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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): April 27, 1998
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The Williams Companies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 1-4174 73-0569878
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
One Williams Center, Tulsa, Oklahoma 74172
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 918/588-2000
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Not Applicable
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
In connection with the acquisition on March 28, 1998, by The Williams
Companies, Inc. (the "Company") of MAPCO Inc., included herein are the
supplemental consolidated financial statements of The Williams Companies, Inc.
for the three years ended December 31, 1997, and related report of its
independent auditors and a copy of the Annual Report on Form 10-K of MAPCO Inc.
for the year ended December 31, 1997.
Item 7. Financial Statements and Exhibits.
The Company files the following exhibits as part of this Report:
Exhibit 23(a). Consent of Independent Auditors, Ernst & Young LLP
Exhibit 23(b). Consent of Independent Auditors, Deloitte & Touche LLP
Exhibit 99(a). The Company's Supplemental Consolidated Financial
Statements for the three years ended December 31, 1997
Exhibit 99(b). Opinion of Independent Auditors, Deloitte & Touche LLP
Exhibit 99(c). Annual Report on Form 10-K for MAPCO Inc. for the year
ended December 31, 1997 (incorporating by reference the filing by
MAPCO Inc. of its Annual Report on Form 10-K of MAPCO Inc. for the
fiscal year ended December 31, 1997, filed March 4, 1998, Commission
File No. 1-5254).
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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.
Date: April 27, 1998 /s/ GARY R. BELITZ
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Name: Gary R. Belitz
Title: Controller and
Chief Accounting Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<S> <C>
Exhibit 23(a). Consent of Independent Auditors, Ernst &
Young LLP
Exhibit 23(b). Consent of Independent Auditors, Deloitte &
Touche LLP
Exhibit 99(a). The Company's Supplemental Consolidated
Financial Statements for the three years ended December 31, 1997
Exhibit 99(b). Opinion of Independent Auditors, Deloitte &
Touche LLP
Exhibit 99(c). Annual Report on Form 10-K for MAPCO Inc. for
the year ended December 31, 1997 (incorporating by reference the
filing by MAPCO Inc. of its Annual Report on Form 10-K of MAPCO
Inc. for the fiscal year ended December 31, 1997, filed March 4,
1998, Commission File No. 1-5254).
</TABLE>
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EXHIBIT 23(a)
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-8 of The Williams Companies, Inc. of our
report dated April 3, 1998, with respect to the supplemental consolidated
financial statements of The Williams Companies, Inc. included in its Current
Report on Form 8-K to be filed with the Securities and Exchange Commission on
or about April 27, 1998.
Form S-3: Registration No. 333-20929
Registration No. 333-29185
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; and Registration No. 333-48945.
ERNST & YOUNG LLP
Tulsa, Oklahoma
April 27, 1998
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Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements of
MAPCO Inc. and The Williams Companies, Inc. shown below of our report dated
January 27, 1998 (March 3, 1998, as to Notes 2 and 16 to the MAPCO Inc.
consolidated financial statements) with respect to the consolidated financial
statements of MAPCO Inc., which report includes explanatory paragraphs relating
to certain litigation to which MAPCO Inc. is a defendant and the change in its
method of accounting for business process reengineering activities to conform to
the consensus reached by the Emerging Issues Task Force in Issue No. 97-13,
appearing in this Current Report of The Williams Companies, Inc. on Form 8-K.
MAPCO Inc. Registration Statements
Form S-3: Registration No. 33-34044
Registration No. 333-20837
Form S-8: Registration No. 33-13090(Post-effective Amendment No. 1)
Registration No. 33-29044(Post-effective Amendment No. 1)
Registration No. 33-33217
The Williams Companies, Inc. Registration Statements
Form S-3: Registration No. 333-20929
Registration No. 333-29185
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 Registration No. 333-48945
Deloitte & Touche LLP
Tulsa, Oklahoma
April 27, 1998
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EXHIBIT 99(a)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
MAPCO ACQUISITION
On November 24, 1997, Williams and MAPCO Inc. announced that they had
entered into a definitive merger agreement whereby Williams would acquire MAPCO
by exchanging 1.665 shares of Williams common stock for each outstanding share
of MAPCO common stock. In addition, outstanding MAPCO employee stock options
would be converted into Williams common stock. The merger was consummated on
March 28, 1998, with the issuance of 98.6 million shares of Williams common
stock. MAPCO is engaged in the NGL pipeline, petroleum refining and marketing
and propane marketing businesses, and became part of the Energy Services
business unit.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests. Accordingly, all prior period financial
information presented has been restated to include the combined results of
operations, financial condition and liquidity of MAPCO as though it had always
been a part of Williams.
RESULTS OF OPERATIONS
1997 vs. 1996
CENTRAL'S revenues increased $6 million, or 3 percent, due primarily to
the net effect of adjustments to certain accruals in 1997. Total throughput
decreased 4.2 TBtu, or 1 percent, due primarily to lower interruptible volumes.
Other (income) expense--net includes a $7 million gain from the
sale-in-place of natural gas from a decommissioned storage field.
Operating profit increased $12.2 million, or 27 percent, due primarily
to the gain from the sale-in-place of natural gas, lower operating and
maintenance expenses, an increase in firm reserved capacity and lower general
and administrative expenses.
KERN RIVER GAS TRANSMISSION'S (KERN RIVER) revenues increased $6.5
million, or 4 percent, due primarily to a full year of Williams' ownership in
1997 as compared to 1996 and increased transportation revenues. Results for 1996
reflect operations from January 16, 1996, when Williams acquired the remaining
interest in Kern River. Total throughput increased 15.5 TBtu, or 6 percent, due
primarily to the full year of Williams' ownership in 1997 and increased firm
transportation volumes during the last half of 1997.
Operating profit increased $7.3 million, or 6 percent, due primarily to
the full year of Williams' ownership in 1997, higher transportation revenues and
lower operations and maintenance expenses, partially offset by the impact of
Kern River's levelized rate design.
NORTHWEST PIPELINE'S revenues increased $3.4 million, or 1 percent, due
primarily to a new rate design, effective March 1, 1997, that enabled greater
short-term firm and interruptible transportation volumes and a $3.5 million gain
on the sale of system balancing gas. Largely offsetting these increases were $7
million of adjustments to rate refund accruals in 1997 and the effect of $9
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million of revenue in 1996 associated with reserve reversals and favorable
regulatory decisions. Total throughput decreased 120.3 TBtu, or 14 percent, as a
result of the 1996 sale of the south-end facilities.
Operating profit decreased $900,000, or 1 percent, due primarily to the
combined impact of the increase to rate reserve accruals in 1997 and recognition
in 1996 of favorable regulatory actions, significantly offset by the new
transportation rates effective in 1997, lower operating and maintenance expenses
and the $3.5 million gain on the sale of system balancing gas.
TEXAS GAS TRANSMISSION'S revenues decreased $13.1 million, or 4
percent, and costs and operating expenses decreased $13 million, or 8 percent,
due primarily to lower reimbursable costs passed through to customers as
provided in Texas Gas' rates including $6 million related to the suspension of
gas supply realignment cost recovery from firm transportation customers. Total
throughput decreased 20.9 TBtu, or 3 percent.
Operating profit increased $2.5 million, or 3 percent, due primarily to
cost reductions and efficiency efforts and the favorable resolutions in 1997 of
certain contractual and regulatory issues, partially offset by lower gas
processing revenue and favorable 1996 adjustments to rate refund accruals.
TRANSCONTINENTAL GAS PIPE LINE'S (TRANSCO) revenues increased $5.9
million, or 1 percent, due primarily to the effects of a mainline expansion
placed into service in late 1996, new services begun in late 1997, new rates
effective May 1, 1997, to recover costs associated with increased capital
expenditures, and the effects of a 1996 downward adjustment (offset in costs) of
$14 million to reflect a rate case settlement, partially offset by $23 million
lower reimbursable costs passed through to customers as provided in Transco's
rates. Total throughput decreased 21.1 TBtu, or 1 percent, due primarily to
milder weather during 1997 as compared to 1996, which lowered firm long-haul and
production area interruptible transportation volumes.
Costs and operating expenses decreased $17.3 million, or 4 percent, due
primarily to the lower reimbursable costs charged to Transco and passed through
to customers, lower operation and maintenance expenses and a $5.4 million
settlement related to a prior rate proceeding, partially offset by the effect of
a 1996 downward adjustment (offset in revenues) of $14 million to depreciation
expense to reflect a rate case settlement and higher depreciation expense in
1997 associated with recent capital expenditures.
Operating profit increased $30.7 million, or 16 percent, due primarily
to lower operation and maintenance expenses, the $5.4 million settlement and the
effects of the mainline expansion, new services and the new rates effective May
1, 1997, slightly offset by higher depreciation expense.
ENERGY MARKETING & TRADING'S revenues of $549.2 million in 1997 include
$413.4 million from propane marketing operations and $135.8 million from energy
trading and price-risk management activities. Revenues of $690.6 million in 1996
include $429.5 million from propane marketing operations and $261.1 million from
energy trading and price-risk management activities. The $16.1 million, or 4
percent, decrease in revenues from the propane marketing business resulted from
the sale of certain propane and liquid fertilizer assets in 1996, partially
offset by increased propane sales volumes primarily from acquisitions. The
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$125.3 million, or 48 percent, decrease in revenues from energy trading and
price-risk management activities was due primarily to the 1997 reporting on a
net margin basis of certain natural gas and gas liquids marketing operations
previously not considered to be included in trading operations. Excluding this
decrease, energy trading and price-risk management revenues increased $16
million due primarily to the initial income recognition from long-term electric
power contracts, increased physical and notional natural gas volumes of 22
percent and 44 percent, respectively, and higher petroleum trading volumes,
partially offset by lower natural gas trading margins as a result of decreased
price volatility. Revenues also increased from project financing services for
energy producers and the sale of excess transportation capacity.
Costs and operating expenses decreased $120 million, or 23 percent, due
primarily to decreases of $141 million from the 1997 reporting on a net margin
basis of certain natural gas and gas liquids marketing operations previously not
considered to be included in trading operations, $21 million associated with the
sale of certain propane and liquid fertilizer assets, and lower propane purchase
prices. Partially offsetting these decreases were increased propane purchase
volumes, increased depreciation, and increased operating expenses associated
with acquisitions and growth initiatives. Selling, general and administrative
expenses increased $31 million, or 52 percent, due primarily to propane business
acquisitions and the expenses associated with expansion of business growth
platforms.
Operating profit of $64.4 million in 1997 includes $70.6 million from
energy trading and price-risk management activities and a $6.2 million operating
loss from the propane marketing business. Operating profit of $110.6 million in
1996 includes $66.4 million from energy trading and price-risk management
activities and $44.2 million from the propane marketing business. The $4.2
million, or 6 percent, increase in energy trading and price-risk management
operating profit is due primarily to the $16 million increase in net revenues
and a $6.3 million recovery of an account previously written off, largely offset
by the expenses associated with expansion of business growth platforms. The
$50.4 million decrease in operating profit from the propane marketing business
results from increased operating expenses and selling, general and
administrative expenses associated with acquisitions and market expansion
programs.
EXPLORATION & PRODUCTION'S revenues increased $47.7 million, or 58
percent, due primarily to higher average natural gas sales prices for
company-owned production and from the marketing of Williams Coal Seam Gas
Royalty Trust (Royalty Trust) natural gas, and a 21 percent increase in
company-owned production volumes.
Costs and operating expenses increased $23 million, or 32 percent, due
primarily to higher Royalty Trust natural gas purchase prices, increased
production activities and higher dry hole costs.
Operating profit increased $27.5 million, from $2.8 million in 1996,
due primarily to the increase in average natural gas prices and company-owned
production volumes, partially offset by higher expenses associated with
increased activity levels.
MIDSTREAM GAS & LIQUIDS' revenues of $1.4 billion in 1997 include
$690.3 million from gathering and processing activities and $750.6 million from
the
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Mid-America pipeline natural gas liquids transportation activities. Revenues of
$1.3 billion in 1996 include $616.3 million from gathering and processing
activities and $716.4 million from the Mid-America pipeline natural gas liquids
transportation activities. The $74 million, or 12 percent, increase in revenues
from gathering and processing activities is due primarily to higher natural gas
liquids sales of $44 million, receipt of $8 million of business interruption
insurance proceeds related to a 1996 claim, and higher gathering, processing and
condensate revenues of $7 million, $5 million and $11 million, respectively.
Natural gas liquids sales associated with gathering and processing activities
increased due to a 37 percent increase in volumes, slightly offset by lower
average sales prices. The $34.2 million, or 5 percent, increase in revenues from
natural gas liquids transportation activities results from a $40 million
increase in product sales partially offset by a $10 million decrease related to
the January 1997 sale of the West Panhandle operations. The product sales
increase includes $53 million related to a full year of Canadian operations in
1997 as compared to four months in 1996 and increased product sales volumes,
partially offset by significantly lower natural gas liquids sales prices.
Costs and operating expenses increased $129 million, or 13 percent.
Transportation costs related to the Mid-America pipeline remained flat while
costs and operating expenses for other operations increased due primarily to $56
million higher fuel and replacement gas purchases, the $52 million impact of a
full year of Canadian operations in 1997 as compared to four months in 1996, $12
million related to other product sales volume increases, and increases in
operating and maintenance expenses and depreciation, slightly offset by the $13
million impact of the sale of the West Panhandle operations.
Other (income) expense--net for 1996 includes a $20 million gain from
the property insurance coverage associated with construction of replacement
gathering facilities and $6 million of gains from the sale of two small
gathering systems, partially offset by $5 million of environmental remediation
accruals.
