<PAGE>   1
 
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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 AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
                          FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
                                              OR
  / /                 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)
 
<TABLE>
<S>                                             <C>
                  DELAWARE                                       73-1455707
      (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER IDENTIFICATION NO.)
       INCORPORATION OR ORGANIZATION)

            ONE WILLIAMS CENTER
              TULSA, OKLAHOMA                                      74172
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)                        (ZIP CODE)
</TABLE>
 
                         Registrant's Telephone Number:
                                 (918) 588-2000
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
                                      None
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                                      None
 
     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 / /  No /X/
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  /X/
 
     None of the registrant's voting stock is held by nonaffiliates.
 
     The number of shares of the registrant's Common Stock outstanding at March
25, 1996, 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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<PAGE>   2
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                                   FORM 10-K
 
                                     PART I
 
ITEM 1.  BUSINESS
 
(A) GENERAL DEVELOPMENT OF BUSINESS
 
     Williams Holdings of Delaware, Inc. (the "Company"), was incorporated under
the laws of the State of Delaware in July 1994. The principal executive offices
of the Company are located at One Williams Center, Tulsa, Oklahoma 74172
(telephone (918) 588-2000). Unless the context otherwise requires, references to
the Company herein include subsidiaries of the Company. The Company is a
wholly-owned subsidiary of The Williams Companies, Inc. ("Williams").
 
     Except as noted below, virtually all of the Company's assets have been
transferred to the Company by Williams since January 1, 1995, and were
previously operated by subsidiaries of Williams. Williams acquired Williams Pipe
Line Company in 1966. Williams acquired the original gathering, processing and
production properties operated by Williams Field Services Company in 1983.
Williams acquired the original equipment business of Williams Telecommunications
Systems, Inc. in 1991. Other assets transferred to the Company by Williams have
also been operated by Williams' subsidiaries for various periods of time, as
described herein.
 
     In the third quarter of 1994, the Company entered into an agreement to sell
its telecommunications network services operations. The transaction was
completed on January 5, 1995. See Note 3 of Notes to Consolidated Financial
Statements.
 
     On January 18, 1995, Williams acquired 60 percent of Transco Energy Company
("Transco"), in a cash tender offer. The remaining 40 percent of Transco's stock
was acquired through a merger, effective May 1, 1995. Also effective May 1,
1995, Williams transferred to the Company certain natural gas gathering,
processing and marketing assets, as well as certain other assets, previously
owned by Transco. The consolidated financial statements of the Company and
financial and operating information include the results of operations for these
assets from January 18, 1995. The Company has sold or liquidated certain assets
received from Transco. The largest of these assets, Transco Coal Company, was
sold in June 1995 for $65 million in cash and up to $23 million in preferred
stock of the purchaser. See Note 2 of Notes to Consolidated Financial
Statements.
 
     On December 28, 1995, a subsidiary of the Company purchased the BOk Tower,
an approximate 1.1 million square foot commercial office building located in
Tulsa, Oklahoma. The building serves as headquarters for Williams and its
subsidiaries, including the Company. Williams and certain of its subsidiaries
currently occupy approximately 48 percent of the building. In connection with
the purchase, the Company assumed intercompany debt payable to Williams of
approximately $60 million.
 
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     See Part II, Item 8 -- Financial Statements and Supplemental Data.
 
(C) NARRATIVE DESCRIPTION OF BUSINESS
 
     The Company, through subsidiaries, is engaged in natural gas gathering,
processing and production, the transportation of crude oil and petroleum
products, natural gas trading activities, natural gas liquids marketing and
provides a variety of other products and services to the energy industry. The
Company's telecommunications subsidiaries offer data, voice and video-related
products and services and customer premise equipment nationwide. The Company
also has certain other equity investments. See Note 4 of Notes to Consolidated
Financial Statements.
 
     Substantially all of the Company's operations are conducted through
subsidiaries. Williams performs management, legal, financial, tax, consultative,
administrative and other services for the Company and its
 
                                        1
<PAGE>   3
 
subsidiaries. The Company's principal sources of cash are from external
financings, dividends and advances from its subsidiaries, advances from
Williams, investments and interest payments from subsidiaries and Williams on
cash advances. The amount of dividends available to the Company from
subsidiaries largely depends on each subsidiary's earnings and capital
requirements. Terms of one subsidiary's borrowing arrangements limit the
transfer of funds to the Company. See Note 12 of Notes to Consolidated Financial
Statements.
 
                                     ENERGY
 
WILLIAMS FIELD SERVICES GROUP, INC. (WILLIAMS FIELD SERVICES)
 
     Williams Field Services, through subsidiaries, owns and/or operates both
regulated and nonregulated natural gas gathering and processing facilities and
owns and operates natural gas leasehold properties. In 1995 and 1994, gathering
and processing activities represented 98 percent and 89 percent, respectively,
of Williams Field Services' operating profit. Natural gas production represented
the balance.
 
     In 1995, Williams Field Services completed an expansion of its Manzanares
coal seam gas gathering systems in northwestern New Mexico increasing capacity
of the systems to over 1 Bcf* of gas per day. A plant expansion in the Wamsutter
field of south-central Wyoming completed in the fourth quarter of 1995 increased
the capacity of this field to 240 MMcf of gas per day. Also in 1995, Williams
Field Services completed the construction of a 75 MMcf of gas per day processing
plant in the Oklahoma Panhandle.
 
     Effective May 1, 1995, Williams transferred to Williams Field Services the
operation of certain production area transmission assets and certain gathering
and processing assets which Williams had acquired as of such date from Transco.
The production area transmission assets consist of approximately 3,500 miles of
pipeline located in gas producing areas offshore and onshore in Texas and
Louisiana which are currently classified by the Federal Energy Regulatory
Commission ("FERC") as interstate transmission lines. The gathering assets
consist of nonjurisdictional and intrastate gas gathering lines located offshore
and onshore in Texas. Such facilities consist of approximately 28 miles of
gathering pipelines. The processing assets consist of two natural gas processing
facilities. The first is a 50 percent joint ownership interest in a processing
facility with a 500 MMcf per day capacity located in southwestern Louisiana and
the second is a 50 percent partnership interest in a 60 MMcf per day cryogenic
extraction facility located in south Texas.
 
     In June 1995, Williams Field Services acquired the natural gas gathering
and processing assets of Public Service Company of New Mexico located in the San
Juan and Permian Basins of New Mexico for $154 million. Williams Field Services
immediately thereafter sold the southeastern New Mexico portion of the acquired
assets for $14.2 million. The assets retained consist of approximately 1,400
miles of gathering pipelines and three gas processing plants which have an
aggregate daily inlet capacity of 300 MMcf of gas.
 
     In the fourth quarter of 1995, the development of a commercial coal
gasification venture in Wyoming was canceled. Reclamation of the site in
coordination with various governmental agencies is underway. See Note 5 of Notes
to Consolidated Financial Statements.
 
     Williams Field Services' first nonregulated merchant power plant is
scheduled to begin operation in New Mexico in 1996. The $53 million 62-megawatt
facility, powered by coal seam gas, will produce electricity which will be sold
under a long-term contract. Other areas on Williams Field Services' system hold
the potential for similar cogeneration investments.
 
---------------
 
* 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 "MMBtu" means one million British Thermal Units and
  "TBtu" means one trillion British Thermal Units.
 
                                        2
<PAGE>   4
 
  Gathering and Processing
 
     Williams Field Services, through subsidiaries, owns and operates natural
gas gathering and processing facilities located in the San Juan Basin in
northwestern New Mexico and southwestern Colorado, southwestern Wyoming, the
Rocky Mountains of Utah and Colorado, northwest Oklahoma, Louisiana and areas
offshore and onshore in Texas. Williams Field Services, through subsidiaries,
also operates natural gas gathering and processing facilities located in the
Texas Panhandle and the Hugoton Basin in northwest Oklahoma and southwest Kansas
which are owned by Williams Natural Gas, an affiliated company, and natural gas
gathering and processing facilities located both onshore and offshore in Texas
and Louisiana, which are also owned by an affiliated company. The facilities
operated for affiliates are the subject of applications for orders permitting
abandonment so the facilities can be transferred to Williams Field Services.
Gathering services provided include the gathering of gas and the treating of
coal seam gas. The operating information below does not include operations for
facilities currently owned by affiliates but operated by Williams Field
Services.
 
     Customers and Operations.  Facilities owned and operated by Williams Field
Services consist of approximately 6,000 miles of gathering pipelines, six gas
treating plants and 14 gas processing plants (five of which are partially owned)
which have an aggregate daily inlet capacity of 4.9 Bcf of gas. Gathering and
processing customers have direct access to interstate pipelines, including
affiliated pipelines, which provide access to multiple markets.
 
     During 1995, Williams Field Services gathered natural gas for 116
customers. The three largest gathering customers accounted for approximately 26
percent, 15 percent and 11 percent of total gathered volumes. During 1995,
natural gas was processed for a total of 108 customers. The three largest
customers accounted for approximately 26 percent, 12 percent and 11 percent,
respectively, of total processed volumes. No other customer accounted for more
than 10 percent of gathered or processed volumes. Williams 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 Williams Field Services.
 
     Liquids extracted at the processing plants are ethane, propane, butane and
natural gasoline. During 1995, liquid products were sold to a total of 52
customers under short-term contracts. The four largest customers accounted for
approximately 32 percent, 18 percent, 16 percent and 15 percent, respectively,
of total liquid products volumes sold. No other customer accounted for more than
10 percent of volumes sold.
 
     Operating Statistics.  The following table summarizes gathering, processing
and natural gas liquid volumes for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                     1995      1994     1993
                                                                     -----     ----     ----
    <S>                                                              <C>       <C>      <C>
    Gas volumes (TBtu, except where noted):
      Gathering....................................................    810     679      588
      Processing...................................................    406     392      323
      Natural gas liquid sales (millions of gallons)...............    297     281      295
</TABLE>
 
  Production
 
     Williams Field Services, through a subsidiary, owns and operates producing
gas leasehold properties in Colorado, Louisiana, New Mexico, Utah and Wyoming.
 
     Gas Reserves.  As of December 31, 1995, 1994 and 1993, Williams Field
Services had proved developed natural gas reserves of 292 Bcf, 269 Bcf and 229
Bcf, respectively, and proved undeveloped reserves of 222 Bcf, 220 Bcf and 319
Bcf, respectively. Of Williams Field Services' total proved reserves, 96 percent
are located in the San Juan Basin of Colorado and New Mexico. As discussed
below, Williams Field Services conveyed gas reserves to the Williams Coal Seam
Gas Royalty Trust in 1993. No major discovery or other favorable or adverse
event has caused a significant change in estimated gas reserves since year end.
 
                                        3
<PAGE>   5
 
     Customers and Operations.  As of December 31, 1995, the gross and net
developed leasehold acres owned by Williams Field Services totaled 261,973 and
107,046, respectively, and the gross and net undeveloped acres owned were
152,977 and 44,296, respectively. As of such date, Williams Field Services owned
interests in 2,795 gross producing wells (496 net) on its leasehold lands. The
following table summarizes drilling activity for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                              DEVELOPMENT
                                                                            ---------------
       COMPLETED                                                            GROSS      NET
         DURING                                                             WELLS     WELLS
      -----------                                                           -----     -----
    <S>                                                                     <C>       <C>
      1995................................................................    61        22
      1994................................................................    66        19
      1993................................................................    39         5
</TABLE>
 
     The majority of Williams Field Services' gas production is currently being
sold in the spot market at market prices. Total net production sold during 1995,
1994 and 1993 was 25.9 TBtu, 22.6 TBtu and 16.3 TBtu, respectively. The average
production costs per MMBtu of gas produced were $.14, $.14 and $.17 in 1995,
1994 and 1993, respectively. The average sales price per MMBtu was $.88, $1.21
and $1.44, respectively, for the same periods.
 
     In 1993, Williams Field Services conveyed a net profits interest in certain
of its properties to the Williams Coal Seam Gas Royalty Trust. Trust Units were
subsequently sold to the public by Williams in an underwritten public offering.
The Company holds 3,568,791 Trust Units representing 36.8 percent of outstanding
Units. Substantially all of the production attributable to the properties
conveyed to the Trust was from the Fruitland coal formation and constituted coal
seam gas. Proved developed coal seam gas reserves at December 31, 1995,
attributed to the properties conveyed were 163 Bcf. Production information
reported herein includes Williams Field Services' interest in such Units.
 
  Regulatory Matters
 
     Historically, an issue has existed as to whether FERC has authority under
the Natural Gas Act of 1938 to regulate gathering and processing prices and
services. During 1994, after reviewing its legal authority in a Public Comment
Proceeding, FERC determined that while it retains some regulatory jurisdiction
over gathering and processing performed by interstate pipelines, pipeline
affiliated gathering and processing companies are outside its authority under
the Natural Gas Act. Orders issued in 1994 which implement FERC's conclusion
that it lacks jurisdiction have been appealed to the United States Court of
Appeals for the District of Columbia Circuit. Williams Field Services cannot
predict the ultimate outcome of these proceedings.
 
     As a result of these FERC decisions, several of the individual states in
which Williams Field Services operates may consider whether to impose regulatory
requirements on gathering companies. No state currently regulates Williams Field
Services' gathering or processing rates or services.
 
  Competition
 
     Williams Field Services 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.
 
  Ownership of Property
 
     Williams Field Services' 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 Williams Field Services or on
sites held under leases or permits issued or approved by public authorities.
 
                                        4
<PAGE>   6
 
  Environmental Matters
 
     Williams Field Services is subject to various federal, state and local laws
and regulations relating to environmental quality control. Management believes
that Williams Field Services' 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 Field Services.
 
WILLIAMS ENERGY SERVICES COMPANY (WESCO)
 
     WESCO, through subsidiaries, offers a full range of products and services
to energy markets throughout North America. WESCO's core business includes
natural gas and energy commodity trading activities, energy-related risk
management products and services and computer-based information products. WESCO
was incorporated in 1993. See Note 13 of Notes to Consolidated Financial
Statements.
 
  Trading Activities and Services
 
     In addition to its own natural gas trading operations, WESCO conducts
certain natural gas trading operations formerly conducted by a subsidiary of
Transco as well as third-party trading activities managed by an affiliate. WESCO
trades natural gas throughout North America, primarily serving local
distribution company markets in the eastern and midwestern United States. The
Operating Statistics presented below, for periods prior to 1995, represent
previously existing financial trading services conducted by Williams'
subsidiaries, coupled with third-party trading services provided by an affiliate
and do not include operations previously conducted by the Transco subsidiary.
 
     WESCO serves a customer base of approximately 700 companies across its
natural gas trading operations, with net revenues derived primarily from sales
to local distribution companies, other gas marketers and certain end-users.
WESCO's gas trading activities are conducted on both interstate and intrastate
pipelines, with most sales activity coordinated with transportation along
pipeline systems owned by Williams.
 
     WESCO offers financial instruments and derivatives to producers and
consumers of energy as well as to financial entities participating in energy
price-risk management. WESCO also enters into energy-related financial
instruments to manage market price fluctuations. The customer base for these
activities is comprised of other gas marketing and trading companies,
energy-based entities and brokers trading in energy commodities.
 
  Information Products
 
     In 1995, WESCO marketed various computer-based trading and trader-match
services including Chalkboard, an electronic trader-match system for buyers and
sellers of liquid fuels, crude oil and refined products; Streamline, a physical
cash forward gas trading system located at seven U.S. hubs; and Capacity
Central, a natural gas pipeline capacity information system. These products are
utilized primarily by a customer base of approximately 200 energy-based
companies under short-term service commitments. The information products
architecture was developed in 1993 and introduced to the marketplace in 1994.
These activities have not been profitable to date as costs of establishing
marketing liquidity and product usage still outpace the returns from this
developing market.
 
                                        5
<PAGE>   7
 
     Effective January 1, 1996, Streamline and Capacity Central were contributed
to a limited liability company along with the energy-related information
services of a PanEnergy Corp. subsidiary. The new entity, Altra Energy
Technologies, L.L.C., is owned equally by WESCO and PanEnergy.
 
  Operating Statistics (dollars in millions, volumes in TBtu)
 
<TABLE>
<CAPTION>
                                                                   1995      1994     1993
                                                                   -----     ----     ----
    <S>                                                            <C>       <C>      <C>
    Operating profit.............................................  $30.0     $ .5     $7.9
    Natural gas physical trading.................................    501      148      152
</TABLE>
 
  Producer Services
 
     WESCO also arranges and provides various financial products and other
energy-related financing to oil and gas producers, enabling joint participation
in reserve acquisitions, development and monetization.
 
  Regulatory Matters
 
     Management believes that WESCO's natural gas trading 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
 
     WESCO's gas trading operations are in direct competition with large
independent gas marketers, marketing affiliates of regulated pipelines and
natural gas producers. The financial trading business competes with other
energy-based companies offering similar services as well as certain brokerage
houses. This level of competition contributes to a business environment of
constant pricing and margin pressure.
 
