<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
_________________
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the Transition Period from __________________ to _______________________
Commission File Number 1-7414
NORTHWEST PIPELINE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 87-0269236
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
295 Chipeta Way, Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip Code)
(801) 583-8800
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
-------------------------- ----------------------------
10.65% Debentures due 2018 New York Stock Exchange
9% Debentures due 2022 New York Stock Exchange
7.125% Debentures due 2025 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant.
No voting stock of registrant is held by non-affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 27, 1996
- --------------------------- -----------------------------
Common stock, $1 par value 1,000 shares
Documents Incorporated by References:
None
The registrant meets the conditions set forth in General Instruction (J)(1)(a)
and (b) of Form 10-K and is therefore filing this form 10-K with the reduced
disclosure format.
<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Heading Page
- ------- ----
<S> <C> <C>
Items 1.
and 2. BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Omitted) . . . . . . . . . . . . . . 4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
HOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 6. SELECTED FINANCIAL DATA (Omitted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . 8
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Omitted) . . . . . . . . . . . . . . 26
Item 11. EXECUTIVE COMPENSATION (Omitted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (Omitted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Omitted) . . . . . . . . . . . . . . . . 26
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE> 3
NORTHWEST PIPELINE CORPORATION
FORM 10-K
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
BUSINESS ENVIRONMENT
Northwest Pipeline Corporation ("Pipeline") is wholly owned by The
Williams Companies, Inc. ("Williams").
Pipeline owns and operates an interstate natural gas pipeline system,
including facilities for mainline transmission and gas storage. Pipeline's
transmission and storage activities are subject to regulation by the Federal
Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938
("Natural Gas Act") and under the Natural Gas Policy Act of 1978 ("NGPA"), and,
as such, its rates and charges for the transportation of natural gas in
interstate commerce, the extension, enlargement or abandonment of its
jurisdictional facilities, and its accounting, among other things, are subject
to regulation.
Pipeline has significant future opportunities to provide service to
meet the demands of growing gas markets. Pipeline's geographical position
allows access to the incremental sources of supply required for these markets.
TRANSMISSION
Pipeline owns and operates a pipeline system for the mainline
transmission of natural gas. This system extends from the San Juan Basin in
northwestern New Mexico and southwestern Colorado through Colorado, Utah,
Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near
Sumas, Washington. At December 31, 1995, Pipeline's system, having an
aggregate mainline deliverability of approximately 2.6 Bcf* of gas per day, was
composed of approximately 3,900 miles of mainline and branch transmission
pipelines, and 43 mainline compressor stations with a combined capacity of
approximately 306,000 horsepower.
Pipeline operates under an open-access transportation certificate
wherein gas is transported for third party shippers. Pipeline's transportation
services (firm and interruptible) represented 100% of its total throughput in
1995 and 1994, reflecting the implementation of FERC's Order No. 636 during
1993.
In 1995, Pipeline transported natural gas for a total of 127
customers. Pipeline provides services for markets in California, New Mexico,
Colorado, Utah, Nevada, Wyoming, Idaho, Oregon and Washington. Transportation
customers include distribution companies, municipalities, interstate and
intrastate pipelines, gas marketers and direct industrial users. The two
largest transportation customers of Pipeline in 1995 accounted for
approximately 11.6% and 10.1%, respectively, of total transportation volumes.
No other customer accounted for more than 10% of total volumes moved on
Pipeline's mainline system. Pipeline's firm transportation agreements are
generally long-term agreements with various expiration dates and account for
the major portion of Pipeline's business. Additionally, Pipeline offers
interruptible transportation service under agreements that are generally short
term.
No other interstate natural gas pipeline company presently provides
significant service to Pipeline's primary gas consumer market area. However,
competition with other interstate carriers exists for expansion markets.
Competition also exists with alternate fuels. Electricity and distillate fuel
oil are the primary alternate energy sources in the residential and commercial
markets. In the industrial markets, high sulfur residual fuel oil is the main
alternate fuel source.
- ---------------------
* The term "Mcf" means thousand cubic feet, "MMcf" means million cubic
feet and "Bcf" means billion cubic feet. All volumes of natural gas are stated
at a pressure base of 14.73 pounds per square inch absolute at 60 degrees
Fahrenheit. The term "MMBtu" means one million British Thermal Units and
"TBtu" means one trillion British Thermal Units.
-1-
<PAGE> 4
Northwest Pipeline completed mainline expansion projects that were
placed into service on December 1, 1995. These expansion projects increased
system capacity by an additional 144 MMcf of gas per day and added 14,820
horsepower of new compression and 44 miles of pipeline loop line to Northwest
Pipeline's system.
Pipeline believes that strong economies in the Pacific Northwest and
the growing preference for natural gas in response to environmental concerns
support future expansions of its mainline capacity, although no significant
expansions are in the development stage at the present time.
CONTRACT REFORMATION
Pursuant to FERC policy, Pipeline filed and received approval to
recover a portion of contract reformation costs through direct bills to former
sales customers and through surcharges to transportation as well as sales
commodity rates. Recovery of these amounts was completed in 1994.
The FERC initially approved a method for Pipeline to direct bill its
contract reformation costs, but when challenged on appeal, sought a remand to
reassess such method. Pipeline received an order from the FERC that required a
different allocation of such costs and rebilled its customers accordingly.
This reallocation has had no significant financial impact.
GAS STORAGE
Underground gas storage facilities enable Pipeline to balance daily
receipts and deliveries and provide storage services to certain major
customers.
Pipeline has a contract with a third party, under which gas storage
services are provided to Pipeline in an underground storage reservoir in the
Clay Basin Field located in Daggett County, Utah. Pipeline injects its own gas
into the storage reservoir and is authorized to utilize the Clay Basin Field
at a seasonal storage level of 6.1 Bcf of working gas, with a firm delivery
capability of 51 MMcf of gas per day.
Pipeline owns a one-third interest in the Jackson Prairie underground
storage facility located near Chehalis, Washington, with the remaining
interests owned by two of Pipeline's distribution customers. The authorized
seasonal storage capacity of the facility is 15.1 Bcf of working gas. The
facility provides peak day deliveries to Pipeline of up to 550 MMcf per day on
a firm basis and up to an additional 72 MMcf per day on a best-efforts basis.
Certain of Pipeline's major customers own the working gas stored at the
facility.
Pipeline also owns and operates a liquefied natural gas ("LNG")
storage facility located near Plymouth, Washington, which provides standby
service for Pipeline's customers during extreme peaks in demand. The facility
has a total LNG storage capacity equivalent to 2.4 Bcf of gas, liquefaction
capability of 12 MMcf per day and regasification capability of 300 MMcf per
day. Certain of Pipeline's major customers own the gas stored at the LNG
plant.
OPERATING STATISTICS
The following table summarizes volumes and average rates for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Gas Volumes (TBtu):
Gas sales . . . . . . . . . . . . . . . . . . . . . - - 18
Transportation . . . . . . . . . . . . . . . . . . 826 679 606
------ ----- -----
Total throughput . . . . . . . . . . . . . . . . 826 679 624
====== ===== =====
Average Daily Transportation Volumes (TBtu) . . . . . . 2.3 1.9 1.7
Average Daily Firm Reserve Capacity (TBtu) . . . . . . 2.4 2.4 **
</TABLE>
** Not applicable
-2-
<PAGE> 5
OTHER REGULATORY MATTERS
Pipeline's transportation of natural gas in interstate commerce is
subject to regulation by FERC under the Natural Gas Act and the NGPA.
