<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 March 31, 2000
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to__________________
Commission file number 1-4174
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THE WILLIAMS COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 73-0569878
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(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
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NO CHANGE
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at April 28, 2000
----------------------------- --------------------------------------
Common Stock, $1 par value 441,768,700 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 Months
Ended March 31, 2000 and 1999 2
Consolidated Balance Sheet--March 31, 2000 and December 31, 1999 3
Consolidated Statement of Cash Flows--Three Months
Ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
Part II. Other Information 19
Item 6. Exhibits and Reports on Form 8-K
Exhibit 12--Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividend
Requirements
</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 is
making 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 The Williams Companies, Inc. 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.
1
<PAGE> 3
The Williams Companies, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions, except per-share amounts) Three months ended March 31,
-------------------------------
2000 1999*
------------ ------------
<S> <C> <C>
Revenues:
Gas Pipeline $ 481.3 $ 466.9
Energy Services 1,970.5 1,141.3
Communications 541.2 506.9
Other 33.4 6.2
Intercompany eliminations (598.7) (177.2)
------------ ------------
Total revenues 2,427.7 1,944.1
------------ ------------
Segment costs and expenses:
Costs and operating expenses 1,802.6 1,398.5
Selling, general and administrative expenses 337.9 304.7
Other (income) expense--net .5 (2.5)
------------ ------------
Total segment costs and expenses 2,141.0 1,700.7
------------ ------------
General corporate expenses 19.4 16.9
------------ ------------
Operating income (loss):
Gas Pipeline 197.3 186.8
Energy Services 205.1 125.1
Communications (121.9) (51.5)
Other 6.2 (17.0)
General corporate expenses (19.4) (16.9)
------------ ------------
Total operating income 267.3 226.5
Interest accrued (228.1) (143.3)
Interest capitalized 37.6 9.4
Investing income 100.5 6.7
Minority interest in (income) loss and preferred returns
of consolidated subsidiaries 13.8 (.6)
Other income-net 4.4 1.3
------------ ------------
Income before income taxes and cumulative
effect of change in accounting principle 195.5 100.0
Provision for income taxes 74.2 41.5
------------ ------------
Income before cumulative effect of change in
accounting principle 121.3 58.5
Cumulative effect of change in accounting principle (21.6) (5.6)
------------ ------------
Net income 99.7 52.9
Preferred stock dividends -- 1.6
------------ ------------
Income applicable to common stock $ 99.7 $ 51.3
============ ============
Basic and diluted earnings per common share:
Income before cumulative effect
of change in accounting principle $ .27 $ .13
Cumulative effect of change in accounting principle (.05) (.01)
------------ ------------
Net income $ .22 $ .12
============ ============
Basic average shares (thousands) 442,884 432,091
Diluted average shares (thousands) 448,105 437,000
Cash dividends per common share $ .15 $ .15
</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) March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 626.1 $ 1,092.0
Short-term investments 987.0 1,434.8
Receivables 2,572.0 2,508.2
Inventories 707.4 631.5
Energy trading assets 670.8 376.0
Deferred income taxes 127.8 203.7
Other 302.6 270.4
------------ ------------
Total current assets 5,993.7 6,516.6
Investments 2,276.0 1,965.4
Property, plant and equipment, at cost 20,111.5 19,249.8
Less accumulated depreciation and depletion (4,242.1) (4,094.3)
------------ ------------
15,869.4 15,155.5
Goodwill and other intangible assets--net 424.2 435.6
Other assets and deferred charges 1,236.6 1,215.4
------------ ------------
Total assets $ 25,799.9 $ 25,288.5
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,418.8 $ 1,378.8
Accounts payable 2,172.0 2,049.9
Accrued liabilities 1,705.3 1,835.2
Energy trading liabilities 512.5 312.3
Long-term debt due within one year 513.8 196.0
------------ ------------
Total current liabilities 6,322.4 5,772.2
Long-term debt 8,945.3 9,235.3
Deferred income taxes 2,511.6 2,581.9
Other liabilities and deferred income 1,281.7 1,041.8
Minority interest in consolidated subsidiaries 517.9 561.5
Contingent liabilities and commitments
Preferred ownership interests of subsidiaries:
Preferred interests of subsidiaries 335.1 335.1
Williams obligated mandatorily redeemable preferred securities of
Trust holding only Williams indentures 179.0 175.5
Stockholders' equity:
Common stock, $1 par value, 960 million shares authorized, 445.3 million
issued in 2000, 444.5 million issued in 1999 445.3 444.5
Capital in excess of par value 2,390.3 2,356.7
Retained earnings 2,840.6 2,807.2
Accumulated other comprehensive income 152.1 99.5
Other (78.5) (77.6)
------------ ------------
5,749.8 5,630.3
Less treasury stock (at cost), 3.6 million shares of common stock in 2000
and 3.8 million in 1999 (42.9) (45.1)
------------ ------------
Total stockholders' equity 5,706.9 5,585.2
------------ ------------
Total liabilities and stockholders' equity $ 25,799.9 $ 25,288.5
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
The Williams Companies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Millions) Three months ended March 31,
- ---------- -------------------------------
2000 1999*
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 99.7 $ 52.9
Adjustments to reconcile to cash provided from operations:
Cumulative effect of change in accounting principle 21.6 5.6
Depreciation, depletion and amortization 199.7 172.9
Provision (benefit) for deferred income taxes (23.4) 29.5
Gain on dispositions of assets (50.6) (.3)
Minority interest in income (loss) and preferred returns of
consolidated subsidiaries (13.8) .6
Cash provided (used) by changes in assets and liabilities:
Receivables (113.8) 32.0
Inventories (76.2) (23.6)
Other current assets (30.5) (34.7)
Accounts payable 146.3 (104.8)
Accrued liabilities (129.2) (226.5)
Changes in current energy trading assets and liabilities (94.6) (16.0)
Changes in non-current energy trading assets and liabilities (42.0) 4.2
Changes in non-current deferred income 65.7 116.5
Other, including changes in non-current assets and liabilities 44.8 29.1
------------ ------------
Net cash provided by operating activities 3.7 37.4
------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable 246.0 681.6
Payments of notes payable (103.8) (54.8)
Proceeds from long-term debt 500.7 727.8
Payments of long-term debt (553.1) (598.9)
Proceeds from issuance of common stock 27.0 82.1
Dividends paid (66.3) (66.3)
Other--net (8.4) 4.8
------------ ------------
Net cash provided by financing activities 42.1 776.3
------------ ------------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (935.8) (418.1)
Proceeds from dispositions and excess fiber capacity transactions 25.9 41.8
Changes in accounts payable and accrued liabilities (30.4) (92.4)
Acquisition of business, net of cash acquired -- (162.9)
Proceeds from sales of short-term investments 469.1 --
Proceeds from sales of investments and other assets 205.8 --
Purchases of investments/advances to affiliates (233.7) (353.2)
Other--net (12.6) (2.1)
------------ ------------
Net cash used by investing activities (511.7) (986.9)
------------ ------------
Decrease in cash and cash equivalents (465.9) (173.2)
Cash and cash equivalents at beginning of period 1,092.0 503.3
------------ ------------
Cash and cash equivalents at end of period $ 626.1 $ 330.1
============ ============
</TABLE>
* Certain amounts have been restated as described in Note 2 of Notes to
Consolidated Financial Statements.
