Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-104474
PROSPECTUS
NORTHWEST PIPELINE CORPORATION
EXCHANGE OFFER FOR ALL OUTSTANDING
8 1/8% SENIOR NOTES DUE MARCH 1, 2010
(CUSIP NOS. 667748AJ6 AND U66640AA8)
FOR NEW
8 1/8% SENIOR NOTES DUE MARCH 1, 2010
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MAY 28, 2003, UNLESS EXTENDED.
TERMS OF THE EXCHANGE OFFER:
- We will exchange all outstanding notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.
- You may withdraw tendered outstanding notes at any time prior to the
expiration of the exchange offer.
- The exchange of outstanding notes will not be a taxable exchange for
United States federal income tax purposes.
- The terms of the new notes to be issued are substantially identical to
the terms of the outstanding notes, except that transfer restrictions,
registration rights and liquidated damages provisions relating to the
outstanding notes do not apply.
- Each broker-dealer that receives securities for its own account pursuant
to the Exchange Offer ("Exchange Securities") must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Securities. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange
Securities received in exchange for outstanding notes where such
outstanding notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities.
- We will not receive any proceeds from the exchange offer.
- There is no existing market for the new notes to be issued and we do not
intend to apply for their listing on any securities exchange.
See the "Description of Notes" section beginning on page 51 for more
information about the new notes to be issued in this exchange offer.
THE NEW NOTES INVOLVE SUBSTANTIAL RISKS SIMILAR TO THOSE ASSOCIATED WITH
THE OUTSTANDING NOTES. SEE THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE
12 FOR A DISCUSSION OF THESE RISKS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES AND
EXCHANGE COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated April 28, 2003
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Special Note Regarding Forward-Looking Statements........... ii
Prospectus Summary.......................................... 1
Risk Factors................................................ 12
The Exchange Offer.......................................... 20
Use of Proceeds............................................. 29
Capitalization.............................................. 29
Selected Historical Financial Data.......................... 30
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 31
Business.................................................... 37
Management.................................................. 45
Certain Relationships and Related Party Transactions........ 47
Description of Other Indebtedness........................... 48
Description of Notes........................................ 51
Certain U.S. Federal Income Tax Considerations.............. 92
Plan of Distribution........................................ 97
Legal Matters............................................... 98
Experts..................................................... 98
Where You Can Find More Information......................... 98
Glossary.................................................... 99
Index to Financial Statements............................... F-1
</Table>
---------------------
You should rely only upon the information contained in this document. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to exchange these securities in any
jurisdiction where the offer or exchange is not permitted. You should assume the
information appearing in this document is accurate only as of the date on the
front cover of this document. Our business, financial condition, results of
operations and prospects may have changed since that date.
This document is based on information provided by us and other sources we
believe are reliable. We have summarized certain documents and other information
in a manner we believe to be accurate, but we refer you to the actual documents
for a more complete understanding of what we discuss in this document. In making
an investment decision, you must rely on your own examination of our business
and the terms of this offering and the notes, including the merits and risks
involved. This offering is being made on the basis of this prospectus. Any
decision to purchase the notes in this offering must be based on the information
contained in this prospectus.
You should contact us with any questions about this offering or if you
require additional information to verify the information contained in this
document.
We are not making any representation to any offeree of the notes regarding
the legality of an investment in the notes by it under any legal investment or
similar laws or regulations. You should not consider any information in this
document to be legal, business or tax advice. You should consult your own
attorney, business advisor and tax advisor for legal, business and tax advice
regarding an investment in the notes.
The federal securities laws prohibit trading in our securities while in
possession of material non-public information with respect to us.
The global note representing beneficial interests issued pursuant to this
prospectus (the "global note") will be deposited with, or on behalf of, The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., the
nominee of DTC. Beneficial interests in the global note will be held only
through DTC and its participants, including Clearstream Banking S.A.
("Clearstream") and Euroclear Bank S.A./N.V. ("Euroclear"), as operator of the
Euroclear System. After initial issuance of the global notes, notes in
certificated form may be issued in exchange for the global notes only in limited
circumstances set forth in the indenture. The notes will be issued in registered
form in minimum denominations of $1,000 and integral multiples of $1,000. See
"Description of Notes -- Book-Entry, Delivery and Form" for further discussion
of these matters and for definitions of certain of the capitalized terms used in
this paragraph.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this prospectus includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements relate to anticipated financial performance,
management's plans and objectives for future operations, business prospects,
outcome of regulatory proceedings, market conditions and other matters. Words
such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and
"objective" and other similar expressions identify those statements that are
forward-looking. These statements are based on management's beliefs and
assumptions and on information currently available to management. Actual results
could differ materially from those contemplated by the forward-looking
statements. In addition to any assumptions and other factors referred to
specifically in connection with such statements, factors that could cause our
actual results to differ materially from those contemplated in any
forward-looking statement include, among others, the following:
- future utilization of pipeline capacity, which can depend on energy
prices, competition from other pipelines and alternative fuels, the
general level of natural gas demand, decisions by customers not to renew
expiring natural gas transportation contracts, adequate supplies of
natural gas and weather conditions;
- the ability to raise capital and fund capital expenditures in a
cost-effective manner;
- changes in federal, state or local laws and regulations to which we are
subject, including allowed rates of return and related regulatory
matters, and tax, environmental and employment laws and regulations;
- the ability to manage costs;
- the ability to expand into new markets as well as the ability to maintain
existing markets;
- the ability to obtain governmental and regulatory approval of various
expansion projects;
- the cost and effects of legal and administrative proceedings;
- the effect of changes in accounting policies;
- uncertainties or adverse developments involving our ultimate parent, The
Williams Companies, Inc.;
- changes in general economic conditions;
- economic repercussions from terrorist activities and the government's
response to such terrorist activities; and
- other factors, including the risks outlined under "Risk Factors."
Other factors and assumptions not identified above may also have been
involved in deriving these forward-looking statements, and the failure of those
other assumptions to be realized, as well as other factors, may also cause
actual results to differ materially from those projected. We assume no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
statements.
ii
PROSPECTUS SUMMARY
This summary contains basic information about us and this exchange offer
but may not contain all the information that is important to you. For a more
complete understanding of this exchange offer, we encourage you to read this
entire prospectus and the documents we refer you to. References In this
prospectus to "we," "us," "our," "Northwest" and "Pipeline" refer to Northwest
Pipeline Corporation, unless the context indicates otherwise. The term
"outstanding notes" refers to the 8 1/8% Senior Notes due March 1, 2010 issued
on March 4, 2003. The term "new notes" refers to the 8 1/8% Senior Notes due
March 1, 2010 offered by this prospectus. The term "notes" refers to the
outstanding notes and the new notes, collectively. You should carefully consider
the information set forth under "Risk Factors." In addition, certain statements
are forward-looking statements which involve risks and uncertainties. See
"Special Note Regarding Forward-Looking Statements."
THE EXCHANGE OFFER
Notes offered................. $175,000,000 aggregate principal amount of new
8 1/8% Senior Notes due March 1, 2010, all of
which will have been registered under the
Securities Act. The terms of the new notes
offered in the exchange offer are substantially
identical to those of the outstanding notes,
except that certain transfer restrictions,
registration rights and liquidated damages
provisions relating to the outstanding notes do
not apply to the registered new notes.
Outstanding notes............. $175,000,000 aggregate principal amount of
8 1/8% Senior Notes due March 1, 2010, all of
which were issued on March 4, 2003.
The exchange offer............ We are offering to issue registered new notes
in exchange for a like principal amount and
like denomination of our outstanding notes. We
are offering to issue these registered new
notes to satisfy our obligations under a
registration rights agreement that we entered
into with the initial purchasers of the
outstanding notes when we sold the outstanding
notes in a transaction that was exempt from the
registration requirements of the Securities
Act. You may tender your outstanding notes for
exchange by following the procedures described
under the caption "The Exchange Offer."
Tenders; Expiration date;
Withdrawal.................... The exchange offer will expire at 5:00 p.m.,
New York City time, on May 28, 2003, which is
30 days after the commencement of the exchange
offer, unless we extend it. If you decide to
exchange your outstanding notes for new notes,
you must acknowledge that you are not engaging
in, and do not intend to engage in, a
distribution of the new notes. You may withdraw
any outstanding notes that you tender for
exchange at any time prior to the expiration of
the exchange offer. If we decide for any reason
not to accept any outstanding notes you have
tendered for exchange, those outstanding notes
will be returned to you without cost promptly
after the expiration or termination of the
exchange offer. See "The Exchange
Offer -- Terms of the Exchange Offer" for a
more complete description of the tender and
withdrawal provisions.
Conditions to the exchange
offer......................... The exchange offer is subject to customary
conditions, some of which we may waive.
1
U.S. federal income tax
considerations Your exchange of outstanding notes for new
notes to be issued in the exchange offer will
not result in any gain or loss to you for U.S.
federal income tax purposes.
Use of proceeds............... We will not receive any cash proceeds from the
exchange offer.
Exchange agent................ JPMorgan Chase Bank
Consequences of failure to
exchange your outstanding
notes......................... Outstanding notes that are not tendered or that
are tendered but not accepted will continue to
be subject to the restrictions on transfer that
are described in the legend on those notes. In
general, you may offer or sell your outstanding
notes only if they are registered under, or
offered or sold under an exemption from, the
Securities Act and applicable state securities
laws. We, however, will have no further
obligation to register the outstanding notes.
If you do not participate in the exchange
offer, the liquidity of your outstanding notes
could be adversely affected.
Consequences of exchanging
your outstanding notes........ Based on interpretations of the staff of the
SEC, we believe that you may offer for resale,
resell or otherwise transfer the new notes that
we issue in the exchange offer without
complying with the registration and prospectus
delivery requirements of the Securities Act if
you:
- acquire the new notes issued in the exchange
offer in the ordinary course of your
business;
- are not participating, do not intend to
participate, and have no arrangement or
undertaking with anyone to participate, in
the distribution of the new notes issued to
you in the exchange offer; and
- are not an "affiliate" of our company as
defined in Rule 405 of the Securities Act.
If any of these conditions is not satisfied and
you transfer any new notes issued to you in the
exchange offer without delivering a proper
prospectus or without qualifying for a
registration exemption, you may incur liability
under the Securities Act. We will not be
responsible for or indemnify you against any
liability you may incur.
Any broker-dealer that acquires new notes in
the exchange offer for its own account in
exchange for outstanding notes which it
acquired through market-making or other trading
activities, must acknowledge that it will
deliver a prospectus when it resells or
transfers any new notes issued in the exchange
offer. See "Plan of Distribution" for a
description of the prospectus delivery
obligations of broker-dealers in the exchange
offer.
2
THE NOTES
The terms of the new notes we are issuing in this exchange offer and the
outstanding notes are identical in all material respects, except the new notes
offered in the exchange offer:
- will have been registered under the Securities Act;
- will not contain transfer restrictions and registration rights that
relate to the outstanding notes; and
- will not contain provisions relating to the payment of liquidated damages
to be made to the holders of the outstanding notes under circumstances
related to the timing of the exchange offer.
A brief description of the material terms of the notes follows:
Company....................... Northwest Pipeline Corporation.
Securities Offered............ $175,000,000 aggregate principal amount of
8 1/8% Senior Notes due March 1, 2010.
Maturity Date................. March 1, 2010.
Interest Payment Dates........ March 1 and September 1 of each year,
commencing on September 1, 2003.
Mandatory Redemption.......... We will not be required to make mandatory
redemption or sinking fund payments with
respect to the notes.
Optional Redemption........... We may redeem all or part of the notes at any
time on or after March 1, 2007. Before March 1,
2006, we may redeem up to 35% of the aggregate
principal amount of the notes with the net cash
proceeds of qualified equity offerings. In
addition, we may redeem some or all of the
notes at any time prior to March 1, 2007,
pursuant to a make-whole premium, plus accrued
and unpaid interest, if any, to the redemption
date. Please see "Description of
Notes -- Optional Redemption" for the
applicable redemption prices and other details.
Change of Control............. If we or Williams experience specified kinds of
changes of control, we must offer to repurchase
the notes at 101% of the principal amount of
the notes, plus accrued and unpaid interest, if
any, to the date of repurchase. For more
details, see "Description of Notes --
Repurchase at the Option of Holders -- Change
of Control."
Ranking....................... The notes will be our senior obligations and
will rank pari passu in right of payment with
our existing and future unsecured and
unsubordinated indebtedness and will be senior
in right of payment to all of our existing and
future subordinated indebtedness.
Certain Covenants............. We will issue the notes under an indenture,
dated as of March 4, 2003, between us and
JPMorgan Chase Bank, as trustee. The indenture
contains limitations on, among other things:
- Certain payments with respect to our equity
and certain investments and the purchase,
redemption or retirement of our capital
stock;
- restrictions affecting the right of
restricted subsidiaries, if any, to make
certain payments and distributions;
- our ability to incur additional indebtedness
and issue preferred stock;
3
- asset sales;
- transactions with affiliates;
- the incurrence of liens on assets to secure
certain debt;
- engaging in certain business activities; and
- certain mergers or consolidations and
transfers of assets.
These covenants are subject to exceptions, and
many of the covenants will terminate before the
notes mature if two specified rating agencies
assign the notes investment grade ratings in
the future and no event of default exists under
the indenture. See "Description of
Notes -- Termination of Certain Covenants."
Form and Denomination......... The notes will be issued in fully registered
form in denominations of $1,000 and in integral
multiples of $1,000. Notes will be represented
by global certificates deposited with, or on
behalf of, DTC. Beneficial interests in the
notes will trade in DTC's same-day funds
settlement system.
4
NORTHWEST PIPELINE CORPORATION
We own and operate a regulated interstate natural gas pipeline system,
including facilities for mainline transmission and gas storage. Our system
extends from the San Juan Basin in northwestern New Mexico and southwestern
Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a
point on the Canadian border near Sumas, Washington. Our natural gas pipeline
system transports substantially all of the natural gas to the metropolitan areas
of Seattle, Washington; Portland, Oregon; and Boise, Idaho, which represent most
of our primary market areas. Our system has an aggregate mainline deliverability
of approximately 2.9 Bcf of gas per day and is composed of approximately 4,000
miles of mainline and lateral transmission pipelines, 470 meter stations and 43
mainline compressor stations with a combined capacity of approximately 348,000
horsepower. We also own or have access to natural gas and liquefied natural gas
storage facilities in Utah and Washington with an aggregate seasonal storage
level of 11.4 Bcf of working gas and daily withdrawal capacity of approximately
600 MMcf. These storage facilities enable us to balance daily receipts and
deliveries and provide storage services to our customers. For the year ended
December 31, 2002, our transportation and storage services accounted for
approximately 91% and 3% of our operating revenues, respectively.
In 2002, we transported natural gas for a total of 166 customers, including
distribution companies, municipalities, interstate and intrastate pipelines, gas
marketers and direct industrial users. We provided services to markets located
in California, New Mexico, Colorado, Utah, Nevada, Wyoming, Idaho, Oregon and
Washington. Our firm transportation agreements are generally long-term
agreements with various maturities of up to 30 years and accounted for
approximately 87% of our operating revenues for the year ended December 31,
2002. These long-term agreements have historically resulted in predictable
volumes and related cash flows. Additionally, we offer interruptible and
short-term firm transportation services, which accounted for approximately 4% of
our operating revenues for the year ended December 31, 2002.
As with all interstate natural gas pipeline operators, our transmission and
storage activities are subject to regulation by the Federal Energy Regulatory
Commission ("FERC") and, as such, our rates and charges for the transportation
of natural gas in interstate commerce, the extension, enlargement or abandonment
of our jurisdictional facilities, and our accounting, among other things, are
subject to regulation. In accordance with our most recent FERC rate case, we are
currently authorized to charge our customers a rate equivalent to $0.3076/Dth
for natural gas shipped on our pipeline system, regardless of the distance the
gas is to be shipped. We currently have no outstanding rate cases before the
FERC, nor any immediate plans to file a rate case with the FERC.
For the year ended December 31, 2002, we generated operating revenues,
EBITDA (as defined in "Summary Historical Financial and Operating Data") and net
income of $297.6 million, $203.6 million and $80.6 million, respectively. For
the same period, net cash provided by operating activities was $136.5 million,
total gas volume throughput was 729 TBtu and our average daily transportation
volume and firm reserved capacity were 2.0 TBtu and 2.9 TBtu, respectively.
We are a wholly-owned subsidiary of Williams Gas Pipeline Company LLC
("WGP"), which is a wholly-owned subsidiary of The Williams Companies, Inc.
("Williams"). Williams is a diversified energy company which has been active in
constructing gas pipelines since 1916 and in operating interstate natural gas
pipelines since 1983, when it purchased our company. See "-- Our Relationship
with Williams" and "Risk Factors -- Risks Relating to Our Ownership by
Williams."
COMPETITIVE STRENGTHS
Stable, Recurring Revenues Contracted Under Long-Term Firm Agreements. For
the year ended December 31, 2002, approximately 90% of our operating revenues
were generated under long-term firm transportation and storage agreements. Our
transportation and storage agreements are generally contracted on a long-term
basis and our rates are substantially collected through fixed demand charges. As
a result, fluctuations in natural gas prices and actual volumes transported and
stored have a limited impact on our operating revenues. The average remaining
primary term of our long-term firm agreements is approximately
5
8.9 years on a volume-weighted basis. Our long-term firm agreements generally
contain year-to-year automatic renewals at the end of the primary term, unless a
termination notice is given by the customer. We do not have any substantial
transportation and storage agreements expiring in 2003. Agreements representing
14% of our total long-term firm capacity expire in 2004, and as a result of
rollover provisions will become year-to-year contracts at such time, unless
terminated or extended for a longer term. No single agreement which expires
during the next 10 years represents more than 12% of our total long-term firm
capacity. Additionally, we only invest in infrastructure expansion on the basis
of long-term firm commitments (of at least 15 years) from customers for the
additional capacity or with customer commitments for support of improvements to
existing facilities. We have historically experienced minimal bad debt expense
due to the relatively strong credit quality of most of our customers and the
extensive credit screening process we conduct on all of our customers.
Sole Provider in Significant Geographic Markets. Our natural gas pipeline
system transports substantially all of the natural gas to the metropolitan areas
of Seattle, Washington; Portland, Oregon; and Boise, Idaho, which represent most
of our primary market areas. Although we do not face significant competition in
many of our market areas, we consistently strive to provide high quality
customer service. In 2002, we received our highest rating ever in our annual
customer satisfaction survey conducted by Energy Insights, a third-party energy
consulting firm. We believe our consistently high level of customer satisfaction
is due to our flexible, reliable services as well as the customized
transportation solutions we offer to our customers at prices generally lower
than those of our competitors.
Efficient Operations Resulting in a Competitive Cost Structure. The
efficient operation of our pipeline system enables us to position ourselves as
the low cost, high quality provider of transportation and storage services in
our major market areas. We have attained our competitive cost structure by
exercising strict expense and capital spending discipline, utilizing the same
physical pipeline facilities to provide simultaneous gas transportation services
in two directions, and expanding our facilities to complement our existing
infrastructure and geographic markets. By maintaining low costs, we maximize our
earnings and cash flows and increase the probability of earning a rate of return
on equity that is at least equal to the regulated return as set by the FERC, and
avoid the need to file new rate cases with the FERC.
Flexible Pipeline Operations with Diversified Natural Gas Supplies. Our
pipeline system is designed on a bi-directional basis, which allows us to
provide gas transportation services both north and south simultaneously on the
system. Because we can transport gas from the San Juan and Rockies basins in the
south, as well as from Canada in the north, we are able to provide our customers
with low cost supply alternatives and flexible service options. Through our
system storage and Park and Loan service, we provide our customers flexibility
in helping them manage their gas supply and transportation balancing needs.
Strong Management Team. Our operating management team has an average
tenure of more than 13 years managing Williams' gas pipeline systems. Our
management has an intense focus on operating our assets efficiently while
providing a high level of service to our customers. This team also has a
comprehensive understanding of the regulatory environment under which we
operate. The depth and strength of our management has enabled us to identify and
capitalize on expansion and growth opportunities.
BUSINESS STRATEGY
Our primary strategy is to safely and efficiently operate our facilities
and opportunistically invest in new infrastructure to meet the growing demands
of our market areas. The principal elements of our business strategy are to:
Maintain Safe and Reliable Operations with a High Degree of Customer
Satisfaction. We intend to continue to operate our transportation and storage
facilities in a safe manner for our communities, customers, employees and the
environment. We believe our record of long-term customer relationships and
contract extensions is due to our reliable and flexible transportation and
storage services as well as the relatively lower rates we offer our customers.
6
Continue to Efficiently Operate and Reduce Costs in Our Existing
Operations. We believe we can generate additional revenue and operating income
by increasing and optimizing throughput on our existing pipeline assets and
realizing cost savings through continued operational efficiencies. Because of
our relatively low variable costs in operating our facilities, increasing
revenues directly leads to increased cash flow and improved margins. We believe
we can further reduce our costs by minimizing capital expenditures for
maintenance items that do not impact pipeline safety, security or performance
and by continuing to implement our strict operating expense discipline.
Strategically Expand Our Natural Gas Transportation Infrastructure. We
believe that the demand for natural gas in the Pacific Northwest will continue
to increase due to the growing preference for natural gas in residential and
commercial markets, as well as for use in power generation facilities in
response to environmental concerns. We believe this growth in demand will
support future expansions of our mainline and lateral capacity. We intend to
capitalize on our existing infrastructure, market position and customer
relationships in order to expand operations to meet the anticipated increased
demand for natural gas transportation and storage services, while maintaining
access to substantial sources of natural gas supply. We have expanded our
infrastructure on the basis of long-term firm commitments (of at least 15 years)
from customers for the additional capacity or with customer commitments for
support of improvements to existing facilities. The following table summarizes
our current major expansion projects:
<Table>
<Caption>
ROCKIES EVERGREEN COLUMBIA GORGE
------------------ --------------- ------------------
Location.................... Wyoming, Idaho Washington Oregon, Washington
Timing:
Application Filed......... August 29, 2001 October 3, 2001 October 3, 2001
FERC Certification........ September 23, 2002 June 27, 2002 June 27, 2002
Start Construction........ May 2003 October 2002 May 2003
Expected In-Service
Date................... November 1, 2003 October 1, 2003 November 1, 2003
Additional Capacity:
Daily Capacity............ 175,000 Dth 276,625 Dth 56,000 Dth
Pipeline Miles............ 91 28 NA
Horsepower................ 26,057 64,160 24,030
Estimated Total Capital
Cost(1)................... $140 million(2) $198 million $43 million
Investment as of December
31, 2002.................. $11.3 million $53.5 million $5.6 million
</Table>
- ---------------
(1) Includes a small portion of the capital expenditures expected to be made
during 2004 and allowance for funds used during construction, neither of
which is reflected in our estimated 2003 capital expenditures.
(2) Approximately $16 million of the estimated total capital cost is expected to
be offset by settlement funds from a former customer associated with a
contract restructuring.
Our 2002 capital expenditures totaled approximately $182 million, of which
approximately $33 million was for maintenance and other non-expansion purposes.
We anticipate 2003 capital expenditures will total approximately $330 million,
of which approximately $63 million is anticipated to be for maintenance and
other non-expansion purposes.
RECENT DEVELOPMENTS
2002 Financial Results. Our financial results for the year ended December
31, 2002 included the following:
- operating revenues of $297.6 million, an increase of $12.4 million, or
4%, over the prior year's operating revenues of $285.2 million, due
primarily to facility charge revenues of $3.6 million from incremental
projects put into service during 2002, new reservation charges of $1.5
million and higher short-term firm transportation revenues, partially
offset by a $1.6 million decrease in tracked fuel costs and Gas Research
Institute charges billed to customers. Transportation services accounted
for 91% and 93% of
7
operating revenues for the years ended December 31, 2002 and 2001,
respectively. Additionally, gas storage services represented 3% of
operating revenues in each of the years ended December 31, 2002 and 2001;
- EBITDA of $203.6 million, an increase of $9.5 million, or 5%, over the
prior year's EBITDA of $194.1 million;
- operating income of $144.6 million, an increase of $9.2 million, or 7%,
over the prior year's operating income of $135.4 million, due to the
higher revenues discussed above, partially offset by higher operating
expenses of $3.2 million, which included $3.9 million related to an
enhanced-benefit early retirement option offered to certain Williams
employee groups; and
- net income of $80.6 million, an increase of $13.6 million, or 20%, over
the prior year's net income of $67.0 million, due to the reasons
discussed above combined with reduced charitable contributions and lower
interest charges.
Completed Expansion Project. On November 1, 2002, we placed in service our
Grays Harbor Lateral project. This lateral pipeline is designed to provide
161,500 Dth per day of firm transportation capacity to serve a new power
generation plant in the state of Washington. The Grays Harbor Lateral project
was requested by one of our customers and included installation of 49 miles of
20-inch pipeline, the addition of 4,700 horsepower at an existing compressor
station and a new meter station. The cost of the lateral project was
approximately $92 million. The customer has suspended construction of the
contemplated new power generation plant, but that does not affect its obligation
to pay for the cost of service of the lateral pipeline on an incremental rate
basis. The Grays Harbor Lateral project is based on a 30-year contract and is
expected to generate approximately $22 million of operating revenues in its
first twelve months of operations.
OUR RELATIONSHIP WITH WILLIAMS
We are a wholly-owned subsidiary of WGP, which is a wholly-owned subsidiary
of Williams. Williams is an integrated energy company engaged in the
transportation, processing and storage of natural gas, exploration and
production of natural gas, transportation and distribution of petroleum products
and energy marketing and risk management. Williams' principal operations are
conducted through the following business segments:
- Gas Pipelines: owns and operates Transcontinental Gas Pipe Line
Corporation and Texas Gas Transmission Corporation in addition to our
company. Transcontinental Gas Pipe Line Corporation consists of an
approximately 10,400-mile pipeline system extending from south Texas to
the New York City metropolitan area. Texas Gas Transmission Corporation
consists of an approximately 5,800-mile pipeline system extending from
the Louisiana Gulf Coast and east Texas to the mid-South, lower Midwest
and Northeast.
- Exploration & Production: produces, develops, explores for and manages
natural gas reserves primarily located in the San Juan Basin and Rocky
Mountain region of the United States. As of December 31, 2002, Williams
had proved natural gas reserves of 2.85 Tcf.
- Midstream Gas & Liquids: owns and operates natural gas gathering,
processing and treating facilities throughout the U.S. and Canada.
- Energy Marketing & Trading: buys, sells and transports natural gas,
refined products, natural gas liquids, crude oil, propane, liquefied
natural gas and liquid petroleum gas and provides risk management and
other energy related services.
On February 20, 2003, Williams announced its intent to sell Texas Gas
Transmission Corporation, its general and limited partner interests in Williams
Energy Partners L.P. (the owner of, among other things, a 6,700-mile refined
petroleum products pipeline system) and selected assets from Exploration &
Production and Midstream Gas & Liquids.
8
Williams' Business Structure
[Flow Chart]
During July 2002, the major rating agencies downgraded Williams' unsecured
long-term credit ratings to below investment grade, reflecting the uncertainty
associated with Williams' energy trading business, short-term cash requirements
facing Williams and the increased level of debt Williams had incurred to meet
payment obligations and guarantees associated with Williams Communications
Group, Inc. ("WCG"), a former Williams affiliate. In July 2002, Williams
completed a series of transactions to address then-current liquidity issues and
to strengthen its finances. Williams amended and restated its $700 million
revolving credit facility and provided security thereunder, and also entered
into a new $400 million secured letter of credit facility. A Williams subsidiary
also entered into a $900 million senior secured credit agreement. These
facilities include pledges of certain assets and contain financial ratios that
must be maintained and other covenants. If such provisions of these agreements
are not complied with, financing commitments could be terminated and amounts
outstanding could become due and payable immediately.
The liquidity issues experienced by Williams during 2002, combined with
deteriorating conditions in the general energy trading sector resulting from
credit and regulatory concerns, limited the ability of Williams Energy Marketing
& Trading ("WEM&T") to attract new business, manage market risk and execute
hedging strategies. Williams has experienced substantial net losses due to the
segment losses incurred by WEM&T as a result of a significant decline in the
forward mark-to-market value of its portfolio, the partial impairment of
goodwill and the conditions in the energy trading market previously noted. In
August 2002, Williams announced its intention to further reduce its commitment
and exposure to WEM&T.
In July 2002, Williams announced an agreement in principle with the state
of California and other parties including Washington and Oregon on a global
settlement regarding outstanding litigation and claims against Williams,
including the state's claims for refunds at issue with the FERC. In November
2002, Williams announced that it had agreed to restructure its long-term energy
contracts with the state of California as part of the global settlement. All
necessary approvals were obtained, and the settlement was finalized in December
2002. The settlement resolved most of Williams' outstanding litigation and civil
claims related to natural gas and power markets with the states of California,
Washington and Oregon.
Our assets have not been pledged to secure any indebtedness of Williams or
its other affiliates, but Williams' credit facilities contain restrictions on
our ability to limit loans or advances to Williams or dividends to Williams on
our capital stock. Our principal exposure to the credit difficulties of Williams
relates to its indirect ownership of all of our common stock and the impact of
that relationship if Williams were to become insolvent, and the advances we have
made or may hereafter make indirectly to Williams under its cash management
program. For additional discussion of our exposure to the credit difficulties of
Williams, see "Risk Factors -- Risks Relating to our Ownership by Williams."
---------------------
We were incorporated in Delaware in 1965. Our principal executive offices
are located at 295 Chipeta Way, Salt Lake City, Utah 84108, and our telephone
number is (801) 583-8800.
9
RISK FACTORS
Prospective purchasers of the notes offered hereby should carefully
consider all information contained in this prospectus, including the risk
factors beginning on page 12.
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table summarizes our historical financial and operating data,
which you should read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and related notes contained herein. The summary financial data as of December
31, 2001 and 2002 and for each of the years in the three-year period ended
December 31, 2002 have been derived from our audited financial statements
included elsewhere in this prospectus. "Operating Data" below are not directly
derived from our financial statements, but have been presented to provide
additional data for your analysis.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Operating Revenues............................... $ 296,361 $ 285,171 $ 297,591
Operating Income................................. 149,862 135,419 144,634
Net Income....................................... 79,742 67,041 80,631
BALANCE SHEET (END OF PERIOD):
Cash and Cash Equivalents........................ $ 1,890 $ 443 $ 207
Working Capital(1)............................... 13,427 36,708 7,720
Net Property, Plant & Equipment.................. 933,560 967,643 1,094,741
Total Assets..................................... 1,104,079 1,143,744 1,222,849
Current Maturities of Long-Term Debt............. 1,667 -- 7,500
Long-Term Debt, less current maturities.......... 369,146 367,503 360,023
Total Debt....................................... 370,813 367,503 367,523
Common Stockholder's Equity...................... 469,381 516,422 593,839
Total Capitalization(2).......................... 838,527 883,925 953,862
OTHER FINANCIAL DATA:
Interest Charges................................. $ 31,914 $ 30,524 $ 25,627
Maintenance Capital Expenditures................. 32,176 41,313 27,134
Total Capital Expenditures....................... 47,933 94,923 181,843
Net Cash Provided by Operating Activities........ 155,572 105,906 136,487
Net Cash Used by Investing Activities............ (72,357) (84,024) (136,723)
Net Cash Used by Financing Activities............ (81,667) (23,329) --
EBITDA(3)........................................ 206,420 194,073 203,622
OPERATING DATA:
Total Throughput (TBtu).......................... 752 734 729
Average Daily Transportation Volumes (TBtu)...... 2.1 2.0 2.0
Average Daily Firm Reserved Capacity (TBtu)...... 2.7 2.7 2.9
</Table>
10
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
FINANCIAL RATIOS:
Long-Term Debt/Total Capitalization.............. 44.0% 41.6% 37.7%
EBITDA/Interest Charges.......................... 6.5x 6.4x 7.9x
Total Debt/EBITDA................................ 1.8x 1.9x 1.8x
Return on Equity(4).............................. 17.0% 13.6% 14.5%
Earnings/Fixed Charges(5)........................ 4.7x 4.2x 5.2x
PRO FORMA FINANCIAL RATIOS(6):
Long-Term Debt/Total Capitalization.............. 47.4%
EBITDA/Interest Charges.......................... 5.1x
Total Debt/EBITDA................................ 2.7x
</Table>
- ---------------
(1) Working capital is calculated as current assets minus current liabilities,
not including current maturities of long-term debt.
(2) Total capitalization is calculated as long-term debt (less current
maturities) plus common stockholder's equity.
(3) EBITDA (earnings before interest, taxes, depreciation and amortization) is
calculated as operating revenues minus the sum of general and administrative
expenses, operating and maintenance expenses and taxes other than income
taxes. EBITDA is presented here because it can be used as an indication of a
company's ability to incur and service debt and is commonly used as an
analytical indicator in our industry. EBITDA measures presented may not be
comparable to similarly titled measures used by other companies. EBITDA is
not a measurement presented in accordance with accounting principles
generally accepted in the United States ("GAAP") and we do not intend EBITDA
to represent cash flows from operations as defined by GAAP. You should not
consider EBITDA to be an alternative to net income, cash flows from
operations or any other items calculated in accordance with GAAP or an
indicator of our operating performance. The following are the components of
our EBITDA:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
(DOLLARS IN THOUSANDS)
Operating Revenues................................... $296,361 $285,171 $297,591
General and Administrative Expenses.................. (39,912) (40,657) (49,338)
Operation and Maintenance Expenses................... (36,666) (37,000) (32,279)
Taxes, other than Income Taxes....................... (13,363) (13,441) (12,352)
-------- -------- --------
EBITDA............................................... $206,420 $194,073 $203,622
======== ======== ========
</Table>
(4) Return on equity is calculated as net income divided by average common
stockholder's equity.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
are divided by fixed charges. "Earnings" represent the aggregate of (a) our
pre-tax income, and (b) fixed charges, net of interest capitalized. "Fixed
charges" represent interest (whether expensed or capitalized), the
amortization of total debt discount and expense and that portion of rentals
considered to be representative of the interest factor.
(6) Pro forma financial ratios reflect our financial ratios as adjusted to give
effect to the previous offering of the outstanding notes.
11
RISK FACTORS
You should consider carefully each of the following risks and all other
information contained in this prospectus before deciding to exchange your
outstanding notes for new notes. The risks and uncertainties described below are
not the only ones we face.
RISKS RELATING TO US AND OUR BUSINESS
DECREASES IN THE VOLUME OF NATURAL GAS CONTRACTED OR TRANSPORTED THROUGH OUR
PIPELINE SYSTEM FOR ANY OF THE REASONS DESCRIBED BELOW WILL ADVERSELY AFFECT
OUR BUSINESS.
Expiration of firm transportation agreements. For the year ended December
31, 2002, approximately 87% of our operating revenues were generated through
long-term firm transportation agreements and operating revenues related to the
contracts for which our 10 largest customers are responsible accounted for
approximately 80% of our operating revenues. The agreements with our largest
customer, Puget Sound Energy, Inc., are long-term contracts, many of which were
last amended in 1992 and which will become year-to-year contracts in 2004,
unless terminated or extended for a longer term. These contracts accounted for
13% of our operating revenues for the year ended December 31, 2002. Agreements
representing a majority of our contracted capacity are scheduled to expire
between 2007 and 2012. We cannot give any assurance as to whether any of these
contracts will be renewed or extended or as to the terms that may be applicable
to any such renewal or extension. A decision by customers upon the expiration of
our long-term agreements to substantially reduce or cease to ship volumes of
natural gas on our pipeline system could cause a significant decline in our
revenues. Our results could also be adversely affected by decreased demand for
interruptible and short-term firm transportation service, which accounted for 4%
of our operating revenues and a slightly greater percentage of our operating
profit for the year ended December 31, 2002.
