FINANCIAL REVIEW

1995 vs. 1994

Northwest Pipeline's revenues increased $16.7 million, or 7 percent, due primarily to the $16 million reversal of a portion of certain rate refund accruals and increased transportation rates put into effect in November 1994, partially offset by the completion in 1994 of billing contract-reformation surcharges. Mainline throughput increased 22 percent; however, revenues were not significantly affected due to the effects of the straight-fixed-variable rate design prescribed by the Federal Energy Regulatory Commission (FERC).

Operating profit increased $11.6 million, or 11 percent, due primarily to higher transportation rates and the approximate $11 million net effect of two reserve accrual adjustments, partially offset by $5 million, or 13 percent, higher operations and maintenance expenses. The reserve accrual adjustments involved a $16 million adjustment to rate refund accruals because of favorable rate case developments, partially offset by a loss accrual (included in other income - net) in connection with a lawsuit involving a former transportation customer.

Williams Natural Gas' revenues decreased $57 million, or 25 percent, and costs and operating expenses decreased $62 million, or 40 percent, due primarily to $36 million lower direct billing of purchased gas adjustments and lower contract-reformation recovery of $21 million.

Operating profit decreased $3.8 million, or 8 percent, due primarily to the absence of the 1994 reversal of excess contract-reformation accruals of $7.4 million and $3.2 million from lower 1995 average firm reserved capacity, partially offset by $4.6 million resulting from higher average firm reserved capacity rates, effective August 1, 1995, and higher storage revenues of $3.7 million.

Transcontinental Gas Pipe Line's revenues were $725.3 million in 1995, while costs and expenses were $560 million and operating profit was $165 million. Throughput was 1,410.9 TBtu in 1995 (for the period subsequent to the acquisition date). Transcontinental Gas Pipe Line placed new, higher rates into effect September 1, 1995, subject to refund. Market-area deliveries in 1995 and 1994 were approximately the same.

Texas Gas Transmission's revenues were $276.3 million in 1995, while costs and expenses were $212 million and operating profit was $64 million. Throughput was 653.4 TBtu in 1995 (for the period subsequent to the acquisition date). Texas Gas placed new, higher rates into effect April 1, 1995, subject to refund.

Williams Field Services Group's revenues increased $216.1 million, or 58 percent, due primarily to $172 million higher gathering revenues in addition to higher natural gas sales. Gathering revenues increased due primarily to a 102 percent increase in gathering volumes, including $131 million attributable to Transco Energy's Gulf Coast gathering operations, combined with an increase in average gathering prices, excluding Gulf Coast operations. Natural gas sales increased due to higher volumes, partially offset by lower average prices. Liquids and processing volumes increased 6 percent and 4 percent, respectively.

Costs and operating expenses increased $171 million, or 79 percent, and selling, general and administrative expenses increased $28 million, or 89 percent, with Transco Energy's activities contributing $102 million and $13 million, respectively. In addition, costs and operating expenses increased from higher natural gas purchase volumes and expanded facilities. Other income - net includes $12 million in operating profit from the net effect of two unrelated items. One was $20 million of income from the favorable resolution of contingency issues involving previously regulated gathering and processing assets. This was partially offset by an $8 million accrual for a future minimum price natural gas commitment.

Operating profit increased $28.3 million, or 22 percent, primarily resulting from the $12 million in other income and a doubling of gathering volumes, primarily a result of Transco Energy's gathering activities. Partially offsetting these increases was the effect of lower natural gas prices. Operating profit in 1994 included approximately $12 million in favorable settlements and adjustments of certain prior period accruals, including income of $4 million from an adjustment to operating taxes.

Williams Energy Services' revenues and costs and operating expenses decreased $177.9 million and $238 million, respectively. The addition of Transco Energy's gas trading activities was more than offset by the reporting of 1995 natural gas marketing activities on a net-margin basis (see Note 15). Natural gas physical trading volumes increased to 753.8 TBtu in 1995 compared to 147.8 TBtu in 1994, primarily from the effect of the Transco Energy acquisition.

