Annual Report (Form 10-K), fiscal year 1994





ITEM 3. LEGAL PROCEEDINGS
Various suits and claims, including those referred to in Note 10 of Notes to Financial Statements and above under "Contract Reformation and Gas Supply Contract Issues" and "Other Regulatory Matters", arising in the ordinary course of business, are pending against Pipeline. While the ultimate effect of such actions cannot be ascertained at this time, in the opinion of management of Pipeline and its counsel, the possible liabilities (after consideration of amounts accrued, insurance coverage or other indemnification arrangements) which may result from such actions are not likely to have a materially adverse financial effect upon Pipeline in the future.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since Pipeline meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K, this information is omitted.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pipeline is wholly owned by Williams.
The payment of dividends by Pipeline on its common stock is restricted under various debt agreements. Under the most restrictive provisions, the amount of Pipeline's retained earnings available for dividends on its common stock as of December 31, 1994, was approximately $150.5 million. In 1994 and 1993, Pipeline paid cash dividends on common stock of $30 million and $18 million, respectively.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Since Pipeline meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K, this information is omitted.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This analysis discusses financial results of Pipeline's operations for the years 1992 through 1994.
RESULTS OF OPERATIONS
Year Ended December 31, 1994 vs. Year Ended December 31, 1993
Operating revenues decreased $38.1 million, or 14% due primarily to the absence of natural gas sales and completion of contract reformation surcharge billings early in 1994, partially offset by expanded firm transportation service. Natural gas sales were eliminated following the implementation, during the fourth quarter of 1993, of FERC Order No. 636 which converted remaining sales customers to firm transportation service.
Operating expenses decreased $44.5 million, or 25%, primarily due to the absence of gas purchase volumes as a result of implementation of FERC Order No. 636, the completion of contract reformation and lower maintenance expenses, partially offset by higher operation expenses, depreciation and amortization, and taxes other than income taxes.
Operating income increased $6.5 million, or 7%, primarily due to higher revenues from expanded firm transportation service and lower maintenance expenses partially offset by higher operation expenses, depreciation and amortization, and taxes other than income taxes.
Other income decreased $6.9 million, or 86%, primarily due to a decrease in the allowance for equity funds used during construction associated with Pipeline's mainline expansion completed and placed into service April 1, 1993, a decrease in interest income from short-term investing and a reserve related to rate issues.
Interest on long-term debt decreased $1.8 million as the result of retiring certain sinking fund debt obligations in 1994. Other interest expense decreased $1.8 million primarily due to the absence of deferred carrying charges on contract reformation costs.
Year Ended December 31, 1993 vs. Year Ended December 31, 1992
Operating revenues increased $25.1 million, or 10%, due primarily to increased firm transportation service and higher average transportation rates, partially offset by lower natural gas sales volumes arising from conversion to transportation service. Firm transportation service increased due primarily to a mainline expansion, supported by 15- year firm transportation service contracts being placed into service on April 1, 1993. Additionally, Pipeline placed new, increased transportation rates into effect on April 1, 1993 (subject to refund) that reflected the new mainline expansion and a straight fixed variable rate design that tends to moderate seasonal swings in operating revenues.
Operating expenses decreased $6.8 million, or 4%, primarily due to lower natural gas purchase volumes and lower amortization of contract reformation costs, partially offset by increased operation and maintenance expenses, increased depreciation and amortization expenses and increased taxes other than income taxes. Operation and maintenance expenses increased $3 million due primarily to higher employee related expenses and pipeline maintenance costs. Depreciation and amortization increased $6.8 million as a result of completion of the mainline expansion and other capital projects. Taxes other than income taxes increased $1.6 million due primarily to higher property taxes reflecting the completion of the mainline expansion and other capital projects. Amortization of contract reformation costs decreased $3.9 million due to full amortization of the balance of direct billed contract reformation in 1992 and disallowance of certain contract reformation costs by the FERC, offset by a similar decrease in operating revenues.
Operating income increased $31.9 million, or 47%, primarily due to increased firm transportation service and higher average transportation rates.