  Ownership of Property
 
     The primary assets of WESCO are its term contracts, employees and related
technological support. Costs to develop the information products and certain
trading systems have been capitalized.
 
  Environmental Matters
 
     WESCO is subject to federal, state and local laws and regulations relating
to the environmental aspects of its business. Management believes that WESCO is
in substantial compliance with existing environmental legal requirements for its
business. 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 WESCO.
 
WILLIAMS PIPE LINE COMPANY (WILLIAMS PIPE LINE)
 
     Williams Pipe Line operates a crude oil and petroleum products 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 terminalling services
on a nondiscriminatory basis under published tariffs. The system transports
refined products, LP-gases, lube extracted fuel oil and crude oil.
 
                                        6
<PAGE>   8
 
  Shippers and Pipeline System
 
     At December 31, 1995, the system traversed approximately 7,000 miles of
right-of-way and included over 9,200 miles of pipeline in various sizes up to 16
inches in diameter. The system includes 82 pumping stations, 23 million barrels
of storage capacity and 47 delivery terminals. The terminals are equipped to
deliver refined products into tank trucks and tank cars. The maximum number of
barrels which the system can transport per day depends upon the operating
balance achieved at a given time between various segments of the system. Since
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.
 
     The operating statistics set forth below relate to the system's operations
for the periods indicated:
 
<TABLE>
<CAPTION>
                                                             1995        1994        1993
                                                            -------     -------     -------
    <S>                                                     <C>         <C>         <C>
    Shipments (thousands of barrels):
      Refined products:
         Gasolines........................................  125,060     120,682     109,841
         Distillates......................................   61,238      61,129      51,508
         Aviation fuels...................................   12,535       9,523      11,123
      LP-Gases............................................   12,839      10,849       9,778
      Lube extracted fuel oil.............................    4,462           0           0
      Crude oil...........................................      860       1,062       3,388
                                                            -------     -------     -------
              Total shipments.............................  216,994     203,245     185,638
                                                            =======     =======     =======
      Daily average (thousands of barrels)................      595         557         509
      Average haul (miles)................................      269         284         279
      Barrel miles (millions).............................   58,326      57,631      51,821
    Revenues (millions):
      Transportation......................................  $ 177.0     $ 168.0     $ 153.0
      Nontransportation...................................     65.7        41.7        26.3
                                                            -------     -------     -------
              Total revenues..............................  $ 242.7     $ 209.7     $ 179.3
                                                            =======     =======     =======
      Average transportation revenue per barrel...........     $.82        $.83        $.82
</TABLE>
 
     Williams Pipe Line began moving a new lube extracted fuel oil product in
1995 from an Oklahoma refinery to Toledo, Ohio, through a joint movement with
other carriers. Volume movements approximate 28 thousand barrels per day.
 
     In 1995, 73 shippers transported volumes through the system. The seven
largest shippers accounted for 54 percent of transportation revenues. The
highest transportation revenue-producing shipper accounted for approximately 11
percent of transportation revenues in 1995. Nontransportation activities
accounted for 27 percent of total revenues in 1995. The increase in
nontransportation revenues is primarily due to expanded gas liquids operations.
 
     As of December 31, 1995, Williams Pipe Line was directly connected to, and
received products from, 11 operating refineries reported to have an aggregate
crude oil refining capacity of over 900,000 barrels per day. Eight of these
refineries are located in Kansas and Oklahoma, two in Minnesota and one in
Wisconsin. The system also received products through connecting pipelines from
other refineries located in Illinois, Indiana, Kansas, Louisiana, Montana, North
Dakota, Oklahoma and Texas. Crude oil is received through connections in Kansas
and Oklahoma. The refineries, which are connected directly or indirectly to the
system, have access to a broad range of crude oil producing areas, including
foreign sources. LP-gases are transported from gas producing and storage areas
in central Kansas through connecting pipelines in Iowa, Kansas, Missouri,
Illinois, Nebraska and South Dakota. In addition to making deliveries to
company-owned terminals, the system delivers products to third-party terminals
and connecting pipelines.
 
     The refining industry continues to be affected by environmental regulations
and changing crude supply patterns. The industry's response to environmental
regulations and changing supply patterns will directly affect
 
                                        7
<PAGE>   9
 
volumes and products shipped on the Williams Pipe Line system. EPA regulations,
driven by the Clean Air Act, require refiners to change the composition of fuel
manufactured. A pipeline's ability to respond to the effects of regulation and
changing supply patterns will determine its ability to maintain and capture new
market shares. Williams Pipe Line has successfully responded to changes in
diesel fuel composition and product supply and has adapted to new gasoline
additive requirements. Reformulated gasoline regulations have not yet
significantly affected Williams Pipe Line. Williams Pipe Line will continue to
position itself to respond to changing regulations and supply patterns, but it
is not possible to predict how future changes in the marketplace will affect
Williams Pipe Line's market areas.
 
  Regulatory Matters
 
     General. Williams Pipe Line, as an interstate common carrier pipeline, is
subject to the provisions and regulations of the Interstate Commerce Act. Under
this Act, Williams Pipe Line is required, among other things, to establish just,
reasonable and nondiscriminatory rates, to file its tariffs with FERC, to keep
its records and accounts pursuant to the Uniform System of Accounts for Oil
Pipeline Companies, to make annual reports to FERC and to submit to examination
of its records by the audit staff of FERC. Authority to regulate rates, shipping
rules and other practices and to prescribe depreciation rates for common carrier
pipelines is exercised by FERC. The Department of Transportation, as authorized
by the 1992 Pipeline Safety Reauthorization Act, is the oversight authority for
interstate liquids pipelines. Williams Pipe Line is also subject to the
provisions of various state laws which are applicable to intrastate pipelines.
 
     Rate Proceeding. 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. As
a result of these protests, FERC suspended the effective date of the tariff for
seven months (until September 16, 1990), at which time it became effective,
subject to refund. The revised intrastate tariffs filed with state commissions
were voluntarily withdrawn and refiled to be effective at the same time as the
interstate tariff.
 
     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 hearings in Phase I were held
before an administrative law judge in the summer of 1991. The judge's decision,
issued January 24, 1992, ruled solely on market power issues and certain
discrimination claims. This initial decision concluded that Williams Pipe Line
had sustained its burden of proof in demonstrating that it "lacks significant
market power" and is "workably competitive" in 22 of 32 of its markets and that
the alleged discrimination was justified by competitive conditions. On July 27,
1994, FERC issued a Phase I decision, Order 391. The FERC, while citing
considerable agreement with the theoretical concepts employed by the
administrative law judge, reversed his initial decision regarding the
competitive nature of nine specific markets, thus finding that Williams Pipe
Line had sustained its burden of proof in showing that it is workably
competitive in 13 of 32 markets under investigation. In response to this order,
Williams Pipe Line filed a motion for reconsideration of nine markets on August
29, 1994. On June 6, 1995, FERC issued its rehearing decision of the Phase I
order. This decision found an additional seven markets to be workably
competitive. This brings the total number of Williams Pipe Line competitive
markets to 20. A shipper has appealed this decision to the United States Court
of Appeals for the District of Columbia Circuit which has stayed the appeal
proceedings until Phase II has been completed. Williams Pipe Line filed its
direct evidence in Phase II on January 23, 1995, in which Williams Pipe Line
departed from the more traditional cost allocation methodology in lieu of an
overall total system revenue requirement and stand-alone cost ceiling in
conjunction with incremental and short-run marginal cost floors. The hearings
began December 4, 1995, and concluded January 19, 1996. The current procedural
schedule forecasts an initial decision in Phase II in mid-year 1996. While
Williams Pipe Line cannot predict the final outcome of these
 
                                        8
<PAGE>   10
 
proceedings, it believes its revised tariffs will ultimately be found lawful.
See Note 16 of Notes to Consolidated Financial Statements.
 
     In June 1993, FERC ruled that Williams Pipe Line must file tariffs and cost
justification for transaction charges that are collected for certain bookkeeping
services, Product Transfer Orders and Product Authorizations. Williams Pipe Line
had previously considered these charges as nonjurisdictional. In order to comply
with the ruling, Williams Pipe Line immediately filed tariffs establishing these
charges in its tariff. Williams Pipe Line filed a request for rehearing on July
23, 1993. The FERC, on September 21, 1995, issued an Order on Rehearing,
reversing its previous decision. The FERC has now ruled that Williams Pipe
Line's Product Transfer Orders and Product Authorization charges are not
jurisdictional, do not require cost justification and need not be filed in
Williams Pipe Line's tariffs. Moreover, FERC now recognizes that "transportation
services are completed at the time the petroleum products enter the terminal."
This decision is subject to rehearing and judicial review.
 
     On October 22, 1993, FERC issued a new rule making and two companion
Notices of Inquiry intended to establish "simplified and generally applicable
rate making" as well as procedural streamlining as mandated by the Energy Policy
Act of 1992. On July 27, 1994, FERC issued a final rule establishing a
"simplified and generally applicable rate making" methodology as mandated by the
Energy Policy Act of 1992. FERC has attempted to streamline the rate making
process via generic rules and a rate cap mechanism, or index, based on the
annual Producer Price Index for Finished Goods less one percentage point
("PPI-1"). The final rule, which became effective January 1, 1995, requires
pipelines to use indexing as their primary rate making methodology in markets
not determined to be workably competitive. The Association of Oil Pipelines has
filed an appeal of this order in the Court of Appeals for the District of
Columbia Circuit citing, among other things, the inadequacy of the PPI-1 index.
Williams Pipe Line has intervened in this proceeding.
 
  Competition
 
     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. Since 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 which 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 which 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.
 
  Ownership of Property
 
     Williams Pipe Line's system is owned in fee. However, a substantial portion
of the system is operated, constructed and maintained pursuant to rights-of-way,
easements, permits, licenses or consents on and across properties owned by
others. The terminals, pump stations and all other facilities of the system are
located on lands owned in fee or on lands held under long-term leases, permits
or contracts. Management believes that
 
                                        9
<PAGE>   11
 
the system is in such a condition and maintained in such a manner that it is
adequate and sufficient for the conduct of business.
 
  Environmental Matters
 
     Williams Pipe Line's operations are subject to various federal, state and
local laws and regulations relating to environmental quality control. Management
believes that Williams Pipe Line'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 Pipe Line.
 
     Williams Pipe Line has been named by the EPA 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. This
site was placed 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. Monitoring should be complete in the first
quarter of 1997.
 
WILLIAMS ENERGY VENTURES, INC. (WILLIAMS ENERGY VENTURES)
 
     Another subsidiary of the Company, Williams Energy Ventures, is combined
for financial reporting purposes with Williams Pipe Line, although Williams
Energy Ventures' activities are not included in the Williams Pipe Line operating
statistics on page 7 herein. Williams Energy Ventures is engaged in the
manufacturing and marketing of petroleum products and oxygenates. Williams
Energy Ventures also owns an approximate 70 percent interest in a 30 million
gallon per year ethanol plant in Nebraska that began operations in November
1995. Williams Energy Ventures operates the facility and markets the fuel
ethanol output. In addition, on August 1, 1995, Williams Energy Ventures
purchased Pekin Energy Company in Pekin, Illinois, for $167 million. The Pekin
Energy facility produces 100 million gallons annually of fuel-grade and
industrial ethanol and various coproducts.
 
                               TELECOMMUNICATIONS
 
WILLIAMS TELECOMMUNICATIONS SYSTEMS, INC. (WILTEL)
 
     WilTel provides data, voice and video communications products and services
to a wide variety of customers nationally. WilTel is strategically positioned in
the marketplace with more than 100 sales and service locations throughout the
United States, over 2,800 employees and over 1,200 stocked service vehicles.
WilTel employs more than 1,300 technicians and more than 400 sales
representatives and sales support personnel to serve an estimated 40,000
commercial, governmental and institutional customers. WilTel's customer base
ranges from Fortune 500 corporations and the Federal Government to small
privately-owned entities.
 
     WilTel offers its customers a full array of data, voice and video network
interconnect products including digital key systems (generally designed for
voice applications with fewer than 100 lines), private branch exchange (PBX)
systems (generally designed for voice applications with greater than 100 lines),
voice processing systems, interactive voice response systems, automatic call
distribution applications, call accounting systems, network monitoring and
management systems, desktop video, routers, channel banks, intelligent hubs and
cabling. WilTel's services also include the design, configuration and
installation of voice and data networks and the management of customers'
telecommunications operations and facilities. WilTel's National Technical
Resource Center provides customers with on-line order entry and trouble
reporting services, advanced technical assistance and training. Other service
capabilities include Local Area Network and PBX remote monitoring and toll fraud
detection.
 
                                       10
<PAGE>   12
 
     In March 1994, WilTel acquired BellSouth's customer premise equipment sales
and service operations in 29 states outside of BellSouth's local operating
region in the nine southeastern-most states, and in October 1994, acquired
Jackson Voice Data, a New York City-based customer premise equipment company. In
1996, WilTel acquired Comlink, Incorporated, a Massachusetts-based data and
customer premise equipment company. The acquisition of these businesses has
allowed WilTel to capitalize on its existing infrastructure, strengthen its
national market presence and geographic customer density and has provided more
diversity in product offerings.
 
  Operating Statistics
 
     The following table summarizes the results of operations for the periods
indicated (dollars and ports in millions):
 
<TABLE>
<CAPTION>
                                                                  1995      1994      1993
                                                                 -------   -------   -------
    <S>                                                          <C>       <C>       <C>
    Revenues...................................................  $ 494.9   $ 396.6   $ 302.8
    Percent of revenues by type of service:
      New system sales.........................................      34%       33%       39%
      System modifications.....................................      39%       36%       30%
      Maintenance..............................................      25%       24%       23%
      Other....................................................       2%        7%        8%
    Operating profit...........................................  $  28.3   $  18.9   $   9.5
    Backlog....................................................  $  85.0   $  92.4   $  52.0
    Total ports................................................      4.7       4.1       2.7
</TABLE>
 
     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 1995, WilTel derived approximately 66 percent of its revenues from its
existing customer base and approximately 34 percent from the sale of new
telecommunications systems. WilTel's three largest suppliers accounted for 89
percent of equipment sold in 1995. A single manufacturer supplied 76 percent of
all equipment sold. In this case, WilTel is the largest distributor of certain
of this company's products. About 69 percent of WilTel's active customer base
consists of this manufacturer's products. The distribution agreement with this
supplier is scheduled to expire at the end of 1997. This agreement is expected
to be renewed upon expiration. Management believes there is minimal risk as to
the availability of product from suppliers.
 
  Competition
 
     WilTel has many competitors ranging from AT&T and the Regional Bell
Operating Companies to small individually-owned companies which sell and service
customer premise equipment. Competitors include companies that sell equipment
that is comparable or identical to that sold by WilTel. (See discussion of
telecommunications reform legislation below).
 
  Regulatory Matters
 
     The equipment sold by WilTel must meet the requirements of Part 68 of the
Federal Communications Commission ("FCC") rules governing the equipment
registration, labelling and connection of equipment to telephone networks.
WilTel relies on the equipment manufacturers' compliance with these requirements
for its own compliance regarding the equipment it distributes. A subsidiary of
WilTel, which provides intrastate microwave communications services for a
Federal agency, is subject to FCC regulations as a common carrier microwave
licensee. These regulations have minimal impact on WilTel's operations.
 
                                       11
<PAGE>   13
 
THE WILTECH GROUP, INC. (WILTECH)
 
     WilTech, through subsidiaries, seeks to develop growth opportunities in the
telecommunications and technology industries. WilTech currently conducts its
business through two principal operating subsidiaries, Vyvx, Inc. and Williams
Learning Network, Inc. In October 1995, WilTech acquired a 22 percent interest
in ITCmediaConferencing Company. The investment is expected to expand WilTech's
offerings in the videoconferencing, teleconferencing and enhanced fax services
markets. The total cost of the ITC investment, together with the ICG Wireless
Services' assets and NUS Training Corporation acquisitions discussed below, is
approximately $51 million.
 
  VYVX, INC. (Vyvx)
 
     Vyvx offers fiber-optic television transmission services nationwide. It
provides these broadcast-quality services as an alternative to satellite and
microwave television transmissions. Vyvx primarily provides backhaul or
point-to-point transmission of news and other programming between two or more
customer locations. For example, the Vyvx network is used for the broadcast
coverage of major professional sporting events. Vyvx's customers include all of
the major broadcast and cable networks. Vyvx also provides videoconferencing
business television services.
 
     In 1995, Vyvx announced the acquisition of four teleports (including
satellite earth station facilities) from ICG Wireless Services. The teleports
are located in Atlanta, Denver, Los Angeles and New York (Carteret, N.J.). The
acquisition will enable Vyvx to provide both fiber-optic backhaul and satellite
distribution services. The acquisition, which is subject to certain conditions,
including the receipt of regulatory approvals, is expected to close in the first
half of 1996.
 
