<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, 1998
------------------------------------------
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
- ----------------------------------------- -------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
- ----------------------------------------- -------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (918) 573-2000
-------------------------------------
NO CHANGE
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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 12, 1998, 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.
<PAGE> 2
WILLIAMS HOLDINGS OF DELAWARE, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Income--Three and Nine Months Ended
September 30, 1998 and 1997 2
Consolidated Balance Sheet--September 30, 1998 and December 31, 1997 3
Consolidated Statement of Cash Flows--Nine Months Ended
September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Narrative Analysis of the Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges
Exhibit 27--Financial Data Schedule
</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 Litigation 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 Current Report on Form 8-K dated May 18, 1998, and
the Year 2000 disclosures contained in this document.
1
<PAGE> 3
Williams Holdings of Delaware, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
---------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------
1998 1997* 1998 1997*
---- ----- ---- -----
<S> <C> <C> <C> <C>
Revenues (Note 12):
Energy Services:
Energy Marketing & Trading $ 298.3 $ 524.4 $ 953.5 $ 1,511.6
Exploration & Production 28.7 32.1 106.8 94.5
Midstream Gas & Liquids 187.9 236.5 597.6 716.9
Petroleum Services 705.2 700.2 2,030.8 1,997.3
Communications (Note 2) 418.5 413.7 1,219.6 989.4
Other 14.5 8.9 40.0 28.0
Intercompany eliminations (162.5) (225.9) (569.3) (705.8)
-------- -------- -------- ---------
Total revenues 1,490.6 1,689.9 4,379.0 4,631.9
-------- -------- -------- ---------
Profit-center costs and expenses (Note 12):
Costs and operating expenses 1,178.0 1,408.6 3,481.9 3,834.1
Selling, general and administrative expenses 212.9 157.9 570.6 400.6
Other (income) expense--net (Notes 3 and 4) 9.8 (6.5) 67.2 (8.3)
-------- -------- -------- ---------
Total profit-center costs and expenses 1,400.7 1,560.0 4,119.7 4,226.4
-------- -------- -------- ---------
Operating profit:
Energy Services:
Energy Marketing & Trading (Note 3) 14.6 (2.5) 35.3 9.7
Exploration & Production 4.9 5.4 25.2 20.1
Midstream Gas & Liquids 51.9 67.6 166.0 217.4
Petroleum Services (Note 3) 44.8 62.3 123.8 157.0
Merger-related costs (Note 4) (3.9) -- (45.9) --
Communications (Note 2) (25.6) (5.2) (56.2) (3.9)
Other 3.2 2.3 11.1 5.2
-------- -------- -------- ---------
Total operating profit 89.9 129.9 259.3 405.5
General corporate expenses (Note 4) (11.7) (11.5) (53.6) (39.8)
Interest accrued (Note 12) (45.2) (34.9) (118.3) (94.5)
Interest capitalized 11.2 6.8 25.4 12.2
Investing income (loss) (Notes 5 and 12) (29.5) 11.9 (19.9) 35.0
Gain on sale of interest in subsidiary (Note 6) -- -- -- 44.5
Gain on sale of assets (Note 7) -- -- -- 66.0
Minority interest in (income) loss of consolidated subsidiaries .1 (5.2) (5.5) (12.6)
Other expense--net (13.9) (8.9) (28.5) (9.9)
-------- -------- -------- ---------
Income before income taxes .9 88.1 58.9 406.4
Provision for income taxes (Note 8) .7 34.7 25.3 131.8
-------- -------- -------- ---------
Income before extraordinary loss .2 53.4 33.6 274.6
Extraordinary loss (Note 9) -- -- (4.8) --
-------- -------- -------- ---------
Net income $ .2 $ 53.4 $ 28.8 $ 274.6
======== ======== ======== =========
</TABLE>
*Amounts have been restated to reflect the acquisition of MAPCO Inc., which has
been accounted for as a pooling of interests, and certain revenue amounts have
been reclassified to conform to current year classifications (see Note 2 for
additional information).
See accompanying notes.
2
<PAGE> 4
Williams Holdings of Delaware, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
--------------------------------
September 30, December 31,
1998 1997*
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<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 69.9 $ 96.0
Receivables:
Trade 1,492.1 1,419.0
Affiliates 31.7 43.8
Due from parent -- 93.0
Inventories (Note 10) 318.0 315.6
Commodity trading assets 275.3 180.3
Deferred income taxes - affiliates 84.8 86.1
Other 125.7 113.9
---------- ----------
Total current assets 2,397.5 2,347.7
Due from parent -- 181.3
Investments:
Parent debentures and warrants 818.7 796.1
Other 682.7 379.8
Property, plant and equipment, at cost 7,109.2 6,223.9
Less accumulated depreciation and depletion (1,862.2) (1,690.3)
---------- ----------
5,247.0 4,533.6
Goodwill and other intangible assets--net 588.8 600.6
Non-current commodity trading assets 237.1 141.4
Other assets and deferred charges 158.6 122.4
---------- ----------
Total assets $ 10,130.4 $ 9,102.9
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current liabilities:
Notes payable (Note 11) $ 592.8 $ 701.0
Accounts payable:
Trade 937.8 1,143.7
Affiliates 215.6 69.2
Accrued liabilities 587.7 528.4
Commodity trading liabilities 273.7 182.0
Long-term debt due within one year (Note 11) 67.3 75.7
---------- ----------
Total current liabilities 2,674.9 2,700.0
Long-term debt (Notes 11 and 12)
Affiliates 1,414.3 --
Other 992.0 1,525.5
Deferred income taxes - affiliates 843.5 807.8
Non-current commodity trading liabilities 260.8 201.7
Other liabilities 195.2 197.6
Minority interest in consolidated subsidiaries 184.6 144.8
Contingent liabilities and commitments (Note 13)
Stockholder's equity:
Common stock, $1 par value, 1,000 shares authorized and outstanding -- --
Capital in excess of par value 1,677.7 1,664.8
Retained earnings 1,627.0 1,616.6
Net unrealized gain on non-current marketable securities 265.0 244.1
Other (4.6) --
---------- ----------
Total stockholder's equity 3,565.1 3,525.5
---------- ----------
Total liabilities and stockholder's equity $ 10,130.4 $ 9,102.9
========== ==========
</TABLE>
*Amounts have been restated to reflect the acquisition of MAPCO Inc., which has
been accounted for as a pooling of interests (see Note 2 for additional
information).
