<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-20555
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WILLIAMS HOLDINGS OF DELAWARE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 73-1455707
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(State of Incorporation) (IRS Employer Identification Number)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
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(Address of principal executive office) (Zip Code)
Registrant's telephone number: (918) 588-2000
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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 [ ]
The number of shares of the registrant's Common Stock outstanding at
November 14, 1997, was 1,000, all of which are owned by The Williams Companies,
Inc.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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WILLIAMS HOLDINGS OF DELAWARE, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
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<S> <C>
Item 1. Financial Statements
Consolidated Statement of Income--Three Months and Nine Months Ended
September 30, 1997 and 1996 2
Consolidated Balance Sheet--September 30, 1997 and December 31, 1996 3
Consolidated Statement of Cash Flows--Nine Months Ended
September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Narrative Analysis of the Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges
</TABLE>
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Williams Holdings of Delaware, Inc.
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be achieved. Such statements
are made in reliance on the "safe harbor" protections provided under the Private
Securities Reform Act of 1995. Additional information about issues that could
lead to material changes in performance is contained in the Williams Holdings of
Delaware, Inc.'s Annual Report on Form 10-K.
1
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Williams Holdings of Delaware, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
-------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues (Note 7):
Williams Energy Group:
Field Services $ 146.8 $ 114.6 $ 452.2 $ 345.6
Merchant Services 15.5 57.0 73.9 181.3
Petroleum Services 139.5 114.4 397.1 356.4
Exploration & Production 32.1 19.5 94.5 52.9
Williams Communications Group (Note 3) 413.7 189.0 989.4 491.1
Other 8.9 12.1 28.0 37.3
Intercompany eliminations (44.6) (63.8) (158.7) (167.3)
---------- ---------- ---------- ----------
Total revenues 711.9 442.8 1,876.4 1,297.3
---------- ---------- ---------- ----------
Profit-center costs and expenses (Note 7):
Costs and operating expenses 504.4 299.0 1,291.5 861.6
Selling, general and administrative expenses 141.7 76.6 358.6 211.4
Other income--net (5.8) (1.9) (7.3) (2.7)
---------- ---------- ---------- ----------
Total profit-center costs and expenses 640.3 373.7 1,642.8 1,070.3
---------- ---------- ---------- ----------
Operating profit:
Williams Energy Group:
Field Services 35.1 37.5 120.5 108.2
Merchant Services 6.8 15.1 28.6 52.8
Petroleum Services 27.2 14.4 63.1 57.4
Exploration & Production 5.4 (.7) 20.1 (.9)
Williams Communications Group (Note 3) (5.2) 2.1 (3.9) 6.0
Other 2.3 .7 5.2 3.5
---------- ---------- ---------- ----------
Total operating profit 71.6 69.1 233.6 227.0
Allocated parent company expenses (6.1) (4.4) (15.0) (13.6)
Interest accrued (Note 7) (19.8) (9.1) (51.4) (23.3)
Interest capitalized 3.0 .9 7.1 2.1
Investing income (Note 7) 11.8 10.1 33.3 29.7
Gain on sale of interest in subsidiary (Note 3) -- -- 44.5 --
Minority interest in income of consolidated subsidiaries (Note 3) (4.4) -- (9.5) --
Other income (expense)--net (5.8) 2.3 (11.5) (1.8)
---------- ---------- ---------- ----------
Income before income taxes 50.3 68.9 231.1 220.1
Provision for income taxes (Notes 3 and 4) 19.0 17.9 62.0 65.7
---------- ---------- ---------- ----------
Net income $ 31.3 $ 51.0 $ 169.1 $ 154.4
========== ========== ========== ==========
</TABLE>
See accompanying notes.
