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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4174
THE WILLIAMS COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 73-0569878
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE WILLIAMS CENTER, TULSA, OKLAHOMA 74172
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(918) 573-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Common Stock, $1.00 par value New York Stock Exchange and the
Preferred Stock Purchase Rights Pacific Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
nonaffiliates as of the close of business on March 26, 1999, was approximately
$16.8 billion.
The number of shares of the registrant's Common Stock outstanding at March
26, 1999, was 431,707,086, excluding 6,304,312 shares held by Williams.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement prepared for the solicitation
of proxies in connection with the Annual Meeting of Stockholders of Williams for
1999 are incorporated by reference in Part III.
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THE WILLIAMS COMPANIES, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
The Williams Companies, Inc. was incorporated under the laws of the State
of Nevada in 1949 and was reincorporated under the laws of the State of Delaware
in 1987. The principal executive offices of Williams are located at One Williams
Center, Tulsa, Oklahoma 74172 (telephone (918) 573-2000).
On November 19, 1998, Williams announced that its board of directors had
authorized an initial public offering of a minority interest in its
communications subsidiary, Williams Communications Group, Inc. Williams expects
to file a registration statement for this offering with the Securities and
Exchange Commission in the second quarter of 1999. In addition, on February 8,
1999, Williams announced it had entered into an agreement with SBC
Communications under which SBC would acquire the lesser of the number of shares
of common stock valued at $500 million or ten percent of the common stock of
Williams Communications in a private placement expected to occur simultaneously
with the initial public offering.
On March 28, 1998, Williams acquired MAPCO Inc. in a stock-for-stock
transaction based upon a fixed exchange ratio of 1.665 shares of Williams common
stock and .555 associated preferred stock purchase rights for each share of
MAPCO common stock and associated preferred stock purchase rights. See Note 2 to
Notes to Consolidated Financial Statements. Management believes the acquisition
furthers its strategy of seeking growth through strategic acquisitions and
alliances and that MAPCO's assets and operations complement Williams' existing
lines of business. Williams operates the MAPCO businesses through Williams
Energy Services.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Part II, Item 8 -- Financial Statements and Supplementary Data.
(C) NARRATIVE DESCRIPTION OF BUSINESS
Williams, through Williams Gas Pipeline Company and Williams Energy
Services and their subsidiaries, engages in the following types of
energy-related activities:
- transportation and storage of natural gas and related activities through
operation and ownership of five interstate natural gas pipelines;
- exploration and production of oil and gas through ownership of 708 Bcf of
proved natural gas reserves primarily located in the San Juan Basin of
Colorado and New Mexico;
- natural gas gathering, processing, and treating activities through
ownership and operation of approximately 11,000 miles of gathering lines,
ten gas treating plants, and 11 gas processing plants (one of which is
partially owned);
- natural gas liquids transportation through ownership and operation of
approximately 10,300 miles of natural gas liquids pipeline;
- transportation of petroleum products and related terminal services
through ownership or operation of approximately 9,100 miles of petroleum
products pipeline and 68 petroleum products terminals;
- production and marketing of ethanol through operation and ownership of
two ethanol plants (one of which is partially owned);
- petroleum products and propane distribution services through operation
and ownership of a petroleum trucking company;
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- refining of petroleum products through operation and ownership of two
refineries;
- retail marketing through 256 convenience stores; and
- energy commodity marketing and trading.
Williams, through Williams Communications Group, Inc. and its subsidiaries,
engages in the following types of communications-related activities:
- owner and operator of a 19,000-route mile telecommunications fiber optic
network;
- data-, voice-, and video-related products and services;
- advertising distribution services;
- video services and other multimedia services for the broadcast industry;
- enhanced audio- and video-conferencing services for businesses;
- customer-premise voice and data equipment, sales, and services including
installation, maintenance, and integration; and
- network integration and management services nationwide.
Williams, through subsidiaries of Williams International Company, directly
invests in energy and telecommunications projects primarily in South America and
Australia and continues to explore and develop additional projects for
international investments. It also invests in energy, telecommunications, and
infrastructure development funds in Asia and Latin America.
Substantially all operations of Williams are conducted through
subsidiaries. Williams performs management, legal, financial, tax, consultative,
administrative, and other services for its subsidiaries and employs
approximately 1,000 employees. Williams' principal sources of cash are from
external financings, dividends and advances from its subsidiaries, investments,
payments by subsidiaries for services rendered, and interest payments from
subsidiaries on cash advances. The amount of dividends available to Williams
from subsidiaries largely depends upon each subsidiary's earnings and operating
capital requirements. The terms of certain subsidiaries' borrowing arrangements
limit the transfer of funds to Williams.
To achieve organizational and operating efficiencies, Williams' interstate
natural gas pipelines are grouped together under its wholly owned subsidiary,
Williams Gas Pipeline Company. All other operating companies are owned by
Williams Holdings of Delaware, Inc., a wholly owned subsidiary of Williams. The
energy operations of Williams Holdings of Delaware, Inc. are grouped into a
wholly owned subsidiary, Williams Energy Services; its communications operations
are grouped into a wholly owned subsidiary, Williams Communications Group, Inc.;
and its international operations are grouped into a wholly owned subsidiary,
Williams International Company. Item 1 of this report is formatted to reflect
this structure.
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WILLIAMS GAS PIPELINE COMPANY
Williams' interstate natural gas pipeline group, comprised of Williams Gas
Pipeline Company and its subsidiaries, owns and operates a combined total of
approximately 27,000 miles of pipelines with a total annual throughput of
approximately 3,700 TBtu* of natural gas and peak-day delivery capacity of
approximately 15 Bcf of gas. The gas pipeline group consists of Transcontinental
Gas Pipe Line Corporation, Northwest Pipeline Corporation, Kern River Gas
Transmission Company, Texas Gas Transmission Corporation, and Williams Gas
Pipelines Central, Inc. The gas pipeline group also holds minority interests in
joint venture interstate natural gas pipeline systems.
Williams' gas pipeline group has combined certain administrative functions,
such as human resources, information services, technical services, and finance,
of its operating companies in an effort to lower costs and increase efficiency.
Although a single management team manages Northwest Pipeline and Kern River, and
Texas Gas and Central share a senior vice president and general manager, each of
these operating companies operates as a separate legal entity. Williams' gas
pipeline group employs approximately 3,300 employees.
The gas pipeline group's transmission and storage activities are subject to
regulation by the Federal Energy Regulatory Commission (FERC) under the Natural
Gas Act of 1938 and under the Natural Gas Policy Act of 1978 (NGPA), and, as
such, their rates and charges for the transportation of natural gas in
interstate commerce, the extension, enlargement, or abandonment of
jurisdictional facilities, and accounting, among other things, are subject to
regulation. Each gas pipeline company holds certificates of public convenience
and necessity issued by the FERC authorizing ownership and operation of all
pipelines, facilities, and properties considered jurisdictional for which
certificates are required under the Natural Gas Act. Each gas pipeline company
is also subject to the Natural Gas Pipeline Safety Act of 1968, as amended by
Title I of the Pipeline Safety Act of 1979, which regulates safety requirements
in the design, construction, operation, and maintenance of interstate natural
gas pipelines.
As a result of the MAPCO merger in 1998, Williams Holdings acquired an
approximately 4.8 percent investment interest in Alliance Pipeline. Effective
January 1, 1999, this interest was transferred to the gas pipeline group.
Alliance consists of two proposed segments, a Canadian segment and a United
States segment. Alliance has filed applications for approval with the FERC in
the United States and the National Energy Board (NEB) in Canada, to construct
and operate an approximately 1,800 mile natural gas pipeline system extending
from northeast British Columbia to the Chicago, Illinois, area market center,
where it will interconnect with the North American pipeline grid. On September
17, 1998, the FERC granted a Certificate of Public Convenience and Necessity
(CPCN) for the United States portion of the Alliance pipeline, and on December
3, 1998, the NEB granted a CPCN for the Canadian portion. Construction is
expected to begin in the spring of 1999 with an anticipated in-service date of
October 2000. Total estimated cost of the Alliance project is approximately $3
billion. At December 31, 1998, Williams had invested approximately $19 million
in Alliance.
A business description of the principal companies in the interstate natural
gas pipeline group follows.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
Transco is an interstate natural gas transportation company that owns a
10,500-mile natural gas pipeline system extending from Texas, Louisiana,
Mississippi, and the offshore Gulf of Mexico through Alabama, Georgia, South
Carolina, North Carolina, Virginia, Maryland, Pennsylvania, and New Jersey to
the New York City metropolitan area. The system serves customers in Texas and
eleven southeast and Atlantic seaboard states, including major metropolitan
areas in Georgia, North Carolina, New York, New Jersey, and
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* The term "Mcf" means thousand cubic feet, "MMcf" means million cubic feet and
"Bcf" means billion cubic feet. All volumes of natural gas are stated at a
pressure base of 14.73 pounds per square inch absolute at 60 degrees
Fahrenheit. The term "Btu" means British Thermal Unit, "MMBtu" means one
million British Thermal Units and "TBtu" means one trillion British Thermal
Units. The term "Dth" means dekatherm. The term "Mbbl" means one thousand
barrels. The term "GWh" means gigawatt hour.
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Pennsylvania. Effective May 1, 1995, Transco transferred the operation of
certain production area facilities to Williams Field Services Group, Inc., an
affiliated company.
Pipeline System and Customers
At December 31, 1998, Transco's system had a mainline delivery capacity of
approximately 3.8 Bcf of gas per day from its production areas to its primary
markets. Using its Leidy Line and market-area storage capacity, Transco can
deliver an additional 2.9 Bcf of gas per day for a system-wide delivery capacity
total of approximately 6.7 Bcf of gas per day. Excluding the production area
facilities operated by Williams Field Services Group, Inc., Transco's system is
composed of approximately 7,100 miles of mainline and branch transmission
pipelines, 41 compressor stations, and six storage locations. Compression
facilities at a sea level-rated capacity total approximately 1.3 million
horsepower.
Transco's major natural gas transportation customers are public utilities
and municipalities that provide service to residential, commercial, industrial,
and electric generation end users. Shippers on Transco's system include public
utilities, municipalities, intrastate pipelines, direct industrial users,
electrical generators, gas marketers, and producers. No customer accounted for
more than ten percent of Transco's total operating revenues in 1998. Transco's
firm transportation agreements are generally long-term agreements with various
expiration dates and account for the major portion of Transco's business.
Additionally, Transco offers interruptible transportation service under shorter
term agreements.
Transco has gas storage capacity in five underground storage fields located
on or near its system and/or market areas and operates three of these storage
fields and a liquefied natural gas (LNG) storage facility. The total gas storage
capacity available to Transco and its customers is approximately 216 Bcf of gas.
Storage capacity permits Transco's customers to inject gas into storage during
the summer and off-peak periods for delivery during peak winter demand periods.
Expansion Projects
In 1998 Transco completed construction of, and placed into service, two
major projects, the Mobile Bay Lateral Expansion Project and the Cherokee
Expansion Project. Phase I of the Mobile Bay Lateral Expansion Project, which
was placed into service on August 1, 1998, provides new firm transportation
capacity of 350 MMcf per day on a new offshore pipeline extending from the outer
continental shelf to Transco's Station 82 and 128 MMcf per day of capacity on
the existing onshore lateral from Station 82 to Station 85 at Transco's mainline
in Choctaw County, Alabama. Phase II of the project, which was placed into
service on November 9, 1998, increased capacity onshore by an additional 136
MMcf per day bringing the total Mobile Bay Lateral capacity delivered at Station
85 to 784 MMcf per day. On November 1, 1998, Transco placed into service the
Cherokee Expansion Project, an incremental expansion of Transco's system in its
southern market area providing approximately 84 MMcf per day of new firm
transportation capacity to serve markets in Georgia.
In February 1997 Pine Needle LNG Company, LLC, which is owned by wholly
owned subsidiaries of Transco and several of its major customers, commenced
construction of a LNG storage facility in Guilford County, North Carolina. The
facility will have 4 Bcf of storage capacity, 400 MMcf per day of withdrawal
capacity, and is expected to be operational on May 1, 1999. The project is
estimated to cost approximately $107 million. Wholly owned subsidiaries of
Transco will operate the facility and maintain a 35 percent ownership interest.
Transco expects to make equity investments of approximately $19 million in this
project.
In November 1997 the North Carolina Utilities Commission issued an order
approving the Cardinal Pipeline Project. Wholly owned subsidiaries of Transco
and three of its North Carolina customers will own the Cardinal pipeline system,
which will involve the acquisition of the existing 37-mile Cardinal pipeline in
North Carolina and construction of an approximately 67-mile extension of the
Cardinal pipeline to new interconnections located near Clayton County, North
Carolina. This project will provide 140 MMcf per day of additional firm
transportation capacity to North Carolina markets and is expected to be
operational by November 1, 1999. The project is estimated to cost approximately
$98 million. Wholly owned subsidiaries of Transco will
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operate the Cardinal pipeline and maintain a 45 percent ownership interest in
the project. Transco expects to make equity investments of approximately $22
million in this project.
In December 1997 wholly owned subsidiaries of Transco and AGL Resources
Inc. formed Cumberland Gas Pipeline Company. Cumberland plans to expand existing
pipeline facilities of Transco and AGL northward into Tennessee, creating a
143-mile pipeline that is expected to provide firm transportation capacity to
markets in Georgia and Tennessee by the 2000-2001 winter heating season. Wholly
owned subsidiaries of Transco will operate the Cumberland pipeline and maintain
a 50 percent ownership interest. The estimated total cost of this project is up
to $99 million. Transco expects to make equity investments of up to $24.8
million. Cumberland plans to file for FERC approval of the project during the
first quarter of 1999.
On May 13, 1998, Transco filed an application with the FERC for approval of
its MarketLink Project. Under this project, Transco proposes to construct and
operate mainline and Leidy Line facilities to create an additional 700 MDth per
day of transportation capacity to serve increased demand in the mid-Atlantic and
south-Atlantic regions of the United States by a targeted in-service date of
November 1, 2000. The estimated cost of the proposed facilities is $529 million.
In 1997 Independence Pipeline Company, owned equally by wholly owned
subsidiaries of Transco, ANR Pipeline Company, and National Fuel Gas Company,
filed an application for FERC approval to construct and operate a new pipeline
consisting of approximately 400 miles of 36-inch pipe from ANR's existing
compressor station at Defiance, Ohio, to Transco's facilities at Leidy,
Pennsylvania. In April 1998 Independence notified the FERC that it is revising
its expected in-service date from November 1999 to November 2000, reflecting the
status of its certificate application and the anticipated time required to
construct the pipeline facilities once authorized. Independence's pipeline is
expected to provide approximately 916 MMcf per day of firm transportation
capacity. The estimated cost of the Independence project is $678 million.
Transco estimates that its equity contribution will approximate $68 million
based on its expected one-third ownership interest.
Subsidiaries of Transco, Duke Energy, and KeySpan Energy have formed Cross
Bay(SM) Pipeline Company, L.L.C. The Cross Bay Pipeline Project is designed to
increase natural gas deliveries into the New York City metropolitan area by
installing compression and looping facilities to expand the capacity of
Transco's existing Long Beach lateral pipeline by approximately 121 MMcf per
day. The project is targeted to be operational in the 2000-2001 time frame. The
project is estimated to cost approximately $50 million. Wholly owned
subsidiaries of Transco will operate the Cross Bay pipeline and maintain a 37.5
percent ownership interest. Transco expects to make equity investments of
approximately $5 million in this project.
Buccaneer Gas Pipeline Company, L.L.C., a wholly owned subsidiary of
Transco, announced on March 4, 1999, that it would accept, until March 29, 1999,
requests for firm transportation service to be made available on a proposed new
natural gas pipeline system extending from the Mobile Bay area in Alabama to
markets in Florida. Specifically, Buccaneer anticipates that its pipeline system
will extend from a point near Transco's Station 82 in Coden, Alabama, across the
Gulf of Mexico to the west coast of Florida just north of Tampa. The pipeline
would continue onshore in an easterly direction to serve power generation plants
and other markets across the central part of the state, and will terminate in
Volusia County, Florida. The lateral pipelines will be constructed in accordance
with market demand. The target in-service date for the projects is June 2002.
Buccaneer plans to file for FERC approval of the project in August 1999. The
capital cost of the project will depend upon the level of market commitment
received.
Transco is currently developing the SouthCoast Expansion Project, which it
expects will create additional firm transportation capacity on its system from
the end of Transco's existing Mobile Bay lateral pipeline in Choctaw County,
Alabama, to mainline delivery points in Transco's Rate Zone 4 (Alabama and
Georgia). Transco plans to file for FERC approval of the project during the
first quarter of 1999. The project has a target in-service date of November 1,
2000. Transco expects the cost of this project to approximate $96 million.
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Operating Statistics. The following table summarizes transportation data
for the periods indicated (in TBtus):
<TABLE>
<CAPTION>
TRANSCO SYSTEM DELIVERIES (TBTU) 1998 1997 1996
- -------------------------------- ------- ------- -------
<S> <C> <C> <C>
Market-area deliveries:
Long-haul transportation................................ 857.8 940.2 948.9
Market-area transportation.............................. 522.1 438.9 428.1
------- ------- -------
Total market-area deliveries.................... 1,379.9 1,379.1 1,377.0
Production-area transportation............................ 214.0 242.0 260.7
------- ------- -------
Total system deliveries......................... 1,593.9 1,621.1 1,637.7
======= ======= =======
Average Daily Transportation Volumes...................... 4.4 4.4 4.5
Average Daily Firm Reserved Capacity...................... 5.8 5.5 5.2
</TABLE>
NORTHWEST PIPELINE CORPORATION
Northwest Pipeline is an interstate natural gas transportation company that
owns and operates a natural gas pipeline system extending from the San Juan
Basin in northwestern New Mexico and southwestern Colorado through Colorado,
Utah, Wyoming, Idaho, Oregon, and Washington to a point on the Canadian border
near Sumas, Washington. Northwest Pipeline provides services for markets in
California, New Mexico, Colorado, Utah, Nevada, Wyoming, Idaho, Oregon, and
Washington directly or indirectly through interconnections with other pipelines.
Pipeline System and Customers
At December 31, 1998, Northwest Pipeline's system, having a mainline
delivery capacity of approximately 2.5 Bcf of gas per day, was composed of
approximately 3,900 miles of mainline and branch transmission pipelines and 40
compressor stations having sea level-rated capacity of approximately 307,000
horsepower.
In 1998 Northwest Pipeline transported natural gas for a total of 165
customers. Transportation customers include distribution companies,
municipalities, interstate and intrastate pipelines, gas marketers, and direct
industrial users. The two largest customers of Northwest Pipeline in 1998
accounted for approximately 14.8 percent and 14.1 percent, respectively, of its
total operating revenues. No other customer accounted for more than ten percent
of total operating revenues in 1998. Northwest Pipeline's firm transportation
agreements are generally long-term agreements with various expiration dates and
account for the major portion of Northwest Pipeline's business. Additionally,
Northwest Pipeline offers interruptible transportation service under shorter
term agreements.
As a part of its transportation services, Northwest Pipeline utilizes
underground storage facilities in Utah and Washington enabling it to balance
daily receipts and deliveries. Northwest Pipeline also owns and operates a LNG
storage facility in Washington that provides a needle-peaking service for its
system. These storage facilities have an aggregate delivery capacity of
approximately 973 MMcf of gas per day.
Expansion Projects
The Columbia Gorge project will provide firm transportation between a
Stanfield, Washington, receipt point and a delivery point near Sumas,
Washington, to serve the markets of BC Gas Utility Ltd. (a major gas distributor
in lower British Columbia). Northwest Pipeline has sought regulatory approvals
to complete the first phase of 50,000 Dth per day. Northwest Pipeline filed a
certificate application on May 15, 1998, to complete the first phase and an
amendment (to reflect design cost changes) in the fourth quarter of 1998.
Northwest Pipeline expects this project to cost approximately $18 million.
Northwest Pipeline owns a one-third interest in the Jackson Prairie storage
facility located in the state of Washington. In March 1998 Northwest Pipeline
filed for certificate authority to realign authorized storage capacity for
system balancing by replacing 3.04 Bcf of existing firm storage capacity at the
Clay Basin storage
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facility located in eastern Utah (and 25.3 MMcf per day of associated firm
deliverability) with 1.067 Bcf of Jackson Prairie expansion capacity (and 100
MMcf per day of associated firm deliverability). The FERC order authorizing
expansion of the Jackson Prairie storage facility was received and accepted the
last week of September 1998. The total cost of Northwest Pipeline's one-third
interest in this expansion project is estimated at $10 million with an expected
in-service date of October 1, 1999.
Operating Statistics. The following table summarizes transportation data
for the periods indicated (in TBtus):
<TABLE>
<CAPTION>
1998 1997 1996
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<S> <C> <C> <C>
Transportation Volumes...................................... 732 714 834
Average Daily Transportation Volumes........................ 2.0 2.0 2.3
Average Daily Firm Reserved Capacity........................ 2.6 2.5 2.5
</TABLE>
Transportation volumes declined from 1996 to 1997 as a result of Northwest
Pipeline's sale in late 1996 of a majority of its South End Facilities.
KERN RIVER GAS TRANSMISSION COMPANY
Kern River is an interstate natural gas transportation company that owns
and operates a natural gas pipeline system extending from Wyoming through Utah
and Nevada to California. The system, which commenced operations in February
1992, delivers natural gas primarily to the enhanced oil recovery fields in
southern California. The system also transports natural gas for utilities,
municipalities, and industries in California, Nevada, and Utah.
Pipeline System and Customers
At December 31, 1998, Kern River's system was composed of approximately 707
miles of mainline and branch transmission pipelines and five compressor stations
having a mainline delivery capacity of approximately 700 MMcf of gas per day.
The pipeline system interconnects with the pipeline facilities of another
pipeline company at Daggett, California. From the point of interconnection, Kern
River and the other pipeline company have a common 219-mile pipeline which is
owned 63.6 percent by Kern River and 36.4 percent by the other pipeline company,
as tenants in common, and is designed to accommodate the combined throughput of
both systems. This common facility has a delivery capacity of 1.1 Bcf of gas per
day.
In 1998 Kern River transported natural gas for customers in California,
Nevada, and Utah. Kern River transported gas for reinjection as a part of
enhanced oil recovery in Kern County, California, and for local distribution
customers, electric utilities, cogeneration projects, and commercial and other
industrial customers. The two largest customers of Kern River in 1998 accounted
for approximately 20 percent and 14 percent, respectively, of its total
operating revenues. One of these customers serves the enhanced oil recovery
fields. No other customer accounted for more than ten percent of total operating
revenues in 1998. Kern River transports natural gas for customers under firm
long-term transportation agreements totaling 694 MMcf of gas per day.
Kern River, under an executed firm transportation contract, delivers
natural gas into the Las Vegas, Nevada, market area during the winter months.
Kern River began deliveries of approximately 10 MMcf of gas per day during 1997
and expects to escalate deliveries to 40 MMcf of gas per day on a seasonal basis
by 1999.
Operating Statistics. The following table summarizes transportation data
for the periods indicated, including 1996 and part of 1997 during which Williams
owned less than 100 percent of Kern River (in TBtus):
<TABLE>
<CAPTION>
1998 1997 1996
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<S> <C> <C> <C>
Transportation Volumes...................................... 299 285 281
Average Daily Transportation Volumes........................ .82 .78 .77
Average Daily Firm Reserved Capacity........................ .72 .73 .71
</TABLE>
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TEXAS GAS TRANSMISSION CORPORATION
Texas Gas is an interstate natural gas transportation company that owns and
operates a natural gas pipeline system extending from the Louisiana Gulf Coast
area and eastern Texas and running generally north and east through Louisiana,
Arkansas, Mississippi, Tennessee, Kentucky, and Indiana to Ohio, with smaller
diameter lines extending into Illinois. Texas Gas's direct market area
encompasses eight states in the South and Midwest, and includes the Memphis,
Tennessee; Louisville, Kentucky; Cincinnati and Dayton, Ohio; and Indianapolis,
Indiana, metropolitan areas. Texas Gas also has indirect market access to the
Northeast through interconnections with unaffiliated pipelines.
Pipeline System and Customers
At December 31, 1998, Texas Gas' system, having a mainline delivery
capacity of approximately 2.8 Bcf of gas per day, was composed of approximately
6,000 miles of mainline and branch transmission pipelines and 32 compressor
stations having a sea level-rated capacity totaling approximately 555,000
horsepower.
In 1998 Texas Gas transported natural gas to customers in Louisiana,
Arkansas, Mississippi, Tennessee, Kentucky, Indiana, Illinois, and Ohio, and
indirectly to customers in the Northeast. Texas Gas transported gas for 108
distribution companies and municipalities for resale to residential, commercial,
and industrial end users. Texas Gas provided transportation services to
approximately 21 industrial customers located along its system. At December 31,
1998, Texas Gas had transportation contracts with approximately 595 shippers.
Transportation shippers include distribution companies, municipalities,
intrastate pipelines, direct industrial users, electrical generators, gas
marketers, and producers. The largest customer of Texas Gas in 1998 accounted
for approximately 13.9 percent of its total operating revenues. No other
customer accounted for more than ten percent of total operating revenues in
1998. Texas Gas' firm transportation agreements are generally long-term
agreements with various expiration dates and account for the major portion of
Texas Gas's business. Additionally, Texas Gas offers interruptible
transportation and storage services under agreements that are generally
short-term.
Texas Gas owns and operates gas storage reservoirs in ten underground
storage fields located on or near its system or market areas. The storage
capacity of Texas Gas' certificated storage fields is approximately 177 Bcf of
gas. Texas Gas' storage gas is used in part to meet operational balancing needs
on its system, to meet the requirements of Texas Gas' firm and interruptible
storage customers, and to meet the requirements of Texas Gas' no-notice
transportation service, which allows Texas Gas' customers to temporarily draw
from Texas Gas' storage gas to be repaid in-kind during the following summer
season. A large portion of the gas delivered by Texas Gas to its market area is
used for space heating, resulting in substantially higher daily requirements
during winter months.
Operating Statistics. The following table summarizes transportation data
for the periods indicated (in TBtus):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Transportation Volumes...................................... 752.4 773.6 794.5
Average Daily Transportation Volumes........................ 2.1 2.1 2.2
Average Daily Firm Reserved Capacity........................ 2.2 2.2 2.1
</TABLE>
WILLIAMS GAS PIPELINES CENTRAL, INC.
Central, formerly known as Williams Natural Gas Company, is an interstate
natural gas transportation company that owns and operates a natural gas pipeline
system located in Colorado, Kansas, Missouri, Nebraska, Oklahoma, Texas, and
Wyoming. The system serves customers in seven states, including major
metropolitan areas in Kansas and Missouri, its chief market areas.
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Pipeline System and Customers
At December 31, 1998, Central's system, having a mainline delivery capacity
of approximately 2 Bcf of gas per day, was composed of approximately 6,000 miles
of mainline and branch transmission and storage pipelines and 44 compressor
stations having a sea level-rated capacity totaling approximately 227,000
horsepower.
In 1998 Central transported natural gas to customers in Colorado, Kansas,
Missouri, Nebraska, Oklahoma, Texas, and Wyoming. Central transported gas for 71
distribution companies and municipalities for resale to residential, commercial,
and industrial end users in approximately 530 cities and towns. Central provided
transportation services to approximately 296 industrial customers, federal and
state institutions, and agricultural processing plants located principally in
Kansas, Missouri, and Oklahoma. At December 31, 1998, Central had transportation
contracts with approximately 195 shippers. Transportation shippers include
distribution companies, municipalities, intrastate pipelines, direct industrial
users, electrical generators, gas marketers, and producers.
In 1998 approximately 63 percent of Central's total operating revenues were
generated from gas transportation services to Central's two largest customers,
Kansas Gas Service Company, a division of Oneok, Inc. (approximately 30
percent), and Missouri Gas Energy Company (approximately 33 percent). Kansas Gas
Service Company sells or resells gas to residential, commercial, and industrial
customers principally in certain major metropolitan areas of Kansas. Missouri
Gas Energy sells or resells gas to residential, commercial, and industrial
customers principally in certain major metropolitan areas of Missouri. No other
customer accounted for more than ten percent of operating revenues in 1998.
Central's firm transportation agreements have various expiration dates
ranging from one to 20 years, with the majority expiring in three to eight
years. Additionally, Central offers interruptible transportation services under
shorter term agreements.
Central operates nine underground storage fields with an aggregate gas
storage capacity of approximately 43 Bcf and an aggregate delivery capacity of
approximately 1.2 Bcf of gas per day. Central's customers inject gas into these
fields when demand is low and withdraw it to supply their peak requirements.
During periods of peak demand, approximately two-thirds of the firm gas
delivered to customers is supplied from these storage fields. Storage capacity
enables Central's system to operate more uniformly and efficiently during the
year.
Expansion Projects
Central's largest expansion project in 1998 involved the acquisition of a
petroleum pipeline and conversion of the line to transport 28,000 Dth per day of
natural gas into the St. Louis, Missouri, area. Additionally, Central
constructed a new supply lateral in Hemphill County, Texas, which provided
incremental supply load exceeding 150,000 Dth per day.
Operating Statistics. The following table summarizes transportation data
for the periods indicated (in TBtus):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Transportation Volumes...................................... 329 337 341
Average Daily Transportation Volumes........................ .9 .9 .9
Average Daily Firm Reserved Capacity........................ 2.1 2.1 1.9
</TABLE>
REGULATORY MATTERS
Each interstate natural gas pipeline company has various regulatory
proceedings pending. Each company establishes its rates primarily through the
FERC's ratemaking process. Key determinants in the ratemaking process are (1)
costs of providing service, including depreciation rates, (2) allowed rate of
return, including the equity component of the capital structure, and (3) volume
throughput assumptions. The FERC determines the allowed rate of return in each
rate case. Rate design and the allocation of costs between the demand and
commodity rates also impact profitability. As a result of these proceedings, the
pipeline
9
<PAGE> 11
companies have collected a portion of their revenues subject to refund. See Note
12 of Notes to Consolidated Financial Statements and Management's Discussion &
Analysis of Financial Conditions and Results of Operations for the amount of
revenues reserved for potential refund at December 31, 1998.
Each of the interstate natural gas pipeline companies that were formerly
gas supply merchants have undertaken the reformation of its respective gas
supply contracts. None of the pipeline companies have any significant pending
supplier take-or-pay, ratable-take, or minimum-take claims. After December 31,
1998, Central paid various parties amounts to resolve its three remaining gas
supply contracts. The costs paid to resolve these contracts are presently
subject to certain FERC proceedings. For information on outstanding issues with
respect to contract reformation, gas purchase deficiencies, and related
regulatory issues, see Note 17 of Notes to Consolidated Financial Statements.
COMPETITION
The FERC continues to regulate each of Williams' interstate natural gas
pipeline companies pursuant to the Natural Gas Act and the NGPA. However,
competition for natural gas transportation has intensified in recent years due
to customer access to other pipelines, rate competitiveness among pipelines,
customers' desire to have more than one transporter, and regulatory
developments. Future utilization of pipeline capacity will depend on competition
from other pipelines, use of alternative fuels, the general level of natural gas
demand, and weather conditions. Electricity and distillate fuel oil are the
primary competitive forms of energy for residential and commercial markets. Coal
and residual fuel oil compete for industrial and electric generation markets.
Nuclear and hydroelectric power and power purchased from electric transmission
grid arrangements among electric utilities also compete with gas-fired electric
generation in certain markets.
Suppliers of natural gas are able to compete for any gas markets capable of
being served by pipelines using nondiscriminatory transportation services
provided by the pipeline companies. As the regulated environment has matured,
many pipeline companies have faced reduced levels of subscribed capacity as
contractual terms expire and customers opt to reduce firm capacity under
contract in favor of alternative sources of transmission and related services.
This situation, known in the industry as "capacity turnback," is forcing the
pipeline companies to evaluate the consequences of major demand reductions in
traditional long-term contracts. It could also result in significant shifts in
system utilization, and possible realignment of cost structure for remaining
customers since all interstate natural gas pipeline companies continue to be
authorized to charge maximum rates approved by the FERC on a cost of service
basis.
Williams is aware that several state jurisdictions have been involved in
implementing changes similar to the changes that have occurred at the federal
level. This activity, frequently referred to as "LDC unbundling," has been most
pronounced in New York, New Jersey, Georgia, and Pennsylvania. New York and New
Jersey began establishing LDC unbundling regulations in 1995 and continue to
develop regulations regarding LDC unbundling. Georgia enacted an LDC unbundling
program in 1997. Pennsylvania is currently considering LDC unbundling and may
enact legislation in 1999. In addition, Maryland and Delaware currently have
pilot unbundling programs for industrial, commercial, and residential end-users.
Management expects these regulations to encourage greater competition in the
natural gas marketplace.
OWNERSHIP OF PROPERTY
Each of Williams' interstate natural gas pipeline companies generally owns
its facilities in fee, with certain portions, such as certain offshore
facilities, being held jointly with third parties. However, a substantial
portion of each pipeline companies' facilities is constructed and maintained
pursuant to rights-of-way, easements, permits, licenses, or consents on and
across properties owned by others. Compressor stations, with appurtenant
facilities, are located in whole or in part either on lands owned or on sites
held under leases or permits issued or approved by public authorities. The
storage facilities are either owned or contracted under long-term leases or
easements.
ENVIRONMENTAL MATTERS
Each interstate natural gas pipeline is subject to the National
Environmental Policy Act and federal, state, and local laws and regulations
relating to environmental quality control. Management believes that, with
10
<PAGE> 12
respect to any capital expenditures and operation and maintenance expenses
required to meet applicable environmental standards and regulations, the FERC
would grant the requisite rate relief so that, for the most part, the pipeline
companies could recover these expenditures in their rates. For this reason,
management believes that compliance with applicable environmental requirements
by the interstate pipeline companies is not likely to have a material effect
upon Williams' earnings or competitive position.
For a discussion of specific environmental issues involving the interstate
pipelines, including estimated cleanup costs associated with certain pipeline
activities, see "Environmental" under Management's Discussion and Analysis of
Financial Condition and Results of Operations and "Environmental Matters" in
Note 17 of Notes to Consolidated Financial Statements.
WILLIAMS HOLDINGS OF DELAWARE, INC.
Williams Holdings' energy subsidiaries are engaged in exploration and
production; natural gas gathering, processing, and treating activities; natural
gas liquids transportation; petroleum products transportation and terminal
services; ethanol production and marketing; refining; convenience retailing;
mobile information management systems; fleet fuel management services; and
energy commodity marketing and trading. In addition, these subsidiaries provide
a variety of other products and services to the energy industry. Williams
Holdings' communications subsidiaries own and operate a fiber optic network;
offer data-, voice-, and video-related products; and offer services and customer
premise voice and data equipment, including installation, maintenance, and
integration, nationwide. Williams Holdings' international subsidiaries invest
directly in energy and telecommunications projects primarily in South America
and Australia and development funds in Asia and Latin America. On November 19,
1998, Williams announced its intention to sell a minority interest in its
communications subsidiary, Williams Communications Group, Inc., to the public.
In addition, on February 8, 1999, Williams announced it had entered into an
agreement with SBC Communications under which SBC would acquire the lesser of
the number of shares of common stock valued at $500 million or ten percent of
the common stock of Williams Communications in a private placement expected to
occur simultaneously with the initial public offering. On March 24, 1999,
Williams disclosed that its Board of Directors had authorized the merger of
Williams Holdings with and into Williams and the assumption by Williams of
liabilities and obligations of Williams Holdings. Management expects the merger
to be completed in the second or third quarter of 1999.
WILLIAMS ENERGY SERVICES
Williams Energy is comprised of four major business units: Exploration &
Production, Midstream Gas & Liquids, Petroleum Services, and Energy Marketing &
Trading. Through its business units, Williams Energy engages in energy
production and exploration activities; natural gas gathering, processing, and
treating; natural gas liquids transportation, fractionation, and storage;
petroleum products transportation and terminal services; ethanol production;
refining; convenience retailing; mobile information management systems; fleet
fuel management services; and energy commodity marketing and trading.
Williams Energy, through its subsidiaries, owns 708 Bcf of proved natural
gas reserves located primarily in the San Juan Basin of Colorado and New Mexico
and owns or operates approximately 11,000 miles of gathering pipelines
(including certain gathering lines owned by an affiliate but operated by
Midstream Gas & Liquids), approximately 10,300 miles of natural gas liquids
pipelines, ten gas treating plants, 11 gas processing plants (one of which is
partially owned), 68 petroleum products terminals, two ethanol production
facilities (one of which is partially owned), two refineries, 256 convenience
stores/travel centers, and approximately 9,100 miles of petroleum products
pipeline. Physical and notional volumes marketed and traded by subsidiaries of
Williams Energy approximated 15,873 TBtu equivalents in 1998. Williams Energy,
through its subsidiaries, employs approximately 9,150 employees.
Segment revenues and segment profit for Williams Energy are reported in
Note 19 of Notes to Consolidated Financial Statements herein.
A business description of each of Williams Energy's business units follows.
11
<PAGE> 13
EXPLORATION & PRODUCTION
Williams Energy, through its wholly owned subsidiary Williams Production
Company in its Exploration & Production unit (E&P), owns and operates producing
natural gas leasehold properties in the United States. In addition, E&P is
actively exploring for oil and gas.
Oil and gas properties. E&P's properties are located primarily in the Rocky
Mountains and Gulf Coast areas. Rocky Mountain properties are located in the San
Juan Basin in New Mexico and Colorado, in Wyoming, and in Utah. Gulf Coast
properties are located in Louisiana, east and south Texas, and offshore Gulf of
Mexico.
Gas Reserves. At December 31, 1998, 1997, and 1996, E&P had proved
developed natural gas reserves of 476 Bcf, 362 Bcf, and 323 Bcf, respectively,
and proved undeveloped reserves of 232 Bcf, 238 Bcf, and 208 Bcf, respectively.
Of E&P's total proved reserves, 90 percent are located in the San Juan Basin of
Colorado and New Mexico. No major discovery or other favorable or adverse event
has caused a significant change in estimated gas reserves since year end.
Customers and Operations. At December 31, 1998, the gross and net developed
leasehold acres owned by E&P totaled 312,939 and 131,303, respectively, and the
gross and net undeveloped acres owned were 444,916 and 111,926, respectively. At
December 31, 1998, E&P owned interests in 3,393 gross producing wells (632 net)
on its leasehold lands.
Operating Statistics. The following tables summarize drilling activity for
the periods indicated:
<TABLE>
<CAPTION>
1998 WELLS GROSS NET
---------- ----- ----
<S> <C> <C>
Development
Drilled...................................... 173 46.7
Completed.................................... 173 46.7
Exploration
Drilled...................................... 5 3.1
Completed.................................... 4 2.5
</TABLE>
<TABLE>
<CAPTION>
COMPLETED GROSS NET
DURING WELLS WELLS
--------- ----- -----
<S> <C> <C>
1998......................................... 177 49
1997......................................... 207 35
1996......................................... 65 11
</TABLE>
The majority of E&P's gas production is currently being sold in the spot
market at market prices. Total net production sold during 1998, 1997, and 1996
was 43.2 Bcf, 37.1 Bcf, and 31.0 Bcf, respectively. The average production
costs, including production taxes, per Mcf of gas produced were $.37, $.42, and
$.23, in 1998, 1997, and 1996, respectively. The average wellhead sales price
per Mcf was $1.31, $1.62, and $.98, respectively, for the same periods.
In 1993 E&P conveyed a net profits interest in certain of its properties to
the Williams Coal Seam Gas Royalty Trust. Williams subsequently sold Trust Units
to the public in an underwritten public offering. Williams Holdings owns
3,568,791 Trust Units representing 36.8 percent of outstanding Units.
Substantially all of the production attributable to the properties conveyed to
the Trust was from the Fruitland coal formation and constituted coal seam gas.
Production information reported herein includes E&P's interest in these Units.
MIDSTREAM GAS & LIQUIDS
Williams Energy, through Williams Field Services Group, Inc. and its
subsidiaries (Midstream Gas & Liquids), owns and operates natural gas gathering,
processing, treating, transportation, fractionation, and storage facilities
located in northwestern New Mexico, southwestern Colorado, southwestern Wyoming,
eastern Utah, northwestern Oklahoma, Kansas, northern Missouri, eastern
Nebraska, Iowa, southern Minnesota, Tennessee, and also in areas offshore and
onshore in Texas, Alabama, Mississippi, and Louisiana.
12
<PAGE> 14
Midstream Gas & Liquids also operates gathering facilities, owned by
Transcontinental Gas Pipe Line Corporation, an affiliated interstate natural gas
pipeline company, that are currently regulated by the FERC.
Expansion Projects. During 1998 Midstream Gas & Liquids continued to expand
its operations in the Gulf Coast region through the Mobile Bay and Discovery
projects. Discovery, a 50 percent owned joint venture, began operations during
1997 with the completion of its 150-mile gas gathering system, Larose cryogenic
plant with 600 MMcf per day of capacity, and Paradis fractionation facility with
42,000 bbl per day of capacity. Construction on the Mobile Bay gathering and
processing facilities has remained on schedule, with the processing plant's
commissioning and performance testing expected to begin in the second quarter of
1999. Contracts are currently in place to supply approximately 70 percent of the
processing plant's 600 MMcf per day of capacity. Liquids from this plant will be
handled by three separate joint ventures including the Tri-States Pipeline, a
16.7 percent owned system with a capacity of 80,000 bbl per day, Wilprise
Pipeline, a 33 percent owned system with capacity of 75,000 bbl per day, and a
26.7 percent owned fractionation facility with a capacity of 60,000 bbl per day.
In addition, Midstream Gas & Liquids began construction on an expansion of its
Rocky Mountain natural gas liquids pipeline which will increase capacity from
75,000 bbl per day to 125,000 bbl per day through construction of a 412-mile
pipeline parallel to the existing Mid-America System. Completion is expected in
July 1999.
Customers and Operations. Facilities owned and/or operated by Midstream Gas
& Liquids consist of approximately 11,000 miles of gathering pipelines
(including certain gathering lines owned by Transco but operated by Midstream
Gas & Liquids), ten gas treating plants, 11 gas processing plants (one of which
is partially owned), and approximately 10,300 miles of natural gas liquids
pipeline, of which approximately 1,600 miles are partially owned. The aggregate
daily inlet capacity is approximately 7.9 Bcf for the gathering systems and 6.7
Bcf for the gas processing, treating, and dehydration facilities. Midstream Gas
& Liquids' pipeline operations provide customers with one of the nation's
largest NGL transportation systems, while gathering and processing customers
have direct access to interstate pipelines, including affiliated pipelines,
which provide access to multiple markets.
During 1998 Midstream Gas & Liquids gathered gas for 288 customers,
processed gas for 140 customers, and provided transportation to 87 customers.
The largest customer accounted for approximately 15 percent of total gathered
volumes and 23 percent of processed volumes, and the two largest transportation
customers accounted for 23 percent and 12 percent, respectively, of
transportation volumes. No other customer accounted for more than ten percent of
gathered, processed, or transported volumes. Midstream Gas & Liquids' gathering
and processing agreements with large customers are generally long-term
agreements with various expiration dates. These long-term agreements account for
the majority of the gas gathered and processed by Midstream Gas & Liquids. The
natural gas liquids transportation contracts are tariff-based and generally
short-term in nature with some long-term contracts for system-connected
processing plants.
Operating Statistics. The following table summarizes gathering, processing,
natural gas liquid sales, and transportation volumes for the periods indicated.
The information includes operations attributed to facilities owned by Transco
but operated by Midstream Gas & Liquids.
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Gas volumes:
Gathering (TBtu).......................................... 2,117 2,153 2,155
Processing (TBtu)......................................... 536 520 484
Natural gas liquids sales (millions of gallons)........... 576 551 403
Natural gas liquids transportation (MMBbbl)............... 401 414 397
</TABLE>
PETROLEUM SERVICES
Williams Energy, through wholly owned subsidiaries in its Petroleum
Services unit, owns and operates a petroleum products pipeline system, two
ethanol production plants (one of which is partially owned), and petroleum
products terminals and provides services and markets products related thereto.
Included in this
13
<PAGE> 15
business unit are two refineries, 256 convenience stores/travel centers,
trucking and rail operations for propane and refined products, mobile
information management systems, and fleet fuel management services.