See accompanying notes.
3
<PAGE> 5
Williams Holdings of Delaware, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Millions)
-------------------------------
Nine months ended September 30,
-------------------------------
1998 1997*
---- -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 28.8 $ 274.6
Adjustments to reconcile to cash provided from operations:
Extraordinary loss 4.8 --
Depreciation, depletion and amortization 244.7 201.4
Provision for deferred income taxes 23.7 36.5
Provision for loss on property and other assets 29.8 2.5
(Gain) loss on dispositions of property and interest in subsidiary 4.0 (109.5)
Minority interest in income of consolidated subsidiaries 5.5 12.6
Cash provided (used) by changes in assets and liabilities:
Receivables sold (23.6) 166.9
Receivables (83.9) 76.6
Inventories (2.0) (76.3)
Other current assets (24.5) 9.8
Accounts payable (201.0) (57.9)
Accrued liabilities 33.0 (74.5)
Receivables/payables with affiliates 91.1 50.8
Current commodity trading assets and liabilities (3.3) 11.4
Non-current commodity trading assets and liabilities (36.7) (15.8)
Other, including changes in non-current assets and liabilities 5.9 .2
-------- --------
Net cash provided by operating activities 96.3 509.3
-------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable 403.9 423.4
Payments of notes payable (647.7) (193.7)
Proceeds from long-term debt 447.4 668.0
Payments of long-term debt (853.6) (480.0)
Changes in advances from affiliates 1,480.9 --
Dividends (14.0) (89.7)
Contributions from minority interest owners 41.5 11.9
Other--net 7.1 (1.7)
-------- --------
Net cash provided by financing activities 865.5 338.2
-------- --------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures (980.9) (604.9)
Proceeds from dispositions 58.7 70.2
Acquisition of businesses, net of cash acquired -- (135.3)
Proceeds from sale of assets -- 66.0
Purchase of investments/advances to affiliates (345.9) (224.0)
Changes in advances to parent company 274.3 (55.6)
Other--net 5.8 7.8
-------- --------
Net cash used by investing activities (988.0) (875.8)
-------- --------
Decrease in cash and cash equivalents (26.2) (28.3)
Cash and cash equivalents at beginning of period 96.1 149.2
-------- --------
Cash and cash equivalents at end of period $ 69.9 $ 120.9
======== ========
</TABLE>
*Amounts have been restated to reflect the acquisition of MAPCO Inc., which has
been accounted for as a pooling of interests (see Note 2 for additional
information).
See accompanying notes.
4
<PAGE> 6
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 consolidated financial statements and notes thereto for Williams Holdings'
Current Report on Form 8-K dated May 18, 1998. 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, 1998, results of operations for the three and nine months ended
September 30, 1998 and 1997, and cash flows for the nine months ended September
30, 1998 and 1997.
Operating profit of operating companies may vary by quarter. As a result of
its power services activity, Energy Marketing & Trading experiences higher
operating profit in the second and third quarters as compared to first and
fourth quarters.
2. Basis of presentation
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On March 28, 1998, Williams completed the acquisition of MAPCO Inc. by
exchanging shares of Williams common stock for outstanding MAPCO common stock
and employee stock options (see Note 4). Upon completion of the merger, Williams
transferred its interest in MAPCO to Williams Holdings, and MAPCO became part of
the Energy Services business unit. The transaction has been accounted for as a
pooling of interests and, accordingly, the consolidated financial statements and
notes have been restated to reflect the results of operations, financial
position and cash flows as if the companies had been combined throughout the
periods presented. MAPCO is engaged in the NGL pipeline, petroleum refining and
marketing and propane marketing businesses.
Effective April 1, 1998, certain marketing activities of natural gas liquids
(previously reported in Midstream Gas & Liquids) and petroleum refining products
(previously reported in Petroleum Services) were transferred to Energy Marketing
& Trading and combined with its commodity risk trading operations. As a result,
revenues and operating profit amounts for the three and nine months ended
September 30, 1997, have been reclassified consistent with these activities.
These marketing activities are reported through first quarter 1998 on a "gross"
basis in the Consolidated Statement of Income as revenues and profit-center
costs within Energy Marketing & Trading. Concurrent with completing the
combination of such activities with the commodity risk trading operations of
Energy Marketing & Trading, the related contract rights and obligations of
certain of these operations were recorded in the Consolidated Balance Sheet on a
market-value basis consistent with Energy Marketing & Trading's accounting
policy, and the income statement presentation relating to these operations was
changed effective April 1, 1998, to reflect these revenues net of the related
costs to purchase such items.
On April 30, 1997, Williams and Northern Telecom (Nortel) combined their
customer-premise equipment sales and service operations into a limited liability
company, Williams Communications Solutions, LLC (LLC). Communications' revenues
and operating profit amounts include the operating results of the LLC beginning
May 1, 1997 (see Note 6).
3. Loss accruals and write-downs
- --------------------------------------------------------------------------------
Included in the third quarter 1998 operating profit for Energy Marketing &
Trading are credit loss accruals of $26.4 million for certain energy capital and
retail energy activities.
Included in the nine months ended September 30, 1998, other (income)
expense-net and operating profit for Petroleum Services is a $15.5 million loss
provision for potential refunds to customers from a recent order from the
Federal Energy Regulatory Commission (see Note 13 for additional information).
