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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-20555

WILLIAMS HOLDINGS OF DELAWARE, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 73-1455707
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(Address of principal executive office) (Zip Code)

Registrant's Telephone Number Including Area Code:
(918) 588-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.00 par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

None of the registrant's voting stock is held by nonaffiliates.

The number of shares of the registrant's Common Stock outstanding at March
21, 1997, was 1,000 shares, all of which are owned by The Williams Companies,
Inc.

The registrant meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format.

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WILLIAMS HOLDINGS OF DELAWARE, INC.

FORM 10-K

PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

Williams Holdings of Delaware, Inc. (the "Company") was incorporated under
the laws of the State of Delaware in July 1994. The principal executive offices
of the Company are located at One Williams Center, Tulsa, Oklahoma 74172
(telephone (918) 588-2000). Unless the context otherwise requires, references to
the Company herein include subsidiaries of the Company. The Company is a
wholly-owned subsidiary of The Williams Companies, Inc. ("Williams").

Except as noted below, virtually all of the Company's assets have been
transferred to the Company by Williams since January 1, 1995, and were
previously operated by subsidiaries of Williams. Williams acquired Williams Pipe
Line Company in 1966. Williams acquired the original gathering, processing and
production properties operated by Williams Field Services Company in 1983.
Williams acquired the original equipment business of Williams Telecommunications
Systems, Inc. in 1991. Other assets transferred to the Company by Williams have
also been operated by Williams' subsidiaries for various periods of time, as
described herein.

In the third quarter of 1994, the Company entered into an agreement to sell
its telecommunications network services operations. The transaction was
completed on January 5, 1995. See Note 3 of Notes to Consolidated Financial
Statements.

On January 18, 1995, Williams acquired 60 percent of Transco Energy Company
("Transco") in a cash tender offer. Williams acquired the remaining 40 percent
of Transco's stock through a merger, effective May 1, 1995. Also effective May
1, 1995, Williams transferred to the Company certain natural gas gathering,
processing and marketing assets, as well as certain other assets, previously
owned by Transco. The consolidated financial statements of the Company and
financial and operating information include the results of operations for these
assets from January 18, 1995. See Note 2 of Notes to Consolidated Financial
Statements. The Company has sold or liquidated certain assets received from
Transco. The largest of these assets, Transco Coal Company, was sold in June
1995 for $65 million in cash and up to $23 million in preferred stock of the
purchaser.

On December 28, 1995, a subsidiary of the Company purchased the BOk Tower,
an approximate 1.1 million square foot commercial office building located in
Tulsa, Oklahoma. The building serves as headquarters for Williams and its
subsidiaries, including the Company. Williams and certain of its subsidiaries
currently occupy approximately 51 percent of the building. In connection with
the purchase, the Company assumed intercompany debt payable to Williams of
approximately $60 million.

In 1996, the Company reorganized its energy operations under a newly
created, wholly owned subsidiary, Williams Energy Group, and organized the
reporting for its communications operations under a single communications
subsidiary, Williams Communications Group, Inc.

(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

See Part II, Item 8 -- Financial Statements and Supplemental Data.

The Company, through subsidiaries, engages in hydrocarbon exploration and
production activities; natural gas gathering, processing, and treating
activities; the transportation and terminaling of crude oil and petroleum
products; the production and marketing of ethanol; and energy commodity trading
and marketing and provides a variety of other products and services, including
price risk management services, to the energy industry. The Company's
communications subsidiaries offer data-, voice-, and video-related products and
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services; advertising distribution services; video services and other multimedia
services for the broadcast industry; broadcast facsimile and audio- and
video-conferencing services for businesses; interactive, computer-based training
and services; and customer premise voice and data equipment, including
installation and maintenance; and network integration and management services
nationwide. The Company also has certain other equity investments.

The Company conducts substantially all of its operations through
subsidiaries. Williams performs management, legal, financial, tax, consultative,
administrative, and other services for the Company and its subsidiaries. The
Company's principal sources of cash are from external financings, dividends and
advances from its subsidiaries, advances from Williams, investments, and
interest payments from subsidiaries and Williams on cash advances. The amount of
dividends available to the Company from subsidiaries largely depends on each
subsidiary's earnings and capital requirements. Terms of one subsidiary's
borrowing arrangements limit the transfer of funds to the Company.

ENERGY

WILLIAMS ENERGY GROUP (WILLIAMS ENERGY)

In 1996, the Company reorganized its energy operations under a newly
created, wholly owned subsidiary, Williams Energy, and began reporting such
operations for financial reporting purposes on this basis in the fourth quarter
of 1996. Management believes the new structure will better position it to offer
customers a full range of energy products and services by capitalizing on
synergies of the combined business units.

Williams Energy is comprised of four major business units: Exploration and
Production, Field Services, Petroleum Services, and Merchant Services. Through
its business units, Williams Energy engages in energy production and exploration
activities; natural gas gathering, processing, and treating; petroleum liquids
transportation and terminal services; ethanol production; and energy commodity
marketing and trading.

Williams Energy, through its subsidiaries, owns 531 Bcf* of proved natural
gas reserves located primarily in the San Juan Basin of Colorado and New Mexico
and owns and operates approximately 11,000 miles of gathering pipelines, eight
gas treating plants, 10 gas processing plants, 57 petroleum products terminals
and approximately 9,300 miles of liquids pipeline. Physical and notional volumes
traded by Williams Energy's merchant services unit approximated 6,552 TBtu
equivalents in 1996. Williams Energy, through its subsidiaries, employs
approximately 2,500 employees.

Revenues and operating profit for Williams Energy by business unit are
reported in the Consolidated Financial Statements included herein.

A business description of each of Williams Energy's business units follows.

EXPLORATION AND PRODUCTION

Williams Energy, through its wholly owned subsidiary Williams Production
Company (Williams Production), owns and operates producing gas leasehold
properties in Colorado, Louisiana, New Mexico, Texas, Utah, Wyoming, and
offshore in the Gulf of Mexico.

In December 1996, Williams Production entered into an agreement with an
unaffiliated exploration company for the joint exploration of 27,000 acres in
the Houma Embayment Area of southern Louisiana. Williams Production will earn a
50 percent working interest in the leasehold block by drilling up to eight
exploratory wells within a 125-square mile 3-D seismic survey during the next
12-18 months. Williams Production also purchased 50 percent of this company's
working interest in 23 producing wells and associated facilities in the area
with daily production of approximately 9,000 MMBtus per day. Also in 1996,
Williams

- ---------------

* The term "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, and
"Bcf" means billion cubic feet. All volumes of natural gas are stated at a
pressure base of 14.73 pounds per square inch absolute at 60 degrees
Fahrenheit. The term "Btu" means British Thermal Units, "MMBtu" means one
million British Thermal Units, and "TBtu" means one trillion British Thermal
Units.

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Production acquired leasehold interests in the East Texas Haynesville Cotton
Valley Reef and now controls, along with unaffiliated partners, in excess of
135,000 gross acres in this area.

Gas Reserves. As of December 31, 1996, 1995, and 1994, Williams Production
had proved developed natural gas reserves of 323 Bcf, 292 Bcf, 269 Bcf,
respectively, and proved undeveloped reserves of 208 Bcf, 222 Bcf, and 220 Bcf,
respectively. Of Williams Production's total proved reserves, 87 percent are
located in the San Juan Basin of Colorado and New Mexico. No major discovery or
other favorable or adverse event has caused a significant change in estimated
gas reserves since year end.

Customers and Operations. As of December 31, 1996, the gross and net
developed leasehold acres owned by Williams Production totaled 263,869 and
114,183, respectively, and the gross and net undeveloped acres owned were
339,540 and 76,722, respectively. As of such date, Williams Production owned
interests in 2,911 gross producing wells (523 net) on its leasehold lands. The
following table summarizes drilling activity for the periods indicated:

DEVELOPMENT
--------------
COMPLETED GROSS NET
DURING WELLS WELLS
- --------- ----- -----

1996.................................................................. 65 11
1995.................................................................. 61 22
1994.................................................................. 66 19

The majority of Williams Production's gas production is currently being
sold in the spot market at market prices. Total net production sold during 1996,
1995, and 1994 was 26.8 Bcf, 26.3 Bcf, and 23.2 Bcf, respectively. The average
production costs, including production taxes, per Mcf of gas produced were $.27,
$.26, and $.30, in 1996, 1995, and 1994, respectively. The average wellhead
sales price per Mcf was $.98, $.88, and $1.21, respectively, for the same
periods.

In 1993, Williams Production conveyed a net profits interest in certain of
its properties to the Williams Coal Seam Gas Royalty Trust. Williams
subsequently sold Trust Units to the public in an underwritten public offering.
Williams Holdings holds 3,568,791 Trust Units representing 36.8 percent of
outstanding Units. Substantially all of the production attributable to the
properties conveyed to the Trust was from the Fruitland coal formation and
constituted coal seam gas. Proved developed coal seam gas reserves at December
31, 1996, attributed to the properties conveyed were 149 Bcf. Production
information reported herein includes Williams Production's interest in such
Units.

FIELD SERVICES

Williams Energy, through various direct and indirect subsidiaries in its
Field Services unit (Field Services), owns and operates nonregulated natural gas
gathering, processing, and treating facilities located in northwestern New
Mexico, southwestern Colorado, southwestern Wyoming, northwestern Oklahoma,
southwestern Kansas, and also in areas offshore and onshore in Texas and
Louisiana. Field Services operates regulated gathering facilities owned by
Transcontinental Gas Pipe Line Corporation, an affiliated company. The
facilities operated for this affiliate are the subject of an application for an
order permitting abandonment so the facilities can be transferred to Field
Services. Gathering services provided include the gathering of gas and the
treating of coal seam gas.

Expansion Projects. Field Services expanded its gulf coast operations in
1996 primarily through acquisitions. In July, Field Services acquired a 70 MMcf
per day processing plant in south-central Louisiana. In November, Field Services
signed a letter of intent to acquire the remaining 50 percent interest in a 500
MMcf per day processing plant in southwestern Louisiana and acquired a majority
portion in a south Texas gathering system. In addition, Field Services expanded
its gathering system in the San Juan Basin, completed construction of a 50 MMcf
per day CO(2) treating facility in the Oklahoma Panhandle, and acquired the
remaining 50 percent interest in a 60 MMcf per day processing plant in southern
Texas.

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Customers and Operations. Facilities owned and operated by Field Services
consist of approximately 7,400 miles of gathering pipelines, two gas treating
plants and 10 gas processing plants (five of which are partially owned). The
aggregate daily inlet capacity is approximately 3.9 Bcf of gas. Gathering and
processing customers have direct access to interstate pipelines, including
affiliated pipelines, which provide access to multiple markets.

During 1996, Field Services gathered natural gas for 187 customers. The
largest gathering customers accounted for approximately 29 percent and 11
percent, respectively, of total gathered volumes. During 1996, Field Services
processed natural gas for a total of 119 customers. The three largest customers
accounted for approximately 25 percent, 12 percent, and 10 percent,
respectively, of total processed volumes. No other customer accounted for more
than 10 percent of gathered or processed volumes. Field Services' gathering and
processing agreements with large customers are generally long-term agreements
with various expiration dates. These long-term agreements account for the
majority of the gas gathered and processed by Field Services.

Operating Statistics. The following table summarizes gathering, processing,
and natural gas liquid sales volumes for the periods indicated. The information
includes operations attributed to facilities owned by affiliated entities but
operated by Field Services:

1996 1995 1994
----- ---- ----

Gas volumes (TBtu, except liquids sales):
Gathering................................................. 1,119 810 679
Processing................................................ 484 406 392
Natural gas liquid sales (millions of gallons)............ 391 284 281

PETROLEUM SERVICES

Williams Energy, through wholly owned subsidiaries in its Petroleum
Services unit, owns and operates a petroleum products and crude oil pipeline,
two ethanol production plants (one of which is partially owned), and petroleum
products terminals and provides services and markets products related thereto.

Transportation. A subsidiary in the Petroleum Services unit, Williams Pipe
Line Company (Williams Pipe Line), owns and operates a petroleum products and
crude oil pipeline system which covers an 11-state area extending from Oklahoma
in the south to North Dakota and Minnesota in the north and Illinois in the
east. The system is operated as a common carrier offering transportation and
terminaling services on a nondiscriminatory basis under published tariffs. The
system transports refined products, LP-gases, lube extracted fuel oil, and crude
oil.

At December 31, 1996, the system traversed approximately 7,300 miles of
right-of-way and included approximately 9,300 miles of pipeline in various sizes
up to 16 inches in diameter. The system includes 82 pumping stations, 23 million
barrels of storage capacity, and 47 delivery terminals. The terminals are
equipped to deliver refined products into tank trucks and tank cars. The maximum
number of barrels which the system can transport per day depends upon the
operating balance achieved at a given time between various segments of the
system. Because the balance is dependent upon the mix of products to be shipped
and the demand levels at the various delivery points, the exact capacity of the
system cannot be stated.

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Operating Statistics. The operating statistics set forth below relate to
the system's operations for the periods indicated:

1996 1995 1994
------- ------- -------

Shipments (thousands of barrels):
Refined products:
Gasolines.......................................... 134,296 125,060 120,682
Distillates........................................ 68,628 61,238 61,129
Aviation fuels..................................... 11,189 12,535 9,523
LP-Gases........................................... 15,618 12,839 10,849
Lube extracted fuel oil............................ 8,555 4,462 0
Crude oil.......................................... 891 860 1,062
------- ------- -------
Total Shipments.................................... 239,177 216,994 203,245
======= ======= =======
Daily average (thousands of barrels).................... 655 595 557
Average haul (miles).................................... 259 269 284
Barrel miles (millions)................................. 61,969 58,326 57,631

Environmental regulations and changing crude supply patterns continue to
affect the refining industry. The industry's response to environmental
regulations and changing supply patterns will directly affect volumes and
products shipped on the Williams Pipe Line system. Environmental Protection
Agency ("EPA") regulations, driven by the Clean Air Act, require refiners to
change the composition of fuel manufactured. A pipeline's ability to respond to
the effects of regulation and changing supply patterns will determine its
ability to maintain and capture new market shares. Williams Pipe Line has
successfully responded to changes in diesel fuel composition and product supply
and has adapted to new gasoline additive requirements. Reformulated gasoline
regulations have not yet significantly affected Williams Pipe Line. Williams
Pipe Line will continue to position itself to respond to changing regulations
and supply patterns, but the Company cannot predict how future changes in the
marketplace will affect Williams Pipe Line's market areas.

Ethanol. Williams Energy, through its wholly owned subsidiary Williams
Energy Ventures, Inc. (WEV), is engaged in the production and marketing of
ethanol. WEV owns and operates two ethanol plants of which corn is the principal
feedstock. The Pekin, Illinois, plant, which WEV purchased in 1995, has an
annual production capacity of 100 million gallons of fuel-grade and industrial
ethanol and also produces various coproducts. The Aurora, Nebraska, plant (in
which WEV owns a 75 percent interest) began operations in November 1995 and has
an annual production capacity of 30 million gallons. WEV also markets ethanol
produced by third parties.

The sales volumes set forth below include ethanol produced by third parties
as well as by WEV for the periods indicated:

1996 1995 1994
------- ------ ----

Ethanol sold (thousands of gallons)......................... 119,800 53,500 n/a
Coproducts sold (thousands of tons)......................... 398 159 n/a

Terminals and Services. Williams Energy, through its subsidiary WEV, also
operates petroleum products terminals in the western and southeastern United
States and provides services including performance additives and ethanol
blending. In September 1996, WEV acquired a 45.5 percent interest in eight
petroleum products terminals located in the southeast United States. During the
last four months of the year, these terminals loaded 7.8 million barrels of
refined products.

MERCHANT SERVICES

Williams Energy, through subsidiaries, primarily Williams Energy Services
Company and its subsidiaries ("WESCO"), offers a full suite of energy products
and services throughout North America and serves over 2,000 companies. WESCO's
business includes natural gas and energy commodity marketing activities, at both

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the wholesale and retail levels. In addition, WESCO offers a comprehensive array
of price-risk management products and services and capital services to the
diverse energy industry.

