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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 June 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 ______________________
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
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The number of shares of the registrant's Common Stock outstanding at August
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 Six Months Ended
June 30, 1997 and 1996 2
Consolidated Balance Sheet--June 30, 1997 and December 31, 1996 3
Consolidated Statement of Cash Flows--Six Months Ended
June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Narrative Analysis of the Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 9
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
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.
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Williams Holdings of Delaware, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
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Three months ended Six months ended
June 30, June 30,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues (Note 7):
Williams Energy Group:
Field Services $ 148.9 $ 111.4 $ 305.4 $ 231.0
Merchant Services 18.6 54.8 58.4 124.3
Petroleum Services 129.6 123.6 257.6 242.0
Exploration & Production 24.6 13.5 62.4 33.4
Williams Communications Group (Note 3) 359.1 161.5 575.7 302.1
Other 9.2 12.6 19.1 25.2
Intercompany eliminations (54.7) (56.4) (114.1) (103.5)
----------------------- -------------------------
Total revenues 635.3 421.0 1,164.5 854.5
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Profit-center costs and expenses (Note 7):
Costs and operating expenses 433.4 280.1 787.1 562.6
Selling, general and administrative expenses 123.7 69.9 216.9 134.8
Other income--net (1.1) (3.7) (1.5) (.8)
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Total profit-center costs and expenses 556.0 346.3 1,002.5 696.6
----------------------- -------------------------
Operating profit:
Williams Energy Group:
Field Services 41.9 32.1 85.4 70.7
Merchant Services 5.3 15.9 21.8 37.7
Petroleum Services 21.5 25.2 35.9 43.0
Exploration & Production 4.1 (.8) 14.7 (.2)
Williams Communications Group (Note 3) 3.3 1.1 1.3 3.9
Other 3.2 1.2 2.9 2.8
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Total operating profit 79.3 74.7 162.0 157.9
Allocated parent company expenses (4.0) (4.7) (8.9) (9.2)
Interest accrued (Note 7) (17.5) (7.6) (31.6) (14.2)
Interest capitalized 2.9 (.3) 4.1 1.2
Investing income (Note 7) 9.7 9.7 21.5 19.6
Gain on sale of interest in subsidiary (Note 3) 44.5 -- 44.5 --
Minority interest in income of consolidated subsidiaries (Note 3) (5.1) -- (5.1) --
Other expense--net (3.2) (1.7) (5.7) (4.1)
----------------------- -------------------------
Income before income taxes 106.6 70.1 180.8 151.2
Provision for income taxes (Notes 3 and 4) 21.1 19.8 43.0 47.8
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Net income $ 85.5 $ 50.3 $ 137.8 $ 103.4
======================= =========================
</TABLE>
SEE ACCOMPANYING NOTES.
2
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Williams Holdings of Delaware, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
-----------------------------
June 30, December 31,
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 123.1 $ 44.4
Receivables:
Trade (Note 5) 697.0 852.9
Affiliates 46.8 71.9
Inventories 134.7 101.0
Commodity trading assets 133.0 147.2
Deferred income taxes - affiliates 72.9 66.7
Other 52.6 69.4
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Total current assets 1,260.1 1,353.5
Due from parent 327.7 151.4
Investments 885.9 743.3
Property, plant and equipment, at cost 3,504.9 3,251.0
Less accumulated depreciation and depletion (784.1) (710.6)
---------------------------
2,720.8 2,540.4
Goodwill and other intangible assets--net (Note 3) 440.5 198.1
Non-current commodity trading assets 94.7 93.0
Other assets and deferred charges 86.0 84.2
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Total assets $ 5,815.7 $ 5,163.9
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Note payable $ 10.9 $ --
Accounts payable:
Trade 380.9 550.6
Affiliates 70.2 53.4
Accrued liabilities 383.0 331.7
Commodity trading liabilities 119.6 137.9
Long-term debt due within one year (Note 6 ) 13.1 19.7
---------------------------
Total current liabilities 977.7 1,093.3
Long-term debt (Note 6) 1,271.2 860.4
Deferred income taxes - affiliates 442.1 395.9
Non-current commodity trading liabilities 192.6 201.2
Other liabilities 174.4 123.1
Minority interest in consolidated subsidiaries (Note 3) 85.6 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 800.7 673.2
Net unrealized gain on non-current marketable securities 151.2 104.6
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Total stockholder's equity 2,672.1 2,482.8
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Total liabilities and stockholder's equity $ 5,815.7 $ 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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Six months ended June 30,
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1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 137.8 $ 103.4
Adjustments to reconcile to cash provided from operations:
Depreciation, depletion and amortization 92.0 65.0
Provision for deferred income taxes 14.4 16.1
Minority interest in income of consolidated subsidiaries 5.1 --
Gain on sale of interest in subsidiary (44.5) --
Changes in receivables sold 159.8 --
Changes in receivables 161.5 (44.8)
Changes in inventories (8.8) 2.9
