<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
 
                                   FORM 10-K
                             ---------------------
(MARK ONE)
    [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       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                                   74172
               TULSA, OKLAHOMA                                  (Zip Code)
  (Address of principal executive offices)
</TABLE>
 
       Registrant's telephone number, including area code: (918) 573-2000
 
          Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
 
          Securities Registered Pursuant to Section 12(g) of the Act:
 
                         COMMON STOCK, $1.00 PAR VALUE
                             ---------------------
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]
 
     The number of shares of the registrant's Common Stock outstanding at March
30, 1999, 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. was incorporated under the laws of the
State of Delaware in 1994. The principal executive offices of Williams Holdings
are located at One Williams Center, Tulsa, Oklahoma 74172 (telephone (918)
573-2000). Unless the context otherwise requires, references to Williams
Holdings herein include its subsidiaries. Williams Holdings is a wholly owned
subsidiary of The Williams Companies, Inc. (Williams).
 
     On March 24, 1999, Williams disclosed that its Board of Directors had
authorized the merger of Williams Holdings with and into Williams and the
assumption by Williams of liabilities and obligations of Williams Holdings.
Management expects the merger to be completed in the second or third quarter of
1999.
 
     On November 19, 1998, Williams announced that its board of directors had
authorized an initial public offering of a minority interest in its
communications subsidiary, Williams Communications Group, Inc. Williams expects
to file a registration statement for this offering with the Securities and
Exchange Commission in the second quarter of 1999. In addition, on February 8,
1999, Williams announced it had entered into an agreement with SBC
Communications under which SBC would acquire the lesser of the number of shares
of common stock valued at $500 million or ten percent of the common stock of
Williams Communications in a private placement expected to occur simultaneously
with the initial public offering.
 
     On March 28, 1998, Williams acquired MAPCO Inc. in a stock-for-stock
transaction based upon a fixed exchange ratio of 1.665 shares of Williams common
stock and .555 associated preferred stock purchase rights for each share of
MAPCO common stock and associated preferred stock purchase rights. See Note 2 to
Notes to Consolidated Financial Statements. Management believes the acquisition
furthers its strategy of seeking growth through strategic acquisitions and
alliances and that MAPCO's assets and operations complement Williams' existing
lines of business. Williams operates the MAPCO businesses through Williams
Energy Services.
 
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     See Part II, Item 8 -- Financial Statements and Supplementary Data.
 
(C) NARRATIVE DESCRIPTION OF BUSINESS
 
     Williams Holdings, through Williams Energy Services and its subsidiaries,
engages in the following types of energy-related activities:
 
     - exploration and production of oil and gas through ownership of 708 Bcf of
       proved natural gas reserves primarily located in the San Juan Basin of
       Colorado and New Mexico;
 
     - natural gas gathering, processing, and treating activities through
       ownership and operation of approximately 7,500 miles of gathering lines
       and ownership or operation of ten gas treating plants and 11 gas
       processing plants (one of which is partially owned);
 
---------------
 
* The term "Mcf" means thousand cubic feet, "MMcf" means million cubic feet and
  "Bcf" means billion
  cubic feet. All volumes of natural gas are stated at a pressure base of 14.73
  pounds per square inch absolute
  at 60 degrees Fahrenheit. The term "Btu" means British Thermal Unit, "MMBtu"
  means one million
  British Thermal Units and "TBtu" means one trillion British Thermal Units. The
  term "Dth" means
  dekatherm. The term "Mbbl" means one thousand barrels. The term "GWh" means
  gigawatt hour.
<PAGE>   3
 
     - natural gas liquids transportation through ownership and operation of
       approximately 10,300 miles of natural gas liquids pipeline;
 
     - transportation of petroleum products and related terminal services
       through ownership or operation of approximately 9,100 miles of petroleum
       products pipeline and 68 petroleum products terminals;
 
     - production and marketing of ethanol through operation and ownership of
       two ethanol plants (one of which is partially owned);
 
     - petroleum products and propane distribution services through operation
       and ownership of a petroleum trucking company;
 
     - refining of petroleum products through operation and ownership of two
       refineries;
 
     - retail marketing through 256 convenience stores; and
 
     - energy commodity marketing and trading.
 
     Williams Holdings, through Williams Communications Group, Inc. and its
subsidiaries, engages in the following types of communications-related
activities:
 
     - owner and operator of a 19,000-route mile telecommunications fiber optic
       network;
 
     - data-, voice-, and video-related products and services;
 
     - advertising distribution services;
 
     - video services and other multimedia services for the broadcast industry;
 
     - enhanced audio- and video-conferencing services for businesses;
 
     - customer-premise voice and data equipment, sales, and services including
       installation, maintenance, and integration; and
 
     - network integration and management services nationwide.
 
     Williams Holdings, through subsidiaries of Williams International Company,
directly invests in energy and telecommunications projects primarily in South
America and Australia and continues to explore and develop additional projects
for international investments. It also invests in energy, telecommunications,
and infrastructure development funds in Asia and Latin America.
 
     Substantially all operations of Williams Holdings are conducted through
subsidiaries. Williams performs management, legal, financial, tax, consultative,
administrative, and other services for its subsidiaries. Williams Holdings'
principal sources of cash are from external financings, dividends and advances
from its subsidiaries, investments, payments by subsidiaries for services
rendered, and interest payments from subsidiaries on cash advances. The amount
of dividends available to Williams Holdings from subsidiaries largely depends
upon each subsidiary's earnings and operating capital requirements. The terms of
certain subsidiaries' borrowing arrangements limit the transfer of funds to
Williams Holdings.
 
     The energy operations of Williams Holdings are grouped into a wholly owned
subsidiary, Williams Energy Services; its communications operations are grouped
into a wholly owned subsidiary, Williams Communications Group, Inc.; and its
international operations are grouped into a wholly owned subsidiary, Williams
International Company. Item 1 of this report is formatted to reflect this
structure.
 
WILLIAMS ENERGY SERVICES
 
     Williams Energy is comprised of four major business units: Exploration &
Production, Midstream Gas & Liquids, Petroleum Services, and Energy Marketing &
Trading. Through its business units, Williams Energy engages in energy
production and exploration activities; natural gas gathering, processing, and
treating; natural gas liquids transportation, fractionation, and storage;
petroleum products transportation and terminal services;
 
                                        2
<PAGE>   4
 
ethanol production; refining; convenience retailing; mobile information
management systems; fleet fuel management services; and energy commodity
marketing and trading.
 
     Williams Energy, through its subsidiaries, owns 708 Bcf of proved natural
gas reserves located primarily in the San Juan Basin of Colorado and New Mexico
and owns and operates approximately 7,500 miles of gathering pipelines,
approximately 10,300 miles of natural gas liquids pipelines, owns or operates
ten gas treating plants and 11 gas processing plants (one of which is partially
owned), 68 petroleum products terminals, two ethanol production facilities (one
of which is partially owned), two refineries, 256 convenience stores/travel
centers, and approximately 9,100 miles of petroleum products pipeline. Physical
and notional volumes marketed and traded by subsidiaries of Williams Energy
approximated 15,873 TBtu equivalents in 1998. Williams Energy, through its
subsidiaries, employs approximately 9,150 employees.
 
     Segment revenues and segment profit for Williams Energy are reported in
Note 19 of Notes to Consolidated Financial Statements herein.
 
     A business description of each of Williams Energy's business units follows.
 
EXPLORATION & PRODUCTION
 
     Williams Energy, through its wholly owned subsidiary Williams Production
Company in its Exploration & Production unit (E&P), owns and operates producing
natural gas leasehold properties in the United States. In addition, E&P is
actively exploring for oil and gas.
 
     Oil and gas properties. E&P's properties are located primarily in the Rocky
Mountains and Gulf Coast areas. Rocky Mountain properties are located in the San
Juan Basin in New Mexico and Colorado, in Wyoming, and in Utah. Gulf Coast
properties are located in Louisiana, east and south Texas, and offshore Gulf of
Mexico.
 
     Gas Reserves. At December 31, 1998, 1997, and 1996, E&P had proved
developed natural gas reserves of 476 Bcf, 362 Bcf, and 323 Bcf, respectively,
and proved undeveloped reserves of 232 Bcf, 238 Bcf, and 208 Bcf, respectively.
Of E&P's total proved reserves, 90 percent are located in the San Juan Basin of
Colorado and New Mexico. No major discovery or other favorable or adverse event
has caused a significant change in estimated gas reserves since year end.
 
     Customers and Operations. At December 31, 1998, the gross and net developed
leasehold acres owned by E&P totaled 312,939 and 131,303, respectively, and the
gross and net undeveloped acres owned were 444,916 and 111,926, respectively. At
December 31, 1998, E&P owned interests in 3,393 gross producing wells (632 net)
on its leasehold lands.
 
     Operating Statistics. The following tables summarize drilling activity for
the periods indicated:
 
<TABLE>
<CAPTION>
                         1998 WELLS                           GROSS    NET
                         ----------                           -----   -----
<S>                                                           <C>     <C>
Development
  Drilled...................................................   173    46.7
  Completed.................................................   173    46.7
Exploration
  Drilled...................................................     5     3.1
  Completed.................................................     4     2.5
</TABLE>
 
<TABLE>
<CAPTION>
                                                              GROSS    NET
COMPLETED DURING                                              WELLS   WELLS
----------------                                              -----   -----
<S>                                                           <C>     <C>
1998........................................................   177      49
1997........................................................   207      35
1996........................................................    65      11
</TABLE>
 
     The majority of E&P's gas production is currently being sold in the spot
market at market prices. Total net production sold during 1998, 1997, and 1996
was 43.2 Bcf, 37.1 Bcf, and 31.0 Bcf, respectively. The average production
costs, including production taxes, per Mcf of gas produced were $.37, $.42, and
$.23, in
                                        3
<PAGE>   5
 
1998, 1997, and 1996, respectively. The average wellhead sales price per Mcf was
$1.31, $1.62, and $.98, respectively, for the same periods.
 
     In 1993 E&P conveyed a net profits interest in certain of its properties to
the Williams Coal Seam Gas Royalty Trust. Williams subsequently sold Trust Units
to the public in an underwritten public offering. Williams Holdings owns
3,568,791 Trust Units representing 36.8 percent of outstanding Units.
Substantially all of the production attributable to the properties conveyed to
the Trust was from the Fruitland coal formation and constituted coal seam gas.
Production information reported herein includes E&P's interest in these Units.
 
MIDSTREAM GAS & LIQUIDS
 
     Williams Energy, through Williams Field Services Group, Inc. and its
subsidiaries (Midstream Gas & Liquids), owns and operates natural gas gathering,
processing, treating, transportation, fractionation, and storage facilities
located in northwestern New Mexico, southwestern Colorado, southwestern Wyoming,
eastern Utah, northwestern Oklahoma, Kansas, northern Missouri, eastern
Nebraska, Iowa, southern Minnesota, Tennessee, and also in areas offshore and
onshore in Texas, Alabama, Mississippi, and Louisiana. Midstream Gas & Liquids
also operates gathering facilities, owned by Transcontinental Gas Pipe Line
Corporation, an affiliated interstate natural gas pipeline company, that are
currently regulated by the FERC.
 
     As a result of the MAPCO merger in 1998, Williams Energy acquired an
approximately 4.8 percent investment interest in Alliance Pipeline. Effective
January 1, 1999, this interest was transferred to subsidiaries of the Williams
Companies, Inc. Alliance consists of two proposed segments, a Canadian segment
and a United States segment. Alliance has filed applications for approval with
the FERC in the United States and the National Energy Board (NEB) in Canada, to
construct and operate an approximately 1,800 mile natural gas pipeline system
extending from northeast British Columbia to the Chicago, Illinois, area market
center, where it will interconnect with the North American pipeline grid. On
September 17, 1998, the FERC granted a Certificate of Public Convenience and
Necessity (CPCN) for the United States portion of the Alliance pipeline, and on
December 3, 1998, the NEB granted a CPCN for the Canadian portion. Construction
is expected to begin in the spring of 1999 with an anticipated in-service date
of October 2000. Total estimated cost of the Alliance project is approximately
$3 billion. At December 31, 1998, Williams Energy had invested approximately $19
million in Alliance.
 
     Expansion Projects. During 1998 Midstream Gas & Liquids continued to expand
its operations in the Gulf Coast region through the Mobile Bay and Discovery
projects. Discovery, a 50 percent owned joint venture, began operations during
1997 with the completion of its 150-mile gas gathering system, Larose cryogenic
plant with 600 MMcf per day of capacity, and Paradis fractionation facility with
42,000 bbl per day of capacity. Construction on the Mobile Bay gathering and
processing facilities has remained on schedule, with the processing plant's
commissioning and performance testing expected to begin in the second quarter of
1999. Contracts are currently in place to supply approximately 70 percent of the
processing plant's 600 MMcf per day of capacity. Liquids from this plant will be
handled by three separate joint ventures including the Tri-States Pipeline, a
16.7 percent owned system with a capacity of 80,000 bbl per day, Wilprise
Pipeline, a 33 percent owned system with capacity of 75,000 bbl per day, and a
26.7 percent owned fractionation facility with a capacity of 60,000 bbl per day.
In addition, Midstream Gas & Liquids began construction on an expansion of its
Rocky Mountain natural gas liquids pipeline which will increase capacity from
75,000 bbl per day to 125,000 bbl per day through construction of a 412-mile
pipeline parallel to the existing Mid-America System. Completion is expected in
July 1999.
 
     Customers and Operations. Facilities owned and operated by Midstream Gas &
Liquids consist of approximately 7,500 miles of gathering pipelines and owns or
operates ten gas treating plants and 11 gas processing plants (one of which is
partially owned), and approximately 10,300 miles of natural gas liquids
pipeline, of which approximately 1,600 miles are partially owned. The aggregate
daily inlet capacity is approximately 7.9 Bcf for the gathering systems and 6.7
Bcf for the gas processing, treating, and dehydration facilities. Midstream Gas
& Liquids' pipeline operations provide customers with one of the nation's
largest NGL transportation systems, while gathering and processing customers
have direct access to interstate pipelines, including affiliated pipelines,
which provide access to multiple markets.
 
                                        4
<PAGE>   6
 
     During 1998 Midstream Gas & Liquids gathered gas for 288 customers,
processed gas for 140 customers, and provided transportation to 87 customers.
The two largest customers accounted for approximately 24 percent and 11 percent,
respectively, of total gathered volumes, and the largest customer accounted for
approximately 23 percent of processed volumes. The two largest transportation
customers accounted for 23 percent and 12 percent, respectively, of
transportation volumes. No other customer accounted for more than ten percent of
gathered, processed, or transported volumes. Midstream Gas & Liquids' 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 Midstream Gas & Liquids. The
natural gas liquids transportation contracts are tariff-based and generally
short-term in nature with some long-term contracts for system-connected
processing plants.
 
     Operating Statistics. The following table summarizes gathering, processing,
natural gas liquid sales, and transportation volumes for the periods indicated.
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Gas volumes:
  Gathering (TBtu)..........................................  1,204   1,170   1,119
  Processing (TBtu).........................................    536     520     484
  Natural gas liquid sales (millions of gallons)............    576     551     403
  Natural gas liquids transportation (MMBbbl)...............    401     414     397
</TABLE>
 
PETROLEUM SERVICES
 
     Williams Energy, through wholly owned subsidiaries in its Petroleum
Services unit, owns and operates a petroleum products pipeline system, two
ethanol production plants (one of which is partially owned), and petroleum
products terminals and provides services and markets products related thereto.
Included in this business unit are two refineries, 256 convenience stores/travel
centers, trucking and rail operations for propane and refined products, mobile
information management systems, and fleet fuel management services.
 
     Transportation. A subsidiary in the Petroleum Services unit, Williams Pipe
Line Company, owns and operates a petroleum products pipeline system which
covers an 11-state area extending from Oklahoma to North Dakota and Minnesota
and Illinois. 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 and liquefied petroleum gases.
 
     At December 31, 1998, the system traverses approximately 7,100 miles of
right-of-way and includes approximately 9,100 miles of pipeline in various sizes
up to 16 inches in diameter. The system includes 77 pumping stations, 22.4
million barrels of storage capacity, and 39 delivery terminals. The terminals
are equipped to deliver refined products into tank trucks and tank rail cars.
The maximum number of barrels that the system can transport per day depends upon
the operating balance achieved at a given time between various segments of the
system. Because the balance is dependent upon the mix of products to be shipped
and the demand levels at the various delivery points, the exact capacity of the
system cannot be stated. In 1998 total system shipments averaged 614 thousand
barrels per day.
 
     An affiliate of Williams Pipe Line, Longhorn Enterprises of Texas, Inc.
(LETI), owns a 31.5 percent interest in Longhorn Partners Pipeline, LP, a joint
venture formed to construct and operate a refined products pipeline from Houston
to El Paso, Texas. Pipeline construction is nearly complete, but operations are
not expected to commence until the third quarter of 1999, pending review and
approval of an environmental assessment. Williams Pipe Line has designed and
constructed and will operate the pipeline, and LETI has contributed a total of
$92.4 million to the joint venture.
 
     On February 25, 1999, Williams Energy announced it had reached an agreement
to purchase Union Texas Petrochemicals Corporation, a wholly owned subsidiary of
ARCO, with a closing expected on March 31, 1999. UTP's assets include a 215-mile
light hydrocarbon transportation and 85-mile olefin pipeline and storage
network, which connects, either directly or indirectly, most major natural gas
liquids producers and olefin consumers in Louisiana. UTP also is the leading
merchant marketer of ethylene in Louisiana and
 
                                        5
<PAGE>   7
 
owns and operates a 5/12th interest in a 1.25 billion pounds per year ethylene
plant near Geismar, Louisiana. In connection with the acquisition, the Energy
Marketing & Trading unit anticipates entering into a financial agreement, backed
by an A credit-rated third party, intended to manage the risks related to the
earnings volatility typically associated with ethylene production. The expected
cost of this transaction is $166.5 million.
 
     The operating statistics set forth below relate to the system's operations
for the periods indicated:
 
<TABLE>
<CAPTION>
                                                           1998      1997      1996
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Shipments (thousands of barrels):
Refined products:
  Gasolines.............................................  131,600   132,428   134,296
  Distillates...........................................   72,471    71,694    68,628
  Aviation fuels........................................   10,038    10,557    11,189
  LP-Gases..............................................    8,644    13,322    15,618
  Lube extracted fuel oil...............................    1,246     7,471     8,555
  Crude oil.............................................        0        31       891
                                                          -------   -------   -------
          Total Shipments...............................  223,999   235,503   239,177
                                                          =======   =======   =======
Daily average (thousands of barrels)....................      614       645       655
Barrel miles (millions).................................   61,043    61,086    61,969
</TABLE>
 
     Terminal Services and Development. Williams Energy, through its wholly
owned subsidiary Williams Energy Ventures, provides independent terminal
services to the refining and marketing industries via distribution of petroleum
products through wholly owned and joint interest terminals. WEV owns and/or
operates 29 strategically located independent terminals covering a
thirteen-state area in the South, Southeast, Southwest, and Midwest.
 
     The terminals are supplied with refined products and ethanol by barge,
tanker, truck, rail, and various common carrier pipelines. WEV provides
scheduling and inventory management, access to an expanded transportation and
information services network, additive injection services, and custom
terminalling services such as octane and oxygenate blending. On a selective
basis, WEV provides temporary leased storage.
 
     In 1996 WEV acquired a 45.5 percent interest in eight Southeastern
terminals and in 1998 increased that ownership percentage to 68.94 percent. In
late 1997 WEV acquired a terminal in Dallas, Texas, and in 1998 acquired a
terminal in Atlanta, Georgia. In early 1999 WEV purchased 12 terminals in the
Southeast from Amoco and two Memphis, Tennessee, area terminals from Truman
Arnold Companies. These acquisitions have allowed WEV to increase its core
business and to offer multi-market terminal services to its customers.
 
     Terminal barrels delivered for the periods indicated are noted below.
 
<TABLE>
<CAPTION>
                                                           1998      1997      1996
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Terminal Barrels Delivered (mbbls)......................   28,787    17,336     5,426
</TABLE>
 
     Ethanol. WEV is engaged in the production and marketing of ethanol. WEV
owns and operates two ethanol plants of which corn is the principal feedstock.
The Pekin, Illinois, plant has an annual production capacity of 100 million
gallons of fuel-grade and industrial ethanol and also produces various
coproducts. The Aurora, Nebraska, plant (in which WEV owns a 74.9 percent
interest) has an annual production capacity of 30 million gallons. WEV also
markets ethanol produced by third parties. Coproducts, mainly flavor enhancers,
produced at the Pekin plant are marketed primarily to food processing companies.
 
     The sales volumes set forth below include ethanol produced by third parties
as well as by WEV for the periods indicated:
 
<TABLE>
<CAPTION>
                                                           1998      1997      1996
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Ethanol sold (thousands of gallons).....................  172,056   145,612   119,800
</TABLE>
 
     Distribution Services. Petroleum Services, through its distribution
services group, provides petroleum trucking, propane trucking, and rail car
operations for Williams Energy and third parties. The petroleum
 
                                        6
<PAGE>   8
 
trucking operation, operated out of Memphis, Tennessee, under the name "GENI
Transport," works with local jobbers to supply their retail outlets and with
several of Williams Energy's Energy Marketing & Trading unit's wholesale
customers to develop transportation arrangements. GENI Transport is also the
primary transportation provider to Petroleum Services' retail petroleum group.
The propane trucking and rail car operations are the primary transportation
providers for the Energy Marketing & Trading unit's retail propane group.
 
          Refining. Petroleum Services, through its subsidiaries, owns and
     operates two refineries: the North Pole, Alaska, refinery and the Memphis,
     Tennessee, refinery.
 
          North Pole Refinery. The North Pole Refinery includes the refinery
     located at North Pole, Alaska, and a terminal facility at Anchorage,
     Alaska. The refinery, the largest in the state, is located approximately
     two miles from its supply point for crude oil, the Trans-Alaska Pipeline
     System (TAPS). The refinery's processing capability is approximately
     215,000 barrels per day. At maximum crude throughput, the refinery can
     produce 67,000 barrels per day of refined products. These products are jet
     fuel, gasoline, diesel fuel, heating oil, fuel oil, naphtha, and asphalt.
     Williams Energy's Energy Marketing & Trading unit markets these refined
     products in Alaska, Western Canada, and the Pacific Rim principally to
     wholesale, commercial, industrial, and governmental customers and Petroleum
     Services' retail petroleum group. The retail petroleum group accounted for
     about eight percent of the North Pole Refinery's 1998 product sales volume
     and 64 percent of the North Pole Refinery's gasoline production. Petroleum
     Services completed construction of a third crude unit at the refinery that
     can produce an additional 17,000 barrels per day of refined products,
     including 14,000 barrels per day of jet fuel. The new crude unit
     construction was completed in October 1998 at a cost of $74.5 million.
 
          Average daily throughput and barrels processed and transferred by the
     North Pole Refinery are noted below:
 
<TABLE>
<CAPTION>
                                                   1998      1997      1996
                                                  -------   -------   -------
<S>                                               <C>       <C>       <C>
Throughput (bbl)................................  142,471   132,238   132,912
Barrels Processed and Transferred (bbl).........   44,561    42,201    43,392
</TABLE>
 
          The North Pole Refinery's crude oil is purchased through Williams
     Energy's Energy Marketing & Trading unit from the state of Alaska or is
     purchased or received on exchanges from crude oil producers. The refinery
     has a long-term agreement with the state of Alaska for the purchase of
     royalty oil, which is scheduled to expire on December 31, 2003. The
     agreement provides for the purchase of up to 35,000 barrels per day
     (approximately 17 percent of the refinery's supply) of the state's royalty
     share of crude oil produced from Prudhoe Bay, Alaska. These volumes, along
     with crude oil either purchased from crude oil producers or received under
     exchange agreements or other short-term supply agreements with the state of
     Alaska, are utilized as throughput in the production of products at the
     refinery. Approximately 34 percent of the throughput is refined and sold as
     finished product and the remainder of the throughput is returned to the
     TAPS and either delivered to repay exchange obligations or sold.
 
          Memphis Refinery. The Memphis Refinery is the only refinery in the
     state of Tennessee and has a throughput capacity of approximately 140,000
     barrels per day. In January 1998 Petroleum Services completed construction
     of a splitter, increasing the refinery's capacity for propylene production
     from 2,000 barrels per day to 6,000 barrels per day. In November 1998
     Petroleum Services commissioned an expansion of its East Crude Unit,
     increasing crude production capacity by approximately 20,000 barrels per
     day to 140,000 barrels per day. Williams Energy is currently in the process
     of making significant plant modifications for further increasing the
     refinery's crude oil flexibility. In late 1998 a $123 million project to
     increase crude processing capacity of the refinery to 160,000 barrels per
     day and construct a 36,000 barrels per day continuous catalyst regeneration
     reformer was approved. Both projects are slated for completion in the year
     2000 and will enable the refinery to produce 100 percent of customer demand
     for premium gasoline in the mid-South region of the United States while
     significantly enhancing crude flexibility.
 
                                        7
<PAGE>   9
 
          The Memphis Refinery produces gasoline, low sulfur diesel fuel, jet
     fuel, K-1 kerosene, propylene, No. 6 fuel oil, propane, and elemental
     sulfur. These products are exchanged or marketed primarily in the Mid-South
     region of the United States by Williams Energy's Energy Marketing & Trading
     unit to wholesale customers, such as industrial, governmental, and
     commercial consumers, jobbers, independent dealers, other
     refiner/marketers, and to Petroleum Services' retail petroleum group.
 
          The Memphis Refinery has access to crude oil from the Gulf Coast via
     common carrier pipeline and by river barges. In addition to domestic crude
     oil, the Memphis Refinery has the capability of receiving and processing
     certain foreign crudes. During 1998, following the MAPCO merger, Williams
     Energy's Energy Marketing & Trading unit purchased all of the crude oil
     processed at the Memphis Refinery. Although this method of purchase reduces
     the financial effect of volatile crude oil market prices, the financial
     results of the Memphis Refinery may be significantly impacted by changes in
     the market prices for crude oil and refined products. Petroleum Services
     cannot with any assurance predict the future of crude oil and product
     prices or their impact on its financial results.
 
          Average daily barrels processed and transferred by the Memphis
     Refinery are noted below:
 
<TABLE>
<CAPTION>
                                                   1998      1997      1996
                                                  -------   -------   -------
<S>                                               <C>       <C>       <C>
Barrels Processed and Transferred (bbl).........  120,985   113,040   104,129
</TABLE>
 
     Retail Petroleum. Petroleum Services, primarily under the brand names
"Williams TravelCenters" and "MAPCO Express," is engaged in the retail marketing
of gasoline, diesel fuel, other petroleum products, convenience merchandise, and
restaurant and fast food items. The retail petroleum group operates 29
interstate TravelCenter locations and 227 convenience stores. The TravelCenter
sites consist of 11 modern facilities providing gasoline and diesel fuel,
merchandise, and restaurant offerings for both traveling consumers and
professional drivers, and 18 locations providing fuel and merchandise. The
convenience store sites are primarily concentrated in the vicinities of
Nashville and Memphis, Tennessee, and the state of Alaska. MAPCO Express stores
represent 38 percent of the convenience store market in Alaska. All of the motor
fuel sold by Williams TravelCenters and MAPCO Express stores is supplied either
by exchanges, directly from either the Memphis or North Pole Refineries or
through Williams Energy's Energy Marketing & Trading unit.
 
     Convenience merchandise and fast food accounted for approximately 57
percent of the retail petroleum group's gross margins in 1998 and 55 percent in
1997. Gasoline and diesel sales volumes for the periods indicated are noted
below:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Gasoline (mgals)......................................  329,821    292,644    279,708
Diesel (mgals)........................................  188,401    137,219    147,548
</TABLE>
 
ENERGY MARKETING & TRADING
 
     Williams Energy, through subsidiaries, primarily Williams Energy Marketing
& Trading Company and its subsidiaries (EM&T), is a national energy services
provider that buys, sells, and transports a full suite of energy commodities,
including natural gas, electricity, refined products, natural gas liquids, crude
oil, propane, liquefied natural gas, and liquefied petroleum gas on a wholesale
and retail level, serving over 300,000 customers. In addition, EM&T provides
price-risk management services through a variety of financial instruments
including exchange-traded futures, as well as over-the-counter forwards,
options, and swap agreements related to various energy commodities and provides
capital services to the diverse energy industry. See Note 16 of Notes to
Consolidated Financial Statements.
 
     EM&T markets natural gas throughout North America and grew its total
volumes (physical and notional) to an average of 27.7 Bcf per day in 1998.
EM&T's core business has traditionally been natural gas marketing in the Gulf
Coast and Eastern regions of the United States, using the pipeline systems owned
by Williams, but also includes marketing on approximately 50 non-Williams'
pipelines. EM&T's natural gas customers include producers, industrials, local
distribution companies, utilities, and other gas marketers.
 
                                        8
<PAGE>   10
 
     In February 1999 EM&T and AES Ironwood, L.L.C. executed an amended and
restated 20-year power purchase agreement under which EM&T is to provide fuel to
and market up to approximately 655 megawatts of electricity output from a
generating facility to be built and owned by AES in Southern Pennsylvania. In
December 1998 EM&T reached agreement with Hoosier Energy Rural Electric
Cooperative, Inc. to supply a part of its wholesale energy needs and manage its
energy portfolio.
 
     In May 1998 EM&T and The AES Corporation signed a 15-year agreement under
which EM&T provides fuel to and markets up to approximately 4,000 megawatts of
electricity output from three southern California generating sites with 14 units
owned and operated by AES. During 1998 EM&T marketed 16.9 GW per hour (physical
and notional) of electricity.
 
     In 1998 EM&T provided supply, distribution, and related risk management
services to petroleum producers, refiners, and end-users in the United States
and various international regions. During 1998 EM&T's total crude and petroleum
products (physical and notional) marketed averaged 2,153 Mbbl per day. During
1998 EM&T also marketed natural gas liquids with total volumes (physical and
notional) averaging 480.3 Mbbl per day.
 
     EM&T markets and distributes propane and appliances to approximately
300,000 customers at the retail level. Propane is used principally as a fuel in
various domestic, commercial, industrial, agricultural, and vehicle motor fuel
applications. Residential customers, who account for the majority of sales, use
propane for home heating, cooking, and other domestic purposes. The primary
agricultural use is crop drying. Commercial and industrial sales include fuel
for shopping centers and industrial plants. During 1998 EM&T marketed 262.6
million gallons of propane.
 