WESCO markets natural gas throughout North America and grew its total
volumes (physical and notional) to an average of 15.9 TBtu per day in 1996. The
core of WESCO's business has traditionally been the Gulf Coast and eastern
regions, using the pipeline systems owned by the Company, but also includes
marketing on approximately 30 non-Williams' pipelines. WESCO's natural gas
customers include producers, industrials, local distribution companies,
utilities, and other marketers.

During 1996, WESCO also marketed natural gas liquids, crude, refined
products, and liquefied natural gas with total volumes (physical and notional)
averaging 2.0 TBtu per day.

WESCO entered the power marketing and trading business in 1996. During its
first year of operations, WESCO's power group marketed over 4 million megawatt
hours (physical and notional) of power.

WESCO provides price risk management services through a variety of
financial instruments including option and swap agreements related to various
energy commodities. Through its capital financing services, WESCO also provides
participants in the energy industry with capital for energy-related projects
including acquisitions of proved reserves and reworking of wells.

In 1996, WESCO established a retail energy services group. As a part of the
retail strategy, WESCO acquired a 50 percent interest in Volunteer Energy
Corporation, a natural gas marketing company with experience in end-use markets.
WESCO has also aligned with Boston Edison Company to form EnergyVision, an
enterprise designed to provide access to retail energy markets in the New
England area.

Operating Statistics. The following table summarizes operating profit and
marketing volumes for the periods indicated (dollars in millions, volumes in
TBtu equivalents).

1996 1995 1994
------ ------ ------

Operating profit......................................... $ 66.4 $ 33.2 $ 3.4
Total marketing volumes (physical and notional).......... 6,552 3,822 1,642

REGULATORY MATTERS

Field Services. Historically, an issue has existed as to whether the
Federal Energy Regulatory Commission (FERC) has authority under the Natural Gas
Act to regulate gathering and processing prices and services. During 1994, after
reviewing its legal authority in a Public Comment Proceeding, FERC determined
that while it retains some regulatory jurisdiction over gathering and processing
performed by interstate pipelines, pipeline-affiliated gathering and processing
companies are outside its authority under the Natural Gas Act. An appellate
court has affirmed FERC's determination. As a result of these FERC decisions,
several of the individual states in which Field Services conducts its operations
may consider whether to impose regulatory requirements on gathering companies.
No state currently regulates Field Services' gathering or processing rates or
services.

Petroleum Services. Williams Pipe Line, as an interstate common carrier
pipeline, is subject to the provisions and regulations of the Interstate
Commerce Act. Under this Act, Williams Pipe Line is required, among other
things, to establish just, reasonable and nondiscriminatory rates, to file its
tariffs with FERC, to keep its records and accounts pursuant to the Uniform
System of Accounts for Oil Pipeline Companies, to make annual reports to FERC
and to submit to examination of its records by the audit staff of FERC.
Authority to regulate rates, shipping rules, and other practices and to
prescribe depreciation rates for common carrier pipelines is exercised by FERC.
The Department of Transportation, as authorized by the 1992 Pipeline Safety
Reauthorization Act, is the oversight authority for interstate liquids
pipelines. Williams Pipe Line is also subject to the provisions of various state
laws applicable to intrastate pipelines.

On December 31, 1989, a rate cap, which resulted from a settlement with
several shippers, effectively freezing Williams Pipe Line's rates for the
previous five years, expired. Williams Pipe Line filed a revised tariff on
January 16, 1990, with FERC and the state commissions. The tariff set an average
increase in rates of 11 percent and established volume incentives and
proportional rate discounts. Certain shippers on the

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Williams Pipe Line system and a competing pipeline carrier filed protests with
FERC alleging that the revised rates are not just and reasonable and are
unlawfully discriminatory. Williams Pipe Line elected to bifurcate this
proceeding in accordance with the then-current FERC policy. Phase I of FERC's
bifurcated proceeding provides a carrier the opportunity to justify its rates
and rate structure by demonstrating that its markets are workably competitive.
Any issues unresolved in Phase I require cost justification in Phase II.

FERC's Presiding Judge issued the Initial Decision in Phase II on May 29,
1996. The Judge ruled that Williams Pipe Line failed to demonstrate that the
rates at issue for the 12 less competitive markets were just and reasonable and
that Williams Pipe Line must roll back those rates to pre-1990 levels and pay
refunds with interest to its shippers. The Initial Decision held that Williams
Pipe Line's individual rates must be judged on the basis of cost allocations,
although Williams Pipe Line was given no notice of this particular basis of
judgment and the Commission expressly declined to adopt such standards in its
Opinion No. 391. Moreover, the Commission clarified its final order in Phase I
(Opinion No. 391-A) by stating that Williams Pipe Line was not required to
defend its rates with cost allocations. Primarily on this basis, Williams Pipe
Line sought a review of the Initial Decision by the full Commission by filing a
brief on exceptions on June 28, 1996. The review of the Phase II Initial
Decision is pending before the Commission, and a shipper's appeal of the Phase I
order in the United States Court of Appeals for the District of Columbia Circuit
has been stayed pending the completion of Phase II. Williams Pipe Line is not
required to comply with the Initial Decision in Phase II prior to the
Commission's issuance of a final order. Williams Pipe Line continues to believe
that its revised tariffs will ultimately be found lawful. See Note 17 of Notes
to Consolidated Financial Statements.

Merchant Services. Management believes that WESCO's activities are
conducted in substantial compliance with the marketing affiliate rules of FERC
Order 497. Order 497 imposes certain nondiscrimination, disclosure, and
separation requirements upon interstate natural gas pipelines with respect to
their natural gas trading affiliates. WESCO has taken steps to ensure it does
not share employees with affiliated interstate natural gas pipelines and does
not receive information from such affiliates that is not also available to
unaffiliated natural gas trading companies.

COMPETITION

Exploration and Production. Williams Energy's exploration and production
unit competes with a wide variety of independent producers as well as integrated
oil and gas companies for markets for its production.

Field Services. Williams Energy competes for gathering and processing
business with interstate and intrastate pipelines, producers, and independent
gatherers and processors. Numerous factors impact any given customer's choice of
a gathering or processing services provider, including rate, term, timeliness of
well connections, pressure obligations, and the willingness of the provider to
process for either a fee or for liquids taken in-kind.

Petroleum Services. Williams Energy's petroleum services operations are
subject to competition because Williams Pipe Line operates without the
protection of a federal certificate of public convenience and necessity that
might preclude other entrants from providing like service in its area of
operations. Further, Williams Pipe Line must plan, operate and compete without
the operating stability inherent in a broad base of contractually obligated or
owner-controlled usage. Because Williams Pipe Line is a common carrier, its
shippers need only meet the requirements set forth in its published tariffs in
order to avail themselves of the transportation services offered by Williams
Pipe Line.

Competition exists from other pipelines, refineries, barge traffic,
railroads, and tank trucks. Competition is affected by trades of products or
crude oil between refineries that have access to the system and by trades among
brokers, traders and others who control products. Such trades can result in the
diversion from the Williams Pipe Line system of volume that might otherwise be
transported on the system. Shorter, lower revenue hauls may also result from
such trades. Williams Pipe Line also is exposed to interfuel competition whereby
an energy form shipped by a liquids pipeline, such as heating fuel, is replaced
by a form not transported by a liquids pipeline, such as electricity or natural
gas. While Williams Pipe Line faces competition from a variety of sources
throughout its marketing areas, the principal competition is other pipelines. A
number of pipeline systems, competing on a broad range of price and service
levels, provide

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transportation service to various areas served by the system. The possible
construction of additional competing products or crude oil pipelines,
conversions of crude oil or natural gas pipelines to products transportation,
changes in refining capacity, refinery closings, changes in the availability of
crude oil to refineries located in its marketing area, or conservation and
conversion efforts by fuel consumers may adversely affect the volumes available
for transportation by Williams Pipe Line.

Williams Energy's ethanol operations compete in local, regional, and
national fuel additive markets with one large ethanol producer, numerous smaller
ethanol producers, and other fuel additive producers, such as refineries.

Merchant Services. Williams Energy's merchant services operations directly
compete with large independent energy marketers, marketing affiliates of
regulated pipelines and utilities, electric wholesalers and retailers and
natural gas producers. The financial trading business competes with other
energy-based companies offering similar services as well as certain brokerage
houses. This level of competition contributes to a business environment of
constant pricing and margin pressure.

OWNERSHIP OF PROPERTY

The majority of Williams Energy's ownership interests in exploration and
production properties are held as working interests in oil and gas leaseholds.

Subsidiaries of Williams Energy own gathering and processing facilities in
fee. Gathering systems are constructed and maintained pursuant to rights-of-way,
easements, permits, licenses, and consents on and across properties owned by
others. The compressor stations and gas processing and treating facilities are
located in whole or in part on lands owned by subsidiaries of Williams Energy or
on sites held under leases or permits issued or approved by public authorities.

Williams Pipe Line's system is owned in fee. However, a substantial portion
of the system is operated, constructed and maintained pursuant to rights-of-way,
easements, permits, licenses, or consents on and across properties owned by
others. The terminals, pump stations, and all other facilities of the system are
located on lands owned in fee or on lands held under long-term leases, permits,
or contracts. Management believes that the system is in such a condition and
maintained in such a manner that it is adequate and sufficient for the conduct
of business.

The primary assets of Williams Energy's merchant services unit are its term
contracts, employees, and related systems and technological support.

ENVIRONMENTAL MATTERS

Williams Energy is subject to various federal, state, and local laws and
regulations relating to environmental quality control. Management believes that
Williams Energy's operations are in substantial compliance with existing
environmental legal requirements. Management expects that compliance with such
existing environmental legal requirements will not have a material adverse
effect on the capital expenditures, earnings, and competitive position of
Williams Energy.

The EPA has named Williams Pipe Line as a potentially responsible party as
defined in Section 107(a) of the Comprehensive Environmental Response,
Compensation, and Liability Act, for a site in Sioux Falls, South Dakota. The
EPA placed this site on the National Priorities List in July 1990. In April
1991, Williams Pipe Line and the EPA executed an administrative consent order
under which Williams Pipe Line agreed to conduct a remedial investigation and
feasibility study for this site. The EPA issued its "No Action" Record of
Decision in 1994, concluding that there were no significant hazards associated
with the site subject to two additional years of monitoring for arsenic in
certain existing monitoring wells. Williams Pipe Line should complete monitoring
in the second quarter of 1997.

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COMMUNICATIONS

WILLIAMS COMMUNICATIONS GROUP, INC. (WILLIAMS COMMUNICATIONS GROUP)

The Company organized the reporting for its communications operations under
a single communications reporting entity in 1996 and has reported the financial
results of these operations on a consolidated basis since the third quarter of
1996. Management believes that the new structure will better position it to
provide total enterprise network solutions and superior customer service on a
global basis. In addition, management believes this structure will facilitate
growth and diversification while recognizing the convergence of customers,
markets and product offerings of its communications operations. Management also
believes the combination creates a vehicle to better establish name recognition
and presence in the communications industry.

The new entity, Williams Communications Group, Inc. ("Williams
Communications Group"), is comprised of four major business units: Williams
Telecommunications Systems, Inc.; Vyvx, Inc.; Global Access Telecommunications
Services, Inc. (formerly known as ITC mediaConferencing Company); and Williams
Learning Network, Inc. Through these business units, Williams Communications
Group provides customer-premise voice and data equipment, including installation
and maintenance; network integration and management services; advertising
distribution; video services and other multimedia services for the broadcasting
industry; broadcast facsimile, audio- and videoconferencing services for
businesses; and interactive, computer-based training programs and services for a
variety of industries.

In March 1997, Williams Communications Group acquired the stock of Critical
Technologies, Incorporated, a network systems integrator that designs, builds,
implements, and maintains large-scale business communications systems.

Williams Communications Group, through its subsidiaries, owns approximately
11,000 fiber miles of fiber-optic network, a global satellite network including
five teleports in the United States and capacity on domestic and international
transponders, approximately 53 television switching centers, more than 1,300
fully equipped service vehicles, and 120 sales and services locations nationwide
plus international offices serving Europe, South America and the Pacific Rim.
Williams Communications Group employed approximately 4,300 employees as of
December 31, 1996.

Consolidated revenues by business unit and operating profit for Williams
Communications Group for 1996 were as follows (dollars in millions):

Revenues:
WilTel
WilTel Voice..................... $520.6
WilTel Data...................... 47.5
Vyvx............................... 100.0
Williams Learning Network.......... 17.9
Global Access...................... 7.6
Other.............................. 17.7
------
Total......................... $711.3
======
Operating Profit........................ $ 6.6
======

A business description of each of Williams Communications Group's business
units follows.

WILLIAMS TELECOMMUNICATIONS SYSTEMS, INC. (WILTEL)

WilTel provides data, voice and video communications products and services
to a wide variety of customers nationally. WilTel serves its customers through
more than 100 sales and service locations throughout the United States, over
3,100 employees and over 1,300 stocked service vehicles. WilTel employs more
than 1,400 technicians and more than 500 sales representatives and sales support
personnel to serve an

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estimated 41,000 commercial, governmental and institutional customer sites.
WilTel's customer base ranges from large publicly-held corporations and the
federal government to small privately-owned entities.

WilTel offers its customers a full array of data, multimedia, voice and
video network interconnect products including digital key systems (generally
designed for voice applications with fewer than 100 lines), private branch
exchange (PBX) systems (generally designed for voice applications with greater
than 100 lines), voice processing systems, interactive voice response systems,
automatic call distribution applications, call accounting systems, network
monitoring and management systems, desktop video, routers, channel banks,
intelligent hubs and cabling. WilTel's services also include the design,
configuration and installation of voice and data networks and the management of
customers' telecommunications operations and facilities. WilTel's National
Technical Resource Center provides customers with on-line order entry and
trouble reporting services, advanced technical assistance and training. Other
service capabilities include Local Area Network and PBX remote monitoring and
toll fraud detection.

In 1994, WilTel acquired BellSouth's customer premise equipment sales and
service operations in 29 states outside of BellSouth's local operating region in
the nine southeastern-most states and Jackson Voice Data, a New York City-based
customer premise equipment company. In 1996, WilTel acquired Comlink, Inc., a
Marlborough, Massachusetts, based voice and network systems integrator. Comlink
services 5,000 customers in Vermont, New Hampshire, Maine, Massachusetts, Rhode
Island and Connecticut. Also in 1996, WilTel acquired SoftIRON Systems, Inc., a
network systems integrator based in California. SoftIRON works with
organizations to design, procure, install and support complex data systems.
SoftIRON maintains more than 200 sites with high-speed data switches, 5,000
remote access ports and extensive networks managing more than 15,000 devices.
The acquisition of these businesses has allowed WilTel to capitalize on its
existing infrastructure, strengthen its national market presence and geographic
customer density and has provided more diversity in product offerings.

Operating Statistics. The following table summarizes the results of
operations for the periods indicated (dollars and ports in millions):

1996 1995 1994
------ ------ ------

Revenues................................ $568.1 $494.9 $396.6
Percentage of revenues by type of
service:
New system sales...................... 40% 34% 33%
System modifications.................. 34 39 36
Maintenance........................... 24 25 24
Other................................. 2 2 7
Backlog................................. $112.2 $ 85.0 $ 92.4
Total ports............................. 5.1 4.7 4.1

A port is defined as an electronic address resident in a customer's PBX or
key system that supports a station, trunk or data port.

In 1996, WilTel derived approximately 59.7 percent of its revenues from its
existing customer base and approximately 40.3 percent from the sale of new
telecommunications systems. WilTel's three largest suppliers accounted for
approximately 86 percent of equipment sold in 1996. A single manufacturer
supplied 73 percent of all equipment sold. In this case, WilTel is the largest
independent distributor in the United States of certain of this company's
products. About 63 percent of WilTel's active customer base consists of this
manufacturer's products. The distribution agreement with this supplier is
scheduled to expire at the end of 2000. Management believes there is minimal
risk as to the availability of products from suppliers.