Operating profit of $280.6 million in 1997 includes $163 million from
gathering and processing activities and $117.6 million from natural gas liquids
transportation activities. Operating profit of $324.5 million in 1996 includes
$187.4 million from gathering and processing activities and $137.1 million from
natural gas liquids transportation activities. The $24.4 million, or 13 percent,
decrease in operating profit from gathering and processing activities is due
primarily to lower per-unit liquids margins, the $12 million net effect of lower
insurance recoveries between 1997 and 1996, higher operating and maintenance
expenses, increased depreciation, and higher gathering fuel and replacement gas
purchase costs, partially offset by increased liquids and processing volumes.
Operating profit from natural gas liquids transportation activities decreased
$19.5 million, or 14 percent, due primarily to the sale of the West Panhandle
operations and an additional $5 million litigation accrual in 1997.
PETROLEUM SERVICES' revenues of $3.3 billion in 1997 include $2.8
billion from petroleum refining and marketing operations and $548.7 million from
transportation activities and ethanol sales. Revenues of $2.8 billion in 1996
include $2.3 billion from petroleum refining and marketing operations and $493.3
million from transportation activities and ethanol sales. The petroleum refining
and marketing revenues increased $536.1 million, or 24 percent, due primarily to
$493 million higher refining revenues, $18 million higher retail sales revenues
and $25 million from new energy information management operations.
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Refining revenues increased mainly due to 49 percent higher sales volumes at the
Memphis refinery, mainly from increased purchases of refined products. This
increase reflects increased demand for petroleum products, aggressive marketing
in the Memphis and Ohio River Valley areas and the inclusion of Texas Oil
operations, which prior to July 1997 were unconsolidated. The retail sales
increase reflects increased gasoline and merchandise sales following the
EZ-Serve convenience stores acquisition, partially offset by decreased diesel
sales. The $55.4 million, or 11 percent, increase in revenues from
transportation activities and ethanol sales is due primarily to a $24 million
increase in product sales from transportation activities and a $27 million
increase in ethanol sales. Ethanol sales increased as a result of 22 percent
higher sales volumes, partially offset by lower average ethanol sales prices.
Ethanol production was reduced during the second half of 1996 due to unfavorable
market conditions. Pipeline shipments and average rates were comparable to 1996.
Costs and operating expenses increased $558 million, or 22 percent, due
primarily to a $437 million increase in crude oil and refined product purchases
by the refineries, $33 million associated with the new energy information
management operations, $23 million increase in product purchases related to
transportation activities, higher operating expenses associated with increased
refinery throughput and maintenance activity, increased ethanol production and
the impact of the EZ-Serve acquisition.
Operating profit of $196.7 million in 1997 includes $108.6 million from
petroleum refining and marketing operations, $97 million from transportation
activities and ethanol sales and an $8.9 million operating loss associated with
the new information management operations. Operating profit of $169.9 million in
1996 includes $94.2 million from petroleum refining and marketing operations and
$75.7 million from transportation activities and ethanol sales. Operating profit
from petroleum refining and marketing operations increased $14.4 million, or 15
percent, reflecting a $33 million increase from refining operations, partially
offset by a decrease of $18 million from retail operations. The petroleum
refining increase is due primarily to higher per-unit margins on processed
barrels sold and increased refined products sales volumes, partially offset by
higher selling, general and administrative expenses. The $18 million decrease in
retail operations reflects the additional costs associated with the
implementation of strategic growth initiatives and lower per-unit margins on
gasoline sales. Operating profit from transportation activities and ethanol
sales increased $21.3 million, or 28 percent, due primarily to increased ethanol
sales volumes and per-unit margins.
COMMUNICATIONS' revenues increased $734 million, or 103 percent, due
primarily to acquisitions which contributed revenues of approximately $650
million, including $536 million from the acquisition of the customer premise
equipment sales and services operations of Northern Telecom (Nortel).
Additionally, increased business activity resulted in a $119 million revenue
increase in new system sales, partially offset by a $46 million decrease in
system modification revenues. The number of ports in service at December 31,
1997, more than doubled as compared to December 31, 1996, due primarily to the
Nortel acquisition. Fiber billable minutes from occasional service increased 47
percent. Dedicated service voice-grade equivalent miles at December 31, 1997,
increased 26 percent as compared with December 31, 1996.
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Costs and operating expenses increased $550 million, or 102 percent,
due primarily to acquired operations, the overall increase in business activity,
higher expenses for developing advanced network applications and increased
depreciation associated with added capacity. Selling, general and administrative
expenses increased $198 million, or 121 percent, due primarily to acquired
operations, the overall increase in business activity, higher expenses for
developing advanced network applications and expanding the infrastructure of
this business for future growth.
Other (income) expense--net includes $49.8 million of charges in 1997
related to the decision to sell the learning content business, and the
write-down of assets and the development expenses associated with certain
advanced applications.
Operating profit decreased $62.3 million from a $6.6 million operating
profit in 1996 to a $55.7 million operating loss in 1997, due primarily to the
other expense charges of $49.8 million and the expense of developing
infrastructure while integrating the most recent acquisitions, partially offset
by improved operating profit from Communications Solutions including the impact
of the Nortel acquisition.
GENERAL CORPORATE EXPENSES increased $22.6 million, or 31 percent, due
primarily to higher employee compensation expense, $10 million of costs related
to the MAPCO acquisition and higher consulting fees. Interest accrued increased
$45.4 million, or 11 percent, due primarily to higher borrowing levels including
increased borrowing under the $1 billion bank-credit facility and Williams
Holdings' commercial paper program, partially offset by a lower average interest
rate. The lower average interest rate reflects lower rates on new 1997
borrowings as compared to previously outstanding borrowings. Interest
capitalized increased $15.1 million to $23.3 million, due primarily to capital
expenditures for the Discovery pipeline project and Communications' fiber-optic
network. For information concerning the $44.5 million 1997 gain on sale of
interest in subsidiary, see Note 2. The $66 million 1997 gain on sales of assets
results from the sale of an interest in the liquids and condensate in the West
Panhandle field. The $36.5 million 1996 gain on sales of assets results from the
sale of the fertilizer and Iowa propane assets and the sale of certain
communication rights (see Note 6). The $18.2 million minority interest in income
of consolidated subsidiaries in 1997 is related primarily to the 30 percent
interest held by Williams Communications Solutions, LCC's minority shareholder
(see Note 2). The $16.2 million unfavorable change in other income
(expense)--net in 1997 is due primarily to the costs associated with expansion
of the sale of receivables program in 1997 and the effect of $10 million of
reserve reversals in 1996, partially offset by lower environmental accruals in
1997.
The provision for income taxes on continuing operations decreased $14.7
million, or 6 percent. The effective income tax rate in 1997 exceeds the federal
statutory rate due primarily to the effects of state income taxes, substantially
offset by the effect of the non-taxable gain recognized in 1997 (see Note 2) and
income tax credits from coal-seam gas production. The effective tax rate in 1996
approximates the federal statutory rate as income tax credits from research
activities and coal-seam gas production are offset by the effects of state
income taxes. In addition, the 1996 tax provision includes recognition of
favorable adjustments totaling $13 million related to previously provided
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deferred income taxes on certain regulated capital projects and state income tax
adjustments.
On September 10, 1996, Williams sold substantially all of the net
assets of the MAPCO coal business to Alliance Coal Corporation for $236 million
in cash. The sale yielded losses in 1997 and 1996 which are reported as
discontinued operations along with the operating results for 1996 (see Note 3).
The 1997 extraordinary loss results from the early extinguishment of
debt (see Note 8).
1996 vs. 1995
CENTRAL'S revenues increased $4.1 million, or 2 percent, due primarily
to increased transportation revenue resulting from new tariff rates that became
effective August 1, 1995. Total throughput increased 6.9 TBtu, or 2 percent.
Operating profit was substantially the same as the prior year as the
effect of a $4 million 1995 reversal of a regulatory accrual was offset by new
tariff rates that became effective August 1, 1995.
KERN RIVER'S remaining interest was acquired by Williams on January 16,
1996. Revenues and operating profit amounts for 1996 include the operating
results of Kern River since the acquisition date. Kern River's revenues were
$160.6 million for 1996, while costs and operating expenses were $35 million,
selling, general and administrative expenses were $13 million and operating
profit was $113 million. Prior to the acquisition, Williams accounted for its 50
percent ownership in Kern River using the equity method of accounting, with its
share of equity earnings recorded in investing income. Throughput was 269.9 TBtu
during 1996 (for the period subsequent to the acquisition date). Throughput for
1996 is comparable to 1995.
NORTHWEST PIPELINE'S revenues increased $14.5 million, or 6 percent,
due primarily to increased transportation rates, effective February 1, 1996,
associated with the expansion of mainline capacity placed into service on
December 1, 1995. In addition, $9 million of revenue in 1996 associated with
reserve reversals and favorable regulatory decisions was more than offset by the
effect of the 1995 reversal of approximately $16 million of accrued liabilities
for estimated rate refund accruals. Total throughput increased 8 TBtu, or 1
percent.
Operating profit increased $9.2 million, or 8 percent, due primarily to
increased transportation rates associated with the expansion of mainline
capacity, and the reserve reversals and favorable regulatory decisions.
Partially offsetting were higher depreciation expense associated with the
mainline expansion and the approximate $11 million net favorable effect of two
1995 reserve accrual adjustments. The 1995 reserve accrual adjustments included
a $16 million favorable adjustment of rate refund accruals based on a favorable
rate case order, partially offset by a loss accrual (included in other (income)
expense--net) in connection with a lawsuit involving a former transportation
customer.
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TEXAS GAS TRANSMISSION'S revenues and operating profit increased $29.8
million, or 11 percent, and $21.1 million, or 33 percent, respectively, due
primarily to new rates that became effective April 1, 1995, and an adjustment to
regulatory accruals based upon a recent rate case settlement. Also, 1995
reflected operations from January 18, when Williams acquired a majority interest
in Transco Energy. Revenues associated with the period January 1 through January
17, 1995, were $16 million. Total throughput increased 141.1 TBtu, or 22
percent, due primarily to a full year of Williams' ownership in 1996 compared to
a partial year in 1995 and the impact of a colder winter in 1996.
TRANSCO'S revenues increased $35.1 million, or 5 percent, due primarily
to higher natural gas transportation revenues and liquids and liquefiable
transportation revenues of $20 million and $9 million, respectively.
Additionally, revenue for 1996 reflects a full year of Williams' ownership as
compared with 1995, which reflected operations from January 18, 1995, when
Williams acquired a majority interest in Transco Energy. Revenues associated
with the period January 1 through January 17, 1995, were approximately $36
million. Offsetting these increases were lower revenues resulting from lower
transportation costs charged to Transco by others and passed through to
customers as provided in Transco's rates. Transportation revenues increased due
primarily to increased long-haul throughput, which benefitted from a two-phase
system expansion placed in service in late 1996 and late 1995, and new rates
effective September 1, 1995, which allowed the passthrough of increased costs.
Total throughput increased 176.1 TBtu, or 12 percent, due primarily to a full
year of Williams' ownership in 1996 compared to a partial year in 1995.
Operating profit increased $29.6 million, or 18 percent, due primarily
to increased transportation revenues, lower general and administrative expenses
and a full year of Williams' ownership in 1996, partially offset by higher
operation and maintenance expenses and higher taxes other than income taxes.
ENERGY MARKETING & TRADING'S revenues of $690.6 million in 1996 include
$429.5 million from propane marketing operations and $261.1 million from energy
trading and price-risk management activities. Revenues of $491.8 million in 1995
include $338.3 million from propane marketing operations and $153.5 million from
energy trading and price-risk management activities. Revenues from propane
marketing operations increased $91.2 million, or 27 percent, due primarily to a
14 percent increase in retail propane sales volumes resulting from colder
weather and $54 million related to higher average retail, wholesale and spot
sales prices, partially offset by the $34 million impact from the sale of
certain propane and liquid fertilizer assets in March 1996. The $107.6 million,
or 70 percent, increase in revenues from energy trading and price-risk
management activities is due primarily to higher natural gas and gas liquids
marketing revenues, price-risk management revenues and petroleum product
marketing revenues of $77 million, $24 million and $18 million, respectively,
partially offset by lower contract origination revenues of $10 million. Natural
gas and gas liquids marketing revenues increased due to higher marketing volumes
and prices. In addition, net physical trading revenues increased $3 million, due
to a 19 percent increase in natural gas physical trading volumes from 754 TBtu
to 896 TBtu, largely offset by lower physical trading margins.
Costs and operating expenses increased $157 million, or 43 percent, due
primarily to higher natural gas and propane purchase volumes and prices.
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Operating profit of $110.6 million in 1996 includes $66.4 million from
energy trading and price-risk management activities and $44.2 million from
propane marketing operations. Operating profit of $68.4 million in 1995 includes
$33.2 million from energy trading and price-risk management activities and $35.2
million from propane marketing operations. The $33.2 million, or 100 percent,
increase in operating profit from energy trading and price-risk management
activities is due primarily to higher price-risk management revenues, a
reduction of development costs associated with its information products business
and increased natural gas marketing volumes. Partially offsetting were higher
selling, general and administrative expenses and lower contract origination
revenues resulting from the impact of profits realized from certain long-term
natural gas supply obligations in 1995. Operating profit from propane marketing
operations increased $9 million, or 26 percent, due primarily to increased
propane volumes and higher wholesale propane margins, partially offset by the $5
million impact of the sale of certain propane and liquid fertilizer assets.
