December 31, 1995 173.5 316.0 840.4 1,915.6 (2.3) (56.1) 3,187.1
Net income--1996 -- -- -- 362.3 -- -- 362.3
Cash dividends--
Common stock ($.47 per share) -- -- -- (148.0) -- -- (148.0)
Preferred stock (Note 15) -- -- -- (10.4) -- -- (10.4)
Issuance of shares--5,574,916 common -- 4.4 31.4 -- (.6) 12.0 47.2
Purchase of treasury stock--
1,915,500 common -- -- -- -- -- (31.3) (31.3)
96,300 preferred -- -- -- -- -- (2.6) (2.6)
Retirement of treasury stock--
497,900 preferred (12.5) -- (.3) -- -- 12.8 --
Tax benefit of stock-based awards -- -- 16.0 -- -- -- 16.0
Amortization of deferred compensation -- -- -- -- .7 -- .7
------ ------ ------ -------- ------ ------ --------
$161.0 $320.4 $887.5 $2,119.5 $ (2.2) $(65.2) $3,421.0
</TABLE>
NOTE: Certain amounts have been restated to reflect the December 29, 1997
two-for-one stock split and distribution.
See accompanying notes.
5
<PAGE> 7
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONCLUDED)
<TABLE>
<CAPTION>
(Dollars in millions, Capital in
except per-share amounts) Preferred Common Excess Retained Treasury
Stock Stock Par Value Earnings Other Stock Total
--------- ------ --------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $161.0 $320.4 $887.5 $2,119.5 $(2.2) $(65.2) $3,421.0
Net income--1997 -- -- -- 271.4 -- -- 271.4
Cash dividends--
Common stock ($.54 per share) -- -- -- (171.7) -- -- (171.7)
Preferred stock (Note 15) -- -- -- (9.8) -- -- (9.8)
Issuance of shares--5,221,039 common -- 4.7 48.7 -- (.7) 7.1 59.8
Conversion of preferred stock--
2,528 shares (.3) -- .3 -- -- -- --
Redemption of preferred stock--
741,552 shares (Note 15) (18.5) -- -- -- -- -- (18.5)
Tax benefit of stock-based awards -- -- 21.1 -- -- -- 21.1
Amortization of deferred compensation -- -- -- -- .8 -- .8
Unrealized loss on marketable
equity securities -- -- -- -- (2.4) -- (2.4)
------ ------ ------ -------- ----- ------ --------
Balance, December 31, 1997 $142.2 $325.1 $957.6 $2,209.4 $(4.5) $(58.1) $3,571.7
====== ====== ====== ======== ===== ====== ========
</TABLE>
NOTE: Certain amounts have been restated to reflect the December 29, 1997
two-for-one stock split and distribution.
See accompanying notes.
6
<PAGE> 8
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Millions) Years Ended December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 271.4 $ 362.3 $ 1,318.2
Adjustments to reconcile to cash provided from operations:
Discontinued operations - - (1,018.8)
Extraordinary loss 79.1 - -
Premium on early extinguishment of debt (171.2) - -
Depreciation, depletion and amortization 499.5 421.0 375.5
Provision for deferred income taxes 81.8 72.4 125.4
Provision for loss on property and other assets 49.8 - 41.4
(Gain) loss on dispositions of property
and interest in subsidiary (56.8) (46.4) 10.5
Minority interest in income of consolidated subsidiaries 14.0 - 10.0
Changes in receivables sold 188.6 (13.1) 55.9
Changes in receivables (180.6) (214.2) 33.2
Changes in inventories (73.7) (16.1) 11.9
Changes in other current assets 25.5 3.8 1.1
Changes in accounts payable 195.8 204.0 (6.5)
Changes in accrued liabilities (7.9) (24.9) (33.4)
Changes in current commodity trading assets
and liabilities 11.0 (29.7) 28.1
Changes in non-current commodity trading assets
and liabilities (47.7) (37.7) (82.1)
Other, including changes in non-current
assets and liabilities 41.0 29.0 (41.7)
--------- --------- ---------
Net cash provided by operating activities 919.6 710.4 828.7
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable 1,860.4 356.8 116.8
Payments of notes payable (1,245.9) (87.3) (623.8)
Proceeds from long-term debt 2,007.7 1,996.7 399.0
Payments of long-term debt (2,169.0) (1,387.7) (1,009.4)
Proceeds from issuance of common stock 62.9 54.3 78.1
Purchases of treasury stock - (33.9) (3.7)
Dividends paid (181.5) (158.4) (119.1)
Subsidiary preferred stock redemptions - - (193.7)
Other--net (17.7) (6.3) (3.5)
--------- --------- ---------
Net cash provided (used) by financing activities 316.9 734.2 (1,359.3)
--------- --------- ---------
</TABLE>
See accompanying notes.
7
<PAGE> 9
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (concluded)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
(Millions) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures $(1,162.1) $ (818.9) $ (827.5)
Proceeds from dispositions 100.3 60.2 28.2
Acquisition of businesses, net of cash acquired (87.0) (366.2) (858.9)
Proceeds from sales of businesses - - 2,588.3
Income tax and other payments
related to discontinued operations (9.7) (261.7) (350.4)
Proceeds from sales of assets 5.2 23.0 125.1
Purchase of investments/advances to affiliates (134.2) (76.9) (49.7)
Purchase of note receivable - - (75.1)
Other--net 17.0 20.8 4.9
--------- --------- ---------
Net cash provided (used) by investing activities (1,270.5) (1,419.7) 584.9
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (34.0) 24.9 54.3
Cash and cash equivalents at beginning of year 115.3 90.4 36.1
--------- --------- ---------
Cash and cash equivalents at end of year $ 81.3 $ 115.3 $ 90.4
========= ========= =========
</TABLE>
See accompanying notes.
8
<PAGE> 10
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NATURE OF OPERATIONS
Operations of The Williams Companies, Inc. (Williams) are located
principally in the United States and are organized into three operating groups
as follows: (1) Gas Pipelines, which is comprised of five interstate natural gas
pipelines located in the eastern, midsouth, Gulf Coast, midwest and northwest
regions; (2) Energy Services, which is comprised of natural gas gathering and
processing facilities in the Rocky Mountain, midwest and Gulf Coast regions,
energy trading and price-risk management activities throughout the United
States, a petroleum products pipeline and ethanol production/marketing
operations in the midwest region, and hydrocarbon exploration and production
activities in the Rocky Mountain and Gulf Coast regions; and (3) Communications,
which includes network integration and management services; video and other
multimedia transmission services for the broadcast industry; business audio and
video conferencing services; and installation and maintenance of
customer-premise voice and data equipment. Additional information about these
businesses is contained throughout the following notes.
BASIS OF PRESENTATION
Revenues and operating profit amounts previously reported as Williams
Natural Gas and Merchant Services are now reported as Central and Energy
Marketing & Trading, respectively.
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 (see Note 2). Communications' revenues and operating profit
amounts for 1997 include the operating results of the LLC beginning May 1,
1997.
Revenues and operating profit amounts include the operating results of Kern
River Gas Transmission Company (Kern River) since the January 16, 1996,
acquisition by Williams of the remaining interest (see Note 2). Prior to this
acquisition, Williams accounted for its 50 percent ownership in Kern River using
the equity method of accounting, with its share of equity earnings recorded in
investing income.
Revenues and operating profit amounts include the operating results of
Transco Energy Company (Transco Energy) since its January 18, 1995, acquisition
by Williams (see Note 2). The transportation operations from Transco Energy's
two interstate natural gas pipelines are reported separately within the Gas
Pipelines group. Transco Energy's gas gathering operations are included in Field
Services, and its gas marketing operations are included in Energy Marketing &
Trading.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Williams and
its majority-owned subsidiaries. Companies in which Williams and its
subsidiaries own 20 percent to 50 percent of the voting common stock, or
otherwise exercise sufficient influence over operating and financial policies of
the company, are accounted for under the equity method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits, certificates of
deposit and other marketable securities with maturities of three months or less
when acquired.