VYVX, INC. (VYVX)

Vyvx offers broadcast-quality television and multimedia transmission
services nationwide by means of fiber optic cable, satellite uplink/downlink
facilities and satellite transponder capacity. Vyvx fiber primarily provides
backhaul or point-to-point transmission of news and other programming between
two or more

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customer locations. For example, the Vyvx network is used for the broadcast
coverage of major professional sporting events. With satellite facilities, Vyvx
provides point-to-multipoint transmission service. Vyvx's customers include all
of the major broadcast and cable networks. Vyvx is also engaged in the business
of advertising distribution and is exploring other multimedia communication
opportunities through its fiber optic network.

In 1996, Vyvx acquired four teleports (including satellite earth station
facilities) from ICG Wireless Services. The teleports are located in Atlanta,
Denver, Los Angeles and New York (Carteret, New Jersey). Also in 1996, Vyvx
acquired Global Access Telecommunications Services, Inc., the second largest
reseller of worldwide video transmission services, which resulted in the
management of a fifth teleport in Kansas City. The business television
operations were transferred to ITC mediaConferencing, and Vyvx continues to
operate the satellite and transponder facilities of the former Global Access. As
discussed below, ITC mediaConferencing has adopted the Global Access name. These
acquisitions enabled Vyvx to become a full-service fiber-optic and satellite
video transmission provider.

In November and December, 1996, respectively, Vyvx acquired the assets of
Cycle-Sat, Inc. and Viacom MGS Services Inc., both distributors of television
advertising. These acquisitions provide connectivity and presence in more than
550 television broadcast stations around the country.

Under an agreement with IXC Communications entered into in the fourth
quarter of 1996, Vyvx will build a 1,600-mile fiber-optic network from Houston
to Washington, D.C., in proximity to pipeline right-of-way owned by the Company.
Vyvx will then exchange rights to use a portion of the unlit fiber for usage
rights to IXC's existing 4,500-mile Los Angeles-to-New York route. It is
estimated that by mid-1998, Vyvx will have added 6,100 miles of new,
unrestricted network to its existing 11,000-mile system, which is limited to
multimedia applications.

WILLIAMS LEARNING NETWORK, INC. (WILLIAMS LEARNING NETWORK)

Williams Learning Network, formerly Williams Knowledge Systems, provides
multimedia-based training products for the chemical, refining, utility and
manufacturing industries. Williams Learning Network serves approximately 6,500
customers in these industries.

In December 1996, Williams Learning Network announced the formation of a
joint venture with the Public Broadcast Service to utilize Internet,
video-on-demand, fiber-optic and satellite technologies to bring professional
development and training services to the business community. The 20-year
agreement provides for a management committee to operate the new entity.

GLOBAL ACCESS TELECOMMUNICATIONS SERVICES, INC. (GLOBAL ACCESS)
(FORMERLY ITC MEDIACONFERENCING COMPANY)

In October 1995, a business unit of Williams Communications Group acquired
a 22 percent interest in ITCmediaConferencing Company ("ITC") and acquired the
remaining interest in ITC in 1996. Williams Communications Group has
subsequently changed ITC's name to Global Access Telecommunications Services,
Inc. ("Global Access"). Global Access offers multi-point videoconferencing,
audioconferencing and enhanced facsimile services as well as single point to
multi-point business television services. The acquisition enables Williams
Communications Group to provide customers with integrated media conferences,
bringing together voice, video and facsimile by utilizing Williams
Communications Group's existing fiber-optic and satellite services.

In March 1997, Global Access acquired Satellite Management, Inc., a systems
integrator for business television and provider of other satellite-based
services.

REGULATORY MATTERS

The equipment WilTel sells must meet the requirements of Part 68 of the
Federal Communications Commission (FCC) rules governing the equipment
registration, labeling and connection of equipment to telephone networks. WilTel
relies on the equipment manufacturers' compliance with these requirements for
its

11
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own compliance regarding the equipment it distributes. A subsidiary of WilTel,
which provides intrastate microwave communications services for a Federal
agency, is subject to FCC regulations as a common carrier microwave licensee.
These regulations have a minimal impact on WilTel's operations.

Vyvx is subject to FCC regulations as a common carrier with regard to
certain of its transmission services and is subject to the laws of certain
states governing public utilities. An FCC rulemaking to eliminate domestic,
common carrier tariffs has been stayed pending judicial review. In the interim,
the FCC is requiring such carriers to operate under traditional tariff rules.
Operations of satellite earth stations and certain other related transmission
facilities are also subject to FCC licensing and other regulations. These
regulations do not significantly impact Vyvx's operations.

COMPETITION

WilTel has many competitors ranging from Lucent Technologies and the
Regional Bell Operating Companies to small individually-owned companies that
sell and service customer premise equipment. Competitors include companies that
sell equipment comparable or identical to that sold by WilTel. There are
virtually no barriers to entry into this market.

Vyvx's video and multimedia transmission operations compete primarily with
companies offering video or multimedia transmission services by means of
satellite facilities and to a lesser degree with companies offering transmission
services via microwave facilities or fiber-optic cable.

Federal telecommunications reform legislation enacted in February 1996 is
designed to increase competition both in the long distance market and local
exchange market by significantly liberalizing current restrictions on market
entry. In particular, the legislation establishes procedures permitting Regional
Bell Operating Companies to provide long distance services including, but not
limited to, video transmission services, subject to certain restrictions and
conditions precedent. Moreover, electric and gas utilities may provide
telecommunications services, including long distance services, through separate
subsidiaries. The legislation also calls for tariff forbearance and relaxation
of regulation over common carriers. At this time, management cannot predict the
impact such legislation may have on the operations of Williams Communications
Group.

OWNERSHIP OF PROPERTY

Vyvx owns part of its fiber-optic transmission facilities and leases the
remainder. Vyvx carries signals by means of its own fiber-optics facilities, as
well as carrying signals over fiber-optic facilities leased from third-party
interexchange carriers and the various local exchange carriers. Vyvx holds its
satellite transponder capacity under various agreements. Vyvx owns part of its
teleport facilities and holds the remainder under either a management agreement
or long-term facilities leases.

ENVIRONMENTAL MATTERS

Williams Communications Group is subject to federal, state and local laws
and regulations relating to the environmental aspects of its business.
Management believes that Williams Communications Group's operations are in
substantial compliance with existing environmental legal requirements.
Management expects that compliance with such existing environmental legal
requirements will not have a material adverse effect on the capital
expenditures, earnings and competitive position of Williams Communications
Group.

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14

OTHER INFORMATION

The Company has approximately 6,500 full-time employees, of whom
approximately 750 are represented by unions and covered by collective bargaining
agreements. The Company considers its relations with its employees to be
generally good.

FORWARD-LOOKING INFORMATION

Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. Such statements are made in
reliance on the "safe harbor" protections provided under the Private Securities
Litigation Reform Act of 1995.

As required by such Act, the Company hereby identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in
forward-looking statements: (i) risks and uncertainties impacting the Company as
a whole primarily relate to changes in general economic conditions in the United
States; changes in laws and regulations to which the Company is subject,
including tax, environmental and employment laws and regulations; the cost and
effects of legal and administrative claims and proceedings against the Company
or its subsidiaries or which may be brought against the Company or its
subsidiaries; conditions of the capital markets utilized by the Company to
access capital to finance operations; and, to the extent the Company increases
its investments and activities abroad, such investments and activities will be
subject to foreign economies, laws, and regulations; (ii) for the Company's
regulated businesses, risks and uncertainties primarily relate to the impact of
future federal and state regulation of business activities, including allowed
rates of return; and (iii) risks and uncertainties associated with the Company's
unregulated businesses primarily relate to the ability of such entities to
develop expanded markets and product offerings as well as maintaining existing
markets. In addition, future utilization of pipeline capacity will depend on
energy prices, competition from other pipelines and alternate fuels, the general
level of natural gas and petroleum product demand and weather conditions, among
other things. Further, gas prices which directly impact gathering and processing
throughput and operating profits may fluctuate in unpredictable ways as may corn
prices, which directly affect the Company's ethanol business. It is also not
possible to predict which of many possible future products and service offerings
will be important to maintaining a competitive position in the communications
business or what expenditures will be required to develop and provide such
products and services.

(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

The Company has no significant foreign operations.

ITEM 2. PROPERTIES

See Item 1(c) for description of properties.

ITEM 3. LEGAL PROCEEDINGS.

Other than as described under Item 1 -- Business and in Note 17 of Notes to
Consolidated Financial Statements, there are no material pending legal
proceedings. The Company is subject to ordinary routine litigation incidental to
its business.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

As of December 31, 1996, all of the outstanding shares of the Company's
Common Stock were owned by Williams. The Company's Common Stock is not publicly
traded, and there is no market for such shares.

13
15

ITEM 6. SELECTED FINANCIAL DATA

The following financial data are an integral part of, and should be read in
conjunction with, the consolidated financial statements and notes thereto.
Information concerning significant trends in the financial condition and results
of operations is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages F-1 through F-7 of this report.

1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(MILLIONS)

Revenues............................... $1,841.3 $1,354.0 $1,264.3 $1,221.0 $1,283.2
Income from continuing operations*..... 228.7 211.8 125.5 152.3 46.9
Income from discontinued
operations**......................... -- 1,018.8 94.0 46.4 25.2
Total assets........................... 5,163.9 4,232.8 3,440.1 2,989.4 2,869.9
Long-term debt......................... 860.4 273.9 507.0 229.4 337.1
Stockholder's equity................... $2,482.8 $2,151.6 $1,739.9 $1,818.0 $1,614.6

- ---------------
* See Note 5 of Notes to Consolidated Financial Statements for discussion of
significant asset sales and write-off of project costs in 1996, 1995 and
1994. Income from continuing operations in 1993 includes a pre-tax gain of
$51.6 million as a result of the sale of 6.1 million units in the Williams
Coal Seam Gas Royalty Trust.
** See Note 3 of Notes to Consolidated Financial Statements for discussion of
the gain on the sale of discontinued operations. Amounts prior to 1995
reflect operating results of the network services' operations.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

1996 vs. 1995

Field Services' revenues increased $126.9 million, or 34 percent, due
primarily to higher natural gas liquids sales revenues of $64 million combined
with higher gathering and processing revenues of $46 million and $13 million,
respectively. Natural gas liquids sales revenues increased due to a 36 percent
increase in sales volumes combined with higher average prices. Gathering and
processing volumes increased 18 percent and 19 percent, respectively. Costs and
operating expenses increased $99 million, or 49 percent, due primarily to higher
fuel and replacement gas purchases, expanded facilities and increased
operations. Other income -- net for 1996 includes a $20 million gain from the
property insurance coverage associated with construction of replacement
gathering facilities and $6 million of gains from the sale of two small
gathering systems, partially offset by $5 million of environmental remediation
accruals. Other income -- net for 1995 includes $20 million in operating profit
from a favorable resolution of contingency issues involving previously regulated
gathering and processing assets. Operating profit increased $16 million, or 11
percent, due primarily to higher natural gas liquids margins and increased
gathering and processing activities. Operating profit was favorably impacted in
both 1996 and 1995 by approximately $20 million of other income.

Merchant Services' revenues increased $107.6 million, or 70 percent, due
primarily to higher natural gas and gas liquids marketing, price-risk management
activities and petroleum product marketing of $77 million, $24 million and $18
million, respectively, partially offset by lower contract origination revenues
of $10 million. Natural gas and gas liquids marketing revenues increased due to
higher marketing volumes and prices. In addition, net physical trading revenues
increased $3 million, due to a 19 percent increase in natural gas physical
trading volumes from 754 TBtu to 896 TBtu, largely offset by lower physical
trading margins. Costs and operating expenses increased $73 million, or 94
percent, due primarily to higher natural gas purchase volumes and prices.
Operating profit increased $33.2 million, or 100 percent, due primarily to
higher price-risk management revenues, a reduction of development costs
associated with its information products business and increased natural gas
marketing volumes. Partially offsetting were higher selling, general and
administrative expenses and lower contract origination revenues resulting from
the impact of profits realized from certain long-term natural gas supply
obligations in 1995. Merchant Services' price-risk management and trading
activities are subject to risk from changes in energy commodity market prices,
the portfolio position of its

F-1
16

financial instruments and physical commitments, and credit risk. Merchant
Services manages risk by maintaining its portfolio within established trading
policy guidelines.

Petroleum Services' revenues increased $165.2 million, or 50 percent, due
primarily to an increase in transportation activities and ethanol sales of $31
million and $133 million, respectively. Revenues from transportation activities
increased due primarily to a 10 percent increase in shipments and a $14 million
increase in product sales. Shipments increased as a result of new business and
the 1995 impacts of unfavorable weather conditions and a fire at a truck-loading
rack. Average length of haul and transportation rate per barrel were slightly
below 1995 due primarily to shorter haul movements. Ethanol revenues increased
following the August 1995 acquisition of Pekin Energy and the fourth-quarter
1995 completion of the Aurora plant. Costs and operating expenses increased $155
million, or 68 percent, due primarily to a full year of ethanol production
activities. Operating profit increased $6.5 million, or 9 percent, due primarily
to increased shipments, partially offset by lower ethanol margins and production
levels as a result of record high corn prices.

Exploration and Production's revenues increased $19.5 million, or 31
percent, due primarily to higher revenues from the marketing of production from
the Williams Coal Seam Gas Royalty Trust (Royalty Trust) and increased
production revenues of $9 million and $8 million, respectively. The increase in
marketing revenues reflects both increased volumes and higher average gas
prices. The increase in production revenues reflects higher average gas prices.
Costs and operating expenses increased $18 million due primarily to higher
Royalty Trust natural gas purchase costs. Other income -- net in 1995 includes
an $8 million loss accrual for a future minimum price natural gas commitment.
Operating profit increased $8.7 million to $2.8 million in 1996 due primarily to
the effect of the $8 million 1995 loss accrual.

Williams Communications Group's revenues increased $172.4 million, or 32
percent, due primarily to the 1996 acquisitions which contributed revenues of
$95 million. Additionally, increased business activity resulted in a $36 million
revenue increase in new systems sales and a $16 million increase in digital
fiber television services. The number of ports in service at December 31, 1996,
increased 8 percent and billable minutes from occasional service increased 16
percent. Dedicated service voice-grade equivalent miles at December 31, 1996,
decreased 6 percent as compared with December 31, 1995, which in part reflects a
shift to occasional service. Costs and operating expenses increased $126
million, or 31 percent, and selling, general and administrative expenses
increased $63 million, or 62 percent, due primarily to the overall increase in
business activity and higher expenses for developing additional products and
services, including the cost of integrating the most recent acquisitions.
Operating profit decreased $18.4 million, or 74 percent, due primarily to the
expenses of developing additional products and services along with integrating
the most recent acquisitions.

Allocated parent company expenses increased $5.8 million, or 44 percent,
due primarily to a higher allocation percentage resulting from an increased
level of operations. Interest accrued decreased $5.6 million, or 14 percent, due
primarily to Williams' May 1, 1995, assumption of approximately $770 million of
Transco Energy's outstanding debt previously assumed by Williams Holdings as a
result of the Transco Energy acquisition, substantially offset by higher
Williams Holdings' borrowing levels. Interest capitalized decreased $6.3
million, or 64 percent, due primarily to lower capital expenditures for
gathering and processing facilities. Investing income decreased $35.7 million,
or 47 percent, due primarily to lower interest earned on decreased advances to
Williams and the effects of a $15 million dividend in 1995 from Texasgulf Inc.
(sold in 1995) and $5 million of dividends in 1995 on Williams common stock held
by Williams Holdings (see Note 4). The 1996 gain on sales/exchange of
assets -- net results from the sale of certain communications rights (see Note
5). The 1995 gain on sales/exchange of assets -- net includes a $12.6 million
pre-tax loss on the sale of the 15 percent interest in Texasgulf Inc., a $25.4
million pre-tax gain recognized as a result of the exchange of Williams common
stock for Williams convertible debentures and warrants to purchase Williams
common stock, and a $10.8 million pre-tax gain from the sale of Williams
Holdings' remaining investment in Williams common stock (see Notes 4 and 5). The
1995 write-off of project costs results from the cancellation of an underground
coal gasification project in Wyoming (see Note 5). Other income (expense) -- net
in 1996 includes expenses of international activities offset by $5 million of
reserve reversals. Other income (expense) -- net in 1995 includes approximately
$5 million of dividends for Transco Energy's preferred and minority interest
common stockholders and $4 million related to the wind down of Transco Energy's
corporate activities.

