<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
------------------------------------------------
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
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THE WILLIAMS COMPANIES, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 73-0569878
------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
--------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (918) 573-2000
---------------------------------
NO CHANGE
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at July 31, 2000
-------------------------- ------------------------------
Common Stock, $1 par value 442,783,816 Shares
<PAGE> 2
The Williams Companies, Inc.
Index
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Income--Three and Six Months
Ended June 30, 2000 and 1999 2
Consolidated Balance Sheet--June 30, 2000 and December 31, 1999 3
Consolidated Statement of Cash Flows--Six Months
Ended June 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 26
Part II. Other Information 27
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Exhibit 4.1 -- Credit Agreement dated July 25, 2000, among Williams and
certain of its subsidiaries and the banks named therein
and Citibank N.A., as agent.
Exhibit 4.2 -- Credit Agreement dated July 25, 2000, among Williams and
the banks named therein and Citibank N.A., as agent.
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 -- Financial Data Schedule
</TABLE>
Certain matters discussed in this report, excluding historical information,
include forward-looking statements - statements that discuss Williams' expected
future results based on current and pending business operations. Williams makes
these forward-looking statements in reliance on the safe harbor protections
provided under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by words such as
"anticipates," "believes," "expects," "planned," "scheduled" or similar
expressions. Although Williams believes these forward-looking statements are
based on reasonable assumptions, statements made regarding future results are
subject to numerous assumptions, uncertainties and risks that may cause future
results to be materially different from the results stated or implied in this
document. Additional information about issues that could lead to material
changes in performance is contained in The Williams Companies, Inc.'s 1999 Form
10-K/A.
1
<PAGE> 3
The Williams Companies, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions, except per-share amounts) Three months ended June 30, Six months ended June 30,
----------------------------------------------- --------------------------- -------------------------
2000 1999* 2000 1999*
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Gas Pipeline $ 492.0 $ 424.5 $ 973.3 $ 891.4
Energy Services 2,456.9 1,368.2 4,427.4 2,509.5
Communications 522.7 505.2 1,063.9 1,012.1
Other 33.4 23.8 66.8 30.0
Intercompany eliminations (645.9) (328.7) (1,244.6) (505.9)
---------- --------- ---------- ----------
Total revenues 2,859.1 1,993.0 5,286.8 3,937.1
---------- --------- ---------- ----------
Segment costs and expenses:
Costs and operating expenses 1,956.8 1,435.9 3,759.4 2,834.4
Selling, general and administrative expenses 393.8 323.8 731.7 628.5
Other expense-net 13.7 33.1 14.2 30.6
---------- --------- ---------- ----------
Total segment costs and expenses 2,364.3 1,792.8 4,505.3 3,493.5
---------- --------- ---------- ----------
General corporate expenses 20.9 16.6 40.3 33.5
---------- --------- ---------- ----------
Operating income (loss):
Gas Pipeline 215.2 175.4 412.5 362.2
Energy Services 411.6 105.9 616.7 231.0
Communications (137.1) (76.1) (259.0) (127.6)
Other 5.1 (5.0) 11.3 (22.0)
General corporate expenses (20.9) (16.6) (40.3) (33.5)
---------- --------- ---------- ----------
Total operating income 473.9 183.6 741.2 410.1
Interest accrued (216.6) (134.6) (444.7) (277.9)
Interest capitalized 51.0 17.5 88.6 26.9
Investing income 280.4 5.6 380.9 12.3
Minority interest in (income) loss and preferred returns
of consolidated subsidiaries (.8) (3.4) 13.0 (4.0)
Other income (expense)-net 1.2 (1.1) 5.6 .2
---------- --------- ---------- ----------
Income before provision for income taxes and cumulative
effect of change in accounting principle 589.1 67.6 784.6 167.6
Provision for income taxes 237.3 49.5 311.5 91.0
---------- --------- ---------- ----------
Income before cumulative effect of change in accounting principle 351.8 18.1 473.1 76.6
Cumulative effect of change in accounting principle -- -- (21.6) (5.6)
---------- --------- ---------- ----------
Net income 351.8 18.1 451.5 71.0
Preferred stock dividends -- .9 -- 2.5
---------- --------- ---------- ----------
Income applicable to common stock $ 351.8 $ 17.2 $ 451.5 $ 68.5
========== ========= ========== ==========
Basic earnings per common share:
Income before cumulative effect of change in accounting principle $ .79 $ .04 $ 1.07 $ .17
Cumulative effect of change in accounting principle -- -- (.05) (.01)
---------- --------- ---------- ----------
Net income $ .79 $ .04 $ 1.02 $ .16
========== ========= ========== ==========
Average shares (thousands) 443,778 435,052 443,331 433,580
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle $ .78 $ .04 $ 1.06 $ .17
Cumulative effect of change in accounting principle -- -- (.05) (.01)
---------- --------- ---------- ----------
Net income $ .78 $ .04 $ 1.01 $ .16
========== ========= ========== ==========
Average shares (thousands) 448,617 441,746 448,361 439,382
Cash dividends per common share $ .15 $ .15 $ .30 $ .30
</TABLE>
*Certain amounts have been restated as described in Note 2 of Notes to
Consolidated Financial Statements.
See accompanying notes.
2
<PAGE> 4
The Williams Companies, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions, except per-share amounts) June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 427.4 $ 1,092.0
Short-term investments 32.5 1,434.8
Receivables less allowance of $76.1 ($48.0 in 1999) 2,769.0 2,508.2
Inventories 811.2 631.5
Energy trading assets 2,232.7 376.0
Deferred income taxes 177.0 203.7
Other 420.3 270.4
-------------- --------------
Total current assets 6,870.1 6,516.6
Investments 2,551.1 1,965.4
Property, plant and equipment, at cost 21,647.9 19,249.8
Less accumulated depreciation and depletion (4,625.7) (4,094.3)
-------------- --------------
17,022.2 15,155.5
Goodwill and other intangible assets--net 410.0 435.6
Other assets and deferred charges 1,543.7 1,215.4
-------------- --------------
Total assets $ 28,397.1 $ 25,288.5
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,227.6 $ 1,378.8
Accounts payable 2,454.4 2,049.9
Accrued liabilities 1,729.2 1,835.2
Energy trading liabilities 1,905.4 312.3
Long-term debt due within one year 424.4 196.0
-------------- --------------
Total current liabilities 7,741.0 5,772.2
Long-term debt 9,339.1 9,235.3
Deferred income taxes 2,773.5 2,581.9
Other liabilities and deferred income 1,515.0 1,041.8
Minority interest in consolidated subsidiaries 518.4 561.5
Contingent liabilities and commitments
Preferred ownership interests of subsidiaries:
Preferred interests of subsidiaries 335.1 335.1
Williams obligated mandatorily redeemable preferred securities of
Trust holding only Williams indentures 182.6 175.5
Stockholders' equity:
Common stock, $1 par value, 960 million shares authorized, 446.3 million
issued in 2000, 444.5 million issued in 1999 446.3 444.5
Capital in excess of par value 2,421.1 2,356.7
Retained earnings 3,126.1 2,807.2
Accumulated other comprehensive income 130.6 99.5
Other (88.8) (77.6)
-------------- --------------
6,035.3 5,630.3
Less treasury stock (at cost), 3.6 million shares of common stock in 2000
and 3.8 million in 1999 (42.9) (45.1)
-------------- --------------
Total stockholders' equity 5,992.4 5,585.2
-------------- --------------
Total liabilities and stockholders' equity $ 28,397.1 $ 25,288.5
============== ==============
</TABLE>
See accompanying notes.
3
<PAGE> 5
The Williams Companies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Millions) Six months ended June 30,
---------------------------------
2000 1999*
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 451.5 $ 71.0
Adjustments to reconcile to cash provided from operations:
Cumulative effect of change in accounting principle 21.6 5.6
Depreciation, depletion and amortization 409.8 351.0
Provision for deferred income taxes 203.5 380.9
Provision for loss on property and other assets 4.2 30.7
Gain on dispositions of assets (102.2) (.5)
Gain on conversion of common stock investment (214.7) --
Minority interest in income (loss) and preferred returns of
consolidated subsidiaries (13.0) 4.0
Cash provided (used) by changes in assets and liabilities:
Receivables (309.9) (234.0)
Inventories (178.7) (58.5)
Other current assets (143.4) (44.9)
Accounts payable 428.0 126.9
Accrued liabilities (165.4) (127.1)
Changes in current energy trading assets and liabilities (263.6) (16.9)
Changes in non-current energy trading assets and liabilities (195.6) 5.9
Changes in non-current deferred income 124.5 125.1
Other, including changes in non-current assets and liabilities 65.2 49.5
-------------- --------------
Net cash provided by operating activities 121.8 668.7
-------------- --------------
FINANCING ACTIVITIES:
Proceeds from notes payable 314.0 1,307.1
Payments of notes payable (445.1) (435.6)
Proceeds from long-term debt 900.6 852.1
Payments of long-term debt (554.4) (933.5)
Proceeds from issuance of common stock 47.4 124.8
Dividends paid (132.6) (132.1)
Other--net 1.3 9.3
-------------- --------------
Net cash provided by financing activities 131.2 792.1
-------------- --------------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (2,162.1) (1,168.2)
Proceeds from dispositions and excess fiber capacity transactions 39.9 51.0
Changes in accounts payable and accrued liabilities 28.4 (82.8)
Acquisitions of businesses, net of cash acquired (147.7) (162.9)
Proceeds from sales of short-term investments 1,436.1 --
Proceeds from sales of investments and other assets 253.0 5.6
Purchases of investments/advances to affiliates (336.5) (404.5)
Other--net (28.7) (2.2)
-------------- --------------
Net cash used by investing activities (917.6) (1,764.0)
-------------- --------------
Decrease in cash and cash equivalents (664.6) (303.2)
Cash and cash equivalents at beginning of period 1,092.0 503.3
-------------- --------------
Cash and cash equivalents at end of period $ 427.4 $ 200.1
============== ==============
</TABLE>
* Certain amounts have been restated as described in Note 2 of Notes to
Consolidated Financial Statements.
See accompanying notes.
4
<PAGE> 6
The Williams Companies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
--------------------------------------------------------------------------------
The accompanying interim consolidated financial statements of The Williams
Companies, Inc. (Williams) do not include all notes in annual financial
statements and therefore should be read in conjunction with the consolidated
financial statements and notes thereto in Williams' Annual Report on Form
10-K/A. The accompanying financial statements have not been audited by
independent auditors, but include all normal recurring adjustments and others,
which, in the opinion of Williams' management, are necessary to present fairly
its financial position at June 30, 2000, its results of operations for the three
and six months ended June 30, 2000 and 1999, and cash flows for the six months
ended June 30, 2000 and 1999.
Segment profit of operating companies may vary by quarter. Based on current
rate structures and/or historical maintenance schedules of certain of its
pipelines, Gas Pipeline generally experiences lower segment profits in the
second and third quarters as compared to the first and fourth quarters.
2. Basis of presentation
--------------------------------------------------------------------------------
During first-quarter 2000, management of certain activities related to the
marketing of products from the Alaska refinery were transferred from Energy
Marketing & Trading to Petroleum Services. Prior year amounts for Petroleum
Services and Energy Marketing & Trading have been restated to reflect the
transfer of these operations.
In fourth-quarter 1999, Williams conformed its accounting for all of its
inventories of non-trading crude oil and refined products to the average-cost
method or market, if lower, the method used for the majority of such
inventories. Previously, certain of these inventories were carried on the
last-in, first-out cost method. All previously reported results have been
restated to reflect the retroactive application of this accounting change. The
accounting change increased net income for the three and six months ended June
30, 1999, by $1.1 million and $3.7 million, respectively. Diluted earnings per
share for the six months ended June 30, 1999, increased $.01 per share as a
result of the accounting change.