Transportation. A subsidiary in the Petroleum Services unit, Williams Pipe
Line Company, owns and operates a petroleum products pipeline system which
covers an 11-state area extending from Oklahoma to North Dakota and Minnesota
and Illinois. The system is operated as a common carrier offering transportation
and terminalling services on a nondiscriminatory basis under published tariffs.
The system transports refined products and liquified petroleum gases.
At December 31, 1998, the system traverses approximately 7,100 miles of
right-of-way and includes approximately 9,100 miles of pipeline in various sizes
up to 16 inches in diameter. The system includes 77 pumping stations, 22.4
million barrels of storage capacity, and 39 delivery terminals. The terminals
are equipped to deliver refined products into tank trucks and tank rail cars.
The maximum number of barrels that the system can transport per day depends upon
the operating balance achieved at a given time between various segments of the
system. Because the balance is dependent upon the mix of products to be shipped
and the demand levels at the various delivery points, the exact capacity of the
system cannot be stated. In 1998 total system shipments averaged 614 thousand
barrels per day.
An affiliate of Williams Pipe Line, Longhorn Enterprises of Texas, Inc.
(LETI), owns a 31.5 percent interest in Longhorn Partners Pipeline, LP, a joint
venture formed to construct and operate a refined products pipeline from Houston
to El Paso, Texas. Pipeline construction is nearly complete, but operations are
not expected to commence until the third quarter of 1999, pending review and
approval of an environmental assessment. Williams Pipe Line has designed and
constructed and will operate the pipeline, and LETI has contributed a total of
$92.4 million to the joint venture.
On February 25, 1999, Williams Energy announced it had reached an agreement
to purchase Union Texas Petrochemicals Corporation, a wholly owned subsidiary of
ARCO, with a closing expected on March 31, 1999. UTP's assets include a 215-mile
light hydrocarbon transportation and 85-mile olefin pipeline and storage
network, which connects, either directly or indirectly, most major natural gas
liquids producers and olefin consumers in Louisiana. UTP also is the leading
merchant marketer of ethylene in Louisiana and owns and operates a 5/12(th)
interest in a 1.25 billion pounds per year ethylene plant near Geismar,
Louisiana. In connection with the acquisition, the Energy Marketing & Trading
unit anticipates entering into a financial agreement, backed by an A
credit-rated third party, intended to manage the risks related to the earnings
volatility typically associated with ethylene production. The expected cost of
this transaction is $166.5 million.
The operating statistics set forth below relate to the system's operations
for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Shipments (thousands of barrels):
Refined products:
Gasolines.......................................... 131,600 132,428 134,296
Distillates........................................ 72,471 71,694 68,628
Aviation fuels..................................... 10,038 10,557 11,189
LP-Gases........................................... 8,644 13,322 15,618
Lube extracted fuel oil............................ 1,246 7,471 8,555
Crude oil.......................................... -- 31 891
------- ------- -------
Total Shipments............................... 223,999 235,503 239,177
======= ======= =======
Daily average (thousands of barrels).................... 614 645 655
Barrel miles (millions)................................. 61,043 61,086 61,969
</TABLE>
Terminal Services and Development. Williams Energy, through its wholly
owned subsidiary Williams Energy Ventures, provides independent terminal
services to the refining and marketing industries via distribution of petroleum
products through wholly owned and joint interest terminals. WEV owns and/or
operates 29 strategically located independent terminals covering a
thirteen-state area in the South, Southeast, Southwest, and Midwest.
14
<PAGE> 16
The terminals are supplied with refined products and ethanol by barge,
tanker, truck, rail, and various common carrier pipelines. WEV provides
scheduling and inventory management, access to an expanded transportation and
information services network, additive injection services, and custom
terminalling services such as octane and oxygenate blending. On a selective
basis, WEV provides temporary leased storage.
In 1996 WEV acquired a 45.5 percent interest in eight Southeastern
terminals and in 1998 increased that ownership percentage to 68.94 percent. In
late 1997 WEV acquired a terminal in Dallas, Texas, and in 1998 acquired a
terminal in Atlanta, Georgia. In early 1999 WEV purchased 12 terminals in the
Southeast from Amoco and two Memphis, Tennessee, area terminals from Truman
Arnold Companies. These acquisitions have allowed WEV to increase its core
business and to offer multi-market terminal services to its customers.
Terminal barrels delivered for the periods indicated are noted below.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Terminal Barrels Delivered (mbbls).......................... 28,787 17,336 5,426
</TABLE>
Ethanol. WEV is engaged in the production and marketing of ethanol. WEV
owns and operates two ethanol plants of which corn is the principal feedstock.
The Pekin, Illinois, plant has an annual production capacity of 100 million
gallons of fuel-grade and industrial ethanol and also produces various
coproducts. The Aurora, Nebraska, plant (in which WEV owns a 74.9 percent
interest) has an annual production capacity of 30 million gallons. WEV also
markets ethanol produced by third parties. Coproducts, mainly flavor enhancers,
produced at the Pekin plant are marketed primarily to food processing companies.
The sales volumes set forth below include ethanol produced by third parties
as well as by WEV for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Ethanol sold (thousands of gallons)..................... 172,056 145,612 119,800
</TABLE>
Distribution Services. Petroleum Services, through its distribution
services group, provides petroleum trucking, propane trucking, and rail car
operations for Williams Energy and third parties. The petroleum trucking
operation, operated out of Memphis, Tennessee, under the name "GENI Transport,"
works with local jobbers to supply their retail outlets and with several of
Williams Energy's Energy Marketing & Trading unit's wholesale customers to
develop transportation arrangements. GENI Transport is also the primary
transportation provider to Petroleum Services' retail petroleum group. The
propane trucking and rail car operations are the primary transportation
providers for the Energy Marketing & Trading unit's retail propane group.
Refining. Petroleum Services, through its subsidiaries, owns and operates
two refineries: the North Pole, Alaska, refinery and the Memphis, Tennessee,
refinery.
North Pole Refinery. The North Pole Refinery includes the refinery
located at North Pole, Alaska, and a terminal facility at Anchorage,
Alaska. The refinery, the largest in the state, is located approximately
two miles from its supply point for crude oil, the Trans-Alaska Pipeline
System (TAPS). The refinery's processing capability is approximately
215,000 barrels per day. At maximum crude throughput, the refinery can
produce 67,000 barrels per day of refined products. These products are jet
fuel, gasoline, diesel fuel, heating oil, fuel oil, naphtha, and asphalt.
Williams Energy's Energy Marketing & Trading unit markets these refined
products in Alaska, Western Canada, and the Pacific Rim principally to
wholesale, commercial, industrial, and governmental customers and Petroleum
Services' retail petroleum group. The retail petroleum group accounted for
about eight percent of the North Pole Refinery's 1998 product sales volume
and 64 percent of the North Pole Refinery's gasoline production. Petroleum
Services completed construction of a third crude unit at the refinery that
can produce an additional 17,000 barrels per day of refined products,
including 14,000 barrels per day of jet fuel. The new crude unit
construction was completed in October 1998 at a cost of $74.5 million.
15
<PAGE> 17
Average daily throughput and barrels processed and transferred by the
North Pole Refinery per day are noted below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Throughput (bbl)....................................... 142,471 132,238 132,912
Barrels Processed and Transferred (bbl)................ 44,561 42,201 43,392
</TABLE>
The North Pole Refinery's crude oil is purchased through Williams
Energy's Energy Marketing & Trading unit from the state of Alaska or is
purchased or received on exchanges from crude oil producers. The refinery
has a long-term agreement with the state of Alaska for the purchase of
royalty oil, which is scheduled to expire on December 31, 2003. The
agreement provides for the purchase of up to 35,000 barrels per day
(approximately 17 percent of the refinery's supply) of the state's royalty
share of crude oil produced from Prudhoe Bay, Alaska. These volumes, along
with crude oil either purchased from crude oil producers or received under
exchange agreements or other short-term supply agreements with the state of
Alaska, are utilized as throughput in the production of products at the
refinery. Approximately 34 percent of the throughput is refined and sold as
finished product and the remainder of the throughput is returned to the
TAPS and either delivered to repay exchange obligations or sold.
Memphis Refinery. The Memphis Refinery is the only refinery in the
state of Tennessee and has a throughput capacity of approximately 140,000
barrels per day. In January 1998 Petroleum Services completed construction
of a splitter, increasing the refinery's capacity for propylene production
from 2,000 barrels per day to 6,000 barrels per day. In November 1998
Petroleum Services commissioned an expansion of its East Crude Unit
increasing crude production capacity by approximately 20,000 barrels per
day to 140,000 barrels per day. Williams Energy is currently in the process
of making significant plant modifications for further increasing the
refinery's crude oil flexibility. In late 1998 a $123 million project to
increase crude processing capacity of the refinery to 160,000 barrels per
day and construct a 36,000 barrels per day continuous catalyst regeneration
reformer was approved. Both projects are slated for completion in the year
2000 and will enable the refinery to produce 100 percent of customer demand
for premium gasoline in the mid-South region of the United States while
significantly enhancing crude flexibility.
The Memphis Refinery produces gasoline, low sulfur diesel fuel, jet
fuel, K-1 kerosene, propylene, No. 6 fuel oil, propane, and elemental
sulfur. These products are exchanged or marketed primarily in the Mid-South
region of the United States by Williams Energy's Energy Marketing & Trading
unit to wholesale customers, such as industrial, governmental, and
commercial consumers, jobbers, independent dealers, other
refiner/marketers, and to Petroleum Services' retail petroleum group.
The Memphis Refinery has access to crude oil from the Gulf Coast via
common carrier pipeline and by river barges. In addition to domestic crude
oil, the Memphis Refinery has the capability of receiving and processing
certain foreign crudes. During 1998, following the MAPCO merger, Williams
Energy's Energy Marketing & Trading unit purchased all of the crude oil
processed at the Memphis Refinery. Although this method of purchase reduces
the financial effect of volatile crude oil market prices, the financial
results of the Memphis Refinery may be significantly impacted by changes in
the market prices for crude oil and refined products. Petroleum Services
cannot with any assurance predict the future of crude oil and product
prices or their impact on its financial results.
Average daily barrels processed and transferred by the Memphis
Refinery are noted below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Barrels Processed and Transferred (bbl)........ 120,985 113,040 104,129
</TABLE>
Retail Petroleum. Petroleum Services, primarily under the brand names
"Williams TravelCenters" and "MAPCO Express," is engaged in the retail marketing
of gasoline, diesel fuel, other petroleum products, convenience merchandise, and
restaurant and fast food items. The retail petroleum group operates 29
interstate TravelCenter locations and 227 convenience stores. The TravelCenter
sites consist of 11 modern facilities
16
<PAGE> 18
providing gasoline and diesel fuel, merchandise, and restaurant offerings for
both traveling consumers and professional drivers, and 18 locations providing
fuel and merchandise. The convenience store sites are primarily concentrated in
the vicinities of Nashville and Memphis, Tennessee, and the state of Alaska.
MAPCO Express stores represent 38 percent of the convenience store market in
Alaska. All of the motor fuel sold by Williams TravelCenters and MAPCO Express
stores is supplied either by exchanges, directly from either the Memphis or
North Pole Refineries or through Williams Energy's Energy Marketing & Trading
unit.
Convenience merchandise and fast food accounted for approximately 57
percent of the retail petroleum group's gross margins in 1998 and 55 percent in
1997. Gasoline and diesel sales volumes for the periods indicated are noted
below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Gasoline (mgals)........................................ 329,821 292,644 279,708
Diesel (mgals).......................................... 188,401 137,219 147,548
</TABLE>
ENERGY MARKETING & TRADING
Williams Energy, through subsidiaries, primarily Williams Energy Marketing
& Trading Company and its subsidiaries (EM&T), is a national energy services
provider that buys, sells, and transports a full suite of energy commodities,
including natural gas, electricity, refined products, natural gas liquids, crude
oil, propane, liquefied natural gas, and liquified petroleum gas, on a wholesale
and retail level, serving over 300,000 customers. In addition, EM&T provides
price-risk management services through a variety of financial instruments
including exchange-traded futures, as well as over-the-counter forwards, options
and swap agreements related to various energy commodities and provides capital
services to the diverse energy industry. See Note 16 of the Notes to
Consolidated Financial Statements.
EM&T markets natural gas throughout North America and grew its total
volumes (physical and notional) to an average of 27.7 Bcf per day in 1998.
EM&T's core business has traditionally been natural gas marketing in the Gulf
Coast and Eastern regions of the United States, using the pipeline systems owned
by Williams, but also includes marketing on approximately 50 non-Williams'
pipelines. EM&T's natural gas customers include producers, industrials, local
distribution companies, utilities, and other gas marketers.
In February 1999 EM&T and AES Ironwood, L.L.C. executed an amended and
restated 20-year power purchase agreement under which EM&T is to provide fuel to
and market up to approximately 655 megawatts of electricity output from a
generating facility to be built and owned by AES in southern Pennsylvania. In
December 1998 EM&T reached agreement with Hoosier Energy Rural Electric
Cooperative, Inc. to supply a part of its wholesale energy needs and manage its
energy portfolio.
In May 1998 EM&T and The AES Corporation signed a 15-year agreement under
which EM&T provides fuel to and markets up to approximately 4,000 megawatts of
electricity output from three southern California generating sites with 14 units
owned and operated by AES. During 1998 EM&T marketed 16.9 GW per hour (physical
and notional) of electricity.
In 1998 EM&T provided supply, distribution, and related risk management
services to petroleum producers, refiners, and end-users in the United States
and various international regions. During 1998 EM&T's total crude and petroleum
products (physical and notional) marketed averaged 2,153 Mbbl per day. During
1998 EM&T also marketed natural gas liquids with total volumes (physical and
notional) averaging 480.3 Mbbl per day.
EM&T markets and distributes propane and appliances to approximately
300,000 customers at the retail level. Propane is used principally as a fuel in
various domestic, commercial, industrial, agricultural, and vehicle motor fuel
applications. Residential customers, who account for the majority of sales, use
propane for home heating, cooking, and other domestic purposes. The primary
agricultural use is crop drying. Commercial and industrial sales include fuel
for shopping centers and industrial plants. During 1998 EM&T marketed 262.6
million gallons of propane.
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<PAGE> 19
EM&T is currently focusing its retail natural gas and electric business to
concentrate on large end-use customers and away from sales to commercial and
residential customers. See Note 5 of Consolidated Financial Statements.
Operating Statistics. The following table summarizes marketing and trading
volumes for the periods indicated, including propane totals during 1996, 1997,
and a portion of 1998 during which Williams did not own MAPCO:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Average marketing and trading volumes (physical and
notional):
Natural gas (Bcf per day)................................ 27.7 22.3 15.9
Refined products, natural gas liquids, crude (mbbl per
day).................................................. 2,633.3 1,549.0 616.0
Electricity (GWh per hour)............................... 16.9 8.3 0.5
Propane gallons (millions)............................... 262.6 297.2 331.4
</TABLE>
REGULATORY MATTERS
Midstream Gas & Liquids. In May 1994 after reviewing its legal authority in
a Public Comment Proceeding, the FERC determined that while it retains some
regulatory jurisdiction over gathering and processing performed by interstate
pipelines, pipeline-affiliated gathering and processing companies are outside
its authority under the Natural Gas Act. An appellate court has affirmed the
FERC's determination and the United States Supreme Court has denied requests for
certiorari. As a result of these FERC decisions, some of the individual states
in which Midstream Gas & Liquids conducts its operations have considered whether
to impose regulatory requirements on gathering companies. Kansas, Oklahoma, and
Texas currently regulate gathering activities using complaint mechanisms under
which the state commission may resolve disputes involving an individual
gathering arrangement. Other states may also consider whether to impose
regulatory requirements on gathering companies.
In February 1996 Midstream Gas & Liquids and Transco filed applications
with the FERC to spindown all of Transco's gathering facilities to Midstream Gas
& Liquids. The FERC subsequently denied the request in September 1996. Midstream
Gas & Liquids and Transco sought rehearing in October 1996. In August 1997
Midstream Gas & Liquids and Transco filed a second request for expedited
treatment of the rehearing request. The FERC has yet to rule on this request for
rehearing. In February 1998 Midstream Gas & Liquids and Transco filed separate
applications to spindown an onshore gathering system located in Texas, the
Tilden/ McMullen gathering system, which was also one of the subjects of the
pending rehearing request. The FERC has not ruled on this request. In June 1998
the FERC issued a Notice of Inquiry into its policy related to pipeline
facilities located on the Outer Continental Shelf. No policy or rule has been
issued from that proceeding.
Midstream Gas & Liquids' natural gas liquids group is subject to various
federal, state, and local environmental and safety laws and regulations.
Midstream Gas & Liquids' pipeline operations are subject to the provisions of
the Hazardous Liquid Pipeline Safety Act. In addition, the tariff rates,
shipping regulations, and other practices of the Mid-America, Rio Grande, and
Seminole pipelines are regulated by the FERC pursuant to the provisions of the
Interstate Commerce Act applicable to interstate common carrier petroleum and
petroleum products pipelines. The tariff rates and practices of the ammonia
system are regulated by the Surface Transportation Board under the provisions of
the Interstate Commerce Commission Termination Act of 1995 applicable to
pipeline carriers. Both of these statutes require the filing of reasonable and
nondiscriminatory tariff rates and subject Midstream Gas & Liquids to certain
other regulations concerning its terms and conditions of service. The
Mid-America, Rio Grande, and Seminole pipelines also file tariff rates covering
intrastate movements with various state commissions. The United States
Department of Transportation has prescribed safety regulations for common
carrier pipelines. The pipeline systems are subject to various state laws and
regulations concerning safety standards, exercise of eminent domain, and similar
matters.
Petroleum Services. Williams Pipe Line, as an interstate common carrier
pipeline, is subject to the provisions and regulations of the Interstate
Commerce Act. Under this Act, Williams Pipe Line is required,
18
<PAGE> 20
among other things, to establish just, reasonable, and nondiscriminatory rates,
to file its tariffs with the FERC, to keep its records and accounts pursuant to
the Uniform System of Accounts for Oil Pipeline Companies, to make annual
reports to the FERC, and to submit to examination of its records by the audit
staff of the FERC. Authority to regulate rates, shipping rules, and other
practices and to prescribe depreciation rates for common carrier pipelines is
exercised by the FERC. The Department of Transportation, as authorized by the
1995 Pipeline Safety Reauthorization Act, is the oversight authority for
interstate liquids pipelines. Williams Pipe Line is also subject to the
provisions of various state laws applicable to intrastate pipelines.
On December 31, 1989, a rate cap, which resulted from a settlement with
several shippers and had effectively frozen Williams Pipe Line's rates for the
previous five years, expired. Williams Pipe Line filed a revised tariff on
January 16, 1990, with the FERC and the state commissions. The tariff set an
average increase in rates of 11 percent and established volume incentives and
proportional rate discounts. Certain shippers on the Williams Pipe Line system
and a competing pipeline carrier filed protests with the FERC alleging that the
revised rates were not just and reasonable and were unlawfully discriminatory.
Williams Pipe Line elected to bifurcate this proceeding in accordance with the
then-current FERC policy. Phase I of the FERC's bifurcated proceeding provided
Williams Pipe Line the opportunity to justify its rates and rate structure by
demonstrating that its markets were workably competitive. Rates to markets that
were not deemed workably competitive in Phase I required cost justification in
Phase II. Subsequent rate increases filed by Williams Pipe Line were stayed
pending ultimate resolution of Phase II.
In the Phase I proceeding, the FERC found all but 12 of Williams Pipe
Line's markets to be workably competitive and, thus, eligible for market-based
rates. On July 15, 1998, the FERC issued its decision in Phase II finding that
Williams Pipe Line failed to demonstrate that the rates at issue for the 12 less
competitive markets were just and reasonable and that Williams Pipe Line must
roll back those rates to pre-1990 levels and pay refunds with interest to its
shippers. Williams Pipe Line sought rehearing of the July 15, 1998, order and
has been granted leave to stay the order's refund requirement until the FERC
acts on rehearing. A shipper has appealed the Phase I order in the United States
Court of Appeals for the District of Columbia Circuit and the appeal has been
stayed pending the completion of Phase II. Williams Pipe Line took appropriate
reserves in 1998 for the July 15, 1998, order, but continues to believe that
subsequently revised tariffs will be found lawful. See Note 17 of Notes to
Consolidated Financial Statements.
Environmental regulations and changing crude supply patterns continue to
affect the refining industry. The industry's response to environmental
regulations and changing supply patterns will directly affect volumes and
products shipped on the Williams Pipe Line system. Environmental Protection
Agency regulations, driven by the Clean Air Act, require refiners to change the
composition of fuel manufactured. A pipeline's ability to respond to the effects
of regulation and changing supply patterns will determine its ability to
maintain and capture new market shares. Williams Pipe Line has successfully
responded to changes in diesel fuel composition and product supply and has
adapted to new gasoline additive requirements. Reformulated gasoline regulations
have not yet significantly affected Williams Pipe Line. Williams Pipe Line will
continue to attempt to position itself to respond to changing regulations and
supply patterns but cannot predict how future changes in the marketplace will
affect its market areas.
Energy Marketing & Trading. Management believes that EM&T's activities are
conducted in substantial compliance with the marketing affiliate rules of FERC
Order 497. Order 497 imposes certain nondiscrimination, disclosure, and
separation requirements upon interstate natural gas pipelines with respect to
their natural gas trading affiliates. EM&T has taken steps to ensure it does not
share employees or officers with affiliated interstate natural gas pipelines and
does not receive information from affiliated interstate natural gas pipelines
that is not also available to unaffiliated natural gas trading companies.
COMPETITION
Exploration & Production. Williams Energy unit competes with a wide variety
of independent producers as well as integrated oil and gas companies for markets
for its production. E&P has three general phases of operations: acquiring
non-producing properties, developing non-producing properties, and operating
producing properties. In the process of acquiring minerals, the primary methods
of competition are on acquisition price
19
<PAGE> 21
and terms such as duration of the mineral lease, the amount of the royalty
payment, and special conditions related to rights to use the surface of the land
under which the mineral interest lies. In the process of developing
non-producing properties, E&P does not face significant competition. In the
operating phase, the primary method of competition involves operating
efficiencies related to the cost to produce the hydrocarbons from the reservoir.
Midstream Gas & Liquids. Williams Energy competes for gathering and
processing business with interstate and intrastate pipelines, producers, and
independent gatherers and processors. Numerous factors impact any given
customer's choice of a gathering or processing services provider, including
rate, term, timeliness of well connections, pressure obligations, and the
willingness of the provider to process for either a fee or for liquids taken
in-kind. Competition for the natural gas liquids pipelines include other
pipelines, tank cars, trucks, barges, local sources of supply (refineries,
gasoline plants, and ammonia plants), and other sources of energy such as
natural gas, coal, oil, and electricity. Factors that influence customer
transportation decisions include rate, location, and timeliness of delivery.
Petroleum Services. Williams Energy's operations are subject to competition
because Williams Pipe Line operates without the protection of a federal
certificate of public convenience and necessity that might preclude other
entrants from providing like service in its area of operations. Further,
Williams Pipe Line must plan, operate, and compete without the operating
stability inherent in a broad base of contractually obligated or
owner-controlled usage. Because Williams Pipe Line is a common carrier, its
shippers need only meet the requirements set forth in its published tariffs in
order to avail themselves of the transportation services offered by Williams
Pipe Line.
Competition exists from other pipelines, refineries, barge traffic,
railroads, and tank trucks. Competition is affected by trades of products or
crude oil between refineries that have access to the system and by trades among
brokers, traders, and others who control products. These trades can result in
the diversion from the Williams Pipe Line system of volume that might otherwise
be transported on the system. Shorter, lower revenue hauls may also result from
these trades. Williams Pipe Line also is exposed to interfuel competition
whereby an energy form shipped by a liquids pipeline, such as heating fuel, is
replaced by a form not transported by a liquids pipeline, such as electricity or
natural gas. While Williams Pipe Line faces competition from a variety of
sources throughout its marketing areas, the principal competition is other
pipelines. A number of pipeline systems, competing on a broad range of price and
service levels, provide transportation service to various areas served by the
system. The possible construction of additional competing products or crude oil
pipelines, conversions of crude oil or natural gas pipelines to products
transportation, changes in refining capacity, refinery closings, changes in the
availability of crude oil to refineries located in its marketing area, or
conservation and conversion efforts by fuel consumers may adversely affect the
volumes available for transportation by Williams Pipe Line.
Williams Energy's ethanol operations compete in local, regional, and
national fuel additive markets with one large ethanol producer, numerous smaller
ethanol producers, and other fuel additive producers, such as refineries.
The principal competitive forces affecting Williams Energy's refining
businesses are feedstock costs, refinery efficiency, refinery product mix, and
product distribution. Some of Memphis Refinery's competitors can more easily
process sour crudes, and accordingly, are more flexible in the crudes which they
can process. Williams Energy has no crude oil reserves and does not engage in
crude oil exploration, and it must therefore obtain its crude oil requirements
from unaffiliated sources. Williams Energy believes that it will be able to
obtain adequate crude oil and other feedstocks at generally competitive prices
for the foreseeable future.
The principal competitive factors affecting Williams Energy's retail
petroleum business are location, product price and quality, appearance and
cleanliness of stores, and brand-name identification. Competition in the
convenience store industry is intense. Within the travel center industry,
Williams TravelCenters are recognized as leaders in customer service by the
local consumer, traveling consumer, and professional driver. Averaging 10,000
square feet, the facilities seamlessly blend these customer groups, resulting in
greater revenue and income diversification than traditional convenience stores.
Williams Energy intends to construct
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<PAGE> 22
ten new travel centers in 1999, in addition to six sites currently scheduled to
open during the first and second quarters in 1999.
Energy Marketing & Trading. Williams Energy's operations directly compete
with large independent energy marketers, marketing affiliates of regulated
pipelines and utilities, propane wholesalers and retailers, and natural gas
producers. The financial trading business competes with other energy-based
companies offering similar services as well as certain brokerage houses. This
level of competition contributes to a business environment of constant pricing
and margin pressure.
OWNERSHIP OF PROPERTY
The majority of Williams Energy's ownership interests in exploration and
production properties are held as working interests in oil and gas leaseholds.
Williams Energy's gathering and processing facilities and natural gas
liquids pipelines are owned in fee. Midstream Gas & Liquids constructs and
maintains gathering and natural gas liquids pipeline systems pursuant to
rights-of-way, easements, permits, licenses, and consents on and across
properties owned by others. The compressor stations and gas processing and
treating facilities are located in whole or in part on lands owned by
subsidiaries of Williams Energy or on sites held under leases or permits issued
or approved by public authorities.
Williams Energy owns its petroleum pipeline system in fee. However, a
substantial portion of the system is operated, constructed, and maintained
pursuant to rights-of-way, easements, permits, licenses, or consents on and
across properties owned by others. The terminals, pump stations, and all other
facilities of the system are located on lands owned in fee or on lands held
under long-term leases, permits, or contracts. The North Pole Refinery is
located on land leased from the state of Alaska under a long-term lease
scheduled to expire in 2025 and renewable at that time by Williams Energy. The
Anchorage, Alaska, terminal is located on land leased from the Alaska Railroad
Corporation under two long-term leases. The Memphis Refinery is located on land
owned by Williams Energy. Williams Energy owns approximately one-half of the
properties upon which its Retail Petroleum stores are located and leases the
remainder from third parties. Williams Energy management believes its assets are
in such a condition and maintained in such a manner that they are adequate and
sufficient for the conduct of business.
The primary assets of Williams Energy's energy marketing and trading unit
are its term contracts, employees, related systems and technological support,
and 180 Thermogas retail outlets located in 18 states including Alabama,
Arkansas, Colorado, Florida, Illinois, Indiana, Kansas, Michigan, Minnesota,
Missouri, Mississippi, North Carolina, Ohio, Oklahoma, South Dakota, Tennessee,
and Wisconsin.
ENVIRONMENTAL MATTERS
Williams Energy is subject to various federal, state, and local laws and
regulations relating to environmental quality control. Management believes that
Williams Energy's operations are in substantial compliance with existing
environmental legal requirements. Management expects that compliance with
existing environmental legal requirements will not have a material adverse
effect on the capital expenditures, earnings, and competitive position of
Williams Energy. See Note 17 of Notes to Consolidated Financial Statements.
The EPA has named Williams Pipe Line as a potentially responsible party as
defined in Section 107(a) of the Comprehensive Environmental Response,
Compensation, and Liability Act, for a site in Sioux Falls, South Dakota. The
EPA placed this site on the National Priorities List in July 1990. In April 1991
Williams Pipe Line and the EPA executed an administrative consent order under
which Williams Pipe Line agreed to conduct a remedial investigation and
feasibility study for this site. The EPA issued its "No Action" Record of
Decision in 1994, concluding that there were no significant hazards associated
with the site subject to two additional years of monitoring for arsenic in
certain existing monitoring wells. Williams Pipe Line completed monitoring in
the second quarter of 1997 and submitted a report of results to the EPA, which
published a Notice of Intent to delete the Sioux Falls site in the January 4,
1999, Federal Register. The public comment
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<PAGE> 23
period has ended with no significant comments needing to be addressed. Williams
Pipe Line expects a closure letter from the EPA in the near future, which will
effectively complete the EPA's interest in the site.
Groundwater monitoring and remediation are ongoing at both refineries and
air and water pollution control equipment is operating at both refineries to
comply with applicable regulations. The Clean Air Act Amendments of 1990
continue to impact Williams Energy's refining businesses through a number of
programs and provisions. The provisions include Maximum Achievable Control
Technology rules which are being developed for the refining industry, controls
on individual chemical substances, new operating permit rules and new fuel
specifications to reduce vehicle emissions. The provisions impact other
companies in the industry in similar ways and are not expected to adversely
impact Williams Energy's competitive position.
WILLIAMS COMMUNICATIONS GROUP, INC.
Williams Communications is comprised of three business units: Network,
which owns and operates Williams Communications' fiber optic network; Solutions,
which provides customer-premise voice and data equipment, sales, and services
including installation, integration, and maintenance; and Applications, which
provides video services and other multimedia services for the broadcast
industry, advertising distribution, business television applications, audio-,
and video-conferencing services for businesses. In Canada, Solutions operates
through its subsidiary, WilTel Communications (Canada), Inc. In 1998 Williams
Communications sold the product business segment of Williams Learning Network,
Inc. and withdrew from the Business Channel partnership. See Note 5 of Notes to
Consolidated Financial Statements. Williams Communications also enters into
strategic alliances and makes strategic investments in order to secure
long-term, high volume customer contracts and gain additional capabilities to
better serve its customers.
Williams Communications and its subsidiaries own approximately 19,000-route
miles of fiber optic communications network (with an additional 13,000-route
miles planned or under construction), maintain 120 offices primarily across
North America, but also in London, Singapore, and Australia, and service
approximately 100,000 customer sites. In addition, Williams Communications owns
four teleports in the United States and has rights to capacity on domestic and
international satellite transponders. Williams Communications employed
approximately 8,300 employees as of December 31, 1998.
Consolidated segment revenues by business unit and segment profit/loss for
Williams Communications were as follows for 1998 (dollars in millions):
<TABLE>
<S> <C>
Segment revenues:
Solutions............................................... $1,366.8
Network................................................. 194.9
Applications............................................ 206.5
--------
Total................................................... $1,768.2
========
Segment loss.............................................. $ (175.0)
========
</TABLE>
A business description of each of Williams Communications' business units
follows.
NETWORK
The Network unit of Williams Communications, through Williams
Communications, Inc., owns and operates approximately 19,000-route miles of
fiber optic communications network, 10,000-route miles of which are restricted
until July 1, 2001, to multi-media applications including Internet services, and
4,300-route miles of which are not restricted and were acquired from IXC
Communications. Network has constructed an unrestricted network along a 1,600
mile route from Houston to Washington, D.C., in proximity to pipeline
right-of-way owned by an affiliated company. In addition, Williams
Communications, Inc. also owns an interest in a joint venture constructing a
1,600-mile fiber optic network on a route connecting Portland, Salt Lake City,
and Las Vegas with a dark fiber agreement extending the network to Los Angeles.
"Dark fibers" are optical fibers contained within fiber-optic cables installed
along Williams' rights-of-way,
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<PAGE> 24
which do not have transmission equipment attached. Purchasers of the right to
use dark fibers connect their own transmission equipment and transmit their own
communications signals over the fibers. Williams Communications, Inc. has also
acquired a 350-mile fiber network in Florida and plans to construct additional
fiber to connect the Florida network to its existing network in the Southeast
and to construct a new fiber route in the midwest region of the United States
from Chicago westward. Network has ultimate plans for a 32,000-route mile
network.
In January 1998, upon the expiration of the non-compete agreement related
to Williams' 1995 sale of its network services operations, Williams
Communications announced that it was re-entering the long-distance
communications market as a wholesale provider of telecommunications services.
Network serves companies that are communications carriers, including long
distance telephone companies, local telephone service providers, Internet
service providers, and utilities entering the telecommunications market. Network
provides these customers with a full range of carrier services, including
nationwide transmission of telecommunications signals, Internet transmission
services, the origination and termination of a long distance call, local access
services, consulting, and operational assistance services.
Customers. Network's customers are primarily other carriers. Network is a
carrier to other telecommunications companies, providing dedicated line and
switched services to other carriers over its owned or leased fiber optic network
facilities. Network's customers currently include regional bell operating
companies, Internet service providers, other local service providers, utilities,
and competitive local access providers and other providers who desire high speed
connectivity to the Internet; asynchronous transfer mode (ATM), which is a
switching and transmission technology based on sending various types of
information, including voice, data, and video, in packets; or frame relay;
private lines; or long distance voice services on a wholesale basis. Sales to
Intermedia Communications Inc. accounted for approximately 82.5 percent of
Network's revenues in 1998. Sales to the next three largest customers accounted
for approximately 13.5 percent of Network's revenues in 1998.
Strategic Alliances. Effective January 1998 Network entered into an
agreement with US West, which provides that the two companies will work together
to provide data networking services and vertical applications to a variety of
customers. US West has agreed to use Network on a preferred provider basis
through 2002 and is required to purchase at least $36.6 million of services and
equipment from Network over the five-year term.
Network also entered into an agreement with Concentric Network Corporation
to provide wholesale communications services. Williams Communications owns
approximately 16 percent of Concentric. Under the agreement with Concentric,
Concentric has agreed to purchase either services or equipment from Network or
Solutions, respectively, valued at a minimum of $21 million over the five-year
contract term. Concentric has also agreed that Network or Solutions,
respectively, will be its preferred provider for these services and equipment.
In April 1998 Intermedia Communications Inc. purchased a 20-year
indefeasible right of use for Network's nationwide transmission capacity with a
value of approximately $450 million. An indefeasible right of use is an
exclusive, indefeasible right to use the specified property for a term
essentially representing the economic life of the property. The $450 million
represents the present value of the minimum amount Intermedia will pay over the
life of the agreement. Network will provide Intermedia with transmission
capacity at rates up to 9.952 billion bits per second.
In October 1998 Network purchased shares of preferred stock of UniDial
Communications, Inc. for a purchase price of $27 million. Dividends begin to
accrue at the rate of ten percent per annum beginning October 1, 1999. The
shares are convertible into shares of common stock under certain circumstances,
with Network's resulting percentage of UniDial being subject to various formulas
and timing elements. UniDial markets a variety of long distance and other
communications products including frame relay, Internet, and conferencing
services. UniDial has agreed to use Network as a preferred provider and has also
agreed to allow Solutions to sell UniDial's products and services at competitive
prices and for UniDial to handle the billing and collection relating to
Solution's sales of their services.
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<PAGE> 25
On December 17, 1998, Network entered into two agreements with WinStar
Wireless, Inc., a provider of communications services that uses wireless
technology to provide high capacity local exchange and Internet access services
to companies located in buildings not served by fiber optic cable. The
agreements give Network a 25-year right to use approximately two percent of
WinStar's wireless capacity in exchange for installment payments totalling $400
million over approximately two years, and give WinStar a 25-year right to use
four strands of Network's fiber over 15,000-route miles in exchange for a seven
year $476 million obligation.
In February 1999 Network entered into a strategic alliance with SBC
Communications under which Network will be SBC's preferred provider for domestic
voice and data long distance services for 20 years, SBC will be Network's
preferred provider for selected international wholesale services, toll-free
operator, calling card, and directory assistance services for 20 years,
Solutions will sell SBC's products to its customers, and SBC may sell Network's
services to its customers. Additionally, SBC agreed to make an equity investment
by purchasing the lesser of $500 million or ten percent of the common stock of
Williams Communications at the time of the initial public offering.
SOLUTIONS
The Solutions unit of Williams Communications, operated primarily through
Williams Communications Solutions, LLC (WCS), provides services and sells and
installs equipment for the voice, video, and data networks of its customers. WCS
was formed in April 1997 following the merger of subsidiaries of Williams
Communications and Northern Telecom, Inc. Williams Communications now holds a 70
percent interest in WCS, and Northern Telecom owns the remaining 30 percent.
Williams Communications continues to address challenges following the
combination related to integration of software systems, related processes, and
business issues.
Williams Communications, through subsidiaries including WCS, serves
customers at approximately 100,000 business locations throughout the United
States consisting of small, medium, and large businesses and governmental,
educational, and non-profit institutions. Solutions' customer base ranges from
large, publicly-held corporations and the federal government to small,
privately-owned entities. Solutions' top 25 customers combined accounted for
approximately 12 percent of its revenue in 1998. Solutions' employs
approximately 6,400 employees, including sales employees, billable engineers,
design specialists, and service technicians.
Solutions also helps its customers reduce the complexity and cost of their
communications decisions by combining components from a variety of manufacturers
into the communications solutions required by its customers. Solutions' broad
range of voice, video, and data solutions allow Solutions to serve as a
single-source provider for its customers' communications needs. Solutions
distributes the products and services of a number of leading communications
suppliers including Nortel, SBC Communications, Cisco Systems, Lucent
Technologies, NEC, US West, and Bell Atlantic. Solutions also provides service
and maintenance support for these products.
Operating Statistics. The following table summarizes the results of
operations for the Solutions unit of Williams Communications for the periods
indicated (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Segment revenues................................. $ 1,366.8 $ 1,206.5 $ 568.1
Percentage of revenues by type of service:
New system sales............................... 43% 52% 40%
System modifications........................... 34 28 34
Maintenance.................................... 22 19 24
Other.......................................... 1 1 2
Backlog.......................................... $ 227.0 $ 202.5 $ 112.2
Segment profit (loss)............................ $ (54.1) $ 47.3 $ 14.3
</TABLE>
In 1998 Solutions derived approximately 56 percent of its revenues from its
existing customer base through system modifications and maintenance and
approximately 43 percent from the sale of new
24
<PAGE> 26
telecommunications systems to its existing customer base and new customers.
Solutions' three largest suppliers accounted for approximately 91 percent of
equipment sold in 1998. A single manufacturer, Northern Telecom, supplied
approximately 83 percent of all equipment sold. In this case, WCS is the largest
independent distributor in the United States of certain of this company's
products. The distribution agreement with this supplier is scheduled to expire
at the end of 2000. Management believes there is minimal risk as to the
availability of products from suppliers.
APPLICATIONS
Vyvx
Vyvx, an unincorporated business unit of Williams Communications, Inc.,
offers broadcast-quality television and multimedia transmission services
nationwide by means of Network's 19,000-mile multimedia network, four satellite
teleport facilities located near Atlanta, Denver, Los Angeles, and New York, and
satellite transponder capacity. Vyvx primarily provides backhaul or
point-to-point transmission of sports, news, and other programming between two
or more customer locations. With satellite facilities, Vyvx provides point-
to-multipoint transmission service. Vyvx's customers include all of the major
broadcast and cable networks. Vyvx is also engaged in the business of
advertising distribution and is exploring other multimedia communication
opportunities.
Conferencing
Global Access, offers multi-point videoconferencing and audioconferencing,
as well as single point to multi-point business television services. Global
Access enables Williams Communications to provide customers with integrated
media conferences, bringing together voice and video by utilizing Williams
Communications' existing fiber-optic and satellite services.
In 1998 Williams Communications withdrew from The Business Channel, a joint
venture with the Public Broadcast Services (PBS). See Note 5 of Notes to
Consolidated Financial Statements.
REGULATORY MATTERS
Network. Williams Communications, Inc. is subject to Federal Communications
Commission regulations as a common carrier with regard to certain of its
transmission services and is subject to the laws of certain states governing
public utilities. An FCC rulemaking to eliminate domestic, common carrier
tariffs has been stayed pending judicial review. In the interim, the FCC is
requiring such carriers to operate under traditional tariff rules. Operations of
intrastate microwave communications, satellite earth stations, and certain other
related transmission facilities are also subject to FCC licensing and other
regulations. These regulations do not significantly impact Williams
Communications, Inc.'s operations. In 1997 the FCC began implementation of the
Universal Service Fund contemplated in the Telecommunications Act of 1996.
Williams Communications, Inc. is required to contribute to this fund based upon
certain revenues. Although Williams Communications, Inc. intends to pass on such
charges to its customers, FCC rulings raise questions about the right of
companies like Williams Communications, Inc. to do so.
Solutions. The equipment WCS sells must meet the requirements of Part 68 of
the FCC rules governing the equipment registration, labeling and connection of
equipment to telephone networks. WCS relies on the equipment manufacturers'
compliance with these requirements for its own compliance regarding the
equipment it distributes. These regulations have a minimal impact on WCS'
operations.
COMPETITION
Network. In the market for network transmission services, Williams
Communications faces competition from three major facilities-based long distance
fiber optic network companies. In addition, several other companies have just
completed or are in the process of constructing regional and nationwide fiber
optic networks that will compete with Williams Communications in the wholesale
network market. Because Williams Communications has focused its efforts on the
market for wholesale network services, it does not
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compete with these networks in the retail sector of the market. Network intends
to compete by being the lowest cost provider in the market for technologically
advanced network services and by pursuing only wholesale opportunities. By
avoiding the retail market, it seeks to avoid the situation of competing with
its customers who purchase wholesale services for resale in the retail market.
Federal telecommunications reform legislation enacted in February 1996 is
designed to increase competition both in the long distance market and local
exchange market by significantly liberalizing current restrictions on market
entry. In particular, the legislation establishes procedures permitting Regional
Bell Operating Companies to provide long distance services including, but not
limited to, video transmission services, subject to certain restrictions and
conditions precedent. Moreover, electric and gas utilities may provide
telecommunications services, including long distance services, through separate
subsidiaries. The legislation also calls for elimination of federal tariff
filing requirements and relaxation of regulation over common carriers. At this
time, management cannot predict the impact such legislation may have on
Networks' operations.
The Regional Bell Operating companies continue to seek regulatory approval
to provide national long distance services. As courts or regulators remove
restrictions on the Regional Bell Operating Companies, they will be both
important potential customers and important potential competitors of Network. If
Regional Bell Operating Companies are permitted to compete in the market for
long-distance services, they will require nationwide fiber networks to provide
services. If any such Regional Bell Operating Company chooses to contract with
Williams Communications for use of its network, it could create opportunities
for Williams Communications to sell fiber or to lease long distance, high volume
capacity. If any such Regional Bell Operating Company chooses either to
construct its own network or to contract with one of Williams Communications'
competitors, it would be in a position to provide nationwide long distance
services in direct competition with Williams Communications.
Solutions. For the Solutions business, Williams Communications is the
largest independent provider of integrated communications solutions to
businesses throughout North America. Though 30 percent owned by Northern
Telecom, Solutions maintains strong relationships with other manufacturers of
products that it sells to its customers. Solutions' competitors include
communications equipment distributors, network integrators, and manufacturers of
equipment (including in some instances those manufacturers whose products
Solutions also sells). WCS has many competitors ranging from Lucent
Technologies, Siemens, and Cisco Systems to small individually-owned companies
that sell and service customer-premise equipment. Because WCS sells and installs
equipment manufactured by third parties and provides maintenance services on the
equipment it sells, it seeks to compete by giving customers their choice of high
quality, technologically advanced equipment along with high quality service.
Applications. Vyvx's video and multimedia transmission operations compete
primarily with companies offering video or multimedia transmission services by
means of satellite facilities and to a lesser degree with companies offering
transmission services via microwave facilities or fiber-optic cable. Vyvx
competes by providing high quality services in its niche market.