TRANSPORTATION AND EXCHANGE GAS IMBALANCES
In the course of providing transportation services to customers, the
natural gas pipelines may receive different quantities of gas from shippers than
the quantities delivered on behalf of those shippers. Additionally, the
pipelines and other Williams subsidiaries transport gas on various pipeline
systems which may deliver different quantities of gas on their behalf than the
quantities of gas received. These transactions result in gas transportation and
exchange imbalance receivables and payables which are recovered or repaid in
cash or through the receipt or delivery of gas in the future. Settlement of
imbalances requires agreement between the pipelines and shippers as to
allocations of volumes to specific transportation contracts and timing of
delivery of gas based on operational conditions.
INVENTORY VALUATION
Inventories are stated at cost, which is not in excess of market, except
for those held by Energy Marketing & Trading, which are primarily stated at
market. The cost of inventories is primarily determined using the average-cost
method, except for certain inventories held by Transcontinental Gas Pipe Line,
which are determined using the last-in, first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is provided
primarily on the straight-line method over estimated useful lives. Gains or
losses from the ordinary sale or retirement of property, plant and equipment for
regulated pipeline subsidiaries are credited or charged to accumulated
depreciation; other gains or losses are recorded in net income.
9
<PAGE> 11
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, which represents the excess of cost over fair value of assets of
businesses acquired, is amortized on a straight-line basis over periods not
exceeding 25 years. Other intangible assets are amortized on a straight-line
basis over periods not exceeding 11 years. Accumulated amortization at December
31, 1997 and 1996 was $56 million and $31.8 million, respectively. Amortization
of intangible assets was $24.2 million, $9.6 million and $6.2 million in 1997,
1996 and 1995, respectively.
TREASURY STOCK
Treasury stock purchases are accounted for under the cost method whereby
the entire cost of the acquired stock is recorded as treasury stock. Gains and
losses on the subsequent reissuance of shares are credited or charged to capital
in excess of par value using the average-cost method.
REVENUE RECOGNITION
Revenues generally are recorded when services have been performed or
products have been delivered. Petroleum Services bills customers when products
are shipped and defers the estimated revenues for shipments in transit. The Gas
Pipelines recognize revenues based upon contractual terms and the related
transportation volumes through month-end. These pipelines are subject to Federal
Energy Regulatory Commission (FERC) regulations and, accordingly, certain
revenues are subject to possible refunds pending final FERC orders. Williams
records rate refund accruals based on management's estimate of the expected
outcome of these proceedings. Communications' customer-premise equipment sales
and service business primarily uses the percentage of completion method of
recognizing revenues for services provided.
COMMODITY PRICE-RISK MANAGEMENT ACTIVITIES
Energy Marketing & Trading has trading operations that enter into
energy-related derivative financial instruments and derivative commodity
instruments (forward contracts, futures contracts, option contracts and swap
agreements) to provide price-risk management services to its third-party
customers. This trading operation also has commodity inventories and enters into
short- and long-term energy-related purchase and sale commitments which involve
physical delivery of an energy commodity. These financial instruments, physical
inventories and commitments are valued at market and are recorded in commodity
trading assets, other assets and deferred charges, commodity trading liabilities
and other liabilities in the Consolidated Balance Sheet. The change in
unrealized market gains and losses is recognized in income currently and is
recorded as revenues in the Consolidated Statement of Income. Such market values
are subject to change in the near term and reflect management's best estimate of
market prices considering various factors including closing exchange and
over-the-counter quotations, liquidity of the market in which the contract is
transacted, the terms of the contract, credit considerations, time value and
volatility factors underlying the positions. Energy Marketing & Trading reports
its trading operations' physical sales transactions net of the related purchase
costs, consistent with market value accounting for such trading activities.
Certain Energy Marketing & Trading's revenues were not considered to be
trading operations in 1996 and 1995 and, therefore, were not reported net of
related costs to purchase such items.
Williams' operations also enter into energy-related derivative financial
instruments and derivative commodity instruments (primarily futures contracts,
option contracts and swap agreements) to hedge against market price fluctuations
of certain commodity inventories and sales and purchase commitments. Unrealized
and realized gains and losses on these hedge contracts are deferred and
recognized in income when the related hedged item is recognized and recorded
with the related hedged item. These contracts are initially and regularly
evaluated to determine that there is a high correlation between changes in the
market value of the hedge contract and market value of the hedged item.
INTEREST-RATE DERIVATIVES
Williams enters into interest-rate swap agreements to modify the interest
characteristics of its long-term debt. These agreements are designated with all
or a portion of the principal balance and term of specific debt obligations.
These agreements involve the exchange of amounts based on a fixed-interest rate
for amounts based on variable interest rates without an exchange of the notional
amount upon which the payments are based. The difference to be paid or received
is accrued and recognized as an adjustment of interest expense. Gains and losses
from terminations of interest-rate swap agreements are deferred and amortized as
an adjustment to interest expense over the original term of the terminated swap
agreement.
Kern River specifically has interest-rate swap agreements that are not
designated with long-term debt that are recorded in other liabilities at market
value. Changes in market value are recorded as adjustments to a regulatory asset
which is expected to be recovered in transportation rates.
Williams enters into interest-rate forward contracts to lock-in underlying
treasury rates on anticipated long-term debt issuances. The settlement amounts
upon termination of the contracts are deferred and amortized as an adjustment to
interest expense of the issued long-term debt over the term of the settled
forward contract.
10
<PAGE> 12
CAPITALIZATION OF INTEREST
Williams capitalizes interest on major projects during construction.
Interest is capitalized on borrowed funds and, where regulation by the FERC
exists, on internally generated funds. The rates used by regulated companies are
calculated in accordance with FERC rules. Rates used by unregulated companies
approximate the average interest rate on related debt. Interest capitalized on
internally generated funds is included in non-operating other income
(expense)--net.
EMPLOYEE STOCK-BASED AWARDS
Employee stock-based awards are accounted for under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Williams' fixed plan common stock options do not result in
compensation expense, because the exercise price of the stock options equals the
market price of the underlying stock on the date of grant.
INCOME TAXES
Williams includes the operations of its subsidiaries in its consolidated
federal income tax return. Deferred income taxes are computed using the
liability method and are provided on all temporary differences between the
financial basis and the tax basis of Williams' assets and liabilities.
EARNINGS PER SHARE
Basic earnings per share are based on the sum of the average number of
common shares outstanding and issuable restricted and deferred shares. Diluted
earnings per share assumes issuance of common stock from dilutive stock options
and conversion of the $3.50 cumulative convertible preferred stock into common
stock effective May 1, 1995. The earnings per share amounts and number of shares
for 1996 and 1995 have been restated to reflect the effect of the two-for-one
stock split and distribution (see Note 15) and the adoption of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (see Note
9).
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
accounting standards, SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Both standards, effective for fiscal years beginning after December 15, 1997,
are disclosure-oriented standards. Therefore, neither standard will affect
Williams' reported consolidated net income or cash flows.
2. ACQUISITIONS
- -------------------------------------------------------------------------------
NORTEL
On April 30, 1997, Williams and Nortel combined their customer-premise
equipment sales and service operations into a limited liability company,
Williams Communications Solutions, LLC. In addition, Williams paid $68 million
to Nortel. Williams has accounted for its 70 percent interest in the operations
that Nortel contributed to the LLC as a purchase business combination, and
beginning May 1, 1997, has included the results of operations of the acquired
company in Williams' Consolidated Statement of Income. Accordingly, the acquired
assets and liabilities, including $168 million in accounts receivable, $68
million in accounts payable and accrued liabilities and $150 million in debt
obligations, have been recorded based on an allocation of the purchase price,
with substantially all of the cost in excess of historical carrying values
allocated to goodwill.
Williams recorded the 30 percent reduction in its operations contributed to
the LLC as a sale to the minority shareholders of the LLC. Williams recognized a
gain of $44.5 million based on the excess of the fair value over the net book
value (approximately $71 million) of its operations conveyed to the LLC minority
interest. Income taxes were not provided on the gain, because the transaction
did not affect the difference between the financial and tax bases of
identifiable assets and liabilities.