Network's recognition of revenue related to cash received for the right to
use portions of its fiber-optic network was impacted by Financial Accounting
Standards Board (FASB) Interpretation No. 43, "Real Estate Sales, an
interpretation of FASB Statement No. 66," issued in June 1999. Network's lease
transactions entered into after June 30, 1999, are accounted for as operating
leases unless title to the fibers under lease transfers to the lessee. The
effect of this interpretation on the three and six months ended June 30, 2000,
was to decrease revenues by $31.1 million and $34.8 million, respectively and
decrease net income by $8.5 million and $9.8 million, respectively.
Certain other income statement and cash flow amounts have been reclassified
to conform to the current classifications.
3. Investing income
--------------------------------------------------------------------------------
In second-quarter 2000, Williams recognized a gain of $214.7 million
resulting from the conversion of Williams' shares of Concentric Network
Corporation's common stock into shares of NEXTLINK Communications, Inc.'s common
stock pursuant to a merger of those companies in June 2000.
Williams sold a portion of its investment in certain marketable equity
securities for gains of $36.6 million and $68.1 million for the three and six
months ended June 30, 2000, respectively.
In a series of transactions during first-quarter 2000, Williams sold a
portion of its investment in ATL-Algar Telecom Leste S.A. (ATL) for
approximately $168 million in cash to SBC Communications, Inc. (SBC), which
became a related party in first-quarter 2000. This investment had a carrying
value of $30 million. Williams recognized a gain on the sale of $16.5 million
and deferred a gain of approximately $121 million associated with $150 million
of the proceeds which were subsequently advanced to ATL.
4. Asset impairments and other accruals
--------------------------------------------------------------------------------
Included in second-quarter 2000 other expense-net within segment costs and
expenses and Energy Marketing & Trading's segment profit is a $25.9 million
guarantee loss accrual. The accrual results from the decision to discontinue
mezzanine lending services and represents the estimated liability associated
with guarantees of current lending activities.
Included in second-quarter 1999 other expense-net within segment costs and
expenses and Strategic Investments' segment loss are pre-tax charges totaling
$26.7 million relating to management's second-quarter 1999 decision and
commitment to sell certain audio and video conferencing and closed-circuit video
conferencing businesses. The $26.7 million charge consisted of a $22.8 million
impairment of the assets to fair value based on the expected net sales proceeds
of $50 million and $3.9 million in exit costs consisting of contractual
obligations related to the sale of these businesses. The sales were completed
later in 1999 with an additional $1.7 million impairment charge recorded. These
transactions resulted in an income tax provision of approximately $7.9 million,
which reflects the impact of goodwill not deductible for tax purposes. Segment
losses for the operations related to these assets for the three and six months
ended June 30, 1999, were $5 million and $9.1 million, respectively.
5
<PAGE> 7
Notes (Continued)
5. Provision for income taxes
--------------------------------------------------------------------------------
The provision (benefit) for income taxes includes:
<TABLE>
<CAPTION>
Three months ended Six months ended
(Millions) June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
Federal $ 8.9 $ (307.3) $ 90.1 $ (299.5)
State 6.4 4.4 19.1 7.7
Foreign (4.9) 1.0 (1.2) 1.9
---------- ---------- ---------- ----------
10.4 (301.9) 108.0 (289.9)
Deferred:
Federal 203.2 346.5 162.3 371.0
State 22.0 4.9 43.6 9.9
Foreign 1.7 -- (2.4) --
---------- ---------- ---------- ----------
226.9 351.4 203.5 380.9
---------- ---------- ---------- ----------
Total provision $ 237.3 $ 49.5 $ 311.5 $ 91.0
========== ========== ========== ==========
</TABLE>
The effective income tax rate for the three and six months ended June 30,
2000, is greater than the federal statutory rate due primarily to the effects of
state income taxes.
A federal tax refund of $321 million received in second-quarter 1999 is
reflected as a current federal benefit with an offsetting deferred federal
provision attributable to temporary differences between the book and tax basis
of certain assets.
The effective income tax rate for 1999 is greater than the federal statutory
rate due primarily to the effects of state income taxes and the impact of
goodwill not deductible for tax purposes related to the assets impaired during
second-quarter 1999 (see Note 4).
6. Cumulative effect of change in accounting principle
--------------------------------------------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." Among other things, SAB 101 clarifies certain conditions regarding
the culmination of an earnings process and customer acceptance requirements in
order to recognize revenue. Prior to January 1, 2000, Solutions' revenue
recognition policy had been to recognize revenues on new systems sales and
upgrades under the percentage-of-completion method. A portion of the revenues on
the contracts were initially recognized upon delivery of equipment with the
remaining revenues under the contract being recognized over the installation
period based on the relationship of incurred labor to total estimated labor. In
light of the new guidance issued in SAB 101, effective January 1, 2000,
Solutions changed its method of accounting for new systems sales and upgrades
from the percentage-of-completion method to the completed-contract method. The
provisions of SAB 101 permit Solutions to treat this change in accounting
principle as a cumulative effect adjustment consistent with rules issued under
Accounting Principles Board Opinion No. 20. The cumulative effect of the
accounting change resulted in a charge to first-quarter 2000 net income of $21.6
million (net of income tax benefits of $14.9 million and minority interest of
$21 million). Solutions recognized $63.2 million and $201.4 million of revenue
for the three and six months ended June 30, 2000, respectively, for contracts
completed in 2000 that were previously reported under the
percentage-of-completion method.
Pro forma amounts, assuming the completed-contract method is applied
retroactively, are as follows:
<TABLE>
<CAPTION>
(Dollars in millions, Three Six
except per-share months ended months ended
amounts) June 30, 1999 June 30, 1999
------------------------- -------------------------
Pro forma Reported Pro forma Reported
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 18.1 $ 18.1 $ 67.4 $ 71.0
Earnings per share:
Basic $ .04 $ .04 $ .15 $ .16
Diluted $ .04 $ .04 $ .15 $ .16
----------- ----------- ----------- -----------
</TABLE>
Effective January 1, 1999, Williams adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities." The SOP requires that all
start-up costs be expensed as incurred, and the expense related to the initial
application of this SOP of $5.6 million (net of a $3.6 million benefit for
income taxes) is reported as the cumulative effect of a change in accounting
principle in first-quarter 1999.
6
<PAGE> 8
Notes (Continued)
7. Earnings per share
--------------------------------------------------------------------------------
Basic and diluted earnings per common share are computed as follows:
<TABLE>
<CAPTION>
(Dollars in millions, except Three Six
per-share amounts; shares in months ended months ended
thousands) June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before cumulative
effect of change in
accounting principle $ 351.8 $ 18.1 $ 473.1 $ 76.6
Preferred stock dividends -- .9 -- 2.5
----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle
available to common
stockholders for basic and
diluted earnings per share $ 351.8 $ 17.2 $ 473.1 $ 74.1
=========== =========== =========== ===========
Basic weighted-average shares 443,778 435,052 443,331 433,580
Effect of dilutive securities:
Stock options 4,839 6,694 5,030 5,802
----------- ----------- ----------- -----------
Diluted weighted-average
shares 448,617 441,746 448,361 439,382
=========== =========== =========== ===========
Basic and diluted earnings
per common share before
cumulative effect of change
in accounting principle:
Basic $ .79 $ .04 $ 1.07 $ .17
Diluted $ .78 $ .04 $ 1.06 $ .17
=========== =========== =========== ===========
</TABLE>
For the three and six months ended June 30, 1999, approximately 6.4 million
and 7.1 million shares, respectively, 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. Each
share of the $3.50 convertible preferred stock was converted during 1999.
8. Inventories
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 2000 1999
------------ ------------
<S> <C> <C>
Raw materials:
Crude oil $ 111.5 $ 66.6
Other 3.3 2.1
------------ ------------
114.8 68.7
Finished goods:
Refined products 227.5 172.5
Natural gas liquids 163.8 83.9
General merchandise and
communications equipment 118.6 116.0
------------ ------------
509.9 372.4
Materials and supplies 106.4 110.2
Natural gas in underground storage 77.2 77.5
Other 2.9 2.7
------------ ------------
$ 811.2 $ 631.5
============ ============
</TABLE>
9. Debt and banking arrangements
--------------------------------------------------------------------------------
Notes payable
Williams has a $1.4 billion commercial paper program, backed by a short-term
bank-credit facility. At June 30, 2000, approximately $1.2 billion of commercial
paper was outstanding under the program. Interest rates vary with current market
conditions. Subsequent to June 30, 2000, the commercial paper program and
related short-term bank-credit facility were increased to $1.7 billion.
Debt
<TABLE>
<CAPTION>
Weighted-
average
interest June 30, December 31,
(Millions) rate* 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revolving credit loans 7.2% $ 500.0 $ 525.0
Debentures, 6.25%-10.25%,
payable 2003-2027 (1) 7.4 1,103.2 1,105.2
Notes, 5.1%-10.875%,
payable through 2022 (2) 8.0 6,901.8 7,339.1
Notes, adjustable rate,
payable through 2004 7.2 1,253.3 455.0
Other, payable through 2009 7.0 5.2 7.0
------------ ------------ ------------
9,763.5 9,431.3
Current portion of long-term debt (424.4) (196.0)
------------ ------------
$ 9,339.1 $ 9,235.3
============ ============
</TABLE>
* At June 30, 2000, including the effects of interest-rate swaps.
(1) $200 million, 7.08% debentures, payable 2026, are subject to redemption at
par at the option of the debtholder in 2001.
(2) $240 million, 6.125% notes, payable 2012, are subject to redemption at par
at the option of the debtholder in 2002.
Williams' communications business, Williams Communications Group, Inc. (WCG),
has a $1.05 billion long-term credit agreement. Terms of the credit agreement
contain restrictive covenants limiting the transfer of funds to Williams
(parent), including the payment of dividends and repayment of intercompany
borrowings by WCG to Williams (parent). At June 30, 2000, no amounts were
outstanding under this facility. Interest rates vary with current market
conditions.
Under the terms of Williams' $1 billion revolving credit agreement, Northwest
Pipeline, Transcontinental Gas Pipe Line and Texas Gas Transmission have access
to varying amounts of the facility, while Williams (parent) has access to all
unborrowed amounts. Interest rates vary with current market conditions.
Subsequent to June 30, 2000, Williams' $1 billion revolving credit agreement was
terminated and replaced with a $700 million revolving credit agreement under
which Northwest Pipeline, Transcontinental Gas Pipe Line and Texas Gas
Transmission have access to varying amounts of the facility, while Williams
(parent) has access to all unborrowed amounts. Terms of the agreement are based
on Williams exclusive of WCG and restrict the transfer of funds from Williams to
WCG.
7
<PAGE> 9
Notes (Continued)
In January 2000, Williams issued $500 million of adjustable rate notes due
2001 at an initial interest rate of approximately 6.5 percent. In April 2000,
Williams entered into a $400 million three-year term loan bank agreement. A
total of $400 million was borrowed under the agreement. Interest rates are based
on LIBOR plus one percent.
Subsequent to June 30, 2000, WCG issued $1 billion in debt obligations
consisting of $575 million in 11.7 percent notes due 2008 and $425 million in
11.875 percent notes due 2010.
During second-quarter 2000, Williams terminated certain interest rate swaps
with a notional value of approximately $700 million. These swaps were utilized
to convert certain fixed-rate debt obligations to variable rate obligations.