See accompanying notes.
4
<PAGE> 6
The Williams Companies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
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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.
The accompanying financial statements have not been audited by independent
auditors, but include all normal recurring adjustments, which, in the opinion of
Williams' management, are necessary to present fairly its financial position at
March 31, 2000, and its results of operations and cash flows for the three
months ended March 31, 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 experiences higher segment profits in the first and
fourth quarters as compared to the second and third quarters.
2. Basis of presentation
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During first-quarter 2000, management of certain activities related to the
marketing of products from the Alaska refinery were transferred from Energy
Marketing & Trading to Petroleum Services. Prior year amounts for Petroleum
Services and Energy Marketing & Trading have been restated to reflect the
transfer of these operations.
In fourth-quarter 1999, Williams conformed its accounting for all of its
inventories of non-trading crude oil and refined products to the average-cost
method or market, if lower, the method used for the majority of such
inventories. Previously, certain of these inventories were carried on the
last-in, first-out cost method. All previously reported results have been
restated to reflect the retroactive application of this accounting change. The
accounting change increased net income for the three months ended March 31,
1999, by $2.6 million or $.01 per diluted share.
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 first-quarter 2000 results was insignificant.
Certain other income statement and cash flow amounts have been reclassified
to conform to the current classifications.
3. Investing income
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During first-quarter 2000, Williams sold a portion of its investment in
certain marketable equity securities for a gain of $31.5 million.
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., 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. Provision for income taxes
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The provision (benefit) for income taxes includes:
<TABLE>
<CAPTION>
Three months ended
(Millions) March 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Current:
Federal $ 81.2 $ 7.8
State 12.7 3.3
Foreign 3.7 .9
------------ ------------
97.6 12.0
Deferred:
Federal (40.9) 24.5
State 21.6 5.0
Foreign (4.1) --
------------ ------------
(23.4) 29.5
------------ ------------
Total provision $ 74.2 $ 41.5
============ ============
</TABLE>
The effective income tax rate for the three months ended March 31, 2000, is
greater than the federal statutory rate due primarily to the effects of state
income taxes, partially offset by the tax benefit of permanent basis differences
on certain assets sold during the first quarter.
The effective income tax rate for the three months ended March 31, 1999, is
greater than the federal statutory rate due primarily to the effects of state
income taxes.
5
<PAGE> 7
Notes (continued)
5. Cumulative effect of change in accounting principle
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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. Historically, Solutions' revenue recognition policy
has been to recognize revenues on new systems sales and upgrades under the
percentage-of-completion method. Revenues on the contracts were initially
recognized upon delivery of equipment with the remaining revenues under the
contract being recognized over the installation period based on the relationship
of incurred labor to total estimated labor. In light of the new guidance issued
in SAB 101, effective January 1, 2000, Solutions has 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 $138.2 million of revenue in first-quarter 2000 that was included in
the cumulative effect adjustment.
Pro forma amounts, assuming the completed-contract method is applied
retroactively, are as follows:
<TABLE>
<CAPTION>
(Dollars in millions; Three months ended
except per-share amounts) March 31,
-----------------------------
1999
Pro forma Reported
------------ ------------
<S> <C> <C>
Net income $ 44.8 $ 52.9
Earnings per share:
Basic $ .10 $ .12
Diluted $ .10 $ .12
</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. Earnings per share
- --------------------------------------------------------------------------------
Basic and diluted earnings per common share are computed as follows:
<TABLE>
<CAPTION>
(Dollars in millions, except Three
per-share amounts; shares in months ended
thousands) March 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Income before cumulative
effect of change in
accounting principle $ 121.3 $ 58.5
Preferred stock dividends -- 1.6
------------ ------------
Income before cumulative
effect of change in
accounting principle
available to common
stockholders for basic and
diluted earnings per share $ 121.3 $ 56.9
============ ============
Basic weighted-average
shares 442,884 432,091
Effect of dilutive securities:
Stock options 5,221 4,909
------------ ------------
Diluted weighted-average
shares 448,105 437,000
============ ============
Basic and diluted earnings per
common share before cumulative
effect of change in accounting
principle $ .27 $ .13
============ ============
</TABLE>
For 1999, approximately 7.7 million shares related to the assumed
conversion of $3.50 convertible preferred stock have been excluded from the
computation of diluted earnings per common share. Inclusion of these shares
would be antidilutive. Each share of the $3.50 convertible preferred stock was
converted during 1999.
7. Inventories
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 2000 1999
------------ ------------
<S> <C> <C>
Raw materials:
Crude oil $ 83.8 $ 66.6
Other 3.4 2.1
------------ ------------
87.2 68.7
Finished goods:
Refined products 224.1 172.5
Natural gas liquids 103.6 83.9
General merchandise and
communications equipment 115.5 116.0
------------ ------------
443.2 372.4
Materials and supplies 109.9 110.2
Natural gas in underground storage 63.9 77.5
Other 3.2 2.7
------------ ------------
$ 707.4 $ 631.5
============ ============
</TABLE>
6
<PAGE> 8
Notes (Continued)
8. Debt and banking arrangements
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Notes payable
Williams has a $1.4 billion commercial paper program, backed by a
short-term bank-credit facility. At March 31, 2000, approximately $1.3 billion
of commercial paper was outstanding under the program. Interest rates vary with
current market conditions.
