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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, 1997

[ ] 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 offices) (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]

The number of shares of the registrant's Common Stock outstanding at March
30, 1998, 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 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").

On November 24, 1997, Williams announced that it had entered into a
definitive merger agreement to acquire MAPCO Inc. ("MAPCO") in a stock-for-stock
transaction based upon a fixed exchange ratio of 1.665 shares of Williams'
Common Stock and .555 associated preferred stock purchase rights (adjusted to
reflect the Company's two-for-one stock split on December 29, 1997) for each
share of MAPCO Common Stock and associated preferred stock purchase rights.
Williams' and MAPCO's shareholders approved actions necessary to complete the
transaction at special stockholder meetings on February 26, 1998. See Note 18 to
Notes to Consolidated Financial Statements. The Federal Trade Commission
announced on March 27, 1998, that it would allow the parties to consummate the
transaction, and the parties closed the transaction on March 28, 1998.

MAPCO is a Tulsa, Oklahoma-based diversified energy company. Subsidiaries
of MAPCO engage in the transportation by pipeline of natural gas liquids
("NGLs"), anhydrous amonia, crude oil, and refined petroleum products; the
transportation by truck and rail of NGLs and refined petroleum products; the
refining of crude oil; the marketing and trading of NGLs, refined petroleum
products and crude oil; NGL storage; and the marketing of motor fuel and
merchandise through convenience store operations. MAPCO's subsidiary,
Mid-America Pipeline Company, owns and operates 7,668 miles of pipeline and
related pumping, metering, and storage facilities. Subsidiaries of MAPCO also
own and operate two petroleum products refineries, one in Alaska, which markets
approximately 44,000 barrels of refined products per day in Alaska, Canada, and
the Pacific Rim, and one in Tennessee, which markets approximately 110,000
barrels of refined products per day. MAPCO's subsidiary, Thermogas Company, is
the fourth largest propane marketer in the United States and sells propane in 18
states to more than 350,000 customers. Its MAPCO Express subsidiaries operate
approximately 230 convenience stores and travel centers primarily in Tennessee
and Alaska. MAPCO also owns subsidiaries providing fleet operators with motor
fuel and data management and providing energy-related information services.
MAPCO also holds equity investments in other businesses.

Management believes the acquisition furthers its strategy of seeking growth
through strategic acquisitions and alliances and that MAPCO's assets and
operations complement the Company's existing lines of business. Following the
acquisition, Williams intends to transfer MAPCO and its subsidiaries to the
Company, and the Company will operate the MAPCO businesses through Williams
Energy Group.

On January 5, 1998, the Williams' three-year non-compete agreement
resulting from the 1995 sale of the network services operations of its
telecommunications subsidiary expired, and Williams Communications Group, Inc.,
a subsidiary of the Company, announced plans to re-enter the long-distance
telecommunications market as a provider of wholesale communications services
over an 18,000-mile network expected to be in operation by the beginning of
1999.

In April 1997, the Company merged its wholly owned subsidiary, Williams
Telecommunications Systems, Inc. with Nortel Communications Systems, Inc., which
was a wholly owned subsidiary of Northern Telecom, Inc. The Company holds a 70
percent interest in the newly formed entity, Williams Communications Solutions,
LLC. See Note 2 of Notes to Consolidated Financial Statements.

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(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

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

The Company, through subsidiaries, engages in natural gas gathering,
processing, and treating activities; the transportation and terminaling of
petroleum products; hydrocarbon exploration and production activities; the
production and marketing of ethanol; and energy commodity marketing and trading
and provides a variety of other products and services, including price risk
management services, to the energy industry. The Company also engages in the
communications business. In 1997, the Company's energy subsidiaries owned and
operated: (i) natural gas production properties; (ii) natural gas gathering and
processing facilities; (iii) a common carrier petroleum products and crude oil
pipeline system; (iv) petroleum products terminals; and (v) ethanol production
facilities. The Company's communications subsidiaries offer: (i) data-, voice-
and video-related products and services; (ii) advertising distribution services;
(iii) video services and other multimedia services for the broadcast industry;
(iv) enhanced facsimile and audio- and videoconferencing services for
businesses; (v) customer-premise voice and data equipment, including
installation, maintenance, and integration; and (vi) network integration and
management services nationwide. The Company also has investments in the equity
of certain other companies.

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

WILLIAMS ENERGY GROUP (WILLIAMS ENERGY)

In 1996, the Company reorganized its energy operations under a newly
created, wholly owned subsidiary, Williams Energy Group, and began reporting
such operations for financial reporting purposes on this basis in the fourth
quarter of 1996.

Williams Energy is comprised of four major business units: Exploration and
Production, Field Services, Petroleum Services, and Energy Marketing and
Trading. 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 600 Bcf* of proved natural
gas reserves located primarily in the San Juan Basin of Colorado and New Mexico
and owns or operates approximately 7,500 miles of gathering pipelines (including
certain gathering lines owned by an affiliate but operated by Field Services),
10 gas treating plants, 10 gas processing plants, 53 petroleum products
terminals, and approximately 9,100 miles of liquids pipeline. Physical and
notional volumes marketed and traded by Williams Energy's Energy Marketing and
Trading unit approximated 11,018 TBtu equivalents in 1997. In support of its
power marketing activities, Williams Energy acquired a cogeneration plant in
Hazleton, Pennsylvania, in 1997 and also owns a cogeneration plant in
northwestern New Mexico. These facilities add approximately 113 megawatts of
capacity to its portfolio. Williams Energy, through its subsidiaries, employs
approximately 2,800 employees.

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

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

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

* 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 Unit, "MMBtu" means one
million British Thermal Units and "TBtu" means one trillion British Thermal
Units. The term "Dth" means dekatherm. The term "Mbbl" means one thousand
barrels. The term "GWh" means gigawatt hour.

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EXPLORATION AND PRODUCTION

Williams Energy, through its wholly owned subsidiary Williams Production
Company (Williams Production), owns and operates producing natural gas leasehold
properties in the United States. In addition, Williams Production is actively
exploring for oil and gas.

Oil and gas properties. Exploration and production properties are located
primarily in the Rocky Mountains and Gulf Coast areas. Rocky Mountain properties
are located in the San Juan Basin in New Mexico and Colorado, in Wyoming, and in
Utah. Gulf Coast properties include North Louisiana, the Houma Embayment and
Transition Zone in Southern Louisiana, Pinnacle Reef play in East Texas, Sligo
and Wilcox trends in South Texas, and offshore Gulf of Mexico.

Gas Reserves. As of December 31, 1997, 1996, and 1995, Williams Production
had proved developed natural gas reserves of 362 Bcf, 323 Bcf, and 292 Bcf,
respectively, and proved undeveloped reserves of 238 Bcf, 208 Bcf, and 222 Bcf,
respectively. Of Williams Production's total proved reserves, 89 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, 1997, the gross and net
developed leasehold acres owned by Williams Production totaled 268,331 and
115,728 respectively, and the gross and net undeveloped acres owned were 447,458
and 121,351 respectively. As of such date, Williams Production owned interests
in 3,113 gross producing wells (558 net) on its leasehold lands. The following
tables summarize drilling activity for the periods indicated:

1997 WELLS GROSS NET
---------- ----- -----

Development
Drilled............................................. 198 32.6
Completed........................................... 198 32.6
Exploration
Drilled............................................. 12 4.6
Completed........................................... 9 2.8

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

1997................................................ 207 35
1996................................................ 65 11
1995................................................ 61 22

The majority of Williams Production's gas production is currently being
sold in the spot market at market prices. Total net production sold during 1997,
1996, and 1995 was 37.1 Bcf, 31.0 Bcf, and 30.0 Bcf, respectively. The average
production costs, including production taxes, per Mcf of gas produced were $.42,
$.23, and $.23, in 1997, 1996, and 1995, respectively. The average wellhead
sales price per Mcf was $1.62, $.98, and $.88, respectively, for the same
periods. Net production sold and average production costs for 1996 and 1995 have
been restated to include net profits volumes not previously reported.

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 owns 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. Production information reported herein includes
Williams Production's interest in such Units.

FIELD SERVICES

Williams Energy, through Williams Field Services Group, Inc. and its
subsidiaries (Field Services), owns and operates natural gas gathering,
processing, and treating facilities located in northwestern New Mexico,

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southwestern Colorado, southwestern Wyoming, northwestern Oklahoma, southwestern
Kansas, and also in areas offshore and onshore in Texas and Louisiana. Field
Services also operates gathering facilities that are owned by Transcontinental
Gas Pipe Line Corporation (Transco), an affiliated company, and that are
currently regulated by the FERC. In February 1996, Field Services and Transco
filed applications with FERC to spindown all of Transco's gathering facilities
to Field Services. FERC subsequently denied the request in September 1996. Field
Services and Transco sought rehearing in October 1996. In August 1997, Field
Services and Transco filed a second request for expedited treatment of the
rehearing request. FERC has yet to rule on this request for rehearing.

Expansion Projects. Field Services continued to expand its operations in
the gulf coast region during 1997 primarily through the Mobile Bay Project.
During the year, Field Services obtained a life-of-reserves commitment from SOCO
Offshore to anchor the construction of the Field Services' facilities required
to gather and process near the Outer Continental Shelf. These committed reserves
along with existing production from the Mobile Bay area will more than
adequately supply this plant, scheduled to begin operations in early 1999. In
addition, Field Services has acquired the remaining 50 percent interest in the
500 MMcfd Cameron Meadows processing plant in south Texas, has reached an
agreement to partner in a 200 MMcfd processing plant in Louisiana, and finalized
construction plans for a deep water gathering line to Green Canyon Federal Block
205 off Transco's Southeast Louisiana gathering system where planned capacity is
expected to reach 90 MMcfd in the fourth quarter of 1998.

Customers and Operations. Facilities owned and operated by Field Services
consist of approximately 7,500 miles of gathering pipelines, 4 gas treating
plants and 10 gas processing plants (one of which is 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 1997, Field Services gathered natural gas for 176 customers. The two
largest gathering customers accounted for approximately 29 percent and 11
percent respectively of total gathered volumes. During 1997, Field Services
processed natural gas for a total of 130 customers. The largest customer
accounted for approximately 24 percent 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:

1997 1996 1995
----- ----- -----

Gas volumes (TBtu, except liquids sales):
Gathering................................................. 1,170 1,119 810
Processing................................................ 520 484 406
Natural gas liquid sales (millions of gallons)............ 551 403 284

PETROLEUM SERVICES

Williams Energy, through wholly owned subsidiaries in its Petroleum
Services unit, owns and operates a petroleum products and crude oil pipeline
system, 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.

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At December 31, 1997, the system traversed approximately 7,100 miles of
right-of-way and included approximately 9,100 miles of pipeline in various sizes
up to 16 inches in diameter. The system includes 77 pumping stations, 23 million
barrels of storage capacity, and 40 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.

An affiliate of Williams Pipe Line, Longhorn Enterprises of Texas, Inc.
("LETI"), owns a 31.5 percent interest in Longhorn Partners Pipeline, LP, a
joint venture formed to construct and operate a refined products pipeline from
Houston to El Paso, Texas. The pipeline is expected to commence operations in
1998. Williams Pipe Line will design, construct, and operate the pipeline, and
LETI has irrevocably committed to contribute $87.4 million to the joint venture
in 1998.