2
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Williams Holdings of Delaware, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
--------------------------
September 30, December 31,
1997 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 76.4 $ 44.4
Receivables:
Trade (Note 5) 823.6 852.9
Affiliates 47.0 71.9
Inventories 154.8 101.0
Commodity trading assets 165.3 147.2
Deferred income taxes - affiliates 73.3 66.7
Other 61.2 69.4
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Total current assets 1,401.6 1,353.5
Due from parent 207.0 151.4
Investments 938.5 743.3
Property, plant and equipment, at cost 3,741.7 3,251.0
Less accumulated depreciation and depletion (822.8) (710.6)
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2,918.9 2,540.4
Goodwill and other intangible assets--net (Note 3) 437.0 198.1
Non-current commodity trading assets 100.6 93.0
Other assets and deferred charges 87.1 84.2
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Total assets $ 6,090.7 $ 5,163.9
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable (Note 6) $ 414.1 $ --
Accounts payable:
Trade 556.8 550.6
Affiliates 78.9 53.4
Accrued liabilities 369.5 331.7
Commodity trading liabilities 167.4 137.9
Long-term debt due within one year (Note 6 ) 28.8 19.7
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Total current liabilities 1,615.5 1,093.3
Long-term debt (Note 6) 845.1 860.4
Deferred income taxes - affiliates 463.0 395.9
Non-current commodity trading liabilities 192.9 201.2
Other liabilities 150.8 123.1
Minority interest in consolidated subsidiaries (Note 3) 105.9 7.2
Contingent liabilities and commitments (Note 8)
Stockholder's equity:
Common stock, $1 par value, 1,000 shares authorized and outstanding -- --
Capital in excess of par value 1,720.2 1,705.0
Retained earnings 828.0 673.2
Net unrealized gain on non-current marketable securities 169.3 104.6
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Total stockholder's equity 2,717.5 2,482.8
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Total liabilities and stockholder's equity $ 6,090.7 $ 5,163.9
========== ==========
</TABLE>
See accompanying notes.
3
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Williams Holdings of Delaware, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
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Nine months ended September 30,
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1997 1996
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OPERATING ACTIVITIES:
Net income $ 169.1 $ 154.4
Adjustments to reconcile to cash provided from operations:
Depreciation, depletion and amortization 138.2 100.0
Provision for deferred income taxes 23.0 39.7
Minority interest in income of consolidated subsidiaries 9.5 --
Gain on sale of interest in subsidiary (44.5) --
Changes in receivables sold 166.9 --
Changes in receivables 16.8 (43.2)
Changes in inventories (28.9) (2.4)
Changes in other current assets 5.8 (13.2)
Changes in accounts payable (4.6) 38.9
Changes in accrued liabilities (58.5) (69.1)
Changes in receivables/payables with affiliates 50.8 (14.7)
Changes in current commodity trading assets and liabilities 11.4 (20.5)
Changes in non-current commodity trading assets and liabilities (15.8) (35.9)
Other, including changes in non-current assets and liabilities 4.3 (4.6)
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Net cash provided by operating activities 443.5 129.4
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FINANCING ACTIVITIES:
Proceeds from notes payable 423.4 10.0
Payments of notes payable (170.9) --
Proceeds from long-term debt 458.6 407.0
Payments of long-term debt (465.1) (12.8)
Dividends paid to parent (14.3) (10.2)
Other--net 10.8 (1.4)
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Net cash provided by financing activities 242.5 392.6
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INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (484.8) (264.8)
Proceeds from dispositions 68.4 15.8
Acquisition of businesses, net of cash acquired (80.4) (94.1)
Income tax and other payments related to discontinued operations (11.6) (261.2)
Purchase of investments/advances to affiliate (109.4) (55.1)
Changes in advances to parent company (55.6) 125.1
Other--net 19.4 8.5
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Net cash used by investing activities (654.0) (525.8)
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Increase (decrease) in cash and cash equivalents 32.0 (3.8)
Cash and cash equivalents at beginning of period 44.4 29.5
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Cash and cash equivalents at end of period $ 76.4 $ 25.7
============ ============
</TABLE>
See accompanying notes.
4
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Williams Holdings of Delaware, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
Williams Holdings of Delaware, Inc. (Williams Holdings) is a wholly-owned
subsidiary of The Williams Companies, Inc. (Williams). The accompanying interim
consolidated financial statements of Williams Holdings do not include all notes
in annual financial statements and therefore should be read in conjunction with
the annual financial statements and notes thereto for Williams Holdings' 1996
Annual Report on Form 10-K. The accompanying financial statements have not been
audited by independent auditors but include all adjustments, both normal
recurring and others, which, in the opinion of Williams Holdings' management,
are necessary to present fairly its financial position at September 30, 1997,
results of operations for the three and nine months ended September 30, 1997 and
1996, and cash flows for the nine months ended September 30, 1997 and 1996.
2. Basis of presentation
On April 30, 1997, Williams Holdings and Northern Telecom (Nortel) combined
their customer premise operations into a limited liability company, WilTel
Communications, LLC (LLC) (see Note 3). Williams Communications Group's revenues
and operating profit amounts for 1997 include the operating results of the LLC
beginning May 1, 1997.
