SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2003 | ||
or | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 1-4174
The Williams Companies, Inc.
Delaware | 73-0569878 | |
(State or Other Jurisdiction of
Incorporation or Organization) |
(IRS Employer
Identification No.) |
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One Williams Center, Tulsa, Oklahoma | 74172 | |
(Address of Principal Executive Offices) | (Zip Code) |
918-573-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange | ||
Title of Each Class | on Which Registered | |
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Common Stock, $1.00 par value
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New York Stock Exchange and
Pacific Stock Exchange |
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Preferred Stock Purchase Rights
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New York Stock Exchange and Pacific Stock Exchange | |
Income PACs
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrants most recently completed second quarter was approximately $4,096,500,669.
The number of shares outstanding of the registrants common stock held by non-affiliates outstanding at February 27, 2004 was 519,304,009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement being prepared for the solicitation of proxies in connection with the Annual Meeting of Stockholders of the registrant for 2004 are incorporated by reference in Part III of this Form 10-K.
THE WILLIAMS COMPANIES, INC.
TABLE OF CONTENTS
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DEFINITIONS
We use the following oil and gas measurements in this report:
Bcfe means one billion cubic feet of gas equivalent determined using the ratio of one barrel of oil or condensate to six thousand cubic feet of natural gas. | |
British Thermal Unit or BTU means a unit of energy needed to raise the temperature of one pound of water by one degree Fahrenheit. | |
Dekatherms or Dth means a unit of energy equal to one million BTUs. | |
Dth/d means dekatherms per day. | |
Mbbls/d means one thousand barrels per day. | |
Mcfe means one thousand cubic feet of gas equivalent using the ratio of one barrel of oil or condensate to six thousand cubic feet of natural gas. | |
Mdt/d means one thousand dekatherms per day. | |
MMcf means one million cubic feet. | |
MMcf/d means one million cubic feet per day. | |
MMcfe means one million cubic feet of gas equivalent using the ratio of one barrel of oil or condensate to six thousand cubic feet of natural gas. | |
MMdt means one million dekatherms. |
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PART I
Items 1 and 2. Business and Properties
In this report, Williams (which includes The Williams Companies, Inc. and unless the context otherwise requires, all of our subsidiaries) is at times referred to in the first person as we, us or our. We also sometimes refer to Williams as the Company.
WEBSITE ACCESS TO REPORTS AND OTHER INFORMATION
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other documents electronically with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended. You may read and copy any materials that we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain such reports from the SECs Internet website at http://www.sec.gov.
We make available free of charge on or through our Internet website at http://www.williams.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Corporate Governance Principles, Code of Ethics, Board committee charters and Code of Business Conduct are also available on our Internet website.
GENERAL
We are a natural gas company originally incorporated under the laws of the state of Nevada in 1949 and reincorporated under the laws of the state of Delaware in 1987. We were founded in 1908 when two Williams brothers began a construction company in Fort Smith, Arkansas.
Today, we primarily find, produce, gather, process and transport natural gas. Our operations stretch across the country and serve the Northwest, California, Rocky Mountains, Gulf Coast and Eastern Seaboard markets.
The energy industry has substantially changed over the last two years. Those changes have significantly impacted our operations and will continue to impact future operations. In light of the changed environment, on February 20, 2003, we outlined our planned business strategy for the next few years. Our refocused strategy is to become a smaller integrated natural gas company focusing on key growth markets. We also focused on bolstering our liquidity through asset sales, strategic levels of financing and reductions in operating costs to develop a balance sheet capable of supporting and ultimately growing our remaining businesses.
Our principal executive offices are located at One Williams Center, Tulsa, Oklahoma 74172. Our telephone number is 918-573-2000.
RECENT DEVELOPMENTS
Implementing Our Strategy
We expended considerable effort in 2003 implementing our refocused business strategy and have successfully completed a number of the components of that strategy including asset sales, cost reductions, improving our financial position through a series of financial transactions, and addressing issues surrounding our Power segment. Each of those components is discussed in more detail below.
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Asset sales
In 2003, consistent with the strategy outlined above, we generated proceeds of approximately $3 billion from the sale of assets. In addition, we realized proceeds from the sale, termination and liquidation of Power contracts during the year. We have completed the sale of or announced our intention to sell the following:
Power |
| February 3, 2003 We sold our 170-megawatt power facility in Worthington, Indiana, to Hoosier Energy and terminated our power load serving contract with Hoosier Energy for cash totaling $67 million. | |
| May 15, 2003 We sold certain crude gathering contracts and assets to Seminole Transportation and Gathering, L.P. for $13.9 million. The sale included the assignment of certain purchase and sales contracts with average annual throughput of 40,000 barrels per day, a four-mile pipeline in Louisiana, and a two percent interest in the High Island Pipeline System located offshore, Gulf Coast. The sale relieved us of a fixed-lease obligation totaling $32 million over the next eight years related to the lease of a terminal in Louisiana. | |
| May 30, 2003 We sold our full-requirements power agreement with Jackson Electric Membership Corporation in Jefferson, Georgia, to Progress Energy for $188 million in cash with $175 million received in second quarter 2003 and $13 million received in third quarter 2003. | |
| August 1, 2003 We announced an agreement to terminate a long-term power contract with a subsidiary of Allegheny Energy, Inc. for $100 million in cash and a $28 million note receivable. On the same date, we also announced the sale of or agreements to sell distributed-generation units and an associated third-party contract for approximately $31 million. |
Gas pipeline |
| May 16, 2003 We sold our Texas Gas Transmission pipeline to a subsidiary of Loews Corporation for approximately $1.045 billion, which included approximately $795 million in cash and assumption of $250 million in existing Texas Gas Transmission debt. |
Exploration & production |
| May 30, 2003 We sold certain exploration and production assets, on properties located in Kansas, Colorado, and New Mexico for net proceeds of $383 million. | |
| June 2003 We sold natural gas exploration and production properties in the Green River basin in southwest Wyoming and the Denver-Julesberg basin in northeastern Colorado for net proceeds of $34 million. | |
| August 28, 2003 We sold oil and gas properties in Brundage Canyon, Utah, to Berry Petroleum Company for net proceeds of $44 million. |
Midstream |
| May 2, 2003 We mutually agreed to terminate an agreement for the sale of certain of our South Texas natural gas transmission lines to Enbridge Energy Partners, L.P. because the parties were unable to obtain regulatory approvals from the Federal Energy Regulatory Commission (FERC). We intend to pursue an alternative transaction with another buyer under a structure that is responsive to the FERCs concerns. | |
| June 30, 2003 We sold our 45 percent ownership interest in the 223-mile Rio Grande Pipeline that transports natural gas liquids from Hobbs, New Mexico to Ciudad Juarez, Chihuahua. Navajo Southern Inc., a wholly-owned subsidiary of Holly Corporation, purchased our interest for $27.5 million, subject to certain closing adjustments. |
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| August 1, 2003 We sold our West Stoddart natural gas processing plant located near Fort St. John, British Columbia. | |
| August 8, 2003 We sold our 20 percent aggregate ownership interest in the 3,000-mile West Texas LPG Pipeline Limited Partnership to Buckeye Partners, L.P. for approximately $28.5 million. | |
| September 30, 2003 We sold our natural gas fractionation system and a portion of our storage and distribution system at a plant in Redwater, Alberta for $246 million in U.S. funds to Provident Energy Trust. | |
| October 2, 2003 We sold our interests in Wilprise Pipeline Co. and Tri-States NGL Pipeline LLC to affiliates of Enterprise Products Partners L.P. for $26.5 million plus an earn-out provision that entitles us to receive up to an additional $8.3 million based on transportation volumes for Wilprise and Tri-States through 2006. | |
| December 2003 We sold our Dry Trail gas processing plant located in the Oklahoma panhandle, and certain wholesale propane assets, including seven propane distribution terminals. |
Other |
| February 27, 2003 We sold our retail travel center operations for approximately $189 million in cash to Pilot Travel Centers LLC. | |
| March 4, 2003 We sold our Memphis, Tennessee refinery and other related operations to Premcor Inc. for approximately $455 million in cash. In April 2003 we sold an earnout agreement we retained in the sale of the refinery. | |
| May 30, 2003 We sold our interest in Williams Bio-Energy L.L.C. to a new company formed by Morgan Stanley Capital Partners for $59 million in cash. The sale included ethanol production plants in Pekin, Illinois, and Aurora, Nebraska. | |
| June 17, 2003 We sold our 54.6 percent ownership interest in Williams Energy Partners L.P. (now known as Magellan Midstream Partners, L.P.). The buyer, a limited partnership formed by the private equity firms Madison Dearborn Partners, LLC and Carlyle/ Riverstone Global Energy and Power Fund II, L.P., paid approximately $512 million in cash at closing for our interests in the partnership. In addition, the transaction had the effect of removing $570 million of the partnerships debt from our consolidated balance sheet. In the fourth quarter 2003 we received an additional $20 million associated with the terms of this sale. | |
| September 10, 2003 We sold all of our investment in a soda ash and sodium bicarbonate mining operation to a wholly-owned affiliate of Solvay America, Inc. | |
| November 17, 2003 We announced definitive agreements to sell for approximately $265 million in cash our refinery at North Pole, two petroleum terminals in Anchorage and Fairbanks, and related crude oil and refined products inventories, our 3.0845 percent interest in the Trans Alaska Pipeline System, and 26 convenience stores. The sales price is subject to closing adjustments for items such as the value of petroleum inventories. In addition to anticipated cash proceeds, the transaction will eliminate two cash-collateralized letters of credit that we have with the state of Alaska, releasing $90.9 million back to us. | |
| December 2003 We announced the closing of an agreement for the structured sale of our 20 percent investment in Brazil-based Algar Telecom Leste (ATL). |
Cost reductions
Our selling, general and administrative costs from continuing operations decreased 28 percent and our general corporate expenses decreased 39 percent. We are continuing our efforts to reduce costs through internal initiatives in which we are working to find more efficient and cost effective means of providing internal
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Other efforts to improve our financial position
In addition to asset sales and cost reductions, we pursued other transactions to improve our financial position, which included the following:
| March 4, 2003 Our wholly-owned subsidiary, Northwest Pipeline Corporation, completed a $175 million offering of senior notes due 2010. | |
| May 28, 2003 We closed a $300 million private offering of junior subordinated convertible debentures due 2033. We used substantially all of the approximately $290 million of net proceeds from the offering to fund our repurchase of our 9.875 percent cumulative-convertible preferred stock held by a subsidiary of MidAmerican Energy Holdings Company on June 10, 2003. | |
| May 30, 2003 We retired a $1.15 billion obligation to a group of investors led by a subsidiary of Berkshire Hathaway Inc. secured by substantially all of our exploration and production interests in the U.S. Rocky Mountains. We retired the obligation with funds from the proceeds of recent asset sales and funds from a new $500 million, secured, subsidiary-level financing. The new loan, which closed on May 30, 2003, is also secured by substantially all of our exploration and production interests in the U.S. Rocky Mountains and the terms of the new loan reflect market rates. The loan was amended on February 25, 2004 to reduce the floating interest rate 125 basis points from 3.75 percent over the London InterBank Offered Rate (LIBOR) to 2.5 percent over LIBOR and extends the maturity by one year from May 30, 2007, to May 30, 2008. | |
| June 6, 2003 We obtained a new $800 million cash-collateralized letter of credit and revolver facility, primarily for the purpose of issuing letters of credit. The new facility replaced a $1.1 billion credit line. The majority of our Midstream assets were security for the previous agreement. | |
| June 10, 2003 We issued 8.625 percent senior unsecured notes due 2010 in an $800 million public offering. | |
| November 6, 2003 We issued tender offers relating to approximately $1.641 billion aggregate outstanding principal of debt securities. As of the expiration of the offers, we received tenders for approximately $721 million aggregate principal amount of our 9.25 percent notes due March 15, 2004, $24 million aggregate principal amount of 9.875 percent debentures due 2020 that were originally issued by Transco Energy Company, approximately $105.5 million aggregate principal amount of various tranches of Series B Medium Notes due 2003-2022 that were originally issued by MAPCO, Inc., and approximately $100 million aggregate principal amount of three series of debentures due 2012-2021 that we issued under a 1990 indenture. |
Addressing power issues
In 2003 we continued to pursue a strategy of exiting the Power business. We sold, terminated or liquidated certain Power contracts and assets. We have continued to manage the activities of this business unit to reduce risk, to generate cash, and to fulfill contractual commitments. We have also expended considerable effort addressing civil litigation and challenges and investigations by state and federal regulators and attorneys general regarding the trading practices of subsidiaries of our Power unit in California and other western states in 2000 and 2001. These challenges include refund proceedings, investigations of market manipulation, challenges to long-term power sales to the State of California, and civil litigation relating to each of these issues.
On November 11, 2002, we executed a settlement agreement that resulted in renegotiated long-term energy contracts with the State of California, resolution of civil complaints brought by the California Attorney General, resolution of refund claims by the State of California, and resolution of ongoing investigations by the states of California, Oregon, and Washington. The settlement did not extend to criminal matters or matters of
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On Oct. 25, 2002, we disclosed that our internal review of our trading activities revealed that a few non-managerial employees had engaged in inaccurate reporting of natural gas trades to energy publications that compile and report index prices. We voluntarily reported these findings to the Commodity Futures Trading Commission (CFTC) and other relevant federal agencies. On July 29, 2003, we announced that we and our subsidiary, Williams Power Company, Inc., reached a settlement with the Commodity Futures Trading Commission on the matter pursuant to which we paid a civil penalty of $20 million, the CFTC closed its investigation and we did not admit or deny allegations of false reporting or attempted manipulation. The U.S. Department of Justice (DOJ) is continuing to investigate the matter. Civil suits based on allegations of manipulating gas indexes have been brought against us and others in federal and state courts.
On March 26, 2003, the FERC issued a report on an investigation by the agency into price manipulation in the western energy markets in 2000 and 2001. The report cleared us of an allegation that we attempted to corner the gas market. On January 22, 2004, the FERC approved a settlement between us and the FERC trial staff of all Enron trading practices for $45,000. The agency is continuing its investigation of physical and economic withholding.
On February 25, 2004, we announced that we had reached agreement on terms to settle with two California utilities, Pacific Gas and Electric Company (PG&E) and Southern California Edison Company, resolving outstanding disputes, including refund liability related to natural gas and power markets in 2000 and 2001. The settlement will be subject to approval of the FERC, the California Public Utilities Commission and the U.S. Bankruptcy Court administering PG&Es bankruptcy proceedings.
See Note 16 of our Notes to Consolidated Financial Statement for more information about investigations and proceedings involving energy trading practices, including our continued involvement in FERC and related refund proceedings.
Other events
On March 17, 2003, the FERC approved a settlement of issues raised during a joint investigation of Transcontinental Gas Pipe Line Corporations (Transco) and Williams Power Companys compliance with regulations governing the relationship between interstate gas pipelines and marketing affiliates. Pursuant to the settlement, we will pay a $20 million civil penalty to the FERC over the next four years and Transco will discontinue firm sales services by April 1, 2005. The settlement also places restrictions on Powers ability to transport gas on affiliated pipelines. We also agreed to implement a compliance program to ensure future compliance with the settlement agreement and FERCs marketing affiliate rules. See Note 16 of our Notes to Consolidated Financial Statements for further information on the settlement.
On May 15, 2003, our shareholders approved a stock option exchange program. Under this exchange program, eligible employees were given a one-time opportunity to exchange certain outstanding options for a proportionately lesser number of options at an exercise price which was based on the market value of our common stock on the grant date of the new options. Surrendered options for 10.4 million shares were cancelled June 26, 2003, and replacement options for 3.9 million shares were granted on December 29, 2003.
FINANCIAL INFORMATION ABOUT SEGMENTS
See Note 19 of our Notes to Consolidated Financial Statements for information with respect to each segments revenues, profits or losses and total assets.
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BUSINESS SEGMENTS
General
Substantially all of our operations are conducted through our subsidiaries. To achieve organizational and operating efficiencies, our activities are primarily operated through our wholly-owned subsidiary, Williams Power Company; our interstate natural gas pipelines and pipeline joint venture investments are organized under our wholly-owned subsidiary, Williams Gas Pipeline Company, LLC; our Exploration & Production business is operated through several wholly-owned subsidiaries including Williams Production Company LLC and Williams Production RMT Company; our Midstream business is operated primarily through wholly-owned subsidiaries including Williams Field Services Group, Inc. and Williams Natural Gas Liquids, Inc.; and our previously reported Petroleum Services and International segments are now reported under our Other segment. This report is organized to reflect this structure.
Our business segments include Power, Gas Pipeline, Exploration & Production, Midstream, and Other. An overview and detailed discussion of each of our business segments follows.
Power
Power overview |
| Our Power segment, formerly known as Energy Marketing & Trading, is an energy services provider that buys, sells and transports a full suite of energy and energy-related commodities, including power, natural gas, refined products, crude oil and emissions credits, primarily on a wholesale level. | |
| We have sold certain portions of the Power portfolio, liquidated certain positions and are negotiating with various parties for a joint venture or sale of all or a portion of the remainder of our trading portfolio. |
Power details |
In June 2002, we announced our intent to exit the power business and reduce our financial commitment to our Power segment. Until the portfolio is completely sold or liquidated, we continue to operate and manage the risk associated with our remaining contracts and our assets in order to maximize cash flow and, where possible, reduce risk within the portfolio. Our contracts include various financial instruments and structured transactions. Our financial instruments include exchange-traded futures, over-the-counter forwards, options and swaps. Structured transactions include tolling contracts and full requirements contracts, which are explained in the next two paragraphs. Through our contracts, we buy, sell, store and transport energy and energy-related commodities. These energy and energy-related commodities include power, natural gas, refined products, crude oil, and emission credits.
Tolling contracts represent the most significant
portion of our remaining portfolio. Under the tolling contracts,
we have the right to request a plant owner to convert our fuel
(usually natural gas) to electricity in exchange for a fixed
fee. We have the right to request approximately 7,700 megawatts
of electricity under six tolling agreements. The table below
lists the locations and capacity of each of our tolling
agreements:
Location
Megawatts
4,141
844
765
766
666
541
7,723
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We use portions of the electricity produced under the tolling agreements to supply obligations under counterparty-tailored arrangements known as full requirements contracts. Under full requirements contracts, we supply the electricity required by our counterparties to serve their customers. Through full requirements contracts, we supply approximately 1,146 megawatts of electricity in Georgia and Pennsylvania.
We have resold part of our rights (1,045 to 1,175 megawatts) under the California tolling arrangement to the California Department of Water Resources.
Additionally, we have rights to sell energy and capacity from two natural gas-fired electric generating plants owned by affiliated companies and located near Bloomfield, New Mexico (60 megawatts) and in Hazleton, Pennsylvania (147 megawatts).
In 2003, we marketed natural gas throughout North America with total physical volumes averaging 2.7 billion cubic feet per day. With approximately 20 percent of this natural gas, we fuel electric generating plants we own or have contractual rights to. We sell approximately 28 percent of this natural gas to customers including local distribution companies, utilities, producers, industrials and other gas marketers. With the remaining 52 percent, we procure gas supply for our Midstream operations, sell gas produced by Exploration & Production and manage firm service contracts for Gas Pipeline.
In 2003, we marketed on average approximately 77,000 barrels per day of physical crude oil and petroleum products to petroleum producers, refiners and end-users in the United States and various international regions.
In 2003, we substantially exited our European activities, which had been conducted through our London office.
Operating statistics |
The following table summarizes marketing and trading gross sales volumes for the periods indicated:
Power |
Year Ending December 31, | |||||||||||||
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2003 | 2002 | 2001 | |||||||||||
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U.S. Operations
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Marketing and trading physical volumes:
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Power (thousand megawatt hours)
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165,908 | 404,711 | 293,808 | ||||||||||
Natural Gas (billion cubic feet per day)
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2.7 | 3.8 | 3.4 | ||||||||||
Petroleum products (thousand barrels per day)
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77 | 832 | 241 |
2003 | 2002 | ||||||||
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European Operations
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Marketing and trading physical volumes:
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Power (thousand megawatt hours)
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| 26,094 | |||||||
Natural Gas (billion cubic feet per day)
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Petroleum products (thousand barrels per day)
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23 | 83 |
As of December 31, 2003, our Power segment had approximately 234 customers compared with 287 customers at the end of 2002.
Regulatory and legal matters |
Our Power business is subject to a variety of laws and regulations at the local, state and federal levels. The FERC and the Commodity Futures Trading Commission regulate us. Electricity and natural gas markets in California and elsewhere continue to be subject to numerous and wide-ranging federal and state regulatory proceedings and investigations. They are also subject to civil actions regarding, among other things, market
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Competition and market environment |
We compete directly with large independent energy marketers, marketing affiliates of regulated pipelines and utilities and natural gas producers. We also compete with both brokerage houses and other energy-based companies offering similar services. Since 2002, we have fewer competitors due to the exit of independent energy marketers from the marketplace and the exit of utilities from financial merchant activities. We anticipate more competition in the future from brokerage houses, which are increasing their trading activity.
As a result of the credit rating downgrades to below investment grade levels in 2002, certain of our counterparties require adequate assurance or alternate credit support. In addition, under our industry standard derivative agreements, we are required to fund margin requirements with cash, letters of credit or other negotiable instruments. In 2003, however, due to improvements in our credit and liquidity, we were able to negotiate lower collateral requirements with certain brokers and counterparties.
Certain of our counterparties have experienced significant declines in their financial stability and creditworthiness, which may adversely impact their ability to perform under contracts. Revenues from two counterparties, which have credit ratings below investment grade, constitute approximately 12 percent of Powers gross revenues. Our exposure to these counterparties may be mitigated by the existence of netting arrangements. In conjunction with efforts to sell or liquidate all or portions of our portfolio, we closed out or sold positions with a number of counterparties in 2003. Credit constraints and financial instability of market participants are expected to continue in 2004. These factors may also significantly impact our ability to manage market risk.
Ownership of property |
Powers primary assets are its term contracts, related systems and technological support. As mentioned, we intend to sell or liquidate all or portions of our portfolio. No assurances can be made regarding the ultimate consummation of any sale or liquidation. As discussed further in Note 1 of our Notes to Consolidated Financial Statements, derivative contracts in our portfolio have been recognized at their estimated fair value. According to generally accepted accounting principles (GAAP), fair value is the amount at which an instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation or sale. Non-derivative contracts are not recognized until revenue is earned or expenses have been incurred. Certain of our tolling agreements have a negative fair value, which is not reflected in our financial statements since these agreements are non-derivatives. These tolling agreements may result in future accrual losses. See Note 1 of our Notes to Consolidated Financial Statements and our Managements Discussion and
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Amounts ultimately received in any portfolio sale, contract liquidation or realization may be significantly different than the estimated economic value or the carrying values presented in the financial statements. It is possible that we may sell contracts for less than their carrying value or enter into agreements to terminate certain obligations, either of which could result in future loss recognition or reductions of future cash flows.
Environmental matters |
Our generation facilities are subject to various environmental laws and regulations, including those regarding emissions. We believe compliance with various environmental laws and regulations will not have a material adverse effect on capital expenditures, earnings or competitive position. However, these laws and regulations may affect facility availability from time to time.
Gas pipeline
Gas pipeline overview |
| We own one of the nations largest interstate natural gas pipeline systems with 14,600 miles of interstate natural gas pipelines for transportation of natural gas across the country to utilities and industrial customers. | |
| Our pipelines include Transco, Northwest Pipeline Corporation (Northwest Pipeline) and several pipeline joint ventures. | |
| We also own a 50 percent interest in the Gulfstream Pipeline. |
Gas pipeline details |
We own and operate, through Williams Gas Pipeline Company, LLC and its subsidiaries (Gas Pipeline), a combined total of approximately 14,600 miles of pipelines with a total annual throughput of approximately 2,600 trillion British Thermal Units of natural gas and peak-day delivery capacity of approximately 11 billion cubic feet of gas. Gas Pipeline consists of Transco and Northwest Pipeline. Gas Pipeline also holds interests in joint venture interstate and intrastate natural gas pipeline systems including a 50 percent interest in the Gulfstream Natural Gas System, L.L.C.
In February 2001, one of our subsidiaries and a subsidiary of Duke Energy completed a joint acquisition of The Coastal Corporations 100 percent ownership interest in Gulfstream Natural Gas System, L.L.C., and announced that they were proceeding with the development of the Gulfstream gas pipeline project. In June, 2001 construction commenced on the project, which consists of a new natural gas pipeline system extending from the Mobile Bay area in Alabama to markets in Florida. On December 28, 2001, Gulfstream filed an application with the FERC to allow Gulfstream to complete the construction of its approved facilities in phases. On May 28, 2002, the first phase of the project was placed into service at a cost of approximately $1.5 billion. The scheduled in-service date for the second phase of the project is May 1, 2005. The total estimated capital cost of both phases of the project is approximately $1.7 billion. At December 31, 2003, our investment in Gulfstream was $731 million.
On April 24, 2001 the respective general partners of U.S. and Canadian general partnerships that are pursuing the Georgia Strait Crossing Pipeline Project (GSX), filed separate applications with the FERC and Canadas National Energy Board (NEB) to construct and operate a new pipeline that will provide firm transportation capacity from Sumas, Washington to Vancouver Island, British Columbia. GSX is a project being pursued jointly between Gas Pipeline and BC Hydro, in part to meet the needs of the Vancouver Island Generation Plant (VIGP). On September 20, 2002, the FERC issued an order approving the construction and operation of the U.S. portion of the project. An NEB certificate approving the project in Canada was issued on December 15, 2003. Construction of the GSX project is contingent upon a favorable outcome of a British Columbia Utilities Commission mandated call for tenders process which is being pursued by BC Hydro to
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Regulatory matters |
Gas Pipelines interstate transmission and storage activities are subject to regulation by the FERC under the Natural Gas Act of 1938 and under the Natural Gas Policy Act of 1978, and, as such, its rates and charges for the transportation of natural gas in interstate commerce, the extension, enlargement or abandonment of jurisdictional facilities and accounting, among other things, are subject to regulation. Each gas pipeline company holds certificates of public convenience and necessity issued by the FERC authorizing ownership and operation of all pipelines, facilities and properties for which certificates are required under the Natural Gas Act of 1938. Each gas pipeline company is also subject to the Natural Gas Pipeline Safety Act of 1968, as amended by Title I of the Pipeline Safety Act of 1979 and the Pipeline Safety Improvement Act of 2002, which regulate safety requirements in the design, construction, operation and maintenance of interstate natural gas transmission facilities. Cardinal Pipeline Company, LLC, a North Carolina natural gas pipeline company that is operated and 45 percent owned by Gas Pipeline, is subject to the jurisdiction of the North Carolina Utilities Commission.
Each of our interstate natural gas pipeline companies establishes its rates primarily through the FERCs ratemaking process. Key determinants in the ratemaking process are (1) costs of providing service, including depreciation expense, (2) allowed rate of return, including the equity component of the capital structure and related income taxes and (3) volume throughput assumptions. The FERC determines the allowed rate of return in each rate case. Rate design and the allocation of costs between the demand and commodity rates also impact profitability. As a result of these proceedings, certain revenues previously collected may be subject to refund. See Note 16 of our Notes to Consolidated Financial Statements for the amounts accrued for potential refund at December 31, 2003.
On March 17, 2003, we entered into a settlement with FERC regarding its investigation of the relationship between Transco and Power whereby Transco will pay a civil penalty in the amount of $20 million payable over a five-year period. In addition, we agreed to certain operational restrictions and agreed to implement a compliance program to ensure future compliance with the settlement agreement and FERCs marketing affiliate rules. See Note 16 of our Notes to Consolidated Financial Statements for further information on the settlement.
Competition |
The FERC has taken various actions to strengthen market forces in the natural gas pipeline industry which has led to increased competition throughout the industry. In a number of key markets, interstate pipelines are now facing competitive pressures from other major pipeline systems, enabling local distribution companies and end users to choose a supplier or switch suppliers based on the short-term price of gas and the cost of transportation. We expect competition for natural gas transportation to continue to intensify in future years due to increased customer access to other pipelines, rate , competitiveness among pipelines, customers desire to have more than one transporter, shorter contract terms and regulatory developments. Future utilization of pipeline capacity will depend on competition from other pipelines, use of alternative fuels, the general level of natural gas demand and weather conditions. Electricity and distillate fuel oil are the primary competitive forms of energy for residential and commercial markets. Coal and residual fuel oil compete for industrial and electric generation markets. Nuclear and hydroelectric power and power purchased from electric transmission grid arrangements among electric utilities also compete with gas-fired electric generation in certain markets.
Suppliers of natural gas are able to compete for any gas markets capable of being served by pipelines using nondiscriminatory transportation services provided by the pipeline companies. As the regulated environment has matured, many pipeline companies have faced reduced levels of subscribed capacity as contractual terms expire and customers opt to reduce firm capacity under contract in favor of alternative
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Several state jurisdictions have been involved in implementing changes similar to the changes that have occurred at the federal level. New York, New Jersey, Pennsylvania, Maryland, Georgia, Delaware, Virginia, California, Wyoming, and the District of Columbia are currently at various points in the process of unbundling services at local distribution companies. Management expects the implementation of these changes to encourage greater competition in the natural gas marketplace.
Ownership of property |
Each of our interstate natural gas pipeline companies generally owns its facilities, with certain portions being held jointly with third parties. However, a substantial portion of each pipeline companys facilities is constructed and maintained pursuant to rights-of-way, easements, permits, licenses or consents on and across properties owned by others. Our compressor stations and appurtenant facilities are located on lands owned by us or on sites leased from or permitted by public authorities. The storage facilities are either owned or held under long-term leases or easements.
Environmental matters |
Each of our interstate natural gas pipelines is subject to the National Environmental Policy Act and federal, state and local laws and regulations relating to environmental protection. We believe that, with respect to any capital expenditures and operation and maintenance expenses required to meet applicable environmental standards and regulations, the FERC would grant the requisite rate relief so that our pipeline companies could recover most of the cost of these expenditures in their rates. For this reason, we believe that compliance with applicable environmental requirements by the interstate pipeline companies is not likely to have a material adverse effect upon our earnings or competitive position.
For a discussion of specific environmental issues involving the interstate pipelines, including estimated cleanup costs associated with certain pipeline activities, see Environmental under Managements Discussion and Analysis of Financial Condition and Results of Operations and Environmental Matters in Note 16 of our Notes to Consolidated Financial Statements.
Principal Companies in the Gas Pipeline Segment |
A business description of the principal companies in the interstate natural gas pipeline group follows.
Transcontinental Gas Pipe Line Corporation (Transco) |
Transco is an interstate natural gas transportation company that owns and operates a 10,500-mile natural gas pipeline system extending from Texas, Louisiana, Mississippi and the offshore Gulf of Mexico through Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Pennsylvania, and New Jersey to the New York City metropolitan area. The system serves customers in Texas and eleven southeast and Atlantic seaboard states, including major metropolitan areas in Georgia, North Carolina, New York, New Jersey, and Pennsylvania. Effective May 1, 1995, Transco transferred the operation of certain production area facilities to Williams Field Services Group, Inc. (Williams Field Services), an affiliated company and part of the Midstream segment.
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Pipeline system and customers |
At December 31, 2003, Transcos system had a mainline delivery capacity of approximately 4.7 MMdt of natural gas per day from its production areas to its primary markets. Using its Leidy Line and market-area storage capacity, Transco can deliver an additional 3.4 MMdt of natural gas per day for a system-wide delivery capacity total of approximately 8.1 MMdt of natural gas per day. Transcos system includes 44 compressor stations, five underground storage fields, two liquefied natural gas (LNG) storage facilities and four processing plants. Compression facilities at a sea level-rated capacity total approximately 1.5 million horsepower.
Transcos major natural gas transportation customers are public utilities and municipalities that provide service to residential, commercial, industrial and electric generation end users. Shippers on Transcos system include public utilities, municipalities, intrastate pipelines, direct industrial users, electrical generators, gas marketers and producers. One customer accounted for approximately 12 percent of Transcos total revenues in 2003. Transcos firm transportation agreements are generally long-term agreements with various expiration dates and account for the major portion of Transcos business. Additionally, Transco offers storage services and interruptible transportation services under short-term agreements.
Transco has natural gas storage capacity in five underground storage fields located on or near its pipeline system or market areas and operates three of these storage fields. Transco also has storage capacity in a LNG storage facility and operates the facility. The total usable gas storage capacity available to Transco and its customers in such underground storage fields and LNG storage facility and through storage service contracts is approximately 216 billion cubic feet of gas. In addition, wholly-owned subsidiaries of Transco operate and hold a 35 percent ownership interest in Pine Needle LNG Company, an LNG storage facility with four billion cubic feet of storage capacity. Storage capacity permits Transcos customers to inject gas into storage during the summer and off-peak periods for delivery during peak winter demand periods.
Expansion projects |
In 2003 and early 2004, Transco completed construction of, and placed into service, two major projects, the Momentum Expansion Project and the Trenton-Woodbury Expansion Project.
Momentum Expansion Project |
Pursuant to a FERC certificate, Transco placed into service the Momentum Expansion Project, an expansion of its pipeline system from Station 65 in Louisiana to Station 165 in Virginia. The first phase, consisting of approximately 269 Mdt/d, was placed into service on May 1, 2003. On February 1, 2004, Transco placed into service the second phase of the project consisting of 54 Mdt/d. All of the expansion capacity is fully subscribed by shippers under long-term firm arrangements. The project facilities include approximately 50 miles of pipeline looping and 45,000 horsepower of compression. The revised capital cost of the project is estimated to be approximately $189 million. |
Trenton-Woodbury Expansion Project |
On November 1, 2003, Transco placed into service a 51 Mdt/d expansion of its Trenton-Woodbury Line, which runs from its mainline at Station 200 in eastern Pennsylvania, around the metropolitan Philadelphia area and southern New Jersey area, to its mainline near Station 205. All of the expansion capacity is fully subscribed by shippers under long-term firm arrangements. The project facilities include approximately seven miles of pipeline looping at an estimated capital cost of approximately $22 million. |
Central New Jersey Expansion Project |
On January 14, 2004, Transco announced that it was holding an open season from January 14, 2004 to February 13, 2004 to receive requests for incremental firm transportation service to be made available through its Central New Jersey Expansion Project, a proposed expansion of Transcos pipeline system in Transcos Zone 6 from Station 210 to locations along Transcos Trenton-Woodbury Line. As a result of the open season, the expansion has been designed to create approximately 105 Mdt/d of new firm |
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transportation capacity, which will be fully subscribed under a long-term arrangement with one shipper. The project facilities will include approximately 3.5 miles of pipeline loop at an estimated capital cost of $13 million. Transco plans to file for FERC approval of the project in the second quarter of 2004. The target in-service date for the project is November 1, 2005. |
Operating statistics |
The following table summarizes transportation
data for the Transco system for the periods indicated:
2003
2002
2001
(In trillion British
Thermal Units)
771
824
766
802
777
645
1573
1,601
1,411
297
179
202
1870
1,780
1,613
5.1
4.9
4.4
6.5
6.4
6.2
Transcos facilities are divided into eight rate zones. Five are located in the production area, and three are located in the market area. Long-haul transportation involves gas that Transco receives in one of the production-area zones and delivers to a market-area zone. Market-area transportation involves gas that Transco both receives and delivers within the market-area zones. Production-area transportation involves gas that Transco both receives and delivers within the production-area zones.
Northwest Pipeline Corporation (Northwest Pipeline) |
Northwest Pipeline is an interstate natural gas transportation company that owns and operates a natural gas pipeline system extending from the San Juan Basin in northwestern New Mexico and southwestern Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near Sumas, Washington. Northwest Pipeline provides services for markets in California, New Mexico, Colorado, Utah, Nevada, Wyoming, Idaho, Oregon and Washington directly or indirectly through interconnections with other pipelines.
Pipeline system and customers |
At December 31, 2003, Northwest Pipelines system, having long term firm transportation agreements with peaking capacity of approximately 3.4 billion cubic feet of natural gas per day, was composed of approximately 4,100 miles of mainline and lateral transmission pipelines and 42 compressor stations having sea level-rated capacity of approximately 462,000 horsepower.
On May 1, 2003, a line break occurred on our 26-inch gas transmission pipeline near Lake Tapps in Pierce County, Washington. The line break did not result in ignition and there were no injuries. On May 2, 2003, the Office of Pipeline Safety (OPS) initiated an investigation and issued a Corrective Action Order (CAO) requiring us to reduce the pressure in our 26-inch line from Sumas to Washougal, Washington to 80 percent of Maximum Allowable Operating Pressure (MAOP), determine the cause, and work to remedy the cause of the line break. We subsequently determined that the line break was caused by stress corrosion cracking (SCC) and implemented a variety of processes to ensure the integrity of our pipeline. Specifically, we completed surface and in-line inspection of certain segments of the line and were developing and executing plans to return the line to service prior to an additional line break occurring in December 2003.
On December 13, 2003, we experienced another line break on the same line seventy miles south near Toledo, Washington. This line break occurred during pendency of the OPS CAO referred to above and the
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In 2003, Northwest Pipeline transported natural gas for a total of 175 customers. Transportation customers include distribution companies, municipalities, interstate and intrastate pipelines, gas marketers and direct industrial users. The three largest customers of Northwest Pipeline in 2003 accounted for approximately 12.4 percent, 11.7 percent and 10.3 percent, respectively, of its total operating revenues. No other customer accounted for more than 10 percent of Northwest Pipelines total operating revenues in 2003. Northwest Pipelines firm transportation agreements are generally long-term agreements with various expiration dates and account for the major portion of Northwest Pipelines business. Additionally, Northwest Pipeline offers interruptible and short-term firm transportation service.
As a part of its transportation services, Northwest Pipeline utilizes underground storage facilities in Utah and Washington enabling it to balance daily receipts and deliveries. Northwest Pipeline also owns and operates a LNG storage facility in Washington that provides service for customers during a few days of extreme demands. These storage facilities have an aggregate firm delivery capacity of approximately 600 million cubic feet of gas per day.
Expansion projects |
Rockies Expansion Project |
On November 1, 2003, Northwest Pipeline placed into service most of the facilities associated with its Rockies Expansion Project, an expansion of its pipeline system designed to provide an additional 175 MDt/d of capacity to its transmission system in Wyoming and Idaho in order to reduce reliance on displacement capacity. The remaining facilities were placed into service on November 30, 2003. The project included the installation of 91 miles of pipeline loop and the upgrading or modification of six compressor stations for a total increase of 26,057 horsepower. A majority of Northwest Pipelines firm shippers agreed to support roll-in of the expansion costs into its existing rates. The estimated cost of the expansion project is approximately $140 million, of which approximately $16 million has been offset by settlement funds received from a former customer in connection with a contract restructuring. |
Evergreen Expansion Project |
On October 1, 2003, Northwest Pipeline placed into service its Evergreen Expansion Project, an expansion of its pipeline system designed to provide 277 Mdt/d of firm transportation service from Sumas, Washington to Chehalis, Washington to serve new power generation demand in western Washington. The project included installation of 28 miles of pipeline loop, upgrading, replacing or modifying five compressor stations and adding a net total of 64,160 horsepower of compression. The estimated cost of the expansion project is approximately $198 million including the allocated portion of the Columbia Gorge Project discussed below. The Evergreen Expansion customers have agreed to pay for the cost of service of this expansion on an incremental basis. |
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Columbia Gorge Expansion Project |
On October 1, 2003 Northwest Pipeline placed into service its Columbia Gorge project, an expansion of its pipeline system designed to replace 56 Mdt/d of northflow design displacement capacity from Stanfield, Oregon to Washougal, Washington. The project includes upgrading, replacing or modifying five existing compressor stations and adding a net total of 23,900 horsepower of compression. A majority of Northwest Pipelines firm shippers have agreed to support roll-in of approximately 84 percent of the expansion costs into the existing rates with the remainder to be allocated to the incremental Evergreen Expansion customers. The estimated cost of the expansion project is approximately $43 million. |
Operating statistics |
The following table summarizes transportation
data for the Northwest Pipeline System for the periods indicated:
2003
2002
2001
(In trillion British
Thermal Units)
682
729
734
1.9
2.0
2.0
2.3
2.3
2.2
.8
.5
.4
(1) | Consists primarily of additional capacity created from time to time through the installation of new receipt or delivery points or the segmentation of existing mainline capacity. Such capacity is generally marketed on a short-term firm basis, because it does not involve the construction of additional mainline capacity. |
Exploration & production
Exploration & production overview |
| We produce, develop, explore for and manage natural gas reserves primarily located in the Rocky Mountain and Mid-Continent regions of the United States. | |
| We produce natural gas predominately from tight-sand formations and coal bed methane reserves. | |
| We own 2.7 trillion cubic feet equivalent of proved natural gas reserves in the United States as of December 31, 2003. |
We also own and manage certain international oil and gas investments, including a 69 percent equity investment in APCO Argentina Inc., an oil and gas exploration and production company whose securities are traded on the NASDAQ under symbol APAGF.
Exploration & production details |
Our Exploration & Production segment, which is comprised of several wholly-owned subsidiaries, including Williams Production Company LLC and Williams Production RMT Company (RMT), produces, develops, explores for and manages natural gas reserves primarily located in the Rocky Mountain and Mid-Continent regions of the United States. We specialize in natural gas production from tight-sands formations and coal bed methane reserves in the Piceance, San Juan, Powder River and Arkoma basins. Over 99 percent of Exploration & Productions domestic reserves are natural gas. Our Exploration & Production segment is also comprised of international oil and gas interests, which include a 69 percent equity interest in APCO Argentina, an oil and gas exploration and production company with operations in Argentina, and a 10 percent interest in the La Concepcion area located in western Venezuela.
Exploration & Productions primary strategy is to utilize its expertise in the development of tight-sands and coalbed methane reserves. Exploration & Productions current proved undeveloped and probable reserves
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Information for our Exploration & Production segment relates only to domestic activity unless otherwise noted.
Pledged assets |
Certain exploration and production assets managed through RMT serve as collateral for a $500 million term loan facility established in May 2003 and amended in February 2004. This facility, as amended in February 2004, matures May 30, 2008 and represents a first priority lien on substantially all of our Piceance and Powder River basin assets and any future assets in these basins.
Oil and gas properties |
Exploration & Productions properties are located primarily in the Rocky Mountain and Mid-Continent regions of the United States. Rocky Mountain properties are located primarily in New Mexico, Wyoming and Colorado. All of our Mid-Continent properties are located in Oklahoma. We use the terms gross to refer to all wells or acreage in which we have at least a partial working interest and net to refer to our ownership represented by that working interest.
Rocky Mountain properties |
Piceance Basin |
The Piceance Basin is located in northwestern Colorado, where we primarily target the tight sands contained within the Williams Fork Mesaverde formation. The Piceance Basin is our largest area of concentrated development comprising approximately 58 percent of our proved reserves. This area has approximately 1,075 undrilled proved locations in inventory. Probable reserves in this basin provide significant potential beyond our existing proved reserves. Within this basin, we are the owner and operator of a natural gas gathering system and, thus, have the ability to gather, process and deliver to four interstate and one intrastate pipelines. In 2003, we drilled 76 gross wells and produced a net of approximately 64 billion cubic feet equivalent (Bcfe) of natural gas from the Piceance Basin. Our estimated proved reserves in the Piceance Basin at year-end 2003 were 1,560 Bcfe.
San Juan Basin |
The San Juan Basin is a large gas producing area, located in northwest New Mexico and southwest Colorado. We produce natural gas primarily from the Fruitland Coal, Mesaverde, Pictured Cliffs and Dakota formations. In 2003, we participated in the drilling of 173 gross wells, of which we operate 19, and produced a net of approximately 51 Bcfe from the San Juan Basin. Our estimated proved reserves in the San Juan Basin at year-end 2003 were 702 Bcfe.
Powder River Basin |
Located in northeast Wyoming, the Powder River Basin includes large areas with multiple coal seam potential, targeting thick coalbed methane formations at shallow depths. We are one of the largest natural gas producers in the Powder River Basin and operate approximately half of our large leasehold position in the basin, where we own an interest in approximately 1,000,000 gross acres. We operate 2,300 wells in the basin and have an interest in an additional 2,500 wells. We have a significant inventory of undrilled locations, providing long-term drilling opportunities. In 2003, we drilled 560 gross wells from this basin, of which we operate 410, and produced a net of approximately 47 Bcfe of natural gas. Our estimated proved reserves in the
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Mid-Continent properties |
Arkoma Basin |
Our Arkoma Basin properties are located in southeastern Oklahoma. Our production from the Arkoma Basin is primarily from the Hartshorne coal bed methane formation. We utilize horizontal drilling technology to develop the coal seams. We own and operate a natural gas gathering system, which enables us to move our natural gas production out of the basin. In 2003, we drilled 53 gross wells, of which we operate 33, and produced a net of approximately five Bcfe of natural gas. Our estimated proved reserves in the Arkoma Basin at year-end 2003 were 122 Bcfe.
Other properties |
We have production in other areas, including the Green River Basin, located in southwest Wyoming and the Gulf Coast region. These properties represent approximately two percent of our estimated proved reserves.
Gas reserves and wells |
The following table summarizes our natural gas
reserves as of December 31 (using prices at
December 31 held constant) for the year indicated:
2003
2002
2001
(Bcfe)
1,165
1,368
1,599
1,538
1,466
1,579
2,703
2,834
3,178
The following table summarizes our natural gas
reserves by basin as of December 31, 2003:
Percentage of
Basin
Proved Reserves
58%
26%
10%
6%
100%
No major discovery or other favorable or adverse event has caused a significant change in estimated gas reserves since year-end 2003. We have not filed on a recurring basis estimates of our total proved net oil and gas reserves with any U.S. regulatory authority or agency other than the Department of Energy (DOE) and the SEC. The estimates furnished to the DOE have been consistent with those furnished to the SEC, although Exploration & Production has not yet filed any information with respect to its estimated total reserves at December 31, 2003, with the DOE. Certain estimates filed with the DOE may not necessarily be directly comparable due to special DOE reporting requirements, such as requirements to report in some instances on a gross, net or total operator basis, and requirements to report in terms of smaller units. The underlying estimated reserves for the DOE did not differ by more than five percent from the underlying estimated reserves utilized in preparing the estimated reserves reported to the SEC.
Approximately 98 percent of our year-end 2003 United States proved reserves estimates were either audited by Netherland, Sewell & Associates, Inc. or, in the case of reserves estimates related to properties underlying the Williams Coal Seam Gas Royalty Trust, were prepared by Miller and Lents, LTD.
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The following table summarizes our leased acreage
as of December 31, 2003:
Gross Acres
Net Acres
697,654
312,849
2,205,420
567,640
At December 31, 2003, we owned interests in 7,923 gross producing wells (3,649 net) on our leasehold lands.
Operating statistics |
We focus on lower-risk development drilling. Our
drilling success rate was nearly 99 percent in 2003 and
98 percent in 2002. The following tables summarize domestic
drilling activity by number and type of well for the periods
indicated:
Number of 2003 Wells
Gross Wells
Net Wells
900
419
891
414
1,334
714
776
352
The majority of our natural gas production is currently being sold to Power generally at prevailing market prices. Because we currently have a low-risk drilling program in proven basins, the main component of risk that we manage is price risk. Exploration & Production has entered into derivative contracts with Power that hedge approximately 80 percent of projected 2004 domestic natural gas production. Power then enters into offsetting derivative contracts with unrelated third parties. Approximately 86 percent of our natural gas production in 2003 was hedged. Hedging decisions are made considering the overall Williams commodity risk exposure and are not executed independently by Exploration & Production, thus there are gas purchase hedging contracts executed on behalf of other Williams entities which taken as a net position may counteract Exploration & Production gas sales hedging derivatives.
The following table summarizes our sales and cost
information for the year indicated:
2003
2002
2001
182.1
211.5
130.7
$
.76
$
.58
$
.61
$
3.87
$
2.03
$
2.67
$
(.51
)
$
1.20
$
.46
Acquisitions |
On December 30, 2003, Williams Production Mid-Continent Company purchased various incremental ownership interests in certain Arkoma Basin properties located in Oklahoma. The acquisition, for which we paid cash of $11 million, added 33 Bcfe in proved reserves and 4.6 MMcf/d of production. We operate the majority of these properties.
Divestitures |
Effective April 1, 2003, RMT sold its interest in the Raton Basin located in south central Colorado and its interest in the Hugoton Embayment located in southwest Kansas, and Williams Production Company LLC sold its interest in a small portion of its outside-operated properties in the San Juan Basin located in northwest New Mexico and southwest Colorado. This divestiture comprised nearly 303 Bcfe in year-end 2002 reserves
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Effective April 1, 2003, RMT sold its interest in the Uinta Basin in Brundage Canyon, Utah, which consisted of nearly 53 Bcfe in year-end 2002 reserves and 13 MMcfe per day in production.
Effective April 1, 2003, RMT sold its interest in the West Side Canal properties located in the Green River Basin in southwest Wyoming and its interest in the Denver-Julesberg Basin properties in northeastern Colorado, which together represent approximately 26 Bcfe in year-end 2002 reserves and around 7.5 MMcfe per day in production.
Environmental and other regulatory matters |
Our Exploration & Production business is subject to various federal, state and local laws and regulations on taxation, the exploration for and development, production and marketing of oil and gas, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of production, water discharge, prevention of waste and other matters. Such laws and regulations have increased the costs of planning, designing, drilling, installing, operating and abandoning our oil and gas wells and other facilities. In addition, these laws and regulations, and any others that are passed by the jurisdictions where we have production, could limit the total number of wells drilled or the allowable production from successful wells which could limit our reserves.
Our operations are subject to complex environmental laws and regulations adopted by the various jurisdictions in which we operate. We could incur liability to governments or third parties for any unlawful discharge of oil, gas or other pollutants into the air, soil, or water, including responsibility for remedial costs. We could potentially discharge such materials into the environment in many ways including:
| from a well or drilling equipment at a drill site; | |
| leakage from gathering systems, pipelines, transportation facilities and storage tanks; | |
| damage to oil and gas wells resulting from accidents during normal operations; and | |
| blowouts, cratering and explosions. |
Because the requirements imposed by such laws and regulations are frequently changed, we cannot assure you that laws and regulations enacted in the future, including changes to existing laws and regulations, will not adversely affect our business. In addition, because we acquire properties that have been operated in the past by others, we may be liable for environmental damage caused by such former operators.
Competition |
The natural gas industry is highly competitive. We compete in the areas of property acquisitions and the development, production and marketing of, and exploration for, natural gas with major oil companies, other independent oil and natural gas concerns and individual producers and operators. We also compete with major and independent oil and gas concerns in recruiting and retaining qualified employees.
Ownership of property |
The majority of our ownership interest in exploration and production properties are held as working interests in oil and gas leaseholds.
Other information |
In 1993, Exploration & Production conveyed a net profits interest in certain of its properties to the Williams Coal Seam Gas Royalty Trust. Substantially all of the production attributable to the properties conveyed to the trust was from the Fruitland coal formation and constituted coal seam gas. Williams subsequently sold trust units to the public in an underwritten public offering and retained 3,568,791 trust units representing 36.8 percent of outstanding trust units. During 2000, we sold all of our trust units as part of a
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In March 2001, Williams Production Company LLC transferred certain interests in coal seam gas properties located in the San Juan Basin of New Mexico and Colorado to a third party. These properties are burdened by net profits interests held by the Williams Coal Seam Gas Royalty Trust. Williams Production Company exercised its right to repurchase the underlying properties pursuant to the original purchase and sale agreement. This repurchase of the underlying properties by Williams Production Company LLC was completed in May 2003 and effective January 1, 2003.
In May 2000, Williams Production Company LLC transferred certain interests in coal seam gas properties located in the San Juan Basin of New Mexico to a third party. Williams exercised its right to repurchase these certain interests pursuant to the original purchase and sale agreement. The repurchase of these interests by Williams Production Company LLC was effective January 1, 2003.
International exploration and production interests |
We also have investments in international oil and gas interests. We own approximately a 69 percent interest in APCO Argentina Inc., an oil and gas exploration and production company with operations in Argentina, whose securities are traded on the NASDAQ stock market. APCO Argentinas principal business is its 52.9 percent interest in the Entre Lomas concession in southwest Argentina. It also owns a 82.0 percent interest in the Canadon Ramirez concession, a 50 percent interest in the Capricorn Exploration Permit and a 1.5 percent interest in the Acambuco concession. We also own a direct 1.5 percent interest in Acambuco through our Northwest Argentina subsidiary. In Venezuela, we own a 10 percent interest in the La Concepcion area, located in Western Venezuela, near Lake Maracaibo. If combined with our domestic proved reserves, these interests would make up 7.3 percent of our total proved reserves.
Midstream
Midstream overview |
| We own and operate gas gathering, treating and processing facilities within the western states of Wyoming, Colorado, and New Mexico and the onshore and offshore shelf and deepwater areas in and around the Gulf Coast states of Texas, Alabama, Mississippi, and Louisiana including ownership and operation of approximately 8,500 miles of gathering lines, nine natural gas processing plants (one of which is partially owned), and eight natural gas treating plants within the United States. In addition to these natural gas assets, we own and operate two crude oil pipelines totaling over 150 miles of pipeline. | |
| We own interests in and/or operate natural gas liquids fractionation and storage assets in central Kansas and southern Louisiana. | |
| We own a 41.67 percent interest and operate an ethylene production, storage and transportation complex and a 100 percent interest and operate olefin extraction assets within Louisiana. | |
| We own and/or operate three natural gas processing plants (one partially owned), a liquid extraction plant, and an olefin fractionation facility within Alberta, Canada. We intend to sell certain of our Canadian assets. | |
| We have ownership interests in various Venezuelan midstream energy assets. |
Midstream details |
Our Midstream segment, one of the nations largest natural gas gatherers and processors, has primary service areas concentrated in the major producing basins of San Juan, Wyoming, the Gulf Coast, Venezuela and Canada. Our businesses gathering, treating, processing, fractionation, storage and transportation fall
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Although much of our gas services are performed for a volumetric-based fee, a portion of our gas processing contracts are commodity-based and include two distinct types of commodity exposure. The first type includes Keep Whole processing contracts whereby we receive the liquids extracted and replace the lost heating value with natural gas. Under these contracts, we are exposed to the spread between NGLs and natural gas prices. The second type consists of Percent of Liquids contracts whereby we receive a portion of the extracted liquids with no exposure to the price of natural gas. Under these contracts, we are only exposed to NGL price movements.
Key variables for our business will continue to be (1) the revenue growth associated with additional infrastructure recently completed in late 2003 and planned for 2004 in the deepwater portion of the Gulf of Mexico, (2) the execution of our remaining planned asset sales, and (3) the commodity prices impacting our commodity-based processing activities. With increased fee-based business in the deepwater and the planned sale of our Canadian liquids extraction plants, our exposure to commodity prices is expected to decline in future periods.
Domestic gathering and processing |
Geographically, our natural gas assets are positioned to maximize commercial and operational synergies. For example, most of our offshore gathering and processing assets attach and condition natural gas supplies to the Williams Transco pipeline. Also, our gathering and processing facilities in the San Juan Basin handle about 80 percent of our Exploration & Production groups wellhead production in this basin. Several of our western gathering systems serve as critical sources of supply for Williams Northwest Pipeline customers. We gather the largest volume of gas in the San Juan Basin. We produce approximately one-half of the natural gas liquids coming out of Wyoming and we gather 40 percent of the gas produced in the western Gulf of Mexico.
We own and/or operate domestic gas gathering and processing assets primarily within the western states of Wyoming, Colorado and New Mexico, and the onshore and offshore shelf and deepwater areas in and around the Gulf Coast states of Texas, Louisiana, Mississippi and Alabama. These assets consist of approximately 8,500 miles of gathering pipelines with a capacity in excess of 7.9 billion cubic feet per day (including certain gathering lines owned by Transco but operated by Midstream), 9 processing plants (one partially owned) and 8 natural gas treating plants with a combined daily inlet capacity in excess of 5.3 billion cubic feet per day. In addition to these natural gas assets, we own and operate two crude oil pipelines totaling over 150 miles with a capacity of more than 160,000 barrels per day. This includes our recently completed Alpine crude oil pipeline in the deepwater Gulf of Mexico that serves the Kerr McGee-operated Gunnison field.
Included in the natural gas assets listed above are the assets of Discovery Producer Services LLC and its subsidiary Discovery Gas Transmission Services LLC (Discovery). We own a 50 percent interest in Discovery and operate its facilities. Discoverys assets include a cryogenic natural gas processing plant near Larose, Louisiana, a natural gas liquids fractionator plant near Paradis, Louisiana and an offshore natural gas gathering and transportation system.
Gulf Coast petrochemical and olefins |
In southern Louisiana, we provide customers in the petrochemical industry a full suite of products and services. These operations include a 42 percent interest in a 1.3 billion pound per year ethylene production, storage and transportation complex in Geismar, Louisiana. Also, our Gulf Liquids New River LLC (Gulf Liquids) business consists of two refinery off-gas processing facilities, an olefinic fractionator and propylene splitter and connecting pipeline system. During 2003, we announced our intention to sell Gulf Liquids and we continue to market for sale certain of the petrochemical pipeline and storage assets located in Geismar, Louisiana with the expectation that these assets will be sold in the first half of 2004.
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Venezuela |
Our Venezuelan investments involve gas compression recovery and gas gathering and processing operations. We own controlling interests in three gas compressor facilities. These facilities help stabilize the reservoir and enhance the recovery of crude oil by re-injecting natural gas at high pressures. We also own a 49.25 percent interest in two 400 MMcf/d natural gas liquids extraction plants, a 50,000 barrels per day natural gas liquids fractionation plant and associated storage and refrigeration facilities.
Our compression facilities provide roughly 70 percent of the gas injections in eastern Venezuela. These injections allow our sole customer, Petroleos de Venezuela S.A. (PDVSA) to freely produce approximately 500,000 barrels of oil per day, which is roughly 50 percent of PDVSAs eastern crude oil production.
Prior to 2003, our Venezuelan operations included an operations contract for an oil loading and storage facility. We operated these facilities on behalf of PDVSA, the owner of these facilities. In December 2002, we were removed as operator of these facilities in connection with the nationwide strike within Venezuela. We are presently in arbitration with PDVSA regarding the termination of this contract.
Canada |
Our Canadian operations include three natural gas straddle plants (one partially owned) in Alberta, Canada, a liquids extraction plant located near Ft. McMurray, Alberta and an olefin fractionation facility near Edmonton, Alberta. Our interests in these straddle plants are capable of processing more than 5.5 billion cubic feet of gas per day. The facilities located at Ft. McMurray and near Edmonton, extract olefin liquids from the off-gas produced from oil sands and then fractionate, treat, store and terminal the propane and propylene recovered from this process. We continue to be the largest gas processor and ethane producer in Canada, the only olefins fractionator in Western Canada, and the only processor of oil sands off-gas.
During 2003, we announced two separate sales related to our Canadian assets. We closed the sale of our West Stoddart natural gas processing plant to Canadian Natural Resources Limited on August 1, 2003. On September 30, 2003, we closed on the sale of our natural gas liquids fractionation, storage and distribution system in Redwater, Alberta to Provident Energy Trust. We continue to market for sale our natural gas straddle plants with the expectation of selling these assets before the end of 2004 and intend to retain our Ft. McMurray liquids extraction plant and our olefin fractionation, storage and distribution facility in Redwater, Alberta.
Other |
We own interests in and/or operate natural gas liquid fractionation and storage assets. These assets include two partially owned natural gas liquid fractionation facilities near McPherson, Kansas and Baton Rouge, Louisiana that have a combined capacity in excess of 160,000 barrels per day. We also own approximately 20 million barrels of natural gas liquid storage capacity in central Kansas.
We also own a 14.6 percent interest in Aux Sable Liquid Products LP, which owns and operates a natural gas liquids extraction and fractionation facility located in the Village of Channahon, Illinois. Natural gas delivered from the Alliance Pipeline System is processed at the plant before it is redelivered to the Alliance shippers at downstream interconnecting pipelines. The recovered liquids are sold in the U.S. Midwest and Canada.
Expansion projects |
Gathering and processing Wyoming expansion |
We have been selected by Shell Exploration & Production Company affiliates to process their incremental natural gas production from the Pinedale Anticline in southwestern Wyoming. To accommodate the projected volumes, a fourth cryogenic processing train is being added to our existing gas plant in Opal, Wyoming. The new train has a processing capacity of 350 MMcf/d and is capable of extracting more than 7,000 barrels of natural gas liquids.
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Willbros Mt. West, a business unit of Willbros Group, Inc., an unaffiliated third party, funded the new train, which will be commissioned in the first quarter of 2004. Willbros will own the new train and we will operate it under an operating and processing agreement. This project will boost Opals overall processing capacity from 750 MMcf/d to more than 1.1 billion cubic feet per day, with the ability to recover in excess of 50,000 barrels per day of NGL products.
As our scale increases at Opal, our per unit operating and capital costs will go down, which should increase the value of these operations. The fourth train also allows us to provide the most reliable and flexible services available to producers in the area.
Gathering and processing deepwater projects |
The deepwater Gulf continues to be an attractive growth area for our Midstream business. Investments like our Alpine pipeline and Devils Tower production facilities continue to increase our fee-based business and our scale in the Gulf.
Our Devils Tower project, a floating production system and associated pipelines built to initially serve Dominion Exploration and Productions Devils Tower discovery in Mississippi Canyon Block 773, is scheduled to be in service in the second quarter of 2004. The facility is located about 180 miles southeast of New Orleans in a water depth of 5,610 feet. This project required us to construct and own a floating production facility, a 90-mile gas pipeline and a 120-mile oil pipeline to handle the production from the Devils Tower discovery. The oil will be transported to ChevronTexacos Empire Terminal in Plaquemines Parish, Louisiana. The gas will be delivered into Transcos pipeline, and processed at our Mobile Bay Plant to recover the natural gas liquids. The estimated capital costs including capitalized interest for this project is approximately $512 million.
Our new 18-inch oil pipeline, Alpine, became operational on December 14, 2003 and has a capacity of transporting an estimated 84,000 barrels of oil per day. The pipeline extends 96 miles from Garden Banks Block 668 in the central Gulf of Mexico to our shallow-water platform at Galveston Area Block A244. From the platform, the oil is delivered onshore through ExxonMobils Hoover Offshore Oil Pipeline System under a joint tariff agreement. The initial oil production is coming from the Gunnison field, which is located in 3,150 feet of water and operated by Kerr-McGee Oil & Gas Corp., a wholly owned affiliate of Kerr-McGee Corporation.
Customers and operations |
Our domestic gas gathering and processing customers are generally natural gas producers who have proved and/or producing natural gas fields in the areas surrounding our infrastructure. During 2003, these operations gathered gas for over 200 customers and processed gas for approximately 100 customers. Our top four gathering and processing customers accounted for about one-third (1/3) of our domestic gathering revenue and processing gross margin. Our gathering and processing agreements are generally long-term agreements.
In addition to our gathering and processing operations, we also market natural gas liquids and petrochemical products to a wide range of users in the energy and petrochemical industries. We provide these products to third parties from the production at our domestic facilities. The majority of domestic sales are based on supply contracts of less than one-year in duration. Our Canadian operations sell the ethane produced from the Canadian facilities to third party end users and the plant operator markets the remainder of the products. Our Canadian ethane sales contracts are typically long-term in nature.
Our Venezuelan assets were constructed and are currently operated for the exclusive benefit of PDVSA, the state owned petroleum corporation of Venezuela. The significant contracts are 20 years in duration with revenues based on a combination of fixed capital payments, throughput volumes, and in the case of one of the gas compression facilities, a minimum throughput guarantee. During December 2002 and early 2003, a countrywide strike took place within Venezuela that resulted in significant political instability and a volatile economic environment. The Venezuelan economic and political environment remains fluid and volatile, but
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Financial & operating statistics |
The following table summarizes our significant
operating statistics for Midstream:
2003
2002
2001
2,207
2,108
2,174
129
135
122
120
135
131
282
147
31
68
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0
(1) | Excludes volumes associated with partially owned assets that are not consolidated for financial reporting purposes. |
(2) | Annual Average mbbls/d (thousand barrels per day). |
(3) | Deepwater volumes are included in the Domestic Gathering volumes listed above. |
(4) | 2001 and 2002 NGL Production volumes have been restated to reflect asset sales. |
Regulatory and environmental matters |
Under the Natural Gas Act (NGA), gathering and processing facilities and services are generally not subject to the regulatory authority of the FERC. Onshore gathering is reserved to the states and offshore gathering is subject to the Outer Continental Shelf Lands Act (OCSLA).
Of the states where Midstream operates, currently only Kansas, Oklahoma and Texas actively regulate gathering activities. Those states regulate gathering through complaint mechanisms under which the state commission may resolve disputes involving an individual gathering arrangement. Although gathering facilities located offshore are not subject to the NGA, some controversy exists as to how the FERC should determine whether offshore facilities function as gathering. These issues are currently before the FERC and appellate courts. Most gathering facilities offshore are subject to the OCSLA, which provides in part that outer continental shelf pipelines must provide open and nondiscriminatory access to both owner and non-owner shippers.
Midstreams business operations are subject to various federal, state, and local environmental and safety laws and regulations. The Discovery and other pipeline systems are subject to FERC regulation common to interstate gas transmission. Midstreams liquid pipeline operations are subject to the provisions of the Hazardous Liquid Pipeline Safety Act. Certain of our pipelines also file tariff rates covering intrastate movements with various state commissions. The United States Department of Transportation has prescribed safety regulations for common carrier pipelines. The pipeline systems are subject to various state laws and regulations concerning safety standards, exercise of eminent domain, and similar matters. The Kansas Department of Health and Environment (KDHE) has adopted new regulations to govern underground storage in Kansas, which will require additional equipment and testing for Midstreams storage operations in Kansas.
Our remaining Midstream Canadian assets are regulated by the Alberta Energy & Utilities Board (AEUB) and Alberta Environment. The regulatory system for the Alberta oil and gas industry incorporates a large measure of self-regulation, providing that licensed operators are held responsible for ensuring that their operations are conducted in accordance with all provincial regulatory requirements. For situations in which non-compliance with the applicable regulations is at issue, the AEUB and Alberta Environment have implemented an enforcement process with escalating consequences.
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Competition |
The gathering and processing business is a regional business with varying competitive factors in each basin. Our gathering and processing business competes with other midstream companies, interstate and intrastate pipelines, master limited partnerships (MLP), producers and independent gatherers and processors. We primarily compete with five to ten companies across all basins in which we provide services. Our focus is to provide our customers with reliable service at a competitive price.
Numerous factors impact any given customers choice of a gathering or processing services provider, including rate, location, term, timeliness of well connections, pressure obligations and the willingness of the provider to process for either a fee or for liquids taken in-kind. Our gathering and processing services are generally covered by long-term contracts with applicable acreage or reserve dedications. The active drilling programs near our relatively large positions in the San Juan Basin, Wyoming area and Gulf Coast Region are indicators that demand for future gathering and processing infrastructure and services should continue.
Ownership of property |
We typically own our gathering and processing facilities. We construct and maintain gathering pipeline systems pursuant to rights-of-way, easements, permits, licenses, and consents on and across properties owned by others. Some portion of the compression equipment used to lower field pressures to the natural gas wells that we gather are leased. The compressor stations and gas processing and treating facilities are located in whole or in part on lands owned by our subsidiaries or on sites held under leases or permits issued or approved by public authorities.
Other
At year end, we owned approximately 32% of Longhorn Partners Pipeline, L.P. (Longhorn) which owns a refined petroleum products pipeline form Houston, Texas to El Paso, Texas. During February 2004, we participated in a recapitalization plan completed by Longhorn following which, our subsidiaries, Longhorn Enterprises of Texas, Inc. (LETI) and Williams Petroleum Services, LLC (WPS), together own, directly or indirectly, approximately 94.7% of the Class B Interests in Longhorn Pipeline Investors, LLC (Pipeline Investors) and approximately 22.7% of the Common Interests therein. Pipeline Investors now indirectly owns Longhorn. The recapitalization provided the funds necessary to complete final construction and start-up of the pipeline and operations are expected to commence by mid-year 2004. As part of the recapitalization, LETI sold a portion of its limited partner interests in Longhorn for $11.4 million, and LETI and WPS sold a portion of the debt owed to them individually by Longhorn for approximately $58 million. In addition, in exchange for the Common Interests described above, LETI contributed the remaining balance of its limited partnership interests, and WPS contributed all of its general partnership interests in the general partner of Longhorn. LETI and WPS also exchanged the remaining debt owed by Longhorn for the Class B Interests described above. The Class B Interests are preferred interests but subordinate to the new investors, preferred interests, and the Common Interests are subordinate to both.
Additional business segment information |
Our ongoing business segments are accounted for as continuing operations in the accompanying financial statements and notes to financial statements included in Part II. Assets announced to be sold are also included in continuing operations until such time that they qualify for treatment as discontinued operations under GAAP.
Our Petroleum Services segment is now reported within Other as a result of the Alaska refinery and related assets being reflected as discontinued operations. Our Other segment consists of corporate operations and certain continuing operations previously reported with the International and Petroleum Services segments.
Other assets sold in 2003 or subject to an approved sale have also been reclassified in accordance with GAAP, from their traditional business segment to Discontinued Operations in the accompanying financial statements and notes to financial statements included in Part II.
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Our corporate parent company performs certain management, legal, financial, tax, consultative, administrative and other services for our subsidiaries
Our principal sources of cash are from external financings, dividends and advances from our subsidiaries, investments, payments by subsidiaries for services rendered, interest payments from subsidiaries on cash advances and net proceeds from asset sales. The amount of dividends available to us from subsidiaries largely depends upon each subsidiarys earnings and operating capital requirements. The terms of many of our subsidiaries borrowing arrangements limit the transfer of funds to us.
We believe that we have adequate sources and availability of raw materials and commodities for existing and anticipated business needs. With the deterioration of our credit ratings, we now must provide additional margin, adequate assurance and pre-pay for gas supplies to support our energy commodity operations. Our pipeline systems are all regulated in various ways resulting in the financial return on the investments made in the systems being limited to standards permitted by the regulatory agencies. Each of the pipeline systems has ongoing capital requirements for efficiency and mandatory improvements, with expansion opportunities also necessitating periodic capital outlays.
ENVIRONMENTAL MATTERS
In addition to the environmental matters included in the business segment discussions above, a description of environmental claims is included in Note 16 of our Notes to Consolidated Financial Statements and is incorporated herein by reference.
EMPLOYEES
At March 1, 2004, we had approximately 4,800 full-time employees including 1,819 at the corporate level, 250 at Power, 1,449 at Gas Pipeline, 317 at Exploration & Production, and 965 at Midstream. None of our employees are represented by unions or covered by collective bargaining agreements. We expect further workforce reductions in 2004 as a result of further cost reduction efforts and asset sales.
FORWARD LOOKING STATEMENTS/ RISK FACTORS AND CAUTIONARY STATEMENT
Certain matters discussed in this annual report, excluding historical information, include forward-looking statements statements that discuss our expected future results based on current and pending business operations. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this Form 10-K which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements can be identified by words such as anticipates, believes, could, continues, estimates, expects, forecasts, might, planned, potential, projects, scheduled or similar expressions. These forward-looking statements include, among others, such things as:
| amounts and nature of future capital expenditures; | |
| expansion and growth of our business and operations; | |
| business strategy; | |
| estimates of proved gas and oil reserves; | |
| reserve potential; |
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| development drilling potential; and | |
| power and gas prices and demand. |
These statements are based on certain assumptions and analysis made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. Although we believe these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a number of assumptions, uncertainties and risks that could cause future results to be materially different from the results stated or implied in this document.
These risks and uncertainties include:
| general economic and market conditions; | |
| changes in laws or regulations; | |
| continued availability of capital and financing; and | |
| other factors, most of which are beyond our control. |
Events in 2002 significantly impacted the risk environment all businesses face and raised a level of uncertainty in the capital markets that has approached that which lead to the general market collapse of 1929. Beliefs and assumptions as to what constitutes appropriate levels of capitalization and fundamental value have changed abruptly. The collapse of Enron and the energy industry is a new reality that has had and will likely continue to have specific impacts on all companies, including us.
RISK FACTORS
You should carefully consider the following risk factors in addition to the other information in this annual report. Each of these factors could adversely affect our business, operating results, and financial condition as well as adversely affect the value of an investment in our securities.
Risks related to our business
Our risk measurement and hedging activities might not prevent losses. |
Although we have risk management systems in place that use various methodologies to quantify risk, these systems might not always be followed or might not always work as planned. Further, such risk measurement systems do not in themselves manage risk, and adverse changes in energy commodity market prices, volatility, adverse correlation of commodity prices, the liquidity of markets, and changes in interest rates might still adversely affect our earnings and cash flows and our balance sheet under applicable accounting rules, even if risks have been identified.
To lower our financial exposure related to commodity price and market fluctuations, we have entered into contracts to hedge certain risks associated with our assets and operations, including our long-term tolling agreements. In these hedging activities, we have used fixed-price, forward, physical purchase and sales contracts, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible. Substantial declines in market liquidity, however, as well as deterioration of our credit, and termination of existing positions (due for example to credit concerns) have greatly limited our ability to hedge risks identified and have caused previously hedged positions to become unhedged. To the extent we have unhedged positions, fluctuating commodity prices could cause our net revenues and net income to be volatile.
Some of the hedges of our tolling contracts are more effective than others in reducing economic risk and creating future cash flow certainty. For example, we may resell our rights under a tolling contract through a forward contract, which has terms that match those of the tolling contract. This type of forward contract would be very effective at hedging not only the commodity price risk but also the volatility risk inherent in the tolling contract. However, this forward contract would not hedge the tolling contracts counterparty credit or
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The impact of changes in market prices for natural gas on the average gas prices received by us may be reduced based on the level of our hedging strategies. These hedging arrangements may limit our potential gains if the market prices for natural gas were to rise substantially over the price established by the hedge. In addition, our hedging arrangements expose us to the risk of financial loss in certain circumstances, including instances in which:
| production is less than expected; | |
| a change in the difference between published price indexes established by pipelines in which our hedged production is delivered and the reference price established in the hedging arrangements is such that we are required to make payments to our counterparties; or | |
| the counterparties to our hedging arrangements fail to honor their financial commitments. |
Electricity, natural gas liquids and gas prices are volatile and this volatility could adversely affect our financial results, cash flows, access to capital and ability to maintain existing businesses. |
Our revenues, operating results, profitability, future rate of growth and the value of our power and gas businesses depend primarily upon the prices we receive for natural gas and other commodities. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raise additional capital.
Historically, the markets for these commodities have been volatile and they are likely to continue to be volatile. Wide fluctuations in prices might result from relatively minor changes in the supply of and demand for these commodities, market uncertainty and other factors that are beyond our control, including:
| worldwide and domestic supplies of electricity, natural gas, petroleum, and related commodities; | |
| turmoil in the Middle East and other producing regions; | |
| weather conditions; | |
| the level of consumer demand; | |
| the price and availability of alternative fuels; | |
| the availability of pipeline capacity; | |
| the price and level of foreign imports; | |
| domestic and foreign governmental regulations and taxes; | |
| increased volatility in the natural gas markets in light of continuing uncertainty surrounding regulatory proceedings and proposed regulations; | |
| the overall economic environment; and | |
| the credit of participants in the markets where products are bought and sold. |
These factors and the volatility of the energy markets make it extremely difficult to predict future electricity and gas price movements with any certainty. Further, electricity and gas prices do not necessarily move in tandem.
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We might not be able to successfully manage the risks associated with selling and marketing products in the wholesale energy markets. |
Our portfolios consist of wholesale contracts to buy and sell commodities, including contracts for electricity, natural gas, natural gas liquids and other commodities that are settled by the delivery of the commodity or cash throughout the United States. If the values of these contracts change in a direction or manner that we do not anticipate or cannot manage, we could realize material losses from our marketing. In the past, certain marketing and trading companies have experienced severe financial problems due to price volatility in the energy commodity markets. In certain instances this volatility has caused companies to be unable to deliver energy commodities that they had guaranteed under contract. In such event, we might incur additional losses to the extent of amounts, if any, already paid to, or received from, counterparties. In addition, in our businesses, we often extend credit to our counterparties. Despite performing credit analysis prior to extending credit, we are exposed to the risk that we might not be able to collect amounts owed to us. If the counterparty to such a financing transaction fails to perform and any collateral that secures our counterpartys obligation is inadequate, we will lose money.
If we are unable to perform under our energy agreements, we could be required to pay damages. These damages generally would be based on the difference between the market price to acquire replacement energy or energy services and the relevant contract price. Depending on price volatility in the wholesale energy markets, such damages could be significant.
Our operating results might fluctuate on a seasonal and quarterly basis. |
Revenues from our businesses, including gas transmission and the sale of electric power, can have seasonal characteristics. In many parts of the country, demand for power peaks during the hot summer months, with market prices also peaking at that time. In other areas, demand for power peaks during the winter. In addition, demand for gas and other fuels peaks during the winter. As a result, our overall operating results in the future might fluctuate substantially on a seasonal basis. The pattern of this fluctuation might change depending on the nature and location of our facilities and pipeline systems and the terms of our power sale agreements and gas transmission arrangements.
Our investments and projects located outside of the United States expose us to risks related to laws of other countries, taxes, economic conditions, fluctuations in currency rates, political conditions and policies of foreign governments. These risks might delay or reduce our realization of value from our international projects. |
We currently own and might acquire and/or dispose of material energy-related investments and projects outside the United States. The economic and political conditions in certain countries where we have interests or in which we might explore development, acquisition or investment opportunities present risks of delays in construction and interruption of business, as well as risks of war, expropriation, nationalization, renegotiation, trade sanctions or nullification of existing contracts and changes in law or tax policy, that are greater than in the United States. The uncertainty of the legal environment in certain foreign countries in which we develop or acquire projects or make investments could make it more difficult to obtain non-recourse project or other financing on suitable terms, could adversely affect the ability of certain customers to honor their obligations with respect to such projects or investments and could impair our ability to enforce our rights under agreements relating to such projects or investments.
Operations in foreign countries also can present currency exchange rate and convertibility, inflation and repatriation risk. In certain conditions under which we develop or acquire projects, or make investments, economic and monetary conditions and other factors could affect our ability to convert our earnings denominated in foreign currencies. In addition, risk from fluctuations in currency exchange rates can arise when our foreign subsidiaries expend or borrow funds in one type of currency but receive revenue in another. In such cases, an adverse change in exchange rates can reduce our ability to meet expenses, including debt service obligations. Foreign currency risk can also arise when the revenues received by our foreign subsidiaries are not in U.S. dollars. In such cases, a strengthening of the U.S. dollar could reduce the amount of cash and
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Risks related to legal proceedings and governmental investigations
We might be adversely affected by governmental investigations and any related legal proceedings related to our power business. |
Public and regulatory scrutiny of the energy industry and of the capital markets has resulted in increased regulation being either proposed or implemented. Such scrutiny has also resulted in various inquiries, investigations and court proceedings.
Such inquiries, investigations and court proceedings are ongoing and continue to adversely affect our business as well as the energy trading business as a whole. We might see these adverse effects continue as a result of the uncertainty of these ongoing inquiries or additional inquiries by federal or state regulatory agencies. In addition, we cannot predict the outcome of any of these inquiries or whether these inquiries will lead to additional legal proceedings against us, civil or criminal fines or penalties, or other regulatory action, including legislation, which might be materially adverse to the operation of our business and our revenues and net income or increase our operating costs in other ways.
Risks affecting our strategy and financing needs
Our ability to timely divest our wholesale power and energy trading business may be dependent on factors outside of our control. |
In June 2002, we announced our intention to exit the wholesale power and energy trading business and divest our trading portfolio. Our ability to do so in a timely manner may be subject to circumstances outside of our control, such as our ability to attract a creditworthy buyer for the portfolio, reduced market activity, market conditions and creditworthiness of counterparties to the contracts in the trading portfolio. Liquidation or divestiture of all or parts of our wholesale power and energy trading business may require that we liquidate contracts or assets at a value that is less than our carrying value or the value we would expect to receive if we retained the benefits of those contracts.
Recent developments affecting the wholesale power and energy trading industry sector have reduced market activity and liquidity and might continue to adversely affect our results of operations. |
As a result of the 2000-2001 energy crisis in California, the resulting collapse in energy merchant credit, the recent volatility in natural gas prices, the Enron Corporation bankruptcy filing, and investigations by governmental authorities into energy trading activities and increased litigation related to such inquiries, companies generally in the regulated and so-called unregulated utility businesses have been adversely affected.
These market factors have led to industry-wide downturns that have resulted in some companies being forced to exit from the energy trading markets, leading to a reduction in the number of trading partners and in market liquidity and announcements by us, other energy suppliers and gas pipeline companies of plans to sell large numbers of assets in order to boost liquidity and strengthen their balance sheets. Proposed and completed sales by other energy suppliers and gas pipeline companies could increase the supply of the type of assets we are attempting to sell and potentially lead either to our failing to execute such asset sales or our obtaining lower prices on completed asset sales.
Because we no longer maintain investment grade credit ratings, our counterparties have required us to provide higher amounts of credit support which raises our cost of doing business. |
Our transactions in each of our businesses require greater credit assurances, both to be given from, and received by, us to satisfy credit support requirements. Additionally, certain market disruptions or a further
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| further economic downturns; | |
| capital market conditions generally; | |
| market prices for electricity and natural gas; | |
| terrorist attacks or threatened attacks on our facilities or those of other energy companies; or | |
| the overall health of the energy industry, including the bankruptcy or insolvency of other energy companies. |
Despite our restructuring efforts, we may not attain investment grade ratings. |
Credit rating agencies perform independent analysis when assigning credit ratings. Given the significant changes in capital markets and the energy industry over the last few years, credit rating agencies continue to review the criteria for attaining investment grade ratings. Our goal is to attain investment grade ratings. However, there is no guarantee that the credit rating agencies will assign us investment grade ratings once we meet or exceed their criteria for investment grade ratings.
Risks related to the regulation of our businesses
Our businesses are subject to complex government regulations. The operation of our businesses might be adversely affected by changes in these regulations or in their interpretation or implementation. |
Existing regulations might be revised or reinterpreted, new laws and regulations might be adopted or become applicable to us or our facilities, and future changes in laws and regulations might have a detrimental effect on our business. Certain restructured markets have recently experienced supply problems and price volatility. These supply problems and volatility have been the subject of a significant amount of press coverage, much of which has been critical of the restructuring initiatives. In some of these markets, including California, proposals have been made by governmental agencies and other interested parties to re-regulate areas of these markets which have previously been deregulated. We cannot assure you that other proposals to re-regulate will not be made or that legislative or other attention to the electric power restructuring process will not cause the deregulation process to be delayed or reversed.
On November 25, 2003, the FERC issued a final rule, Order No. 2004, that adopted new standards of conduct for transmission providers to follow when dealing with their energy affiliates. Order No. 2004 may require substantial changes to our internal leadership structure that may have an adverse impact on our ability to effectively run our business. Our transmission providers must comply with the new standards of conduct and post procedures on the internet indicating how they will do so by June 1, 2004. The precise scope of the new rule is unclear and clarification has been requested from FERC. That clarification may not be received until after the June 1 deadline, and so the new procedures we implement to meet the standards of Order No. 2004 may not be adequate in spite of our efforts to comply with the new rule.
Our revenues might decrease if we are unable to gain adequate, reliable and affordable access to transmission and distribution assets due to the FERC and regional regulation of wholesale market transactions for electricity and gas. |
We depend on transmission and distribution facilities owned and operated by utilities and other energy companies to deliver the electricity and natural gas we buy and sell in the wholesale market. If transmission is disrupted, if capacity is inadequate, or if credit requirements or rates of such utilities or energy companies are increased, our ability to sell and deliver products might be hindered. The FERC has issued power transmission regulations that require wholesale electric transmission services to be offered on an open-access, non-discriminatory basis. Although these regulations are designed to encourage competition in wholesale market transactions for electricity, some companies have failed to provide fair and equal access to their transmission systems or have not provided sufficient transmission capacity to enable other companies to transmit electric
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In addition, the independent system operators who oversee the transmission systems in regional power markets, such as California, have in the past been authorized to impose, and might continue to impose, price limitations and other mechanisms to address volatility in the power markets. These types of price limitations and other mechanisms might adversely impact the profitability of our wholesale power marketing and trading. Given the extreme volatility and lack of meaningful long-term price history in many of these markets and the imposition of price limitations by regulators, independent system operators or other marker operators, we can offer no assurance that we will be able to operate profitably in all wholesale power markets.
The different regional power markets in which we compete or will compete in the future have changing regulatory structures, which could affect our growth and performance in these regions. |
Our results are likely to be affected by differences in the market and transmission regulatory structures in various regional power markets. Problems or delays that might arise in the formation and operation of new regional transmission organizations (RTOs) might restrict our ability to sell power produced by our generating capacity to certain markets if there is insufficient transmission capacity otherwise available. The rules governing the various regional power markets might also change from time to time which could affect our costs or revenues. Because it remains unclear which companies will be participating in the various regional power markets, or how RTOs will develop and evolve or what regions they will cover, we are unable to assess fully the impact that these power markets might have on our business.
Our gas sales, transmission, and storage operations are subject to government regulations and rate proceedings that could have an adverse impact on our ability to recover the costs of operating our pipeline facilities. |
Our interstate gas sales, transmission, and storage operations conducted through our Gas Pipelines business are subject to the FERCs rules and regulations in accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. The FERCs regulatory authority extends to:
| transportation and sale for resale of natural gas in interstate commerce; | |
| rates and charges; | |
| construction; | |
| acquisition, extension or abandonment of services or facilities; | |
| accounts and records; | |
| depreciation and amortization policies; and | |
| operating terms and conditions of service. |
The FERC has taken certain actions to strengthen market forces in the natural gas pipeline industry that has led to increased competition throughout the industry. In a number of key markets, interstate pipelines are now facing competitive pressure from other major pipeline systems, enabling local distribution companies and end users to choose a transmission provider based on economic and other considerations.
Risks related to environmental matters
We could incur material losses if we are held liable for the environmental condition of any of our assets or divested assets, which could include losses that exceed our current expectations. |
We are generally responsible for all on-site liabilities associated with the environmental condition of our facilities and assets, which we have acquired or developed, regardless of when the liabilities arose and whether they are known or unknown. In addition, in connection with certain acquisitions and sales of assets, we might obtain, or be required to provide, indemnification against certain environmental liabilities. If we incur a
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We make assumptions and develop expectations about possible liability related to environmental conditions based on current laws and regulations and current interpretations of those laws and regulations. If the interpretation of laws or regulations, or the laws and regulations themselves, change, our assumptions may change. Our assumptions and expectations are also based on available information. If more information becomes available to us, our assumptions may change. Any of these changes may result in not only increased risk related to one or more of our assets, but material losses in excess of current estimates.
Environmental regulation and liability relating to our business will be subject to environmental legislation in all jurisdictions in which it operates, and any changes in such legislation could negatively affect our results of operations. |
Our operations are subject to extensive environmental regulation pursuant to a variety of federal, provincial, state and municipal laws and regulations. Such environmental legislation imposes, among other things, restrictions, liabilities and obligations in connection with the generation, handling, use, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances into the environment. Environmental legislation also requires that our facilities, sites and other properties associated with our operations be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Existing environmental regulations could also be revised or reinterpreted, new laws and regulations could be adopted or become applicable to us or our facilities, and future changes in environmental laws and regulations could occur. The federal government and several states recently have proposed increased environmental regulation of many industrial activities, including increased regulation of air quality, water quality and solid waste management.
Compliance with environmental legislation will require significant expenditures, including expenditures for compliance with the Clean Air Act and similar legislation, for clean up costs and damages arising out of contaminated properties, and for failure to comply with environmental legislation and regulations which might result in the imposition of fines and penalties. The steps we take to bring certain of our facilities into compliance could be prohibitively expensive, and we might be required to shut down, divest or alter the operation of those facilities, which might cause us to incur losses.
Further, our regulatory rate structure and our contracts with clients might not necessarily allow us to recover capital costs we incur to comply with new environmental regulations. Also, we might not be able to obtain or maintain from time to time all required environmental regulatory approvals for certain development projects. If there is a delay in obtaining any required environmental regulatory approvals or if we fail to obtain and comply with them, the operation of our facilities could be prevented or become subject to additional costs. Should we fail to comply with all applicable environmental laws, we might be subject to penalties and fines imposed against us by regulatory authorities. Although we do not expect that the costs of complying with current environmental legislation will have a material adverse effect on our financial condition or results of operations, no assurance can be made that the costs of complying with environmental legislation in the future will not have such an effect.
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Risks relating to accounting standards
Potential changes in accounting standards might cause us to revise our financial results and disclosure in the future, which might change the way analysts measure our business or financial performance. |
Recently discovered accounting irregularities in various industries have forced regulators and legislators to take a renewed look at accounting practices, financial disclosures, companies relationships with their independent auditors and retirement plan practices. Because it is still unclear what laws or regulations will develop, we cannot predict the ultimate impact of any future changes in accounting regulations or practices in general with respect to public companies or the energy industry or in our operations specifically.
In addition, the Financial Accounting Standards Board (FASB) or the SEC could enact new accounting standards that might impact how we are required to record revenues, expenses, assets and liabilities.
Risks relating to our industry
The long-term financial condition of our U.S. and Canadian natural gas transmission and midstream businesses are dependent on the continued availability of natural gas reserves. |
The development of additional natural gas reserves requires significant capital expenditures by others for exploration and development drilling and the installation of production, gathering, storage, transportation and other facilities that permit natural gas to be produced and delivered to our pipeline systems. Low prices for natural gas, regulatory limitations, or the lack of available capital for these projects could adversely affect the development of additional reserves and production, gathering, storage and pipeline transmission and import and export of natural gas supplies. Additional natural gas reserves might not be developed in commercial quantities and in sufficient amounts to fill the capacities of our gathering and processing pipeline facilities.
Our drilling, production, gathering, processing and transporting activities involve numerous risks that might result in accidents and other operating risks and costs. |
Our operations are subject to all of the risks and hazards typically associated with the exploitation, development and exploration for, and the production and transportation of oil and gas. These operating risks include, but are not limited to:
| blowouts, cratering and explosions; | |
| uncontrollable flows of oil, natural gas or well fluids; | |
| fires; | |
| formations with abnormal pressures; | |
| pollution and other environmental risks; and | |
| natural disasters. |
In addition, there are inherent in our gas gathering, processing and transporting properties a variety of hazards and operating risks, such as leaks, explosions and mechanical problems that could cause substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial losses to us. In accordance with customary industry practice, we maintain insurance against some, but not all, of these risks and losses. The occurrence of any of these events not fully covered by insurance could have a material adverse effect on our financial position and results of operations. The location of pipelines near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.
Accidents or other operating risks could further result in loss of service available to our customers. Such circumstances could adversely impact our ability to meet contractual obligations and retain customers. For example, the 26 inch segment of Northwest Pipeline from Sumas to Washougal, Washington was idled in 2003 after a line break associated with stress corrosion cracking (SCC). Efforts are underway to determine
34
Potential customer impact arising from the 2003 line break on Northwest Pipeline in particular may include potential shortages in Northwest Pipelines ability to satisfy customer requirements, obligations to provide reservation charge credits to customers in times of constrained capacity, and solicitation of existing Northwest Pipeline customers by others for potential new pipeline projects that would compete directly with Northwest Pipeline. The size of reservation charge credits in particular is sensitive to actual market requirements and difficult to predict. From a market and rate recovery standpoint, it will be critical for Northwest Pipeline to expedite its response to the diminished capacity arising out of the 2003 line break. Critical to the ability to respond will be regulatory approval of any such response plan by the Department of Transportation Office of Pipeline Safety and the Washington Utilities and Transportation Commission. Such approvals will be subject to the same uncertainty inherent in any government approval process.
Compliance with the Pipeline Safety Improvement Act may result in unanticipated costs and consequences. |
Implementation of new Pipeline Safety Improvement Act (PSIA) regulations requires us to implement an Integrity Management Plan (IMP) for our gas transmission pipelines by December 2004. As part of the IMP, we must identify High Consequence Areas (HCA) through which our pipelines run. Although our investigations are ongoing, we believe that certain segments of our pipelines will be determined to run through HCAs. An HCA is defined by the rule as an area where the potential consequence of a gas pipeline accident may be significant or do considerable harm to people or property. Designing and implementing the IMP and identifying HCAs could result in significant additional costs. There is always the possibility that the assessments related to the IMP would reveal an unexpected condition for which remedial action would be required.
Estimating reserves and future net revenues involves uncertainties and negative revisions to reserve estimates, and oil and gas price declines may lead to impairment of oil and gas assets. |
Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The process relies on interpretations of available geological, geophysical, engineering and production data. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of developmental expenditures, including many factors beyond the control of the producer. The reserve data included in this Form 10-K represent estimates. In addition, the estimates of future net revenues from our proved reserves and the present value of such estimates are based upon certain assumptions about future production levels, prices and costs that may not prove to be correct over time.
Quantities of proved reserves are estimated based on economic conditions in existence during the period of assessment. Lower oil and gas prices may have the impact of shortening the economic lives of certain fields because it becomes uneconomic to produce all recoverable reserves on such fields, which reduces proved property reserve estimates.
If negative revisions in the estimated quantities of proved reserves were to occur, it would have the effect of increasing the rates of depreciation, depletion and amortization on the affected properties, which would decrease earnings or result in losses through higher depreciation, depletion and amortization expense. The revisions may also be sufficient to trigger impairment losses on certain properties which would result in a further non-cash charge to earnings. Although unlikely, the revisions could also affect the evaluation of Exploration & Productions goodwill for impairment purposes.
35
Other risks
The threat of terrorist activities and the potential for continued military and other actions could adversely affect our business. |
The continued threat of terrorism and the impact of continued military and other action by the United States and its allies might lead to increased political, economic and financial market instability and volatility in prices for natural gas, which could affect the market for our gas operations. In addition, future acts of terrorism could be directed against companies operating in the United States, and it has been reported that terrorists might be targeting domestic energy facilities. While we are taking steps that we believe are appropriate to increase the security at locations where our energy assets are located, there is no assurance that we can completely secure our locations or to completely protect them against a terrorist attack. These developments have subjected our operations to increased risks and, depending on their ultimate magnitude, could have a material adverse effect on our business. In particular, we might experience increased capital or operating costs to implement increased security for our energy assets.
Historic performance of our exploration and production business is no guarantee of future performance. |
Performance of our exploration and production business is affected in part by factors beyond our control, such as:
| regulations and regulatory approvals; | |
| availability of capital for drilling projects which may be affected by other risk factors discussed in this report; | |
| cost-effective availability of drilling rigs and necessary equipment; | |
| availability of cost-effective transportation for products; or | |
| market risks already discussed in this report. |
Our success rate for drilling projects in 2003 should not be considered a predictor of future performance. Reserves that are proven reserves are those estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty are recoverable in future years form known reservoirs under existing economic and operating conditions, but should not be considered as a guarantee of results for future drilling projects.
Our assets and operations can be affected by weather and other natural phenomena. |
Our assets and operations, especially those located offshore, can be adversely affected by hurricanes, earthquakes, tornadoes and other natural phenomena and weather conditions including extreme temperatures.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 19 of our Notes to Consolidated Financial Statements for amounts of revenues during the last three fiscal years from external customers attributable to the United States and all foreign countries. See Note 19 of our Notes to Consolidated Financial Statements for information relating to long-lived assets during the last two fiscal years, other than financial instruments, long-term customer relationships of a financial institution, mortgage and other servicing rights and deferred policy acquisition costs, located in the United States and all foreign countries.
Item 3. | Legal Proceedings |
For information regarding certain proceedings pending before federal regulatory agencies, see Note 16 of our Notes to Consolidated Financial Statements. We are also subject to other ordinary routine litigation incidental to our businesses.
36
ENVIRONMENTAL MATTERS
Since 1989, Transco has had studies under way to test certain of its facilities for the presence of toxic and hazardous substances to determine to what extent, if any, remediation may be necessary. Transco has responded to data requests regarding such potential contamination of certain of its sites. The costs of any such remediation will depend upon the scope of the remediation. At December 31, 2003, Transco had accrued liabilities totaling approximately $28 million for these costs related to these sites.
Certain of our subsidiaries have been identified as potentially responsible parties (PRP) at various Superfund and state waste disposal sites. In addition, certain of our subsidiaries have incurred, or are alleged to have incurred, various other hazardous materials removal or remediation obligations under environmental laws.
Transco previously used lubricating oils containing polychlorinated biphenyls (PCBs) and, although the use of such oils was discontinued in the 1970s, residual PCB contamination has been discovered in equipment and soils at certain gas compressor station sites. Transco has worked closely with the EPA and state regulatory authorities regarding PCB issues, and they have a program to assess and remediate such conditions. Transco has entered into consent orders with the EPA and state agencies to develop screening, sampling and cleanup programs. As of December 31, 2003, much of the work required by such consent orders had been completed. In addition, Transco has commenced negotiations with certain environmental authorities and other programs concerning investigative and remedial actions relative to potential mercury contamination at certain gas metering sites. Actual costs incurred will depend on the actual number of contaminated sites identified, the actual amount and extent of contamination discovered, the final cleanup standards mandated by the EPA and other governmental authorities and other factors.
Transco operates facilities in some areas of the country currently designated as non-attainment for certain EPA air quality standards, and it anticipates that during 2004, the EPA may designate additional new non-attainment areas which might impact Transcos operations. Pursuant to existing non-attainment area requirements and those requirements in EPAs proposed rules designed to mitigate the migration of ground-level ozone (NOx) in 22 eastern states, Transco is planning installation of air emission controls on existing sources at certain facilities in order to reduce NOx emissions. Transco anticipates that additional facilities may be subject to increased controls within five years. For many of these facilities, Transco is developing more cost effective and innovative compressor engine control designs. The EPA is expected to promulgate additional rules regarding hazardous air pollutants in 2004, which may require Transco to install additional controls. The anticipated additions to Transcos air emission controls are estimated to cost in the range of $230 million to $260 million. If the EPA designates additional new non-attainment areas in 2004 which impact Transcos operations, the cost of additions to property, plant and equipment is expected to increase. Transco considers costs associated with compliance with environmental laws and regulations described above to be prudent costs incurred in the ordinary course of business and, therefore, recoverable through its rates.
At December 31, 2003, Midstream had accrued liabilities for environmental remediation costs related to its natural gas gathering and processing facilities totaling approximately $12 million.
In connection with the 1987 sale of the assets of Agrico Chemical Company, we agreed to indemnify the purchaser for environmental cleanup costs resulting from certain conditions at specified locations, to the extent such costs exceed a specified amount. At December 31, 2003, we had approximately $9 million accrued for such excess costs. The actual costs incurred will depend on the actual amount and extent of contamination discovered, the final cleanup standards mandated by the EPA or other governmental authorities, and other factors.
On July 2, 2001, the EPA issued an information request asking for information on oil releases and discharges in any amount from our pipelines, pipeline systems and pipeline facilities used in the movement of oil or petroleum products, during the period July 1, 1998, through July 2, 2001. In November 2001, we furnished our response. This matter has not become an enforcement proceeding. On March 11, 2004, the Department of Justice (DOJ) invited the new owner of the pipeline to enter into negotiations regarding alleged violations of the Clean Water Act and to sign a tolling agreement. No penalty has been assessed by the
37
In 2002, Williams Refining & Marketing, LLC (Williams Refining) submitted to the EPA a self-disclosure letter indicating noncompliance with the EPAs benzene waste NESHAP regulations. This unintentional noncompliance had occurred due to a regulatory interpretation that resulted in under-counting the total annual benzene level at the Memphis refinery. Also in 2002, the EPA conducted an all-media audit of the Memphis refinery. On March 4, 2003, we sold the Memphis refinery. In late August 2003, EPA issued its report on the multi-media inspection of this refinery. We have some environmental obligations to the new owner under the sale agreement. The indemnification provisions in the sale agreement for the Memphis refinery provide that the capital improvements are the responsibility of the purchaser and we are responsible for fines or penalties. In 2003, the EPA informed us that it has initiated an enforcement action based on the report. The EPA released its audit report in the fall of 2003. The EPA will likely assess a penalty on Williams Refining due to the benzene waste NESHAP issue, but the amount of any such penalty is unknown. To date, EPA has not sought any certain penalty or injunctive relief, but we expect EPA may seek both. We expect to negotiate with the EPA regarding the multi-media inspection and benzene issues during the first half of 2004.
In 2002, the Memphis/ Shelby County Health Department (MSCHD) assessed a $100,000 penalty on Williams Refining due to a four-day period in 2001 within which Williams Refining allegedly released excess emissions of sulfur dioxide. We are currently reviewing technical analysis of the emissions tests. Settlement negotiations with the MSCHD and the Tennessee Department of Environment and Conservation are ongoing and are likely to be successful.
In September 2003, Williams Petroleum Services, LLC (WPL) concluded negotiations with the EPA on a Consent Order. The Consent Order requires us to conduct a phased investigation of identified units at the former Augusta refinery. Costs for the phase I and II investigation will be spread over the next four years and are estimated to be approximately $2.0 million. WPL purchased the Augusta, Kansas refinery, along with other assets, in 1983 from Mobil Oil Corporation, which is now ExxonMobil Corporation. Pursuant to the Contract of Sale, ExxonMobil retained responsibility for certain environmental remediation at the site. The Kansas Department of Health and Environment issued a consent order to ExxonMobil requiring ExxonMobil to remediate the site. ExxonMobil made little progress in complying with that order. We filed a lawsuit against ExxonMobil on October 10, 2003 for contractual, statutory and common law obligations to recover damages and to require ExxonMobil to investigate and remediate environmental conditions at the refinery site.
In early 2002, Cenex advised us of its intention to proceed with arbitration allocating liability for environmental remediation costs at certain former Thermogas fertilizer sites. Most of these sites are in Iowa. In late 2002, the parties arbitrated the dispute. Effective February 18, 2003, Williams Natural Gas Liquids, Inc. and Cenex executed a settlement and release, which resolves all past, present, future disputes regarding the purchase and sale agreement.
In 2002, Williams Field Services Company (WFSC) submitted to the Oklahoma Department of Environmental Quality (ODEQ) a self-disclosure of noncompliance with the Dry Trail gas processing facilitys air permit. This unintentional noncompliance had occurred due to operational difficulties with the facilitys flare. WFSC is in negotiations with ODEQ, and the amount of any penalty that ODEQ may assess to WFSC is unknown.
Williams Power Company, Inc. (WPC), formerly known as Williams Energy Marketing & Trading Company, self-disclosed to the EPA certain issues of noncompliance with EPAs reformulated gasoline and anti-dumping regulations. WPC continues to negotiate with EPA in good faith to resolve the noncompliance issues. WPC anticipates that any settlement of such issues will require WPC to pay a penalty which at this time the amount is unknown.
See Note 16 to our Notes to Consolidated Financial Statements for further information regarding environmental matters including indemnification arrangements related to such matters.
38
OTHER LEGAL MATTERS
In connection with agreements to resolve take-or-pay and other contract claims and to amend gas purchase contracts, our subsidiary Transco 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, certain producers have sought indemnification from Transco. One producer, Freeport-McMoRan, Inc., filed a lawsuit against Transco on March 30, 1995 in the 19th Judicial District Court in East Baton Rouge, Louisiana in which it asserted damages, including interest calculated through December 31, 2003, of approximately $10 million. The case was tried in 2003 and resulted in a judgment in favor of Transco which the producer has appealed. On November 25, 2003, Transco and another producer, Mobil Producing Texas & New Mexico, Inc., settled a lawsuit filed on August 30, 2000, in the 79th District Court, Brooks County, Texas, in which the producer had asserted damages, including interest, of approximately $8 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 Transco.
On June 8, 2001, fourteen of our entities were named as defendants in a nationwide class action lawsuit which had been pending in the 26th Judicial District Court, Stevens County, Kansas, against other defendants, generally pipeline and gathering companies, for more than one year. The producer plaintiffs alleged that the defendants, including the Williams defendants, have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs for which it seeks to recover damages. After the court denied class action certification and while motions to dismiss for lack of personal jurisdiction were pending, on July 29, 2003, the court granted the producers motion to amend their petition. The fourth amended petition, which was filed on July 29, 2003, excludes all the Williams defendants except two Midstream subsidiaries. All defendants intend to continue their opposition to class certification.
In 1998, the DOJ informed us that Jack Grynberg, an individual, had filed claims in the United States District Court for the District of Colorado under the False Claims Act against us and certain of our current and former subsidiaries including Central, Kern River, Northwest Pipeline, Williams Gas Pipeline, Transco, Texas Gas, Williams Field Services and Williams Production Company. Mr. Grynberg has also filed claims against approximately 300 other energy companies and alleges that the defendants violated the False Claims Act in connection with the measurement and purchase of hydrocarbons. The relief sought is an unspecified amount of royalties allegedly not paid to the federal government, treble damages, a civil penalty, attorneys fees, and costs. On April 9, 1999, the DOJ announced that it was declining to intervene in any of the Grynberg qui tam cases, including the action filed against our entities in the United States District Court for the District of Colorado. On October 21, 1999, the Panel on Multi-District Litigation transferred all of the Grynberg qui tam cases, including those filed against us, to the United States District Court for the District of Wyoming for pre-trial purposes. Grynbergs measurement claims remain pending against us and the other defendants; the court previously dismissed Grynbergs royalty valuation claims.
Between November 2000 and May 2001, several class actions were filed on behalf of California electric ratepayers against California power generators and traders including our subsidiary Power. These lawsuits concern the increase in power prices in California during the summer of 2000 through the winter of 2000-01. The suits claim that the defendants acted to manipulate prices in violation of the California antitrust and business practice statutes and other state and federal laws. Plaintiffs are seeking injunctive relief as well as restitution, disgorgement, appointment of a receiver, and damages, including treble damages. These cases have been consolidated before the San Diego County Superior Court. As part of a comprehensive settlement with the state of California and other parties, including various California water districts, various California cities and counties, and the states of Oregon and Washington, we and the plaintiffs in these suits have resolved these claims. The settlement is final as to the state of California, and, as to the ratepayer plaintiffs, the San Diego Superior Court granted preliminary approval on October 24, 2003, and scheduled a hearing for final approval for June 4, 2004. Numerous other federal investigations regarding California power prices are also underway that involve Power. See Note 11 of our Notes to Consolidated Financial Statements.
39
Since January 29, 2002, numerous shareholder class action suits seeking class certification and compensatory damages have been filed in the United States District Court for the Northern District of Oklahoma. The majority of the suits allege that we and our co-defendants, Williams Communications and certain corporate officers and directors of both companies, acted jointly and separately to inflate the stock price of the two companies. Other suits seeking class certification and compensatory damages allege similar causes of action related to a public offering in early January 2002, known as the FELINE PACS offering. This case was filed against us, certain of our corporate officers, all members of our Board of Directors and all of the offerings underwriters. In addition, in 2002 class action complaints seeking class certification and compensatory damages were filed in the United States District Court for the Northern District of Oklahoma against us and the members of our Board of Directors under the Employee Retirement Income Security Act (ERISA) by participants in our 401(k) plan based on similar allegations. On July 14, 2003, the court dismissed us and our Board of Directors from these consolidated ERISA class actions, but not our officers or the members of our Benefits and Investment Committees who we might be required to indemnify. The U.S. Department of Labor is also independently investigating our employee benefits plans.
Williams Alaska Petroleum (WAPI) is actively engaged in administrative litigation being conducted jointly by the FERC and the Regulatory Commission of Alaska concerning the Trans-Alaska Pipeline System (TAPS) Quality Bank. Primary issues being litigated include the appropriate valuation of the naphtha, heavy distillate, vacuum gas oil and residual product cuts within the TAPS Quality Bank as well as the appropriate retroactive effects of the determinations. WAPIs interest in these proceedings is material as the matter involves claims by crude producers and the State of Alaska for retroactive payments plus interest of up to $180 million in excess of amounts previously paid by WAPI or accrued at December 31, 2003. Because of the complexity of the issues involved, however, the outcome cannot be predicted with any certainty nor can the likely result be quantified. Certain periodic discussions have been held and continue among some of the litigants. Because of the number of parties involved and the diversity of positions, no comprehensive terms have been identified that could be considered probable to achieve final settlement among all parties. The FERC and RCA presiding administrative law judges are expected to render their joint and/or individual initial decision(s) sometime during the second quarter of 2004.