EXPLORATION & PRODUCTION'S revenues increased $19.5 million, or 31
percent, due primarily to higher revenues from the marketing of production from
the Royalty Trust and increased production revenues of $9 million and $8
million, respectively. The increase in marketing revenues reflects both
increased volumes and higher average gas prices. The increase in production
revenues reflects higher average gas prices.
Costs and operating expenses increased $18 million due primarily to
higher Royalty Trust natural gas purchase costs. Other (income) expense--net in
1995 includes an $8 million loss accrual for a future minimum price natural gas
commitment.
Operating profit increased $8.7 million to $2.8 million in 1996 due
primarily to the effect of the $8 million 1995 loss accrual.
MIDSTREAM GAS & LIQUIDS' revenues of $1.3 billion in 1996 include
$616.3 million from gathering and processing activities and $716.4 million from
the Mid-America pipeline natural gas liquids transportation activities. Revenues
of $1.1 billion in 1995 include $532.9 million from gathering and processing
activities and $549.9 million from the Mid-America pipeline natural gas liquids
transportation activities. Revenues from gathering and processing activities
increased $83.4 million, or 16 percent, due primarily to higher natural gas
liquids sales revenues of $64 million combined with higher gathering and
processing revenues of $6 million and $13 million, respectively. Natural gas
liquids sales associated with gathering and processing activities increased due
to a 36 percent increase in volumes combined with higher average prices.
Gathering and processing volumes each increased 19 percent while average
gathering rates decreased. The $166.5 million, or 30 percent, increase in
revenues from the natural gas liquids transportation business resulted from
higher product sales and transportation revenues of $130 million and $42
million, respectively. The product sales revenue increase resulted mainly from a
36 percent increase in average prices. The transportation revenue increase
resulted mainly from increased pipeline shipments reflecting the impact of an
expansion project completed in early 1996.
Costs and operating expenses increased $180 million, or 23 percent. Of
this increase, $128 million is related to the natural gas liquids transportation
activities and is due primarily to higher product purchase costs resulting from
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<PAGE> 10
higher prices, and increased costs associated with the increased shipments. The
remaining $52 million increase is in the gathering and processing business and
relates to higher fuel and replacement gas purchases, expanded facilities and
increased operations.
Other (income) expense -- net for 1996 includes a $20 million gain from
the property insurance coverage associated with construction of replacement
gathering facilities and $6 million of gains from the sale of two small
gathering systems, partially offset by $5 million of environmental remediation
accruals. Other (income) expense -- net for 1995 includes $20 million in
operating profit from a favorable resolution of contingency issues involving
previously regulated gathering and processing assets.
Operating profit of $324.5 million in 1996 includes $187.4 million from
gathering and processing activities and $137.1 million from natural gas liquids
transportation activities. Operating profit of $265.2 million in 1995 includes
$161 million from gathering and processing activities and $104.2 million from
natural gas liquids transportation activities. The $26.4 million, or 16 percent,
increase in operating profit from gathering and processing activities is due
primarily to higher natural gas liquids margins and higher gathering and
processing revenues, partially offset by higher costs and operating expenses.
Operating profit from gathering and processing activities was favorably impacted
in both 1996 and 1995 by approximately $20 million of other income. The $32.9
million, or 32 percent, increase in operating profit from the natural gas
liquids transportation business is due primarily to increased pipeline
shipments.
PETROLEUM SERVICES' revenues of $2.8 billion in 1996 include $2.3
billion from petroleum refining and marketing operations and $493.3 million from
transportation activities and ethanol sales. Revenues of $2.3 billion in 1995
include $2 billion from petroleum refining and marketing operations and $328.1
million from transportation activities and ethanol sales. Revenues from
petroleum refining and marketing operations increased $260.2 million, or 13
percent, due primarily to $176 million higher refining revenues and $84 million
higher retail sales revenues. Refining revenues increased mainly due to a 20
percent increase in volumes sold, partially offset by a 4 percent decrease in
average refined product sales prices. Production volumes at the Memphis refinery
were favorably impacted in 1996 by capital improvements made during the major
turnaround in 1995, and unfavorably impacted in 1995 because of the 4-week
turnaround shut-down. Retail sales revenues was favorably impacted $56 million
from higher average refined product pump prices, $12 million related to
increased refined product volumes and $16 million from increased merchandise
sales volumes. Revenues from transportation activities and ethanol sales
increased $165.2 million, or 50 percent, due primarily to a $133 million
increase in ethanol sales, a 10 percent increase in shipments, and a $14 million
increase in product sales from transportation activities. Ethanol revenues
increased following the August 1995 acquisition of Pekin Energy and the
fourth-quarter 1995 completion of the Aurora plant. Shipments increased as a
result of new business and the 1995 impacts of unfavorable weather conditions
and a fire at a truck-loading rack. Average length of haul and transportation
rate per barrel were slightly below 1995 due primarily to shorter haul
movements.
Costs and operating expenses increased $360 million, or 17 percent, due
primarily to $209 million higher crude and refined product purchases and $144
million associated with the full year of ethanol production activities. The
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<PAGE> 11
increase in product purchases is due to increased volumes partially offset by
lower average prices.
Operating profit of $169.9 million in 1996 includes $94.2 million from
petroleum refining and marketing operations and $75.7 million from
transportation activities and ethanol sales. Operating profit of $117.4 million
in 1995 includes $48.2 million from petroleum refining and marketing operations
and $69.2 million from transportation activities and ethanol sales. The $46
million, or 95 percent, increase in operating profit from petroleum refining and
marketing operations is due primarily to increased refinery production levels,
higher per-unit margins at the Memphis refinery, and $12 million from increased
merchandise margins and volumes. The $6.5 million, or 9 percent, increase in
operating profit from transportation activities and ethanol sales is due
primarily to increased shipments, partially offset by lower ethanol margins and
production levels as a result of record high corn prices.
COMMUNICATIONS' revenues increased $172.4 million, or 32 percent, due
primarily to the 1996 acquisitions which contributed revenues of $95 million.
Additionally, increased business activity resulted in a $36 million revenue
increase in new systems sales and a $16 million increase in digital fiber
television services. The number of ports in service at December 31, 1996,
increased 8 percent and billable minutes from occasional service increased 16
percent. Dedicated service voice-grade equivalent miles at December 31, 1996,
decreased 6 percent as compared with December 31, 1995, which in part reflects a
shift to occasional service.
Costs and operating expenses increased $126 million, or 31 percent, and
selling, general and administrative expenses increased $63 million, or 62
percent, due primarily to the overall increase in business activity and higher
expenses for developing additional products and services, including the cost of
integrating the most recent acquisitions.
Operating profit decreased $18.4 million, or 74 percent, due primarily
to the expenses of developing additional products and services along with
integrating the most recent acquisitions.
GENERAL CORPORATE EXPENSES increased $11.2 million, or 18 percent, due
primarily to higher employee compensation expense and consulting fees, partially
offset by the effect of a $5 million contribution in 1995 to The Williams
Companies Foundation. Interest accrued increased $80.5 million, or 24 percent,
due primarily to higher borrowing levels including debt associated with the
January 1996 acquisition of the remaining interest in Kern River (see Note 2),
slightly offset by lower average interest rates. Interest capitalized decreased
$8 million, or 49 percent, due primarily to lower capital expenditures for
gathering and processing facilities and the 1995 completion of Northwest
Pipeline's mainline expansion. Investing income decreased $72.5 million, or 76
percent, due primarily to the effect of interest earned in 1995 on the invested
portion of the cash proceeds from the sale of Williams' network services
operations, a $15 million dividend in 1995 from Texasgulf Inc. (sold in 1995),
and $31 million lower equity earnings from Williams' 50 percent ownership in
Kern River. Kern River's 1996 operating results are included in operating profit
since the acquisition date (see Note 2). The 1996 gain on sales of assets
results from the sale of the fertilizer and Iowa propane assets and the sale of
certain communication rights. The 1995 loss on sales of assets results from the
sale of the 15 percent interest in Texasgulf Inc. The 1995 write-off of project
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<PAGE> 12
costs results from the cancellation of an underground coal gasification project
in Wyoming (see Note 6). Minority interest in income of consolidated
subsidiaries in 1995 is associated with the Transco merger. The $5.6 million
favorable change in other income (expense)--net in 1996 is due primarily to
approximately $10 million of reserve reversals in 1996 and gains realized on the
sale of corporate aircraft, partially offset by higher environmental accruals of
$4 million and additional expense of international activities in 1996.
The $124.5 million, or 88 percent, increase in the provision for income
taxes on continuing operations is primarily a result of higher pre-tax income
and a higher effective income tax rate. The increase in the effective income tax
rate is the result of the 1995 recognition of $29.8 million of previously
unrecognized tax benefits realized as a result of the sale of Texasgulf Inc.
(see Note 6). The effective income tax rate in 1996 approximates the federal
statutory rate as income tax credits from research activities and coal-seam gas
production are offset by the effects of state income taxes. In addition, 1996
includes recognition of favorable adjustments totaling $13 million related to
previously provided deferred income taxes on certain regulated capital projects
and state income tax adjustments related to 1995. The effective income tax rate
in 1995 is less than the federal statutory rate due primarily to income tax
credits from coal-seam gas production, partially offset by the effects of state
income taxes and minority interest. In addition, 1995 includes the previously
unrecognized tax benefits related to the sale of Texasgulf Inc. (see Note 6) and
recognition of an $8 million income tax benefit resulting from settlements with
taxing authorities (see Note 7).
On September 10, 1996, Williams sold substantially all of the net
assets of the MAPCO coal business to Alliance Coal Corporation for $236 million
in cash. The sale yielded a loss in 1996 which is reported as discontinued
operations along with the operating results for 1996 and 1995 (see Note 3). On
January 5, 1995, Williams sold its network services operations to LDDS
Communications, Inc. for $2.5 billion in cash. The sale yielded an after-tax
gain of approximately $1 billion, which is reported as income from discontinued
operations (see Note 3).
Preferred stock dividends decreased $4.9 million, or 32 percent, due
primarily to the 1995 effect of a difference in the fair value of subordinated
debentures issued and the carrying value of the exchanged $2.21 cumulative
preferred stock (see Note 15).
FINANCIAL CONDITION AND LIQUIDITY
Debt Restructuring
In September 1997, Williams initiated a restructuring of a portion of
its debt portfolio (see Note 14). As of December 31, 1997, Williams has 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 (see Note 8). The restructuring is expected to reduce
interest expense by approximately $25 million annually. The restructuring was
temporarily financed with a combination of borrowings under the $1 billion
bank-credit facility, commercial paper and new short-term bank agreements with
commitments totaling $1.2 billion. Registration statements were filed with the
Securities and Exchange Commission in September 1997 by Williams, Williams
Holdings of Delaware, Northwest Pipeline and Transcontinental Gas Pipe Line
(each
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<PAGE> 13
a wholly-owned subsidiary of Williams). These additional filings brought the
total shelf financing availability for these entities to $900 million, $820
million, $400 million and $500 million, respectively, prior to the
restructuring. The restructuring was completed with the fourth-quarter 1997 and
first-quarter 1998 issuance of approximately $1.5 billion of debentures and
notes with interest rates ranging from 5.91 percent to 6.625 percent.
Liquidity
Williams considers its liquidity to come from two sources: internal
liquidity, consisting of available cash investments, and external liquidity,
consisting of borrowing capacity from available bank-credit facilities and
Williams Holdings' commercial paper program, which can be utilized without
limitation under existing loan covenants. At December 31, 1997, Williams had
access to $166 million of liquidity including $132 million available under its
$1 billion bank-credit facility. This compares with liquidity of $630 million at
December 31, 1996, and $669 million at December 31, 1995. The decrease in 1997
is due primarily to additional borrowings under the bank-credit facility to
finance increased capital expenditures and to provide interim financing related
to the debt restructuring program.
During 1997, Williams Holdings entered into a commercial paper program
backed by $650 million of new short-term bank-credit facilities. At December 31,
1997, $645 million of commercial paper was outstanding under the program. In
March 1998, Williams Holdings' commercial paper program was increased to $1
billion.
In addition to the registration statements filed in connection with the
debt restructuring, MAPCO filed a $500 million shelf registration with the
Securities and Exchange Commission in January 1997 providing for the issuance of
debt or equity securities; $200 million of medium and long-term notes were
subsequently issued. Approximately $1.5 billion of shelf availability remains
under outstanding registration statements and may be used to issue a variety of
debt or equity securities. In addition, short-term uncommitted bank lines are
utilized in managing liquidity. Williams believes any additional financing
arrangements can be obtained on reasonable terms if required.
Williams had a net working-capital deficit of $729 million at December
31, 1997, compared with $279 million at December 31, 1996. Williams manages its
borrowings to keep cash and cash equivalents at a minimum and has relied on
bank-credit facilities to provide flexibility for its cash needs. As a result,
it historically has reported negative working capital. The increase in the
working-capital deficit at December 31, 1997, as compared to prior year-end is
primarily a result of short-term borrowings under the commercial paper program.
Terms of certain borrowing agreements limit transfer of funds to
Williams from its subsidiaries. The restrictions have not impeded, nor are they
expected to impede, Williams' ability to meet its cash requirements in the
future.
During 1998, Williams expects to finance capital expenditures,
investments and working-capital requirements through cash generated from
operations and the use of the available portion of its $1 billion bank-credit
facility, commercial paper, short-term uncommitted bank lines and debt or equity
public offerings.
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<PAGE> 14
Operating Activities
Cash provided by continuing operating activities was: 1997--$988
million; 1996--$951 million; and 1995--$995 million. Receivables, inventories
and accounts payable increased in 1997 due primarily to the combination of
customer equipment sales and services operations with Nortel (see Note 2) and
increased trading activities by Energy Marketing & Trading. Cash provided by
discontinued operations was: 1996--$22 million; and 1995--$64 million.