Pipeline holds certificates of public convenience and necessity issued by FERC
authorizing it to own and operate all pipelines, facilities and properties
considered jurisdictional for which certificates are required under the Natural
Gas Act.
Pipeline is subject to the Natural Gas Pipeline Safety Act of 1968, as
amended by Title I of the Pipeline Safety Act of 1979, which regulates safety
requirements in the design, construction, operation and maintenance of
interstate gas transmission facilities.
On April 1, 1993, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed October 1, 1992. On May
31, 1995, Pipeline received a favorable order from the FERC on this rate case.
A number of parties have sought rehearing on the rate of return on equity and
various other issues. Pipeline has adjusted its reserve accruals in the
accompanying financial statements to reflect the favorable order from the FERC.
On November 1, 1994, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed April 29, 1994. This
filing seeks a revenue increase for a projected deficiency caused by increased
costs and the impact of a transportation contract terminated subsequent to the
rate case filed on October 1, 1992. On November 14, 1995, Pipeline filed an
uncontested settlement proposal with the FERC. The settlement resolves
substantially all the issues in this rate case. The FERC's final order on this
settlement was received on February 16, 1996. No requests for rehearing were
filed. Pipeline has not adjusted its reserve accruals in the accompanying
financial statements to reflect the favorable settlement.
On February 1, 1996, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 1, 1995. This rate
case is set for hearing in the fall of 1996. The filing seeks a revenue
increase for increases in rate base related primarily to the mainline expansion
facilities placed into service December 1, 1995, increased operating costs
primarily associated with an increase in headquarters office rent and increased
depreciation expense.
OWNERSHIP OF PROPERTY
Pipeline's system is owned in fee. However, a substantial portion of
Pipeline's system is constructed and maintained pursuant to rights-of-way,
easements, permits, licenses or consents on and across properties owned by
others. The compressor stations of Pipeline, with appurtenant facilities, are
located in whole or in part upon lands owned by Pipeline and upon sites held
under leases or permits issued or approved by public authorities. The LNG
plant is located on lands owned in fee by Pipeline. Pipeline's debt indentures
restrict the sale or disposal of a major portion of its pipeline system.
EMPLOYEES
At December 31, 1995, Pipeline employed 577 persons, none of whom are
represented under collective bargaining agreements. No strike or work stoppage
in any of Pipeline's operations has occurred in the past and relations with
employees are good.
ENVIRONMENTAL MATTERS
Pipeline is subject to the National Environmental Policy Act and other
federal and state legislation regulating the environmental aspects of its
business. Management believes that Pipeline is in substantial compliance with
existing environmental requirements. Pipeline believes that, with respect to
any capital expenditures required to meet applicable standards and regulations,
FERC would grant the requisite rate relief so that, for the most part, such
expenditures and a return thereon would be permitted to be recovered. Pipeline
believes that compliance with applicable environmental requirements is not
likely to have a material effect upon Pipeline's earnings or competitive
position. Refer to Note 1 of Notes to Financial Statements for a summary of
accounting policy on environmental matters.
-3-
<PAGE> 6
ITEM 3. LEGAL PROCEEDINGS
Other than as described in Note 9 of Notes to Financial Statements and
above under Items 1 and 2 - Business and Properties, there are no material
pending legal proceedings. Pipeline is subject to ordinary routine litigation
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since Pipeline meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K, this information is omitted.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Pipeline is wholly owned by Williams.
The payment of dividends by Pipeline on its common stock is restricted
under various debt agreements. Under the most restrictive provisions, the
amount of Pipeline's retained earnings available for dividends on its common
stock as of December 31, 1995, was approximately $182.9 million. In 1995 and
1994, Pipeline paid cash dividends on common stock of $20 million and $30
million, respectively.
ITEM 6. SELECTED FINANCIAL DATA
Since Pipeline meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K, this information is omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This analysis discusses financial results of Pipeline's operations for
the years 1993 through 1995.
RESULTS OF OPERATIONS
Year Ended December 31, 1995 vs. Year Ended December 31, 1994
Operating revenues increased $16.7 million, or 7%, due primarily to
the reversal of a portion of certain accrued liability reserves of
approximately $16 million associated with estimated rate refunds, increased
transportation rates put into effect in November 1994 and the early in-service
of mainline expansion facilities in December 1995, partially offset by the
completion in 1994 of billing contract reformation surcharges. The reserve
reversals included approximately $8.4 million related to 1993 and $8.7 million
related to 1994. Variances due to changes in price and volume no longer have a
significant impact on revenues, because under its straight-fixed-variable rate
design methodology, the majority of Pipeline's overall cost of service is
recovered through fixed demand charges in its transportation rates.
Pipeline's transportation service accounted for 93% and 94% of
operating revenues for 1995 and 1994, respectively. Of those amounts,
Pipeline's firm transportation service accounted for 99% each year. The
remaining 1% represented interruptible transportation service. Additionally,
4% and 5% of operating revenues represented gas storage service for 1995 and
1994, respectively.
-4-
<PAGE> 7
Operating expenses decreased $.8 million due primarily to the absence
of amortization of contract reformation costs. This was partially offset by
higher operation and maintenance expenses aggregating $2.4 million and
increased depreciation of $1.1 million resulting from previous capital
additions.
Operating income increased $17.5 million, or nearly 17%, primarily
due to the reversal of reserve accruals, increased rates put into effect
November 1, 1994, the early in-service of mainline expansion facilities in
December and the absence of contract reformation amortization expense,
partially offset by higher operation and maintenance expenses and increased
depreciation expenses.
Other expenses increased $1.8 million primarily due to a reserve
accrual of $6.4 million related to the initial October 1995 judge's order in a
non-jury trial involving claims arising from a transportation agreement of a
former customer, partially offset by increases of $2.5 million in investing and
other income and the reversal of a $1.5 million reserve accrual.
Interest on long-term debt decreased $.5 million, or nearly 2%, due to
scheduled debt repayments and certain optional prepayments, partially offset by
the issuance of $85 million in new debt during December 1995. Other interest
expense decreased $2.2 million, or 34%, primarily due to the absence of
deferred carrying costs on contract reformation and the reversal of interest on
revenues subject to refund which were previously reserved. The allowance for
borrowed funds used during construction increased $2.2 million reflecting
construction of the mainline expansion project that was placed into service
December 1, 1995.
In summary, a review by Pipeline of the rehearing requests in the FERC
proceedings described above and other issues impacting reserve estimates
resulted in a net reversal to income in the third quarter 1995 of a portion of
these accruals, including amounts previously accrued for estimated rate
refunds, based on management's assessment of the possible outcome of such
issues. Reserve additions, including the significant litigation discussed
above, amounted to $8.2 million and reserve reversals amounted to $18.6 million
for a net increase to income before income taxes of $10.4 million. If the
reserves had not been recorded in prior years, income before income taxes would
have been higher by $8.4 million and $10.2 million for 1993 and 1994,
respectively.
Year Ended December 31, 1994 vs. Year Ended December 31, 1993
Operating revenues decreased $38.1 million, or 14% due primarily to
the absence of natural gas sales and completion of contract reformation
surcharge billings early in 1994, partially offset by expanded firm
transportation service. Natural gas sales were eliminated following the
implementation, during the fourth quarter of 1993, of FERC Order No. 636 which
converted remaining sales customers to firm transportation service.