     Regulatory Matters. Vyvx is subject to FCC regulations as a common carrier
with regard to certain of its existing and future transmission services and is
subject to the laws of certain states governing public utilities. Operation of
to-be-acquired satellite earth stations and certain other related transmission
facilities are also subject to FCC licensing and other regulations. These
regulations do not have a significant impact on Vyvx's operations.
 
     Competition. Competition for Vyvx's fiber-optic television transmission
operations is derived primarily from companies offering video transmission
services by means of satellite facilities and to a lesser degree from companies
offering transmission services via microwave facilities or fiber-optic cable.
 
     Federal telecommunications reform legislation enacted in February 1996, is
designed to increase competition in the long distance market by significantly
liberalizing current restrictions on market entry. In particular, Regional Bell
Operating Companies are permitted to provide long distance services, including
but not limited to, video transmission services, subject to certain restrictions
and conditions precedent. Moreover, public utilities are permitted to provide
telecommunications services, including long distance services, through separate
subsidiaries. The legislation also calls for tariff forbearance and relaxation
of regulation over common carriers. Any impact such legislation may have on Vyvx
cannot be predicted at this time.
 
     Ownership of Property. Vyvx's fiber-optic transmission facilities are owned
in part and leased in part. Vyvx carries signals by means of its own fiber-optic
facilities, as well as carrying signals over fiber-optic facilities leased from
third-party interexchange carriers and the various local exchange carriers.
 
     Environmental Matters. Vyvx is subject to federal, state and local laws and
regulations relating to the environmental aspects of its business. Management
believes that Vyvx'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 Vyvx.
 
                                       12
<PAGE>   14
 
  WILLIAMS LEARNING NETWORK, INC. (Williams Learning Network)
 
     Williams Learning Network, formerly Williams Knowledge Systems, provides
computer-based operator training primarily to the energy industry. Williams
Learning Network has licensing agreements with over 150 customers in the oil and
gas pipeline, terminal and trucking industries.
 
     In October 1995, Williams Learning Network acquired NUS Training
Corporation. This acquisition gives Williams Learning Network a large library of
video-based and multimedia training products for the chemical, refining and
utility industries plus an expanded customer base and sales force.
 
                               OTHER INFORMATION
 
     The Company has approximately 5,700 full-time employees, of whom
approximately 900 are represented by unions and covered by collective bargaining
agreements. The Company considers its relations with its employees to be
generally good.
 
FORWARD-LOOKING INFORMATION
 
     Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. Such statements are made in
reliance on the "safe harbor" protections provided under the Private Securities
Litigation Reform Act of 1995.
 
     As required by such Act, the Company hereby identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in
forward-looking statements: (i) risks and uncertainties impacting the Company as
a whole primarily relate to changes in general economic conditions in the United
States, changes in laws and regulations to which the Company is subject,
including tax, environmental and employment laws and regulations, the cost and
effects of legal and administrative claims and proceedings against the Company
or its subsidiaries or which may be brought against the Company or its
subsidiaries and conditions of the capital markets utilized by the Company to
access capital to finance operations; (ii) for the Company's regulated
businesses, risks and uncertainties primarily relate to the impact of future
federal and state regulation of business activities, including allowed rates of
return; and (iii) risks and uncertainties associated with the Company's
nonregulated businesses primarily relate to the ability of such entities to
develop expanded markets and product offerings as well as maintaining existing
markets. In addition, future utilization of pipeline capacity will depend on
energy prices, competition from other pipelines and alternate fuels, the general
level of natural gas and petroleum product demand and weather conditions, among
other things. Further, gas prices which directly impact gathering and processing
throughput and operating profits may fluctuate in unpredictable ways. It is also
not possible to predict which of many possible future products and service
offerings will be important to maintaining a competitive position in the
telecommunications business or what expenditures will be required to develop and
provide such products and services.
 
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
 
     The Company has no significant foreign operations.
 
ITEM 2. PROPERTIES
 
     See Item 1(c) for description of properties.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     Other than as described under Item 1 -- Business and in Note 16 of Notes to
Consolidated Financial Statements, there are no material pending legal
proceedings. The Company is subject to ordinary routine litigation incidental to
its business.
 
                                       13
<PAGE>   15
 
     With respect to the Dakota litigation described in Note 16, in which
Transco Energy Company and Transco Coal Gas Company, subsidiaries of the
Company, are named as defendants, certain parties have subsequently filed a
motion with FERC requesting that FERC establish an additional proceeding to
consider claims for additional refunds. The claimed additional refunds pertain
to amounts paid to Dakota from November 1, 1988, through April 30, 1993. Net to
Transcontinental Gas Pipe Line's (an affiliated company) interest, the claimed
additional refunds approximate $90 million. Transcontinental Gas Pipe Line has
filed documents with FERC opposing the motion for additional refunds. The
administrative law judge's initial decision in this case pertained only to
periods after April 30, 1993, and, if sustained, would require Transcontinental
Gas Pipe Line to refund to ratepayers approximately $75 million. This litigation
is not expected to have an adverse effect on the financial condition of the
Company.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
        AND RELATED STOCKHOLDER MATTERS
 
     As of December 31, 1995, 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.
 
                                       14
<PAGE>   16
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following financial data are an integral part of, and should be read in
conjunction with, the consolidated financial statements and notes thereto.
Information concerning significant trends in the financial condition and results
of operations is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages F-1 through F-7 of this report.
 
<TABLE>
<CAPTION>
                                               1995        1994        1993        1992        1991
                                             --------    --------    --------    --------    --------
                                             (MILLIONS, EXCEPT RATIO OF EARNINGS TO FIXED CHARGES)
<S>                                          <C>         <C>         <C>         <C>         <C>
Revenues:*
  Williams Field Services Group............  $  426.8    $  336.4    $  386.5    $  397.7    $  295.5
  Williams Energy Services.................      85.8       263.7       360.8       496.2       289.4
  Williams Pipe Line.......................     350.2       310.7       180.5       148.5       140.6
  WilTel...................................     494.9       396.6       302.8       271.1       212.8
  WilTech Group............................      44.0        20.0        13.5         9.5         6.2
  Other....................................      17.4          --          --          --          --
  Intercompany eliminations................     (65.1)      (63.1)      (23.1)      (39.8)      (14.7)
                                             --------    --------    --------    --------    --------
          Total revenues...................   1,354.0     1,264.3     1,221.0     1,283.2       929.8
Income from continuing operations*.........     211.8       125.5       152.3        46.9        20.7
Income from discontinued operations**......   1,018.8        94.0        46.4        25.2        40.3
Total assets...............................   4,166.4     3,440.1     2,989.4     2,869.9     2,316.2
Long-term debt.............................     273.9       507.0       229.4       337.1       375.9
Stockholder's equity.......................   2,151.6     1,739.9     1,818.0     1,614.6     1,262.0
</TABLE>
 
---------------
 
 * See Notes 4 and 5 of Notes to Consolidated Financial Statements for
   discussion of significant asset sales and write-off of project costs.
 
 **See Note 3 of Notes to Consolidated Financial Statements for discussion of
   the gain on the sale of discontinued operations.
 
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
       CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
  1995 vs. 1994
 
     Williams Field Services Group's revenues increased $90.4 million, or 27
percent, due primarily to $39 million higher gathering revenues in addition to
higher natural gas sales. Gathering revenues increased due primarily to a 19
percent increase in volumes combined with an increase in average prices. Natural
gas sales increased due to higher volumes, partially offset by lower average
prices. Costs and operating expenses increased $55 million, or 28 percent, due
primarily to higher natural gas purchase volumes and expanded facilities.
Selling, general and administrative expenses increased $28 million, or 125
percent, due primarily to expanded facilities, including Transco Energy
activities, and additional business development activities. Other income -- net
includes $12 million in operating profit from the net effect of two unrelated
items. One was $20 million of income from the favorable resolution of
contingency issues involving previously regulated gathering and processing
assets. This was partially offset by an $8 million accrual for a future minimum
price natural gas commitment. Operating profit increased $17.9 million, or 15
percent, primarily resulting from the $12 million in other income -- net and the
increase in gathering volumes, partially offset by the effect of lower natural
gas prices. Operating profit in 1994 included approximately $12 million in
favorable settlements and adjustments of certain prior period accruals,
including income of $4 million from an adjustment to operating taxes.
 
     Williams Energy Services' revenues and costs and operating expenses
decreased $177.9 million and $238 million, respectively. The addition of Transco
Energy's gas trading activities was more than offset by the reporting of 1995
natural gas marketing activities on a net-margin basis (see Note 13). Natural
gas physical trading volumes increased to 500.6 TBtu in 1995 compared to 147.8
TBtu in 1994, primarily from the effect of
 
                                       F-1
<PAGE>   17
 
the Transco Energy acquisition. Operating profit increased $29.5 million from
$500,000 in 1994. Trading activities' operating profit increased $34 million,
attributable primarily to income recognition from long-term natural gas supply
obligations and no-notice service provided to local distribution companies.
Included in trading activities is a price-risk management adjustment of $4
million from the valuation of certain natural gas supply and sales contracts
previously excluded from trading activities. These increases were partially
offset by $6 million of loss provisions, primarily accruals for contract
disputes, and increased costs of supporting its information services business.
As a result of Williams Energy Services' price-risk management and trading
activities, it is subject to risk from changes in energy commodity market
prices, the portfolio position of its financial instruments and credit risk.
Williams Energy Services manages its portfolio position by making commitments
which manage risk by maintaining its portfolio within established trading policy
guidelines.
 
     Williams Pipe Line's revenues (including Williams Energy Ventures)
increased $39.5 million, or 13 percent, due to an increase in transportation and
non-transportation revenues of $9 million and $30.5 million, respectively.
Shipments, while 7 percent higher than 1994, were reduced by the November 1994
fire at our truck-loading rack and unfavorable weather conditions in the first
half of 1995. The average transportation rate per barrel and average length of
haul were slightly below 1994 due primarily to shorter haul movements. The
increase in non-transportation revenues reflects $84 million from the
acquisition of Pekin Energy in August 1995 and increased gas liquids operations
of $16 million, largely offset by $62 million related to lower petroleum-product
services due to adverse market conditions and a $15 million decrease in refined-
product sales due to the unavailability of certain refined-product supplies.
Costs and expenses increased $22 million, or 8 percent, due primarily to
increased operating expenses associated with transportation and
non-transportation activities. Operating profit (including Williams Energy
Ventures) increased $17.8 million, or 34 percent, due primarily to higher
transportation revenues of $9 million and non-transportation activities of $8.8
million. Non-transportation includes $3 million related to the acquisition of
Pekin Energy and the absence of $5 million of costs in 1994 for evaluating and
determining whether to build an oil refinery near Phoenix. Williams Energy
Ventures' results improved in 1995 with a $400,000 operating loss compared to an
$8.1 million operating loss in 1994.
 
     WilTel's revenues increased $98.3 million, or 25 percent, due primarily to
$30 million from new systems, $28 million from existing system enhancements and
$37 million from contract maintenance, moves, adds and changes. These amounts
include the effect of the acquisitions of BellSouth Communications Systems in
March 1994 and Jackson Voice Data, completed in October 1994. The number of
ports in service at December 31, 1995, has increased 14 percent as compared to
December 31, 1994. Costs and operating expenses increased $79 million, or 26
percent, due primarily to the increase in volume of sales and services. While
the $11 million, or 15 percent, increase in selling, general and administrative
expenses is due primarily to higher revenues, the selling, general and
administrative expense to revenue percent declined from 19.2 percent to 17.7
percent, reflecting better leveraging of the company's existing infrastructure.
Operating profit increased $9.4 million, or 50 percent, due primarily to
increased activity in new system sales, enhancements to existing systems,
maintenance and the full-year 1995 impact of two 1994 acquisitions and cost
control efforts.
 
     WilTech Group's revenues increased $24 million, or 120 percent, due
primarily to $15 million in higher occasional and dedicated digital television
services revenues and the effect of an acquisition during 1995. Billable minutes
from occasional service increased 110 percent and dedicated service voice grade
equivalent miles at December 31, 1995, increased 50 percent as compared with
December 31, 1994. The $6 million, or 22 percent, increase in cost of sales and
the $10 million increase in selling, general and administrative expenses
reflects the overall increase in sales activity and higher expenses for
developing additional products and services. Operating loss decreased $8
million, or 71 percent, due to higher demand for WilTech Group's digital
television services, which produced volumes sufficient to result in operating
profit for the fourth quarter.
 
     Allocated parent company expenses decreased $7 million due primarily to the
sale of Williams Holdings' network services operations. Interest accrued
increased $15.1 million due primarily to the approximately $770 million of
Transco Energy's outstanding debt assumed by Williams Holdings for the period
January 17 to April 30, 1995, as a result of the Transco Energy acquisition,
partially offset by lower levels of intercompany debt. Effective May 1, 1995,
all debt resulting from the Transco Energy acquisition was assumed by Williams.
Interest capitalized increased $5.1 million due primarily to increased
expenditures for gathering and
 
                                       F-2
<PAGE>   18
 
processing facilities. Investing income increased $60.3 million due primarily to
interest earned from the parent, Williams, on the invested portion of the cash
proceeds from the sale of the network services operations in addition to an $11
million increase in the dividend from Texasgulf Inc. and a $3 million increase
in dividends received on Williams common stock held by Williams Holdings. The
1995 gain on sales/exchange of investments -- net includes a $12.6 million
pre-tax loss on the sale of the 15 percent interest in Texasgulf Inc., combined
with 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 Note 4).
The 1994 gain on sales/exchange of investments -- net results from the sale of
3,461,500 limited partner common units in Northern Border Partners, L.P. The
1995 write-off of project costs results from the cancellation of an underground
coal gasification project in Wyoming (see Note 5). Other income (expense) -- net
in 1995 includes approximately $5 million of dividends for Transco Energy's
preferred and minority interest common stockholders and $4 million related to
the wind down of Transco Energy's corporate activities. Other income
(expense) -- net in 1994 includes a credit for $4.8 million from the reversal of
previously accrued liabilities associated with certain Williams Coal Seam Gas
Royalty Trust contingencies that expired. Also included is approximately $4
million of expense related to Statement of Financial Accounting Standards (FAS)
No. 112, "Employers' Accounting for Postemployment Benefits," which relates to
postemployment benefits being paid to employees of companies previously sold.
 
     The $3.3 million increase in the provision for income taxes is primarily a
result of higher pre-tax income, largely offset by a lower effective income tax
rate resulting from $29.8 million of previously unrecognized tax benefits
realized as a result of the sale of Texasgulf Inc. (see Note 4). The effective
income tax rate in 1995 is significantly less than the federal statutory rate
due primarily to the previously unrecognized tax benefits realized as a result
of the sale of the investment in Texasgulf Inc. and income tax credits from
coal-seam gas production, partially offset by state income taxes. The effective
income tax rate in 1994 is lower than the federal statutory rate primarily
because of income tax credits from coal-seam gas production, partially offset by
state income taxes (see Note 6).
 
     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. Prior period operating results for the network services
operations are reported as discontinued operations (see Note 3).
 
     The 1994 extraordinary loss results from the early extinguishment of debt
(see Note 7).
 
  1994 vs. 1993
 
     Williams Field Services Group's revenues decreased $50.1 million, or 13
percent, due primarily to lower natural gas sales, which decreased revenues by
$71 million, as a result of the March 1993 sale of Williams' intrastate natural
gas pipeline system and related marketing operations in Louisiana. Revenues also
decreased $9 million from lower liquids volumes and prices and $7 million from
lower average processing prices. Partially offsetting these decreases were
increased revenues of $21 million from 16 percent higher gathering volumes and
$8 million from 21 percent higher processing volumes. Costs and operating
expenses decreased $69 million, or 24 percent, due primarily to lower natural
gas purchases of $68 million and the effects of a favorable adjustment of an
accrual related to operating taxes, partially offset by higher operations,
maintenance and depreciation expenses at expanded gathering facilities.
Operating profit increased $17.6 million, or 17 percent, due primarily to higher
gathering and processing volumes and a $5 million favorable operating taxes
adjustment, partially offset by lower per-unit liquids margins of $5 million,
lower average processing prices of $7 million and higher operations, maintenance
and depreciation expenses associated with expanded facilities.
 
     Williams Energy Services' revenues decreased $97.1 million, or 27 percent,
due primarily to lower natural gas sales of $45 million from decreased volumes
and prices, lower refined-product trading margins and the $45 million effect of
reporting these trading activities on a "net margin" basis effective July 1,
1993. Costs and operating expenses decreased 29 percent, due primarily to lower
natural gas purchases of $46 million from
 
                                       F-3
<PAGE>   19
 
decreased volumes and prices and the $43 million effect of reporting
refined-product trading activities on a "net margin" basis, partially offset by
the cost of developing long-term energy industry businesses. General and
administrative expenses increased 44 percent, reflecting the costs of
establishing appropriate administrative and project support groups to serve
growing business activities. Operating profit was $500,000 in 1994 compared to
$7.9 million in 1993. Price-risk management services' results continued to be
profitable but were lower by $6 million in 1994 than 1993 because of reduced
gasoline and distillate margins and the effect of location pricing differentials
in refined-products trading activities, partially offset by an improvement in
natural gas trading margins reflecting increased volumes. Costs to develop
long-term energy industry opportunities also adversely affected operating
profit. Results from natural gas marketing activities increased by $2 million in
1994 compared to 1993.
 
