Cardinal, Pipeline Company, LLC, a North Carolina intrastate natural gas pipeline company. These assetsentities were transferred at historical cost as the entities are under common control. No gains or losses were recorded as a result of the distribution.

     StatementFollowing the guidance of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections”, requires thatthe FASB for when a change in the reporting entity occurs, the change shall be retrospectively applied to the financial statements of all prior periods to show financial information for the new reporting entity.

     The impact of these retrospective adjustments to our net income for the three and nine months ended September 30, 2008 was an increase of $0.9 million and $2.7 million, respectively. The impact of these retrospective adjustments to our comprehensive income for the three and nine months ended September 30, 2008 was an increase of $0.8 million and $2.7 million, respectively.

     On March 1, 2001, we submitted to the Federal Energy Regulatory Commission (FERC) a general rate filing (Docket No. RP01-245) to recover increased costs. All cost of service, throughput and throughput

2008. In November 2008, the ALJ issued an initial decision in which he determined that our proposed incremental rate design is unjust and unreasonable. The ALJ’s decision is subject to review by the FERC.

     In 1998, the United States Department of Justice (DOJ) informed Williams that Jack Grynberg, an individual, had filed claims under the False Claims Act on behalf of himself and the federal government in the United States District Court for the District of Colorado against Williams, certain of its wholly-owned subsidiaries (including us) and approximately 300 other energy companies. Grynberg alleged violations of the False Claims Act in connection with the measurement, royalty valuation and purchase of hydrocarbons. The claim sought an unspecified amount of royalties allegedly not paid to the federal government, treble damages, a civil penalty, attorneys’ fees and costs. In 1999, the DOJ announced that it would not intervene in any of the Grynberg cases. Also in 1999, the Panel on Multi-District Litigation transferred all of these cases, including those filed against us, to the federal court in Wyoming for pre-trial purposes. The District Court dismissed all claims against Williams and its wholly-owned subsidiaries, including us. On March 17, 2009, the Tenth Circuit Court of Appeals affirmed the District Court’s dismissal, and on May 4,dismissal. On October 5, 2009 the Tenth Circuit Court of Appeals denied Grynberg’s request for rehearing. Grynberg has filed with the United States Supreme Court adenied Grynberg’s petition for a writ of certiorari requesting review of the Tenth Circuit Court of Appeal’s ruling. This matter is concluded.

     Since 1989, we have had studies underway to test some of our facilities for the presence of toxic and hazardous substances to determine to what extent, if any, remediation may be necessary. We have responded to data requests from the U.S. Environmental Protection Agency (EPA) and state agencies regarding such potential contamination of certain of our sites. On the basis of the findings to date, we estimate that environmental assessment and remediation costs under various federal and state statutes will total approximately $8 million to $10 million (including both expense and capital expenditures), measured on an undiscounted basis, and will be spent over the next four to six years. This estimate depends upon a number of assumptions concerning the scope of remediation that will be required at certain locations and the cost of the remedial measures. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs. At JuneSeptember 30, 2009,

negotiations with certain environmental authorities and other parties concerning investigative and remedial actions relative to potential mercury contamination at certain gas metering sites. All such costs are included in the $8 million to $10 million range discussed above.

     We have been identified as a potentially responsible party (PRP) at various Superfund and state waste disposal sites. Based on present volumetric estimates and other factors, our estimated aggregate exposure for remediation of these sites is less than $0.5 million. The estimated remediation costs for all of these sites are included in the $8 million to $10 million range discussed above. Liability under The Comprehensive Environmental Response, Compensation and Liability Act (and applicable state law) can be joint and several with other PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability could be substantially greater than the amounts described above.

     We are also subject to the Federal Clean Air Act (Act) and to the Federal Clean Air Act Amendments of 1990 (1990 Amendments), which added significantly to the existing requirements established by the Act. Pursuant to requirements of the 1990 Amendments and EPA rules designed to mitigate the migration of ground-level ozone (NOx), we are planning installation of air pollution controls on existing sources at certain facilities in order to reduce NOx emissions. We anticipate that additional facilities may be subject to increased controls within three years. For many of these facilities, we are developing more cost effective and innovative compressor engine control designs. Due to the developing nature of federal and state emission regulations, it is not possible to precisely determine the ultimate emission control costs. However, the emission control additions required to comply with current Act requirements, the 1990 Amendments, the hazardous air pollutant regulations and the individual state implementation plans for NOx reductions are estimated to include costs in the range of $5 million to $10 million for the period 2009 through 2012. In March 2008, the EPA promulgated a new, lower National Ambient Air Quality Standard (NAAQS) for ground-level ozone. Within two years, the EPA iswas expected to designate new eight-hour ozone non-attainment areas. Designation of new eight-hour ozone non-attainment areas will result in additional federal and state regulatory actions that willwould likely impact our operations and increase the cost of additions to property, plant and equipment. In September 2009, the EPA announced it would reconsider the 2008 NAAQS for ground level ozone to ensure that the standards are clearly grounded in science, and are protective of both public health and the environment. As a result, the EPA has delayed designation of new eight-hour ozone non-attainment areas under the 2008 standards until the reconsideration is complete. Additionally, the EPA is expected to promulgate additional hazardous air pollutant regulations in 2010 that will likely impact our operations. We are unable at this time to estimate with any certainty the cost of additions that may be required to meet new regulations, although we believe that some of those costs are included in the range discussed above. Management considers costs associated with

