Edgar Filing: WILLIAMS COMPANIES INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

FORM 10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-4174

The Williams Companies, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		73-0569878
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

One Williams Center, Tulsa, Oklahoma		74172
(Address of Principal Executive Offices)		(Zip Code)

918-573-2000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $1.00 par value		New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

5.50% Junior Subordinated Convertible Debentures due 2033

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second quarter was approximately $17,802,985,945.

The number of shares outstanding of the registrant’s common stock outstanding at February 22, 2012 was 592,181,611.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement for the Registrant’s 2011 Annual Meeting of Stockholders to be held on May 17, 2012, are incorporated into Part III, as specifically set forth in Part III.

Explanatory Note

This Amendment No. 1 on Form 10-K/A for the fiscal year ended December 31, 2011, is filed to revise the Report of Independent Registered Public Accounting Firm related to the financial statements of Gulfstream Natural Gas System, L.L.C. contained in Item 8 of the original Form 10-K. The revision relates solely to the deletion of the word “auditing” in reference to the standards of the Public Company Accounting Oversight Board (United States). Note 19 of the Notes to Consolidated Financial Statements has been updated to include information subsequent to the date of the report of our Independent Registered Public Accounting Firm. No changes have been made to the audited financial statements.

Item 8.

Financial Statements and Supplementary Data

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER

FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Securities Exchange Act of 1934). Our internal controls over financial reporting are designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and the circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2011, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, we concluded that, as of December 31, 2011, our internal control over financial reporting was effective.

Ernst & Young LLP, our independent registered public accounting firm, has audited our internal control over financial reporting, as stated in their report which is included in this Amendment No. 1 on Form 10-K/A.

Report of Independent Registered Public Accounting Firm

On Internal Control Over Financial Reporting

The Board of Directors and Stockholders of

The Williams Companies, Inc.

We have audited The Williams Companies, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Williams Companies, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, The Williams Companies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Williams Companies, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2011, of The Williams Companies, Inc. and our report dated February 27, 2012, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Tulsa, Oklahoma

February 27, 2012

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

The Williams Companies, Inc.

We have audited the accompanying consolidated balance sheet of The Williams Companies, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedules listed in the index at Item 15(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 did not audit the financial statements of Gulfstream Natural Gas System, L.L.C. (Gulfstream) (a limited liability corporation in which the Company has a 50 percent interest). The Company’s investment in Gulfstream constituted two percent of the Company’s assets as of both December 31, 2011 and 2010 and the Company’s equity earnings in the net income of Gulfstream constituted five and seventeen percent of the Company’s income from continuing operations before income taxes for the years ended December 31, 2011 and 2010, respectively, Gulfstream’s financial statements were audited by other auditors whose report has been furnished to us, and our opinion on the 2011 and 2010 consolidated financial statements, insofar as it relates to the amounts included for Gulfstream, is based solely on the report of the other auditors.

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Williams Companies, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. 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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Williams Companies, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2012, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Tulsa, Oklahoma

February 27, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Members of Gulfstream Natural Gas System, L.L.C.

We have audited the balance sheets of Gulfstream Natural Gas System, L.L.C., (the “Company”), as of December 31, 2011 and 2010, and the related statements of operations, cash flows, and members’ equity and comprehensive income for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such financial statements present fairly, in all material respects, the financial position of Gulfstream Natural Gas System, L.L.C. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Houston, Texas

February 23, 2012

THE WILLIAMS COMPANIES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS


	Years Ended December 31,
	2011			2010			2009
	(Millions, except per-share amounts)
Revenues:
Williams Partners	$	6,729		$	5,715		$	4,602
Midstream Canada & Olefins		1,312			1,033			753
Other		25			24			27
Intercompany eliminations		(136	)		(134	)		(104	)

Total revenues		7,930			6,638			5,278

Segment costs and expenses:
Costs and operating expenses		5,550			4,712			3,712
Selling, general, and administrative expenses		325			313			330
Other (income) expense – net		1			(15	)		(34	)

Total segment costs and expenses		5,876			5,010			4,008

General corporate expenses		187			221			164

Operating income (loss):
Williams Partners		1,754			1,465			1,236
Midstream Canada & Olefins		300			172			37
Other		—			(9	)		(3	)
General corporate expenses		(187	)		(221	)		(164	)

Total operating income (loss)		1,867			1,407			1,106

Interest accrued		(598	)		(628	)		(656	)
Interest capitalized		25			36			61
Investing income – net		168			188			38
Early debt retirement costs		(271	)		(606	)		(1	)
Other income (expense) – net		11			(12	)		2

Income (loss) from continuing operations before income taxes		1,202			385			550
Provision (benefit) for income taxes		124			114			204

Income (loss) from continuing operations		1,078			271			346
Income (loss) from discontinued operations		(417	)		(1,193	)		15

Net income (loss)		661			(922	)		361
Less: Net income attributable to noncontrolling interests		285			175			76

Net income (loss) attributable to The Williams Companies, Inc.	$	376		$	(1,097	)	$	285

Amounts attributable to The Williams Companies, Inc.:
Income (loss) from continuing operations	$	803		$	104		$	206
Income (loss) from discontinued operations		(427	)		(1,201	)		79

Net income (loss)	$	376		$	(1,097	)	$	285

Basic earnings (loss) per common share:
Income (loss) from continuing operations	$	1.36		$	.17		$	.35
Income (loss) from discontinued operations		(.72	)		(2.05	)		.14

Net income (loss)	$	.64		$	(1.88	)	$	.49

Weighted-average shares (thousands)		588,553			584,552			581,674

Diluted earnings (loss) per common share:
Income (loss) from continuing operations	$	1.34		$	.17		$	.35
Income (loss) from discontinued operations		(.71	)		(2.03	)		.14

Net income (loss)	$	.63		$	(1.86	)	$	.49

Weighted-average shares (thousands)		598,175			590,699			585,955

See accompanying notes.

THE WILLIAMS COMPANIES, INC.