     Williams Pipe Line's shipments increased 9 percent, due primarily to new
volumes resulting from the December 1993 acquisition of a pipeline system in
southern Oklahoma. Revenues (including Williams Energy Ventures) increased
$130.2 million, or 72 percent, due primarily to higher shipments, increased gas
liquids and fractionator operations of $30 million and petroleum services
activities of $106 million. The slightly higher average transportation rate
resulted primarily from longer hauls into the northern region and overall
increases in tariff rates, effective December 1, 1994, and June 1, 1993,
partially offset by lower rates on shorter haul movements from new business.
Costs and operating expenses increased $125 million, or 94 percent, due
primarily to gas liquids and fractionator operations, additional operating
expenses, petroleum services activities of $104 million and the cost of
developing long-term energy industry businesses. Operating profit (including
Williams Energy Ventures) increased $4.8 million, or 10 percent, reflecting $15
million from increased shipments and a favorable insurance settlement, partially
offset by higher operating and maintenance expenses. Operating profit also
includes $9 million of costs from developing long-term energy industry
investment opportunities. Included in 1994's other income -- net is
approximately $5 million of costs for evaluating and determining whether to
build an oil refinery near Phoenix.
 
     WilTel's revenues increased $93.8 million, or 31 percent, due in large part
to the March 31, 1994, acquisition of BellSouth's customer equipment sales and
service operations in 29 states, as evidenced by a 52 percent increase in the
number of ports. Costs and operating expenses and selling, general and
administrative expenses increased 31 percent and 20 percent, respectively, due
to the increase in volume of equipment sales and services. Operating profit
increased to $18.9 million in 1994 from $9.5 million in 1993, primarily
resulting from higher sales volumes, partially offset by an increase in selling,
general and administrative expenses. Margins were level between 1994 and 1993,
while selling, general and administrative expenses as a percent of revenue
decreased in 1994 compared to 1993.
 
     WilTech Group's revenues and operating losses for 1994 and 1993 are
primarily from Vyvx, Inc.'s switched fiber-optic television transmission
services. Results of Vyvx's operations improved significantly in 1994; however,
the operations in both periods were not profitable as sufficient volumes had not
been achieved to support the infrastructure in place. Revenues increased $6.5
million, or 48 percent, in 1994 reflecting higher occasional and dedicated
digital television services, which helped reduce operating losses 34 percent
from $17 million in 1993 to $11.4 million in 1994.
 
     Interest accrued increased 74 percent primarily because of significantly
higher levels of intercompany debt and higher average external borrowing levels,
partially offset by lower effective interest rates. Investing income decreased
due primarily to lower equity earnings for Apco Argentina Inc. and the sale of a
portion of the interest in Northern Border Partners, L.P., partially offset by
dividends on Williams common stock (see Note 4). The 1994 gain on sales of
assets results from the sale of 3,461,500 limited partner common units in
Northern Border Partners, L.P. The gain on sales of assets in 1993 results from
the sale of 6.1 million units in the Williams Coal Seam Gas Royalty Trust and
the sale of the intrastate natural gas pipeline system and other related assets
in Louisiana (see Note 5).
 
     The decrease in the provision for income taxes on continuing operations is
primarily a result of lower pre-tax income and the $9 million cumulative effect
in 1993 of the 1 percent increase in the federal income tax rate. The effective
income tax rate in 1994 is lower than the statutory rate, primarily because of
income tax credits from coal-seam gas production, partially offset by state
income taxes. The effective income tax rate in
 
                                       F-4
<PAGE>   20
 
1993 is higher than the statutory rate, primarily because of the effect of the
federal income tax rate increase and state income taxes, partially offset by
income tax credits from coal-seam gas production (see Note 6).
 
     The network services operations have been presented in the Consolidated
Financial Statements as discontinued operations (see Note 3). Income from
discontinued operations more than doubled to $94 million. The increase reflects
a 93 percent increase in switched services minutes and a 24 percent increase in
private line billable circuits. These increases more than offset a major
carrier's long-expected removal of traffic from the system to the carrier's
expanded network. Income was also impacted by a decrease in interest accrued,
due to the early extinguishment of network services' long-term debt. The
effective income tax rate for both 1994 and 1993 is greater than the federal
statutory rate, due to the effect of state income taxes.
 
     The extraordinary credit (loss) results from early extinguishment of debt
(see Note 7).
 
FINANCIAL CONDITION AND LIQUIDITY
 
  Liquidity
 
     Williams Holdings considers its liquidity to come from borrowing capacity
available under bank-credit facilities and notes receivable from its parent,
Williams. During 1995, Williams Holdings became a participant in an $800 million
bank-credit facility entered into by Williams. Under this agreement, Williams
Holdings and Williams Pipe Line have access to $600 million and $100 million,
respectively, subject to borrowing by other affiliated companies. At December
31, 1995, Williams Holdings had access to $620 million of liquidity from the
available portion of the bank-credit facility (see Note 12). Prior to this
facility, Williams Holdings' liquidity came primarily from Williams, and cash
requirements to finance working capital, investments and capital expenditures
were obtained from Williams either through capital contributions or intercompany
note agreements.
 
     Williams Holdings and its subsidiaries have amounts receivable from
Williams totaling $511 million at December 31, 1995, including $360 million of
parent company debentures (see Note 4), compared to amounts due to Williams of
$390 million at December 31, 1994, and amounts receivable from Williams of $56
million at December 31, 1993. The increase in amounts receivable from Williams
at December 31, 1995, reflects the parent company debentures in addition to the
transfer of certain of the proceeds from the sale of the network services
operations to Williams.
 
     Williams Holdings believes its parent can meet its cash needs because
Williams has access to $726 million of liquidity at December 31, 1995,
representing the available portion of its $800 million bank-credit facility
previously discussed plus cash-equivalent investments. This compares with
Williams liquidity of $495 million at December 31, 1994, and $639 million at
December 31, 1993. The increase in 1995 is due to a $200 million increase in the
capacity of the bank-credit facility.
 
     In January 1996, Williams Holdings filed a $400 million shelf registration
statement with the Securities and Exchange Commission and subsequently issued
$250 million of debt securities (see Note 12). During 1996, the issuance of
additional debt securities under this registration statement is expected.
Williams Holdings does not anticipate the need for additional financing
arrangements; however, Williams Holdings believes such arrangements could be
obtained on reasonable terms if required.
 
     Williams Holdings had a net working-capital deficit of $174 million at
December 31, 1995, compared to net working capital of $523 million at December
31, 1994, and a $39 million net working-capital deficit at December 31, 1993.
The decrease in working capital from December 31, 1994, reflects a $744 million
decrease in assets held for sale following the sale of the network services
operations and additional income taxes payable of $312 million primarily as a
result of that sale, partially offset by the repayment of $398 million of bank
notes payable from the proceeds of the network services operations sale. The
remaining proceeds were transferred to Williams and are included in non-current
affiliate receivables; therefore, the remaining proceeds are not a part of net
working capital at December 31, 1995. Williams Holdings' funds are automatically
transferred to Williams under a centralized cash management program.
 
                                       F-5
<PAGE>   21
 
     Terms of certain borrowing agreements limit transfer of funds to Williams
Holdings from one of its subsidiaries. The restrictions have not impeded, nor
are they expected to impede in the future, Williams Holdings' ability to meet
its cash requirements.
 
     During 1996, Williams Holdings expects to finance capital expenditures,
investments and working-capital requirements through cash generated from
operations, the use of its bank-credit facility, advances from its parent or
debt offerings.
 
  Operating Activities
 
     Cash provided (used) by continuing operating activities was: 1995 -- $77
million; 1994 -- $125 million; and 1993 -- ($21) million. Accrued liabilities
increased due primarily to the income tax and other liabilities associated with
the sale of the network services operations in addition to the acquisition of
Transco Energy, excluding Transcontinental Gas Pipe Line and Texas Gas. The
increases in other assets and deferred charges, trade payables and other
liabilities primarily reflect Williams Energy Services' increased price-risk
management trading activities as a result of the acquisition of Transco Energy.
The increase in receivables primarily reflects increased activities following
various 1995 acquisitions, including Transco Energy.
 
     Cash provided by discontinued operations was: 1994 -- $169 million; and
1993 -- $163 million.
 
  Financing Activities
 
     Net cash provided (used) by financing activities was: 1995 -- ($1.5)
billion; 1994 -- $428 million; 1993 -- ($162) million. Long-term debt principle
payments net of debt proceeds were $221 million during 1995. Long-term debt
principal payments during 1994 and 1993 were $142 million and $34 million,
respectively.
 
     During 1994, Williams Holdings purchased approximately 13.4 million shares
of Williams common stock on the open market for $395 million. Substantially all
of the purchases were financed with a $400 million short-term credit agreement.
In January 1995, the outstanding amounts under the credit agreement were repaid
from the proceeds of the sale of the network services operations, and the credit
agreement was terminated.
 
     Long-term debt at December 31, 1995, was $274 million, compared to $507
million at December 31, 1994, and $229 million at December 31, 1993. The
decrease in long-term debt is due primarily to the repayment of amounts due
Williams from the proceeds of the sale of the network services operations,
partially offset by $150 million in borrowings under the bank-credit facility
(see Note 12). The long-term debt to debt-plus-equity ratio was 11.3 percent at
year-end, compared to 22.6 percent and 11.2 percent at December 31, 1994 and
1993, respectively. The decrease in this ratio reflects the decrease in
long-term debt and the increase in equity as a result of the gain on the sale of
the network services operations and the acquisition of Transco Energy,
substantially offset by dividends paid to Williams.
 
     Williams Holdings paid dividends to Williams of $1 billion, $336 million
and $71 million in 1995, 1994 and 1993, respectively, and received capital
contributions from Williams of $792 million, $73 million and $75 million in
1995, 1994 and 1993, respectively. The 1995 dividends were paid primarily from
the proceeds from the sale of the network services operations. The 1995 capital
contributions were made in connection with the merger of Transco Energy and were
used to retire and/or terminate various Transco Energy borrowings, preferred
stock and interest-rate swaps (see Note 2).
 
     See Note 7 for information regarding early extinguishment of debt by one of
Williams Holdings subsidiaries during 1994.
 
  Investing Activities
 
     Net cash provided (used) by investing activities was: 1995 -- $1.4 billion;
1994 -- ($718) million; 1993 -- $25 million. Capital expenditures in all years
include the expansion of various gathering and processing facilities, and
expenditures in 1993 also include the expansion of product pipeline facilities.
Capital
 
                                       F-6
<PAGE>   22
 
expenditures for discontinued operations were $143 million in 1994 and $101
million in 1993, primarily to expand and enhance Williams Holdings' network
services operations network. Budgeted capital expenditures and acquisitions for
1996 are approximately $590 million, primarily to expand gathering and
processing facilities and the telecommunications network.
 
     During 1995, Williams Holdings received proceeds of $124 million from the
sale of its 15 percent interest in Texasgulf Inc. and $46 million from the sale
of its remaining investment in Williams common stock (see Note 4). During 1994,
Williams Holdings received net proceeds of $80 million from the sale of limited
partner common units in Northern Border Partners, L.P. During 1993, Williams
Holdings received net proceeds of $113 million from the sale of 6.1 million
units in the Williams Coal Seam Gas Royalty Trust. In addition, Williams
Holdings sold its intrastate natural gas pipeline system and other related
assets in Louisiana for $170 million (see Note 5).
 
     During 1995, in addition to the Transco Energy acquisition (see Note 2),
Williams Holdings acquired the Gas Company of New Mexico's natural gas gathering
and processing assets in the San Juan and Permian basins for $154 million
(including approximately 10 percent of which was immediately sold to a third
party) and Pekin Energy Co., the nation's second largest ethanol producer, for
$167 million in cash.
 
     During 1995, Williams Holdings also purchased the BOk Tower, an approximate
1.1 million square foot commercial office building located in Tulsa, Oklahoma.
The building serves as headquarters for Williams and its subsidiaries, including
Williams Holdings. Williams and certain of its subsidiaries currently occupy
approximately 48 percent of the building, all of which had previously been
leased from the seller under varying terms and conditions. In connection with
the approximate $60 million purchase, Williams Holdings assumed intercompany
debt payable to its parent of an equal amount.
 
EFFECTS OF INFLATION
 
     Williams Holdings has experienced increased costs in recent years due to
the effects of inflation. However, approximately 60 percent of Williams
Holdings' property, plant and equipment was acquired or constructed during the
last seven years, a period of relatively low inflation.
 
ENVIRONMENTAL
 
     Williams Holdings is a participant in certain environmental activities in
various stages involving assessment studies, cleanup operations and/or remedial
processes. The sites are being monitored by Williams Holdings, other potentially
responsible parties, 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 $9 million, all of which is accrued at December 31, 1995. Williams
Holdings will fund these costs from operations and/or available bank-credit
facilities. The actual costs incurred will depend on the final amount, type and
extent of contamination discovered at these sites, the final cleanup standards
mandated by the EPA or other governmental authorities, and other factors.
 
                                       F-7
<PAGE>   23
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        -----
<S>                                                                                     <C>
Report of Independent Auditors........................................................  F-9
Consolidated Statement of Income......................................................  F-10
Consolidated Balance Sheet............................................................  F-11
Consolidated Statement of Stockholder's Equity........................................  F-12
Consolidated Statement of Cash Flows..................................................  F-13
Notes to Consolidated Financial Statements............................................  F-14
Quarterly Financial Data (Unaudited)..................................................  F-33
</TABLE>
 
                                       F-8
<PAGE>   24
 
                         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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, 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 9, 1996
 
                                       F-9
<PAGE>   25
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                        CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                                 --------------------------------
                                                                   1995        1994        1993
                                                                 --------    --------    --------
                                                                 (MILLIONS)
<S>                                                              <C>         <C>         <C>
Revenues (Note 14):
  Williams Field Services Group................................  $  426.8    $  336.4    $  386.5
  Williams Energy Services (Note 13)...........................      85.8       263.7       360.8
  Williams Pipe Line...........................................     350.2       310.7       180.5
  WilTel.......................................................     494.9       396.6       302.8
  WilTech Group................................................      44.0        20.0        13.5
  Other........................................................      17.4          --          --
  Intercompany eliminations (Note 15)..........................     (65.1)      (63.1)      (23.1)
                                                                 --------    --------    --------
          Total revenues.......................................   1,354.0     1,264.3     1,221.0
                                                                 --------    --------    --------
Profit-center costs and expenses (Note 14):
  Costs and operating expenses.................................     876.6       939.4       951.8
  Selling, general and administrative expenses.................     224.6       142.7       121.8
  Other income -- net..........................................     (10.7)         --        (4.8)
                                                                 --------    --------    --------
          Total profit-center costs and expenses...............   1,090.5     1,082.1     1,068.8
                                                                 --------    --------    --------
Operating profit (loss):
  Williams Field Services Group................................     140.1       122.2       104.6
  Williams Energy Services.....................................      30.0          .5         7.9
  Williams Pipe Line...........................................      69.8        52.0        47.2
  WilTel.......................................................      28.3        18.9         9.5
  WilTech Group................................................      (3.3)      (11.4)      (17.0)
  Other........................................................      (1.4)         --          --
                                                                 --------    --------    --------
          Total operating profit...............................     263.5       182.2       152.2
Allocated parent company expenses (Note 14)....................     (13.0)      (20.0)      (17.7)
Interest accrued (Note 14).....................................     (40.9)      (25.8)      (14.8)
Interest capitalized...........................................       9.8         4.7         5.4
Investing income (Notes 4 and 14)..............................      75.3        15.0        22.6
Gain on sales/exchange of investments -- net (Notes 4 and 5)...      23.6        22.7        97.5
Write-off of project costs (Note 5)............................     (41.4)         --          --
Other income (expense) -- net..................................      (8.2)         .3         (.3)
                                                                 --------    --------    --------
Income from continuing operations before income taxes..........     268.7       179.1       244.9
Provision for income taxes (Note 6)............................      56.9        53.6        92.6
                                                                 --------    --------    --------
Income from continuing operations..............................     211.8       125.5       152.3
Income from discontinued operations (Note 3)...................   1,018.8        94.0        46.4
                                                                 --------    --------    --------
Income before extraordinary loss...............................   1,230.6       219.5       198.7
Extraordinary loss (Note 7)....................................        --        (6.1)         --
                                                                 --------    --------    --------
Net income.....................................................  $1,230.6    $  213.4    $  198.7
                                                                 ========    ========    ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-10
<PAGE>   26
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                           CONSOLIDATED BALANCE SHEET
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                           ------------------
                                                                            1995       1994
                                                                           -------    -------
                                                                              (DOLLARS IN
                                                                               MILLIONS,
                                                                            EXCEPT PER-SHARE
                                                                                AMOUNTS)
<S>                                                                        <C>        <C>
Current assets:
  Cash and cash equivalents.............................................. $   29.5   $   17.9
  Receivables:
     Trade less allowance of $10.3 ($7.2 in 1994)........................    424.1      305.6
     Affiliates (Note 14)................................................     77.5        2.4
  Inventories (Note 9)...................................................     97.6       84.6
  Net assets of discontinued operations (Note 3).........................       --      743.6
  Deferred income taxes -- affiliates (Note 6)...........................    128.0       33.3
  Other..................................................................     84.7       43.7
                                                                          --------   --------
          Total current assets...........................................    841.4    1,231.1
Due from parent (Note 14)................................................    246.8         --
Investments (Note 4).....................................................    599.1      536.0
Property, plant and equipment -- net (Note 10)...........................  2,225.2    1,585.1
Other assets and deferred charges........................................    253.9       87.9
                                                                          --------   --------
          Total assets................................................... $4,166.4   $3,440.1
                                                                          ========   ========
                            LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Notes payable (Note 12)................................................ $     --   $  398.2
  Accounts payable:
     Trade (Note 11).....................................................    253.0      145.7
     Affiliates (Note 14)................................................    128.6        3.5
  Accrued liabilities (Note 11)..........................................    619.9      147.4
  Long-term debt due within one year (Note 12)...........................     14.2       13.0
                                                                          --------   --------
          Total current liabilities......................................  1,015.7      707.8
Long-term debt (Note 12):
  Affiliates.............................................................       --      389.9
  Other..................................................................    273.9      117.1
Deferred income taxes -- affiliates (Note 6).............................    328.7      356.2
Other liabilities........................................................    396.5      129.2
Contingent liabilities and commitments (Note 16).........................
Stockholder's equity:
  Common stock, $1 par value, 1,000 shares authorized and outstanding....       --         --
  Capital in excess of par value.........................................  1,634.1    1,531.4
  Retained earnings (Note 12)............................................    464.1      244.3
  Net unrealized gain (loss) on non-current marketable securities (Note
     4)..................................................................     53.4      (35.8)
                                                                          --------   --------
          Total stockholder's equity.....................................  2,151.6    1,739.9
                                                                          --------   --------
          Total liabilities and stockholder's equity..................... $4,166.4   $3,440.1
                                                                          ========   ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-11
<PAGE>   27
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
 
