Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies
2. Transco Energy Acquisition
3. Discounted Operations
4. Williams Interstate Natural Gas Systems
5. Investing Activities
6. Asset Sales and Write-Off of Project Costs
7. Provision for Income Taxes
8. Extraordinary Loss
9. Employee Benefit Plans
10. Inventories
11. Property, Plant and Equipment
12. Accounts Payable and Accrued Liabilities
13. Debt, Leases and Banking Arrangements
14.Stockholders' Equity
15.Financial Instruments
16.Other Financial Information
17. Contingent Liabilities and Commitments

Nature of operations

The Williams Companies, Inc. (Williams) operations are located in the United States and consist primarily of the following: five interstate natural gas pipelines located in the eastern, midsouth, Gulf Coast, midwest and northwest regions; natural gas gathering and processing facilities in the rocky mountain, midwest and Gulf Coast regions; energy trading throughout the United States; petroleum products pipeline in the midwest region; and national data, voice and video communication products and services. Additional information about these businesses is contained throughout the following notes.

Basis of presentation

Revenues and operating profit amounts include the operating results of Transco Energy Company (Transco Energy) since its January 18, 1995, acquisition by Williams (see Note 2). The transportation operations from Transco Energy's two interstate natural gas pipelines are reported separately within Williams Interstate Natural Gas Systems (see Note 4). Transco Energy's gas gathering operations are included as part of Williams Field Services Group, and Transco Energy's gas marketing operations are included in Williams Energy Services.

Revenues and operating profit amounts for 1994 and 1993 have been reclassified to conform to current year classifications. Commodity price-risk management and trading operations and energy-related information services operations are included in Williams Energy Services. Liquid fuels operations are reported as part of Williams Pipe Line and continue with the Williams Energy Ventures name. In addition, certain natural gas marketing operations formerly reported as part of Williams Field Services Group are included in Williams Energy Services. The WilTech Group, which owns a national fiber-optic network, was previously reported in other revenues and operating profit.

Principles of consolidation

The consolidated financial statements include the accounts of Williams and its majority-owned subsidiaries. Companies in which Williams and its subsidiaries own 20 percent to 50 percent of the voting common stock, or otherwise exercise sufficient influence over operating and financial policies of the company, are accounted for under the equity method.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents include demand and time deposits, certificates of deposit and other marketable securities with maturities of three months or less when acquired.

Transportation and exchange gas imbalances

In the course of providing transportation services to customers, the natural gas pipelines may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. Additionally, the pipelines and other Williams subsidiaries transport gas on various pipeline systems which may deliver different quantities of gas on their behalf than the quantities of gas received. These transactions result in gas transportation and exchange imbalance receivables and payables which are recovered or repaid in cash or through the receipt or delivery of gas in the future. 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. Transcontinental Gas Pipe Line's imbalances predating August 1, 1991, are being recovered or repaid in cash or through the receipt or delivery of gas upon agreements of allocation.

Inventory valuation

Inventories are stated at cost, which is not in excess of market, except for those held by Williams Energy Services which are stated at market. Inventories of natural gas are determined using the last-in, first-out (LIFO) method by Transcontinental Gas Pipe Line and the average-cost method by other subsidiaries. Except for Williams Energy Services, inventories of petroleum products are determined using average cost. The cost of materials and supplies inventories is determined using the first-in, first-out method (FIFO) by WilTel and principally using the average-cost method by other subsidiaries.

Property, plant and equipment

Property, plant and equipment is recorded at cost. Deprecia tion is provided primarily on the straight-line method over estimated useful lives. Gains or losses from the ordinary sale or retirement of property, plant and equipment for regulated pipeline subsidiaries are credited or charged to accumulated depreciation; other gains or losses are recorded in net income.

Treasury stock

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares are credited or charged to capital in excess of par value using the average-cost method.