CONSOLIDATED BALANCE SHEET


	December 31,
	2011			2010
	(Millions, except per-share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	889		$	758
Accounts and notes receivable (net of allowance of $1 at December 31, 2011 and 2010, respectively)		637			497
Inventories		169			225
Assets of discontinued operations		—			897
Regulatory assets		40			51
Other current assets and deferred charges		159			102

Total current assets		1,894			2,530

Investments		1,391			1,240
Property, plant, and equipment – net		12,580			11,754
Assets of discontinued operations		—			8,828
Regulatory assets, deferred charges, and other		637			620

Total assets	$	16,502		$	24,972

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	691		$	432
Accrued liabilities		631			738
Liabilities of discontinued operations		—			896
Long-term debt due within one year		353			508

Total current liabilities		1,675			2,574
Long-term debt		8,369			8,600
Deferred income taxes		1,660			1,738
Liabilities of discontinued operations		—			2,179
Regulatory liabilities, deferred income, and other		1,715			1,262
Contingent liabilities and commitments (Note 16)

Equity:
Stockholders’ equity:
Common stock (960 million shares authorized at $1 par value; 626 million shares issued at December 31, 2011 and 620 million shares issued at December 31, 2010)		626			620
Capital in excess of par value		8,417			8,269
Retained deficit		(5,820	)		(478	)
Accumulated other comprehensive income (loss)		(389	)		(82	)
Treasury stock, at cost (35 million shares of common stock)		(1,041	)		(1,041	)

Total stockholders’ equity		1,793			7,288
Noncontrolling interests in consolidated subsidiaries		1,290			1,331

Total equity		3,083			8,619

Total liabilities and equity	$	16,502		$	24,972

See accompanying notes.

THE WILLIAMS COMPANIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


	The Williams Companies, Inc., Stockholders
	Common Stock		Capital in Excess of Par Value		Retained Earnings (Deficit)			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity			Noncontrolling Interest			Total
	(Millions, except per-share amounts)
Balance, December 31, 2008	$	613	$	8,074	$	874		$	(80	)	$	(1,041	)	$	8,440		$	614		$	9,054
Comprehensive income (loss):
Net income (loss)		—		—		285			—			—			285			76			361
Other comprehensive income (loss):
Net change in cash flow hedges (Note 17)		—		—		—			(221	)		—			(221	)		—			(221	)
Foreign currency translation adjustments		—		—		—			83			—			83			—			83
Pension benefits:
Net actuarial gain (loss)		—		—		—			46			—			46			7			53
Other postretirement benefits:
Prior service cost		—		—		—			4			—			4			—			4

Total other comprehensive income (loss)															(88	)		7			(81	)

Total comprehensive income (loss)															197			83			280
Cash dividends – common stock (Note 12)		—		—		(256	)		—			—			(256	)		—			(256	)
Dividends and distributions to noncontrolling interests		—		—		—			—			—			—			(129	)		(129	)
Issuance of common stock from debentures conversion (Note 12)		3		25		—			—			—			28			—			28
Stock-based compensation, net of tax benefit		2		36		—			—			—			38			—			38
Other		—		—		—			—			—			—			4			4

Balance, December 31, 2009		618		8,135		903			(168	)		(1,041	)		8,447			572			9,019
Comprehensive income (loss):
Net income (loss)		—		—		(1,097	)		—			—			(1,097	)		175			(922	)
Other comprehensive income (loss):
Net change in cash flow hedges (Note 17)		—		—		—			92			—			92			—			92
Foreign currency translation adjustments		—		—		—			29			—			29			—			29
Pension benefits:
Prior service cost		—		—		—			1			—			1			—			1
Net actuarial gain (loss)		—		—		—			(25	)		—			(25	)		—			(25	)
Other postretirement benefits:
Prior service cost		—		—		—			(3	)		—			(3	)		—			(3	)
Net actuarial gain (loss)		—		—		—			(8	)		—			(8	)		—			(8	)

Total other comprehensive income (loss)															86			—			86

Total comprehensive income (loss)															(1,011	)		175			(836	)
Cash dividends – common stock (Note 12)		—		—		(284	)		—			—			(284	)		—			(284	)
Dividends and distributions to noncontrolling interests		—		—		—			—			—			—			(145	)		(145	)
Issuance of common stock from debentures conversion (Note 12)		—		2		—			—			—			2			—			2
Sale of limited partner units of consolidated partnership		—		—		—			—			—			—			806			806
Stock-based compensation, net of tax benefit		2		55		—			—			—			57			—			57
Changes in Williams Partners L.P. ownership interest, net		—		77		—			—			—			77			(77	)		—

Balance, December 31, 2010		620		8,269		(478	)		(82	)		(1,041	)		7,288			1,331			8,619
Comprehensive income (loss):
Net income (loss)		—		—		376			—			—			376			285			661
Other comprehensive income (loss):
Net change in cash flow hedges (Note 17)		—		—		—			53			—			53			—			53
Foreign currency translation adjustments		—		—		—			(18	)		—			(18	)		—			(18	)
Pension benefits:
Prior service cost		—		—		—			1			—			1			—			1
Net actuarial gain (loss)		—		—		—			(112	)		—			(112	)		—			(112	)
Other postretirement benefits:
Prior service cost		—		—		—			(2	)		—			(2	)		—			(2	)
Net actuarial gain (loss)		—		—		—			(13	)		—			(13	)		—			(13	)
Unrealized gain (loss) on equity securities		—		—		—			3			—			3			—			3

Total other comprehensive income (loss)															(88	)		—			(88	)

Total comprehensive income (loss)															288			285			573
Cash dividends – common stock (Note 12)		—		—		(457	)		—			—			(457	)		—			(457	)
Dividends and distributions to noncontrolling interests		—		—		—			—			—			—			(214	)		(214	)
Issuance of common stock from debentures conversion (Note 12)		1		13		—			—			—			14			—			14
Stock-based compensation, net of tax benefit		4		104		—			—			—			108			—			108
Changes in Williams Partners L.P. ownership interest, net		—		30		—			—			—			30			(30	)		—
Distribution of WPX Energy, Inc. to shareholders (Note 2)		—		—		(5,261	)		(219	)		—			(5,480	)		(81	)		(5,561	)
Other		1		1		—			—			—			2			(1	)		1

Balance, December 31, 2011	$	626	$	8,417	$	(5,820	)	$	(389	)	$	(1,041	)	$	1,793		$	1,290		$	3,083

See accompanying notes.