<TABLE>
<CAPTION>
                                                                                  NET
                                                     CAPITAL IN                UNREALIZED
                                           COMMON    EXCESS OF     RETAINED       GAIN
                                           STOCK     PAR VALUE     EARNINGS      (LOSS)       TOTAL
                                           ------    ----------    --------    ----------    --------
                                                                  (MILLIONS)
<S>                                        <C>       <C>           <C>         <C>           <C>
Balance, December 31, 1992...............   $ --      $ 1,375.1    $  239.5      $   --      $1,614.6
Net income -- 1993.......................     --             --       198.7          --         198.7
Cash dividends...........................     --             --       (71.0)         --         (71.0)
Capital contributions --
  Cash...................................     --           75.3          --          --          75.3
  Other..................................     --             .4          --          --            .4
                                            ----      ---------    --------      ------      --------
Balance, December 31, 1993...............     --        1,450.8       367.2          --       1,818.0
Net income -- 1994.......................     --             --       213.4          --         213.4
Dividends --
  Cash...................................     --             --      (335.8)         --        (335.8)
  Other..................................     --             --         (.5)         --           (.5)
Contributions --
  Cash...................................     --           73.4          --          --          73.4
  Other..................................     --            7.2          --          --           7.2
Unrealized loss on non-current
  marketable securities..................     --             --          --       (35.8)        (35.8)
                                            ----      ---------    --------      ------      --------
Balance, December 31, 1994...............     --        1,531.4       244.3       (35.8)      1,739.9
Net income -- 1995.......................     --             --     1,230.6          --       1,230.6
Dividends --
  Cash...................................     --             --    (1,010.7)         --      (1,010.7)
  Other..................................     --             --         (.1)         --           (.1)
Acquisition of Transco Energy --
  Cash contributions.....................     --          791.9          --          --         791.9
  Noncash contributions..................     --          911.2          --          --         911.2
  Allocation of purchase price...........     --       (1,608.1)         --          --      (1,608.1)
Other noncash contributions..............     --            7.7          --          --           7.7
Unrealized gain on non-current marketable
  securities.............................     --             --          --        89.2          89.2
                                            ----      ---------    --------      ------      --------
Balance, December 31, 1995...............   $ --      $ 1,634.1    $  464.1      $ 53.4      $2,151.6
                                            ====      =========    ========      ======      ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-12
<PAGE>   28
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                   --------------------------------
                                                                     1995        1994        1993
                                                                   --------     -------     -------
                                                                              (MILLIONS)
<S>                                                                <C>          <C>         <C>
OPERATING ACTIVITIES:
  Net income.....................................................  $1,230.6     $ 213.4     $ 198.7
  Adjustments to reconcile to cash provided from operations:
     Discontinued operations.....................................  (1,018.8)      (94.0)      (46.4)
     Extraordinary loss..........................................        --         6.1          --
     Depreciation and depletion..................................      94.3        80.0        70.0
     Provision for deferred income taxes.........................     121.5        15.4          .6
     Write-off of project costs..................................      41.4          --          --
     (Gain) loss on sales of property, plant and equipment.......      (2.2)         .6      (100.9)
     Gain on sales/exchange of investments.......................     (23.6)      (22.7)         --
     Changes in receivables sold.................................        --          --       (74.7)
     Changes in receivables......................................     (16.1)      (72.3)        4.6
     Changes in inventories......................................      10.4        (3.3)       (5.2)
     Changes in other current assets.............................     (42.2)      (31.5)      (14.0)
     Changes in accounts payable.................................      (3.0)       22.1       (39.5)
     Changes in accrued liabilities..............................     (39.4)        (.3)      (11.3)
     Changes in balances with affiliates.........................    (188.1)         .5        (1.0)
     Net change in non-current unrealized trading assets and
      liabilities................................................     (72.9)       (2.4)         --
     Other, including changes in non-current assets and
      liabilities................................................     (14.9)       13.4        (1.7)
                                                                   --------     -------     -------
          Net cash provided (used) by continuing operations......      77.0       125.0       (20.8)
          Net cash provided by discontinued operations...........        --       169.4       162.6
                                                                   --------     -------     -------
          Net cash provided by operating activities..............      77.0       294.4       141.8
                                                                   --------     -------     -------
FINANCING ACTIVITIES:
  Payments of notes payable......................................    (398.2)         --          --
  Proceeds from notes payable....................................        --       398.2          --
  Payments of long-term debt.....................................    (399.7)     (141.7)      (34.3)
  Proceeds from long-term debt...................................     179.0          --          --
  Dividends paid to parent.......................................  (1,010.7)     (335.8)      (71.0)
  Capital contributions from parent..............................     791.9        73.4        75.3
  Changes in parent company advances.............................    (474.8)      433.6      (132.1)
  Subsidiary preferred stock redemptions.........................    (144.0)         --          --
  Other -- net...................................................       3.8          --          --
                                                                   --------     -------     -------
          Net cash provided (used) by financing activities.......  (1,452.7)      427.7      (162.1)
                                                                   --------     -------     -------
INVESTING ACTIVITIES:
  Property, plant and equipment:
     Capital expenditures:
       Continuing operations.....................................    (375.2)     (223.5)     (190.3)
       Discontinued operations...................................        --      (142.8)     (100.8)
     Proceeds from sales.........................................      19.1         3.3       293.6
  Acquisition of businesses, net of cash acquired................    (360.8)      (56.5)         --
  Proceeds from sales of businesses..............................   2,588.3          --          --
  Income tax and other payments related to discontinued
     operations..................................................    (349.8)         --          --
  Purchase of investments........................................     (48.3)     (398.1)         --
  Proceeds from sales of investments.............................     171.2        80.6         8.8
  Changes in advances to parent company..........................    (257.8)         --          --
  Other -- net...................................................        .6        19.3        13.7
                                                                   --------     -------     -------
          Net cash provided (used) by investing activities.......   1,387.3      (717.7)       25.0
                                                                   --------     -------     -------
          Increase in cash and cash equivalents..................      11.6         4.4         4.7
Cash and cash equivalents at beginning of year...................      17.9        13.5         8.8
                                                                   --------     -------     -------
Cash and cash equivalents at end of year.........................  $   29.5     $  17.9     $  13.5
                                                                   ========     =======     =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-13
<PAGE>   29
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Organization and basis of presentation
 
     Williams Holdings of Delaware, Inc. (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. On January 18, 1995, Williams acquired 60
percent of Transco Energy Company's (Transco Energy) outstanding common stock
and on May 1, 1995, acquired the remaining 40 percent of Transco Energy's
outstanding common stock (see Note 2). On May 1, 1995, Transco Energy dividended
to Williams all of Transco Energy's interests in two Transco Energy
subsidiaries, Transcontinental Gas Pipe Line Corporation and Texas Gas
Transmission Corporation. Also effective May 1, 1995, Williams made a capital
contribution of its interest in Transco Energy and Transco Energy's
subsidiaries, except Transcontinental Gas Pipe Line and Texas Gas, to Williams
Holdings. Revenues and operating profit amounts include the operating results of
the Transco Energy entities contributed to Williams Holdings since the January
18, 1995, acquisition (see Note 2). Transco Energy's gas gathering operations
(except those related operations of Transcontinental Gas Pipe Line and Texas
Gas) are included as part of Williams Field Services Group, and Transco Energy's
gas marketing operations are included as a part of Williams Energy Services.
 
  Nature of operations
 
     Williams Holdings' operations are located in the United States and consist
primarily of the following: natural gas gathering and processing facilities in
the rocky mountain and midwest regions; energy trading throughout the United
States; petroleum products pipeline in the midwest region; and national data,
voice and video communication products and services. Additional information
about these businesses is contained throughout the following notes.
 
  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.
 
  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
 
                                      F-14
<PAGE>   30
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 Williams Energy Services which are stated at market. Except
for Williams Energy Services, inventories of natural gas and petroleum products
are determined using the average-cost method. The cost of materials and supplies
inventories is determined using the first-in, first-out method (FIFO) by WilTel
and principally using the average-cost method by other subsidiaries.
 
  Investments
 
     Williams Holdings' investment in subordinated debentures of Williams is
classified as "available for sale" and is recorded at current market value with
unrealized gains and losses reported net of income taxes as a component of
stockholder's equity. Average cost is used to determine realized gains and
losses. Williams Holdings' investment in Williams warrants is recorded at cost
since its fair value is not readily determinable.
 
  Property, plant and equipment
 
     Property, plant and equipment is recorded at cost. Depreciation is provided
primarily on the straight-line method over estimated useful lives. Gains or
losses from the ordinary sale or retirement of property, plant and equipment for
Williams Pipe Line are credited or charged to accumulated depreciation; other
gains or losses are recorded in net income.
 
  Revenue recognition
 
     Revenues generally are recorded when services have been performed or
products have been delivered. Williams Pipe Line bills customers when products
are shipped and defers the estimated revenues for shipments in transit.
 
  Commodity price-risk management activities
 
     Williams Energy Services enters into energy-related financial instruments
(forward contracts, futures contracts, option contracts and swap agreements) to
provide price-risk management services to its third-party customers. This
subsidiary also enters into short- and long-term energy-related purchase and
sale commitments as part of its trading business. All of these investments and
commitments are valued at market and are recorded in other current assets, other
assets and deferred charges, accrued liabilities and other liabilities in the
Consolidated Balance Sheet. The resulting change in unrealized market gains and
losses is recognized in income currently and is recorded as revenues in the
Consolidated Statement of Income. Such market values are subject to change in
the near term and reflect management's best estimate of market prices
considering various factors including closing exchange and over-the-counter
quotations, the terms of the contract, credit considerations, time value and
volatility factors underlying the positions.
 
     Williams Energy Services reports sales of natural gas, refined products and
crude oil net of the related costs to purchase such items, consistent with
mark-to-market accounting for such trading activities.
 
     Other Williams Holdings operations enter into energy-related financial
instruments (primarily futures contracts, option contracts and swap agreements)
to hedge against market price fluctuations of certain commodity inventories and
sales and purchase commitments. Unrealized and realized gains and losses on
these hedge contracts are deferred and recognized in income when the related
hedged item is recognized. These contracts are evaluated to determine that there
is a high correlation between changes in the market value of the hedge contract
and fair value of the hedged item.
 
                                      F-15
<PAGE>   31
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Capitalization of interest
 
     Williams Holdings capitalizes interest on major projects during
construction. Interest is capitalized on borrowed funds at rates that
approximate the average interest rate on related debt.
 
  Income taxes
 
     Williams Holdings and subsidiaries are included in Williams' consolidated
federal income tax return. The provision for income taxes is computed on a
separate company basis for Williams Holdings. Payments are made under the same
timing and minimum amount requirements as if the payments were being made
directly to the taxing authorities. Deferred income taxes are computed using the
liability method and are provided on all temporary differences between the
financial basis and the tax basis of Williams Holdings' assets and liabilities.
 
  Related party transactions
 
     Williams charges its subsidiaries, including Williams Holdings'
subsidiaries, for certain corporate general and administrative expenses which
are directly identifiable or allocable to the subsidiaries and other general
corporate expenses utilizing a combination of revenues, property at cost and
payroll for the allocation base. Williams Holdings, as a separate corporate
entity, does not receive such an allocation because it has no revenues, property
or employees. Management believes that the method used for these allocations is
reasonable.
 
NOTE 2 -- TRANSCO ENERGY ACQUISITION
 
     On January 18, 1995, Williams acquired 60 percent of Transco Energy's
outstanding common stock in a cash tender for $430.5 million. Williams acquired
the remaining 40 percent of Transco Energy's outstanding common stock on May 1,
1995, through a merger by exchanging the remaining Transco Energy common stock
for approximately 10.4 million shares of Williams common stock valued at $334
million. The acquisition is accounted for as a purchase. The results of
operations of the Transco Energy entities contributed to Williams Holdings
beginning January 18, 1995, are included 100 percent in Williams Holdings'
Consolidated Statement of Income due to the losses from these entities. An
allocation of the purchase price was assigned to the assets and liabilities of
the Transco Energy entities contributed to Williams Holdings based on their
estimated fair values.
 
     The Transco Energy entities contributed to Williams Holdings are engaged
primarily in the natural gas gathering and marketing businesses. Williams
Holdings has sold substantially all of Transco Energy's coal operations, coalbed
methane properties and certain pipeline and gathering operations. Results of
operations and changes in the carrying amount of these businesses during the
holding period and the gain from the ultimate dispositions are reflected in the
purchase price and are not material.
 
     Williams made cash contributions during 1995 of approximately $792 million
to Transco Energy primarily to retire and/or terminate certain Transco Energy
borrowings, $4.75 preferred stock and interest-rate swaps, to advance funds to
Transcontinental Gas Pipe Line and Texas Gas for the termination of sale of
receivables facilities and to assume all amounts payable by Transco Energy to
Transcontinental Gas Pipe Line and Texas Gas. Effective with the May 1, 1995,
merger, Transco Energy's $3.50 cumulative convertible preferred stock was
exchanged for Williams' $3.50 cumulative convertible preferred stock and
Williams assumed all Transco Energy external debt, except Transcontinental Gas
Pipe Line and Texas Gas debt. These noncash transactions totaled approximately
$911 million and were capital contributions by Williams to Williams Holdings.
 
                                      F-16
<PAGE>   32
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following unaudited pro forma information combines the results of
operations of Williams Holdings and the Transco Energy entities contributed to
Williams Holdings as if the purchase occurred on January 1, 1994.
 
<TABLE>
<CAPTION>
                                                                        1995       1994
                                                                       -------    -------
                                                                           (MILLIONS)
                                                                           UNAUDITED
    <S>                                                                <C>        <C>
    Revenues.........................................................  $1,358.0   $1,089.7
    Income from continuing operations................................     240.8      104.5
    Income before extraordinary loss.................................   1,259.6      198.5
    Net income.......................................................   1,259.6      192.4
</TABLE>
 
     Pro forma financial information is not necessarily indicative of results of
operations that would have occurred if the acquisition had occurred on January
1, 1994, or of future results of operations of the combined companies.
 