If the transaction had occurred on January 1, 1996, Williams' unaudited pro
forma revenues for the years ended 1997 and 1996 would have been $4,658 million
and $4,268 million, respectively. 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, 1996, or of future results of operations
of the combined companies.
KERN RIVER
On January 16, 1996, Williams acquired the remaining interest in Kern River
for $206 million in cash. The acquisition was accounted for as a purchase, and
the acquired assets and liabilities have been recorded based on an allocation of
the purchase price, with substantially all of the cost in excess of Kern River's
historical carrying value allocated to property, plant and equipment.
TRANSCO
On January 18, 1995, Williams acquired 60 percent of Transco Energy's
outstanding common stock in a cash tender offer for $430.5 million. Williams
acquired the remaining 40 percent of Transco Energy's outstanding common stock
on May 1, 1995, through a merger by exchanging the remaining Transco Energy
common stock for approximately 31.2 million shares of Williams common stock
valued
11
<PAGE> 13
at $334 million. The acquisition was accounted for as a purchase with 60
percent of Transco Energy's results of operations included in Williams'
Consolidated Statement of Income for the period January 18, 1995, through April
30, 1995, and 100 percent included beginning May 1, 1995. The purchase price,
including transaction fees and other related costs, was approximately $800
million, excluding $2.3 billion in preferred stock and debt obligations of
Transco Energy.
3. DISCONTINUED OPERATIONS
- -------------------------------------------------------------------------------
On January 5, 1995, Williams sold its network services operations to LDDS
Communications, Inc. for $2.5 billion in cash. The sale yielded a gain of $1
billion (net of income taxes of approximately $732 million) which is reported as
income from discontinued operations.
4. REVENUES AND OPERATING PROFIT
- -------------------------------------------------------------------------------
Revenues and operating profit of Gas Pipelines and Energy Services for the
years ended December 31, 1997, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
- -----------------------------------------------------------------------
REVENUES:
Gas Pipelines:
Central $ 184.4 $ 178.4 $ 174.3
Kern River Gas Transmission 167.1 160.6 --
Northwest Pipeline 273.1 269.7 255.2
Texas Gas Transmission 293.0 306.1 276.3
Transcontinental Gas Pipe Line 766.3 760.4 725.3
- -----------------------------------------------------------------------
$ 1,683.9 $ 1,675.2 $ 1,431.1
=======================================================================
Energy Services:
Energy Marketing & Trading $ 135.8 $ 261.1 $ 153.5
Exploration & Production 130.1 82.4 62.9
Field Services 690.3 616.3 532.9
Petroleum Services 548.7 493.3 328.1
- -----------------------------------------------------------------------
$ 1,504.9 $ 1,453.1 $ 1,077.4
=======================================================================
Operating Profit:
Gas Pipelines:
Central $ 57.0 $ 44.8 $ 45.0
Kern River Gas Transmission 120.3 113.0 --
Northwest Pipeline 124.0 124.9 115.7
Texas Gas Transmission 87.6 85.1 64.0
Transcontinental Gas Pipe Line 225.3 194.6 165.0
- -----------------------------------------------------------------------
$ 614.2 $ 562.4 $ 389.7
=======================================================================
Energy Services:
Energy Marketing & Trading $ 70.6 $ 66.4 $ 33.2
Exploration & Production 30.3 2.8 (5.9)
Field Services 163.0 187.4 161.0
Petroleum Services 97.0 75.7 69.2
- -----------------------------------------------------------------------
$ 360.9 $ 332.3 $ 257.5
=======================================================================
</TABLE>
5. INVESTING ACTIVITIES
- -------------------------------------------------------------------------------
Investing income for the years ended December 31, 1997, 1996 and 1995, is
as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------
<S> <C> <C> <C>
Interest $ 9.9 $ 11.1 $ 37.2
Dividends 1.4 1.6 16.1
Equity earnings 7.9 6.1 40.6
- ---------------------------------------------------
$ 19.2 $ 18.8 $ 93.9
===================================================
</TABLE>
Dividends and distributions received from companies carried on an equity
basis were $7 million in 1997 and 1996, and $44 million in 1995.
At December 31, 1997, certain equity investments, with a carrying value of
$46 million, have a market value of $175 million.
6. ASSET SALES AND WRITE-OFFS
- -------------------------------------------------------------------------------
In the fourth quarter of 1997, Communications incurred charges totaling
$49.8 million related to the decision to sell the learning content business, and
the write-down of assets and the development costs associated with certain
advanced applications.
In 1996, Williams recognized a pre-tax gain of $15.7 million from the sale
of certain communication rights for approximately $38 million.
In 1995, the development of a commercial coal gasification venture in
south-central Wyoming was canceled, resulting in a $41.4 million pre-tax charge.
In 1995, Williams sold its 15 percent interest in Texasgulf Inc. for
approximately $124 million in cash, which resulted in an after-tax gain of
approximately $16 million because of previously unrecognized tax benefits
included in the provision for income taxes.
12
<PAGE> 14
7. PROVISION FOR INCOME TAXES
- --------------------------------------------------------------------------------
The provision (credit) for income taxes from continuing operations
includes:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 75.9 $ 96.3 $ (26.5)
State 18.4 14.4 3.1
Foreign 1.9 -- --
- ---------------------------------------------------
96.2 110.7 (23.4)
===================================================
Deferred:
Federal 70.4 61.9 114.2
State 11.4 10.5 11.2
- ---------------------------------------------------
81.8 72.4 125.4
- ---------------------------------------------------
Total provision $ 178.0 $ 183.1 $ 102.0
===================================================
</TABLE>
Reconciliations from the provision for income taxes from continuing
operations at the statutory rate to the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $ 185.0 $ 190.9 $ 140.5
Increases (reductions) in taxes
resulting from:
State income taxes 19.3 16.1 13.5
Income tax credits (16.5) (19.0) (18.7)
Non-taxable gain from sale of
interest in subsidiary (Note 2) (15.6) -- --
Decrease in valuation allowance
for deferred tax assets -- -- (29.8)
Reversal of prior tax accruals -- -- (8.0)
Other-- net 5.8 (4.9) 4.5
- ---------------------------------------------------------------------------
Provision for income taxes $ 178.0 $ 183.1 $ 102.0
===========================================================================
</TABLE>
Significant components of deferred tax liabilities and assets as of
December 31 are as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996*
- --------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ 1,839.4 $ 1,755.8
Investments 120.9 93.3
Other 116.8 120.3
- --------------------------------------------------------------------
Total deferred tax liabilities 2,077.1 1,969.4
Deferred tax assets:
Deferred revenues 84.9 31.5
Rate refunds 119.9 111.4
Accrued liabilities 144.5 171.7
Minimum tax credits 131.3 86.8
Other 102.2 140.9
- --------------------------------------------------------------------
Total deferred tax assets 582.8 542.3
- --------------------------------------------------------------------
Net deferred tax liabilities $ 1,494.3 $ 1,427.1
====================================================================
</TABLE>
*Reclassified to conform to current classifications.
Cash payments for income taxes (net of refunds) were $48 million, $395
million and $339 million in 1997, 1996 and 1995, respectively.
8. EXTRAORDINARY LOSS
- --------------------------------------------------------------------------------
In September 1997, Williams initiated a restructuring of its debt portfolio
(see Note 14). During 1997, Williams paid approximately $1.4 billion to redeem
approximately $1.3 billion of debt with stated interest rates in excess of 8.8
percent, resulting in an extraordinary loss of $79.1 million (net of a $46.6
million benefit for income taxes). In addition, approximately $30 million of
costs to redeem have been deferred as a regulatory asset for rate recovery.
9. EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Basic and diluted earnings per common share are computed for the years
ended December 31, 1997, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
(Dollars in millions, except per-share
amounts; shares in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $ 350.5 $ 362.3 $ 299.4
Preferred stock dividends (9.8) (10.4) (15.3)
- ---------------------------------------------------------------------------
Income from continuing operations
available to common stockholders
for basic earnings per share 340.7 351.9 284.1
Effect of dilutive securities:
Convertible preferred stock dividends 8.7 8.8 5.8
- ---------------------------------------------------------------------------
Income from continuing operations
available to common stockholders
for diluted earnings per share $ 349.4 $ 360.7 $ 289.9
================================================================================
Basic weighted-average shares 321,184 319,048 302,807
Effect of dilutive securities:
Convertible preferred stock 11,717 11,718 7,866
Stock options 4,638 5,232 3,370
- ----------------------------------------------------------------------------
16,355 16,950 11,236
- ----------------------------------------------------------------------------
Diluted weighted-average shares 337,539 335,998 314,043
===========================================================================
Earnings per share from continuing operations:
Basic $ 1.06 $ 1.10 $ .94
Diluted $ 1.04 $ 1.07 $ .92
===========================================================================
</TABLE>
Options to purchase approximately 3.1 million shares of common stock at a
weighted-average exercise price of $27.93 were outstanding at December 31, 1997,
but were not included in the computation of diluted earnings per common share.
Inclusion of these shares would be antidilutive, as the exercise prices of the
options exceed the average market price of the common shares.
13
<PAGE> 15
10. EMPLOYEE BENEFIT PLANS
- -----------------------------------------------------------------------
PENSIONS
Williams maintains non-contributory defined-benefit pension plans covering
substantially all of its employees. Benefits are based on years of service and
average final compensation. Pension costs are funded to satisfy minimum
requirements prescribed by the Employee Retirement Income Security Act of 1974.
Net pension expense consists of the following:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned
during the year $ 30.9 $ 30.3 $ 19.5
Interest cost on projected benefit
obligation 49.8 43.9 40.1
Actual return on plan assets (94.1) (100.6) (120.3)
Amortization and deferrals 44.1 61.3 82.0
- -----------------------------------------------------------------------
Net pension expense $ 30.7 $ 34.9 $ 21.3
=======================================================================
</TABLE>
Net pension expense increased in 1996 from 1995 as a result of a decrease
in the discount rate from 8 1/2 percent to 7 1/4 percent and an increase in the
number of plan participants. The following table presents the funded status of
the plans:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $ 507 $ 407
Non-vested benefits 42 37
- -------------------------------------------------------------
Accumulated benefit obligations 549 444
Effect of projected salary increases 208 167
- -------------------------------------------------------------
Projected benefit obligations 757 611
Assets at market value 736 637
- -------------------------------------------------------------
Assets less than (in excess of)
projected benefit obligations 21 (26)
Unrecognized net (loss) gain (12) 37
Unrecognized prior-service cost (6) (8)
Unrecognized transition asset 3 3
- -------------------------------------------------------------
Pension liability $ 6 $ 6
=============================================================
</TABLE>
The discount rate used to measure the present value of benefit obligations
is 7 1/4 percent (7 1/2 percent in 1996); the assumed rate of increase in future
compensation levels is 5 percent; and the expected long-term rate of return on
assets is 10 percent. Plan assets consist primarily of commingled funds and
assets held in a master trust. The master trust is comprised primarily of
domestic and foreign common and preferred stocks, corporate bonds, United States
government securities and commercial paper.
Subsequent to December 31, 1997, Williams offered an early retirement
incentive program to a certain group of employees. This program will not have a
material impact on the funded status of the plans or Williams' financial
position.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Williams sponsors health care plans that provide postretirement medical
benefits to retired Williams employees who were employed full time, hired prior
to January 1, 1992 (January 1, 1996, for Transco Energy employees) and have met
certain other requirements.
The plans provide for retiree contributions and contain other cost-sharing
features such as deductibles and coinsurance. The accounting for the plans
anticipates future cost-sharing changes to the written plans that are consistent
with Williams' expressed intent to increase the retiree contribution rate
annually, generally in line with health care cost increases, except for certain
retirees whose premiums are fixed. A portion of the cost has been funded in
trusts by Williams' FERC-regulated natural gas pipeline subsidiaries to the
extent recovery from customers can be achieved. Plan assets consist of assets
held in two master trusts and money market funds. One of the master trusts was
previously described, and the other consists primarily of domestic and foreign
common stocks, government bonds and commercial paper.
Net postretirement benefit expense consists of the following:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned
during the year $ 7.1 $ 6.4 $ 7.4
Interest cost on accumulated
postretirement benefit obligation 24.4 22.7 23.9
Actual return on plan assets (19.4) (16.4) (17.9)
Amortization of unrecognized
transition obligation 4.1 5.0 5.0
Amortization and deferrals 21.0 19.7 23.1
- -----------------------------------------------------------------
Net postretirement benefit expense $ 37.2 $ 37.4 $ 41.5
=================================================================
</TABLE>
The following table presents the funded status of the plans:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of postretirement
benefit obligation:
Retirees $ 223 $ 200
Fully eligible active plan participants 34 26
Other active plan participants 126 89
- --------------------------------------------------------------------
Accumulated postretirement benefit
obligation 383 315
Assets at market value 185 155
- --------------------------------------------------------------------
Assets less than accumulated postretirement
benefit obligation 198 160
Unrecognized net gain 18 60
Unrecognized prior-service credit 4 1
Unrecognized transition obligation (61) (65)
- --------------------------------------------------------------------
Postretirement benefit liability $159 $156
====================================================================
</TABLE>
14
<PAGE> 16
The amount of postretirement benefit costs deferred as a regulatory asset
at December 31, 1997 and 1996, is $107 million and $118 million, respectively,
and is expected to be recovered through rates over approximately 15 years.
The discount rate used to measure the present value of benefit obligations
is 7 1/4 percent (7 1/2 percent in 1996). The expected long-term rate of return
on plan assets is 10 percent (6 percent after taxes). The annual assumed rate of
increase in the health care cost trend rate for 1998 is 8 1/2 to 9 1/2 percent,
systematically decreasing to 5 percent by 2006. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rate by 1 percent in each year would increase the
aggregate of the service and interest cost components of postretirement benefit
expense for the year ended December 31, 1997, by $5 million and the accumulated
postretirement benefit obligation as of December 31, 1997, by $46 million.
OTHER
Williams maintains various defined-contribution plans covering
substantially all employees. Company contributions are based on employees'
compensation and, in part, match employee contributions. Company contributions
are invested primarily in Williams common stock. Williams' contributions to
these plans were $29 million in 1997, $23 million in 1996 and $19 million in
1995.
11. INVENTORIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Millions) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Natural gas in underground storage:
Transcontinental Gas Pipe Line (LIFO)$ 38.3 $ 38.8
Energy Marketing & Trading 3.0 1.5
Other 16.5 --
Petroleum products:
Energy Marketing & Trading 68.6 12.7
Other 30.1 33.7
Materials and supplies 140.3 112.0
Other 3.7 5.9
- -------------------------------------------------------------
$ 300.5 $ 204.6
=============================================================
</TABLE>
If inventories valued on the LIFO method at December 31, 1997, were valued
at current average cost, the amount would increase by approximately $13 million.
Inventories valued on the LIFO method at December 31, 1996, approximate current
average cost.
12. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Millions) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Cost:
Gas Pipelines:
Central $ 844.2 $ 787.4
Kern River Gas Transmission 1,003.9 990.5
Northwest Pipeline 1,478.6 1,447.9
Texas Gas Transmission 1,022.7 958.9
Transcontinental Gas Pipe Line 3,334.8 3,095.7
Energy Services:
Energy Marketing & Trading 43.0 5.4
Exploration & Production 318.5 255.1
Field Services 2,352.4 2,188.3
Petroleum Services 1,055.2 1,073.1
Communications 535.0 257.3
Other 296.1 152.7
- -------------------------------------------------------------
$ 12,284.4 $ 11,212.3
Accumulated depreciation
and depletion (2,228.8) (1,826.0)
- -------------------------------------------------------------
$ 10,055.6 $ 9,386.3
=============================================================
</TABLE>
Commitments for construction and acquisition of property, plant and
equipment are approximately $530 million at December 31, 1997.