     EM&T is currently refocusing its retail natural gas and electric business
to concentrate on large end-use customers and away from sales to commercial and
residential customers. See Note 5 of Notes to Consolidated Financial Statements.
 
     Operating Statistics. The following table summarizes marketing and trading
volumes for the periods indicated, including propane totals during 1996, 1997,
and a portion of 1998 during which Williams did not own MAPCO:
 
<TABLE>
<CAPTION>
                                                            1998       1997      1996
                                                           -------    -------    -----
<S>                                                        <C>        <C>        <C>
Average marketing and trading volumes (physical and
  notional):
  Natural gas (Bcf per day)..............................     27.7       22.3     15.9
  Refined products, natural gas liquids, crude (mbbl per
     day)................................................  2,633.3    1,549.0    616.0
  Electricity (GW per hour)..............................     16.9        8.3      0.5
  Propane gallons (millions).............................    262.6      297.2    331.4
</TABLE>
 
REGULATORY MATTERS
 
     Midstream Gas & Liquids. In May 1994 after reviewing its legal authority in
a Public Comment Proceeding, the FERC determined that while it retains some
regulatory jurisdiction over gathering and processing performed by interstate
pipelines, pipeline-affiliated gathering and processing companies are outside
its authority under the Natural Gas Act. An appellate court has affirmed the
FERC's determination and the United States Supreme Court has denied requests for
certiorari. As a result of these FERC decisions, some of the individual states
in which Midstream Gas & Liquids conducts its operations have considered whether
to impose regulatory requirements on gathering companies. Kansas, Oklahoma, and
Texas currently regulate gathering activities using complaint mechanisms under
which the state commission may resolve disputes involving an individual
gathering arrangement. Other states may also consider whether to impose
regulatory requirements on gathering companies.
 
     In February 1996 Midstream Gas & Liquids and Transco filed applications
with the FERC to spindown all of Transco's gathering facilities to Midstream Gas
& Liquids. The FERC subsequently denied the request in September 1996. Midstream
Gas & Liquids and Transco sought rehearing in October 1996. In August 1997
Midstream Gas & Liquids and Transco filed a second request for expedited
treatment of the rehearing request.
 
                                        9
<PAGE>   11
 
The FERC has yet to rule on this request for rehearing. In February 1998
Midstream Gas & Liquids and Transco filed a separate application to spindown an
onshore gathering system located in Texas, the Tilden/ McMillen gathering
system, which was also one of the subjects of the pending rehearing request. The
FERC has not ruled on this request. In June 1998 the FERC issued a Notice of
Inquiry into its policy related to pipeline facilities located on the Outer
Continental Shelf. No policy or rule has been issued from that proceeding.
 
     Midstream Gas & Liquids' natural gas liquids group is subject to various
federal, state, and local environmental and safety laws and regulations.
Midstream Gas & Liquids' pipeline operations are subject to the provisions of
the Hazardous Liquid Pipeline Safety Act. In addition, the tariff rates,
shipping regulations, and other practices of the Mid-America, Rio Grande, and
Seminole pipelines are regulated by the FERC pursuant to the provisions of the
Interstate Commerce Act applicable to interstate common carrier petroleum and
petroleum products pipelines. The tariff rates and practices of the ammonia
system are regulated by the Surface Transportation Board under the provisions of
the Interstate Commerce Commission Termination Act of 1995 applicable to
pipeline carriers. Both of these statutes require the filing of reasonable and
nondiscriminatory tariff rates and subject Midstream Gas & Liquids to certain
other regulations concerning its terms and conditions of service. The
Mid-America, Rio Grande, and Seminole pipelines also file tariff rates covering
intrastate movements with various state commissions. The United States
Department of Transportation has prescribed safety regulations for common
carrier pipelines. The pipeline systems are subject to various state laws and
regulations concerning safety standards, exercise of eminent domain, and similar
matters.
 
     Petroleum Services. Williams Pipe Line, as an interstate common carrier
pipeline, is subject to the provisions and regulations of the Interstate
Commerce Act. Under this Act, Williams Pipe Line is required, among other
things, to establish just, reasonable, and nondiscriminatory rates, to file its
tariffs with the FERC, to keep its records and accounts pursuant to the Uniform
System of Accounts for Oil Pipeline Companies, to make annual reports to the
FERC, and to submit to examination of its records by the audit staff of the
FERC. Authority to regulate rates, shipping rules, and other practices and to
prescribe depreciation rates for common carrier pipelines is exercised by the
FERC. The Department of Transportation, as authorized by the 1995 Pipeline
Safety Reauthorization Act, is the oversight authority for interstate liquids
pipelines. Williams Pipe Line is also subject to the provisions of various state
laws applicable to intrastate pipelines.
 
     On December 31, 1989, a rate cap, which resulted from a settlement with
several shippers and had effectively frozen Williams Pipe Line's rates for the
previous five years, expired. Williams Pipe Line filed a revised tariff on
January 16, 1990, with the 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 the FERC alleging that the
revised rates were not just and reasonable and were unlawfully discriminatory.
Williams Pipe Line elected to bifurcate this proceeding in accordance with the
then-current FERC policy. Phase I of the FERC's bifurcated proceeding provided
Williams Pipe Line the opportunity to justify its rates and rate structure by
demonstrating that its markets were workably competitive. Rates to markets that
were not deemed workably competitive in Phase I required cost justification in
Phase II. Subsequent rate increases filed by Williams Pipe Line were stayed
pending ultimate resolution of Phase II.
 
     In the Phase I proceeding, the FERC found all but 12 of Williams Pipe
Line's markets to be workably competitive and, thus, eligible for market-based
rates. On July 15, 1998, the FERC issued its decision in Phase II finding that
Williams Pipe Line failed to demonstrate that the rates at issue for the 12 less
competitive markets were just and reasonable and that Williams Pipe Line must
roll back those rates to pre-1990 levels and pay refunds with interest to its
shippers. Williams Pipe Line sought rehearing of the July 15, 1998, order and
has been granted leave to stay the order's refund requirement until the FERC
acts on rehearing. A shipper has appealed the Phase I order in the United States
Court of Appeals for the District of Columbia Circuit and the appeal has been
stayed pending the completion of Phase II. Williams Pipe Line took appropriate
reserves in 1998 for the July 15, 1998, order, but continues to believe that
subsequently revised tariffs will be found lawful. See Note 17 of Notes to
Consolidated Financial Statements.
 
                                       10
<PAGE>   12
 
     Environmental regulations and changing crude supply patterns continue to
affect the refining industry. The industry's response to environmental
regulations and changing supply patterns will directly affect volumes and
products shipped on the Williams Pipe Line system. Environmental Protection
Agency regulations, driven by the Clean Air Act, require refiners to change the
composition of fuel manufactured. A pipeline's ability to respond to the effects
of regulation and changing supply patterns will determine its ability to
maintain and capture new market shares. Williams Pipe Line has successfully
responded to changes in diesel fuel composition and product supply and has
adapted to new gasoline additive requirements. Reformulated gasoline regulations
have not yet significantly affected Williams Pipe Line. Williams Pipe Line will
continue to attempt to position itself to respond to changing regulations and
supply patterns but cannot predict how future changes in the marketplace will
affect its market areas.
 
     Energy Marketing & Trading. Management believes that EM&T's activities are
conducted in substantial compliance with the marketing affiliate rules of FERC
Order 497. Order 497 imposes certain nondiscrimination, disclosure, and
separation requirements upon interstate natural gas pipelines with respect to
their natural gas trading affiliates. EM&T has taken steps to ensure it does not
share employees or officers with affiliated interstate natural gas pipelines and
does not receive information from affiliated interstate natural gas pipelines
that is not also available to unaffiliated natural gas trading companies.
 
COMPETITION
 
     Exploration & Production. Williams Energy unit competes with a wide variety
of independent producers as well as integrated oil and gas companies for markets
for its production. E&P has three general phases of operations: acquiring
non-producing properties, developing non-producing properties, and operating
producing properties. In the process of acquiring minerals, the primary methods
of competition are on acquisition price and terms such as duration of the
mineral lease, the amount of the royalty payment, and special conditions related
to rights to use the surface of the land under which the mineral interest lies.
In the process of developing non-producing properties, E&P does not face
significant competition. In the operating phase, the primary method of
competition involves operating efficiencies related to the cost to produce the
hydrocarbons from the reservior.
 
     Midstream Gas & Liquids. Williams Energy competes for gathering and
processing business with interstate and intrastate pipelines, producers, and
independent gatherers and processors. Numerous factors impact any given
customer's choice of a gathering or processing services provider, including
rate, term, timeliness of well connections, pressure obligations, and the
willingness of the provider to process for either a fee or for liquids taken
in-kind. Competition for the natural gas liquids pipelines include other
pipelines, tank cars, trucks, barges, local sources of supply (refineries,
gasoline plants, and ammonia plants), and other sources of energy such as
natural gas, coal, oil, and electricity. Factors that influence customer
transportation decisions include rate, location, and timeliness of delivery.
 
     Petroleum Services. Williams Energy's operations are subject to competition
because Williams Pipe Line operates without the protection of a federal
certificate of public convenience and necessity that might preclude other
entrants from providing like service in its area of operations. Further,
Williams Pipe Line must plan, operate, and compete without the operating
stability inherent in a broad base of contractually obligated or
owner-controlled usage. Because Williams Pipe Line is a common carrier, its
shippers need only meet the requirements set forth in its published tariffs in
order to avail themselves of the transportation services offered by Williams
Pipe Line.
 
     Competition exists from other pipelines, refineries, barge traffic,
railroads, and tank trucks. Competition is affected by trades of products or
crude oil between refineries that have access to the system and by trades among
brokers, traders, and others who control products. These trades can result in
the diversion from the Williams Pipe Line system of volume that might otherwise
be transported on the system. Shorter, lower revenue hauls may also result from
these 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
 
                                       11
<PAGE>   13
 
pipelines. A number of pipeline systems, competing on a broad range of price and
service levels, provide transportation service to various areas served by the
system. The possible construction of additional competing products or crude oil
pipelines, conversions of crude oil or natural gas pipelines to products
transportation, changes in refining capacity, refinery closings, changes in the
availability of crude oil to refineries located in its marketing area, or
conservation and conversion efforts by fuel consumers may adversely affect the
volumes available for transportation by Williams Pipe Line.
 
     Williams Energy's ethanol operations compete in local, regional, and
national fuel additive markets with one large ethanol producer, numerous smaller
ethanol producers, and other fuel additive producers, such as refineries.
 
     The principal competitive forces affecting Williams Energy's refining
businesses are feedstock costs, refinery efficiency, refinery product mix, and
product distribution. Some of Memphis Refinery's competitors can more easily
process sour crudes, and accordingly, are more flexible in the crudes which they
can process. Williams Energy has no crude oil reserves and does not engage in
crude oil exploration, and it must therefore obtain its crude oil requirements
from unaffiliated sources. Williams Energy believes that it will be able to
obtain adequate crude oil and other feedstocks at generally competitive prices
for the foreseeable future.
 
     The principal competitive factors affecting Williams Energy's retail
petroleum business are location, product price and quality, appearance and
cleanliness of stores, and brand-name identification. Competition in the
convenience store industry is intense. Within the travel center industry,
Williams TravelCenters are recognized as leaders in customer service by the
local consumer, traveling consumer, and professional driver. Averaging 10,000
square feet, the facilities seamlessly blend these customer groups, resulting in
greater revenue and income diversification than traditional convenience stores.
Williams Energy intends to construct ten new travel centers in 1999, in addition
to six sites currently scheduled to open during the first and second quarters in
1999.
 
     Energy Marketing & Trading. Williams Energy's operations directly compete
with large independent energy marketers, marketing affiliates of regulated
pipelines and utilities, propane wholesalers and retailers, and natural gas
producers. The financial trading business competes with other energy-based
companies offering similar services as well as certain brokerage houses. This
level of competition contributes to a business environment of constant pricing
and margin pressure.
 
OWNERSHIP OF PROPERTY
 
     The majority of Williams Energy's ownership interests in exploration and
production properties are held as working interests in oil and gas leaseholds.
 
     Williams Energy's gathering and processing facilities and natural gas
liquids pipelines are owned in fee. Midstream Gas & Liquids constructs and
maintains gathering and natural gas liquids pipeline systems pursuant to
rights-of-way, easements, permits, licenses, and consents on and across
properties owned by others. The compressor stations and gas processing and
treating facilities are located in whole or in part on lands owned by
subsidiaries of Williams Energy or on sites held under leases or permits issued
or approved by public authorities.
 
     Williams Energy owns its petroleum pipeline system 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. The North Pole Refinery is
located on land leased from the state of Alaska under a long-term lease
scheduled to expire in 2025 and renewable at that time by Williams Energy. The
Anchorage, Alaska, terminal is located on land leased from the Alaska Railroad
Corporation under two long-term leases. The Memphis Refinery is located on land
owned by Williams Energy. Williams Energy owns approximately one-half of the
properties upon which its Retail Petroleum stores are located and leases the
remainder from third parties. Williams Energy management believes its assets are
in such a condition and maintained in such a manner that they are adequate and
sufficient for the conduct of business.
 
                                       12
<PAGE>   14
 
     The primary assets of Williams Energy's energy marketing and trading unit
are its term contracts, employees, related systems and technological support,
and 180 retail propane outlets located in 18 states including Alabama, Arkansas,
Colorado, Florida, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri,
Mississippi, North Carolina, Ohio, Oklahoma, South Dakota, Tennessee, and
Wisconsin.
 
ENVIRONMENTAL MATTERS
 
     Williams Energy is subject to various federal, state, and local laws and
regulations relating to environmental quality control. Management believes that
Williams Energy's operations are in substantial compliance with existing
environmental legal requirements. Management expects that compliance with
existing environmental legal requirements will not have a material adverse
effect on the capital expenditures, earnings, and competitive position of
Williams Energy. See Note 17 of Notes to Consolidated Financial Statements.
 
     The EPA has named Williams Pipe Line as a potentially responsible party as
defined in Section 107(a) of the Comprehensive Environmental Response,
Compensation, and Liability Act, for a site in Sioux Falls, South Dakota. The
EPA placed this site on the National Priorities List in July 1990. In April 1991
Williams Pipe Line and the EPA executed an administrative consent order under
which Williams Pipe Line agreed to conduct a remedial investigation and
feasibility study for this site. The EPA issued its "No Action" Record of
Decision in 1994, concluding that there were no significant hazards associated
with the site subject to two additional years of monitoring for arsenic in
certain existing monitoring wells. Williams Pipe Line completed monitoring in
the second quarter of 1997 and submitted a report of results to the EPA, which
published a Notice of Intent to delete the Sioux Falls site in the January 4,
1999, Federal Register. The public comment period has ended with no significant
comments needing to be addressed. Williams Pipe Line expects a closure letter
from the EPA in the near future, which will effectively complete the EPA's
interest in the site.
 
     Groundwater monitoring and remediation are ongoing at both refineries and
air and water pollution control equipment is operating at both refineries to
comply with applicable regulations. The Clean Air Act Amendments of 1990
continue to impact Williams Energy's refining businesses through a number of
programs and provisions. The provisions include Maximum Achievable Control
Technology rules which are being developed for the refining industry, controls
on individual chemical substances, new operating permit rules and new fuel
specifications to reduce vehicle emissions. The provisions impact other
companies in the industry in similar ways and are not expected to adversely
impact Williams Energy's competitive position.
 
WILLIAMS COMMUNICATIONS GROUP, INC.
 
     Williams Communications is comprised of three business units: Network,
which owns and operates Williams Communications' fiber optic network; Solutions,
which provides customer-premise voice and data equipment, sales, and services
including installation, integration, and maintenance; and Applications, which
provides video services and other multimedia services for the broadcast
industry, advertising distribution, business television applications, audio-,
and video-conferencing services for businesses. In Canada, Solutions operates
through its subsidiary, WilTel Communications (Canada), Inc. In 1998 Williams
Communications sold the product business segment of Williams Learning Network,
Inc. and withdrew from the Business Channel partnership. See Note 5 of Notes to
Consolidated Financial Statements. Williams Communications also enters into
strategic alliances and makes strategic investments in order to secure
long-term, high volume customer contracts and gain additional capabilities to
better serve its customers.
 
     Williams Communications and its subsidiaries own approximately 19,000-route
miles of fiber optic communications network (with an additional 13,000-route
miles planned or under construction), maintain 120 offices primarily across
North America, but also in London, Singapore, and Australia, and service
approximately 100,000 customer sites. In addition, Williams Communications owns
four teleports in the United States and has rights to capacity on domestic and
international satellite transponders. Williams Communications employed
approximately 8,300 employees as of December 31, 1998.
 
                                       13
<PAGE>   15
 
     Consolidated segment revenues by business unit and segment profit/loss for
Williams Communications were as follows for 1998 (dollars in millions):
 
<TABLE>
<S>                                                            <C>
Segment revenues:
  Solutions.................................................   $1,366.8
  Network...................................................      194.9
  Applications..............................................      206.5
                                                               --------
          Total.............................................   $1,768.2
                                                               ========
Segment loss................................................   $ (175.0)
                                                               ========
</TABLE>
 
     A business description of each of Williams Communications' business units
follows.
 
NETWORK
 
     The Network unit of Williams Communications, through Williams
Communications, Inc., owns and operates approximately 19,000-route miles of
fiber optic communications network, 10,000-route miles of which are restricted
until July 1, 2001, to multi-media applications including Internet services, and
4,300-route miles of which are not restricted and were acquired from IXC
Communications. Network has constructed an unrestricted network along a 1,600
mile route from Houston to Washington, D.C., in proximity to pipeline
right-of-way owned by an affiliated company. In addition, Williams
Communications, Inc. also owns an interest in a joint venture constructing a
1,600 mile fiber optic network on a route connecting Portland, Salt Lake City,
and Las Vegas with a dark fiber agreement extending the network to Los Angeles.
"Dark fibers" are optical fibers contained within fiber-optic cables installed
along Williams' rights-of-way, which do not have transmission equipment
attached. Purchasers of the right to use dark fibers connect their own
transmission equipment and transmit their own communications signals over the
fibers. Williams Communications, Inc. has also acquired a 350-mile fiber network
in Florida and plans to construct additional fiber to connect the Florida
network to its existing network in the Southeast and to construct a new fiber
route in the midwest region of the United States from Chicago westward. Network
has ultimate plans for a 32,000-route mile network.
 
     In January 1998 upon the expiration of the non-compete agreement related to
Williams' 1995 sale of its network services operations, Williams Communications
announced that it was re-entering the long-distance communications market as a
wholesale provider of telecommunications services. Network serves companies that
are communications carriers, including long distance telephone companies, local
telephone service providers, Internet service providers, and utilities entering
the telecommunications market. Network provides these customers with a full
range of carrier services, including nationwide transmission of
telecommunications signals, Internet transmission services, the origination and
termination of a long distance call, local access services, consulting, and
operational assistance services.
 
     Customers. Network's customers are primarily other carriers. Network is a
carrier to other telecommunications companies, providing dedicated line and
switched services to other carriers over its owned or leased fiber optic network
facilities. Network's customers currently include regional bell operating
companies, Internet service providers, other local service providers, utilities,
and competitive local access providers and other providers who desire high speed
connectivity to the Internet; asynchronous transfer mode (ATM), which is a
switching and transmission technology based on sending various types of
information, including voice, data, and video, in packets; or frame relay;
private lines; or long distance voice services on a wholesale basis. Sales to
Intermedia Communications Inc. accounted for approximately 82.5 percent of
Network's revenues in 1998. Sales to the next three largest customers accounted
for approximately 13.5 percent of Network's revenues in 1998.
 
     Strategic Alliances. Effective January 1998 Network entered into an
agreement with US West, which provides that the two companies will work together
to provide data networking services and vertical applications to a variety of
customers. US West has agreed to use Network on a preferred provider basis
 
                                       14
<PAGE>   16
 
through 2002 and is required to purchase at least $36.6 million of services and
equipment from Network over the five-year term.
 
     Network also entered into an agreement with Concentric Network Corporation
to provide wholesale communications services. Williams Communications owns
approximately 16 percent of Concentric. Under the agreement with Concentric,
Concentric has agreed to purchase either services or equipment from Network or
Solutions, respectively, valued at a minimum of $21 million over the five-year
contract term. Concentric has also agreed that Network or Solutions,
respectively, will be its preferred provider for these services and equipment.
 
     In April 1998 Intermedia Communications Inc. purchased a 20-year
indefeasible right of use for Network's nationwide transmission capacity with a
value of approximately $450 million. An indefeasible right of use is an
exclusive, indefeasible right to use the specified property for a term
essentially representing the economic life of the property. The $450 million
represents the present value of the minimum amount Intermedia will pay over the
life of the agreement. Network will provide Intermedia with transmission
capacity at rates up to 9.952 billion bits per second.
 
     In October 1998 Network purchased shares of preferred stock of UniDial
Communications, Inc. for a purchase price of $27 million. Dividends begin to
accrue at the rate of ten percent per annum beginning October 1, 1999. The
shares are convertible into shares of common stock under certain circumstances,
with Network's resulting percentage of UniDial being subject to various formulas
and timing elements. UniDial markets a variety of long distance and other
communications products including frame relay, Internet, and conferencing
services. UniDial has agreed to use Network as a preferred provider and has also
agreed to allow Solutions to sell UniDial's products and services at competitive
prices and for UniDial to handle the billing and collection relating to
Solution's sales of their services.
 
     On December 17, 1998, Network entered into two agreements with WinStar
Wireless, Inc., a provider of communications services that uses wireless
technology to provide high capacity local exchange and Internet access services
to companies located in buildings not served by fiber optic cable. The
agreements give Network a 25-year right to use approximately two percent of
WinStar's wireless capacity in exchange for installment payments totaling $400
million over approximately two years, and give WinStar a 25-year right to use
four strands of Network's fiber over 15,000-route miles in exchange for a seven
year $476 million obligation.
 
     In February 1999 Network entered into a strategic alliance with SBC
Communications under which Network will be SBC's preferred provider for domestic
voice and data long distance services for 20 years, SBC will be Network's
preferred provider for selected international wholesale services, toll-free
operator, calling card, and directory assistance services for 20 years,
Solutions will sell SBC's products to its customers, and SBC may sell Network's
services to its customers. Additionally, SBC agreed to make an equity investment
by purchasing the lesser of $500 million or ten percent of the common stock of
Williams Communications at the time of the initial public offering.
 
SOLUTIONS
 
     The Solutions unit of Williams Communications, operated primarily through
Williams Communications Solutions, LLC (WCS), provides services and sells and
installs equipment for the voice, video, and data networks of its customers. WCS
was formed in April 1997 following the merger of subsidiaries of Williams
Communications and Northern Telecom, Inc. Williams Communications now holds a 70
percent interest in WCS, and Northern Telecom owns the remaining 30 percent.
Williams Communications continues to address challenges following the
combination related to integration of software systems, related processes, and
business issues.
 
     Williams Communications, through subsidiaries including WCS, serves
customers at approximately 100,000 business locations throughout the United
States consisting of small, medium, and large businesses and governmental,
educational, and non-profit institutions. Solutions' customer base ranges from
large, publicly-held corporations and the federal government to small,
privately-owned entities. Solutions' top 25 customers
 
                                       15
<PAGE>   17
 
combined accounted for approximately 12 percent of its revenue in 1998.
Solutions' employs approximately 6,400 employees, including sales employees,
billable engineers, design specialists, and service technicians.
 
     Solutions also helps its customers reduce the complexity and cost of their
communications decisions by combining components from a variety of manufacturers
into the communications solutions required by its customers. Solutions' broad
range of voice, video, and data solutions allow Solutions to serve as a
single-source provider for its customers' communications needs. Solutions
distributes the products and services of a number of leading communications
suppliers including Nortel, SBC Communications, Cisco Systems, Lucent
Technologies, NEC, US West, and Bell Atlantic. Solutions also provides service
and maintenance support for these products.
 
     Operating Statistics. The following table summarizes the results of
operations for the Solutions unit of Williams Communications for the periods
indicated (dollars in millions):
 
<TABLE>
<CAPTION>
                                                            1998       1997      1996
                                                          --------   --------   ------
<S>                                                       <C>        <C>        <C>
Segment revenues.......................................   $1,366.8   $1,206.5   $568.1
Percentage of revenues by type of service:
  New system sales.....................................         43%        52%      40%
  System modifications.................................         34         28       34
  Maintenance..........................................         22         19       24
  Other................................................          1          1        2
Backlog................................................   $  227.0   $  202.5   $112.2
Segment profit (loss)..................................   $  (54.1)  $   47.3   $ 14.3
</TABLE>
 
     In 1998 Solutions derived approximately 56 percent of its revenues from its
existing customer base through system modifications and maintenance and
approximately 43 percent from the sale of new telecommunications systems to its
existing customer base and new customers. Solutions' three largest suppliers
accounted for approximately 91 percent of equipment sold in 1998. A single
manufacturer, Northern Telecom, supplied approximately 83 percent of all
equipment sold. In this case, WCS is the largest independent distributor in the
United States of certain of this company's products. The distribution agreement
with this supplier is scheduled to expire at the end of 2000. Management
believes there is minimal risk as to the availability of products from
suppliers.
 
APPLICATIONS
 
  Vyvx
 
     Vyvx, an unincorporated business unit of Williams Communications, Inc.,
offers broadcast-quality television and multimedia transmission services
nationwide by means of Network's 19,000-mile multimedia network, four satellite
teleport facilities located near Atlanta, Denver, Los Angeles, and New York, and
satellite transponders capacity. Vyvx primarily provides backhaul or
point-to-point transmission of sports, news, and other programming between two
or more customer locations. With satellite facilities, Vyvx provides
point-to-multipoint transmission service. Vyvx's customers include all of the
major broadcast and cable networks. Vyvx is also engaged in the business of
advertising distribution and is exploring other multimedia communication
opportunities.
 
  Conferencing
 
     Global Access, offers multi-point videoconferencing and audio-conferencing,
as well as single point to multi-point business television services. Global
Access enables Williams Communications to provide customers with integrated
media conferences, bringing together voice and video by utilizing Williams
Communications' existing fiber-optic and satellite services.
 
     In 1998 Williams Communications withdrew from The Business Channel, a joint
venture with the Public Broadcast Services (PBS). See Note 5 of Notes to
Consolidated Financial Statements.
 
                                       16
<PAGE>   18
 
REGULATORY MATTERS
 
     Network. Williams Communications, Inc. is subject to Federal Communications
Commission regulations as a common carrier with regard to certain of its
transmission services and is subject to the laws of certain states governing
public utilities. An FCC rulemaking to eliminate domestic, common carrier
tariffs has been stayed pending judicial review. In the interim, the FCC is
requiring such carriers to operate under traditional tariff rules. Operations of
intrastate microwave communications, satellite earth stations, and certain other
related transmission facilities are also subject to FCC licensing and other
regulations. These regulations do not significantly impact Williams
Communications, Inc.'s operations. In 1997 the FCC began implementation of the
Universal Service Fund contemplated in the Telecommunications Act of 1996.
Williams Communications, Inc. is required to contribute to this fund based upon
certain revenues. Although Williams Communications, Inc. intends to pass on such
charges to its customers, FCC rulings raise questions about the right of
companies like Williams Communications, Inc. to do so.
 
     Solutions. The equipment WCS sells must meet the requirements of Part 68 of
the FCC rules governing the equipment registration, labeling and connection of
equipment to telephone networks. WCS relies on the equipment manufacturers'
compliance with these requirements for its own compliance regarding the
equipment it distributes. These regulations have a minimal impact on WCS'
operations.
 
COMPETITION
 
     Network. In the market for network transmission services, Williams
Communications faces competition from three major facilities-based long distance
fiber optic network companies. In addition, several other companies have just
completed or are in the process of constructing regional and nationwide fiber
optic networks that will compete with Williams Communications in the wholesale
network market. Because Williams Communications has focused its efforts on the
market for wholesale network services, it does not compete with these networks
in the retail sector of the market. Network intends to compete by being the
lowest cost provider in the market for technologically advanced network services
and by pursuing only wholesale opportunities. By avoiding the retail market, it
seeks to avoid the situation of competing with its customers who purchase
wholesale services for resale in the retail market.
 
     Federal telecommunications reform legislation enacted in February 1996 is
designed to increase competition both in the long distance market and local
exchange market by significantly liberalizing current restrictions on market
entry. In particular, the legislation establishes procedures permitting Regional
Bell Operating Companies to provide long distance services including, but not
limited to, video transmission services, subject to certain restrictions and
conditions precedent. Moreover, electric and gas utilities may provide
telecommunications services, including long distance services, through separate
subsidiaries. The legislation also calls for elimination of federal tariff
filing requirements and relaxation of regulation over common carriers. At this
time, management cannot predict the impact such legislation may have on
Networks' operations.
 
     The Regional Bell Operating companies continue to seek regulatory approval
to provide national long distance services. As courts or regulators remove
restrictions on the Regional Bell Operating Companies, they will be both
important potential customers and important potential competitors of Network. If
Regional Bell Operating Companies are permitted to compete in the market for
long-distance services, they will require nationwide fiber networks to provide
services. If any such Regional Bell Operating Company chooses to contract with
Williams Communications for use of its network, it could create opportunities
for Williams Communications to sell fiber or to lease long distance, high volume
capacity. If any such Regional Bell Operating Company chooses either to
construct its own network or to contract with one of Williams Communications'
competitors, it would be in a position to provide nationwide long distance
services in direct competition with Williams Communications.
 
     Solutions. For the Solutions business, Williams Communications is the
largest independent provider of integrated communications solutions to
businesses throughout North America. Though 30 percent owned by Northern
Telecom, Solutions maintains strong relationships with other manufacturers of
products that it sells to its customers. Solutions' competitors include
communications equipment distributors, network integrators,
                                       17
<PAGE>   19
 
and manufacturers of equipment (including in some instances those manufacturers
whose products Solutions also sells). WCS has many competitors ranging from
Lucent Technologies, Siemens, and Cisco Systems to small individually-owned
companies that sell and service customer-premise equipment. Because WCS sells
and installs equipment manufactured by third parties and provides maintenance
services on the equipment it sells, it seeks to compete by giving customers
their choice of high quality, technologically advanced equipment along with high
quality service.
 