SUMMARY
While no assurances may be given, we, based on advice of counsel, do not believe that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, insurance coverage, recovery from customers or other indemnification arrangements, will have a materially adverse effect upon our future financial position.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 4A. | Executive Officers of the Registrant |
The name, age, period of service, and title of each of our executive officers as of March 1, 2004, are listed below.
Alan S. Armstrong
|
Senior Vice President, Midstream
Age: 41 Position held since February 2002. |
|
From 1999 to February 2002, Mr. Armstrong was Vice President, Gathering and Processing for Midstream. From 1998 to 1999 he was Vice President, Commercial Development for Midstream. |
40
Senior Vice President and General Counsel
Age 47
Position held since December 16, 2002.
Prior to joining us, Mr. Bender was Senior
Vice President and General Counsel with NRG Energy, Inc., a
position held since June 2000, prior to which he was Vice
President, General Counsel and Secretary of NRG Energy Inc.
since June 1997. NRG Energy, Inc. filed a voluntary bankruptcy
petition during 2003 and its plan of reorganization was approved
in December 2003.
Senior Vice President and Chief Financial
Officer
Age: 52
Position held since April 16, 2003.
Prior to joining us, Mr. Chappel during 2000
founded and served as chief executive officer of a development
business in Chicago, Illinois through April, 2003 when he joined
us. Mr. Chappel joined Waste Management, Inc. in 1987 and held
various financial, administrative and operational leadership
positions, including twice serving as chief financial officer,
during 1997 and 1998 and most recently during 1999 through
February 2000.
Senior Vice President, Exploration and
Production
Age: 44
Position held since December 1998.
Mr. Hill was vice president of the exploration
and production unit from 1993 to 1998 as well as Senior Vice
President Petroleum Services from 1998 to 2003.
Senior Vice President, Power
Age: 44
Position held since October 2002
From February 2000 to October 2002,
Mr. Hobbs was President and Chief Executive Officer of
Williams Energy Marketing & Trading. From 1997 to
February 2000, he served as a Vice President of various Williams
subsidiaries.
Senior Vice President, Strategic Services and
Administration
Age: 56
Position held since April 1999.
Mr. Johnson was named our Senior Vice President
of Human Resources and Administration in April 1999. Prior to
joining us in December 1998, he held officer level positions,
such as Vice President of Human Resources, Vice President for
Corporate People Strategies, and Vice President Human Resource
Services, for Amoco Corporation from 1991 to 1998.
Chairman of the Board, Chief Executive Officer
and President
Age: 55
Position held since September 21, 2001.
Mr. Malcolm was elected Chief Executive Officer
of Williams in January 2002 and Chairman of the Board in May
2002. He was elected President and Chief Operating Officer in
September 2001. Prior to that, he was our Executive Vice
President since May 2001, President and Chief Executive Officer
of our subsidiary Williams Energy Services, LLC, since December
1998 and the Senior Vice President and General Manager of our
subsidiary, Williams Field Services Company, since November 1994.
Senior Vice President, Gas Pipeline
Age: 57
Position held since October 2002.
From December 2001 to October 2002,
Mr. Whisenant was President of our subsidiary Williams Gas
Pipeline. Prior to that he served as Senior Vice President and
General Manager of Williams Gas Pipeline West from
1997 to December 2001.
41
Senior Vice President and Chief Restructuring
Officer
Age: 48
Position held since October 2002.
From September 2001 to October 2002,
Mr. Wright served as President and Chief Executive Officer
of our subsidiary Williams Energy Services. From 1996 until
September 2001, he was Senior Vice President, Enterprise
Development and Planning for our energy services group.
Mr. Wright has held various positions with us since 1989.
PART II
Item 5. | Market for Registrants Common Equity and Related Stockholder Matters |
Our common stock is listed on the New York
Stock Exchange and Pacific Stock Exchanges under the symbol
WMB. At the close of business on March 1, 2004,
we had approximately 13,917 holders of record of our common
stock and approximately 164,000 beneficial owners that hold in
street name. The high and low closing sales price ranges
(New York Stock Exchange composite transactions) and
dividends declared by quarter for each of the past two years are
as follows:
2003
2002
Quarter
High
Low
Dividend
High
Low
Dividend
$
4.74
$
2.60
$
.01
$
25.97
$
14.53
$
.20
$
8.77
$
4.87
$
.01
$
24.17
$
5.47
$
.20
$
9.42
$
6.20
$
.01
$
6.32
$
0.88
$
.01
$
10.62
$
8.94
$
.01
$
3.06
$
1.35
$
.01
Some of our subsidiaries borrowing arrangements limit the transfer of funds to us. These terms have not impeded, nor are they expected to impede, our ability to pay dividends. However, our high yield indenture currently prohibits us from paying quarterly cash dividends on our common stock in excess of $0.02 per share.
42
Item 6. | Selected Financial Data |
The following financial data as of
December 31, 2003 and 2002 and for the three years ended
December 31, 2003 are an integral part of, and should be
read in conjunction with, the consolidated financial statements
and notes thereto. All other amounts have been prepared from our
financial records. Certain amounts below have been restated or
reclassified (see Note 1 of Notes to Consolidated Financial
Statements in Item 8). Information concerning significant
trends in the financial condition and results of operations is
contained in Managements Discussion & Analysis of
Financial Condition and Results of Operations of this report.
2003
2002
2001
2000
1999
(Millions, except per-share amounts)
$
16,834.1
$
3,716.6
$
5,303.2
$
4,945.7
$
3,558.8
15.2
(611.7
)
648.3
662.3
87.7
253.9
(143.0
)
(1,126.0
)
(138.0
)
68.5
65.2
(761.3
)
(.03
)
(1.35
)
1.30
1.48
.19
.49
(.28
)
(2.25
)
(.31
)
.16
.15
(1.47
)
27,021.8
34,988.5
38,614.2
34,776.6
21,682.1
939.7
2,079.0
2,512.3
3,195.2
1,525.1
11,039.8
11,076.7
8,287.8
6,319.8
6,211.6
976.4
877.9
335.1
189.9
175.5
4,102.1
5,049.0
6,044.0
5,892.0
5,585.2
.04
.42
.68
.60
.60
(1) | As discussed in Note 1 of Notes to Consolidated Financial Statements, the adoption of Emerging Issues Task Force Issue No. 02-3 (EITF 02-3) requires that revenues and costs of sale from non-derivative contracts and certain physically settled derivative contracts be reported on a gross basis. Prior to the adoption, these revenues were presented net of costs. As permitted by EITF 02-3, prior year amounts have not been restated. |
(2) | See Note 4 of Notes to Consolidated Financial Statements for discussion of asset sales, impairments and other accruals in 2003, 2002 and 2001 and see Note 3 of Notes to Consolidated Financial Statements for discussion of write-downs of certain assets related to WilTel Communications, formerly Williams Communications Group, (WilTel) in 2002 and 2001. See Note 1 of Notes to Consolidated Financial Statements for discussion of revenue recognized in 2003 related to the correction of prior period items. |
(3) | See Note 2 of Notes to Consolidated Financial Statements for the discussion of the 2003, 2002 and 2001 income (losses) from discontinued operations. The income (loss) from discontinued operations for 2000 and 1999 relates to the operations of WilTel; Kern River Gas Transmission; Williams Gas Pipelines Central; the Colorado soda ash mining; Mid-America and Seminole pipelines; retail travel centers; bio-energy; Midsouth refinery; Texas Gas Transmission; Williams Energy Partners; Alaska refining, retail and pipeline and Canadian liquids (2000 only). |
(4) | The extraordinary gain for 1999 relates to the sale of our retail propane business, Thermogas L.L.C. |
(5) | See Note 1 of Notes to Consolidated Financial Statements for discussion of the 2003 cumulative effect of change in accounting principles. |
(6) | Stockholders equity for 2001 includes the January 2001 common stock issuance, the issuance of common stock for the Barrett acquisition and the impact of the WilTel spinoff. |
43
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview of 2003 |
In February 2003, we outlined our planned business strategy in response to the events that significantly impacted the energy sector and our company during late 2001 and 2002, including the collapse of Enron and the severe decline of the telecommunications industry. The plan focused upon migrating to an integrated natural gas business comprised of a strong, but smaller, portfolio of natural gas businesses, reducing debt and increasing our liquidity through asset sales, strategic levels of financing and reductions in operating costs. The plan provided us with a clear strategy to address near-term and medium-term debt and liquidity issues, to de-leverage the company with the objective of returning to investment grade status and to develop a balance sheet capable of supporting and ultimately growing our remaining businesses. A component of our plan was to reduce the risk and liquidity requirements of the Power segment while realizing the value of Powers portfolio.
Company restructuring
During 2003, we successfully executed the following critical components of our restructuring plan:
| generated cash proceeds of approximately $3 billion from the sale of assets; | |
| sustained core business earnings capacity through completed system expansions at Gas Pipeline, continued drilling activity at Exploration & Production and continued investment in deepwater activities within Midstream; | |
| repaid $3.2 billion of debt through scheduled maturities and early extinguishment of debt and accessed the public debt markets available to us primarily to refinance $2 billion of higher cost debt; and | |
| continued rationalization of our cost structure, including a 28 percent reduction in selling, general and administrative (SG&A) costs from continuing operations and a 39 percent reduction in general corporate expenses. |
Addressing liquidity
Through these efforts, we satisfied key liquidity issues facing us in the form of scheduled debt maturities. These were primarily the Williams Production RMT Company (RMT) note payable (RMT Note) of approximately $1.15 billion (including certain contractual fees and deferred interest) due on July 25, 2003, and $1.4 billion of senior unsecured 9.25 percent notes due March 15, 2004. As a result of the proceeds generated from asset sales and proceeds from the issuance of $500 million of long-term debt, we prepaid the RMT Note in May 2003. During the fourth quarter, we completed tender offers that prepaid approximately $721 million of the senior unsecured 9.25 percent notes and approximately $230 million of other notes and debentures. With approximately $2.3 billion available cash on hand at the end of 2003, we have the capacity to pay the $679 million balance of the senior unsecured 9.25 percent notes upon their maturity.
During 2004, we expect to maintain cash/ liquidity levels of at least $1 billion in excess of our immediate needs. While improved during 2003, we have limited access to the capital markets and must maintain liquidity at a level to manage our operations and meet unforeseen or extraordinary calls on cash. Additionally, we will pursue establishing new revolving and letter of credit facilities to reduce cash requirements associated with our current facility.
Exiting the power business
We are pursuing a strategy of exiting the Power business. However, market conditions have contributed to the difficulty of, and could delay, a full, immediate exit from this business. In 2003, we generated in excess of $600 million from the sale, termination or liquidation of Power contracts and assets. During the year, we continued to manage our portfolio to reduce risk, to generate cash and to fulfill contractual commitments. We are also pursuing our goal to resolve the remaining legal and regulatory issues associated with the business.
44
During 2003, we engaged financial advisors to assist and advise with this effort. Because market conditions may change, and we cannot determine the impact of this on a buyers point of view, amounts ultimately received in any portfolio sale, contract liquidation or realization may be significantly different from the estimated economic value or carrying values reflected in the Consolidated Balance Sheet. In addition, our tolling agreements are not derivatives and thus have no carrying value in the Consolidated Balance Sheet pursuant to the application of Emerging Issues Task Force (EITF) Issue No. 02-3 (EITF 02-3). Based on current market conditions, certain of these agreements are forecasted to realize significant future losses. It is possible that we may sell contracts for less than their carrying value or enter into agreements to terminate certain obligations, either of which could result in significant future loss recognition or reductions of future cash flows.
On a consolidated basis, the net book value at December 31, 2003 of Powers portfolio and other long-lived assets were in excess of $800 million, while other net assets of Power, including net working capital, were in excess of $400 million.
Outlook for 2004
Entering 2004, our plan is focused upon the following objectives:
| Sustain solid core business performance, including increased capital allocated to Exploration & Production. |
We expect cash flow from operations to be sufficient to meet our 2004 capital spending plan of $700 to $800 million and to generate additional cash to be available for debt reduction. |
| Continue reduction of debt and selective refinancing of certain instruments. |
We expect to aggressively reduce debt in 2004. We have approximately $1 billion in scheduled maturities coming due throughout the year and anticipate using available cash flow, proceeds from assets sales and the release of collateral from credit facilities to further reduce debt levels. |
| Maintain investment discipline. |
We have implemented the Economic Value Added®(EVA®) financial management system as a financial framework for use in evaluating our business decisions and as a major component for determining incentive compensation. We will invest selectively in those projects that are projected to add value to the company through EVA® improvement. |
Key execution steps will include the completion of planned asset sales, which are estimated to generate proceeds of approximately $800 million in 2004, additional reduction of SG&A costs, replacing our cash-collateralized letter of credit and revolver facility with facilities that do not encumber cash and continued efforts to exit the power business. Some factors that present obstacles that could prevent us from achieving these objectives include:
| volatility of commodity prices; | |
| ongoing shareholder and Power-related litigation; | |
| lower than expected cash flow from continuing operations; | |
| general economic and industry downturn; and | |
| unfavorable capital market conditions. |
We continue to address these risks through utilization of commodity hedging strategies, focused efforts to resolve and/or respond to litigation claims, managing our business with an emphasis upon generating cash and retaining and developing those business operations serving key economic and energy needs.
45
Critical accounting policies & estimates
Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and assumptions. The selection of these has been discussed with our Audit Committee. We believe that the following are the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.
Revenue recognition derivatives |
We hold a substantial portfolio of derivative contracts for a variety of purposes. Many of these are designated in hedge positions; hence, changes in their fair value are not reflected in earnings until the associated hedged item impacts earnings. Others have not been designated as hedges or do not qualify for hedge accounting. The net change in fair value of these contracts represents unrealized gains and losses and is recognized in income currently (marked-to-market). The fair value for each of these derivative contracts is determined based on the nature of the transaction and the market in which transactions are executed. We also incorporate assumptions and judgments about counterparty performance and credit considerations in our determination of fair value. Certain contracts are executed in exchange traded or over-the-counter markets where quoted prices in active markets may exist. Transactions are also executed in exchange-traded or over-the-counter markets for which market prices may exist, but which may be relatively inactive with limited price transparency. Hence, the ability to determine the fair value of the contract is more subjective than if an independent third party quote were available. A limited number of transactions are also executed for which quoted market prices are not available. Determining fair value for these contracts involves assumptions and judgments when estimating prices at which market participants would transact if a market existed for the contract or transaction. We estimate the fair value of these various derivative contracts by incorporating information about commodity prices in actively quoted markets, quoted prices in less active markets, and other market fundamental analysis. The estimated fair value of all these derivative contracts is continually subject to change as the underlying energy commodity market changes and as managements assumptions and judgments change.
Additional discussion of the accounting for energy contracts at fair value is included in Note 1 of Notes to Consolidated Financial Statements, Energy Trading Activities, and Item 7A Qualitative and Quantitative Disclosures About Market Risk.
Valuation of deferred tax assets and tax contingencies |
We have deferred tax assets resulting from certain investments and businesses that have a tax basis in excess of the book basis and from tax carry-forwards generated in the current and prior years. We must evaluate whether we will ultimately realize these tax benefits and establish a valuation allowance for those that may not be realizable. This evaluation considers tax planning strategies, including assumptions about the availability and character of future taxable income. At December 31, 2003, we have $700 million of deferred tax assets for which a $68 million valuation allowance has been established. When assessing the need for a valuation allowance, we considered forecasts of future company performance, the estimated impact of potential asset dispositions and our ability and intent to execute tax planning strategies to utilize tax carryovers. Based on our projections, we believe that it is probable that we can utilize our year-end 2003 federal tax carryovers prior to their expiration. See Note 5 of Notes to Consolidated Financial Statements for additional information regarding the tax carryovers. The ultimate realized amount of deferred tax assets could be materially different from those recorded, as influenced by potential changes in jurisdictional income tax laws and the circumstances surrounding the actual realization of these assets.
We frequently face challenges from domestic and foreign tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the liability associated with our various filing positions, we record a liability for probable tax contingencies. The ultimate disposition of these contingencies could have a material impact on net cash flows. To the extent we were to prevail in matters for which accruals have been
46
Impairment of long-lived assets and investments |
We evaluate our long-lived assets and investments for impairment when we believe events or changes in circumstances indicate that we may not be able to recover the carrying value of certain long-lived assets or the decline in carrying value of an investment is other-than-temporary. In addition to those long-lived assets and investments for which impairment charges were recorded (see Notes 2, 3 and 4 of Notes to Consolidated Financial Statements), many others were reviewed for which no impairment was required. Our computations utilized judgments and assumptions in the following areas:
| the probability that we would sell an asset or continue to hold and use it; | |
| undiscounted future cash flows if an asset is held for use; | |
| estimated fair value of the asset; | |
| estimated sales proceeds if an asset is sold; | |
| form and timing of the asset disposition; and | |
| counterparty performance considerations under contracted sales transactions. |
Our Alaska refining, retail and pipeline operations are classified as held for sale at December 31, 2003. They are currently under contract to be sold as a single disposal group. This sale is expected to close during the first quarter of 2004. These assets were written down to fair value less cost to sell during 2003 based on the assumption that they would be sold as one disposal group. If events were to occur that caused us to divide this disposal group or to separately evaluate the individual assets within the disposal group for impairment, certain assets within that group could require an additional impairment.
We have entered into a structured sales transaction for our investment in a foreign telecommunications company. In our review of this investment for potential impairment, we assumed that the counterparty would perform under the agreement. If the counterparty is unable to fully perform, an impairment of up to $22 million could be necessary.
We own an equity investment in Longhorn Partners Pipeline L.P., a petroleum products pipeline still under development. During 2003, we recognized an impairment of a portion of our investment based on the terms of a recapitalization plan that closed in February 2004. We estimated the fair value of our remaining equity investment based on discounted future cash flows from the project. Because the pipeline is not yet operational, this estimate involved significant judgment, including:
| expected in service date; | |
| duration of operational ramp up; | |
| ultimate annual volume throughput; | |
| ability to obtain external debt financing in the future; | |
| risk-weighted discount rate; and | |
| cash flow projections. |
A decrease of 10 percent in our estimate of fair value of this investment would result in an additional impairment of approximately $8 million.
We own a 14.6 percent equity interest in Aux Sable Liquid Products LP, a natural gas liquids extraction and fractionation facility. During 2003, we performed an impairment review of our investment in Aux Sable as current operating results and cash flow projections suggested that a decline in the fair value of this investment below our carrying value could exist. We estimated the fair value of our investment based on a projection of discounted cash flows of Aux Sable. Based upon our analysis we concluded that the estimated fair value of our
47
Our Gulf Liquids New River Project LLC (Gulf Liquids) operations are classified as held for sale at December 31, 2003. These assets were written down to fair value less costs to sell during 2003. We estimated fair value based on probability-weighted analysis that considered sales price negotiations, salvage value estimates, and discounted future cash flows. This estimate involved significant judgment, including:
| commodity pricing; | |
| probability weighting of the different scenarios; and | |
| range of estimated sales proceeds, salvage value and future cash flows. |
The estimated cash flows from the various scenarios ranged approximately $15 million above and below our estimated fair value.
We evaluated certain asset groups not yet held for sale for impairment because of the possibility that we could dispose of these assets pursuant to our strategy to sell additional assets in 2004. Our current estimates of the recoverability of these assets indicate that no impairment is necessary. A significant assumption in the evaluation of one asset group in this analysis is the probability associated with selling the asset group versus continuing to hold it for use. We currently believe we are more likely to continue to hold this asset group than sell it; however, if the probability associated with selling it were increased to approximately 90 percent, these assets may not be recoverable. If our recoverability estimates had resulted in a determination that these assets were not recoverable, based on our current estimates of fair value, we would have recognized an impairment loss of approximately $40 million to $70 million in the year ended December 31, 2003.
Our current estimate of recoverability for certain Canadian gas processing assets indicated that they were not recoverable due to managements expectation that these assets would be sold at a price less than their current carrying value. As a result, we recognized impairment charges of $41.7 million during 2003. We estimated fair market value using an earnings multiple applied to projected operating results. We validated this estimate of fair value with discounted future cash flows ranging from approximately $10 million above and $25 million below our estimated fair value.
Contingent liabilities |
We record liabilities for estimated loss contingencies when we assess that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in income in the period in which new or different facts or information become known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Liabilities for contingent losses are based upon our assumptions and estimates, and advice of legal counsel or other third parties regarding the probable outcomes of the matter. As new developments occur or more information becomes available, it is possible that our assumptions and estimates in these matters will change. Changes in our assumptions and estimates or outcomes different from our current assumptions and estimates could materially affect future results of operations for any particular quarterly or annual period. See Note 16 of Notes to Consolidated Financial Statements.
48
Oil and gas producing activities |
We use the successful efforts method of accounting for our oil and gas producing activities. Estimated natural gas and oil reserves and/or forward market prices for oil and gas are a significant part of our financial calculations. Following are examples of how these estimates affect financial results:
| An increase (decrease) in estimated proved oil and gas reserves can reduce (increase) our unit of production depletion rate. | |
| Changes in oil and gas reserves and forward market prices both impact projected future cash flows from our oil and gas properties. These projected future cash flows are used: |
* | to estimate the fair value of oil and gas properties for purposes of assessing them for impairment; and | |
* | to estimate the fair value of the Exploration & Production reporting unit for purposes of assessing its goodwill for impairment. |
| Certain estimated reserves are used as collateral to secure financing. |
The process of estimating natural gas and oil reserves is very complex, requiring significant judgement in the evaluation of all available geological, geophysical, engineering and economic data. After being estimated internally, virtually all of our reserve estimates are either audited or prepared by independent experts. The data may change substantially over time as a result of numerous factors, including additional development activity, evolving production history and a continual reassessment of the viability of production under changing economic conditions. As a result, material revisions to existing reserve estimates could occur from time to time. A reasonably likely revision of our reserve estimates is not expected to result in an impairment of our oil and gas properties or goodwill. However, reserve estimate revisions would impact our depreciation and depletion expense prospectively. For example, a change of approximately 10 percent in oil and gas reserves for each basin would change our annual depreciation, depletion and amortization expense between approximately $15 million and $20 million. The actual impact would depend on the specific basins impacted.
Forward market prices include estimates of prices for periods that extend beyond those with quoted market prices. This forward market price information is consistent with that generally used in evaluating drilling decisions and acquisition plans. These market prices for future periods impact the production economics underlying oil and gas reserve estimates. The prices of natural gas and oil are volatile and change from period to period thus impacting our estimates. A reasonably likely unfavorable change in the forward price curve is not expected to result in an impairment of our oil and gas properties or goodwill.
General
In accordance with the provisions related to discontinued operations within Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the consolidated financial statements and notes in Item 8 reflect our results of operations, financial position and cash flows through the date of sale, as applicable, of certain components as discontinued operations (see Note 2 of Notes to Consolidated Financial Statements).
Unless indicated otherwise, the following discussion and analysis of results of operations, financial condition and liquidity relates to our current continuing operations and should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this document.
49
Results of operations
Consolidated overview |
The following table and discussion is a summary
of our consolidated results of operations for the three years
ended December 31, 2003. The results of operations by
segment are discussed in further detail following this
Consolidated Overview discussion.
Years Ended December 31,
% Change
% Change
from
from
2003
2002(1)
2002
2001(1)
2001
(Millions)
(Millions)
(Millions)
$
16,834.1
+353
%
$
3,716.6
-30
%
$
5,303.2
15,156.8
-583
%
2,218.6
+11
%
2,498.4
412.2
+28
%
568.7
+14
%
660.5
(88.7
)
+NM
276.8
-NM
(12.4
)
87.0
+39
%
142.8
-15
%
124.3
15,567.3
-385
%
3,206.9
+2
%
3,270.8
1,266.8
+149
%
509.7
-75
%
2,032.4
(1,240.9
)
-10
%
(1,132.3
)
-73
%
(654.9
)
73.4
+NM
(113.1
)
+35
%
(172.8
)
(2.2
)
+98
%
(124.2
)
-NM
(19.4
)
+54
%
(41.8
)
+42
%
(71.7
)
(26.1
)
-NM
24.3
-8
%
26.4
51.6
+NM
(877.4
)
-NM
1,159.4
(36.4
)
-NM
265.7
+NM
(511.1
)
15.2
+NM
(611.7
)
-NM
648.3
253.9
+NM
(143.0
)
+87
%
(1,126.0
)
269.1
+NM
(754.7
)
-58
%
(477.7
)
(761.3
)
-NM
NM
(492.2
)
+35
%
(754.7
)
-58
%
(477.7
)
29.5
+67
%
90.1
-NM
$
(521.7
)
+38
%
$
(844.8
)
-77
%
$
(477.7
)
(1) | + = Favorable Change; - = Unfavorable Change |
NM = A percentage calculation is not meaningful due to change in signs or a zero-value denominator.
2003 vs. 2002 |
Our revenue increased $13.1 billion due primarily to increased revenues at our Williams Power Company segment (Power) and our Midstream Gas and Liquids segment (Midstream) as a result of the January 1, 2003 adoption of EITF 02-3, which requires that revenues and costs of sale from non-derivative contracts and certain physically settled derivative contracts be reported on a gross basis (see Note 1 of Notes to Consolidated Financial Statements for a discussion of the impact on our financial statements as a result of
50
Results for 2003 include approximately $117 million of revenue related to the correction of the accounting treatment previously applied to certain third party derivative contracts during 2002 and 2001. This matter was initially disclosed in our Form 10-Q for the second quarter of 2003. Income from continuing operations before income taxes and cumulative effect of change in accounting principles in 2003 was $51.6 million. Absent the corrections, we would have reported a pretax loss from continuing operations in 2003. Approximately $83 million of this revenue relates to a correction of net energy trading assets for certain derivative contract terminations occurring in 2001. The remaining $34 million relates to net gains on certain other derivative contracts entered into in 2002 and 2001 that we now believe should not have been deferred as a component of other comprehensive income due to the incorrect designation of these contracts as cash flow hedges. Our management, after consultation with our independent auditor, concluded that the effect of the previous accounting treatment was not material to 2003 and prior periods and the trend of earnings.
Costs and operating expenses increased $12.9 billion due primarily to the effect of reporting certain costs gross at Power and Midstream, as discussed above. Costs increased $12.9 billion at Power and $1.8 billion at Midstream due primarily to the effect of EITF 02-3. Contributing to the increase at our Midstream segment is $273 million attributable to rising market prices for natural gas used to replace the heating value of NGLs extracted at their gas processing facilities. The cost increases at these operating units were partially offset by $1.7 billion higher intercompany eliminations resulting primarily from intercompany costs that were previously netted in revenues prior to the adoption of EITF 02-3.
Selling, general and administrative expenses decreased $156.5 million due primarily to reduced staffing levels at Power reflective of our strategy to exit this business. Also contributing to the decrease was the absence of $22 million of costs related to an enhanced benefit early retirement option offered to certain employee groups in 2002. We expect continued declines in these costs as we continue to exit the power business and complete our planned asset sales.
Other (income) expense net, within operating income, in 2003 includes a $188 million gain from the sale of a Power contract, $96.7 million in net gains from the sale of our Exploration & Production segments interests in certain natural gas properties in the San Juan basin, a $16.2 million gain from Midstreams sale of the wholesale propane business, and a $12.2 million gain on foreign currency exchange at Power. Partially offsetting these gains was a $45 million goodwill impairment at Power, a $44.1 million impairment of the Hazelton generation plant at Power, a $41.7 million impairment of Canadian assets at Midstream, a $25.6 million charge to write-off capitalized software development costs at Northwest Pipeline, a $20 million charge related to a settlement by Power with the Commodity Futures Trading Commission (see Note 16 of Notes to Consolidated Financial Statements) and a $19.5 million accrual at Power related to an adjustment of California rate refund and other related accruals. Other (income) expense net, within operating income, in 2002 includes $244.6 million of impairment charges, loss accruals, and write-offs within Power, including a partial impairment of goodwill, $141.7 million in net gains from the sale of Exploration & Productions interests in natural gas properties and $115 million of impairment charges related to Midstreams Canadian assets.
General corporate expenses decreased $55.8 million. During 2002, we incurred $24 million of various restructuring costs associated with the liquidity and business issues addressed beginning third-quarter 2002. We also incurred $19 million higher advertising and branding costs in 2002 (due primarily to golf events and other advertising campaigns that were not continued in 2003). In 2004, we will continue efforts to further reduce our corporate cost structure following the recent and anticipated divestitures. We could also experience
51
Interest accrued net increased $108.6 million, or 10 percent, due primarily to:
| $48.1 million higher interest expense and fees primarily related to the RMT note payable, which was prepaid in May 2003 (see Note 11 of Notes to Consolidated Financial Statements); | |
| an $18.2 million increase in capitalized interest, which offsets interest accrued, due primarily to Midstreams projects in the Gulf Coast Region; | |
| $25 million higher amortization expense related to deferred debt issuance costs including a $14.5 million write-off of accelerated amortization of costs from the termination of a revolving credit agreement in June 2003 (see Note 11 of Notes to Consolidated Financial Statements); | |
| a $43 million increase reflecting higher average interest rates on long-term debt; | |
| a $15 million decrease reflecting lower average borrowing levels; and | |
| $14.3 million of interest expense of Power as a result of certain 2003 FERC proceedings. |
We expect interest expense to decrease in 2004 due to reduced averaged borrowing levels and lower average interest rates.
In 2002, we began entering into interest rate swaps with external counter parties primarily in support of the energy-trading portfolio (see Note 19 of Notes to Consolidated Financial Statements). The change in market value of these swaps was $122 million more favorable in 2003 than 2002, due largely to a reduction in overall swap positions during the second half of 2002. The total notional amount of these swaps is approximately $300 million at December 31, 2003.
Investing income increased to $73.4 million in 2003 compared to a $113.1 million loss in 2002. As detailed in Note 3 of Notes to Consolidated Financial Statements, investing income (loss) in 2003 includes:
| $52.1 million lower equity earnings from Gulfstream Natural Gas System LLC, primarily resulting from the absence in 2003 of a $27.4 million contractual construction completion fee received in 2002; | |
| $33.6 million higher net interest income at Power as a result of certain 2003 FERC proceedings; and | |
| a $43.1 million impairment related to our investment in Longhorn Partners Pipeline L.P. |
Investing income (loss) in 2002 includes a $268.7 million loss provision relating to the estimated recoverability of receivables from WilTel Communications Group, Inc. (WilTel), a former subsidiary, partially offset by equity earnings and a $58.5 million gain on the sale of all of our interest in a Lithuanian oil refinery, pipeline and terminal complex.
Minority interest in income and preferred returns of consolidated subsidiaries in 2003 is lower than 2002 due primarily to the absence of preferred returns totaling $25 million on the preferred interests in Castle Associates L.P., Piceance Production Holdings L.L.C., and Williams Risk Holdings L.L.C., which were modified and reclassified as debt in third-quarter 2002, and Arctic Fox, L.L.C., which was modified and reclassified as debt in April 2002. See Note 12 of Notes to Consolidated Financial Statements.
Other income net, below operating income, in 2003 includes debt tender and related costs of $66.8 million, which were incurred in 2003 related to the third quarter 2003 tender offers and consent solicitations (see Note 11 of Notes to Consolidated Financial Statements). We may pursue additional debt tender offers in 2004. In addition, $84.7 million of foreign currency transaction gains on a Canadian dollar denominated note receivable are included. Partially offsetting these gains were $79.8 million of derivative losses on a forward contract to fix the U.S. dollar principal cash flows from this note. In 2004, these may be less offsetting since the note receivable balance was substantially reduced in the last half of 2003.
52
The provision (benefit) for income taxes was unfavorable by $302.1 million due primarily to pre-tax income in 2003 as compared to a pre-tax loss in 2002. The effective income tax rate for 2003 is significantly higher than the federal statutory rate due primarily to non-deductible impairment of goodwill, non-deductible expenses, an accrual for tax contingencies, and the effect of state income taxes, somewhat offset by the tax benefit of capital losses. The effective income tax rate for 2002 is less than the federal statutory rate due primarily to the tax benefit of capital losses and the effect of state income taxes, somewhat offset by the effect of taxes on foreign operations, non-deductible impairment of goodwill, an accrual for tax contingencies, and income tax credit recapture that reduced the tax benefit of the pre-tax loss.
In addition to the operating results from activities included in discontinued operations (see Note 2 of Notes to Consolidated Financial Statements), the 2003 loss from discontinued operations includes pre-tax gains and losses on sales, net of impairments, totaling $210.7 million. The $210.7 million consists primarily of the following:
| a $310.8 million gain on sale of Williams Energy Partners; | |
| a $92.1 million gain on sale of Canadian liquids operations; | |
| a $39.7 million gain on sale of natural gas properties in the Raton Basin in southern Colorado and the Hugoton Embayment in southwestern Kansas; | |
| a $108.7 million impairment of Gulf Liquids; | |
| a $106.2 million impairment (net of a $2.8 million gain on sale) of Texas Gas Transmission; and | |
| a $21.6 million loss on sale and impairment on assets of the soda ash mining facility located in Colorado. |
The 2002 loss from discontinued operations includes pre-tax impairments and losses totaling $531 million (see the 2002 vs. 2001 discussion below).
The cumulative effect of change in accounting principles reduces net income for 2003 by $761.3 million due to a $762.5 million charge related to the adoption of EITF 02-3 (see Note 1 of Notes to Consolidated Financial Statements), slightly offset by $1.2 million related to the adoption of SFAS No. 143, Accounting for Asset Retirement Obligations (see Note 1 of Notes to Consolidated Financial Statements).
In June 2003, we redeemed all of our outstanding 9.875 percent cumulative-convertible preferred shares for approximately $289 million, plus $5.3 million for accrued dividends (see Note 13 of Notes to Consolidated Financial Statements). Preferred stock dividends in 2002 reflects the first-quarter 2002 impact of recording a $69.4 million non-cash dividend associated with the accounting for a preferred security that contained a conversion option that was beneficial to the purchaser at the time the security was issued.
2002 vs. 2001 |
Our revenue decreased approximately $1.6 billion, or 30 percent, due primarily to lower revenues associated with energy risk management and trading activities at Power and the absence of $184 million of revenue related to the 198 convenience stores sold in May 2001 within our previously reported Petroleum Services segment (Petroleum Services). Partially offsetting these decreases was the impact of an increase in net production volumes within Exploration & Production partly due to the August 2001 acquisition of Barrett Resources Corporation (Barrett). As permitted by EITF 02-3, discussed above, 2002 and 2001 revenues were not restated for the adoption of EITF 02-3 in January 2003.
Costs and operating expenses decreased $279.8 million, or 11 percent, due primarily to the absence of the 198 convenience stores sold in May 2001 and lower fuel and product shrink gas purchases related to processing activities at Midstream. Slightly offsetting these decreases are increased depletion, depreciation and amortization and lease operating expenses at Exploration & Production due primarily to the addition of the former Barrett operations.
53
Selling, general and administrative expenses decreased $91.8 million due primarily to lower variable compensation levels at Power. Selling, general and administrative expenses for 2002 also include approximately $22 million of early retirement costs, $9 million of employee-related severance costs and approximately $5 million related to early payoff of employee stock ownership plan expenses.
Other (income) expense net, within operating income, in 2002 includes $244.6 million of impairment charges and loss accruals within Power comprised of $138.8 million of impairments and loss accruals for commitments for certain power assets associated with terminated power projects, $61.1 million goodwill impairments and a $44.7 million impairment charge related to the Worthington generation facility sold in January 2003. Included in Other (income) expense net, within operating income, in 2002 is a $115 million impairment charge related to Midstreams Canadian assets. Partially offsetting these impairment charges and accruals are $141.7 million of net gains on sales of natural gas production properties at Exploration & Production in 2002. Other (income) expense net, within operating income, in 2001 includes a $75.3 million gain on the May 2001 sale of the convenience stores and impairment charges of $13.8 million and $12.1 million within Midstream and the former Petroleum Services segment, respectively (see Note 4 of Notes to Consolidated Financial Statements).
General corporate expenses increased $18.5 million, or 15 percent, due primarily to approximately $24 million of various restructuring costs associated with the liquidity and business issues addressed beginning third-quarter 2002, $6 million of expense related to the enhanced-benefit early retirement program offered to certain employee groups and $6 million of expense related to employee severance costs. Partially offsetting these increases were lower charitable contributions and advertising costs.
Operating income decreased $1,522.7 million, or 75 percent, due primarily to lower net revenues associated with energy risk management and trading activities at Power and the impairment charges and loss accruals noted above. Partially offsetting these decreases are the gains from the sales of natural gas production properties and the impact of increased net production volumes at Exploration & Production, higher demand revenues and the effect of the reductions in rate refund liabilities associated with rate case settlements at Gas Pipeline, higher natural gas liquids margins at Midstream and higher equity earnings.
Interest accrued net increased $477.4 million, or 73 percent, due primarily to $154 million related to interest expense, including amortization of fees, on the RMT note payable (see Note 11 of Notes to Consolidated Financial Statements), the $76 million effect of higher average interest rates, the $222 million effect of higher average borrowing levels and $41 million of higher debt issuance cost amortization expense.
In 2002, we entered into interest rate swaps with external counter parties primarily in support of the energy trading portfolio. The swaps resulted in losses of $124.2 million (see Note 19 of Notes to Consolidated Financial Statements).
The 2002 investing loss decreased
$59.7 million as compared to the 2001 investing loss.
Investing loss for 2002 and 2001 consisted of the following
components:
Years Ended
December 31
2002
2001
(Millions)
$
73.0
$
22.7
42.1
4.2
(95.9
)
(268.7
)
(188.0
)
40.5
84.2
$
(113.1
)
$
(172.8
)
* | These items are also included in the measure of segment profit (loss). |
54
The equity earnings increase includes a $27.4 million benefit reflecting a contractual construction completion fee received by an equity method investment (see Note 3 of Notes to Consolidated Financial Statements) and $4 million of earnings in 2002 versus $20 million of losses in 2001 from the Discovery pipeline project, partially offset by an equity loss in 2002 of $13.8 million from our investment in Longhorn Partners Pipeline LP. Income (loss) from investments in 2002 includes a $58.5 million gain on the sale of our equity interest in a Lithuanian oil refinery, pipeline and terminal complex, which was included in the Other segment, a gain of $8.7 million related to the sale of our general partner interest in Northern Borders Partners, L.P., a $12.3 million write-down of an investment in a pipeline project which was canceled and a $10.4 million net loss on the sale of our equity interest in a Canadian and U.S. gas pipeline. Income (loss) from investments in 2001 includes a $27.5 million gain on the sale of our limited partner equity interest in Northern Border Partners, L.P. offset by a $23.3 million loss from other investments, both of which were determined to be other than temporary. See Note 2 of Notes to Consolidated Financial Statements for a discussion of the losses related to WilTel. Interest income and other decreased due to a $22 million decrease in interest income related to margin deposits, a $4.9 million decrease in dividend income primarily as a result of the second-quarter 2001 sale of Ferrellgas Partners L.P. senior common units and write-downs of certain foreign investments.
Other income (expense) net, below operating income, decreased $2.1 million due primarily to an $11 million gain in second-quarter 2002 at our Gas Pipeline segment associated with the disposition of securities received through a mutual insurance company reorganization, a $13 million decrease in losses from the sales of receivables to special purpose entities (see Note 15 of Notes to Consolidated Financial Statements) and the absence in 2002 of a 2001 $10 million payment to settle a claim for coal royalty payments relating to a discontinued activity. Partially offsetting these increases was an $8 million loss related to early retirement of remarketable notes in first-quarter 2002.
The provision (benefit) for income taxes was favorable by $776.8 million due primarily to a pre-tax loss in 2002 as compared to pre-tax income in 2001. The effective income tax rate for 2002 is less than the federal statutory rate due primarily to the tax benefit of capital losses and the effect of state income taxes, somewhat offset by the effect of taxes on foreign operations, non-deductible impairment of goodwill, an accrual for tax contingencies, and income tax credits recapture that reduced the tax benefit of the pre-tax loss. The effective income tax rate for 2001 is greater than the federal statutory rate due primarily to an accrual for tax contingencies, the effect of state income taxes, and valuation allowances associated with the tax benefits for investing losses, for which no tax benefits were provided.
In addition to the operating results from activities included in discontinued operations (see Note 2 of Notes to Consolidated Financial Statements), the 2002 loss from discontinued operations includes pre-tax impairments and losses totaling $531 million. The $531 million consists of $240.8 million of impairments related to the Memphis refinery, $195.7 million of impairments related to bio-energy, $146.6 million of impairments related to travel centers, $133.5 million of impairments related to the soda ash operations, a $91.3 million loss on sale related to the Central natural gas pipeline system, $18.4 million of impairments related to the Alaska refinery and a $6.4 million loss on sale related to the Kern River natural gas pipeline system. Partially offsetting these impairments and losses was a pre-tax gain of $301.7 million related to the sale of the Mid-America and Seminole pipelines. Loss from discontinued operations in 2001 includes a $1.84 billion pre-tax charge for loss accruals related to guarantees and payment obligations for WilTel and $184.8 million of other pre-tax charges for impairments and loss accruals, including a $170 million pre-tax impairment charge related to the soda ash mining facility.
Income (loss) applicable to common stock in 2002 reflects the impact of the $69.4 million associated with accounting for a preferred security that contains a conversion option that was beneficial to the purchaser at the time the security was issued. The weighted-average number of shares in 2002 for the diluted calculation (which is the same as the basic calculation since we reported a loss from continuing operations) increased approximately 16 million from December 31, 2001. The increase is due primarily to the 29.6 million shares issued in the Barrett acquisition in August 2001.
55
Results of operations segments
We are currently organized into the following segments: Power (formerly named Energy Marketing & Trading), Gas Pipeline, Exploration & Production, Midstream and Other. The Petroleum Services segment is now reported within Other as a result of the Alaska refinery and related assets being reflected as discontinued operations. Other primarily consists of corporate operations and certain continuing operations previously reported within the International and Petroleum Services segments. Our management currently evaluates performance based on segment profit (loss) from operations (see Note 19 of Notes to Consolidated Financial Statements).
Prior period amounts have been restated to reflect these changes. The following discussions relate to the results of operations of our segments.
Power
Overview of 2003 |
As described below, a strategic change in business focus and a required change in accounting principles significantly influenced Powers 2003 operating results.
In June 2002, we announced our intent to exit our Power business and reduce our financial commitment to the Power segment. Prior to this point, Power focused on originating short-term and long-term contracts that it considered profitable based on its view of the market. Beginning in mid-2002, Power now focuses on 1) terminating or selling all or portions of the portfolio, 2) maximizing cash flow, 3) reducing risk, and 4) managing existing contractual commitments, many of which are long-term. We initiated efforts to sell all or portions of Powers power, natural gas, and crude and refined products portfolios in mid-2002. Based on bids received in these sales efforts, Power recognized impairments for certain assets and capital projects in 2002. In 2003, we continued our efforts to exit this business. In 2003, proceeds from contract sales and terminations exceeded carrying values, resulting in gains. The decision to exit the Power business also resulted in decreased selling, general and administrative expense. Segment profit was unfavorably impacted in 2003 as a result of reduced origination of long-term energy-related transactions.
As discussed further in Note 1 of Notes to the Consolidated Financial Statements, in 2003, Power adopted EITF 02-3, which changed the classification of certain revenues and costs in the statement of operations and the accounting method for non-derivative energy and energy-related contracts. Decreased power prices and increased natural gas prices primarily caused an increase in the fair value of power and gas derivative contracts, which is reflected as an increase in earnings. Due to the change in accounting method discussed further below, the related change in fair value of non-derivative contracts was not recognized in earnings during 2003 since non-derivative contracts are no longer marked to market. However, accrual losses on power and gas non-derivative contracts were recognized in 2003.
Power considers key factors that influence its financial condition and operating performance to include the following:
| prices of power and natural gas, including changes in the margin between power and natural gas prices, | |
| changes in market liquidity, including changes in the ability to economically hedge the portfolio, | |
| changes in power and natural gas price volatility, | |
| changes in the regulatory environment, and | |
| changes in power and natural gas supply and demand. |
Outlook for 2004 |
In 2004, Power anticipates further variability in earnings due in part to the difference in accounting treatment of derivative contracts at fair value and our underlying non-derivative contracts on an accrual basis.
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The following risks and challenges also impact how Power manages its business and affect its operating results:
| unresolved litigation, | |
| regulatory changes and oversight, | |
| lack of liquidity, and | |
| key employee retention. |
Year-over-year operating results |
Years Ended December 31, | ||||||||||||
|
||||||||||||
2003 | 2002 | 2001 | ||||||||||
|
|
|
||||||||||
(Millions) | ||||||||||||
Segment revenues
|
$ | 13,192.6 | $ | (85.2 | ) | $ | 1,705.6 | |||||
Segment profit (loss)
|
$ | 154.1 | $ | (624.8 | ) | $ | 1,270.0 |
2003 vs. 2002 |
Increase in revenues and cost of sales |
EITF 02-3 impacts how Power presents
revenues and costs from certain transactions in the statement of
operations. The table below summarizes items included in
revenues and costs before and after January 1, 2003:
Before
After
Revenues:
Gains and losses from
changes in fair value of only
derivative contracts
with a
future settlement or delivery date
Revenue from sales of
commodities or completion of energy-related services
Gains and losses from net
financial settlement of derivative contracts
Costs:
Costs from purchases of
all
commodities and fees paid for energy-related services
Revenues increased $13.3 billion and costs increased $12.9 billion from 2002 to 2003 primarily because Power now reports certain purchases in costs instead of reporting them as reduction of revenues. This change in reporting does not affect gross margin or segment profit. EITF 02-3 does not require restatement of prior
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Increase in segment profit |
EITF 02-3, which was implemented
January 1, 2003, significantly impacted the increase in
segment profit from 2002 to 2003. Before the adoption of
EITF 02-3, Power reported the fair value of all its energy
contracts, energy-related contracts and inventory on the balance
sheet. Power reported changes in the fair value of the items
from period to period in segment profit. Examples of derivative
and non-derivative contracts are as follows:
Derivative Contracts
Non-Derivative Contracts
Spot purchase and sale contracts
Transportation contracts
Storage contracts
Tolling agreements (power conversion
contracts)
Full requirement or load serving
contracts (power sales contracts in which we supply all of the
customers requirements for power)
In 2003, Power continues to reflect the changes in fair value of derivative contracts in segment profit. However, for non-derivative contracts, Power does not recognize revenue until commodities are delivered or services are completed. Also, for non-derivative contracts, Power does not recognize costs until products are received and consumed, services are used, or inventories are sold. Power is exposed to earnings fluctuations because of these differences in accounting for derivative and non-derivative contracts within its portfolio. The following example illustrates this exposure to earnings fluctuations:
Assume there are two contracts. The first is a ten-year contract in which Power agrees to pay a counterparty a monthly fee for the right to convert natural gas to power (a tolling contract). Power has the right to sell the power produced under the tolling contract. The contract is not a derivative. The second is a derivative contract to sell power in 2008 to another party for a fixed price, entered into to fix the sales price of the power produced in 2008 under the tolling contract. Therefore, the power sales contract economically hedges the forward power price component of the tolling contract. If power prices fall, the decline in fair value of the tolling agreement would not be reflected in 2003 segment profit since the contract is not a derivative. The increase in the fair value of the power sale contract, however, would be reflected in segment profit since it is a derivative. |
As illustrated in the above example, many of our derivative contracts serve as economic hedges of our non-derivative positions. We could reduce our exposure to earnings fluctuations by applying hedge accounting, as provided for under SFAS No. 133. However, since we have announced our intent to exit the business, we do not currently meet the criteria to be eligible for hedge accounting. We reduced our exposure to earnings fluctuations through election of the normal purchases and sales exception available under SFAS No. 133 for two significant long-term derivative contracts. These two derivative contracts hedge a tolling contract. Since the election in the second quarter of 2003, we account for the two derivative contracts on an accrual basis. However, we remain exposed to earnings fluctuations from changes in fair value of certain other derivative positions.
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The following table summarizes the major elements
impacting segment profit in 2003 and 2002:
Years Ended
December 31,
2003
2002
(Millions)
$
(268
)
$
11
401
(420
)
(12
)
91
204
117
238
(114
)
35
40
124
209
75
(262
)
$
154
$
(625
)
Increase in gross margin |
The impact of the earnings fluctuations discussed in the previous section is reflected in our 2003 gross margin. Gross margin increased from a margin loss of $114.2 million in 2002 to a gross margin of $238 million in 2003.
Accrual Earnings: Losses on contracts and assets in 2003 accounted for on an accrual basis partially offset increases in gross margin from mark-to-market earnings as discussed in the next section. In 2002, we accounted for revenues and costs generated only on our owned assets on an accrual basis. These owned assets resulted in a $10.9 million gross margin in 2002. In 2003, we also accounted for revenues and costs generated on our non-derivative contracts on an accrual basis. The owned assets and non-derivative contracts generated a $268.1 million margin loss in 2003.
The $268.1 million margin loss primarily consists of accrual losses of $246.6 million on non-derivative contracts and owned assets within our power and natural gas portfolios. As with forward power prices, the increased power supply in the mid-continent and eastern regions contributed to lower prices received on power sales in 2003, primarily contributing to the accrual losses. The $246.6 million also includes a $37 million loss from increased power rate refunds owed to the state of California because of FERC rulings issued and a $13.8 million loss for other contingencies related to our power marketing activities in the state of California.
Mark-to-Market Earnings: The difference in accounting for non-derivative contracts in 2003 compared to 2002 primarily contributed to the increase in gross margin. In 2002, we recognized mark-to-market losses of $420 million on derivative contracts and non-derivative contracts, both of which we carried at fair value, or marked to market, in 2002. In 2003, we recognized mark-to-market gains of $401.4 million on derivative contracts only. We refer to net realized and unrealized gains and losses on contracts carried at fair value as mark-to-market earnings.
Derivative contracts within our power and natural gas portfolios primarily contributed to the mark-to-market gains in 2003, generating $412.3 million of the total mark-to-market gains of $401.4 million. Decreased forward power prices on net power sales contracts and increased forward gas prices on net gas purchase contracts primarily caused the mark-to-market gains from power and natural gas derivative contracts. Increased power supply in the mid-continent and eastern U.S. significantly contributed to the decrease in forward power prices. A $126.8 million positive valuation adjustment on a terminated derivative contract also contributed to the 2003 mark-to-market gains on power and natural gas derivative contracts.
Of the $420 million in mark-to-market losses in 2002, $320 million related to the power and natural gas portfolios. The fair value of certain tolling portfolios decreased as the margin between forward power prices
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Interest Rate Portfolio: Differences in the treatment of interest rate movements in 2003 compared to 2002 also offset the increase in gross margin. The 2002 interest rate earnings of $91 million reflect the impact of decreased interest rates on power, natural gas and crude and refined derivative and non-derivative contracts. As interest rates decreased, the overall fair value of these commodity contracts increased. The increase in the fair value of these contracts was partially offset by the decrease in the fair value of interest rate derivatives. Interest rate derivatives hedge the power, natural gas and crude and refined products contracts on an economic basis. The 2003 interest rate loss of $12.3 million reflects the mark-to-market loss on interest rate derivatives only.
Origination: The lack of contract origination in 2003 further offsets the increase in gross margin. Consistent with our reduced financial commitment to the Power business, we did not originate long-term energy-related contracts in 2003. In 2002, we recognized $85.1 million of power and natural gas revenues and $118.8 million of petroleum products revenues by originating new contracts.
Correction of Prior Period Items: Results for 2003 include approximately $117 million of revenue related to the correction of the accounting treatment previously applied to certain third party derivative contracts during 2002 and 2001. This matter was initially disclosed in our Form 10-Q for the second quarter of 2003. See Note 1 of Notes to Consolidated Financial Statements.
Decrease in selling, general and administrative expenses |
The reduced focus on the Power business resulted in further employee reductions in 2003. Power employed approximately 250 employees at the end of 2003 compared to approximately 410 at the end of 2002. This decrease in employees was the primary factor in the $85 million, or 41 percent, decrease in selling, general, and administrative expenses.
Increase in other income (expense) net |
Other income (expense) net improved $337.1 million. Power terminated or sold certain contracts and other assets, resulting in losses in 2002 and gains in 2003. In 2002, Power terminated certain power related capital projects, which resulted in $138.8 million of impairments. Power also recorded a $44.7 million impairment in 2002 from the January 2003 sale of the Worthington generation facility. In 2003, Power sold a non-derivative energy-trading contract resulting in a $188 million gain on sale. Power also sold an interest in certain investments accounted for under the cost method in 2003 for a gain of $13.8 million.
A $45 million goodwill impairment in 2003 compared to a $61.1 million goodwill impairment in 2002 also contributed to the increase in Other (income) expense-net. See Note 4 of Notes to Consolidated Financial Statements.
Other factors offset the increase in Other income (expense) net. In 2003, Power recognized a $44.1 million impairment on a power generating facility (see Note 4 of Notes to Consolidated Financial Statements). Power also reached a settlement with the Commodity Futures Trading Commission as discussed in Note 16 of Notes to Consolidated Financial Statements, resulting in a charge of $20 million. Finally, Power
60
2002 vs. 2001 |
The $1,790.8 million, or 105 percent, decrease in revenues is due primarily to a $1,783.3 million decrease in risk management and trading revenues. During 2002, the impact of market movements against Powers portfolio and a significant reduction in origination activities adversely affected our results. Powers ability to manage or hedge its portfolio against adverse market movements was limited by a lack of market liquidity as well as our limited ability to provide credit and liquidity support.
The decrease in risk management and trading revenues includes the following:
| $1,901.4 million decrease in natural gas and power revenues, | |
| $6.3 million increase in petroleum products revenues, | |
| $12 million increase in European trading revenues, and | |
| $99.8 million increase in interest rate revenues. |
The net impact of interest rate movements, including the impact of interest derivatives, caused the $99.8 million increase in interest rate revenues.
The $1,783.3 million decrease in risk management and trading revenues includes a $205 million decrease in revenues from new transactions originated and contract amendments as compared to 2001. A decline in natural gas revenues caused $454.9 million of the $1,901.4 million decline in natural gas and power revenues. Increasing prices on short natural gas positions during the third quarter of 2002 primarily caused the decline in natural gas revenues. The remaining $1,446.5 million decline in natural gas and power revenues relates to lower revenues from the power portfolio caused primarily by 1) smaller differences in the margin between forward power prices and the estimated cost to produce the power on certain power tolling portfolios; 2) lower volatility compared with 2001; and 3) the net impact of portfolio valuation adjustments associated with the decline in market liquidity and portfolio liquidation activities.
Origination activities during the first quarter of 2002 primarily caused the $6.3 million increase in petroleum products revenues. The commencement of trading activities in the European office as compared to start-up activities in 2001 principally drove the $12 million increase in European trading revenues. The European operations were being wound down in 2002.
As a result of our liquidity constraints, we initiated efforts in 2002 to sell all or portions of Powers portfolio and/or pursue potential joint venture or business combination opportunities. Portions of Powers portfolio were recognized at their estimated fair value, which under generally accepted accounting principles is the amount at which they could be exchanged in a current transaction between willing parties other than in a forced liquidation or sale. As a result of information obtained through the portfolio sales efforts in 2002, Power adjusted the estimated fair value of certain portions of the portfolio to reflect viable market information received. For those portions of the portfolio for which no viable market information was received through sales efforts, Power estimated fair value using other market-based information and consistent application of valuation techniques. Portfolio valuation adjustments recognized in 2002 as a result of new market information obtained through sales efforts resulted in a $74.8 million decrease in segment profit.
Revenues for 2002 also includes the favorable fourth-quarter net effect of approximately $85 million resulting from the settlement with the state of California, the restructuring of associated energy contracts, and the related improved credit situation of the counterparties during the quarter.
Selling, general, and administrative expenses decreased by $124.7 million, or 37 percent. Lower variable compensation levels and staff reductions primarily caused this cost reduction.
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Other (income) expense net in 2002 includes the following:
| Impairments and loss accruals associated with commitments for certain power projects that have been terminated of $138.8 million; | |
| Partial impairment of goodwill of $61.1 million, reflecting a decline in fair value resulting from deteriorating market conditions during 2002; and | |
| Impairment charge related to the January 2003 sale of the Worthington generation facility of $44.7 million. |
Other (income) expense net in 2001 included a $13.3 million charge due to a terminated expansion project.
The $1,894.8 million, or 149 percent decrease in Segment profit (loss) is due primarily to the $1,783.3 million reduction of risk management and trading revenues and the other (income) expense net items, partially offset by the $124.7 million reduction in selling, general and administrative expenses, and the $23.3 million charge from the write-downs in 2001 of marketable equity securities and a cost based investment (see Note 3 of Notes to Consolidated Financial Statements).
Gas Pipeline
Overview of 2003 |
Gas Pipelines interstate transmission and storage activities are subject to regulation by the FERC and as such, our rates and charges for the transportation of natural gas in interstate commerce, and the extension, enlargement or abandonment of jurisdictional facilities and accounting, among other things, are subject to regulation. The rates are established through the FERCs rulemaking process. As a result of this regulation, Gas Pipelines revenues and operating costs are relatively stable, with fluctuations primarily driven by the approval by the FERC of new rates, the level of pipeline transportation capacity used and seasonal demands. Therefore capacity is a significant factor for revenues and ultimately segment profit.
During 2003, Gas Pipeline completed five major expansion projects. The combined impact of the completed projects resulted in the following:
Northwest Pipeline: |
| Created 450,000 Dth/d of new physical capacity. | |
| Installed more than 120 miles of new pipeline looping in Washington, Idaho, and Wyoming. |
Transco: |
| Increased capacity by 320,000 Dth/d. | |
| Installed more than 43 miles of new pipeline. |
Significant risk factors that could affect the profitability of our Gas Pipeline segment include:
| legal and regulatory events such as FERC rate authorization and/ or rate case settlements (see Note 16 of Notes to Consolidated Financial Statements), | |
| market demand for expansion projects to increase revenue and segment profit, and | |
| catastrophic events to our infrastructure such as ruptures to pipelines. |
Outlook for 2004 |
In December 2003, we received an order from the U.S. Department of Transportation regarding restoration of transportation service on a segment of a natural gas pipeline in western Washington. The pipeline experienced a line break in May 2003 and we subsequently received an order to lower pressure by 20 percent and perform an integrity study on the pipeline segment. The pipeline experienced a second break in
62
In February 2004, Gas Pipeline placed a pipeline expansion into service increasing capacity on its Transco natural gas system by 54,000 Dth/d. The completed projects for Northwest Pipeline and Transco are expected to increase revenues in 2004 by approximately $45 million. The majority of the planned 2004 capital expenditures is expected to be spent on maintenance of the pipelines.
Year-over-year operating results |
During 2003, we sold Texas Gas Transmission Corporation (Texas Gas). We received $795 million in cash and the buyer assumed $250 million in debt. During 2002, we sold both our Central and Kern River interstate natural gas pipeline businesses. The following discussions exclude any gains or losses on such sales and the results of operations related to Texas Gas, Central, and Kern River, which are all reported within discontinued operations.
The following discussions relate to the current
continuing businesses of our Gas Pipeline segment which includes
Transco, Northwest Pipeline and various joint venture projects.
Certain assets sold during 2002 are included in the 2002
results. These assets include Cove Point, a general partner
interest in Northern Border, and our 14.6 percent interest
in Alliance Pipeline. These assets represented $7.4 million
of revenues and $15.7 million of segment profit for the
year ended December 31, 2002.
Years Ended December 31,
2003
2002
2001
(Millions)
$
1,299.0
$
1,241.8
$
1,180.8
$
554.9
$
545.1
$
472.1
2003 vs. 2002 |
The $57.2 million, or five percent, increase in revenues is due primarily to $61 million higher demand revenues on the Transco system resulting from new expansion projects (MarketLink, Momentum and Sundance) and higher rates approved under Transcos rate proceedings that became effective in late 2002 and $27 million on the Northwest Pipeline system resulting from new projects (Grays Harbor, Centralia, and Chehalis). Partially offsetting these increases was the absence in 2003 of $26 million of revenue from reductions in the rate refund liabilities and other adjustments associated with a rate case settlement on Transco in 2002 and $13 million lower storage demand revenues in 2003 due to lower storage rates in connection with Transcos rate proceedings that became effective in late 2002.
Cost and operating expenses increased $21 million, or four percent, due primarily to $25 million higher depreciation expense due to additional property, plant and equipment placed into service and $12 million higher state sales and use, ad valorem and franchise taxes. These increases were partially offset by $15 million lower fuel expense on Transco, resulting primarily from pricing differentials on the volumes of gas used in operation. Costs and operating expenses are projected to be approximately $20 million higher in 2004 due primarily to non-capitalized maintenance projects.
General and administrative costs decreased $32 million, or 20 percent, due primarily to the absence in 2003 of $23 million of early retirement pension costs recorded in 2002 and other employee-related benefits
63
Other (income) expense net in 2003 includes a $25.6 million charge at Northwest Pipeline to write-off capitalized software development costs for a service delivery system. Subsequent to the implementation of the same system at Transco in the second quarter of 2003 and a determination of the unique and additional programming requirements that would be needed to complete the system at Northwest Pipeline, management determined that the system would not be implemented at Northwest Pipeline. Other (income) expense net in 2003 also includes $7.2 million of income at Transco due to a partial reduction of accrued liabilities for claims associated with certain producers as a result of recent settlements and court rulings. Other income (expense) net in 2002 includes a $17 million charge associated with a FERC penalty (see Note 16 of Notes to Consolidated Financial Statements) and a $3.7 million loss on the sale of the Cove Point facility.
Summarized changes in Gas Pipelines segment profit: |
Segment profit, which includes equity earnings and income (loss) from investments (included in Investing income (loss)), increased $9.8 million, or two percent, due to the following favorable 2003 items:
| the $57.2 million increase in revenues, | |
| the $32 million decrease in general and administrative costs, | |
| the absence of the $17 million FERC charge in 2002 discussed above; and | |
| the absence of the $12.3 million write off of Gas Pipelines investment in a cancelled pipeline project and a $10.4 million loss on the sale of Gas Pipelines 14.6 percent ownership interest in Alliance Pipeline in 2002. Both items were included in income (loss) from investment, which is included in Investing income (loss). |
These increases to segment profit were partially offset by the following:
| $73 million lower equity earnings (included in Investing income (loss)), | |
| the $25.6 million charge at Northwest Pipeline to write-off capitalized software costs discussed previously, | |
| the $21 million higher operating costs, and | |
| the absence of an $8.7 million gain in 2002 on the sale of our general partnership interest in Northern Border Partners, L.P. |
The $73 million decrease to equity earnings reflects $24 million lower equity earnings from Gulfstream, the absence of a $27.4 million benefit in 2002 related to the contractual construction completion fee received by an equity affiliate and the absence of $19 million of equity earnings following the October 2002 sale of Gas Pipelines 14.6 percent ownership in Alliance Pipeline. The lower earnings for Gulfstream were primarily due to the absence in 2003 of interest capitalized on internally generated funds as allowed by the FERC during construction. The Gulfstream pipeline was placed into service during second-quarter 2002.
2002 vs. 2001 |
The $61 million, or five percent, increase in revenues is due primarily to $67 million higher demand revenues on the Transco system resulting from new expansion projects and new settlement rates effective September 1, 2001 and $10 million impact of reductions in the rate refund liabilities associated with rate case settlements on the Transco system. Revenue also increased due to $8 million higher transportation revenue on the Northwest Pipeline system, $9 million from environmental mitigation credit sales and services and $4 million higher revenues associated with tracked costs, which are passed through to customers (offset in general and administrative expenses). Partially offsetting these increases were $23 million lower gas exchange imbalance settlements (offset in costs and operating expenses), $14 million lower storage revenues and
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Costs and operating expenses decreased $30 million, or five percent, due primarily to $23 million lower gas exchange imbalance settlements (offset in revenues), $19 million lower operations and maintenance expense due primarily to lower professional and other contractual services and telecommunications expenses, $7 million lower other tracked costs which are passed through to customers (offset in revenues) and a $5 million franchise tax refund for Transco. These decreases were partially offset by the $15 million effect in 2001 of a regulatory reserve reversal resulting from the FERCs approval for recovery of fuel costs incurred in prior periods by Transco, as well as $13 million higher depreciation expense. The $13 million higher depreciation expense reflects a $15 million increase due to increased property, plant and equipment placed into service (including depletion of property held for the environmental mitigation credit sales), partially offset by a $2 million adjustment related to the 2002 rate case settlements resulting in lower depreciation rates applied retroactively.
General and administrative costs increased $17 million, or 12 percent, due primarily to $10 million higher employee-related benefits expense, including:
| $8 million related to higher pension and retiree medical expense due to decreases in assumed return on plan assets, and | |
| approximately $3 million related to expense recognized as a result of accelerated company contributions to an employee stock ownership plan. |
Also contributing to the increase is $11 million in costs associated with an early retirement program, a $5 million write-off in 2002 of capitalized software development costs resulting from cancellation of a project, and $4 million higher tracked costs (offset in revenues). These increases were partially offset by $12 million lower charitable contributions in 2002.
Other income (expense) net in 2002 includes a $17 million charge associated with a FERC penalty (see Note 16 of Notes to Consolidated Financial Statements) and a $3.7 million loss on the sale of the Cove Point facility. Other (income) expense net in 2001 includes an $18 million charge resulting from the unfavorable court decision and resulting settlement in one of Transcos royalty claims proceedings (an additional $19 million is included in interest expense).
Summarized changes in Gas Pipelines segment profit |
Segment profit, which includes equity earnings and income (loss) from investments (both included in Investing income (loss)), increased $73 million, or 15 percent, due primarily to the following:
| $67 million higher demand revenues discussed above, | |
| $42.1 million higher equity earnings (included in Investing income (loss)), | |
| $30 million lower costs and operating expenses discussed above, | |
| the effect of the $18 million 2001 charge discussed previously in Other (income) expense net, | |
| the $10 million effect of rate refund liability reductions related to the finalization of rate cases during third-quarter 2002, and | |
| an $8.7 million gain in 2002 on the sale of our general partnership interest in Northern Border Partners, L.P. |
These increases were partially offset by the following items:
| the effect of a $27.5 million gain in 2001 from the sale of our limited partnership interest in Northern Border Partners, L.P., |
65
| the $17 million increase in general and administrative costs discussed above, | |
| the $17 million FERC penalty and the $3.7 million loss on the sale of the Cove Point facility discussed above in Other income (expense), | |
| a $12.3 million write-down in 2002 of Gas Pipelines investment in a cancelled pipeline project, and | |
| a loss of $10.4 million on the sale of Gas Pipelines 14.6 percent ownership interest in Alliance Pipeline. |
The $42.1 million increase in equity earnings includes a $27.4 million benefit in 2002 related to the contractual construction completion fee received by an equity affiliate. This equity affiliate served as the general contractor on the Gulfstream pipeline project for Gulfstream Natural Gas System (Gulfstream), an interstate natural gas pipeline subject to FERC regulation and an equity affiliate. The fee, paid by Gulfstream and associated with the completion during the second quarter of 2002 of the construction of Gulfstreams pipeline, was capitalized by Gulfstream as property, plant and equipment and is included in Gulfstreams rate base to be recovered in future revenues. Additionally, the increase in equity earnings reflects an $18 million increase from Gulfstream, $12 million of which is related to interest capitalized on the Gulfstream pipeline project in accordance with FERC regulations.
Exploration & Production
Overview of 2003 |
Our focus within Exploration & Production is to develop, produce and explore for natural gas reserves in the Rocky Mountain and Mid-continent regions. We are currently one of the top producers in the Rocky Mountain region. Our specialty is extracting natural gas from non-conventional tight sands and coalbed methane formations. Almost all of our natural gas production is sold to Williams Power segment.
We maintain a leadership presence in the following strategic natural gas basins:
| Piceance Basin in western Colorado; | |
| Powder River Basin in northeastern Wyoming; | |
| San Juan Basin, which stretches from northwestern New Mexico into Colorado; and | |
| Arkoma Basin in southeastern Oklahoma. |
These basins are core to our future success with a large portion of our proved reserves being undeveloped. Thus, we plan to maintain a significant drilling program over the next several years. In addition, we manage other oil and gas interests, including an international oil and gas company, APCO Argentina, Inc., in which we own an approximate 69 percent interest.
During the first half of 2003, our strategy focused on selling assets and reducing our development drilling activity in order to raise or preserve cash to strengthen our balance sheet. In the second half of the year, after we had successfully paid down or refinanced certain debt, we resumed development drilling to levels similar to those achieved in 2002. The major accomplishments for the Exploration & Production segment during 2003 included the following:
| Completed the targeted asset sales of properties located primarily in Kansas, Colorado, Utah and New Mexico. We received net proceeds of approximately $465 million resulting in net pre-tax gains of approximately $134.8 million, including $39.7 million of pre-tax gains reported in discontinued operations related to the interests in the Raton and Hugoton basins. | |
| Achieved a reserves replacement rate of over 250 percent for our core retained basins. Overall, our reserves replacement rate was approximately 30 percent. |
66
| Increased our development drilling program in the latter part of the year, returning to activity levels reached prior to 2003. Capital expenditures for 2003 were approximately $200 million. | |
| Decreased our selling, general and administrative costs by $7 million. |
Outlook for 2004 |
Our expectations for the Exploration & Production segment in 2004 include:
| A continuing development drilling program in our key basins with an increase in activity in the Piceance Basin. | |
| Increasing our current production level of 447 Mmcfe per day by 10 to 15 percent by the end of 2004. Approximately 80 percent of our forecasted 2004 production is hedged at prices that average $3.63 per Mcfe at a basin level. Approximately 48 percent of our estimated 2005 production is hedged at prices that average above $4.00 per Mcfe at the basin level. |
Risks that may prevent us from fully accomplishing our objectives include drilling rig availability, obtaining permits as planned for drilling and any potential capital constraints.
Year-over-year operating results |
The following discussions of the year-over-year
results primarily relate to our continuing operations. However,
the results do include those operations that were sold during
2003 or 2002 that did not qualify for discontinued operations
reporting. The operations in the Hugoton and Raton basins
qualified for discontinued operations.
Years Ended December 31,
2003
2002
2001
(Millions)
$
779.7
$
860.4
$
603.9
$
401.4
$
508.6
$
231.8
2003 vs. 2002 |
The $80.7 million, or nine percent decrease in revenues is due primarily to $66 million lower production revenues due to lower production levels as the result of property sales and reduced drilling activities and $21 million lower other revenues primarily due to the absence in 2003 of deferred income relating to transactions in prior years that transferred certain economic benefits to a third party.
The decrease in domestic production revenues reflects $68 million associated with an eleven percent decrease in net domestic production volumes, partially offset by $2 million higher revenues from increased net realized average prices for production. Net realized average prices include the effect of hedge positions. The decrease in production volumes primarily results from the sales of properties in 2002 and 2003 and the impact of reduced drilling activity. Drilling activity was lower in the January through August period of 2003 due to our capital constraints. During the third quarter, drilling activities on our retained properties began to increase and by the fourth quarter of 2003 returned to the levels more consistent with 2002 drilling levels. This drilling level is expected to increase production volumes in the future.
To minimize the risk and volatility associated with the ownership of producing gas properties, we enter into derivative forward sales contracts, which economically lock in a price for a portion of our future production. Approximately 86 percent of domestic production in 2003 was hedged. These hedging decisions are made considering our overall commodity risk exposure.
Costs and expenses, including selling, general and administrative expenses, decreased $11 million, reflecting:
| $17 million lower exploration expenses reflecting the current focus of the company on developing proved properties while reducing exploratory activities, |
67
| $10 million lower depreciation, depletion and amortization expense primarily as a result of lower production volumes, | |
| $7 million lower selling general and administrative expense, and | |
| $19 million higher operating taxes due primarily to higher market prices. |
Other (income) expense net in 2003 includes approximately $95.1 million in net gains on sales of natural gas properties during 2003, which were discussed previously. Other (income) expense net in 2002 includes approximately $141 million in net gains on sales of natural gas properties during 2002.
The $107.2 million decrease in segment profit is partially due to $46 million lower net gains on sales of assets in 2003 as compared to 2002, as discussed above. Additionally, lower production revenues due primarily to lower production volumes also contributed to the decrease. Segment profit also includes $18.2 million and $11.8 million related to international activities for 2003 and 2002, respectively. This increase primarily reflects improved operating results of APCO Argentina.
2002 vs. 2001 |
The $256.5 million, or 42 percent, increase in revenues is primarily due to:
| $246 million higher domestic production revenues, | |
| $27 million in unrealized gains from mark-to-market financial instruments related to basis differentials on natural gas production, and | |
| $28 million lower domestic gas management revenues. |
The $246 million increase in domestic production revenues includes $227 million associated with an increase in net domestic production volumes, resulting primarily from the acquisition in third-quarter 2001 of the former Barrett operations. The increase in our revenues also includes $19 million from increased net realized average prices for production (including the effect of hedge positions). Approximately 88 percent of domestic production in 2002 was hedged.
Costs and operating expenses, including selling, general and administrative expenses, increased $112 million, due primarily to the addition of the former Barrett operations. Increased costs include depreciation, depletion and amortization, lease operating expenses and selling, general and administrative expenses. These increases were partially offset by decreased gas management purchase costs.
Other (income) expense net in 2002 includes $120 million and $21 million in gains from the sales of substantially all of our interests in natural gas production properties in the Jonah field (Wyoming) and in the Anadarko Basin, respectively.
Segment profit increased $276.8 million due primarily to the gains from asset sales mentioned in the preceding paragraph, increased production volumes, and higher net realized average prices. Segment profit also includes $11.8 million and $15.4 million related to international activities for 2002 and 2001, respectively.
Midstream Gas & Liquids
Overview of 2003 |
In 2003, we continued to execute our strategy to focus on targeted growth areas in the Four Corners, Rockies and Gulf Coast production areas. Pursuing our strategy, we placed into service significant pipeline infrastructure in the deepwater offshore area of the Gulf of Mexico and added a fourth cryogenic processing train and a billion cubic feet per day dehydration plant to our Opal gas processing facility. A third party funded and owns the fourth cryogenic train mentioned above. The deepwater project contributed to segment profit in 2003 while both Opal expansions will begin contributing in 2004. While strengthening our positions in these
68
| Wholesale propane business, which represents the most significant portion of our NGL trading activities, and includes certain supply contracts and seven propane distribution terminals (fourth quarter). | |
| Dry Trail gas processing plant located in Texas County, Oklahoma (fourth quarter). | |
| West Stoddart gas processing facility and the fractionation, storage, and distribution system at our Redwater, Alberta plant in western Canada (third quarter). | |
| Ownership interest in the following investments: 45 percent interest in Rio Grande Pipeline (second quarter); 20 percent interest in the West Texas Pipeline (third quarter); 37.5 percent interest in Wilprise Pipeline (fourth quarter); and 16.67 percent interest in Tri-States NGL Pipeline (fourth quarter). |
Outlook for 2004 |
The following factors could impact our business in 2004 and beyond:
| Continued growth in the deepwater areas of the Gulf of Mexico is expected to contribute to, and become a larger component of, our future segment revenues and segment profit. These additional fee-based revenues will lower our relative exposure to commodity price risks. | |
| Gas processing margins may not be as favorable as those realized in 2002 and 2003. Although Wyoming natural gas prices are historically below natural gas prices in other domestic markets, the magnitude of this basis differential may be less in the near future. | |
| Midstream realized additional product gains related to its gas gathering systems in 2003. We do not consider these gains to be recurring in nature. | |
| In 2003, our Gulf Coast gas processing plants earned additional fee revenues derived from temporary processing agreements contracted in response to gas merchantability orders from pipeline operators requiring producers gas to be processed to achieve pipeline quality standards. These contracts may terminate if processing economics in this region were to significantly improve. | |
| We continue to evaluate and pursue the sale of various assets, including the assets of our wholly-owned subsidiary Gulf Liquids New River LLC (Gulf Liquids) currently reported as discontinued operations. We also intend to sell certain Canadian assets in 2004. The completion of asset sales may have the effect of lowering revenues and/or segment profit in the periods following the sales. The sale of our wholesale propane business mentioned above will reduce revenues and expenses, but should not have a material effect on our segment profit. Additional fee-based revenues from our new deepwater assets are expected to mitigate segment profit decline resulting from certain asset sales. | |
| A recent FERC Energy Affiliate Ruling will impact our operation of certain regulated gas gathering assets owned by our affiliate Transco. As a result certain revenues and net profits may shift from our Midstream segment to our Gas Pipelines segment. |
Year-over-year operating results |
In August 2002, we completed the sale of 98 percent of Mapletree LLC and 98 percent of E-Oaktree, LLC to Enterprise Products Partners L.P. Mapletree owned all of Mid-America Pipeline, a 7,226-mile natural gas liquids pipeline system. E-Oaktree owned 80 percent of the Seminole Pipeline, a 1,281-mile natural gas liquids pipeline system. The gains on the sale of these businesses and the related results of operations have been reported as discontinued operations.
69
Pursuant to generally accepted accounting
principles, we have classified the operations of Gulf Liquids,
West Stoddart and Redwater as discontinued operations. All prior
periods reflect this reclassification.
Years Ended December 31,
2003
2002
2001
(Millions)
$
3,319.2
$
1,525.2
$
1,621.2
$
273.5
$
194.2
*
74.9
75.4
*
(61.4
)
(103.7
)
*
(1.0
)
17.3
*
$
286.0
$
183.2
$
172.2
* | Beginning in the third quarter of 2003, our management discussion and analysis of operating results was reorganized into major asset groups to provide additional clarity. The discussion comparing 2002 and 2001 results was not completed using the same asset groupings. |
2003 vs. 2002 |
Revenues increased $1.8 billion primarily as a result of adopting EITF 02-3, which changed how we report natural gas liquids trading activities. The costs of such activities are no longer reported as reductions in revenues. EITF 02-3 does not require restatement of prior year amounts. In addition to this effect, our revenues increased $379 million primarily due to higher natural gas liquids (NGL) revenues at our gas processing plants as a result of moderate market price increases, partially offset by lower NGL production volumes. Additional fee revenues associated with newly constructed deepwater assets and higher olefins sales also contributed to the revenue increase.
Costs and operating expenses also increased $1.8 billion primarily due to the adoption of EITF 02-3 as discussed in the previous paragraph. In addition to this effect, costs and expenses increased $359 million, of which $273 million is attributable to rising market prices for natural gas used to replace the heating value of NGLs extracted at our gas processing facilities. Feedstock purchases for the olefins facilities increased $109 million due to higher NGL and gas prices as well as higher purchase volumes.
Segment profit increased $102.8 million and reflects impairment charges of $41.7 million in 2003 and $115 million in 2002. Both impairment charges related to certain Canadian assets. The remaining $29.5 million increase is largely attributable to higher deepwater and other Gulf Coast fee revenues partially offset by unfavorable results in our Canadian and Gulf Olefins operations. Segment profit benefited from increased processing margins in both 2003 and 2002 due to rising NGL prices coupled with depressed natural gas prices in the Wyoming area. In contrast, Canadian and Gulf Olefins production margins suffered as market prices for ethane and propane feedstocks increased more than those for the olefins produced at these facilities, which lowered operating results. In addition, gains on asset and investment sales, reduced selling, general and administrative expenses, and gathering system net gains are offset by lower partnership earnings and higher depreciation expense. A more detailed analysis of segment profit of our various operations is presented below:
Domestic Gathering & Processing: The $79.3 million increase in domestic gathering and processing segment profit includes an $86.0 million increase in the Gulf Coast Region, partially offset by a $6.7 million decline in the West Region.
The Gulf Coast Regions $86 million improvement is largely attributable to $42 million of incremental segment profit associated with new infrastructure in the deepwater area of the Gulf of Mexico. The Canyon Station production platform, Seahawk gas gathering pipeline, and Banjo oil transportation system were placed into service during the latter half of 2002 and each contributed to Midstreams segment profit. The remaining Gulf Coast gathering and processing assets provided approximately $44 million in additional net revenues,
70
The West Regions $6.7 million segment profit decline reflects the absence of $7 million in operating profit associated with the Kansas Hugoton gathering system sold in August 2002. Although 2003 segment profit is comparable to 2002, the West Regions segment results were impacted by several offsetting factors discussed below:
| Gas processing margins declined $10 million compared to margins experienced in 2002. Throughout 2002 and the first quarter of 2003, rising NGL prices and depressed Wyoming natural gas prices yielded very favorable processing margins. Wyoming natural gas prices rebounded at the end of the first quarter 2003 as the completion of the Kern River Pipeline system added transportation capacity relieving downward price pressure. Margins recovered somewhat in the fourth quarter as Wyoming gas prices lagged behind the increases in other energy commodities. | |
| Gathering and processing fee revenues declined $11 million primarily due to fewer customers electing the fee-based billing option of processing contracts. | |
| Non-reimbursed fuel expenses declined $8 million, largely attributed to favorable adjustments in the annual fuel reimbursement rates. This favorable variance is not likely to continue in 2004. | |
| We realized $17 million in non-recurring net product gains related to our gas gathering system. These gains represent less than one-third of one percent of total gas gathered and are within industry standards. Historically our gathering system realizes net gains and losses, and therefore, we do not consider these gains to be recurring in nature. | |
| Depreciation expense was $10 million higher in large part due to additional investments in the West. |
Venezuela: Segment profit for our Venezuelan assets remained virtually unchanged. Higher compression rates in 2003 and the 2002 currency exchange loss resulted in $11 million higher profits at the PIGAP gas compression facility. These higher profits were partially offset by a $8 million decrease in the El Furrial operating margins attributed to plant downtime caused by a fire that occurred in the first quarter of 2003. Also offsetting the increase in PIGAP operating profit is a $4 million decline resulting from the termination of the Jose Terminal operations contract in December 2002. Our Venezuelan assets were constructed and are currently operated for the exclusive benefit of Petroleos de Venezuela S.A. (PDVSA), the state owned Petroleum Corporation of Venezuela. The Venezuelan economic and political environment can be volatile, but has not significantly impacted the operations and cash flows of our facilities.
Effective February 7, 2004, the Venezuelan government revalued the fixed exchange rate for their local currency from 1,600 Bolivars to the dollar to 1,920 Bolivars to the dollar. This effect of this currency devaluation will be recorded in the first quarter of 2004 but should not have a significant impact on our first quarter segment profit.
Canada: The $42.3 million increase in segment profit for our Canadian assets reflects the difference in impairment charges of $41.7 million in 2003 and $115 million in 2002. The 2003 charge relates to the Empress V and Empress II liquids extraction facilities; the 2002 charge related to the same facilities as well as the Redwater/ Fort McMurray olefins assets. The remaining $31 million decline is primarily attributable to declining processing margins and higher operating expenses. Segment profit at our Canadian gas processing plants and olefins facility declined $26 million primarily due to gas prices increasing at a greater rate than NGL prices and higher operating expenses related to the Redwater/ Fort McMurray olefins facility that became operational in April 2002. In addition, currency transaction losses were $5 million higher in 2003 due to the decline of the U.S. dollar compared to the Canadian dollar.
71
Other: The $18.3 million decline in segment profit for Midstreams other operations is attributed to lower domestic olefins margins and unfavorable partnership earnings, partially offset by the gain on sale of our wholesale propane operations.
| Segment profit for our domestic Olefins group declined $14 million primarily as a result of reduced olefins fractionation margins as the price of ethane and propane feedstock increased more than the price of olefins products. Higher maintenance expenses also contributed to the decline in segment profit. Olefins production margins continue to be impacted by weak consumer demand for products produced by petrochemical facilities. | |
| Our earnings from partially owned domestic assets accounted for using the equity method declined $18 million largely due to $13 million in prior period accounting adjustments recorded on the Discovery partnership, the 2003 sale of other investments that generated positive earnings in 2002 and $14 million of impairment charges associated with the Aux Sable partnership investment. These unfavorable results were partially offset by net gains totaling approximately $20 million from the sale of our interests in the West Texas, Rio Grande, Wilprise, and Tri-states liquids pipeline partnerships. | |
| Segment profit for our Trading, Fractionation, and Storage group increased $14 million primarily due to a $16 million gain on the fourth-quarter 2003 sale of our wholesale propane business consisting of certain supply contracts and seven propane distribution terminals. Our NGL trading operations activities were substantially curtailed in 2003, resulting in $11 million lower selling, general, and administrative costs partially offset by $8 million in lower net trading revenues. In addition, NGL service fees declined $5 million due to the sale of several NGL terminals in 2002. |
2002 vs. 2001 |
Our revenues decreased $96.0 million as a result of:
| a $19.8 million increase in domestic gathering, processing, transportation and liquid product sales revenues, | |
| a $48.7 million increase in Venezuelan revenues, | |
| a $47.5 million decrease in Canadian revenues, and | |
| a $117 million decline in domestic petrochemical and trading revenues. |
The $19.8 million increase in domestic gathering, processing, transportation, storage, fractionation and liquid product sales revenues resulted from a $34 million increase in liquid sales and a $10 million increase in transportation revenues, partially offset by a $17 million decrease in gathering revenues primarily due to the third-quarter 2002 sale of the Kansas-Hugoton gathering system, a $2 million decrease in storage revenues and a $4 million decrease in fractionation revenues. The increase in liquid sales reflects a $67 million increase in gulf coast liquid sales resulting primarily from higher production at existing processing facilities, and the September 2001 completion of a new processing facility that processes natural gas gathered from deepwater projects off the coast of Texas.
The increase in Gulf Coast liquid sales was partially offset by a $33 million decline in liquid sales in the west, primarily caused by a decline in average liquid sales prices. The $10 million increase in transportation revenues reflects the results of a new deepwater oil and gas transportation system which was completely operational by mid-year 2002.
The $117 million decline in petrochemicals and trading revenues is due largely to a September 2001 change in the reporting of certain petrochemical and liquid product trading transactions from a gross revenue basis to a net revenue basis combined with lower natural gas liquid trading margins.
The $48.7 million increase in Venezuelan revenues reflects a full year of results from a new gas compression facility that began operations in August 2001.
72
The decrease in Canadian revenues primarily results from a $29 million decrease in processing revenues and a $24 million decrease in liquid sales from processing activities. The decrease in processing revenue reflects lower processing rates under cost of service agreements as a result of lower natural gas shrink prices. The decrease in liquid sales from processing activities reflects lower average liquid sales prices.
Costs and operating expenses decreased $192 million, or 15 percent, primarily reflecting a decline in fuel and product shrink costs at the domestic and Canadian processing facilities of $21 million and $71 million, respectively. These decreases reflect lower average natural gas prices in Canada and Wyoming, offset by higher volumes and prices in the Gulf Coast. The lower average gas prices in Wyoming during 2002 reflect a favorable differential between gas prices in Wyoming and the Gulf as a result of limited transportation capacity from Wyoming to other markets. This favorable basis differential had the effect of lower shrink costs and increasing liquid sales margins from Wyoming processing plants and is not expected to continue once take away transportation capacity within this region has been expanded. Costs and operating expenses also reflect a $92 million decline in petrochemical and trading costs resulting from the September 2001 change in reporting certain product trading classifications. These decreases are partially offset by $14 million higher transportation, fractionation, and marketing costs. Operations and maintenance expenses were relatively unchanged on a segment basis. A $32 million decline in costs in the west primarily, resulting from lower maintenance spending, was offset by a corresponding increase in the Gulf, Canada and Venezuela. The increase in these areas was largely associated with higher maintenance costs resulting from the new Venezuelan gas compression facility, Canadian olefins facility and new deepwater offshore operations.
Selling, general and administrative costs were relatively unchanged on a segment basis.
Other (income) expense-net within segment costs and expense for 2002 includes a $115 million impairment associated with the Canadian processing, extraction and olefin extraction assets (see Note 4 of Notes to Consolidated Financial Statements) and a $6 million impairment associated with the sale of the Kansas Hugoton gathering system in the third quarter. Reflected in 2001 are $13.8 million of impairments associated with certain south Texas non-regulated gathering and processing assets (see Note 4 of Notes to Consolidated Financial Statements).
Segment profit increased $11 million from 2001. This increase reflects a $95 million increase in domestic operations, a $20 million increase in Venezuelan operations and a $104 million decrease in Canadian operations.
Domestic segment profit reflects a $45 million increase in liquid sales margins resulting from the low fuel and shrink costs in the west reflecting the wide basis differential for natural gas prices in Wyoming. Domestic segment profit also increased $31 million due to income from equity investments primarily related to significant improvements in the operations of Discovery pipeline following new supply connections that resulted in higher transportation and liquid volumes. Domestic segment profit was also impacted by a $16 million increase in profits from an increase in deepwater operations.
The decrease in segment profit from Canadian operations primarily relates to the $115 million impairment discussed above.
Segment profit from Venezuelan operations reflects an increase resulting from a full year of results following the completion of a new gas compression facility in August 2001.
Other
Overview of 2003 |
During 2003, we began reporting the Petroleum Services segment within Other as a result of a significant portion of the Petroleum Services assets being reflected as discontinued operations. Other now includes corporate operations, certain international activities and the remaining continuing operations of Petroleum Services.
73
Outlook for 2004 |
During February 2004, we were a party to a recapitalization plan completed by Longhorn Partners Pipeline, L.P. (Longhorn). As a result of this plan, we sold a portion of our equity investment in Longhorn for $11.4 million, received $58 million in repayment of a portion of our advances to Longhorn and converted the remaining advances, including accrued interest, into preferred equity interests in Longhorn. These preferred equity interests are subordinate to the preferred interests held by the new investors. No gain or loss was recognized on this transaction.
Year-over-year operating results |
Years Ended December 31, | ||||||||||||
|
||||||||||||
2003 | 2002 | 2001 | ||||||||||
|
|
|
||||||||||
(Millions) | ||||||||||||
Segment revenues
|
$ | 72.0 | $ | 124.1 | $ | 319.3 | ||||||
Segment profit (loss)
|
$ | (50.5 | ) | $ | 14.1 | $ | 37.5 |
2003 vs. 2002 |
Other segment loss for 2003 includes a $43.1 million impairment related to our investment in Longhorn. The impairment resulted from our assessment that indicated there had been an other than temporary decline in the fair value of this investment. Longhorn equity earnings increased $15.7 million during 2003 from a loss of $13.8 million in 2002. The 2002 segment profit includes a $58.5 million gain on the sale of our 27 percent ownership interest in the Lithuanian operations partially offset by a $12.6 million equity loss for those operations.
2002 vs. 2001
The $195.2 million, or 61 percent, decrease in revenues is due primarily to $184 million lower convenience store revenues after the sale in May 2001 of 198 convenience stores.
Other segment profit in 2002 includes a $58.5 million gain from the September 2002 sale of our 27 percent ownership interest in the Lithuanian refinery, pipeline and terminal complex and a $9.5 million decrease in equity losses from the Lithuanian operations for the period. We received proceeds of approximately $85 million from the sale of this investment. In addition, we sold our $75 million note receivable from the Lithuanian operations at face value. Equity losses related to Longhorn increased $13.9 million from 2001 to 2002. Included in 2001 segment profit is a $75.3 million gain on the sale of 198 convenience stores.
74
Energy trading activities
As of December 31, 2002, we carried energy and energy-related contracts on the Consolidated Balance Sheet at fair value. We held all of these energy and energy-related contracts for trading purposes. As of December 31, 2002, we reported net assets of approximately $1,632 million related to the fair value of energy risk management and trading contracts. Of this value, approximately $1,193 million pertained to non-derivative energy contracts, which were reflected at fair value under EITF Issue No. 98-10. On October 25, 2002 in Issue No. 02-3, the EITF rescinded Issue No. 98-10. With the adoption of EITF 02-3 on January 1, 2003, we reversed this non-derivative fair value through a cumulative adjustment from a change in accounting principle. These contracts are now accounted for under the accrual method. Effective January 1, 2003, only energy contracts meeting the definition of a derivative are reflected at fair value on the Consolidated Balance Sheet.
Fair value of trading derivatives
Consistent with our announcement to exit the
merchant power and generation business, in 2003 we assessed
which derivative contracts we held for trading purposes and
which we held for non-trading purposes. We consider trading
derivatives to be those held to provide price risk management
services to third-party customers. The chart below reflects the
fair value of derivatives held for trading purposes as of
December 31, 2003. We have presented the fair value of
assets and liabilities by period in which they are expected to
be realized.
To be
To be
To be
To be
Realized in
Realized in
Realized in
Realized in
1-12 Months
13-36 Months
37-60 Months
61-120 Months
Total Fair
(Year 1)
(Years 2-3)
(Years 4-5)
(Years 6-10)
Value
(Millions)
$(3)
$25
$22
$(5)
$39
As the table above illustrates, we are not materially engaged in trading activities. However, we hold a substantial portfolio of non-trading derivative contracts. Non-trading derivative contracts are those that hedge or could possibly hedge Powers long-term structured contract positions and the activities of our other segments on an economic basis. Certain of these economic hedges have not been designated as or do not qualify as SFAS No. 133 hedges. As such, changes in the fair value of these derivative contracts are reflected in earnings. We also hold certain derivative contracts, which do qualify as SFAS No. 133 cash flow hedges, which primarily hedge Exploration & Productions forecasted natural gas sales. As of December 31, 2003, the fair value of these non-trading derivative contracts was a net asset of $435 million.
Methods of estimating fair value |
Most of the derivatives we hold settle in active periods and markets in which quoted market prices are available. Quoted market prices in active markets are readily available for valuing forward contracts, futures contracts, swap agreements and purchase and sales transactions in the commodity and capital markets in which we transact. While an active market may not exist for the entire period, quoted prices can generally be obtained for the following:
| natural gas through 2013, | |
| power through 2007, | |
| crude and refined products through 2005, | |
| natural gas liquids through 2004, and | |
| interest rates through 2033. |
These prices reflect the economic and regulatory conditions that currently exist in the marketplace and are subject to change in the near term due to changes in market conditions. The availability of quoted market prices in active markets varies between periods and commodities based upon changes in market conditions.
75
We estimate energy commodity prices in illiquid periods by incorporating information about commodity prices in actively quoted markets, quoted prices in less active markets, and other market fundamental analysis.
Due to the adoption of EITF 02-3, modeling and other valuation techniques are not used significantly in determining the fair value of our derivatives. Such techniques were primarily used in previous years for valuing non-derivative contracts, which are no longer reported at fair value, such as transportation, storage, full requirements, load serving, transmission and power tolling contracts (see Note 1 of Notes to Consolidated Financial Statements).
Counterparty credit considerations |
We include an assessment of the risk of counterparty non-performance in our estimate of fair value for all contracts. Such assessment considers 1) the credit rating of each counterparty as represented by public rating agencies such as Standard & Poors and Moodys Investors Service, 2) the inherent default probabilities within these ratings, 3) the regulatory environment that the contract is subject to and 4) the terms of each individual contract.
Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. We continually assess this risk. We have credit protection within various agreements to call on additional collateral support if necessary. At December 31, 2003, we held collateral support of $342 million.
We also enter into netting agreements to mitigate counterparty performance and credit risk. In 2002 and 2003, we closed out various trading positions. During 2003, we did not incur any significant losses due to recent counterparty bankruptcy filings.
The gross credit exposure from our derivative
contracts as of December 31, 2003 is summarized below.
Investment
Counterparty Type
Grade(a)
Total
(Millions)
$
988.2
$
1,045.9
1,317.2
3,118.5
918.5
918.5
609.8
619.3
$
3,833.7
5,702.2
(39.8
)
$
5,662.4
76
We assess our credit exposure on a net basis. The
net credit exposure from our derivatives as of December 31,
2003 is summarized below.
Investment
Counterparty Type
Grade(a)
Total
(Millions)
$
606.1
$
629.4
52.1
376.3
160.4
160.4
.2
$
818.6
1,166.3
(39.8
)
$
1,126.5
(a) | We determine investment grade primarily using publicly available credit ratings. We included counterparties with a minimum Standard & Poors rating of BBB- or Moodys Investors Service rating of Baa3 in investment grade. We also classify counterparties that have provided sufficient collateral, such as cash, standby letters of credit, adequate parent company guarantees, and property interests, as investment grade. | |
(b) | One counterparty within the California power market represents more than ten percent of the derivative assets and is included in investment grade. Standard & Poors and Moodys Investors Service do not currently rate this counterparty. We included this counterparty in the investment grade column based upon contractual credit requirements in the event of assignment or substitution of a new obligation for the existing one. |
Financial condition and liquidity
Liquidity |
Overview of 2003 |
Entering 2003, we faced significant liquidity challenges with sizeable maturing debt obligations and limited financial flexibility due in part to covenants arising from 2002 short-term financings. Our plan to address these issues, announced in February 2003, required immediate execution of significant levels of asset sales to meet maturing obligations in excess of $1 billion by mid-year.
Through June 30, we were successful in generating approximately $2.4 billion of net proceeds from the sale of assets. With sufficient liquidity in hand, we prepaid the RMT Note totaling $1.15 billion. During the same period, we enhanced overall liquidity through the following actions:
| obtained a new $800 million revolving and letter of credit facility that is collateralized by cash and/or government securities, but allows operation with minimal covenants, none of which contain financial ratios; | |
| issued $800 million of 8.625 percent senior unsecured notes due 2010, which provided added liquidity in advance of remaining asset sales and flexibility to use funds to retire the $1.4 billion senior unsecured 9.25 percent notes maturing in March 2004; | |
| redeemed the $275 million 9.875 percent cumulative-convertible preferred shares through the issuance of $300 million of 5.5 percent junior subordinated convertible debentures; | |
| through our RMT subsidiary, obtained a new $500 million term loan at market rates and collateralized by RMT assets, the proceeds of which were used together with other funds to repay the RMT Note; and |
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| through our Northwest Pipeline subsidiary, issued $175 million of 8.125 percent senior unsecured notes due 2010, which enabled Northwest Pipeline to fund capital expenditures without borrowing cash from our parent company. |
During the fourth quarter of 2003, we continued the execution of our plan to reduce debt with available funds by tendering for and retiring debt of nearly $1 billion. Of this total, $721 million was comprised of the 9.25 percent notes due March 2004, leaving $679 million outstanding.
During 2003, we generated net cash proceeds from asset sales of approximately $3.0 billion. We expect to realize approximately $800 million from additional asset sales in 2004. The remaining expected asset sales include our Alaska refinery and related operations, which are currently under contract for sale, and certain Midstream assets. Our 2003 cash flow from operations of $770 million funded a large portion of our capital spending requirements for the year. At December 31, 2003, we have available unrestricted cash on hand of approximately $2.3 billion.
Sources of liquidity |
Our liquidity is derived from both internal and external sources. Certain of those sources are available to us (at the parent level) and others are available to certain of our subsidiaries.
At December 31, 2003, we have the following sources of liquidity:
| Cash-equivalent investments at the corporate level of $2.2 billion as compared to $1.3 billion at December 31, 2002. | |
| Cash and cash-equivalent investments of various international and domestic entities of $91 million, as compared to $352 million at December 31, 2002. |
At December 31, 2003, we have capacity of $447 million available under our current revolving and letter of credit facility. In June 2003, we entered into this revolving and letter of credit facility which is used primarily for issuing letters of credit and must be collateralized at 105 percent of the level utilized (see Note 11 of Notes to Consolidated Financial Statements). As discussed below in the Outlook for 2004 section, we intend to replace this facility in 2004 with facilities that do not require cash collateralization. In contrast, at December 31, 2002 we had a combined $466 million available under the previous revolver and letter of credit facilities.
In addition to these sources of liquidity described above, we have an effective shelf registration statement with the Securities and Exchange Commission that authorizes us to issue an additional $2.2 billion of a variety of debt and equity securities. However, the ability to utilize this shelf registration for debt securities is restricted by certain covenants associated with our $800 million 8.625 percent senior unsecured notes (see Note 11 of Notes to Consolidated Financial Statements).
In addition, our wholly owned subsidiaries Northwest Pipeline and Transco have outstanding registration statements filed with the Securities and Exchange Commission. As of December 31, 2003, approximately $350 million of shelf availability remains under these registration statements. However, the ability to utilize these registration statements is restricted by certain covenants associated with our $800 million 8.625 percent senior unsecured notes. Interest rates, market conditions, and industry conditions will affect amounts raised, if any, in the capital markets. On March 4, 2003, Northwest Pipeline completed an offering of $175 million of 8.125 percent senior notes due 2010. These notes contain covenants similar to those of the $800 million 8.625 percent senior unsecured notes discussed above. The $350 million of shelf availability mentioned above was not utilized for this offering.
During 2003, we supplied liquidity needs with:
| Cash generated from the sale of assets In 2003, we generated approximately $3.0 billion in net proceeds from asset sales and expect to realize approximately $800 million from additional asset sales in 2004. |
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| Cash generated from operations In 2003, we generated $569.8 million in cash flow from continuing operations and expect to generate $1.0 to $1.3 billion in 2004. |
We estimate approximately $700 million to $800 million for 2004 capital and investment expenditures. We expect to fund capital and investment expenditures, debt payments and working-capital requirements through (1) cash and cash equivalent investments on hand, (2) cash generated from operations, and (3) cash generated from the sale of assets.
Outlook for 2004 |
In 2004, we expect to make significant additional progress towards debt reduction while maintaining appropriate levels of cash and other forms of liquidity. To manage our operations and meet unforeseen or extraordinary calls on cash, we expect to maintain cash and/or liquidity levels of at least $1 billion. While access to the capital markets continues to improve, one of our indentures has a covenant that restricts our ability to issue new debt, with minimal exceptions, until a certain fixed charge coverage ratio is achieved. We expect to satisfy this requirement by the end of 2005. The covenant does not prohibit us from replacing our existing revolving and letter of credit facility with new facilities. Several of our indentures contain covenants restricting our ability to grant liens securing debt, but such covenants all contain significant exceptions allowing us to incur secured debt without granting similar liens to the holders of notes under those indentures. In determining the appropriate level of liquidity, we have considered the potential impact of significant swings in commodity prices, contract margin requirements, unplanned calls on capital spending and the need for a reserve for near term scheduled debt payments.
During 2004, we expect to reduce long term debt, including scheduled maturities of $1 billion, based on the following assumptions:
| generation of approximately $800 million from additional asset sales, | |
| generation of cash flow from operations by our businesses in excess of capital spending levels, | |
| replacement of our revolving and letter of credit facility with facilities that do not require cash collateralization, and | |
| utilization of available cash on hand in excess of minimum liquidity levels. |
Successful execution of this plan does not require us to to incur new debt.
Potential risks associated with achieving this objective include:
| Lower than expected levels of cash flow from operations. |
To mitigate this exposure, Exploration & Production has hedged the price of natural gas for approximately 80 percent of its expected 2004 production. Power estimates that it has hedged revenues, of varying degrees of certainty, covering approximately 98 percent of its fixed demand obligations through 2010. |
| Delays in asset sales or lower than expected proceeds. |
Approximately one-third of the remaining asset sales are currently under contract and expected to close during the first quarter. If these sales do not close, we will not be precluded from meeting our operating commitments. |
| Sensitivity of margin requirements associated with our marginable commodity contracts. |
As of February 2004, we estimate our exposure to additional margin requirements over the next 360 days to be as much as $350 million. |
| Exposure associated with our efforts to resolve regulatory and litigation issues arising from the Power business and the ongoing defense of certain shareholder litigation (see Note 16 of Notes to Consolidated Financial Statements). | |
| Ability to replace our revolver and letter of credit facility on satisfactory terms. |
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Based on our available cash on hand and expected cash flows from operations, we believe we have, or have access to, the financial resources and liquidity necessary to meet future cash requirements and maintain a sufficient level of liquidity to reasonably protect against unforeseen circumstances requiring the use of funds.
Credit ratings
During 2002, our credit ratings were downgraded to below investment grade and remained below investment grade throughout 2003. As a result, Powers participation in energy risk management and trading activities requires alternate credit support under certain agreements. In addition, we are required to fund margin requirements pursuant to industry standard derivative agreements with cash, letters of credit or other negotiable instruments. Currently, we are effectively required to post margins of 100 percent or more on forward contracts in a loss position. Future liquidity requirements relating to these instruments will be based on changes in their value resulting from changes in factors such as price and volatility.
As part of the plan announced in February of 2003, we established a goal of returning to investment grade status. While reduction of debt is viewed as a key contributor towards this goal, certain of the key credit rating agencies have imputed the financial commitments associated with our long-term tolling agreements within the Power business as debt. If we are unable to achieve our goal of exiting the Power business and/or the elimination of these commitments, receiving an investment grade rating may be further delayed.
Off-balance sheet financing arrangements and guarantees of debt or other commitments to third parties |
At December 31, 2001, we had operating lease agreements with special purpose entities (SPEs) relating to certain of our travel center stores (included in discontinued operations), offshore oil and gas pipelines and an onshore gas processing plant. As a result of changes to the leases in conjunction with the secured financing facilities completed in July 2002, they no longer qualified for operating lease treatment. The operating leases for the offshore oil and gas pipelines and onshore gas processing plant were recorded as capital leases within long-term debt at that time and were repaid in May 2003. The travel center lease was reported in liabilities of discontinued operations and was repaid in March 2003 pursuant to the travel centers sale.
We had agreements to sell, on an ongoing basis, certain of our accounts receivable to qualified special-purpose entities. On July 25, 2002, these agreements expired and were not renewed.
In May 2002, we provided a guarantee of approximately $127 million towards project financing of energy assets owned and operated by Discovery Producer Services LLC (Discovery) in which we own a 50 percent interest. This obligation was not consolidated in our balance sheet as we account for our interest under the equity method of accounting. The guarantee was scheduled to expire at the end of 2003. However, in December 2003, we made an additional $127 million investment in Discovery which was used to fully repay maturing debt satisfying the guarantee obligation. All owners contributed amounts equal to their ownership percentage. (See the Investing Activities section for discussion of additional investment).
We have provided guarantees in the event of nonpayment by WilTel on certain of its lease performance obligations that extend through 2042 and have a maximum potential exposure of approximately $51 million and $53 million at December 31, 2003 and 2002, respectively. Our exposure declines systematically throughout the remaining lease terms. The recorded carrying value of these guarantees was $46 million and $48 million at December 31, 2003 and 2002 respectively.
In addition to these guarantees, we have issued guarantees and other similar arrangements with off-balance sheet risk as discussed under Guarantees in Note 15 of Notes to Consolidated Financial Statements.
Operating activities
The increase in cash flow from operations from 2002 levels is primarily due to the following:
| improvement in Income (loss) from continuing operations by $626.9 million, | |
| the absence of $753.9 million in payment of guarantees and payment obligations related to WilTel, |
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| the reduction of margin funding requirements of $885.6 million, and | |
| the increase in cash flow due to changes in accounts and notes receivable of $430.6 million. |
The increase in Income (loss) from continuing operations is reflective of the overall improvement in the performance of our operating units. However, the noted improvement in Income (loss) from continuing operations had a lesser impact on cash flow from operations because Income (loss) from continuing operations in 2002 included higher non-cash expenses of $162.2 million for losses on property and other assets and the $268.7 million provision for uncollectible accounts from WilTel. The improvement in margin funding requirements is a result of our decreased activity in the Power business. We expect a continued decrease in margin funding requirements in 2004 as we continue to manage our current positions to reduce risk and exit other positions, which reduces our overall activity. The increase in operating cash flow related to decreased accounts receivable is a reflection of the continued decrease in activity in the Power business in 2003. Cash flow from operations for 2004 is expected to be sufficient to fund the projected 2004 capital expenditures of $700 million to $800 million.
In March 2002, WilTel exercised its option to purchase certain network assets under the ADP transaction for which we had previously provided a guarantee. On March 29, 2002, as guarantor under the agreement, we paid $753.9 million related to WilTels purchase of these network assets. In 2002, we recorded in continuing operations additional pre-tax charges of $268.7 million related to the settlement of these receivables and claims. In 2001, we had recorded a $188 million charge related to estimated recovery of amounts from WilTel (see Note 2 of Notes to Consolidated Financial Statements).
