Annual Report (Form 10-K), fiscal year 1994




ITEM 2. PROPERTIES
See Item 1(c) for description of properties.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Other than as described under Item 1 -- Business and in Note 15 of Notes to Consolidated Financial Statements, there are no material pending legal proceedings. Williams is subject to ordinary routine litigation incidental to its businesses.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF WILLIAMS
The names, ages, positions and election dates of the executive officers of Williams are:
All of the above officers have been employed by Williams or its subsidiaries as officers or otherwise for more than the past five years and have had no other employment during such period.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Williams' Common Stock is listed on the New York and Pacific Stock Exchanges under the symbol "WMB." At the close of business on December 31, 1994, Williams had 7,400 holders of record of its Common Stock. The daily closing price ranges (composite transactions) and dividends declared by quarter for each of the past two years are as follows:
In January 1995, the Board of Directors of the Company approved a 28.5 percent increase in the Common Stock dividend. The dividend approved for the first quarter of 1995 was $.27 per share.
Terms of certain subsidiaries' borrowing arrangements limit transfer of funds to Williams. Terms of other borrowing arrangements limit the payment of dividends on Williams' Common Stock. These restrictions have not impeded, nor are they expected to in the future, Williams' ability to meet its cash obligations. See Note 11 of Notes to Consolidated Financial Statements.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following financial data are an integral part of, and should be read in conjunction with, the consolidated financial statements and notes thereto. Information concerning significant trends in the financial condition and results of operations is contained in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages through of this report.
- --------------- * Certain amounts have been restated as described in Note 2 of Notes to Consolidated Financial Statements.
** See Note 4 of Notes to Consolidated Financial Statements for discussion of significant asset dispositions.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULT OF OPERATIONS
1994 vs. 1993
Northwest Pipeline's revenues decreased 14 percent as expanded firm transportation service was more than offset by the absence of natural gas sales following the fourth-quarter 1993 implementation of Federal Energy Regulatory Commission (FERC) Order 636, and the completion of contract-reformation surcharges. Total mainline throughput increased 9 percent. Firm transportation service increased due to a mainline expansion, supported by 15-year firm transportation contracts, being placed into service on April 1, 1993. Northwest Pipeline placed new increased transportation rates into effect on November 1, 1994, and April 1, 1993, subject to refund. The April 1, 1993, rates reflected the new mainline expansion and straight-fixed-variable rate design that moderates seasonal swings in operating revenues. Costs and operating expenses decreased 32 percent, due primarily to the absence of natural gas purchase volumes and the completion of contract-reformation amortization, slightly offset by increased operating expenses primarily related to the full-year effect on 1994 of the mainline expansion. Operating profit increased 5 percent due primarily to expanded firm transportation service related to the company's mainline system expansion.
Williams Natural Gas' revenues decreased 21 percent, primarily as a result of the absence of natural gas sales resulting from implementation of FERC Order 636 on October 1, 1993. The decrease in revenues was partially offset by the implementation of new rates required by the Order, direct billing of net purchased gas cost adjustment amounts of approximately $40 million and higher direct billing of recoverable contract-reformation costs of approximately $17 million. Costs and operating expenses decreased 30 percent, primarily as a result of lower gas purchase costs resulting from the implementation of FERC Order 636, partially offset by the costs that were direct billed as discussed above. Operating profit increased 19 percent, primarily as a result of the full-year effect of new rates, implementation of Order 636 and the reversal of excess contract-reformation accruals recorded in other income -- net ($7.4 million in 1994 and $2.5 million in 1993), partially offset by the absence of the regulatory accounting effect of an income tax rate increase in 1993 (which was offset in income tax expense). FERC Order 636 utilizes a straight-fixed-variable rate design that is applied to each customer's annual firm contract demand for transportation.
Williams Field Services Group's revenues decreased 17 percent, due primarily to 22 percent lower natural gas sales volumes as a result of the March 1993 sale of Williams' intrastate natural gas pipeline system and related marketing operations in Louisiana. Liquids volumes and prices, average natural gas sales prices and average gathering and processing prices also decreased, but were somewhat offset by increased gathering and processing volumes of 13 percent and 21 percent, respectively. Costs and operating expenses decreased, due primarily to lower natural gas purchase volumes and per-unit costs and the effects of a favorable adjustment of an accrual related to operating taxes, partially offset by higher operations, maintenance and depreciation expenses at expanded gathering facilities. Operating profit increased 5 percent, due primarily to higher gathering and processing volumes, a favorable operating taxes adjustment and other revenues, partially offset by lower per-unit liquids margins, lower average gathering and processing prices and higher operations and maintenance expenses associated with expanded facilities. Operating profit in 1993 included a favorable settlement involving processing revenues from prior periods.
Williams Pipe Line's shipments increased 9 percent, due primarily to new volumes resulting from the December 1993 acquisition of a pipeline system in southern Oklahoma. Revenues increased 17 percent, due primarily to higher shipments and increased gas liquids and fractionator operations. The slightly higher average transportation rate resulted primarily from longer hauls into the northern region and overall increases in tariff rates, effective December 1, 1994, and June 1, 1993, partially offset by lower rates on shorter haul movements from new business. Costs and operating expenses increased, due primarily to gas liquids and fractionator operations, and additional operating expenses. Operating profit increased 25 percent, due primarily to increased shipments and a favorable insurance settlement, partially offset by higher operating and maintenance expenses.
Williams Energy Ventures' revenues increased 72 percent, due primarily to newly established petroleum services activities, partially offset by lower refined product trading margins and the effect of reporting these trading activities on a "net margin" basis effective July 1, 1993. Costs and operating expenses increased as a result of the newly established petroleum services activities and the cost of developing long-term energy industry businesses, partially offset by the effect of reporting refined product trading activities on a "net margin" basis. General and administrative expenses increased, reflecting the costs of establishing appropriate administrative and project support groups to serve growing business activities. An operating loss of $10.8 million in 1994 compares to operating profit of $7.8 million in 1993, reflecting costs of developing long-term energy industry investment opportunities and lower results from price-risk management services, partially offset by improved petroleum services activities. Included in 1994's other income -- net is approximately $5 million of costs for evaluating and determining whether to build an oil refinery near Phoenix. Price-risk management services' results continued to be profitable but were lower in 1994 than 1993 because of reduced gasoline and distillate margins and the effect of location pricing differentials in refined products trading activities, partially offset by an improvement in natural gas trading margins reflecting increased volumes.
Williams Telecommunications Systems' revenues increased 31 percent, due in large part to the March 31, 1994, acquisition of BellSouth's customer equipment sales and service operations in 29 states, as evidenced by a 52 percent increase in the number of ports. Costs and operating expenses and selling, general and administrative expenses increased 31 percent and 20 percent, respectively, due to the increase in volume of equipment sales and services. Operating profit nearly doubled from higher sales volumes, partially offset by an increase in selling, general and administrative expenses. Margins were level between 1994 and 1993, while selling, general and administrative expenses as a percent of revenue decreased in 1994 compared to 1993.
General corporate expenses decreased, reflecting lower supplemental retirement benefits (see Note 7) and incentive compensation accruals. Interest accrued decreased primarily because of lower effective interest rates, partially offset by higher average borrowing levels. Interest capitalized decreased, reflecting the completion of Northwest Pipeline's mainline expansion, which was placed in service April 1, 1993. Investing income decreased, due primarily to lower investment levels and lower equity earnings for Apco Argentina Inc., in addition to the sale of a portion of Williams' interest in Northern Border Partners, L.P. The 1994 gain on sales of assets results from the sale of 3,461,500 limited partner common units in Northern Border Partners, L.P. The gain on sales of assets in 1993 results from the sale of 6.1 million units in the Williams Coal Seam
Gas Royalty Trust and the sale of the intrastate natural gas pipeline system and other related assets in Louisiana (see Note 4). Other income (expense) -- net in 1994 includes a credit for $4.8 million from the reversal of previously accrued liabilities associated with certain Royalty Trust contingencies that expired. Also included is approximately $4 million of expense related to Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits," which relates to postemployment benefits being paid to employees of companies previously sold. Other income (expense) -- net in 1993 includes $6 million of expense accruals for certain costs associated with businesses previously sold, offset with $6 million of equity allowance for funds used during construction (AFUDC) related to the Northwest Pipeline mainline expansion.
The decrease in the provision for income taxes on continuing operations is primarily a result of lower pre-tax income and the $15.8 million cumulative effect in 1993 of the 1 percent increase in the federal income tax rate. The effective income tax rate in 1994 is lower than the statutory rate, primarily because of income tax credits from coal-seam gas production, partially offset by state income taxes. The effective income tax rate in 1993 is higher than the statutory rate, primarily because of the effect of the federal income tax rate increase and state income taxes, partially offset by income tax credits from coal-seam gas production (see Note 5).
The network services operations of WilTel have been presented in the Consolidated Financial Statements as discontinued operations, with prior period operating results restated (see Note 2). Income from discontinued operations more than doubled to $94 million. The increase reflects a 93 percent increase in switched services minutes and a 24 percent increase in private line billable circuits. These increases more than offset a major carrier's long-expected removal of traffic from WilTel's system to the carrier's expanded network. Income was also impacted by a decrease in interest accrued, due to the early extinguishment of network services' long-term debt. The effective income tax rate for both 1994 and 1993 is greater than the federal statutory rate, due to the effect of state income taxes.