4. MAPCO acquisition
- --------------------------------------------------------------------------------
On November 24, 1997, Williams and MAPCO Inc. announced that they had entered
into a definitive merger agreement whereby Williams would acquire MAPCO by
exchanging 1.665 shares of Williams common stock for each outstanding share of
MAPCO common stock. In addition, outstanding MAPCO employee stock options would
be converted into Williams common stock. The merger was consummated on March 28,
1998, with the issuance of 98.8 million shares of Williams common stock.
The merger constitutes a tax-free reorganization and has been accounted for
as a pooling of interests. Intercompany transactions between Williams Holdings
and MAPCO prior to the merger have been eliminated, and no material adjustments
were necessary to conform MAPCO's accounting policies.
In connection with the merger, Williams Holdings has recognized approximately
$67 million in merger-related costs comprised primarily of outside professional
fees and early retirement and severance costs. Approximately $46 million of
these merger-related costs are included in other (income) expense-net as a
component of Energy Services' operating profit for the nine months ended
September 30, 1998, and approximately $21 million is included in general
corporate expenses. During 1997, payments of $32.6 million were made for
non-compete agreements. These costs are being amortized over one to three years
from the merger completion date.
5
<PAGE> 7
The results of operations for each company and the combined amounts presented
in Williams Holdings' consolidated statement of income are as follows:
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
Three months Three months Nine months
ended March 31, ended September 30, ended September 30,
- --------------------------------------------------------------------------------
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Williams
Holdings $ 682.0 $ 711.9 $ 1,876.4
MAPCO 823.8 982.1 2,767.6
Intercompany
eliminations (1.3) (4.1) (12.1)
--------- --------- ---------
Combined $ 1,504.5 $ 1,689.9 $ 4,631.9
========= ========= =========
Net income (loss):
Williams
Holdings $ (2.7) $ 31.3 $ 169.1
MAPCO 8.4 22.1 105.5
--------- --------- ---------
Combined $ 5.7 $ 53.4 $ 274.6
========= ========= =========
</TABLE>
5. Investing income (loss)
- --------------------------------------------------------------------------------
Third-quarter 1998 investing loss includes a $23.2 million write-down related
to a Communications network applications venture that was re-evaluated in the
third quarter.
6. Sale of interest in subsidiary
- --------------------------------------------------------------------------------
On April 30, 1997, Williams Holdings and Nortel combined their
customer-premise equipment sales and service operations into a limited liability
company, Williams Communications Solutions, 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.
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 effect the differences between the
financial and tax bases of identifiable assets and liabilities.
If the transaction occurred on January 1, 1997, Williams Holdings' unaudited
pro forma revenues for the nine months ended September 30, 1997, would have been
approximately $4.9 billion. 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, 1997, or of future results of operations
of the combined companies.
7. Sale of assets
- --------------------------------------------------------------------------------
In January 1997, Williams Holdings sold its interest in the natural gas
liquids and condensate reserves in the West Panhandle field of Texas for $66
million in cash. The sale resulted in a $66 million pre-tax gain on the
transaction, because the related reserves had no book value.
<PAGE> 8
8. Provision for income taxes
- --------------------------------------------------------------------------------
The provision for income taxes includes:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(Millions) September 30, September 30,
- --------------------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current:
Federal $ 1.2 $ 14.2 $ 1.0 $ 81.8
State -- 4.7 -- 13.5
Foreign -- -- .6 --
------ ------ ------ ------
1.2 18.9 1.6 95.3
Deferred:
Federal (.6) 13.2 20.3 28.7
State .1 2.6 3.4 7.8
------ ------ ------ ------
(.5) 15.8 23.7 36.5
------ ------ ------ ------
Total provision $ .7 $ 34.7 $ 25.3 $131.8
====== ====== ====== ======
</TABLE>
The effective income tax rate for 1998 is greater than the federal statutory
rate due primarily to the effects of state income taxes.
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 less than the federal statutory rate due primarily to the effect of the
non-taxable gain recognized in the second quarter (see Note 6) and income tax
credits from coal-seam gas production, partially offset by the effects of state
income taxes.
9. Extraordinary loss
- --------------------------------------------------------------------------------
The extraordinary loss in 1998 resulted from the early extinguishment of
debt. Williams Holdings paid $54.4 million to redeem higher interest rate debt
for a $4.8 million net loss (net of a $2.6 million benefit for income taxes).
6
<PAGE> 9
10. Inventories
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<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials:
Crude oil $ 45.7 $ 30.5
Other 1.2 5.2
------- -------
46.9 35.7
Finished goods:
Refined products 79.6 122.3
Natural gas liquids 68.4 43.8
General merchandise &
communications equipment 78.8 90.0
------- -------
226.8 256.1
Materials and supplies 22.7 19.0
Natural gas in underground storage 19.2 --
Other 2.4 4.8
------- -------
$ 318.0 $ 315.6
======= =======
</TABLE>
11. Debt and banking arrangements
- --------------------------------------------------------------------------------
Notes payable
During 1998, Williams Holdings increased its commercial paper program to $1
billion. The commercial paper program is backed by short-term bank-credit
facilities totaling $1 billion. At September 30, 1998, $593 million of
commercial paper was outstanding under the program. Interest rates vary with
current market conditions.
Debt
Williams Holdings and Williams Communications Solutions, LLC also participate
in Williams' $1 billion credit agreement under which the LLC has access to $300
million, and Williams Holdings has access to all unborrowed amounts, subject to
borrowings by other affiliated companies, including Williams (parent). At
September 30, 1998, the amount available under the agreement was $318 million.
Interest rates vary with current market conditions.
During the third quarter of 1998, Williams Holdings utilized approximately
$1.3 billion in additional advances from affiliates to repay external debt
obligations and to fund additional capital expenditures.
<TABLE>
<CAPTION>
Weighted-
average
interest September 30, December 31,
(Millions) rate* 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Williams Holdings of
Delaware, Inc.
Revolving credit loans -- % $ -- $ 200.0
Debentures, 6.25% and 7.7%,
payable 2006 and 2027 5.6 351.9 351.8
Notes, 6.365%-8.87%,
payable through 2002 7.6 536.6 572.3
MAPCO Inc.