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

1997 1996 1995
------- ------- -------

Shipments (thousands of barrels):
Refined products:
Gasolines........................................ 132,428 134,296 125,060
Distillates...................................... 71,694 68,628 61,238
Aviation fuels................................... 10,557 11,189 12,535
LP-Gases......................................... 13,322 15,618 12,839
Lube extracted fuel oil.......................... 7,471 8,555 4,462
Crude oil........................................ 31 891 860
------- ------- -------
Total Shipments............................. 235,503 239,177 216,994
======= ======= =======
Daily average (thousands of barrels).................. 645 655 595
Average haul (miles).................................. 259 259 269
Barrel miles (millions)............................... 61,086 61,969 58,326

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 attempt to position itself to respond to changing
regulations and supply patterns but cannot predict how future changes in the
marketplace will affect its 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 74.68 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.

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

1997 1996 1995
------- ------- ------

Ethanol sold (thousands of gallons).................... 145,612 119,800 53,500
Coproducts sold (thousands of tons).................... 494 398 159

Terminals and Services. Williams Energy, through its subsidiary WEV,
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. In 1997,
these terminals loaded approximately 17.3 million barrels of refined products.
In December 1997, WEV acquired a terminal in Dallas, Texas. The preceding volume
data do not reflect activity at this terminal.

ENERGY MARKETING AND TRADING

Williams Energy, through subsidiaries, primarily Williams Energy Services
Company and its subsidiaries ("WESCO"), is a national energy services provider
that buys, sells, and transports a full suite of energy commodities, including
natural gas, electricity, refined products, natural gas liquids, crude oil, and
liquefied natural gas, on a wholesale and retail level, serving over 3,500
companies. 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 22.3 Bcf per day in 1997. 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 50 non-Williams' pipelines. During 1997,
approximately one-third of WESCO's volumes were from the Mid-Continent region,
up from 10 percent in 1996. WESCO's natural gas customers include producers,
industrials, local distribution companies, utilities, and other marketers.

During 1997, WESCO also marketed refined products, natural gas liquids,
crude, and liquefied natural gas with total volumes (physical and notional)
averaging 1,208.2 Mbbl per day. WESCO's acquisition in 1997 of the wholesale
propane business of Level Energy significantly enhanced its natural gas liquids
marketing effort.

WESCO entered the power marketing and trading business in 1996. During
1997, WESCO marketed 8.3 GWh per hour (physical and notional) of electricity.

WESCO provides price-risk management services through a variety of
financial instruments including forwards, futures, and option and swap
agreements related to various energy commodities. Through its energy capital
services, WESCO provides participants in both the upstream and downstream
portions of the energy industry with capital for energy-related projects
including acquisitions of proved reserves and related drilling projects.

During 1997, WESCO has continued to develop its retail energy services
group through acquisitions and alliances. As part of that strategy, WESCO
acquired Utility Management Corporation, an energy management services and
marketing company in the southeastern United States, serving small- to mid-sized
commercial, industrial, and municipal customers. WESCO also has signed a letter
of intent with GPU Advanced Resources to form an alliance which will serve
markets in six mid-Atlantic states.

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Operating Statistics. The following table summarizes operating profit and
marketing volumes for the periods indicated:

1997 1996 1995
------ ----- -----

Average marketing volumes (physical and notional):
Natural gas (Bcfd)...................................... 22.3 15.9 10.2
Refined products, natural gas liquids, crude (MBpd)..... 1,208 384 19
Electricity (GWh/hr).................................... 8.3 0.5 --

REGULATORY MATTERS

Field Services. In May 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
and the U.S. Supreme Court has denied requests for certiorari. As a result of
these FERC decisions, some of the individual states in which Field Services
conducts its operations have considered whether to impose regulatory
requirements on gathering companies. Kansas, Oklahoma, and Texas currently
regulate gathering activities using complaint mechanisms under which the state
commission may resolve disputes involving an individual gathering arrangement.
Other states may also consider whether to impose regulatory requirements on
gathering companies.

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 1995 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 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

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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.

Energy Marketing and Trading. 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 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.

Energy Marketing and Trading. Williams Energy's energy marketing and
trading 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.

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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.

Williams Energy's gathering and processing facilities are owned 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 Energy's petroleum pipeline 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 energy marketing and trading 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 completed monitoring in
the second quarter of 1997 and has submitted a report of results to the EPA.
Management believes no significant additional expenditures will be required for
investigation and follow-up at this site.

WILLIAMS COMMUNICATIONS GROUP, INC. (WILLIAMS COMMUNICATIONS)

As of December 31, 1997, Williams Communications has organized its
operating companies into three business units: Solutions, which provides
customer-premise voice and data equipment, including installation, integration,
and maintenance; Network, which operates the Company's fiber optic network; and
Applications, which provides video services and other multimedia services for
the broadcast industry; advertising distribution; business television
applications; and audio- and videoconferencing services and enhanced facsimile
services for businesses. Management believes that the new structure will better
position it to provide total enterprise network solutions and superior customer
service. In addition, management believes this structure will facilitate growth
and diversification while recognizing the convergence of customers, markets and
product offerings of its communications entities. In Canada, Solutions operates
through its subsidiary, WilTel Communications (Canada), Inc. In late 1997,
Williams Communications announced plans to sell its product and content training
services business, Williams Learning Network, Inc. See Note 5 to Notes to
Consolidated Financial Statements.

Williams Communications and its subsidiaries own an approximately
11,000-mile communications network (with an additional 21,000-route miles
planned or under construction), maintain 155 offices primarily across North
America but also in London, Singapore, and Australia, service approximately
133,000 customer

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11

sites with approximately 11 million customer ports. In addition, Williams
Communications owns or manages five teleports in the United States and has
rights to capacity on domestic and international satellite transponders.
Williams Communications employed approximately 8,000 employees as of December
31, 1997.

Consolidated revenues by business unit and operating profit/loss for
Williams Communications were as follows for 1997 (dollars in millions):

Revenues:
Solutions................................................ $1,206.5
Network.................................................. 43.0
Applications............................................. 222.4
Eliminations............................................. (26.6)
--------
Total.................................................... $1,445.3
========
Operating loss............................................. $ (55.7)
========

The revenues for the Solutions business unit include only eight months of
revenues resulting from the merger, which is discussed below, with Nortel
Communications Systems, Inc., effective April 30, 1997. The operating loss
includes $49.8 million in fourth quarter charges related to the previously noted
decision to sell the learning content business and the write-down of assets and
the development costs associated with certain advanced applications.

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

SOLUTIONS

The Solutions unit of Williams Communications provides data, voice and
video communications products and services to customers in the United States and
Canada. In April 1997, Williams Communications merged its wholly owned
subsidiary, Williams Telecommunications Systems, Inc. with Nortel Communications
Systems Inc., which was a wholly owned subsidiary of Northern Telecom, Inc.
(Northern Telecom). Williams Communications holds a 70 percent interest in the
newly formed entity, Williams Communications Solutions, LLC (WCS). Northern
Telecom owns the remaining 30 percent. This merger effectively doubled the size
of Williams Communications Solutions Customer premise and network solutions
operations.

Williams Communications, through subsidiaries including WCS, serves its
customers through more than 120 sales and service locations throughout the
United States, over 6,000 employees and over 2,200 stocked service vehicles. WCS
employs more than 2,500 technicians and more than 700 sales representatives and
sales support personnel to serve an estimated 133,000 commercial, governmental
and institutional customer sites. WCS's customer base ranges from large,
publicly-held corporations and the federal government to small privately-owned
entities.

WCS 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. WCS's services also include the design, configuration and installation
of voice and data networks and call centers and the management of customers'
telecommunications operations and facilities. WCS'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.

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

1997 1996 1995
-------- ------ ------

Revenues................................................... $1,206.5 $568.1 $494.9
Percentage of revenues by type of service:
New system sales......................................... 52% 40% 34%
System modifications..................................... 28 34 36
Maintenance.............................................. 19 24 25
Other.................................................... 1 2 2
Backlog.................................................... $ 202.5 $112.2 $ 85.0
Total ports................................................ 11.0 5.1 4.7

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 1997, WCS derived approximately 47.8 percent of its revenues from its
existing customer base and approximately 52.2 percent from the sale of new
telecommunications systems. WCS's three largest suppliers accounted for
approximately 86 percent of equipment sold in 1997. A single manufacturer,
Northern Telecom, supplied 73 percent of all equipment sold. In this case, WCS
is the largest independent distributor in the United States of certain of this
company's products. About 63 percent of WCS'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.

NETWORK

The Network unit of Williams Communications owns and operates an
approximately 11,000-route mile communications network, which is restricted to
multi-media applications, and is currently constructing an unrestricted network
along a 1,600 mile route from Houston to Washington, D.C. in proximity to
pipeline right-of-way owned by an affiliated company. Williams Communications,
Inc., a subsidiary of Williams Communications, has entered into an exchange
agreement with IXC Communications under which it will provide IXC Communications
rights to use dark fiber along the Houston-to-Washington, D.C. route and obtain
rights to use dark fiber along a 4,500-mile route from Los Angeles to New York,
which IXC Communications is constructing. In addition, Williams Communications,
Inc. also owns an interest in a joint venture constructing a 1,600-mile fiber
optic network on a route connecting Portland, Salt Lake City, and Las Vegas,
with a dark fiber agreement extending the network to Los Angeles. With these
construction projects and dark fiber agreements and other projects, Williams
Communications, Inc. anticipates having an 18,000-route mile fiber optic network
in operation by the end of 1998. Williams Communications, Inc. has also signed
an agreement to acquire a 350-mile fiber network in Florida and plans to
construct additional fiber to connect the Florida network to its existing
network in the southeastern United States, and to construct a new fiber route in
the Midwestern United States from Chicago westward. The Network unit has
ultimate plans for a 32,000-route mile network.

Upon the expiration of the non-compete agreement related to the Company's
1995 sale of its network services operations on January 5, 1998, Williams
Communications announced that it was re-entering the long-distance
communications market as a wholesale provider of telecommunications services and
had entered into a five-year, multimillion dollar agreement with U S WEST
Communications Group to provide wholesale services using its fiber optic
network. Williams Communications has also entered into an agreement with
Concentric Network Corporation to provide wholesale communications services.

During 1997, Williams Communications acquired Critical Technologies, Inc.,
a professional services company deriving revenue from integrating, designing,
building, implementing, and maintaining large-scale business communications
systems. In addition, Williams Communications acquired a 12.5 percent interest
in Concentric Network Corporation, a provider of Internet protocol-based
networking services for business and consumer markets.

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APPLICATIONS

Vyvx

Vyvx, an unincorporated business unit of Williams Communications, Inc.,
offers broadcast-quality television and multimedia transmission services
nationwide by means of Network's 11,000-mile multimedia network, five satellite
uplink/downlink facilities and satellite capacity on 30 transponders. Vyvx owns
53 television switching centers, 20 sales and service locations in the United
States, and sales and service offices in London, Singapore, and Australia. Vyvx
primarily provides backhaul or point-to-point transmission of sports, news and
other programming between two or more customer locations. 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.

Vyvx owns four teleports (including satellite earth station facilities)
located near Atlanta, Denver, Los Angeles, and New York and operates a fifth
teleport in Kansas City. Vyvx also owns assets for the distribution of
television advertising, which provide connectivity and presence in more than 550
television broadcast stations around the country.

Global Access

Global Access, offers multi-point videoconferencing, audioconferencing and
enhanced facsimile services as well as single point to multi-point business
television services. Global Access enables Williams Communications to provide
customers with integrated media conferences, bringing together voice, video and
facsimile by utilizing Williams Communications's existing fiber-optic and
satellite services.

In March 1997, Global Access acquired Satellite Management, Inc., a
U.S.-based satellite integrator for business television applications,
interactive long distance learning, and corporate communications.

In December 1996, Williams Communications announced the formation of The
Business Channel, a joint venture with the Public Broadcast Service (PBS), to
utilize Internet, video-on-demand, fiber-optic and satellite technologies to
bring professional development and training services to the business community.