     Applications. Vyvx's video and multimedia transmission operations compete
primarily with companies offering video or multimedia transmission services by
means of satellite facilities and to a lesser degree with companies offering
transmission services via microwave facilities or fiber-optic cable. Vyvx
competes by providing high quality services in its niche market.
 
OWNERSHIP OF PROPERTY
 
     Network. Williams Communications owns part of the fiber-optic transmission
facilities and leases the remainder. Approximately 10,000-route miles of its
owned facilities are comprised of a single fiber, which is on a portion of the
fiber optic network of MCI WorldCom, Inc. and is restricted until July 1, 2001,
to multimedia content usage. Williams Communications retained this fiber when a
predecessor of MCI WorldCom purchased Williams Communications' network services
operations in 1995. Williams Communications carries signals by means of its own
fiber-optics facilities, as well as carrying signals over fiber-optic facilities
leased from third-party interexchange carriers and the various local exchange
carriers. Williams Communications holds its satellite transponder capacity under
various agreements. Williams Communications owns part of its teleport facilities
and holds the remainder under either a management agreement or long-term
facilities leases.
 
     Network intends to obtain capacity primarily by means of the fiber optic
networks Williams Communications is constructing or plans to construct or
acquire, as well as acquiring dark fiber rights on fiber optic facilities of
other carriers. Network obtains dark fiber rights in the form of the purchase or
lease of "indefeasible rights of use" or "IRUs" in specific fiber strands.
Purchased IRUs have many of the characteristics of ownership, including many of
the associated risks, but the owner of the fiber optic cable retains legal title
to the fibers. Specifically, an IRU is an exclusive, indefeasible right to use
the specified property for a term essentially representing the economic life of
the property. The grant of an IRU transfers the risks and rewards of ownership
but does not convey title, ownership, or rights of possession in the network,
the individual fibers comprising the network, the related right-of-way
agreements, or any other real or personal property. The transferee of an IRU
typically has a right to retake possession at the end of the contract term,
which generally exceeds 20 years.
 
ENVIRONMENTAL MATTERS
 
     Williams Communications is subject to federal, state, and local laws and
regulations relating to the environmental aspects of its business. Management
believes that Williams Communications' operations are in substantial compliance
with existing environmental legal requirements. Management expects that
compliance with such existing environmental legal requirements will not have a
material adverse effect on the capital expenditures, earnings, and competitive
position of Williams Communications.
 
WILLIAMS INTERNATIONAL COMPANY
 
     Williams International Company, through subsidiaries, has made direct
investments in energy and telecommunications projects primarily in South America
and Australia and continues to explore and develop additional projects for
international investment. Williams International also has investments in energy,
telecommunications, and infrastructure development funds in Asia and Latin
America.
 
     El Furrial. Williams International owns a 67 percent interest in a venture
near the El Furrial field in eastern Venezuela that constructs, owns, and
operates medium and high pressure gas compression facilities for Petroleos de
Venezuela (PDVSA), the state owned petroleum corporation of Venezuela.
 
                                       18
<PAGE>   20
 
     The medium pressure facility compresses 130 MMcf per day of raw natural gas
from 100 to 1,200 p.s.i.g. for delivery into a natural gas processing plant
owned by PDVSA. The high pressure facility compresses 450 MMcf per day of
processed natural gas from 1,100 to 7,500 p.s.i.g. for injection into PDVSA's El
Furrial producing field.
 
     The medium pressure facility began operations in November 1997. The high
pressure facility began operations in September 1998. An expansion of the high
pressure facility to 650 MMcf per day is underway, and Williams International
anticipates that the expansion will be complete in the second half of 1999.
 
     Jose Terminal. In November 1998 a consortium in which Williams
International owns 45 percent, entered into an agreement with PDVSA to purchase
the Jose Terminal, an 800,000 Bbp per day petroleum storage and shiploading
facility in northeastern Venezuela, for a 20-year renewable term. As part of the
transaction, PDVSA, directly and indirectly through its partners, has committed
to store and shipload an average of 873,000 Bbp per day of crude oil during the
first 20 years of the transaction. The interim operations began in the first
quarter of 1999, and formal closing is expected in the second quarter of 1999.
 
     Apco Argentina. Williams International also owns an interest in Apco
Argentina Inc., an oil and gas exploration and production company with
operations in Argentina. Apco Argentina's principal business is its 47.6 percent
interest in the Entre Lomas concession in southwest Argentina. It also owns a 45
percent interest in the Canadon Ramirez concession and a 1.5 percent interest in
the Acambuco concession.
 
     At December 31, 1998, 1997, and 1996, estimated developed, proved reserves
net to Apco Argentina were 15.5, 23.7, and 24.2 million barrels, respectively,
of oil, condensate, and plant products, and 26.8, 35.8, and 44.3 Bcf,
respectively, of natural gas. Estimated undeveloped, proved reserves net to Apco
Argentina were 5.1, 9.5, and 10.5 million barrels, respectively, of oil,
condensate, and plant products, and 700 MMcf, 800 MMcf, and 2.5 Bcf,
respectively, of natural gas.
 
     At December 31, 1998, the gross and net developed concession acres owned by
Apco Argentina totaled 37,140 acres and 17,093 acres, respectively, and the
gross and net undeveloped concession acres owned were 504,860 acres and 115,493
acres, respectively. At December 31, 1998, Apco Argentina owned interests in 452
gross producing wells and 212 net producing wells on its concession acreage.
 
     Total net production sold during 1998, 1997, and 1996 was 1.7, 1.8, and 1.6
million barrels, respectively, of oil, condensate, and plant products, and 7.7,
7.7, and 8.4 Bcf, respectively, of natural gas. The average production costs,
including all costs of operations such as remedial well workovers and
depreciation of property and equipment, per barrel of oil produced were $9.09,
$8.27, and $8.15, respectively, and per Mcf of natural gas produced were $.23,
$.21, and $.22, respectively. The average wellhead sales price per barrel of oil
sold were $12.71, $19.52, and $20.87, respectively, and per Mcf of natural gas
sold were $1.33, $1.34, and $1.33, respectively, for the same periods.
 
     Lightel and Brazilian Cellular Project. Williams International owns a 20
percent equity interest in Lightel, S.A., a company that owns interests in a
local exchange carrier, a cable television company, and cellular telephone
companies in Brazil. In April 1998 Williams International participated in
Lightel's acquisition of licenses to provide cellular telephone service in the
States of Sao Paulo, Rio de Janeiro, and Espirito Santo by issuing convertible
debt to Lightel to help fund the investment and by directly investing in
ATL -- Algar Telecom Leste, S.A. which holds the Rio de Janeiro and Espirito
Santo concession in exchange for a 30 percent equity ownership interest in ATL.
Construction on the cellular network began in 1998 and is expected to be
complete in the first quarter of 1999. In February 1999 Williams International
exercised its right of first refusal to acquire an additional 35 percent equity
interest in ATL. It anticipates completing the transaction before the end of the
first quarter of 1999.
 
     PowerTel. In August 1998 Williams International closed a transaction under
which it will eventually own an approximate 45 percent direct and 2.4 percent
indirect interest in PowerTel Limited (a publicly traded corporation in which
three Australian electric utilities will own a 30 percent interest) to build,
own, and operate a fiber optic telecommunications network in Australia serving
the cities of Brisbane, Sydney, and Melbourne, as well as other cities.
Engineering and construction work on the network began in the fourth quarter of
1998, and commercial operations are expected to commence midyear 1999.
                                       19
<PAGE>   21
 
     MetroCom. In March 1999 Williams International plans to acquire a 19.9
percent equity interest in Metrocom, S.A., a Chilean company formed by Metrogas,
S.A., to build, own, and operate a telecommunications network providing
high-quality, low-cost local, Internet, data, and voice services to businesses
and residences in the Santiago metropolitan area, focusing on the commercial and
high-end residential markets. Metrogas, S.A., whose shareholders consist of
several large international and Chilean electric utilities and energy companies,
is installing a natural gas distribution network in Santiago along with
telecommunications ducts for the installation of the fiber optic network. The
estimated cost of the investment is approximately U.S. $24.5 million.
 
                               OTHER INFORMATION
 
     Williams Holdings believes that it has adequate sources and availability of
raw materials to assure the continued supply of its services and products for
existing and anticipated business needs. At December 31, 1998, Williams Holdings
had approximately 17,450 full-time employees, of whom approximately 1,312 were
represented by unions and covered by collective bargaining agreements. In
September 1998 Williams created three new companies in order to streamline
payroll processing and reduce costs. In connection with this, Williams
transferred its employees to one of these companies, and the employees are now
jointly employed by Williams and one of these new companies. This change had no
impact on Williams' management structure or on its employees' seniority and
benefits. Williams 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 Williams Holdings believes these
forward-looking statements are based on reasonable assumptions, it cannot give
any assurance that it will reach every objective. Williams Holdings is making
these forward-looking statements in reliance on the safe harbor protections
provided under the Private Securities Litigation Reform Act of 1995.
 
     As required by the Act, Williams Holdings identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated, or budgeted:
 
     - changes in general economic conditions in the United States
 
     - changes in laws and regulations to which Williams Holdings is subject,
       including tax, environmental, and employment laws and regulations
 
     - the cost and effects of legal and administrative claims and proceedings
       against Williams Holdings or its subsidiaries
 
     - conditions of the capital markets Williams Holdings utilizes to access
       capital to finance operations
 
     - the ability to raise capital in a cost effective way
 
     - Year 2000 readiness of Williams Holdings, its customers, and its vendors
 
     - the effect of changes in accounting policies
 
     - the ability to manage rapid growth
 
     - the ability to control costs
 
     - changes in foreign economies, laws, and regulations, especially in
       Brazil, Argentina, Venezuela, and Australia where Williams Holdings has
       made direct investments
 
     - political developments in foreign countries, especially in Brazil,
       Argentina, Venezuela, and Australia where Williams Holdings has made
       direct investments
 
                                       20
<PAGE>   22
 
     - the impact of future federal and state regulations of business
       activities, including allowed rates of return, the pace of deregulation
       in retail natural gas and electricity markets, and the resolution of
       other regulatory matters discussed herein
 
     - fluctuating energy commodity prices
 
     - fluctuating corn prices, which affect Williams Holdings' ethanol business
 
     - the ability of Williams Holdings' energy businesses to develop expanded
       markets and product offerings as well as their ability to maintain
       existing markets
 
     - 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, decisions by customers not
       to renew expiring natural gas transportation contracts, and weather
       conditions
 
     - the accuracy of estimated hydrocarbon reserves and seismic data
 
     - successful completion of the communications network build
 
     - the ability to successfully market capacity on the communications network
 
     - technological developments, high levels of competition, lack of customer
       diversification, and general uncertainties of governmental regulation in
       the communications industry
 
     - significant competition on pricing and product offerings for the
       Solutions business unit
 
     - the ability of the Solutions business unit to introduce and market
       competitive products and services
 
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
 
     Williams Holdings has no significant amounts of revenue or segment profit
or loss attributable to export sales. See Item 1(c) for a description of
Williams Energy's and Williams International's export sales activities.
 
ITEM 2. PROPERTIES
 
     See Item 1(c) for description of properties.
 
ITEM 3. LEGAL PROCEEDINGS
 
     For information regarding certain proceedings pending before federal
regulatory agencies, see Note 17 of Notes to Consolidated Financial Statements.
Williams Holdings is also subject to other ordinary routine litigation
incidental to its businesses.
 
  Environmental matters
 
     Certain Williams Holdings' subsidiaries have been identified as potentially
responsible parties (PRP) at various Superfund and state waste disposal sites.
In addition, these subsidiaries have incurred, or are alleged to have incurred,
various other hazardous materials removal or remediation obligations under
environmental laws. Although no assurances can be given, Williams Holdings does
not believe that the PRP status of these subsidiaries will have a material
adverse effect on its financial position, results of operations or net cash
flows.
 
     The Midstream Gas & Liquids unit of Williams Energy had recorded an
aggregate liability of approximately $10 million, representing the current
estimate of future environmental and remediation costs. Williams Energy also
accrues environmental remediation costs for its petroleum products pipelines,
retail petroleum, refining, and propane marketing operations primarily related
to soil and groundwater contamination. At December 31, 1998, Williams Energy and
its subsidiaries had reserves, in addition to the reserves listed above,
totaling approximately $31 million. Williams Energy recognizes receivables
related to environmental remediation costs from state funds as a result of laws
permitting states to reimburse certain expenses associated with underground
storage tank problems and repairs. At December 31, 1998, Williams Energy and its
subsidiaries had receivables totaling $14 million. Actual costs incurred will
depend on the actual number of
 
                                       21
<PAGE>   23
 
contaminated sites identified, the actual amount and extent of contamination
discovered, the final cleanup standards mandated by the EPA and other
governmental authorities and other factors.
 
  Other legal matters
 
     On April 7, 1992, a liquefied petroleum gas explosion occurred near an
underground salt dome storage facility located near Brenham, Texas, and owned by
an affiliate of MAPCO Inc., Seminole Pipeline Company. MAPCO Inc., as well as
Seminole, Mid-America Pipeline Company, MAPCO Natural Gas Liquids Inc., and
other non-MAPCO entities were named as defendants in civil action lawsuits filed
in state district courts located in four Texas counties. Seminole and the
above-mentioned subsidiaries of MAPCO Inc. have settled in excess of 1,600
claims in these lawsuits. The only lawsuit remaining is the Dallmeyer case which
was tried before a jury in Harris County, Texas. In Dallmeyer, the judgment
rendered in March 1996 against defendants Seminole and MAPCO Inc. and its
subsidiaries totaled approximately $72 million, which included nearly $65
million of punitive damages awarded to the 21 plaintiffs. Both plaintiffs and
defendants have appealed the Dallmeyer judgment to the Court of Appeals for the
Fourteenth District of Texas in Harris County. The defendants seek to have the
judgment modified in many respects, including the elimination of punitive
damages as well as a portion of the actual damages awarded. If the defendants
prevail on appeal, it will result in an award significantly less than the
judgment. The plaintiffs have cross-appealed and seek to modify the judgment to
increase the total award plus interest to exceed $155 million. In February and
March 1998, the defendants entered into settlement agreements involving 17 of
the 21 plaintiffs to finally resolve their claims against all defendants for an
aggregate payment of approximately $10 million. These settlements have satisfied
and reduced the judgment on appeal by approximately $42 million. As to the
remaining four plaintiffs, the Court of Appeals issued its decision on October
15, 1998, which, while denying all of the plaintiffs' cross-appeal issues,
affirmed in part and reversed in part the trial court's judgment. The defendants
had entered into settlement agreements with the remaining plaintiffs which, in
light of the decision, Williams believes will provide for aggregate payments of
approximately $13.6 million, the full amount of which has been previously
accrued.
 
     In 1991 the Southern Ute Indian Tribe filed a lawsuit against Williams
Production Company, a wholly owned subsidiary of Williams, 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 sought
compensation for the value of the coal-seam gas. The Tribe also sought an order
transferring to the Tribe ownership of all of the defendants' equipment and
facilities utilized in the extraction of the coal-seam gas. In September 1994
the court granted summary judgment in favor of the defendants and the Tribe
lodged an interlocutory appeal with the U.S. Court of Appeals for the Tenth
Circuit. Williams Production agreed to indemnify the Williams Coal Seam Gas
Royalty Trust against any losses that may arise in respect of certain properties
subject to the lawsuit. On July 16, 1997, the Court of Appeals reversed the
decision of the District Court, held that the Tribe owns the coal-seam gas
produced from certain coal strata on fee lands within the exterior boundaries of
the Tribe's reservation, and remanded the case to the District Court for further
proceedings. On September 16, 1997, Amoco Production Company, the class
representative for the defendant class (of which Williams Production is a part),
filed its motion for rehearing en banc before the Court of Appeals. On July 20,
1998, the Court of Appeals sitting en banc affirmed the panel's decision. The
U.S. Supreme Court has granted a writ of certiorari in respect of this decision.
 
     In late March 1999 Williams Production, BP Amoco, and the Tribe announced
that they are in settlement negotiations to finalize the terms of an agreement
in connection with the claims asserted against Williams. Under the proposed
settlement, Williams Production will convert its net profits interest in the
production from the oil and gas leases in dispute into a working interest. A
portion of Williams Production's working interest will then be transferred to
the Tribe effective January 1, 1999. The Tribe will release Williams Production
from all other claims asserted in the lawsuit. This pending settlement agreement
does not address key issues still being pursued on appeal to the Supreme Court,
including the ownership of the natural gas in the coal formation, tribal
severance tax payments, and other matters. The Supreme Court is expected to
render its decision by mid-1999. The details of this settlement are still being
negotiated, and it must be
 
                                       22
<PAGE>   24
 
approved by the District Court after an opportunity for review and comment.
Williams believes the parties will be successful in reaching a final agreement
on the partial settlement in principal and that it will be approved by the
District Court.
 
     In 1998 the United States Department of Justice informed Williams that Jack
Grynberg, an individual, had filed claims in the United States District Court
for the District of Colorado under the False Claims Act against Williams and
certain of its wholly owned subsidiaries including Williams Field Services
Company and Williams Production Company. Mr. Grynberg has also filed claims
against approximately 300 other energy companies and alleges that the defendants
violated the False Claims Act in connection with the measurement and purchase of
hydrocarbons. The relief sought is an unspecified amount of royalties allegedly
not paid to the federal government, treble damages, civil penalty, attorneys'
fees, and costs.
 
     In addition to the foregoing, various other proceedings are pending against
Williams or its subsidiaries which are incidental to their operations.
 
  Summary
 
     While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage, recovery from customers,
or other indemnification arrangements, will have a materially adverse effect
upon Williams Holdings' future financial position, results of operations, or
cash flow requirements.
 
                                       23
<PAGE>   25
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
     As of December 31, 1998, all of the outstanding shares of Williams
Holdings' Common Stock were owned by Williams. Williams Holdings' Common Stock
is not publicly traded, and there is no market for such shares.
 
                                       24
<PAGE>   26
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following financial data as of December 31, 1998 and 1997 and for the
three years ended December 31, 1998 are an integral part of, and should be read
in conjunction with, the consolidated financial statements and notes thereto.
All other amounts have been prepared from the company's financial records.
Amounts below reflect the combined operations and financial position of Williams
Holdings and MAPCO and the adoption of the Statement of Financial Accounting
Standards No. 131 (see Note 19). 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-15 of this report.
 
<TABLE>
<CAPTION>
                                       1998       1997       1996       1995       1994
                                     --------   --------   --------   --------   --------
                                                          (MILLIONS)
<S>                                  <C>        <C>        <C>        <C>        <C>
Revenues(1)........................  $5,942.6   $6,520.3   $5,157.2   $4,161.7   $3,878.5
Income (loss) from continuing
  operations(2)....................     (10.3)     301.0      358.9      276.0      175.7
Income (loss) from discontinued
  operations(3)....................     (14.3)      (6.3)     (32.7)   1,029.3      122.9
Total assets.......................  11,850.6    9,134.5    7,334.6    6,515.5    5,555.7
Long-term debt.....................   2,917.0    1,525.5    1,421.5    1,021.7    1,169.2
Stockholder's equity...............   3,923.6    3,525.5    3,152.7    2,849.0    2,422.5
</TABLE>
 
---------------
 
(1) See Note 1 for discussion of the 1998 change in the reporting of certain
    marketing activities from a "gross" basis to a "net" basis consistent with
    fair value accounting. See Note 2 for discussion of Williams Holdings' 1997
    acquisition of Nortel's customer-premise equipment sales and service
    operations.
 
(2) See Notes 2 and 5 for discussion of the gain on sale of interest in
    subsidiary, significant asset sales, write-offs and other accruals in 1998,
    1997 and 1996. Income from continuing operations in 1995 includes a $41.4
    million pre-tax charge related to the cancellation of a commercial coal
    gasification venture and a $16 million after-tax gain related to the sale of
    Williams Holdings' 15 percent interest in Texasgulf Inc. Income from
    continuing operations in 1994 includes a $22.7 million pre-tax gain from the
    sale of a portion of Williams Holdings' interest in Northern Border
    Partners, L.P. and a $68.7 million pre-tax charge related to the settlement
    of a dispute with the State of Alaska related to royalty oil purchase
    agreements. In addition, the 1994 amounts include a pre-tax gain of $25.4
    million related to the exchange of 36.6 million shares of Williams common
    stock for Williams convertible debentures and warrants and a pre-tax gain on
    the sale of Williams common stock of $10.8 million.
 
(3) See Note 3 for discussion of the losses from discontinued operations for
    1998, 1997 and 1996. The income from discontinued operations for 1995
    primarily relates to the gain from the 1995 sale of Williams Holdings'
    network services operations, while the 1994 amount reflects the operating
    results of the network services operations and the MAPCO Coal operations.
 
                                       F-1
<PAGE>   27
 
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
 
RESULTS OF OPERATIONS
 
  1998 vs. 1997
 
     CONSOLIDATED OVERVIEW. Williams Holdings' revenues decreased $578 million,
or 9 percent, due primarily to the $384 million impact in 1998 of reporting
certain revenues net of costs within Energy Services (see Note 1 of Notes to
Consolidated Financial Statements) and lower petroleum products and natural gas
liquids sales prices. Favorably effecting revenues were higher revenues from
Communications' equipment sales and services activities and excess fiber sales,
higher power services revenues and increased petroleum products sales volumes.
 
     Segment costs and expenses decreased $258 million, or 4 percent, due
primarily to the $384 million impact in 1998 of reporting certain costs net in
revenues within Energy Services (see Note 1) and lower purchase prices for
petroleum products. Partially offsetting these decreases were higher costs and
expenses within Communications, costs associated with increased petroleum
products sales volumes, higher power services costs and $77 million of higher
charges in 1998 as compared to 1997. The 1998 charges include $37 million of
asset impairments, $51 million of MAPCO merger-related expenses, a $16 million
accrual for potential transportation rate refunds and a $23 million accrual for
modification of an employee benefit program associated with vesting of paid time
off. Included in 1997 are charges totaling $50 million for asset impairments.
 
     Operating income decreased $308 million, or 70 percent, reflecting the
change in revenues and segment costs and expenses discussed above and comprised
primarily of a $176 million decrease at Energy Services and a $117 million
decrease at Communications. Income from continuing operations before
extraordinary loss and income taxes decreased $451 million, or 99 percent, due
primarily to the lower operating income, $43 million higher interest expense
resulting from continued expansion and new projects, the effect of a $45 million
gain in 1997 on the sale of interest in subsidiary and the effect of a $66
million gain in 1997 on the sale of assets.
 
     ENERGY MARKETING & TRADING'S revenues decreased $337.7 million, or 15
percent, due primarily to the $384 million impact in 1998 of reporting revenues
on a net basis for certain natural gas liquids trading operations previously
reported on a "gross" basis (see Note 1) and $95 million lower crude and refined
products marketing and trading revenues. In addition, revenues associated with
natural gas origination, price-risk management and physical trading decreased
$50 million reflecting lower margins, the unfavorable market movement against
the natural gas portfolio and the adverse market and supply conditions which
resulted from Hurricane Georges in September 1998, partially offset by the $24
million favorable effect of certain contract settlements and terminations.
Retail propane revenues decreased $59 million due to the $35 million effect of
lower volumes following unseasonably warm weather in 1998 as compared to 1997
and the $24 million effect of lower average propane sales prices. Partially
offsetting these decreases were $243 million higher power services revenues
including $220 million from new power activity in southern California and
additional business growth.
 
     Costs and operating expenses decreased $407 million, or 19 percent, due
primarily to the $384 million impact in 1998 of reporting revenues on a net
basis for certain natural gas liquids trading operations previously reported on
a "gross" basis (see Note 1) and $104 million lower product purchases associated
with the marketing and trading of crude and refined products. In addition,
retail propane cost of sales decreased $55 million due to the $21 million effect
of lower volumes and the $34 million effect of lower average propane purchase
costs. These decreases were partially offset by $156 million of costs related to
new power activity in southern California.
 
     Segment profit decreased $14.4 million, or 27 percent, due primarily to the
$50 million decline in revenues from natural gas trading activities discussed
above, $43 million of additional losses from retail natural gas and electric
activities and the effect of a $6 million recovery in 1997 of an account
previously written off as a bad debt. The $43 million of losses from retail
natural gas and electric activities includes $17 million of credit losses and
$14 million of asset impairments (included in other (income) expense -- net).
The $14 million asset impairment is associated with the company's decision to
change focus from selling to small
 
                                       F-2
<PAGE>   28
 
commercial and residential customers to large end users (see Note 5). The retail
natural gas and electric losses also reflect costs incurred to penetrate new
markets. Offsetting these decreases were $60 million of higher electric power
marketing and trading profits, $17 million lower retail propane operating
expenses and $7 million higher natural gas liquids trading profits.
 
     EXPLORATION & PRODUCTION'S revenues increased $9.2 million, or 7 percent,
due primarily to the recognition of $22 million of additional deferred income
resulting from a 1997 transaction that transferred certain nonoperating economic
benefits to a third party and $8 million from a 14 percent increase in company-
owned production, partially offset by the $25 million effect of lower average
natural gas sales prices for company-owned production and for sales of volumes
from the Williams Coal Seam Gas Royalty Trust (Royalty Trust) and royalty
interest owners.
 
     Segment profit decreased $3.1 million, or 10 percent, due primarily to $13
million higher depreciation, depletion and amortization, $6 million higher
nonproducing leasehold amortization, $2 million higher dry hole costs and $2
million of leasehold impairment costs, partially offset by the $22 million
increased recognition of deferred income.
 
     MIDSTREAM GAS & LIQUIDS' revenues decreased $143.8 million, or 15 percent,
due primarily to $60 million lower natural gas liquids sales from processing
activities reflecting a decline in average liquids sales prices, and the $44
million effect of the shutdown of the Canadian liquids marketing operations in
late 1997. Revenues also declined due to $18 million lower natural gas liquids
pipeline transportation revenues reflecting 3 percent lower shipments, the
passthrough of $9 million lower operating costs to customers and the effect of
an $8 million receipt in 1997 of business interruption insurance proceeds,
slightly offset by $9 million higher gathering revenues and $8 million
associated with a 4 percent increase in natural gas liquids sales volumes.
 
     Costs and operating expenses decreased $88 million, or 15 percent, due
primarily to the $50 million effect of the shutdown of the Canadian liquids
marketing operations, $9 million lower costs passed through to customers, $15
million lower fuel and replacement gas purchases, and lower natural gas liquids
pipeline transportation costs.
 
     Other (income) expense -- net in 1998 includes a loss of approximately $9
million related to the retirement of certain assets and $6 million of
unfavorable litigation loss provisions, partially offset by a $6 million gain
from the settlement of product imbalances.
 
     Segment profit decreased $60.2 million, or 22 percent, due primarily to $45
million of lower per-unit liquids margins, decreased pipeline transportation
shipments, the $9 million loss related to the retirement of certain assets and
the effect of an $8 million business interruption insurance receipt in 1997,
slightly offset by $9 million higher gathering revenues.
 
     PETROLEUM SERVICES' revenues decreased $20.5 million, or 1 percent, due
primarily to a $213 million decrease in revenues from refining operations and
$17 million lower product sales from transportation activities, significantly
offset by $107 million higher pipeline construction revenue, $54 million higher
convenience store sales, and $37 million higher revenues from fleet management
and mobile computer technology operations initiated in mid-1997. The $213
million decline in refining revenues reflects $386 million from lower average
sales prices, partially offset by $173 million from a 13 percent increase in
refined product volumes sold. The $54 million increase in convenience store
sales is due primarily to the May 1997 EZ-Serve acquisition, additional travel
centers and increased per-store merchandise sales. Increases of $101 million in
gasoline and diesel sales volumes and $47 million higher merchandise sales were
partially offset by a $94 million impact of lower average retail gasoline and
diesel sales prices.
 
     Costs and expenses increased $27 million, or 1 percent, due primarily to
$102 million of pipeline construction costs, $46 million higher convenience
store merchandise purchases and operating costs resulting from the EZ-Serve
acquisition, additional travel centers and increased per-store sales, $41
million higher costs from fleet management and mobile computer technology
operations, $24 million higher general and administrative expenses and a $15.5
million accrual for potential transportation rate refunds to customers (included
in other (income) expense -- net) (see Note 17). Substantially offsetting these
increases were a $194 million decrease from refining operations and $15 million
lower cost of product sales from transportation
                                       F-3
<PAGE>   29
 
activities. The $24 million increase in general and administrative expenses is
due, in part, to increased activities in human resources development,
investor/media/customer relations and business development. The $194 million
decrease from refining operations reflects a $343 million decrease due to lower
average crude oil purchase prices, partially offset by a $143 million increase
related to an increase in processed barrels sold and $7 million higher operating
costs at the Memphis refinery. Convenience store gasoline and diesel cost of
sales remained flat as a $90 million increase from higher sales volumes was
offset by lower average purchase prices.
 
     Segment profit decreased $47.5 million, or 24 percent, due primarily to the
$15.5 million accrual for potential refunds to transportation customers, $13
million lower refinery gross margins, $7 million higher operating costs due to
increased production levels at the Memphis refinery, approximately $24 million
higher general and administrative expenses and a $4.4 million accrual for
modification of an employee benefit program associated with vesting of paid time
off, partially offset by $6 million higher product transportation revenues, $7
million increased profits from convenience store operations and $5 million from
pipeline construction activities.
 
     COMMUNICATIONS SOLUTIONS' revenues increased $160.3 million, or 13 percent,
due primarily to the April 30, 1997, combination of the Nortel customer premise
equipment sales and services operations, which contributed an additional $196
million of revenue during the first four months of 1998. A $30 million increase
in maintenance contract revenues was more than offset by $46 million lower new
system sales and $31 million lower customer service orders due, in part, to
competitive pressures.
 
     Costs and operating expenses increased $116 million, or 13 percent, and
selling, general and administrative expenses increased $138 million, or 53
percent, due primarily to the combination with Nortel. Included in the overall
increase in selling, general and administrative expenses are $23 million of
increased information systems costs associated with expansion and enhancement of
the infrastructure and continued costs of maintaining multiple systems while
common systems are being developed, $36 million higher selling costs including
the effects of large increases in sales and support staff and higher sales
commissions in anticipation of a higher revenue base than actually achieved, $12
million increased provision for bad debts, and a $6 million accrual for
modification of an employee benefit program associated with vesting of paid time
off.
 
     Segment profit decreased $101.4 million from a $47.3 million segment profit
in 1997 to a $54.1 million segment loss in 1998, due primarily to the increase
in selling, general and administrative costs as described above, $6 million
related to information systems cancellations and $7 million of obsolete
equipment write-downs, severance and contract loss accruals.
 