Operating expenses decreased $44.5 million, or 25%, primarily due to
the absence of gas purchase volumes as a result of implementation of FERC Order
No. 636, the completion of contract reformation and lower maintenance expenses,
partially offset by higher operation expenses, depreciation and amortization,
and taxes other than income taxes.
Operating income increased $6.5 million, or 7%, primarily due to
higher revenues from expanded firm transportation service and lower maintenance
expenses partially offset by higher operation expenses, depreciation and
amortization, and taxes other than income taxes.
Other income decreased $6.9 million, or 86%, primarily due to a
decrease in the allowance for equity funds used during construction associated
with Pipeline's mainline expansion completed and placed into service April 1,
1993, a decrease in interest income from short-term investing and a reserve
related to rate issues.
Interest on long-term debt decreased $1.8 million as the result of
retiring certain sinking fund debt obligations in 1994. Other interest expense
decreased $1.8 million primarily due to the absence of deferred carrying
charges on contract reformation costs.
-5-
<PAGE> 8
FINANCIAL CONDITION AND LIQUIDITY
Capital Expenditures and Financing
Pipeline's expenditures for property, plant and equipment additions
amounted to $130.5 million, $62.6 million and $175.7 million for 1995, 1994 and
1993, respectively. Funds necessary to complete capital projects are expected
to come from several sources, including Pipeline's operations and available
cash. In addition, Pipeline expects to be able to obtain financing, when
necessary, on reasonable terms. To allow flexibility in the timing of issuance
of long-term securities, financing may be provided on an interim basis with
bank debt and from sources discussed below.
Pipeline believes that strong economies in the Pacific Northwest and
the growing preference for natural gas in response to environmental concerns
support future expansions of its mainline capacity.
Pipeline shares in an $800 million Revolving Credit Agreement with
Williams and four affiliated companies. Pipeline's maximum borrowing
availability, subject to prior borrowing by other affiliated companies, is $400
million, none of which was used by Pipeline at December 31, 1995. Interest
rates vary with current market conditions. The agreement contains restrictions
which limit, under certain circumstances, the issuance of additional debt, the
attachment of liens on any assets and any change of ownership of Pipeline. Any
borrowings by Pipeline using this agreement are not guaranteed by Williams and
are based on Pipeline's financial need and credit worthiness.
Pipeline has also arranged various uncommitted lines-of-credit at
market interest rates. These credit facilities are also subject to Pipeline's
continued credit worthiness.
OTHER
Pipeline owns and operates an interstate natural gas pipeline system
including facilities for mainline transmission and gas storage. Pipeline's
transmission and storage activities are subject to regulation by the FERC under
the Natural Gas Act and under the NGPA, and, as such, its rates and charges for
the transportation, the extension, enlargement or abandonment of its
jurisdictional facilities, and its accounting, among other things, are subject
to regulation.
Pipeline is also subject to the National Environmental Policy Act and
other Federal and state legislation regulating the environmental aspects of its
business. Management believes that Pipeline is in substantial compliance with
existing environmental requirements. Pipeline believes that, with respect to
any capital expenditures required to meet applicable standards and regulations,
FERC would grant the requisite rate relief so that, for the most part, such
expenditures and a return thereon would be permitted to be recovered. Pipeline
believes that compliance with applicable environmental requirements is not
likely to have a material effect upon Pipeline's earnings or competitive
position.
On April 1, 1993, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed October 1, 1992. On May
31, 1995, Pipeline received a favorable order from the FERC on this rate case.
A number of parties have sought rehearing on the rate of return on equity and
various other issues. Pipeline has adjusted its reserve accruals in the
accompanying financial statements to reflect the favorable order from the FERC.
On November 1, 1994, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed April 29, 1994. This
filing seeks a revenue increase for a projected deficiency caused by increased
costs and the impact of a transportation contract terminated subsequent to the
rate case filed on October 1, 1992. On November 14, 1995, Pipeline filed an
uncontested settlement proposal with the FERC. The settlement resolves
substantially all the issues in this rate case. The FERC's final order on this
settlement was received on February 16, 1996. No requests for rehearing were
filed. Pipeline has not adjusted its reserve accruals in the accompanying
financial statements to reflect the favorable settlement.
-6-
<PAGE> 9
On February 1, 1996, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 1, 1995. This rate
case is set for hearing in the fall of 1996. The filing seeks a revenue
increase for increases in rate base related primarily to the mainline expansion
facilities placed into service December 1, 1995, increased operating costs
primarily associated with an increase in headquarters office rent and increased
depreciation expense.
See Note 2 of Notes to Financial Statements for fair value of
financial instruments and Note 7 for the effects of a new accounting standard
on other postretirement and postemployment benefits.
Effect of Inflation
Pipeline generally has experienced increased costs in recent years due
to the effect of inflation on the cost of labor, materials and supplies, and
property, plant and equipment. A portion of the increased labor and materials
and supplies cost can directly affect income through increased maintenance and
operating costs. The cumulative impact of inflation over a number of years has
resulted in increased costs for current replacement of productive facilities.
The majority of Pipeline's property, plant and equipment and inventory is
subject to ratemaking treatment, and under current FERC practices, recovery is
limited to historical costs. While amounts in excess of historical cost are
not recoverable under current FERC practices, Pipeline believes it will be
allowed to recover and earn a return based on increased actual cost incurred
when existing facilities are replaced. Cost based regulation along with
competition and other market factors limit Pipeline's ability to price services
or products based upon inflation's effect on costs.
Contingencies
Reference is made to Note 9 of Notes to Financial Statements for
information about regulatory and judicial developments which cause operating
and financial uncertainties.
-7-
<PAGE> 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Covered by report of independent auditors:
Statement of income for the years ended December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Balance sheet at December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . 11
Statement of cash flows for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 13
Statement of capitalization for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 14
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Not covered by report of independent auditors:
Quarterly financial data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
All other schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require submission of
the schedule or because the information required is included in the financial
statements and notes thereto.
-8-
<PAGE> 11
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Northwest Pipeline Corporation
We have audited the accompanying balance sheet of Northwest Pipeline
Corporation as of December 31, 1995 and 1994, and the related statements of
income, cash flows and capitalization for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Northwest Pipeline
Corporation at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 9, 1996
-9-
<PAGE> 12
NORTHWEST PIPELINE CORPORATION
STATEMENT OF INCOME
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1994 1993
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES (Notes 1, 3, 8 and 9) . . . . . . $255,219 $238,473 $276,543
--------- --------- ---------
OPERATING EXPENSES:
Gas Purchases . . . . . . . . . . . . . . . . . . - - 41,122
Amortization of contract reformation costs (Note 9) - 4,053 14,114
Operation . . . . . . . . . . . . . . . . . . . . 77,266 75,894 73,987
Maintenance . . . . . . . . . . . . . . . . . . . 11,204 10,136 11,745
Depreciation and amortization (Note 1) . . . . . . 30,657 29,607 26,457
Taxes, other than income taxes . . . . . . . . . . 12,640 12,844 9,648
--------- --------- ---------
131,767 132,534 177,073
--------- --------- ---------
Operating income . . . . . . . . . . . . . . . 123,452 105,939 99,470
--------- --------- ---------
OTHER INCOME (EXPENSES) - net (Note 1) . . . . . . . (689) 1,117 7,970
--------- --------- ---------
INTEREST CHARGES:
Interest on long-term debt . . . . . . . . . . . . 29,253 29,798 31,565
Other interest . . . . . . . . . . . . . . . . . . 4,228 6,391 8,226
Allowance for borrowed funds used
during construction (Note 1) . . . . . . . . . (3,146) (978) (4,655)
--------- --------- ---------
30,335 35,211 35,136
--------- --------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . 92,428 71,845 72,304
PROVISION FOR INCOME TAXES
(Notes 1 and 4) . . . . . . . . . . . . . . . . . . 33,101 26,947 28,405
--------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 59,327 $ 44,898 $ 43,899
========= ========= =========
CASH DIVIDENDS ON COMMON STOCK . . . . . . . . . . . $ 20,000 $ 30,000 $ 18,000
========= ========= =========
</TABLE>
- ---------------------
See accompanying notes.