NOTE 3 -- DISCONTINUED OPERATIONS
 
     On January 5, 1995, Williams Holdings sold its network services operations
to LDDS Communications, Inc. (LDDS) 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. Prior period operating results
for the network services operations are reported as discontinued operations.
Under the terms of the agreement, Williams Holdings retained Williams
Telecommunications Systems, Inc. (WilTel), a national telecommunications
equipment supplier and service company, and Vyvx, Inc. (included in WilTech
Group), which operates a national video network specializing in broadcast
television applications.
 
     Summarized operating results of discontinued operations are as follows:
 
<TABLE>
<CAPTION>
                                                                           1994      1993
                                                                          ------    ------
                                                                             (MILLIONS)
    <S>                                                                   <C>       <C>
    Revenues............................................................  $921.8    $663.8
    Operating profit....................................................   163.1      97.0
    Provision for income taxes..........................................    60.9      32.2
    Income from discontinued operations.................................    94.0      46.4
</TABLE>
 
     The assets and liabilities that were transferred to LDDS in the sale of the
network services operations are presented in the Consolidated Balance Sheet on a
net basis at December 31, 1994. Net assets consist of current assets ($86.5
million), net property, plant and equipment ($797.8 million), other assets and
deferred charges ($144.3 million), less current liabilities ($218.3 million) and
other liabilities ($66.7 million).
 
NOTE 4 -- INVESTING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                                          1995       1994
                                                                         ------     ------
                                                                             (MILLIONS)
    <S>                                                                  <C>        <C>
    Investments:
      Williams debentures..............................................  $449.0     $   --
      Williams common stock............................................      --      336.3
      Williams warrants................................................    25.4         --
      Texasgulf Inc. (15%).............................................      --      150.0
      Other, at equity (varying ownerships from 3.2% to 50%)...........    84.1       49.7
      Other, at cost...................................................    40.6         --
                                                                         ------     ------
                                                                         $599.1     $536.0
                                                                         ======     ======
</TABLE>
 
                                      F-17
<PAGE>   33
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1994, the investment in common stock of Williams had a cost
basis of $395 million, a gross unrealized loss of $59 million and a net
unrealized loss of $36 million. In April 1995, Williams Holdings exchanged 12.2
million shares of Williams common stock with a market value at exchange date of
$385 million and a cost basis of $360 million for Williams convertible
debentures and warrants having a total fair value of $385 million at the time of
the exchange. The exchange resulted in the recognition of a pre-tax gain of
$25.4 million. The convertible debentures, with a face value of $360 million,
bear interest at 6 percent, mature in 2005 and are convertible into 9.3 million
shares of Williams common stock at $38.58 per share. The warrants give Williams
Holdings the right to purchase 7.5 million shares of Williams common stock at
$46.67 per share and were recorded at appraised value of $25 million. The
warrants are exercisable immediately and mature five years from date of
issuance. In October 1995, Williams Holdings sold its remaining investment in
Williams common stock for $46.2 million in cash resulting in a pre-tax gain of
approximately $11 million.
 
     At December 31, 1995, certain equity investments, with a carrying value of
$30.8 million, have a market value of $81.5 million.
 
     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.
 
     Investing income from continuing operations (see Note 14):
 
<TABLE>
<CAPTION>
                                                                    1995     1994     1993
                                                                    -----    -----    -----
                                                                           (MILLIONS)
    <S>                                                             <C>      <C>      <C>
    Interest......................................................  $46.1    $ 1.0    $ 1.1
    Dividends.....................................................   20.8      6.6      5.6
    Equity earnings...............................................    8.4      7.4     15.9
                                                                    -----    -----    -----
                                                                    $75.3    $15.0    $22.6
                                                                    =====    =====    =====
</TABLE>
 
     Dividends and distributions received from companies carried on an equity
basis were $11 million in 1995 and 1994 and $14 million in 1993.
 
NOTE 5 -- ASSET SALES AND WRITE-OFF OF PROJECT COSTS
 
     In the fourth quarter of 1995, the development of a commercial coal
gasification venture in south-central Wyoming was canceled, resulting in a $41.4
million pre-tax charge. Of this amount, $38 million represents the capitalized
costs related to lease acquisitions and permits, site preparations, engineering
and drilling costs for injection and production wells, water, oxygen and steam
injection mixtures, surface well and testing equipment and other related project
costs. This $41.4 million amount also includes what management believes to be a
reasonable estimate of future costs of $4 million to reclaim the site, of which
it is expected that 60 percent to 70 percent will be incurred during 1996 and
the remainder over a five-year period. Williams Holdings will perform the
reclamation of the site in coordination with various governmental agencies and
expects to receive necessary environmental releases and approvals upon
completion of the reclamation.
 
     In 1994, 3,461,500 limited partner common units were sold in Northern
Border Partners, L.P. Net proceeds from the sale were approximately $80 million
and the sale resulted in a pre-tax gain of $22.7 million. As a result of the
sale, Williams Holdings' original 12.25 percent interest in Northern Border
partnerships has been reduced to 3.2 percent.
 
     In a 1993 public offering, 6.1 million units were sold in the Williams Coal
Seam Gas Royalty Trust (Trust), which resulted in net proceeds of $113 million
and a pre-tax gain of $51.6 million. The Trust owns defined net profits
interests in the developed coal-seam properties in the San Juan Basin of New
Mexico and Colorado, which were conveyed to the Trust by Williams Production
Company. Ownership of an additional 3.6 million units remains with Williams
Holdings.
 
                                      F-18
<PAGE>   34
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In March 1993, the intrastate natural gas pipeline system and other related
assets in Louisiana were sold for $170 million in cash, resulting in a pre-tax
gain of $45.9 million.
 
NOTE 6 -- PROVISION FOR INCOME TAXES
 
     The provision (credit) for income taxes from continuing operations
includes:
 
<TABLE>
<CAPTION>
                                                                  1995      1994      1993
                                                                 ------     -----     -----
                                                                         (MILLIONS)
    <S>                                                          <C>        <C>       <C>
    Current:
      Federal..................................................  $(49.4)    $28.9     $70.5
      State....................................................   (15.2)      9.3      21.5
                                                                 ------     -----     -----
                                                                  (64.6)     38.2      92.0
                                                                 ------     -----     -----
    Deferred:
      Federal..................................................    96.4      14.0       7.4
      State....................................................    25.1       1.4      (6.8)
                                                                 ------     -----     -----
                                                                  121.5      15.4        .6
                                                                 ------     -----     -----
    Total provision............................................  $ 56.9     $53.6     $92.6
                                                                 ======     =====     =====
</TABLE>
 
     Reconciliations from the provision for income taxes attributable to
continuing operations at the statutory rate to the provision for income taxes
are as follows:
 
<TABLE>
<CAPTION>
                                                                1995       1994       1993
                                                               ------     ------     ------
                                                                        (MILLIONS)
    <S>                                                        <C>        <C>        <C>
    Provision at statutory rate..............................  $ 94.0     $ 62.7     $ 85.7
    Increases (reductions) in taxes resulting from:
      Increase in statutory tax rate on beginning of year
         deferred tax balances...............................      --         --        9.0
      State income taxes.....................................    10.6        6.9        9.6
      Coal-seam tax credits..................................   (18.7)     (14.3)     (10.0)
      Decrease in valuation allowance for deferred tax
         assets..............................................   (29.8)        --         --
      Other -- net...........................................      .8       (1.7)      (1.7)
                                                               ------     ------     ------
    Provision for income taxes...............................  $ 56.9     $ 53.6     $ 92.6
                                                               ======     ======     ======
</TABLE>
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial purposes
and the amounts used for income tax purposes.
 
                                      F-19
<PAGE>   35
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Significant components of deferred tax liabilities and assets as of
December 31 are as follows:
 
<TABLE>
<CAPTION>
                                                                          1995      1994*
                                                                         ------     ------
                                                                            (MILLIONS)
    <S>                                                                  <C>        <C>
    Deferred tax liabilities:
      Property, plant and equipment....................................  $393.8     $415.9
      Investments......................................................    76.2       33.1
      Other............................................................   102.3       18.1
                                                                         ------     ------
              Total deferred tax liabilities...........................   572.3      467.1
                                                                         ------     ------
    Deferred tax assets:
      Deferred revenues................................................    19.6       35.9
      Investments......................................................    30.3       75.4
      Accrued liabilities..............................................    97.0       27.5
      Minimum tax credits..............................................    93.9         --
      Other............................................................   137.2       35.2
                                                                         ------     ------
              Total deferred tax assets................................   378.0      174.0
              Valuation allowance for deferred tax assets..............     6.4       29.8
                                                                         ------     ------
              Net deferred tax assets..................................   371.6      144.2
                                                                         ------     ------
    Net deferred tax liabilities.......................................  $200.7     $322.9
                                                                         ======     ======
</TABLE>
 
---------------
 
* Reclassified to conform to current classification.
 
     The valuation allowance for deferred tax assets decreased $23.4 million and
$1.7 million during 1995 and 1994, respectively.
 
     Cash payments to Williams and certain state taxing authorities for income
taxes are as follows: 1995 -- $336 million; 1994 -- $108 million, before refunds
of $6 million; and 1993 -- $117 million.
 
NOTE 7 -- EXTRAORDINARY LOSS
 
     The extraordinary loss in 1994 resulted from early extinguishment of debt.
A subsidiary of Williams Holdings paid approximately $137 million to redeem
higher interest rate debt for a $6.1 million net loss (net of a $3.9 million
benefit for income taxes).
 
NOTE 8 -- EMPLOYEE BENEFIT PLANS
 
  Pensions
 
     Williams Holdings is included in Williams' non-contributory defined-benefit
pension plans covering the majority of employees. Williams Pipe Line has a
separate plan for its union employees. Pekin Energy has separate plans for its
salaried and union employees. Benefits are based on years of service and average
final compensation. Pension costs are funded to satisfy minimum requirements
prescribed by the Employee Retirement Income Security Act of 1974.
 
     Net pension expense related to Williams Holdings' participation in the
Williams' plan was as follows:
 
<TABLE>
<CAPTION>
                                                                     1995     1994     1993
                                                                     ----     ----     ----
                                                                           (MILLIONS)
    <S>                                                              <C>      <C>      <C>
    Continuing operations..........................................  $5.1     $1.3     $ .5
    Discontinued operations........................................    --      4.6      2.7
                                                                     ----     ----     ----
                                                                     $5.1     $5.9     $3.2
                                                                     ====     ====     ====
</TABLE>
 
                                      F-20
<PAGE>   36
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Net pension expense for the Williams Pipe Line and Pekin Energy plans
consists of the following:
 
<TABLE>
<CAPTION>
                                                                  1995      1994      1993
                                                                  -----     -----     -----
                                                                         (MILLIONS)
    <S>                                                           <C>       <C>       <C>
    Service cost for benefits earned during the year............  $  .6     $  .5     $  .4
    Interest cost on projected benefit obligation...............    1.6       1.1       1.1
    Actual return on plan assets................................   (3.8)       .7      (1.6)
    Amortization and deferrals..................................    1.8      (2.2)       .1
                                                                  -----     -----     -----
    Net pension expense.........................................  $  .2     $  .1     $  --
                                                                  =====     =====     =====
</TABLE>
 
     The following table presents the funded status of the Williams Pipe Line
and Pekin Energy plans:
 
<TABLE>
<CAPTION>
                                                                           1995      1994
                                                                           -----     -----
                                                                              (MILLIONS)
    <S>                                                                    <C>       <C>
    Actuarial present value of benefit obligations:
      Vested benefits....................................................  $18.2     $11.2
      Non-vested benefits................................................     .3        .3
                                                                           -----     -----
      Accumulated benefit obligations....................................   18.5      11.5
      Effect of projected salary increases...............................    7.4       2.5
                                                                           -----     -----
      Projected benefit obligations......................................   25.9      14.0
    Assets at market value...............................................   22.7      14.6
                                                                           -----     -----
    Assets less than (in excess of) projected benefit obligations........    3.2       (.6)
    Unrecognized net loss................................................   (3.9)     (2.4)
    Unrecognized prior-service cost......................................   (3.2)      (.8)
    Unrecognized transition asset........................................     .8        .9
                                                                           -----     -----
    Pension asset........................................................  $(3.1)    $(2.9)
                                                                           =====     =====
</TABLE>
 
     The discount rate used to measure the present value of benefit obligations
is 7 1/4 percent (8 1/2 percent in 1994); the assumed rate of increase in future
compensation levels is 5 percent; and the expected long-term rate of return on
assets is 10 percent. Plan assets consist primarily of commingled funds and
assets held in a master trust. The master trust is comprised primarily of
domestic and foreign common and preferred stocks, corporate bonds, United States
government securities and commercial paper.
 
     Williams Holdings has retained all liabilities and obligations of its
network services operations' plan participants up to the date of sale (see Note
3).
 
  Postretirement benefits other than pensions
 
     Williams Holdings is included in Williams' health care plan that provides
postretirement medical benefits to retired employees who were employed full
time, hired prior to January 1, 1992 (January 1, 1996, for Transco Energy
employees), have worked five years, attained age 55 while in service with
Williams and are a participant in the Williams pension plans.
 
     Net postretirement benefit expense related to Williams Holdings'
participation in the Williams' plan was as follows:
 
<TABLE>
<CAPTION>
                                                                     1995     1994     1993
                                                                     ----     ----     ----
                                                                           (MILLIONS)
    <S>                                                              <C>      <C>      <C>
    Continuing operations..........................................  $5.7     $5.5     $5.6
    Discontinued operations........................................    --      1.6      1.5
                                                                     ----     ----     ----
                                                                     $5.7     $7.1     $7.1
                                                                     ====     ====     ====
</TABLE>
 
                                      F-21
<PAGE>   37
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Other
 
     Williams Holdings is included in Williams defined-contribution plans
covering substantially all employees. Williams Holdings' contributions are
invested primarily in Williams common stock and are based on employees'
compensation and, in part, match employee contributions. Williams Holdings'
contributions to these plans were $9 million in 1995, $10 million in 1994 and $8
million in 1993. Contributions to these plans made by discontinued operations
were $3 million in both 1994 and 1993.
 
     Effective January 1, 1994, Williams Holdings adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," which requires the accrual of benefits provided to former or inactive
employees after employment but before retirement. Adoption of the standard
reduced 1994 net income by approximately $2 million and is not reported as a
change in accounting principle due to immateriality.
 
     During November 1994, Williams Holdings entered into a deferred share
agreement (the Agreement) in connection with the sale of its network services
operations. Under the terms of the Agreement, Williams will distribute up to
approximately 2.6 million shares of Williams common stock to key employees of
the network services operations over various periods through 1998, less amounts
necessary to meet minimum tax withholding requirements. The associated liability
has been recorded by Williams Holdings. Williams distributed 314,405 and 273,095
shares during 1995 and 1994, respectively.
 
NOTE 9 -- INVENTORIES
 
<TABLE>
<CAPTION>
                                                                           1995      1994
                                                                           -----     -----
                                                                              (MILLIONS)
    <S>                                                                    <C>       <C>
    Natural gas in underground storage:
      Williams Energy Services...........................................  $ 6.0     $ 8.7
      Other..............................................................    1.1       1.5
    Petroleum products:
      Williams Energy Services...........................................   12.8      13.5
      Other..............................................................   27.4      19.1
    Materials and supplies:
      WilTel.............................................................   28.2      28.6
      Other..............................................................   18.9      13.2
    Other................................................................    3.2        --
                                                                           -----     -----
                                                                           $97.6     $84.6
                                                                           =====     =====
</TABLE>
 
NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                       1995        1994
                                                                      -------     -------
                                                                          (MILLIONS)
    <S>                                                               <C>         <C>
    Cost:
      Williams Field Services Group................................. $1,561.2    $1,173.3
      Williams Pipe Line............................................  1,023.3       809.6
      WilTel........................................................     55.2        32.1
      WilTech Group.................................................     90.7        69.5
      Other.........................................................    107.8        29.0
                                                                     --------    --------
                                                                      2,838.2     2,113.5
    Accumulated depreciation........................................   (613.0)     (528.4)
                                                                     --------    --------
                                                                     $2,225.2    $1,585.1
                                                                     ========    ========
</TABLE>
 
                                      F-22

<PAGE>   38
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Commitments for construction and acquisition of property, plant and
equipment are approximately $189 million at December 31, 1995.
 
     The Financial Accounting Standards Board has issued a new accounting
standard, FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," effective for fiscal years beginning
after December 15, 1995. The standard, which will be adopted in the first
quarter of 1996, is not expected to have a material effect on Williams Holdings'
financial position or results of operations.
 
NOTE 11 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
     Under Williams' cash-management system, certain subsidiaries' cash accounts
reflect credit balances to the extent checks written have not been presented for
payment. The amounts of these credit balances included in accounts payable are
$54 million at December 31, 1995, and $31 million at December 31, 1994.
 