Williams paid approximately $9 million to terminate the swaps. The $9 million
was deferred and will be amortized as an adjustment of interest expense on the
outstanding debt over the remaining original term of the terminated swap
agreements.
10. Contingent liabilities and commitments
--------------------------------------------------------------------------------
Rate and regulatory matters and related litigation
Williams' interstate pipeline subsidiaries 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 accrued approximately $138
million for potential refund as of June 30, 2000.
In 1997, the Federal Energy Regulatory Commission (FERC) issued orders
addressing, among other things, the authorized rates of return for three of the
Williams interstate natural gas pipeline subsidiaries. All of the orders involve
rate cases that became effective between 1993 and 1995 and, in each instance,
these cases have been superseded by more recently filed rate cases. In the three
orders, the FERC continued its practice of utilizing a methodology for
calculating rates of return that incorporates a long-term growth rate component.
However, the long-term growth rate component used by the FERC is now a
projection of U.S. gross domestic product growth rates. Generally, calculating
rates of return utilizing a methodology which includes a long-term growth rate
component results in rates of return that are lower than they would be if the
long-term growth rate component were not included in the methodology. Each of
the three pipeline subsidiaries challenged its respective FERC order in an
effort to have the FERC change its rate-of-return methodology with respect to
these and other rate cases. On January 30, 1998, the FERC convened a public
conference to consider, on an industry-wide basis, issues with respect to
pipeline rates of return. In July 1998, the FERC issued orders in two of the
three pipeline subsidiary rate cases, again modifying its rate-of-return
methodology by adopting a formula that gives less weight to the long-term growth
component. Certain parties appealed the FERC's action, because the most recent
formula modification results in somewhat higher rates of return compared to the
rates of return calculated under the FERC's prior formula. The appeals have been
denied. In June and July 1999, the FERC applied the new methodology in the third
pipeline subsidiary rate case, as well as in a fourth case involving the same
pipeline subsidiary. In March 2000, the FERC applied the new methodology in a
fifth case involving a Williams interstate pipeline subsidiary, and certain
parties have sought rehearing before the FERC in this proceeding. After
evaluating the rehearing requests, Williams reduced its accrued liability for
rate refunds in second-quarter 2000 by $62.7 million of which $58.8 million is
included in Gas Pipeline's segment revenues and segment profit and $3.9 million
is included in Midstream Gas & Liquids' segment revenues and segment profit. An
additional $8.5 million of related interest is included as a reduction of
interest accrued.
As a result of FERC Order 636 decisions in prior years, 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.
In September 1995, Texas Gas received FERC approval of a settlement regarding
Texas Gas' recovery of gas supply realignment costs. Through June 30, 2000,
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.
On July 29, 1998, 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 sought comments on its pricing policies in the
existing long-term market and pricing policies for new capacity. Williams filed
comments on the NOPR and NOI in the second quarter of 1999. On February
9, 2000, the FERC issued a final rule, Order 637, in response to the comments
received on the NOPR and NOI. The FERC adopts in Order 637 certain policies that
it finds are necessary to adjust its current regulatory model to the needs of
the evolving markets, but determines that any fundamental changes to its
regulatory policy, which changes were raised and commented on in the NOPR and
NOI, will be considered after further study and evaluation of the evolving
marketplace. Most significantly, in Order 637, the FERC (i) revises its pricing
policy to waive, for a two-year period, the maximum price ceilings for
short-term releases of capacity of less than one year, and (ii) permits
8
<PAGE> 10
Notes (Continued)
pipelines to file proposals to implement seasonal rates for short-term services
and term-differentiated rates, subject to certain requirements including the
requirement that a pipeline be limited to recovering its annual revenue
requirement under those rates.
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 June 30,
2000, these subsidiaries had accrued liabilities totaling approximately
$26 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 Williams Gas Pipelines Central
(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 June 30, 2000, Central had
accrued a liability for approximately $11 million, representing the current
estimate of future environmental cleanup costs to be incurred over the next six
to 10 years. Texas Gas and Transcontinental Gas Pipe Line likewise had accrued
liabilities for these costs which are included in the $26 million liability
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.
In July 1999, Transcontinental Gas Pipe Line received a letter stating that
the U.S. Department of Justice (DOJ), at the request of the EPA, intends to file
a civil action against Transcontinental Gas Pipe Line arising from its waste
management practices at Transcontinental Gas Pipe Line's compressor stations and
metering stations in 11 states from Texas to New Jersey. DOJ stated in the
letter that its complaint will seek civil penalties and injunctive relief under
federal environmental laws. DOJ and Transcontinental Gas Pipe Line are
discussing a settlement. While no specific amount was proposed, DOJ stated that
any settlement must include an appropriate civil penalty for the alleged
violations. Transcontinental Gas Pipe Line cannot reasonably estimate the amount
of its potential liability, if any, at this time. However, Transcontinental Gas
Pipe Line believes it has substantially addressed environmental concerns on its
system through ongoing voluntary remediation and management programs.
Energy Services (WES) also accrues environmental remediation costs for its
natural gas gathering and processing facilities, petroleum products pipelines,
retail petroleum and refining operations and for certain facilities related to
former propane marketing operations primarily related to soil and groundwater
contamination. In addition, WES owns a discontinued petroleum refining facility
that is being evaluated for potential remediation efforts. At June 30, 2000, WES
and its subsidiaries had accrued liabilities totaling approximately $41 million.
WES accrues receivables related to environmental remediation costs based upon an
estimate of amounts that will be reimbursed from state funds for certain
expenses associated with underground storage tank problems and repairs. At June
30, 2000, WES and its subsidiaries had accrued receivables totaling $16 million.
Williams Field Services (WFS), a WES subsidiary, received a Notice of
Violation (NOV) from the EPA in February 2000. WFS received a contemporaneous
letter from the DOJ indicating that DOJ will also be involved in the matter. The
NOV alleged violations of the Clean Air Act at a gas processing plant. In April,
WFS received a demand for payment in the amount of $1.2 million from the DOJ.
WFS disagrees with the assessment and related violations and plans to continue
negotiations with the EPA and DOJ.
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 June 30, 2000, 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.
Other legal matters
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
9
<PAGE> 11
Notes (Continued)
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. On June 8, 2000,
Transcontinental Gas Pipe Line's appeal was denied by the Texas Court of
Appeals, and the company is pursuing rehearing of the court's decision. In the
other case, a producer has asserted damages, including interest calculated
through December 31, 1997, of approximately $6 million. Producers have received
and may receive other demands, which could result in additional claims.
Indemnification for royalties will depend on, among other things, the specific
lease provisions between the producer and the lessor and the terms of the
settlement between the producer and either Transcontinental Gas Pipe Line or
Texas Gas. Texas Gas may file to recover 75 percent of any such additional
amounts it may be required to pay pursuant to indemnities for royalties under
the provisions of Order 528.
In 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 Pipelines
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. On April 9, 1999, the United States
Department of Justice announced that it was declining to intervene in any of the
Grynberg qui tam cases, including the action filed against the Williams entities
in the United States District Court for the District of Colorado. On October 21,
1999, the Panel on Multi- District Litigation transferred all of the Grynberg
qui tam cases, including the ones filed against Williams, to the United States
District Court for the District of Wyoming for pre-trial purposes. Motions to
dismiss the complaints filed by various defendants, including Williams, are
pending.
WCG and a subsidiary are named as defendants in various putative, nationwide
class actions brought on behalf of all landowners on whose property the
plaintiffs have alleged WCG installed fiber-optic cable without the permission
of the landowner. WCG believes that installation of the cable containing the
single fiber network that crosses over or near the putative class members' land
does not infringe on their property rights. WCG also does not believe that the
plaintiffs have sufficient basis for certification of a class action.
It is likely that WCG will be subject to other putative class action suits
challenging its railroad or pipeline rights of way. WCG cannot quantify the
impact of all such claims at this time. Thus, WCG cannot be certain that the
plaintiffs' purported class action or other purported class actions, if
successful, will not have a material adverse effect.
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, based on advice of counsel, 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.
Commitments
Energy Marketing & Trading has entered into certain contracts giving Williams
the right to receive fuel conversion and certain other services for purposes of
generating electricity. At June 30, 2000, annual estimated committed payments
under these contracts range from approximately $20 million to $383 million,
resulting in total committed payments over the next 22 years of approximately $7
billion.
10
<PAGE> 12
Notes (Continued)
11. Recent accounting standards
--------------------------------------------------------------------------------
The FASB has issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard, as amended, will be effective for Williams beginning January 1, 2001.
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 is being evaluated.
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." This interpretation modifies the current practice
of accounting for certain stock award agreements and is generally effective
beginning July 1, 2000. The initial impact of this interpretation on Williams'
results of operations and financial position will not be material.
At the July 2000 meeting, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-17, "Measuring the Fair Value of Energy-Related
Contracts in Applying EITF Issue No. 98-10, 'Accounting for Contracts Involved
in Energy Trading and Risk Management Activities.'" This Issue addresses how the
fair value for energy-related contracts and any related energy purchase and
sales contracts should be measured. This Issue is effective immediately upon
issuance on a prospective basis and may initially have a material favorable
impact to Williams' results of operations and financial position during
third-quarter 2000. The actual impact of this Issue is being determined.
12. Comprehensive income
--------------------------------------------------------------------------------
Comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Six
months ended months ended
(Millions) June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 351.8 $ 18.1 $ 451.5 $ 71.0
Other comprehensive income (loss):
Unrealized gains on securities 222.9 11.0 363.5 131.6
Realized gains in net income (251.3) -- (282.8) --
Foreign currency
translation adjustments (10.4) 1.1 (15.5) (20.9)
---------- ---------- ---------- ----------
Other comprehensive
income (loss) before taxes
and minority interest (38.8) 12.1 65.2 110.7
Income tax benefit (provision)
on other comprehensive
income (loss) 11.2 (4.3) (31.2) (51.2)
Minority interest in other
comprehensive income (loss) 6.1 -- (2.9) --
---------- ---------- ---------- ----------
Other comprehensive
income (loss) (21.5) 7.8 31.1 59.5
---------- ---------- ---------- ----------
Comprehensive income $ 330.3 $ 25.9 $ 482.6 $ 130.5
========== ========== ========== ==========
</TABLE>
In first-quarter 2000, Williams entered into a derivative instrument that
will expire in various stages throughout the remainder of 2000. Subsequent to
June 30, 2000, Williams entered into another derivative instrument which will
expire by fourth-quarter 2001. These derivative instruments are designed to
hedge Williams' exposure to changes in the price of its investments in certain
marketable equity securities. Changes in the fair value of the hedged marketable
equity securities and the impact of the associated derivative instruments are
currently reflected in other comprehensive income. The derivative instruments
impact realized gains or losses from the sale of the hedged marketable equity
securities.
11
<PAGE> 13
Notes (Continued)
13. Segment disclosures
-----------------------------------------------------------------------------
Williams evaluates performance based upon segment profit (loss) from
operations which includes revenues from external and internal customers, equity
earnings (losses), operating costs and expenses, depreciation, depletion and
amortization and income (loss) from investments. Intersegment sales are
generally accounted for as if the sales were to unaffiliated third parties, that
is, at current market prices. As a result of the assumption of investment
management activities within the operating segments, the definition of segment
profit (loss) was modified during first-quarter 2000 to include income (loss)
from investments resulting from the management of investments in equity
instruments. This income (loss) from investments is reported in investing income
in the Consolidated Statement of Income. The prior year segment information has
been restated to conform to the current period presentation. The primary
components of income from investments included in segment profit (loss) are the
gains from certain marketable equity securities (in Network) and the gain on the
sale of investments in ATL-Algar Telecom Leste, S.A. (in Strategic Investments)
(see Note 3).