Operating profit increased $29.5 million from $500,000 in 1994. Trading activities' operating profit increased $34 million, attributable primarily to income recognition from long-term natural gas supply obligations and no-notice service provided to local distribution companies. Included in trading activities is a price-risk management adjustment of $4 million from the valuation of certain natural gas supply and sales contracts previously excluded from trading activities. These increases were partially offset by $6 million of loss provisions, primarily accruals for contract disputes, and increased costs of supporting its information services business.

As a result of Williams Energy Services' price-risk management and trading activities, it is subject to risk from changes in energy commodity market prices, the portfolio position of its financial instruments and credit risk. Williams Energy Services manages its portfolio position by making commitments which manage risk by maintaining its portfolio within established trading policy guidelines.

Williams Pipe Line's revenues (including Williams Energy Ventures) increased $39.5 million, or 13 percent, due to an increase in transportation and non-transportation revenues of $9 million and $30.5 million, respectively. Shipments, while 7 percent higher than 1994, were reduced by the November 1994 fire at our truck-loading rack and unfavorable weather conditions in the first half of 1995. The average transportation rate per barrel and average length of haul were slightly below 1994 due primarily to shorter haul movements. The increase in non-transportation revenues reflects $84 million from the acquisition of Pekin Energy in August 1995 and increased gas liquids operations of $16 million, largely offset by $62 million related to lower petroleum-product services due to adverse market conditions and a $15 million decrease in refined-product sales due to the unavailability of certain refined-productsupplies.

Costs and expenses increased $22 million, or 8 percent, due primarily to increased operating expenses associated with transportation and non-transportation activities.

Operating profit (including Williams Energy Ventures) increased $17.8 million, or 34 percent, due primarily to higher transportation revenues of $9 million and non-transportation activities of $8.8 million. Non-transportation includes $3 million related to the acquisition of Pekin Energy and the absence of $5 million of costs in 1994 for evaluating and determining whether to build an oil refinery near Phoenix. Williams Energy Ventures' results improved in 1995 with a $400,000 operating loss compared to an $8.1 million operating loss in 1994.

WilTel's revenues increased $98.3 million, or 25 percent, due primarily to $30 million from new systems, $28 million from existing system enhancements and $37 million from contract maintenance, moves, adds and changes. These amounts include the effect of the acquisitions of BellSouth Communications Systems in March 1994 and Jackson Voice Data, completed in October 1994. The number of ports in service at December 31, 1995, has increased 14 percent as compared to December 31, 1994.

Costs and operating expenses increased $79 million, or 26 percent, due primarily to the increase in volume of sales and services. While the $11 million, or 15 percent, increase in selling, general and administrative expenses is due primarily to higher revenues, the selling, general and administrative expense to revenue percent declined from 19.2 percent to 17.7 percent, reflecting better leveraging of the company's existing infrastructure.

Operating profit increased $9.4 million, or 50 percent, due primarily to increased activity in new system sales, enhancements to existing systems, maintenance and the full-year 1995 impact of two 1994 acquisitions and cost control efforts.

WilTech Group's revenues increased $24 million, or 120 percent, due primarily to $15 million in higher occasional and dedicated digital television services revenues and the effect of an acquisition during 1995. Billable minutes from occasional serv ice increased 110 percent and dedicated service voice grade equivalent miles at December 31, 1995, increased 50 percent as compared with December 31, 1994.

The $6 million, or 22 percent, increase in cost of sales and the $10 million increase in selling, general and administrative expenses reflects the overall increase in sales activity and higher expenses for developing additional products and services.

Operating loss decreased $8 million, or 71 percent, due to higher demand for WilTech Group's digital television services, which produced volumes sufficient to result in operating profit for the fourth quarter.