REGULATORY MATTERS

The equipment WCS 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. WCS
relies on the equipment manufacturers' compliance with these requirements for
its own compliance regarding the equipment it distributes. These regulations
have a minimal impact on WCS's operations.

Williams Communications, Inc. is subject to FCC regulations as common
carriers with regard to certain of their transmission services and are 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 intrastate microwave communications,
satellite earth stations and certain other related transmission facilities are
also subject to FCC licensing and other regulations. These regulations do not
significantly impact Williams Communications, Inc.'s operations. In 1997, the
FCC began implementation of the Universal Service Fund contemplated in the
Telecommunications Act of 1996. Williams Communications, Inc. is required to
contribute to this fund based upon certain revenues. Although Williams
Communications, Inc. intends to pass on such charges to its customers, FCC
rulings raise questions about the right of companies like Williams
Communications, Inc. to do so.

COMPETITION

WCS 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.

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Competitors include companies that sell equipment comparable or identical to
that sold by WCS. 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.

Network faces existing competition from a number of large, well-established
interexchange carriers, some with extensive fiber optic networks. Several other
carriers are constructing or have plans to construct new fiber optic networks or
are establishing networks based on dark fiber rights obtained from
facilities-based carriers.

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 elimination of federal tariff
filing requirements 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, Inc.

In late 1997, a Federal District Court decision, which has been stayed
pending appeal, invalidated provisions of the 1996 federal legislation. While
legislation or rulings by appellate courts may overturn this lower court ruling,
the Regional Bell Operating companies continue to seek regulatory approval to
provide national long distance services. As courts or regulators remove
restrictions on the Regional Bell Operating Companies, they will be both
important potential customers and important potential competitors of Network.

OWNERSHIP OF PROPERTY

Williams Communications owns part of its fiber-optic transmission
facilities and leases the remainder. Approximately 11,000-route miles of its
owned facilities are comprised of a single fiber, which is on a portion of the
fiber optic network of WorldCom, Inc. ("WorldCom") and is restricted to
multimedia content usage. Williams Communications retained this fiber when a
predecessor of WorldCom purchased the Company's network services operations in
1995. Williams Communications and WorldCom are currently in litigation to
clarify, among other things, whether the usage restriction would permit internet
services and Williams Communications' right to purchase additional WorldCom
fiber. Williams Communications 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.
Williams Communications holds its satellite transponder capacity under various
agreements. Williams Communications owns part of its teleport facilities and
holds the remainder under either a management agreement or long-term facilities
leases.

Williams Network intends to obtain capacity primarily by means of the fiber
optic networks Williams Communications is constructing or plans to construct or
acquire, as well as acquiring dark fiber rights on fiber optic facilities of
other carriers. Network obtains dark fiber rights in the form of the purchase or
lease of "indefeasible rights of use" or "IRUs" in specific fiber strands.
Purchased IRUs have many of the characteristics of ownership, including many of
the associated risks, but the owner of the fiber optic cable retains legal title
to the fibers.

ENVIRONMENTAL MATTERS

Williams Communications is subject to federal, state, and local laws and
regulations relating to the environmental aspects of its business. Management
believes that Williams Communications' 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.

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OTHER INFORMATION

The Company believes that it has adequate sources and availability of raw
materials to assure the continued supply of its services and products for
existing and anticipated business needs.

At December 31, 1997, the Company had approximately 11,000 full-time
employees, of whom approximately 2,000 were 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 relate to changes in general economic conditions in the United States;
the availability and cost of capital; 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
regulations of business activities, including allowed rates of return and the
resolution of other matters discussed herein; and (iii) risks and uncertainties
associated with the Company's unregulated businesses primarily relate to energy
prices and the ability of such entities to develop expanded markets and product
offerings as well as their ability to maintain existing markets. It is also
possible that certain aspects of the Company's businesses that are currently
unregulated may be subject to both federal and state regulation in the future.
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 transportation and gathering
and processing throughput and operating profit, may fluctuate in unpredictable
ways as may corn prices, which directly affect the Company's ethanol business.
Factors impacting future results of the Company's communications business
include successful completion of its network build, technological developments,
high levels of competition, lack of customer diversification, and general
uncertainties of governmental regulation.

(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

For information regarding certain proceedings pending before federal
regulatory agencies, see Note 17 of Notes to Consolidated Financial Statements.
The Company is also subject to other ordinary routine litigation incidental to
its businesses.

Environmental matters

Certain of the Company's 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

14
16

laws. Although no assurances can be given, the Company does not believe that 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 had recorded an aggregate
liability of approximately $12 million, representing the current estimate of
future environmental and remediation costs, including approximately $5 million
relating to former facilities of an affiliate, Williams Gas Pipelines Central,
Inc.

Other legal matters

Williams Communications owns one fiber, which is restricted to multimedia
content usage, on a portion of the fiber optic network of WorldCom, Inc.
("WorldCom"). Williams Communications retained this fiber, along with an option
to purchase additional fiber from WorldCom in connection with WorldCom's
subsequent fiber builds, acquisitions, and expansions, when a predecessor of
Worldcom purchased the Company's network services operations in 1995. On March
20, 1998, Williams Communications filed suit in Oklahoma District Court in Tulsa
County against WorldCom claiming that WorldCom had failed to fulfill its
obligations associated with the single fiber as well as a number of other
obligations arising from the agreements entered into in 1995 in conjunction with
the network services operations sale.

In 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit against
Williams Production Company (Williams Production), a wholly-owned subsidiary of
the Company, 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 price paid for the units. On July 16, 1997, the
U.S. Court of Appeals for the Tenth Circuit reversed the decision of the
district court, held that the Tribe owns the coal-seam gas produced from certain
coal strata on fee lands within the exterior boundaries of the Tribe's
reservation, and remanded the case to the district court for further
proceedings. On September 16, 1997, Amoco Production Company, the class
representative for the defendant class (of which Williams Production is a part),
filed its motion for rehearing en banc before the Court of Appeals. On December
4, 1997, the Tenth Circuit Court of Appeals agreed to rehear the appeal.

In connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, affiliates of the Company,
Transcontinental Gas Pipe Line Corporation and Texas Gas Transmission
Corporation, 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. Transco Energy
Company and Transco Gas Supply Company (wholly-owned subsidiaries of the
Company) have also been named as defendants in certain of these lawsuits. In one
of the two remaining cases, a jury verdict found that Transcontinental Gas Pipe
Line Corporation was required to pay $23.3 million including $3.8 million in
attorneys' fees. Transcontinental Gas Pipe Line Corporation is considering an
appeal. In the other remaining case, a producer has asserted damages, including
interest calculated through December 31, 1996, of approximately $6 million.

Summary

While no assurances may be given, the Company 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 the Company's future
financial position, results of operations or cash flow requirements.

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17

PART II

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

As of December 31, 1997, 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.

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18

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19

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-8 of this report.

1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(MILLIONS)

Revenues............................. $2,680.9 $1,841.3 $1,354.0 $1,264.3 $1,221.0
Income from continuing operations*... 197.8 228.7 211.8 125.5 152.3
Income from discontinued
operations**....................... -- -- 1,018.8 94.0 46.4
Total assets......................... 6,704.3 5,163.9 4,232.8 3,440.1 2,989.4
Long-term debt....................... 780.3 860.4 273.9 507.0 229.4
Stockholder's equity................. 2,798.6 2,482.8 2,151.6 1,739.9 1,818.0

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

* See Notes 2, 4 and 5 of Notes to Consolidated Financial Statements for
discussion of the gain on sale of interest in subsidiary, significant asset
sales and write-offs in 1997, 1996 and 1995. Income from continuing
operations in 1994 includes a $22.7 million pre-tax gain from the sale of a
portion of Williams Holdings' interest in Northern Border Partners, L.P.
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 1995 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 CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

1997 vs. 1996

ENERGY MARKETING & TRADING'S revenues decreased $125.3 million, or 48
percent, and costs and operating expenses decreased $141 million, or 93 percent,
due primarily to the 1997 reporting on a net margin basis of certain natural gas
and gas liquids marketing operations previously not considered to be included in
trading operations. Excluding this decrease, revenues increased $16 million due
primarily to the initial income recognition from long-term electric power
contracts, increased physical and notional natural gas volumes of 22 percent and
44 percent, respectively, and higher petroleum trading volumes, partially offset
by lower natural gas trading margins as a result of decreased price volatility.
Revenues also increased from project financing services for energy producers and
the sale of excess transportation capacity.

Operating profit increased $4.2 million, or 6 percent, due primarily to the
$16 million increase in net revenues and a $6.3 million recovery of an account
previously written off, largely offset by the expenses associated with expansion
of business growth platforms.

Energy Marketing & Trading's price-risk management and trading activities
are subject to risk from changes in energy commodity market prices, the
portfolio position of its financial instruments and physical commitments, and
credit risk. Energy Marketing & Trading manages risk by maintaining its
portfolio within established trading policy guidelines.

EXPLORATION & PRODUCTION'S revenues increased $47.7 million, or 58 percent,
due primarily to higher average natural gas sales prices for company-owned
production and from the marketing of Williams Coal Seam Gas Royalty Trust
(Royalty Trust) natural gas, and a 21 percent increase in company-owned
production volumes.

F-1
20

Costs and operating expenses increased $23 million, or 32 percent, due
primarily to higher Royalty Trust natural gas purchase prices, increased
production activities and higher dry hole costs.

Operating profit increased $27.5 million, from $2.8 million in 1996, due
primarily to the increase in average natural gas prices and company-owned
production volumes, partially offset by higher expenses associated with
increased activity levels.

FIELD SERVICES' revenues increased $107.8 million, or 22 percent, due
primarily to higher natural gas liquids sales of $44 million, the receipt of $8
million of business interruption insurance proceeds related to a 1996 claim and
higher gathering, processing and condensate revenues of $40 million, $5 million
and $11 million, respectively. Natural gas liquids sales increased due to a 37
percent increase in volumes, slightly offset by lower average sales prices.
Gathering revenues increased as a result of a 16 percent increase in volumes
following the transfer of Williams Gas Pipelines Central (formerly Williams
Natural Gas, a wholly-owned subsidiary of Williams Holdings' parent) gathering
assets to Field Services in the last half of 1996.

Costs and operating expenses increased $95 million, or 32 percent, due
primarily to higher fuel and replacement gas purchases and costs and expenses
associated with the gathering assets transferred to Field Services from Williams
Gas Pipelines Central.

Operating profit decreased $7.9 million, or 5 percent, due primarily to the
$12 million net lower impact of insurance recoveries between 1997 and 1996, $30
million from lower per-unit liquids margins, and higher gathering fuel and
replacement gas purchases, significantly offset by $24 million from higher
natural gas liquids volumes, the transfer of Williams Gas Pipelines Central
gathering assets to Field Services and a 7 percent increase in processing
volumes.

PETROLEUM SERVICES' revenues increased $55.4 million, or 11 percent, due
primarily to a $24 million increase in product sales from transportation
activities and a $27 million increase in ethanol sales. Ethanol sales increased
as a result of 22 percent higher sales volumes, partially offset by lower
average ethanol sales prices. Ethanol production was reduced during the second
half of 1996 due to unfavorable market conditions. Pipeline shipments and
average rates were comparable to 1996.

Costs and operating expenses increased $33 million, or 9 percent, due
primarily to the increase in refined product sales and ethanol production,
partially offset by lower corn costs.

Operating profit increased $21.3 million, or 28 percent, due primarily to
increased ethanol sales volumes and per-unit margins.