Revenue recognition

Revenues generally are recorded when services have been performed or products have been delivered. Williams Pipe Line bills customers when products are shipped and defers the estimated revenues for shipments in transit. Williams' interstate natural gas pipelines recognize revenues based upon contractual terms and the related transportation volumes through month-end. These pipelines are subject to Federal Energy Regulatory Commission (FERC) regulations and, accordingly, certain revenues are subject to possible refunds pending final FERC orders. Williams records rate refund accruals based on management's estimate of the expected outcome of these proceedings.

Commodity price-risk management activities

Williams Energy Services enters into energy-related financial instruments (forward contracts, futures contracts, options contracts and swap agreements) to provide price-risk management services to its third-party customers. This subsidiary also enters into short- and long-term energy-related purchase and sale commitments as part of its trading business. All of these investments and commitments are valued at market and are recorded in other current assets, other assets and deferred charges, accrued liabilities and other liabilities in the Consolidated Balance Sheet. The resulting change in unrealized market gains and losses is recognized in income currently and is recorded as revenues in the Consolidated Statement of Income. Such market values are subject to change in the near term and reflect management's best estimate of market prices considering various factors including closing exchange and over-the-counter quotations, the terms of the contract, credit considerations, time value and volatility factors underlying the positions.

Williams Energy Services reports sales of natural gas, refined products and crude oil net of the related costs to purchase such items, consistent with mark-to-market accounting for such trading activities.

Other Williams operations enter into energy-related financial instruments (primarily futures contracts, option contracts and swap agreements) to hedge against market price fluctuations of certain commodity inventories and sales and purchase commitments. Unrealized and realized gains and losses on these hedge contracts are deferred and recognized in income when the related hedged item is recognized. These contracts are evaluated to determine that there is a high correlation between changes in the market value of the hedge contract and fair value of the hedged item.

Capitalization of interest

Williams capitalizes interest on major projects during construction. Interest is capitalized on borrowed funds and, where regulation by the FERC exists, on internally generated funds. The rates used by regulated companies are calculated in accord ance with FERC rules. Rates used by unregulated companies approximate the average interest rate on related debt. Interest capitalized on internally generated funds is included in other income (expense) - net.

Income taxes

Williams includes the operations of its subsidiaries in its consolidated federal income tax return. Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis of Williams' assets and liabilities.

Earnings per share

Primary earnings per share are based on the sum of the average number of common shares outstanding and common-share equivalents resulting from stock options and deferred shares. Fully diluted earnings per share for 1995 assumes conversion of the $3.50 convertible preferred stock into common stock effective May 1, 1995. Shares used in determination of primary earnings per share are as follows (in thousands): 1995 - 102,046; 1994 - 102,470; and 1993 - 99,911. Shares used in determination of fully diluted earnings per share are as follows (in thousands): 1995 - 104,853; 1994 - 102,502; and 1993 - 103,171.

On January 18, 1995, Williams acquired 60 percent of Transco Energy's outstanding common stock in a cash tender offer for $430.5 million. Williams acquired the remaining 40 percent of Transco Energy's outstanding common stock on May 1, 1995, through a merger by exchanging the remaining Transco Energy common stock for approximately 10.4 million shares of Williams common stock valued at $334 million. The acquisition is accounted for as a purchase with 60 percent of Transco Energy's results of operations included in Williams' Consolidated Statement of Income for the period January 18, 1995, through April 30, 1995, and 100 percent included beginning May 1, 1995. The purchase price, including transaction fees and other related costs, is approximately $800 million, excluding $2.3 billion in preferred stock and debt obligations of Transco Energy. The acquired assets and liabilities have been recorded based on an allocation of the purchase price with substantially all of the cost in excess of Transco Energy's historical carrying amounts allocated to property, plant and equipment of the two interstate natural gas pipeline systems. The cash portion of the acquisition was financed with the proceeds from the sale of Williams' network services operations (see Note 3).

Transco Energy was engaged primarily in the natural gas pipeline and natural gas marketing businesses. Williams has sold substantially all of Transco Energy's coal operations, coalbed methane properties and certain pipeline and gathering operations. Results of operations and changes in the carrying amount of these businesses during the holding period and from the ultimate dispositions are reflected in the purchase price and are not material.