General corporate expenses increased $9.7 million, due primarily to a $6.4 million increase in charitable contributions, including $5 million to The Williams Companies Foundation. Interest accrued increased $132.1 million, due primarily to the $2 billion outstanding debt assumed as a result of the Transco Energy acquisition. Interest capitalized increased $8.5 million, due primarily to increased expenditures for gathering and processing facilities and Northwest Pipeline's expansion projects. Investing income increased $44.3 million, due primarily to interest earned on the invested portion of the cash proceeds from the sale of Williams' network services operations in addition to an $11 million increase in the dividend from Texasgulf Inc. The 1995 loss on sales of assets results from the sale of the 15 percent interest in Texasgulf Inc. (see Note 5). The 1994 gain on sales of assets results from the sale of 3,461,500 limited partner common units in Northern Border Partners, L.P. The 1995 write-off of project costs results from the cancellation of an underground coal gasification project in Wyoming (see Note 6). Other income (expense) - net in 1995 includes approximately $10 million of minority interest expense associated with the Transco Energy merger, $4 million of dividends on subsidiary preferred stock and $4 million of losses on sales of receivables, partially offset by $11 million of equity allowance for funds used during construction (AFUDC). Other income (expense) - net in 1994 includes a credit for $4.8 million from the reversal of previously accrued liabilities associated with certain Royalty Trust contingencies that expired. Also included is approximately $4 million of expense related to Statement of Financial Accounting Standards (FAS) No. 112, "Employers' Accounting for Postemployment Benefits," which relates to postemployment benefits being paid to employees of companies previously sold.

The $20.3 million increase in the provision for income taxes on continuing operations is primarily a result of higher pre-tax income, partially offset by a lower effective income tax rate resulting from $29.8 million of previously unrecognized tax benefits realized as a result of the sale of Texasgulf Inc. (see Note 5) and an $8 million income tax benefit resulting from settlements with taxing authorities. The effective income tax rate in 1995 is significantly less than the federal statutory rate, due primarily to the previously unrecognized tax benefits realized as a result of the sale of the investment in Texasgulf Inc., income tax credits from coal-seam gas production and recognition of an $8 million income tax benefit resulting from settlements with taxing authorities, partially offset by the effects of state income taxes and minority interest. The effective income tax rate in 1994 is lower than the statutory rate primarily because of income tax credits from coal-seam gas production, partially offset by state income taxes (see Note 7).

On January 5, 1995, Williams sold its network services operations to LDDS Communi ca tions, Inc. for $2.5 billion in cash. The sale yielded an after-tax gain of approximately $1 billion, which is reported as income from discontinued operations. Prior period operating results for the network serv ices operations are reported as discontinued operations (see Note 3).

The 1994 extraordinary loss results from the early extinguishment of debt (see Note 8).

Preferred stock dividends increased $6.5 million as a result of the May 1995 issuance of 2.5 million shares of Williams $3.50 cumulative convertible preferred stock in exchange for Transco Energy's $3.50 cumulative convertible preferred stock (see Note 14) in addition to the $3.5 million premium on exchange of $2.21 cumulative preferred stock for debentures.

1994 vs. 1993

Northwest Pipeline's revenues decreased $38 million, or 14 percent, as expanded firm transportation service was more than offset by the absence of natural gas sales following the fourth-quarter 1993 implementation of FERC Order 636 and $10 million resulting from the 1994 completion of contract-reformation surcharges. Total mainline throughput increased 9 percent. Firm transportation service increased due to a mainline expansion, supported by 15-year firm transportation contracts, being placed into service on April 1, 1993. Northwest Pipeline placed new, increased transportation rates into effect on November 1, 1994, and April 1, 1993, subject to refund. The April 1, 1993, rates reflected the new mainline expansion and straight-fixed-variable rate design that moderates seasonal swings in operating revenues.

Costs and operating expenses decreased $43 million, or 32 percent, due primarily to the absence of natural gas purchase volumes of $41 million and the completion of contract-reformation amortization, slightly offset by increased operating expenses primarily related to the full-year effect on 1994 of the mainline expansion.

Operating profit increased $5.3 million, or 5 percent, due primarily to expanded firm transportation service related to the company's mainline system expansion.

Williams Natural Gas' revenues decreased $62.8 million, or 21 percent, primarily as a result of the absence of natural gas sales resulting from implementation of FERC Order 636 on October 1, 1993. The decrease in revenues was partially offset by the implementation of new rates required by the Order, direct billing of net purchased gas cost adjustment amounts of approximately $40 million and higher direct billing of recoverable contract-reformation costs of approximately $17 million.

Costs and operating expenses decreased $67 million, or 30 percent, primarily as a result of approximately $120 million lower gas purchase costs resulting from the implementation of FERC Order 636, partially offset by the costs that were direct billed as discussed above.