Decreases in natural gas production. Our operating results are dependent
upon the continuing availability of supplies of natural gas. We depend on having
access to multiple sources of gas production, both in the United States and
Canada, in order to provide our customers with an overall lower cost for
delivered gas. Moreover, we do not have the ability to operate our pipeline
system at full capacity without access to multiple gas sources. The ability of
producers to maintain production is dependent on the prevailing market price of
natural gas, the exploration and production budgets of the major and independent
gas companies, the depletion rate of existing sources, the success of new
sources, environmental concerns, regulatory initiatives and other matters beyond
our control. There can be no assurance that production of natural gas will be
maintained at sufficient levels to sustain our expected volume of transportation
commitments on our pipeline system or that multiple sources will remain
available to provide our customers with access to low cost supplies.
Operational limitations. In order to satisfy our firm transportation
commitments, we depend on transporting gas from multiple sources and in two
directions. The availability of sufficient quantities of gas from multiple
sources at different points on our pipeline system permits us to fulfill certain
transportation obligations by displacement. If our displacement capability in
the future should be reduced as a result of declines in gas available to our
pipeline system, capacity limitations in certain portions of our pipeline system
would prevent physical movement and delivery of gas volumes to completely
replace the volumes now transported through displacement. Absent our
displacement capability, we also could not transport gas on any of our pipelines
in the opposite direction of the physical flow of gas within the pipeline and
could also be limited in our ability to provide all our customers with access,
at all times, to the lowest cost gas source available on our system. Our
contemplated expansion projects will not resolve all of the potential
limitations on our pipeline system, and additional expansion projects may
require more costly solutions. There can be no assurance that additional
expansion projects, beyond current plans, will result in lower cost deliveries
to our customers or increased returns for us. In addition, the relatively high
costs of any additional expansion projects may restrain our ability to meet
increased demand in our existing markets and to expand into new markets.
Decreases in demand for natural gas. Demand depends on the ability and
willingness of shippers with access to our facilities to satisfy their demand by
deliveries through our system. Any decrease in this demand could adversely
affect our business. Demand for natural gas is also dependent upon the impact of
weather,
12
future industrial and economic conditions, fuel conservation measures,
alternative fuel requirements, governmental regulation or technological advances
in fuel economy and energy generation devices, all of which are matters beyond
our control.
Competitive pressures. Although most of our pipeline system's current
capacity is contracted under long-term firm transportation service agreements,
the market for the transportation of natural gas through pipelines is
competitive. Other entities could construct new pipelines or expansions of
existing pipelines that could potentially serve the same markets as our pipeline
system. Any such new pipelines could offer transportation services that are more
desirable to shippers because of locations, facilities or other factors. These
new pipelines could charge rates or provide service to locations that would
result in greater net profit for shippers and producers and thereby force us to
lower the rates charged for service on our pipeline in order to extend our
existing transportation service agreements or to attract new customers. Although
we are not aware of any significant new pipeline proposals or expansions in our
market service areas, such projects are always possible in the future and
proposals are made from time to time. There can be no assurance that any such
proposed project might not proceed and increase the competitive pressures upon
us. In addition, because our rates are structured as "postage stamp" rates that
do not vary based on the transportation distance, our short-haul customers may
be attracted to possible alternatives with short-haul rates that would bypass
our system. An increase in the availability of bypass alternatives could
adversely affect our business.
REDUCTIONS OF OUR CREDIT RATINGS HAVE NEGATIVELY AFFECTED OUR COST OF CAPITAL
AND ANY ADDITIONAL REDUCTIONS IN OUR CREDIT RATING WILL FURTHER NEGATIVELY
AFFECT OUR COST OF, AND POSSIBLY OUR ACCESS TO, CAPITAL.
In July 2002, Moody's Investor Services, Standard & Poor's and Fitch
Ratings reduced the credit ratings on our unsecured long-term debt from Baa1,
BBB+ and BBB+ to Ba2, B+ and BB-, respectively. In November 2002, Moody's
Investor Services further lowered our credit rating to B3 from Ba2. Currently,
Moody's Investor Services and Standard & Poor's have our credit ratings on
"negative outlook" and "negative watch," respectively. As a result of those
downgrades, or any future downgrades in our credit ratings, our borrowing costs
have increased and may increase further and our access to capital may be
limited. In addition, the covenants in various debt instruments, including those
in Williams' credit agreements and the indenture for the notes offered hereby,
impose significant operating and financial restrictions upon us, which could
place us at a disadvantage relative to competitors not subject to such
limitations. These factors could materially and adversely affect our operating
and expansion plans.
Historically, we funded a portion of our capital requirements through a
sale of receivables program. In July 2002, this program expired and was not
renewed as a result of the loss of our investment grade rating.
WE MAY NOT BE ABLE TO BORROW UNDER OUR CREDIT FACILITY.
Williams and some of its subsidiaries, including us, are parties to a $700
million credit agreement, under which we can borrow up to $400 million. These
funds are only available to us to the extent they have not been borrowed by
Williams or other of its participating subsidiaries or otherwise must remain
available to Williams, and only to the extent the commitments under the credit
facility have not been reduced due to asset sales by Williams and its
subsidiaries. These commitments had been reduced to $463 million at December 31,
2002. Also, even if we are not in default under the credit agreement, a default
by Williams or other of its participating subsidiaries under the credit
agreement could cause the commitments available to us under the credit facility
to be terminated and any amounts borrowed by us to become immediately due and
payable.
CHANGES IN OUR REGULATORY ENVIRONMENT AND RECENT EVENTS IN THE ENERGY MARKETS
THAT ARE BEYOND OUR CONTROL MAY SIGNIFICANTLY AFFECT OUR BUSINESS AND OUR
ACCESS TO CAPITAL MARKETS.
Our rates and operations are subject to regulation by various state and
federal regulators as well as the actions of state and federal legislators. As a
result of the energy crisis in California during 2000 and 2001, the volatility
of natural gas prices in North America, the bankruptcy filings by certain energy
companies and investigations by governmental authorities into energy trading
activities, companies in the regulated and
13
unregulated utility businesses have generally been under an increased amount of
scrutiny by public, state and federal regulators, the capital markets and the
rating agencies. We cannot predict or control what effect these types of events,
or future actions of regulatory agencies in response to such events, may have on
our business or our access to the capital markets.
On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking
proposing to adopt uniform standards of conduct for transmission providers. The
proposed rules define transmission providers as interstate natural gas pipelines
and public utilities that own, operate or control electric transmission
facilities. The proposed standards would regulate the conduct of transmission
providers with their energy affiliates. The FERC proposed to define energy
affiliates broadly to include any transmission provider affiliate that engages
in or is involved in transmission (gas or electric) transactions, or manages or
controls transmission capacity, or buys, sells, trades or administers natural
gas or electric energy or engages in financial transactions relating to the sale
or transmission of natural gas or electricity. Current rules regulate our
conduct and the conduct of our gas marketing affiliates. The FERC's staff
analysis of the proposed rulemaking proposed redefining energy affiliates to
exclude affiliated transmission providers. If the proposed rules are adopted as
proposed, they would require new compliance measures which could result in
increased costs.
On August 1, 2002, the FERC issued a Notice of Proposed Rulemaking that
proposes restrictions on various types of cash management programs employed by
companies in the energy industry such as Williams and its subsidiaries. In
addition to stricter guidelines regarding the accounting for and documentation
of cash management or cash pooling programs, the FERC proposal, if made final,
would preclude public utilities, natural gas companies and oil pipeline
companies from participating in such programs unless the parent company and its
FERC-regulated affiliates maintain investment-grade credit ratings and the
FERC-regulated affiliates maintain stockholders' equity of at least 30% of total
capitalization. Williams' and our current credit ratings are non-investment
grade. Should this proposed rule be enacted, we would incur additional costs
from having to maintain separate treasury operations.
We periodically file general rate cases with the FERC. In our general rate
cases, the FERC establishes, among other things, our return on common equity,
overall rate of return, depreciation expenses and our cost of service. Although
we do not have any rate cases pending or any immediate plans to file one,
unfavorable rulings by the FERC in possible future general rate cases could
adversely impact our results of operation. In the case of our Rockies and
Columbia Gorge expansion projects, where our customers have agreed to support
the roll-in of expansion costs into our rates, we will not recover those costs
for periods prior to the roll-in of such costs into our rates until we file a
general rate case filing.
WE ARE SUBJECT TO NUMEROUS ENVIRONMENTAL LAWS AND REGULATIONS THAT MAY INCREASE
OUR COST OF OPERATIONS, IMPACT OR LIMIT OUR BUSINESS PLANS, OR EXPOSE US TO
ENVIRONMENTAL LIABILITIES.
Laws and regulations relating to environmental protection can result in
increased capital, operating and other costs. These laws and regulations
generally require us to obtain and comply with a wide variety of environmental
licenses, permits, inspections and other approvals, and may be enforced by both
public officials and private individuals. We cannot predict the initiation,
outcome or effect of any action or litigation that may arise from applicable
environmental regulations.
In addition, we may be required to be a responsible party for environmental
clean-up at sites identified by environmental agencies or regulatory bodies. We
cannot predict with certainty the identification of such sites, the imposition
of such clean-up obligations upon us or the amount and timing of future
expenditures related to environmental matters because of the difficulty of
estimating clean-up costs. There is also uncertainty in quantifying liabilities
under environmental laws that impose joint and several liability on all
potentially responsible parties. Environmental regulations may also require us
to install pollution control equipment at, or perform environmental remediation
on, our facilities.
Existing environmental regulations may be revised or new regulations may be
adopted or become applicable to us. Revised or additional regulations imposed on
us, which may result in increased compliance costs or additional operating
restrictions, could have a material adverse effect on our financial condition
and results of operations, particularly if those costs are not fully recoverable
from our customers.
14
Furthermore, we may not be able to obtain or maintain all environmental
regulatory approvals necessary to our business. If there is a delay in obtaining
any required environmental regulatory approval, including in the case of future
expansion projects, or if we fail to obtain, maintain or comply with any such
approval, operations at our affected facilities could be halted or subjected to
additional costs.
SUBSTANTIAL OPERATIONAL RISKS ARE INVOLVED IN OPERATING A NATURAL GAS PIPELINE
SYSTEM.
There are risks associated with the operation of a complex pipeline system,
such as operational hazards and unforeseen interruptions caused by events beyond
our control. These include adverse weather conditions, accident, the breakdown
or failure of equipment or processes, the performance of pipeline facilities
below expected levels of capacity and efficiency, and catastrophic events such
as explosions, fires, earthquakes, floods, landslides or other similar events
beyond our control. A casualty occurrence might result in injury or loss of
life, extensive property damage or environmental damage. Liabilities incurred,
and interruptions to the operation of our pipeline caused by such an event,
could reduce revenues generated by us and increase our expenses, thereby
impairing our ability to meet our obligations and to make payments under the
notes. Although we have insurance to protect against these risks, insurance
proceeds may not be adequate to cover all liabilities or expenses incurred or
revenues lost.
WE ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS IN THE ORDINARY COURSE OF
OUR BUSINESS.
We are exposed to the credit risk of our customers in the ordinary course
of our business. Generally our customers are rated investment grade or are
required to make pre-payments or provide security to satisfy credit concerns.
However, we cannot predict at this time to what extent our business may be
impacted by the deteriorating conditions in the energy sector, including
declines in our customers' creditworthiness.
TERRORISM AND THE UNCERTAINTY OF WAR MAY ADVERSELY AFFECT OUR FUTURE GROWTH AND
OPERATING RESULTS.
The long-range impact that terrorist attacks or war may have on the energy
industry in general, and on us in particular, is not predictable at this time.
Uncertainty regarding a military campaign may affect our business in
unpredictable ways, including disruptions of fuel supplies and markets, and it
is possible that our infrastructure facilities could be direct targets or
indirect casualties of an act of terror. Should new regulatory requirements
regarding the security of our pipeline system be imposed, we could be subject to
additional costs which could adversely affect our financial condition and
results of operations.
RISKS RELATING TO OUR OWNERSHIP BY WILLIAMS
WE MAY BE ADVERSELY AFFECTED BY THE FINANCIAL CONDITION, LIQUIDITY PROBLEMS AND
POSSIBLE BANKRUPTCY OF WILLIAMS AND ITS AFFILIATES.
We are an indirect wholly-owned subsidiary of Williams. Substantially all
of Williams' operations are conducted through its subsidiaries. Williams' cash
flows are substantially derived from loans and dividends paid to it by its
subsidiaries, including WGP, our parent company under which Williams' interstate
natural gas pipelines and gas pipeline joint venture investments are grouped.
Williams' cash flows are typically utilized to service debt and pay dividends on
common stock of Williams, with the balance, if any, reinvested in its
subsidiaries as contributions to capital.
As a participant in Williams' cash management program, we make advances to
and receive advances from Williams through WGP. These advances are represented
by demand notes. In regard to these advances and to the extent we advance
Williams funds in the future, we cannot assure you that Williams or WGP will
have the ability to repay us or to repay us on demand. Moreover, we cannot
assure you that Williams will continue to advance funds to us in the future. For
the 24-month period ended December 31, 2002, net advances to Williams from us
have been as high as approximately $80 million in May 2001 and as low as
approximately $17 million at December 31, 2002. We intend to utilize the
proceeds from the offering of the outstanding notes for general corporate
purposes, including the funding of capital expenditures. Pending such
utilization, we intend to invest such proceeds in cash and cash equivalents,
however, we are not contractually
15
prohibited from including these proceeds in Williams' cash management program.
Although Williams has indicated that it will continue to have the financial
resources and liquidity to repay advances made by us, we cannot assure you that
Williams or WGP will continue to have such financial resources and liquidity in
the future.
Williams has a substantial amount of debt and other obligations including
its exposure attributable to WEM&T. Williams' liquidity problems have limited
WEM&T's ability to manage market risk and exercise hedging strategies as market
conditions have deteriorated, which in turn has required Williams to allocate
additional liquidity to WEM&T. WEM&T and other Williams entities have also been
parties to extensive litigation relating to trading activities and the
California energy crisis, as well as shareholder and other litigation. Although
much of the California litigation was settled in December 2002, Williams remains
subject to potentially material litigation and possible regulatory responses.
We expect that Williams' recent financial difficulties, together with the
provisions contained in various credit agreements to which Williams is a party,
will severely restrict the ability of Williams and WGP to make future capital
contributions to us or to guarantee our obligations. Williams has agreed in its
credit agreements to restrict its subsidiaries, including us, from taking
certain actions, including agreeing to restrictions on their ability to make
dividend and other payments or make loans to Williams, WGP and its other
subsidiaries.
In July 2002, all of the major credit ratings agencies downgraded the
credit ratings on the unsecured long-term debt of Williams and all of its
subsidiaries to below investment grade. In November 2002 Moody's Investor
Services further downgraded Williams' and our credit ratings. Currently, Moody's
Investor Services and Standard & Poor's have our credit ratings on "negative
outlook" and "negative watch," respectively. As of the date hereof, Williams'
unsecured long-term debt ratings are Caa1 from Moody's Investor Services, B from
Standard & Poor's and B- from Fitch Ratings. As a result of the downgrades,
Williams' ability to service its debt obligations and refinance its maturing
debt as it becomes due has become uncertain. The terms of Williams' credit
facilities, particularly those negotiated in July and amended in October 2002
(including the credit agreement to which we are a party as a borrower), have
imposed significant new restrictions on Williams and its subsidiaries and their
financial and operating flexibility. Williams is not currently able to access
various financing sources formerly available to it, including the commercial
paper market. In an effort to reduce its leverage, Williams commenced a series
of asset sales in mid-2002, with substantially all the net proceeds being
applied to reduce debt and lending commitments. As of December 31, 2002,
Williams had cash and cash equivalents of approximately $1.7 billion. Williams
has scheduled debt retirements through the first quarter of 2004 of
approximately $3.8 billion (which includes certain contractual fees associated
with the underlying debt), of which approximately $1.2 billion comes due in July
2003 and $1.5 billion comes due in the first quarter of 2004, and expected
capital expenditures through 2003 of between $900 million and $1.05 billion.
Williams has announced that it intends to meet its liquidity needs over those
periods through a combination of cash flow from operations, refinancings and
asset sales. Realization of the proceeds from forecasted asset sales is a
significant element for Williams to satisfy one of its loan provisions regarding
minimum levels of parent liquidity, and we cannot assure you of the successful
execution of future asset sales, the realization of the anticipated proceeds or
the time required to complete the asset sales.
In the event that Williams' financial condition does not improve or becomes
worse, or if it fails to realize sufficient proceeds from its planned asset
sales, it may have to consider other options including the possibility of
seeking protection in a bankruptcy proceeding. We cannot predict with certainty
what impact a Williams bankruptcy would have on us. Under the equitable doctrine
of substantive consolidation, a bankruptcy court may consolidate and pool the
assets and liabilities of a subsidiary with those of its parent. We cannot
assure you that Williams, WGP or their creditors would not attempt to advance
substantive consolidation claims in the event of a Williams bankruptcy
proceeding or, if advanced, how a bankruptcy court would resolve the issue. If a
bankruptcy court were to allow the substantive consolidation of our assets and
liabilities in the context of a Williams bankruptcy filing, our financial
condition, operations and ability to meet our obligations with respect to the
notes would be materially adversely affected.
16
WILLIAMS CAN EXERCISE SUBSTANTIAL CONTROL OVER OUR DIVIDEND POLICY AND OUR
BUSINESS AND OPERATIONS AND MAY DO SO IN A MANNER THAT IS ADVERSE TO OUR OR
YOUR INTERESTS.
Our board of directors, which is elected by WGP, which in turn is
controlled by Williams, exercises substantial control over our business and
operations and makes determinations with respect to, among other things, the
following:
- payment of dividends and extension of advances;
- decisions on financings and our capital raising activities;
- mergers or other business combinations; and
- acquisition or disposition of assets.
Our board of directors could decide to increase dividends or advances to
our parent entities. This could adversely affect our liquidity. Moreover,
various Williams credit facilities include covenants prohibiting restrictions on
the ability of Williams entities, including us, to make advances to Williams and
its other subsidiaries, which could make the terms on which we may be able to
secure additional financing in the future less favorable.
RISKS RELATING TO THE NOTES
THE NOTES IMPOSE RESTRICTIONS ON US THAT MAY ADVERSELY AFFECT OUR ABILITY TO
OPERATE OUR BUSINESS.
The notes contain covenants that restrict, among other things, our ability
to:
- incur additional indebtedness and issue preferred stock;
- enter into asset sales;
- enter into transactions with affiliates;
- incur liens on assets to secure certain debt;
- engage in certain business activities; and
- engage in certain mergers or consolidations and transfers of assets.
Our ability to comply with these covenants may be affected by many events
beyond our control, and we cannot assure you that our future operating results
will be sufficient to comply with the covenants, or in the event of a default,
to remedy that default. Our failure to comply with those financial covenants
could result in default, which could cause the notes (and by reason of
cross-default provisions, other indebtedness) to become immediately due and
payable. If such an event of default occurs and we are not able to remedy or
obtain a waiver from such default, we may not have sufficient funds to repay the
notes.
THE NOTES CONTAIN ONLY LIMITED RESTRICTIONS ON DIVIDENDS AND INTERCOMPANY
ADVANCES.
For so long as our credit facility and various other agreements are in
place, the notes will not by their terms prohibit us from paying dividends or
distributions or making loans or advances to Williams and its other
subsidiaries.
WE MAY BE UNABLE TO PURCHASE THE NOTES UPON A CHANGE OF CONTROL.
If a change of control were to occur, the terms of our credit agreement and
other credit facilities of Williams would currently limit our ability to
purchase your notes. Our future debt agreements and Williams' debt agreements
may contain similar restrictions and provisions. The notes require that, upon
the occurrence of a change of control, we must offer to purchase all of the
outstanding notes after first obtaining necessary waivers or causing Williams or
the relevant borrowers to obtain waivers or prepay our credit agreement and
other debt of Williams or such borrower that might otherwise prohibit such
purchase. Accordingly, we may not be able to satisfy our obligations to purchase
your notes unless we are able to refinance or waivers are
17
obtained under all of these credit facilities and other indebtedness with
similar restrictions. Any failure to obtain these necessary waivers and make
this offer to purchase, or to repay holders tendering notes, upon a change of
control will result in an event of default under the notes. We cannot assure you
that we will have the financial resources to purchase your notes, particularly
if that change of control event triggers a similar repurchase requirement for,
or results in the acceleration of, other indebtedness. See "Description of Other
Indebtedness" and "Description of Notes -- Repurchase at the Option of
Holders -- Change of Control."
WE MAY NOT BE ABLE TO SERVICE OUR DEBT.
Our ability to pay or to refinance our indebtedness, including the notes,
will depend upon our future operating performance, which will be affected by
general economic, financial, competitive, legislative, regulatory, business and
other factors beyond our control.
We anticipate that our operating cash flow, together with money we
anticipate being available to us to borrow under our credit facility and through
other sources including further issuances, if needed, in the capital markets,
will be sufficient to meet anticipated future operating expenses, to fund
capital expenditures and to service our debt as it becomes due. However, we
cannot assure you that our business will generate sufficient cash flow from
operations, or that we will be able to borrow additional funds in amounts
sufficient to enable us to pay our indebtedness, including the notes, or to fund
our other liquidity needs. Williams, we and certain of Williams' other
subsidiaries are parties to a secured credit facility. Our ability to borrow
under that facility depends not only on our financial performance but also on
the ability of those other parties to comply with their obligations under the
facility. The amount of funds available to us under that facility will be
diminished at any time at which other borrowers under the facility are borrowing
under it or if the commitments under it are reduced due to future asset sales of
Williams and its subsidiaries.
RESTRICTIVE COVENANTS IN OUR CREDIT FACILITY MAY ADVERSELY AFFECT US.
Our credit facility contains restrictive covenants that will prohibit us
from prepaying our indebtedness, including the notes, and also require us to
maintain specified financial ratios and satisfy other financial condition tests.
Williams is also party to various other debt agreements that contain similar and
additional restrictions on our activities. It is not within our control to
ensure that all of these conditions are met at any time under our credit
facility or Williams' other agreements. A breach of any of these covenants would
result in an event of default under the credit facilities. Upon the occurrence
of an event of default under our credit facility, the lenders could elect to
declare all amounts outstanding under the credit agreement to be immediately due
and payable and terminate all commitments to extend further credit. By reason of
cross-default provisions in our other debt instruments, including the indenture
for the notes, much of our other indebtedness could also become immediately due
and payable at that time as well. If the lenders under the credit agreement
accelerate the repayment of any loans outstanding to us, we cannot assure you
that we will have sufficient assets to repay amounts outstanding under the
credit facility and our other indebtedness, including the notes.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES AND ANY FUTURE SUBSIDIARY
GUARANTEES IS UNSECURED AND WILL BE EFFECTIVELY SUBORDINATED TO ANY FUTURE
SECURED INDEBTEDNESS.
We have agreed in the indenture that the notes will be guaranteed by our
future subsidiaries unless we choose to designate any such subsidiary as an
unrestricted subsidiary pursuant to the indenture. The notes will not be
guaranteed by Williams. The notes and any guarantees by a future guarantor
subsidiary will be effectively subordinated to claims of creditors under any
secured debt that we or such guarantor subsidiary may issue or incur. Although
we have no active subsidiaries at the time of this offering, we may in the
future have one or more subsidiaries that, under certain circumstances, are not
required to become guarantors. In that case, the notes would be effectively
subordinated to the claims of all creditors, including trade creditors and tort
claimants, of our subsidiaries that are not guarantors. In the event of the
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up
of the business of a subsidiary that is not a guarantor, creditors of that
subsidiary would generally have the right to be paid in full before any
distribution is made to us or the holders of the notes.
18
YOU MAY HAVE DIFFICULTY SELLING ANY OUTSTANDING NOTES THAT YOU DO NOT EXCHANGE.
If you do not exchange your outstanding notes for the new notes offered in
this exchange offer, you will continue to be subject to the restrictions on the
transfer of your outstanding notes. Those transfer restrictions are described in
the indenture governing the outstanding notes and in the legend contained on the
outstanding notes, and arose because we originally issued the outstanding notes
under exemptions from, and in transactions not subject to, the registration
requirements of the Securities Act.
In general, you may offer or sell your outstanding notes only if they are
registered under the Securities Act and applicable state securities laws, or if
they are offered and sold under an exemption from those requirements. We do not
intend to register the outstanding notes under the Securities Act.
If a large number of outstanding notes are exchanged for new notes issued
in the exchange offer, it may be more difficult for you to sell your outstanding
notes. In addition, if you do not exchange your outstanding notes in the
exchange offer, you will no longer be entitled to exchange your outstanding
notes for registered notes or to have those outstanding notes registered under
the Securities Act. See "The Exchange Offer -- Consequences of Failure to
Exchange Outstanding Notes" for a discussion of the possible consequences of
failing to exchange your notes.
NO PUBLIC MARKET EXISTS FOR THE NOTES AND AN ACTIVE TRADING MARKET FOR THE NEW
NOTES MAY NOT DEVELOP.
The notes are a new issue of securities with no established trading market.
We do not intend to list the notes for trading on any national securities
exchange or arrange for any quotation system to quote prices for them. The
initial purchasers of the outstanding notes informed us after the completion of
the offering of the outstanding notes that they intended to make a market in
those notes and we anticipate that they will make a market in the new notes.
However, they are not obligated to do so and may cease market-making activities
at any time. As a result, we cannot assure you that an active trading market
will develop for the notes.
19
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
When we sold the outstanding notes on March 4, 2003, we entered into a
registration rights agreement with the initial purchasers of those notes. Under
the registration rights agreement, we agreed to file by June 2, 2003 a
registration statement for the exchange of the outstanding notes for new notes
registered under the Securities Act. This prospectus is a part of the
registration statement we have filed to satisfy our obligation. We also agreed
to use our commercially reasonable efforts to cause this registration statement
to be declared effective by the SEC by September 1, 2003. We also agreed to use
our reasonable best efforts to keep this registration statement effective until
the exchange offer is completed. The registration rights agreement provides that
we are required to pay liquidated damages to the holders of the outstanding
notes whose notes are subject to transfer restrictions if:
- by June 2, 2003, the registration statement for the exchange of the
outstanding notes for new notes registered under the Securities Act has
not been filed;
- by September 1, 2003, the registration statement for the exchange of the
outstanding notes for new notes registered under the Securities Act is
not declared effective; or
- the exchange offer has not been consummated on or before the 30th
business day, or longer, if required by the federal securities laws,
after the registration statement for the exchange of the outstanding
notes for new notes registered under the Securities Act is declared
effective.
A copy of the registration rights agreement is filed as an exhibit to the
registration statement.
TERMS OF THE EXCHANGE OFFER
This prospectus and the accompanying letter of transmittal together
constitute the exchange offer. Subject to the terms and conditions in this
prospectus and the letter of transmittal, we will accept for exchange
outstanding notes which are properly tendered on or before the expiration date
and are not withdrawn as permitted below. The expiration date for this exchange
offer is 5:00 p.m., New York City time, on May 28, 2003, or such later date and
time to which we, in our sole discretion, extend the exchange offer.
The form and terms of the new notes being issued in the exchange offer are
the same as the form and terms of the outstanding notes, except that the new
notes being issued in the exchange offer:
- will have been registered under the Securities Act;
- will not bear the restrictive legends restricting their transfer under
the Securities Act; and
- will not contain the registration rights and liquidated damages
provisions contained in the outstanding notes.
Notes tendered in the exchange offer must be in denominations of the
principal amount of $1,000 and any integral multiple of $1,000.
We expressly reserve the right, in our sole discretion:
- to extend the expiration date;
- to delay accepting any outstanding notes;
- if any of the conditions set forth below under "-- Conditions to the
Exchange Offer" has not been satisfied, to terminate the exchange offer
and not accept any outstanding notes for exchange; and
- to amend the exchange offer in any manner.
We will give oral or written notice of any extension, delay,
non-acceptance, termination or amendment as promptly as practicable by a public
announcement, and in the case of an extension, no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
20
During an extension, all outstanding notes previously tendered will remain
subject to the exchange offer and may be accepted for exchange by us. Any
outstanding notes not accepted for exchange for any reason will be returned
without cost to the holder that tendered them as promptly as practicable after
the expiration or termination of the exchange offer.
HOW TO TENDER OUTSTANDING NOTES FOR EXCHANGE
When the holder of outstanding notes tenders and we accept outstanding
notes for exchange, a binding agreement between us and the tendering holder is
created, subject to the terms and conditions in this prospectus and the
accompanying letter of transmittal. Except as set forth below, a holder of
outstanding notes who wishes to tender outstanding notes for exchange must, on
or prior to the expiration date:
(1) transmit a properly completed and duly executed letter of transmittal,
including all other documents required by such letter of transmittal,
to JPMorgan Chase Bank, the exchange agent, at the address set forth
below under the heading "-- The Exchange Agent"; or
(2) if outstanding notes are tendered pursuant to the book-entry procedures
set forth below, the tendering holder must transmit an agent's message
to the exchange agent at the address set forth below under the heading
"-- The Exchange Agent."
In addition, one of the following must occur:
(1) the exchange agent must receive the certificates for the outstanding
notes and the letter of transmittal;
(2) the exchange agent must receive, prior to the expiration date, a timely
confirmation of the book-entry transfer of the outstanding notes being
tendered into the exchange agent's account at the Depository Trust
Company, or DTC, along with the letter of transmittal or an agent's
message; or
(3) the holder must comply with the guaranteed delivery procedures
described below.
The term "agent's message" means a message, transmitted to DTC and received by
the exchange agent and forming a part of a book-entry transfer, referred to as a
"book-entry confirmation," which states that DTC has received an express
acknowledgment that the tendering holder agrees to be bound by the letter of
transmittal and that we may enforce the letter of transmittal against such
holder.
The method of delivery of the outstanding notes, the letters of transmittal
and all other required documents is at the election and risk of the holders. If
such delivery is by mail, we recommend registered mail, properly insured, with
return receipt requested. In all cases, you should allow sufficient time to
assure timely delivery. No letters of transmittal or notes should be sent
directly to us.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the outstanding notes surrendered for
exchange are tendered:
(1) by a holder of outstanding notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
(2) for the account of an eligible institution.
An "eligible institution" is a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
If signatures on a letter of transmittal or notice of withdrawal are
required to be guaranteed, the guarantor must be an eligible institution. If
outstanding notes are registered in the name of a person other than the signer
of the letter of transmittal, the outstanding notes surrendered for exchange
must be endorsed by, or accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by us in our sole
discretion, duly executed by the registered holder with the holder's signature
guaranteed by an eligible institution.
21
We will determine all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of outstanding notes tendered for
exchange in our sole discretion. Our determination will be final and binding. We
reserve the absolute right to:
(1) reject any and all tenders of any outstanding note improperly tendered;
(2) refuse to accept any outstanding note if, in our judgment or the
judgment of our counsel, acceptance of the outstanding note may be
deemed unlawful; and
(3) waive any defects or irregularities or conditions of the exchange offer
as to any particular outstanding note either before or after the
expiration date, including the right to waive the ineligibility of any
holder who seeks to tender outstanding notes in the exchange offer.
Our interpretation of the terms and conditions of the exchange offer as to
any particular notes either before or after the expiration date, including the
letter of transmittal and the instructions to it, will be final and binding on
all parties. Holders must cure any defects and irregularities in connection with
tenders of notes for exchange within such reasonable period of time as we will
determine, unless we waive such defects or irregularities. Neither we, the
exchange agent nor any other person will be under any duty to give notification
of any defect or irregularity with respect to any tender of outstanding notes
for exchange, nor will any of us incur any liability for failure to give such
notification.
If a person or persons other than the registered holder or holders of the
outstanding notes tendered for exchange signs the letter of transmittal, the
tendered outstanding notes must be endorsed or accompanied by appropriate powers
of attorney, in either case signed exactly as the name or names of the
registered holder or holders that appear on the outstanding notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any notes or any power of attorney,
such persons should so indicate when signing, and you must submit proper
evidence satisfactory to us of such person's authority to so act unless we waive
this requirement.
By tendering, each holder will represent to us that, among other things,
the person acquiring new notes in the exchange offer is obtaining them in the
ordinary course of its business, whether or not such person is the holder, and
that neither the holder nor such other person has any arrangement or
understanding with any person to participate in the distribution of the new
notes. If any holder or any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of our company, or is engaged in or intends
to engage in or has an arrangement or understanding with any person to
participate in a distribution of the new notes, such holder or any such other
person:
(1) may not rely on the applicable interpretations of the staff of the SEC;
and
(2) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for the outstanding notes, where such outstanding notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes. See "Plan of Distribution."
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES ISSUED IN
THE EXCHANGE OFFER
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all outstanding notes
properly tendered and will issue new notes registered under the Securities Act.
For purposes of the exchange offer, we will be deemed to have accepted properly
tendered outstanding notes for exchange when, as and if we have given oral or
written notice to the exchange agent, with written confirmation of any oral
notice to be given promptly thereafter. See "-- Conditions to the Exchange
Offer" for a discussion of the conditions that must be satisfied before we
accept any notes for exchange.
22
For each outstanding note accepted for exchange, the holder will receive a
new note registered under the Securities Act having a principal amount equal to,
and in the denomination of, that of the surrendered outstanding note.
Accordingly, registered holders of new notes that are outstanding on the
relevant record date for the first interest payment date following the
consummation of the exchange offer will receive interest accruing from the issue
date of the outstanding notes, or, if interest has been paid, the most recent
date to which interest has been paid. Outstanding notes that we accept for
exchange will cease to accrue interest from and after the date of consummation
of the exchange offer. Under the registration rights agreement, we may be
required to make additional payments in the form of liquidated damages to the
holders of the outstanding notes under circumstances relating to the timing of
the exchange offer.
In all cases, we will issue new notes in the exchange offer for outstanding
notes that are accepted for exchange only after the exchange agent timely
receives:
(1) certificates for such outstanding notes or a timely book-entry
confirmation of such outstanding notes into the exchange agent's
account at DTC;
(2) a properly completed and duly executed letter of transmittal or an
agent's message; and
(3) all other required documents.
If for any reason set forth in the terms and conditions of the exchange
offer we do not accept any tendered outstanding notes, or if a holder submits
outstanding notes for a greater principal amount than the holder desires to
exchange, we will return such unaccepted or non-exchanged outstanding notes
without cost to the tendering holder. In the case of outstanding notes tendered
by book-entry transfer into the exchange agent's account at DTC, such
non-exchanged outstanding notes will be credited to an account maintained with
DTC. We will return the outstanding notes or have them credited to DTC as
promptly as practicable after the expiration or termination of the exchange
offer.