F-2
17

The $31 million, or 55 percent, increase in the provision for income taxes
is primarily a result of higher pre-tax income and a higher effective income tax
rate. The lower effective income tax rate in 1995 is the result of the $29.8
million of previously unrecognized tax benefits realized as a result of the sale
of Texasgulf Inc. (see Note 6). The effective income tax rate in 1996 is less
than the federal statutory rate due primarily to income tax credits from
research activities and coal-seam gas production, partially offset by the
effects of state income taxes. In addition, 1996 includes recognition of
favorable state income tax adjustments of $6 million related to 1995. The
effective income tax rate in 1995 is less than the federal statutory rate due
primarily to income tax credits from coal-seam gas production, partially offset
by the effects of state income taxes. In addition, 1995 includes the previously
unrecognized tax benefits related to the sale of Texasgulf Inc. (see Note 6).

On January 5, 1995, Williams Holdings sold its network services operations
to LDDS Communications, 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 (see Note 3).

1995 vs. 1994

Field Services' revenues increased $78.1 million, or 27 percent, due
primarily to higher gathering and processing revenues of $39 million and $10
million, respectively, combined with $17 million from Transco Energy's
non-regulated Gulf Coast operations. Gathering revenues increased due primarily
to a 19 percent increase in volumes combined with an increase in average prices.
Processing revenues increased due primarily to an increase in average prices.
Costs and operating expenses increased $33 million, or 20 percent, and selling,
general and administrative expenses increased $25 million, or 134 percent, due
primarily to expanded facilities, including Transco Energy's non-regulated Gulf
Coast operations. In addition, selling, general and administrative expenses
increased due to additional business development activities. Other income -- net
for 1995 includes $20 million in operating profit from the favorable resolution
of contingency issues involving previously regulated gathering and processing
assets. Operating profit increased $37.6 million, or 36 percent, primarily
resulting from the $20 million in other income and the increase in gathering and
processing revenues, partially offset by higher costs and operating expenses and
selling, general and administrative expenses. Operating profit in 1994 included
approximately $7 million in favorable settlements and adjustments of certain
prior period accruals, including income of $4 million from an adjustment to
operating taxes.

Merchant Services' revenues and costs and operating expenses decreased
$228.2 million and $289 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) and $72 million in
lower petroleum services operations resulting from adverse market conditions.
Natural gas physical trading volumes increased to 754 TBtu in 1995 compared to
148 TBtu in 1994, primarily from the effect of the Transco Energy acquisition.
Selling, general and administrative expenses increased $28 million due primarily
to the increase in trading activity. Operating profit increased $29.8 million
from $3.4 million 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.

Petroleum Services' revenues increased $111.2 million, or 51 percent, due
to an increase in transportation activities and ethanol sales of $33 million and
$84 million, respectively. Revenue from transportation activities increased due
primarily to higher shipments and a $15 million increase in product sales.
Shipments, while 7 percent higher than 1994, were reduced by the November 1994
fire at a 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. Ethanol
revenues increased following the acquisition of Pekin Energy in August 1995.
Costs and operating expenses increased $93 million, or 69 percent, due primarily
to increased operating expenses associated with transportation and ethanol
activities. Operating profit increased $17.3 million, or 33 percent, due
primarily to increased shipments, higher product

F-3
18

sales margins of $4 million, $3 million related to the operations of Pekin
Energy and the effect of $5 million of costs in 1994 for evaluating and
determining whether to build an oil refinery near Phoenix.

Exploration and Production's revenues increased $23.7 million, or 61
percent, due primarily to $35 million higher revenue from the marketing of
production from the Royalty Trust and a 14 percent increase in production
volumes, partially offset by a decrease in average gas sales prices. Costs and
operating expenses increased $33 million due primarily to higher Royalty Trust
natural gas purchase costs. Other income -- net in 1995 includes an $8 million
loss accrual for a future minimum price natural gas commitment. Operating profit
decreased $19.5 million to a $5.9 million operating loss in 1995 due primarily
to the $8 million loss accrual, lower average gas sales prices and $3 million
higher selling, general and administrative expenses.

Williams Communications Group's revenues increased $122.3 million, or 29
percent, due primarily to $30 million from new systems, $28 million from
existing system enhancements, $37 million from contract maintenance, moves, adds
and changes, and $15 million in digital fiber television services. 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, increased 14 percent, billable minutes
from occasional service increased 110 percent and dedicated service voice-grade
equivalent miles at December 31, 1995, increased 50 percent as compared with
December 31, 1994. Costs and operating expenses increased $84 million, or 26
percent, and selling, general and administrative expenses increased $21 million,
or 27 percent, due primarily to the overall increase in volume of sales and
services and higher expenses for developing additional products and services.
Operating profit increased $17.4 million from $7.6 million in 1994 due primarily
to increased activity in new system sales, enhancements to existing systems,
maintenance, digital television services and the full-year 1995 impact of two
1994 acquisitions.

Allocated parent company expenses decreased $7 million, or 35 percent, due
primarily to the sale of Williams Holdings' network services operations.
Interest accrued increased $15.1 million, or 59 percent, due primarily to the
approximately $770 million of Transco Energy's outstanding debt assumed by
Williams Holdings for the period January 17 to April 30, 1995, as a result of
the Transco Energy acquisition, partially offset by lower levels of intercompany
debt. Effective May 1, 1995, all debt resulting from the Transco Energy
acquisition was assumed by Williams. Interest capitalized increased $5.1
million, or 108 percent, due primarily to increased expenditures for gathering
and processing facilities. Investing income increased $60.3 million, from $15
million in 1994, due primarily to interest earned from Williams on the invested
portion of the cash proceeds from the sale of the network services operations in
addition to an $11 million increase in the dividend from Texasgulf Inc. and a $3
million increase in dividends received on Williams common stock held by Williams
Holdings. The 1995 gain on sales/exchange of assets -- net includes a $12.6
million pre-tax loss on the sale of the 15 percent interest in Texasgulf Inc., a
$25.4 million pre-tax gain recognized as a result of the exchange of Williams
common stock for Williams convertible debentures and warrants to purchase
Williams common stock and a $10.8 million pre-tax gain from the sale of Williams
Holdings' remaining investment in Williams common stock (see Notes 4 and 5). The
1994 gain on sales/exchange of assets -- net 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 5). Other income (expense) -- net in
1995 includes approximately $5 million of dividends for Transco Energy's
preferred and minority interest common stockholders and $4 million related to
the wind down of Transco Energy's corporate activities. Other income
(expense) -- net in 1994 includes a credit for $4.8 million from the reversal of
previously accrued liabilities associated with certain Williams Coal Seam Gas
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 $3.3 million, or 6 percent, increase in the provision for income taxes
is primarily a result of higher pre-tax income, largely 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 6). 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.
and income tax credits from

F-4
19

coal-seam gas production, partially offset by state income taxes. The effective
income tax rate in 1994 is lower than the federal statutory rate primarily
because of income tax credits from coal-seam gas production, partially offset by
state income taxes (see Note 6).

The 1994 extraordinary loss results from the early extinguishment of debt
(see Note 7).

FINANCIAL CONDITION AND LIQUIDITY

Liquidity

Williams Holdings considers its liquidity to come from borrowing capacity
available under bank-credit facilities and available cash investments. During
1995, Williams Holdings became a participant in an $800 million bank-credit
facility entered into by Williams. In December 1996, Williams increased the
amounts available under this facility to $1 billion. Under this agreement,
Williams Holdings has access to $700 million, subject to borrowing by other
affiliated companies. At December 31, 1996, Williams Holdings had access to $210
million of liquidity representing the available portion of the bank-credit
facility plus cash-equivalent investments, compared to $550 million at December
31, 1995. The decrease in 1996 is due to an increase in borrowing levels under
the bank-credit facility by Williams Holdings (see Note 12).

In addition, Williams Holdings and its subsidiaries had net amounts
receivable from Williams totaling $484 million at December 31, 1996, including
$360 million of parent company debentures (see Note 4), compared to $511 million
at December 31, 1995, and amounts due to Williams of $390 million at December
31, 1994. The increase in amounts receivable from Williams at December 31, 1995
from December 31, 1994 reflects the parent company debentures in addition to the
transfer of certain of the proceeds from the sale of the network services
operations to Williams.

Williams Holdings believes its parent can meet its cash needs because
Williams has access to $550 million of liquidity at December 31, 1996,
representing the available portion of its $1 billion bank-credit facility
previously discussed plus cash-equivalent investments. This compares with
Williams' liquidity of $656 million at December 31, 1995, and $495 million at
December 31, 1994. The decrease in 1996 is due primarily to additional
borrowings by Williams Holdings under the bank-credit facility, partially offset
by the $200 million increase in the capacity of the bank-credit facility (see
Note 12).

In January 1997, Williams Holdings filed a $200 million shelf registration
statement with the Securities and Exchange Commission to issue trust preferred
securities. In 1996, Williams Holdings filed a $400 million shelf registration
statement with the Securities and Exchange Commission and subsequently issued
$250 million of debt securities (see Note 12). Williams Holdings believes any
additional financing arrangements can be obtained on reasonable terms if
required.

Williams Holdings had working capital of $260 million at December 31, 1996,
compared to a net working-capital deficit of $184 million at December 31, 1995.
The increase in working capital at December 31, 1996, as compared to the prior
year-end, is primarily a result of higher 1996 levels of receivables.

Terms of certain borrowing agreements limit transfer of funds to Williams
Holdings from one of its subsidiaries. The restrictions have not impeded, nor
are they expected to impede in the future, Williams Holdings' ability to meet
its cash requirements.

During 1997, Williams Holdings expects to finance capital expenditures,
investments and working-capital requirements through cash generated from
operations, the use of the available portion of its bank-credit facility,
advances from its parent or debt offerings.

F-5
20

Operating Activities

Cash provided by operating activities was: 1996 -- $149 million;
1995 -- $77 million; and 1994 -- $294 million. The increase in receivables,
commodity trading assets and accounts payable is due primarily to increased
trading activities by Williams Energy Group's Merchant Services. The increase in
other assets and deferred charges is due primarily to the excess purchase price
allocated to intangibles for businesses acquired in 1996 by Williams
Communications Group. The decrease in accrued liabilities reflects the payment
to Williams of income taxes related to discontinued operations.

Financing Activities

Net cash provided (used) by financing activities was: 1996 -- $570 million;
1995 -- ($1.5) billion; and 1994 -- $428 million. Long-term debt proceeds, net
of principal payments, were $590 million during 1996. Long-term debt principal
payments, net of debt proceeds, were $221 million in 1995. Long-term debt
principal payments were $142 million in 1994. The increase in net new borrowings
during 1996 was primarily to fund capital expenditures, investments and
acquisitions of businesses.

During 1994, Williams Holdings purchased $395 million of Williams common
stock on the open market. Substantially all of the purchases were financed with
a $400 million short-term credit agreement. In January 1995, the outstanding
amounts under the credit agreement were repaid from the proceeds of the sale of
the network services operations, and the credit agreement was terminated.

Long-term debt at December 31, 1996, was $860 million, compared to $274
million at December 31, 1995, and $507 million at December 31, 1994. The
increase in long-term debt is due primarily to $350 million in additional
borrowings under the bank-credit facility and the issuance of $250 million of
debentures in 1996. The long-term debt to long-term debt-plus-equity ratio was
25.7 percent at year-end, compared to 11.3 percent and 22.6 percent at December
31, 1995 and 1994, respectively. The increase in this ratio reflects the
increase in borrowing levels.

Williams Holdings paid dividends to Williams of $19 million, $1 billion and
$336 million in 1996, 1995 and 1994, respectively, and received cash capital
contributions from Williams of $792 million and $73 million in 1995 and 1994,
respectively. The 1995 dividends were paid primarily from the proceeds from the
sale of the network services operations. The 1995 capital contributions were
made in connection with the merger of Transco Energy and were used to retire
and/or terminate various Transco Energy borrowings, preferred stock and
interest-rate swaps (see Note 2).

See Note 7 for information regarding early extinguishment of debt by one of
Williams Holdings' subsidiaries during 1994.

Investing Activities

Net cash provided (used) by investing activities was: 1996 -- ($703)
million; 1995 -- $1.4 billion; and 1994 -- ($718) million. Capital expenditures
in all years include the expansion of various gathering and processing
facilities. Capital expenditures in 1994 also included the expansion and
enhancement of Williams Holdings' network services operations network. Budgeted
capital expenditures and acquisitions for 1997 are approximately $1 billion,
primarily to expand gathering and processing facilities and the fiber-optic
network.

During 1996, Williams Holdings received proceeds of $23 million from the
sale of certain communications rights (see Note 5). During 1995, Williams
Holdings received proceeds of $124 million from the sale of its 15 percent
interest in Texasgulf Inc. and $46 million from the sale of its remaining
investment in Williams common stock (see Note 4). During 1994, Williams Holdings
received net proceeds of $80 million from the sale of limited partner common
units in Northern Border Partners, L.P. (see Note 5).

During 1996, Williams Holdings acquired various communications technology
businesses for a total of $165 million in cash. During 1995, in addition to the
Transco Energy acquisition (see Note 2), Williams Holdings 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

F-6
21

to a third party) and Pekin Energy Co., the nation's second largest ethanol
producer, for $167 million in cash. During 1995, Williams Holdings also
purchased the BOk Tower, an approximate 1.1 million square foot commercial
office building located in Tulsa, Oklahoma. The building serves as headquarters
for Williams and its subsidiaries, including Williams Holdings. Williams and
certain of its subsidiaries currently occupy approximately 51 percent of the
building, all of which had previously been leased from the seller under varying
terms and conditions. In connection with the $60 million purchase, Williams
Holdings assumed intercompany debt payable to its parent of an equal amount.

Effects of Inflation

Williams Holdings has experienced increased costs in recent years due to
the effects of inflation. However approximately 58 percent of Williams Holdings'
property, plant and equipment was acquired or constructed during the last six
years, a period of relatively low inflation.

Environmental

Williams Holdings is a participant in certain environmental activities in
various stages involving assessment studies, cleanup operations and/or remedial
processes. The sites are being monitored by Williams Holdings, other potentially
responsible parties, the U.S. Environmental Protection Agency (EPA), or other
governmental authorities in a coordinated effort. In addition, Williams Holdings
maintains an active monitoring program for its continued remediation and cleanup
of certain sites connected with its refined-products pipeline activities.
Williams Holdings 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 $18 million, all of which is accrued at December 31, 1996.
Williams Holdings 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.

F-7
22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PAGE
----

Report of Independent Auditors.............................. F-9

Consolidated Statement of Income............................ F-10

Consolidated Balance Sheet.................................. F-11

Consolidated Statement of Stockholder's Equity.............. F-12

Consolidated Statement of Cash Flows........................ F-13

Notes to Consolidated Financial Statements.................. F-14

Quarterly Financial Data (Unaudited)........................ F-34

F-8
23

REPORT OF INDEPENDENT AUDITORS

To The Board of Directors
Williams Holdings of Delaware, Inc.

We have audited the accompanying consolidated balance sheet of Williams
Holdings of Delaware, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Williams Holdings of Delaware, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

ERNST & YOUNG LLP

Tulsa, Oklahoma
February 10, 1997

F-9
24

WILLIAMS HOLDINGS OF DELAWARE, INC.