Debt
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Weighted-
average
interest March 31, December 31,
(Millions) rate* 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revolving credit loans 6.8% $ 400.0 $ 525.0
Debentures, 6.25% -10.25%,
payable 2003 - 2027 (1) 7.0 1,105.1 1,105.2
Notes, 5.1% -10.875%,
payable through 2022 (2) 8.0 7,009.0 7,339.1
Notes, adjustable rate,
payable through 2004 6.5 853.3 455.0
Other, payable through 2009 6.8 91.7 7.0
------------ ------------
9,459.1 9,431.3
Current portion of long-term debt (513.8) (196.0)
------------ ------------
$ 8,945.3 $ 9,235.3
============ ============
</TABLE>
* At March 31, 2000, including the effects of interest-rate swaps.
(1) $200 million, 7.08% debentures, payable 2026, are subject to redemption at
par at the option of the debtholder in 2001.
(2) $240 million, 6.125% notes, payable 2012, are subject to redemption at par
at the option of the debtholder in 2002.
Williams' communications business, Williams Communications Group, Inc.
(WCG), has a $1.05 billion long-term credit agreement. Terms of the credit
agreement contain restrictive covenants limiting the transfer of funds to
Williams (parent), including the payment of dividends and repayment of
intercompany borrowings by WCG to Williams (parent). At March 31, 2000, no
amounts were outstanding under this facility. Interest rates vary with current
market conditions.
Under the terms of Williams' $1 billion revolving credit agreement,
Northwest Pipeline, Transcontinental Gas Pipe Line and Texas Gas Transmission
have access to varying amounts of the facility, while Williams (parent) has
access to all unborrowed amounts. Interest rates vary with current market
conditions.
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 to repay other long-term debt obligations.
9. 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 $208
million for potential refund as of March 31, 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 are appealing 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. 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 February 2000, the U.S. Court of Appeals for the D.C. Circuit denied the
appeal in one of these cases. 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.
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 March 31,
2000,
7
<PAGE> 9
Notes (Continued)
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 seeks comments on its pricing policies in the
existing long-term market and pricing policies for new capacity. Williams filed
comments on the NOPR and NOI in the second quarter of 1999. On February 9, 2000,
the FERC issued a final rule, Order 637, in response to the comments received on
the NOPR and NOI. The FERC adopts in Order 637 certain policies that it finds
are necessary to adjust its current regulatory model to the needs of the
evolving markets, but determines that any fundamental changes to its regulatory
policy, which changes were raised and commented on in the NOPR and NOI, will be
considered after further study and evaluation of the evolving marketplace. Most
significantly, in Order 637, the FERC (i) revises its pricing policy to waive,
for a two-year period, the maximum price ceilings for short-term releases of
capacity of less than one year, and (ii) permits 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 March 31,
2000, these subsidiaries had accrued liabilities totaling approximately $26
million for these costs.
Certain Williams subsidiaries, including Texas Gas and Transcontinental Gas
Pipe Line, have been identified as potentially responsible parties (PRP) at
various Superfund and state waste disposal sites. In addition, these
subsidiaries have incurred, or are alleged to have incurred, various other
hazardous materials removal or remediation obligations under environmental laws.
Although no assurances can be given, Williams does not believe that these
obligations or the PRP status of these subsidiaries will have a material adverse
effect on its financial position, results of operations or net cash flows.
Transcontinental Gas Pipe Line, Texas Gas and 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 March 31, 2000, Central had accrued a liability for
approximately $11 million, representing the current estimate of future
environmental cleanup costs to be incurred over the next six to 10 years. Texas
Gas and Transcontinental Gas Pipe Line likewise had accrued liabilities for
these costs which are included in the $26 million liability mentioned above.
Actual costs incurred will depend on the actual number of contaminated sites
identified, the actual amount and extent of contamination discovered, the final
cleanup standards mandated by the EPA and other governmental authorities and
other factors. Texas Gas, Transcontinental Gas Pipe Line and Central have
deferred these costs as incurred pending recovery through future rates and other
means.
In July 1999, Transcontinental Gas Pipe Line received a letter stating that
the U.S. Department of Justice (DOJ), at the request of the EPA, intends to file
a civil action against Transcontinental Gas Pipe Line arising from its waste
management practices at Transcontinental Gas Pipe Line's compressor stations and
metering stations in 11 states from Texas to New Jersey. DOJ stated in the
letter that its complaint will seek civil penalties and injunctive relief under
federal environmental laws. DOJ and Transcontinental Gas Pipe Line are
discussing a settlement. While no specific amount was proposed, DOJ stated that
any settlement must include an appropriate civil penalty for the alleged
violations. Transcontinental Gas Pipe Line cannot reasonably estimate the amount
of its potential liability, if any, at this time. However, Transcontinental Gas
Pipe Line believes it has substantially addressed environmental concerns on its
system through ongoing voluntary remediation and management programs.
8
<PAGE> 10
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. At March 31, 2000, WES and its subsidiaries had accrued
liabilities totaling approximately $40 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 March 31, 2000, WES and its subsidiaries
had accrued receivables totaling $17 million.
Williams Field Services (WFS), a WES subsidiary, received a Notice of
Violation (NOV) from the EPA in February 2000. WFS received a contemporaneous
letter from the DOJ indicating that DOJ will also be involved in the matter. The
NOV alleged violations of the Clean Air Act at a gas processing plant. In April,
WFS received a demand for payment in the amount of $1.2 million from the DOJ.
WFS disagrees with the assessment and related violations and plans to continue
negotiations with the EPA and DOJ.
In connection with the 1987 sale of the assets of Agrico Chemical Company,
Williams agreed to indemnify the purchaser for environmental cleanup costs
resulting from certain conditions at specified locations, to the extent such
costs exceed a specified amount. At March 31, 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. Transcontinental Gas Pipe
Line is pursuing an appeal. In the other case, a producer has asserted damages,
including interest calculated through December 31, 1997, of approximately $6
million. Producers have received and may receive other demands, which could
result in additional claims. Indemnification for royalties will depend on, among
other things, the specific lease provisions between the producer and the lessor
and the terms of the settlement between the producer and either Transcontinental
Gas Pipe Line or Texas Gas. Texas Gas may file to recover 75 percent of any such
additional amounts it may be required to pay pursuant to indemnities for
royalties under the provisions of Order 528.