Commercial paper and bank
money market lines -- -- 135.8
MAPCO Natural Gas Liquids, Inc.
Notes, 6.67%-8.95%, payable
through 2022 7.8 165.0 165.0
Williams Communications Solutions
Revolving credit loans -- -- 125.0
Other, payable through 2005 7.4 5.8 51.3
--------- ---------
1,059.3 1,601.2
Current portion of long-term debt (67.3) (75.7)
--------- ---------
$ 992.0 $ 1,525.5
========= =========
</TABLE>
*At September 30, 1998, including the effects of interest-rate swaps.
12. Related party transactions
- --------------------------------------------------------------------------------
Williams Holdings and its subsidiaries maintain promissory notes with
Williams and other Williams subsidiaries for both advances from and advances to
affiliates depending on the cash position of each subsidiary. Interest accrued
includes $9.7 million for the three and nine months ended September 30, 1998,
from advances from affiliates. Investing income (loss) includes $5.4 million and
$8.4 million for the three months ended September 30, 1998 and 1997,
respectively, and $14.5 million and $24.8 million for the nine months ended
September 30, 1998 and 1997, respectively, from advances to affiliates and
investment in Williams (parent) debentures.
Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Williams Gas Pipelines Central, Kern River Gas
Transmission, Northwest Pipeline, Texas Gas Transmission, and Transcontinental
Gas Pipe Line. Energy Marketing & Trading's revenues include natural gas sales
to affiliates of $74.1 million and $92.3 million for the three months ended
September 30, 1998 and 1997, respectively, and $259.7 million and $308.7 million
for the nine months ended September 30, 1998 and 1997, respectively. Energy
Marketing & Trading also incurred costs and operating expenses, including
transportation and certain other costs, from affiliates of $20.3 million and
$15.1 million for the three months ended September 30, 1998 and 1997,
respectively, and $71.5 million and $55.5 million for the nine months ended
September 30, 1998 and 1997, respectively. These sales and costs are included in
Energy Marketing & Trading's revenues consistent with a "net" basis of reporting
these activities. Transactions with affiliates are at prices that generally
apply to unaffiliated parties.
7
<PAGE> 10
13. Contingent liabilities and commitments
- --------------------------------------------------------------------------------
Rate and regulatory matters
Williams Pipe Line (WPL) has various regulatory proceedings pending. On July
15, 1998, WPL received an Order from the Federal Energy Regulatory Commission
(FERC) which affirmed an administrative law judge's 1996 initial decision
regarding rate-making proceedings for the period September 15, 1990 through May
1, 1992. The FERC has ruled that WPL did not meet its burden of establishing
that its transportation rates in its 12 noncompetitive markets were just and
reasonable for the period and has ordered refunds. WPL continues to believe it
should prevail upon appeal regarding collected rates for that period. However,
due to this FERC decision, WPL accrued $15.5 million, including interest, in the
second quarter of 1998, for potential refunds to customers for the issues
described above. Since May 1, 1992, WPL has collected and recognized as revenues
$141 million in noncompetitive markets that are in excess of tariff rates
previously approved by the FERC and that are subject to refund with interest.
WPL believes that the tariff rates collected in these markets during this period
will be justified in accordance with the FERC's cost-basis guidelines and will
be making the appropriate filings with the FERC to support this position.
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 Midstream Gas & Liquids unit of Energy Services (WES) has recorded an
aggregate liability of approximately $11 million, representing the current
estimate of its future environmental and remediation costs, including
approximately $5 million relating to former Williams Gas Pipelines Central
facilities. WES also accrues environmental remediation costs for its petroleum
products pipeline, retail petroleum and refining and propane marketing
operations primarily related to soil and groundwater contamination. At September
30, 1998, WES and its subsidiaries had reserves, in addition to the reserves
listed above, totaling approximately $30 million. WES recognizes receivables
related to environmental remediation costs from state funds as a result of laws
permitting states to reimburse certain expenses associated with underground
storage tank problems and repairs. At September 30, 1998, WES and its
subsidiaries had receivables totaling $19 million.
Other legal matters
In 1988, certain royalty owners in a producing field in Cameron Parish,
Louisiana, brought suit against a Williams Holdings subsidiary and other working
interest owners seeking additional royalties or lease cancellation. An amended
petition later added a second Williams Holdings subsidiary, Williams and
additional working interest owners. All other defendants have been dismissed or
have settled with plaintiffs. In their recently amended damage claim, the
plaintiffs asserted royalty underpayments plus interest of approximately $12
million. The claimed damages are attributable to all working interests for a
period of about 15 years. One of the two Williams Holdings subsidiaries sued
owned a one-half interest in the field and served as operator for approximately
eight years. The other subsidiary purchased produced gas from the field.
Plaintiffs also request punitive damages equal to double the alleged damages and
attorneys' fees. Williams Holdings believes all royalties due from its
subsidiaries were properly paid, that the field was properly operated, and that
it is not responsible for any amounts due from any other working interests or
for the period after its subsidiary had sold its interest and terminated its
status as operator of the field. The litigation pending in Cameron Parish,
Louisiana, has recently been settled for payments aggregating approximately $9
million, for which reserves have been fully accrued.