     NETWORK APPLICATIONS' revenues decreased $9.1 million, or 4 percent, due
primarily to the $14 million effect of the decision to exit the learning content
business in November 1997. Partially offsetting this decline was a $9 million
increase in audio and video conferencing and business television revenues.
 
     Costs and operating expenses increased $9 million, or 5 percent, due
primarily to $8 million higher costs of providing network services following the
transfer of fiber assets to Network Services in October 1997 and the $7 million
effect of increased audio and video conferencing and business television
activities, partially offset by $8 million lower costs as a result of the
decision to exit the learning content business in November 1997. A $10 million,
or 11 percent, decrease in selling, general and administrative expenses was also
due to the decision to exit the learning content business.
 
     Other (income) expense -- net in 1998 includes a $23.2 million write-down
related to the abandonment of a venture involved in the technology and
transmission of business information for news and educational purposes (see Note
5). Other (income) expense -- net in 1997 includes charges totaling $49.8
million related to the decision and formulation of a plan to sell the learning
content business ($28 million), and the write-down of assets and development
costs associated with certain advanced applications (see Note 5). During 1998, a
substantial portion of the learning content business was sold at its approximate
carrying value.
 
     Segment loss decreased $14.1 million from a $108.7 million segment loss in
1997 to a $94.6 million segment loss in 1998, due primarily to the effect of
$49.8 million of charges in 1997, partially offset by the $23.2 million
write-down in 1998, $7 million higher network access costs and a $3 million
accrual for modification of an employee benefit program associated with vesting
of paid time off.
                                       F-4
<PAGE>   30
 
     NETWORK SERVICES' revenues increased $151.9 million from $43 million in
1997, due primarily to $64 million of revenue in 1998 from the sale of excess
fiber capacity on the newly constructed digital fiber-optic network, $49 million
of revenues from providing fiber services to new long-term customers and $27
million higher revenue following the transfer of fiber assets from Network
Applications in October 1997.
 
     Costs and operating expenses increased $136 million from $32 million in
1997, due primarily to $38 million of cost of sales of excess fiber capacity,
$55 million of leased capacity costs associated with providing customer services
prior to completion of the new network, and $17 million higher operating
expenses. Selling, general and administrative expenses increased $45 million due
primarily to the expansion of the infrastructure to support the new national
digital fiber-optic network, including $8 million of increased information
systems costs and $8 million for a new national advertising campaign.
 
     Segment profit decreased $29.6 million from a $3.3 million segment profit
in 1997 to a $26.3 million segment loss in 1998, due primarily to the cost of
expanding the infrastructure in support of the network expansion and losses
experienced from providing customer services prior to completion of the new
network, partially offset by $26 million of profit from selling excess fiber
capacity.
 
     As each phase of the ongoing construction of the planned 32,000 mile
full-service wholesale communications network goes into service, revenues and
costs are expected to increase. During 1998, 9,000 miles of new network were
added increasing the network to 19,000 cable miles at December 31, 1998. The
remaining 13,000 miles are planned to come online during 1999 and 2000. This
business is expected to contribute an increasing percentage of consolidated
revenues but is not expected to contribute significantly to segment profit until
2001. The February 8, 1999, announcement by Williams of a 20-year agreement with
SBC Communications, under which Network Services will become the preferred
provider of nationwide long-distance voice and data services for SBC
Communications, will contribute to the expected network revenue increase in
2000. Additional sales of excess dark fiber capacity along the new network are
expected to generate increasing revenues and segment profit during 1999 and
2000.
 
     OTHER segment loss of $14.5 million in 1998 compares to $12.7 million of
segment profit in 1997. The 1998 segment loss includes equity losses of $14.8
million from investing activities in a Brazilian communication business in which
Williams has a 30 percent interest. This business is constructing a cellular
phone network scheduled to be in operation during 1999. In addition, 1998
includes $8 million higher general and administrative expenses as compared to
1997 and $5.6 million of write-downs of international cost investments to
market.
 
     GENERAL CORPORATE EXPENSES decreased $11.6 million, or 16 percent, due
primarily to expense savings realized following the MAPCO merger, largely offset
by MAPCO merger-related costs of $21 million in 1998 compared to $10 million in
1997. An additional $51 million of merger-related costs are included as a
component of Energy Services' segment profit (see Note 19). Interest accrued
increased $49.8 million, or 38 percent, due primarily to higher borrowing levels
including Williams Holdings' commercial paper program and advances from
affiliates, partially offset by the $9 million effect of a lower average
interest rate. Interest capitalized increased $7.3 million, or 38 percent, due
primarily to increased capital expenditures for the fiber-optic network, the
Venezuelan gas injection plant and international investment activities.
Investing income decreased $3.6 million, or 8 percent, due primarily to $14
million lower interest earned on advances to Williams largely offset by higher
interest income on advances to affiliates and long-term notes receivable. For
information concerning the $44.5 million gain on sale of interest in subsidiary
in 1997, see Note 2. The $66 million gain on sales of assets in 1997 results
from the sale of Williams Holdings' interest in the liquids and condensate
reserves in the West Panhandle field of Texas (see Note 5). Minority interest in
(income) loss of consolidated subsidiaries in 1998 is $30.2 million favorable as
compared to 1997 due primarily to losses experienced by Williams Communications
Solutions, LLC which has a 30 percent interest held by minority shareholders.
Other income (expense) -- net is $15.7 million unfavorable as compared to 1997
due primarily to 1998 litigation accruals and loss provisions totaling $11
million related to assets previously sold, and the effect of a 1997 gain of $4
million on the termination of interest-rate swap agreements.
 
     The $139.2 million, or 90 percent, decrease in the provision for income
taxes on continuing operations is primarily a result of lower pre-tax income,
partially offset by a higher effective income tax rate in 1998. The
                                       F-5
<PAGE>   31
 
effective income tax rate in 1998 exceeds the federal statutory rate due
primarily to the effects of state income taxes and the effects of non-deductible
costs, including goodwill. The effective tax rate in 1997 is less than the
federal statutory rate due primarily to the effect of the non-taxable gain
recognized in 1997 (see Note 2) and income tax credits from coal-seam gas
production, partially offset by the effects of state income taxes.
 
     The 1998 and 1997 losses on discontinued operations are attributable to
loss provisions for contractual obligations related to the sale of the net
assets of the MAPCO coal business in 1996 (see Note 3).
 
     The 1998 and 1997 extraordinary losses result from the early extinguishment
of debt (see Note 7).
 
  1997 vs. 1996
 
     CONSOLIDATED OVERVIEW. Williams Holdings' revenues increased $1.4 billion,
or 26 percent, due primarily to increased marketing of crude oil and refined
products and higher revenues at Communications reflecting increased business
activity and revenue contributed by acquisitions, including the 1997 combination
of the Nortel customer premise equipment sales and services operations.
Partially offsetting these increases was the $141 million impact in 1997 of
reporting certain revenues net of costs within Energy Services (see Note 1).
 
     Segment costs and expenses increased $1.4 billion, or 31 percent, due
primarily to costs associated with the increased marketing of crude oil and
refined products, higher costs and expenses at Communications and $50 million
for asset impairments, partially offset by the $141 million impact in 1997 of
reporting certain costs net in revenues within Energy Services (see Note 1).
 
     Operating income decreased $95 million, or 18 percent, reflecting the
change in revenues and segment costs and expenses discussed above and comprised
primarily of a $63 million decrease at Communications and a $20 million decrease
at Energy Services. Income from continuing operations before extraordinary loss
and income taxes decreased $75 million, or 14 percent, reflecting the lower
operating income, increased interest accrued resulting from higher capital
expenditures and the effect of the $37 million gain in 1996 on sales of assets,
partially offset by a $45 million gain in 1997 on the sale of interest in
subsidiary and a $66 million gain in 1997 on the sale of assets.
 
     ENERGY MARKETING & TRADING'S revenues increased $276.4 million, or 14
percent, due primarily to a $488 million increase in marketing of crude oil and
refined products from the Memphis refinery. This increase reflects increased
demand for petroleum products, aggressive marketing in the Memphis and Ohio
River Valley areas and $183 million from the inclusion of Lexas Oil operations,
which prior to July 1997 were unconsolidated. Partially offsetting this increase
was a $125 million decrease in revenues from energy trading and price-risk
management activities, $77 million lower marketing of natural gas liquids
associated with Midstream's natural gas liquids transportation activities and a
$16 million decrease in revenues from the propane marketing business. The $125
million decrease in revenues from energy trading and price-risk management
activities resulted from the 1997 reporting on a net margin basis of certain
natural gas and gas liquids marketing operations previously not considered to be
included in trading operations. Excluding this decrease, energy trading and
price-risk management revenues increased $16 million due primarily to the
initial income recognition from long-term electric power contracts, increased
physical and notional natural gas volumes of 22 percent and 44 percent,
respectively, higher petroleum trading volumes, revenues from new project
financing services for energy producers and the sale of excess transportation
capacity, partially offset by lower natural gas trading margins as a result of
decreased price volatility. The $77 million decrease in marketing of natural gas
liquids results mainly from significantly lower natural gas liquids sales
prices. The $16 million decrease in revenues from the propane marketing business
resulted from the $24 million effect of the sale of certain propane and liquid
fertilizer assets in 1996, partially offset by increased propane sales volumes
primarily from acquisitions.
 
     Costs and operating expenses increased $335 million, or 19 percent, due
primarily to $526 million of additional costs associated with the marketing of
crude oil and refined products from the Memphis refinery, $23 million of
increased operating expenses associated with propane marketing acquisitions and
growth initiatives and a $16 million increase in propane purchase costs relating
to increased volumes, partially offset by the $141 million effect of the 1997
reporting on a net margin basis of certain natural gas and gas liquids
 
                                       F-6
<PAGE>   32
 
marketing operations previously not considered to be included in trading
operations, $73 million lower costs of marketing natural gas liquids associated
with Midstream's natural gas liquids transportation activities and $21 million
associated with the sale of certain propane and liquid fertilizer assets.
Selling, general and administrative expenses increased $32 million, or 52
percent, due primarily to propane business acquisitions and the expenses
associated with expansion of certain business growth platforms.
 
     Segment profit decreased $85.1 million, or 61 percent, due primarily to $38
million lower gross margins on the marketing of crude oil and refined products
from the Memphis refinery, $32 million higher selling, general and
administrative expenses, $23 million of increased operating expenses associated
with propane marketing acquisitions and growth initiatives, and $10 million
lower gross margins on propane marketing operations, partially offset by the $16
million increase in net energy trading and price-risk management revenues and a
$6 million recovery of an account previously written off as a bad debt.
 
     EXPLORATION & PRODUCTION'S revenues increased $47.7 million, or 58 percent,
due primarily to the $20 million effect of higher average natural gas sales
prices for company-owned production, the $14 million effect of higher average
natural gas sales prices from the sale of volumes from the Royalty Trust and
royalty interest owners, and the $9 million effect of a 21 percent increase in
company-owned production volumes.
 
     Costs and operating expenses increased $23 million, or 32 percent, due
primarily to higher Royalty Trust natural gas purchase prices, increased
production activities and higher dry hole costs.
 
     Segment profit increased $27.5 million, from $2.8 million in 1996, due
primarily to the increase in average natural gas sales prices and company-owned
production volumes, partially offset by higher expenses associated with
increased activity levels.
 
     MIDSTREAM GAS & LIQUIDS' revenues increased $155.2 million, or 20 percent,
due primarily to $53 million related to a full year of Canadian marketing
operations in 1997 as compared to four months in 1996, $44 million of higher
natural gas liquids sales from processing activities, the receipt of $8 million
of business interruption insurance proceeds related to a 1996 claim, and higher
gathering, processing and condensate revenues of $40 million, $5 million and $11
million, respectively. These increases were slightly offset by the impact of the
January 1997 sale of the West Panhandle operations. The $44 million increase in
natural gas liquids sales from processing activities is due to a 37 percent
increase in volumes, slightly offset by lower average sales prices. Gathering
revenues increased as a result of a 16 percent increase in volumes following the
transfer of Williams Gas Pipelines Central (a wholly-owned subsidiary of
Williams Holdings' parent) gathering assets to Midstream Gas & Liquids in the
last half of 1996.
 
     Costs and operating expenses increased $154.4 million, or 35 percent, due
primarily to higher fuel and replacement gas purchases associated with gathering
and processing activities, the $52 million impact of a full year of Canadian
marketing operations, costs associated with the gathering assets transferred to
Midstream Gas & Liquids from Williams Gas Pipelines Central and higher operating
and maintenance and depreciation expenses, slightly offset by the $13 million
effect of the sale of the West Panhandle operations.
 
     Other (income) expense -- net for 1996 includes a $20 million gain from the
property insurance coverage associated with construction of replacement
gathering facilities and $6 million of gains from the sale of two small
gathering systems, partially offset by $5 million of environmental remediation
accruals.
 
     Segment profit decreased $23.2 million, or 8 percent, due primarily to the
$30 million effect of lower per-unit liquids margins, an $18 million impact of
the sale of the West Panhandle operations, and $12 million lower insurance
recoveries in 1997 as compared to 1996, partially offset by the $24 million
effect of increased liquids volumes sold and the transfer of gathering assets
from Williams Gas Pipelines Central.
 
     PETROLEUM SERVICES' revenues increased $100.8 million, or 4 percent, due
primarily to a $27 million increase in ethanol sales, $25 million from new fleet
management and mobile computer technology operations, a $24 million increase in
product sales from transportation activities and $18 million higher retail sales
revenues. Ethanol sales increased as a result of 22 percent higher sales
volumes, partially offset by lower average ethanol sales prices. Ethanol
production was reduced during the second half of 1996 due to unfavorable market
conditions. The retail sales increase reflects higher gasoline and merchandise
sales
 
                                       F-7
<PAGE>   33
 
following the EZ-Serve convenience stores acquisition, partially offset by lower
diesel sales. A 5 percent increase in processed volumes sold was offset by
slightly lower average refined product sales prices. Products pipeline shipments
and average rates were comparable to 1996.
 
     Costs and operating expenses increased $33.6 million, or 1 percent, due
primarily to a $35 million increase in retail costs following the EZ-Serve
convenience stores acquisition, $33 million associated with the new fleet
management and mobile computer technology operations, $23 million higher product
purchases associated with transportation activities, $15 million higher
operating expenses associated with increased refinery throughput and maintenance
activity, and $9 million higher costs from increased ethanol production, largely
offset by $84 million lower crude oil costs at the refineries.
 
     Segment profit increased $60.8 million, or 43 percent, due primarily to a
$71 million increase from petroleum refining operations and a $15 million
increase related to increased ethanol sales volumes and per-unit margins,
partially offset by an $18 million decrease from retail operations and $9
million of losses associated with the new fleet management and mobile computer
technology operations. The $71 million petroleum refining increase reflects
higher per-unit margins and 5 percent higher volumes processed, partially offset
by $10 million of higher costs associated with increased maintenance activity.
The retail operations decrease reflects the additional costs associated with the
implementation of strategic growth initiatives and lower per-unit margins on
gasoline sales.
 
     COMMUNICATIONS SOLUTIONS' revenues increased $638.4 million, or 112
percent, due primarily to acquisitions which contributed revenues of
approximately $556 million, including $536 million from the April 30, 1997,
combination of the Nortel customer premise equipment sales and services
operations. Additionally, increased business activity resulted in a $119 million
revenue increase in new system sales, partially offset by a $46 million decrease
in system modification revenues.
 
     Costs and operating expenses increased $460 million, or 105 percent, due
primarily to the $393 million impact of the combination with Nortel. In
addition, costs and operating expenses increased due to $50 million of higher
costs associated with increased new systems sales activity and $16 million of
higher costs related to system modification activity. Selling, general and
administrative expenses increased $148 million, or 129 percent, due primarily to
the combination with Nortel in addition to costs associated with expanding the
infrastructure for future growth.
 
     Segment profit increased $33 million from $14.3 million in 1996, due
primarily to the combination with Nortel, partially offset by increased expenses
associated with expanding the infrastructure.
 
     NETWORK APPLICATIONS' revenues increased $84.7 million, or 65 percent, due
primarily to 1997 acquisitions which contributed revenues of approximately $81
million.
 
     Costs and operating expenses increased $83 million, or 86 percent, due
primarily to the $68 million impact of acquisitions and higher expenses for
developing and expanding video transmission services. Selling, general and
administrative expenses increased $46 million, or 94 percent, due primarily to
acquisitions and higher expenses for expanding the infrastructure for future
growth.
 
     Other (income) expense -- net in 1997 includes charges totaling $49.8
million related to the decision and formulation of a plan to sell the learning
content business ($28 million), and the write-down of assets and development
expenses associated with certain advanced applications (see Note 5).
 
     Segment loss increased $93.6 million to $108.7 million, due primarily to
the $49.8 million in charges described above and the expense of developing
infrastructure while integrating the most recent acquisitions.
 
     NETWORK SERVICES' revenues increased $31.9 million to $43 million in 1997,
reflecting $14 million contributed by a March 1997 acquisition, $11 million from
fiber assets transferred from Network Applications in late 1997 and internal
growth.
 
     Costs and operating expenses increased $27 million from $5 million in 1996,
reflecting a $15 million effect of the transfer of fiber assets from Network
Applications late in 1997 and $8 million from the March 1997 acquisition.
 
                                       F-8
<PAGE>   34
 
     Segment profit decreased $2.5 million, or 43 percent, due primarily to an
increase in selling, general and administrative expenses.
 
     GENERAL CORPORATE EXPENSES increased $20.5 million, or 41 percent, due
primarily to higher employee compensation expense, $10 million of costs related
to the MAPCO acquisition, and a higher cost allocation percentage from Williams
resulting from the combination of customer-premise equipment sales and service
operations with Nortel and an increased level of other operations. Interest
accrued increased $38.6 million, or 41 percent, due primarily to higher
borrowing levels including increased borrowing under the $1 billion bank-credit
facility and commercial paper program, partially offset by a lower average
interest rate. The lower average interest rate reflects lower rates on new 1997
borrowings as compared to previously outstanding borrowings. Interest
capitalized increased $14.5 million, from $4.8 million in 1996, due primarily to
capital expenditures for the Discovery pipeline project and Communications'
fiber-optic network. Investing income increased $5.2 million, or 13 percent, due
primarily to interest earned on increased advances to Williams. For information
concerning the $44.5 million 1997 gain on sale of interest in subsidiary, see
Note 2. The $66 million 1997 gain on sales of assets results from the sale of
Williams Holdings' interest in the liquids and condensate in the West Panhandle
field of Texas (see Note 5). The $36.5 million 1996 gain on sales of assets
results from the sale of the fertilizer and Iowa propane assets and the sale of
certain communication rights (see Note 5). The $18.2 million minority interest
in income of consolidated subsidiaries in 1997 is related primarily to the 30
percent interest held by Williams Communications Solutions, LLC's minority
shareholder (see Note 2). The $17.4 million unfavorable change in other income
(expense) -- net in 1997 is due primarily to $9 million of costs associated with
Williams Holdings' sales of receivables program started in 1997, and the effects
of gains realized on the sale of corporate aircraft in 1996 and $5 million of
favorable accrual adjustments in 1996.
 
     The provision for income taxes on continuing operations decreased $16.6
million, or 10 percent. The effective income tax rate in 1997 is less than the
federal statutory rate due primarily to the effect of the non-taxable gain
recognized in 1997 (see Note 2) and income tax credits from coal-seam gas
production, partially offset by the effects of state income taxes. The effective
tax rate in 1996 is less than the federal statutory rate due primarily to income
tax credits from research activities and coal-seam gas production, partially
offset by the effects of state income taxes. In addition, the 1996 tax provision
includes recognition of favorable state income tax adjustments of $6 million.
 
     On September 10, 1996, Williams Holdings sold the net assets of the MAPCO
coal business to Alliance Coal Corporation for $236 million in cash. The sale
resulted in losses in 1997 and 1996 which are reported as discontinued
operations along with the operating results for 1996 (see Note 3).
 
     The 1997 extraordinary loss results from the early extinguishment of debt
(see Note 7).
 
FINANCIAL CONDITION AND LIQUIDITY
 
  MAPCO Acquisition
 
     On March 28, 1998, Williams (Williams Holdings' parent) completed the
acquisition of MAPCO Inc. by exchanging 1.665 shares of Williams common stock
for each outstanding share of MAPCO common stock. In addition, outstanding MAPCO
employee stock options were converted into 5.7 million shares of Williams common
stock. Upon completion, 98.8 million shares of Williams common stock were
issued. MAPCO was engaged in the NGL pipeline, petroleum refining and marketing,
and propane marketing businesses. Upon completion of the merger, Williams
transferred its interest in MAPCO to Williams Holdings, and MAPCO became part of
the Energy Services business unit.
 
     The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period financial information
presented includes the combined results of operations, financial condition and
liquidity of MAPCO and Williams Holdings.
 
                                       F-9
<PAGE>   35
 
  Liquidity
 
     Williams Holdings considers its liquidity to come from two sources:
internal liquidity, consisting of available cash investments, and external
liquidity, consisting of borrowing capacity from available bank-credit
facilities and its commercial paper program, which can be utilized without
limitation under existing loan covenants, as amended in January 1999. Williams
Holdings is a participant in Williams' $1 billion bank-credit facility and has
access to the entire $1 billion facility, subject to borrowing by other
affiliated companies. At December 31, 1998, Williams Holdings had access to $361
million of liquidity including $306 million available under the $1 billion
bank-credit facility. This compares with liquidity of $165 million at December
31, 1997, and $290 million at December 31, 1996.
 
     During 1998, Williams Holdings increased its commercial paper program to $1
billion from $650 million. The commercial paper program is backed by short-term
bank-credit facilities totaling $1 billion. At December 31, 1998, $903 million
of commercial paper was outstanding under the program. In January 1999, Williams
Holdings' commercial paper program was increased to $1.4 billion with the
short-term bank-credit facilities increased to the same amount.
 
     In addition, Williams Holdings and its subsidiaries had net amounts
receivable from Williams totaling $1 billion at December 31, 1998, excluding
parent company debentures with a face value of $360 million (see Note 4),
compared to $231 million at December 31, 1997, and $124 million at December 31,
1996. The increase in amounts receivable from Williams at December 31, 1998 from
December 31, 1997, reflects additional advances to the parent under Williams'
cash-management system, primarily due to proceeds from Williams Holdings'
commercial paper program, long-term debt issuances and proceeds from the sale of
limited partnership member interest.
 
     Williams Holdings believes its parent can meet its cash needs. Williams has
access to $738 million of liquidity at December 31, 1998 including $306 million
available under its $1 billion bank-credit facility previously discussed, as
compared to liquidity of $166 million and $630 million at December 31, 1997 and
1996, respectively. The lower liquidity level at December 31, 1997, reflected
the use of the $1 billion bank-credit facility to provide interim financing
related to a debt restructuring program. This restructuring program was
completed during the first quarter of 1998 and a significant portion of the $1
billion bank-credit facility was repaid with the proceeds from long-term
financings.
 
     At December 31, 1998, Williams Holdings has $595 million of shelf
availability remaining under registration statements filed with the Securities
and Exchange Commission. These registration statements may be used to issue a
variety of debt or equity securities. Interest rates and market conditions will
affect amounts borrowed, if any, under these arrangements. In addition, Williams
Holdings uses short-term uncommitted bank lines to manage liquidity. Williams
Holdings believes any additional financing arrangements can be obtained on
reasonable terms if required.
 
     On November 19, 1998, Williams Holdings announced that it intends to sell a
minority interest in its communications business. The initial equity offering is
expected to be filed in the second quarter of 1999 and yield proceeds of $500
million to $750 million. In addition, Williams Holdings expects Communications
to issue high-yield public debt of approximately $1.3 billion to $1.5 billion in
1999. On February 8, 1999, Williams Holdings announced that, simultaneously with
the public equity offering, SBC Communications plans to acquire up to a 10
percent interest in Williams Holdings' communications business for an investment
of up to $500 million. Proceeds from these transactions will be reinvested in
the continued construction of Williams Holdings' national fiber-optic network
and other expansion opportunities.
 
     During 1998, Williams Holdings entered into an agreement described as a
securitized asset lease program designed to fund up to $750 million of capital
expenditures for the fiber-optic network. A total of $463 million remains
available under this agreement. See Note 12 for additional information.
 
     Williams Holdings had a net working-capital deficit of $640 million at
December 31, 1998, compared with $352 million at December 31, 1997. The increase
in the working-capital deficit at December 31, 1998, as compared to prior
year-end is primarily a result of short-term borrowings under the commercial
paper program. Williams Holdings manages its borrowings to keep cash and cash
equivalents at a minimum and has
                                      F-10
<PAGE>   36
 
relied on bank-credit facilities to provide flexibility for its cash needs. As a
result, it historically has reported negative working capital.
 
     During 1999, Williams Holdings expects to finance capital expenditures,
investments and working-capital requirements through cash generated from
operations, Communications' initial equity and high-yield debt offerings, and
the use of the available portion of its $1 billion bank-credit facility and
asset lease program, commercial paper, short-term uncommitted bank lines,
private borrowings, advances from its parent or debt offerings.
 
  Operating Activities
 
     Cash provided by continuing operating activities was: 1998 -- $86 million;
1997 -- $560 million; and 1996 -- $390 million. Cash provided by operating
activities in 1997 includes $200 million of proceeds from the sale of
receivables program begun in 1997. Energy trading assets and liabilities
increased in 1998 due primarily to increased physical power trading activity.
 
  Financing Activities
 
     Net cash provided by financing activities was: 1998 -- $2.3 billion;
1997 -- $575 million; and 1996 -- $265 million. Long-term debt proceeds, net of
principal payments, were $567 million, $122 million and $573 million during
1998, 1997 and 1996, respectively. Notes payable proceeds, net of notes payable
payments, were $210 million and $542 million during 1998 and 1997, respectively.
Notes payable payments, net of notes payable proceeds, were $161 million during
1996. The increase in net new borrowings during 1998, 1997 and 1996 reflects
borrowings to fund capital expenditures, investments and acquisition of
businesses.
 
     Long-term debt, at December 31, 1998, was $2.9 billion, including $948
million in advances from affiliates, compared with $1.5 billion at December 31,
1997, and $1.4 billion at December 31, 1996. At December 31, 1997 and 1996, $162
million and $129 million, respectively, in current debt obligations were
classified as non-current obligations based on Williams Holdings' intent and
ability to refinance on a long-term basis. The 1998 increase in long-term debt
is due primarily to $425 million of public debt issued and $948 million of
advances from affiliates. The long-term debt to debt-plus-equity ratio was 42.6
percent at December 31, 1998 compared to 30.2 percent and 31.1 percent at
December 31, 1997 and 1996, respectively. If short-term notes payable and
long-term debt due within one year are included in the calculations, these
ratios would be 51.1 percent, 39.5 percent and 31.8 percent, respectively.
 
     Williams Holdings paid cash dividends to Williams of $14 million, $114
million and $148 million in 1998, 1997 and 1996, respectively, and received cash
capital contributions from Williams of $213 million, $10 million and $2 million
in 1998, 1997 and 1996, respectively.
 
     During 1998, Williams Holdings received proceeds of $200 million from the
sale of a limited partnership minority interest to an outside investor (see Note
13).
 
  Investing Activities
 
     Net cash used by investing activities was: 1998 -- $2.4 billion;
1997 -- $1.2 billion; and 1996 -- $590 million. Capital expenditures of Energy
Services, primarily to expand and modernize gathering and processing facilities
and refineries, were $701 million in 1998, $451 million in 1997, and $398
million in 1996. Capital expenditures of Communications were $304 million in
1998, $276 million in 1997, and $67 million in 1996. The 1998 and 1997
expenditures include the expansion of the fiber-optic network. Budgeted capital
expenditures and investments for all business units for 1999 are estimated to be
approximately $4.4 billion, including $2.2 billion for the fiber-optic network
expansion and expenditures to expand and modernize gathering and processing
facilities, refineries and other international investment activities. Capital
expenditures for 1999 and 2000 for the fiber-optic network are expected to total
$3.4 billion.
 
     During 1998, Williams Holdings made a $100 million advance and a $150
million investment in a telecommunications business in Brazil. In addition,
during 1998 Williams Holdings made an $85 million investment in a Texas refined
petroleum products pipeline joint venture.
                                      F-11
<PAGE>   37
 
     Subsequent to December 31, 1998, Williams Holdings exercised an option to
increase its investment in the Brazilian cellular phone venture. Negotiations
are currently underway, and the company could invest up to $265 million, which
is included in budgeted capital expenditures above, during the first quarter of
1999.
 
     On April 30, 1997, Williams Holdings and Northern Telecom (Nortel) combined
their customer-premise equipment sales and services operations into a limited
liability company, Williams Communications Solutions, LLC. In addition, Williams
Holdings paid $68 million to Nortel. See Note 2 for additional information.
During 1997, Williams Holdings also purchased a 20 percent interest in a foreign
telecommunications business for $65 million in cash and made a $59 million cash
investment in the 50 percent owned Discovery pipeline project. During 1996
Williams Holdings acquired various communications technology businesses totaling
$165 million in cash.
 
     During 1997, Williams Holdings received proceeds of $66 million from the
sale of interests in the West Panhandle field. During 1996, Williams Holdings
received proceeds of $236 million from the sale of its MAPCO coal operations
(see Note 3).
 
  Other Commitments
 
     During 1998, Energy Marketing & Trading entered into a 15-year contract
giving Williams Holdings the right to receive fuel conversion services for
purposes of generating electricity. This contract also gives Williams Holdings
the right to receive installed capacity as well as certain ancillary services.
Annual committed payments under the contract range from $140 million to $165
million, resulting in total committed payments of approximately $2.3 billion.
Williams Holdings' intent is to resell power generated as a result of this
service into markets in the western region of the United States. Williams
Holdings also intends to resell capacity and ancillary services into such
markets as the opportunities arise.
 
  Subsequent event
 
     On March 18, 1999, Williams' board of directors approved the merger of
Williams Holdings with Williams. Upon completion of the merger, which is
expected to be in the second or third quarter of 1999, Williams will assume all
liabilities and obligations of Williams Holdings.
 
NEW ACCOUNTING STANDARDS
 
     See Note 1 for the effects of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" and
Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts Involved
in Energy Trading and Risk Management Activities."
 