In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly owned subsidiaries including Williams Gas Pipelines
Central, Kern River Gas Transmission, Northwest Pipeline, Williams Gas Pipeline
Company, Transcontinental Gas Pipe Line Corporation, Texas Gas, Williams Field
Services Company and Williams Production Company. Mr. Grynberg has also filed
claims against approximately 300 other energy companies and alleges that the
defendants violated the False Claims Act in connection with the measurement and
purchase of hydrocarbons. The relief sought is an unspecified amount of
royalties allegedly not paid to the federal government, treble damages, a civil
penalty, attorneys' fees, and costs. On April 9, 1999, the United States
Department of Justice announced that it was declining to intervene in any of the
Grynberg qui tam cases, including the action filed against the Williams entities
in the United States District Court for the District of Colorado. On October 21,
1999, the Panel on Multi- District Litigation transferred all of the Grynberg
qui tam cases, including the ones filed against Williams, to the United States
District Court for the District of Wyoming for pre-trial purposes. Motions to
dismiss the complaints filed by various defendants including Williams, are
pending.
WCG and a subsidiary are named as defendants in various putative,
nationwide class actions brought on behalf of all landowners on whose property
the plaintiffs have alleged WCG installed fiber-optic cable without the
permission of the landowner. WCG believes that installation of the cable
containing the single fiber network that crosses over or near the putative class
members' land does not infringe on their property rights. WCG also does not
believe that the plaintiffs have sufficient basis for certification of a class
action.
It is likely that WCG will be subject to other putative class action suits
challenging its railroad or pipeline rights of way. WCG cannot quantify the
impact of all such claims at this time. Thus, WCG cannot be certain that the
plaintiffs' purported class action or other purported class actions, if
successful, will not have a material adverse effect.
In addition to the foregoing, various other proceedings are pending against
Williams or its subsidiaries which are incidental to their operations.
9
<PAGE> 11
Notes (Continued)
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 March 31, 2000, annual estimated
committed payments under these contracts range from approximately $20 million to
$383 million, resulting in total committed payments over the next 22 years of
approximately $7 billion.
10
<PAGE> 12
Notes (Continued)
10. Adoption of accounting standards
- --------------------------------------------------------------------------------
The FASB has issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard, as amended, will be effective for Williams beginning January 1, 2001.
This standard requires that all derivatives be recognized as assets or
liabilities in the balance sheet and that those instruments be measured at fair
value. The effect of this standard on Williams' results of operations and
financial position is being evaluated.
11. Comprehensive income
- --------------------------------------------------------------------------------
Comprehensive income is as follows:
<TABLE>
<CAPTION>
Three months ended
(Millions) March 31,
2000 1999
------------ ------------
<S> <C> <C>
Net income $ 99.7 $ 52.9
Other comprehensive income:
Unrealized gains on securities 140.6 120.6
Realized gains in net income (31.5) --
Foreign currency
translation adjustments (5.1) (22.0)
------------ ------------
Other comprehensive
income before taxes
and minority interest 104.0 98.6
Income taxes on other
comprehensive income (42.4) (46.9)
Minority interest in other
comprehensive income (9.0) --
------------ ------------
Other comprehensive income 52.6 51.7
------------ ------------
Comprehensive income $ 152.3 $ 104.6
============ ============
</TABLE>
During first-quarter 2000, Williams entered into a derivative
instrument which will expire in various stages throughout the remainder of 2000
and is designed to hedge the exposure to changes in the price of its investment
in certain marketable equity securities. Changes in the fair value of the
hedged marketable equity security and the impact of its associated derivative
instrument are reflected in other comprehensive income. The derivative
instrument will impact realized gains or losses from the sale of the hedged
marketable equity security.
11
<PAGE> 13
Notes (Continued)
12. 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) has been modified in 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 period 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
gain on the sale of certain marketable equity securities (in Network) and the
gain on the sale of investments in ATL-Algar Telecom Leste, S.A. (in Strategic
Investments) (see Note 3).
Williams' reportable segments are strategic business units that offer
different products and services. The segments are managed separately, because
each segment requires different technology, marketing strategies and industry
knowledge. Other includes investments in international energy and certain
communications-related ventures, as well as corporate operations.
In first-quarter 2000, Communications realigned its operating segments into
four segments: Network, Broadband Media, Solutions and Strategic Investments.
Network includes those operations previously reported as Network, as well as
investments in network-related companies and operations of an Australian
communications company, which were all previously reported in Strategic
Investments. Broadband Media includes operations principally located in the
United States offering video, advertising distribution and other multimedia
transmission services via terrestrial and satellite links for the broadcast
industry, as well as investments in broadband media communications companies.
These operations and investments were previously reported in Strategic
Investments. Solutions includes the operations previously reported as Solutions,
as well as a data systems integration and professional development company in
Mexico previously reported in Strategic Investments. Strategic Investments now
consists of certain domestic and international companies and investments. Prior
year amounts of Communications' operating segments have been restated to conform
with current presentation.