On April 7, 1992, a liquefied petroleum gas explosion occurred near an
underground salt dome storage facility located near Brenham, Texas and owned by
an affiliate of MAPCO Inc., Seminole Pipeline Company ("Seminole"). MAPCO Inc.,
as well as Seminole, Mid-America Pipeline Company, MAPCO Natural Gas Liquids
Inc., and other non-MAPCO entities were named as defendants in civil action
lawsuits filed in state district courts located in four Texas counties. Seminole
and the above-mentioned subsidiaries of MAPCO Inc. have settled in excess of
1,600 claims in these lawsuits. The only lawsuit remaining is the Dallmeyer
case, which was tried before a jury in Harris County. In Dallmeyer, the judgment
rendered in March 1996 against defendants Seminole and MAPCO Inc. and its
subsidiaries totaled approximately $72 million, which included nearly $65
million of punitive damages awarded to the 21 plaintiffs. Both plaintiffs and
defendants have appealed the Dallmeyer judgment to the Court of Appeals for the
Fourteenth District of Texas in Harris County. The defendants seek to have the
judgment modified in many respects, including the elimination of punitive
damages as well as a portion of the actual damages awarded. If the defendants
prevail on appeal, it will result in an award significantly less than the
judgment. The plaintiffs have cross-appealed and seek to modify the judgment to
increase the total award plus interest to exceed $155 million. In February and
March 1998, the defendants entered into settlement agreements involving 17 of
the 21 plaintiffs to finally resolve their claims against all defendants for an
aggregate payment of approximately $10 million. These settlements have satisfied
and reduced the judgment on appeal by approximately $42 million. As to the
remaining four plaintiffs, the Court of Appeals issued its decision on October
15, 1998, which, while denying all of the plaintiffs' cross-appeal issues,
affirmed in part and reversed in part the trial court's judgment. The defendants
had entered into settlement agreements with the remaining plaintiffs which, in
light of the decision, Williams Holdings believes will provide for aggregate
payments of approximately $13 million, the full amount of which has been
previously accrued.
In 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit against
Williams Production Company (Williams
8
<PAGE> 11
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. 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. On July 20, 1998, the Court of Appeals sitting en banc
affirmed the panel's decision. The defendants are considering an appeal to the
Supreme Court. The Supreme Court has granted an extension of time in which to
file a writ of certiorari to November 18, 1998.
Williams Communications, Inc. filed suit on March 20, 1998, against WorldCom
Network Services, Inc. (WorldCom) in district court in Tulsa County in order to
prevent WorldCom from disconnecting any Williams Holdings' equipment on the
WorldCom network. This suit sought a declaratory judgment that the single fiber
retained by Williams Holdings on the WorldCom network could be used for
specified multimedia uses, and that WorldCom was required to permit Williams
Holdings to purchase additional fiber either acquired or constructed by
WorldCom. WorldCom had denied Williams Holdings' claim and had asserted various
counterclaims for monetary damages, rescission and injunctive relief. This
lawsuit was settled on July 9, 1998. The settlement resolves all claims for
monetary damages, permitted uses of Williams Holdings' fiber on the WorldCom
network and Williams Holdings' right to purchase additional fiber on WorldCom
fiber builds. There was no significant financial impact to Williams Holdings as
a result of the settlement.
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. 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. As a
result of such settlements, Transcontinental Gas Pipe Line is currently
defending two lawsuits brought by producers. In one of the cases, a jury verdict
found that Transcontinental Gas Pipe Line was required to pay a producer damages
of $23.3 million including $3.8 million in attorneys' fees. Transcontinental Gas
Pipe Line is pursuing an appeal. In the other case, a producer has asserted
damages, including interest calculated through December 31, 1997, of
approximately $6 million. Producers have received and may receive other demands,
which could result in additional claims. Indemnification for royalties will
depend on, among other things, the specific lease provisions between the
producer and the lessor and the terms of the settlement between the producer and
either Transcontinental Gas Pipe Line or Texas Gas. Texas Gas may file to
recover 75 percent of any such additional amounts it may be required to pay
pursuant to indemnities for royalties under the provisions of FERC Order 528.
In connection with the sale of certain coal assets in 1996, MAPCO entered
into a Letter Agreement with the buyer providing for indemnification by MAPCO
for reductions in the price or tonnage of coal delivered under a certain
pre-existing Coal Sales Agreement dated December 1, 1986. The Letter Agreement
is effective for reductions during the period July 1, 1996, through December 31,
2002, and provides for indemnification for such reductions as incurred on a
quarterly basis. The buyer has stated it is entitled to indemnification from
MAPCO for amounts of $7.8 million and may claim indemnification for additional
amounts in the future. MAPCO has filed for declaratory relief as to certain
aspects of the buyer's claims. MAPCO also believes it would be entitled to
substantial set-offs and credits against any amounts determined to be due and
has accrued, in a prior year, a liability representing an estimate of amounts it
expects to incur in satisfaction of this indemnity.
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.
Other matters
During the second quarter of 1998, Energy Marketing & Trading entered into a
15-year contract giving Williams Holdings the right to receive fuel conversion
services for purposes of generating electricity. This contract also gives
Williams Holdings the right to receive installed capacity and certain ancillary
services. Annual committed payments under the contract range from $140 million
to $165 million, resulting in total committed payments of approximately $2.3
billion.
9
<PAGE> 12
14. Adoption of accounting standards
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board issued three new accounting
standards, Statement on Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 131 and No. 132, effective for fiscal years beginning
after December 15, 1997, are disclosure-oriented standards. Therefore, neither
standard will affect Williams Holdings' reported consolidated net income or cash
flows. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
This standard requires that all derivatives be recognized as assets or
liabilities in the balance sheet and that those instruments be measured at fair
value. The effect of this standard on Williams Holdings' results of operations
and financial position has yet to be determined.
The American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," effective for fiscal years beginning after December 15, 1998. The
SOP requires that all start-up costs be expensed and that the effect of adopting
the SOP be reported as the cumulative effect of a change in accounting
principle. The effect of this SOP on Williams Holdings' results of operations
and financial position has yet to be determined.
15. Comprehensive income
- --------------------------------------------------------------------------------
Comprehensive income for the three and nine months ended September 30 is as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(Millions) September 30, September 30,
- -----------------------------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ .2 $ 53.4 $ 28.8 $ 274.6
Other comprehensive
income (losses):
Unrealized gain (loss)
on debentures (118.9) 30.1 22.6 107.7
Unrealized gains
(losses) on
securities (16.0) -- 10.8 --
Foreign currency
translation
adjustments (2.0) -- (4.5) --
------- ------- ------- -------
Comprehensive income
(loss) before taxes (136.7) 83.5 57.7 382.3
Income tax provision
(benefit) (50.2) 12.1 12.6 43.1
------- ------- ------- -------
Comprehensive
income (loss) $ (86.5) $ 71.4 $ 45.1 $ 339.2
======= ======= ======= =======
</TABLE>
10
<PAGE> 13
ITEM 2.