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 certain
communications-related ventures, as well as corporate operations.
Prior year amounts of Communications' operating segments have been restated
to reflect the first quarter 2000 segment realignment. In addition, prior period
segment amounts within Energy Services have been restated to reflect the fourth
quarter 1999 change in inventory valuation method and the first quarter 2000
transfer of certain Alaskan operations within Energy Services (see Note 2).
The increase in Energy Marketing & Trading's total assets, as noted on page
14, is due primarily to increased commodity prices within the trading
portfolios. The following table reflects the reconciliation of operating income
(loss) as reported in the Consolidated Statement of Income to segment profit
(loss), per the tables on pages 13 and 14:
<TABLE>
<CAPTION>
Three months ended June 30, 2000 Three months ended June 30, 1999
Operating Income from Segment Operating Income from Segment
(Millions) Income (Loss) Investments Profit (Loss) Income (Loss) Investments Profit (Loss)
------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gas Pipeline $ 215.2 $ -- $ 215.2 $ 175.4 $ -- $ 175.4
Energy Services 411.6 -- 411.6 105.9 -- 105.9
Communications (137.1) 251.3 114.2 (76.1) -- (76.1)
Other 5.1 -- 5.1 (5.0) -- (5.0)
---------- ----------- ------------ ----------- ----------- -----------
Total segments 494.8 $ 251.3 $ 746.1 200.2 $ -- $ 200.2
---------- ----------- ------------ ----------- ----------- -----------
General corporate
expenses (20.9) (16.6)
---------- -----------
Total operating
income $ 473.9 $ 183.6
========== ===========
Six months ended June 30, 2000 Six months ended June 30, 1999
Operating Income from Segment Operating Income from Segment
(Millions) Income (Loss) Investments Profit (Loss) Income (Loss) Investments Profit (Loss)
------------- ----------- ------------- ------------- ----------- -------------
Gas Pipeline $ 412.5 $ -- $ 412.5 $ 362.2 $ -- $ 362.2
Energy Services 616.7 -- 616.7 231.0 -- 231.0
Communications (259.0) 303.0 44.0 (127.6) -- (127.6)
Other 11.3 -- 11.3 (22.0) -- (22.0)
---------- ---------- ------------ ----------- ----------- -----------
Total segments 781.5 $ 303.0 $ 1,084.5 443.6 $ -- $ 443.6
---------- ---------- ------------ ----------- ----------- -----------
General corporate
expenses (40.3) (33.5)
---------- -----------
Total operating
income $ 741.2 $ 410.1
========== ===========
</TABLE>
12
<PAGE> 14
Notes (Continued)
13. Segment disclosures (continued)
<TABLE>
<CAPTION>
Revenues
-----------------------------------------------------------------------
External Inter- Equity Earnings Segment
(Millions) Customers segment (Losses) Total Profit (Loss)
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 2000
GAS PIPELINE $ 471.3 $ 14.3 $ 6.4 $ 492.0 $ 215.2
ENERGY SERVICES
Energy Marketing & Trading 980.8 (13.4)* .1 967.5 268.8
Exploration & Production 16.5 55.2 -- 71.7 10.0
Midstream Gas & Liquids 167.2 157.3 (.8) 323.7 71.9
Petroleum Services 684.7 409.5 (.2) 1,094.0 62.4
Merger-related costs and
non-compete amortization -- -- -- -- (1.5)
-------------- -------------- -------------- -------------- --------------
TOTAL ENERGY SERVICES 1,849.2 608.6 (.9) 2,456.9 411.6
-------------- -------------- -------------- -------------- --------------
COMMUNICATIONS
Network 134.7 11.0 .6 146.3 161.0
Broadband Media 41.6 .1 (2.8) 38.9 (8.6)
Solutions 337.9 1.4 -- 339.3 (34.7)
Strategic Investments -- -- (1.8) (1.8) (3.5)
-------------- -------------- -------------- -------------- --------------
TOTAL COMMUNICATIONS 514.2 12.5 (4.0) 522.7 114.2
-------------- -------------- -------------- -------------- --------------
OTHER 22.8 10.5 .1 33.4 5.1
ELIMINATIONS -- (645.9) -- (645.9) --
-------------- -------------- -------------- -------------- --------------
TOTAL $ 2,857.5 $ -- $ 1.6 $ 2,859.1 $ 746.1
============== ============== ============== ============== ==============
FOR THE THREE MONTHS ENDED JUNE 30, 1999
GAS PIPELINE $ 412.6 $ 11.3 $ .6 $ 424.5 $ 175.4
ENERGY SERVICES
Energy Marketing & Trading 414.4 (37.6)* (.2) 376.6 13.2
Exploration & Production 10.9 32.1 -- 43.0 7.0
Midstream Gas & Liquids 137.1 105.8 (5.6) 237.3 53.6
Petroleum Services 516.1 195.1 .1 711.3 34.8
Merger-related costs and
non-compete amortization -- -- -- -- (2.7)
-------------- -------------- -------------- -------------- --------------
TOTAL ENERGY SERVICES 1,078.5 295.4 (5.7) 1,368.2 105.9
-------------- -------------- -------------- -------------- --------------
COMMUNICATIONS
Network 85.3 11.4 -- 96.7 (25.7)
Broadband Media 40.4 .5 -- 40.9 (4.2)
Solutions 359.4 -- -- 359.4 (8.6)
Strategic Investments 12.8 .3 (4.9) 8.2 (37.6)
-------------- -------------- -------------- -------------- --------------
TOTAL COMMUNICATIONS 497.9 12.2 (4.9) 505.2 (76.1)
-------------- -------------- -------------- -------------- --------------
OTHER 18.0 9.8 (4.0) 23.8 (5.0)
ELIMINATIONS -- (328.7) -- (328.7) --
-------------- -------------- -------------- -------------- --------------
TOTAL $ 2,007.0 $ -- $ (14.0) $ 1,993.0 $ 200.2
============== ============== ============== ============== ==============
</TABLE>
*Energy Marketing & Trading intercompany cost of sales, which are netted in
revenues consistent with fair value accounting, exceed intercompany revenue.
13
<PAGE> 15
13. Segment disclosures (continued)
<TABLE>
<CAPTION>
Revenues
-----------------------------------------------------------------------
External Inter- Equity Earnings Segment
(Millions) Customers segment (Losses) Total Profit (Loss)
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
GAS PIPELINE $ 932.1 $ 28.9 $ 12.3 $ 973.3 $ 412.5
ENERGY SERVICES
Energy Marketing & Trading 1,580.5 (7.8)* .1 1,572.8 343.0
Exploration & Production 24.4 103.1 -- 127.5 21.4
Midstream Gas & Liquids 339.5 311.5 .2 651.2 156.4
Petroleum Services 1,312.4 763.7 (.2) 2,075.9 100.1
Merger-related costs and
non-compete amortization -- -- -- -- (4.2)
-------------- -------------- -------------- -------------- --------------
TOTAL ENERGY SERVICES 3,256.8 1,170.5 .1 4,427.4 616.7
-------------- -------------- -------------- -------------- --------------
COMMUNICATIONS
Network 253.7 22.2 1.0 276.9 102.7
Broadband Media 82.5 .1 (3.5) 79.1 (14.6)
Solutions 710.3 2.2 -- 712.5 (56.8)
Strategic Investments -- -- (4.6) (4.6) 12.7
-------------- -------------- -------------- -------------- --------------
TOTAL COMMUNICATIONS 1,046.5 24.5 (7.1) 1,063.9 44.0
-------------- -------------- -------------- -------------- --------------
OTHER 45.6 20.7 .5 66.8 11.3
ELIMINATIONS -- (1,244.6) -- (1,244.6) --
-------------- -------------- -------------- -------------- --------------
TOTAL $ 5,281.0 $ -- $ 5.8 $ 5,286.8 $ 1,084.5
============== ============== ============== ============== ==============
FOR THE SIX MONTHS ENDED JUNE 30, 1999
GAS PIPELINE $ 864.9 $ 25.8 $ .7 $ 891.4 $ 362.2
ENERGY SERVICES
Energy Marketing & Trading 821.0 (89.0)* (.3) 731.7 55.2
Exploration & Production 12.1 58.4 -- 70.5 11.7
Midstream Gas & Liquids 330.2 132.7 (7.9) 455.0 100.2
Petroleum Services 919.6 332.4 .3 1,252.3 70.7
Merger-related costs and
non-compete amortization -- -- -- -- (6.8)
-------------- -------------- -------------- -------------- --------------
TOTAL ENERGY SERVICES 2,082.9 434.5 (7.9) 2,509.5 231.0
-------------- -------------- -------------- -------------- --------------
COMMUNICATIONS
Network 192.7 24.1 -- 216.8 (48.2)
Broadband Media 79.0 1.3 -- 80.3 (9.9)
Solutions 699.9 -- -- 699.9 (17.7)
Strategic Investments 27.5 .6 (13.0) 15.1 (51.8)
-------------- -------------- -------------- -------------- --------------
TOTAL COMMUNICATIONS 999.1 26.0 (13.0) 1,012.1 (127.6)
-------------- -------------- -------------- -------------- --------------
OTHER 30.8 19.6 (20.4) 30.0 (22.0)
ELIMINATIONS -- (505.9) -- (505.9) --
-------------- -------------- -------------- -------------- --------------
TOTAL $ 3,977.7 $ -- $ (40.6) $ 3,937.1 $ 443.6
============== ============== ============== ============== ==============
<CAPTION>
TOTAL ASSETS
(Millions) June 30, 2000 December 31, 1999
-------------- -----------------
GAS PIPELINE $ 8,716.5 $ 8,628.5
ENERGY SERVICES
Energy Marketing & Trading 6,206.4 3,209.7
Exploration & Production 592.7 618.6
Midstream Gas & Liquids 3,496.7 3,514.4
Petroleum Services 2,778.3 2,588.7
-------------- --------------
TOTAL ENERGY SERVICES 13,074.1 9,931.4
-------------- --------------
COMMUNICATIONS
Network 4,578.7 4,079.8
Broadband Media 226.8 348.0
Solutions 1,176.7 1,537.6
Strategic Investments 531.4 412.5
-------------- --------------
TOTAL COMMUNICATIONS 6,513.6 6,377.9
-------------- --------------
OTHER 7,219.5 6,629.3
ELIMINATIONS (7,126.6) (6,278.6)
-------------- --------------
TOTAL $ 28,397.1 $ 25,288.5
============== ==============
</TABLE>
*Energy Marketing & Trading intercompany cost of sales, which are netted in
revenues consistent with fair value accounting, exceed intercompany revenue.
14
<PAGE> 16
Notes (Continued)
14. Asset acquisitions from related party
------------------------------------------------------------------------------
In June of 2000, WCG acquired interests in undersea communications cables
between the United States and China, and between the United States and Japan,
from SBC, a related party, for a purchase price of approximately $111.4
million. In addition, WCG has entered into an agreement, expected to close in
third-quarter 2000, to purchase certain long-distance network assets of
Ameritech Communications, Inc., a subsidiary of SBC, for approximately $145
million.
15. Subsequent events
------------------------------------------------------------------------------
Subsequent to June 30, 2000, Williams entered into several agreements to
purchase various energy-related assets including a natural gas liquids (NGL)
extraction plant and other NGL assets in Canada, an NGL pipeline in the United
States and Canada and refined petroleum product terminals in the northeastern
United States. Williams estimates the aggregate purchase price pursuant to these
agreements to be no more than $800 million. All agreements are expected to close
by the end of 2000.