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 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 page 13:
<TABLE>
<CAPTION>
Three months ended March 31, 2000 Three months ended March 31, 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 $ 197.3 $ -- $ 197.3 $ 186.8 $ -- $ 186.8
Energy Services 205.1 -- 205.1 125.1 -- 125.1
Communications (121.9) 51.7 (70.2) (51.5) -- (51.5)
Other 6.2 -- 6.2 (17.0) -- (17.0)
------------ ------------ ------------ ------------ ------------ ------------
Total segments 286.7 $ 51.7 $ 338.4 243.4 $ -- $ 243.4
------------ ------------ ------------ ------------ ------------ ------------
General corporate
expenses (19.4) (16.9)
------------ ------------
Total operating
income $ 267.3 $ 226.5
============ ============
</TABLE>
12
<PAGE> 14
Notes (Continued)
12. Segment disclosures (continued)
<TABLE>
<CAPTION>
Revenues
-----------------------------------------------------------
External Inter- Equity Earnings Segment
(Millions) Customers segment (Losses) Total Profit (Loss)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
GAS PIPELINE $ 460.8 $ 14.6 $ 5.9 $ 481.3 $ 197.3
ENERGY SERVICES
Energy Marketing & Trading 606.4 (1.1)* -- 605.3 74.2
Exploration & Production 7.9 47.9 -- 55.8 11.4
Midstream Gas & Liquids 172.3 154.2 1.0 327.5 84.5
Petroleum Services 630.6 351.3 -- 981.9 37.7
Merger-related costs and
non-compete amortization -- -- -- -- (2.7)
------------ ------------ ------------ ------------ ------------
TOTAL ENERGY SERVICES 1,417.2 552.3 1.0 1,970.5 205.1
------------ ------------ ------------ ------------ ------------
COMMUNICATIONS
Network 119.0 11.2 .4 130.6 (58.3)
Broadband Media 40.9 -- (.7) 40.2 (6.0)
Solutions 372.4 .8 -- 373.2 (22.1)
Strategic Investments -- -- (2.8) (2.8) 16.2
------------ ------------ ------------ ------------ ------------
TOTAL COMMUNICATIONS 532.3 12.0 (3.1) 541.2 (70.2)
------------ ------------ ------------ ------------ ------------
OTHER 13.2 19.8 .4 33.4 6.2
ELIMINATIONS -- (598.7) -- (598.7) --
------------ ------------ ------------ ------------ ------------
TOTAL $ 2,423.5 $ -- $ 4.2 $ 2,427.7 $ 338.4
============ ============ ============ ============ ============
FOR THE THREE MONTHS ENDED MARCH 31, 1999
GAS PIPELINE $ 452.3 $ 14.5 $ .1 $ 466.9 $ 186.8
ENERGY SERVICES
Energy Marketing & Trading 406.6 (51.4)* (.1) 355.1 42.0
Exploration & Production 1.2 26.3 -- 27.5 4.7
Midstream Gas & Liquids 193.1 26.9 (2.3) 217.7 46.6
Petroleum Services 403.5 137.3 .2 541.0 35.9
Merger-related costs and
non-compete amortization -- -- -- -- (4.1)
------------ ------------ ------------ ------------ ------------
TOTAL ENERGY SERVICES 1,004.4 139.1 (2.2) 1,141.3 125.1
------------ ------------ ------------ ------------ ------------
COMMUNICATIONS
Network 107.4 12.7 -- 120.1 (22.5)
Broadband Media 38.6 .8 -- 39.4 (5.7)
Solutions 340.5 -- -- 340.5 (9.1)
Strategic Investments 14.7 .3 (8.1) 6.9 (14.2)
------------ ------------ ------------ ------------ ------------
TOTAL COMMUNICATIONS 501.2 13.8 (8.1) 506.9 (51.5)
------------ ------------ ------------ ------------ ------------
OTHER 12.8 9.8 (16.4) 6.2 (17.0)
ELIMINATIONS -- (177.2) -- (177.2) --
------------ ------------ ------------ ------------ ------------
TOTAL $ 1,970.7 $ -- $ (26.6) $ 1,944.1 $ 243.4
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TOTAL ASSETS
----------------------------------
(Millions) March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
GAS PIPELINE $ 8,641.1 $ 8,628.5
ENERGY SERVICES
Energy Marketing & Trading 3,833.9 3,209.7
Exploration & Production 579.9 618.6
Midstream Gas & Liquids 3,528.3 3,514.4
Petroleum Services 2,644.0 2,588.7
------------ ------------
TOTAL ENERGY SERVICES 10,586.1 9,931.4
------------ ------------
COMMUNICATIONS
Network 4,433.0 4,079.8
Broadband Media 287.8 348.0
Solutions 1,272.7 1,537.6
Strategic Investments 564.1 412.5
------------ ------------
TOTAL COMMUNICATIONS 6,557.6 6,377.9
------------ ------------
OTHER 6,886.8 6,629.3
ELIMINATIONS (6,871.7) (6,278.6)
------------ ------------
TOTAL $ 25,799.9 $ 25,288.5
============ ============
</TABLE>
*Energy Marketing & Trading intercompany cost of sales, which are netted in
revenues consistent with fair value accounting, exceed intercompany revenue.
13
<PAGE> 15
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Results of Operations
First Quarter 2000 vs. First Quarter 1999
CONSOLIDATED OVERVIEW
Williams' revenues increased $484 million, or 25 percent, due primarily to
increased petroleum products and natural gas liquids average sales prices and
sales volumes, higher electric power services revenues and growth in
Communications' data and voice services. Partially offsetting these increases
were lower retail natural gas, electric and propane revenues following the 1999
sale of these businesses and lower Communications' dark fiber lease revenues.
Segment costs and expenses increased $440 million, or 26 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.
Partially offsetting these increases were lower retail natural gas, electric and
propane costs following the sale of these businesses in 1999 and lower
construction costs associated with Communications' dark fiber leases.
Operating income increased $41 million, or 18 percent, due primarily to an
$80 million increase at Energy Services and improved results from energy-related
international investments and operations (included in Other segment profit),
partially offset by $70 million higher losses at Communications. Energy
Services' increase reflects improved electric power services results and higher
per-unit natural gas liquids sales margins, partially offset by lower natural
gas trading margins and the absence of retail natural gas, electric and propane
margins following the sale of these businesses. The increased losses at
Communications result from expenses associated with providing customer services
prior to completion of the new network, higher depreciation and network lease
expense as the network is brought into operation and higher selling, general and
administrative expenses, including costs associated with infrastructure growth
and improvement.
Income before income taxes and cumulative effect of change in accounting
principle increased $96 million, from $100 million in 1999 to $196 million in
2000, due primarily to $41 million higher operating income and $94 million
higher investing income. Investing income includes a $31.5 million gain on 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 offsetting is $57 million higher net interest expense
reflecting increased debt in support of continued expansion and new projects.
GAS PIPELINES
GAS PIPELINE'S revenues increased $14.4 million, or 3 percent, due
primarily to $7 million higher transportation demand revenues, $7 million from
the settlement of a prior rate proceeding in 2000 and $6 million higher equity
earnings, partially offset by the effect of a $3 million recovery of gas supply
realignment costs in 1999.
Segment profit increased $10.5 million, or 6 percent, due primarily to the
higher revenues discussed above, partially offset by a $4 million accrual for
gas exchange imbalances and $4 million of costs associated with consolidating
the office headquarters of two of the pipelines.