BOOK-ENTRY TRANSFERS
The exchange agent will make a request to establish an account at DTC for
purposes of the exchange offer within two business days after the date of this
prospectus. Any financial institution that is a participant in DTC's system must
make book-entry delivery of outstanding notes by causing DTC to transfer the
outstanding notes into the exchange agent's account at DTC in accordance with
DTC's procedures for transfer. Such participant should transmit its acceptance
to DTC on or prior to the expiration date or comply with the guaranteed delivery
procedures described below. DTC will verify such acceptance, execute a book-
entry transfer of the tendered outstanding notes into the exchange agent's
account at DTC and then send to the exchange agent confirmation of such
book-entry transfer. The confirmation of such book-entry transfer will include
an agent's message confirming that DTC has received an express acknowledgment
from such participant that such participant has received and agrees to be bound
by the letter of transmittal and that we may enforce the letter of transmittal
against such participant. Delivery of new notes issued in the exchange offer may
be effected through book-entry transfer at DTC as applicable. However, the
letter of transmittal or facsimile thereof or an agent's message, with any
required signature guarantees and any other required documents, must:
(1) be transmitted to and received by the exchange agent at the address set
forth below under "-- Exchange Agent" on or prior to the expiration
date; or
(2) comply with the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a holder of outstanding notes desires to tender such notes and the
holder's notes are not immediately available, or time will not permit such
holder's outstanding notes or other required documents to reach the
23
exchange agent before the expiration date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if:
(1) the holder tenders the outstanding notes through an eligible
institution;
(2) prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of
guaranteed delivery, substantially in the form we have provided, by
facsimile transmission, mail or hand delivery, setting forth the name
and address of the holder of the outstanding notes being tendered and
the amount of the outstanding notes being tendered. The notice of
guaranteed delivery will state that the tender is being made and
guarantee that within three New York Stock Exchange trading days after
the date of execution of the notice of guaranteed delivery, the
certificates for all physically tendered outstanding notes, in proper
form for transfer, or a book-entry confirmation, as the case may be,
together with a properly completed and duly executed letter of
transmittal or agent's message with any required signature guarantees
and any other documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange agent; and
(3) the exchange agent receives the certificates for all physically
tendered outstanding notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, together with a properly
completed and duly executed letter of transmittal or agent's message
with any required signature guarantees and any other documents required
by the letter of transmittal, within three New York Stock Exchange
trading days after the date of execution of the notice of guaranteed
delivery.
WITHDRAWAL RIGHTS
You may withdraw tenders of your outstanding notes at any time prior to
5:00 p.m., New York City time, on the expiration date.
For a withdrawal to be effective, you must send a written notice of
withdrawal to the exchange agent at one of the addresses set forth below under
"-- Exchange Agent." Any such notice of withdrawal must:
(1) specify the name of the person having tendered the outstanding notes to
be withdrawn;
(2) identify the outstanding notes to be withdrawn, including the principal
amount of such outstanding notes; and
(3) where certificates for outstanding notes are transmitted, specify the
name in which outstanding notes are registered, if different from that
of the withdrawing holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an eligible institution unless such holder is an
eligible institution. If outstanding notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawn outstanding notes and otherwise comply with the procedures of such
facility. We will determine all questions as to the validity, form and
eligibility (including time of receipt) of such notices and our determination
will be final and binding on all parties. Any tendered outstanding notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the exchange offer. Any outstanding notes which have been tendered
for exchange but which are not exchanged for any reason will be returned to the
holder of those notes without cost to the holder. In the case of outstanding
notes tendered by book-entry transfer into the exchange agent's account at DTC,
the outstanding notes withdrawn will be credited to an account maintained with
DTC for the outstanding notes. The outstanding notes will be returned or
credited to this account as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn notes may be re-
tendered by following one of the procedures described under "-- How to Tender
Outstanding Notes for Exchange" above at anytime on or prior to 5:00 p.m., New
York City time, on the expiration date.
24
CONDITIONS TO THE EXCHANGE OFFER
We are not required to accept for exchange, or to issue new notes in the
exchange offer for, any outstanding notes. We may terminate or amend the
exchange offer at any time before the acceptance of outstanding notes for
exchange if:
(1) any federal law, statute, rule or regulation is adopted or enacted
which, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer;
(2) any stop order is threatened or in effect with respect to either (i)
the registration statement of which this prospectus constitutes a part
or (ii) the qualification of the indenture under the Trust Indenture
Act of 1939, as amended;
(3) there is a change in the current interpretation by staff of the SEC
which permits the new notes issued in the exchange offer in exchange
for the outstanding notes to be offered for resale, resold and
otherwise transferred by such holders, other than broker-dealers and
any such holder which is an "affiliate" of our company within the
meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities
Act, provided that the new notes acquired in the exchange offer are
acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to
participate in the distribution of the new notes;
(4) there is a general suspension of or general limitation on prices for,
or trading in, securities on any national exchange or in the
over-the-counter market;
(5) any governmental agency creates limits that adversely affect our
ability to complete the exchange offer;
(6) there is any declaration of war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or the worsening of any such condition that existed at the time
that we commence the exchange offer;
(7) there is a change or a development involving a prospective change in
our business, properties, assets, liabilities, financial condition,
operations, results of operations taken as a whole, that is or may be
adverse to us; or
(8) we become aware of facts that, in our reasonable judgment, have or may
have adverse significance with respect to the value of the outstanding
notes or the new notes to be issued in the exchange offer.
The preceding conditions are for our sole benefit and we may assert them
regardless of the circumstances giving rise to any such condition. We may waive
the preceding conditions in whole or in part at any time and from time to time
in our sole discretion. If we do so, the exchange offer will remain open for at
least three business days following any waiver of the preceding conditions. Our
failure at any time to exercise the foregoing rights will not be deemed a waiver
of any such right and each such right will be deemed an ongoing right which we
may assert at any time and from time to time.
25
THE EXCHANGE AGENT
JPMorgan Chase Bank has been appointed as our exchange agent for the
exchange offer. All executed letters of transmittal should be directed to our
exchange agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
Main Delivery To:
JPMORGAN CHASE BANK
By mail, hand delivery or overnight courier:
<Table>
IF BY MAIL, TO: IF IN PERSON, TO: IF BY COURIER SERVICE, TO:
JPMorgan Chase Bank JPMorgan Chase Bank JPMorgan Chase Bank
Corporate Trust Services GIS Unit Trust Window Corporate Trust Services
2001 Bryan Street -- 9th 4 New York Plaza -- 1st 2001 Bryan Street -- 9th
Floor Floor Floor
Dallas, Texas 75201 New York, New York 10004 Dallas, Texas 75201
Attention: Frank Ivins Attention: Frank Ivins Attention: Frank Ivins
</Table>
By facsimile transmission:
(for eligible institutions only)
(214) 468-6494
Confirm by telephone:
(214) 468-6464
Delivery of the letter of transmittal to an address other than as set forth
above or transmission of such letter of transmittal via facsimile other than as
set forth above does not constitute a valid delivery of such letter of
transmittal.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptance of the exchange offer except for reimbursement of mailing expenses.
We will pay the cash expenses to be incurred in connection with the exchange
offer, including:
- SEC registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees;
- printing fees; and
- related fees and expenses.
TRANSFER TAXES
Holders who tender their outstanding notes for exchange will not be
obligated to pay any transfer taxes in connection with the exchange. If,
however, new notes issued in the exchange offer are to be delivered to, or are
to be issued in the name of, any person other than the holder of the outstanding
notes tendered, or if a transfer tax is imposed for any reason other than the
exchange of outstanding notes in connection with the exchange offer, then the
holder must pay any of these transfer taxes, whether imposed on the registered
holder or on any other person. If satisfactory evidence of payment of, or
exemption from, these taxes is not submitted with the letter of transmittal, the
amount of these transfer taxes will be billed directly to the tendering holder.
26
CONSEQUENCES OF FAILURE TO EXCHANGE OUTSTANDING NOTES
Holders who desire to tender their outstanding notes in exchange for new
notes registered under the Securities Act should allow sufficient time to ensure
timely delivery. Neither the exchange agent nor we are under any duty to give
notification of defects or irregularities with respect to the tenders of
outstanding notes for exchange.
Outstanding notes that are not tendered or are tendered but not accepted
will, following the consummation of the exchange offer, continue to be subject
to the provisions in the indenture regarding the transfer and exchange of the
outstanding notes and the existing restrictions on transfer set forth in the
legend on the outstanding notes and in the offering memorandum dated February
27, 2003, relating to the outstanding notes. Except in limited circumstances
with respect to specific types of holders of outstanding notes, we will have no
further obligation to provide for the registration under the Securities Act of
such outstanding notes. In general, outstanding notes, unless registered under
the Securities Act, may not be offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. We do not currently anticipate that we will take any
action to register the outstanding notes under the Securities Act or under any
state securities laws.
Upon completion of the exchange offer, holders of the outstanding notes
will not be entitled to any further registration rights under the registration
rights agreement, except under limited circumstances.
Holders of the new notes and any outstanding notes which remain outstanding
after consummation of the exchange offer will vote together as a single class
for purposes of determining whether holders of the requisite percentage of the
class have taken certain actions or exercised certain rights under the
indenture.
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES
Based on interpretations of the staff of the SEC, as set forth in no-action
letters to third parties, we believe that the new notes may be offered for
resale, resold or otherwise transferred by holders of those new notes, other
than by any holder which is our "affiliate" within the meaning of Rule 405 under
the Securities Act. The new notes may be offered for resale, resold or otherwise
transferred without compliance with the registration and prospectus delivery
provisions of the Securities Act, if:
(1) the new notes issued in the exchange offer are acquired in the ordinary
course of the holder's business; and
(2) the holder, other than broker-dealers, has no arrangement or
understanding with any person to participate in the distribution of the
new notes issued in the exchange offer.
However, the SEC has not considered the exchange offer in the context of a
no-action letter and we cannot guarantee that the staff of the SEC would make a
similar determination with respect to the exchange offer as in such other
circumstances.
Each holder, other than a broker-dealer, must furnish a written
representation, at our request, that:
(1) it is not an affiliate of ours;
(2) it is not engaged in, and does not intend to engage in, a distribution
of the notes issued in the exchange offer and has no arrangement or
understanding to participate in a distribution of notes issued in the
exchange offer;
(3) it is acquiring the new notes issued in the exchange offer in the
ordinary course of its business; and
(4) it is not acting on behalf of a person who could not make
representations (1)-(3).
Each broker-dealer that receives new notes for its own account in exchange
for outstanding notes must acknowledge that:
(1) such outstanding notes were acquired by such broker-dealer as a result
of market-making or other trading activities; and
27
(2) it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction, including the delivery of a prospectus that contains
information with respect to any selling holder required by the
Securities Act in connection with any resale of new notes issued in the
exchange offer.
Furthermore, any broker-dealer that acquired any of its outstanding notes
directly from us:
(1) may not rely on the applicable interpretation of the SEC staff's
position contained in Exxon Capital Holdings Corp., SEC No-Action
Letter (April 13, 1989), Morgan, Stanley & Co., Inc., SEC No-Action
Letter (June 5, 1991) and Shearman & Sterling, SEC No-Action Letter
(July 2, 1993); and
(2) must also be named as a selling holder of the new notes in connection
with the registration and prospectus delivery requirements of the
Securities Act relating to any resale transaction.
See "Plan of Distribution" for a discussion of the exchange and resale
obligations of broker-dealers in connection with the exchange offer.
In addition, to comply with state securities laws of certain jurisdictions,
the new notes issued in the exchange offer may not be offered or sold in any
state unless they have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and complied with by
the holders selling the new notes. We have agreed in the registration rights
agreement that, prior to any public offering of transfer restricted notes, we
will register or qualify or cooperate with the holders of the new notes in
connection with the registration or qualification of the notes for offer and
sale under the securities laws of those states as any holder of the notes
reasonably requests in writing. Unless a holder requests, we currently do not
intend to register or qualify the sale of the new notes in any state where an
exemption from registration or qualification is required and not available.
28
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. In consideration
for issuing the new notes as contemplated in this prospectus, we will receive in
exchange outstanding notes in like principal amount. We will cancel all
outstanding notes exchanged for new notes in the exchange offer.
CAPITALIZATION
The following table sets forth the cash and cash equivalents and our
capitalization as of December 31, 2002 on an actual basis and as adjusted to
give effect to the previous offering of the outstanding notes. You should read
this table in conjunction with our financial statements and the related notes to
the financial statements included in this prospectus. See "Selected Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Other Indebtedness."
<Table>
<Caption>
DECEMBER 31, 2002
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents................................... $ 207 $ 169,582
======== ==========
Current maturities of long-term debt........................ $ 7,500 $ 7,500
======== ==========
Long-term debt, less current maturities:
6.625% Debentures due 2007................................ $250,000 $ 250,000
7.125% Debentures due 2025................................ 84,740 84,740
9.000% Debentures due 2022................................ 25,283 25,283
Outstanding 8.125% Senior Notes due 2010.................. -- 175,000
-------- ----------
Total long-term debt, less current maturities.......... $360,023 $ 535,023
-------- ----------
Common stockholder's equity:
Common stock.............................................. $ 1 $ 1
Additional paid-in capital................................ 262,844 262,844
Retained earnings......................................... 334,208 334,208
Accumulated other comprehensive loss...................... (3,214) (3,214)
-------- ----------
Total common stockholder's equity...................... $593,839 $ 593,839
-------- ----------
Total capitalization(1)................................ $953,862 $1,128,862
======== ==========
</Table>
- ---------------
(1) Total capitalization is calculated as long-term debt (less current
maturities) plus common stockholder's equity.
29
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our selected historical financial data. You
should read this table in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and related notes. The selected financial data as of December 31, 2001 and 2002
and for each of the years in the three-year period ended December 31, 2002 have
been derived from our audited financial statements included elsewhere in this
prospectus. The selected financial data as of December 31, 1998, 1999 and 2000
and for each of the years in the two-year period ended December 31, 1999 have
been derived from our audited financial statements that are not included in this
prospectus. The data should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere in
this prospectus.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Operating Revenues......................... $ 287,390 $ 287,793 $ 296,361 $ 285,171 $ 297,591
Operating Expenses:
General and administrative............... 47,283 43,441 39,912 40,657 49,338
Operation and maintenance................ 38,156 37,784 36,666 37,000 32,279
Depreciation and amortization............ 50,957 51,444 56,558 58,654 58,988
Taxes, other than income taxes........... 12,610 11,777 13,363 13,441 12,352
---------- ---------- ---------- ---------- ----------
Total Operating Expenses............. 149,006 144,446 146,499 149,752 152,957
Operating Income........................... 138,384 143,347 149,862 135,419 144,634
Other Income, net.......................... 3,722 2,657 10,656 2,278 10,374
Interest Charges:
Interest on long-term debt............... 29,064 26,064 25,914 25,670 25,577
Other interest........................... 8,496 4,185 6,273 5,302 2,688
Allowance for borrowed funds used during
construction........................... (520) (833) (273) (448) (2,638)
---------- ---------- ---------- ---------- ----------
Total Interest Charges............... 37,040 29,416 31,914 30,524 25,627
Income Before Income Taxes................. 105,066 116,588 128,604 107,173 129,381
Provision for Income Taxes................. 41,030 43,575 48,862 40,132 48,750
---------- ---------- ---------- ---------- ----------
Net Income................................. $ 64,036 $ 73,013 $ 79,742 $ 67,041 $ 80,631
========== ========== ========== ========== ==========
Cash Dividends on Common Stock............. $ 36,000 $ 56,000 $ 80,000 $ 20,000 $ --
RATIO OF EARNINGS TO FIXED
CHARGES(1):.............................. 3.6x 4.5x 4.7x 4.2x 5.2x
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents.................. $ 1,164 $ 342 $ 1,890 $ 443 $ 207
Working Capital(2)......................... (6,991) 3,908 13,427 36,708 7,720
Net Property, Plant & Equipment............ 927,688 942,677 933,560 967,643 1,094,741
Total Assets............................... 1,080,271 1,080,767 1,104,079 1,143,744 1,222,849
Current maturities of long-term debt....... 1,667 1,667 1,667 -- 7,500
Long-term debt, less current maturities.... 372,440 370,793 369,146 367,503 360,023
Total Debt................................. 374,107 372,460 370,813 367,503 367,523
Common Stockholder's Equity................ 453,352 469,639 469,381 516,422 593,839
Total Capitalization(3).................... 825,792 840,432 838,527 883,925 953,862
</Table>
- ---------------
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
are divided by fixed charges. "Earnings" represent the aggregate of (a) our
pre-tax income, and (b) fixed charges, net of interest capitalized. "Fixed
charges" represent interest (whether expensed or capitalized), the
amortization of total debt discount and expense and that portion of rentals
considered to be representative of the interest factor.
(2) Working capital is calculated as current assets minus current liabilities,
not including current maturities of long-term debt.
(3) Total capitalization is calculated as long-term debt, less current
maturities, plus common stockholder's equity.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We own and operate a regulated interstate natural gas pipeline system,
including facilities for mainline transmission and gas storage. Our system
extends from the San Juan Basin in northwestern New Mexico and southwestern
Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a
point on the Canadian border near Sumas, Washington. Our natural gas pipeline
system transports substantially all of the natural gas to the metropolitan areas
of Seattle, Washington; Portland, Oregon; and Boise, Idaho, which represent most
of our primary market areas. Our system has an aggregate mainline deliverability
of approximately 2.9 Bcf of gas per day, and is composed of approximately 4,000
miles of mainline and lateral transmission pipelines, 470 meter stations and 43
mainline compressor stations with a combined capacity of approximately 348,000
horsepower. We also own or have access to natural gas and liquefied natural gas
storage facilities in Utah and Washington with an aggregate seasonal storage
level of 11.4 Bcf of working gas and daily withdrawal capacity of approximately
600 MMcf. These storage facilities enable us to balance daily receipts and
deliveries and provide storage services to our customers. For the year ended
December 31, 2002, our transportation and storage services accounted for
approximately 91% and 3% of our operating revenues, respectively.
In 2002, we transported and stored natural gas for a total of 166
customers. We provided services to markets in California, New Mexico, Colorado,
Utah, Nevada, Wyoming, Idaho, Oregon and Washington. As with all natural gas
pipeline operators, our transmission and storage activities are subject to
regulation by the FERC under the Natural Gas Act and the NGPA. In accordance
with our most recent FERC rate case, we currently charge our customers a rate of
$0.3076/Dth of natural gas shipped on our pipeline system, regardless of the
distance the gas is to be shipped.
Critical Accounting Policies
Regulatory Accounting. We are regulated by the Federal Energy Regulatory
Commission ("FERC"). Statement of Financial Accounting Standards ("SFAS") No.
71, "Accounting for the Effects of Certain Types of Regulation," provides that
rate-regulated public utilities account for and report regulatory assets and
liabilities consistent with the economic effect of the way in which regulators
establish rates if the rates established are designed to recover the costs of
providing the regulated service and if the competitive environment makes it
reasonable to assume that such rates can be charged and collected. Accounting
for businesses that are regulated and apply the provisions of SFAS No. 71 can
differ from the accounting requirements for non-regulated businesses.
Transactions that are recorded differently as a result of regulatory accounting
requirements include the capitalization of an equity return component on
regulated capital projects, employee related benefits and other costs and taxes
included in, or expected to be included in, future rates. As a rate-regulated
entity, our management has determined that it is appropriate to apply the
accounting prescribed by SFAS No. 71 and, accordingly, the accompanying
financial statements include the effects of the types of transactions described
above that result from regulatory accounting requirements.
Revenue Subject to Refund. The FERC regulatory processes and procedures
govern the tariff rates that we are permitted to charge to customers for
interstate transportation of natural gas. Key determinants in the ratemaking
process are (i) volume throughput assumptions, (ii) costs of providing service,
including depreciation expense, and (iii) allowed rate of return, including the
equity component of a pipeline's capital structure and related income taxes.
Accordingly, at any given time, some of the revenues collected by us may be
subject to possible refunds which may be required by final orders of the FERC.
We record estimates of rate refund liabilities considering our and other
third-parties' regulatory proceedings, advice of counsel and estimated total
exposure, as discounted and risk weighted, as well as collection and other
risks. Because we were not involved in any rate case proceedings at the FERC as
of December 31, 2002, we had no potential rate refunds accrued as of that date.
Contingent Liabilities. We establish reserves for estimated loss
contingencies when it is management's assessment that a loss is probable and the
amount of the loss can be reasonably estimated. Revisions to
31
contingent liabilities are reflected in income in the period in which different
facts or information become known or circumstances change that affect the
previous assumptions with respect to the likelihood or amount of loss. Reserves
for contingent liabilities are based upon management's assumptions and
estimates, advice of legal counsel or other third parties regarding the probable
outcomes of the matter. Should the outcome differ from the assumptions and
estimates, revisions to the estimated reserves for contingent liabilities would
be required.
Impairment of Long-Lived Assets. We evaluate long-lived assets for
impairment when events or changes in circumstances indicate, in management's
judgment, that the carrying value of such assets may not be recoverable. When
such a determination has been made, management's estimate of undiscounted future
cash flows attributable to the assets is compared to the carrying value of the
assets to determine whether an impairment has occurred. If an impairment of the
carrying value has occurred, the amount of the impairment recognized in the
financial statements is determined by estimating the fair value of the assets
and recording a loss for the amount by which the carrying value exceeds the
estimated fair value.
Judgments and assumptions are inherent in management's estimate of
undiscounted future cash flows used to determine recoverability of an asset and
the estimate of an asset's fair value used to calculate the amount of impairment
to recognize. The use of alternate judgments and/or assumptions could result in
the recognition of different levels of impairment charges in the financial
statements.
Recent Developments
Completed Expansion Project. On November 1, 2002, we placed in service our
Grays Harbor Lateral project. This lateral pipeline is designed to provide
161,500 Dth per day of firm transportation capacity to serve a new power
generation plant in the State of Washington. The Grays Harbor Lateral project
was requested by one of our customers and included installation of 49 miles of
20-inch pipeline, the addition of 4,700 horsepower at an existing compressor
station and a new meter station. The cost of the lateral project was
approximately $92 million. The customer has suspended construction of the
contemplated new power generation plant but that does not affect its obligation
to pay for the cost of service of the lateral pipeline on an incremental rate
basis. The Grays Harbor Lateral project is based on a 30-year contract and is
expected to generate approximately $22 million of operating revenues in its
first twelve months of operations.
Early Retirement and Severance Expenses. As part of the effort to reduce
future operating expenses, certain employee positions are being eliminated
through organizational changes. In the second quarter of 2002, we recorded $3.9
million of pension benefits expense associated with an enhanced-benefit early
retirement option offered to certain Williams employee groups. In the third and
fourth quarters, we recorded an aggregate of $0.5 million of severance costs.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere in this
prospectus.
Year Ended December 31, 2002 vs. Year Ended December 31, 2001
Operating revenues increased $12.4 million, or 4%, due primarily to
facility charge revenues of $3.6 million from incremental projects put into
service during 2002, new reservation charges of approximately $1.5 million and
higher short-term firm transportation revenues of $6.4 million, partially offset
by a $1.6 million decrease in tracked fuel costs and Gas Research Institute
charges billed to customers.
Our transportation service accounted for 91% and 93% of operating revenues
for the years ended December 31, 2002 and 2001, respectively. Additionally, gas
storage services represented 3% of operating revenues in each of the years ended
December 31, 2002 and 2001. Other revenues related to our transportation
services represented 3% and 2% of operating revenues for the years ended
December 31, 2002 and 2001, respectively.
32
Operating expenses increased $3.2 million, or 2%, due primarily to a $6.6
million increase in retirement plan expenses, including $3.9 million related to
an enhanced-benefit early retirement option offered to certain Williams employee
groups, higher allocated general and administrative costs from Williams
resulting from the consolidation of several of our administrative functions into
Williams, and a $1.1 million charge for an abandoned project. These increases
were partially offset by the decrease in tracked fuel costs and Gas Research
Institute charges collectible from customers, a $1.2 million reduction in
employee benefit costs and $3.8 million lower labor and other employee related
cots resulting primarily from recent staff reductions in connection with the
early retirement option and organizational changes across Williams. The
increased level of capital spending compared to 2001, which has resulted in a
greater percentage of employee labor and expenses being dedicated to capital
projects, including the expansion projects discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments" and "Business -- Expansion Projects," has also contributed to the
decrease in operating expenses during 2002.
Operating income increased $9.2 million, or 7%, due to the higher revenues
discussed above, partially offset by the higher operating expenses.
Other income (net) increased $8.1 million primarily due to reduced
charitable contribution commitments reflecting our desire to reduce non-income
producing related expenses.
Other interest charges decreased $2.6 million resulting from the 1995 rate
case settlement refund paid to customers in August 2001.
Allowance for borrowed funds used during construction increased $2.2
million as a result of the increase in expenditures for capital projects,
including expansion projects.
Year Ended December 31, 2001 vs. Year Ended December 31, 2000
Operating revenues decreased $11.2 million, or 4%, due primarily to the
recognition in 2000 of a $10.2 million surcharge resulting from a favorable FERC
decision on return on equity related to our 1993 rate case.
Our transportation service accounted for 93% and 94% of operating revenues
for the years ended December 31, 2001 and 2000, respectively. Additionally, 3%
of operating revenues represented gas storage service in each of the years ended
December 31, 2001 and 2000.
Operating expenses increased $3.3 million, or 2%, due primarily to higher
depreciation in 2001 and the receipt in 2000 of $2.1 million in environmental
liability insurance settlements, partially offset in 2001 by decreased rental
expense reflected in general and administrative expense.
Operating income decreased $14.4 million, or 10%, due to reasons identified
above.
Other income (net) decreased $8.4 million primarily resulting from the
recognition in 2000 of $7.0 million of interest on the 1993 rate case surcharge
revenues discussed above in operating revenues and higher charitable
contributions in 2001.
Other interest charges decreased $1.0 million due primarily to the payment
of the 1995 rate case refund in August of 2001.
Operating Statistics
The following table summarizes volumes and capacity for the periods
indicated:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2000 2001 2002
---- ---- ----
Total Throughput (TBtu)..................................... 752 734 729
Average Daily Transportation Volumes (TBtu)................. 2.1 2.0 2.0
Average Daily Firm Reserved Capacity (TBtu)................. 2.7 2.7 2.9
</Table>
33
CAPITAL RESOURCES AND LIQUIDITY
Method of Financing
We fund our capital requirements with cash flows from operating activities,
by accessing capital markets, by repayments of funds advanced to WGP, by
borrowings under the credit agreement described below, and, if required,
advances from WGP.
Williams and some of its subsidiaries, including us, are parties to a $700
million credit agreement, under which we can borrow up to $400 million to the
extent the funds available under the credit agreement have not been borrowed by
Williams or other subsidiaries or otherwise must remain available to Williams.
The credit agreement expires in July 2005. Interest rates vary with current
market conditions based on the base rate of Citibank N.A., the federal funds
rate or the London Interbank Offered Rate ("LIBOR"). The credit agreement
contains restrictions, which limit, under some circumstances, the issuance of
additional debt, the attachment of liens on any assets and any change of
ownership of us. As Williams completes certain asset sales, the commitments from
participating banks in the credit agreement will be reduced to $400 million, and
with further asset sales could be reduced below that amount, but we will
continue to have borrowing capacity up to the lesser of $400 million or the
amount that Williams would be able to borrow, to the extent the funds available
under the credit agreement have not been borrowed by Williams or other
participating subsidiaries or otherwise must remain available to Williams. At
December 31, 2002, the commitment from participating banks had been reduced to
$463 million, the borrowing capacity available to us was $400 million, and we
had no outstanding borrowings under this agreement. Our assets have not been
pledged to secure any indebtedness of Williams or its other affiliates, either
under the credit agreement or pursuant to any other credit facility of Williams
and its other affiliates.
As a participant in Williams' cash management program, we make advances to
and receive advances from Williams through our parent company, WGP. At December
31, 2002, the advances due to us by WGP totaled $17.3 million. The advances are
represented by demand notes. The interest rate on intercompany demand notes is
the LIBOR on the first day of the month plus an applicable margin (which was
3.5% at December 31, 2002) based on our current Standard & Poor's credit rating.
Due to recent asset sales, anticipated asset sales in the future and recently
negotiated secured borrowing facilities, Williams has indicated that it
currently believes that it will continue to have the financial resources and
liquidity to repay these advances made by us. See "Risk Factors -- Risks
Relating to Our Ownership by Williams."
Historically, we also funded our capital requirements through a sale of
receivables program. Through a wholly-owned bankruptcy remote subsidiary, we
sold certain trade accounts receivable to a special-purpose entity ("SPE") in a
securitization structure requiring annual renewal. We acted as the servicing
agent for the sold receivables. The sale of receivables program expired on July
25, 2002, and on July 26, 2002, we completed the repurchase of $15 million of
trade accounts receivable previously sold. This program was not renewed as a
result of the loss of our investment grade credit ratings.
Our expenditures for property, plant and equipment additions were $181.8
million, $94.9 million and $47.9 million for 2002, 2001 and 2000, respectively.
We expect total capital expenditures for 2003 will be approximately $330
million, of which approximately $63 million will be for maintenance capital
expenditures and other non-expansion related items. Although no assurances can
be given, we currently believe that the aggregate of cash flows from operating
activities, supplemented, when necessary, by the repayment by WGP to us of funds
previously advanced to WGP, the net proceeds of the offering of the outstanding
notes, advances or capital contributions from Williams and borrowings under the
revolving credit agreement will provide us with sufficient liquidity to meet our
capital requirements. When necessary, we also expect to access the public and
private capital markets to finance our capital requirements.
Credit Ratings
We have no guarantees of off-balance sheet debt to third parties and
maintain no debt obligations that contain provisions requiring accelerated
payment of the related obligations in the event of specified levels of
34
declines in Williams' or our credit ratings given by Moody's Investor Services,
Standard & Poor's and Fitch Ratings.
In July 2002, Moody's Investor Services, Standard & Poor's and Fitch
Ratings lowered our credit ratings on our unsecured long-term debt from Baa1,
BBB+ and BBB+ to Ba2, B+ and BB-, respectively. In November 2002, Moody's
Investor Services further lowered our credit rating to B3 from Ba2. Currently,
Moody's Investor Services and Standard & Poor's have our credit ratings on
"negative outlook" and "negative watch," respectively.
With the downgrade in our credit ratings, we expect interest rates on
future financings may be higher than they would otherwise be.
OTHER
Contractual Obligations
The table below summarizes some of the more significant contractual
obligations and commitments by period (in millions of dollars).
<Table>
<Caption>
CAPITAL TOTAL
LONG-TERM OPERATING EXPENDITURE CONTRACTUAL
PERIOD DEBT LEASES COMMITMENTS OBLIGATIONS
- ------ --------- --------- ----------- -----------
2003..................................... $ 7.5 $ 4.4 $ 324.6(1) $336.5
2004..................................... 7.5 6.0 30.2 43.7
2005..................................... 7.5 7.0 -- 14.5
2006..................................... 7.5 6.0 -- 13.5
2007..................................... 252.9 6.1 -- 259.0
After 2007............................... 85.0 12.1 -- 97.1
------ ----- -------- ------
Total.................................... $367.9 $41.6 $ 354.8 $764.3
====== ===== ======== ======
</Table>
- ---------------
(1) These contractual commitments for construction and acquisition of property,
plant and equipment are included in our estimated $330 million of total
capital expenditures for 2003.
Contingencies
We are not currently involved in any pending rate cases. See Note 2 of the
notes to the audited financial statements as of December 31, 2002 and 2001 and
for the three years in the period ended December 31, 2002 included elsewhere in
this prospectus for information about regulatory, judicial and business
developments which cause operating and financial uncertainties.
Effect of Inflation
We generally have experienced increased costs in recent years due to the
effect of inflation on the cost of labor, materials and supplies, and property,
plant and equipment. A portion of the increased labor and materials and supplies
cost can directly affect income through increased maintenance and operating
costs. The cumulative impact of inflation over a number of years has resulted in
increased costs for current replacement of productive facilities. The majority
of our property, plant and equipment and inventory is subject to rate-making
treatment, and under current FERC practices, recovery is limited to historical
costs. While amounts in excess of historical cost are not recoverable under
current FERC practices, we believe we will be allowed to recover and earn a
return based on the increased actual costs incurred when existing facilities are
replaced. Cost-based regulation, along with competition and other market
factors, limit our ability to price services or products based upon the effect
of inflation on costs.
35
MARKET RISK DISCLOSURES
Interest Rate Risk
Our interest rate risk exposure is limited to our long-term debt. All
interest rates on long-term debt are fixed in nature.
The following table provides information as of December 31, 2002 about our
long-term debt, including current maturities. The table presents principal cash
flows (at face value) and weighted average interest rates by expected maturity
dates.
<Table>
<Caption>
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ------ ---------- ------ ----------
(DOLLARS IN MILLIONS)
Long-term debt, including current
portion:
Fixed rate........................... $7.5 $7.5 $7.5 $7.5 $252.9 $85.0 $367.9 $328.2
Interest rate........................ 6.9% 6.9% 6.8% 6.8% 6.8% 7.1%
</Table>
36
BUSINESS
NORTHWEST PIPELINE CORPORATION
We own and operate a regulated interstate natural gas pipeline system,
including facilities for mainline transmission and gas storage. Our system
extends from the San Juan Basin in northwestern New Mexico and southwestern
Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a
point on the Canadian border near Sumas, Washington. Our natural gas pipeline
system transports substantially all of the natural gas to the metropolitan areas
of Seattle, Washington; Portland, Oregon; and Boise, Idaho which represent most
of our primary market areas. Our system has an aggregate mainline deliverability
of approximately 2.9 Bcf of gas per day and is composed of approximately 4,000
miles of mainline and lateral transmission pipelines, 470 meter stations and 43
mainline compressor stations with a combined capacity of approximately 348,000
horsepower. We also own or have access to natural gas and liquefied natural gas
storage facilities in Utah and Washington with an aggregate seasonal storage
level of 11.4 Bcf of working gas and daily withdrawal capacity of approximately
600 MMcf. These storage facilities enable us to balance daily receipts and
deliveries and provide storage services to our customers. For the year ended
December 31, 2002, our transportation and storage services accounted for
approximately 91% and 3% of our operating revenues, respectively.
In 2002, we transported natural gas for a total of 166 customers, including
distribution companies, municipalities, interstate and intrastate pipelines, gas
marketers and direct industrial users. We provided services to markets located
in California, New Mexico, Colorado, Utah, Nevada, Wyoming, Idaho, Oregon and
Washington. Our firm transportation agreements are generally long-term
agreements with various maturities of up to 30 years and accounted for
approximately 87% of our operating revenues for the year ended December 31,
2002. These long-term agreements have historically resulted in predictable
volumes and related cash flows. Additionally, we offer interruptible and
short-term firm transportation services, which accounted for approximately 4% of
our operating revenues for the year ended December 31, 2002.
As with all interstate natural gas pipeline operators, our 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, the
extension, enlargement or abandonment of our jurisdictional facilities, and our
accounting, among other things, are subject to regulation. In accordance with
our most recent FERC rate case, we are currently authorized to charge our
customers a rate equivalent to $0.3076/Dth for natural gas shipped on our
pipeline system, regardless of the distance the gas is to be shipped. We
currently have no outstanding rate cases before the FERC, nor any immediate
plans to file a rate case with the FERC.