CONSOLIDATED STATEMENT OF INCOME

YEARS ENDED DECEMBER 31,
------------------------------
1996 1995* 1994*
-------- -------- --------
(MILLIONS)

Revenues (Note 15):
Williams Energy Group:
Field Services......................................... $ 494.8 $ 367.9 $ 289.8
Merchant Services (Note 14)............................ 261.1 153.5 381.7
Petroleum Services..................................... 493.3 328.1 216.9
Exploration and Production............................. 82.4 62.9 39.2
Williams Communications Group............................. 711.3 538.9 416.6
Other..................................................... 48.0 17.4 --
Intercompany eliminations (Note 16)....................... (249.6) (114.7) (79.9)
-------- -------- --------
Total revenues.................................... 1,841.3 1,354.0 1,264.3
-------- -------- --------
Profit-center costs and expenses (Note 15):
Costs and operating expenses.............................. 1,240.8 876.6 939.4
Selling, general and administrative expenses.............. 307.6 224.6 142.7
Other income -- net....................................... (19.3) (10.7) --
-------- -------- --------
Total profit-center costs and expenses............ 1,529.1 1,090.5 1,082.1
-------- -------- --------
Operating profit:
Williams Energy Group:
Field Services......................................... 159.4 143.4 105.8
Merchant Services...................................... 66.4 33.2 3.4
Petroleum Services..................................... 75.7 69.2 51.9
Exploration and Production............................. 2.8 (5.9) 13.6
Williams Communications Group............................. 6.6 25.0 7.6
Other..................................................... 1.3 (1.4) (.1)
-------- -------- --------
Total operating profit............................ 312.2 263.5 182.2
Allocated parent company expenses (Note 15)................. (18.8) (13.0) (20.0)
Interest accrued (Note 15).................................. (35.3) (40.9) (25.8)
Interest capitalized........................................ 3.5 9.8 4.7
Investing income (Notes 4 and 15)........................... 39.6 75.3 15.0
Gain on sales/exchange of assets -- net (Notes 4 and 5)..... 15.7 23.6 22.7
Write-off of project costs (Note 5)......................... -- (41.4) --
Other income (expense) -- net............................... (.3) (8.2) .3
-------- -------- --------
Income from continuing operations before income taxes....... 316.6 268.7 179.1
Provision for income taxes (Note 6)......................... 87.9 56.9 53.6
-------- -------- --------
Income from continuing operations........................... 228.7 211.8 125.5
Income from discontinued operations (Note 3)................ -- 1,018.8 94.0
-------- -------- --------
Income before extraordinary loss............................ 228.7 1,230.6 219.5
Extraordinary loss (Note 7)................................. -- -- (6.1)
-------- -------- --------
Net income.................................................. $ 228.7 $1,230.6 $ 213.4
======== ======== ========

- ---------------

* Certain amounts have been reclassified as described in Note 1.

See accompanying notes.

F-10
25

WILLIAMS HOLDINGS OF DELAWARE, INC.

CONSOLIDATED BALANCE SHEET

ASSETS

DECEMBER 31,
----------------------------
1996 1995
----------- -----------
(DOLLARS IN MILLIONS, EXCEPT
PER-SHARE AMOUNTS)

Current assets:
Cash and cash equivalents............. $ 44.4 $ 29.5
Receivables:
Trade less allowance of $8.8 ($10.3
in 1995).......................... 852.9 424.1
Affiliates (Note 15)............... 71.9 77.5
Inventories (Note 9).................. 101.0 97.6
Commodity trading assets (Note 14).... 147.2 66.8*
Deferred income taxes -- affiliates
(Note 6)........................... 66.7 128.0
Other................................. 69.4 51.7*
-------- --------
Total current assets.......... 1,353.5 875.2
Due from parent (Note 15)............... 151.4 246.8
Investments (Note 4).................... 743.3 599.1
Property, plant and equipment -- net
(Note 10)............................. 2,540.4 2,225.2
Non-current commodity trading assets
(Note 14)............................. 93.0 104.6*
Other assets and deferred charges....... 282.3 181.9*
-------- --------
Total assets.................. $5,163.9 $4,232.8
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable:
Trade (Note 11).................... $ 550.6 $ 253.0
Affiliates (Note 15)............... 53.4 128.6
Accrued liabilities (Note 11)......... 331.7 575.8*
Commodity trading liabilities (Note
14)................................ 137.9 87.2*
Long-term debt due within one year
(Note 12).......................... 19.7 14.2
-------- --------
Total current liabilities..... 1,093.3 1,058.8
Long-term debt (Note 12)................ 860.4 273.9
Deferred income taxes -- affiliates
(Note 6).............................. 395.9 328.7
Non-current commodity trading
liabilities (Note 14)................. 201.2 256.4*
Other liabilities....................... 130.3 163.4*
Contingent liabilities and commitments
(Note 17)
Stockholder's equity:
Common stock, $1 par value, 1,000
shares authorized and
outstanding........................ -- --
Capital in excess of par value........ 1,705.0 1,634.1
Retained earnings..................... 673.2 464.1
Net unrealized gain on non-current
marketable securities (Note 4)..... 104.6 53.4
-------- --------
Total stockholder's equity.... 2,482.8 2,151.6
-------- --------
Total liabilities and
stockholder's equity........ $5,163.9 $4,232.8
======== ========

- ---------------

* Reclassified to conform to current classifications.

See accompanying notes.

F-11
26

WILLIAMS HOLDINGS OF DELAWARE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY

CAPITAL IN NET
COMMON EXCESS OF RETAINED UNREALIZED
STOCK PAR VALUE EARNINGS GAIN (LOSS) TOTAL
------ ---------- --------- ----------- ---------
(MILLIONS)

Balance, December 31, 1993............. $-- $ 1,450.8 $ 367.2 $ -- $ 1,818.0
Net income -- 1994..................... -- -- 213.4 -- 213.4
Dividends --
Cash................................. -- -- (335.8) -- (335.8)
Other................................ -- -- (.5) -- (.5)
Contributions --
Cash................................. -- 73.4 -- -- 73.4
Other................................ -- 7.2 -- -- 7.2
Unrealized loss on non-current
marketable securities................ -- -- -- (35.8) (35.8)
--- --------- --------- ------ ---------
Balance, December 31, 1994............. -- 1,531.4 244.3 (35.8) 1,739.9
Net income -- 1995..................... -- -- 1,230.6 -- 1,230.6
Dividends --
Cash................................. -- -- (1,010.7) -- (1,010.7)
Other................................ -- -- (.1) -- (.1)
Acquisition of Transco Energy --
Cash contributions................... -- 791.9 -- -- 791.9
Noncash contributions................ -- 911.2 -- -- 911.2
Allocation of purchase price......... -- (1,608.1) -- -- (1,608.1)
Other noncash contributions............ -- 7.7 -- -- 7.7
Unrealized gain on non-current
marketable securities................ -- -- -- 89.2 89.2
--- --------- --------- ------ ---------
Balance, December 31, 1995............. -- 1,634.1 464.1 53.4 2,151.6
Net income -- 1996..................... -- -- 228.7 -- 228.7
Dividends --
Cash................................. -- -- (19.2) -- (19.2)
Other................................ -- -- (.4) -- (.4)
Noncash contributions.................. -- 70.9 -- -- 70.9
Unrealized gain on non-current
marketable securities................ -- -- -- 51.2 51.2
--- --------- --------- ------ ---------
Balance, December 31, 1996............. $-- $ 1,705.0 $ 673.2 $104.6 $ 2,482.8
=== ========= ========= ====== =========

See accompanying notes.

F-12
27

WILLIAMS HOLDINGS OF DELAWARE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- --------- -------
(MILLIONS)

OPERATING ACTIVITIES:
Net income............................ $ 228.7 $ 1,230.6 $ 213.4
Adjustments to reconcile to cash
provided from operations:
Discontinued operations............ -- (1,018.8) (94.0)
Extraordinary loss................. -- -- 6.1
Depreciation and depletion......... 128.6 94.3 80.0
Provision for deferred income
taxes............................ 83.9 121.5 15.4
Write-off of project costs......... -- 41.4 --
(Gain) loss on dispositions of
property, plant and equipment.... (27.5) (2.2) .6
Gain on sales/exchange of assets... (15.7) (23.6) (22.7)
Changes in receivables............. (297.6) (16.1) (72.3)
Changes in inventories............. (5.3) 10.4 (3.3)
Changes in other current assets.... (25.7) (30.8)* (14.9)*
Changes in accounts payable........ 282.1 (3.0) 22.1
Changes in accrued liabilities..... (75.8) (69.5)* (1.1)*
Changes in receivables/payables
with affiliates.................. (70.1) (188.1) .5
Changes in current commodity
trading assets and liabilities... (29.7) 28.1* (15.9)*
Changes in non-current commodity
trading assets and liabilities... (37.7) (82.1)* (2.4)
Other, including changes in
non-current assets and
liabilities...................... 10.4 (15.1) 13.5
------- --------- -------
Net cash provided by
continuing operations....... 148.6 77.0 125.0
Net cash provided by
discontinued operations..... -- -- 169.4
------- --------- -------
Net cash provided by operating
activities.................. 148.6 77.0 294.4
------- --------- -------
FINANCING ACTIVITIES:
Proceeds from notes payable........... 10.0 -- 398.2
Payments of notes payable............. (10.0) (398.2) --
Proceeds from long-term debt.......... 603.8 179.0 --
Payments of long-term debt............ (13.4) (399.7) (141.7)
Dividends paid to parent.............. (19.2) (1,010.7) (335.8)
Capital contributions from parent..... -- 791.9 73.4
Changes in parent company advances.... -- (474.8) 433.6
Subsidiary preferred stock
redemptions........................ -- (144.0) --
Other -- net.......................... (1.4) 3.8 --
------- --------- -------
Net cash provided (used) by
financing activities........ 569.8 (1,452.7) 427.7
------- --------- -------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures:
Continuing operations............ $(370.0) $ (375.2) $(223.5)
Discontinued operations.......... -- -- (142.8)
Proceeds from dispositions......... 47.6 19.1 3.3
Acquisition of businesses, net of cash
acquired........................... (164.9) (360.8) (56.5)
Proceeds from sales of businesses..... -- 2,588.3 --
Income tax and other payments related
to discontinued operations......... (270.5) (349.8) --
Purchase of investments/advances to
affiliates......................... (74.3) (48.3) (398.1)
Proceeds from sales of assets......... 23.0 171.2 80.6
Changes in advances to parent
company............................ 95.4 (257.8) --
Other -- net.......................... 10.2 .6 19.3
------- --------- -------
Net cash provided (used) by
investing activities........ (703.5) 1,387.3 (717.7)
------- --------- -------
Increase in cash and cash
equivalents................. 14.9 11.6 4.4
Cash and cash equivalents at beginning
of year............................... 29.5 17.9 13.5
------- --------- -------
Cash and cash equivalents at end of
year.................................. $ 44.4 $ 29.5 $ 17.9
======= ========= =======

- ---------------

* Reclassified to conform to current classifications.
See accompanying notes.

F-13
28

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations

Williams Holdings of Delaware, Inc.'s (Williams Holdings) operations are
located in the United States and are organized into two operating groups as
follows: Williams Energy Group, which is comprised of natural gas gathering and
processing facilities in the Rocky Mountain and midwest regions, energy
commodity trading and price-risk management activities throughout the United
States, a petroleum products pipeline in the midwest region, and hydrocarbon
exploration and production activities in the Rocky Mountain and Gulf Coast
regions; and Williams Communications Group, which includes Williams Holdings'
national data, voice, video and Internet communication products and network
integration services and fiber-optic and satellite multimedia transmission
services. Additional information about these businesses is contained throughout
the following notes.

Organization and basis of presentation

Williams Holdings is a wholly owned subsidiary of The Williams Companies,
Inc. (Williams). Williams has made capital contributions based on historical
carrying amounts to Williams Holdings of its ownership interests in all
subsidiaries, excluding its interstate natural gas pipelines and related
subsidiaries, effective April 1, 1995. The consolidated financial statements of
Williams Holdings include the subsidiaries contributed by Williams for all
periods presented.

Williams Energy Group is comprised of four units. Field Services includes
Williams Holdings' natural gas gathering and processing activities previously
reported in Williams Field Services Group. Merchant Services includes Williams
Holdings' energy commodity trading and price-risk management activities
previously reported in Williams Energy Services. Certain natural gas and natural
gas liquids marketing operations formerly reported in Williams Field Services
Group are also included in Merchant Services. Petroleum Services includes
Williams Holdings' interstate petroleum products pipeline, ethanol-producing
facilities and petroleum terminals previously reported in Williams Pipe Line.
Exploration and Production includes exploration for and production of
hydrocarbons previously reported as a component of Williams Field Services
Group. Williams Communications Group is the combination of WilTel and WilTech
Group, previously reported separately. Revenues and operating profit amounts for
1995 and 1994 have been reclassified to conform to current year classifications.

On January 18, 1995, Williams acquired 60 percent of Transco Energy
Company's (Transco Energy) outstanding common stock and on May 1, 1995, acquired
the remaining 40 percent of Transco Energy's outstanding common stock (see Note
2). On May 1, 1995, Transco Energy dividended to Williams all of Transco
Energy's interests in two Transco Energy subsidiaries, Transcontinental Gas Pipe
Line Corporation and Texas Gas Transmission Corporation. Also effective May 1,
1995, Williams made a capital contribution of its interest in Transco Energy and
Transco Energy's subsidiaries, except Transcontinental Gas Pipe Line and Texas
Gas, to Williams Holdings. Revenues and operating profit amounts include the
operating results of the Transco Energy entities contributed to Williams
Holdings since the January 18, 1995, acquisition (see Note 2). Transco Energy's
gas gathering operations (except those related operations of Transcontinental
Gas Pipe Line and Texas Gas) are included as part of Field Services, and its gas
marketing operations are included in Merchant Services.

Principles of consolidation

The consolidated financial statements include the accounts of Williams
Holdings and its majority-owned subsidiaries. Companies in which Williams
Holdings 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.

F-14
29

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Certain Williams Holdings 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.

Inventory valuation

Inventories are stated at cost, which is not in excess of market, except
for those held by Merchant Services which are primarily stated at market. Except
for Merchant Services, inventories of natural gas and petroleum products are
determined using the average-cost method. The cost of materials and supplies
inventories is determined using the first-in, first-out method (FIFO) by
Williams Communications Group and principally using the average-cost method by
other subsidiaries.

Investments

Williams Holdings' investment in subordinated debentures of Williams is
classified as "available for sale" and is recorded at current market value with
unrealized gains and losses reported net of income taxes as a component of
stockholder's equity. Average cost is used to determine realized gains and
losses. Williams Holdings' investment in Williams warrants is recorded at cost
since the fair value of this equity security is not readily determinable.

Property, plant and equipment

Property, plant and equipment is recorded at cost. Depreciation 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
Petroleum Services' regulated pipelines are credited or charged to accumulated
depreciation; other gains or losses are recorded in net income.

Revenue recognition

Revenues generally are recorded when services have been performed or
products have been delivered. Petroleum Services bills customers when products
are shipped and defers the estimated revenues for shipments in transit.

Commodity price-risk management activities

Merchant Services has trading operations that enter into energy-related
financial instruments (forward contracts, futures contracts, option contracts
and swap agreements) to provide price-risk management services

F-15
30

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to its third-party customers. This operation 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 commodity trading assets and commodity trading liabilities in the
Consolidated Balance Sheet. The 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. Merchant Services reports its trading operations'
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.

Certain Merchant Services' natural gas, natural gas liquids and refined
product marketing revenues previously reported in Williams Field Services Group
and/or Williams Pipe Line were not included in trading operations and therefore
are not reported net of related costs to purchase such items.