The increase in net income and other increases in cash flows from operations were offset by:
| a $929.5 million decrease in derivative and energy risk management and trading net assets and liabilities; and | |
| a $265.0 million payment on deferred set-up fee and fixed rate interest on the RMT note payable. |
The decrease in funds associated with derivative and energy risk management and trading assets and liabilities during 2003 is a result of the decline in the activity of the Power business. As we continue to reduce our activity in the Power business, the cash requirements tied to working capital and margin deposits will continue to decrease.
During 2003, we recorded approximately $273.6 million in provisions for losses on property and other assets and a net gain on disposition of assets of $142.8 (see Notes 3 and 4 of Notes to Consolidated Financial Statements).
The accrual for fixed rate interest included in the RMT Note on the Consolidated Statement of Cash Flows represents the quarterly non-cash reclassification of the deferred fixed rate interest from an accrued liability to the RMT Note. The amortization of deferred set-up fee and fixed rate interest on the RMT Note relates to amounts recognized in the income statement as interest expense, which were not payable until maturity. The RMT Note was repaid in May 2003 (see Note 11 of Notes to Consolidated Financial Statements).
Financing activities |
During 2003, we made significant progress in executing our business plan. We retired $3.2 billion in debt, redeemed $275 million in preferred stock, and issued $2 billion in debt at more favorable market rates. In 2004, we plan to further reduce debt with funding from (1) available cash on hand, (2) cash from asset sales, (3) operating cash flow after capital expenditures, and (4) the release of cash currently used as collateral. As discussed in the Outlook section, we plan to replace our existing revolver and letter of credit facility with new credit facilities that do not require cash collateralization.
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Significant borrowings and repayments during 2003 included the following:
| On March 4, our Northwest Pipeline subsidiary completed an offering of $175 million of 8.125 percent senior notes due 2010. Proceeds from the issuance were used for general corporate purposes, including the funding of capital expenditures. | |
| On May 28, we issued $300 million of 5.5 percent junior subordinated convertible debentures due 2033. The proceeds were used to redeem all of the outstanding 9.875 percent cumulative-convertible preferred shares (see Note 13 of Notes to Consolidated Financial Statements). | |
| In May, we repaid the RMT note payable of Williams Production RMT Company totaling $1.15 billion, which included certain contractual fees and deferred interest. | |
| On May 30, a subsidiary in our Exploration & Production segment entered into a $500 million secured note due May 30, 2007, at a floating interest rate of LIBOR plus 3.75 percent. This loan refinances a portion of the RMT Note discussed above. On February 25, 2004 we completed an amendment that provided more favorable terms including a lower interest rate and an extension of the maturity by one year (see Note 11 of Notes to Consolidated Financial Statements). | |
| On June 6, we entered into a two-year $800 million revolving and letter of credit facility, primarily for the purpose of issuing letters of credit. Along with our subsidiaries Northwest Pipeline and Transco, we have access to all unborrowed amounts under the facility. The facility must be secured by cash and/or acceptable government securities with a market value of at least 105 percent of the then outstanding aggregate amount available for drawing under all letters of credit, plus the aggregate amount of all loans then outstanding. | |
| On June 10, we issued $800 million of 8.625 percent senior unsecured notes due 2010. The notes were issued under our $3 billion shelf registration statement. See Note 11 of Notes to Consolidated Financial Statements for a description of the terms and covenants related to this issuance. The proceeds were used to improve corporate liquidity, general corporate purposes, and payment of maturing debt obligations. | |
| On June 10, we also redeemed all the outstanding 9.875 percent cumulative-convertible preferred shares for approximately $289 million, plus $5.3 million for accrued dividends. | |
| On October 8, we announced a cash tender offer for any and all of our $1.4 billion senior unsecured 9.25 percent notes due in March 2004, as well as cash tender offers and consent solicitations for approximately $241 million of additional notes and debentures. At the expiration of the offers, we received tenders of debt securities with an aggregate principal amount of approximately $951 million. In conjunction with the tendered notes and related consents, we paid premiums of approximately $58 million. The premiums, as well as related fees and expenses, together totaling $66.8 million, were recorded in fourth-quarter 2003 as a pre-tax charge to earnings. | |
| In October, our PIGAP high-pressure gas compression project in Venezuela obtained $230 million in non-recourse financing. We own a 70 percent interest in the project and, therefore, the debt is reflected on our Consolidated Balance Sheet ($22 million in current portion of long-term debt, $208 million in long-term debt). Proceeds from the loan were used to repay us for notes due and the other owner for a portion of the initial funding of construction-related costs. Upon the execution of the loan, the project made additional cash distributions to the owners based on their respective ownership interests. We received approximately $185 million in cash proceeds, net of amounts paid relating to an up front premium, the purchase of an interest rate lock and cash used to fund a debt service reserve. |
For a discussion of other borrowings and repayments in 2003, see Note 11 of Notes to Consolidated Financial Statements.
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In 2002, notes payable payments were $1.1 billion net of notes payable proceeds while long-term debt proceeds was $943 million net of long term debt payments. Significant borrowings and repayments in 2002 included the following:
| On January 14, we completed the sale of 44 million publicly traded units, commonly known as FELINE PACS, that include a senior debt security and an equity purchase contract, for net proceeds of approximately $1.1 billion (see Note 13 of Notes to Consolidated Financial Statements). | |
| On March 19, we issued $850 million of 30-year notes with an interest rate of 8.75 percent and $650 million of 10-year notes with an interest rate of 8.125 percent. The proceeds were used to repay approximately $1.4 billion outstanding commercial paper, provide working capital and for general corporate purposes. | |
| In May, Power entered into an agreement which transferred the rights to certain receivables, along with risks associated with that collection, in exchange for cash. Due to the structure of the agreement, Power accounted for this transaction as debt collateralized by the claims. The $79 million of debt at December 31, 2003 and 2002 is classified as current on the Consolidated Balance Sheet. The debt is classified as current because if at any time the value of the underlying receivables decreases or becomes questionable, the liability will be required to be paid. | |
| RMT entered into a $900 million credit agreement dated as of July 31, 2002. As discussed previously, this amount was repaid in May 2003. |
Dividends paid on common stock are currently $.01 per common share on a quarterly basis and totaled $20.8 million for the year ended December 31, 2003. One of the covenants under the indenture for the $800 million senior unsecured notes due 2010 currently limits our quarterly common stock dividends to not more than $.02 per common share. This restriction will be removed in the future if certain requirements in the covenants are met (see Note 11 of Notes to Consolidated Financial Statements). In 2003, we also paid $32.6 million in accrued dividends on the 9.875 percent cumulative-convertible preferred shares that were redeemed in June 2003. The $32.6 million of deferred dividends paid includes the 2003 payment of $6.8 million in dividends accrued at December 31, 2002. The $29.5 million of preferred stock dividends reported on the Consolidated Statement of Operations also includes $3.7 million of issuance costs.
In December 2001, we received net proceeds of $95.3 million from the sale of a non-controlling preferred interest in Piceance Production Holdings LLC (Piceance) to an outside investor. During 2000, we received net proceeds totaling $546.8 million from the sale of a preferred return interest in Snow Goose Associates, L.L.C. (Snow Goose) to an outside investor (see Note 12 of Notes to Consolidated Financial Statements). During 2002, changes to these limited liability company member interests and interests in Castle Associates L.P. (Castle) required classification of these outside investor interests as debt. The changes to the Snow Goose structure also included the repayment of the investors preferred interest in installments. During 2002, approximately $558 million was repaid related to these interests and is included in the payments of long-term debt. During 2003, the remaining balances associated with the above interests were paid. Approximately $323 million of payments were made and are included in payments of long-term debt for 2003 (see Note 12 of Notes to Consolidated Financial Statements.)
In third-quarter 2002, the downgrade of our senior unsecured rating below BB by Standard & Poors, and Ba1 by Moodys Investors Service, resulted in the early retirement of an outside investors preferred ownership interest for $135 million (see Note 12 of Notes to Consolidated Financial Statements).
In December 1999, we formed Williams Capital Trust I, which issued $175 million in our zero-coupon obligated, mandatorily-redeemable preferred securities. In April 2001, we redeemed our obligated, mandatorily-redeemable preferred securities for $194 million. We used proceeds from the sale of the Ferrellgas senior common units for this redemption.
Long-term debt, including debt due within one year was $12.0 billion at December 31, 2003 compared to $12.2 billion at December 31, 2002.
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Significant items reflected as discontinued operations within financing activities in the Consolidated Statement of Cash Flows, including the cash provided by financing activities, included the following items:
2002 |
| Proceeds from long-term debt of Williams Energy Partners LP related to financing entered into in 2002 of $489 million. | |
| Net proceeds from issuance of common units by Williams Energy Partners LP in 2002 of $279 million. |
2001 |
| Proceeds from issuance of $1.4 billion of WCG Note Trust Notes for which we provided indirect credit support. WilTel retained all of the proceeds from this issuance (see Note 2 of Notes to Consolidated Financial Statements). |
Investing activities |
Capital expenditures by segment are presented below.
Capital Expenditures
Segment
2003
2002
2001
(Millions)
$
1.0
$
135.8
$
103.7
485.2
655.0
526.1
202.0
364.1
202.6
266.1
450.6
556.9
2.5
57.3
60.4
$
956.8
$
1,662.8
$
1,449.7
| Power made capital expenditures in 2002 and 2001 primarily to purchase power-generating turbines. | |
| Gas Pipeline made capital expenditures in 2001 through 2003 primarily to expand deliverability into the east and west coast markets. Planned expenditures for 2004 are primarily for pipeline maintenance. | |
| Exploration & Production made capital expenditures in 2001 through 2003 primarily for continued development of our natural gas reserves through the drilling of wells. Planned expenditures for 2004 are expected to be for similar activities. | |
| Midstream made capital expenditures in 2001 through 2003 primarily to acquire, expand, develop and modernize gathering and processing facilities and terminals. Included in capital expenditures are the following amounts related to the deepwater project: 2003 $189 million; 2002 $343 million; and 2001 $136 million. Planned expenditures for 2004 are expected to be for similar activities. |
The acquisition of businesses in 2001 reflects our June 11, 2001, acquisition of 50 percent of Barretts outstanding common stock in a cash tender offer of $73 per share for a total of approximately $1.2 billion. On August 2, 2001, we completed the acquisition of Barrett by issuing 29.6 million shares of our common stock in exchange for the remaining Barrett shares.
Purchase of investments/advances to affiliates in 2003 consists primarily of $127 million of additional investment by Midstream in Discovery. The cash investment was used by Discovery to pay maturing debt (see Note 3 of Notes to Consolidated Financial Statements). Purchases in 2002 include approximately $234 million towards the development of the Gulfstream joint venture project, one of our equity method investments. In 2001, we contributed $437 million toward the development of our joint interest in the Gulfstream project.
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In 2003, we purchased $739.9 million of restricted investments comprised of U.S. Treasury notes. We sold $10 million of these notes and retired $341.8 million on their scheduled maturity date. We made these purchases and sales to satisfy the 105 percent cash collateralization covenant in the $800 million revolving credit facility (see Note 11 of Notes to Consolidated Financial Statements).
In 2003 and 2002, we realized significant cash proceeds from asset dispositions, the sales of businesses, and the disposition of investments as part of our overall plan to increase liquidity and reduce debt. The following sales provided significant proceeds from sales and include various adjustments subsequent to the actual date of sale:
In 2003:
| $803 million related to the sale of Texas Gas Transmission Corporation; | |
| $465 million related to the sale of certain natural gas exploration and production properties in Kansas, Colorado, New Mexico and Utah; | |
| $452 million related to the sale of the Midsouth refinery; | |
| $455 million (net of cash held by Williams Energy Partners) related to the sale of our general partnership interest and limited partner investment in Williams Energy Partners; | |
| $246 million related to the sale of certain natural gas liquids assets in Redwater, Alberta, Canada; and | |
| $188 million related to the sale of the Williams travel centers. |
In 2002:
| $1.15 billion related to the sale of Mid-American and Seminole Pipeline; | |
| $464 million related to the sale of Kern River; | |
| $380 million related to the sale of Central; | |
| $326 million related to the sale of properties in the Jonah Field and the Anadarko Basin; | |
| $229 million related to the sale of the Cove Point LNG facility; and | |
| $173 million related to the sale of our interest in Alliance Pipeline. |
Proceeds received from disposition of investments and other assets in 2001 reflect our sale of the Ferrellgas senior common units to an affiliate of Ferrellgas for proceeds of $199 million in April 2001 and our sale of certain convenience stores for approximately $150 million in May 2001.
We received $180 million in cash proceeds from the sale of notes receivable from WilTel to Leucadia in fourth-quarter 2002. See Note 2 of Notes to Consolidated Financial Statements for further discussion of WilTel items and amounts.
In 2001, Purchase of assets subsequently leased to seller reflects our purchase of the Williams Technology Center, other ancillary assets and three corporate aircraft for $276 million. These assets were sold to WilTel in 2002.
Significant items reflected as discontinued operations within investing activities on the Consolidated Statement of Cash Flows include the following:
| capital expenditures and purchases of investments by WilTel, totaling $1.5 billion in 2001; | |
| capital expenditures of Kern River, primarily for expansion of its interstate natural gas pipeline system, of $134 million in 2001; and | |
| capital expenditures of Texas Gas, primarily for expansion of its interstate natural gas pipeline system, of $41.9 million and $106.2 million in 2002 and 2001, respectively. |
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Contractual obligations
The table below summarizes the maturity dates of
our contractual obligations by period.
2005-
2007-
2004
2006
2008
Thereafter
Total
(Millions)
$
3
$
$
$
$
3
933
1,219
2,405
(1)
7,448
12,005
856
1,548
1,253
6,449
10,106
57
69
44
68
238
391
797
814
4,669
6,671
807
(4)
412
226
387
(5)
1,832
1,844
1,048
381
623
3,896
33
97
35
30
195
$
4,924
$
5,190
$
5,158
$
19,674
$
34,946
(1) | Includes $1.1 billion of 6.5 percent notes payable in 2007 which are subject to remarketing in 2004 (FELINE PACS). These FELINE PACS include equity forward contracts attached which require the holder to purchase shares of our common stock in 2005. If the 2004 remarketing is unsuccessful and a second remarketing in 2005 is also unsuccessful, then we could exercise our right to foreclose on the notes in order to satisfy the obligation of the holders of the equity forward contracts requiring the holder to purchase our common stock. This would be a non-cash transaction. |
(2) | Total operating lease payments include $26 million related to discontinued operations. |
(3) | Power has entered into certain contracts giving us the right to receive fuel conversion services as well as certain other services associated with electric generation facilities that are currently in operation throughout the continental United States. |
(4) | Includes $385 million for a crude purchase contract with the state of Alaska which expires in September 2004. It is anticipated that the expected sale of the Alaska refinery in the first quarter of 2004 will result in the cancellation of our obligations under this contract. |
(5) | Includes one year of annual payments totaling $3 million for contracts with indefinite termination dates. |
(6) | Although the amounts presented represent expected cash outflows, a portion of those obligations have previously been paid in accordance with third party margining agreements. As of December 31, 2003, we have paid $571 million in margins, adequate assurance, and prepays related to the obligations included in this disclosure. In addition, expected offsetting cash inflows resulting from product sales or net positive settlements are not reflected in these amounts. The offsetting expected cash inflows as of December 31, 2003 are $5.8 billion. In addition, the obligations for physical and financial derivatives are based on market information as of December 31, 2003. Because market information changes daily and has the potential to be volatile, significant changes to the values in this category may occur. |
Effects of inflation
Our cost increases in recent years have benefited from relatively low inflation rates during that time. Approximately 45 percent of our gross property, plant and equipment is at Gas Pipeline and approximately 55 percent is at other operating units. Gas Pipeline is subject to regulation, which limits recovery to historical
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Environmental
We are a participant in certain environmental activities in various stages involving assessment studies, cleanup operations and/or remedial processes at certain sites, some of which we currently do not own (see Note 16 of Notes to Consolidated Financial Statements). We are monitoring these sites in a coordinated effort with other potentially responsible parties, the U.S. Environmental Protection Agency (EPA), or other governmental authorities. We are jointly and severally liable along with unrelated third parties in some of these activities and solely responsible in others. Current estimates of the most likely costs of such cleanup activities are approximately $74 million, all of which is accrued at December 31, 2003. We expect to seek recovery of approximately $28 million of the accrued costs through future natural gas transmission rates. The remainder of these costs will be funded from operations. During 2003, we paid approximately $18 million for cleanup and/or remediation and monitoring activities. We expect to pay approximately $24 million in 2004 for these activities. Estimates of the most likely costs of cleanup are generally based on completed assessment studies, preliminary results of studies or our experience with other similar cleanup operations. At December 31, 2003, certain assessment studies were still in process for which the ultimate outcome may yield significantly different estimates of most likely costs. Therefore, the actual costs incurred will depend on the final amount, type and extent of contamination discovered at these sites, the final cleanup standards mandated by the EPA or other governmental authorities, and other factors.
We are subject to the federal Clean Air Act and to the federal Clean Air Act Amendments of 1990 which require the EPA to issue new regulations. We are also subject to regulation at the state and local level. In September 1998, the EPA promulgated rules designed to mitigate the migration of ground-level ozone in certain states. We anticipate that during 2004, the EPA will promulgate additional rules regarding hazardous air pollutants. We estimate that capital expenditures necessary to install emission control devices on our Transco system over the next five years to comply with rules will be between $230 million and $260 million. The actual costs incurred will depend on the final implementation plans developed by each state to comply with these regulations. We consider these costs on our Transco system associated with compliance with these environmental laws and regulations to be prudent costs incurred in the ordinary course of business and, therefore, recoverable through its rates.
In December 1999, standards promulgated by the EPA for tailpipe emissions and the content of sulfur in gasoline were announced. Our estimation is that capital expenditures necessary to bring our refinery into compliance over the next five years will be approximately $50 million. We anticipate that, if the sale of the refinery is completed (see Note 2 of Notes to Consolidated Financial Statements), the purchaser would be responsible for these compliance expenditures. The actual costs incurred will depend on the final implementation plans.
On July 2, 2001, the EPA issued an information request asking for information on oil releases and discharges in any amount from our pipelines, pipeline systems, and pipeline facilities used in the movement of oil or petroleum products, during the period July 1, 1998 through July 2, 2001. In November 2001, we furnished our response. This matter has not become an enforcement proceeding. On March 11, 2004, the Department of Justice (DOJ) invited the new owner of the pipeline to enter into negotiations regarding alleged violations of the Clean Water Act and to sign a tolling agreement. No penalty has been assessed by the EPA; however, the DOJ stated in its letter that the maximum possible penalties were approximately $22 million for the alleged violations. It is anticipated that by providing additional clarification and through negotiations with the EPA and DOJ, that any proposed penalty will be reduced. We have indemnity obligations to the new owner related to this matter.
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Item 7A. | Qualitative and Quantitative Disclosures About Market Risk |
Interest rate risk
Our current interest rate risk exposure is related primarily to our debt portfolio and energy trading and non-trading portfolios.
A significant portion of our debt portfolio is comprised of fixed rate debt in order to mitigate the impact of fluctuations in interest rates. We have historically utilized interest rate swaps and interest rate forward contracts to further mitigate risk. Currently, we do not have outstanding swaps or forward contracts related to our debt portfolio. The maturity of our long-term debt portfolio is partially influenced by the expected life of our operating assets.
We also have interest rate risk in long-dated energy contracts included in our energy trading and non-trading portfolios. The value of these transactions can fluctuate daily based on movements in the underlying interest rates. We use floating to fixed interest rate swaps, bond futures and Eurodollar contracts to manage this variable rate exposure. At December 31, 2003, the notional amount of the outstanding contracts included in our energy trading and non-trading portfolios was $860 million.
The tables below provide information as of
December 31, 2003 and 2002, about our interest rate risk
sensitive instruments. Long-term debt in the tables represents
principal cash flows, net of (discount) premium, and
weighted-average interest rates by expected maturity dates.
Fair Value
December 31,
2004
2005
2006
2007
2008
Thereafter
Total
2003
(Dollars in millions)
$
3
$
$
$
$
$
$
3
$
3
6.6
%
$
841
$
232
$
957
$
1,527
$
374
$
7,362
$
11,293
$
11,574
7.5
%
7.5
%
7.5
%
7.7
%
7.8
%
7.7
%
$
95
$
15
$
15
$
493
$
11
$
54
$
683
$
709
$
379
$
$
$
$
$
$
379
$
381
3.5
%
Fair Value
December 31,
2003
2004
2005
2006
2007
Thereafter
Total
2002
(Dollars in millions)
$
996
$
$
$
$
$
$
996
$
1,063
5.4
%
$
328
$
1,591
$
1,340
$
954
$
423
$
6,549
$
11,185
$
7,674
7.8
%
7.7
%
7.6
%
7.8
%
7.9
%
8.2
%
$
755
$
1
$
$
78
$
$
$
834
$
834
$
$
$
140
$
$
$
$
140
$
140
6.4
%
(1) | 2003 Weighted-average interest rate is LIBOR plus 3.75 percent. |
(2) | $922 million of notes payable relates to the RMT note payable (see Note 11 of Notes to Consolidated Financial Statements). The variable rate portion related to these notes is based on the Eurodollar rate, |
88
plus 4 percent per annum. An additional 14 percent fixed rate, compounded quarterly, accrues to the RMT note payable. | |
(3) | 2002 Weighted-average interest rate through 2006 is LIBOR plus an applicable margin ranging from 1.125 percent to 5.0 percent, except $178 million at Eurodollar plus 4.25 percent; weighted-average interest rate in 2007 is Eurodollar plus 4.25 percent. |
(4) | The marketable securities mature in 2004. The Balance Sheet classification is determined based on the expected term of the underlying collateral requirement (see Note 1 of Notes to Consolidated Financial Statements). |
Commodity price risk
We are exposed to the impact of market fluctuations in the price of natural gas, power, crude oil, refined products and natural gas liquids. We are exposed to these risks in connection with our owned energy-related assets, our long-term energy-related contracts and our proprietary trading activities. We manage the risks associated with these market fluctuations using various derivatives. The fair value of derivative contracts is subject to changes in energy-commodity market prices, the liquidity and volatility of the markets in which the contracts are transacted, and changes in interest rates. We measure the risk in our portfolios using a value-at-risk methodology to estimate the potential one-day loss from adverse changes in the fair value of the portfolios.
Value at risk requires a number of key assumptions and is not necessarily representative of actual losses in fair value that could be incurred from the portfolios. The value-at-risk model assumes that, as a result of changes in commodity prices, there is a 95 percent probability that the one-day loss in fair value of the portfolios will not exceed the value at risk. The value-at-risk model uses historical simulations to estimate hypothetical movements in future market prices. In these simulations, we assume normal market conditions and historical market prices. In applying the value-at-risk methodology, we do not consider that changing the portfolio in response to market conditions could affect market prices and could take longer than a one-day holding period to execute. While a one-day holding period has historically been the industry standard, a longer holding period could more accurately represent the true market risk given market liquidity and our own credit and liquidity constraints.
We segregated our derivative contracts into trading and non-trading contracts, as defined in the following paragraphs. We calculate value at risk separately for these two categories. Derivative contracts designated as normal purchases or sales under SFAS No. 133 and non-derivative energy contracts have been excluded from our estimation of value at risk.
Trading |
At December 31, 2003, our trading portfolio consists of derivative contracts entered into to provide price risk management services to third-party customers. Only contracts that meet the definition of a derivative are carried at fair value on the balance sheet. At December 31, 2002, both derivatives and non-derivative energy-related contracts were carried at fair value on the balance sheet in accordance with EITF 98-10. With the adoption of EITF 02-3 on January 1, 2003, we discontinued reporting non-derivative contracts at fair value. In addition, during the second quarter of 2003, consistent with our intention to exit the merchant energy trading business, we reassessed which contracts were considered trading and which were hedges or potential hedges of our long-dated power business. This resulted in the reclassification of certain derivative contracts related to our Power segment to the non-trading portfolio during 2003.
The value at risk for contracts held for trading purposes was $5 million and $36 million at December 31, 2003 and 2002, respectively. The value at risk for contracts held at December 31, 2002, has been restated to exclude the non-derivative contracts that are no longer carried at fair value on the balance sheet. The trading portfolio value at risk at December 31, 2002, includes all the derivative contracts, except for those designated as SFAS No. 133 hedges, from our Power segment and the natural gas liquids trading operations reported in the Midstream segment, as those contracts were all considered trading at that time. During the year ended December 31, 2003, our value at risk for contracts considered trading ranged from a high of $36 million to a low of $5 million.
89
Non-Trading |
Our non-trading portfolio consists of contracts that hedge or could potentially hedge the price risk exposure from the following activities:
Segment | Commodity Price Risk Exposure | |
|
|
|
Exploration & Production
|
Natural gas sales | |
Midstream
|
Natural gas liquids purchases | |
Natural gas liquids sales | ||
Natural gas purchases | ||
Electricity purchases | ||
Power
|
Natural gas purchases | |
Electricity purchases | ||
Electricity sales |
The value at risk for contracts held for non-trading purposes was $18 million at December 31, 2003 and $45 million at December 31, 2002. During the year ended December 31, 2003, our value at risk for contracts considered non-trading ranged from a high of $45 million to a low of $18 million. As discussed in the Trading section above, we reassessed which contracts were considered trading and which contracts were considered non-trading during the second quarter of 2003. Certain of these contracts are accounted for as cash flow hedges under SFAS No. 133. We did not consider the underlying commodity positions to which the cash flow hedges relate in our value-at-risk model. Therefore, value at risk does not represent economic losses that could occur on a total non-trading portfolio that includes the underlying commodity positions.
Foreign currency risk
We have international investments that could affect our financial results if the investments incur a permanent decline in value as a result of changes in foreign currency exchange rates and the economic conditions in foreign countries.
International investments accounted for under the cost method totaled $95 million and $130 million at December 31, 2003, and 2002, respectively. These investments are primarily in non-publicly traded companies for which it is not practicable to estimate fair value; therefore, the fair value of these investments is deemed to approximate their carrying amount. We continue to believe that we can realize the carrying value of these investments considering the status of the operations of the companies underlying these investments. If a 20 percent change occurred in the value of the underlying currencies of these investments against the U.S. dollar, the fair value of these investments at December 31, 2003, could change by approximately $19 million assuming a direct correlation between the currency fluctuation and the value of the investments.
Net assets of consolidated foreign operations whose functional currency is the local currency are located primarily in Canada and approximate 15 percent of our net assets at December 31, 2003. These foreign operations do not have significant transactions or financial instruments denominated in other currencies. However, these investments do have the potential to impact our financial position, due to fluctuations in these local currencies arising from the process of re-measuring the local functional currency into the U.S. dollar. As an example, a 20 percent change in the respective functional currencies against the U.S. dollar could have changed stockholders equity by approximately $125 million at December 31, 2003.
We historically have not utilized derivatives or other financial instruments to hedge the risk associated with the movement in foreign currencies with the exception of a Canadian dollar-denominated note receivable (see Note 15 of Notes to Consolidated Financial Statements). However, we monitor currency fluctuations and could potentially use derivative financial instruments or employ other investment alternatives if cash flows or investment returns so warrant.
90
Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT AUDITORS
The Stockholders of The Williams Companies, Inc.
We have audited the accompanying consolidated balance sheet of The Williams Companies, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Williams Companies, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
As explained in Note 1 to the consolidated financial statements, effective January 1, 2003, the Company adopted Emerging Issues Task Force Issue No. 02-3, Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities (see third paragraph of Energy commodity risk management and trading activities and revenues section in Note 1) and Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (see last paragraph of Property, plant and equipment section in Note 1).
ERNST & YOUNG LLP |
Tulsa, Oklahoma
91
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31,
2003
2002
2001
(Millions, except per-share amounts)
$
13,195.5
$
56.2
$
1,705.6
1,299.0
1,241.8
1,180.8
779.7
860.4
603.9
3,319.2
1,525.2
1,621.2
72.0
124.1
319.3
(1,831.3
)
(91.1
)
(127.6
)
16,834.1
3,716.6
5,303.2
15,156.8
2,218.6
2,498.4
412.2
568.7
660.5
(88.7
)
276.8
(12.4
)
15,480.3
3,064.1
3,146.5
87.0
142.8
124.3
145.3
(471.7
)
1,294.6
539.0
470.6
398.3
392.5
504.9
217.2
285.7
165.6
186.2
(8.7
)
(16.9
)
60.4
(87.0
)
(142.8
)
(124.3
)
1,266.8
509.7
2,032.4
(1,286.4
)
(1,159.6
)
(691.8
)
45.5
27.3
36.9
(2.2
)
(124.2
)
73.4
(113.1
)
(172.8
)
(19.4
)
(41.8
)
(71.7
)
(26.1
)
24.3
26.4
51.6
(877.4
)
1,159.4
36.4
(265.7
)
511.1
15.2
(611.7
)
648.3
253.9
(143.0
)
(1,126.0
)
269.1
(754.7
)
(477.7
)
(761.3
)
(492.2
)
(754.7
)
(477.7
)
29.5
90.1
$
(521.7
)
$
(844.8
)
$
(477.7
)
$
(.03
)
$
(1.35
)
$
1.31
.49
(.28
)
(2.27
)
.46
(1.63
)
(.96
)
(1.47
)
$
(1.01
)
$
(1.63
)
$
(.96
)
$
(.03
)
$
(1.35
)
$
1.30
.49
(.28
)
(2.25
)
.46
(1.63
)
(.95
)
(1.47
)
$
(1.01
)
$
(1.63
)
$
(.95
)
See accompanying notes.
92
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
See accompanying notes.
93
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY
See accompanying notes.
94
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes.
95
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Operations of our company are located principally
in the United States and are organized into the following
reporting segments: Gas Pipeline, Exploration &
Production, Midstream Gas & Liquids, and Power
(formerly named Williams Energy Marketing & Trading
Company).
Gas Pipeline is comprised primarily of two
interstate natural gas pipelines as well as investments in
natural gas pipeline-related companies. The Gas Pipeline
operating segments have been aggregated for reporting purposes
and include Northwest Pipeline, which extends from the
San Juan Basin in northwestern New Mexico and southwestern
Colorado to Oregon and Washington, and Transcontinental Gas Pipe
Line (Transco), which extends from the Gulf of Mexico region to
the northeastern United States.
Exploration & Production includes
natural gas exploration, production and gas management
activities primarily in the Rocky Mountain and Mid-Continent
regions of the United States and in Argentina.
Midstream Gas & Liquids (Midstream) is
comprised of natural gas gathering and processing and treating
facilities in the Rocky Mountain and Gulf Coast regions of the
United States, majority-owned natural gas compression and
transportation facilities in Venezuela; and assets in Canada
including several natural gas liquids extraction facilities and
a fractionation plant.
Power is an energy services provider that buys,
sells, stores, and transports a full suite of energy-related
commodities, including power, natural gas, crude oil, refined
products and emission credits, primarily on a wholesale level.
In June 2002, we announced our intent to exit the energy
merchant business and reduce our financial commitment to the
Power segment. As a result, Power initiated efforts to sell all
or portions of its power, natural gas and crude and refined
products portfolios and reduced its involvement in trading
activities as defined in Statement of Financial Accounting
Standard (SFAS) No. 115
Accounting for
Certain Investments in Debt and Equity Securities.
However, Power still conducts limited trading activities and
maintains contracts entered into for trading purposes. As the
process to sell the portfolio continues, Power manages its
activities to reduce risk, to generate cash and to fulfill
contractual commitments.
In February 2003, we outlined our planned
business strategy in response to the events that significantly
impacted the energy sector and our company during late 2001 and
much of 2002, including the collapse of Enron and the severe
decline of the telecommunications industry. The plan focused on
migrating to an integrated natural gas business comprised of a
strong, but smaller, portfolio of natural gas businesses;
reducing debt; and increasing our liquidity through asset sales,
strategic levels of financing and reductions in operating costs.
The plan was designed to address near-term and medium-term debt
and liquidity issues, to de-leverage the company with the
objective of returning to investment grade status, and to
develop a balance sheet and cash flows capable of supporting and
ultimately growing our remaining businesses. A component of our
plan was to reduce risk and liquidity requirements of the Power
segment while realizing the value of Powers portfolio.
Another component of the plan consisted of selling all or parts
of the Power business.
During 2003, we successfully executed the
following critical components of our plan:
96
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Through these efforts, we satisfied key liquidity
issues facing us in 2003, including the early repayment of the
Williams Production RMT Company (RMT) note payable of
approximately $1.15 billion (including certain contractual
fees and deferred interest). Additionally, we completed tender
offers that prepaid approximately $721 million of the
$1.4 billion of our senior unsecured 9.25 percent
notes that mature in first-quarter 2004.
We are pursuing a strategy of exiting the Power
business. However, market conditions have contributed to the
difficulty of, and could delay, full, immediate exit from this
business. In 2003, we generated in excess of $600 million
from the sale, termination or liquidation of Power contracts and
assets. During the year, we continued to manage our portfolio to
reduce risk, to generate cash and to fulfill contractual
commitments. We are also pursuing our goal to resolve the
remaining legal and regulatory issues associated with the
business.
During 2003, we engaged financial advisors to
assist and advise with efforts to exit the Power business.
Because market conditions may change and we cannot determine the
impact of this on a buyers point of view, amounts
ultimately received in any portfolio sale, contract liquidation
or realization may be significantly different from the estimated
economic value or carrying values reflected in the Consolidated
Balance Sheet. In addition, tolling agreements are not
derivatives and thus have no carrying value in the Consolidated
Balance Sheet pursuant to the application of Emerging Issues
Task Force (EITF) Issue No. 02-3, Issues Related to
Accounting for Contracts Involved in Energy Trading and Risk
Management Activities, (EITF 02-3). Based on current
market conditions certain of these agreements are forecasted to
realize significant future losses. It is possible that we may
sell contracts for less than their carrying value or enter into
agreements to terminate certain obligations, either of which
could result in significant future loss recognition or
reductions of future cash flows.
Results for 2003 include approximately
$117 million of revenue related to the correction of the
accounting treatment previously applied to certain third party
derivative contracts during 2002 and 2001. This matter was
initially disclosed in our Form 10-Q for the second quarter
of 2003. Income from continuing operations before income taxes
and cumulative effect of change in accounting principles in 2003
was $51.6 million. Absent the corrections, we would have
reported a pretax loss from continuing operations in 2003.
Approximately $83 million of this revenue relates to a
correction of net energy trading assets for certain derivative
contract terminations occurring in 2001. The remaining
$34 million relates to net gains on certain other
derivative contracts entered into in 2002 and 2001 that we now
believe should not have been deferred as a component of other
comprehensive income due to the incorrect designation of these
contracts as cash flow hedges. Our management, after
consultation with our independent auditor, concluded that the
effect of the previous accounting treatment was not material to
2003 and prior periods and the trend of earnings.
Entering 2004, our plan is to focus on the
following objectives:
Key execution steps include the completion of
planned asset sales, which are estimated to generate proceeds of
approximately $800 million in 2004, additional reductions
of our SG&A costs, the replacement of our
cash-collateralized letter of credit and revolver facility with
facilities that do not encumber cash and continuing efforts to
exit from the power business.
97
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with the provisions related to
discontinued operations within SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, the accompanying consolidated financial statements
and notes reflect the results of operations, financial position
and cash flows of the following components as discontinued
operations (see Note 2):
Additionally, the results of operations and cash
flows of WilTel Communications (WilTel), formerly Williams
Communications, are reflected in discontinued operations in the
accompanying financial statements.
Unless otherwise indicated, the information in
the Notes to the Consolidated Financial Statements relates to
our continuing operations. We expect that other components of
our business may be classified as discontinued operations in the
future as the sales of those assets occur.
We have restated all segment information in the
Notes to the Consolidated Financial Statements for all prior
periods presented to reflect the changes noted above.
We have also reclassified certain prior year
amounts to conform to current year classifications.
In 2001, through two transactions, we acquired
all of the outstanding stock of Barrett Resources Corporation
(Barrett). On June 11, 2001, we acquired 50 percent of
Barretts outstanding common stock in a cash tender offer
totaling approximately $1.2 billion. We acquired the
remaining 50 percent of Barretts outstanding common
stock on August 2, 2001, through a merger by exchanging
each remaining share of Barrett common stock for
1.767 shares of our common stock for a total of
approximately 30 million shares of our common stock valued
at $1.2 billion.
98
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unaudited pro forma net loss for 2001, if the
purchase of 100 percent of Barrett occurred at the
beginning of that year, was $396.0 million, or $.76 loss
per diluted share. Pro forma financial information is not
necessarily indicative of results of operations that would have
occurred if the acquisition had occurred at the beginning of
that year or of future results of operations of the combined
companies.
The estimated fair values of the significant
assets acquired and liabilities assumed at August 2, 2001,
the date of acquisition, were:
The consolidated financial statements include the
accounts of our corporate parent and our majority-owned
subsidiaries and investments. We account for companies in which
we and our subsidiaries own 20 percent to 50 percent of the
voting common stock, or otherwise exercise significant influence
over operating and financial policies of the company, under the
equity method.
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.
Estimates and assumptions which, in the opinion
of management, are significant to the underlying amounts
included in the financial statements and for which it would be
reasonably possible that future events or information could
change those estimates include:
These estimates are discussed further throughout
the accompanying notes.
99
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and cash equivalents include demand and time
deposits, certificates of deposit and other marketable
securities with maturities of three months or less when acquired.
Restricted cash within current assets consists
primarily of collateral as required by certain borrowings by our
Venezuelan operations and letters of credit. Restricted cash
within noncurrent assets consists primarily of collateral in
support of surety bonds underwritten by an insurance company,
the RMT term loan B (see Note 11), certain borrowings
by our Venezuelan operations and letters of credit. We do not
expect this cash to be released within the next twelve months.
The current and noncurrent restricted cash is primarily invested
in short-term money market accounts with financial institutions
and an insurance company as well as treasury securities.
Both short-term and long-term restricted
investments consist of short-term U.S. Treasury securities
as required under the $800 million revolving and letter of
credit facility (see Note 11). These securities are
purchased and sold based on the balance required in the
collateral account. Therefore, these securities are accounted
for as available-for-sale. These securities are
marked to market with the unrealized holding gains and losses
included in Other Comprehensive Income, until realized (see
Note 18). Realized gains or losses are reclassified into
earnings and based on specific identification of the securities
sold.
The classification of restricted cash and
investments is determined based on the expected term of the
collateral requirement and not necessarily the maturity date of
the underlying securities.
Accounts receivable are carried on a gross basis,
with no discounting, less the allowance for doubtful accounts.
No allowance for doubtful accounts is recognized at the time the
revenue, which generates the accounts receivable, is recognized.
We estimate the allowance for doubtful accounts based on
existing economic conditions, the financial conditions of the
customers and the amount and age of past due accounts.
Receivables are considered past due if full payment is not
received by the contractual due date. Interest income related to
past due accounts receivable is recognized at the time full
payment is received or collectibility is assured. Past due
accounts are generally written off against the allowance for
doubtful accounts only after all collection attempts have been
exhausted.
Prior to the EITF reaching a consensus on
EITF 02-3 on October 25, 2003 (see
Energy commodity
risk management and trading activities and revenues
), we
stated inventories at cost, which were not in excess of market,
except for certain assets held for energy risk management by
Power and Midstream which were stated at fair value. We stated
all inventories purchased after October 25, 2003 at cost in
accordance with Issue 02-3. For inventories held for energy risk
management purposes purchased on or before October 25,
2002, we included the amount by which fair value exceeded cost
in a cumulative effect of a change in accounting principle.
Beginning on January 1, 2003, we stated all inventories at
cost, which is not in excess of market. We determined the cost
of certain natural gas inventories held by Transco using the
last-in, first-out (LIFO) cost method; and we determined
the cost of the remaining inventories primarily using the
average-cost method or market, if lower.
Property, plant and equipment is recorded at
cost. We base the carrying value of these assets on estimates,
assumptions and judgments relative to capitalized costs, useful
lives and salvage values. As
100
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
regulated entities, Northwest Pipeline and
Transco provide for depreciation using the straight-line method
at FERC prescribed rates. Depreciation of general plant is
provided on a group basis at straight-line rates. Depreciation
rates used for major regulated gas plant facilities at
December 31, 2003, 2002, and 2001 are as follows:
Depreciation for non-regulated entities is
provided primarily on the straight-line method over estimated
useful lives except as noted below regarding oil and gas
exploration and production activities. The estimated useful
lives are as follows.
Gains or losses from the ordinary sale or
retirement of property, plant and equipment for regulated
pipelines are credited or charged to accumulated depreciation;
other gains or losses are recorded in net income (loss).
Oil and gas exploration and production activities
are accounted for under the successful efforts method of
accounting. Costs incurred in connection with the drilling and
equipping of exploratory wells are capitalized as incurred. If
proved reserves are not found, such costs are charged to
expense. Other exploration costs, including lease rentals, are
expensed as incurred. All costs related to development wells,
including related production equipment and lease acquisition
costs, are capitalized when incurred. Unproved properties are
evaluated annually, or as conditions warrant, to determine any
impairment in carrying value. Depreciation, depletion and
amortization are provided under the units of production method
on a field basis.
Proved properties, including developed and
undeveloped, and costs associated with probable reserves, are
assessed for impairment using estimated future cash flows on a
field basis. Estimating future cash flows involves the use of
complex judgments such as estimation of the proved and probable
oil and gas reserve quantities, risk associated with the
different categories of oil and gas reserves, timing of
development and production, expected future commodity prices,
capital expenditures and production costs.
Effective January 1, 2003, we adopted
SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement requires that the fair value
of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate
of fair value can be made, and that the associated asset
retirement costs be capitalized as part of the carrying amount
of the long-lived asset. As required by the new standard, we
recorded liabilities equal to the present value of expected
future asset retirement obligations at January 1, 2003. The
obligations relate to producing wells, offshore platforms,
underground storage caverns and gas gathering well connections.
At the end of the useful life of each respective asset, we are
legally obligated to plug both producing wells and storage
caverns and remove any related surface equipment, to
101
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
dismantle offshore platforms, and to cap certain
gathering pipelines at the wellhead connection and remove any
related surface equipment. The liabilities are partially offset
by increases in property, plant and equipment, net of
accumulated depreciation, recorded as if the provisions of the
Statement had been in effect at the date the obligation was
incurred. As a result of the adoption of SFAS No. 143,
we recorded a long-term liability of $33.4 million;
property, plant and equipment, net of accumulated depreciation,
of $24.8 million and a credit to earnings of
$1.2 million (net of a $.1 million benefit for income
taxes) reflected as a cumulative effect of a change in
accounting principle. We also recorded a $9.7 million
regulatory asset for retirement costs of dismantling offshore
platforms expected to be recovered through regulated rates. In
connection with adoption of SFAS No. 143, we changed
our method of accounting to include salvage value of equipment
related to producing wells in the calculation of depreciation.
The impact of this change is included in the amounts discussed
above. We have not recorded liabilities for pipeline
transmission assets, processing and refining assets, and gas
gathering systems pipelines. A reasonable estimate of the fair
value of the retirement obligations for these assets cannot be
made as the remaining life of these assets is not currently
determinable. If the Statement had been adopted at the beginning
of 2002, the impact to our income from continuing operations and
net income would have been immaterial. There would have been no
impact on earnings per share.
Goodwill represents the excess of cost over fair
value of assets of businesses acquired. Beginning
January 1, 2002, the impairment of goodwill and other
intangible assets is measured pursuant to the guidelines of
SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill is evaluated for impairment by first
comparing our managements estimate of the fair value of a
reporting unit with its carrying value, including goodwill. If
the carrying value exceeds its fair value, a computation of the
implied fair value of the goodwill is compared with its related
carrying value. If the carrying value of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in the amount of the excess.
When a reporting unit is sold or classified as
held for sale, any goodwill of that reporting unit is included
in its carrying value for purposes of determining any impairment
or gain/ loss on sale. If a portion of a reporting unit with
goodwill is sold or classified as held for sale and that asset
group represents a business, a portion of the reporting
units goodwill is allocated to and included in the
carrying value of that asset group. Except for Bio-energy,
Alaska Retail, Williams Energy Partners and the Travel Centers,
none of the operations sold during 2003 or classified as held
for sale at December 31, 2003 represented reporting units
with goodwill or businesses within reporting units to which
goodwill was required to be allocated.
Judgments and assumptions are inherent in our
managements estimate of undiscounted future cash flows
used to determine the estimate of the reporting units fair
value. The use of alternate judgments and/or assumptions could
result in the recognition of different levels of impairment
charges in the financial statements.
In accordance with SFAS No. 142,
approximately $1 billion of goodwill acquired subsequent to
June 30, 2001, in the acquisition of Barrett, was not
amortized in 2001. Beginning January 1, 2002, all goodwill
is no longer amortized, but is tested annually for impairment.
Application of the nonamortization provisions of
SFAS No. 142 did not materially impact the
comparability of the Consolidated Statement of Operations.
Exploration & Productions goodwill was
approximately $1 billion at December 31, 2003 and 2002.
Treasury stock purchases are accounted for under
the cost method whereby the entire cost of the acquired stock is
recorded as treasury stock. Gains and losses on the subsequent
reissuance of shares are credited or charged to capital in
excess of par value using the average-cost method.
102
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to 2003, we, through Power and the natural
gas liquids trading operations (reported within the Midstream
segment), had energy commodity risk management and trading
operations that entered into energy and energy-related contracts
to provide price-risk management services to our third-party
customers. These contracts involved power, natural gas, refined
products, natural gas liquids and crude oil. Prior to the
adoption of EITF 02-3, we valued all energy and
energy-related contracts used in energy commodity risk
management and trading activities at fair value in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and Issue
No. 98-10, Accounting for Contracts Involved in
Energy Trading and Risk Management Activities. Energy
contracts included the following:
Energy-related contracts included the following:
In addition, we entered into interest rate swap
agreements and credit default swaps to manage the interest rate
and credit risk in our energy trading portfolio. Prior to 2003,
we recorded these energy and energy-related contracts and credit
default swap agreements, with the exception of physical trading
commodity inventories, in current and noncurrent energy risk
management and trading assets and energy risk management and
trading liabilities in the Consolidated Balance Sheet. We based
the classification of current versus noncurrent on the timing of
expected future cash flows. In accordance with
SFAS No. 133 and Issue No. 98-10, we recognized
the net change in fair value of these contracts representing
unrealized gains and losses in income currently. We also
recorded the net change in fair value as revenues in the
Consolidated Statement of Operations. Power and the natural gas
liquids trading operations, reported their trading
operations physical sales transactions net of the related
purchase costs, consistent with fair value accounting for such
trading activities. The accounting for energy-related contracts
required us to assess whether certain of these contracts were
executory service arrangements or leases pursuant to
SFAS No. 13, Accounting for Leases. As a
result, we assessed each of our energy-related contracts and
made the determination based on the substance of each contract
focusing on factors such as 1) physical and operational
control of the related asset, 2) risks and rewards of
owning, operating and maintaining the related asset and
3) other contractual terms. See
Recent accounting
standards
section within this Note for recent developments
regarding guidance determining whether an arrangement contains a
lease.
103
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As discussed in the
Inventory valuation
section of this note, the EITF reached a consensus on Issue
No. 02-3 on October 25, 2002. This Issue rescinded
EITF Issue No. 98-10. As a result of the rescission, in
2003, we no longer account for 1) energy trading contracts
that are not derivatives as defined in SFAS No. 133
and 2) commodity trading inventories at fair value. The
consensus was applicable for fiscal periods beginning after
December 15, 2002, except for physical trading commodity
inventories purchased after October 25, 2002. Issue
No. 02-3 prohibited us from reporting physical trading
commodity inventories purchased after October 25, 2002 at
fair value. We applied the consensus effective January 1,
2003 and reported the initial application as a cumulative effect
of a change in accounting principle. The effect of initially
applying the consensus reduced net income by
$762.5 million, net of a $471.4 million benefit for
income taxes. The charge primarily consisted of the fair value
of power tolling, load serving, transportation and storage
contracts. These contracts did not meet the definition of a
derivative and thus are no longer reported at fair value. After
January 1, 2003, these contracts were accounted for under
the accrual basis of accounting. The charge also included the
amount by which the December 31, 2002 fair value of
physical trading commodity inventories exceeded cost. We
continued to carry derivatives at fair value in 2003. See
further discussion on derivative assets and liabilities in the
Derivative instruments and hedging activities, including
interest rate swaps
section within this Note.
Prior to 2003, we determined the fair value of
energy and energy-related contracts based on the nature of the
transaction and the market in which transactions were executed.
We executed certain transactions in exchange-traded or
over-the-counter markets for which quoted prices in active
periods existed. We executed other transactions in markets or
periods in which quoted prices were not available. Quoted market
prices for varying periods in active markets were readily
available for valuing forward contracts, futures contracts, swap
agreements and purchase and sales transactions in the commodity
markets in which Power and the natural gas liquids trading
operations transacted. Market data in active periods was also
available for interest rate transactions, which affected the
trading portfolio. For contracts or transactions that extended
into periods for which actively quoted prices were not
available, Power and the natural gas liquids trading operations
estimated energy commodity prices in the illiquid periods by
incorporating information obtained from commodity prices in
actively quoted markets, prices in less active markets, prices
reflected in current transactions and market fundamental
analysis. For contracts where quoted market prices were not
available, primarily transportation, storage, full requirements,
load serving, transmission and power tolling contracts
(energy-related contracts), Power estimated fair value using
proprietary models and other valuation techniques that reflected
the best information available under the circumstances. In
situations where Power had received current information from
negotiation activities with potential buyers of these contracts,
Power considered this information in the determination of the
fair value of the contract. The valuation techniques used when
estimating fair value for energy-related contracts incorporated
the following:
In estimating fair value, Power also assumed
liquidation of the positions in an orderly manner over a
reasonable period of time in a transaction between a willing
buyer and seller.
These valuation techniques for tolling contracts,
full requirements contracts and other non-derivative
energy-related contracts utilized factors such as the following:
104
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair value also reflected a risk premium that
market participants would consider in their determination of
fair value. Regardless of the method for which fair value was
determined, we considered the risk of non-performance and credit
considerations of the counterparty in estimating the fair value
of all contracts. We adjusted the estimates of fair value as
assumptions changed or as transactions became closer to
settlement and enhanced estimates become available.
The fair value of our trading portfolio was
continually subject to change due to changing market conditions
and changing trading portfolio positions. In 2002, determining
fair value for these contracts also involved complex assumptions
including estimating natural gas and power market prices in
illiquid periods and markets, estimating market volatility and
liquidity and correlation of natural gas and power prices,
evaluating risk arising from uncertainty inherent in estimating
cash flows and estimates regarding counterparty performance and
credit considerations. Changes in valuation methodologies or the
underlying assumptions could result in significantly different
fair values.
Derivative
instruments and hedging activities, including interest rate
swaps
In 2002, we presented Power and Midstreams
derivative and non-derivative trading assets on the Consolidated
Balance Sheet in energy commodity risk management and trading
activities. All other derivatives were presented in current
assets, other assets and deferred charges, accrued liabilities
and other liabilities and deferred income in the Consolidated
Balance Sheet as of December 31, 2002. After the adoption
of EITF 02-3 on January 1, 2003, we recorded all
derivatives in current and noncurrent derivative assets and
current and noncurrent derivative liabilities. We based the
classification of current versus noncurrent on the timing of
expected future cash flows.
Derivative instruments held by us consist
primarily of futures contracts, swap agreements, forward
contracts and option contracts. We execute most of these
transactions in exchange-traded or over-the-counter markets for
which quoted prices in active periods exist. For contracts with
lives exceeding the time period for which quoted prices were
available, we determine fair value by estimating commodity
prices during the illiquid periods. We estimate commodity prices
during illiquid periods by incorporating information obtained
from commodity prices in actively quoted markets, prices
reflected in current transactions and market fundamental
analysis.
In first-quarter 2002, we began managing a
portion of our interest rate risk on an enterprise basis by the
corporate parent. The more significant of these risks relates to
Powers trading and non-trading portfolio. To facilitate
the management of the risk, our entities enter into derivative
instruments (usually swaps) with the corporate parent. The
level, term and nature of derivative instruments entered into
with external parties are determined by the corporate parent.
Power enters into intercompany interest rate swaps with the
corporate parent, the effect of which is included in
Powers segment revenues and segment profit (loss) as shown
in the reconciliation within the segment disclosures (see
Note 19). The results of interest rate swaps with external
counterparties are shown as interest rate swap loss in the
Consolidated Statement of Operations below operating income
(loss).
The accounting for changes in the fair value of
all derivatives depends upon whether we have designated them in
a hedging relationship and, further, on the type of hedging
relationship. To qualify for designation in a hedging
relationship, specific criteria have to be met and the
appropriate documentation maintained. We
105
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
establish hedging relationships pursuant to our
risk management policies. We initially and regularly evaluate
the hedging relationships to determine whether they were
expected to be, and remain, highly effective hedges. If a
derivative ceases to be a highly effective hedge, hedge
accounting is discontinued prospectively, and future changes in
the fair value of the derivative are recognized in earnings each
period.
For derivatives designated as a hedge of a
recognized asset or liability or an unrecognized firm commitment
(fair value hedges), we recognize the changes in the fair value
of the derivative as well as changes in the fair value of the
hedged item attributable to the hedged risk each period in
earnings. If we terminate a firm commitment designated as the
hedged item in a fair value hedge or it otherwise no longer
qualifies as the hedged item, we recognize any asset or
liability previously recorded as part of the hedged item
currently in earnings.
For derivatives designated as a hedge of a
forecasted transaction or of the variability of cash flows
related to a recognized asset or liability (cash flow hedges),
the effective portion of the change in fair value of the
derivative is reported in other comprehensive income and
reclassified into earnings in the period in which the hedged
item affects earnings. Amounts excluded from the effectiveness
calculation and any ineffective portion of the change in fair
value of the derivative are recognized currently in earnings.
Gains or losses deferred in accumulated other comprehensive
income associated with terminated derivatives, derivatives that
cease to be highly effective hedges and cash flow hedges that
have been otherwise discontinued remain in accumulated other
comprehensive income until the hedged item affects earnings or
it is probable that the hedged item will not occur by the end of
the originally specified time period or within two months
thereafter. Forecasted transactions designated as the hedged
item in a cash flow hedge are regularly evaluated to assess
whether they continue to be probable of occurring. When it is
probable the forecasted transaction will not occur, any gain or
loss deferred in accumulated other comprehensive income is
recognized in earnings at that time.
For derivatives held for trading and non-trading
purposes not designated as a hedge, we reported changes in fair
value currently in earnings. As discussed in the
Description
of business
section of this Note, in 2003, we are no longer
significantly engaged in trading activities. We now primarily
enter into derivative contracts to reduce risk associated with
our assets and non-derivative energy-related contracts, such as
tolling, full requirements, storage and transportation
contracts. However, we still maintain certain derivatives
entered into for trading purposes. In Issue No. 02-3, the
EITF reached a consensus that gains and losses on derivative
instruments within the scope of SFAS No. 133 should be
shown net in the income statement if the derivative instruments
are held for trading purposes. On July 31, 2003, the EITF
reached a consensus on Issue No. 03-11, Reporting
Realized Gains and Losses on Derivative Instruments That Are
Subject to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Not Held for
Trading Purposes as Defined in Issue No. 02-3 Issues
Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk
Management Activities. In this issue, the EITF concluded
that determining whether realized gains and losses on physically
settled derivative contracts not held for trading purposes
should be reported in the income statement on a gross or net
basis is a matter of judgment that depended on the relevant
facts and circumstances. Applying these two consensuses, we
report unrealized gains and losses on all derivative contracts
not designated as hedges on a net basis in the Consolidated
Statement of Operations. We also report realized gains and
losses on all derivative contracts not designated as hedges that
settled financially on a net basis. We apply the indicators
provided in Issue No. 99-19, Reporting Revenue Gross
as a Principal versus Net as an Agent to determine the
proper treatment for derivative and non-derivative contracts not
designated as hedges that resulted in physical delivery. In
accordance with Issue No. 99-19, we account for realized
revenues and purchase costs for all contracts that result in
physical delivery on a gross basis in the Consolidated Statement
of Operations. EITF 02-3 and Issue No. 03-11 did not
require restatement of prior year amounts.
In the second quarter of 2003, we elected the
normal purchases and normal sales exception available under
SFAS No. 133 on certain derivative contracts held by
our Power segment. We reflected these contracts
106
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in current and noncurrent derivative assets and
liabilities at their fair value on the date of the election less
the portion of that fair value allocable to previous settlement
periods.
On January 1, 2001, we recorded a cumulative
effect of an accounting change associated with the adoption of
SFAS No. 133, as amended, to record all derivatives at fair
value. The cumulative effect of the accounting change was not
material to net income (loss), but resulted in a
$95 million reduction of other comprehensive income (net of
income tax benefits of $59 million) related to derivatives
which hedge the variable cash flows of certain forecasted energy
commodity transactions.
Revenues for sales of products are recognized in
the period of delivery, and revenues from the transportation of
gas are recognized in the period the service is provided. Gas
Pipeline is subject to Federal Energy Regulatory Commission
(FERC) regulations and, accordingly, certain revenues
collected may be subject to possible refunds upon final orders
in pending rate cases. Gas Pipeline records estimates of rate
refund liabilities considering Gas Pipeline and other
third-party regulatory proceedings, advice of counsel and
estimated total exposure, as discounted and risk weighted, as
well as collection and other risks.
Revenues generally are recorded when services are
performed or products have been delivered.
Additionally, revenues from the domestic
production of natural gas in properties for which
Exploration & Production has an interest with other
producers are recognized based on the actual volumes sold during
the period. Any differences between volumes sold and entitlement
volumes, based on Exploration & Productions net
working interest, which are determined to be non-recoverable
through remaining production, are recognized as accounts
receivable or accounts payable, as appropriate. Cumulative
differences between volumes sold and entitlement volumes are not
significant.
Impairment
of long-lived assets and investments
We evaluate the long-lived assets of identifiable
business activities for impairment when events or changes in
circumstances indicate, in our managements judgment, that
the carrying value of such assets may not be recoverable.
Beginning January 1, 2002, the impairment evaluation of
tangible long-lived assets is measured pursuant to the
guidelines of SFAS No. 144. When an indicator of
impairment has occurred, we compare our managements
estimate of undiscounted future cash flows attributable to the
assets to the carrying value of the assets to determine whether
an impairment has occurred. We apply a probability-weighted
approach to consider the likelihood of different cash flow
assumptions and possible outcomes including selling in the near
term or holding for the remaining estimated useful life. If an
impairment of the carrying value has occurred, we determine the
amount of the impairment recognized in the financial statements
by estimating the fair value of the assets and recording a loss
for the amount that the carrying value exceeds the estimated
fair value.
For assets identified to be disposed of in the
future and considered held for sale in accordance with
SFAS No. 144, we compare the carrying value to the
estimated fair value less the cost to sell to determine if
recognition of an impairment is required. Until the assets are
disposed of, the estimated fair value, which includes estimated
cash flows from operations until the assumed date of sale, is
redetermined when related events or circumstances change.
We evaluate our investments for impairment when
events or changes in circumstances indicate, in our
managements judgement, that the carrying value of such
investments may have experienced an other-than-temporary decline
in value. When evidence of loss in value has occurred, we
compare our estimate of fair value of the investment to the
carrying value of the investment to determine whether an
impairment has
107
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
occurred. If the estimated fair value is less
than the carrying value and we consider the decline in value to
be other than temporary, the excess of the carrying value over
the fair value is recognized in the financial statements as an
impairment.
Judgments and assumptions are inherent in our
managements estimate of undiscounted future cash flows
used to determine recoverability of an asset and the estimate of
an assets fair value used to calculate the amount of
impairment to recognize. Additionally, our managements
judgment is used to determine the probability of sale with
respect to assets considered for disposal pursuant to our
announced strategy of selling assets as a significant source of
liquidity. The use of alternate judgments and/or assumptions
could result in the recognition of different levels of
impairment charges in the financial statements.
We capitalize interest on major projects during
construction. Interest is capitalized on borrowed funds and,
where regulation by the FERC exists, on internally generated
funds. The rates used by regulated companies are calculated in
accordance with FERC rules. Rates used by unregulated companies
are based on the average interest rate on debt. Interest
capitalized on internally generated funds, as permitted by FERC
rules, is included in non-operating other income
(expense) net.
Employee stock-based awards are accounted for
under Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees and related interpretations. Fixed-plan common
stock options generally do not result in compensation expense
because the exercise price of the stock options equals the
market price of the underlying stock on the date of grant. The
plans are described more fully in Note 14. The following
table illustrates the effect on net loss and loss per share if
we had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation.
Pro forma amounts for 2003 include compensation
expense from awards of our company stock made in 2003, 2002 and
2001. Also included in the 2003 pro forma expense is
$2 million of incremental expense associated with a stock
option exchange program (see Note 14). Pro forma amounts
for 2002 include compensation expense from awards made in 2002
and 2001 and from certain awards made in 1999. Pro forma
108
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amounts for 2001 include compensation expense
from awards made in 2001 and from certain awards made in 1999.
Since compensation expense from stock options is
recognized over the future years vesting period for pro
forma disclosure purposes and additional awards are generally
made each year, pro forma amounts may not be representative of
future years amounts.
We include the operations of our subsidiaries in
our consolidated tax return. Deferred income taxes are computed
using the liability method and are provided on all temporary
differences between the financial basis and the tax basis of our
assets and liabilities. Our managements judgment and
income tax assumptions are used to determine the levels, if any,
of valuation allowances associated with deferred tax assets.
Basic earnings (loss) per share is based on the
sum of the weighted average number of common shares outstanding
and issuable restricted and vested deferred shares. Diluted
earnings (loss) per share includes any dilutive effect of stock
options, unvested deferred shares and, for applicable periods
presented, convertible preferred stock and convertible debt,
unless otherwise noted.
Certain of our foreign subsidiaries and equity
method investees use their local currency as their functional
currency. These foreign currencies include the Canadian dollar,
British pound and Euro. Assets and liabilities of certain
foreign subsidiaries and equity investees are translated at the
spot rate in effect at the applicable reporting date, and the
combined statements of operations and our share of the results
of operations of our equity affiliates are translated into the
U.S. dollar at the average exchange rates in effect during
the applicable period. The resulting cumulative translation
adjustment is recorded as a separate component of other
comprehensive income (loss).
Transactions denominated in currencies other than
the functional currency are recorded based on exchange rates at
the time such transactions arise. Subsequent changes in exchange
rates result in transactions gains and losses which are
reflected in the Consolidated Statement of Operations.
Sales of common stock by a consolidated
subsidiary are accounted for as capital transactions with the
adjustment to capital in excess of par value. No gain or loss is
recognized on these transactions.
Through July 2002, we had agreements to sell, on
an ongoing basis, certain of our trade accounts receivable
through revolving securitization structures under which we
retained servicing responsibilities as well as a subordinate
interest in the transferred receivables. These agreements
expired in July 2002 and were not renewed. We accounted for the
securitization of trade accounts receivable in accordance with
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. As a result, the related receivables were
removed from the Consolidated Balance Sheet and a retained
interest was recorded for the amount of receivables sold in
excess of cash received.
We determined the fair value of our retained
interests based on the present value of future expected cash
flows using our managements best estimate of various
factors, including credit loss experience and discount rates
commensurate with the risks involved. These assumptions were
updated periodically based on actual
109
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
results, thus the estimated credit loss and
discount rates utilized were materially consistent with
historical performance. The fair value of the servicing
responsibility was estimated based on internal costs, which
approximate market. Costs associated with the sale of
receivables are included in nonoperating other income
(expense) net in the Consolidated Statement of
Operations.
The FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Under this Statement,
a liability for a cost associated with an exit or disposal
activity is recognized at fair value when the liability is
incurred rather than at the date of an entitys commitment
to an exit plan. The provisions of this Statement are effective
for exit or disposal activities that are initiated after
December 31, 2002; hence, initial adoption of this
Statement on January 1, 2003, did not have any impact on
our results of operations or financial position.
The FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, which is effective for fiscal
years ending after December 15, 2002.
SFAS No. 148 amends SFAS No. 123 to permit
two additional transition methods for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation from the intrinsic method under APB No. 25.
The prospective method of transition under
SFAS No. 123 is an option to the entities that adopt
the recognition provisions under this statement in a fiscal year
beginning before December 15, 2003. In addition, this
statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements concerning the method of
accounting used for stock-based employee compensation and the
effects of that method on reported results of operations. Under
this statement, pro forma disclosures are required in a specific
tabular format in the Summary of Significant Accounting
Policies. We have applied the disclosure requirements of
this statement effective December 31, 2002. The adoption
had no effect on our consolidated financial position or results
of operations. We continue to account for our stock-based
compensation plans under APB Opinion No. 25. See
Employee stock-based awards.
FASB has announced it will
be issuing an Exposure Draft on equity-based compensation. In
deliberations on this matter, the FASB has concluded that
equity-based compensation awards to employees results in an
expense to the employer that should be recognized in the income
statement.
The FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This Interpretation requires the fair value of
guarantees issued or modified after December 31, 2002, be
initially recognized by the guarantor at the inception of the
guarantee, and expands the disclosure requirements for
guarantees. Initial adoption of this Interpretation did not have
any impact on our results of operations or financial position.
The expanded disclosure requirements have been presented in the
Notes to Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities. The Interpretation defines a variable interest
entity (VIE) as an entity in which equity investors do not
have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support
from other parties. The investments or other interests that will
absorb portions of the VIEs expected losses if they occur
or receive portions of the VIEs expected residual returns
if they occur are called variable interests. Variable interests
may include, but are not limited to, equity interests, debt
instruments, beneficial interests, derivative instruments and
guarantees. The Interpretation requires an entity to consolidate
a VIE if that entity will absorb a majority of the VIEs
expected losses if they occur, receive a majority of the
VIEs expected residual returns if they occur, or both. If
no party will absorb a majority of the expected losses or
expected residual returns, no party will
110
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidate the VIE. The Interpretation also
requires disclosure of significant variable interests in
unconsolidated VIEs. The Interpretation is effective for
all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of the
Interpretation were initially to be effective for the first
interim or annual period ending after June 15, 2003.
However, in October 2003, the FASB delayed the required
effective date of the Interpretation on those entities to the
first period beginning after December 15, 2003.
Additionally, in December 2003, the FASB issued a revision to
the Interpretation to clarify certain provisions and to exempt
certain entities from its requirements. The revised
Interpretation will require full implementation in the first
quarter of 2004. We adopted the original Interpretation in 2003
with no material effect to the consolidated financial
statements. The effect of the adoption of the revised
Interpretation is not expected to be material to the
consolidated financial statements.
The FASB issued revised SFAS No. 132,
Employers Disclosures about Pensions and Other
Postretirement Benefits. This Statement addresses
disclosure requirements for pensions and other postretirement
benefits. The provisions of this Statement retain the disclosure
requirements of the previously issued SFAS No. 132 and
expand the disclosure requirements to include information
describing types of plan assets, investment strategy,
measurement date, plan obligations and cash flows. Additionally,
the Statement requires disclosure of the components of net
periodic benefit cost recognized during interim periods. This
Statement is effective for financial statements with fiscal
years and interim periods ending after December 15, 2003,
except for the disclosure of estimated future benefit payments,
which is effective for fiscal years ending after June 15,
2004.
EITF Issue No. 01-8, Determining
Whether An Arrangement Contains a Lease, became effective
on July 1, 2003, and provides guidance for determining
whether certain contracts such as transportation, storage, load
serving, and tolling agreements are executory service
arrangements or leases pursuant to SFAS No. 13. A
prospective transition is provided for whereby the consensus is
to be applied to arrangements consummated or modified after
July 1, 2003. Our review indicates that certain of
Powers tolling agreements could be considered leases under
the consensus if the tolling agreements are modified after
July 1, 2003. If such tolling agreements are deemed to be
capital leases, the net present value of the demand payments
would be reported on the balance sheet consistent with debt as
an obligation under capital lease, and as an asset in property,
plant and equipment.
The SEC staff, in a letter to the EITF Chairman,
raised the issue of classification of leased mineral rights, for
companies subject to SFAS No. 19
Financial
Accounting and Reporting by Oil and Gas Producing
Companies
that acquire leased mineral rights.
Specifically, the SEC staff has stated its view that leased
mineral rights meet the definition of an intangible asset under
SFAS No. 141
Business Combinations
and are thus subject to the disclosure requirements of
SFAS No. 142
Goodwill and Other Intangible
Assets.
At December 31, 2003 and 2002, our
Exploration & Production segment had net leased mineral
rights of $1.9 billion and $2.1 billion, respectively.
The leased mineral rights would continue to be amortized over
their remaining useful life, where appropriate. The effect of
such a reclassification, if required, is not expected to affect
our Statement of Operations or Statement of Cash Flows.
Note 2. Discontinued
operations
During 2002, we began the process of selling
certain assets and/or businesses to address liquidity issues.
The businesses discussed below represent components that have
been sold or approved for sale by our Board of Directors as of
December 31, 2003. Therefore, their results of operations
(including any impairments, gains or losses), financial position
and cash flows have been reflected in the consolidated financial
statements and notes as discontinued operations.
111
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized results of discontinued operations for
the years ended December 31, 2003, 2002, and 2001 are as
follows:
Summarized assets and liabilities of discontinued
operations as of December 31, 2003 and 2002, are as follows:
112
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On November 17, 2003, we entered into
agreements to sell our Alaska refinery, retail and pipeline
assets for approximately $265 million in cash, subject to
various closing adjustments. The transactions are expected to
close in the first quarter of 2004 following the completion of
various closing conditions.
Throughout the sales negotiation process, we
regularly reassessed the estimated fair value of these assets
based on information obtained from the sales negotiations using
a probability-weighted approach. As a result, impairment charges
of $8 million and $18.4 million were recorded during
2003 and 2002, respectively. These impairments are included in
(impairments) and gain (loss) on sales in the preceding
table of summarized results of discontinued operations. These
operations were part of the previously reported Petroleum
Services segment.
During second-quarter 2003, our Board of
Directors approved a plan authorizing management to negotiate
and facilitate a sale of the assets of Gulf Liquids New River
Project LLC (Gulf Liquids). We recognized impairment charges
totaling $108.7 million during 2003 to reduce the carrying
cost of the long-lived assets to estimated fair value less costs
to sell the assets. These charges are included in (impairments)
and gain (loss) on sales in the preceding table of summarized
results of discontinued operations. We estimated fair value
based on a probability-weighted analysis of various scenarios
including expected sales prices, salvage valuations and
discounted cash-flows. We expect to complete the sale of these
operations within one year of the Boards approval. These
operations were part of our Midstream segment.
During 2003, we completed the sales of certain
gas processing, natural gas liquids fractionation, storage and
distribution operations in western Canada and at our Redwater,
Alberta plant for total proceeds of $246 million in cash.
We recognized pre-tax gains totaling $92.1 million in 2003
on the sales which are included in (impairments) and gain
(loss) on sales in the preceding table of summarized results of
discontinued operations. These operations were part of our
Midstream segment.
On September 9, 2003, we completed the sale
of our soda ash mining facility located in Colorado. The
December 31, 2002 carrying value reflected the then
estimated fair value less cost to sell. During 2003, ongoing
sale negotiations continued to provide new information regarding
estimated fair value, and, as a result, we recognized additional
impairment charges of $17.4 million in 2003. We also
recognized a loss on the sale in 2003 of $4.2 million.
These impairments, the loss on the sale and previous impairments
of $133.5 million in 2002 and $170 million in 2001 are
included in (impairments) and gain (loss) on sales in the
preceding table of
113
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
summarized results of discontinued operations.
The soda ash operations were part of the previously reported
International segment.
On June 17, 2003, we completed the sale of
our 100 percent general partnership interest and
54.6 percent limited partner investment in Williams Energy
Partners for $512 million in cash and assumption by the
purchasers of $570 million in debt. In December 2003, we
received additional cash proceeds of $20 million following
the occurrence of a contingent event. We recognized a total
pre-tax gain of $310.8 million on the sale during 2003,
including the $20 million of additional proceeds, all of
which is included in (impairments) and gain (loss) on sales
in the preceding table of summarized results of discontinued
operations. We deferred an additional $113 million
associated with our indemnifications of the purchasers for a
variety of matters, including obligations that may arise
associated with existing environmental contamination relating to
operations prior to April 2002 and identified prior to April
2008 (see Note 16).
On May 30, 2003, we completed the sale of
our bio-energy operations for $59 million in cash. During
2003, we recognized an additional pre-tax loss on the sale of
$5.4 million. We recorded impairment charges totaling
$195.7 million, including $23 million related to
goodwill, during 2002, to reduce the carrying cost to our
estimate of fair value, less cost to sell, at that time. Both
the additional loss and impairment charges are included in
(impairments) and gain (loss) on sales in the preceding table of
summarized results of discontinued operations. These operations
were part of the previously reported Petroleum Services segment.
On May 30, 2003, we completed the sale of
natural gas exploration and production properties in the Raton
Basin in southern Colorado and the Hugoton Embayment in
southwestern Kansas. This sale included all of our interests
within these basins. We recognized a $39.7 million gain on
the sale during 2003. The gain is included in (impairments) and
gain (loss) on sales in the preceding table of summarized
results of discontinued operations. These properties were part
of the Exploration & Production segment.
On May 16, 2003, we completed the sale of
Texas Gas Transmission Corporation for $795 million in cash
and the assumption by the purchaser of $250 million in
existing Texas Gas debt. We recorded a $109 million
impairment charge in first-quarter 2003 reflecting the excess of
the carrying cost of the long-lived assets over our estimate of
fair value based on our assessment of the expected sales price
pursuant to the purchase and sale agreement. The impairment
charge is included in (impairments) and gain (loss) on
sales in the preceding table of summarized results of
discontinued operations. No significant gain or loss was
recognized on the subsequent sale. Texas Gas was a segment
within Gas Pipeline.
On March 4, 2003, we completed the sale of
our refinery and other related operations located in Memphis,
Tennessee for $455 million in cash. We had previously
written these assets down by $240.8 million to their
estimated fair value less cost to sell at December 31,
2002. We recognized a pre-tax gain on sale of $4.7 million
in the first quarter of 2003. During the second quarter of 2003,
we recognized a $24.7 million pre-tax gain on the sale of
an earn-out agreement that we retained in the sale of the
refinery. The 2002 impairment charge and subsequent gains are
included in (impairments) and gain (loss) on sales in the
preceding table of summarized results of discontinued
operations. These operations were part of the previously
reported Petroleum Services segment.
114
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On February 27, 2003, we completed the sale
of our travel centers for approximately $189 million in
cash. We had previously written these assets down by
$146.6 million in 2002 and $14.7 million in 2001 to
their estimated fair value less cost to sell at
December 31, 2002. These impairments are included in
(impairments) and gain (loss) on sales in the preceding table of
summarized results of discontinued operations. We did not
recognize a significant gain or loss on the sale. These
operations were part of the previously reported Petroleum
Services segment.
On November 15, 2002, we completed the sale
of our Central natural gas pipeline for $380 million in
cash and the assumption by the purchaser of $175 million in
debt. Impairment charges totaling $91.3 million during 2002
are reflected in (impairments) and gain (loss) on sales in
the preceding table of summarized results of discontinued
operations. Central was a segment within Gas Pipeline.
On August 1, 2002, we completed the sale of
our 98 percent interest in Mid-America Pipeline and
98 percent of our 80 percent ownership interest in
Seminole Pipeline for $1.2 billion. The sale generated net
cash proceeds of $1.15 billion. The preceding table of
summarized results of discontinued operations,
(impairments) and gain (loss) on sales includes a pre-tax
gain of $301.7 million during 2002 and an
$11.4 million reduction of the gain during 2003. These
assets were part of the Midstream segment.
On March 27, 2002, we completed the sale of
our Kern River pipeline for $450 million in cash and the
assumption by the purchaser of $510 million in debt. As
part of the agreement, $32.5 million of the purchase price
was contingent upon Kern River receiving a certificate from the
FERC to construct and operate a future expansion. We received
the certificate in July 2002, and recognized the contingent
payment plus interest as income from discontinued operations in
third-quarter 2002. Included as a component of
(impairments) and gain (loss) on sales in the preceding
table of summarized results of discontinued operations is a
pre-tax loss of $6.4 million for the year ended
December 31, 2002. Kern River was a segment within Gas
Pipeline.
On March 30, 2001, our Board of Directors
approved a tax-free spinoff of WilTel to our shareholders. On
April 23, 2001, we distributed 398.5 million shares,
or approximately 95 percent of our WilTel common stock, to
holders of our common stock. Accordingly, the results of
operations, financial position and cash flows for WilTel have
been reflected in the accompanying consolidated financial
statements and notes as discontinued operations.
In an effort to strengthen WilTels capital
structure, prior to the spinoff we took the following steps:
115
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to filing our 2001 Annual Report on
Form 10-K, WilTel announced that it might seek to
reorganize under the U.S. Bankruptcy Code. As a result, we
determined that it was probable we would be unable to fully
recover certain receivables and our investment in WilTel. We
also concluded that it was probable that we would be required to
perform under certain guarantees and payment obligations. Using
the information available prior to March 7, 2002 and under
the circumstances, we developed an estimated range of loss
related to our total WilTel exposure. As part of this
evaluation, we considered our position as an unsecured creditor,
the fair value of the leased assets securing the Technology
Center lease, likely recoveries from a successful reorganization
process under Chapter 11 of the U.S. Bankruptcy Code,
and the enterprise value of WilTel. We also received assistance
from external legal counsel and an external financial and
restructuring advisor. At that time, we believed that no loss
within the range was more probable than another. Accordingly, we
recorded the $2.05 billion minimum amount of the range of
loss. This is reported in the 2001 Consolidated Statement of
Operations as a $1.84 billion pre-tax charge to
discontinued operations and a $213 million pre-tax charge
to continuing operations.
The $1.84 billion pre-tax charge to
discontinued operations includes portions of the following items:
The $213 million pre-tax charge to
continuing operations includes portions of the following items:
In 2002, we acquired all of the WCG Note Trust
Notes by exchanging $1.4 billion of our Senior Unsecured
9.25 percent Notes due March 2004. WilTel was indirectly
obligated to reimburse us for any payments we were required to
make in connection with the WCG Note Trust Notes.
On March 29, 2002, we funded the
$754 million purchase price related to WilTels
March 8, 2002 exercise of its option to purchase the
covered network assets under the ADP transaction. The payment
entitled us to an unsecured note from WilTel for the same amount.
On April 22, 2002, WilTel filed for
bankruptcy protection under Chapter 11 of the
U.S. Bankruptcy Code. On October 15, 2002, WilTel
consummated its reorganization plan. Under this plan:
116
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2002, we recognized additional pre-tax
charges of $268.7 million in continuing operations related
to the recovery and settlement of our receivables and claims
against WilTel.
At December 31, 2003, we have a
$110.8 million receivable from WilTel for the promissory
notes relating to the sale of the Technology Center pursuant to
the WilTel reorganization plan. The receivable is included in
other assets and deferred charges.
We have provided guarantees in the event of
nonpayment by WilTel on certain lease performance obligations of
WilTel that extend through 2042 and have a maximum potential
exposure of approximately $51 million at December 31,
2003. Our exposure declines systematically throughout the
remaining term of WilTels obligations. The carrying value
of these guarantees is approximately $46 million at
December 31, 2003 and is recorded as a non-current
liability.
Investing income (loss) for the years ended
December 31, 2003, 2002 and 2001, is as follows:
Equity earnings for the year ended
December 31, 2002, includes a benefit of $27.4 million
for a contractual construction completion fee received by one of
our equity affiliates whose operations are accounted for under
the equity method of accounting. This equity affiliate served as
the general contractor on the Gulfstream pipeline project for
Gulfstream Natural Gas System (Gulfstream), an interstate
natural gas pipeline subject to FERC regulations and an equity
affiliate of ours. The fee paid by Gulfstream was for the early
completion during second-quarter 2002 of the construction of
Gulfstreams pipeline. It was capitalized by Gulfstream as
property, plant and equipment and is included in
Gulfstreams rate base to be recovered in future revenues.
Income (loss) from investments for the year ended
December 31, 2003, includes:
117
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income (loss) from investments for the year ended
December 31, 2002, includes:
Income (loss) from investments for the year ended
December 31, 2001, includes:
Impairments of cost based investments for the
year ended December 31, 2003, includes:
The 2002 and 2001 impairments of cost based
investments relate primarily to various international
investments.
Interest income for the year ended
December 31, 2003, includes approximately $34 million
of interest income at Power as the result of certain recent FERC
proceedings.
118
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments at December 31, 2003 and 2002,
are as follows:
In December 2003, our Midstream subsidiary made
an additional $127 million investment in Discovery Pipeline
which was subsequently used by Discovery Pipeline to repay
maturing debt. All owners contributed amounts equal to their
ownership percentage so our 50 percent ownership in
Discovery remained unchanged. Also during 2003, Midstream sold
its investments in four pipelines that had a combined book value
of approximately $63 million at December 31, 2002.
During February 2004, we were a party to a
recapitalization plan completed by Longhorn Partners Pipeline,
L.P. (Longhorn). As a result of this plan, we sold a portion of
our equity investment in Longhorn for $11.4 million,
received $58 million in repayment of a portion of our
advances to Longhorn and converted the remaining advances,
including accrued interest, into preferred equity interests in
Longhorn. These preferred equity interests are subordinate to
the preferred interests held by the new investors. No gain or
loss was recognized on this transaction.
Dividends and distributions received from
companies carried on the equity basis were $21 million,
$81 million and $51 million in 2003, 2002 and 2001,
respectively. The $27.4 million Gulfstream construction
completion fee described previously is included in the 2002
distributions.
We have guaranteed commercial letters of credit
totaling $17 million on behalf of ACCROVEN. These expire in
January 2005, have no carrying value and are fully
collateralized with cash.
In connection with the construction of a joint
venture pipeline project, we guaranteed, through a put
agreement, certain portions of the joint ventures project
financing in the event of nonpayment by the joint
119
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
venture. Our potential liability under this
guarantee ranges from zero percent to 100 percent of the
outstanding project financing, depending on our ability and the
other project members ability to meet certain performance
criteria. As of December 31, 2003, the total outstanding
project financing is $31.7 million. Our maximum potential
liability is the full amount of the financing, but based on the
current status of the project, it is likely that any obligation
would be limited to 50 percent of the outstanding
financing. As additional borrowings are made under the project
financing facility, our potential exposure will increase. This
guarantee expires in March 2005, and we have not accrued any
amounts at December 31, 2003.
We have provided guarantees on behalf of certain
partnerships in which we have an equity ownership interest.
These generally guarantee operating performance measures and the
maximum potential future exposure cannot be determined. These
guarantees continue until we withdraw from the partnerships. No
amounts have been accrued at December 31, 2003.
Significant gains or losses from asset sales,
impairments and other accruals included in other (income)
expense net within segment costs and expenses for
the years ended December 31, 2003, 2002 and 2001, are as
follows:
120
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2002, we announced our intent to exit the
Power business. As a result, Power pursued efforts to sell all
or portions of our power, natural gas, and crude and refined
products portfolios in the latter half of 2002 and in 2003.
Based on bids received in these sales efforts, we impaired
certain assets and projects in 2002. During 2003, we continued
our focus on exiting the Power business and, as a result,
impaired certain assets.
California Rate Refund and Other Accrual
Adjustments.
In addition to the
$19.5 million charge included in other (income)
expense net within segment costs and expenses for
2003, a $13.8 million charge is recorded within costs and
operating expenses. These two amounts, totaling
$33.3 million, are for California rate refund liability and
other accrual adjustments and relate to power marketing
activities in California during 2000 and 2001. See Note 16
for further discussion.
Goodwill.
The fair
value of the Power reporting unit used to calculate the goodwill
impairment loss in 2002 was based on the estimated fair value of
the trading portfolio inclusive of the fair value of contracts
with affiliates. In 2002, the trading portfolio was reflected at
fair value in the financial statements and the affiliate
contracts were not. The fair value of the affiliate contracts
was estimated using a discounted cash flow model with natural
gas pricing assumptions based on current market information.
During 2003, we continued to focus on exiting the
Power business. Because of this and current market conditions in
which this business operates, we evaluated Powers
remaining goodwill for impairment. In estimating the fair value
of the Power reporting unit, we considered our derivative
portfolio which is carried at fair value on the balance sheet
and our non-derivative portfolio which is no longer carried at
fair value on the balance sheet. Because of the significant
negative fair value of certain of our non-derivative contracts,
we may be unable to realize our carrying value of this reporting
unit. As a result, we recognized a $45 million impairment
of the remaining goodwill within Power during 2003.
Generation
Facilities.
The 2003 impairment
relates to the Hazelton generation facility. Fair value was
estimated using future cash flows based on current market
information and discounted at a risk adjusted rate. The 2002
impairment was related to the Worthington generation facility.
Fair value was estimated based on expected proceeds from the
sale of the facility, which closed in first-quarter 2003.
Loss Accruals and Impairment of Other Power
Related Assets.
The 2002 loss accruals
and impairments of other power related assets were recorded
pursuant to reducing activities associated with the distributive
power generation business.
Guarantee Loss Accruals and
Write-Offs.
The 2002 guarantee loss
accruals and write-offs within Power of $56.2 million
includes accruals for commitments for certain assets that were
previously planned to be used in power projects, write-offs
associated with a terminated power plant project and a
$13.2 million reversal of loss accruals related to the
wind-down of our mezzanine lending business.
Midstream
Gas & Liquids
Canadian Assets.
Approximately $38 million of the 2002 Canadian asset
impairment reflects a reduction of carrying cost to
managements estimate of fair market value for our natural
gas liquid extraction plants, determined primarily from
information available from efforts to sell these assets in a
single transaction. The balance is associated with an olefin
fractionation facility whose carrying costs were determined to
be not fully recoverable. Fair value was estimated using
discounted future cash flows.
During 2003, we temporarily suspended our efforts
to sell the natural gas liquid extraction plants pending certain
commercial contract renegotiations expected to be completed
during 2004. Thus, these assets were reevaluated individually
for impairment. This resulted in an additional impairment of
certain of the natural gas liquid extraction plants to fair
value. We estimated fair value using an earnings multiple
applied to projected operating results. This estimate was
validated by a range of discounted future cash flows for the
assets.
121
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision (benefit) for income taxes from
continuing operations includes:
Reconciliations from the provision (benefit) for
income taxes from continuing operations at the federal statutory
rate to the provision (benefit) for income taxes are as follows:
122
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of deferred tax
liabilities and assets as of December 31, 2003 and 2002,
are as follows:
Valuation allowances at December 31, 2003
serve to reduce the recognized tax benefit associated with
foreign asset impairments and foreign carryovers to an amount
that will, more likely than not, be realized. Valuation
allowances at December 31, 2002 serve to reduce the
recognized tax benefit associated with federal capital loss
carryovers, foreign asset impairments and foreign carryovers to
an amount that will, more likely than not, be realized. The
valuation allowance decreased $89 million and
$23 million in 2003 and 2002, respectively.
Utilization of foreign operating loss carryovers
reduced the provision for income taxes during 2003 by
$19 million.
Undistributed earnings of certain consolidated
foreign subsidiaries at December 31, 2003, amounted to
approximately $45 million. No provision for deferred U.S.
income taxes has been made for these subsidiaries because we
intend to permanently reinvest such earnings in those foreign
operations.
The impact of foreign operations on the effective
tax rate increased during 2002 due to the recognition of
U.S. tax on foreign dividend distributions and recording of
a financial impairment on certain foreign assets for which a
valuation allowance was established.
Federal net operating loss carryovers, charitable
contribution carryovers, and capital loss carryovers of
$204 million, $58 million and $68 million,
respectively, at the end of 2003 are expected to be utilized
prior to expiration in 2007 through 2022.
Cash refunds for income taxes (net of payments)
were $88 million in 2003. Cash payments for income taxes
(net of refunds) were $36 million and $87 million in
2002 and 2001, respectively.
123
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the course of audits of our business by
domestic and foreign tax authorities, we frequently face
challenges regarding the amount of taxes due. These challenges
include questions regarding the timing and amount of deductions
and the allocation of income among various tax jurisdictions. In
evaluating the liability associated with our various filing
positions, we record a liability for probable tax contingencies.
In association with this liability, we record an estimate of
related interest as a component of our current tax provision.
The impact of this accrual is included within Other
net in our reconciliation of the tax provision to the federal
statutory rate.
Basic and diluted earnings (loss) per common
share for the years ended December 31, 2003, 2002 and 2001,
are as follows:
For the year ended December 31, 2003,
approximately 3.6 million weighted-average stock options,
approximately 6.4 million weighted average shares related
to the assumed conversion of 9.875 percent cumulative
convertible preferred stock, approximately 2.5 million
weighted-average unvested deferred shares and approximately
16.5 million weighted-average shares related to the assumed
conversion of convertible debentures, as well as the related
interest, that otherwise would have been included, have been
excluded from the computation of diluted earnings per common
share as their inclusion would be antidilutive. The preferred
stock was redeemed in June 2003.
For the year ended December 31, 2002,
approximately 666 thousand weighted-average stock options,
approximately 11.3 million weighted-average shares related
to the assumed conversion of the 9.875 percent cumulative
convertible preferred stock and approximately 3.6 million
weighted-average unvested deferred shares, that otherwise would
have been included, have been excluded from the computation of
diluted earnings per common share as their inclusion would be
antidilutive.
Additionally, approximately 15.0 million,
38.7 million and 15.3 million options to purchase
shares of common stock with weighted-average exercise prices of
$22.77, $19.90 and $36.12, respectively, were outstanding on
December 31, 2003, 2002 and 2001, respectively, but have
been excluded from the computation of diluted earnings per
share. Inclusion of these shares would have been antidilutive,
as the exercise prices of the options exceeded the average
market prices of the common shares for the respective years.
124
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the changes in
benefit obligations and plan assets for pension benefits and
other postretirement benefits for the years indicated. It also
presents a reconciliation of the funded status of these benefits
to the amount recorded in the Consolidated Balance Sheet at
December 31 of each year indicated. The annual measurement
date for our plans is December 31. Prior year amounts have
been restated to exclude those benefit plans where we will no
longer serve as sponsor related to those operations reported as
discontinued operations (see Note 1). Changes in the
obligations or assets of continuing plans associated with the
transfer of such obligations or assets in a sale or planned sale
reflected as discontinued operations have been reflected as
divestitures in the following tables.
125
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts recognized in the Consolidated Balance
Sheet consist of:
The accumulated benefit obligation for pension
benefit plans was $720.2 million and $680.5 million at
December 31, 2003 and 2002, respectively.
Information for pension plans with projected
benefit obligation and accumulated benefit obligation in excess
of plan assets as of December 31, 2003 and 2002 is as
follows:
Net pension and other postretirement benefit
expense for the years ended December 31, 2003, 2002 and
2001, consists of the following:
126
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The $(41.9) million and $13.5 million
settlement/ curtailment expense (credit) included in net
periodic postretirement benefit expense in 2003 and 2002,
respectively, is included in income (loss) from discontinued
operations in the Consolidated Statement of Operations due to
the settlement/ curtailment directly resulting from the sale of
the operations included within discontinued operations.
The weighted-average assumptions utilized to
determine benefit obligations as of December 31, 2003 and
2002 are as follows:
The weighted-average assumptions utilized to
determine net pension and other postretirement benefit expense
for the years ended December 31, 2003, 2002 and 2001, are
as follows:
The expected rate of return was determined by our
Investment Committee by combining a review of the historical
returns realized within the portfolio, the investment strategy
included in the Plans Investment Policy Statements, and
the capital market projections provided by our independent
investment consultants for the asset classifications in which
the portfolio is invested and the target weightings of each
asset classification.
The annual assumed rate of increase in the health
care cost trend rate for 2004 is 11.8 percent, and
systematically decreases to 5 percent by 2015.
127
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The nonpension postretirement benefit plans which
we sponsor provide for retiree contributions and contain other
cost-sharing features such as deductibles and coinsurance. The
accounting for these plans anticipates future cost-sharing that
is consistent with our expressed intent to increase the retiree
contribution rate generally in line with health care cost
increases.
In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) was signed
into law. The Act introduces a prescription drug benefit under
Medicare (Medicare Part D) as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare
Part D. Our health care plan for retirees includes
prescription drug coverage. Management is evaluating the impact
of the Act on the future obligations of the plan. In accordance
with FASB Staff Position No. FAS 106-1, the provisions
of the Act are not reflected in any measures of benefit
obligations or other postretirement benefit expense in the
financial statements or accompanying notes. Authoritative
guidance on the accounting for a federal subsidy is pending and
that guidance, when issued, could require us to change
previously reported information.
The health care cost trend rate assumption has a
significant effect on the amounts reported. A
one-percentage-point change in assumed health care cost trend
rates would have the following effects:
The amount of postretirement benefit costs
deferred as a net regulatory asset at December 31, 2003 and
2002, is $24 million and $57.5 million, respectively,
and is expected to be recovered through rates over approximately
8 years.
Our pension plans weighted-average asset
allocations at December 31, 2003 and 2002, by asset
category are as follows:
Included in equity securities are investments in
commingled funds that invest entirely in equity securities and
comprise 38 percent of the pension plans
weighted-average assets at December 31, 2003 and 2002.
Other assets are comprised primarily of cash and cash
equivalents.
Our investment strategy for the assets within the
pension plans is to maximize investment returns with prudent
levels of risk to meet current and projected financial
requirements of the pension plans. These risks are evaluated, in
part, from an asset-only standpoint as to investment allocation,
investment style and manager selection. Additional risk
perspectives are reviewed considering the allocation of assets
and the structure of the plan liabilities and the combined
effects on the plans. Our investment policy for the pension plan
assets includes a target asset allocation. The target for equity
securities is 84 percent and debt securities and other is
16 percent at December 31, 2003.
128
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our other postretirement benefits plan
weighted-average asset allocations at December 31, 2003 and
2002, by asset category are as follows:
Included in equity securities are investments in
commingled funds that invest entirely in equity securities and
comprise 22 percent and 17 percent of the other
postretirement benefit plans weighted-average assets at
December 31, 2003 and 2002, respectively. Other assets are
comprised primarily of cash and cash equivalents, and insurance
contracts assets.
Our investment strategy for the assets within the
other postretirement benefit plans is to maximize investment
returns with prudent levels of risk in a tax efficient manner to
meet current and projected financial requirements of the other
postretirement benefit plans. These risks are evaluated, in
part, from an asset-only standpoint as to investment allocation,
investment style and manager selection. Additional risk
perspectives are reviewed considering the allocation of assets
and the structure of the plan liabilities and the combined
effects on the plans. Our investment policy for the other
postretirement benefit plan assets includes a target asset
allocation. The target for equity securities is 80 percent
and debt securities and other is 20 percent at
December 31, 2003.
We expect to contribute approximately
$60 million to our pension plans and approximately
$15 million to our other postretirement benefit plans in
2004.
We maintain defined-contribution plans. Costs
related to continuing operations of $18 million,
$39 million and $24 million were recognized for these
plans in 2003, 2002 and 2001, respectively. In 2002, these costs
included the cost related to additional contributions to an
employee stock ownership plan resulting from the retirement of
related external debt.
Inventories at December 31, 2003 and 2002,
are as follows:
129
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2003, we adopted
EITF 02-3 (see Note 1). As a result, we reduced the
recorded value of natural gas in underground storage by
$37.0 million, refined products by $2.9 million and
natural gas liquids by $1.0 million. Prior to the adoption
of EITF 02-3, we reported inventories related to energy
risk management and trading activities at fair value. Subsequent
to the adoption, these inventories are reported using the
average-cost method.
As of December 31, 2003 less than one
percent of inventories were stated at fair value compared with
52 percent at December 31, 2002. Inventories,
primarily related to energy risk management and trading
activities, stated at fair value at December 31, 2002,
included refined products of $23.1 million, natural gas in
underground storage of $76.2 million, and natural gas
liquids of $90.7 million. Inventories determined using the
LIFO cost method were approximately ten percent and seven
percent of inventories at December 31, 2003 and 2002,
respectively. The remaining inventories were primarily
determined using the average-cost method.
Lower-of-cost or market reductions of
approximately $1.1 million and $18.2 million were
recognized in 2003 and 2002, respectively, related to certain
power-related inventories primarily included in materials and
supplies.
Property, plant and equipment at
December 31, 2003 and 2002, is as follows:
Depreciation, depletion and amortization expense
for property, plant and equipment was $669.4 million in
2003, $657.6 million in 2002 and $521.5 million in
2001.
Gross property, plant and equipment includes
approximately $677 million at December 31, 2003 and
$984 million at December 31, 2002 of construction in
progress which is not yet subject to depreciation. In addition,
property of Exploration & Production includes
approximately $675 million at December 31, 2003 and
$774 million at December 31, 2002 of capitalized costs
from the Barrett acquisition related to properties with probable
reserves not yet subject to depletion.
Commitments for construction and acquisition of
property, plant and equipment are approximately $60 million
at December 31, 2003.
Net property, plant and equipment includes
approximately $1.2 billion at December 31, 2003 and
2002, related to amounts in excess of the original cost of the
regulated facilities within Gas Pipeline as a result of our
prior acquisitions. This amount is being amortized over the
estimated remaining useful lives of these assets at the date of
acquisition. Current FERC policy does not permit recovery
through rates for amounts in excess of original cost of
construction.
130
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We adopted SFAS No. 143,
Accounting for Asset Retirement Obligations on
January 1, 2003 (see Note 1). As a result, we recorded
a liability of $33.4 million representing the present value
of expected future asset retirement obligations at
January 1, 2003. The asset retirement obligation at
December 31, 2003 is $38.7 million (see Note 1).
Under our cash-management system, certain
subsidiaries cash accounts reflect credit balances to the
extent checks written have not been presented for payment.
Accounts payable includes approximately $27 million of
these credit balances at December 31, 2003 and
$57 million at December 31, 2002.
Accrued liabilities at December 31, 2003 and
2002, are as follows:
131
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes payable and long-term debt at
December 31, 2003 and 2002, are as follows:
Notes payable at December 31, 2002, included
a $921.8 million secured note (the RMT note payable), which
was repaid in May 2003 with proceeds from asset sales and from a
new $500 million long-term debt obligation (described below
under Issuances and Retirements).
Long-term debt includes $1.1 billion of
6.5 percent notes, payable in 2007, that are subject to
remarketing in 2004. These FELINE PACS include equity forward
contracts which require the holder to purchase shares of our
common stock in 2005. If the 2004 remarketing is unsuccessful
and a second remarketing in February 2005 is unsuccessful, we
could exercise our right to foreclose on the notes in order to
satisfy the obligation of the holders of the equity forward
contracts requiring the holder to purchase our common stock (see
Note 13). This would be a non-cash transaction.
In September 2003, our Board of Directors
authorized us to retire or otherwise prepay up to
$1.8 billion of debt, including $1.4 billion
designated for our senior, unsecured 9.25 percent notes due
March 15, 2004. On October 8, 2003, we announced a
cash tender offer for any and all of our $1.4 billion
senior, unsecured 9.25 percent notes as well as cash tender
offers and consent solicitations for approximately
$241 million of other outstanding notes and debentures. As
of the November 6, 2003, tender offer expiration date, we
had accepted $721 million of the senior, unsecured
9.25 percent notes for purchase. Additionally, we received
132
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tenders of notes and deliveries of related
consents from holders of $230 million of the other notes
and debentures. In conjunction with the tendered notes and
related consents, we paid premiums of approximately
$58 million. The premiums, as well as related fees and
expenses, together totaling $66.8 million, were recorded in
fourth-quarter 2003 as a pre-tax charge to earnings.
We are required by certain foreign lenders to
ensure that the interest rates received by them under various
loan agreements are not reduced by taxes by providing for the
reimbursement of any domestic taxes required to be paid by the
foreign lender. The maximum potential amount of future payments
under these indemnifications is based on the related borrowings,
generally continue indefinitely unless limited by the underlying
tax regulations, and have no carrying value. We have never been
called upon to perform under these indemnifications.
On June 6, 2003, we entered into a two-year
$800 million revolving and letter of credit facility,
primarily for the purpose of issuing letters of credit.
Northwest Pipeline and Transco also have access to all
unborrowed amounts under the facility. The facility must be
secured by cash and/or acceptable government securities with a
market value of at least 105 percent of the then
outstanding aggregate amount available for drawing under all
letters of credit, plus the aggregate amount of all loans then
outstanding. The restricted cash and investments used as
collateral are classified on our balance sheet as current or
non-current based on the expected ultimate termination date of
the underlying debt or letters of credit. The new credit
facility replaced a $1.1 billion credit line entered into
in July 2002 that was comprised of a $700 million revolving
credit facility and a $400 million letter of credit
facility secured by substantially all of our Midstream assets.
The lenders released these assets as collateral upon termination
of the old credit facilities, and they were not pledged in
support of the new facility. The interest rate on the new
facility is variable at the London InterBank Offered Rate
(LIBOR) plus .75 percent, or 1.87 percent at
December 31, 2003. As of December 31, 2003, letters of
credit totaling $353 million have been issued by the
participating financial institutions under this facility and
remain outstanding. No revolving credit loans were outstanding.
At December 31, 2003, the amount of restricted investments
securing this facility was $381 million, which
collateralized the facility at approximately 108 percent.
On May 28, 2003, we issued $300 million
of 5.5 percent junior subordinated convertible debentures
due 2033. These notes, which are callable after seven years, are
convertible at the option of the holder into our common stock at
a conversion price of approximately $10.89 per share. The
proceeds were used to redeem all of the outstanding
9.875 percent cumulative-convertible preferred shares (see
Note 13).
On May 30, 2003, our Exploration &
Production subsidiary entered into a $500 million secured
note due May 30, 2007, at a floating interest rate of LIBOR
plus 3.75 percent (totaling 4.92 percent at
December 31, 2003). This loan refinances a portion of the
RMT note discussed above. Certain of our Exploration &
Production interests in the U.S. Rocky Mountains had
secured the RMT note payable and now serve as security on the
current loan. Significant covenants on the borrower, RMT and its
parent Williams Production Holdings LLC (Holdings), include:
133
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On February 25, 2004, this loan facility was
amended. The maturity date was extended to May 30, 2008,
and the interest rate was lowered to LIBOR plus 2.5 percent.
On June 10, 2003, we issued
$800 million of 8.625 percent senior unsecured notes
due 2010. The notes were issued under our $3 billion shelf
registration statement. Significant covenants include:
While we do not expect to exceed the fixed charge
covenant ratio until the end of 2005, the covenant includes a
provision that allows us to refinance our existing revolver and
letter of credit facility. These restrictions may be lifted if
certain conditions, including our attaining an investment grade
rating from both Moodys Investors Service and Standard and
Poors are met.
A summary of significant issuances and
retirements of long-term debt, including capital leases, as well
as the items listed above, for the year ended December 31,
2003, is as follows:
Terms of certain of our subsidiaries
borrowing arrangements with lenders limit the transfer of funds
to the corporate parent. At December 31, 2003,
approximately $105 million of net assets of consolidated
subsidiaries was restricted. Of this amount, $91 million is
reported as restricted cash on our Consolidated
134
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Balance Sheet. In addition, certain equity method
investees borrowing arrangements and foreign government
regulations limit the amount of dividends or distributions to
the corporate parent. Restricted net assets of equity method
investees was approximately $86 million at
December 31, 2003.
Aggregate minimum maturities of long-term debt
for each of the next five years are as follows:
As noted above, the FELINE PACS are subject to
remarketing in 2004. If the 2004 remarketing is unsuccessful, a
second remarketing will occur in February of 2005. If this
attempt at remarketing is unsuccessful, we could exercise our
right to foreclose on the notes in order to satisfy the
obligation of the holders of the equity forward contracts
requiring the holder to purchase our common stock (see
Note 13). This would be a non-cash transaction. Otherwise,
the notes are not subject to early retirement.
Cash payments for interest (net of amounts
capitalized) and other fees recorded as interest expense were as
follows: 2003 $1.3 billion; 2002
$856 million; and 2001 $548 million.
Future minimum annual rentals under noncancelable
operating leases as of December 31, 2003, are payable as
follows:
Total rent expense was $110 million in 2003,
$93 million in 2002, and $89 million in 2001. In 2003,
sublease income from third parties was $16.5 million.
In July 2002, we amended the terms of an
operating lease with a special-purpose entity owned by third
parties through which we leased offshore oil and gas pipelines
and an onshore gas processing plant. The amended terms caused
the lease to be reclassified as a capital lease. The capital
lease obligation, which was $139.9 million at
December 31, 2002, was paid off in second-quarter 2003.
Prior to 2003, we transferred certain of our
assets into newly created consolidated entities and then sold a
non-controlling preferred interest in those entities to outside
investors. The outside investors in three of the entities were
unconsolidated special purpose entities formed solely for the
purpose of purchasing the preferred ownership interest in the
respective entity. The special purpose entities were capitalized
with no less than three-percent equity from an independent third
party. The outside investor in the fourth entity was not a
135
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
special purpose entity. In each case, the outside
investor was entitled to priority distributions from the
consolidated entity. The assets and liabilities of these
entities are included in the Consolidated Balance Sheet, with
the obligations to the outside investors reflected as debt. In
2002 and 2003, we paid the remaining obligations to the outside
investors in these entities, as further described below.
In December 2000, we formed two separate legal
entities, Snow Goose Associates, L.L.C. (Snow Goose) and Arctic
Fox Assets, L.L.C. (Arctic Fox) for the purpose of generating
funds to invest in certain Canadian energy-related assets. An
outside investor contributed $560 million in exchange for
the non-controlling preferred interest in Snow Goose. The
investor in Snow Goose was entitled to quarterly priority
distributions, representing an adjustable rate structure. The
initial priority return period was scheduled to expire in
December 2005.
During first-quarter 2002, the terms of the
priority return were amended. Significant terms of the amendment
included elimination of covenants regarding our credit ratings,
modifications of certain Canadian interest coverage covenants
and a requirement to amortize the outside investors
preferred interest with equal principal payments due each
quarter and the final payment in April 2003. In addition, we
provided a financial guarantee of the Arctic Fox note payable to
Snow Goose which, in turn, is the source of the priority
returns. Based on the terms of the amendment, the remaining
balance due of $224 million was classified as long-term
debt due within one year on our Consolidated Balance Sheet at
December 31, 2002. Priority returns prior to this amendment
are included in preferred returns and minority interest in
income of consolidated subsidiaries on the Consolidated
Statement of Operations. Subsequent priority return payments are
included in interest accrued on the Consolidated Statement of
Operations.
In April 2003, we purchased the remaining outside
investors interest in Snow Goose.
In December 2001, we formed Piceance Production
Holdings LLC (Piceance) and Rulison Production Company LLC
(Rulison) in a series of transactions that resulted in the sale
of a non-controlling preferred interest in Piceance to an
outside investor for $100 million. We used the proceeds of
the sale for general corporate purposes. The assets of Piceance
included fixed-price overriding royalty interests in certain oil
and gas properties owned by a subsidiary of ours as well as a
$135 million note from Rulison. The outside investor was
entitled to quarterly priority distributions beginning in
January 2002, based upon an adjustable rate structure in
addition to participation in a portion of the operating results
of Piceance. At December 31, 2002, the obligation to the
outside investor was $78.5 million and in May 2003, we
purchased the remaining outside investors interest in
Piceance.
In December 1998, we formed Castle Associates
L.P. (Castle) through a series of transactions that resulted in
the sale of a non-controlling preferred interest in Castle to an
outside investor for $200 million. We used the proceeds of
the sale for general corporate purposes. The outside investor
was entitled to quarterly priority distributions based upon an
adjustable rate structure, in addition to a portion of the
participation in the operating results of Castle. We purchased
the outside investors interest in December 2002.