COMPETITIVE STRENGTHS
Stable, Recurring Revenues Contracted Under Long-Term Firm Agreements. For
the year ended December 31, 2002, approximately 90% of our operating revenues
were generated under long-term firm transportation and storage agreements. Our
transportation and storage agreements are generally contracted on a long-term
basis and our rates are substantially collected through fixed demand charges. As
a result, fluctuations in natural gas prices and actual volumes transported and
stored have a limited impact on our operating revenues. The average remaining
primary term of our long-term firm agreements is approximately 8.9 years on a
volume-weighted basis. Our long-term firm agreements generally contain
year-to-year automatic renewals at the end of the primary term, unless a
termination notice is given by the customer. We do not have any substantial
transportation and storage agreements expiring in 2003. Agreements representing
14% of our total long-term firm capacity expire in 2004, and as a result of
rollover provisions will become year-to-year contracts at such time, unless
terminated or extended for a longer term. No single agreement which expires
during the next 10 years represents more than 12% of our total long-term firm
capacity. Additionally, we only invest in infrastructure expansion on the basis
of long-term firm commitments (of at least 15 years) from customers for the
additional capacity or with customer commitments for support of improvements to
existing facilities. We have historically experienced minimal bad debt expense
due to the relatively strong credit quality of most of our customers and the
extensive credit screening process we conduct on all of our customers.
37
Sole Provider in Significant Geographic Markets. Our natural gas pipeline
system transports substantially all of the natural gas to the metropolitan areas
of Seattle, Washington; Portland, Oregon; and Boise, Idaho, which represent most
of our primary market areas. Although we do not face significant competition in
many of our market areas, we consistently strive to provide high quality
customer service. In 2002, we received our highest rating ever in our annual
customer satisfaction survey conducted by Energy Insights, a third-party energy
consulting firm. We believe our consistently high level of customer satisfaction
is due to our flexible, reliable services as well as the customized
transportation solutions we offer to our customers at prices generally lower
than those of our competitors.
Efficient Operations Resulting in a Competitive Cost Structure. The
efficient operation of our pipeline system enables us to position ourselves as
the low cost, high quality provider of transportation and storage services in
our major market areas. We have attained our competitive cost structure by
exercising strict expense and capital spending discipline, utilizing the same
physical pipeline facilities to provide simultaneous gas transportation services
in two directions, and expanding our facilities to complement our existing
infrastructure and geographic markets. By maintaining low costs, we maximize our
earnings and cash flows and increase the probability of earning a rate of return
on equity that is at least equal to the regulated return as set by the FERC, and
avoid the need to file new rate cases with the FERC.
Flexible Pipeline Operations with Diversified Natural Gas Supplies. Our
pipeline system is designed on a bi-directional basis, which allows us to
provide gas transportation services both north and south simultaneously on the
system. Because we can transport gas from the San Juan and Rockies basins in the
south, as well as from Canada in the north, we are able to provide our customers
with low cost supply alternatives and flexible service options. Through our
system storage and Park and Loan service, we provide our customers flexibility
in helping them manage their gas supply and transportation balancing needs.
Strong Management Team. Our operating management team has an average
tenure of more than 13 years managing Williams' gas pipeline systems. Our
management has an intense focus on operating our assets efficiently while
providing a high level of service to our customers. This team also has a
comprehensive understanding of the regulatory environment under which we
operate. The depth and strength of our management has enabled us to identify and
capitalize on expansion and growth opportunities.
BUSINESS STRATEGY
Our primary strategy is to safely and efficiently operate our facilities
and opportunistically invest in new infrastructure to meet the growing demands
of our market areas. The principal elements of our business strategy are to:
Maintain Safe and Reliable Operations with a High Degree of Customer
Satisfaction. We intend to continue to operate our transportation and storage
facilities in a safe manner for our communities, customers, employees and the
environment. We believe our record of long-term customer relationships and
contract extensions is due to our reliable and flexible transportation and
storage services as well as the relatively lower rates we offer our customers.
Continue to Efficiently Operate and Reduce Costs in Our Existing
Operations. We believe we can generate additional revenue and operating income
by increasing and optimizing throughput on our existing pipeline assets and
realizing cost savings through continued operational efficiencies. Because of
our relatively low variable costs in operating our facilities, increasing
revenues directly leads to increased cash flow and improved margins. We believe
we can further reduce our costs by minimizing capital expenditures for
maintenance items that do not impact pipeline safety, security or performance
and by continuing to implement our strict operating expense discipline.
Strategically Expand Our Natural Gas Transportation Infrastructure. We
believe that the demand for natural gas in the Pacific Northwest will continue
to increase due to the growing preference for natural gas in residential and
commercial markets, as well as for use in power generation facilities in
response to environmental concerns. We believe this growth in demand will
support future expansions of our mainline and lateral capacity. We intend to
capitalize on our existing infrastructure, market position and customer
38
relationships in order to expand operations to meet the anticipated increased
demand for natural gas transportation and storage services, while maintaining
access to substantial sources of natural gas supply. We have expanded our
infrastructure on the basis of long-term firm commitments (of at least 15 years)
from customers for the additional capacity or with customer commitments for
support of improvements to existing facilities.
Our 2002 capital expenditures totaled approximately $182 million, of which
approximately $33 million was for maintenance and other non-expansion purposes.
EXPANSION PROJECTS
The Rockies Expansion Project. On August 29, 2001, we filed an application
with the FERC to construct and operate an expansion of our pipeline system
designed to provide an additional 175,000 dekatherms per day of capacity to our
transmission system in Wyoming and Idaho in order to reduce reliance on
displacement capacity. The Rockies Expansion Project includes 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. We reached a settlement
agreement with the majority of our firm shippers to support the roll-in of the
expansion costs into our existing rates. The FERC issued a certificate on
September 23, 2002 approving the project. We filed an application with the FERC
in February 2003 to amend the certificate to reflect minor facility scope
changes. Construction is scheduled to start by May 2003, with a targeted
in-service date of November 1, 2003. The current estimated cost of the expansion
project is approximately $140 million, of which approximately $16 million may be
offset by settlement funds anticipated to be received from a former customer in
connection with a contract restructuring.
The Evergreen Expansion Project. On October 3, 2001, we filed an
application with the FERC to construct and operate an expansion of our pipeline
system designed to provide 276,625 dekatherms per day of firm transportation
capacity to serve new power generation demand in western Washington. The
Evergreen Expansion Project includes installing 28 miles of pipeline loop,
upgrading, replacing or modifying five compressor stations and adding a net
total of 64,160 horsepower of compression. The FERC issued a certificate on June
27, 2002 approving the expansion and the incremental rates to be charged our
expansion customers. We started construction in October 2002 with completion
targeted for October 1, 2003. We filed an application with the FERC in January
2003 to amend the certificate to reflect minor facility scope and schedule
changes. The estimated cost of the expansion project is approximately $198
million. This expansion is based on 15 and 25 year contracts and is expected to
provide approximately $42 million of operating revenues in its first twelve
months of operations.
The Columbia Gorge Expansion Project. Our October 3, 2001 application with
respect to the Evergreen Expansion Project, which was approved by the FERC on
June 27, 2002, also requested approvals to construct and operate an expansion of
our pipeline system designed to replace 56,000 dekatherms per day of northflow
design displacement capacity from Stanfield, Oregon to Washougal, Washington.
The Columbia Gorge Project includes upgrading, replacing or modifying five
existing compressor stations, adding a net total of 24,030 horsepower of
compression. We reached a settlement with the majority of our firm shippers to
support roll-in of 84% of the expansion costs into our existing rates with the
remainder to be allocated to the incremental Evergreen Expansion customers. Our
January 2003 application to amend the certificate also reflected minor facility
scope changes for the Columbia Gorge Expansion Project. We plan to start
construction by May 2003, with a targeted in-service date of November 1, 2003.
The estimated cost of the expansion project is approximately $43 million.
DESCRIPTION OF THE PIPELINE SYSTEM
Pipeline Facilities. The mainline is comprised of approximately 2,371
miles of predominantly 26-inch diameter pipe, much of which is looped, and
extends from its point of origination in the San Juan Basin to a point on the
Canadian border near Sumas, Washington. An additional 1,641 miles of supply and
service laterals of varying diameters are included as part of the mainline
transmission system. The mainline
39
transmission system has a design capacity of 2.9 Bcf per day, which we expect to
increase to 3.2 Bcf per day upon completion of our current expansion projects.
Pipeline Operations. We currently have 43 mainline compressor stations,
and we own and operate 470 meter stations as part of the mainline system. We
maintain 24-hour monitoring of our pipeline system via a computerized data
monitoring and control system that links all compressor stations and maintenance
bases with our operations center in Salt Lake City, Utah. Remote facilities
along our pipeline route are accessed with the use of multiple address radio
communication links which allow our pipeline to be operated remotely from our
operations center. The central gas control operations center includes the
dispatching center, which houses the gas management and control and computer
systems required to operate our pipeline system. A back-up operations center is
located at the Evanston, Wyoming maintenance base.
Operations. We have operated our pipeline system with regular and
continuous maintenance since we commenced operations. Inspections and tests are
performed at prescribed intervals to ensure the integrity of the pipeline
system. These inspections include periodic corrosion surveys, testing of relief
and over-pressure devices and periodic aerial inspections of the rights-of-way,
all conforming to United States Department of Transportation regulations.
TRANSPORTATION SERVICE
Long-Term Firm Transportation Service Agreements. Most of our pipeline
system's design capacity of 2.9 Bcf per day is contracted under long-term firm
gas transportation service agreements with approximately 52 firm transportation
shippers. Under these agreements our pipeline system receives natural gas on
behalf of such shippers at designated receipt points, transports the gas on a
firm basis up to each shipper's maximum daily quantity and delivers thermally
equivalent quantities of gas at designated delivery points. In return for this
service, as provided in the long-term firm transportation service agreements,
each shipper pays us the amount set forth in our FERC gas tariff, with such
amount consisting primarily of a fixed monthly reservation fee which is
currently $0.2776 per Dth, based on each shipper's maximum daily quantity, and a
commodity charge which is currently $0.0300 per Dth.
We have long-term firm transportation service agreements providing for the
transportation of approximately 2.2 MMDth per day of natural gas. Upon
completion and placement in-service of our Evergreen expansion project, we will
have long-term firm transportation service agreements providing for the
transportation of approximately 2.5 MMDth per day. The following table provides
information regarding capacity, stated as a function of contract demand
associated with long-term firm transportation service agreements the primary
terms of which are due to expire each year through 2012.
<Table>
<Caption>
LONG-TERM FIRM CONTRACTS WITH PRIMARY TERMS EXPIRING IN:
-------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
---- ----- ---- ---- ----- ----- ----- ---- ----- -----
MDth/d........................... 9.2 349.1 0.0 0.8 109.1 496.2 160.0 58.4 102.0 379.6
</Table>
The foregoing table illustrates that the primary terms of our long-term
firm transportation agreements representing a majority of our contracted
capacity will expire over the course of the next 10 years. We believe, however,
that because we are the only interstate natural gas pipeline company that
presently provides significant service to most of our primary gas market areas,
most of the customers who are parties to those long-term firm agreements are
likely to renew or extend those agreements, although we cannot predict the terms
that will be applicable to those renewals or extensions. In the event that any
of those customers elected not to renew or extend its agreement, we could seek a
change in rates with the FERC in order to allocate the costs associated with
that agreement among other customers.
Other Transportation Service Agreements. In addition to long-term firm
transportation service agreements, we have entered into several relatively
short-term firm service transportation agreements, which are typically for a
term of less than one year.
40
GAS STORAGE
Underground gas storage facilities enable us to balance daily receipts and
deliveries and provide storage services to our customers.
We have a contract with a third party, under which gas storage services are
provided to us in an underground storage reservoir in the Clay Basin Field
located in Daggett County, Utah. We are authorized to utilize the Clay Basin
Field at a seasonal storage level of 3.0 Bcf of working gas, with a firm
delivery capability of 25 MMcf of gas per day.
We own a one-third interest in the Jackson Prairie underground storage
facility located near Chehalis, Washington, with the remaining interests owned
by two of our distribution customers. Our one-third share of the authorized
seasonal storage capacity of the facility is 6.1 Bcf of working gas. Our
one-third share of the facility provides peak-day deliveries to us of up to 283
MMcf per day on a firm basis and up to an additional 50 MMcf per day on a
best-efforts basis.
We also own and operate a liquefied natural gas storage facility located
near Plymouth, Washington, which provides standby service for our customers
during extreme peaks in demand. The facility has a total liquefied natural gas
storage capacity equivalent to 2.3 Bcf of working gas, liquefaction capability
of 12 MMcf per day and regasification capability of 300 MMcf per day. Some of
our major customers own the working gas stored at the liquefied natural gas
plant.
OWNERSHIP OF PROPERTY
Our pipeline system is owned in fee simple. However, a substantial portion
of our system is constructed and maintained pursuant to rights-of-way,
easements, permits, licenses or consents on and across properties owned by
others. Our compressor stations with appurtenant facilities are located in whole
or in part upon lands owned by us or held under leases or permits issued or
approved by public authorities, or pursuant to easements granted by private
landowners. Our liquefied natural gas facility is located on lands owned by us
in fee simple. Various credit arrangements restrict the sale or disposal of a
major portion of our pipeline system.
INSURANCE
We maintain insurance coverage for our pipeline system in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which we
operate. Our insurance program includes general liability insurance, auto
insurance, worker's compensation insurance and all-risk property, boiler and
machinery and business interruption insurance with a mortgagee clause naming the
collateral agent as sole loss payee. Our insurance needs are provided for, on an
"at cost" basis, through Williams' insurance program. From time to time,
Williams may extend insurance to us through a self-insurance program, to the
extent and in the manner normal for companies of like size, type and financial
condition.
EMPLOYEES
At January 31, 2003, 436 persons were either employed directly by us or
otherwise assigned to us by Williams, none of whom is represented under
collective bargaining agreements. No strike or work stoppage in any of our
operations has occurred in the past, and relations with employees are good.
REGULATORY MATTERS
FERC Regulation and Rate Structure
Our transportation of natural gas in interstate commerce is subject to
regulation by the FERC under the Natural Gas Act and the Natural Gas Policy Act.
We hold certificates of public convenience and necessity issued by the FERC
authorizing us to own and operate all pipelines, facilities and properties
considered jurisdictional for which certificates are required under the Natural
Gas Act.
41
We are subject to the Natural Gas Pipeline Safety Act of 1968, as amended
by Title I of the Pipeline Safety Act of 1979, which regulates safety
requirements in the design, construction, operation and maintenance of
interstate gas transmission facilities.
Our rates and charges for transportation in interstate commerce are subject
to regulation by the FERC under the applicable FERC regulations. FERC
regulations and our FERC approved tariff allow us to establish and collect rates
designed to give us an opportunity to recover all actually and prudently
incurred operations and maintenance costs of our pipeline system, taxes,
interest, depreciation and amortization and a regulated equity return.
Rates charged by natural gas companies may not exceed the just and
reasonable rates approved by the FERC. In addition, natural gas companies are
prohibited from granting any undue preference to any person, or maintaining any
unreasonable difference in their rates or terms and conditions of service. FERC
regulations also prohibit us from preventing shippers from freely assigning
their capacity, provided that the assignee meets the credit rating standards
imposed by our FERC tariff and that the assignment is operationally feasible to
accommodate.
Under Section 5 of the Natural Gas Act, on its own motion or based on a
complaint filed by a customer of the pipeline or other interested person, the
FERC may initiate a proceeding seeking to compel a pipeline to change any rate
which is on file. If the FERC determines that the existing rate or condition is
unjust, unreasonable, unduly discriminatory or preferential, then any rate
reduction that is ordered at the conclusion of such a proceeding is generally
effective prospectively from the date of the order requiring this change. We
currently have no outstanding rate cases before the FERC, nor any immediate
plans to file a rate case.
The nature, and degree of, regulation of natural gas companies has changed
significantly during the past 20 years, and there is no assurance that further
substantial changes will not occur, or that existing policies and rules will not
be applied in a new or different manner.
On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking
proposing to adopt uniform standards of conduct for transmission providers. The
proposed rules define transmission providers as interstate natural gas pipelines
and public utilities that own, operate or control electric transmission
facilities. The proposed standards would regulate the conduct of transmission
providers with their energy affiliates. The FERC proposes to define energy
affiliates broadly to include any transmission provider affiliate that engages
in or is involved in transmission (gas or electric) transactions, or manages or
controls transmission capacity, or buys, sells, trades or administers natural
gas or electric energy or engages in financial transactions relating to the sale
or transmission of natural gas or electricity. Current rules regulate our
conduct and our gas marketing affiliates. The FERC invited interested parties to
comment on the Notice of Proposed Rulemaking. On April 25, 2002, the FERC issued
its staff analysis of the Notice of Proposed Rulemaking and the comments
received. The staff analysis proposed redefining energy affiliates to exclude
affiliated transmission providers. On May 21, 2002, the FERC held a public
conference concerning the Notice of Proposed Rulemaking and the FERC invited the
submission of additional comments. If adopted, these new standards would require
us to adopt new compliance measures.
On July 17, 2002, the FERC issued a Notice of Inquiry to seek comments on
its negotiated rate policies and practices. The FERC states that it is
undertaking a review of the recourse rate as a viable alternative and safeguard
against the exercise of market power of interstate gas pipelines, as well as the
entire spectrum of issues related to its negotiated rate program. The FERC has
requested that interested parties respond to various questions related to the
FERC's negotiated rate policies and practices. We have negotiated certain rates
under the FERC's existing negotiated rate program, and participated in comments
filed in this proceeding by Williams in support of the FERC's existing
negotiated rate program.
On August 1, 2002, the FERC issued a Notice of Proposed Rulemaking that
proposes restrictions on various types of cash management programs employed by
companies in the energy industry such as Williams and its subsidiaries. In
addition to stricter guidelines regarding the accounting for and documentation
of cash management or cash pooling programs, the FERC proposal, if made final,
would preclude public utilities, natural gas companies and oil pipeline
companies from participating in such programs unless the parent
42
company and its FERC-regulated affiliate maintain investment grade credit
ratings and that the FERC-regulated affiliate maintains stockholders' equity of
at least 30% of total capitalization. Williams' and our current credit ratings
are non-investment grade. We participated in comments filed in this proceeding
on August 28, 2002 by the Interstate Natural Gas Association of America. On
September 25, 2002, the FERC convened a technical conference to discuss issues
raised in the comments filed by parties in this proceeding.
Safety Regulations
Our operations are subject to regulation by the United States Department of
Transportation under the Natural Gas Pipeline Safety Act of 1969, as amended,
relating to the design, installation, testing, construction, operation and
management of our pipeline system. The Natural Gas Pipeline Safety Act requires
any entity that owns or operates pipeline facilities to comply with applicable
safety standards, to establish and maintain inspection and maintenance plans and
to comply with such plans.
The Natural Gas Pipeline Safety Act was amended by the Pipeline Safety Act
of 1992 to require the Department of Transportation's Office of Pipeline Safety
to consider protection of the environment when developing minimum pipeline
safety regulations. In addition, the amendments required that the Department of
Transportation issue pipeline regulations concerning, among other things, the
circumstances under which emergency flow restriction devices should be required,
training and qualification standards for personnel involved in maintenance and
operation, and requirements for periodic integrity inspections, as well as
periodic inspection of facilities in navigable waters which could pose a hazard
to navigation or public safety. In addition, the amendments narrowed the scope
of our gas pipeline exemption pertaining to underground storage tanks under the
Resource Conservation and Recovery Act.
In 2002, the U.S. Congress enacted the Pipeline Safety Improvement Act, and
final regulations implementing the Pipeline Safety Improvement Act are
anticipated to be issued in 2003. The Pipeline Safety Improvement Act makes
numerous changes to pipeline safety law, the most significant of which is the
requirement that operators of pipeline facilities implement written integrity
management programs. Such programs must include a baseline integrity assessment
of each of an operator's transmission facilities that must be completed within
10 years of the enactment of the Pipeline Safety Improvement Act. We anticipate
that the Pipeline Safety Improvement Act and regulations will impose increased
costs associated with the new pipeline inspection and pipeline integrity program
requirements, but based on current information we do not expect these costs to
have a material adverse effect upon our earnings.
ENVIRONMENTAL MATTERS
We are subject to extensive federal, state and local statutes, rules and
regulations relating to environmental protection, including the National
Environmental Policy Act, the Clean Air Act, and the Comprehensive Environmental
Response, Compensation and Liability Act. These laws and regulations can result
in increased capital, operating, and other costs. These laws and regulations
generally require us to obtain and comply with a wide variety of environmental
licenses, permits, inspections and other approvals, and may be enforced by both
public officials and private individuals.
We may be responsible for environmental clean-up and other costs at sites
that we formerly or currently own or operate and at third-party waste disposal
sites. We cannot predict with certainty the amount and timing of future
expenditures related to environmental matters because of the difficulty of
estimating clean-up costs. There is also uncertainty in quantifying liabilities
under environmental laws that impose joint and several liability on all
potentially responsible parties. Environmental regulations may also require us
to install pollution control equipment at, or perform environmental remediation
on, our facilities.
Historically, with respect to any capital expenditures required to meet
applicable standards and regulations, the FERC has granted the requisite rate
relief so that, for the most part, such expenditures and a return thereon have
been permitted to be recovered. We have no reason to believe the FERC will
change that position. Our management believes that compliance with applicable
environmental requirements is not likely to have a material adverse effect upon
our financial condition.
43
LEGAL PROCEEDINGS
In 1998, the U.S. Department of Justice informed Williams that Jack
Grynberg, an individual, had filed claims in the U.S. District Court for the
District of Colorado under the False Claims Act against Williams and some of its
wholly-owned subsidiaries, including us. Mr. Grynberg had also filed claims
against approximately 300 other energy companies and alleged that the defendants
violated the False Claims Act in connection with the measurement, royalty
valuation and purchase of hydrocarbons. The relief sought was 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
Department of Justice announced that it was declining to intervene in any of the
Grynberg qui tam cases; including the action filed against Williams entities in
the U.S. 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 Williams to the U.S. District Court for the
District of Wyoming for pre-trial purposes. On October 9, 2002, the court
granted a motion to dismiss Grynberg's royalty valuation claims. Grynberg's
measurement claims remain pending against Williams and the other defendants.
On June 8, 2001, 14 Williams entities, including us, were named as
defendants in a nationwide class action lawsuit which has been pending against
other defendants, generally pipeline and gathering companies, for more than one
year. The plaintiffs allege that the defendants, including 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. In September 2001, plaintiffs' counsel voluntarily
dismissed two of the 14 Williams entities named as defendants in the lawsuit. In
November 2001, Williams defendants, along with other coordinating defendants,
filed a motion to dismiss on non-jurisdictional grounds. In January 2002, most
of the Williams defendants, along with a group of coordinating defendants filed
a motion to dismiss for lack of personal jurisdiction. On August 19, 2002,
defendants' motion to dismiss on non-jurisdictional grounds was denied. On
September 17, 2002, the plaintiffs filed a motion for class certification. The
Williams entities joined with other defendants in contesting certification of
the plaintiff class and a decision on this issue is pending.
We believe that the ultimate resolution of the foregoing matters, based on
advice of counsel and after consideration of amounts accrued, insurance
coverage, potential recovery from customers and other indemnification
arrangements, will not have a materially adverse effect upon our future
financial position, results of operations and cash flow requirements.
44
MANAGEMENT
DIRECTORS AND OFFICERS
The following is a list of our directors and officers, their ages and their
positions as of January 31, 2003.
<Table>
<Caption>
NAME AGE TITLE
- ---- --- -----
Steven J. Malcolm.................... 54 Director and Chairman of the Board
J. Douglas Whisenant................. 56 Director, President and Chief Executive Officer
Allison G. Bridges................... 43 Director and Vice President, Commercial
Operations
Randall Lee Barnard.................. 44 Vice President, Operations
Randall R. Conklin................... 46 Vice President, General Counsel and Assistant
Secretary
P. David Dean........................ 51 Vice President, Engineering and Construction
Frank J. Ferazzi..................... 46 Vice President, Commercial Operations
H. Dean Jones II..................... 50 Vice President, Commercial Operations
Ronald M. Mucci...................... 45 Vice President, Chief Information Officer
Richard D. Rodekohr.................. 44 Vice President, Finance and Accounting and
Treasurer
Nancy W. Schultz..................... 46 Vice President, Operations and Engineering
Services
Jeffrey P. Heinrichs................. 52 Controller and Assistant Treasurer
Brian K. Shore....................... 38 Secretary
</Table>
There are no family relationships among our directors or the officers
listed. Directors serve one-year terms with elections held at each annual
meeting, or until their successors have been elected and qualified. Officers
serve a term which extends to and expires at the annual meeting of the Board of
Directors or until a successor has been elected and qualified. Each of our
officers is also an officer of WGP.
Steven J. Malcolm has served as a Director and Chairman of the Board of our
company since May 2002. He has been a director of Williams since 2001, and was
elected Chief Executive Officer of Williams in January 2002. He was elected
President and Chief Operating Officer of Williams in September 2001. Prior to
that, he was an Executive Vice President of Williams since May 2001, President
and Chief Executive Officer of Williams Energy Services, LLC, a subsidiary of
Williams, from December 1998 to May 2001, and the Senior Vice President and
General Manager of Williams Field Services Company, another subsidiary of
Williams, from November 1994 to May 2001.
J. Douglas Whisenant has served as a Director of our company since October
1992 and as President and Chief Executive Officer since December 2001. From 1992
until December, 2001 he was Senior Vice President and General Manager of our
company. Prior to that he was Vice President, Finance and Administration from
1989, and Vice President, Finance from 1983.
Allison G. Bridges has served as a Director of our company since December
2002 and as Vice President, Commercial Operations since November 2002. Before
being named to her current position, she was Vice President, Service Delivery,
Gas Management and Control for WGP. In 1981 she joined Transcontinental Gas Pipe
Line Corporation, a subsidiary of Williams since 1995.
Randall Lee Barnard has served as a Vice President, Operations of our
company since April 2002. From 2001 until April 2002 he served as President of
International Operations for Williams, and he also served as Senior Vice
President of Williams Energy Services, LLC, a subsidiary of Williams. From 1997
to 2000 he was the Country Manager and General Manager of Williams' operations
in Venezuela. He has been involved in Williams' international business
development since 1994.
Randall R. Conklin has served as Vice President, General Counsel and
Assistant Secretary of our company since April 2002. Since 1992 he has served as
Vice President and General Counsel of Transcontinen-
45
tal Gas Pipe Line Corporation, a subsidiary of Williams. He began his career in
1981 as an attorney with Transco Energy Company, a subsidiary of Williams since
1995.
P. David Dean has served as a Vice President, Engineering and Construction
of our company since April 2002. Prior to that he was Vice President, Technical
Services for WGP from 1998 until April 2002, and from 1995 to 1998 he was the
Director of Operations for our company and Kern River Gas Transmission Company,
a former subsidiary of Williams.
Frank J. Ferazzi has served as a Vice President, Commercial Operations of
our company since April 2002. Prior to his current position, in 1995, he was
elected Vice President, Customer Service for Transcontinental Gas Pipe Line
Corporation, a subsidiary of Williams. He is also the Commercial Officer in
charge of the development and implementation of WGP's 1Line Service Delivery
System and is the Management Representative for Williams' investment in the
Gulfstream Natural Gas System, a Williams joint venture with Duke Energy Gas
Transmission Corporation.
H. Dean Jones II has served as a Vice President, Commercial Operations of
our company since April 2002, and in November 2002 he was also elected Vice
President, Commercial Operations for Texas Gas Transmission Corporation, a
subsidiary of Williams. Prior to that he was Vice President, Customer Service
for WGP, Eastern Region, and from 2000 until April 2002 he was Vice President,
Customer Services and Rates for WGP, South Central. In 1999 to 2000 he was Vice
President, Strategic Business Relations for WEM&T.
Ronald M. Mucci has served as Vice President, Chief Information Officer of
our company since April 2002. Prior to his current position he was Senior Vice
President, Williams Gas Pipeline Shared Services Unit, a division of WGP. He was
Vice President, Business Practices and Systems and Chief Information Officer for
WGP from 1997 until 1999, and from 1995 to 1997 he served as Vice President,
Marketing of our company. From 1993 to 1994 he was Vice President, Operations
and Engineering for Williams Natural Gas Company, and prior to that he was Vice
President, Rates and Regulatory Affairs, Information Systems and Business
Development of Williams Natural Gas Company.
Richard D. Rodekohr has served as Vice President, Finance and Accounting
and Treasurer of our company since November 2002. Prior to joining WGP he was
Vice President of Investor Relations for Williams since 1998, having joined
Williams in 1995 through the acquisition by Williams of Transco Energy Company
where he was Director of Corporate Planning.
Nancy W. Schultz has served as a Vice President, Operations and Engineering
Services of our company since April 2002. Before being named to her current
position she was Senior Vice President and General Manager, Technical Functions
for the Gulfstream Natural Gas System, a Williams joint venture with Duke Energy
Gas Transmission Corporation. From 1996 to 2000 she served as Director,
Engineering and Project Management for WGP. In 1982 she joined Transcontinental
Gas Pipe Line Corporation as an engineer, which became a Williams subsidiary in
1995.
Jeffrey P. Heinrichs has served as Controller and Assistant Treasurer of
our company since April 2002. Prior to that he was a Director of Williams Gas
Pipeline Shared Services Unit, a division of WGP. Since 1976 he has worked in
various financial and accounting positions for Transcontinental Gas Pipe Line
Corporation, a subsidiary of Williams since 1995.
Brian K. Shore has served as the Secretary of our company since November
2002. Prior to election as Corporate Secretary, he was a Senior Attorney in the
Williams legal department representing the corporate services group. Over the
past 14 years, he has also represented Williams Midstream Gas & Liquids,
Williams Exploration & Production, and Williams Telecommunications, Inc., a
former affiliate of Williams.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
As a subsidiary of Williams, we engage in transactions with Williams and
other Williams subsidiaries typical of group operations. As a participant in
Williams' cash management program, we have advances to and from Williams through
our parent company, WGP. The advances are represented by demand notes. The
interest rate on intercompany demand notes is LIBOR on the first day of the
month plus an applicable margin (which was 3.5% at December 31, 2002) based on
our current Standard & Poor's Rating. We received interest income from advances
to these affiliates of $1.6 million, $3.1 million and $3.4 million during 2002,
2001 and 2000, respectively. Our ability to participate in Williams' cash
management program may be limited if the FERC adopts certain proposed rules. See
"Business -- Regulatory Matters -- FERC Regulation and Rate Structure."
Williams' corporate overhead expenses allocated to us were $9.7 million,
$6.9 million and $4.5 million for 2002, 2001 and 2000, respectively. Such
expenses have been allocated to us by Williams primarily based on the Modified
Massachusetts formula, which is a FERC-approved method utilizing a combination
of net revenues, gross payroll and gross plant for the allocation base. In
addition, Williams or an affiliate has provided executive, data processing,
legal, aviation, internal audit and other administrative services to us on a
direct charge basis, which totaled $4.6 million, $5.0 million and $4.8 million
for 2002, 2001 and 2000, respectively.
Our operating revenues typically include transportation and exchange
transactions with subsidiaries of Williams, including WEM&T. Combined operating
revenues for these activities totaled $2.2 million, $1.8 million and $1.2
million for 2002, 2001 and 2000, respectively.
We have entered into a credit agreement with Williams, Williams' other
natural gas pipeline subsidiaries and a syndicate of banks. See "Description of
Other Indebtedness -- Our Credit Agreement." We have entered into various other
transactions with other related parties, the amounts of which were not
significant. These transactions and the above-described transactions are made on
the basis of commercial relationships and prevailing market prices or general
industry practices.
From time to time, employees are assigned on a temporary or permanent basis
to us from Williams and its other affiliates and from us to other Williams
affiliates.
We have also entered into an interconnect agreement and an operation
balance agreement, each in connection with the Georgia Strait Crossing project,
with an affiliate of Williams.
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DESCRIPTION OF OTHER INDEBTEDNESS
OUR CREDIT AGREEMENT
Williams, its natural gas pipeline subsidiaries, Transcontinental Gas Pipe
Line Corporation, Texas Gas Transmission Corporation and our company, are each
borrowers under a $700 million credit agreement with a syndicate of banks which
as of December 31, 2002 permits total borrowings by Williams of $463 million.
Under the credit agreement, the banks have commitments to us of $400 million, to
the extent that the funds have not been borrowed by Williams or the other
borrowers or otherwise must remain available to Williams. The credit agreement
provides that the proceeds of any advance may only be used for general corporate
purposes relating to the business of a borrower and its subsidiaries.
Borrowings under the credit agreement are designated by the applicable
borrower at the time of giving notice of such borrowing as either base rate type
advances or Eurodollar rate type advances.
The interest rate for base rate advances with respect to any period is the
higher of Citibank, N.A.'s per annum base rate in effect from time to time and
0.50% per annum above the federal funds effective rate, in each case plus an
applicable margin. The interest rate for Eurodollar rate advances with respect
to any interest period is the London Interbank Offered Rate for U.S. Dollar
deposits for a term comparable to the term of such interest period, plus an
applicable margin. The applicable margin is determined by reference to the
ratings of Williams senior unsecured long-term debt by Standard & Poor's Ratings
Group and Moody's Investors Service, Inc. and to the level of utilization of
commitments. The range of the base rate applicable margin is from 1.75% to
3.50%, and the range of the Eurodollar rate applicable margin is from 3.00% to
4.75%. The commitment and other fees payable under the terms of the credit
agreement are direct obligations of Williams.
The credit agreement terminates in July 2005. Prior to termination, each
borrower has the right to terminate in whole or reduce ratably in part the
unused portions of the respective commitments of the banks to such borrower. If
all of the commitments of the banks to any borrower are so terminated or
reduced, and such borrower is not otherwise in default under the credit
agreement, then such borrower may elect to cease to be a borrower for the
purposes of the credit agreement. In the event that Williams or its subsidiaries
receive cash proceeds from certain asset dispositions or from the sale or
issuance of preferred stock or other equity interests, the credit agreement
provides for the mandatory application of such cash proceeds, in varying
proportions, to the permanent ratable reduction of the respective commitments of
the banks to Williams, the reduction of Williams' other indebtedness and the
cash collateralization of certain Williams letter of credit commitments. The
exact application of such cash proceeds, and therefore the extent to which the
commitments of the banks to Williams are to be reduced, depends upon the
aggregate amount of the commitments of the banks to Williams prior to such
application, as well as the nature of the transaction which gives rise to the
cash proceeds. These asset sale provisions apply to sales of our assets and,
under the credit agreement, Williams is required to apply 50% of the net cash
proceeds from the sale of any of our assets to the reduction of commitments
under the credit agreement and to the reduction of certain other indebtedness of
Williams and its affiliates, on a ratable basis until commitments under the
credit agreement are reduced to $400 million and thereafter with priority to the
reduction of certain other indebtedness. As Williams completes certain projected
asset sales, the current commitment from participating banks in the credit
agreement is anticipated to be reduced, but we will continue to have borrowing
capacity up to the lesser of $400 million or the greatest amount that Williams
would be able to borrow (but not over $400 million) to the extent the funds
available under the credit agreement have not been borrowed by Williams or other
participating subsidiaries or otherwise must remain available to Williams. Upon
certain change of control events of any of the borrowers, the banks under the
credit agreement have the option to terminate their obligations under the credit
agreement.