-10-
<PAGE> 13
NORTHWEST PIPELINE CORPORATION
BALANCE SHEET
================================================================================
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1994
---------- -----------
(Thousands of Dollars)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, at cost (Note 5) . . . . . . . . . . . . . $1,402,437 $1,264,539
Less - Accumulated depreciation and amortization . . . . . . . . . . 518,780 497,075
---------- -----------
883,657 767,464
Construction work in progress . . . . . . . . . . . . . . . . . . . . 31,040 43,429
---------- -----------
914,697 810,893
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 570 1,818
Advances to parent . . . . . . . . . . . . . . . . . . . . . . . . . 41,215 11,909
Accounts receivable -
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,773 35,578
Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . 1,234 2,055
Gas stored underground (principally at average cost) . . . . . . . . - 8,354
Materials and supplies (principally at average cost) . . . . . . . . 11,065 10,826
Exchange gas due from others . . . . . . . . . . . . . . . . . . . . 9,390 6,821
Costs recoverable through rate adjustments . . . . . . . . . . . . . 5,951 2,148
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . 4,480 -
Deferred income taxes (Note 4) . . . . . . . . . . . . . . . . . . . 17,729 2,368
Prepayments and other . . . . . . . . . . . . . . . . . . . . . . . . 6,286 2,795
---------- -----------
134,693 84,672
---------- -----------
OTHER ASSETS:
Deferred charges (Note 1) . . . . . . . . . . . . . . . . . . . . . . 26,177 23,207
---------- -----------
$1,075,567 $ 918,772
========== ===========
</TABLE>
- ---------------------
See accompanying notes.
-11-
<PAGE> 14
NORTHWEST PIPELINE CORPORATION
BALANCE SHEET
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- --------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION:
Common stockholder's equity -
Common stock, par value $1 per share, authorized
and outstanding, 1,000 shares . . . . . . . . . . . . . . . . . . $ 1 $ 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 262,440 262,440
Retained earnings (Note 5) . . . . . . . . . . . . . . . . . . . . . 197,019 164,536
---------- --------
459,460 426,977
Long-term debt, less current maturities (Note 6) . . . . . . . . . . . 372,228 297,705
---------- --------
831,688 724,682
---------- --------
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 6) . . . . . . . . . . . . . 8,591 8,591
Accounts payable -
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,033 15,301
Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . 423 371
Accrued liabilities -
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,779
Taxes, other than income taxes . . . . . . . . . . . . . . . . . . . 4,404 6,724
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,752 11,890
Employee costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,873 6,950
Exchange gas due to others . . . . . . . . . . . . . . . . . . . . . 14,630 11,007
Reserves for estimated rate refunds . . . . . . . . . . . . . . . . 43,883 39,998
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,228 2,704
---------- --------
128,817 105,315
---------- --------
DEFERRED INCOME TAXES (Notes 1 and 4) . . . . . . . . . . . . . . . . . . . 105,855 78,183
---------- --------
OTHER DEFERRED CREDITS (Note 1) . . . . . . . . . . . . . . . . . . . . . 9,207 10,592
---------- --------
CONTINGENT LIABILITIES AND COMMITMENTS (Note 9) . . . . . . . . . . . . . .
---------- --------
$1,075,567 $918,772
========== ========
</TABLE>
- ----------------------
See accompanying notes.
-12-
<PAGE> 15
NORTHWEST PIPELINE CORPORATION
STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1994 1993
--------- -------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 59,327 $ 44,898 $ 43,899
Adjustments to reconcile to cash provided by operations-
Depreciation and amortization . . . . . . . . . . . . 30,657 29,607 26,457
Provision (credit) for deferred income taxes . . . . 12,311 223 (2,627)
Amortization of deferred charges and credits . . . . 976 1,212 (768)
Allowance for equity funds used during construction . (4,273) (1,323) (6,077)
Premium on early retirement of long-term debt . . . . - - (170)
Increase (decrease) from changes in:
Accounts receivable . . . . . . . . . . . . . . . (7,423) (2,305) 14,166
Inventory . . . . . . . . . . . . . . . . . . . . 2,415 10,029 7,054
Other current assets . . . . . . . . . . . . . . . (7,294) 7,188 6,185
Other assets and deferred charges . . . . . . . . (3,952) (362) 10,597
Accounts payable . . . . . . . . . . . . . . . . . 23,567 (7,898) 22,487
Other current liabilities . . . . . . . . . . . . 5,095 14,144 11,234
Other deferred credits . . . . . . . . . . . . . . (185) - (1)
Other . . . . . . . . . . . . . . . . . . . . . . . . (85) 8 575
--------- -------- ---------
Net cash provided by operating activities . . . . . . . 111,136 95,421 133,011
--------- -------- ---------
INVESTING ACTIVITIES:
Property, plant and equipment -
Capital expenditures . . . . . . . . . . . . . . . . (130,481) (62,583) (175,726)
Asset removal cost . . . . . . . . . . . . . . . . . (766) (1,973) (1,774)
Changes in accounts payable . . . . . . . . . . . . . (5,160) 1,202 (65,625)
Advances to parent . . . . . . . . . . . . . . . . . . . (29,306) (11,909) -
--------- -------- ---------
Net cash used by investing activities . . . . . . . . . (165,713) (75,263) (243,125)
--------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . 85,000 - -
Debt issue costs . . . . . . . . . . . . . . . . . . . . (1,156) - -
Principal payments on long-term debt . . . . . . . . . . (10,515) (13,015) (29,165)
Proceeds from notes payable to banks . . . . . . . . . . 23,450 - -
Payments on notes payable to banks . . . . . . . . . . . (23,450) - -
Cash dividends paid . . . . . . . . . . . . . . . . . . (20,000) (30,000) (18,000)
--------- -------- ---------
Net cash provided (used) by financing activities . . . . 53,329 (43,015) (47,165)
--------- -------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (Note 1) . . . . (1,248) (22,857) (157,279)
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . 1,818 24,675 181,954
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . $ 570 $ 1,818 $ 24,675
========= ======== =========
</TABLE>
- ---------------------
See accompanying notes.