Based on current rate structures and/or historical maintenance schedules of
certain of its pipelines, Gas Pipeline experiences higher segment profits in the
first and fourth quarters as compared with the second and third quarters. On
March 17, 2000, Transcontinental Gas Pipe Line received a favorable order from
the Federal Energy Regulatory Commission related to the rate of return and
capital structure issues in a regulatory proceeding. Based on an initial review
of the requests for rehearing filed in April 2000 and preliminary calculations
of the financial impact of the FERC's March 17 order, Gas Pipeline estimates
that rate refund liabilities will be reduced by approximately $45 million to $50
million in the second quarter of 2000 (a portion of which is attributable to the
gas processing operations managed by Midstream Gas & Liquids).
ENERGY SERVICES
ENERGY MARKETING & TRADING'S revenues increased $250.2 million, or 70
percent, due to a $55.4 million increase in trading revenues and a $194.8
million increase in non-trading revenues. The $55.4 million increase in trading
revenues is due primarily to $97 million higher electric power services margins,
including $45 million from increased contract origination revenues, $38 million
from increased market prices for certain ancillary services in the California
portfolio and increased trading volumes. Partially offsetting this increase were
$29 million lower natural gas trading margins and $8 million lower margins on
crude oil and refined products trading.
The $194.8 million non-trading revenue increase is due primarily to $308
million higher refined product marketing revenues resulting from higher average
sales prices and increased sales volumes primarily reflecting recent expansions
of the Memphis refinery. In addition, natural gas liquids revenues were $9
million higher due primarily to a petrochemical plant which was acquired in
March 1999. Partially offsetting these increases were $122 million lower retail
natural gas, electric and propane revenues following the sale of these
businesses in 1999.
Costs and operating expenses increased $220.8 million, or 82 percent, due
primarily to $310 million higher refined product cost of sales associated with
non-trading activities, partially offset by lower retail natural
14
<PAGE> 16
gas, electric and propane cost of sales and operating expenses of $66 million
and $24 million, respectively, reflecting the 1999 sale of these businesses.
These variances are associated with the corresponding changes in non-trading
revenues discussed above.
Segment profit increased $32.2 million, or 77 percent, due primarily to $97
million higher electric power services margins, partially offset by $29 million
lower natural gas trading margins and $32 million lower margins following the
sale of the retail natural gas, electric and propane businesses in 1999.
EXPLORATION & PRODUCTION'S revenues increased $28.3 million, or 103
percent, due primarily to $15 million from increased average natural gas sales
prices, $8 million from oil and gas properties acquired in April 1999 and $5
million associated with increases in both company-owned production volumes and
marketing volumes from the Williams Coal Seam Gas Royalty Trust and royalty
interest owners.
Segment profit increased $6.7 million, or 144 percent, due primarily to a
$6 million favorable effect of the April 1999 acquisition and $5 million higher
margins from company-owned production, partially offset by a $3 million decrease
in margins from the marketing of natural gas.
MIDSTREAM GAS & LIQUIDS' revenues increased $109.8 million, or 50 percent,
due primarily to $81 million higher natural gas liquids sales from processing
activities. The liquids sales increase reflects $20 million from a 59 percent
increase in volumes sold and $61 million from a 109 percent increase in average
natural gas liquids sales prices. The increase in natural gas liquids sales
volumes is a result of improved liquids market conditions and a new plant which
became operational in the second quarter of 1999. In addition, revenues
increased from $13 million higher natural gas liquids pipeline transportation
revenues associated with increased shipments, $4 million higher storage
revenues following the second-quarter 1999 acquisition of two storage
facilities and $3 million higher processing revenues.
Costs and operating expenses increased $59 million, or 39 percent, due
primarily to $31 million higher liquids fuel and replacement gas purchases, $12
million of losses associated with certain propane storage transactions and
higher operating and maintenance expenses.
General and administrative expenses increased $11.9 million, or 51 percent,
due primarily to $9 million of costs associated with reorganizing 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 the first quarter of 2000. In addition, severance,
relocation and other exit costs were incurred. An additional $3 million to $4
million of such costs are expected to be incurred during the second quarter of
2000. Midstream expects one-year cost savings to exceed these charges.
Segment profit increased $37.9 million, or 81 percent, due primarily to $47
million higher per-unit natural gas liquids margins reflecting increased
petrochemical demand and higher crude oil prices. In addition, transportation,
storage and processing revenues increased $13 million, $4 million and $3
million, respectively. Partially offsetting were the $11.9 million higher
general and administrative expenses, the $12 million of propane storage losses
and higher operating and maintenance expenses.
PETROLEUM SERVICES' revenues increased $440.9 million, or 81 percent, due
primarily to $379 million higher refinery revenues (including $97 million higher
intra-segment sales to the travel centers/convenience stores which are
eliminated) and $134 million higher travel center/convenience store sales. The
$379 million increase in refinery revenues reflects a $338 million increase from
120 percent higher average refined product sales prices and $41 million from a
17 percent increase in refined product volumes sold. The increase in refined
product volumes sold follows refinery improvements in mid-1999 which increased
capacity. The $134 million increase in travel center/convenience store sales
reflects $84 million from 48 percent higher average gasoline and diesel sales
prices, $43 million primarily from an 86 percent increase in diesel sales
volumes and $8 million higher merchandise sales. The increase in diesel sales
volumes reflects the opening of twelve new travel centers since first-quarter
1999. Additional travel centers are planned to open in 2000. In addition,
revenues increased due to $20 million higher ethanol sales reflecting both an
increase in ethanol volumes sold and higher average ethanol sales prices, $10
million in revenues from a petrochemical plant acquired in March 1999 and $8
million higher revenues from terminalling operations following the acquisition
of additional terminals in August 1999, partially offset by $13 million lower
fleet management revenues following the sale of a portion of such operations in
late 1999.
Costs and operating expenses increased $429 million, or 88 percent, due
primarily to $380 million higher refining costs and $140 million higher travel
center/convenience store costs (including $97 million higher intra-segment
purchases from the refineries which are eliminated). The $380 million increase
in refining costs reflects $340 million from higher crude supply costs and
other related per-unit cost of sales, $31 million associated with increased
volumes sold and $9 million higher operating costs at the refineries. The $140
million increase in travel center/convenience store costs reflects $88 million
from increased average gasoline and diesel purchase prices, $40 million
primarily from increased diesel sales volumes, $8 million from increased store
operating costs and $4 million higher merchandise costs of sales. In addition,
costs and operating expenses increased due to $15 million higher ethanol
operating costs, $5 million higher terminalling costs following the
15
<PAGE> 17
August 1999 acquisition of additional terminals and $5 million of costs from the
petrochemical plant acquired in March 1999, partially offset by $14 million
lower fleet management operating costs following the sale of a portion of such
operations in late 1999.