Financing Activities
Net cash provided (used) by financing activities was: 1997--$424
million; 1996--$429 million; and 1995--($1.3) billion. Long-term debt proceeds,
net of principal payments, were $18 million during 1997, and notes payable
proceeds, net of notes payable payments, were $622 million during 1997. The
increase in notes payable at December 31, 1997, reflects borrowings under the
new commercial paper program to fund capital expenditures, investments and
acquisition of businesses. Long-term debt proceeds, net of principal payments,
were $592 million during 1996. The increase in net new borrowings during 1996
was primarily to fund capital expenditures, investments and acquisitions of
businesses. Long-term debt principal payments, net of debt proceeds, were $638
million during 1995. The net payments in 1995 were primarily a result of
payments Williams made to retire and/or terminate approximately $700 million of
Transco Energy's borrowings, preferred stock, interest-rate swaps and sale of
receivable facilities in connection with the acquisition of Transco Energy.
The proceeds from issuance of common stock in 1997, 1996 and 1995
include benefit plan stock purchases and exercise of stock options under the
stock plans. The 1995 proceeds from issuance of common stock also includes $46.2
million from the sale of 3.6 million shares of Williams common stock.
The purchases of treasury stock in 1997, 1996 and 1995 include 2.7
million shares of common stock on the open market for $50 million, 6.2 million
shares of common stock on the open market for $130 million, and 1 million shares
of common stock on the open market for $31 million, respectively. In 1996 the
Williams' board of directors authorized up to $800 million of purchases of
common stock on the open market. That repurchase program was terminated during
the fourth quarter of 1997.
Long-term debt at December 31, 1997, was $5.4 billion, compared with $5
billion at December 31, 1996, and $3.7 billion at December 31, 1995. At December
31, 1997 and 1996, $696 million and $329 million, respectively, in current debt
obligations have been classified as non-current obligations based on Williams'
intent and ability to refinance on a long-term basis. The 1996 increase in
long-term debt is due primarily to the $643 million outstanding debt assumed
with the acquisition of Kern River (see Note 2), $300 million in additional
borrowings under the $1 billion bank-credit facility and $250 million of debt
issued by Williams Holdings. The long-term debt to debt-plus-equity ratio was
55.8 percent at December 31, 1997 compared to 55.3 percent and 49 percent at
December 31, 1996 and 1995, respectively. If short-term notes payable and
long-term debt due within one year are included in the calculations, these
ratios would be 59.1 percent, 57.1 percent and 51.2 percent, respectively.
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Investing Activities
Net cash provided (used) by investing activities was: 1997--($1.5)
billion; 1996--($1.3) billion; and 1995--$340 million. Capital expenditures of
gas pipeline subsidiaries, primarily to expand and modernize systems, were $419
million in 1997, $441 million in 1996, and $445 million in 1995. Expenditures in
1997 and 1996 include Transcontinental Gas Pipe Line's expansion; expenditures
in 1995 include Transcontinental Gas Pipe Line and Northwest Pipeline's
expansions. Capital expenditures of Energy Services, primarily to expand and
modernize gathering and processing facilities and refineries, were $469 million
in 1997, $406 million in 1996, and $533 million in 1995. Energy Services capital
expenditures in 1995 also included the expansion of the natural gas liquids
pipeline. Capital expenditures of Communications were $276 million in 1997, $67
million in 1996, and $32 million 1995. The 1997 expenditures include the
fiber-optic network. Budgeted capital expenditures and investments for 1998 are
estimated to be approximately $2.9 billion, primarily to expand and modernize
pipeline systems, gathering and processing facilities, refineries and the
fiber-optic network.
On April 30, 1997, Williams and Northern Telecom (Nortel) combined
their customer-premise equipment sales and services operations into a limited
liability company, Williams Communications Solutions, LLC (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. Williams recorded the 30 percent reduction in its
operations contributed to the LLC as a sale to the minority shareholder of the
LLC (see Note 2). During 1997, Williams also purchased a 20 percent interest in
a foreign telecommunications business for $65 million in cash and made a $59
million cash investment in the 50 percent owned Discovery pipeline project.
During 1996, Williams acquired the remaining interest in Kern River for $206
million in cash (see Note 2). In addition, during 1996 Williams acquired various
communications technology businesses totaling $165 million in cash. In 1995,
Williams acquired all of Transco Energy's outstanding common stock for cash of
$430.5 million and 31.2 million shares of Williams common stock valued at $334
million (see Note 2). During 1995, Williams also acquired the Gas Company of New
Mexico's natural gas gathering and processing assets in the San Juan and Permian
basins for $154 million and Pekin Energy Co., the nation's second largest
ethanol producer, for $167 million in cash.
During 1997, Williams received proceeds of $66 million from the sale of
interests in the West Panhandle field. During 1996, Williams received proceeds
of $236 million from the sale of its MAPCO coal operations (see Note 3) and
proceeds of $43 million from the sale of the Iowa propane and liquid fertilizer
assets. During 1995, Williams received proceeds of $2.5 billion in cash from the
sale of its network services operations (see Note 3) and proceeds of $124
million from the sale of its 15 percent interest in Texasgulf Inc. (see Note 6).
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NEW ACCOUNTING STANDARDS
See Note 1 for the effects of Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," and SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits."
EFFECTS OF INFLATION
Williams' cost increases in recent years have benefitted from
relatively low inflation rates during that time. Approximately 50 percent of
Williams' property, plant and equipment is at the gas pipelines and
approximately 50 percent is at the Williams Energy and Communications
businesses. Approximately 80 percent of the gas pipelines' property, plant and
equipment has been acquired or constructed since 1995, a period of relatively
low inflation. The gas pipelines are subject to regulation, which limits
recovery to historical cost. While amounts in excess of historical cost are not
recoverable under current FERC practices, Williams believes it will be allowed
to recover and earn a return based on increased actual cost incurred to replace
existing assets. Cost based regulation along with competition and other market
factors may limit the ability to recover such increased costs. Within Williams
Energy, operating costs are influenced to a greater extent by specific price
changes in oil and gas and related commodities than by changes in general
inflation. Crude, refined product and natural gas liquids prices are
particularly sensitive to OPEC production levels and/or the market perceptions
concerning the supply and demand balance in the near future. See Market Risk
Disclosures below for additional information concerning the impact of specific
price changes.
ENVIRONMENTAL
Williams is a participant in certain environmental activities in
various stages involving assessment studies, cleanup operations and/or remedial
processes. The sites, some of which are not currently owned by Williams (see
Note 18), are being monitored by Williams, other potentially responsible
parties, the U.S. Environmental Protection Agency (EPA), or other governmental
authorities in a coordinated effort. In addition, Williams maintains an active
monitoring program for its continued remediation and cleanup of certain sites
connected with its refined products pipeline activities. Williams has both joint
and several liability in some of these activities and sole responsibility in
others. Current estimates of the most likely costs of such cleanup activities,
after payments by other parties, are approximately $97 million, all of which is
accrued at December 31, 1997. Williams expects to seek recovery of approximately
$41 million of the accrued costs through future natural gas transmission rates
and approximately $13 million of accrued costs from states in accordance with
laws permitting reimbursement of certain expenses associated with underground
storage tank containment problems and repairs. Williams will fund these costs
from operations and/or available bank-credit facilities. The actual costs
incurred will depend on the final amount, type and extent of contamination
discovered at these sites, the final cleanup standards mandated by the EPA or
other governmental authorities, and other factors.
YEAR 2000 COMPLIANCE
Williams has initiated an enterprisewide project to address the year
2000 compliance issue for all technology hardware and software, external
interfaces
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<PAGE> 17
with customers and suppliers, operations process control, automation and
instrumentation systems, and facility items. The assessment phase of this
project as it relates to one of Williams' subsidiaries, MAPCO, has been
completed. The assessment phase as it relates to traditional information
technology areas for other than MAPCO should be substantially complete by the
end of the first quarter of 1998. Completion of the assessment phase for
non-traditional information technology areas for other than MAPCO is expected in
mid-1998. Necessary conversion and replacement activities have and will continue
through mid-1999. Testing of systems has begun and will continue throughout the
process. Williams has initiated a formal communications process with other
companies with which Williams' systems interface or rely on to determine the
extent to which those companies are addressing their year 2000 compliance, and
where necessary, Williams will be working with those companies to mitigate any
material adverse effect on Williams.
Williams expects to utilize both internal and external resources to
complete this process. Existing resources will be redeployed and previously
planned system replacements will be accelerated during this time. For example,
implementation of previously planned financial and human resources systems is
currently in process. These systems will address the year 2000 compliance issues
in certain areas. In addition, MAPCO has replaced or is replacing six major
applications. Costs incurred for new software and hardware purchases and new
system implementation costs will be capitalized and other costs will be expensed
as incurred. For the regulated pipelines, Williams considers costs associated
with the year 2000 compliance to be prudent costs incurred in the ordinary
course of business, and, therefore, recoverable through rates.
While the total cost of Williams' enterprisewide project is still being
evaluated, Williams estimates that total projected costs for MAPCO to be
expensed are approximately $10 million and to be capitalized are approximately
$65 million of which $27 million has already been incurred and capitalized. In
addition, Williams estimates that external costs in other areas, excluding
previously planned system replacements, necessary to complete the project within
the schedule described will total at least $15 million. Williams will update
this estimate as additional information becomes available. The costs of the
project and the completion dates are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party year 2000 compliance
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from these
estimates.
MARKET RISK DISCLOSURES
Interest Rate Risk
Williams' interest rate risk exposure results from short-term rates,
primarily LIBOR based borrowings from commercial banks and the issuance of
commercial paper, and long-term U.S. Treasury rates. To mitigate the impact of
fluctuations in interest rates, Williams targets to maintain a significant
portion of its debt portfolio in fixed rate debt. At December 31, 1997, the
amount of Williams' fixed and variable rate debt was approximately the same as a
result of a debt restructuring program begun in 1997 where Williams extinguished
higher cost long-term debt. During early 1998, the percent of fixed rate debt
increased to targeted levels as Williams completed issuing long-term debt under
the restructuring program and repaid its interim financings. The
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<PAGE> 18
maturity of Williams' long-term debt portfolio is influenced by the life of its
operating assets. Williams also utilizes interest rate swaps to change the ratio
of its fixed and variable rate debt portfolio based on management's assessment
of future interest rates, volatility of the yield curve and Williams' ability to
access the capital markets in a timely manner. Williams has entered into
interest rate forward contracts to establish an effective borrowing rate for
anticipated long-term debt issuances.
The following table provides information about Williams' notes payable,
long-term debt, interest rate swaps and interest rate forward contracts that are
subject to interest rate risk. For notes payable and long-term debt, the table
presents principal cash flows and weighted average interest rates by expected
maturity dates. For interest rate swaps and interest rate forward contracts, the
table presents notional amounts and weighted average interest rates by
contractual maturity dates. Notional amounts are used to calculate the
contractual cash flows to be exchanged under the interest rate swaps and the
settlement amounts under the interest rate forward contracts.
<TABLE>
<CAPTION>
(Dollars in millions) There- Fair Value
1998 1999 2000 2001 2002 after Total December 31, 1997
------- ------- -------- ------- -------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes payable $ 693 $ -- $ -- $ -- $ -- $ -- $ 693 $ 693
Interest rate 6.6%
Long-term debt,
including current
portion:
Fixed rate $ 78 $ 251 $ 274 $ 834 $ 498 $ 1,855 $ 3,790 $ 3,921
Interest rate 7.4% 7.4% 7.4% 7.4% 7.4% 7.5%
Variable rate $ -- $ 130 $ -- $ 276 $ 1,207 $ 28 $ 1,641 $ 1,641
Interest rate(1)
Interest rate swaps:
Pay variable/
receive fixed $ 36 $ 42 $ 47 $ 461 $ -- $ 450 $ 1,036 $ 9
Pay rate(2)
Receive rate 6.3% 6.3% 6.4% 6.4% 6.8% 6.5%
Pay fixed/receive
variable(3) $ 36 $ 172 $ 47 $ 53 $ 59 $ 349 $ 716 $ (56)
Pay rate 7.8% 7.8% 7.8% 8.0% 8.0% 8.0%
Receive rate(4)
Interest rate forward
contracts purchased
related to anticipated
long-term debt
issuances $ 1,150 $ -- $ -- $ -- $ -- $ -- $ 1,150 $ (8)
</TABLE>
Average locked-in rate of 5.9 percent referenced to underlying Treasury
securities having a weighted-average maturity of 6 years.
(1) LIBOR plus .33 percent.
(2) LIBOR, except $250 million notional amount maturing after 2002 is at LIBOR
less 1.04 percent.
(3) Counterparties have an option to cancel all outstanding swaps in 2001.
(4) LIBOR.
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Commodity Price Risk
Energy Marketing & Trading has trading operations that provide price
risk management services to third-party customers. The trading operations have
commodity price risk exposure associated with the crude oil, natural gas,
refined products, natural gas liquids and electricity energy markets in the
United States and the natural gas markets in Canada. The trading operations
enter into energy-related financial instruments (forward contracts, futures
contracts, option contracts and swap agreements) and have commodity inventories
and purchase and sale commitments which involve the physical delivery of an
energy commodity. These financial instruments and physical positions and
commitments are valued at market value and unrealized gains and losses from
changes in market value are recognized in income. The trading operations are
subject to 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, changes in interest rates and
credit risk. Energy Marketing & Trading manages risk by maintaining its
portfolio within established trading policy guidelines. A Risk Control Group,
independent of the trading operations, monitors compliance with established
trading policy guidelines and measures the risk associated with the trading
portfolio.