Changes in other current assets 14.0 6.2
Changes in accounts payable (179.5) 61.2
Changes in accrued liabilities (40.2) (63.5)
Changes in receivables/payables with affiliates 40.5 (48.4)
Changes in current commodity trading assets and liabilities (4.1) (19.1)
Changes in non-current commodity trading assets and liabilities (10.2) (20.6)
Other, including changes in non-current assets and liabilities 11.6 (3.9)
-----------------------
Net cash provided by operating activities 349.4 54.5
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FINANCING ACTIVITIES:
Proceeds from notes payable 10.0 --
Payments of notes payable (10.0) --
Proceeds from long-term debt 308.7 328.7
Payments of long-term debt (54.7) (56.5)
Dividends paid to parent (10.3) --
Other--net (.7) (1.3)
-----------------------
Net cash provided by financing activities 243.0 270.9
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INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (244.6) (132.1)
Proceeds from dispositions 63.5 5.4
Acquisition of businesses, net of cash acquired (78.7) (35.3)
Income tax and other payments related to discontinued operations (9.7) (226.9)
Purchase of investments/advance to affiliate (86.2) (25.8)
Changes in advances to parent company (176.4) 61.7
Other--net 18.4 8.7
-----------------------
Net cash used by investing activities (513.7) (344.3)
-----------------------
Increase (decrease) in cash and cash equivalents 78.7 (18.9)
Cash and cash equivalents at beginning of period 44.4 29.5
-----------------------
Cash and cash equivalents at end of period $ 123.1 $ 10.6
=======================
</TABLE>
SEE ACCOMPANYING NOTES.
4
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Williams Holdings of Delaware, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
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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 June 30, 1997,
results of operations for the three and six months ended June 30, 1997 and
1996, and cash flows for the six months ended June 30, 1997 and 1996.
2. Basis of presentation
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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 the three and six months ended June
30, 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. Williams Communications Group is a combination of WilTel and
WilTech Group, previously reported separately. Certain revenues and operating
profit amounts for the three and six months ended June 30, 1996, and cash flow
amounts for the six months ended June 30, 1996, have been reclassified to
conform to current-year classifications for these reorganizations and certain
other matters.
3. Acquisition
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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
long-term debt, 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 of Williams Holdings for the six months ended
June 30, 1997 and 1996, would have been $1,412.6 million and $1,209.8 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.
4. Provision for income taxes
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The provision for income taxes includes:
<TABLE>
<CAPTION>
Three months Six months
ended ended
(Millions) June 30, June 30,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Current:
Federal $ 11.3 $ 10.6 $ 23.9 $ 27.3
State 1.9 1.9 4.7 4.4
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13.2 12.5 28.6 31.7
Deferred:
Federal 6.0 6.0 10.7 12.3
State 1.9 1.3 3.7 3.8
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7.9 7.3 14.4 16.1
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Total provision $ 21.1 $ 19.8 $ 43.0 $ 47.8
===============================================================================
</TABLE>
The effective income tax rate in 1997 is significantly less than the federal
statutory rate due primarily to the effect of the non-taxable 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.
5
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Notes (continued)
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. In addition, both 1996
periods include 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 six months ended June 30, 1997 and 1996, are $28
million and $245 million, respectively.
5. Sale of receivables
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In January 1997, Williams Holdings sold certain receivables under a new
revolving receivables facility with a limit of $200 million. As of June 30,
1997, Williams Holdings has sold $159.8 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. Long-term debt
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Long-term debt consists of the following amounts:
<TABLE>
<CAPTION>
Weighted
average
interest June 30, December 31,
(Millions) rate* 1997 1996
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<S> <C> <C> <C>
Williams Holdings of
Delaware, Inc.
Revolving credit
loans 6.1% $ 575.0 $ 500.0
Debentures, 6.25%,
payable 2006 4.6 248.8 248.8
Notes, 6.4% - 6.91%,
payable 1998
through 2002 6.8 205.6 --
Williams Pipe Line
Notes, 8.95% and
9.78%, payable
through 2001 9.4 100.0 100.0
Williams Energy Ventures
Adjustable rate notes -- -- 25.6
WilTel Communications,
LLC
Note, 6.19%,
payable 1997 6.2 150.0 --
Other, payable through 1999 8.0 4.9 5.7
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1,284.3 880.1
Current portion of long-term debt (13.1) (19.7)
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$ 1,271.2 $ 860.4
======================================================================
</TABLE>
*At June 30, 1997, including the effects of interest-rate swap.