THE WILLIAMS COMPANIES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS


	Years Ended December 31,
	2011			2010			2009
	(Millions)
OPERATING ACTIVITIES:
Net income (loss)	$	661		$	(922	)	$	361
Adjustments to reconcile to net cash provided by operating activities:
Depreciation, depletion, and amortization		1,614			1,507			1,469
Provision (benefit) for deferred income taxes		(179	)		(155	)		249
Provision for loss on goodwill, investments, property and other assets		882			1,735			386
Provision for doubtful accounts and notes		1			(6	)		48
Amortization of stock-based awards		52			48			43
Early debt retirement costs		271			606			1
Cash provided (used) by changes in current assets and liabilities:
Accounts and notes receivable		(197	)		(36	)		52
Inventories		60			(81	)		33
Margin deposits and customer margin deposits payable		(18	)		(1	)		4
Other current assets and deferred charges		(15	)		43			7
Accounts payable		250			(14	)		5
Accrued liabilities		51			(29	)		(170	)
Changes in current and noncurrent derivative assets and liabilities		7			(42	)		36
Other, including changes in noncurrent assets and liabilities		(1	)		(2	)		48

Net cash provided by operating activities		3,439			2,651			2,572

FINANCING ACTIVITIES:
Proceeds from long-term debt		3,172			5,129			595
Payments of long-term debt		(2,055	)		(4,305	)		(33	)
Proceeds from sale of limited partner units of consolidated partnership		—			806			—
Dividends paid		(457	)		(284	)		(256	)
Dividends and distributions paid to noncontrolling interests		(214	)		(145	)		(129	)
Cash of WPX Energy, Inc. at spin-off		(526	)		—			—
Payments for debt issuance costs		(50	)		(71	)		(7	)
Premiums paid on early debt retirements		(254	)		(574	)		—
Changes in restricted cash		—			—			40
Other – net		42			17			(44	)

Net cash provided (used) by financing activities		(342	)		573			166

INVESTING ACTIVITIES:
Capital expenditures(1)		(2,796	)		(2,788	)		(2,387	)
Purchases of investments/advances to affiliates		(233	)		(488	)		(142	)
Purchase of businesses		(41	)		(1,099	)		—
Distribution from Gulfstream Natural Gas System, L.L.C.		—			—			148
Other – net		67			79			71

Net cash used by investing activities		(3,003	)		(4,296	)		(2,310	)

Increase (decrease) in cash and cash equivalents		94			(1,072	)		428
Cash and cash equivalents at beginning of year(2)		795			1,867			1,439

Cash and cash equivalents at end of year(2)	$	889		$	795		$	1,867


(1) Increases to property, plant, and equipment	$	(2,953	)	$	(2,755	)	$	(2,314	)
Changes in related accounts payable and accrued liabilities		157			(33	)		(73	)

Capital expenditures	$	(2,796	)	$	(2,788	)	$	(2,387	)

(2)	Except for cash and cash equivalents at end of year 2011, includes cash from our former exploration and production business (See Note 2).

See accompanying notes.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies

Description of Business

Our operations are located principally in the United States and are organized into the following reporting segments: Williams Partners and Midstream Canada & Olefins. All remaining business activities are included in Other.

Williams Partners consists of our consolidated master limited partnership, Williams Partners L.P. (WPZ) and includes gas pipeline and domestic midstream businesses. The gas pipeline businesses include 100 percent of Transcontinental Gas Pipe Line Company, LLC (Transco), 100 percent of Northwest Pipeline GP (Northwest Pipeline), and 49 percent of Gulfstream Natural Gas System, L.L.C. (Gulfstream). WPZ’s midstream operations are composed of significant, large-scale operations in the Rocky Mountain and Gulf Coast regions, operations in Pennsylvania’s Marcellus Shale region, and various equity investments in domestic natural gas gathering and processing assets and natural gas liquid (NGL) fractionation and transportation assets. WPZ’s midstream assets also include substantial operations and investments in the Four Corners region, as well as an NGL fractionator and storage facilities near Conway, Kansas.

Our Midstream Canada & Olefins segment includes our oil sands off-gas processing plant near Fort McMurray, Alberta, our NGL/olefin fractionation facility and butylene/butane splitter facility at Redwater, Alberta, our NGL light-feed olefins cracker in Geismar, Louisiana, along with associated ethane and propane pipelines, and our refinery grade splitter in Louisiana.

Other includes other business activities that are not operating segments, as well as corporate operations.

Basis of Presentation

In May 2011, we contributed a 24.5 percent interest in Gulfstream to WPZ in exchange for aggregate consideration of $297 million of cash, 632,584 limited partner units, and an increase in the capital account of its general partner to allow us to maintain our 2 percent general partner interest. Williams Partners now holds a 49 percent interest in Gulfstream. We also own an additional 1 percent interest in Gulfstream reported in Other. Prior period segment disclosures have not been adjusted for this transaction as the impact, which was less than 2.5 percent of Williams Partners’ segment profit for all periods affected, was not material. Equity earnings related to this interest in Gulfstream that have not been recast for the years ended December 31, 2011, 2010, and 2009 are $12 million, $32 million, and $30 million, respectively.

Master limited partnership

At December 31, 2011, we own approximately 75 percent of the interests in WPZ, including the interests of the general partner, which are wholly owned by us, and incentive distribution rights.

WPZ is self funding and maintains separate lines of bank credit and cash management accounts. Cash distributions from WPZ to us, including any associated with our incentive distribution rights, occur through the normal partnership distributions from WPZ to all partners.