-13-
<PAGE> 16
NORTHWEST PIPELINE CORPORATION
STATEMENT OF CAPITALIZATION
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
COMMON STOCKHOLDER'S EQUITY:
Common stock, par value $1 per share,
authorized and outstanding, 1,000 shares . . . . . . $ 1 $ 1 $ 1
-------- -------- --------
Additional paid-in capital -
Balance at beginning and end of period . . . . . . . 262,440 262,440 262,440
-------- -------- --------
Retained earnings (Note 5) -
Balance at beginning of period . . . . . . . . . . . 164,536 151,301 126,797
Net income . . . . . . . . . . . . . . . . . . . . 59,327 44,898 43,899
Cash dividends . . . . . . . . . . . . . . . . . . (20,000) (30,000) (18,000)
Noncash dividend (Note 5) . . . . . . . . . . . . (6,844) (1,663) (1,395)
-------- -------- --------
Balance at end of period . . . . . . . . . . . . . . 197,019 164,536 151,301
-------- -------- --------
Total common stockholder's equity . . . . . . . . 459,460 426,977 413,742
-------- -------- --------
LONG-TERM DEBT (Note 6):
Debentures -
7.125%, payable 2025 . . . . . . . . . . . . . . . . 85,000 - -
9%, payable through 2001 . . . . . . . . . . . . . . 12,500 17,500 25,000
9%, payable 2003 through 2022 . . . . . . . . . . . . 149,351 149,313 149,275
9.25%, payable through 2006 . . . . . . . . . . . . . 15,380 19,228 23,076
10.65%, payable 1999 through 2018 . . . . . . . . . . 100,000 100,000 100,000
Adjustable rate notes, payable through 2002 . . . . . . 9,997 11,664 13,331
-------- -------- --------
Total long-term debt . . . . . . . . . . . . . . . 372,228 297,705 310,682
-------- -------- --------
Total capitalization . . . . . . . . . . . . . . . $831,688 $724,682 $724,424
======== ======== ========
</TABLE>
- ---------------------
See accompanying notes.
-14-
<PAGE> 17
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Northwest Pipeline Corporation ("Pipeline") is wholly owned by The
Williams Companies, Inc. ("Williams").
Pipeline owns and operates a pipeline system for the mainline
transmission of natural gas. This system extends from the San Juan Basin in
northwestern New Mexico and southwestern Colorado through Colorado, Utah,
Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near
Sumas, Washington.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Property, Plant and Equipment
Property, plant and equipment ("plant"), consisting principally of
natural gas transmission facilities, is recorded at original cost.
Expenditures which materially increase values or capacities or extend useful
lives of plant are capitalized. Routine maintenance, repairs and renewal costs
are charged to income as incurred. Gains or losses from the ordinary sale or
retirement of plant are charged or credited to accumulated depreciation and
amortization ("D&A").
Depreciation is provided by the straight-line method for transmission
plant over its useful life. The composite annual D&A rate was 2.19%, 2% and
2.13% for 1995, 1994 and 1993, respectively.
The Financial Accounting Standards Board has issued a new Statement of
Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective
for fiscal years beginning after December 15, 1995. The standard, which will be
adopted in the first quarter of 1996, is not expected to have a material effect
on Pipeline's financial position or results of operations.
Allowance for Borrowed and Equity Funds Used During Construction
Allowance for funds used during construction ("AFUDC") represents the
estimated cost of borrowed and equity funds applicable to utility plant in
process of construction. Recognition is made of this item as a cost of utility
plant because it constitutes an actual cost of construction under established
regulatory practices. The Federal Energy Regulatory Commission ("FERC") has
prescribed a formula to be used in computing separate allowances for borrowed
and equity AFUDC.
The composite rate used to capitalize AFUDC was approximately 11.8%
for 1995, 1994 and 1993. Equity AFUDC of $4.3 million, $1.3 million and $6.1
million for 1995, 1994 and 1993, respectively, is reflected in other income.
Income Taxes
Pipeline is included in Williams' consolidated federal income tax
return. Pipeline's Federal income tax provisions are computed as though
separate tax returns are filed. Deferred income taxes are computed using the
liability method and are provided on all temporary differences between the
financial basis and the tax basis of Pipeline's assets and liabilities.
Deferred Charges
Pipeline amortizes deferred charges over varying periods consistent
with FERC approved accounting treatment for such deferred items. Unamortized
debt expense, debt discount and gains or losses on reacquired long-term debt
are amortized by the bonds outstanding method over the related debt repayment
periods.
-15-
<PAGE> 18
Deferred Credits
The regulatory liability, recorded as a result of new accounting
principles for income taxes was adjusted to reflect the increase in the Federal
income tax rate from 34 percent to 35 percent in 1993. This liability of $9.1
million and $10.2 million at December 31, 1995 and 1994, respectively, is
reflected in other deferred credits. The regulatory liability is being
amortized over the lives of the related depreciable assets.
Cash and Cash Equivalents
Cash and cash equivalents include demand and time deposits,
certificates of deposit and other marketable securities with a term to maturity
of three months or less when acquired.
Exchange Gas Imbalances
In the course of providing transportation services to customers,
Pipeline may receive different quantities of gas from shippers than the
quantities delivered on behalf of those shippers. These transactions result in
imbalances which are typically settled through the receipt or delivery of gas
in the future although some may be settled in cash. Customer imbalances to be
repaid or recovered in-kind are recorded as exchange gas due from others or due
to others in the accompanying balance sheets. Settlement of imbalances requires
agreement between the pipelines and shippers as to allocations of volumes to
specific transportation contracts and timing of delivery of gas based on
operational conditions.
Revenue Recognition
Pipeline recognizes revenues for the transportation of natural gas
based upon contractual terms and the related transported volume through month
end. Pursuant to FERC regulations, a portion of the revenues being collected
may be subject to possible refunds upon final orders in pending cases.
Pipeline establishes financial reserves for such contingencies based on the
facts and circumstances of the pending case.
Environmental Matters
Pipeline is subject to Federal, state, and local environmental laws
and regulations. Environmental expenditures are expensed or capitalized
depending on their future economic benefit and potential for rate recovery.
Pipeline believes that, with respect to any expenditures required to meet
applicable standards and regulations, FERC would grant the requisite rate
relief so that, for the most part, such expenditures would be permitted to be
recovered. Pipeline believes that compliance with applicable environmental
requirements is not likely to have a material effect upon Pipeline's financial
position.
Interest Payments
Cash payments for interest were $27.8 million, $28.9 million and $26.8
million, net of $3.1 million, $1 million and $4.7 million of interest
capitalized in 1995, 1994 and 1993, respectively.
Stock-Based Compensation
The Financial Accounting Standards Board has issued a new accounting
standard, FAS No. 123 "Accounting for Stock-Based Compensation," effective for
fiscal years beginning after December 15, 1995. As provided for in the
standard, Pipeline will not adopt the recognition provisions and will provide
the pro forma net income disclosures required by the standard in its 1996
annual financial statements.
(2) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by Pipeline, using available market
information and appropriate valuation methodologies. However, considerable
judgement is necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that Pipeline could realize in a current
market exchange. The use and complexity of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
-16-
<PAGE> 19
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
===============================================================================
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents - The carrying amount of these items are assumed to
be indicative of their fair value.
Long-term debt - The fair value of Pipeline's publicly traded long-term debt is
valued using year-end traded market prices. Private debt is valued based on
the prices of similar securities with similar terms and credit ratings.
Pipeline used the expertise of an outside investment banking firm to estimate
the fair value of long-term debt.
The carrying amount and estimated fair value of Pipeline's long term
debt, including current maturities, were $380.8 million and $416.2 million,
respectively, at December 31, 1995, and $306.3 million and $314.3 million,
respectively, at December 31, 1994.