Management's Narrative Analysis of
the Results of Operations
MAPCO Acquisition
On November 24, 1997, Williams (Williams Holdings parent) and MAPCO Inc.
announced that they had entered into a definitive merger agreement whereby
Williams would acquire MAPCO by exchanging 1.665 shares of Williams common stock
for each outstanding share of MAPCO common stock. In addition, outstanding MAPCO
employee stock options would be converted into Williams common stock. The merger
was consummated on March 28, 1998, with the issuance of 98.8 million shares of
Williams common stock. MAPCO is engaged in the NGL pipeline, petroleum refining
and marketing and propane marketing businesses. Upon completion of the merger,
Williams transferred its interest in MAPCO to Williams Holdings, and MAPCO
became part of the Energy Services business unit.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period financial information
presented has been restated to include the combined results of operations and
financial condition of MAPCO as though it had always been a part of Williams
Holdings.
Results of Operations
Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
ENERGY MARKETING & TRADING'S revenues decreased $558.1 million, or 37
percent, due primarily to the $676 million impact in 1998 of reporting revenues
on a net basis for certain crude oil, refined products and natural gas liquids
trading operations previously reported on a "gross" basis (see Note 2 of the
Notes to Consolidated Financial Statements). In addition, revenues associated
with natural gas origination, price-risk management and physical trading
decreased $41 million due primarily to unfavorable market movement against the
natural gas portfolio and the adverse market and supply conditions which
resulted from Hurricane Georges in September 1998; crude oil and refined
products revenues decreased $25 million including the impact of decreased
average prices associated with the marketing of refined products from the Alaska
and Memphis refineries; and energy capital revenues were unfavorably impacted by
$9.8 million of credit loss accruals. Partially offsetting these decreases were
increased power services revenue of $185 million from power generation under a
new contract, $16 million of long-term natural gas transportation contract
settlements and increased physical and notional trading volumes. Costs and
operating expenses decreased $642 million, or 44 percent, due primarily to the
impact in 1998 of reporting revenues on a net margin basis for certain crude
oil, refined products and natural gas liquids trading operations previously
reported on a "gross basis" and lower average prices associated with refined
product purchases from the Memphis and Alaska refineries, partially offset by
electric power generation costs under the new power services contract. Selling,
general and administrative expenses increased $52 million due primarily to a
$16.6 million retail energy credit loss accrual and increased staffing and
other costs associated with an expanded business base. Operating profit
increased $25.6 million, to $35.3 million in 1998, due primarily to $58 million
from power services, improved crude oil, refined products and liquids trading,
favorable long-term transportation contract settlements, and lower retail
propane operating costs. Partially offsetting these increases were a decrease in
revenues from natural gas origination, price-risk management and physical
trading activities, total 1998 credit loss accruals of $26.4 million for certain
energy capital and retail energy activities and the effect of a $6 million
recovery in 1997 of an account previously considered a bad debt. The new power
services activity is associated with a power generation plant that is normally
operational during the summer peak cooling season; therefore, operating profit
from this activity will typically be higher in the second and third quarters as
compared to the first and fourth quarters.
EXPLORATION & PRODUCTION'S revenues increased $12.3 million, or 13 percent,
due primarily to the recognition of additional deferred income resulting from a
transaction that transferred certain tax credits to a third party, partially
offset by lower average natural gas sales prices for both company-owned
production and marketing of Williams Coal Seam Gas Royalty Trust volumes.
Operating profit increased $5.1 million, or 26 percent, due primarily to
increased recognition of deferred income, partially offset by $9 million higher
depreciation, depletion and amortization resulting from downward adjustments to
natural gas reserves, $5 million higher leasehold impairment expense and $3
million higher general and administrative expenses.
MIDSTREAM GAS & LIQUIDS' revenues decreased $119.3 million, or 17 percent,
due primarily to the $43 million impact from the shutdown of the Canadian
marketing operations and $43 million lower natural gas liquids sales from
processing activities resulting from a decline in average liquids sales prices.
Revenues also declined due
11
<PAGE> 14
to $13 million lower natural gas liquids pipeline transportation revenues
resulting from decreased shipments and the passthrough of $10 million lower
operating costs to customers, slightly offset by $7 million higher gathering
revenues. Costs and operating expenses decreased $66 million, or 15 percent, due
primarily to the shutdown of the Canadian marketing operations, lower costs
passed through to customers and lower fuel and replacement gas purchases.
Operating profit decreased $51.4 million, or 24 percent, due primarily to $35
million from lower per-unit liquids margins, decreased pipeline transportation
shipments, higher operating and maintenance expenses and $6 million of
unfavorable litigation loss provisions in 1998, partially offset by higher
gathering revenues and a gain of $6 million on the settlement of product
imbalances.
PETROLEUM SERVICES' revenues increased $33.5 million, or 2 percent, due
primarily to $74 million in pipeline construction revenue and $36 million higher
convenience store merchandise sales resulting from the May 1997 EZ-Serve
acquisition and increased per store sales. In addition, revenues increased due
to $24 million higher revenues from fleet management and mobile computer
technology operations begun in mid-1997, $14 million higher ethanol sales and $8
million higher product transportation revenues resulting primarily from an
increased average transportation rate per barrel. Partially offsetting these
increases were a $110 million decrease in revenues from refining operations and
$9 million lower product sales from transportation activities. The $14 million
higher ethanol sales reflects a 27 percent increase in sales volumes, partially
offset by a decrease in average sales prices. The $110 million decline in
refining revenues reflects $279 million from lower average sales prices,
partially offset by $169 million from a 16 percent increase in barrels sold. A
$64 million revenue increase from higher convenience store gasoline and diesel
sales volumes was offset by lower average gasoline and diesel sales prices.