Williams Energy Group is comprised of four units. Field Services includes
Williams Holdings' natural gas gathering and processing activities previously
reported in Williams Field Services Group. Merchant Services includes Williams
Holdings' energy commodity trading and price-risk management activities
previously reported in Williams Energy Services. Certain natural gas and natural
gas liquids marketing operations formerly reported in Williams Field Services
Group are also included in Merchant Services. Petroleum Services includes
Williams Holdings' interstate petroleum products pipeline, ethanol-producing
facilities and petroleum terminals previously reported in Williams Pipe Line.
Exploration & Production includes exploration for and production of hydrocarbons
previously reported as a component of Williams Field Services Group. Certain
revenues and operating profit amounts for the three and nine months ended
September 30, 1996, and cash flow amounts for the nine months ended September
30, 1996, have been reclassified to conform to current-year classifications for
these reorganizations and certain other matters.
3. Acquisition
On April 30, 1997, Williams Holdings and Nortel combined their customer
premise equipment sales and service operations into a limited liability company,
WilTel Communications, LLC. In addition, Williams Holdings paid $68 million to
Nortel. Williams Holdings has accounted for its 70 percent interest in the
operations that Nortel contributed to the LLC as a purchase business combination
and, beginning May 1, 1997, has included the results of operations of the
acquired company in Williams Holdings' Consolidated Statement of Income.
Accordingly, the acquired assets and liabilities, including $150 million in debt
obligations, have been recorded based on an allocation of the purchase price,
with substantially all of the cost in excess of historical carrying values
allocated to goodwill. The goodwill will be amortized using the straight line
method over approximately 25 years.
Williams Holdings recorded the 30 percent reduction in its operations
contributed to the LLC as a sale to the minority shareholders of the LLC.
Williams Holdings recognized a gain of $44.5 million based on the fair value of
its operations contributed to the LLC. Income taxes were not provided on the
gain because the transaction did not affect the differences between the
financial and tax bases of identifiable assets and liabilities.
If the transaction occurred on January 1, 1996, Williams Holdings'
unaudited pro forma revenues for the nine months ended September 30, 1997 and
1996, would have been $2,124.5 million and $1,837.5 million, respectively. The
pro forma effect of the transaction on Williams Holdings' net income is not
significant. Pro forma financial information is not necessarily indicative of
results of operations that would have occurred if the transaction had occurred
on January 1, 1996, or of future results of operations of the combined
companies.
<PAGE> 7
4. Provision for income taxes
The provision for income taxes includes:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
(Millions) September 30, September 30,
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1997 1996 1997 1996
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Current:
Federal $ 8.9 $ 4.6 $ 32.8 $ 31.9
State 1.5 (10.3) 6.2 (5.9)
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10.4 (5.7) 39.0 26.0
Deferred:
Federal 6.9 19.0 17.6 31.3
State 1.7 4.6 5.4 8.4
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8.6 23.6 23.0 39.7
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Total provision $ 19.0 $ 17.9 $ 62.0 $ 65.7
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</TABLE>
The effective income tax rate for the three months ended September 30,
1997, is greater than the federal statutory rate due primarily to the effects of
state income taxes, partially offset by the effects of income tax credits from
coal-seam gas production.
The effective income tax rate for the nine months ended September 30, 1997,
is significantly less than the federal statutory rate due primarily to the
effect of the non-taxable
5
<PAGE> 8
Notes (continued)
gain recognized in the second quarter (see Note 3) and income tax credits from
coal-seam gas production, partially offset by the effects of state income taxes.
The effective income tax rate in 1996 is less than the federal statutory
rate due primarily to income tax credits from coal-seam gas production,
partially offset by the effects of state income taxes. Both 1996 periods include
approximately $6 million, net of federal income tax effect, from the effects of
state income tax adjustments related to 1995. In addition, the nine months ended
September 30, 1996, includes recognition of favorable adjustments totaling $3
million related to research credits.
Cash payments, net of refunds, to Williams and certain taxing authorities
for income taxes for the nine months ended September 30, 1997 and 1996, are $29
million and $279 million, respectively.