(3) REVENUES ATTRIBUTABLE TO MAJOR CUSTOMERS
During some or all of the periods presented, more than 10% of Pipeline's
operating revenues were generated from each of the following customers who are
large distribution companies.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1994 1993
-------- ------ -------
(Thousands of Dollars)
<S> <C> <C> <C>
Washington Natural Gas Co. $47,219 $48,658 $71,661
Northwest Natural Gas Co. 31,232 29,911 31,450
Pacific Interstate Transmission 25,938 23,493 24,119
Cascade Natural Gas Corp. 25,382 25,709 33,594
</TABLE>
Pipeline's major customers are located in the Pacific Northwest. As a
general policy, collateral is not required for receivables, but customers'
financial condition and credit worthiness are regularly evaluated and
historical losses have been minimal. A portion of the revenues reflected above
(subsequent to April 1, 1993) may be subject to refund due to Pipeline's
pending rate cases as discussed in Note 9.
-17-
<PAGE> 20
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
(4) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
(Thousands of Dollars)
1995 1994
--------- ---------
<S> <C> <C>
Property, plant and equipment $ 106,922 $ 93,871
Regulatory assets 5,465 4,657
Other - net 110 2,263
--------- ---------
Deferred tax liabilities 112,497 100,791
--------- ---------
Rate refunds (15,914) (14,638)
Regulatory liabilities (3,547) (3,982)
Accrued liabilities (1,629) (3,533)
State deferred taxes (3,281) (2,823)
--------- ---------
Deferred tax assets (24,371) (24,976)
--------- ---------
Net deferred tax liabilities $ 88,126 $75,815
========= =========
Reflected as:
Deferred income taxes - asset $ (17,729) $ (2,368)
Deferred income taxes - liability 105,855 78,183
--------- ---------
$ 88,126 $75,815
========= =========
</TABLE>
The provision for income taxes includes:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1994 1993
-------- -------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . $ 18,536 $ 23,811 $ 28,127
State . . . . . . . . . . . . . . . . . . . 2,254 2,913 2,905
-------- -------- ---------
20,790 26,724 31,032
-------- -------- ---------
Deferred:
Federal . . . . . . . . . . . . . . . . . . 11,001 200 (1,113)
State . . . . . . . . . . . . . . . . . . . 1,310 23 (1,514)
-------- -------- ---------
12,311 223 (2,627)
-------- -------- ---------
Total provision . . . . . . . . . . . . . . . . $ 33,101 $ 26,947 $ 28,405
======== ======== =========
</TABLE>
-18-
<PAGE> 21
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
A reconciliation of the statutory Federal income tax rate to the
provision for income taxes on continuing operations is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Provision at statutory Federal income tax
rate of 35% . . . . . . . . . . . . . . . . . . . . . $32,350 $25,146 $25,306
Increase (decrease) in tax provision resulting from -
Increase in Federal rates on beginning of year
deferred tax balances . . . . . . . . . . . . . - - 1,936
Federal audits . . . . . . . . . . . . . . . . . . (1,593) - -
State income taxes, net of Federal tax benefit . . 2,531 1,908 904
Other - net . . . . . . . . . . . . . . . . . . . . (187) (107) 259
------- ------- -------
Provision for income taxes . . . . . . . . . . . . $33,101 $26,947 $28,405
======= ======= =======
Effective tax rate . . . . . . . . . . . . . . . . . . . 35.81% 37.51% 39.29%
======= ======= =======
</TABLE>
Net cash payments made to Williams for income taxes were $27 million,
$22.7 million and $36.2 million in 1995, 1994 and 1993, respectively.
(5) RETAINED EARNINGS
Noncash Dividends
On December 31, 1993, Pipeline transferred certain aircraft and
computer assets, net of associated deferred income tax liabilities, to Williams
by dividend. These assets, which are not included in the accompanying balance
sheet as of December 31, 1993, had a net book value of $1.4 million.
On January 31, 1994, Pipeline transferred certain telecommunication
and measurement assets, net of associated deferred income tax liabilities, to
Williams by dividend. These assets, which are not included in the accompanying
balance sheet as of December 31, 1994, had a net book value of $.9 million.
On September 30, 1994, Pipeline transferred certain gas transmission
assets located in Oklahoma, net of associated deferred income tax liabilities,
to Williams by dividend. These assets, which are not included in the
accompanying balance sheet as of December 31, 1994, had a net book value of $.7
million.
On May 1, 1995, Pipeline transferred an aircraft, net of associated
deferred income tax liabilities, to Williams by dividend. This asset, which is
not included in the accompanying balance sheet as of December 31, 1995, had a
net book value of $5.5 million.
On December 31, 1995, Pipeline transferred the Green River Area
Office, net of associated deferred income tax liabilities, to Williams by
dividend. This asset, which is not included in the accompanying balance sheet
as of December 31, 1995, had a net book value of $1.3 million.
-19-
<PAGE> 22
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
Restrictions
Pipeline's debt indentures contain provisions limiting common stock
dividends. Under the most restrictive provisions, the amount of Pipeline's
retained earnings available for dividends on its common stock as of December
31, 1995, was approximately $182.9 million.
(6) LONG-TERM DEBT, LEASES AND BANKING ARRANGEMENTS
Debt Covenants
The terms of Pipeline's debt indentures preclude the issuance of
mortgage bonds. The indentures contain provisions for the acceleration of
repayment or the reset of interest rates under certain conditions. Pipeline's
debt indentures also contain restrictions which, under certain circumstances,
limit the issuance of additional debt, restrict the payment of cash dividends
and restrict the disposal of a major portion of its natural gas pipeline
system.
Long-Term Debt
On April 27, 1994, Pipeline called $2.5 million of its outstanding 9%
Series B Debentures and $1.9 million of its outstanding 9.25% Series C
Debentures, due 2001 and 2006, respectively, under terms of the optional
prepayment provisions in the debenture agreement. No early redemption premium
was required. The prepayment was in addition to the May 31, 1994 sinking fund
payments of $5 million for the 9% Series B and $1.9 million for the 9.25%
Series C.
On May 31, 1995, Pipeline called $1.9 million of its outstanding 9.25%
Series C Debentures, due 2006 under terms of the optional prepayment provisions
in the debenture agreement. No early redemption premium was required. The
prepayment was in addition to the scheduled May 31, 1995 sinking fund payment
of $1.9 million for the 9.25% Series C.
On September 14, 1995, Pipeline filed a registration statement for
issuance of up to $150 million in public debt securities; and on November 30,
1995, $85 million was marketed and priced, with an interest rate of 7.125%. On
December 5, 1995, Pipeline received net proceeds of approximately $83.9
million. The terms of the offering include a 30- year no-call life, maturing
December 1, 2025, and no sinking fund requirement.
Adjustable Interest Rate Notes
The interest rate on these notes will be adjusted periodically, but
will never exceed 25% or be less than 9% per annum. The interest rate at
December 31, 1995 was 9%.
Sinking Fund Requirements and Maturities
As of December 31, 1995, cumulative sinking fund requirements and
other maturities of long-term debt for each of the next five years are as
follows:
<TABLE>
<CAPTION>
(Thousands
of Dollars)
-----------
<S> <C>
1996 . . . $ 8,591
1997 . . . 8,591
1998 . . . 8,591
1999 . . . 11,091
2000 . . . 8,591
</TABLE>
-20-
<PAGE> 23
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
Line-of-Credit Arrangements
Pipeline shared in a $600 million Revolving Credit Agreement with
Williams and two affiliated companies during 1994 and the first two months of
1995. Pipeline's maximum borrowing availability, subject to prior borrowing by
other affiliated companies, was $300 million, none of which was used by
Pipeline during 1994 or the first two months of 1995. Effective February 23,
1995, this agreement was renegotiated to an $800 million Revolving Credit
Agreement with Williams and four affiliated companies, with Pipeline's maximum
borrowing availability, subject to prior borrowing by other affiliated
companies, increasing to $400 million, none of which was used by Pipeline at
December 31, 1995. As with the original agreement, interest rates vary with
current market conditions. The agreement contains restrictions that limit,
under certain circumstances, the issuance of additional debt, the attachment of
liens on any assets and any change of ownership of Pipeline. Any borrowings
by Pipeline using this agreement are not guaranteed by Williams and are based
on Pipeline's financial need and credit worthiness.
