<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 September 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
------
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
--------------------------------------------------------------------------------
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 October 31, 2000
------------------------------ --------------------------------
Common Stock, $1 par value 440,014,536 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 Nine Months
Ended September 30, 2000 and 1999 2
Consolidated Balance Sheet--September 30, 2000 and December 31, 1999 3
Consolidated Statement of Cash Flows--Nine Months
Ended September 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 6. Exhibits and Reports on Form 8-K
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges
</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>
Three months Nine months
(Dollars in millions, except per-share amounts) ended September 30, ended September 30,
--------------------------- ---------------------------
2000 1999* 2000 1999*
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Gas Pipeline $ 437.4 $ 409.5 $ 1,410.7 $ 1,300.9
Energy Services 2,532.3 1,657.4 6,959.7 4,166.9
Communications 544.7 504.6 1,608.6 1,516.7
Other 35.7 40.7 102.5 70.7
Intercompany eliminations (691.3) (405.0) (1,935.9) (910.9)
----------- ----------- ----------- -----------
Total revenues 2,858.8 2,207.2 8,145.6 6,144.3
----------- ----------- ----------- -----------
Segment costs and expenses:
Costs and operating expenses 2,170.2 1,666.9 5,929.6 4,501.3
Selling, general and administrative expenses 345.0 311.2 1,076.7 939.7
Other (income) expense-net 11.4 (6.2) 25.6 24.4
----------- ----------- ----------- -----------
Total segment costs and expenses 2,526.6 1,971.9 7,031.9 5,465.4
----------- ----------- ----------- -----------
General corporate expenses 16.0 12.7 56.3 46.2
----------- ----------- ----------- -----------
Operating income (loss):
Gas Pipeline 153.4 142.7 565.9 504.9
Energy Services 311.5 155.2 928.2 386.2
Communications (140.2) (81.7) (399.2) (209.3)
Other 7.5 19.1 18.8 (2.9)
General corporate expenses (16.0) (12.7) (56.3) (46.2)
----------- ----------- ----------- -----------
Total operating income 316.2 222.6 1,057.4 632.7
Interest accrued (263.4) (168.6) (708.1) (446.5)
Interest capitalized 66.6 10.6 155.2 37.5
Investing income 51.7 7.2 432.6 19.5
Minority interest in (income) loss and preferred returns
of consolidated subsidiaries 17.9 (2.9) 30.9 (6.9)
Other income (expense)-net (5.0) (.4) .6 (.2)
----------- ----------- ----------- -----------
Income before provision for income taxes and cumulative
effect of change in accounting principle 184.0 68.5 968.6 236.1
Provision for income taxes 62.9 40.4 374.4 131.4
----------- ----------- ----------- -----------
Income before cumulative effect of change in accounting principle 121.1 28.1 594.2 104.7
Cumulative effect of change in accounting principle -- -- (21.6) (5.6)
----------- ----------- ----------- -----------
Net income 121.1 28.1 572.6 99.1
Preferred stock dividends -- .3 -- 2.8
----------- ----------- ----------- -----------
Income applicable to common stock $ 121.1 $ 27.8 $ 572.6 $ 96.3
=========== =========== =========== ===========
Basic earnings per common share:
Income before cumulative effect of change in accounting principle $ .27 $ .06 $ 1.34 $ .23
Cumulative effect of change in accounting principle -- -- (.05) (.01)
----------- ----------- ----------- -----------
Net income $ .27 $ .06 $ 1.29 $ .22
=========== =========== =========== ===========
Average shares (thousands) 445,066 436,546 443,914 434,579
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle $ .27 $ .06 $ 1.33 $ .23
Cumulative effect of change in accounting principle -- -- (.05) (.01)
----------- ----------- ----------- -----------
Net income $ .27 $ .06 $ 1.28 $ .22
=========== =========== =========== ===========
Average shares (thousands) 450,294 442,244 449,010 440,347
Cash dividends per common share $ .15 $ .15 $ .45 $ .45
</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) September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,027.5 $ 1,092.0
Short-term investments 921.0 1,434.8
Receivables less allowance of $80.8 ($48.0 in 1999) 3,024.5 2,508.2
Inventories 943.7 631.5
Energy trading assets 2,232.4 376.0
Deferred income taxes 259.7 203.7
Other 459.4 270.4
------------ ------------
Total current assets 8,868.2 6,516.6
Investments 2,833.1 1,965.4
Property, plant and equipment, at cost 23,032.7 19,249.8
Less accumulated depreciation and depletion (4,771.2) (4,094.3)
------------ ------------
18,261.5 15,155.5
Goodwill and other intangible assets--net 393.9 435.6
Energy trading assets 826.6 200.9
Other assets and deferred charges 1,045.0 1,014.5
------------ ------------
Total assets $ 32,228.3 $ 25,288.5
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,374.0 $ 1,378.8
Accounts payable 2,705.4 2,049.9
Accrued liabilities 1,994.6 1,835.2
Energy trading liabilities 1,825.9 312.3
Long-term debt due within one year 1,094.6 196.0
------------ ------------
Total current liabilities 9,994.5 5,772.2
Long-term debt 10,013.7 9,235.3
Deferred income taxes 2,965.8 2,581.9
Energy trading liabilities 492.3 136.8
Other liabilities and deferred income 1,290.1 905.0
Minority interest in consolidated subsidiaries 514.7 561.5
Contingent liabilities and commitments
Preferred ownership interests of subsidiaries:
Preferred interests of subsidiaries 575.6 335.1
Williams obligated mandatorily redeemable preferred securities of
Trust holding only Williams indentures 186.2 175.5
Stockholders' equity:
Common stock, $1 par value, 960 million shares authorized, 447.5 million
issued in 2000, 444.5 million issued in 1999 447.5 444.5
Capital in excess of par value 2,460.5 2,356.7
Retained earnings 3,180.7 2,807.2
Accumulated other comprehensive income 238.6 99.5
Other (89.0) (77.6)
------------ ------------
6,238.3 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 6,195.4 5,585.2
------------ ------------
Total liabilities and stockholders' equity $ 32,228.3 $ 25,288.5
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
The Williams Companies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Millions) Nine months ended September 30,
2000 1999*
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 572.6 $ 99.1
Adjustments to reconcile to cash provided from operations:
Cumulative effect of change in accounting principle 21.6 5.6
Depreciation, depletion and amortization 631.5 545.1
Provision for deferred income taxes 216.2 413.7
Provision for loss on property and other assets 36.4 7.3
(Gain) loss on dispositions of assets (141.3) 20.5
Gain on conversion of common stock investment (214.7) --
Provision for uncollectible accounts 31.0 19.1
Minority interest in income (loss) and preferred returns of
consolidated subsidiaries (30.9) 6.9
Tax benefit of stock-based awards 22.4 74.3
Cash provided (used) by changes in assets and liabilities:
Receivables (532.4) (725.2)
Inventories (311.2) (166.4)
Other current assets (116.6) (69.4)
Accounts payable 677.8 577.0
Accrued liabilities 5.7 (128.3)
Changes in current energy trading assets and liabilities (342.8) (20.6)
Changes in non-current energy trading assets and liabilities (291.2) (23.9)
Changes in non-current deferred income 250.1 131.3
Other, including changes in non-current assets and liabilities 28.3 10.1
------------ ------------
Net cash provided by operating activities 512.5 776.2
------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable 1,164.2 2,338.0
Payments of notes payable (150.6) (1,418.0)
Proceeds from long-term debt 2,533.3 2,195.7
Payments of long-term debt (843.5) (1,327.0)
Proceeds from issuance of common stock 65.4 58.6
Dividends paid (199.1) (198.4)
Proceeds from issuance of preferred ownership interests of subsidiary 240.5 --
Other--net (27.8) (5.4)
------------ ------------
Net cash provided by financing activities 2,782.4 1,643.5
------------ ------------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (3,739.2) (2,071.2)
Proceeds from dispositions and excess fiber capacity transactions 46.8 62.7
Changes in accounts payable and accrued liabilities 112.2 (63.5)
Acquisitions of businesses, net of cash acquired (147.8) (162.9)
Proceeds from sales of short-term investments 1,654.4 --
Purchases of short-term investments (1,140.6) --
Proceeds from sales of investments and other assets 274.7 59.4
Purchases of investments/advances to affiliates (426.7) (458.4)
Other--net 6.8 (1.2)
------------ ------------
Net cash used by investing activities (3,359.4) (2,635.1)
------------ ------------
Decrease in cash and cash equivalents (64.5) (215.4)
Cash and cash equivalents at beginning of period 1,092.0 503.3
------------ ------------
Cash and cash equivalents at end of period $ 1,027.5 $ 287.9
============ ============
</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 September 30, 2000, its results of operations for the
three and nine months ended September 30, 2000 and 1999, and cash flows for the
nine months ended September 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 was 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 nine months ended
September 30, 1999, by $12.4 million and $16.1 million, respectively. Diluted
earnings per share for the three and nine months ended September 30, 1999,
increased $.03 and $.04 per share, respectively, 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 nine months ended September 30,
2000, was to decrease revenues by $44.8 million and $115.4 million,
respectively, and decrease net income by $11.9 million and $32.5 million,
respectively.