Energy Marketing & Trading uses a value at risk methodology to estimate
the potential one day loss from adverse changes in the market value of its
trading operations. At December 31, 1997, the value at risk for the trading
operations is $4 million. This reflects a 97.5 percent probability that as a
result of changes in commodity prices, the one day loss in the market value of
the trading portfolio will not exceed the value at risk. The value at risk
includes all the financial instruments and physical positions and commitments
that expose the trading operations to market risk. The value-at-risk model
estimates assume normal market conditions based upon historical market prices.
Value at risk does not purport to represent actual losses in market value that
could be incurred from the trading portfolio, nor does it consider that changing
our trading portfolio in response to market conditions could affect market
prices and could take longer to execute than the one-day holding period assumed
in our value at risk model.
Foreign Currency Risk
Williams has investments in companies whose operations are located in
foreign countries, of which $87 million are accounted for using the cost method.
Fair value for the cost method investments is deemed to approximate their
carrying amount, because estimating cash flows by year is not practicable given
that the time frame for selling these investments is uncertain. Williams'
financial results could be affected if the investments incur a permanent decline
in value as a result of changes in foreign currency exchange rates and the
economic conditions in foreign countries. Williams attempts to mitigate these
risks by investing in different countries and business segments. Approximately
80 percent of the cost method investments are in Asian countries and 20 percent
in South American countries. Of the Asian investments, approximately 50 percent
are in countries whose currencies have recently suffered significant
devaluations and volatility. The ultimate duration and severity of the
conditions in Asia remains uncertain as does the long-term impact on Williams'
investments.
19
<PAGE> 20
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Although the Company believes
such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. Such statements
are made in reliance on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995.
As required by such Act, the Company hereby identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in forward-
looking statements: (i) risks and uncertainties impacting the Company as a whole
relate to changes in general economic conditions in the United States; the
availability and cost of capital; changes in laws and regulations to which the
Company is subject, including tax, environmental and employment laws and
regulations; the cost and effects of legal and administrative claims and
proceedings against the Company or its subsidiaries or which may be brought
against the Company or its subsidiaries; conditions of the capital markets
utilized by the Company to access capital to finance operations; the timing of
the implementation of changes in operations to effect cost savings; completion
of capital projects within cost and timing plans; the capacity of constructed or
acquired assets to function as designed or expected; and, to the extent the
Company increases its investments and activities abroad, such investments and
activities will be subject to foreign economies, laws, and regulations; (ii) for
the Company's regulated businesses, risks and uncertainties primarily relate to
the impact of future federal and state regulations of business activities,
including allowed rates of return and the resolution of other matters discussed
herein; and (iii) risks and uncertainties associated with the Company's
unregulated businesses primarily relate to energy prices and the ability of such
entities to develop expanded markets and product offerings as well as their
ability to maintain existing markets. It is also possible that certain aspects
of the Company's businesses that are currently unregulated may be subject to
both federal and state regulation in the future. In addition, future utilization
of pipeline capacity will depend on energy prices, competition from other
pipelines and alternate fuels, the general level of natural gas, natural gas
liquids, and petroleum product demand and weather conditions, among other
things. Weather conditions also directly impact the Company's retail propane
business. Price differentials between crude oil and refined products as well as
the number of crude barrels processed directly affect results of the Company's
refinery businesses. Further, the wholesale cost of motor fuels impacts the
Company's retail petroleum operations, and prices for natural gas and natural
gas liquids, which directly impact transportation and gathering and processing
throughput and operating profit, may fluctuate in unpredictable ways as may corn
prices, which directly affect the Company's ethanol business. Factors impacting
future results of the Company's communications business include successful
completion of its network build, technological developments, high levels of
competition, lack of customer diversification, and general uncertainties of
governmental regulation.
20
<PAGE> 21
Report of Independent Auditors
To the Stockholders of
The Williams Companies, Inc.
We have audited the supplemental consolidated balance sheet of The Williams
Companies, Inc. (formed as a result of the consolidation of The Williams
Companies, Inc. and MAPCO Inc.) as of December 31, 1997 and 1996 and the related
supplemental consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. The
supplemental consolidated financial statements give retroactive effect to the
merger of The Williams Companies, Inc. and MAPCO Inc. on March 28, 1998, which
has been accounted for using the pooling of interests method as described in the
notes to the supplemental consolidated financial statements. These supplemental
financial statements are the responsibility of the management of The Williams
Companies, Inc. Our responsibility is to express an opinion on these
supplemental financial statements based on our audits. We did not audit the
financial statements of MAPCO Inc. which statements reflect total assets
constituting 15% for both 1997 and 1996 of the related supplemental consolidated
financial statement totals, and which reflect net income constituting
approximately 26%, 21% and 5% of the related supplemental consolidated financial
statement totals for the years ended December 31, 1997, 1996 and 1995,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for MAPCO Inc., is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental 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, after giving retroactive effect to the merger of MAPCO
Inc., as described in the notes to the supplemental consolidated financial
statements, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
April 3, 1998
21
<PAGE> 22
THE WILLIAMS COMPANIES, INC
SUPPLEMENTAL 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)* 5,466.2 4,860.2 3,966.6
Communications (Note 2) 1,445.3 711.3 538.9
Other 38.4 48.0 17.4
Intercompany eliminations (Note 17) (392.2) (451.8) (299.0)
-------- -------- --------
Total revenues 8,241.6 6,842.9 5,655.0
-------- -------- --------
Profit-center costs and expenses:
Costs and operating expenses* 6,227.2 5,063.9 4,278.5
Selling, general and administrative expenses 838.3 621.9 532.9
Other (income) expense--net (Note 6) 38.6 (19.8) (14.7)
-------- -------- --------
Total profit-center costs and expenses 7,104.1 5,666.0 4,796.7
-------- -------- --------
Operating profit:
Gas Pipelines (Note 4) 614.2 562.4 389.7
Energy Services (Note 4) 572.0 607.8 445.1
Communications (Notes 2 and 6) (55.7) 6.6 25.0
Other 7.0 .1 (1.5)
-------- -------- --------
Total operating profit 1,137.5 1,176.9 858.3
General corporate expenses (95.1) (72.5) (61.3)
Interest accrued (463.5) (418.1) (337.6)
Interest capitalized 23.3 8.2 16.2
Investing income (Note 5) 20.5 22.7 95.2
Gain on sale of interest in subsidiary (Note 2) 44.5 -- --
Gain (loss) on sales of assets (Note 6) 66.0 36.5 (12.6)
Write-off of project costs (Note 6) -- -- (41.4)
Minority interest in income of consolidated
subsidiaries (Note 2) (18.2) (1.4) (12.3)
Other income (expense)--net (10.1) 6.1 .5
-------- -------- --------
Income from continuing operations
before extraordinary loss and income taxes 704.9 758.4 505.0
Provision for income taxes (Note 7) 251.2 265.9 141.4
-------- -------- --------
Income from continuing operations before
extraordinary loss 453.7 492.5 363.6
Income (loss) from discontinued operations (Note 3) (6.3) (32.7) 1,029.3
-------- -------- --------
Income before extraordinary loss 447.4 459.8 1,392.9
Extraordinary loss (Note 8) (79.1) -- --
-------- -------- --------
Net income 368.3 459.8 1,392.9
Preferred stock dividends (Note 15) 9.8 10.4 15.3
-------- -------- --------
Income applicable to common stock $ 358.5 $ 449.4 $1,377.6
======== ======== ========
</TABLE>
* Includes consumer excise taxes of $157.8 million, $155.9 million and $158.1
million in 1997, 1996 and 1995, respectively.
See accompanying notes.
22
<PAGE> 23
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL 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 before
extraordinary loss $1.08 $1.16 $ .87
Income (loss) from discontinued operations (Note 3) (.02) (.08) 2.56
----- ----- -----
Income before extraordinary loss 1.06 1.08 3.43
Extraordinary loss (Note 8) (.19) -- --
----- ----- -----
Net income $ .87 $1.08 $3.43
===== ===== =====
Diluted earnings per common
share (Notes 1 and 9):
Income from continuing operations before
extraordinary loss $1.05 $1.14 $ .86
Income (loss) from discontinued operations (Note 3) (.01) (.08) 2.49
----- ----- -----
Income before extraordinary loss 1.04 1.06 3.35
Extraordinary loss (Note 8) (.19) -- --
----- ----- -----
Net income $ .85 $1.06 $3.35
===== ===== =====
</TABLE>
See accompanying notes.
23
<PAGE> 24
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL 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 $ 122.1 $ 220.1
Receivables less allowance of $21.5
($11.4 in 1996) 1,584.5 1,324.9
Transportation and exchange gas receivable 130.4 117.7
Inventories (Note 11) 433.9 314.2
Commodity trading assets 180.3 147.2
Deferred income taxes (Note 7) 236.6 209.5
Other 176.2 175.6
---------- ----------
Total current assets 2,864.0 2,509.2
Investments (Note 5) 388.1 216.5
Property, plant and equipment--net (Note 12) 11,536.8 10,743.2
Goodwill and other intangible
assets--net (Notes 1 and 2) 600.6 310.2
Other assets and deferred charges 888.1 810.4
---------- ----------
Total assets $ 16,277.6 $ 14,589.5
========== ==========
</TABLE>
See accompanying notes.
24
<PAGE> 25
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL 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) 1,288.5 1,095.2
Transportation and exchange gas payable 67.7 73.7
Accrued liabilities (Note 13) 1,281.6 1,116.3
Commodity trading liabilities 182.0 137.9
Long-term debt due within one year (Note 14) 80.3 95.3
---------- ----------
Total current liabilities 3,593.1 2,787.9
Long-term debt (Note 14) 5,351.5 4,985.3
Deferred income taxes (Note 7) 2,009.1 1,893.5
Other liabilities 946.5 872.1
Minority interest in consolidated subsidiaries
(Note 2) 144.8 35.9
Contingent liabilities and commitments (Note 18)
Stockholders' equity (Note 15):
Preferred stock, $1 per share par value,
30 million shares authorized,
2.5 million shares issued in 1997 and
3.2 million shares issued in 1996 142.2 161.0
Common stock, $1 per share par value,
480 million shares authorized,
431.5 million shares issued in 1997 and
425.3 million shares issued in 1996 431.5 425.3
Capital in excess of par value 1,041.6 942.2
Retained earnings 2,983.3 2,828.7
Other (54.1) (55.8)
---------- ----------
4,544.5 4,301.4
Less treasury stock (at cost), 18.9 million
shares of common stock in 1997 and 17.7 million
shares of common stock in 1996 (311.9) (286.6)
---------- ----------
Total stockholders' equity 4,232.6 4,014.8
---------- ----------
Total liabilities and stockholders' equity $ 16,277.6 $ 14,589.5
========== ==========
</TABLE>
See accompanying notes.
25
<PAGE> 26
<TABLE>
<CAPTION>
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in millions, Capital in
except per-share amounts) Preferred Common Excess of Retained Treasury
Stock Stock Par Value Earnings Other Stock Total
-------- -------- --------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as previously
reported $ 100.0 $ 313.2 $ 782.2 $ 716.5 $ (1.3) $ (405.1) $ 1,505.5
Adjustment for pooling of interests -- 104.6 161.0 1,346.6 (63.8) (935.6) 612.8
-------- -------- -------- ---------- ------- ---------- ---------
Balance, December 31, 1994, as restated 100.0 417.8 943.2 2,063.1 (65.1) (1,340.7) 2,118.3
Net income--1995 -- -- -- 1,392.9 -- -- 1,392.9
Cash dividends--
Common stock ($.36 per share) -- -- -- (107.2) -- -- (107.2)
Common stock of pooled company -- -- -- (29.7) -- -- (29.7)
Preferred stock (Note 15) -- -- -- (11.9) -- -- (11.9)
Issuance of shares--
38.7 million common -- 2.9 57.0 -- (1.7) 352.7 410.9
2.5 million preferred 142.5 -- -- -- -- -- 142.5
Exchange of shares for debentures--
2.8 million preferred (Note 15) (69.0) -- (3.5) -- -- -- (72.5)
Purchase of treasury stock--
1 million common -- -- -- -- -- (31.1) (31.1)
142,800 preferred -- -- -- -- -- (3.7) (3.7)
Tax benefit of stock-based awards -- -- 4.8 -- -- -- 4.8
ESOP loan repayment -- -- -- -- 4.9 -- 4.9
Amortization of deferred
compensation -- -- -- -- .8 -- .8
Other -- -- .2 .4 -- -- .6
-------- -------- -------- ---------- ------- ---------- ---------
Balance, December 31, 1995 173.5 420.7 1,001.7 3,307.6 (61.1) (1,022.8) 3,819.6
</TABLE>
See accompanying notes.