Other income reflects a $4 million decrease in the equity component of the allowance for funds used during construction attributed to the completion of Pipeline's mainline expansion and other capital projects.
Interest on long-term debt increased $12 million due to issuance of $150 million in debentures during the third quarter of 1992 and the allocation of interest expense to discontinued operations in 1992. Other interest expense increased $2.6 million primarily due to the amortization of previously deferred carrying costs on contract reformation.
The increase in the effective tax rate is a result of the cumulative effect of the 1% increase in the Federal income tax rate.
FINANCIAL CONDITION AND LIQUIDITY
Capital Expenditures and Financing
Pipeline's expenditures for property, plant and equipment additions for continuing operations amounted to $62.6 million, $175.7 million and $297.6 million for 1994, 1993 and 1992, respectively. Funds necessary to complete capital projects are expected to come from several sources, including Pipeline's operations and available cash. In addition, Pipeline expects to be able to obtain financing, when necessary, on reasonable terms. To allow flexibility in the timing of issuance of long-term securities, financing may be provided on an interim basis with bank debt and from sources discussed below.
Pipeline believes that strong economies in the Pacific Northwest and the growing preference for natural gas in response to environmental concerns support future expansions of its mainline capacity. In August 1993, Pipeline filed applications for FERC approval to build additional mainline expansions totaling 360 MMcf of gas per day of system capacity. In order to assure unneeded incremental capacity was not constructed, in March 1994 Pipeline allowed expansion shippers to reduce their contracted level of service. As a result, Pipeline filed an amended certificate reducing the expansions to 164 MMcf of gas per day of increased system capacity at an estimated cost of $99.5 million to be in service by the end of 1995. Most of the expansion shippers reducing their contracted level of service were able to obtain needed service through readily available firm segmented capacity releases under FERC Order No. 636 that Pipeline implemented on November 1, 1993. Other opportunities include the construction of $15 million of lateral and meter station expansions to meet existing customer's shifting demand patterns under Order No. 636.
Pipeline participated in a $600 million Revolving Credit Agreement with Williams and two affiliated companies. Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, was $300 million, none of which was used by Pipeline at December 31, 1994 or 1993. Interest rates vary with current market conditions. The agreement contains restrictions that limit, under certain circumstances, the issuance of additional debt, the attachment of liens on any assets and any change of ownership of Pipeline. Effective February 23, 1995, this agreement was renegotiated to an $800 million Revolving Credit Agreement with Williams and three affiliated companies, with Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, increasing to $400 million. Other terms and restrictions remain essentially the same.
Pipeline has also arranged various uncommitted lines-of-credit at market interest rates. Pipeline's credit facilities are subject to Pipeline's continued credit worthiness.
OTHER
Pipeline owns and operates an interstate natural gas pipeline system including facilities for mainline transmission and gas storage. Pipeline's transmission and storage activities are subject to regulation by the FERC under the Natural Gas Act of 1938 and under the Natural Gas Policy Act of 1978, and, as such, its rates and charges for the transportation, the extension, enlargement or abandonment of its jurisdictional facilities, and its accounting, among other things, are subject to regulation.
Pipeline is also subject to the National Environmental Policy Act and other Federal and state legislation regulating the environmental aspects of its business. Management believes that Pipeline is in substantial compliance with existing environmental requirements. Pipeline believes that, with respect to any capital expenditures required to meet applicable standards and regulations, FERC would grant the requisite rate relief so that, for the most part, such expenditures and a return thereon 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 earnings or competitive position.
On April 1, 1993, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed October 1, 1992. On July 28, 1994, Pipeline received an initial decision from an ALJ on this rate case. This decision will be considered by the FERC prior to its issuance of a final order. Pipeline has raised exceptions with the FERC to the ALJ decision and is awaiting the FERC's final order. Pipeline believes the outcome of the final order is not likely to have a significant effect on net income.
On November 1, 1994, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed April 29, 1994. This new filing seeks a revenue increase for a projected deficiency caused by increased costs and loss of cost recovery assigned to a transportation contract terminated subsequent to the rate case filed on October 1, 1992.