Certain other income statement and cash flow amounts have been reclassified
to conform to the current classifications.
3. Investing income
Williams sold a portion of its investment in certain marketable equity
securities for gains of $40.2 million and $108.3 million for the three and nine
months ended September 30, 2000, respectively. In third-quarter 2000, Williams
recognized a loss of $20 million related to the write-down of certain cost-basis
and equity investments resulting from management's estimate of the permanent
decline in the value of these investments.
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 XO Communications, Inc.'s common stock
pursuant to a merger of those companies completed in June 2000.
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 other (income) expense-net within segment costs and expenses
and Energy Marketing & Trading's segment profit for the nine months ended
September 30, 2000, is a $25.9 million guarantee loss accrual. The accrual
results from the estimated liability associated with guarantees of certain
energy capital activities.
Included in other (income) expense-net within segment costs and expenses
and Strategic Investments' segment loss for the nine months ended September 30,
1999, 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 broadcasting 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
5
<PAGE> 7
Notes (Continued)
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 nine months ended September 30, 1999, were $.9
million and $10 million, respectively.
5. Provision for income taxes
The provision (benefit) for income taxes includes:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(Millions) September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
Federal $ 37.5 $ .2 $ 127.6 $ (299.3)
State 8.5 6.3 27.6 14.0
Foreign 4.2 1.1 3.0 3.0
---------- ---------- ---------- ----------
50.2 7.6 158.2 (282.3)
Deferred:
Federal 18.5 27.3 180.8 398.3
State .9 5.5 44.5 15.4
Foreign (6.7) -- (9.1) --
---------- ---------- ---------- ----------
12.7 32.8 216.2 413.7
---------- ---------- ---------- ----------
Total provision $ 62.9 $ 40.4 $ 374.4 $ 131.4
========== ========== ========== ==========
</TABLE>
The effective income tax rate for the three months ended September 30, 2000,
approximates the federal statutory rate.
The effective income tax rate for the nine months ended September 30, 2000,
is greater than the federal statutory rate due primarily to the effect of state
income taxes.
The effective income tax rate for the three months ended September 30, 1999,
is greater than the federal statutory rate due primarily to the effects of state
income taxes and the losses of foreign entities which are not deductible for
U.S. tax purposes.
The effective income tax rate for the nine months ended September 30, 1999,
is greater than the federal statutory rate due primarily to the effects of state
income taxes, losses of foreign entities not deductible for U.S. tax purposes,
and the impact of goodwill not deductible for tax purposes related to the assets
impaired during second-quarter 1999 (see Note 4).
A federal tax refund of $321 million received in second-quarter 1999 is
reflected for the nine months ended September 30, 1999, as a current federal
benefit with an offsetting deferred federal provision attributable to temporary
differences between the book and tax basis of certain assets.
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 was 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 $7.3 million and $208.7 million of revenue
for the three and nine months ended September 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 Nine
except per-share months ended months ended
amounts) September 30, 1999 September 30, 1999
----------------------- ---------------------
Pro forma Reported Pro forma Reported
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income $ 27.7 $ 28.1 $ 95.6 $ 99.1
Earnings per share:
Basic and diluted $ .06 $ .06 $ .22 $ .22
--------- -------- --------- --------
</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 Nine
per-share amounts; shares in months ended months ended
thousands) September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before cumulative
effect of change in
accounting principle $ 121.1 $ 28.1 $ 594.2 $ 104.7
Preferred stock dividends -- .3 -- 2.8
----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle
available to common
stockholders for basic and
diluted earnings per share $ 121.1 $ 27.8 $ 594.2 $ 101.9
=========== =========== =========== ===========
Basic weighted-average shares 445,066 436,546 443,914 434,579
Effect of dilutive securities:
Stock options 5,228 5,698 5,096 5,768
----------- ----------- ----------- -----------
Diluted weighted-average
shares 450,294 442,244 449,010 440,347
=========== =========== =========== ===========
Basic and diluted earnings
per common share before
cumulative effect of change
in accounting principle:
Basic $ .27 $ .06 $ 1.34 $ .23
Diluted $ .27 $ .06 $ 1.33 $ .23
=========== =========== =========== ===========
</TABLE>
For the three and nine months ended September 30, 1999, approximately 5.8
million and 6.6 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>
September 30, December 31,
(Millions) 2000 1999
------------- -------------
<S> <C> <C>
Raw materials:
Crude oil $ 99.7 $ 66.6
Other 1.0 2.1
----------- -----------
100.7 68.7
Finished goods:
Refined products 253.2 172.5
Natural gas liquids 237.4 83.9
General merchandise and
communications equipment 105.6 116.0
----------- -----------
596.2 372.4
Materials and supplies 125.2 110.2
Natural gas in underground storage 118.8 77.5
Other 2.8 2.7
----------- -----------
$ 943.7 $ 631.5
=========== ===========
</TABLE>
9. Debt and banking arrangements
Notes payable
During third-quarter 2000, Williams increased its commercial paper program to
$1.7 billion, backed by a short-term bank-credit facility. At September 30,
2000, approximately $1.5 billion of commercial paper was outstanding under the
program. Interest rates vary with current market conditions.
In September 2000, Williams entered into a $630 million short-term bank
credit agreement expiring December 2000. At September 30, 2000, $300 million was
borrowed under this agreement at an initial interest rate of approximately 7.95
percent. Interest rates are based on LIBOR plus .875 percent.
In September 2000, Williams entered into a $500 million debt obligation with
a 10-year and four-month maturity. During the initial four months, the interest
rate varies based on LIBOR plus .40 percent with an initial interest rate of
7.02 percent. During the initial four-month term, the debt obligation will be
remarketed, and the interest rate will be set at a fixed rate for the remaining
10-year term.
Debt
<TABLE>
<CAPTION>
Weighted-
average
interest September 30, December 31,
(Millions) rate* 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revolving credit loans 7.4% $ 350.0 $ 525.0
Debentures, 6.25% -10.25%,
payable 2003 - 2027(1) 7.4 1,103.3 1,105.2
Notes, 5.1% -11.875%,
payable through 2022(2) 8.5 7,871.2 7,339.1
Notes, adjustable rate,
payable through 2006 7.9 1,778.3 455.0
Other, payable through 2009 7.1 5.5 7.0
------------ ------------ ------------
11,108.3 9,431.3
Current portion of long-term debt (1,094.6) (196.0)
------------ ------------
$ 10,013.7 $ 9,235.3
============ ============
</TABLE>
* At September 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 consisting of a $525 million term
loan facility and a $525 million revolving credit facility. 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 September 30, 2000, $525
million was outstanding under the term loan portion of the facility at an
initial interest rate of 9.02 percent. Interest rates vary with current market
conditions.
7
<PAGE> 9
Notes (Continued)
During third-quarter 2000, Williams replaced its $1 billion revolving credit
agreement with a $700 million revolving credit agreement. Under the terms of the
new 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. Terms of the agreement include
financial covenants based on Williams' financial position, exclusive of WCG, and
restrict the transfer of funds from Williams to WCG. Interest rates vary with
current market conditions.
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 which
was fully utilized at September 30, 2000. Interest rates are based on LIBOR plus
one percent.
In August 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. Preferred ownership interests of subsidiaries
In September 2000, WCG issued 5,000,000 shares of 6.75 percent redeemable
cumulative convertible preferred stock in a private placement at a liquidation
preference of $50 per share for net proceeds of approximately $240.5 million.
Each share of preferred stock is convertible into 1.7610 shares of WCG common
stock, based on a conversion price of $28.39. WCG may redeem all or any shares
of preferred stock at any time on or after October 15, 2005 and, under specified
circumstances, before that date. The preferred stock will be subject to
mandatory redemption on October 15, 2012.
Dividends are payable quarterly beginning January 15, 2001, at an annual
rate of 6.75 percent. The terms of certain WCG debt agreements currently
restrict WCG from paying cash dividends. Under those conditions, WCG delivers
shares of WCG common stock to a transfer agent. The transfer agent in turn sells
the shares and transfers the proceeds to holders of the WCG preferred stock.