15
<PAGE> 17
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Results of Operations
Second Quarter 2000 vs. Second Quarter 1999
CONSOLIDATED OVERVIEW
Williams' revenues increased $866 million, or 43 percent, due primarily to
higher Energy Services' revenues from increased petroleum products and natural
gas liquids average sales prices and volumes and higher electric power services
revenues. Revenues also increased due to additional rate refund liability
reductions at Gas Pipeline and growth in Communications' data and voice
services. Partially offsetting these increases were lower Communications'
revenues from new systems sales and upgrades.
Segment costs and expenses increased $572 million, or 32 percent, due
primarily to higher costs related to increased petroleum products and natural
gas liquids average purchase prices and volumes, higher costs and expenses from
growth of Communications' Network operations and infrastructure, higher variable
compensation levels associated with improved performance at Energy Services and
a $25.9 million guarantee loss accrual at Energy Services. Partially offsetting
these increases was the effect in 1999 of $26.7 million of asset impairment
charges and exit costs at Communications.
Operating income increased $290 million, or 158 percent, due primarily to a
$306 million increase at Energy Services and a $40 million increase at Gas
Pipeline, partially offset by $61 million higher losses at Communications.
Energy Services' increase reflects improved electric power services margins and
higher per-unit natural gas liquids margins, partially offset by higher variable
compensation levels and the $25.9 million guarantee loss accrual. Gas Pipeline's
increase reflects increased reductions to rate refund liabilities in 2000. The
increased losses at Communications reflect losses associated with providing
customer services prior to completion of the new network, higher depreciation
and network lease expense as the network is brought into service and higher
selling, general and administrative expenses, including costs associated with
infrastructure growth and improvement, partially offset by the effect in 1999 of
$26.7 million of asset impairment and exit costs.
Income before income taxes and cumulative effect of change in accounting
principle increased $521 million, from $68 million in 1999 to $589 million in
2000, due primarily to $290 million higher operating income and $275 million
higher investing income. The increase in investing income reflects a $214.7
million gain from the conversion of Williams' shares of Concentric Network
Corporation's common stock into shares of NEXTLINK Communications, Inc.'s common
stock pursuant to a merger of those companies in June 2000, gains totaling $36.6
million from the sale of certain marketable equity securities and higher
interest income. Partially offsetting was $49 million higher net interest
expense reflecting increased debt in support of continued expansion and new
projects.
GAS PIPELINE
GAS PIPELINE'S revenues increased $67.5 million, or 16 percent, due
primarily to $64 million of rate refund liability reductions associated mainly
with the evaluation of a favorable Federal Energy Regulatory Commission (FERC)
order received in March 2000 by Transcontinental Gas Pipe Line related to the
rate-of-return and capital structure issues in a regulatory proceeding. Revenues
also increased due to $32 million higher gas exchange imbalance settlements
(offset in costs and operating expenses), $7 million higher transportation
demand revenues and $6 million higher equity investment earnings from pipeline
joint venture projects. Partially offsetting these increases was a total of $38
million of reductions to rate refund liabilities in 1999 by three of the gas
pipelines resulting from second-quarter 1999 regulatory proceedings involving
rate-of-return methodology.
Segment profit increased $39.8 million, or 23 percent, due primarily to the
$26 million net effect of rate refund liability reductions discussed above, $6
million higher equity investment earnings and lower professional services costs
associated with year 2000 compliance work.
Based on current rate structures and/or historical maintenance schedules of
certain of its pipelines, Gas Pipeline generally experiences lower segment
profits in the second and third quarters as compared to the first and fourth
quarters.
ENERGY SERVICES
ENERGY MARKETING & TRADING'S revenues increased $590.9 million, or 157
percent, due to a $330.3 million increase in trading revenues and a $260.6
million increase in non-trading revenues. The $330.3 million increase in trading
revenues is due primarily to $311 million higher electric power services margins
reflecting higher contract origination revenues, favorable changes in forward
power market prices, increased trading power volumes and increased demand and
market prices for certain ancillary services in the western region. In addition,
natural gas services trading revenues increased $20 million due primarily to
financial trading gains.
The $260.6 million non-trading revenue increase is due primarily to $258
million higher refined products marketing revenues and $31 million higher
natural gas liquids revenues resulting from higher average sales prices and
increased volumes. Recent expansions of the Memphis refinery were a significant
contributor to the increased refined product marketing volumes. Partially
16
<PAGE> 18
Management's Discussion and Analysis (Continued)
offsetting these increases were $28 million lower revenues following the sale of
the retail natural gas, electric and propane businesses in 1999.
Costs and operating expenses increased $271.4 million, or 82 percent, due
primarily to $263 million higher refined products cost of sales associated with
non-trading activities and $31 million higher natural gas liquids cost of sales.
Partially offsetting these increases were lower retail natural gas, electric and
propane cost of sales and operating expenses of $11 million and $20 million,
respectively. These variances result from the corresponding changes in
non-trading revenues discussed above.
Other expense-net in 2000 includes a $25.9 million guarantee loss accrual
(see Note 4 of Notes to Consolidated Financial Statements) and a $12.4 million
gain on the sale of certain natural gas liquids contracts. Other expense-net in
1999 includes a $5.6 million gain on the sale of certain retail gas and electric
assets.
Segment profit increased $255.6 million, from $13.2 million in 1999 to
$268.8 million in 2000, due primarily to the $311 million higher electric power
services margins, $20 million higher natural gas services margins and the $12.4
million gain on the sale of certain natural gas liquids contracts. Partially
offsetting these increases were $46 million higher selling, general and
administrative costs reflecting higher variable compensation levels associated
with improved operating performance, the $25.9 million guarantee loss accrual
and the effect of the $5.6 million gain on the sale of certain assets in 1999.
EXPLORATION & PRODUCTION'S revenues increased $28.7 million, or 66 percent,
due primarily to $27 million from increased average natural gas sales prices.
Segment profit increased $3 million, or 42 percent, due primarily to $18
million higher profits from company-owned production. Largely offsetting were $4
million lower margins from the marketing of natural gas from the Williams Coal
Seam Gas Royalty Trust (Royalty Trust) and royalty interest owners, a $4 million
decrease in the recognition of income previously deferred from a 1997
transaction which transferred certain nonoperating economic benefits to a third
party, $3 million higher production-related taxes and $2 million higher
provision for nonproducing leasehold impairment.
MIDSTREAM GAS & LIQUIDS' revenues increased $86.4 million, or 36 percent,
due primarily to $80 million higher natural gas liquids sales from processing
activities. The liquids sales increase reflects $48 million from a 63 percent
increase in average natural gas liquids sales prices and $32 million from a 74
percent increase in volumes sold. The increase in natural gas liquids sales
volumes is a result of improved liquids market conditions and the contribution
of a new plant which became operational in June 1999. In addition, revenues
increased due to $7 million higher natural gas liquids pipeline transportation
revenues associated with increased shipments. Shipments increased due to
improved market conditions and the completion of the Rocky Mountain liquids
pipeline expansion project in November 1999.
Costs and operating expenses increased $65.3 million, or 42 percent, due
primarily to $44 million higher liquids fuel and replacement gas purchases and
higher transportation, depreciation and power costs.
Segment profit increased $18.3 million, or 34 percent, due primarily to $21
million from higher per-unit natural gas liquids margins reflecting increased
petrochemical demand and higher crude oil prices and $6 million from increased
natural gas liquids volumes sold, partially offset by $6.8 million higher
general and administrative expenses.
PETROLEUM SERVICES' revenues increased $382.7 million, or 54 percent, due
primarily to $335 million higher refinery revenues (including $79 million higher
intra-segment sales to the travel centers/convenience stores which are
eliminated) and $121 million higher travel center/convenience store sales. The
$335 million increase in refinery revenues reflects $314 million from 79 percent
higher average refined product sales prices and $21 million from a 6 percent
increase in refined product volumes sold. The increase in refined product
volumes sold follows refinery expansions and improvements in mid-to-late 1999
which increased capacity. The $121 million increase in travel center/convenience
store sales reflects $72 million from 33 percent higher average gasoline and
diesel sales prices, $45 million primarily from a 74 percent increase in diesel
sales volumes and $4 million higher merchandise sales. The increases in diesel
sales volumes and merchandise sales reflect the opening of 13 new travel centers
since second-quarter 1999. Additional travel centers are planned to open in
2000. In addition, revenues increased due to $15 million higher ethanol sales
reflecting both an increase in ethanol volumes sold and average ethanol sales
prices, $13 million higher product sales from transportation activities and $10
million higher revenues from terminalling operations following the acquisition
of additional terminals in August 1999, partially offset by $23 million lower
fleet management revenues following the sale of a portion of such operations in
late 1999.
Costs and operating expenses increased $351.8 million, or 54 percent, due
primarily to $323 million higher refining costs and $122 million higher travel
center/convenience store costs (including $79 million higher intra-segment
purchases from the refineries which are eliminated). The $323 million increase
in refining costs reflects $295 million from higher crude supply costs and other
related per-unit cost of sales, $18 million associated with increased volumes
sold and $11 million higher operating costs at the refineries. The $122 million
increase in travel center/convenience store costs reflects
17
<PAGE> 19
Management's Discussion and Analysis (Continued)
$73 million from higher average gasoline and diesel purchase prices, $42 million
primarily from increased diesel sales volumes and $12 million higher store
operating costs, slightly offset by $5 million lower merchandise costs of sales.
In addition, costs and operating expenses increased due to $11 million higher
cost of product sales from transportation activities and $11 million higher
ethanol operating costs, offset by $26 million lower fleet management operating
costs following the sale of a portion of such operations in late 1999.
Segment profit increased $27.6 million, or 79 percent, due primarily to $23
million higher refinery gross margins, $9 million higher gross profit from
travel center/convenience store merchandise sales, $7 million higher gross
profit from product transportation operations and $4 million from improved
ethanol operations. Partially offsetting these increases were $11 million and
$12 million of increased operating costs at the refineries and travel
centers/convenience stores, respectively.
COMMUNICATIONS
NETWORK'S revenues increased $49.6 million, or 51 percent, due primarily to
$49 million from growth in voice and data services provided to customers and $12
million higher network design, operational support and other revenues, partially
offset by $8 million lower revenues from dark fiber leases accounted for as
sales-type leases on the new fiber-optic network.
Costs and operating expenses increased $96.1 million, or 108 percent, due
primarily to $46 million higher off-net capacity and local access connection
costs associated with providing increased customer services, $18 million higher
depreciation expense as portions of the new network are placed into service, $15
million higher operating and maintenance expenses to support the increased
revenues and future revenue streams and $13 million higher network lease expense
for the leased portion of the network.
Selling, general and administrative expenses increased $20.3 million, or 62
percent, due primarily to costs associated with adding resources and
infrastructure required to increase and serve a growing customer base as more of
the network is installed and lit.
Segment profit increased $186.7 million, from a $25.7 million segment loss
in 1999 to a $161 million segment profit in 2000. This increase is due primarily
to a $214.7 million gain from the conversion of Williams' shares of Concentric
Network Corporation's common stock into shares of NEXTLINK Communications,
Inc.'s common stock pursuant to a merger of those companies in June 2000 and
gains totaling $36.6 million from the sales of certain marketable equity
securities (see Note 3). Partially offsetting these increases were losses
associated with providing customer services off-net prior to completion of the
new network, $31 million higher depreciation and network lease expense and $20.3
million higher selling, general and administrative expenses.
BROADBAND MEDIA'S revenues decreased $2 million, or 5 percent, and segment
loss increased $4.4 million, or 104 percent, due primarily to $3 million of
equity investment losses.