See Note 3 of Notes to Financial Statements for fair value of financial instruments and Note 8 for the effects of a new accounting standard on other postretirement and postemployment benefits.
Effect of Inflation
Pipeline generally has experienced increased costs in recent years due to the effect of inflation on the cost of labor, material and supplies, and plant and equipment. A portion of the increased labor and material 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 Pipeline's plant and equipment and inventory is subject to ratemaking 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, Pipeline believes it will be allowed to recover and earn a return based on increased actual cost incurred when existing facilities are replaced. Cost based regulation along with competition and other market factors limit Pipeline's ability to price services or products based upon inflation's effect on costs.
Contingencies
Reference is made to Note 10 of Notes to Financial Statements for information about regulatory and judicial developments which cause operating and financial uncertainties.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.
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, 1994 and 1993, and the related statements of income, cash flows and capitalization for each of the three years in the period ended December 31, 1994. 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 generally accepted auditing standards. 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, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma February 10, 1995
NORTHWEST PIPELINE CORPORATION
STATEMENT OF INCOME ================================================================================
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See accompanying notes.
NORTHWEST PIPELINE CORPORATION
BALANCE SHEET ================================================================================
ASSETS
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See accompanying notes.
NORTHWEST PIPELINE CORPORATION
BALANCE SHEET
================================================================================ LIABILITIES AND STOCKHOLDER'S EQUITY
____________________ See accompanying notes.
NORTHWEST PIPELINE CORPORATION
STATEMENT OF CASH FLOWS ================================================================================
_______________________
See accompanying notes.
NORTHWEST PIPELINE CORPORATION
STATEMENT OF CAPITALIZATION ================================================================================
____________________
See accompanying notes.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
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(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Northwest Pipeline Corporation ("Pipeline") is wholly owned by The Williams Companies, Inc. ("Williams").
Property, Plant and Equipment
Property, plant and equipment ("plant"), consisting principally of natural gas transmission facilities, is recorded at original cost. Expenditures which materially increase values or capacities or extend useful lives of plant are 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 and amortization ("D&A").
Depreciation is provided by the straight-line method for transmission plant over its useful life. The composite annual D&A rate was 2%, 2.13% and 3.05% for 1994, 1993 and 1992, respectively.
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. Recognition is made of this item as a cost of utility plant because it constitutes an actual cost of construction under established regulatory practices. The Federal Energy Regulatory Commission ("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 11.8% for 1994 and 1993 and 12.2% for 1992. Equity AFUDC of $1.3 million, $6.1 million and $10.1 million for 1994, 1993 and 1992, respectively, is reflected in other income.
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.
Deferred Charges
Pipeline amortizes deferred charges over varying periods consistent with FERC approved accounting treatment for such deferred items. Unamortized debt expense, debt discount and gains or losses on reacquired long-term debt are amortized by the bonds outstanding method over the related debt repayment periods.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================
Deferred Credits
The regulatory liability, recorded as a result of new accounting principles for income taxes was adjusted to reflect the increase in the Federal income tax rate from 34 percent to 35 percent in 1993. This liability of $10.2 million and $11.3 million at December 31, 1994 and 1993, respectively, is reflected in other deferred credits. The regulatory liability is being amortized over the lives of the related depreciable assets.
Cash and Cash Equivalents
Cash and cash equivalents include demand and time deposits, certificates of deposit and other marketable securities with a term to maturity of three months or less when acquired.
Revenue Recognition
Pipeline recognizes revenues for the transportation of natural gas based upon contractual terms and the related transported volume through month end. Pursuant to FERC regulations, a portion of the revenues being collected may be subject to possible refunds upon final orders in pending cases. Pipeline establishes financial reserves for such contingencies based on the facts and circumstances of the pending case.