Discontinued operations

WPX separation

On December 31, 2011, we completed the tax-free spin-off of our 100 percent interest in WPX Energy, Inc. (WPX), to our shareholders. WPX was formed in April 2011 to hold our former exploration and production business. The spin-off was completed by means of a special stock dividend, which consisted of a distribution of one share of WPX common stock for every three shares of our common stock.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On December 30, 2011, we entered into a Separation and Distribution Agreement with WPX which at the time was a wholly owned subsidiary, pursuant to which WPX would be legally and structurally separated from us. In addition to, and concurrently with, this agreement, we entered into certain ancillary agreements with WPX, including, (i) an Employee Matters Agreement that sets forth agreements as to certain employment, compensation, and benefits matters, (ii) a Tax Sharing Agreement that governs rights and obligations after the spin-off with respect to matters regarding U.S. Federal, state, local, and foreign income taxes and other taxes, including tax liabilities and benefits, attributes, returns, and contests, and (iii) a Transition Services Agreement under which we or certain of our subsidiaries will provide WPX with certain services for a limited time to help ensure an orderly transition following the Distribution Date.

For periods prior to the spin-off, the accompanying consolidated financial statements and notes reflect the results of operations and financial position of our former exploration and production business as discontinued operations. At December 31, 2011, all net assets of our former exploration and production business have been removed from our consolidated balance sheet as the spin-off was complete. (See Note 2.)

Unless indicated otherwise, the information in the Notes to the consolidated Financial Statements relates to our continuing operations.

Accounting standards issued but not yet adopted

In June 2011, the FASB issued Accounting Standards Update No. 2011-5, “Comprehensive Income (Topic 220) Presentation of Comprehensive Income” (ASU 2011-5). ASU 2011-5 requires presentation of net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive, statements. ASU 2011-5 requires separate presentation in both net income and other comprehensive income of reclassification adjustments for items that are reclassified from other comprehensive income to net income. The new guidance does not change the items reported in other comprehensive income, nor affect how earnings per share is calculated and presented. We currently report net income in the Consolidated Statement of Operations and report other comprehensive income in the Consolidated Statement of Changes in Equity. In December 2011, The FASB issued Accounting Standards Update No. 2011-12, “Comprehensive Income (Topic 220) Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (ASU 2011-12). ASU 2011-12 defers the effective date for only the presentation requirements related to reclassifications in ASU 2011-5. During this deferral period, ASU 2011-12 states that we should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Both standards are effective beginning the first quarter of 2012, with retrospective application to prior periods. We will apply the new guidance for both standards beginning in 2012.

Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of our corporate parent and our majority-owned or controlled subsidiaries and investments. We apply the equity method of accounting for investments in unconsolidated companies in which we and our subsidiaries own 20 to 50 percent of the voting interest, otherwise exercise significant influence over operating and financial policies of the company, or where majority ownership does not provide us with control due to significant participatory rights of other owners.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Significant estimates and assumptions include:

•

Impairment assessments of investments and long-lived assets;

•

Litigation-related contingencies;

•

Environmental remediation obligations;

•

Realization of deferred income tax assets;

•

Asset retirement obligations;

•

Pension and postretirement valuation variables.

These estimates are discussed further throughout these notes.

Regulatory accounting

Transco and Northwest Pipeline are regulated by the Federal Energy Regulatory Commission (FERC). Their rates established by the FERC are designed to recover the costs of providing the regulated services, and their competitive environment makes it probable that such rates can be charged and collected. Therefore, our management has determined that it is appropriate to account for and report regulatory assets and liabilities related to these operations consistent with the economic effect of the way in which their rates are established. Accounting for these businesses that are regulated can differ from the accounting requirements for nonregulated businesses. The components of our regulatory assets and liabilities relate to the effects of deferred taxes on equity funds used during construction, asset retirement obligations, fuel cost differentials, levelized incremental depreciation, negative salvage, and postretirement benefits.

Cash and cash equivalents

Cash and cash equivalents includes amounts primarily invested in funds with high-quality, short-term securities and instruments that are issued or guaranteed by the U.S. government. These have maturity dates of three months or less when acquired.

Accounts receivable

Accounts receivable are carried on a gross basis, with no discounting, less the allowance for doubtful accounts. We estimate the allowance for doubtful accounts based on existing economic conditions, the financial conditions of our customers, and the amount and age of past due accounts. We consider receivables past due if full payment is not received by the contractual due date. Interest income related to past due accounts receivable is generally recognized at the time full payment is received or collectability is assured. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted.

Inventory valuation

All inventories are stated at the lower of cost or market. The cost of inventories is primarily determined using the average-cost method. We determine the cost of certain natural gas inventories held by Transco using the last-in, first-out (LIFO) cost method. There was no LIFO inventory at December 31, 2011. LIFO inventory at December 31, 2010 was $9 million.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Property, plant, and equipment

Property, plant, and equipment is recorded at cost. We base the carrying value of these assets on estimates, assumptions, and judgments relative to capitalized costs, useful lives, and salvage values.

As regulated entities, Northwest Pipeline and Transco provide for depreciation using the straight-line method at FERC-prescribed rates. Depreciation for nonregulated entities is provided primarily on the straight-line method over estimated useful lives, except for certain offshore facilities that apply a declining balance method. (See Note 9.)

Gains or losses from the ordinary sale or retirement of property, plant, and equipment for regulated pipelines are credited or charged to accumulated depreciation; other gains or losses are recorded in other (income) expense — net included in operating income (loss) or other (income) expense — net below operating income (loss).

Ordinary maintenance and repair costs are generally expensed as incurred. Costs of major renewals and replacements are capitalized as property, plant, and equipment.

We record an asset and a liability equal to the present value of each expected future asset retirement obligation (ARO) at the time the liability is initially incurred, typically when the asset is acquired or constructed. The ARO asset is depreciated in a manner consistent with the depreciation of the underlying physical asset. As regulated entities, Northwest Pipeline and Transco record the ARO asset depreciation offset to a regulatory asset. We measure changes in the liability due to passage of time by applying an interest method of allocation. This amount is recognized as an increase in the carrying amount of the liability and as a corresponding accretion expense included in costs and operating expenses, except for regulated entities, for which the liability is offset by a regulatory asset as management expects to recover amounts in future rates. The regulatory asset is amortized commensurate with our collection of those costs in rates.

Measurements of AROs include, as a component of future expected costs, an estimate of the price that a third party would demand, and could expect to receive, for bearing the uncertainties inherent in the obligations, sometimes referred to as a market-risk premium.