SOLUTIONS' revenues decreased $20.1 million, or 6 percent, due primarily to
$30 million lower revenues from new systems sales and upgrades, partially offset
by $7 million higher maintenance and customer service orders. Solutions' revenue
recognition policy for new system sales and upgrades was changed from the
percentage-of-completion method to the completed-contract method effective
January 1, 2000 (see Note 6). If second-quarter 1999 were determined using the
completed-contract method, the decrease in revenues would have been $18.9
million, or 5 percent.
Selling, general and administrative expenses increased $8.3 million, or 8
percent, due primarily to a $12 million increase in the provision for
uncollectible trade receivables reflecting increased aging of accounts due to
significant historical billing and collection issues, partially offset by $3
million of expense in 1999 associated with a Williams-wide incentive program.
Segment loss increased $26.1 million, to $34.7 million in 2000 from $8.6
million in 1999, due primarily to lower revenues and a higher provision for
uncollectible trade receivables. If second-quarter 1999 were determined using
the completed-contract method, the increase in segment loss would have been $26
million.
STRATEGIC INVESTMENTS' revenues decreased $10 million due primarily to the
$12 million effect of the July 1999 sale of the audio and video conferencing and
closed-circuit video broadcasting businesses, partially offset by $3 million
lower equity investment losses following the first-quarter 2000 sale of a
portion of the investment in ATL-Algar Telecom Leste S.A. (ATL).
Costs and operating expenses decreased $10.6 million and selling, general
and administrative expenses decreased $7 million due primarily to the sale of
the audio and video conferencing and closed-circuit video broadcasting
businesses.
Segment loss decreased $34.1 million, or 91 percent, due primarily to $26.7
million of asset impairment charges and exit costs in 1999 (included in other
expense-net within segment costs and expenses) relating to management's decision
and commitment to sell the audio and video conferencing and closed-circuit video
broadcasting businesses (see Note 4), a $6 million effect of businesses that
were generating losses that have been sold or otherwise exited and $3 million
lower equity investment losses.
18
<PAGE> 20
Management's Discussion and Analysis (Continued)
OTHER
OTHER revenues increased $9.6 million, or 41 percent, and segment profit
improved $10.1 million, from a $5 million segment loss in 1999 to a $5.1 million
segment profit in 2000. These improvements were due primarily to $7 million
lower international equity investment losses reflecting the change in accounting
for an equity investment to a cost basis investment following a reduction of
management influence.
CONSOLIDATED
INTEREST ACCRUED increased $82 million, or 61 percent, due primarily to the
$37 million effect of higher borrowing levels combined with the $44 million
effect of higher average interest rates. These increases reflect the issuance of
$2 billion of high-yield public debt in October 1999 by Communications. Interest
capitalized increased $33.5 million, from $17.5 million in 1999 to $51 million
in 2000, due primarily to increased capital expenditures for the fiber-optic
network. Investing income increased $274.8 million, from $5.6 million in 1999 to
$280.4 million in 2000, due primarily to $251.3 million of gains from
sales/conversion of investments previously discussed within Communications'
segment profit and $19 million higher interest income associated primarily with
the investment of proceeds from Communications' equity and debt offerings.
The provision for income taxes increased $187.8 million, from $49.5 million
in 1999 to $237.3 million in 2000, due to higher pre-tax income, partially
offset by a lower effective income tax rate. The effective income tax rate in
2000 exceeds the federal statutory rate due primarily to the effects of state
income taxes. The effective income tax rate in 1999 is significantly higher than
the federal statutory rate due primarily to the impact of goodwill not
deductible for tax purposes related to assets impaired during the second quarter
of 1999 (see Note 4) and the effects of state income taxes.
Six Months Ended June 30, 2000 vs. Six Months Ended June 30, 1999
CONSOLIDATED OVERVIEW
Williams' revenues increased $1.35 billion, or 34 percent, due primarily to
higher Energy Services' revenues from increased petroleum products and natural
gas liquids average sales prices and volumes and higher electric power services
revenues. Revenues also increased due to additional rate refund liability
reductions at Gas Pipeline and growth in Communications' data and voice
services. Partially offsetting these increases were lower retail natural gas,
electric and propane revenues following the 1999 sale of these businesses and
lower Communications' dark fiber lease revenues.
Segment costs and expenses increased $1.01 billion, or 29 percent, due
primarily to higher costs related to increased petroleum products and natural
gas liquids average purchase prices and volumes, higher costs and expenses from
growth of Communications' Network operations and infrastructure, higher variable
compensation levels associated with improved performance at Energy Services and
a $25.9 million guarantee loss accrual at Energy Services. Partially offsetting
these increases were lower retail natural gas, electric and propane costs
following the sale of these businesses in 1999, lower construction costs
associated with Communications' dark fiber leases and the effect in 1999 of
$26.7 million of asset impairment charges and exit costs at Communications.
Operating income increased $331 million, or 81 percent, due primarily to a
$386 million increase at Energy Services and a $50 million increase at Gas
Pipeline, partially offset by $131 million higher losses at Communications.
Energy Services' increase reflects improved electric power services margins and
higher per-unit natural gas liquids margins, partially offset by higher variable
compensation levels, the $25.9 million guarantee loss accrual and a $29 million
lower contribution from retail natural gas, electric and propane following the
sale of these businesses in 1999. Gas Pipeline's increase reflects increased
reductions to rate refund liabilities in 2000. The increased losses at
Communications reflect losses associated with providing customer services prior
to completion of the new network, higher depreciation and network lease expense
as the network is brought into service and higher selling, general and
administrative expenses, including costs associated with infrastructure growth
and improvement, partially offset by the effect in 1999 of $26.7 million of
asset impairment and exit costs.
Income before income taxes and cumulative effect of change in accounting
principle increased $617 million, from $168 million in 1999 to $785 million in
2000, due primarily to $331 million higher operating income and $369 million
higher investing income. The increase in investing income reflects a $214.7
million gain from the conversion of Williams' shares of Concentric Network
Corporation's common stock into shares of NEXTLINK Communications, Inc.'s common
stock pursuant to a merger of those companies in June 2000, gains totaling $68.1
million from the sale of certain marketable equity securities, a $16.5 million
gain on the sale of a portion of the investment in ATL and higher interest
income. Partially offsetting was $105 million higher net interest expense
reflecting increased debt in support of continued expansion and new projects.
19
<PAGE> 21
Management's Discussion and Analysis (Continued)
GAS PIPELINE
GAS PIPELINE'S revenues increased $81.9 million, or 9 percent, due
primarily to $71 million of rate refund liability reductions associated mainly
with the evaluation of a favorable FERC order received in March 2000 by
Transcontinental Gas Pipe Line related to the rate-of-return and capital
structure issues in a regulatory proceeding. Revenues also increased due to $33
million higher gas exchange imbalance settlements (offset in costs and operating
expenses), $15 million higher transportation demand revenues and $12 million
higher equity investment earnings from pipeline joint venture projects.
Partially offsetting these increases was a total of $41 million of reductions to
rate refund liabilities in 1999 by three of the gas pipelines resulting
primarily from second-quarter 1999 regulatory proceedings involving
rate-of-return methodology.
Segment profit increased $50.3 million, or 14 percent, due primarily to the
$30 million net effect of rate refund liability reductions discussed above, $15
million higher transportation demand revenues, $12 million higher equity
investment earnings and lower professional services costs associated with year
2000 compliance work. Partially offsetting were $6 million of accruals for gas
exchange imbalances and $4 million of costs associated with consolidating the
office headquarters of two of the pipelines.
Based on current rate structures and/or historical maintenance schedules of
certain of its pipelines, Gas Pipeline generally experiences lower segment
profits in the second and third quarters as compared to the first and fourth
quarters.
ENERGY SERVICES
ENERGY MARKETING & TRADING'S revenues increased $841.1 million, or 115
percent, due to a $385.8 million increase in trading revenues and a $455.3
million increase in non-trading revenues. The $385.8 million increase in trading
revenues is due primarily to $408 million higher electric power services margins
reflecting higher contract origination revenues, favorable changes in forward
power market prices, increased power trading volumes and $49 million from
increased demand and market prices for certain ancillary services in the western
region. Slightly offsetting these increases were $9 million lower natural gas
services trading margins, $7 million lower crude oil and refined products
trading margins and $7 million lower natural gas liquids trading margins.
The $455.3 million increase in non-trading revenues is due primarily to
$566 million higher refined products marketing revenues and $39 million higher
natural gas liquids revenues resulting from higher average sales prices and
increased volumes. Recent expansions of the Memphis refinery were a significant
contributor to the increased refined products marketing volumes. Partially
offsetting these increases were $151 million lower revenues following the sale
of the retail natural gas, electric and propane businesses in 1999.
Costs and operating expenses increased $492.2 million, or 82 percent, due
primarily to $573 million higher refined products cost of sales associated with
non-trading activities and $31 million higher natural gas liquids cost of sales.
Partially offsetting these increases were lower natural gas, electric and
propane cost of sales and operating expenses of $77 million and $45 million,
respectively. These variances result from the corresponding changes in
non-trading revenues discussed above.
Other expense-net in 2000 includes a $25.9 million guarantee loss accrual
(see Note 4) and a $12.4 million gain on the sale of certain natural gas liquids
contracts. Other expense-net in 1999 includes a $5.6 million gain on the sale of
certain retail gas and electric assets.
Segment profit increased $287.8 million, from $55.2 million in 1999 to $343
million in 2000, due primarily to $408 million higher electric power services
margins and the $12.4 million gain on the sale of certain natural gas liquids
contracts. Partially offsetting these increases were $43 million higher selling,
general and administrative costs reflecting higher variable compensation levels
associated with the improved operating performance, a $29 million lower
contribution from retail natural gas, electric and propane following the sale of
the businesses in 1999, the $25.9 million guarantee loss accrual, $9 million
lower natural gas services margins and $13 million lower crude and refined
products margins.
At the July 2000 meeting, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-17, "Measuring the Fair Value of Energy-Related
Contracts in Applying EITF Issue No. 98-10, `Accounting for Contracts Involved
in Energy Trading and Risk Management Activities.'" This Issue addresses how the
fair value for energy-related contracts and any related energy purchase and
sales contracts should be measured. This Issue is effective immediately upon
issuance on a prospective basis and may initially have a material favorable
impact to Energy Marketing & Trading's results of operations and financial
position during third-quarter 2000. The actual impact of this Issue is being
determined.
EXPLORATION & PRODUCTION'S revenues increased $57 million, or 81 percent,
due primarily to $42 million from increased average natural gas sales prices, an
$8 million contribution in first-quarter 2000 from oil and gas properties
acquired in April 1999, and $10 million associated with increases in both
company-owned production volumes and marketing volumes from the Royalty Trust
and royalty interest owners. Partially offsetting was a $6 million decrease in
the recognition of income previously deferred from a 1997 transaction which
transferred certain nonoperating economic benefits to a third party.
20
<PAGE> 22
Management's Discussion and Analysis (Continued)
Segment profit increased $9.7 million, or 82 percent, due primarily to $22
million higher profits from company-owned production and a $6 million
contribution in first-quarter 2000 from the April 1999 acquisition. Partially
offsetting were $8 million lower margins from the marketing of natural gas, $6
million decreased recognition of deferred income and $4 million higher
production-related taxes.
MIDSTREAM GAS & LIQUIDS' revenues increased $196.2 million, or 43 percent,
due primarily to $161 million higher natural gas liquids sales from processing
activities. The liquids sales increase reflects $109 million from an 84 percent
increase in average natural gas liquids sales prices and $52 million from a 66
percent increase in volumes sold. The increase in natural gas liquids sales
volumes is a result of improved liquids market conditions and the contribution
of a new plant which became operational in June 1999. In addition, revenues
increased due to $20 million higher natural gas liquids pipeline transportation
revenues associated with increased shipments, $8 million improved equity
investment earnings mainly from the Discovery pipeline project and $6 million
higher processing revenues. The increased natural gas liquids pipeline shipments
reflect improved market conditions and the completion of the Rocky Mountain
liquids pipeline expansion in November 1999.