The extraordinary credit (loss) results from early extinguishment of debt (see Note 6). Preferred stock dividends decreased, reflecting the redemption of 3,000,000 shares of outstanding $3.875 convertible exchangeable preferred stock during the second quarter of 1993 (see Note 12).
1993 vs. 1992
Northwest Pipeline's revenues increased 10 percent, reflecting increased firm transportation service and higher average transportation rates, partially offset by lower average gas sales prices. Total mainline throughput increased 2 percent. Firm transportation service increased due to a mainline expansion, supported by 15-year firm transportation contracts, being placed into service on April 1, 1993. Northwest Pipeline also placed new, increased transportation rates (subject to refund) into effect on April 1, 1993, that reflected the new mainline expansion and straight-fixed-variable rate design that moderates seasonal swings in operating revenues. Costs and operating expenses decreased 10 percent, due primarily to lower gas purchase volumes and per-unit costs and decreased operation and maintenance expenses, partially offset by increased depreciation. General and administrative expenses increased, due primarily to higher supplemental retirement expenses and increased outside technical and professional fees. Operating profit increased 49 percent, due primarily to increased firm transportation service, higher average transportation rates and lower operation and maintenance expenses, partially offset by higher depreciation and general and administrative expenses and lower gas sales margins.
Williams Natural Gas' revenues decreased 7 percent, primarily as a result of lower natural gas sales volumes reflecting implementation of FERC Order 636 on October 1, 1993, partially offset by higher average transportation rates and volumes and revenues generated from the sale of working gas in storage. Total throughput increased 2 percent, due primarily to cooler weather in the first quarter of 1993 and increased on-system industrial demand, partially offset by lower off-system activity. Costs and operating expenses decreased 9 percent, primarily as a result of decreased gas supply volumes, partially offset by increased operating and maintenance expenses, increased amortization of recoverable contract-reformation costs and higher per-unit gas supply costs. Operating profit increased 4 percent, primarily due to higher average transportation rates and volumes, reversal of excess contract-reformation costs that had been previously accrued and the regulatory
accounting for an income tax rate increase. Largely offsetting operating profit increases were lower natural gas sales volumes and higher operating and maintenance expenses. The impact of the regulatory accounting adjustment was offset by additional deferred income tax expense.
Williams Field Services Group's revenues decreased 24 percent, due primarily to lower natural gas sales volumes, partially offset by increased gathering, liquids products and processing volumes, and higher average gathering, processing and natural gas sales prices. Gathering volumes increased 18 percent, natural gas liquids volumes increased 11 percent and processing volumes increased 14 percent when compared with volumes from the prior year. The lower natural gas sales volumes were due to the March 1993 sale of Williams' intrastate natural gas pipeline system and related marketing operations in Louisiana. Costs and operating expenses decreased, due primarily to lower natural gas purchase volumes, partially offset by higher gas costs associated with the liquids extraction process and increased operating and maintenance expenses at expanded gathering and processing facilities. Operating profit increased 9 percent, due primarily to increased volumes at expanded facilities and a favorable settlement involving processing revenues from prior periods, partially offset by decreased gas sales volumes, lower liquids margins and increased operating costs from expanded facilities. Other income -- net and operating profit in 1992 also included a gain on the sale of a gathering facility and the reversal of a loss accrual made in prior years.
Williams Pipe Line's revenues increased 21 percent, due primarily to 12 percent higher shipments, increased other revenues primarily related to gas liquids and fractionator operations, partially offset by a slightly lower transportation rate per barrel. The lower average transportation rate per barrel reflects a 5 percent decrease in the length of the average haul, partially offset by increased tariff rates for portions of both 1992 and 1993. Costs and operating expenses increased, due primarily to gas liquids and fractionator operations. Operating profit increased primarily as a result of higher shipments and lower general and administrative expenses. During the fourth quarter, Williams Pipe Line completed the acquisition of a 300-mile pipeline that connects with the southern portion of its system in Oklahoma. The additional pipeline will provide more direct access to key refining areas and open new markets.
Williams Energy Ventures' revenues and operating costs decreased approximately 27 percent, due primarily to reporting refined product trading activities on a "net margin" basis effective July 1, 1993. Selling, general and administrative expenses increased significantly from costs associated with establishing this company's operations, pursuing new business development and equipping the company to pursue a growing range of financial and information-based opportunities in the energy industry. Operating profit decreased as improved results from price-risk management activities were more than offset by the expense associated with the development and marketing of new information-based products and exploring other growth opportunities in the energy industry. Improved results in price-risk management activities relate to increases in marketing of commodities and derivatives products, in addition to increased refined product trading volumes.
Williams Telecommunications Systems' revenues increased 12 percent, due primarily to higher equipment sales and services. Costs and operating expenses increased 9 percent, due primarily to the increased volume of equipment sales and services. Selling, general and administrative expenses decreased 9 percent as 1992 was negatively impacted by the costs associated with restructuring this business. Operating profit increased to $9.5 million in 1993, compared with an operating loss of $9.8 million in 1992 due to increased margins and volumes and a decrease in selling, general and administrative expenses.
General corporate expenses increased, reflecting higher supplemental retirement benefits (see Note 7) and incentive compensation accruals, in addition to a contribution to The Williams Companies Foundation. Interest accrued increased, primarily because of higher average borrowing levels, partially offset by a lower effective interest rate including the effects of interest-rate swap agreements (see Note 11). Investing income increased, reflecting higher equity earnings from the Kern River Gas Transmission Company pipeline, which became operational February 1992, and higher levels of short-term investments. The gain on sales of assets in 1993 results from the sale of 6.1 million units in the Williams Coal Seam Gas Royalty Trust and the sale of the intrastate natural gas pipeline system and other related assets in Louisiana. The 1992 gain on sales of assets results from the sale of a tract of land in Florida that had been retained from the assets of Agrico Chemical Company, which was sold in 1987. Other income (expense) -- net is unfavorable to 1992, primarily
because of decreased equity AFUDC related to Northwest Pipeline's mainline expansion and expense accruals for certain costs associated with businesses previously sold.
The increase in the provision for income taxes is primarily a result of higher pre-tax income and the $15.8 million cumulative effect of the 1 percent increase in the federal income tax rate. The effective income tax rate in 1993 is higher than the statutory rate, primarily because of the effect of the federal income tax rate increase and state income taxes, partially offset by income tax credits from coal-seam gas production. The effective income tax rate in 1992 is lower than the statutory rate, primarily because of income tax credits from coal-seam gas production, partially offset by state income taxes (see Note 5).
Income from discontinued operations related to WilTel's network services operations increased 84 percent to $46.4 million in 1993 (see Note 2). The increase is due primarily to a 122 percent increase in switched services minutes, a 32 percent increase in private line billable circuits and lower provisions for bad debt expense, partially offset by a decrease in the weighted average price per circuit. The effective income tax rate for both 1993 and 1992 is greater than the federal statutory rate due to the effect of state income taxes.
Preferred stock dividends decreased, reflecting the redemption of 3,000,000 shares of outstanding $3.875 convertible exchangeable preferred stock during the second quarter of 1993 (see Note 12).
FINANCIAL CONDITION AND LIQUIDITY
Liquidity
Williams 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, which can be utilized without limitation under existing loan covenants. At December 31, 1994, Williams had access to $495 million of liquidity, representing the available portion of its $600 million bank-credit facility (see Note 11). This compares with liquidity of $639 million at December 31, 1993, and $780 million at December 31, 1992, including $178 million from Northwest Pipeline. During 1993, Williams filed a $300 million shelf registration statement with the Securities and Exchange Commission, increasing the total amount available to $400 million. The registration statement may be used to issue Williams common or preferred stock, preferred stock purchase rights, debt securities, warrants to purchase Williams common stock or warrants to purchase debt securities. In addition, Northwest Pipeline has $50 million remaining on a registration statement filed with the Securities and Exchange Commission in 1992. Williams does not anticipate the need for additional financing arrangements; however, Williams believes it could be obtained on reasonable terms if required.
Williams had a net working-capital deficit of $17 million at December 31, 1994, including net assets of discontinued operations of $744 million, compared with $106 million at December 31, 1993. Subsequent to December 31, 1994, $398 million of notes payable and $350 million of revolving credit loans (see Note 11) were repaid from proceeds of the sale of WilTel's network services operations. Williams manages its borrowings to keep cash and cash equivalents at a minimum and has relied on bank-credit facilities to provide flexibility for its cash needs. As a result, it historically has reported negative working capital.
Terms of certain borrowing agreements limit transfer of funds to Williams from its subsidiaries. The restrictions have not impeded, nor are they expected to impede, Williams' ability to meet its cash requirements in the future.
Subsequent to December 31, 1994, Williams completed the sale of WilTel's network services operations, and also acquired 60 percent of Transco Energy Company (Transco). See Notes 2 and 16 and the subsequent events section of Management's Discussion and Analysis for additional information regarding the impact these transactions will have on Williams' financial condition and liquidity. During 1995, Williams expects to finance capital expenditures, the Transco acquisition, investments and working-capital requirements through the use of its $600 million bank-credit facility or public debt/equity offerings and the proceeds from the sale of WilTel's network services operations.