5. Sale of receivables
In January 1997, Williams Holdings sold certain receivables under a new
revolving receivables facility with a limit of $200 million. As of September 30,
1997, Williams Holdings has sold $166.9 million under this facility. The
Financial Accounting Standards Board has issued a new accounting standard, FAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," effective for transactions occurring after
December 31, 1996. The adoption of this standard has not had a material impact
on Williams Holdings' consolidated results of operations, financial position or
cash flows.
6. Debt and banking arrangements
Notes payable
In July 1997, Williams Holdings entered into a commercial paper program
backed by a new $500 million short-term bank-credit facility. At September 30,
1997, $414 million of commercial paper was outstanding under the program.
Interest rates vary with current market conditions.
Debt
<TABLE>
<CAPTION>
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Weighted
average
interest September 30, December 31,
(Millions) rate(*) 1997 1996
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<S> <C> <C> <C>
Williams Holdings of
Delaware, Inc.
Revolving credit loans 6.3% $200.0 $500.0
Debentures, 6.25%,
payable 2006 4.8 248.9 248.8
Notes, 6.4% - 6.91%,
payable 1998
through 2002 6.7 205.6 --
Williams Pipe Line
Notes, 8.95% and
9.78%, payable
through 2001 9.4 90.0 100.0
Williams Energy Ventures
Adjustable rate notes,
payable through 2002 -- -- 25.6
WilTel Communications, LLC
Revolving credit
loans 6.0 125.0 --
Other, payable through 1999 7.9 4.4 5.7
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873.9 880.1
Current portion of long-term debt (28.8) (19.7)
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$845.1 $860.4
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</TABLE>
(*) At September 30, 1997, including the effects of interest-rate swap.
In September 1997, Williams and certain of its consolidated subsidiaries
initiated a restructuring of its debt portfolio. In conjunction with this
restructuring Williams Pipe Line has notified lenders of its intention to call
its notes subsequent to September 30, 1997. Williams Pipe Line will pay $96
million to redeem its outstanding notes totaling $90 million, resulting in an
estimated extraordinary loss of $4 million (net of a $2 million benefit for
income taxes). Williams Holdings will issue new debt securities or utilize the
bank-credit agreement, noted below, to finance the transaction.
In July 1997, Williams, Williams Holdings, WilTel Communications, LLC,
Williams Pipe Line and other affiliates entered into a new $1 billion
bank-credit agreement, replacing the previous agreement. Under this agreement,
the LLC and Williams Pipe Line have access to varying amounts of the facility,
while Williams (parent) and Williams Holdings (parent) have access to all
unborrowed amounts. Interest rates vary with current market conditions.
Subsequent to September 30, 1997, Williams Pipe Line elected to withdraw as a
borrower under the agreement. Amounts available to the remaining parties did not
change.
For financial statement purposes at September 30, 1997, current debt
obligations of $90 million have been classified as non-current obligations based
on Williams Holdings' intent and ability to refinance them on a long-term basis.
At September 30, 1997, the amount available on the existing credit agreement of
$468 million is sufficient to complete this refinancing.
6
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Cash payments for interest (net of amounts capitalized) for the nine months
ended September 30, 1997 and 1996, are $50 million and $28 million,
respectively, including payments to Williams and affiliates of $5 million in
both 1997 and 1996, respectively.
7. Related party transactions
Williams Holdings and its subsidiaries maintain promissory notes with
Williams for both advances from and advances to Williams depending on the cash
position of each subsidiary. Investing income includes $8.4 million and $7
million for the three months ended September 30, 1997 and 1996, respectively,
and $24.8 million and $23.8 million for the nine months ended September 30, 1997
and 1996, respectively, from advances to affiliates.
William Holdings' subsidiaries have transactions primarily with the
following affiliates: Northwest Pipeline, Williams Natural Gas, Transcontinental
Gas Pipe Line and Texas Gas Transmission. Merchant Services' revenues include
natural gas sales to affiliates of $92.3 million and $71.2 million for the three
months ended September 30, 1997 and 1996, respectively, and $308.7 million and
$340.2 million for the nine months ended September 30, 1997 and 1996,
respectively. Merchant Services also incurred costs and operating expenses,
including transportation and certain other costs, from affiliates of $15.1
million and $19.2 million for the three months ended September 30, 1997 and
1996, respectively, and $55.5 million and $125.3 million for the nine months
ended September 30, 1997 and 1996, respectively. These sales and costs are
included in Merchant Services' revenues consistent with a "net" basis of
reporting these activities. Transactions with affiliates are at prices that
generally apply to unaffiliated parties.