13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
Under Williams' cash-management system, certain subsidiaries' cash accounts
reflect credit balances to the extent checks written have not been presented for
payment. The amounts of these credit balances included in accounts payable are
$92 million at December 31, 1997, and $95 million at December 31, 1996.
<TABLE>
<CAPTION>
(Millions) 1997 1996
- --------------------------------------------------------------
Accrued liabilities:
<S> <C> <C>
Rate refunds $ 337.5 $ 305.1
Employee costs 191.5 178.1
Interest 79.4 95.2
Income taxes payable 76.0 77.6
Taxes other than income taxes 72.4 66.2
Other 400.5 253.1
- --------------------------------------------------------------
$ 1,157.3 $ 975.3
==============================================================
</TABLE>
14. DEBT, LEASES AND BANKING ARRANGEMENTS
- --------------------------------------------------------------------------------
NOTES PAYABLE
During 1997, Williams Holdings of Delaware, Inc. (Williams Holdings)
entered into a commercial paper program backed by new short-term bank-credit
facilities totaling $650 million. At December 31, 1997, $645 million of
commercial paper was outstanding under the program. In addition, Williams has
entered into various other short-term
15
<PAGE> 17
credit agreements with amounts outstanding totaling $48 million and $269.5
million at December 31, 1997 and 1996, respectively. The weighted-average
interest rate on the outstanding short-term borrowings at December 31, 1997 and
1996, was 6.56 percent and 7.85 percent, respectively.
DEBT
<TABLE>
<CAPTION>
Weighted-
average
interest December 31,
(Millions) rate* 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
The Williams Companies, Inc.
Revolving credit loans 7.1% $ 383.0 $ --
Debentures, 8.875% - 10.25%,
payable 2012, 2020, 2021 and 2025 8.6 137.0 587.5
Notes, 6.365% - 9.625%, payable
through 2004 7.0 994.7 817.5
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 6.6 586.4 617.7
Northwest Pipeline
Debentures, 7.125% - 10.65%,
payable through 2025 8.3 151.6 360.0
Notes, 6.625%, payable 2007 6.6 250.0 --
Adjustable rate notes, payable
through 2002 9.0 8.3 10.0
Texas Gas Transmission
Debentures, 7.25%, payable 2027 7.3 99.0 --
Notes, 9.625% and 8.625%,
payable 1997 and 2004 8.6 152.4 253.6
Transcontinental Gas Pipe Line
Revolving credit loans 6.3 160.0 --
Debentures, 7.25% and 9.125%,
payable through 2026 7.3 199.7 352.4
Debentures, 7.08%, payable 2026
(subject to debtholder
redemption in 2001) 7.1 200.0 200.0
Notes, 8.125% and 8.875%,
payable 1997 and 2002 8.9 128.2 227.7
Adjustable rate note, payable 2002 5.8 150.0 --
Williams Holdings of Delaware
Revolving credit loans 6.3 200.0 500.0
Debentures, 6.25%, payable 2006 4.8 248.9 248.8
Notes, 6.365% - 6.91%, payable
through 2002 6.7 258.6 --
Williams Pipe Line
Notes, 8.95% and 9.78%, payable
through 2001 9.0 40.0 100.0
Williams Energy Ventures
Adjustable rate notes -- -- 25.6
Williams Communications Solutions, LLC
Revolving credit loans 6.2 125.0 --
Other, payable through 2000 7.8 3.6 5.7
- ------------------------------------------------------------------------------
4,606.4 4,436.5
Current portion of long-term debt (41.1) (59.6)
- ------------------------------------------------------------------------------
$ 4,565.3 $ 4,376.9
==============================================================================
</TABLE>
*At December 31, 1997, including the effects of interest-rate swaps.
In September 1997, Williams initiated a restructuring of its debt
portfolio. As of December 31, 1997, Williams has redeemed approximately $1.3
billion of debt with stated interest rates in excess of 8.8 percent. In January
1998, Williams redeemed $40 million of additional debt obligations. The
restructuring was temporarily financed with the combination of short-term bank
agreements, commercial paper and Williams' existing bank-credit agreement,
until new long-term debt securities were issued. During the fourth quarter of
1997, Williams issued $550 million of new long-term debt obligations. In
January 1998, Williams issued approximately $700 million in additional debt
obligations.
In July 1997, Williams entered into a new $1 billion bank-credit
agreement, replacing the previous agreement. Under the new credit agreement,
Northwest Pipeline, Transcontinental Gas Pipe Line, Texas Gas Transmission, and
Williams Communications Solutions, LLC have access to various amounts of the
facility, while Williams (parent) and Williams Holdings have access to all
unborrowed amounts. Interest rates vary with current market conditions.
For financial statement reporting purposes at December 31, 1997, $560
million in notes payable and current debt obligations, primarily related to the
restructuring noted above, have been classified as non-current obligations
based on Williams' intent and ability to refinance on a long-term basis.
Williams' subsequent issuance of $700 million of long-term debt obligations in
January 1998 is sufficient to complete these refinancings.
Interest-rate swaps with a notional value of $450 million are currently
being utilized to convert certain fixed rate debt obligations resulting in an
effective weighted-average floating rate of 5.24 percent at December 31, 1997.
Interest-rate swaps with a notional value of $130 million are currently being
utilized to convert certain variable rate debt obligations resulting in an
effective weighted-average fixed rate of 7.78 percent at December 31, 1997.
Certain interest-rate swap agreements relating to Kern River which
preceded the January 1996 purchase of Kern River by Williams and the subsequent
Kern River debt refinancing, remain outstanding. In 1996, Kern River entered
into additional interest-rate swap agreements to manage the exposure from the
original interest-rate swap agreements. As described in Note 1, these
interest-rate swap agreements are not designated with the Kern River debt, but
when combined with interest on the debt obligations, Kern River's effective
interest rate is 8.5 percent.
16
<PAGE> 18
Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments and considering the reclassification of current obligations as
previously described, for each of the next five years are as follows:
<TABLE>
<CAPTION>
(Millions)
- ---------------------------------------------------------------
<S> <C>
1998 $ 40
1999 349
2000 251
2001 1,052
2002 1,512
===============================================================
</TABLE>
Cash payments for interest (net of amounts capitalized) are as follows:
1997 -- $396 million; 1996 -- $347 million; and 1995 -- $266 million.
LEASES
Future minimum annual rentals under non-cancelable operating leases are
$113 million in 1998, $99 million in 1999, $84 million in 2000, $59 million in
2001, $55 million in 2002 and $176 million thereafter.
Total rent expense was $126 million in 1997 and $78 million in 1996 and
1995.
15. STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
On November 20, 1997, the board of directors of Williams declared a
two-for-one common stock split and distribution; 160.1 million shares were
issued on December 29, 1997. All references in the financial statements and
notes to the number of common shares outstanding and per-share amounts reflect
the effect of the split.
In the third quarter of 1996, the board of directors authorized the
open-market purchase of up to $800 million of Williams common stock. During
1996, 1.9 million shares were purchased at a total cost of approximately $31
million. No shares were purchased during 1997. In the fourth quarter of 1997,
Williams' board of directors terminated the repurchase program.
In connection with the 1995 merger with Transco Energy, Williams exchanged
all of Transco Energy's outstanding $3.50 cumulative convertible preferred stock
for 2.5 million shares of Williams' $3.50 cumulative convertible preferred
stock. These shares are redeemable by Williams beginning in November 1999, at an
initial price of $51.40 per share. Each share of $3.50 preferred stock is
convertible at the option of the holder into 4.6875 shares of Williams common
stock. Dividends per share of $3.50 were recorded in 1997 and 1996, and $2.33 in
1995.
During 1995, Williams exchanged 2.8 million shares of its $2.21 cumulative
preferred stock with a carrying value of $69 million for 9.6 percent debentures
with a fair value of $72.5 million. The difference in the fair value of the new
securities and the carrying value of the preferred stock exchanged was recorded
as a decrease in capital in excess of par value. This amount did not impact net
income, but is included in preferred stock dividends on the Consolidated
Statement of Income and in the computation of earnings per share. The remaining
shares of $2.21 cumulative preferred stock were redeemed by Williams at par
($25) in September 1997 for a total of $18.5 million. Dividends per share of
$1.47 were recorded in 1997, and $2.21 in 1996 and 1995.