At June 30, 1997, Williams Holdings and Williams Pipe Line participated in
Williams' $1 billion credit agreement. Williams Holdings' and Williams Pipe
Line's maximum borrowing availability, subject to borrowings by other
affiliated companies, was $600 million and $100 million, respectively. Interest
rates varied with current market conditions. The available amount under the
credit agreement at June 30, 1997, was $125 million.
Subsequent to June 30, 1997, Williams, Williams Holdings, WilTel
Communications, LLC (see Note 3), Williams Pipe Line and other affiliates
entered into a new $1 billion bank-credit agreement, replacing the previous
agreement. Under the new agreement, the LLC, Williams Pipe Line and other
affiliates 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.
In July 1997, Williams Holdings finalized a commercial paper program backed
by a new $500 million short-term bank-credit facility and issued $250 million
under this program. Interest rates vary with current market conditions.
For financial statement reporting purposes at June 30, 1997, a current debt
obligation of $150 million has been classified as a non-current obligation
based on Williams Holdings' intent and ability to refinance on a long-term
basis. At June 30, 1997, the amount available on the existing credit agreement
of $125 million and the subsequent increase in availability as noted above are
sufficient to complete this refinancing.
Cash payments for interest (net of amounts capitalized) for the six months
ended June 30, 1997 and 1996, are $27 million and $12 million, respectively,
including payments to Williams and affiliates of $3 million in both 1997 and
1996, respectively.
7. Related party transactions
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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 $8.7 million and $7.9
million for the three months ended June 30, 1997 and 1996, respectively, and
$16.4 million and $16.8 million for the six months ended June 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 $110.9 million and $125.2
million for the three months ended June 30, 1997 and 1996, respectively, and
$216.4 million and $269 million for the six months ended June 30, 1997 and
1996, respectively. Merchant Services also incurred costs and operating
expenses, including transportation and certain other costs, from affiliates of
$11 million and $43.2 million for the three months ended June 30, 1997 and
1996, respectively, and $40.4 million and
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$106.1 million for the six months ended June 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
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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 $286 million at June 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 $14 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. Amoco Production Company, the class representative for the
defendant class (of which Williams Production is a part), has indicated its
intent to seek review of the Court of Appeals decision. 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
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. Damages, including interest calculated through December 31, 1996, of
approximately $29 million have been asserted in the remaining cases. 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. As
of June 30, 1997, HFMC had current outstanding receivables from the Partnership
of approximately $20 million, all of which have been reserved. A Plan of
Reorganization (the Plan) acceptable to most creditors and the debtor has been
filed with the court. Under the Plan, all litigation involving HFMC will be
fully settled, and a net payment in some amount to HFMC is possible. It is not
possible to predict with certainty whether
7
<PAGE> 9
the Plan as filed will be approved or the amount of any such payment to HFMC.
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 Enterprises and Related Information,"
effective for fiscal years beginning after December 15, 1997. The disclosure
requirements will not impact Williams Holdings' results of operations or
financial position. Williams Holdings has not yet determined if it will
adopt either standard early.
ITEM 2.
Management's Narrative Analysis of
the Results of Operations
Six Months Ended June 30, 1997 vs. Six Months Ended June 30, 1996
FIELD SERVICES' revenues increased $74.4 million, or 32 percent, due
primarily to higher natural gas liquids sales of $31 million, the passthrough
of $12 million higher operating costs to customers and higher condensate
revenues of $8 million. In addition, gathering revenues increased $21 million
as a result of an 18 percent increase in gathering volumes following the
transfer of Williams Natural Gas gathering assets to Field Services in the
fourth quarter of 1996. Natural gas liquids revenues increased due to a 29
percent increase in volumes combined with higher average natural gas liquids
prices. Costs and operating expenses increased $61 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 higher operating costs passed through to customers.
Other income--net in 1996 includes a $3 million environmental remediation
accrual. Operating profit increased $14.7 million, or 21 percent, due primarily
to higher natural gas liquids volumes, the transfer of Williams Natural Gas
gathering assets to Field Services, a $2 million business interruption
insurance estimate adjustment in 1997 and the effect of the 1996 environmental
remediation accrual, partially offset by higher gathering fuel and replacement
gas purchases.