COMMUNICATIONS' revenues increased $734 million, or 103 percent, due
primarily to acquisitions which contributed revenues of approximately $650
million, including $536 million from the acquisition of the customer-premise
equipment sales and services operations of Northern Telecom. Additionally,
increased business activity resulted in a $119 million revenue increase in new
system sales, partially offset by a $46 million decrease in system modification
revenues. The number of ports in service at December 31, 1997, more than doubled
as compared to December 31, 1996, due primarily to the Nortel acquisition. Fiber
billable minutes from occasional service increased 47 percent. Dedicated service
voice-grade equivalent miles at December 31, 1997, increased 26 percent as
compared with December 31, 1996.

Costs and operating expenses increased $550 million, or 102 percent, due
primarily to acquired operations, the overall increase in business activity,
higher expenses for developing advanced network applications and increased
depreciation associated with added capacity. Selling, general and administrative
expenses increased $198 million, or 121 percent, due primarily to acquired
operations, the overall increase in business activity, higher expenses for
developing advanced network applications and expanding the infrastructure of
this business for future growth.

F-2
21

Other (income) expense -- net includes $49.8 million of charges in 1997
related to the decision to sell the learning content business, and the
write-down of assets and the development expenses associated with certain
advanced applications.

Operating profit decreased $62.3 million from a $6.6 million operating
profit in 1996 to a $55.7 million operating loss in 1997, due primarily to the
other expense charges of $49.8 million and the expense of developing
infrastructure while integrating the most recent acquisitions, partially offset
by improved operating profit from Communications Solutions including the impact
of the Nortel acquisition.

GENERAL CORPORATE EXPENSES increased $7.4 million, or 39 percent, due
primarily to costs related to the pending MAPCO acquisition and a higher cost
allocation percentage from Williams resulting from the combination of
customer-premise equipment sales and service operations with Nortel and an
increased level of other operations. Interest accrued increased $37.8 million,
or 107 percent, due primarily to higher borrowing levels including increased
borrowing under the $1 billion bank-credit facility and commercial paper
program, partially offset by a lower average interest rate. The lower average
interest rate reflects lower rates on new 1997 borrowings as compared to
previously outstanding borrowings. Interest capitalized increased $8.4 million,
from $3.5 million in 1996, due primarily to capital expenditures for
Communications' fiber-optic network. Investing income increased $11 million, or
28 percent, due primarily to interest earned on increased advances to Williams.
For information concerning the 1997 gain on sale of interest in subsidiary, see
Note 2. The 1996 gain on sales/exchange of assets -- net results from the sale
of certain communication rights (see Note 5). The minority interest in income of
consolidated subsidiaries in 1997 is related primarily to the 30 percent
interest held by Williams Communications Solutions, LLC's minority shareholder
(see Note 2). The $16.7 million unfavorable change in other expense -- net in
1997 is due primarily to $9.2 million of costs associated with Williams
Holdings' sales of receivables program started in 1997 and the effect of $5
million of reserve reversals in 1996.

The provision for income taxes on continuing operations decreased $7
million, or 8 percent. The effective income tax rate in 1997 is less than the
federal statutory rate due primarily to the effect of the non-taxable gain
recognized in 1997 (see Note 2) and income tax credits from coal-seam gas
production, partially offset by the effects of state income taxes. The effective
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.

The 1997 extraordinary loss results from the early extinguishment of debt
(see Note 7).

1996 vs. 1995

ENERGY MARKETING & TRADING'S 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.

EXPLORATION & PRODUCTION'S revenues increased $19.5 million, or 31 percent,
due primarily to higher revenues from the marketing of production from the
Royalty Trust and increased production revenues of

F-3
22

$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) expense -- 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.

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) expense -- 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) expense -- 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.

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.

COMMUNICATIONS' 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.

F-4
23

GENERAL CORPORATE EXPENSES increased $5.8 million, or 44 percent, due
primarily to a higher cost allocation percentage from Williams 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 expense -- net in 1996
includes expenses of international activities offset by $5 million of reserve
reversals. Other expense -- net in 1995 includes approximately $5 million of
dividends from Transco Energy's preferred and minority interest common
stockholders and $4 million related to the wind down of Transco Energy's
corporate activities.

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).

FINANCIAL CONDITION AND LIQUIDITY

Liquidity

Williams Holdings considers its liquidity to come from two sources:
internal liquidity, consisting of available cash investments, and external
liquidity, consisting of borrowing capacity from available bank-credit
facilities and its commercial paper program, which can be utilized without
limitation under existing loan covenants. In July 1997, Williams entered into a
new $1 billion bank-credit facility, replacing its previous bank-credit
facility. Under the new agreement, Williams Holdings has access to the entire $1
billion facility, subject to borrowing by other affiliated companies.
Previously, Williams Holdings had access to $700 million under the facility. At
December 31, 1997, Williams Holdings has access to $154 million of liquidity
including $132 million available under the $1 billion bank-credit facility. This
compares to $210 million at December 31, 1996, and $550 million at December 31,
1995. During 1997, Williams Holdings entered into a commercial paper program
backed by $650 million of new short-term bank-credit facilities. At December 31,
1997, $645 million of commercial paper was outstanding under the program.

In addition, Williams Holdings and its subsidiaries had net amounts
receivable from Williams totaling $231 million at December 31, 1997, excluding
parent company debentures with a face value of $360 million (see Note 4),
compared to $124 million at December 31, 1996, and $151 million at December 31,
1995. The

F-5
24

increase in amounts receivable from Williams at December 31, 1997 from December
31, 1996, reflects additional advances to the parent under Williams'
cash-management system, primarily due to proceeds from Williams Holdings'
commercial paper program.

Williams Holdings believes its parent can meet its cash needs. Williams has
access to $155 million of liquidity at December 31, 1997, including $132 million
available under its $1 billion bank-credit facility previously discussed, as
compared to $550 million and $656 million at December 31, 1996 and 1995,
respectively. The decrease at December 31, 1997, was temporary because it was
due in part to additional borrowings under the bank-credit facility to provide
interim financing related to Williams' debt restructuring program which began in
September 1997. In January and February 1998, Williams issued approximately $1
billion additional debt securities pursuant to the restructuring program and
repaid a significant portion of the $1 billion bank-credit facility, thus
increasing its liquidity available to meet cash needs.

In April 1997, Williams Holdings filed a $350 million registration
statement with Securities and Exchange Commission and subsequently issued $180
million of medium-term notes. In September 1997, Williams Holdings filed an
additional registration statement to increase its total shelf financing
availability to $820 million. Williams Holdings also uses short-term uncommitted
bank lines to manage liquidity. Williams Holdings believes any additional
financing arrangements can be obtained on reasonable terms if required.

Williams Holdings had a net working-capital deficit of $401 million at
December 31, 1997, compared with working capital of $260 million at December 31,
1996. The decrease in the working-capital at December 31, 1997, as compared to
prior year-end is primarily a result of short-term borrowings under the
commercial paper program. Williams Holdings manages its borrowings to keep cash
and cash equivalents at a minimum and has relied on bank-credit facilities to
provide flexibility for its cash needs.

During 1998, Williams Holdings expects to finance capital expenditures,
investments and working-capital requirements through cash generated from
operations, the use of the available portion of the $1 billion bank-credit
facility and commercial paper, short-term uncommitted bank lines, advances from
its parent or debt offerings.

Operating Activities

Cash provided by operating activities was: 1997 -- $492 million;
1996 -- $149 million; and 1995 -- $77 million. The increase in cash provided by
operating activities in 1997 includes $200 million of proceeds from the sales of
receivables program begun in 1997. The increase in receivables, inventories, and
accounts payable is due primarily to the combination of customer-premise
equipment sales and service operations with Nortel and increased trading
activities by Energy Marketing & Trading.

Financing Activities

Net cash provided (used) by financing activities was 1997 -- $468 million;
1996 -- $570 million; and 1995 -- ($1.5) billion. Long-term debt principal
payments, net of debt proceeds, were $57 million during 1997, and notes payable
proceeds, net of notes payable payments, were $535 million during 1997. The
increase in notes payable at December 31, 1997, reflects borrowings under the
new commercial paper program. Long-term debt proceeds, net of principal
payments, were $590 million during 1996. The increase in net new borrowings
during 1997 and 1996 was primarily to fund capital expenditures, investments,
and acquisition of businesses. Long-term debt principal payments, net of debt
proceeds, were $221 million during 1995.

Long-term debt at December 31, 1997, was $780 million, compared to $860
million at December 31, 1996, and $274 million at December 31, 1995. At December
31, 1997, $26 million in current debt obligations have been classified as
non-current obligations based on Williams Holdings' intent and ability to
refinance on a long-term basis. The 1996 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 debt-plus-equity ratio was 21.8 percent for 1997, compared to 25.7
percent and 11.3 percent at December 31, 1996 and 1995, respectively. If
short-term notes payable and long-term debt due within one year are included in
the calculations, these ratios would be 35.3 percent, 26.2 percent and 11.8
percent, respectively. The increases in these ratios reflect the increases in
borrowing levels during 1997 and 1996.
F-6
25

Williams Holdings paid dividends to Williams of $31 million, $19 million
and $1 billion in 1997, 1996 and 1995, respectively, and received cash capital
contributions from Williams of $792 million in 1995. 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.

Investing Activities

Net cash provided (used) by investing activities was: 1997 -- ($949)
million; 1996 -- ($703) million; and 1995 -- $1.4 billion. Capital expenditures
in all years include the expansion and modernization of gathering and processing
facilities. Capital expenditures in 1997 also include Communications'
fiber-optic network. Budgeted capital expenditures and investments for 1998 are
approximately $1.9 billion, primarily to expand gathering and processing
facilities and the fiber-optic network. If the pending MAPCO acquisition is
completed, budgeted capital expenditures will increase an estimated $400
million.

On April 30, 1997, Williams Holdings and Northern Telecom (Nortel) combined
their customer-premise equipment sales and services operations into a limited
liability company, Williams Communications Solutions, LLC (LLC). In addition,
Williams Holdings paid $68 million to Nortel. Williams Holdings has accounted
for its 70 percent interest in the operations that Nortel contributed to the LLC
as a purchase business combination. Williams Holdings recorded the 30 percent
reduction in its operations contributed to the LLC as a sale to the minority
shareholder of the LLC (see Note 2). During 1997, Williams Holdings also
purchased a 20 percent interest in a foreign telecommunications business for $65
million in cash. During 1996, Williams Holdings acquired various communications
technology businesses totaling $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 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 it subsidiaries, including Williams Holdings. In
connection with the $60 million purchase, Williams Holdings assumed intercompany
debt payable to its parent of an equal amount.

During 1995, Williams Holdings received proceeds of $2.5 billion from the
sale of its network services operations (see Note 3), $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).

MAPCO Acquisition

On November 24, 1997, Williams and MAPCO Inc. announced that they had
entered into a definitive merger agreement whereby Williams would acquire MAPCO
by exchanging 1.665 share of Williams common stock for each outstanding share of
MAPCO common stock. In addition, outstanding MAPCO employee stock options would
be converted into Williams common stock. Based on the closing market price of
Williams common stock on December 31, 1997, approximately 96.8 million shares of
Williams common stock valued at approximately $2.8 billion would be issued in
the transaction. Upon completion of the merger, Williams will make a capital
contribution of its interest in MAPCO to Williams Holdings, and MAPCO will
become part of the Energy Services business unit (see Note 18). The transaction
closed on March 28, 1998.

Effects of Inflation

Williams Holdings has experienced increased costs in recent years due to
the effects of inflation. However approximately 64 percent of Williams Holdings'
property, plant and equipment was acquired or constructed during the last seven
years, a period of relatively low inflation.

F-7
26

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 $19 million, all of which is accrued at December 31, 1997.
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.