During 1998, we formed Williams Risk Holdings
L.L.C. (Holdings) in a series of transactions that resulted in
the sale of a non-controlling preferred interest in Holdings to
an outside investor for $135 million. we used the proceeds
from the sale for general corporate purposes. The outside
investor in Holdings was not a
136
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
special purpose entity. The outside investor was
entitled to monthly preferred distributions based upon an
adjustable rate structure, in addition to participation in a
portion of the operating results of Holdings. The initial
priority return structure of Holdings was scheduled to expire in
September 2003. In July 2002, following the downgrade of our
senior unsecured rating we purchased the outside investors
ownership interest.
Concurrent with the sale of Kern River to
MidAmerican Energy Holdings Company (MEHC) on
March 27, 2002, we issued approximately 1.5 million
shares of 9.875 percent cumulative convertible preferred
stock to MEHC for $275 million. The terms of the preferred
stock allowed the holder to convert, at any time, one share of
preferred stock into 10 shares of our common stock at
$18.75 per share. The preferred shares carried no voting
rights and had a liquidation preference equal to the stated
value of $187.50 per share plus any dividends accumulated
and unpaid. Dividends on the preferred stock were payable
quarterly. At the time the preferred stock was issued, the
conversion price was less than the market price of our common
stock and thus deemed beneficial to the purchaser. The benefit
was recorded as a noncash dividend of $69.4 million, which
was a reduction to our retained earnings with an offsetting
amount recorded as an increase to capital in excess of par value.
On June 10, 2003, we redeemed all of the
outstanding 9.875 percent cumulative-convertible preferred
shares for approximately $289 million, plus
$5.3 million for accrued dividends. The $13.8 million
payments in excess of carrying value of the shares was also
recorded as a dividend. These shares were repurchased with
proceeds from a private placement of 5.5 percent junior
subordinated convertible debentures due 2033 (see Note 11).
In January 2002, we issued $1.1 billion of
6.5 percent notes payable in 2007 which are subject to
remarketing in 2004. Each note was bundled with an equity
forward contract (together, the FELINE PACS units) and sold in a
public offering for $25 per unit. The equity forward
contract requires the holder of each note to purchase one share
of our common stock for $25 three years from issuance of the
contract, provided that the average price of our common stock
does not exceed $41.25 per share for the 20 trading day
period prior to settlement. If the average price over that
period exceeds $41.25 per share, the number of shares
issued in exchange for $25 will be equal to one share multiplied
by the quotient of $41.25 divided by the average price over that
period. For example, if the average price at settlement is
$45 per share, the holder will be required to purchase
.9166 of a share for $25. The holder of the equity forward
contract can settle the contract early in the event we are
involved in a merger in which at least 30 percent of the
proceeds received by our shareholders is cash. In this event,
the holder will be entitled to pay the purchase price and
receive the kind and amount of securities they would have
received had they settled the equity forward contract
immediately prior to the acquisition. In addition to the
6.5 percent interest payment on the notes, we also make a
2.5 percent annual contract adjustment payment for the term
of the equity forward contract. The present value of the total
of the contract adjustment payments at the date the FELINE PACS
were issued was $76.7 million and was recorded as a
liability and a reduction to capital in excess of par at that
time. A periodic charge is recognized in income to increase the
value of the related liability as the date of the common stock
issuance approaches.
We maintain a Stockholder Rights Plan under which
each outstanding share of our common stock has one-third of a
preferred stock purchase right attached. Under certain
conditions, each right may be exercised to purchase, at an
exercise price of $140 (subject to adjustment), one
two-hundredth of a share of Series A Junior Participating
Preferred Stock. The rights may be exercised only if an
Acquiring Person acquires (or obtains the right to acquire) 15
percent or more of our common stock; or commences an offer for
15 percent or more of our common stock; or the Board of
Directors determines an Adverse Person has become the owner of a
substantial amount of our common stock. The rights, which until
exercised do not have voting rights, expire in 2006 and may be
redeemed at a price of $.01 per right prior to their
expiration, or within a specified period of time after the
occurrence of certain events. In the event a person becomes the
owner of more than
137
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
15 percent of our common stock or the Board
of Directors determines that a person is an Adverse Person, each
holder of a right (except an Acquiring Person or an Adverse
Person) shall have the right to receive, upon exercise, our
common stock having a value equal to two times the exercise
price of the right. In the event we are engaged in a merger,
business combination or 50 percent or more of our assets,
cash flow or earnings power is sold or transferred, each holder
of a right (except an Acquiring Person or an Adverse Person)
shall have the right to receive, upon exercise, common stock of
the acquiring company having a value equal to two times the
exercise price of the right.
On May 16, 2002, our stockholders approved
The Williams Companies, Inc. 2002 Incentive Plan (the
Plan). The Plan provides for common-stock-based
awards to both employees and non-management directors. Upon
approval by the stockholders, all prior stock plans were
terminated resulting in no further grants being made from those
plans. However, options outstanding in those prior plans remain
in those plans with their respective terms and provisions.
The Plan permits the granting of various types of
awards including, but not limited to, stock options, restricted
stock and deferred stock. Awards may be granted for no
consideration other than prior and future services or based on
certain financial performance targets being achieved. At
December 31, 2003, 56.2 million shares of our common
stock were reserved for issuance pursuant to existing and future
stock awards, of which 28.3 million shares were available
for future grants (14.8 million at December 31, 2002).
Several of our prior stock plans allowed us to
loan money to participants to exercise stock options using stock
certificates as collateral. Effective November 14, 2001, we
no longer issue loans under the stock option loan programs. Loan
holders were offered a one-time opportunity in January 2002 to
refinance outstanding loans at a market rate of interest
commensurate with the borrowers credit standing. The
refinancing was in the form of a full recourse note, with
interest payable annually in cash and a loan maturity date of
December 31, 2005. We continue to hold the collateral
shares and may review the borrowers financial position at
any time. The variable rate of interest on the loans was
determined at the signing of the promissory note to be
1.75 percent plus the current three-month London Interbank
Offered Rate (LIBOR). The rate is subject to change every three
months beginning with the first three-month anniversary of the
note. The amount of loans outstanding at December 31, 2003
and 2002, totaled approximately $28 million (net of a
$5 million allowance) and $30.3 million (net of a
$5 million allowance), respectively.
We granted deferred shares of approximately
158,000 in 2003, 2,738,000 in 2002 and 1,423,000 in 2001.
Deferred shares are valued at the date of award, and the
weighted-average grant date fair value of the shares granted was
$4.68 in 2003, $12.26 in 2002 and $40.84 in 2001. We recognized
approximately $30 million, $31 million and
$22 million of expense for deferred shares, net of the
reduction of expense from forfeited shares, in 2003, 2002 and
2001, respectively. Expense related to deferred shares granted
is recognized in the performance year or over the vesting
period, depending on the terms of the awards. The reduction of
expense related to the deferred shares forfeited is recognized
in the year of the forfeiture. We issued approximately 1,329,000
in 2003, 499,000 in 2002 and 260,000 in 2001, of the deferred
shares previously granted.
138
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price per share for stock options
may not be less than the market price of the underlying stock on
the date of grant. Stock options generally become exercisable
after three years from the date of grant and generally expire
ten years after grant.
On May 15, 2003, our shareholders approved a
stock option exchange program. Under this program, eligible
employees were given a one-time opportunity to exchange certain
outstanding options for a proportionately lesser number of
options at an exercise price to be determined at the grant date
of the new options. Surrendered options were cancelled
June 26, 2003, and replacement options were granted on
December 29, 2003. We did not recognize any expense
pursuant to the stock option exchange. However, for purposes of
pro forma disclosures, we recognized additional expense related
to these new options. The remaining expense on the cancelled
options will be amortized through year-end 2004.
The following summary reflects stock option
activity for our common stock and related information for 2003,
2002 and 2001:
139
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summary provides information about
options for our common stock that are outstanding and
exercisable at December 31, 2003:
The estimated fair value at date of grant of
options for our common stock granted in 2003, 2002 and 2001,
using the Black-Scholes option pricing model, is as follows:
Pro forma net income (loss) and earnings per
share, assuming we had applied the fair-value method of
SFAS No. 123, Accounting for Stock-Based
Compensation in measuring compensation cost beginning with
1997 employee stock-based awards is disclosed under Employee
stock-based awards in Note 1.
Fair-value
methods
We used the following methods and assumptions in
estimating our fair-value disclosures for financial instruments:
Cash and Cash Equivalents and Restricted
Cash:
The carrying amounts reported in
the balance sheet approximate fair value due to the short-term
maturity of these instruments.
140
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes and Other Non-current Receivables,
Margin Deposits and Deposits Received from Customers Relating to
Energy Trading and Hedging Activities:
The carrying amounts reported in the balance sheet approximate
fair value as these instruments have interest rates
approximating market or maturities of less than three years.
Restricted Investments and Marketable Equity
Securities:
The restricted investments
consist of short-term U.S. Treasury securities. Fair value
is determined using indicative year-end traded prices.
Advances to
Affiliates:
The 2003 carrying amounts
reported in the balance sheet approximate fair value as these
instruments were written down to estimated fair value based on
terms of a recapitalization plan (see Note 3). The 2002
carrying amounts, reported in the balance sheet in Investments
approximate fair value as these instruments have interest rates
approximating market.
Notes Payable:
Fair
value of the RMT note payable in 2002 was determined using the
expertise of outside investment banking firms. The carrying
amounts of other notes payable approximate fair value due to the
short-term maturity of these instruments.
Long-Term Debt:
The
fair value of our publicly traded long-term debt is valued using
indicative year-end traded bond market prices. Private debt is
valued based on the prices of similar securities with similar
terms and credit ratings. At December 31, 2003 and 2002,
77 percent and 76 percent, respectively, of our
long-term debt was publicly traded. We used the expertise of
outside investment banking firms to assist with the estimate of
the fair value of long-term debt.
Energy Derivatives:
Energy derivatives include:
Fair value of energy derivatives is determined
based on the nature of the transaction and the market in which
transactions are executed. Most of these transactions are
executed in exchange-traded or over-the-counter markets for
which quoted prices in active periods exist. For contracts with
lives exceeding the time period for which quoted prices are
available, we determined fair value by estimating commodity
prices during the illiquid periods. We estimated commodity
prices during illiquid periods by incorporating information
obtained from commodity prices in actively quoted markets,
prices reflected in current transactions and market fundamental
analysis.
Foreign Currency
Derivatives:
Fair value is determined
by discounting estimated future cash flows using forward foreign
exchange rates derived from the year-end forward exchange curve.
Fair value was calculated by the financial institution that is
counterparty to the agreement.
Interest-Rate Swaps:
Fair value is determined by discounting estimated future cash
flows using forward-interest rates derived from the year-end
yield curve. The financial institutions that are the
counterparties to the swaps calculated the fair value.
141
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have energy trading and non-trading
derivatives that have not been designated as or do not qualify
as SFAS No. 133 hedges. As such, the net change in
their fair value is recognized in earnings. Our Power segment
has trading derivatives that provide risk management services to
our third-party customers and non-trading derivatives that hedge
or could possibly hedge our long-term structured contract
positions on an economic basis. In addition, our
Exploration & Production segment enters into natural
gas basis swap agreements and the Alaska operations (within
discontinued operations) enters into crude oil and refined
product contracts.
We also hold significant non-derivative
energy-related contracts in our Power trading and non-trading
portfolios. These have not been included in the financial
instruments table above because they do not qualify as financial
instruments. See Note 1 regarding
Energy commodity risk
management and trading activities and revenues
for further
discussion of the non-derivative energy-related contracts.
142
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Futures Contracts:
Futures contracts are commitments to either purchase or sell a
commodity at a future date for a specified price and are
generally settled in cash, but may be settled through delivery
of the underlying commodity. Exchange-traded or over-the-counter
markets providing quoted prices in active periods are available.
Where quoted prices are not available, other market indicators
exist for the futures contracts we enter into. The fair value of
these contracts is based on quoted prices.
Swap Agreements and Forward Purchase and Sale
Contracts:
Swap agreements require us
to make payments to (or receive payments from) counterparties
based upon the differential between a fixed and variable price
or variable prices of energy commodities for different
locations. Forward contracts which involve physical delivery of
energy commodities contain both fixed and variable pricing
terms. Swap agreements and forward contracts are valued based on
prices of the underlying energy commodities over the contract
life and contractual or notional volumes with the resulting
expected future cash flows discounted to a present value using a
risk-free market interest rate.
Options:
Physical
and financial option contracts give the buyer the right to
exercise the option and receive the difference between a
predetermined strike price and a market price at the date of
exercise. These contracts are valued based on option pricing
models considering prices of the underlying energy commodities
over the contract life, volatility of the commodity prices,
contractual volumes, estimated volumes under option and other
arrangements and a risk-free market interest rate.
Interest-Rate and Credit
Derivatives:
Interest-rate swap and
futures agreements, including those with the parent, are used to
manage the interest rate risk in Powers energy trading and
non-trading portfolio. Under swap agreements, Power pays a fixed
rate and receives a variable rate on the notional amount of the
agreements. Financial futures contracts are commitments to
either purchase or sell a financial instrument, such as a
Eurodollar deposit, U.S. Treasury bond or
U.S. Treasury note, at a future date for a specified price.
These are generally settled in cash, but may be settled through
delivery of the underlying instrument. The fair value of these
contracts is determined by discounting estimated future cash
flows using forward interest rates derived from interest rate
yield curves. Credit default swaps are used to manage
counterparty credit exposure in the energy trading and
non-trading portfolio. Under these agreements, Power pays a
fixed rate premium for a notional amount of risk coverage
associated with certain credit events. The covered credit events
are bankruptcy, obligation acceleration, failure to pay and
restructuring. The fair value of these agreements is based on
current pricing received from the counterparties.
The valuation of all the contracts discussed
above also considers factors such as the liquidity of the market
in which the contract is transacted, uncertainty regarding the
ability to liquidate the position considering market factors
applicable at the date of such valuation and risk of
non-performance and credit considerations of the counterparty.
For contracts or transactions that extend into periods for which
actively quoted prices are not available, we estimate energy
commodity prices in the illiquid periods by incorporating
information obtained from commodity prices in actively quoted
markets, prices reflected in current transactions and market
fundamental analysis.
Our operations associated with the production of
natural gas enter into basis swap agreements fixing the price
differential between the Rocky Mountain natural gas prices and
Gulf Coast natural gas prices as part of their overall natural
gas price risk management program to reduce risk of declining
natural gas prices in basins with limited pipeline capacity to
other markets. Certain of these basis swaps do not qualify for
hedge accounting treatment under SFAS No. 133; hence,
the net change in fair value of these derivatives representing
unrealized gains and losses is recognized in earnings currently
as revenues in the Consolidated Statement of Operations.
143
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2002 and early 2003, our operations
associated with crude oil refining and refined products
marketing in the Midsouth entered into derivative transactions
(primarily forward contracts, futures contracts, swap agreements
and option contracts) which were not designated as hedges. The
forward contracts were for the procurement of crude oil and
refined products supply for operational purposes, while the
other derivatives manage certain risks associated with market
fluctuations in crude oil and refined product prices related to
refined products marketing. The net change in fair value of
these derivatives, representing unrealized gains and losses, was
recognized in earnings currently as revenues or costs and
operating expenses in the Consolidated Statement of Operations.
As a result of the completion of the sale of the Midsouth
refinery during first-quarter 2003, these derivatives were
discontinued.
We are also exposed to market risk from changes
in energy commodity prices within other areas of our operations.
We utilize derivatives to manage our exposure to the variability
in expected future cash flows attributable to commodity price
risk associated with forecasted purchases and sales of natural
gas, refined products and crude oil. These derivatives have been
designated as cash flow hedges.
We produce, buy and sell natural gas and crude
oil at different locations throughout the United States. To
reduce exposure to a decrease in revenues or an increase in
costs from fluctuations in natural gas and crude oil market
prices, we enter into natural gas and crude oil futures
contracts and swap agreements to fix the price of anticipated
sales and purchases of natural gas and sales of crude oil.
During 2003, we discontinued hedge accounting for anticipated
sales of crude oil due to the sale of those producing properties.
Our refinery operations purchase crude oil for
processing and sell the refined products. These operations are
exposed to increasing costs of crude oil and/or decreasing
refined product sales prices due to changes in market prices. We
enter into crude oil and refined products futures contracts and
swap agreements to lock in the prices of anticipated purchases
of crude oil and sales of refined products. During 2002, these
derivatives were accounted for as cash flow hedges. Hedge
accounting was discontinued during 2002 for forecasted
transactions no longer probable of occurring because of the
anticipated sales of the refineries (see Note 2).
Our electric generation facilities utilize
natural gas in the production of electricity. To reduce the
exposure to increasing costs of natural gas due to changes in
market prices, we enter into natural gas futures contracts and
swap agreements to fix the prices of anticipated purchases of
natural gas. In addition, during 2002 we entered into
fixed-price forward physical contracts to fix the prices of
anticipated sales of electric production. During 2002, we
discontinued hedge accounting for one of the electric generation
facilities due to the sale of the facility in 2003.
Derivative gains or losses from these cash flow
hedges are deferred in other comprehensive income and
reclassified into earnings in the same period or periods during
which the hedged forecasted purchases or sales affect earnings.
To match the underlying transaction being hedged, derivative
gains or losses associated with anticipated purchases are
recognized in costs and operating expenses and amounts
associated with anticipated sales are recognized in revenues in
the Consolidated Statement of Operations. Approximately
$.6 million of gains from hedge ineffectiveness are
included in costs and operating expenses in the Consolidated
Statement of Operations during 2003. Approximately
$.5 million of losses and $.7 million of gains from
hedge ineffectiveness are included in revenues and costs and
operating expenses, respectively, in the Consolidated Statement
of Operations during 2002. We discontinued hedge accounting in
2003 and 2002 for certain contracts when it became probable that
the related forecasted transactions would not occur. As a
result, we reclassified net losses of $5 million and net
gains of $43 million from accumulated other comprehensive
income and into earnings in the Consolidated Statement of
Operations in 2003 and 2002, respectively. For 2003 and 2002,
there were no derivative gains or losses excluded from the
assessment of hedge effectiveness.
144
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2003, we had hedged
future cash flows associated with anticipated energy commodity
purchases and sales for up to 12 years. Based on recorded
values at December 31, 2003, approximately
$104 million of net losses (net of income tax benefits of
$65 million) will be reclassified into earnings within the
next year. These losses will offset net gains that will be
realized in earnings from previous favorable market movements
associated with underlying hedged transactions.
Our refineries carry inventories of crude oil and
refined products. During 2002, we entered into crude oil and
refined products futures contracts and swap agreements to reduce
the market exposure of these inventories from changing energy
commodity prices. These derivatives were designated as
fair-value hedges. Derivative gains and losses from these
fair-value hedges were recognized in earnings currently along
with the change in fair value of the hedged item attributable to
the risk being hedged. Gains and losses related to hedges of
inventory were recognized in costs and operating expenses in the
Consolidated Statement of Operations. Approximately
$8 million of net gains from hedge ineffectiveness was
recognized in costs and operating expenses in the Consolidated
Statement of Operations during 2002. There were no derivative
gains or losses excluded from the assessment of hedge
effectiveness. During third-quarter 2002, we discontinued the
use of fair value hedges related to refined products and crude
oil in early 2003 due to the sale of the Midsouth refinery.
We have an intercompany
Canadian-dollar-denominated note receivable that is exposed to
foreign-currency risk. To protect against variability in the
cash flows from the repayment of the note receivable associated
with changes in foreign currency exchange rates, we entered into
a forward contract to fix the U.S. dollar principal cash
flows from this note. This derivative was designated as a cash
flow hedge and was expected to be highly effective over the
period of the hedge. Hedge accounting was discontinued effective
October 1, 2002 because the hedge is no longer expected to
be highly effective. All gains or losses subsequent to
October 1, 2002, are recognized currently in other income
(expense) net below operating income. Gains and
losses from the change in fair value of the derivatives prior to
October 1, 2002, were deferred in other comprehensive
income (loss) and reclassified to other income
(expense) net below operating income as the
Canadian-dollar-denominated note receivable impacted earnings as
it was translated into U.S. dollars. The $2.4 million
of net losses (net of income tax benefits of $1.5 million)
deferred in other comprehensive income (loss) at
December 31, 2002, was reclassified into earnings during
2003. In 2002, there were no derivative gains or losses recorded
in the Consolidated Statement of Operations from hedge
ineffectiveness or from amounts excluded from the assessment of
hedge effectiveness, and no foreign currency hedges were
discontinued as a result of it becoming probable that the
forecasted transaction would not occur.
We managed our interest rate risk on an
enterprise basis through the corporate parent. A significant
component of this risk relates to our Power segments
trading and non-trading portfolios. To facilitate the management
of the risk, Power may enter into derivative instruments
(usually swaps) with the corporate parent. The corporate parent
determines the level, term and nature of derivative instruments
entered into with external parties. These external derivative
instruments do not qualify for hedge accounting per
SFAS No. 133; therefore, changes in their fair value
are reflected in earnings, the effect of which is shown as
interest rate swap loss in the Consolidated Statement of
Operations below operating income.
145
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition to the guarantees and payment
obligations discussed elsewhere in these footnotes (see
Notes 2, 3, 11 and 16), we have issued guarantees and
other similar arrangements with off-balance sheet risk as
discussed below.
In connection with the 1993 public offering of
units in the Williams Coal Seam Gas Royalty Trust (Royalty
Trust), our Exploration & Production segment entered
into a gas purchase contract for the purchase of natural gas in
which the Royalty Trust holds a net profits interest. Under this
agreement, we guarantee a minimum purchase price that the
Royalty Trust will realize in the calculation of its net profits
interest. We have an annual option to discontinue this minimum
purchase price guarantee and pay solely based on an index price.
The maximum potential future exposure associated with this
guarantee is not determinable because it is dependent upon
natural gas prices and production volumes. No amounts have been
accrued for this contingent obligation as the index price
continues to exceed the minimum purchase price.
Through July 25, 2002 we sold certain trade
accounts receivable to special purpose entities (SPEs) in a
securitization structure. We acted as the servicing agent for
the sold receivables and received a servicing fee approximating
the fair value of such services. During 2002 and 2001, we
received cash proceeds from the SPEs of approximately
$4.5 billion and $12.5 billion, respectively. The
sales of these receivables resulted in charges to results of
operations of approximately $3 million and $16 million
in 2002 and 2001, respectively.
Our cash equivalents consist of high-quality
securities placed with various major financial institutions with
credit ratings at or above BBB by Standard &
Poors or Baa1 by Moodys Investors Service.
Restricted investments consist of short-term U.S. Treasury
Securities.
The following table summarizes concentration of
receivables, net of allowances, by product or service at
December 31, 2003 and 2002:
Natural gas customers include pipelines,
distribution companies, producers, gas marketers and industrial
users primarily located in the eastern and northwestern United
States, Rocky Mountains, Gulf Coast, Venezuela and Canada. Power
customers include the California Independent System Operator
(ISO), the California Department of Water Resources, other power
marketers and utilities located throughout the majority of the
United States. Petroleum products customers include wholesale,
commercial, industrial and
146
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
independent dealers located primarily in the
Mid-Continent region. As a general policy, collateral is not
required for receivables, but customers financial
condition and credit worthiness are evaluated regularly.
As of December 31, 2003, approximately
$177 million of certain power receivables net of related
allowances from the ISO and the California Power Exchange have
not been paid (compared to $230 million at
December 31, 2002). We believe that we have appropriately
reflected the collection and credit risk associated with
receivables and derivative assets in our Consolidated Balance
Sheet and Statement of Operations at December 31, 2003. In
2002, we borrowed approximately $79 million which was
collateralized by certain of these receivables.
We have a risk of loss as a result of
counterparties not performing pursuant to the terms of their
contractual obligations. Risk of loss can result from credit
considerations and the regulatory environment of the
counterparty. We attempt to minimize credit-risk exposure to
derivative counterparties and brokers through formal credit
policies, consideration of credit ratings from public ratings
agencies, monitoring procedures, master netting agreements and
collateral support under certain circumstances.
The concentration of counterparties within the
energy and energy trading industry impacts our overall exposure
to credit risk in that these counterparties are similarly
influenced by changes in the economy and regulatory issues.
Additional collateral support could include the following:
We also enter into netting agreements to mitigate
counterparty performance and credit risk.
The gross credit exposure from our derivative
contracts as of December 31, 2003 is summarized below.
147
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We assess our credit exposure on a net basis. The
net credit exposure from our derivatives as of December 31,
2003 is summarized below.
In 2003, there were no customers that exceeded
10 percent of our revenues. In 2002, seven of Powers
customers exceeded 10 percent of our revenues with sales
from each customer of $516.9 million, $505.5 million,
$482.5 million, $474.8 million, $408.7 million,
$379.2 million and $377.5 million, respectively. The
revenues from these customers in 2002 are net of cost of sales
with the same customer consistent with fair-value accounting
(see Note 1). The sum of these net revenues exceeds our
total revenues because there are additional customers with whom
we have negative net revenues (due to the costs from these
customers exceeding the revenues) which offset this sum. In
2001, two of Powers customers exceeded 10 percent of our
revenues with sales of $937.7 million and
$597.9 million, respectively.
Certain of our counterparties have experienced
significant declines in their financial stability and
creditworthiness, which may adversely impact their ability to
perform under contracts. Revenues from two counterparties, which
have credit ratings below investment grade, constitute
approximately 12 percent of Powers gross revenues.
Our exposure to these counterparties may be mitigated by the
existence of netting arrangements.
Our interstate pipeline subsidiaries have various
regulatory proceedings pending. As a result of rulings in
certain of these proceedings, a portion of the revenues of these
subsidiaries has been collected subject to refund. The natural
gas pipeline subsidiaries have accrued approximately
$11 million for potential refund as of December 31,
2003.
148
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Power subsidiaries are engaged in power marketing
in various geographic areas, including California. Prices
charged for power by us and other traders and generators in
California and other western states in 2000 and 2001 have been
challenged in various proceedings including those before the
FERC. These challenges include refund proceedings, California
Independent System Operator (ISO) fines, summer 2002 90-day
contracts, investigations of alleged market manipulation
including withholding gas indices and other gaming of the
market, new long-term power sales to the State of California
that were subsequently challenged and civil litigation relating
to certain of these issues. We have entered into a settlement
with the State of California and others that has resolved each
of these issues as to the State. However, certain of these
issues remain open as to the FERC and other non-settling parties.
We and other suppliers of electricity in the
California market are the subject of refund proceedings before
the FERC. In December 2000, the FERC issued an order initiating
the proceeding, which ultimately (by order dated June 19,
2001) established a refund methodology and set a refund period
of October 2, 2000 to June 19, 2001. As a result of a
hearing to determine refund liability for the market
participants, a FERC Administrative Law Judge issued findings on
December 12, 2002, that estimated our refund obligation to
the ISO at $192 million, excluding emissions costs and
interest. The judge estimated that our refund obligation to the
California Power Exchange (PX) was $21.5 million,
excluding interest. However, the judge estimated that the ISO
owes us $246.8 million, excluding interest, and that the
PX owes us $31.7 million, excluding interest, and
$2.9 million in charge backs. The estimates did not include
$17 million in emissions costs that the judge found we are
entitled to use as an offset to the refund liability, and the
judges refund estimates are not based on final mitigated
market clearing prices. On March 26, 2003, the FERC acted
to largely adopt the judges order with a change to the gas
methodology used to set the clearing price. As a result, Power
recorded a first-quarter 2003 charge for refund obligations of
$37 million. Net interest income related to amounts due
from the counterparties is approximately $19 million
through December 31, 2003. On October 16, 2003, the
FERC issued an additional refund order granting rehearing in
part and denying rehearing in part. This order is not expected
to have a material effect on the refund calculation for us.
However, pursuant to the October 16 Order, the ISO has been
ordered to calculate refunds for the market. This study is
expected to be complete in early summer, 2004. Although we have
entered into a global settlement with the State of California
and various other parties that resolves the refund issues among
the settling parties for the period of January 17, 2001 to
June 19, 2001, we have potential refund exposure to
non-settling parties (e.g., various California electric
utilities). Therefore, we continue to participate in the FERC
refund case and related proceedings. Challenges to virtually
every aspect of the refund proceeding, including the refund
period, are now pending at the Ninth Circuit Court of Appeals.
No schedule has yet been established for hearing the appeals.
On February 25, 2004, we announced a
settlement agreement with California utilities, Southern
California Edison and Pacific Gas & Electric
(PG&E), to resolve our refund liability to the utilities as
well as all other known disputes related to the California
energy crisis of 2000 and 2001. While only these two utilities
are parties to the settlement with us, the settlement provides
funding for refunds to all buyers in equal kind in the FERC
refund period. Should any buyer opt out of the settlement, the
refund amount in the settlement would be reduced and we would
continue to litigate with that buyer regarding the refund issue
and amount. To be effective, this settlement must be approved by
the FERC, the California Public Utilities Commission, and the
U.S. Bankruptcy Court for PG&E. Approval by the FERC
will also resolve FERC investigations into physical and economic
withholding. We recorded a charge of approximately
$33 million in the fourth quarter of 2003 associated with
the terms of this settlement.
In a separate but related proceeding, certain
entities have also asked the FERC to revoke our authority to
sell power from California-based generating units at
market-based rates, to limit us to cost-based rates for
149
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
future sales from such units and to order refunds
of excessive rates, with interest, retroactive to May 1,
2000, and possibly earlier.
On July 3, 2002, the ISO announced fines
against several energy producers including us, for failure to
deliver electricity during the period December 2000 through May
2001. The ISO fined us $25.5 million during this period,
which was offset against our claims for payment from the ISO.
These amounts will be adjusted as part of the refund proceeding
described above. We believe the vast majority of fines are not
justified and have challenged them pursuant to the FERC-approved
dispute resolution process contained in the ISO tariff.
On May 2, 2002, PacifiCorp filed a complaint
with the FERC against Power seeking relief from rates contained
in three separate confirmation agreements between PacifiCorp and
Power (known as the Summer 2002 90-Day Contracts). PacifiCorp
filed similar complaints against three other suppliers.
PacifiCorp alleged that the rates contained in the contracts are
unjust and unreasonable. On June 26, 2003, the FERC
affirmed the Administrative Law Judges initial decision
dismissing the complaints. PacifiCorp has appealed the
FERCs order after the FERC denied rehearing of its order
on November 10, 2003.
As a result of various allegations and FERC
Orders, the FERC initiated investigations of manipulation of the
California gas and power markets in 2002. As they related to us,
these investigations included economic and physical withholding,
so-called Enron Gaming Practices and gas index
manipulation.
On February 13, 2002, the FERC issued an
Order Directing Staff Investigation commencing a proceeding
titled Fact-Finding Investigation of Potential Manipulation of
Electric and Natural Gas Prices prior to the California parties
(who include the California Attorney General, the Electricity
Oversight Board, the Public Utilities Commission and two
investor-owned utilities) filing of their report. Through the
investigation, the FERC intends to determine whether any
entity, including Enron Corporation (Enron) (through any of its
affiliates or subsidiaries), manipulated short-term prices for
electric energy or natural gas in the West or otherwise
exercised undue influence over wholesale electric prices in the
West since January 1, 2000, resulting in potentially unjust
and unreasonable rates in long-term power sales contracts
subsequently entered into by sellers in the West. On
May 8, 2002, we received data requests from the FERC
related to a disclosure by Enron of certain trading practices in
which it may have been engaged in the California market. On
May 21, and May 22, 2002, the FERC supplemented the
request inquiring as to wash or
round-trip transactions. We responded on
May 22, 2002, May 31, 2002, and June 5, 2002, to
the data requests. On June 4, 2002, the FERC issued an
order to us to show cause why our market-based rate authority
should not be revoked as the FERC found that certain of our
responses related to the Enron trading practices constituted a
failure to cooperate with the staffs investigation. We
subsequently supplemented our responses to address the show
cause order. On July 26, 2002, we received a letter from
the FERC informing us that it had reviewed all of our
supplemental responses and concluded that we responded to the
initial May 8, 2002 request.
As also discussed below in
Reporting of
natural gas-related information to trade publications,
on November 8, 2002, we received a subpoena from a federal
grand jury in Northern California seeking documents related to
our involvement in California markets. We are in the process of
completing our response to the subpoena. This subpoena is a part
of the broad United States Department of Justice (DOJ)
investigation regarding gas and power trading.
Pursuant to an order from the Ninth Circuit, the
FERC permitted certain California parties to conduct additional
discovery into market manipulation by sellers in the California
markets. The California parties
150
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sought this discovery in order to potentially
expand the scope of the refunds. On March 3, 2003, the
California parties submitted evidence from this discovery on
market manipulation (March 3rd Report). We and
other sellers submitted comments regarding the additional
evidence on March 20, 2003.
On March 26, 2003, the FERC issued a Staff
Report addressing: (1) Enron trading practices, (2) an
allegation in a June 2, 2002
New York Times
article that we had attempted to corner the gas market, and
(3) the allegations of gas price index manipulation which
are discussed in more detail below in
Reporting of natural
gas-related information to trade publications
. The Staff
Report cleared us on the issue of cornering the market and
contemplated or established further proceedings on the other two
issues as to us and numerous other market participants. On
June 25, 2003, the FERC issued a series of orders in
response to the California parties March 3rd Report
and the Staff Report. These orders resulted in further
investigations regarding potential allegations of physical
withholding, economic withholding, and a show cause order
alleging that various companies engaged in Enron trading
practices. On August 29, 2003, we entered into a settlement
with the FERC trial staff of all Enron trading practices for
approximately $45,000. The settlement was approved by the FERC
on January 22, 2004. The investigations of physical and
economic withholding are also continuing. Each of these FERC
investigations of alleged market manipulation will be resolved
pursuant to the February 25 settlement that is discussed
above in
Refund proceedings
.
In February 2001, during the height of the
California Energy Crisis, we entered into a long-term power
contract with the State of California to assist in stabilizing
its market. This contract was later challenged by the State of
California. This challenge resulted in settlement discussions
being held between the State and us on the contract issue as
well as other state initiated proceedings and allegations on
market manipulation. A settlement was reached that resulted in
us entering into a settlement agreement with the State of
California and other non-Federal parties that includes
renegotiated long-term energy contracts. These contracts are
made up of block energy sales, dispatchable products and a gas
contract. The settlement does not extend to criminal matters or
matters of willful fraud, but also resolved civil complaints
brought by the California Attorney General against us and the
State of Californias refund claims that are discussed
above. In addition, the settlement resolved ongoing
investigations by the States of California, Oregon and
Washington. The settlement was reduced to writing and executed
on November 11, 2002. The settlement closed on
December 31, 2002, after FERC issued an order granting our
motion for partial dismissal from the refund proceedings. The
dismissal affects our refund obligations to the settling
parties, but not to other parties, such as investor-owned
utilities. Pursuant to the settlement, the California Public
Utilities Commission (CPUC) and California Electricity
Oversight Board (CEOB) filed a motion on January 13,
2003 to withdraw their complaints against us regarding the
original block energy sales contract. On June 26, 2003, the
FERC granted the CPUC and CEOB joint motion to withdraw their
respective complaints against us. Certain private class action
and other civil plaintiffs who have initiated class action
litigation against us and others in California based on
allegations against us with respect to the California energy
crisis also executed the settlement. Final approval by the court
is needed to make the settlement effective as to plaintiffs and
to terminate the class actions as to us. On October 24,
2003, the court granted a motion for preliminary approval of the
settlement. The final approval hearing is currently scheduled
for June 4, 2004. Upon approval, the majority of civil
litigation involving Williams and California markets will be
resolved. Some litigation by non-California plaintiffs, or
relating to reporting of natural gas information to trade
publications, as discussed below, will continue. As of
December 31, 2003, pursuant to the terms of the settlement,
we have transferred ownership of six LM6000 gas powered electric
turbines, have made two payments totaling $72 million to
the California Attorney General, and have funded a
$15 million fee and expense fund associated with civil
actions that are subject to the settlement. An additional
$75 million remains to be paid to the California Attorney
General (or his designee) over the next six years, with the
final payment of $15 million due on January 1, 2010.
151
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
By order dated March 17, 2003, the FERC
approved a settlement between the FERC staff and us, Transco,
and Power which resolved the FERC staffs allegations
during a formal, nonpublic investigation that Power personnel
had access to Transco data bases and other information, and that
Transco had failed to accurately post certain information on its
electronic bulletin board. Pursuant to the terms of the
settlement agreement, Transco will pay a civil penalty in the
amount of $20 million in five equal installments. The first
payment was made on May 16, 2003, and the subsequent
payments are due on or before the first, second, third and
fourth anniversaries of the first payment. Transco recorded a
charge to income and established a liability of $17 million
in 2002 representing the net present value of the future
payments. Transco notified its Firm Sales (FS) customers of
its intention to terminate the FS service effective
April 1, 2005 under the terms of any applicable contracts
and FERC certificates authorizing such services. As part of the
settlement, Power has agreed, subject to certain exceptions,
that it will not enter into new transportation agreements that
would increase the transportation capacity it holds on certain
affiliated interstate gas pipelines, including Transco. Finally,
Transco and certain affiliates have agreed to the terms of a
compliance plan designed to ensure future compliance with the
provisions of the settlement agreement and the FERCs rules
governing the relationship of Transco and Power.
On May 31, 2002, we received a request from
the Enforcement Division of the Securities and Exchange
Commission (SEC) to voluntarily produce documents and
information regarding round-trip trades for gas or
power from January 1, 2000, to the present in the United
States. On June 24, 2002, the SEC made an additional
request for information including a request that we address the
amount of our credit, prudency and/or other reserves associated,
with our energy trading activities and the methods used to
determine or calculate these reserves. The June 24, 2002,
request also requested our volumes, revenues, and earnings from
our energy trading activities in the Western U.S. market.
We have responded to the SECs requests and have received
no further related requests from them to date.
We disclosed on October 25, 2002, that
certain of our natural gas traders had reported inaccurate
information to a trade publication that published gas price
indices. As noted above, on November 8, 2002, we received a
subpoena from a federal grand jury in Northern California
seeking documents related to our involvement in California
markets, including our reporting to trade publications for both
gas and power transactions. We are in the process of completing
our response to the subpoena. The DOJs investigation into
this matter is continuing. In addition, the Commodity Futures
Trading Commission (CFTC) has conducted an investigation of
us regarding this issue. On July 29, 2003, we reached a
settlement with the CFTC where in exchange for $20 million,
the CFTC closed its investigation and we did not admit or deny
allegations that we had engaged in false reporting or attempted
manipulation. Civil suits based on allegations of manipulating
the gas indices have been brought against us and others in
federal and state court in California and in Federal court in
New York.
On December 3, 2002, an administrative law
judge at the FERC issued an initial decision in Transcos
general rate case which, among other things, rejects the
recovery of the costs of Transcos Mobile Bay expansion
project from its shippers on a rolled-in basis and
finds that incremental pricing for the Mobile Bay expansion
project is just and reasonable. The initial decision does not
address the issue of the effective date for the change to
incremental pricing, although Transcos rates reflecting
recovery of the Mobile Bay expansion project costs on a
rolled-in basis have been in effect since
September 1, 2001. The administrative law
152
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
judges initial decision is subject to
review by the FERC. Power holds long-term transportation
capacity on the Mobile Bay expansion project. If the FERC adopts
the decision of the administrative law judge on the pricing of
the Mobile Bay expansion project and also requires that the
decision be implemented effective September 1, 2001, Power
could be subject to surcharges of approximately
$41 million, excluding interest, through December 31,
2003, in addition to increased costs going forward.
We have outstanding claims against Enron Corp.
and various of its subsidiaries (collectively Enron)
related to Enrons bankruptcy filed in December 2001. In
March 2002, we sold $100 million of our claims against
Enron to a third party for $24.5 million. On
December 23, 2003, Enron filed objections to these claims.
Under the sales agreement, the purchaser of the claims may
demand repayment of the purchase price, plus interest assessed
at 7.5 percent per annum, for that portion of the claims
still subject to objections 90 days following the initial
objection.
Since 1989, Transco has had studies under way to
test certain of its facilities for the presence of toxic and
hazardous substances to determine to what extent, if any,
remediation may be necessary. Transco has responded to data
requests regarding such potential contamination of certain of
its sites. Transco has identified polychlorinated biphenyl
(PCB) contamination in compressor systems, soils and
related properties at certain compressor station sites. Transco
has also been involved in negotiations with the
U.S. Environmental Protection Agency (EPA) and state
agencies to develop screening, sampling and cleanup programs. In
addition, Transco commenced negotiations with certain
environmental authorities and other programs concerning
investigative and remedial actions relative to potential mercury
contamination at certain gas metering sites. The costs of any
such remediation will depend upon the scope of the remediation.
At December 31, 2003, Transco had accrued liabilities of
$28 million related to PCB contamination, potential mercury
contamination, and other toxic and hazardous substances.
We also accrue environmental remediation costs
for our natural gas gathering and processing facilities,
primarily related to soil and groundwater contamination. At
December 31, 2003, we had accrued liabilities totaling
approximately $12 million for these costs.
Actual costs incurred for these matters will
depend on the actual number of contaminated sites identified,
the amount and extent of contamination discovered, the final
cleanup standards mandated by the EPA and other governmental
authorities and other factors.
In connection with the sale of certain assets and
businesses, we have retained responsibility, through
indemnification of the purchasers, for environmental and other
liabilities existing at the time the sale was consummated.
In connection with the 1987 sale of the assets of
Agrico Chemical Company, we agreed to indemnify the purchaser
for environmental cleanup costs resulting from certain
conditions at specified locations, to the extent such costs
exceed a specified amount. At December 31, 2003, we had
accrued liabilities of approximately $9 million for such
excess costs.
153
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As part of our June 17, 2003 sale of
Williams Energy Partners (see Note 2), we indemnified the
purchaser for:
At December 31, 2003, we had accrued
liabilities totaling approximately $9 million for these
costs. In addition, we deferred a portion of the gain associated
with our indemnifications, including environmental
indemnifications, of the purchaser under the sales agreement. At
December 31, 2003, we had a remaining deferred gain
relating to this sale of approximately $96 million.
On July 2, 2001, the EPA issued an
information request asking for information on oil releases and
discharges in any amount from our pipelines, pipeline systems,
and pipeline facilities used in the movement of oil or petroleum
products, during the period from July 1, 1998 through
July 2, 2001. In November 2001, we furnished our response.
This matter has not become an enforcement proceeding. On
March 11, 2004, the Department of Justice (DOJ)
invited the new owner of the pipeline to enter into negotiations
regarding alleged violations of the Clean Water Act and to sign
a tolling agreement. No penalty has been assessed by the EPA;
however, the DOJ stated in its letter that the maximum possible
penalties were approximately $22 million for the alleged
violations. It is anticipated that by providing additional
clarification and through negotiations with the EPA and DOJ,
that any proposed penalty will be reduced. We have indemnity
obligations to the new owner related to this matter.
At December 31, 2003, we had accrued
environmental liabilities totaling approximately
$16 million related to our:
These costs include (1) certain conditions
at specified locations related primarily to soil and groundwater
contamination and (2) any penalty assessed on Williams
Refining & Marketing, LLC (Williams Refining)
associated with noncompliance with EPAs benzene waste
NESHAP regulations. In 2002, Williams Refining
submitted to the EPA a self-disclosure letter indicating
noncompliance with those regulations. This unintentional
noncompliance had occurred due to a regulatory interpretation
that resulted in under-counting the total annual benzene level
at Williams Refinerys Memphis refinery. Also in 2002, the
EPA conducted an all-media audit of the Memphis refinery. The
EPA anticipates releasing a report of its audit findings in
2004. The EPA will likely assess a penalty on Williams Refining
due to the benzene waste NESHAP issue, but the amount of any
such penalty is not known. In connection with the sale of the
Memphis refinery in March 2003, we indemnified the purchaser for
any such penalty.
154
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain of our 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.
Actual costs incurred for these matters could be
substantially greater than amounts accrued depending on the
actual number of contaminated sites identified, the actual
amount and extent of contamination discovered, the final cleanup
standards mandated by the EPA and other governmental authorities
and other factors.
In connection with agreements to resolve
take-or-pay and other contract claims and to amend gas purchase
contracts, Transco 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,
through its agent, Power, continues to purchase gas under
contracts which extend, in some cases, through the life of the
associated gas reserves. Certain of these contracts contain
royalty indemnification provisions which have no carrying value.
Producers have received and may receive other demands, which
could result in claims pursuant to royalty indemnification
provisions. Indemnification for royalties will depend on, among
other things, the specific lease provisions between the producer
and the lessor and the terms of the agreement between the
producer and Transco. Consequently, the potential maximum future
payments under such indemnification provisions cannot be
determined.
As a result of these settlements, Transco has
been sued by certain producers seeking indemnification from
Transco. Transco is currently a defendant in one lawsuit in
which a producer has asserted damages, including interest
calculated through December 31, 2003, of approximately
$10 million. On July 11, 2003, at the conclusion of
the trial, the judge ruled in Transcos favor and
subsequently entered a formal judgment. The plaintiff is seeking
an appeal. On November 25, 2003, Transco and another
producer settled a separate lawsuit in which the producer had
asserted damages, including interest, of approximately
$8 million.
On October 24, 2003, we settled the claims
by Western Gas Resources, Inc. and its subsidiary that our
merger with Barrett Resources Corporation triggered a
preferential right to purchase and a right to operate certain
Barrett coal bed methane development properties in the Powder
River Basin in Wyoming. As a result, terms in a long-term
gathering agreement with Western were amended and a subsidiary
of Western received operating rights to approximately one-half
of the properties jointly owned with us.
On June 8, 2001, fourteen of our entities
were named as defendants in a nationwide class action lawsuit
which had been pending against other defendants, generally
pipeline and gathering companies, for more than one year. The
plaintiffs allege that the defendants, including us, have
engaged in mismeasurement techniques that distort the heating
content of natural gas, resulting in an alleged underpayment of
royalties to the class of producer plaintiffs. After the court
denied class action certification and while motions to dismiss
for lack of personal jurisdiction were pending, the court
granted the plaintiffs motion to amend their petition on
July 29, 2003. The fourth amended petition, which was filed
on July 29, 2003, deletes all of our defendants except two
Midstream subsidiaries. All defendants intend to continue their
opposition to class certification.
155
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 1998, the DOJ informed us that Jack Grynberg,
an individual, had filed claims on behalf of himself and the
federal government, in the United States District Court for the
District of Colorado under the False Claims Act against us and
certain of our wholly owned subsidiaries. The claims sought an
unspecified amount of royalties allegedly not paid to the
federal government, treble damages, a civil penalty,
attorneys fees, and costs. In connection with our sale of
Kern River and Texas Gas, we agreed to indemnify the purchasers
for any liability relating to this claim, including legal fees.
The maximum amount of future payments that we could potentially
be required to pay under these indemnifications depends upon the
ultimate resolution of the claim and cannot currently be
determined. The amounts accrued for these indemnifications are
insignificant. Grynberg has also filed claims against
approximately 300 other energy companies alleging that the
defendants violated the False Claims Act in connection with the
measurement, royalty valuation and purchase of hydrocarbons. On
April 9, 1999, the DOJ announced that it was declining to
intervene in any of the Grynberg
qui tam
cases, including
the action filed in federal court in Colorado against us. On
October 21, 1999, the Panel on Multi-District Litigation
transferred all of the Grynberg
qui tam
cases,
including those filed against us, to the federal court in
Wyoming for pre-trial purposes. Grynbergs measurement
claims remain pending against us and the other defendants; the
court previously dismissed Grynbergs royalty valuation
claims.
On August 6, 2002, Jack J. Grynberg, and
Celeste C. Grynberg, Trustee on Behalf of the Rachel Susan
Grynberg Trust, and the Stephen Mark Grynberg Trust, served us
and Williams Production RMT Company with a complaint in the
state court in Denver, Colorado. The complaint alleges that the
defendants have used mismeasurement techniques that distort the
BTU heating content of natural gas, resulting in the alleged
underpayment of royalties to Grynberg and other independent
natural gas producers. The complaint also alleges that
defendants inappropriately took deductions from the gross value
of their natural gas and made other royalty valuation errors.
Theories for relief include breach of contract, breach of
implied covenant of good faith and fair dealing, anticipatory
repudiation, declaratory relief, equitable accounting, civil
theft, deceptive trade practices, negligent misrepresentation,
deceit based on fraud, conversion, breach of fiduciary duty, and
violations of the state racketeering statute. Plaintiff is
seeking actual damages of between $2 million and
$20 million based on interest rate variations, and punitive
damages in the amount of approximately $1.4 million
dollars. Our motion to stay the proceedings in this case based
on the pendency of the False Claims Act litigation discussed in
the preceding paragraph was granted on January 15, 2003.
Numerous shareholder class action suits have been
filed against us in the United States District Court for the
Northern District of Oklahoma. The majority of the suits allege
that we and co-defendants, WilTel and certain corporate
officers, have acted jointly and separately to inflate the stock
price of both companies. Other suits allege similar causes of
action related to a public offering in early January 2002, known
as the FELINE PACS offering. These cases were filed against us,
certain corporate officers, all members of our Board of
Directors and all of the offerings underwriters. These
cases have all been consolidated and an order has been issued
requiring separate amended consolidated complaints by our equity
holders and WilTel equity holders. The amended complaint of the
WilTel securities holders was filed on September 27, 2002,
and the amended complaint of our securities holders was filed on
October 7, 2002. This amendment added numerous claims
related to Power. In addition, four class action complaints have
been filed against us, the members of our Board of Directors and
members of our Benefits and Investment Committees under the
Employee Retirement Income Security Act (ERISA) by
participants in our 401(k) plan. A motion to consolidate these
suits has been approved. On July 14, 2003, the Court
dismissed us and our Board from the ERISA suits, but not the
members of the Benefits and Investment Committees to whom we
might have an indemnity obligation. The Department of Labor is
also independently investigating our employee benefit plans. On
December 15, 2003, the court substantially denied the
defendants motion to dismiss in the shareholder suits.
Derivative shareholder suits have been filed in state court in
Oklahoma, all based on similar allegations. On August 1,
156
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002, a motion to consolidate and a motion to
stay these Oklahoma suits pending action by the federal court in
the shareholder suits was approved.
On April 26, 2002, the Oklahoma Department
of Securities issued an order initiating an investigation of us
and WilTel regarding issues associated with the spin-off of
WilTel and regarding the WilTel bankruptcy. We have no pending
inquiries in this investigation, but are committed to cooperate
fully in the investigation.
On November 30, 2001, Shell Offshore, Inc.
filed a complaint at the FERC against Williams Gas
Processing Gulf Coast Company, L.P. (WGP), Williams
Gulf Coast Gathering Company (WGCGC), Williams Field Services
Company (WFS) and Transco, alleging concerted actions by
the affiliates frustrating the FERCs regulation of
Transco. The alleged actions are related to offers of gathering
service by WFS and its subsidiaries on the deregulated North
Padre Island offshore gathering system. On September 5,
2002, the FERC issued an order reasserting jurisdiction over
that portion of the North Padre Island facilities previously
transferred to WFS. The FERC also determined an unbundled
gathering rate for service on these facilities which is to be
collected by Transco. Transco, WGP, WGCGC and WFS believe their
actions were reasonable and lawful and each have filed petitions
for review of the FERCs orders with the U.S. Court of
Appeals for the District of Columbia.
Williams Alaska Petroleum, Inc. (WAPI) is
actively engaged in administrative litigation being conducted
jointly by the FERC and the Regulatory Commission of Alaska
concerning the Trans-Alaska Pipeline System (TAPS) Quality
Bank. Primary issues being litigated include the appropriate
valuation of the naphtha, heavy distillate, vacuum gas oil and
residual product cuts within the TAPS Quality Bank as well as
the appropriate retroactive effects of the determinations.
WAPIs interest in these proceedings is material as the
matter involves claims by crude producers and the State of
Alaska for retroactive payments plus interest of up to
$180 million in excess of amounts previously paid by WAPI
or accrued at December 31, 2003. Because of the complexity
of the issues involved, however, the outcome cannot be predicted
with certainty nor can the likely result be quantified. Certain
periodic discussions have been held and continue among some of
the litigants. Because of the number of parties involved and the
diversity of positions, no comprehensive terms have been
identified that could be considered probable to achieve final
settlement among all parties. The FERC and RCA presiding
administrative law judges are expected to render their joint
and/or individual initial decision(s) sometime during the second
quarter of 2004.
Pursuant to various purchase and sale agreements
relating to divested businesses and assets, we have indemnified
certain purchasers against liabilities that they may incur with
respect to the businesses and assets acquired from us. The
indemnities provided to the purchasers are customary in sale
transactions and are contingent upon the purchasers incurring
liabilities that are not otherwise recoverable from third
parties. The indemnities generally relate to breach of
warranties, tax, historic litigation, personal injury,
environmental matters, right of way and other representations
that we have provided. At December 31, 2003, we do not
expect any of the indemnities provided pursuant to the sales
agreements to have a material impact on our future financial
position. However, if a claim for indemnity is brought against
us in the future, it may have a material adverse effect on
results of operations in the period in which the claim is made.
In addition to the foregoing, various other
proceedings are pending against us which are incidental to our
operations.
157
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Litigation, arbitration, regulatory matters and
environmental matters are subject to inherent uncertainties.
Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of
operations in the period in which the ruling occurs. Management,
including internal counsel, currently believes that the ultimate
resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage, recovery
from customers or other indemnification arrangements, will not
have a materially adverse effect upon our future financial
position.
Power has entered into certain contracts giving
it the right to receive fuel conversion services as well as
certain other services associated with electric generation
facilities that are currently in operation throughout the
continental United States. At December 31, 2003,
Powers estimated committed payments under these contracts
range from approximately $391 million to $422 million
annually through 2017 and decline over the remaining five years
to $57 million in 2022. Total committed payments under
these contracts over the next 19 years are approximately
$6.7 billion.
Lehman Brothers Inc. is a related party as a
result of a director that serves on our Board of Directors and
Lehman Brothers Holdings, Inc.s Board of Directors. In
third-quarter 2002, RMT, a wholly owned subsidiary, entered into
a $900 million short-term Credit Agreement dated
July 31, 2002, with certain lenders including a subsidiary
of Lehman Brothers Inc. This debt obligation was paid in
second-quarter 2003 (see Note 11). Included in interest
accrued on the Consolidated Statement of Operations for 2003 and
2002, are $199.4 million and $154.1 million,
respectively, of interest expense, including amortization of
deferred set up fees related to the RMT note. As of
December 31, 2003, the amount due to Lehman Brothers, Inc.,
related primarily to advisory fees was $1.8 million. At
December 31, 2002, the amount payable related to the RMT
note and related interest was approximately $1 billion. In
addition, we paid $37.2 million, $39.6 million and
$27 million to Lehman Brothers Inc. in 2003, 2002, and
2001, respectively, primarily for underwriting fees related to
debt and equity issuances as well as strategic advisory and
restructuring success fees.
American Electric Power Company, Inc.
(AEP) is a related party as a result of a director that
serves on both our Board of Directors and AEPs Board of
Directors. Our Power segment engaged in forward and physical
power and gas trading activities with AEP. Net revenues from AEP
were $264.6 million in 2002. There were no trading
activities with AEP in 2003. Amounts due to AEP were
$106.4 million as of December 31, 2002. Amounts
receivable from AEP were $215.1 million as of
December 31, 2002. During 2002, AEP disputed a settlement
amount related to the liquidation of a trading position with
Power. Arbitration was initiated and in 2003 AEP paid Power
$90 million to resolve the dispute.
ExxonMobil Corporation is a related party as a
result of a director that serves on both our Board of Directors
and ExxonMobil Corporations Board of Directors.
Transactions with ExxonMobil Corporation result primarily from
the purchase and sale of crude oil, refined products and natural
gas liquids in support of crude oil, refined products and
natural gas liquids trading activities and strategies as well as
revenues generated from gathering and processing activities.
Aggregate revenues from this customer, including those reported
on a net basis in 2002 and 2001, were $121.8 million,
$217.6 million and $38.9 million in 2003, 2002 and
2001,
158
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. Aggregate purchases from this
customer were $30.4 million, $15.6 million and
$6.4 million in 2003, 2002 and 2001, respectively. Amounts
due from ExxonMobil were $40.0 million and
$22.1 million as of December 31, 2003 and 2002,
respectively. Amounts due to ExxonMobil were $8.7 million
and $66.9 million as of December 31, 2003 and 2002,
respectively.
The table below presents changes in the
components of accumulated other comprehensive income.
159
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The 2001 adjustment due to the spin-off of WilTel
includes unrealized appreciation (depreciation) on
securities and foreign currency translation balances that relate
to WilTel (see Note 2).
At December 31, 2003, we held
U.S. Treasury securities with a fair value of
$381.3 million. These securities mature within three to six
months. Gross unrealized losses of $3 million on these
securities are included in Accumulated Other Comprehensive
Income at December 31, 2003.
During 2003 we received proceeds totaling
$370.5 million from the sale and maturity of available for
sale securities. We realized gross gains and losses of
$14.4 million and $0.1 million, respectively, from
these transactions.
At December 31, 2002, we held marketable
equity securities for which gross unrealized gains of
$8.7 million were included in Accumulated Other
Comprehensive Income.
Note 19. Segment disclosures
Our reportable segments are strategic business
units that offer different products and services. The segments
are managed separately because each segment requires different
technology, marketing strategies and industry knowledge. The
segment formerly named Energy Marketing & Trading is
now named Power. The Petroleum Services segment is now reported
within Other as the result of a significant portion of its
assets being reflected as discontinued operations. Segment
amounts have been restated to reflect this change. Other
primarily consists of corporate operations and certain
continuing operations previously reported within the
International and Petroleum Services segments.
Segment amounts for 2002 and 2001 reflect the
reclassification of the Petroleum Services segment to Other.
160
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We currently evaluate performance based on
segment profit (loss) from operations, which includes revenues
from external and internal customers, operating costs and
expenses, depreciation, depletion and amortization, equity
earnings (losses) and income (loss) from investments including
gains/losses on impairments related to investments accounted for
under the equity method. The accounting policies of the segments
are the same as those described in Note 1, Summary of
significant accounting policies. Intersegment sales are
generally accounted for at current market prices as if the sales
were to unaffiliated third parties.
Power has entered into intercompany interest rate
swaps with the corporate parent, the effect of which is included
in Powers segment revenues and segment profit (loss) as
shown in the reconciliation within the following tables. The
results of interest rate swaps with external counterparties are
shown as interest rate swap income (loss) in the Consolidated
Statement of Operations below operating income.
The majority of energy commodity hedging by
certain of our business units is done through intercompany
derivatives with Power which, in turn, enters into offsetting
derivative contracts with unrelated third parties. Power bears
the counterparty performance risks associated with unrelated
third parties.
The following geographic area data includes
revenues from external customers based on product shipment
origin and long-lived assets based upon physical location.
The increase in revenues in 2003 is due primarily
to the adoption of EITF 02-3 in 2003, which requires that
revenues and costs of sale from non-derivative contracts and
certain physically settled derivative contracts be reported on a
gross basis. Prior to the adoption, these revenues were
presented net of costs. As permitted by EITF 02-3, prior
year amounts have not been restated. Results for 2003 include
approximately $117 million of revenue related to the
correction of the accounting treatment previously applied to
certain third party derivative contracts during 2002 and 2001.
Long-lived assets are comprised of property,
plant and equipment, goodwill and other intangible assets.
161
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
162
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
163
THE WILLIAMS COMPANIES, INC
QUARTERLY FINANCIAL DATA
Summarized quarterly financial data are as
follows (millions, except per-share amounts). Certain amounts
have been restated or reclassified as described in Note 1
of Notes to Consolidated Financial Statements.
The sum of earnings per share for the four
quarters may not equal the total earnings per share for the year
due to changes in the average number of common shares
outstanding and rounding.
Net loss for fourth-quarter 2003 includes the
following items which are pre-tax:
164
QUARTERLY FINANCIAL
DATA (Continued)
Net income for third-quarter 2003 includes the
following items which are pre-tax:
Net income for second-quarter 2003 includes the
following items which are pre-tax:
Net loss for first-quarter 2003 includes the
following items which are pre-tax:
165
QUARTERLY FINANCIAL
DATA (Continued)
Net loss for fourth-quarter 2002 includes the
following items which are pre-tax:
Net loss for third-quarter 2002 includes the
following items which are pre-tax:
Net loss for second-quarter 2002 includes the
following items which are pre-tax:
166
QUARTERLY FINANCIAL
DATA (Continued)
Net income for first-quarter 2002 includes the
following items which are pre-tax:
167
THE WILLIAMS COMPANIES, INC.
SUPPLEMENTAL OIL AND GAS DISCLOSURES
The following information pertains to our oil and
gas producing activities and is presented in accordance with
SFAS No. 69, Disclosures About Oil and Gas
Producing Activities. The information is required to be
disclosed by geographic region. We have significant oil and gas
producing activities primarily in the Rocky Mountain and
Mid-continent areas of the United States. Additionally, we have
oil and gas producing activities in Argentina and Venezuela.
However, proved reserves and revenues related to these
activities are approximately 7.3 percent and
4.2 percent, respectively, of our total international and
domestic oil and gas producing activities. The following
information relates only to the oil and gas activities in the
United States and includes the activities of those properties
that qualified for reporting as discontinued operations in the
Consolidated Statement of Operations.
Capitalized costs
Costs incurred
168
SUPPLEMENTAL OIL AND GAS
DISCLOSURES (Continued)
169
SUPPLEMENTAL OIL AND GAS
DISCLOSURES (Continued)
Standardized measure of discounted future net
cash flows relating to proved oil and gas reserves
The following is based on the estimated
quantities of proved reserves and the year-end prices and costs.
The average year end natural gas prices used in the following
estimates were $5.28, $3.85, and $2.31 per mmcfe at
December 31, 2003, 2002 and 2001, respectively. Future
income tax expenses have been computed considering available
carryforwards and credits and the appropriate statutory tax
rates. The discount rate of 10 percent is as prescribed by
SFAS No. 69. Continuation of year-end economic
conditions also is assumed. The calculation is based on
estimates of proved reserves, which are revised over time as new
data becomes available. Probable or possible reserves, which may
become proved in the future, are not considered. The calculation
also requires assumptions as to the timing of future production
of proved reserves, and the timing and amount of future
development and production costs. Of the $1,303 million of
future development costs, $192 million, $277 million
and $186 million are estimated to be spent in 2004, 2005
and 2006, respectively.
170
SUPPLEMENTAL OIL AND GAS
DISCLOSURES (Continued)
Numerous uncertainties are inherent in estimating
volumes and the value of proved reserves and in projecting
future production rates and timing of development expenditures.
Such reserve estimates are subject to change as additional
information becomes available. The reserves actually recovered
and the timing of production may be substantially different from
the reserve estimates.
Standardized measure of discounted future net
cash flows
Sources of change in standardized measure of
discounted future net cash flows
171
Table of Contents
Accumulated
Capital in
Other
Excess of
Retained
Comprehensive
Preferred
Common
Par
Earnings
Income
Treasury
Stock
Stock
Value
(Deficit)
(Loss)
Other
Stock
Total
(Dollars in millions, except per-share amounts)
$
$
447.9
$
2,473.9
$
3,065.7
$
28.2
$
(81.2
)
$
(42.5
)
$
5,892.0
(477.7
)
(477.7
)
370.2
370.2
(35.3
)
(35.3
)
(37.1
)
(37.1
)
(2.2
)
(2.2
)
295.6
(182.1
)
38.0
1,295.4
1,333.4
29.6
1,206.1
1,235.7
(341.0
)
(341.0
)
(8.8
)
(8.8
)
6.3
6.3
3.4
98.6
.7
2.8
105.5
(2,047.4
)
21.3
18.0
(2,008.1
)
11.1
11.1
518.9
5,085.1
199.6
345.1
(65.0
)
(39.7
)
6,044.0
(754.7
)
(754.7
)
(298.9
)
(298.9
)
4.6
4.6
(.1
)
(.1
)
(16.9
)
(16.9
)
(311.3
)
(1,066.0
)
271.3
271.3
(216.8
)
(216.8
)
(20.8
)
(20.8
)
44.6
44.6
69.4
(69.4
)
(76.7
)
(76.7
)
7.8
(1.3
)
6.5
1.0
33.1
.4
2.4
36.9
26.5
26.5
21.7
(22.2
)
(.5
)
271.3
519.9
5,177.2
(884.3
)
33.8
(30.3
)
(38.6
)
5,049.0
(492.2
)
(492.2
)
(236.9
)
(236.9
)
(7.4
)
(7.4
)
77.0
77.0
12.5
12.5
(154.8
)
(647.0
)
(271.3
)
(271.3
)
(20.8
)
(20.8
)
(29.5
)
(29.5
)
2.3
2.3
1.5
17.9
19.4
$
$
521.4
$
5,195.1
$
(1,426.8
)
$
(121.0
)
$
(28.0
)
$
(38.6
)
$
4,102.1
Table of Contents
Years Ended December 31,
2003
2002
2001
(Millions)
$
15.2
$
(611.7
)
$
648.3
671.2
661.6
526.9
66.6
(192.4
)
319.6
(753.9
)
273.6
435.8
157.4
(142.8
)
(190.4
)
(91.2
)
268.7
188.0
7.3
9.7
13.6
19.4
41.8
71.7
18.2
32.3
48.4
(265.0
)
99.3
32.2
154.5
110.9
(1.4
)
(4.0
)
671.7
241.1
336.9
88.1
80.6
264.3
252.2
(633.4
)
559.5
9.5
(263.3
)
(4.6
)
(612.1
)
(576.4
)
(449.4
)
(386.7
)
(254.8
)
225.5
(350.0
)
579.5
(1,419.2
)
17.6
(104.1
)
(36.6
)
26.4
(13.6
)
569.8
(1,063.8
)
1,382.1
200.3
548.5
446.5
770.1
(515.3
)
1,828.6
913.4
1,852.4
(960.8
)
(2,051.7
)
(2,631.4
)
2,006.5
3,481.5
3,377.1
(2,189.3
)
(2,538.1
)
(1,654.9
)
1.2
5.2
1,388.5
(53.3
)
(230.8
)
(341.0
)
271.3
(275.0
)
(135.0
)
95.3
(194.0
)
(78.6
)
(186.3
)
(44.8
)
(57.7
)
(19.8
)
(48.0
)
(50.3
)
67.9
(182.1
)
(29.7
)
28.4
(28.8
)
(2.8
)
(8.4
)
(.1
)
(1,591.4
)
(680.6
)
1,768.0
(92.6
)
526.6
1,584.4
(1,684.0
)
(154.0
)
3,352.4
(956.8
)
(1,662.8
)
(1,449.7
)
603.9
549.1
28.4
(1,291.6
)
(150.4
)
(308.7
)
(568.3
)
(739.9
)
2,250.5
2,300.4
163.7
351.8
128.6
273.0
243.9
75.0
95.0
180.0
(276.0
)
33.6
35.1
24.7
1,521.3
1,441.1
(3,029.9
)
(25.2
)
(336.9
)
(1,964.2
)
1,496.1
1,104.2
(4,994.1
)
(96.5
)
582.2
434.9
90.4
1,736.0
1,301.1
1,210.7
$
2,318.2
$
1,736.0
$
1,301.1
*
Includes cash and cash equivalents of
discontinued operations of $2.5 million, $85.6 million
and $60.7 million for 2003, 2002 and 2001, respectively.
Table of Contents
Note 1.
Description of business, basis of presentation
and summary of significant accounting policies
Description of business
Overview
Generated cash proceeds of approximately
$3 billion from the sales of assets.
Repaid $3.2 billion of debt through
scheduled maturities and early extinguishment of debt and
accessed the public debt markets available to us primarily to
refinance $2 billion of higher cost debt.
Sustained core business earnings capacity through
completed system expansions at Gas Pipeline, continued drilling
activity at Exploration & Production and continued
investment in deepwater activities within Midstream.
Table of Contents
Continued rationalization of our cost structure,
including a 28 percent reduction in selling, general and
administrative costs of continuing operations and a
39 percent reduction in general corporate expenses.
sustain solid core business performance,
including increased capital allocation to Exploration &
Production activities;
continue reduction of debt, including scheduled
maturities and early retirements, and selective refinancing of
certain instruments; and
maintain investment discipline.
Table of Contents
Basis of presentation
Kern River Gas Transmission (Kern River),
previously one of Gas Pipelines segments;
two natural gas liquids pipeline systems,
Mid-American Pipeline and Seminole Pipeline, previously part of
the Midstream segment;
Central natural gas pipeline, previously one of
Gas Pipelines segments;
retail travel centers concentrated in the
Midsouth, part of the previously reported Petroleum Services
segment;
refining and marketing operations in the
Midsouth, including the Midsouth refinery, part of the
previously reported Petroleum Services segment;
Texas Gas Transmission Corporation, previously
one of Gas Pipelines segments;
natural gas properties in the Hugoton and Raton
basins, previously part of the Exploration & Production
segment;
bio-energy operations, part of the previously
reported Petroleum Services segment;
Our general partnership interest and limited
partner investment in Williams Energy Partners, previously the
Williams Energy Partners segment;
the Colorado soda ash mining operations, part of
the previously reported International segment;
certain gas processing, natural gas liquids
fractionation, storage and distribution operations in western
Canada and at a plant in Redwater, Alberta, previously part of
the Midstream segment;
refining, retail and pipeline operations in
Alaska, part of the previously reported Petroleum Services
segment; and
Gulf Liquids New River Project LLC, previously
part of the Midstream segment.
Table of Contents
Current assets $127.6 million
Property, plant and equipment
$2,520.4 million
Goodwill and other assets
$1,114.5 million
Current liabilities
$171.6 million
Long-term debt $312.1 million
Deferred income taxes
$634.7 million
Other non-current liabilities
$127.1 million
Summary of significant accounting
policies
Principles of consolidation
Use of estimates
impairment assessments of long-lived assets and
goodwill;
litigation-related contingencies;
valuations of energy contracts, including
energy-related contracts;
environmental remediation obligations;
realization of deferred income tax assets;
Gas Pipeline and Power revenues subject to
refund; and
valuation of Exploration & Productions
reserves.
Table of Contents
Cash and cash equivalents
Restricted cash and investments
Accounts receivable
Inventory valuation
Property, plant and equipment
Table of Contents
Category of Property
2003
2002
2001
0% - 3.80%
0% - 3.80%
2.60% - 3.80%
1.05% - 2.50%
1.05% - 2.50%
1.05% - 2.50%
2.35% - 5.00%
2.35% - 5.00%
2.35% - 5.00%
0.85% - 1.50%
0.85% - 1.50%
1.50%
Estimated
Category of Property
Useful Lives
(In years)
10 to 40
15 to 30
3 to 30
10 to 45
4 to 40
3 to 20
Table of Contents
Goodwill
Treasury stock
Table of Contents
Energy commodity risk management and trading
activities and revenues
forward contracts,
futures contracts,
option contracts,
swap agreements,
certain physical commodity inventories, and
short-and long-term purchase and sale
commitments, which involve physical delivery of an energy
commodity.
power tolling contracts,
full requirements contracts,
load serving contracts,
storage contracts,
transportation contracts, and
transmission contracts.
Table of Contents
option pricing theory,
statistical and simulation analysis,
present value concepts incorporating risk from
uncertainty of the timing and amount of estimated cash
flows, and
specific contractual terms.
quoted energy commodity market prices,
estimates of energy commodity market prices in
the absence of quoted market prices,
Table of Contents
volatility factors underlying the positions,
estimated correlation of energy commodity prices,
contractual volumes, and estimated volumes under option and
other arrangements,
liquidity of the market in which the contract was
transacted, and
a risk-free market discount rate.
Table of Contents
Table of Contents
Gas pipeline revenues
Revenues, other than gas pipeline and energy
commodity risk management and trading activities
Table of Contents
Capitalization of interest
Employee stock-based awards
Years Ended December 31,
2003
2002
2001
(Dollars in millions)
$
(492.2
)
$
(754.7
)
$
(477.7
)
18.7
19.1
13.6
(31.6
)
(34.5
)
(24.7
)
$
(505.1
)
$
(770.1
)
$
(488.8
)
$
(1.01
)
$
(1.63
)
$
(.96
)
$
(1.03
)
$
(1.66
)
$
(.98
)
$
(1.01
)
$
(1.63
)
$
(.95
)
$
(1.03
)
$
(1.66
)
$
(.98
)
Table of Contents
Income taxes
Earnings (loss) per share
Foreign currency translation
Issuance of equity of consolidated
subsidiary
Securitizations and transfers of financial
instruments
Table of Contents
Recent accounting standards
Table of Contents
Table of Contents
Summarized results of discontinued
operations
2003
2002
2001
(Millions)
$
2,431.5
$
5,685.0
$
6,602.8
$
150.1
$
314.3
$
219.7
210.7
(531.0
)
(184.8
)
(1,839.2
)
(106.9
)
73.7
678.3
$
253.9
$
(143.0
)
$
(1,126.0
)
Summarized assets and liabilities of
discontinued operations
2003
2002
(Millions)
$
143.4
$
723.9
263.9
3,212.3
2.0
268.5
265.9
3,480.8
$
409.3
$
4,204.7
$
409.3
$
1,263.6
2,941.1
$
409.3
$
4,204.7
$
$
68.7
65.4
445.1
65.4
513.8
.3
828.3
340.0
12.0
113.5
12.3
1,281.8
$
77.7
$
1,795.6
Table of Contents
2003
2002
(Millions)
$
77.7
$
532.1
1,263.5
$
77.7
$
1,795.6
Held for sale at December 31,
2003
Alaska refining, retail and pipeline
operations
Gulf Liquids New River Project LLC
2003 completed transactions
Canadian liquids operations
Soda ash operations
Table of Contents
Williams Energy Partners
Bio-energy facilities
Natural gas properties
Texas Gas
Midsouth Refinery and related assets
Table of Contents
Williams travel centers
2002 Completed transactions
Central
Mid-America and Seminole Pipelines
Kern River
WilTel
Spinoff and related information
We contributed an outstanding promissory note
from WilTel of approximately $975 million.
We contributed certain other assets, including
the Williams Technology Center (Technology Center) and other
ancillary assets under construction. We also committed to
complete construction of the Technology Center. Later in 2001,
we repurchased the Technology Center and three corporate
aircraft from WilTel for $276 million. We then leased these
assets back to WilTel.
Table of Contents
We provided indirect credit support for
$1.4 billion of the WCG Note Trust Notes.
We provided a guarantee of WilTels
obligations under a 1998 asset defeasance program
(ADP) transaction in which WilTel entered into a lease
agreement covering a portion of its fiber-optic network. WilTel
had an option to purchase the covered network assets during the
lease term at an amount approximating lessors cost of
$750 million.
2001 post spinoff and accounting
Indirect credit support for $1.4 billion of
WCG Note Trust Notes and related interest.
Guarantee of the ADP transaction.
$106 million of receivables from services
prior to the spinoff
$269 million receivable for the Technology
Center lease
the remaining investment in WilTel common stock,
which had previously been written down by $70.9 million
earlier in 2001
2002 developments and accounting
our common stock ownership in WilTel was
cancelled,
we recovered $180 million of claims against
WilTel through the sale of those claims to WilTels new
parent organization, and
Table of Contents
we sold the Technology Center back to WilTel in
exchange for two promissory notes due in seven and one-half
years and four years and secured by a mortgage on the Technology
Center.
Status at December 31, 2003
Note 3.
Investing activities
Investing income (loss)
2003
2002
2001
(Millions)
$
20.3
$
73.0
$
22.7
(25.3
)
42.1
4.2
(35.0
)
(12.1
)
(5.6
)
(95.9
)
(268.7
)
(188.0
)
113.4
52.6
89.8
$
73.4
$
(113.1
)
$
(172.8
)
*
Items also included in segment profit.
a $43.1 million impairment of our investment
in equity and debt securities of Longhorn Partners Pipeline
L.P., which is included in the Other segment;
a $14.1 million impairment of our equity
interest in Aux Sable, which is included in the Midstream
segment;
Table of Contents
a $13.5 million gain on the sale of stock in
eSpeed Inc., which is included in the Power segment; and
an $11.1 million gain on sale of our equity
interest in West Texas LPG Pipeline, L.P. which is included in
the Midstream segment.
a $58.5 million gain on sale of our
investment in AB Mazeikiu Nafta, a Lithuanian oil refinery,
pipeline and terminal complex, which is included in the Other
segment;
a $12.3 million write-off of Gas
Pipelines investment in a pipeline project which was
cancelled in 2002;
a $10.4 million net write-down pursuant to
the sale of our equity interest in Alliance Pipeline, a Canadian
and U.S. gas pipeline, which is included in the Gas
Pipeline segment; and
an $8.7 million gain on sale of our general
partner equity interest in Northern Border Partners, L.P., which
is included in the Gas Pipeline segment.
a $27.5 million gain on the sale of our
limited partnership interest in Northern Border Partners, L.P.,
which is included in the Gas Pipeline segment; and
$23.3 million of write-downs of certain
investments which are included in the Power segment.
a $13.5 million impairment of investment in
ReserveCo, a company holding phosphate reserves, and
a $13.2 million impairment of investment in
Algar Telecom S.A.
Table of Contents
Investments
2003
2002
(Millions)
$
730.8
$
734.4
194.6
75.3
85.1
89.3
67.1
60.4
42.8
54.8
41.5
35.8
71.8
140.1
1,233.7
1,190.1
15.3
52.8
48.9
53.9
23.7
23.7
24.8
33.5
112.7
163.9
117.2
100.9
13.7
$
1,463.6
$
1,468.6
Guarantees on behalf of
investees
Table of Contents
Note 4.
Asset sales, impairments and other
accruals
(Income) Expense
2003
2002
2001
(Millions)
$
(188.0
)
$
$
20.0
19.5
45.0
61.1
44.1
44.7
82.6
56.2
13.3
25.6
18.3
(96.7
)
(141.7
)
(16.2
)
41.7
115.0
13.8
(75.3
)
12.1
Table of Contents
Power
Table of Contents
Note 5.
Provision (benefit) for income taxes
2003
2002
2001
(Millions)
$
(8.8
)
$
(126.7
)
$
167.9
(17.6
)
27.5
9.7
(3.8
)
25.9
13.9
(30.2
)
(73.3
)
191.5
29.1
(150.6
)
265.6
51.3
(56.6
)
37.0
(13.8
)
14.8
17.0
66.6
(192.4
)
319.6
$
36.4
$
(265.7
)
$
511.1
2003
2002
2001
(Millions)
$
18.0
$
(307.1
)
$
405.8
5.0
(19.0
)
30.4
.7
94.2
12.2
(39.6
)
(121.2
)
44.5
15.8
21.7
26.8
36.5
38.9
18.2
$
36.4
$
(265.7
)
$
511.1
Table of Contents
2003
2002
(Millions)
$
2,118.8
$
2,183.1
149.9
642.7
514.8
568.0
195.8
168.9
2,979.3
3,562.7
151.5
151.7
208.7
314.5
52.5
68.2
115.7
216.2
46.2
72.9
125.7
111.3
700.3
934.8
67.8
156.5
632.5
778.3
$
2,346.8
$
2,784.4
Table of Contents
Note 6.
Earnings (loss) per share
2003
2002
2001
(Dollars in millions, except per-
share amounts; shares in thousands)
$
15.2
$
(611.7
)
$
648.3
29.5
90.1
$
(14.3
)
$
(701.8
)
$
648.3
518,137
516,793
496,935
3,632
518,137
516,793
500,567
$
(.03
)
$
(1.35
)
$
1.31
$
(.03
)
$
(1.35
)
$
1.30
Table of Contents
Note 7.
Employee benefit plans
Other Postretirement
Pension Benefits
Benefits
2003
2002
2003
2002
(Millions)
$
788.9
$
870.2
$
410.5
$
489.0
25.5
32.5
6.2
7.1
52.7
59.3
24.1
31.8
3.3
3.9
(.8
)
(6.1
)
(18.7
)
(87.1
)
(116.0
)
(24.6
)
(26.3
)
(.8
)
(3.3
)
(118.3
)
(27.0
)
29.5
1.5
2.8
(63.8
)
61.2
(69.5
)
775.9
788.9
362.4
410.5
592.9
725.0
193.9
247.6
155.8
(94.7
)
36.1
(34.9
)
(70.2
)
(20.2
)
50.8
97.3
14.2
23.8
3.3
3.9
(87.1
)
(116.0
)
(24.6
)
(26.3
)
(6.1
)
(18.7
)
706.3
592.9
152.7
193.9
(69.6
)
(196.0
)
(209.7
)
(216.6
)
195.5
309.5
44.5
14.3
(4.6
)
(7.2
)
1.5
(1.5
)
23.6
28.2
$
121.3
$
106.3
$
(140.1
)
$
(175.6
)
Table of Contents
$
164.4
$
169.1
$
$
(53.7
)
(91.6
)
(140.1
)
(175.6
)
10.6
28.8
$
121.3
$
106.3
$
(140.1
)
$
(175.6
)
December 31,
2003
2002
$
335.0
$
368.8
279.2
260.3
225.5
169.9
Pension Benefits
2003
2002
2001
(Millions)
$
25.5
$
32.5
$
30.8
52.7
59.3
60.9
(54.2
)
(65.3
)
(80.0
)
(1.0
)
(2.5
)
(1.6
)
(1.4
)
13.7
4.0
.8
3.9
(1.2
)
1.2
.6
4.8
29.5
$
39.7
$
62.0
$
11.3
Table of Contents
Other Postretirement Benefits
2003
2002
2001
(Millions)
$
6.2
$
7.1
$
6.9
24.1
31.8
29.5
(13.0
)
(18.9
)
(22.6
)
2.7
4.1
4.1
.6
.2
.1
(2.6
)
8.6
3.7
14.7
(41.9
)
13.5
1.5
$
(12.7
)
$
43.0
$
30.1
Other
Postretirement
Pension Benefits
Benefits
2003
2002
2003
2002
6.25
%
7
%
6.25
%
7
%
5
5
N/A
N/A
Other
Pension Benefits
Postretirement Benefits
2003
2002
2001
2003
2002
2001
7
%
7.5
%
7.5
%
7
%
7.5
%
7.5
%
8.5
8.5
10
8.5
8.5
10
N/A
N/A
N/A
7
7
8.2
5
5
5
N/A
N/A
N/A
Table of Contents
Point increase
Point decrease
(Millions)
$
5.1
$
(4.1
)
50.9
(46.2
)
Plan Assets
at
December 31,
2003
2002
82
%
78
%
13
16
5
6
100
%
100
%
Table of Contents
Plan Assets
at
December 31,
2003
2002
74
%
69
%
14
19
12
12
100
%
100
%
Note 8.
Inventories
2003
2002
(Millions)
$
2.1
$
3.8
8.0
47.7
40.6
102.9
48.6
150.6
62.6
88.3
132.5
125.4
$
245.8
$
368.1
Table of Contents
Note 9.
Property, plant and equipment
2003
2002
(Millions)
$
190.7
$
420.9
7,306.1
6,884.7
3,235.7
3,174.1
5,122.8
4,890.8
250.2
319.2
16,105.5
15,689.7
(4,026.4
)
(3,663.7
)
$
12,079.1
$
12,026.0
Table of Contents
Note 10.
Accounts payable and accrued
liabilities
2003
2002
(Millions)
$
261.2
$
301.2
153.9
179.0
101.2
99.7
65.3
58.5
46.1
47.7
25.8
141.2
6.2
63.3
237.0
290.5
278.8
$
950.2
$
1,406.4
Table of Contents
Note 11.
Debt, leases and banking
arrangements
Notes payable and long-term
debt
Weighted-
Average
December 31,
Interest
Rate(1)
2003
2002
(Millions)
6.57
%
$
3.3
$
996.3
$
$
81.0
28.7
8.0
%
243.7
256.8
4.4
%
603.7
5.2
20.9
7.0
%
1,645.2
1,449.0
7.7
%
9,404.3
9,349.9
669.9
4.3
%
79.3
158.1
139.9
11,976.2
12,159.4
(936.4
)
(1,082.7
)
$
11,039.8
$
11,076.7
(1)
At December 31, 2003
(2)
Includes $1.1 billion of 6.5% notes
payable 2007, subject to remarketing in 2004, discussed below.
Table of Contents
Revolving credit and letter of credit
facilities
Issuances and retirements
interest coverage ratio computed on a
consolidated RMT basis of greater than 3 to 1;
ratio of the present value of future cash flows
of proved reserves, discounted at ten percent, based on the most
recent engineering report to total senior secured debt, computed
on a consolidated RMT basis, of greater than 1.75 to 1;
Table of Contents
limitation on restricted payments; and
limitation on intercompany indebtedness.
limitation on certain payments, including a
limitation on the payment of quarterly dividends to no greater
than $.02 per common share;
limitation on asset sales, unless the
consideration is at least equal to fair market value and at
least 75 percent of the consideration received is in the
form of cash or cash equivalents;
limitation on the use of proceeds from permitted
asset sales;
limitation on transactions with
affiliates; and
limitation on additional indebtedness and
issuance of preferred stock unless the Fixed Charge Coverage
Ratio for our most recently ended four full fiscal quarters is
at least 2 to 1, determined on a proforma basis.
Principal
Issue/Terms
Due Date
Amount
(Millions)
2010
$
175.0
2007
500.0
2033
300.0
2010
800.0
2016
105.0
2016
125.0
2003-2006
$
302.5
2005
139.8
2003-2004
247.4
2003-2004
531.2
2003
7.5
2003-2022
951.4
Table of Contents
(Millions)
$
933.4
246.8
971.7
2,019.6
384.9
Leases-lessee
(Millions)
$
41.8
36.3
25.8
20.1
19.4
54.9
$
198.3
Note 12.
Preferred interests in consolidated
subsidiaries
Table of Contents
Snow Goose Associates, L.L.C.
Piceance Production Holdings
LLC
Castle Associates L.P.
Williams Risk Holdings L.L.C.
Table of Contents
Note 13.
Stockholders equity
Table of Contents
Note 14.
Stock-based compensation
Plan information
Loans
Deferred shares
Table of Contents
Options
2003
2002
2001
Weighted-
Weighted-
Weighted-
Average
Average
Average
Exercise
Exercise
Exercise
Options
Price
Options
Price
Options
Price
(Millions)
(Millions)
(Millions)
38.8
$
19.85
25.6
$
28.23
23.1
$
28.63
4.1
*
9.76
15.8
6.64
4.8
37.45
(.2
)
5.86
(.5
)
11.77
(3.3
)
18.47
2.0
21.57
2.1
(17.0
)**
25.60
(2.1
)
26.31
(3.1
)
32.35
25.7
$
14.63
38.8
$
19.85
25.6
$
28.23
12.3
$
24.23
21.7
$
27.42
20.0
$
26.41
*
Includes 3.9 million shares that were
granted December 29, 2003, under the stock option exchange
program, described above.
**
Includes 10.4 million shares that were
cancelled on June 26, 2003 under the stock option exchange
program, described above.
(1)
Effective with the spinoff of WilTel on
April 23, 2001, the number and exercise price of
unexercised stock options were adjusted to preserve the
intrinsic value of the stock options that existed prior to the
spinoff.
Table of Contents
Stock Options Outstanding
Stock Options Exercisable
Weighted-
Weighted-
Average
Weighted-
Average
Remaining
Average
Exercise
Contractual
Exercise
Range of Exercise Prices
Options
Price
Life
Options
Price
(Millions)
(Millions)
10.0
$
2.82
8.7 years
1.2
$
4.28
.8
8.68
1.1 years
.8
8.68
4.5
10.21
5.2 years
.7
11.40
5.8
20.39
3.4 years
5.2
20.86
4.6
37.74
3.8 years
4.4
37.87
25.7
$
14.63
5.8 years
12.3
$
24.23
2003*
2002
2001
$
2.95
$
2.77
$
10.93
1
%
1
%
1.9
%
50
%
56
%
35
%
3.1
%
3.6
%
4.8
%
5.0
5.0
5.0
*
The 2003 weighted average fair value and
assumptions do not reflect options that were granted
December 29, 2003, as part of the stock option exchange
program which is described above. The fair value of these
options is $1.58, which is the difference in the fair value of
the new options granted and the fair value of the exchanged
options. The assumptions used in the fair value calculation of
the new options granted were: 1) dividend yield of .40
percent; 2) volatility of 50 percent; 3) weighted
average expected remaining life of 3.4 years; and
4) weighted average risk free interest rate of
1.99 percent.
Note 15.
Financial instruments, derivatives, guarantees
and concentration of credit risk
Financial instruments fair
value
Table of Contents
futures contracts,
forward purchase and sale contracts,
swap agreements,
option contracts,
interest-rate swap agreements and futures
contracts, and
credit default swaps.
Table of Contents
Carrying Amounts and Fair Values of Our
Financial Instruments
2003
2002
Carrying
Fair
Carrying
Fair
Asset (Liability)
Amount
Value
Amount
Value
(Millions)
$
2,315.7
$
2,315.7
$
1,650.4
$
1,650.4
206.9
206.9
290.9
290.9
140.0
140.0
164.9
164.9
112.7
(a
)
163.9
(a
)
381.3
381.3
13.7
13.7
117.2
117.2
100.9
100.9
(3.3
)
(3.3
)
(996.3
)
(1,063.1
)
(11,976.2
)
(12,282.7
)
(12,019.6
)
(8,508.4
)
553.9
553.9
804.8
804.8
(25.8
)
(25.8
)
(141.2
)
(141.2
)
46.8
(b
)
65.7
(b
)
845.9
845.9
465.9
465.9
(296.4
)
(296.4
)
49.3
49.3
(55.2
)
(55.2
)
24.0
24.0
(20.2
)
(20.2
)
(27.9
)
(27.9
)
(a)
These investments are primarily in non-publicly
traded companies for which it is not practicable to estimate
fair value.
(b)
It is not practicable to estimate the fair value
of these financial instruments because of their unusual nature
and unique characteristics.
Energy derivatives
Energy trading and non-trading
derivatives
Table of Contents
Power segment
Exploration & Production
segment
Table of Contents
Discontinued operations
Energy commodity cash flow hedges
Table of Contents
Energy commodity fair-value hedges
Foreign currency derivatives
Interest-rate swaps
Table of Contents
Guarantees
Sale of receivables
Concentration of credit risk
Cash equivalents and restricted
investments
Accounts and notes receivable
2003
2002
(Millions)
$
819.1
$
938.2
704.9
1,009.1
29.2
276.9
17.5
152.0
67.7
39.2
$
1,638.4
$
2,415.4
Table of Contents
Derivative assets and liabilities
letters of credit,
payment under margin agreements,
guarantees of payment by credit worthy parties,
and
transfers of ownership interests in natural gas
reserves or power generation assets.
Investment
Counterparty Type
Grade(a)
Total
(Millions)
$
988.2
$
1,045.9
1,317.2
3,118.5
918.5
918.5
609.8
619.3
$
3,833.7
5,702.2
(39.8
)
$
5,662.4
Table of Contents
Investment
Counterparty Type
Grade(a)
Total
(Millions)
$
606.1
$
629.4
52.1
376.3
160.4
160.4
.2
$
818.6
1,166.3
(39.8
)
$
1,126.5
(a)
We determine investment grade primarily using
publicly available credit ratings. We included counterparties
with a minimum Standard & Poors of BBB- or
Moodys Investors Service rating of Baa3 in investment
grade. We also classify counterparties that have provided
sufficient collateral, such as cash, standby letters of credit,
parent company guarantees, and property interests, as investment
grade.
(b)
One counterparty within the California power
market represents more than ten percent of the derivative assets
and is included in investment grade. Standard &
Poors and Moodys Investors Service do not currently
rate this counterparty. We included this counterparty in the
investment grade column based upon contractual credit
requirements in the event of assignment or substitution of a new
obligation for the existing one.
Revenues
Note 16.
Contingent liabilities and
commitments
Rate and regulatory matters and related
litigation
Table of Contents
Issues resulting from California energy
crisis
Refund proceedings
Table of Contents
ISO fines
Summer 2002 90-day contracts
Investigations of alleged market
manipulation
Table of Contents
Long-term contracts
Table of Contents
Marketing affiliate
investigation
Investigation of round-trip
trading and reserves for energy trading activities
Reporting of natural gas-related
information to trade publications
Mobile Bay expansion
Table of Contents
Enron bankruptcy
Environmental matters
Continuing operations
Former operations, including operations
classified as discontinued
Agrico
Table of Contents
Williams Energy Partners
(1) environmental cleanup costs resulting
from certain conditions, primarily soil and groundwater
contamination, at specified locations, to the extent such costs
exceed a specified amount and
(2) currently unidentified environmental
contamination relating to operations prior to April 2002 and
identified prior to April 2008.
Other
Alaska refining, retail and pipeline operations
currently classified as held for sale;
potential indemnification obligations to
purchasers of our former retail petroleum and refining
operations;
former propane marketing operations, petroleum
products and natural gas pipelines, natural gas liquids
fractionation;
a discontinued petroleum refining facility; and
exploration and production and mining operations.
Table of Contents
Summary of environmental matters
Other legal matters
Royalty indemnifications
Western gas resources
Will Price (formerly Quinque)
Table of Contents
Grynberg
Securities class actions
Table of Contents
Oklahoma securities investigation
Shell offshore litigation
TAPS Quality Bank
Other divestiture indemnifications
Table of Contents
Summary
Commitments
Note 17.
Related party transactions
Lehman Brothers Holdings,
Inc.
American Electric Power Company,
Inc.
ExxonMobil Corporation
Table of Contents
Note 18.
Accumulated other comprehensive
income
Income (Loss)
Unrealized
Appreciation
Foreign
Minimum
Cash Flow
(Depreciation)
Currency
Pension
Hedges
on Securities
Translation
Liability
Total
(Millions)
$
$
72.7
$
(44.5
)
$
$
28.2
(94.5
)
(94.5
)
896.8
(69.7
)
(39.9
)
(3.6
)
783.6
(343.3
)
27.5
1.4
(314.4
)
5.4
2.8
8.2
1.5
1.5
(88.8
)
(88.8
)
370.2
(35.3
)
(37.1
)
(2.2
)
295.6
(36.5
)
57.8
21.3
370.2
.9
(23.8
)
(2.2
)
345.1
(170.7
)
5.3
(.1
)
(27.3
)
(192.8
)
65.0
(1.9
)
10.4
73.5
.4
.4
1.2
1.2
(193.6
)
(193.6
)
(298.9
)
4.6
(.1
)
(16.9
)
(311.3
)
71.3
5.5
(23.9
)
(19.1
)
33.8
Table of Contents
Income (Loss)
Unrealized
Appreciation
Foreign
Minimum
Cash Flow
(Depreciation)
Currency
Pension
Hedges
on Securities
Translation
Liability
Total
(Millions)
(408.8
)
2.6
77.0
18.2
(311.0
)
156.3
(1.0
)
(6.9
)
148.4
15.6
15.6
(9.0
)
(9.0
)
1.2
1.2
(236.9
)
(7.4
)
77.0
12.5
(154.8
)
$
(165.6
)
$
(1.9
)
$
53.1
$
(6.6
)
$
(121.0
)
Available for sale securities
Segments and reclassification of
operations
Table of Contents
Segments performance
measurement
United States
Other
Total
(Millions)
$
15,749.5
$
1,084.6
$
16,834.1
3,167.3
549.3
3,716.6
4,738.4
564.8
5,303.2
$
11,982.0
$
1,122.0
$
13,104.0
11,996.7
1,100.0
13,096.7
Table of Contents
Midstream
Gas
Exploration &
Gas &
Power
Pipeline
Production
Liquids
Other
Eliminations
Total
$
12,288.5
$
1,275.0
$
(36.3
)
$
3,274.6
$
32.3
$
$
16,834.1
904.1
24.0
816.0
44.6
39.7
(1,828.4
)
13,192.6
1,299.0
779.7
3,319.2
72.0
(1,828.4
)
16,834.1
(2.9
)
2.9
$
13,195.5
$
1,299.0
$
779.7
$
3,319.2
$
72.0
$
(1,831.3
)
$
16,834.1
$
154.1
$
554.9
$
401.4
$
286.0
$
(50.5
)
$
$
1,345.9
15.8
8.9
(5.7
)
1.3
20.3
11.7
0.1
6.0
(43.1
)
(25.3
)
(2.9
)
(2.9
)
$
145.3
$
539.0
$
392.5
$
285.7
$
(8.7
)
$
1,353.8
(87.0
)
$
1,266.8
$
1.0
$
505.0
$
241.5
$
268.2
$
2.5
$
$
1,018.2
$
31.5
$
247.2
$
173.9
$
198.9
$
19.7
$
$
671.2
$
909.6
$
1,184.7
$
62.6
$
1,492.8
$
66.9
$
$
3,716.6
(994.8
)*
57.1
797.8
32.4
57.2
50.3
(85.2
)
1,241.8
860.4
1,525.2
124.1
50.3
3,716.6
(141.4
)
141.4
$
56.2
$
1,241.8
$
860.4
$
1,525.2
$
124.1
$
(91.1
)
$
3,716.6
$
(624.8
)
$
545.1
$
508.6
$
183.2
$
14.1
$
$
626.2
(9.7
)
88.4
3.7
17.6
(27.0
)
73.0
(2.0
)
(13.9
)
58.0
42.1
(141.4
)
(141.4
)
$
(471.7
)
$
470.6
$
504.9
$
165.6
$
(16.9
)
$
652.5
(142.8
)
$
509.7
$
135.8
$
688.0
$
382.8
$
641.1
$
51.7
$
$
1,899.4
$
33.1
$
225.9
$
184.6
$
189.8
$
28.2
$
$
661.6
$
2,249.6
$
1,142.2
$
121.6
$
1,541.5
$
248.3
$
$
5,303.2
(544.0
)*
38.6
482.3
79.7
71.0
(127.6
)
$
1,705.6
$
1,180.8
$
603.9
$
1,621.2
$
319.3
$
(127.6
)
$
5,303.2
$
1,270.0
$
472.1
$
231.8
$
172.2
$
37.5
$
$
2,183.6
(1.3
)
46.3
14.6
(14.0
)
(22.9
)
22.7
(23.3
)
27.5
4.2
$
1,294.6
$
398.3
$
217.2
$
186.2
$
60.4
$
2,156.7
(124.3
)
$
2,032.4
$
209.2
$
549.8
$
3,561.1
$
562.7
$
53.5
$
$
4,936.3
$
20.0
$
219.2
$
97.1
$
164.0
$
26.6
$
$
526.9
*
Prior to January 1, 2003, Power intercompany
cost of sales, which are netted in revenues consistent with
fair-value accounting, exceed intercompany revenues. Beginning
January 1, 2003, Power intercompany cost of sales are no
longer netted in revenues due to the adoption of EITF Issue
No. 02-3 (see Note 1). Segment revenues and profit for
Power include net realized and unrealized mark-to market gains
of $401 million from derivative contracts accounted for on
a fair value basis for the year ended December 31, 2003.
Table of Contents
Total Assets
Equity Method Investments
December 31,
December 31,
December 31,
December 31,
2003
2002
2003
2002
(Millions)
$
8,690.1
$
12,532.9
$
$
6,943.4
6,892.1
774.4
778.4
5,347.4
5,595.1
41.5
35.8
4,781.1
4,736.3
332.7
282.0
6,928.7
7,664.3
85.1
93.9
(6,078.2
)
(6,636.9
)
26,612.5
30,783.8
1,233.7
1,190.1
409.3
4,204.7
$
27,021.8
$
34,988.5
$
1,233.7
$
1,190.1
(1)
The decrease in Powers total assets is
largely due to the decrease in energy risk management and
trading assets as a result of the adoption of EITF 02-3
(see Note 1).
Table of Contents
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
$
4,832.6
$
3,657.0
$
4,795.3
$
3,549.2
4,473.5
3,064.9
4,434.7
3,183.7
(39.3
)
116.2
22.8
(84.5
)
(814.5
)
269.7
106.3
(53.7
)
(.09
)
.18
.05
(.16
)
(1.59
)
.48
.21
(.10
)
(.09
)
.17
.04
(.16
)
(1.59
)
.46
.20
(.10
)
$
1,204.0
$
671.3
$
719.2
$
1,122.1
524.7
542.4
527.3
624.2
46.5
(335.8
)
(171.2
)
(151.2
)
107.7
(349.1
)
(294.1
)
(219.2
)
(.05
)
(.65
)
(.34
)
(.31
)
.07
(.68
)
(.58
)
(.44
)
$45.0 million impairment of goodwill at
Power (see Note 4),
$44.1 million impairment of the Hazelton
generation facility at Power (see Note 4),
$33.3 million California rate refund and
other accrual adjustments at Power (see Note 4),
$19.9 million in unrealized gains on certain
derivative contracts that had previously not been recognized in
2003, including approximately $10 million of revenue
related to the accounting treatment applied to certain
derivative contracts terminated in prior periods at Power (see
Note 1),
$16.2 million gain on sale of the wholesale
propane business at Midstream (see Note 4),
$41.7 million impairment of certain Canadian
assets at Midstream (see Note 4),
$66.8 million of costs for the early
retirement of debt (see Note 10),
$25.4 million income from discontinued
operations (see Note 2), and
$22.8 million gain from discontinued
operations for impairments and net gains on sales (see
Note 2).
Table of Contents
$13.0 million gain on sale of a full
requirements contract at Power (see Note 4),
$126.8 million positive valuation adjustment
on a terminated derivative contract at Power,
$13.5 million gain on sale of marketable
equity securities at Power (see Note 3),
$11.0 million gain on sale of equity
interest in West Texas LPG Pipeline, L.P. investment at
Midstream (see Note 3),
$13.1 million income from discontinued
operations (see Note 2), and
$72.3 million gain from discontinued
operations for impairments and net gains on sales (see
Note 2).
$20 million Commodity Futures Trading
Commission settlement at Power (see Note 4),
$175 million gain on sale of a full
requirements contract at Power (see Note 4),
$25.5 million write-off of software
development costs at Gas Pipelines (see Note 4),
$80.7 million correction, attributable to
prior periods relating to the accounting treatment previously
applied to certain third party derivative contracts during 2002
and 2001 at Power (see Note 1),
$12.4 million of revenue attributable to
prior periods relating to the accounting treatment previously
applied to certain third party derivative contracts during 2002
and 2001 and recorded prior to the $80.7 million correction
in second-quarter at Power (see Note 1),
$94.1 million gain on the sale of certain
natural gas properties at Exploration & Production (see
Note 4),
$42.4 million impairment of an investment in
equity and debt securities of Longhorn Partners Pipeline L.P. at
Other (see Note 4),
$14.5 million in accelerated amortization of
costs related to the termination of the revolving credit
agreement,
$13.5 million impairment of cost based
investment in ReserveCo, a company holding phosphate reserves
(see Note 3),
$19.8 million income from discontinued
operations (see Note 2), and
$232.9 million gain from discontinued
operations for impairments and net gains on sales (see
Note 2).
$13.7 million of revenue attributable to
prior periods relating to the accounting treatment previously
applied to certain third party derivative contracts during 2002
and 2001 and recorded prior to the $80.7 million correction
in second-quarter at Power (see Note 1),
$12.0 million impairment of a cost based
investment in Algar Telecom S.A. at Other (see Note 3),
$761.3 million cumulative effect of change
in accounting principles related to the adoption of EITF Issue
No. 02-3 and SFAS No. 143 (see Note 1),
Table of Contents
$92.2 million income from discontinued
operations (see Note 2), and
$117.3 million loss from discontinued
operations for impairments and net losses on sales (see
Note 2).
$85.0 million net revenue impact related to
the settlement and valuation of Power contracts with the State
of California,
$44.7 million impairment of the Worthington
generation facility at Power (see Note 4),
$50.8 million loss accruals and impairments
of other power related assets at Power (see Note 4),
$17.0 million charge associated with a FERC
settlement at Gas Pipeline (see Note 16),
$115.0 million impairment of Canadian assets
at Midstream (see Note 4),
$80.8 million income from discontinued
operations (see Note 2), and
$190.4 million loss from discontinued
operations for impairments and net losses on sales (see
Note 2).
$10.5 million loss accruals related to
commitments for certain assets previously planned to be used in
power projects at Power (see Note 4),
$11.6 million net write-down pursuant to the
sale of our equity interest in a Canadian and U.S. gas
pipeline, at Gas Pipeline (see Note 3),
$143.9 million gain related to the sale of
certain natural gas production properties at
Exploration & Production (see Note 4),
$58.5 million gain on sale of our investment
in a Lithuanian oil refinery, pipeline and terminal complex,
included at Other (see Note 3),
$22.9 million charge, included in continuing
operations, related to estimated losses from an assessment of
the recoverability of WilTel related receivables (see
Note 2),
$44.1 million income from discontinued
operations (see Note 2), and
$231.4 million loss from discontinued
operations for impairments and net losses on sales (see
Note 2).
$57.5 million impairment of goodwill at
Power due to deteriorating market conditions in the merchant
energy sector (see Note 4),
$58.9 million of loss accruals related to
commitments for certain assets previously planned to be used in
power projects and write-offs associated with a terminated power
plant project at Power (see Note 4),
$31.8 million impairment of other power
related assets at Power (see Note 4),
$12.3 million write-down of Gas
Pipelines investment in a pipeline project which was
cancelled in 2002 (see Note 3),
Table of Contents
$27.4 million benefit which reflects a
contractual construction completion fee received by one of our
equity affiliates at Gas Pipeline whose operations are accounted
for under the equity method of accounting (see Note 3),
$15.0 million charge, included in continuing
operations, related to estimated losses from an assessment of
the recoverability of WilTel related receivables (see
Note 2),
$28.8 million of expense was recorded for
our early retirement option,
$51.5 million income from discontinued
operations (see Note 2), and
$71.1 million loss from discontinued
operations for impairments and net losses on sales (see
Note 2).
$232.0 million charge, included in
continuing operations, related to estimated losses from an
assessment of the recoverability of WilTel related receivables
(see Note 2),
$137.9 million income from discontinued
operations (see Note 2), and
$38.1 million loss from discontinued
operations for impairments and net losses on sales (see
Note 2).
Table of Contents
As of December 31,
2003
2002
(Millions)
$
2,464.4
$
2,544.8
682.5
784.5
3,146.9
3,329.3
(511.1
)
(417.7
)
$
2,635.8
$
2,911.6
Capitalized costs include the cost of equipment
and facilities for oil and gas producing activities. These
amounts for 2003 and 2002 do not include approximately
$1 billion of goodwill related to the purchase of Barrett
Resources Corp. (Barrett) in 2001.
Proved properties include capitalized costs for
oil and gas leaseholds holding proved reserves; development
wells and related equipment and facilities (including
uncompleted development well costs); successful exploratory
wells and related equipment and facilities (and uncompleted
exploratory well costs) and support equipment.
Unproved properties consist primarily of acreage
related to probable reserves acquired through the Barrett
acquisition in addition to a small portion of unproved
exploratory acreage.
For the Year Ended December 31,
2003
2002
2001
(Millions)
$
11.3
$
$
2,557.0
7.1
15.5
35.6
186.8
374.3
198.9
$
205.2
$
389.8
$
2,791.5
Costs incurred include capitalized and expensed
items.
Acquisition costs include costs incurred to
purchase, lease, or otherwise acquire a property, the majority
of the 2001 costs relates to the Barrett acquisition during 2001.
Exploration costs include the costs of geological
and geophysical activity, dry holes, drilling and equipping
exploratory wells, and the cost of retaining undeveloped
leaseholds.
Table of Contents
Development costs include costs incurred to gain
access to and prepare development well locations for drilling
and to drill and equip development wells.
Results of operations
For the Year Ended December 31,
2003
2002*
2001*
(Millions)
$
611.9
$
683.0
$
408.4
168.8
189.0
171.2
780.7
872.0
579.6
138.3
119.5
79.3
54.4
62.9
40.1
7.1
13.9
10.1
170.2
191.0
94.0
8.4
7.2
(134.8
)
(141.7
)
102.1
109.2
138.7
337.3
363.2
369.4
443.4
508.8
210.2
8.5
(169.6
)
(186.9
)
(80.4
)
$
273.8
$
321.9
$
138.3
*
Certain amounts have been reclassified to conform
to current presentation.