Operating Activities
Cash provided by continuing operating activities was: 1994 -- $189 million; 1993 -- $187 million; and 1992 -- $141 million. Accounts receivable increased because of expanded activities of Williams Energy Ventures and acquisitions made by Williams Telecommunications Systems, partially offset by the reclassification of WilTel's network services receivables to net assets of discontinued operations (see Note 2). Accounts payable and accrued liabilities also declined as a result of the network services reclassification.
Cash provided by discontinued operations was: 1994 -- $179 million; 1993 -- $162 million; 1992 -- $113 million. The increases during the periods primarily reflect improved operating results.
Financing Activities
Net cash provided (used) by financing activities was: 1994 -- $31 million; 1993 -- ($220) million; 1992 -- $421 million. Long-term debt proceeds, net of principal payments and early extinguishments of debt, were $24 million during 1994. Long-term debt principal payments totaled $192 million during 1993. Long- term debt proceeds, net of principal payments, during 1992 were $264 million. The increase in net new borrowings during 1992 was primarily to fund capital expenditures and investments and advances to affiliates.
During 1994, Williams and one of its subsidiaries purchased 13.8 million shares of Williams common stock on the open market for $407 million. Substantially all of the purchases were financed with a $400 million bank-credit agreement. Subsequent to December 31, 1994, the outstanding amounts under the credit agreement were repaid from the proceeds of the sale of WilTel's network services operations, and the credit agreement was terminated. Williams also repurchased 258,800 shares of its $2.21 cumulative preferred stock on the open market for $6 million.
The majority of the proceeds from issuance of common stock in 1994 and 1993 resulted from certain Williams benefit plan stock purchases and exercise of stock options under Williams' stock plan (see Note 12). During 1992, Williams received net proceeds of $96 million from the sale of 4,000,000 shares of $2.21 cumulative preferred stock and $119 million from the sale of 7,100,000 shares of common stock.
During 1993, Williams called for redemption of its 3,000,000 shares of outstanding $3.875 convertible exchangeable preferred stock. Substantially all of the preferred shares were converted into 7,600,000 shares of Williams common stock.
Long-term debt at December 31, 1994, was $1.3 billion, compared with $1.6 billion at December 31, 1993, and $1.7 billion at December 31, 1992. The long-term debt to debt-plus-equity ratio was 46.5 percent at year-end, compared with 48.2 percent and 52.6 percent at December 31, 1993 and 1992, respectively. If short-term notes payable and long-term debt due within one year are included in the calculations, these ratios would be 59.3 percent, 49 percent and 54.9 percent, respectively. Included in long-term debt due within one year is $350 million outstanding under Williams' revolving credit loan (see Note 11).
See Note 6 for information regarding early extinguishment of debt by Williams and its subsidiaries during 1994 and 1992.
Investing Activities
Net cash used by investing activities was: 1994 -- $427 million; 1993 -- $277 million; 1992 -- $511 million. Capital expenditures for discontinued operations were $143 million in 1994; $101 million in 1993; and $59 million in 1992, primarily to expand and enhance WilTel's network. Capital expenditures of pipeline subsidiaries, primarily to expand and modernize systems, were $272 million in 1994; $405 million in 1993; and $500 million in 1992. Expenditures in 1994 include Northwest Pipeline's additional mainline expansion and the expansion of various gathering and processing facilities. Expenditures in 1993 include the completion of Northwest Pipeline's first mainline expansion and the expansion of various gathering and processing facilities. Approximately two-thirds of the 1992 expenditures relate to Northwest Pipeline's mainline expansion. Budgeted capital expenditures for 1995 are approximately $1.3 billion, primarily to expand pipeline systems
and gathering and processing facilities, develop an underground coal gasification project and acquire certain gathering and processing assets in New Mexico.
During 1994, Williams received net proceeds of $80 million from the sale of limited partner units in Northern Border Partners, L.P. During 1993, Williams received net proceeds of $113 million from the sale of 6.1 million units in the Williams Coal Seam Gas Royalty Trust. In addition, Williams sold its intrastate natural gas pipeline system and other related assets in Louisiana for $170 million (see Note 4).
Subsequent to December 31, 1994, Williams announced that Texasgulf Inc. (in which Williams owns 15 percent) had filed registration statements with the Securities and Exchange Commission covering the initial public offering for all of Texasgulf's common stock and certain senior subordinated notes (see Note 3).
EFFECTS OF INFLATION
Williams has experienced increased costs in recent years due to the effects of inflation. However, approximately 90 percent of Williams' property, plant and equipment has been purchased since 1982, a period of relatively low inflation. A substantial portion of Williams' property, plant and equipment is subject to regulation, which limits recovery to historical cost. While Williams believes it will be allowed the opportunity to earn a return based on the actual cost incurred to replace existing assets, competition or other market factors may limit the ability to recover such increased costs.
OTHER
In 1992, the FERC issued Order 636, Order 636-A and Order 636-B. These orders, which have been challenged in various respects by various parties in proceedings pending in the U.S. Court of Appeals for the D.C. Circuit, require interstate gas pipeline companies to change the manner in which they provide services. Williams Natural Gas implemented its restructuring on October 1, 1993, and Northwest Pipeline implemented its restructuring on November 1, 1993. Certain aspects of each pipeline company's restructuring are under appeal (see Note 15).
Williams is a participant in certain environmental activities in various stages involving assessment studies, cleanup operations and/or remedial processes. The sites, some of which are not currently owned by Williams (see Note 15), are being monitored by Williams, other potentially responsible parties, U.S. Environmental Protection Agency (EPA), or other governmental authorities in a coordinated effort. In addition, Williams maintains an active monitoring program for its continued remediation and cleanup of certain sites connected with its refined products pipeline activities. Williams 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 $40 million, all of which is accrued at December 31, 1994. Williams expects to seek recovery of approximately $28 million of these costs through future rates. Williams 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.
See Note 7 for the effects of a new accounting standard on postemployment benefits; Note 13 for fair value and off-balance-sheet risk of financial instruments; and Note 15 for contingencies.
SUBSEQUENT EVENTS
In January 1995, the Williams Board of Directors increased the quarterly cash dividend on Williams common stock to $.27 per share, a 28.5 percent increase over the previous amount.
Subsequent to December 31, 1994, Williams completed its previously announced sale of WilTel's network services operations for $2.5 billion in cash. The estimated after-tax gain of approximately $1 billion will be recorded in the first quarter of 1995 (see Note 2). Net proceeds from the sale have been or will be used to reduce Williams bank debt, finance the cash tender offer for shares of Transco's common stock, retire certain Transco borrowings and preferred stock, and finance Williams' 1995 capital expenditures program.
Subsequent to December 31, 1994, Williams acquired 60 percent of Transco in a cash tender offer for $430.5 million. Williams will acquire the remaining 40 percent of Transco's outstanding common stock through a merger, which will result in the issuance of approximately 10.2 million shares of Williams common stock (see Note 16). In connection with the acquisition, Williams plans to redeem for cash $150 million in Transco's $4.75 preferred stock, issue $125 million in Williams preferred stock in exchange for Transco's $3.50 preferred stock and retire approximately $550 million of Transco's borrowings and subsidiary preferred stock, interest-rate swaps and sale of receivables facilities. Williams may also provide funds for Transco working capital and other needs.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To The Stockholders of The Williams Companies, Inc.
We have audited the accompanying consolidated balance sheet of The Williams Companies, Inc. as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Williams Companies, Inc. at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma February 10, 1995
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME
- ---------------
* Restated as described in Note 2.
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME -- (CONCLUDED)
- --------------- * Restated as described in Note 2.
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------
* Restated as described in Note 2.
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of The Williams Companies, Inc. and majority-owned subsidiaries (Williams). Companies in which Williams 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.
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 those held by Williams Energy Ventures (see Commodity price-risk management activities accounting policy). Inventories of natural gas are determined using the average-cost method. Williams Pipe Line's inventories of petroleum products are also principally determined using average cost. The cost of materials and supplies inventories is determined principally using the first-in, first-out method by Williams Telecommunications Systems and the average-cost method by other subsidiaries.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Depreciation is provided primarily on the straight-line method over estimated useful lives. Gains or losses from the ordinary sale or retirement of property, plant and equipment for regulated pipeline subsidiaries are credited or charged to accumulated depreciation; other gains or losses are recorded in net income.
Treasury stock
Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares are credited or charged to capital in excess of par value using the average-cost method.
Revenue recognition
Revenues generally are recorded when services have been performed or products have been delivered. Natural gas transportation revenues are recognized based upon contractual terms and the related transported volume through month-end. Williams Pipe Line bills customers when products are shipped and defers the estimated revenues for shipments in transit.
Commodity price-risk management activities
Williams Energy Ventures enters into energy-related financial instruments (primarily futures contracts, options contracts and swap agreements) to hedge against market price fluctuations of certain refined products inventories and natural gas sales and purchase commitments. Gains and losses on these hedge contracts are recognized in income when the related hedged item is recognized.
Williams Energy Ventures also uses energy-related financial instruments (forward contracts, futures contracts, options contracts and swap agreements) and physical inventory to provide price-risk management services to its customers. These investments are valued at market and are primarily recorded in other current assets and other accrued liabilities in the Consolidated Balance Sheet. The resulting change in unrealized
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market gains and losses is recognized in income currently and is recorded as revenues in the Consolidated Statement of Income. Such market values reflect management's best estimate of market prices considering various factors including closing exchange and over-the-counter quotations, the terms of the contract, credit considerations, time value and volatility factors underlying the positions.