26
<PAGE> 27
<TABLE>
<CAPTION>
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(Dollars in millions, Capital in
except per-share amounts) Preferred Common Excess of Retained Treasury
Stock Stock Par Value Earnings Other Stock Total
-------- ------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 173.5 $ 420.7 $ 1,001.7 $ 3,307.6 $ (61.1) $(1,022.8) $3,819.6
Net income--1996 -- -- -- 459.8 -- -- 459.8
Cash dividends--
Common stock ($.47 per share) -- -- -- (148.0) -- -- (148.0)
Common stock of pooled company -- -- -- (30.1) -- -- (30.1)
Preferred stock (Note 15) -- -- -- (10.4) -- -- (10.4)
MAPCO stock split effected in the
form of a stock dividend from
treasury shares -- -- (93.1) (750.5) -- 843.6 --
Issuance of shares--5.8 million common -- 4.6 33.9 -- (1.0) 12.0 49.5
Purchase of treasury stock--
6.2 million common -- -- -- -- -- (129.6) (129.6)
96,300 preferred -- -- -- -- -- (2.6) (2.6)
Retirement of treasury stock-
497,900 preferred (12.5) -- (.3) -- -- 12.8 --
Proceeds from sale of equity put
options -- -- .6 -- -- -- .6
Transfer of exercise price for equity
put options -- -- (16.7) -- -- -- (16.7)
Tax benefit of stock-based awards -- -- 16.0 -- -- -- 16.0
ESOP loan repayment -- -- -- -- 5.5 -- 5.5
Amortization of deferred
compensation -- -- -- -- .8 -- .8
Other -- -- .1 .3 -- -- .4
-------- ------- --------- --------- ------- --------- --------
Balance, December 31, 1996 161.0 425.3 942.2 2,828.7 (55.8) (286.6) 4,014.8
</TABLE>
See accompanying notes.
27
<PAGE> 28
<TABLE>
<CAPTION>
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONCLUDED)
(Dollars in millions, Capital in
except per-share amounts) Preferred Common Excess of Retained Treasury
Stock Stock Par Value Earnings Other Stock Total
-------- -------- ----------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 161.0 $ 425.3 $ 942.2 $ 2,828.7 $ (55.8) $ (286.6) $ 4,014.8
Net income--1997 -- -- -- 368.3 -- -- 368.3
Cash dividends--
Common stock ($.54 per share) -- -- -- (171.7) -- -- (171.7)
Common stock of pooled company -- -- -- (32.9) -- -- (32.9)
Preferred stock (Note 15) -- -- -- (9.8) -- -- (9.8)
Issuance of shares--6.7 million
common -- 6.2 66.4 -- (2.9) 7.1 76.8
Purchase of treasury stock--
2.7 million common -- -- -- -- -- (50.2) (50.2)
Conversion of preferred stock--
2,528 shares (.3) -- .3 -- -- -- --
Redemption of preferred stock--
741,552 shares (Note 15) (18.5) -- -- -- -- -- (18.5)
Treasury shares utilized for
acquisition of business -- -- .9 -- -- 17.8 18.7
Expiration of equity put options -- -- 4.9 -- -- -- 4.9
Tax benefit of stock-based awards -- -- 26.7 -- -- -- 26.7
ESOP loan repayment -- -- -- -- 5.8 -- 5.8
Amortization of deferred compensation -- -- -- -- 1.3 -- 1.3
Unrealized loss on marketable
equity securities -- -- (2.4) -- (2.4)
Other -- -- .2 .7 (.1) -- .8
-------- -------- ---------- ---------- ------- ---------- ---------
Balance, December 31, 1997 $ 142.2 $ 431.5 $ 1,041.6 $ 2,983.3 $ (54.1) $ (311.9) $ 4,232.6
======== ======== ========== ========== ======= ========== =========
</TABLE>
See accompanying notes.
28
<PAGE> 29
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Millions) Years Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 368.3 $ 459.8 $ 1,392.9
Adjustments to reconcile to cash provided from operations:
Discontinued operations 6.3 32.7 (1,029.3)
Extraordinary loss 79.1 -- --
Premium on early extinguishment of debt (171.2) -- --
Depreciation, depletion and amortization 585.9 500.3 452.4
Provision for deferred income taxes 104.3 92.7 141.8
Provision for loss on property and other assets 49.8 -- 41.4
(Gain) loss on dispositions of property
and interest in subsidiary (121.0) (68.9) 11.6
Minority interest in income of consolidated subsidiaries 18.2 1.4 12.3
Cash provided (used) by changes in assets and liabilities:
Receivables sold 188.6 (13.1) 55.9
Receivables (180.5) (361.0) 23.3
Inventories (89.5) (11.9) (5.5)
Other current assets 16.7 7.6 6.9
Accounts payable 188.0 347.2 4.4
Accrued liabilities (37.6) (7.4) (30.1)
Current commodity trading assets and liabilities 11.0 (29.7) 28.1
Non-current commodity trading assets
and liabilities (47.7) (37.7) (82.1)
Other, including changes in non-current
assets and liabilities 19.5 39.3 (28.6)
---------- ---------- ----------
Net cash provided by continuing operations 988.2 951.3 995.4
Net cash provided by discontinued operations -- 21.8 63.6
---------- ---------- ----------
Net cash provided by operating activities 988.2 973.1 1,059.0
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable 1,927.4 406.8 221.4
Payments of notes payable (1,305.5) (298.6) (623.8)
Proceeds from long-term debt 2,217.4 2,000.5 399.0
Payments of long-term debt (2,199.0) (1,408.5) (1,036.7)
Proceeds from issuance of common stock 72.5 56.1 78.1
Purchases of treasury stock (50.2) (132.2) (34.8)
Dividends paid (214.4) (188.5) (148.8)
Subsidiary preferred stock redemptions -- -- (193.7)
Other--net (24.3) (6.2) (3.0)
---------- ---------- ----------
Net cash provided (used) by financing activities 423.9 429.4 (1,342.3)
---------- ---------- ----------
</TABLE>
See accompanying notes.
29
<PAGE> 30
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (CONCLUDED)
<TABLE>
<CAPTION>
(Millions) Years Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures:
Continuing operations $ (1,340.5) $ (948.3) $ (1,028.4)
Discontinued operations -- (22.1) (33.1)
Proceeds from dispositions 104.2 73.8 35.7
Acquisition of businesses, net of cash acquired (146.7) (371.8) (875.4)
Proceeds from sales of businesses -- 236.4 2,588.3
Income tax and other payments
related to discontinued operations (9.7) (261.7) (350.4)
Proceeds from sales of assets 71.2 66.0 125.1
Purchase of investments/advances to affiliates (205.6) (100.0) (51.3)
Purchase of note receivable -- -- (75.1)
Other--net 17.0 21.6 4.9
---------- ---------- ----------
Net cash provided (used) by investing activities (1,510.1) (1,306.1) 340.3
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (98.0) 96.4 57.0
Cash and cash equivalents at beginning of year 220.1 123.7 66.7
---------- ---------- ----------
Cash and cash equivalents at end of year $ 122.1 $ 220.1 $ 123.7
========== ========== ==========
</TABLE>
See accompanying notes.
30
<PAGE> 31
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 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; a natural gas
liquids and anhydrous ammonia pipeline in the northwest, southwest, midwest and
Gulf Coast regions; energy marketing and trading, and price-risk management
activities throughout the United States; petroleum refining and marketing in
Alaska and the southeast; a petroleum products pipeline and ethanol
production/marketing operations in the midwest region; propane marketing in the
upper midwest and the southeast regions; 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
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 shares of Williams common stock for outstanding MAPCO common stock
and employee stock options. The merger was consummated on March 28, 1998 (see
Note 2). The transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes have been restated
to reflect the results of operations, financial position and cash flows as if
the companies had been combined throughout the periods presented. MAPCO's
propane marketing operations are included in Energy Marketing & Trading; its
natural gas liquids operations are included in Midstream Gas & Liquids; and its
petroleum refining and retail petroleum operations are included in Petroleum
Services. Revenues and operating profit amounts previously reported as Field
Services are now included in Midstream Gas & Liquids.
On April 30, 1997, Williams and Northern Telecom (Nortel) combined their
customer-premise equipment sales and service operations into a limited
liability company, Williams Communications Solutions, LLC (LLC), formerly
WilTel Communications, LLC (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.
31
<PAGE> 32
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of significant accounting policies (continued)
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
Midstream Gas & Liquids, 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
certain assets 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 natural gas inventories held by
Transcontinental Gas Pipe Line and certain crude oil and refined petroleum
products inventories held by Petroleum Services which are determined using the
last-in, first-out (LIFO) method.
32
<PAGE> 33
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of significant accounting policies (continued)
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 pipelines are credited or charged to accumulated depreciation;
other gains or losses are recorded in net income.
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 up to
but not exceeding 40 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 $72.2 million and $43 million,
respectively. Amortization of intangible assets was $29.2 million, $15.2
million and $11.7 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. 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.
33
<PAGE> 34
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of significant accounting policies (continued)
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 Supplemental Consolidated Balance
Sheet. The change in unrealized market gains and losses is recognized in
income currently and is recorded as revenues in the Supplemental 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.
Propane marketing revenues in all years and certain other Energy Marketing &
Trading revenues in 1996 and 1995 were not considered to be trading operations
and, therefore, were not reported net of related costs to purchase such items.
Williams also enters 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
34
<PAGE> 35
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of significant accounting policies (continued)
of the interest expense on the outstanding debt over the remaining original
term of the terminated swap agreement. In the event the designated debt is
extinguished, gains and losses from terminations of interest-rate swap
agreements are recognized in income.
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
referenced security underlying the settled forward contract.
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. 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
For the periods presented, Williams and MAPCO separately included the
operations of their respective subsidiaries in consolidated federal income tax
returns. Williams and MAPCO will begin filing a single consolidated federal
income tax return as of the date of the merger. 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
35
<PAGE> 36
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of significant accounting policies (continued)
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 (FASB) issued two new
accounting standards, SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." These standards, effective for
fiscal years beginning after December 15, 1997, are disclosure- oriented
standards. Therefore, these standards will not affect Williams' reported
consolidated net income or cash flows.
Note 2 -- Acquisitions
MAPCO
On November 24, 1997, Williams and MAPCO Inc. announced that they had entered
into a definitive merger agreement whereby Williams would acquire MAPCO by
exchanging 1.665 shares of Williams common stock for each outstanding share of
MAPCO common stock. In addition, outstanding MAPCO employee stock options
would be converted into Williams common stock. The merger was consummated on
March 28, 1998, with the issuance of 98.6 million shares of Williams common
stock. MAPCO is engaged in the NGL pipeline, petroleum refining and marketing
and propane marketing businesses, and became part of the Energy Services
business unit.
The merger constituted a tax-free reorganization and has been accounted for as
a pooling of interests. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of MAPCO as though it had always
been a part of Williams. Intercompany transactions between Williams and MAPCO
prior to the merger have been eliminated, and no material adjustments were
necessary to conform MAPCO's accounting policies. These supplemental
consolidated financial statements will become the historical consolidated
financial statements upon issuance of consolidated financial statements for the
period that includes the date of the merger.
During 1997, payments of $32.6 million were made for non-compete agreements.
These costs will be amortized over one to three years after completion of the
merger.
36
<PAGE> 37
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 2 -- Acquisitions (continued)
The results of operations for the separate companies and the combined amounts
presented in the Supplemental Consolidated Income Statement follow:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
(Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Williams $4,409.6 $3,531.2 $2,855.7
MAPCO 3,847.5 3,353.1 2,856.6
Intercompany eliminations (15.5) (41.4) (57.3)
======== ======== ========
Combined $8,241.6 $6,842.9 $5,655.0
-------- -------- --------
Net income:
Williams $ 271.4 $ 362.3 $1,318.2
MAPCO 96.9 97.5 74.7
-------- -------- --------
Combined $ 368.3 $ 459.8 $1,392.9
======== ======== ========
</TABLE>
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' Supplemental 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 shareholder 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 $8,490 million
and $7,580 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.
37
<PAGE> 38
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 2 -- Acquisitions (continued)
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 at $334 million. The acquisition was accounted for as a purchase with
60 percent of Transco Energy's results of operations included in Williams'
Supplemental 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.
Note 3 -- Discontinued operations
On September 10, 1996, Williams sold substantially all of the net assets of the
MAPCO coal business to Alliance Coal Corporation, a corporation formed by The
Beacon Group Energy Investment Fund, L.P. ("Beacon") for $236 million in cash.
The sale yielded losses of $6.3 million and $47.2 million in 1997 and 1996,
respectively, (net of income tax benefits of $.7 million and $30 million,
respectively). The loss on disposal in 1997 includes liabilities recognized
for guarantees, indemnifications and representations made to Beacon relative to
the sale and an income tax adjustment to the 1996 loss amount. Operating
results for 1996 and 1995 for the coal business are reported as discontinued
operations and were as follows for the years ended December 31.
<TABLE>
<CAPTION>
(Millions) 1996 1995
------ ------
<S> <C> <C>
Revenues $276.8 $453.4
Provision (credit) for income taxes 4.8 (2.3)
Income from discontinued operations 14.5 10.5
</TABLE>
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.
38
<PAGE> 39
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 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)
-----------------------------------------------------------------
Revenues Operating profit
---------------------------------- --------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas Pipelines:
Central $ 184.4 $ 178.4 $ 174.3 $ 57.0 $ 44.8 $ 45.0
Kern River Gas
Transmission 167.1 160.6 -- 120.3 113.0 --
Northwest Pipeline 273.1 269.7 255.2 124.0 124.9 115.7
Texas Gas
Transmission 293.0 306.1 276.3 87.6 85.1 64.0
Transcontinental
Gas Pipe Line 766.3 760.4 725.3 225.3 194.6 165.0
-------- -------- -------- ------ ------ ------
$1,683.9 $1,675.2 $1,431.1 $614.2 $562.4 $389.7
======== ======== ======== ====== ====== ======
Energy Services:
Energy Marketing
& Trading $ 549.2 $ 690.6 $ 491.8 $ 64.4 $110.6 $ 68.4
Exploration &
Production 130.1 82.4 62.9 30.3 2.8 (5.9)
Midstream Gas &
Liquids 1,440.9 1,332.7 1,082.8 280.6 324.5 265.2
Petroleum Services 3,346.0 2,754.5 2,329.1 196.7 169.9 117.4
-------- -------- -------- ------ ------ ------
$5,466.2 $4,860.2 $3,966.6 $572.0 $607.8 $445.1
======== ======== ======== ====== ====== ======
</TABLE>
Note 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 $11.2 $15.0 $38.5
Dividends 1.4 1.6 16.1
Equity earnings 7.9 6.1 40.6
----- ----- -----
$20.5 $22.7 $95.2
===== ===== =====
</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.