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, 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 $28.9 million, $26.8 million and $16.5 million, net of $1 million, $4.7 million and $5.7 million of interest capitalized in 1994, 1993 and 1992, respectively. Of these amounts, $4.5 million, net of $1.6 million of interest capitalized was allocated to discontinued operations in 1992.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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(2) DISCONTINUED OPERATIONS
The following results of operations of the gathering and processing activities, transferred to Williams Gas Processing Company ("Processing") on December 31, 1992, are included in Income from Discontinued Operations, Net of Income Taxes, on the accompanying Statement of Income for the year ended December 31, 1992:
Pipeline's long-term debt for this period cannot be specifically sourced to gathering and processing even though these assets were financed historically, at least in part, with overall debt obligations of Pipeline. Therefore, the amount of interest allocated to discontinued operations for purposes of this restatement is based on the ratio of all gathering and processing assets, net of all gathering and processing liabilities to total assets, net of total liabilities (except long-term debt).
(3) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by Pipeline, using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Pipeline could realize in a current market exchange. The use and complexity of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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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 and cash equivalents, advances to parent, accounts receivable, and accounts payable - The carrying amount of these items are assumed to be indicative of 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 $306.3 million and $314.3 million, respectively, at December 31, 1994, and $319.3 million and $351.5 million, respectively, at December 31, 1993.
(4) REVENUES ATTRIBUTABLE TO MAJOR CUSTOMERS
During some or all of the periods presented, more than 10% of Pipeline's operating revenues were generated from each of the following customers who are large distribution companies.
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 losses have been minimal. A portion of the revenues reflected above (subsequent to April 1, 1993) may be subject to refund due to Pipeline's pending rate cases as discussed in Note 10.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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(5) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax liabilities and assets are as follows:
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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The provision for income taxes includes:
Deferred income taxes, accounted for under SFAS No. 109, result from temporary differences in the book basis and tax basis of assets and liabilities. Temporary differences primarily result from depreciation of property, plant and equipment and estimated liabilities.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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A reconciliation of the statutory Federal income tax rate to the provision for income taxes on continuing operations is as follows:
The provision for income taxes from discontinued operations was allocated based on Pipeline's overall effective tax rate for the respective periods. Net cash payments, including discontinued operations, made to Williams for income taxes were $22.7 million, $36.2 million and $47.3 million in 1994, 1993 and 1992, respectively.
(6) RETAINED EARNINGS
Noncash Dividends
On December 31, 1992, Pipeline transferred its gathering and processing properties and certain other assets and liabilities to Processing. On the same date, the stock of Processing was transferred by dividend to Pipeline's parent, Williams. The assets and liabilities transferred consisted of all the gathering and processing properties of Pipeline and related liabilities, net of associated deferred income tax liabilities. The total amount of this dividend was $163.1 million.
On December 31, 1993, Pipeline transferred certain aircraft and computer assets, net of associated deferred income tax liabilities, to Williams by dividend. These assets, which are not included in the accompanying balance sheet as of December 31, 1993, had a net book value of $1.4 million.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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On January 31, 1994, Pipeline transferred certain telecommunication and measurement assets, net of associated deferred income tax liabilities, to Williams by dividend. These assets, which are not included in the accompanying balance sheet as of December 31, 1994, had a net book value of $.9 million.
On September 30, 1994, Pipeline transferred certain gas transmission assets located in Oklahoma, net of associated deferred income tax liabilities, to Williams by dividend. These assets, which are not included in the accompanying balance sheet as of December 31, 1994, had a net book value of $.7 million.
Restrictions
Pipeline's debt indentures contain provisions limiting common stock dividends. Under the most restrictive provisions, the amount of Pipeline's retained earnings available for dividends on its common stock as of December 31, 1994, was approximately $150.5 million.
(7) LONG-TERM DEBT, LEASES AND BANKING ARRANGEMENTS
Debt Covenants
The terms of Pipeline's debt indentures preclude 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, restrict the payment of cash dividends and restrict the disposal of a major portion of its natural gas pipeline system.
Long-Term Debt
On April 29, 1993, Pipeline called the balance of its outstanding 8.75% Series A Debentures, due 1996, under terms of the optional prepayment provisions in the debenture agreement. On the prepayment date of June 1, 1993, the debenture holders were paid the principal amount of $8.7 million plus early redemption premiums of $.2 million. The prepayment was in addition to the May 31, 1993 sinking fund payment of $5.8 million and an optional, partial sinking fund payment of $2.9 million. The redemption premium and the unamortized debt expense associated with the 8.75% Series A Debentures, totaling approximately $.2 million, will be amortized over the original life of the debt as required by the FERC.