Pipeline has also arranged various uncommitted lines-of-credit at
market interest rates. These credit facilities are also subject to Pipeline's
continued credit worthiness.
Leases
Pipeline's leasing arrangements include mostly premise and equipment
leases that are classified as operating leases.
The major operating lease is a leveraged lease which became effective
during 1982 for Pipeline's headquarters building. The agreement has an initial
term of approximately 27 years, with options for consecutive renewal terms of
approximately 9 years and 10 years. The major component of the lease payment
is set through the initial and first renewal terms of the lease except for a
potential one time adjustment in 1995 to track an allowed interest rate change
on a portion of the lessor's debt. Various purchase options exist under the
building lease, including options involving adverse regulatory development.
Following are the estimated future minimum yearly rental payments
required under operating leases which have initial or remaining noncancelable
lease terms in excess of one year:
<TABLE>
<CAPTION>
(Thousands
of Dollars)
----------
<S> <C>
1996 . . . . . . . $ 8,379
1997 . . . . . . . 8,351
1998 . . . . . . . 8,351
1999 . . . . . . . 8,351
2000 . . . . . . . 8,351
Thereafter . . . . 98,508
----------
Total . . . . . $ 140,291
==========
</TABLE>
Operating lease rental expense amounted to $4.9 million, $4.6 million
and $4.3 million for 1995, 1994 and 1993, respectively. Capital lease payments
for the periods presented are not significant.
-21-
<PAGE> 24
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
(7) EMPLOYEE BENEFIT PLANS
Pipeline's employees are covered by Williams' noncontributory defined
benefit pension plan. Benefits are based on years of service and average final
compensation. Pension costs are funded to satisfy minimum requirements
prescribed by the Employee Retirement Income Security Act of 1974. Pipeline
accrued pension expense of $.8 million, $.5 million and $1.1 million in 1995,
1994 and 1993, respectively. Such accrued expenses have been or are being
funded currently.
Substantially all retirees who were hired prior to January 1, 1992,
are provided medical benefits. Employees hired after January 1, 1992 will not
be provided postretirement medical benefits. As of January 1, 1993, Northwest
Pipeline adopted FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions". During 1995, 1994 and 1993 the expense of
providing medical benefits to retirees was approximately $2.3 million, $2.8
million and $2.8 million, respectively. Included in 1995, 1994 and 1993
expenses is the amortization of Pipeline's estimated transition obligation of
$19.2 million which is being amortized prospectively over 20 years.
Effective January 1, 1994 Pipeline adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits", which requires the accrual of benefits
provided to former or inactive employees after regular employment but before
retirement. The adoption of the new standard had no effect on Pipeline's net
income and had no significant effect on Pipeline's balance sheet.
Williams maintains various defined contribution plans covering
substantially all employees. Company contributions are based on employees'
compensation and, in part, match employee contributions. All Company
contributions are invested in Williams stock. Contributions by Pipeline to
these plans totaled $1.6 million for 1995 and $1.8 million for each of the
years 1994 and 1993.
(8) RELATED PARTY TRANSACTIONS
Williams' corporate overhead expenses allocated to Pipeline were $4
million, $4.6 million and $4.2 million for 1995, 1994 and 1993, respectively.
Such expenses have been allocated to Pipeline by Williams, primarily based on
the Massachusetts formula until April 30, 1995 and the Distrigas formula
thereafter, which are FERC approved methods utilizing a combination of
operating revenues or net revenues, gross payroll and gross plant for the
allocation base. In addition, Williams or an affiliate has provided executive,
data processing, legal, aviation, internal audit and other administrative
services to Pipeline on a direct charge basis which amounted to $3.2 million,
$3.4 million and $4.9 million for 1995, 1994 and 1993, respectively. In
addition, Pipeline received interest income from advances to parent of $1.1
million and $1.2 million during 1995 and 1994, respectively. There were no
advances to parent during 1993.
During the periods presented, Pipeline's revenues reflect gas sales,
transportation and exchange transactions with subsidiaries of Williams.
Combined revenues for these activities totaled $1.8 million, $3.4 million and
$4.8 million for 1995, 1994 and 1993, respectively.
Pipeline has entered into various other transactions with certain
related parties, the amounts of which were not significant. These transactions
and the above described transactions are charged on the basis of commercial
relationships and prevailing market prices or general industry practices.
-22-
<PAGE> 25
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
(9) CONTINGENT LIABILITIES AND COMMITMENTS
Contract Reformation
Pursuant to FERC policy, Pipeline filed and received approval to
recover a portion of contract reformation costs through direct bills to former
sales customers and through surcharges to transportation as well as sales
commodity rates. Recovery of these amounts was completed in 1994.
The FERC initially approved a method for Pipeline to direct bill its
contract reformation costs, but when challenged on appeal, sought a remand to
reassess such method. Pipeline received an order from the FERC that required a
different allocation of such costs and rebilled its customers accordingly.
This reallocation has had no significant financial impact.
Pending Rate Cases
On April 1, 1993, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed October 1, 1992. On May
31, 1995, Pipeline received a favorable order from the FERC on this rate case.
A number of parties have sought rehearing on the rate of return on equity and
various other issues. Pipeline has adjusted its reserve accruals in the
accompanying financial statements to reflect the favorable order from the FERC.
On November 1, 1994, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed April 29, 1994. This
filing seeks a revenue increase for a projected deficiency caused by increased
costs and the impact of a transportation contract terminated subsequent to the
rate case filed on October 1, 1992. On November 14, 1995, Pipeline filed an
uncontested settlement proposal with the FERC. The settlement resolves
substantially all the issues in this rate case. The FERC's final order on this
settlement was received on February 16, 1996. No requests for rehearing were
filed. Pipeline has not adjusted its reserve accruals in the accompanying
financial statements to reflect the favorable settlement.
On February 1, 1996, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 1, 1995. This rate
case is set for hearing in the fall of 1996. The filing seeks a revenue
increase for increases in rate base related primarily to the mainline expansion
facilities placed into service December 1, 1995, increased operating costs
primarily associated with an increase in headquarters office rent and increased
depreciation expense.
Significant Litigation
In October 1995, Pipeline received a judge's order following a
non-jury trial involving claims arising from a transportation agreement of a
former customer. In the decision which was amended in January 1996, it was
held that Pipeline was liable to the former customer in the amount of $5.3
million, plus interest. Although Pipeline recorded a charge to "other
expenses" in the third quarter 1995, Pipeline is appealing the decision.
Other Legal and Regulatory Matters
In addition to the foregoing, various other proceedings are pending
against Pipeline incidental to its operations.
-23-
<PAGE> 26
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
================================================================================
Summary of Contingent Liabilities
Management believes that the ultimate resolution of the foregoing
matters, after consideration of amounts accrued, insurance coverage and other
indemnification arrangements, will not have a materially adverse effect upon
Pipeline's future financial position, results of operations, and future cash
flow requirements.