Operating profit increased $7.8 million, or 19 percent, primarily as a result of the full-year effect of new rates, implementation of Order 636 and the reversal of excess contract-reformation accruals recorded in other income - net ($7.4 million in 1994 and $2.5 million in 1993), partially offset by the absence of the regulatory accounting effect of an income tax rate increase in 1993 (which was offset in income tax expense). FERC Order 636 utilizes a straight-fixed-variable rate design that is applied to each customer's annual firm contract demand for transportation.

Williams Field Services Group's revenues decreased $56.5 million, or 13 percent, due primarily to $71 million in lower natural gas sales revenues as a result of the March 1993 sale of Williams' intrastate natural gas pipeline system and related marketing operations in Louisiana, $9 million in lower liquids revenues and lower average processing prices. Partially offsetting were higher gathering and processing revenues of $22 million and $8 million, respectively, from increased volumes of 13 percent and 21 percent, respectively. Increased other revenues in 1994 were offset by a 1993 favorable settlement involving processing revenues from prior periods.

Costs and operating expenses decreased $59 million, or 21 percent, due primarily to lower natural gas purchases of $66 million and the effects of a favorable adjustment of an accrual related to operating taxes, partially offset by higher operations, maintenance and depreciation expenses at expanded gathering facilities.

Operating profit increased $2.6 million, or 2 percent, due primarily to higher gathering and processing volumes and a $4 million favorable operating taxes adjustment, partially offset by $5 million of lower per-unit liquids margins, lower average processing prices and higher operations, maintenance and depreciation expenses associated with expanded facilities.

Williams Energy Services' revenues decreased $97.1 million, or 27 percent, due primarily to lower natural gas sales volumes and prices of $45 million, lower refined- product trading margins and the $45 million effect of reporting these trading activities on a "net margin" basis, effective July 1, 1993.

Costs and operating expenses decreased 29 percent, due to lower natural gas purchase volumes and prices of $46 million and the $43 million effect of reporting refined- product trading activities on a "net margin" basis, partially offset by the cost of developing long-term energy industry businesses. General and administrative expenses increased 44 percent, reflecting the costs of establishing appropriate administrative and project support groups to serve growing business activities.

Operating profit was $500,000 in 1994 compared to $7.9 million in 1993. Price-risk management services' results continued to be profitable but were lower by $6 million in 1994 than 1993 because of reduced gasoline and distillate margins and the effect of location pricing differentials in refined-products trading activities, partially offset by an improvement in natural gas trading margins reflecting increased volumes. Costs to develop long-term energy industry opportunities also adversely affected operating profit. Results from natural gas marketing activities increased by $2 million in 1994 compared to 1993.

Williams Pipe Line's shipments increased 9 percent, due primarily to new volumes resulting from the December 1993 acquisition of a pipeline system in southern Oklahoma. Revenues (including Williams Energy Ventures) increased $130.2 million, or 72 percent, due primarily to higher shipments, increased gas liquids and fractionator operations of $30 million and petroleum services activities of $106 million. The slightly higher average transportation rate resulted primarily from longer hauls into the northern region and overall increases in tariff rates, effective December 1, 1994, and June 1, 1993, partially offset by lower rates on shorter haul movements from new business.

Costs and operating expenses increased $125 million, or 94 percent, due primarily to gas liquids and fractionator operations, additional operating expenses, petroleum services activities of $104 million and the cost of developing long-term energy industry businesses.

Operating profit (including Williams Energy Ventures) increased $4.8 million, or 10 percent, reflecting $15 million from increased shipments and a favorable insurance settlement, partially offset by higher operating and maintenance expenses. Operating profit also includes $9 million of costs from developing long-term energy industry investment opportunities. Included in 1994's other income - net is approximately $5 million of costs for evaluating and determining whether to build an oil refinery near Phoenix.

WilTel's revenues increased $93.8 million, or 31 percent, due in large part to the March 31, 1994, acquisition of BellSouth's customer equipment sales and serv ice operations in 29 states, as evidenced by a 52 percent increase in the number of ports.

Costs and operating expenses and selling, general and administrative expenses increased 31 percent and 20 percent, respectively, due to the increase in volume of equipment sales and services.

Operating profit increased to $18.9 million in 1994 from $9.5 million in 1993, primarily resulting from higher sales volumes, partially offset by an increase in selling, general and administrative expenses. Margins were level between 1994 and 1993, while selling, general and administrative expenses as a percent of revenue decreased in 1994 compared to 1993.