On April 29, 1993, Pipeline also called $5 million of its outstanding 9% Series B Debentures, due 2001, under terms of the optional prepayment provisions in the debenture agreement. No early redemption premium was required. The prepayment was in addition to the May 31, 1993 sinking fund payment of $5 million.
On April 27, 1994, Pipeline called $2.5 million of its outstanding 9% Series B Debentures and $1.9 million of its outstanding 9.25% Series C Debentures, due 2001 and 2006, respectively, under terms of the optional prepayment provisions in the debenture agreement. No early redemption premium was required. The prepayment was in addition to the May 31, 1994 sinking fund payments of $5 million for the 9% Series and $1.9 million for the 9.25% Series.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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Adjustable Interest Rate Notes
The interest rate on these notes will be adjusted periodically, but will never exceed 25% or be less than 9% per annum. The interest rate at December 31, 1994 was 9%.
Sinking Fund Requirements and Maturities
As of December 31, 1994, cumulative sinking fund requirements and other maturities of long-term debt for each of the next five years are as follows:
Line-of-Credit Arrangements
Pipeline participated in a $600 million Revolving Credit Agreement with Williams and two affiliated companies. Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, was $300 million, none of which was used by Pipeline at December 31, 1994 or 1993. Interest rates vary with current market conditions. The agreement contains restrictions that limit, under certain circumstances, the issuance of additional debt, the attachment of liens on any assets and any change of ownership of Pipeline. Effective February 23, 1995, this agreement was renegotiated to an $800 million Revolving Credit Agreement with Williams and three affiliated companies, with Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, increasing to $400 million. Other terms and restrictions remain essentially the same.
Pipeline has also arranged various uncommitted lines-of-credit at market interest rates. Pipeline's credit facilities are subject to Pipeline's continued credit worthiness.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================
Leases
Pipeline's leasing arrangements include mostly premise and equipment leases that are classified as operating leases.
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 except for a potential one time adjustment in 1995 to track an allowed interest rate change on a portion of the lessor's debt. Various purchase options exist under the building lease, including options involving adverse regulatory development.
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:
Operating lease rental expense, net of amounts applicable to discontinued operations for 1992 amounted to $4.6 million, $4.3 million and $3.4 million for 1994, 1993 and 1992, respectively. Capital lease payments for the periods presented are not significant.
(8) EMPLOYEE BENEFIT PLANS
Pipeline's employees are covered by Williams' noncontributory defined benefit pension plan. Benefits are based on years of service and average final compensation. Pension costs are funded to satisfy minimum requirements prescribed by the Employee Retirement Income Security Act of 1974. Pipeline accrued pension expense of $.5 million in 1994 and $1.1 million in each of the years 1993 and 1992. Such accrued expenses have been or are being funded currently.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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Substantially all retirees who were hired prior to January 1, 1992, are provided medical benefits. Employees hired after January 1, 1992 will not be provided postretirement medical benefits. As of January 1, 1993, Northwest Pipeline adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions". During 1994, 1993 and 1992 the expense of providing medical benefits to retirees was approximately $2.8 million, $2.8 million and $1.7 million, respectively. Included in 1994 and 1993 expenses is the amortization of Pipeline's estimated transition obligation of $19.2 million which is being amortized prospectively over 20 years.
In December 1992, FERC issued a Statement of Policy allowing natural gas pipelines to recognize, as a component of jurisdictional cost-based rates, prudently incurred SFAS No. 106 costs, provided that amounts accrued under SFAS No. 106 are fully funded with an irrevocable external trust fund and that income tax deductions for contributions to the trust fund are maximized. Northwest Pipeline has complied with this Statement of Policy.
Effective January 1, 1994 Pipeline adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits", which requires the accrual of benefits provided to former or inactive employees after regular employment but before retirement. The adoption of the new standard had no effect on Pipeline's net income and had no significant effect on Pipeline's balance sheet.