11. 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 $148
million for potential refund as of September 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.
8
<PAGE> 10
Notes (Continued)
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 September 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 adopted in Order 637 certain policies that it found
were necessary to adjust its current regulatory model to the needs of the
evolving markets, but determined that any fundamental changes to its regulatory
policy, which changes were raised and commented on in the NOPR and NOI, would be
considered after further study and evaluation of the evolving marketplace. Most
significantly, in Order 637, the FERC (i) revised 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) permitted 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 September 30,
2000, these subsidiaries had accrued liabilities totaling approximately $25
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 September 30, 2000, Central
had accrued a liability for approximately $10 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 $25 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.
9
<PAGE> 11
Notes (Continued)
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 September 30,
2000, WES and its subsidiaries had accrued liabilities totaling approximately
$43 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 September 30, 2000, WES and its subsidiaries had accrued receivables totaling
$15 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 the 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, the EPA and the DOJ have reached an agreement in principle to settle
this matter for a penalty of $850,000. In the course of investigating this
matter, WFS discovered a similar potential violation at the plant and disclosed
it to the EPA and the DOJ. The parties will discuss whether additional
enforcement action is warranted.
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 September 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 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. In August 2000, a
producer asserted a claim for approximately $6.7 million against
Transcontinental Gas Pipe Line. 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.
10
<PAGE> 12
Notes (Continued)
On September 7, 2000, All-Phase Utility Corp. amended its complaint in a
matter originally filed June 28, 1999, against 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 a portion of WCI's
Eugene, Oregon to Bandon, Oregon route is based on confidential information
developed by All-Phase and that WCI breached its non-disclosure agreement with
All-Phase and violated the Oregon Trade Secrets Act by using it. All-Phase also
alleges that WCI misrepresented plans for the route and that, as a result,
All-Phase lost the opportunity to build its own line along the same route.
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 conduits. WCI intends to refute the allegations and to
vigorously defend this lawsuit. WCG 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.
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 September 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.
12. Recent accounting standards
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." In
June 1999, the FASB issued SFAS 137, which deferred the effective date of SFAS
133. This was followed in June 2000 by the issuance of SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which amends
SFAS 133. SFAS 133 and 138 establish accounting and reporting standards for
derivative financial instruments. The standards require that all derivative
financial instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in
earnings if the derivative is not a hedge. If a derivative is a hedge, changes
in the fair value of the derivative will either be recognized in earnings along
with the change in the fair value of the hedged asset, liability or firm
commitment also recognized in earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. For a derivative
recognized in other comprehensive income, the ineffective portion of the
derivative's change in fair value will be recognized immediately in earnings.
Williams will adopt these standards effective January 1, 2001.
Based on Williams' implementation efforts to date and the fair value of its
identified derivative positions existing at September 30, 2000, Williams does
not expect that the impact of adopting the standards will be material to its
financial position or results of operations. However, changing market prices and
new derivative positions in the fourth quarter of 2000 and the fact that
Williams continues to pursue implementation efforts, causes the impact to
Williams' financial position or results of operations to remain uncertain.
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 were not material.
11
<PAGE> 13
Notes (Continued)
13. Comprehensive income (loss)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three Nine
months ended months ended
(Millions) September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 121.1 $ 28.1 $ 572.6 $ 99.1
Other comprehensive income (loss):
Unrealized gains (losses) on
securities 272.3 (102.5) 635.8 29.1
Realized gains in net income (40.2) -- (323.0) --
Foreign currency
translation adjustments (14.9) 3.0 (30.4) (17.9)
---------- ---------- ---------- ----------
Other comprehensive
income (loss) before taxes
and minority interest 217.2 (99.5) 282.4 11.2
Income tax benefit (provision)
on other comprehensive
income (loss) (90.2) 39.9 (121.4) (11.3)
Minority interest in other
comprehensive income (loss) (19.0) -- (21.9) --
---------- ---------- ---------- ----------
Other comprehensive
income (loss) 108.0 (59.6) 139.1 (.1)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 229.1 $ (31.5) $ 711.7 $ 99.0
========== ========== ========== ==========
</TABLE>
In 2000, Williams entered into derivative instruments 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.
12
<PAGE> 14
Notes (Continued)
14. 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),
partially offset by a loss of $20 million related to the write-downs of certain
cost-basis and equity investments resulting from management's estimate of the
permanent decline in the value of these investments (in Network) (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
15, is due primarily to increased value of the trading portfolios as a result of
higher commodity prices. The increase in Network's total assets, also noted on
page 15, is due primarily to the construction of its fiber-optic network. 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 14 and 15:
<TABLE>
<CAPTION>
Three months ended September 30, 2000 Three months ended September 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 $ 153.4 $ -- $ 153.4 $ 142.7 $ -- $ 142.7
Energy Services 311.5 -- 311.5 155.2 -- 155.2
Communications (140.2) 20.3 (119.9) (81.7) -- (81.7)
Other 7.5 -- 7.5 19.1 -- 19.1
------------ ------------ ------------ ------------ ------------ ------------
Total segments 332.2 $ 20.3 $ 352.5 235.3 $ -- $ 235.3
------------ ------------ ------------ ------------ ------------ ------------
General corporate
expenses (16.0) (12.7)
------------ ------------
Total operating
income $ 316.2 $ 222.6
============ ============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 2000 Nine months ended September 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 $ 565.9 $ -- $ 565.9 $ 504.9 $ -- $ 504.9
Energy Services 928.2 -- 928.2 386.2 -- 386.2
Communications (399.2) 323.3 (75.9) (209.3) -- (209.3)
Other 18.8 -- 18.8 (2.9) -- (2.9)
--------- --------- --------- --------- --------- ---------
Total segments 1,113.7 $ 323.3 $ 1,437.0 678.9 $ -- $ 678.9
--------- --------- --------- --------- --------- ---------
General corporate
expenses (56.3) (46.2)
--------- ---------
Total operating
income $ 1,057.4 $ 632.7
========= =========
</TABLE>
13
<PAGE> 15
Notes (Continued)
14. Segment disclosures (continued)
<TABLE>
<CAPTION>
Revenues
-----------------------------------------------------------------
External Equity Earnings Segment
(Millions) Customers Intersegment (Losses) Total Profit (Loss)
------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
GAS PIPELINE $ 413.2 $ 17.0 $ 7.2 $ 437.4 $ 153.4
ENERGY SERVICES
Energy Marketing & Trading 914.7 (59.7)* .1 855.1 143.5
Exploration & Production 4.9 62.1 -- 67.0 18.0
Midstream Gas & Liquids 173.0 173.1 (1.0) 345.1 84.3
Petroleum Services 791.1 474.1 (.1) 1,265.1 67.1
Merger-related costs and
non-compete amortization -- -- -- -- (1.4)
------------- ------------ ------------- ------------- -------------
TOTAL ENERGY SERVICES 1,883.7 649.6 (1.0) 2,532.3 311.5
------------- ------------ ------------- ------------- -------------
COMMUNICATIONS
Network 166.3 11.9 2.5 180.7 (81.1)
Broadband Media 39.8 .2 (1.1) 38.9 (10.1)
Solutions 326.8 2.3 -- 329.1 (23.6)
Strategic Investments -- -- (4.0) (4.0) (5.1)
------------- ------------ ------------- ------------- -------------
TOTAL COMMUNICATIONS 532.9 14.4 (2.6) 544.7 (119.9)
------------- ------------ ------------- ------------- -------------
OTHER 24.8 10.3 .6 35.7 7.5
ELIMINATIONS -- (691.3) -- (691.3) --
------------- ------------ ------------- ------------- -------------