OWNERSHIP OF PROPERTY
Network. Williams Communications owns part of the fiber-optic transmission
facilities and leases the remainder. Approximately 10,000-route miles of its
owned facilities are comprised of a single fiber, which is on a portion of the
fiber optic network of MCI WorldCom, Inc. and is restricted until July 1, 2001,
to multimedia content usage. Williams Communications retained this fiber when a
predecessor of MCI WorldCom purchased Williams Communications' network services
operations in 1995. Williams Communications carries signals by means of its own
fiber-optics facilities, as well as carrying signals over fiber-optic facilities
leased from third-party interexchange carriers and the various local exchange
carriers. Williams Communications holds its satellite transponder capacity under
various agreements. Williams Communications owns part of its teleport facilities
and holds the remainder under either a management agreement or long-term
facilities leases.
Network intends to obtain capacity primarily by means of the fiber optic
networks Williams Communications is constructing or plans to construct or
acquire, as well as acquiring dark fiber rights on fiber optic
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facilities of other carriers. Network obtains dark fiber rights in the form of
the purchase or lease of "indefeasible rights of use" or "IRUs" in specific
fiber strands. Purchased IRUs have many of the characteristics of ownership,
including many of the associated risks, but the owner of the fiber optic cable
retains legal title to the fibers. Specifically, an IRU is an exclusive,
indefeasible right to use the specified property for a term essentially
representing the economic life of the property. The grant of an IRU transfers
the risks and rewards of ownership but does not convey title, ownership, or
rights of possession in the network, the individual fibers comprising the
network, the related right-of-way agreements, or any other real or personal
property. The transferee of an IRU typically has a right to retake possession at
the end of the contract term, which generally exceeds 20 years.
ENVIRONMENTAL MATTERS
Williams Communications is subject to federal, state, and local laws and
regulations relating to the environmental aspects of its business. Management
believes that Williams Communications' operations are in substantial compliance
with existing environmental legal requirements. Management expects that
compliance with such existing environmental legal requirements will not have a
material adverse effect on the capital expenditures, earnings, and competitive
position of Williams Communications.
WILLIAMS INTERNATIONAL COMPANY
Williams International Company, through subsidiaries, has made direct
investments in energy and telecommunications projects primarily in South America
and Australia and continues to explore and develop additional projects for
international investment. Williams International also has investments in energy,
telecommunications, and infrastructure development funds in Asia and Latin
America.
El Furrial. Williams International owns a 67 percent interest in a venture
near the El Furrial field in eastern Venezuela that constructed, owns, and
operates medium and high pressure gas compression facilities for Petroleos de
Venezuela (PDVSA), the state owned petroleum corporation of Venezuela.
The medium pressure facility compresses 130 MMcf per day of raw natural gas
from 100 to 1,200 p.s.i.g. for delivery into a natural gas processing plant
owned by PDVSA. The high pressure facility compresses 450 MMcf per day of
processed natural gas from 1,100 to 7,500 p.s.i.g. for injection into PDVSA's El
Furrial producing field.
The medium pressure facility began operations in November 1997. The high
pressure facility began operations in September 1998. An expansion of the high
pressure facility to 650 MMcf per day is underway, and Williams International
anticipates that the expansion will be complete in the second half of 1999.
Jose Terminal. In November 1998 a consortium in which Williams
International owns 45 percent, entered into an agreement with PDVSA to purchase
the Jose Terminal, an 800,000 Bbp per day petroleum storage and shiploading
facility in northeastern Venezuela, for a 20-year renewable term. As part of the
transaction, PDVSA, directly and indirectly through its partners, has committed
to store and shipload an average of 873,000 Bbp per day of crude oil during the
first 20 years of the transaction. The interim operations began in the first
quarter of 1999, and formal closing is expected in the second quarter of 1999.
Apco Argentina. Williams International also owns an interest in Apco
Argentina Inc., an oil and gas exploration and production company with
operations in Argentina. Apco Argentina's principal business is its 47.6 percent
interest in the Entre Lomas concession in southwest Argentina. It also owns a 45
percent interest in the Canadon Ramirez concession and a 1.5 percent interest in
the Acambuco concession.
At December 31, 1998, 1997, and 1996, estimated developed, proved reserves
net to Apco Argentina were 15.5, 23.7, and 24.2 million barrels, respectively,
of oil, condensate, and plant products, and 26.8, 35.8, and 44.3 Bcf,
respectively, of natural gas. Estimated undeveloped, proved reserves net to Apco
Argentina were 5.1, 9.5, and 10.5 million barrels, respectively, of oil,
condensate, and plant products, and 700 MMcf, 800 MMcf, and 2.5 Bcf,
respectively, of natural gas.
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At December 31, 1998, the gross and net developed concession acres owned by
Apco Argentina totaled 37,140 acres and 17,093 acres, respectively, and the
gross and net undeveloped concession acres owned were 504,860 acres and 115,493
acres, respectively. At December 31, 1998, Apco Argentina owned interests in 452
gross producing wells and 212 net producing wells on its concession acreage.
Total net production sold during 1998, 1997, and 1996 was 1.7, 1.8, and 1.6
million barrels, respectively, of oil, condensate, and plant products, and 7.7,
7.7, and 8.4 Bcf, respectively, of natural gas. The average production costs,
including all costs of operations such as remedial well workovers and
depreciation of property and equipment, per barrel of oil produced were $9.09,
$8.27, and $8.15, respectively, and per Mcf of natural gas produced were $.23,
$.21, and $.22, respectively. The average wellhead sales price per barrel of oil
sold were $12.71, $19.52, and $20.87, respectively, and per Mcf of natural gas
sold were $1.33, $1.34, and $1.33, respectively, for the same periods.
Lightel and Brazilian Cellular Project. Williams International owns a 20
percent equity interest in Lightel, S.A., a company that owns interests in a
local exchange carrier, a cable television company, and cellular telephone
companies in Brazil. In April 1998 Williams International participated in
Lightel's acquisition of licenses to provide cellular telephone service in the
States of Sao Paulo, Rio de Janeiro, and Espirito Santo by issuing convertible
debt to Lightel to help fund the investment and by directly investing in
ATL -- Algar Telecom Leste, S.A. which holds the Rio de Janeiro and Espirito
Santo concession in exchange for a 30 percent equity ownership interest in ATL.
Construction on the cellular network began in 1998 and is expected to be
complete in the first quarter of 1999. In February 1999 Williams International
exercised its right of first refusal to acquire an additional 35 percent equity
interest in ATL. Management anticipates completing the transaction before the
end of the first quarter of 1999.
PowerTel. In August 1998 Williams International closed a transaction under
which it will eventually own an approximate 45 percent direct and 2.4 percent
indirect interest in PowerTel Limited (a publicly traded corporation in which
three Australian electric utilities will own a 30 percent interest) to build,
own, and operate a fiber optic telecommunications network in Australia serving
the cities of Brisbane, Sydney, and Melbourne, as well as other cities.
Engineering and construction work on the network began in the fourth quarter of
1998, and commercial operations are expected to commence midyear 1999.
MetroCom. In March 1999 Williams International plans to acquire a 19.9
percent equity interest in Metrocom, S.A., a Chilean company formed by Metrogas,
S.A., to build, own, and operate a telecommunications network providing
high-quality, low-cost local, Internet, data, and voice services to businesses
and residences in the Santiago metropolitan area, focusing on the commercial and
high-end residential markets. Metrogas, S.A., whose shareholders consist of
several large international and Chilean electric utilities and energy companies,
is installing a natural gas distribution network in Santiago along with
telecommunications ducts for the installation of the fiber optic network. The
estimated cost of the investment is approximately U.S. $24.5 million.
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OTHER INFORMATION
Williams believes that it has adequate sources and availability of raw
materials to assure the continued supply of its services and products for
existing and anticipated business needs. Williams' pipeline systems are all
regulated in various ways resulting in the financial return on the investments
made in the systems being limited to standards permitted by the regulatory
bodies. Each of the pipeline systems has ongoing capital requirements for
efficiency and mandatory improvements, with expansion opportunities also
necessitating periodic capital outlays.
At December 31, 1998, Williams had approximately 21,011 full-time
employees, of whom approximately 1,842 were represented by unions and covered by
collective bargaining agreements. In September 1998 Williams created three new
companies in order to streamline payroll processing and reduce costs. In
connection with this, Williams transferred its employees to one of these
companies, and the employees are now jointly employed by Williams and one of
these new companies. This change had no impact on Williams' management structure
or on its employees' seniority and benefits. Williams considers its relations
with its employees to be generally good.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Williams believes these
forward-looking statements are based on reasonable assumptions, it cannot give
any assurance that it will reach every objective. Williams is making these
forward-looking statements in reliance on the safe harbor protections provided
under the Private Securities Litigation Reform Act of 1995.
As required by the Act, Williams identifies the following important factors
that could cause actual results to differ materially from any results projected,
forecasted, estimated, or budgeted:
- changes in general economic conditions in the United States
- changes in laws and regulations to which Williams is subject, including
tax, environmental, and employment laws and regulations
- the cost and effects of legal and administrative claims and proceedings
against Williams or its subsidiaries
- conditions of the capital markets Williams utilizes to access capital to
finance operations
- the ability to raise capital in a cost effective way
- Year 2000 readiness of Williams, its customers, and its vendors
- the effect of changes in accounting policies
- the ability to manage rapid growth
- the ability to control costs
- changes in foreign economies, laws, and regulations, especially in
Brazil, Argentina, Venezuela, and Australia where Williams has made
direct investments
- political developments in foreign countries, especially in Brazil,
Argentina, Venezuela, and Australia where Williams has made direct
investments
- the impact of future federal and state regulations of business
activities, including allowed rates of return, the pace of deregulation
in retail natural gas and electricity markets, and the resolution of
other regulatory matters discussed herein
- fluctuating energy commodity prices
- fluctuating corn prices, which affect Williams' ethanol business
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- the ability of Williams' energy businesses to develop expanded markets
and product offerings as well as their ability to maintain existing
markets
- future utilization of pipeline capacity will depend on energy prices,
competition from other pipelines and alternate fuels, the general level
of natural gas and petroleum product demand, decisions by customers not
to renew expiring natural gas transportation contracts, and weather
conditions
- the accuracy of estimated hydrocarbon reserves and seismic data
- successful completion of the communications network build
- the ability to successfully market capacity on the communications network
- technological developments, high levels of competition, lack of customer
diversification, and general uncertainties of governmental regulation in
the communications industry
- significant competition on pricing and product offerings for the
Communications Solutions business unit
- the ability of the Communications Solutions business unit to introduce
and market competitive products and services
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Williams has no significant amounts of revenue or segment profit or loss
attributable to export sales. See Item 1(c) for a description of Williams
Energy's and Williams International's export sales activities.
ITEM 2. PROPERTIES
See Item 1(c) for description of properties.
ITEM 3. LEGAL PROCEEDINGS
For information regarding certain proceedings pending before federal
regulatory agencies, see Note 17 of Notes to Consolidated Financial Statements.
Williams is also subject to other ordinary routine litigation incidental to its
businesses.
Contract reformations and gas purchase deficiencies
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, 636-C, and
636-D costs incurred to comply with these rules are permitted to be recovered in
full, although a percentage of the costs must be allocated to interruptible
transportation service.
Pursuant to a stipulation and agreement approved by the FERC, Williams Gas
Pipelines Central, Inc. has made 15 filings to recover take-or-pay and gas
supply realignment costs of $78.9 million from its customers. An intervenor
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's decision and determined that three contracts were imprudently
entered into in 1982. Central has filed for rehearing, and management is
vigorously defending the prudency of these contracts. An intervenor also filed a
protest seeking to have the FERC decide whether non-settlement costs are
eligible for recovery under Order No. 636. In January 1997 the FERC held that
none of the non-settlement costs and only 75 percent of settlement costs could
be recovered by Central if the costs were not eligible for recovery under Order
No. 636. This order was affirmed on rehearing in April 1997. On June 16, 1998, a
FERC administrative law judge issued an initial decision finding that Central
had not met all the tests necessary to show that these costs were eligible for
recovery under Order No. 636. On July 20, 1998, Central filed exceptions to the
administrative law judge's decision, which in turn must be acted upon by the
FERC. If the FERC's final ruling on eligibility is
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unfavorable, Central will appeal those orders to the courts. On May 29, 1998,
the FERC approved an Order which permitted Central to conduct a reverse auction
of the gas purchase contracts which are the subject of the prudence challenges
outlined above. No party bid less than the reserve price in the approved auction
and, as a result, the contracts were not assigned. In accordance with the FERC's
Orders, on September 30, 1998, Central filed a request for authority to conduct
a second reverse auction of the contracts. Under the approved reverse auction,
Central was granted authority to assign the contracts to bidders at or below an
aggregate reserve price of $112.6 million. If no unaffiliated bidders were
willing to accept assignment on those terms, Central was authorized to assign
the contracts to an affiliate and recover $112.6 million from its customers
subject to the outcome of the prudence and eligibility cases described above.
Central was also authorized to assign the contracts to unaffiliated parties and
then file to recover the total cost of the assignment. The FERC also approved an
extension of the recovery mechanism for non-settlement costs through February 1,
1999.
Through the end of the third quarter, Williams and Central were unable to
reasonably estimate the ultimate costs to be incurred because of the
uncertainties pertaining to the outcome of issues pending at the FERC and the
status of settlement negotiations with producers. However, on January 21, 1999,
Central assigned its obligations under the largest of the three contracts to an
unaffiliated third party and paid the third party $100 million. Central also
agreed to pay the third party $18 million in equal installments over the next
five years. Central received indemnities from the third party and a release of
its obligations under the contract. No parties submitted bids at the second
reverse auction, and in accordance with the tariff provisions for the reverse
auction, Central assigned the two smaller contracts to an affiliate effective
February 1, 1999. As a result of these assignments, Central has no remaining
market price gas contracts. Central will file with the FERC to recover all
costs, approximately $126 million, relative to the three contracts. At December
31, 1998, Central has accrued a liability related to these contracts of $122.2
million.
During the fourth quarter and continuing into 1999, Central has been
negotiating with the FERC and state regulators to resolve the amount of costs
which are recoverable from its customers. As a result of these negotiations,
Central expensed $58 million of costs previously expected to be recovered and
capitalized as a regulatory asset. At December 31, 1998, Central has $61.4
million remaining regulatory asset representing an estimate of costs to be
recovered in the future. If Central does not reach a settlement and prevail in
these FERC proceedings or any subsequent appeals, the maximum loss could be the
total of the regulatory asset and $40 million of previously recovered but
protested costs. While Central cannot predict the final outcome of the FERC's
rulings on contract prudency and cost recovery under Order 636, Williams and
Central continue to believe that they entered into the gas purchase contracts in
a prudent manner under the FERC rules in place at the time, and that these costs
will ultimately be found prudent and eligible for recovery under Order No. 636.
The foregoing accruals are in accordance with Williams' accounting policies
regarding the establishment of the 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 the costs are recovered from customers. The estimated portion of
the 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 the potential contamination of certain of its sites. The costs of any
remediation will depend upon the scope of the remediation. At December 31, 1998,
these subsidiaries had reserves totaling approximately $27 million for these
costs.
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Certain Williams subsidiaries, including Texas Gas and Transcontinental Gas
Pipe Line, have been identified as potentially responsible parties (PRP) at
various Superfund and state waste disposal sites. In addition, these
subsidiaries have incurred, or are alleged to have incurred, various other
hazardous materials removal or remediation obligations under environmental laws.
Although no assurances can be given, Williams does not believe that these
obligations or the PRP status of these subsidiaries will have a material adverse
effect on its financial position, results of operations or net cash flows.
Transcontinental Gas Pipe Line, Texas Gas, and Central have identified
polychlorinated biphenyl (PCB) contamination in air compressor systems, soils,
and related properties at certain compressor station sites. Transcontinental Gas
Pipe Line, Texas Gas, and Central have also been involved in negotiations with
the 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, 1998,
Central had recorded a liability for approximately $12 million, representing the
current estimate of future environmental cleanup costs to be incurred over the
next six to ten years. The Midstream Gas & Liquids unit of Energy Services has
recorded an aggregate liability of approximately $10 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 has recorded liabilities for these costs
which are included in the $27 million reserve mentioned above. Actual costs
incurred will depend on the actual number of contaminated sites identified, the
actual amount and extent of contamination discovered, the final cleanup
standards mandated by the EPA and other governmental authorities, and other
factors. Texas Gas, Transcontinental Gas Pipe Line, and Central have deferred
these costs as incurred pending recovery through future rates and other means.
Williams Energy also accrues environmental remediation costs for its
petroleum products pipelines, retail petroleum, refining, and propane marketing
operations primarily related to soil and groundwater contamination. At December
31, 1998, Williams Energy and its subsidiaries had reserves, in addition to the
reserves listed above, totaling approximately $31 million. Williams Energy
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,
1998, Williams Energy and its subsidiaries had receivables totaling $14 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 the costs
exceed a specified amount. At December 31, 1998, Williams had approximately $12
million accrued for the excess costs. The actual costs incurred will depend on
the actual amount and extent of contamination discovered, the final cleanup
standards mandated by the EPA or other governmental authorities, and other
factors.
A lawsuit was filed in May 1993 in a state court in Colorado in which
certain claims have been made against various defendants, including Northwest
Pipeline, contending that gas exploration and development activities in portions
of the San Juan Basin have caused air, water, and other contamination. The
plaintiffs in the case sought certification of a plaintiff class. In June 1994
the lawsuit was dismissed for failure to join an indispensable party over which
the state court had no jurisdiction. The Colorado court of appeals has affirmed
the dismissal and remanded the case to Colorado district court for action
consistent with the appeals court's decision. Since June 1994 eight individual
lawsuits have been filed against Northwest Pipeline and others in U.S. district
court in Colorado, making essentially the same claims. The district court has
stayed all of the cases involving Northwest Pipeline until the plaintiffs
exhaust their remedies before the Southern Ute Indian Tribal Court. Some
plaintiffs filed cases in the Tribal court, but none named Northwest Pipeline as
a defendant.
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Other legal matters
On April 7, 1992, a liquefied petroleum gas explosion occurred near an
underground salt dome storage facility located near Brenham, Texas, and owned by
an affiliate of MAPCO Inc., Seminole Pipeline Company. 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, Texas. 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. 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 defendants entered into settlement agreements involving 17 of
the 21 plaintiffs to finally resolve their claims against all defendants for an
aggregate payment of approximately $10 million. These settlements have satisfied
and reduced the judgment on appeal by approximately $42 million. As to the
remaining four plaintiffs, the Court of Appeals issued its decision on October
15, 1998, which, while denying all of the plaintiffs' cross-appeal issues,
affirmed in part and reversed in part the trial court's judgment. The defendants
had entered into settlement agreements with the remaining plaintiffs which, in
light of the decision, Williams believes will provide for aggregate payments of
approximately $13.6 million, the full amount of which has been previously
accrued.
In 1991 the Southern Ute Indian Tribe filed a lawsuit against Williams
Production Company, a wholly owned subsidiary of Williams, and other gas
producers in the San Juan Basin area, alleging that certain coal strata were
reserved by the United States for the benefit of the Tribe and that the
extraction of coal-seam gas from the coal strata was wrongful. The Tribe sought
compensation for the value of the coal-seam gas. The Tribe also sought 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 against any losses that may arise in respect of certain properties
subject to the lawsuit. On July 16, 1997, the Court of Appeals 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 July 20,
1998, the Court of Appeals sitting en banc affirmed the panel's decision. The
U.S. Supreme Court has granted a writ of certiorari in respect of this decision.
In late March 1999 Williams Production, BP Amoco, and the Tribe announced
that they are in settlement negotiations to finalize the terms of an agreement
in connection with the claims asserted against Williams. Under the proposed
settlement, Williams Production will convert its net profits interest in the
production from the oil and gas leases in dispute into a working interest. A
portion of Williams Production's working interest will then be transferred to
the Tribe effective January 1, 1999. The Tribe will release Williams Production
from all other claims asserted in the lawsuit. This pending settlement agreement
does not address key issues still being pursued on appeal to the Supreme Court,
including the ownership of the natural gas in the coal formation, tribal
severance tax payments, and other matters. The Supreme Court is expected to
render its decision by mid-1999. The details of this settlement are still being
negotiated, and it must be approved by the District Court after an opportunity
for review and comment. Williams believes the parties will be successful in
reaching a final agreement on the partial settlement in principal and that it
will be approved by the District Court.
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In 1998 the United States Department of Justice informed Williams that Jack
Grynberg, an individual, had filed claims in the United States District Court
for the District of Colorado under the False Claims Act against Williams and
certain of its wholly owned subsidiaries including Williams Gas Pipeline
Central, Kern River Gas Transmission, Northwest Pipeline, Williams Gas Pipeline
Company, Transcontinental Gas Pipe Line Corporation, Texas Gas, Williams Field
Services Company, and Williams Production Company. Mr. Grynberg has also filed
claims against approximately 300 other energy companies and alleges that the
defendants violated the False Claims Act in connection with the measurement and
purchase of hydrocarbons. The relief sought is an unspecified amount of
royalties allegedly not paid to the federal government, treble damages, a civil
penalty, attorneys' fees, and costs.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF WILLIAMS
The names, ages, positions, and earliest election dates of the executive
officers of Williams are:
<TABLE>
<CAPTION>
HELD OFFICE
NAME AGE POSITIONS AND OFFICES HELD SINCE
- ---- --- -------------------------- -----------
<S> <C> <C> <C>
Keith E. Bailey................ 56 Chairman of the Board, President, Chief Executive 05-19-94
Officer and Director (Principal Executive
Officer)
John C. Bumgarner, Jr.......... 56 Senior Vice President -- Corporate Development 01-01-79
and Planning; President -- Williams International
Company
James R. Herbster.............. 57 Senior Vice President -- Administration 01-01-92
Jack D. McCarthy............... 56 Senior Vice President-- Finance (Principal 01-01-92
Financial Officer)
William G. von Glahn........... 55 Senior Vice President and General Counsel 08-01-96
Gary R. Belitz................. 49 Controller (Principal Accounting Officer) 01-01-92
Steven J. Malcolm*............. 50 President -- Williams Energy Services 12-01-98
Howard E. Janzen............... 45 President and Chief Operating Officer -- Williams 02-11-97
Communications, Inc.
Brian E. O'Neill............... 63 President -- Williams Gas Pipeline Company 01-01-88
</TABLE>
- ---------------
* Mr. Malcolm assumed these responsibilities on September 29, 1998, in
connection with a leave of absence from Williams by Mr. Stephen L. Cropper.
Upon Mr. Cropper's resignation on December 1, 1998, Mr. Malcolm was elected to
this position.
All of the above officers have been employed by Williams or its
subsidiaries as officers or otherwise for more than five years and have had no
other employment during the period.
34
<PAGE> 36
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Williams' Common Stock is listed on the New York and Pacific Stock
exchanges under the symbol "WMB." At the close of business on December 31, 1998,
Williams had approximately 15,809 holders of record of its Common Stock. The
daily closing price ranges (composite transactions) and dividends declared by
quarter for each of the past two years are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- ------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
1st...................................... $34.88 $26.25 $.15 $23.38 $18.19 $.13
2nd...................................... $35.75 $28.81 $.15 $23.50 $20.00 $.13
3rd...................................... $36.94 $20.00 $.15 $24.59 $21.56 $.13
4th...................................... $31.88 $24.88 $.15 $28.50 $23.09 $.15
</TABLE>
35
<PAGE> 37
ITEM 6. SELECTED FINANCIAL DATA
The following financial data as of December 31, 1998 and 1997 and for the
three years ended December 31, 1998 are an integral part of, and should be read
in conjunction with, the consolidated financial statements and notes thereto.
All other amounts have been prepared from the Company's financial records.
Amounts below reflect the combined operations and financial position of Williams
and MAPCO and the adoption of the Statement of Financial Accounting Standards
No. 131 (see Note 19). Information concerning significant trends in the
financial condition and results of operations is contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages F-1 through F-18 of this report.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues(1)............................ $ 7,658.3 $ 8,249.5 $ 6,849.0 $ 5,695.6 $4,397.5
Income from continuing operations(2)... 146.6 453.7 492.5 363.6 215.1
Income (loss) from discontinued
operations(3)........................ (14.3) (6.3) (32.7) 1,029.3 122.9
Extraordinary loss(4).................. (4.8) (79.1) -- -- (12.2)
Diluted earnings per share:
Income from continuing operations.... .32 1.05 1.14 .86 .51
Income (loss) from discontinued
operations........................ (.03) (.01) (.08) 2.49 .30
Extraordinary loss(4)................ (.01) (.19) -- -- (.03)
Cash dividends per common share........ .60 .54 .47 .36 .28
Total assets at December 31............ 18,647.3 16,277.6 14,589.5 12,843.9 7,341.7
Long-term obligations at December 31... 6,366.4 5,351.5 4,985.3 3,675.0 2,028.7
Stockholders' equity at December 31.... 4,257.4 4,232.6 4,014.8 3,819.6 2,118.3
</TABLE>
- ---------------
(1) See Note 1 for discussion of the 1998 change in the reporting of certain
marketing activities from a "gross" basis to a "net" basis consistent with
fair value accounting. See Note 2 for discussion of Williams' 1997
acquisition of Nortel's customer premise equipment sales and service
operations.
(2) See Notes 2 and 5 for discussion of the gain on sale of interest in
subsidiary, significant asset sales, write-offs and other accruals in 1998,
1997 and 1996. Income from continuing operations in 1995 includes a $41.4
million pre-tax charge related to the cancellation of a commercial coal
gasification venture and a $16 million after-tax gain related to the sale of
Williams' 15 percent interest in Texasgulf, Inc. Income from continuing
operations in 1994 includes a $22.7 million pre-tax gain from the sale of a
portion of Williams' interest in Northern Border Partners, L.P. and a $68.7
million pre-tax charge related to the settlement of a dispute with the state
of Alaska related to royalty oil purchase agreements.
(3) See Note 3 for the discussion of the losses from discontinued operations for
1998, 1997 and 1996. The income from discontinued operations for 1995
primarily relates to the gain from the 1995 sale of Williams' network
services operations, while the 1994 amount reflects the operating results of
the network services operations and the MAPCO Coal operations.
(4) See Note 7 for discussion of the 1998 and 1997 extraordinary losses. The
1994 loss also related to the early extinguishment of debt.
F-1
<PAGE> 38
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1998 vs. 1997
CONSOLIDATED OVERVIEW. Williams' revenues decreased $591 million, or 7
percent, due primarily to the $384 million impact in 1998 of reporting certain
revenues net of costs within Energy Services (see Note 1 of Notes to
Consolidated Financial Statements) and lower petroleum products and natural gas
liquids sales prices. Favorably affecting revenues were higher revenues from
Communications' equipment sales and services activities and excess fiber sales,
higher power services revenues and increased petroleum products sales volumes.
Segment costs and expenses decreased $271 million, or 4 percent, due
primarily to the $384 million impact in 1998 of reporting certain costs net in
revenues within Energy Services (see Note 1) and lower purchase prices for
petroleum products. Partially offsetting these decreases were higher costs and
expenses within Communications, costs associated with increased petroleum
products sales volumes, higher power services costs and $143 million of higher
charges in 1998 as compared to 1997. The 1998 charges include $74 million
related to contractual and regulatory issues, $37 million of asset impairments,
$51 million of MAPCO merger-related expenses, and a $31 million accrual for
modification of an employee benefit program associated with vesting of paid time
off. Included in 1997 are charges totaling $50 million for asset impairments.
Operating income decreased $315 million, or 30 percent, reflecting the
change in revenues and segment costs and expenses discussed above and comprised
primarily of a $172 million decrease at Energy Services and a $117 million
decrease at Communications. Income from continuing operations before
extraordinary loss and income taxes decreased $448 million, or 64 percent, due
primarily to the lower operating income, $44 million higher interest expense
resulting from continued expansion and new projects, the effect of a $45 million
gain in 1997 on the sale of interest in subsidiary and the effect of a $66
million gain in 1997 on the sale of assets.
GAS PIPELINE'S $4.7 million increase in revenues and $4.3 million, or 1
percent, decrease in segment profit for 1998 as compared to 1997 includes
increases (decreases) from the following pipelines:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------------
REVENUES SEGMENT PROFIT
-------- --------------
(MILLIONS)
<S> <C> <C>
Central.................................................... $ (5.3) $(56.6)
Kern River Gas Transmission................................ (3.8) (6.2)
Northwest Pipeline......................................... 14.3 12.3
Texas Gas Transmission..................................... (19.7) 5.7
Transcontinental Gas Pipe Line (Transco)................... 19.0 40.5
Eliminations............................................... .2 --
------ ------
Total Gas Pipeline............................... $ 4.7 $ (4.3)
====== ======
</TABLE>
Central's revenues decreased $5.3 million due primarily to the reversal in
1997 of a $12 million potential refund associated with the sale of working gas
in a prior year and $4 million lower gas supply realignment cost recovery,
partially offset by the 1998 reversal of a $7 million accrual for other
regulatory issues initially recorded in 1997. Kern River's revenues decreased
$3.8 million due primarily to the effect of its designed rate structure.
Northwest Pipeline's revenues increased $14.3 million due primarily to the $4
million effect of a new rate design effective March 1, 1997, that enables
greater short-term firm and interruptible transportation volumes, $5 million of
favorable adjustments to rate refund accruals and demand charge reserves in 1998
and the $10 million effect of unfavorable adjustments in 1997 to rate refund
accruals and demand charge reserves, partially offset by a $3.5 million 1997
gain on the sale of system balancing gas. Texas Gas' revenues decreased $19.7
million due primarily to $21 million lower reimbursable costs passed through to
customers as provided in Texas Gas' rates and the $4 million effect of the
favorable resolution of certain contractual issues in 1997, partially offset by
$6 million higher revenues related to new services and increased cost recovery
in the current
F-2
<PAGE> 39
rate structure. Transco's revenues increased $19 million due primarily to the
$26 million impact of expansion projects placed into service in 1998 and late
1997 and $4 million from new services initiated in the last half of 1997.
Transco's revenues were also favorably impacted by a 1998 adjustment of $11
million related to the new rates placed into effect May 1, 1997, partially
offset by $17 million lower reimbursable costs passed through to customers.
Total throughput for Gas Pipeline decreased 23.5 TBtu, or 1 percent.
Costs and operating expenses decreased $46 million, or 6 percent, due
primarily to $33 million lower reimbursable costs passed through to customers by
Texas Gas and Transco and $15 million lower operation and maintenance expenses,
partially offset by the effect of a $5.4 million settlement received in 1997
related to a prior Transco rate proceeding and a $4 million accrual related to
the modification of an employee benefit program associated with the vesting of
paid time off.
Other (income) expense -- net in 1998 includes a $58.4 million charge
related to certain long-term gas supply contracts that Central entered into in
1982. The charge represents an estimate, based on recent developments, of
natural gas costs that will not be recoverable from customers (see Note 17).
Central's segment profit decreased $56.6 million due primarily to the $58.4
million accrual for costs related to certain long-term gas supply contracts.
Kern River's segment profit decreased $6.2 million due primarily to its designed
rate structure. Northwest Pipeline's segment profit increased $12.3 million due
primarily to a new rate design and the $14 million combined favorable effect of
1998 and 1997 rate refund accrual adjustments, partially offset by the effect of
a $3.5 million gain in 1997 from the sale of system balancing gas. Texas Gas'
segment profit increased $5.7 million due primarily to $6 million higher
revenues related to new services and increased cost recovery and $2 million
lower operating and maintenance expenses, partially offset by the $4 million
effect of the favorable resolution in 1997 of certain contractual issues.
Transco's segment profit increased $40.5 million due primarily to the $26
million revenue impact of expansion projects placed into service in 1998 and
late 1997, $4 million from new services initiated in the last half of 1997, an
adjustment of $11 million related to the 1998 settlement of new rates placed
into effect May 1, 1997, and $9 million lower operation and maintenance
expenses, partially offset by $6 million higher depreciation related to
expansions placed in service and the effect of a $5.4 million settlement
received in 1997.
During 1998, the Federal Energy Regulatory Commission (FERC) issued several
rulings that could result in higher tariff rates in future years for Gas
Pipeline. These FERC rulings are subject to appeal (see Note 17.)
ENERGY MARKETING & TRADING'S revenues decreased $337.7 million, or 15
percent, due primarily to the $384 million impact in 1998 of reporting revenues
on a net basis for certain natural gas liquids trading operations previously
reported on a "gross" basis (see Note 1) and $95 million lower crude and refined
products marketing and trading revenues. In addition, revenues associated with
natural gas origination, price-risk management and physical trading decreased
$50 million reflecting lower margins, the unfavorable market movement against
the natural gas portfolio and the adverse market and supply conditions which
resulted from Hurricane Georges in September 1998, partially offset by the $24
million favorable effect of certain contract settlements and terminations.
Retail propane revenues decreased $59 million due to the $35 million effect of
lower volumes following unseasonably warm weather in 1998 as compared to 1997
and the $24 million effect of lower average propane sales prices. Partially
offsetting these decreases were $243 million higher power services revenues
including $220 million from new power activity in southern California and
additional business growth.
Costs and operating expenses decreased $407 million, or 19 percent, due
primarily to the $384 million impact in 1998 of reporting revenues on a net
basis for certain natural gas liquids trading operations previously reported on
a "gross" basis (see Note 1) and $104 million lower product purchases associated
with the marketing and trading of crude and refined products. In addition,
retail propane cost of sales decreased $55 million due to the $21 million effect
of lower volumes and the $34 million effect of lower average propane purchase
costs. These decreases were partially offset by $156 million of costs related to
new power activity in southern California.
F-3
<PAGE> 40
Segment profit decreased $14.4 million, or 27 percent, due primarily to the
$50 million decline in revenues from natural gas trading activities discussed
above, $43 million of additional losses from retail natural gas and electric
activities and the effect of a $6 million recovery in 1997 of an account
previously written off as a bad debt. The $43 million of losses from retail
natural gas and electric activities includes $17 million of credit losses and
$14 million of asset impairments (included in other (income) expense -- net).
The $14 million asset impairment is associated with the company's decision to
change focus from selling to small commercial and residential customers to large
end users (see Note 5). The retail natural gas and electric losses also reflect
costs incurred to penetrate new markets. Offsetting these decreases were $60
million of higher electric power marketing and trading profits, $17 million
lower retail propane operating expenses and $7 million higher natural gas
liquids trading profits.
EXPLORATION & PRODUCTION'S revenues increased $9.2 million, or 7 percent,
due primarily to the recognition of $22 million of additional deferred income
resulting from a 1997 transaction that transferred certain nonoperating economic
benefits to a third party and $8 million from a 14 percent increase in company-
owned production, partially offset by the $25 million effect of lower average
natural gas sales prices for company-owned production and for sales of volumes
from the Williams Coal Seam Gas Royalty Trust (Royalty Trust) and royalty
interest owners.
Segment profit decreased $3.1 million, or 10 percent, due primarily to $13
million higher depreciation, depletion and amortization, $6 million higher
nonproducing leasehold amortization, $2 million higher dry hole costs and $2
million of leasehold impairment costs, partially offset by the $22 million
increased recognition of deferred income.
MIDSTREAM GAS & LIQUIDS' revenues decreased $158.7 million, or 15 percent,
due primarily to $60 million lower natural gas liquids sales from processing
activities reflecting a decline in average liquids sales prices, and the $44
million effect of the shutdown of the Canadian liquids marketing operations in
late 1997. Revenues also declined due to $18 million lower natural gas liquids
pipeline transportation revenues reflecting 3 percent lower shipments, the
passthrough of $9 million lower operating costs to customers, adjustments of $14
million related to new rates placed into effect in 1997 for Midstream's
regulated gathering activities (offset in costs and operating expenses) and the
effect of an $8 million receipt in 1997 of business interruption insurance
proceeds, slightly offset by $7 million higher gathering revenues and $8 million
associated with a 4 percent increase in natural gas liquids sales volumes.
Costs and operating expenses decreased $107 million, or 16 percent, due
primarily to the $50 million effect of the shutdown of the Canadian liquids
marketing operations, $14 million of rate adjustments related to Midstream's
regulated gathering activities, $9 million lower costs passed through to
customers, $15 million lower fuel and replacement gas purchases, and lower
natural gas liquids pipeline transportation costs.
Other (income) expense -- net in 1998 includes a loss of approximately $9
million related to the retirement of certain assets and $6 million of
unfavorable litigation loss provisions, partially offset by a $6 million gain
from the settlement of product imbalances.
Segment profit decreased $56.6 million, or 20 percent, due primarily to $45
million of lower per-unit liquids margins, decreased pipeline transportation
shipments, the $9 million loss related to retirement of certain assets and the
effect of an $8 million business interruption insurance receipt in 1997,
slightly offset by $7 million higher gathering revenues.
PETROLEUM SERVICES' revenues decreased $20.5 million, or 1 percent, due
primarily to a $213 million decrease in revenues from refining operations and
$17 million lower product sales from transportation activities, significantly
offset by $107 million higher pipeline construction revenue, $54 million higher
convenience store sales, and $37 million higher revenues from fleet management
and mobile computer technology operations initiated in mid-1997. The $213
million decline in refining revenues reflects $386 million from lower average
sales prices, partially offset by $173 million from a 13 percent increase in
refined product volumes sold. The $54 million increase in convenience store
sales is due primarily to the May 1997 EZ-Serve acquisition, additional travel
centers and increased per-store merchandise sales. Increases of
F-4
<PAGE> 41
$101 million in gasoline and diesel sales volumes and $47 million higher
merchandise sales were partially offset by a $94 million impact of lower average
retail gasoline and diesel sales prices.
Costs and expenses increased $27 million, or 1 percent, due primarily to
$102 million of pipeline construction costs, $46 million higher convenience
store merchandise purchases and operating costs resulting from the EZ-Serve
acquisition, additional travel centers and increased per-store sales, $41
million higher costs from fleet management and mobile computer technology
operations, $24 million higher general and administrative expenses and a $15.5
million accrual for potential transportation rate refunds to customers (included
in other (income) expense -- net) (see Note 17). Substantially offsetting these
increases were a $194 million decrease from refining operations and $15 million
lower cost of product sales from transportation activities. The $24 million
increase in general and administrative expenses is due, in part, to increased
activities in human resources development, investor/media/customer relations and
business development. The $194 million decrease from refining operations
reflects a $343 million decrease due to lower average crude oil purchase prices,
partially offset by a $143 million increase related to an increase in processed
barrels sold and $7 million higher operating costs at the Memphis refinery.
Convenience store gasoline and diesel cost of sales remained flat as a $90
million increase from higher sales volumes was offset by lower average purchase
prices.
Segment profit decreased $47.5 million, or 24 percent, due primarily to the
$15.5 million accrual for potential refunds to transportation customers, $13
million lower refinery gross margins, $7 million higher operating costs due to
increased production levels at the Memphis refinery, approximately $24 million
higher general and administrative expenses and a $4.4 million accrual for
modification of an employee benefit program associated with vesting of paid time
off, partially offset by $6 million higher product transportation revenues, $7
million increased profits from convenience store operations and $5 million from
pipeline construction activities.
COMMUNICATIONS SOLUTIONS' revenues increased $160.3 million, or 13 percent,
due primarily to the April 30, 1997, combination of the Nortel customer premise
equipment sales and services operations, which contributed an additional $196
million of revenue during the first four months of 1998. A $30 million increase
in maintenance contract revenues was more than offset by $46 million lower new
system sales and $31 million lower customer service orders due, in part, to
competitive pressures.
Costs and operating expenses increased $116 million, or 13 percent, and
selling, general and administrative expenses increased $138 million, or 53
percent, due primarily to the combination with Nortel. Included in the overall
increase in selling, general and administrative expenses are $23 million of
increased information systems costs associated with expansion and enhancement of
the infrastructure and continued costs of maintaining multiple systems while
common systems are being developed, $36 million higher selling costs including
the effects of large increases in sales and support staff and higher sales
commissions in anticipation of a higher revenue base than actually achieved, $12
million increased provision for bad debts, and a $6 million accrual for
modification of an employee benefit program associated with vesting of paid time
off.
Segment profit decreased $101.4 million from a $47.3 million segment profit
in 1997 to a $54.1 million segment loss in 1998, due primarily to the increase
in selling, general and administrative costs as described above, $6 million
related to information systems cancellations and $7 million of obsolete
equipment write-downs, severance and contract loss accruals.
NETWORK APPLICATIONS' revenues decreased $9.1 million, or 4 percent, due
primarily to the $14 million effect of the decision to exit the learning content
business in November 1997. Partially offsetting this decline was a $9 million
increase in audio and video conferencing and business television revenues.
Costs and operating expenses increased $9 million, or 5 percent, due
primarily to $8 million higher costs of providing network services following the
transfer of fiber assets to Network Services in October 1997 and the $7 million
effect of increased audio and video conferencing and business television
activities, partially offset by $8 million lower costs as a result of the
decision to exit the learning content business in November 1997. A $10 million,
or 11 percent, decrease in selling, general and administrative expenses was also
due to the decision to exit the learning content business.
F-5
<PAGE> 42
Other (income) expense -- net in 1998 includes a $23.2 million write-down
related to the abandonment of a venture involved in the technology and
transmission of business information for news and educational purposes (see Note
5). Other (income) expense -- net in 1997 includes charges totaling $49.8
million related to the decision and formulation of a plan to sell the learning
content business ($28 million), and the write-down of assets and development
costs associated with certain advanced applications (see Note 5). During 1998, a
substantial portion of the learning content business was sold at its approximate
carrying value.
Segment loss decreased $14.1 million from a $108.7 million segment loss in
1997 to a $94.6 million segment loss in 1998, due primarily to the effect of
$49.8 million of charges in 1997, partially offset by the $23.2 million
write-down in 1998, $7 million higher network access costs and a $3 million
accrual for modification of an employee benefit program associated with vesting
of paid time off.
NETWORK SERVICES' revenues increased $151.9 million from $43 million in
1997, due primarily to $64 million of revenue in 1998 from the sale of excess
fiber capacity on the newly constructed digital fiber-optic network, $49 million
of revenues from providing fiber services to new long-term customers and $27
million higher revenue following the transfer of fiber assets from Network
Applications in October 1997.
Costs and operating expenses increased $136 million from $32 million in
1997, due primarily to $38 million of cost of sales of excess fiber capacity,
$55 million of leased capacity costs associated with providing customer services
prior to completion of the new network, and $17 million higher operating
expenses. Selling, general and administrative expenses increased $45 million due
primarily to the expansion of the infrastructure to support the new national
digital fiber-optic network, including $8 million of increased information
systems costs and $8 million for a new national advertising campaign.
Segment profit decreased $29.6 million from a $3.3 million segment profit
in 1997 to a $26.3 million segment loss in 1998, due primarily to the cost of
expanding the infrastructure in support of the network expansion and losses
experienced from providing customer services prior to completion of the new
network, partially offset by $26 million of profit from selling excess fiber
capacity.
As each phase of the ongoing construction of the planned 32,000 mile
full-service wholesale communications network goes into service, revenues and
costs are expected to increase. During 1998, 9,000 miles of new network were
added increasing the network to 19,000 cable miles at December 31, 1998. The
remaining 13,000 miles are planned to come online during 1999 and 2000. This
business is expected to contribute an increasing percentage of consolidated
revenues but is not expected to contribute significantly to segment profit until
2001. The February 8, 1999, announcement by Williams of a 20-year agreement with
SBC Communications, under which Network Services will become the preferred
provider of nationwide long-distance voice and data services for SBC
Communications, will contribute to the expected network revenue increase in
2000. Additional sales of excess dark fiber capacity along the new network are
expected to generate increasing revenues and segment profit during 1999 and
2000.
OTHER segment loss of $15.5 million in 1998 compares to $11.4 million of
segment profit in 1997. The 1998 segment loss includes equity losses of $14.8
million from investing activities in a Brazilian communication business in which
Williams has a 30 percent interest. This business is constructing a cellular
phone network scheduled to be in operation during 1999. In addition, 1998
includes $8 million higher general and administrative expenses as compared to
1997 and $5.6 million of write-downs of international cost investments to
market.