Williams maintains various defined contribution plans covering substantially all employees. Company contributions are based on employees' compensation and, in part, match employee contributions. All Company contributions are invested in Williams stock. Contributions by Pipeline to these plans totaled $1.8 million for each of the years 1994, 1993 and 1992.
(9) RELATED PARTY TRANSACTIONS
Williams' corporate overhead expenses allocated to Pipeline were $4.6 million, $4.2 million and $6.4 million for 1994, 1993 and 1992, respectively, of which $2.4 million was allocated to discontinued operations for 1992. Such expenses have been allocated to Pipeline by Williams, primarily based on the Massachusetts formula, which is a FERC approved method utilizing a combination of operating 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 Pipeline on a direct charge basis which amounted to $3.4 million, $4.9 million and $5.4 million for 1994, 1993 and 1992, respectively, of which $2 million was charged to discontinued operations in 1992. Corporate overhead allocated and direct administrative services, representative of the amounts allocated/charged to discontinued operations, continue to be allocated/charged to Processing since the transfer described in Note 2. In addition, Pipeline received interest income from advances to parent of $1.2 million and $2.3 million during 1994 and 1992, respectively. There were no advances to parent during 1993.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================
During the periods presented, Pipeline's revenues reflect gas sales, transportation and exchange transactions with subsidiaries of Williams. Combined revenues for these activities totaled $3.4 million, $4.8 million and $16.8 million for 1994, 1993 and 1992, respectively. Liquids products extracted from Pipeline's gas processing plants (discontinued operations) were marketed by a subsidiary of Williams for a fee. Such commissions were $2.1 million in 1992.
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 charged on the basis of commercial relationships and prevailing market prices or general industry practices.
(10) CONTINGENT LIABILITIES AND COMMITMENTS
Contract Reformation
Pursuant to FERC policy, Pipeline filed to recover a portion of contract reformation costs through direct bills to former sales customers and through surcharges to transportation as well as sales commodity rates. The total amount of contract reformation costs authorized by FERC to be collected by Pipeline by means of a direct bill mechanism was $34 million. All amounts have been recovered at December 31, 1994.
FERC initially approved Pipeline's use of a mechanism to direct bill Pipeline's contract reformation costs, but when challenged on appeal, sought a remand to reassess its order concerning the billing mechanism. Pipeline has received an order from FERC that requires Pipeline to reallocate such contract reformation costs using a different method. Although reallocation will require refunds of certain amounts, it is expected that Pipeline will be permitted to recover substantially all of these costs from other customers.
Pending Rate Cases
On April 1, 1993, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed October 1, 1992. On July 28, 1994, Pipeline received an initial decision from an Administrative Law Judge ("ALJ") on this rate case. This decision will be considered by the FERC prior to its issuance of a final order. Pipeline has raised exceptions with the FERC to the ALJ decision and is awaiting the FERC's final order. Pipeline believes the outcome of the final order is not likely to have a significant effect on net income.
On November 1, 1994, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed April 29, 1994. This new filing seeks a revenue increase for a projected deficiency caused by increased costs and loss of cost recovery assigned to a transportation contract terminated subsequent to the rate case filed on October 1, 1992.
NORTHWEST PIPELINE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================
Other Regulatory Matters
In 1989, the FERC issued an order to Pipeline instituting a formal investigation related to the assignment by Pipeline of certain gas supply contracts to an affiliate. Pipeline was ordered to show cause why the assignments did not violate certain federal statutes and FERC regulations. By order dated October 5, 1992, the FERC set the matter for an expedited hearing before an Administrative Law Judge ("ALJ"). The ALJ issued a decision in favor of Pipeline on May 13, 1993. On April 6, 1994, the FERC issued an order terminating all proceedings and affirming the ALJ's May 13, 1993 decision in favor of Pipeline.
Other Legal Matters
In addition to the foregoing, various other proceedings are pending against Pipeline incidental to its operations.
Summary of Contingent Liabilities
Management believes that the ultimate resolution of the foregoing matters, after consideration of amounts accrued, insurance coverage or other indemnification arrangements, is not likely to have a materially adverse financial effect upon Pipeline in the future.