39
<PAGE> 40
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 6 -- Asset sales and write-offs
In 1997, Williams sold its interest in the natural gas liquids and condensate
reserves in the West Panhandle field of Texas for $66 million in cash. The
sale resulted in a $66 million pre-tax gain on the transaction because the
related reserves had no book value.
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.
Also in 1996, Williams sold its Iowa propane and liquid fertilizer assets as
well as its remaining liquid fertilizer assets in Arkansas, Illinois, Indiana,
Minnesota, Ohio and Wisconsin for $43 million in cash, resulting in a pre-tax
gain of $20.8 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.
Note 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 $121.5 $154.1 $ (5.1)
State 23.1 19.1 4.7
Foreign 2.3 -- --
------ ------ ------
146.9 173.2 (.4)
------ ------ ------
Deferred:
Federal 90.4 76.5 130.8
State 13.9 16.2 11.0
------ ------ ------
104.3 92.7 141.8
------ ------ ------
Total provision $251.2 $265.9 $141.4
====== ====== ======
</TABLE>
40
<PAGE> 41
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Provision for income taxes (continued)
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 $246.7 $265.4 $176.8
Increases (reductions) in taxes resulting from:
State income taxes 24.8 24.8 14.3
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 11.8 (5.3) 6.8
------ ------ ------
Provision for income taxes $251.2 $265.9 $141.4
====== ====== ======
</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 $2,126.7 $2,028.1
Investments 120.9 93.3
Other 129.6 146.7
-------- --------
Total deferred tax liabilities 2,377.2 2,268.1
-------- --------
Deferred tax assets:
Deferred revenues 84.9 31.5
Rate refunds 119.9 111.4
Accrued liabilities 154.8 204.4
Minimum tax credits 131.3 86.8
Other 113.8 150.0
-------- --------
Total deferred tax assets 604.7 584.1
-------- --------
Net deferred tax liabilities $1,772.5 $1,684.0
======== ========
</TABLE>
Cash payments for income taxes (net of refunds) were $126 million, $472 million
and $352 million in 1997, 1996 and 1995, respectively.
41
<PAGE> 42
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 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.
Note 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 $453.7 $492.5 $363.6
Preferred stock dividends (9.8) (10.4) (15.3)
------ ------ ------
Income from continuing operations
available to common stockholders
for basic earnings per share 443.9 482.1 348.3
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 $452.6 $490.9 $354.1
====== ====== ======
Basic weighted-average shares 412,380 414,417 401,845
Effect of dilutive securities:
Convertible preferred stock 11,717 11,718 7,866
Stock options 6,097 5,828 3,678
------- ------- -------
17,814 17,546 11,544
------- ------- -------
Diluted weighted-average shares 430,194 431,963 413,389
======= ======= =======
Earnings per share from continuing operations:
Basic $1.08 $1.16 $.87
===== ===== ====
Diluted $1.05 $1.14 $.86
===== ===== ====
</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.
42
<PAGE> 43
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 10 -- Employee benefit plans
Pensions
Williams maintains non-contributory defined-benefit pension plans covering
substantially all of its employees plus certain employees of the coal business
sold in 1996 (see Note 3). Benefits are generally 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 $ 34.9 $ 36.6 $ 24.1
Interest cost on projected benefit
obligation 63.6 56.5 51.3
Actual return on plan assets (134.0) (129.4 ) (159.3)
Amortization and deferrals 66.3 70.8 102.7
------- ------- -------
Net pension expense $ 30.8 $ 34.5 $ 18.8
======= ======= =======
</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.
43
<PAGE> 44
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 10 -- Employee benefit plans (continued)
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 $692 $565
Non-vested benefits 48 44
---- ----
Accumulated benefit obligations 740 609
Effect of projected salary increases 229 185
---- ----
Projected benefit obligations 969 794
Assets at market value 975 845
---- ----
Assets in excess of projected
benefit obligations (6) (51)
Unrecognized net (loss) gain (7) 40
Unrecognized prior-service cost (7) (9)
Unrecognized transition asset 3 3
---- ----
Pension asset $(17) $(17)
==== ====
</TABLE>
The discount rate used to measure the present value of benefit obligations is
7 to 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 master trusts. The master trusts are 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. Williams' employees retained in the MAPCO merger
are not covered by the health care plans.
44
<PAGE> 45
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 10-- Employee benefit plans (continued)
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>
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
====== ====== ======
The following table presents the funded status of the plans:
(Millions)
-----------------------
1997 1996
---- ----
Actuarial present value of postretirement benefit
obligation:
Retirees $230 $207
Fully eligible active plan participants 34 26
Other active plan participants 126 89
---- ----
Accumulated postretirement benefit obligation 390 322
Assets at market value 185 155
---- ----
Assets less than accumulated postretirement
benefit obligation 205 167
Unrecognized net gain 18 60
Unrecognized prior-service credit 4 1
Unrecognized transition obligation (61) (65)
---- ----
Postretirement benefit liability $166 $163
==== ====
</TABLE>
45
<PAGE> 46
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 10 -- Employee benefit plans (continued)
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 $37 million in 1997, $31 million in 1996 and $27 million in 1995.
Note 11 -- Inventories
<TABLE>
<CAPTION>
(Millions)
-----------------------
1997 1996
------ ------
<S> <C> <C>
Raw materials:
Crude oil $ 30.5 $ 22.1
Other 5.2 6.5
------ ------
35.7 28.6
------ ------
Finished goods:
Refined petroleum products 122.3 61.4
Fertilizer and natural gas liquids 43.8 45.5
General merchandise and communications equipment 90.0 56.5
------ ------
256.1 163.4
------ ------
Materials and supplies 82.5 79.0
Natural gas in underground storage 57.8 40.3
Other 1.8 2.9
------ ------
$433.9 $314.2
====== ======
</TABLE>
46
<PAGE> 47
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 11 -- Inventories (continued)
As of December 31, 1997 and 1996, approximately 17 percent and 5 percent of
inventories, respectively, were stated at market. As of December 31, 1997 and
1996, approximately 28 percent and 32 percent of inventories, respectively,
were determined using the last-in, first-out (LIFO) method. The remaining
inventories were primarily determined using the average-cost method.
If inventories valued on the LIFO method at December 31, 1997 and 1996, were
valued at current average cost, the amounts would increase by approximately $20
million and $35 million, respectively.
Note 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 345.2 256.0
Exploration & Production 318.5 255.1
Midstream Gas & Liquids 3,541.9 3,374.8
Petroleum Services 1,826.7 1,744.7
Communications 535.0 257.3
Other 353.6 198.2
--------- ---------
14,605.1 13,366.5
Accumulated depreciation and depletion (3,068.3) (2,623.3)
--------- ---------
$11,536.8 $10,743.2
========= =========
</TABLE>
Commitments for construction and acquisition of property, plant and equipment
are approximately $534 million at December 31, 1997.
Note 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 $112 million at December 31, 1997, and $116 million at December 31, 1996.
47
<PAGE> 48
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 13 -- Accounts payable and accrued liabilities (continued)
<TABLE>
<CAPTION>
(Millions)
----------------------
1997 1996
-------- --------
<S> <C> <C>
Accrued liabilities:
Rate refunds $ 337.5 $ 305.1
Employee costs 205.4 206.0
Interest 89.5 100.8
Income taxes payable 69.6 95.4
Taxes other than income taxes 112.7 109.2
Other 466.9 299.8
-------- --------
$1,281.6 $1,116.3
======== ========
</TABLE>
Note 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 March 1998, Williams Holdings' commercial
paper program was increased to $1 billion. In addition, Williams has entered
into various other short-term 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.
48
<PAGE> 49
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 14 -- Debt, leases and banking arrangements (continued)
<TABLE>
<CAPTION>
Debt Weighted- December 31,
- ---- average ---------------------
(Millions) interest 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 --
MAPCO Inc. and subsidiaries
Commercial paper and bank money market lines 6.6 135.8 128.5
Debentures, 7.7%, payable 2027 7.7 102.9 --
Notes, 6.67%-8.95%, payable through 2022 8.1 586.7 515.6
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
-------- --------
5,431.8 5,080.6
Current portion of long-term debt (80.3) (95.3)
-------- --------
$5,351.5 $4,985.3
======== ========
</TABLE>
*At December 31, 1997, including the effects of interest-rate swaps.
49
<PAGE> 50
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 14 -- Debt, leases and banking arrangements (continued)
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. The restructuring was
completed with the fourth-quarter 1997 and first-quarter 1998 issuance of
approximately $1.5 billion of debentures and notes with interest rates ranging
from 5.91 percent to 6.625 percent.
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. In addition, MAPCO is party to a $400 million bank-credit agreement
which serves as a back-up facility for their commercial paper and bank money
market lines and expires in March 2002. There were no borrowings outstanding
under this agreement at December 31, 1997, and, in March 1998, this facility was
terminated. Interest rates for both agreements 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 $1,240 million of long-term debt obligations in
first-quarter 1998 is sufficient to complete these refinancings. An additional
$136 million of MAPCO commercial paper and bank money market lines at December
31, 1997, has been classified as non-current obligations based on the ability
and intent to refinance on a long-term basis. This amount was repaid in March
1998 with borrowings due subsequent to December 31, 1998.
Interest-rate swaps with a notional value of $450 million are currently being
utilized to convert certain fixed rate debt obligations to variable rate
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 to fixed rate 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.
50
<PAGE> 51
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 14 -- Debt, leases and banking arrangements (continued)
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 $ 78
1999 381
2000 274
2001 1,110
2002 1,705
</TABLE>
Cash payments for interest (net of amounts capitalized) are as follows:
1997--$450 million; 1996--$406 million; and 1995--$325 million.
Leases
Future minimum annual rentals under non-cancelable operating leases are $126
million in 1998, $110 million in 1999, $94 million in 2000, $67 million in
2001, $60 million in 2002 and $197 million thereafter.
Total rent expense was $137 million in 1997, $97 million in 1996 and $98
million in 1995.
Note 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.
On September 30, 1996, 47.8 million shares of common stock were distributed
pursuant to a two-for-one common stock split affecting only former MAPCO
stockholders. The split was effected in the form of a stock dividend from
shares held as treasury stock.
During 1997, 2.7 million shares of common stock were repurchased at a total
cost of approximately $50 million. During 1996, 6.2 million shares
51
<PAGE> 52
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 15 -- Stockholders' equity (continued)
of common stock were repurchased at a total cost of approximately $130 million.
During 1995, 1 million shares of common stock were repurchased at a total cost
of approximately $31 million. In the fourth quarter of 1997, the common stock
repurchase program was terminated.
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
Supplemental 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 Williams board of directors adopted a Stockholder Rights Plan (the
Rights Plan). Under the Rights Plan, each outstanding share of Williams 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, Williams 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.
52
<PAGE> 53
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 15 -- Stockholders' equity (continued)
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.
Certain Williams stock options become exercisable after five years, subject to
accelerated vesting if certain future stock prices are achieved. Other stock
options become exercisable one-third annually beginning two years following the
date of grant. Williams stock options expire 10 years after grant. At
December 31, 1997, 46.7 million shares of Williams 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).
53
<PAGE> 54
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 15 -- Stockholders' equity (continued)
The following summary reflects Williams 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 29.2 $14.18 24.4 $12.41
Grant 12.9 22.57 10.5 16.77
Exercised (6.1) 13.46 (4.7) 10.44
Canceled (.8) 18.32 (1.0) 17.77
---- ----
Outstanding--end of year 35.2 $17.29 29.2 $14.18
==== ====
Exercisable--at end of year 18.8 $13.83 15.4 $12.26
==== ====
Weighted-average grant date fair value
of options granted during the year $7.15 $4.80
===== =====
</TABLE>
In connection with the merger on March 28, 1998, approximately 12.9 million
outstanding options were converted into approximately 5.7 million shares of
Williams common stock under the terms of the merger agreement.
The following summary provides information about Williams stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
- --------------------------------------------------------------------- ----------------------------
Weighted-
Range of Weighted- Average Weighted-
Exercise Options Average Remaining Options Average
Prices (Millions) Exercise Price Contractual Life (Millions) Exercise Price
- ------------------ ---------- -------------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$4.62 to $18.04 20.4 $13.71 7.1 years 17.4 $13.27
$18.05 to $49.34 14.8 22.75 8.5 years 1.4 20.86
----- -----
Total 35.2 $17.29 7.6 years 18.8 $13.83
==== ====
</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 approximately 5.5 years;
volatility of the expected market price of Williams common stock of 26 percent
(22 percent in 1996 and 1995); risk-free interest rate of 6.1 percent (6.0
percent in 1996 and 6.5 percent in 1995); and a dividend yield of 1.7 percent
(2.0 percent in 1996 and 2.5 percent in 1995).
54
<PAGE> 55
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 15 -- Stockholders' equity (continued)
Pro forma net income and earnings per share, assuming Williams had applied the
fair-value method of SFAS 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) $331.0 $368.3 $452.9 $459.8 $1,378.9 $1,392.9
Earnings
per share:
Basic $.78 $.87 $1.07 $1.08 $3.39 $3.43
Diluted $.77 $.85 $1.05 $1.06 $3.31 $3.35
</TABLE>
Pro forma amounts for 1997 include compensation expense from 78 percent of 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
compensation expense from 75 percent of 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 for pro forma disclosure purposes, and additional awards
generally are made each year, pro forma amounts may not be representative of
future years' amounts.