Year 2000 Compliance

Williams and its wholly-owned subsidiaries, which includes Williams
Holdings, has initiated an enterprise-wide project to address the year 2000
compliance issue for all technology hardware and software, external interfaces
with customers and suppliers, operations process control, automation and
instrumentation systems, and facility items. The assessment phase of this
project as it relates to traditional information technology areas should be
substantially complete by the end of the first quarter of 1998. Completion of
the assessment phase for non-traditional information technology areas is
expected in mid-1998. Necessary conversion and replacement activities will begin
in 1998 and continue through mid-1999. Testing of systems has begun and will
continue throughout the process. Williams Holdings has initiated a formal
communications process with other companies with which Williams Holdings'
systems interface or rely on to determine the extent to which those companies
are addressing their year 2000 compliance, and where necessary, Williams
Holdings will be working with those companies to mitigate any material adverse
effect on Williams Holdings.

Williams Holdings expects to utilize both internal and external resources
to complete this process. Existing resources will be redeployed and previously
planned system replacements will be accelerated during this time. For example,
implementation of previously planned financial and human resources systems is
currently in process. These systems will address the year 2000 compliance issues
in certain areas. Costs incurred for new software and hardware purchases will be
capitalized and other costs will be expensed as incurred. While the total cost
of this project is still being evaluated, Williams Holdings estimates that
external costs, excluding previously planned system replacements, necessary to
complete the project within the schedule described will total at least $10
million. Williams Holdings will update this estimate as additional information
becomes available. The costs of the project and the completion dates are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party year 2000 compliance modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from these estimates.

F-8
27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PAGE
----

Report of Independent Auditors.............................. F-10
Consolidated Statement of Income............................ F-11
Consolidated Balance Sheet.................................. F-12
Consolidated Statement of Stockholder's Equity.............. F-13
Consolidated Statement of Cash Flows........................ F-14
Notes to Consolidated Financial Statements.................. F-15
Quarterly Financial Data (Unaudited)........................ F-34

F-9
28

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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, 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 13, 1998

F-10
29

WILLIAMS HOLDINGS OF DELAWARE, INC.

CONSOLIDATED STATEMENT OF INCOME

YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(MILLIONS)

Revenues (Note 15):
Energy Services:
Energy Marketing & Trading............................. $ 135.8 $ 261.1 $ 153.5
Exploration & Production............................... 130.1 82.4 62.9
Field Services......................................... 602.6 494.8 367.9
Petroleum Services..................................... 548.7 493.3 328.1
Communications (Note 2)................................... 1,445.3 711.3 538.9
Other..................................................... 38.4 48.0 17.4
Intercompany eliminations (Note 16)....................... (220.0) (249.6) (114.7)
-------- -------- --------
Total revenues.................................... 2,680.9 1,841.3 1,354.0
-------- -------- --------
Profit-center costs and expenses (Note 15):
Costs and operating expenses.............................. 1,818.5 1,240.8 876.6
Selling, general and administrative expenses.............. 518.8 307.6 224.6
Other (income) expense -- net (Note 5).................... 41.6 (19.3) (10.7)
-------- -------- --------
Total profit-center costs and expenses............ 2,378.9 1,529.1 1,090.5
-------- -------- --------
Operating profit:
Energy Services:
Energy Marketing & Trading............................. 70.6 66.4 33.2
Exploration & Production............................... 30.3 2.8 (5.9)
Field Services......................................... 151.5 159.4 143.4
Petroleum Services..................................... 97.0 75.7 69.2
Communications (Notes 2 and 5)............................ (55.7) 6.6 25.0
Other..................................................... 8.3 1.3 (1.4)
-------- -------- --------
Total operating profit............................ 302.0 312.2 263.5
General corporate expenses (Note 15)........................ (26.2) (18.8) (13.0)
Interest accrued (Note 15).................................. (73.1) (35.3) (40.9)
Interest capitalized........................................ 11.9 3.5 9.8
Investing income (Notes 4 and 15)........................... 50.6 39.6 75.3
Gain on sale of interest in subsidiary (Note 2)............. 44.5 -- --
Gain on sales/exchange of assets -- net (Notes 4 and 5)..... -- 15.7 23.6
Write-off of project costs (Note 5)......................... -- -- (41.4)
Minority interest in income of consolidated subsidiaries
(Note 2).................................................. (14.0) -- --
Other expense -- net........................................ (17.0) (.3) (8.2)
-------- -------- --------
Income from continuing operations before income taxes....... 278.7 316.6 268.7
Provision for income taxes (Note 6)......................... 80.9 87.9 56.9
-------- -------- --------
Income from continuing operations........................... 197.8 228.7 211.8
Income from discontinued operations (Note 3)................ -- -- 1,018.8
-------- -------- --------
Income before extraordinary loss............................ 197.8 228.7 1,230.6
Extraordinary loss (Note 7)................................. (3.6) -- --
-------- -------- --------
Net income.................................................. $ 194.2 $ 228.7 $1,230.6
======== ======== ========

See accompanying notes.
F-11
30

WILLIAMS HOLDINGS OF DELAWARE, INC.

CONSOLIDATED BALANCE SHEET

ASSETS

DECEMBER 31,
----------------------
1997 1996
--------- ---------
(DOLLARS IN MILLIONS,
EXCEPT PER-SHARE
AMOUNTS)

Current assets:
Cash and cash equivalents................................. $ 55.2 $ 44.4
Receivables:
Trade less allowance of $18.5 ($8.8 in 1996)........... 1,035.0 852.9
Affiliates............................................. 43.8 71.9
Due from parent (Note 15)................................. 93.0 --
Inventories (Note 9)...................................... 182.2 101.0
Commodity trading assets.................................. 180.3 147.2
Deferred income taxes -- affiliates (Note 6).............. 74.1 66.7
Other..................................................... 76.0 69.4
-------- --------
Total current assets.............................. 1,739.6 1,353.5
Due from parent (Note 15)................................... 181.3 151.4
Investments, primarily in affiliates (Note 4)............... 1,079.2 743.3
Property, plant and equipment -- net (Note 10).............. 3,052.4 2,540.4
Goodwill and other intangible assets -- net (Notes 1 and
2)........................................................ 435.2 198.1
Non-current commodity trading assets........................ 141.4 93.0
Other assets and deferred charges........................... 75.2 84.2
-------- --------
Total assets...................................... $6,704.3 $5,163.9
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Notes payable (Note 12)................................... $ 701.0 $ --
Accounts payable:
Trade (Note 11)........................................ 741.5 550.6
Affiliates............................................. 69.2 53.4
Accrued liabilities (Note 11)............................. 404.1 331.7
Commodity trading liabilities............................. 182.0 137.9
Long-term debt due within one year (Note 12).............. 42.9 19.7
-------- --------
Total current liabilities......................... 2,140.7 1,093.3
Long-term debt (Note 12).................................... 780.3 860.4
Deferred income taxes -- affiliates (Note 6)................ 523.8 395.9
Non-current commodity trading liabilities................... 201.7 201.2
Other liabilities........................................... 142.1 123.1
Minority interest in consolidated subsidiaries (Note 2)..... 117.1 7.2
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............................ 1,718.0 1,705.0
Retained earnings......................................... 836.5 673.2
Net unrealized gain on marketable securities (Note 4)..... 244.1 104.6
-------- --------
Total stockholder's equity........................ 2,798.6 2,482.8
-------- --------
Total liabilities and stockholder's equity........ $6,704.3 $5,163.9
======== ========

See accompanying notes.

F-12
31

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, 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 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 marketable securities... -- -- -- 51.2 51.2
---- --------- --------- ------ ---------
Balance, December 31, 1996................. -- 1,705.0 673.2 104.6 2,482.8
Net income -- 1997......................... -- -- 194.2 -- 194.2
Cash dividends............................. -- -- (30.9) -- (30.9)
Noncash contributions...................... -- 15.2 -- -- 15.2
Noncash return of capital.................. -- (2.2) -- -- (2.2)
Unrealized gain on marketable securities... -- -- -- 139.5 139.5
---- --------- --------- ------ ---------
Balance, December 31, 1997................. $ -- $ 1,718.0 $ 836.5 $244.1 $ 2,798.6
==== ========= ========= ====== =========

See accompanying notes.
F-13
32

WILLIAMS HOLDINGS OF DELAWARE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- ---------
(MILLIONS)

OPERATING ACTIVITIES:
Net income................................................ $ 194.2 $ 228.7 $ 1,230.6
Adjustments to reconcile to cash provided from operations:
Discontinued operations................................ -- -- (1,018.8)
Extraordinary loss..................................... 3.6 -- --
Depreciation, depletion and amortization............... 189.7 138.2 100.5
Provision for deferred income taxes.................... 28.4 83.9 121.5
Provision for loss on property and other assets........ 49.8 -- 41.4
Gain on dispositions of property and interest in
subsidiary........................................... (42.8) (43.2) (25.8)
Minority interest in income of consolidated
subsidiaries......................................... 14.0 -- --
Changes in receivables sold............................ 200.0 -- --
Changes in receivables................................. (264.2) (297.6) (16.1)
Changes in inventories................................. (59.0) (5.3) 10.4
Changes in other current assets........................ (5.2) (25.7) (30.8)
Changes in accounts payable............................ 176.4 282.1 (3.0)
Changes in accrued liabilities......................... 5.6 (75.8) (69.5)
Changes in receivables/payables with affiliates........ 44.7 (70.1) (188.1)
Changes in current commodity trading assets and
liabilities.......................................... 11.0 (29.7) 28.1
Changes in non-current commodity trading assets and
liabilities.......................................... (47.7) (37.7) (82.1)
Other, including changes in non-current assets and
liabilities.......................................... (6.7) .8 (21.3)
------- ------- ---------
Net cash provided by operating activities......... 491.8 148.6 77.0
------- ------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable............................... 791.7 10.0 --
Payments of notes payable................................. (256.7) (10.0) (398.2)
Proceeds from long-term debt.............................. 459.5 603.8 179.0
Payments of long-term debt................................ (516.8) (13.4) (399.7)
Dividends paid to parent.................................. (30.9) (19.2) (1,010.7)
Capital contributions from parent......................... -- -- 791.9
Changes in parent company advances........................ -- -- (474.8)
Subsidiary preferred stock redemptions.................... -- -- (144.0)
Other -- net.............................................. 21.0 (1.4) 3.8
------- ------- ---------
Net cash provided (used) by financing
activities...................................... 467.8 569.8 (1,452.7)
------- ------- ---------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures................................... (696.5) (370.0) (375.2)
Proceeds from dispositions............................. 74.1 47.6 19.1
Acquisition of businesses, net of cash acquired........... (86.5) (164.9) (360.8)
Proceeds from sales of businesses......................... -- -- 2,588.3
Income tax and other payments related to discontinued
operations............................................. (12.6) (270.5) (349.8)
Purchase of investments/advances to affiliates............ (129.3) (74.3) (48.3)
Proceeds from sales of assets............................. 5.2 23.0 171.2
Changes in advances to parent company..................... (123.0) 95.4 (257.8)
Other -- net.............................................. 19.8 10.2 .6
------- ------- ---------
Net cash provided (used) by investing
activities...................................... (948.8) (703.5) 1,387.3
------- ------- ---------
Increase in cash and cash equivalents............. 10.8 14.9 11.6
Cash and cash equivalents at beginning of year.............. 44.4 29.5 17.9
------- ------- ---------
Cash and cash equivalents at end of year.................... $ 55.2 $ 44.4 $ 29.5
======= ======= =========

See accompanying notes.