TOTAL $ 2,854.6 $ -- $ 4.2 $ 2,858.8 $ 352.5
============= ============ ============= ============= =============
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
GAS PIPELINE $ 392.3 $ 16.0 $ 1.2 $ 409.5 $ 142.7
ENERGY SERVICES
Energy Marketing & Trading 473.0 (26.5)* -- 446.5 10.3
Exploration & Production 20.3 36.9 -- 57.2 8.1
Midstream Gas & Liquids 184.5 94.7 (2.5) 276.7 68.2
Petroleum Services 615.0 261.7 .3 877.0 71.8
Merger-related costs and
non-compete amortization -- -- -- -- (3.2)
------------- ------------ ------------- ------------- -------------
TOTAL ENERGY SERVICES 1,292.8 366.8 (2.2) 1,657.4 155.2
------------- ------------ ------------- ------------- -------------
COMMUNICATIONS
Network 85.4 11.7 .1 97.2 (55.5)
Broadband Media 39.4 .2 -- 39.6 (10.5)
Solutions 365.2 -- -- 365.2 (11.2)
Strategic Investments 7.3 .1 (4.8) 2.6 (4.5)
------------- ------------ ------------- ------------- -------------
TOTAL COMMUNICATIONS 497.3 12.0 (4.7) 504.6 (81.7)
------------- ------------ ------------- ------------- -------------
OTHER 22.8 10.2 7.7 40.7 19.1
ELIMINATIONS -- (405.0) -- (405.0) --
------------- ------------ ------------- ------------- -------------
TOTAL $ 2,205.2 $ -- $ 2.0 $ 2,207.2 $ 235.3
============= ============ ============= ============= =============
</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. Segment disclosures (continued)
<TABLE>
<CAPTION>
Revenues
---------------------------------------------------------------
External Equity Earnings Segment
(Millions) Customers Intersegment (Losses) Total Profit (Loss)
------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
GAS PIPELINE $ 1,345.3 $ 45.9 $ 19.5 $ 1,410.7 $ 565.9
ENERGY SERVICES
Energy Marketing & Trading 2,495.2 (67.5)* .2 2,427.9 486.5
Exploration & Production 29.3 165.2 -- 194.5 39.4
Midstream Gas & Liquids 512.5 484.6 (.8) 996.3 240.7
Petroleum Services 2,103.5 1,237.8 (.3) 3,341.0 167.2
Merger-related costs and
non-compete amortization -- -- -- -- (5.6)
------------ ------------ ------------ ------------ ------------
TOTAL ENERGY SERVICES 5,140.5 1,820.1 (.9) 6,959.7 928.2
------------ ------------ ------------ ------------ ------------
COMMUNICATIONS
Network 420.0 34.1 3.5 457.6 21.6
Broadband Media 122.3 .3 (4.6) 118.0 (24.7)
Solutions 1,037.1 4.5 -- 1,041.6 (80.4)
Strategic Investments -- -- (8.6) (8.6) 7.6
------------ ------------ ------------ ------------ ------------
TOTAL COMMUNICATIONS 1,579.4 38.9 (9.7) 1,608.6 (75.9)
------------ ------------ ------------ ------------ ------------
OTHER 70.4 31.0 1.1 102.5 18.8
ELIMINATIONS -- (1,935.9) -- (1,935.9) --
------------ ------------ ------------ ------------ ------------
TOTAL $ 8,135.6 $ -- $ 10.0 $ 8,145.6 $ 1,437.0
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
GAS PIPELINE $ 1,257.2 $ 41.8 $ 1.9 $ 1,300.9 $ 504.9
ENERGY SERVICES
Energy Marketing & Trading 1,294.0 (115.5)* (.3) 1,178.2 65.5
Exploration & Production 32.4 95.3 -- 127.7 19.8
Midstream Gas & Liquids 514.7 227.4 (10.4) 731.7 168.4
Petroleum Services 1,534.6 594.1 .6 2,129.3 142.5
Merger-related costs and
non-compete amortization -- -- -- -- (10.0)
------------ ------------ ------------ ------------ ------------
TOTAL ENERGY SERVICES 3,375.7 801.3 (10.1) 4,166.9 386.2
------------ ------------ ------------ ------------ ------------
COMMUNICATIONS
Network 278.1 35.8 .1 314.0 (103.7)
Broadband Media 118.4 1.5 -- 119.9 (20.4)
Solutions 1,065.1 -- -- 1,065.1 (28.9)
Strategic Investments 34.8 .7 (17.8) 17.7 (56.3)
------------ ------------ ------------ ------------ ------------
TOTAL COMMUNICATIONS 1,496.4 38.0 (17.7) 1,516.7 (209.3)
------------ ------------ ------------ ------------ ------------
OTHER 53.6 29.8 (12.7) 70.7 (2.9)
ELIMINATIONS -- (910.9) -- (910.9) --
------------ ------------ ------------ ------------ ------------
TOTAL $ 6,182.9 $ -- $ (38.6) $ 6,144.3 $ 678.9
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TOTAL ASSETS
--------------------------------------------
(Millions) September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
GAS PIPELINE $ 8,847.6 $ 8,628.5
ENERGY SERVICES
Energy Marketing & Trading 6,602.7 3,209.7
Exploration & Production 619.2 618.6
Midstream Gas & Liquids 4,131.4 3,514.4
Petroleum Services 2,888.3 2,588.7
------------ ------------
TOTAL ENERGY SERVICES 14,241.6 9,931.4
------------ ------------
COMMUNICATIONS
Network 6,763.3 4,079.8
Broadband Media 261.5 348.0
Solutions 1,231.7 1,537.6
Strategic Investments 553.7 412.5
------------ ------------
TOTAL COMMUNICATIONS 8,810.2 6,377.9
------------ ------------
OTHER 7,782.4 6,629.3
ELIMINATIONS (7,453.5) (6,278.6)
------------ ------------
TOTAL $ 32,228.3 $ 25,288.5
============ ============
</TABLE>
*Energy Marketing & Trading intercompany cost of sales, which are netted in
revenues consistent with fair-value accounting, exceed intercompany revenue.
15
<PAGE> 17
Notes (Continued)
15. 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 entered into an agreement in September 2000, to purchase the
long-distance network assets of Ameritech Communications, Inc., a subsidiary of
SBC, for a purchase price of $145 million. These assets are located in the
states of Illinois, Indiana, Michigan, Ohio and Wisconsin and include a 2,200
mile fiber-optic network over four routes, indefeasible rights of use in dark
fiber and 15 data centers.
16. Subsequent events
On October 11, 2000, Williams completed the purchase of various
energy-related assets from TransCanada PipeLines Limited for approximately $540
million. Included in the purchase were interests in several natural gas liquids
(NGL) extraction and fractionation plants, NGL transportation pipeline and
storage facilities, and a natural gas processing plant.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Results of Operations
Third Quarter 2000 vs. Third Quarter 1999
CONSOLIDATED OVERVIEW
Williams' revenues increased $652 million, or 30 percent, due primarily to
higher Energy Services' revenues from increased petroleum products and NGL
average sales prices and volumes, higher gas and electric power services
revenues and higher average natural gas sales prices. Growth in Communications'
voice and data services revenues also contributed to the increase. Partially
offsetting these increases were lower Communications' revenues from new system
sales and upgrades.
Segment costs and expenses increased $555 million, or 28 percent, due
primarily to higher costs at Energy Services' related to increased petroleum
products and NGL average purchase prices and volumes, higher costs and expenses
from the growth of Communications' Network operations and infrastructure and
higher variable compensation levels associated with improved performance at
Energy Services. Partially offsetting these increases were lower Communications'
costs associated with new systems sales and upgrades.
Operating income increased $93.6 million, or 42 percent, due primarily to a
$156 million increase at Energy Services, partially offset by $59 million higher
losses at Communications. Energy Services' increase reflects higher gas and
electric power services margins, higher profits from company-owned natural gas
production and higher per-unit natural gas liquids margins, partially offset by
higher variable compensation expense. The increased losses at Communications
reflect losses associated with providing customer services prior to completion
of the new network higher depreciation and lease expense as the network is
brought into service, and higher selling, general and administrative expense
including costs associated with infrastructure growth and improvement.
Income before income taxes and cumulative effect of change in accounting
principle increased $115.5 million, from $68.5 million in 1999 to $184 million
in 2000, due primarily to $93.6 million higher operating income and $45 million
higher investing income. Partially offsetting was $39 million higher net
interest expense reflecting increased debt in support of continued expansion and
new projects. The higher investing income includes $40 million of gains on sales
of marketable equity securities, partially offset by $20 million in losses
related to the writedowns of certain cost basis and equity investments.
GAS PIPELINE
GAS PIPELINE'S revenues increased $27.9 million, or 7 percent, due primarily
to $13 million higher gas exchange imbalance settlements (offset in costs and
operating expenses) and $6 million higher storage revenues resulting, in part,
from the second quarter 2000 acquisition of a liquefied natural gas storage
facility. Revenues also increased due to $6 million higher equity investment
earnings from pipeline joint venture projects entered into in late 1999.
Segment profit increased $10.7 million, or 7 percent, due primarily to $8
million lower general
16
<PAGE> 18
Management's Discussion & Analysis (Continued)
and administrative expenses and $6 million higher equity investment earnings,
partially offset by $4 million higher depreciation expense. The reduction in
general and administrative expenses reflects lower professional services costs
associated with year 2000 compliance work, efficiencies realized from the
headquarters consolidation of two of the pipelines and other cost reduction
initiatives.