Capitalization of interest
Williams capitalizes interest on major projects during construction. Interest is capitalized on borrowed funds and, where regulation by the Federal Energy Regulatory Commission (FERC) exists, on internally generated funds. The rates used by regulated companies are calculated in accordance with FERC rules. Rates used by unregulated companies approximate the average interest rate on related debt. Interest capitalized on internally generated funds is included in other income (expense) -- net.
Income taxes
Williams includes the operations of its subsidiaries in its consolidated federal income tax return. 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' assets and liabilities.
Earnings per share
Primary earnings per share are based on the sum of the average number of common shares outstanding and common-share equivalents resulting from stock options and deferred shares. Fully diluted earnings per share for 1993 assumes conversion of the convertible exchangeable preferred stock (CEPS) into common stock effective January 1, 1993. The CEPS were not dilutive in 1992. Shares used in determination of primary earnings per share are as follows (in thousands): 1994 -- 102,470; 1993 -- 99,911; and 1992 -- 90,816. Shares used in determination of fully diluted earnings per share are as follows (in thousands): 1994 -- 102,502; 1993 -- 103,171; and 1992 -- 90,816.
NOTE 2 -- DISCONTINUED OPERATIONS
In August 1994, Williams signed a definitive agreement to sell WilTel's network services operations to LDDS Communications, Inc. (LDDS) for $2.5 billion in cash. The sale closed January 5, 1995, yielding an after-tax gain of approximately $1 billion, which will be recorded in the first quarter of 1995. Under the terms of the agreement, Williams retained WilTel Communications Systems, Inc. (which has been renamed Williams Telecommunications Systems, Inc.), a national telecommunications equipment supplier and service company, and Vyvx, Inc., which operates a national video network specializing in broadcast television applications. The Consolidated Financial Statements have been prepared to present operating results of network services as discontinued operations, with prior period operating results restated.
Summarized operating results of discontinued operations are as follows:
The assets and liabilities that were transferred to LDDS in the sale of the network services operations are presented in the Consolidated Balance Sheet on a net basis at December 31, 1994. Net assets consist of current assets ($86.5 million), net property, plant and equipment ($797.8 million), other assets and deferred
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charges ($144.3 million), less current liabilities ($218.3 million) and deferred income and other liabilities ($66.7 million).
NOTE 3 -- INVESTING ACTIVITIES
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* Accounted for on the equity method.
Williams' investment in Texasgulf Inc. is subject to certain rights under a shareholder agreement. Williams has the right to sell the shares to the majority owner under various specified terms and to require Texasgulf to register the shares for public offering. Most of the rights under the shareholder agreement, including the right to sell to the majority owner, are not transferable in the event Williams sells the shares or there is a change in control of Williams.
Subsequent to December 31, 1994, Williams and the majority owner of Texasgulf filed registration statements with the Securities and Exchange Commission covering an initial public offering of all Texasgulf's common stock and certain senior subordinated notes. If the common stock offering is completed as filed, Williams will sell all of its interests in Texasgulf except for certain nonproducing phosphate reserves. After giving consideration to the expected effect of these transactions, the estimated net realizable value of certain properties which are expected to be retained, dividends already received from Texasgulf in 1995 and previously unrecognized income tax benefits, Williams does not expect to incur an after-tax loss on the disposition. If the above public offerings do not occur or are significantly altered, Williams believes it will ultimately realize its after-tax investment in Texasgulf through other rights or alternatives.
At December 31, 1994, other investments carried at $30 million have a market value of $73 million.
Investing income from continuing operations:
Dividends and distributions received from companies carried on an equity basis were $43 million in 1994; $39 million in 1993; and $10 million in 1992.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial position and results of operations for Kern River Gas Transmission Company are presented below. Kern River operations began in February 1992.
NOTE 4 -- SALES OF ASSETS
In 1994, Williams sold 3,461,500 limited partner common units in Northern Border Partners, L.P. Net proceeds from the sale were approximately $80 million and the sale resulted in a pre-tax gain of $22.7 million. As a result of the sale, Williams' original 12.25 percent interest in Northern Border partnerships has been reduced to 3.2 percent.
In a 1993 public offering, Williams sold 6.1 million units in the Williams Coal Seam Gas Royalty Trust (Trust), which resulted in net proceeds of $113 million and a pre-tax gain of $51.6 million. The Trust owns defined net profits interests in the developed coal-seam properties in the San Juan Basin of New Mexico and Colorado, which were conveyed to the Trust by Williams Production Company. Ownership of an additional 3.6 million units remains with Williams.
In March 1993, Williams sold its intrastate natural gas pipeline system and other related assets in Louisiana for $170 million in cash, resulting in a pre-tax gain of $45.9 million.
The 1992 gain of $14.6 million resulted from the sale of a tract of land in Florida that had been retained from the assets of Agrico Chemical Company, which was sold several years ago.
NOTE 5 -- PROVISION FOR INCOME TAXES
The provision (credit) for income taxes from continuing operations includes:
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1993 provision for income taxes includes the effect of a 1 percent increase in the federal income tax rate, which was made retroactive to January 1, 1993. Effective January 1, 1993, Williams adopted Statement of Financial Accounting Standards (FAS) No. 109, "Accounting for Income Taxes." Adoption of the standard had a cumulative favorable effect of approximately $2 million on net income. The effect is recorded in income tax expense because of immateriality. Prior to 1993, Williams accounted for deferred income taxes under FAS No. 96. As permitted under the new rules, prior years' financial statements have not been restated.
Reconciliations from the provision for income taxes attributable to continuing operations at the statutory rate to the provision for income taxes are as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes.
Significant components of deferred tax liabilities and assets as of December 31 are as follows:
The valuation allowance for deferred tax assets decreased $1.7 million and $3.4 million during 1994 and 1993, respectively.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash payments for income taxes are as follows: 1994 -- $113 million, before refunds of $6 million; 1993 -- $129 million; and 1992 -- $50 million.
NOTE 6 -- EXTRAORDINARY CREDIT (LOSS)
The extraordinary items in 1994 and 1992 result from early extinguishment of debt. During 1994, Williams and one of its subsidiaries paid $316.7 million to redeem higher interest rate debt for a $12.2 million net loss (net of a $7.7 million benefit for income taxes). In 1992, two of Williams' subsidiaries paid a total of $55.7 million to redeem debt resulting in a $9.9 million net gain (including a $.7 million benefit for income taxes).
NOTE 7 -- EMPLOYEE BENEFIT PLANS
Pensions
Williams maintains non-contributory defined-benefit pension plans covering the majority of employees. Benefits are based on years of service and average final compensation. Pension costs are funded to satisfy minimum requirements prescribed by the Employee Retirement Income Security Act of 1974.
Net pension expense consists of the following:
During 1993, certain supplemental retirement plan participants elected to receive lump-sum benefits, which resulted in a settlement loss of $5.7 million.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the funded status of the plans:
Williams has retained all liabilities and obligations of WilTel's network services operations' plan participants up to the date of sale (see Note 2).
At December 31, 1994, assets of two of Williams' pension plans exceeded the projected benefit obligations by $5 million. However, the preceding table includes pension plans that had projected benefit obligations of $26 million and assets of $13 million at December 31, 1994.
The discount rate used to measure the present value of benefit obligations is 8 1/2 percent (7 1/4 percent in 1993); the assumed rate of increase in future compensation levels is 5 percent; and the expected long-term rate of return on assets is 10 percent. Plan assets consist primarily of commingled funds and assets held in a master trust. The master trust is comprised primarily of domestic and foreign common and preferred stocks, corporate bonds, United States government securities and commercial paper.
Postretirement benefits other than pensions
Williams sponsors a health care plan that provides postretirement medical benefits to retired employees who were employed full time, hired prior to January 1, 1992, have worked five years, attained age 55 while in service with Williams and are a participant in the Williams pension plans. The plan provides for retiree contributions and contains other cost-sharing features such as deductibles and coinsurance. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with Williams' expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year. A portion of the cost has been funded in trusts by Williams' FERC-regulated natural gas pipeline subsidiaries to the extent recovery from customers can be achieved. Plan assets consist of assets held in a master trust (previously described) and money market funds.
Effective January 1, 1993, Williams prospectively adopted FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Application of the standard reduced 1993 net income by approximately $2 million.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net postretirement benefit expense consists of the following:
The estimated expense of providing these benefits to retirees was $8 million in 1992 ($1 million for discontinued operations) and included accruals of $4 million for future benefits payable to eligible active employees.
The following table presents the funded status of the plan:
The postretirement benefit liability at December 31, 1994, includes approximately $5 million for WilTel's network services operations' plan participants. Williams has no obligation to pay postretirement medical benefits for these participants after the date of sale (see Note 2).