We do not guaranty the obligations of any other borrower under the credit
agreement. The obligations under the credit agreement are secured by liens on
assets of certain Williams affiliates, but not our assets. WGP and certain other
subsidiaries of Williams are guarantors of borrowings under the credit
agreement.
48
The credit agreement contains restrictions, which limit, under certain
circumstances, prepayment of other debt (including the notes offered hereby),
certain sale and lease-back transactions, the attachment of liens on or the
disposition of certain assets and any change of ownership, whether by merger,
consolidation or otherwise, of any borrower. In the credit agreement, we also
agreed not to permit to exist any consensual encumbrance or consensual
restriction on our ability to pay dividends or make any other distributions, to
pay any obligations owed or to make loans or advances, to Williams or its other
subsidiaries, with certain exceptions. Furthermore, we have agreed in the credit
agreement not to permit the ratio of (a) the aggregate amount of our
consolidated indebtedness, to (b) the sum of our consolidated net worth and the
aggregate amount of our consolidated indebtedness, to exceed at any time 0.55 to
1.00. We have also agreed not to permit, for any period of four consecutive
quarters, the ratio of (a) the sum of our cash flow plus interest expense to (b)
interest expense to be less than 1.50 to 1.00. As of the date of this
prospectus, we are in compliance with these covenants after giving effect to the
offering of the outstanding notes and the application of the net proceeds
therefrom. The credit agreement further requires that, if we make advances to
WGP under the Williams cash management program, the obligations to repay those
advances must be subordinated to the obligations under the credit agreement.
OUR SENIOR NOTES
In addition to the credit facility, at December 31, 2002, we also had
outstanding three series of senior notes with a total outstanding principal
amount of $367.9 million. One of these series of senior notes has a total
outstanding principal amount of $250.0 million, pays interest semiannually at a
rate of 6.625% and matures on December 1, 2007. Another of these series of
senior notes has a total outstanding principal amount of $85.0 million, pays
interest semiannually at a rate of 7.125% and matures on December 1, 2025. The
third of these series of senior notes has a total outstanding principal amount
of $32.9 million, pays interest semiannually at a rate of 9.000% and matures on
August 1, 2022. Except with respect to the redemption and sinking fund features,
which are summarized below, the material terms of the three series of senior
notes are otherwise identical. We have also filed copies of the indentures under
which the senior notes were issued with the Securities and Exchange Commission.
The senior notes are our direct obligations and are not guaranteed or
secured. The indentures contain certain events of default and agreements which
are customary with respect to investment grade debt securities, including
limitations on mergers, consolidations, and sale of substantially all assets by
us, and limitations on liens and sale and leaseback transactions by us or our
subsidiaries. The indentures do not limit the amount of indebtedness we may
incur.
Under certain circumstances described in the indentures, we may be entitled
to discharge or defease our obligations with respect to the senior notes or our
obligations pursuant to the restrictive covenants contained in the indentures.
Defeasance, or covenant defeasance, with respect to any series of senior notes
may be effected only if, among other things, we irrevocably deposit with the
relevant trustee funds in an amount sufficient to pay at maturity (or upon
redemption) the principal of and interest on all outstanding senior notes of
such series, and we deliver to the relevant trustee an opinion of counsel to the
effect that the holders of such series of senior notes will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance or covenant defeasance.
The senior notes due on December 1, 2007 and December 1, 2025 do not
include redemption or sinking fund features.
The senior notes due on August 1, 2022 are redeemable at our option from
and after August 1, 2002. If redeemed prior to July 31, 2012 the redemption
price varies between 104.24% and 100.42% of the principal amount of the notes
then outstanding, together with accrued interest to the date fixed for
redemption. From and after August 1, 2012 the redemption price is 100.00% of the
principal amount of the notes then outstanding, together with accrued interest
to the date fixed for redemption. In the event of any redemption of less than
all of the outstanding senior notes, the particular notes to be redeemed will be
selected by the trustee under the applicable indenture.
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The senior notes due on August 1, 2022 are also entitled to a mandatory
sinking fund beginning August 1, 2003 in annual installments of $7.5 million. As
a result of the mandatory sinking fund, we anticipate that the senior notes due
on August 1, 2022 will be redeemed in their entirety by 2007. At our option, we
may make an additional sinking fund payment on or before the due date of any
mandatory sinking fund payment in an amount which does not exceed $7.5 million.
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DESCRIPTION OF NOTES
The terms of the new notes and the outstanding notes are identical in all
material respects, except the new notes:
- will have been registered under the Securities Act;
- will not contain transfer restrictions and registration rights that
relate to the outstanding notes; and
- will not contain provisions relating to the payment of liquidated damages
to be made to the holders of the outstanding notes under circumstances
related to the timing of the exchange offer.
Any outstanding notes that remain outstanding after the exchange offer,
together with new notes issued in the exchange offer, will be treated as a
single class of securities under the indenture for voting purposes.
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Northwest" refers only to Northwest Pipeline Corporation and not to any of its
subsidiaries. As of the date of the indenture, Northwest does not have any
active subsidiaries.
Northwest will issue the notes under an indenture between itself and
JPMorgan Chase Bank, as trustee. The terms of the notes include those stated in
the indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939, as amended.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate the
indenture and the registration rights agreement in their entirety. We urge you
to read the indenture and the registration rights agreement because they, and
not this description, define your rights as holders of the notes. Copies of the
indenture and the registration rights agreement are available from Northwest.
Certain defined terms used in this description but not defined below under
"-- Certain Definitions" have the meanings assigned to them in the indenture.
The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders will have rights under the indenture.
BRIEF DESCRIPTION OF THE NOTES AND FUTURE GUARANTEES
The Notes
The notes:
- are general unsecured obligations of Northwest;
- are pari passu in right of payment with any current and future senior
Indebtedness of Northwest;
- are senior in right of payment to any future subordinated Indebtedness of
Northwest; and
- will be fully and unconditionally guaranteed, on a joint and several
basis, by all Domestic Restricted Subsidiaries of Northwest.
Future Guarantees; Unrestricted Subsidiaries
As of the date of this prospectus, our only subsidiaries are inactive, and
will be "Unrestricted Subsidiaries." In addition, under the circumstances
described below under the subheading "-- Certain Covenants -- Designation of
Restricted and Unrestricted Subsidiaries," we will be permitted to designate
certain of our future subsidiaries as "Unrestricted Subsidiaries." Our
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants in the indenture and will not guarantee the notes.
As of the date of this prospectus, we have no subsidiaries that are or are
required to become guarantors of the notes. If in the future we form or acquire
any Domestic Restricted Subsidiary, such Domestic Restricted Subsidiary will be
required to execute a guarantee of the notes. Any such guarantee so executed
would be:
- a general unsecured obligation of that Guarantor;
51
- pari passu in right of payment to all existing and future senior
unsecured Indebtedness of that Guarantor; and
- senior in right of payment to any future subordinated Indebtedness of
that Guarantor.
PRINCIPAL, MATURITY AND INTEREST
Northwest originally issued the outstanding notes and will issue the new
notes with an initial maximum aggregate principal amount of $175 million.
Northwest may issue an unlimited amount of additional notes from time to time
after this offering. Any offering of additional notes is subject to the covenant
described below under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock." The notes and any additional
notes subsequently issued under the indenture will be treated as a single class
for all purposes under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. Northwest will issue notes in
denominations of $1,000 and integral multiples of $1,000. The notes will mature
on March 1, 2010.
Interest on the notes will accrue at the rate of 8 1/8% per annum and will
be payable semi-annually in arrears on March 1 and September 1, commencing on
September 1, 2003. Northwest will make each interest payment to the Holders of
record on the immediately preceding February 15 and August 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to Northwest, Northwest
will pay all principal, interest and premium and Liquidated Damages, if any, on
that Holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless Northwest elects to make interest
payments by check mailed to the Holders at their address set forth in the
register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. Northwest may
change the paying agent or registrar without prior notice to the Holders of the
notes, and Northwest or any of its Subsidiaries may act as paying agent or
registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. Northwest is not
required to transfer or exchange any note selected for redemption. Also,
Northwest is not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
SUBSIDIARY GUARANTEES
The notes will be guaranteed by each of Northwest's future Domestic
Restricted Subsidiaries. These Subsidiary Guarantees will be joint and several
obligations of the Guarantors. In the event of the bankruptcy or financial
difficulty of a Guarantor, such Guarantor's obligations under its Subsidiary
Guarantee may be subject to review and avoidance under state and federal
fraudulent transfer laws. Among other things, such obligations may be avoided if
a court concludes that such obligations were incurred for less than reasonably
equivalent value or fair consideration at a time when the Guarantor was
insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that a Guarantor did not
receive reasonably equivalent value or fair consideration to the extent that the
aggregate amount of its liability on its Subsidiary Guarantee exceeds the
economic benefits it receives from the issuance of the notes.
52
The obligations of each Guarantor under its Subsidiary Guarantee will be limited
in a manner intended to cause it not to be a fraudulent conveyance under
applicable law, although no assurance can be given that a court would give the
Holder the benefit of such provision.
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than Northwest or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition
or the Person formed by or surviving any such consolidation or merger (if
other than such Guarantor) assumes all the obligations of that Guarantor
under the indenture, its Subsidiary Guarantee and the registration rights
agreement pursuant to a supplemental indenture satisfactory to the trustee;
or
(b) the Net Proceeds of such sale or other disposition (or an amount
of cash equal to such Net Proceeds) are applied in accordance with the
applicable provisions of the indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation) to a Person that is not (either before or
after giving effect to such transaction) a Subsidiary of Northwest, if
the sale or other disposition complies with the "Asset Sale" provisions
of the indenture; or
(2) in connection with any sale of all of the Capital Stock of a Guarantor
to a Person that is not (either before or after giving effect to such
transaction) a Subsidiary of Northwest, if the sale complies with the
"Asset Sale" provisions of the indenture; or
(3) if Northwest designates any Restricted Subsidiary that is a Guarantor
as an Unrestricted Subsidiary in accordance with the applicable
provisions of the indenture.
See "-- Repurchase at the Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
At any time and from time to time prior to March 1, 2007, Northwest may, at
its option, redeem all or a portion of the notes at the Make-Whole Price plus
accrued and unpaid interest to the redemption date.
At any time and from time to time on or after March 1, 2007, Northwest may,
at its option, redeem the notes, in whole or in part, at a redemption price
equal to the percentage of principal amount set forth below plus accrued and
unpaid interest to the redemption date, if redeemed during the twelve-month
period beginning on March 1, of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2007........................................................ 104.063%
2008........................................................ 102.031%
2009 and thereafter......................................... 100.000%
</Table>
At any time and from time to time prior to March 1, 2006, Northwest may, at
its option, redeem up to 35% of the aggregate principal amount of the notes with
the net cash proceeds received by Northwest from any Public Equity Offering
(excluding any net cash proceeds received from Williams or any of its
Affiliates) at a redemption price equal to 108.125% of the principal amount plus
accrued and unpaid interest and liquidated damages, if any, to the redemption
date; provided that
(1) in each case the redemption takes place not later than 90 days after
the closing of the related Public Equity Offering, and
53
(2) at least 65% of the aggregate principal amount of notes remains
outstanding immediately after the occurrence of such redemption
(excluding notes held by Northwest and its Subsidiaries).
MANDATORY REDEMPTION
Northwest is not required to make mandatory redemption or sinking fund
payments with respect to the notes.
Termination of Certain Covenants
From and after the first date after the date of the indenture on which the
notes have an Investment Grade Rating from both Rating Agencies and no Default
or Event of Default has occurred and is continuing under the indenture (the
"Investment Grade Date"), Northwest and its Restricted Subsidiaries will no
longer be subject to the provisions of the indenture described below under the
following captions:
- " -- Additional Interest,"
- " -- Repurchase at the Option of Holders -- Asset Sales,"
- " -- Certain Covenants -- Restricted Payments,"
- " -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock,"
- " -- Certain Covenants -- Transactions with Affiliates,"
- " -- Certain Covenants -- Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries,"
- " -- Certain Covenants -- Business Activities"
provided, however, that the provisions of the indenture described below
under the following captions will not be so terminated:
- " -- Repurchase at the Option of Holders -- Change of Control,"
- " -- Certain Covenants -- Liens,"
- " -- Certain Covenants -- Merger, Consolidation or Sale of Assets"
(except as set forth in that covenant),
- " -- Certain Covenants -- Sale and Leaseback Transactions" (except as set
forth in that covenant),
- " -- Certain Covenants -- Additional Future Guarantees" (except as set
forth in that covenant),
- " -- Certain Covenants -- Payments for Consent," and
- " -- Reports."
As a result, the notes will be entitled to substantially reduced covenant
protection from and after any Investment Grade Date.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require Northwest to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indenture. In the Change of Control Offer,
Northwest will offer a Change of Control Payment in cash equal to 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid interest
and Liquidated Damages, if any, on the notes repurchased, to the date of
purchase. Within 30 days following any Change of Control, Northwest will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase notes on the Change of Control
Payment Date specified in the notice, which date will be no earlier
54
than 30 days and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and described in such
notice. Northwest will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions of the indenture, Northwest will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Change of Control provisions of the indenture by virtue of
such conflict.
On the Change of Control Payment Date, Northwest will, to the extent
lawful:
(1) accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions of notes properly tendered;
and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by
Northwest.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 30 days following a Change of Control, if
Northwest or any of its Williams Group Affiliates is subject to any agreement
evidencing Indebtedness (or commitments to extend Indebtedness) that prohibits
prepayment or repurchase of the notes pursuant to a Change of Control Offer,
Northwest will either repay, or cause its Williams Group Affiliates to repay,
all such outstanding Indebtedness of Northwest and its Williams Group Affiliates
(and terminate all commitments to extend such Indebtedness), or obtain the
requisite consents, if any, under all agreements governing such Indebtedness or
commitments to permit the repurchase of notes required by this covenant.
Northwest shall first comply with the covenant set forth in this paragraph
before it shall be required to make a Change of Control Offer or to repurchase
notes pursuant to the "Change of Control" covenant. Northwest's failure to
comply with the covenant described in this paragraph may (with notice and lapse
of time) constitute an Event of Default described in clause (3) but shall not
constitute an Event of Default described in clause (2) under "Events of Default"
below.
Northwest will publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require Northwest to make a Change of
Control Offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable to the transaction giving
rise to such requirement. Except as described above with respect to a Change of
Control, the indenture does not contain provisions that permit the Holders of
the notes to require that Northwest repurchase or redeem the notes in the event
of a takeover, recapitalization or similar transaction.
Northwest will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by Northwest and
purchases all notes properly tendered and not withdrawn under the Change of
Control Offer.
Various Credit Facilities and other agreements evidencing Indebtedness to
which Northwest or its Williams Group Affiliates are parties currently prohibit
Northwest from repurchasing any notes. Any future Credit Facilities or other
agreements relating to Indebtedness to which any of Northwest or its Williams
Group Affiliates becomes a party may contain similar restrictions. In the event
a Change of Control occurs at
55
a time when Northwest is prohibited from purchasing notes (either directly or as
a result of a covenant binding on one of its Williams Group Affiliates),
Northwest could seek the consent of the creditors of Northwest or its Williams
Group Affiliates to the purchase of the notes or could attempt to refinance (or
have its Williams Group Affiliates attempt to refinance) the Indebtedness that
contains such provision. If Northwest or its Williams Group Affiliates do not
obtain such a consent or refinance such Indebtedness, Northwest will remain
prohibited from purchasing notes. In such case, the failure to obtain such
consent or complete such refinancing would constitute a Default under the
indenture.
If a Change of Control Offer is made, there can be no assurance that
Northwest will have available funds sufficient to pay the Change of Control
Payment for all the notes that might be delivered by Holders seeking to accept
the Change of Control Offer. In the event that Northwest is required to purchase
outstanding notes pursuant to a Change of Control Offer, Northwest expects that
it would seek third party financing to the extent it does not have available
funds to meet its purchase obligations. However, there can be no assurance that
Northwest would be able to obtain such financing or that the terms of the
indenture would permit the occurrence of such financing.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of Northwest and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require Northwest to repurchase its notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of Northwest and its Subsidiaries taken as a whole to another Person or
group may be uncertain.
Asset Sales
Northwest will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) Northwest (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) the fair market value is determined by (a) an executive officer of
Northwest if the value is less than $10 million or (b) Northwest's
Board of Directors if the value is $10 million or more, as evidenced by
a resolution of such Board of Directors;
(3) at least 75% of the consideration received in the Asset Sale by
Northwest or such Restricted Subsidiary is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following will
be deemed to be cash:
(a) any liabilities, as shown on Northwest's or such Restricted
Subsidiary's most recent balance sheet, of Northwest or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are by
their terms subordinated to the notes or any Subsidiary Guarantee) that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Northwest or such Subsidiary from further
liability;
(b) any securities, notes or other obligations received by Northwest
or any such Restricted Subsidiary from such transferee that are
contemporaneously, subject to ordinary settlement periods, converted by
Northwest or such Subsidiary into cash, to the extent of the cash received
in that conversion; and
(c) property or assets received as consideration for such Asset Sale
that would otherwise constitute a permitted application of Net Proceeds (or
other cash in such amount) under clauses (2), (3) or (4) under the next
succeeding paragraph below.
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Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Northwest may apply an amount of cash equal to the amount of such Net Proceeds
at its option:
(1) to repay or prepay senior Indebtedness of Northwest and/or the
Guarantors under a Credit Facility;
(2) to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a
Permitted Business.
To the extent that Northwest does not apply an amount of cash equal to the
amount of such Net Proceeds of any Asset Sale during such period as provided in
the preceding paragraph, the amount not so applied (excluding Net Proceeds of
any Asset Sale of the Gray's Harbor lateral project and excluding Net Proceeds
of any Asset Sale to the extent of the amount of acquisitions or capital
expenditures described under clauses (2), (3) or (4) under the immediately
preceding paragraph above made during the 365 days preceding the receipt of such
Net Proceeds (other than any portion of such amount that was funded with Net
Proceeds of any other Asset Sale or that has been allocated to exclude Net
Proceeds of any other Asset Sales under this provision)) will constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $20.0 million,
Northwest will make an Asset Sale Offer to all Holders of notes and all holders
of other Indebtedness that is pari passu with the notes containing provisions
similar to those set forth in the indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets to purchase the maximum principal
amount of notes and such other pari passu Indebtedness that may be purchased out
of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to
100% of the principal amount plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase, and will be payable in cash. If any
Excess Proceeds remain after consummation of an Asset Sale Offer, Northwest may
use those Excess Proceeds for any purpose not otherwise prohibited by the
indenture. If the aggregate principal amount of notes and other pari
passuIndebtedness tendered into such Asset Sale Offer exceeds the amount of
Excess Proceeds, the trustee will select the notes and such other pari passu
Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset
Sale Offer, the amount of Excess Proceeds will be reset at zero.
Northwest will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sale
provisions of the indenture, Northwest will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the indenture by virtue of such
conflict.
Prior to making any Asset Sale Offer, but in any event within 30 days
following the date on which such Asset Sale Offer would otherwise be required,
if Northwest or any of its Williams Group Affiliates is subject to any agreement
evidencing Indebtedness (or commitments to extend Indebtedness) that prohibits
prepayment or repurchase of the notes pursuant to an Asset Sale Offer, Northwest
will either repay, or cause its Williams Group Affiliates to repay, all such
outstanding Indebtedness of Northwest and its Williams Group Affiliates (and
terminate all commitments to extend such Indebtedness), or obtain the requisite
consents, if any, under all agreements governing such Indebtedness or
commitments to permit the repurchase of notes required by this covenant.
Northwest shall first comply with the covenant set forth in this paragraph
before it shall be required to make an Asset Sale Offer or to repurchase notes
pursuant to this "Asset Sale" covenant. Northwest's failure to comply with the
covenant described in this paragraph may (with notice and lapse of time)
constitute an Event of Default in clause (3) but shall not constitute an Event
of Default described in clause (2) under "Events of Default" below.
Various Credit Facilities and other agreements evidencing Indebtedness to
which Northwest or its Williams Group Affiliates are parties currently prohibit
Northwest from repurchasing any notes. Any future Credit Facilities or other
agreements relating to Indebtedness to which Northwest or its Williams Group
Affiliates becomes a party may contain similar restrictions. In the event an
Asset Sale Offer would be required at a time when Northwest is prohibited from
purchasing notes (either directly or as a result of a covenant
57
binding on one of its Williams Group Affiliates), Northwest could seek the
consent of the creditors of Northwest or its Williams Group Affiliates to the
purchase of the notes or could attempt to refinance (or have its Williams Group
Affiliates attempt to refinance) the Indebtedness that contains such
prohibition. If Northwest (or its Williams Group Affiliates) do not obtain such
a consent or refinance such Indebtedness, Northwest will remain prohibited from
purchasing notes. In such case, the failure to obtain such consent or complete
such refinancing would constitute a Default under the Indenture.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on a
pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior to
a redemption date if the notice is issued in connection with a defeasance of the
notes or a satisfaction and discharge of the indenture. Notices of redemption
may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in a principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder of notes
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of the notes called for redemption.
If less than all of the notes are to be purchased at any time pursuant to
an Asset Sale Offer, the trustee will select notes for purchase as set forth
above for redemptions. No notes of $1,000 or less can be purchased in part.
Asset Sale Offers will be mailed by first class mail at least 30 days before the
purchase date to each Holder of Notes at its registered address. In the event of
a partial purchase of any Note pursuant to an Asset Sale Offer or a Change of
Control Offer, a new note in a principal amount equal to the unpurchased portion
of the original note will be issued in the name of the Holder of Notes upon
cancellation of the original note.
ADDITIONAL INTEREST
If, at any time and from time to time after the date of the indenture but
prior to the earlier of (1) the Credit Agreement Refinancing Date and (2) the
Investment Grade Date, the Fixed Charge Coverage Ratio for Northwest's four most
recent fiscal quarters for which internal financial statements are available is
less than 1.75 to 1.0, then, from (A) the date of any such determination until
(B) the earliest of (1) the next date (if any) on which the Fixed Charge
Coverage Ratio for Northwest's four most recent fiscal quarters then most
recently ended for which internal financial statements are available is equal to
or greater than 1.75 to 1.0, (2) the Credit Agreement Refinancing Date and (3)
the Investment Grade Date, the interest rate otherwise applicable to the notes
will be increased by a rate of 1.00% per annum.
CERTAIN COVENANTS
Restricted Payments
Northwest will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of Northwest's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection
with any merger or consolidation involving Northwest or any of its
Restricted Subsidiar-
58
ies) or to the direct or indirect holders of Northwest's or any of its
Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of Northwest or to Northwest or a
Restricted Subsidiary of Northwest);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving Northwest) any Equity Interests of Northwest or any direct or
indirect parent of Northwest;
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or the Subsidiary Guarantees, except a
payment of interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions set
forth in these clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment, no
Default or Event of Default has occurred and is continuing or would occur as a
consequence of such Restricted Payment; and
(1) if the Fixed Charge Coverage Ratio for Northwest's four most recent
fiscal quarters for which internal financial statements are available
is not less than 1.75 to 1.0, such Restricted Payment, together with
the aggregate amount of all other Restricted Payments made by Northwest
and its Restricted Subsidiaries after the end of the fiscal year of
Northwest then most recently ended for which internal financial
statements are available, is less than the sum, without duplication,
of:
(a) Available Cash Flow from Operations for the fiscal year of
Northwest then most recently ended for which internal financial statements
are available, plus
(b) 100% of the aggregate net cash proceeds received by Northwest
(including the fair market value of any Permitted Business or assets used
or useful in a Permitted Business to the extent acquired in consideration
of Equity Interests (other than Disqualified Stock) of Northwest) after the
date of the indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of Northwest (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of Northwest that have been converted into or exchanged for such
Equity Interests (other than Equity Interests (or Disqualified Stock or
debt securities) sold to a Subsidiary of Northwest), plus
(c) to the extent that any Restricted Investment that was made after
the date of the indenture is sold for cash or Cash Equivalents or otherwise
liquidated or repaid for cash, the lesser of (i) the cash return of capital
with respect to such Restricted Investment, including without limitation
repayment of principal of any Restricted Investment constituting a loan or
advance (less the cost of disposition, if any) and (ii) the initial amount
of such Restricted Investment, plus
(d) to the extent that any Unrestricted Subsidiary of Northwest is
redesignated as a Restricted Subsidiary after the date of the indenture,
the lesser of (i) the fair market value of Northwest's Investment in such
Subsidiary as of the date of such redesignation or (ii) such fair market
value as of the date on which such Subsidiary was originally designated as
an Unrestricted Subsidiary (the amount determined at any time pursuant to
items (b), (c) and (d) being referred to as the "Incremental Funds"); minus
(e) the aggregate amount of Restricted Payments previously made in
reliance on Incremental Funds pursuant to this clause (1) or clause (2)
below; or
(2) if the Fixed Charge Coverage Ratio for Northwest's four most recent
fiscal quarters for which internal financial statements are available
is less than 1.75 to 1.0, such Restricted Payment, together with the
aggregate amount of all other Restricted Payments made by Northwest and
its Restricted Subsidiaries during the period commencing on the date
such internal financial statements are available and ending on the date
the next quarterly internal financial statements are available (such
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Restricted Payments for purposes of this clause (2) meaning only
distributions on Northwest's common stock and loans and advances to
Williams and its Subsidiaries), is less than the sum, without
duplication, of:
(a) $50.0 million less the aggregate amount of all Restricted Payments
made by Northwest pursuant to this clause (2)(a) during the period ending
on the last day immediately preceding the date on which such internal
financial statements are available and beginning on the date of the
indenture; plus
(b) the aggregate amount of Incremental Funds at such time minus the
aggregate amount of Restricted Payments previously made in reliance on such
Incremental Funds pursuant to this clause (2) or clause (1) above.
Notwithstanding the foregoing, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indenture;
(2) so long as no Default or Event of Default has occurred and is
continuing or would be caused thereby, the redemption, repurchase,
retirement, defeasance or other acquisition of any subordinated
Indebtedness of Northwest or any Guarantor or of any Equity Interests
of Northwest in exchange for, or out of the net cash proceeds of, the
substantially concurrent (a) contribution (other than from a Subsidiary
of Northwest) to the equity capital of Northwest or (b) sale (other
than to a Subsidiary of Northwest) of, Equity Interests of Northwest
(other than Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition will be
excluded from clause (1) (b) of the preceding paragraph;
(3) so long as no Default or Event of Default has occurred and is
continuing or would be caused thereby, the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness of
Northwest or any Guarantor with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any distribution or dividend by a Restricted Subsidiary
of Northwest or to the holders of such Restricted Subsidiary's Equity
Interests on a pro rata basis;
(5) so long as no Default or Event of Default has occurred and is
continuing or would be caused thereby, dividends, distributions or
advances to Williams Group Affiliates, at times and in amounts equal to
amounts expended by Williams for the repurchase, redemption or
acquisition or retirement for value of any Equity Interests of Williams
held by any member of Northwest's (or any of its Restricted
Subsidiaries') management pursuant to any management equity
subscription agreement, stock option agreement or similar agreement;
provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests may not exceed $2.0
million in any twelve-month period and provided further that if the
amount so paid in any calendar year is less than $2.0 million, such
shortfall may be used to so repurchase, redeem, acquire or retire
Equity Interests in either of the next two calendar years in addition
to the $2.0 million that may otherwise be paid in each such calendar
year; and
(6) prior to the Credit Agreement Refinancing Date (i) to pay, directly or
indirectly, dividends or make any other distributions in respect of its
capital stock or pay any Debt or other obligation owed to Williams or
any of its Subsidiaries, or (ii) to make loans or advances to Williams
or any of its Subsidiaries.
In computing the amount of Restricted Payments previously made for purposes of
the immediately preceding paragraph, Restricted Payments made under clause (1)
(but only if the declaration or such dividend or other distribution has not been
counted in a prior period), clause (4) (but only to the extent of amounts paid
to holders other than Northwest or any of its Restricted Subsidiaries), clause
(5) and clause (6) of this paragraph shall be included, and Restricted Payments
made under clauses (2), (3) and (4) (except as noted above) shall be excluded.
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The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Northwest or such Restricted Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be valued by this covenant will be
determined, in the case of amounts under $5.0 million, by an officer of
Northwest and, in the case of amounts over $5.0 million, by the Board of
Directors.
Incurrence of Indebtedness and Issuance of Preferred Stock
Northwest will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and
Northwest will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that Northwest and any Guarantor may incur Indebtedness (including
Acquired Debt) or Northwest may issue Disqualified Stock, if the Fixed Charge
Coverage Ratio for Northwest's most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the date
on which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred or Disqualified Stock had been issued,
as the case may be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Northwest and any Guarantor of additional
Indebtedness and letters of credit under any Credit Facilities to which
Northwest is a party in an aggregate principal amount at any one time
outstanding under this clause (1) (with letters of credit being deemed
to have a principal amount equal to the undrawn face amount thereof)
not to exceed $400 million;
(2) the incurrence by Northwest and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by Northwest of Indebtedness represented by the notes
issued and sold in this offering and any Subsidiary Guarantees issued
pursuant to the indenture;
(4) the incurrence by Northwest and any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for
the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in
the business of Northwest or such Restricted Subsidiary, in an
aggregate principal amount not to exceed $5 million at any time
outstanding;
(5) the incurrence by Northwest or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other
than intercompany Indebtedness) that was permitted by the indenture to
be incurred under the first paragraph of this covenant or clauses (2),
(3), (4) or (5) of this paragraph;
(6) the incurrence by Northwest or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Northwest and any of its
Restricted Subsidiaries; provided, however, that:
(a) if Northwest or any Guarantor is the obligor on such Indebtedness,
such Indebtedness must be expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes, in the case of
Northwest, or the Subsidiary Guarantee, in the case of a Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than
Northwest or a Restricted Subsidiary of Northwest and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either
Northwest or a Restricted Subsidiary of Northwest, will be deemed, in each
case, to constitute an incurrence of such Indebtedness by Northwest or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (6);
61
(7) the incurrence by Northwest or any of its Subsidiaries of Hedging
Obligations;
(8) the guarantee by Northwest or any of the Guarantors of Indebtedness of
Northwest or any Guarantor of Northwest that was permitted to be
incurred by another provision of this covenant;
(9) Indebtedness in respect of bankers acceptances, letters of credit and
performance or surety bonds issued for the account of Northwest or any
of its Restricted Subsidiaries in the ordinary course of business in
amounts and for the purposes customary in Northwest's industry, in each
case only to the extent that such incurrence does not result in the
incurrence of any obligation to repay any borrowed money; and
(10) the incurrence by Northwest or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (10), not to exceed $25
million.
If any Non-Recourse Debt of an Unrestricted Subsidiary shall at any time
cease to constitute Non-Recourse Debt or such Unrestricted Subsidiary shall be
redesignated a Restricted Subsidiary, such event will be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant:
(1) in the event that an item of proposed Indebtedness (including Acquired
Debt) meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (10) above, or is
entitled to be incurred pursuant to the first paragraph of this
covenant, Northwest will be permitted to classify (or later classify or
reclassify in whole or in part in its sole discretion) such item of
Indebtedness in any manner that complies with this covenant;
(2) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form
of additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of the
same class of Disqualified Stock will not be deemed to be an incurrence
of Indebtedness or an issuance of Disqualified Stock for purposes of
this covenant; provided, in each such case, that the amount thereof is
included in the computation of Fixed Charges of Northwest as accrued;
and
(3) for the purposes of determining compliance with any dollar-denominated
restriction on the incurrence of Indebtedness denominated in a foreign
currency, the dollar-equivalent principal amount of such Indebtedness
incurred pursuant thereto shall be calculated based on the relevant
currency exchange rate in effect on the date that such Indebtedness was
incurred.
Liens
Northwest will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or otherwise cause or suffer to exist or become
effective any Lien of any kind securing Indebtedness, Attributable Debt or trade
payables (other than Permitted Liens) upon any of their property or assets, now
owned or hereafter acquired, unless all payments due under the indenture and the
notes are secured on an equal and ratable basis with the obligations so secured
until such time as such obligations are no longer secured by a Lien or, in the
case of any obligation so secured that is expressly subordinated to the notes or
any Subsidiary Guarantee, as applicable, by a Lien prior to any Liens securing
any and all obligations thereby secured for so long as any such obligations
shall be so secured.
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Dividend and Other Payment Restrictions Affecting Subsidiaries
Northwest will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to
Northwest or any of its Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to Northwest or any of its Restricted Subsidiaries;
(2) make loans or advances to Northwest or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Northwest or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and the Credit Agreement as
in effect on the date of the indenture and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of those agreements; provided
that the amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive in any material respect, taken as a whole, with respect to
such dividend and other payment restrictions than those contained in
the respective agreements on the date of the indenture, as determined
by the Board of Directors of Northwest in their reasonable and good
faith judgment;
(2) the indenture, the notes and the Subsidiary Guarantees;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Northwest or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness or Capital Stock was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person,
so acquired; provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the indenture to be
incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) Capital Lease Obligations, mortgage financings or purchase money
obligations for property acquired in the ordinary course of business
that impose restrictions on that property of the nature described in
clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive in any material respect, taken as
a whole, than those contained in the agreements governing the
Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred under
the provisions of the covenant described above under the caption
"-- Liens" that limit the right of the debtor to dispose of the assets
subject to such Liens;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, assets sale agreements, stock
sale agreements and other similar agreements; provided
63
that such restrictions apply only to the assets or property subject to
such joint venture or similar agreement or to the assets or property
being sold, as the case may be; and
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business.
Merger, Consolidation or Sale of Assets
Northwest may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not Northwest is the surviving Person); or (2)
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of Northwest and its Restricted Subsidiaries taken
as a whole, in one or more related transactions, to another Person unless:
(1) either: (a) Northwest is the surviving Person; or (b) the Person formed
by or surviving any such consolidation or merger (if other than
Northwest) or to which such sale, assignment, transfer, conveyance or
other disposition has been made is a Person organized or existing under
the laws of the United States, any state of the United States or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if
other than Northwest) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made expressly
assumes by supplemental indenture all the obligations of Northwest
under the notes, the indenture and the registration rights agreement
and delivers to the trustee an opinion of counsel to the effect that
the supplemental indenture has been duly authorized, executed and
delivered by such Person and constitutes a valid and binding obligation
of such Person, enforceable against such Person in accordance with its
terms (subject to customary exceptions);
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) Northwest or the Person formed by or surviving any such consolidation
or merger (if other than Northwest), or to which such sale, assignment,
transfer, conveyance or other disposition has been made will, on the
date of such transaction after giving pro forma effect thereto and any
related financing transactions as if the same had occurred at the
beginning of the applicable four-quarter period, be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock;" provided, however, that this clause (4)
shall no longer be applicable from and after any Investment Grade Date.