Results of operations for producing activities
consist of all related domestic activities within the
Exploration & Production reporting unit, including
those operations that qualified for presentation as discontinued
operations within our Consolidated Statement of Operations.
Included above are the pretax results of operations and gains on
sales of assets, reported as discontinued operations, of
$60.2 million in 2003, $11.9 million in 2002 and
$2.3 million in 2001.
Oil and gas revenues consist primarily of natural
gas production sold to the Power subsidiary and includes the
impact of intercompany hedges.
Other revenues and other expenses consist of
activities within the Exploration & Production segment
that are not a direct part of the producing activities. These
non-producing activities include acquisition and disposition of
other working interest and royalty interest gas and the movement
of gas from the wellhead to the tailgate of the respective
plants for sale to the Power subsidiary or third party
purchasers. In addition, other revenues include recognition of
income from transactions which transferred certain non-operating
benefits to a third party.
Production costs consist of costs incurred to
operate and maintain wells and related equipment and facilities
used in the production of petroleum liquids and natural gas.
These costs also include production related taxes other than
income taxes, and administrative expenses related to the
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production activity. Excluded are depreciation,
depletion and amortization of capitalized acquisition,
exploration and development costs.
Exploration expenses include unsuccessful
exploratory dry hole costs, leasehold impairment, geological and
geophysical expenses and the cost of retaining undeveloped
leaseholds.
Depreciation, depletion and amortization includes
depreciation of support equipment.
Proved reserves
2003
2002
2001
(Bcfe)
2,834
3,178
1,202
(5
)
(87
)
(69
)
38
1,949
412
385
239
(186
)
(211
)
(131
)
(390
)
(431
)
(12
)
2,703
2,834
3,178
1,165
1,368
1,599
The SEC defines proved oil and gas reserves
(Rule 4-10(a) of Regulation S-X) as the estimated
quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with
reasonable certainty are recoverable in future years from known
reservoirs under existing economic and operating conditions. Our
proved reserves consist of two categories, proved developed
reserves and proved undeveloped reserves. Proved developed
reserves are currently producing wells and wells awaiting minor
sales connection expenditure, recompletion, additional
perforations or borehole stimulation treatments. Proved
undeveloped reserves are those reserves which are expected to be
recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for
recompletion. Proved reserves on undrilled acreage are limited
to those drilling units offsetting productive units that are
reasonably certain of production when drilled or where it can be
demonstrated with certainty that there is continuity of
production from the existing productive formation.
Natural gas reserves are computed at 14.73 pounds
per square inch absolute and 60 degrees Fahrenheit. Crude oil
reserves are insignificant and have been included in the proved
reserves on a basis of billion cubic feet equivalents (Bcfe).
Table of Contents
At December 31,
2003
2002
(Millions)
$
14,268
$
10,904
2,434
2,828
1,303
1,215
3,858
2,346
6,673
4,515
3,324
2,243
$
3,349
$
2,272
2003
2002
2001
(Millions)
$
2,272
$
1,432
$
2,720
(567
)
(322
)
(270
)
2,001
1,602
(3,945
)
901
546
153
187
374
199
(159
)
(326
)
(41
)
78
1,069
(855
)
(611
)
(8
)
(11
)
(123
)
(43
)
341
203
426
(773
)
(537
)
1,077
(66
)
34
95
1,077
840
(1,288
)
$
3,349
$
2,272
$
1,432
Table of Contents
THE WILLIAMS COMPANIES, INC.
SCHEDULE II VALUATION AND
QUALIFYING ACCOUNTS
ADDITIONS
Charged to
Beginning
Costs and
Ending
Balance
Expenses
Other
Deductions
Balance
(Millions)
$
111.8
$
7.3
7.9
(j)
$
14.8
(c)
$
112.2
250.4
2.6
(f)
213.2
(i)
39.8
2.7
1.4
4.1
251.8
22.4
162.4
(c)
111.8
103.2
256.0
1,720.0
(e)
2,079.2
(c)
648.2
(397.8
)(f)
250.4
1.2
1.5
2.7
6.9
98.4
145.6
(g)
(.9
)(c)
251.8
103.2
103.2
60.9
728.5
(f)
(141.2
)(h)
648.2
6.0
1.2
6.0
(d)
1.2
(a) | Deducted from related assets. | |
(b) | Included in liabilities. | |
(c) | Represents balances written off, net of recoveries and reclassifications. | |
(d) | Represents payments made. | |
(e) | Reflects a reclassification of amounts included in the liability for Guarantees and payment obligations related to WilTel at December 31, 2002 (see Note 2 of Notes to Consolidated Financial Statements). | |
(f) | Included in revenue. | |
(g) | Reflects a reclassification of the reserve related to Enron from Price-risk management credit reserves to Allowance for doubtful accounts Accounts and notes receivable and amounts related to acquisitions of businesses. | |
(h) | Reflects a reclassification of the reserve related to Enron from Price-risk management credit reserves to Allowance for doubtful accounts Accounts and notes receivable. | |
(i) | Reflects cumulative effect of change in accounting principle related to EITF 02-3 (see Note 1 of Notes to Consolidated Financial Statements). | |
(j) | Reflects allowances for accounts receivable charged to costs and expenses for a discontinued operation whose receivables were not held for sale. |
172
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
Item 9A. | Controls and Procedures |
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-(e) of the Securities Exchange Act) (Disclosure Controls) was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, subject to the limitations noted below, these Disclosure Controls are effective.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our Disclosure Controls or its internal controls over financial reporting (Internal Controls) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be modified as systems change and conditions warrant.
As further described in Note 1 of our Consolidated Financial Statements included in Part II, we have corrected certain prior period items related to our Power business. A significant portion of the adjustments related to the accounting treatment of certain derivative contract terminations occurring in 2001. These adjustments were identified in 2003 because of additional analysis of account reconciliations. As a result, changes were made earlier in 2003 to improve Powers processes of accounting for and monitoring of these types of transactions. Additionally, we have identified certain portions of our account reconciliation process whereby the controls and policies are in the process of being enhanced across all business segments.
Notwithstanding the above, management believes that its current controls are effective. In addition, there has been no material change in our Internal Controls that occurred during the registrants fourth fiscal quarter.
PART III
Item 10. | Directors and Executive Officers of the Registrant |
The information regarding our directors and nominees for director required by Item 401 of Regulation S-K will be presented under the headings Board of Directors Board Committees, Election of Directors, and Principal Accounting Fees and Services in our Proxy Statement prepared for the solicitation of proxies in connection with our Annual Meeting of Stockholders to be held May 20, 2004 (Proxy Statement), which information is incorporated by reference herein.
Information regarding our executive officers required by Item 401 of Regulation S-K is presented as Item 4A herein as permitted by General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
173
Information required by Item 405 of Regulation S-K will be included under the heading Compliance with Section 16(a) of the Securities Exchange Act of 1934 in our Proxy Statement, which information is incorporated by reference herein.
We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, and Controller, or persons performing similar functions. The Code of Ethics, together with our Corporate Governance Principles, the charters for each of our board committees, and our Code of Business Conduct applicable to all employees are available on our Internet website at http://williams.com . We will provide, free of charge, a copy of our Code of Ethics or any of our other corporate documents listed above upon written request to our Secretary at Williams, One Williams Center, Suite 4100, Tulsa, Oklahoma 74172. We intend to disclose any amendments to or waivers of the Code of Ethics on behalf of our Chief Executive Officer, Chief Financial Officer, Controller, and persons performing similar functions on our Internet website at http://williams.com under the Investor Relations caption, promptly following the date of any such amendment or waiver.
Item 11. | Executive Compensation |
The information required by Item 402 of Regulation S-K regarding executive compensation will be presented under the headings Board of Directors and Executive Compensation and Other Information in our Proxy Statement, which information is incorporated by reference herein. Notwithstanding the foregoing, the information provided under the headings Compensation Committee Report on Executive Compensation and Stockholder Return Performance Presentation in our Proxy Statement is not incorporated by reference herein.
Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The information regarding the security ownership of certain beneficial owners and management required by Item 403 of Regulation S-K will be presented under the headings Security Ownership of Certain Beneficial Owners and Management in our Proxy Statement, which information is incorporated by reference herein.
174
EQUITY COMPENSATION STOCK PLANS
Securities authorized for issuance under equity compensation plans
The following table provides information
concerning our common stock that may be issued upon the exercise
of options, warrants and rights under all of our existing equity
compensation plans as of December 31, 2003, including The
Williams Companies, Inc. 2002 Incentive Plan, The Williams
Companies, Inc. 2001 Stock Plan, The Williams Companies, Inc.
Stock Plan for Non-Officer Employees, The Williams Companies,
Inc. 1996 Stock Plan, The Williams International Stock Plan, The
Williams Companies, Inc. 1996 Stock Plan for Non-Employee
Directors, The Williams Companies, Inc. 1988 Stock Option Plan
for Non-Employee Directors, The Williams Companies, Inc. 1990
Stock Plan and The Williams Communications Stock Plan.
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Number of Securities to
Weighted-Average
Compensation Plans
be Issued upon Exercise
Exercise Price of
(Excluding
of Outstanding Options,
Outstanding Options,
Securities Reflected
Warrants and
Warrants and
in the 1st Column of
Plan Category
Rights(2)
Rights(3)
This Table)
20,403,860
$
10.74
28,312,915
7,494,478
$
26.12
0
27,898,338
$
14.63
28,312,915
(1) | As described in Note 14 of our Notes to Consolidated Financial Statements, these plans were terminated upon shareholder approval of the 2002 Incentive Plan. Options outstanding in these plans remain in the plans subject to their terms. Those options generally expire 10 years after the grant date. |
(2) | Includes 2,262,386 shares of deferred stock. |
(3) | Excludes the shares of deferred stock included in the 1st column of this table for which there is no weighted-average price. |
Item 13. | Certain Relationships and Related Transactions |
The information regarding certain relationships and related transactions required by Item 404 of Regulation S-K will be presented under the heading Certain Relationships and Related Transactions in our Proxy Statement, which information is incorporated by reference herein.
Item 14. | Principal Accounting Fees and Services |
The information regarding our principal accountant fees and services required by Item 9(e) of Schedule 14A will be presented under the heading Principal Accounting Fees and Services in our Proxy Statement, which information is incorporated by reference herein.
175
PART IV
Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(a) 1 and 2.
Page | ||||||
|
||||||
Covered by report of independent auditors:
|
||||||
Consolidated statement of operations for each of
the three years ended December 31, 2003
|
92 | |||||
Consolidated balance sheet at December 31,
2003 and 2002
|
93 | |||||
Consolidated statement of stockholders
equity for each of the three years ended December 31, 2003
|
94 | |||||
Consolidated statement of cash flows for each of
the three years ended December 31, 2003
|
95 | |||||
Notes to consolidated financial statements
|
96 | |||||
Schedule for each of the three years ended
December 31, 2003:
|
||||||
II Valuation and qualifying accounts
|
172 | |||||
Not covered by report of independent auditors:
|
||||||
Quarterly financial data (unaudited)
|
164 | |||||
Supplemental oil and gas disclosures (unaudited)
|
168 |
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
(a) 3 and (c). The exhibits listed below are filed as part of this annual report.
INDEX TO EXHIBITS
Exhibit
No.
Description
3.1
Restated Certificate of Incorporation, as
supplemented.
3.2*
Restated By-laws (filed as Exhibit 99.1 to
Form 8-K filed January 19, 2000).
4.1*
Form of Senior Debt Indenture between Williams
and Bank One Trust Company, N.A. (formerly The First National
Bank of Chicago), as Trustee (filed as Exhibit 4.1 to
Form S-3 filed September 8, 1997).
4.2*
Form of Floating Rate Senior Note (filed as
Exhibit 4.3 to Form S-3 filed September 8, 1997).
4.3*
Form of Fixed Rate Senior Note (filed as
Exhibit 4.4 to Form S-3 filed September 8, 1997).
4.4*
Fourth Supplemental Indenture between Williams
and Bank One Trust Company, N.A., as Trustee, dated as of
January 17, 2001 (filed as Exhibit 4(j) to
Form 10-K for the fiscal year ended December 31, 2000).
4.5*
Fifth Supplemental Indenture between Williams and
Bank One Trust Company, N.A., as Trustee, dated as of
January 17, 2001 (filed as Exhibit 4(k) to
Form 10-K for the fiscal year ended December 31, 2000).
4.6*
Sixth Supplemental Indenture dated
January 14, 2002, between Williams and Bank One Trust
Company, National Association, as Trustee (filed as
Exhibit 4.1 to Form 8-K filed January 23, 2002).
4.7*
Seventh Supplemental Indenture dated
March 19, 2002, between The Williams Companies, Inc. as
Issuer and Bank One Trust Company, National Association, as
Trustee (filed as Exhibit 4.1 to Form 10-Q filed
May 9, 2002).
4.8
Eighth Supplemental Indenture dated as of
June 3, 2002, between The Williams Companies, Inc., as
Issuer and Bank One Trust Company, N.A., as Trustee.
176
Exhibit
No.
Description
4.9*
Ninth Supplemental Indenture dated June 10,
2003 between The Williams Companies, Inc. as Issuer and JPMorgan
Chase Bank as Trustee (filed as Exhibit 4.1 to
Form 10-Q filed August 12, 2003).
4.10*
Form of Senior Debt Indenture between Williams
Holdings of Delaware, Inc. and Citibank, N.A., as Trustee (filed
as Exhibit 4.1 to Williams Holdings of Delaware,
Inc.s Form 10-Q filed October 18, 1995).
4.11*
First Supplemental Indenture dated as of
July 31, 1999, among Williams Holdings of Delaware, Inc.,
Williams and Citibank, N.A., as Trustee (filed as
Exhibit 4(o) to Form 10-K for the fiscal year ended
December 31, 1999).
4.12*
Senior Indenture dated February 25, 1997,
between MAPCO Inc. and Bank One Trust Company, N.A. (formerly
The First National Bank of Chicago), as Trustee (filed as
Exhibit 4.4.1 to MAPCO Inc.s Amendment No. 1 to
Form S-3 dated February 25, 1997).
4.13*
Supplemental Indenture No. 1 dated
March 5, 1997, between MAPCO Inc. and Bank One Trust
Company, N.A. (formerly The First National Bank of Chicago), as
Trustee (filed as Exhibit 4.(o) to MAPCO Inc.s
Form 10-K for the fiscal year ended December 31, 1997).
4.14*
Supplemental Indenture No. 2 dated
March 5, 1997, between MAPCO Inc. and Bank One Trust
Company, N.A. (formerly The First National Bank of Chicago), as
Trustee (filed as Exhibit 4.(p) to MAPCO Inc.s
Form 10-K for the fiscal year ended December 31, 1997).
4.15*
Supplemental Indenture No. 3 dated
March 31, 1998, among MAPCO Inc., Williams Holdings of
Delaware, Inc. and Bank One Trust Company, N.A. (formerly The
First National Bank of Chicago), as Trustee (filed as
Exhibit 4(j) to Williams Holdings of Delaware, Inc.s
Form 10-K for the fiscal year ended December 31, 1998).
4.16*
Supplemental Indenture No. 4 dated as of
July 31, 1999, among Williams Holdings of Delaware, Inc.,
Williams and Bank One Trust Company, N.A. (formerly The First
National Bank of Chicago), as Trustee (filed as
Exhibit 4(q) to Form 10-K for the fiscal year ended
December 31, 1999).
4.17*
Revised Form of Indenture between Barrett
Resources Corporation, as Issuer, and Bankers Trust Company, as
Trustee, with respect to Senior Notes including specimen of
7.55% Senior Notes (filed as Exhibit 4.1 to Barrett
Resources Corporations Amendment No. 2 to
Registration Statement on Form S-3 filed February 10,
1997).
4.18*
First Supplemental Indenture dated 2001, between
Barrett Resources Corporation, as Issuer, and Bankers Trust
Company, as Trustee (filed as Exhibit 4.3 to Form 10-Q
filed November 13, 2001).
4.19*
Second Supplemental Indenture dated as of
August 2, 2001, among Barrett Resources Corporation, as
Issuer, Resources Acquisition Corp., The Williams Companies,
Inc. and Bankers Trust Company, as Trustee (filed as
Exhibit 4.4 to Form 10-Q filed November 13, 2001).
4.20*
Form of Note (filed as Exhibit 4.2 and
included in Exhibit 4.1 to Form 8-K filed
January 23, 2002).
4.21*
Purchase Contract Agreement dated
January 14, 2002, between Williams and JPMorgan Chase Bank,
as Purchase Contract Agent (filed as Exhibit 4.3 to
Form 8-K filed January 23, 2002).
4.22*
Form of Income PACS Certificate (filed as
Exhibit 4.4 and included in Exhibit 4.3 to
Form 8-K filed January 23, 2002).
4.23*
Pledge Agreement dated January 14, 2002,
among Williams, Bank, as Purchase Contract Agent (filed as
Exhibit 4.5 to Form 8-K filed January 23, 2002).
4.24*
Remarketing Agreement dated January 14,
2002, among Williams, JPMorgan Chase Bank, as Purchase Contract
Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Remarketing Agent
(filed as Exhibit 4.6 to Form 8-K filed
January 23, 2002).
4.25*
Indenture dated March 4, 2003, between
Northwest Pipeline Corporation and JP Morgan Chase Bank, as
Trustee (filed as Exhibit 4.1 to Form 10-Q filed
May 13, 2003.
4.26*
Indenture dated as of May 28, 2003, by and
between The Williams Companies, Inc. and JPMorgan Chase Bank, as
Trustee for the issuance of the 5.50% Junior Subordinated
Convertible Debentures due 2033 (filed as Exhibit 4.2 to
Form 10-Q filed August 12, 2003).
177
Exhibit
No.
Description
4.27*
Registration Rights Agreement between The
Williams Companies, Inc., as Issuer, and Lehman Brothers Inc.,
as Initial Purchaser dated May 28, 2003 (filed as
Exhibit 4.3 to Form 10-Q filed August 12, 2003).
10.1*
The Williams Companies, Inc. Supplemental
Retirement Plan effective as of January 1, 1988 (filed as
Exhibit 10(iii)(c) to Form 10-K for the fiscal year
ended December 31, 1987).
10.2
First Amendment to The Williams Companies, Inc.
Supplemental Retirement Plan effective as of January 1,
1988.
10.3*
The Williams Companies, Inc. 1988 Stock Option
Plan for Non-Employee Directors (filed as Exhibit A to the
Proxy Statement dated March 14, 1988).
10.4*
The Williams Companies, Inc. 1990 Stock Plan
(filed as Exhibit A to the Proxy Statement dated
March 12, 1990).
10.5*
The Williams Companies, Inc. Stock Plan for
Non-Officer Employees (filed as Exhibit 10(iii)(g) to
Form 10-K for the fiscal year ended December 31, 1995).
10.6*
The Williams Companies, Inc. 1996 Stock Plan
(filed as Exhibit A to the Proxy Statement dated
March 27, 1996).
10.7*
The Williams Companies, Inc. 1996 Stock Plan for
Non-Employee Directors (filed as Exhibit B to the Proxy
Statement dated March 27, 1996).
10.8*
Indemnification Agreement effective as of
August 1, 1986, among Williams, members of the Board of
Directors and certain officers of Williams (filed as
Exhibit 10(iii)(e) to Form 10-K for the year ended
December 31, 1986).
10.9*
The Williams International Stock Plan (filed as
Exhibit 10(iii)(l) to Form 10-K for the fiscal year
ended December 31, 1998).
10.10*
Form of Stock Option Secured Promissory Note and
Pledge Agreement among Williams and certain employees, officers
and non-employee directors (filed as Exhibit 10(iii)(m) to
Form 10-K for the fiscal year ended December 31, 1998).
10.11*
The Williams Companies, Inc. 2001 Stock Plan
(filed as Exhibit 4.1 to Form S-8 filed August 1,
2001).
10.12*
The Williams Companies, Inc. 2002 Incentive Plan
(filed as Appendix A to the Proxy Statement dated
March 29, 2002).
10.13*
Special Amendment to The Williams Companies, Inc.
2002 Incentive Plan (filed as Exhibit B to the Proxy
Statement dated March 28, 2003).
10.14*
Amended and Restated Separation Agreement dated
April 23, 2001, between Williams and Williams
Communications Group, Inc. (filed as Exhibit 99.1 to
Form 8-K filed May 3, 2001).
10.15*
Second Amended Joint Chapter 11 Plan dated
August 12, 2002, of Williams Communications Group, Inc. and
CG Austria, Inc. (filed as Exhibit 10.38 to Form 10-K
for the fiscal year ended December 31, 2002).
10.16*
Tax Cooperation Agreement dated July 26,
2002, by and between Williams and Williams Communications Group,
Inc. (filed as Exhibit 10.47 to Form 10-K for the
fiscal year ended December 31, 2002).
10.17*
Guaranty Indemnification Agreement dated
July 26, 2002, by and between Williams and Williams
Communications Group, Inc. (filed as Exhibit 10.48 to
Form 10-K for the fiscal year ended December 31, 2002).
10.18*
Underwriting Agreement dated January 7,
2002, between Williams and the several underwriters named
therein (filed as Exhibit 1.1 to Form 8-K filed
January 23, 2002).
10.19*
Form of Change in Control Severance Agreement
between the Company and certain executive officers (filed as
Exhibit 10.12 to Form 10-Q filed November 14,
2002).
10.20*
Settlement Agreement, by and among the Governor
of the State of California and the several other parties named
therein and The Williams Companies, Inc. and Williams Energy
Marketing & Trading Company dated November 11,
2002 (filed as Exhibit 10.79 for Form 10-K for the
fiscal year ended December 31, 2002).
178
Exhibit
No.
Description
10.21*
Purchase Agreement by and among Williams Gas
Pipeline Company, LLC as Seller, The Williams Companies, Inc.
and Loews Pipeline Holding Corp., as Buyer, for the purchase and
sale of all the capital stock of Texas Gas Transmission
Corporation, a Delaware Corporation, dated as of April 11,
2003 (filed as Exhibit 10.1 to Form 10-Q filed
May 13, 2003).
10.22*
Purchase and Sale Agreement between Williams
Production RMT Company and Williams Production Company, L.L.C.,
as Seller, and XTO Energy Inc., as Buyer dated April 9,
2003 filed as Exhibit 10.2 to Form 10-Q filed
May 13, 2003).
10.23*
U.S. $500,000,000 Term Loan Agreement among
Williams Production Holdings LLC, Williams Production RMT
Company, as Borrower, the Several Lenders from time to time
parties thereto, Lehman Brothers Inc. and Banc of America
Securities LLC as Joint Lead Arrangers, Citigroup USA, Inc. and
JPMorgan Chase Bank, as Co-Syndication Agents, Bank of America,
N.A., as Documentation Agent, and Lehman Commercial Paper Inc.,
as Administrative Agent dated as of May 30, 2003 (filed as
Exhibit 10.1 to Form 10-Q filed August 12, 2003).
10.24*
Guarantee and Collateral Agreement made by
Williams Production Holdings LLC, Williams Production RMT
Company and certain of its Subsidiaries in favor of Lehman
Commercial Paper Inc. as Administrative Agent dated as of
May 30, 2003 (filed as Exhibit 10.2 to Form 10-Q
filed August 12, 2003).
10.25*
U.S. $800,000,000 Credit Agreement dated as
of June 6, 2003, among The Williams Companies, Inc.,
Northwest Pipeline Corporation, Transcontinental Gas Pipe Line
Corporation, as Borrowers, Citibank, N.A., as Administrative
Agent and Collateral Agent, Bank of America, N.A., as
Syndication Agent, JPMorgan Chase Bank, as documentation
Agreement, Citibank, N.A. and Bank of America, N.A. as Issuing
Banks, the banks named therein as Banks and Citigroup Global
Markets Inc. and Banc of America Securities LLC as Joint Lead
Arrangers and Joint Book Runners (filed as Exhibit 10.3 to
Form 10-Q filed August 12, 2003).
10.26*
Security Agreement dated as of June 6, 2003,
among The Williams Companies, Inc., as Grantor, Citibank, N.A.,
as Collateral Agent and Citibank, N.A. as Securities
Intermediary (filed as Exhibit 10.4 to Form 10-Q filed
August 12, 2003).
10.27*
Stock Purchase Agreement dated as of May 19,
2003, between MEHC Investment, Inc., MidAmerican Energy Holdings
Company, and The Williams Companies, Inc. (filed as
Exhibit 10.5 to Form 10-Q filed August 12, 2003).
10.28*
Purchase Agreement by and among Williams Energy
Services, LLC, Williams Natural Gas Liquids, Inc. and Williams
GP LLC collectively, as Selling Parties, and WEG Acquisitions,
L.P. as Buyer for the purchase and sale of all the membership
interests of WEG GP LLC, all the Common Units and Subordinated
Units of Williams Energy Partners, L.P. owned by Williams Energy
Services, LLC and Williams Natural Gas Liquids, Inc. and all of
the Class B Common Units of Williams Energy Partners, L.P.
dated as of April 18, 2003 (filed as Exhibit 10.6 to
Form 10-Q filed August 12, 2003).
10.29*
Amendment No. 1 to the Purchase Agreement
dated as of April 18, 2003 by and among Williams Energy
Services, LLC, Williams Natural Gas Liquids, Inc. and Williams
GP LLC collectively, as Selling Parties, and WEG Acquisitions,
L.P. as Buyer for the purchase and sale of all the membership
interests of WEG GP LLC, all the Common Units and Subordinated
Units of Williams Energy Partners, L.P. owned by Williams Energy
Services, LLC and Williams Natural Gas Liquids, Inc. and all of
the Class B Common Units of Williams Energy Partners, L.P.
dated as of May 5, 2003 (filed as Exhibit 10.7 to
Form 10-Q filed August 12, 2003).
10.30*
Transition Services Agreement by and between The
Williams Companies, Inc. and WEG Acquisitions, L.P. dated
June 17, 2003 (filed as Exhibit 10.8 to Form 10-Q
filed August 12, 2003).
10.31*
New Omnibus Agreement among WEG Acquisitions,
L.P., Williams Energy Services, LLC, Williams Natural Gas
Liquids, Inc. and The Williams Companies, Inc. dated as of
June 17, 2003 (filed as Exhibit 10.9 to Form 10-Q
filed August 12, 2003).
10.32*
Assumption Agreement dated June 17, 2003 by
and between The Williams Companies, Inc. and WEG Acquisitions,
L.P. (filed as Exhibit 10.10 to Form 10-Q filed
August 12, 2003).
179
Exhibit
No.
Description
10.33
Asset Sale and Purchase Agreement by and among
Williams Alaska Petroleum, Inc., as Seller, The Williams
Companies, Inc., as Guarantor, and Flint Hills Resources, LLC,
as Buyer dated as of November 17, 2003.
10.34
Purchase Agreement by and among Koch Alaska
Pipeline Company , LLC (Buyer), Williams Energy Services, LLC
(Seller and The Williams Companies, Inc. (Williams Guarantor)
dated November 17, 2003.
12
Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividend Requirements.
14
Code of Ethics.
20*
Definitive Proxy Statement of Williams for 2004
(to be filed with the Securities and Exchange Commission on or
before April 12, 2004).
21
Subsidiaries of the registrant.
23.1
Consent of Independent Auditors, Ernst &
Young LLP.
23.2
Consent of Independent Petroleum Engineers and
Geologists, Netherland, Sewell & Associates, Inc.
23.3
Consent of Independent Petroleum Engineers and
Geologists, Miller and Lents, LTD.
24
Power of Attorney together with certified
resolution.
31.1
Certification of the Chief Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under
the Securities Exchange Act of 1934, as amended, and Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under
the Securities Exchange Act of 1934, as amended, and Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification of the Chief Executive Officer and
the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
* | Each such exhibit has heretofore been filed with the SEC as part of the filing indicated and is incorporated herein by reference. |
180
(b) Reports on Form 8-K. During
fourth-quarter 2003, we filed the following Form 8-Ks:
Item 5 Other Events
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 5 Other Events
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 5 Other Events
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 12 Results of Operations
and Financial Condition
Williams issued a press release dated November 6, 2003
announcing its financial results for the quarter-ended
September 30, 2003.
Item 5 Other Events
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 5 Other Events
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
Item 9 Regulation FD
Disclosure
Item 5 Other Events
Item 7 Financial Statements,
Proforma Financial Information and Exhibits
Item 9 Regulation FD
Disclosure
(d) The financial statements of partially owned companies are not presented herein since none of them individually, or in the aggregate, constitute a significant subsidiary.
181
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 15, 2004
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
182
183
INDEX TO EXHIBITS
THE WILLIAMS COMPANIES, INC.
(Registrant)
By:
/s/ BRIAN K. SHORE
Brian K. Shore
Attorney-in-fact
Signature
Title
Date
/s/ STEVEN J. MALCOLM*
Steven J. Malcolm
President, Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)
March 15, 2004
/s/ DONALD R. CHAPPEL*
Donald R. Chappel
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
March 15, 2004
/s/ GARY R. BELITZ*
Gary R. Belitz
Controller (Principal Accounting Officer)
March 15, 2004
/s/ HUGH M. CHAPMAN*
Hugh M. Chapman
Director
March 15, 2004
/s/ THOMAS H. CRUIKSHANK*
Thomas H. Cruikshank
Director
March 15, 2004
/s/ WILLIAM E. GREEN*
William E. Green
Director
March 15, 2004
/s/ W.R. HOWELL*
W.R. Howell
Director
March 15, 2004
/s/ CHARLES M. LILLIS*
Charles M. Lillis
Director
March 15, 2004
/s/ GEORGE A. LORCH*
George A. Lorch
Director
March 15, 2004
/s/ WILLIAM G. LOWRIE*
William G. Lowrie
Director
March 15, 2004
Table of Contents
Signature
Title
Date
/s/ FRANK T. MACINNIS*
Frank T. MacInnis
Director
March 15, 2004
/s/ JANICE D. STONEY*
Janice D. Stoney
Director
March 15, 2004
/s/ JOSEPH H. WILLIAMS*
Joseph H. Williams
Director
March 15, 2004
*By:
/s/ BRIAN K. SHORE
Brian K. Shore
Attorney-in-fact
March 15, 2004
Table of Contents
Exhibit
No.
Description
3.1
Restated Certificate of Incorporation, as
supplemented.
3.2*
Restated By-laws (filed as Exhibit 99.1 to
Form 8-K filed January 19, 2000).
4.1*
Form of Senior Debt Indenture between Williams
and Bank One Trust Company, N.A. (formerly The First National
Bank of Chicago), as Trustee (filed as Exhibit 4.1 to
Form S-3 filed September 8, 1997).
4.2*
Form of Floating Rate Senior Note (filed as
Exhibit 4.3 to Form S-3 filed September 8, 1997).
4.3*
Form of Fixed Rate Senior Note (filed as
Exhibit 4.4 to Form S-3 filed September 8, 1997).
4.4*
Fourth Supplemental Indenture between Williams
and Bank One Trust Company, N.A., as Trustee, dated as of
January 17, 2001 (filed as Exhibit 4(j) to
Form 10-K for the fiscal year ended December 31, 2000).
4.5*
Fifth Supplemental Indenture between Williams and
Bank One Trust Company, N.A., as Trustee, dated as of
January 17, 2001 (filed as Exhibit 4(k) to
Form 10-K for the fiscal year ended December 31, 2000).
4.6*
Sixth Supplemental Indenture dated
January 14, 2002, between Williams and Bank One Trust
Company, National Association, as Trustee (filed as
Exhibit 4.1 to Form 8-K filed January 23, 2002).
4.7*
Seventh Supplemental Indenture dated
March 19, 2002, between The Williams Companies, Inc. as
Issuer and Bank One Trust Company, National Association, as
Trustee (filed as Exhibit 4.1 to Form 10-Q filed
May 9, 2002).
4.8
Eighth Supplemental Indenture dated as of
June 3, 2002, between The Williams Companies, Inc., as
Issuer and Bank One Trust Company, N.A., as Trustee.
4.9*
Ninth Supplemental Indenture dated June 10,
2003 between The Williams Companies, Inc. as Issuer and JPMorgan
Chase Bank as Trustee (filed as Exhibit 4.1 to
Form 10-Q filed August 12, 2003).
4.10*
Form of Senior Debt Indenture between Williams
Holdings of Delaware, Inc. and Citibank, N.A., as Trustee (filed
as Exhibit 4.1 to Williams Holdings of Delaware,
Inc.s Form 10-Q filed October 18, 1995).
4.11*
First Supplemental Indenture dated as of
July 31, 1999, among Williams Holdings of Delaware, Inc.,
Williams and Citibank, N.A., as Trustee (filed as
Exhibit 4(o) to Form 10-K for the fiscal year ended
December 31, 1999).
4.12*
Senior Indenture dated February 25, 1997,
between MAPCO Inc. and Bank One Trust Company, N.A. (formerly
The First National Bank of Chicago), as Trustee (filed as
Exhibit 4.4.1 to MAPCO Inc.s Amendment No. 1 to
Form S-3 dated February 25, 1997).
4.13*
Supplemental Indenture No. 1 dated
March 5, 1997, between MAPCO Inc. and Bank One Trust
Company, N.A. (formerly The First National Bank of Chicago), as
Trustee (filed as Exhibit 4.(o) to MAPCO Inc.s
Form 10-K for the fiscal year ended December 31, 1997).
4.14*
Supplemental Indenture No. 2 dated
March 5, 1997, between MAPCO Inc. and Bank One Trust
Company, N.A. (formerly The First National Bank of Chicago), as
Trustee (filed as Exhibit 4.(p) to MAPCO Inc.s
Form 10-K for the fiscal year ended December 31, 1997).
4.15*
Supplemental Indenture No. 3 dated
March 31, 1998, among MAPCO Inc., Williams Holdings of
Delaware, Inc. and Bank One Trust Company, N.A. (formerly The
First National Bank of Chicago), as Trustee (filed as
Exhibit 4(j) to Williams Holdings of Delaware, Inc.s
Form 10-K for the fiscal year ended December 31, 1998).
4.16*
Supplemental Indenture No. 4 dated as of
July 31, 1999, among Williams Holdings of Delaware, Inc.,
Williams and Bank One Trust Company, N.A. (formerly The First
National Bank of Chicago), as Trustee (filed as
Exhibit 4(q) to Form 10-K for the fiscal year ended
December 31, 1999).
Table of Contents
Exhibit
No.
Description
4.17*
Revised Form of Indenture between Barrett
Resources Corporation, as Issuer, and Bankers Trust Company, as
Trustee, with respect to Senior Notes including specimen of
7.55% Senior Notes (filed as Exhibit 4.1 to Barrett
Resources Corporations Amendment No. 2 to
Registration Statement on Form S-3 filed February 10,
1997).
4.18*
First Supplemental Indenture dated 2001, between
Barrett Resources Corporation, as Issuer, and Bankers Trust
Company, as Trustee (filed as Exhibit 4.3 to Form 10-Q
filed November 13, 2001).
4.19*
Second Supplemental Indenture dated as of
August 2, 2001, among Barrett Resources Corporation, as
Issuer, Resources Acquisition Corp., The Williams Companies,
Inc. and Bankers Trust Company, as Trustee (filed as
Exhibit 4.4 to Form 10-Q filed November 13, 2001).
4.20*
Form of Note (filed as Exhibit 4.2 and
included in Exhibit 4.1 to Form 8-K filed
January 23, 2002).
4.21*
Purchase Contract Agreement dated
January 14, 2002, between Williams and JPMorgan Chase Bank,
as Purchase Contract Agent (filed as Exhibit 4.3 to
Form 8-K filed January 23, 2002).
4.22*
Form of Income PACS Certificate (filed as
Exhibit 4.4 and included in Exhibit 4.3 to
Form 8-K filed January 23, 2002).
4.23*
Pledge Agreement dated January 14, 2002,
among Williams, Bank, as Purchase Contract Agent (filed as
Exhibit 4.5 to Form 8-K filed January 23, 2002).
4.24*
Remarketing Agreement dated January 14,
2002, among Williams, JPMorgan Chase Bank, as Purchase Contract
Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Remarketing Agent
(filed as Exhibit 4.6 to Form 8-K filed
January 23, 2002).
4.25*
Indenture dated March 4, 2003, between
Northwest Pipeline Corporation and JP Morgan Chase Bank, as
Trustee (filed as Exhibit 4.1 to Form 10-Q filed
May 13, 2003.
4.26*
Indenture dated as of May 28, 2003, by and
between The Williams Companies, Inc. and JPMorgan Chase Bank, as
Trustee for the issuance of the 5.50% Junior Subordinated
Convertible Debentures due 2033 (filed as Exhibit 4.2 to
Form 10-Q filed August 12, 2003).
4.27*
Registration Rights Agreement between The
Williams Companies, Inc., as Issuer, and Lehman Brothers Inc.,
as Initial Purchaser dated May 28, 2003 (filed as
Exhibit 4.3 to Form 10-Q filed August 12, 2003).
10.1*
The Williams Companies, Inc. Supplemental
Retirement Plan effective as of January 1, 1988 (filed as
Exhibit 10(iii)(c) to Form 10-K for the fiscal year
ended December 31, 1987).
10.2
First Amendment to The Williams Companies, Inc.
Supplemental Retirement Plan effective as of January 1,
1988.
10.3*
The Williams Companies, Inc. 1988 Stock Option
Plan for Non-Employee Directors (filed as Exhibit A to the
Proxy Statement dated March 14, 1988).
10.4*
The Williams Companies, Inc. 1990 Stock Plan
(filed as Exhibit A to the Proxy Statement dated
March 12, 1990).
10.5*
The Williams Companies, Inc. Stock Plan for
Non-Officer Employees (filed as Exhibit 10(iii)(g) to
Form 10-K for the fiscal year ended December 31, 1995).
10.6*
The Williams Companies, Inc. 1996 Stock Plan
(filed as Exhibit A to the Proxy Statement dated
March 27, 1996).
10.7*
The Williams Companies, Inc. 1996 Stock Plan for
Non-Employee Directors (filed as Exhibit B to the Proxy
Statement dated March 27, 1996).
10.8*
Indemnification Agreement effective as of
August 1, 1986, among Williams, members of the Board of
Directors and certain officers of Williams (filed as
Exhibit 10(iii)(e) to Form 10-K for the year ended
December 31, 1986).
10.9*
The Williams International Stock Plan (filed as
Exhibit 10(iii)(l) to Form 10-K for the fiscal year
ended December 31, 1998).
10.10*
Form of Stock Option Secured Promissory Note and
Pledge Agreement among Williams and certain employees, officers
and non-employee directors (filed as Exhibit 10(iii)(m) to
Form 10-K for the fiscal year ended December 31, 1998).
10.11*
The Williams Companies, Inc. 2001 Stock Plan
(filed as Exhibit 4.1 to Form S-8 filed August 1,
2001).
Table of Contents
Exhibit
No.
Description
10.12*
The Williams Companies, Inc. 2002 Incentive Plan
(filed as Appendix A to the Proxy Statement dated
March 29, 2002).
10.13*
Special Amendment to The Williams Companies, Inc.
2002 Incentive Plan (filed as Exhibit B to the Proxy
Statement dated March 28, 2003).
10.14*
Amended and Restated Separation Agreement dated
April 23, 2001, between Williams and Williams
Communications Group, Inc. (filed as Exhibit 99.1 to
Form 8-K filed May 3, 2001).
10.15*
Second Amended Joint Chapter 11 Plan dated
August 12, 2002, of Williams Communications Group, Inc. and
CG Austria, Inc. (filed as Exhibit 10.38 to Form 10-K
for the fiscal year ended December 31, 2002).
10.16*
Tax Cooperation Agreement dated July 26,
2002, by and between Williams and Williams Communications Group,
Inc. (filed as Exhibit 10.47 to Form 10-K for the
fiscal year ended December 31, 2002).
10.17*
Guaranty Indemnification Agreement dated
July 26, 2002, by and between Williams and Williams
Communications Group, Inc. (filed as Exhibit 10.48 to
Form 10-K for the fiscal year ended December 31, 2002).
10.18*
Underwriting Agreement dated January 7,
2002, between Williams and the several underwriters named
therein (filed as Exhibit 1.1 to Form 8-K filed
January 23, 2002).
10.19*
Form of Change in Control Severance Agreement
between the Company and certain executive officers (filed as
Exhibit 10.12 to Form 10-Q filed November 14,
2002).
10.20*
Settlement Agreement, by and among the Governor
of the State of California and the several other parties named
therein and The Williams Companies, Inc. and Williams Energy
Marketing & Trading Company dated November 11,
2002 (filed as Exhibit 10.79 for Form 10-K for the
fiscal year ended December 31, 2002).
10.21*
Purchase Agreement by and among Williams Gas
Pipeline Company, LLC as Seller, The Williams Companies, Inc.
and Loews Pipeline Holding Corp., as Buyer, for the purchase and
sale of all the capital stock of Texas Gas Transmission
Corporation, a Delaware Corporation, dated as of April 11,
2003 (filed as Exhibit 10.1 to Form 10-Q filed
May 13, 2003).
10.22*
Purchase and Sale Agreement between Williams
Production RMT Company and Williams Production Company, L.L.C.,
as Seller, and XTO Energy Inc., as Buyer dated April 9,
2003 filed as Exhibit 10.2 to Form 10-Q filed
May 13, 2003).
10.23*
U.S. $500,000,000 Term Loan Agreement among
Williams Production Holdings LLC, Williams Production RMT
Company, as Borrower, the Several Lenders from time to time
parties thereto, Lehman Brothers Inc. and Banc of America
Securities LLC as Joint Lead Arrangers, Citigroup USA, Inc. and
JPMorgan Chase Bank, as Co-Syndication Agents, Bank of America,
N.A., as Documentation Agent, and Lehman Commercial Paper Inc.,
as Administrative Agent dated as of May 30, 2003 (filed as
Exhibit 10.1 to Form 10-Q filed August 12, 2003).
10.24*
Guarantee and Collateral Agreement made by
Williams Production Holdings LLC, Williams Production RMT
Company and certain of its Subsidiaries in favor of Lehman
Commercial Paper Inc. as Administrative Agent dated as of
May 30, 2003 (filed as Exhibit 10.2 to Form 10-Q
filed August 12, 2003).
10.25*
U.S. $800,000,000 Credit Agreement dated as
of June 6, 2003, among The Williams Companies, Inc.,
Northwest Pipeline Corporation, Transcontinental Gas Pipe Line
Corporation, as Borrowers, Citibank, N.A., as Administrative
Agent and Collateral Agent, Bank of America, N.A., as
Syndication Agent, JPMorgan Chase Bank, as documentation
Agreement, Citibank, N.A. and Bank of America, N.A. as Issuing
Banks, the banks named therein as Banks and Citigroup Global
Markets Inc. and Banc of America Securities LLC as Joint Lead
Arrangers and Joint Book Runners (filed as Exhibit 10.3 to
Form 10-Q filed August 12, 2003).
10.26*
Security Agreement dated as of June 6, 2003,
among The Williams Companies, Inc., as Grantor, Citibank, N.A.,
as Collateral Agent and Citibank, N.A. as Securities
Intermediary (filed as Exhibit 10.4 to Form 10-Q filed
August 12, 2003).
10.27*
Stock Purchase Agreement dated as of May 19,
2003, between MEHC Investment, Inc., MidAmerican Energy Holdings
Company, and The Williams Companies, Inc. (filed as
Exhibit 10.5 to Form 10-Q filed August 12, 2003).
Table of Contents
Exhibit
No.
Description
10.28*
Purchase Agreement by and among Williams Energy
Services, LLC, Williams Natural Gas Liquids, Inc. and Williams
GP LLC collectively, as Selling Parties, and WEG Acquisitions,
L.P. as Buyer for the purchase and sale of all the membership
interests of WEG GP LLC, all the Common Units and Subordinated
Units of Williams Energy Partners, L.P. owned by Williams Energy
Services, LLC and Williams Natural Gas Liquids, Inc. and all of
the Class B Common Units of Williams Energy Partners, L.P.
dated as of April 18, 2003 (filed as Exhibit 10.6 to
Form 10-Q filed August 12, 2003).
10.29*
Amendment No. 1 to the Purchase Agreement
dated as of April 18, 2003 by and among Williams Energy
Services, LLC, Williams Natural Gas Liquids, Inc. and Williams
GP LLC collectively, as Selling Parties, and WEG Acquisitions,
L.P. as Buyer for the purchase and sale of all the membership
interests of WEG GP LLC, all the Common Units and Subordinated
Units of Williams Energy Partners, L.P. owned by Williams Energy
Services, LLC and Williams Natural Gas Liquids, Inc. and all of
the Class B Common Units of Williams Energy Partners, L.P.
dated as of May 5, 2003 (filed as Exhibit 10.7 to
Form 10-Q filed August 12, 2003).
10.30*
Transition Services Agreement by and between The
Williams Companies, Inc. and WEG Acquisitions, L.P. dated
June 17, 2003 (filed as Exhibit 10.8 to Form 10-Q
filed August 12, 2003).
10.31*
New Omnibus Agreement among WEG Acquisitions,
L.P., Williams Energy Services, LLC, Williams Natural Gas
Liquids, Inc. and The Williams Companies, Inc. dated as of
June 17, 2003 (filed as Exhibit 10.9 to Form 10-Q
filed August 12, 2003).
10.32*
Assumption Agreement dated June 17, 2003 by
and between The Williams Companies, Inc. and WEG Acquisitions,
L.P. (filed as Exhibit 10.10 to Form 10-Q filed
August 12, 2003).
10.33
Asset Sale and Purchase Agreement by and among
Williams Alaska Petroleum, Inc., as Seller, The Williams
Companies, Inc., as Guarantor, and Flint Hills Resources, LLC,
as Buyer dated as of November 17, 2003.
10.34
Purchase Agreement by and among Koch Alaska
Pipeline Company , LLC (Buyer), Williams Energy Services, LLC
(Seller and The Williams Companies, Inc. (Williams Guarantor)
dated November 17, 2003.
12
Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividend Requirements.
14
Code of Ethics.
20*
Definitive Proxy Statement of Williams for 2004
(to be filed with the Securities and Exchange Commission on or
before April 12, 2004).
21
Subsidiaries of the registrant.
23.1
Consent of Independent Auditors, Ernst &
Young LLP.
23.2
Consent of Independent Petroleum Engineers and
Geologists, Netherland, Sewell & Associates, Inc.
23.3
Consent of Independent Petroleum Engineers and
Geologists, Miller and Lents, LTD.
24
Power of Attorney together with certified
resolution.
31.1
Certification of the Chief Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under
the Securities Exchange Act of 1934, as amended, and Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under
the Securities Exchange Act of 1934, as amended, and Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification of the Chief Executive Officer and
the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*
Each such exhibit has heretofore been filed with
the SEC as part of the filing indicated and is incorporated
herein by reference.
EXHIBIT 3.1
Delaware
The First State
I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF RETIREMENT OF "THE WILLIAMS COMPANIES, INC.", FILED IN THIS OFFICE ON THE TWENTY-FIRST DAY OF NOVEMBER, A.D. 2003, AT 3:42 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
AND I DO HERBY FURTHER CERTIFY THAT THE EFFECTIVE DATE OF THE AFORESAID
CERTIFICATE OF RETIREMENTS IS THE TWENTY-THIRD DAY OF NOVEMBER, A.D. 2003.
/s/ Harriet Smith Windsor ----------------------------------------- Harriet Smith Windsor, Secretary of State AUTHENTICATION: 2768747 DATE: 11-24-03 |
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 03:42 PM 11/21/2003
030752133 -- 2116534
CERTIFICATE OF RETIREMENT
OF THE
DECEMBER 2000 CUMULATIVE CONVERTIBLE PREFERRED STOCK
($1.00 PAR VALUE)
PURSUANT TO SECTION 243
OF THE GENERAL CORPORATION LAW OF DELAWARE
The Williams Companies, Inc., a corporation organized and existing under the General Corporation Law of the state of Delaware,
DOES HEREBY CERTIFY:
That the Restated Certificate of Incorporation of said Company, as subsequently amended, was filed in the office of the Secretary of State of Delaware on April 27, 1987, and was filed for recording in the office of the Recorder of Deeds for New Castle County, Delaware on April 27, 1987, and that the Certificate of Designation for the December 2000 Cumulative Convertible Preferred Stock, $1.00 par value (the "Preferred Stock"), was filed in the office of the Secretary of State of Delaware on December 28, 2000;
That the Company has reacquired all of the issued shares of the Preferred Stock;
That the Certificate of Incorporation prohibits the reissuance of preferred stock, thereby reducing the total number of authorized shares.
That the Board of Directors of said Company at a meeting duly called and convened on September 17, 2003, adopted a resolution to the effect that none of the authorized shares of the Preferred Stock remain outstanding, and that no additional stock of such series will be issued subject to the Certificate of Designation filed with respect to such series of Preferred Stock; and
That when this Certificate is executed, acknowledged, filed and recorded in accordance with Section 103 of the General Corporation Law of Delaware and, when the certificate becomes effective, it shall have the effect of eliminating from the Company's Restated Certificate of Incorporation all matters set forth in the Certificate of Designation with respect to such series of Preferred Stock in the amount of 400,000 shares.
IN WITNESS WHEREOF, said The Williams Companies, Inc. has caused this certificate to be signed by James J. Bender, Senior Vice President and General Counsel, and attested by Brian K. Shore, its Secretary, this 31st day of October, 2003.
THE WILLIAMS COMPANIES, INC.
By: /s/ James J. Bender --------------------------------- James J. Bender Senior Vice President and General Counsel ATTEST: By: /s/ Brian K. Shore ---------------------- Brian K. Shore Secretary |
Delaware The First State
I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF RETIREMENT OF "THE WILLIAMS COMPANIES, INC.", FILED IN THIS OFFICE ON THE EIGHTH DAY OF DECEMBER, A.D. 2003, AT 6:59 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ Harriet Smith Windsor ----------------------------------------- Harriet Smith Windsor, Secretary of State AUTHENTICATION: 2796815 DATE: 12-09-03 |
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:18 PM 12/08/2003
030786861 -- 2116534
CERTIFICATE OF RETIREMENT
OF THE
9-7/8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
($1.00 PAR VALUE)
PURSUANT TO SECTION 243
OF THE GENERAL CORPORATION LAW OF DELAWARE
The Williams Companies, Inc., a corporation organized and existing under the General Corporation Law of the state of Delaware,
DOES HEREBY CERTIFY:
That the Restated Certificate of Incorporation of said Company, as subsequently amended, was filed in the office of the Secretary of State of Delaware on April 27, 1987, and was filed for recording in the office of the Recorder of Deeds for New Castle County, Delaware on April 27, 1987, and that the Certificate of Designation for the 9-7/8% Cumulative Convertible Preferred Stock, $1.00 par value (the "Preferred Stock"), was filed in the office of the Secretary of State of Delaware on March 27, 2002;
That the Company has reacquired all of the issued shares of the Preferred Stock;
That the Certificate of Incorporation prohibits the reissuance of preferred stock, thereby reducing the total number of authorized shares.
That the Board of Directors of said Company at a meeting duly called and convened on November 20, 2003, adopted a resolution to the effect that none of the authorized shares of the Preferred Stock remain outstanding, and that no additional stock of such series will be issued subject to the Certificate of Designation filed with respect to such series of Preferred Stock; and
That when this Certificate is executed, acknowledged, filed and recorded in accordance with Section 103 of the General Corporation Law of Delaware and, when the certificate becomes effective, it shall have the effect of eliminating from the Company's Restated Certificate of Incorporation all matters set forth in the Certificate of Designation with respect to such series of Preferred Stock in the amount of 1,466,667 shares.
IN WITNESS WHEREOF, said The Williams Companies, Inc. has caused this certificate to be signed by James J. Bender, Senior Vice President and General Counsel, and attested by Brian K. Shore, its Secretary, this 8th day of December, 2003.
THE WILLIAMS COMPANIES, INC.
By: /s/ James J. Bender ----------------------------------- James J. Bender Senior Vice President and General Counsel ATTEST: By: /s/ Brian K. Shore ----------------------------- Brian K. Shore Secretary |
Delaware The First State
I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "THE WILLIAMS COMPANIES, INC.", FILED IN THIS OFFICE ON THE TWENTY-SEVENTH DAY OF MARCH, A.D. 2002, AT 11:30 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ Harriet Smith Windsor ----------------------------------------- Harriet Smith Windsor, Secretary of State AUTHENTICATION: 1690674 DATE: 03-27-02 |
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 11:30 A& 03/27/2002
020199809 -- 2116534
CERTIFICATE OF DESIGNATION
OF THE
9-7/8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
THE WILLIAMS COMPANIES, INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors of The Williams Companies, Inc., a Delaware corporation (hereinafter called the "Corporation"), with the rights, powers and preferences set forth therein relating to dividends, conversion, redemption, dissolution and distribution of assets of the Corporation having been fixed by the Board of Directors pursuant to authority wanted to it under Article FOURTH of the Corporation's Restated Certificate of Incorporation and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware:
RESOLVED that pursuant to authority expressly granted to and vested in the Board of Directors by provisions of the Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $1.00 per share (the "Preferred Stock"), which shall consist of up to 1,466,667 of the 30,000,000 shares of Preferred Stock which the Corporation now has authority to issue, be, and the saint hereby is, authorized, and the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be Applicable to the Preferred Stock) are fixed as follows:
1. DESIGNATION MID AMOUNT. The designation of such series of the Preferred Stock authorized by this resolution shall be the 9-7/8% Cumulative Convertible Preferred Stock (the "9-7/8% Preferred Stock"). The total number of shares of the 9-7/8% Preferred Stock shall be 1,466,667.
2. RANKING. The 9-7/8% Preferred Stock shall rank senior, with respect to dividends and with respect to distributions upon the liquidation, winding up or dissolution of the Corporation, as to the Common Stock and any other stock of the Corporation ranking junior to the 9-7/8% Preferred Stock (collectively, the "Junior Stock"). All series of stock of the Corporation with which the 9-7/8% Preferred Stock ranks on a parity, with respect to dividends or distributions upon the liquidation, winding up or dissolution of the Corporation shall constitute "Parity Stock" and the 9-7/8% Preferred Stock shall rank, as to dividends and distributions upon the liquidation, winding up or dissolution of the Corporation, on a parity with such Parity Stock, which shall include the Existing Parity Preferred Stock. For purposes of this Certificate of Designation, the term "Existing Parity Preferred Stock" shall mean the December
2000 Cumulative Convertible Preferred Stock of the Corporation, par value $1.00 per share or the March 2001 Mandatorily Convertible Single Reset Preferred Stock of the Corporation, par value $1.00 per share (the "March 2001 Preferred Stock"), as applicable.
3. DIVIDENDS.
(a) The holders of 9-7/8% Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation (the "Board of Directors"), out of the assets of the Corporation legally available for payment, cumulative cash dividends per share equal to 9-7/8% per annum of the Stated Value (as herein defined) of such 9-7/8% Preferred Stock. All dividends declared upon the 9-7/8% Preferred Stock shall be declared pro rata per share. For purposes hereof, the term "Stated Value" shall mean $187.50 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, stock distribution or combination with respect to the 9-7/8% Preferred Stock.
(b) Dividends on the 9-7/8% Preferred Stock will be payable in equal quarterly installments (except as provided below) in arrears on each January 1, April 1, July 1 and October 1, commencing on July 1, 2002 (each such date being referred to hereinafter as a "Dividend Payment Date") provided, that if such Dividend Payment Date is not a business day, then any payment with respect to such Dividend Payment Date shall be payable on the next succeeding business day. Each such payment shall be payable to holders of record as they appear on the stock books of the Corporation on the record date established by the Corporation for each dividend declared, which record date shall not be more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Dividends on the 9-7/8% Preferred Stock shall accrue on a daily basis commencing on and including the date of issuance, and accrued dividends for each dividend period or portion thereof shall cumulate, to the extent not paid, as of the date on which such dividends were to have been paid. A dividend period shall commence on a Dividend Payment Date and continue to the day next preceding the next succeeding Dividend Payment Date. Accumulated unpaid dividends shall not accrue interest. Dividends payable on the 9-7/8% Preferred Stock for any period less than or more than a full quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in any period less than one month. Dividends on the 9-7/8% Preferred Stock shall accrue whether or not the Corporation has earnings, whether or not there are assets legally available for the payment of such dividends and whether or not such dividends are declared. The holders of the 9-7/8% Preferred Stock shall not be entitled to any dividends in excess of the cumulative dividends provided herein. Dividends in arrears for any past dividend periods or portions thereof may be declared and paid at any time witlxut reference to any regular Dividend Payment Date to holders of record on such date as shall be fixed by the Board of Directors subject to applicable law, Dividends on the 9-7/8% Preferred Stock shall cease to accrue on the day immediately preceding the date of conversion in the event of an Optional Conversion, the Mandatory Conversion Date in the event of a Mandatory Conversion, or the Redemption Date in the event of an Optional Redemption (provided, in the event of any conversion or an Optional Redemption, the shares of 9-7/8% Preferred Stock are actually converted or redeemed on the terms provided herein, as applicable). In the case of an Optional Conversion of the 9-7/8% Preferred Stock, the payment of accrued and unpaid dividends shall be subject to Section 6(e).
(c) Dividends or other distributions for any dividend period may not be paid on any outstanding shares of Parity Stock unless any such dividends are declared and paid pro raw so that the amounts of any dividends declared and paid per share on outstanding 9-7/8% Preferred Stock and each share of such Parity Stock will in all cases bear to each other the same ratio that accrued and unpaid dividends (including any accumulation with respect to unpaid dividends for prior dividend periods, if such dividends are cumulative) per share of outstanding 9-7/8% Preferred Stock and such outstanding shares of Parity Stock bear to each other.
If dividends on any shares of 9-7/8% Preferred Stock are in arrears: (i) no dividends (in cash, stock or other property) may be declared, paid or set aside for payment or any other distribution made on any Parity Stock (except as set forth, above) or Junior Stock (other than dividends or distributions in shares of Junior Stock or options, warrants or rights to subscribe for Junior Stock) and (ii) no Parity Stock oi- Junior Stock nay be redeemed, purchased or otherwise acquired by the Corporation or any subsidiary, except by conversion of such stock into, or exchange of such stock for shares of Junior Stock or options, warrants or rights to subscribe for Junior Stock and cash in lieu of fractional shares of such Junior Stock in connection therewith.
(d) Any dividend payment made on the 9-7/8% Preferred Stock shall first be credited against the earliest scented but unpaid dividend due with respect to the 9-7/8% Preferred Stock.
(e) For the purposes of this Certificate of Designation, "business day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law to close.
4. LIQUIDATION.
(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of shares of 9-7/8% Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made to the holders of Common Stock or any other class or series of Junior Stock, an amount in cash equal to the Stated Value per share plus any dividends (whether or not declared) accrued and unpaid, on the shares of 9-7/8% Preferred Stock to the date of final distribution (the "Liquidation Preference"). After payment of the full amount of the Liquidation Preference, the holders of shares of 9-7/8% Preferred Stock will not be entitled to any further participation in any distribution in the assets of the Corporation. If, upon any such liquidation, dissolution or winding up of the affairs of the Corporation, the assets of the Corporation, or proceeds thereof. available for the distribution among the holders of shares of 9-7/8% Preferred Stock and Parity Stock shall be insufficient to pay the holders of shares of 9-7/8% Preferred Stock and any Parity Stock the fill amount to which they shall be entitled, the holders of shares of 9-7/8% Preferred Stock and Parity Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect to the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. For the purposes hereof, neither a consolidation nor merger of the Corporation with or into any other corporation, nor a merger of any corporation
with or into the Corporation, nor a sale or exchange or transfer of all or any part of the Corporation's assets for cash, shares of stock, securities or other consideration shall be considered a liquidation, dissolution or winding up of the affair of the Corporation.
(b) After the payment of all preferential amounts required to be paid to the holders of 9-7/8% Preferred Stock and any other Parity Stock, the holders of shares of Junior Liquidation Stock then outstanding shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders.
5. VOTING RIGHTS. The holders of 9-7/8% Preferred Stock shall have no right to vote except as otherwise specifically provided herein, in the Certificate of Incorporation or as required by statute.
(a) in The event the holders of 9-7/8% Preferred Stock shall become entitled to exercise the right to vote as a separate class together with other shares of Preferred Stock then entitled to vote on such matter with the 9-7/8% Preferred Stock, if any, as provided in Section 5(c), each share of 9-7/8% Preferred Stock shall be entitled to one vote.
(b) So long as any shares of 9-7/8% Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required in the Certificate of Incorporation or by law, the affirmative vote of the holders of at least a majority of the shares of 9-7/8% Preferred Stock entitled to vote, given in person or by proxy, either pursuant to a consent in writing without a meeting (if permitted by law and the Certificate of incorporation) or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:
(i) any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation which alters or changes the rights, powers or preferences of the shares of 9-7/8% Preferred Stock so as to affect them adversely. Without limiting the foregoing, the amendment of the provisions of the Certificate of Incorporation so as to authorize or create, or to increase the authorized amount of Junior Stock shall not require approval by the holders of the 9-7/8% Preferred Stock and such holders shall not be entitled to vote thereon to the fullest extent permitted by law;
(ii) the authorization, creation or issuance of, or the increase in the authorized amount of, any stock of any class or series, or any security convertible into stock of any. class or series, ranking senior to, or on parity with (including the Existing Parity Preferred Stock), the 9-7/8% Preferred Stock with respect to (A) dividends, and/or (B) distributions upon the liquidation, winding up or dissolution of the Corporation;
(iii) the merger or consolidation of the Corporation with or into any other corporation or other entity in any case where (A) such merger or consolidation would affect adversely the rights, powers or preferences of the 9-7/8% Preferred Stock, or (B) each holder of shares of 9-7/8% Preferred Stock immediately preceding such merger or consolidation shall not receive or continue to hold in the surviving or resulting corporation or other entity the same number of shares, with substantially the same rights, powers amid preferences (except for those rights, powers and preferences that could be affected without the vote of the holders of the 9-7/-% Preferred. Stock, such as the
authorization and issuance of Junior Stock), as correspond to the shares of 9-7/8% Preferred Stock held immediately prior to such merger or consolidation (and if neither (A) nor (B) is applicable, then, and in such event, such merger or consolidation shall, not be subject to approval by the holders of the 9-7/8% Preferred Stock and such holders shall not be entitled to vote thereon);
(iv) any reclassification of the 9-7/8% Preferred Stock; and
(v) any amendment of Section I(5)(b) of Article FOURTH or
Section H of Article FIFTH of the Certificate of Incorporation (other
than any amendment that does not limit or restrict the right of holders
of 9-7/8% Preferred Stock to act by written consent to the extent
permitted by Section I(5)(b) of Article FOURTH and Section H of Article
FIFTH of the Certificate of Incorporation).
(c) (i) In the event that (i) full cumulative dividends on the
9-7/8% Preferred Stock are not paid and are in arrears for four
quarterly dividend periods (whether or not consecutive) or (ii) The
holders of shares of any other series of Parity Stock have the then
present right to elect one or more directors for any reason, the number
of directors of the Corporation constituting the entire Board of
Directors shall be increased by two persons and the holders of shares
of the 9-7/8% Preferred Stock, voting together as a single class with
the holders of shares of all other series of Parity Stock of the
Corporation having the then present right to elect one or more
directors (herein referred to as "Class Voting Stock"), shall have the
right to elect such additional two directors to fill such positions at
any regular meeting of shareholders or special meeting held in place
thereof, or at a special meeting called as provided in Section
5(c)(ii.). Whenever (i) all arrearages of dividends on the 9-7/8%
Preferred Stock then outstanding shall have been paid or declared and
irrevocably set apart for payment and (ii) the holders of shares of any
other series of Parity Stock no longer have the present right to elect
one or more directors for any reason (clause (i) and (ii) hereinafter
referred to collectively as a "Special Director Termination Event"),
then the right of the holders of shares of the 9-7/8% Preferred Stock
to elect such additional two directors shall cease (but subject always
to the same provisions for the vesting of such voting rights in the
case of any similar future arrearages in dividends or in the case of
the vesting of voting rights in the holders of shares of any other
series of Parity Stock), and the terms of office of all persons
previously elected as directors by the holders of shares of the 9-7/8%
Preferred Stock and such other Class Voting Stock shall forthwith
terminate and the number of the Board of Directors shall be reduced
accordingly.
(ii) At any time after the voting power referred to in Section 5(c)(i) shall have been so vested, in the holders of shares of the 9-7/8% Preferred Stock, the Secretary of the Corporation may, and upon the written request of any holder or the holders of at least 10% of the number of shares of 9-7/8% Preferred Stock then outstanding (addressed to the Secretary at the principal executive office of the Corporation) shall, call a special meeting of the. holders of shares of the 9-7/8% Preferred Stock and all other Class Voting Stock for the election of the directors to be elected by them pursuant to Section 5(c)(i); provided that the Secretary shall not be required. to call such special meeting if the request for such meeting is received less than 45 calendar days before the date fixed for
the next ensuing annual meeting of shareholders. Such call shall be
made by notice similar to that provided in the bylaws of the
Corporation for a special meeting of the shareholders or as required by
law. Subject to the foregoing provisions, if any such special meeting
required to be called as above provided shall not be called by the
Secretary within 20 calendar days after receipt of an appropriate
request, then any holder of shares of 9-7/8% Preferred Stock may call
such meeting, upon the notice above provided, and for that purpose
shall have access to the stock books and records of the Corporation.
Except as otherwise provided by law, at any such meeting, the holders
of a majority of the number of shares of 9-7/8% Preferred Stock and
such other Class Voting Stock then outstanding shall constitute a
quorum for the purpose of electing directors as contemplated in Section
5(c)(i). If at any such meeting or adjournment thereof, a quorum of
such holders of 9-7/8% Preferred Stock and, if applicable, such other
Class Voting Stock shall not be present, no election of directors by
the 9-7/8% Preferred Stock and, if applicable, such other Class Voting
Stock shall take place, and any such meeting may be adjourned from time
to time for periods not exceeding 30 calendar days until a quorum of
the 9-7/8% Preferred Stock and, if applicable, the Class Voting Stock
is present at such adjourned meeting. Unless otherwise provided by law
or the Certificate of Incorporation, directors to be elected by the
holders of shares of 9-7/8% Preferred Stock and, if applicable, such
other Class Voting Stock shall be elected by a plurality of the votes
cast by such holders at a meeting at which a quorum is present.
Notwithstanding the foregoing, the absence of a quorum of the 9-7/8%
Preferred Stock and, if applicable, such other Class Voting Stock shall
not prevent the voting of, including the election of, directors by the
holders of Common Stock and other classes of capital stock at such
meeting.
(iii) Any director who shall have been elected by holders of shares of 9-7/8% Preferred Stock voting together, if applicable, as a single class with the holders of one or more other series of Class Voting Stock, or any director so elected as provided below, may be removed at any time during the period in which the holders of shares of the 9-7/8% Preferred Stock voting together, if applicable, as a single class with the holders of one or more other series of Class Voting Stock are entitled to elect directors (such period being referred to herein as a "class voting period"), either for or without cause, by, and only by, the affirmative vote of the holders of a majority of the number of shares of 9-7/8% Preferred Stock (and, if applicable, one or more other series of Class Voting Stock) then outstanding, voting together, if applicable, as a single class with the holders of all other series of Class Voting Stock then outstanding, given at a special meeting of such shareholders called for such. purpose, and any vacancy thereby created may be filled during such class voting period only by the holder of shares of 9-7/8% Preferred Stock and, if applicable the other series, if any, of Class Voting Stock; provided, however, that a Special Director Termination Event has not occurred at the time of such class voting period. In case any vacancy (other than as provided in the preceding sentence) shall occur among the directors elected by the holder of shares of the 9-7/8% Preferred Stock (and, if applicable, such other Class Voting Stock), and provided that a Special Director Termination Event has not occurred, a successor shall be elected by the Board of Directors to serve until the next annual meeting of the shareholders or special meeting held in place thereof upon the nomination of the then remaining director elected by the
holders of the 9-7/8% Preferred Stock (and, if applicable, such. other Class Voting Stock) or the successor of such remaining director.
(d) So long as any shares of 9-7/8% Preferred Stock remain outstanding, the unanimous vote or consent of the shares of the 9-7/8% Preferred Stock outstanding (voting separately as a class) given in person or by Proxy, either by written consent or at any special or annual meeting called for the purpose, shall be necessary to effect any amendment to these resolutions that would (i) except as otherwise permitted by Section 7, increase the Conversion Price or (ii) reduce the annual cash dividends payable on the shares of the Preferred Stock.
(e) Holders of 9-7/8% Preferred Stock shall not be entitled to receive notice of any meeting of shareholders at which they are not entitled to vote or consent except as otherwise provided by applicable law.
6. OPTIONAL CONVERSION. Each share of 9-7/8% Preferred Stock
may be converted at any time, at the option of the holder thereof ("Optional
Conversion"), into the number of fully-paid and non-assessable shares of Common
Stock obtained by dividing the Stated Value by the Conversion Price then in
effect (the "Conversion Rate") provided, however, that on any Optional
Redemption of the 9-7/8% Preferred Stock pursuant to Section 10 or any
liquidation of the Corporation, the right of conversion shall terminate at the
close of business on the business day next preceding the date fixed for such
redemption or for the payment of any amounts distributable on liquidation to the
holders of 9-7/8% Preferred Stock; provided, further, however, that in the event
the Company fails to redeem any of the 9-7/8% Preferred Stock in accordance with
Section 10 hereof, the right of conversion hereunder with respect to the shares
of 9-7/% Preferred Stock not so redeemed shall continue in full force and
effect.
(a) The initial conversion price, subject to adjustment as provided herein, is equal to $18.75 (the "Conversion Price"). The applicable Conversion Price from time to time in effect is subject to adjustment as hereinafter provided.
(b) The Corporation shall not issue fractions of shares of Common Stock upon conversion of 9-7/8% Preferred Stock or scrip in lieu thereof If any fraction of a share of Common Stock would, except for the provisions of this Section 6(b), be issuable upon conversion of any 9-7/8% Preferred Stock, the Corporation shall in lieu thereof pay to the person entitled thereto an amount in cash equal to the current value of such fraction, calculated to the nearest one-hundredth (1/100) of a share, to be computed (i) if the Common Stock is quoted or listed or admitted to trading on any national securities exchange or quotation system, on the basis of the last sales price of the Common Stock on such exchange or quotation system (or the quoted closing bid price if there shall have been no sales) on the last business day immediately preceding the date of conversion, or (ii) if the Common Stock shall not be listed, on the basis of the fair market value per share as determined by the Board of Directors.
(c) In order to exercise the conversion privilege, the holder of any 9-7/8% Preferred Stock to be converted shall surrender its certificate or certificates therefore to the Corporation at its principal office, and shall give written notice to the Corporation at such office that the holder elects to convert the 9-7/8% Preferred Stock represented by such certificates, or any number thereof. Such notice shall also state the name or names (with address) in which the
certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, subject to any restrictions on transfer relating to shares of Common Stock upon conversion thereof. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly authorized in writing. The date of receipt by the Corporation of the certificates and notice shall be the conversion date. As soon as practicable after receipt of such notice and the surrender of the certificate or certificates for 9-7/8% Preferred Stock as aforesaid, the Corporation shall cause to be issued and delivered at such office to such holder, or on its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof, cash as provided in Section 6(b) hereof in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion and, if less than all shares of 9-7/8% Preferred Stock represented by the certificate or certificates so surrendered are being converted., a residual certificate or certificates representing the shares of 9-7/8% Preferred Stock not converted.
(d) The Corporation shall at all times when the 9-7/8% Preferred Stock shall be outstanding reserve and keep available out of its authorized but unissued stock, for the purposes of effecting the conversion of the 9-7/8% Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding 9-7/8% Preferred Stock. Before taking any action that would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the 9-7/8% Preferred Stock, the Corporation will lake any corporate action that may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully-paid arid non-assessable shares of such Common Stock at such adjusted Conversion Price.
(e) Upon any conversion, all accrued and unpaid. dividends on the 9-7/8% Preferred Stock surrendered for conversion shall be paid at the election of the Corporation, in cash or in shares of Common Stock. In the event such dividends are paid in additional shares of Common Stock, the number of shares of Common Stock to be issued in payment of the dividend with respect to each outstanding share of Common Stock shall be determined by dividing the amount of the dividend that would have been payable had such dividend been paid in cash by an amount equal to the Conversion Price, To the extent that any such dividend would result in the issuance of a fractional share of Common Stock (which shall be determined with respect to the aggregate number of shares of Common Stock held of record by each holder), then the amount of such fraction multiplied by the Conversion Price shall be paid in cash (unless there are no legally available funds with which to make such cash payment, in which event such cash payment shall be made as soon as possible). Notwithstanding the foregoing, holders of shares of 9-7/8% Preferred Stock whose shares are converted following the record date for the payment of a quarterly dividend and prior to the Dividend Payment Date with respect to such record date shall not be entitled to the quarterly dividend, payment for the quarterly dividend period ending on such Dividend Payment Date if such conversion is an Optional Conversion, but shall be entitled to such quarterly dividend payment if such conversion is a Mandatory Conversion. A holder of shares of 9-7/8% Preferred Stock surrendered for Optional Conversion in the circumstances described in the preceding sentence shall pay the Corporation a cash amount equal to the amount of such quarterly dividend at the time such holder surrenders its shares for conversion and such holder shall be entitled to retain the quarterly dividend payment received from the Corporation;
provided, however, that in the event the Corporation shall fail to pay such quarterly dividend payment, the Corporation shall promptly refund the cash amount paid by the holder to the Corporation at the time such holder surrendered its shares for conversion.
(f) All shares of 9-7/8% Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holder thereof to receive shares of Common Stock in exchange therefore and payment of any accrued and unpaid dividends thereon. Any shares of 9-7/8% Preferred Stock so converted, shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized 9-7/8% Preferred Stock accordingly.
(g) The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of shares of Preferred Stock pursuant to this Section 6. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involving the issue and delivery of shares of Common Stock in the name other than that in which the shares of 9-7/8% Preferred Stock so converted were registered and no such issue and delivery shall be made unless and until the person. requesting such issue has paid to the Corporation the amount of any tax, or has established, to the satisfaction of the Corporation, that such tax has been paid,
7. ANTI-DILUTION PROVISIONS. The Conversion Price shall be adjusted from time to time by the Corporation as follows:
(a) In case the Corporation shall hereafter pay a dividend or make a distribution on any class of capital stock of the Corporation in shares of Common Stock, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination, and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. If any dividend or distribution of the type described in this Section 7(a) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price that would then be in effect if such dividend or distribution had not been declared.
(b) In case the Corporation shall issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within 45 days after the record date for determination of the stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price on the date fixed for determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date fixed for determination of stockholders entitled to receive such rights or warrants by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for determination of stockholders entitled to receive such rights or warrants plus the number of shares that the aggregate offering price of the total number of shares so offered for subscription or purchase (pursuant to such rights or warrants) would purchase at such Current Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding on the date fixed for determination of stockholders entitled to receive such rights or warrants plus the total number of additional shares of Common Stock offered for subscription or purchase pursuant to such rights or warrants. Such reduction shall be successively made whenever any such rights or warrants are issued, and shall become effective immediately after the opening of business on the day following the date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price that would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price that would then be in effect if such date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Current Market Price and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Corporation for such rights or warrants and the minimum aggregate amount payable on exercise or conversion thereof, the value of such consideration, if other than cash, to be determined by the Board in good faith as described in a resolution of the Board.
(c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, stmh reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.
(d) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock shares of any class of capital
stock of the Corporation (other than any dividends or distributions to which
Section 7(a) applies) or evidences of its indebtedness or assets (including
securities of the Corporation or any subsidiary, including rights or warrants,
but excluding any rights or warrants referred to in Section 7(b), and excluding
any dividend paid exclusively in cash (any of the foregoing hereinafter in this
Section 7(d) called the "Securities")), then, in each such case (unless the
Corporation elects to reserve such Securities for distribution to the holders of
9-7/8% Preferred Stock upon conversion so that any holder converting will
receive upon such conversion, in addition to the shares of Common Stock to which
such holder is entitled, the amount and kind of such Securities which such
holder would have received if such holder had converted its 9-7/8% Preferred
Stock into Common Stock immediately prior to the Record Date (as defined in
Section 7(g)(iv)) for such distribution of the Securities), the
Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect on the Record Date with respect to such distribution by a fraction, the numerator of which shall be the Current Market Price per share of the Common Stock on such Record Date less the fair market value (as determined by the Board in good faith, whose determination shall be conclusive, and described in a resolution of the Board a copy of which will be provided to the holders of the 9-7/8% Preferred Stock) on the Record Date of the portion of the Securities distributed applicable to one share of Common Stock and the denominator of which shall be the Current Market Price per share of the Common Stock on such Record Date, such reduction to become effective immediately prior to the opening of business on the day following such Record Date; provided, however, that in the event the then fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of 9-7/8% Preferred Stock shall have the right to receive upon conversion the amount of Securities such holder would have received had such holder converted its 9-7/8% Preferred Stock into Common Stock immediately prior to the Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price that would then be in effect if such, dividend or distribution had not been declared. If the Board determines the fair market value of any distribution for purposes of this Section 7(d) by reference to the actual or when issued trading market for any Securities, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price of the Common Stock.
Rights or warrants distributed by the Corporation to all
holders of Common Stock entitling the holders thereof to subscribe for or
purchase shares of the Corporation's capital stock (either initially or under
certain circumstances), which rights or warrants, until the occurrence of a
specified event or events ("Trigger Event"): (i) are deemed to be transferred
with such shares of Common Stock; (ii) are not immediately exercisable; and
(iii) are also issued in respect of future issuances of Common Stock, shall be
deemed not to have been distributed for purposes of this Section 7 (and no
adjustment to the Conversion Price under this Section 7 will be required) until
the occurrence of the earliest Trigger Event, whereupon such rights and warrants
shall be deemed to have been distributed and an appropriate adjustment (if any
is required) to the Conversion Price shall be made under this Section 7(d). If
any such right or warrant, including any such existing rights or warrants
distributed prior to the date of this Certificate of Designation, are subject to
events, upon the occurrence of which such rights or warrants become exercisable
to purchase different securities, evidences of indebtedness or other assets,
then the date of the occurrence of any and each such event shall be deemed to be
the date of distribution and Record Date with respect to new rights or warrants
with such rights (and a termination or expiration of the existing rights or
warrants without exercise by any of the holders thereof). In addition, in the
event of any distribution (or deemed distribution) of rights or warrants, or any
Trigger Event or other event (of the type described in the preceding sentence)
with respect thereto, that was counted for purposes of calculating a
distribution amount for which an adjustment to the Conversion Price under this
Section 7 was made, (1) in the case of any such rights or warrants that shall
all have been redeemed or repurchased without exercise by any holders thereof,
the Conversion Price shall be readjusted upon such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share redemption or
repurchase price received by a
holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants that shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.
No adjustment of the Conversion Price shall be made pursuant to this Section 7(d) in respect of rights or warrants distributed or deemed distributed on any Trigger Event or other event of the type described in the preceding paragraph to the extent that such rights or warrants are actually distributed, or reserved by the Corporation for distribution, to holders of 9-7/8% Preferred Stock upon conversion by such holders of 9-7/8% Preferred Stock to Common Stock. For purposes of this Section 7(d) and Sections 7(a) and (b), any dividend or distribution to which this Section 7(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of capital stock other than such shares of Common Stock or rights or warrants (and any Conversion Price reduction required by this Section 7(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 7(a) and (b) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution," "the date fixed for the deter of stockholders entitled to receive such rights or warrants" and "the date fixed for such determination" within the meaning of Sections 7(a) and (b), and (B) any shares of Common Stock included in such. dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 7(a).
(e) In case the Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding (x) any regular quarterly cash dividend on the Common Stock payable from the earnings of the Company to the extent the annualized rate of such cash dividend does not exceed the Maximum Permitted Dividend Rate (as defined below), and (y) any dividend or distribution in connection with the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary), then, in such case, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction, the numerator of which shall be the Current Market Price of the Common Stock on the Record Date less the amount of cash so distributed (and not excluded as provided above or as set forth in the last two sentences of this paragraph) applicable to one share of Common Stock, and the denominator of which shall be such Current Market Price of the Common Stock, such reduction to be effective immediately prior to the opening of business on the day following the Record Date; provided, however, that if the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of 9-7/8% Preferred Stock shall have the right to receive upon conversion, out of funds legally available therefore, the amount of cash such holder would have received had such holder converted such 9-7/8% Preferred Stock or the Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shill again be adjusted to be the Conversion Price that
would then be in effect if such dividend or distribution had not been declared. If any adjustment is required to be made as set forth in this Section 7(e) as a result of a distribution that is a quarterly dividend, such adjustment shall be based upon the amount by which such distribution exceeds the amount of the quarterly cash dividend permitted to be excluded pursuant hereto, If an adjustment is required to be made as set forth in this Section 7(e) above as a result of a distribution that is not a quarterly dividend, such. adjustment shall be based upon the full amount of the distribution.
The "Maximum Permitted Dividend Rate" shall mean an annualized dividend rate of $0.80 per share of Common Stock (as adjusted to appropriately reflect any of the events referred to in Sections 7(a) or 7(c)) (the "Current Rate"). The Maximum Permitted Dividend Rate will be adjusted to a rate in excess of the Current Rate only on the following terms:
(i) if the regular dividend mate on the Common Stock is reduced to a rate less than the Current Rate, the regular dividend rate may thereafter be increased but (except as provided in clause (ii) below) not to an annualized rate exceeding the Current Rate.
(ii) Having been reduced as contemplated by clause (i), if the annualized dividend rate on the Common Stock is increased to the Current Rate, it may not thereafter be increased to a rate greater than the Current Rate for a period of four consecutive quarters. Thereafter, the Maximum Permitted Dividend Rate shall increase annually at a rate of increase of 10% per annum.
(iii) If the regular dividend rate on the Common Stock is not reduced as contemplated in clause (i), the Maximum Dividend Rate shall increase annually at a rate of increase of 10% per annum for the dividend period commencing October 1, 2002.
(f) In case a tender or exchange offer made by the Corporation or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration per share of Common Stock having a fair market value (as determined by the Board, whose determination shall be conclusive and described in a resolution of the Board) that as of the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration. Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time multiplied, by the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator of which shall be the sum of (x) the fair market value (determined, as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the tenns of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, upto any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time,
such reduction to become effective immediately prior to the opening of business on the Trading Day following the Expiration Time, If the Corporation is obligated to purchase shares pursuant to any such tender or exchange offer, but the Corporation is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price that would then be in effect if such tender or exchange offer had not been made.
(g) For purposes of this Section 7, the following terms shall have the meaning indicated:
(i) "Closing Price" with respect to any security on any day shall mean the closing sale price, regular way, on such day or, in case no such sale takes place on such day, the average of the reported closing bid arid asked prices, regular way, in each case as quoted on the New York Stock Exchange or, if such security is not quoted or listed or admitted to trading on such New York Stock Exchange, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board for that purpose, or a price determined in good faith by the Board.
(ii) "Current Market Price" shall mean the arithmetic average of the daily Closing Prices per share of Common Stock for the 10 consecutive Trading Days immediately prior to the date in question.
(iii) "Fair Market Value" shall mean the amount which a willing buyer would pay a willing seller in an arm's-length transaction.
(iv) "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board or by statute, contract or otherwise).
(v) "Trading Day" shall mean (x) if the applicable security is quoted or listed or admitted for trading on the New York Stock Exchange or another national securities exchange or quotation system, a day on which the New York Stock Exchange or such other national securities exchange or quotation system is open for business or (y) if the applicable security is not so quoted, listed or admitted for trading, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.
(h) In case the Corporation shall agree or resolve to issue, or issue or sell, or shall be deemed to have issued or sold, within nine months after the date of issuance of the 9-7/8% Preferred Stock:
(i) any shares of Common Stock without consideration or for consideration per share less than the Conversion Price in effect on the date of and immediately prior to such agreement, resolution, issuance or sale;
(ii) any options, warrants or other rights to subscribe for or purchase shares of Common Stock with an exercise or purchase price per share less than the Conversion Price in effect on the date of and immediately prior to such agreement, resolution, issuance or sale; or
(iii) any securities convertible into or exchangeable for Common Stock or otherwise entitling the holder thereof to acquire (whether for consideration or otherwise) or requiring the Corporation to issue in respect thereof, Common Stock with a conversion or exchange price per share of Common Stock less than the Conversion Price in effect on the date of and immediately prior to such agreement, resolution, issuance or sale,
then the Conversion Price shall be reduced to a price equal to the amount of such consideration or price (as applicable), effective from the date of such issuance or sale. The foregoing provisions shall not apply to the issuance of options pursuant to the Corporation's stock option or employee benefit plans, or the exercise of any options issued pursuant to such plans. In determining (I) the aggregate offering price of such shares of Common Stock, (II) whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at a purchase price per share less than the Conversion Price in effect on the date of and immediately prior to such issuance or sale and (III) whether any securities are convertible into or exchangeable for, or otherwise entitling the holder thereof to acquire, Common Stock with a conversion or exchange price per share of Common Stock less than the Conversion Price in effect on the dare of and immediately prior to such issuance or sale, in each such case, there shall be taken into account any consideration received by the Corporation in connection with such issuance or sale of Common Stock, rights, warrants or other securities and the minimum aggregate amount payable on exercise or conversion thereof, the value of such consideration, if other than cash, to be determined by the Board in good faith as described in a resolution of the Board.
(i) If, on or after the successful completion of the remarketing of the March 2001 Preferred Stock, conducted in accordance with the terms of the Williams Preferred Stock Remarketing Registration Rights and Support Agreement, dated as of March 28, 2001, by and among the Corporation, Williams Share Trust, WCG Note Trust, United. States Trust Company of New York and Credit Suisse First Boston Corporation (or any successor agreement), the conversion price per share of Common Stock for the March 2001 Preferred Stock (as measured by the amount of liquidation preference or stated value required to be surrendered per share of Common Stock) is less than the Conversion Price then in effect, the Conversion Price shall be reduced so as to equal such conversion price per share of Common Stock of the March 2001 Preferred Stock. The reduction of the Conversion Price hereunder shall be effective as and from the date the conversion price of the March 2001 Preferred Stock is established.
(j) The Corporation may (but is not obligated to) make such reductions in the Conversion Price, in addition to those required by this Certificate of Designation as the Board considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes.
To the extent permitted by applicable law, the Corporation from time to time may (but is not obligated to) reduce the Conversion Price by any amount for any period of time if the period is at least 20 days, the reduction is irrevocable during the period and the Board shall have made a determination that such reduction would be in the best interests of the Corporation, which determination shall, be conclusive. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Corporation shall mail to holders of record of the 9-7(8% Preferred Stock a notice of the reduction at least 15 days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period during which it will be in effect.
(k) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least one
percent (1%) in such price; provided, however, that any adjustments that by
reason of this Section 7(k) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 7 shall be made by the Corporation and shall be made to the nearest cent
or to the nearest one-hundredth (1/100) of a share, as the case may be. No
adjustment need be made pursuant to any provision of this Section 7 for rights
to purchase Common Stock pursuant to a Corporation plan for reinvestment of
dividends or interest. To the extent the 9-7/8% Preferred Stock becomes
convertible into cash, assets, property or securities (other than capital stock
of the Corporation), no adjustment need be made thereafter as to the cash,
assets, property or such securities. Interest will not accrue on the cash into
which shares of 9-7/8% Preferred Stock may be convertible.
(1) Whenever the Conversion Price shall be adjusted as herein provided, the Corporation shall forthwith file at each office designated for the conversion of 9-7/8% Preferred Stock., a statement, signed by the Chairman of the Board, the President, any Vice President or Treasurer of the Corporation, showing in reasonable detail the facts requiring such adjustment and the Conversion Rate that will be effective after such adjustment. The Corporation shall also cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to each record holder of 9-7/8% Preferred Stock at his or its address appearing on the stock register. Failure to deliver such. notice shall not affect the legality or validity of any such adjustment.
(m) In any case in Which this Section 7 provides that an adjustment shall become effective immediately after (1) a record date for an event, (2) the date fixed for the determination of stockholders entitled to receive a dividend or distribution pursuant to Section 7(a), or (3) a date fixed for the determination of stockholders entitled to receive rights or warrants pursuant to Section 7(b) or (4) the Expiration Time for any tender or exchange offer pursuant to Section 7(f), (each a "Determination Date"), the Corporation may elect to defer until the occurrence of the relevant Adjustment Event (as hereinafter defined) (x) issuing to the holder of any share of 9-7/8% Preferred Stock converted after such Determination Date and before the
occurrence of such Adjustment Event, the additional shares of Common Stock or
other securities or assets issuable upon such conversion by reason of the
adjustment required by such Adjustment Event over and above the Common Stock
issuable upon such conversion before giving effect to such adjustment and (y)
paying to such holder any amount in cash in lieu, of any fraction pursuant to
Section 6(b) or Section 6(e). For purposes of this Section 7(m), the term
"Adjustment Event" shall mean:
(i) in any case referred to in clause (1) hereof, the occurrence of such event,
(ii) in any case referred to in clause (2) hereof, the date any such dividend or distribution is paid Or made,
(iii) in any case referred to in clause (3) hereof, the date of expiration of such rights or warrants, and
(iv) in any case referred to in clause (4) hereof, the date a sale or exchange of Common Stock pursuant to such tender or exchange offer is consummated and becomes irrevocable.
(n) For purposes of this Section 7, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of outstanding scrip certificates, if any, issued by the Corporation in lieu of fractions of shares of Common Stock. The Corporation will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation.
(o) If any event occurs as to which, in the opinion of the
Board of Directors, the provisions of this Section 7 arc not strictly applicable
or if strictly applicable would not fairly protect the rights of the holders of
the 9-7/8% Preferred Stock in accordance with the essential intent and
principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such, provisions, in accordance with such
essential intent and principles, so as to protect such rights as aforesaid, but
in no event shall any adjustment have the effect of increasing the Conversion.
Price as otherwise determined pursuant to any of the provisions of this Section
7 except in the case of a combination of shares of a type contemplated in
Section 7(e) hereof and then in no event to an amount larger than the Conversion
Price as adjusted pursuant to Section 7(c) hereof. The determination of the
Board of Directors as to whether an adjustment should be made pursuant to the
provisions of this Section 7(o), and if so, as to what adjustment should be made
and when, shall be conclusive, final and binding on the Corporation and all
stockholders of the Corporation..
8. RECLASSIFICATIONS, CONSOLIDATION, MERGER OR SALE. If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 7(c) applies), (ii) any consolidation, merger or combination of the Corporation with another Person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or Conveyance of all or substantially all of the properties and assets of the
Corporation to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common. Stock, then the 9-7/8% Preferred Stock shall be convertible into The kind and amount of shares of stock, other securities or other property or assets (including cash) that the holder of a share of 9-7/8% Preferred Stock would have received upon such reclassification, change, consolidation., merger, combination, sale or conveyance had such holder converted such share of 9-7/8% Preferred Stock into the number of shares of Common Stock issuable upon such conversion (assuming, for such purposes, a sufficient number of authorized shares of Common Stock are available for such conversion) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance (but after giving effect to the adjustment of the Conversion Price required in Section 10(a)), assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination., sale or conveyance (provided that, if the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change; consolidation, merger, combination, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purposes of this Section 8 the kind and amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares),
The Corporation shall not enter into any transaction governed
by this Section 8 unless (I) if the Corporation is not the entity surviving any
such merger, consolidation or combination, the 9-7/8% Preferred Stock is
converted into share's of preferred stock or equivalent equity securities of the
entity surviving or resulting from such merger or consolidation having terms and
conditions substantially similar to the terms and conditions of the 9-7/8%
Preferred Stock in effect immediately prior to such merger or consolidation, but
giving effect to the conversion adjustments contemplated in this Section 8 or
(II) if the Corporation survives such consolidation, merger or sale, the entity
into whose securities or assets the 9-7/8% Preferred Stock becomes convertible
pursuant to this Section 8, if other than the Corporation shall agree to honor
the conversion rights provided in this Section 8.
The above provisions of this Section 8 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.
If this Section 8 applies to any event or occurrence, Section 7 shall not apply.
9. MANDATORY CONVERSION. On or alter March 27,2017, the Corporation may, by giving notice to the holders of 9-7/8% Preferred Stock (the "Forced Conversion Notice"), convert each share of 9-7/8% Preferred Stock held by such holder (the "Mandatory Conversion") into the number of shares of the Common Stock (the "Mandatory Conversion Rate") equal to the Stated Value plus all accrued and unpaid dividends to the date of conversion (whether or not declared) divided by the Conversion Price then in effect; provided that in order to be allowed to exercise this right to compel Mandatory Conversion, the average of the last reported Closing Prices (as defined in Section 7(g)) for the Common Stock for the 20 day
period ending not more than 10 days prior to the date of the giving of the Forced Conversion Notice must be greater Than 1 28% of the Conversion Price then in effect. Such conversion shall be effective as of the date (the "Mandatory Conversion Date") the Forced Conversion Notice is given by the Corporation and the holders of 9-7/8% Preferred Stock shall promptly surrender their certificates evidencing their ownership of 9-7/8% Preferred Stock for Common Stock certificates. The provisions of Section 6 shall be applicable to any Mandatory Conversion.
10. OPTIONAL REDEMPTION
(a) Upon a Merger (as defined below), the Corporation may, upon written notice (the "Redemption Notice") to the holders of 9-7/8% Preferred Stock, redeem all, but not less than all, of the then outstanding shares of 9-7/8% Preferred Stock (the "Optional Redemption") for cash at a redemption price per share equal to 120% of the Stated Value plus accrued and unpaid dividends (whether or not declared) (the "Redemption Price"). The Redemption Notice shall be given no later than 10 business days following the consummation of the Merger. In the event the value of the consideration paid per share to holders of Common Stock in such Merger (the "Merger Consideration") is less than the Conversion Price in effect on the date of and immediately prior to such Merger, then the Conversion Price shall be reduced to a price equal to the value of the Merger Consideration. In the event the Merger Consideration payable to holders of Common. Stock is not entirely in cash, the value to be ascribed to the Merger Consideration per share for purposes of this Section 10 shall be the Current Market Price of the Common Stock on the date the Merger occurs. "Merger" shall be deemed to have occurred when the Corporation consolidates with or merges into any other person or any other person merges into the Corporation or conveys, transfers or leases all or substantially all of its assets to any person other than a subsidiary or subsidiaries, and the outstanding Common Stock of the Corporation is changed or exchanged into other assets or securities as a result, unless the shareholders of the Corporation immediately before such transaction owns directly or indirectly immediately following such transaction, more than 50% of the combined voting power of the outstanding voting securities of the person resulting from such transaction or the transferee person.
(b) The Corporation shall mail the Redemption Notice, postage prepaid, to each bolder of record of 9-7/8% Preferred Stock to be redeemed, at his or its post office address last shown on the books of the Corporation, notifying such holder of the date of the Optional Redemption, which shall be at least 30 days but not more than 45 days alter such notice (the "Redemption Date"), the Redemption Price and the date on which such holder's conversion rights (pursuant to Section 6 hereof) as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his or its certificate or certificates representing the shares to be redeemed. On or prior to the Redemption Date, each holder of 9-7/8% Preferred Stock to be Seemed shall surrender its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of the 9-7/8% Preferred Stock designated for redemption in the Redemption Notice as holders of 9-7/8% Preferred Stock (except the right to receive the Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.
(c) If the Corporation is unable on the Redemption Date to redeem all of the shares of 9-7/8% Preferred Stock then to be redeemed because such redemption would violate the applicable laws of the State of Delaware, then the Corporation shall be permitted to redeem only as many shares of 9-7/8% Preferred Stock as it may legally redeem, ratably from the holders thereof in proportion to the number of shares held by them.
(d) Except as provided in Section 10(a) hereof, the Corporation shall have no right to redeem the shares of 9-7/8% Preferred Stock, Any shares of 9-7/8% Preferred Stock so redeemed shall be permanently retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued. Nothing herein contained shall prevent or restrict the purchase by the Corporation, from time to time either at public or private sale, of the whole or any part of the 9-7/8% Preferred Stock at such price or prices as the Corporation may determine, subject to the provisions of applicable law.
11. ACTIONS NOT Requiring CONSENT. No consent of the holders of the 9-7/8% Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) subject to Section S, the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior upon liquidation or as to the payment of dividends to the 9-7/8% Preferred Stock or (c) any increase or decrease in the amount of authorized shares of Common Stock or blank check Preferred Stock or any increase, decrease or change in the par value thereof or in any other terms thereof.
12. EXCLUSION OF OTHER RIGHTS. Unless otherwise required by law, shares of this series of Preferred Stock shall not have any relative rights, powers or preferences or other special rights other than those specifically set forth in this Certificate of Designation or otherwise in the Certificate of Incorporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation of 9-7/8% Cumulative Convertible Preferred Stock to be duly executed by its President this 27th day of March, 2002.
THE WILLIAMS COMPANIES, INC.
By: /s/ Steven J. Malcolm ------------------------------------ Name: Steven J. Malcolm Title: President |
EXHIBIT 4.8
THE WILLIAMS COMPANIES, INC.
AND
BANK ONE TRUST COMPANY, N.A.,
as Trustee
Eighth Supplemental Indenture
Dated as of June 3, 2002
To
Indenture
Dated as of November 10, 1997
9.25% Notes due March 15, 2004
EXHIBIT 4.8
EIGHTH SUPPLEMENTAL INDENTURE, dated as of June 3, 2002 (this "Eighth Supplemental Indenture"), between THE WILLIAMS COMPANIES, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "Issuer"), having its principal office at One Williams Center, Tulsa, Oklahoma 74172, and BANK ONE TRUST COMPANY, N.A. (successor in interest to THE FIRST NATIONAL BANK OF CHICAGO), as Trustee (the "Trustee") under the Indenture, dated as of November 10, 1997, between the Issuer and the Trustee (the "Original Indenture").
WHEREAS, the Issuer has executed and delivered the Original Indenture to the Trustee to provide for the issuance from time to time of its senior, unsecured notes, debentures or other evidences of indebtedness (the "Securities"), to be issued in one or more series as in the Original Indenture provided;
WHEREAS, pursuant to the terms of the Original Indenture, the Issuer desires to make, execute and deliver to the Trustee this Eighth Supplemental Indenture to the Original Indenture in order to establish the form and terms of, and to provide for the creation and issue of, a new series of its Securities designated as the 9.25% Notes due March 15, 2004 (herein called the "Notes"), under the Original Indenture in the aggregate principal amount of $1,400,000,000;
WHEREAS, all things necessary to make the Notes, when executed by the Issuer and authenticated and delivered by the Trustee and issued upon the terms and subject to the conditions hereinafter and in the Indenture set forth, against payment therefor, the valid, binding and legal obligations of the Issuer and to make this Eighth Supplemental Indenture a valid, binding and legal agreement of the Issuer, have been done;
NOW THEREFORE, for, and in consideration of, the premises and covenants contained in the Original Indenture and this Eighth Supplemental Indenture and the purchase of the Notes by the Holders thereof, it is mutually agreed and covenanted, for the equal and proportionate benefit of all Holders of the Notes, as follows:
ARTICLE I
DEFINED TERMS
Section 1.1 Defined Terms. Except as otherwise expressly provided in this Eighth Supplemental Indenture or in the form of Note set forth in Exhibit A hereto or otherwise clearly required by the context hereof or thereof, all capitalized terms used and not defined herein or in said form of Note that are defined in the Original Indenture shall have the meanings assigned to them in the Original Indenture. The Original Indenture, as supplemented from time to time, including by this Eighth Supplemental Indenture, is hereafter referred to as the "Indenture."
ARTICLE II
TERMS OF THE NOTES
Section 2.1 Establishment of the Notes. There is hereby
authorized a series of Securities designated the 9.25% Notes due March 15, 2004,
limited in aggregate principal amount to $1,400,000,000 (except as provided in
Section 2.3(2) of the Original Indenture). The Issuer may, without the consent
of the Holders of the Notes, provided that no Event of Default shall have
occurred and be continuing, issue additional Notes in such principal amount as
shall be determined by or pursuant to a Board Resolution and having the same
ranking and the same interest rate, maturity or other terms as the Notes
originally issued hereunder, which together with said additional Notes shall
constitute a single series of Securities under the Indenture. The Notes shall be
substantially in the form set forth in Exhibit A hereto and shall include
substantially the legends set forth on the face thereof.
Section 2.2 Terms of the Notes. The terms and provisions of the Notes as set forth in Exhibit A are hereby incorporated in and expressly made part of this Eighth Supplemental Indenture.
The Notes will mature and the principal thereof will be due and payable, together with all accrued and unpaid interest thereon, on March 15, 2004.
The Notes shall bear interest at the rate of 9.25% per annum.
The amount of interest payable on the Notes will be computed on the basis of a 360-day year consisting of twelve 30-day months.
Payment of the principal of (and premium, if any) and interest on the Notes will be made at the office or agency of the Issuer maintained for that purpose in the Borough of Manhattan, the City and State of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts and in immediately available funds; provided, however, that at the option of the Issuer payment of interest may be made by wire transfer of immediately available funds to an account of the Person entitled thereto as such account shall be provided to the Trustee at least 15 days prior to the relevant payment date or by check in New York Clearinghouse Funds mailed to the address of the person entitled thereto as such address shall appear in the registry books of the Issuer.
Initially the Notes will be issued in global form registered in the name of Cede & Co. (as nominee for The Depository Trust Company (the "Depositary"), the initial securities depositary for the Notes), and may bear such legends as the Depositary may reasonably request. So long as the Notes are outstanding in global form registered in the name of the Depositary or its nominee, all payments of principal, premium, if any, and interest will be made by the Issuer in immediately available funds.
No service charge shall be made for the registration of transfer or exchange of the Notes; provided, however, that the Issuer may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with the exchange or transfer.
The Notes shall not be superior in right of payment to, and shall rank pari passu with, all other unsecured and unsubordinated Indebtedness of the Issuer.
The Notes shall be issued in minimum denominations of $1,000 or any integral multiple of $1,000 over such denomination.
Section 2.3 Global Notes. Unless and until it is exchanged for the Notes in registered form, one or more global Notes in principal amount equal to the aggregate principal amount of all outstanding Notes ("Global Notes") may be transferred, in whole but not in part, only to the Depositary or a nominee of the Depositary, or to a successor Depositary selected or approved by the Issuer or to a nominee of such successor Depositary.
If at any time (i) the Depositary notifies the Issuer that it is unwilling or unable to continue as a Depositary for the Global Notes and no successor Depositary shall have been appointed within 90 days after such notification, (ii) the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934 at any time the Depositary is required to be so registered to act as such Depositary and no successor Depositary shall have been appointed within 90 days after the Issuer's becoming aware of the Depositary's ceasing to be so registered, (iii) the Issuer, in its sole discretion, determines that the Global Notes shall be exchangeable for Notes in definitive registered form or (iv) there shall have occurred and be continuing an Event of Default, the Issuer will execute, and subject to Article Five of the Original Indenture, the Trustee, upon written notice from the Issuer, will authenticate and deliver the Notes in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Note in exchange for such Global Note.
Upon exchange of the Global Note for such Notes in definitive registered form without coupons, in authorized denominations, the Global Note shall be cancelled by the Trustee. Such Notes in definitive registered form issued in exchange for the Global Note shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Securities to the Depositary for delivery to the Persons in whose names such Securities are so registered.
ARTICLE III
Section 3.1 Execution Of Notes. The Notes shall be executed as follows:
The Notes shall be signed on behalf of the Issuer by its Chairman of the Board, its President, one of its Vice Presidents or its Treasurer, under its corporate seal which may, but need not, be attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Notes. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect
the validity or enforceability of any Note that has been duly authenticated and delivered by the Trustee.
In case any officer of the Issuer who shall have signed any of the Notes shall cease to be such officer before the Note so signed shall be authenticated and delivered by the Trustee or disposed of by the Issuer, such Note nevertheless may be authenticated and delivered or disposed of as though the person who signed such Note had not ceased to be such officer of the Issuer; and any Note may be signed on behalf of the Issuer by such persons as, at the actual date of the execution of such Note, shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Eighth Supplemental Indenture any such person was not such an officer.
ARTICLE IV
SUNDRY PROVISIONS
Section 4.1 Execution, Authentication and Delivery of the Notes. Notes in the aggregate principal amount of $1,400,000,000, or in such greater principal amount as shall be permitted by Section 2.1, may, upon execution of this Eighth Supplemental Indenture, or from time to time thereafter, be executed by the Issuer and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes upon an Issuer Order without any further action by the Issuer.
Section 4.2 Paying Agent and Security Registrar. Bank One Trust Company, N.A. will be the paying agent and registrar for the Notes.
Section 4.3 Trustee Not Responsible for Recitals. The recitals contained in this Eighth Supplemental Indenture shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Eighth Supplemental Indenture.
Section 4.4 Incorporation of Indenture. The Original Indenture, as supplemented by this Eighth Supplemental Indenture, is in all respects ratified and confirmed, and this Eighth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.
Section 4.5 Governing Law. This Eighth Supplemental Indenture shall be deemed to be a contract under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law.
Section 4.6 Counterparts. This Eighth Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
EXHIBIT 4.8
IN WITNESS WHEREOF, the parties hereto have caused this Eighth Supplemental Indenture to be duly executed as of the day and year first above written.
THE WILLIAMS COMPANIES, INC.
By: /s/ JAMES G. IVEY --------------------------------- Name: James G. Ivey Title: Treasurer |
BANK ONE TRUST COMPANY, N.A.,
as Trustee
By: /s/ BENITA A. POINTER --------------------------------- Name: Benita A. Pointer, CCTS Title: Account Executive |
EXHIBIT 4.8
EXHIBIT A
[FORM OF FACE OF NOTE]
[IF THE NOTE IS TO BE A GLOBAL NOTE, INSERT:] THIS NOTE IS A GLOBAL NOTE WITHIN
THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE
NAME OF THE DEPOSITORY TRUST COMPANY OR A NOMINEE OF THE DEPOSITORY TRUST
COMPANY. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON
OTHER THAN THE DEPOSITORY TRUST COMPANY OR ITS NOMINEE ONLY IN THE LIMITED
CIRCUMSTANCED DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER
THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TRUST COMPANY TO A
NOMINEE OF THE DEPOSITORY TRUST COMPANY OR BY A NOMINEE OF THE DEPOSITORY TRUST
COMPANY TO THE DEPOSITORY TRUST COMPANY OR ANOTHER NOMINEE OF THE DEPOSITORY
TRUST COMPANY OR TO A SUCCESSOR DEPOSITARY OR TO A NOMINEE OF SUCH SUCCESSOR)
MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THE WILLIAMS COMPANIES, INC.
9.25% NOTE DUE MARCH 15, 2004
CUSIP No. [ ] $[ ] No. [__]
THE WILLIAMS COMPANIES, INC., a corporation duly organized and
existing under the laws of the State of Delaware (hereinafter referred to as the
"Issuer," which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
[___________], or registered assigns, the principal sum of [___________] on
March 15, 2004 (the "Maturity Date"), unless earlier redeemed or repurchased,
and to pay interest thereon in the manner and on the Interest Payment Dates set
forth below at the rate of 9.25% per annum, from and including March 16, 2002,
or from the most recent Interest Payment Date (as defined below) to which
interest has been paid or duly provided for, until the principal hereof is paid
or made available for payment. The interest so payable, and punctually paid or
duly provided for, on any Interest Payment Date will, as provided in the
Indenture, be paid to the Person in whose name this Security (or one or more
predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest. "Regular Record Date" shall mean the March 1 and
September 1 (whether or not a Business Day) next preceding such Interest Payment
Date. "Interest Payment Date" shall mean March 15 and September 15 of each year,
commencing September 15, 2002, to the Maturity Date.
Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on a subsequent record date (a "Special Record Date") for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 15 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and interest on this Security will be made at the office or agency of the Issuer maintained for that purpose in the Borough of Manhattan, the City and State of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts and in immediately available funds; provided, however, that at the option of the Issuer payment of interest may be made by wire transfer of immediately available funds to an account of the Person entitled thereto as such account shall be provided to the Trustee at least 15 days prior to the relevant payment date or by check in New York Clearinghouse Funds mailed to the address of the Person entitled thereto as such address shall appear in the registry books of the Issuer.
Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, The Williams Companies, Inc. has caused this instrument to be duly executed under its corporate seal.
Dated: [_________]
THE WILLIAMS COMPANIES, INC.
Title:
Attest:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture.
BANK ONE TRUST COMPANY, N.A.,
as Trustee
Dated: [_________]
[FORM OF REVERSE OF NOTE]
THE WILLIAMS COMPANIES, INC.
9.25% NOTE DUE MARCH 15, 2004
This Security is one of a duly authorized issue of securities of the Issuer (the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of November 10, 1997 (the "Original Indenture"), as supplemented by a First Supplemental Indenture, dated as of September 8, 2000, a Second Supplemental Indenture, dated as of December 7, 2000, a Third Supplemental Indenture, dated as of December 20, 2000, a Fourth Supplemental Indenture, dated as of January 17, 2001, a Fifth Supplemental Indenture, dated as of January 17, 2001, a Sixth Supplemental Indenture, dated as of January 14, 2002, a Seventh Supplemental Indenture, dated as of March 19, 2002, and an Eighth Supplemental Indenture, dated as of June 3, 2002 (the "Eighth Supplemental Indenture" and the Original Indenture, as so supplemented, the "Indenture"), each between the Issuer and Bank One Trust Company, N.A. (successor in interest to The First National Bank of Chicago), as Trustee (the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Eighth Supplemental Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Trustee and the Holders and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is a Global Security representing $[________] aggregate principal amount of the Issuer's 9.25% Notes due March 15, 2004. The Securities of this series of which this Global Security is a part are limited in aggregate principal amount to $1,400,000,000, except as provided in the Eighth Supplemental Indenture.
Optional Redemption. The Securities of this series are redeemable, in whole or in part, at any time, at the option of the Issuer, at a redemption price equal to the greater of:
o 100% of the principal amount of the Securities of this series then outstanding to be redeemed, or
o the sum of the present values of the remaining scheduled payments of principal and interest thereon from the redemption date to the Maturity Date computed by discounting such payments to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a rate equal to the sum of 50 basis points plus the Adjusted Treasury Rate on the third Business Day prior to the redemption date, as calculated by an Independent Investment Banker.
"Adjusted Treasury Rate" means, with respect to any redemption date:
o the yield, under the heading which represents the average for the immediately preceding week, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded U.S. Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Optional Redemption Comparable Treasury Issue (if no maturity is within three months before or after the remaining term of the Securities of this series, yields for the two published maturities most closely corresponding to the Optional
Redemption Comparable Treasury Issue will be determined and the Adjusted Treasury Rate will be interpolated or extrapolated from such yields on a straight line basis, rounding to the nearest month); or
o if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Optional Redemption Comparable Treasury Issue, calculated using a price for the Optional Redemption Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Optional Redemption Comparable Treasury Price for such redemption date.
"Independent Investment Banker" means [Salomon Smith Barney Inc.] and any successor firm, or if any such firm is unwilling or unable to serve as such, an independent investment and banking institution of national standing appointed by the Issuer.
"Optional Redemption Reference Treasury Dealer" means each of up to five dealers to be selected by the Issuer, and their respective successors; provided that if any of the foregoing ceases to be, and has no affiliate that is, a U.S. government securities dealer (a "Primary Treasury Dealer"), the Issuer will substitute for it another Primary Treasury Dealer.
"Optional Redemption Comparable Treasury Issue" means the U.S. Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Securities of this series to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Securities or, if, in the reasonable judgment of the Independent Investment Banker, there is no such security, then the Optional Redemption Comparable Treasury Issue will mean the U.S. Treasury security or securities selected by an Independent Investment Banker as having an actual or interpolated maturity or maturities comparable to the remaining term of the Securities.
"Optional Redemption Comparable Treasury Price" means (1) the average of five Optional Redemption Reference Treasury Dealer Quotations for the redemption date, after excluding the highest and lowest Optional Redemption Reference Treasury Dealer Quotations, or (2) if the Independent Investment Banker obtains fewer than five such Optional Redemption Reference Treasury Dealer Quotations, the average of all such quotations.
"Optional Redemption Reference Treasury Dealer Quotations" means, with respect to each Optional Redemption Reference Treasury Dealer and any redemption date, the average, as determined by the Independent Investment Banker of the bid and asked prices for the Optional Redemption Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker at 5:00 p.m., New York City time, on the third Business Day preceding such redemption date.
The Issuer will mail notice of redemption at least 30 days but not more than 60 days before the applicable redemption date to each Holder of the Securities to be redeemed. If the Issuer elects to partially redeem the Securities, the Trustee will select in a fair and appropriate manner the Securities to be redeemed. The Issuer shall give the Trustee notice of the redemption price shortly after the calculation thereof.
Upon the payment of the redemption price plus accrued and unpaid interest, if any, to the date of redemption, interest will cease to accrue on and after the applicable redemption date on the Securities or portions thereof called for redemption.
Usury. The interest rate on the Securities of this series shall in no event be higher than the maximum rate permitted by New York law as the same may be modified by United States law of general application.
Defeasance. The Indenture contains provisions for defeasance of (a) the entire Indebtedness evidenced by this Security and (b) certain restrictive covenants upon compliance by the Issuer with certain conditions set forth therein.
Events of Default. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.
Amendment to Indenture; Waiver of Defaults. The Indenture permits the Issuer and the Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities of each series issued under the Indenture then outstanding and affected, to execute supplemental indentures adding any provisions to or changing in any manner the rights of the Holders of each series so affected; provided that the Issuer and the Trustee may not, without the consent of the Holder of each outstanding Security affected thereby, (a) extend the final maturity of any such Security, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption or repayment thereof, or change the currency of payment thereof, or impair or affect the rights of any Holder to institute suit for the payment; or (b) reduce the aforesaid percentage in principal amount of Securities. The Indenture contains provisions permitting the Holders of not less than a majority in aggregate principal amount of the Securities of all series with respect to which a default under the Indenture shall have occurred and be continuing (voting as one class), on behalf of the Holders of all Securities of all such series, to waive certain past defaults under the Indenture and their consequences with certain conditions set forth therein. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
Obligations Unconditional. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of, premium, if any, and interest, if any, on this Security at the time, place and rate, and in the coin or currency, herein prescribed unless otherwise agreed between the Issuer and the registered Holder of this Security.
Transfer and Exchange. This Security shall be exchangeable for Securities registered in the names of Persons other than the Depositary with respect to such series or its nominee only as provided in this paragraph. This Security shall be so exchangeable if (x) the Depositary notifies the Issuer that it is unwilling or unable to continue as Depositary for such series or at any time ceases to be a clearing agency registered as such under the Exchange Act, or (y) the Issuer executes and delivers to the Trustee an Officers' Certificate providing that this Security shall be so exchangeable. Securities so issued in exchange for this Security shall be of the same series, having the same interest rate, if any, and maturity and having the same terms as this Security, in authorized denominations and in the aggregate having the same principal amount as this Security and registered in such names as the Depositary for such Global Security shall direct. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of a Security of the series of which this Security is a part is registrable in the registry books of the Issuer, upon surrender of this Security for registration of transfer at the office or agency of the Issuer in any place where the principal of (and premium, if any) and interest, if any, on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer
and the Trustee duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in minimum denominations of $1,000 or any integral multiple of $1,000 over such minimum denomination. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer, the Trustee nor any such agent shall be affected by notice to the contrary.
Governing Law. This Security shall be governed by, and construed in accordance with, the laws of the State of New York.
All terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture.
ASSIGNMENT FORM
To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to
and irrevocably appoint ________________________________________________________ to transfer this Security on the books of the Issuer. The agent may substitute another to act for him.
Date: Your Signature: -------------- -------------------------------- (Sign exactly as your name appears on the face of this Note) Tax Identification No: ------------------------ SIGNATURE GUARANTEE: ----------------------------------------------- Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. |
Exhibit 10.2
THE WILLIAMS COMPANIES
SUPPLEMENTAL RETIREMENT PLAN
(Effective as of January 1, 1988)
First Amendment
The Williams Companies Supplemental Retirement Plan, effective as of January 1, 1988 (the "Plan") is hereby amended effective as of April 1, 1998, in the following respects:
1. The first sentence of Article IV of the Plan is amended and restated to provide as follows:
"Subject to Section 7.8, a Participant's Supplemental Retirement Benefit, if any and if vested, shall normally commence to be paid at the same time and shall normally be paid pursuant to the same method of payment as is selected by the Participants under the Pension Plan; however, the Committee, in its sole and absolute discretion, is authorized to approve or reject a Participant's request for a time of commencement of payment or a method of payment under the Pension Plan."
2. In all other respects, the Plan remains unchanged.
IN WITNESS WHEREOF, the Administrative Committee has caused this amendment of the Plan to be executed this 30th day of March, 1998.
THE WILLIAMS COMPANIES, INC.
By: /s/ John C. Fischer ---------------------------------- Title: Chair, Administrative Committee The Williams Companies, Inc. |
EXHIBIT 10.33
ASSET SALE AND PURCHASE AGREEMENT
BY AND AMONG
WILLIAMS ALASKA PETROLEUM, INC.,
AS SELLER,
THE WILLIAMS COMPANIES, INC.,
AS WILLIAMS GUARANTOR,
AND
FLINT HILLS RESOURCES, LLC,
AS BUYER
DATED AS OF NOVEMBER 17, 2003
ASSET SALE AND PURCHASE AGREEMENT
This ASSET SALE AND PURCHASE AGREEMENT, is dated as of November 17, 2003, by and among WILLIAMS ALASKA PETROLEUM, INC., an Alaska corporation ("Seller"), THE WILLIAMS COMPANIES, INC., a Delaware corporation ("Williams Guarantor"), and FLINT HILLS RESOURCES, LLC, a Delaware limited liability company ("Buyer").
RECITALS
WHEREAS, Seller desires to sell, assign, transfer and convey to Buyer certain of its properties, assets and liabilities, and Buyer desires to acquire such properties, assets and liabilities, all upon the terms and conditions set forth herein;
WHEREAS, an Affiliate of Seller, an Affiliate of Buyer and Williams Guarantor are concurrently with the execution of this Agreement entering into that certain purchase agreement of even date herewith by and among Williams Energy Services, LLC, as seller, Williams Guarantor and Koch Alaska Pipeline Company, LLC, as buyer, (the "TAPS Purchase Agreement") relating to all of the outstanding membership interests of Williams Alaska Pipeline Company, L.L.C. ("WAPCO"); and
WHEREAS, an Affiliate of Seller, Holiday Alaska, Inc., Holiday Stationstores, Inc. and Williams Guarantor are concurrently with the execution of this Agreement entering into that certain Asset Sale and Purchase Agreement of even date herewith by and among Williams Express, Inc., as seller, Williams Guarantor, as seller's guarantor, Holiday Alaska, Inc., as buyer, and Holiday Stationstores, Inc., as buyer's guarantor, (the "C Stores ASPA") relating to the acquisition of certain convenience stores located in Alaska:
NOW, THEREFORE, in consideration of the premises and the respective representations, warranties, covenants and agreements set forth in this Agreement, and intending to be legally bound hereby, the Parties hereto and Williams Guarantor agree as follows:
ARTICLE I.
DEFINITIONS
1.1 DEFINED TERMS.
As used in this Agreement, each of the following terms has the meaning specified below:
"ACTION" means any action, cause of action, appeal, petition, plea, charge, complaint, claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry, investigation, or similar event, occurrence, or proceeding.
"AFFILIATE" means, with respect to any Person, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by, or is
under common control with such Person. The term "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the possession, directly or indirectly, of the actual power to direct or cause the direction of the management policies of a Person, whether through the ownership of stock or other equity, by Contract, credit arrangement or otherwise.
"AGGREGATE CAP" means the maximum amount of indemnifiable Damages from all causes which may be recovered by all Buyer Indemnified Parties from Seller or Williams Guarantor and by all Seller Indemnified Parties from Buyer. Such amount shall be the amount specified in paragraphs A or B below, as applicable, plus any amount available pursuant to paragraph C below.
A. In the event that the transactions described in
(i) this Agreement, and (ii) a Retail Agreement close as
contemplated herein and therein, the amount of the Aggregate
Cap shall be $40,000,000; provided, however, that such amount
is an aggregate cap for this Agreement and the applicable
Retail Agreement. For the avoidance of doubt, this means that
for purposes of determining if such cap has been reached for
any Buyer Indemnified Parties, the Parties will look at
whether the aggregate amount of all Damages due to (i) the
Buyer Indemnified Parties under the applicable Retail
Agreement and (ii) the Buyer Indemnified Parties under this
Agreement exceeds $40,000,000. Further, for purposes of
determining if such cap has been reached for any Seller
Indemnified Parties, the Parties will look at whether the
aggregate amount of all Damages due to (i) the Seller
Indemnified Parties under the applicable Retail Agreement and
(ii) the Seller Indemnified Parties under this Agreement
exceeds $40,000,000.
B. In the event that the transactions described in this Agreement close as contemplated herein, but the C Stores are not sold pursuant to a Retail Agreement, the amount of the Aggregate Cap shall be $38,000,000. For the avoidance of doubt, this means that for purposes of determining if such cap has been reached for any Buyer Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Buyer Indemnified Parties under this Agreement exceeds $38,000,000. Further, for purposes of determining if such cap has been reached for any Seller Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Seller Indemnified Parties under this Agreement exceeds $38,000,000.
C. In the event that the transactions contemplated in this Agreement close as contemplated herein and the transactions contemplated by the TAPS Purchase Agreement close as contemplated therein with an Affiliate of Buyer purchasing the WAPCO Interests (as defined in the TAPS Purchase Agreement), Buyer will be entitled to any portion of the WAPCO Aggregate Cap (as defined in the TAPS Purchase Agreement) that the Buyer (as defined in the TAPS Purchase Agreement) has not used.
"AGREEMENT" means this Asset Sale and Purchase Agreement, as amended, supplemented or modified from time to time in accordance with the express terms hereof, together with all schedules and exhibits attached hereto.
"ASSETS" means all property, tangible and intangible, of any nature that is owned or held for use primarily in connection with the ownership and operation of Seller's North Pole refinery, Fairbanks terminal and Anchorage terminal and the wholesale marketing of refined products produced by the North Pole refinery, including:
(a) process units, piping, meters, loading facilities, tanks and other fixtures and equipment that constitute the North Pole refinery generally described on EXHIBIT A;
(b) tanks, piping, meters, loading facilities and other fixtures and equipment that constitute the Fairbanks terminal generally described on EXHIBIT B;
(c) tanks, piping, meters, loading facilities and other fixtures and equipment that constitute the Anchorage terminal generally described on EXHIBIT C;
(d) the Seller Contracts set forth on EXHIBIT D;
(e) the Intellectual Property set forth on EXHIBIT E that is included in the Assets pursuant to the IP Side Agreement;
(f) the Inventory;
(g) the Leases set forth on EXHIBIT F;
(h) the Licensed Intellectual Property set forth on EXHIBIT G that is included in the Assets pursuant to the IP Side Agreement;
(i) the Transferable Permits set forth on EXHIBIT H;
(j) the Real Property set forth on EXHIBIT I;
(k) all of the vehicles that are used by Seller in the operation of (a), (b) and (c) above;
(l) all of the office equipment that is used by Seller in the operation of (a), (b) and (c) above;
(m) all of the spare parts, warehouse stock, catalyst inventories, and chemical inventories that are used by Seller in the operation of (a), (b) and (c) above;
(n) any hydrocarbons located within the refinery process units, refinery piping or terminal piping;
(o) any books, records, data or other documents relating to the above; and
(p) the Gasoline Sulfur Credits described Section 4.19 of the Disclosure Schedule;
but excluding the Excluded Assets.
"BUSINESS DAY" means any day other than Saturday, Sunday or other day on which commercial banks located in New York, New York are authorized or required by law to close.
"BUYER" has the meaning specified in the introductory paragraph of this Agreement.
"BUYER CLAIMS ADMINISTRATOR" shall have the meaning set forth in
Section 10.3(e).
"BUYER INDEMNIFIED PARTY" shall have the meaning set forth in Section 10.2(a).
"C STORES ASPA" has the meaning specified in the Recitals.
"C STORES ASSETS" shall have the meaning set forth in Section 6.18.
"CLAIM NOTICE" shall have the meaning set forth in Section 10.3(a).
"CLAIMS" shall have the meaning set forth in Section 10.3(a).
"CLOSING" means the closing of the transactions contemplated by this Agreement.
"CLOSING DATE" has the meaning assigned to that term in Section 8.1.
"CLOSING HEDGE LIQUIDATION AMOUNT" has the meaning assigned to that term in Section 3.1.
"CLOSING INVENTORY" has the meaning assigned to that term in Section 3.3(a).
"CLOSING INVENTORY ADJUSTMENT AMOUNT" has the meaning assigned to that term in Section 3.3(b).
"CLOSING INVENTORY AMOUNT" has the meaning assigned to that term in
Section 3.1.
"CLOSING PAYMENT" has the meaning assigned to that term in Section 3.2.
"CLOSING STATEMENT" has the meaning assigned to that term in Section 3.3(c).
"COBRA" means the Consolidated Omnibus Benefit Reconciliation Act of 1985, as amended.
"CODE" means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder.
"CONFIDENTIALITY AGREEMENT" means the letter agreement dated July 12, 2002, between Flint Hills Resources, LP, an Affiliate of Buyer, and Williams Guarantor relating to the furnishing of information to Flint Hills Resources, LP and it Affiliates, including Buyer, in connection with its evaluation of the transactions contemplated in this Agreement.
"CONSENT" means waiver, consent, approval, grant, concession, order, authorization, declaration, registration, filing, notification, order, authorization or exemption of, or with, any Person, including any Governmental Authority.
"CONTRACTS" means any contract, lease, license, agreement, arrangement, commitment, letter of intent, memorandum of understanding, heads of agreement, promise, obligation, right, instrument, document, sale or purchase orders or other similar understanding, whether written or oral, express or implied, except any Plan, employment agreement, or other agreement or contract between Seller or its Affiliates and any Employees.
"DESTRUCTION NOTICE" has the meaning assigned to that term in Section 6.6.
"DAMAGES" has the meaning assigned to that term in Section 10.3(d).
"DIRECT CLAIM" has the meaning assigned to that term in Section 10.3(a).
"DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto, containing the various exceptions to the representations, warranties and covenants of Seller and Buyer contemplated by the provisions of this Agreement.
"DISPUTE DEADLINE DATE" has the meaning assigned to that term in
Section 3.3(d).
"EFFECTIVE TIME" shall mean 11:59 p.m. Alaska time on the last day of the month in which the Closing occurs.
"EMPLOYEE BENEFIT PLAN" has the meaning assigned to that term in
Section 4.14(b).
"EMPLOYEES" has the meaning assigned to that term in Section 6.7(a).
"ENVIRONMENTAL CAP" means the maximum amount of indemnifiable Damages
which may be recovered by all Buyer Indemnified Parties from Seller or Williams
Guarantor and by all Seller Indemnified Parties from Buyer arising out of,
resulting from or incident to the matters enumerated in Section 10.2(a) or
Section 10.2(b) with respect to any and all Environmental Claims. Such amount
shall be the amount specified in paragraphs A or B below, as applicable, plus
any amount available pursuant to paragraph C below.
A. In the event that the transactions described in
(i) this Agreement and (ii) a Retail Agreement close as
contemplated herein and therein, the amount of the
Environmental Cap shall be $32,000,000; provided, however,
that such amount is an aggregate cap for this Agreement and
the applicable Retail Agreement. For the avoidance of doubt,
this means that for purposes of determining if such cap has
been reached for any Buyer Indemnified Parties, the Parties
will look at whether the aggregate amount of such Damages due
to (i) the Buyer Indemnified Parties under the applicable
Retail Agreement and (ii) the Buyer Indemnified Parties under
this Agreement exceeds $32,000,000. Further, for purposes of
determining if such cap has been reached for any Seller
Indemnified Parties, the Parties will look at whether the
aggregate amount of such Damages due to (i) the Seller
Indemnified Parties under the applicable Retail Agreement and
(ii) the Seller Indemnified Parties under this Agreement
exceeds $32,000,000.
B. In the event that the transactions described in this Agreement close as contemplated herein, but the C Stores are not sold pursuant to a Retail Agreement, the amount of the Environmental Cap shall be $30,500,000. For the avoidance of doubt, this means that for purposes of determining if such cap has been reached for any Buyer Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Buyer Indemnified Parties under this Agreement exceeds $30,500,000. Further, for purposes of determining if such cap has been reached for any Seller Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Seller Indemnified Parties under this Agreement exceeds $30,500,000.
C. In the event that the transactions contemplated in this Agreement close as contemplated herein and the transactions contemplated by the TAPS Purchase Agreement close as contemplated therein with an Affiliate of Buyer purchasing the WAPCO Interests (as defined in the TAPS Purchase Agreement), Buyer will be entitled to any portion of the WAPCO Environmental Cap (as defined in the TAPS Purchase Agreement) that the Buyer (as defined in the TAPS Purchase Agreement) has not used.
"ENVIRONMENTAL CLAIMS" has the meaning assigned to that term in Sections 10.2(a) and 10.2(b), as applicable to Buyer or Seller as the context requires.
"ENVIRONMENTAL CONDITION" means any condition existing on, at or
originating from, each property included within the Assets which constitutes,
(a) a Release on, at or from such property of any Hazardous Materials or (b) a
violation of any applicable Environmental Laws or any Environmental Permits.
"ENVIRONMENTAL INSURANCE POLICY" has the meaning assigned to that term in Section 6.11.
"ENVIRONMENTAL LAWS" means any and all Legal Requirements, rules,
codes, policies, directives, standards, licenses or Permits of any Governmental
Authority relating to Hazardous Materials, the abatement of pollution,
protection or restoration of the environment, or the ensuring of public health
and safety from environmental, occupational or workplace hazards, specifically
including those relating to the exposure to, use, Release, threatened Release,
emission, presence, storage, treatment, disposal, generation, transportation,
distribution, manufacture, processing, handling, management or control of
Hazardous Materials, previously, presently, or hereafter in effect, including
the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; the Federal Water
Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Federal Insecticide,
Fungicide & Rodenticide Act, 7 U.S.C. Section 136 et seq.; the Toxic Substances
Control Act, 15 U.S.C. Section 2601 et seq.; the Oil Pollution Act of 1990, 33
U.S.C. Section 2701 et seq.; the Clean Air Act, 42 U.S.C. Section 7401 et seq.;
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., as amended by the Superfund Amendments and Reauthorization
Act of 1986, 42 U.S.C. Section 9601 et seq.; the Emergency Planning and
Community Right to Know Act, 42 U.S.C. Section 11001 et seq.; the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801 et seq.; Endangered Species
Act, 16 U.S.C. Section 1531 et seq.; and the Occupational Safety and Health Act,
29 U.S.C. Section 651 et seq., and all similar statutes and regulations
thereunder adopted by the U.S., the states, the counties, the boroughs or the
municipalities in which the Assets are located, or any other Governmental
Authority, as each may be amended from time to time.
"ENVIRONMENTAL LIABILITIES" means those liabilities, actions, rights of action, Contracts, Indebtedness, obligations, claims, causes of action, suits, Damages, demands, costs, expenses and attorneys' fees whatsoever, known or unknown, disclosed or undisclosed, accrued or unaccrued, existing at any time, of every kind and nature arising directly or indirectly out of or as a consequence of the actual or suspected use, storage, handling, generation, transportation, manufacture, production, release, discharge, disposal or presence of Hazardous Materials on, in, under or about the Real Property or the air, soil or groundwater thereof, including, without limitation, any and all costs incurred due to any investigation of the Real Property and/or Assets or any cleanup, remediation, removal or restoration mandated by or pursuant to any applicable Environmental Laws or agencies enforcing such applicable Environmental Laws.
"ENVIRONMENTAL PERMITS" has the meaning assigned to that term in
Section 4.11(a) of this Agreement.
"ENVIRONMENTAL REPORTS" has the meaning assigned to that term in
Section 4.11(d).
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"EXCLUDED ASSETS" has the meaning assigned to that term in Section 2.2.
"FERC" means the Federal Energy Regulatory Commission.
"FINAL CLOSING STATEMENT" has the meaning assigned to that term in
Section 3.3(e).
"GAAP" means generally accepted accounting principles, as recognized by the U.S. Financial Accounting Standards Board (or any generally recognized successor), consistently applied.
"GENERAL CAP" means the maximum amount of indemnifiable Damages which
may be recovered by all Buyer Indemnified Parties from Seller or Williams
Guarantor and by all Seller Indemnified Parties from Buyer arising out of,
resulting from or incident to the matters enumerated in Section 10.2(a) or
Section 10.2(b) with respect to any and all claims for indemnity other than
Environmental Claims. Such amount shall be the amount specified in paragraphs A
or B below, as applicable, plus any amount available pursuant to paragraph C
below.
A. In the event that the transactions described in
(i) this Agreement and (ii) a Retail Agreement close as
contemplated herein and therein, the amount of the General Cap
shall be $15,000,000; provided, however, that such amount is
an aggregate cap for this Agreement and the applicable Retail
Agreement. For the avoidance of doubt, this means that for
purposes of determining if such cap has been reached for any
Buyer Indemnified Parties, the Parties will look at whether
the aggregate amount of such Damages due to (i) the Buyer
Indemnified Parties under the applicable Retail Agreement and
(ii) the Buyer Indemnified Parties under this Agreement
exceeds $15,000,000. Further, for purposes of determining if
such cap has been reached for any Seller Indemnified Parties,
the Parties will look at whether the aggregate amount of such
Damages due to (i) the Seller Indemnified Parties under the
applicable Retail Agreement and (ii) the Seller Indemnified
Parties under this Agreement exceeds $15,000,000.
B. In the event that the transactions described in this Agreement close as contemplated herein, but the C Stores are not sold pursuant to a Retail Agreement, the amount of the General Cap shall be $14,500,000. For the avoidance of doubt, this means that for purposes of determining if such cap has been reached for any Buyer Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Buyer Indemnified Parties under this Agreement exceeds $14,500,000. Further, for purposes of determining if such cap has been reached for any Seller Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Seller Indemnified Parties under this Agreement exceeds $14,500,000.
C. In the event that the transactions contemplated in this Agreement close as contemplated herein and the transactions contemplated by the TAPS Purchase Agreement close as contemplated therein with an Affiliate of Buyer purchasing the WAPCO Interests (as defined in the TAPS Purchase Agreement) or TAPS Interests (as defined in the TAPS Purchase Agreement), Buyer will be entitled to any portion of the WAPCO General Cap (as defined in the TAPS Purchase Agreement) that the Buyer (as defined in the TAPS Purchase Agreement) has not used.
"GOVERNMENTAL ACTION" means any authorization, application, action, order, writ, injunction, decree, stipulation, approval, consent, ruling, decision, verdict, mandate, subpoena, command, directive, award, exemption, filing, judgment, license, notice, registration, permit or other requirement, determination, finding by, of, to or with any Governmental Authority.
"GOVERNMENTAL AUTHORITY" means any (a) nation, state, county, city, borough, town, village, district, territory, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); or (d) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature, in each case having jurisdiction over Seller or the Assets.
"HAZARDOUS MATERIAL" means (a) any chemicals, materials or substances defined as "hazardous waste," "hazardous substance," "hazardous constituent," "extremely hazardous substance," "toxic chemical," "hazardous material," "hazardous chemical," "toxic pollutant," "contaminant," "chemical," "chemical substance," "hazardous air pollutant," "pollutant," "pesticide," "toxic" or "asbestos," as such terms are defined in any of the Environmental Laws, and related substances, and all other substances which are regulated by any Environmental Laws or which may be declared to constitute a material threat to human health or to the environment, (b) any radioactive materials, asbestos-containing materials, urea formaldehyde foam insulation, ethylene glycol, lead, silica, and radon and (c) any Petroleum Products, except Petroleum Products that are produced, stored, refined or otherwise handled lawfully in the normal course of business and operation of the business.
"HIPAA" means the Health Insurance Portability and Accountability Act of 1996, as amended.
"HIRED EMPLOYEES" has the meaning assigned to that term in Section 6.7(a).
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
"IDENTIFIED SITE" has the meaning assigned to that term in Section 4.11(a).
"INDEBTEDNESS" means with respect to any Person without duplication (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property payment, but excluding obligations to trade creditors incurred in the Ordinary Course of Business that are not overdue by six (6) months unless being contested in good faith, (b) all reimbursement and other obligations with respect to letters of credit, bankers' acceptances and surety bonds, whether or not matured, (c) all obligations evidenced by notes, bonds, debentures or similar instruments and (d) guaranties of indebtedness.
"INDEMNIFIED PARTY" has the meaning specified in Section 10.3(a).
"INDEMNIFYING PARTY" has the meaning specified in Section 10.3(a).
"INDEPENDENT AUDITOR" has the meaning assigned to that term in Section 3.3(d).
"INTELLECTUAL PROPERTY" means any and all patents, license agreements, trade secrets, trademarks, copyrights, domain names, in-house developed software, hardware, information technology applications, proprietary and technical information, supplier lists and other supplier information, customer lists and other customer information, price lists, advertising and promotional materials, field performance data, research materials, other proprietary intangibles, databases, processes, technical know-how, business and product know-how, engineering and other drawings, designs, plans, methods, engineering and manufacturing specifications, technology, inventions, processes, methods, formulas, procedures, sales history, model numbers, literature and phone numbers, and operating and quality control manuals and data.
"INTEREST" has the meaning assigned to that term in Section 3.3(b).
"INVENTORY" means the crude oil, feedstock, intermediate petroleum products and refined products owned and/or paid for (including pre-pays) by Seller (a) located on Real Property, (b) located in pipelines, barges, tank cars, tank trucks or terminals belonging to third parties, or (c) purchased from third parties but in transit and not yet located on Real Property. Inventory includes tank bottoms but excludes: any hydrocarbons located within refinery process units, refinery piping and terminal piping; water and sludge located in tanks; Seller's accounts receivable; and Seller's accounts payable. Inventory shall be determined in accordance with the procedures on EXHIBIT J.
"IP SIDE AGREEMENT" shall have the meaning set forth in Section 6.19 of this Agreement.
"KNOWLEDGE" means, with respect to Seller, the actual knowledge after due inquiry of the following individuals: Randy Newcomer, Diane Prier, Keith Selby, Belinda Breaux, Kathleen McCullom, John Hellen, Jeff Cook, Kristen Winters, Steve Schluneger, Bob Hook, Henry Boland, Joe Hufman, Oran Paul, Dave Edic, Mike Gully, John Cherry, Kirk Payne, Chanaka Gunawardena, Abby Langenham, Tom Kelley and Linda Dunlap.
"LEASE" or "LEASES" shall mean those leases identified on EXHIBIT F.
"LEGAL REQUIREMENT" means any applicable order, constitution, law, ordinance, regulation, statute, code or treaty issued by any federal, state, local, municipal, foreign, international, multinational, or other administrative body, including an arbitration panel, any principle of common law or judicial or administrative interpretation thereof.
"LIABILITIES" shall mean, any and all direct or indirect liability, indebtedness, obligation, commitment, expense, loss, claim, action, suit, damages, fines, penalties, duties, deficiency, guaranty or endorsement of or by any Person of any type, whether accrued, absolute, contingent, matured, unmatured, liquidated, unliquidated, known or unknown, choate or inchoate or otherwise, including tax liabilities, liabilities in respect of products and liabilities arising under any Environmental Law.
"LICENSE PERIOD" shall have the meaning set forth in Section 6.8(b).
"LICENSED INTELLECTUAL PROPERTY" means the Intellectual Property used by Seller in connection with or related to the Assets with respect to which the rights being exercised by Seller have been licensed from another Person.
"LICENSORS" shall have the meaning set forth in Section 6.8(a).
"LIEN" means any lien, charge, mortgage, deed to secure debt, security interest, title defect, pledge, option, deed of trust, claim, easement, right of first refusal, production payment, restriction, proxy and voting or other agreement, claim, easement, preemptive right, option, right of first refusal, burden, encumbrance of any kind, rights of a vendor under any title retention, or conditional sale or lease agreement or other arrangement substantially equivalent thereto, in each case whether imposed by law, agreement, understanding or otherwise.
"MATERIAL ADVERSE CHANGE (OR EFFECT)" means (a) when used with respect to Seller or the Assets, (i) a change (or effect) in the condition (financial or otherwise), properties, assets, liabilities, rights, obligations, operations or business of Seller, which change (or effect), individually or in the aggregate, has had or would reasonably be expected to have a materially adverse effect on the condition, properties, assets, liabilities, rights, obligations, operations or business of Seller as it relates to the Assets, (ii) a result or consequence that would materially impair the ability of Seller to own, hold, develop or operate the Assets, or (iii) a result or consequence that would materially impair the ability of Seller to perform its obligations hereunder or to consummate the transaction contemplated hereunder; and (b) when used with respect to Buyer, a result or consequence that would impair Buyer's ability to perform its obligations hereunder or consummate the transactions contemplated hereby. In determining whether any individual event would result in a Material Adverse Effect, notwithstanding that such event does not in and of itself have such effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events would result in a Material Adverse Effect. Material Adverse Change or (Effect) shall not include an adverse effect arising from matters that generally affect the economy or industry in which the relevant Party or Williams Guarantor is engaged and shall not include any settlement of the TAPS Quality Bank Litigation approved by Buyer in writing or any post-Closing decisions relating to the TAPS Quality Bank Litigation.
"MINIMUM INDEMNIFIABLE AMOUNT" means $100,000.
"NEW C STORES ASPA" shall have the meaning set forth in Section 6.18.
"NEW C STORES PURCHASER" shall have the meaning set forth in Section 6.18.
"NEW PERMITS" has the meaning assigned to that term in Section 6.15.
"NORTH POLE REFINERY LEASE" means the lease between the State of Alaska and Energy Company of Alaska (now known as Williams Alaska Petroleum, Inc.) dated October 22, 1970 relating to the land under the North Pole refinery.
"ORDINARY COURSE OF BUSINESS" means action taken if (a) consistent in nature, scope, and magnitude with past practices and is taken in the ordinary course of the normal, day-to-day operations, (b) does not require authorization by the board of directors or shareholders of Seller and does not require any other separate or special authorization of any nature, and (c) is in accordance with all Legal Requirements.
"ORGANIZATIONAL DOCUMENTS" means the articles of incorporation, bylaws, operating agreement, partnership agreement, regulations concerning the board resolutions, and other similar documents, instruments or certificates executed, adopted, or filed in connection with the creation, formation, or organization of a Person, including any amendments thereto.
"PARTY" and "PARTIES" means each of Seller and Buyer, but shall not include the Williams Guarantor.
"PERMITS" means the permits, licenses, certificates, variances, exemptions, orders, franchises, approvals, filings, consents, accreditation, registrations and authorizations of all Governmental Authorities necessary for the lawful conduct of the business conducted by Seller or the lawful possession, ownership, use or operation by Seller of the Assets.
"PERMITTED LIENS" means:
(a) the terms, conditions, restrictions, obligations, exceptions, reservations, limitations and other matters contained in any rights of way or documents under which Seller obtained any rights of way or other property rights associated with the Real Property, in each case that do not, and will not, interfere materially with the possession, ownership, use, operation or value of the Assets;
(b) liens for property taxes and assessments that are not yet due and payable as of the Effective Time (or if delinquent, that are being contested in good faith by Seller by appropriate proceedings);
(c) any obligations or duties affecting the Assets to the extent created by any Governmental Authority under any Permit or Legal Requirement;
(d) easements, restrictive covenants, defects in title and irregularities, and other matters that (i) are of record and (ii) do not interfere materially with the possession, ownership, use, operation or value of the Assets; and
(e) mechanic's, materialmen's, repairmen's and other statutory liens arising in the Ordinary Course of Business and securing obligations incurred prior to the Effective Time, for which Seller is and will remain responsible for payment and removal of such liens and for which Seller has escrowed funds for such payment.
"PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities.
"PETROLEUM PRODUCTS" means any crude oil, condensate, petroleum or petroleum products, natural or synthetic gas.
"PLANS" OR "PLAN" means the savings, Code section 401(k), pension, retirement, medical, dental, life insurance, accident and sickness, short-term disability, long-term disability, profit-sharing, flexible spending account, deferred compensation, stock option, vacation, stock bonus, employee stock ownership, bonus, discount fuel purchasing, severance, or other similar plans, programs, agreements, and arrangements, including all employee benefit plans as defined in Section 3(3) of ERISA, which are maintained by or contributed to by Seller or its Affiliates.
"PRELIMINARY STATEMENT" has the meaning assigned to that term in
Section 3.2.
"PROCEEDING" means any action, arbitration, audit, claim, inspection, notice, review, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal), at law or in equity, commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Authority or arbitrator.
"PURCHASE PRICE" has the meaning assigned to that term in Section 3.1.
"PURCHASE PRICE ALLOCATION" has the meaning assigned to that term in
Section 3.1.
"QUALITY BANK LIABILITY" means any Liability of Seller that relates to or arises from measurements or differences in quality or value of substances received from and/or injected into TAPS prior to the Effective Time, whether due as a result of normal operations, FERC and/or the Regulatory Commission of Alaska and/or or other Governmental Authority decision or judgment, legal settlement, or other Contract.
"REAL PROPERTY" means all real property and interests in real property owned by Seller and constituting an Asset or leased by Seller pursuant to a Lease, including all buildings, fixtures, structures and other improvements of any kind or nature situated thereof, together with any easements, appurtenances, licenses, servitudes, tenancies, options, rights-of-way (including, without limitation, rights to adjacent streets and alleys), licenses, and other real property rights and privileges and interest relating therein, and set forth on EXHIBIT I.
"REIMBURSEMENT" shall have the meaning set forth in Section 10.3(b).
"RELEASE" or "RELEASED" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, migrating or disposing (including the abandoning or discarding of barrels, containers and other closed receptacles containing any Hazardous Material) of a substance into the environment, including the movement or continued movement of any materials through or in the air, soil, surface water, ground water or property.
"REPRESENTATIVE" means, with respect to any Person, any director, officer, employee, agent, advisor (including legal, accounting and financial advisors), Affiliate or other representative or agent authorized to act on behalf of such Person.
"RETAIL AGREEMENT" shall mean either the C Stores ASPA, the New C Stores ASPA or an agreement entered in connection with the exercise of the C Stores Option by Flint Hills Resources, LLC.
"RESPONSIBLE OFFICER" means, with respect to Seller or Buyer, the Chairman, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer or any Vice President of such Party.
"REQUIRED CONSENTS" has the meaning assigned to that term in Section 6.15.
"SELLER" has the meaning specified in the introductory paragraph of this Agreement.
"SELLER CLAIMS ADMINISTRATOR" shall have the meaning set forth in
Section 10.3(f).
"SELLER CONTRACTS" has the meaning assigned to that term in Section 4.13.
"SELLER HEDGES" has the meaning assigned to that term in Section 3.1.
"SELLER INDEMNIFIED PARTY" shall have the meaning set forth in Section 10.2(b).
"SUPPLEMENTAL FINANCIAL STATEMENTS" has the meaning assigned to that term in Section 6.10.
"SUPPLEMENTAL OPERATING SUMMARIES" has the meaning assigned to that term in Section 6.10.
"SUPPLY AGREEMENT" has the meaning assigned to that term in Section 6.18.
"SURVEY" shall have the meaning set forth in Section 6.14(b).
"TAPS" means the Trans Alaska Pipeline System.
"TAPS PURCHASE AGREEMENT" has the meaning specified in the Recitals.
"TAPS QUALITY BANK LITIGATION" means FERC Dockets OR-89-2-000 et al., RCA Dockets P-89-2 et al., consolidated, and related proceedings and settlement discussions.
"TAX RETURN" means any return, report or similar statement required to be filed with respect to any Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Taxes.
"TAXES" means taxes of any kind, levies or other like assessments, customs, duties, or imposts, including income, gross receipts, ad valorem, value added, excise, motor fuel, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes or other governmental taxes imposed or payable to the United States or any state, local or foreign governmental subdivision or agency thereof, and in each instance such term shall include any interest, penalties or additions to tax attributable to any such Tax, including penalties for the failure to file any Tax Return or report.
"THREATENED" means, with respect to Seller, as follows: a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (in writing or, to Seller's Knowledge, verbally) or any notice has been given (in writing or, to Seller's Knowledge, verbally).
"THRESHOLD" means such amount as specified in paragraphs A or B below, as applicable, plus any amount available pursuant to paragraph C below.
A. In the event that the transactions described in
(i) this Agreement and (ii) a Retail Agreement close as
contemplated herein and therein, the amount of the Threshold
shall be $2,000,000; provided, however, that such amount is an
aggregate threshold for this Agreement and the applicable
Retail Agreement. For the avoidance of doubt, this means that
for purposes of determining if such threshold has been reached
for any Buyer Indemnified Parties, the Parties will look at
whether the aggregate amount of Damages due to (i) the Buyer
Indemnified Parties under the applicable Retail Agreement and
(ii) the Buyer Indemnified Parties under this Agreement
exceeds $2,000,000. Further, for purposes of determining if
such threshold has been reached for any Seller Indemnified
Parties, the Parties will look at whether the aggregate amount
of Damages due to (i) the Seller Indemnified Parties under the
applicable Retail Agreement and (ii) the Seller Indemnified
Parties under this Agreement exceeds $2,000,000.
B. In the event that the transactions described in this Agreement close as contemplated herein, but the C Stores are not sold pursuant to a Retail Agreement, the amount of the Threshold shall be $2,000,000. For the avoidance of doubt, this means that for purposes of determining if such threshold has been reached for any Buyer Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Buyer Indemnified Parties under this Agreement exceeds $2,000,000. Further, for purposes of determining if such threshold has been reached for any Seller Indemnified Parties, the Parties will look at whether the aggregate amount of all Damages due to the Seller Indemnified Parties under this Agreement exceeds $2,000,000.
C. In the event that the transactions contemplated in this Agreement close as contemplated herein and the transactions contemplated by the TAPS Purchase Agreement close as contemplated therein with an Affiliate of Buyer purchasing the WAPCO Interests (as defined in the TAPS Purchase Agreement), Buyer will be obligated to assume any amount of the WAPCO Threshold (as defined in the TAPS Purchase Agreement) that the Buyer (as defined in the TAPS Purchase Agreement) has not used.
"THIRD PARTY CLAIM" shall have the meaning set forth in Section 10.3(a).
"TITLE COMMITMENTS" shall have the meaning set forth in Section 6.14(a).
"TITLE COMPANY" shall have the meaning set forth in Section 6.14(a).
"TITLE POLICY" shall have the meaning set forth in Section 6.14(c).
"TRANSFER PERMITS" has the meaning assigned to that term in Section 6.15.
"TRANSFER TAXES" has the meaning assigned to that term in Section 6.9(a).
"TRANSFERABLE PERMITS" means those Permits and Environmental Permits that are transferable to Buyer prior to or at Closing and that Buyer has requested that Seller transfer to Buyer as set forth on EXHIBIT H.
"TRANSITION SERVICES AGREEMENT" means the form of agreement attached as EXHIBIT K pursuant to which Seller agrees to provide certain services to Buyer after the Closing.
"WARN ACT" means the Worker Adjustment and Retraining Notification Act, as amended.
"WILLIAMS GUARANTOR" has the meaning specified in the introductory paragraph of this Agreement.
"WILLIAMS GUARANTY" has the meaning specified in Section 8.2(b).
"WILLIAMS MARKS" has the meaning set forth in Section 6.8(a).
1.2 OTHER DEFINITIONAL PROVISIONS.
(a) All references in this Agreement to Exhibits, Articles,
Sections, subsections and other subdivisions refer to the corresponding
Exhibits, Articles, Sections, subsections and other subdivisions of or to this
Agreement unless expressly provided otherwise. References in a Section of this
Agreement to any Disclosure Schedule shall refer to (i) that section or schedule
of the Disclosure Schedule which corresponds to the number of such Section, and
(ii) any other Section or Schedule that contains information or disclosures that
reasonably relate to the substance of such Section or Schedule. Titles appearing
at the beginning of any
Articles, Sections, subsections or other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof.
(b) Exhibits and Schedules to this Agreement are attached hereto and by this reference incorporated herein for all purposes.
(c) The words "THIS AGREEMENT," "HEREIN," "HEREBY," "HEREUNDER" and "HEREOF," and words of similar import, refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The words "THIS ARTICLE," "THIS SECTION" and "THIS SUBSECTION," and words of similar import, refer only to the Article, Section or subsection hereof in which such words occur. The word "OR" is not exclusive, and the word "INCLUDING" (in its various forms) means including without limitation.
(d) Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires.
ARTICLE II.
PURCHASE AND SALE OF ASSETS
2.1 ASSETS. Subject to the terms and conditions hereof, as of the Effective Time, Seller will sell, assign, transfer and convey to Buyer or its designee and Buyer or its designee shall purchase all of Seller's right, title and interest in and to the Assets, free and clear of all Liens other than Permitted Liens.
2.2 EXCLUDED ASSETS. The Assets shall not include any of the following assets of Seller related to the Assets (hereinafter collectively called the "Excluded Assets"):
(a) Any refunds and interest for the years 2001, 2002, 2003 and 2004 (prior to the Effective Time) ordered in the intrastate rate case pending before the Regulatory Commission of Alaska, docket number P-03-4;
(b) The rights to any and all payments received or receivable by Seller or its Affiliates after Closing in connection with the claims that are being pursued in the action captioned "Williams Alaska Petroleum, Inc. and Williams Energy Marketing & Trading v. The United States" pending in the United States Court of Federal Claims, Case No. 02-705C;
(c) Any refunds and interest for periods prior to the Effective Time arising out of the intrastate rate case pending before the Regulatory Commission of Alaska, docket numbers P-97-4/P-97-7 and P-86-2;
(d) The membership interest in Williams Alaska Air Cargo Properties, L.L.C.;
(e) Seller's accounts receivable as of the Effective Time;
(f) Any benefits or rights under any Contracts of Seller to the extent accruing before the Effective Time, except as specifically described in Section 2.2(f) of the Disclosure Schedule;
(g) Seller's contract or contracts with the State of Alaska for the purchase of crude oil;
(h) All hedges with any Affiliates of Seller or Williams Guarantor that affect the Assets; and
(i) The assets set forth with particularity on EXHIBIT L.
2.3 LIABILITIES. Except as otherwise expressly stated in this Agreement, Seller shall retain, and shall pay and discharge, all Liabilities to the extent relating to or arising out of the use, ownership or operation of the Assets prior to the Effective Time. Notwithstanding anything to the contrary contained herein, Buyer shall not assume, or in any way be liable or responsible for, any Liabilities of Seller (whether accrued or contingent or due or not due) which are not expressly stated in this Agreement. Without limiting the generality of the foregoing, Seller's retained Liabilities shall include:
(a) The full amount of the Quality Bank Liability (for the avoidance of doubt, this Section 2.3(a) in no way applies to any Liability to the extent relating to or arising from measurements or differences in quality or value of substances received from and/or injected into TAPS after the Effective Time, whether due as a result of normal operations, FERC and/or the Regulatory Commission of Alaska and/or or other Governmental Authority decision or judgment, legal settlement, or other Contract);
(b) Any Liability to which Seller or its Affiliates or Buyer or its Affiliates may become subject in connection with purchases of royalty oil from the State of Alaska prior to the Effective Time;
(c) Any Liabilities arising from, relating to or incident to the Excluded Assets;
(d) Seller's accounts payable as of the Effective Time; and
(e) Except as otherwise expressly stated in this Agreement, any Liabilities arising from, relating to or incident to the possession, use, ownership, operation or existence of the Assets, and any Liability, warranty or indemnity of Seller or its Affiliates arising from, relating to or incident to the Assets (whether by statute, Contract, tort or otherwise) that arises from, relates to or is incident to the period prior to the Effective Time, including all of the Liabilities associated with, resulting from or incident to:
(i) any assets, properties, Contracts or other interests of Seller or its Affiliates;
(ii) except as described in Section 2.3(e)(ii) of the Disclosure Schedule, any Liabilities under any Contract of Seller to the extent accruing before the Effective Time;
(iii) a breach or violation (or acts, events or circumstances with which notice or passage of time would constitute a breach or violation) of any Contract that is part of the Assets prior to the Effective Time by Seller or its Affiliates;
(iv) nonpayment of any accrued expenses, fees or amounts due under any Contract that is part of the Assets by Seller or its Affiliates, which amounts accrued or were otherwise due prior to the Effective Time;
(v) personal injuries, bodily injury, sickness or disease that arises out of or relates to events, circumstances or occurrences prior to the Effective Time (including any arising from or relating to any exposure or contact with any allegedly injurious or Hazardous Materials) and relating to or arising out of the possession, use, ownership or operation of the Assets prior to the Effective Time, except to the extent that such Liabilities are caused or contributed to by Buyer's operations, actions or omissions after the Effective Time;
(vi) property losses or damages to the extent the alleged property loss or damage occurred before the Effective Time or arises out of, or relates to, the possession, use, ownership or operation of the Assets prior to the Effective Time, except to the extent that such Liabilities are caused or contributed to by Buyer's operations, actions or omissions after the Effective Time, and any and all ongoing insurance premiums, taxes, assessments, indemnification obligations, loss payment obligations and all other costs and expenses related to any insurance policies procured by Seller or its Affiliates prior to the Effective Time;
(vii) any assets, products, employees or operations of Seller or its Affiliates not included in the Assets or any facilities, businesses or entities previously divested, sold or otherwise discontinued by Seller, its Affiliates, or their respective predecessors;
(viii) any failures by Seller or its Affiliates to comply with any Legal Requirement prior to the Effective Time, including any currently pending or Threatened litigation and any fines or penalties imposed on Seller or its Affiliates, or with respect to any of the Assets by a Governmental Authority;
(ix) any payment obligations of Seller or its Affiliates for goods delivered or services rendered before the Effective Time, any and all costs for title reports and surveys, and any other operating expenditures, associated overhead expenses and accounts payable to the extent relating to the possession, use, ownership, or operations of the Assets for periods up to the Effective Time;
(x) any Liabilities relating to any of Seller's or its Affiliates' employees or former employees or the employees or former employees of any ERISA Affiliate, including, without limitation, compensation and Liabilities under the Plans or any employee benefit plans sponsored or maintained by Seller, its Affiliates, or any ERISA Affiliate, including
any liability: (i) under Title IV of ERISA, (ii) with respect to the continuation coverage requirements of COBRA, (iii) with respect to any noncompliance with ERISA, the Code or any other applicable Legal Requirements, or (iv) with respect to any suit, proceeding or claim that is brought regarding any such Plan or any fiduciary or former fiduciary of any such Plan;
(xi) Seller's or its Affiliates' employment or termination of employment of their respective employees and Liabilities of Seller or any Affiliate for noncompliance with Legal Requirements related to its or their employees, including HIPAA;
(xii) with respect to any infringement or misappropriation, or claims of infringement or misappropriation, of any Intellectual Property rights of any Person resulting from or related to the Assets for periods up to the Effective Time;
(xiii) any Liability of Seller or its Affiliates related to Taxes;
(xiv) litigation, claims or suits relating to the Assets pending or Threatened as of the Effective Time, or related to or arising out of any period up to the Effective Time, including any litigation disclosed in, or arising from, the matters set forth in Section 4.10 of the Disclosure Schedule;
(xv) any Liens on the Assets, other than the Permitted Liens;
(xvi) any of Seller's or any of its Affiliates' Indebtedness, including any inter-company Indebtedness;
(xvii) Environmental Liabilities to the extent arising in, relating to or accruing in periods up to and including the Effective Time, other than the Environmental Liabilities set forth on Section 10.2(a)(iv) of the Disclosure Schedule;
(xviii) Seller's obligation to repay TAPS linefill borrowed from the State of Alaska; and
(xix) Seller's obligation to deliver jet fuel owned by Federal Express.
2.4 REVENUES AND EXPENSES.
(a) Seller shall be: (i) entitled to all operating revenues
(and related accounts receivable) attributable to the Assets, and (ii)
responsible for the payment of all Liabilities (including accounts payable,
customer deposits, customer prepayments, lease deposits, etc.) attributable to
the Assets, in each case to the extent the foregoing are earned or incurred
prior to the Effective Time.
(b) Buyer shall be: (i) entitled to all operating revenues
(and related accounts receivable) attributable to the Assets, and (ii)
responsible for the payment of all Liabilities (including accounts payable,
customer deposits, customer prepayments, lease deposits, etc.)
attributable to the Assets, in each case to the extent the foregoing are earned or incurred after the Effective Time.
(c) To the extent that any Party receives any funds to which the other Party is entitled pursuant to Section 2.4(a) or (b), the Party receiving such funds shall deliver the funds to the other Party within five (5) Business Days after actual receipt of such funds. If any Party pays any cost or expense (or related account payable) that is properly borne by the other Party pursuant to Section 2.4(a) or (b), the Party responsible for such cost or expense (or related account payable) shall promptly reimburse the Party who made such payment within five (5) Business Days via wire transfer of immediately available funds or ACH. The obligations of Seller and Buyer under this Section 2.4(c) shall be performed without any right of setoff. Each Party shall give representatives of the other Party reasonable access to its books and records related to the Assets as are reasonably necessary for purposes of reviewing, verifying and auditing any amount payable pursuant to this Section 2.4(c). The term "Party" shall include Williams Guarantor for purposes of this Section 2.4(c).
ARTICLE III.
PURCHASE PRICE
3.1 THE PURCHASE PRICE AND ALLOCATION. The cash purchase price for the Assets shall be an amount equal to $125,320,000 plus the actual market value of Inventory at the Effective Time as calculated in accordance with EXHIBIT J-1 ("Closing Inventory Amount") minus the net present value of Seller's hedges with an Affiliate of Seller (the "Seller Hedges") as calculated in accordance with the procedures set forth on EXHIBIT M (the "Closing Hedge Liquidation Amount"). Within 120 days after the Closing Date, but in no event prior to the resolution of any dispute under Section 3.3(d), Buyer shall prepare and deliver to Seller an allocation of the Purchase Price (as required under the Code) among the various Assets prepared in accordance with Section 1060 of the Code (the "Purchase Price Allocation"). As provided in Section 6.9(b), Buyer and Seller shall cooperate and in good faith attempt to reach an agreement regarding the Purchase Price Allocation. In the event that Buyer and Seller are able to reach such agreement, Buyer and Seller shall be bound by such Purchase Price Allocation for all purposes, and neither Party shall take any contrary position regarding such allocation in any Tax Return, audit, appeal, contest or otherwise.
3.2 PAYMENT OF THE CLOSING PURCHASE PRICE. Not later than five (5) Business Days prior to the Closing, Seller shall deliver to Buyer a statement (the "Preliminary Statement") setting forth in reasonable detail Seller's good faith estimate of the Closing Inventory Amount and the Closing Hedge Liquidation Amount. At the Closing, Buyer shall make a cash payment to Seller in an amount equal to $125,320,000 plus 75% of Seller's estimate of the Closing Inventory Amount minus the Closing Hedge Liquidation Amount (the "Closing Payment") to be made by wire transfer of immediately available funds to such account as Seller shall designate.
3.3 CLOSING INVENTORY LIQUIDATION ADJUSTMENT. A post-closing adjustment to the Closing Payment shall be made as follows:
(a) MEASUREMENT OF CLOSING INVENTORY. At the Effective Time, Buyer and Seller shall conduct a physical inventory of the Inventory to provide the information necessary for the determination of the Inventory as of the Effective Time (the "Closing Inventory"), which shall be used to determine the Closing Inventory Adjustment Amount as described in Section 3.3(b). The physical inventory shall be conducted in accordance with the protocol described on EXHIBIT J-2 by an independent testing agent mutually selected by Buyer and Seller or, in the absence of such agreement, by one independent testing agent selected by Buyer and one independent testing agent selected by Seller.
(b) DETERMINATION OF CLOSING INVENTORY ADJUSTMENT AMOUNT. If the payment at Closing for 75% of the estimated Closing Inventory Amount exceeds the actual Closing Inventory Amount determined using the Closing Inventory, Seller shall pay to Buyer an amount equal to such excess, plus interest at the thirty day USD Libor rate published by the British Bankers Association two Business Days prior to the Effective Time ("Interest") on the portion of such excess for the actual number of days between the Effective Time and the date the payment is made. If the payment at Closing for 75% of the estimated Closing Inventory Amount is less than the actual Closing Inventory Amount determined using the Closing Inventory, Buyer shall pay to Seller an amount equal to such difference, plus Interest on such difference for the actual number of days between the Effective Time and the date the payment is made. The amount of the payment to be made by Buyer or Seller, as applicable, pursuant to this Section 3.3(b) shall be referred to as the "Closing Inventory Adjustment Amount." The Closing Inventory Adjustment Amount shall be paid by Seller or Buyer, as applicable, within five (5) Business Days of the determination of the Final Closing Statement.
(c) CLOSING STATEMENT. As promptly as practicable after the Closing Date, and in any event not later than forty-five (45) days after the Effective Time, Buyer shall prepare and deliver to Seller (i) a statement (the "Closing Statement"), which shall set forth in reasonable detail (A) the Closing Inventory and (B) its calculations of the Closing Inventory Adjustment Amount as described in Section 3.3(b) and (ii) a copy of the schedule of Closing Inventory. Buyer, at no cost to Seller, shall provide all information reasonably requested by Seller and shall give representatives of Seller reasonable access to the premises, employees and other facilities related to the Assets and to books and records related to the Assets as are reasonably necessary for purposes of reviewing, verifying and auditing the Closing Inventory Adjustment Amount.
(d) DISPUTE RESOLUTION. The Closing Statement shall become
final and binding on Seller and Buyer as to the Closing Inventory Adjustment
Amount thirty (30) days following the date the Closing Statement is received by
Seller (the "Dispute Deadline Date"), unless prior to the Dispute Deadline Date,
Seller delivers notice that it disputes the Closing Inventory Adjustment Amount
and/or Closing Statement. Seller's notice shall set forth all of Seller's
disputed items together with Seller's proposed changes thereto, including an
explanation in reasonable detail of the basis on which Seller proposes such
changes. If Seller has delivered a timely notice of disagreement, then Buyer and
Seller shall use their good faith efforts to reach written agreement on the
disputed items to determine the Closing Inventory Adjustment Amount. If all of
Seller's disputed items have not been resolved by Buyer and Seller within sixty
(60) days following Seller's receipt of the Closing Statement, then Seller's
disputed items shall be submitted for final and binding determination to KPMG
LLP (the "Independent Auditor") who
shall act as an expert and not an arbitrator, within five (5) Business Days after the end of the foregoing sixty (60) day period. The determination of the Closing Inventory Adjustment Amount by the Independent Auditor shall be final and binding upon Buyer and Seller as to the Closing Inventory Adjustment Amount. If the Independent Auditor determines that Buyer is entitled to less than 50% of the dollar value of the total disputed items, Buyer shall pay all of the Independent Auditor's fees and expenses in connection with this Section 3.3(d). If the Independent Auditor determines that Buyer is entitled to 50% or more of the dollar value of the total disputed items, Seller shall pay all of the Independent Auditor's fees and expenses in connection with this Section 3.3(d).
(e) FINAL CLOSING STATEMENT. The Closing Inventory Adjustment Amount shall be deemed to be finally determined in the amount set forth in the Closing Statement on the Dispute Deadline Date unless a dispute notice is given in accordance with Section 3.3(d) with respect to the calculation thereof. If such a dispute notice is given, the Closing Inventory Adjustment Amount shall be deemed finally determined on the date that the Independent Auditor gives notice to Buyer and Seller of its determination with respect to all disputes regarding the calculation thereof, or, if earlier, the date on which Seller and Buyer agree in writing on the amount thereof, in which case the Closing Inventory Adjustment Amount shall be calculated in accordance with such determination or agreement, as the case may be. The Closing Statement as accepted by Seller (by absence of notice pursuant to Section 3.3(d)), as mutually agreed upon by the Parties or as determined by the Independent Auditor shall be referred to as the "Final Closing Statement."
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth in the Disclosure Schedule, Seller represents and warrants to Buyer the statements contained in this Article IV are correct and complete as of the date hereof and will be correct and complete as of the Closing Date and the Effective Time:
4.1 ORGANIZATION; AUTHORITY. Seller is a corporation, duly organized, validly existing and in good standing under the laws of the State of Alaska and has the requisite power and authority to own, lease and operate its assets and properties, and to conduct the business that it is currently conducting. Seller has full corporate power and authority necessary to execute and deliver this Agreement and all the documents related thereto, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated in this Agreement. The execution, delivery and performance of this Agreement by Seller has been duly authorized by all necessary corporate, shareholder and other action, and no further corporate, shareholder or other action is necessary on the part of Seller to execute and deliver this Agreement and all the documents related thereto and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated by this Agreement.
4.2 VALIDITY AND BINDING EFFECT. Assuming the due authorization, delivery and execution of this Agreement by Buyer, this Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles, regardless of whether enforceability is considered in a proceeding at law or in equity.
4.3 NO VIOLATIONS. Except as specified in Section 4.3 of the Disclosure
Schedule, neither the execution and delivery of this Agreement and the other
agreements contemplated hereby by Seller, nor the consummation of the
transactions contemplated hereby or thereby will (a) violate, conflict with or
result in the breach of any provision of the Organizational Documents of Seller;
(b) result in a material violation of or conflict with any Legal Requirement or
Governmental Action applicable to or affecting Seller, or any of its assets or
properties (including the Assets); (c) result in a material breach of, or a
maturity under, or constitute a material default (or event which with the giving
of notice or lapse of time, or both, would become a material default) under, or
result in, or give to others any rights of, termination, amendment or
acceleration of any Contract (or any rights, benefits or payments thereunder) or
Permit; (d) give any Person the right or option to purchase, or trigger or give
any Person the right of first refusal or similar right with respect to, any of
the Assets; or (e) result in the creation of any Lien on any of the Assets.
4.4 GOVERNMENTAL CONSENTS AND APPROVALS. Except as set forth in Section 4.4 of the Disclosure Schedule, no Consent with, or to, any Governmental Authority is required by or with respect to Seller in connection with the execution and delivery of this Agreement by Seller, the performance of this Agreement by Seller, or the consummation of the transactions contemplated by this Agreement by Seller, except for the filing of a pre-merger notification report by Seller under the HSR Act and the expiration or termination of the applicable waiting period thereunder.
4.5 TITLE TO ASSETS; NO LIENS; SUFFICIENCY OF ASSETS; CONDITION.
(a) TITLE TO ASSETS. Seller owns, has a leasehold or license interest in or rights to, all of the Assets (including the leased Real Property) and Seller has good, valid and marketable title to all of the Assets (including the owned Real Property) not leased or licensed.
(b) NO LIENS. The Assets are free and clear of all Liens and Indebtedness, except for (i) Liens set forth in Section 4.5(b) of the Disclosure Schedule and (ii) Permitted Liens.
(c) SUFFICIENCY OF ASSETS. Except as set forth in Section 4.5(c) of the Disclosure Schedule, the Assets include all assets, facilities, properties, equipment, fixtures, Contracts, Permits, infrastructure and other rights, privileges and interests necessary to conduct or operate the Assets as currently operated by Seller.
(d) CONDITION OF TANGIBLE ASSETS. Except as set forth in
Section 4.5(d) of the Disclosure Schedule, each item of tangible personal
property or fixture (including all equipment and infrastructure, whether
classified as real property, personal property or a fixture under applicable
law) that is part of the Assets is in good and workable condition and repair
(normal wear and tear excepted), free of any material defect, suitable for the
purposes for which it is
being used, has been maintained in accordance with normal industry practices, is not experiencing any material mechanical or integrity problems, and no material maintenance of such Assets is due or has been delayed.
(e) NO ABANDONED FACILITIES, ETC. None of the Assets includes any abandoned facilities, and except as set forth in Section 4.5(e) of the Disclosure Schedule, none of the Assets require reclamation, restoration or remediation under Legal Requirement, agreement or otherwise. No asset essential to the use or operation of the Assets has been diverted to other uses in contemplation of the sale of the Assets.
(f) INVENTORY. All Inventory is merchantable, is fit for the purposes for which it is to be sold, exchanged or intended, and does not contain any obsolete or unusable inventory.
4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 4.6 of the Disclosure Schedule, disclosed on an Exhibit attached hereto
or as specifically contemplated by this Agreement, since March 31, 2003:
(a) Seller has operated the Assets only in the Ordinary Course of Business;
(b) Seller has made all reasonable efforts consistent with past practices to preserve the relationships with customers, suppliers and others with whom Seller deals;
(c) there has not been any Material Adverse Change;
(d) Seller has not incurred any material Liability or entered into any material Contract;
(e) there has not been any material loss, damage, destruction, condemnation or other casualty (whether or not covered by insurance) with respect to any of the Assets;
(f) there has not been any change in any of the accounting principles or policies followed by Seller;
(g) except normal periodic increases or promotions effected in the Ordinary Course of Business, Seller has not made any change in the compensation levels (whether it be salary, wage, commission, bonus or other direct or indirect remuneration) of any Employees (salaried or hourly), independent contractors, officers or directors or material changes in the manner in which Employees of Seller are generally compensated, or any provision of additional or supplemental benefits for Employees of Seller generally;
(h) there has not been any citation or notice received by Seller for violation of any Legal Requirement;
(i) there has not been a material change in the terms of any Plan that has not been disclosed to Buyer in writing or otherwise delivered in documents made available to Buyer;
(j) there has not been a grant of, or the existence of, any Lien in any of the Assets, other than Permitted Liens; and
(k) Seller has not agreed to take any action described in this
Section 4.6, whether in writing or otherwise.
4.7 ACCURACY OF STATEMENTS. To Seller's Knowledge, no representation, warranty or other statement made by Seller to Buyer in this Agreement or any statement, certificate or schedule furnished to Buyer pursuant to this Agreement contains any untrue statement of a material fact or omits to state a material fact that would make the statements contained therein misleading. Seller has no Knowledge of any fact that has specific application to Seller that may have a Material Adverse Effect that has not been set forth in this Agreement.
4.8 COMPLIANCE WITH LEGAL REQUIREMENTS. Except as set forth in Section 4.8 of the Disclosure Schedule, and except with respect to Environmental Matters, Employee Matters and Taxes (which are the subject of separate representations in Sections 4.11, 4.14 and 4.15, respectively), (a) Seller and the Assets are not in violation of, or in default under, and no event has occurred that (with notice or the lapse of time or both) would constitute a material violation of or default under any applicable Legal Requirement; and (b) no investigation or review by any Governmental Authority with respect to Seller or the Assets is pending or Threatened.
4.9 PERMITS. Section 4.9 of the Disclosure Schedule contains a true and complete list of all Permits issued or granted to Seller necessary to operate the Assets. Seller has obtained and holds all of the Permits required by it to own and operate the Assets as they have been conducted and each of these Permits have been fully paid for. Each Permit has been validly issued and is in full force and effect. Seller is in compliance in all material respects with the terms of its Permits and there are no proceedings pending or Threatened, which may result in the revocation, cancellation, limitation, suspension or modification of any Permit.
4.10 LITIGATION. Except as set forth in Section 4.10 of the Disclosure Schedule: (a) no Actions of any Governmental Authority or any other Person is pending or Threatened against, related to, or affecting the Assets, Seller or Seller's officers or directors, and Seller has no Knowledge of any matters which are reasonably likely to result in any such Action; and (b) Seller is not subject to or in default of any outstanding injunction, writ, judgment, order, decree or ruling by a Governmental Authority. There is no Action pending or Threatened, related to or affecting Seller, or any of the Assets that (i) questions the validity or enforceability of this Agreement or any other document, instrument or agreement to be executed and delivered by Seller in connection with the transactions contemplated by this Agreement or (ii) which could prohibit, limit, or delay the consummation of the transactions contemplated by this Agreement.
4.11 ENVIRONMENTAL MATTERS.
(a) Except as set forth in Section 4.11 of the Disclosure Schedule: (i) Seller is in compliance with, and has complied in all respects with and, to Seller's Knowledge, there are and have been no violations of, any Environmental Laws applicable to the Assets or to the
possession, use, ownership, or operation by Seller of the Assets; (ii) Seller possesses all required Permits, identification numbers, and other authorizations required under any applicable Environmental Laws to own or operate the Assets ("Environmental Permits"), and they may be assigned or transferred to Buyer without the consent or approval of any Governmental Authority or other Person and such assignment or transfer will not cause any such Environmental Permit to be revoked, limited or terminated; (iii) to the Knowledge of Seller, Seller is in compliance with, and has complied in all respects with, the provisions of all Environmental Permits and there are and have been no violations of, any Environmental Permits; (iv) there have been and, to the Knowledge of Seller, are no Environmental Conditions on or affecting the Assets; (v) there are no Hazardous Materials on the Real Property, except as allowed by Environmental Laws; (vi) to the Knowledge of Seller, Seller has not caused or taken any action that would result in, and Seller is not subject to, any Liability under any Environmental Laws arising from the possession, use, ownership or operation of the Assets; (vii) Seller has filed all notices required under all Environmental Laws and Environmental Permits; (viii) Seller has and will have taken all actions required under applicable Environmental Laws and Environmental Permits to satisfy or obtain the approval of a Governmental Authority of the transactions contemplated by this Agreement; (ix) the Environmental Reports constitute all information and data, including all studies, analyses and test results, in Seller's possession, custody or control relating to environmental matters associated with the Assets, including all Environmental Conditions and all Hazardous Materials, and all such Environmental Reports have been disclosed to Buyer; (x) the Real Property is not listed or, to Seller's Knowledge, proposed for listing under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, or under any similar state list, or the subject of any federal, state or local enforcement action or investigation, or citizen's suit, under any Environmental Law ("Identified Site"); (xi) the Real Property has never operated subject to "interim status" or other permit requirements imposed by the Resource Conservation and Recovery Act, as amended, or similar state statute, regardless of whether such interim status or other permit was ever lawfully obtained; (xii) Seller has not transported or arranged for transportation of (directly or indirectly) to any Identified Site any Hazardous Materials generated or created by the possession, use, ownership or operation of the Assets; and (xiii) there is not now, nor at any time in the past has there been, at, on or in any of the Real Property, any (A) "treatment", "recycling", "storage" or "disposal" of any "Hazardous Waste", as these terms are defined in the Resource Conservation & Recovery Act, as amended and in the regulations promulgated thereunder, or (B) surface impoundment, landfill lagoon or other containment facility for the temporary or permanent "storage", "treatment", or "disposal" of "Hazardous Waste", as these terms are defined in the Resource Conservation & Recovery Act, as amended and in the regulations promulgated thereunder.
(b) Except as set forth in Section 4.11 of the Disclosure Schedule: to Seller's Knowledge, there are no facts or circumstances related to environmental matters concerning the Assets that could reasonably be expected to lead to any new Environmental Liabilities under any applicable Environmental Law.
(c) Seller has disclosed to AIG all "Pollution Conditions" (as defined in the Environmental Insurance Policy) existing prior to and known by "Responsible Insured" (as defined in the Environmental Insurance Policy) of Seller as of the "Inception Date" (as defined in the Environmental Insurance Policy), provided that such Responsible Insured knew that such
Pollution Conditions could give rise to "Clean-up Costs" (as defined in the Environmental Insurance Policy) or a claim under the Environmental Insurance Policy.
(d) Seller has caused the Representatives of Seller with responsibility for environmental matters to furnish Buyer and its Representatives with all environmental assessments, reports, or other documents, data and other information that exist with respect to the environmental condition of the Assets and/or compliance with Environmental Laws, and any such other existing documents, data and other information as Buyer has requested (collectively, the "Environmental Reports").
4.12 INTELLECTUAL PROPERTY. The Intellectual Property identified on EXHIBIT E and Licensed Intellectual Property identified on EXHIBIT G constitutes all the material Intellectual Property rights used to operate the Assets and the C Stores Assets as such assets are currently being used. Other than the Intellectual Property identified on EXHIBIT E and Licensed Intellectual Property identified on EXHIBIT G, no other Intellectual Property is necessary after the Effective Time to operate the Assets and the C Store Assets in substantially the same manner as such assets have been operated prior to the Effective Time. The products used, manufactured, marketed, sold or licensed by Seller in connection with the Assets, and all Intellectual Property and Licensed Intellectual Property used in the operation of the Assets as currently conducted, to Seller's Knowledge, do not infringe upon, violate or constitute the unauthorized use of any rights owned or controlled by any third party, including any Intellectual Property of any third party. Seller is not in material violation of the terms of any Licensed Intellectual Property. Seller is current in all payments relating to any Licensed Intellectual Property. The Intellectual Property identified on EXHIBIT E and included in the Assets or the C Store Assets pursuant to the IP Side Agreement and the Licensed Intellectual Property identified on EXHIBIT G and included in the Assets or the C Store Assets pursuant to the IP Side Agreement may be assigned by Seller without the consent of or notice to any Person, except as set forth on Section 4.12 of the Disclosure Schedule or where the failure to obtain such consent or provide such notice would not have a material effect on Buyer's ability to use such Intellectual Property or the Licensed Intellectual Property.
4.13 CONTRACTS. EXHIBIT D and EXHIBIT G contain a complete and accurate list of all material Contracts, including, without limitation, the licenses with respect to the Licensed Intellectual Property, of Seller which constitute Assets hereunder (the "Seller Contracts"). Except as set forth on Section 4.13 of the Disclosure Schedule, (a) Seller, and to Seller's Knowledge, each other Person that has any Liability under any Seller Contract is in compliance with all applicable material terms and requirements of each such Seller Contract, (b) no event has occurred or circumstance exists that (with or without notice or lapse of time) may materially contravene, conflict with, or result in a material violation or breach of, or give Seller or any other Person the right to declare a default under, or to accelerate the maturity or performance of, or to cancel, terminate or modify, any Seller Contract, (c) there has not been any material amendment or modification to any Seller Contracts, and (d) the Seller Contracts have not been assigned in any manner. Seller has not given or received from any other Person any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any Seller Contract. Each Seller Contract is in full force and effect, is valid and enforceable in accordance with its terms and, except as set forth on Section 4.13 of the Disclosure Schedule, each Seller Contract may be assigned without the consent of or notice to any Person. Except as set forth on
Section 4.13 of the Disclosure Schedule, there are no negotiations of, attempts to renegotiate or outstanding rights to renegotiate any material amounts paid or payable to Seller under any Seller Contract. Except as set forth on Section 4.13 of the Disclosure Schedule, there are no other material Contracts to which Seller is a party affecting the Assets or necessary for the operation of the Assets as presently operated. Except as set forth in Section 4.13 of the Disclosure Schedule, Seller has not with respect to any Contract: (i) received any quantity of oil or other hydrocarbons to be paid for thereafter other than in the normal cycle of billing; or (ii) received prepayments, advance payments, or loans which will require Buyer to perform services or provide oil, refined products or other hydrocarbons under such Contract on or after the Effective Time without being paid at or near the time of delivery. A true and complete list of the Seller Hedges is set forth on EXHIBIT M. Except for the Seller Hedges, the J Aron Hedge and the Morgan Stanley Hedge, Seller is not a party to any hedging contracts.
4.14 EMPLOYEE MATTERS. Except as set forth in Section 4.14 of the Disclosure Schedule:
(a) With respect to the Employees, Seller (i) is in material compliance with all applicable Legal Requirements respecting labor and employment, occupational safety, plant closing and wages and hours, (ii) has not committed any unfair labor practices, (iii) is not party to a collective bargaining agreement, or any organization effort presently being made or Threatened by or on behalf of a labor union, and (iv) has no pending or Threatened claims, trade disputes or controversies regarding employment, terms of employment or termination of employment, including any claims for unpaid wages, discrimination, harassment, or workers' compensation.
(b) Each employee benefit plan (as defined in Section 3(3) of ERISA) in which Employees participate (each an "Employee Benefit Plan") has in all respects been maintained in material compliance with its terms and all provisions of ERISA, HIPAA and the Code applicable thereto. Each Employee Benefit Plan which is a welfare plan providing health benefits has at all times been in material compliance with the provisions of Section 4980B of the Code.
4.15 TAXES. Except as set forth in Section 4.15 of the Disclosure Schedule:
(a) Seller has timely filed (or has had filed on its behalf) all Tax Returns required to be filed that relate in any way to the Assets and has timely paid all Taxes due, whether reflected on such Tax Returns or under any assessment, as applicable, before the date of this Agreement, and all such Tax Returns are true, complete, and accurate;
(b) there is no Action, audit, or written claim or assessment pending or Threatened, with respect to such Tax Returns or Taxes the non-payment of which could give rise to a Lien upon, or otherwise could adversely affect, any of the Assets or the use thereof or could cause Buyer to incur any Liability;
(c) Seller has not received written notice of any assessment of any Taxes;
(d) there is not in force any waiver of any statute of limitations in respect of Tax Returns or Taxes, or any outstanding request for such a waiver;
(e) there is not in force any extension of time for the assessment or payment of any Taxes or the filing of any Tax Return;
(f) there are no Liens with respect to Taxes upon the Assets except for Liens for Taxes not yet due;
(g) Seller has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party and all Forms W-2 and 1099 required with respect thereto have been properly completed and timely filed;
(h) Seller is not a party to any Tax allocation or sharing agreement;
(i) Seller is not liable for, and has not had asserted against it, any Liability for the Taxes of any Person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign Legal Requirements), as a transferee or successor, by Contract or otherwise;
(j) Seller has not distributed the stock of another Person, nor has Seller had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Code section 355 or 361; and
(k) Seller is not a non-resident, alien, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Code and the rules and regulations promulgated thereunder).
4.16 REAL PROPERTY.
(a) Seller has provided Buyer with a true, complete and correct copy of each Lease. Except as set forth on Section 4.16 of the Disclosure Schedule, (i) Seller, and to Seller's Knowledge, each other Person that has any Liability under any Lease is in compliance with all applicable terms and requirements of each such Lease, (ii) no event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with, or result in a violation or breach of, or give Seller or any other Person the right to declare a default under, or to accelerate the maturity or performance of, or to cancel, terminate or modify, any Lease, (iii) there has not been any amendment or modification to the Leases, and (iv) the Leases have not been assigned in any manner. Seller has not given or received from any other Person any notice or other communication (whether oral or written) regarding any actual or Threatened violation or breach of, or default under, any Lease. Each Lease is in full force and effect, is valid and enforceable in accordance with its terms, and, except as set forth on Section 4.16 of the Disclosure Schedule, each Lease may be assigned by Seller without the consent of or notice to
any person. Except as set forth on Section 4.16 of the Disclosure Schedule, there are no negotiations of, attempts to renegotiate or outstanding rights to renegotiate any material amounts paid or payable to Seller under any Leases. Except for those Leases set forth on Section 4.16 of the Disclosure Schedule, there are no other written leases or occupancy agreements to which Seller is a party affecting the Assets or necessary for the operation of the Assets as presently operated. Seller has not assigned, transferred, conveyed, mortgaged, deeded in trust, or encumbered any interest in the Leases, except as set forth on Section 4.16 of the Disclosure Schedule. All facilities leased or subleased thereunder have received all approvals of Governmental Authorities (including Permits) required in connection with the operation thereof and have been operated and maintained in accordance with the applicable Legal Requirements. The lessee of each facility leased or subleased has good and valid title in the facility and good and valid leasehold interests in the underlying parcel of real property, free and clear of any Lien other than Permitted Liens.
(b) No material default or breach exists (or would result from the consummation of the transactions contemplated hereunder) under any easements, appurtenances, licenses, servitudes, tenancies, options, rights-of-way, licenses, or other real property rights and privileges constituting the Real Property. There are no outstanding options or rights of first refusal to purchase any Real Property, or any portion thereof or interest therein. To the Knowledge of Seller, there is no pending or contemplated reassessment by any taxing authority of any property included in any parcel of Real Property.
4.17 BANKRUPTCY. There are no bankruptcy, reorganization or receivership proceedings pending or planned by Seller or any of its direct or indirect parents (including Williams Guarantor). Seller is not entering into this Agreement with the intent (whether actual or constructive) to hinder, delay, or defraud its present or future creditors.
4.18 BUSINESS RELATIONSHIPS. Except as set forth in Section 4.18 of the Disclosure Schedule, there is no actual, pending or Threatened change in the relationship of Seller with any of its customers, licensors, suppliers, distributors, sales representatives or vendors that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect with respect to Seller or the Assets.
4.19 GASOLINE SULFUR CREDITS. The gasoline sulfur credits described on
Section 4.19 of the Disclosure Schedule have been transferred to the Assets in
accordance with all Legal Requirements. The North Pole refinery is in compliance
with Tier II gasoline requirements under all Legal Requirements, and to the
Knowledge of Seller, no changes in the operations of the North Pole refinery
will be required until January 1, 2007.
4.20 DISCLAIMER. EXCEPT AS AND TO THE EXTENT SET FORTH IN THIS AGREEMENT AND THE OTHER AGREEMENTS, DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AGREEMENT, SELLER DOES NOT MAKE ANY OTHER REPRESENTATIONS OR WARRANTIES, AND DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY SUCH OTHER REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER. EXCEPT AS REQUIRED BY LAW AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT AND THE OTHER DOCUMENTS, AGREEMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS
AGREEMENT, SELLER MAKES NO REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE MAINTENANCE, REPAIR, CONDITION, DESIGN, WORKMANSHIP, SUITABILITY, UTILITY OR MARKETABILITY OF THE ASSETS OR ANY PORTION THEREOF OR PROPERTY THEREON OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO BUYER OR BUYER'S REPRESENTATIVES IN CONNECTION WITH THE CONTEMPLATED TRANSACTIONS OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IT BEING THE EXPRESS AGREEMENT OF BUYER AND SELLER THAT EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT AND THE OTHER DOCUMENTS, AGREEMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AGREEMENT, BUYER WILL OBTAIN RIGHTS IN THE ASSETS IN THEIR PRESENT CONDITION AND STATE OF REPAIR, "AS IS" AND "WHERE IS" AND "WITH ALL FAULTS." FOR THE AVOIDANCE OF DOUBT, THE FORGOING SENTENCE SHALL NOT ABSOLVE SELLER FROM ANY CLAIM FOR FRAUD THAT BUYER MAY BRING AGAINST SELLER.
4.21 WILLIAMS GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Williams Guarantor represents and warrants to Buyer as follows:
(a) ORGANIZATION AND STANDING. Williams Guarantor is a corporation duly organized, validly existing in good standing under the laws of the State of Delaware and is in good standing as a corporation in all jurisdictions where the nature of its properties or business requires it.
(b) AUTHORITY AND BINDING OBLIGATIONS. Williams Guarantor has full corporate power and authority to execute and deliver this Agreement and the Williams Guaranty, to perform its obligations under this Agreement and the Williams Guaranty and to consummate the transactions contemplated in this Agreement and the Williams Guaranty. The execution, delivery, and performance of this Agreement and the Williams Guaranty by Williams Guarantor have been duly and validly authorized by all necessary corporate, shareholder and other action and no further corporate, shareholder or other action is necessary on the part of Williams Guarantor to execute and deliver this Agreement and the Williams Guaranty and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated by this Agreement and the Williams Guaranty. This Agreement and the Williams Guaranty constitute legal, valid and binding obligations of Williams Guarantor enforceable against Williams Guarantor in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or equity).
(c) NO CONSENT REQUIRED; NON-CONTRAVENTION.
(i) Except as specified in Section 4.21(c) of the Disclosure Schedule, no Consent with, or to, any Governmental Authority or other Person is required in connection with the execution, delivery and performance by Williams Guarantor of this Agreement or the Williams Guaranty.
(ii) Except as specified in Section 4.21(c) of the
Disclosure Schedule, neither the execution and delivery of this Agreement or the
Williams Guaranty by Williams Guarantor, nor the consummation of the
transactions contemplated hereby or thereby will (a) violate, conflict with or
result in the breach of any provision of the certificate of incorporation or
by-laws of Williams Guarantor (b) result in a material violation of or conflict
with any Legal Requirement or Governmental Action applicable to or affecting
Williams Guarantor or any of its assets or properties; (c) result in any
material breach of, or a maturity under, or constitute a material default (or
event which with the giving of notice or lapse of time, or both, would become a
material default) under, require any Consent under, or result in, or give to
others any rights of, termination, amendment or acceleration of any material
Contract (or any rights, benefits or payments thereunder) to which Williams
Guarantor is a party or is subject; (d) give any Person the right or option to
purchase any of the Assets or any of the equity of, or interest in, Seller; or
(e) result in the creation of any Lien on any of the Assets.
(d) LITIGATION. Except as specified in Section 4.21(d) of the Disclosure Schedule, there are no Actions pending or, to the actual knowledge of Williams Guarantor, threatened, or anticipated by any Person against or affecting Williams Guarantor by or before any arbitrator or Governmental Authority that (i) questions the validity or enforceability of the Williams Guaranty or this Agreement or (ii) which could prohibit, limit, or delay the consummation of the transactions contemplated by this Agreement and the Williams Guaranty.
(e) ACTIONS AND PROCEEDINGS. Except as specified in Section 4.21(e) of the Disclosure Schedule, no Action is pending or, to the actual knowledge of Williams Guarantor, threatened before any arbitrator or administrator or Governmental Authority to delay, impair, restrain, limit, enjoin or prohibit, or to obtain damages, a discovery order or other relief in connection with this Agreement, or the Williams Guaranty or any of the transactions contemplated hereby or thereby.
(f) FINANCIAL CAPACITY; FUTURE PERFORMANCE. Williams Guarantor has and will have the financial capacity to guaranty Seller's payments and performance under the Agreement. Except as described in its filings with the Securities Exchange Commission pursuant to the Securities Exchange Act of 1934, Williams Guarantor is not aware of any facts or circumstances that now or in the future would have a Material Adverse Effect on its financial condition, results of operations, business, properties, assets, or liabilities. Williams Guarantor is solvent, is not in the hands of a receiver, nor is any receivership pending, and no proceedings are planned or pending by or against it for bankruptcy or reorganization in any state or federal court.
(g) OTHER INDEBTEDNESS. Section 4.21(g) of the Disclosure Schedule contains a complete list of bonds, letters of credit and guaranties issued by Williams Guarantor affecting the Assets.
(h) DISCLAIMER. EXCEPT AS AND TO THE EXTENT SET FORTH IN THIS AGREEMENT, THE WILLIAMS GUARANTY AND THE OTHER DOCUMENTS AND INSTRUMENTS DELIVERED IN CONNECTION WITH THIS AGREEMENT, WILLIAMS GUARANTOR MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, AND DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY SUCH OTHER REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as set forth in the Disclosure Schedule, Buyer represents and warrants to Seller the statements contained in this Article V are correct and complete as of the date hereof and will be correct as of the Closing Date and at the Effective Time:
5.1 ORGANIZATION. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the requisite power and authority to own, lease and operate its properties and to conduct its business as it is presently being conducted.
5.2 AUTHORITY. Buyer has full limited liability company power and authority necessary to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement by Buyer have been duly authorized by all necessary company, member, and other action, and no further company, member or other action is necessary on the part of Buyer to execute and deliver this Agreement and to consummate and perform its obligations hereunder and consummate the transactions contemplated by this Agreement.
5.3 VALIDITY AND BINDING EFFECT. Assuming the due authorization, delivery and execution of this Agreement by Seller and Williams Guarantor, this Agreement has been executed and delivered on behalf of Buyer and constitutes the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles, regardless of whether enforceability is considered in a proceeding at law or in equity.
5.4 NO VIOLATIONS. Except as specified in Section 5.4 of the Disclosure Schedule, neither the execution and delivery of this Agreement or the other agreements contemplated hereby by Buyer, nor the consummation of the transactions contemplated hereby or thereby will (a) violate, conflict with or result in the breach of any provision of the limited liability company agreement of Buyer; (b) result in a material violation of or conflict with any Legal Requirement or Governmental Action applicable to or affecting Buyer, or any of its assets or properties; or (c) result in a material breach of, or a maturity under, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or result in, or give to others any rights of, termination, amendment or acceleration of any material Contract (or any rights, benefits or payments thereunder) to which Buyer is directly or indirectly a party or is directly or indirectly subject.
5.5 CONSENTS AND APPROVALS. Except as set forth on Sections 5.5 and 4.4 of the Disclosure Schedule and other than Required Consents, no Consent or Permit from any Governmental Authority or any other Person is required by or with respect to Buyer in connection with the execution and delivery of this Agreement by Buyer or the consummation by
Buyer of the transactions contemplated hereby, except for the filing of a pre-merger notification report by Buyer under the HSR Act and the expiration or termination of the applicable waiting period thereunder.
5.6 LITIGATION. There is no Action pending or threatened, in writing or, to the knowledge of Buyer, verbally, against or affecting Buyer that questions the validity or enforceability of this Agreement or any other document, instrument or agreement to be executed and delivered by Buyer in connection with the transactions contemplated hereby.
ARTICLE VI.
COVENANTS
6.1 BROKERS' FEES. Each Party represents and warrants to the other Party that it and its Affiliates have not incurred any Liability for brokerage fees, finder's fees, agent's commissions, or other similar forms of compensation in connection with or in any way related to the transactions contemplated by this Agreement, except with respect to the fee owed to Lehman Brothers Inc., which fee shall be the sole obligation of, and be paid by, Seller. Each Party agrees to indemnify, defend and hold the other Party harmless from any claim or demand for any commission, fee or other compensation by any broker, finder, agent or similar intermediary claiming to have been employed by or on behalf of the indemnifying party, and to bear the cost of attorneys' fees and expenses incurred in defending against any such claim.
6.2 CONDUCT OF BUSINESS PENDING CLOSING. Seller covenants and agrees with Buyer that, from the date of this Agreement through the Effective Time, Seller will own, operate and maintain the Assets, only in the Ordinary Course of Business and Seller shall use commercially reasonable efforts to keep the Assets intact and to preserve the goodwill of employees and customers, preserve and keep in full force and effect its respective legal existence and material rights and franchises, and keep and maintain accurate books, records and accounts in accordance with GAAP and industry standards. Without limiting the preceding sentences, Seller covenants and agrees with Buyer that, except as specifically contemplated in this Agreement, from the date of this Agreement through the Effective Time, Seller will not, without the prior written consent of Buyer:
(a) pay, discharge, or satisfy any Liability, other than the payment, discharge or satisfaction in the Ordinary Course of Business;
(b) enter into or materially modify any collective bargaining agreement;
(c) change in any respect any of the accounting principles or practices used by Seller, except for any change required by reason of a concurrent change in GAAP;
(d) settle or resolve any pending or Threatened Action, which affects, relates to, or is part of the Assets;
(e) grant or enter into any suretyship Contract, performance bond, working capital maintenance and support agreement, contingent obligation agreement or other form of guaranty agreement which affects, relates to, or is part of, the Assets;
(f) amend, modify, renew, change, or waive, release, grant, close out or transfer (collectively, "Modifications") any rights under, any material Contract or Permit (including hedge arrangements), except non-material Modifications made in the Ordinary Course of Business;
(g) enter into any additional material Contracts or any hedging arrangements that affects, relates to, or is part of, the Assets and are performable after the Effective Time;
(h) enter into any Contract with an Affiliate, which Contract affects, relates to, or is part of, the Assets;
(i) cancel or waive any debt, claim or right (absolute or contingent) of which Buyer will receive the benefit under the terms of this Agreement;
(j) make any new capital commitment in excess of $1,000,000 (current capital commitments are described on Section 6.2(j) of the Disclosure Schedule);
(k) take any action which individually or in the aggregate is reasonably expected to have an adverse effect on Seller's relationship with any customer or supplier;
(l) encumber (other than Permitted Liens), sell, lease, assign
license or otherwise dispose of any interest in any of the Assets, except for
(i) sales of Inventory in the Ordinary Course of Business, and (ii) the sale or
disposal of excess and obsolete assets in the Ordinary Course of Business in
compliance with Seller's policies and in an amount not to exceed $250,000 per
month;
(m) take any other action, which individually or in the aggregate materially affects the Assets outside the Ordinary Course of Business;
(n) except for cause, remove or dismiss any key employees serving the Assets;
(o) change overall levels of wages of employees serving the Assets by greater than 3% of the aggregate payroll;
(p) cancel or materially modify insurance policies relating to the Assets or employees serving the Assets;
(q) commit or agree, or enter into any Contract, to do any of the foregoing; and
(r) except to the extent necessary to comply with the requirements of applicable Legal Requirements, (i) take, agree, or commit to take, any action that would make any representation or warranty of Seller hereunder inaccurate in any respect at, or as of any time prior to, the Effective Time, (ii) omit, or agree or commit to omit, to take any action necessary to prevent any such representation or warranty from being inaccurate in any respect at the Effective Time, or (iii) take, agree, or commit to take, any action that would result in, or is reasonably likely to result in, any of the conditions set forth in Section 7.1 not being satisfied.
6.3 ACCESS TO ASSETS, PERSONNEL, AND INFORMATION. From and after the
date of this Agreement until the Effective Time, Seller shall give Buyer and its
Representatives reasonable access, during regular business hours and upon
reasonable advance notice, to such employees and the Assets, as are necessary to
allow Buyer and its Representatives to make such inspections, and to interview
or confer with Seller and its Representatives as they may require in connection
with reasonable due diligence and transition planning activities that Buyer
believes are necessary and appropriate with respect to the Assets. Seller shall
have the right to have a Representative present at all times of any such
inspections, interviews and examinations conducted at or on the offices or other
facilities or properties of Seller. The scope, sequence, and timing of these
activities shall be at the sole discretion of Buyer, except the scope of these
activities shall not include any taking, sampling or testing of soil or water.
The cost and expense of these activities shall be borne by Buyer. Buyer may
confer with regulatory agencies and review and copy any and all agency records
with respect to the Assets. Additionally, the Environmental Reports and all
other records provided to Buyer pursuant to this Section 6.3 will be deemed to
be "Confidential Information" for purposes of the Confidentiality Agreement.
Buyer, however, shall not be entitled to access to any (i) materials containing
privileged communications or (ii) information about employees, disclosure of
which might violate an employee's reasonable expectation of privacy or otherwise
be prohibited by Legal Requirements. Buyer expressly acknowledges that nothing
in this Section 6.3 is intended to give rise to any contingency to Buyer's
obligations to proceed with the transactions contemplated herein. Buyer shall
defend, indemnify and hold harmless Seller, its Affiliates and their officers,
directors, employees and agents from and against all losses, claims, demands,
lawsuits, judgments, costs, expenses (including reasonable attorney's fees) and
other Liabilities arising out of personal injury or death suffered by Buyer's or
Seller's employees or contractors during inspection of the Assets under this
Section 6.3.
6.4 PUBLIC ANNOUNCEMENTS. Prior to the Closing, neither Party nor Williams Guarantor shall issue any press release or otherwise make any such public statement or respond to any media inquiry with respect to this Agreement and the transactions contemplated hereby prior to obtaining the approval of the other Party, which approval will not be unreasonably withheld and all such disclosures shall be jointly coordinated and managed; provided, however, that prior notice shall be required but prior approval shall not be required where such release or announcement is required by applicable Legal Requirement, securities regulations or stock exchange rules.
6.5 PAYMENT OF EXPENSES. Except as otherwise expressly provided in this Agreement, each Party and Williams Guarantor shall bear its own expenses incurred in connection with the transactions contemplated herein, including all fees and expenses of agents,
representatives, brokers, counsel and accountants engaged by it, whether or not the Closing occurs.
6.6 PRESERVATION OF FILES AND RECORDS. Except in the ordinary course of business of such party regarding its own general records or in compliance with such party's record retention policies, until the seventh anniversary of the Effective Time, Buyer, Seller and Williams Guarantor will maintain all books and records, including electronic and computerized records that relate to the pre-Closing business, operations, assets and properties related to the Assets, and shall give each other party full and complete access during regular business hours to all such books, records, and personnel to the extent reasonably required to enable such other party to satisfy its respective obligations hereunder or under applicable law. In addition to the foregoing, neither Seller, Williams Guarantor nor Buyer shall, without ninety (90) days prior written notification (a "Destruction Notice") to the other, destroy any pre-Closing books and records, including electronic and computerized records, related to the Assets, unless such destruction is to occur in the ordinary course of business of the party destroying such books and records, or in compliance with such party's general record retention policies. Following receipt of a Destruction Notice, if Seller, Williams Guarantor or Buyer, as applicable, advises the other party in writing within such ninety (90) day period, the applicable party will promptly deliver the applicable books and records to the other.
6.7 EMPLOYEE MATTERS.
(a) Seller shall use its commercially reasonable efforts to assure that Buyer or its Affiliates may interview and/or offer employment to any or all of those employees of Seller listed on Section 6.7 of the Disclosure Schedule ("Employees"). Buyer shall notify Seller of Buyer's intentions as to making offers to each of the Employees as soon as practicable, and offers of employment shall be made by Buyer to Employees Buyer intends to retain no later than 15 days before Closing. Offers of employment will be conditioned upon Closing, successfully passing Buyer's drug testing and background checks and upon the termination of such Employees' employment with Seller or any Affiliate of Seller immediately prior to the Effective Time and shall be effective at the Effective Time. Buyer shall provide Seller with a list of all of those Employees Buyer or its Affiliates wishes to interview or make offers of employment to without interviews and shall coordinate interviews with a designated representative of Seller or its Affiliates. Buyer shall provide Seller a list of those Employees to whom offers of employment have been made, which list shall include the nature and title of the position, salary, and location of employment. With respect to any Employee, Buyer's offer of employment made pursuant to this Section 6.7(a) shall be equal to or greater than 90% of such Employee's base compensation immediately prior to the Effective Time. Buyer shall also provide Seller with a list of those Employees accepting such employment offer and meeting the requirements of such offer (the "Hired Employees") on or within two (2) Business Days after the Closing Date.
(b) The Hired Employees will become Buyer's or its Affiliates' employees immediately following the Effective Time and at that time Buyer or its Affiliates will become responsible for wages, salaries, benefits, other compensation, severance pay, and severance benefits to the extent required under any Legal Requirement or Section 6.7 of this Agreement, or
notices required under such Legal Requirements with respect to the Hired Employees arising with respect to employment with Buyer.
(c) Except as otherwise provided in Section 6.7 of this Agreement, Seller shall retain responsibility for all Damages for the following matters, which accrue for the periods prior and up to the Effective Time as a result of the Employees' employment with Seller:
(i) wages, salaries and bonuses to the extent payable as of the Effective Time (including all associated taxes described in Section 4.15(g)) (for the avoidance of doubt, Buyer shall not be responsible for paying any bonuses earned and payable prior to or at the Effective Time);
(ii) severance pay and severance benefits to the extent required under applicable Legal Requirements or notices required under such Legal Requirements with respect to Employees of Seller who are terminated prior to or at the Effective Time; and
(iii) vacation pay and paid time off with respect to the Employees to the extent payable as of the Effective Time.
(d) On the last day of the month in which the Closing occurs, the Hired Employees' participation in Seller's or its Affiliates' medical, and dental, and life insurance plans shall terminate.
(e) Seller shall retain responsibility for, and Buyer shall not assume any responsibility for, any Liabilities related to or for the administration of Seller's Plans.
(f) Following the Effective Time, all Hired Employees will be permitted to enroll in all of Buyer's or its Affiliates' plans, as the case may be, in accordance with the terms and conditions of this Agreement, and to the extent not inconsistent with this Section 6.7, with the terms and conditions of such plans in effect from time to time and on no less favorable terms than those provided by Buyer and its Affiliates to other similarly situated employees of Buyer and its Affiliates. Hired Employees will be given credit for prior service with Seller and its predecessors and Affiliates for purposes of eligibility and vesting in Buyer's or its Affiliates' plans.
(g) At the Effective Time, Buyer or its Affiliates, as the case may be, shall waive or cause the waiver of pre-existing condition exclusions otherwise applicable to any Hired Employee and qualified dependents under, or with respect to, all employee welfare benefit plans maintained by Buyer or its Affiliates provided the Hired Employee and qualified dependents were covered by a Seller's Plan as of the Effective Time (and the Hired Employee immediately elects coverage), including coverage for qualified dependents, under a similar employee welfare benefit plan of Buyer or its Affiliates.
(h) Seller shall retain responsibility for all medical, dental, life, vision, AD&D, cafeteria, short-term disability, and long-term disability claims by any Hired Employee which were incurred on or prior to the Effective Time or, in the case of medical, dental and
flexible spending accounts, prior to the last day of the month in which the Closing occurs, while covered by the applicable Plan and for worker's compensation claims related to injuries arising from the employment of the Hired Employees for periods prior to and through the Effective Time, in each case to the extent covered by the respective employee benefit plan and/or insurance plan or policy of Seller or its Affiliates, and any claims regarding Seller's 401(k) Plan and any other pension or retirement plan, qualified or non-qualified, which arise out of the administration or operation of such Plans prior to, at or following the Effective Time. Hired Employees shall be given credit for any deductible or co-insurance amounts paid with respect to the plan year in which the Closing occurs, to the extent, following the Effective Time, they participate in any plan of Buyer or its Affiliates for which deductibles or co-insurance are required. Promptly after the Effective Time, Seller shall provide Buyer with a list of deductibles and co-insurance that have been paid by the Hired Employees with respect to the plan year in which the Closing occurs. Buyer shall provide written notice of all Hired Employees who have elected coverage under the medical plans of Buyer or its Affiliates within forty (40) days of the Effective Time, provided that Buyer shall not be required to provide any information that would violate the provisions of HIPAA.
(i) For purposes of this Section 6.7, a claim for reimbursement under a medical, hospital or dental, prescription drug, or similar plan shall be deemed to be incurred on the date that the claim occurs. A claim occurs on the date service is provided and there shall be no continuation of a claim from one day to the next.
(j) With respect to the Hired Employees, prior employment with Seller or an Affiliate thereof shall be recognized by Buyer or its Affiliates, as the case may be, for the purpose of determining vacation eligibility. All Hired Employees shall be subject to Buyer's vacation policies, provided all such Hired Employees shall be given full credit by Buyer or its Affiliates, as the case may be, under Buyer's or its Affiliates' policies for pre-Effective Time years of service recognized by Seller and its Affiliates for vacation purposes. Seller or its Affiliates shall be responsible for payment to Employees for any accrued and earned but not used vacation and paid time off as of the Effective Time (collectively referred to herein as "Vacation Pay Benefits"). Seller or its Affiliates shall pay the Vacation Pay Benefits to the Employees in accordance with Legal Requirements.
(k) The Parties expressly acknowledge that this Agreement is not intended to create a Contract between Buyer or Seller and any Hired Employee, and no Employee or Hired Employee may rely on this Agreement as the basis for any breach of Contract claim against Buyer or Seller. Seller shall not, in any manner, be responsible or liable for administration or the payment of any benefit due under any plans maintained by Buyer or its Affiliates and, except as otherwise specifically provided in Section 6.7 of this Agreement, Buyer or its Affiliates shall not, in any manner, be responsible or liable for administration or the payment of any benefit due under the Plans or any other employment benefit plans maintained by Seller.
(l) Seller shall have caused the termination of the employment of the Hired Employees as of the Effective Time and shall have provided such notice of termination if and as required by the WARN Act, and shall have complied with any Legal Requirements. Buyer shall
be responsible for all notification or other requirements of the WARN Act with respect to Hired Employees in connection with actions taken by Buyer after the Effective Time.
(m) Nothing in this Agreement shall be deemed or construed to require Buyer to continue to employ any Hired Employees for any period after the Effective Time.
(n) To the extent required by COBRA, continuation coverage under COBRA shall be offered by Seller to all Employees whose employment with Seller is terminated as a result of this transaction contemplated by this Agreement. Seller shall continue to maintain its group health plan following the Effective Time for a period not less than the maximum period any M&A qualified beneficiary (as defined in the regulations issued under COBRA) could elect COBRA. Seller shall be responsible for any and all Damages incurred by Buyer as a result of the failure of Seller to comply with its obligations hereunder with respect to any of the requirements of COBRA or the WARN Act. Buyer shall be responsible for any and all Damages incurred by Seller as a result of Buyer's failure to comply with its obligations hereunder with respect to any of the requirements of the WARN Act.
(o) With respect to those Employees set forth on EXHIBIT N who become Hired Employees ("ARP Employees"), Buyer shall provide such ARP Employees the transportation benefits described on such Exhibit.
(q) The provisions of this Section 6.7 are intended to be for the benefit of, and enforceable by, Seller and/or its Affiliates and Buyer and/or its Affiliates and/or their respective successors.
6.8 CHANGE OF NAME; USE OF TRADEMARKS, WILLIAMS MARKS.
(a) Effective at the Effective Time, Seller and its Affiliates (the "Licensors") grant to Buyer a nonexclusive, nontransferable, royalty-free license, without right to sublicense, to use any and all trademarks, service marks, trade names and associated goodwill, slogans, corporate business or brand names and other like property owned by Seller or its Affiliates and used in connection with the Assets in which the name "Williams" or any derivatives or variations thereof is used and the Williams logos and any derivatives or variations thereof (the "Williams Marks") for the periods set forth below.
(b) Buyer may use such existing Inventory, advertising materials, communication materials and property (such as signage, vehicles and equipment) of Seller containing Williams Marks for a period not exceeding six months after the Effective Time, provided however, that Buyer shall have twelve months for the uses defined in the next sentence (the "License Period"), but shall not create new Inventory, advertising materials, communication materials or property using the Williams Marks. Buyer shall promptly replace or remove the Williams Marks on Inventory, advertising materials and property, no later than the end of the six month period after the Effective Time; provided however, that Buyer shall have up to twelve months to paint tanks and change signage. Immediately upon expiration of the License Period, Buyer shall cease all other use of the Williams Marks and shall adopt new trademarks, service marks, and trade names, which are not confusingly similar to the Williams Marks.
6.9 OTHER TAX MATTERS.
(a) SALES AND TRANSFER TAXES. Buyer shall be responsible for and agrees to pay when due all sales, use, value added, documentary, stamp, gross receipts, transfer, conveyance, excise, real estate recording and other similar Taxes and fees (collectively, "Transfer Taxes") arising out of the transfer of the Assets by Seller and the other transactions contemplated herein, specifically including all sales and transfer Taxes with respect to any real property or vehicles to be transferred to Buyer hereunder. Buyer shall prepare and timely file all Tax Returns required to be filed in respect of Transfer Taxes, provided that Seller shall be permitted to prepare any such Tax Returns that are the primary responsibility of Seller under applicable law. Seller's preparation of any such Tax Returns shall be subject to Buyer's approval, which approval shall not be withheld unreasonably.
(b) PRORATION OF PROPERTY TAXES. General and special real estate and other ad valorem taxes and assessments and other state or local taxes, fees, charges and assessments in respect of real and personal property assessed on the Assets, if any, for the fiscal year in which the Closing occurs and any prior years for which taxes are unpaid at the Effective Time (including penalties and interest) shall be prorated between Buyer and Seller as of the Effective Time. If the Closing occurs before the tax rate or assessment is fixed for any such fiscal year, the apportionment of such taxes and payments at the Closing will be based upon the most recently ascertainable tax bills; provided that Buyer and Seller will recalculate and re-prorate said taxes and payments and make the necessary cash adjustments promptly upon the issuance, and on the basis, of the actual tax bills received for the fiscal year in which the Closing occurs and the amount of any payments in lieu of tax made with respect to any such fiscal year.
(c) COOPERATION ON TAX MATTERS. After the Closing, Seller will cooperate with Buyer, and Buyer will cooperate with Seller, to the extent necessary in the preparation of all Tax Returns and will provide (or cause to be provided) any records and other information the other so reasonably requests and will provide the cooperation of its employees and auditors. Seller will reasonably cooperate with Buyer and Buyer will reasonably cooperate with Seller in connection with any Tax investigation, audit or other Proceeding.
6.10 FINANCIAL STATEMENTS. From the date of this Agreement through the Effective Time, within twenty (20) days after the end of each applicable month, Seller shall provide Buyer with copies of (a) the financial statements of Seller for each month ending subsequent to the date of this Agreement (the "Supplemental Financial Statements"), prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby (except that such Supplemental Financial Statements do not include footnotes and shall be subject to nonmaterial recurring year-end adjustments) and (b) monthly plant operating summaries for each month ending subsequent to the date of this Agreement (the "Supplemental Operating Summaries"), prepared on a basis consistent with Seller's historically prepared operating summaries.