8. Contingent liabilities and commitments
Rate and regulatory matters
Williams Pipe Line has various regulatory proceedings pending. As a result
of rulings in these proceedings, a portion of its revenues has been collected
subject to refund. Such revenues were $307 million at September 30, 1997. As a
result of various Federal Energy Regulatory Commission (FERC) rulings in these
and other proceedings, Williams Pipe Line does not expect that the amount of any
refunds ordered would be significant. Accordingly, no portion of these revenues
has been reserved for refund.
Environmental matters
Certain Williams Holdings' subsidiaries 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 Holdings 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.
The Field Services unit of Williams Energy Group has recorded an aggregate
liability of approximately $13 million, representing the current estimate of
their future environmental and remediation costs, including approximately $5
million relating to former Williams Natural Gas facilities.
Other legal matters
In 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit against
Williams Production Company (Williams Production), a wholly-owned subsidiary of
Williams Holdings, and other gas producers in the San Juan Basin area, alleging
that certain coal strata were reserved by the United States for the benefit of
the Tribe and that the extraction of coal-seam gas from the coal strata was
wrongful. The Tribe seeks compensation for the value of the coal-seam gas. The
Tribe also seeks an order transferring to the Tribe ownership of all of the
defendants' equipment and facilities utilized in the extraction of the coal-seam
gas. In September 1994, the court granted summary judgment in favor of the
defendants, and the Tribe lodged an interlocutory appeal with the U.S. Court of
Appeals for the Tenth Circuit. Williams Production agreed to indemnify the
Williams Coal Seam Gas Royalty Trust (Trust) against any losses that may arise
in respect of certain properties subject to the lawsuit. In addition, if the
Tribe is successful in showing that Williams Production has no rights in the
coal-seam gas, Williams Production has agreed to pay to the Trust for
distribution to then-current unitholders, an amount representing a return of a
portion of the original purchase price paid for the units. While Williams
Holdings believes that such a payment is not probable, it has reserved a portion
of the proceeds from the sale of the units in the Trust. On July 16, 1997, the
U.S. Court of Appeals for the Tenth Circuit reversed the decision of the
district court, held that the Tribe owns the coal-seam gas produced from certain
coal strata on fee lands within the exterior boundaries of the Tribe's
reservation, and remanded the case to the district court for further
proceedings. On September 16, 1997, Amoco Production Company, the class
representative for the defendant class (of which Williams Production is a part),
filed its motion for rehearing en banc before the Court of Appeals. In the event
that further review is denied, the district court will be in the position to
hear the defendants' affirmative defenses against the Tribe's claims.
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 and Texas Gas were named as
defendants in, respectively, six and two lawsuits. Transco Energy Company and
Transco Gas Supply Company (wholly-owned subsidiaries of Williams Holdings) have
also been named as defendants in certain of these lawsuits. Six of the eight
lawsuits have been settled for cash payments aggregating
7
<PAGE> 10
Notes (continued)
approximately $9 million, all of which have previously been accrued, and of
which approximately $3 million is recoverable as transition costs under FERC
Order 636. In one of the two remaining cases, a jury verdict found that
Transcontinental Gas Pipe Line was required to pay to a producer damages of
$14.5 million plus $3.8 million in attorneys fees. The trial judge deferred
entering judgement pending mediation. In the other remaining case, a producer
has asserted damages, including interest calculated through December 31, 1996,
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 FERC Order 528.
In November 1994, Continental Energy Associates Limited Partnership (the
Partnership) filed a voluntary petition under Chapter 11 of the Bankruptcy Code
with the U.S. Bankruptcy Court, Middle District of Pennsylvania. The Partnership
owns a cogeneration facility in Hazelton, Pennsylvania (the Facility). Hazelton
Fuel Management Company (HFMC), a subsidiary of Transco Energy Company, formerly
supplied natural gas and fuel oil to the Facility. Pursuant to a court-approved
Plan of Reorganization, all litigation involving HFMC has been fully settled and
HFMC received $6.3 million from the bankruptcy estate, leaving it with
approximately $14 million of outstanding receivables, all of which have been
fully reserved.
In addition to the foregoing, various other proceedings are pending against
Williams Holdings or its subsidiaries incidental to their operations.
Summary
While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements, will have a materially adverse effect upon Williams Holdings'
future financial position, results of operations or cash flow requirements.