Segment profit increased $1.8 million, or 5 percent, due primarily to $10
million from increased refined product volumes sold, $5 million from improved
ethanol operations, $5 million from activities at the petrochemical plant
acquired in March 1999, $4 million higher gross profit from travel
center/convenience store merchandise sales and $3 million from increased
terminalling activities following the 1999 acquisition. Largely offsetting these
increases were $9 million and $8 million of increased operating costs at the
refineries and travel centers/convenience stores, respectively, $4 million
higher selling, general and administrative expenses and the favorable effect in
1999 of the recovery of $4 million of environmental costs previously expensed.
COMMUNICATIONS
NETWORK'S revenues increased $10.5 million, or 9 percent, due primarily to
$45 million from growth in both data and voice services provided to customers,
partially offset by $31 million lower revenues from dark fiber leases accounted
for as sales-type leases on the new network and $4 million lower revenues from
an Australian telecommunications operation.
Costs and operating expenses increased $58.3 million, or 49 percent, due
primarily to $37 million higher off-net capacity and local access connection
costs associated with providing customer services, $19 million higher operating
and maintenance expenses in anticipation and support of future revenue streams,
$16 million higher depreciation expense as portions of the new network were
placed into service and $12 million higher lease expense for the leased portion
of the network. These increases are partially offset by $27 million lower
construction costs associated with dark fiber leases accounted for as sales-type
leases.
Selling, general and administrative expenses increased $19.7 million, or 85
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 $35.8 million, from a $22.5 million loss in 1999 to
a $58.3 million loss in 2000, due primarily to the $19.7 million increase in
selling, general and administrative expenses, expenses associated with providing
customer services off-net prior to completion of the new network and $28 million
higher depreciation and network lease expense, partially offset by a $31.5
million gain on the sale of a portion of the investment in certain marketable
equity securities.
BROADBAND MEDIA'S revenues increased $.8 million, or 2 percent, while
segment loss increased $.3 million, or 6 percent, due primarily to lower
margins.
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 5 of Notes to Consolidated Financial
Statements). Solutions' revenues increased $32.7 million, or 10 percent, due
primarily to $16 million higher new system sales and upgrades, $9 million higher
maintenance and customer service orders and $8 million higher other revenues. If
first-quarter 1999 were determined using the completed-contract method, the
increase in revenues would have been $61.3 million, or 20 percent.
Costs and operating expenses increased $38.7 million, or 15 percent,
reflecting the higher level of activity associated with the revenue increase.
If first-quarter 1999 were determined using the completed-contract method, the
increase in cost and operating expenses would have been $59.2 million or 26
percent.
Segment loss increased $13 million, from $9.1 million in 1999 to $22.1
million in 2000 due primarily to lower margins and $7 million higher selling,
general and administrative expenses. If first-quarter 1999 were determined
using the completed-contract method, the increase in segment loss would have
been $4.9 million. Selling, general and administrative expenses increased due
primarily to $6 million higher business integration, support and information
technology costs and $3 million higher depreciation and amortization, partially
offset by a $4 million decrease in the provision for uncollectible trade
receivables.
STRATEGIC INVESTMENTS' revenues decreased $9.7 million due primarily to the
$13 million effect of the July 1999 sale of the audio and video conferencing and
closed-circuit video broadcasting businesses, partially offset by $5 million
lower equity investment losses following the first-quarter 2000 sale of a
portion of the investment in ATL.
Costs and operating expenses decreased $11.5 million and selling, general
and administrative expenses decreased $8.3 million due primarily to the sale of
the audio and video conferencing and closed-circuit video broadcasting
businesses.
Segment profit increased $30.4 million, from a $14.2 million segment loss
in 1999 to a $16.2 million segment profit in 2000, due primarily to 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), $3.7 million of dividends from a
telecommunications investment, $5 million lower equity investment losses and a
$6 million effect of businesses that were generating losses that have been sold
or otherwise exited.
OTHER
OTHER revenues increased $27.2 million, from $6.2 million in 1999, and
segment profit improved $23.2 million, from a $17 million segment loss in 1999
to a $6.2 million segment profit in 2000. These improvements were due primarily
to $9 million higher Venezuelan gas compression revenues and $18 million lower
international equity investment losses. The $9 million higher Venezuelan gas
compression revenues reflect higher volumes in 2000 following operational
problems experienced in first-quarter 1999. The $18 million lower international
equity investment losses reflect mainly the change in accounting for an equity
investment to a cost basis investment following a reduction of management
influence.
16
<PAGE> 18
CONSOLIDATED
INTEREST ACCRUED increased $84.8 million, or 59 percent, due primarily to
the $46 million effect of higher borrowing levels combined with the $25 million
effect of higher average interest rates. These increases reflect the issuance of
$2 billion of high-yield public debt in October 1999 by Communications. Interest
capitalized increased $28.2 million, from $9.4 million in 1999 to $37.6 million
in 2000, due primarily to increased capital expenditures for the fiber-optic
network. Investing income increased $93.8 million, from $6.7 million in 1999 to
$100.5 million in 2000, due primarily to $51.7 million of gains from sales of
investments and dividends previously discussed within Communications' segment
profit and $35 million higher interest income associated primarily with the
investment of proceeds from Communications' equity and debt offerings, long-term
notes receivable and advances to affiliates. Minority interest in (income) loss
and preferred returns of consolidated subsidiaries is $14.4 million favorable to
1999 due primarily to the effect of the 14.7 percent minority ownership interest
in Communications following the October 1999 initial public offering and higher
losses experienced by Williams Communications Solutions, LLC which has a 30
percent interest held by a minority shareholder.
The $32.7 million, or 79 percent, increase in the provision for income
taxes is primarily a result of higher pre-tax income. The effective income tax
rate in 2000 exceeds the federal statutory rate due primarily to the effects of
state income taxes, partially offset by the tax benefit of permanent basis
differences on certain assets sold during the first quarter. The effective
income tax rate in 1999 exceeds the federal statutory rate due primarily to the
effects of state income taxes.