Note 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
55
<PAGE> 56
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 16 -- Financial instruments (continued)
and 1996, 57 percent and 66 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 $ 122.1 $ 122.1 $ 220.1 $ 220.1
Notes and other non-current
receivables 33.5 33.5 34.4 34.4
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 (5,430.8) (5,561.5) (5,079.2) (5,260.6)
Interest-rate swaps (51.1) (46.8) (54.8) (60.6)
Interest-rate locks - (8.3) - 4.2
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 13.3 .9 11.2
Liabilities (.3) (8.8) (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.
56
<PAGE> 57
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 16 -- Financial instruments (continued)
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 receivable. 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
57
<PAGE> 58
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 16 -- Financial instruments (continued)
price or variable prices for different locations. The variable prices 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.
58
<PAGE> 59
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 16 -- Financial instruments (continued)
At December 31, 1997 and 1996, approximately 48 percent and 58 percent,
respectively, of receivables are for the sale or transportation of natural gas
and related products or services. Approximately 22 percent and 20 percent of
receivables at December 31, 1997 and 1996, respectively, are for the sale or
transportation of petroleum products. Approximately 25 percent and 17 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. Petroleum
products customers include wholesale, commercial, governmental, industrial and
individual consumers and independent dealers located primarily in Alaska and
the mid-south and southeastern 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.
Note 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* (85.6) 134.4 71.6
Exploration & Production 126.5 57.1 4.9
Midstream Gas & Liquids 163.5 98.0 60.6
Petroleum Services 118.0 87.6 78.5
Other 12.8 9.3 .2
------ ------ ------
$392.2 $451.8 $299.0
======= ====== ======
</TABLE>
*Energy Marketing & Trading intercompany cost of sales, which are netted
in revenues consistent with market-value accounting, exceed intercompany
revenues in 1997.
59
<PAGE> 60
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 17-- Other financial information (continued)
Information for business segments is as follows:
<TABLE>
<CAPTION>
(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 1,147.1 1,218.1 791.1
Exploration & Production 247.1 200.3 164.6
Midstream Gas & Liquids 3,005.7 2,916.5 2,844.8
Petroleum Services 1,786.3 1,624.2 1,484.1
Communications 1,312.9 670.6 401.0
Investments 388.1 216.5 311.4
General corporate and other 715.2 365.4 320.1
--------- --------- ---------
Consolidated $16,277.6 $14,589.5 $12,485.1
========= ========= =========
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 71.0 20.8 12.8
Exploration & Production 63.3 30.3 15.6
Midstream Gas & Liquids 190.4 244.1 353.7
Petroleum Services 144.0 111.0 150.9
Communications 276.3 66.9 32.4
General corporate and other 176.1 34.6 18.2
--------- --------- ---------
Consolidated $ 1,340.5 $ 948.3 $ 1,028.4
========= ========= =========
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
Transcontinental Gas Pipe Line 129.5 113.7 109.1
Energy Services:
Energy Marketing & Trading 20.8 16.9 18.3
Exploration & Production 12.6 10.5 9.8
Midstream Gas & Liquids 131.9 124.3 126.9
Petroleum Services 67.8 64.1 57.6
Communications 66.8 30.9 20.3
General corporate and other 13.0 12.2 9.3
--------- --------- ---------
Consolidated $ 585.9 $ 500.3 $ 452.4
========= ========= =========
</TABLE>
60
<PAGE> 61
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 17-- Other financial information (continued)
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.
Note 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, 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 pipeline 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
61
<PAGE> 62
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Contingent liabilities and commitments (continued)
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 $68 million. An
intervenor has filed a protest seeking to have the FERC review the prudence of
certain of the costs covered by these filings. On July 31, 1996, the
administrative law judge issued an initial decision rejecting the intervenor's
prudency challenge. On September 30, 1997, the FERC, by a two-to-one vote,
reversed the administrative law judge and determined that these 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. 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 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
62
<PAGE> 63
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Contingent liabilities and commitments (continued)
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 future
recovery of 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 such 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
63
<PAGE> 64
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Contingent liabilities and commitments (continued)
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 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 Midstream Gas & Liquids unit of Williams Energy Services (WES) 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.
WES also accrues environmental remediation costs for its retail petroleum
refining and propane marketing operations primarily related to soil and
groundwater contamination. At December 31, 1997, WES and its subsidiaries had
reserves, in addition to the reserves listed above, totaling approximately $24
million. WES recognizes receivables related to environmental remediation costs
from state funds as a result of laws permitting states to reimburse certain
expenses associated with underground storage tank problems and repairs. At
December 31, 1997, WES and its subsidiaries had such receivables totaling $13
million.
In connection with the 1987 sale of the assets of Agrico Chemical Company,
Williams agreed to indemnify the purchaser for environmental cleanup costs
resulting from certain conditions at specified locations, to the extent such
costs exceed a specified amount. Such costs have exceeded this amount. At
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.
64
<PAGE> 65
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Contingent liabilities and commitments (continued)
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.
Texas explosion litigation
On April 7, 1992, a liquefied petroleum gas explosion occurred near an
underground salt dome storage facility located near Brenham, Texas and owned by
an affiliate of MAPCO Inc., Seminole Pipeline Company ("Seminole"). MAPCO
Inc., as well as Seminole, Mid-America Pipeline Company, MAPCO Natural Gas
Liquids Inc., and other non-MAPCO entities were named as defendants in civil
action lawsuits filed in state district courts located in four Texas counties.
Seminole and the above-mentioned subsidiaries of MAPCO Inc. have settled in
excess of 1,600 claims in these lawsuits. The only lawsuit remaining is the
Dallmeyer case which was tried before a jury in Harris County. In Dallmeyer,
the judgment rendered in March 1996 against defendants Seminole and MAPCO Inc.
and its subsidiaries totaled approximately $72 million which included nearly
$65 million of punitive damages awarded to the 21 plaintiffs.
Both plaintiffs and defendants have appealed the Dallmeyer judgment to the
Court of Appeals for the Fourteenth District of Texas in Harris County. The
defendants seek to have the judgment modified in many respects, including the
elimination of punitive damages as well as a portion of the actual damages
awarded. If the defendants prevail on appeal, it will result in an award
significantly less than the judgment, or alternatively, a retrial of the case.
The plaintiffs have cross-appealed and seek to modify the judgment to increase
the total award plus interest to exceed $155 million. In February and March
1998, the Company entered into settlement agreements involving 17 of the 21
plaintiffs to finally resolve their claims against all defendants for an
aggregate payment of approximately $10 million. These settlements have
satisfied and reduced the judgment on appeal by approximately $42 million.
Management believes that it has defenses of considerable merit and will
vigorously litigate the Dallmeyer appeal or seek a satisfactory settlement, but
is not able to predict the ultimate outcome of this matter at this time. MAPCO
Inc. has accrued a liability representing an estimate of amounts it
65
<PAGE> 66
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Contingent liabilities and commitments (continued)
may incur to finally resolve all litigation and had, as of December 31, 1997,
also recorded a receivable which corresponds to the remainder of its insurance
coverage to be reimbursed by its insurance carrier. Management is unable to
estimate a range of loss beyond the amount accrued. Unfavorable resolution of
this matter could result in liabilities and charges materially in excess of the
amount accrued.
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 and on March 17, 1998, the court sitting en banc heard oral arguments.
The parties await the Court of Appeals' decision.
Williams Communications, Inc. filed suit on March 20, 1998, against WorldCom
Network Services, Inc. in district court in Tulsa County in order to prevent
WorldCom from disconnecting any Williams' equipment on the WorldCom network.
This suit seeks a declaratory judgment that the single fiber retained by
Williams on the WorldCom network can be used for specified multimedia uses and
that WorldCom is required to permit Williams to purchase additional fiber
either acquired or constructed by WorldCom.
In connection with agreements to resolve take-or-pay and other contract claims
and to amend gas purchase contracts, Transcontinental Gas Pipe Line and Texas
Gas each entered into certain settlements with producers which may require the
indemnification of certain claims for additional royalties which the producers
may be required to pay as a result of such settlements. As a
66
<PAGE> 67
THE WILLIAMS COMPANIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Contingent liabilities and commitments (continued)
result of such settlements, Transcontinental Gas Pipe Line is currently
defending two lawsuits brought by producers. In one of the cases, a jury
verdict found that Transcontinental Gas Pipe Line was required to pay a
producer damages of $23.3 million including $3.8 million in attorneys' fees.
Transcontinental Gas Pipe Line intends to appeal. In the other case, a
producer has asserted damages, including interest calculated through December
31, 1997, of approximately $6 million.
Producers have received and may receive other demands, which could result in
additional claims. Indemnification for royalties will depend on, among other
things, the specific lease provisions between the producer and the lessor and
the terms of the settlement between the producer and either Transcontinental
Gas Pipe Line or Texas Gas. Texas Gas may file to recover 75 percent of any
such additional amounts it may be required to pay pursuant to indemnities for
royalties under the provisions of Order 528.
In November 1994, Continental Energy Associates Limited Partnership (the
Partnership) filed a voluntary petition under Chapter 11 of the Bankruptcy Code
with the U.S. Bankruptcy Court, Middle District of Pennsylvania. The
Partnership owns a cogeneration facility in Hazleton, Pennsylvania (the
Facility). Hazleton Fuel Management Company (HFMC), a subsidiary of Transco
Energy, 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.
67
<PAGE> 68
THE WILLIAMS COMPANIES, INC.
QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data restated to reflect the pooling of Williams
and MAPCO 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
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
- ----
Revenues $ 1,928.6 $ 1,870.9 $ 2,099.0 $ 2,343.1
Costs and operating expenses 1,425.6 1,419.2 1,609.5 1,772.9
Income before extraordinary loss 178.6 118.5 87.4 62.9
Net income (loss) 178.6 118.5 13.7 57.5
Basic earnings per common share:
Income before extraordinary loss .43 .28 .21 .14
Net income .43 .28 .03 .13
Diluted earnings per common share:
Income before extraordinary loss .42 .28 .20 .14
Net income .42 .28 .03 .13
1996
- ----
Revenues $ 1,623.8 $ 1,608.8 $ 1,628.3 $ 1,982.0
Costs and operating expenses 1,142.6 1,206.8 1,225.1 1,489.4
Net income 160.1 59.4 92.0 148.3
Basic earnings per common share .38 .14 .22 .35
Diluted earnings per common share .37 .14 .21 .34
</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.
First-quarter 1997 net income includes a pre-tax $66 million gain related to the
sale of the interest in the West Panhandle field (see Note 6 of Notes to
Supplemental Consolidated Financial Statements). 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 Supplemental 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 Supplemental
Consolidated Financial Statements).
First-quarter 1996 net income includes a pre-tax $20.8 million gain related to
the sale of Iowa propane and liquid fertilizer assets (see Note 6 of Notes to
Supplemental 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. Second-quarter 1996 net income also includes
68
<PAGE> 69
THE WILLIAMS COMPANIES, INC.
QUARTERLY FINANCIAL DATA (Unaudited)
an after-tax loss of $45.5 million related to the disposal of MAPCO's coal
business (see Note 3 of Notes to Supplemental Consolidated Financial
Statements). 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 41.3 36.7
Exploration & Production 10.2 3.7
Midstream Gas & Liquids 54.2 95.8
Petroleum Services 53.1 46.0
Communications (51.8) .6
Other 2.8 (2.9)
---------- ----------
Total operating profit 270.1 332.4
General corporate expenses (38.1) (23.7)
Interest expense--net (111.0) (104.1)
Investing income 7.0 4.7
Gain on sale of asset -- 15.7
Minority interest in income of
consolidated subsidiaries (5.6) .9
Other income (expense)--net (5.4) 10.7
---------- ----------
Income from continuing operations
before extraordinary loss and income taxes 117.0 236.6
Provision for income taxes 47.8 88.3
---------- ----------
Income from continuing operations 69.2 148.3
before extraordinary loss
Loss from discontinued operations (6.3) --
---------- ----------
Income before extraordinary loss 62.9 148.3
Extraordinary loss (5.4) --
---------- ----------
Net income $ 57.5 $ 148.3
========== ==========
Basic earnings per common share $ .13 $ .35
========== ==========
Diluted earnings per common share $ .13 $ .34
========== ==========
</TABLE>
69
<PAGE> 70
THE WILLIAMS COMPANIES, INC.
QUARTERLY FINANCIAL DATA (Unaudited)
Communications' fourth-quarter 1997 operating profit includes charges totaling
approximately $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 addition, 1997 general
corporate expenses include approximately $10 million in costs related to the
MAPCO acquisition (see Note 2 of Notes to Supplemental Consolidated Financial
Statements).
Midstream Gas & Liquids 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.
70
<PAGE> 1
EXHIBIT 99(b)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MAPCO Inc.:
We have audited the consolidated balance sheets of MAPCO Inc. and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997 (none of which are presented
herein). 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAPCO Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 16 to the MAPCO Inc. consolidated financial statements
(Note 18 to the supplemental consolidated financial statements), MAPCO Inc. is
a defendant in litigation relating to an LPG explosion in April 1992, that
occurred near an underground salt dome storage facility located near Brenham,
Texas.
Effective October 1, 1997, MAPCO Inc. changed its method of accounting for
business process reengineering activities to conform to the consensus reached
by the Emerging Issues Task Force in Issue No. 97-13.
Deloitte & Touche LLP
Tulsa, Oklahoma
January 27, 1998
(March 3, 1998 as to
Notes 2 and 16 to the
MAPCO Inc. consolidated financial statements)