MERCHANT SERVICES' revenues decreased $65.9 million, or 53 percent, and
costs and operating expenses decreased $57 million, or 85 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 due to lower physical trading margins
as a result of decreased price volatility, slightly offset by higher price-risk
management revenues and increased natural gas trading volumes. Operating profit
decreased $15.9 million, or 42 percent, due primarily to the decrease in net
revenues and the expense of expansion of business growth platforms.
PETROLEUM SERVICES' revenues increased $15.6 million, or 6 percent, due
primarily to a $19 million increase in product sales from transportation
activities, partially offset by a decrease in average transportation rates.
Costs and operating expenses increased $19 million, or 10 percent, due
primarily to the increase in product sales. Operating profit decreased $7.1
million, or 16 percent, due primarily to lower average transportation rates,
higher operating expenses within the products pipeline business and the impact
of a $2 million favorable insurance settlement in 1996.
EXPLORATION & PRODUCTION'S revenues increased $29 million, or 87 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 14 percent increase in company-owned
production volumes. Costs and operating expenses increased $16 million, or 53
percent, due primarily to increased Royalty Trust natural gas purchase prices,
higher operating expenses associated with increased production activities and
increased taxes other than income. Operating profit increased $14.9 million,
from a $200,000 loss in 1996, due primarily to the increase in average natural
gas prices and company-owned production volumes sold, partially offset by
higher operating expenses and dry hole costs.
WILLIAMS COMMUNICATIONS GROUP'S revenues increased $273.6 million, or 91
percent, to $575.7 million due primarily to acquisitions which contributed
revenues of approximately $200 million, including $125 million from the
acquisition of the customer premise equipment sales and service operations of
Northern Telecom (Nortel). Additionally, increased business activity in the
customer premise equipment sales and service operations resulted in a $38
million revenue increase in new systems sales and a $21 million increase in
existing system enhancement revenues. The number of ports in service at June 30,
1997, more than doubled as compared
8
<PAGE> 10
to June 30, 1996, due primarily to the acquisition of Nortel. Fiber billable
minutes from occasional service increased 81 percent. Dedicated service
voice-grade equivalent miles at June 30, 1997, increased 46 percent as compared
with June 30, 1996. Costs and operating expenses increased $202 million, or 88
percent, and selling, general and administrative expenses increased $75 million,
or 110 percent, due primarily to the acquired operations, the overall increase
in business activity and higher expenses for developing advanced network
applications. The increase in selling, general and administrative expenses also
reflects the commitment by management to expand the infrastructure of this
business for future growth. Operating profit decreased $2.6 million, or 67
percent, to $1.3 million due primarily to the expense of developing the
infrastructure and integrating the most recent acquisitions.
INTEREST ACCRUED increased $17.4 million, or 122 percent, due primarily to
higher borrowings under the bank-credit facility. Interest capitalized
increased $2.9 million, from $1.2 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). The effective income tax rate in 1997 is
significantly 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,
partially offset by the effects of state income taxes. In addition, 1996
includes recognition of favorable adjustments of $3 million related to research
credits.
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 second quarter of 1997, Williams Holdings did
not file a Form 8-K.
9
<PAGE> 11
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)
/s/ Gary R. Belitz
-------------------------------------
Gary R. Belitz
Controller
(Duly Authorized Officer and
Principal Accounting Officer)
August 14, 1997
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. 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>
Six months ended
June 30, 1997
----------------
<S> <C>
Earnings:
Income before income taxes $ 180.8
Add:
Interest expense - net 27.5
Rental expense representative of interest factor 4.0
Other (.6)
---------
Total earnings as adjusted plus fixed charges $ 211.7
=========
Fixed charges:
Interest expense - net $ 27.5
Capitalized interest 4.1
Rental expense representative of interest factor 4.0
---------
Total fixed charges $ 35.6
=========
Ratio of earnings to fixed charges 5.95
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 123,128
<SECURITIES> 0
<RECEIVABLES> 705,772
<ALLOWANCES> (8,815)
<INVENTORY> 134,710
<CURRENT-ASSETS> 1,260,099
<PP&E> 3,504,869
<DEPRECIATION> (784,056)
<TOTAL-ASSETS> 5,815,706
<CURRENT-LIABILITIES> 977,679
<BONDS> 1,271,200
1
0
<COMMON> 0
<OTHER-SE> 2,672,055
<TOTAL-LIABILITY-AND-EQUITY> 5,815,706
<SALES> 0
<TOTAL-REVENUES> 1,164,488
<CGS> 0
<TOTAL-COSTS> 787,129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (2,230)
<INTEREST-EXPENSE> 31,564
<INCOME-PRETAX> 180,779
<INCOME-TAX> 43,017
<INCOME-CONTINUING> 137,762
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,762
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