F-14
33

WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations

Operations of Williams Holdings of Delaware, Inc. (Williams Holdings) are
located principally in the United States and are organized into two operating
groups as follows: (1) Energy Services, which is comprised of natural gas
gathering and processing facilities in the Rocky Mountain, midwest and Gulf
Coast regions, energy trading and price-risk management activities throughout
the United States, a petroleum products pipeline and ethanol
production/marketing operations in the midwest region, and hydrocarbon
exploration and production activities in the Rocky Mountain and Gulf Coast
regions; and (2) Communications, which includes network integration and
management services; video and other multimedia transmission services for the
broadcast industry; business audio and video conferencing services; and
installation and maintenance of customer-premise voice and data equipment.
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.

Revenues and operating profit amounts previously reported as Merchant
Services are now reported as Energy Marketing & Trading.

On April 30, 1997, Williams Holdings and Northern Telecom (Nortel) combined
their customer-premise equipment sales and service operations into a limited
liability company, Williams Communications Solutions, LLC (LLC), formerly WilTel
Communications, LLC (see Note 2). Communications' revenues and operating profit
amounts for 1997 include the operating results of the LLC beginning May 1, 1997.

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. 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 Energy Marketing & Trading.

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-15
34
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 Energy Marketing & Trading, which are primarily stated at
market. The cost of inventories is primarily determined using the average-cost
method.

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 warrants are not traded on a securities exchange. As such, the fair
value of the warrants is not readily determinable under generally accepted
accounting principles, and Williams Holdings has no current intention of
exercising the warrants in the future.

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.

Goodwill and other intangible assets

Goodwill, which represents the excess of cost over fair value of assets of
businesses acquired, is amortized on a straight-line basis over periods not
exceeding 25 years. Other intangible assets are amortized on a straight-line
basis over periods not exceeding 11 years. Accumulated amortization at December
31, 1997 and 1996 was $56 million and $31.8 million, respectively. Amortization
of intangible assets was $24.2 million, $9.6 million and $6.2 million in 1997,
1996 and 1995, respectively.

F-16
35
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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.
Communications' customer-premise equipment sales and service business primarily
uses the percentage-of-completion method of recognizing revenues for services
provided.

Commodity price-risk management activities

Energy Marketing & Trading has trading operations that enter into
energy-related derivative financial instruments and derivative commodity
instruments (forward contracts, futures contracts, option contracts and swap
agreements) to provide price-risk management services to its third-party
customers. This trading operation also has commodity inventories and enters into
short- and long-term energy-related purchase and sale commitments which involve
physical delivery of an energy commodity. These financial instruments, physical
inventories 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, liquidity of the
market in which the contract is transacted, the terms of the contract, credit
considerations, time value and volatility factors underlying the positions.
Energy Marketing & Trading reports its trading operations' physical sales
transactions net of the related purchase costs, consistent with market value
accounting for such trading activities.

Certain Energy Marketing & Trading revenues were not considered to be
trading operations in 1996 and 1995 and, therefore, were not reported net of
related costs to purchase such items.

Williams Holdings' operations also enter into energy-related derivative
financial instruments and derivative commodity 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
and recorded with the related hedged item. These contracts are initially and
regularly evaluated to determine that there is a high correlation between
changes in the market value of the hedge contract and market value of the hedged
item.

Interest-rate derivatives

Williams Holdings enters into interest-rate swap agreements to modify the
interest characteristics of its long-term debt. These agreements are designated
with all or a portion of the principal balance and term of specific debt
obligations. These agreements involve the exchange of amounts based on a
fixed-interest rate for amounts based on variable interest rates without an
exchange of the notional amount upon which the payments are based. The
difference to be paid or received is accrued and recognized as an adjustment of
interest expense.

Williams Holdings enters into interest-rate forward contracts to lock-in
underlying treasury rates on anticipated long-term debt issuances. The
settlement amounts upon termination of the contracts are deferred and amortized
as an adjustment to interest expense of the issued long-term debt over the term
of the settled forward contract.

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.
F-17
36
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

Income taxes

Williams Holdings and its 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 and its
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.

New accounting standards

In June 1997, the Financial Accounting Standards Board issued two new
Statement of Financial Accounting Standards, (SFAS) No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Both standards, effective for fiscal years
beginning after December 15, 1997, are disclosure-oriented standards. Therefore,
neither standard will affect Williams Holdings' reported consolidated net income
or cash flows.

NOTE 2 -- ACQUISITIONS

Nortel

On April 30, 1997, Williams Holdings and Nortel combined their
customer-premise equipment sales and service operations into a limited liability
company, Williams Communications Solutions, LLC. In addition, Williams Holdings
paid $68 million to Nortel. Williams Holdings has accounted for its 70 percent
interest in the operations that Nortel contributed to the LLC as a purchase
business combination, and beginning May 1, 1997, has included the results of
operations of the acquired company in Williams Holdings' Consolidated Statement
of Income. Accordingly, the acquired assets and liabilities, including $168
million in accounts receivable, $68 million in accounts payable and accrued
liabilities and $150 million in debt obligations, have been recorded based on an
allocation of the purchase price, with substantially all of the cost in excess
of historical carrying values allocated to goodwill.

Williams Holdings recorded the 30 percent reduction in its operations
contributed to the LLC as a sale to the minority shareholder of the LLC.
Williams Holdings recognized a gain of $44.5 million based on the excess of the
fair value over the net book value (approximately $71 million) of its operations
conveyed to the LLC minority interest. Income taxes were not provided on the
gain, because the transaction did not affect the difference between the
financial and tax bases of identifiable assets and liabilities.

If the transaction occurred on January 1, 1996, Williams Holdings'
unaudited pro forma revenues for the years ended 1997 and 1996 would have been
$2,929 million and $2,578 million, respectively. The pro forma effect of the
transaction on Williams Holdings' net income is not significant. Pro forma
financial information is not necessarily indicative of results of operations
that would have occurred if the transaction had occurred on January 1, 1996, or
of future results of operations of the combined companies.

F-18
37
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

Transco

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 31.2 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 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.

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.

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.

NOTE 4 -- INVESTING ACTIVITIES

1997 1996
-------- ------
(MILLIONS)

Investments:
Williams debentures.................................. $ 770.7 $534.5
Williams warrants.................................... 25.4 25.4
Equity............................................... 168.4 100.4
Cost................................................. 114.7 83.0
-------- ------
$1,079.2 $743.3
======== ======

During 1995, Williams Holdings exchanged 36.6 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 at any time into approximately 28 million
shares of Williams common stock at $12.86 per share. The warrants give Williams
Holdings the right to purchase approximately 22.6 million shares of Williams
common stock at $15.56 per share and were recorded at appraised value of $25
million. The warrants are exercisable immediately and mature five years from
date of issuance. During 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.

F-19
38
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

On November 20, 1997, Williams board of directors declared a two-for-one
common stock split, effective December 29, 1997. References in the Notes to
Consolidated Financial Statements to Williams common stock have been restated to
reflect the effect of the stock split.

Investing income for the years ended December 31, 1997, 1996 and 1995, is
as follows (see Note 15):

1997 1996 1995
----- ----- -----
(MILLIONS)

Interest.................................................... $41.8 $33.8 $46.1
Dividends................................................... 1.4 1.6 20.8
Equity earnings............................................. 7.4 4.2 8.4
----- ----- -----
$50.6 $39.6 $75.3
===== ===== =====

Dividends and distributions received from companies carried on an equity
basis were $7 million in 1997 and 1996, and $11 million in 1995.

At December 31, 1997, certain equity investments, with a carrying value of
$46 million, have a market value of $175 million.

NOTE 5 -- ASSET SALES AND WRITE-OFFS

In the fourth quarter of 1997, Communications incurred charges totaling
$49.8 million, related to the decision to sell the learning content business,
and the write-down of assets and the development costs associated with certain
advanced applications.

In 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.

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.

NOTE 6 -- PROVISION FOR INCOME TAXES

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

1997 1996 1995
----- ----- ------
(MILLIONS)

Current:
Federal.................................................. $42.7 $ 8.5 $(49.4)
State.................................................... 7.9 (4.5) (15.2)
Foreign.................................................. 1.9 -- --
----- ----- ------
52.5 4.0 (64.6)
----- ----- ------
Deferred:
Federal.................................................. 21.7 85.8 96.4
State.................................................... 6.7 (1.9) 25.1
----- ----- ------
28.4 83.9 121.5
----- ----- ------
Total provision............................................ $80.9 $87.9 $ 56.9
===== ===== ======

F-20
39
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

1997 1996 1995
------ ------ ------
(MILLIONS)

Provision at statutory rate.............................. $ 97.5 $110.8 $ 94.0
Increases (reductions) in taxes resulting from:
State income taxes..................................... 9.7 (4.2) 10.6
Income tax credits..................................... (16.5) (19.0) (18.7)
Non-taxable gain from sale of interest in subsidiary
(Note 2)............................................ (15.6) -- --
Decrease in valuation allowance for deferred tax
assets.............................................. -- -- (29.8)
Other -- net........................................... 5.8 .3 .8
------ ------ ------
Provision for income taxes............................... $ 80.9 $ 87.9 $ 56.9
====== ====== ======

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

1997 1996*
------ ------
(MILLIONS)

Deferred tax liabilities:
Property, plant and equipment............................. $559.1 $469.8
Investments............................................... 163.8 44.4
Other..................................................... 34.5 91.7
------ ------
Total deferred tax liabilities.................... 757.4 605.9
------ ------
Deferred tax assets:
Deferred revenues......................................... 71.9 20.9
Accrued liabilities....................................... 41.1 58.6
Minimum tax credits....................................... 134.8 117.4
Other..................................................... 59.9 79.8
------ ------
Total deferred tax assets......................... 307.7 276.7
------ ------
Net deferred tax liabilities................................ $449.7 $329.2
====== ======

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

* Reclassified to conform to current classifications.

Cash payments to Williams and certain state taxing authorities for income
taxes (net of refunds) were $30 million, $294 million, and $336 million in 1997,
1996 and 1995, respectively.

NOTE 7 -- EXTRAORDINARY LOSS

In September 1997, Williams initiated a restructuring of its debt portfolio
(see Note 12). In the fourth quarter of 1997, Williams Pipe Line paid
approximately $55 million to redeem $50 million of debt with a stated interest
rate of 9.78 percent, resulting in an extraordinary loss of $3.6 million (net of
a $2.4 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. Effective August 1, 1997,
separate plans were established for the Williams Communications Solutions, LLC
union employees and the Williams Communications Solutions, LLC salaried
employees (LLC plans). At

F-21
40
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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 $14.1 million in 1997; $19.3 million in 1996; and $5.1
million in 1995.

Net pension expense decreased in 1997 from 1996 as a result of $4.4 million
of settlement losses in 1996. 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,
an increase in the number of plan participants and the 1996 settlement losses.

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

1997 1996 1995
----- ----- -----
(MILLIONS)

Service cost for benefits earned during the year............ $ 2.5 $ .7 $ .6
Interest cost on projected benefit obligation............... 2.6 1.5 1.6
Actual return on plan assets................................ (2.1) (3.1) (3.8)
Amortization and deferrals.................................. (1.5) 1.3 1.8
----- ----- -----
Net pension expense......................................... $ 1.5 $ .4 $ .2
===== ===== =====

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

1997 1996
----- -----
(MILLIONS)

Actuarial present value of benefit obligations:
Vested benefits........................................... $51.1 $15.8
Non-vested benefits....................................... 4.7 1.2
----- -----
Accumulated benefit obligations........................... 55.8 17.0
Effect of projected salary increases...................... 8.8 3.6
----- -----
Projected benefit obligations............................. 64.6 20.6
Assets at market value...................................... 66.5 22.4
----- -----
Assets in excess of projected benefit obligations........... (1.9) (1.8)
Unrecognized net loss....................................... (5.3) (2.1)
Unrecognized prior-service (cost) credit.................... .7 (.7)
Unrecognized transition asset............................... .5 .7
----- -----
Pension asset............................................... $(6.0) $(3.9)
===== =====

The discount rate used to measure the present value of benefit obligations
is 7 1/4 percent (7 1/2 percent in 1996); 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 two master trusts. The master trusts are comprised primarily of
cash equivalents, domestic and foreign common and preferred stocks, corporate
bonds, United States government securities and commercial paper.