EFFECTS OF INFLATION
 
     Williams Holdings' cost increases in recent years have benefited from
relatively low inflation rates during that time. Approximately 62 percent of
Williams Holdings' property, plant and equipment was acquired or constructed
during the last seven years, a period of relatively low inflation. Within Energy
Services, operating costs are influenced to a greater extent by specific price
changes in oil and gas and related commodities than by changes in general
inflation. Crude, refined product and natural gas liquids prices are
particularly sensitive to OPEC production levels and/or the market perceptions
concerning the supply and demand balance in the near future. See Market Risk
Disclosures in Item 7a for additional information concerning the impact of
commodity price risk. The activities of Communications have historically not
been significantly affected by the effects of inflation.
 
ENVIRONMENTAL
 
     Williams Holdings is a participant in certain environmental activities in
various stages involving assessment studies, cleanup operations and/or remedial
processes. The sites are being monitored by Williams Holdings, other potentially
responsible parties, the U.S. Environmental Protection Agency (EPA), or other
 
                                      F-12
<PAGE>   38
 
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 $47 million, all of which is accrued at December 31, 1998.
Williams Holdings expects to seek recovery of approximately $14 million of
accrued costs from states in accordance with laws permitting reimbursement of
certain expenses associated with underground storage tank containment problems
and repairs. Williams Holdings will fund these costs from operations and/or
available bank-credit facilities. The actual costs incurred will depend on the
final amount, type and extent of contamination discovered at these sites, the
final cleanup standards mandated by the EPA or other governmental authorities,
and other factors.
 
YEAR 2000 COMPLIANCE
 
     Williams and its wholly-owned subsidiaries, which includes Williams
Holdings, initiated an enterprise-wide project in 1997 to address the year 2000
compliance issue for both traditional information technology areas and
non-traditional areas, including embedded technology which is prevalent
throughout the company. This project focuses on all technology hardware and
software, external interfaces with customers and suppliers, operations process
control, automation and instrumentation systems, and facility items. The phases
of the project are awareness, inventory and assessment, renovation and
replacement, testing and validation. The awareness and inventory/assessment
phases of this project as they relate to both traditional and non-traditional
information technology areas have been substantially completed. During the
inventory and assessment phase, all systems with possible year 2000 implications
were inventoried and classified into five categories: 1) highest, business
critical, 2) high, compliance necessary within a short period of time following
January 1, 2000, 3) medium, compliance necessary within 30 days from January 1,
2000, 4) low, compliance desirable but not required, and 5) unnecessary.
Categories 1 through 3 were designated as critical and are the major focus of
this project. Renovation/replacement and testing/validation of critical systems
is expected to be completed by June 30, 1999, except for replacement of certain
critical systems scheduled for completion by September 1, 1999. Some
non-critical systems may not be compliant by January 1, 2000.
 
     Testing and validation activities have begun and will continue throughout
the process. Year 2000 test labs are in place and operational. As expected, few
problems have been detected during testing for items believed to be compliant.
The following table indicates the project status for traditional information
technology and non-traditional areas by business unit. The tested category
indicates the percentage that has been fully tested or otherwise validated as
compliant. The untested category includes items that are believed to be
compliant but which have not yet been validated. The not compliant category
includes items which have been identified as not year 2000 compliant. The
unknown category includes items identified during the assessment phase which
require additional follow-up to determine whether they are compliant.
 
<TABLE>
<CAPTION>
                    BUSINESS UNIT                      TESTED   UNTESTED   NOT COMPLIANT   UNKNOWN
                    -------------                      ------   --------   -------------   -------
<S>                                                    <C>      <C>        <C>             <C>
Traditional Information Technology:
  Energy Services....................................    32%       49%          13%           6%
  Communications.....................................    32        47           21            0
  Corporate/Other....................................    71        21            7            1
Non-Traditional Information Technology:
  Energy Services....................................    32        63            2            3
  Communications.....................................    21        57           17            5
  Corporate/Other....................................    84        12            2            2
</TABLE>
 
     Williams Holdings initiated a formal communications process with other
companies in 1998 to determine the extent to which those companies are
addressing year 2000 compliance. In connection with this process, Williams
Holdings has sent approximately 10,000 letters and questionnaires to third
parties including customers, vendors and service providers. Additional
communications are being mailed during 1999. Williams Holdings is evaluating
responses as they are received or otherwise investigating the status of these
companies'
 
                                      F-13
<PAGE>   39
 
year 2000 compliance efforts. As of December 31, 1998, approximately 38 percent
of the companies contacted have responded and virtually all of these have
indicated that they are already compliant or will be compliant on a timely
basis. Where necessary, Williams Holdings will be working with key business
partners to reduce the risk of a break in service or supply and with
non-compliant companies to mitigate any material adverse effect on Williams
Holdings.
 
     Williams Holdings expects to utilize both internal resources and external
contractors to complete the year 2000 compliance project. Williams Holdings has
a core group of 106 people involved in this enterprise-wide project. This
includes 13 individuals responsible for coordinating, organizing, managing,
communicating, and monitoring the project and another 93 staff members
responsible for completing the project. Depending on which phase the project is
in and what area is being focused on at any given point in time, there can be up
to an additional 1,000 employees who are also contributing a portion of their
time to the completion of this project. The Communications business unit has
contracted with an external contractor at a cost of approximately $3 million to
assist in all phases and various areas of the project. Within Energy Services,
two external contractors are being utilized at a total cost of approximately $1
million.
 
     Several previously planned system implementations are scheduled for
completion on or before September 1, 1999, which will lessen possible year 2000
impacts. For example, a new year 2000 compliant payroll/human resources system,
was implemented January 1, 1999. It replaced multiple human resources
administration and payroll processing systems previously in place. The
Communications business unit has a major service information management system
implementation and other system implementations currently in process necessary
to integrate the operations of its many components acquired in past
acquisitions. These systems will address the year 2000 compliance issues in
certain areas. Within the Energy Services business unit, major applications had
been replaced or were being replaced by MAPCO prior to its acquisition by
Williams Holdings. Those applications have been incorporated into the
enterprise-wide project and remaining system replacements are proceeding on
schedule. In situations where planned system implementations will not be in
service timely, alternative steps are being taken to make existing systems
compliant.
 
     Although all critical systems over which Williams Holdings has control are
planned to be compliant and tested before the year 2000, Williams Holdings has
identified two areas that would equate to a most reasonably likely worst case
scenario. First is the possibility of service interruptions due to
non-compliance by third parties. For example, power failures along the
communications network or transportation systems would cause service
interruptions. This risk should be minimized by the enterprise-wide
communications effort and evaluation of third-party compliance plans. Another
area of risk for non-compliance is the delay of system replacements scheduled
for completion during 1999. The status of these systems is being closely
monitored to reduce the chance of delays in completion dates. It is not possible
to quantify the possible financial impact if this most reasonably likely worst
case scenario were to come to fruition.
 
     Initial contingency planning began during 1998; however, significant focus
on that phase of the project will take place in 1999. Guidelines for that
process were issued in January 1999 in the form of a formal business continuity
plan. Contingency plans are being developed for critical business processes,
critical business partners, suppliers and system replacements that experience
significant delays. These plans are expected to be defined by August 31, 1999
and implemented where appropriate.
 
     Costs incurred for new software and hardware purchases are being
capitalized and other costs are being expensed as incurred. Williams Holdings
currently estimates the total cost of the enterprise-wide project, including any
accelerated system replacements, to be approximately $42 million. Prior to 1998
and during the first quarter of 1998, Williams Holdings was conducting the
project awareness and inventory/assessment phases of the project and incurred
costs totaling $2 million. During the second quarter of 1998, $2 million was
spent on the renovation/replacement and testing/validation phases and completion
of the inventory/assessment phase. The third and fourth quarters of 1998 focused
on the renovation/replacement and testing/validation phases, and $7 million was
incurred. During the first-quarter 1999, renovation/replacement and
testing/validation will continue, contingency planning will begin and $11
million is expected to be spent. During the second quarter of 1999, the primary
focus is expected to shift to testing/validation and contingency planning, and
$10 million is expected to be spent. The third and fourth quarters of 1999 will
focus mainly on
 
                                      F-14
<PAGE>   40
 
contingency planning and final testing with $10 million expected to be spent. Of
the $11 million incurred to date, approximately $9 million has been expensed,
and approximately $2 million has been capitalized. Of the $31 million of future
costs necessary to complete the project within the schedule described,
approximately $28 million will be expensed and the remainder capitalized. This
estimate does not include Williams Holdings' potential share of year 2000 costs
that may be incurred by partnerships and joint ventures in which the company
participates but is not the operator. The costs of previously planned system
replacements are not considered to be year 2000 costs and are, therefore,
excluded from the amounts discussed above.
 
     The preceding discussion contains forward-looking statements including,
without limitation, statements relating to the company's plans, strategies,
objectives, expectations, intentions, and adequate resources, that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-looking statements
contained in the year 2000 update are based on certain assumptions which may
vary from actual results. Specifically, the dates on which the company believes
the year 2000 project will be completed and computer systems will be implemented
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third parties, the company cannot
ensure its ability to timely and cost effectively resolve problems associated
with the year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
 
ITEM 7A. MARKET RISK DISCLOSURES
 
INTEREST RATE RISK
 
  Affiliate Debentures
 
     Williams Holdings holds an investment in Williams convertible debentures
with a face value of $360 million, bearing interest at a fixed rate of 6 percent
and maturing in 2005 (see Note 4). The fair value of Williams Holdings'
investment is based on the prices of similar securities with similar terms and
credit ratings (see Note 15).
 
  Due From Parent
 
     Williams Holdings has interest rate risk exposure related to the advances
from and to Williams depending on the cash position of each subsidiary and/or
for other specified business requirements (see Notes 15 and 16). Amounts are
payable on demand, however, the net amount due from Williams at December 31,
1998, is classified as long-term as there is no expectation that Williams
Holdings and its subsidiaries will demand payment in the next year. Interest
rates for these advances vary with current market conditions. Accordingly fair
value is estimated to approximate historically recorded amounts.
 
  Debt
 
     Williams Holdings' interest rate risk exposure primarily results from its
debt portfolio which is influenced by short-term rates, primarily LIBOR-based
borrowings from commercial banks and the issuance of commercial paper, and
long-term U.S. Treasury rates. To mitigate the impact of fluctuations in
interest rates, Williams Holdings targets to maintain a significant portion of
its debt portfolio, including debt with Williams, in fixed rate debt. Williams
Holdings also utilizes interest-rate swaps to change the ratio of its fixed and
variable rate debt portfolio based on management's assessment of future interest
rates, volatility of the yield curve and Williams Holdings' ability to access
the capital markets in a timely manner. Williams Holdings periodically enters
into interest rate forward contracts to establish an effective borrowing rate
for anticipated
 
                                      F-15
<PAGE>   41
 
long-term debt issuances. The maturity of Williams Holdings' long-term debt
portfolio is influenced by the life of its operating assets.
 
     At December 31, 1998, the amount of Williams Holdings' fixed and variable
rate debt was at targeted levels. Williams Holdings has traditionally maintained
an investment grade credit rating as one aspect of managing its interest rate
risk. In order to fund its 1999 capital expenditure plan, Williams Holdings will
need to access various sources of liquidity, which will likely include
traditional borrowing and leasing markets, while its Telecommunications business
also anticipates accessing high yield debt markets and equity markets.
 
     The following table provides information as of December 31, 1998, about
Williams Holdings' external notes payable, long-term debt and interest-rate
swaps that are subject to interest rate risk. For notes payable and long-term
debt, the table presents principal cash flows and weighted-average interest
rates by expected maturity dates. For interest-rate swaps, the table presents
notional amounts and weighted-average interest rates by contractual maturity
dates. Notional amounts are used to calculate the contractual cash flows to be
exchanged under the interest-rate swaps.
 
<TABLE>
<CAPTION>
                                                                                        FAIR VALUE
                                                                                       DECEMBER 31,
                             1999    2000   2001   2002   2003   THEREAFTER   TOTAL        1998
                            ------   ----   ----   ----   ----   ----------   ------   ------------
                                                     (DOLLARS IN MILLIONS)
<S>                         <C>      <C>    <C>    <C>    <C>    <C>          <C>      <C>
Notes payable.............  $1,053   $ --   $ --   $ --   $ --     $   --     $1,053      $1,053
Interest rate.............     5.9%
Long-term debt, including
  current portion:
  Fixed rate..............  $   67   $ 97   $ 50   $129   $220     $  923     $1,486      $1,526
  Interest rate...........     7.0%   7.0%   7.0%   7.0%   7.0%       7.5%
  Variable rate...........  $   --   $ --   $ --   $550   $ --     $   --     $  550      $  550
  Interest rate(1)........
Interest rate swaps:
  Pay variable/ receive
     fixed................  $   --   $ --   $ --   $ --   $ --     $  250     $  250      $    4
  Pay rate(2).............
  Receive rate............     6.3%   6.3%   6.3%   6.3%   6.3%      6.3%
</TABLE>
 
---------------
 
(1) LIBOR plus .33 percent.
 
(2) LIBOR less 1.04 percent.
 
  Debt With Affiliates
 
     Williams Holdings has approximately $1 billion of long-term debt, including
the current portion, with other Williams subsidiaries at December 31, 1998,
bearing interest at a fixed rate of 5.57 percent and maturing in 2002. The fair
value of the debt approximates the carrying value (see Notes 15 and 16).
 
COMMODITY PRICE RISK
 
     Energy Marketing & Trading has trading operations that incur commodity
price risk as a consequence of providing price risk management services to
third-party customers. The trading operations have commodity price risk exposure
associated with the crude oil, natural gas, refined products, natural gas
liquids and electricity energy markets in the United States and the natural gas
markets in Canada. The trading operations enter into energy contracts which
include forward contracts, futures contracts, option contracts, swap agreements,
commodity inventories and short- and long-term purchase and sale commitments
which involve the physical delivery of an energy commodity. These energy
contracts are valued at fair value and unrealized gains and losses from changes
in fair value are recognized in income. The trading operations are subject to
risk from changes in energy commodity market prices, the portfolio position of
its financial instruments and physical commitments, the liquidity of the market
in which the contract is transacted, changes in interest rates and credit risk.
Energy Marketing & Trading manages market risk on a portfolio basis subject to
the parameters established in its trading policy. A Risk Control Group,
independent of the trading operations,
 
                                      F-16
<PAGE>   42
 
monitors compliance with the established trading policy and measures the risk
associated with the trading portfolio.
 
     Energy Marketing & Trading measures the market risk in its trading
portfolio on a daily basis utilizing a value at risk methodology to estimate the
potential one day loss from adverse changes in the fair value of its trading
operations. At December 31, 1998, the value at risk for the trading operations
was $8 million. Value at risk requires a number of key assumptions and is not
necessarily representative of actual losses in fair value that could be incurred
from the trading portfolio. Energy Marketing & Trading's value-at-risk model
includes all financial instruments and physical positions and commitments in its
trading portfolio and assumes that as a result of changes in commodity prices,
there is a 97.5 percent probability that the one day loss in the fair value of
the trading portfolio will not exceed the value at risk. The value-at-risk model
uses historical simulation to estimate hypothetical movements in future market
prices assuming normal market conditions based upon historical market prices.
Value-at-risk does not consider that changing our trading portfolio in response
to market conditions could affect market prices and could take longer to execute
than the one-day holding period assumed in the value-at-risk model.
 
FOREIGN CURRENCY RISK
 
     Williams Holdings has investments in companies whose operations are located
in foreign countries, of which $95 million are accounted for using the cost
method. Fair value for the cost-method investments is deemed to approximate
their carrying amount, because estimating cash flows by year is not practicable
given that the time frame for selling these investments is uncertain. Williams
Holdings' financial results could be affected if the investments incur a
permanent decline in value as a result of changes in foreign currency exchange
rates and the economic conditions in foreign countries. Williams Holdings
attempts to mitigate these risks by investing in different countries and
business segments. Approximately 69 percent of the cost-method investments are
in Asian countries and 27 percent in South American countries. Approximately 50
percent of the Asian investments and approximately 25 percent of the South
American investments are in countries whose currencies have recently suffered
significant devaluations and volatility. The ultimate duration and severity of
the conditions in Asia and South America remain uncertain as does the long-term
impact on Williams Holdings' investments.
 
                                      F-17
<PAGE>   43
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
<TABLE>
<CAPTION>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Report of Independent Auditors..............................   F-19
Consolidated Statement of Operations........................   F-20
Consolidated Balance Sheet..................................   F-21
Consolidated Statement of Stockholder's Equity..............   F-22
Consolidated Statement of Cash Flows........................   F-23
Notes to Consolidated Financial Statements..................   F-24
Quarterly Financial Data (Unaudited)........................   F-50
</TABLE>
 
                                      F-18
<PAGE>   44
 
                         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, 1998 and 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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 did not audit the financial
statements and schedules of MAPCO Inc., a wholly owned subsidiary (see Note 2),
which statements reflect total assets constituting 26% of the related
consolidated financial statement total for 1997, and which reflect net income
constituting approximately 33% and 30% of the related consolidated financial
statement totals for the years ended December 31, 1997 and 1996, respectively.
Those statements and schedules were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for MAPCO Inc. for those periods, is based solely on the report of the other
auditors.
 
     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 and the report of other auditors provide a reasonable
basis for our opinion.
 
     In our opinion, based on our audits and the report of other auditors, 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, based on our audits and the report of other
auditors, the financial statement schedule referred to above, 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 26, 1999,
except for Note 20, as to which the date is
March 18, 1999
 
                                      F-19
<PAGE>   45
 
                       WILLIAMS HOLDINGS OF DELAWARE, INC
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1998        1997*       1996*
                                                              ---------   ---------   ---------
                                                                         (MILLIONS)
<S>                                                           <C>         <C>         <C>
Revenues (Notes 16 and 19):
  Energy Services**.........................................  $ 5,520.0   $ 6,012.8   $ 5,432.7
  Communications (Note 2)...................................    1,768.2     1,465.1       710.1
  Other.....................................................       64.8        53.4        58.3
  Intercompany eliminations.................................   (1,410.4)   (1,011.0)   (1,043.9)
                                                              ---------   ---------   ---------
         Total revenues.....................................    5,942.6     6,520.3     5,157.2
                                                              ---------   ---------   ---------
Segment costs and expenses (Note 16):
  Costs and operating expenses**............................    4,754.6     5,381.2     4,240.6
  Selling, general and administrative expenses..............      865.0       587.6       351.1
  Other (income) expense -- net (Notes 2 and 5).............      133.1        41.6       (19.3)
                                                              ---------   ---------   ---------
         Total segment costs and expenses...................    5,752.7     6,010.4     4,572.4
                                                              ---------   ---------   ---------
General corporate expenses (Notes 2 and 16).................       58.8        70.4        49.9
                                                              ---------   ---------   ---------
Operating income (loss) (Notes 5 and 19):
  Energy Services (Note 2)..................................      379.4       555.3       575.3
  Communications (Note 2)...................................     (175.0)      (58.1)        5.0
  Other.....................................................      (14.5)       12.7         4.5
  General corporate expenses................................      (58.8)      (70.4)      (49.9)
                                                              ---------   ---------   ---------
         Total operating income.............................      131.1       439.5       534.9
Interest accrued (Note 16)..................................     (181.9)     (132.1)      (93.5)
Interest capitalized........................................       26.6        19.3         4.8
Investing income (Notes 4 and 16)...........................       40.9        44.5        39.3
Gain on sale of interest in subsidiary (Note 2).............         --        44.5          --
Gain on sales of assets (Note 5)............................         --        66.0        36.5
Minority interest in (income) loss of consolidated
  subsidiaries (Note 2).....................................       12.0       (18.2)       (1.4)
Other income (expense) -- net...............................      (24.1)       (8.4)        9.0
                                                              ---------   ---------   ---------
Income from continuing operations before extraordinary loss
  and income taxes..........................................        4.6       455.1       529.6
Provision for income taxes (Note 6).........................       14.9       154.1       170.7
                                                              ---------   ---------   ---------
Income (loss) from continuing operations before
  extraordinary loss........................................      (10.3)      301.0       358.9
Loss from discontinued operations (Note 3)..................      (14.3)       (6.3)      (32.7)
                                                              ---------   ---------   ---------
Income (loss) before extraordinary loss.....................      (24.6)      294.7       326.2
Extraordinary loss (Note 7).................................       (4.8)       (3.6)         --
                                                              ---------   ---------   ---------
Net income (loss)...........................................  $   (29.4)  $   291.1   $   326.2
                                                              =========   =========   =========
</TABLE>
 
---------------
 
 * Reclassified as described in Note 1.
 
** Includes consumer excise taxes of $192.9 million, $157.8 million and $155.9
   million in 1998, 1997 and 1996, respectively.
 
                            See accompanying notes.
                                      F-20
<PAGE>   46
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                           CONSOLIDATED BALANCE SHEET
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               ---------------------
      (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)            1998         1997
      -----------------------------------------------          ---------    --------
<S>                                                            <C>          <C>
Current assets:
  Cash and cash equivalents.................................   $   109.7    $   96.0
  Receivables:
    Trade less allowance of $29.8 ($20.7 in 1997) (Note
     1).....................................................     1,490.8     1,450.6
    Affiliates..............................................        14.0        43.8
  Due from parent (Note 16).................................           -        93.0
  Inventories (Note 9)......................................       384.2       315.6
  Energy trading assets.....................................       354.5       180.3
  Deferred income taxes -- affiliates (Note 6)..............        91.8        86.1
  Other.....................................................       150.2       113.9
                                                               ---------    --------
         Total current assets...............................     2,595.2     2,379.3
 
Due from parent (Note 16)...................................     1,066.2       181.3
Investments, partially in affiliates (Note 4)...............     1,738.0     1,175.9
Property, plant and equipment -- net (Note 10)..............     5,464.0     4,533.6
Goodwill and other intangible assets -- net (Note 1)........       583.6       600.6
Non-current energy trading assets...........................       185.8       141.4
Other assets and deferred charges...........................       217.8       122.4
                                                               ---------    --------
         Total assets.......................................   $11,850.6    $9,134.5
                                                               =========    ========
 
                        LIABILITIES AND STOCKHOLDER'S EQUITY
 
Current liabilities:
  Notes payable (Note 12)...................................   $ 1,052.7    $  701.0
  Accounts payable:
    Trade (Note 11).........................................     1,059.3     1,143.7
    Affiliates..............................................        51.0        69.2
  Accrued liabilities (Notes 1 and 11)......................       649.7       560.0
  Energy trading liabilities................................       290.1       182.0
  Long-term debt due within one year (Notes 12 and 16):
    Affiliates..............................................        65.4          --
    Other...................................................        67.0        75.7
                                                               ---------    --------
         Total current liabilities..........................     3,235.2     2,731.6
 
Long-term debt (Notes 12 and 16):
  Affiliates................................................       948.4          --
  Other.....................................................     1,968.6     1,525.5
Deferred income taxes -- affiliates (Note 6)................       880.5       807.8
Non-current energy trading liabilities......................       201.5       201.7
Other liabilities...........................................       319.6       197.6
Minority interest in consolidated subsidiaries (Notes 2 and
  13).......................................................       373.2       144.8
Contingent liabilities and commitments (Notes 10 and 17)
Stockholder's equity:
  Common stock, $1 par value, 1,000 shares authorized and
    outstanding.............................................          --          --
  Capital in excess of par value............................     2,038.1     1,664.8
  Retained earnings.........................................     1,568.8     1,616.6
  Accumulated other comprehensive income (Note 18)..........       316.7       244.1
                                                               ---------    --------
         Total stockholder's equity.........................     3,923.6     3,525.5
                                                               ---------    --------
         Total liabilities and stockholder's equity.........   $11,850.6    $9,134.5
                                                               =========    ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-21
<PAGE>   47
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
 
<TABLE>
<CAPTION>
                                                                                      ACCUMULATED
                                                             CAPITAL IN                  OTHER
                                                    COMMON   EXCESS OF    RETAINED   COMPREHENSIVE
                                                    STOCK    PAR VALUE    EARNINGS      INCOME        TOTAL
                                                    ------   ----------   --------   -------------   --------
                                                                           (MILLIONS)
<S>                                                 <C>      <C>          <C>        <C>             <C>
Balance, December 31, 1995........................  $ --      $1,533.1    $1,262.5      $ 53.4       $2,849.0
Comprehensive income:
  Net income -- 1996..............................    --            --       326.2          --          326.2
  Other comprehensive income (Note 18):
     Unrealized appreciation on marketable
       securities.................................    --            --          --        51.2           51.2
                                                                                                     --------
Total comprehensive income........................                                                      377.4
Dividends --
  Cash............................................    --            --      (147.6)         --         (147.6)
  Other...........................................    --            --         (.4)         --            (.4)
Contributions --
  Cash............................................    --           2.4          --          --            2.4
  Noncash.........................................    --          71.5          --          --           71.5
Other.............................................    --            .1          .3          --             .4
                                                      --      --------    --------      ------       --------
Balance, December 31, 1996........................    --       1,607.1     1,441.0       104.6        3,152.7
Comprehensive income:
  Net income -- 1997..............................    --            --       291.1          --          291.1
  Other comprehensive income (Note 18):
     Unrealized appreciation on marketable
       securities.................................    --            --          --       139.5          139.5
                                                                                                     --------
Total comprehensive income........................                                                      430.6
Dividends --
  Cash............................................    --            --      (114.0)         --         (114.0)
  Other...........................................    --            --        (2.2)         --           (2.2)
Contributions --
  Cash............................................    --          10.1          --          --           10.1
  Noncash.........................................    --          47.4          --          --           47.4
Other.............................................    --            .2          .7          --             .9
                                                      --      --------    --------      ------       --------
Balance, December 31, 1997........................    --       1,664.8     1,616.6       244.1        3,525.5
Comprehensive income:
  Net loss -- 1998................................    --            --       (29.4)         --          (29.4)
  Other comprehensive income (Note 18):
     Unrealized appreciation on marketable
       securities.................................    --            --          --        77.6           77.6
     Foreign currency translation adjustments.....    --            --          --        (5.0)          (5.0)
                                                                                                     --------
          Total other comprehensive income........                                                       72.6
                                                                                                     --------
Total comprehensive income........................                                                       43.2
Dividends --
  Cash............................................    --            --       (14.0)         --          (14.0)
  Other...........................................    --            --        (4.4)         --           (4.4)
Contributions --
  Cash............................................    --         212.7          --          --          212.7
  Noncash.........................................    --         160.6          --          --          160.6
                                                      --      --------    --------      ------       --------
Balance, December 31, 1998........................  $ --      $2,038.1    $1,568.8      $316.7       $3,923.6
                                                    ====      ========    ========      ======       ========
</TABLE>
 
                            See accompanying notes.
                                      F-22
<PAGE>   48
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              -------------------------------
                                                                1998        1997       1996
                                                              ---------   ---------   -------
                                                                        (MILLIONS)
<S>                                                           <C>         <C>         <C>
OPERATING ACTIVITIES:
  Net income (loss).........................................  $   (29.4)  $   291.1   $ 326.2
  Adjustments to reconcile to cash provided from operations:
    Discontinued operations.................................       14.3         6.3      32.7
    Extraordinary loss......................................        4.8         3.6        --
    Depreciation, depletion and amortization................      340.7       276.1     217.5
    Provision for deferred income taxes.....................       30.2        50.9     104.2
    Provision for loss on property and other assets.........       68.4        49.8        --
    (Gain) loss on dispositions of property and interest in
      subsidiary............................................        9.5      (107.0)    (65.7)
    Provision for uncollectible accounts....................       39.8        13.3       5.3
    Minority interest in income (loss) of consolidated
      subsidiaries..........................................      (12.0)       18.2       1.4
    Cash provided (used) by changes in assets and
      liabilities:
      Receivables sold......................................      (14.9)      200.0        --
      Receivables...........................................      (92.8)     (293.0)   (444.4)
      Inventories...........................................      (66.4)      (74.8)     (1.1)
      Other current assets..................................      (58.4)      (14.0)    (21.9)
      Accounts payable......................................     (155.0)      165.9     425.3
      Accrued liabilities...................................       66.5         7.5     (58.3)
      Receivables/payables with affiliates..................       23.5        44.7     (70.1)
    Changes in current energy trading assets and
      liabilities...........................................      (66.2)       11.0     (29.7)
    Changes in non-current energy trading assets and
      liabilities...........................................      (44.6)      (47.7)    (37.7)
    Other, including changes in non-current assets and
      liabilities...........................................       28.6       (41.5)      5.8
                                                              ---------   ---------   -------
         Net cash provided by continuing operations.........       86.6       560.4     389.5
         Net cash provided by discontinued operations.......         --          --      21.8
                                                              ---------   ---------   -------
         Net cash provided by operating activities..........       86.6       560.4     411.3
                                                              ---------   ---------   -------
FINANCING ACTIVITIES:
  Proceeds from notes payable...............................      501.9       858.7      60.0
  Payments of notes payable.................................     (292.0)     (316.3)   (221.3)
  Proceeds from long-term debt..............................    1,121.0       669.2     607.6
  Payments of long-term debt................................     (554.2)     (546.8)    (34.2)
  Dividends.................................................      (14.0)     (114.0)   (147.6)
  Capital contributions.....................................      212.7        10.1       2.4
  Proceeds from sale of limited partnership interest........      200.0          --        --
  Changes in advances from affiliates.......................    1,140.1          --        --
  Other -- net..............................................      (10.1)       13.9      (1.9)
                                                              ---------   ---------   -------
         Net cash provided by financing activities..........    2,305.4       574.8     265.0
                                                              ---------   ---------   -------
INVESTING ACTIVITIES:
  Property, plant and equipment:
    Capital expenditures....................................   (1,226.1)     (874.9)   (521.5)
    Proceeds from dispositions..............................       23.2        78.0      61.2
    Changes in accounts payable and accrued liabilities.....       88.4         (.6)      2.2
  Acquisition of businesses, net of cash acquired...........       (9.6)     (146.2)   (170.5)
  Proceeds from sales of businesses.........................         --          --     236.4
  Income tax and other payments related to discontinued
    operations..............................................      (12.0)      (12.6)   (270.5)
  Proceeds from sales of assets.............................       10.7        71.2      66.0
  Purchase of investments/advances to affiliates............     (466.6)     (200.7)    (97.4)
  Changes in advances to parent company.....................     (791.9)     (123.0)     95.4
  Other -- net..............................................        5.6        20.4       8.8
                                                              ---------   ---------   -------
         Net cash used by investing activities..............   (2,378.3)   (1,188.4)   (589.9)
                                                              ---------   ---------   -------
         Increase (decrease) in cash and cash equivalents...       13.7       (53.2)     86.4
Cash and cash equivalents at beginning of year..............       96.0       149.2      62.8
                                                              ---------   ---------   -------
Cash and cash equivalents at end of year....................  $   109.7   $    96.0   $ 149.2
                                                              =========   =========   =======
</TABLE>
 
                            See accompanying notes.
                                      F-23
<PAGE>   49
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Description of business
 
     Williams Holdings of Delaware, Inc. (Williams Holdings) is a wholly owned
subsidiary of The Williams Companies, Inc. (Williams). Operations of Williams
Holdings are located principally in the United States and are organized into two
industry groups: Energy Services and Communications.
 