Other Matters
Commitments for construction and acquisition of property, plant and
equipment are approximately $24.5 million at December 31, 1995.
During 1994 Pipeline sold, with limited recourse, certain receivables.
Until the expiration of the arrangement in July 1994, net proceeds to Pipeline
were limited to $40 million, none of which was utilized at the expiration date.
During 1994, Pipeline utilized this facility at varying times up to $18
million.
-24-
<PAGE> 27
NORTHWEST PIPELINE CORPORATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial data for 1995 and 1994:
<TABLE>
<CAPTION>
Quarter of 1995
----------------------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues . . . . . . . . . . . . $ 59,073 $ 59,052 $ 75,638 $ 61,456
Operating income . . . . . . . . . . . . . 26,407 27,297 43,323 26,425
Net income . . . . . . . . . . . . . . . . 12,578 15,599 24,344 6,806
</TABLE>
Operating results in the third quarter include the reversal of certain
reserve accruals, including amounts previously accrued for rate refunds. (See
Management's Discussion & Analysis of Financial Condition and Results of
Operations and Note 9 of Notes to Financial Statements.)
<TABLE>
<CAPTION>
Quarter of 1994
----------------------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues . . . . . . . . . . . . $ 64,686 $ 57,816 $ 57,022 $ 58,949
Operating income . . . . . . . . . . . . . 30,475 26,673 24,110 24,681
Net income . . . . . . . . . . . . . . . . 12,894 12,282 10,217 9,505
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-25-
<PAGE> 28
PART III
Since Pipeline meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K, this information is omitted.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1 AND 2. FINANCIAL STATEMENTS AND SCHEDULES (included in Parts II and IV of
this report).
The financial statements are listed in the Index to Financial
Statements on page 8. No schedules are required to be filed.
(A)3. EXHIBITS:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession:
*(a) Merger Agreement, dated as of September 20, 1983, between
Williams and Energy (Exhibit 18 to Energy schedule 14D-9
(Amendment No. 3) dated September 22, 1983).
*(b) The Plan of Merger, dated as of November 7, 1983, between
Energy and a subsidiary of Williams (Exhibit 2(b) to Pipeline
report on Form 10-K, No. 1-7414, filed March 22, 1984).
(3) Articles of incorporation and by-laws:
*(a) Restated Certificate of Incorporation (Exhibit 3a to Amendment
No. 1 to Registration Statement on Form S-1, No. 2-55-273,
filed January 13, 1976).
*(b) By-laws, as amended (Exhibit 3c to Registration Statement on
Form S-1, No. 2-55273, filed December 30, 1975).
(4) Instruments defining the rights of security holders, including
indentures:
*(a) Note Purchase Agreement, dated as of April 15, 1982, between
Pipeline and Teachers Insurance and Annuity Association of
America relating to Adjustable Rate Notes, due March 31, 2002
(Exhibit (a)4(e) to Energy Report on Form 10-Q for the quarter
ended June 30, 1982, No. 1-7987).
*(b) Debenture Purchase Agreement, dated as of June 6, 1986,
between Pipeline and certain institutional investors relating
to the 8.75% Series A Debentures, due 1996, 9.0% Series B
Debentures, due 2001 and 9.25% Series C Debentures, due 2006
(Exhibit 4(n) to Pipeline Report on Form 10-K, No. 1-7414,
filed March 31, 1987.)
*(c) Indenture, dated as of November 15, 1988, between Pipeline and
The Chase Manhattan Bank, relating to Pipeline's 10.65%
Debentures (Exhibit 4.1 to Amendment No. 1 to Registration
Statement on Form S-3, No. 33-25512, filed November 18,
1988).
*(d) Senior Indenture, dated as of August 1, 1992, between Pipeline
and Continental Bank, N.A., relating to Pipeline's 9%
Debentures, due 2022 (Exhibit 4.1 to Registration Statement on
Form S-3, No. 33-49150, filed July 2, 1992).
*(e) Senior Indenture, dated as of November 30, 1995 between
Pipeline and Chemical Bank, relating to Pipeline's 7.125%
Debentures, due 2025 (Exhibit 4.1 to Registration Statement on
Form S-3, No. 33- 62639, filed September 14, 1995).
-26-
<PAGE> 29
(10) Material contracts:
(c) *(1) Form of Transfer Agreement, dated July 1, 1991, between
Pipeline and Gas Processing (Exhibit 10(c)(8) to
Pipeline Report on Form 10-K, No. 1-7414, filed March
26, 1992).
*(2) Form of Operating Agreement, dated July 1, 1991, between
Pipeline and Williams Field Services Company (Exhibit
10(c)(9) to Pipeline Report on Form 10-K, No. 1-7414,
filed March 26, 1992).
(23) Consent of Independent Auditors
(27) Financial Data Schedule (submitted to the SEC for its information).
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed by Pipeline during the last
quarter of the period covered by this report.
- ---------------
*Exhibits so marked have heretofore been filed with the Securities and
Exchange Commission as part of the filing indicated and are incorporated herein
by reference.
-27-
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NORTHWEST PIPELINE CORPORATION
(Registrant)
By /s/ Brian E. O'Neill
-----------------------------
Brian E. O'Neill, President
Date: March 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Keith E. Bailey Chairman of the Board and Director
- ----------------------------------
Keith E. Bailey
/s/ Brian E. O'Neill President (Principal Executive Officer) and Director
- ----------------------------------
Brian E. O'Neill
/s/ J. Douglas Whisenant Sr. Vice President and General Manager and Director
- ----------------------------------
J. Douglas Whisenant
/s/ Timothy J. Hausler Vice President - Finance and Administration, Treasurer and Director
- ---------------------------------- (Principal Financial Officer)
Timothy J. Hausler
/s/ Matt J. Gillis Vice President - Operations and Director
- ----------------------------------
Matt J. Gillis
/s/ Ronald M. Mucci Vice President - Marketing and Director
- ----------------------------------
Ronald M. Mucci
/s/ Lewis A. Posekany, Jr. Vice President and Director
- ----------------------------------
Lewis A. Posekany, Jr.
/s/ Curtis C. Kennedy Controller (Principal Accounting Officer)
- ----------------------------------
Curtis C. Kennedy
/s/ Robert L. Sluder, Jr. Director
- ----------------------------------
Robert L. Sluder, Jr.
</TABLE>
Date: March 27, 1996
-28-
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-62639) of Northwest Pipeline Corporation and in the related
Prospectus of our report dated February 9, 1996, with respect to the financial
statements of Northwest Pipeline Corporation included in this Annual Report
(Form 10-K) for the year ended December 31, 1995.
Ernst & Young LLP
Tulsa, Oklahoma
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 570
<SECURITIES> 0
<RECEIVABLES> 36,773
<ALLOWANCES> 0
<INVENTORY> 11,065
<CURRENT-ASSETS> 134,693
<PP&E> 1,402,437
<DEPRECIATION> 518,780
<TOTAL-ASSETS> 1,075,567
<CURRENT-LIABILITIES> 128,817
<BONDS> 372,228
<COMMON> 1
0
0
<OTHER-SE> 459,459
<TOTAL-LIABILITY-AND-EQUITY> 1,075,567
<SALES> 0
<TOTAL-REVENUES> 255,219
<CGS> 0
<TOTAL-COSTS> 131,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,335
<INCOME-PRETAX> 92,428
<INCOME-TAX> 33,101
<INCOME-CONTINUING> 59,327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,327
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