The discount rate used to measure the present value of benefit obligations is 8 1/2 percent (7 1/4 percent in 1993). The expected long-term rate of return on plan assets is 10 percent. The annual assumed rate of increase in the health care cost trend rate for 1995 is 10 to 14 percent, systematically decreasing to 6 percent by 2003. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rate by 1 percent in each year would increase the aggregate of the service and interest cost components of postretirement benefit expense for the year ended December 31, 1994, by $2 million and the accumulated postretirement benefit obligation as of December 31, 1994, by $14 million.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
Williams maintains various defined-contribution plans covering substantially all employees. Company contributions are based on employees' compensation and, in part, match employee contributions. Company contributions are invested primarily in Williams common stock. Williams' contributions to these plans were $14 million in 1994, $13 million in 1993 and $11 million in 1992. Contributions to these plans made by discontinued operations were $3 million in 1994 and 1993, and $2 million in 1992.
Effective January 1, 1994, Williams adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," which requires the accrual of benefits provided to former or inactive employees after employment but before retirement. Adoption of the standard reduced 1994 net income by approximately $2 million and is not reported as a change in accounting principle due to immateriality.
NOTE 8 -- INVENTORIES
NOTE 9 -- PROPERTY, PLANT AND EQUIPMENT
Commitments for construction and acquisition of property, plant and equipment are approximately $70 million at December 31, 1994.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- 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 $41 million at December 31, 1994, and $53 million at December 31, 1993.
NOTE 11 -- LONG-TERM DEBT, LEASES AND BANKING ARRANGEMENTS
Notes payable
During 1994, a subsidiary of Williams entered into a $400 million short-term credit agreement to finance the acquisition of Williams common stock. Notes payable totaling $398 million were outstanding under this agreement at December 31, 1994. These notes were repaid in January 1995.
The weighted average interest rate on the $507 million outstanding short-term borrowings at December 31, 1994, was 6.75 percent. There were no short-term borrowings outstanding at December 31, 1993.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt
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* At December 31, 1994.
Under Williams' $600 million credit agreement, Northwest Pipeline, Williams Natural Gas and Williams Pipe Line have access to various amounts of the facility while Williams (parent) has access to all unborrowed amounts. Interest rates vary with current market conditions. Certain amounts outstanding at December 31, 1994, under this facility do not reduce amounts available to Williams in the future. The available amount at December 31, 1994, is $495 million. The agreement terminates in December 1995 and Williams expects to replace it with a similar agreement.
In conjunction with the issuance of $130 million of variable rate debt by Williams Natural Gas in November 1994, Williams entered into an interest-rate swap agreement under which Williams pays a 7.78 percent fixed rate in exchange for a variable rate (5.81 percent at December 31, 1994). The difference between the fixed and variable rate is included in interest expense.
During 1993, Williams sold to financial institutions options to enter into future interest-rate swap agreements on $220 million of fixed-rate debt. Net proceeds of $22 million from the sale of these options were deferred and amortized as a reduction of interest expense over the remaining term of the original debt agreements. In 1994, the original debt was prepaid, the options were terminated and the remaining deferred proceeds from the sale of the options have been included in the extraordinary loss on the debt extinguishments (see Note 6).
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1992, Williams entered into interest-rate swap agreements to effectively convert $450 million of fixed-rate debt to variable-rate debt. Subsequently, Williams entered into a forward termination of the agreements, effective March 1993, which resulted in Williams receiving $29 million in net proceeds. This amount has been deferred and is being amortized as a reduction of interest expense over the remaining term of the original agreements.
Terms of borrowings require maintenance of certain financial ratios, limit the sale or encumbrance of assets and limit the amount of additional borrowings. In addition, certain debt agreements include a restriction on the payment of dividends on common stock and the amount that can be expended to acquire Williams common stock. At December 31, 1994, Williams had $565 million available under this covenant. Terms of certain subsidiaries' borrowing arrangements with institutional lenders limit the transfer of funds to Williams. Net assets of consolidated subsidiaries at December 31, 1994, are $2.7 billion, of which approximately $432 million is restricted. Undistributed earnings of companies and partnerships accounted for under the equity method of $64 million are included in Williams' consolidated retained earnings at December 31, 1994.
Aggregate minimum maturities and sinking-fund requirements, excluding lease payments, for each of the next five years are as follows:
Cash payments for interest (net of amounts capitalized) related to continuing operations are as follows: 1994 -- $143 million; 1993 -- $144 million; and 1992 -- $119 million. Cash payments for interest (net of amounts capitalized) related to discontinued operations are as follows: 1994 -- $6 million; 1993 -- $16 million; and 1992--$18 million.
Leases
Future minimum annual rentals under non-cancelable leases related to continuing operations are as follows:
Total rent expense from continuing operations was $26 million in 1994, $22 million in 1993, and $23 million in 1992. Total rent expense from discontinued operations was $70 million in 1994, $59 million in 1993, and $48 million in 1992.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- STOCKHOLDERS' EQUITY
The outstanding $2.21 cumulative preferred shares are redeemable by Williams at a price of $25, beginning in September 1997. Dividends per share of $2.21, $2.21 and $.72 were recorded during 1994, 1993 and 1992, respectively.
During 1993, Williams called for redemption of its 3,000,000 shares of outstanding $3.875 convertible exchangeable preferred stock. Substantially all of the preferred shares were converted into 7.6 million shares of Williams common stock. Dividends per share of $.97 and $3.875 were recorded during 1993 and 1992, respectively.
Each outstanding share of common stock has one-half of a preferred stock purchase right attached. Under certain conditions, each right may be exercised to purchase, at an exercise price of $75 (subject to adjustment), one two-hundredth of a share of a new series of junior participating preferred stock. The rights may be exercised only if an Acquiring Person acquires (or obtains the right to acquire) 20 percent or more of Williams common stock; or commences an offer for 30 percent or more of Williams common stock; or the board of directors determines an Adverse Person has become the owner of 10 percent or more of Williams common stock. The rights, which do not have voting rights, expire in 1996 and may be redeemed at a price of $.05 per right prior to their expiration, or within a specified period of time after the occurrence of certain events. In the event a person becomes the owner of more than 20 percent of Williams common stock or the board of directors determines that a person is an Adverse Person, each holder of a right (except an Acquiring Person or an Adverse Person) shall have the right to receive, upon exercise, common stock having a value equal to two times the exercise price of the right. In the event Williams is acquired in a merger or other business combination, each holder of a right (except an Acquiring Person or an Adverse Person) shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the right.
The 1990 Stock Plan (the Plan) permits granting of various types of awards including, but not limited to, stock options, stock-appreciation rights, restricted stock and deferred stock. The Plan provides for granting of awards to key employees, including officers and directors who are employees. Such awards may be granted for no consideration other than prior and future services. The purchase price per share for stock options and stock-appreciation rights may not be less than the fair-market value of the stock on the date of grant. Another stock option plan provides for the granting of non-qualified options to non-employee directors. Options generally become exercisable in three annual installments beginning within one year after grant, and they expire 10 years after grant.
The following summary reflects option transactions during 1994.
Under the Plan, Williams granted 127,706, 97,504 and 108,920 deferred shares in 1994, 1993 and 1992, respectively, to key employees. Deferred shares are valued at the date of award and generally charged to expense in the year of award. Williams issued 45,298, 191,007 and 70,958 of previously deferred shares in
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1994, 1993 and 1992, respectively. Williams also issued 44,800, 62,000 and 40,000 shares of restricted stock in 1994, 1993 and 1992, respectively. Restricted stock is valued on the issuance date, and the related expense is amortized over varying periods of three to ten years.
During November 1994, Williams entered into a deferred share agreement (the Agreement) in connection with the sale of WilTel's network services operations. Under the terms of the Agreement, Williams will distribute up to approximately 2.6 million shares of Williams common stock to key employees over various periods through 1998. During 1994, the initial stock distribution of 273,095 shares was made.
At December 31, 1994, 7,131,209 shares of common stock were reserved for stock awards, of which 1,835,014 were available for future grants (3,200,354 at December 31, 1993).
NOTE 13 -- FINANCIAL INSTRUMENTS
Fair value methods
The following methods and assumptions were used by Williams 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. For those notes with maturities beyond three years and fixed interest rates, fair value is calculated using discounted cash flow analysis based on current market rates.
Long-term debt: The fair value of Williams' 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, 1994 and 1993, 59 percent and 76 percent, respectively, of Williams' long-term debt was publicly traded. Williams used the expertise of an outside investment banking firm to estimate the fair value of long-term debt.
Call options sold on interest-rate swaps: Fair value is determined by discounting estimated future cash flows using forward interest rates implied by the year-end yield curve and standard option pricing techniques. Fair value was calculated by the two financial institutions holding the options.
Interest-rate swap: Fair value is determined by discounting estimated future cash flows using forward interest rates implied by the year-end yield curve. Fair value was calculated by the financial institution who is the counterparty to the swap.
Energy-related futures, swaps and options: Fair value reflects management's best estimate of market prices considering various factors including closing exchange and over-the-counter quotations, the terms of the contract, credit considerations, time value and volatility factors underlying the positions.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Carrying amounts and fair values of Williams' financial instruments
Asset (liability)
The above asset and liability amounts for energy-related hedging represent unrealized gains or losses and do not include the related deferred amounts.
The 1994 average fair value of the energy-related trading futures contracts is a liability of $1.5 million. The 1994 average fair value of the trading swaps and options assets and liabilities are $9.2 million and $7 million, respectively.
Williams has recorded liabilities of $27 million and $37 million at December 31, 1994 and 1993, respectively, for certain guarantees that qualify as financial instruments. It is not practicable to estimate the fair value of these guarantees because of their unusual nature and unique characteristics.