WilTech Group's revenues and operating losses for 1994 and 1993 are primarily from Vyvx, Inc.'s switched fiber-optic television transmission services. Results of Vyvx's operations improved significantly in 1994; however, the operations in both periods were not profitable as sufficient volumes had not been achieved to support the infrastructure in place. Revenues increased $6.5 million, or 48 percent, in 1994 reflecting higher occasional and dedicated digital television services, which helped reduce operating losses 34 percent from $17 million in 1993 to $11.3 million in 1994.

General corporate expenses decreased $10.4 million, reflecting lower supplemental retirement benefits (see Note 9) and incentive compensation accruals. Interest accrued decreased $5.4 million, primarily because of lower effective interest rates, partially offset by higher average borrowing levels. Interest capitalized decreased $4.4 million, reflecting the completion of Northwest Pipeline's mainline expansion, which was placed in service April 1, 1993. Investing income decreased $15.6 million, due primarily to lower investment levels and lower equity earnings for Apco Argentina Inc., in addition to the sale of a portion of Williams' interest in Northern Border Partners, L.P. The 1994 gain on sales of assets results from the sale of 3,461,500 limited partner common units in Northern Border Partners, L.P. The gain on sales of assets in 1993 results from the sale of 6.1 million units in the Williams Coal Seam Gas Royalty Trust and the sale of the intrastate natural gas pipeline system and other related assets in Louisiana (see Note 6). Other income (expense) - net in 1994 includes a credit for $4.8 million from the reversal of previously accrued liabilities associated with certain Royalty Trust contingencies that expired. Also included is approximately $4 million of expense related to FAS No. 112, "Employers' Accounting for Postemployment Benefits," which relates to postemployment benefits being paid to employees of companies previously sold. Other income (expense) - net in 1993 includes $6 million of expense accruals for certain costs associated with businesses previously sold, offset by $6 million of equity AFUDC related to the Northwest Pipeline mainline expansion.

The $30.9 million decrease in the provision for income taxes on continuing operations is primarily a result of lower pre-tax income and the $15.8 million cumulative effect in 1993 of the 1 percent increase in the federal income tax rate. The effective income tax rate in 1994 is lower than the statutory rate, primarily because of income tax credits from coal-seam gas production, partially offset by state income taxes. The effective income tax rate in 1993 is higher than the statutory rate, primarily because of the effect of the federal income tax rate increase and state income taxes, partially offset by income tax credits from coal-seam gas production (see Note 7).

The network services operations of Williams have been presented in the Consolidated Financial Statements as discontinued operations (see Note 3). Income from discontinued operations more than doubled to $94 million. The increase reflects a 93 percent increase in switched services minutes and a 24 percent increase in private line billable circuits. These increases more than offset a major carrier's long-expected removal of traffic from Williams' system to the carrier's expanded network. Income was also impacted by a decrease in interest accrued due to the early extinguishment of network services' long-term debt. The effective income tax rate for both 1994 and 1993 is greater than the federal statutory rate, due to the effect of state income taxes.

The extraordinary loss results from early extinguishment of debt (see Note 8). Preferred stock dividends decreased, reflecting the redemption of 3,000,000 shares of outstanding $3.875 convertible exchangeable preferred stock during the second quarter of 1993 (see Note 14).

Financial Condition and Liquidity

Liquidity

Williams considers its liquidity to come from two sources: internal liquidity, consisting of available cash investments, and external liquidity, consisting of borrowing capacity from available bank-credit facilities, which can be utilized without limitation under existing loan covenants. At December 31, 1995, Williams had access to $726 million of liquidity representing the available portion of its $800 million bank-credit facility plus cash-equivalent investments. This compares with liquidity of $495 million at December 31, 1994, and $639 million at December 31, 1993. The increase in 1995 is due primarily to a $200 million increase in the capacity of the bank-credit facility (see Note 13). In January 1996, Williams Holdings of Delaware, Inc., a wholly owned subsidiary of Williams, filed a $400 million shelf registration statement with the Securities and Exchange Commission and subsequently issued $250 million of debt securities. During 1993, Williams filed a $300 million shelf registration statement with the Securities and Exchange Commission, increasing the total amount available to

$400 million. The registration statement may be used to issue Williams common or preferred stock, preferred stock purchase rights, debt securities, warrants to purchase Williams common stock or warrants to purchase debt securities. Williams does not anticipate the need for additional financing arrangements; however, Williams believes such arrangements could be obtained on reasonable terms if required.

