Letter to Our Stockholders

      Keith E. Bailey Chairman, president and chief executive officer

      Identifying the Quest

      To say that 1995 was eventful would be an understatement. During the year, we fundamentally reshaped the company and literally doubled our assets, while completing more than $6.5 billion in acquisitions and dispositions in the process.

      We opened the year with a market capitalization of $2.3 billion and closed it at double that as the price of our stock rose almost 75 percent - from $251/8 to $437/8. By this most fundamental measure of perform ance, even in a year when the stock market reached record highs, we achieved extraordinary success.

      It was a very successful year by other measures as well. We believe we have laid the foundation from which we can achieve our long-term goal of providing superior, sustainable returns for you, our shareholders.

      This goal is specific and definable, not just a familiar shareholder-letter platitude. We intend to achieve returns that are in the top quartile of comparable businesses. Not just once in a while, but most of the time. If we are successful, we will accomplish something less than 10 percent of corporate America has.

      Our timetable for achieving this perform ance milestone is 1998. This past year was a great start, but we still have a long way to go to reach our objective. It will not be easily achieved, but few goals of great value are.

      Preparation for the Quest

      How do the events of 1995 prepare us for the quest? Let's take a look, first, at the "regulated" side of our business and then at the "unregulated" side.

      Regulated Businesses

      • The acquisition of Transco Energy makes us, by many standards, the largest interstate natural gas pipeline company in the country. The January 1996 purchase of the remaining 50 percent interest in the Kern River pipeline solidifies that position. A look at the map shows systems across the nation.
      • Transcontinental Gas Pipe Line and Texas Gas Transmission, premier systems serving growing markets, enjoy a substantial cost advantage over competitors in virtually every market served. As such, these newest additions ideally complement Northwest Pipeline, Williams Natural Gas and Kern River pipeline - each of which is similarly situated.
      • This five-pipeline asset base provides both significant levels of operating profit and cash flow, as well as the sort of income stabili ty and steady growth opportunity that contribute to our goal of sustaining superior returns.
      • The economics of these businesses are regulated by the Federal Energy Regulatory Commission (FERC) and their ultimate rate-of-return range is tempered. But, each of these systems has the potential to perform at the high end of that range. We will continue to build on their competitive advantage by, among other things, benchmarking performance across the systems, extracting the best practices from each and applying those practices to all. We also will aggressively pursue expansion opportunities, since our competitive advantage should enable us to capture a large share of the growth in demand for gas in markets these pipelines serve.

      Unregulated Businesses

      Our unregulated companies provide higher risk/higher reward growth and have the proven ability to leverage additional value from our regulated businesses.

      • We created substantial changes on the unregulated side. The most obvious occurred early in the year with the sale of the network services portion of the telecommunications business we started a decade ago. The $2.5 billion price we received resulted in an increase to shareholders' equity of more than $1 billion and provided the resources needed to complete our Transco Energy acquisition.
      • Just as important as the $1 billion gain is the fact that we retained a presence in the part of the telecommunications industry experiencing the most explosive growth. The future appears robust for our growing number of applications, products and services involving video and data. We began our telecommunications business 10 years ago with no traditional assets, no customers and limited experience. Entering a market dominated by major players, we faced a significant amount of skepticism from the financial community. Now, with WilTel and WilTech, we have our essential assets in place, top-shelf customers and a tested, proven work force. These high-technology companies are market leaders in the data- and video-related businesses we are pursuing. Time will tell whether we can recreate the level of value we achieved with the long-distance business. But, the exciting WilTech Group of companies and WilTel's nationwide equipment business each has a goal of becoming a billion-dollar company by the year 2000. Because of the growth in demand for the types of services these companies provide, we believe their goals are achievable and will commit the resources necessary to enable them to succeed. We have not stood idly by with our unregulated energy businesses either.
      • Our entry into the offshore gas gathering business provided by the Transco Energy acquisition, the purchase of the Gas Company of New Mexico's gathering and processing assets, and multiple expansions of existing processing facilities in the Midwest and Rocky Mountains - all have combined to enable Williams Field Services to report another year of record operating profit. This was accomplished against a backdrop of severe margin pressure and producer shut-ins in this segment of the natural gas industry.
      • Williams Pipe Line established all-time highs in petroleum products throughput and operating profit, marking its fourth consecutive year of double-digit growth. The Pipe Line team accomplished this in a mature, slow-growth market area by aggressively developing new business, providing superior customer service, creating a variety of value-added services, and establishing strategic alliances with major shipper customers.
      • We made a significant entry into the ethanol business through the acquisition of a large plant in Illinois and construction of a smaller one in Nebraska. These Williams Energy Ventures facilities make us the second largest producer of this environmentally important gasoline blending component, which clearly is the blending agent of choice throughout Williams Pipe Line's service area and the Corn Belt.
      • WESCO, the energy trader we created by combining similar activities at Williams and Transco Energy, reported solid profit ability in its first year out. More importantly, it appears to have positioned itself to be a successful, long-term player in this complex, rapidly evolving and intensely competitive business.