Contingent liabilities

We record liabilities for estimated loss contingencies, including environmental matters, when we assess that a loss is probable and the amount of the loss can be reasonably estimated. These liabilities are calculated based upon our assumptions and estimates with respect to the likelihood or amount of loss and upon advice of legal counsel, engineers, or other third parties regarding the probable outcomes of the matters. These calculations are made without consideration of any potential recovery from third-parties. We recognize insurance recoveries or reimbursements from others when realizable. Revisions to these liabilities are generally reflected in income when new or different facts or information become known or circumstances change that affect the previous assumptions or estimates.

Cash flows from revolving credit facilities

Proceeds and payments related to borrowings under our credit facilities are reflected in the financing activities of the Consolidated Statement of Cash Flows on a gross basis.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

Derivative instruments and hedging activities

We may utilize derivatives to manage a portion of our commodity price risk. These instruments consist primarily of swap agreements and forward contracts involving short- and long-term purchases and sales of physical energy commodities. We report the fair value of derivatives, except for those for which the normal purchases and normal sales exception has been elected, in other current assets and deferred charges; regulatory assets, deferred charges, and other; accrued liabilities; or regulatory liabilities, deferred income, and other. We determine the current and noncurrent classification based on the timing of expected future cash flows of individual trades. We report these amounts on a gross basis. Additionally, we report cash collateral receivables and payables with our counterparties on a gross basis.

The accounting for the changes in fair value of a commodity derivative can be summarized as follows:


Derivative Treatment		Accounting Method
Normal purchases and normal sales exception		Accrual accounting
Designated in a qualifying hedging relationship		Hedge accounting
All other derivatives		Mark-to-market accounting

We may elect the normal purchases and normal sales exception for certain short- and long-term purchases and sales of physical energy commodities. Under accrual accounting, any change in the fair value of these derivatives is not reflected on the balance sheet after the initial election of the exception.

We have also designated a hedging relationship for certain commodity derivatives. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and we must maintain appropriate documentation. We establish hedging relationships pursuant to our risk management policies. We evaluate the hedging relationships at the inception of the hedge and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. We also regularly assess whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if we believe the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative are recognized currently in revenues or costs and operating expenses.

For commodity derivatives designated as a cash flow hedge, the effective portion of the change in fair value of the derivative is reported in accumulated other comprehensive income (loss) (AOCI) and reclassified into earnings in the period in which the hedged item affects earnings. Any ineffective portion of the derivative’s change in fair value is recognized currently in revenues or costs and operating expenses. Gains or losses deferred in AOCI associated with terminated derivatives, derivatives that cease to be highly effective hedges, derivatives for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in revenues or costs and operating expenses at that time. The change in likelihood of a forecasted transaction is a judgmental decision that includes qualitative assessments made by management.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For commodity derivatives that are not designated in a hedging relationship, and for which we have not elected the normal purchases and normal sales exception, we report changes in fair value currently in revenues or costs and operating expenses.

Certain gains and losses on derivative instruments included in the Consolidated Statement of Operations are netted together to a single net gain or loss, while other gains and losses are reported on a gross basis. Gains and losses recorded on a net basis include:

•

Unrealized gains and losses on all derivatives that are not designated as hedges and for which we have not elected the normal purchases and normal sales exception;

•

The ineffective portion of unrealized gains and losses on derivatives that are designated as cash flow hedges;

•

Realized gains and losses on all derivatives that settle financially other than natural gas derivatives for NGL processing activities;

•

Realized gains and losses on derivatives entered into as a pre-contemplated buy/sell arrangement.

Realized gains and losses on derivatives that require physical delivery, as well as natural gas derivatives for NGL processing activities and which are not held for trading purposes nor were entered into as a pre-contemplated buy/sell arrangement, are recorded on a gross basis. In reaching our conclusions on this presentation, we considered whether we act as principal in the transaction; whether we have the risks and rewards of ownership, including credit risk; and whether we have latitude in establishing prices.

Revenues

Revenues from Williams Partners’ gas pipeline businesses are primarily from services pursuant to long-term firm transportation and storage agreements. These agreements provide for a reservation charge based on the volume of contracted capacity and a commodity charge based on the volume of gas delivered, both at rates specified in our FERC tariffs. We recognize revenues for reservation charges ratably over the contract period regardless of the volume of natural gas that is transported or stored. Revenues for commodity charges, from both firm and interruptible transportation services, and storage injection and withdrawal services, are recognized when natural gas is delivered at the agreed upon delivery point or when natural gas is injected or withdrawn from the storage facility.

In the course of providing transportation services to customers, we may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. The resulting imbalances are primarily settled through the purchase and sale of gas with our customers under terms provided for in our FERC tariffs. Revenue is recognized from the sale of gas upon settlement of the transportation and exchange imbalances.

As a result of the ratemaking process, certain revenues collected by us may be subject to refunds upon the issuance of final orders by the FERC in pending rate proceedings. We record estimates of rate refund liabilities considering our and other third-party regulatory proceedings, advice of counsel, and other risks.

Revenues from Williams Partners’ midstream operations include those derived from natural gas gathering and processing services and are performed under volumetric-based fee contracts, keep-whole, agreements and percent-of-liquids arrangements. Revenues under volumetric-based fee contracts are recorded when services have been performed. Under keep-whole and percent-of-liquids processing contracts, we retain the rights to all or a portion of the NGLs extracted from the producers’ natural gas stream and recognize revenues when the extracted NGLs are sold and delivered.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Oil gathering and transportation revenues and offshore production handling fees of Williams Partners’ midstream operations are recognized when the services have been performed. Certain offshore production handling contracts contain fixed payment terms that result in the deferral of revenues until such services have been performed.

Within Williams Partners, we market NGLs that we purchase from our producer customers as part of the overall service provided to producers. Revenues from marketing NGLs are recognized when the products have been sold and delivered.

Storage revenues under prepaid contracted storage capacity contracts primarily within Williams Partners are recognized evenly over the life of the contract as services are provided.