In addition, Northwest may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. Clause (4) under this "Merger, Consolidation
or Sale of Assets" covenant will not apply to a sale, assignment, transfer,
conveyance or other disposition of assets between or among Northwest and any of
its Restricted Subsidiaries. Without limitation of the foregoing, in no event
shall Northwest, directly or indirectly, (1) consolidate or merge with or into
Williams or any of the Williams Group Affiliates (whether or not Northwest is
the surviving Person) or (2) sell, assign, transfer, convey or otherwise dispose
of all or substantially all of the properties or assets of Northwest and its
Restricted Subsidiaries taken as a whole, in one or more related transactions,
to Williams or any of the Williams Group Affiliates (other than mergers or
transactions otherwise permitted by this covenant with (a) Williams Group
Affiliates engaged in no businesses other than being principally engaged in
owning and operating regulated interstate natural gas pipeline systems and any
businesses incidental and reasonably related thereto, including facilities for
mainline transmission and gas storage ("Pipeline Business") or (b) a holding
company of Northwest engaged in no businesses other than Pipeline Business and
having no Subsidiaries other than Subsidiaries engaged in no businesses other
than Pipeline Business and in the case of (a) or (b), only if at the time of
such merger or transaction, Northwest and such Williams Group Affiliate or
holding company each have an Investment Grade Rating from Moody's and S&P and
the surviving Person will have an Investment Grade Rating from Moody's and S&P).
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Transactions with Affiliates
Northwest will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
Northwest or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Northwest or such
Restricted Subsidiary with an unrelated Person; and
(2) Northwest delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess
of $10 million, a resolution of the Board of Directors set forth
in an officers' certificate certifying that such Affiliate
Transaction complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess
of $25 million, an opinion as to the fairness to Northwest of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national
standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement on customary terms entered into by Northwest
or any of its Restricted Subsidiaries in the ordinary course of
business of Northwest or such Restricted Subsidiary;
(2) transactions between or among Northwest and/or its Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of Northwest solely
because Northwest owns an Equity Interest in, or controls, such Person;
(4) payment of reasonable directors fees and provision to directors,
officers and employees of customary indemnities and customary benefits
pursuant to employee benefit plans and similar arrangements;
(5) sales of Equity Interests (other than Disqualified Stock) to Affiliates
of Northwest;
(6) (A) corporate sharing agreements with Northwest's Williams Group
Affiliates and their subsidiaries with respect to tax sharing and
general overhead and other administrative matters and (B) any other
intercompany arrangements disclosed or described in Northwest's report
on Form 10-K for the fiscal year ended December 31, 2001 (including the
exhibits thereto) or the offering memorandum relating to the sale of
the outstanding notes, all as in effect on the date of the indenture,
and any amendment or replacement of any of the foregoing so long as
such amendment or replacement agreement is not less advantageous to
Northwest in any material respect than the agreement so amended or
replaced, as such agreement was in effect on the date of the indenture;
(7) transactions entered into as part of a Permitted Receivables Financing;
and
(8) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "-- Restricted Payments."
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default; provided
that in no event will the businesses currently operated by Northwest be
transferred to or held by an Unrestricted Subsidiary. If a Restricted Subsidiary
is designated as an Unrestricted Subsidiary, the aggregate fair market value of
all outstanding Investments owned by
65
Northwest and its Restricted Subsidiaries in the Subsidiary properly designated
will be deemed to be an Investment made as of the time of the designation and
will reduce the amount available for Restricted Payments under the first
paragraph of the covenant described above under the caption "-- Restricted
Payments" or Permitted Investments, as determined by Northwest. That designation
will only be permitted if the Investment would be permitted at that time and if
the Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
Future Subsidiary Guarantees
If Northwest or any of its Restricted Subsidiaries acquires or creates
another Domestic Restricted Subsidiary after the date of the indenture, then
that newly acquired or created Domestic Restricted Subsidiary will become a
Guarantor and execute a supplemental indenture and deliver to the trustee an
opinion of counsel to the effect that the supplemental indenture has been duly
authorized, executed and delivered by the Domestic Restricted Subsidiary and
constitutes a valid and binding obligation of the Domestic Restricted
Subsidiary, enforceable against the Domestic Restricted Subsidiary in accordance
with its terms (subject to customary exceptions), all within 10 Business Days of
the date on which it was acquired or created; provided, however, that the
foregoing shall not apply to subsidiaries that have properly been designated as
Unrestricted Subsidiaries in accordance with the indenture for so long as they
continue to constitute Unrestricted Subsidiaries.
Sale and Leaseback Transactions
Northwest will not, and will not permit any of its Restricted Subsidiaries
to, enter into any Sale and Leaseback Transaction; provided that Northwest or
any Guarantor may enter into a Sale and Leaseback Transaction if:
(1) Northwest or that Guarantor, as applicable, could have incurred
Indebtedness in an amount equal to the Attributable Debt relating to
such Sale and Leaseback Transaction under the Fixed Charge Coverage
Ratio test in the first paragraph of the covenant described above under
the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock;"
(2) immediately after giving effect to such Sale and Leaseback Transaction,
the aggregate outstanding Attributable Debt with respect to all Sale
and Leaseback Transactions by Northwest and the Guarantors does not
exceed 10% of the Consolidated Net Tangible Assets of Northwest; and
(3) the gross cash proceeds of that Sale and Leaseback Transaction are at
least equal to the fair market value, as determined in good faith by
the Board of Directors and set forth in an officers' certificate
delivered to the trustee, of the property that is the subject of that
Sale and Leaseback Transaction;
provided, however, that the foregoing clauses (1) and (2) shall no longer be
applicable after any Investment Grade Date.
Business Activities
Northwest will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to Northwest and its Subsidiaries taken as a whole.
Payments for Consent
Northwest will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the indenture or the notes unless
such consideration is offered to be paid and is paid to all Holders of the notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
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REPORTS
Whether or not required by the Commission, so long as any notes are
outstanding, Northwest will furnish to the trustee, within 15 days after the
time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K
if Northwest were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" (or, if applicable to Northwest for such filings
at such time, or if such filings were required at such time, a
"Management's Narrative and Analysis of Results of Operations"), and,
with respect to the annual information only, a report on the annual
financial statements by Northwest's certified independent accountants;
and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Northwest were required to file such reports.
If Northwest has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations (or, as applicable, in Management's Narrative and Analysis of Results
of Operations), of the financial condition and results of operations of
Northwest and its Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of Northwest.
In addition, following the consummation of the exchange offer contemplated
by this prospectus, whether or not required by the Commission, Northwest will
file a copy of all of the information and reports referred to in clauses (1) and
(2) above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, Northwest and the
Guarantors have agreed that, for so long as any outstanding notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes;
(2) default in payment when due of the principal of, or premium, if any, on
the notes;
(3) failure by Northwest to purchase notes tendered pursuant to an offer
described under the captions "-- Repurchase at the Option of
Holders -- Change of Control," "-- Repurchase at the Option of
Holders -- Asset Sales" in accordance with the terms thereof, or
failure of Northwest or any Guarantor to comply with the provisions of
"-- Certain Covenants -- Merger, Consolidation or Sale of Assets;"
(4) failure by Northwest or any of its Restricted Subsidiaries for 60 days
after notice, from the Trustee or the Holders of at least 25% of the
outstanding principal amount of the notes, to comply with any of the
other agreements in the indenture;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Northwest or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Northwest or any
of its Restricted
67
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the indenture, if that default:
(a) is caused by a failure of Northwest or any Subsidiary of Northwest
to pay principal of such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates $15
million or more;
(6) failure by Northwest or any of its Subsidiaries to pay final judgments
aggregating in excess of $15 million, which judgments are not paid,
discharged or stayed for a period of 60 days;
(7) except as permitted by the indenture, any Subsidiary Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor,
or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency described in the indenture
with respect to Northwest or any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Northwest, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding notes will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the trustee or the Holders of at least 25% in
principal amount of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from Holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notice is in their interest, except a Default or Event of Default
relating to the payment of principal or interest or Liquidated Damages.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Liquidated Damages on, or the principal of, the notes. The Holders
of a majority in aggregate principal amount of the notes then outstanding also
may rescind and cancel a declaration of acceleration and its consequences, if:
(1) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the notes that have
become due solely by the declaration of acceleration, have been cured
or waived, and
(2) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Northwest with the
intention of avoiding payment of the premium (including, in the case of any such
Event of Default prior to March 1, 2007, payment of the Make-Whole Price) that
Northwest would have had to pay if Northwest then had elected to redeem the
notes pursuant to the optional redemption provisions of the indenture, an
equivalent premium (or, in the case of any such Event of Default prior to March
1, 2007, the relevant Make-Whole Amount that would apply at such time if the
notes were optionally redeemed at the Make-Whole Price) will also become and be
immediately due and payable to the extent permitted by law upon the acceleration
of the notes.
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Northwest is required to deliver to the trustee annually a statement
regarding compliance with the indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Northwest or
any Guarantor, as such, will have any liability for any obligations of Northwest
or the Guarantors under the notes, the indenture, the Subsidiary Guarantees, or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of notes by accepting a note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the notes. The waiver may not be effective to waive liabilities
under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Northwest may, at its option and at any time, elect to have all of its
obligations discharged with respect to the notes and all obligations of the
Guarantors discharged with respect to their Subsidiary Guarantees ("Legal
Defeasance") except for:
(1) the rights of Holders of notes to receive payments in respect of the
principal of, or interest or premium and Liquidated Damages, if any, on
such notes when such payments are due from the trust referred to below;
(2) Northwest's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
Northwest's and the Guarantor's obligations in connection therewith;
and
(4) the Legal Defeasance provisions of the indenture.
In addition, Northwest may, at its option and at any time, elect to have
the obligations of Northwest and the Guarantors released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "-- Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Northwest must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium and
Liquidated Damages, if any, on the outstanding notes on the stated
maturity or on the applicable redemption date, as the case may be, and
Northwest must specify whether the notes are being defeased to maturity
or to a particular redemption date;
(2) in the case of Legal Defeasance, Northwest has delivered to the trustee
an opinion of counsel reasonably acceptable to the trustee confirming
that (a) Northwest has received from, or there has been published by,
the Internal Revenue Service a ruling or (b) since the date of the
indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion
of counsel will confirm that, the Holders of the outstanding notes will
not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
69
(3) in the case of Covenant Defeasance, Northwest has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on the
date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which Northwest
or any of its Subsidiaries is a party or by which Northwest or any of
its Subsidiaries is bound;
(6) Northwest must deliver to the trustee an officers' certificate stating
that the deposit was not made by Northwest with the intent of
preferring the Holders of notes over the other creditors of Northwest
with the intent of defeating, hindering, delaying or defrauding
creditors of Northwest or others; and
(7) Northwest must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent relating
to the Legal Defeasance or the Covenant Defeasance have been complied
with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions (including without limitation the amount of any
premium or the price therefor) with respect to the redemption of the
notes (other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Liquidated Damages, if any, on the notes
(except a rescission of acceleration of the notes by the Holders of at
least a majority in aggregate principal amount of the notes and a
waiver of the payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of Holders of notes to receive payments
of principal of, or interest or premium or Liquidated Damages, if any,
on the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders");
70
(8) release any Guarantor from any of its obligations under its Subsidiary
Guarantee or the indenture, except in accordance with the terms of the
indenture; or
(9) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any Holder of notes,
Northwest, the Guarantors and the trustee may amend or supplement the indenture
or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Northwest's obligations to Holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of Northwest's assets;
(4) to provide for any Guarantee of the notes, to secure the notes or to
confirm and evidence the release, termination or discharge of any
Guarantee of or Lien securing the notes when such release, termination
or discharge is permitted by the indenture;
(5) to make any change that would provide any additional rights or benefits
to the Holders of notes or that does not adversely affect the legal
rights under the indenture of any such Holder; or
(6) to comply with requirements of the Commission under the Securities Act
or the Exchange Act or in order to effect or maintain the qualification
of the indenture under the Trust indenture Act.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose payment
money has been deposited in trust and thereafter repaid to Northwest, have
been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of a
notice of redemption or otherwise or will become due and payable within one
year and Northwest or any Guarantor has irrevocably deposited or caused to
be deposited with the trustee as trust funds in trust solely for the
benefit of the Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination of cash in U.S. dollars and non- callable
Government Securities, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and Liquidated Damages, if any, and
accrued interest to the date of maturity or redemption;
(2) Northwest or any Guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
(3) Northwest has delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money toward the payment of the
notes at maturity or the redemption date, as the case may be.
In addition, Northwest must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Northwest or any Guarantor, the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any
71
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
You may obtain a copy of the indenture and registration rights agreement
without charge by writing to Northwest Pipeline Corporation, 295 Chipeta Way,
Salt Lake City, Utah 84108; Attention: Legal Department.
BOOK-ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the notes will initially be
issued in the form of one or more Global Notes (the "Global Notes"). Upon
issuance, the Global Notes will be deposited with, or on behalf of, The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee of DTC (such nominee being referred to herein as the "Global Note
Holder"). See "-- Depository Procedures" below for a description of DTC and its
procedures.
Notes that are issued as described below under "-- Exchange of Global Notes
for Certificated Notes" will be issued in the form of Certificated Notes (as
defined therein). Upon the transfer of Certificated Notes, Certificated Notes
may, unless all Global Notes have previously been exchanged for Certificated
Notes, be exchanged for an interest in the Global Note representing the
principal amount of notes being transferred, subject to the transfer
restrictions set forth in the indenture.
Prospective purchasers are advised that the laws of some states require
that certain Persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Note to such Persons will be limited to such extent.
So long as the Global Note Holder is the registered owner of any notes, the
Global Note Holder will be considered the sole Holder under the indenture of any
notes evidenced by the Global Notes. Beneficial owners of notes evidenced by the
Global Notes will not be considered the owners or Holders of the notes under the
indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the trustee thereunder. Neither
Northwest nor the trustee will have any responsibility or liability for any
aspect of the records of DTC or for maintaining, supervising or reviewing any
records of DTC relating to the notes.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of the
Global Note Holder on the applicable record date will be payable by the trustee
to or at the direction of the Global Note Holder in its capacity as the
registered Holder under the indenture. Under the terms of the indenture,
Northwest and the trustee will treat the Persons in whose names the notes,
including the Global Notes, are registered as the owners of the notes for the
purpose of receiving payments and for all other purposes. Consequently, neither
Northwest, the trustee nor any agent of Northwest or the trustee has or will
have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or
Indirect Participant's records relating to the beneficial ownership
interests in the Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants.
DTC has advised Northwest that its current practice, upon receipt of any
payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with
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the payment on the payment date unless DTC has reason to believe it will not
receive payment on such payment date. Each relevant Participant is credited with
an amount proportionate to its beneficial ownership of an interest in the
principal amount of the relevant security as shown on the records of DTC.
Payments by the Participants and the Indirect Participants to the beneficial
owners of notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the trustee or
Northwest. Neither Northwest nor the trustee will be liable for any delay by DTC
or any of its Participants in identifying the beneficial owners of the notes,
and Northwest and the trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to changes by it. Northwest
takes no responsibility for these operations and procedures and urges investors
to contact DTC or its participants directly to discuss these matters.
DTC has advised Northwest that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised Northwest that, pursuant to procedures established by
it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the trustee with portions of the principal
amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on, and
the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants)
or by the Participants and the Indirect Participants (with respect to
other owners of beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not Participants may hold their interests therein indirectly through
organizations which are Participants in such system. The laws of some states
require that certain Persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such Persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants, the ability of a Person having beneficial interests in
a Global Note to pledge such interests to Persons that do not participate in the
DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
Indirect Participants will be effected in accordance with their respective rules
and operating procedures.
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DTC has advised Northwest that it will take any action permitted to be
taken by a Holder of notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the notes, DTC reserves the right
to exchange the Global Notes for legended notes in certificated form, and to
distribute such notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Participants, it is under no obligation
to perform or to continue to perform such procedures, and may discontinue such
procedures at any time. Neither Northwest nor the trustee nor any of their
respective agents will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies Northwest that it is unwilling or unable to continue
as depositary for the Global Notes and Northwest fails to appoint a
successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act;
(2) Northwest, at its option, notifies the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default with
respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
SAME DAY SETTLEMENT AND PAYMENT
Northwest will make payments in respect of the notes represented by the
Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. Northwest will make all payments of
principal, interest and premium and Liquidated Damages, if any, with respect to
Certificated Notes by wire transfer of immediately available funds to the
accounts specified by the Holders of the Certificated Notes or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The notes represented by the Global Notes are expected to be eligible
to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such notes will, therefore, be required by DTC to be
settled in immediately available funds. Northwest expects that secondary trading
in any Certificated Notes will also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the proposed form of registration rights agreement
in its entirety because it, and not this description, defines your registration
rights as Holders of the outstanding notes. Copies of the registration rights
agreement may be obtained from Northwest. See "Where You Can Find More
Information."
Northwest and the initial purchasers of the outstanding notes entered into
the registration rights agreement on March 4, 2003. Pursuant to the registration
rights agreement, Northwest agreed to file with the Commission a registration
statement in connection with the Registered Exchange Offer (the "Exchange Offer
74
Registration Statement") on the appropriate form under the Securities Act with
respect to the an issue of notes of Northwest ("Exchange Notes") with terms
substantially identical to the outstanding notes (except that the new notes will
not be subject to transfer restrictions or liquidated damages). Upon the
effectiveness of the Exchange Offer Registration Statement, Northwest will offer
to the Holders of Transfer Restricted Securities pursuant to the Exchange Offer
who are able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for Exchange Notes.
If:
(1) Northwest is not
(a) required to file the Exchange Offer Registration Statement; or
(b) permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy; or
(2) any Holder of Transfer Restricted Securities notifies Northwest prior
to the 20th day following consummation of the Exchange Offer that:
(a) it is prohibited by law or Commission policy from participating in
the Exchange Offer; or
(b) it may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales; or
(c) it is a broker-dealer and owns notes acquired directly from
Northwest or an affiliate of Northwest,
Northwest will file with the Commission a shelf registration statement (the
"Shelf Registration Statement") to cover resales of the notes by the Holders of
the notes who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement.
Northwest will use its commercially reasonable efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission.
For purposes of the preceding, "Transfer Restricted Securities" means each
outstanding note until:
(1) the date on which such note has been exchanged by a Person other than a
broker-dealer for an Exchange Note in the Exchange Offer;
(2) following the exchange by a broker-dealer in the Exchange Offer of an
outstanding note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the prospectus contained in
the Exchange Offer Registration Statement;
(3) the date on which such note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf
Registration Statement; or
(4) the date on which such note is distributed to the public or is saleable
pursuant to Rule 144 under the Securities Act.
The registration rights agreement provides that:
(1) Northwest will file an Exchange Offer Registration Statement with the
Commission on or prior to 90 days after the closing of the offering of
the outstanding notes;
(2) Northwest will use its commercially reasonable efforts to have the
Exchange Offer Registration Statement declared effective by the
Commission on or prior to 180 days after the closing of the offering of
the outstanding notes;
(3) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, Northwest will
75
(a) commence the Exchange Offer; and
(b) use its commercially reasonable efforts to issue on or prior to 30
business days, or longer, if required by the federal securities laws, after
the date on which the Exchange Offer Registration Statement was declared
effective by the Commission, Exchange Notes in exchange for all outstanding
notes tendered prior thereto in the Exchange Offer; and
(4) if obligated to file the Shelf Registration Statement, Northwest will
use its commercially reasonable efforts to file the Shelf Registration
Statement with the Commission on or prior to 60 days after such filing
obligation arises (or, if later, the date by which Northwest is
obligated to file an Exchange Offer Registration Statement) and to
cause the Shelf Registration to be declared effective by the Commission
on or prior to 180 days after such obligation arises (or, if later, the
date by which Northwest is obligated to use commercially reasonably
efforts to have the Exchange Offer Registration Statement declared
effective).
If:
(1) Northwest fails to file any of the registration statements required by
the registration rights agreement on or before the date specified for
such filing; or
(2) any of such registration statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness
(the "Effectiveness Target Date"); or
(3) Northwest and the Guarantors fails to consummate the Exchange Offer
within 30 business days of the Effectiveness Target Date with respect
to the Exchange Offer Registration Statement; or
(4) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective
or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the registration rights agreement
(except with respect to permitted suspension periods as provided
therein) (each such event referred to in clauses (1) through (4) above,
a "Registration Default"),
then Northwest and the Guarantors will pay Liquidated Damages to each Holder of
notes or, in the case of a Shelf Registration Statement, affected notes, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default in an amount equal to $.05 per week per $1,000
principal amount of notes held by such Holder.
The amount of the Liquidated Damages will increase by an additional $.05
per week per $1,000 principal amount of notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages for all Registration Defaults of $.50 per week per
$1,000 principal amount of notes.
All accrued Liquidated Damages will be paid by Northwest on each Damages
Payment Date to the Global Note Holder by wire transfer of immediately available
funds or by federal funds check and to Holders of Certificated Notes by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of outstanding notes will be required to make certain
representations to Northwest (as described in the registration rights agreement)
in order to participate in the Exchange Offer and will be required to deliver
certain information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the registration rights agreement in order to have
their notes included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above. By acquiring Transfer
Restricted Securities, a Holder will be deemed to have agreed to indemnify
Northwest and the Guarantors against certain losses arising out of information
furnished by such Holder in writing for inclusion in any Shelf Registration
Statement. Holders of outstanding notes will also be required to suspend their
use of the prospectus included
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in the Shelf Registration Statement under certain circumstances upon receipt of
written notice to that effect from Northwest.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
whether or not such Indebtedness is incurred in connection with, or in
contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights; provided that the sale, conveyance or other disposition of all
or substantially all of the assets of Northwest and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
indenture described above under the caption "-- Repurchase at the
Option of Holders -- Change of Control" and/or the provisions described
above under the caption "-- Certain Covenants -- Merger, Consolidation
or Sale of Assets" and not by the provisions of the Asset Sale
covenant; and
(2) the issuance of Equity Interests in any of Northwest's Restricted
Subsidiaries or the sale of Equity Interests in any of its Restricted
Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value of less than $2.0 million;
(2) a transfer of assets between or among Northwest and its Restricted
Subsidiaries,
(3) an issuance of Equity Interests by a Restricted Subsidiary to Northwest
or to another Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or other
assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) dispositions of accounts receivable and related assets to a
Securitization Subsidiary in connection with a Permitted Receivables
Financing;
(7) Sale and Leaseback Transactions; and
(8) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "-- Certain Covenants --
Restricted Payments."
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"Attributable Debt" in respect of a Sale and Leaseback Transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
Sale and Leaseback Transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Available Cash Flow from Operations" means for any period of Northwest,
Consolidated Cash Flow of Northwest for such period, minus the sum of the
following, each determined for such period on a consolidated basis:
(1) cash taxes for Northwest and its Restricted Subsidiaries, including
payments to Northwest's Williams Group Affiliates in respect of taxes
pursuant to tax sharing arrangements; plus
(2) cash interest expense paid by Northwest and its Restricted Subsidiaries
whether or not capitalized (including, without limitation, the interest
component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net of the effect of all
payments made or received pursuant to Hedging Obligations); plus
(3) additions to property, plant and equipment and other capital
expenditures of Northwest and its Restricted Subsidiaries that are (or
would be) set forth in a consolidated statement of cash flows of
Northwest and its Restricted Subsidiaries for such period prepared in
accordance with generally accepted accounting principles (except to the
extent financed by the incurrence of Indebtedness); plus
(4) the aggregate principal amount of long-term Indebtedness repaid by
Northwest and its Restricted Subsidiaries and any short-term
Indebtedness that financed capital expenditures referred to in clause
(3) above, excluding any such repayments (i) under working capital
facilities (except to the extent that such Indebtedness so repaid was
incurred to finance capital expenditures as described in clause (3)
above), (ii) out of Net Cash Proceeds of Asset Sales as provided above
in "-- Certain Covenants -- Asset Sales" and (iii) through a
refinancing involving the incurrence of new long-term Indebtedness.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such Person
serving a similar function.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
78
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the
United States is pledged in support of those securities) having
maturities of not more than one year from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of
one year or less from the date of acquisition, bankers' acceptances
with maturities not exceeding 365 days and overnight bank deposits and
other similar types of investments routinely offered by commercial
banks, in each case, with any lender party to the Credit Agreement or
with any domestic commercial bank or trust company having capital and
surplus in excess of $500.0 million and a Thomson Bank Watch Rating of
"B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in
each case maturing within 270 days after the date of acquisition;
(6) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition; and
(7) deposits available for withdrawal on demand with any commercial bank
not meeting the qualifications specified in clause (3) above; provided
that all such deposits are made in the ordinary course of business, do
not remain on deposit for more than 30 consecutive days and do not
exceed $10.0 million in the aggregate at any one time.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the properties or
assets of Northwest and its Restricted Subsidiaries taken as a whole to
any "person" (as that term is used in Section 13(d)(3) of the Exchange
Act);
(2) the adoption of a plan relating to the liquidation or dissolution of
Northwest;
(3) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that (A) any "person"
or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act), other than a Williams Group Affiliate,
becomes the Beneficial Owner, directly or indirectly, of more than 50%
of the Voting Stock of Northwest, measured by voting power rather than
number of shares (B) any "person" or "group" (as defined above) (other
than a trustee or other fiduciary holding securities under an employee
benefit plan of Williams or any of its Subsidiaries) becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the
Voting Stock of Williams, measured by voting power rather than number
of shares;
(4) the first day on which a majority of the members of the Board of
Directors of Northwest are not Continuing Directors; or
79
(5) Northwest consolidates with, or merges with or into, any Person, or any
Person consolidates with, or merges with or into, Northwest, in any
such event pursuant to a transaction in which any of the outstanding
Voting Stock of Northwest or such other Person is converted into or
exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of Northwest outstanding immediately
prior to such transaction is converted into or exchanged for Voting
Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting
Stock of such surviving or transferee Person (immediately after giving
effect to such issuance).
"Commission" means the U.S. Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus
(without duplication):
(1) an amount equal to any extraordinary loss plus any net loss realized by
such Person or any of its Subsidiaries in connection with an Asset
Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect
of letter of credit or bankers' acceptance financings, and net of the
effect of all payments made or received pursuant to Hedging
Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period) of
such Person and its Subsidiaries for such period to the extent that
such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income; plus
(5) unrealized non-cash losses resulting from foreign currency balance
sheet adjustments required by GAAP to the extent such losses were
deducted in computing such Consolidated Net Income; plus
(6) all extraordinary, unusual or non-recurring items of gain or loss, or
revenue or expense to the extent such gains or losses were added or
deducted in computing such Consolidated Net Income.
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
will be included only to the extent of the amount of dividends or
distributions paid in cash to the specified Person or a Restricted
Subsidiary of the Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement,
80
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its
stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will
be excluded; and
(4) the cumulative effect of a change in accounting principles will be
excluded.
"Consolidated Net Tangible Assets" means, with respect to any Person at any
date of determination, the aggregate amount of total assets included in such
Person's most recent quarterly or annual consolidated balance sheet prepared in
accordance with GAAP less applicable reserves reflected in such balance sheet,
after deducting the following amounts: (i) all current liabilities reflected in
such balance sheet, and (ii) all goodwill, trademarks, patents, unamortized debt
discounts and expenses and other like intangibles reflected in such balance
sheet.
"Consolidated Subsidiaries" means, with respect to any Person, all other
Persons the financial statements of which are consolidated with those of such
Person in accordance with generally accepted accounting principals.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Northwest who:
(1) was a member of such Board of Directors on the date of the indenture;
or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"Credit Agreement" means the First Amended and Restated Credit Agreement
dated as of October 31, 2002, by and among The Williams Companies, Inc.,
Northwest, Transcontinental Gas Pipe Line Corporation and Texas Gas Transmission
Corporation as Borrowers and the banks named therein as Banks, JPMorgan Chase
Bank and Commerzbank AG as Co-Syndication Agents, Credit Lyonnais New York
Branch as Documentation Agent and Citicorp USA, Inc. as Agent and Salomon Smith
Barney Inc. as Arranger, providing for up to $400 million of revolving credit
borrowings to Northwest, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time.
"Credit Agreement Refinancing Date" means the first date after the date of
the indenture on which Northwest's ability to enter into or suffer to exist
restrictions on dividends and advances to its Williams Group Affiliates is no
longer restricted pursuant to a credit facility or debt instrument to which any
Williams Group Affiliates are parties from time to time, including without
limitation pursuant to Section 5.02(d) of the Credit Agreement as in effect on
the date of the indenture.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, (1) the Credit Agreement and (2) one or more Permitted Receivables
Financings) or commercial paper facilities, in each case with banks or other
institutional lenders, or pursuant to intercompany loan or advance arrangements
with Williams and/or Williams Gas Pipeline Company, LLC (provided that in the
case of such arrangements with Williams and/or Williams Gas Pipeline Company,
LLC that such arrangements are on terms consistent with practices in existence
on the date of the indenture) providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund
81
obligation or otherwise, or redeemable at the option of the holder of the
Capital Stock, in whole or in part, on or prior to the date that is 91 days
after the date on which the notes mature. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Stock solely
because the holders of the Capital Stock have the right to require Northwest to
repurchase such Capital Stock upon the occurrence of a change of control or an
asset sale will not constitute Disqualified Stock if the terms of such Capital
Stock provide that Northwest may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of
Northwest that was formed under the laws of the United States or any state of
the United States or the District of Columbia or that guarantees or otherwise
provides direct credit support for any Indebtedness of Northwest.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Notes" has the meaning set forth in the second paragraph under
"-- Registration Rights; Liquidated Damages."
"Exchange Offer Registration Statement" has the meaning set forth in the
second paragraph under "-- Registration Rights; Liquidated Damages."
"Existing Indebtedness" means up to $367.9 million in aggregate principal
amount of Indebtedness of Northwest and its Restricted Subsidiaries (other than
Indebtedness under the Credit Agreement) in existence on the date of the
indenture, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the specified Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary
working capital borrowings) or issues, repurchases or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated and on or prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated
giving pro forma effect to such incurrence, assumption, Guarantee, repayment,
repurchase or redemption of Indebtedness, or such issuance, repurchase or
redemption of preferred stock, and the use of the proceeds therefrom as if the
same had occurred at the beginning of the applicable four-quarter reference
period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of its
Restricted Subsidiaries, including through mergers, consolidations or
otherwise (including acquisitions of assets used in a Permitted
Business) and Qualifying Expansion Projects that have been commenced by
the specified Person or any of its Restricted Subsidiaries, and
including in each case any related financing transactions (including
repayment of Indebtedness) during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation
Date will be given pro forma effect as if they had occurred or (in the
case of any Qualifying Expansion Projects) been completed and in
service on the first day of the four-quarter reference period,
including any Consolidated Cash Flow (including interest income
reasonably anticipated by such Person to be received from Cash and Cash
Equivalents held by such Person or any of its Restricted Subsidiaries)
and any pro forma expense and cost reductions that have occurred or are
reasonably expected to occur, in the reasonable judgment of the chief
financial officer or chief accounting officer of Northwest (regardless
of whether those cost savings or operating improvements could then be
reflected in pro forma financial statements in accordance with
Regulation S-X promulgated under the Securities Act or any other
regulation or policy of the Commission related thereto), but in the
case of Qualifying Expansion Projects, only to the extent of Qualifying
Expansion Project Amounts;
82
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded, but only
to the extent that the obligations giving rise to such Fixed Charges
will not be obligations of the specified Person or any of its
Restricted Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including,
without limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, any premiums, fees, discounts, expenses and
losses on the sale of accounts receivable (and any amortization
thereof) in connection with a Permitted Receivables Financing, and net
of the effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries, whether or not such Guarantee or Lien is called upon;
plus
(4) the product of (a) all dividends, whether paid or accrued and whether
or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of Northwest (other than
Disqualified Stock) or to Northwest or a Restricted Subsidiary of
Northwest, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means any subsidiary of Northwest that executes a Subsidiary
Guarantee in accordance with the provisions of the indenture and its successors
and assigns.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person incurred in the normal course of business and
consistent with past practices and not for speculative purposes under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) foreign exchange contracts and currency protection agreements entered
into with one of more financial institutions designed to protect the
person or entity entering into the agreement against
83
fluctuations in interest rates or currency exchanges rates with respect
to Indebtedness incurred and not for purposes of speculation;
(3) any commodity futures contract, commodity option or other similar
agreement or arrangement designed to protect against fluctuations in
the price of commodities used by that entity at the time; and
(4) other agreements or arrangements designed to protect such person
against fluctuations in interest rates or currency exchange rates.
"Incremental Funds" has the meaning set forth in the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments."
"Indebtedness" means, with respect to any specified Person, any obligation
of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued
expense or trade payable;
(6) representing any Hedging Obligations, or
(7) under Permitted Receivables Financings;
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations and obligations in respect of Permitted Receivables
Financings) would appear as a liability upon a balance sheet of the specified
Person prepared in accordance with GAAP. In addition, the term "Indebtedness"
includes all Indebtedness of others secured by a Lien on any asset of the
specified Person (whether or not such Indebtedness is assumed by the specified
Person) and, to the extent not otherwise included, the Guarantee by the
specified Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any Indebtedness
issued with original issue discount;
(2) in the case of any Permitted Receivables Financing, the net unrecovered
principal amount of the accounts receivable sold thereunder at such
date, or other similar amount representing the principal financing
amount thereof;
(3) in the case of any Hedging Obligation, the net amount payable if such
Hedging Obligation is terminated at that time due to default by such
Person (after giving effect to any contractually permitted set-off);
and
(4) the principal amount of the Indebtedness in the case of any other
Indebtedness.
"Investment Grade Date" has the meaning set forth above under "--
Termination of Certain Covenants."
"Investment Grade Rating" means a rating equal to or higher than Baa3 by
Moody's and BBB -- by S&P.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees (other than Guarantees of Indebtedness of
Northwest or any of its Guarantors to the extent permitted in the covenant
described above under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock")),
84
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business and
excluding trade payables of Northwest and its subsidiaries arising in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If Northwest or any Subsidiary of Northwest sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of Northwest such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of Northwest, Northwest will be deemed to
have made an Investment on the date of any such sale or disposition equal to the
fair market value of the Equity Interests of such Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "-- Certain Covenants -- Restricted
Payments." The acquisition by Northwest or any Subsidiary of Northwest of a
Person that holds an Investment in a third Person will be deemed to be an
Investment by Northwest or such Subsidiary in such third Person in an amount
equal to the fair market value of the Investment held by the acquired Person in
such third Person in an amount determined as provided in the final paragraph of
the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Make-Whole Amount" with respect to a note means an amount equal to the
excess, if any, of (1) the present value of the remaining interest, premium and
principal payments due on such note (excluding any portion of such payments of
interest accrued as of the redemption date), computed using a discount rate
equal to the Treasury Rate plus 50 basis points, over (2) the outstanding
principal amount of such note. "Treasury Rate" is defined as the yield to
maturity (calculated on a semi-annual bond-equivalent basis) at the time of the
computation of United States Treasury securities with a constant maturity (as
compiled by and published in the most recent Federal Reserve Statistical Release
H.15 (510), which has become publicly available at least two business days prior
to the date of the redemption notice or, if such Statistical Release is no
longer published, any publicly available source of similar market data) most
nearly equal to the then remaining maturity of the notes; provided that if the
Make-Whole Average Life of such note is not equal to the constant maturity of
the United States Treasury security for which a weekly average yield is given,
the Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the Make-
Whole Average Life of such note is less than one year, the weekly average yield
on actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used. "Make-Whole Average Life" means the number
of years (calculated to the nearest one-twelfth) between the date of redemption
and the Stated Maturity of the notes.
"Make-Whole Price" means the sum of the outstanding principal amount of the
notes to be redeemed plus the Make-Whole Amount of those notes.