Off-balance-sheet credit and market risk
Williams is a participant in numerous transactions and arrangements that involve financial instruments that have off-balance-sheet risk of accounting loss. It is not practicable to estimate the fair value of these off- balance-sheet financial instruments because of their unusual nature and unique characteristics.
Williams sold, with limited recourse, certain receivables. The aggregate limit under these receivables facilities was $80 million at December 31, 1994 (all related to discontinued operations) and $180 million at December 31, 1993. Williams received $45 million of additional net proceeds in 1994, none in 1993 and $171 million in 1992. At December 31, 1994 and 1993, $80 million and $35 million (all related to discontinued operations) of such receivables had been sold, respectively. Under a different arrangement, one of Williams' subsidiaries sold $18 million of receivables with limited recourse in 1992. Williams has no risk of credit loss because amounts outstanding relate to discontinued operations (see Note 2).
In connection with certain assets disposed in 1987, Williams has been providing, for the benefit of the mortgage lender, a guarantee of the sufficiency of certain lease rentals to meet a portion of the debt service associated with the assets. At December 31, 1994 and 1993, the maximum possible loss under this
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
arrangement was approximately $16 million and $15 million, respectively, before consideration of future contractual and estimated sublease income, which is expected to be substantial. In January 1995, Williams acquired from the lender the underlying debt and mortgage and believes that under the arrangement the guarantee terminated by its terms. The debtor and owner of the assets has disputed Williams' interpretation of the guarantee.
In connection with the sale of units in the Williams Coal Seam Gas Royalty Trust (Trust), Williams indemnified the Trust against losses from certain litigation (see Note 15), guaranteed certain minimum ownership interests based on natural gas reserve volumes through 1993 only and guaranteed minimum gas prices through 1997. At December 31, 1994 and 1993, Williams has a recorded liability of $10 million and $15 million, respectively, for these items, representing the maximum amounts for the first two guarantees and an estimate of the gas price exposure based on historical operating trends and an assessment of market conditions. While Williams' maximum exposure from this guarantee exceeds amounts accrued, it is not practicable to determine such amount because of the unique aspects of the guarantee.
In connection with the sale of WilTel's network services operations, Williams has been indemnified by LDDS against any losses related to retained guarantees of $200 million for lease rental obligations. LDDS is negotiating with the guaranteed parties to remove Williams as guarantor.
Williams has issued other guarantees and letters of credit with off-balance-sheet risk that total approximately $9 million and $20 million at December 31, 1994 and 1993, respectively. Williams 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.
In accordance with historical industry practice, Williams' natural gas subsidiaries have gas purchase contracts with commitments to buy minimum quantities of natural gas, primarily at market prices, for varying periods estimated to extend through at least 2014. The subsidiaries currently have or will enter into gas sales contracts for these volumes, or the subsidiaries will negotiate the termination of contracts that are not required to meet gas sales demand (see Note 15).
Commodity price-risk management services
Williams Energy Ventures provides price-risk management services associated with the energy industry to its customers. These services are provided through a variety of financial instruments, including forward contracts, futures contracts, options contracts and swap agreements. See Note 1 for a description of the accounting for these trading activities. The net gain for 1994 from all trading activities was $14.2 million and is reported as revenues in the Consolidated Statement of Income.
Williams Energy Ventures manages risk from financial instruments by making various logistical commitments which manage profit margins through offsetting financial instruments. As a result, price movements can result in losses on certain contracts offset by gains on others.
Williams Energy Ventures takes an active role in managing and controlling market and counterparty risks and has established formal control procedures which are reviewed on an ongoing basis. Williams Energy Ventures 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 WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional quantities and average prices for natural gas related swap agreements, options contracts and futures contracts at December 31, 1994, are as follows:
At December 31, 1993, Williams Energy Ventures was the payor and receiver under natural gas fixed-price swap agreements having notional quantities of 44.1 TBtu and 43.9 TBtu, respectively. Average prices are $2.24 and $2.18, respectively. In addition, Williams Energy Ventures was the payor and receiver under location differential variable-priced swap agreements having notional quantities of 26.3 TBtu and 38.8 TBtu, respectively, at December 31, 1993. The average price under these agreements was $1.77.
The swap agreements call for Williams Energy Ventures to make payments to (or receive payments from) counterparties based upon the differential between a fixed and variable price or variable prices for different locations. The variable prices are generally based on either industry pricing publications or exchange quotations. Williams Energy Ventures buys and sells options contracts which give the buyer the right to exercise the options and receive the difference between a predetermined strike price and a market price at the date of exercise. The market prices used for natural-gas-related contracts are generally exchange quotations. Williams Energy Ventures 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. The swap agreements extend for various periods through 2000; options contracts and futures contracts extend for various periods through 1996. Average prices are based on weighted averages for contracts outstanding at December 31, 1994 and 1993. Average prices for location differential swaps incorporate forward prices based on the appropriate index.
Williams Energy Ventures enters into energy-related financial instruments to hedge against market price fluctuations of certain refined products inventories and natural gas sales and purchase commitments. Net
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred losses at December 31, 1994, on anticipated sales and purchase commitments were $9 million. It is expected that substantially all of these deferred amounts will be recognized in income during 1995. See Note 1 for a description of the accounting for these hedging activities.
Concentration of credit risk
Williams' cash equivalents consist of high quality securities placed with various major financial institutions with high credit ratings. Williams' investment policy limits the company's credit exposure to any one financial institution.
At December 31, 1994 and 1993, approximately 40 percent and 48 percent, respectively, of receivables are for the sale or transportation of natural gas and related products or services. Approximately 30 percent and 43 percent of receivables at December 31, 1994 and 1993, respectively, are for telecommunications and related services. Natural gas customers include pipelines, distribution companies, producers, gas marketers and industrial users primarily located in the northwestern and central United States. Telecommunications customers include numerous corporations. As a general policy, collateral is not required for receivables, but customers' financial conditions and credit worthiness are evaluated regularly.
NOTE 14 -- OTHER FINANCIAL INFORMATION
Intercompany revenues (at prices that generally apply to sales to unaffiliated parties) are as follows:
Williams Natural Gas had sales to a natural gas distributor that accounted for 15 percent in 1993 and 11 percent in 1992 of Williams' revenues.
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for business segments is as follows:
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* Restated as described in Note 2.
NOTE 15 -- CONTINGENT LIABILITIES AND COMMITMENTS
Rate and regulatory matters and related litigation
In June 1990, a producer brought suit against Williams Natural Gas alleging antitrust and interference with contract claims regarding the transportation of gas and seeking actual, treble and punitive damages and injunctive relief. Williams Natural Gas has denied any liability. In April 1991, Williams Natural Gas was granted summary judgment on the antitrust claim and at the close of the plaintiff's case, a directed verdict was granted in favor of Williams Natural Gas on the remaining claims. The plaintiff filed an appeal on November 18, 1992, and on January 12, 1995, the lower court's judgment was affirmed.
Williams' interstate pipeline subsidiaries, including Williams Pipe Line, have various regulatory proceedings pending. As a result of rulings in certain of these proceedings, a portion of the revenues of these subsidiaries has been collected subject to refund. As to Williams Pipe Line, revenues collected subject to
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
refund were $111 million at December 31, 1994; it is not expected that the amount of any refunds ordered would be significant. Accordingly, no portion of these revenues has been reserved for refund. As to the other pipelines, see Note 10 for the amount of revenues reserved for potential refund as of December 31, 1994.
In 1992, the FERC issued Order 636, Order 636-A and Order 636-B. These orders, which have been challenged in various respects by various parties in proceedings pending in the U.S. Court of Appeals for the D.C. Circuit, require interstate gas pipeline companies to change the manner in which they provide services. Williams Natural Gas implemented its restructuring on October 1, 1993, and Northwest Pipeline implemented its restructuring on November 1, 1993. Certain aspects of each pipeline company's restructuring are under appeal.
Contract reformations and gas purchase deficiencies
Williams Natural Gas has undertaken the reformation of its respective gas supply contracts to settle gas purchase deficiencies, avoid future gas purchase deficiencies, reduce prices to market levels or make other appropriate modifications. As of December 31, 1994, Williams Natural Gas' total supplier take-or-pay, ratable take and minimum take claims were not significant.
Williams Natural Gas and a producer have executed a number of definitive agreements to resolve outstanding issues between the two companies and restructure their relationship. Among other things, the agreements terminate Williams Natural Gas' largest gas purchase contract and resolve a number of disputes and litigation, including a $203 million claim by the producer for take-or-pay deficiencies and a gas pricing dispute. With respect to the latter dispute, Williams Natural Gas paid the producer $35 million in cash and is committed to pay an additional $40 million under certain circumstances, all but a small portion of which payments Williams Natural Gas believes it will be permitted to recover from certain of its former sales customers. Portions of the settlement are subject to regulatory approvals, including the regulatory abandonment of a certain Williams Natural Gas gathering system on terms acceptable to Williams Natural Gas.