     Energy Services includes four operating segments: Energy Marketing &
Trading, Exploration & Production, Midstream Gas & Liquids, and Petroleum
Services. Energy Marketing & Trading offers price-risk management services and
buys, sells and arranges for transportation/transmission of energy
commodities -- including natural gas and gas liquids, crude oil and refined
products, and electricity -- to local distribution companies and large
industrial and commercial customers in North America and retail propane
marketing in the upper midwest and southwest regions. Exploration & Production
includes hydrocarbon exploration and production activities in the Rocky Mountain
and Gulf Coast regions. Midstream Gas & Liquids is comprised of natural gas
gathering and processing facilities in the Rocky Mountain, midwest and Gulf
Coast regions, natural gas liquids pipelines in the Rocky Mountain, southwest,
midwest and Gulf Coast regions and an anhydrous ammonia pipeline in the midwest.
Petroleum Services includes petroleum refining and marketing in Alaska and the
southeast, a petroleum products pipeline and ethanol production and marketing
operations in the midwest region.
 
     Communications consists of three operating segments: Communications
Solutions, Network Applications, and Network Services. Communications Solutions
includes consulting, installation and maintenance of customer-premise voice,
data and video equipment and services for customers throughout North America.
Network Applications' operations are located principally in the United States
and include video, advertising distribution, and other multimedia transmission
services (via terrestrial and satellite links) for the broadcast industry as
well as business audio and video conferencing services. Network Services
provides fiber-optic construction, transmission and management services
throughout the United States.
 
  Basis of presentation
 
     Williams Holdings adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information," during the fourth quarter of 1998. SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
Prior year financial statements and notes were reclassified to conform to the
requirements of SFAS No. 131. (See Note 19 for segment disclosures.)
 
     Certain balance sheet and cash flow amounts for 1997 have been reclassified
to conform to current classifications.
 
     On March 28, 1998, Williams completed the acquisition of MAPCO Inc. (see
Note 2). Upon completion of the merger, Williams transferred its interest in
MAPCO to Williams Holdings, and MAPCO became part of the Energy Services
business unit. The transaction has been accounted for as a pooling of interests
and, accordingly, the consolidated financial statements and notes reflect the
results of operations, financial position and cash flows as if the companies had
been combined throughout the periods presented. The restated 1997 annual
financial statements were filed with the Securities and Exchange Commission in a
Form 8-K dated May 18, 1998. MAPCO was engaged in the natural gas liquids
pipeline, petroleum refining and marketing and propane marketing businesses.
Effective April 1, 1998, certain marketing activities of natural gas liquids
(previously reported in Midstream Gas & Liquids) and petroleum refining
(previously reported in Petroleum Services) were transferred to Energy Marketing
& Trading and combined with its energy risk trading operations. As a result,
revenues and segment profit amounts for 1997 and 1996 have been reclassified and
reported within Energy Marketing & Trading. These marketing activities are
reported through first-quarter 1998 on a "gross" basis in the Consolidated
Statement of Operations as revenues and segment costs within
 
                                      F-24
<PAGE>   50
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Energy Marketing & Trading. Concurrent with completing the combination of such
activities with the energy risk trading operations of Energy Marketing &
Trading, the related contract rights and obligations of certain of these
operations were recorded in the Consolidated Balance Sheet on a market-value
basis consistent with Energy Marketing & Trading's accounting policy, and the
statement of operations presentation relating to these operations was changed
effective April 1, 1998, on a prospective basis, to reflect these revenues net
of the related costs to purchase such items.
 
     On April 30, 1997, Williams Holdings and Northern Telecom (Nortel) combined
their customer-premise equipment sales and service operations into a limited
liability company, Williams Communications Solutions, LLC (LLC) (see Note 2).
Communications Solutions' revenues and segment profit amounts for 1997 include
the operating results of the LLC beginning May 1, 1997.
 
  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.
 
  Inventory valuation
 
     Inventories are stated at cost, which is not in excess of market, except
for certain assets held for energy trading activities by Energy Marketing &
Trading, which are primarily stated at fair value. The cost of inventories is
primarily determined using the average-cost method, except for certain crude
oil, refined products, and general merchandise inventories which are determined
using the last-in, first-out (LIFO) method.
 
  Investments
 
     Williams Holdings' investment in subordinated debentures of Williams is
classified as "available for sale" and is recorded at current market value with
unrealized gains and losses reported net of income taxes as a component of other
accumulated comprehensive income in stockholder's equity. Average cost is used
to determine realized gains and losses. Williams Holdings' investment in
Williams warrants is recorded at cost since the warrants are not traded on a
securities exchange. As such, the fair value of the warrants is not readily
determinable under generally accepted accounting principles, and Williams
Holdings has no current intention of exercising the warrants in the future.
 
  Property, plant and equipment
 
     Property, plant and equipment is recorded at cost. Depreciation is provided
primarily on the straight-line method over estimated useful lives. Gains or
losses from the ordinary sale or retirement of property, plant and
 
                                      F-25
<PAGE>   51
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
equipment for the regulated pipelines are credited or charged to accumulated
depreciation; other gains or losses are recorded in net income (loss).
 
  Goodwill and other intangible assets
 
     Goodwill, which represents the excess of cost over fair value of assets of
businesses acquired, is amortized on a straight-line basis over periods from 10
to 30 years. Other intangible assets are amortized on a straight-line basis over
periods from three to 11 years. Accumulated amortization at December 31, 1998
and 1997 was $128.9 million and $72.2 million, respectively. Amortization of
intangible assets was $49.7 million, $29.2 million and $15.2 million in 1998,
1997 and 1996, respectively.
 
  Revenue recognition
 
     Revenues generally are recorded when services have been performed or
products have been delivered. Communications Solutions primarily uses the
percentage-of-completion method of recognizing revenues for services provided.
At December 31, 1998 and 1997, costs in excess of billings, included in trade
receivables, were $185.9 million and $144.6 million, respectively, and billings
in excess of costs, included in accrued liabilities, were $49.4 million and
$48.1 million, respectively. Network Services records revenues related to the
sale of portions of its fiber-optic network upon completion of the construction
of the respective network segments and upon acceptance of the fiber by the
purchaser. Certain of Energy Marketing & Trading's activities are accounted for
at fair value as described in Energy Trading Activities.
 
  Energy trading activities
 
     Energy Marketing & Trading has trading operations that enter into energy
contracts to provide price-risk management services to its third-party
customers. Energy contracts include forward contracts, futures contracts, option
contracts, swap agreements, commodity inventories and short- and long-term
purchase and sale commitments which involve physical delivery of an energy
commodity. These energy contracts are valued at fair value and, with the
exception of commodity inventories, are recorded in energy trading assets and
energy trading liabilities in the Consolidated Balance Sheet. The net change in
the fair value representing unrealized gains and losses is recognized in income
currently and is recorded as revenues in the Consolidated Statement of
Operations. Fair value, which is subject to change in the near term, reflects
management's estimates using valuation techniques that reflect the best
information available in the circumstances. This information includes various
factors such as quoted market prices, estimates of market prices in the absence
of quoted market prices, contractual volumes, estimated volumes under option and
other arrangements that result in varying volumes, other contract terms,
liquidity of the market in which the contract is transacted, credit
considerations, time value and volatility factors underlying the positions.
Energy Marketing & Trading reports its trading operations' physical sales
transactions net of the related purchase costs, consistent with fair value
accounting for such trading activities.
 
     Williams Holdings also enters into energy derivative financial instruments
and derivative commodity instruments (primarily futures contracts, option
contracts and swap agreements) to hedge against market price fluctuations of
certain commodity inventories and sales and purchase commitments. Unrealized and
realized gains and losses on these hedge contracts are deferred and recognized
in income in the same manner as the hedged item. These contracts are initially
and regularly evaluated to determine that there is a high correlation between
changes in the fair value of the hedge contract and fair value of the hedged
item.
 
  Impairment of long-lived assets
 
     Williams Holdings evaluates the long-lived assets, including related
intangibles, of identifiable business activities for impairment when events or
changes in circumstances indicate, in management's judgment, that the carrying
value of such assets may not be recoverable. The determination of whether an
impairment has
                                      F-26
<PAGE>   52
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a provision
for loss if the carrying value is greater than fair value.
 
     For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
 
  Interest-rate derivatives
 
     Williams Holdings enters into interest-rate swap agreements to modify the
interest characteristics of its long-term debt. These agreements are designated
with all or a portion of the principal balance and term of specific debt
obligations. These agreements involve the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates without an exchange
of the notional amount upon which the payments are based. The difference to be
paid or received is accrued and recognized as an adjustment of interest expense.
Gains and losses from terminations of interest-rate swap agreements are deferred
and amortized as an adjustment of the interest expense on the outstanding debt
over the remaining original term of the terminated swap agreement. In the event
the designated debt is extinguished, gains and losses from terminations of
interest-rate swap agreements are recognized in income.
 
     Williams Holdings enters into interest-rate forward contracts to lock in
underlying treasury rates on anticipated long-term debt issuances. The
settlement amounts upon termination of the contracts are deferred and amortized
as an adjustment to interest expense of the issued long-term debt over the term
of the referenced security underlying the settled forward contract.
 
  Capitalization of interest
 
     Williams Holdings capitalizes interest on major projects during
construction. Interest is capitalized on borrowed funds at rates that
approximate the average interest rate on related debt.
 
  Income taxes
 
     The operations of Williams Holdings and its subsidiaries, except for MAPCO
Inc., are included in Williams' consolidated federal income tax return. MAPCO
filed a separate consolidated federal income tax return during the period prior
to the merger. Subsequent to the date of the merger, MAPCO's operations will be
included in Williams' consolidated federal income tax return.
 
     The provision for income taxes is computed on a separate-company basis for
Williams Holdings. Prior to the merger, income taxes were computed separately
for the Williams Holdings and MAPCO consolidated groups and then combined.
Williams Holdings makes payments to Williams under the same timing and minimum
amount requirements as if the payments are being made directly to the taxing
authorities. Deferred income taxes are computed using the liability method and
are provided on all temporary differences between the financial basis and the
tax basis of Williams Holdings' assets and liabilities.
 
  Related party transactions
 
     Williams charges its subsidiaries, including Williams Holdings and its
subsidiaries, for certain corporate general and administrative expenses which
are directly identifiable or allocable to the subsidiaries and other general
corporate expenses utilizing a combination of revenues, property at cost and
payroll for the allocation base. Williams Holdings, as a separate corporate
entity, does not receive such an allocation because it has no revenues, property
or employees. Management believes that the method used for these allocations is
reasonable.
                                      F-27
<PAGE>   53
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  New accounting standards
 
     The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. This standard requires that all
derivatives be recognized as assets or liabilities in the balance sheet and that
those instruments be measured at fair value. The effect of this standard on
Williams Holdings' results of operations and financial position will be
evaluated in 1999.
 
     The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," effective
for fiscal years beginning after December 15, 1998. The SOP requires that all
start-up costs be expensed and that the effect of adopting the SOP be reported
as the cumulative effect of a change in accounting principle. Williams Holdings
will adopt this SOP effective January 1, 1999. The effect of adopting the SOP on
Williams Holdings' results of operations and financial position is not expected
to be material.
 
     The Emerging Issues Task Force (EITF) reached a consensus on Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," which is effective for fiscal years beginning after December 15,
1998. The effect of initially applying the Consensus must be reported as a
cumulative effect of a change in accounting principle, and financial statements
for periods prior to initial application of the Consensus may not be restated.
The EITF concluded that energy trading contracts should be recorded at fair
value in the balance sheet, with changes in fair value included in earnings.
Energy Marketing & Trading records its energy contracts at estimated fair value,
except for certain types of contracts that are not currently considered to be
trading in nature. The effect of the Consensus on Williams Holdings' results of
operations and financial position has yet to be determined.
 
NOTE 2. ACQUISITIONS
 
  MAPCO
 
     On March 28, 1998, Williams completed the acquisition of MAPCO Inc. by
exchanging 1.665 shares of Williams common stock for each outstanding share of
MAPCO common stock. In addition, outstanding MAPCO employee stock options were
converted into 5.7 million shares of Williams common stock. Upon completion,
98.8 million shares of Williams common stock valued at $3.1 billion, based on
the closing price of Williams common stock on March 27, 1998, were issued. Upon
completion of the merger, Williams transferred its interest in MAPCO to Williams
Holdings, and MAPCO became part of the Energy Services business unit.
 
     The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period consolidated financial
statements presented include the combined results of operations, financial
position and cash flows of MAPCO and Williams Holdings. Intercompany
transactions between Williams Holdings and MAPCO prior to the merger have been
eliminated, and no material adjustments were necessary to conform MAPCO's
accounting policies.
 
     In connection with the merger, Williams Holdings has recognized
approximately $72 million in merger-related costs in 1998, comprised primarily
of outside professional fees and early retirement and severance costs.
Approximately $51 million of these merger-related costs is included in other
(income) expense-net as a component of segment profit within Energy Services for
1998 (see Note 19), and approximately $21 million, unrelated to segments, is
included in general corporate expenses. During 1997, payments of $32.6 million
were made for non-compete agreements. These costs are being amortized over one
to three years from the merger completion date.
 
                                      F-28
<PAGE>   54
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The results of operations for the separate companies prior to the merger
date and the combined amounts included in the Consolidated Statement of
Operations follow:
 
<TABLE>
<CAPTION>
                                                                                  YEARS ENDED
                                                                                  DECEMBER 31,
                                                       THREE MONTHS ENDED    ----------------------
                                                         MARCH 31, 1998         1997         1996
                                                       ------------------    ----------    --------
                                                                        (MILLIONS)
<S>                                                    <C>                   <C>           <C>
Revenues:
  Williams Holdings..................................       $  681.0          $2,688.3     $1,845.5
  MAPCO..............................................          823.8           3,847.5      3,353.1
  Intercompany eliminations..........................           (1.3)            (15.5)       (41.4)
                                                            --------          --------     --------
          Combined...................................       $1,503.5          $6,520.3     $5,157.2
                                                            ========          ========     ========
Net income (loss):
  Williams Holdings..................................       $   (2.7)         $  194.2     $  228.7
  MAPCO..............................................            8.4              96.9         97.5
                                                            --------          --------     --------
          Combined...................................       $    5.7          $  291.1     $  326.2
                                                            ========          ========     ========
</TABLE>
 
  Nortel
 
     On April 30, 1997, Williams Holdings and Nortel combined their
customer-premise equipment sales and service operations into a limited liability
company, Williams Communications Solutions, LLC. In addition, Williams Holdings
paid $68 million to Nortel. Williams Holdings has accounted for its 70 percent
interest in the operations that Nortel contributed to the LLC as a purchase
business combination and, beginning May 1, 1997, has included the results of
operations of the acquired company in Williams Holdings' Consolidated Statement
of Operations. Accordingly, the acquired assets and liabilities, including $168
million in accounts receivable, $68 million in accounts payable and accrued
liabilities and $150 million in debt obligations, were recorded based on an
allocation of the purchase price, with substantially all of the cost in excess
of historical carrying values allocated to goodwill.
 
     Williams Holdings recorded the 30 percent reduction in its operations
contributed to the LLC as a sale to the minority shareholder of the LLC.
Williams Holdings recognized a gain of $44.5 million based on the excess of the
fair value over the net book value (approximately $71 million) of its operations
conveyed to the LLC minority interest. Income taxes were not provided on the
gain, because the transaction did not affect the difference between the
financial and tax bases of identifiable assets and liabilities.
 
     If the transaction occurred on January 1, 1996, Williams Holdings'
unaudited pro forma revenues for the years ended 1997 and 1996 would have been
$6,768 million and $5,894 million, respectively. The pro forma effect of the
transaction on Williams Holdings' net income (loss) is not significant. Pro
forma financial information is not necessarily indicative of results of
operations that would have occurred if the transaction had occurred on January
1, 1996, or of future results of operations of the combined companies.
 
NOTE 3. DISCONTINUED OPERATIONS
 
     On September 10, 1996, substantially all of the net assets of the MAPCO
coal business were sold to Alliance Coal Corporation, a corporation formed by
The Beacon Group Energy Investment Fund, L.P. ("Beacon"), for $236 million in
cash. The sale resulted in losses of $14.3 million, $6.3 million and $47.2
million in 1998, 1997 and 1996, respectively (net of income tax benefits of $7.4
million, $.7 million and $30 million, respectively). The losses in 1998 and 1997
include cost accruals for contractual obligations related to financial
performance of the assets sold to Beacon and a 1997 income tax adjustment to the
1996 loss amount.
 
                                      F-29
<PAGE>   55
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 4. INVESTING ACTIVITIES
 
     Investments at December 31, 1998 and 1997, are as follows:
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
                                                                  (MILLIONS)
<S>                                                           <C>        <C>
Williams convertible debentures.............................  $  855.8   $  770.7
Williams warrants...........................................      25.4       25.4
Equity:
  Brazilian Telecommunications:
     Algar Telecom Leste, S.A. -- 30%.......................     142.7         --
     Lightel -- S.A. Tecnologia da Informacao -- 20%........      68.7       68.5
  Longhorn Partners Pipeline, L.P. -- 48%...................      90.0        5.0
  Discovery Pipeline -- 50%.................................      78.0       59.3
Other.......................................................     138.7      115.9
                                                              --------   --------
                                                                 518.1      248.7
Cost........................................................     156.7      112.3
Advances to affiliates and other............................     182.0       18.8
                                                              --------   --------
                                                              $1,738.0   $1,175.9
                                                              ========   ========
</TABLE>
 
     Williams convertible debentures, with a face value of $360 million, bear
interest at 6 percent, mature in 2005 and are convertible at any time into
approximately 28 million shares of Williams common stock at $12.86 per share.
The warrants give Williams Holdings the right to purchase approximately 22.6
million shares of Williams common stock at $15.56 per share. The warrants are
exercisable immediately and mature in 2000.
 
     Earnings related to equity investments are included in revenues (see Note
19).
 
     Summarized unaudited financial position and results of operations of
Williams Holdings' equity-basis affiliates are as follows:
 
<TABLE>
<CAPTION>
                                                                     1998
                                                                  ----------
                                                                  (MILLIONS)
  <S>                                                             <C>
  Current assets..............................................     $  202.0
  Non-current assets..........................................      4,938.6
  Current liabilities.........................................      1,030.8
  Non-current liabilities.....................................      2,546.7
 
  Revenues....................................................        347.0
  Costs and operating expenses................................        164.6
  Net income..................................................         70.1
</TABLE>
 
     The non-current assets consist primarily of communication and interstate
natural gas pipeline assets.
 
     Dividends and distributions received from investments carried on an equity
basis were $12 million in 1998 and $7 million in both 1997 and 1996.
 
     At December 31, 1998, certain equity investments, with a carrying value of
$45 million, have a market value of $100 million.
 
     Investing income for all of the years presented is comprised primarily of
interest income.
 
                                      F-30
<PAGE>   56
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5. ASSET SALES, WRITE-OFFS AND OTHER ACCRUALS
 
     Included in the 1998 segment profit for all of the respective business
units and general corporate expenses are accruals totaling approximately $23
million related to the modification of Williams' employee benefit program
associated with vesting of paid time off.
 
     Included in the 1998 other (income) expense-net and segment profit for
Energy Marketing & Trading are asset impairments totaling approximately $14
million related to the decision to focus its retail natural gas and electric
business from sales to small commercial and residential customers to large end
users. The impairment primarily reflects the reduction in value of a software
system and certain intangible assets associated specifically with retail energy
applications that will no longer be utilized by Energy Marketing & Trading and
for which management estimates the fair value to be insignificant.
 
     Included in the 1998 other (income) expense-net and segment profit for
Petroleum Services is a $15.5 million loss provision, including interest, for
potential refunds to customers from a recent order from the Federal Energy
Regulatory Commission (see Note 17 for additional information).
 
     Included in the 1998 other (income) expense-net in segment costs and
expenses and Network Applications' segment loss is a $23.2 million loss related
to a venture involved in the technology and transmission of business information
for news and educational purposes. The loss occurred as a result of Williams
Holdings' re-evaluation and decision to exit the venture as Williams Holdings
decided against making further investments in the venture. The loss was recorded
in the third quarter, and Williams Holdings abandoned the venture during the
fourth quarter. The loss primarily consists of $17 million from impairing the
total carrying amount of the investment and $5 million from recognition of
contractual obligations that will continue after the abandonment. During the
fourth quarter of 1998, $2 million of contractual obligations was paid. Williams
Holdings' share of losses from the venture was $3.7 million in 1998 and $2.3
million in 1997.
 
     Included in the 1997 other (income) expense-net in segment costs and
expenses and Network Applications' segment loss are impairments and other
charges totaling $49.8 million. In the fourth quarter of 1997, Communications
made the decision and committed to a plan to sell the learning content business,
which resulted in a loss of $28 million. The loss consisted of a $21 million
impairment of the assets to fair value less cost to sell and recognition of $7
million in exit costs primarily consisting of employee-related costs and
contractual obligations. Fair value was based on management's estimate of the
expected net proceeds to be received. During 1998, the learning content business
was sold with a resulting $2 million reduction in 1998 expenses. During 1998, $5
million of exit costs was paid. The results of operations and the effect of
suspending amortization for the learning content business included in
consolidated net income (loss) are not significant for any of the periods
presented.
 
     Additionally in the fourth quarter of 1997, Communications' management
evaluated certain Network Applications' business activities because of
indications that their carrying values may not be recoverable. This resulted in
impairments of $17 million, based upon management's estimate as to the ultimate
recovery of these evaluated activities.
 
     In 1997, Williams Holdings sold its interest in the natural gas liquids and
condensate reserves in the West Panhandle field of Texas for $66 million in
cash. The sale resulted in a $66 million pre-tax gain on the transaction because
the related reserves had no book value.
 
     In 1996, Williams Holdings recognized a pre-tax gain of $15.7 million from
the sale of certain communication rights for approximately $38 million.
 
     Also in 1996, Williams Holdings sold its Iowa propane and liquid fertilizer
assets as well as its remaining liquid fertilizer assets in Arkansas, Illinois,
Indiana, Minnesota, Ohio and Wisconsin for $43 million in cash, resulting in a
pre-tax gain of $20.8 million.
 
                                      F-31
<PAGE>   57
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 6.  PROVISION FOR INCOME TAXES
 
     The provision (credit) for income taxes from continuing operations
includes:
 
<TABLE>
<CAPTION>
                                                              1998     1997     1996
                                                             ------   ------   ------
                                                                    (MILLIONS)
<S>                                                          <C>      <C>      <C>
Current:
  Federal..................................................  $(13.4)  $ 88.3   $ 66.3
  State....................................................    (6.5)    12.6       .2
  Foreign..................................................     4.6      2.3       --
                                                             ------   ------   ------
                                                              (15.3)   103.2     66.5
                                                             ------   ------   ------
Deferred:
  Federal..................................................    20.5     41.7    100.4
  State....................................................     9.7      9.2      3.8
                                                             ------   ------   ------
                                                               30.2     50.9    104.2
                                                             ------   ------   ------
Total provision............................................  $ 14.9   $154.1   $170.7
                                                             ======   ======   ======
</TABLE>
 
     Reconciliations from the provision for income taxes from continuing
operations at the federal statutory rate to the provision for income taxes are
as follows:
 
<TABLE>
<CAPTION>
                                                              1998     1997     1996
                                                              -----   ------   ------
                                                                    (MILLIONS)
<S>                                                           <C>     <C>      <C>
Provision at federal statutory rate.........................  $ 1.6   $159.2   $185.3
Increases (reductions) in taxes resulting from:
  State income taxes (net of federal benefit)...............    2.1     15.2      4.5
  Income tax credits........................................   (4.0)   (16.5)   (19.0)
  Non-taxable gain from sale of interest in subsidiary (Note
     2).....................................................     --    (15.6)      --
  Non-deductible costs, including goodwill amortization.....    9.8      6.9      2.6
  Other -- net..............................................    5.4      4.9     (2.7)
                                                              -----   ------   ------
Provision for income taxes..................................  $14.9   $154.1   $170.7
                                                              =====   ======   ======
</TABLE>
 
     Significant components of deferred tax liabilities and assets as of
December 31 are as follows:
 
<TABLE>
<CAPTION>
                                                                1998      1997*
                                                              --------   --------
                                                                  (MILLIONS)
<S>                                                           <C>        <C>
Deferred tax liabilities:
  Property, plant and equipment.............................  $  902.3   $  849.7
  Other.....................................................     252.6      197.1
                                                              --------   --------
          Total deferred tax liabilities....................   1,154.9    1,046.8
                                                              --------   --------
Deferred tax assets:
  Accrued liabilities.......................................      95.4       54.4
  Minimum tax credits.......................................     192.7      134.2
  Other.....................................................      78.1      136.5
                                                              --------   --------
          Total deferred tax assets.........................     366.2      325.1
                                                              --------   --------
Net deferred tax liabilities................................  $  788.7   $  721.7
                                                              ========   ========
</TABLE>
 
---------------
 
* Reclassified to conform to current classification.
 
                                      F-32
<PAGE>   58
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Cash refunds for income taxes (net of payments) from Williams and certain
federal and state taxing authorities were $3 million in 1998. Cash payments for
income taxes (net of refunds) to Williams and certain federal and state taxing
authorities were $108 million and $371 million in 1997 and 1996, respectively.
 
NOTE 7.  EXTRAORDINARY LOSS
 
     During 1998, Williams Holdings paid $54.4 million to redeem higher interest
rate debt for a $4.8 million net loss (net of a $2.6 million benefit for income
taxes).
 
     During 1997, Williams Pipe Line, a subsidiary of Williams Holdings, paid
approximately $55 million to redeem $50 million of debt with a stated interest
rate of 9.78 percent, resulting in a loss of $3.6 million (net of a $2.4 million
benefit for income taxes).
 
NOTE 8.  EMPLOYEE BENEFIT PLANS
 
     Substantially all of Williams Holdings' employees are covered by
non-contributory defined-benefit pension plans. Williams Pipe Line and Pekin
Energy, subsidiaries of Williams Holdings, have separate plans for their union
employees. At December 31, 1997 and 1996, MAPCO had separate plans covering
substantially all of its employees including certain employees of the coal
business sold in 1996 (see Note 3). During 1998, one of the MAPCO plans merged
into a Williams plan, and the other plan transferred to Williams. Effective
August 1, 1997, separate plans were established for the Williams Communications
Solutions, LLC union employees and the Williams Communications Solutions, LLC
salaried employees (LLC plans). Substantially all of the remaining Williams
Holdings' employees are covered by Williams' non-contributory defined-benefit
pension plans in which Williams Holdings is included. Williams Holdings is also
included in Williams' health care plan that provides postretirement medical
benefits to certain retired employees. Contributions for pension and
postretirement medical benefits related to Williams Holdings' participation in
the Williams plans were $10 million in 1998, $3 million in 1997, and $29 million
in 1996. The change in contributions from year to year is due to a change in the
rate of pension contributions during the periods. Contributions in excess of the
minimum funding requirements were made in 1996, and the resulting credit
balances were used to reduce the required pension contributions in 1997.
 
                                      F-33
<PAGE>   59
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table presents the changes in benefit obligations and plan
assets for pension benefits for the MAPCO, Williams Pipe Line, Pekin Energy, and
LLC plans for the years indicated. It also presents a reconciliation of the
funded status of these benefits to the amount recognized in the Consolidated
Balance Sheet at December 31 of each year indicated.
 
<TABLE>
<CAPTION>
                                                              PENSION BENEFITS
                                                              -----------------
                                                               1998       1997
                                                              -------    ------
                                                                 (MILLIONS)
<S>                                                           <C>        <C>
Change in benefit obligation:
  Benefit obligation at beginning of year...................  $ 277.0    $203.3
  Service cost..............................................      6.8       6.5
  Interest cost.............................................      8.1      16.4
  Amendments................................................       --        .2
  Acquisition...............................................       --      38.7
  Actuarial loss............................................       .1      21.9
  Benefits paid.............................................     (7.8)    (10.0)
  Transfer..................................................   (208.1)       --
                                                              -------    ------
Benefit obligation at end of year...........................     76.1     277.0
                                                              -------    ------
Change in plan assets:
  Fair value of plan assets at beginning of year............    305.9     230.0
  Actual return on plan assets..............................     33.9      42.0
  Acquisition...............................................       .1      43.9
  Employer contributions....................................     23.8        --
  Benefits paid.............................................     (7.8)    (10.0)
  Transfer..................................................   (282.6)       --
                                                              -------    ------
Fair value of plan assets at end of year....................     73.3     305.9
                                                              -------    ------
Funded status...............................................     (2.8)     28.9
Unrecognized net actuarial loss.............................      7.1        .3
Unrecognized prior service cost (credit)....................      (.5)       .4
Unrecognized transition asset...............................      (.4)      (.5)
                                                              -------    ------
Prepaid benefit cost........................................  $   3.4    $ 29.1
                                                              =======    ======
Prepaid benefit cost........................................  $   5.6    $ 30.6
Accrued benefit cost........................................     (2.2)     (1.5)
                                                              -------    ------
                                                              $   3.4    $ 29.1
                                                              =======    ======
</TABLE>
 
     Net pension expense for the MAPCO, Williams Pipe Line, Pekin Energy, and
LLC plans consists of the following:
 
<TABLE>
<CAPTION>
                                                                 PENSION BENEFITS
                                                             ------------------------
                                                              1998     1997     1996
                                                             ------   ------   ------
                                                                    (MILLIONS)
<S>                                                          <C>      <C>      <C>
Components of net periodic pension expense:
  Service cost.............................................  $  6.8   $  6.5   $  7.0
  Interest cost............................................     8.1     16.4     14.1
  Expected return on plan assets...........................   (11.6)   (21.8)   (18.6)
  Amortization of transition asset.........................     (.1)     (.1)    (3.7)
  Amortization of prior service cost (credit)..............     (.2)      .3       .5
  Recognized net actuarial loss............................      --       .3       .7
                                                             ------   ------   ------
Net periodic pension expense...............................  $  3.0   $  1.6   $   --
                                                             ======   ======   ======
</TABLE>
 
                                      F-34
<PAGE>   60
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following are the weighted-average assumptions utilized as of December
31 of the year indicated.
 