In connection with the acquisition, Williams made payments to retire and/or terminate approximately $700 million of Transco Energy borrowings, preferred stock, interest-rate swaps and sale of receivable facilities. As a part of the merger, Williams exchanged Transco Energy's $3.50 preferred stock for Williams' $3.50 preferred stock.

The following unaudited pro forma information combines the results of operations of Williams and Transco Energy as if the purchase of 100 percent of Transco Energy occurred January 1, 1994.

Unaudited
(Millions, except per-share amounts)	1995	1994
Revenues	$2,916.4	$2,660.3
Income from continuing operations	314.4	191
Income before extraordinary loss	1,333.20	285
Net income	1,333.20	272.8
Primary earnings per share:
Income from continuing operations	2.93	1.77
Income before extraordinary loss	12.92	2.69
Net income	12.92	2.57
Fully diluted earnings per share:
Income from continuing operations	2.9	1.77
Income before extraordinary loss	12.62	2.69
Net income	12.62	2.57

Pro forma financial information is not necessarily indicative of results of operations that would have occurred if the acquisition had occurred on January 1, 1994, or of future results of operations of the combined companies.

3. Discounted Operations

On January 5, 1995, Williams sold its network serv ices operations to LDDS Communications, Inc. (LDDS) for $2.5 billion in cash. The sale yielded a gain of $1 billion (net of income taxes of approximately $732 million) which is reported as income from discontinued operations. Prior period operating results for the network services operations are reported as discontinued operations. Under the terms of the agreement, Williams retained Williams Telecommunications Systems, Inc. (WilTel), a national telecommunications equipment supplier and service company, and Vyvx, Inc. (included in WilTech Group), which operates a national video network specializing in broadcast television applications.

Summarized operating results of discontinued operations are as follows:

(Millions)	1994	1993
Revenues	$921.80	$663.80
Operating profit	163.1	97
Provision for income taxes	60.9	32.2
Income from discontinued operations	94	46.4

The assets and liabilities that were transferred to LDDS in the sale of the network services operations are presented in the Consolidated Balance Sheet on a net basis at December 31, 1994. Net assets consist of current assets ($86.5 million), net property, plant and equipment ($797.8 million), other assets and deferred charges ($144.3 million), less current liabilities ($218.3 million) and other liabilities ($66.7 million).

(Millions)	1995	1994
Investments:
Kern River Gas Transmission Company,
at equity (50%)	$178.60	$179.40
Texasgulf Inc. (15%)	-	150
Other, at equity (varying ownerships from
3.2% to 50%)	84.2	49.7
Other, at cost	44.8	-
	$307.60	$379.10

At December 31, 1995, certain equity investments with a carrying value of $30.8 million have a market value of $81.5 million.

In 1995, Williams sold its 15 percent interest in Texasgulf Inc. for approximately $124 million in cash, which resulted in an after-tax gain of approximately $16 million because of previously unrecognized tax benefits included in the provision for income taxes.

Subsequent to December 31, 1995, Williams acquired the remaining interest in Kern River Gas Transmission Company for $205 million in cash. The acquisition will be accounted for as a purchase in 1996, and the excess purchase price will be allocated to property, plant and equipment.

Summarized financial position and results of operations for Kern River Gas Transmission are presented below.

(Millions)	1995	1994	1993
Current assets	$55.40	$98.30	$80.10
Non-current assets, principally
natural gas transmission plant	994.5	1,026.30	1,028.70
Current liabilities	-47.3	-86.9	-62.1
Long-term debt	-620.5	-643.2	-662.9
Other non-current liabilities	-124.1	-109.5	-66.9
Partners' equity	$258.00	$285.00	$316.90
Revenues	$187.00	$179.00	$176.80
Costs and expenses	65.7	54.9	48.7
Net income	38	38.1	42.1

Investing income from continuing operations:

(Millions)	1995	1994	1993
Interest	$37.20	$5.50	$10.00
Dividends	16.1	4.5	5.6
Equity earnings	40.6	39.6	49.6
	$93.90	$49.60	$65.20

Dividends and distributions received from companies carried on an equity basis were $44 million in 1995; $43 million in 1994; and $39 million in 1993.