Other Williams Holdings 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 regularly 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 Holdings capitalizes interest on major projects during
construction. Interest is capitalized on borrowed funds at rates that
approximate the average interest rate on related debt.

Income taxes

Williams Holdings and subsidiaries are included in Williams' consolidated
federal income tax return. The provision for income taxes is computed on a
separate company basis for Williams Holdings. Payments are made under the same
timing and minimum amount requirements as if the payments were being made
directly to the taxing authorities. 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 Holdings' assets and liabilities.

Related party transactions

Williams charges its subsidiaries, including Williams Holdings'
subsidiaries, for certain corporate general and administrative expenses which
are directly identifiable or allocable to the subsidiaries and other general
corporate expenses utilizing a combination of revenues, property at cost and
payroll for the allocation base. Williams Holdings, as a separate corporate
entity, does not receive such an allocation because it has no revenues, property
or employees. Management believes that the method used for these allocations is
reasonable.

NOTE 2 -- TRANSCO ENERGY ACQUISITION

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 15.6 million shares of Williams common stock
valued at $334 million. The acquisition was accounted for as a purchase. The
results of operations of the Transco Energy entities

F-16
31

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contributed to Williams Holdings beginning January 18, 1995, were included 100
percent in Williams Holdings' Consolidated Statement of Income due to the losses
from these entities. An allocation of the purchase price was assigned to the
assets and liabilities of the Transco Energy entities contributed to Williams
Holdings based on their estimated fair values.

The Transco Energy entities contributed to Williams Holdings are engaged
primarily in the natural gas gathering and marketing businesses. Williams
Holdings 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 the gain from the ultimate dispositions are reflected in the
purchase price and are not material.

Williams made cash contributions during 1995 of approximately $792 million
to Transco Energy primarily to retire and/or terminate certain Transco Energy
borrowings, $4.75 preferred stock and interest-rate swaps, to advance funds to
Transcontinental Gas Pipe Line and Texas Gas for the termination of sale of
receivables facilities and to assume all amounts payable by Transco Energy to
Transcontinental Gas Pipe Line and Texas Gas. Effective with the May 1, 1995,
merger, Transco Energy's $3.50 cumulative convertible preferred stock was
exchanged for Williams' $3.50 cumulative convertible preferred stock, and
Williams assumed all Transco Energy external debt, except Transcontinental Gas
Pipe Line and Texas Gas debt. These noncash transactions totaled approximately
$911 million and were capital contributions by Williams to Williams Holdings.

The following unaudited pro forma information combines the results of
operations of Williams Holdings and the Transco Energy entities contributed to
Williams Holdings as if the purchase occurred on January 1, 1994.

1995 1994
-------- --------
(MILLIONS)
UNAUDITED

Revenues.................................................... $1,358.0 $1,089.7
Income from continuing operations........................... 240.8 104.5
Income before extraordinary loss............................ 1,259.6 198.5
Net income.................................................. 1,259.6 192.4

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.

NOTE 3 -- DISCONTINUED OPERATIONS

On January 5, 1995, Williams Holdings sold its network services operations
to LDDS Communications, Inc. 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. Operating results for 1994 for
the network services operations are reported as discontinued operations. Under
the terms of the agreement, Williams Holdings retained Williams
Telecommunications Systems, Inc., a national telecommunications equipment
supplier and service company, and Vyvx, Inc., which operates a national video
network specializing in broadcast television applications and satellite
transmission. These operations are included in Williams Communications Group.

F-17
32

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized operating results of discontinued operations for 1994 were as
follows:

(MILLIONS)
----------

Revenues.................................................... $921.8
Operating profit............................................ 163.1
Provision for income taxes.................................. 60.9
Income from discontinued operations......................... 94.0

NOTE 4 -- INVESTING ACTIVITIES

1996 1995
------ ------
(MILLIONS)

Investments:
Williams debentures....................................... $534.5 $449.0
Williams warrants......................................... 25.4 25.4
Equity.................................................... 100.4 84.1
Cost...................................................... 83.0 40.6
------ ------
$743.3 $599.1
====== ======

In April 1995, Williams Holdings exchanged 18.3 million shares of Williams
common stock with a market value at exchange date of $385 million and a cost
basis of $360 million for Williams convertible debentures and warrants having a
total fair value of $385 million at the time of the exchange. The exchange
resulted in the recognition of a pre-tax gain of $25.4 million. The convertible
debentures, with a face value of $360 million, bear interest at 6 percent,
mature in 2005 and are convertible into approximately 14 million shares of
Williams common stock at $25.72 per share. The warrants give Williams Holdings
the right to purchase approximately 11.3 million shares of Williams common stock
at $31.11 per share and were recorded at appraised value of $25 million. The
warrants are exercisable immediately and mature five years from date of
issuance. In October 1995, Williams Holdings sold its remaining investment in
Williams common stock for $46.2 million in cash resulting in a pre-tax gain of
approximately $11 million.

During 1996, Williams board of directors declared a three-for-two common
stock split, effective December 30, 1996. References in the preceding paragraph
to Williams common stock have been restated to reflect the effect of the stock
split.

At December 31, 1996, certain equity investments, with a carrying value of
$36 million, have a market value of $126 million.

Investing income from continuing operations (see Note 15):

1996 1995 1994
----- ----- -----
(MILLIONS)

Interest.................................................... $33.8 $46.1 $ 1.0
Dividends................................................... 1.6 20.8 6.6
Equity earnings............................................. 4.2 8.4 7.4
----- ----- -----
$39.6 $75.3 $15.0
===== ===== =====

Dividends and distributions received from companies carried on an equity
basis were $7 million in 1996 and $11 million in 1995 and 1994.

F-18
33

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- ASSET SALES AND WRITE-OFF OF PROJECT COSTS

In the fourth quarter of 1996, Williams Holdings recognized a pre-tax gain
of $15.7 million from the sale of certain communication rights for approximately
$38 million.

In 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 approximately $3
million remains to be incurred over a five-year period. Williams Holdings
continues to 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 1995, Williams Holdings 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.

In 1994, 3,461,500 limited partner common units were sold 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 Holdings' original 12.25 percent interest in Northern Border
partnerships has been reduced to 3.2 percent.

NOTE 6 -- PROVISION FOR INCOME TAXES

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

1996 1995 1994
----- ------ -----
(MILLIONS)

Current:
Federal............................... $ 8.5 $(49.4) $28.9
State................................. (4.5) (15.2) 9.3
----- ------ -----
4.0 (64.6) 38.2
----- ------ -----
Deferred:
Federal............................... 85.8 96.4 14.0
State................................. (1.9) 25.1 1.4
----- ------ -----
83.9 121.5 15.4
----- ------ -----
Total provision............... $87.9 $ 56.9 $53.6
===== ====== =====

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

1996 1995 1994
------ ------ ------
(MILLIONS)

Provision at statutory rate............. $110.8 $ 94.0 $ 62.7
Increases (reductions) in taxes
resulting from:
State income taxes.................... (4.2) 10.6 6.9
Income tax credits.................... (19.0) (18.7) (14.3)
Decrease in valuation allowance for
deferred tax assets................ -- (29.8) --
Other -- net.......................... .3 .8 (1.7)
------ ------ ------
Provision for income taxes.............. $ 87.9 $ 56.9 $ 53.6
====== ====== ======

F-19
34

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

1996 1995
------ ------
(MILLIONS)

Deferred tax liabilities:
Property, plant and equipment............................. $473.3 $393.8
Investments............................................... 75.4 76.2
Commodity trading assets.................................. 60.8 78.1*
Other..................................................... 54.2 75.3*
------ ------
Total deferred tax liabilities.................... 663.7 623.4
------ ------
Deferred tax assets:
Deferred revenues......................................... 18.6 19.6
Investments............................................... 29.8 30.3
Accrued liabilities....................................... 62.9 97.0
Commodity trading liabilities............................. 73.5 108.1*
Minimum tax credits....................................... 117.4 93.9
Other..................................................... 32.3 73.8*
------ ------
Total deferred tax assets......................... 334.5 422.7
------ ------
Net deferred tax liabilities................................ $329.2 $200.7
====== ======

- ---------------

* Reclassified to conform to current classifications.

A valuation allowance for deferred tax assets decreased $23.4 million
during 1995.

Cash payments to Williams and certain state taxing authorities for income
taxes (net of refunds) were $294 million, $336 million, and $102 million in
1996, 1995 and 1994, respectively.

NOTE 7 -- EXTRAORDINARY LOSS

The extraordinary loss in 1994 resulted from early extinguishment of debt.
A subsidiary of Williams Holdings paid approximately $137 million to redeem
higher interest rate debt for a $6.1 million net loss (net of a $3.9 million
benefit for income taxes).

NOTE 8 -- EMPLOYEE BENEFIT PLANS

Pensions

Williams Holdings is included in Williams' non-contributory defined-benefit
pension plans covering the majority of employees. Williams Pipe Line and Pekin
Energy have separate plans for their union employees. At December 31, 1995,
Pekin Energy also had a separate plan for its salaried employees. That plan was
merged into one of the Williams' plans during 1996. 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.

Net pension expense related to Williams Holdings' participation in the
Williams' plan was as follows:

1996 1995 1994
----- ---- ----
(MILLIONS)

Continuing operations....................................... $19.3 $5.1 $1.3
Discontinued operations..................................... -- -- 4.6
----- ---- ----
$19.3 $5.1 $5.9
===== ==== ====

F-20
35

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net pension expense increased in 1996 from 1995 as a result of a decrease
in the discount rate from 8 1/2 percent to 7 1/4 percent and an increase in the
number of plan participants and a $2.5 million settlement loss in 1996.

Net pension expense for the Williams Pipe Line and Pekin Energy plans
consists of the following:

1996 1995 1994
----- ----- -----
(MILLIONS)

Service cost for benefits earned during the year............ $ .7 $ .6 $ .5
Interest cost on projected benefit obligation............... 1.5 1.6 1.1
Actual return on plan assets................................ (3.1) (3.8) .7
Amortization and deferrals.................................. 1.3 1.8 (2.2)
----- ----- -----
Net pension expense......................................... $ .4 $ .2 $ .1
===== ===== =====

The following table presents the funded status of the Williams Pipe Line
and Pekin Energy plans:

1996 1995
----- -----
(MILLIONS)

Actuarial present value of benefit obligations:
Vested benefits........................................... $15.8 $18.2
Non-vested benefits....................................... 1.2 .3
----- -----
Accumulated benefit obligations........................... 17.0 18.5
Effect of projected salary increases...................... 3.6 7.4
----- -----
Projected benefit obligations............................. 20.6 25.9
Assets at market value...................................... 22.4 22.7
----- -----
Assets less than (in excess of) projected benefit
obligations............................................... (1.8) 3.2
Unrecognized net loss....................................... (2.1) (3.9)
Unrecognized prior-service cost............................. (.7) (3.2)
Unrecognized transition asset............................... .7 .8
----- -----
Pension asset............................................... $(3.9) $(3.1)
===== =====

The discount rate used to measure the present value of benefit obligations
is 7 1/2 percent (7 1/4 percent in 1995); the assumed rate of increase in future
compensation levels is 5 percent; and the expected long-term rate of return on
assets is 10 percent. Plan assets consist primarily of commingled funds and
assets held in a master trust. The master trust is comprised primarily of
domestic and foreign common and preferred stocks, United States government
securities, corporate bonds and commercial paper.

Williams has retained all liabilities and obligations for service of its
network services operations' plan participants up to the date of sale (see Note
3).

Postretirement benefits other than pensions

Williams Holdings is included in Williams' health care plan that provides
postretirement medical benefits to retired employees who were employed full
time, hired prior to January 1, 1992 (January 1, 1996, for Transco Energy
employees) and have met certain other requirements.

F-21
36

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net postretirement benefit expense related to Williams Holdings'
participation in the Williams' plan was as follows:

1996 1995 1994
---- ---- ----
(MILLIONS)

Continuing operations....................................... $7.8 $5.7 $5.5
Discontinued operations..................................... -- -- 1.6
---- ---- ----
$7.8 $5.7 $7.1
==== ==== ====

Other

Williams Holdings is included in Williams defined-contribution plans
covering substantially all employees. Williams Holdings' contributions are
invested primarily in Williams common stock and are based on employees'
compensation and, in part, match employee contributions. Williams Holdings'
contributions to these plans were $12 million in 1996, $9 million in 1995 and
$10 million in 1994. Contributions to these plans made by discontinued
operations were $3 million in 1994.

During November 1994, Williams Holdings entered into a deferred share
agreement (the Agreement) in connection with the sale of its network services
operations. Under the terms of the Agreement, Williams has approximately 1.6
million shares of Williams common stock remaining to be distributed to key
employees of the network services operations over various periods through 2002,
less amounts necessary to meet minimum tax withholding requirements. The
associated liability has been recorded by Williams Holdings. Williams
distributed 637,361, 471,608 and 409,643 shares during 1996, 1995 and 1994,
respectively.

NOTE 9 -- INVENTORIES

1996 1995*
------ -----
(MILLIONS)

Natural gas in underground storage:
Merchant Services......................................... $ 1.5 $ 6.0
Other..................................................... -- 1.1
Petroleum products:
Merchant Services......................................... 12.7 16.5
Other..................................................... 33.7 23.7
Materials and supplies:
Williams Communications Group............................. 32.7 28.2
Other..................................................... 14.5 18.9
Other....................................................... 5.9 3.2
------ -----
$101.0 $97.6
====== =====

- ---------------

* Certain amounts have been reclassified as described in Note 1.

F-22
37

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT

1996 1995*
-------- --------
(MILLIONS)

Cost:
Williams Energy Group:
Field Services......................................... $1,545.4 $1,336.2
Merchant Services...................................... 5.4 4.3
Petroleum Services..................................... 1,073.1 1,023.3
Exploration and Production............................. 255.1 225.0
Williams Communications Group............................. 257.3 145.9
Other..................................................... 114.7 103.5
-------- --------
3,251.0 2,838.2
Accumulated depreciation and depletion...................... (710.6) (613.0)
-------- --------
$2,540.4 $2,225.2
======== ========

- ---------------

* Certain amounts have been reclassified as described in Note 1.

Commitments for construction and acquisition of property, plant and
equipment are approximately $187 million at December 31, 1996.

Effective January 1, 1996, Williams Holdings adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Adoption of the standard
had no effect on Williams Holdings' financial position or results of operations.

NOTE 11 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Under Williams' cash-management system, certain subsidiaries' cash accounts
reflect credit balances to the extent checks written have not been presented for
payment. The amounts of these credit balances included in accounts payable are
$69 million at December 31, 1996, and $54 million at December 31, 1995.

1996 1995
------ ------
(MILLIONS)

Accrued liabilities:
Employee costs............................................ $ 67.0 $ 47.4
State income taxes payable................................ 34.0 78.3
Deferred revenue.......................................... 32.6 34.4
Taxes other than income taxes............................. 24.2 23.0
Transportation and exchange gas payable................... 21.2 28.7
Federal income taxes payable-affiliate.................... -- 236.7
Other..................................................... 152.7 127.3*
------ ------
$331.7 $575.8
====== ======

- ---------------

* Reclassified to conform to current classifications.

F-23
38

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- DEBT, LEASES AND BANKING ARRANGEMENTS

Debt

WEIGHTED
AVERAGE DECEMBER 31,
INTEREST ----------------
RATE* 1996 1995
-------- ------ ------
(MILLIONS)

Williams Holdings of Delaware, Inc.
Revolving credit loans.................................... 6.0% $500.0 $150.0
Debentures, 6.25%, payable 2006........................... 4.7 248.8 --
Williams Pipe Line
Notes, 8.95% and 9.78%, payable through 2001.............. 9.4 100.0 110.0
Williams Energy Ventures
Adjustable rate notes, payable through 2002............... 8.1 25.6 21.0
Other, payable through 1999................................. 7.7 5.7 7.1
------ ------
880.1 288.1
Current portion of long-term debt........................... (19.7) (14.2)
------ ------
$860.4 $273.9
====== ======

- ---------------

* At December 31, 1996, including the effects of interest-rate swap.