<TABLE>
<CAPTION>
                                                              PENSION BENEFITS
                                                              ----------------
                                                              1998       1997
                                                              -----      -----
<S>                                                           <C>        <C>
Discount rate...............................................   7.0%       7.1%
Expected return on plan assets..............................    10         10
Rate of compensation increase...............................     5          5
</TABLE>
 
     Williams maintains various defined-contribution plans in which Williams
Holdings is included. Williams Holdings' costs related to these plans were $29
million in 1998, $21 million in 1997 and $15 million in 1996.
 
NOTE 9. INVENTORIES
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              ------   ------
                                                                (MILLIONS)
<S>                                                           <C>      <C>
Raw materials:
  Crude oil.................................................  $ 43.2   $ 30.5
  Other.....................................................     2.0      5.2
                                                              ------   ------
                                                                45.2     35.7
                                                              ------   ------
Finished goods:
  Refined products..........................................   104.1    122.3
  Natural gas liquids.......................................    58.6     43.8
  General merchandise and communications equipment..........    99.1     90.0
                                                              ------   ------
                                                               261.8    256.1
                                                              ------   ------
Materials and supplies......................................    29.8     19.0
Natural gas in underground storage..........................    46.1      3.0
Other.......................................................     1.3      1.8
                                                              ------   ------
                                                              $384.2   $315.6
                                                              ======   ======
</TABLE>
 
     As of December 31, 1998 and 1997, approximately 37 percent and 23 percent
of inventories, respectively, were stated at market. As of December 31, 1998 and
1997, approximately 16 percent and 26 percent of inventories, respectively, were
determined using the last-in, first-out (LIFO) method. The remaining inventories
were primarily determined using the average-cost method.
 
     If inventories valued on the LIFO method at December 31, 1998 and 1997,
were valued at current average cost, the amounts would increase by approximately
$14 million and $7 million, respectively.
 
     During 1998, lower of cost or market reductions of approximately $10
million were recognized with respect to certain crude oil and refined products
inventories.
 
                                      F-35
<PAGE>   61
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 10. PROPERTY, PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              ---------   ---------
                                                                   (MILLIONS)
<S>                                                           <C>         <C>
Cost:
  Energy Services:
     Energy Marketing & Trading.............................  $   434.0   $   345.2
     Exploration & Production...............................      368.3       318.5
     Midstream Gas & Liquids................................    3,165.2     2,899.0
     Petroleum Services.....................................    2,114.7     1,826.7
  Communications:
     Communications Solutions...............................      161.2       121.1
     Network Applications...................................      203.6       178.2
     Network Services.......................................      541.2       235.7
  Other.....................................................      417.1       299.5
                                                              ---------   ---------
                                                                7,405.3     6,223.9
Accumulated depreciation and depletion......................   (1,941.3)   (1,690.3)
                                                              ---------   ---------
                                                              $ 5,464.0   $ 4,533.6
                                                              =========   =========
</TABLE>
 
     Commitments for construction and acquisition of property, plant and
equipment are approximately $1.3 billion at December 31, 1998. Included in this
amount is $316 million for the purchase of wireless network capacity.
 
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
$100 million at December 31, 1998, and $69 million at December 31, 1997.
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              ------   ------
                                                                (MILLIONS)
<S>                                                           <C>      <C>
Accrued liabilities:
  Employee costs............................................  $121.9   $ 84.6
  Deferred revenue..........................................    85.7     61.7
  Taxes other than income taxes.............................    81.4     66.4
  Income taxes payable......................................    28.8     46.1
  Other.....................................................   331.9    301.2
                                                              ------   ------
                                                              $649.7   $560.0
                                                              ======   ======
</TABLE>
 
     Income taxes payable include $24.8 million and $44.7 million payable to
Williams at December 31, 1998 and 1997, respectively.
 
                                      F-36
<PAGE>   62
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 12. DEBT, LEASES AND BANKING ARRANGEMENTS
 
  Notes payable
 
     During 1998, Williams Holdings' commercial paper program was increased to
$1 billion. At December 31, 1998 and 1997, $903 million and $645 million,
respectively, of commercial paper was outstanding under the program. In January
1999, the commercial paper program was increased to $1.4 billion. In addition,
Williams Holdings has entered into various other short-term credit agreements
with amounts outstanding totaling $150 million and $56 million at December 31,
1998 and 1997, respectively. The weighted-average interest rate on the
outstanding short-term borrowings at December 31, 1998 and 1997, was 5.92
percent and 6.51 percent, respectively.
 
  Debt
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                              INTEREST   -------------------
                                                               RATE*       1998       1997
                                                              --------   --------   --------
                                                                             (MILLIONS)
<S>                                                           <C>        <C>        <C>
Williams Holdings of Delaware, Inc.
  Revolving credit loans....................................    5.7%     $  550.0   $  200.0
  Debentures, 6.25% and 7.7%, payable 2006 and 2027.........    5.6         351.9      351.8
  Notes, 6.013% -- 8.87%, payable through 2022..............    7.1         960.1      572.3
MAPCO Inc.
  Commercial paper and bank money market lines..............     --            --      135.8
MAPCO Natural Gas Liquids, Inc.
  Notes, 6.67% -- 8.95%, payable through 2022...............    7.8         165.0      165.0
Williams Communications Solutions, LLC
  Revolving credit loans....................................     --            --      125.0
Other, payable through 2005.................................    8.3           8.6       51.3
                                                                         --------   --------
                                                                          2,035.6    1,601.2
Current portion of long-term debt...........................                (67.0)     (75.7)
                                                                         --------   --------
                                                                         $1,968.6   $1,525.5
                                                                         ========   ========
</TABLE>
 
---------------
 
* Weighted-average at December 31, 1998, including the effects of interest-rate
swaps.
 
     Williams Holdings and Williams Communications Solutions, LLC participate in
Williams' $1 billion credit agreement under which the LLC has access to $300
million and Williams Holdings has access to all unborrowed amounts, subject to
borrowings by other affiliated companies, including Williams (parent). At
December 31, 1998, the amount available under the agreement was $306 million.
Interest rates vary with current market conditions. In January 1999, the $1
billion bank credit agreement was amended, adding Williams Communications Group,
Inc. to the subsidiaries with access to the facility.
 
     An interest-rate swap with a notional value of $250 million is currently
being utilized to convert certain fixed-rate debt obligations to variable rate
obligations resulting in an effective weighted-average floating rate of 4.7
percent at December 31, 1998.
 
                                      F-37
<PAGE>   63
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Aggregate minimum maturities and sinking-fund requirements, excluding lease
payments and payments on long-term debt with affiliates, for each of the next
five years are as follows:
 
<TABLE>
<CAPTION>
                                                               (MILLIONS)
                                                               ----------
<S>                                                            <C>
1999........................................................      $ 67
2000........................................................        97
2001........................................................        50
2002........................................................       679
2003........................................................       220
</TABLE>
 
     Cash payments for interest (net of amounts capitalized) are as follows:
1998 -- $155 million; 1997 -- $117 million and 1996 -- $93 million, including
payments to Williams and affiliates of $36 million in 1998 and $7 million in
1997 and 1996.
 
  Leases
 
     Future minimum annual rental payments under non-cancelable operating leases
(including a total of $15 million to affiliates) are $174 million in 1999, $192
million in 2000, $145 million in 2001, $123 million in 2002, $77 million in 2003
and $71 million thereafter. Future minimum annual rentals to be received from
affiliates under sublease agreements are $26 million in 1999 through 2002, and
$6 million in 2003.
 
     Total rent expense was $174 million in 1998, $111 million in 1997 and $70
million in 1996, including $2 million in each year paid to Williams and
affiliates.
 
     During 1998, Williams Holdings entered into an operating lease agreement
covering a portion of its fiber-optic network. The total estimated cost of the
network assets to be covered by the lease agreement is $750 million. The lease
term will include an interim term, during which the covered network assets will
be constructed, that is anticipated to end no later than December 31, 1999 and a
base term. The interim and base terms are expected to total five years and, if
renewed, could total seven years.
 
     Williams Holdings has an option to purchase the covered network assets
during the lease term at an amount approximating the lessor's cost. Williams
Holdings provides a residual value guarantee, the present value of which is
equal to a maximum of 89.9 percent of the cost of the assets under lease. The
residual value guarantee is reduced by the present value of actual lease
payments. In the event that Williams Holdings does not exercise its purchase
option, Williams Holdings expects the fair market value of the covered network
assets to substantially reduce Williams Holdings' obligation under the residual
value guarantee. Williams Holdings' disclosures for future minimum annual
rentals under non-cancelable operating leases do not include amounts for the
residual value guarantee. As of December 31, 1998, $287 million of costs have
been incurred by the lessor.
 
NOTE 13. MINORITY INTEREST
 
     During 1998, Williams Holdings formed separate legal entities and
contributed various assets to a newly-formed limited partnership, Castle
Associates L.P. ("Castle"), as a part of a transaction that generated funds for
Williams' and Williams Holdings' general corporate use. An outside investor
purchased from Williams Holdings a non-controlling preferred interest in the
newly formed entity for $200 million. The assets and liabilities of Castle are
consolidated for financial reporting purposes. The outside investor's interest
of $200 million is reflected in "Minority interest in consolidated subsidiaries"
in the Consolidated Balance Sheet. The transaction did not result in any gain or
loss for Williams Holdings.
 
                                      F-38
<PAGE>   64
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The preferred interest holders in Castle are entitled to a priority return
based on a variable rate structure, currently approximately seven percent, in
addition to their participation in the operating results of the partnership.
 
     The Castle limited partnership agreement and associated operating documents
included certain restrictive covenants and guarantees of Williams Holdings and
certain of its subsidiaries. These restrictions are similar to those in the
Williams Holdings' credit agreement and other debt instruments.
 
NOTE 14. STOCK-BASED COMPENSATION
 
     Williams has several plans providing for common-stock-based awards to its
employees and employees of its subsidiaries. The plans permit the granting of
various types of awards including, but not limited to, stock options,
stock-appreciation rights, restricted stock and deferred stock. Awards may be
granted for no consideration other than prior and future services or based on
certain financial performance targets being achieved. The purchase price per
share for stock options and the grant price for stock-appreciation rights may
not be less than the market price of the underlying stock on the date of grant.
Depending upon terms of the respective plans, stock options become exercisable
after three or five years, subject to accelerated vesting if certain future
stock prices or specific financial performance targets are achieved. Stock
options expire ten years after grant.
 
     Williams' employee stock-based awards are accounted for under provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Williams' fixed plan common stock
options do not result in compensation expense, because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant.
 
     SFAS No. 123, "Accounting for Stock-Based Compensation," requires that
companies who continue to apply APB Opinion No. 25 disclose pro forma net income
(loss) assuming that the fair-value method in SFAS No. 123 had been applied in
measuring compensation cost. Pro forma net income (loss) for Williams Holdings
was $(74.4) million, $261.4 million and $320.5 million for 1998, 1997 and 1996,
respectively. Reported net income (loss) was $(29.4) million, $291.1 million and
$326.2 million for 1998, 1997 and 1996, respectively. Pro forma amounts for 1998
include the previously unrecognized compensation expense related to the MAPCO
options converted at the time of the merger (see Note 2) and the remaining total
compensation expense from the awards made in 1997, as these awards fully vested
in 1998 as a result of the accelerated vesting provision. Pro forma amounts for
1997 include compensation expense from approximately 65 percent of the awards
made in 1996, as these awards fully vested in 1997 as a result of the
accelerated vesting provision. Since compensation expense from stock options is
recognized over the future years' vesting period for pro forma disclosure
purposes, and additional awards generally are made each year, pro forma amounts
may not be representative of future years' amounts.
 
     The following summary reflects stock options related to 1998, 1997 and
1996:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              -----   -----   -----
                                                              (OPTIONS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Options granted.............................................    3.7    10.3     6.5
Weighted-average grant date fair value......................  $8.19   $7.15   $4.80
Options outstanding -- December 31..........................   12.0    24.4    19.0
Options exercisable -- December 31..........................    8.5    10.6     9.4
</TABLE>
 
                                      F-39
<PAGE>   65
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 15. FINANCIAL INSTRUMENTS
 
  Fair-value methods
 
     The following methods and assumptions were used by Williams Holdings in
estimating its fair-value disclosures for financial instruments:
 
          Cash and cash equivalents and notes payable: The carrying amounts
     reported in the balance sheet approximate fair value due to the short-term
     maturity of these instruments.
 
          Notes and other non-current receivables: For those notes with interest
     rates approximating market or maturities of less than three years, fair
     value is estimated to approximate historically recorded amounts.
 
          Due from parent and long-term debt with affiliates: The amounts bear
     interest at rates approximating market; therefore, fair value is estimated
     to approximate historically recorded amounts.
 
          Investment in Williams debentures: The fair value of Williams
     Holdings' investment is based on the prices of similar securities with
     similar terms and credit ratings. Williams Holdings used the expertise of
     an outside investment banking firm to estimate fair value.
 
          Investments-cost, advances to affiliates and other: Fair value is
     estimated to approximate historically recorded amounts as the operations
     underlying these investments are in their developmental phases.
 
          Long-term debt: The fair value of Williams Holdings' long-term debt is
     valued using indicative year-end traded bond market prices for publicly
     traded issues, while private debt is valued based on the prices of similar
     securities with similar terms and credit ratings. At December 31, 1998 and
     1997, 64 percent and 54 percent, respectively, of Williams Holdings'
     long-term debt was publicly traded. Williams Holdings used the expertise of
     an outside investment banking firm to estimate the fair value of long-term
     debt.
 
          Interest-rate swap: Fair value is determined by discounting estimated
     future cash flows using forward interest rates derived from the year-end
     yield curve. Fair value was calculated by the financial institution that is
     the counterparty to the swap.
 
          Interest-rate locks: Fair value is determined using year-end traded
     market prices for the referenced U.S. Treasury securities underlying the
     contracts. Fair value was calculated by the financial institutions that are
     parties to the locks.
 
          Energy-related trading and hedging: Energy-related trading includes
     forwards, options, swaps and purchase and sales commitments. Energy-related
     hedging includes options and swaps. Fair value reflects management's best
     estimates using valuation techniques that reflect the best information
     available in the circumstances. This information includes various factors
     such as quoted market prices, estimates of market prices in absence of
     quoted market prices, contractual volumes, estimated volumes under option
     and other arrangements that result in varying volumes, other contract
     terms, liquidity of the market in which the contract is transacted, credit
     considerations, time value and volatility factors underlying the positions.
 
                                      F-40
<PAGE>   66
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Carrying amounts and fair values of Williams Holdings' financial instruments
 
<TABLE>
<CAPTION>
                                                        1998                       1997
                                               ----------------------     ----------------------
                                               CARRYING       FAIR        CARRYING       FAIR
              ASSET (LIABILITY)                 AMOUNT        VALUE        AMOUNT        VALUE
              -----------------                ---------    ---------     ---------    ---------
                                                                  (MILLIONS)
<S>                                            <C>          <C>           <C>          <C>
Cash and cash equivalents....................  $   109.7    $   109.7     $    96.0    $    96.0
Notes and other non-current receivables......        7.4          7.4          20.9         20.9
Due from parent..............................    1,066.2      1,066.2         274.3        274.3
Investment in Williams debentures............      855.8        855.8         770.7        770.7
Investments-cost, advances to affiliate and
  other......................................      325.2        325.2         101.2        101.2
Notes payable................................   (1,052.7)    (1,052.7)       (701.0)      (701.0)
Long-term debt, including current portion....   (2,035.4)    (2,075.9)     (1,600.1)    (1,640.8)
Long-term debt with affiliates, including
  current portion............................   (1,013.8)    (1,013.8)           --           --
Interest-rate swap...........................        1.6          3.6           1.5          6.5
Interest-rate locks..........................         --           --            --          (.5)
Energy-related trading:
  Assets.....................................      548.1        548.1         324.9        324.9
  Liabilities................................     (491.6)      (491.6)       (383.7)      (383.7)
Energy-related hedging:
  Assets.....................................         --          7.0            .9         13.3
  Liabilities................................        (.7)       (10.2)          (.3)        (8.8)
</TABLE>
 
     The preceding asset and liability amounts for energy-related hedging
represent unrealized gains or losses and do not include the related deferred
amounts.
 
     The 1998 average fair value of the energy-related trading assets and
liabilities is $485 million and $518 million, respectively. The 1997 average
fair value of the energy-related trading assets and liabilities is $258 million
and $345 million, respectively.
 
  Off-balance-sheet credit and market risk
 
     Williams Holdings is a participant in the following transactions and
arrangements that involve financial instruments that have off-balance-sheet risk
of accounting loss. It is not practicable to estimate the fair value of these
off-balance-sheet financial instruments because of their unusual nature and
unique characteristics.
 
     In 1997, Williams Holdings entered into agreements to sell, on an ongoing
basis, certain of their accounts receivables. At December 31, 1998 and 1997,
$185 million and $200 million, respectively, have been sold under these
agreements.
 
     In connection with the 1995 sale of its network services operations,
Williams has been indemnified by LDDS against any losses related to retained
guarantees of $113 million and $135 million at December 31, 1998 and 1997,
respectively, for lease rental obligations.
 
     Williams Holdings has issued other guarantees and letters of credit with
off-balance-sheet risk that total approximately $81 million and $54 million at
December 31, 1998 and 1997, respectively. Williams Holdings believes it will not
have to perform under these agreements, because the likelihood of default by the
primary party is remote and/or because of certain indemnifications received from
other third parties.
 
                                      F-41
<PAGE>   67
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Energy trading activities
 
     Williams Holdings, through Energy Marketing & Trading, provides price-risk
management services associated with the energy industry to its customers. These
services are provided through a variety of energy contracts including forward
contracts, futures contracts, option contracts, swap agreements and purchase and
sale commitments. See Note 1 for a description of the accounting for these
trading activities. The net gain from trading activities was $112.6 million,
$125.8 million and $99.2 million in 1998, 1997 and 1996, respectively.
 
     Energy Marketing & Trading enters into contracts which involve physical
delivery of an energy commodity. Prices under these contracts are both fixed and
variable. These contracts involve both firm commitments requiring fixed volumes
and option and other arrangements that result in varying volumes. Swap
arrangements call for Energy Marketing & Trading to make payments to (or receive
payments from) counterparties based upon the differential between a fixed and
variable price or variable prices for different locations. Energy Marketing &
Trading buys and sells financial 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 prices used for
forwards, swap, option and physical contracts consider exchange quoted prices or
management's estimates based on the best information available. Energy Marketing
& Trading also enters into futures contracts, which are commitments to either
purchase or sell a commodity at a future date for a specified price and are
generally settled in cash, but may be settled through delivery of the underlying
commodity. The market prices for futures contracts are based on exchange
quotations.
 
     Energy Marketing & Trading is subject to market risk from changes in energy
commodity market prices, the portfolio position of its financial instruments and
physical commitments, the liquidity of the market in which the contract is
transacted, and changes in interest rates and credit risk.
 
     Energy Marketing & Trading manages market risk on a portfolio basis through
established trading policy guidelines, which are monitored on an ongoing basis.
Energy Marketing & Trading attempts to minimize credit-risk exposure to trading
counterparties and brokers through formal credit policies and monitoring
procedures. In the normal course of business, collateral is not required for
financial instruments with credit risk.
 
     The notional quantities for trading activities at December 31 are as
follows:
 
<TABLE>
<CAPTION>
                                                          1998                1997*
                                                   ------------------   ------------------
                                                    PAYOR    RECEIVER    PAYOR    RECEIVER
                                                   -------   --------   -------   --------
<S>                                                <C>       <C>        <C>       <C>
Fixed price:
  Natural gas (TBtu).............................  1,310.1   1,413.9    1,262.5   1,400.4
  Refined products, NGL's and crude (MMBbls).....    185.2     167.5       68.7      59.6
  Power (Terawatt Hrs)...........................     28.6      23.6       15.0      14.0
Variable price:
  Natural gas (TBtu).............................  1,749.4   1,537.4    1,898.3   1,322.4
  Refined products, NGL's and crude (MMBbls).....     48.5      44.8        1.9       1.9
  Power (Terawatt Hrs)...........................       --        .8         .1       1.6
</TABLE>
 
---------------
 
*Restated
 
     The net cash inflow related to these contracts at December 31, 1998 was $96
million, and the net cash requirement at December 31, 1997, was $92 million. At
December 31, 1998, the cash inflows extend primarily through 2007.
 
                                      F-42
<PAGE>   68
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Concentration of credit risk
 
     Williams Holdings' cash equivalents consist of high quality securities
placed with various major financial institutions with high credit ratings.
Williams Holdings' investment policy limits its credit exposure to any one
insurer/obligor.
 
     At December 31, 1998 and 1997, approximately 46 percent and 30 percent,
respectively, of receivables are for communications and related services.
Approximately 25 percent and 40 percent of receivables at December 31, 1998 and
1997, respectively, are for the sale of natural gas and related products or
services. Approximately 21 percent and 24 percent of receivables at December 31,
1998 and 1997, respectively, are for petroleum products and related services.
Communications' customers include numerous corporations. Natural gas customers
include pipelines, distribution companies, producers, gas marketers and
industrial users primarily located in the eastern, northwestern and midwestern
United States. Petroleum products customers include wholesale, commercial,
governmental, industrial and individual consumers and independent dealers
located primarily in Alaska and the mid-south and southeastern United States. As
a general policy, collateral is not required for receivables, but customers'
financial condition and credit worthiness are evaluated regularly.
 
NOTE 16. RELATED PARTY TRANSACTIONS
 
     Williams charges its subsidiaries, including Williams Holdings and its
subsidiaries, for certain corporate general and administrative expenses, which
are directly identifiable or allocable to the subsidiaries and for other general
corporate expenses utilizing a combination of revenues, property at cost and
payroll for the allocation base. Details of such charges are as follows:
 
<TABLE>
<CAPTION>
                                                             1998       1997      1996
                                                             -----   ----------   -----
                                                                     (MILLIONS)
<S>                                                          <C>     <C>          <C>
Direct costs...............................................  $61.0     $27.1      $21.2
Allocated parent company expenses..........................   37.4      21.4       18.8
</TABLE>
 
     The direct costs charged to Williams Holdings' subsidiaries are reflected
in selling, general and administrative expenses, and the direct costs charged to
Williams Holdings (parent) related to the MAPCO merger (see Note 2) are
reflected in general corporate expenses. Allocated parent company expenses are
included in general corporate expenses in the Consolidated Statement of
Operations.
 
     Williams Holdings and its subsidiaries maintain promissory notes with
Williams for both advances from and advances to Williams depending on the cash
position of each subsidiary. Amounts outstanding are payable on demand; however,
the net amount outstanding at December 31, 1998, has been classified as
long-term as there are no expectations for Williams and Williams Holdings and
its subsidiaries to demand payment in the next year. The agreements do not
require commitment fees. Interest is payable monthly, and rates vary with market
conditions. The interest rates were 5.83 percent and 6.29 percent at December
31, 1998 and 1997, respectively.
 
     Interest accrued includes $22 million in 1998 resulting from advances from
Williams. Investing income includes $22 million, $36 million and $31 million for
1998, 1997 and 1996, respectively, resulting from advances to Williams.
 
     During 1998, Williams Holdings utilized advances from other Williams'
subsidiaries to repay external debt obligations and to fund additional capital
expenditures. The advances are due in 2002, and the interest rate was 5.57
percent at December 31, 1998. The balance at December 31, 1998 was approximately
$1 billion including $65.4 million classified as current. Interest accrued in
1998 includes $14.4 million related to these advances.
 
                                      F-43
<PAGE>   69
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During 1998, two of Williams Holdings' subsidiaries issued two separate
notes totaling $198 million to Williams. The notes are payable on demand,
however, amounts outstanding have been classified as long-term as these
subsidiaries are not expected to demand payment from Williams within the next
year. Interest rates vary with market conditions. The interest rate for these
notes at December 31, 1998, was 6.5 percent.
 
     Williams Holdings' subsidiaries have transactions primarily with the
following affiliates: Northwest Pipeline, Williams Gas Pipelines Central,
Transcontinental Gas Pipe Line and Texas Gas. Energy Marketing & Trading's
revenues include natural gas sales to affiliates of $332 million, $429 million
and $499 million for 1998, 1997 and 1996, respectively. Energy Marketing &
Trading also incurred costs and operating expenses, including transportation and
certain other costs, from affiliates of $93 million, $96 million and $157
million for 1998, 1997 and 1996, respectively. These sales and costs are
included in Energy Marketing & Trading revenues consistent with a "net" basis of
reporting these activities. Transactions with affiliates are at prices that
generally apply to unaffiliated parties.
 
NOTE 17. CONTINGENT LIABILITIES AND COMMITMENTS
 
  Rate and regulatory matters
 
     Williams Pipe Line (WPL) has various regulatory proceedings pending. On
July 15, 1998, WPL received an Order from the Federal Energy Regulatory
Commission (FERC) which affirmed an administrative law judge's 1996 initial
decision regarding rate-making proceedings for the period September 15, 1990
through May 1, 1992. The FERC has ruled that WPL did not meet its burden of
establishing that its transportation rates in its 12 noncompetitive markets were
just and reasonable for the period and has ordered refunds. WPL continues to
believe it should prevail upon appeal regarding collected rates for that period.
However, due to this FERC decision, WPL accrued $15.5 million, including
interest, in the second quarter of 1998, for potential refunds to customers for
the issues described above. Since May 1, 1992, WPL has collected and recognized
as revenues $151 million in noncompetitive markets that are in excess of tariff
rates previously approved by the FERC and that are subject to refund with
interest. WPL believes that the tariff rates collected in these markets during
this period will be justified in accordance with the FERC's cost-basis
guidelines and will be making the appropriate filings with the FERC to support
this position.
 
  Environmental matters
 
     Certain Williams Holdings' subsidiaries have been identified as potentially
responsible parties (PRP) at various Superfund and state waste disposal sites.
In addition, these subsidiaries have incurred, or are alleged to have incurred,
various other hazardous materials removal or remediation obligations under
environmental laws. Although no assurances can be given, Williams Holdings does
not believe that the PRP status of these subsidiaries will have a material
adverse effect on its financial position, results of operations or net cash
flows.
 
     The Midstream Gas & Liquids unit of Energy Services (WES) had recorded an
aggregate liability of approximately $10 million, representing the current
estimate of future environmental and remediation costs. WES also accrues
environmental remediation costs for its petroleum products pipeline, retail
petroleum, refining and propane marketing operations primarily related to soil
and groundwater contamination. At December 31, 1998, WES and its subsidiaries
had reserves, in addition to other reserves listed above, totaling approximately
$31 million. WES recognizes receivables related to environmental remediation
costs from state funds as a result of laws permitting states to reimburse
certain expenses associated with underground storage tank problems and repairs.
At December 31, 1998, WES and its subsidiaries had receivables totaling $14
million. Actual costs incurred will depend on the actual number of contaminated
sites identified, the actual amount and extent of contamination discovered, the
final cleanup standards mandated by the EPA and other governmental authorities
and other factors.
 
                                      F-44
<PAGE>   70
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Other legal matters
 
     In 1998, certain royalty owners in a producing field in Cameron Parish,
Louisiana, brought suit against a Williams Holdings subsidiary and other working
interest owners seeking additional royalties or lease cancellation. An amended
petition later added a second Williams Holdings subsidiary, Williams and
additional working interest owners. All other defendants have been dismissed or
have settled with plaintiffs. In their recently amended damage claim, the
plaintiffs asserted royalty underpayments plus interest of approximately $12
million. The claimed damages are attributable to all working interests for a
period of about 15 years. One of the two Williams Holdings subsidiaries sued
owned a one-half interest in the field and served as operator for approximately
eight years. The other subsidiary purchased produced gas from the field.
Plaintiffs also request punitive damages equal to double the alleged damages and
attorneys' fees. Williams Holdings believes all royalties due from its
subsidiaries were properly paid, that the field was properly operated, and that
it is not responsible for any amounts due from any other working interests or
for the period after its subsidiary had sold its interest and terminated its
status as operator of the field. The litigation pending in Cameron Parish,
Louisiana, has recently been settled for payments aggregating approximately $9
million, for which reserves have been fully accrued.
 
     On April 7, 1992, a liquefied petroleum gas explosion occurred near an
underground salt dome storage facility located near Brenham, Texas and owned by
an affiliate of MAPCO Inc., Seminole Pipeline Company ("Seminole"). MAPCO Inc.,
as well as Seminole, Mid-America Pipeline Company, MAPCO Natural Gas Liquids
Inc., and other non-MAPCO entities were named as defendants in civil action
lawsuits filed in state district courts located in four Texas counties. Seminole
and the above-mentioned subsidiaries of MAPCO Inc. have settled in excess of
1,600 claims in these lawsuits. The only lawsuit remaining is the Dallmeyer case
which was tried before a jury in Harris County. In Dallmeyer, the judgment
rendered in March 1996 against defendants Seminole and MAPCO Inc. and its
subsidiaries totaled approximately $72 million which included nearly $65 million
of punitive damages awarded to the 21 plaintiffs. Both plaintiffs and defendants
have appealed the Dallmeyer judgment to the Court of Appeals for the Fourteenth
District of Texas in Harris County. The defendants seek to have the judgment
modified in many respects, including the elimination of punitive damages as well
as a portion of the actual damages awarded. If the defendants prevail on appeal,
it will result in an award significantly less than the judgment. The plaintiffs
have cross-appealed and seek to modify the judgment to increase the total award
plus interest to exceed $155 million. In February and March 1998, the defendants
entered into settlement agreements involving 17 of the 21 plaintiffs to finally
resolve their claims against all defendants for an aggregate payment of
approximately $10 million. These settlements have satisfied and reduced the
judgment on appeal by approximately $42 million. As to the remaining four
plaintiffs, the Court of Appeals issued its decision on October 15, 1998, which,
while denying all of the plaintiffs' cross-appeal issues, affirmed in part and
reversed in part the trial court's judgment. The defendants had entered into
settlement agreements with the remaining plaintiffs which, in light of the
decision, Williams Holdings believes will provide for aggregate payments of
approximately $13.6 million, the full amount of which has been previously
accrued.
 