Our midstream Canada business has processing and fractionation operations where we retain certain NGLs and olefins from an upgrader’s off-gas stream and we recognize revenues when the fractionated products are sold and delivered. Our domestic olefins business produces olefins from purchased feed-stock, and we recognize revenues when the olefins are sold and delivered.

Impairment of long-lived assets and investments

We evaluate our long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate, in our management’s judgment, that the carrying value of such assets may not be recoverable. When an indicator of impairment has occurred, we compare our management’s estimate of undiscounted future cash flows attributable to the assets to the carrying value of the assets to determine whether an impairment has occurred and we apply a probability-weighted approach to consider the likelihood of different cash flow assumptions and possible outcomes including selling in the near term or holding for the remaining estimated useful life. If an impairment of the carrying value has occurred, we determine the amount of the impairment recognized in the financial statements by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.

For assets identified to be disposed of in the future and considered held for sale, we compare the carrying value to the estimated fair value less the cost to sell to determine if recognition of an impairment is required. Until the assets are disposed of, the estimated fair value, which includes estimated cash flows from operations until the assumed date of sale, is recalculated when related events or circumstances change.

We evaluate our investments for impairment when events or changes in circumstances indicate, in our management’s judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, we compare our estimate of fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and we consider the decline in value to be other-than-temporary, the excess of the carrying value over the fair value is recognized in the consolidated financial statements as an impairment charge.

Judgments and assumptions are inherent in our management’s estimate of undiscounted future cash flows and an asset’s or investment’s fair value. Additionally, judgment is used to determine the probability of sale with respect to assets considered for disposal.

Interest capitalized

We capitalize interest during construction on major projects with construction periods of at least three months and a total project cost in excess of $1 million. Interest is capitalized on borrowed funds and where

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

regulation by the FERC exists, on internally generated funds. The latter is included in other income (expense) — net below operating income (loss). The rates used by regulated companies are calculated in accordance with FERC rules. Rates used by nonregulated companies are based on the average interest rate on debt.

Employee stock-based awards

Stock options are valued at the date of award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis, net of estimated forfeitures, over the requisite service period. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. Stock options generally become exercisable over a three-year period from the date of grant and can be subject to accelerated vesting if certain future stock prices or specific financial performance targets are achieved. Stock options generally expire ten years after the grant.

Restricted stock units are generally valued at market value on the grant date and generally vest over three years. Restricted stock unit compensation cost, net of estimated forfeitures, is generally recognized over the vesting period on a straight-line basis.

Income taxes

We include the operations of our subsidiaries in our consolidated 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 our assets and liabilities. Our management’s judgment and income tax assumptions are used to determine the levels, if any, of valuation allowances associated with deferred tax assets.

Effective with the spin-off of WPX on December 31, 2011, certain state and federal tax attributes (primarily alternative minimum tax credits) will be allocated between us and WPX pursuant to the consolidated return regulations. Although the final allocation of these tax attributes cannot be determined until the consolidated tax returns for tax year 2011 are complete, an estimate of the allocated tax attributes has been recorded in 2011.

Earnings (loss) per common share

Basic earnings (loss) per common share is based on the sum of the weighted-average number of common shares outstanding and vested restricted stock units. Diluted earnings (loss) per common share includes any dilutive effect of stock options, nonvested restricted stock units and, for applicable periods presented, convertible debt, unless otherwise noted.

Foreign currency translation

Certain of our foreign subsidiaries use the Canadian dollar as their functional currency. Assets and liabilities of such foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date, and the combined statements of operations are translated into the U.S. dollar at the average exchange rates in effect during the applicable period. The resulting cumulative translation adjustment is recorded as a separate component of accumulated other comprehensive income (loss).

Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the Consolidated Statement of Operations.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Discontinued Operations

In addition to the accounting policies previously discussed, the following policies were considered significant to our former exploration and production business.

•

Significant estimates and assumptions included the valuation of oil and natural gas reserves, valuation of derivatives and hedge accounting correlations and probability;

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Property, plant and equipment related to oil and gas exploration and production activities were accounted for under the successful efforts method. Depreciation, depletion and amortization was provided under the units-of-production method on a field basis;

•

Goodwill was evaluated at least annually for impairment by first comparing our management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. As a result of significant declines in forward natural gas prices during the third quarter of 2010, we performed an impairment assessment of our goodwill which resulted in a $1 billion impairment (See Note 2);

•

Revenues for sales of natural gas were recognized when the product was sold and delivered;

•

Impairments of proved properties, including developed and undeveloped, were assessed using estimated future undiscounted cash flows on a field basis. Unproved properties included lease acquisition costs and costs of acquired unproved reserves. These costs were assessed for impairment as conditions warranted.

Note 2. Discontinued Operations

On December 31, 2011, we completed the tax-free spin-off of our interest in WPX to our shareholders. The spin-off was completed by means of a special stock dividend. (See Note 1.) The dividend to our shareholders on December 31, 2011, represented approximately $10.3 billion of assets, $4.8 billion of liabilities and $5.5 billion of net equity, which includes approximately $219 million of accumulated other comprehensive income (AOCI). The carrying value of AOCI is primarily related to net unrealized gains from WPX’s cash flow hedges associated with energy commodity derivatives.

The following summarized results of discontinued operations reflect the results of operations of our former exploration and production business as discontinued operations. Each period presented includes the results of intercompany transactions with our continuing business, such as sales of commodities and charges for gathering, processing and transportation services. Although we expect certain of these types of transactions to continue in the future, the expected continuing cash flows are not considered significant; thus, the operations and cash flows of our former exploration and production business are considered to be eliminated from our ongoing operations. The summarized results of discontinued operations also include certain of our former Venezuela operations, whose facilities were expropriated by the Venezuelan government in May 2009, and settlement of various items pertaining to operations discontinued prior to periods covered by this report.