In 1996, the board of directors adopted a Stockholder Rights Plan (the
Rights Plan). Under the Rights Plan, each outstanding share of common stock has
one-third of a preferred stock purchase right attached. Under certain
conditions, each right may be exercised to purchase, at an exercise price of
$140 (subject to adjustment), one two-hundredth of a share of junior
participating preferred stock. The rights may be exercised only if an Acquiring
Person acquires (or obtains the right to acquire) 15 percent or more of Williams
common stock; or commences an offer for 15 percent or more of Williams common
stock; or the board of directors determines an Adverse Person has become the
owner of 10 percent or more of Williams common stock. The rights, which do not
have voting rights, expire in 2006 and may be redeemed at a price of $.01 per
right prior to their expiration, or within a specified period of time after the
occurrence of certain events. In the event a person becomes the owner of more
than 15 percent of Williams common stock or the board of directors determines
that a person is an Adverse Person, each holder of a right (except an Acquiring
Person or an Adverse Person) shall have the right to receive, upon exercise,
common stock having a value equal to two times the exercise price of the right.
In the event Williams is engaged in a merger, business combination or 50 percent
or more of Williams' assets, cash flow or earnings power is sold or transferred,
each holder of a right (except an Acquiring Person or an Adverse Person) shall
have the right to receive, upon exercise, common stock of the acquiring company
having a value equal to two times the exercise price of the right.
Williams has several plans providing for common-stock-based awards to
employees and to non-employee directors. The plans permit the granting of
various types of awards including, but not limited to, stock options,
stock-appreciation rights, restricted stock and deferred stock. Awards may be
granted for no consideration other than prior and future services. The purchase
price per share for stock options and the grant price for stock-appreciation
rights may not be less than the market price of the underlying stock on the date
of grant. Stock options generally become
17
<PAGE> 19
exercisable after five years, subject to accelerated vesting if certain future
stock prices are achieved. Stock options expire 10 years after grant. At
December 31, 1997, 46.7 million shares of common stock were reserved for
issuance pursuant to existing and future stock awards, of which 21.4 million
shares were available for future grants (15.6 million at December 31, 1996).
The following summary reflects stock option activity and related
information for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
(Options in millions) Options Price Options Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding--beginning
of year 19.7 $12.85 15.7 $10.02
Granted 6.7 24.83 8.2 16.71
Exercised (3.8) 11.13 (4.0) 9.14
Canceled (.3) 19.82 (.2) 21.01
- ------------------------------------------------------------------------------
Outstanding -- end of year 22.3 $16.66 19.7 $12.85
- ------------------------------------------------------------------------------
Exercisable at end of year 15.7 $13.21 10.9 $10.29
- ------------------------------------------------------------------------------
Weighted-average grant date
fair value of options
granted during the year $ 5.98 $3.92
==============================================================================
</TABLE>
The following summary provides information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Stock Options
Outstanding Exercisable
---------------------- ----------------
Weighted-
Weighted- Average Weighted-
Range of Average Remaining Average
Exercise Options Exercise Contractual Options Exercise
Prices (millions) Price Life (millions) Price
- ------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C> <C>
$ 4.62 to $17.32 15.4 $12.91 7.5 years 15.4 $12.91
$18.00 to $49.34 6.9 24.98 9.6 years .3 28.14
---- ----
Total 22.3 $16.66 8.1 years 15.7 $13.21
============================================================ ==============
</TABLE>
The fair value of the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: expected life of the stock options of five years; volatility of the
expected market price of Williams common stock of 23 percent (24 percent in 1996
and 1995); risk-free interest rate of 6.1 percent (6.2 percent in 1996 and
1995); and a dividend yield of 2.4 percent (3 percent in 1996 and 1995).
Pro forma net income and earnings per share, assuming Williams had applied
the fair-value method of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" in measuring compensation cost beginning with 1995
employee stock-based awards, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
Pro Pro Pro
forma Reported forma Reported forma Reported
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income
(millions) $252.8 $271.4 $359.9 $362.3 $1,306.1 $1,318.2
Earnings
per share:
Basic $ .76 $ .81 $ 1.10 $ 1.10 $ 4.26 $ 4.30
Diluted $ .74 $ .80 $ 1.07 $ 1.07 $ 4.13 $ 4.17
- -------------------------------------------------------------------------------
</TABLE>
Pro forma amounts for 1997 include the remaining total compensation expense
from the awards made in 1996, as these awards fully vested in 1997 as a result
of the accelerated vesting provisions. Pro forma amounts for 1995 include total
compensation expense from the awards made in 1995, as these awards fully vested
in 1995 as a result of the accelerated vesting provisions. Since compensation
expense from stock options is recognized over the future years' vesting period,
and additional awards generally are made each year, pro forma amounts may not be
representative of future years' amounts.
16. FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
FAIR-VALUE METHODS
The following methods and assumptions were used by Williams in estimating
its fair-value disclosures for financial instruments:
Cash and cash equivalents and notes payable: The carrying amounts reported
in the balance sheet approximate fair value due to the short-term maturity of
these instruments.
Notes and other non-current receivables: For those notes with interest
rates approximating market or maturities of less than three years, fair value is
estimated to approximate historically recorded amounts.
Investments-cost: Fair value is estimated to approximate historically
recorded amounts as the operations underlying these investments are in their
initial phases.
Long-term debt: The fair value of Williams' long-term debt is valued using
indicative year-end traded bond market prices for publicly traded issues, while
private debt is valued based on the prices of similar securities with similar
terms and credit ratings. At December 31, 1997 and
18
<PAGE> 20
1996, 57 percent and 69 percent, respectively, of Williams' long-term debt was
publicly traded. Williams used the expertise of an outside investment banking
firm to estimate the fair value of long-term debt.
Interest-rate swaps: Fair value is determined by discounting estimated
future cash flows using forward interest rates derived from the year-end yield
curve. Fair value was calculated by the financial institutions that are the
counterparties to the swaps.
Interest-rate locks: Fair value is determined using year-end traded market
prices for the referenced U.S. Treasury securities underlying the contracts.
Fair value was calculated by the financial institutions that are parties to the
locks.
Energy-related trading and hedging: Includes forwards, options, swaps and
purchase and sales commitments. Fair value reflects management's best estimate
of market prices considering various factors including closing exchange and
over-the-counter quotations, liquidity of the market in which the contract is
transacted, the terms of the contract, credit considerations, time value and
volatility factors underlying the positions.
CARRYING AMOUNTS AND FAIR VALUES OF WILLIAMS' FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
Asset (liability) 1997 1996
- --------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Millions) Amount Value Amount Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 81.3 $ 81.3 $ 115.3 $ 115.3
Notes and other
non-current receivables 32.5 32.5 27.4 27.4
Investments -- cost 102.8 102.8 71.2 71.2
Notes payable (693.0) (693.0) (269.5) (269.5)
Long-term debt, including
current portion (4,605.4) (4,693.0) (4,435.1) (4,594.4)
Interest-rate swaps (51.1) (46.8) (54.8) (63.7)
Interest-rate locks -- (8.3) -- --
Energy-related trading:
Assets 324.9 324.9 253.6 253.6
Liabilities (383.7) (383.7) (339.1) (339.1)
Energy-related hedging:
Assets .9 11.0 .9 11.2
Liabilities -- (3.6) (1.3) (12.2)
- --------------------------------------------------------------------------------------
</TABLE>
The preceding asset and liability amounts for energy-related hedging
represent unrealized gains or losses and do not include the related deferred
amounts.
The 1997 average fair value of the energy-related trading assets and
liabilities is $258 million and $345 million, respectively. The 1996 average
fair value of the energy-related trading assets and liabilities is $196 million
and $322 million, respectively.
Williams has recorded liabilities of $21 million and $18 million at
December 31, 1997 and 1996, respectively, for certain guarantees that represent
the estimated fair value of these financial instruments.