<TABLE>
<CAPTION>
                                                                           1995      1994
                                                                          ------    ------
                                                                             (MILLIONS)
    <S>                                                                   <C>       <C>
    Accrued liabilities:
      Federal income taxes payable -- affiliate.........................  $236.7    $   --
      State income taxes payable........................................    78.3       2.8
      Employee costs....................................................    47.4      26.2
      Deferred revenue..................................................    34.4      24.5
      Transportation and exchange gas payable...........................    28.7       5.7
      Taxes other than income taxes.....................................    23.0      29.1
      Other.............................................................   171.4      59.1
                                                                          ------    ------
                                                                          $619.9    $147.4
                                                                          ======    ======
</TABLE>
 
NOTE 12 -- DEBT, LEASES AND BANKING ARRANGEMENTS
 
  Notes payable
 
     During 1994, Williams Holdings entered into a $400 million short-term
credit agreement to finance the acquisition of Williams common stock. Notes
payable totaling $398 million were outstanding under this agreement at December
31, 1994. These notes were repaid in January 1995. The weighted average interest
rate on the outstanding short-term borrowings at December 31, 1994, was 6.79
percent.
 
                                      F-23
<PAGE>   39
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Debt
 
<TABLE>
<CAPTION>
                                                                WEIGHTED
                                                                AVERAGE
                                                                INTEREST
                                                                 RATE*       1995      1994
                                                                --------    ------    ------
                                                                               (MILLIONS)
    <S>                                                         <C>         <C>       <C>
    Williams Holdings of Delaware, Inc.
      Revolving credit loans -- Williams (Note 14)............              $   --    $389.9
                                                                            ======    ======
    Williams Holdings of Delaware, Inc.
      Revolving credit loans..................................     6.3%     $150.0    $   --
    Williams Pipe Line
      Notes, 8.95% and 9.78%, payable through 2001............     9.3       110.0     120.0
    Williams Energy Ventures
      Adjustable rate notes, payable 1996 through 2002........     8.3        21.0        --
    Other, payable through 1999...............................     8.0         7.1      10.1
                                                                            ------    ------
                                                                             288.1     130.1
    Current portion of long-term debt.........................               (14.2)    (13.0)
                                                                            ------    ------
                                                                            $273.9    $117.1
                                                                            ======    ======
</TABLE>
 
---------------
 
* At December 31, 1995.
 
     Williams Holdings and Williams Pipe Line participate in Williams' $800
million credit agreement. Williams Holdings and Williams Pipe Line's maximum
borrowing availability, subject to borrowings by other affiliated companies, is
$600 million and $100 million, respectively. Williams Holdings had $150 million
of borrowings and Williams Pipe Line had no borrowings under this facility at
December 31, 1995. Interest rates vary with current market conditions. Certain
amounts outstanding at December 31, 1995, under this facility do not reduce
amounts available to Williams Holdings in the future. The available amount at
December 31, 1995, is $620 million.
 
     In January 1996, Williams Holdings issued $250 million of 6.25 percent
debentures due 2006.
 
     Terms of one subsidiary's borrowing arrangements limit the transfer of
funds to Williams Holdings. At December 31, 1995, approximately $200 million of
net assets of consolidated subsidiaries was restricted. Undistributed earnings
of companies and partnerships accounted for under the equity method of $13
million are included in Williams Holdings' consolidated retained earnings at
December 31, 1995.
 
     Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments, for each of the next five years are as follows:
 
<TABLE>
<CAPTION>
                                                                            (MILLIONS)
                                                                            ----------
        <S>                                                                 <C>
        1996..............................................................     $ 13
        1997..............................................................       14
        1998..............................................................       14
        1999..............................................................       14
        2000..............................................................      214
</TABLE>
 
     Cash payments for interest (net of amounts capitalized) related to
continuing operations are as follows: 1995 -- $51 million; 1994 -- $28 million
and 1993 -- $19 million, including payments to Williams of $25 million, $17
million and $11 million, respectively. Cash payments for interest (net of
amounts capitalized) related to discontinued operations are as follows:
1994 -- $9 million and 1993 -- $16 million, including payments to Williams of $3
million in 1994.
 
                                      F-24
<PAGE>   40
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Leases
 
     Future minimum annual rentals under non-cancelable operating leases related
to continuing operations (including a total of $12 million to affiliates) are
$19 million in 1996, $14 million in 1997, $8 million in 1998, $6 million in
1999, $3 million in 2000 and $10 million thereafter.
 
     Total rent expense from continuing operations was $39 million in 1995, $16
million in 1994 and $10 million in 1993, including $4 million in 1995 and 1994
and $2 million in 1993 paid to Williams and affiliates. Total rent expense from
discontinued operations was $72 million in 1994 and $61 million in 1993,
including $2 million in 1994 and 1993 paid to Williams.
 
NOTE 13 -- 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 receivable: For those notes with interest rates approximating
     market or maturities of less than three years, fair value is estimated to
     approximate historically recorded amounts. For those notes with maturities
     beyond three years and fixed interest rates, fair value is calculated using
     discounted cash flow analysis based on current market rates.
 
          Due from parent: The amounts bear interest at rates approximating
     market; therefore, fair value is estimated to approximate historically
     recorded amounts.
 
          Investment in Williams debentures: The fair value of Williams
     Holdings' investment is based on the prices of similar securities with
     similar terms and credit ratings. Williams Holdings used the expertise of
     an outside investment banking firm to estimate fair value.
 
          Investment in Williams common stock: The fair value of Williams
     Holdings' investment is based on quoted market prices.
 
          Investment in Williams warrants: The fair value of Williams Holdings'
     investment is based on option pricing techniques. Williams Holdings used
     the expertise of an outside investment banking firm to estimate fair value.
 
          Revolving credit loans -- Williams: The loans bear interest at rates
     approximating market; therefore, fair value is estimated to approximate
     historically recorded amounts.
 
          Long-term debt: The fair value of Williams Holdings' long-term debt,
     all private, is valued 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 the fair value of long-term
     debt.
 
          Energy-related trading and hedging: Includes forwards, futures,
     options, swaps and purchase and sales commitments. Fair value reflects
     management's best estimate of market prices considering various factors
     including closing exchange and over-the-counter quotations, the terms of
     the contract, credit considerations, time value and volatility factors
     underlying the positions.
 
                                      F-25
<PAGE>   41
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Carrying amounts and fair values of Williams Holdings' financial instruments
 
     Asset (liability)
 
<TABLE>
<CAPTION>
                                                            1995                   1994
                                                     -------------------    -------------------
                                                     CARRYING     FAIR      CARRYING     FAIR
                                                      AMOUNT      VALUE      AMOUNT      VALUE
                                                     --------    -------    --------    -------
                                                                     (MILLIONS)
    <S>                                              <C>         <C>        <C>         <C>
    Cash and cash equivalents......................  $   29.5    $  29.5    $   17.9    $  17.9
    Notes receivable...............................      13.5       13.5         6.2        6.0
    Due from parent................................     246.8      246.8          --         --
    Investment in Williams debentures..............     449.0      449.0          --         --
    Investment in Williams common stock............        --         --       336.3      336.3
    Investment in Williams warrants................      25.4       56.2          --         --
    Notes payable..................................        --         --      (398.2)    (398.2)
    Revolving credit loans -- Williams.............        --         --      (389.9)    (389.9)
    Long-term debt, including current portion......    (287.2)    (297.4)     (127.9)    (132.1)
    Energy-related trading:
      Assets.......................................     102.5      102.5        22.7       22.7
      Liabilities..................................    (283.1)    (283.1)      (15.8)     (15.8)
    Energy-related hedging:
      Assets.......................................       2.9        4.5          .3         .3
      Liabilities..................................       (.6)      (3.2)       (8.5)      (8.5)
</TABLE>
 
     The above asset and liability amounts for energy-related hedging represent
unrealized gains or losses and do not include the related deferred amounts.
 
     The 1995 average fair value of the energy-related trading assets and
liabilities is $57.3 million and $144.6 million, respectively. The 1994 average
fair value of the energy-related trading assets and liabilities is $9.2 million
and $8.5 million, respectively.
 
  Off-balance-sheet credit and market risk
 
     Williams Holdings is a participant in the following transactions and
arrangements that involve financial instruments that have off-balance-sheet risk
of accounting loss. It is not practicable to estimate the fair value of these
off-balance-sheet financial instruments because of their unusual nature and
unique characteristics.
 
     Williams Holdings sold, with limited recourse, certain receivables. The
aggregate limit under these receivables facilities was $80 million at December
31, 1994 (all related to discontinued operations). Williams Holdings received
$45 million of additional net proceeds in 1994 and none in 1993. At December 31,
1994, $80 million (all related to discontinued operations) of such receivables
had been sold. Williams Holdings has no risk of credit loss because amounts
outstanding relate to discontinued operations (see Note 3).
 
     In connection with the sale of units in the Williams Coal Seam Gas Royalty
Trust (Trust), Williams Holdings indemnified the Trust against losses from
certain litigation (see Note 16) and guaranteed minimum gas prices through 1997.
At December 31, 1995 and 1994, Williams Holdings has a recorded liability of $10
million for these items, representing the maximum amount for the first guarantee
and an estimate of the gas price exposure based on historical operating trends
and an assessment of market conditions. While Williams Holdings' maximum
exposure from this guarantee exceeds amounts accrued, it is not practicable to
determine such amount because of the unique aspects of the guarantee.
 
     In connection with the sale of the network services operations, Williams
has been indemnified by LDDS against any losses related to retained guarantees
of $180 million at December 31, 1995, for lease rental
 
                                      F-26
<PAGE>   42
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
obligations. LDDS has advised that it is negotiating with the guaranteed parties
to remove Williams as guarantor. Williams Holdings could be impacted if Williams
has to perform under the guarantee.
 
     Williams Holdings has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $5 million at December 31, 1995
and 1994. 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 Energy Services provides price-risk management services associated
with the energy industry to its customers. These services are provided through a
variety of financial instruments, including forward contracts, futures
contracts, option contracts, swap agreements and purchase and sale commitments.
See Note 1 for a description of the accounting for these trading activities.
 
     Williams Energy Services enters into forward contracts and purchase and
sale commitments which involve physical delivery of an energy commodity. Prices
under these contracts are both fixed and variable. Swap agreements call for
Williams Energy Services to make payments to (or receive payments from)
counterparties based upon the differential between a fixed and variable price or
variable prices for different locations. The variable prices are generally based
on either industry pricing publications or exchange quotations. Williams Energy
Services buys and sells option contracts which give the buyer the right to
exercise the options and receive the difference between a predetermined strike
price and a market price at the date of exercise. The market prices used for
natural-gas-related contracts are generally exchange quotations. Williams Energy
Services 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.
 
     Williams Energy Services manages risk from financial instruments by making
various logistical commitments which manage profit margins through offsetting
financial instruments. As a result, price movements can result in losses on
certain contracts offset by gains on others.
 
     Williams Energy Services takes an active role in managing and controlling
market and counterparty risks and has established formal control procedures
which are reviewed on an ongoing basis. Williams Energy Services attempts to
minimize credit-risk exposure to trading counterparties and brokers through
formal credit policies and monitoring procedures. In the normal course of
business, collateral is not required for financial instruments with credit risk.
 
     The notional quantities for all trading financial instruments at December
31, 1995, and December 31, 1994, are as follows:
 
<TABLE>
<CAPTION>
                                                                1995                 1994
                                                         ------------------    -----------------
                                                         PAYOR     RECEIVER    PAYOR    RECEIVER
                                                         ------    --------    -----    --------
    <S>                                                  <C>       <C>         <C>      <C>
    Fixed price:
      Natural gas (TBtu)...............................   873.2       847.3    181.4      179.5
      Refined products and crude (MMBbls)..............    15.9        14.9     11.2       12.5
    Variable price:
      Natural gas (TBtu)............................... 1,841.2     1,517.2     85.0      136.3
      Refined products and crude (MMBbls)..............     2.8         2.5      2.5        2.5
</TABLE>
 
                                      F-27
<PAGE>   43
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The net cash flow requirement related to these contracts at December 31,
1995, was $215 million. At December 31, 1995, the average remaining life of the
trading fixed-price portfolio is approximately two years and four years for the
trading variable-price portfolio.
 
     In 1995, certain gas marketing operations of Williams Energy Services,
along with gas marketing operations from Transco Energy, were combined with the
commodity price-risk management and trading activities of Williams Energy
Services. Such combination in 1995 involves managing the price and other
business risks and opportunities of such physical gas-trading activities and any
related financial instruments previously accounted for as hedges in common-risk
portfolios with Williams Energy Services' other financial instruments. These
former marketing activities, consisting of buying and selling natural gas,
through 1994 were reported on a "gross" basis in the Consolidated Statement of
Income as revenues and profit-center costs. Concurrent with completing the
combination of such activities with the commodity price-risk management
operations in the third quarter of 1995, the related contract rights and
obligations along with any related financial instruments previously accounted
for as hedges, were recorded in the Consolidated Balance Sheet on a
current-market-value basis and the related income statement presentation was
changed to a net basis. Such revenues reported on a gross basis through the
first two quarters of 1995 were reclassified to a net basis concurrent with this
change in the third quarter of 1995. Following is a summary of Williams Energy
Services' revenues:
 
<TABLE>
<CAPTION>
                                                                          1995       1994
                                                                         -------    ------
    <S>                                                                  <C>        <C>
    Financial instrument and physical trading market gains -- net......  $  65.8    $ 14.2
    Gross marketing revenues...........................................    460.8*    249.2
    Gross marketing cost...............................................   (442.3)*      --
    Other..............................................................      1.5        .3
                                                                         -------    ------
                                                                         $  85.8    $263.7
                                                                         =======    ======
</TABLE>
 
---------------
 
* Through June 30, 1995.
 
  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, 1995 and 1994, approximately 36 percent and 44 percent,
respectively, of receivables are for telecommunications and related services;
approximately 50 percent and 30 percent, respectively, of receivables are for
the sale of natural gas and related products or services; and approximately 9
percent and 23 percent, respectively, of receivables are for petroleum products
and related services. Natural gas customers include pipelines, distribution
companies, producers, gas marketers and industrial users primarily located in
the eastern, northwestern and midwestern United States. Telecommunications
customers include numerous corporations. Petroleum products customers include
refiners and marketers primarily in the central United States. As a general
policy, collateral is not required for receivables, but customers' financial
condition and credit worthiness are evaluated regularly.
 
                                      F-28
<PAGE>   44
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 14 -- 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 for continuing
operations are as follows:
 
<TABLE>
<CAPTION>
                                                                  1995      1994      1993
                                                                  -----     -----     -----
                                                                          (MILLIONS)
    <S>                                                           <C>       <C>       <C>
    Direct costs................................................  $16.6     $11.2     $ 8.2
    Allocated parent company expenses...........................   13.0      20.0      17.7
</TABLE>
 
     The direct costs above are reflected in selling, general and administrative
expenses.
 
     Direct costs charged to discontinued operations were $7 million for both
1994 and 1993.
 
     Prior to 1995, Williams Holdings and its subsidiaries maintained promissory
notes with Williams for both advances from and advances to Williams depending on
the cash position of each subsidiary. During 1995, the subsidiaries' promissory
notes with Williams were transferred to Williams Holdings. In 1995, Williams
Holdings has a promissory note with Williams for advances to Williams and one of
Williams Holdings' subsidiaries has a note payable to Williams. Amounts
outstanding are payable on demand, however, any amounts outstanding have been
classified as long-term inasmuch as there has been no expectation for Williams
or Williams Holdings to demand payment in the next year. The notes do not
require commitment fees. Interest is payable monthly and rates vary with market
conditions. The interest rates were 6.39 percent and 6.69 percent at December
31, 1995 and 1994, respectively. Investing income for 1995 includes $42.6
million, resulting from advances to affiliates, while interest accrued includes
$3.4 million, $8.2 million and $.2 million for 1995, 1994 and 1993,
respectively, resulting from advances from affiliates.
 
     Investing income also includes dividends received on the investment in
Williams common stock of $4.7 million and $2.1 million in 1995 and 1994,
respectively.
 
     Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Williams Natural Gas, Northwest Pipeline, Transcontinental
Gas Pipe Line and Texas Gas. Revenues include $145 million, $4 million and $35
million for 1995, 1994 and 1993, respectively, of transactions with affiliates,
primarily natural gas sales. Costs and operating expenses include $71 million,
$18 million and $9 million for 1995, 1994 and 1993, respectively, of
transactions with affiliates, primarily transportation costs. Transactions with
affiliates are at prices that generally apply to unaffiliated parties.
 