Williams Holdings and Williams Pipe Line participate in Williams' $1
billion credit agreement. Williams Holdings' and Williams Pipe Line's maximum
borrowing availability, subject to borrowings by other affiliated companies, is
$600 million and $100 million, respectively. Interest rates vary with current
market conditions. The available amount at December 31, 1996, is $200 million,
which may be used for refinancing of current debt obligations by Williams or
other affiliated companies until such time as additional long-term obligations
are issued.

In January 1996, Williams Holdings issued $250 million of 6.25 percent
debentures due 2006. In April 1996, Williams Holdings entered into an
interest-rate swap agreement, which effectively converted its 6.25 percent
fixed-rate debentures to floating-rate debt (4.66 percent at December 31, 1996).
The difference between the fixed and variable rate is included in interest
expense.

Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments, for each of the next five years are as follows:

(MILLIONS)
----------

1997...................................................... $ 19
1998...................................................... 15
1999...................................................... 14
2000...................................................... 64
2001...................................................... 514

Cash payments for interest (net of amounts capitalized) related to
continuing operations are as follows: 1996 -- $34 million; 1995 -- $51 million
and 1994 -- $28 million, including payments to Williams of $7 million, $25
million and $17 million, respectively. Cash payments for interest (net of
amounts capitalized) related to discontinued operations were $9 million in 1994,
which included payments to Williams of $3 million.

Leases

Future minimum annual rentals under non-cancelable operating leases related
to continuing operations (including a total of $17 million to affiliates) are
$28 million in 1997, $22 million in 1998, $17 million in 1999, $11 million in
2000, $9 million in 2001 and $18 million thereafter.

F-24
39

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total rent expense from continuing operations was $51 million in 1996, $39
million in 1995 and $16 million in 1994, including $2 million in 1996 and $4
million in 1995 and 1994 paid to Williams and affiliates. Total rent expense
from discontinued operations was $72 million in 1994, which included $2 million
paid to Williams.

NOTE 13 -- STOCK-BASED COMPENSATION

Williams has several plans providing for common stock-based awards to its
employees and employees of its subsidiaries. The plans permit the granting of
various types of awards including, but not limited to, stock options, stock
appreciation rights, restricted stock and deferred stock. The purchase price per
share for stock options may not be less than the market price of the underlying
stock on the date of grant. Stock options generally become exercisable after
five years, subject to accelerated vesting if certain future stock prices are
achieved. Stock options expire ten years after grant.

Williams' employee stock-based awards are accounted for under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Williams' fixed plan common stock options do not result
in compensation expense, because the exercise price of the stock options equals
the market price of the underlying stock on the date of grant.

Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," requires that companies who continue to apply APB Opinion No. 25
disclose pro forma net income assuming that the fair-value method in FAS No. 123
had been applied in measuring compensation cost. Pro forma net income for
Williams Holdings, beginning with 1995 employee stock-based awards, was $227.5
million and $1,225.2 million for 1996 and 1995, respectively. Reported net
income was $228.7 million and $1,230.6 million for 1996 and 1995, respectively.
Pro forma amounts for 1995 reflect total compensation expense from the awards
made in 1995 as these awards fully vested as a result of the accelerated vesting
provisions. Pro forma amounts for 1996 reflect compensation expense that may not
be representative of future years' amounts because the compensation expense from
stock options is recognized over the future years' vesting period, and
additional awards generally are made each year.

Stock options granted to employees of Williams Holdings in 1996 were
2,108,582 shares at a weighted average grant date fair value of $7.84. At
December 31, 1996, stock options outstanding and options exercisable for
employees of Williams Holdings were 4,754,796 and 2,480,998, respectively.

NOTE 14 -- FINANCIAL INSTRUMENTS

Fair-value methods

The following methods and assumptions were used by Williams Holdings in
estimating its fair-value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the
balance sheet approximate fair value due to the short-term maturity of
these instruments.

Notes receivable: For those notes with interest rates approximating
market or maturities of less than three years, fair value is estimated to
approximate historically recorded amounts. For those notes with maturities
beyond three years and fixed interest rates, fair value is calculated using
discounted cash flow analysis based on current market rates.

Due from parent: The amounts bear interest at rates approximating
market; therefore, fair value is estimated to approximate historically
recorded amounts.

F-25
40

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Investment in Williams debentures: The fair value of Williams
Holdings' investment is based on the prices of similar securities with
similar terms and credit ratings. Williams Holdings used the expertise of
an outside investment banking firm to estimate fair value.

Investment in Williams warrants: The fair value of Williams Holdings'
investment is based on standard option pricing techniques. Williams
Holdings used the expertise of an outside investment banking firm to
estimate fair value.

Investments-cost: Fair value is estimated to approximate historically
recorded amounts as the operations underlying these investments are in
their initial phases.

Long-term debt: The fair value of Williams Holdings' long-term debt is
valued using indicative year-end traded bond market prices for the publicly
traded issue, while private debt is valued based on the prices of similar
securities with similar terms and credit ratings. At December 31, 1996, 27
percent of Williams Holdings' long-term debt was publicly traded. Williams
Holdings used the expertise of an outside investment banking firm to
estimate the fair value of long-term debt.

Interest-rate swap: Fair value is determined by discounting estimated
future cash flows using forward interest rates implied by the year-end
yield curve. Fair value was calculated by the financial institution that is
the counterparty to the swap.

Energy-related trading and hedging: Includes forwards, futures,
options, swaps and purchase and sales commitments. Fair value reflects
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.

Carrying amounts and fair values of Williams Holdings' financial instruments

1996 1995*
ASSET (LIABILITY) ------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(MILLIONS)

Cash and cash equivalents............................... $ 44.4 $ 44.4 $ 29.5 $ 29.5
Notes receivable........................................ 22.0 22.0 13.5 13.5
Due from parent......................................... 151.4 151.4 246.8 246.8
Investment in Williams debentures....................... 534.5 534.5 449.0 449.0
Investment in Williams warrants......................... 25.4 123.7 25.4 56.2
Investments-costs....................................... 69.5 69.5 27.1 27.1
Long-term debt, including current portion............... (878.8) (874.7) (287.2) (297.4)
Interest-rate swap...................................... 1.6 (1.8) -- --
Energy-related trading:
Assets................................................ 253.6 253.6 171.4 171.4
Liabilities........................................... (339.1) (339.1) (343.6) (343.6)
Energy-related hedging:
Assets................................................ .9 11.2 -- 1.7
Liabilities........................................... (1.3) (12.2) -- (2.6)

- ---------------

* Reclassified to conform to current classifications.

The above asset and liability amounts for energy-related hedging represent
unrealized gains or losses and do not include the related deferred amounts.

F-26
41

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The 1996 average fair value of the energy-related trading assets and
liabilities is $196 million and $322 million, respectively. The 1995 average
fair value of the energy-related trading assets and liabilities is $97 million
and $181 million, respectively.

Off-balance-sheet credit and market risk

Williams Holdings is a participant in the following transactions and
arrangements that involve financial instruments that have off-balance-sheet risk
of accounting loss. It is not practicable to estimate the fair value of these
off-balance-sheet financial instruments because of their unusual nature and
unique characteristics.

In January, 1997, Williams Holdings sold certain receivables under a new
revolving receivables facility with a limit of $200 million. Williams Holdings
received $200 million of proceeds from the sale. The Financial Accounting
Standards Board has issued a new accounting standard, FAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," effective for transactions occurring after December 31, 1996. The
adoption of this standard is not expected to impact Williams Holdings'
consolidated results of operations, financial position or cash flows.

In connection with the sale of units in the Williams Coal Seam Gas Royalty
Trust (Trust), Williams Holdings indemnified the Trust against losses from
certain litigation (see Note 16) and guaranteed minimum gas prices through 1997.
At December 31, 1996 and 1995, Williams Holdings has a recorded liability of $5
million and $10 million, respectively, for these items, representing the maximum
amount for the first guarantee and an estimate of the gas price exposure based
on historical operating trends and an assessment of market conditions. While
Williams Holdings' maximum exposure from this guarantee exceeds amounts accrued,
it is not possible to determine such amount because it is dependent on future
events.

In connection with the sale of the network services operations, Williams
has been indemnified by LDDS against any losses related to retained guarantees
of $158 million and $180 million at December 31, 1996 and 1995, respectively,
for lease rental obligations. LDDS has advised that it is negotiating with the
guaranteed parties to remove Williams as guarantor. Williams Holdings could be
impacted if Williams has to perform under the guarantee.

Williams Holdings has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $7 million and $5 million at
December 31, 1996 and 1995, respectively. Williams Holdings believes it will not
have to perform under these agreements because the likelihood of default by the
primary party is remote and/or because of certain indemnifications received from
other third parties.

Commodity price-risk management services

Merchant Services provides price-risk management services associated with
the energy industry to its customers. These services are provided through a
variety of financial instruments, including forward contracts, futures
contracts, option contracts, swap agreements and purchase and sale commitments.
See Note 1 for a description of the accounting for these trading activities.

Merchant Services enters into forward contracts and purchase and sale
commitments which involve physical delivery of an energy commodity. Prices under
these contracts are both fixed and variable. Swap agreements call for Merchant
Services to make payments to (or receive payments from) counterparties based
upon the differential between a fixed and variable price or variable prices for
different locations. The variable prices are generally based on either industry
pricing publications or exchange quotations. Merchant Services buys and sells
option contracts which give the buyer the right to exercise the options and
receive the difference between a predetermined strike price and a market price
at the date of exercise. The market prices used for natural-gas-related option
contracts are generally exchange quotations. Merchant Services also enters into
futures contracts which are commitments to either purchase or sell a commodity
at a future date for a

F-27
42

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

specified price and are generally settled in cash, but may be settled through
delivery of the underlying commodity. The market prices for futures contracts
are based on exchange quotations.

Merchant Services manages risk from financial instruments by making various
logistical commitments and manages profit margins through offsetting financial
instruments. As a result, price movements can result in losses on certain
contracts offset by gains on others.

Merchant Services takes an active role in managing and controlling market
and counterparty risks and has established formal control procedures which are
reviewed on an ongoing basis. Merchant Services attempts to minimize credit-risk
exposure to trading counterparties and brokers through formal credit policies
and monitoring procedures. In the normal course of business, collateral is not
required for financial instruments with credit risk.

The notional quantities for trading financial instruments at December 31,
1996, and December 31, 1995, are as follows:

1996 1995
------------------- --------------------
PAYOR RECEIVER PAYOR RECEIVER
------- -------- -------- --------

Fixed price:
Natural gas (TBtu)....................... 1,066.6 1,196.8 873.2 847.3
Refined products and crude (MMBbls)...... 34.4 26.3 15.9 14.9
Variable price:
Natural gas (TBtu)....................... 1,584.9 1,123.8 1,841.2 1,517.2
Refined products and crude (MMBbls)...... 3.7 3.3 2.8 2.5

The net cash flow requirement related to these contracts at December 31,
1996 and 1995, was $117 million and $215 million, respectively. At December 31,
1996, the cash flows requirements extended primarily through 2006.

In 1995, certain gas marketing operations of Merchant Services, along with
gas marketing operations from Transco Energy, were combined with the commodity
price-risk management and trading activities of Merchant Services. Such
combination in 1995 involves managing the price and other business risks and
opportunities of such physical gas-trading activities and any related financial
instruments previously accounted for as hedges in common-risk portfolios with
Merchant Services, other financial instruments. These former marketing
activities, consisting of buying and selling natural gas, through 1994 were
reported on a "gross" basis in the Consolidated Statement of Income as revenues
and profit-center costs. Concurrent with completing the combination of such
activities with the commodity price-risk management operations in the third
quarter of 1995, the related contract rights and obligations along with any
related financial instruments previously accounted for as hedges, were recorded
in the Consolidated Balance Sheet on a current-market-value basis and the
related income statement presentation was changed to a net basis. Such revenues
reported on a gross basis through the first two quarters of 1995 were
reclassified to a net basis concurrent with this change in the third quarter of
1995. Following is a Summary of Merchant Services' revenues:

1996 1995 1994
------ ------- ------

Financial instrument and physical trading market
gains -- net.......................................... $ 99.2 $ 65.8 $ 14.2
Gross marketing revenues................................ -- 460.8* 249.2
Gross marketing cost.................................... -- (442.3)* --
Marketing activities not included in trading
operations............................................ 161.9 67.7 118.0
Other................................................... -- 1.5 .3
------ ------- ------
$261.1 $ 153.5 $381.7
====== ======= ======

- ---------------

* Through June 30, 1995.

F-28
43

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Concentration of credit risk

Williams Holdings' cash equivalents consist of high quality securities
placed with various major financial institutions with high credit ratings.
Williams Holdings' investment policy limits its credit exposure to any one
financial institution.

At December 31, 1996 and 1995, approximately 27 percent and 36 percent,
respectively, of receivables are for telecommunications and related services;
approximately 64 percent and 50 percent, respectively, of receivables are for
the sale of natural gas and related products or services; and approximately 7
percent and 9 percent, respectively, of receivables are for petroleum products
and related services. Natural gas customers include pipelines, distribution
companies, producers, gas marketers and industrial users primarily located in
the eastern, northwestern and midwestern United States. Telecommunications
customers include numerous corporations. Petroleum products customers include
refiners and marketers primarily in the central United States. As a general
policy, collateral is not required for receivables, but customers' financial
condition and credit worthiness are evaluated regularly.

NOTE 15 -- RELATED PARTY TRANSACTIONS

Williams charges its subsidiaries, including Williams Holdings'
subsidiaries, for certain corporate general and administrative expenses, which
are directly identifiable or allocable to the subsidiaries and for other general
corporate expenses utilizing a combination of revenues, property at cost and
payroll for the allocation base. Details of such charges for continuing
operations are as follows:

1996 1995 1994
----- ----- -----
(MILLIONS)

Direct costs................................................ $21.2 $16.6 $11.2
Allocated parent company expenses........................... 18.8 13.0 20.0

The direct costs above are reflected in selling, general and administrative
expenses.

Direct costs charged to discontinued operations were $7 million for 1994.

Williams Holdings and its subsidiaries maintain promissory notes with
Williams for both advances from and advances to Williams depending on the cash
position of each subsidiary. Amounts outstanding are payable on demand, however,
any amounts outstanding have been classified as long-term inasmuch as there has
been no expectation for Williams or the subsidiaries to demand payment in the
next year. The agreements do not require commitment fees. Interest is payable
monthly and rates vary with market conditions. The interest rates were 5.73
percent and 6.39 percent at December 31, 1996 and 1995, respectively.

Investing income includes $31 million and $43 million for 1996 and 1995,
respectively, resulting from advances to affiliates, while interest accrued
includes $3 million and $8 million for 1995 and 1994, respectively, resulting
from advances from affiliates.

Investing income also includes dividends received on the investment in
Williams common stock of $5 million and $2 million in 1995 and 1994,
respectively.

Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Northwest Pipeline, Williams Natural Gas, Transcontinental
Gas Pipe Line and Texas Gas. Revenues include $505 million, $145 million and $4
million for 1996, 1995 and 1994, respectively, of transactions with affiliates,
primarily trading operations sales of natural gas. Costs and operating expenses
include $162 million, $196 million and $18 million for 1996, 1995 and 1994,
respectively, of transactions with affiliates, primarily

F-29
44

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transportation costs. In connection with Merchant Services, commodity price-risk
management activities, $157 million and $194 million of these costs for 1996 and
1995, respectively, are included in revenues consistent with a "net" basis of
reporting these activities. Transactions with affiliates are at prices that
generally apply to unaffiliated parties.