Costs and operating expenses increased $34 million, or 2 percent, due primarily
to $70 million of pipeline construction costs and $24 million higher convenience
store merchandise cost of sales resulting from the EZ-Serve acquisition and
increased per store sales. In addition, costs and operating expenses increased
due to $28 million higher costs from fleet management and mobile computer
technology operations, $15 million higher convenience store operating costs
resulting from the EZ-Serve acquisition and $13 million of increased ethanol
cost of sales. Largely offsetting these increases were a $94 million decrease
from refining operations, $8 million lower cost of product sales from
transportation activities and a $6 million decrease in the cost of gasoline and
diesel sales. The $94 million decrease from refining operations reflects a $240
million decrease due to lower average crude oil purchase prices, partially
offset by $139 million due to increased processed volumes and higher operating
costs at the Memphis refinery. Selling, general and administrative expenses
increased $17 million due in part to increased activities in human resources
development, investor/media/customer relations and business development. Other
(income) expense - net in 1998 includes a $15.5 million accrual for potential
transportation rate refunds to customers (see Note 3). Operating profit
decreased $33.2 million, or 21 percent, due primarily to the $15.5 million
accrual for potential refunds to transportation customers, $17 million higher
selling, general and administrative expenses and lower refinery operating
profit, partially offset by higher average transportation rates. Refinery
operating profit decreased due to lower per-unit refinery margins and $6 million
increased operating costs at the Memphis refinery due to higher production
levels, partially offset by 8 percent higher refinery volumes processed.
COMMUNICATIONS' revenues increased $230.2 million, or 23 percent, due
primarily to the April 30, 1997 combination of the Nortel customer premise
equipment sales and services operations which contributed an additional $196
million of revenue in 1998. In addition, revenues increased as a result of
providing off-net services to new long-term customers associated with the
fiber-optic network currently under construction. Sales order backlog at
September 30, 1998 increased $17.3 million from September 30, 1997. Costs and
operating expenses increased $170.4 million, or 23 percent, including $121
million associated with the combination with Nortel and higher costs in both the
network and network applications businesses including off-net leased capacity
costs associated with providing customer services prior to completion of the new
network. Selling, general, and administrative expenses increased $102.9 million,
or 41 percent, of which $90 million is attributable to the solutions business
which includes the combination with Nortel. Included in the overall increase are
$23 million of increased information systems costs associated with expansion and
enhancement of the infrastructure and continued costs of maintaining multiple
systems while common systems are being developed, and the expansion of the sales
infrastructure to support the new national digital fiber-optic network including
$6 million for a new national advertising campaign. The construction of the
network continues ahead of schedule and on budget. Operating profit decreased
$52.3 million to a $56.2 million operating loss in 1998, due primarily to the
increase in selling, general and administrative expenses as a percentage of
revenue resulting from the items discussed above, and $6 million of charges for
asset write-downs by the solutions business.
GENERAL CORPORATE EXPENSES increased $13.8 million, or 35 percent, due
primarily to MAPCO merger-related costs of $21 million, partially offset by
expense savings realized following the MAPCO merger. An additional $45.9 million
of merger-related costs are included in other (income) expense - net as a
component of Energy Services' operating profit. Interest accrued increased $23.8
million, or 25 percent, due primarily to higher
12
<PAGE> 15
borrowing levels including Williams Holdings' commercial paper program and
advances from Williams, partially offset by a lower average interest rate. The
lower average interest rate reflects the impact of lower rates on commercial
paper borrowings. Interest capitalized increased $13.2 million to $25.4 million,
due primarily to increased capital expenditures for the fiber-optic network, the
Venezuelan gas injection plant and international investment activities.
Investing income decreased $54.9 million to a $19.9 million loss, due primarily
to a $23.2 million write-down related to a network applications venture (see
Note 5), a $28 million decrease in equity earnings primarily from international
investments and $10 million lower interest earned on advances to Williams,
partially offset by higher interest income on long-term notes receivable. For
information concerning the $44.5 million 1997 gain on sale of interest in
subsidiary, see Note 6. The $66 million 1997 gain on sale of assets results from
the sale of Williams Holdings' interest in the liquids and condensate reserves
in the West Panhandle field of Texas (see Note 7). Minority interest in (income)
loss of consolidated subsidiaries is $7.1 million favorable as compared to 1997
due primarily to lower earnings experienced by Williams Communications
Solutions, LLC and allocated to the 30 percent interest held by minority
shareholders. Other expense - net is $18.6 million unfavorable as compared to
1997 due primarily to 1998 litigation loss accruals and other reserve
adjustments totaling $11 million related to assets previously sold and the
impact of a 1997 gain of $4 million on the termination of interest rate swaps
agreements.
The $106.5 million, or 81 percent, decrease in the provision for income taxes
is due to lower pre-tax income, partially offset by a higher effective income
tax rate in 1998. The effective income tax rate in 1998 exceeds the federal
statutory rate due primarily to the effects of state income taxes. 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 6) and income
tax credits from coal-seam gas production, partially offset by the effects of
state income taxes.
The $4.8 million 1998 extraordinary loss results from the early
extinguishment of debt (see Note 9).
Year 2000 Compliance
Williams and its wholly-owned subsidiaries, which includes Williams Holdings,
initiated an enterprise-wide project in 1997 to address the year 2000 compliance
issue for both traditional information technology areas and non-traditional
areas, including embedded technology which is prevalent throughout the company.
This project focuses on all technology hardware and software, external
interfaces with customers and suppliers, operations process control, automation
and instrumentation systems, and facility items. The phases of the project are
awareness, inventory and assessment, renovation and replacement, and testing and
validation. The awareness and inventory/assessment phases of this project as
they relate to both traditional and non-traditional information technology areas
have been substantially completed except with respect to international
investments. During the inventory and assessment phase, all systems with
possible year 2000 implications were inventoried and classified into five
categories: 1) highest, business critical, 2) high, compliance necessary within
a short period of time following January 1, 2000, 3) medium, compliance
necessary within 30 days from January 1, 2000, 4) low, compliance desirable but
not required, and 5) unnecessary. Categories 1 - 3 were designated as critical
and are the major focus of this project. Renovation/replacement and
testing/validation of critical systems is expected to be completed by June 30,
1999, except for replacement of certain critical systems scheduled for
completion by September 1, 1999. Certain non-critical systems may not be
compliant by January 1, 2000.