OFF-BALANCE-SHEET CREDIT AND MARKET RISK
Williams is a participant in the following transactions and arrangements
that involve financial instruments that have off-balance-sheet risk of
accounting loss. It is not practicable to estimate the fair value of these
off-balance-sheet financial instruments because of their unusual nature and
unique characteristics.
In 1997, Williams entered into agreements to sell, on an ongoing basis,
certain of their accounts receivables. Williams also sold certain receivables in
1996 under another revolving receivable sales program. At December 31, 1997 and
1996, $343 million and $152 million have been sold, respectively.
In connection with the sale of Williams' network services operations,
Williams has been indemnified by LDDS against any losses related to retained
guarantees of $135 million and $158 million at December 31, 1997 and 1996,
respectively, for lease rental obligations.
Williams has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $56 million and $10 million at
December 31, 1997 and 1996, respectively. Williams believes it will not have to
perform under these agreements because the likelihood of default by the primary
party is remote and/or because of certain indemnifications received from other
third parties.
COMMODITY PRICE-RISK MANAGEMENT SERVICES
Williams, through Energy Marketing & Trading, provides price-risk
management services associated with the energy industry to its customers. These
services are provided through a variety of financial instruments, including
forward contracts, futures contracts, option contracts, swap agreements and
purchase and sale commitments. See Note 1 for a description of the accounting
for these trading activities. The net gain from trading activities was $125.8
million, $99.2 million and $65.8 million in 1997, 1996 and 1995, respectively.
Energy Marketing & Trading enters into forward contracts and purchase and
sale commitments which involve physical delivery of an energy commodity. Prices
under these contracts are both fixed and variable. Swap agreements call for
Energy Marketing & Trading to make payments to (or receive payments from)
counterparties based upon the differential between a fixed and variable price or
variable prices for different locations. The variable prices
19
<PAGE> 21
are generally based on either industry pricing publications or exchange
quotations. Energy Marketing & Trading buys and sells option contracts which
give the buyer the right to exercise the options and receive the difference
between a predetermined strike price and a market price at the date of exercise.
The market prices used for option contracts are generally exchange quotations.
Energy Marketing & Trading also enters into futures contracts, which are
commitments to either purchase or sell a commodity at a future date for a
specified price and are generally settled in cash, but may be settled through
delivery of the underlying commodity. The market prices for futures contracts
are based on exchange quotations.
Energy Marketing & Trading is subject to market risk from changes in energy
commodity market prices, the portfolio position of its financial instruments and
physical commitments, the liquidity of the market in which the contract is
transacted, and changes in interest rates and credit risk.
Energy Marketing & Trading manages market risk through established trading
policy guidelines, which are monitored on an ongoing basis. Energy Marketing &
Trading attempts to minimize credit-risk exposure to trading counterparties and
brokers through formal credit policies and monitoring procedures. In the normal
course of business, collateral is not required for financial instruments with
credit risk.
The notional quantities for trading activities at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------
Payor Receiver Payor Receiver
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed price:
Natural gas (TBtu) 1,327.9 1,702.5 1,066.6 1,196.8
Refined products and
crude (MMBbls) 337.2 230.7 34.4 26.3
Power (Terawatt Hrs) 20.0 16.7 -- --
Variable price:
Natural gas (TBtu) 2,091.1 1,508.2 1,584.9 1,123.8
Refined products and
crude (MMBbls) 4.5 3.1 3.7 3.3
Power (Terawatt Hrs) .2 2.1 -- --
- ----------------------------------------------------------------------------------
</TABLE>
The net cash flow requirement related to these contracts at December 31,
1997 and 1996, was $92 million and $117 million, respectively. At December 31,
1997, the cash flow requirements extend primarily through 2007.
CONCENTRATION OF CREDIT RISK
Williams' cash equivalents consist of high quality securities placed with
various major financial institutions with high credit ratings. Williams'
investment policy limits its credit exposure to any one financial institution.
At December 31, 1997 and 1996, approximately 57 percent and 69 percent,
respectively, of receivables are for the sale or transportation of natural gas
and related products or services. Approximately 33 percent and 23 percent of
receivables at December 31, 1997 and 1996, respectively, are for communications
and related services. Natural gas customers include pipelines, distribution
companies, producers, gas marketers and industrial users primarily located in
the eastern, northwestern and midwestern United States. Communications'
customers include numerous corporations. As a general policy, collateral is not
required for receivables, but customers' financial condition and credit
worthiness are evaluated regularly.
17. OTHER FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Intercompany revenues (at prices that generally apply to sales to
unaffiliated parties) are as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas Pipelines:
Central $ 6.1 $ 9.2 $ 9.5
Northwest Pipeline 2.8 1.1 1.8
Texas Gas Transmission 7.6 20.5 37.7
Transcontinental Gas Pipe Line 40.5 34.6 34.2
Energy Services:
Energy Marketing & Trading* (47.1) 130.7 62.2
Exploration & Production 126.5 57.1 4.9
Field Services 32.3 26.2 14.0
Petroleum Services 81.6 67.7 44.6
Other 12.6 9.3 .2
- ----------------------------------------------------------------------------------
$ 262.9 $ 356.4 $ 209.1
- ----------------------------------------------------------------------------------
</TABLE>
*Energy Marketing & Trading intercompany cost of sales, which are netted in
revenues consistent with market-value accounting, exceed intercompany revenues
in 1997.
20
<PAGE> 22
<TABLE>
<CAPTION>
Information for business segments is as follows:
(Millions)
----------------------------------------
1997 1996 1995
------------- ------------ ---------
<S> <C> <C> <C>
Identifiable assets at December 31:
Gas Pipelines:
Central $ 854.9 $ 704.8 $ 709.2
Kern River Gas Transmission 1,083.0 1,081.6 --
Northwest Pipeline 1,161.3 1,153.9 1,147.5
Texas Gas Transmission 1,162.1 1,132.2 1,151.8
Transcontinental Gas Pipe Line 3,413.9 3,305.4 3,159.5
Energy Services:
Energy Marketing & Trading 725.1 839.1 438.2
Exploration & Production 247.1 200.3 164.6
Field Services 2,038.4 1,995.0 1,939.3
Petroleum Services 904.6 906.5 863.2
Communications 1,312.9 670.6 401.0
Investments 291.4 190.6 307.6
General corporate and other 684.3 238.8 279.3
----------- ----------- -----------
Consolidated $ 13,879.0 $ 12,418.8 $ 10,561.2
=========== =========== ===========
Additions to property, plant and equipment:
Gas Pipelines:
Central $ 60.4 $ 50.9 $ 43.5
Kern River Gas Transmission 15.3 4.7 --
Northwest Pipeline 44.4 62.8 130.5
Texas Gas Transmission 74.5 50.1 32.1
Transcontinental Gas Pipe Line 224.8 272.1 238.7
Energy Services:
Energy Marketing & Trading 37.6 .6 .4
Exploration & Production 63.3 30.3 15.6
Field Services 158.8 205.7 232.1
Petroleum Services 45.0 55.8 87.9
Communications 276.3 66.9 32.4
General corporate and other 161.7 19.0 14.3
----------- ----------- -----------
Consolidated $ 1,162.1 $ 818.9 $ 827.5
=========== =========== ===========
Depreciation, depletion and amortization:
Gas Pipelines:
Central $ 28.0 $ 27.5 $ 27.3
Kern River Gas Transmission 17.8 15.5 --
Northwest Pipeline 55.2 43.2 34.9
Texas Gas Transmission 42.5 41.5 38.9
Trancontinental Gas Pipe Line 129.5 113.7 109.1
Energy Services:
Energy Marketing & Trading .7 .6 1.2
Exploration and Production 12.6 10.5 9.8
Field Services 102.7 94.7 100.4
Petroleum Services 35.0 34.1 26.4
Communications 66.8 30.9 20.3
General corporate and other 8.7 8.8 7.2
----------- ----------- -----------
Consolidated $ 499.5 $ 421.0 $ 375.5
=========== =========== ===========
</TABLE>
Identifiable assets are gross assets used by a business segment, including
an allocated portion of assets used jointly by more than one business segment.