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 $408.6 million, or 92
percent, due to a $159.3 million increase in trading revenues and a $249.3
million increase in non-trading revenues. The $159.3 million increase in trading
revenues is due primarily to $178 million in higher gas and electric power
services margins reflecting the benefit of higher volatility, expanded price
risk management portfolio, greater overall market demand, and increased trading
volumes, partially offset by decreased revenues in basis trading and the impact
of favorable contract settlements in third-quarter 1999.
The $249.3 million non-trading revenue increase is due primarily to $262
million higher refined products marketing revenues resulting from increased
prices and higher volumes and $15 million higher power services revenues from a
portable electric generation business. The higher refined product volumes
result from recent expansions at the Memphis refinery. Partially offsetting
these increases were $40 million lower revenues following the sale of the retail
natural gas, electric and propane businesses in 1999.
Costs and operating expenses increased $235.2 million, or 58 percent, due
primarily to $264 million higher refined product cost of sales associated with
non-trading activities. Partially offsetting these increases were lower retail
natural gas, electric and propane cost of sales of $22 million and lower
operating expenses of $22 million. These variances are associated with the
corresponding changes in non-trading revenues discussed above.
Segment profit increased $133.2 million, from $10.3 million in 1999 to $143.5
million in 2000, due primarily to the $178 million higher gas and electric power
service margins, partially offset by $12 million in lower natural gas liquids
margins and $31 million higher selling, general and administrative expenses
reflecting higher variable compensation levels associated with improved
operating performance.
EXPLORATION & PRODUCTION'S revenues increased $9.8 million, or 17 percent,
due to an increase in average realized natural gas sales prices (including the
impact of hedged positions) and higher volumes.
Segment profit increased $9.9 million, from $8.1 million in 1999, due
primarily to the increase in revenues previously discussed.
MIDSTREAM GAS & LIQUIDS' revenues increased $68 million, or 25 percent, due
primarily to $63 million higher natural gas liquids sales from processing
activities. The natural gas liquids sales increase reflects $44 million from a
42 percent increase in average natural gas liquids sales prices and $19 million
from a 23 percent increase in volumes sold. Natural gas liquids sales volumes
increased as a result of improved liquids market conditions and the increased
contribution of a new plant which became operational in June 1999.
Cost and operating expenses increased $57 million, or 30 percent, due
primarily to $36 million higher liquids fuel and replacement gas purchases and
higher transportation, depreciation and power costs.
Segment profit increased $16 million, or 24 percent, due primarily to $14
million from higher per-unit natural gas liquids margins reflecting increased
petrochemical demand and the effect of higher crude oil prices, $6 million from
increased natural gas liquids volumes sold and lower general and administrative
expenses, partially offset by higher depreciation and fuel costs.
PETROLEUM SERVICES' revenues increased $388.1 million, or 44 percent, due
primarily to $333 million higher refinery revenues (including $52 million higher
intra-segment sales to the travel centers/convenience stores which are
eliminated) and $111 million higher travel center/convenience store sales. The
$333 million increase in refinery revenues reflects $260 million from 45 percent
higher average refined product sales prices and $73 million from a 15 percent
increase in refined product volumes sold. The increase in refined product
volumes sold follows refinery expansions and improvements in mid-to-late 1999
and May 2000 which increased capacity. The $111 million increase in travel
center/convenience store sales reflects $58 million from 26 percent higher
average gasoline and diesel sales prices, $47 million primarily from a 65
percent increase in diesel sales volumes and $6 million higher merchandise
sales. The increase in diesel sales volumes and higher merchandise sales reflect
the opening of 11 new travel centers since third-quarter 1999. An additional 12
travel centers are planned to open in fourth-quarter 2000. In addition, revenues
increased due to $20 million higher bio-energy sales reflecting both an increase
in ethanol volumes sold and average ethanol sales prices and $8 million higher
revenues from Williams' 3.1 percent undivided interest in the
17
<PAGE> 19
Management's Discussion & Analysis (Continued)
Trans Alaska Pipeline System (TAPS) acquired in late June 2000, partially offset
by $34 million lower fleet management revenues following the sale of a portion
of such operations in late 1999.
Costs and operating expenses increased $387.1 million, or 49 percent, due
primarily to $334 million higher refining costs and $117 million higher travel
center/convenience store costs (including $52 million higher intra-segment
purchases from the refineries which are eliminated). The $334 million increase
in refining costs reflects $266 million from higher crude supply costs and other
related per-unit cost of sales, $61 million associated with increased volumes
sold and $7 million higher operating costs at the refineries. The $117 million
increase in travel center/convenience store costs reflects $44 million primarily
from increased diesel sales volumes, $62 million from higher average gasoline
and diesel purchase prices and $11 million higher store operating costs. In
addition, costs and operating expenses increased due to $17 million higher
bio-energy operating costs and $4 million related to Williams' interest in TAPS.
Slightly offsetting these increases was $37 million lower fleet management
operating costs following the sale of a portion of such operations in late 1999.
Segment profit decreased $4.7 million, or 7 percent, due primarily to $12
million and $7 million higher operating costs at the travel centers/convenience
stores and the refineries, respectively, $6 million from lower overall per-unit
refinery gross margins and the favorable effect in 1999 of a $6.5 million
adjustment to rate refund accruals following the third-quarter 1999 approved
settlement of transportation pipeline rate case issues. Partially offsetting
these decreases were $12 million from increased refined product sales volumes,
$7 million higher gross profit from merchandise sales primarily due to new
travel centers, $3 million from improved bio-energy operations and $3 million
from Williams' interest in TAPS.
COMMUNICATIONS
NETWORK'S revenues increased $83.5 million, or 86 percent, due primarily to
$87 million from growth in voice and data services provided to customers and $6
million higher network design, operational support and other revenues, partially
offset by $7 million lower revenue from an Australian telecommunications
operation and $5 million lower revenues from dark fiber leases accounted for as
sales-type leases on the new fiber-optic network.
Costs and operating expenses increased $109 million, or 93 percent, due
primarily to $60 million higher off-net capacity and local access connection
costs associated with providing increased customer services, $23 million higher
depreciation expense as portions of the new network are placed into service, $18
million higher operating and maintenance expenses to support increased revenues
and future revenue streams, $14 million higher network lease expense for the
leased portion of the network, and $6 million higher ad valorem taxes, partially
offset by $7 million decreased operating expenses from an Australian
telecommunications operation.
Selling, general and administrative expenses increased $21 million, or 60
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 loss increased $25.6 million, or 46 percent due primarily to losses
associated with providing customer services off-net prior to completion of the
new network, $37 million higher depreciation and network lease expense, $21
million higher selling, general and administrative expenses, and $20 million
related to write-downs of certain cost-basis and equity investments (see Note
3), partially offset by gains totaling $40 million from the sale of certain
marketable equity securities (see Note 3).
BROADBAND MEDIA'S revenues decreased $.7 million due primarily to $1.1
million of equity investment losses and segment loss decreased $.4 million.
SOLUTIONS' revenues decreased $36.1 million, or 9.9 percent, due primarily to
$41 million lower revenues from new systems sales and upgrades due to lower
sales activity consistent with voice equipment industry trends. 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 third quarter 1999 were determined using the
completed-contract method, the decrease in revenues would have been $33.4
million, or 9.2 percent.
Costs and operating expenses decreased $18 million, due primarily to $32
million lower costs associated with the decrease in revenues from new systems
sales and upgrades, partially offset by increased installation and service
costs. If third quarter 1999 were determined using the completed-contract
method, the decrease in costs and operating expenses would have been $16
million.
Selling, general and administrative expenses decreased $6 million due
primarily to lower payroll related expenses including a decrease in commissions
associated with lower revenues and the effect of a 1999 charge associated with
the conversion and vesting of employee stock options from Williams to WCG stock
options related to the WCG initial public offering.
Segment loss increased $12.4 million, to a $23.6 million loss in 2000 from a
$11.2 million loss in
18
<PAGE> 20
Management's Discussion & Analysis (Continued)
1999, due primarily to lower margins, partially offset by $6 million lower
selling, general and administrative expenses. If third-quarter 1999 were
determined using the completed-contract method, the increase in segment loss
would have been $11 million.
STRATEGIC INVESTMENTS' revenues decreased $6.6 million due primarily to the
$5.1 million effect of the July 1999 sale of the audio and video conferencing
and closed-circuit video broadcasting businesses. Revenues for third-quarter
2000 represent the equity investment losses of ATL-Algar Telecom Leste S.A.
(ATL). Segment loss increased $.6 million to $5.1 million.