The December 31, 2010 summarized assets and liabilities of discontinued operations reflects our former exploration and production business. At December 31, 2011, the net assets of this former business have been eliminated from our consolidated balance sheet as the spin-off was complete.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Summarized Results of Discontinued Operations


	Years Ended December 31,
	2011			2010			2009
	(Millions)
Revenues	$	3,997		$	4,042		$	3,684

Income (loss) from discontinued operations before impairments, gain on deconsolidation and income taxes	$	223		$	350		$	338
Impairments		(755	)		(1,682	)		(242	)
Gain on deconsolidation		—			—			9
(Provision) benefit for income taxes		115			139			(90	)

Income (loss) from discontinued operations	$	(417	)	$	(1,193	)	$	15

Income (loss) from discontinued operations:
Attributable to noncontrolling interests	$	10		$	8		$	(64	)
Attributable to The Williams Companies, Inc.	$	(427	)	$	(1,201	)	$	79

Income (loss) from discontinued operations before impairments, gain on deconsolidation and income taxes for 2011 and 2010 primarily reflect the results of operations of our discontinued exploration and production business (see Note 1), including $42 million of transaction costs related to the spin-off recognized in 2011.

Income (loss) from discontinued operations before impairments, gain on deconsolidation and income taxes for 2009 primarily reflects $420 million of income from our discontinued exploration and production business. Also reflected are $104 million of losses from our discontinued Venezuela operations and a $15 million gain related to our former coal operations.

Impairments in 2011 reflect $367 million and $180 million of impairments of capitalized costs of certain natural gas producing properties of our discontinued exploration and production business in the Powder River basin and the Barnett Shale, respectively, $29 million of write-downs to estimates of fair value less costs to sell the assets of our discontinued exploration and production business in the Arkoma basin, and a noncash impairment of $179 million in connection with the spin-off of WPX to reflect the difference between the carrying value of our investment in WPX and the estimated fair value of WPX at the time of spin-off. See further discussion below regarding the determination of the fair value of WPX. These nonrecurring fair value measurements fall within Level 3 of the fair value hierarchy.

Impairments in 2010 include a $1,003 million impairment of domestic goodwill (to an implied fair value of zero at the assessment date) and $678 million of impairments of capitalized costs of certain natural gas producing properties in the Barnett Shale and acquired unproved reserves in the Piceance basin of our discontinued exploration and production business (to their estimated fair value of $320 million at the assessment date). These nonrecurring fair value measurements fell within Level 3 of the fair value hierarchy.

For the goodwill evaluation, we used an income approach (discounted cash flow) for valuing reserves. The significant inputs into the valuation of proved and unproved reserves included estimated reserve quantities, forward natural gas prices, anticipated drilling and operating costs, anticipated production curves, income taxes, and appropriate discount rates.

For our assessment of the carrying value of our natural gas producing properties and costs of acquired unproved reserves, we utilized estimates of future cash flows, in certain cases including purchase offers received. Significant judgments and assumptions in these assessments are similar to those used in the goodwill evaluation

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and include estimates of natural gas reserve quantities, estimates of future natural gas prices using a forward NYMEX curve adjusted for locational basis differentials, drilling plans, expected capital costs, and an applicable discount rate commensurate with risk of the underlying cash flow estimates.

Impairments for 2009 primarily reflect a $211 million impairment of our Venezuela property, plant, and equipment that was expropriated by the Venezuelan government in 2009. We are pursuing collection of claims related to that expropriation. Also included is an impairment charge of $20 million related to natural gas producing properties and acquired unproved reserves of our discontinued exploration and production business and an $11 million impairment of a cost-based investment related to our interest in a Venezuelan corporation that owns and operates oil and gas activities.

Gain on deconsolidation reflects the gain recognized when we deconsolidated the entities that owned and operated our Venezuela gas compression facilities prior to their expropriation by the Venezuelan government in 2009.

(Provision) benefit for income taxes for 2011 includes a $26 million net tax benefit associated with the write-down of certain indebtedness related to our former power operations.

(Provision) benefit for income taxes for 2009 includes a $76 million benefit from the reversal of deferred tax balances related to our discontinued Venezuela operations.

Impairment of our investment in WPX

In conjunction with accounting for the spin-off of WPX, we evaluated whether there was an indicator of impairment of the carrying value of the investment at the date of the spin-off. Because the market capitalization of WPX as determined by its closing stock price on December 30, 2011 pursuant to the “when issued” trading market was less than our investment in WPX, we determined that an indicator of impairment was present and conducted an evaluation of the fair value of our investment in WPX at the date of the spin-off.

To determine the fair value at the time of spin-off, we considered several valuation approaches to derive a range of fair value estimates. These included consideration of the “when issued” stock price at December 30, 2011, an income approach, and a market approach. While the “when issued” stock price approach utilizes the most observable inputs of the three approaches, we note that the short trading duration, low trading volumes and lack of liquidity in the “when issued” market, among other factors, serve to limit this input in being solely determinative of the fair value of WPX. As such, we also considered the other valuation approaches in estimating the overall fair value of WPX, though giving preferential weighting to the “when issued” stock price approach.

Key variables and assumptions included the application of a control premium of up to 30 percent to the December 30, 2011 “when issued” trading value based on transactions involving energy companies. For the income approach, we estimated the fair value of WPX using a discounted cash flow analysis of their oil and natural gas reserves, primarily adjusted for long-term debt. Implicit in this approach was the use of forward market prices and discount rates that considered the risk of the respective reserves. After tax discount rates assumed to be used by market participants were an average of 11.25 percent for proved reserves, 13.25 percent to 15.25 percent for probable reserves and 15.25 percent to 18.25 percent for possible reserves. For the market approach, we considered multiples of cash flows derived from the value of comparable companies utilizing their respective traded stock prices, adjusted for a control premium consistent with levels noted above. Using these methodologies, we computed a range of estimated fair values from $4.5 billion to $6.7 billion. After giving preferential weighting to the “when issued” valuation, we computed an estimated fair value of approximately $5.5 billion.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As a result of this evaluation, we have recorded an impairment charge which is nondeductible for tax purposes. This amount served to reduce the investment basis of the net assets accounted for as a dividend upon the spin-off at December 31, 2011.