In the fourth quarter of 1995, the development of a commercial coal gasification venture in south-central Wyoming was canceled, resulting in a $41.4 million pre-tax charge. This amount includes what management believes to be a reasonable estimate of future costs of $4 million to reclaim the site, of which it is expected that 60 percent to 70 percent will be incurred during 1996 and the remainder over a five-year period. Williams will perform the reclamation of the site in coordination with various governmental agencies and expects to receive necessary environmental releases and approvals upon completion of the reclamation.

In 1994, Williams sold 3,461,500 limited partner common units in Northern Border Partners, L.P. Net proceeds from the sale were approximately $80 million and the sale resulted in a pre-tax gain of $22.7 million. As a result of the sale, Williams' original 12.25 percent interest in Northern Border partnerships has been reduced to 3.2 percent.

In a 1993 public offering, Williams sold 6.1 million units in the Williams Coal Seam Gas Royalty Trust (Trust), which resulted in net proceeds of $113 million and a pre-tax gain of $51.6 million. The Trust owns defined net profits interests in the developed coal-seam properties in the San Juan Basin of New Mexico and Colorado, which were conveyed to the Trust by Williams Production Company. Ownership of an additional 3.6 million units remains with Williams.

In March 1993, Williams sold its intrastate natural gas pipeline system and other related assets in Louisiana for $170 million in cash, resulting in a pre-tax gain of $45.9 million.

7. Provision for Income Taxes

The provision (credit) for income taxes from continuing operations includes:

(Millions)	1995	1994	1993
Current:
Federal	($26.50)	$45.80	$84.10
State	3.1	10.1	20.4
	-23.4	55.9	104.5
Deferred:
Federal	114.2	23.7	15.8
State	11.2	2.1	-7.7
	125.4	25.8	8.1
Total provision	$102.00	$81.70	$112.60

Reconciliations from the provision for income taxes attributable to continuing operations at the statutory rate to the provision for income taxes are as follows:

(Millions)	1995	1994	1993
Provision at statutory rate	$140.50	$86.30	$104.30
Increases (reductions) in taxes resulting from:
Increase in statutory tax rate on beginning of year deferred
tax balances	-	-	15.8
State income taxes	13.5	8	8.2
Coal-seam tax credits	-18.7	-14.9	-12.8
Decrease in valuation allowance
for deferred tax assets	-29.8	-	-
Reversal of prior tax accruals	-8	-	-
Other - net	4.5	2.3	-2.9
Provision for income taxes	$102.00	$81.70	$112.60

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes.

Significant components of deferred tax liabilities and assets as of December 31 are as follows:

(Millions)	1995	1994*
Deferred tax liabilities:
Property, plant and equipment	$1,669.2	$704.60
Investments	96.9	81.9
Other	248.1	74.7
Total deferred tax liabilities	2,014.20	861.2
Deferred tax assets:
Deferred revenues	23.5	40
Investments	31.3	55.9
Rate refunds	70.7	32
Accrued liabilities	226.4	64.2
Minimum tax credits	93.9	-
Other	220.5	93.1
Total deferred tax assets	666.3	285.2
Valuation allowance for deferred tax assets	6.4	29.8
Net deferred tax assets	659.9	255.4
Net deferred tax liabilities	$1,354.3	$605.80
*Reclassified to conform to current classification.

The valuation allowance for deferred tax assets decreased $23.4 million and $1.7 million during 1995 and 1994, respectively.

Cash payments for income taxes are as follows: 1995 - $348 million, before refunds of $9 million; 1994 - $113 million, before refunds of $6 million; and 1993 - $129 million.

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