OTHER
OTHER revenues decreased $5 million, or 12 percent, due primarily to $7.3
million lower international equity investment earnings.
Other segment profit decreased $11.6 million, or 61 percent, due primarily to
lower international equity investment earnings and lower operating profit from
Venezuelan gas compression operations. International equity investment income
decreased due primarily to losses from a Lithuanian energy investment acquired
in the fourth quarter of 1999.
CONSOLIDATED
INTEREST ACCRUED increased $94.8 million, or 56 percent, due primarily to the
$48 million effect of higher borrowing levels combined with the $44 million
effect of higher average interest rates. These increases primarily reflect the
issuance of $2 billion and $1 billion of high-yield public debt in October 1999
and August 2000, respectively, by Communications. Interest capitalized increased
$56 million, from $10.6 million in 1999 to $66.6 million in 2000, due primarily
to increased capital expenditures for the fiber-optic network. Investing income
increased $44.5 million, from $7.2 million in 1999 to $51.7 million in 2000, due
primarily to $40.2 million of gains from sales of certain marketable equitable
securities partially offset by $20 million of write-downs of investments
previously discussed within Communications' segment profit. Also contributing to
the increase in investing income was $20 million higher interest income
associated primarily with the investment of proceeds from Communications' equity
and debt offerings. The $20.8 million change in minority interest in (income)
loss and preferred returns of consolidated subsidiaries is attributable
primarily to the effect of the 14.7 percent minority ownership in losses at
Communications following the October 1999 initial public offering. Also during
the third quarter, the cumulative losses attributable to Williams Communications
Solutions, LLC (Solutions LLC) exceeded Communications minority interest
liability in the consolidated subsidiary. As a result, Williams has suspended
recording minority interest related to this subsidiary.
The provision for income taxes increased $22.5 million, from $40.4 million in
1999 to $62.9 million in 2000, primarily a result of higher pre-tax income,
partially offset by a lower effective income tax rate. The effective income tax
rate in 2000 approximates the federal statutory rate. The effective income tax
rate in 1999 is significantly higher than the federal statutory rate due
primarily to the effects of state income taxes and the losses of foreign
entities which are not deductible for U.S. tax purposes.
Nine Months Ended September 30, 2000 vs. Nine Months Ended September 30, 1999
CONSOLIDATED OVERVIEW
Williams' revenues increased $2 billion, or 33 percent, due primarily to
higher Energy Services' revenues from increased petroleum products and natural
gas liquids average sales prices and volumes and higher gas and electric power
services revenues. Revenues also increased due to additional rate refund
liability reductions at Gas Pipeline and growth in Communications' voice and
data services. Partially offsetting these increases were lower fleet management,
retail natural gas, electric and propane revenues at Energy Services following
the 1999 sales of these businesses, lower Communications' dark fiber lease
revenues and lower Communications' revenues from new systems sales and upgrades.
Segment costs and expenses increased $1.6 billion, or 29 percent, due
primarily to higher costs related to increased petroleum products and natural
gas liquids average purchase prices and volumes purchased and 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 fleet management, natural gas,
electric, and propane costs following the sale of all or part of these
businesses in 1999 and lower costs associated with the decrease in revenues from
new systems sales and upgrades.
Operating income increased $424.7 million, or 67 percent, due primarily to a
$542 million increase at Energy Services and a $61 million increase at Gas
Pipeline, partially offset by $190 million higher losses at Communications.
Energy Services' increase reflects improved gas and electric power services
margins and higher per-unit natural gas liquids
19
<PAGE> 21
Management's Discussion & Analysis (Continued)
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 offsetting Communications' losses was 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 $732.5 million, from $236.1 million in 1999 to $968.6
million in 2000, due primarily to $424.7 million higher operating income and
$413.1 million higher investing income. Partially offsetting these increases was
$143.9 million higher net interest expense reflecting increased debt in support
of continued expansion and new projects. The increase in investing income
reflects a $214.7 million gain from the conversion of Williams' common stock
investment in Concentric Network Corporation for common stock of XO
Communications, Inc. (formerly Nextlink Communications, Inc.) pursuant to a
merger of those two companies in June 2000, gains totaling $108.3 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-Algar Telecom Leste S.A. (ATL) and
higher interest income, partially offset by $20 million of losses related to the
write-downs of certain cost basis and equity investments (see Note 3).
GAS PIPELINE
GAS PIPELINE'S revenues increased $109.8 million, or 8 percent, due primarily
to $74 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 (Transco) related to
the rate-of-return and capital structure issues in a regulatory proceeding.
Revenues also increased due to $47 million higher gas exchange imbalance
settlements (offset in costs and operating expenses), $18 million higher
transportation demand revenues at Transco and $18 million higher equity
investment earnings from pipeline joint venture projects. Partially offsetting
was a total of $46 million of reductions to rate refund liabilities in 1999 by
four of the gas pipelines resulting primarily from second-quarter 1999
regulatory proceedings involving rate-of-return methodology.
Segment profit increased $61 million, or 12 percent, due to the $28 million
net effect of rate refund liability reductions discussed above, $18 million
higher transportation demand revenues at Transco, $18 million higher equity
investment earnings and $14 million lower general and administrative expenses.
The lower general and administrative costs include lower professional services
costs associated with year 2000 compliance work, efficiencies realized from the
headquarters consolidation of two of the pipelines and other cost reduction
initiatives, partially offset by costs associated with the office headquarters
consolidation. Partially offsetting were $6 million of accruals for gas exchange
imbalances and $7 million higher depreciation expense primarily due to increased
property plant and equipment.
Based on current rate structures and/or historical maintenance schedules of
certain of its pipelines, Gas Pipeline 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 $1.25 billion, or 106
percent, due to a $545 million increase in trading revenues and a $705 million
increase in non-trading revenues. The $545 million increase in trading revenues
is due primarily to $576 million in higher gas and electric power services
margins, partially offset by $18 million lower natural gas liquids trading
margins and $13 million lower crude and refined trading margins. The higher gas
and electric power services margins reflect the benefit of higher volatility,
expanded price risk management services, $49 million from increased demand and
market prices for certain ancillary services in the western region and increased
trading volumes, partially offset by $62 million of favorable contract
settlements during 1999.
The $705 million increase in non-trading revenues is due primarily to $829
million higher refined products marketing revenues from higher sales prices and
volumes, $49 million higher natural gas liquids revenues resulting from higher
average sales prices and volumes and $23 million higher revenues from a portable
electric generation business that was transferred from Petroleum Services during
2000. Recent expansions of the Memphis refinery were a significant contributor
to the increased refined products marketing volumes. Partially offsetting these
increases were $190 million lower revenues following the sale of the retail
natural gas, electric and propane businesses in 1999.
Costs and operating expenses increased $727 million, or 72 percent, due
primarily to $837 million higher refined product cost of sales associated with
non-trading activities and $41 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 $99
20
<PAGE> 22
Management's Discussion & Analysis (Continued)
million and $67 million, respectively. These variances are associated with 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) partially offset by a $12.4 million gain on the sale of certain
natural gas liquids contracts.
Segment profit increased $421 million, from $65.5 million in 1999 to $486.5
million in 2000, due primarily to $576 million higher gas and electric power
services margins and the $12.4 million gain on the sale of certain natural gas
liquids contracts. Partially offsetting these increases were $74 million higher
selling, general and administrative costs reflecting higher variable
compensation levels associated with the improved operating performance, the
$25.9 million guarantee loss accrual, $22 million lower crude and refined
products margins and a $25 million lower contribution from retail natural gas,
electric and propane following the sale of those businesses in 1999.
EXPLORATION & PRODUCTION'S revenues increased $66.8 million, or 52 percent,
due primarily to $36 million from increased realized average natural gas sales
prices (including the effect of hedged positions), $28 million associated with
increases in both company-owned production volumes and marketing volumes from
the Royalty Trust and royalty interest owners and an $8 million contribution in
first-quarter 2000 of oil and gas properties acquired in April 1999. Partially
offsetting was a $7 million decrease in the recognition of income previously
deferred from a 1997 transaction which transferred certain non-operating
economic benefits to a third party.
Segment profit increased $19.6 million, or 99 percent, due primarily to the
higher revenues discussed previously partially offset by $33 million higher gas
purchase costs related to the marketing of natural gas from the Williams Coal
Seam Royalty Trust and royalty interest owners, $7 million higher
production-related taxes and $4 million lower gains on sales of assets.