Williams Natural Gas also has commitments under gas supply contracts reflecting prices in excess of market-based prices. The estimated commitment amounts at December 31, 1994, attributable to these contracts were:
Williams has an accounting policy of determining accruals taking into consideration both historical and future gas quantities and appropriate prices to determine an estimated total exposure. This exposure is discounted and risk-weighted to determine the appropriate accrual. The estimated portion recoverable from sales and transportation customers is deferred based on Williams' estimate of its expected recovery of the amounts allowed by FERC policy. As of December 31, 1994, Williams Natural Gas had a remaining accrual of $47 million for take-or-pay settlements and reformation of the non-market responsive contracts. Although Williams believes these accruals are adequate, the actual amount paid for take-or-pay settlements and contract reformation will depend on the outcome of various court proceedings; the provisions and enforceability of each gas purchase contract; the success of settlement negotiations; and other factors.
Current FERC policy associated with Orders 436 and 500 requires interstate gas pipelines to absorb some of the cost of reforming gas supply contracts before allowing any recovery through direct bill or surcharges to transportation as well as sales commodity rates. Pursuant to FERC Order 500, Williams Natural Gas has filed to recover a portion of previously incurred take-or-pay and contract-reformation costs. As of December 31, 1994, this subsidiary had $40 million included in recoverable contract-reformation and take-or-pay settlement costs which had not yet been paid and filed for recovery with the FERC. Under Orders 636, 636-A and 636-B,
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs incurred to comply with these rules are permitted to be recovered in full, although 10 percent of such costs must be allocated to interruptible transportation service.
The FERC initially approved a method for Northwest Pipeline to direct bill its contract-reformation costs, but when challenged on appeal, sought a remand to reassess such method. Northwest Pipeline has received an order from the FERC that requires a different allocation of such costs which is now being challenged by certain customers. Northwest Pipeline does not expect any reallocation to result in a significant financial impact upon the company.
Pursuant to a stipulation and agreement approved by the FERC, Williams Natural Gas has made two filings to direct bill take-or-pay and gas supply realignment costs recoverable under Orders 436, 500 and 528. The first provided for the offset of certain amounts collected subject to refund against previous take-or-pay direct-billed amounts and, in addition, covered $24 million in new costs. This filing was approved, and the final direct-billed amount, taking into consideration the offset, was $15 million. The second filing covered $18 million in additional costs, and provided for an offset of $3 million. An intervenor has filed a protest seeking to have the Commission review the prudence of certain of the costs covered by the second filing. Williams Natural Gas believes that the filing will most likely be approved and will make additional filings in the future under the stipulation and agreement to recover such further contract-reformation costs as may be incurred.
Other legal matters
Williams Natural Gas has identified polychlorinated biphenyl (PCB) contamination in air compressor systems, disposal pits and related properties at certain compressor station sites and has been involved in negotiations with the U.S. Environmental Protection Agency (EPA) to develop additional screening, detailed sampling and cleanup programs. In addition, negotiations concerning investigative and remedial actions relative to potential mercury contamination at certain gas metering sites have commenced with certain environmental authorities. As of December 31, 1994, Williams Natural Gas had recorded a liability for approximately $28 million, representing the current estimate of future environmental cleanup costs to be incurred over the next six to ten years. 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. Williams Natural Gas deferred these costs pending recovery as incurred through future rates and other means.
In connection with the 1987 sale of the assets of Agrico Chemical Company, Williams agreed to indemnify the purchaser for environmental cleanup costs resulting from certain conditions at specified locations, to the extent such costs exceed a specified amount. It appears probable that such costs will exceed this amount. At December 31, 1994, Williams had approximately $6 million accrued for such excess costs. The actual costs incurred will depend on the actual amount and extent of contamination discovered, the final cleanup standards mandated by the EPA or other governmental authorities, and other factors.
A lawsuit was filed on May 14, 1993, in a state court in Colorado in which certain claims have been made against various defendants, including Northwest Pipeline, contending that gas exploration and development activities in portions of the San Juan Basin have caused air, water and other contamination. The plaintiffs in the case sought certification of a plaintiff class. On June 28, 1994, the lawsuit was dismissed for failure to join an indispensable party over which the state court had no jurisdiction. This decision is being appealed by the plaintiffs. Since June 28, 1994, four individual lawsuits have been filed against Northwest Pipeline in U.S. district court in Colorado, making essentially the same claims. Northwest Pipeline is vigorously defending these lawsuits.
On December 31, 1991, the Southern Ute Indian Tribe (the 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 WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the extraction of coal-seam gas from the coal strata was wrongful. The Tribe seeks compensation for the value of the coal-seam gas. The Tribe also seeks an order transferring to the Tribe ownership of all of the defendants' equipment and facilities utilized in the extraction of the coal-seam gas. On September 13, 1994, the Court granted summary judgment in favor of the defendants. The Tribe sought a certification of an interlocutory appeal from the Court which was denied. Nevertheless, the Tribe has lodged an interlocutory appeal with the U.S. Court of Appeals for the Tenth Circuit. Williams Production agreed to indemnify the Williams Coal Seam Gas Royalty Trust (Trust) against any losses that may arise in respect of certain properties subject to the lawsuit. In addition, if the Tribe is successful in showing that Williams Production has no rights in the coal-seam gas, Williams Production has agreed to pay to the Trust for distribution to then-current unitholders, an amount representing a return of a portion of the original purchase price paid for the units. While Williams believes that such a payment is not probable, it has reserved a portion of the proceeds from the sale of the units in the Trust.
Relative to a proposal for the acquisition of WilTel submitted to Williams by LDDS Communications, Inc. (LDDS), contained in a letter dated May 3, 1994, and attached as an exhibit to a report on Form 8-K filed by LDDS on that day, two class action lawsuits were filed on May 9, 1994, in the Chancery Court of Delaware alleging that Williams' directors breached their fiduciary duty to the plaintiff and the members of the putative class by summarily rejecting the LDDS proposal and by issuing false and misleading statements. On September 26, 1994, both suits were dismissed without prejudice. See Note 2 for information regarding the sale of WilTel's network services operations on January 5, 1995.
On October 6, 1994, the Antitrust Division of the Department of Justice issued a civil investigation demand to Williams Natural Gas concerning its provision of transportation services in Kansas and Missouri. Williams Natural Gas has filed a response, and believes that it has not violated the antitrust laws in the conduct of its business.
On December 21, 1994, Williams Natural Gas received a second civil investigative demand from the Antitrust Division of the Department of Justice concerning certain gathering activities of Williams Natural Gas and Williams' other operating subsidiaries. Williams is preparing a response but believes that none of its subsidiaries has violated the antitrust laws in the conduct of its business.
Relative to a certain Agreement and Plan of Merger, dated December 12, 1994, among Williams, a Williams subsidiary and Transco Energy Company (Transco), seven class action lawsuits were filed on December 12, 1994, and later, in the Chancery Court of Delaware, challenging the transaction and alleging a breach of fiduciary duties by Transco's directors. In six of the lawsuits, Williams was named as a party defendant, the plaintiffs alleging that Williams aided and abetted the alleged breach of duty. On January 6, 1995, the parties to all of the lawsuits entered into an agreement in principle and on January 9, 1995, a stipulation and agreement of compromise, settlement and release was executed subject to approval of the Court. See Note 16 for information regarding the acquisition of Transco.
In addition to the foregoing, various other proceedings are pending against Williams or its subsidiaries incidental to their operations.
Summary
Williams 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 financial effect upon Williams in the future.
NOTE 16 -- TRANSCO ACQUISITION
Subsequent to December 31, 1994, Williams acquired 60 percent of Transco's outstanding common stock in a cash tender offer for $430.5 million. Williams also plans to acquire the remaining 40 percent of Transco's
THE WILLIAMS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding common stock through a merger which will exchange the remaining Transco common stock for approximately 10.2 million shares of Williams common stock. The cash portion of the acquisition was financed from the proceeds of the WilTel network services sale.
Transco is engaged primarily in the natural gas pipeline and natural gas marketing businesses. Williams plans to sell certain other Transco operations, such as coal mining and coalbed methane extraction in 1995. The estimated purchase price, including transaction fees and other related costs, is approximately $775 million, excluding $2.3 billion in preferred stock and debt obligations of Transco. The acquisition will be accounted for as a purchase in 1995 and it is expected that the excess purchase price will be allocated to Transco's property, plant and equipment.
THE WILLIAMS COMPANIES, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (millions, except per-share amounts). Certain amounts have been restated as described in Note 2 of Notes to Consolidated Financial Statements.
The sum of earnings per share for the four quarters may not equal the total earnings per share for the year due to changes in the average number of common shares outstanding.
Second-quarter 1994 includes a $23 million gain from the sale of assets (see Note 4 of Notes to Consolidated Financial Statements).
First-quarter 1993 includes gains totaling $95 million from the sales of assets (see Note 4 of Notes to Consolidated Financial Statements). Third-quarter 1993 net income was reduced $15 million related to the cumulative effect of the 1 percent increase in the federal income tax rate.
Selected comparative fourth-quarter data are as follows (millions, except per-share amounts). Certain 1993 amounts have been restated as described in Note 2 of Notes to Consolidated Financial Statements.
In fourth-quarter 1994, Williams Natural Gas recorded a $7 million reversal of excess contract-reformation accruals. Williams Energy Ventures' fourth-quarter operating loss includes $5 million in costs for evaluating and determining whether to build an oil refinery. Fourth-quarter 1994 discontinued operations includes favorable adjustments of approximately $15 million relating to bad debt recoveries and accrual reversals.