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-22
41
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 $8.1 million in 1997; $7.8 million in
1996; and $5.7 million in 1995.

Other

Williams Holdings is included in Williams' defined-contribution plans
covering substantially all employees. Williams Holdings' contributions are
invested primarily in Williams common stock, are based on employees'
compensation and, in part, match employee contributions. Williams Holdings'
contributions to these plans were $17 million in 1997, $12 million in 1996, and
$9 million in 1995.

NOTE 9 -- INVENTORIES

1997 1996
------ ------
(MILLIONS)

Natural gas in underground storage:
Energy Marketing & Trading........................... $ 3.0 $ 1.5
Petroleum products:
Energy Marketing & Trading........................... 68.6 12.7
Other................................................ 30.1 33.7
Materials and supplies................................. 76.8 47.2
Other.................................................. 3.7 5.9
------ ------
$182.2 $101.0
====== ======

NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT

1997 1996
-------- --------
(MILLIONS)

Cost:
Energy Services:
Energy Marketing & Trading........................ $ 43.0 $ 5.4
Exploration & Production.......................... 318.5 255.1
Field Services.................................... 1,709.5 1,545.4
Petroleum Services................................ 1,055.2 1,073.1
Communications....................................... 535.0 257.3
Other................................................ 242.0 114.7
-------- --------
3,903.2 3,251.0
Accumulated depreciation and depletion................. (850.8) (710.6)
-------- --------
$3,052.4 $2,540.4
======== ========

Commitments for construction and acquisition of property, plant and
equipment are approximately $455 million at December 31, 1997.

F-23
42
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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
$48 million at December 31, 1997, and $69 million at December 31, 1996.

1997 1996
------ ------
(MILLIONS)

Accrued liabilities:
Employee costs....................................... $ 70.7 $ 67.0
Deferred revenue..................................... 61.7 32.6
Federal income taxes payable-affiliate............... 44.7 --
Transportation and exchange gas payable.............. 33.6 21.2
Taxes other than income taxes........................ 26.1 24.2
State and foreign income taxes payable............... 7.8 34.0
Other................................................ 159.5 152.7
------ ------
$404.1 $331.7
====== ======

NOTE 12 -- DEBT, LEASES AND BANKING ARRANGEMENTS

Notes payable

During 1997, Williams Holdings entered into a commercial paper program
backed by new short-term bank-credit facilities totaling $650 million. At
December 31, 1997, $645 million of commercial paper was outstanding under the
program. In addition, Williams Holdings has entered into various other
short-term credit agreements with amounts outstanding totaling $56 million at
December 31, 1997. The weighted-average interest rate on the outstanding
short-term borrowings at December 31, 1997 was 6.51 percent. There were no
short-term borrowings outstanding at December 31, 1996.

Debt

WEIGHTED-
AVERAGE DECEMBER 31,
INTEREST ---------------
RATE* 1997 1996
--------- ------ ------
(MILLIONS)

Williams Holdings of Delaware, Inc.
Revolving credit loans.................................... 6.3% $200.0 $500.0
Debentures, 6.25%, payable 2006........................... 4.8 248.9 248.8
Notes, 6.40%-6.91%, payable through 2002.................. 6.8 205.6 --
Williams Pipe Line
Notes, 8.95% and 9.78%, payable through 2001.............. 9.0 40.0 100.0
Williams Energy Ventures
Adjustable rate notes..................................... -- -- 25.6
Williams Communications Solutions, LLC
Revolving credit loans.................................... 6.2 125.0 --
Other, payable through 2000................................. 7.8 3.7 5.7
------ ------
823.2 880.1
Current portion of long-term debt........................... (42.9) (19.7)
------ ------
$780.3 $860.4
====== ======

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

* At December 31, 1997, including the effects of interest-rate swap.

F-24
43
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

In September 1997, Williams and certain of its consolidated subsidiaries
initiated a restructuring of its debt portfolio. In conjunction with this
restructuring, during 1997 Williams Pipe Line redeemed $50 million of debt with
a stated interest rate of 9.78 percent. In January 1998, Williams Pipe Line
redeemed an additional $40 million of debt obligations. The restructuring was
temporarily financed with the combination of short-term bank agreements,
commercial paper and the $1 billion bank-credit agreement, including $203
million of short-term borrowings and commercial paper at Williams Holdings. In
January 1998, these short-term borrowings were repaid with funds previously
advanced to Williams.

In July 1997, Williams, Williams Holdings, Williams Communications
Solutions, LLC, and other affiliates entered into a new $1 billion bank-credit
agreement. Under the terms of the new credit agreement, Williams Communications
Solutions, LLC and the other affiliates have access to varying amounts of the
facility, while Williams (parent) and Williams Holdings (parent) have access to
all unborrowed amounts. Interest rates vary with current market conditions.

For financial statement purposes at December 31, 1997, current debt
obligations of $26 million have been classified as non-current obligations based
on Williams Holdings' intent and ability to refinance on a long-term basis. At
December 31, 1997, the amount available on the existing credit agreement of $132
million is sufficient to complete these refinancings.

An interest-rate swap with a notional value of $250 million is currently
being utilized to convert certain fixed-rate debt obligations to variable rate
obligations resulting in an effective weighted-average floating rate of 4.8
percent at December 31, 1997.

Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments and considering the reclassification of current obligations as
previously described, for each of the next five years are as follows:

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

1998.............................................. $ 42
1999.............................................. 20
2000.............................................. 80
2001.............................................. --
2002.............................................. 431

Cash payments for interest (net of amounts capitalized) are as follows:
1997 -- $63 million; 1996 -- $34 million and 1995 -- $51 million, including
payments to Williams of $7 million in 1997 and 1996, and $25 million in 1995.

Leases

Future minimum annual rentals under non-cancelable operating leases
(including a total of $15 million to affiliates) are $80 million in 1998, $67
million in 1999, $52 million in 2000, $27 million in 2001, $23 million in 2002
and $67 million thereafter.

Total rent expense was $100 million in 1997, $51 million in 1996 and $39
million in 1995, including $2 million in 1997 and 1996, and $4 million in 1995
paid to Williams and affiliates.

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. Awards may be granted
for no consideration other than prior and future services. The purchase price
per share for stock options may not be

F-25
44
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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 provisions of
Accounting Principles Board (APB) 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.

SFAS 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 SFAS No. 123 had been applied in
measuring compensation cost. Pro forma net income for Williams Holdings,
beginning with 1995 employee stock-based awards, was $183.2 million, $227.5
million and $1,225.2 million for 1997, 1996 and 1995, respectively. Reported net
income was $194.2 million, $228.7 million and $1,230.6 million for 1997, 1996
and 1995, respectively. Pro forma amounts for 1997 include the remaining total
compensation expense from the awards made in 1996, as these awards fully vested
in 1997 as a result of the accelerated vesting provisions. Pro forma amounts for
1995 include total compensation expense from the awards made in 1995, as these
awards fully vested in 1995 as a result of the accelerated vesting provisions.
Since compensation expense from stock options is recognized over the future
years' vesting period, and additional awards generally are made each year, pro
forma amounts may not be representative of future years' amounts.

The following summary reflects stock options related to 1997 and 1996:

1997 1996
---- ----
(OPTIONS IN MILLIONS)

Options granted............................................. 4.1 4.2
Weighted-average grant date fair value...................... $5.98 $3.92
Options outstanding -- December 31.......................... 11.5 9.5
Options exercisable -- December 31.......................... 7.4 5.0

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

Notes and other non-current receivables: For those notes with interest
rates approximating market or maturities of less than three years, fair
value is estimated to approximate historically recorded amounts.

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

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.

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

F-26
45
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

Long-term debt: The fair value of Williams Holdings' long-term debt is
valued using indicative year-end traded bond market prices for publicly
traded issues, while private debt is valued based on the prices of similar
securities with similar terms and credit ratings. At December 31, 1997 and
1996, 52 percent and 27 percent, respectively, 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 derived from the year-end
yield curve. Fair value was calculated by the financial institution that is
the counterparty to the swap.

Interest-rate locks: Fair value is determined using year-end traded
market prices for the referenced U.S. Treasury securities underlying the
contracts. Fair value was calculated by the financial institutions that are
parties to the locks.

Energy-related trading and hedging: Includes forwards, 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, liquidity of the market in which
the contract is transacted, 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

Asset (liability)

1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(MILLIONS)

Cash and cash equivalents........................ $ 55.2 $ 55.2 $ 44.4 $ 44.4
Notes and other non-current receivables.......... 19.9 19.9 22.0 22.0
Due from parent.................................. 274.3 274.3 151.4 151.4
Investment in Williams debentures................ 770.7 770.7 534.5 534.5
Investments -- cost.............................. 101.2 101.2 69.5 69.5
Notes payable.................................... (701.0) (701.0) -- --
Long-term debt, including current portion........ (822.1) (821.9) (878.8) (874.7)
Interest-rate swap............................... 1.5 6.5 1.6 (1.8)
Interest-rate locks.............................. -- (.5) -- --
Energy-related trading:
Assets......................................... 324.9 324.9 253.6 253.6
Liabilities.................................... (383.7) (383.7) (339.1) (339.1)
Energy-related hedging:
Assets......................................... .9 11.0 .9 11.2
Liabilities.................................... -- (3.6) (1.3) (12.2)

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

The 1997 average fair value of the energy-related trading assets and
liabilities is $258 million and $345 million, respectively. The 1996 average
fair value of the energy-related trading assets and liabilities is $196 million
and $322 million, respectively.

F-27
46
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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 1997, Williams Holdings entered into an agreement to sell, on an ongoing
basis, certain of their accounts receivables. At December 31, 1997, $200 million
has been sold.

In connection with the sale of the network services operations, Williams
has been indemnified by LDDS against any losses related to retained guarantees
of $135 million and $158 million at December 31, 1997 and 1996, respectively,
for lease rental obligations.

Williams Holdings has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $54 million and $7 million at
December 31, 1997 and 1996, 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

Williams Holdings, through Energy Marketing & Trading, 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. The net gain from trading activities was $125.8
million, $99.2 million and $65.8 million in 1997, 1996 and 1995, respectively.

Energy Marketing & Trading 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
Energy Marketing & Trading 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. Energy Marketing
& Trading 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
option contracts are generally exchange quotations. Energy Marketing & Trading
also enters into futures contracts, which are commitments to either purchase or
sell a commodity at a future date for a 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.

Energy Marketing & Trading is subject to market risk from changes in energy
commodity market prices, the portfolio position of its financial instruments and
physical commitments, the liquidity of the market in which the contract is
transacted, and changes in interest rates and credit risk.

Energy Marketing & Trading manages market risk through established trading
policy guidelines, which are monitored on an ongoing basis. Energy Marketing &
Trading 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.