     Pipeline Integrity RegulationsRegulations.We have developed an Integrity Management Plan that meets the United States Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) final rule pursuant to the requirements of the Pipeline Safety Improvement Act of 2002. In meeting the integrity regulations, we have identified high consequence areas and completed our baseline assessment plan. We are on schedule to complete the required assessments within specified timeframes. Currently, we estimate that the cost to perform required assessments and remediation will be between $200 million and $250 million over the remaining assessment period of 2009 through 2012. Management considers the costs associated with compliance with the rule to be prudent costs incurred in the ordinary course of business and, therefore, recoverable through our rates.

     Appomattox, Virginia Pipeline RuptureRupture.On September 14, 2008, we experienced a rupture of our 30-inch diameter mainline B pipeline near Appomattox, Virginia. The rupture resulted in an explosion and fire which caused several minor injuries and property damage to several nearby residences. On September 25, 2008, PHMSA issued a Corrective Action Order (CAO) which required that we operate three of our mainlines in a portion of Virginia at reduced operating pressure and prescribes various remedial actions that must be undertaken before the lines can be restored to normal operating pressure. On October 6, 2008, we filed a request for hearing with PHMSA to challenge the CAO but asked that the hearing be stayed pending discussions with PHMSA to modify certain aspects of the order. PHMSA approved the request for stay. On November 7, 2008, PHMSA approved our request to restore the first of the three affected pipelines to normal operating pressure. On December 24, 2008, PHMSA approved our request to restore the second of the three affected pipelines to normal operating pressure. On May 6, 2009, PHMSA approved our request to restore the last of the three affected pipelines to normal operating pressure. In August 2009, PHMSA issued to us a Notice of Probable Violation and Proposed Civil Penalty of $1.0 million as a result of the incident. In September 2009, we paid the penalty.

     In addition to the foregoing, various other proceedings are pending against us incidental to our operations.

     Litigation, arbitration, regulatory matters, environmental matters and safety matters are subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the ruling occurs. Management, including internal counsel, currently believes that the ultimate resolution of the foregoing matters, taken as a whole and after

     Williams has a $1.5 billion unsecured revolving credit facility (Credit Facility) with a maturity date of May 1, 2012. We have access to $400 million under the Credit Facility to the extent not utilized by Williams. Lehman Commercial Paper Inc., which is committed to fund up to $70 million of the Credit Facility, filed for bankruptcy in October of 2008. Williams expects that its ability to borrow under this facility is reduced by this committed amount. Consequently, we expect our ability to borrow under the Credit Facility is reduced by approximately $18.7 million. The committed amounts of other participating banks remain in effect. As of JuneSeptember 30, 2009, no letters of credit totaling $45.4 million, none of which are associated with us, have been issued by the participating institutions. There were no revolving credit loans outstanding as of JuneSeptember 30, 2009. Our ratio of debt to capitalization must be no greater than 55 percent under the Credit Facility. At JuneSeptember 30, 2009, we are in compliance with this covenant.

     Pursuant to the terms of the Agreement approved by the FERC in March 2008 (see Note 23 of Notes to Condensed Consolidated Financial Statements), we collect in rates the amounts necessary to fund our asset retirement obligations (ARO). In accordance with the Agreement, we deposit monthly, into an external trust account, the revenues collected specifically designated for ARO. We established the ARO trust account (ARO Trust) in June 2008. The ARO Trust carries a moderate risk portfolio. We apply SFAS 157the fair value measurements to the financial instruments held in our ARO Trust. However, in accordance with SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,”Accounting Standards Codification Topic 980, Regulated Operations, both realized and unrealized gains and losses of the ARO Trust are recorded as regulatory assets or liabilities.

     SFAS 157 establishes aThe fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy givesvalue, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). We classify

     Fair value of financial instrumentsThe carrying amount and estimated fair values of our financial instruments as of JuneSeptember 30, 2009 and December 31, 2008 are as follows (in thousands):