Other Matters
Commitments for construction and acquisition of property, plant and equipment are approximately $19.1 million at December 31, 1994.
During 1994 Pipeline sold, with limited recourse, certain receivables. Until the expiration of the arrangement in July 1994, net proceeds to Pipeline were limited to $40 million, none of which was utilized at the expiration date or at December 31, 1993. During 1994, Pipeline utilized this facility at varying times up to $18 million.
NORTHWEST PIPELINE CORPORATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial data for 1994 and 1993:
Operating results since April 1, 1993 reflect a straight fixed variable rate design that tends to moderate seasonal swings in operating revenues. However, fourth quarter results include additions to certain rate reserves and, effective November 1, 1993, the final conversion of sales customers to transportation service.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Since Pipeline meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K, this information is omitted.
PART IV
ITEM 14.







ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1 AND 2. FINANCIAL STATEMENTS AND SCHEDULES (included in Parts II and IV of this report).
The financial statements are listed in the Index to Financial Statements on page 10. No schedules are required to be filed.
(A)3. EXHIBITS:
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession:
*(a) Merger Agreement, dated as of September 20, 1983, between Williams and Energy (Exhibit 18 to Energy schedule 14D-9 (Amendment No. 3) dated September 22, 1983).
*(b) The Plan of Merger, dated as of November 7, 1983, between Energy and a subsidiary of Williams (Exhibit 2(b) to Pipeline report on Form 10-K, No. 1-7414, filed March 22, 1984).
(3) Articles of incorporation and by-laws:
*(a) Restated Certificate of Incorporation (Exhibit 3a to Amendment No. 1 to Registration Statement on Form S-1, No. 2-55-273, filed January 13, 1976).
*(b) By-laws, as amended (Exhibit 3c to Registration Statement on Form S-1, No. 2-55273, filed December 30, 1975).
(4) Instruments defining the rights of security holders, including indentures:
*(a) Note Purchase Agreement, dated as of April 15, 1982, between Pipeline and Teachers Insurance and Annuity Association of America relating to Adjustable Rate Notes, due March 31, 2002 (Exhibit (a)4(e) to Energy Report on Form 10-Q for the quarter ended June 30, 1982, No. 1-7987).
*(b) Debenture Purchase Agreement, dated as of June 6, 1986, between Pipeline and certain institutional investors relating to the 8.75% Series A Debentures, due 1996, 9.0% Series B Debentures, due 2001 and 9.25% Series C Debentures, due 2006 (Exhibit 4(n) to Pipeline Report on Form 10-K, No. 1-7414, filed March 31, 1987.)
*(c) Indenture, dated as of November 15, 1988, between Pipeline and The Chase Manhattan Bank, relating to Pipeline's 10.65% Debentures (Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form S-3, No. 33- 25512, filed November 18, 1988).
*(d) Senior Indenture, dated as of August 1, 1992, between Pipeline and Continental Bank, N.A., relating to Pipeline's 9% Debentures, due 2022 (Exhibit 4.1 to Registration Statement on Form S-3, No. 33-49150, filed July 2, 1992).
(10) Material contracts:
(c) *(1) Form of Transfer Agreement, dated July 1, 1991, between Pipeline and Gas Processing (Exhibit 10(c)(8) to Pipeline Report on Form 10-K, No. 1-7414, filed March 26, 1992). *(2) Form of Operating Agreement, dated July 1, 1991, between Pipeline and Williams Field Services Company (Exhibit 10(c)(9) to Pipeline Report on Form 10-K, No. 1-7414, filed March 26, 1992).
(23) Consent of Independent Auditors
(27) Financial Data Schedule (submitted to the SEC for its information).
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed by Pipeline during the last quarter of the period covered by this report.
______________________
*Exhibits so marked have heretofore been filed with the Securities and Exchange Commission as part of the filing indicated and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHWEST PIPELINE CORPORATION (Registrant)
By /s/Brian E. O'Neill ------------------------------ Brian E. O'Neill, President
Date: February 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Date: February 28, 1995