MIDSTREAM GAS & LIQUIDS' revenues increased $264.6 million, or 36 percent,
due primarily to $224 million higher natural gas liquids sales from processing
activities. The liquids sales increase reflects $147 million from a 61 percent
increase in average natural gas liquids sales prices and $77 million from a 48
percent increase in volumes sold. Natural gas liquids sales volumes increased as
a result of improved liquids market conditions and a new plant, which became
operational in June 1999. In addition, revenues increased due to $24 million
higher natural gas liquids pipeline transportation revenues associated with
increased shipments following improved market conditions and the completion of
the Rocky Mountain liquids pipeline expansion in November 1999, $9 million
higher processing revenues and $10 million lower equity investment losses,
mainly from the Discovery pipeline project.
Costs and operating expenses increased $182 million, or 38 percent, due
primarily to $111 million higher liquids fuel and replacement gas purchases, $19
million higher transportation, fractionation, and marketing expense related to
higher natural gas liquid sales, $12 million higher depreciation expense, $12
million of losses associated with certain propane storage transactions, $10
million higher power costs and increased gathering fuel costs.
General and administrative expenses increased $14 million, or 19 percent, due
primarily to $12 million of reorganization costs. Midstream has completed 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 $72.3 million, or 43 percent, due primarily to $78
million from higher per-unit natural gas liquids margins, $17 million from
increased natural gas liquids volumes sold and $10 million lower equity
investment losses. Partially offsetting were $12 million of propane storage
losses and $14 million higher general and administrative expenses.
PETROLEUM SERVICES' revenues increased $1,212 million, or 57 percent, due
primarily to $1,047 million higher refinery revenues (including $228 million
higher intra-segment sales to the travel centers/convenience stores which are
eliminated) and $366 million higher travel center/convenience store sales. The
$1,047 million increase in refinery revenues reflects $911 million from 72
percent higher average refined product sales prices and $136 million from a 12
percent increase in refined product volumes sold. The increase in refined
product volumes sold follows refinery expansions and improvements in mid-to-late
1999 and May 2000 which increased capacity. The $366 million increase in travel
center/convenience store sales reflects $212 million from 36 percent higher
average gasoline and diesel sales prices, $136 million primarily from a 75
percent increase in diesel sales volumes and $18 million higher merchandise
sales. The increase in diesel sales volumes and the higher merchandise sales
reflect the opening of 11 new travel centers since third-quarter 1999.
An additional 12 travel centers are planned to open in fourth-quarter 2000.In
addition, Williams is currently negotiating the sale of the convenience stores
to a third party. Revenues related to convenience stores for the nine months
ended September 30, 2000 and 1999 were $365 million and $337 million,
respectively. It is expected that a sale of the convenience stores would be
completed by March 31, 2001. Revenues also increased due to $55 million higher
21
<PAGE> 23
Management's Discussion & Analysis (Continued)
bio-energy sales reflecting both an increase in ethanol volumes sold and average
ethanol sales prices, $24 million higher revenues from terminalling operations
following the acquisition of additional terminals in August 1999, $20 million
higher product sales from transportation activities, $13 million higher revenues
from a petrochemical plant acquired in March 1999 and $8 million higher revenues
from Williams' interest in TAPS acquired in late June 2000. Slightly offsetting
these increases were $70 million lower fleet management revenues following the
sale of a portion of such operations in late 1999, $15 million lower
distribution revenues due to a reduction of propane trucking operations and $14
million lower pipeline construction revenues following substantial completion of
the Longhorn project.
Costs and operating expenses increased $1,169 million, or 61 percent, due
primarily to $1,038 million higher refining costs and $380 million higher travel
center/convenience store costs (including $228 million higher intra-segment
purchases from the refineries which are eliminated). The $1,038 million increase
in refining costs reflects $898 million from higher crude supply costs and other
related per-unit cost of sales, $112 million associated with increased volumes
sold and $28 million higher operating costs at the refineries. The $380 million
increase in travel center/convenience store costs includes $222 million from
higher average gasoline and diesel purchase prices, $126 million primarily from
increased diesel sales volumes and $32 million higher store operating costs. In
addition, costs and operating expenses increased due to $42 million higher
bio-energy operating costs, $17 million higher cost of product sales from
transportation activities and $16 million higher terminalling costs following
the August 1999 acquisition of additional terminals. Slightly offsetting these
increases were $76 million lower fleet management operating costs following the
sale of a portion of such operations in late 1999, $13 million lower pipeline
construction costs following substantial completion of the pipeline project and
$13 million lower cost of distribution activities following a reduction of
propane trucking operations.
Segment profit increased $24.7 million, or 17 percent, due primarily to $24
million from increased refined product volumes sold, $13 million from higher
per-unit refinery margins and $20 million higher gross profit from travel
center/convenience store merchandise sales. In addition, segment profit
increased $13 million from improved bio-energy operations, $8 million from
activities at the petrochemical plant acquired in March 1999, $8 million from
increased terminalling activities following the 1999 acquisition and $6 million
from product transportation operations. Partially offsetting these increases
were $28 million higher operating costs at the refineries, $32 million higher
operating costs at the travel centers/convenience stores and the $6.5 million
favorable effect in 1999 of settlement of transportation pipeline rate case
issues.
COMMUNICATIONS
NETWORK'S revenues increased $143.6 million, or 45.7 percent, due primarily to
$182 million from growth in voice and data services provided to customers and
$16 million higher network design, operational support and other revenues,
partially offset by $43 million lower revenues from dark fiber leases accounted
for as sales-type leases on the new fiber-optic network and $14 million lower
revenue from an Australian telecommunications operation.
Costs and operating expenses increased $263.4 million, or 81 percent, due
primarily to $149 million higher off-net capacity and local access connection
costs associated with providing increased customer services, $57 million higher
depreciation expense as portions of the new network are placed into service, $53
million higher operating and maintenance expenses to support increased revenues
and future revenue streams, $39 million higher network lease expense for the
leased portion of the network, and $12 million higher ad valorem taxes,
partially offset by $34 million lower construction costs associated with dark
fiber leases accounted for as sales-type leases and $13 million decreased
operating expenses from an Australian telecommunications operation.
Selling, general and administrative expenses increased $61 million, or 67
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 $125.3 million, from a $103.7 million segment loss
in 1999 to a $21.6 million segment profit in 2000, due primarily to a $214.7
million gain from the conversion of Williams' shares of Concentric Network
Corporation's common stock into shares of XO Communications, Inc.'s (formerly
NEXTLINK Communications, Inc.) common stock pursuant to a merger of those
companies in June 2000 and gains totaling $108.3 million from the sale of
certain marketable equity securities (see Note 3), partially offset by losses
associated with providing customer services off-net prior to completion of the
new network, $96 million higher depreciation and network lease expense, $61
million higher selling, general and administrative expenses, and $20 million in
write-downs of certain cost-basis and equity investments.
BROADBAND MEDIA'S revenues decreased $1.9 million and segment loss increased
$4.3 million due primarily to $4.6 million of equity losses.
22
<PAGE> 24
Management's Discussion & Analysis (Continued)
SOLUTIONS' revenues decreased $23.5 million, or 2 percent, due primarily to
$55 million lower revenues from new systems sales and upgrades due to lower
sales activity consistent with voice equipment industry trends. Partially
offsetting were $13 million higher revenues from maintenance and customer
service orders and a $19 million increase from all other revenues. 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 nine months ended September 30, 1999 were
determined using the completed-contract method, revenues would have increased $9
million, or one percent.
Costs and operating expenses increased $19 million, due primarily to $49
million increased installation and service costs, partially offset by $30
million lower costs associated with the decrease in revenues from new systems
sales and upgrades. If the nine months ended September 30, 1999 were determined
using the completed-contract method, the increase in costs and operating
expenses would have been $42 million, or 5.5 percent.
Selling, general and administrative expenses increased $10 million, due
primarily to $9 million higher provision for uncollectible trade receivables
reflecting increased aging of accounts due to significant historical billing and
collection issues and $8 million increased depreciation and amortization
expenses. Partially offsetting these increases were lower incentive compensation
levels.
Segment loss increased $51.5 million, to a $80.4 million loss in 2000 from
$28.9 million loss in 1999, due primarily to lower margins and increased
selling, general and administrative expenses. If the nine months ended September
30, 1999 were determined using the completed-contract method, the increase in
segment loss would have been $42 million.
STRATEGIC INVESTMENTS' revenues decreased $26.3 million due primarily to the
$33 million effect of businesses that have been sold or otherwise exited,
primarily audio and video conferencing and closed-circuit video broadcasting
businesses, partially offset by $9 million lower equity investment losses
following the first-quarter 2000 sale of a portion of the investment in ATL.
Revenues for 2000 represent equity losses from ATL.