Testing and validation activities have begun and will continue throughout the
process. Year 2000 test labs are in place and operational. As expected, few
problems have been detected during testing for items believed to be compliant.
The following table indicates the approximate project status for traditional
information technology and non-traditional areas by business unit. The tested
category indicates the percentage that has been fully tested or otherwise
validated as compliant. The untested category includes items that are believed
to be compliant but which have not yet been validated. The not compliant
category includes items which have been identified as not year 2000 compliant.
The unknown category includes items identified during the assessment phase which
require additional follow-up to determine whether they are compliant.
<TABLE>
<CAPTION>
Not
Business Unit Tested Untested Compliant Unknown
<S> <C> <C> <C> <C>
Traditional Information
Technology:
Energy Services 12% 46% 18% 24%
Communications 8 62 27 3
Corporate/Other 45 43 11 1
Non-Traditional Infor-
mation Technology:
Energy Services 27 73 -- --
Communications 15 64 16 5
Corporate/Other 73 11 1 15
</TABLE>
Williams Holdings has initiated a formal communications process with other
companies to determine the extent to which those companies are addressing their
year 2000 compliance. In connection with this process, Williams Holdings has
sent over 9,500 letters and questionnaires to third parties including customers,
vendors, service providers, etc. Additional communications are being mailed
during the fourth quarter of 1998. Williams Holdings is evaluating
13
<PAGE> 16
responses as they are received or otherwise investigating the status of these
companies' year 2000 compliance efforts. As of September 30, 1998, approximately
21 percent of the companies contacted have responded and substantially all have
indicated that they are already compliant or will be compliant on a timely
basis. Where necessary, Williams Holdings will be working with key business
partners to reduce the risk of a break in service or supply and with
non-compliant companies to mitigate any material adverse effect on Williams
Holdings.
Williams Holdings expects to utilize both internal resources and external
contractors to complete the year 2000 compliance project. Existing resources
will be redeployed, and several previously planned system implementations
currently in process are scheduled for completion on or before September 1,
1999, which are expected to lessen possible year 2000 impacts. For example, a
new year 2000 compliant payroll/human resources system, scheduled to be online
January 1, 1999, will replace multiple human resources administration and
payroll processing systems currently in place. The Communications business unit
has a major service information management system implementation and other
system implementations currently in process necessary to integrate the
operations of its many components acquired in past acquisitions. These systems
will address the year 2000 compliance issues in certain areas. Within the Energy
Services business unit, major applications had been replaced or were being
replaced by MAPCO prior to its acquisition by Williams. In situations where
planned system implementations will not be in service timely, alternative steps
are being taken to make existing systems compliant.
Although all critical systems over which Williams Holdings has control are
planned to be compliant and tested before the year 2000, there is a possibility
of service interruptions due to non-compliance by third parties. For example,
power failures along the communications network or transportation systems would
cause service interruptions. This risk should be minimized by the
enterprise-wide effort to communicate with and evaluate third-party compliance
plans. Another area of risk for non-compliance is the delay of system
replacements scheduled for completion during 1999. The status of these systems
is being closely monitored to reduce the chance of delays in completion dates.
Contingency plans are being developed for critical business processes, critical
business partners, suppliers and system replacements that experience significant
delays. These plans are expected to be defined by August 31, 1999 and
implemented where appropriate.
Costs incurred for new software and hardware purchases are being capitalized
and other costs are being expensed as incurred. While estimates of the total
cost of Williams Holdings' enterprise-wide project continue to be refined,
Williams Holdings estimates that future costs, including any accelerated system
replacements, necessary to complete the project within the schedule described
will total approximately $40 million. Of this total, approximately $35 million
will be expensed and the remainder capitalized. This estimate does not include
Williams Holdings' potential share of year 2000 costs that may be incurred by
partnerships and joint ventures in which the company participates but is not the
operator. Approximately $6 million of costs has been expensed to date and
approximately $2 million has been capitalized. The costs of the project and the
completion dates are based on management's best estimates which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party year 2000 compliance modification
plans and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from these estimates.
The preceding discussion contains forward-looking statements including,
without limitation, statements relating to the company's plans, strategies,
objectives, expectations, intentions, and adequate resources, that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-looking statements
contained in the year 2000 update are based on certain assumptions which may
vary from actual results. Specifically, the dates on which the company believes
the year 2000 project will be completed and computer systems will be implemented
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third-parties, the company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
14
<PAGE> 17
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
Exhibit 27 Financial Data Schedule
(b) During the third quarter of 1998, Williams Holdings did not
file a Form 8-K.
15
<PAGE> 18
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)
November 13, 1998
<PAGE> 19
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, 1998
------------------
<S> <C>
Earnings:
Income before income taxes $ 58.9
Add:
Interest expense - net 92.9
Rental expense representative of interest factor 16.2
Minority interest in income of consolidated subsidiaries 5.5
Other 18.0
-------
Total earnings as adjusted plus fixed charges $ 191.5
=======
Fixed charges:
Interest expense - net $ 92.9
Capitalized interest 25.4
Rental expense representative of interest factor 16.2
-------
Total fixed charges $ 134.5
=======
Ratio of earnings to fixed charges 1.42
=======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 69,873
<SECURITIES> 0
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<TOTAL-ASSETS> 10,130,377
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0
0
<COMMON> 0
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<INCOME-PRETAX> 58,902
<INCOME-TAX> 25,388
<INCOME-CONTINUING> 33,514
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<EXTRAORDINARY> (4,762)
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</TABLE>