6.11 ENVIRONMENTAL INSURANCE. Seller shall purchase at its sole expense from AIG a fully pre-paid, ten (10)-year environmental pollution legal liability policy per the terms and conditions of the indication and draft policy, which is attached as EXHIBIT O (the "Environmental
Insurance Policy"). The Environmental Insurance Policy shall be purchased and placed in effect promptly after this Agreement is executed and AIG has reviewed and accepted this Agreement. On the date the Environmental Insurance Policy is placed in effect, such policy shall have the self insured retention and limits set forth in EXHIBIT O. The continuity date on the Environmental Insurance Policy shall be simultaneous with the Closing Date. After Closing, Buyer shall comply with the terms of the Environmental Insurance Policy so as to not cause the policy to be cancelled or otherwise materially prejudice Seller or its Affiliates.
6.12 HSR ACT FILING. If filings pursuant to and under the HSR Act or any similar act or law of any applicable foreign jurisdiction are required in connection with the consummation of the transactions contemplated by this Agreement, within fourteen days of the date of this Agreement Seller and Buyer will compile and file (or will cause its "ultimate parent entity" to file) under the HSR Act or such other act or law such information respecting such Party as the HSR Act or such other act or law requires; provided, however, no Party's obligations in connection with the foregoing shall require such Party to take action which is likely to result in a Material Adverse Effect with respect to such Party, provided, further, under no circumstances shall Buyer or any of its Affiliates be required to hold separate (including in trust or otherwise) or divest or dispose of any of its businesses or assets (categories of assets) or waive any conditions to this Agreement or the other transactions contemplated by this Agreement set forth in Article VIII of this Agreement, nor shall Buyer or any of its Affiliates be required to hold separate (including by trust or otherwise) or divest any of the Assets. HSR Act filing fees (excluding any attorneys fees incurred by Seller or its Affiliates) shall be split equally by Seller and Buyer.
6.13 FURTHER ACTIONS REGARDING ASSETS AND LIABILITIES. Each Party shall, from time to time at the reasonable request of the other, and without further consideration, execute and deliver such other instruments of sale, transfer, conveyance, assignment, clarification, and termination, and take such other action as the Party making the request may reasonably require to effectuate the intentions of the Parties, including those required to sell, transfer, convey and assign to, and vest in Buyer, and to place Buyer in possession of the Assets, and to transfer, assign, or convey the Excluded Assets to Seller. Seller intends to convey the Assets at the Effective Time; provided, however, if it is determined after the Effective Time that: (a) any part of the Assets was not in fact conveyed to Buyer, and that the title to any part of the Assets is incorrectly in the name of Seller, or (b) any Excluded Asset is conveyed to Buyer and that the title to such Excluded Asset is incorrectly in the name of Buyer, then each Party shall take all such action necessary to promptly and correctly convey any part of the Assets to Buyer, or any part of the Excluded Assets to Seller. Seller agrees to pursue insurance proceeds for any physical loss or damage to the Assets that occurs prior to the Effective Time and is covered under Seller's all-risk property insurance. Any such insurance proceeds recovered by Seller shall be promptly remitted to Buyer, less any amounts reasonably incurred by or on behalf of Seller or for which Seller is responsible in the repair or replacement of such loss or damage.
6.14 REAL PROPERTY MATTERS.
(a) REMOVAL OF LIENS. Seller shall remove, or cause to be removed, all Liens with respect to the Real Property other than Permitted Liens prior to or on the Closing Date.
(b) SURVEY. Buyer may obtain an ALTA survey of the Real Property ("Survey").
(c) CONVEYANCE OF TITLE. At the Closing, Seller shall take such actions as will enable the Title Company to issue to Buyer at Buyer's option and sole expense an ALTA Owner's or Leasehold Policy of Title Insurance, as applicable ("Title Policy") with extended coverage covering the Real Property together with all endorsements reasonably requested by Buyer (including, without limitation, zoning with parking, access, contiguity, comprehensive, survey and tax parcel), in the amount of the Purchase Price attributed by Buyer to the Real Property and without any of the Schedule B standard preprinted exceptions (other than taxes not yet due and payable), subject only to the Permitted Liens.
(d) LEASES. Seller shall obtain all necessary consents required to transfer all Leases, Permits and any other property right associated with the Assets and requiring the consent of another Person. Seller agrees to advise Buyer promptly in writing with respect to any Lease, Permit or other property right, which it knows or has reason to believe will not receive any Required Consent. To the extent that assignment by Seller to Buyer of any Lease is not permitted or is not permitted without the consent of another Person, this Agreement will not be deemed to constitute an undertaking to assign such Lease if such consent is not given or if such an undertaking otherwise would constitute a breach of, or cause a loss of benefits under, such Lease. Additionally, Seller shall use commercially reasonable efforts to obtain and deliver to Buyer estoppel certificates from landlords, licensors and other third parties reasonably requested by Buyer, in such form as provided by Buyer.
6.15 PERMITS AND CONSENTS.
(a) Prior to Closing, Seller and Buyer shall use commercially reasonable efforts to (i) obtain all approvals, consents, ratifications, waivers, or authorizations if any, of any Person not a party to this Agreement which are required to transfer any of the Assets, including the Licensed Intellectual Property, to Buyer (collectively, the "Required Consents"), (ii) obtain all Permits and Environmental Permits, if any, necessary to transfer the Assets to Buyer (collectively, the "Transfer Permits"); (iii) transfer to Buyer all Transferable Permits; and (iv) obtain all Permits and Environmental Permits, other than the Transferable Permits, necessary for Buyer's lawful operation of the Assets following the Effective Time in substantially the same manner as presently operated by Seller (collectively, the "New Permits"); provided, however, that Seller shall not be required to pay any consideration or suffer any financial disadvantages to obtain such Required Consents, Transfer Permits, Transferable Permits and/or New Permits. Prior to Closing, Buyer shall cooperate with Seller to obtain all Required Consents, Transfer Permits and Transferable Permits, and shall obtain all New Permits, and Seller shall cooperate with Buyer to obtain all New Permits. To the extent that any Required Consent is not capable of being assigned, transferred, subleased or sublicensed without the consent of, or waiver by, any other party thereto or any other Person, or if such assignment, transfer, sublease or sublicense or attempted assignment, transfer, sublease or sublicense would constitute a breach thereof or a violation of any Legal Requirement, this Agreement shall not constitute an assignment, transfer, sublease or sublicense, or an attempted assignment, transfer, sublease or sublicense thereof.
(b) In the event that Seller is unable to obtain any Required Consent prior to Closing, either (i) Seller shall retain such Asset or Licensed Intellectual Property, as the case may be, and shall enter into an arrangement with Buyer to provide Buyer with the benefits of such Asset or Licensed Intellectual Property, as the case may be, provided Buyer shall be liable for and perform Seller's obligations and responsibilities arising in connection with such Asset or Licensed Intellectual Property, as the case may be, after the Closing Date until such Asset or Licensed Intellectual Property, as the case may be, is assigned to Buyer or the right to use such Asset or Licensed Intellectual Property, as the case may be, expires in accordance with the terms applicable to such Asset or Licensed Intellectual Property, or (ii) Seller and Buyer shall enter into a mutually acceptable agreement that allows Buyer to enjoy the benefits of such Asset or Licensed Intellectual Property, as the case may be, for which such Required Consent has not been obtained; provided, however, Buyer shall promptly pay Seller's costs of satisfying any obligations and responsibilities accruing under such Asset or Licensed Intellectual Property, as the case may be, that Buyer would have otherwise incurred if the Required Consents had been obtained and Buyer shall promptly reimburse Seller or its Affiliates, as the case may be, for their fully loaded personnel costs, as further described in the Transition Services Agreement attached hereto, incident to administering the obligations and responsibilities underlying such Assets or Licensed Intellectual Property.
(c) Seller shall continue after Closing to use commercially reasonable efforts to obtain Required Consents that were not obtained prior to Closing. Seller's duty to use these efforts as to Required Consents that are not material shall expire 90 days following Closing, but Seller shall continue to satisfy its obligations under Section 6.15(b) as to these non-material Required Consents.
6.16 ONGOING LITIGATION. Buyer and Seller shall make commercially reasonable efforts to cooperate in the prosecution or defense of the matters set forth Section 4.10 of the Disclosure Schedule, and shall take any actions reasonably requested by the other Party or its Affiliates relating to such prosecution or defense, including providing such personnel and records reasonably requested by such Party. Buyer shall be entitled to be reimbursed for any reasonable out-of-pocket costs and expenses authorized in advance by and incurred in connection with assisting Seller and its Affiliates in connection with this Section 6.16.
6.17 BONDS, LETTERS OF CREDIT AND GUARANTIES. At the Effective Time,
Buyer will assume all obligations for bonding for state motor fuel tax purposes
with respect to the operation of the Assets by Buyer after the Effective Time.
Section 6.17 of the Disclosure Schedule lists the motor fuel tax bonds that
Seller currently has in place. Within 30 days of the Effective Time, Seller will
terminate the letters of credit and guaranties that are listed in Section 6.17
of the Disclosure Schedule and Buyer will assume all obligations to replace such
letters of credit, surety bonds and guaranties as the counterparties thereto
require.
6.18 C STORES ASPA. In the event the transactions contemplated by the C Stores ASPA fail to close simultaneously with the Closing for any reason, (a) Buyer shall, and Williams Guarantor shall cause Williams Express, Inc. to, at the Closing, enter into a supply agreement between Buyer and Williams Express, Inc. with terms that are substantially similar to those terms
contained in that certain supply agreement dated April 1, 2003, between Seller and Williams Express, Inc. attached hereto as EXHIBIT Q (the "Supply Agreement"), and (b) Buyer shall use commercially reasonable efforts to locate another purchaser ("New C Stores Purchaser") for the convenience stores and related assets described in the C Stores ASPA (the "C Stores Assets") on or before the first anniversary of the Effective Time. If the New C Stores Purchaser is acceptable to Williams Guarantor acting reasonably, Williams Guarantor shall cause Williams Express, Inc. to enter into an asset purchase and sale agreement relating to the C Stores Assets with terms substantially similar as those contained in the C Stores ASPA (the "New C Stores ASPA") with the New C Stores Purchaser. The Parties agree that the New C Stores Purchaser shall be subject to the aggregate indemnity provisions covering this Agreement, the C Stores ASPA and Buyer shall cause the New C Stores Purchaser to enter into a New C Stores ASPA with such provisions. In the event that the highest price that a New C Stores Purchaser is willing to pay for the C Stores Assets is less than the purchase price provided for in the C Stores ASPA, Buyer shall pay Williams Express, Inc. the difference between the purchase price provided for in the C Stores ASPA and the purchase price provided for in the New C Stores ASPA upon the closing of the transactions contemplated in the New C Stores ASPA. In addition, for a period of 365 days beginning at the Effective Time, Buyer shall have the option to purchase the C Stores Assets on substantially the same terms and conditions contained in the C Stores ASPA (including the aggregate indemnity provisions covering this Agreement and the C Stores ASPA) for the purchase price set forth in the C Stores ASPA (the "C Stores Option"). In the event that neither (x) the transaction contemplated in subsection (b) of this Section 6.18 has been consummated as described in this Section 6.18 nor (y) Buyer has exercised the C Stores Option, then on the first anniversary of the Effective Time, Buyer shall pay Williams Express, Inc. $8,000,000 by wire transfer of immediately available funds to such account as Williams Express, Inc. shall designate; provided, however, that in no event shall Buyer be required to pay, or shall Williams Express, Inc. be entitled to receive, such $8,000,000 if the transactions contemplated by the C Stores ASPA or the New C Stores ASPA failed to close due to a breach by Williams Express, Inc. or Williams Guarantor of any of their respective representations or warranties contained in this Agreement, the C Stores ASPA or the New C Stores ASPA or due to Williams Express, Inc.'s or Williams Guarantor's failure to perform any of their respective covenants or agreements under this Agreement, the C Stores ASPA or the New C Stores ASPA. If the C Stores Assets have not been purchased by a New C Stores Purchaser or the C Stores Option has not been exercised on or before a date within the first anniversary of the Effective Time, Williams Express, Inc. shall be free to sell the C Stores Assets at and in its sole and absolute discretion; provided, however, Williams Guarantor shall cause Williams Express, Inc. to cause any sale(s) of the C Store Assets to be contingent upon the execution of an agreement with substantially similar terms as contained in the Supply Agreement by the purchaser(s) of the C Store Assets if such purchaser(s) intend(s) to remain in the fuel retailing business.
6.19 IP SIDE AGREEMENT. Simultaneously with the execution of this Agreement, Seller and Buyer shall enter into the side agreement of even date herewith attached hereto as EXHIBIT R (the "IP Side Agreement").
ARTICLE VII.
CONDITIONS
7.1 CONDITIONS TO CLOSING OBLIGATIONS OF BUYER. Buyer's obligation to effect the transactions contemplated by this Agreement is subject to the satisfaction, or waiver (by Buyer), at or prior to the Closing Date of each of the following conditions:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each representation and warranty set forth in Article IV (excluding the representation and warranties in Section 4.21), hereof must have been accurate and complete in all material respects (except as to the representations and warranties already qualified as to materiality, which must be accurate and complete in all respects) on the date of this Agreement and as of the Closing Date, as if made on the Closing Date. Each representation and warranty set forth in Section 4.21 hereof must have been accurate and complete in all material respects (except as to the representations and warranties already qualified as to materiality, which must be accurate and complete in all respects) on the date of this Agreement and as of the Closing Date, as if made on the Closing Date.
(b) COMPLIANCE WITH OBLIGATIONS. Seller shall have performed and complied with all covenants and agreements to be performed or complied with at or prior to Closing (singularly or in the aggregate) in all material respects. Williams Guarantor shall have performed and complied with all of its covenants and agreements to be performed or complied with at or prior to Closing (singularly or in the aggregate) in all material respects.
(c) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement there shall have been no Material Adverse Change with respect to Seller, Williams Guarantor or the Assets.
(d) PERMITS. All Transferable Permits either shall have been transferred to Buyer or Seller and Buyer shall have entered into a mutually acceptable agreement that allows Buyer to enjoy the benefits of the Transferable Permits that have not been transferred, and all Transfer Permits shall have been obtained on or before the Closing Date. In addition, no Governmental Authority shall have refused or indicated that it is likely to refuse to provide (by transfer, assignment, or otherwise) any of the New Permits necessary to allow Buyer to operate the Assets after the Effective Time.
(e) CONSENTS; HSR ACT. Seller shall have furnished to Buyer copies of any Required Consents obtained by Seller prior to Closing, and Seller and Buyer shall have entered into any agreements required by Sections 6.15(b) and 6.18. The waiting period required by the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated.
(f) NO GOVERNMENT ACTION OR ACTION; PROHIBITION BY LEGAL REQUIREMENT. There shall have been no Governmental Action or Action pending, threatened, issued or in effect (i) seeking to restrain or prohibit, or restraining or prohibiting the transactions contemplated by this Agreement, (ii) seeking to cause or causing any of the transactions contemplated by this
Agreement to be rescinded following consummation, or (iii) materially adversely affecting or which is likely to materially adversely affect the right of Buyer to own the Assets. There shall have been no Legal Requirement enacted or promulgated, or proposed to be enacted or promulgated, by any Governmental Authority of competent jurisdiction which prohibits the consummation of the transactions contemplated by this Agreement or makes such transactions illegal or invalid.
(g) CLOSING OBLIGATIONS AND DELIVERIES. Seller and Williams Guarantor shall have delivered, or caused to be delivered to Buyer at the Closing, each of the Closing deliveries described in Section 8.2(a) and (b) hereof.
(h) TAPS. There shall have been a waiver by all holders of, or expiration of, the initial 45-day period relating to the preferential purchase right in Section 7.2(a) of the TAPS Agreement. The parties agree that this condition will be met upon: (i) receipt of notice from each of the other owners of an interest in TAPS (the "TAPS Owners") irrevocably stating that they will not exercise the right to purchase the WAPCO Interests or any portion thereof, or providing a waiver that would permit the transfer to occur prior to the 45-day waiting period during which the TAPS Owners have the right to exercise the preferential right to purchase such interest, or (ii) the passage of 45 days from the date of notice to the TAPS Owners with no action by the TAPS Owners.
(i) 10 YEAR ROYALTY OIL CONTRACT WITH THE STATE OF ALASKA. Buyer or its Affiliate shall have entered into a 10 year royalty oil contract with the State of Alaska that has received legislative approval and has been signed by the Governor of Alaska, with provisions satisfactory to Buyer in its sole and absolute discretion.
(j) TAX CERTIFICATES. Buyer shall have received from Seller, in a form reasonably satisfactory to Buyer, a statement satisfying Buyer's obligations under Treasury Regulation Section 1.1445-2(b)(2).
(k) NORTH POLE REFINERY LEASE. Seller shall have purchased the land underlying the North Pole refinery and provided Buyer with good and marketable title in such land as a part of the Assets as of the Effective Time, without any Liens (other than Permitted Liens), or Buyer shall otherwise be satisfied that such purchase will occur within a reasonable period of time after Closing.
(l) HEDGES WITH J ARON AND MORGAN STANLEY. Seller shall have provided Buyer with consents from J Aron and Morgan Stanley permitting the assignment of Seller's hedge contracts with J Aron and Morgan Stanley to Buyer as of the Effective Time.
7.2 CONDITIONS TO CLOSING OBLIGATIONS OF SELLER. Seller's obligation to effect the transactions contemplated by this Agreement is subject to the satisfaction, or waiver (by Seller) at or prior to the Closing Date of each of the following conditions:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each representation and warranty set forth in Article V hereof must have been accurate and complete in all material
respects (except as to the representations and warranties already qualified as to materiality, which must be accurate and complete in all respects) on the date of this Agreement and as of the Closing Date.
(b) COMPLIANCE WITH OBLIGATIONS. Buyer shall have performed and complied with all of its covenants and agreements to be performed or complied with at or prior to Closing (singularly or in the aggregate) in all material respects.
(c) NO GOVERNMENTAL ACTION. There shall have been no Governmental Action or Action issued and in effect restraining or prohibiting any of the transactions contemplated by this Agreement.
(d) PROHIBITION BY LEGAL REQUIREMENT. There shall have been no Legal Requirement enacted or promulgated by any Governmental Authority of competent jurisdiction which prohibits the consummation of the transactions contemplated by this Agreement or makes such transactions illegal or invalid.
(e) HSR ACT. The waiting period required by the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated.
(f) BUYER'S CREDIT RATING. Buyer shall have an issuer credit rating of at least "A" from Standard & Poors and Moody's Investor Services on the Closing Date, or shall have delivered Seller a written guaranty of Buyer's obligations under this Agreement through the Closing Date from an Affiliate with such credit rating or better.
(g) CLOSING OBLIGATIONS AND DELIVERIES. Buyer shall have delivered, or caused to be delivered, to Seller at the Closing, the Closing deliveries described in Section 8.2(c) hereof.
(h) GUARANTY RELATING TO HOLIDAY ALASKA, INC. Buyer shall have delivered a written guaranty for up to $8,000,000 relating to Holiday Alaska, Inc.'s indemnity obligations under the C Stores ASPA to Seller; provided, however, in the event that Buyer does not have an issuer credit rating of at least "A" from Standard & Poors and Moody's Investor Services on the Closing Date, Buyer shall have delivered Seller a written guaranty relating to Holiday Alaska, Inc.'s indemnity obligations under the C Stores ASPA from an Affiliate with such credit rating or better.
ARTICLE VIII.
CLOSING
8.1 CLOSING. Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Seller on the last Business Day of the month in which all conditions to Closing contained in Articles VII and VIII have been satisfied or waived (other than those conditions that by their nature can only be satisfied at the Closing), or at such other time and place as the Parties may mutually agree (the "Closing Date").
8.2 CLOSING OBLIGATIONS. At the Closing:
(a) Pursuant to the terms of this Agreement, Seller shall sell, assign, transfer and convey to Buyer all of its right, title and interest in and to the Assets, free and clear of all Liens, except for Permitted Liens. Such sale, assignment, transfer and conveyance shall be effected or evidenced by delivery by Seller to Buyer of appropriate deeds, bills of sale, assignments and other documents as Buyer may reasonably require in form and substance reasonably acceptable to Buyer and Seller, and shall be dated to effect transfer as of the Effective Time. Such documents shall include:
(i) a certificate of the Secretary or other appropriate officer of Seller dated as of the Closing Date, in form and substance reasonably satisfactory to Buyer certifying: (A) that resolutions of the Boards of Directors of Seller authorize the execution and performance of this Agreement, the ancillary agreements and the consummation of the transactions contemplated hereby and thereby and that such resolutions have not been rescinded or amended, are true and complete and in full force and effect; (B) that resolutions of (and, if any, consents of) the shareholders of Seller authorize the execution and performance of this Agreement, all other ancillary agreements and the consummation of the transactions contemplated hereby and thereby and that such resolutions have not been amended or rescinded, are true and complete and in full force and effect; and (C) as to the incumbency of the officers of Seller executing this Agreement and/or any related agreement, and including specimen signatures;
(ii) an Officer's Certificate, substantially in the
form of EXHIBIT S, duly executed by a Responsible Officer of Seller, to the
effect that each condition specified in Section 7.1, except that contained in
Section 7.1(i), has been satisfied;
(iii) a Transition Services Agreement, substantially in the form of EXHIBIT K hereto signed by a Responsible Officer of Seller;
(iv) the Environmental Insurance Policy described in
Section 6.11;
(v) any Required Consents obtained by Seller prior to the Closing Date or such other documentation evidencing the Parties obligations with regards to any Contract for which a Required Consent has not been obtained as required pursuant to Section 6.15(b);(vii) a certificate of existence and good standing issued by the State of Alaska issued as of a recent date by the Secretary of the State, together with a bring-down of such good standing as of the Closing Date; and
(vi) such other certificates, instruments and documents as may be called for under this Agreement or as Buyer shall reasonably request.
(b) Williams Guarantor shall deliver, or cause to be delivered, unless waived by Buyer, the following to Buyer:
(i) a certificate of the Secretary or other appropriate officer of Williams Guarantor, dated as of the Closing Date, certifying: (A) that resolutions of the Board of Directors of Williams Guarantor authorize the execution and performance of this Agreement, the Williams Guaranty and the transactions contemplated hereby and thereby, and that such resolutions have not been rescinded or amended, are true and complete and in full force and effect; and (B) as to the incumbency of the officers of the Williams Guarantor executing this Agreement and the Williams Guaranty and any other related agreement, and including specimen signatures;
(ii) a certificate of existence and good standing issued by the State of Delaware issued as of a recent date by the Secretary of the State of the State of Delaware, together with a bring-down of such good standing as of the Closing Date;
(iii) the performance guaranty in the form as specified in EXHIBIT T (the "Williams Guaranty"); and
(iv) such other certificates and documents as may be called for under this Agreement or as Buyer shall reasonably request.
(c) Buyer shall deliver, or cause to be delivered, unless waived by Seller, the following to Seller:
(i) a certificate of the Secretary or other appropriate officer of Buyer, dated the Closing Date, in form and substance reasonably satisfactory to Seller certifying: (A) that resolutions of the Board of Managers of Buyer authorize the execution and performance of this Agreement and the transactions contemplated hereby and that they have not been amended or rescinded, are true and complete and in full force and effect; (B) that resolutions of the members of Buyer authorize the execution and performance of the Agreement and the transactions contemplated hereby and that such resolutions have not been rescinded or amended, are true and complete and in full force and effect; and (C) as to the incumbency of the officers of Buyer executing this Agreement and/or any related agreement and including specimen signatures;
(ii) an Officer's Certificate, substantially in the form of EXHIBIT U, duly executed by a Responsible Officer of Buyer, to the effect that each condition specified in Section 7.2 has been satisfied;
(iii) a Transition Services Agreement in the form of EXHIBIT K hereto signed by a Responsible Officer of Buyer;
(iv) to the extent required by Section 7.2(f), a performance guaranty of an Affiliate of Buyer in the form specified in EXHIBIT V;
(v) a guaranty for up to $8,000,000 relating to Holiday Alaska, Inc.'s indemnity obligations under the C Stores ASPA as required pursuant to Section 7.2(h) in the form specified in EXHIBIT W; and
(vi) such other certificates and documents as may be called for under this Agreement or as Seller shall reasonably request.
ARTICLE IX.
TERMINATION
9.1 TERMINATION RIGHTS. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and abandoned at any time prior to the Closing Date:
(a) By written consent of the Parties and Williams Guarantor;
(b) By Seller or Buyer if (i) the Closing has not occurred on
or before February 29, 2004 (provided, however, that the right to terminate this
Agreement pursuant to this clause shall not be available to any Party whose
breach of any representation or warranty or failure to perform any covenant or
agreement under this Agreement has been the cause of or resulted in the failure
of the Closing to occur on or before such date); or (ii) if any Governmental
Authority shall have issued an order, decree or ruling or taken any other action
(x) permanently restraining, enjoining or otherwise prohibiting the Closing or
(y) conditioning the Closing in a manner reasonably unacceptable to Seller or
Buyer, and in either case, such order, decree, ruling or other action shall have
become final and non-appealable;
(c) By Buyer, by giving written notice to Seller at (i) any time within 30 days after any equity owner of TAPS exercises its preferential purchase right with respect to Williams Alaska Pipeline Company, L.L.C.'s equity interest in TAPS; or (ii) any time prior to the Closing, if Seller has breached any of its representations, warranties or covenants contained in this Agreement in any material respect, which breach (x) has continued without cure for a period of twenty (20) days following written notice thereof by Buyer to Seller and (y) would result in a condition to Closing set forth in Section 7.1 not being satisfied (which condition has not been waived by Buyer in writing); or
(d) By Seller, by giving written notice to Buyer at (i) any time after December 17, 2003, but before Buyer has notified Seller that Buyer or its Affiliate has entered into a crude oil purchase agreement with the State of Alaska that will be presented to the legislature for approval, or that Buyer waives the condition to Closing described in Section 7.1(i), or (ii) any time prior to the Closing, if Buyer has breached any of its respective representations, warranties or covenants contained in this Agreement in any material respect, which breach (x) has continued without cure for a period of twenty (20) days following written notice thereof by Seller to Buyer and (y) would result in a condition to Closing set forth in Section 7.2 not being satisfied (which condition has not been waived by Seller in writing).
9.2 EFFECT OF TERMINATION. If this Agreement is terminated by a Party pursuant to the provisions of Section 9.1, this Agreement shall forthwith become void and of no further force and effect and there shall be no Liability on the part of any Party hereto or Williams Guarantor, except that the obligations of Buyer relating to "Confidential Information" in Section 6.3 and the
agreements contained in Sections 6.1, 6.5, 9.2, and 11.1 shall continue pursuant to their terms; provided, however, that a termination of this Agreement shall not relieve any Party or Williams Guarantor from any liability for Damages incurred as a result of a breach by such Party or Williams Guarantor, as the case may be, of its representations, warranties, covenants, agreements or other obligations hereunder occurring prior to such termination (including without limitation, Seller's and Buyer's rights to liquidated damages in certain events as provided in Section 9.3 below).
9.3 LIQUIDATED DAMAGES. If either Seller or Buyer fails to close the transactions contemplated by this Agreement following the receipt of all authorizations, waivers, consents and approvals of any Governmental Authority, for any reason except pursuant to an express right to do so as provided in this Agreement, or fails to use its commercially reasonable efforts to satisfy all conditions to Closing set forth in this Agreement, the Party failing to close or failing to use such commercially reasonable efforts shall pay the other Party $10,000,000 as the sole and exclusive remedy available to such Party or Williams Guarantor, as the case may be, for such failure to close or to use commercially reasonable efforts. Such payment will be by wire transfer of immediately available funds immediately upon demand from the other Party and without any right of setoff. Upon payment of such amount, each Party and Williams Guarantor shall be fully released and discharged from any and all Liabilities resulting from its failure to close the transactions contemplated by this Agreement and for any breach of the terms of this Agreement giving rise thereto.
ARTICLE X.
INDEMNIFICATION AND THIRD PARTY CLAIMS
10.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. The representations, warranties, covenants and obligations of Seller, Williams Guarantor and Buyer contained in this Agreement shall survive the Closing as set forth in this Article X. Covenants and obligations shall survive until fully performed. The representations and warranties of Seller, Williams Guarantor and Buyer shall survive for a period of three (3) years after the Effective Time; except that:
(a) the representations and warranties of (i) Seller contained
in Sections 4.1 (Organization; Authority), 4.2 (Validity and Binding Effect),
4.5(a) (Title to Assets), (ii) Williams Guarantor contained in Sections 4.21(a)
(Organization and Standing) and 4.21(b) (Authority and Binding Obligation), and
(iii) Buyer contained in Sections 5.1 (Organization), 5.2 (Authority) and 5.3
(Validity and Binding Effect) shall survive for the statute of limitations
applicable to breach of written contracts;
(b) the representations and warranties of Seller contained in
Section 4.11 (Environmental Matters) shall survive for a period of ten (10)
years after the Effective Time; and
(c) the representations and warranties of Seller contained in
Section 4.15 (Taxes) shall survive until ninety (90) days following the
expiration of the applicable statute or similar period of limitations (after
giving effect to any extensions or waivers);
it being understood that in the event notice of any Claim for indemnification under Section 10.2 (a)(i) or Section 10.2(b)(i) shall have been given within the applicable survival period, the representations and warranties that are the subject of such indemnification Claim shall survive with respect to such Claim until such time as such Claim is finally resolved.
10.2 INDEMNIFICATION.
(a) INDEMNIFICATION BY SELLER. FROM AND AFTER THE EFFECTIVE TIME, TO THE FULLEST EXTENT PERMITTED BY LAW, SELLER SHALL INDEMNIFY, DEFEND AND HOLD BUYER, ANY AFFILIATES OF BUYER, AND THEIR RESPECTIVE SHAREHOLDERS, PARTNERS, OFFICERS, DIRECTORS, MEMBERS, MANAGERS, EMPLOYEES, AGENTS AND ASSIGNS (EACH, A "BUYER INDEMNIFIED PARTY") HARMLESS, FROM AND AGAINST ANY AND ALL DAMAGES INCURRED BY ANY BUYER INDEMNIFIED PARTY IN CONNECTION WITH OR ARISING OR RESULTING FROM ANY ONE OR MORE OF THE FOLLOWING:
(i) ANY MISREPRESENTATION OR BREACH OF ANY REPRESENTATION OR WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR OBLIGATION OF SELLER OR WILLIAMS GUARANTOR UNDER THIS AGREEMENT OR ANY MISREPRESENTATION IN ANY STATEMENT, DOCUMENT, SCHEDULE, EXHIBIT OR CERTIFICATE FURNISHED OR TO BE FURNISHED TO BUYER PURSUANT TO THIS AGREEMENT;
(ii) SELLER'S OBLIGATIONS UNDER SECTION 6.7 (EMPLOYEE MATTERS);
(iii) THE POSSESSION, OWNERSHIP, USE, OR OPERATION OF
THE ASSETS PRIOR TO THE EFFECTIVE TIME, EXCEPT THAT SELLER SHALL HAVE NO DUTY TO
INDEMNIFY UNDER THIS SECTION 10.2(a)(III) (A) WITH RESPECT TO BUYER'S
OBLIGATIONS UNDER SECTIONS 10.2(b)(II), 10.2(b)(v)(C) AND 10.2(b)(v)(D), (B) TO
THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY BUYER'S OPERATIONS,
ACTIONS OR OMISSIONS AFTER THE EFFECTIVE TIME AND/OR (C) WITH RESPECT TO ANY
ENVIRONMENTAL CLAIM (ENVIRONMENTAL CLAIMS, WITH THE EXCEPTION OF BREACHES OF
REPRESENTATIONS AND WARRANTIES, ARE COVERED EXCLUSIVELY BY THE PROVISIONS OF
SECTION 10.2(a)(IV));
(iv) EXCEPT TO THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY BUYER'S OPERATIONS, ACTIONS OR OMISSIONS AFTER THE EFFECTIVE TIME, THE FOLLOWING ENVIRONMENTAL MATTERS (HEREIN "ENVIRONMENTAL CLAIM(s)"):
(A) ANY ENVIRONMENTAL CONDITION EXISTING PRIOR TO THE EFFECTIVE TIME, AT, ON OR UNDER OR ARISING, EMANATING, OR FLOWING FROM ANY OF THE ASSETS, OR FROM THE PROPERTY UNDERLYING THE REAL PROPERTY, WHETHER KNOWN OR UNKNOWN AS OF THE EFFECTIVE TIME, INCLUDING ANY LOSS, PROPERTY DAMAGE, NATURAL RESOURCE DAMAGE, INJURY TO, OR DEATH OF ANY THIRD-PARTY ARISING THEREFROM, BUT EXCLUDING (i) ANY AND ALL COSTS OF CLEANUP, MONITORING, CORRECTIVE ACTIONS AND COMPLIANCE WITH REGULATIONS INCURRED AFTER THE EFFECTIVE TIME WITH RESPECT TO THE MATTERS SET FORTH ON SECTION 10.2(a)(iv) OF THE DISCLOSURE SCHEDULE AND (ii) ANY COSTS OF INSTALLING AIR POLLUTION CONTROL EQUIPMENT, MAKING OTHER CAPITAL CHANGES OR RESPONDING TO INFORMATION REQUESTS REQUIRED BY THE ENVIRONMENTAL PROTECTION AGENCY PURSUANT TO ANY ENFORCEMENT PROCEEDINGS OR ACTIONS RELATING TO COMPLIANCE WITH CLEAN AIR ACT NEW SOURCE REVIEW OR PREVENTION OF SIGNIFICANT
DETERIORATION REQUIREMENTS APPLICABLE TO THE ASSETS ("BUYER'S NSR/PSD ENVIRONMENTAL OBLIGATIONS");
(B) LOSS, PROPERTY DAMAGE, NATURAL RESOURCE DAMAGE, INJURY TO, OR DEATH OF ANY THIRD-PARTY ARISING OUT OF OR RELATED TO ANY ENVIRONMENTAL CONDITION TO THE EXTENT (i) NOT LOCATED ON THE ASSETS OR THE PROPERTY UNDERLYING THE REAL PROPERTY AND (II) EXISTING PRIOR TO THE EFFECTIVE TIME;
(C) PAYMENT OF PENALTIES AND FINES ASSESSED OR IMPOSED BY ANY GOVERNMENTAL AUTHORITY ARISING OUT OF OR RELATED TO ANY ENVIRONMENTAL CONDITION EXISTING PRIOR TO THE EFFECTIVE TIME; AND
(D) ANY DAMAGES THAT ARISE, DIRECTLY OR INDIRECTLY, FROM THE RELEASE, GENERATION, USE, PRESENCE, STORAGE, TREATMENT AND/OR RECYCLING OF ANY HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS BY SELLER OR FROM THE POSSESSION, USE, OWNERSHIP, OR OPERATION OF THE ASSETS PRIOR TO THE EFFECTIVE TIME, OR BY A THIRD PARTY IF ANY SUCH HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS WERE GENERATED OR USED BY SELLER, INCLUDING ANY DAMAGES ARISING FROM HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS THAT HAVE BEEN TRANSPORTED OR OTHERWISE REMOVED FROM THE REAL PROPERTY TO AN OFFSITE LOCATION PRIOR TO THE EFFECTIVE TIME AND/OR RELEASED DURING TRANSPORT TO AN OFFSITE LOCATION PRIOR TO THE EFFECTIVE TIME, BUT EXCLUDING (i) ANY AND ALL COSTS OF CLEANUP, MONITORING, CORRECTIVE ACTIONS OR COMPLIANCE WITH REGULATIONS INCURRED AFTER THE EFFECTIVE TIME WITH RESPECT TO THE MATTERS SET FORTH ON SECTION 10.2(a)(iv) OF THE DISCLOSURE SCHEDULE AND (ii) ANY BUYER'S NSR/PSD ENVIRONMENTAL OBLIGATIONS;
(v) THE EXCLUDED ASSETS; AND
(vi) THE ENFORCEMENT OF INDEMNIFICATION RIGHTS UNDER THIS SECTION 10.2(a).
(b) INDEMNIFICATION BY BUYER. FROM AND AFTER THE EFFECTIVE TIME, TO THE FULLEST EXTENT PERMITTED BY LAW, BUYER SHALL INDEMNIFY, DEFEND AND HOLD SELLER, ANY AFFILIATES OF SELLER, AND THEIR RESPECTIVE SHAREHOLDERS, PARTNERS, OFFICERS, DIRECTORS, MEMBERS, MANAGERS, EMPLOYEES, AGENTS AND ASSIGNS (EACH, A "SELLER INDEMNIFIED PARTY") HARMLESS, FROM AND AGAINST ANY AND ALL DAMAGES INCURRED BY ANY SELLER INDEMNIFIED PARTY IN CONNECTION WITH OR ARISING OR RESULTING FROM ANY ONE OR MORE OF THE FOLLOWING:
(i) ANY MISREPRESENTATION OR BREACH OF ANY REPRESENTATION OR WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR OBLIGATION OF BUYER UNDER THIS AGREEMENT OR ANY MISREPRESENTATION IN ANY STATEMENT, DOCUMENT OR CERTIFICATE FURNISHED OR TO BE FURNISHED TO SELLER PURSUANT TO THIS AGREEMENT;
(ii) BUYER'S OBLIGATIONS UNDER SECTION 6.7 (EMPLOYEE MATTERS) AND SECTION 6.9(a) (TRANSFER TAXES);
(iii) BUYER'S OBLIGATIONS UNDER SECTION 6.15(b);
(iv) THE POSSESSION, OWNERSHIP, USE OR OPERATION OF THE ASSETS AFTER THE EFFECTIVE TIME, EXCEPT THAT BUYER SHALL HAVE NO DUTY TO INDEMNIFY UNDER THIS SECTION 10.2(b)(iv) (A) TO THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY SELLER'S OPERATIONS, ACTIONS OR OMISSIONS BEFORE THE EFFECTIVE TIME AND/OR (B) WITH RESPECT TO ANY ENVIRONMENTAL CONDITION (ENVIRONMENTAL CONDITIONS ARE COVERED EXCLUSIVELY BY THE PROVISIONS OF SECTION 10.2(b)(v));
(v) (A) EXCEPT TO THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY SELLER'S OPERATIONS, ACTIONS OR OMISSIONS BEFORE THE EFFECTIVE TIME, THE FOLLOWING ENVIRONMENTAL MATTERS (HEREIN "ENVIRONMENTAL CLAIM(s)"), ANY ENVIRONMENTAL CONDITION AT, ON OR UNDER OR ARISING OR EMANATING FROM ANY OF THE ASSETS ARISING FROM BUYER'S OWNERSHIP, USE OR OPERATION OF THE ASSETS AFTER THE EFFECTIVE TIME, INCLUDING ANY LOSS, PROPERTY DAMAGE, NATURAL RESOURCE DAMAGE, INJURY TO, OR DEATH OF ANY THIRD-PARTY ARISING THEREFROM, (B) EXCEPT TO THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY SELLER'S OPERATIONS, ACTIONS OR OMISSIONS BEFORE THE EFFECTIVE TIME, ANY DAMAGES THAT ARISE, DIRECTLY OR INDIRECTLY, FROM THE RELEASE, GENERATION, USE, PRESENCE, STORAGE, TREATMENT AND/OR RECYCLING OF ANY HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS BY BUYER OR FROM THE POSSESSION, USE, OWNERSHIP, OR OPERATION OF THE ASSETS AFTER THE EFFECTIVE TIME, OR BY A THIRD PARTY IF ANY SUCH HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS WERE GENERATED OR USED BY BUYER, INCLUDING ANY DAMAGES ARISING FROM HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS THAT HAVE BEEN TRANSPORTED OR OTHERWISE REMOVED FROM THE REAL PROPERTY TO AN OFFSITE LOCATION AFTER THE EFFECTIVE TIME AND/OR RELEASED DURING TRANSPORT TO AN OFFSITE LOCATION AFTER THE EFFECTIVE TIME, (C) ANY AND ALL COSTS OF CLEANUP, MONITORING, CORRECTIVE ACTIONS AND COMPLIANCE WITH REGULATIONS INCURRED AFTER THE EFFECTIVE TIME WITH RESPECT TO THE MATTERS SET FORTH ON SECTION 10.2(a)(iv) OF THE DISCLOSURE SCHEDULE AND (D) BUYER'S NSR/PSD ENVIRONMENTAL OBLIGATIONS; AND
(vi) THE ENFORCEMENT OF INDEMNIFICATION RIGHTS UNDER THIS SECTION 10.2(b).
10.3 INDEMNIFICATION PROCEDURES.
(a) INDEMNIFICATION PROCESS. The Person making a claim for indemnification under this Article X shall be, for the purposes of this Agreement, referred to as the "Indemnified Party" (provided that for the purpose of clause (iii) below such term shall refer to the party hereto to whom such Person is related for purposes of obtaining the benefits of this Article X) and the party or parties against whom such claims are asserted under this Article X shall be, for the purposes of this Agreement, referred to as the "Indemnifying Party." All claims by any Indemnified Party under this Article X shall be asserted and resolved as follows:
(i) NOTICE OF CLAIMS. In the event that (i) any claim or Action is asserted or instituted against any Indemnified Party by any Person other than the Parties to this Agreement or their Affiliates which could give rise to Damages for which an Indemnifying Party could be liable to an Indemnified Party for Damages under this Agreement (such claim, demand or Proceeding, a "Third Party Claim") or (ii) any Indemnified Party under this Agreement shall
have a claim to be indemnified for Damages by any Indemnifying Party under this Agreement which does not involve a Third Party Claim (such claim, a "Direct Claim" and, together with Third Party Claims, "Claims"), the Indemnified Party shall with reasonable promptness send to the Indemnifying Party a written notice specifying the nature of such Claim, the amount of Damages sought in such Claim, if known, and the provisions of this Agreement in respect of which such right of indemnification is claimed or arises (a "Claim Notice"), provided that a delay or defect in notifying the Indemnifying Party shall not relieve the Indemnifying Party of its obligations under this Agreement except to the extent that (and only to the extent that) the Indemnifying Party demonstrates such failure shall have caused the Damages for which the Indemnifying Party is obligated to be greater than such Damages would have been had the Indemnified Party given the Indemnifying Party timely notice.
(ii) THIRD PARTY CLAIMS. In the event of a Third Party Claim the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim and to appoint counsel of the Indemnifying Party's choice at the expense of the Indemnifying Party to represent the Indemnified Party and any others the Indemnifying Party may reasonably designate in connection with such Third Party Claim (in which case the Indemnifying Party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by any Indemnified Party except as set forth below); provided that such counsel is reasonably acceptable to the Indemnified Party, which approval shall not be unreasonably withheld. The Indemnified Party shall cooperate with the Indemnifying Party and its counsel in such defense and make available to the Indemnifying Party all witnesses, records, materials, and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as may be reasonably requested by the Indemnifying Party, and in contesting any Action which the Indemnifying Party defends, or, if appropriate and related to the Action in question, in making any counterclaim against the Person asserting the Third Party Claim, or any cross-complaint against any Person. In the event the Indemnifying Party fails to assume the defense of such Third Party Claim within ten (10) days after receipt of notice thereof in accordance with the terms hereof, (A) the Indemnified Party against which such Third Party Claim has been asserted shall have the right to undertake the defense, compromise or settlement of such Third Party Claim on behalf of, at the expense of and for the account and risk of the Indemnifying Party, and (B) the Indemnifying Party agrees to cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, all witnesses, records, materials and information in the Indemnifying Party's possession or under the Indemnifying Party's control relating thereto as may be reasonably requested by the Indemnified Party.
(iii) SETTLEMENT OF THIRD PARTY CLAIMS. In connection with the settlement or compromise of any Third Party Claim, the Indemnifying Party shall not, without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld), (A) settle or compromise any Third Party Claims or consent to the entry of any judgment which does not include as an unconditional term thereof the delivery by the claimant or plaintiff to the Indemnified Party of a written release from all liability in respect of such Third Party Claim of all Indemnified Parties affected by such Third Party Claim or (B) settle or compromise any Third Party Claim if the settlement or compromise imposes equitable remedies or obligations on the Indemnified Party other than financial obligations for which such Indemnified Party will be indemnified hereunder or (C) settle or compromise any Third Party Claim if the Indemnified
Party will be required to make any payment with respect to such compromise or settlement due to the application of the limitations of Section 10.4. No Third Party Claim which is being defended in good faith by the Indemnifying Party or which is being defended by the Indemnified Party in accordance with the terms of this Agreement shall be settled or compromised by the Indemnified Party without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld, conditioned or delayed); provided, however, if a Third Party Claim is being defended by an Indemnified Party pursuant to the last sentence of clause (ii) above (unless the Indemnifying Party and Indemnified Party mutually agree that the Indemnified Party shall defend such Third Party Claim), the limitations on the Indemnified Party's right to settle or compromise set forth in this clause (iii) shall not apply to such Indemnified Party, unless the Indemnifying Party has been advancing (in a timely manner) payment of such Indemnified Party's costs and expenses associated with such defense upon demand therefor by the Indemnified Party (subject to the undertaking of the Indemnified Party to reimburse such advances in the event such costs of defense are not ultimately to be indemnifiable under this Article X).
(b) REDUCTION OF DAMAGES. To the extent any Damages of an Indemnified Party are reduced by receipt of payment under insurance policies, which payments are not subject to retroactive adjustment or other reimbursement to the insurer in respect of such payment, such payments (net of the expenses of the recovery thereof) (such net payment, a "Reimbursement") shall be credited against any such Damages; provided however, the pendency of such payments shall not delay or reduce the obligation of the Indemnifying Party to timely make payment to the Indemnified Party in respect of such Damages. The Indemnified Party shall use commercially reasonable efforts (but in no event shall the Indemnified Party be required to sue the insurer or its agent, unless the Indemnifying Party agrees to pay all reasonable costs and expenses in connection therewith, including reasonable attorneys' fees) to pursue payment under or from any insurer in respect of such Damages. If any Reimbursement is obtained subsequent to payment by an Indemnifying Party in respect of any Damages, such Reimbursement shall be promptly paid over to the Indemnifying Party.
(c) ACCESS. From and after the delivery of a Claim Notice under this Agreement, at the reasonable request of the Indemnifying Party, each Indemnified Party shall grant the Indemnifying Party and its Representatives all reasonable access to the books, records and properties of such Indemnified Party to the extent reasonably related to the matters to which the Claim Notice relates. All such access shall be granted during normal business hours and shall be granted under conditions, which will not unreasonably interfere with the business and operations of such Indemnified Party. The Indemnifying Party will not, and shall require that its Representatives do not, use (except in connection with such Claim Notice) or disclose to any third Person other than the Indemnifying Party's Representatives (except as may be required by applicable Legal Requirement) any information obtained pursuant to this Section 10.3(c) which is designated as confidential by an Indemnified Party, unless such disclosure is required by the Indemnifying Party in defense of a Claim and such disclosure is authorized by Indemnified Party (which authorization shall not be unreasonably withheld if there is in place or will be put in place a protective order or agreement covering the use by the third party of any such disclosed confidential information).
(d) DEFINITION OF DAMAGES. "Damages" means all damages (including incidental and consequential damages and lost profits), losses (including any diminution of value), Liabilities, payments, amounts paid in settlement, obligations, remediation costs and expenses, natural resource damages, fines, interests, assessments, penalties, costs of burdens associated with performing injunctive relief, other costs (including reasonable fees and expenses of attorneys and consultants) of investigation, preparation, and litigation in connection with any Action, threatened Action or settlement, and other costs and expenses of any kind or nature whatsoever, whether known or unknown, contingent or vested, matured or unmatured, and whether or not resulting from third-party claims, strict liability claims, including those under Environmental Laws. Notwithstanding anything to the contrary in this Agreement, Damages shall expressly exclude punitive damages, exemplary damages and other penalty damages, unless arising out of a Third-Party Claim.
(e) BUYER CLAIMS ADMINISTRATOR. Buyer agrees that with respect to Claims for indemnification by any Buyer Indemnified Party pursuant to this Agreement, the C Stores ASPA, and the TAPS Purchase Agreement (provided that the transactions contemplated therein close with an Affiliate of Buyer purchasing the WAPCO Interests (as defined in the TAPS Purchase Agreement)), Buyer will act as the sole buyer claims administrator (the "Buyer Claims Administrator"). The Buyer Claims Administrator's responsibilities and obligations will include: (i) delivering any indemnification Claims by any Buyer Indemnified Party under this Agreement, the TAPS Purchase Agreement (if applicable) and the C Stores ASPA to the Seller Claims Administrator; (ii) monitoring all indemnification Claims brought by any Buyer Indemnified Party pursuant to this Agreement, the TAPS Purchase Agreement (if applicable) and the C Stores ASPA; (iii) keeping a running tally of all indemnification Claims made by any Buyer Indemnified Party under this Agreement, the TAPS Purchase Agreement (if applicable) and the C Stores ASPA for purposes of keeping the Seller Claims Administrator informed, on a monthly basis, with respect to the status of each indemnification Claim and the status of the Threshold, the Aggregate Cap, the Environmental Cap and the General Cap; and (iv) acting as a liaison between the Seller Claims Administrator and any Buyer Indemnified Party under this Agreement, the TAPS Purchase Agreement (if applicable) and the C Stores ASPA so that the Seller Claims Administrator does not need to interface with anyone other than the Buyer Claims Administrator in connection with Section 10.3 (Indemnification Procedures) of this Agreement or the corresponding provisions of the TAPS Purchase Agreement (if applicable) and the C Stores ASPA.
(f) SELLER CLAIMS ADMINISTRATOR. Williams Guarantor agrees that with respect to Claims for indemnification by any Seller Indemnified Party pursuant to this Agreement, the C Stores ASPA, and the TAPS Purchase Agreement (provided that the transactions contemplated therein close with an Affiliate of Buyer purchasing the WAPCO Interests (as defined in the TAPS Purchase Agreement)), Williams Guarantor will act as the sole seller claims administrator (the "Seller Claims Administrator"). The Seller Claims Administrator's responsibilities and obligations will include: (i) delivering any indemnification Claims by any Seller Indemnified Party under this Agreement, the TAPS Purchase Agreement (if applicable) and the C Stores ASPA to the Buyer Claims Administrator; (ii) monitoring all indemnification Claims brought by any Seller Indemnified Party pursuant to this Agreement, the TAPS Purchase Agreement (if applicable) and the C Stores ASPA; (iii) keeping a running tally
of all indemnification Claims made by any Seller Indemnified Party under this
Agreement, the TAPS Purchase Agreement (if applicable) and the C Stores ASPA for
purposes of keeping the Buyer Claims Administrator informed, on a monthly basis,
with respect to the status of each indemnification Claim and the status of the
Threshold, the Aggregate Cap, the Environmental Cap and the General Cap; and
(iv) acting as a liaison between the Buyer Claims Administrator and any Seller
Indemnified Party under this Agreement, the TAPS Purchase Agreement (if
applicable) and the C Stores ASPA so that the Buyer Claims Administrator does
not need to interface with anyone other than the Seller Claims Administrator in
connection with Section 10.3 (Indemnification Procedures) of this Agreement or
the corresponding provisions of the TAPS Purchase Agreement (if applicable) and
the C Stores ASPA.
10.4 LIMITATIONS ON INDEMNIFICATION.
(a) MINIMUM; THRESHOLD. Except with respect to claims for breaches of the covenants and obligations stated in Articles II, III, VI or IX, no amount shall be payable by any Indemnifying Party pursuant to Section 10.2(a) or Section 10.2(b):
(i) unless the amount of Damages for each individual and unrelated Claim exceeds the Minimum Indemnifiable Amount; and
(ii) unless the aggregate amount of Damages
(excluding Damages excluded from indemnification pursuant to clause (i) above)
under Section 10.2(a) or Section 10.2(b)), respectively, exceeds the Threshold
(at which point the Indemnified Party shall be entitled to all indemnification
amounts in excess of such Threshold, excluding Claims less than the Minimum
Idemnifiable Amount).
(b) CAP. Notwithstanding anything to the contrary contained in
this Agreement, and except with respect to claims for breaches of the covenants
and obligations stated in Articles II, III, VI or IX, the maximum amount of
indemnifiable Damages which may be recovered by any Buyer Indemnified Parties
from Seller or Williams Guarantor and by any Seller Indemnified Parties from
Buyer arising out of, resulting from or incident to the matters enumerated in
Section 10.2(a) or Section 10.2(b) shall be the Environmental Cap with respect
to any and all Environmental Claims and the General Cap with respect to any and
all claims for indemnity other than Environmental Claims, but in no event shall
the amount of all indemnifiable Damages of any type which may be recovered by
any Buyer Indemnified Parties or any Seller Indemnified Parties pursuant to this
Section 10.4(b) exceed the Aggregate Cap.
10.5 EXCLUSIVITY OF REMEDIES. Except for (a) any equitable relief, including injunctive relief or specific performance to which any Party hereto or Williams Guarantor may be entitled, (b) remedies available under the Williams Guaranty, and (c) fraud, the indemnification provisions of this Article X shall be the sole and exclusive remedy of each Party (including Buyer Indemnified Parties, Seller Indemnified Parties and Williams Guarantor) with respect to any and all Actions or Damages arising out of this Agreement from and after the Closing.
ARTICLE XI.
MISCELLANEOUS
11.1 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the substantive law of the State of Texas without giving effect to the principles of conflicts of law thereof.
11.2 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement.
11.3 ASSIGNMENT; BINDING EFFECT; NO THIRD PARTY BENEFICIARIES. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the Parties or Williams Guarantor (whether by operation of law or otherwise) without the prior written consent of the other Parties and Williams Guarantor, except, Buyer may, without prior consent of Seller or Williams Guarantor, transfer or assign by operation of law or otherwise this Agreement to any Affiliate or subsidiary of Buyer, but Buyer shall continue to be liable for the obligations, commitments, duties and responsibilities of the Buyer hereunder notwithstanding any such transfer or assignment. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the Parties and Williams Guarantor and their respective successors and assigns. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any Person other than the Parties hereto, Williams Guarantor, their successors and assigns, any Indemnified Parties, and, under certain circumstances (including those contained in Section 6.18 of this Agreement), the Parties' Affiliates any right, remedy or claim under or by reason of this Agreement.
11.4 ENTIRE AGREEMENT. This Agreement (including the Exhibits and Schedules hereto and any documents referred to herein including, without limitation, the Confidentiality Agreement, and the Williams Guaranty) constitutes the entire agreement between the Parties and Williams Guarantor, and supersedes any prior understandings, agreements, arrangements and representations among the Parties and Williams Guarantor, written or oral, to the extent they related in any way to the subject matter hereof.
11.5 NOTICES. All notices, requests, demands, claims and other communications required or permitted to be given hereunder shall be in writing and shall be given by (a) personal delivery, (b) facsimile transmission, (c) recognized overnight delivery service, or (d) registered or certified mail, return receipt requested and postage prepaid, in each case addressed to the intended recipient as set forth below:
If to Buyer:
Flint Hills Resources, LLC
4111 East 37th Street North
Wichita, Kansas 67220
Attention: President
Fax: (316) 828-8245
With a copy to:
Flint Hills Resources, LLC
4111 East 37th Street North
Wichita, Kansas 67220
Attention: General Counsel
Fax: (316) 828-8245
If to Seller or Williams Guarantor:
The Williams Companies, Inc.
One Williams Center
Tulsa, Oklahoma 74172
Attention: Mark Wilson
Facsimile: (918) 573-5540
With a copy (which shall not constitute notice) to:
Conner & Winters, P.C.
3700 First Place Tower
15 East 5th Street
Tulsa, Oklahoma 74103-4344
Attention: Lynnwood R. Moore, Jr.
Facsimile: (918) 586-8548
Any Party may change its address for receiving notices by giving
written notice of such change to the other Party in accordance with this Section
11.5. Any notice properly provided in accordance with this Section 11.5 will be
effective upon delivery; provided, however, if any notice is not delivered
during the recipient's normal business hours on a Business Day, such notice will
be effective as of the next Business Day.
11.6 AMENDMENT. This Agreement may be amended or modified at any time only by a written instrument signed on behalf of each of the Parties and Williams Guarantor.
11.7 SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable.
11.8 WAIVERS. The Parties and Williams Guarantor may, to the extent legally allowed: (a) extend the time for the performance of any of the obligations or other acts of the other Party or Williams Guarantor, (b) waive any inaccuracies in the representations and warranties of the
other Party or Williams Guarantor contained herein or in any document delivered pursuant hereto, or (c) waive performance of any of the covenants or agreements, or satisfaction of any of the conditions, contained herein, by the Person entitled to the benefit thereof. Any agreement to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such Party, or Williams Guarantor, as the case may be, against whom enforcement of the waiver is sought. Except as provided in this Agreement, no action taken pursuant to this Agreement, including any investigation by or on behalf of either Party or Williams Guarantor, shall be deemed to constitute a waiver of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by either Party or Williams Guarantor of a breach of any provision hereof shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provisions hereof or be deemed a waiver of any rights to indemnification with to such matter waived.
11.9 HEADINGS; TABLE OF CONTENTS. The descriptive headings contained in this Agreement and table of contents of this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.
So agreed as of the date first above written.
[NEXT PAGE IS THE SIGNATURE PAGE]
FLINT HILLS RESOURCES, LLC WILLIAMS ALASKA PETROLEUM, INC.
By: /s/ David L. Robertson By: /s/ Phillip D. Wright --------------------------------- -------------------------------- Printed Name: David L. Robertson Printed Name: Phillip D. Wright ------------------------ ----------------------- Title: President Title: Senior Vice President |
THE WILLIAMS COMPANIES, INC.
By: /s/ Phillip D. Wright --------------------------------- Printed Name: Phillip D. Wright ----------------------- Title: Senior Vice President ------------------------------ |
EXHIBIT 10.34
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made and entered into this 17th day of November, 2003, by and among Koch Alaska Pipeline Company, LLC, an Alaska limited liability company ("Buyer"), Williams Energy Services, LLC, a Delaware limited liability company ("Seller"), and The Williams Companies, Inc., a Delaware corporation ("Williams Guarantor").
RECITALS
A. Seller owns all of the outstanding membership interests (the "WAPCO
Interests") in Williams Alaska Pipeline Company, L.L.C., a Delaware limited
liability company ("WAPCO"), and WAPCO owns: (i) an undivided 3.0845% interest
in the Trans Alaska Pipeline System ("TAPS") and in all TAPS inventory (not
including line fill) attributable to the 3.0845% undivided interest in TAPS and
(ii) 308 shares of Alyeska Pipeline Service Company ("Alyeska") ((i) and (ii)
together, the "TAPS Interests");
B. WAPCO is a party to the Trans Alaska Pipeline System Agreement dated August 27, 1970 (as amended from time to time) (the "TAPS Agreement");
C. TAPS consists of two components: (a) the "Pipeline" component, consisting of all TAPS real and personal property of every nature and kind, other than the "Terminal Tankage" component, and (b) the "Terminal Tankage" component, consisting of all TAPS real and personal property of every nature and kind at Valdez, Alaska which real and personal property is associated with the holding of crude petroleum pending its delivery out of TAPS. The TAPS property includes, without limitation, petroleum tanks, tank farm manifolds, tank vent lines, vapor recovery system, power generation facilities and other related facilities, equipment and appurtenances;
D. As a condition to entering into this Agreement, (i) an Affiliate of Buyer and an Affiliate of Seller have entered into that certain Asset Sale and Purchase Agreement of even date herewith by and among Williams Alaska Petroleum, Inc., as seller, The Williams Companies, Inc., as guarantor, and Flint Hills Resources, LLC, as buyer, relating to the acquisition of the North Pole refinery (the "Refinery ASPA") and (ii) Holiday Alaska, Inc. and an Affiliate of Seller have entered into that certain Asset Sale and Purchase Agreement of even date herewith by and among Williams Express, Inc., as seller, The Williams Companies, Inc., as seller's guarantor, Holiday Alaska, Inc., as buyer, and Holiday Stationstores, Inc., as buyer's guarantor, relating to the acquisition of certain convenience stores located in Alaska (the "C Stores ASPA"); and
E. Buyer desires to purchase and acquire all of the WAPCO Interests from Seller and Seller desires to sell and assign the WAPCO Interests to Buyer, all on the terms and conditions hereinafter set forth.
IN CONSIDERATION of the foregoing and of the mutual covenants and agreements set forth below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Purchase and Sale. Subject to the terms and conditions hereinafter set forth, at the Effective Time (as hereinafter defined):
(a) Seller shall sell, grant, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase and acquire from Seller, all right, title and interest in and to the WAPCO Interests, free and clear of all Liens and Indebtedness, other than the Liens set forth on Schedule 1(a) (the "WAPCO Permitted Liens").
(b) Buyer agrees to take the WAPCO Interests subject to the WAPCO Contracts, including the Amended and Restated Agreement for the Operation and Maintenance of the Trans Alaska Pipeline System, as amended, (the "TAPS Operation Agreement") and the TAPS Agreement.
2. Purchase Price; Closing Payment; Adjustment to Purchase Price.
(a) Purchase Price; Closing Payment. The purchase price for the WAPCO Interests shall be the sum of (i) One Hundred Million Dollars and No Cents ($100,000,000), plus or minus (ii) the Final Direct Net Working Capital, as calculated in accordance with Sections 2(c) and 2(d) of this Agreement, plus (iii) the value of the Valdez Inventory Transportation Revenue, as calculated in accordance with Section 2(e) of this Agreement, plus or minus (iv) an adjustment (if any) pursuant to Section 2(f) of this Agreement, plus or minus (v) an adjustment (if necessary) for delayed closing pursuant to Section 2(g) of this Agreement (items (i) through (v) together, the "Purchase Price"). The amount to be paid to Seller by Buyer at Closing shall be One Hundred Million Dollars and No Cents ($100,000,000), plus the Estimated Direct Net Working Capital as calculated in accordance with Section 2(b) of this Agreement plus the Valdez Inventory Transportation Revenue (the "Closing Payment").
(b) Estimated Direct Net Working Capital. Not later than five
(5) days prior to the anticipated Closing Date, Seller shall prepare
and deliver to Buyer: (i) a certificate setting forth Seller's good
faith estimate of the Direct Net Working Capital in accordance with the
form as set forth on Schedule 2(b) (the "Estimated Direct Net Working
Capital"), which form shall be used solely to prepare such estimate,
and not for any other calculation and (ii) documentation supporting the
calculation of the Estimated Direct Net Working Capital. This estimate
shall be based on the WAPCO month end balance sheet for the most recent
full calendar month prior to Closing.
(c) Direct Net Working Capital.
(i) As promptly as practicable, but no later than 45 days, after the Effective Time, Buyer will cause to be prepared and delivered to Seller: (A) a certificate and statement of the Direct Net Working Capital, which shall be calculated in accordance with GAAP applied on a consistent basis with those used in the preparation of the Estimated Direct Net Working Capital as described in Section 2(b) above and (B) account information for a bank account of Buyer.
(ii) If Seller agrees with Buyer's calculation of the
Direct Net Working Capital delivered pursuant to Section
2(c)(i), then such Direct Net Working Capital shall be deemed
the "Final Direct Net Working Capital." If Seller disagrees
with Buyer's calculation of the Direct Net Working Capital
delivered pursuant to Section 2(c)(i) and Seller elects to
take action with respect to such disagreement, Seller must,
within twenty (20) days after delivery of the certificate and
statement referred to in Section 2(c)(i), deliver a notice to
Buyer disagreeing with such calculation and setting forth
Seller's calculation of such amount. Any such notice of
disagreement shall specify those items or amounts as to which
Seller disagrees and shall set forth in reasonable detail the
reasons for such disagreement, and Seller shall be deemed to
have agreed with all other items and amounts contained in the
calculation of the Direct Net Working Capital delivered
pursuant to Section 2(c)(i).
(iii) If a notice of disagreement shall be duly delivered pursuant to Section 2(c)(ii), Buyer and Seller shall, during the ten (10) days following such delivery, use their good faith efforts to reach agreement on the disputed items or amounts in order to determine, as may be required, the amount of the Direct Net Working Capital, which amount shall not be less than the amount thereof shown in Buyer's calculation delivered pursuant to Section 2(c)(i) nor more than the amount thereof shown in Seller's notice delivered pursuant to Section 2(c)(ii). If, during such period, Buyer and Seller reach an agreement as to the amount of the Direct Net Working Capital then such amount shall be deemed the "Final Direct Net Working Capital." If Buyer and Seller are unable to reach agreement within such period, they shall thereafter cause KPMG LLP promptly to review this Agreement and the disputed items or amounts for the purpose of calculating the Final Direct Net Working Capital. In making such calculation, KPMG LLP shall consider only those items or amounts in Buyer's calculation of the Direct Net Working Capital as to which Seller has disagreed and shall make its decision in accordance with the terms of this Agreement and GAAP as consistently applied by Seller in the preparation of the Balance Sheet. KPMG LLP shall deliver to Buyer and Seller, as promptly as practicable, a report setting forth its judgment as to the correct calculations of the items or amounts in dispute and such report shall be considered the "Final Direct Net Working Capital." Such Final Direct Net Working Capital shall be final and binding upon Buyer, Seller and Williams Guarantor and judgment may be entered upon the determination of such independent accountants in any court having jurisdiction over the party against
which such determination is to be enforced. The cost of such review and report shall be borne (A) by Buyer if the difference between the Final Direct Net Working Capital and Buyer's calculation of the Direct Net Working Capital delivered pursuant to Section 2(c)(i) is greater than the difference between the Final Direct Net Working Capital and Seller's calculation of the Direct Net Working Capital delivered pursuant to Section 2(c)(ii), (B) by Seller if the first such difference is less than the second such difference and (C) otherwise equally by Seller and Buyer.
(iv) Seller and Buyer shall, and shall cause their respective independent accountants, WAPCO and each Subsidiary (to the extent controlled) to, cooperate and assist in the calculation of the Final Direct Net Working Capital, including the making available to the extent necessary of books, records, reports, ledgers, data, systems, work papers and personnel.
(d) Post Effective Time Adjustment Relating to Direct Net Working Capital.
(i) If Seller has delivered a notice of disagreement in accordance with Section 2(c)(ii) and the amount of the Direct Net Working Capital, as calculated by Seller, is less than the amount of the Estimated Direct Net Working Capital, then Seller shall pay to Buyer, as an adjustment to the Purchase Price, the amount of such difference (the "Preliminary Effective Time Deficit") with Interest as provided in Section 2(d)(v) in immediately available funds by wire transfer to an account of Buyer as specified by Buyer pursuant to Section 2(c)(i) within three (3) Business Days after Seller has delivered its notice of disagreement.
(ii) If Seller has delivered a notice of disagreement in accordance with Section 2(c)(ii) and the amount of the Direct Net Working Capital, as calculated by Buyer, is greater than the amount of the Estimated Direct Net Working Capital, then Buyer shall pay to Seller, as an adjustment to the Purchase Price, the amount of such difference (the "Preliminary Effective Time Surplus") with Interest as provided in Section 2(d)(v) in immediately available funds by wire transfer to an account of Seller as specified by Seller pursuant to Section 11(c) within three (3) Business Days after Seller has delivered its notice of disagreement.
(iii) If the Final Direct Net Working Capital is less than the Estimated Direct Net Working Capital (such difference, the "Effective Time Deficit"), then Seller shall pay to Buyer, as an adjustment to the Purchase Price, the amount of such Effective Time Deficit with Interest as provided in Section 2(d)(v), net of any prior payments made pursuant to Section 2(d)(i), in immediately available funds by wire transfer to an account of Buyer as specified by Buyer pursuant to Section 2(c)(i) within three (3) Business Days after any Effective Time Deficit has been finally determined.
(iv) If the Final Direct Net Working Capital exceeds the Estimated Direct Net Working Capital (such excess, the "Effective Time Surplus"), then Buyer shall
pay to Seller, as an adjustment to the Purchase Price, the amount of such Effective Time Surplus with Interest as provided in Section 2(d)(v), net of any prior payments made pursuant to Section 2(d)(ii), in immediately available funds by wire transfer to an account of Seller as specified by Seller pursuant to Section 11(c) within three (3) Business Days after any Effective Time Surplus has been finally determined.
(v) The amount of any payment to be made pursuant to this Section 2(d) shall bear Interest from and including the day immediately following the Effective Time.
(e) Valdez Inventory Transportation Revenue. Buyer shall pay Seller the value of the net transportation revenue in connection with any shipper barrels held in WAPCO inventory at the Valdez Terminal as of the Effective Time (the "Valdez Inventory Transportation Revenue"). The value of the Valdez Inventory Transportation Revenue to be paid by Buyer to Seller shall equal the WAPCO interstate tariff in effect at the Effective Time multiplied times the number of shipper barrels in WAPCO inventory at the Valdez Terminal minus a per barrel operating cost of $1.87, which reflects the Alyeska fixed and variable operating costs applicable to such shipper barrels. The Parties shall rely on Alyeska Report Number ALOA P006-1 to determine the number of shipper barrels in WAPCO inventory at the Valdez Terminal at the Effective Time.
(f) Stockholder's Equity Purchase Price Adjustment.
(i) The Base Stockholder's Equity, as calculated at June 30, 2003 and set forth on Schedule 2(f), is equal to zero (the "Base Stockholder's Equity").
(ii) Buyer will, as promptly as practicable, but no later than 45 days after the Effective Time, cause to be prepared and delivered to Seller the Effective Time Balance Sheet, together with a certificate based on such Effective Time Balance Sheet setting forth Buyer's calculation of the Stockholder's Equity.
(iii) If Seller agrees with Buyer's calculation of
the Stockholder's Equity delivered pursuant to Section
2(f)(ii), then such Stockholder's Equity shall be deemed the
"Final Stockholder's Equity." If Seller disagrees with Buyer's
calculation of the Stockholder's Equity delivered pursuant to
Section 2(f)(ii) and Seller elects to take action with respect
to such disagreement, then Seller must within twenty (20) days
deliver a notice to Buyer disagreeing with such calculation
and setting forth Seller's calculation of such amount. Any
such notice of disagreement shall specify those items or
amounts as to which Seller disagrees and shall set forth in
reasonable detail the reasons for such disagreement, and
Seller shall be deemed to have agreed with all other items and
amounts contained in the Effective Time Balance Sheet and the
calculation of the Stockholder's Equity delivered pursuant to
Section 2(f)(ii).
(iv) If a notice of disagreement shall be duly delivered pursuant to Section 2(f)(iii), then Buyer and Seller shall, during the ten (10) days following such delivery, use their good faith efforts to reach agreement on the disputed items or amounts in order to determine the amount of the Stockholder's Equity, which amount shall not be less than the amount thereof shown in Buyer's calculation delivered pursuant to Section 2(f)(ii) nor more than the amount thereof shown in Seller's notice delivered pursuant to Section 2(f)(iii). If during such period, Buyer and Seller reach agreement as to the amount of the Stockholder's Equity, then such amount shall be deemed the "Final Stockholder's Equity." If Buyer and Seller are unable to reach agreement within such time period, then they will promptly retain KPMG LLP to review this Agreement and the disputed items or amounts for the purpose of calculating the Final Stockholder's Equity. In making such calculation, KPMG LLP shall consider only those ITEMS or amounts in Buyer's calculation of the Stockholder's Equity as to which Seller has disagreed and shall make its decision in accordance with the terms of this Agreement and GAAP as consistently applied by Seller in the preparation of the Balance Sheet. KPMG LLP shall deliver to Buyer and Seller, as promptly as practicable, a report setting forth its judgment as to the correct calculations of the items or amounts in dispute and the amount set forth in such report shall be considered the "Final Stockholder's Equity." Such Final Stockholder's Equity shall be final and binding upon Buyer, Seller and Williams Guarantor. The cost of such review and report shall be borne (A) by Buyer if the difference between the Final Stockholder's Equity and Buyer's calculation of the Stockholder's Equity delivered pursuant to Section 2(f)(ii) is greater than the difference between the Final Stockholder's Equity and Seller's calculation of the Stockholder's Equity delivered pursuant to Section 2(f)(iii), (B) by Seller if the first such difference is less than the second such difference and (C) otherwise equally by Seller and Buyer.
(v) Seller and Buyer shall, and shall cause their respective independent accountants, WAPCO and each Subsidiary (to the extent controlled), to cooperate and assist in the calculation of the Final Stockholder's Equity, including the making available to the extent necessary of books, records, reports, ledgers, data, systems, work papers and personnel.
(vi) If the Final Stockholder's Equity is less than the Base Stockholder's Equity, then Seller shall pay such amount to Buyer, as an adjustment to the Purchase Price, in the manner and with Interest as provided in Section 2(f)(vii). If the Final Stockholder's Equity exceeds the Base Stockholder's Equity, then Buyer shall pay such amount to Seller, as an adjustment to the Purchase Price, in the manner and with Interest as provided in Section 2(f)(vii).
(vii) Any payment pursuant to this Section 2(f) shall be made within three (3) Business Days after the Final Stockholder's Equity has been determined, in immediately available funds by wire transfer to an account of Buyer or Seller, as specified by Buyer pursuant to Section 2(c)(i), or Seller pursuant to 11(c), as the case
may be. The amount of any payment to be made pursuant to this
Section 2(f) shall bear Interest from and including the day
immediately following the Effective Time.
(g) Delayed Closing Potential Adjustment to Purchase Price. In the event that the transactions contemplated herein do not close within 106 days after the execution hereof, the Purchase Price shall be adjusted by (i) adding to the Purchase Price an amount equal to the Purchase Price times the Interest Rate divided by 365 and then multiplied by the number of days from the 106th day after the date hereof until the day immediately following the Effective Time, and (ii) subtracting from such amount the Net Cash Flow realized during the period from the 106th day after the date hereof to the Effective Time. Buyer will be permitted to review Seller's calculation of any adjustment pursuant to this Section 2(g) in connection with its review of the Stockholder's Equity to confirm the accuracy thereof, and if Buyer and Seller are not able to reach agreement on these amounts pursuant to the procedures set forth above, then KPMG LLP shall determine such amounts and such determination shall be final and binding on Buyer, Seller and Williams Guarantor. In making any determination pursuant to this Section 2(g), KPMG LLP shall consider only those items or amounts in Seller's calculation to which Buyer has disagreed and KPMG LLP shall make its decision in accordance with the terms of this Agreement and GAAP as consistently applied by Seller during its ownership of the WAPCO Interests.
3. Revenues and Expenses. To the extent any of the following have not been accounted for pursuant to Section 2 or Section 4 of this Agreement:
(a) Seller shall be: (i) entitled to all operating revenues
(and related accounts receivable) realized by or attributable to WAPCO,
and (ii) responsible for the payment of all liabilities, costs and
expenses (and related accounts payable), including the payment of Taxes
when due and owing, incurred by or attributable to WAPCO, in each case
to the extent the foregoing are earned or incurred prior to the
Effective Time. WAPCO shall, either before or after the Effective Time,
make such distributions and assignments as may be necessary or
appropriate to give real economic effect to allocations of operating
revenues and accounts receivable, net of the allocation of liabilities,
costs and expenses contemplated by the first sentence of this Section
3(a). Buyer shall be: (y) entitled to all operating revenues (and
related accounts receivable) realized by or attributable to WAPCO, and
(z) responsible for the payment of all liabilities, costs and expenses
(and related accounts payable), including the payment of Taxes,
incurred by or attributable to WAPCO, in each case to the extent the
foregoing are earned or incurred after the Effective Time.
(b) Notwithstanding the generality of Section 3(a), the
following provisions shall be applicable to expenses relating to TAPS
settlement methodology adjustments. In accordance with Section II-2
(f)(ii) of the Tariff Settlement Methodology ("TSM") Agreement, Alyeska
will reallocate actual operating costs among all TAPS Owners on a
barrel-mile basis and distribute during the first quarter of a year any
overpayments or underpayments collected for the prior year to the
appropriate carrier. For the time period from January 1, 2003 through
the Effective Time, Seller will be responsible for any underpayments
due to Alyeska, and Buyer will pay to Seller the disbursement collected
for
any overpayment for the same time period. The amounts due to or payable by Seller shall be determined as the difference between WAPCO's percentage barrel-mile share of the total TAPS barrel-mile throughputs and WAPCO's composite TAPS ownership percentage of 3.0845% in the Pipeline and Terminal Tankage for the time period of January 1, 2003 to the Effective Time, times the total TSM costs and allowances for the year as defined by the above TSM Section II-2 (f)(ii).
(c) Any payments to be made to Seller by Buyer in connection
with Section 3 shall be made within ten (10) days of Buyer's receipt of
the revenues described therein. Except as otherwise provided in Section
3(b), to the extent that a Party receives any funds to which the other
Party is entitled, the Party receiving such funds shall deliver the
funds to the other Party within five (5) Business Days after actual
receipt of such funds. If any Party pays any cost or expense (or
related account payable) that is properly borne by the other Party, the
Party responsible for such cost or expense (or related account payable)
shall promptly reimburse the Party who made such payment. The
obligations of the parties under this Section 3(c) shall be performed
without any right of setoff, except as specifically described in
Section 3(b).
4. Post Effective Time Tariff Adjustments and Indemnities.
(a) Seller Obligations. Seller, for itself, its Affiliates, successors and assigns, shall pay, indemnify, and hold harmless Buyer, its Affiliates, successors and assigns, from and against any and all liability for refund payments arising out of the matter denoted as Docket Number P-03-4, currently pending before the Regulatory Commission of Alaska, or any other retroactive tariff reduction payments required by any final, non-appealable ruling of any regulatory or judicial authorities in connection with amounts collected for the tariff rates in effect with respect to WAPCO's TAPS Interest for the period beginning January 1, 2003 and ending at the Effective Time. This obligation shall not be subject to the Minimum Indemnifiable Amount or WAPCO Threshold or included in the calculation of the maximum amount of indemnifiable Damages under Section 15 of this Agreement.
(b) Buyer Obligations. Buyer, for itself, its Affiliates,
successors and assigns, shall pay, indemnify and hold harmless Seller
its Affiliates, successors and assigns, for any under collections by
Seller, including the amounts held in escrow pursuant to the Interim
Temporary Rates, as determined by any final, non-appealable ruling of
any regulatory or judicial authorities in connection with the tariff
rates in effect with respect to WAPCO's TAPS Interest for the period
beginning January 1, 2003 through the Effective Time, together with
interest earned on such escrowed amounts; provided, however, Buyer
shall only be obligated to the extent it has actually collected any
such amounts. The obligations of this Section 4(b) shall not be subject
to the Minimum Indemnifiable Amount or WAPCO Threshold or included in
the calculation of the maximum amount of indemnifiable Damages under
Section 15 of this Agreement.
5. Seller's Representations and Warranties. Seller represents and warrants to Buyer as of the date hereof, as of the Closing Date and as of the Effective Time as follows:
(a) Organization and Power. Seller and WAPCO are limited liability companies, duly organized, validly existing, and in good standing under the laws of the State of Delaware. Each of Seller and WAPCO has all requisite power and authority to own, lease and operate its properties and assets and to conduct its business as now conducted. A true, complete and correct copy of the limited liability company agreement of each of Seller and WAPCO, as in effect on the date hereof, including all amendments thereto, has heretofore been delivered to Buyer.
(b) Membership Interests of WAPCO. Except as disclosed on Schedule 5(b), Seller owns all right, title and interest in and to the WAPCO Interests free and clear of all Liens, except for the WAPCO Permitted Liens, and upon delivery of the WAPCO Interests by Seller and payment therefor by Buyer at the Closing, good title to the WAPCO Interests, free and clear of all Liens (other than the WAPCO Permitted Liens and those that arise by action or with respect to Buyer) will pass to Buyer. There are no membership interests or other equity interests in WAPCO outstanding, other than the WAPCO Interests. There are no outstanding options, warrants, calls, preemptive or other rights, commitments or agreements of any kind to which Seller, WAPCO or their respective Affiliates is a party or by which Seller, WAPCO or their respective Affiliates is bound relating to the sale, issuance, or voting of, or the granting of rights to acquire, all or a portion of the membership interests of WAPCO or any securities convertible or exchangeable into or evidencing the right to purchase all or a portion of the membership interests or other equity interests in WAPCO, or obligating Seller, WAPCO, or their respective Affiliates to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. There are no outstanding contractual obligations of any of Seller, WAPCO or their respective Affiliates to repurchase, redeem or otherwise acquire the membership interests of WAPCO. There are no voting trusts or other agreements or understandings to which Seller, WAPCO, or their respective Affiliates is a party with respect to voting of the membership interests of WAPCO. WAPCO owns all right, title and interest in and to the TAPS Interests free and clear of all Liens, other than the TAPS Permitted Liens.
(c) Authorization. Seller has the requisite power and authority to execute and deliver, and has taken all requisite action required for the execution and delivery of this Agreement and the other agreements, documents and instruments to be executed and delivered by Seller in connection with this Agreement and the consummation of the transactions contemplated hereby and thereby, and no other action is necessary by Seller, its board of directors, or its members, to authorize the execution and delivery by Seller of this Agreement and such other agreements, documents and instruments and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Seller and constitutes, and when executed and delivered, each of the other agreements, documents and instruments to be executed and delivered by Seller in connection with this Agreement will constitute, the legal, valid, and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and other laws affecting the rights of creditors and except in respect of equitable remedies.
(d) Governmental Consents. The execution, delivery and performance by Seller of this Agreement and the consummation of the transactions contemplated hereby require no action by or in respect of, or filing with, any governmental body, agency or official, other than compliance with (i) any applicable requirements of the HSR Act, (ii) any applicable requirements of the 1934 Act, (iii) any applicable requirements of the Federal Energy Regulatory Commission, (iv) any applicable requirements of the Regulatory Commission of Alaska, (v) any applicable requirements of the Secretary of the Interior, (vi) any applicable requirements of the Alaska Department of Natural Resources, and (vii) the matters disclosed on Schedule 5(d).
(e) No Consent Required; Noncontravention. Subject to
compliance by Seller with the requirements in the TAPS Agreement
regarding the preferential purchase right of the equity owners of TAPS
with respect to WAPCO's equity interest in TAPS or as otherwise
disclosed on Schedule 5(e), the execution, delivery and performance by
Seller of this Agreement and the consummation of the transactions
contemplated hereby do not and will not, directly or indirectly, with
or without notice or lapse of time: (i) result in a violation of any
provision of the governing documents of Seller, WAPCO or, to the
Knowledge of Seller, Alyeska; (ii) violate any applicable law, rule,
regulation, judgment, injunction, order or decree (assuming compliance
with the matters referred to in Section 5(d)); (iii) require any
consent, approval or other action by any Person under, or constitute a
default under any provision of any agreement or other instrument
binding upon Seller, WAPCO or, to the knowledge of Seller, Alyeska;
(iv) give rise to any right of termination, cancellation or
acceleration of any right or obligation of Seller, WAPCO or, to the
Knowledge of Seller, Alyeska or to a loss of any benefit to which
Seller, WAPCO or, to the Knowledge of Seller, Alyeska is entitled under
any provision of any agreement or other instrument binding upon Seller,
WAPCO or Alyeska; (v) result in the creation or imposition of any Lien
on the WAPCO Interests, other than the WAPCO Permitted Liens or, to the
Knowledge of Seller, the TAPS Interests; or (vi) result in a violation
of, or give any Governmental Authority or other person the right to
challenge the transactions contemplated hereby or to exercise any
remedy or obtain any relief under, any Legal Requirement to which
Seller, or any of the WAPCO Interests or, to Seller's Knowledge, the
TAPS Interests, may be subject in a manner that would adversely affect
Seller's ability to perform its obligations under this Agreement.
(f) Operations of WAPCO; No Subsidiaries. Seller formed WAPCO solely for the purpose of owning the TAPS Interests and since its formation WAPCO has not engaged in any other business activities other than owning the TAPS Interests. WAPCO does not have any subsidiaries, and except for the TAPS Interests, WAPCO does not own any securities or other ownership interests of any entity.
(g) Financial Statements. The unaudited balance sheet as of December 31, 2002 and the related unaudited statements of income and cash flows for the year ended December 31, 2002 and the unaudited interim balance sheet as of June 30, 2003 and the related unaudited interim statements of income and cash flows for the six months ended June 30, 2003 of WAPCO fairly present, in conformity with GAAP applied on a consistent basis, the
financial position of WAPCO as of the dates thereof and its results of operations and cash flows for the periods then ended (subject to normal adjustments in the case of any unaudited interim financial statements). Schedule 5(g) attached hereto includes: WAPCO's unaudited interim balance sheet as of June 30, 2003 and the related unaudited interim statements of income and cash flows for the six months ended June 30, 2003 of WAPCO. Certain adjustments have been made to the June 30, 2003 WAPCO unaudited interim balance sheet. These adjustments appear on the Balance Sheet, which is also included in Schedule 5(g).
(h) Absence of Certain Changes. Except as set forth in Schedule 5(h) or as specifically contemplated by this Agreement, since March 31, 2003, WAPCO's business has been operated only in the Ordinary Course of Business, and there has not been any of the following:
(i) any event, occurrence, development or state of circumstances or facts which individually or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect on WAPCO;
(ii) other than contemplated by Section 3(a) above, any declaration, setting aside or payment of any dividend or other distribution with respect to any membership interests of WAPCO, or any repurchase, redemption or other acquisition by WAPCO of any outstanding membership interests of WAPCO;
(iii) any amendment of any material term of the membership interests of WAPCO;
(iv) any incurrence, assumption or guarantee by WAPCO of any Indebtedness;
(v) to Seller's Knowledge, any material loss, damage, destruction, condemnation or other casualty (whether or not covered by insurance) affecting the TAPS Interests;
(vi) any change in any of the accounting principles followed by WAPCO;
(vii) any making of any loan, advance or capital contributions to or investment in any Person, other than loans, advances or capital contributions to or investments in Alyeska or TAPS made pursuant to and in accordance with the WAPCO Contracts;
(viii) any transaction or commitment made, or any contract or agreement entered into, by WAPCO relating to its assets or business (including the acquisition or disposition of any assets) or any relinquishment by WAPCO of any contract or other right, in either case, material to WAPCO, other than transactions and commitments contemplated by this Agreement;
(ix) any (A) employment, compensation, consulting, severance, retirement or other similar agreement entered into with any Person, including any director or officer of WAPCO (or any amendment to any such existing agreement), (B) grant of any severance or termination pay to any Person, including any director or officer of WAPCO, or (C) change in compensation or other benefits payable to any Person, including any director or officer of WAPCO pursuant to any severance or retirement plans or policies thereof;
(x) any capital expenditure, or commitment for a capital expenditure, for additions or improvements to property, plant and equipment related to TAPS brought to the TAPS owners' committee, other than in the Ordinary Course of Business;
(xi) a grant of, or the existence of, any Lien on any of the WAPCO Interests, other than the WAPCO Permitted Liens; or
(xii) an agreement, whether in writing or otherwise, to do any of the foregoing.
(i) No Undisclosed Material Liabilities. There are no liabilities of WAPCO of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, other than:
(i) liabilities provided for in the Balance Sheet or disclosed in the notes thereto;
(ii) liabilities disclosed in Schedule 5(i); and
(iii) other undisclosed liabilities which, individually or in the aggregate, are not material to WAPCO.
(j) Litigation.
(i) There is no pending Action or other Proceeding before any court, arbitrator or any Governmental Authority by, against or affecting Seller or WAPCO or any of their respective assets that challenges the validity or enforceability of this Agreement or any other document, instrument or agreement to be executed and delivered by Seller in connection with the transactions contemplated hereby, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, the transactions contemplated hereby. No such proceeding has been Threatened and, to the Knowledge of Seller, no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such proceeding.
(ii) Except as set forth in Schedule 5(j)(ii), no Action or Proceeding is pending or Threatened against WAPCO and, to Seller's Knowledge, there are not any
matters which are reasonably likely to result in any such Action or Proceeding against WAPCO. WAPCO has not been served any notice of an Action or Proceeding relating to its TAPS Interests, except as set forth on Schedule 5(j)(ii) or Schedule 5(y)(iv).
(k) Intercompany Accounts. Schedule 5(k) contains a complete list of all intercompany balances as of June 30, 2003 between WAPCO and its Affiliates. Since June 30, 2003, there has not been any accrual of liability by WAPCO to any of its Affiliates or other transaction between WAPCO and any of its Affiliates, except with respect to the period prior to the date of this Agreement, in the Ordinary Course of Business of WAPCO, and thereafter, as provided in Schedule 5(k).
(l) Material Contracts.
(i) Except for the agreements disclosed in Schedule
5(l) (such agreements, the "WAPCO Contracts"), WAPCO is not
bound by or through any financial or performance guaranties
and is neither a party to nor in contractual privity under:
(A) any material lease (whether of real or personal property);
(B) any material agreement for the purchase of materials, supplies, goods, services, equipment or other assets;
(C) any material agreement providing for the sale by WAPCO of materials, supplies, goods, services, equipment or other assets;
(D) any partnership, joint venture or other similar agreement or arrangement;
(E) any agreement relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of assets or otherwise);
(F) any agreement relating to Indebtedness (whether incurred, assumed, guaranteed or secured by any asset);
(G) any material option, license, franchise or similar agreement;
(H) any material agency, dealer, sales representative, marketing or other similar agreement;
(I) any agreement that limits the freedom of WAPCO to compete in any line of business or with any Person or in any area or which would so limit the freedom of WAPCO after the Effective Time;
(J) any agreement with (1) Seller or any of
its Affiliates, (2) any Person directly or indirectly
owning, controlling or holding with power to vote, 5%
or more of the outstanding voting securities of
Seller or any of its Affiliates, (3) any Person 5% or
more of whose outstanding voting securities are
directly or indirectly owned, controlled or held with
power to vote by Seller or any of its Affiliates or
(4) any director or officer of Seller or any of its
Affiliates or any "associates" or members of the
"immediate family" (as such terms are respectively
defined in Rules 12b-2 and 16a-1 of the 1934 Act) of
any such director or officer;
(K) any agreement with any director or officer of WAPCO or with any "associates" or members of the "immediate family" (as such terms are respectively defined in Rules 12b-2 and 16a-1 of the 1934 Act) of any such director or officer; or
(L) any other agreement, commitment, arrangement or plan not made in the Ordinary Course of Business that is material to WAPCO.
(ii) Except as set forth on Schedule 5(l), (A) WAPCO, and to Seller's Knowledge, each other Person that has any obligation or liability under any WAPCO Contract is in compliance with all applicable material terms and requirements of each such WAPCO Contract, (B) no event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with, or result in a violation or breach of, or give WAPCO or any other Person, the right to declare a default under, or to accelerate the maturity or performance of, or to cancel, terminate or modify, any WAPCO Contract, (C) there has not been any amendment or modification to any WAPCO Contracts, and (D) the WAPCO Contracts have not been assigned in any manner. WAPCO has not given or received from any other Person any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any WAPCO Contract. Each WAPCO Contract is in full force and effect, and is valid, binding and enforceable in accordance with its terms. True and complete copies of each WAPCO Contract have been delivered or made available to Buyer.
(iii) Pursuant to Section 4.03 of that certain Agreement of Sale and Purchase of an Undivided Interest in TAPS, dated March 24, 2000, by and among Mobil Alaska Pipeline Company ("MAPL") and WAPCO, WAPCO maintains an obligation to collect and timely remit to MAPL monies associated with the Dismantlement, Removal and Restoration ("DR&R") of TAPS related to a DR&R indemnity from MAPL. Throughout its ownership of the TAPS Interests, WAPCO has fulfilled its obligations with respect to the collection and timely remittance of the DR&R monies. There exists no claim, pending or Threatened, by MAPL or the successors or affiliates of MAPL, that WAPCO's DR&R collection and remittance obligations are deficient. Further, to the Knowledge of Seller, there exists no material breach of any of the provisions of the March 24, 2000, Agreement of Sale
and Purchase of an Undivided Interest in TAPS on the part of either party to that agreement, except as set forth on Schedule 5(l)(ii).
(m) Finders' Fees. Except with respect to the fee owed to Lehman Brothers Inc., which fee shall be the sole obligation of, and be paid by, Seller or its Affiliates (other than WAPCO), there is no liability, contingent or otherwise, for investment bankers', brokers' or finders' fees relating to the transactions contemplated by this Agreement.
(n) Compliance with Laws and Court Orders. Except as set forth on Schedule 5(n), and except with respect to Environmental Matters (which is subject of separate representations in Section 5(u)) and Taxes (which is subject of separate representations in Section 5(v)), neither WAPCO nor, to the Knowledge of Seller, Alyeska is in violation of, and since June 30, 2000, neither WAPCO nor, to the Knowledge of Seller, Alyeska has violated, and neither WAPCO nor, to the Knowledge of Seller, Alyeska is under investigation with respect to, or has been Threatened to be charged with or given notice of any violation of, any applicable law, rule, regulation, judgment, injunction, order or decree that would have a Material Adverse Effect on WAPCO.
(o) Properties.
(i) WAPCO has good, valid and marketable title to, or in the case of leased property and assets, has valid leasehold interests in, all property and assets (whether real, personal, tangible or intangible) reflected on the Balance Sheet or acquired after June 30, 2003, except for properties and assets sold since June 30, 2003 in the Ordinary Course of Business. None of such property or assets is subject to any Lien, except the WAPCO Permitted Liens and the TAPS Permitted Liens.
(ii) There are no developments affecting any such property or assets pending or Threatened, which might materially detract from the value, materially interfere with any present use or materially adversely affect the marketability of any such property or assets.
(iii) All leases of such real property and personal property are in good standing and are valid, binding and enforceable in accordance with their respective terms and there does not exist under any such lease any default or any event which with notice or lapse of time or both would constitute a default.
(iv) The property and assets owned or leased by WAPCO, or which they otherwise have the right to use, constitute all of the property and assets used or held for use in connection with the businesses of WAPCO and are adequate to conduct such businesses as currently conducted.
(p) Intellectual Property.
(i) The Intellectual Property listed on Schedule 5(p) constitutes all the Intellectual Property necessary for, or used or held for use in, the conduct of the business of WAPCO during the previous twelve (12) months and as currently conducted. Except with regards to the Intellectual Property that is included in the Excluded Items, there exist no restrictions on the disclosure, use or transfer of the Intellectual Property and the consummation of the transactions contemplated by this Agreement will not alter, impair or extinguish any such Intellectual Property.
(ii) WAPCO has not infringed, misappropriated or otherwise violated any Intellectual Property of any third person. There is no Action or Proceeding pending against, or, to the Knowledge of Seller, Threatened against or affecting, WAPCO or any present or former officer or director of WAPCO (A) based upon, or challenging or seeking to deny or restrict, the rights of WAPCO in any of the Intellectual Property, (B) alleging that the use of the Intellectual Property or any services provided, processes used or products manufactured, used, imported or sold by WAPCO do or may conflict with, misappropriate, infringe or otherwise violate any intellectual property of any third party or (C) alleging that WAPCO has infringed, misappropriated or otherwise violated any intellectual property of any third party.
(iii) None of the Intellectual Property material to the operation of the business of WAPCO has been adjudged invalid or unenforceable in whole or part, and, to the Knowledge of Seller, all such Intellectual Property is valid and enforceable.
(q) Insurance Coverage. Schedule 5(q) contains a summary schedule of all insurance policies and surety bonds relating to the assets, business, operations, officers or directors of WAPCO. At the Effective Time, all such insurance policies shall remain with Williams Guarantor and coverage for WAPCO shall terminate under such insurance policies. There is no claim by WAPCO pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds or in respect of which such underwriters have reserved their rights. All premiums payable under all such policies and bonds have been timely paid and WAPCO has otherwise complied fully with the terms and conditions of all such policies and bonds. Such policies of insurance and bonds (or other policies and bonds providing substantially similar insurance coverage) have been in effect since July 1, 2000 and remain in full force and effect. Such policies and bonds are of the type and in amounts customarily carried by Persons conducting businesses similar to those of WAPCO. There is not any Threatened termination of, premium increase with respect to, or material alteration of coverage under, any of such policies or bonds.
(r) Permits. Schedule 5(r) correctly describes each Permit together with the name of the Governmental Authority issuing such Permit. Except as set forth on Schedule 5(r), (i) the Permits are valid and in full force and effect, (ii) WAPCO is not in default under, and no condition exists that with notice or lapse of time or both would constitute a default under, the Permits and (iii) none of the Permits will be terminated or impaired or become terminable, in
whole or in part, as a result of the transactions contemplated hereby.
(s) No Employees. WAPCO does not have and has never had any employees.
(t) No Employee Benefit Plans. WAPCO has never maintained, administered or contributed to an "employee benefit plan," as defined in Section 3(3) of ERISA and neither WAPCO nor any ERISA Affiliate has any liability under any "employee benefit plan." None of WAPCO, any ERISA Affiliate and any predecessor thereof sponsors, maintains or contributes to, or has in the past sponsored, maintained or contributed to, any employee benefit plan subject to Title IV of ERISA. None of WAPCO, any ERISA Affiliate of WAPCO and any predecessor thereof contributes to, or has in the past contributed to, any multiemployer plan, as defined in Section 3(37) of ERISA.
(u) Environmental Matters. Except as disclosed on Schedule 5(u):
(i) no notice, notification, demand, request for information, citation, summons or order has been received, no complaint has been filed, no penalty has been assessed and no Action is pending or Threatened by any Governmental Authority or other Person naming WAPCO or, to Seller's Knowledge, Alyeska and relating to or arising out of any Environmental Law;
(ii) to the Knowledge of Seller, there are no liabilities of or relating to WAPCO or Alyeska of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any Environmental Law, and there are no facts, conditions, situations or set of circumstances which could reasonably be expected to result in or be the basis for any such liability;
(iii) to the Knowledge of Seller, no incinerator, sump, surface impoundment, lagoon, landfill, septic, wastewater treatment or other disposal system or underground storage tank (active or inactive) is or has been present at, on or under any property now or previously owned, leased or operated by WAPCO or Alyeska;
(iv) to the Knowledge of Seller, no Hazardous Substance has been discharged, disposed of, dumped, injected, pumped, deposited, spilled, leaked, emitted or released at, on or under any property now or previously owned, leased or operated by WAPCO or Alyeska;
(v) to the Knowledge of Seller, no property now or previously owned, leased or operated by WAPCO or Alyeska or any property to which WAPCO or Alyeska has, directly or indirectly, transported or arranged for the transportation of any Hazardous Substances is listed or proposed for listing, on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA) or on any similar federal, state or foreign list of sites requiring investigation or clean-up;
(vi) to the Knowledge of Seller, each of WAPCO and Alyeska is in compliance with all Environmental Laws and has obtained and is in compliance with all environmental Permits; such environmental Permits are valid and in full force and effect and will not be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated hereby;
(vii) to the Knowledge of Seller, there has been no environmental investigation, study, audit, test, review or other analysis conducted in relation to the current or prior business of WAPCO or Alyeska or any property or facility now or previously owned, leased or operated by WAPCO or Alyeska which has not been delivered to Buyer at least ten days prior to the date hereof; and
(viii) WAPCO does not own, lease or operate and has not owned, leased or operated any property or conducted any operations in any state other than Alaska.
(v) Tax Matters. Except as set forth in Schedule 5(v):
(i) WAPCO has timely filed (or has had filed on its behalf) all Tax Returns required to be filed that relate in any way to WAPCO's assets and has timely paid all Taxes due, whether reflected on such Tax Returns or under any assessment, as applicable, before the date of this Agreement, and all such Tax Returns are true, complete, and accurate;
(ii) there is no Action, audit, written claim or assessment pending or Threatened, with respect to such Tax Returns or Taxes the non-payment of which could give rise to a Lien upon, or otherwise could adversely affect, any of WAPCO's assets or the use thereof or could cause Buyer to incur any liability or obligation;
(iii) WAPCO has not received written notice of any assessment of any Taxes;
(iv) there is not in force any waiver of any statute of limitations in respect to Tax Returns or Taxes, or any outstanding request for such a waiver;
(v) there is not in force any extension of time for the assessment or payment of any Taxes or the filing of any Tax Return;
(vi) there are no Liens with respect to Taxes upon WAPCO's assets, except for Liens for Taxes not yet due;
(vii) WAPCO has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party and all Forms W-2
and 1099 required with respect thereto have been properly completed and timely filed;
(viii) WAPCO is not a party to any Tax allocation or sharing agreement;
(ix) Seller formed WAPCO as a single member limited liability company and WAPCO since its formation has been a single member limited liability company;
(x) WAPCO has not made an election to be treated as a corporation for federal or state income tax purposes;
(xi) WAPCO has not received any assets pursuant to any transaction that would be treated as anything other than a conveyance of assets for cash consideration for United States federal income tax purposes or other state law purposes;
(xii) WAPCO is not liable for, and has not had asserted against it, any liability or obligation for the Taxes of any Person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign Legal Requirements), as a transferee or successor, by contract or otherwise;
(xiii) WAPCO has not distributed the stock of another Person, nor has WAPCO had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Code section 355 or 361; and
(xiv) WAPCO is not a non-resident, alien, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Code and the rules and regulations promulgated thereunder).
(w) Representations. To Seller's Knowledge, no representation, warranty or other statement made by Seller to Buyer in this Agreement or any statement, certificate or schedule furnished to Buyer pursuant to this Agreement contains any untrue statement of a material fact or omits to state a material fact that would make the statements contained therein misleading. Seller has no Knowledge of any fact that has specific application to Seller that may have a Material Adverse Effect that has not been set forth in this Agreement.
(x) No Bankruptcy Proceedings. There are no bankruptcy, reorganization or receivership proceedings pending or planned by Seller, WAPCO or any of their direct or indirect parents (including Williams Guarantor). Seller is not entering into this Agreement with the intent (whether actual or constructive) to hinder, delay, or defraud its present or future creditors.
(y) Alyeska. To Seller's Knowledge, (i) Alyeska is a corporation duly organized, validly existing and in good standing under the law of the State of Delaware; (ii) the authorized capital stock of Alyeska consists of 10,000 shares of common stock, par value
$1.00 per share and all of the outstanding shares of capital stock of Alyeska have been duly authorized and validly issued and are fully paid and non-assessable and free of pre-emptive rights; (iii) Schedule 5(y)(iii) contains a copy of the audited balance sheet of Alyeska (including the notes thereto) included as the 2002 Accounting to the Owners of TAPS (the "Alyeska Balance Sheet") and the Alyeska Balance Sheet presents fairly the financial condition of Alyeska as of the date thereof in accordance with GAAP; (iv) except as set forth in Schedule 5(y)(iv) and except with regards to worker compensation Actions, Proceedings and claims, there are no Actions or Proceedings pending or Threatened against Alyeska or against TAPS, at law or in equity, or before any arbitrator of any kind, or before or by any Governmental Authority; nor is there any existing ground in which any such Action or Proceeding could be commenced with any reasonable likelihood of success; (v) except as disclosed in the Alyeska Balance Sheet, and except for current liabilities incurred in the Ordinary Course of Business since the date of the Alyeska Balance Sheet, Alyeska does not have any liabilities or obligations of any nature that would have a Material Adverse Effect on Alyeska or its business; (vi) Alyeska has filed all tax returns that it was required to file with respect to TAPS or any of the TAPS Owners, and has paid all taxes shown thereon as owing; and (vii) Alyeska has maintained, repaired and operated TAPS and the TAPS Interests in substantial compliance with all TAPS-related Federal and state rights of way, leases and easements and with all applicable laws and regulations applicable to TAPS and its business (including, without limitation, any Environmental Laws).
(z) DISCLAIMER. EXCEPT AS AND TO THE EXTENT SET FORTH IN THIS AGREEMENT AND THE OTHER AGREEMENTS, DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AGREEMENT, SELLER DOES NOT MAKE ANY OTHER REPRESENTATIONS OR WARRANTIES, AND DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY SUCH OTHER REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER.
6. Williams Guarantor's Representations and Warranties. Williams Guarantor represents and warrants to Buyer as of the date hereof, as of the Closing Date and as of the Effective Time as follows:
(a) Organization and Good Standing. Williams Guarantor is a corporation duly organized, validly existing in good standing under the laws of the State of Delaware and is in good standing as a corporation in all jurisdictions where the nature of its properties or business requires it.
(b) Authority and Binding Obligation. Williams Guarantor has full corporate power and authority to execute and deliver this Agreement and the Williams Guaranty, to perform its obligations under this Agreement and the Williams Guaranty and to consummate the transactions contemplated in this Agreement and the Williams Guaranty. The execution, delivery, and performance of this Agreement and the Williams Guaranty by Williams Guarantor have been duly and validly authorized by all necessary corporate, shareholder and other action and no further corporate, shareholder or other action is necessary on the part of Williams Guarantor to execute and deliver this Agreement and the Williams Guaranty and to perform its obligations hereunder and thereunder and to consummate the transactions
contemplated by this Agreement and the Williams Guaranty. This Agreement and the Williams Guaranty constitute legal, valid and binding obligations of Williams Guarantor enforceable against Williams Guarantor in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or equity).
(c) No Consent Required; Noncontravention. Except as specified on Schedule 6(c):
(i) no consent, approval or other action with, or to, any Governmental Authority or other Person is required in connection with the execution, delivery and performance by Williams Guarantor of this Agreement or the Williams Guaranty; and
(ii) neither the execution and delivery of this Agreement or the Williams Guaranty by Williams Guarantor, nor the consummation of the transactions contemplated hereby or thereby will (A) violate, conflict with or result in the breach of any provision of the certificate of incorporation or by-laws of Williams Guarantor; (B) result in a violation of or conflict with any Legal Requirement or Governmental Action applicable to or affecting Williams Guarantor or any of its assets or properties; (C) result in any breach of, or a maturity under, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent, approval or other action under, or result in, or give to others any rights of, termination, amendment or acceleration of any material contract, right or obligation of Williams Guarantor or to a loss of any benefit to which Williams Guarantor is entitled under any provision of any agreement or other instrument binding on Williams Guarantor; (D) give any Person the right or option to purchase the WAPCO Interests or any of the equity of, or interest in, WAPCO; or (E) result in the creation of any Lien on the WAPCO Interests or any of the equity of, or interest in, WAPCO, other than the WAPCO Permitted Liens.
(d) Litigation. Except as specified on Schedule 6(d), there
are no Actions pending or, to the knowledge of Williams Guarantor,
threatened or anticipated by any Person against or affecting Williams
Guarantor by or before any arbitrator or Governmental Authority that
(i) questions the validity or enforceability of the Williams Guaranty
or this Agreement or (ii) which could prohibit, limit, or delay the
consummation of the transactions contemplated by this Agreement and the
Williams Guaranty.
(e) Actions and Proceedings. Except as specified on Schedule
6(e), no Action is pending or, to the knowledge of Williams Guarantor,
threatened before any arbitrator or administrator or Governmental
Authority to delay, impair, restrain, limit, enjoin or prohibit, or to
obtain damages, a discovery order or other relief in connection with
this Agreement, or the Williams Guaranty or any of the transactions
contemplated hereby or thereby.
(f) Financial Capacity; Future Performance. Williams Guarantor has and will have the financial capacity to guaranty Seller's payments and performance under the Agreement. Except as described in its filings with the Securities Exchange Commission pursuant to the Securities Exchange Act of 1934, Williams Guarantor is not aware of any facts or circumstances that now or in the future would have a Material Adverse Effect on its financial condition, results of operations, business, properties, assets, or liabilities. Williams Guarantor is solvent, is not in the hands of a receiver, nor is any receivership pending, and no proceedings are planned or pending by or against it for bankruptcy or reorganization in any state or federal court.
(g) Other Indebtedness. Schedule 6(g) contains a complete list of bonds, letters of credit and guaranties issued by Williams Guarantor affecting WAPCO's assets.
(h) DISCLAIMER. EXCEPT AS AND TO THE EXTENT SET FORTH IN THIS AGREEMENT, WILLIAMS GUARANTY AND THE OTHER DOCUMENTS AND INSTRUMENTS DELIVERED IN CONNECTION WITH THIS AGREEMENT, WILLIAMS GUARANTOR MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, AND DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY SUCH OTHER REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER.