Costs and operating expenses decreased $26 million and selling, general and
administrative expenses decreased $17.5 million due primarily to the sale of the
audio and video conferencing and closed-circuit video broadcasting businesses.
Segment profit increased $63.9 million from a $56.3 million 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 the first quarter of
2000 (see Note 3), $9 million lower equity investment losses, a $13.5 million
income effect of businesses that were generating losses that have been sold or
otherwise exited, and $3.7 million of dividends from a telecommunications
investment.
OTHER
OTHER revenues increased $31.8 million, or 45 percent, due primarily to $17
million of improved international equity investment earnings and $13 million
higher Venezuelan gas compression revenues reflecting higher volumes in 2000
following operational problems experienced in first-quarter 1999.
Segment profit improved $21.7 million, from a $2.9 million segment loss in
1999 to an $18.8 million segment profit in 2000. The improvement was due
primarily to a $17 million favorable change in international equity investment
earnings and improved operating profit from Venezuelan gas compression related
to higher revenues. The $17 million improved international equity investment
earnings reflect the change in accounting for an equity investment to a cost
basis investment following a reduction of management influence. In addition, the
improved international equity investment earnings reflect the consolidation of a
partially-owned subsidiary previously accounted for as an equity investment
following additional investments in the subsidiary. Partially offsetting were
losses from a Lithuanian energy investment acquired in fourth-quarter 1999.
CONSOLIDATED
INTEREST ACCRUED increased $261.6 million, or 58.6 percent due primarily to
the $135 million effect of higher borrowing levels combined with the $117.6
million effect of higher average interest rates. These increases primarily
reflect the issuance of $2 billion of high-yield public debt in October 1999 by
Communications. Interest capitalized increased $117.7 million, from $37.5
million in 1999 to $155.2 million in 2000, due primarily to increased capital
expenditures for the fiber-optic network. Investing income increased $413.1
million, from $19.5 million in 1999 to $432.6 million in 2000, due primarily to
$343.2 million of gains from sales/conversion of investments and dividends
previously discussed within Communications' segment profit and $74 million
higher interest income associated primarily with the investment of proceeds from
23
<PAGE> 25
Management's Discussion & Analysis (Continued)
Communications' equity and debt offerings, partially offset by $20 million
related to writedowns of certain cost basis and equity investments.
Minority interest in (income) loss and preferred returns of consolidated
subsidiaries changed $37.8 million compared to 1999 due primarily to the effect
of the 14.7 percent minority ownership interest in losses at Communications
following the October 1999 initial public offering and higher losses experienced
by Solutions, LLC which has a 30 percent interest held by a minority
shareholder. During third quarter 2000, the cumulative losses attributable to
Solutions LLC exceeded Williams' minority interest in the consolidated
subsidiary. As a result Williams suspended recording minority interest related
to this subsidiary.
The provision for income taxes increased $243 million, from $131.4 million in
1999 to $374.4 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 effects of state income taxes,
losses of foreign entities not deductible for U.S. tax purposes, and the impact
of goodwill not deductible for tax purposes related to assets impaired during
the second quarter of 1999 (see Note 4).
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 subject to
certain limitations under existing loan covenants, consist primarily of the
following:
o Available cash-equivalent investments of $150 million at September 30, 2000,
as compared to $494 million at December 31, 1999.
o $350 million available under Williams' $700 million bank-credit facility at
September 30, 2000, as compared to $475 million at December 31, 1999 under
the $1 billion bank credit facility that was terminated and replaced in July
with the $700 million bank-credit facility (See Note 9).
o $205 million available under Williams' $1.7 billion commercial paper program
at September 30, 2000, as compared to $154 million at December 31, 1999 under
a $1.4 billion commercial paper program.
o Cash generated from operations.
o Short-term uncommitted bank lines of credit 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 $1
billion at September 30, 2000, as compared to $1.9 billion at December 31,
1999.
o Communications' $1.05 billion bank-credit facility under which $525 million
was outstanding at September 30, 2000, and no amounts were outstanding at
December 31, 1999.
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.
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 at September 30, 2000, only an additional $152
million could be borrowed and utilized under the bank-credit facility without
issuing additional equity or amending the facility.
In 2000, capital expenditures and investments, including acquisitions of
businesses, are estimated to total approximately $6.6 billion, including
approximately $3.8 billion at Communications. Williams expects to fund capital
and investment expenditures, debt payments and working-capital requirements
through (1) cash generated from
24
<PAGE> 26
Management's Discussion & Analysis (Continued)
operations, (2) the use of the available portion of Williams' $700 million
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 September 30, 2000, has fully utilized the facility. The
proceeds were used for general corporate purposes, including the repayment of
outstanding debt.
In August 2000, Communications 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. Proceeds will be used to fund operations and
building of the fiber-optic network.
In September 2000, Williams entered into a $630 million short-term bank
credit agreement expiring December 2000 and at September 30, 2000 has borrowed
$300 million. The proceeds plus additional borrowings under the facility were
used to purchase various energy-related assets in Canada. Williams is
negotiating long-term financing to replace this facility. Also in September
2000, Williams entered into a $500 million debt obligation with a 10 year and
four month maturity. During the initial four months, the interest rate varies
based on LIBOR plus .40 percent with an initial rate of approximately 7.02
percent. During the initial four month term, the debt obligation will be
remarketed and the interest rate will be set at a fixed rate for the remaining
10 year term. Proceeds were used for general corporate purposes, including the
repayment of commercial paper. In September 2000, Communications issued
5,000,000 shares of 6.75 percent redeemable cumulative convertible preferred
stock in a private placement for net proceeds of $240.5 million.
The long-term debt to debt-plus-equity ratio was 61.8 percent at September
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 68.5 percent at September 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 liquefied natural gas facility for $148
million in cash.
During 2000, Communications sold portions of its investments in certain
marketable equity securities for approximately $84 million in cash and a portion
of its investment in ATL for approximately $168 million in cash. Communications
subsequently advanced $150 million to ATL. In addition, Communications made
approximately $96 million of investments in and advances to various
communications businesses in 2000.
Subsequent to September 30, 2000, Williams completed the purchase of various
energy-related assets in Canada for approximately $540 million. Included in the
purchase were interests in several natural gas liquids (NGL) extraction and
fractionation plants, NGL transportation pipeline and storage facilities, and a
natural gas processing plant.
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 (IRS)
ruling on the proposed tax-free spinoff of the communications business to
Williams' stockholders. In order for Williams and its stockholders to receive
the benefit of the ruling, a spinoff must be completed by August 2001, unless
the IRS consents to an extension of time. The specific course of action has not
been determined, but is envisioned to occur no later than September 30, 2001.
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 the $1.4 billion of
short-term investments at December 31, 1999 was reduced as a result of the sale
of those investments throughout the year to fund Communications' capital
expenditures program and operations. However, in August 2000, Communications
received net proceeds from the sale of $1 billion in notes which were invested
primarily in similar short-term debt securities. At September 30, 2000,
short-term investments totaled $921 million.
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. During third-quarter 2000, Communications 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. Communications also issued $525
million of variable rate debt under the term loan portion of its $1.05 billion
long-term credit agreement at an initial rate of 9.02 percent. Also during the
third quarter, Williams borrowed $300 million at a variable interest rate
(initially 7.95 percent) under a new $630 million short-term bank credit
agreement and entered into a $500 million debt obligation with the initial four
months at a variable interest rate (initially 7.02 percent).
COMMODITY PRICE RISK
Energy Marketing and Trading's value at risk for trading commodity price
risk increased to $41 million at September 30, 2000 as compared to $9 million at
December 31, 1999. This increase is attributable to increased electric power and
natural gas prices, combined with increased price volatility in the power and
gas markets, and an expanded price risk management portfolio.
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 $141.8 million based on the current
exchange rate of the Brazilian real to the U.S. dollar at September 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 totalled approximately $883 million and $288 million at September 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 instruments which will expire by fourth-quarter
2001 and are designed to hedge the exposure to changes in the price of certain
marketable equity securities. Approximately 27 percent of Williams' marketable
securities portfolio is hedged at September 30, 2000. 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 September 30, 2000, which is
included in investments in the Consolidated Balance Sheet, would increase or
decrease by approximately $246 million or $210 million, respectively.
26
<PAGE> 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed below are filed as part of this report:
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges
(b) During third-quarter 2000, the Company filed a Form 8-K on July
24, 2000 and August 2, 2000, which reported significant events
under Item 5 of the Form and included the Exhibits required by
Item 7 of the Form.
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)
November 14, 2000
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
12 -- Computation of Ratio of Earnings to Fixed Charges
27 -- Financial Data Schedule
</TABLE>