F-28
47
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

The notional quantities for trading activities at December 31 are as
follows:

1997 1996
------------------ ------------------
PAYOR RECEIVER PAYOR RECEIVER
------- -------- ------- --------

Fixed price:
Natural gas (TBtu)............................ 1,327.9 1,702.5 1,066.6 1,196.8
Refined products and crude (MMBbls)........... 337.2 230.7 34.4 26.3
Power (Terawatt Hrs).......................... 20.0 16.7 -- --
Variable price:
Natural gas (TBtu)............................ 2,091.1 1,508.2 1,584.9 1,123.8
Refined products and crude (MMBbls)........... 4.5 3.1 3.7 3.3
Power (Terawatt Hrs).......................... .2 2.1 -- --

The net cash flow requirement related to these contracts at December 31,
1997 and 1996, was $92 million and $117 million, respectively. At December 31,
1997, the cash flow requirements extend primarily through 2007.

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, 1997 and 1996, approximately 40 percent and 27 percent,
respectively, of receivables are for communications and related services;
approximately 49 percent and 64 percent, respectively, of receivables are for
the sale of natural gas and related products or services; and approximately 10
percent and 7 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. Communications'
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 and its
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 are as follows:

1997 1996 1995
----- ----- -----
(MILLIONS)

Direct costs................................................ $27.1 $21.2 $16.6
Allocated parent company expenses........................... 21.4 18.8 13.0

The direct costs charged to Williams Holdings' subsidiaries are reflected
in selling, general and administrative expenses and the direct costs charged to
Williams Holdings (parent) are reflected in general corporate expenses.
Allocated parent company expenses are included in general corporate expenses in
the Consolidated Statement of Income.

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

F-29
48
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

on demand, however, amounts outstanding have been classified as long-term to the
extent there are no expectations for Williams and Williams Holdings and its
subsidiaries to demand payment in the next year. The current amount due from
parent was $93 million on December 31, 1997, reflecting Williams' payment to
Williams Holdings in January 1998. The agreements do not require commitment
fees. Interest is payable monthly and rates vary with market conditions. The
interest rates were 6.29 percent and 5.73 percent at December 31, 1997 and 1996,
respectively.

Investing income includes $36 million, $31 million and $43 million for
1997, 1996 and 1995, respectively, resulting from advances to affiliates, while
interest accrued includes $3 million for 1995 resulting from advances from
affiliates.

Investing income also includes dividends received on the investment in
Williams common stock of $5 million in 1995.

Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Northwest Pipeline, Williams Gas Pipelines Central,
Transcontinental Gas Pipe Line and Texas Gas. Energy Marketing & Trading's
revenues include natural gas sales to affiliates of $429 million, $499 million
and $145 million for 1997, 1996 and 1995, respectively. Energy Marketing &
Trading also incurred costs and operating expenses, including transportation and
certain other costs, from affiliates of $96 million, $157 million and $194
million for 1997, 1996 and 1995, respectively. These sales and costs are
included in Energy Marketing & Trading 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:

1997 1996 1995
------ ------ ------
(MILLIONS)

Energy Services:
Energy Marketing & Trading*............................ $(24.7) $ 94.9 $ 51.3
Exploration & Production............................... 126.5 57.1 4.9
Field Services......................................... 32.3 26.2 14.0
Petroleum Services..................................... 81.6 67.7 44.5
Other.................................................... 4.3 3.7 --
------ ------ ------
$220.0 $249.6 $114.7
====== ====== ======

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

* Energy Marketing & Trading intercompany cost of sales, which are netted in
revenues consistent with market value accounting, exceeded intercompany
revenues in 1997.

F-30
49
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

Information for business segments is as follows:

1997 1996 1995
-------- -------- --------
(MILLIONS)

Identifiable assets at December 31:
Energy Services:
Energy Marketing & Trading...................... $ 759.2 $ 901.7 $ 484.9
Exploration & Production........................ 247.1 200.3 164.6
Field Services.................................. 1,504.5 1,425.5 1,260.8
Petroleum Services.............................. 904.6 906.5 863.2
Communications..................................... 1,313.3 671.3 401.5
Investments........................................ 1,079.2 743.3 599.1
General corporate and other........................ 896.4 315.3 458.7
-------- -------- --------
Consolidated.................................... $6,704.3 $5,163.9 $4,232.8
======== ======== ========
Additions to property, plant and equipment:
Energy Services:
Energy Marketing & Trading...................... $ 37.6 $ .6 $ .4
Exploration & Production........................ 63.3 30.3 15.6
Field Services.................................. 141.4 197.2 227.3
Petroleum Services.............................. 45.0 55.8 87.9
Communications..................................... 276.3 66.9 32.4
Other.............................................. 132.9 19.2 11.6
-------- -------- --------
Consolidated.................................... $ 696.5 $ 370.0 $ 375.2
======== ======== ========
Depreciation, depletion and amortization:
Energy Services:
Energy Marketing & Trading...................... $ .7 $ .6 $ 1.2
Exploration & Production........................ 12.6 10.5 9.8
Field Services.................................. 67.9 56.2 39.7
Petroleum Services.............................. 35.0 34.1 26.4
Communications..................................... 66.8 30.9 20.3
Other.............................................. 6.7 5.9 3.1
-------- -------- --------
Consolidated.................................... $ 189.7 $ 138.2 $ 100.5
======== ======== ========

Identifiable assets are gross assets used by a business segment, including
an allocated portion of assets used jointly by more than one business segment.
Items such as investments are considered to be general corporate assets rather
than identifiable assets of individual business segments.

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 $328 million at December 31, 1997. 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.

F-31
50
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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 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 Energy Services had recorded an aggregate
liability of approximately $12 million, representing the current estimate of
future environmental and remediation costs, including approximately $5 million
relating to former Williams Gas Pipelines Central facilities.

Other legal matters

In 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 price paid for the units. On July 16, 1997, the
U.S. Court of Appeals for the Tenth Circuit reversed the decision of the
district court, held that the Tribe owns the coal-seam gas produced from certain
coal strata on fee lands within the exterior boundaries of the Tribe's
reservation, and remanded the case to the district court for further
proceedings. On September 16, 1997, Amoco Production Company, the class
representative for the defendant class (of which Williams Production is a part),
filed its motion for rehearing en banc before the Court of Appeals. On December
4, 1997, the Tenth Circuit Court of Appeals agreed to rehear the appeal.

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. 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. In
one of the two remaining cases, a jury verdict found that Transcontinental Gas
Pipe Line was required to pay $23.3 million including $3.8 million in attorneys'
fees. Transcontinental Gas Pipe Line is considering an appeal. In the other
remaining case, a producer has asserted damages, including interest calculated
through December 31, 1996, of approximately $6 million.

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 Hazleton, Pennsylvania (the Facility).

F-32
51
WILLIAMS HOLDINGS OF DELAWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

Hazleton Fuel Management Company (HFMC), a subsidiary of Transco Energy Company,
formerly supplied natural gas and fuel oil to the Facility. Pursuant to a
court-approved Plan of Reorganization, all litigation involving HFMC has been
fully settled, and HFMC received $6.3 million from the bankruptcy estate,
leaving it with approximately $14 million of outstanding receivables, all of
which have been fully reserved.

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

NOTE 18 -- MAPCO ACQUISITION

On November 24, 1997, Williams and MAPCO Inc. announced that they had
entered into a definitive merger agreement whereby Williams would acquire MAPCO
by exchanging approximately 1.665 shares of Williams common stock for each
outstanding share of MAPCO common stock. In addition, outstanding MAPCO employee
stock options would be converted into Williams common stock. Approximately 96.8
million shares of Williams common stock valued at approximately $2.8 billion,
based on the closing market price of Williams common stock on December 31, 1997,
would be issued in the transaction. The transaction, subject to approval by both
Williams and MAPCO stockholders and review under federal antitrust laws, is
expected to close during the first quarter of 1998. MAPCO is engaged in the NGL
pipeline, petroleum refining and marketing and propane marketing business. Upon
completion of the merger, Williams will make a capital contribution of its
interest in MAPCO to Williams Holdings, and MAPCO will become part of the Energy
Services business unit.

The merger will be accounted for as a pooling of interests. Anticipated
changes in accounting methods as a result of the merger are not expected to have
a material impact on the financial position or results of operations of the
combined entity.

The following unaudited pro forma information combines the results of
operations of Williams Holdings and MAPCO as if the companies had been combined
throughout the periods presented.

YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(MILLIONS)

Revenues.................................................... $6,512.9 $5,153.0 $4,153.3
Income from continuing operations........................... 301.0 358.9 276.0
Net income.................................................. 291.1 326.2 1,305.3

Pro forma financial information is not necessarily indicative of results of
operations that would have occurred if the companies had been combined
throughout the periods presented or of future results of operations of the
combined companies.

F-33
52

WILLIAMS HOLDINGS OF DELAWARE, INC.

QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data are as follows (millions):

FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------

Revenues........................................... $529.2 $635.3 $711.9 $804.5
Costs and operating expenses....................... 353.7 433.4 504.4 527.0
Income before extraordinary loss................... 52.3 85.5 31.3 28.7
Net income......................................... 52.3 85.5 31.3 25.1

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

Second-quarter 1997 net income includes a $44.5 million gain related to the
combination of Williams Holdings' and Nortel's customer-premise equipment sales
and service operations (see Note 2 of Notes to Consolidated Financial
Statements). Fourth-quarter 1997 net income includes charges totaling
approximately $49.8 million, related to the decision to sell the learning
content business, and the write-down of assets and the development costs
associated with advanced applications (see Note 5 of Notes to Consolidated
Financial Statements). Fourth-quarter 1997 net income also includes
approximately $5 million in costs related to the MAPCO acquisition (see Note 18
of Notes to Consolidated Financial Statements) and an extraordinary loss of $3.6
million related to the restructuring of Williams' debt portfolio (see Note 7 of
Notes to Consolidated Financial Statements).

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.

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

None.

F-34
53

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, 1997...................................... F-11
Consolidated balance sheet at December 31, 1997 and
1996................................................... F-12
Consolidated statement of stockholder's equity for the
three years ended December 31, 1997.................... F-13
Consolidated statement of cash flows for the three years
ended December 31, 1997................................ F-14
Notes to consolidated financial statements................ F-15
Schedule for the three years ended December 31, 1997:
II -- Valuation and qualifying accounts................ F-36
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-35
54

WILLIAMS HOLDINGS OF DELAWARE, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(a)

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

Allowance for doubtful accounts:
1997...................................... $ 8.8 $8.8 $7.8 $6.9 $18.5
1996...................................... 10.3 4.1 1.3 6.9 8.8
1995...................................... 7.2 3.6 1.5 2.0 10.3

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

(a) Deducted from related assets.

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

F-36
55

PART IV

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

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

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

Exhibit 2 --

*(a) Agreement and Plan of Merger, dated as of November 23, 1997, and
as amended on January 25, 1998, among The Williams Companies, Inc., MAPCO
Inc. and TML Acquisition Corp. (filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-4, filed January 27, 1998).

Exhibit 3 --

*(a) Certificate of Incorporation of the Company (filed as Exhibit 3.2
to the Company's Form 10, dated October 18, 1995).

*(b) 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 July 23, 1997, 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, 1997).
4.3 -- U.S. $500,000,000 Credit Agreement, dated as of July 23,
1997, among the Company and the lenders named therein and
Citibank, N.A., as agent.
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.

(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 1997.

(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-37
56

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. GEHRES
----------------------------------
Shawna L. Gehres
Attorney-in-fact

Dated: March 30, 1998

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 -- Finance (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/ HOWARD E. JANZEN* Director
- -----------------------------------------------------
Howard E. Janzen

By: /s/ SHAWNA L. GEHRES
-------------------------------------------------
Shawna L. Gehres
Attorney-in-fact

Dated: March 30, 1998

II-1
57

INDEX TO EXHIBITS

EXHIBIT
NO. DESCRIPTION
------- -----------