GENERAL CORPORATE EXPENSES decreased $5.9 million, or 6 percent, due
primarily to expense savings realized following the MAPCO merger, largely offset
by MAPCO merger-related costs of $29 million in 1998 compared to $10 million in
1997. An additional $51 million of merger-related costs are included as a
component of Energy Services' segment profit (see Note 19). Interest accrued
increased $51.6 million, or 11 percent, due primarily to higher borrowing levels
including Williams Holdings' commercial paper program and the issuance of
additional public debt, partially offset by the $52 million effect of lower
average interest rates. The lower average interest rate reflects the
fourth-quarter 1997 debt restructuring and lower rates on new 1998 borrowings as
compared to previously outstanding borrowings. Interest capitalized increased
$7.3 million, or 31 percent, due primarily to increased capital expenditures for
the fiber-optic network, the
F-6
<PAGE> 43
Venezuelan gas injection plant and international investment activities.
Investing income increased $13.2 million to $25.8 million due primarily to
higher interest income on advances to affiliates and long-term notes receivable.
For information concerning the $44.5 million gain on sale of interest in
subsidiary in 1997, see Note 2. The $66 million gain on sales of assets in 1997
results from the sale of Williams' interest in the liquids and condensate
reserves in the West Panhandle field of Texas (see Note 5). Minority interest in
(income) loss of consolidated subsidiaries in 1998 is $27.8 million favorable as
compared to 1997 due primarily to losses experienced by Williams Communications
Solutions, LLC which has a 30 percent interest held by minority shareholders.
Other income (expense) -- net is $19.6 million unfavorable as compared to 1997
due primarily to 1998 litigation accruals and loss provisions totaling $11
million related to assets previously sold, and the impact of a 1997 gain of $4
million on the termination of interest-rate swap agreements.
The $140.8 million, or 56 percent, decrease in the provision for income
taxes on continuing operations is primarily a result of lower pre-tax income,
partially offset by a higher effective income tax rate in 1998. The effective
income tax rate in 1998 exceeds the federal statutory rate due primarily to the
effects of state income taxes and the effects of non-deductible costs, including
goodwill. The effective 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 1998 and 1997 losses on discontinued operations are attributable to
loss provisions for contractual obligations related to the sale of the net
assets of the MAPCO coal business in 1996 (see Note 3).
The 1998 and 1997 extraordinary losses result from the early extinguishment
of debt (see Note 7).
1997 vs. 1996
CONSOLIDATED OVERVIEW. Williams' revenues increased $1.4 billion, or 20
percent, due primarily to increased marketing of crude oil and refined products
and higher revenues at Communications reflecting increased business activity and
revenue contributed by acquisitions, including the 1997 combination of the
Nortel customer premise equipment sales and services operations. Partially
offsetting these increases was the $141 million impact in 1997 of reporting
certain revenues net of costs within Energy Services (see Note 1).
Segment costs and expenses increased $1.4 billion, or 25 percent, due
primarily to costs associated with the increased marketing of crude oil and
refined products, higher costs and expenses at Communications and $50 million of
asset impairments, partially offset by the $141 million impact in 1997 of
reporting certain costs net in revenues within Energy Services (see Note 1).
Operating income decreased $64 million, or 6 percent, reflecting the change
in revenues and segment costs and expenses discussed above and comprised
primarily of a $63 million decrease at Communications and a $37 million decrease
at Energy Services, partially offset by a $50 million increase at Gas Pipeline.
Income from continuing operations before extraordinary loss and income taxes
decreased $54 million, or 7 percent, reflecting the lower operating income,
increased interest accrued resulting from higher capital expenditures and the
effect of the $37 million gain in 1996 on sales of assets, partially offset by a
$45 million gain in 1997 on the sale of interest in subsidiary, and a $66
million gain in 1997 on the sale of assets.
F-7
<PAGE> 44
GAS PIPELINE'S $20.5 million, or 1 percent, increase in revenues and $50.4
million, or 9 percent, increase in segment profit for 1997 as compared to 1996
includes increases (decreases) from the following pipelines:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------
REVENUES SEGMENT PROFIT
-------- --------------
(MILLIONS)
<S> <C> <C>
Central..................................................... $ 6.0 $12.2
Kern River Gas Transmission................................. 5.0 5.8
Northwest Pipeline.......................................... 3.4 (.9)
Texas Gas Transmission...................................... (13.1) 2.5
Transcontinental Gas Pipe Line (Transco).................... 6.0 30.8
Eliminations................................................ 13.2 --
------ -----
Total Gas Pipeline................................ $ 20.5 $50.4
====== =====
</TABLE>
Central's revenues increased $6 million due primarily to the reversal in
1997 of a $12 million potential refund associated with the sale of working gas
in a prior year, partially offset by a $7 million accrual for other regulatory
issues. Kern River's revenues increased $5 million due primarily to a full year
of revenues in 1997 as compared to a partial year of revenues in 1996 and
increased transportation revenues. Results for 1996 reflect only operations from
January 16, 1996, when Williams acquired the remaining interest in Kern River.
Prior to January 16, 1996, Kern River was accounted for on an equity basis.
Northwest Pipeline's revenues increased $3.4 million due primarily to a new rate
design, effective March 1, 1997, that enabled greater short-term firm and
interruptible transportation volumes, largely offset by $7 million of
adjustments to rate refund accruals in 1997 and the effect of $9 million of
revenue in 1996 associated with favorable regulatory decisions. Texas Gas'
revenues decreased $13.1 million 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. Transco's revenues increased $6 million due
primarily to the $14 million effect of a 1996 downward adjustment (offset in
costs) to reflect a rate case settlement, $10 million associated with new rates
effective May 1, 1997, to recover costs associated with increased capital
expenditures and $6 million related to a mainline expansion placed into service
in late 1996 and new services begun in late 1997, largely offset by $23 million
of lower reimbursable costs passed through to customers as provided in Transco's
rates. Total throughput for Gas Pipeline decreased 146.4 TBtu, or 4 percent, as
a result of the 1996 sale of the south-end facilities by Northwest Pipeline.
Costs and operating expenses and general and administrative expenses
decreased $27.2 million, or 2 percent, due primarily to $34 million lower
reimbursable costs incurred by Texas Gas and Transco and passed through to their
customers, $30 million lower operation and maintenance expenses and a $5.4
million favorable settlement related to a prior Transco rate proceeding,
partially offset by the $14 million effect of a 1996 downward adjustment (offset
in revenues) to depreciation expense reflecting a Transco rate case settlement,
$18 million higher depreciation expense and a $5 million accrual for gas
purchase contract settlement costs by Central.
Central's segment profit increased $12.2 million due primarily to the 1997
reversal of a $12 million potential refund associated with the sale of working
gas, a $7 million gain from the sale-in-place of natural gas from a
decommissioned storage field (included in other (income) expense -- net) and a
$4 million increase in firm reserved capacity revenues, partially offset by the
$7 million accrual for other regulatory issues and a $5 million accrual for gas
purchase contract settlement costs. Kern River's segment profit increased $5.8
million due primarily to the full year of Williams' ownership in 1997. Northwest
Pipeline's segment profit decreased $.9 million due primarily to the combined
effect of the $7 million increase to rate refund accruals in 1997 and the $9
million recognition in 1996 of favorable regulatory actions, significantly
offset by $7 million lower operating and maintenance expenses, new
transportation rates effective in 1997 and a $3.5 million gain on the sale of
system balancing gas. Transco's segment profit increased $30.8 million due
primarily to $15 million lower operation and maintenance expenses, $10 million
higher revenues associated with new rates effective May 1, 1997, and the $5.4
million rate proceeding settlement.
F-8
<PAGE> 45
ENERGY MARKETING & TRADING'S revenues increased $276.4 million, or 14
percent, due primarily to a $488 million increase in marketing of crude oil and
refined products from the Memphis refinery. This increase reflects increased
demand for petroleum products, aggressive marketing in the Memphis and Ohio
River Valley areas and $183 million from the inclusion of Lexas Oil operations,
which prior to July 1997 were unconsolidated. Partially offsetting this increase
was a $125 million decrease in revenues from energy trading and price-risk
management activities, $77 million lower marketing of natural gas liquids
associated with Midstream's natural gas liquids transportation activities and a
$16 million decrease in revenues from the propane marketing business. The $125
million decrease in revenues from energy trading and price-risk management
activities resulted 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. 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, higher petroleum trading volumes, revenues from new project
financing services for energy producers and the sale of excess transportation
capacity, partially offset by lower natural gas trading margins as a result of
decreased price volatility. The $77 million decrease in marketing of natural gas
liquids results mainly from significantly lower natural gas liquids sales
prices. The $16 million decrease in revenues from the propane marketing business
resulted from the $24 million effect of the sale of certain propane and liquid
fertilizer assets in 1996, partially offset by increased propane sales volumes
primarily from acquisitions.
Costs and operating expenses increased $335 million, or 19 percent, due
primarily to $526 million of additional costs associated with the marketing of
crude oil and refined products from the Memphis refinery, $23 million of
increased operating expenses associated with propane marketing acquisitions and
growth initiatives and a $16 million increase in propane purchase costs relating
to increased volumes, partially offset by the $141 million effect of 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, $73
million lower costs of marketing natural gas liquids associated with Midstream's
natural gas liquids transportation activities and $21 million associated with
the sale of certain propane and liquid fertilizer assets. Selling, general and
administrative expenses increased $32 million, or 52 percent, due primarily to
propane business acquisitions and the expenses associated with expansion of
certain business growth platforms.
Segment profit decreased $85.1 million, or 61 percent, due primarily to $38
million lower gross margins on the marketing of crude oil and refined products
from the Memphis refinery, $32 million higher selling, general and
administrative expenses, $23 million of increased operating expenses associated
with propane marketing acquisitions and growth initiatives, and $10 million
lower gross margins on propane marketing operations, partially offset by the $16
million increase in net energy trading and price-risk management revenues and a
$6 million recovery of an account previously written off as a bad debt.
EXPLORATION & PRODUCTION'S revenues increased $47.7 million, or 58 percent,
due primarily to the $20 million effect of higher average natural gas sales
prices for company-owned production, the $14 million effect of higher average
natural gas sales prices from the sale of volumes from the Royalty Trust and
royalty interest owners, and the $9 million effect of 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.
Segment profit increased $27.5 million, from $2.8 million in 1996, due
primarily to the increase in average natural gas sales prices and company-owned
production volumes, partially offset by higher expenses associated with
increased activity levels.
MIDSTREAM GAS & LIQUIDS' revenues increased $121.4 million, or 13 percent,
due primarily to $53 million related to a full year of Canadian marketing
operations in 1997 as compared to four months in 1996, $44 million of higher
natural gas liquids sales from processing activities, the 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. These increases were slightly offset by the impact of the
January 1997 sale of the West Panhandle operations. The $44 million increase in
natural gas
F-9
<PAGE> 46
liquids sales from processing activities is due to a 37 percent increase in
volumes, slightly offset by lower average sales prices.
Costs and operating expenses increased $138.5 million, or 26 percent, due
primarily to $56 million higher fuel and replacement gas purchases associated
with gathering and processing activities, the $52 million impact of a full year
of Canadian marketing operations, and higher operating and maintenance and
depreciation expenses.
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.
Segment profit decreased $39.7 million, or 12 percent, due primarily to the
$30 million effect of lower per-unit liquids margins, an $18 million impact of
the sale of the West Panhandle operations, and $12 million lower insurance
recoveries in 1997 as compared to 1996, partially offset by the $24 million
effect of increased liquids volumes sold.
PETROLEUM SERVICES' revenues increased $100.8 million, or 4 percent, due
primarily to a $27 million increase in ethanol sales, $25 million from new fleet
management and mobile computer technology operations, a $24 million increase in
product sales from transportation activities and $18 million higher retail sales
revenues. 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. The retail sales increase reflects higher gasoline and merchandise
sales following the EZ-Serve convenience stores acquisition, partially offset by
lower diesel sales. A 5 percent increase in processed volumes sold was offset by
slightly lower average refined product sales prices. Products pipeline shipments
and average rates were comparable to 1996.
Costs and operating expenses increased $33.6 million, or 1 percent, due
primarily to a $35 million increase in retail costs following the EZ-Serve
convenience stores acquisition, $33 million associated with the new fleet
management and mobile computer technology operations, $23 million higher product
purchases associated with transportation activities, $15 million higher
operating expenses associated with increased refinery throughput and maintenance
activity, and $9 million higher costs from increased ethanol production, largely
offset by $84 million lower crude oil costs at the refineries.
Segment profit increased $60.8 million, or 43 percent, due primarily to a
$71 million increase from petroleum refining operations and a $15 million
increase related to increased ethanol sales volumes and per-unit margins,
partially offset by an $18 million decrease from retail operations and $9
million of losses associated with the new fleet management and mobile computer
technology operations. The $71 million petroleum refining increase reflects
higher per-unit margins and 5 percent higher volumes processed, partially offset
by $10 million of higher costs associated with increased maintenance activity.
The retail operations decrease reflects the additional costs associated with the
implementation of strategic growth initiatives and lower per-unit margins on
gasoline sales.
COMMUNICATIONS SOLUTIONS' revenues increased $638.4 million, or 112
percent, due primarily to acquisitions which contributed revenues of
approximately $556 million, including $536 million from the April 30, 1997,
combination of the Nortel customer premise equipment sales and services
operations. 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.
Costs and operating expenses increased $460 million, or 105 percent, due
primarily to the $393 million impact of the combination with Nortel. In
addition, costs and operating expenses increased due to $50 million of higher
costs associated with increased new systems sales activity and $16 million of
higher costs related to system modification activity. Selling, general and
administrative expenses increased $148 million, or 129 percent, due primarily to
the combination with Nortel in addition to costs associated with expanding the
infrastructure for future growth.
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<PAGE> 47
Segment profit increased $33 million from $14.3 million in 1996, due
primarily to the combination with Nortel, partially offset by increased expenses
associated with expanding the infrastructure.
NETWORK APPLICATIONS' revenues increased $84.7 million, or 65 percent, due
primarily to 1997 acquisitions which contributed revenues of approximately $81
million.
Costs and operating expenses increased $83 million, or 86 percent, due
primarily to the $68 million impact of acquisitions and higher expenses for
developing and expanding video transmission services. Selling, general and
administrative expenses increased $46 million, or 94 percent, due primarily to
acquisitions and higher expenses for expanding the infrastructure for future
growth.
Other (income) expense -- net in 1997 includes charges totaling $49.8
million related to the decision and formulation of a plan to sell the learning
content business ($28 million), and the write-down of assets and development
expenses associated with certain advanced applications (see Note 5).
Segment loss increased $93.6 million to $108.7 million, due primarily to
the $49.8 million in charges described above and the expense of developing
infrastructure while integrating the most recent acquisitions.
NETWORK SERVICES' revenues increased $31.9 million to $43 million in 1997,
reflecting $14 million contributed by a March 1997 acquisition, $11 million from
fiber assets transferred from Network Applications in late 1997 and internal
growth.
Costs and operating expenses increased $27 million from $5 million in 1996,
reflecting a $15 million effect of the transfer of fiber assets from Network
Applications late in 1997 and $8 million from the March 1997 acquisition.
Segment profit decreased $2.5 million, or 43 percent, due primarily to an
increase in selling, general and administrative expenses.
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 Williams' interest in the liquids and condensate
reserves in the West Panhandle field of Texas (see Note 5). 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 5). The
$18.2 million minority interest in (income) loss of consolidated subsidiaries in
1997 is related primarily to the 30 percent interest held by Williams
Communications Solutions, LLC's minority shareholder (see Note 2). The $12.7
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 favorable accrual adjustments
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
deferred income taxes on certain regulated capital projects and state income tax
adjustments.
F-11
<PAGE> 48
On September 10, 1996, Williams sold 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 7).
FINANCIAL CONDITION AND LIQUIDITY
MAPCO Acquisition
On March 28, 1998, Williams completed the acquisition of MAPCO Inc. by
exchanging 1.665 shares of Williams common stock for each outstanding share of
MAPCO common stock. In addition, outstanding MAPCO employee stock options were
converted into 5.7 million shares of Williams common stock. Upon completion,
98.8 million shares of Williams common stock were issued. Also in connection
with the merger, 8.4 million shares of MAPCO common stock previously held in
treasury were retired. These shares had a carrying value of $253.8 million.
MAPCO was 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 includes the combined results of operations, financial condition and
liquidity of MAPCO and Williams.
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, as amended in January 1999. At
December 31, 1998, Williams had access to $738 million of liquidity including
$306 million available under its $1 billion bank-credit facility and $377
million of cash-equivalent investments. This compares with liquidity of $166
million at December 31, 1997, and $630 million at December 31, 1996. The lower
liquidity level at December 31, 1997, reflected the use of the $1 billion bank-
credit facility to provide interim financing related to a debt restructuring
program. This restructuring program was completed during the first quarter of
1998, and a significant portion of the $1 billion bank-credit facility was
repaid with the proceeds from long-term financings.
During 1998, Williams Holdings increased its commercial paper program to $1
billion from $650 million. The commercial paper program is backed by short-term
bank-credit facilities totaling $1 billion. At December 31, 1998, $903 million
of commercial paper was outstanding under the program. In January 1999, Williams
Holdings' commercial paper program was increased to $1.4 billion with the
short-term bank-credit facilities increased to the same amount.
Registration statements have been filed with the Securities and Exchange
Commission by Williams and Williams Holdings of Delaware, Northwest Pipeline,
Texas Gas Transmission and Transcontinental Gas Pipe Line (each a wholly owned
subsidiary of Williams). At December 31, 1998, approximately $1.1 billion of
shelf availability remains under these outstanding registration statements and
may be used to issue a variety of debt or equity securities. The registration of
an additional $975 million of debt or equity securities by Williams is currently
in process. Interest rates and market conditions will affect amounts borrowed,
if any, under these arrangements. 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.
On November 19, 1998, Williams announced that it intends to sell a minority
interest in its communications business. The initial equity offering is expected
to be filed in the second quarter of 1999 and yield proceeds of $500 million to
$750 million. In addition, Williams expects Communications to issue high-yield
public debt of $1.3 billion to $1.5 billion in 1999. On February 8, 1999,
Williams announced that, simultaneously with the public equity offering, SBC
Communications plans to acquire up to a 10 percent interest in Williams'
communications business for an investment of up to $500 million. Proceeds from
these
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<PAGE> 49
transactions will be reinvested in the continued construction of Williams'
national fiber-optic network and other expansion opportunities.
During 1998, Williams entered into an agreement described as a securitized
asset lease program designed to fund up to $750 million of capital expenditures
for the fiber-optic network. A total of $463 million remains available under
this agreement. See Note 13 for additional information.
Williams had a net working-capital deficit of $907 million at December 31,
1998, compared with $729 million at December 31, 1997. Williams manages its
borrowings to keep cash and cash equivalents at a minimum and has relied on
bank-credit and commercial paper facilities to provide flexibility for its cash
needs. As a result, it historically has reported negative working capital.
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 1999, Williams expects to finance capital expenditures, investments
and working-capital requirements through cash generated from operations,
Communications' initial equity and high-yield debt offerings, and the use of the
available portion of its $1 billion bank-credit facility and asset lease
program, commercial paper, short-term uncommitted bank lines, private borrowings
and debt or equity public offerings.
Operating Activities
Cash provided by continuing operating activities was: 1998 -- $613 million;
1997 -- $988 million; and 1996 -- $951 million. Energy trading assets and
liabilities increased in 1998 due primarily to increased physical power trading
activity.
Financing Activities
Net cash provided by financing activities was: 1998 -- $1.8 billion;
1997 -- $424 million; and 1996 -- $429 million. Long-term debt proceeds, net of
principal payments, were $1.8 billion, $18 million and $592 million during 1998,
1997 and 1996, respectively. Notes payable payments, net of notes payable
proceeds, were $139 million during 1998. Notes payable proceeds, net of notes
payable payments, were $622 million and $108 million during 1997 and 1996,
respectively. The increase in net new borrowings during 1998, 1997 and 1996
reflects borrowings to fund capital expenditures, investments and acquisition of
businesses.
The proceeds from issuance of common stock in 1998, 1997 and 1996 include
benefit plan stock purchases and exercise of stock options under the stock
plans.
The purchases of treasury stock in 1997 and 1996 include 2.7 million shares
of common stock in the open market for $50 million and 6.2 million shares of
common stock in the open market for $130 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.
During 1998, Williams received proceeds totaling $335 million from the sale
of limited partnerships and limited-liability company member minority interests
to outside investors (see Note 14).
During the first quarter of 1998, Williams completed the restructuring of a
portion of its debt portfolio that was initiated in September 1997. As of
December 31, 1997, Williams had 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. During first
quarter of 1998, Williams paid an additional $54.4 million to redeem higher
interest rate debt for a $4.8 million extraordinary loss (see Note 7). The
restructuring was temporarily financed with a combination of borrowings under
the $1 billion bank-credit facility, commercial paper and short-term bank
agreements with commitments totaling $1.2 billion. 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 and maturities from 2000 to 2008.
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<PAGE> 50
Long-term debt at December 31, 1998, was $6.4 billion, compared with $5.4
billion at December 31, 1997, and $5 billion at December 31, 1996. At December
31, 1997 and 1996, $696 million and $329 million, respectively, of current debt
obligations were classified as non-current obligations based on Williams' intent
and ability to refinance on a long-term basis. The 1998 increase in long-term
debt is due primarily to $1.6 billion of public debt issued by Williams, $425
million of public debt issued by Williams Holdings, $300 million of public debt
issued by Transcontinental Gas Pipe Line and new borrowings in 1998 under the
bank-credit facility, partially offset by the repayment of approximately $900
million of interim financings related to the debt restructuring program and the
repayment or classification as current of $750 million of long-term debt. The
long-term debt to debt-plus-equity ratio was 59.9 percent at December 31, 1998,
compared to 55.8 percent and 55.3 percent at December 31, 1997 and 1996,
respectively. If short-term notes payable and long-term debt due within one year
are included in the calculations, these ratios would be 64.7 percent, 59.1
percent and 57.1 percent, respectively.
Investing Activities
Net cash used by investing activities was: 1998 -- $2 billion; 1997 -- $1.5
billion; and 1996 -- $1.3 billion. Capital expenditures of Gas Pipeline,
primarily to expand and modernize systems, were $472 million in 1998, $419
million in 1997, and $441 million in 1996. Capital expenditures of Energy
Services, primarily to expand and modernize gathering and processing facilities
and refineries, were $707 million in 1998, $469 million in 1997, and $406
million in 1996. Capital expenditures of Communications were $304 million in
1998, $276 million in 1997, and $67 million in 1996. The 1998 and 1997
expenditures include the expansion of the fiber-optic network. Budgeted capital
expenditures and investments for all business units for 1999 are estimated to be
approximately $5.2 billion, including $2.2 billion for the fiber-optic network
expansion and expenditures to expand and modernize pipeline systems, gathering
and processing facilities, refineries and other international investment
activities. Capital expenditures for 1999 and 2000 for the fiber-optic network
are expected to total $3.4 billion.
Subsequent to December 31, 1998, Williams exercised an option to increase
its investment in the Brazilian cellular phone venture. Negotiations are
currently underway, and the company could invest up to $265 million, which is
included in budgeted expenditures above, during the first quarter of 1999.
During 1998, Williams made a $100 million advance and a $150 million
investment in a telecommunications business in Brazil. In addition, during 1998
Williams made an $85 million investment in a Texas refined petroleum products
pipeline joint venture.
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. In addition, Williams
paid $68 million to Nortel. See Note 2 for additional information. 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.
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).
Other Commitments
During 1998, Energy Marketing & Trading entered into a 15-year contract
giving Williams the right to receive fuel conversion services for purposes of
generating electricity. This contract also gives Williams the right to receive
installed capacity as well as certain ancillary services. Annual committed
payments under the contract range from $140 million to $165 million, resulting
in total committed payments of approximately $2.3 billion. Williams' intent is
to resell power generated as a result of this service into markets in the
western region of the United States. Williams also intends to resell capacity
and ancillary services into such markets as the opportunities arise.
F-14
<PAGE> 51
NEW ACCOUNTING STANDARDS
See Note 1 for the effects of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" and
Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts Involved
in Energy Trading and Risk Management Activities."
EFFECTS OF INFLATION
Williams' cost increases in recent years have benefited from relatively low
inflation rates during that time. Approximately 50 percent of Williams'
property, plant and equipment is at Gas Pipeline, and approximately 50 percent
is at Energy Services and Communications. Approximately 80 percent of Gas
Pipeline's property, plant and equipment has been acquired or constructed since
1995, a period of relatively low inflation. Gas Pipeline is 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 Energy Services, 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, natural gas 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 on page 35 for additional information
concerning the impact of specific price changes. The activities of
Communications have historically not been significantly affected by the effects
of inflation.
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 17), 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 $93 million, all of which is
accrued at December 31, 1998. Williams expects to seek recovery of approximately
$39 million of the accrued costs through future natural gas transmission rates
and approximately $14 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.
Williams is subject to the federal Clean Air Act and to the federal Clean
Air Act Amendments of 1990 which require the EPA to issue new regulations. In
September 1998, the EPA promulgated new rules designed to mitigate the migration
of ground-level ozone in certain states. Williams estimates that capital
expenditures necessary to install emission control devices over the next five
years to comply with these new rules will be between $145 million and $190
million. The actual costs incurred will depend on the final implementation plans
developed by each state to comply with these regulations.
YEAR 2000 COMPLIANCE
Williams initiated an enterprise-wide project in 1997 to address the year
2000 compliance issue for both traditional information technology areas and
non-traditional areas, including embedded technology which is prevalent
throughout the company. This project focuses on all technology hardware and
software, external interfaces with customers and suppliers, operations process
control, automation and instrumentation systems,
F-15
<PAGE> 52
and facility items. The phases of the project are awareness, inventory and
assessment, renovation and replacement, testing and validation. The awareness
and inventory/assessment phases of this project as they relate to both
traditional and non- traditional information technology areas have been
substantially completed. During the inventory and assessment phase, all systems
with possible year 2000 implications were inventoried and classified into five
categories: 1) highest, business critical, 2) high, compliance necessary within
a short period of time following January 1, 2000, 3) medium, compliance
necessary within 30 days from January 1, 2000, 4) low, compliance desirable but
not required, and 5) unnecessary. Categories 1 through 3 were designated as
critical and are the major focus of this project. Renovation/replacement and
testing/validation of critical systems is expected to be completed by June 30,
1999, except for replacement of certain critical systems scheduled for
completion by September 1, 1999. Some non-critical systems may not be compliant
by January 1, 2000.
Testing and validation activities have begun and will continue throughout
the process. Year 2000 test labs are in place and operational. As expected, few
problems have been detected during testing for items believed to be compliant.
The following table indicates the project status for traditional information
technology and non-traditional areas by business unit. The tested category
indicates the percentage that has been fully tested or otherwise validated as
compliant. The untested category includes items that are believed to be
compliant but which have not yet been validated. The not compliant category
includes items which have been identified as not year 2000 compliant. The
unknown category includes items identified during the assessment phase which
require additional follow-up to determine whether they are compliant.
<TABLE>
<CAPTION>
BUSINESS UNIT TESTED UNTESTED NOT COMPLIANT UNKNOWN
- ------------- ------ -------- ------------- -------
<S> <C> <C> <C> <C>
Traditional Information Technology:
Gas Pipeline............................... 53% 28% 19% 0%
Energy Services............................ 32 49 13 6
Communications............................. 32 47 21 0
Corporate/Other............................ 71 21 7 1
Non-Traditional Information Technology:
Gas Pipeline............................... 50 33 17 0
Energy Services............................ 32 63 2 3
Communications............................. 21 57 17 5
Corporate/Other............................ 84 12 2 2
</TABLE>
Williams initiated a formal communications process with other companies in
1998 to determine the extent to which those companies are addressing year 2000
compliance. In connection with this process, Williams has sent approximately
15,000 letters and questionnaires to third parties including customers, vendors
and service providers. Additional communications are being mailed during 1999.
Williams is evaluating responses as they are received or otherwise investigating
the status of these companies' year 2000 compliance efforts. As of December 31,
1998, approximately 33 percent of the companies contacted have responded and
virtually all of these have indicated that they are already compliant or will be
compliant on a timely basis. Where necessary, Williams will be working with key
business partners to reduce the risk of a break in service or supply and with
non-compliant companies to mitigate any material adverse effect on Williams.
Williams expects to utilize both internal resources and external
contractors to complete the year 2000 compliance project. Williams has a core
group of 270 people involved in this enterprise-wide project. This includes 16
individuals responsible for coordinating, organizing, managing, communicating,
and monitoring the project and another 254 staff members responsible for
completing the project. Depending on which phase the project is in and what area
is being focused on at any given point in time, there can be an additional 500
to 1,200 employees who are also contributing a portion of their time to the
completion of this project. The Communications business unit has contracted with
an external contractor at a cost of approximately $3 million to assist in all
phases and various areas of the project. Gas Pipeline has contracted with an
external contractor for a cost of up to $6 million for the remediation of the
customer service software. Within Energy Services, two external contractors are
being utilized at a total cost of approximately $1 million.
F-16
<PAGE> 53
Several previously planned system implementations are scheduled for
completion on or before September 1, 1999, which will lessen possible year 2000
impacts. For example, a new year 2000 compliant payroll/human resources system,
was implemented January 1, 1999. It replaced multiple human resources
administration and payroll processing systems previously in place. The
Communications business unit has a major service information management system
implementation and other system implementations currently in process necessary
to integrate the operations of its many components acquired in past
acquisitions. These systems will address the year 2000 compliance issues in
certain areas. Within the Energy Services business unit, major applications had
been replaced or were being replaced by MAPCO prior to its acquisition by
Williams. Those applications have been incorporated into the enterprise-wide
project, and remaining system replacements are proceeding on schedule. Gas
Pipeline completed implementation of a new telephone system in 1998, and a new
common financial system is scheduled for completion July 1, 1999. In situations
where planned system implementations will not be in service timely, alternative
steps are being taken to make existing systems compliant.
Although all critical systems over which Williams has control are planned
to be compliant and tested before the year 2000, Williams has identified two
areas that would equate to a most reasonably likely worst case scenario. First
is the possibility of service interruptions due to non-compliance by third
parties. For example, power failures along the communications network or
transportation systems would cause service interruptions. This risk should be
minimized by the enterprise-wide communication effort and evaluation of
third-party compliance plans. Another area of risk for non-compliance is the
delay of system replacements scheduled for completion during 1999. The status of
these systems is being closely monitored to reduce the chance of delays in
completion dates. It is not possible to quantify the possible financial impact
if this most reasonably likely worst case scenario were to come to fruition.
Initial contingency planning began during 1998; however, significant focus
on that phase of the project will take place in 1999. Guidelines for that
process were issued in January 1999 in the form of a formal business continuity
plan. Contingency plans are being developed for critical business processes,
critical business partners, suppliers and system replacements that experience
significant delays. These plans are expected to be defined by August 31, 1999,
and implemented where appropriate.
Costs incurred for new software and hardware purchases are being
capitalized, and other costs are being expensed as incurred. Williams currently
estimates the total cost of the enterprise-wide project, including any
accelerated system replacements, to be approximately $55 million. Prior to 1998
and during the first quarter of 1998, Williams was conducting the project
awareness and inventory/assessment phases of the project and incurred costs
totaling $3 million. During the second quarter of 1998, $2 million was spent on
the renovation/replacement and testing/validation phases and completion of the
inventory/assessment phase. The third and fourth quarters of 1998 focused on the
renovation/replacement and testing/validation phases, and $10 million was
incurred. During the first-quarter 1999, renovation/replacement and
testing/validation will continue, contingency planning will begin and $15
million is expected to be spent. During the second quarter of 1999, the primary
focus is expected to shift to testing/validation and contingency planning, and
$13 million is expected to be spent. The third and fourth quarters of 1999 will
focus mainly on contingency planning and final testing with $12 million expected
to be spent. Of the $15 million incurred to date, approximately $12 million has
been expensed, and approximately $3 million has been capitalized. Of the $40
million of future costs necessary to complete the project within the schedule
described, approximately $36 million will be expensed and the remainder
capitalized. This estimate does not include Williams' potential share of year
2000 costs that may be incurred by partnerships and joint ventures in which the
company participates but is not the operator. The costs of previously planned
system replacements are not considered to be year 2000 costs and are, therefore,
excluded from the amounts discussed above.
The preceding discussion contains forward-looking statements including,
without limitation, statements relating to the company's plans, strategies,
objectives, expectations, intentions, and adequate resources, that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-looking statements
contained in the year 2000 update are based on certain assumptions which may
vary from actual results. Specifically, the dates on which the company believes
the year 2000 project will be completed and computer systems will be implemented
are based on
F-17
<PAGE> 54
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third parties, the company cannot
ensure its ability to timely and cost effectively resolve problems associated
with the year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
F-18
<PAGE> 55
ITEM 7A. MARKET RISK DISCLOSURES
INTEREST RATE RISK
Williams' interest rate risk exposure primarily results from its debt
portfolio which is influenced by 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. 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
periodically enters into interest-rate forward contracts to establish an
effective borrowing rate for anticipated long-term debt issuances. The maturity
of Williams' long-term debt portfolio is influenced by the life of its operating
assets.
At December 31, 1998, the amount of Williams' fixed and variable rate debt
was at targeted levels. 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 initiated in 1997 where Williams extinguished higher cost
long-term debt. In early 1998, the percent of Williams' fixed rate debt
increased to targeted levels as Williams completed issuing long-term debt under
the restructuring program and reduced its variable rate interim financing.
Williams has traditionally maintained an investment grade credit rating as one
aspect of managing its interest rate risk. In order to fund its 1999 capital
expenditure plan, Williams will need to access various sources of liquidity,
which will likely include traditional borrowing and leasing markets, while for
its telecommunications business, Williams also anticipates accessing high-yield
debt markets and equity markets.
The following tables provide information as of December 31, 1998 and 1997,
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>
FAIR VALUE
DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------ ---- ------ ---- ------ ---------- ------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes payable.................... $1,053 $ -- $ -- $ -- $ -- $ -- $1,053 $1,053
Interest rate.................... 5.9%
Long-term debt, including current
portion:
Fixed rate..................... $ 260 $563 $1,082 $995 $ 268 $2,615 $5,783 $5,922
Interest rate.................. 6.9% 6.9% 6.9% 7.0% 7.1% 7.5%
Variable rate.................. $ 130 $ -- $ -- $844 $ -- $ -- $ 974 $ 974
Interest rate(1)
Interest-rate swaps:
Pay variable/receive fixed..... $ 42 $ 47 $ 461 $240 $ -- $ 450 $1,240 $ 21
Pay rate(2)
Receive rate................... 6.3% 6.3% 6.3% 6.8% 6.8% 6.4%
Pay fixed/receive
variable(3).................. $ 172 $ 47 $ 53 $ 59 $ 65 $ 284 $ 680 $ (67)
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(5)................... $ 50 $ -- $ -- $ -- $ -- $ -- $ 50 $ --
</TABLE>
F-19
<PAGE> 56
<TABLE>
<CAPTION>
FAIR VALUE
DECEMBER 31,
1998 1999 2000 2001 2002 THEREAFTER TOTAL 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(5)................... $1,150 $ -- $ -- $ -- $ -- $ -- $1,150 $ (8)
</TABLE>
- ---------------
(1) LIBOR plus .30 percent and .33 percent for 1998 and 1997, respectively.
(2) LIBOR, except $250 million notional amount maturing after 2003 is at LIBOR
less 1.04 percent and $240 million (effective 1998) notional amount maturing
in 2002 is at LIBOR plus .26 percent.
(3) Counterparties have an option to cancel all outstanding swaps in 2001.
(4) LIBOR.
(5) Average locked in rate of 4.8 percent and 5.9 percent referenced to
underlying Treasury securities having a weighted-average maturity of 10
years and 6 years for 1998 and 1997, respectively.
COMMODITY PRICE RISK
Energy Marketing & Trading has trading operations that incur commodity
price risk as a consequence of providing 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 contracts which
include forward contracts, futures contracts, option contracts, swap agreements,
commodity inventories and short- and long-term purchase and sale commitments
which involve the physical delivery of an energy commodity. These energy
contracts are valued at fair value and unrealized gains and losses from changes
in fair 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 continues to manage market risk on a portfolio basis
subject to the parameters established in its trading policy. A risk control
group, independent of the trading operations, monitors compliance with the
established trading policy and measures the risk associated with the trading
portfolio.
Energy Marketing & Trading measures the market risk in its trading
portfolio on a daily basis utilizing a value at risk methodology to estimate the
potential one day loss from adverse changes in the fair value of its trading
operations. At December 31, 1998 and 1997, the value at risk for the trading
operations was $8 million and $4 million, respectively. The change in the value
at risk between 1998 and 1997 reflects that the market risk of the trading
portfolio has changed because of increases in the size of the portfolio, changes
in market prices and changes in the commodity product composition of the
portfolio. As supplemental quantitative information to further understand the
general risk levels of the trading portfolio, the average of the actual monthly
changes in the fair value of the trading portfolio for 1998 was an increase of
$8 million. Value at risk
F-20
<PAGE> 57
requires a number of key assumptions and is not necessarily representative of
actual losses in fair value that could be incurred from the trading portfolio.
Energy Marketing & Trading's value at risk model includes all financial
instruments and physical positions and commitments in its trading portfolio and
assumes that as a result of changes in commodity prices, there is a 97.5 percent
probability that the one day loss in the fair value of the trading portfolio
will not exceed the value at risk. The value-at-risk model uses historical
simulation to estimate hypothetical movements in future market prices assuming
normal market conditions based upon historical market prices. Value-at-risk does
not 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 the value-at-risk model.
FOREIGN CURRENCY RISK
Williams has investments in companies whose operations are located in
foreign countries, of which $95 million is 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
69 percent of the cost-method investments are in Asian countries and 27 percent
in South American countries. Approximately 50 percent of the Asian investments
and approximately 25 percent of the South American investments is in countries
whose currencies have recently suffered significant devaluations and volatility.
The ultimate duration and severity of the conditions in Asia and South America
remain uncertain as does the long-term impact on Williams' investments.
F-21
<PAGE> 58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-23
Consolidated Statement of Income............................ F-24
Consolidated Balance Sheet.................................. F-25
Consolidated Statement of Stockholders' Equity.............. F-26
Consolidated Statement of Cash Flows........................ F-27
Notes to Consolidated Financial Statements.................. F-28
Quarterly Financial Data (Unaudited)........................ F-59
</TABLE>
F-22
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of The Williams Companies, Inc.
We have audited the accompanying consolidated balance sheet of The Williams
Companies, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements and
schedules of MAPCO Inc., a wholly owned subsidiary (see Note 2), which
statements reflect total assets constituting 15% of the related consolidated
financial statement total for 1997, and which reflect net income constituting
approximately 26% and 21% of the related consolidated financial statement totals
for the years ended December 31, 1997 and 1996, respectively. Those statements
and schedules 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. for
those periods, 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
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The Williams
Companies, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, based on our audits and the report of other
auditors, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 26, 1999
F-23
<PAGE> 60
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1998 1997* 1996*
---------- ---------- ----------
(MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues (Note 19):
Gas Pipeline.............................................. $ 1,684.8 $ 1,680.1 $ 1,659.6
Energy Services**......................................... 5,592.8 6,100.5 5,554.2
Communications (Note 2)................................... 1,768.2 1,465.1 710.1
Other..................................................... 64.8 53.4 58.3
Intercompany eliminations................................. (1,452.3) (1,049.6) (1,133.2)
--------- --------- ---------
Total revenues..................................... 7,658.3 8,249.5 6,849.0
--------- --------- ---------
Segment costs and expenses:
Costs and operating expenses**............................ 5,532.4 6,227.2 5,063.9
Selling, general and administrative expenses 1,115.7 848.9 629.0
Other (income) expense -- net (Notes 2 and 5)............. 195.8 38.6 (19.8)
--------- --------- ---------
Total segment costs and expenses................... 6,843.9 7,114.7 5,673.1
--------- --------- ---------
General corporate expenses.................................. 89.2 95.1 72.5
--------- --------- ---------
Operating income (loss) (Notes 5 and 19):
Gas Pipeline.............................................. 610.4 614.7 564.3
Energy Services (Note 2).................................. 394.5 566.8 603.3
Communications (Note 2)................................... (175.0) (58.1) 5.0
Other..................................................... (15.5) 11.4 3.3
General corporate expenses (Note 2)....................... (89.2) (95.1) (72.5)
--------- --------- ---------
Total operating income............................. 725.2 1,039.7 1,103.4
--------- --------- ---------
Interest accrued............................................ (515.1) (463.5) (418.1)
Interest capitalized........................................ 30.6 23.3 8.2
Investing income (Note 4)................................... 25.8 12.6 16.6
Gain on sale of interest in subsidiary (Note 2)............. -- 44.5 --
Gain on sales of assets (Note 5)............................ -- 66.0 36.5
Minority interest in (income) loss of consolidated
subsidiaries (Note 2)..................................... 9.6 (18.2) (1.4)
Other income (expense) -- net............................... (19.1) .5 13.2
--------- --------- ---------
Income from continuing operations before extraordinary loss
and income taxes.......................................... 257.0 704.9 758.4
Provision for income taxes (Note 6)......................... 110.4 251.2 265.9
--------- --------- ---------
Income from continuing operations before extraordinary
loss...................................................... 146.6 453.7 492.5
Loss from discontinued operations (Note 3).................. (14.3) (6.3) (32.7)
--------- --------- ---------
Income before extraordinary loss............................ 132.3 447.4 459.8
Extraordinary loss (Note 7)................................. (4.8) (79.1) --
--------- --------- ---------
Net income.................................................. 127.5 368.3 459.8
Preferred stock dividends (Note 15)......................... 7.1 9.8 10.4
--------- --------- ---------
Income applicable to common stock........................... $ 120.4 $ 358.5 $ 449.4
========= ========= =========
Basic earnings per common share (Note 8):
Income from continuing operations before extraordinary
loss.................................................... $ .32 $ 1.08 $ 1.16
Loss from discontinued operations (Note 3)................ (.03) (.02) (.08)
--------- --------- ---------
Income before extraordinary loss.......................... .29 1.06 1.08
Extraordinary loss (Note 7)............................... (.01) (.19) --
--------- --------- ---------
Net income................................................ $ .28 $ .87 $ 1.08
========= ========= =========
Diluted earnings per common share (Note 8):
Income from continuing operations before extraordinary
loss.................................................... $ .32 $ 1.05 $ 1.14
Loss from discontinued operations (Note 3)................ (.03) (.01) (.08)
--------- --------- ---------
Income before extraordinary loss.......................... .29 1.04 1.06
Extraordinary loss (Note 7) (.01) (.19) --
--------- --------- ---------
Net income $ .28 $ .85 $ 1.06
========= ========= =========
</TABLE>
- ---------------
* Reclassified as described in Note 1.
** Includes consumer excise taxes of $192.9 million, $157.8 million and $155.9
million in 1998, 1997 and 1996, respectively.
See accompanying notes.