9. Adoption of accounting standards
The Financial Accounting Standards Board has issued two new accounting
standards, FAS No. 130, "Reporting Comprehensive Income," and FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. While Williams Holdings has
certain comprehensive income items, adopting these pronouncements will not
materially change Williams Holdings financial reporting and disclosures.
Williams Holdings has not yet determined if it will adopt either standard early.
8
<PAGE> 11
ITEM 2.
Management's Narrative Analysis of
the Results of Operations
Nine Months Ended September 30, 1997 vs. Nine
Months Ended September 30, 1996
FIELD SERVICES' revenues increased $106.6 million, or 31 percent, due
primarily to $52 million higher natural gas liquids sales, a $34 million
increase in gathering revenues, the pass through of $11 million higher operating
costs to customers and higher condensate revenues of $9 million. Natural gas
liquids revenues increased due to a 47 percent increase in volumes combined with
an increase in average natural gas liquids prices. Gathering revenues increased
as a result of a 21 percent increase in gathering volumes following the transfer
of Williams Natural Gas (a wholly-owned subsidiary of Williams Holdings' parent)
gathering assets to Field Services in the last half of 1996. Costs and operating
expenses increased $91 million, or 46 percent, due primarily to higher fuel and
replacement gas purchases, costs and expenses associated with the gathering
assets transferred to Field Services from Williams Natural Gas and $11 million
higher operating costs passed through to customers. Other income--net in 1996
includes a $3 million environmental remediation accrual offset by a $3 million
gain from the sale of a small gathering system in the Texas panhandle. Operating
profit increased $12.3 million, or 11 percent, due primarily to $21 million from
higher natural gas liquids volumes, the transfer of Williams Natural Gas
gathering assets to Field Services and an 8 percent increase in processing
volumes, partially offset by $16 million from lower per-unit liquids margins and
higher gathering fuel and replacement gas purchases.
MERCHANT SERVICES' revenues decreased $107.4 million, or 59 percent, and
costs and operating expenses decreased $87 million, or 90 percent, due primarily
to the 1997 reporting on a net margin basis of certain natural gas and gas
liquids marketing operations previously reported in Field Services (see Note
2). In addition, revenues decreased an additional $20 million, due primarily to
lower price-risk management revenues and physical trading margins as a result
of decreased price volatility. Increases in both physical trading and notional
natural gas volumes of 12 percent and 52 percent, respectively, and increased
petroleum products trading volumes partially offset this decrease. Operating
profit decreased $24.2 million, or 46 percent, due primarily to the decrease in
net revenues and the expenses associated with expansion of business growth
platforms, partially offset by a $6.3 million recovery of an account previously
considered a bad debt.
PETROLEUM SERVICES' revenues increased $40.7 million, or 11 percent, due
primarily to a $27 million increase in product sales from transportation
activities and a $15 million increase in ethanol sales, slightly offset by a
decrease in average transportation rates. Ethanol sales increased as a result of
15 percent higher sales volumes, partially offset by lower average sales prices.
Ethanol production was reduced during the second half of 1996 due to unfavorable
market conditions. Costs and operating expenses increased $32 million, or 12
percent, due primarily to the increase in ethanol production and product sales.
Operating profit increased $5.7 million, or 10 percent, due primarily to $11
million from increased ethanol sales volumes and per-unit margins, in addition
to improved product terminalling operations resulting from the August 1996
acquisition of eight petroleum products terminals. These increases were
partially offset by lower average transportation rates and the impact of
favorable insurance settlements of $3 million in 1996.
EXPLORATION & PRODUCTION'S revenues increased $41.6 million, or 79 percent,
due primarily to higher average natural gas sales prices for company-owned
production and from the marketing of Williams Coal Seam Gas Royalty Trust
(Royalty Trust) natural gas and a 24 percent increase in company-owned
production volumes. Costs and operating expenses increased $23 million, or 45
percent, due primarily to higher Royalty Trust natural gas purchase prices and
increased production activities. Operating profit increased $21 million from a
$900,000 loss in 1996 to a $20.1 million operating profit in 1997, due primarily
to the increase in average natural gas prices and company-owned production
volumes, partially offset by higher expenses associated with increased activity
levels.