"Maturity Date" means, with respect to any note, the date on which any
principal of such note becomes due and payable, whether at the Stated Maturity
with respect to such principal or by declaration of acceleration, call for
redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for taxes
on such gain (but not loss), realized in connection with: (a) any Asset
Sale; or (b) the disposition of any securities by such
85
Person or any of its Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by Northwest or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result of the Asset Sale, taxes paid or payable as a result of the
Asset Sale (as reasonably estimated by Northwest), in each case, after taking
into account any available tax credits or deductions and any tax sharing
arrangements, and amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Northwest nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the holders
of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or
both any holder of any other Indebtedness (other than the notes) of
Northwest or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment of the Indebtedness to be
accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Northwest or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the lines of business conducted by us and our
Restricted Subsidiaries on the date of the indenture and any business incidental
or reasonably related thereto or which is a reasonable extension thereof as
determined in good faith by our Board of Directors and set forth in an officer's
certificate delivered to the trustee.
"Permitted Investments" means:
(1) any Investment in Northwest or in a Restricted Subsidiary of
Northwest;
(2) any Investment in Cash Equivalents;
(3) any Investment by Northwest or any Subsidiary of Northwest in a
Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Northwest; or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Northwest or a Restricted Subsidiary of Northwest;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales," or any
non-cash consideration that was excluded from the definition of "Asset
Sale" pursuant to clause (1) or (4) (for the sale or lease of
equipment) pursuant to the second paragraph of such definition;
86
(5) any Investment in any Person solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Northwest;
(6) any purchase or other acquisition of senior debt of Northwest or any
Guarantor (other than Indebtedness that is subordinated to the notes
or the Subsidiary Guarantees);
(7) any Investments received in compromise of obligations of such persons
incurred in the ordinary course of trade creditors or customers that
were incurred in the ordinary course of business, including pursuant
to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of any trade creditor or customer;
(8) Hedging Obligations permitted to be incurred under the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant;
(9) Investments in a Securitization Subsidiary that are necessary or
desirable to effect any Permitted Receivables Financing; and
(10) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (10) that are at the
time outstanding not to exceed $10 million.
"Permitted Liens" means:
(1) Liens of Northwest and any Guarantor securing any Credit Facility that
was permitted by the terms of the indenture to be incurred and all
Obligations and Hedging Obligations relating to such Indebtedness (but
excluding any Credit Facility with Williams or any Williams Group
Affiliate, as lender);
(2) Liens in favor of Northwest or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Northwest or any Restricted
Subsidiary of Northwest or renewals or replacement of such Liens in
connection with the incurrence of Permitted Refinancing Indebtedness
to refinance Indebtedness secured by such Liens; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with Northwest or the Restricted
Subsidiary;
(4) Liens on property existing at the time of acquisition of the property
by Northwest or any Restricted Subsidiary of Northwest or renewals or
replacement of such Liens in connection with the incurrence of
Permitted Refinancing Indebtedness to refinance Indebtedness secured
by such Liens; provided that such Liens were in existence prior to the
contemplation of such acquisition;
(5) Liens to secure the performance of tenders, bids, statutory
obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of
business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant
entitled "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with
such Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as is
required in conformity with GAAP has been made therefor;
(9) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries;
87
(10) Liens on accounts receivable and related assets and proceeds thereof
arising in connection with a Permitted Receivables Financing; and
(11) Liens with respect to Indebtedness that at the time of incurrence does
not exceed 10% of the Consolidated Net Tangible Assets of Northwest.
"Permitted Receivables Financing" means any receivables financing facility
or arrangement pursuant to which a Securitization Subsidiary purchases or
otherwise acquires accounts receivable of Northwest or any Restricted
Subsidiaries and enters into a third party financing thereof on terms that the
Board of Directors has concluded are customary and market terms fair to
Northwest and its Restricted Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of Northwest or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of Northwest or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount
(or accreted value, if applicable) of the Indebtedness extended,
refinanced, renewed, replaced, defeased or refunded (plus all accrued
interest on the Indebtedness and the amount of all expenses and
premiums incurred in connection therewith) and any premiums paid on the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded;
(2) such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes
and any Subsidiary Guarantees, such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the notes and any Subsidiary
Guarantees, as the case may be, on terms at least as favorable to the
Holders of notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and
(4) such Indebtedness is incurred either by Northwest or by the Subsidiary
who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Public Equity Offering" means an underwritten primary public offering,
after the date of the indenture, of Capital Stock (other than Disqualified
Stock) of Northwest pursuant to an effective registration statement under the
Securities Act other than an issuance registered on Form S-4 or S-8 or any
successor thereto or any issuance pursuant to employee benefit plans or
otherwise in compensation to officers, directors or employees.
"Qualifying Expansion Project" means any capital expansion project that has
increased or will increase the physical capacity of the pipeline system of
Northwest and the Guarantors; provided that such project has been completed and
the assets are in service at, or Northwest reasonably believes that the
in-service date of the project will be within twelve months after, the
Calculation Date.
"Qualifying Expansion Project Amounts" means with respect to any
calculation of pro forma amounts under the Fixed Charge Coverage Ratio
additional revenues (if any) and related expenses for any Qualifying Expansion
Project for the portion of the four-quarter period prior to the in-service date
of such Qualifying Expansion Project (the "Estimation Period"); provided that
revenues and related expenses anticipated from any Qualifying Expansion Project
during any Estimation Period shall be included in such calculation only to the
extent (1) of the portion of the capacity of such Qualifying Expansion Project
that is committed under a long-term firm transportation contract on customary
terms (as determined in good faith by Northwest) with a
88
counterparty that has an Investment Grade Rating of its long-term debt from at
least one of S&P and Moody's and (2) the aggregate amount of Qualifying
Expansion Project Amounts for all Qualifying Expansion Projects included in any
such calculation does not exceed 25% of the aggregate revenues of Northwest and
its Restricted Subsidiaries for such period, determined for this purpose on a
pro forma basis but before inclusion of any Qualifying Expansion Project
Amounts.
"Rating Agency" means each of S&P and Moody's, or if S&P or Moody's or both
shall not make a rating on the notes publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by Northwest
(as evidenced by a resolution of the Board of Directors), which shall be
substituted for S&P or Moody's, or both, as the case may be.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard and Poor's, a division of The McGraw-Hill Companies,
Inc., and its successors.
"Sale and Leaseback Transaction" means any arrangement with any Person
(other than Northwest or a Subsidiary), or to which any such Person is a party,
providing for the leasing, pursuant to a capital lease that would at such time
be required to be capitalized on a balance sheet in accordance with GAAP, to
Northwest or a Restricted Subsidiary of any property or asset which has been or
is to be sold or transferred by Northwest or such Restricted Subsidiary to such
Person or to any other Person (other than Northwest or a Subsidiary), to which
funds have been or are to be advanced by such Person.
"Securitization Subsidiary" means a Subsidiary of Northwest
(1) that is designated a "Securitization Subsidiary" by the Board of
Directors,
(2) that does not engage in, and whose charter prohibits it from engaging
in, any activities other than Permitted Receivables Financings and any
activity necessary, incidental or related thereto,
(3) no portion of the Debt or any other obligation, contingent or
otherwise, of which
(A) is Guaranteed by Northwest or any Restricted Subsidiary of
Northwest,
(B) is recourse to or obligates Northwest or any Restricted Subsidiary
of Northwest in any way, or
(C) subjects any property or asset of Northwest or any Restricted
Subsidiary of Northwest, directly or indirectly, contingently or otherwise,
to the satisfaction thereof,
(4) with respect to which neither Northwest nor any Restricted Subsidiary
of Northwest (other than an Unrestricted Subsidiary) has any obligation
to maintain or preserve such its financial condition or cause it to
achieve certain levels of operating results
other than, in respect of clauses (3) and (4), pursuant to customary
representations, warranties, covenants and indemnities entered into in
connection with a Permitted Receivables Financing.
"Shelf Registration Statement" has the meaning set forth in the second
paragraph under "-- Registration Rights; Liquidated Damages."
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
89
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation,
association or other business entity is at the time owned or
controlled, directly or indirectly, by that Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Subsidiary Guarantee" means each Guarantee of the notes issued by a
Guarantor pursuant to the indenture.
"Unrestricted Subsidiary" means (1) any Securitization Subsidiary, (2) NWP
Enterprises, LLC, (3) NWP Enterprises, Inc., or (4) any Subsidiary of Northwest
that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with Northwest or any Restricted Subsidiary of Northwest unless the
terms of any such agreement, contract, arrangement or understanding are
no less favorable to Northwest or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates
of Northwest;
(3) is a Person with respect to which neither Northwest nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Northwest or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Northwest as an Unrestricted Subsidiary will
be evidenced to the trustee by filing with the trustee a certified copy of the
Board Resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the preceding conditions and was
permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the preceding requirements as an Unrestricted Subsidiary, it
will thereafter cease to be an Unrestricted Subsidiary for purposes of the
indenture and any Indebtedness of such Subsidiary will be deemed to be incurred
by a Restricted Subsidiary of Northwest as of such date and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock," Northwest will be in default of such covenant.
The Board of Directors of Northwest may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation will be
deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of
Northwest of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation will only be permitted if (1) such Indebtedness is permitted
under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
90
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the
making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Williams" means The Williams Companies, Inc.
"Williams Group Affiliates" means Williams and its Subsidiaries other than
Northwest and its Subsidiaries.
91
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material U.S. federal tax
consequences of the exchange of outstanding notes for new notes and of the
beneficial ownership and disposition of new notes.
This summary is based on the Internal Revenue Code of 1986, referred to
herein as the "Code," regulations issued under the Code, judicial authority and
administrative rulings and practice, all as of the date of this prospectus, all
of which are subject to change. Any such change may be applied retroactively and
may adversely affect the federal tax consequences described in this prospectus.
This summary addresses only the tax consequences to investors that own the
outstanding notes and will own the new notes as capital assets and not as part
of a "straddle" or "conversion transaction" for federal income tax purposes, or
as part of some other integrated investment. This summary does not discuss all
of the tax consequences that may be relevant to particular investors or to
investors subject to special treatment under the federal income tax laws (such
as insurance companies, financial institutions, tax-exempt organizations,
retirement plans, regulated investment companies, securities dealers,
expatriates or persons whose functional currency for tax purposes is not the
U.S. dollar). We will not seek a ruling from the Internal Revenue Service,
referred to herein as the "IRS," with respect to any matters discussed in this
section, and we cannot assure you that the IRS will not challenge one or more of
the tax consequences described below. When we use the term "holder" in this
section, we are referring to a beneficial owner of the notes and not the record
holder. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION
OF U.S. FEDERAL TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES OF THE EXCHANGE OFFER AND OF THE BENEFICIAL OWNERSHIP AND
DISPOSITION OF THE NEW NOTES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
The following is a general discussion of the material U.S. federal income
tax consequences of the purchase, beneficial ownership and disposition of the
notes by a holder that is a United States person, referred to herein as a "U.S.
Holder." For purposes of this discussion, a United States person means:
- a citizen or resident of the United States (as defined for federal income
tax purposes);
- a corporation, partnership or other business entity created or organized
in or under the laws of the United States or any State or political
subdivision thereof or therein (including the District of Columbia);
- an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
- a trust if a court within the United States is able to exercise primary
supervision over its administration and one or more United States persons
have the authority to control all of its substantial decisions, or
certain electing trusts that were in existence on August 19, 1996, and
were treated as domestic trusts on that date.
The Exchange Offer
The exchange of outstanding notes for new notes pursuant to this exchange
offer will not be treated as an "exchange" for United States federal income tax
purposes because the new notes will not be considered to differ materially in
kind or extent from the outstanding notes. Rather, any new notes received by you
should be treated as a continuation of your investment in the outstanding notes.
As a result, there should be no United States federal income tax consequences to
you resulting from the exchange offer. In addition, you should have the same
adjusted issue price, adjusted basis, and holding period in the new notes as you
had in the outstanding notes immediately prior to the exchange.
Treatment of Interest
Stated interest on the notes will be taxable to a U.S. Holder as ordinary
income at the time it is accrued or received (in accordance with the U.S.
Holder's method of tax accounting).
92
Treatment of Liquidated Damages and Additional Interest
The outstanding notes provided for the payment of Liquidated Damages and
the notes provide for the payment of additional amounts of interest, under
certain circumstances described above under "Description of
Notes -- Registration Rights; Liquidated Damages" and "Description of
Notes -- Additional Interest" and therefore are subject to Treasury regulations
that apply to debt instruments providing for one or more contingent payments.
For purposes of determining whether the notes were issued with "original issue
discount" for federal income tax purposes, we intend to take the position that,
as of the issue date, the notes do not represent contingent payment debt
instruments because (i) the likelihood of our paying Liquidated Damages as a
result of a Registration Default is remote and (ii) the payment schedule without
payments of additional interest resulting from our Fixed Charge Coverage Ratio
falling below 1.75 to 1.0 is significantly more likely than not to occur as
compared to the alternative payment schedules that would result if our Fixed
Charge Coverage Ratio were to fall below 1.75 to 1.0; and therefore, we intend
to take the position that the notes will not be considered to be issued with
original issue discount.
If, contrary to our expectations, the IRS were to assert successfully that
the likelihood of making contingent payments was sufficient to cause original
issue discount, then a U.S. Holder may be required to include in gross income
interest in excess of the coupon amount of interest received periodically over
the term of the notes as it accrues, regardless of the holder's method of tax
accounting, which may result in the recognition of interest income before the
receipt in cash of such interest income; and any gain on the sale, exchange,
redemption or retirement of a note may be recharacterized as ordinary income. If
we become obligated to pay Liquidated Damages or additional interest, we intend
to take the position that such amounts are includible in a U.S. Holder's gross
income in accordance with such U.S. Holder's method of tax accounting. U.S.
Holders should consult their tax advisors regarding the tax consequences of the
notes being treated as contingent payment debt instruments.
Market Discount
If a U.S. Holder purchases a new note (or purchased an outstanding note and
exchanges it for a new note) for an amount that is less than the stated
principal amount of the note, the amount of such difference is treated as
"market discount" for U.S. federal income tax purposes, unless such difference
is less than 1/4 of one percent of the stated principal amount multiplied by the
remaining number of complete years to maturity from the date of the acquisition.
A U.S. Holder holding a note with market discount generally will be
required to treat any full or partial principal payment, or any gain upon the
sale, exchange or retirement (including redemption or repurchase) of the note,
as ordinary income to the extent of the accrued market discount on the note that
such holder has not previously included in income. A U.S. Holder may be required
to defer, until the maturity of the note or its earlier disposition in a taxable
transaction, the deduction of all or a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry a note with market
discount.
In general, any market discount will be considered to accrue ratably during
the period from the date of acquisition to the maturity date of the note, unless
the holder elects to accrue the market discount under a constant yield method. A
U.S. Holder may elect to include market discount in gross income currently as it
accrues (on either a ratable or constant yield method), rather than on
disposition of the note, in which case the rule described above regarding
deferral of interest deductions will not apply. This election to include market
discount in gross income on an accrual basis, once made, applies to all market
discount obligations acquired by the holder on or after the first day of the
first taxable year to which the election applies, and is irrevocable without the
consent of the IRS. The holder's tax basis in the notes will be increased by the
amount of any market discount included in gross income under such an election.
Amortizable Bond Premium
In general, if a U.S. Holder purchases a new note (or purchased an
outstanding note and exchanges it for a new note) for an amount in excess of the
sum of all amounts payable on the note (other than stated interest payments),
such excess will be considered to have purchased the note with "amortizable bond
premium." A
93
U.S. Holder generally may elect to amortize the bond premium over the remaining
term of the note on a constant yield method as an offset to interest. A special
rule applies to determine the amount of amortizable bond premium on debt
instruments (such as the notes) that may be redeemed prior to maturity at the
issuer's option. Under these rules, a U.S. Holder will calculate the amount of
amortizable bond premium based on the amount payable at the applicable call
date, but only if the use of the call date (in lieu of the stated maturity date)
results in a smaller amortizable bond premium for the period ending on the call
date. If a U.S. holder does not elect to amortize bond premium, that premium
will decrease the gain or increase the loss such holder would otherwise
recognize on disposition of the note.
If a U.S. Holder elects to amortize bond premium, its tax basis in the note
will be reduced by the amount of allowable amortization. The election to
amortize bond premium applies to all taxable debt obligations held during or
after the taxable year for which the election is made, and is irrevocable
without the consent of the IRS.
The rules regarding market discount and amortizable bond premium are
complex, and you should consult your own tax advisors regarding these rules.
Treatment of Dispositions of Notes
Upon the sale, exchange, retirement or other taxable disposition of a note,
a U.S. Holder generally will recognize gain or loss equal to the difference
between the amount received on such disposition (other than amounts representing
accrued and unpaid interest not previously included in income) and the U.S.
Holder's tax basis in the note. A U.S. Holder's tax basis in a note will be, in
general, the cost of the note to the U.S. Holder. Subject to the market discount
rules discussed above, gain or loss realized on the sale, exchange or retirement
of a note generally will be capital gain or loss, and will be long-term capital
gain or loss if, at the time of such sale, exchange or retirement, the note has
been held for more than one year. Net long-term capital gain recognized by a
non-corporate U.S. Holder is generally subject to U.S. federal income tax at a
preferential rate.
FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the U.S. federal income and estate
tax consequences of the exchange offer, and of the beneficial ownership and
disposition of new notes by a holder that is not a United States person,
referred to herein as a "Non-U.S. Holder." For purposes of the following
discussion, any interest income and any gain realized on the sale, exchange or
other disposition of a note will be considered "U.S. trade or business income"
if such interest income or gain is (i) effectively connected with the conduct of
a trade or business in the United States, or (ii) in the case of a treaty
resident, attributable to a permanent establishment (or in the case of an
individual, to a fixed base) in the United States.
The Exchange Offer
The exchange of outstanding notes for new notes pursuant to this exchange
offer will not be a taxable sale or exchange for United States federal income
tax purposes.
Treatment of Interest
A Non-U.S. Holder will not be subject to U.S. federal income or withholding
tax in respect of interest income on a note if each of the following
requirements is satisfied:
- The interest is not U.S. trade or business income (as defined above).
- The Non-U.S. Holder provides to us or our paying agent an appropriate
statement on IRS Form W-8BEN (or suitable substitute form), together with
all appropriate attachments, signed under penalties of perjury,
identifying the Non-U.S. Holder and stating, among other things, that the
Non-U.S. Holder is not a United States person. If a note is held through
a securities clearing organization, bank or another financial institution
that holds customers' securities in the ordinary course of its trade or
business, this requirement is satisfied if (i) the Non-U.S. Holder
provides such a form to the
94
organization or institution, and (ii) the organization or institution,
under penalties of perjury, certifies to us that it has received such a
form from the beneficial owner or another intermediary and furnishes us
or our paying agent with a copy.
- The Non-U.S. Holder does not actually or constructively own 10% or more
of the voting power of our stock.
- The Non-U.S. Holder is not a "controlled foreign corporation" (as defined
for federal income tax purposes) that is actually or constructively
related to us.
To the extent these conditions are not met, a 30% U.S. withholding tax will
apply to interest income on the notes, unless one of the following two
exceptions is satisfied. The first exception is that an applicable income tax
treaty reduces or eliminates such tax, and a Non-U.S. Holder claiming the
benefit of that treaty provides to us or our paying agent a properly executed
IRS Form W-8BEN (or substitute form). The second exception is that the interest
is U.S. trade or business income (as defined above) and the Non-U.S. Holder
provides an appropriate statement to that effect on IRS Form W-8ECI (or
substitute form). In the case of the second exception, such Non-U.S. Holder
generally will be subject to U.S. federal income tax with respect to all income
from the notes on a net income basis in the same manner as a U.S. Holder, as
described above. Additionally, Non-U.S. Holders that are corporations could be
subject to a branch profits tax on such income. Special procedures contained in
Treasury regulations may apply to partnerships, trusts and intermediaries. We
urge Non-U.S. Holders to consult their own tax advisors for information on the
impact of these withholding regulations.
Treatment of Dispositions of Notes
Generally, a Non-U.S. Holder will not be subject to U.S. federal income tax
on gain realized upon the sale, exchange, retirement or other disposition of a
note unless:
- such holder is an individual present in the United States for 183 days or
more in the taxable year of the sale, exchange, retirement or other
disposition and certain other conditions are met, or
- the gain is U.S. trade or business income (as defined above).
Treatment of Notes for U.S. Federal Estate Tax Purposes
A note held, or treated as held, by an individual who is a Non-U.S. Holder
at the time of his or her death will not be subject to U.S. federal estate tax,
provided that the Non-U.S. Holder does not at the time of death actually or
constructively own 10% or more of the combined voting power of all classes of
our stock and payments of interest on such notes would not have been considered
U.S. trade or business income (as defined above).
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
When required, we will report to the holders of the notes and the IRS
amounts paid on or with respect to the notes and the amount of any tax withheld
from such payments.
Certain non-corporate U.S. Holders may be subject to backup withholding at
a rate equal to the fourth lowest marginal rate of income tax applicable to
unmarried individuals on payments made on or with respect to the notes and on
payment of the proceeds from the disposition of a note. This rate is currently
30%. In general, backup withholding will apply to a U.S. Holder only if the U.S.
Holder:
- fails to furnish its Taxpayer Identification Number, or TIN, which for an
individual is his or her Social Security Number;
- furnishes an incorrect TIN;
- is notified by the IRS that it has failed properly to report payments of
interest and dividends; or
95
- under certain circumstances, fails to certify, under penalties of
perjury, that it has furnished a correct TIN and has not been notified by
the IRS that it is subject to backup withholding for failure to report
interest and dividend payments.
A U.S. Holder will be eligible for an exemption from backup withholding by
providing a properly completed IRS Form W-9 (or substitute form) to us or our
paying agent.
A Non-U.S. Holder that provides an IRS Form W-8BEN (or substitute form),
together with all appropriate attachments, signed under penalties of perjury,
identifying the Non-U.S. Holder and stating that the Non-U.S. Holder is not a
United States person, will not be subject to IRS information reporting
requirements and U.S. backup withholding provided that neither we nor our paying
agent has actual knowledge that the holder is a United States person or
otherwise does not satisfy the requirements of an exemption.
Information reporting and backup withholding requirements with respect to
the payment of proceeds from the disposition of a note by a Non-U.S. Holder are
as follows:
- If the proceeds are paid to or through the U.S. office of a broker, they
generally will be subject to information reporting and backup withholding
as described above. However, no such reporting and withholding will be
required if: (i) the holder either certifies as to its status as a
Non-U.S. Holder under penalties of perjury on IRS Form W-8BEN (or
substitute form) or otherwise establishes an exemption, and (ii) the
broker does not have actual knowledge to the contrary.
- If the proceeds are paid to or through a foreign office of a broker that
is not a United States person or a "U.S. related person," as defined
below, they will not be subject to information reporting or backup
withholding.
- If the proceeds are paid to or through a foreign office of a broker that
is either a United States person or a "U.S. related person," they
generally will be subject to information reporting. However, no such
reporting will be required if (i) the holder certifies as to its status
as a Non-U.S. Holder under penalties of perjury or the broker has certain
documentary evidence in its files as to the Non-U.S. Holder's foreign
status, and (ii) the broker has no actual knowledge to the contrary.
Backup withholding will not apply to payments made through foreign
offices of a United States person or U.S. related person, absent actual
knowledge that the payee is a United States person.
For these purposes, a "U.S. related person" is:
- a "controlled foreign corporation," as defined for U.S. federal income
tax purposes;
- a foreign person 50% or more of whose gross income during a specified
three-year period was effectively connected with the conduct of a trade
or business within the United States; or
- a foreign partnership if, at any time during its tax year, one or more of
its partners are United States persons who, in the aggregate, hold more
than 50% of the income or capital interest in the partnership or if, at
any time during its tax year, the partnership is engaged in the conduct
of a trade or business in the United States.
Backup withholding is not an additional tax and may be refunded or credited
against the holder's U.S. federal income tax liability, provided that certain
required information is furnished to the IRS. The information reporting
requirements may apply regardless of whether withholding is required. Copies of
the information returns reporting interest and withholding may be made available
to the tax authorities in foreign countries under the provisions of a tax treaty
or agreement.
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE BENEFICIAL OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
96
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such notes. This prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of notes received in exchange for outstanding notes where such
outstanding notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration date of the exchange offer, it will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such new notes. Any broker-dealer that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
such new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of new notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the expiration date of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
as set forth in the letter of transmittal. We have agreed to pay all expenses
incident to the exchange offer (including the expenses of one counsel for the
holders of the outstanding notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the outstanding notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
97
LEGAL MATTERS
Certain matters with respect to the issuance and sale of the notes offered
hereby will be passed upon for us by Gibson, Dunn & Crutcher LLP.
EXPERTS
The financial statements of Northwest Pipeline Corporation at December 31,
2002 and 2001, and for each of the three years in the period ended December 31,
2002, appearing in this prospectus and registration statement and appearing in
Northwest Pipeline Corporation's Annual Report (Form 10-K) for the year ended
December 31, 2002, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon appearing and incorporated by reference
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and file reports and other
information with the SEC. The public may read and copy any reports or other
information that we file with the SEC at the SEC's public reference room, Room
1024 at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at http://www.sec.gov.
We have filed the following document with the SEC which is incorporated by
reference:
- our Annual Report on Form 10-K for the year ended December 31, 2002.
You may request a copy of this filing at no cost, by writing or telephoning
us at the following address:
Northwest Pipeline Corporation
Attention: Cheryl Blycker
295 Chipeta Way
Salt Lake City, Utah 84108
(801) 583-8800
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the termination
of this offering shall be deemed to be incorporated by reference into this
prospectus and be a part of it from the dates of filing of these documents.
98
GLOSSARY
All volumes of natural gas stated in this prospectus are stated at a
pressure base of 14.73 pounds per square inch absolute at 60 degrees Fahrenheit.
"Bcf"......................... one billion cubic feet
"Contract demand"............. the maximum amount of natural gas deliverable
to a customer on a given day
"Dekatherm"................... the standard quantity for nominations,
confirmations and scheduling is dekatherms per
gas day. One dekatherm is equal to one MMBtu
"Displacement"................ utilizing the same physical pipeline facilities
to, in effect, provide simultaneous gas
transportation service in both directions
"Dth"......................... one dekatherm
"Incremental rate"............ a separately stated rate designed to recover
all costs associated with new facilities
"Looping"..................... the installation of a redundant pipeline,
generally a second line, parallel or adjacent
to an existing line, creating an integrated
system which increases the physical carrying
capacity and adds to the reliability of that
part of the pipeline system
"Mcf"......................... one thousand cubic feet
"MDth"........................ one thousand dekatherms
"MMBtu"....................... one million British Thermal Units
"MMcf"........................ one million cubic feet
"MMDth"....................... one million dekatherms
"TBtu"........................ one trillion British Thermal Units
"Tcf"......................... one trillion cubic feet
"Working gas"................. gas stored pending further transportation and
delivery to customers
99
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Report of Independent Auditors.............................. F-2
Statement of income......................................... F-3
Balance sheet............................................... F-4
Statement of cash flows..................................... F-5
Statement of common stockholder's equity.................... F-6
Notes to financial statements............................... F-7
</Table>
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Northwest Pipeline Corporation
We have audited the accompanying balance sheet of Northwest Pipeline
Corporation as of December 31, 2002 and 2001, and the related statements of
income, cash flows, and common stockholder's equity for each of the three years
in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly,
in all material respects, the financial position of Northwest Pipeline
Corporation at December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 21, 2003
F-2
NORTHWEST PIPELINE CORPORATION
STATEMENT OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
(THOUSANDS OF DOLLARS)
Operating Revenues.......................................... $297,591 $285,171 $296,361
Operating Expenses:
General and administrative................................ 49,338 40,657 39,912
Operation and maintenance................................. 32,279 37,000 36,666
Depreciation.............................................. 58,988 58,654 56,558
Taxes, other than income taxes............................ 12,352 13,441 13,363
-------- -------- --------
152,957 149,752 146,499
-------- -------- --------
Operating income....................................... 144,634 135,419 149,862
-------- -------- --------
Other Income -- net......................................... 10,374 2,278 10,656
-------- -------- --------
Interest Charges:
Interest on long-term debt................................ 25,577 25,670 25,914
Other interest............................................ 2,688 5,302 6,273
Allowance for borrowed funds used during construction..... (2,638) (448) (273)
-------- -------- --------
25,627 30,524 31,914
-------- -------- --------
Income Before Income Taxes.................................. 129,381 107,173 128,604
Provision for Income Taxes.................................. 48,750 40,132 48,862
-------- -------- --------
Net Income.................................................. $ 80,631 $ 67,041 $ 79,742
Cash Dividends on Common Stock.............................. $ -- $ 20,000 $ 80,000
======== ======== ========
</Table>
See accompanying notes.
F-3
NORTHWEST PIPELINE CORPORATION
BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
(THOUSANDS OF DOLLARS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 207 $ 443
Advances to affiliates.................................... 17,282 72,073
Accounts receivable --
Trade, less reserves of $486 for 2002 and $138 for
2001.................................................. 30,031 12,497
Affiliated companies................................... 775 5,407
Materials and supplies.................................... 10,510 11,009
Exchange gas due from others.............................. 1,995 2,236
Deferred income taxes..................................... 2,768 3,810
Excess system gas......................................... 14,016 13,000
Prepayments and other..................................... 1,334 1,697
---------- ----------
Total current assets................................... 78,918 122,172
---------- ----------
Property, Plant and Equipment, at cost...................... 1,937,096 1,775,222
Less -- Accumulated depreciation.......................... 842,355 807,579
---------- ----------
Total property, plant and equipment.................... 1,094,741 967,643
---------- ----------
Other Assets:
Deferred charges.......................................... 49,190 53,929
---------- ----------
Total assets........................................... $1,222,849 $1,143,744
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable --
Trade.................................................. $ 20,502 $ 15,624
Affiliated companies................................... 7,547 30,396
Accrued liabilities --
Income taxes due to affiliate.......................... 12,138 9,094
Taxes, other than income taxes......................... 2,932 2,509
Interest............................................... 3,117 3,123
Employee costs......................................... 8,075 8,549
Exchange gas due to others............................. 16,010 15,236
Other.................................................. 877 933
Current maturities of long-term debt................... 7,500 --
---------- ----------
Total current liabilities............................ 78,698 85,464
---------- ----------
Long-term debt, less current maturities..................... 360,023 367,503
Deferred Income Taxes....................................... 164,818 153,801
Deferred Credits and Other Noncurrent Liabilities........... 25,471 20,554
Contingent Liabilities and Commitments
Common Stockholder's Equity:
Common stock, par value $1 per share; authorized and
outstanding, 1,000 shares.............................. 1 1
Additional paid-in capital................................ 262,844 262,844
Retained earnings......................................... 334,208 253,577
Accumulated other comprehensive loss...................... (3,214) --
---------- ----------
Total common stockholder's equity.................... 593,839 516,422
---------- ----------
Total liabilities and stockholder's equity........... $1,222,849 $1,143,744
========== ==========
</Table>
See accompanying notes.
F-4
NORTHWEST PIPELINE CORPORATION
STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
--------- -------- --------
(THOUSANDS OF DOLLARS)
Operating Activities:
Net Income................................................ $ 80,631 $ 67,041 $ 79,742
Adjustments to reconcile to net cash provided by operating
activities --
Depreciation........................................... 58,988 58,654 56,558
Provision for deferred income taxes.................... 15,956 3,163 23,050
Amortization of deferred charges and credits........... 139 1,871 1,111
Allowance for equity funds used during construction.... (5,496) (826) (496)
Reserve for doubtful accounts.......................... 348 138 --
Changes in:
Accounts receivable and exchange gas due from
others............................................ (12,639) 23,469 (17,635)
Materials and supplies............................... 499 (211) (64)
Other current assets................................. (653) (5,459) (6,513)
Deferred charges..................................... (920) 7,705 (4,124)
Accounts payable, income taxes due to affiliate and
exchange gas due to others........................ (2,940) (19,234) 27,242
Other accrued liabilities............................ 2,931 (29,609) (3,086)
Other deferred credits............................... (359) (653) (213)
Other.................................................. 2 (143) --
--------- -------- --------
Net cash provided by operating activities................. 136,487 105,906 155,572
--------- -------- --------
Investing Activities:
Property, plant and equipment --
Capital expenditures................................... (181,843) (94,923) (47,933)
Proceeds from sales.................................... 4,586 3,155 988
Changes in accounts payable............................ (14,257) 25,935 (2,372)
Repayments from (Advances to) affiliates.................. 54,791 (18,191) (23,040)
--------- -------- --------
Net cash used by investing activities..................... (136,723) (84,024) (72,357)
--------- -------- --------
Financing Activities:
Principal payments on long-term debt...................... -- (3,329) (1,667)
Dividends paid............................................ -- (20,000) (80,000)
--------- -------- --------
Net cash used by financing activities..................... -- (23,329) (81,667)
--------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ (236) (1,447) 1,548
Cash and Cash Equivalents at Beginning of Year.............. 443 1,890 342
--------- -------- --------
Cash and Cash Equivalents at End of Year.................... $ 207 $ 443 $ 1,890
========= ======== ========
</Table>
See accompanying notes.
F-5
NORTHWEST PIPELINE CORPORATION
STATEMENT OF COMMON STOCKHOLDER'S EQUITY
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
(THOUSANDS OF DOLLARS)
Common stock, par value $1 per share, authorized and
outstanding, 1,000 shares................................. $ 1 $ 1 $ 1
-------- -------- --------
Additional paid-in capital --
Balance at beginning and end of period.................... 262,844 262,844 262,844
-------- -------- --------
Retained earnings --
Balance at beginning of period............................ 253,577 206,536 206,794
Net income................................................ 80,631 67,041 79,742
Cash dividends............................................ -- (20,000) (80,000)
-------- -------- --------
Balance at end of period.................................. 334,208 253,577 206,536
-------- -------- --------
Accumulated other comprehensive income --
Balance at beginning of period............................ -- -- --
Minimum pension liability adjustment...................... (3,214) -- --
-------- -------- --------
Balance at end of period.................................. (3,214) -- --
-------- -------- --------
Total common stockholder's equity........................... $593,839 $516,422 $469,381
======== ======== ========
</Table>
See accompanying notes.
F-6
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE AND CONTROL
Northwest Pipeline Corporation ("Pipeline") is a wholly-owned subsidiary of
Williams Gas Pipeline Company LLC ("WGP"). WGP is a wholly-owned subsidiary of
The Williams Companies, Inc. ("Williams").
NATURE OF OPERATIONS
Pipeline owns and operates a pipeline system for the mainline transmission
of natural gas. This system extends from the San Juan Basin in northwestern New
Mexico and southwestern Colorado through Colorado, Utah, Wyoming, Idaho, Oregon
and Washington to a point on the Canadian border near Sumas, Washington.
REGULATORY ACCOUNTING
Pipeline is regulated by the Federal Energy Regulatory Commission ("FERC").
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation," provides that rate-regulated public
utilities account for and report regulatory assets and liabilities consistent
with the economic effect of the way in which regulators establish rates if the
rates established are designed to recover the costs of providing the regulated
service and if the competitive environment makes it reasonable to assume that
such rates can be charged and collected. Accounting for businesses that are
regulated and apply the provisions of SFAS No. 71 can differ from the accounting
requirements for non-regulated businesses. Transactions that are recorded
differently as a result of regulatory accounting requirements include the
capitalization of an equity return component on regulated capital projects,
employee related benefits, and other costs and taxes included in, or expected to
be included in, future rates. As a rate-regulated entity, Pipeline management
has determined that it is appropriate to apply the accounting prescribed by SFAS
No. 71 and, accordingly, the accompanying financial statements include the
effects of the types of transactions described above that result from regulatory
accounting requirements.