F-24
<PAGE> 61
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) 1998 1997
- ----------------------------------------------- --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 503.3 $ 122.1
Receivables less allowance of $30.5 ($21.5 in 1997)....... 1,628.2 1,584.5
Transportation and exchange gas receivable................ 96.4 130.4
Inventories (Note 10)..................................... 497.5 433.9
Energy trading assets..................................... 354.5 180.3
Deferred income taxes (Note 6)............................ 239.9 236.6
Other..................................................... 212.3 176.2
--------- ---------
Total current assets.............................. 3,532.1 2,864.0
--------- ---------
Investments (Note 4)........................................ 866.1 388.1
Property, plant and equipment -- net (Note 11).............. 12,604.6 11,536.8
Goodwill and other intangible assets -- net (Note 1)........ 583.6 600.6
Other assets and deferred charges........................... 1,060.9 888.1
--------- ---------
Total assets...................................... $18,647.3 $16,277.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 13)................................... $ 1,052.7 $ 693.0
Accounts payable (Note 12)................................ 1,158.2 1,288.5
Transportation and exchange gas payable................... 47.1 67.7
Accrued liabilities (Note 12)............................. 1,500.5 1,281.6
Energy trading liabilities................................ 290.1 182.0
Long-term debt due within one year (Note 13).............. 390.6 80.3
--------- ---------
Total current liabilities......................... 4,439.2 3,593.1
--------- ---------
Long-term debt (Note 13).................................... 6,366.4 5,351.5
Deferred income taxes (Note 6).............................. 2,060.8 2,009.1
Other liabilities........................................... 1,015.2 946.5
Minority interest in consolidated subsidiaries (Notes 2 and
14)....................................................... 508.3 144.8
Contingent liabilities and commitments (Notes 11 and 17)
Stockholders' equity (Note 15):
Preferred stock, $1 per share par value, 30 million shares
authorized, 1.8 million issued in 1998, 2.5 million in
1997................................................... 102.2 142.2
Common stock, $1 per share par value, 960 million shares
authorized, 432.3 million issued in 1998, 431.5 million
in 1997................................................ 432.3 431.5
Capital in excess of par value............................ 982.4 1,041.6
Retained earnings......................................... 2,849.5 2,983.3
Accumulated other comprehensive income (loss) (Note 18)... 16.7 (2.5)
Other..................................................... (78.5) (51.6)
--------- ---------
4,304.6 4,544.5
Less treasury stock (at cost), 4.0 million shares of
common stock in 1998 and 18.9 million in 1997.......... (47.2) (311.9)
--------- ---------
Total stockholders' equity........................ 4,257.4 4,232.6
--------- ---------
Total liabilities and stockholders' equity........ $18,647.3 $16,277.6
========= =========
</TABLE>
See accompanying notes.
F-25
<PAGE> 62
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN ACCUMULATED
EXCESS OF OTHER
PREFERRED COMMON PAR RETAINED COMPREHENSIVE TREASURY
STOCK STOCK VALUE EARNINGS INCOME (LOSS) OTHER STOCK TOTAL
--------- ------- ---------- --------- ------------- ------ --------- --------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <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
Comprehensive income:
Net income -- 1997................. -- -- -- 368.3 -- -- -- 368.3
Other comprehensive income (Note
18):
Unrealized depreciation on
marketable equity securities... -- -- -- -- (2.4) -- -- (2.4)
Foreign currency translation
adjustments.................... -- -- -- -- (.1) -- -- (.1)
--------
Total other comprehensive
income...................... (2.5)
--------
Total comprehensive income.......... 365.8
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
Other............................... -- -- .2 .7 -- -- -- .9
------ ------ -------- -------- ----- ------ --------- --------
Balance, December 31, 1997.......... $142.2 $431.5 $1,041.6 $2,983.3 $(2.5) $(51.6) $ (311.9) $4,232.6
Comprehensive income:
Net income -- 1998................. -- -- -- 127.5 -- -- -- 127.5
Other comprehensive income (Note
18):
Unrealized appreciation on
marketable equity securities... -- -- -- -- 24.1 -- -- 24.1
Foreign currency translation
adjustments.................... -- -- -- -- (4.9) -- -- (4.9)
--------
Total other comprehensive
income...................... 19.2
--------
Total comprehensive income.......... 146.7
Cash dividends --
Common stock ($.60 per share)...... -- -- -- (240.3) -- -- -- (240.3)
Common stock of pooled company..... -- -- -- (14.0) -- -- -- (14.0)
Preferred stock (Note 15).......... -- -- -- (7.1) -- -- -- (7.1)
Issuance of shares -- 12.4 million
common............................. -- 11.5 47.4 -- -- (.3) 10.7 69.3
Stockholders' notes issued (Note
15)................................ -- -- -- -- -- (35.7) -- (35.7)
Conversion of preferred
stock -- 704,190 shares............ (40.0). 3.3 36.7 -- -- -- -- --
Retirement of treasury stock -- 14.0
million common..................... -- (14.0) (239.8) -- -- -- 253.8 --
Expiration of equity put options.... -- -- 12.3 -- -- -- -- 12.3
Tax benefit of stock-based awards... -- -- 83.9 -- -- -- -- 83.9
ESOP loan repayment................. -- -- -- -- -- 6.3 -- 6.3
Amortization of deferred
compensation....................... -- -- -- -- -- 2.8 -- 2.8
Other............................... -- -- .3 .1 -- -- .2 .6
------ ------ -------- -------- ----- ------ --------- --------
Balance, December 31, 1998.......... $102.2 $432.3 $ 982.4 $2,849.5 $16.7 $(78.5) $ (47.2) $4,257.4
====== ====== ======== ======== ===== ====== ========= ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 63
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 127.5 $ 368.3 $ 459.8
Adjustments to reconcile to cash provided from operations:
Discontinued operations................................... 14.3 6.3 32.7
Extraordinary loss........................................ 4.8 79.1 --
Premium on early extinguishment of debt................... (8.9) (171.2) --
Depreciation, depletion and amortization.................. 646.3 585.9 500.3
Provision for deferred income taxes....................... 42.9 104.3 92.7
Provision for loss on property and other assets........... 126.8 49.8 --
(Gain) loss on dispositions of property and interest in
subsidiary............................................. 5.9 (121.0) (68.9)
Provision for uncollectible accounts...................... 39.8 13.3 5.3
Minority interest in income (loss) of consolidated
subsidiaries........................................... (9.6) 18.2 1.4
Cash provided (used) by changes in assets and liabilities:
Receivables sold....................................... (41.8) 188.6 (13.1)
Receivables............................................ (1.1) (180.5) (361.0)
Inventories............................................ (61.6) (89.5) (11.9)
Other current assets................................... (58.5) 16.7 7.6
Accounts payable....................................... (199.7) 188.0 347.2
Accrued liabilities.................................... 91.9 (37.6) (7.4)
Changes in current energy trading assets and
liabilities............................................ (66.2) 11.0 (29.7)
Changes in non-current energy trading assets and
liabilities............................................ (44.6) (47.7) (37.7)
Other, including changes in non-current assets and
liabilities............................................ 4.5 6.2 34.0
--------- --------- ---------
Net cash provided by continuing operations........ 612.7 988.2 951.3
Net cash provided by discontinued operations...... -- -- 21.8
--------- --------- ---------
Net cash provided by operating activities......... 612.7 988.2 973.1
--------- --------- ---------
Financing Activities:
Proceeds from notes payable................................. 806.9 1,927.4 406.8
Payments of notes payable................................... (946.0) (1,305.5) (298.6)
Proceeds from long-term debt................................ 3,597.0 2,217.4 2,000.5
Payments of long-term debt.................................. (1,776.5) (2,199.0) (1,408.5)
Proceeds from issuance of common stock...................... 78.2 72.5 56.1
Purchases of treasury stock................................. -- (50.2) (132.2)
Dividends paid.............................................. (261.4) (214.4) (188.5)
Proceeds from sale of limited partnership and LLC member
interests................................................. 335.1 -- --
Other -- net................................................ (24.7) (24.3) (6.2)
--------- --------- ---------
Net cash provided by financing activities......... 1,808.6 423.9 429.4
Investing Activities:
Property, plant and equipment:
Capital expenditures...................................... (1,708.2) (1,340.5) (970.4)
Proceeds from dispositions................................ 43.1 104.2 73.8
Changes in accounts payable and accrued liabilities....... 87.9 (7.5) 9.3
Acquisition of businesses, net of cash acquired............. (9.6) (146.7) (371.8)
Proceeds from sales of businesses........................... -- -- 236.4
Income tax and other payments related to discontinued
operations................................................ (9.9) (9.7) (261.7)
Proceeds from sales of assets............................... 11.6 71.2 66.0
Purchase of investments/advances to affiliates.............. (470.3) (205.6) (100.0)
Other -- net................................................ 15.3 24.5 12.3
--------- --------- ---------
Net cash used by investing activities............. (2,040.1) (1,510.1) (1,306.1)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents..................................... 381.2 (98.0) 96.4
Cash and cash equivalents at beginning of year.............. 122.1 220.1 123.7
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 503.3 $ 122.1 $ 220.1
========= ========= =========
</TABLE>
See accompanying notes.
F-27
<PAGE> 64
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Operations of The Williams Companies, Inc. (Williams) are located
principally in the United States and are organized into three industry groups:
Gas Pipeline, Energy Services and Communications.
Gas Pipeline is comprised of five interstate natural gas pipelines located
in the eastern, midsouth, Gulf Coast, midwest and northwest regions of the
United States. The five Gas Pipeline operating segments have been aggregated for
reporting purposes and include Williams Gas Pipelines Central, Kern River Gas
Transmission, Northwest Pipeline, Texas Gas Transmission and Transcontinental
Gas Pipe Line.
Energy Services includes four operating segments: Energy Marketing &
Trading, Exploration & Production, Midstream Gas & Liquids, and Petroleum
Services. Energy Marketing & Trading offers price-risk management services and
buys, sells and arranges for transportation/transmission of energy
commodities -- including natural gas and gas liquids, crude oil and refined
products, and electricity -- to local distribution companies and large
industrial and commercial customers in North America and retail propane
marketing in the upper midwest and southeast regions. Exploration & Production
includes hydrocarbon exploration and production activities in the Rocky Mountain
and Gulf Coast regions. Midstream Gas & Liquids is comprised of natural gas
gathering and processing facilities in the Rocky Mountain, midwest and Gulf
Coast regions, natural gas liquids pipelines in the Rocky Mountain, southwest,
midwest and Gulf Coast regions and an anhydrous ammonia pipeline in the midwest.
Petroleum Services includes petroleum refining and marketing in Alaska and the
southeast, a petroleum products pipeline and ethanol production and marketing
operations in the midwest region.
Communications consists of three operating segments: Communications
Solutions, Network Applications, and Network Services. Communications Solutions
includes consulting, installation and maintenance of customer-premise voice,
data and video equipment and services for customers throughout North America.
Network Applications' operations are located principally in the United States
and include video, advertising distribution, and other multimedia transmission
services (via terrestrial and satellite links) for the broadcast industry as
well as business audio and video conferencing services. Network Services
provides fiber-optic construction, transmission and management services
throughout the United States.
Basis of presentation
Williams adopted Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
during the fourth quarter of 1998. SFAS No. 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas, and major customers. Prior year
financial statements and notes have been reclassified to conform to the
requirements of SFAS No. 131. (See Note 19 for segment disclosures).
On March 28, 1998, Williams completed the acquisition of MAPCO Inc. (see
Note 2). The transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes reflect the results
of operations, financial position and cash flows as if the companies had been
combined throughout the periods presented. The restated 1997 annual financial
statements were filed with the Securities and Exchange Commission in a Form 8-K
dated May 18, 1998. MAPCO was engaged in the natural gas liquids pipeline,
petroleum refining and marketing and propane marketing businesses, and became
part of the Energy Services business unit. Effective April 1, 1998, certain
marketing activities of natural gas liquids (previously reported in Midstream
Gas & Liquids) and petroleum refining (previously reported in Petroleum
Services) were transferred to Energy Marketing & Trading and combined with its
energy risk trading operations. As a result, revenues and segment profit amounts
for 1997 and 1996 have been reclassified and reported within Energy Marketing &
Trading. These marketing activities are reported through first-quarter 1998 on a
"gross" basis in the Consolidated Statement of Income as revenues and segment
costs within
F-28
<PAGE> 65
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Energy Marketing & Trading. Concurrent with completing the combination of such
activities with the energy risk trading operations of Energy Marketing &
Trading, the related contract rights and obligations of certain of these
operations were recorded in the Consolidated Balance Sheet on a market-value
basis consistent with Energy Marketing & Trading's accounting policy, and the
income statement presentation relating to these operations was changed effective
April 1, 1998, on a prospective basis, to reflect these revenues net of the
related costs to purchase such items.
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) (see Note 2).
Communications Solutions' revenues and segment profit amounts for 1997 include
the operating results of the LLC beginning May 1, 1997.
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 for energy trading activities by Energy Marketing &
Trading, which are primarily stated at fair value. 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,
refined products and general merchandise inventories which are determined using
the last-in, first-out (LIFO) method.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Depreciation is provided
primarily on the straight-line method over estimated useful lives. Gains or
losses from the ordinary sale or retirement of property, plant and
F-29
<PAGE> 66
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 from 10
to 30 years. Other intangible assets are amortized on a straight-line basis over
periods from three to 11 years. Accumulated amortization at December 31, 1998
and 1997 was $128.9 million and $72.2 million, respectively. Amortization was
$49.7 million, $29.2 million and $15.2 million in 1998, 1997 and 1996,
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. Gas Pipeline recognizes 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 resolution of FERC orders. Williams records rate refund accruals
based on management's estimate of the expected outcome of these proceedings.
Communications Solutions primarily uses the percentage-of-completion method of
recognizing revenues for services provided. Network Services records revenues
related to the sale of portions of its fiber-optic network upon completion of
the construction of the respective network segments and upon acceptance of the
fiber by the purchaser. Certain of Energy Marketing & Trading's activities are
accounted for at fair value as described in Energy Trading Activities.
Energy trading activities
Energy Marketing & Trading has trading operations that enter into energy
contracts to provide price-risk management services to its third-party
customers. Energy contracts include forward contracts, futures contracts, option
contracts, swap agreements, commodity inventories and short- and long-term
purchase and sale commitments, which involve physical delivery of an energy
commodity. These energy contracts are valued at fair value and, with the
exception of commodity inventories, are recorded in energy trading assets, other
assets and deferred charges, energy trading liabilities and other liabilities in
the Consolidated Balance Sheet. The net change in fair value representing
unrealized gains and losses is recognized in income currently and is recorded as
revenues in the Consolidated Statement of Income. Fair value, which is subject
to change in the near term, reflects management's estimates using valuation
techniques that reflect the best information available in the circumstances.
This information includes various factors such as quoted market prices,
estimates of market prices in the absence of quoted market prices, contractual
volumes, estimated volumes under option and other arrangements that result in
varying volumes, other contract terms, liquidity of the market in which the
contract is transacted, 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 fair value accounting for such trading activities.
Williams also enters into energy 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 in the same manner as the hedged
F-30
<PAGE> 67
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
item. These contracts are initially and regularly evaluated to determine that
there is a high correlation between changes in the fair value of the hedge
contract and fair value of the hedged item.
Impairment of long-lived assets
Williams evaluates the long-lived assets, including related intangibles, of
identifiable business activities for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether an impairment
has occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a provision
for loss if the carrying value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
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 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 are 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.
F-31
<PAGE> 68
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes
For certain of 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. This consolidated return
will include the operations of Williams' subsidiaries. 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 include any dilutive effect of stock options, restricted
stock and convertible preferred stock.
New accounting standards
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. This standard requires that all
derivatives be recognized as assets or liabilities in the balance sheet and that
those instruments be measured at fair value. The effect of this standard on
Williams' results of operations and financial position will be evaluated in
1999.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," effective
for fiscal years beginning after December 15, 1998. The SOP requires that all
start-up costs be expensed and that the effect of adopting the SOP be reported
as the cumulative effect of a change in accounting principle. Williams will
adopt this SOP effective January 1, 1999. The effect of adopting the SOP on
Williams' results of operations and financial position is not expected to be
material.
The Emerging Issues Task Force (EITF) reached a consensus on Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," which is effective for fiscal years beginning after December 15,
1998. The effect of initially applying the Consensus must be reported as a
cumulative effect of a change in accounting principle, and financial statements
for periods prior to initial application of the Consensus may not be restated.
The EITF concluded that energy trading contracts should be recorded at fair
value in the balance sheet, with changes in fair value included in earnings.
Energy Marketing & Trading records its energy contracts at estimated fair value,
except for certain types of contracts that are not currently considered to be
trading in nature. The effect of the Consensus on Williams' results of
operations and financial position has yet to be determined.
NOTE 2. ACQUISITIONS
MAPCO
On March 28, 1998, Williams completed the acquisition of MAPCO Inc. by
exchanging 1.665 shares of Williams common stock for each outstanding share of
MAPCO common stock. In addition, outstanding MAPCO employee stock options were
converted into 5.7 million shares of Williams common stock. Upon completion,
98.8 million shares of Williams common stock valued at $3.1 billion, based on
the closing price of Williams common stock on March 27, 1998, were issued. Also
in connection with the merger, 8.4 million shares of MAPCO $1 par value common
stock previously held in treasury were retired. These shares had a carrying
value of $253.8 million.
F-32
<PAGE> 69
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 include the combined results of operations, financial
position and cash flows of MAPCO and 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.
In connection with the merger, Williams has recognized approximately $80
million in merger-related costs in 1998, comprised primarily of outside
professional fees and early retirement and severance costs. Approximately $51
million of these merger-related costs are included in other (income) expense-net
as a component of segment profit within Energy Services for 1998 (see Note 19),
and approximately $29 million, unrelated to segments, is included in general
corporate expenses. During 1997, payments of $32.6 million were made for
non-compete agreements. These costs are being amortized over one to three years
from the merger completion date.
The results of operations for the separate companies prior to the merger
date and the combined amounts included in the Consolidated Statement of Income
follow:
<TABLE>
<CAPTION>
YEARS ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, -------------------
1998 1997 1996
------------------ -------- --------
(MILLIONS)
<S> <C> <C> <C>
Revenues:
Williams............................................. $1,136.3 $4,417.5 $3,537.3
MAPCO................................................ 823.8 3,847.5 3,353.1
Intercompany eliminations............................ (1.3) (15.5) (41.4)
-------- -------- --------
Combined............................................. $1,958.8 $8,249.5 $6,849.0
-------- -------- --------
Net income:
Williams............................................. $ 59.7 $ 271.4 $ 362.3
MAPCO................................................ 8.4 96.9 97.5
-------- -------- --------
Combined............................................. $ 68.1 $ 368.3 $ 459.8
-------- -------- --------
</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' 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, were 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 $8,498 million
and $7,586 million, respectively. The pro forma effect of the transaction on
Williams' net income is not significant. Pro forma financial information is not
necessarily
F-33
<PAGE> 70
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indicative of results of operations that would have occurred if the transaction
had occurred on January 1, 1996, or of future results of operations of the
combined companies.
Kern River
On January 16, 1996, Williams acquired the remaining interest in Kern River
for $206 million in cash. The acquisition was accounted for as a purchase, and
the acquired assets and liabilities have been recorded based on an allocation of
the purchase price, with substantially all of the cost in excess of Kern River's
historical carrying value allocated to property, plant and equipment.
NOTE 3. DISCONTINUED OPERATIONS
On September 10, 1996, substantially all of the net assets of the MAPCO
coal business were sold to Alliance Coal Corporation, a corporation formed by
The Beacon Group Energy Investment Fund, L.P. ("Beacon"), for $236 million in
cash. The sale resulted in losses of $14.3 million, $6.3 million and $47.2
million in 1998, 1997 and 1996, respectively, (net of income tax benefits of
$7.4 million, $.7 million and $30 million, respectively). The losses in 1998 and
1997 include cost accruals for contractual obligations related to financial
performance of the assets sold to Beacon and a 1997 income tax adjustment to the
1996 loss amount.
NOTE 4. INVESTING ACTIVITIES
Investments at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Equity:
Brazilian Telecommunications:
Algar Telecom Leste S.A. -- 30%........................... $142.7 $ --
Lightel -- S.A. Tecnologia da Informacao -- 20%........... 68.7 68.5
Longhorn Partners Pipeline, L.P. -- 48%..................... 90.0 5.0
Discovery Pipeline -- 50%................................... 78.0 59.3
Other....................................................... 147.6 122.7
------ ------
527.0 255.5
Cost........................................................ 157.0 113.9
Advances to affiliates and other............................ 182.1 18.7
------ ------
$866.1 $388.1
====== ======
</TABLE>
Earnings related to equity investments are included in revenues (see Note
19).
Dividends and distributions received from investments carried on an equity
basis were $16 million in 1998 and $7 million in both 1997 and 1996.
At December 31, 1998, certain equity investments, with a carrying value of
$45 million, have a market value of $100 million.
Investing income for all of the years presented is comprised primarily of
interest income.
NOTE 5. ASSET SALES, WRITE-OFFS AND OTHER ACCRUALS
Included in the 1998 segment profit for all of the respective business
units and general corporate expenses are accruals totaling approximately $31
million related to the modification of Williams' employee benefit program
associated with vesting of paid time off.
F-34
<PAGE> 71
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other (income) expense -- net and Gas Pipeline's segment profit for 1998
include a charge of $58 million related to certain long-term gas supply
contracts that Williams Gas Pipelines Central entered into in 1982. The charge
represents an estimate, based on recent developments, of natural gas costs that
will not be recoverable from customers (see Note 17 for additional information).
Included in the 1998 other (income) expense -- net and segment profit for
Energy Marketing & Trading are asset impairments totaling approximately $14
million related to the decision to focus its retail natural gas and electric
business from sales to small commercial and residential customers to large end
users. The impairment primarily reflects the reduction in value of a software
system and certain intangible assets associated specifically with retail energy
applications that will no longer be utilized by Energy Marketing & Trading and
for which management estimates the fair value to be insignificant.
Included in the 1998 other (income) expense -- net and segment profit for
Petroleum Services is a $15.5 million loss provision, including interest, for
potential refunds to customers from a recent order from the FERC (see Note 17
for additional information).
Included in 1998 other (income) expense -- net in segment costs and
expenses and Network Applications' segment loss is a $23.2 million loss related
to a venture involved in the technology and transmission of business information
for news and educational purposes. The loss occurred as a result of Williams'
re-evaluation and decision to exit the venture as Williams decided against
making further investments in the venture. The loss was recorded in the third
quarter, and Williams abandoned the venture during the fourth quarter. The loss
primarily consists of $17 million from impairing the total carrying amount of
the investment and $5 million from recognition of contractual obligations that
will continue after the abandonment. During the fourth quarter of 1998, $2
million of contractual obligations were paid. Williams' share of losses from the
venture is not significant to consolidated net income for any periods presented.
Included in 1997 other (income) expense -- net in segment costs and
expenses and Network Applications' segment loss are impairments and other
charges totaling $49.8 million. In the fourth quarter of 1997, Communications
made the decision and committed to a plan to sell the learning content business,
which resulted in a loss of $28 million. The loss consisted of a $21 million
impairment of the assets to fair value less cost to sell and recognition of $7
million in exit costs primarily consisting of employee-related costs and
contractual obligations. Fair value was based on management's estimate of the
expected net proceeds to be received. During 1998, the learning content business
was sold with a resulting $2 million reduction in 1998 expenses. During 1998, $5
million of exit costs were paid. The results of operations and the effect of
suspending amortization for the learning content business included in
consolidated net income are not significant for any of the periods presented.
Additionally, in the fourth quarter of 1997, Communications' management
evaluated certain Network Applications' business activities because of
indications that their carrying values may not be recoverable. This resulted in
impairments of $17 million, based upon management's estimate as to the ultimate
recovery of these evaluated activities.
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 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.
F-35
<PAGE> 72
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. PROVISION FOR INCOME TAXES
The provision for income taxes from continuing operations includes:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................ $ 57.8 $121.5 $154.1
State.............................................. 5.1 23.1 19.1
Foreign............................................ 4.6 2.3 --
------ ------ ------
67.5 146.9 173.2
------ ------ ------
Deferred:
Federal............................................ 32.2 90.4 76.5
State.............................................. 10.7 13.9 16.2
------ ------ ------
42.9 104.3 92.7
------ ------ ------
Total provision............................ $110.4 $251.2 $265.9
====== ====== ======
</TABLE>
Reconciliations from the provision for income taxes from continuing
operations at the federal statutory rate to the provision for income taxes are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Provision at statutory rate.......................... $ 89.9 $246.7 $265.4
Increases (reductions) in taxes resulting from:
State income taxes (net of federal benefit)........ 10.3 24.8 24.8
Non-deductible costs, including goodwill
amortization.................................... 11.7 8.8 3.8
Income tax credits................................. (4.0) (16.5) (19.0)
Non-taxable gain from sale of interest in
subsidiary (Note 2)............................. -- (15.6) --
Other-- net........................................ 2.5 3.0 (9.1)
------ ------ ------
Provision for income taxes........................... $110.4 $251.2 $265.9
====== ====== ======
</TABLE>
Significant components of deferred tax liabilities and assets as of
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997*
-------- --------
(MILLIONS)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment............................. $2,322.4 $2,135.1
Other..................................................... 166.5 238.5
-------- --------
Total deferred tax liabilities.................... 2,488.9 2,373.6
-------- --------
Deferred tax assets:
Rate refunds.............................................. 126.1 120.7
Accrued liabilities....................................... 209.1 158.3
Minimum tax credits....................................... 178.5 131.3
Other..................................................... 154.3 190.8
-------- --------
Total deferred tax assets......................... 668.0 601.1
-------- --------
Net deferred tax liabilities................................ $1,820.9 $1,772.5
======== ========
</TABLE>
- ---------------
* Reclassified to conform to current classifications.
F-36
<PAGE> 73
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash payments for income taxes (net of refunds) were $29 million, $126
million and $472 million in 1998, 1997 and 1996, respectively.
NOTE 7. EXTRAORDINARY LOSS
During 1998, Williams paid $54.4 million to redeem higher interest rate
debt for a $4.8 million net loss (net of a $2.6 million benefit for income
taxes).
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, for a net loss of $79.1 million (net of a $46.6 million benefit for
income taxes). In addition, approximately $30 million of costs to redeem the
debt have been deferred as a regulatory asset for rate recovery and are being
amortized over the original term of the related debt.
NOTE 8. EARNINGS PER SHARE
Basic and diluted earnings per common share are computed for the years
ended December 31, 1998, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE
AMOUNTS; SHARES IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations..................... $146.6 $453.7 $492.5
Preferred stock dividends............................. (7.1) (9.8) (10.4)
------- ------- -------
Income from continuing operations available to common
stockholders for basic earnings per share........... 139.5 443.9 482.1
Effect of dilutive securities:
Convertible preferred stock dividends............... -- 8.7 8.8
------- ------- -------
Income from continuing operations available to common
stockholders for diluted earnings per share......... $139.5 $452.6 $490.9
======= ======= =======
Basic weighted-average shares......................... 425,681 412,380 414,417
Effect of dilutive securities:
Convertible preferred stock......................... -- 11,717 11,718
Stock options....................................... 6,135 6,097 5,828
------- ------- -------
6,135 17,814 17,546
------- ------- -------
Diluted weighted-average shares....................... 431,816 430,194 431,963
======= ======= =======
Earnings per share from continuing operations:
Basic............................................... $.32 $1.08 $1.16
======= ======= =======
Diluted............................................. $.32 $1.05 $1.14
======= ======= =======
</TABLE>
During 1998, approximately 9.6 million shares related to the assumed
conversion of $3.50 convertible preferred stock have been excluded from the
computation of diluted earnings per common share. Inclusion of these shares
would be antidilutive. In addition, options to purchase approximately 5 million
shares of common stock at a weighted-average exercise price of $32.20 were
outstanding at December 31, 1998, but were not included in the computation of
diluted earnings per common share. Inclusion of these shares would also be
antidilutive, as the exercise prices of the options exceeded the 1998 average
market price of the common shares.
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 1997 computation of
F-37
<PAGE> 74
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
diluted earnings per common share. Inclusion of these shares would have been
antidilutive, as the exercise prices of the options exceeded the 1997 average
market price of the common shares.
NOTE 9. EMPLOYEE BENEFIT PLANS
The following table presents the changes in benefit obligations and plan
assets for pension benefits and other postretirement benefits for the years
indicated. It also presents a reconciliation of the funded status of these
benefits to the amount recognized in the Consolidated Balance Sheet at December
31 of each year indicated.
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------ ------------------
1998 1997 1998 1997
-------- ------ ------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year........... $ 969.8 $794.1 $ 389.8 $ 321.4
Service cost...................................... 41.9 34.9 8.9 7.1
Interest cost..................................... 70.0 63.6 29.1 24.4
Plan participants' contributions.................. -- -- 1.6 1.7
Amendments........................................ (65.2) .2 2.2 --
Acquisition....................................... -- 30.2 -- 2.3
Settlement/curtailment gain....................... (29.5) -- -- --
Special termination benefit cost.................. 35.1 -- 3.6 --
Actuarial loss.................................... 134.6 109.1 32.3 48.7
Benefits paid..................................... (111.0) (62.3) (18.5) (15.8)
-------- ------ ------- -------
Benefit obligation at end of year................. 1,045.7 969.8 449.0 389.8
-------- ------ ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year.... 975.7 845.0 184.5 155.0
Actual return on plan assets...................... 120.7 134.0 17.2 19.4
Acquisition....................................... .1 34.1 -- --
Employer contributions............................ 53.6 24.9 24.9 24.2
Plan participants' contributions.................. -- -- 1.6 1.7
Benefits paid..................................... (83.0) (62.3) (18.5) (15.8)
Settlement benefits paid.......................... (28.0) -- -- --
-------- ------ ------- -------
Fair value of plan assets at end of year.......... 1,039.1 975.7 209.7 184.5
-------- ------ ------- -------
Funded status....................................... (6.6) 5.9 (239.3) (205.3)
Unrecognized net actuarial (gain) loss.............. 97.4 7.3 7.4 (18.1)
Unrecognized prior service cost (credit)............ (54.8) 6.7 (.2) (3.4)
Unrecognized transition (asset) obligation.......... (1.7) (2.5) 57.0 61.1
-------- ------ ------- -------
Prepaid (accrued) benefit cost...................... $ 34.3 $ 17.4 $(175.1) $(165.7)
======== ====== ======= =======
Prepaid benefit cost................................ $ 83.0 $ 61.0 $ -- $ --
Accrued benefit cost................................ (48.7) (43.6) (175.1) (165.7)
-------- ------ ------- -------
$ 34.3 $ 17.4 $(175.1) $(165.7)
======== ====== ======= =======
</TABLE>
F-38
<PAGE> 75
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension and other postretirement benefit expense consists of the
following:
<TABLE>
<CAPTION>
PENSION BENEFITS
------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Components of net periodic pension expense:
Service cost............................................. $ 41.9 $ 34.9 $ 36.6
Interest cost............................................ 70.0 63.6 56.5
Expected return on plan assets........................... (89.5) (76.9) (68.3)
Amortization of transition asset......................... (.7) (.7) (4.4)
Amortization of prior service cost (credit).............. (4.1) 1.0 1.1
Recognized net actuarial loss............................ 6.5 3.6 2.2
Regulatory asset amortization............................ 12.2 5.3 6.3
Settlement/curtailment (gain) loss....................... (22.2) -- 4.5
Special termination benefit cost......................... 35.1 -- --
------ ------ ------
Net periodic pension expense............................... $ 49.2 $ 30.8 $ 34.5
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT BENEFITS
-------------------------------
1998 1997 1996
--------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Components of net periodic postretirement benefit expense:
Service cost.............................................. $ 8.9 $ 7.1 $ 6.4
Interest cost............................................. 29.1 24.4 22.7
Expected return on plan assets............................ (12.1) (9.9) (7.9)
Amortization of transition obligation..................... 4.1 4.1 5.0
Amortization of prior service cost........................ .4 -- .7
Recognized net actuarial loss (gain)...................... .2 (1.0) (1.2)
Regulatory asset amortization............................. 5.4 12.5 11.7
Special termination benefit cost.......................... 3.6 -- --
------ ----- -----
Net periodic postretirement benefit expense................. $ 39.6 $37.2 $37.4
====== ===== =====
</TABLE>
In connection with the MAPCO merger, Williams offered an early retirement
incentive program to a certain group of employees during 1998. Texas Gas
Transmission also offered an early retirement incentive program to certain
employees during 1998.
The following are the weighted-average assumptions utilized as of December
31 of the year indicated.
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
1998 1997 1998 1997
------- ------- ---- --------
<S> <C> <C> <C> <C>
Discount rate.......................................... 7.0% 7.25% 7.0% 7.25%
Expected return on plan assets......................... 10 10 10 10
Expected return on plan assets (after tax)............. N/A N/A 6 6
Rate of compensation increase.......................... 5 5 N/A N/A
</TABLE>
The annual assumed rate of increase in the health care cost trend rate for
1999 is 8.1 percent to 8.9 percent, systematically decreasing to 5 percent by
2006.
Williams sponsors various nonpension postretirement benefit plans. The
plans provide for retiree contributions and contain other cost-sharing features
such as deductibles and coinsurance. The accounting for
F-39
<PAGE> 76
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The health care cost trend rate assumption has a significant effect on the
amounts reported. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
(MILLIONS)
<S> <C> <C>
Effect on total of service and interest cost components... $ 5.8 $ (4.7)
Effect on postretirement benefit obligation............... 56.3 (46.2)
</TABLE>
The amount of postretirement benefit costs deferred as a regulatory asset
at December 31, 1998 and 1997, is $101 million and $107 million, respectively,
and is expected to be recovered through rates over approximately 17 years.
Williams maintains various defined-contribution plans. Williams recognized
costs of $42 million in 1998, $33 million in 1997 and $26 million in 1996 for
those plans.
NOTE 10. INVENTORIES
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Raw materials:
Crude oil................................................. $ 43.2 $ 30.5
Other..................................................... 2.0 5.2
------ ------
45.2 35.7
------ ------
Finished goods:
Refined products.......................................... 104.1 122.3
Natural gas liquids....................................... 58.6 43.8
General merchandise and communications equipment.......... 99.1 90.0
------ ------
261.8 256.1
------ ------
Materials and supplies...................................... 93.4 82.5
Natural gas in underground storage.......................... 95.7 57.8
Other....................................................... 1.4 1.8
------ ------
$497.5 $433.9
====== ======
</TABLE>
As of December 31, 1998 and 1997, approximately 29 percent and 17 percent
of inventories, respectively, were stated at market. As of December 31, 1998 and
1997, approximately 19 percent and 28 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, 1998 and 1997,
were valued at current average cost, the amounts would increase by approximately
$14 million and $20 million, respectively.
During 1998, lower-of-cost or market reductions of approximately $10
million were recognized with respect to certain crude oil and refined products
inventories.
F-40
<PAGE> 77
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(MILLIONS)
<S> <C> <C>
Cost:
Gas Pipeline.............................................. $ 8,151.5 $ 7,684.2
Energy Services:
Energy Marketing & Trading............................. 434.0 345.2
Exploration & Production............................... 368.3 318.5
Midstream Gas & Liquids................................ 3,808.0 3,541.9
Petroleum Services..................................... 2,114.7 1,826.7
Communications:
Communications Solutions............................... 161.2 121.1
Network Applications................................... 203.6 178.2
Network Services....................................... 541.2 235.7
Other..................................................... 443.1 353.6
--------- ---------
16,225.6 14,605.1
Accumulated depreciation and depletion...................... (3,621.0) (3,068.3)
--------- ---------
$12,604.6 $11,536.8
========= =========
</TABLE>
Commitments for construction and acquisition of property, plant and
equipment are approximately $1.4 billion at December 31, 1998. Included in this
amount is $316 million for the purchase of wireless network capacity.
NOTE 12. 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
$124 million at December 31, 1998, and $112 million at December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
-------- --------
(MILLIONS)
<S> <C> <C>
Accrued liabilities:
Rate refunds.............................................. $ 358.7 $ 337.5
Employee costs............................................ 259.6 205.4
Taxes other than income taxes............................. 127.4 112.7
Interest.................................................. 127.0 89.5
Income taxes payable...................................... 31.3 69.6
Other..................................................... 596.5 466.9
-------- --------
$1,500.5 $1,281.6
======== ========
</TABLE>
NOTE 13. DEBT, LEASES AND BANKING ARRANGEMENTS
Notes payable
During 1998, Williams Holdings of Delaware, Inc.'s (Williams Holdings)
commercial paper program was increased to $1 billion. At December 31, 1998 and
1997, $903 million and $645 million, respectively, of commercial paper was
outstanding under the program. In January 1999, the commercial paper program was
increased to $1.4 billion. In addition, Williams has entered into various other
short-term credit agreements with amounts outstanding totaling $150 million and
$48 million at December 31, 1998 and 1997, respectively.
F-41
<PAGE> 78
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average interest rate on the outstanding short-term borrowings at
December 31, 1998 and 1997, was 5.92 percent and 6.56 percent, respectively.
Debt
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
INTEREST RATE* 1998 1997
-------------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
The Williams Companies, Inc.
Revolving credit loans.................................... 5.8% $ 144.0 $ 383.0
Debentures, 8.875% -- 10.25%, payable 2012, 2020 and
2021................................................... 8.3 137.0 137.0
Notes, 5.1% -- 9.625%, payable through 2012**............. 6.3 2,159.5 1,042.1
Williams Gas Pipelines Central
Variable-rate notes, payable 1999......................... 8.2 130.0 130.0
Kern River Gas Transmission
Notes, 6.42% and 6.72%, payable through 2001.............. 6.7 549.9 586.4
Northwest Pipeline
Debentures, 7.125% -- 10.65%, payable through 2025........ 7.6 117.4 151.6
Notes, 6.625%, payable 2007............................... 6.6 250.0 250.0
Other, payable through 2002............................... 9.0 6.7 8.3
Texas Gas Transmission
Debentures, 7.25%, payable 2027........................... 7.3 99.1 99.0
Notes, 8.625%, payable 2004............................... 8.6 152.1 152.4
Transcontinental Gas Pipe Line
Revolving credit loans.................................... -- -- 160.0
Debentures, 7.08% and 7.25%, payable 2026**............... 7.2 399.7 399.7
Notes, 6.125% -- 8.875%, payable 2002, 2005 and 2008...... 7.0 426.1 128.2
Adjustable rate note, payable 2002........................ 5.2 150.0 150.0
Williams Holdings of Delaware
Revolving credit loans.................................... 5.7 550.0 200.0
Debentures, 6.25% and 7.7%, payable 2006 and 2027......... 5.6 351.9 351.8
Notes, 6.013% -- 8.87%, payable through 2022.............. 7.1 960.1 625.3
MAPCO Inc.
Commercial paper and bank money market lines.............. -- -- 135.8
MAPCO Natural Gas Liquids, Inc.
Notes, 6.67% -- 8.95%, payable through 2022............... 7.8 165.0 165.0
Williams Communications Solutions, LLC
Revolving credit loans.................................... -- -- 125.0
Other, payable through 2005................................. 8.3 8.5 51.2
-------- --------
6,757.0 5,431.8
Current portion of long-term debt........................... (390.6) (80.3)
-------- --------
$6,366.4 $5,351.5
======== ========
</TABLE>
- ---------------
* Weighted-average at December 31, 1998, including the effects of interest-rate
swaps.
** $300 million, 5.95% notes, payable 2010; $200 million, 7.08% debentures,
payable 2026; and $240 million, 6.125% notes, payable 2012, are subject to
redemption at par at the option of the debtholder in 2000, 2001 and 2002,
respectively.
F-42
<PAGE> 79
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to a debt restructuring initiated during 1997, Williams redeemed
approximately $1.3 billion of debt with stated interest rates in excess of 8.8
percent in 1997. In January 1998, Williams redeemed $40 million of additional
debt obligations. 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 (see Note 7
for additional information).
Under Williams' $1 billion credit agreement, Northwest Pipeline,
Transcontinental Gas Pipe Line, Texas Gas Transmission, and Williams
Communications Solutions, LLC have access to various amounts of the facility,
while Williams (parent) and Williams Holdings have access to all unborrowed
amounts. Interest rates vary with current market conditions. In January 1999,
the $1 billion bank credit agreement was amended, adding Williams Communications
Group, Inc. to the subsidiaries with access to the facility.
Interest-rate swaps with a notional value of $690 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, 1998. 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, 1998.
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.
Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments, for each of the next five years are as follows:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
1999............................................... $ 390
2000............................................... 563
2001............................................... 1,082
2002............................................... 1,839
2003............................................... 268
</TABLE>
Cash payments for interest (net of amounts capitalized) are as follows:
1998 -- $414 million; 1997 -- $450 million; and 1996 -- $406 million.
Leases
Future minimum annual rentals under non-cancelable operating leases are
$181 million in 1999, $199 million in 2000, $152 million in 2001, $129 million
in 2002, $83 million in 2003 and $145 million thereafter.
Total rent expense was $200 million in 1998, $137 million in 1997 and $97
million in 1996.
During 1998, Williams entered into an operating lease agreement covering a
portion of its fiber-optic network. The total estimated cost of the network
assets to be covered by the lease agreement is $750 million. The lease term will
include an interim term, during which the covered network assets will be
constructed, that is anticipated to end no later than December 31, 1999 and a
base term. The interim and base terms are expected to total five years and, if
renewed, could total seven years.
Williams has an option to purchase the covered network assets during the
lease term at an amount approximating the lessor's cost. Williams provides a
residual value guarantee, the present value of which is
F-43
<PAGE> 80
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equal to a maximum of 89.9 percent of the cost of the assets under lease. The
residual value guarantee is reduced by the present value of actual lease
payments. In the event that Williams does not exercise its purchase option,
Williams expects the fair market value of the covered network assets to
substantially reduce Williams' obligation under the residual value guarantee.
Williams' disclosures for future minimum annual rentals under non-cancelable
operating leases do not include amounts for the residual value guarantee. As of
December 31, 1998, $287 million of costs have been incurred by the lessor.
NOTE 14. MINORITY INTEREST
During 1998, Williams formed separate legal entities and contributed
various assets to a newly-formed limited partnership, Castle Associates L.P.
("Castle"), and to a limited liability company, Williams Risk Holdings Company,
LLC ("Holdings"), as a part of transactions that generated funds for Williams'
general corporate use. Outside investors obtained from Williams non-controlling
preferred interests in the newly formed entities for $335 million through
purchase and/or contribution. The assets and liabilities of Castle and Holdings
are consolidated for financial reporting purposes. The outside investors'
interests of $335 million are reflected in "Minority interest in consolidated
subsidiaries" in the Consolidated Balance Sheet. The transactions did not result
in any gain or loss for Williams.
The preferred interest holders in both Castle and Holdings are entitled to
a priority return based on a variable rate structure, currently ranging from
approximately seven to 10 percent, in addition to their participation in the
operating results of the partnership and LLC.
The Castle limited partnership agreement and associated operating documents
included certain restrictive covenants and guarantees of Williams and certain of
its subsidiaries. These restrictions are similar to those in the Williams'
credit agreement and other debt instruments.
NOTE 15. STOCKHOLDERS' EQUITY
Williams' $3.50 cumulative convertible preferred stock is 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 1998, 1997 and 1996.
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.
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
F-44
<PAGE> 81
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receive, upon exercise, common stock of the acquiring company having a value
equal to two times the exercise price of the right.
Williams has several plans providing for common-stock-based awards to
employees and to non-employee directors. The plans permit the granting of
various types of awards including, but not limited to, stock options,
stock-appreciation rights, restricted stock and deferred stock. Awards may be
granted for no consideration other than prior and future services or based on
certain financial performance targets being achieved. 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.
Depending upon terms of the respective plans, stock options become exercisable
after three or five years, subject to accelerated vesting if certain future
stock prices or if specific financial performance targets are achieved. Stock
options expire 10 years after grant. At December 31, 1998, 43.3 million shares
of Williams common stock were reserved for issuance pursuant to existing and
future stock awards, of which 18.7 million shares were available for future
grants (21.4 million at December 31, 1997).
Certain of these plans have stock option loan programs for the
participants, whereby, at the time of the option exercise, the participant may
elect to receive a loan from Williams in an amount limited to 80 percent of the
market value of the shares associated with the exercise. A portion of the stock
acquired is held as collateral over the term of the loan, which can be three or
five years. Interest rates are based on the minimum applicable federal rates,
and interest is paid annually. The amount of loans made during 1998 totaled
approximately $36 million.
The following summary reflects stock option activity and related
information for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
(OPTIONS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year......... 35.2 $17.29 29.2 $14.18 24.4 $12.41
Granted.................................. 5.2 31.82 12.9 22.57 10.5 16.77
Exercised................................ (4.9) 12.56 (6.1) 13.46 (4.7) 10.44
MAPCO option conversions (Note 2)........ (12.9) 18.38 -- -- -- --
Canceled................................. (.4) 28.93 (.8) 18.32 (1.0) 17.77
----- ------ ---- ------ ---- ------
Outstanding -- end of year............... 22.2 $20.94 35.2 $17.29 29.2 $14.18
----- ------ ---- ------ ---- ------
Exercisable at end of year............... 17.3 $17.85 18.8 $13.83 15.4 $12.26
----- ------ ---- ------ ---- ------
Weighted-average grant date fair value of
options granted during the year........ $ 8.19 $ 7.15 $ 4.80
====== ====== ======
</TABLE>
The following summary provides information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
----------------------- ----------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE CONTRACTUAL EXERCISE
PRICES OPTIONS PRICE LIFE OPTIONS PRICE
- -------- ---------- --------- ----------- ---------- ---------
(MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C>
$4.62 to $27.37......................... 17.1 $17.62 7.4 years 17.1 $17.62
$28.75 to $49.38........................ 5.1 32.20 9.5 years .2 39.73
---- ---- ------
Total......................... 22.2 $20.94 7.9 years 17.3 $17.85
==== ==== ======
</TABLE>
F-45
<PAGE> 82
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 years;
volatility of the expected market price of Williams common stock of 25 percent
(26 percent in 1997 and 22 percent in 1996); risk-free interest rate of 5.3
percent (6.1 percent in 1997 and 6.0 percent in 1996); and a dividend yield of
2.0 percent (1.7 percent in 1997 and 2.0 percent in 1996).