7. Buyer's Representations and Warranties. Buyer represents and warrants to Seller and Williams Guarantor as of the date hereof, as of the Closing Date and as of the Effective Time as follows:
(a) Organization and Power. Buyer is a limited liability company, duly organized, validly existing, and in good standing under the laws of the State of Alaska. Buyer has all requisite power and authority to own, lease and operate its properties and assets and to conduct its business as now conducted. A true, complete and correct copy of the limited liability company agreement of Buyer, as in effect on the date hereof, including all amendments thereto, has heretofore been delivered to Seller.
(b) Authorization. Buyer has the requisite power and authority to execute and deliver, and has taken all requisite action required for the execution and delivery of this Agreement and the other agreements, documents and instruments to be executed and delivered by Buyer in connection with this Agreement and the consummation of the transactions contemplated hereby and thereby, and no other action is necessary by Buyer, its board of directors, or its members, to authorize the execution and delivery by Buyer of this Agreement and such other agreements, documents and instruments and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Buyer and constitutes, and when executed and delivered, each of the other agreements, documents and instruments to be executed and delivered by Buyer in connection with this Agreement will constitute, the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and other laws affecting the rights of creditors and except in respect of equitable remedies.
(c) Governmental Consents. The execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby require no action by or in respect of, or filing with, any governmental body, agency or official other than compliance with (i) any applicable requirements of the HSR Act, (ii) any applicable requirements of the Federal Energy Regulatory Commission, (iii) any applicable requirements of the Regulatory Commission of Alaska, (iv) any applicable requirements of the Secretary of the Interior, (v) any applicable requirements of the Alaska Department of Natural Resources, and (vi) the matters disclosed on Schedule 7(c).
(d) No Consent Required; Noncontravention. The execution,
delivery and performance by Buyer of this Agreement and the
consummation of the transactions contemplated hereby do not and will
not, directly or indirectly, with or without notice or lapse of time:
(i) result in a violation of any provision of the governing documents
of Buyer; (ii) assuming compliance with the matters referred to in
Section 7(c), violate any applicable law, rule, regulation, judgment,
injunction, order or decree; or (iii) result in a violation of, or give
any Governmental Authority or other person the right to challenge the
transactions contemplated hereby or to exercise any remedy or obtain
any relief under, any legal requirement or any order to which Buyer, or
any assets owned or used by Buyer, may be subject in a manner that
would adversely affect Buyer's ability to perform its obligations under
this Agreement
(e) Litigation. There is no pending action, suit, investigation, arbitration or other proceeding before any court, arbitrator or any Governmental Authority, agency or official by, against or affecting Buyer that challenges the validity or enforceability of this Agreement or any other document, instrument or agreement to be executed and delivered by Buyer in connection with the transactions contemplated hereby, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, the transactions contemplated hereby. To the knowledge of Buyer, (i) no such proceeding has been threatened, and (ii) no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such proceeding.
(f) Finders' Fees. There is no investment banker, broker, finder or other intermediary who has been retained by or is authorized to act on behalf of Buyer who might be entitled to any fee or commission from Seller or any of its Affiliates upon consummation of the transactions contemplated by this Agreement.
(g) Purchase for Investment. Buyer is acquiring the WAPCO Interests for Buyer's own account, for investment purposes and not with a view to, or for sale in connection with, any distribution of such securities or any part thereof in violation of federal or state securities laws. Buyer acknowledges that the WAPCO Interests constitute "restricted securities" within the meaning of the Securities Act of 1933, as amended (the "Securities Act") by reason of their issuance in a transaction exempt from registration under the Securities Act, and that the WAPCO Interests may only be transferred pursuant to an effective registration statement under the Securities Act and qualification or registration
under applicable state securities laws, or an exemption therefrom. Buyer acknowledges that there is no public market for the WAPCO Interests and has not been given and is not relying on any assurances that such a public market will ever exist, and thus Buyer may be required to hold the WAPCO Interests indefinitely.
(h) Accredited Investor. Buyer is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act, is capable of evaluating the merits and risks of an investment in securities of privately held companies such as WAPCO and can bear to lose its entire investment in the WAPCO Interests.
(i) NO OTHER REPRESENTATIONS. EXCEPT AS AND TO THE EXTENT SET FORTH IN THIS AGREEMENT AND THE OTHER AGREEMENTS, DOCUMENTS AND INSTRUMENTS DELIVERED IN CONNECTION WITH THIS AGREEMENT, BUYER DOES NOT MAKE ANY OTHER REPRESENTATIONS AND WARRANTIES.
8A. Covenants of Seller.
Seller agrees that:
(a) Conduct of the Company. Except as specifically contemplated in this Agreement or upon obtaining Buyer's prior written consent, from the date of this Agreement until the Effective Time:
(i) Seller shall cause WAPCO to conduct its business, and own and maintain the TAPS Interests, only in the Ordinary Course of Business;
(ii) Seller shall not cause or allow WAPCO to (A) amend its operating agreement; (B) issue, sell or agree to issue or sell any securities or any rights, options or warrants to acquire its interests, or securities convertible into or exchangeable or exercisable for securities; (D) merge or consolidate with, or transfer all or substantially all of its assets to, another business entity; or (E) liquidate, wind up or dissolve (or suffer any liquidation or dissolution);
(iii) Seller shall not cause or allow WAPCO to (A) acquire any corporation, partnership or other business entity or any interest therein or acquire a material amount of assets; (B) sell, lease or sublease, transfer or otherwise dispose of any of any of its assets (other than in the Ordinary Course of Business); (C) make any loan, advance or capital contribution to, or investment in, any Person; or (D) mortgage, pledge, or otherwise encumber any of its assets;
(iv) Seller shall not cause or allow WAPCO to (A) incur any indebtedness for borrowed money; (B) incur any other material obligation or liability; or (C) assume, endorse, guarantee or otherwise become liable or responsible for the liabilities or obligations of any Person or its Affiliates;
(v) Seller shall cause WAPCO to keep and maintain accurate books, records and accounts in accordance with GAAP, and will not change the accounting principles used by it unless required by Legal Requirement or GAAP;
(vi) Seller shall not and shall not cause or allow WAPCO to create, incur or assume any Lien on the WAPCO Interests, except for the WAPCO Permitted Liens incurred in the Ordinary Course of Business;
(vii) Seller shall cause WAPCO to (A) pay or accrue all Taxes and other governmental charges imposed upon any of its assets or with respect to its franchises, business, income or assets before any penalty or interest accrues thereon; (B) pay all claims (including claims for labor, services, materials and supplies) that have become due and payable and which by Legal Requirements have or may become a Lien upon any of its assets prior to the time when any penalty or fine shall be incurred with respect thereto or any such Lien shall be imposed thereon; and (C) comply in all material respects with the requirements of all applicable Legal Requirements, rules, regulations and orders of any Governmental Authority, and comply with and enforce the provisions of all material contracts to which it is a party, including paying when due all rentals, royalties, expenses and other liabilities relating to its business or assets; provided, however, that WAPCO may contest the imposition of any such Taxes, assessments and other governmental charges, any such claim, or the requirements of any applicable Legal Requirement, rule, regulation or order or any material contract if done so in good faith by appropriate proceedings and if adequate reserves are established in accordance with GAAP and as may be determined as sufficient by WAPCO;
(viii) Seller shall cause WAPCO to preserve and keep in full force and effect its legal existence and material rights and franchises and to preserve intact its relationships with third parties and to keep available the services of its present officers and directors;
(ix) Seller shall not and shall not cause or allow WAPCO to enter into any additional contracts, agreements, leases, licenses, commitments, sale or purchase orders that affect WAPCO's assets and are performable after the Effective Time (other than in the Ordinary Course of Business);
(x) Seller shall not and shall not cause or allow WAPCO to modify, change, amend, waive, release, grant, close out, or transfer any rights under any contract (collectively, "Modifications"), except non-material Modifications in the Ordinary Course of Business;
(xi) Seller shall not and shall not cause or allow WAPCO to settle or compromise any material claims or litigation, without the express written consent of Buyer;
(xii) Seller shall not and shall not cause or allow WAPCO to enter into an agreement, contract, commitment or arrangement to do any of the foregoing; and
(xiii) Seller will not, and will not permit WAPCO to
(i) take or agree or commit to take any action that would make
any representation or warranty of Seller hereunder inaccurate
in any respect at, or as of any time prior to, the Effective
Time or (ii) omit or agree or commit to omit to take any
action necessary to prevent any such representation or
warranty from being inaccurate in any respect at any such
time.
(b) Interim Access to Information. From the date hereof until the Effective Time, Seller will (i) give, and will cause WAPCO to give, Buyer, its counsel, advisors, auditors and other authorized representatives full access to the offices, properties, books and records of WAPCO and to the books and records of Seller relating to WAPCO, (ii) furnish, and will cause WAPCO to furnish, to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to WAPCO as such Persons may reasonably request and (iii) instruct the counsel and financial advisors of Seller and WAPCO to cooperate with Buyer in its investigation of WAPCO. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Seller or WAPCO. No investigation by Buyer or other information received by Buyer shall operate as a waiver or otherwise affect any representation, warranty or agreement given or made by Seller hereunder. Seller shall have the right to have a representative present at all times of any such inspections, interviews and examinations conducted at or on the offices or other facilities or properties of Seller. Buyer shall be responsible for its own costs and expenses in connection with these activities. Additionally, the information, reports, records and all other information provided to Buyer pursuant to this Section will be deemed to be "Confidential Information" for purposes of the Confidentiality Agreement and as appropriate Highly Sensitive Information as provided in the confidentiality acknowledgement between WAPCO and Koch Pipeline Company, L.P. dated October 8, 2003. Buyer, however, shall not be entitled to access to any materials containing privileged communications. Buyer expressly acknowledges that nothing in this Section is intended to give rise to any contingency to Buyer's obligations to proceed with the transactions contemplated herein. Buyer shall defend, indemnify and hold harmless Seller, its Affiliates and their officers, directors, employees and agents from and against all losses, claims, demands, lawsuits, judgments, costs, expenses (including reasonable attorney's fees) and other liabilities arising out of personal injury or death suffered by Buyer's or Seller's or its Affiliates' employees or contractors to the extent caused by Buyer or its employees or agents during inspection of WAPCO's assets under this Section.
(c) Confidentiality. After the Effective Time, Seller and its Affiliates will hold, and will use their best efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning WAPCO, except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis
by Seller, (ii) in the public domain through no fault of Seller or its Affiliates or (iii) later lawfully acquired or developed by Seller from sources other than those related to its prior ownership of WAPCO. The obligation of Seller and its Affiliates to hold any such information in confidence shall be satisfied if they exercise the same care with respect to such information as they would take to preserve the confidentiality of their own similar information.
(d) Notices of Certain Events. Seller shall promptly notify Buyer of:
(i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings commenced or Threatened against, relating to or involving or otherwise affecting Seller or WAPCO that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 5(j)(ii) or that relate to the consummation of the transactions contemplated by this Agreement.
(e) Resignations. Seller will deliver to Buyer the resignations of all officers and directors of WAPCO from their positions with WAPCO at or prior to the Effective Time.
(f) WAPCO Books and Records. Seller will at or prior to the Effective Time deliver to Buyer all books and records relating primarily to WAPCO's and the TAPS Interests' business accounting and legal matters. To the extent that any such books and records are in electronic form, or otherwise stored on a computer system or information network, Seller will cause such information to be delivered to Buyer in a format that is readable and searchable.
(g) Excluded Items. Prior to the Effective Time, Seller shall cause the Excluded Items to be assigned to or assumed by, as the case may be, one or more of Seller's Affiliates and, in connection with such assignment or assumption, all Liabilities of Seller with respect to such Excluded Items shall be assumed by an Affiliate of Seller.
8B. Covenants of Buyer and Seller.
(a) Commercially Reasonable Efforts; HSR Filing. Subject to
the terms and conditions of this Agreement, Buyer and Seller will use
their commercially reasonable efforts to take or cause to be taken, all
actions and to do, or cause to be done, all things necessary or
desirable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement. In furtherance and not in
limitation of the foregoing, Buyer and Seller agree, within fourteen
(14) days of the date of this Agreement, to appropriately compile and
file (or cause their respective "ultimate parent entity" to appropriately file) a Notification and Report Form pursuant to the HSR Act and any other applicable antitrust law with respect to the transactions contemplated hereby; provided, however, no party's obligations in connection with the foregoing shall require such party to take any action which is reasonably likely to result in a Material Adverse Effect with respect to such party, provided, further, under no circumstances shall Buyer or any of its Affiliates be required to hold separate (including in trust or otherwise) or divest or dispose of any of its businesses or assets (categories of assets) or waive any conditions to this Agreement or the other transactions contemplated by this Agreement, nor shall Buyer or any of its Affiliates be required to hold separate (including by trust or otherwise) or divest any assets. All HSR Act filing fees (excluding any attorneys' fees) shall be split equally by Buyer and Seller. Further, Buyer and Seller agree that except as required by the HSR Act, neither Buyer nor its Affiliates shall be required to disclose any information (financial or otherwise) not otherwise in the public domain to any third party.
(b) Public Announcements. Buyer and Seller agree that neither they nor any of their respective Affiliates shall issue any press release, respond to any press inquiry, or make any other public statement with respect to this Agreement or the transactions contemplated hereby without the prior approval of the other Party (which approval will not be unreasonably withheld, conditioned or delayed), except as may be required by applicable law; provided, however, that prior notice shall be required but prior approval shall not be required where such release or announcement is required by applicable law, securities regulations or stock exchange rules.
(c) Certain Filings. Prior to the Effective Time, Seller and Buyer shall cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any Governmental Authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions; contemplated by this Agreement and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. Prior to the Effective Time, and after the Effective Time, to the extent necessary, Seller and Buyer shall cooperate with each other and use their reasonable best efforts to make such filings with the Federal Energy Regulatory Commission as are necessary to enable Buyer to adopt, as of the Effective Time, WAPCO's standard interstate tariff applicable to the TAPS Interests with respect to Buyer's ownership of the TAPS Interests. Prior to the Effective Time, Seller and Buyer shall also cooperate with one another and use their reasonable best efforts to transfer WAPCO's Certificate of Public Convenience to Buyer and to make any other filings with the Regulatory Commission of Alaska as are necessary to enable Buyer to adopt WAPCO's intrastate tariff applicable to the TAPS Interests and to own and hold such TAPS Interest. Seller and Buyer recognize that the transfers of the Federal and State Rights-of-Way associated with the TAPS Interests are subject to the prior written consent, respectively, of the Secretary of the Interior and Alaska Department of Natural Resources. Seller and Buyer agree to expeditiously file the necessary application and any requested supporting information and shall cooperate with each other and use commercially reasonable efforts to
transfer to Buyer WAPCO's interests in the Federal and State Rights-of-Way associated with the TAPS interest.
(d) Control of Litigation. At the Effective Time, Buyer shall assume control of the litigation listed on Schedule 5(j)(ii) and shall have complete discretion and control over such litigation at Buyer's sole cost and expense. Seller shall cooperate with Buyer and its Affiliates in connection with the prosecution or defense of the matters set forth on Schedule 5(j)(ii) and shall take any actions reasonably requested by Buyer and its Affiliates relating to such prosecution or defense. Seller shall be entitled to be reimbursed for any reasonable out-of-pocket costs and expenses authorized in advance by and incurred in connection with assisting Buyer and its Affiliates in connection with this Section 8(d).
(e) Intercompany Accounts. All intercompany accounts between Seller or its Affiliates, on the one hand, and WAPCO, on the other hand, shall be zeroed at the Effective Time, irrespective of the terms of payment of such intercompany accounts.
(f) Sales and Transfer Taxes. Buyer shall be responsible for and agrees to pay when due all sales, use, value added, documentary, stamp, gross receipts, transfer, conveyance, excise, real estate recording and other similar Taxes and fees (collectively, "Transfer Taxes") arising out of the transfer of the WAPCO Interests by Seller and the other transactions contemplated herein. Buyer shall prepare and timely file all Tax Returns required to be filed in respect of Transfer Taxes, provided that Seller shall be permitted to prepare any such Tax Returns that are the primary responsibility of Seller under applicable law. Seller's preparation of any such Tax Returns shall be subject to Buyer's approval, which approval shall not be withheld unreasonably.
(g) Cooperation on Tax Matters. After the Effective Time, Seller will cooperate with Buyer, and Buyer will cooperate with Seller, to the extent necessary in the preparation of all Tax Returns and will provide (or cause to be provided) any records and other information the other so reasonably requests and will provide the cooperation of its employees and auditors. Seller will reasonably cooperate with Buyer and Buyer will reasonably cooperate with Seller in connection with any Tax investigation, audit or other Proceeding.
(h) Post Effective Time Access. On and after the Effective Time, each Party will promptly afford to other Party and its agents reasonable access to its books of account, financial and other records (including, without limitation, accountant's work papers), information, employees and auditors to the extent necessary or useful for such Party in connection with any audit, investigation, dispute or litigation or any other reasonable business purpose relating to WAPCO; provided that any such access by such Party shall not unreasonably interfere with the conduct of the business of the other Party. In addition, Williams Guarantor will promptly afford Buyer access to financial information of Williams Guarantor as reasonably requested by Buyer, provided that such financial information has been publicly disclosed.
(i) Change of WAPCO Name. Buyer shall cause WAPCO to change its name promptly after the Effective Time, but in no event later than 30 days after the Effective Time, so that WAPCO's name does not contain the word "Williams."
(j) Letters of Credit and Guaranties. Within 30 days of the Effective Time, Seller will terminate the letters of credit and guaranties that are listed on Schedule 6(g) and Buyer shall assume all obligations to post or replace such letters of credit, surety bonds and guaranties as the counterparties thereto require and otherwise cooperate and assist with the termination of such letters of credit and guaranties.
(k) ExxonMobil Capacity Lease. Buyer, Seller and Williams Guarantor acknowledge that the Capacity Lease entered into by and between ExxonMobil Pipeline Company ("ExxonMobil"), as lessor, and WAPCO, as lessee, as described on Schedule 5(l) (the "ExxonMobil Capacity Lease"), is in dispute, and that WAPCO has claimed that ExxonMobil has breached the ExxonMobil Capacity Lease. As a result of such dispute, Seller, WAPCO and ExxonMobil are in settlement negotiations to settle their differences relative to the claimed breach. Buyer, Seller and Williams Guarantor make the following covenants:
(i) The ExxonMobil Capacity Lease is a Material Contract and any settlement agreement memorializing the settlement of claims arising out of the ExxonMobil Capacity Lease would be a Material Contract. To that end, Seller and Williams Guarantor agree not to carry on further settlement negotiations with ExxonMobil without the knowledge, consent and participation of Buyer.
(ii) If settlement negotiations regarding the ExxonMobil Capacity Lease do not result in final settlement that is acceptable to ExxonMobil, WAPCO and Buyer prior to the Effective Time, then the ExxonMobil Capacity Lease shall remain a Material Contract of WAPCO at the Effective Time.
(iii) If, at any time after the Effective Time, WAPCO, Buyer, or an Affiliate of Buyer are or become parties to an Action, Proceeding, or Governmental Action wherein the ExxonMobil Capacity Lease is adjudicated, held or found to be invalid, or to violate any law, statute, regulation, ordinance, decree, contract, or right of any party, or to be unenforceable such that Buyer is unable to enjoy the rights afforded to WAPCO under the ExxonMobil Capacity Lease, then Seller and/or Williams Guarantor shall refund to Buyer that portion of the Purchase Price allotted to the value placed on the ExxonMobil Capacity Lease by Seller and Buyer for purposes of the transactions contemplated by this Agreement, such amount being Ten Million Dollars ($10,000,000) (but such amount not representing the total amount of potential recovery under the ExxonMobil Capacity Lease); provided, however, that the refund obligation referred to in this paragraph shall not arise until such adjudication, holding or finding becomes final and non-appealable as against WAPCO, Buyer, or Buyer's Affiliate; and, provided further, that Buyer shall maintain a duty to attempt to mitigate its losses in respect to the ExxonMobil
Capacity Lease through reasonable means; and, provided further, that any amounts collected by WAPCO, Buyer or Buyer's Affiliates in respect to the ExxonMobil Capacity Lease shall serve to offset the refund amount paid by Seller to Buyer pursuant to this Section 8B(k)(iii). Any such refund shall not be subject to the Minimum Indemnifiable Amount or WAPCO Threshold or included in the calculation of the maximum amount of indemnifiable Damages under Section 15 of this Agreement.
(iv) If, at any time after the Effective Time, WAPCO, Buyer, or an Affiliate of Buyer fully and finally settle their differences with ExxonMobil regarding the claims as to the validity or enforceability of the ExxonMobil Capacity Lease, then Buyer shall forego its right to the partial refund of the Purchase Price, as outlined in Section 8B(k)(iii) above, and Buyer shall have no remedy with respect to such refund or the ExxonMobil Capacity Lease against Seller or Seller's Affiliates, successors or assigns.
9. Conditions to Closing.
(a) Buyer's Conditions. Buyer's obligation to effect the transactions contemplated by this Agreement is subject to the satisfaction, or waiver (by Buyer), at or prior to the Closing Date of each of the following conditions:
(i) Each representation and warranty set forth in
Section 5 hereof must have been accurate and complete in all
material respects (except as to the representations and
warranties already qualified as to materiality, which must be
accurate and complete in all respects) on the date of this
Agreement and as of the Closing Date, as if made on the
Closing Date. Each representation and warranty set forth in
Section 6 hereof must have been accurate and complete in all
material respects (except as to the representations and
warranties already qualified as to materiality, which must be
accurate and complete in all respects) on the date of this
Agreement and as of the Closing Date, as if made on the
Closing Date.
(ii) Seller shall have performed and complied with all covenants and agreements to be performed or complied with at or prior to Closing (singularly or in the aggregate) in all material respects. Williams Guarantor shall have performed and complied with all of its covenants and agreements to be performed or complied with at or prior to Closing (singularly or in the aggregate) in all material respects.
(iii) Since the date of this Agreement there shall have been no Material Adverse Change with respect to Seller, Williams Guarantor or WAPCO.
(iv) The waiting period required by the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated.
(v) There shall have been no Governmental Action, Action or Proceeding pending, Threatened, issued or in effect (A) seeking to restrain or prohibit, or restraining or prohibiting the transactions contemplated by this Agreement or (B) seeking to cause or causing any of the transactions contemplated by this Agreement to be rescinded following consummation. There shall have been no Legal Requirement enacted or promulgated, or proposed to be enacted or promulgated, by any Governmental Authority of competent jurisdiction which prohibits the consummation of the transactions contemplated by this Agreement or makes such transactions illegal or invalid.
(vi) Seller and Williams Guarantor shall have delivered, or caused to be delivered to Buyer at the Closing, each of the Closing deliveries described in Subsections 11(a) and 11(b) hereof.
(vii) Buyer shall have received from Seller, in a form reasonably satisfactory to Buyer, a statement satisfying Buyer's obligations under Treasury Regulation Section 1.1445-2(b)(2).
(viii) There shall have been a waiver by all holders of, or expiration of, the initial or any subsequent 45 day period relating to the preferential purchase right in Section 7.2(a) of the TAPS Agreement. The parties agree that this condition will be met upon: (A) receipt of notice from each of the other owners of an interest in TAPS (the "TAPS Owners") irrevocably stating that they will not exercise the right to purchase the WAPCO Interests or any portion thereof, or providing a waiver that would permit the transfer to occur prior to any 45-day waiting period during which the TAPS Owners have the right to exercise the preferential right to purchase such interest, or (B) the passage of 45 days from the date of notice to the TAPS Owners with no action by the TAPS Owners.
(ix) Receipt of written approval of the transfers of the Federal and State Rights-of-Way associated with the TAPS Interests from the Secretary of the Interior and the Alaska Department of Natural Resources; provided, however, that such approval must be unconditional, except as to the closing of the transactions contemplated by this Agreement and except as to any requirement for the delivery of a performance or financial guaranty from an Affiliate of Buyer up through Koch Industries, Inc.; and, provided further, that the condition in this Section 9(a)(ix) shall not be met if any such performance or financial guaranty requirement also contains a requirement that the guarantor of Buyer deliver, disclose or otherwise provide to any Governmental Authority, or any other Person not under strict terms of confidentiality, any non-public financial records or information about any Affiliate of Buyer.
(x) The Regulatory Commission of Alaska shall have issued an order approving the transfer of WAPCO's certificate of authority and convenience to Buyer; provided, however, that such approval must be unconditional, except as to the closing of the transactions contemplated by this Agreement and except as to any
requirement for the delivery of a performance or financial guaranty from an Affiliate of Buyer up through Koch Industries, Inc.; and, provided further, that the condition in this Section 9(a)(x) shall not be met if any such performance or financial guaranty requirement also contains a requirement that the guarantor of Buyer deliver, disclose or otherwise provide to any Governmental Authority, or any other Person not under strict terms of confidentiality, any non-public financial records or information about any Affiliate of Buyer.
(xi) The transactions contemplated by the Refinery ASPA shall have been consummated by an Affiliate of Buyer or Buyer in its sole discretion shall be satisfied that the consummation of such transactions shall be taking place simultaneously with the consummation of the transaction contemplated by this Agreement.
(xii) Seller shall have delivered to Buyer agreements between Seller and an Affiliate of Seller effective prior to the Closing Date relating to the Excluded Items in substantially the same form attached hereto as Exhibit A.
(xiii) Buyer's receipt of an opinion of outside counsel chosen by Buyer (and reasonably acceptable to Seller) that the DR&R indemnity provided to WAPCO by MAPL in the March 24, 2000 Agreement of Sale and Purchase of an Undivided Interest in TAPS will continue to be in full force and effect after the Effective Time.
(xiv) Buyer and Seller shall have entered into a Transition Services Agreement in the form attached to this Agreement as Exhibit B.
(b) Seller's Conditions. Seller's obligation to effect the transactions contemplated by this Agreement is subject to the satisfaction, or waiver (by Seller) at or prior to the Closing Date of each of the following conditions:
(i) The transactions contemplated by the Refinery ASPA shall have been consummated by an Affiliate of Seller or Seller in its sole discretion shall be satisfied that the consummation of such transactions shall be taking place simultaneously with the consummation of the transaction contemplated by this Agreement.
(ii) Each representation and warranty set forth in
Section 7 hereof must have been accurate and complete in all
material respects (except as to the representations and
warranties already qualified as to materiality, which must be
accurate and complete in all respects) on the date of this
Agreement and as of the Closing Date.
(iii) Buyer shall have performed and complied with all of its covenants and agreements to be performed or complied with at or prior to Closing (singularly or in the aggregate) in all material respects.
(iv) There shall have been no Governmental Action, Action or Proceeding issued and in effect restraining or prohibiting any of the transactions contemplated by this Agreement.
(v) There shall have been no Legal Requirement enacted or promulgated by any Governmental Authority of competent jurisdiction which prohibits the consummation of the transactions contemplated by this Agreement or makes such transactions illegal or invalid.
(vi) The waiting period required by the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated.
(vii) Buyer shall have an issuer credit rating of at least "A" from Standard & Poors and Moody's Investor Services on the Closing Date, or shall have delivered Seller a written guaranty of Buyer's obligations under this Agreement through the Closing Date from an Affiliate with such credit rating or better.
(viii) Buyer shall have delivered, or caused to be delivered, to Seller at the Closing, the Closing deliveries described in Subsection 11(c) hereof.
(ix) There shall have been a waiver by all holders of, or expiration of, the initial or any subsequent 45 day period relating to the preferential purchase right in Section 7.2(a) of the TAPS Agreement. The parties agree that this condition will be met upon: (i) receipt of notice from each of the other owners of an interest in TAPS (the "TAPS Owners") irrevocably stating that they will not exercise the right to purchase the WAPCO Interests or any portion thereof, or providing a waiver that would permit the transfer to occur prior to any 45-day waiting period during which the TAPS Owners have the right to exercise the preferential right to purchase such interest, or (ii) the passage of 45 days from the date of notice to the TAPS Owners with no action by the TAPS Owners.
(x) Receipt of written approval of the transfers of the Federal and State Rights-of-Way associated with the TAPS Interests from the Secretary of the Interior and the Alaska Department of Natural Resources; provided, however, that such approval must be unconditional, except as to the closing of the transactions contemplated by this Agreement; and, provided further, that the guaranty currently posted by Williams Guarantor for the purpose of holding such interests in the Federal and State Rights-of-Way is released as of the Effective Time.
(xi) The Regulatory Commission of Alaska shall have issued an order approving the transfer of WAPCO's certificate of authority and convenience to Buyer; provided, however, that such approval must be unconditional, except as to the closing of the transactions contemplated by this Agreement; and, provided further, that all guaranties currently posted by Williams Guarantor for the purpose of holding such certificate is released as of the Effective Time.
10. Closing. Subject to the conditions stated in this Agreement, the purchase and sale of the WAPCO Interests and the consummation of the other transactions contemplated by this Agreement (the "Closing") will take place at the offices of Seller on the last business day of the month in which all conditions to Closing contained in Section 9 (other than those that by their nature can only be satisfied at the Closing) have been satisfied or waived, or at such other time and place as the Parties may mutually agree (the "Closing Date").
11. Actions at Closing. At the Closing, the following actions shall be taken, each being deemed to occur simultaneously with all others:
(a) Seller shall deliver to Buyer the certificate representing the WAPCO Interests duly endorsed for transfer to Buyer effective as of the Effective Time. In addition, Seller shall deliver to Buyer such other documents as Buyer may reasonably require in form and substance reasonably acceptable to Buyer and Seller, including:
(i) a certificate of the Secretary or other appropriate officer of Seller dated as of the Closing Date, in form and substance reasonably satisfactory to Buyer: (A) attaching a true and complete copy of the Limited Liability Agreement of WAPCO and certifying there have been no amendments thereto; (B) certifying that resolutions of the Board of Directors of Seller authorize the execution and performance of this Agreement, the ancillary agreements and the consummation of the transactions contemplated hereby and thereby and certifying that such resolutions have not been rescinded or amended, are true and complete and in full force and effect; (C) certifying that resolutions of (and, if any, consents of) the members of Seller authorize the execution and performance of this Agreement, all other ancillary agreements and the consummation of the transactions contemplated hereby and thereby and certifying that such resolutions have not been amended or rescinded, are true and complete and in full force and effect; and (D) certifying as to the incumbency of the officers of Seller executing this Agreement and/or any related agreement, and including specimen signatures;
(ii) an Officer's Certificate, substantially in the form of Exhibit C, duly executed by a Responsible Officer of Seller, to the effect that each condition specified in Subsections 9(a), except those contained in Sections 9(a)(xi) and 9(a)(xiii), has been satisfied;
(iii) such other certificates, instruments and documents as may be called for under this Agreement or as Buyer shall reasonably request.
(b) Williams Guarantor shall deliver, or cause to be delivered, unless waived by Buyer, the following to Buyer:
(i) a certificate of the Secretary or other appropriate officer of Williams Guarantor, dated as of the Closing Date, certifying: (A) that resolutions of the Board
of Directors of Williams Guarantor authorize execution and performance of this Agreement and the Williams Guaranty and certifying that such resolutions have not been rescinded or amended, are true and complete and in full force and effect; and (B) as to the incumbency of the officers of the Williams Guarantor executing this Agreement and the Williams Guaranty and any other related agreement, and including specimen signatures;
(ii) a certificate of existence and good standing issued by the State of Delaware issued as of a recent date by the Secretary of the State of the State of Delaware, together with a bring-down of such good standing as of the Closing Date;
(iii) the performance guaranty in the form as specified in Exhibit D (the "Williams Guaranty"); and
(iv) such other certificates and documents as may be called for under this Agreement or as Buyer shall reasonably request.
(c) Buyer shall pay to Seller the Closing Payment by direct bank or wire transfer to Seller's account as specified by Seller in writing at least two business days prior to the Closing. In addition, Buyer shall deliver to Seller such other documents as Seller may reasonably require in form and substance reasonably acceptable to Buyer and Seller, including:
(i) a certificate of the Secretary or other
appropriate officer of Buyer, dated the Closing Date, in form
and substance reasonably satisfactory to Seller certifying:
(A) that resolutions of the member of Buyer, or the Board of
Managers of the general partner of the member of Buyer
authorize the execution and performance of this Agreement and
the transactions contemplated hereby and certifying that they
have not been amended or rescinded, are true and complete and
in full force and effect; and (B) as to the incumbency of the
officers of Buyer executing this Agreement and/or any related
agreement and including specimen signatures;
(ii) an Officer's Certificate, substantially in the form of Exhibit E, duly executed by a Responsible Officer of Buyer, to the effect that each condition specified in Subsection 9(b), except that contained in Section 9(b)(i), has been satisfied;
(iii) if required by Subsection 9(b)(vii), a performance guaranty of Flint Hills Resources, LLC in the form specified in Exhibit F; and
(iv) such other certificates and documents as may be called for under this Agreement or as Seller shall reasonably request.
12. Termination Rights. This Agreement may be terminated at any time prior to the Closing Date:
(a) By written consent of the Parties and Williams Guarantor;
(b) By either Party, (i) if any TAPS Owner has purchased the WAPCO Interests or the TAPS Interests from Seller pursuant to such TAPS Owner's exercise of its preferential purchase right; (ii) after the termination of the Refinery ASPA; (iii) if the Closing has not occurred within twelve (12) months after the date hereof; provided, however, that the right to terminate this Agreement pursuant to this clause shall not be available to any Party whose breach of any representation or warranty or failure to perform any covenant or agreement under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; or (iv) if any Governmental Authority shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Closing and such order, decree, ruling or other action shall have become final and nonappealable; provided, however, that the right to terminate this Agreement pursuant to this clause shall not be available to any Party until such Party has used all reasonable efforts to remove such injunction, order, decree or ruling; or
(c) By either Buyer on the one hand, or Seller on the other hand, if a material breach of any provision of this Agreement has been committed by the other Party or any of its Affiliates and such breach is not cured within a period of twenty (20) days following written notice thereof.
13. Effect of Termination. If this Agreement is terminated by a Party pursuant to the provisions of Section 12, this Agreement shall forthwith become void except for, and there shall be no further obligation under this Agreement on the part of any party except the obligations of Buyer relating to "Confidential Information" in Section 8A(b) and except pursuant to the provisions of Sections 5(m), 13, 17 and 21 (which shall continue pursuant to their terms); provided, however, that a termination of this Agreement shall not relieve any party from any liability for damages incurred as a result of a breach by such party of its representations, warranties, covenants, agreements or other obligations hereunder occurring prior to such termination (including without limitation, Seller's and Buyer's rights to liquidated damages in certain events as provided in Section 14).
14. Liquidated Damages for Unexcused Failure to Close. If either Seller or Buyer fails to close the transactions contemplated by this Agreement following the receipt of all authorizations, waivers, consents and approvals of any governmental entity, for any reason except pursuant to an express right to do so as provided in this Agreement, or fails to use its commercially reasonable efforts to satisfy all conditions to Closing set forth herein, then the Party failing to close or failing to use such commercially reasonable efforts shall pay the other Five Million United States Dollars ($5,000,000) (the "Liquidated Damages"). Such payment will be by wire transfer of immediately available funds immediately upon demand from the other Party and without any right of setoff. Upon payment of such amount, each party shall be fully released and discharged from any and all liabilities, damages or obligations resulting from its failure to close the transactions contemplated by this Agreement and for any breach of the terms of this Agreement giving rise thereto. This Section shall in no way be applicable to Seller in the event that any TAPS Owner purchases the WAPCO
Interests or the TAPS Interests from Seller pursuant to such TAPS Owner's exercise of its preferential purchase right.
15. Indemnification.
(a) Survival of Representations, Warranties, Covenants and Agreements. The representations, warranties, covenants and obligations of Seller, Williams Guarantor and Buyer contained in this Agreement shall survive the Effective Time as set forth in this Section 15. Covenants and obligations shall survive until fully performed. The representations and warranties of Seller, Williams Guarantor and Buyer shall survive for a period of three (3) years after the Effective Time; except that:
(i) the representations and warranties of (A) Seller
contained in Sections 5(a) (Organization and Power), 5(b)
(Membership Interests of WAPCO), 5(c) (Authorization), 5(d)
(Governmental Consents), 5(e) (No Consent Required;
Noncontravention), and 5(f) (Operations of WAPCO; No
Subsidiaries), (B) Williams Guarantor contained in Sections
6(a) (Organization and Good Standing) and 6(b) (Authority and
Binding Obligation), and (C) Buyer contained in Sections 7(a)
(Organization and Power), 7(b) (Authorization), 7(c)
(Governmental Consents), and 7(d) (No Consent Required;
Noncontravention) shall survive for the statute of limitations
applicable to breach of written contracts;
(ii) the representations and warranties of Seller contained in Section 5(u) (Environmental Matters) shall survive for a period of ten (10) years after the Effective Time; and
(iii) the representations and warranties of Seller contained in Section 5(v) (Tax Matters) shall survive until ninety (90) days following the expiration of the applicable statute or similar period of limitations (after giving effect to any extensions or waivers);
it being understood that in the event notice of any Claim for indemnification under Section 15(b)(i)(A) or Section 15(b)(ii)(A) shall have been given within the applicable survival period, the representations and warranties that are the subject of such indemnification Claim shall survive with respect to such Claim until such time as such Claim is finally resolved.
(b) INDEMNIFICATION.
(i) INDEMNIFICATION BY SELLER. FROM AND AFTER THE EFFECTIVE TIME, TO THE FULLEST EXTENT PERMITTED BY LAW, SELLER SHALL INDEMNIFY, DEFEND AND HOLD BUYER, ANY AFFILIATES OF BUYER, AND THEIR RESPECTIVE SHAREHOLDERS, PARTNERS, OFFICERS, DIRECTORS, MEMBERS, MANAGERS, EMPLOYEES, AGENTS AND ASSIGNS (EACH, A "BUYER INDEMNIFIED PARTY") HARMLESS, FROM AND AGAINST ANY AND ALL DAMAGES INCURRED BY ANY BUYER INDEMNIFIED PARTY IN CONNECTION WITH OR ARISING OR RESULTING FROM ANY ONE OR MORE OF THE FOLLOWING:
(A) ANY MISREPRESENTATION OR BREACH OF ANY REPRESENTATION OR WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR OBLIGATION OF SELLER OR WILLIAMS GUARANTOR UNDER THIS AGREEMENT OR ANY MISREPRESENTATION IN ANY STATEMENT, DOCUMENT, SCHEDULE, EXHIBIT OR CERTIFICATE FURNISHED OR TO BE FURNISHED TO BUYER PURSUANT TO THIS AGREEMENT;
(B) THE POSSESSION OR OWNERSHIP OF THE WAPCO INTERESTS FROM JUNE 30, 2000 TO THE EFFECTIVE TIME, EXCEPT THAT SELLER SHALL HAVE NO DUTY TO INDEMNIFY UNDER THIS SECTION 15(b)(i)(B) (1) TO THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY BUYER'S OPERATIONS, ACTIONS OR OMISSIONS AFTER THE EFFECTIVE TIME AND/OR (2) WITH RESPECT TO ANY ENVIRONMENTAL CLAIM (ENVIRONMENTAL CLAIMS, WITH THE EXCEPTION OF BREACHES OF REPRESENTATIONS AND WARRANTIES, ARE COVERED EXCLUSIVELY BY THE PROVISIONS OF SECTION 15(b)(i)(C));
(C) EXCEPT TO THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY BUYER'S OPERATIONS, ACTIONS OR OMISSIONS AFTER THE EFFECTIVE TIME, THE FOLLOWING ENVIRONMENTAL MATTERS (HEREIN "ENVIRONMENTAL CLAIM(s)"):
(1) ANY ENVIRONMENTAL CONDITION EXISTING FROM JUNE 30, 2000 TO THE EFFECTIVE TIME, AT, ON OR UNDER OR ARISING, EMANATING, OR FLOWING FROM ANY OF ASSETS OR PROPERTIES OF WAPCO, WHETHER KNOWN OR UNKNOWN AS OF THE EFFECTIVE TIME, INCLUDING ANY LOSS, PROPERTY DAMAGE, NATURAL RESOURCE DAMAGE, INJURY TO, OR DEATH OF ANY THIRD-PARTY ARISING THEREFROM;
(2) LOSS, PROPERTY DAMAGE, NATURAL RESOURCE DAMAGE, INJURY TO, OR DEATH OF ANY THIRD-PARTY ARISING OUT OF OR RELATED TO ANY ENVIRONMENTAL CONDITION TO THE EXTENT (a) NOT LOCATED ON THE ASSETS OR THE PROPERTY OF WAPCO AND (b) EXISTING FROM JUNE 30, 2000 TO THE EFFECTIVE TIME;
(3) PAYMENT OF PENALTIES AND FINES ASSESSED OR IMPOSED BY ANY GOVERNMENTAL AUTHORITY ARISING OUT OF OR RELATED TO ANY ENVIRONMENTAL CONDITION EXISTING FROM JUNE 30, 2000 TO THE EFFECTIVE TIME; AND
(4) ANY DAMAGES THAT ARISE, DIRECTLY OR INDIRECTLY, FROM THE RELEASE, GENERATION, USE, PRESENCE, STORAGE, TREATMENT AND/OR RECYCLING OF ANY HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS BY SELLER OR WAPCO OR FROM THE POSSESSION, USE, OWNERSHIP, OR OPERATION OF WAPCO FROM JUNE 30, 2000 TO THE EFFECTIVE TIME, OR BY A THIRD PARTY IF ANY SUCH HAZARDOUS MATERIALS OR PETROLEUM
PRODUCTS WERE GENERATED OR USED BY SELLER OR
WAPCO, INCLUDING ANY DAMAGES ARISING FROM
HAZARDOUS MATERIALS OR PETROLEUM PRODUCTS
THAT HAVE BEEN TRANSPORTED OR OTHERWISE
REMOVED FROM WAPCO'S PREMISES TO AN OFFSITE
LOCATION FROM JUNE 30, 2000 TO THE EFFECTIVE
TIME AND/OR RELEASED FROM AN OFFSITE
LOCATION AT ANY TIME;
(D) ANY EXCLUDED ITEMS; AND
(E) THE ENFORCEMENT OF INDEMNIFICATION
RIGHTS UNDER THIS SECTION 15(b)(i).
NOTWITHSTANDING THE ABOVE INDEMNITY PROVISIONS, SELLER AND WILLIAMS GUARANTOR SHALL (x) HAVE NO OBLIGATION TO BUYER ARISING OUT OF OR RELATED, DIRECTLY OR INDIRECTLY, TO DR&R, OTHER THAN THE OBLIGATION TO MAKE AN ACCURATE REPRESENTATION AS PROVIDED IN SECTION 5(l)(ii), AND (y) HAVE NO OBLIGATION TO INDEMNIFY OR HOLD HARMLESS AS PROVIDED ABOVE IN CONNECTION WITH ANY TARIFF PAYMENTS OR RETROACTIVE REDUCTION PAYMENTS, EXCEPT AS PROVIDED IN 4(a) AND 4(b) OF THIS AGREEMENT.
(ii) INDEMNIFICATION BY BUYER. FROM AND AFTER THE EFFECTIVE TIME, TO THE FULLEST EXTENT PERMITTED BY LAW, BUYER SHALL INDEMNIFY, DEFEND AND HOLD SELLER, ANY AFFILIATES OF SELLER, AND THEIR RESPECTIVE SHAREHOLDERS, PARTNERS, OFFICERS, DIRECTORS, MEMBERS, MANAGERS, EMPLOYEES, AGENTS AND ASSIGNS (EACH, A "SELLER INDEMNIFIED PARTY") HARMLESS, FROM AND AGAINST ANY AND ALL DAMAGES INCURRED BY ANY SELLER INDEMNIFIED PARTY IN CONNECTION WITH OR ARISING OR RESULTING FROM ANY ONE OR MORE OF THE FOLLOWING:
(A) ANY MISREPRESENTATION OR BREACH OF ANY REPRESENTATION OR WARRANTY OR NONFULFILLMENT OF ANY COVENANT OR OBLIGATION OF BUYER UNDER THIS AGREEMENT OR ANY MISREPRESENTATION IN ANY STATEMENT, DOCUMENT OR CERTIFICATE FURNISHED OR TO BE FURNISHED TO SELLER PURSUANT TO THIS AGREEMENT;
(B) BUYER'S OBLIGATIONS UNDER SECTION 8B(f)
(TRANSFER TAXES);
(C) THE POSSESSION OR OWNERSHIP OF THE WAPCO
INTERESTS AFTER THE EFFECTIVE TIME, EXCEPT THAT BUYER
SHALL HAVE NO DUTY TO INDEMNIFY UNDER THIS SECTION
15(b)(ii)(C) (1) TO THE EXTENT THAT DAMAGES ARE
CAUSED OR CONTRIBUTED TO BY SELLER'S OPERATIONS,
ACTIONS OR OMISSIONS BEFORE THE EFFECTIVE TIME AND/OR
(2) WITH RESPECT TO ANY ENVIRONMENTAL CONDITION
(ENVIRONMENTAL CONDITIONS ARE COVERED EXCLUSIVELY BY
THE PROVISIONS OF SECTION 15(b)(ii)(D));
(D) EXCEPT TO THE EXTENT THAT DAMAGES ARE CAUSED OR CONTRIBUTED TO BY SELLER'S OPERATIONS, ACTIONS OR OMISSIONS BEFORE THE EFFECTIVE TIME, ANY ENVIRONMENTAL CONDITION AT, ON OR UNDER OR ARISING OR EMANATING FROM ANY ASSETS, OR PROPERTIES OF WAPCO, ARISING FROM BUYER'S OWNERSHIP, USE OR OPERATION OF SUCH ASSETS AFTER THE EFFECTIVE TIME, INCLUDING ANY LOSS, PROPERTY DAMAGE, NATURAL RESOURCE DAMAGE, INJURY TO, OR DEATH OF ANY THIRD-PARTY ARISING THEREFROM ("ENVIRONMENTAL CLAIMS"); AND
(E) THE ENFORCEMENT OF INDEMNIFICATION
RIGHTS UNDER THIS SECTION 15(B)(ii).
(c) Indemnification Procedures.
(i) Indemnification Process. The Person making a
claim for indemnification under this Section 15 shall be, for
the purposes of this Agreement, referred to as the
"Indemnified Party" (provided that for the purpose of clause
(C) below such term shall refer to the party hereto to whom
such Person is related for purposes of obtaining the benefits
of this Section 15) and the party or parties against whom such
claims are asserted under this Section 15 shall be, for the
purposes of this Agreement, referred to as the "Indemnifying
Party." All claims by any Indemnified Party under this Section
15 shall be asserted and resolved as follows:
(A) Notice of Claims. In the event that (1)
any claim or Action is asserted or instituted against
any Indemnified Party by any Person other than the
Parties to this Agreement or their Affiliates which
could give rise to Damages for which an Indemnifying
Party could be liable to an Indemnified Party for
Damages under this Agreement (such claim, demand or
Proceeding, a "Third Party Claim") or (2) any
Indemnified Party under this Agreement shall have a
claim to be indemnified for Damages by any
Indemnifying Party under this Agreement which does
not involve a Third Party Claim (such claim, a
"Direct Claim" and, together with Third Party Claims,
"Claims"), the Indemnified Party shall with
reasonable promptness send to the Indemnifying Party
a written notice specifying the nature of such Claim,
the amount of Damages sought in such Claim, if known,
and the provisions of this Agreement in respect of
which such right of indemnification is claimed or
arises (a "Claim Notice"), provided that a delay or
defect in notifying the Indemnifying Party shall not
relieve the Indemnifying Party of its obligations
under this Agreement except to the extent that (and
only to the extent that) the Indemnifying Party
demonstrates such failure shall have caused the
Damages for which the Indemnifying Party is obligated
to be greater than such Damages would have been had
the Indemnified Party given the Indemnifying Party
timely notice.
(B) Third Party Claims. In the event of a Third Party Claim, the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim and to appoint counsel of the Indemnifying Party's choice at the expense of the Indemnifying Party to represent the Indemnified Party and any others the Indemnifying Party may reasonably designate in connection with such Third Party Claim (in which case the Indemnifying Party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by any Indemnified Party except as set forth below); provided that such counsel is reasonably acceptable to the Indemnified Party, which approval shall not be unreasonably withheld. The Indemnified Party shall cooperate with the Indemnifying Party and its counsel in such defense and make available to the Indemnifying Party all witnesses, records, materials, and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as may be reasonably requested by the Indemnifying Party, and in contesting any Action which the Indemnifying Party defends, or, if appropriate and related to the Action in question, in making any counterclaim against the Person asserting the Third Party Claim, or any cross-complaint against any Person. In the event the Indemnifying Party fails to assume the defense of such Third Party Claim within ten (10) days after receipt of notice thereof in accordance with the terms hereof, (1) the Indemnified Party against which such Third Party Claim has been asserted shall have the right to undertake the defense, compromise or settlement of such Third Party Claim on behalf of, at the expense of and for the account and risk of the Indemnifying Party, and (2) the Indemnifying Party agrees to cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, all witnesses, records, materials and information in the Indemnifying Party's possession or under the Indemnifying Party's control relating thereto as may be reasonably requested by the Indemnified Party.
(C) Settlement of Third Party Claims. In
connection with the settlement or compromise of any
Third Party Claim, the Indemnifying Party shall not,
without the written consent of the Indemnified Party
(which consent shall not be unreasonably withheld),
(1) settle or compromise any Third Party Claims or
consent to the entry of any judgment which does not
include as an unconditional term thereof the delivery
by the claimant or plaintiff to the Indemnified Party
of a written release from all liability in respect of
such Third Party Claim of all Indemnified Parties
affected by such Third Party Claim or (2) settle or
compromise any Third Party Claim if the settlement or
compromise imposes equitable remedies or obligations
on the Indemnified Party other than financial
obligations for which such Indemnified Party will be
indemnified hereunder or (3) settle or compromise any
Third Party Claim if the Indemnified Party will be
required to make any payment with respect to such
compromise or settlement due to the application of
the limitations of Section 15(d). No Third Party
Claim which is being defended in good faith
by the Indemnifying Party or which is being defended by the Indemnified Party in accordance with the terms of this Agreement shall be settled or compromised by the Indemnified Party without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld, conditioned or delayed); provided, however, if a Third Party Claim is being defended by an Indemnified Party pursuant to the last sentence of clause (B) above (unless the Indemnifying Party and Indemnified Party mutually agree that the Indemnified Party shall defend such Third Party Claim), the limitations on the Indemnified Party's right to settle or compromise set forth in this clause (C) shall not apply to such Indemnified Party, unless the Indemnifying Party has been advancing (in a timely manner) payment of such Indemnified Party's costs and expenses associated with such defense upon demand therefor by the Indemnified Party (subject to the undertaking of the Indemnified Party to reimburse such advances in the event such costs of defense are not ultimately to be indemnifiable under this Section 15).
(ii) Reduction of Damages. To the extent any Damages of an Indemnified Party are reduced by receipt of payment under insurance policies, which payments are not subject to retroactive adjustment or other reimbursement to the insurer in respect of such payment, such payments (net of the expenses of the recovery thereof) (such net payment, a "Reimbursement") shall be credited against any such Damages; provided however, the pendency of such payments shall not delay or reduce the obligation of the Indemnifying Party to timely make payment to the Indemnified Party in respect of such Damages. The Indemnified Party shall use commercially reasonable efforts (but in no event shall the Indemnified Party be required to sue the insurer or its agent, unless the Indemnifying Party agrees to pay all reasonable costs and expenses in connection therewith, including reasonable attorneys' fees) to pursue payment under or from any insurer in respect of such Damages. If any Reimbursement is obtained subsequent to payment by an Indemnifying Party in respect of any Damages, such Reimbursement shall be promptly paid over to the Indemnifying Party.
(iii) Access. From and after the delivery of a Claim Notice under this Agreement, at the reasonable request of the Indemnifying Party, each Indemnified Party shall grant the Indemnifying Party and its Representatives all reasonable access to the books, records and properties of such Indemnified Party to the extent reasonably related to the matters to which the Claim Notice relates. All such access shall be granted during normal business hours and shall be granted under conditions, which will not unreasonably interfere with the business and operations of such Indemnified Party. The Indemnifying Party will not, and shall require that its Representatives do not, use (except in connection with such Claim Notice) or disclose to any third Person other than the Indemnifying Party's Representatives (except as may be required by applicable Legal Requirement) any information obtained pursuant to this Section 15(c) which is designated as confidential by an Indemnified Party, unless such disclosure is required by the Indemnifying Party in
defense of a Claim and such disclosure is authorized by Indemnified Party (which authorization shall not be unreasonably withheld if there is in place or will be put in place a protective order or agreement covering the use by the third party of any such disclosed confidential information).
(iv) Definition of Damages. "Damages" means all damages (including incidental and consequential damages and lost profits), losses (including any diminution of value), liabilities, payments, amounts paid in settlement, obligations, remediation costs and expenses, natural resource damages, fines, interests, assessments, penalties, costs of burdens associated with performing injunctive relief, other costs (including reasonable fees and expenses of attorneys and consultants) of investigation, preparation, and litigation in connection with any Action, threatened Action or settlement, and other costs and expenses of any kind or nature whatsoever, whether known or unknown, contingent or vested, matured or unmatured, and whether or not resulting from third-party claims, strict liability claims, including those under Environmental Laws. Notwithstanding anything to the contrary in this Agreement, Damages shall expressly exclude punitive damages, exemplary damages and other penalty damages, unless arising out of a Third-Party Claim.
(d) Limitations on Indemnification.
(i) Minimum; Threshold. Except with respect to claims for breaches of the covenants and obligations stated in Sections 1, 2, 3, 4, 8A, 8B, 12, 15(b)(i)(E), 15(b)(ii)(B) and 15(b)(ii)(E) and with respect to the Excluded Items, no amount shall be payable by any Indemnifying Party pursuant to Section 15(b)(i) or Section 15(b)(ii):
(A) unless the amount of Damages for each individual and unrelated Claim exceeds the Minimum Indemnifiable Amount; and
(B) unless the aggregate amount of Damages (including Damages excluded from indemnification pursuant to clause (A) above) under Section 15(b)(i) or Section 15(b)(ii), respectively, exceeds $500,000 (the "WAPCO Threshold") (at which point the Indemnified Party shall be entitled to all indemnification amounts in excess of such Threshold, excluding Claims less than the Minimum Indemnifiable Amount).
(ii) Cap. Notwithstanding anything to the contrary contained in this Agreement, and except with respect to claims for breaches of the covenants and obligations stated in Sections 1, 2, 3, 4, 8A, 8B, 12, 15(b)(i)(E), 15(b)(ii)(B) and 15(b)(ii)(E) and with respect to the Excluded Items, the maximum amount of indemnifiable Damages which may be recovered by any Buyer Indemnified Parties from Seller or Williams Guarantor and by any Seller Indemnified Parties from Buyer arising out of, resulting from or incident to the matters enumerated in Section 15(b)(i) or Section 15(b)(ii) shall be $8,000,000 (the "WAPCO Environmental Cap") with respect to any and all Environmental Claims and $4,000,000 (the "WAPCO General Cap") with
respect to any and all claims for indemnity other than Environmental Claims, but in no event shall the amount of all indemnifiable Damages of any type which may be recovered by any Buyer Indemnified Parties or any Seller Indemnified Parties pursuant to this Section 15(d)(ii) exceed $10,000,000 (the "WAPCO Aggregate Cap").
(e) Exclusivity of Remedies. Except for (1) any equitable relief, including injunctive relief or specific performance to which any Party hereto or Williams Guarantor may be entitled, (2) remedies available under the Williams Guaranty, and (3) fraud, the indemnification provisions of this Section 15 shall be the sole and exclusive remedy of each Party (including Buyer Indemnified Parties, Seller Indemnified Parties and Williams Guarantor) with respect to any and all Actions or Damages arising out of this Agreement from and after the Effective Time.
16. Further Assurances.
(a) After the Effective Time, each of the parties hereto shall, at the request and expense of the any other party, execute, acknowledge and deliver or cause to be executed, acknowledged and delivered such instruments and take such other action as may be necessary or advisable to carry out their respective obligations under this Agreement and under any document delivered pursuant hereto.
(b) In order to provide an orderly transition from Seller to Buyer of the WAPCO Interests and the TAPS Interests, Seller and Buyer agree to enter into a Transition Services Agreement in the form attached to this Agreement as Exhibit B. Additionally, Seller shall, at Buyer's request, and without further consideration, take all actions necessary to obtain any contractual consents that were not obtained prior to the Effective Time and to take all actions necessary to provide Buyer with the benefits under any such contracts or agreements.
17. Expenses. Except as otherwise provided herein or in the Transition Services Agreement provided for in Section 16 above, all fees, costs and expenses incurred by a party hereto in negotiating this Agreement or in consummating the transactions contemplated by this Agreement shall be paid by such party.
18. Notices. All notices and communications required or permitted under this Agreement shall be in writing and any such notice or communication shall be deemed to have been duly given or made if personally delivered, or if mailed by certified mail, postage and certification charges prepaid, or sent by a nationally recognized commercial delivery service, charges prepaid, or by facsimile telecopier, addressed as follows:
If to Buyer:
Koch Alaska Pipeline Company, LLC
4111 East 37th Street North
Wichita, Kansas 67220
Attention: President
Fax: (316) 828-7997
With a copy to:
Koch Alaska Pipeline Company, LLC
4111 East 37th Street North
Wichita, Kansas 67220
Attention: General Counsel
Fax: (316) 828-7199
If to Seller or Williams Guarantor:
The Williams Companies
One Williams Center
Tulsa, Oklahoma 74172
Attention: Corporate Development
Facsimile: (918) 573-5540
With a copy (which shall not constitute notice) to:
The Williams Companies
One Williams Center
Tulsa, Oklahoma 74172
Attention: Assistant General Counsel, Corporate Shared
Services
Facsimile: (918) 573-8024
The effective date of notice shall be the date of receipt in case of personal delivery. In all other cases, the effective date of notice shall be three Business Days after the date such notice is mailed or sent. Any party may, by written notice to the other hereunder, change the address or facsimile number to which delivery shall thereafter be made.
19. Assignment; Binding Affect; No Third Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the Parties (whether by operation of law or otherwise) without the prior written consent of the other Parties, except, Buyer may, without prior consent of Seller, transfer or assign by operation of law or otherwise this Agreement to any Affiliate or subsidiary of Buyer, but Buyer shall continue to be liable for the obligations, commitments, duties and responsibilities of the Buyer hereunder notwithstanding any such transfer or assignment. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the Parties and their respective
successors and assigns. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any Person other than the Parties hereto, their successors and assigns, any Indemnified Parties, and, under certain circumstances, the Parties' Affiliates any right, remedy or claim under or by reason of this Agreement.
20. Counterparts. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original instrument for all purposes and all of which together shall constitute one Agreement.
21. Governing Law. This Agreement and the transactions contemplated hereby shall be construed in accordance with, and governed by, the laws of the State of Texas.
22. Miscellaneous. This Agreement may not be amended nor any rights hereunder be waived except by an instrument in writing signed by the party to be charged with such amendment or waiver. The headings of the sections of this Agreement are for convenience and shall not limit or otherwise affect any of the provisions of this Agreement. This Agreement (including the Exhibits hereto) constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. The parties acknowledge that they and their respective counsel have negotiated and drafted this Agreement jointly and agree that the rule of construction that ambiguities are to be resolved against the drafting party shall not be employed in the interpretation or construction of this Agreement. As used herein, the term "person" shall include any natural person, corporation, partnership (general or limited), limited liability company, trust or Governmental Authority.
23. Defined Terms; Other Definitional Provisions.
(a) Defined Terms. As used in this Agreement, each of the following terms has the meaning specified below:
"1934 ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"ACTION" means any action, cause of action, appeal, petition, plea, charge, complaint, claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry, investigation, or similar event, occurrence, or proceeding.
"AFFILIATE" means, with respect to any Person, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by, or is under common control with such Person. The term "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL with") means the possession, directly or indirectly, of the actual power to direct or cause the direction of the management policies of a Person, whether through the ownership of stock or other equity, by contract, agreement, credit arrangement or otherwise.
"AGREEMENT" means this Purchase Agreement, as amended, supplemented or modified from time to time in accordance with the express terms hereof, together with all schedules and exhibits attached hereto.
"ALYESKA" has the meaning specified in the Recitals.
"BALANCE SHEET" means the unaudited proforma balance sheet of WAPCO as of June 30, 2003 included in Schedule 5(g). The Balance Sheet shall fairly present the financial position of WAPCO as at the close of business on June 30, 2003 in accordance with GAAP.
"BASE STOCKHOLDER'S EQUITY" has the meaning set forth in
Section 2(f)(i).
"BUSINESS DAY" means any day other than Saturday, Sunday or other day on which commercial banks located in New York, New York are authorized or required by law to close.
"BUYER" has the meaning specified in the introductory paragraph of this Agreement.
"BUYER INDEMNIFIED PARTY" shall have the meaning set forth in
Section 15(b)(i).
"C STORES ASPA" has the meaning specified in the Recitals.
"CLAIM NOTICE" shall have the meaning set forth in Section 15(c)(i).
"CLAIMS" shall have the meaning set forth in Section 15(c)(i).
"CLOSING" means the closing of the transactions contemplated by this Agreement.
"CLOSING DATE" has the meaning assigned to that term in
Section 10.
"CLOSING PAYMENT" has the meaning set forth in Section 2(a).
"CODE" means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder.
"CONFIDENTIALITY AGREEMENT" means the letter agreement dated July 12, 2002, between Flint Hills Resources, L.P., an Affiliate of Buyer, and Williams Guarantor relating to the furnishing of information to Flint Hills Resources, L.P. and it Affiliates, including Buyer, in connection with its evaluation of the transactions contemplated in this Agreement.
"CURRENT ASSETS" means the value of all assets of WAPCO on a consolidated basis as of the Effective Time that (A) would be classified as current assets in accordance with GAAP, (B) have demonstrable value to WAPCO and to Buyer, on a going forward basis (e.g. prepaid property taxes, prepaid rent, prepaid supplies, cash advances, and other prepaid expenses) and (C) directly relate to WAPCO's proportionate share ownership of TAPS. For
the avoidance of doubt, the following current assets (which list is illustrative and not exhaustive) are excluded from the definition of Current Assets: (i) current income taxes receivable (State); (ii) current income taxes receivable (Federal); (iii) deferred income taxes (Federal); (iv) deferred income taxes (State); (v) trade notes and accounts receivable - MAPL; (vi) escrowed tariff; (vii) intercompany receivables and (viii) WAPCO's proportionate share of Alyeska's current assets, with (i), (ii), (iii), (iv), (v), (vi), (vii) and (viii) collectively referred to as the ("EXCLUDED CURRENT ASSETS").
"CURRENT LIABILITIES" means the value of all liabilities of
WAPCO on a consolidated basis as of the Effective Time that (A) would
be classified as current liabilities in accordance with GAAP, (B)
directly offset current assets that have demonstrable value to WAPCO
and to Buyer, on a going forward basis and (C) directly relate to
WAPCO's proportionate share ownership of TAPS. For the avoidance of
doubt, the following current liabilities (which list is illustrative
and not exhaustive) are excluded from the definition of Current
Liabilities: all (i) current income taxes payable (State); (ii) current
income taxes payable (Federal); (iii) deferred income taxes (State);
(iv) deferred income taxes (Federal); (v) deferred revenue - T&D; (vi)
deferred revenue - tariff subject to refund; (vii) trade accounts
payable - MAPL; (viii) intercompany payables and (ix) WAPCO's
proportionate share of Alyeska's current liabilities, with (i), (ii),
(iii), (iv), (v), (vi), (vii), (viii) and (ix) collectively referred to
as the ("EXCLUDED CURRENT LIABILITIES").
"DAMAGES" has the meaning assigned to that term in Section 15(c)(iv).
"DIRECT CLAIM" has the meaning assigned to that term in
Section 15(c)(i).
"DIRECT NET WORKING CAPITAL" means the Current Assets less the Current Liabilities as of the Effective Time.
"DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto, containing the various exceptions to the representations, warranties and covenants of Seller and Buyer contemplated by the provisions of this Agreement.
"DR&R" has the meaning assigned to that term in Section 5(l)(ii).
"EFFECTIVE TIME" shall mean 11:59 p.m., Alaska time on the last day of the month in which Closing occurs, unless the Parties expressly agree to some other day or time.
"EFFECTIVE TIME BALANCE SHEET" means WAPCO's balance sheet at the Effective Time. The Effective Time Balance Sheet shall (A) fairly present the financial position of WAPCO as at the Effective Time in accordance with GAAP applied on a basis consistent with those in the preparation of the Balance Sheet, (B) include line items substantially consistent with those in the Balance Sheet, and (C) be prepared in accordance with accounting policies and practices consistent with those used in the preparation of the Balance Sheet.
"EFFECTIVE TIME DEFICIT" has the meaning set forth in Section 2(d)(i).
"EFFECTIVE TIME SURPLUS" has the meaning set forth in Section 2(d)(i).
"ENVIRONMENTAL CLAIMS" has the meaning assigned to that term in Section 15(b)(i)(c).
"ENVIRONMENTAL CONDITION" means any condition existing on, at or originating from, each property included within WAPCO's assets which constitutes, (A) a Release on, at or from such property of any Hazardous Materials or (B) with regards to Seller, a violation of any Environmental Laws applicable before or as of the Effective Time or any Environmental Permits or, with regard to Buyer, a violation of any Environmental Laws applicable as of or after the Effective Time or any Environmental Permits.
"ENVIRONMENTAL LAWS" means any and all Legal Requirements,
rules, codes, policies, directives, standards, licenses or Permits of
any Governmental Authority relating to Hazardous Materials, the
abatement of pollution, protection or restoration of the environment,
or the ensuring of public health and safety from environmental,
occupational or workplace hazards, specifically including those
relating to the exposure to, use, Release, threatened Release,
emission, presence, storage, treatment, disposal, generation,
transportation, distribution, manufacture, processing, handling,
management or control of Hazardous Materials, previously, presently, or
hereafter in effect, including the Safe Drinking Water Act, 42 U.S.C.
Section 300f et seq.; the Federal Water Pollution Control Act, 33
U.S.C. Section 1251 et seq.; the Federal Insecticide, Fungicide &
Rodenticide Act, 7 U.S.C. Section 136 et seq.; the Toxic Substances
Control Act, 15 U.S.C. Section 2601 et seq.; the Oil Pollution Act of
1990, 33 U.S.C. Section 2701 et seq.; the Clean Air Act, 42 U.S.C.
Section 7401 et seq.; the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 et seq.; the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as
amended by the Superfund Amendments and Reauthorization Act of 1986, 42
U.S.C. Section 9601 et seq.; the Emergency Planning and Community Right
to Know Act, 42 U.S.C. Section 11001 et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801 et seq.; Endangered Species
Act, 16 U.S.C. Section 1531 et seq.; and the Pipeline Safety Act, 49
U.S.C. Section 60101, et seq., and all similar statutes and regulations
thereunder adopted by the U.S., the states, the counties, the boroughs
or the municipalities to which WAPCO assets are subject, or any other
Governmental Authority, as each may be amended from time to time.
"ENVIRONMENTAL LIABILITIES" means those liabilities, actions, rights of action, contracts, Indebtedness, obligations, claims, causes of action, suits, Damages, demands, costs, expenses and attorneys' fees whatsoever, known or unknown, disclosed or undisclosed, accrued or unaccrued, existing at any time, of every kind and nature arising directly or indirectly out of or as a consequence of the actual or suspected use, storage, handling, generation, transportation, manufacture, production, release, discharge, disposal or presence of Hazardous Materials on, in, under or about WAPCO's assets or the air, soil or groundwater thereof, including, without limitation, any and all costs incurred due to any investigation of WAPCO's assets or any cleanup, remediation, removal or restoration mandated by or pursuant to any applicable Environmental Laws or agencies enforcing such applicable Environmental Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ESTIMATED DIRECT NET WORKING CAPITAL" shall have the meaning set forth in Section 2(b).
"EXCLUDED CURRENT ASSETS" shall have the meaning set forth in the definition of "Current Assets."
"EXCLUDED LIABILITIES" shall have the meaning set forth in the definition of "Current Liabilities."
"EXCLUDED ITEMS" means all rights, liabilities and obligations
of Seller with respect or relating to (i) items 10 and 11 on Schedule
5(j)(ii),(ii) all of Seller's and its Affiliates' rights relating to
the Oracle financial system and ATLAS system used by Seller, and (iii)
any rights, liabilities and obligations not directly related to the
TAPS Interests.
"FERC" means the Federal Energy Regulatory Commission.
"FINAL DIRECT NET WORKING CAPITAL" shall have the meaning set forth in Section 2(c).
"FINAL STOCKHOLDER'S EQUITY" shall have the meaning set forth in Section 2(f).
"GAAP" means generally accepted accounting principles, as recognized by the U.S. Financial Accounting Standards Board (or any generally recognized successor), consistently applied.
"GOVERNMENTAL ACTION" means any authorization, application, action, order, writ, injunction, decree, stipulation, approval, consent, ruling, decision, verdict, mandate, subpoena, command, directive, award, exemption, filing, judgment, license, notice, registration, permit or other requirement, determination, finding by, of, to or with any Governmental Authority.
"GOVERNMENTAL AUTHORITY" means any (A) nation, state, county, city, borough, town, village, district, territory, or other jurisdiction of any nature; (B) federal, state, local, municipal, foreign, or other government; (C) governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); or (D) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature, in each case having jurisdiction over Seller, Buyer, WAPCO or TAPS, as the applicable context requires.
"HAZARDOUS MATERIAL" means (A) any chemicals, materials or substances defined as "hazardous waste," "hazardous substance," "hazardous constituent," "extremely hazardous substance," "toxic chemical," "hazardous material," "hazardous chemical," "toxic pollutant," "contaminant," "chemical," "chemical substance," "hazardous air pollutant," "pollutant," "pesticide," "toxic" or "asbestos," as such terms are defined in any of the Environmental Laws, and related substances, and all other substances which are regulated by any Environmental Laws or which may be declared to constitute a material threat to human health or to the environment, (B) any radioactive materials, asbestos-containing materials, urea formaldehyde foam insulation, ethylene glycol, lead, silica, and radon and (C) any Petroleum Products, except Petroleum Products that are produced, stored, refined or otherwise handled lawfully in the normal course of business and operation of the business.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
"INDEBTEDNESS" means with respect to any Person without duplication (A) all indebtedness of such Person for borrowed money or for the deferred purchase price of property payment, but excluding obligations to trade creditors incurred in the Ordinary Course of Business that are not overdue by six (6) months unless being contested in good faith, (B) all reimbursement and other obligations with respect to letters of credit, bankers' acceptances and surety bonds, whether or not matured, (C) all obligations evidenced by notes, bonds, debentures or similar instruments and (D) guaranties of indebtedness.
"INDEMNIFIED PARTY" has the meaning specified in Section 15(c).
"INDEMNIFYING PARTY" has the meaning specified in Section 15(c).
"INTELLECTUAL PROPERTY" means any and all patents, license agreements, trade secrets, trademarks, copyrights, domain names, in-house developed software, hardware information technology applications, proprietary and technical information, supplier lists and other supplier information, customer lists and other customer information, price lists, advertising and promotional materials, field performance data, research materials, other proprietary intangibles, databases, processes, technical know-how, business and product know-how, engineering and other drawings, designs, plans, methods, engineering and manufacturing specifications, technology, inventions, processes, methods, formulas, procedures, sales history, model numbers, literature and phone numbers, and operating and quality control manuals and data owned, licensed, sublicensed or otherwise used by WAPCO.
"INTEREST" means interest at the thirty day USD LIBOR rate published by the British Bankers Association two Business Days prior to the Effective Time.
"INTEREST RATE" means the thirty day USD LIBOR rate published by the British Bankers Association on the 106th day after the date hereof.
"INTERIM TEMPORARY RATES" shall mean the temporary rates issued by the Regulatory Commission of Alaska in Order No. 10 in RCA Docket P-03-4.
"KNOWLEDGE" means, with respect to Seller, the actual knowledge of the following individuals: Mike Mears, Karl Meyer, Tina Granger, Rand Clark and Paula Chavez. Such individuals shall be deemed to have actual knowledge of any information gained by or submitted to the owners of TAPS by Alyeska by whatever means for the time period between June 30, 2000 and the Effective Time.
"LEGAL REQUIREMENT" means any applicable order, constitution, law, ordinance, regulation, statute, code or treaty issued by any federal, state, local, municipal, foreign, international, multinational, or other administrative body, including an arbitration panel, any principle of common law or judicial or administrative interpretation thereof.
"LIEN" means any lien, charge, mortgage, deed to secure debt, security interest, title defect, pledge, option, deed of trust, claim, easement, right of first refusal, production payment, restriction, proxy and voting or other agreement, claim, easement, preemptive right, option, right of first refusal, burden, encumbrance of any kind, rights of a vendor under any title retention, or conditional sale or lease agreement or other arrangement substantially equivalent thereto, in each case whether imposed by law, agreement, understanding or otherwise.
"MAPL" has the meaning specified in Section 5(l)(ii).
"MATERIAL ADVERSE CHANGE (OR EFFECT)" means (A) when used with respect to Seller or WAPCO's assets, (i) a change (or effect) in the condition (financial or otherwise), properties, WAPCO's assets, liabilities, rights, obligations, operations or business of Seller, which change (or effect), individually or in the aggregate, has had or would reasonably be expected to have a materially adverse effect on the condition, properties, assets, liabilities, rights, obligations, operations or business of Seller as it relates to WAPCO's assets, (ii) a result or consequence that would materially impair the ability of Seller to own, hold, develop or operate WAPCO's assets, or (iii) a result or consequence that would materially impair the ability of Seller to perform its obligations hereunder or to consummate the transaction contemplated hereunder; and (B) when used with respect to Buyer, a result or consequence that would impair Buyer's ability to perform its obligations hereunder or consummate the transactions contemplated hereby. In determining whether any individual event would result in a Material Adverse Effect, notwithstanding that such event does not in and of itself have such effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events would result in a Material Adverse Effect. Material Adverse Change or (Effect) shall not include an adverse effect arising from matters that generally affect the economy or industry in which the relevant Party or Williams Guarantor is engaged and shall not include any settlement of the TAPS Intrastate Rates Litigation approved by Buyer in writing or any post-Closing decisions relating to the TAPS Intrastate Rates Litigation.
"MINIMUM INDEMNIFIABLE AMOUNT" means $100,000.
"NET AFTER TAX INCOME" is equal to WAPCO's revenues minus: (A) cost of sales, (B) operating expenses, (C) depreciation, (D) sales, general and administrative expenses, (E) interest and (F) federal and state income taxes.
"NET CASH FLOW" means Net After Tax Income plus financial/book depreciation plus interest expense or minus interest income, as the case may be, plus financial/book federal and state income taxes minus cash federal and state income taxes.
"ORDINARY COURSE OF BUSINESS" means action taken if (A) consistent in nature, scope, and magnitude with past practices and is taken in the ordinary course of the normal, day-to-day operations, (B) does not require authorization by the board of directors or shareholders of Seller and does not require any other separate or special authorization of any nature, and (C) is in accordance with all Legal Requirements.
"PARTY" and "PARTIES" means each of Seller and Buyer, but shall not include the Williams Guarantor.
"PERMITS" means the permits, licenses, certificates, licenses, variances, exemptions, orders, franchises, approvals, filings, consents, accreditation, registrations and authorizations of all Governmental Authorities necessary for the lawful conduct of the business conducted by WAPCO.
"PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, but excludes Governmental Authorities and employees of Governmental Authorities working in their capacity as employees of such Governmental Authorities.
"PETROLEUM PRODUCTS" means any crude oil, condensate, petroleum or petroleum products, natural or synthetic gas.
"PRELIMINARY EFFECTIVE TIME DEFICIT" has the meaning assigned to that term in Section 2(d)(i).
"PRELIMINARY EFFECTIVE TIME SURPLUS" has the meaning assigned to that term in Section 2(d)(ii).
"PROCEEDING" means any action, arbitration, audit, claim, inspection, notice, review, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal), at law or in equity, commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Authority or arbitrator.
"PURCHASE PRICE" has the meaning assigned to that term in
Section 2(a).
"REFINERY ASPA" has the meaning specified in the Recitals.
"REIMBURSEMENT" shall have the meaning set forth in Section 15.
"RELEASE" or "RELEASED" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, migrating or disposing (including the abandoning or discarding of barrels, containers and other closed receptacles containing any Hazardous Material) of a substance into the environment, including the movement or continued movement of any materials through or it the air, soil, surface water, ground water or property.
"REPRESENTATIVE" means, with respect to any Person, any director, officer, employee, agent, advisor (including legal, accounting and financial advisors), Affiliate or other representative or agent authorized to act on behalf of such Person.
"RESPONSIBLE OFFICER" means, with respect to Seller or Buyer, the Chairman, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer or any Vice President of such Party.
"SELLER" has the meaning specified in the introductory paragraph of this Agreement.
"SELLER INDEMNIFIED PARTY" shall have the meaning set forth in
Section 15(b)(ii).
"STOCKHOLDER'S EQUITY" will be derived from the Effective Time Balance Sheet. The following items will be removed from the Effective Time Balance Sheet for purposes of calculating Stockholder's Equity:(A) fixed assets and depreciation; (B) Excluded Current Assets; (C) Excluded Current Liabilities; (D) the Direct Net Working Capital; (E) all Excluded Items; (F) all other items which represent WAPCO's proportionate share of Alyeska's balance sheet; and (G) all noncurrent intercompany payables and receivables.
"TAPS" has the meaning specified in the Recitals.
"TAPS AGREEMENT" has the meaning specified in the Recitals.
"TAPS INTERESTS" has the meaning specified in the Recitals.
"TAPS INTRASTATE RATES LITIGATION" means intrastate rate case pending before the Regulatory Commission of Alaska, docket numbers P-97-4/P-97-7, P-03-4 and P-86-2.
"TAPS PERMITTED LIENS" means:
(A) the terms, conditions, restrictions, obligations, exceptions, reservations, limitations and other matters contained in any rights of way or documents under which Seller has obtained any rights of way or other property rights associated with the TAPS Interests, in each case that do not, and will not, interfere materially with the possession, ownership, use, operation or value of the TAPS Interests;
(B) liens for property taxes and assessments that are not yet due and payable as of the Effective Time (or if delinquent, that are being contested in good faith by Seller by appropriate proceedings);
(C) any obligations or duties affecting the TAPS Interests to the extent created by any Governmental Authority under any Permit or Legal Requirement;
(D) easements, restrictive covenants, defects in title and irregularities, and other matters that do not and will not interfere materially with the possession, ownership, use, operation or value of the TAPS Interests;
(E) mechanic's, materialmen's, repairmen's and other statutory liens that do not and will not interfere materially with the possession, ownership, use, operation or value of the TAPS Interests; and
(F) transfer restrictions and requirements arising under applicable Federal and state securities laws.
"TAXES" means taxes of any kind, levies or other like assessments, customs, duties, or imposts, including income, gross receipts, ad valorem, value added, excise, motor fuel, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes or other governmental taxes imposed or payable to the United States or any state, local or foreign governmental subdivision or agency thereof, and in each instance such term shall include any interest, penalties or additions to tax attributable to any such Tax, including penalties for the failure to file any Tax Return or report.
"TAX RETURN" means any return, report or similar statement required to be filed with respect to any Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Taxes.
"THREATENED" means as follows: a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (in writing or, to Seller's Knowledge, verbally) or any notice has been given (in writing or, to Seller's Knowledge, verbally).
"THIRD PARTY CLAIM" shall have the meaning set forth in
Section 15.
"TSM" shall have the meaning set forth in Section 3(b).
"VALDEZ INVENTORY TRANSPORTATION REVENUE" has the meaning set forth in Section 2(e).
"WAPCO" has the meaning specified in the Recitals.
"WAPCO AGGREGATE CAP" has the meaning specified in Section 15(d)(ii).
"WAPCO CONTRACTS" has the meaning specified in Section 5(l).
"WAPCO ENVIRONMENTAL CAP" has the meaning specified in Section 15(d)(ii).
"WAPCO GENERAL CAP" has the meaning specified in Section 15(d)(ii).
"WAPCO INTERESTS" has the meaning specified in the Recitals.
"WAPCO PERMITTED LIENS" shall have the meaning specified in
Section 1(a).
"WAPCO THRESHOLD" has the meaning specified in Section 15(d)(i).
"WILLIAMS GUARANTOR" has the meaning specified in the introductory paragraph of this Agreement.
"WILLIAMS GUARANTY" has the meaning specified in Section
11(b)(iii).
(b) Other Definitional Provisions.
(i) All references in this Agreement to Exhibits, Sections, subsections and other subdivisions refer to the corresponding Exhibits, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise. References in a Section of this Agreement to any Disclosure Schedule shall refer to (A) that section or schedule of the Disclosure Schedule which corresponds to the number of such Section, and (B) any other Section or Schedule that contains information or disclosures that reasonably relate to the substance of such Section or Schedule. Titles appearing at the beginning of any Sections, subsections or other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof.
(ii) Any representations and warranties with regards to WAPCO Interests are made solely with regards to the WAPCO Interests and are not intended to imply a representation or warranty with regards to the TAPS interests.
(iii) Exhibits and Schedules to this Agreement are attached hereto and by this reference incorporated herein for all purposes.
(iv) References to "days" in this Agreement shall refer to calendar days, unless otherwise specified.
(v) The words "THIS AGREEMENT," "HEREIN," "HEREBY," "HEREUNDER" and "HEREOF," and words of similar import, refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The words "THIS SECTION" and "THIS SUBSECTION," and words of similar import, refer only to the Section or subsection hereof in which such words occur. The word "OR" is not exclusive, and the word "INCLUDING" (in its various forms) means including without limitation.
(vi) Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
This Purchase Agreement is executed as of the date first above stated.
KOCH ALASKA PIPELINE COMPANY, LLC
By: /s/ Patrick M. McCann ------------------------ Name: Patrick M. McCann ------------------------ Title: President ------------------------ |
WILLIAMS ENERGY SERVICES, LLC
By: /s/ Phillip D. Wright ------------------------ Name: Phillip D. Wright ------------------------ Title: Senior Vice President ------------------------ |
THE WILLIAMS COMPANIES, INC.
By: /s/ Phillip D. Wright ------------------------ Name: Phillip D. Wright ------------------------ Title: Senior Vice President ------------------------ |
EXHIBIT 12
THE WILLIAMS COMPANIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2003 2002* 2001* 2000* 1999* -------- -------- -------- -------- ------ (DOLLARS IN MILLIONS) Earnings: Income (loss) from continuing operations before income taxes, extraordinary gain (loss) and cumulative effect of change in accounting principles............... $ 51.6 $ (877.4) $1,159.4 $1,106.1 $154.9 Add: Interest expense -- net................ 1,240.9 1,132.3 654.9 588.7 461.9 Rental expense representative of interest factor...................... 26.6 23.8 23.8 23.1 24.0 Minority interest in income and preferred returns of consolidated subsidiaries......................... 19.4 41.8 71.7 56.8 33.1 Interest accrued -- 50% owned companies............................ 4.8 3.2 9.0 8.7 7.5 Equity losses in less than 50% owned companies............................ 5.5 20.6 27.9 16.5 13.0 Other.................................. (.7) 18.5 6.6 _(8.7) (4.1) -------- -------- -------- -------- ------ Total earnings as adjusted plus fixed charges................... $1,348.1 $ 362.8 $1,953.3 $1,791.2 $690.3 ======== ======== ======== ======== ====== Fixed charges and preferred stock dividend requirements: Interest expense -- net................ $1,240.9 $1,132.3 $ 654.9 $ 588.7 $461.9 Capitalized interest................... 45.5 27.3 36.9 32.1 19.6 Rental expense representative of interest factor...................... 26.6 23.8 23.8 23.1 24.0 Pre-tax effect of our preferred stock dividend requirements................ 47.8 33.6 -- -- 5.1 Pre-tax effect of preferred returns of subsidiaries......................... -- 15.2 59.1 44.2 26.7 Interest accrued -- 50% owned company.............................. 4.8 3.2 9.0 8.7 7.5 -------- -------- -------- -------- ------ Combined fixed charges and preferred stock dividend requirements.................... $1,365.6 $1,235.4 $ 783.7 $ 696.8 $544.8 ======== ======== ======== ======== ====== Ratio of earnings to combined fixed charges and preferred stock dividend requirements.............................. (a) (a) 2.49 2.57 1.27 ======== ======== ======== ======== ====== |
* Certain amounts have been restated or reclassified as described in Note 1 of Notes to Consolidated Financial Statements.
(a) Earnings were inadequate to cover combined fixed charges and preferred stock dividend requirement by $17.5 million and $872.6 million for the years ended December 31, 2003 and 2002, respectively.
EXHIBIT 14
CODE OF ETHICS FOR SENIOR OFFICERS
IN MY ROLE AS _____________________ OF WILLIAMS, I RECOGNIZE THAT MY POSITION HOLDS AN IMPORTANT AND ELEVATED ROLE IN CORPORATE GOVERNANCE. I AM UNIQUELY CAPABLE AND EMPOWERED TO ENSURE THAT STAKEHOLDERS' INTERESTS ARE APPROPRIATELY BALANCED, PROTECTED AND PRESERVED. ACCORDINGLY, THIS CODE PROVIDES THE FOLLOWING PRINCIPLES AND RESPONSIBILITIES GOVERNING MY PROFESSIONAL AND ETHICAL CONDUCT, AND TO WHICH I AM EXPECTED TO ADHERE AND ADVOCATE.
I CERTIFY THAT I ADHERE TO AND ADVOCATE:
1. HONEST AND ETHICAL CONDUCT, INCLUDING THE ETHICAL HANDLING OF ACTUAL OR APPARENT CONFLICTS OF INTEREST BETWEEN PERSONAL AND PROFESSIONAL RELATIONSHIPS;
2. AVOIDANCE OF CONFLICTS OF INTEREST, INCLUDING DISCLOSURE TO THE CHIEF ETHICS AND COMPLIANCE OFFICER OF ANY MATERIAL TRANSACTION OR RELATIONSHIP THAT REASONABLY COULD BE EXPECTED TO GIVE RISE TO SUCH A CONFLICT;
3. FULL, FAIR, ACCURATE, TIMELY, AND UNDERSTANDABLE DISCLOSURE IN REPORTS AND DOCUMENTS THAT THE COMPANY FILES WITH, OR SUBMITS TO, THE U. S. SECURITIES AND EXCHANGE COMMISSION AND IN OTHER PUBLIC COMMUNICATIONS MADE BY THE COMPANY;
4. COMPLIANCE WITH APPLICABLE GOVERNMENTAL LAWS, RULES AND REGULATIONS;
5. THE PROMPT INTERNAL REPORTING OF CODE VIOLATIONS TO THE CHIEF ETHICS AND COMPLIANCE OFFICER; AND
6. ACCOUNTABILITY FOR ADHERENCE TO THE CODE.
.
.
.
EXHIBIT 21
ENTITY JURISDICTION 898389 Alberta Ltd. Alberta ACCROSERV SRL Barbados ACCROVEN SRL Barbados Alliance Canada Marketing L.P. Alberta Alliance Canada Marketing LTD Alberta Apco Argentina, Inc. Cayman Islands Apco Properties Ltd. Cayman Islands Arctic Fox Assets, L.L.C. Delaware Aspen Products Pipeline LLC Delaware Aux Sable Canada Ltd. Alberta Aux Sable Canada LP Alberta Aux Sable Liquid Products Inc. Delaware Aux Sable Liquid Products LP Alberta Bargath Inc. Colorado Barrett Fuels Corporation Delaware Barrett Resources International Corporation Delaware Barrett Resources Peru Corporation Delaware Baton Rouge Fractionators LLC Delaware Baton Rouge Pipeline LLC Delaware Beaver Dam Wash Energy, LLC Delaware Beech Grove Processing Company Tennessee Bison Royalty LLC Delaware Black Marlin Pipeline Company Texas Buccaneer Gas Pipeline Company, L.L.C. Delaware Cannon Pipeline L.L.C. Oklahoma Carbon County UCG, Inc. Delaware Cardinal Operating Company Delaware Cardinal Pipeline Company, LLC North Carolina Castle Associates, L.P. Delaware Chacahoula Natural Gas Storage, LLC Delaware Choctaw Natural Gas Storage, LLC Delaware ChoiceSeat, L.L.C. Delaware Cross Bay Operating Company Delaware Cross Bay Pipeline Company, L.L.C. Delaware Cumberland Gas Pipeline Company Delaware Cumberland Operating Company Delaware Discovery Gas Transmission LLC Delaware Discovery Producer Services LLC Delaware Distributed Power Solutions L.L.C. Delaware Dogwood Ventures Company, LLC Delaware Eagle Gas Services, Inc. Ohio |
E-Birchtree, LLC Delaware EM&T NPC Co., LLC Delaware Energy International Corporation Pennsylvania Energy News Live, LLC Delaware Energy Tech, Inc. Delaware E-Oaktree, LLC Delaware Erie & Hudson Development Company Ohio ESPAGAS USA, Inc. Delaware ESPAGAS, S.A. de C.V. Mexico F T & T, Inc. Delaware Fishhawk Ranch, Inc. Florida FleetOne Inc. Delaware FPT Marketing Company Limited Bermuda Free Port Terminal Company Limited Bermuda Fulton Energy Center, LLC Delaware Garrison, L.L.C. Delaware Gas Supply, L.L.C. Delaware Georgia Strait Crossing Pipeline LP Utah Goebel Gathering Company, L.L.C. Delaware Great Basin Energy Resources, LLC Delaware GSX Canada Limited Partnership British Columbia GSX Operating Company, LLC Delaware GSX Pipeline, LLC Delaware GSX Western Pipeline Company Delaware Gulf Liquids Holdings LLC Delaware Gulf Liquids New River Project LLC Delaware Gulf Star Deepwater Services, LLC Delaware Gulf Stream Natural Gas System, L.L.C. Delaware Gulfstream Management & Operating Services, L.L.C. Delaware Halgas, Inc. Oklahoma Hazleton Fuel Management Company Delaware Hazleton Pipeline Company Delaware HI-BOL Pipeline Company Delaware Independence Operating Company Delaware Independence Pipeline Company Delaware Inland Ports, Inc. Tennessee Juarez Pipeline Company Delaware Kern River Acquisition, LLC Delaware Kiowa Gas Storage, L.L.C. Delaware Langside Limited Bermuda Laughton, L.L.C. Delaware Liberty Operating Company Delaware Littlefield Energy, LLC Delaware Longhorn Enterprises of Texas, Inc. Delaware Longhorn Partners GP, L.L.C. Delaware Longhorn Partners Pipeline, L.P. Delaware |
Magnolia Methane Corp. Delaware MAPCO Alaska Inc. Alaska MAPCO Canada Energy Inc. Canada MAPCO Energy Services, L.L.C. Delaware MAPCO Impressions Inc. Oklahoma MAPCO Inc. DE Delaware MAPCO Indonesia Inc. Delaware MAPL Investments, Inc. Delaware Marsh Resources, Inc. Delaware Memphis Generation, L.L.C. Delaware Mid-Continent Fractionation and Storage, LLC Delaware Millennium Energy Fund, L.L.C. Delaware Moriche Bank Ltd. Barbados Nebraska Energy, L.L.C. Kansas NESP Supply Corp. Delaware North Padre Island Spindown, Inc. Delaware Northwest Alaskan Pipeline Company Delaware Northwest Argentina Corporation Utah Northwest Land Company Delaware Northwest Pipeline Corporation Delaware NWP Enterprises, Inc. Delaware NWP Enterprises, LLC Delaware Pacesetter/MVHC, Inc. Texas Pan-Alberta Resources Inc. Canada Parkco, L.L.C. Oklahoma Parkco Two, L.L.C. Oklahoma Petrolera Perez Companc Argentina Piceance Production Holdings LLC Delaware Pine Needle LNG Company, LLC North Carolina Pine Needle Operating Company Delaware Piper Power Company, LLC Delaware Plains Petroleum Gathering Company Delaware Rainbow Resources, Inc. Colorado Realco of Crown Center, Inc. Delaware Realco of San Antonio, Inc. Delaware Realco Realty Corp. Delaware Reserveco Inc. Delaware Rio Vista Energy Marketing Company, L.L.C. Delaware Rulison Gas Company, LLC Colorado Rulison Production Company LLC Delaware Servicios Williams International de Mexico S.A. de C.V. Mexico Silver State Resources Management, LLC Delaware Snow Goose Associates, L.L.C. Delaware Sociedad Williams Enbridge y Compania Venezuela Solutions EMT, Inc. Texas SPV, L.L.C. Oklahoma |
Tennessee Processing Company Delaware Terrebonne Pipeline Company Delaware TGPL Enterprises, Inc. Delaware TGPL Enterprises, LLC Delaware TGT Enterprises, Inc. Delaware TGT Enterprises, LLC Delaware The Tennessee Coal Company Delaware Thermogas Energy, LLC Delaware TM Cogeneration Company Delaware Touchstar Energy Technologies, Inc. Texas Touchstar Technologies Pty Ltd. South Africa TouchStar Technologies, L.L.C. Delaware TransCardinal Company Delaware TransCarolina LNG Company Delaware Transco Coal Gas Company Delaware Transco Cross Bay Company Delaware Transco Energy Company Delaware Transco Energy Investment Company Delaware Transco Energy Marketing Company Delaware Transco Exploration Company Delaware Transco Gas Company Delaware Transco Independence Pipeline Company Delaware Transco Liberty Pipeline Company Delaware Transco P-S Company Delaware Transco Resources, Inc. Delaware Transco Terminal Company Delaware Transco Tower Realty, Inc. Delaware Transcontinental Gas Pipe Line Corporation Delaware TransCumberland Pipeline Company Delaware Transeastern Gas Pipeline Company, Inc. Delaware TransNetwork Holding Company Delaware Tulsa Williams Company Delaware TXG Gas Marketing Company Delaware Valley View Coal, Inc. Tennessee Volunteer - Williams, L.L.C. Delaware WCG NOTE CORP., INC. Delaware WEM&T Trading GmbH Austria WFS - Liquids Company Delaware WFS - NGL Pipeline Company, Inc. Delaware WFS - OCS Gathering Co. Delaware WFS - Offshore Gathering Company Delaware WFS - Pipeline Company Delaware WFS Enterprises, Inc. Delaware WFS Gathering Company, L.L.C. Delaware WGP Enterprises, Inc. Delaware WGP Gulfstream Pipeline Company, L.L.C. Delaware |
WGP International Canada, Inc. New Brunswick WHBC Holdings, LLC Delaware WHBC, LLC Delaware WHD Enterprises, Inc. Delaware WHD Enterprises, LLC Delaware Williams Acquisition Holding Company, Inc. (Del) Delaware Williams Acquisition Holding Company, Inc. (NJ) New Jersey Williams Aircraft, Inc. Delaware Williams Alaska Air Cargo Properties, L.L.C. Alaska Williams Alaska Petroleum, Inc. Alaska Williams Alaska Pipeline Company, L.L.C. Delaware Williams Alliance Canada Marketing, Inc. New Brunswick Williams Arkoma Gathering Company, LLC Delaware Williams Cove Point, Inc. Delaware Williams Customer Information Solution, Inc. Delaware Williams Distributed Power Services, Inc. Delaware Williams EnergIa Espana, S.L. Spain Williams Energia Italia SRL Italy Williams Energy Canada Pipeline, Inc. New Brunswick Williams Energy Canada, Inc. New Brunswick Williams Energy Company Delaware Williams Energy European Services Ltd. United Kingdom Williams Energy Management LLC Delaware Williams Energy Marketing & Trading Canada, Inc. New Brunswick Williams Energy Marketing & Trading Europe Ltd England Williams Energy Marketing & Trading Holdings UK Ltd. United Kingdom Williams Energy Network, Inc. Delaware Williams Energy Services, LLC Delaware Williams Energy Solutions, Inc. Delaware Williams Energy, L.L.C. Delaware Williams Environmental Services Company Delaware Williams Equities, Inc. Delaware Williams Exploration Company Delaware Williams Express, Inc. AK Alaska Williams Express, Inc. Delaware Williams Fertilizer, Inc. Delaware Williams Field Services - Gulf Coast Company, L.P. Delaware Williams Field Services - Matagorda Offshore Company, LLC Delaware Williams Field Services Company Delaware Williams Field Services Group, Inc Delaware Williams Flexible Generation, LLC Delaware Williams Gas Company Delaware Williams Gas Energy, Inc. Delaware Williams Gas Pipeline - Alliance Canada, Inc. Alberta Williams Gas Pipeline - Alliance U.S., Inc. Delaware Williams Gas Pipeline Company, LLC Delaware |
Williams Gas Pipeline Mexico, S.A. de C.V. Mexico Williams Gas Processing - Gulf Coast Company, L.P. Delaware Williams Gas Processing - Mid-Continent Region Company Delaware Williams Gas Processing - Wamsutter Company Delaware Williams Gas Processing Company Delaware Williams Gathering & Transportation, L.L.C. Oklahoma Williams Generation Company - Hazleton Delaware Williams Global Energy Cayman Limited Cayman Islands Williams Global Holdings Company Delaware Williams GmbH Austria Williams GP LLC Delaware Williams GSR, L.L.C. Delaware Williams GSX Canada Inc. New Brunswick Williams Gulf Coast Gathering Company, LLC Delaware Williams Headquarters Acquisition Company Delaware Williams Headquarters Building Company Delaware Williams Headquarters Building, L.L.C. Delaware Williams Headquarters Management Company Delaware Williams Holdings GmbH Austria Williams Hugoton Compression Services, Inc. Delaware Williams Independence Marketing Company Delaware Williams Indonesia, L.L.C. Delaware Williams Information Technology, Inc. Delaware Williams Intercontinental Holdings Company Delaware Williams International Bermuda Limited Bermuda Williams International Communications, Inc. Delaware Williams International Company Delaware Williams International Cusiana-Cupiagua Limited Cayman Islands Williams International de Mexico, S.A. de C.V. Mexico Williams International Ecuador Cayman Limited Cayman Islands Williams International Ecuadorian Ventures Bermuda Limited Bermuda Williams International El Furrial Limited Cayman Islands Williams International Guara Limited Cayman Islands Williams International Holdings Limited Cayman Islands Williams International Investment Ventures Cayman Limited Cayman Islands Williams International Investments Cayman Limited Cayman Islands Williams International Jose Limited Cayman Islands Williams International Oil & Gas Venezuela Limited Cayman Islands Williams International Operations Ecuador Limited Cayman Islands Williams International Operations Venezuela Limited Cayman Islands Williams International Pigap Limited Cayman Islands Williams International Pipeline Company Delaware Williams International Services Company Nevada Williams International Telecom Limited Delaware Williams International Telecommunications Investments Cayman Limited Cayman Islands Williams International Venezuela Limited Cayman Islands |
Williams International Ventures Bermuda Ltd. Bermuda Williams Learning Center, Inc. Delaware Williams Lietuva Lithuania Williams Lynxs Alaska CargoPort, L.L.C. Alaska Williams Memphis Terminal, Inc. Delaware Williams Merchant Services Company, Inc. Delaware Williams Mid-South Pipelines, LLC Delaware Williams Midstream Marketing and Risk Management, LLC Delaware Williams Midstream Natural Gas Liquids, Inc. Delaware Williams Mobile Bay Producer Services, L.L.C. Delaware Williams Natural Gas Liquids Canada, Inc. Alberta Williams Natural Gas Liquids, Inc. Delaware Williams Natural Gas Storage, LLC Delaware Williams New Soda, Inc. Delaware Williams NGL, LLC Delaware Williams Northern NGL Pipeline, L.L.C. Delaware Williams Oil Gathering, L.L.C. Delaware Williams Olefins Feedstock Pipelines, L.L.C. Delaware Williams Olefins, L.L.C. Delaware Williams One-Call Services, Inc. Delaware WILLIAMS PETROLEOS ESPANA, S.L. Spain Williams Petroleum Pipeline Systems, Inc. Delaware Williams Petroleum Services, LLC Delaware Williams Pipe Line Company, LLC Delaware Williams Pipeline Services Company Delaware Williams Pipelines Holdings, L.P. Delaware Williams Portfolio Holdings, LLC Delaware Williams Power Company, Inc. Delaware Williams Production - Gulf Coast Company, L.P. Delaware Williams Production Company, LLC Delaware Williams Production Holdings LLC Delaware Williams Production Mid-Continent Company Oklahoma Williams Production RMT Company Delaware Williams Production Rocky Mountain Company Delaware Williams Refining & Marketing, L.L.C. Delaware Williams Relocation Management, Inc. Delaware Williams Resource Center, L.L.C. Delaware Williams Risk Holdings, L.L.C. Delaware Williams Risk Management L.L.C. Delaware Williams Soda Holdings, LLC Delaware Williams Sodium, LLC Delaware Williams Sodium Products Company Delaware Williams Strategic Sourcing Company Delaware Williams Strategic Ventures, LLC Delaware Williams Trading UK Ltd. United Kingdom Williams TravelCenters, Inc. Delaware |
Williams Underground Gas Storage Company Delaware Williams Western Holding Company, Inc. Delaware Williams Western Pipeline Company, LLC Delaware Williams Wireless, Inc. Delaware Williams WPC - I, Inc. Delaware Williams WPC - II, Inc. Delaware Williams WPC International Company Delaware WilMart, Inc. Delaware WilPro Energy Services El Furrial Limited Cayman Islands WilPro Energy Services Pigap II Limited Cayman Islands Worldwide Services Limited Cayman Islands WPX Enterprises, Inc. Delaware WPX Gas Resources Company Delaware |
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following registration statements on Form S-3 and Form S-4, and related prospectuses and in the following registration statements on Form S-8 of The Williams Companies, Inc. of our report dated February 18, 2004, with respect to the consolidated financial statements and schedule of The Williams Companies, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2003:
Form S-3: Registration No. 333-20929; Registration No. 333-35097; Registration No. 333-29185; Registration No. 333-70394; Registration No. 333-20927; Registration No. 333-27311; Registration No. 333-35101; Registration No. 333-106504; Registration No. 333-85540;
Form S-4: Registration No. 333-57416; Registration No. 333-63202; Registration No. 333-101788; Registration No. 333-72982; Registration No. 333-85566; Registration No. 333-85568;
Form S-8: Registration No. 33-58971; Registration No. 33-58969; Registration No. 33-56521; Registration No. 33-58671; Registration No. 333-11151; Registration No. 333-40721; Registration No. 333-48945; Registration No. 333-90265; Registration No. 333-76929; Registration No. 333-66474; Registration No. 333-85542; Registration No. 333-03957; Registration No. 333-51994; Registration No. 333-85546; Registration No. 333-61597
Ernst & Young LLP
Tulsa, Oklahoma
March 9, 2004
NSA Netherland, Sewell
& Associates, Inc.
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference to our audit letters dated as of December 31, 2003, each of which is included in the Annual Report on Form 10-K of The Williams Companies for the year ended December 31, 2003. We also consent to the reference to us under the heading of "Experts" in such Annual Report.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell ------------------------------------ Frederic D. Sewell Chairman and Chief Executive Officer Dallas, Texas February 20, 2004 |
EXHIBIT 23.3
MILLER AND LENTS, LTD.
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference to our reserve reports dated as of December 31, 2003, 2002, and 2001, each of which is included in the Annual Report on Form 10-K of The Williams Companies for the year ended December 31, 2003. We also consent to the reference to us under the heading of "Experts" in such Annual Report.
MILLER AND LENTS, LTD.
By /s/ Stephen M. Hamburg ---------------------- Stephen M. Hamburg February 16, 2004 |
EXHIBIT 24
THE WILLIAMS COMPANIES, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned individuals, in their capacity as a director or officer, or both, as hereinafter set forth below their signature, of THE WILLIAMS COMPANIES, INC., a Delaware corporation ("Williams"), does hereby constitute and appoint JAMES J. BENDER and BRIAN K. SHORE their true and lawful attorneys and each of them (with full power to act without the others) their true and lawful attorneys for them and in their name and in their capacity as a director or officer, or both, of Williams, as hereinafter set forth below their signature, to sign Williams' Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2003, and any and all amendments thereto or all instruments necessary or incidental in connection therewith; and
THAT the undersigned Williams does hereby constitute and appoint JAMES J. BENDER and BRIAN K. SHORE its true and lawful attorneys and each of them (with full power to act without the others) its true and lawful attorney for it and in its name and on its behalf to sign said Form 10-K and any and all amendments thereto and any and all instruments necessary or incidental in connection therewith.
Each of said attorneys shall have full power of substitution and resubstitution, and said attorneys or any of them or any substitute appointed by any of them hereunder shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully to all intents and purposes as each of the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys or any of them or of any such substitute pursuant hereto.
IN WITNESS WHEREOF, the undersigned have executed this instrument, all as of the 23rd day of January, 2004.
/s/ Steven J. Malcolm /s/ Donald R. Chappel -------------------------------------- ----------------------------- Steven J. Malcolm Donald R. Chappel Chairman of the Board Senior Vice President President and and Chief Financial Officer Chief Executive Officer (Principal Financial Officer) (Principal Executive Officer) (Principal Executive Officer) /s/ Gary R. Belitz --------------------------------------- Gary R. Belitz Controller (Principal Accounting Officer) |
/s/ Hugh M. Chapman /s/ Thomas H. Cruikshank ---------------------------------- --------------------------------- Hugh M. Chapman Thomas H. Cruikshank Director Director /s/ William E. Green /s/ W. R. Howell ---------------------------------- --------------------------------- William E. Green W. R. Howell Director Director /s/ Charles M. Lillis /s/ George A. Lorch ---------------------------------- --------------------------------- Charles M. Lillis George A. Lorch Director Director /s/ William G. Lowrie /s/ Frank T. MacInnis ---------------------------------- --------------------------------- William G. Lowrie Frank T. MacInnis Director Director /s/ Janice D. Stoney /s/ Joseph H. Williams ---------------------------------- --------------------------------- Janice D. Stoney Joseph H. Williams Director Director |
THE WILLIAMS COMPANIES, INC.
By /s/ James J. Bender --------------------------------- James J. Bender ATTEST: Senior Vice President /s/ Brian K. Shore ---------------------------- Brian K. Shore Secretary |
THE WILLIAMS COMPANIES, INC.
Secretary's Certificate
I, the undersigned, BRIAN K. SHORE, Secretary of THE WILLIAMS COMPANIES, INC., a Delaware corporation (hereinafter called the "Company"), do hereby certify that at a regular meeting of the Board of Directors of the Company, duly convened and held on January 23, 2004, at which a quorum of said Board was present and acting throughout, the following resolutions were duly adopted:
RESOLVED that the Chairman of the Board, the President, any Senior Vice President and the Controller of the Company be, and each of them hereby is, authorized and empowered to execute a Power of Attorney for use in connection with the execution and filing for and on behalf of the Company, under the Securities Exchange Act of 1934, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of The Williams Companies, Inc. this 26th day of January, 2004.
/s/ Brian K. Shore ---------------------------- Brian K. Shore Secretary |
[S E A L ]
EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, Steven J. Malcolm, certify that:
1. I have reviewed this annual report on Form 10-K of The Williams Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
By: /s/ STEVEN J. MALCOLM ------------------------------------ Steven J. Malcolm President and Chief Executive Officer (Principal Executive Officer) Date: March 15, 2004 |
EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, Donald R. Chappel, certify that:
1. I have reviewed this annual report on Form 10-K of The Williams Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
By: /s/ DONALD R. CHAPPEL ------------------------------------ Donald R. Chappel Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 15, 2004 |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Williams Companies, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned hereby certifies, in his capacity as an officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Steven J. Malcolm ------------------------- Steven J. Malcolm Chief Executive Officer March 15, 2004 /s/ Donald R. Chappel ------------------------- Donald R. Chappel Chief Financial Officer March 15, 2004 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report.