In fourth-quarter 1993, Williams Field Services Group recorded an $11 million favorable settlement involving processing revenues from prior periods. General corporate expenses in the fourth quarter of 1993 include $5 million of additional accruals for supplemental retirement benefits. Fourth-quarter 1993 discontinued operations includes favorable adjustments of approximately $6 million relating to bad debt recoveries and accrual reversals.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Directors and nominees for Director of Williams required by Item 401 of Regulation S-K is presented under the heading "Election of Directors" in Williams' Proxy Statement prepared for the solicitation of proxies in connection with the Annual Meeting of Stockholders of the Company for 1995 (the "Proxy Statement"), which information is incorporated by reference herein. A copy of the Proxy Statement will be filed as an exhibit to the Form 10-K. Information regarding the executive officers of Williams is presented following Item 4 herein, as permitted by General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is included under the heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement, which information is incorporated by reference herein.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K regarding executive compensation is presented under the headings "Election of Directors" and "Executive Compensation and Other Information" in the Proxy Statement, which information is incorporated by reference herein. Notwithstanding the foregoing, the information provided under the headings "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Presentation" in the Proxy Statement are not incorporated by reference herein. A copy of the Proxy Statement will be filed as an exhibit to the Form 10-K.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding the security ownership of certain beneficial owners and management required by Item 403 of Regulation S-K is presented under the headings "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement, which information is incorporated by reference herein. A copy of the Proxy Statement will be filed as an exhibit to the Form 10-K.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no information regarding certain relationships and related transactions required by Item 404 of Regulation S-K to be reported in response to this Item.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. The financial statements and schedules listed in the accompanying index to consolidated financial statements are filed as part of this annual report.
(a) 3 and (c). The exhibits listed below are filed as part of this annual report.
Exhibit 2 --
*(a) Agreement and Plan of Merger, dated as of December 12, 1994, among Williams, WC Acquisition Corp. and Transco (filed as Exhibit (c)(1) to Schedule 14D-1, dated December 16, 1994).
*(b) Amendment to Agreement and Plan of Merger, dated as of February 17, 1995 (filed as Exhibit 6 to Amendment No. 8 to Schedule 13D, dated February 23, 1995).
*(c) Stock Option Agreement, dated as of December 12, 1994, by and between Williams and Transco (filed as Exhibit (c)(2) to Schedule 14D-1, dated December 16, 1994).
Exhibit 3 --
*(a) Restated Certificate of Incorporation of Williams (filed as Exhibit 4(a) to Form 8-B Registration Statement, filed August 20, 1987).
*(b) Certificate of Designation with respect to the $2.21 Cumulative Preferred Stock (filed as Exhibit 4.3 to the Registration Statement on Form S-3, filed August 19, 1992).
*(c) Certificate of Increase of Authorized Number of Shares of Series A Junior Participating Preferred Stock (filed as Exhibit 3(c) to Form 10-K for the year ended December 31, 1988).
(d) Certificate of Amendment of Restated Certificate of Incorporation, dated May 20, 1994.
*(e) Amended and Restated Rights Agreement, dated as of July 12, 1988, between Williams and First Chicago Trust Company of New York (filed as Exhibit 4(c) to Williams Form 8, dated July 28, 1988).
*(f) By-laws of Williams (filed as Exhibit 3 to Form 10-Q for the quarter ended September 30, 1993).
Exhibit 4 --
*(a) Form of Senior Debt Indenture between the Company and Chemical Bank, Trustee, relating to the 10 1/4% Debentures, due 2020; the 9 3/8% Debentures, due 2021; the 8 1/4% Notes, due 1998; Medium-Term Notes (8.50%-9.31%), due 1996 through 2001; the 7 1/2% Notes, due 1999, and the 8 7/8% Debentures, due 2012 (filed as Exhibit 4.1 to Form S-3 Registration Statement No. 33-33294, filed February 2, 1990).
(b) U.S. $800,000,000 Credit Agreement, dated as of February 23, 1995, among Williams and certain of its subsidiaries and the banks named therein and Citibank, N.A., as agent.
Exhibit 10(iii) -- Compensatory Plans and Management Contracts
*(a) The Williams Companies, Inc. Supplemental Retirement Plan, effective as of January 1, 1988 (filed as Exhibit 10(iii)(c) to Form 10-K for the year ended December 31, 1987).
*(b) Form of Employment Agreement, dated January 1, 1990, between Williams and certain executive officers (filed as Exhibit 10(iii) (d) to Form 10-K for the year ended December 31, 1989).
*(c) Form of The Williams Companies, Inc. Change in Control Protection Plan between Williams and employees (filed as Exhibit 10(iii) (e) to Form 10-K for the year ended December 31, 1989).
*(d) The Williams Companies, Inc. 1985 Stock Option Plan (filed as Exhibit A to Williams' Proxy Statement, dated March 13, 1985).
*(e) The Williams Companies, Inc. 1988 Stock Option Plan for Non-Employee Directors (filed as Exhibit A to Williams' Proxy Statement, dated March 14, 1988).
*(f) The Williams Companies, Inc. 1990 Stock Plan (filed as Exhibit A to Williams' Proxy Statement, dated March 12, 1990).
*(g) Indemnification Agreement, effective as of August 1, 1986, between Williams and members of the Board of Directors and certain officers of Williams (filed as Exhibit 10(iii) (e) to Form 10-K for the year ended December 31, 1986).
Exhibit 11 -- Computation of Earnings Per Common and Common-equivalent Share.
Exhibit 12 -- Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements.
Exhibit 20 -- Definitive Proxy Statement of Williams for 1995 (to be filed by amendment).
Exhibit 21 -- Subsidiaries of the registrant.
Exhibit 23 -- Consent of Independent Auditors.
Exhibit 24 -- Power of Attorney together with certified resolution.
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Williams with the Securities and Exchange Commission during the fourth quarter of 1994.
(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.
THE WILLIAMS COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 14(A) 1 AND 2
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.
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME (PARENT)
- ---------------
*Certain amounts have been restated as described in Note 1.
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
BALANCE SHEET (PARENT)
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
STATEMENT OF CASH FLOWS (PARENT)
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* Certain amounts have been restated as described in Note 1.
See accompanying notes.
THE WILLIAMS COMPANIES, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONCLUDED)
NOTES TO FINANCIAL INFORMATION (PARENT)
NOTE 1. DISCONTINUED OPERATIONS
In August 1994, Williams signed a definitive agreement to sell WilTel's network services operations to LDDS Communications, Inc. (LDDS) for $2.5 billion in cash. The sale closed January 5, 1995, yielding an after-tax gain of approximately $1 billion, which will be recorded in the first quarter of 1995. The Condensed Financial Information of Registrant have been prepared to present operating results of network services as discontinued operations, with prior period operating results restated.
NOTE 2. SALES OF ASSETS
In a 1993 public offering, Williams sold 6.1 million units in the Williams Coal Seam Gas Royalty Trust (Trust), which resulted in net proceeds of $113 million and a pre-tax gain of $51.6 million. The Trust owns defined net profits interests in the developed coal-seam properties in the San Juan Basin of New Mexico and Colorado, which were conveyed to the Trust by Williams Production Company. Ownership of an additional 3.6 million units remains with Williams.
NOTE 3. LONG-TERM DEBT AND LEASES
Long-term debt due within one year includes $350 million of borrowings under Williams' $600 million credit agreement. This agreement terminates in December 1995 and Williams expects to replace it with a similar agreement.
Aggregate minimum maturities and sinking-fund requirements, excluding lease payments, for each of the next five years are as follows: 1995 -- $361 million; 1996 -- $23 million; 1997 -- none; 1998 -- $110 million; and 1999 -- $150 million.
Future minimum annual rentals under non-cancelable capital leases for each of the next five years are $4 million. See Note 11 of Notes to Consolidated Financial Statements for additional information on long-term debt.
NOTE 4. TREASURY STOCK
For financial reporting purposes, treasury stock of $394.8 million held by a wholly-owned subsidiary of Williams has been presented as a reduction of stockholders' equity.
NOTE 5. DIVIDENDS RECEIVED
Cash dividends from subsidiaries and companies accounted for on an equity basis are as follows: 1994 -- $354.2 million; 1993 -- $142.6 million; and 1992 -- $36 million.
NOTE 6. INCOME TAX AND INTEREST PAYMENTS
Cash payments for income taxes are as follows: 1994 -- $112 million; 1993 -- $118 million; and 1992 -- $49.6 million.
Cash payments for interest are as follows: 1994 -- $90 million; 1993 -- $96.6 million; and 1992 -- $79.2 million.
NOTE 7. FINANCIAL INSTRUMENTS
Disclosure of financial instruments for the parent company are included in the consolidated disclosures. See Note 13 of Notes to Consolidated Financial Statements.
THE WILLIAMS COMPANIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(A)
- ---------------
(a) Deducted from related assets.
(b) Represents balances written off, net of recoveries and reclassifications.
(c) Excludes $5.7 million related to discontinued operations.
(d) Includes the discontinued operations beginning balance reclassification of $3.6 million.
(e) Includes $4.1 million reversal of amounts previously accrued.
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.
THE WILLIAMS COMPANIES, INC. (Registrant)
By: /s/ DAVID M. HIGBEE David M. Higbee Attorney-in-Fact Dated: March 2, 1995
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.
II-1
Dated: March 2, 1995
II-2 INDEX TO EXHIBITS