Williams had a net working-capital deficit of $706 million at December 31, 1995, compared with $17 million at December 31, 1994. Williams manages its borrowings to keep cash and cash equivalents at a minimum and has relied on bank-credit facilities to provide flexibility for its cash needs. As a result, it historically has reported negative working capital. The increase in the working-capital deficit at December 31, 1995, as compared to the prior year-end is primarily a result of higher 1995 levels of accounts payable and accrued liabilities (see Note 12) and the effect of the 1994 net assets of discontinued operations (see Note 3).

Terms of certain borrowing agreements limit transfer of funds to Williams from its subsidiaries. The restrictions have not impeded, nor are they expected to impede, Williams' ability to meet its cash requirements in the future. Subsequent to December 31, 1995, Williams entered into a $205 million short-term borrowing agreement to finance the purchase of the remaining interest in Kern River Gas Transmission (see Notes 5 and 13).

During 1996, Williams expects to finance capital expenditures, investments and working-capital requirements through cash generated from operations and the use of its $800 million bank-credit facility or public debt/equity offerings.

Operating Activities

Cash provided by continuing operating activities was: 1995 - $829 million; 1994 - $180 million; and 1993 - $187 million. Accrued liabilities increased, due primarily to the income tax and other liabilities associated with the sale of the network services operations in addition to the acquisition of Transco Energy. The increases in receivables, inventory, other current assets, property, plant and equipment, other non-current assets and deferred charges, payables, long-term debt, deferred income taxes, and other liabilities primarily reflect the acquisition of Transco Energy. In addition, the increase in receivables was partially offset by a $56 million increase in the level of receivables sold. Cash provided by discontinued operations was: 1994 - $169 million; and 1993 - $162 million.

Financing Activities

Net cash provided (used) by financing activities was: 1995 - ($1.4) billion; 1994 -$50 million; 1993 - ($220) million. Notes payable decreased, reflecting the repayment of these notes with the proceeds from the sale of the network services operations. Long-term debt principal payments net of debt proceeds were $610 million during 1995. Long-term debt proceeds, net of principal payments and early extinguishment of debt were $24 million during 1994. Long-term debt principal payments totaled $192 million during 1993.

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. Additionally, $2.3 billion in preferred stock and debt obligations of Transco Energy was assumed by Williams. Williams made payments to retire and/or terminate approximately $700 million of Transco Energy's borrowings, preferred stock, interest-rate swaps and sale of receivable facilities. As part of the merger, Williams exchanged Transco Energy's $3.50 cumulative convertible preferred stock for Williams' $3.50 cumulative convertible preferred stock (see Note 2). The cash portion of the acquisition and the payments to retire and/or terminate various Transco Energy facilities were financed with the proceeds from the sale of Williams' network services operations (see Note 3).

During 1995, Williams exchanged 2.8 million shares of its $2.21 cumulative preferred stock with a carrying value of $69 million for 9.6 percent debentures with a fair value of $72.5 million (see Note 14).

The 1995 proceeds from issuance of common stock includes $46.2 million from the sale of 1.2 million shares of Williams common stock, held by a subsidiary of Williams and previously classified as treasury stock in the Consolidated Balance Sheet, in addition to certain Williams benefit plan stock purchases and exercise of stock options under Williams' stock plans. The majority of the proceeds from issuance of common stock in 1994 and 1993 resulted from certain Williams benefit plan stock purchases and exercise of stock options under Williams' stock plan (see Note 14).

During 1994, Williams and one of its subsidiaries purchased 13.8 million shares of Williams common stock on the open market for $407 million. Substantially all of the purchases were financed with a $400 million bank-credit agreement. In 1995, the outstanding amounts under the credit agreement were repaid from the proceeds of the sale of Williams' network services operations, and the credit agreement was terminated. Williams also repurchased 258,800 shares of its $2.21 cumulative preferred stock on the open market for $6 million in 1994.