BASIS OF PRESENTATION
Pipeline's 1983 acquisition by Williams has been accounted for using the
purchase method of accounting. Accordingly, an allocation of the purchase price
was assigned to the assets and liabilities of Pipeline, based on their estimated
fair values at the time of the acquisition. Williams has not pushed down the
purchase price allocation (amounts in excess of original cost) of $89.2 million,
as of December 31, 2002, to Pipeline as current FERC policy does not permit
Pipeline to recover through its rates amounts in excess of original cost. The
accompanying financial statements reflect Pipeline's original basis in its
assets and liabilities.
ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and disclosure of contingent assets and
liabilities. On an ongoing basis, Pipeline evaluates its estimates, including
those related to revenues subject to refund, bad debts, materials and supplies
obsolescence, property, plant and equipment and other long-lived assets, income
taxes, pensions and other postretirement benefits and contingent liabilities.
Pipeline bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results could differ from such estimates.
F-7
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment ("plant"), consisting principally of natural
gas transmission facilities, is recorded at original cost. Pipeline accounts for
repair and maintenance costs under the guidance of FERC regulations. The FERC
identifies installation, construction and replacement costs that are to be
capitalized. Routine maintenance, repairs and renewal costs are charged to
income as incurred. Gains or losses from the ordinary sale or retirement of
plant are charged or credited to accumulated depreciation.
Depreciation is provided by the straight-line method for plant. The annual
weighted average composite depreciation rate recorded for transmission and
storage plant was 3.08 percent, 3.09 percent and 3.16 percent for 2002, 2001 and
2000, respectively, including an allowance for negative salvage.
ALLOWANCE FOR BORROWED AND EQUITY FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction ("AFUDC") represents the
estimated cost of borrowed and equity funds applicable to utility plant in
process of construction and are included as a cost of property, plant and
equipment because it constitutes an actual cost of construction under
established regulatory practices. The FERC has prescribed a formula to be used
in computing separate allowances for borrowed and equity AFUDC.
The composite rate used to capitalize AFUDC was approximately 10.0 percent
in 2002 and 9.9 percent in each of the years 2001 and 2000. Equity AFUDC of $5.5
million, $0.8 million and $0.5 million for 2002, 2001 and 2000, respectively, is
reflected in other income.
ADVANCES TO AFFILIATES
As a participant in Williams' cash management program, Pipeline makes
advances to and receives advances from Williams through WGP. The advances are
represented by demand notes. Advances are stated at the historical carrying
amounts. Interest income is recognized when chargeable and collectibility is
reasonably assured.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL RECEIVABLES
Accounts receivable are stated at the historical carrying amount net of
reserves or write-offs. Due to its customer base, Pipeline has not historically
experienced recurring credit losses in connection with its receivables. As a
result, receivables determined to be uncollectible are reserved or written off
in the period of such determination.
IMPAIRMENT OF LONG-LIVED ASSETS
Pipeline evaluates long-lived assets for impairment when events or changes
in circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. When such a determination has been made,
management's estimate of undiscounted future cash flows attributable to the
assets is compared to the carrying value of the assets to determine whether an
impairment has occurred. If an impairment of the carrying value has occurred,
the amount of the impairment recognized in the financial statements is
determined by estimating the fair value of the assets and recording a loss for
the amount that the carrying value exceeds the estimated fair value.
INCOME TAXES
Pipeline is included in Williams' consolidated federal income tax return.
Pipeline's federal income tax provisions are computed as though separate tax
returns are filed. Deferred income taxes are computed using the liability method
and are provided on all temporary differences between the financial basis and
the tax basis of Pipeline's assets and liabilities.
F-8
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED CHARGES
Pipeline amortizes deferred charges over varying periods consistent with
the FERC approved accounting treatment for such deferred items. Unamortized debt
expense, debt discount and losses on reacquired long-term debt are amortized by
the bonds outstanding method over the related debt repayment periods.
CASH AND CASH EQUIVALENTS
Cash equivalents are stated at cost plus accrued interest, which
approximates fair value. Cash equivalents are highly liquid investments with an
original maturity of three months or less.
EXCHANGE GAS IMBALANCES
In the course of providing transportation services to customers, Pipeline
may receive different quantities of gas from shippers than the quantities
delivered on behalf of those shippers. These transactions result in imbalances,
which are typically settled through the receipt or delivery of gas in the
future. Customer imbalances to be repaid or recovered in-kind are recorded as
exchange gas due from others or due to others in the accompanying balance
sheets. These imbalances are valued at the average of the spot market rates at
the Canadian border and the Rocky Mountain market as published in "Inside FERC's
Gas Market Report." Settlement of imbalances requires agreement between the
pipelines and shippers as to allocations of volumes to specific transportation
contracts and timing of delivery of gas based on operational conditions.
EXCESS SYSTEM GAS
Pipeline's excess system gas is valued at the average of the spot market
rates of the Canadian border and the Rocky Mountain market as published in
"Inside FERC's Gas Market Report".
REVENUE RECOGNITION
Revenues from the transportation of gas are recognized based on contractual
terms and the related transported volumes. Pipeline is subject to FERC
regulations and, accordingly, certain revenues collected may be subject to
possible refunds upon final orders in pending rate cases. Pipeline records rate
refund liabilities considering 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.
ENVIRONMENTAL MATTERS
Pipeline is subject to Federal, state, and local environmental laws and
regulations. Environmental expenditures are expensed or capitalized depending on
their future economic benefit and potential for rate recovery. Pipeline believes
that, with respect to any expenditures required to meet applicable standards and
regulations, the FERC would grant the requisite rate relief so that, for the
most part, such expenditures would be permitted to be recovered. Pipeline
believes that compliance with applicable environmental requirements is not
likely to have a material effect upon Pipeline's financial position.
INTEREST PAYMENTS
Cash payments for interest were $22.9 million, $39.9 million and $25.7
million, net of $2.6 million, $0.4 million and $0.3 million of interest
capitalized (allowance for borrowed funds used during construction) in 2002,
2001 and 2000, respectively.
EMPLOYEE STOCK BASED AWARDS
Williams' employee stock-based awards are accounted for under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Williams' fixed plan
F-9
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 4. The following table illustrates the effect on net income if Pipeline had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- ------- -------
(THOUSANDS OF DOLLARS)
Net income, as reported................................. $80,631 $67,041 $79,742
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax.................................... 365 401 1,320
------- ------- -------
Pro forma net income.................................... $80,266 $66,640 $78,422
======= ======= =======
</Table>
Pro forma amounts for 2002 include compensation expense from Williams
awards made in 2002 and 2001 and compensation expense from certain Williams
awards made in 1999.
Pro forma amounts for 2001 include compensation expense from certain
Williams awards made in 1999 and compensation expense from Williams awards made
in 2001.
Pro forma amounts for 2000 include compensation expense from certain
Williams awards made in 1999 and the total compensation expense from Williams
awards made in 2000, as these awards fully vested in 2000 as a result of
accelerated vesting provisions.
The pro forma net income effects of applying SFAS 123 recognition of
compensation expense provided for the periods shown above may not be
representative of the effects on reported net income for future years.
The fair value of each award was estimated using the Black-Scholes options
pricing model. See Note 4 for the assumptions used in the calculation of fair
value.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," which is effective for
fiscal years beginning after June 15, 2002. The Statement requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost should be capitalized as part of the
related long-lived asset and allocated to expense over the useful life of the
asset. Pipeline will adopt the new rules on asset retirement obligations on
January 1, 2003. The impact of adoption is to be reported as a cumulative effect
of change in accounting principle. Retirement obligations have not been
estimated for assets with currently indeterminable lives including pipeline
transmission assets and gas gathering systems accordingly, the impact of
adopting the statement is not expected to have a material effect on Pipeline's
financial position or results of operations.
The FASB issued SFAS 144, "Accounting for Impairment or Disposal of
Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the
accounting and reporting provisions of APB 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 retains the accounting and reporting provisions of SFAS 121 for recognition
and measurement of long-lived asset impairment and for the measurement of
long-lived assets to be disposed of by sale and the accounting and reporting
provisions of APB 30. In addition to these fundamental provisions, SFAS 144
provides guidance for determining whether long-lived assets should be tested for
impairment and specific criteria for classifying assets to be disposed of as
held for sale. The statement is effective for fiscal years beginning after
December 15, 2001. Pipeline adopted the statement
F-10
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
as of January 1, 2002. The adoption of this statement had no material effect on
Pipeline's financial position or results of operations.
In the second quarter of 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical
Corrections." The rescission of SFAS No. 4 "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements, "requires that gains and losses from
extinguishment of debt only be classified as extraordinary items in the event
that they meet the criteria of APB Opinion No. 30. SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers," established accounting requirements for
the effects of transition to the Motor Carriers Act of 1980 and is no longer
required now that the transitions have been completed. Finally, the amendments
to SFAS No. 13, "Accounting for Leases," require certain lease modifications
that have economic effects, which are similar to sale-leaseback transactions, be
accounted for as sale-leaseback transactions. The provisions of this Statement
related to the rescission of SFAS No. 4 to be applied in fiscal years beginning
after May 15, 2002, while the provisions related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. All other provisions of the
Statement are effective for financial statements issued on or after May 15,
2002. There was no initial impact of SFAS No. 145 on Pipeline's results of
operations and financial position.
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
Emerging Issues Task Force 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 entity's
commitment to an exit plan. The provisions of the 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 Pipeline's results of operations or financial position.
The FASB issued SFAS 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure," which is effective for fiscal years ending after
December 15, 2002. SFAS 148 amends SFAS 123, "Accounting for Stock-Based
Compensation," 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 25, "Accounting for Stock
Issued to Employees." The prospective method of transition under SFAS 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, SFAS
148 amends the disclosure requirements of SFAS 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 SFAS 148, pro forma
disclosures will be required in a specific tabular format in the "Summary of
Significant Accounting Policies". Pipeline has adopted the disclosure
requirements of this statement effective December 31, 2002. The adoption had no
effect on Pipeline's consolidated financial position or results of operations.
Pipeline continues to account for its stock-based compensation plans under APB
25. See "Employee Stock Based Awards".
The FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." This Interpretation requires the initial recognition at
fair value of guarantees issued or modified after December 31, 2002, and expands
the disclosure requirements for guarantees. Initial adoption of this
Interpretation did not have any impact on Pipeline's results of operations or
financial position. The expanded disclosure requirements have been incorporated
in this annual report.
The FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN
46 requires companies with a variable interest in a variable interest entity to
apply this guidance to that entity as of the beginning of the
F-11
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
first interim period beginning after June 15, 2003 for existing interests and
immediately for new interests. The application of the guidance could result in
the consolidation of a variable interest entity. As of December 31, 2002,
Pipeline has no variable interest entities as defined by FIN 46.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2001 and 2000 financial
statements to conform to the 2002 presentation.
2. CONTINGENT LIABILITIES AND COMMITMENTS
RATE AND REGULATORY MATTERS
GENERAL RATE CASE (DOCKET NO. RP93-5) On April 1, 1993, Pipeline began
collecting new rates, subject to refund, under its rate case filed October 1,
1992 ("1993 Rate Case"). Pipeline made refunds to customers in June 1998
totaling $27 million, including interest, reflecting the FERC's resolution of
all disputed matters in this case. Pipeline and other parties sought judicial
review of the FERC's decision concerning rate of return on equity. One party
sought judicial review of the inclusion of unpaid accruals in rate base. In July
1998, the FERC issued orders concerning its rate of return on equity policy in
rate proceedings of other pipelines adopting a formula that gives less weight to
the long-term growth component. In April 1999, the Court of Appeals for the D.C.
Circuit remanded the 1993 Rate Case to the FERC for application of its revised
rate of return on equity policy. On July 14, 1999, the FERC issued an order
requiring Pipeline to: (a) submit a surcharge plan to the FERC, (b) recalculate
rates consistent with the new weighting formula favoring short term growth, and
(c) address in a remand hearing the appropriate source for Gross Domestic
Product ("GDP") growth data. The new weighting formula generally results in a
higher authorized rate of return on equity. Pipeline and its customers resolved
by settlement those issues relating to long term GDP growth. In February 2000,
the FERC approved the long-term growth settlement and issued an order related to
return on equity issues requiring Pipeline to incorporate the effects of the
settlement and to calculate its allowed rate of return on equity consistent with
the recently announced policy changes in other proceedings. As a part of this
recalculation of allowed return on equity, the FERC provided that Pipeline must
use the median instead of the midpoint of the various results of Discounted Cash
Flow ("DCF") analysis for a proxy group. This resulted in a 13.67 percent return
on equity for Pipeline. On April 3, 2000, Pipeline made the necessary compliance
filings to implement the FERC's decision including the establishment of
surcharges in order to recollect moneys that shippers owe Pipeline for these
corrective actions. On July 14, 2000, the FERC issued an order denying customer
rehearing requests and approving Pipeline's compliance filing. The order
reaffirmed Pipeline's right to use the median result from the DCF proxy group
analysis. Some of Pipeline's customers sought judicial review concerning the
FERC's orders with respect to return on equity issues. On July 13, 2001, the
D.C. Circuit issued its decision affirming the FERC's earlier rulings on various
rate base, accounting, and risk issues, but remanding the case to the FERC to
allow the FERC to set forth more clearly its rationale for allowing Pipeline to
utilize the median result of the DCF proxy group analysis. On June 12, 2002, the
FERC issued an Order on Remand reaffirming its decision to utilize the median of
the proxy companies in setting Pipeline's return on equity. No requests for
rehearing were filed in response to the June 12, 2002 order. This decision
effectively brought the 1993 Rate Case to its conclusion.
GENERAL RATE CASE (DOCKET NO. RP95-409) On February 1, 1996, Pipeline began
collecting new rates, subject to refund, under the provisions of its rate case
filed August 1, 1995 ("1995 Rate Case"). During the first quarter of 1998, the
Administrative Law Judge ("ALJ") issued an Initial Decision. The ALJ found that
the facts of this case continue to support Pipeline's capital structure of 55
percent equity and 45 percent debt. The ALJ also determined that Pipeline fits
within the average risk range for determining pipeline return on equity and
allowed a return on equity of 11.2 percent. On June 1, 1999, the FERC issued its
order affirming many aspects of the ALJ's initial decision, but finding that the
return on equity issue should be resolved by using the FERC's new policy
concerning rate of return determinations. This resulted in an allowed return on
F-12
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equity of 12.22 percent. On September 29, 2000, the FERC issued its Order on
Rehearing, which, for the most part, reaffirmed the FERC's earlier June 1, 1999
decision. Pipeline made a compliance filing on October 16, 2000. On July 11,
2001, the FERC issued an Order accepting Pipeline's compliance filings, subject
to Pipeline making some minor rate related changes relating to billing
determinants and cost of service recovery for facilities subject to
reimbursement agreements. On August 31, 2001, Pipeline made refunds to customers
totaling $43.1 million, including interest. Some shippers filed petitions for
review concerning return on equity issues. On October 25, 2002, the United
States Court of Appeals for the D.C. Circuit affirmed the FERC's decision in its
treatment of return on equity issues. This decision effectively brought the 1995
Rate Case to its conclusion.
NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM01-10-000) On September 27,
2001, the FERC issued a Notice of Proposed Rulemaking ("NOPR") proposing to
adopt uniform standards of conduct for transmission providers. The proposed
rules define transmission providers as interstate natural gas pipelines and
public utilities that own, operate or control electric transmission facilities.
The proposed standards would regulate the conduct of transmission providers with
their energy affiliates. The FERC proposed to define energy affiliates broadly
to include any transmission provider affiliate that engages in or is involved in
transmission (gas or electric) transactions, or manages or controls transmission
capacity, or buys, sells, trades or administers natural gas or electric energy
or engages in financial transactions relating to the sale or transmission of
natural gas or electricity. Current rules regulate the conduct of Pipeline and
its gas marketing affiliates. The FERC's staff analysis of the proposed
rulemaking proposed redefining energy affiliates to exclude affiliated
transmission providers. If the proposed rules are adopted as proposed, these new
standards would require new compliance measures by Pipeline.
NOTICE OF INQUIRY (DOCKET NO. PL02-6-000) On July 17, 2002, the FERC issued
a Notice of Inquiry to seek comments on its negotiated rate policies and
practices. The FERC states that it is undertaking a review of the recourse rate
as a viable alternative and safeguard against the exercise of market power of
interstate gas pipelines, as well as the entire spectrum of issues related to
its negotiated rate program. Pipeline has negotiated certain rates under the
FERC's existing negotiated rate program, and participated in comments filed in
this proceeding by Williams in support of the FERC's existing negotiated rate
program.
NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM02-14-000) On August 1, 2002,
the FERC issued a NOPR that proposes restrictions on various types of cash
management programs employed by companies in the energy industry such as
Williams and its subsidiaries, including Pipeline. In addition to stricter
guidelines regarding the accounting for and documentation of cash management or
cash pooling programs, the FERC proposal, if made final, would preclude public
utilities, natural gas companies and oil pipeline companies from participating
in such programs unless the parent company and its FERC-regulated affiliate
maintain investment-grade credit ratings and the FERC-regulated affiliate
maintains stockholder's equity of at least 30 percent of total capitalization.
Williams' and Pipeline's current credit ratings are not investment grade.
Pipeline participated in comments filed in this proceeding on August 28, 2002 by
the Interstate Natural Gas Association of America. On September 25, 2002, the
FERC convened a technical conference to discuss issues raised in the comments
filed by parties in this proceeding.
LEGAL PROCEEDINGS
In 1998, the United States Department of Justice ("DOJ") informed Williams
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
Williams and certain of its wholly-owned subsidiaries including Pipeline. Mr.
Grynberg had also filed claims against approximately 300 other energy companies
and alleged that the defendants violated the False Claims Act in connection with
the measurement, royalty valuation and purchase of hydrocarbons. The relief
sought was 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 the
F-13
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Williams 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
Williams to the United States District Court for the District of Wyoming for
pre-trial purposes. On October 9, 2002, the court granted a motion to dismiss
Grynberg's royalty valuation claims. Grynberg's measurement claims remain
pending against Williams and the other defendants.
On June 8, 2001, fourteen Williams entities, including Pipeline, were named
as defendants in a nationwide class action lawsuit which has been pending
against other defendants, generally pipeline and gathering companies, for more
than one year. The plaintiffs allege 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. In September 2001, plaintiffs' counsel voluntarily
dismissed two of the fourteen Williams entities named as defendants in the
lawsuit. In November 2001, The Williams defendants, along with other
coordinating defendants, filed a motion to dismiss on non-jurisdictional
grounds. In January 2002, most of the Williams defendants, along with a group of
coordinating defendants filed a motion to dismiss for lack of personal
jurisdiction. On August 19, 2002, defendants' motion to dismiss on
non-jurisdictional grounds was denied. On September 17, 2002, the plaintiffs
filed a motion for class certification. The Williams entities joined with other
defendants in contesting certification of the plaintiff class and this issue,
along with the personal jurisdiction motion, remains pending.
OTHER LEGAL AND REGULATORY MATTERS
In addition to the foregoing, various other proceedings are pending against
Pipeline incidental to its operations.
SUMMARY
While no assurances may be given, Pipeline does not believe that the
ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, recovery from customers, insurance coverage or
other indemnification arrangements, will have a materially adverse effect upon
Pipeline's financial position, results of operations, or cash flow requirements.
OTHER COMMITMENTS
Commitments for construction and acquisition of property, plant and
equipment are approximately $354.8 million at December 31, 2002.
3. DEBT, FINANCING ARRANGEMENTS AND LEASES
DEBT COVENANTS
The terms of Pipeline's debt indentures restrict the issuance of mortgage
bonds. The indentures contain provisions for the acceleration of repayment or
the reset of interest rates under certain conditions. Pipeline's debt indentures
also contain restrictions, which, under certain circumstances, limit the
issuance of additional debt and restrict the disposal of a major portion of its
natural gas pipeline system.
ADJUSTABLE INTEREST RATE NOTES
On May 15, 2001, under the terms of the note agreement, Pipeline prepaid,
without penalty, the outstanding $1.7 million balance of its adjustable rate
notes with accrued interest. Prepayment was made from Pipeline's operations and
available cash.
F-14
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
(THOUSANDS OF DOLLARS)
6.625%, payable 2007........................................ $250,000 $250,000
7.125%, payable 2025........................................ 84,740 84,729
9.000%, payable 2003 through 2007........................... 32,783 32,774
-------- --------
Total long-term debt...................................... 367,523 367,503
Less current maturities..................................... 7,500 --
-------- --------
Total long-term debt, less current maturities............. $360,023 $367,503
======== ========
</Table>
As of December 31, 2002, cumulative sinking fund requirements and other
maturities of long-term debt (at face value) for each of the next five years are
as follows:
<Table>
<Caption>
(THOUSANDS OF DOLLARS)
----------------------
2003........................................................ $ 7,500
2004........................................................ 7,500
2005........................................................ 7,500
2006........................................................ 7,500
2007........................................................ 252,867
Thereafter.................................................. 85,000
--------
Total..................................................... $367,867
========
</Table>
LINE-OF-CREDIT ARRANGEMENTS
Williams and certain of its subsidiaries, including Pipeline, are parties
to a $700 million credit agreement (Credit Agreement), under which Pipeline can
borrow up to $400 million to the extent the funds available under the Credit
Agreement have not been borrowed by Williams or other subsidiaries. The Credit
Agreement expires in July 2005. Interest rates vary with current market
conditions based on the base rate of Citibank N.A., federal funds rate or the
London Interbank Offered Rate. The Credit Agreement contains restrictions, which
limit, under certain circumstances, the issuance of additional debt, the
attachment of liens on any assets and any change of ownership of Pipeline. As
Williams completes certain asset sales, the commitments from participating banks
in the Credit Agreement will be reduced to $400 million, and with further asset
sales could be reduced below that amount, but Pipeline will continue to have
borrowing capacity up to the lesser of $400 million or the amount that Williams
would be able to borrow to the extent the funds available under the Credit
Agreement have not been borrowed by Williams or other participating subsidiaries
or that otherwise would be required to remain available to Williams. At December
31, 2002, the commitment from participating banks had been reduced to $463
million, the borrowing capacity available to Pipeline was $400 million, and
Pipeline had no outstanding borrowings under this agreement. Pipeline's assets
have not been pledged to secure any indebtedness of Williams or its other
affiliates, either under the Credit Agreement or pursuant to any other credit
facility of Williams and its other affiliates.
LEASES
Pipeline's leasing arrangements include mostly premise and equipment leases
that are classified as operating leases.
F-15
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The major operating lease is a leveraged lease, which became effective
during 1982 for Pipeline's headquarters building. The agreement has an initial
term of approximately 27 years, with options for consecutive renewal terms of
approximately 9 years and 10 years. The major component of the lease payment is
set through the initial and first renewal terms of the lease. Various purchase
options exist under the building lease, including options involving adverse
regulatory developments.
Pipeline subleases portions of its headquarters building to third parties
under agreements with varying terms. Following are the estimated future minimum
yearly rental payments required under operating leases, which have initial or
remaining noncancelable lease terms in excess of one year:
<Table>
<Caption>
(THOUSANDS OF DOLLARS)
----------------------
2003........................................................ $ 8,806
2004........................................................ 8,806
2005........................................................ 8,807
2006........................................................ 6,354
2007........................................................ 6,355
Thereafter.................................................. 14,120
-------
$53,248
Less: noncancelable subleases............................... 11,689
-------
Total..................................................... $41,559
=======
</Table>
Operating lease rental expense amounted to $5.4 million, $6.1 million and
$8.8 million for 2002, 2001 and 2000, respectively.
4. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT MEDICAL PLANS
Pipeline's employees are covered by Williams' non-contributory
defined-benefit pension plan and Williams' health care plan that provides
postretirement medical benefits to certain retired employees. Contributions for
pension and postretirement medical benefits related to Pipeline's participation
in these plans were $5.9 million, $2.3 million and $2.8 million in 2002, 2001
and 2000, respectively. These amounts are currently recoverable in Pipeline's
rates.
At December 31, 2002, Pipeline recorded a minimum pension liability of $3.2
million, net of $2.0 million tax, which is included as a component of Pipeline's
other comprehensive loss for the year 2002.
DEFINED CONTRIBUTION PLAN
Pipeline's employees are also covered by various Williams' defined
contribution plans. Pipeline's costs related to these plans totaled $2.3
million, $2.1 million and $1.8 million in 2002, 2001 and 2000, respectively.
STOCK-BASED COMPENSATION
Williams has several plans providing for common-stock-based awards to its
employees and employees of its subsidiaries. The plans permit the granting of
various types of awards including, but not limited to, stock options, stock
appreciation rights, 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. The purchase price per share for
stock options and the grant price for stock appreciation rights may not be less
than the market price of the underlying stock on the date of grant. Stock
options generally become exercisable in one-third increments each year from the
anniversary of the grant or after three or five years,
F-16
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subject to accelerated vesting if certain future stock prices or if specific
financial performance targets are achieved. Stock options expire 10 years after
grant.
The following summary reflects stock option activity for Williams common
stock attributable to Pipeline and related information for 2002, 2001 and 2000
(options in thousands):
<Table>
<Caption>
2002 2001 2000
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
Outstanding -- beginning of
year......................... 1,291 $24.38 1,200 $24.02 1,183 $20.64
Granted........................ 527 $ 7.27 159 $38.00 136 $46.04
Exercised...................... (26) $ 9.59 (112) $11.82 (131) $15.01
Forfeited/expired.............. (484) $24.59 (21) $32.81 (7) $38.66
Adjustment for WCG
spinoff(1)................... -- -- 111 -- -- --
Employee transfers, in......... 594 $25.46 99 $20.50 235 $22.90
Employee transfers, out........ (391) $22.70 (145) $23.32 (216) $23.06
----- ----- -----
Outstanding -- end of year..... 1,511 $19.40 1,291 $24.38 1,200 $24.02
===== ===== =====
Exercisable at year end........ 1,040 $24.45 1,102 $22.58 1,169 $23.66
===== ===== =====
</Table>
- ---------------
(1) Effective with the spinoff of Williams Communications Group ("WCG") on April
23, 2001, by Williams, the number of unexercised Williams stock options and
the exercise price were adjusted to preserve the intrinsic value of the
stock options that existed prior to the spinoff.
The following summary provides information about stock options granted to
employees of Pipeline that are outstanding and exercisable at December 31, 2002
(options in thousands):
<Table>
<Caption>
STOCK OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED STOCK OPTIONS EXERCISABLE
AVERAGE --------------------------
WEIGHTED REMAINING WEIGHTED
RANGE OF EXERCISE AVERAGE CONTRACTUAL AVERAGE
PRICES OPTIONS EXERCISE PRICE LIFE (YRS) OPTIONS EXERCISE PRICE
- ----------------- ------- -------------- ----------- -------- ---------------
$2.27 to $2.58 340 $ 2.58 9.89 -- $ 0.00
$6.71 to $15.32 320 $12.38 2.59 320 $12.38
$15.71 to $42.29 851 $28.76 5.54 720 $29.81
----- -----
1,511 $19.40 5.33 1,040 $24.45
===== =====
</Table>
F-17
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value at the date of grant of options for Williams
common stock granted in 2002, 2001 and 2000, using the Black-Scholes
option-pricing model is as follows:
<Table>
<Caption>
2002 2001 2000
----- ------ ------
Weighted-average grant date fair value of options for
Williams common stock granted during the year............ $2.77 $10.93 $15.44
===== ====== ======
Assumptions
Dividend yield........................................... 1.0% 1.9% 1.5%
Volatility............................................... 56% 35% 31%
Risk-free interest rate.................................. 3.6% 4.8% 6.5%
Expected life (years).................................... 5.0 5.0 5.0
</Table>
5. INCOME TAXES
Significant components of the deferred tax liabilities and assets are as
follows:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
(THOUSANDS OF DOLLARS)
Property, plant and equipment............................... $155,927 $141,637
Regulatory assets........................................... 6,223 5,243
Loss on reacquired debt..................................... 6,482 7,214
Other -- net................................................ 799 648
-------- --------
Deferred tax liabilities.................................... 169,431 154,742
-------- --------
Regulatory liabilities...................................... 500 917
Accrued liabilities......................................... 6,881 3,834
-------- --------
Deferred tax assets......................................... 7,381 4,751
-------- --------
Net deferred tax liabilities................................ $162,050 $149,991
======== ========
Reflected as:
Deferred income taxes -- current asset.................... $ 2,768 $ 3,810
Deferred income taxes -- noncurrent liability............. 164,818 153,801
-------- --------
$162,050 $149,991
======== ========
</Table>
F-18
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes includes:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- ------- -------
(THOUSANDS OF DOLLARS)
Current:
Federal............................................... $29,305 $33,036 $23,150
State................................................. 3,489 3,933 2,662
------- ------- -------
32,794 36,969 25,812
------- ------- -------
Deferred:
Federal............................................... 14,461 2,827 20,598
State................................................. 1,495 336 2,452
------- ------- -------
15,956 3,163 23,050
------- ------- -------
Total provision......................................... $48,750 $40,132 $48,862
======= ======= =======
</Table>
A reconciliation of the statutory Federal income tax rate to the provision
for income taxes is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- ------- -------
(THOUSANDS OF DOLLARS)
Provision at statutory Federal income tax rate of 35
percent................................................... $45,283 $37,511 $45,011
Increase (decrease) in tax provision resulting from --
State income taxes net of Federal tax benefit............. 3,240 2,775 3,324
Other -- net.............................................. 227 (154) 527
------- ------- -------
Provision for income taxes............................. $48,750 $40,132 $48,862
======= ======= =======
Effective tax rate.......................................... 37.68% 37.45% 37.99%
======= ======= =======
</Table>
Net cash payments made to Williams for income taxes were $29.7 million,
$35.9 million and $26.3 million in 2002, 2001 and 2000, respectively.
6. FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash, cash equivalents and advances to affiliate -- The carrying amounts of
these items approximates their fair value.
Long-term debt -- The fair value of Pipeline's publicly traded long-term
debt is valued using year-end traded market prices. Private debt is valued based
on the prices of similar securities with similar terms and credit ratings.
Pipeline used the expertise of an outside investment-banking firm to estimate
the fair value of long-term debt. The carrying amount and estimated fair value
of Pipeline's long term debt, including current maturities, were $368 million
and $328 million, respectively, at December 31, 2002, and $368 million and $369
million, respectively, at December 31, 2001.
F-19
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
CONCENTRATION OF OFF-BALANCE-SHEET AND OTHER CREDIT RISK
During the periods presented, more than 10 percent of Pipeline's operating
revenues were generated from each of the following customers:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- ------- -------
(THOUSANDS OF DOLLARS)
Puget Sound Energy, Inc..................................... $42,116 $43,919 $43,368
Northwest Natural Gas Co.................................... 37,815 39,203 40,376
</Table>
Pipeline's major customers are located in the Pacific Northwest. As a
general policy, collateral is not required for receivables, but customers'
financial condition and credit worthiness are regularly evaluated and historical
collection losses have been minimal.
Pipeline, through a wholly-owned bankruptcy remote subsidiary, sold certain
trade accounts receivable to a special-purpose entity ("SPE") in a
securitization structure requiring annual renewal. Pipeline acted as the
servicing agent for the sold receivables. The sale of receivables program
expired on July 25, 2002, and on July 26, 2002, Pipeline completed the
repurchase of $15 million of trade accounts receivable previously sold. For
2002, cash inflows from the SPE were approximately $112 million. The sales of
these receivables resulted in a net charge to results of operations of
approximately $0.2 million and $0.7 million in 2002 and 2001, respectively.
RELATED PARTY TRANSACTIONS
As a subsidiary of Williams, Pipeline engages in transactions with Williams
and other Williams subsidiaries characteristic of group operations. As a
participant in Williams' cash management program, Pipeline makes advances to and
receives advances from Williams through Pipeline's parent company, WGP. The
advances are represented by demand notes. The interest rate on intercompany
demand notes is LIBOR on the first day of the month plus an applicable margin
based on Pipeline's current credit ratings as determined by Moody's Investors
Service and Standard and Poor's. Pipeline received interest income from advances
to these affiliates of $1.6 million, $3.1 million, and $3.4 million during 2002,
2001 and 2000, respectively.
Williams' corporate overhead expenses allocated to Pipeline were $9.7
million, $6.9 million and $4.5 million for 2002, 2001 and 2000, respectively.
Such expenses have been allocated to Pipeline by Williams primarily based on the
Modified Massachusetts formula, which is a FERC approved method utilizing a
combination of net revenues, gross payroll and gross plant for the allocation
base. In addition, Williams or an affiliate has provided executive, data
processing, legal, aviation, accounting, internal audit and other administrative
services to Pipeline on a direct charge basis, which totaled $4.6 million, $5.0
million and $4.8 million for 2002, 2001 and 2000, respectively.
During the periods presented, Pipeline's revenues include transportation
and exchange transactions with subsidiaries of Williams. Combined revenues for
these activities totaled $2.2 million, $1.8 million and $1.2 million for 2002,
2001 and 2000, respectively.
Pipeline has entered into various other transactions with certain related
parties, the amounts of which were not significant. These transactions and the
above-described transactions are made on the basis of commercial relationships
and prevailing market prices or general industry practices.
Pipeline has also entered into an interconnect agreement and an operation
balance agreement, each in connection with the Georgia Strait Crossing project,
with an affiliate of Williams.
F-20
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for 2002
and 2001:
<Table>
<Caption>
QUARTER OF 2002
-------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(THOUSANDS OF DOLLARS)
Operating revenues..................................... $71,617 $73,228 $73,042 $79,704
Operating income....................................... 34,034 31,645 37,987 40,968
Net income............................................. 18,377 16,683 22,211 23,360
</Table>
<Table>
<Caption>
QUARTER OF 2001
-------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(THOUSANDS OF DOLLARS)
Operating revenues..................................... $71,198 $71,881 $69,624 $72,468
Operating income....................................... 34,437 35,532 33,824 31,626
Net income............................................. 17,532 18,135 15,584 15,790
</Table>
9. SUBSEQUENT EVENT (UNAUDITED)
On March 4, 2003, Pipeline sold $175 million of senior notes due 2010 to
certain institutional investors in an offering exempt from the registration
requirements of the Securities Act of 1933. Pipeline intends to use the proceeds
for general corporate purposes, including the funding of capital expenditures.
F-21
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus
does not offer to sell or ask for offers to buy any securities other than those
to which this prospectus relates and it does not constitute an offer to sell or
ask for offers to buy any of the securities in any jurisdiction where it is
unlawful, where the person making the offer is not qualified to do so, or to any
person who cannot legally be offered the securities. The information contained
in this prospectus is current only as of its date.
------------------------
PROSPECTUS
------------------------
NORTHWEST PIPELINE CORPORATION
EXCHANGE OFFER FOR OUTSTANDING
8 1/8% SENIOR NOTES DUE MARCH 1, 2010
IN EXCHANGE FOR NEW
8 1/8% SENIOR NOTES DUE MARCH 1, 2010
APRIL 28, 2003