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 1996 employee
stock-based awards, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- -----------------
PRO PRO PRO
FORMA REPORTED FORMA REPORTED FORMA REPORTED
----- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income (Millions)............ $73.2 $127.5 $331.0 $368.3 $452.9 $459.8
Earnings per share:
Basic.......................... $ .16 $ .28 $ .78 $ .87 $ 1.07 $ 1.08
Diluted........................ $ .15 $ .28 $ .77 $ .85 $ 1.05 $ 1.06
</TABLE>
Pro forma amounts for 1998 include the previously unrecognized compensation
expense related to the MAPCO options converted at the time of the merger and the
remaining total compensation expense from the awards made in 1997, as these
awards fully vested in 1998 as a result of the accelerated vesting provision.
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. 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.
Williams granted approximately 800,000 deferred shares in 1998. Deferred
shares are valued at the date of award and the weighted-average grant date fair
value of the shares granted was $31.62. Approximately 15 percent of the deferred
shares granted in 1998 was expensed in 1998, while the value of remaining
deferred shares granted is being amortized over the vesting period. In 1998,
Williams issued approximately 119,000 deferred shares previously granted. Grants
made in prior years were not significant.
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, advances to affiliates and other: Fair value is estimated
to approximate historically recorded amounts as the operations underlying these
investments are in their developmental 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, 1998 and 1997, 74 percent and 57
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.
F-46
<PAGE> 83
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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: Energy-related trading includes
forwards, options, swaps and purchase and sales commitments. Energy-related
hedging includes options and swaps. Fair value reflects management's estimates
using valuation techniques that reflect the best information available in the
circumstances. This information includes various factors such as quoted market
prices, estimates of market prices in absence of quoted market prices,
contractual volumes, estimated volumes under option and other arrangements that
result in varying volumes, other contract terms, liquidity of the market in
which the contract is transacted, credit considerations, time value and
volatility factors underlying the positions.
Carrying amounts and fair values of Williams' financial instruments
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
ASSET (LIABILITY) AMOUNT VALUE AMOUNT VALUE
----------------- --------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................ $ 503.3 $ 503.3 $ 122.1 $ 122.1
Notes and other non-current
receivables............................ 45.2 45.2 33.5 33.5
Investments-cost, advances to affiliates
and other.............................. 325.6 325.6 102.8 102.8
Notes payable............................ (1,052.7) (1,052.7) (693.0) (693.0)
Long-term debt, including current
portion................................ (6,756.9) (6,896.2) (5,430.8) (5,561.5)
Interest-rate swaps...................... (50.7) (45.6) (51.1) (46.8)
Interest-rate locks...................... -- (.3) -- (8.3)
Energy-related trading:
Assets................................. 548.1 548.1 324.9 324.9
Liabilities............................ (491.6) (491.6) (383.7) (383.7)
Energy-related hedging:
Assets................................. -- 7.0 .9 13.3
Liabilities............................ (.7) (10.2) (.3) (8.8)
</TABLE>
The preceding asset and liability amounts for energy-related hedging
represent unrealized gains or losses and do not include the related deferred
amounts.
The 1998 average fair value of the energy-related trading assets and
liabilities is $485 million and $518 million, respectively. The 1997 average
fair value of the energy-related trading assets and liabilities is $258 million
and $345 million, respectively.
Williams has recorded liabilities of $18 million and $21 million at
December 31, 1998 and 1997, 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.
F-47
<PAGE> 84
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, Williams entered into agreements to sell, on an ongoing basis,
certain of their accounts receivable. At December 31, 1998 and 1997, $302
million and $343 million have been sold, respectively.
In connection with the 1995 sale of Williams' network services operations,
Williams has been indemnified by LDDS against any losses related to retained
guarantees of $113 million and $135 million at December 31, 1998 and 1997,
respectively, for lease rental obligations.
Williams has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $83 million and $56 million at
December 31, 1998 and 1997, 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.
Energy trading activities
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 energy contracts 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 $112.6 million,
$125.8 million and $99.2 million in 1998, 1997 and 1996, respectively.
Energy Marketing & Trading enters into contracts which involve physical
delivery of an energy commodity. Prices under these contracts are both fixed and
variable. These contracts involve both firm commitments requiring fixed volumes
and option and other arrangements that result in varying volumes. Swap
arrangements call for Energy Marketing & Trading to make payments to (or receive
payments from) counterparties based upon the differential between a fixed and
variable price or variable prices for different locations. Energy Marketing &
Trading buys and sells financial option contracts which give the buyer the right
to exercise the option and receive the difference between a predetermined strike
price and a market price at the date of exercise. The prices for forwards, swap,
option and physical contracts consider exchange quoted prices or management's
estimates based on the best information available. 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, changes in interest rates and credit risk.
Energy Marketing & Trading manages market risk on a portfolio basis 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.
F-48
<PAGE> 85
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional quantities for trading activities at December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997*
------------------ ------------------
PAYOR RECEIVER PAYOR RECEIVER
------- -------- ------- --------
<S> <C> <C> <C> <C>
Fixed price:
Natural gas (TBtu)................................ 1,310.1 1,413.9 1,262.5 1,400.4
Refined products, NGL's and crude (MMBbls)........ 185.2 167.5 68.7 59.6
Power (Terawatt Hrs).............................. 28.6 23.6 15.0 14.0
Variable price:
Natural gas (TBtu)................................ 1,749.4 1,537.4 1,898.3 1,322.4
Refined products, NGL's and crude (MMBbls)........ 48.5 44.8 1.9 1.9
Power (Terawatt Hrs).............................. -- .8 .1 1.6
</TABLE>
- ---------------
* Restated
The net cash inflow related to these contracts at December 31, 1998, was
$96 million, and the net cash requirement at December 31, 1997, was $92 million.
At December 31, 1998, the cash inflows 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 issuer/obligor.
At December 31, 1998 and 1997, approximately 33 percent and 48 percent,
respectively, of receivables are for the sale or transportation of natural gas
and related products or services. Approximately 19 percent and 22 percent of
receivables at December 31, 1998 and 1997, respectively, are for the sale or
transportation of petroleum products. Approximately 39 percent and 25 percent of
receivables at December 31, 1998 and 1997, 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. 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. The natural gas pipeline subsidiaries have reserved
$343 million for potential refund as of December 31, 1998.
In 1997, the Federal Energy Regulatory Commission (FERC) issued orders
addressing, among other things, the authorized rates of return for three of the
Williams' interstate natural gas pipeline subsidiaries. All of the orders
involve rate cases that became effective between 1993 and 1995 and, in each
instance, these cases have been superseded by more recently filed rate cases. In
the three orders, the FERC continued its practice of utilizing a methodology for
calculating rates of return that incorporates a long-term growth rate component.
However, the long-term growth rate component used by the FERC is now a
projection of U.S. gross domestic product growth rates. Generally, calculating
rates of return utilizing a methodology which includes a long-term growth rate
component results in rates of return that are lower than they would be if the
long-term growth rate component were not included in the methodology. Each of
the three pipeline subsidiaries challenged its
F-49
<PAGE> 86
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 July
1998, the FERC issued orders in the other two pipeline rate cases, again
modifying its rate-of-return methodology by adopting a formula that gives less
weight to the long-term growth component. This most recent formula modification
results in somewhat higher rates of return compared to the rates of return
calculated under the FERC's prior formula. Neither pipeline has made any changes
to its accounting reserves pending resolution of the issues discussed above.
In 1992, the FERC issued Order 636, Order 636-A and Order 636-B. These
orders, which were challenged in various respects by various parties in
proceedings ruled on by the U.S. Court of Appeals for the D.C. Circuit, required
interstate gas pipeline companies to change the manner in which they provide
services. Williams' gas pipelines subsidiaries implemented restructurings in
1993.
The only appeal challenging Northwest Pipeline's restructuring has been
dismissed. On April 14, 1998, all appeals concerning Transcontinental Gas Pipe
Line's restructuring were denied by the D.C. Circuit. Williams Gas Pipeline
Central's restructuring appeal was remanded to FERC. The appeal of Texas Gas'
restructuring remains pending. On February 27, 1997, the FERC issued Order No.
636-C in response to the D.C. Circuit's partial remand of the three previous 636
orders. In that order, the FERC reaffirmed that pipelines should be exempt from
sharing gas supply realignment costs. Rehearing of Order 636-C was denied in
Order 636-D. Orders 636-C and 636-D have been appealed.
Recently, the FERC issued a Notice of Proposed Rulemaking (NOPR) and a
Notice of Inquiry (NOI), proposing revisions to regulatory policies for
interstate natural gas transportation service. In the NOPR, the FERC proposes to
eliminate the rate cap on short-term transportation services and implement
regulatory policies that are intended to maximize competition in the short-term
transportation market, mitigate the ability of firms to exercise residual
monopoly power and provide opportunities for greater flexibility in the
provision of pipeline services and to revise certain other rate and certificate
policies. In the NOI, the FERC seeks comments on its pricing policies in the
existing long-term market and pricing policies for new capacity. The deadline
for comments on the NOPR and NOI has been extended until the second quarter of
1999.
As a result of the Order 636 decisions described, 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. Central is
continuing efforts to recover certain gas supply realignment costs which arose
from supplier take-or-pay contracts.
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, 636-C and
636-D, 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
Pipeline Central (Central) has made 15 filings to recover take-or-pay and gas
supply realignment costs of $78.9 from its customers. An intervenor 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's decision and determined that three contracts were imprudently entered
into in 1982. Central has filed for rehearing, and management is vigorously
defending the prudency of these contracts. An intervenor also filed a protest
seeking to have the FERC decide whether non-settlement costs are eligible for
recovery under Order No. 636. In January 1997, the FERC held that none of the
non-settlement costs and only 75 percent of settlement costs could be recovered
by Central if the costs were not eligible for recovery
F-50
<PAGE> 87
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under Order No. 636. This order was affirmed on rehearing in April 1997. On June
16, 1998, a FERC administrative law judge issued an initial decision finding
that Central had not met all the tests necessary to show that these costs were
eligible for recovery under Order No. 636. On July 20, 1998, Central filed
exceptions to the administrative law judge's decision, which in turn must be
acted upon by the FERC. If the FERC's final ruling on eligibility is
unfavorable, Central will appeal those orders to the courts. On May 29, 1998,
FERC approved an Order which permitted Central to conduct a reverse auction of
the gas purchase contracts which are the subject of the prudence challenges
outlined above. No party bid less than the fixed maximum price in the approved
auction and, as a result, the contracts were not assigned. In accordance with
FERC's Orders, on September 30, 1998, Central filed a request for authority to
conduct a second reverse auction of the contracts. Under the approved reverse
auction, Central was granted authority to assign the contracts to bidders at or
below an aggregate reserve price of $112.6 million. If no unaffiliated bidders
were willing to accept assignment on those terms, Central was authorized to
assign the contracts to an affiliate or a third party and recover $112.6 million
from its customers subject to the outcome of the prudence and eligibility cases
described above. The FERC also approved an extension of the recovery mechanism
for non-settlement costs through February 1, 1999.
Through the end of the third quarter, Williams and Central were unable to
reasonably estimate the ultimate costs to be incurred because of the
uncertainties pertaining to the outcome of issues pending at FERC and the status
of settlement negotiations with producers. However, on January 21, 1999, Central
assigned its obligations under the largest of the three contracts to an
unaffiliated third party and paid the third party $100 million. Central also
agreed to pay the third party a total of $18 million in installments over the
next five years. Central received indemnities from the third party and a release
of its obligations under the contract. No parties submitted bids at the second
reverse auction, and in accordance with the tariff provisions for the reverse
auction, Central assigned the two smaller contracts to an affiliate effective
February 1, 1999. As a result of these assignments, Central has no remaining
market price gas contracts. Central will file with the FERC to recover all costs
relative to the three contracts. At December 31, 1998, Central has accrued a
liability related to these contracts of $122.2 million.
During the fourth quarter and continuing into 1999, Central has been
negotiating with the FERC and state regulators to resolve the amount of costs
which are recoverable from its customers. As a result of these negotiations,
Central expensed $58 million of costs previously expected to be recovered and
capitalized as a regulatory asset. At December 31, 1998, Central has $61.4
million remaining regulatory asset representing an estimate of costs to be
recovered in the future. If Central does not reach a settlement and prevail in
these FERC proceedings or any subsequent appeals, the maximum loss could be the
total of the regulatory asset and $40 million of previously recovered but
protested costs. While Central cannot predict the final outcome of the FERC's
rulings on contract prudency and cost recovery under Order 636, Williams and
Central continue to believe that they entered into the gas purchase contracts in
a prudent manner under FERC rules in place at the time, and that these costs
will ultimately be found eligible for recovery.
In September 1995, Texas Gas received FERC approval of a settlement
regarding Texas Gas' recovery of gas supply realignment costs. Through December
31, 1998, Texas Gas has paid approximately $76 million and expects to pay no
more than $80 million for gas supply realignment costs, primarily as a result of
contract terminations. Texas Gas has recovered approximately $66 million, plus
interest, in gas supply realignment costs.
The foregoing accruals are in accordance with Williams' accounting policies
regarding the establishment of such accruals which take into consideration
estimated total exposure, as discounted and risk-weighted, as well as costs and
other risks associated with the difference between the time costs are incurred
and the time such costs are recovered from customers. The estimated portion of
such costs recoverable from customers is deferred or recorded as a regulatory
asset based on an estimate of expected recovery of the amounts allowed by FERC
policy. While Williams believes that these accruals are adequate and the
associated regulatory assets
F-51
<PAGE> 88
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
On July 15, 1998, Williams Pipe Line (WPL) received an Order from the FERC
which affirmed an administrative law judge's 1996 initial decision regarding
rate-making proceedings for the period September 15, 1990 through May 1, 1992.
The FERC has ruled that WPL did not meet its burden of establishing that its
transportation rates in its 12 less competitive markets were just and reasonable
for the period and has ordered refunds. WPL continues to believe it should
prevail upon appeal regarding collected rates for that period. However, due to
this FERC decision, WPL accrued $15.5 million, including interest, in the second
quarter of 1998, for potential refunds to customers for the issues described
above. Since May 1, 1992, WPL has collected and recognized as revenues $151
million in noncompetitive markets that are in excess of tariff rates previously
approved by the FERC and that are subject to refund with interest. WPL believes
that the tariff rates collected in these markets during this period will be
justified in accordance with the FERC's cost-basis guidelines and will be making
the appropriate filings with the FERC to support this position.
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,
1998, these subsidiaries had reserves totaling approximately $27 million for
these costs.
Certain Williams subsidiaries, including Texas Gas and Transcontinental Gas
Pipe Line, have been identified as potentially responsible parties (PRP) at
various Superfund and state waste disposal sites. In addition, these
subsidiaries have incurred, or are alleged to have incurred, various other
hazardous materials removal or remediation obligations under environmental laws.
Although no assurances can be given, Williams does not believe that these
obligations or the PRP status of these subsidiaries will have a material adverse
effect on its financial position, results of operations or net cash flows.
Transcontinental Gas Pipe Line, Texas Gas and Central have identified
polychlorinated biphenyl (PCB) contamination in air compressor systems, soils
and related properties at certain compressor station sites. Transcontinental Gas
Pipe Line, Texas Gas and Central have also been involved in negotiations with
the U.S. Environmental Protection Agency (EPA) and state agencies to develop
screening, sampling and cleanup programs. In addition, negotiations with certain
environmental authorities and other programs concerning investigative and
remedial actions relative to potential mercury contamination at certain gas
metering sites have been commenced by Central, Texas Gas and Transcontinental
Gas Pipe Line. As of December 31, 1998, Central had recorded a liability for
approximately $12 million, representing the current estimate of future
environmental cleanup costs to be incurred over the next six to ten years. The
Midstream Gas & Liquids unit of Energy Services (WES) has recorded an aggregate
liability of approximately $10 million, representing the current estimate of its
future environmental and remediation costs, including approximately $5 million
relating to former Central facilities. Texas Gas and Transcontinental Gas Pipe
Line likewise had recorded liabilities for these costs which are included in the
$27 million reserve mentioned above. Actual costs incurred will depend on the
actual number of contaminated sites identified, the actual amount and extent of
contamination discovered, the final cleanup standards mandated by the EPA and
other governmental authorities and other factors. Texas Gas, Transcontinental
Gas Pipe Line and Central have deferred these costs as incurred pending recovery
through future rates and other means.
WES also accrues environmental remediation costs for its petroleum products
pipelines, retail petroleum, refining and propane marketing operations primarily
related to soil and groundwater contamination. At
F-52
<PAGE> 89
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, WES and its subsidiaries had reserves, in addition to the
reserves listed above, totaling approximately $31 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, 1998, WES and its
subsidiaries had receivables totaling $14 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. At December 31, 1998, Williams had
approximately $12 million accrued for such excess costs. The actual costs
incurred will depend on the actual amount and extent of contamination
discovered, the final cleanup standards mandated by the EPA or other
governmental authorities, and other factors.
A lawsuit was filed in May 1993, in a state court in Colorado in which
certain claims have been made against various defendants, including Northwest
Pipeline, contending that gas exploration and development activities in portions
of the San Juan Basin have caused air, water and other contamination. The
plaintiffs in the case sought certification of a plaintiff class. In June 1994,
the lawsuit was dismissed for failure to join an indispensable party over which
the state court had no jurisdiction. The Colorado court of appeals has affirmed
the dismissal and remanded the case to Colorado district court for action
consistent with the appeals court's decision. Since June 1994, eight individual
lawsuits have been filed against Northwest Pipeline and others in U.S. district
court in Colorado, making essentially the same claims. The district court has
stayed all of the cases involving Northwest Pipeline until the plaintiffs
exhaust their remedies before the Southern Ute Indian Tribal Court. Some
plaintiffs filed cases in the Tribal Court, but none named Northwest Pipeline as
a defendant.
Other legal matters
In 1988, certain royalty owners in a producing field in Cameron Parish,
Louisiana, brought suit against a Williams subsidiary and other working interest
owners seeking additional royalties or lease cancellation. An amended petition
later added a second Williams subsidiary, Williams and additional working
interest owners. All other defendants have been dismissed or have settled with
plaintiffs. In their recently amended damage claim, the plaintiffs asserted
royalty underpayments plus interest of approximately $12 million. The claimed
damages are attributable to all working interests for a period of about 15
years. One of the two Williams subsidiaries sued owned a one-half interest in
the field and served as operator for approximately eight years. The other
subsidiary purchased produced gas from the field. Plaintiffs also request
punitive damages equal to double the alleged damages and attorneys' fees.
Williams believes all royalties due from its subsidiaries were properly paid,
that the field was properly operated, and that it is not responsible for any
amounts due from any other working interests or for the period after its
subsidiary had sold its interest and terminated its status as operator of the
field. The litigation pending in Cameron Parish, Louisiana, has recently been
settled for payments aggregating approximately $9 million, for which reserves
have been fully accrued.
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
F-53
<PAGE> 90
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
County. The defendants seek to have the judgment modified in many respects,
including the elimination of punitive damages as well as a portion of the actual
damages awarded. If the defendants prevail on appeal, it will result in an award
significantly less than the judgment. The plaintiffs have cross-appealed and
seek to modify the judgment to increase the total award plus interest to exceed
$155 million. In February and March 1998, the defendants entered into settlement
agreements involving 17 of the 21 plaintiffs to finally resolve their claims
against all defendants for an aggregate payment of approximately $10 million.
These settlements have satisfied and reduced the judgment on appeal by
approximately $42 million. As to the remaining four plaintiffs, the Court of
Appeals issued its decision on October 15, 1998, which, while denying all of the
plaintiffs' cross-appeal issues, affirmed in part and reversed in part the trial
court's judgment. The defendants had entered into settlement agreements with the
remaining plaintiffs which, in light of the decision, Williams believes will
provide for aggregate payments of approximately $13.6 million, the full amount
of which has been previously accrued.
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. 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 July 20,
1998, the Court of Appeals sitting en banc affirmed the panel's decision. The
Supreme Court has granted a writ of certiorari in respect of this decision.
Williams Communications, Inc. filed suit on March 20, 1998, against
WorldCom Network Services, Inc. (WorldCom) in district court in Tulsa County in
order to prevent WorldCom from disconnecting any of Williams' equipment on the
WorldCom network. This suit sought a declaratory judgment that the single fiber
retained by Williams on the WorldCom network could be used for specified
multimedia uses, and that WorldCom was required to permit Williams to purchase
additional fiber either acquired or constructed by WorldCom. WorldCom had denied
Williams' claim and had asserted various counterclaims for monetary damages,
rescission and injunctive relief. This lawsuit was settled on July 9, 1998. The
settlement resolves all claims for monetary damages, permitted uses of Williams'
fiber on the WorldCom network and Williams' right to purchase additional fiber
on WorldCom fiber builds. There was no significant financial impact to Williams
as a result of the settlement.
In connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, Transcontinental Gas Pipe Line and
Texas Gas each entered into certain settlements with producers which may require
the indemnification of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. As a result of
such settlements, Transcontinental Gas Pipe Line is currently defending two
lawsuits brought by producers. In one of the cases, a jury verdict found that
Transcontinental Gas Pipe Line was required to pay a producer damages of $23.3
million including $3.8 million in attorneys' fees. Transcontinental Gas Pipe
Line is pursuing an 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
F-54
<PAGE> 91
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 connection with the sale of certain coal assets in 1996, MAPCO entered
into a Letter Agreement with the buyer providing for indemnification by MAPCO
for reductions in the price or tonnage of coal delivered under a certain
pre-existing Coal Sales Agreement dated December 1, 1986. The Letter Agreement
is effective for reductions during the period July 1, 1996 through December 31,
2002 and provides for indemnification for such reductions as incurred on a
quarterly basis. The buyer has stated it is entitled to indemnification from
MAPCO for amounts of $7.8 million through June 30, 1998, and may claim
indemnification for additional amounts in the future. MAPCO has filed for
declaratory relief as to certain aspects of the buyer's claims. MAPCO also
believes it would be entitled to substantial set-offs and credits against any
amounts determined to be due and has accrued a liability representing an
estimate of amounts it expects to incur in satisfaction of this indemnity. The
parties are currently pursuing settlement negotiations as a part of a mediation.
In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly owned subsidiaries including Williams Gas Pipeline
Central, Kern River Gas Transmission, Northwest Pipeline, Williams Gas Pipeline
Company, Transcontinental Gas Pipe Line Corporation, Texas Gas, Williams Field
Services Company, and Williams Production Company. Mr. Grynberg has also filed
claims against approximately 300 other energy companies and alleges that the
defendants violated the False Claims Act in connection with the measurement and
purchase of hydrocarbons. The relief sought is an unspecified amount of
royalties allegedly not paid to the federal government, treble damages, a civil
penalty, attorneys' fees, and costs.
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.
Other matters
During the second quarter of 1998, Energy Marketing & Trading entered into
a 15-year contract giving Williams the right to receive fuel conversion services
for purposes of generating electricity. This contract also gives Williams the
right to receive installed capacity and certain ancillary services. Annual
committed payments under the contract range from $140 million to $165 million,
resulting in total committed payments of approximately $2.3 billion.
F-55
<PAGE> 92
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below presents changes in the components of accumulated other
comprehensive income (loss).
<TABLE>
<CAPTION>
INCOME (LOSS)
-------------------------------------
UNREALIZED
APPRECIATION FOREIGN
(DEPRECIATION) CURRENCY
ON SECURITIES TRANSLATION TOTAL
-------------- ----------- ------
(MILLIONS)
<S> <C> <C> <C>
Balance at December 31, 1996................................ $ -- $ -- $ --
1997 change:
Pre-income tax amount..................................... (3.9) (.1) (4.0)
Income tax benefit........................................ 1.5 -- 1.5
------ ----- ------
Balance at December 31, 1997................................ (2.4) (.1) (2.5)
------ ----- ------
1998 change:
Pre-income tax amount..................................... 39.4 (4.9) 34.5
Income tax expense........................................ (15.3) -- (15.3)
------ ----- ------
24.1 (4.9) 19.2
====== ===== ======
Balance at December 31, 1998................................ $ 21.7 $(5.0) $ 16.7
====== ===== ======
</TABLE>
NOTE 19. SEGMENT DISCLOSURES
Williams evaluates performance based upon segment profit or loss from
operations which includes revenues from external and internal customers, equity
earnings, operating costs and expenses, and depreciation, depletion and
amortization. The accounting policies of the segments are the same as those
described in Note 1, Summary of Significant Accounting Policies. Intersegment
sales are generally accounted for as if the sales were to unaffiliated third
parties, that is, at current market prices.
Williams' reportable segments are strategic business units that offer
different products and services. The segments are managed separately because
each segment requires different technology, marketing strategies and industry
knowledge. Other includes investments in international energy and
communications-related ventures, as well as corporate operations.
The following table reflects the reconciliation of segment profit, per the
table on page 63, to operating income as reported on the Consolidated Statement
of Income.
<TABLE>
<CAPTION>
1998 1997 1996
------ -------- --------
(MILLIONS)
<S> <C> <C> <C>
Segment profit.......................................... $814.4 $1,134.8 $1,175.9
General corporate expenses.............................. (89.2) (95.1) (72.5)
------ -------- --------
Operating income........................................ $725.2 $1,039.7 $1,103.4
====== ======== ========
</TABLE>
F-56
<PAGE> 93
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following geographic area data includes revenues from external
customers based on product shipment origin and long-lived assets based upon
physical location.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Revenues from external customers:
United States....................................... $ 7,488.2 $ 8,101.1 $ 6,837.8
Other............................................... 181.0 140.5 5.1
--------- --------- ---------
Total..................................... $ 7,669.2 $ 8,241.6 $ 6,842.9
========= ========= =========
Long-lived assets:
United States....................................... $12,937.4 $12,010.5 $11,051.4
Other............................................... 250.8 126.9 2.0
--------- --------- ---------
$13,188.2 $12,137.4 $11,053.4
========= ========= =========
</TABLE>
Long-lived assets are comprised of property, plant and equipment, goodwill
and other intangible assets.
F-57
<PAGE> 94
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
REVENUES
-------------------------------------------- ADDITIONS
EQUITY SEGMENT EQUITY TO LONG-
EXTERNAL INTER- EARNINGS PROFIT TOTAL METHOD LIVED
CUSTOMERS SEGMENT (LOSSES) TOTAL (LOSS) ASSETS INVESTMENTS ASSETS
--------- --------- -------- --------- -------- --------- ----------- ---------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Gas Pipeline................... $1,633.5 $ 51.1 $ .2 $ 1,684.8 $ 610.4 $ 8,386.2 $ 8.9 $ 485.0
Energy Services
Energy Marketing & Trading... 2,025.3 (111.5)* (6.7) 1,907.1 39.0 2,596.8 .8 27.3
Exploration & Production..... 33.5 105.8 -- 139.3 27.2 359.1 -- 58.1
Midstream Gas & Liquids...... 799.0 63.7 8.2 870.9 225.7 3,201.8 129.1 342.6
Petroleum Services........... 1,417.2 1,257.9 .4 2,675.5 153.3 2,525.2 96.0 264.2
Merger-related costs......... -- -- -- -- (50.7) -- -- --
-------- --------- ------ --------- -------- --------- ------ --------
4,275.0 1,315.9 1.9 5,592.8 394.5 8,682.9 225.9 692.2
-------- --------- ------ --------- -------- --------- ------ --------
Communications
Communications Solutions..... 1,366.8 -- -- 1,366.8 (54.1) 946.4 -- 68.5
Network Applications......... 205.4 4.8 (3.7) 206.5 (94.6) 295.6 .5 55.3
Network Services............. 145.2 49.7 -- 194.9 (26.3) 822.9 -- 283.8
-------- --------- ------ --------- -------- --------- ------ --------
1,717.4 54.5 (3.7) 1,768.2 (175.0) 2,064.9 .5 407.6
-------- --------- ------ --------- -------- --------- ------ --------
Other.......................... 43.3 30.8 (9.3) 64.8 (15.5) 5,140.2 291.7 160.5
Eliminations................... -- (1,452.3) -- (1,452.3) -- (5,626.9) -- --
-------- --------- ------ --------- -------- --------- ------ --------
Total.................. $7,669.2 $ -- $(10.9) $ 7,658.3 $ 814.4 $18,647.3 $527.0 $1,745.3
======== ========= ====== ========= ======== ========= ====== ========
1997
Gas Pipeline................... $1,626.9 $ 52.7 $ .5 $ 1,680.1 $ 614.7 $ 8,202.8 $ 6.7 $ 435.9
Energy Services
Energy Marketing & Trading... 2,018.2 232.2 (5.6) 2,244.8 53.4 1,688.8 1.8 102.4
Exploration & Production..... 3.6 126.5 -- 130.1 30.3 367.2 -- 63.3
Midstream Gas & Liquids...... 929.1 100.5 -- 1,029.6 282.3 3,188.3 87.5 212.0
Petroleum Services........... 2,192.9 502.7 .4 2,696.0 200.8 1,836.8 9.6 150.5
-------- --------- ------ --------- -------- --------- ------ --------
5,143.8 961.9 (5.2) 6,100.5 566.8 7,081.1 98.9 528.2
-------- --------- ------ --------- -------- --------- ------ --------
Communications
Communications Solutions..... 1,206.5 -- -- 1,206.5 47.3 869.0 -- 247.5
Network Applications......... 213.1 4.9 (2.4) 215.6 (108.7) 329.6 3.8 98.9
Network Services............. 22.0 21.0 -- 43.0 3.3 240.1 2.3 178.2
-------- --------- ------ --------- -------- --------- ------ --------
1,441.6 25.9 (2.4) 1,465.1 (58.1) 1,438.7 6.1 524.6
-------- --------- ------ --------- -------- --------- ------ --------
Other.......................... 29.3 9.1 15.0 53.4 11.4 2,476.7 143.8 208.7
Eliminations................... -- (1,049.6) -- (1,049.6) -- (2,921.7) -- --
-------- --------- ------ --------- -------- --------- ------ --------
Total.................. $8,241.6 $ -- $ 7.9 $ 8,249.5 $1,134.8 $16,277.6 $255.5 $1,697.4
======== ========= ====== ========= ======== ========= ====== ========
1996
Gas Pipeline................... $1,609.8 $ 47.9 $ 1.9 $ 1,659.6 $ 564.3 $ 7,833.4 $ 5.5 $1,432.2
Energy Services
Energy Marketing & Trading... 1,548.3 424.9 (4.8) 1,968.4 138.5 1,544.7 .9 26.3
Exploration & Production..... 25.3 57.1 -- 82.4 2.8 256.8 -- 30.3
Midstream Gas & Liquids...... 817.8 90.3 .1 908.2 322.0 2,974.6 47.4 245.2
Petroleum Services........... 2,091.6 503.4 .2 2,595.2 140.0 1,705.8 4.3 111.0
-------- --------- ------ --------- -------- --------- ------ --------
4,483.0 1,075.7 (4.5) 5,554.2 603.3 6,481.9 52.6 412.8
-------- --------- ------ --------- -------- --------- ------ --------
Communications
Communications Solutions..... 568.1 -- -- 568.1 14.3 344.6 -- 36.9
Network Applications......... 130.7 1.8 (1.6) 130.9 (15.1) 148.6 6.6 193.0
Network Services............. 11.1 -- -- 11.1 5.8 212.7 -- --
-------- --------- ------ --------- -------- --------- ------ --------
709.9 1.8 (1.6) 710.1 5.0 705.9 6.6 229.9
-------- --------- ------ --------- -------- --------- ------ --------
Other.......................... 40.2 7.8 10.3 58.3 3.3 1,961.4 59.8 34.8
Eliminations................... -- (1,133.2) -- (1,133.2) -- (2,393.1) -- --
-------- --------- ------ --------- -------- --------- ------ --------
Total.................. $6,842.9 $ -- $ 6.1 $ 6,849.0 $1,175.9 $14,589.5 $124.5 $2,109.7
======== ========= ====== ========= ======== ========= ====== ========
<CAPTION>
DEPRECIATION,
DEPLETION &
AMORTIZATION
-------------
(MILLIONS)
<S> <C>
1998
Gas Pipeline................... $287.0
Energy Services
Energy Marketing & Trading... 30.1
Exploration & Production..... 26.0
Midstream Gas & Liquids...... 121.6
Petroleum Services........... 70.8
Merger-related costs......... --
------
248.5
------
Communications
Communications Solutions..... 36.9
Network Applications......... 33.7
Network Services............. 13.2
------
83.8
------
Other.......................... 27.0
Eliminations................... --
------
Total.................. $646.3
======
1997
Gas Pipeline................... $273.0
Energy Services
Energy Marketing & Trading... 20.8
Exploration & Production..... 12.6
Midstream Gas & Liquids...... 131.9
Petroleum Services........... 67.8
------
233.1
------
Communications
Communications Solutions..... 29.7
Network Applications......... 33.1
Network Services............. 4.0
------
66.8
------
Other.......................... 13.0
Eliminations................... --
------
Total.................. $585.9
======
1996
Gas Pipeline................... $241.4
Energy Services
Energy Marketing & Trading... 16.9
Exploration & Production..... 10.5
Midstream Gas & Liquids...... 124.3
Petroleum Services........... 64.1
------
215.8
------
Communications
Communications Solutions..... 16.0
Network Applications......... 14.9
Network Services............. --
------
30.9
------
Other.......................... 12.2
Eliminations................... --
------
Total.................. $500.3
======
</TABLE>
- ---------------
* Energy Marketing & Trading intercompany cost of sales, which are netted in
revenues consistent with fair-value accounting, exceed intercompany revenues
in 1998.
F-58
<PAGE> 95
THE WILLIAMS COMPANIES, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (millions, except
per-share amounts). Certain amounts have been reclassified as described in Note
1 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Revenues.......................................... $1,958.8 $1,774.3 $1,886.8 $2,038.4
Costs and operating expenses...................... 1,423.1 1,259.1 1,377.2 1,473.0
Income (loss) before extraordinary loss........... 72.9 60.7 32.1 (33.4)
Net income (loss)................................. 68.1 60.7 32.1 (33.4)
Basic earnings per common share:
Income (loss) before extraordinary loss......... .17 .14 .07 (.08)
Net income (loss)............................... .16 .14 .07 (.08)
Diluted earnings per common share:
Income (loss) before extraordinary loss......... .17 .14 .07 (.08)
Net income (loss)............................... .16 .14 .07 (.08)
1997
Revenues.......................................... $1,931.3 $1,873.0 $2,100.9 $2,344.3
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........................................ 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
</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, second-quarter, third-quarter, and fourth-quarter 1998 net
income includes approximately $59 million, $9 million, $6 million and $6
million, respectively, of pre-tax merger-related costs (see Note 2).
Second-quarter 1998 net income also includes a pre-tax $15.5 million loss
provision for potential refunds to customers (see Note 5). Third-quarter 1998
net income includes $17 million in pre-tax credit loss accruals for certain
retail energy activities. In addition, third-quarter 1998 includes a $23.2
million pre-tax loss related to a venture involved in the technology and
transmission of business information for news and educational purposes (see Note
5).
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 5).
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). Third-quarter 1997 net income includes an
extraordinary loss of $74 million related to the restructuring of Williams' debt
portfolio (see Note 7).
F-59
<PAGE> 96
Selected comparative fourth-quarter data are as follows (millions, except
per-share amounts).
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Operating income (loss):
Gas Pipeline.............................................. $ 120.5 $ 160.3
Energy Services........................................... 85.7 155.9
Communications............................................ (91.9) (52.6)
Other..................................................... 1.1 3.7
General corporate expenses................................ (13.1) (38.1)
------- -------
Total operating income...................................... 102.3 229.2
Interest expense -- net..................................... (137.1) (111.0)
Investing income............................................ 6.2 5.8
Minority interest in (income) loss of consolidated
subsidiaries.............................................. 15.1 (5.6)
Other expense -- net........................................ (6.7) (1.4)
------- -------
Income (loss) from continuing operations before
extraordinary loss and income taxes....................... (20.2) 117.0
Provision (credit) for income taxes......................... (1.1) 47.8
------- -------
Income (loss) from continuing operations before
extraordinary loss........................................ (19.1) 69.2
Loss from discontinued operations (Note 3).................. (14.3) (6.3)
------- -------
Income (loss) before extraordinary loss..................... (33.4) 62.9
Extraordinary loss.......................................... -- (5.4)
------- -------
Net income (loss)........................................... $ (33.4) $ 57.5
======= =======
Basic and diluted earnings (loss) per common share.......... $ (.08) $ .13
======= =======
</TABLE>
The fourth-quarter 1998 operating income includes accruals totaling
approximately $31 million related to the modification of Williams' employees
benefit program (see Note 5). Fourth-quarter 1998 segment profit for Gas
Pipeline includes a charge of $58 million related to certain long-term gas
supply contracts (see Note 5), while Energy Services segment profit includes $14
million for asset impairments related to the decision to change the focus of its
retail natural gas and electric business (see Note 5).
Communications' fourth-quarter 1997 segment loss includes charges totaling
approximately $49.8 million, related to the decision and commitment to a plan to
sell the learning content business, and the impairment of several advanced
applications projects (see Note 5). In addition, 1997 general corporate expenses
include approximately $10 million in costs related to the MAPCO acquisition (see
Note 2) and approximately $19 million of MAPCO's pre-merger general corporate
expense.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
F-60
<PAGE> 97
THE WILLIAMS COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 14(A) 1 AND 2
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Covered by report of independent auditors:
Consolidated statement of income for the three years ended F-24
December 31, 1998......................................
Consolidated balance sheet at December 31, 1998 and F-25
1997...................................................
Consolidated statement of stockholders' equity for the F-26
three years ended December 31, 1998....................
Consolidated statement of cash flows for the three years F-27
ended December 31, 1998................................
Notes to consolidated financial statements................ F-28
Schedules for the three years ended December 31, 1998:
II -- Valuation and qualifying accounts................ F-62
Not covered by report of independent auditors:
Quarterly financial data (unaudited)...................... F-59
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
F-61
<PAGE> 98
THE WILLIAMS COMPANIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(A)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
CHARGED
TO COSTS
BEGINNING AND ENDING
BALANCE EXPENSES OTHER DEDUCTIONS(B) BALANCE
--------- -------- ---------- ------------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts --
Receivables.............................. $21.5 $39.8 $ -- $30.8 $30.5
Other assets............................. 4.6 -- -- 4.6 --
Price-risk management credit reserves....... 7.7 5.3 -- -- 13.0
Year ended December 31, 1997:
Allowance for doubtful accounts --
Receivables.............................. 11.4 13.3 7.0(c) 10.2 21.5
Other assets............................. 4.6 -- -- -- 4.6
Price-risk management credit reserves....... 7.6 .1 -- -- 7.7
Year ended December 31, 1996:
Allowance for doubtful accounts --
Receivables.............................. 12.8 5.3 1.4(c) 8.1 11.4
Other assets............................. 1.6 3.0 -- -- 4.6
Price-risk management credit reserves....... 8.3 (.7) -- -- 7.6
</TABLE>
- ---------------
(a) Deducted from related assets.
(b) Represents balances written off, net of recoveries and reclassifications.
(c) Primarily relates to acquisitions of businesses.
F-62
<PAGE> 99
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Directors and nominees for Director of
Williams required by Item 401 of Regulation S-K is presented under the heading
"Election of Directors" in Williams' Proxy Statement prepared for the
solicitation of proxies in connection with the Annual Meeting of Stockholders of
the Company for 1999 (the "Proxy Statement"), which information is incorporated
by reference herein. A copy of the Proxy Statement is filed as an exhibit to the
Form 10-K. Information regarding the executive officers of Williams is presented
following Item 4 herein, as permitted by General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item
405 of Regulation S-K is included under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement, which
information is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K regarding executive
compensation is presented under the headings "Election of Directors" and
"Executive Compensation and Other Information" in the Proxy Statement, which
information is incorporated by reference herein. Notwithstanding the foregoing,
the information provided under the headings "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation" in the
Proxy Statement are not incorporated by reference herein. A copy of the Proxy
Statement is filed as an exhibit to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding the security ownership of certain beneficial
owners and management required by Item 403 of Regulation S-K is presented under
the headings "Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement, which information is incorporated by reference herein. A
copy of the Proxy Statement is filed as an exhibit to the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
required by Item 404 of Regulation S-K is presented under the heading "Certain
Relationships and Related Transactions" in the Proxy Statement, which
information is incorporated by reference herein. A copy of the Proxy Statement
is filed as an exhibit to the Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. The financial statements and schedule listed in the
accompanying index to consolidated financial statements are filed as part of
this annual report.
(a) 3 and (c). The exhibits listed below are filed as part of this annual
report.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
Exhibit 2 --
*(a) -- Agreement and Plan of Merger, dated as of November 23,
1997, and as amended on January 25, 1998, among The
Williams Companies, Inc., MAPCO Inc. and TML Acquisition
Corp. (filed as Exhibit 2.1 to Williams' Registration
Statement on Form S-4, filed January 27, 1998).
</TABLE>
F-63
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
Exhibit 3 --
*(a) -- Restated Certificate of Incorporation of Williams (filed
as Exhibit 4(a) to Form 8-B Registration Statement, filed
August 20, 1987).
*(b) -- Certificate of Amendment of Restated Certificate of
Incorporation, dated May 20, 1994 (filed as Exhibit 3(d)
to Form 10-K for the fiscal year ended December 31,
1994).
*(c) -- Certificate of Amendment of Restated Certificate of
Incorporation dated May 16, 1997 (filed as Exhibit 4.3 to
the Registration Statement on Form S-8 filed November 21,
1997).
*(d) -- Certificate of Amendment of Restated Certificate of
Incorporation, dated February 26, 1998 (filed as Exhibit
3(d) to Form 10-K for the fiscal year ended December 31,
1997).
*(e) -- Certificate of Designation with respect to the $3.50
Cumulative Convertible Preferred Stock (filed as Exhibit
3.1(c) to the Prospectus and Information Statement to
Amendment No. 2 to the Registration Statement on Form
S-4, filed March 30, 1995).
*(f) -- Certificate of Increase of Authorized Number of Shares of
Series A Junior Participating Preferred Stock (filed as
Exhibit 3(f) to Form 10-K for the fiscal year ended
December 31, 1995).
*(g) -- Certificate of Increase of Authorized Number of Shares of
Series A Junior Participating Preferred Stock, dated
December 31, 1997 (filed as Exhibit 3(g) to Form 10-K for
the fiscal year ended December 31, 1997).
*(h) -- Rights Agreement, dated as of February 6, 1996, between
Williams and First Chicago Trust Company of New York
(filed as Exhibit 4 to Williams Form 8-K filed January
24, 1996).
*(i) -- By-laws of Williams, as amended (filed, as amended, as
Exhibit 3 to Form 10-Q for the quarter ended September
30, 1996).
Exhibit 4 --
*(a) -- Form of Senior Debt Indenture between the Company and
Chase Manhattan Bank (formerly Chemical Bank), Trustee,
relating to the 10 1/4% Debentures, due 2020; the 9 3/8%
Debentures, due 2021; Medium-Term Notes (9.10%-9.31%),
due 2001; the 7 1/2% Notes, due 1999, and the 8 7/8%
Debentures, due 2012 (filed as Exhibit 4.1 to Form S-3
Registration Statement No. 33-33294, filed February 2,
1990).
*(b) -- Second Amended and Restated Credit Agreement, dated as of
July 23, 1997, among Williams and certain of its
subsidiaries and the banks named therein and Citibank,
N.A., as agent (filed as Exhibit 4(c) to Form 10-K for
the fiscal year ended December 31, 1997).