During 1993, Williams called for redemption of its 3,000,000 shares of outstanding $3.875 convertible exchangeable preferred stock. Substantially all of the preferred shares were converted into 7,600,000 shares of Williams common stock.

Long-term debt at December 31, 1995, was $2.9 billion, compared with $1.3 billion at December 31, 1994, and $1.6 billion at December 31, 1993. The increase in long-term debt is due primarily to the $2 billion outstanding debt assumed as a result of the Transco Energy acquisition. The long-term debt to debt-plus-equity ratio was 47.4 percent at year-end, compared with 46.5 percent and 48.2 percent at December 31, 1994 and 1993, respectively. Included in long-term debt due within one year at December 31, 1994, was $350 million outstanding under Williams' revolving credit loan.

See Note 8 for information regarding early extinguishment of debt by Williams and one of its subsidiaries during 1994.

Investing Activities

Net cash provided (used) by investing activities was: 1995 - $585 million; 1994 - ($427) million; and 1993 - ($277) million. Capital expenditures of pipeline subsidiaries, including gathering and processing facilities, primarily to expand and modernize systems, were $734 million in 1995; $272 million in 1994; and $405 million in 1993. Capital expenditures for discontinued operations were $143 million and $101 million in 1994 and 1993, respectively, primarily to expand and enhance Williams' network services operations network. Expenditures in 1995 include Transcontinental Gas Pipe Line and Northwest Pipeline's expansions as well as expansion of gathering and processing facilities. Expenditures in 1994 include Northwest Pipeline's additional mainline expansion and the expansion of various gathering and processing facilities. Expenditures in 1993 include the completion of Northwest Pipeline's first mainline expansion and the expansion of various gathering and processing facilities. Budgeted capital expenditures and acquisitions for 1996 are approximately $1.3 billion, primarily to expand pipeline systems and gathering and processing facilities, expand the telecommunications network and acquire the remaining interest in Kern River Gas Transmission.

During 1995, Williams received proceeds of $124 million from the sale of its 15 percent interest in Texasgulf Inc. (see Note 5). During 1994, Williams received net proceeds of

$80 million from the sale of limited partner units in Northern Border Partners, L.P. During 1993, Williams received net proceeds of $113 million from the sale of 6.1 million units in the Williams Coal Seam Gas Royalty Trust. In addition, Williams sold its intrastate natural gas pipeline system and other related assets in Louisiana for $170 million (see Note 6).

During 1995, in addition to the Transco Energy acquisition (see Note 2), Williams acquired the Gas Company of New Mexico's natural gas gathering and processing assets in the San Juan and Permian basins for $154 million (including approximately 10 percent of which was immediately sold to a third party) and Pekin Energy Co., the nation's second largest ethanol producer, for $167 million in cash.

Williams has experienced increased costs in recent years due to the effects of inflation. However, approximately 55 percent of Williams' property, plant and equipment was acquired or constructed during 1995, while the remainder was purchased or constructed since 1982, a period of relatively low inflation. A substantial portion of Williams' property, plant and equipment is subject to regulation, which limits recovery to historical cost. While Williams believes it will be allowed the opportunity to earn a return based on the actual cost incurred to replace existing assets, competition or other market factors may limit the ability to recover such increased costs.

Williams is a participant in certain environmental activities in various stages involving assessment studies, cleanup operations and/or remedial processes. The sites, some of which are not currently owned by Williams (see Note 17), are being monitored by Williams, other potentially responsible parties, U.S. Environmental Protection Agency (EPA), or other governmental authorities in a coordinated effort. In addition, Williams maintains an active monitoring program for its continued remediation and cleanup of certain sites connected with its refined products pipeline activities. Williams has both joint and several liability in some of these activities and sole responsibility in others. Current estimates of the most likely costs of such cleanup activities, after payments by other parties, are approximately $86 million, all of which is accrued at December 31, 1995. Williams expects to seek recovery of approximately $82 million of the accrued costs through future rates. Williams will fund these costs from operations and/or available bank-credit facilities. The actual costs incurred will depend on the final amount, type and extent of contamination discovered at these sites, the final cleanup standards mandated by the EPA or other governmental authorities, and other factors.