      As a part of our overall strategy in this area, we merged our electronic commodity trading services with those of another major pipeline. Altra Energy Technologies, the resulting entity, is equipped to become the market leader for online energy trading services.

      Financially Speaking

      Although 1995 marked our sixth consecutive year of improved results, we experienced a significant setback during the year.

      Our application of the promising technology to produce fuel gases by burning unmineable, underground coal seams in Wyoming was unsuccessful. At year-end, we ended this demonstration project and took a pre-tax write-off of $41.4 million. This reduced our 1995 reported net income by 24 cents a share.

      In spite of this substantial charge to income in 1995, we reported net income of $1.3 billion, or $12.48 per share, obviously boosted by the sale of our long-distance network operations. However, even setting that gain aside, income from continuing operations was $2.76 per share. That is a record in its own right and represents an 82 percent increase over 1994 results.

      • The strong financial performance, combined with the cash infusion and gain from the sale of the long-distance network, allowed us to absorb Transco Energy's weak balance sheet and close 1995 with an overall debt to debt-plus-equity level about where we started. At year-end that ratio was 47.4 percent.
      • The robust cash flow characteristics of our businesses should help us support capital spending consistently in the $1 billion-a-year range while continuing to improve our balance sheet. The financial flexibility this provides will enable us to pursue high quality investment opportunities.
      • In January 1996, the Williams board of directors declared a 25.9 percent increase in our company's common stock dividend. It raises the dividend to an annual rate of $1.36. Williams has paid a common stock dividend each quarter for the past 22 years.

      Gaining Full-Year Benefits

      Looking forward, we have reason for optimism. Many of the additions to our business activities realized only a partial-year impact in 1995 and now will enjoy full-year benefits. Some examples:

      • The New Mexico gathering and processing assets acquired by Williams Field Services Group, coupled with its construction of a processing plant in Oklahoma and expansion of a major processing facility in Wyoming.
      • The ethanol plants acquired and built in the Midwest by Williams Energy Ventures.
      • The New England voice and data systems provider recently acquired by WilTel, giving it greater customer density, regional operating efficiencies and enhanced data management capability.
      • The strategic acquisition of several companies by WilTech, including teleports that establish us as the first in the nation to link satellite with a dedicated, fiber-optic, digital network for broadcast television services. Plus the merging of NUS Training with Williams Knowledge Systems, making WilTech one of the largest providers of training-on-demand for major industries.
      • We also will realize virtually a full year's benefit from our acquisition of the remaining half of the Kern River pipeline. We were able to add this excellent performing asset and still maintain our investment grade credit rating.

      Immediate Challenges

      We face substantial challenges in our quest.

      • Prominent among these challenges is the continuing pressure on wellhead gas prices and gas liquids margins in the western United States, home to many of our gathering systems and most of our processing plants. The severe 1995-96 winter caused gas prices in much of the country to reach record highs. Yet, we saw little benefit in the West as continuing surpluses, combined with limited ability to move gas out of the region, left prices and margins depressed. Those low prices caused some producers to temporarily shut in their gas during 1995, depriving us of the gathering and processing volumes associated with this. Early indications are that the producers in our basins will follow that same course in 1996 unless prices firm from 1995 levels. That firming of gas prices in those basins is one of the primary keys to Williams Field Services being able to deliver the sort of improved performance essential to our 1998 quest.
      • We must make progress during this year to deregulate our offshore Gulf gathering systems acquired as part of the Transco acquisition. As is, we are competitively disadvantaged as we seek expansion opportunities to support increased drilling activity there. Gaining opportunity to successfully compete for this incremental business is key to fully realizing the economic potential of this strategically placed asset. To put this in larger perspective, winning business in the Gulf is an essential element of our quest.
      • We must continue identifying quality expansion opportunities in each of our businesses. The SunBelt, SeaBoard, Pine Needle and Cardinal expansions announced by Transcontinental Gas Pipe Line in 1995 come to mind as good examples. These should move through the regulatory process this year.
      • To stay on track to our 1998 objective, we must develop opportunities on the unregulated side of our business while supplementing identified projects on the regulated side. We also must squeeze still-better efficiencies from each of our businesses.

      Fulfilling the Quest

      In 1995, we established new standards of performance for our company. Now, we move forward with the challenge of improving on that.

      Be assured the employees of this company have an unwavering commitment to excellence. From coast to coast, they are participating in incentive programs that place a portion of their pay at risk if our company doesn't clear specific hurdles, and rewards them when it does. Virtually all of these men and women are shareholders as well. All of us at The Williams Companies share the same goal - to provide shareholders with superior, sustainable returns - and none of us will be satisfied until we reach it.

      Keith E. Bailey
      Chairman, president
      and chief executive officer