(c) -- Amendment dated January 26, 1999, to Second Amended and
Restated Credit Agreement dated July 23, 1997, among
Williams and certain of its subsidiaries and the banks
named therein and Citibank, N.A., as agent.
*(d) -- Form of Senior Debt Indenture between the Company and The
First National Bank of Chicago, Trustee, relating to
6 1/2% Notes due 2002; 6 5/8% Notes due 2004; floating
rate notes due 2000; 6 1/8% Notes due 2001; 6.20% Notes
due 2002; 6 1/2% Notes due 2006; 5.95% Structured
Putable/Remarketable Securities due 2010; and 6 1/8%
Mandatory Putable/Remarketable Securities due 2012 (filed
as Exhibit 4.1 to Registration Statement on Form S-3
filed September 8, 1997).
</TABLE>
F-64
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*(e) -- Form of Debenture representing $360,000,000 principal
amount of 6% Convertible Subordinated Debenture Due 2005
(filed as Exhibit 4.7 to the Registration Statement on
Form S-8, filed August 30, 1996).
*(f) -- Form of Warrant to purchase 11,305,720 shares of the
Common Stock of the Company (filed as Exhibit 4.8 to the
Registration Statement on Form S-8, filed August 30,
1996).
*(g) -- Indenture dated May 1, 1990, between Transco Energy
Company and The Bank of New York, as Trustee (filed as an
Exhibit to Transco Energy Company's Form 8-K dated June
25, 1990).
*(h) -- First Supplemental Indenture dated June 20, 1990, between
Transco Energy Company and The Bank of New York, as
Trustee (filed as an Exhibit to Transco Energy Company's
Form 8-K dated June 25, 1990).
*(i) -- Second Supplemental Indenture dated November 29, 1990,
between Transco Energy Company and The Bank of New York,
as Trustee (filed as an Exhibit to Transco Energy
Company's Form 8-K dated December 7, 1990).
*(j) -- Third Supplemental Indenture dated April 23, 1991,
between Transco Energy Company and The Bank of New York,
as Trustee (filed as an Exhibit to Transco Energy
Company's Form 8-K dated April 30, 1991).
*(k) -- Fourth Supplemental Indenture dated August 22, 1991,
between Transco Energy Company and The Bank of New York,
as Trustee (filed as an Exhibit to Transco Energy
Company's Form 8-K dated August 27, 1991).
(l) -- Fifth Supplemental Indenture dated May 1, 1995, among
Transco Energy Company, Williams, and The Bank of New
York, Trustee.
Exhibit 10(iii) -- Compensatory Plans and Management Contracts
*(a) -- The Williams Companies, Inc. Supplemental Retirement
Plan, effective as of January 1, 1988 (filed as Exhibit
10(iii)(c) to Form 10-K for the year ended December 31,
1987).
*(b) -- Form of Employment Agreement, dated January 1, 1990,
between Williams and certain executive officers (filed as
Exhibit 10(iii)(d) to Form 10-K for the year ended
December 31, 1989).
*(c) -- Form of The Williams Companies, Inc. Change in Control
Protection Plan between Williams and employees (filed as
Exhibit 10(iii)(e) to Form 10-K for the year ended
December 31, 1989).
*(d) -- The Williams Companies, Inc. 1985 Stock Option Plan
(filed as Exhibit A to Williams' Proxy Statement, dated
March 13, 1985).
*(e) -- The Williams Companies, Inc. 1988 Stock Option Plan for
Non-Employee Directors (filed as Exhibit A to Williams'
Proxy Statement, dated March 14, 1988).
*(f) -- The Williams Companies, Inc. 1990 Stock Plan (filed as
Exhibit A to Williams' Proxy Statement, dated March 12,
1990).
*(g) -- The Williams Companies, Inc. Stock Plan for Non-Officer
Employees (filed as Exhibit 10(iii)(g) to Form 10-K for
the fiscal year ended December 31, 1995).
*(h) -- The Williams Companies, Inc. 1996 Stock Plan (filed as
Exhibit A to Williams' Proxy Statement, dated March 27,
1996).
*(i) -- The Williams Companies, Inc. 1996 Stock Plan for
Non-Employee Directors (filed as Exhibit B to Williams'
Proxy Statement, dated March 27, 1996).
</TABLE>
F-65
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*(j) -- Indemnification Agreement, effective as of August 1,
1986, between Williams and members of the Board of
Directors and certain officers of Williams (filed as
Exhibit 10(iii)(e) to Form 10-K for the year ended
December 31, 1986).
*(k) -- The Williams Communications Stock Plan (filed as Exhibit
99 to the Registration Statement on Form S-8, filed on
August 14, 1998).
(l) -- The Williams International Stock Plan.
(m) -- Form of Stock Option Secured Promissory Note and Pledge
Agreement between Williams and certain employees,
officers, and non-employee directors.
Exhibit 12 -- Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements.
Exhibit 20 -- Definitive Proxy Statement of Williams for 1999 (as filed
with the Commission on March 29, 1999).
Exhibit 21 -- Subsidiaries of the registrant.
Exhibit 23(a) -- Consent of Independent Auditors, Ernst & Young LLP.
Exhibit 23(b) -- Consent of Independent Auditors, Deloitte & Touche LLP.
Exhibit 24 -- Power of Attorney together with certified resolution.
Exhibit 27 -- Financial Data Schedule.
Exhibit 99 -- Opinion of Independent Auditors, Deloitte & Touche LLP.
</TABLE>
(b) Reports on Form 8-K.
On October 21, 1998, Williams filed a report on Form 8-K to report third
quarter earnings.
On November 23, 1998, Williams filed a report on Form 8-K to report that
the Board of Directors of The Williams Companies, Inc. has authorized Williams
Communications Group, Inc., a wholly-owned subsidiary of the Company to sell a
minority interest in its business to the public.
(d) The financial statements of partially-owned companies are not presented
herein since none of them individually, or in the aggregate, constitute a
significant subsidiary.
- ---------------
* Each such exhibit has heretofore been filed with the Securities and Exchange
Commission as part of the filing indicated and is incorporated herein by
reference.
F-66
<PAGE> 103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE WILLIAMS COMPANIES, INC.
(Registrant)
By: /s/ SHAWNA L. GEHRES
----------------------------------
Shawna L. Gehres
Attorney-in-fact
Dated: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ KEITH E. BAILEY* Chairman of the Board, President, Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
Keith E. Bailey Officer) and Director
/s/ JACK D. MCCARTHY* Senior Vice President -- Finance (Principal
- ----------------------------------------------------- Financial Officer)
Jack D. McCarthy
/s/ GARY R. BELITZ* Controller (Principal Accounting Officer)
- -----------------------------------------------------
Gary R. Belitz
/s/ GLENN A. COX* Director
- -----------------------------------------------------
Glenn A. Cox
/s/ THOMAS H. CRUIKSHANK* Director
- -----------------------------------------------------
Thomas H. Cruikshank
/s/ WILLIAM E. GREEN* Director
- -----------------------------------------------------
William E. Green
/s/ PATRICIA L. HIGGINS* Director
- -----------------------------------------------------
Patricia L. Higgins
/s/ W.R. HOWELL* Director
- -----------------------------------------------------
W. R. Howell
/s/ ROBERT J. LAFORTUNE* Director
- -----------------------------------------------------
Robert J. LaFortune
/s/ JAMES C. LEWIS* Director
- -----------------------------------------------------
James C. Lewis
/s/ JACK A. MACALLISTER* Director
- -----------------------------------------------------
Jack A. MacAllister
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ FRANK T. MACINNIS Director
- -----------------------------------------------------
Frank T. MacInnis
/s/ PETER C. MEINIG* Director
- -----------------------------------------------------
Peter C. Meinig
/s/ KAY A. ORR* Director
- -----------------------------------------------------
Kay A. Orr
/s/ GORDON R. PARKER* Director
- -----------------------------------------------------
Gordon R. Parker
/s/ JOSEPH H. WILLIAMS* Director
- -----------------------------------------------------
Joseph H. Williams
</TABLE>
By: /s/ SHAWNA L. GEHRES
--------------------------------
Shawna L. Gehres
Attorney-in-fact
Dated: March 29, 1999
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4(c) -- Amendment to Second Amended and Restated Credit
Agreement.
4(l) -- Fifth Supplemental Indenture Dated as of May 1, 1995,
among Transco Energy Company, Williams, and The Bank of
New York, Trustee.
10(iii)(l) -- The Williams International Stock Plan.
10(iii)(m) -- Form of Stock Option Secured Promissory Note and Pledge
Agreement between Williams and certain employees,
officers, and non-employee directors.
12 -- Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements.
21 -- Subsidiaries of the registrant.
23(a) -- Consent of Independent Auditors, Ernst & Young LLP.
23(b) -- Consent of Independent Auditors, Deloitte & Touche LLP.
24 -- Power of Attorney together with certified resolution.
27 -- Financial Data Schedule.
99 -- Opinion of Independent Auditors, Deloitte & Touche LLP.
</TABLE>
<PAGE> 1
EXHIBIT 4(c)
AMENDMENT
TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF
JULY 23, 1997
DATED AS OF JANUARY 26, 1999
THIS AMENDMENT (herein called this "Amendment") is made and entered
into this 26th day of January, 1999, by and among the Borrowers, the Agent and
the Banks. In consideration of the mutual covenants and agreements contained
herein, the Borrowers, the Agent and the Banks hereby agree as set forth herein.
WITNESSETH:
WHEREAS, the Borrowers, the Agent and certain of the Banks are parties
to the Second Amended and Restated Credit Agreement dated as of July 23, 1997
(the "1997 Credit Agreement"); and
WHEREAS, the Borrowers have requested that the 1997 Credit Agreement be
further amended, and the parties hereto have agreed to do so on the terms and
conditions set forth herein; and
WHEREAS, Williams Communications Group, Inc. ("WCG") intends to become
a Borrower pursuant to the 1997 Credit Agreement and the Banks have agreed to
the inclusion of WCG in such capacity subject to the terms hereof.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrowers, the Agent and the
Banks agree as follows:
1. Unless the context otherwise requires or unless otherwise expressly
defined herein, the terms defined in the 1997 Credit Agreement shall have the
same meanings whenever used in this Amendment.
2. The definition of "Applicable Margin" as listed in ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS is hereby amended as follows:
(a) Clause (i) of the definition of "Applicable Margin" is hereby
amended and restated in its entirety to read as follows:
<PAGE> 2
(i) as to any Eurodollar Rate Advance to any Borrower (other than (x)
WilTel during such times as WilTel is Unrated and (y) WCG at any time),
the rate per annum set forth in Schedule XI under the heading
"Applicable Margin" for the relevant Rating Category applicable to such
Borrower from time to time;
(b) Clause (iii) of the definition of "Applicable Margin" is hereby
amended and restated in its entirety to read as follows:
(iii) for each day during such times as WilTel is Unrated, as to any
Eurodollar Rate Advance to WilTel at such times subsequent to January
26, 1999, the rate per annum set forth in the following table for the
relevant Applicable WilTel Debt to EBITDA Ratio for such day:
<TABLE>
<CAPTION>
Applicable Margin
Applicable If 50% or less If more than 50%
WilTel Debt to of Commitment of Commitment
EBITDA Ratio drawn drawn
-------------- -------------- ----------------
<S> <C> <C>
Less than or equal to 1.0 .375% .500%
Greater than 1.0 and less .500% .625%
than or equal to 1.75
Greater than 1.75 and less .625% .750%
than or equal to 2.5
Greater than 2.5 and less .750% .875%
than or equal to 3.5
Greater than 3.5 and less 1.00% 1.125%
than or equal to 4.5
Greater than 4.5 and less 1.25% 1.50%
than or equal to 5.5
Greater than 5.5 1.50% 2.00%
</TABLE>
(c) The following clause (iv) is added to the definition of "Applicable
Margin" immediately following clause (iii) of such definition:
2
<PAGE> 3
and (iv) as to any Eurodollar Rate Advance to WCG as Borrower, the
Applicable Margin in effect with respect to WHD on such date, as
determined pursuant to clause (i) of this definition.
3. The definition of "WilTel" as listed in ARTICLE I DEFINITIONS AND
ACCOUNTING TERMS is hereby deleted and replaced with the following:
"WilTel" means Williams Communications Solutions, LLC, a Delaware
limited liability company.
4. The definition of "Borrowers" as listed in ARTICLE I DEFINITIONS AND
ACCOUNTING TERMS is hereby amended to delete WPL and to add "WCG".
5. ARTICLE I DEFINITIONS AND ACCOUNTING TERMS is hereby amended to add
the following terms:
"Guaranty" means that certain guaranty dated January 26, 1999 duly
executed and delivered to the Agent by WHD in substantially the form of
Exhibit I.
"Permitted WCG Liens" means Liens specifically described on
Schedule IX-A.
"WCG" means Williams Communications Group, Inc., a Delaware
corporation.
6. Section 3.02 Additional Conditions Precedent to Each A Borrowing is
hereby amended to add the following subpart (a)(iv):
(a)(iv) The Guaranty has been executed and delivered by WHD and
remains in full force and effect.
7. Section 3.03 Conditions Precedent to Each B Borrowing is hereby
amended to add the following subpart (iii)(a)(5):
(iii)(a)(5) The Guaranty has been executed and delivered by WHD and
remains in full force and effect.
8. Section 4.1 Representations and Warranties is hereby amended by
adding thereto the following additional clause (n):
(n) The Borrower has (i) reviewed the areas within its business and
operations and those of its Subsidiaries which could be adversely
affected by failure to become "Year 2000 Compliant" (that is, that
computer applications, imbedded microchips and other systems
3
<PAGE> 4
used by any of the Borrower or its Subsidiaries or their material
vendors, will be able properly to recognize and perform date-sensitive
functions involving certain dates prior to and any date after December
31, 1999); (ii) developed a detailed plan and timetable to become Year
2000 Compliant in a timely manner; and (iii) committed adequate
resources to support its plan to become Year 2000 Compliant in a timely
manner. Based on such review and plan the Borrower reasonably believes
that it and its Subsidiaries will become Year 2000 Compliant on a
timely basis except to the extent that a failure to do so would not
reasonably be expected to have a material adverse effect on the
business, assets or financial condition of the Borrower and its
Subsidiaries, taken as a whole, or on the ability of the Borrower to
perform its obligations hereunder.
9. Section 5.02 Negative Covenants, is hereby amended as follows:
(a) By adding to clause (a) Liens, Etc. thereof the following
additional subclause:
(viii) WCG and its Non-Borrowing Subsidiaries may create, incur, assume
or suffer to exist Permitted WCG Liens
(b) By deleting subparts (b) Debt, (i) and (ii) and replacing them
with the following:
(b) Debt. (i) in the case of TWC, permit the ratio of (A) the
aggregate amount of all Debt of TWC and its Subsidiaries on a
Consolidated basis to (B) the sum of the Consolidated Net Worth of TWC
plus the aggregate amount of all Debt of TWC and its Subsidiaries on a
Consolidated basis to exceed (1) 0.7 to 1.0 at any time during the
period beginning on January 1, 1999 through December 31, 2000, (2)
0.675 to 1.0 at any time during the period beginning on January 1, 2001
through December 31, 2001, or (3) 0.65 to 1.0 at any time during the
period beginning on January 1, 2002 through the term of this Agreement;
(ii) in the case of WHD, permit the ratio of (A) the aggregate
amount of all Debt of WHD and its Subsidiaries on a Consolidated basis
to (B) the sum of the Consolidated Net Worth of WHD plus the aggregate
amount of all Debt of WHD and its Subsidiaries on a consolidated basis
to exceed (1) 0.6 to 1.0 at any time during the period beginning on
January 1, 1999 through December 31, 2000, (2) 0.575 to 1.0 at any time
during the period beginning on January 1, 2001 through December 31,
2001, or (3) 0.55 to 1.0 at any time during the period beginning on
January 1, 2002 through the term of this Agreement; and
4
<PAGE> 5
(c) By adding in clause (f) Maintenance of Ownership of Certain
Subsidiaries immediately after the reference to "WilTel" in phrases (1)
and (2) of such clause (f) a reference to WCG.
(d) By amending and restating subpart (vii) of clause (j) Sale and
Lease-Back Transactions to read as follows:
(vii) paragraph (x) of Schedule IX in the case of WilTel and its
Subsidiaries or Schedule IX-A in the case of WCG and its Subsidiaries.
10. Section 6.01 Events of Default is hereby amended by adding the word
"or" after the semi-colon ending clause (i) thereof and adding the following
clause (j) to such Section 6.01:
(j) As to WCG as Borrower, the Guaranty shall (except in accordance
with its terms), in whole or in part, terminate, cease to be effective
or cease to be the legally valid, binding and enforceable obligation of
WHD as guarantor thereunder; any Borrower or any Subsidiary or
Affiliate of a Borrower shall, directly or indirectly, contest in any
manner such effectiveness, validity, binding nature or enforceability;
11. Schedule II "Borrower Information" is hereby amended by adding
thereto the following information: Williams Communications Group, One Williams
Center, Suite 4800, Tulsa, Oklahoma 74172, Attention:
Patti J. Kastl, Telecopier: (918) 588-4755.
12. Schedule IX-A "Permitted WCG Liens" is hereby added to the 1997
Credit Agreement in the form of Schedule IX-A attached hereto.
13. The total Commitments of the Banks to WCG shall be in the aggregate
amount of $400,000,000 and each Bank?s Commitment to WCG as of the date hereof
shall be forty percent (40%) of its Commitment to WHD pursuant to the 1997
Credit Agreement as hereby amended. Schedule X of the 1997 Credit Agreement is
hereby deemed to be amended to add such Commitment of each Bank to WCG thereto
and to delete the Commitment of each Bank to WPL.
14. Schedule XI "Rating Categories" is hereby deleted in its entirety
and replaced with the Schedule XI attached to this Amendment.
15. Exhibit I "Form of Guaranty", attached to this Amendment, is hereby
added to the Agreement as Exhibit I.
16. To induce the Banks, the Co-Agents and the Agent to enter into this
Amendment, each of the Borrowers hereby reaffirms and WCG makes with respect to
itself, as of the date
5
<PAGE> 6
hereof, those representations and warranties contained in Article IV of the 1997
Credit Agreement (except to the extent such representations and warranties
relate solely to an earlier date) and additionally each Borrower represents and
warrants as follows:
(a) The execution, delivery and performance by WCG of this Amendment
and its Notes and the consummation of the transactions contemplated by this
Amendment are within WCG?s corporate powers, have been duly authorized by all
necessary corporate action, do not contravene (i) WCG?s charter or by-laws, or
(ii) law or any contractual restriction binding on or affecting WCG and will not
result in or require the creation or imposition of any Lien prohibited by the
1997 Credit Agreement, as amended hereby. At the time of each borrowing of any
Advance by WCG, such borrowing and the use of the proceeds of such Advance will
be within WCG?s corporate powers, will have been duly authorized by all
necessary corporate action, will not contravene (i) WCG?s charter or by-laws, or
(ii) law or any contractual restriction binding on or affecting WCG and will not
result in or require the creation or imposition of any Lien prohibited by the
1997 Credit Agreement, as amended hereby.
(b) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required for
the due execution, delivery and performance by WCG of this Amendment or its
Notes, or the performance of the 1997 Credit Agreement as amended hereby or the
consummation of the transactions contemplated by this Amendment and the 1997
Credit Agreement as hereby amended. At the time of each borrowing of any Advance
by WCG, no authorization or approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body will be required for
such borrowing or the use of the proceeds of such Advance.
(c) This Amendment has been duly executed and delivered by WCG. This
Amendment and the 1997 Credit Agreement, as amended hereby, are the legal, valid
and binding obligations of WCG enforceable against WCG in accordance with their
terms, except as such enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors? rights generally and by general principles of equity. The A Notes of
WCG are, and when executed the B Notes of WCG will be, the legal, valid and
binding obligations of WCG enforceable against WCG in accordance with their
respective terms, except as such enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors? rights generally and by general principles of equity.
(d) The execution, delivery and performance by WHD of its Guaranty and
the consummation of the transactions contemplated by this Amendment and such
Guaranty are within WHD?s corporate powers, have been duly authorized by all
necessary corporate action, do not contravene (i) WHD?s charter or by-laws, or
(ii) law or any contractual restriction binding on
6
<PAGE> 7
or affecting WHD and will not result in or require the creation or imposition of
any Lien prohibited by the 1997 Credit Agreement, as amended hereby.
(e) The Guaranty and this Amendment have each been duly executed and
delivered by WHD and each constitutes the legal, valid and binding obligations
of WHD enforceable against WHD in accordance with its respective terms, except
as such enforceability may be limited by any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors? rights generally
and by general principles of equity.
(f) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required for
the due execution, delivery and performance by WHD of this Amendment or its
Guaranty or the consummation of the transactions contemplated by this Amendment
or its Guaranty.
(g) The execution, delivery and performance by each Borrower other than
WCG (such Borrowers the "Existing Borrowers") of this Amendment and the
consummation of the transactions contemplated by this Amendment are within such
Existing Borrower?s corporate or limited liability company powers, have been
duly authorized by all necessary corporate or limited liability company action,
do not contravene (i) such Existing Borrower?s charter, by-laws, or formation
agreement, or (ii) law or any contractual restriction binding on or affecting
such Existing Borrower and will not result in or require the creation or
imposition of any Lien prohibited by the 1997 Credit Agreement, as amended
hereby.
(h) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required for
the due execution, delivery and performance by any Existing Borrower of this
Amendment or the consummation of the transactions contemplated by this
Amendment.
(i) This Amendment has been duly executed and delivered by each
Existing Borrower. This Amendment is the legal, valid and binding obligation of
each Existing Borrower enforceable against each Existing Borrower in accordance
with its terms, except as such enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors? rights generally and by general principles of equity.
17. The obligation of each Bank to make its initial Advance to WCG on
or after the date hereof is conditioned on the receipt by the Agent on or before
the date of such Advance of the following:
7
<PAGE> 8
(a) A certificate of the Secretary or an Assistant Secretary of WCG as
to (i) its by-laws and all changes which have been made, if any, to its
Certificate of Incorporation since the date of certification of such Certificate
delivered pursuant to item (b) below, (ii) resolutions of the Board of Directors
or the Executive Committee thereof then in full force and effect authorizing the
borrowing in an amount equal to or greater than $400,000,000 and the execution,
delivery and performance of such documents, certificates and notes and all other
actions necessary to effect such and (iii) the incumbency and signatures of
those of its officers authorized to act with respect to this Amendment;
(b) A copy of the Certificate of Incorporation of WCG, certified by the
Secretary of State of Delaware and attesting to its existence and good standing;
(c) A certificate of the Secretary or an Assistant Secretary of WHD as
to (i) its by-laws, (ii) resolutions of the Board of Directors or Executive
Committee thereof then in full force and effect authorizing the execution,
delivery and performance of the Guaranty, and (iii) the incumbency and
signatures of those of its officers authorized to act with respect to this
Amendment and the Guaranty;
(d) The A Notes of WCG, duly executed to the order of each of the
respective Banks, substantially in the form of Exhibit A-1 to the 1997 Credit
Agreement in the aggregate principal amount of $400,000,000;
(e) The Guaranty, duly executed by WHD; and
(f) An opinion of William G. von Glahn, General Counsel of TWC,
delivered on behalf of WCG and WHD substantially in the form of Exhibit A
attached hereto.
18. The 1997 Credit Agreement as hereby amended is hereby ratified and
confirmed in all respects. The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Agent or the Banks under the 1997 Credit
Agreement. All references to the Credit Agreement in any other document,
instrument, agreement or writing shall hereafter be deemed to refer to the 1997
Credit Agreement as amended hereby.
19. The provisions of the 1997 Credit Agreement not specifically
amended herein will be interpreted so as to be consistent with this Amendment;
if, however, any discrepancy exists between such provisions in the 1997 Credit
Agreement and this Amendment, such discrepancy shall be resolved in favor of
this Amendment.
8
<PAGE> 9
20. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW
PRINCIPLES, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA, IN ALL
RESPECTS, INCLUDING CONSTRUCTION, VALIDITY AND PERFORMANCE.
21. This Amendment shall be effective as of January 26, 1999 and shall
be binding upon the parties hereto and upon their respective successors, heirs
and permitted assigns.
22. This Amendment may be executed in any number of counterparts, all
of which taken together shall constitute one and the same instrument, and any
party hereto may execute this Amendment by signing one or more counterparts.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first written above.
THE WILLIAMS COMPANIES, INC. TEXAS GAS TRANSMISSION
CORPORATION
By: By:
------------------------------ --------------------------------
Name: Name:
---------------------------- ------------------------------
Title: Title:
--------------------------- -----------------------------
TRANSCONTINENTAL GAS PIPE LINE WILLIAMS COMMUNICATIONS
CORPORATION GROUP, INC.
By: By:
------------------------------ --------------------------------
Name: Name:
---------------------------- ------------------------------
Title: Title:
--------------------------- -----------------------------
WILLIAMS HOLDINGS OF DELAWARE, WILLIAMS COMMUNICATIONS
INC. SOLUTIONS, L.L.C.
By: By:
------------------------------ --------------------------------
Name: Name:
---------------------------- ------------------------------
Title: Title:
--------------------------- -----------------------------
NORTHWEST PIPELINE CORPORATION
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE> 11
AGENT:
CITIBANK, N.A., as Agent
By:
------------------------------
Title:
---------------------------
BANKS:
CITIBANK, N.A. CREDIT LYONNAIS NEW YORK BRANCH
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
BANK OF AMERICA NATIONAL TRUST THE FIRST NATIONAL BANK OF
AND SAVINGS ASSOCIATION CHICAGO
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
THE CHASE MANHATTAN BANK BANK OF MONTREAL
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
CIBC INC. THE BANK OF NEW YORK
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
THE BANK OF NOVA SCOTIA
By:
------------------------------
Title:
---------------------------
<PAGE> 12
BARCLAYS BANK PLC SOCIETE GENERALE, SOUTHWEST AGENCY
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
BANKBOSTON, N.A. WELLS FARGO BANK, N.A.
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
THE FUJI BANK, LIMITED, HOUSTON BANK OF OKLAHOMA, N.A.
AGENCY
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
MELLON BANK, N.A. COMMERCE BANK, N.A.
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
MORGAN GUARANTY TRUST CREDIT AGRICOLE INDOSUEZ
COMPANY OF NEW YORK
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
ROYAL BANK OF CANADA SUNTRUST BANK, ATLANTA
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
<PAGE> 13
INDUSTRIAL BANK OF JAPAN TRUST
COMPANY
By:
------------------------------
Title:
---------------------------
THE SAKURA BANK, LIMITED
By:
------------------------------
Title:
---------------------------
THE BANK OF TOKYO-MITSUBISHI, LTD.
By:
------------------------------
Title:
---------------------------
UBS AG, STAMFORD BRANCH
By:
------------------------------
Title:
---------------------------
NATIONS BANK N.A.
By:
------------------------------
Title:
---------------------------
<PAGE> 1
EXHIBIT 4(l)
- --------------------------------------------------------------------------------
TRANSCO ENERGY COMPANY
THE WILLIAMS COMPANIES, INC.
and
THE BANK OF NEW YORK
Trustee
-----------
FIFTH SUPPLEMENTAL INDENTURE
Dated as of May 1, 1995
- -------------------------------------------------------------------------------
Supplementing the Indenture dated as of
May 1, 1990, as amended
<PAGE> 2
FIFTH SUPPLEMENTAL INDENTURE
FIFTH SUPPLEMENTAL INDENTURE (the "Fifth Supplemental
Indenture"), dated as of May 1, 1995, by and among Transco Energy
Company, a Delaware corporation ("Transco"), The Williams Companies,
Inc., a Delaware corporation ("Williams"), and The Bank of New York, a
New York banking corporation, as Trustee (the "Trustee").
WITNESSETH:
WHEREAS, Transco and the Trustee have entered into an
Indenture dated as of May 1, 1990 (as amended by a First Supplemental
Indenture dated as of June 20, 1990, a Second Supplemental Indenture
dated as of November 29, 1990, a Third Supplemental Indenture dated as
of April 23, 1991 and a Fourth Supplemental Indenture dated as of
August 22, 1991, the "Indenture"), pursuant to which Indenture Transco
has issued certain 9 5/8% Notes due 2000, 9 7/8% Debentures due 2020, 9
1/2% Notes due 1995, 9 1/8% Notes due 1998 and 9 3/8% Notes due 2001
(collectively, the "Notes"); and
WHEREAS, Williams desires to assume, pursuant hereto and
effective as of the date hereof, all of Transco's obligations in
respect of the Notes in connection with the transfer (the "Transfer")
of certain of Transco's assets to Williams following the merger of WC
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary
of Williams ("Sub"), with and into Transco pursuant to an Agreement and
Plan of Merger dated as of December 12, 1994 by and among Transco,
Williams and Sub; and
WHEREAS, pursuant to the Transfer, Transco will assign and
transfer to Williams all of the outstanding capital stock of Texas
Gas Transmission Corporation, Transcontinental Gas Pipe Line
Corporation, Transco Gas Marketing Company and Transco Coal Company,
each a Delaware corporation and a wholly-owned subsidiary of Transco,
such subsidiaries constituting the properties and assets of Transco
substantially as an entirety; and
WHEREAS, Article Thirteen of the Indenture requires, in the
event of a transfer of Transco's properties and assets substantially
as an entirety, that the successor to such assets expressly assume, by
supple-
<PAGE> 3
mental indenture, certain of Transco's obligations in respect of the
Notes.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants contained herein and in the Indenture and for
other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Transco, Williams, and the Trustee
hereby agree as follows:
Section 1. Definitions. Capitalized terms which are used but
not defined herein shall have the meanings ascribed to such terms in
the Indenture.
Section 2. Assumption of Certain Obligations.
(a) Williams hereby expressly assumes (i) the due and
punctual payment of the principal of, premium, if any, on, interest
on, and any Additional Amounts payable under Section 6.09 of the
Indenture in respect of, the Notes and (ii) the performance of all of
the covenants provided for in the Indenture to be performed or
observed by Transco.
(b) Transco and the Trustee hereby acknowledge that
Williams shall succeed to, and be substituted for, and may exercise
every right and power of, Transco under the Indenture with the same
effect as if Williams had been named therein.
Section 3. Effect of Fifth Supplemental Indenture. From and
after the execution and delivery of this Fifth Supplemental
Indenture, the Indenture shall be deemed to be modified as herein
provided, but except as modified hereby, the Indenture shall continue
in full force and effect. The Indenture as modified hereby shall be
read, taken and construed as one and the same instrument.
Section 4. Notice. Any notice or communication by the Trustee
to Williams is duly given if in writing and delivered in person or by
express mail service to the address set forth below:
The Williams Companies, Inc.
One Williams Center
Tulsa, Oklahoma 74172
2
<PAGE> 4
Attention: General Counsel
Section 5. Governing Law. This Fifth Supplemental
Indenture shall be governed by and construed in accordance with the
laws of the State of New York (regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws) as
to all matters, including, without limitation, matters of validity,
construction, effect, performance and remedies.
Section 6. Counterparts. This Fifth Supplemental
Indenture may be executed in any number of counterparts, each of
which; when so executed and delivered, shall be an original, but such
counterparts shall together constitute but one and the same instrument.
3
<PAGE> 5
IN WITNESS WHEREOF, each of Transco, Williams and the Trustee
has caused this Fifth Supplemental Indenture to be executed on its
behalf by its duly authorized officer and has caused its official
seal to be impressed hereon and attested by one of its duly authorized
officers, all as of the day and year first above written.
[SEAL] TRANSCO ENERGY COMPANY
Attest
/s/ BOBBY E. POTTS By: /s/ JACK D. MCCARTHY
-------------------------- --------------------------
Name: Bobby E. Potts Name: Jack D. McCarthy
Title: Assistant Secretary Title: Vice-President
[SEAL] THE WILLIAMS COMPANIES, INC.
Attest
/s/ BOBBY E. POTTS By: /s/ JACK D. MCCARTHY
-------------------------- --------------------------
Name: Bobby E. Potts Name: Jack D. McCarthy
Title: Assistant Secretary Title: Senior Vice-President
Finance and Chief
Financial Officer
[SEAL] THE BANK OF NEW YORK, AS TRUSTEE
Attest
By:/s/ ROBERT F. MCINTYRE
--------------------------
/s/ MARIE E. TRIMBOLI Name: Robert F. McIntyre
-------------------------- Title: Assistant Vice President
Name: Marie E. Trimboli
Title: Assistant Treasurer
4
<PAGE> 1
EXHIBIT 10(iii)(l)
THE WILLIAMS INTERNATIONAL
STOCK PLAN
SECTION 1
PURPOSES AND EFFECTIVE DATE
1.01 Purposes. The objectives of the THE WILLIAMS INTERNATIONAL STOCK
PLAN (the "Plan") are to promote the long-term financial success of WILLIAMS
INTERNATIONAL COMPANY, INC. (the "Company") by providing a compensation program
to enable Williams International to (i) retain employees who are critical to
Williams International's success; (ii) recognize and reward employee
performance; and (iii) provide incentives for key employees that are consistent
with The Williams Companies, Inc. ("Williams") stockholder interests and
values.
1.02 Effective Date. The Plan shall become effective as of May 20,
1998.
SECTION 2
DEFINITIONS
2.01 Definitions. In addition to the terms defined elsewhere in the
Plan, the following terms as used in the Plan shall have the following meanings
when used with initial capital letters:
2.01.1 "Affiliate" means any entity, other than Williams
International, in which Williams owns, directly or indirectly, at least 20
percent of the combined voting power of all classes of stock of such entity or
at least 20 percent of the ownership interest in such entity.
2.01.2 "Award" means any Option, Deferred Stock, Dividend
Equivalent or any other right or interest relating to Shares or cash granted
under the Plan.
2.01.3 "Award Agreement" means any written agreement,
contract, notice to a Participant or other instrument or document between
Williams International and the Participant evidencing an Award.
2.01.4 "Board" means the Board of Directors of Williams.
2.01.5 "CEO" means the Chief Executive Officer of Williams.
2.01.6 "Code" means the Internal Revenue Code of 1986, as
amended from time to time. References to any provision of the Code include
regulations thereunder and successor provisions and regulations thereto.
2.01.7 "Deferred Stock" means a right, granted under the
terms of the Plan, to receive Shares at the end of a specified deferral period.
<PAGE> 2
2.01.8 "Disability" means disability as defined under the
terms of the Williams Consolidated Pension Plan or any successor plan.
2.01.9 "Dividend Equivalent" means a right, granted under the
terms of the Plan, to receive payments equal to dividends paid on Shares.
2.01.10 "Fair Market Value" of a Share means, as of any given
date, the closing price of a Share reported in the table entitled "New York
Stock Exchange Composition Transactions" contained in The Wall Street Journal
(or an equivalent successor table ) for such date or, if no such closing sales
price was reported for such date, for the most recent trading day prior to such
date for which a closing sales price was reported.
2.01.11 "Option" means a right, granted under the terms of
the Plan, to purchase Shares at a specific price during specified time periods.
2.01.12 "Participant" means any employee of Williams
International or an Affiliate granted an Award which remains outstanding under
the Plan.
2.01.13 "Person" is as defined in the Securities Exchange Act
of 1934, as amended.
2.01.14 "Shares" means shares of the Common Stock of
Williams, $1.00 par value, and such other securities of Williams or Williams
International as may be substituted or resubstituted for Shares under the terms
of the Plan.
Definitions of the terms "Change of Control", "Potential Change of
Control", "Change of Control Price", "Related Party" and "Voting Securities"
are set forth in Section 9 hereof.
SECTION 3
ADMINISTRATION
3.01 The Plan shall be administered by the CEO. The CEO shall have
full and final authority to take the following actions, in each case subject
to, and consistent with, the provisions of the Plan:
(i) to designate Participants;
(ii) to determine the type or types of Awards to be granted
to each Participant;
(iii) to determine the number of Awards to be granted, the
number of Shares or amount of cash to which an Award will relate, the terms and
conditions of any Award (including, but not limited to, any exercise price,
grant price or purchase price, any limitations or restrictions, any schedule
for or performance conditions relating to the lapse of limitations, forfeiture
restrictions or restrictions on exercisability or transferability, and
accelerations or waivers thereof, based in each case on such considerations as
the CEO shall determine), and all other matters to be determined in connection
with an Award;
2
<PAGE> 3
(iv) to determine whether, to what extent and under what
circumstances an Award may be settled in, or the exercise price of an Award may
be paid in, cash, Shares, other Awards or other property, or an Award may be
accelerated, vested, canceled, forfeited or surrendered;
(v) to determine whether, to what extent and under what
circumstances cash, Shares, other Awards, other property and other amounts
payable with respect to an Award shall be deferred either automatically, at the
election of the CEO or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which
need not be identical for each Participant;
(vii) to adopt, amend, suspend, waive and rescind such rules
and regulations and approve such agents as may be deemed necessary or advisable
to administer the Plan;
(viii) to correct any defect or supply any omission or
reconsider any inconsistency, and to construe and interpret the Plan, the rules
and regulations, any Award Agreement or any other instrument entered into, or
relating to, an Award under the Plan; and
(ix) to make all other decisions and determinations as may be
required under the terms of the Plan or as may be deemed necessary or advisable
for the administration of the Plan.
Any action of the CEO with respect to the Plan shall be final,
conclusive and binding on all persons, including Williams International,
Williams, Affiliates, Participants, any person claiming rights under the Plan
from or through any Participant, except to the extent the CEO may subsequently
modify, or take further action not inconsistent with, prior action. The express
grant of any specific power to the CEO, and the taking of any action by the
CEO, shall not be construed as limiting the power or authority of the CEO. The
CEO may delegate to officers or managers of Williams International or of any
Affiliate the authority to perform specific functions under the Plan. Any and
all powers, authorizations or discretions granted by the Plan to the CEO shall
likewise be exercisable at any time by the Board of Directors of Williams
International or the board of directors of Williams.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.01 Shares Reserved and Available. Subject to adjustment as provided
in Section 8.01 hereof, the total number of Shares reserved and available for
distribution under the Plan shall be five hundred thousand (500,000) Shares.
3
<PAGE> 4
For purposes of this Section 4.01, the number of Shares to which an
Award relates shall be counted against the number of Shares reserved and
available under the Plan at the time of grant of the Award, unless such number
of Shares cannot be determined at that time in which case the number of Shares
actually distributed pursuant to the Award shall be counted against the number
of Shares reserved and available under the Plan at the time of distribution;
provided, however, that Awards related to or retroactively added to, or granted
in tandem with, substituted for or converted into, other Awards shall be
counted or not counted against the number of Shares reserved and available
under the Plan in accordance with procedures adopted by the CEO so as to ensure
appropriate counting but to avoid double counting; and, provided further, that
the number of Shares deemed to be issued under the Plan upon exercise or
settlement of an Award shall be reduced by the number of Shares surrendered by
the Participant or withheld by Williams International in payment of the
exercise price of the Award and withholding taxes relating to the Award.
If any Shares to which an Award relates are forfeited, or payment is
made to the Participant in the form of cash or other property other than
Shares, or the Award otherwise terminates without payment being made to the
Participant in the form of Shares, any Shares counted against the number of
Shares reserved and available under the Plan with respect to such Award shall,
to the extent of any such forfeiture, alternative payment or termination, again
be available for Awards under the Plan. Any Shares distributed pursuant to an
Award may consist, in whole or in part, of authorized and unissued Shares, or
of treasury Shares, including Shares repurchased by Williams International or
Williams for purposes of the Plan.
SECTION 5
ELIGIBILITY
5.01 Awards may be granted only to individuals who are key employees
of Williams International or Affiliates as may be selected from time to time in
the sole and exclusive discretion of the CEO.
SECTION 6
SPECIFIC TERMS OF AWARDS
6.01 General. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the CEO may impose on any Award or the
exercise or settlement thereof, at the date of grant or thereafter (subject to
the terms of Section 10.01), such additional terms and conditions, not
inconsistent with the provisions of the Plan, as the CEO shall determine,
including terms requiring forfeiture of Awards in the event of termination of
employment by the Participant. Except as may be required under the Delaware
General Corporation Law or as provided in Sections 6.06 or 7.01, Awards shall
be granted for no consideration other than prior and future services.
4
<PAGE> 5
6.02 Options. The CEO is authorized to grant Options on the following
terms and conditions:
(i) Exercise Price. The exercise price per Share purchasable
under an Option shall be determined by the CEO; provided, however, that such
exercise price shall not be less than the Fair Market Value of a Share on the
date of grant of such Option and in no event shall be less than the par value
of a Share;
(ii) Option Term. Subject to the terms of the Plan and any
applicable Award Agreement, the term of each Option shall be determined by the
CEO;
(iii) Methods of Exercise. Subject to the terms of the Plan,
the CEO shall determine the time or times at which an Option may be exercised
in whole or in part, the methods by which such exercise price shall be paid or
deemed paid, and the form of such payment, including, without limitation, cash,
Shares, other outstanding Awards or other property (including notes or other
contractual obligations of Participants to make payment on a deferred basis, to
the extent permitted by law).
6.03 Deferred Stock. The CEO is authorized to grant Deferred Stock on
the following terms and conditions:
(i) Issuance and Limitations. Delivery of Shares shall occur
upon expiration of the deferred period specific for the Award by the CEO. In
addition, an Award of Deferred Stock shall be subject to such limitations as
the CEO may impose, which limitations may lapse at the expiration of the
deferral period or at other specified times, separately or in combination, in
installments or otherwise, as the CEO shall determine at the time of grant or
thereafter. A Participant awarded Deferred Stock shall have no voting rights
and will have no rights to receive dividends in respect of such Deferred Stock.
(ii) Forfeiture. Except as otherwise determined by the CEO,
upon termination of employment (as determined under criteria established by the
CEO) during the applicable deferral period, Deferred Stock that is at the time
subject to deferral (other than a deferral at the election of the Participant)
shall be forfeited; provided, however, that the CEO may provide, by rule or
regulation or in any Award Agreement, that forfeiture of Deferred Stock may be
waived in whole or in part in the event of termination resulting from specified
causes, and the CEO may in other cases waive in whole or in part the forfeiture
of Deferred Stock.
6.04 Dividend Equivalents. The CEO is authorized to grant Awards of
Dividend Equivalents. Dividend Equivalents shall confer upon the Participant
rights to receive payments equal to interest or dividends, when and if paid,
with respect to a number of Shares determined by the CEO. The CEO may provide
that Dividend Equivalents shall be paid or distributed when accrued or shall be
deemed to have been reinvested in additional Shares or additional Awards or
otherwise reinvested.
5
<PAGE> 6
6.05 Other Stock-Based Awards. The CEO is authorized, subject to
limitations under applicable law, to grant such other Awards that are
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Shares, as deemed by the CEO to be
consistent with the purposes of the Plan including, without limitation, Shares
awarded which are not subject to any restrictions or conditions, convertible or
exchangeable debt securities or other rights convertible or exchangeable into
Shares, Awards valued by reference to the value of securities of or the
performance of Williams International or specified Affiliates, and Awards
payable in the securities of Williams International or Affiliates. Except as
may be provided elsewhere herein, Shares granted under this Section 6.05 shall
be purchased for such consideration, paid for by such methods and in such
forms, including, without limitation, cash, Shares, outstanding Awards or other
property, as the CEO shall determine, provided, however, that the value of such
consideration shall not be less per share than the Fair Market Value of a Share
on the date of grant of such purchase right and in no event shall be less per
share than the par value of a Share.
6.06 Exchange Provisions. The CEO may at any time offer to exchange or
buy out any previously granted Award for a payment in cash, Shares or another
Award, based on such terms and conditions as the CEO shall determine and
communicate to the Participant at the time that such offer is made.
SECTION 7
GENERAL TERMS OF AWARDS
7.01 Stand-Alone, Tandem and Substitute Awards. Awards granted under
the Plan may, in the discretion of the CEO, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Award granted
under the Plan or any other plan of Williams, Williams International or any
Affiliate, subject to the terms of the Plan. If an Award is granted in
substitution for another Award or award, the CEO shall require the surrender of
such other Award or award in consideration for the grant of the new Award.