NOTE 15 -- OTHER FINANCIAL INFORMATION
 
     Intercompany revenues (at prices that generally apply to sales to
unaffiliated parties) are as follows:
 
<TABLE>
<CAPTION>
                                                                  1995      1994      1993
                                                                  -----     -----     -----
                                                                         (MILLIONS)
    <S>                                                           <C>       <C>       <C>
    Williams Field Services Group...............................  $ 9.1     $30.0     $14.3
    Williams Energy Services....................................   23.2      16.3       7.3
    Williams Pipe Line..........................................   32.8      16.7       1.4
    Other.......................................................     --        .1        .1
                                                                  -----     -----     -----
                                                                  $65.1     $63.1     $23.1
                                                                  =====     =====     =====
</TABLE>
 
                                      F-29
<PAGE>   45
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Information for business segments is as follows:
 
<TABLE>
<CAPTION>
                                                               1995        1994        1993
                                                             --------    --------    --------
                                                                        (MILLIONS)
    <S>                                                      <C>         <C>         <C>
    Identifiable assets at December 31:
      Williams Field Services Group........................  $1,438.0    $1,017.2    $  942.0
      Williams Energy Services.............................     398.6        96.4        84.7
      Williams Pipe Line...................................     870.5       678.4       586.0
      WilTel...............................................     263.0       251.0       165.5
      WilTech Group........................................     138.5        60.2        26.6
      Investments..........................................     599.1       536.0       257.8
      Corporate and other..................................     458.7        57.3        31.6
      Discontinued operations..............................        --       743.6       895.2
                                                             --------    --------    --------
              Consolidated.................................  $4,166.4    $3,440.1    $2,989.4
                                                             ========    ========    ========
    Additions to property, plant and equipment:
      Williams Field Services Group........................  $  242.9    $  158.0    $  110.8
      Williams Pipe Line...................................      87.9        46.6        62.9
      WilTel...............................................      24.1         4.9         1.9
      WilTech Group........................................       8.3         8.0         5.9
      Other................................................      12.0         6.0         8.8
                                                             --------    --------    --------
              Consolidated.................................  $  375.2    $  223.5    $  190.3
                                                             ========    ========    ========
    Depreciation and depletion:
      Williams Field Services Group........................  $   49.5    $   41.8    $   37.9
      Williams Pipe Line...................................      26.4        22.4        21.4
      WilTel...............................................       5.9         5.3         4.7
      WilTech Group........................................       8.3         7.4         3.9
      Other................................................       4.2         3.1         2.1
                                                             --------    --------    --------
              Consolidated.................................  $   94.3    $   80.0    $   70.0
                                                             ========    ========    ========
</TABLE>
 
NOTE 16 -- 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 $179 million at December 31, 1995. As a
result of various FERC rulings in these and other proceedings, Williams Pipe
Line does not expect that the amount of any refunds ordered would be
significant. Accordingly, no portion of these revenues has been reserved for
refund.
 
  Environmental matters
 
     Certain Williams Holdings' subsidiaries have been named as potentially
responsible parties (PRP) at various Superfund waste disposal sites. In
addition, these subsidiaries have incurred or are alleged to have incurred
various other hazardous materials removal or remediation obligations under
environmental laws. Although no assurances can be given, Williams Holdings does
not believe that these obligations or the PRP status of these subsidiaries will
have a material adverse effect on its financial position, results of operations
or net cash flows.
 
                                      F-30
<PAGE>   46
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Other legal matters
 
     On December 31, 1991, the Southern Ute Indian Tribe (the Tribe) filed a
lawsuit against Williams Production Company, 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. On September 13, 1994, the court granted summary judgment in favor of the
defendants. The Tribe has 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. While Williams
Holdings believes that such a payment is not probable, it has reserved a portion
of the proceeds from the sale of the units in the Trust.
 
     In October 1990, Dakota Gasification Company (Dakota), the owner of the
Great Plains Coal Gasification Plant (Plant), filed suit in the U.S. district
court in North Dakota against Transcontinental Gas Pipe Line, a wholly-owned
subsidiary of Williams, and three other pipeline companies alleging that the
pipeline companies had not complied with their respective obligations under
certain gas purchase and gas transportation contracts. On September 8, 1992,
Dakota and the Department of Justice on behalf of the Department of Energy filed
an amended complaint adding as defendants in the suit, Transco Energy Company,
Transco Coal Gas Company (Transco Energy Company and Transco Coal Gas Company
being wholly-owned subsidiaries of Williams Holdings) and all of the other
partners in the partnership that originally constructed the Plant and each of
the parent companies of these entities. Dakota and the Department of Justice
sought declaratory and injunctive relief and the recovery of damages, alleging
that the four pipeline defendants underpaid for gas, collectively, as of June
30, 1992, by more than $232 million plus interest and for additional damages for
transportation services and costs and expenses including attorneys fees. On
March 30, 1994, the parties executed definitive agreements which would settle
the litigation subject to final non-appealable regulatory approvals. The
settlement is also subject to a Federal Energy Regulatory Commission (FERC)
ruling that Transcontinental Gas Pipe Line's existing authority to recover in
rates certain costs related to the purchase and transportation of gas produced
by Dakota will pertain to gas purchase and transportation costs Transcontinental
Gas Pipe Line will pay Dakota under the terms of the settlement. On October 18,
1994, the FERC issued an order consolidating Transcontinental Gas Pipe Line's
petition for approval of the settlement with similar petitions pending relative
to two of the other three pipeline companies (the third pipeline having entered
into a settlement) and setting the matter for hearing before an administrative
law judge. On December 29, 1995, the administrative law judge issued an initial
decision in which he concluded that the settlement was imprudent. If the
decision is upheld on appeal, Transcontinental Gas Pipe Line and the other
pipelines would be required to refund to their customers amounts collected in
excess of the amounts deemed appropriate by the administrative law judge. The
pipelines would be entitled to collect the amount of any such customer refunds
from Dakota. The administrative law judge's decision will be appealed; however,
in the event that the necessary regulatory approvals are not ultimately obtained
and Dakota elects to continue the litigation, Transcontinental Gas Pipe Line,
Transco Energy Company and Transco Coal Gas Company intend to vigorously defend
the suit.
 
     In connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, Transcontinental Gas Pipe Line and
Texas Gas each entered into certain settlements with producers which may require
the indemnification of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. As a result of
such settlements, Transcontinental Gas Pipe Line and Texas Gas have been named
as defendants in, respectively, six and two lawsuits in which
 
                                      F-31
<PAGE>   47
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
damages claimed aggregate in excess of $133 million. 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. Texas Gas has
settled its two lawsuits for a total cost of $3.7 million, all but $700,000 of
which is recoverable as transition costs under FERC Order 636. On July 17, 1995,
a judge in a Texas state court granted a motion by Transcontinental Gas Pipe
Line for partial summary judgment, rejecting a major portion of the plaintiff's
claims in one of its lawsuits. Producers 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.
 
     On November 14, 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). Hazleton Fuel Management Company (HFMC), a subsidiary of Transco
Energy, formerly supplied natural gas and fuel oil to the Facility. As of
December 31, 1995, it had current outstanding receivables from the Partnership
of approximately $20 million, all of which has been reserved. The construction
of the Facility was funded by several banks that have a security interest in all
of the Partnership's assets. HFMC has asserted to the Bankruptcy Court that
payment of its receivables is superior to the lien of the banks and intends to
vigorously pursue the collection of such amounts. HFMC has also filed suit
against the lead bank with respect to this and other matters, including the
alleged tortious interference with HFMC's contractual relations with the
Partnership and other parties. On March 21, 1995, the Bankruptcy Court approved
the rejection of the gas supply contract between the Partnership and HFMC. HFMC
has in turn asserted force majeure under a contract with a producer under which
HFMC purchased natural gas for the Facility.
 
     In addition to the foregoing, various other proceedings are pending against
Williams Holdings or its subsidiaries incidental to their operations.
 
  Summary
 
     While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements, will have a materially adverse effect upon Williams Holdings'
future financial position, results of operations or cash flow requirements.
 
                                      F-32
<PAGE>   48
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                      QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     Summarized quarterly financial data are as follows:
 
<TABLE>
<CAPTION>
                                                        FIRST     SECOND    THIRD     FOURTH
                          1995                         QUARTER    QUARTER   QUARTER   QUARTER
    -------------------------------------------------  -------    ------    ------    ------
    <S>                                                <C>        <C>       <C>       <C>
    Revenues.........................................  $ 303.3    $302.3    $338.4    $410.0
    Costs and operating expenses.....................    178.2     199.6     223.2     275.6
    Net income.......................................  1,055.9      65.4      58.7      50.6
                          1994
    -------------------------------------------------
    Revenues.........................................  $ 272.8    $311.2    $333.1    $347.2
    Costs and operating expenses.....................    202.4     225.6     253.9     257.5
    Income before extraordinary loss.................     39.8      64.8      48.1      66.8
    Net income.......................................     39.8      58.7      48.1      66.8
</TABLE>
 
     First-quarter 1995 net income includes the after-tax gain of $1 billion on
the sale of Williams Holdings' network services operations (see Note 3 of Notes
to Consolidated Financial Statements). The second quarter of 1995 includes a
$15.5 million after-tax gain on the exchange of 12.2 million shares of Williams
common stock for Williams warrants and subordinated debentures. The
second-quarter 1995 also includes a $16 million after-tax gain from the sale of
the 15 percent interest in Texasgulf Inc. (see Note 4 of Notes to Consolidated
Financial Statements). In third-quarter 1995, Williams Field Services Group
recorded $20 million of income from the favorable resolution of contingency
issues involving previously regulated gathering and processing assets, partially
offset by an $8 million accrual for a future minimum price natural gas purchase
commitment. In fourth-quarter 1995, Williams Energy Services recorded loss
accruals of approximately $6 million, primarily related to contract disputes. In
fourth-quarter 1995, the development of a commercial coal gasification venture
in south-central Wyoming was canceled, resulting in a $41.4 million pre-tax
charge (see Note 5 of Notes to Consolidated Financial Statements).
Fourth-quarter 1995 also includes an $11 million pre-tax gain on the sale of the
remaining investment in Williams common stock (see Note 4 of Notes to
Consolidated Financial Statements). Fourth-quarter 1995 income from discontinued
operations reflects the $13 million after-tax effect of the reversal of accruals
established at the time of the sale of the network services operations.
 
     Second-quarter 1994 includes a $23 million gain from the sale of assets
(see Note 5 of Notes to Consolidated Financial Statements). Fourth-quarter 1994
includes $5 million of costs for evaluating and determining whether to build an
oil refinery. Fourth-quarter 1994 discontinued operations includes favorable
adjustments of approximately $15 million relating to bad debt recoveries and
accrual reversals.
 
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
        Financial Disclosure
 
     None.
 
                                      F-33
<PAGE>   49
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
     (a) 1 and 2. The financial statements and schedules listed in the
accompanying index to consolidated financial statements are filed as a part of
this annual report.
 
     (a) 3 and (c). The Exhibits listed below are filed as part of this annual
report.
 
<TABLE>
<C>                  <S>
         Exhibit 3   --
           *3.1      -- Certificate of Incorporation of the Company, as amended (filed as
                        Exhibit 3.1 to the Company's Form 10, dated October 18, 1995).
           *3.2      -- By-laws of the Company (filed as Exhibit 3.2 to the Company's Form
                        10, dated October 18, 1995).
         Exhibit 4   --
            *4.1     -- Form of Senior Debt Indenture between the Company and Citibank, N.A.,
                        relating to the 6 1/4% Senior Debentures due 2006 (filed as Exhibit
                        4.1 to the Company's Form 10, dated October 18, 1995).
            *4.2     -- U.S. $800,000,000 Credit Agreement, dated as of February 23, 1995,
                        among the Company and certain of its subsidiaries, and the lenders
                        named therein and Citibank, N.A., as agent (filed as Exhibit 4(d) to
                        the Williams Form 10-K for the year ended December 31, 1994).
            *4.3     -- First Amendment, dated as of June 15, 1995, to Exhibit 4.2 above
                        (filed as Exhibit 4.9 to the Northwest Pipeline Corporation
                        Registration Statement on Form S-3 No. 33-62639, filed September 14,
                        1995).
         Exhibit 12  -- Computation of Ratio of Earnings to Fixed Charges.
         Exhibit 23  -- Consent of Independent Auditor
         Exhibit 24  -- Power of Attorney together with certified resolution.
         Exhibit 27  -- Financial Data Schedule.
</TABLE>
 
     (b) Reports on Form 8-K.
 
         No reports on Form 8-K were filed by the Company with the Securities
     and Exchange Commission during the fourth quarter of 1995.
 
     (d) The financial statements of partially-owned companies are not presented
herein since none of them individually, or in the aggregate, constitute a
significant subsidiary.
 
---------------
 
* Each such exhibit has heretofore been filed with the Securities and Exchange
  Commission as part of the filing indicated and is incorporated herein by
  reference.
 
                                      F-34
<PAGE>   50
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                               ITEM 14(A) 1 AND 2
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Covered by report of independent auditors:
  Consolidated statement of income for the three years ended December 31, 1995........  F-10
  Consolidated balance sheet at December 31, 1995 and 1994............................  F-11
  Consolidated statement of stockholder's equity for the three years ended December
     31, 1995.........................................................................  F-12
  Consolidated statement of cash flows for the three years ended December 31, 1995....  F-13
  Notes to consolidated financial statements..........................................  F-14
  Schedules for the three years ended December 31, 1995:
     II -- Valuation and qualifying accounts..........................................  F-36
Not covered by report of independent auditors:
  Quarterly financial data (unaudited)................................................  F-33
</TABLE>
 
     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
<PAGE>   51
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
              SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(A)
 
<TABLE>
<CAPTION>
                                                                 ADDITIONS
                                                             -----------------
                                                             CHARGED
                                                             TO COSTS
                                                 BEGINNING     AND                                ENDING
                                                  BALANCE    EXPENSES    OTHER    DEDUCTIONS(B)   BALANCE
                                                 ---------   --------    -----    -------------   -------
                                                                        (MILLIONS)
<S>                                              <C>         <C>         <C>      <C>             <C>
Allowance for doubtful accounts:
  1995..........................................   $ 7.2       $3.6      $1.5 (c)     $ 2.0        $10.3
  1994..........................................     9.4        4.0(d)     --           6.2(e)       7.2
  1993..........................................    15.5         .3(f)     --           6.4          9.4
</TABLE>
 
---------------
 
(a) Deducted from related assets.
 
(b) Represents balances written off, net of recoveries and reclassifications.
 
(c) Relates primarily to acquisition of businesses.
 
(d) Excludes $5.7 million related to discontinued operations.
 
(e) Includes the discontinued operations beginning balance reclassification of
    $3.6 million.
 
(f) Includes $4.1 million reversal of amounts previously accrued.
 
                                      F-36
<PAGE>   52
 
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                            WILLIAMS HOLDINGS OF DELAWARE, INC.
                                                    (Registrant)
 
                                            By:     /s/  DAVID M. HIGBEE
                                                -----------------------------
                                                       David M. Higbee
                                                       Attorney-in-fact
Dated: March 27, 1996
 

     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.
 
<TABLE>
<CAPTION>
                  SIGNATURE                                          TITLE
                  ---------                                          -----
<S>                                              <C>
          /s/  KEITH E. BAILEY*                  Chairman of the Board, President, Chief
-------------------------------------------        Executive Officer (Principal Executive
               Keith E. Bailey                     Officer) and Director


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


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


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


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


       /s/  LLOYD A. HIGHTOWER*                  Director
-------------------------------------------            
            Lloyd A. Hightower


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


         /s/  HOWARD E. JANZEN*                  Director
-------------------------------------------            
              Howard E. Janzen


*By         /s/  DAVID M. HIGBEE
    ---------------------------------------
                 David M. Higbee
                 Attorney-in-fact
</TABLE>
 
Dated: March 27, 1996
 
                                      II-1
<PAGE>   53
                              INDEX TO EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION
-------                  -----------
<S>         <C>
Exhibit 3   --
  *3.1      -- Certificate of Incorporation of the Company, as amended (filed as
               Exhibit 3.1 to the Company's Form 10, dated October 18, 1995).
  *3.2      -- By-laws of the Company (filed as Exhibit 3.2 to the Company's Form
               10, dated October 18, 1995).
Exhibit 4   --
   *4.1     -- Form of Senior Debt Indenture between the Company and Citibank, N.A.,
               relating to the 6 1/4% Senior Debentures due 2006 (filed as Exhibit
               4.1 to the Company's Form 10, dated October 18, 1995).
   *4.2     -- U.S. $800,000,000 Credit Agreement, dated as of February 23, 1995,
               among the Company and certain of its subsidiaries, and the lenders
               named therein and Citibank, N.A., as agent (filed as Exhibit 4(d) to
               the Williams Form 10-K for the year ended December 31, 1994).
   *4.3     -- First Amendment, dated as of June 15, 1995, to Exhibit 4.2 above
               (filed as Exhibit 4.9 to the Northwest Pipeline Corporation
               Registration Statement on Form S-3 No. 33-62639, filed September 14,
               1995).
Exhibit 12  -- Computation of Ratio of Earnings to Fixed Charges.
Exhibit 23  -- Consent of Independent Auditor
Exhibit 24  -- Power of Attorney together with certified resolution.
Exhibit 27  -- Financial Data Schedule.
</TABLE>