Items such as investments are considered to be general corporate assets rather
than identifiable assets of individual business segments.
18. 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 $328 million at December 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, $337 million of revenues has been reserved for potential refund as of
December 31, 1997.
In 1997, the Federal Energy Regulatory Commission (FERC) issued orders
addressing, among other things, the authorized rates of return for three of
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 consider, on an industry-wide basis, issues with respect
to pipeline rates of return.
In 1992, the FERC issued Order 636, Order 636-A and Order 636-B. These
orders, which were challenged in various respects by various parties in
proceedings 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 three of its 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
was 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.
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 $67 million. An intervenor
has filed protests
21
<PAGE> 23
seeking to have the FERC review the prudence and eligibility of approximately
$40 million of 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 three life-of-lease
producer contracts were imprudently entered into in 1982. Central has filed for
rehearing, and management plans to vigorously defend the prudency of these
contracts. An intervenor has 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 these costs were not eligible for recovery under
Order No. 636. This order was affirmed on rehearing in April 1997. An initial
decision from the administrative law judge is expected in the first quarter of
1998. 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
December 31, 1997, including a $5 million fourth-quarter 1997 charge to expense
for additional absorption of future costs. Central also has an $88 million
regulatory asset at December 31, 1997, 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 December
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 $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.
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 December 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. 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 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
22
<PAGE> 24
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 December 31, 1997, 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
Field Services unit of Energy Services had recorded an aggregate liability of
approximately $12 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 $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 Central 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
December 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. 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
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. 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.
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. In one of the
two remaining cases, a jury verdict found that Transcontinental Gas Pipe Line
was required to pay to a producer damages of $23.3 million including $3.8
million in attorneys' fees. Transcontinental Gas Pipe Line is considering an
appeal. In the other remaining case, a producer has asserted damages, including
interest calculated through December 31, 1996, of approximately $6 million.
23
<PAGE> 25
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
owned a cogeneration facility in Hazleton, Pennsylvania (the Facility). Hazleton
Fuel Management Company (HFMC), a subsidiary of Transco Energy, formerly
supplied natural gas and fuel oil to the Facility. Pursuant to a court-approved
Plan of Reorganization, all litigation involving HFMC has been fully settled,
and HFMC received $6.3 million from the bankruptcy estate, leaving it with
approximately $14 million of outstanding receivables, all of which have been
fully reserved.
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.
19. 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. Approximately 96.8 million shares
of Williams common stock valued at approximately $2.8 billion, based on the
closing market price of Williams common stock on December 31, 1997, would be
issued in the transaction. The transaction, subject to approval by both Williams
and MAPCO stockholders and to review under federal anti-trust laws, is expected
to close during the first quarter of 1998. MAPCO is engaged in the NGL pipeline,
petroleum refining and marketing and propane marketing businesses, and will
become part of the Energy Services business unit.
The merger will be accounted for as a pooling of interests. Anticipated
changes in accounting methods as a result of the merger are not expected to have
a material impact on the financial position or results of operations of the
combined entity.
The following unaudited pro forma information combines the results of
operations of Williams and MAPCO as if the companies had been combined
throughout the periods presented.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------
(Millions, except per-share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 8,241.6 $ 6,842.9 $ 5,655.0
Income from continuing operations 458.6 492.5 363.6
Net income 373.2 459.8 1,392.9
Basic earnings per common share:
Income from continuing operations 1.09 1.16 .87
Net income .88 1.08 3.43
Diluted earnings per common share:
Income from continuing operations 1.06 1.14 .86
Net income .86 1.06 3.35
- ----------------------------------------------------------------------------------------
</TABLE>
Pro forma financial information is not necessarily indicative of results of
operations that would have occurred if the companies had been combined
throughout the periods presented or of future results of operations of the
combined companies.
24
<PAGE> 26
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (millions, except
per-share amounts). Per-share amounts reflect the effect of the two-for-one
common stock split and distribution (see Note 15) and the adoption of SFAS No.
128.
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,001.4 $ 1,020.6 $ 1,121.0 $ 1,266.6
Costs and operating expenses 581.3 625.1 705.3 752.8
Income before
extraordinary loss 105.9 107.8 65.3 71.5
Net income (loss) 105.9 107.8 (8.4) 66.1
Basic earnings per common share:
Income before
extraordinary loss .32 .33 .20 .21
Net income (loss) .32 .33 (.03) .19
Diluted earnings per common share:
Income before
extraordinary loss .31 .32 .19 .21
Net income (loss) .31 .32 (.03) .19
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 893.7 $ 837.5 $ 842.2 $ 957.8
Costs and operating expenses 499.4 493.9 509.3 561.5
Net income 104.9 80.4 71.0 106.0
Basic earnings per common
share .32 .24 .21 .32
Diluted earnings per common
share .31 .24 .21 .31
- -----------------------------------------------------------------------------------------------
</TABLE>
The sum of earnings per share for the four quarters may not equal the total
earnings per share for the year due to changes in the average number of common
shares outstanding.
Second-quarter 1997 net income includes a $44.5 million gain related to the
combination of Williams' and Nortel's customer-premise equipment sales and
service business (see Note 2 of Notes to Consolidated Financial Statements).
Third-quarter 1997 net income includes an extraordinary loss of $74 million
related to the restructuring of Williams' debt portfolio (see Note 8 of Notes to
Consolidated Financial Statements).
Second-quarter 1996 net income includes recognition of favorable income tax
adjustments totaling $10 million related to research credits and previously
provided deferred income taxes on certain regulated capital projects.
Third-quarter 1996 net income includes approximately $6 million, net of federal
income tax effect, from the effects of state income tax adjustments related to
1995.
Selected comparative fourth-quarter data are as follows (millions, except
per-share amounts).
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Operating profit:
Gas Pipelines:
Central $ 5.6 $ 10.9
Kern River Gas Transmission 29.7 29.3
Northwest Pipeline 29.5 21.8
Texas Gas Transmission 32.1 29.5
Transcontinental Gas Pipe Line 63.4 61.0
Energy Services:
Energy Marketing & Trading 42.0 13.6
Exploration & Production 10.2 3.7
Field Services 33.5 56.3
Petroleum Services 33.9 18.3
Communications (51.8) .6
Other 2.8 (2.9)
- ----------------------------------------------------------------------------
Total operating profit 230.9 242.1
General corporate expenses (18.7) (11.6)
Interest expense N net (97.4) (91.9)
Investing income 7.4 4.1
Gain on sale of asset -- 15.7
Minority interest in income of consolidated
subsidiaries (4.5) --
Other income (expense) N net (1.8) 8.0
- ----------------------------------------------------------------------------
Income before income taxes 115.9 166.4
Provision for income taxes 44.4 60.4
- ----------------------------------------------------------------------------
Income before extraordinary loss 71.5 106.0
Extraordinary loss (5.4) --
- ----------------------------------------------------------------------------
Net income $ 66.1 $ 106.0
- ----------------------------------------------------------------------------
Basic earnings per common share $ .19 $ .32
- ----------------------------------------------------------------------------
Diluted earnings per common share $ .19 $ .31
- ----------------------------------------------------------------------------
</TABLE>
Communications' fourth-quarter 1997 operating profit includes charges
totaling approximately $49.8 million, related to the decision to sell the
learning content business, the write-down of assets and the development costs
associated with advanced applications. In addition, 1997 general corporate
expenses include approximately $5 million in costs related to the MAPCO
acquisition (see Note 19 of Notes to Consolidated Financial Statements).
Field Services' fourth-quarter 1996 operating profit includes a gain of
approximately $20 million from the property insurance coverage associated with
construction of replacement gathering facilities. In addition, 1996 segment
operating profit and general corporate expenses together include approximately
$10 million related to an all-employee bonus that was linked to achieving record
financial performance. In fourth-quarter 1996, Williams recognized a pre-tax
gain of $15.7 million from the sale of certain communication rights.
25