Awards granted in addition to or in tandem with other Awards or awards may be
granted either at the same time as or at a different time from the grant of
such other Award or awards. The exercise price of any Option or the purchase
price of any other Award conferring a right to purchase Shares:
(i) granted in substitution for an outstanding Award or award
shall either be not less than the Fair Market Value of Shares at the date such
substitute Award is granted or not less than such Fair Market Value at that
date reduced to reflect the Fair Market Value of the Award or award required to
be surrendered by the Participant as a condition to receipt of a substitute
Award; or
(ii) retroactively granted in tandem with an outstanding
Award or award shall be either not less than the Fair Market Value of Shares at
the date of grant of the later Award or the Fair Market Value at the date of
grant of the earlier Award or award.
6
<PAGE> 7
7.02 Term of Awards. The term of each Award shall be for such period
as may be determined by the CEO.
7.03 Form of Payment of Awards. Subject to the terms of the Plan and
any applicable Award Agreement, payments or substitutions for payments upon the
grant or exercise of any Award may be made in such forms as the CEO shall
determine, including, without limitation, cash, Deferred Stock, Shares, other
Awards of other property, and may be made in a single payment or substitution
in installments or on a deferred basis, in each case in accordance with rules
and procedures established by the CEO. Such rules and procedures may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments on the grant or crediting of
Dividend Equivalents in respect of installment or deferred payments denominated
in Shares. The CEO may also permit or require the deferral of any award
payment, subject to rules and procedures as may be established, which may
include provisions for the payment or crediting of interest, or dividend
equivalents, including converting such credits into deferred Share equivalents.
7.04 Limitations on Transferability. Awards and other rights under the
Plan shall not be transferable by a Participant except by will or the laws of
descent and distribution (or, in the event of the Participant's death, to a
designated beneficiary), and, if exercisable, shall be exercisable during the
lifetime of a Participant only by such Participant or such Participant's
guardian or legal representative; provided, however, that except as otherwise
provided by the CEO, Awards and other rights may be transferred to one or more
Persons during the lifetime of the Participant in connection with the
Participant's estate planning, and may be exercised by such transferees in
accordance with the terms of such Award consistent with the registration of the
offer and sale of Shares on Form S-8 or Form S-3 or such other registration
form of the Securities and Exchange Commission as may then be filed and
effective with respect to the Plan, and permitted by the CEO. Awards and other
rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise
encumbered to or in favor of any Person other than Williams, Williams
International or an Affiliate, and shall not be subject to any lien, obligation
or liability of a Participant or transferee to any Person other than Williams,
Williams International or any Affiliate. If so determined by the CEO, a
Participant may, in the manner established by the CEO, designate a beneficiary
or beneficiaries to exercise the rights of the Participant, and to receive any
distribution with respect to any Award upon the death of the Participant. A
transferee, beneficiary, guardian, legal representative or other Person
claiming any rights under the Plan from or through any Participant shall be
subject to all the terms and conditions of the Plan and any Award Agreement
applicable to such Participant, except to the extent the Plan and Award
Agreement otherwise provide with respect to such Persons, and to any additional
restrictions or limitations deemed necessary or appropriate by the CEO.
7.05 Registration and Listing Compliance. Neither Williams nor
Williams International shall be obligated to issue or deliver Shares in
connection with any Award or take any other action under the Plan in a
transaction subject to the registration requirements of the Securities Act of
1933, as amended, or any other federal or state securities law, any requirement
under any listing agreement between Williams and any national securities
exchange or automated quotation system, or any other law, regulation, or
contractual obligation of Williams or Williams International, until Williams
and Williams International are satisfied that such laws, regulations and any
other obligations have been satisfied.
7
<PAGE> 8
7.06 Share Certificates. All certificates for Shares delivered under
the terms of the Plan shall be subject to such stop-transfer orders and other
restrictions as the CEO may deem advisable under federal or state securities
laws, rules and regulations thereunder, and the rules of any national
securities exchange or automated quotation system on which the Shares are
listed or quoted. The CEO may cause a legend to be placed on any such
certificates to make appropriate reference to such restrictions or limitations
that may be applicable to the Shares. In addition, during any period in which
Awards or Shares are subject to restrictions or limitations under the Plan or
any Award Agreement, or during any period during which delivery or receipt of
an Award or Shares has been deferred by the CEO or a Participant, the CEO may
require the Participant to enter into an agreement providing that certificates
representing Shares issuable or issued pursuant to an Award shall remain in the
physical custody of Williams International or such Person as the CEO may
designate.
7.07 Performance-Based Awards. The CEO may designate any Award as
subject to specified performance conditions. The performance objectives for an
Award shall consist of one or more business criteria and a targeted level or
levels of performance with respect to such criteria, as specified by the CEO.
The levels of performance required with respect to such business criteria may
be expressed in absolute or relative levels. Achievement of performance
objectives with respect to such Awards shall be measured over a period of not
less than one year nor more than five years, as the CEO may specify.
Performance objectives may differ for such Awards to different Participants.
The CEO shall specify the weighting to be given to each performance objective
for purposes of determining the final amount payable with respect to any such
Award. The CEO may, in the CEO's discretion, reduce the amount of a payout
otherwise to be made in connection with an Award subject to this Section 7.07,
but may not exercise discretion to increase such amount, and the CEO may
consider other performance criteria in exercising such discretion. All
determinations by the CEO as to the achievement of performance objectives shall
be in writing. The CEO may not delegate any responsibility with respect to an
Award subject to this Section 7.07. The CEO also has the discretion to adjust
performance objectives to reflect the impact of acquisitions or dispositions of
assets or other events that impact targeted levels of performance that were not
contemplated at the time the Award was made.
SECTION 8
ADJUSTMENT PROVISIONS
8.01 In the event that the CEO shall determine that any dividend or
other distribution (whether in the form of cash, Shares, other securities, or
property), recapitalization, forward or reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, exchange of
Shares or other securities of Williams, or other similar corporate transactions
or event affects the Shares such that an adjustment is determined by the CEO to
be appropriate in order to prevent dilution or enlargement of Participant's
rights under the Plan, then the CEO shall, in such
8
<PAGE> 9
manner as deemed equitable, adjust any and all of: (i) the number and kind of
Shares which may thereafter be issued in connection with Awards; (ii) the
number and kind of Shares issued or issuable with respect to outstanding
Awards; (iii) the exercise price, grant price or purchase price relating to any
Award or, if deemed appropriate, make provision for a cash payment with respect
to any outstanding Award. In addition, the CEO is authorized to make
adjustments in the terms and conditions of, and the criteria in, Awards in
recognition of unusual or nonrecurring events (including, without limitation,
events described in this Section) affecting Williams, Williams International or
any Affiliate or the financial statements of Williams, Williams International
or any Affiliate, or in response to changes in applicable laws, regulations or
accounting principles.
SECTION 9
CHANGE OF CONTROL PROVISIONS
9.01 Creation and Funding of a Trust. Upon the earlier of a Potential
Change of Control as defined in Section 9.02.2, unless the Board adopts a
resolution within ten business days following the date the Potential Change of
Control arises to the effect that such action is not necessary to secure any
payments hereunder, or a Change of Control as defined in Section 9.02.1,
Williams International shall deposit with the trustee of a trust for the
benefit of Participants monies or other property having a Fair Market Value at
least equal to the net present value of cash, Shares and other property
potentially payable or distributable in connection with Awards outstanding at
that date. The trust shall be an irrevocable grantor trust which shall preserve
the "unfunded" status of Awards under the Plan, and shall contain other terms
and conditions substantially as specified for trusts authorized under Williams'
employment agreements with executives.
9.02 Definitions of Certain Terms. For purposes of this Section 9, the
following definitions, in addition to those set forth in Section 2.01, shall
apply:
9.02.1 "Change of Control" means and will be deemed to have
occurred if: (i) any Person, other than Williams or a Related Party, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended), directly or indirectly, of securities of
Williams representing 15 percent or more of the total voting power of all the
then outstanding Voting Securities; or (ii) a Person, other than Williams or a
Related Party, purchases or otherwise acquires, under a tender offer,
securities representing 15 percent or more of the total voting power of all the
then outstanding Voting Securities; or (iii) the individuals (a) who as of the
effective date of the Plan constitute the Board or (b) who thereafter are
elected to the Board and whose election, or nomination for election, to the
Board was approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors as of the effective date of the Plan
or whose election or nomination for election was previously so approved, cease
for any reason to constitute a majority thereof; or (iv) the stockholders of
Williams approve a merger, consolidation, recapitalization or reorganization of
Williams or an acquisition by Williams, or consummation of any such transaction
if stockholder approval is not obtained, other than any such transaction which
9
<PAGE> 10
would result in the Voting Securities outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 65 percent of the
total voting power represented by the Voting Securities of such surviving
entity outstanding immediately after such transaction if the voting rights of
each Voting Security relative to the other Voting Securities were not altered
in such transaction; or (v) the stockholders of Williams approve a plan of
complete liquidation of Williams or an agreement for the sale or disposition by
Williams of all or substantially all of Williams' assets other than any such
transaction which would result in a Related Party owning or acquiring more than
50 percent of the assets owned by Williams immediately prior to the
transaction; or (vi) the Board adopts a resolution to the effect that a Change
of Control has occurred or adopts a resolution to the effect that a Potential
Change of Control has arisen and the transaction giving rise to such resolution
has been thereafter approved by the stockholders of Williams or been
consummated if such approval is not sought.
9.02.2 "Potential Change of Control" means and will be deemed to have
arisen if: (i) Williams enters into an agreement, the consummation of which
would result in the occurrence of a Change of Control; or (ii) any Person
(including Williams) publicly announces an intention to take or to consider
taking actions which if consummated would constitute a Change of Control; or
(iii) any Person, other than a Related Party, files with the Securities and
Exchange Commission a Schedule 13D pursuant to Rule 13d-1 under the Securities
Exchange Act of 1934 with respect to Voting Securities; or (iv) any Person,
other than Williams or a Related Party, files with the Federal Trade Commission
a notification and report form pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 with respect to any Voting Securities or a major
portion of the assets of Williams; or (v) the Board adopts a resolution to the
effect that, for purposes of the Plan, a Potential Change of Control has
arisen. A Potential Change of Control will be deemed to continue (i) with
respect to an agreement within the purview of clause "(i)" of the preceding
sentence, until the agreement is canceled or terminated; or (ii) with respect
to an announcement within the purview of clause "(ii)" of the preceding
sentence, until the Person making the announcement publicly abandons the stated
intention or fails to act on such intention for a period of twelve (12)
calendar months; or (iii) with respect to either the filing of a Schedule 13D
within the purview of clause "(iii)" of the preceding sentence or the filing of
a notification and report form within the purview of clause "(iv)" of the
preceding sentence with respect to Voting Securities, until the Person involved
publicly announces that its ownership or acquisition of the Voting Securities
is for investment purposes only and not for the purpose of seeking a Change of
Control or such Person disposes of the Voting Securities; or (iv) with respect
to any Potential Change of Control until a Change of Control has occurred or
the Board, on reasonable belief after due investigation, adopts a resolution
that the Potential Change of Control has ceased to exist.
9.02.3 "Related Party" means: (i) a majority-owned subsidiary of
Williams; or (ii) an employee or group of employees of Williams or any
majority-owned subsidiary of Williams; or (iii) a trustee or other fiduciary
holding securities under an employee benefit plan of Williams or any
majority-owned subsidiary of Williams; or (iv) a corporation owned directly or
indirectly by the stockholders of Williams in substantially the same proportion
as their ownership of Voting Securities.
10
<PAGE> 11
9.02.4 "Voting Securities" means any securities of Williams which
carry the right to vote generally in the election of directors.
SECTION 10
AMENDMENTS TO AND TERMINATION OF THE PLAN
10.01 The Board or Williams International may amend, alter, suspend,
discontinue or terminate the Plan without the consent of Participants;
provided, however, that, without the consent of a Participant, no amendment,
alteration, suspension, discontinuation or termination of the Plan may
materially and adversely affect the rights of such Participant under any Award
theretofore granted to such Participant. The CEO may waive any conditions or
rights under, or amend, alter, suspend, discontinue or terminate any Award
theretofore granted, prospectively or retrospectively; provided, however, that,
without the consent of a Participant, no amendment, alteration, suspension,
discontinuation or termination of any Award may materially and adversely affect
the rights of such Participant under any Award theretofore granted to such
Participant.
SECTION 11
GENERAL PROVISIONS
11.01 No Rights to Awards. Nothing contained in the Plan shall give
any Participant or employee any claim to be granted any Award under the Plan,
nor give rise to any obligation for uniformity of treatment of Participants and
employees.
11.02 Withholding. Williams, Williams International or any Affiliate
is authorized to withhold from any Award granted or any payment due under the
Plan, including from a distribution of Shares, amounts of withholding taxes due
with respect to an Award, its exercise or any payment thereunder, and to take
such actions as the CEO may deem necessary or advisable to enable Williams,
Williams International or any Affiliate to satisfy obligations for the payment
of such taxes. This authority shall include authority to withhold or receive
Shares, Awards or other property, and to make cash payments in respect thereof
in satisfaction of such tax obligations.
11.03 No Right of Employment. Nothing contained in the Plan shall
confer, and no grant of an Award shall be construed as conferring, upon any
Participant any right to continue in the employ of Williams International or
any Affiliate or to interfere in any way with the right of Williams
International or any Affiliate to terminate a Participant's employment at any
time or increase or decrease a Participant's compensation from the rate in
existence at the time of granting of an Award.
11.04 Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded " plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant
11
<PAGE> 12
pursuant to an Award, nothing contained in the Plan or any Award shall give any
such Participant any rights that are greater than those of a general creditor
of Williams International.
11.05 No Limit on Other Compensatory Arrangements. Nothing contained
in this Plan shall prevent Williams, Williams International or an Affiliate
from adopting other or additional compensation arrangements (which may include,
without limitation, employment agreements and arrangements which relate to
Awards under the Plan), and such arrangements may be either generally
applicable or applicable only in specific cases.
11.06 No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award. The CEO shall determine whether
cash, other Awards or other property shall be issued or paid in lieu of
fractional Shares or whether such fractional Shares or any rights thereto shall
be forfeited or otherwise eliminated.
11.07 Governing Law. The validity, interpretation, construction and
effect of the Plan and any rules and regulations relating to the Plan shall be
governed by the laws of the State of Delaware and applicable federal laws.
11.08 Severability. If any provision of the Plan is or becomes or is
deemed invalid, illegal or unenforceable in any jurisdiction, or would
disqualify the Plan or any Award under any law deemed applicable by the CEO,
such provision shall be construed or deemed amended to conform to applicable
laws or if it cannot be construed or deemed amended without, in the
determination of the CEO, materially altering the intent of the Plan, it shall
be stricken and the remainder of the Plan shall remain in full force and
effect.
12
<PAGE> 1
Exhibit 10 (iii)(m)
SECURED PROMISSORY NOTE
AND PLEDGE AGREEMENT
$_________________ Date:_____________
Tulsa, Oklahoma
FOR VALUE RECEIVED, I _________________________ ("Maker"), promise to
pay to the order of THE WILLIAMS COMPANIES, INC. ("Williams"), a Delaware
corporation, at its office in Tulsa, Oklahoma, the principal sum
___________________________________($____________) plus interest from the date
hereof at the rate hereinafter set forth. Payments of principal and interest due
under this Secured Promissory Note and Pledge Agreement (the "Note") shall be
made in lawful money of the United States of America and shall be paid in
accordance with the following terms and conditions:
1. This Note shall mature and the principal amount hereof shall be due
and payable in full at the earliest of:
(a) _____________________
(b) Thirty (30) days following Maker's termination of
employment with Williams or its subsidiaries for any reason; or
(c) Maker's failure to make any payment of principal or
interest within fifteen (15) days after such payment is due.
This Note may be prepaid in full at any time. No partial prepayments shall be
made without the prior consent of the holder of this Note.
2. The unpaid principal amount of this Note outstanding from time to
time shall bear interest at a per annum rate of ____%, as shall be fixed by
Williams after the execution of this Note at a rate equal to the "Minimum
Interest Rate". Interest shall be payable on December 31 of each year; provided,
however, that at such time as the unpaid principal amount of this Note is
payable in full, all unpaid interest accruing to such date also shall be paid.
3. For purposes of this Note, "Minimum Interest Rate" shall mean the
per annum equivalent of the lowest interest rate that can be stated as of the
date of this Note under applicable federal income tax laws (disregarding any de
minimis exception recognized under such laws) without imputing income to the
Maker or creating original issue discount or its equivalent.
4. For the purpose of securing the payment of the principal of and
interest on this Note, Maker acknowledges that this Note shall be deemed a full
recourse Note secured by any and all assets now or hereafter acquired by Maker,
and, specifically, Maker does hereby pledge, transfer and deliver a stock
certificate to Williams representing ________ shares of Williams Common Stock,
together with a stock power endorsed by Maker in blank. Such certificate shall
be registered in the name of Maker and is represented by Maker to be owned free
and clear of any claims or liens other than the claim or lien hereby created and
acknowledged. Maker shall retain the voting and dividend rights to the
<PAGE> 2
Williams Common Stock while the certificate is in the possession of Williams. In
the event of default under the terms of this Note, Maker does hereby constitute
and appoint the Secretary of Williams as the attorney-in-fact of Maker to
transfer the stock on the books of Williams, with full power of substitution in
the premises. Maker further agrees that such stock shall not be released to
Maker until all indebtedness, including both the principal of and interest on
this Note, has been paid in full to Williams, except at the discretion of
Williams, if another stock certificate that represents other shares of Williams
Common Stock owned by Maker is substituted as security. On and after the
maturity of this Note by its terms, Williams is hereby expressly authorized by
Maker, at any time and from time to time and with or without notice, to sell,
transfer and deliver the whole or any part of such stock, either at public or
private sale, through any broker or at any exchange, whether within or without
the State of Oklahoma, and with or without advertising the time or place of such
sale. Maker further agrees that, after deducting all costs and expenses of any
such sale, including reasonable attorney's fees, and after the payment in full
of the principal and interest due on this Note, the balance, if any, of the
proceeds of such sale may be applied to the payment of any other indebtedness
which Maker owes to Williams, whether due or not due, whether direct or
contingent, and whether owing individually or in connection with others not
parties hereto. After payment of all of the aforesaid amounts to Williams, any
remaining balance shall be paid to Maker. To the extent such balance is less
than the principal and interest due on this Note, Williams may make claim
against any and all other assets of Maker to the extent of the payment owed to
Williams under this Note.
5. Annually, in March of each year, the Company shall conduct a review
of the adequacy of the collateral pledged hereunder in the form of Williams
Common Stock. If the value of the collateral is determined to be less than or
equal to the outstanding balance of the loan, Maker shall be required to pledge
additional Common Stock to restore the collateral to 125 percent of the loan
balance or, alternatively, make a cash payment to the Company to reduce the
outstanding balance of the loan to equal 80 percent of the value of the
collateral. If the value of the collateral is determined to exceed the
outstanding balance of the loan by 50 percent or more, Maker shall be entitled
to borrow an additional sum from the Company up to an amount which, when added
to the current loan balance, shall equal 80 percent of the value of the
collateral at such time.
6. This Note has been executed by Maker to evidence the obligation of
Maker to make certain payments to Williams or its assignee. This Note is subject
to all of the terms and conditions of certain stock option agreement(s) between
Maker and Williams.
7. Subject only to any limitation imposed by applicable law, Maker also
agrees to pay all expenses, including reasonable attorneys' fees and legal
expenses, incurred by the holder of this Note in attempting to collect any
amounts payable hereunder which are not paid when due, whether by acceleration
or otherwise.
8. This Note is made under and governed by the laws of the State of
Oklahoma, without regard to conflict of laws principles.
9. Maker hereby waives presentment, demand, notice of dishonor and
protest.
-------------------------------
<PAGE> 1
EXHIBIT 12
THE WILLIAMS COMPANIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(Dollars in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Earnings:
Income from continuing operations
before extraordinary loss and
income taxes $ 257.0 $ 704.9 $ 758.4 $ 505.0 $ 325.9
Add:
Interest expense--net 484.5 440.6 410.5 321.8 193.3
Rental expense representative
of interest factor 49.1 39.5 32.8 32.5 15.3
Preferred dividends of
subsidiaries -- -- -- 3.7 --
Interest accrued--50% owned
company 6.2 -- 1.3 30.7 31.7
Minority interest in (income) loss
of consolidated subsidiaries (9.6) 18.2 1.4 12.3 1.6
Other 22.4 3.2 6.3 8.0 4.5
--------- --------- --------- --------- ---------
Total earnings as adjusted
plus fixed charges $ 809.6 $ 1,206.4 $ 1,210.7 $ 914.0 $ 572.3
========= ========= ========= ========= =========
Combined fixed charges and preferred
stock dividend requirements:
Interest expense--net $ 484.5 $ 440.6 $ 410.5 $ 321.8 $ 193.3
Capitalized interest 30.6 23.3 8.2 16.2 6.0
Rental expense representative
of interest factor 49.1 39.5 32.8 32.5 15.3
Pretax effect of dividends on
preferred stock of the Company 12.4 16.1 16.2 18.0 13.1
Pretax effect of dividends on
preferred stock of subsidiaries -- -- -- 5.8 --
Interest accrued--50% owned
company 6.2 -- 1.3 30.7 31.7
--------- --------- --------- --------- ---------
Combined fixed charges and
preferred stock dividend
requirements $ 582.8 $ 519.5 $ 469.0 $ 425.0 $ 259.4
========= ========= ========= ========= =========
Ratio of earnings to combined
fixed charges and preferred
stock dividend requirements 1.39 2.32 2.58 2.15 2.21
========= ========= ========= ========= =========
</TABLE>
<PAGE> 1
PAGE 1 THE WILLIAMS COMPANIES, INC. AFFILIATES EXHIBIT 21
<TABLE>
<CAPTION>
JURISDICTION OF OWNED BY
INCORPORATION IMMEDIATE
PARENT
<S> <C> <C>
Laughton, L.L.C. Delaware 100%
Castle Associates, L.P. Delaware 77.10%
Williams Gas Pipeline Company Delaware 100%
Kern River Acquisition Corporation Delaware 100%
Kern River Gas Transmission Company Texas 100%
Kern River Funding Corporation Delaware 100%
Northwest Pipeline Corporation Delaware 100%
NWP Enterprises, Inc. Delaware 100%
Texas Gas Transmission Corporation Delaware 100%
TGT Enterprises, Inc. Delaware 100%
Transcontinental Gas Pipe Line Corporation Delaware 100%
Cardinal Operating Company Delaware 100%
Cross Bay Operating Company Delaware 100%
Cumberland Operating Company Delaware 100%
Independence Operating Company Delaware 100%
Marsh Resources, Inc. Delaware 100%
Pine Needle Operating Company Delaware 100%
TGPL Enterprises, Inc. Delaware 100%
TRANSCO CROSS BAY COMPANY Delaware 100%
Cross Bay Pipeline Company, L.L.C. Delaware 37.50%
TransCardinal Company Delaware 100%
TransCarolina LNG Company Delaware 100%
TransCumberland Pipeline Company Delaware 100%
Transco Independence Pipeline Company Delaware 100%
WGP Enterprises, Inc. Delaware 100%
Williams Gas Processing - Gulf Coast Company, LP. Delaware 100%
Williams Gas Pipeline - Alliance U.S., Inc. Delaware 100%
Williams Gas Pipelines Central, Inc. Delaware 100%
Williams Storage Company Delaware 100%
Williams Western Pipeline Company Delaware 100%
Kern River Funding Corporation Delaware 100%
Williams Holdings of Delaware, Inc. Delaware 100%
Apco Argentina Inc. Cayman Islands 68.96%
Apco Properties Ltd. Cayman Islands 100%
Beech Grove Processing Company Tennessee 100%
Tennessee Processing Company Delaware 100%
Inland Ports, Inc. Tennessee 100%
Langside Limited Bermuda 100%
MAPCO Petroleum Inc. Delaware 100%
Alaska Blimpie Co-Op, Inc. Oklahoma 100%
</TABLE>
<PAGE> 2
PAGE 2 THE WILLIAMS COMPANIES, INC. AFFILIATES EXHIBIT 21
<TABLE>
<CAPTION>
JURISDICTION OF OWNED BY
INCORPORATION IMMEDIATE
PARENT
<S> <C> <C>
MAPCO Gathering & Transportation, L.L.C. Oklahoma 100%
Nationwide Direct Fuel Network, L.L.C. Oklahoma 100%
Valley Towing Service, Inc. Tennessee 100%
Williams Alaska Petroleum, Inc. Alaska 100%
Williams Express, Inc. Alaska 100%
Williams Petroleum Pipeline Systems, Inc. Delaware 100%
Williams Refining, L.L.C. Delaware 100%
Williams TravelCenters, Inc. Delaware 100%
Realco Realty Corp. Delaware 100%
Realco of Crown Center, Inc. Delaware 100%
Realco of San Antonio, Inc. Delaware 100%
The Tennessee Coal Company Delaware 100%
Transco Energy Company Delaware 100%
Energy Tech, Inc. Delaware 100%
Transco Coal Gas Company Delaware 100%
Transco Energy Investment Company Delaware 100%
Transco Exploration Company Delaware 100%
Transco Gas Company Delaware 100%
Border Gas, Inc. Delaware 10%
Liberty Operating Company Delaware 100%
NESP Supply Corp. Delaware 33.33%
Transco Liberty Pipeline Company Delaware 100%
Transeastern Gas Pipeline Company, Inc. Delaware 100%
Transco P-S Company Delaware 100%
Transco Resources, Inc. Delaware 100%
Magnolia Methane Corp. Delaware 100%
Transco Terminal Company Delaware 100%
Transco Tower Realty, Inc. Delaware 100%
Tulsa Williams Company Delaware 100%
Valley View Coal, Inc. Tennessee 100%
WHD Enterprises, Inc. Delaware 100%
WilMart, Inc. Delaware 100%
Williams Acquisition Holding Company, Inc. New Jersey 100%
Agrico Foreign Sales Corporation Guam 100%
Fishhawk Ranch, Inc. Florida 100%
Reserveco Inc. Delaware 15%
Williams Acquisition Holding Company, Inc. (Del) Delaware 100%
Williams Aircraft, Inc. Delaware 100%
ChoiceSeat, L.L.C. Delaware 100%
Volunteer Energy, L.L.C. Delaware 100%
Volunteer-Phoenix Energy, Inc. Ohio 80%
Williams Indonesia, L.L.C. Delaware 100%
Williams International Investments (Cayman) Limited Cayman Islands 100%
AIF Cayman Islands 6.41%
Williams Resource Center, L.L.C. Delaware 100%
Williams Communications Group, Inc. Delaware 100%
</TABLE>
<PAGE> 3
PAGE 3 THE WILLIAMS COMPANIES, INC. AFFILIATES EXHIBIT 21
<TABLE>
<CAPTION>
JURISDICTION OF OWNED BY
INCORPORATION IMMEDIATE
PARENT
<S> <C> <C>
Critical Connections, Inc. Delaware 100%
WCS Communications Systems, Inc. Delaware 100%
WCS Microwave Services, Inc. Nevada 100%
Williams Communications, Inc. Delaware 100%
ChoiceSeat, L.L.C. Delaware 100%
Global Access Telecommunications Services (UK), Inc. Delaware 100%
Vyvx of Virginia, Inc. Virginia 100%
Williams Communications Solutions, LLC Delaware 100%
WCS, Inc. Delaware 100%
WilTel Communications Canada, Inc. Ontario 100%
Williams Learning Network, Inc. Delaware 100%
Williams Wireless, Inc. Delaware 100%
Williams Energy Company Delaware 100%
Williams Energy Services Delaware 100%
Longhorn Enterprises of Texas, Inc. Delaware 100%
MAPCO Inc. (DE) Delaware 100%
FleetOne, L.L.C. Delaware 100%
FleetOne Inc. Delaware 100%
FleetOne de Mexico, S.A. de C.V. Mexico 100%
Servicios FleetOne de Mexico, S.A. de C.V. Mexico 100%
Gas Supply, L.L.C. Delaware 100%
MAPCO Alaska Inc. Alaska 100%
MAPCO Canada Inc. Canada 100%
MAPCO Energy Services, L.L.C. Delaware 100%
MAPCO Energy, L.L.C. Delaware 100%
MAPCO Impressions Inc. Oklahoma 100%
MAPCO Inc. (NV) Nevada 100%
MAPCO Indonesia Inc. Delaware 100%
P.T. MAPCO Indonesia Indonesia 100%
MAPCO Minerals Corporation Delaware 100%
MAPCO Supply and Trading, L.L.C. Delaware 100%
TouchStar Technologies, L.L.C. Delaware 100%
Aurex Sp. zo.o Poland 49%
Clean Fueling Technologies, Inc. Texas 100%
ESPAGAS USA, Inc. Delaware 100%
ESPAGAS, S.A. de C.V. Mexico 100%
SERVICIOS DE ESPAGAS, S.A. de C.V. Mexico 100%
TouchStar Europe, B.V. o.i. Netherlands 100%
TouchStar Technologies, Ltd. U.K. 100%
TouchSystems (Australia) Pty. Ltd. Australia 100%
TouchSystems (Pty) Ltd. South Africa 100%
Williams Equities, Inc. Delaware 100%
Williams International Energy, Inc. Delaware 100%
WPX Enterprises, Inc. Delaware 100%
Williams Production - Gulf Coast Company, L.P. Delaware 100%
Williams Distributed Power Services, Inc. Delaware 100%
</TABLE>
<PAGE> 4
PAGE 4 THE WILLIAMS COMPANIES, INC. AFFILIATES EXHIBIT 21
<TABLE>
<CAPTION>
JURISDICTION OF OWNED BY
INCORPORATION IMMEDIATE
PARENT
<S> <C> <C>
Williams Energy Group Services, Inc. Delaware 100%
Williams Energy Ventures, Inc. Delaware 100%
Nebraska Energy, L.L.C. Kansas 71%
Wiljet, LLC Arizona 50%
Williams Ethanol Services, Inc. Delaware 100%
Williams Field Services Group, Inc. Delaware 100%
Carbon County UCG, Inc. Delaware 100%
Trans-Jeff Chemical Corporation Delaware 100%
WFS - Gas Gathering Company Delaware 100%
WFS - Offshore Gathering Company Delaware 100%
WFS - Pipeline Company Delaware 100%
WFS - Liquids Company Delaware 100%
HI-BOL Pipeline Company Delaware 100%
WFS - NGL Pipeline Company, Inc. Delaware 100%
Tri-States NGL Pipeline, L.L.C. Delaware 16.67%
WILPRISE Pipeline Company, L.L.C. Delaware 50%
WFS - OCS Gathering Co. Delaware 100%
WFS - Production Services Company Delaware 100%
WFS Enterprises, Inc. Delaware 100%
Williams Field Services - Gulf Coast Company, L.P. Delaware 100%
WFS Fractionation Company Delaware 100%
WFS Management Co. Delaware 100%
Williams CNG Company Delaware 100%
Williams Field Services Company Utah 100%
Williams Gas Processing - Blanco, Inc. Delaware 100%
Williams Gas Processing - Kansas Hugoton Company Delaware 100%
Williams Gas Processing - Mid-Continent Region Company Delaware 100%
Williams Gas Processing - Wamsutter Company Delaware 100%
Williams Gas Processing Company Delaware 100%
Williams Power Company Delaware 100%
Williams Merchant Services Company, Inc. Delaware 100%
Williams Energy Marketing & Trading Company Delaware 100%
EnergyVision, LLC Delaware 100%
Excel Energy Technologies, Ltd. Delaware 100%
F T & T, Inc. Delaware 100%
Hazleton Fuel Management Company Delaware 100%
Hazleton Pipeline Company Delaware 100%
TM Cogeneration Company Delaware 100%
Millennium Energy Fund, L.L.C. Delaware 2%
Rio Vista Energy Marketing Company, L.L.C. Delaware 50%
TransNetwork Holding Company Delaware 100%
Williams Energy Network, Inc. Delaware 100%
Transco Energy Marketing Company Delaware 100%
TXG Gas Marketing Company Delaware 100%
Williams Gas Company Delaware 100%
Utility Management Corporation Delaware 100%
</TABLE>
<PAGE> 5
PAGE 5 THE WILLIAMS COMPANIES, INC. AFFILIATES EXHIBIT 21
<TABLE>
<CAPTION>
JURISDICTION OF OWNED BY
INCORPORATION IMMEDIATE
PARENT
<S> <C> <C>
Williams Independence Marketing Company Delaware 100%
Williams Pipe Line Company Delaware 100%
WillBros Terminal Company Delaware 100%
Williams Pipe Line Company of Wisconsin Wisconsin 100%
Williams Terminals Company Delaware 100%
Williams Production Company Delaware 100%
WFS Gas Resources Company Delaware 100%
Williams Generation Company - Hazleton Delaware 100%
Williams Environmental Services Company Delaware 100%
Williams Exploration Company Delaware 100%
Rainbow Resources, Inc. Colorado 100%
Williams Headquarters Acquisition Company Delaware 100%
Williams Headquarters Building Company Delaware 100%
Garrison, L.L.C. Delaware 100%
Parkco, L.L.C. Oklahoma 50%
Williams Headquarters Building, L.L.C. Delaware 100%
Williams Headquarters Management Company Delaware 100%
Williams Hugoton Compression Services, Inc. Delaware 100%
Williams Information Services Corporation Delaware 100%
Williams International Company Delaware 100%
Williams International Bermuda Limited Bermuda 100%
Williams International Australian Telecom Limited Cayman Islands 100%
Williams International Cusiana-Cupiagua Limited Cayman Islands 100%
Williams International Ecuadorian Ventures Bermuda Limited Bermuda 100%
Williams International El Furrial Limited Cayman Islands 100%
WilPro Energy Services (El Furrial) Limited Cayman Islands 66.67%
Williams International Guara Limited Cayman Islands 100%
WilPro Energy Services (Guara) Limited Cayman Islands 100%
Williams International Investment Ventures (Cayman) Limited Cayman Islands 100%
Williams International Investments (Cayman) Limited Cayman Islands 100%
Williams International Jose Limited Cayman Islands 100%
Williams International Oil & Gas (Venezuela) Limited Cayman Islands 100%
Williams International Operations (Venezuela) Limited Cayman Islands 100%
Williams International Pigap Limited Cayman Islands 100%
WilPro Energy Services (Pigap II) Limited Cayman Islands 70%
Williams International Pipeline Company Delaware 100%
Williams International Services Company Nevada 100%
Worldwide Services Limited Cayman Islands 100%
Williams International Telecom Limited Cayman Islands 100%
Williams International Telecom. Investments (Cayman) Limited Cayman Islands 100%
AIF Telecom Fund Cayman Islands 100%
Williams International Ventures Bermuda Ltd. Bermuda 100%
Free Port Terminal Company Limited Bermuda 65%
FPT Marketing Company Limited Bermuda 100%
Transportadora de Gas Zapata Mexico 37%
Williams International Ventures Company Delaware 100%
</TABLE>
<PAGE> 6
PAGE 6 THE WILLIAMS COMPANIES, INC. AFFILIATES EXHIBIT 21
<TABLE>
<CAPTION>
JURISDICTION OF OWNED BY
INCORPORATION IMMEDIATE
PARENT
<S> <C> <C>
Powertel Pty Limited Australia 100%
WilTel Communications Pty Limited Australia 100%
Williams Learning Network (UK) Limited England 100%
Williams Learning Center, Inc. Delaware 100%
Williams Midstream Natural Gas Liquids, Inc. Delaware 100%
Williams Natural Gas Liquids, Inc. Delaware 100%
Bayou Black Liquids Pipeline Company Delaware 100%
MAPCO Ammonia Pipeline Inc. Delaware 100%
Mid-America Pipeline Company Delaware 100%
Denali Pipeline Company Alaska 100%
Juarez Pipeline Company Delaware 100%
Rio Grande Pipeline Company - PT Texas 45%
MAPL Investments, Inc. Delaware 100%
Seminole Pipeline Company Delaware 80%
Thermogas Company Delaware 100%
Farmers Thermogas of Southern Kentucky, LLC Kentucky 50%
Shelby Energy Thermogas, L.L.C. Kentucky 50%
Thermogas Energy, LLC Delaware 100%
Clark Energy/Thermogas, L.L.C. Kentucky 50%
Jackson Thermogas Energy, LLC Kentucky 50%
Williams Fertilizer, Inc. Delaware 100%
Williams Gas Energy, Inc. Delaware 100%
Williams West Texas NGL Pipeline Company Delaware 100%
Williams One-Call Services, Inc. Delaware 100%
Williams Pipeline Services Company Delaware 100%
Williams Relocation Management, Inc. Delaware 100%
Williams Sodium Products Company Delaware 100%
American Soda, L.L.P. Colorado 60%
American Soda, L.L.P. No.2 Colorado 60%
Williams Strategic Sourcing, Inc. Delaware 100%
Williams Underground Gas Storage Company Delaware 100%
Kiowa Gas Storage, L.L.C. Delaware 50%
Williams Western Holding Company, Inc. Delaware 100%
Northwest Alaskan Pipeline Company Delaware 100%
Northwest Argentina Corporation Utah 100%
Northwest Border Pipeline Company Delaware 100%
Northern Border Intermediate Limited Partnership Delaware 0.17%
Northern Border Partners, L.P. Delaware 4.38%
Northwest Land Company Delaware 100%
Williams Risk Holdings, L.L.C. Delaware 100%
Williams WPC - I, Inc. Delaware 100%
Williams Risk Management L.L.C. Delaware 100%
Williams WPC - II, Inc. Delaware 100%
</TABLE>
<PAGE> 1
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 February 26, 1999, with respect to the consolidated financial
statements and schedule of The Williams Companies, Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1998:
<TABLE>
<S> <C>
Form S-3: Registration No. 333-20929
Registration No. 333-29185
Registration No. 333-66141
Form S-8: 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. 33-58671; Registration No. 333-03957;
Registration No. 333-11151; Registration No. 333-40721;
Registration No. 333-33735; Registration No. 333-30095;
Registration No. 333-48945; and Registration No. 333-61597.
</TABLE>
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 26, 1999
<PAGE> 1
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements
of 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 Annual Report of The Williams Companies, Inc. on Form 10-K
for the year ended December 31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Form S-3: Registration No. 333-20929
Registration No. 333-29185
Registration No. 333-66141
Form S-8: 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. 33-58671 Registration No. 333-11151
Registration No. 333-03957 Registration No. 333-33735
Registration No. 333-40721 Registration No. 333-48945
Registration No. 333-30095
Registration No. 333-61597
</TABLE>
Deloitte & Touche LLP
Tulsa, Oklahoma
March 26, 1999
<PAGE> 1
Exhibit 24
THE WILLIAMS COMPANIES, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned
individuals, in their capacity as a director or officer, or both, as
hereinafter set forth below their signature, of THE WILLIAMS COMPANIES, INC., a
Delaware corporation ("Williams"), does hereby constitute and appoint WILLIAM
G. VON GLAHN, SHAWNA L. GEHRES, and REBECCA H. HILBORNE their true and lawful
attorneys and each of them (with full power to act without the others) their
true and lawful attorneys for them and in their name and in their capacity as a
director or officer, or both, of Williams, as hereinafter set forth below their
signature, to sign Williams' Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended December 31, 1998, and any
and all amendments thereto or all instruments necessary or incidental in
connection therewith; and
THAT the undersigned Williams does hereby constitute and
appoint WILLIAM G. VON GLAHN, SHAWNA L. GEHRES, and REBECCA H. HILBORNE its
true and lawful attorneys and each of them (with full power to act without the
others) its true and lawful attorney for it and in its name and on its behalf
to sign said Form 10-K and any and all amendments thereto and any and all
instruments necessary or incidental in connection therewith.
Each of said attorneys shall have full power of substitution
and resubstitution, and said attorneys or any of them or any substitute
appointed by any of them hereunder shall have full power and authority to do
and perform in the name and on behalf of each of the undersigned, in any and
all capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully to all intents and purposes as each of the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys or any of them or of any such substitute pursuant hereto.
IN WITNESS WHEREOF, the undersigned have executed this
instrument, all as of the 24th day of January, 1999.
/s/ Keith E. Bailey /s/ Jack D. McCarthy
- ----------------------------------- -----------------------------------
Keith E. Bailey Jack D. McCarthy
Chairman of the Board, Senior Vice President
President and (Principal Financial Officer)
Chief Executive Office
(Principal Executive Officer)
/s/ Gary R. Belitz
-----------------------------------
Gary R. Belitz
Controller
(Principal Accounting Officer)
<PAGE> 2
/s/ Glenn A. Cox /s/ Thomas H. Cruikshank
----------------------------------- -----------------------------------
Glenn A. Cox Thomas H. Cruikshank
Director Director
/s/ William E. Green /s/ Patricia L. Higgins
----------------------------------- -----------------------------------
William E. Green Patricia L. Higgins
Director Director
/s/ W. R. Howell /s/ Robert J. LaFortune
----------------------------------- -----------------------------------
W.R. Howell Robert J. LaFortune
Director Director
/s/ James C. Lewis /s/ Jack A. MacAllister
----------------------------------- -----------------------------------
James C. Lewis Jack A. MacAllister
Director Director
/s/ Frank T. MacInnis /s/ Peter C. Meining
----------------------------------- -----------------------------------
Frank T. MacInnis Peter C. Meinig
Director Director
/s/ Kay A. Orr /s/ Gordon R. Parker
----------------------------------- -----------------------------------
Kay A. Orr Gordon R. Parker
Director Director
/s/ Joseph H. Williams
-----------------------------------
Joseph H. Williams
Director
THE WILLIAMS COMPANIES, INC.
By /s/ William G. von Glahn
-----------------------------------
William G. von Glahn
ATTEST: Senior Vice President
/s/ Shawna L. Gehres
- -----------------------------------
Shawna L. Gehres
Secretary
<PAGE> 3
I, the undersigned, Shawna L. Gehres, Assistant Secretary of
THE WILLIAMS COMPANIES, INC., a Delaware company (hereinafter called the
"Company"), do hereby certify that at a meeting of the Board of Directors of
the Company, duly convened and held on January 24, 1999, at which a quorum of
said Board was present and acting throughout, the following resolution was duly
adopted:
RESOLVED that the Chairman of the Board,
the President or any Vice President of the Company be, and
each of them hereby is, authorized and empowered to execute a
Power of Attorney for use in connection with the execution
and filing, for and on behalf of the Company, under the
Securities Exchange Act of 1934, of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998.
I further certify that the foregoing resolution have not been
modified, revoked or rescinded and is in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of THE WILLIAMS COMPANIES, INC. this 11th day of March 1999.
/s/ Shawna L. Gehres
-----------------------------------
Shawna L. Gehres
Assistant Secretary
[CORPORATE SEAL]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 503,332
<SECURITIES> 0
<RECEIVABLES> 1,755,206
<ALLOWANCES> 30,540
<INVENTORY> 497,475
<CURRENT-ASSETS> 3,532,059
<PP&E> 16,225,576
<DEPRECIATION> 3,620,951
<TOTAL-ASSETS> 18,647,316
<CURRENT-LIABILITIES> 4,439,180
<BONDS> 6,366,373
0
102,166
<COMMON> 432,257
<OTHER-SE> 3,722,946
<TOTAL-LIABILITY-AND-EQUITY> 18,647,316
<SALES> 0
<TOTAL-REVENUES> 7,658,278
<CGS> 0
<TOTAL-COSTS> 6,843,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 39,827
<INTEREST-EXPENSE> 515,133
<INCOME-PRETAX> 256,963
<INCOME-TAX> 110,352
<INCOME-CONTINUING> 146,611
<DISCONTINUED> (14,300)
<EXTRAORDINARY> (4,762)
<CHANGES> 0
<NET-INCOME> 127,549
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
<PAGE> 1
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MAPCO Inc.:
We have audited the consolidated balance sheet of MAPCO Inc. and subsidiaries
as of December 31, 1997, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1997 (none of which are presented herein). Our audits
also included the financial statement schedules listed at Item 14(a)2 in the
MAPCO Inc. 1997 Annual Report on Form 10-K (not presented herein). These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules 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 the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 16 to the MAPCO Inc. consolidated financial statements
(Note 17 to the consolidated financial statements of The Williams Companies,
Inc.), 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)