The $21.6 million cumulative effect of change in accounting principle in
2000 relates to Solutions' change in revenue recognition policy from the
percentage-of-completion method to the completed-contract method (see Note 5).
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 5).
Financial Condition and Liquidity
Liquidity
Williams considers its liquidity to come from both internal and external
sources. Certain of those sources are available to Williams (parent) and certain
of its subsidiaries while others can only be utilized by Communications.
Williams' unrestricted sources of liquidity, which can be utilized without
limitation under existing loan covenants, consist primarily of the following:
o Available cash-equivalent investments of $150 million at March 31, 2000, as
compared to $494 million at December 31, 1999.
o $600 million available under Williams' $1 billion bank-credit facility at
March 31, 2000, as compared to $475 million at December 31, 1999.
o $45 million available under Williams' $1.4 billion commercial paper program
at March 31, 2000, as compared to $154 million at December 31, 1999.
o Cash generated from operations.
o Short-term uncommitted bank lines can also be used in managing liquidity.
Williams' sources of liquidity restricted to use by Communications consist
primarily of the following:
o Available cash-equivalent investments and short-term investments totaling
$1.3 billion at March 31, 2000, as compared to $1.9 billion at December 31,
1999.
o Communications' $1.05 billion bank-credit facility under which no
borrowings were outstanding at March 31, 2000, or December 31, 1999.
In addition, there are 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). At March 31, 2000, approximately $755 million of shelf
availability remains under these outstanding registration statements and 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 any additional financing arrangements, if required, can be
obtained on reasonable terms.
In 2000, capital expenditures and investments are estimated to total
approximately $5.3 billion, including approximately $3.2 billion at
Communications. Williams expects to fund capital and investment expenditures,
debt payments and working-capital requirements through (1) cash generated from
operations, (2) the use of the available portion of Williams' $1 billion
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. Williams has 90 days from the date of close to request funds
under this facility. At April 30, 2000, Williams has borrowed $150 million under
the facility at an initial interest rate of 7.3 percent. The proceeds were used
for general corporate purposes, including the repayment of outstanding debt.
17
<PAGE> 19
The long-term debt to debt-plus-equity ratio was 61.0 percent at March 31,
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 65.6 percent at March 31, 2000 and 65.9 percent at December 31,
1999.
Investing Activities
The increase in capital expenditures in first-quarter 2000 as compared to
1999 is mainly associated with the construction of Communications' fiber-optic
network.
During first-quarter 2000, Communications sold a portion of its investment
in certain marketable equity securities for approximately $36 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 $48 million of investments in and advances
to various communications businesses in first-quarter 2000.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Interest Rate Risk
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.
Subsequent to March 31, 2000, Williams entered into a $400 million
three-year term bank-credit facility. Interest rates under this facility are
based on LIBOR plus one percent. Williams has 90 days from the date of
close to request funds under this facility. At April 30, 2000, Williams has
borrowed $150 million under the facility at an initial interest rate of 7.3
percent.
Equity Price Risk
Equity price risk primarily arises from investments in publicly traded
telecommunications-related companies. These investments are carried at fair
value and approximate one percent of Williams' total assets at both March 31,
2000 and December 31, 1999. These investments do have the potential to impact
Williams' financial position due to movements in the price of these equity
securities. Williams historically has not utilized derivatives or other
financial instruments to hedge the risk associated with the movement in the
price of these equity securities. However, during first-quarter 2000, Williams
entered into a derivative instrument which will expire in various stages
throughout the remainder of 2000 and is designed to hedge the exposure to
changes in the price of its investment in certain marketable equity securities.
It is reasonably possible that the prices of the equity securities in Williams'
marketable equity securities portfolio could experience a 30 percent increase
or decrease in the near term. Assuming a 30 percent increase or decrease in
prices, the value of Williams' marketable equity securities portfolio at March
31, 2000, which is included in investments in the Consolidated Balance Sheet,
would increase or decrease by approximately $102 million or $109 million,
respectively.
18
<PAGE> 20
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 Combined
Fixed Charges and Preferred Dividend Requirements
Exhibit 27--Financial Data Schedule
(b) During the first quarter of 2000, the Company filed a Form 8-K on
January 19, 2000 and March 1, 2000, which reported significant
events under Item 5 of the Form and included the Exhibits
required by Item 7 of the Form.
19
<PAGE> 21
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)
May 12, 2000
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
12 Computation of Ratio of Earnings to Combine Fixed Charges
and Preferred Dividend Requirements
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
The Williams Companies, Inc. and Subsidiaries
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividend Requirements
(Dollars in millions)
<TABLE>
<CAPTION>
Three months ended
March 31, 2000
------------------
<S> <C>
Earnings:
Income before income taxes and cumulative
effect of change in accounting principle $ 195.5
Add:
Interest expense - net 190.5
Rental expense representative of interest factor 43.5
Minority interest in income (loss) and preferred returns
of consolidated subsidiaries (13.8)
Interest accrued - 50% owned company 1.0
Equity losses in less than 50% owned companies 6.0
Equity earnings in less than 50% owned companies in excess
of distributions (7.5)
Other 1.1
------------
Total earnings as adjusted plus fixed charges $ 416.3
============
Fixed charges and preferred stock dividend requirements:
Interest expense - net $ 190.5
Capitalized interest 37.6
Rental expense representative of interest factor 43.5
Pretax effect of preferred returns of subsidiaries 10.3
Interest accrued - 50% owned company 1.0
------------
Combined fixed charges and preferred stock dividend
requirements $ 282.9
============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements 1.47
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 626
<SECURITIES> 987
<RECEIVABLES> 2,630
<ALLOWANCES> 58
<INVENTORY> 707
<CURRENT-ASSETS> 5,994
<PP&E> 20,112
<DEPRECIATION> 4,243
<TOTAL-ASSETS> 25,800
<CURRENT-LIABILITIES> 6,322
<BONDS> 8,945
179
0
<COMMON> 445
<OTHER-SE> 5,262
<TOTAL-LIABILITY-AND-EQUITY> 25,800
<SALES> 0
<TOTAL-REVENUES> 2,428
<CGS> 0
<TOTAL-COSTS> 1,803
<OTHER-EXPENSES> (51)
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> 196
<INCOME-TAX> 74
<INCOME-CONTINUING> 122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (22)
<NET-INCOME> 100
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