     In 1991, the Southern Ute Indian Tribe (the Tribe) filed a lawsuit against
Williams Production Company (Williams Production), a wholly owned subsidiary of
Williams Holdings, and other gas producers in the San Juan Basin area, alleging
that certain coal strata were reserved by the United States for the benefit of
the Tribe and that the extraction of coal-seam gas from the coal strata was
wrongful. The Tribe seeks compensation for the value of the coal-seam gas. The
Tribe also seeks an order transferring to the Tribe ownership of all of the
defendants' equipment and facilities utilized in the extraction of the coal-seam
gas. In September 1994, the court granted summary judgment in favor of the
defendants, and the Tribe lodged an interlocutory appeal with the U.S. Court of
Appeals for the Tenth Circuit. Williams Production agreed to indemnify the
Williams Coal Seam Gas Royalty Trust (Trust) against any losses that may arise
in respect of certain properties subject to the lawsuit. On July 16, 1997, the
U.S. Court of Appeals for the Tenth Circuit reversed the decision of the
district court, held that the Tribe owns the coal-seam gas produced from certain
coal strata on fee lands within
                                      F-45
<PAGE>   71
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the exterior boundaries of the Tribe's reservation, and remanded the case to the
district court for further proceedings. On September 16, 1997, Amoco Production
Company, the class representative for the defendant class (of which Williams
Production is a part), filed its motion for rehearing en banc before the Court
of Appeals. On July 20, 1998, the Court of Appeals sitting en banc affirmed the
panel's decision. The Supreme Court has granted a writ of certiorari in respect
of this decision.
 
     Williams Communications, Inc. filed suit on March 20, 1998, against
WorldCom Network Services, Inc. (WorldCom) in district court in Tulsa County in
order to prevent WorldCom from disconnecting any Williams' equipment on the
WorldCom network. This suit sought a declaratory judgment that the single fiber
retained by Williams Holdings on the WorldCom network could be used for
specified multimedia uses, and that WorldCom was required to permit Williams
Holdings to purchase additional fiber either acquired or constructed by
WorldCom. WorldCom had denied Williams Holdings' claim and had asserted various
counterclaims for monetary damages, rescission and injunctive relief. This
lawsuit was settled on July 9, 1998. The settlement resolves all claims for
monetary damages, permitted uses of Williams Holdings' fiber on the WorldCom
network and Williams Holdings' right to purchase additional fiber on WorldCom
fiber builds. There was no significant financial impact to Williams Holdings as
a result of the settlement.
 
     In connection with agreements to resolve take-or-pay and other contract
claims and to amend gas purchase contracts, Transcontinental Gas Pipe Line and
Texas Gas each entered into certain settlements with producers which may require
the indemnification of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. Transco Energy
Company and Transco Gas Supply Company (wholly owned subsidiaries of Williams
Holdings) have also been named as defendants in certain of these lawsuits. As a
result of such settlements, Transcontinental Gas Pipe Line is currently
defending two lawsuits brought by producers. In one of the cases, a jury verdict
found that Transcontinental Gas Pipe Line was required to pay a producer damages
of $23.3 million including $3.8 million in attorneys' fees. Transcontinental Gas
Pipe Line is pursuing an appeal. In the other case, a producer has asserted
damages, including interest calculated through December 31, 1997, of
approximately $6 million. Producers have received and may receive other demands,
which could result in additional claims. Indemnification for royalties will
depend on, among other things, the specific lease provisions between the
producer and the lessor and the terms of the settlement between the producer and
either Transcontinental Gas Pipe Line or Texas Gas. Texas Gas may file to
recover 75 percent of any such additional amounts it may be required to pay
pursuant to indemnities for royalties under the provisions of FERC Order 528.
 
     In connection with the sale of certain coal assets in 1996, MAPCO entered
into a Letter Agreement with the buyer providing for indemnification by MAPCO
for reductions in the price or tonnage of coal delivered under a certain
pre-existing Coal Sales Agreement dated December 1, 1986. The Letter Agreement
is effective for reductions during the period July 1, 1996, through December 31,
2002, and provides for indemnification for such reductions as incurred on a
quarterly basis. The buyer has stated it is entitled to indemnification from
MAPCO for amounts of $7.8 million through June 30, 1998, and may claim
indemnification for additional amounts in the future. MAPCO has filed for
declaratory relief as to certain aspects of the buyer's claims. MAPCO also
believes it would be entitled to substantial set-offs and credits against any
amounts determined to be due and has accrued a liability representing an
estimate of amounts it expects to incur in satisfaction of this indemnity. The
parties are currently pursuing settlement negotiations as part of a mediation.
 
     In 1998, the United States Department of Justice informed Williams Holdings
that Jack Grynberg, an individual, had filed claims in the United States
District Court for the District of Colorado under the False Claims Act against
Williams Holdings and certain of its wholly owned subsidiaries including
Williams Field Services Company and Williams Production Company. Mr. Grynberg
has also filed claims against approximately 300 other energy companies and
alleges that the defendants violated the False Claims Act in connection with the
measurement and purchase of hydrocarbons. The relief sought is an unspecified
amount
 
                                      F-46
<PAGE>   72
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of royalties allegedly not paid to the federal government, treble damages, a
civil penalty, attorneys' fees, and costs.
 
     In addition to the foregoing, various other proceedings are pending against
Williams Holdings or its subsidiaries which are incidental to their operations.
 
  Summary
 
     While no assurances may be given, Williams Holdings does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage or other indemnification
arrangements, will have a materially adverse effect upon Williams Holdings'
future financial position, results of operations or cash flow requirements.
 
  Other matters
 
     During the second quarter of 1998, Energy Marketing & Trading entered into
a 15-year contract giving Williams Holdings the right to receive fuel conversion
services for purposes of generating electricity. This contract also gives
Williams Holdings the right to receive installed capacity and certain ancillary
services. Annual committed payments under the contract range from $140 million
to $165 million, resulting in total committed payments of approximately $2.3
billion.
 
NOTE 18.  ACCUMULATED OTHER COMPREHENSIVE INCOME
 
     The table below presents changes in the components of accumulated other
comprehensive income.
 
<TABLE>
<CAPTION>
                                                                          INCOME(LOSS)
                                                              ------------------------------------
                                                               UNREALIZED       FOREIGN
                                                              APPRECIATION     CURRENCY
                                                              ON SECURITIES   TRANSLATION   TOTAL
                                                              -------------   -----------   ------
                                                                           (MILLIONS)
<S>                                                           <C>             <C>           <C>
Balance at December 31, 1995................................     $ 53.4          $  --      $ 53.4
1996 change:
  Pre-income tax amount.....................................       85.4             --        85.4
  Income tax expense........................................      (34.2)            --       (34.2)
                                                                 ------          -----      ------
                                                                   51.2             --        51.2
                                                                 ------          -----      ------
Balance at December 31, 1996................................      104.6             --       104.6
1997 change:
  Pre-income tax amount.....................................      232.4             --       232.4
  Income tax expense........................................      (92.9)            --       (92.9)
                                                                 ------          -----      ------
                                                                  139.5             --       139.5
                                                                 ------          -----      ------
Balance at December 31, 1997................................      244.1             --       244.1
1998 change:
  Pre-income tax amount.....................................      124.4           (5.0)      119.4
  Income tax expense........................................      (46.8)            --       (46.8)
                                                                 ------          -----      ------
                                                                   77.6           (5.0)       72.6
                                                                 ------          -----      ------
Balance at December 31, 1998................................     $321.7          $(5.0)     $316.7
                                                                 ======          =====      ======
</TABLE>
 
NOTE 19.  SEGMENT DISCLOSURES
 
     Williams Holdings evaluates performance based upon segment profit or loss
from operations which includes revenues from external and internal customers,
equity earnings, operating costs and expenses, and
 
                                      F-47
<PAGE>   73
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
depreciation, depletion and amortization. The accounting policies of the
segments are the same as those described in Note 1, Summary of Significant
Accounting Policies. Intersegment sales are generally accounted for as if the
sales were to unaffiliated third parties, that is, at current market prices.
 
     Williams Holdings' reportable segments are strategic business units that
offer different products and services. The segments are managed separately
because each segment requires different technology, marketing strategies and
industry knowledge. Other includes investments in international energy and
communications-related ventures, as well as corporate operations.
 
     The following table reflects the reconciliation of segment profit, per the
table on the following page, to operating income as reported on the Consolidated
Statement of Operations.
 
<TABLE>
<CAPTION>
                                                           1998       1997       1996
                                                         --------   --------   --------
                                                                   (MILLIONS)
<S>                                                      <C>        <C>        <C>
Segment profit.........................................  $  189.9   $  509.9   $  584.8
General corporate expenses.............................     (58.8)     (70.4)     (49.9)
                                                         --------   --------   --------
          Operating income.............................  $  131.1   $  439.5   $  534.9
                                                         ========   ========   ========
</TABLE>
 
     The following geographic area data includes revenues from external
customers based on product shipment origin and long-lived assets based upon
physical location.
 
<TABLE>
<CAPTION>
                                                           1998       1997       1996
                                                         --------   --------   --------
                                                                   (MILLIONS)
<S>                                                      <C>        <C>        <C>
Revenues from external customers:
  United States........................................  $5,772.7   $6,372.4   $5,147.9
  Other................................................     181.0      140.5        5.1
                                                         --------   --------   --------
          Total........................................  $5,953.7   $6,512.9   $5,153.0
                                                         ========   ========   ========
Long-lived assets:
  United States........................................  $5,796.8   $5,007.3   $4,205.5
  Other................................................     250.8      126.9        2.0
                                                         --------   --------   --------
          Total........................................  $6,047.6   $5,134.2   $4,207.5
                                                         ========   ========   ========
</TABLE>
 
     Long-lived assets are comprised of property, plant and equipment, goodwill
and other intangible assets.
 
                                      F-48
<PAGE>   74
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
                                                       REVENUES
                                     --------------------------------------------
                                                              EQUITY                                              EQUITY
                                     EXTERNAL     INTER-     EARNINGS                  SEGMENT        TOTAL       METHOD
                                     CUSTOMERS    SEGMENT    (LOSSES)     TOTAL     PROFIT (LOSS)    ASSETS     INVESTMENTS
                                     ---------   ---------   --------   ---------   -------------   ---------   -----------
                                                                           (MILLIONS)
<S>                                  <C>         <C>         <C>        <C>         <C>             <C>         <C>
1998
Energy Services
  Energy, Marketing & Trading......  $2,007.5    $   (93.7)*  $ (6.7)   $ 1,907.1      $  39.0      $ 2,596.8     $   .8
  Exploration & Production.........      33.5        105.8        --        139.3         27.2          359.1         --
  Midstream Gas & Liquids..........     726.2         63.7       8.2        798.1        210.6        2,688.4      129.1
  Petroleum Services...............   1,417.2      1,257.9        .4      2,675.5        153.3        2,525.2       96.0
  Merger-related costs.............        --           --        --           --        (50.7)            --         --
                                     --------    ---------    ------    ---------      -------      ---------     ------
                                      4,184.4      1,333.7       1.9      5,520.0        379.4        8,169.5      225.9
                                     --------    ---------    ------    ---------      -------      ---------     ------
Communications
  Communications Solutions.........   1,366.8           --        --      1,366.8        (54.1)         946.4         --
  Network Applications.............     209.6           .6      (3.7)       206.5        (94.6)         295.6         .5
  Network Services.................     145.2         49.7        --        194.9        (26.3)         822.9         --
                                     --------    ---------    ------    ---------      -------      ---------     ------
                                      1,721.6         50.3      (3.7)     1,768.2       (175.0)       2,064.9         .5
Other..............................      47.7         26.4      (9.3)        64.8        (14.5)       6,648.6      291.7
Eliminations.......................        --     (1,410.4)       --     (1,410.4)          --       (5,032.4)        --
                                     --------    ---------    ------    ---------      -------      ---------     ------
        Total......................  $5,953.7    $      --    $(11.1)   $ 5,942.6      $ 189.9      $11,850.6     $518.1
                                     ========    =========    ======    =========      =======      =========     ======
1997
Energy Services
  Energy, Marketing & Trading......  $1,995.8    $   254.6    $ (5.6)   $ 2,244.8      $  53.4      $ 1,688.8     $  1.8
  Exploration & Production.........       3.6        126.5        --        130.1         30.3          367.2         --
  Midstream Gas & Liquids..........     841.4        100.5        --        941.9        270.8        2,650.1       87.5
  Petroleum Services...............   2,192.9        502.7        .4      2,696.0        200.8        1,836.8        9.6
                                     --------    ---------    ------    ---------      -------      ---------     ------
                                      5,033.7        984.3      (5.2)     6,012.8        555.3        6,542.9       98.9
                                     --------    ---------    ------    ---------      -------      ---------     ------
Communications
  Communications Solutions.........   1,206.5           --        --      1,206.5         47.3          869.0         --
  Network Applications.............     216.9          1.1      (2.4)       215.6       (108.7)         329.6        3.8
  Network Services.................      22.0         21.0        --         43.0          3.3          240.1        2.3
                                     --------    ---------    ------    ---------      -------      ---------     ------
                                      1,445.4         22.1      (2.4)     1,465.1        (58.1)       1,438.7        6.1
Other..............................      33.8          4.6      15.0         53.4         12.7        3,497.0      143.7
Eliminations.......................        --     (1,011.0)       --     (1,011.0)          --       (2,344.1)        --
                                     --------    ---------    ------    ---------      -------      ---------     ------
        Total......................  $6,512.9    $      --    $  7.4    $ 6,520.3      $ 509.9      $ 9,134.5     $248.7
                                     ========    =========    ======    =========      =======      =========     ======
1996
Energy Services
  Energy, Marketing & Trading......  $1,584.1    $   389.1    $ (4.8)   $ 1,968.4      $ 138.5      $ 1,544.7     $   .9
  Exploration & Production.........      25.3         57.1        --         82.4          2.8          256.8         --
  Midstream Gas & Liquids..........     696.3         90.3        .1        786.7        294.0        2,401.8       47.4
  Petroleum Services...............   2,091.6        503.4        .2      2,595.2        140.0        1,705.8        4.3
                                     --------    ---------    ------    ---------      -------      ---------     ------
                                      4,397.3      1,039.9      (4.5)     5,432.7        575.3        5,909.1       52.6
                                     --------    ---------    ------    ---------      -------      ---------     ------
Communications
  Communications Solutions.........     568.1           --        --        568.1         14.3          344.6          -
  Network Applications.............     132.1           .4      (1.6)       130.9        (15.1)         148.6        6.6
  Network Services.................      11.1           --        --         11.1          5.8          212.7         --
                                     --------    ---------    ------    ---------      -------      ---------     ------
                                        711.3           .4      (1.6)       710.1          5.0          705.9        6.6
Other..............................      44.4          3.6      10.3         58.3          4.5        2,353.8       59.8
Eliminations.......................        --     (1,043.9)       --     (1,043.9)          --       (1,634.2)        --
                                     --------    ---------    ------    ---------      -------      ---------     ------
        Total......................  $5,153.0    $      --    $  4.2    $ 5,157.2      $ 584.8      $ 7,334.6     $119.0
                                     ========    =========    ======    =========      =======      =========     ======
 
<CAPTION>
 
                                     ADDITIONS
                                     TO LONG-    DEPRECIATION,
                                       LIVED      DEPLETION &
                                      ASSETS     AMORTIZATION
                                     ---------   -------------
                                            (MILLIONS)
<S>                                  <C>         <C>
1998
Energy Services
  Energy, Marketing & Trading......  $   27.3       $ 30.1
  Exploration & Production.........      58.1         26.0
  Midstream Gas & Liquids..........     336.8        105.1
  Petroleum Services...............     264.2         70.8
  Merger-related costs.............        --           --
                                     --------       ------
                                        686.4        232.0
                                     --------       ------
Communications
  Communications Solutions.........      68.5         36.9
  Network Applications.............      55.3         33.7
  Network Services.................     283.8         13.2
                                     --------       ------
                                        407.6         83.8
Other..............................     189.6         24.9
Eliminations.......................        --           --
                                     --------       ------
        Total......................  $1,283.6       $340.7
                                     ========       ======
1997
Energy Services
  Energy, Marketing & Trading......  $  102.4       $ 20.8
  Exploration & Production.........      63.3         12.6
  Midstream Gas & Liquids..........     194.6         97.1
  Petroleum Services...............     150.5         67.8
                                     --------       ------
                                        510.8        198.3
                                     --------       ------
Communications
  Communications Solutions.........     247.5         29.7
  Network Applications.............      98.9         33.1
  Network Services.................     178.2          4.0
                                     --------       ------
                                        524.6         66.8
Other..............................     179.9         11.0
Eliminations.......................        --           --
                                     --------       ------
        Total......................  $1,215.3       $276.1
                                     ========       ======
1996
Energy Services
  Energy, Marketing & Trading......  $   26.3       $ 16.9
  Exploration & Production.........      30.3         10.5
  Midstream Gas & Liquids..........     236.7         85.8
  Petroleum Services...............     111.0         64.1
                                     --------       ------
                                        404.3        177.3
                                     --------       ------
Communications
  Communications Solutions.........      36.9         16.0
  Network Applications.............     193.0         14.9
  Network Services.................        --           --
                                     --------       ------
                                        229.9         30.9
Other..............................      35.0          9.3
Eliminations.......................        --           --
                                     --------       ------
        Total......................  $  669.2       $217.5
                                     ========       ======
</TABLE>
 
---------------
 
* Energy Marketing & Trading intercompany cost of sales, which are netted in
  revenues consistent with fair-value accounting, exceed intercompany revenues
  in 1998.
 
NOTE 20.  SUBSEQUENT EVENT
 
     On March 18, 1999, Williams' board of directors approved the merger of
Williams Holdings with Williams. Upon completion of the merger, which is
expected to be in the second or third quarter of 1999, Williams will assume all
liabilities and obligations of Williams Holdings.
 
                                      F-49
<PAGE>   75
 
                      WILLIAMS HOLDINGS OF DELAWARE, INC.
 
                      QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     Summarized quarterly financial data are as follows. Certain amounts have
been reclassified as described in Note 1 of Notes to Consolidated Financial
Statements.
 
<TABLE>
<CAPTION>
                                                FIRST      SECOND     THIRD      FOURTH
                                               QUARTER    QUARTER    QUARTER    QUARTER
                                               --------   --------   --------   --------
                                                              (MILLIONS)
<S>                                            <C>        <C>        <C>        <C>
                    1998
  Revenues...................................  $1,503.5   $1,377.4   $1,476.4   $1,585.3
  Costs and operating expenses...............   1,225.2    1,078.7    1,178.0    1,272.7
  Income (loss) before extraordinary loss....      10.5       22.9         .2      (58.2)
  Net income (loss)..........................       5.7       22.9         .2      (58.2)
                    1997
  Revenues...................................  $1,459.0   $1,487.4   $1,691.7   $1,882.2
  Costs and operating expenses...............   1,198.0    1,227.5    1,408.6    1,547.1
  Income before extraordinary loss...........     125.0       96.2       53.4       20.1
  Net income.................................     125.0       96.2       53.4       16.5
</TABLE>
 
     First-quarter, second-quarter, third-quarter, and fourth-quarter 1998 net
income (loss) includes approximately $52 million, $9 million, $6 million and $5
million, respectively, of pre-tax merger-related costs (see Note 2).
Second-quarter 1998 net income (loss) also includes a pre-tax $15.5 million loss
provision for potential refunds to customers (see Note 5). Third-quarter 1998
net income (loss) includes $17 million in pre-tax credit loss accruals for
certain retail energy activities. In addition, third-quarter 1998 includes a
$23.2 million pre-tax loss related to a venture involved in the technology and
transmission of business information for news and educational purposes (see Note
5). Fourth-quarter 1998 net income (loss) includes pre-tax accruals totaling
approximately $23 million related to the modification of Williams Holdings'
employee benefit program (see Note 5). Fourth-quarter 1998 net income (loss)
also includes pre-tax charges of $14 million for asset impairments related to
the decision to change the focus of its retail natural gas and electric business
(see Note 5). Fourth-quarter 1998 net income (loss) also reflects the impact of
the decline in the energy market for Energy Services results and higher than
expected commissions expense, an increase in reserves required and higher
selling, general and administrative expenses at Communications Solutions.
 
     First-quarter 1997 net income includes a pre-tax $66 million gain related
to the sale of the interest in the West Panhandle field (see Note 5).
Second-quarter 1997 net income includes a $44.5 million gain related to the
combination of Williams Holdings' and Nortel's customer-premise equipment sales
and service business (see Note 2). Fourth-quarter 1997 net income includes
pre-tax charges totaling approximately $49.8 million, related to the decision
and commitment to a plan to sell the learning content business, and the
impairment of several advanced applications projects (see Note 5).
Fourth-quarter 1997 net income also includes approximately $10 million in
pre-tax costs related to the MAPCO acquisition (see Note 2).
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                      F-50
<PAGE>   76
 
                      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 operations for the three years
     ended December 31, 1998................................   F-20
  Consolidated balance sheet at December 31, 1998 and
     1997...................................................   F-21
  Consolidated statement of stockholder's equity for the
     three years ended December 31, 1998....................   F-22
  Consolidated statement of cash flows for the three years
     ended December 31, 1998................................   F-23
  Notes to consolidated financial statements................   F-24
  Schedule for the three years ended December 31, 1998:
     II -- Valuation and qualifying accounts................   F-52
Not covered by report of independent auditors:
  Quarterly financial data (unaudited)......................   F-50
</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-51
<PAGE>   77
 
                      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>
Year ended December 31, 1998:
  Allowance for doubtful accounts --
     Receivables............................    $20.7      $39.8     $   --       $30.7        $29.8
     Other assets...........................      4.6         --         --         4.6           --
  Price-risk management credit reserves.....      7.7        5.3         --          --         13.0
Year ended December 31, 1997:
  Allowance for doubtful accounts --
     Receivables............................     10.5       13.3        7.0(c)      10.1        20.7
     Other assets...........................      4.6         --         --          --          4.6
  Price-risk management credit reserves.....      7.6         .1         --          --          7.7
Year ended December 31, 1996:
  Allowance for doubtful accounts --
     Receivables............................     11.8        5.3        1.4(c)       8.0        10.5
     Other assets...........................      1.6        3.0         --          --          4.6
  Price-risk management credit reserves.....      8.3        (.7)        --          --          7.6
</TABLE>
 
---------------
 
(a)  Deducted from related assets.
 
(b)  Represents balances written off, net of recoveries and reclassifications.
 
(c)  Primarily relates to acquisitions of businesses.
 
                                      F-52
<PAGE>   78
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) 1 and 2. The financial statements and schedule listed in the
accompanying index to consolidated financial statements are filed as part of
this annual report.
 
     (a) 3 and (c). The exhibits listed below are filed as part of this annual
report.
 
     EXHIBIT NO.                  DESCRIPTION
 
     Exhibit 2 --
 
     *(a) Agreement and Plan of Merger, dated as of November 23, 1997, and as
amended on January 25, 1998, among The Williams Companies, Inc., MAPCO Inc., and
TML Acquisition Corp. (filed as Exhibit 2.1 to Williams' Registration Statement
on Form S-4 filed January 27, 1998).
 
     Exhibit 3 --
 
     *(a) Certificate of Incorporation of Williams Holdings (filed as Exhibit
3.2 to Williams Holdings' Form 10-Q dated October 18, 1995).
 
     *(b) By-laws of the Company (filed as Exhibit 3.2 to Williams Holdings'
Form 10-Q dated October 18, 1995).
 
     Exhibit 4 --
 
     *(a) Form of Senior Debt Indenture between Williams Holdings and Citibank,
N.A., relating to the 6 1/4% Senior Debentures, due 2006, and Medium-Term Notes
(6.40%-6.91%), due 1999-2002 (filed as Exhibit 4.1 to Williams Holdings' Form
10-Q dated October 18, 1995).
 
     *(b) Second Amended and Restated Credit Agreement dated July 23, 1997,
among The Williams Companies, Inc., Williams Holdings, and certain of its
subsidiaries, the lenders named therein, and Citibank, N.A., as agent (filed as
Exhibit 4(c) to The Williams Companies, Inc.'s Form 10-K for the fiscal year
ended December 31, 1997).
 
     *(c) Amendment dated January 26, 1999, to Second Amended and Restated
Credit Agreement dated July 23, 1997, among The Williams Companies, Inc.,
Williams Holdings, and certain of its subsidiaries, the lenders named therein,
and Citibank, N.A., as agent (filed as Exhibit 4(c) to The Williams Companies,
Inc.'s Form 10-K for the fiscal year ended December 31, 1998).
 
     (d) Amended and Restated Credit Agreement dated January 26, 1999, among
Williams Holdings, the lenders named therein, and Citibank, N.A., as agent.
 
     *(e) Indenture dated March 31, 1990, between MAPCO Inc. and Bankers Trust
Company, Trustee (filed as Exhibit 4.0 to MAPCO Inc.'s Current Report on Form
8-K dated February 19, 1991).
 
     (f) First Supplemental Indenture dated March 31, 1998, among MAPCO, Inc.,
Williams Holdings, and Bankers Trust Company, Trustee, relating to the
Medium-Term Notes (7.60%-8.87%), due 1999-2022.
 
     *(g) Senior Indenture dated February 25, 1997, between MAPCO Inc. and The
First National Bank of Chicago, Trustee (filed as Exhibit 4.5.1 to MAPCO Inc.'s
Amendment No. 1 to Form S-3 Registration Statement dated February 25, 1997).
 
     *(h) Supplemental Indenture No. 1 dated March 5, 1997, between MAPCO Inc.
and The First National Bank of Chicago (filed as Exhibit 4.(o) to MAPCO Inc.'s
Form 10-K for the fiscal year ended December 31, 1997).
 
     *(i) Supplemental Indenture No. 2 dated March 5, 1997, between MAPCO Inc.
and The First National Bank of Chicago (filed as Exhibit 4.(p) to MAPCO Inc.'s
Form 10-K for the fiscal year ended December 31, 1997).
 
                                      F-53
<PAGE>   79
 
     (j) Supplemental Indenture No. 3 dated March 31, 1998, among MAPCO Inc.,
Williams Holdings, and The First National Bank of Chicago, relating to the
7 1/4% Notes, due 2009, the 7.70% Debentures, due 2027, the 6 1/8% Notes, due
2003, and the 6 1/2% Notes, due 2008.
 
     Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges.
 
     Exhibit 23 --
 
          (a) Consent of Independent Auditors, Ernst & Young LLP.
 
          (b) Consent of Independent Auditors, Deloitte & Touche LLP.
 
     Exhibit 24 -- Power of Attorney together with certified resolution.
 
     Exhibit 27 -- Financial Data Schedule.
 
     Exhibit 27.1 -- Restated Financial Data Schedule for the quarters ended
March 30, June 30, and September 30, 1997.
 
     Exhibit 27.2 -- Restated Financial Data Schedule for the quarters ended
March 30, June 30, and September 30, 1996.
 
     Exhibit 99 -- Opinion of Independent Auditors, Deloitte & Touche LLP.
 
     (b) Reports on Form 8-K.
 
     On November 23, 1998, Williams Holdings filed a report on Form 8-K to
report that the Board of Directors of The Williams Companies, Inc. has
authorized Williams Communications Group, Inc., a wholly owned subsidiary of
Williams Holdings, to sell a minority interest in its business to the public.
 
     (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-54
<PAGE>   80
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                            WILLIAMS HOLDINGS OF DELAWARE, INC.
                                                        (Registrant)
 
                                            By:    /s/ SHAWNA L. GEHRES
                                              ----------------------------------
                                                       Shawna L. Gehres
                                                       Attorney-in-fact
 
Dated: March 30, 1999
 
     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
                      ---------                                                -----
<C>                                                         <S>
 
                /s/ KEITH E. BAILEY*                        Chairman of the Board, President, Chief
-----------------------------------------------------         Executive Officer (Principal Executive
                   Keith E. Bailey                            Officer) and Director
 
                /s/ JACK D. MCCARTHY*                       Senior Vice President -- Finance (Principal
-----------------------------------------------------         Financial Officer) and Director
                  Jack D. McCarthy
 
                 /s/ GARY R. BELITZ*                        Controller (Principal Accounting Officer)
-----------------------------------------------------
                   Gary R. Belitz
 
             /s/ JOHN C. BUMGARNER, JR.*                    Director
-----------------------------------------------------
               John C. Bumgarner, Jr.
 
               /s/ STEVEN J. MALCOLM*                       Director
-----------------------------------------------------
                  Steven J. Malcolm
 
                /s/ HOWARD E. JANZEN*                       Director
-----------------------------------------------------
                  Howard E. Janzen
 
By: /s/ SHAWNA L. GEHRES
-----------------------------------------------------
Shawna L. Gehres
Attorney-in-fact
</TABLE>
 
Dated: March 30, 1999
<PAGE>   81
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
 
            4(d)         -- Amended and Restated Credit Agreement dated January 26,
                            1999, among Williams Holdings, the lenders named therein,
                            and Citibank, N.A., as agent.
            4(f)         -- First Supplemental Indenture dated March 31, 1998, among
                            MAPCO, Inc., Williams Holdings, and Bankers Trust
                            Company, Trustee, relating to the Medium-Term Notes
                            (7.60%-8.87%), due 1999-2022.
            4(j)         -- Supplemental Indenture No. 3 dated March 31, 1998, among
                            MAPCO Inc., Williams Holdings, and The First National
                            Bank of Chicago, relating to the 7 1/4% Notes, due 2009,
                            the 7.70% Debentures, due 2027, the 6 1/8% Notes, due
                            2003, and the 6  1/2% Notes, due 2008.
           12            -- Computation of Ratio of Earnings to Fixed Charges.
           23(a)         -- Consent of Independent Auditors, Ernst & Young LLP.
           23(b)         -- Consent of Independent Auditors, Deloitte & Touche LLP
           24            -- Power of Attorney together with certified resolution.
           27            -- Financial Data Schedule.
         27.1            -- Restated Financial Data Schedule for the quarters ended
                            March 31, June 30, and September 30, 1997.
         27.2            -- Restated Financial Data Schedule for the quarters ended
                            March 30, June 30, and September 30, 1996.
           99            -- Opinion of Independent Auditors, Deloitte & Touche LLP.
</TABLE>