Costs and operating expenses increased $124.5 million, or 41 percent, due
primarily to $75 million higher liquids fuel and replacement gas purchases, $12
million of losses associated with certain propane storage transactions and
higher transportation, depreciation and power costs.
General and administrative expenses increased $18.7 million, or 39 percent,
due primarily to $12 million of reorganization costs, $2 million higher legal
expenses and $3 million higher incentive compensation expense. Midstream is
completing the reorganization of its operations including the consolidation in
Tulsa of certain support functions previously located in Salt Lake City and
Houston. In connection with this, Williams offered certain employees enhanced
retirement benefits under an early retirement incentive program in first-quarter
2000, and incurred severance, relocation and other exit costs. Midstream expects
one-year cost savings to exceed these charges.
Segment profit increased $56.2 million, or 56 percent, due primarily to $68
million from higher per-unit natural gas liquids margins, $7 million from
increased natural gas liquids volumes sold and $8 million improved equity
investment earnings. Partially offsetting were $12 million of propane storage
losses and $18.7 million higher general and administrative expenses.
PETROLEUM SERVICES' revenues increased $823.6 million, or 66 percent, due
primarily to $715 million higher refinery revenues (including $176 million
higher intra-segment sales to the travel centers/convenience stores which are
eliminated) and $256 million higher travel center/convenience store sales. The
$715 million increase in refinery revenues reflects $648 million from 95 percent
higher average refined product sales prices and $66 million from an 11 percent
increase in refined product volumes sold. The increase in refined product
volumes sold follows refinery expansions and improvements in mid-to-late 1999
which increased capacity. The $256 million increase in travel center/convenience
store sales reflects $156 million from 40 percent higher average gasoline and
diesel sales prices, $88 million primarily from an 80 percent increase in diesel
sales volumes and $12 million higher merchandise sales. The increases in diesel
sales volumes and merchandise sales reflect the opening of 13 new travel centers
since second-quarter 1999. Additional travel centers are planned to open in
2000. Revenues also increased due to $35 million higher ethanol sales reflecting
both an increase in ethanol volumes sold and average ethanol sales prices, $18
million higher revenues from terminalling operations following the acquisition
of additional terminals in August 1999, $19 million higher product sales from
transportation activities and $12 million higher revenues from a petrochemical
plant acquired in March 1999. Slightly offsetting these increases were $36
million lower fleet management revenues following the sale of a portion of such
operations in late 1999, $12 million lower pipeline construction revenues
following substantial completion of the project and $6 million lower
distribution revenues due to a reduction of the propane trucking operations.
Costs and operating expenses increased $782.3 million, or 69 percent, due
primarily to $704 million higher refining costs and $262 million higher travel
center/convenience store costs (including $176 million higher intra-segment
purchases from the refineries which are eliminated). The $704 million increase
in refining costs reflects $630 million from higher crude supply costs and other
related per-unit cost of sales, $54 million associated with increased volumes
sold and $20 million higher operating costs at the refineries. The $262 million
increase in travel center/convenience store costs includes $161 million from
higher average gasoline and diesel purchase prices, $82 million primarily from
increased diesel sales volumes and $20 million higher store operating costs. In
addition, costs and operating expenses increased due to $25 million higher
ethanol operating costs, $15 million higher cost of product sales from
transportation activities and $12 million higher terminalling costs following
the August 1999 acquisition of additional terminals. Slightly offsetting these
increases were $40 million lower fleet management operating costs following the
sale of a portion of such operations in late 1999, $11 million lower pipeline
construction costs following substantial completion of the pipeline project and
$10 million lower costs of distribution activities following a reduction of the
propane trucking operations.
21
<PAGE> 23
Management's Discussion and Analysis (Continued)
Segment profit increased $29.4 million, or 42 percent, due primarily to $18
million from higher per-unit refinery margins, $13 million from increased
refined product volumes sold and $13 million higher gross profit from travel
center/convenience store merchandise sales. In addition, segment profit
increased due to $9 million higher gross profit from product transportation
operations, $9 million from improved ethanol operations, $6 million from
activities at the petrochemical plant acquired in March 1999 and $6 million from
increased terminalling activities following the 1999 acquisition. Partially
offsetting these increases were $20 million higher operating costs at the
refineries, $20 million higher operating costs at the travel centers/convenience
stores, $6 million higher selling, general and administrative expenses and the
$4 million favorable effect in 1999 of the recovery of environmental costs
previously expensed.
COMMUNICATIONS
NETWORK'S revenues increased $60.1 million, or 28 percent, due primarily to
$95 million from growth in voice and data services provided to customers and $10
million higher network design, operational support and other revenues, partially
offset by $39 million lower revenues from dark fiber leases accounted for as
sales-type leases on the new fiber-optic network and $8 million lower revenue
from an Australian telecommunications operation. A second-quarter 2000 decision
by the Federal Communications Commission allowing SBC Communications, Inc. to
sell long-distance service in Texas will contribute to the expected future
revenue growth.
Costs and operating expenses increased $154.4 million, or 74 percent, due
primarily to $88 million higher off-net capacity and local access connection
costs associated with providing increased customer services, $34 million higher
depreciation expense as portions of the new network are placed into service, $35
million higher operating and maintenance expenses to support the increased
revenues and future revenue streams, $25 million higher network lease expense
for the leased portion of the network and $7 million higher ad valorem tax
accruals. Partially offsetting these increases were $30 million lower
construction costs associated with dark fiber leases accounted for as sales-type
leases.
Selling, general and administrative expenses increased $40 million, or 72
percent, due primarily to costs associated with adding resources and
infrastructure required to increase and serve a growing customer base as more of
the network is installed and lit.
Segment profit increased $150.9 million, from a $48.2 million segment loss
in 1999 to a $102.7 million segment profit in 2000. This increase is due
primarily to a $214.7 million gain from the conversion of Williams' shares of
Concentric Network Corporation's common stock into shares of NEXTLINK
Communications, Inc.'s common stock pursuant to a merger of those companies in
June 2000 and gains totaling $68.1 million from the sales of certain marketable
equity securities (see Note 3). Partially offsetting these increases were losses
associated with providing customer services off-net prior to completion of the
new network, $59 million higher depreciation and network lease expense and $40
million higher selling, general and administrative expenses.
BROADBAND MEDIA'S revenues decreased $1.2 million, or 1 percent, and
segment loss increased $4.7 million, or 48 percent, due primarily to $3.5
million of equity investment losses.
SOLUTIONS' revenues increased $12.6 million, or 2 percent, due primarily to
$16 million higher maintenance and customer service orders and $11 million
higher other revenues, partially offset by $14 million lower new systems sales
and upgrades. Solutions' revenue recognition policy for new system sales and
upgrades was changed from the percentage-of-completion method to the
completed-contract method effective January 1, 2000 (see Note 6). If the six
months ended June 30, 1999, were determined using the completed-contract method,
the increase in revenues would have been $42.4 million, or 6 percent.
Costs and operating expenses increased $36.2 million, or 7 percent. This
increase exceeds the related revenue increase discussed above due primarily to
increased installation and service costs and competitive pressures. If the six
months ended June 30, 1999, were determined using the completed-contract method,
the increase in costs and operating expenses would have been $57.8 million, or
12 percent.
Selling, general and administrative expenses increased $15.7 million, or 8
percent, due primarily to a $9 million increase in the provision for
uncollectible trade receivables reflecting increased aging of accounts due to
significant historical billing and collection issues and $6 million higher
depreciation and amortization primarily attributable to systems implemented in
third-quarter 1999.
Segment loss increased $39.1 million, to $56.8 million in 2000 from $17.7
million in 1999, due primarily to lower margins and higher selling, general and
administrative expenses. If the six months ended June 30, 1999, were determined
using the completed-contract method, the increase in segment loss would have
been $30.9 million.
STRATEGIC INVESTMENTS' revenues decreased $19.7 million due primarily to
the $28 million effect of the July 1999 sale of the audio and video conferencing
and closed-circuit video broadcasting businesses, partially offset by $8 million
lower equity investment losses following the first quarter 2000 sale of a
portion of the investment in ATL.
22
<PAGE> 24
Management's Discussion and Analysis (Continued)
Costs and operating expenses decreased $22 million and selling, general and
administrative expenses decreased $15.3 million due primarily to the sale of the
audio and video conferencing and closed-circuit video broadcasting businesses.
Segment profit increased $64.5 million, to $12.7 million in 2000 from a
$51.8 million segment loss in 1999, due primarily to $26.7 million of asset
impairment charges and exit costs in 1999 (included in other expense-net within
segment costs and expenses) relating to management's decision and commitment to
sell the audio and video conferencing and closed-circuit video broadcasting
businesses (see Note 4), a $16.5 million gain on the sale of a portion of the
investment in ATL in first-quarter 2000 (see Note 3), a $12 million effect of
businesses that were generating losses that have been sold or otherwise exited,
$8 million lower equity investment losses and $3.7 million of dividends from a
telecommunications investment.
OTHER
OTHER revenues increased $36.8 million, from $30 million in 1999, and
segment profit improved $33.3 million, from a $22 million segment loss in 1999
to an $11.3 million segment profit in 2000. These improvements were due
primarily to $11 million higher Venezuelan gas compression revenues and $25
million lower international equity investment losses. The $11 million higher
Venezuelan gas compression revenues reflect higher volumes in 2000 following
operational problems experienced in first-quarter 1999. The $25 million lower
international equity investment losses reflect the change in accounting for an
equity investment to a cost basis investment following a reduction of management
influence. In addition, the lower international equity investment losses reflect
the consolidation of a partially-owned subsidiary previously accounted for as an
equity investment following additional investments in the subsidiary.
CONSOLIDATED
INTEREST ACCRUED increased $166.8 million, or 60 percent, due primarily to
the $85 million effect of higher borrowing levels combined with the $76 million
effect of higher average interest rates. These increases reflect the issuance of
$2 billion of high-yield public debt in October 1999 by Communications. Interest
capitalized increased $61.7 million, from $26.9 million in 1999 to $88.6 million
in 2000, due primarily to increased capital expenditures for the fiber-optic
network. Investing income increased $368.6 million, from $12.3 million in 1999
to $380.9 million in 2000, due primarily to $303 million of gains from
sales/conversion of investments and dividends previously discussed within
Communications' segment profit and $54 million higher interest income associated
primarily with the investment of proceeds from Communications' equity and debt
offerings. Minority interest in (income) loss and preferred returns of
consolidated subsidiaries is $17 million favorable to 1999 due primarily to the
effect of the 14.7 percent minority ownership interest in Communications
following the October 1999 initial public offering and higher losses experienced
by Williams Communications Solutions, LLC which has a 30 percent interest held
by a minority shareholder.
The provision for income taxes increased $220.5 million, from $91 million
in 1999 to $311.5 million in 2000, due to higher pre-tax income, partially
offset by a lower effective income tax rate. The effective income tax rate in
2000 exceeds the federal statutory rate due primarily to the effects of state
income taxes, partially offset by the tax benefit of permanent basis differences
on certain assets sold during the first quarter. The effective income tax rate
in 1999 is significantly higher than the federal statutory rate due primarily to
the impact of goodwill not deductible for tax purposes related to assets
impaired during the second quarter of 1999 (see Note 4) and the effects of
state income taxes.
The $21.6 million cumulative effect of change in accounting principle in
2000 relates to Solutions' change in revenue recognition policy from the
percentage-of-completion method to the completed-contract method (see Note 6).