WILLIAMS COMMUNICATIONS GROUP'S revenues increased $498.3 million, or 101
percent, to $989.4 million due primarily to acquisitions which contributed
revenues of approximately $400 million, including approximately $300 million
from the acquisition of the customer premise equipment sales and services
operations of Northern Telecom (Nortel). Additionally, increased business
activity in enterprise network solutions resulted in a $47 million revenue
increase in new system sales and a $27 million increase in existing system
enhancement revenues. The number of ports in service at September 30, 1997, more
than doubled as compared to September 30, 1996, due primarily to the Nortel
acquisition. Fiber billable minutes from occasional service increased 63
percent. Dedicated service voice-grade equivalent miles at September 30, 1997,
increased 36 percent as compared with September 30, 1996. Costs and operating
expenses increased $371 million, or 99 percent, due primarily to acquired
operations, the overall increase in business activity, higher expenses for
developing advanced network applications and increased depreciation
9
<PAGE> 12
associated with added capacity. Selling, general and administrative expenses
increased $139 million, or 127 percent, due primarily to acquired operations,
the overall increase in business activity, higher expenses for developing
advanced network applications and expanding the infrastructure of this business
for future growth. Operating profit decreased $9.9 million from a $6 million
operating profit in 1996 to a $3.9 million operating loss in 1997, due primarily
to the expense of developing the infrastructure along with integrating the most
recent acquisitions, partially offset by improved earnings from enterprise
network solutions including the impact of the Nortel acquisition.
INTEREST ACCRUED increased $28.1 million, or 121 percent, due primarily to
higher borrowings under the bank-credit facility. Interest capitalized increased
$5 million, from $2.1 million in 1996, due primarily to capital expenditures for
Williams Communications Group's fiber-optic network. For information concerning
the 1997 gain on sale of interest in subsidiary see Note 3. The minority
interest in income of consolidated subsidiaries is related primarily to the 30
percent interest held by WilTel Communications, LLC's minority shareholders (see
Note 3). Other income (expense)--net in 1997 includes $6.5 million of expenses
related to the sale of receivables under a new revolving receivables program
which began in 1997. Other income (expense)--net in 1996 includes a $3.5 million
gain on the sale of an airplane. The effective income tax rate in 1997 is less
than the federal statutory rate due primarily to the effect of the non-taxable
gain recognized in 1997 (see Note 3) and income tax credits from coal-seam gas
production, partially offset by the effects of state income taxes. The effective
income tax rate in 1996 is less than the federal statutory rate due primarily to
income tax credits from coal-seam gas production and recognition of favorable
adjustments totaling $9 million related to research credits and state income tax
adjustments related to 1995. Partially offsetting these were the effects of
state income taxes.
10
<PAGE> 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed below are filed as part of this report:
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges
(b) During the third quarter of 1997, Williams Holdings did not file
a Form 8-K.
11
<PAGE> 14
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.
WILLIAMS HOLDINGS OF DELAWARE, INC.
-------------------------------------
(Registrant)
Gary R. Belitz
-------------------------------------
Gary R. Belitz
Controller
(Duly Authorized Officer and
Principal Accounting Officer)
November 14, 1997
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
Williams Holdings of Delaware, Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in millions)
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
------------------
<S> <C>
Earnings:
Income before income taxes $ 231.1
Add:
Interest expense - net 44.3
Rental expense representative of interest factor 6.8
Minority interest in income of consolidated subsidiaries 9.5
Other (1.4)
--------
Total earnings as adjusted plus fixed charges $ 290.3
========
Fixed charges:
Interest expense - net $ 44.3
Capitalized interest 7.1
Rental expense representative of interest factor 6.8
--------
Total fixed charges $ 58.2
========
Ratio of earnings to fixed charges 4.99
========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 76,395
<SECURITIES> 0
<RECEIVABLES> 831,589
<ALLOWANCES> (7,947)
<INVENTORY> 154,847
<CURRENT-ASSETS> 1,401,566
<PP&E> 3,741,709
<DEPRECIATION> (822,798)
<TOTAL-ASSETS> 6,090,656
<CURRENT-LIABILITIES> 1,615,523
<BONDS> 845,124
0
0
<COMMON> 1
<OTHER-SE> 2,717,460
<TOTAL-LIABILITY-AND-EQUITY> 6,090,656
<SALES> 0
<TOTAL-REVENUES> 1,876,356
<CGS> 0
<TOTAL-COSTS> 1,291,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (5,694)
<INTEREST-EXPENSE> 51,398
<INCOME-PRETAX> 231,114
<INCOME-TAX> 61,967
<INCOME-CONTINUING> 169,147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,147
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