NOTE 16 -- OTHER FINANCIAL INFORMATION

Intercompany revenues (at prices that generally apply to sales to
unaffiliated parties) are as follows:

1996 1995* 1994*
------ ------ -----
(MILLIONS)

Williams Energy Group:
Field Services.......................................... $ 26.2 $ 14.0 $15.1
Merchant Services....................................... 94.9 51.3 18.0
Petroleum Services...................................... 67.7 44.5 28.6
Exploration and Production.............................. 57.1 4.9 18.1
Other..................................................... 3.7 -- .1
------ ------ -----
$249.6 $114.7 $79.9
====== ====== =====

- ---------------

* Certain amounts have been reclassified as described in Note 1.

Information for business segments is as follows:

1996 1995* 1994*
-------- -------- --------
(MILLIONS)

Identifiable assets at December 31:
Williams Energy Group:
Field Services.................................... $1,425.5 $1,260.8 $ 859.5
Merchant Services................................. 901.7 484.9 114.6
Petroleum Services................................ 906.5 863.2 672.5
Exploration and Production........................ 200.3 164.6 145.4
Williams Communications Group........................ 671.3 401.5 311.2
Investments.......................................... 743.3 599.1 536.0
General corporate and other.......................... 315.3 458.7 57.3
Discontinued operations.............................. -- -- 743.6
-------- -------- --------
Consolidated................................. $5,163.9 $4,232.8 $3,440.1
======== ======== ========
Additions to property, plant and equipment:
Williams Energy Group:
Field Services.................................... $ 197.2 $ 227.3 $ 144.5
Merchant Services................................. .6 .4 3.5
Petroleum Services................................ 55.8 87.9 46.6
Exploration and Production........................ 30.3 15.6 13.5
Williams Communications Group........................ 66.9 32.4 12.9
Other................................................ 19.2 11.6 2.5
======== ======== ========
Consolidated................................. $ 370.0 $ 375.2 $ 223.5
======== ======== ========

- ---------------

* Certain amounts have been reclassified as described in Note 1.

F-30
45

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1996 1995* 1994*
-------- -------- --------
(MILLIONS)

Depreciation and depletion:
Williams Energy Group:
Field Services.................................... $ 56.2 $ 39.7 $ 32.2
Merchant Services................................. .6 1.2 .5
Petroleum Services................................ 34.1 26.4 22.4
Exploration and Production........................ 10.5 9.8 9.6
Williams Communications Group........................ 21.3 14.2 12.7
Other................................................ 5.9 3.0 2.6
-------- -------- --------
Consolidated................................. $ 128.6 $ 94.3 $ 80.0
======== ======== ========

- ---------------
* Certain amounts have been reclassified as described in Note 1.

NOTE 17 -- CONTINGENT LIABILITIES AND COMMITMENTS

Rate and regulatory matters

Williams Pipe Line has various regulatory proceedings pending. As a result
of rulings in these proceedings, a portion of its revenues has been collected
subject to refund. Such revenues were $251 million at December 31, 1996. As a
result of various Federal Energy Regulatory Commission (FERC) rulings in these
and other proceedings, Williams Pipe Line does not expect that the amount of any
refunds ordered would be significant. Accordingly, no portion of these revenues
has been reserved for refund.

Environmental matters

Certain Williams Holdings' subsidiaries have been identified as potentially
responsible parties (PRP) at various Superfund and state waste disposal sites.
In addition, these subsidiaries have incurred or are alleged to have incurred
various other hazardous materials removal or remediation obligations under
environmental laws. Although no assurances can be given, Williams Holdings does
not believe that these obligations or the PRP status of these subsidiaries will
have a material adverse effect on its financial position, results of operations
or net cash flows.

The Field Services unit of Williams Energy Group has recorded an aggregate
liability of approximately $15 million, representing the current estimate of
their future environmental and remediation costs, including approximately $6
million relating to former Williams Natural Gas facilities.

Other legal matters

In December 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit
against Williams Production Company (Williams Production), a wholly owned
subsidiary of Williams Holdings, and other gas producers in the San Juan Basin
area, alleging that certain coal strata were reserved by the United States for
the benefit of the Tribe and that the extraction of coal-seam gas from the coal
strata was wrongful. The Tribe seeks compensation for the value of the coal-seam
gas. The Tribe also seeks an order transferring to the Tribe ownership of all of
the defendants' equipment and facilities utilized in the extraction of the
coal-seam gas. In September 1994, the court granted Summary judgment in favor of
the defendants and the Tribe lodged an interlocutory appeal with the U.S. Court
of Appeals for the Tenth Circuit. Williams Production agreed to indemnify the
Williams Coal Seam Gas Royalty Trust (Trust) against any losses that may arise
in respect of certain properties subject to the lawsuit. In addition, if the
Tribe is successful in showing that Williams Production has no rights in the
coal-seam gas, Williams Production has agreed to pay to the Trust for
distribution to then-current unitholders, an amount representing a return of a
portion of the original purchase

F-31
46

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

price paid for the units. While Williams Holdings believes that such a payment
is not probable, it has reserved a portion of the proceeds from the sale of the
units in the Trust.

In October 1990, Dakota Gasification Company (Dakota), the owner of the
Great Plains Coal Gasification Plant (Plant), filed suit in the U.S. District
Court in North Dakota against Transcontinental Gas Pipe Line, a wholly owned
subsidiary of Williams, and three other pipeline companies alleging that the
pipeline companies had not complied with their respective obligations under
certain gas purchase and gas transportation contracts. In September 1992, Dakota
and the Department of Justice on behalf of the Department of Energy filed an
amended complaint adding as defendants in the suit, Transco Energy Company,
Transco Coal Gas Company (Transco Energy Company and Transco Coal Gas Company
being wholly owned subsidiaries of Williams Holdings) and all of the other
partners in the partnership that originally constructed the Plant and each of
the parent companies of these entities. Dakota and the Department of Justice
sought declaratory and injunctive relief and the recovery of damages, alleging
that the four pipeline defendants underpaid for gas, collectively, as of June
30, 1992, by more than $232 million plus interest and for additional damages for
transportation services and costs and expenses including attorneys' fees. By
order dated December 18, 1996, the FERC approved a settlement of the litigation.
No party to the FERC proceeding has sought review of this order. The final
settlement terms went into effect February 1, 1997, which will allow
Transcontinental Gas Pipe Line to recover its cost.

In connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, Transcontinental Gas Pipe Line and
Texas Gas each entered into certain settlements with producers, which may
require the indemnification of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. As a result of
such settlements, Transcontinental Gas Pipe Line and Texas Gas were named as
defendants in, respectively, six and two lawsuits. Transco Energy Company and
Transco Gas Supply Company (wholly owned subsidiaries of Williams Holdings) have
also been named as defendants in certain of these lawsuits. Six of the eight
lawsuits have been settled for cash payments aggregating approximately $9
million, all of which have previously been accrued, and of which approximately
$3 million is recoverable as transition costs under FERC Order 636. Damages,
including interest, of approximately $29 million have been asserted in the
remaining cases. Producers have received and may receive other demands, which
could result in additional claims. Indemnification for royalties will depend on,
among other things, the specific lease provisions between the producer and the
lessor and the terms of the settlement between the producer and either
Transcontinental Gas Pipe Line or Texas Gas. Texas Gas may file to recover 75
percent of any such additional amounts it may be required to pay pursuant to
indemnities for royalties under the provisions of FERC Order 528.

In November 1994, Continental Energy Associates Limited Partnership (the
Partnership) filed a voluntary petition under Chapter 11 of the Bankruptcy Code
with the U.S. Bankruptcy Court, Middle District of Pennsylvania. The Partnership
owns a cogeneration facility in Hazelton, Pennsylvania (the Facility). Hazelton
Fuel Management Company (HFMC), a subsidiary of Transco Energy Company, formerly
supplied natural gas and fuel oil to the Facility. As of December 31, 1996, HFMC
had current outstanding receivables from the Partnership of approximately $20
million, all of which have been reserved. The Partnership recently negotiated
settlements of its power purchase agreements with two electric utilities. The
settlements have been approved by the Bankruptcy Court and Pennsylvania Public
Utility Commission. The time for appealing the Pennsylvania Public Utility
Commission approval of the settlements expires on February 23, 1997. Assuming no
appeals are filed, the settlements will become binding. A Plan of Reorganization
(the Plan) acceptable to all parties has been negotiated and drafted. The Plan
is contingent upon the power purchase agreement settlements being approved. It
is anticipated the Plan will be filed with the Bankruptcy Court for approval on
or before February 28, 1997. Under the Plan, all litigation involving HFMC will
be fully settled, and a net payment in some amount to HFMC is anticipated under
the Plan. It is not possible to predict with certainty the amount of such a
payment.

F-32
47

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition to the foregoing, various other proceedings are pending against
Williams Holdings or its subsidiaries incidental to their operations.

Summary

While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements, will have a materially adverse effect upon Williams Holdings'
future financial position, results of operations or cash flow requirements.

F-33
48

WILLIAMS HOLDINGS OF DELAWARE, INC.

QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data are as follows (millions):

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------

1996
Revenues....................................... $ 433.5 $421.0 $442.8 $544.0
Costs and operating expenses................... 282.5 280.1 299.0 379.2
Net income..................................... 53.1 50.3 51.0 74.3
1995
Revenues....................................... $ 303.3 $302.3 $338.4 $410.0
Costs and operating expenses................... 178.2 199.6 223.2 275.6
Net income..................................... 1,055.9 65.4 58.7 50.6

Second-quarter 1996 net income includes a favorable income tax adjustment
of $3 million related to research credits. Third-quarter 1996 net income
includes approximately $6 million, net of federal income tax, from the effects
of state income tax adjustments related to 1995. Fourth-quarter 1996 net income
includes a gain of approximately $20 million from the property insurance
coverage associated with construction of replacement gathering facilities and a
pre-tax gain of $15.7 million from the sale of certain communication rights,
partially offset by approximately $7 million related to an all-employee bonus
that was linked to achieving record financial performance.

First-quarter 1995 net income includes the after-tax gain of $1 billion on
the sale of Williams Holdings' network services operations (see Note 3 of Notes
to Consolidated Financial Statements). The second quarter of 1995 includes a
$15.5 million after-tax gain on the exchange of 18.3 million shares of Williams
common stock for Williams warrants and subordinated debentures. The
second-quarter 1995 also includes a $16 million after-tax gain from the sale of
the 15 percent interest in Texasgulf Inc. (see Note 5 of Notes to Consolidated
Financial Statements). In third-quarter 1995, Field Services recorded $20
million of income from the favorable resolution of contingency issues involving
previously regulated gathering and processing assets. In third-quarter 1995,
Exploration and Production recorded an $8 million accrual for a future minimum
price natural gas purchase commitment. In fourth-quarter 1995, Merchant Services
recorded loss accruals of approximately $6 million, primarily related to
contract disputes. In fourth-quarter 1995, the development of a commercial coal
gasification venture in south-central Wyoming was canceled, resulting in a $41.4
million pre-tax charge (see Note 5 of Notes to Consolidated Financial
Statements). Fourth-quarter 1995 also includes an $11 million pre-tax gain on
the sale of the remaining investment in Williams common stock (see Note 4 of
Notes to Consolidated Financial Statements). Fourth-quarter 1995 income from
discontinued operations reflects the $13 million after-tax effect of the
reversal of accruals established at the time of the sale of the network services
operations.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

F-34
49

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) 1 and 2. The financial statements and schedules listed in the
accompanying index to consolidated financial statements are filed as a part of
this annual report.

(a) 3 and (c). The Exhibits listed below are filed as part of this annual
report.

Exhibit 3 --
*3.1 -- Certificate of Incorporation of the Company, as amended
(filed as Exhibit 3.1 to the Company's Form 10, dated
October 18, 1995).
*3.2 -- By-laws of the Company (filed as Exhibit 3.2 to the
Company's Form 10, dated October 18, 1995).
Exhibit 4 --
*4.1 -- Form of Senior Debt Indenture between the Company and
Citibank, N.A., relating to the 6 1/4% Senior Debentures
due 2006 (filed as Exhibit 4.1 to the Company's Form 10,
dated October 18, 1995).
*4.2 -- U.S. $1,000,000,000 Amended and Restated Credit
Agreement, dated as of December 20, 1996, among the
Company and certain of its subsidiaries, and the lenders
named therein and Citibank, N.A., as agent (filed as
Exhibit 4(c) to Williams' Form 10-K for the fiscal year
ended December 31, 1996).
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges.
Exhibit 23 -- Consent of Independent Auditors.
Exhibit 24 -- Power of Attorney together with certified resolution.
Exhibit 27 -- Financial Data Schedule.
Exhibit 27.1 -- Restated Financial Data Schedule for the year ended
December 31, 1995.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed by the Company with the Securities
and Exchange Commission during the fourth quarter of 1995.

(d) The financial statements of partially-owned companies are not presented
herein since none of them individually, or in the aggregate, constitute a
significant subsidiary.
- ---------------

* Each such exhibit has heretofore been filed with the Securities and Exchange
Commission as part of the filing indicated and is incorporated herein by
reference.

F-35
50

WILLIAMS HOLDINGS OF DELAWARE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 14(A) 1 AND 2

PAGE
----

Covered by report of independent auditors:
Consolidated statement of income for the three years ended
December 31, 1996...................................... F-10
Consolidated balance sheet at December 31, 1996 and
1995................................................... F-11
Consolidated statement of stockholder's equity for the
three years ended December 31, 1996.................... F-12
Consolidated statement of cash flows for the three years
ended December 31, 1996................................ F-13
Notes to consolidated financial statements................ F-14
Schedule for the three years ended December 31, 1996:
II -- Valuation and qualifying accounts................ F-37
Not covered by report of independent auditors:
Quarterly financial data (unaudited)...................... F-34

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.

F-36
51

WILLIAMS HOLDINGS OF DELAWARE, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(A)

ADDITIONS
----------------
CHARGED
TO COSTS
BEGINNING AND ENDING
BALANCE EXPENSES OTHER DEDUCTIONS(B) BALANCE
--------- -------- ----- ------------- -------
(MILLIONS)

Allowance for doubtful accounts:
1996....................................... $10.3 $4.1 $1.3(c) $6.9 $ 8.8
1995....................................... 7.2 3.6 1.5(c) 2.0 10.3
1994....................................... 9.4 4.0(d) -- 6.2(e) 7.2

- ---------------

(a) Deducted from related assets.

(b) Represents balances written off, net of recoveries and reclassifications.

(d) Excludes $5.7 million related to discontinued operations.

(e) Includes the discontinued operations beginning balance reclassification of
$3.6 million.

F-37
52

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.

Williams Holdings of Delaware, Inc.
(Registrant)

By: /s/ SHAWNA L. BARNARD
-------------------------------------
Shawna L. Barnard
Attorney-in-fact

Dated: March 26, 1997

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 in the capacities and on the dates indicated.

SIGNATURE TITLE
--------- -----

/s/ KEITH E. BAILEY* Chairman of the Board, President, Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
Keith E. Bailey Officer) and Director

/s/ JACK D. MCCARTHY* Senior Vice President (Principal Financial
- ----------------------------------------------------- Officer) and Director
Jack D. McCarthy

/s/ GARY R. BELITZ* Controller (Principal Accounting Officer)
- -----------------------------------------------------
Gary R. Belitz

/s/ JOHN C. BUMGARNER, JR.* Director
- -----------------------------------------------------
John C. Bumgarner, Jr.

/s/ STEPHEN L. CROPPER* Director
- -----------------------------------------------------
Stephen L. Cropper

/s/ HENRY C. HIRSCH* Director
- -----------------------------------------------------
Henry C. Hirsch

Director
- -----------------------------------------------------
Howard E. Janzen

*By /s/ SHAWNA L. BARNARD
-------------------------------------------------
Shawna L. Barnard
Attorney-in-fact

Dated: March 26, 1997

II-1
53
EXHIBIT INDEX

Exhibit Description
------- -----------
[S] [C]

Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges.

Exhibit 23 -- Consent of Independent Auditors.

Exhibit 24 -- Power of Attorney together with certified resolution.

Exhibit 27 -- Financial Data Schedule.

Exhibit 27.1 -- Restated Financial Data Schedule for the year ended
December 31, 1995.