The $5.6 million cumulative effect of change in accounting principle in 1999
relates to the adoption of Statement of Position 98-5, "Reporting on the Costs
of Start-Up Activities" (see Note 6).
Financial Condition and Liquidity
Liquidity
Williams considers its liquidity to come from both internal and external
sources. Certain of those sources are available to Williams (parent) and certain
of its subsidiaries while others can only be utilized by Communications.
Williams' unrestricted sources of liquidity, which can be utilized without
limitation under existing loan covenants, consist primarily of the following:
o Available cash-equivalent investments of $18 million at June 30, 2000, as
compared to $494 million at December 31, 1999.
o $500 million available under Williams' $1 billion bank-credit facility at
June 30, 2000, as compared to $475 million at December 31, 1999. Subsequent
to June 30, 2000, Williams' $1 billion bank-credit facility was terminated
and replaced with a $700 million bank-credit facility.
23
<PAGE> 25
Management's Discussion and Analysis (Continued)
o $213 million available under Williams' $1.4 billion commercial paper program
at June 30, 2000, as compared to $154 million at December 31, 1999.
Subsequent to June 30, 2000, the commercial paper program was increased to
$1.7 billion.
o Cash generated from operations.
o Short-term uncommitted bank lines can also be used in managing liquidity.
Williams' sources of liquidity restricted to use by Communications consist
primarily of the following:
o Available cash-equivalent investments and short-term investments totaling
$304 million at June 30, 2000, as compared to $1.9 billion at December 31,
1999.
o Communications' $1.05 billion bank-credit facility under which no borrowings
were outstanding at June 30, 2000, or December 31, 1999.
o Marketable equity securities with a market value of approximately $574
million as of June 30, 2000, some of which may be disposed of from time to
time.
In June 2000, Williams filed a $1.5 billion shelf registration statement
with the Securities and Exchange Commission to issue a variety of debt or equity
securities. This registration statement became effective in July 2000. In
addition, there are other outstanding registration statements filed with the
Securities and Exchange Commission for Williams and Northwest Pipeline, Texas
Gas Transmission and Transcontinental Gas Pipe Line (each a wholly-owned
subsidiary of Williams) with approximately $755 million of shelf availability
remaining which may be used to issue a variety of debt or equity securities.
Interest rates and market conditions will affect amounts borrowed, if any, under
these arrangements. Williams believes additional financing arrangements, if
required, can be obtained on reasonable terms.
In August 2000, Communications issued approximately $1 billion of senior
redeemable notes in a private placement. The senior redeemable notes consist of
$575 million of 11.7 percent notes due 2008 and $425 million of 11.875 percent
notes due 2010. Communications' ability to borrow under its bank credit facility
is dependent upon compliance with specified covenants and conditions. Although
the facility provides for a total commitment of $1.05 billion, based on
Communications' ratio of debt to contributed capital after giving effect to the
private placement, only $219 million could be borrowed under the bank-credit
facility without issuing additional equity or amending the facility.
In 2000, capital expenditures and investments are estimated to total
approximately $5.8 billion, including approximately $3 billion at
Communications. Williams expects to fund capital and investment expenditures,
debt payments and working-capital requirements through (1) cash generated from
operations, (2) the use of the available portion of Williams' bank-credit
facility, (3) commercial paper, (4) short-term uncommitted bank lines, (5)
private borrowings and/or (6) debt or equity public offerings. In addition,
Communications' capital and investment expenditures, debt payments and
working-capital requirements are also expected to be funded with (1) the
remaining proceeds from its 1999 initial equity and high-yield debt offerings,
(2) its $1.05 billion bank-credit facility, (3) private borrowings and/or (4)
debt or equity public offerings.
Financing Activities
In January 2000, Williams issued $500 million of adjustable rate notes due
2001 at an initial interest rate of approximately 6.5 percent. Proceeds were
used for general corporate purposes, including the repayment of outstanding
debt.
In April 2000, Williams entered into a $400 million three-year term
bank-credit facility and at June 30, 2000, has borrowed $400 million under the
facility. The proceeds were used for general corporate purposes, including the
repayment of outstanding debt.
The long-term debt to debt-plus-equity ratio was 60.9 percent at June 30,
2000, compared to 62.3 percent at December 31, 1999. 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 at June 30, 2000, and 65.9 percent at December 31,
1999.
Investing Activities
The increase in capital expenditures in 2000 as compared to 1999 is mainly
associated with the construction of Communications' fiber-optic network.
In June 2000, Williams purchased a liquified natural gas facility for $148
million in cash.
During 2000, Communications sold portions of its investments in certain
marketable equity securities for approximately $81 million in cash and a portion
of its investment in ATL for approximately $168 million in cash. Communications
subsequently advanced $150 million to ATL (see Note 3). In addition,
Communications made approximately $96 million of investments in and advances to
various communications businesses in 2000.
Subsequent to June 30, 2000, Williams entered into several agreements to
purchase various energy-related assets including a natural gas liquids (NGL)
extraction plant and other NGL assets in Canada, an NGL pipeline in the United
States and Canada and refined petroleum product terminals in the northeastern
United States. Williams estimates the aggregate purchase price pursuant to these
agreements to be no more than $800 million, which is included in the $5.8
billion estimated 2000 capital expenditures and investments discussed above. All
agreements are expected to close by the end of 2000.
24
<PAGE> 26
Management's Discussion and Analysis (Continued)
Other
In July 2000, the board of directors of Williams authorized management to
pursue a course of action that, if successful and approved by the board, would
lead to a greater or complete separation of Williams' energy and communications
businesses. Williams has received a favorable Internal Revenue Service ruling on
the proposed tax free spin-off of the communications business to Williams'
shareholders. The specific course of action has not been determined, but is
envisioned to occur within the next 18 months. Certain debt agreements include
covenants or other restrictions that would require amendment or waivers from
lenders before such an action could be completed.
25
<PAGE> 27
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
INTEREST RATE RISK
William's interest rate risk exposure associated with its short-term
investments has been reduced since December 31, 1999 as a result of the decrease
in short-term investments from approximately $1.4 billion at December 31, 1999
to approximately $33 million at June 30, 2000. However, subsequent to June 30,
2000, Williams' communications business, WCG, received net proceeds from the
sale of notes in a private placement of $1 billion which was invested primarily
in short-term debt securities.
Interest rate risk exposure, as it relates to the debt portfolio, was
impacted by new debt issuances. During first-quarter 2000, Williams issued $500
million in adjustable rate debt due in 2001 at an initial rate of approximately
6.5 percent. Proceeds were used to repay $100 million of variable rate debt and
$300 million of 5.95 percent fixed rate debt. During second-quarter 2000,
Williams entered into a $400 million three-year term bank loan agreement.
Interest rates vary and are based on LIBOR plus one percent. A total of $400
million was borrowed under this facility at weighted average rate of 7.7
percent. Subsequent to June 30, 2000, Williams' communications business, WCG,
issued $1 billion in debt obligations consisting of $575 million in 11.7 percent
notes due 2008 and $425 million in 11.875 percent notes due 2010.
FOREIGN CURRENCY RISK
In first-quarter 2000, Williams advanced approximately $150 million to ATL,
denominated in Brazilian reals, which subjects Williams to foreign currency
fluctuations. The value of the advance is $143.7 million based on the current
exchange rate of the Brazilian real to the U.S. dollar at June 30, 2000.
Management has historically not utilized derivatives or other financial
instruments to hedge the risk associated with the movement in foreign
currencies. However, management continually monitors fluctuations in these
currencies and will consider the use of derivative financial instruments or
employment of other investment alternatives if cash flows or investment returns
so warrant.
EQUITY PRICE RISK
Equity price risk primarily arises from investments in publicly traded
telecommunications-related companies. These investments are carried at fair
value and approximate two percent and one percent of Williams total assets at
June 30, 2000 and December 31, 1999, respectively. These investments have the
potential to impact Williams' financial position due to movements in the price
of these equity securities. Prior to January 1, 2000, Williams had not utilized
derivatives or other financial instruments to hedge the risk associated with the
movement in the price of these equity securities. However, during 2000, Williams
has entered into a derivative instrument which will expire in various stages
throughout the remainder of 2000 and is designed to hedge the exposure to
changes in the price of certain marketable equity securities. It is reasonably
possible that the prices of the equity securities in Williams' marketable equity
securities portfolio could experience a 30 percent increase or decrease in the
near term. Assuming a 30 percent increase or decrease in prices, the value of
Williams' marketable equity securities portfolio at June 30, 2000, which is
included in investments in the Consolidated Balance Sheet, would increase or
decrease by approximately $175.4 million or $183.7 million, respectively.
Subsequent to June 30, 2000, Williams entered additional derivative instruments
which will expire by the fourth-quarter 2001. Taking into consideration these
additional derivative instruments, approximately 40 percent of Williams'
marketable equity securities portfolio would have been hedged at June 30, 2000.
26
<PAGE> 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 2000, All-Phase Utility Corp. amended its complaint in a matter
originally filed in June 1999 against Williams Communications, Inc. (WCI) in the
United States District Court for Oregon. In the amended complaint, All-Phase
alleges actual damages of at least $236.5 million plus punitive damages of an
additional amount equal to double the amount of actual damages. All-Phase
alleges that WCI failed to engage All-Phase to provide certain route design
services and that a portion of WCI's Eugene, Oregon to Bandon, Oregon route is
based on information developed by All-Phase. All-Phase alleges that its damages
include loss of profit from the construction it believes it would have performed
for WCI and lost revenue from leases of fiber-optic cable and conduit. WCI
intends to refute the allegations and to vigorously defend this lawsuit.
Williams does not believe that the ultimate resolution of this matter will have
a material adverse effect upon its future financial position, results of
operations or cash flows.
For more information regarding other legal proceedings, see Note 10 of Notes to
Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 18, 2000. At
the Annual Meeting, six individuals were elected as directors of the Company and
seven individuals continue to serve as directors pursuant to their prior
election. In addition, the appointment of Ernst & Young LLP as the independent
auditor of the Company for 2000 was ratified.
A tabulation of the voting at the Annual Meeting with respect to the matters
indicated is as follows:
Election of Directors
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
Janice D. Stoney 375,088,036 4,169,235
Keith E. Bailey 375,246,098 4,011,173
Hugh M. Chapman 375,341,830 3,915,441
William E. Green 375,333,542 3,923,729
W.R. Howell 375,404,638 2,852,633
James C. Lewis 373,071,592 6,185,679
</TABLE>
Ratification of Appointment of Independent Auditors
<TABLE>
<CAPTION>
For Against Abstain
----------------- ----------- ------------
<S> <C> <C>
374,553,059 3,170,330 1,533,882
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed below are filed as part of this report:
Exhibit 4.1 - Credit Agreement dated July 25, 2000, among
Williams and certain of its subsidiaries and
the banks named therein and Citibank N.A., as
agent.
Exhibit 4.2 - Credit Agreement dated July 25, 2000, among
Williams and the banks named therein and
Citibank N.A., as agent.
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule
(b) During the second quarter of 2000, the Company did not
file a Form 8-K.
27
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE WILLIAMS COMPANIES, INC.
-----------------------------
(Registrant)
/s/ Gary R. Belitz
-----------------------------
Gary R. Belitz
Controller
(Duly Authorized Officer and
Principal Accounting Officer)
August 10, 2000
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Credit Agreement dated July 25, 2000, among Williams and certain of
its subsidiaries and the banks named therein and Citibank N.A., as
agent.
4.2 Credit Agreement dated July 25, 2000, among Williams and the banks
named therein and Citibank N.A., as agent.
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