Summarized Assets and Liabilities of Discontinued Operations


	December 31, 2010
	(Millions)
Cash and cash equivalents	$	37
Accounts receivable - net		362
Inventories		78
Derivative assets		400
Other current assets and deferred charges		20

Total current assets of discontinued operations		897
Investments		104
Property, plant and equipment - net		8,518
Derivative assets		173
Goodwill		8
Other assets and deferred charges		25

Total noncurrent assets of discontinued operations		8,828

Total assets	$	9,725


Accounts payable	$	486
Accrued liabilities		263
Derivative liabilities		147

Total current liabilities of discontinued operations		896
Deferred income taxes		1,711
Derivative liabilities		142
Other liabilities and deferred income		326

Total noncurrent liabilities of discontinued operations		2,179

Total liabilities	$	3,075

Energy Commodity Derivatives Associated with Discontinued Operations

Our former exploration and production business produced, bought, and/or sold natural gas and crude oil at different locations throughout the United States. It also entered into forward contracts to buy and sell natural gas to maximize the economic value of transportation agreements and storage capacity agreements. To reduce exposure to a decrease in revenues or margins from fluctuations in natural gas and crude oil market prices, it entered into natural gas and crude oil futures contracts, swap agreements, and financial option contracts to mitigate the price risk on forecasted sales of natural gas and crude oil. It also entered into basis swap agreements to reduce the locational price risk associated with its producing basins.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Gains and Losses

The following table presents pre-tax gains and losses for our former exploration and production business’ energy commodity derivatives designated as cash flow hedges. The amounts previously recognized within revenues or costs and operating expenses are now presented within discontinued operations.


	Years ended December 31,
	2011		2010		Classification
	(Millions)
Net gain (loss) recognized in other comprehensive income (loss) (effective portion)	$	413	$	507	AOCI

Net gain (loss) reclassified from accumulated other comprehensive income (loss) into income (effective portion)	$	332	$	355	Income (loss) from discontinued operations

Gain (loss) recognized in income (ineffective portion)	$	—	$	9	Income (loss) from discontinued operations

The following table presents pre-tax gains and losses for energy commodity derivatives not designated as hedging instruments. The amounts previously recognized within revenues or costs and operating expenses are now presented within discontinued operations.


	Years Ended December 31,
	2011		2010
	(Millions)
Revenues	$	30	$	47
Costs and operating expenses		—		28

Net gain (loss)	$	30	$	19

Recurring Fair Value Measurement Disclosures Related to Assets and Liabilities of Discontinued Operations

The following table presents, by level within the fair value hierarchy, our assets and liabilities related to discontinued operations that were measured at fair value on a recurring basis.


	December 31, 2010
	Level 1		Level 2		Level 3		Total
	(Millions)
Energy derivative assets	$	96	$	475	$	2	$	573
Energy derivative liabilities	$	78	$	210	$	1	$	289

Energy derivatives included commodity based exchange-traded contracts and over-the-counter (OTC) contracts. Exchange-traded contracts included futures, swaps, and options. OTC contracts included forwards, swaps and options.

The instruments included in these Level 1 measurements consisted of energy derivatives that were exchange-traded. Exchange-traded contracts included New York Mercantile Exchange and Intercontinental Exchange contracts and were valued based on quoted prices in these active markets.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The instruments included in these Level 2 measurements consisted primarily of OTC instruments. Forward, swap, and option contracts included in Level 2 were valued using an income approach including present value techniques and option pricing models. Option contracts, which hedged future sales of production from our discontinued exploration and production business, were structured as costless collars and were financially settled. They were valued using an industry standard Black-Scholes option pricing model. Significant inputs into these Level 2 valuations included commodity prices, implied volatility by location, and interest rates, and considered executed transactions or broker quotes corroborated by other market data. These broker quotes were based on observable market prices at which transactions could currently be executed. In certain instances where these inputs were not observable for all periods, relationships of observable market data and historical observations were used as a means to estimate fair value. Where observable inputs were available for substantially the full term of the asset or liability, the instrument was categorized in Level 2.

The instruments in these Level 3 measurements primarily consisted of natural gas index transactions that were used by our discontinued exploration and production business to manage physical requirements. These instruments were valued with a present value technique using inputs that may not have been readily observable or corroborated by other market data. These instruments were classified within Level 3 because these inputs had a significant impact on the measurement of fair value. As the fair value of natural gas index transactions was primarily driven by the typically nominal differential transacted and the market price, these transactions did not have a material impact on results of operations or liquidity.

The energy derivatives portfolio of our discontinued exploration and production business was largely comprised of exchange-traded products or like products. Due to the nature of the products and tenure, market pricing was consistently obtainable. All pricing was reviewed on a daily basis and was formally validated with broker quotes and documented on a monthly basis.

Reclassifications of fair value between Level 1, Level 2, and Level 3 of the fair value hierarchy, if applicable, were made at the end of each quarter. No significant transfers between Level 1, Level 2, or Level 3 occurred during the years ended December 31, 2011 or 2010. Additionally, activity associated with the derivatives classified as Level 3 in the fair value hierarchy was not significant for the years ended December 31, 2011 and 2010.

Indemnifications of WPX Matters

According to the terms of the Separation and Distribution Agreement (See Note 1), we have indemnified WPX for certain contingent matters (See Note 16).

Guarantees on behalf of WPX

Following the spin-off of WPX, certain guarantees that were issued on behalf of WPX while it was a consolidated subsidiary remain with us. These primarily include guarantees of WPX performance under a long-term transportation capacity agreement and a natural gas purchase contract, extending through 2017 and 2023, respectively. We estimate the maximum undiscounted potential future payment obligation as of December 31, 2011, under these remaining guarantees is approximately $266 million. Our recorded liability for these guarantees, which considers our estimate of the fair value of the guarantees, is insignificant. Our fair value estimate is a Level 3 measurement within the fair value hierarchy and considers probability weighted scenarios of potential performance and the likelihood of default by WPX.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 3. Investing Activities

Investing Income


	Years Ended December 31,
	2011			2010		2009
	(Millions)
Equity earnings (1)	$	155		$	143	$	118
Income (loss) from investments (1)		7			43		(75	)
Impairment of cost-based investments		(1	)		—		(11	)
Interest income and other		7			2		6

Total investing income	$	168		$	188	$	38

(1)	Items also included in segment profit (loss). (See Note 18.)

In June 2010, we sold our 50 percent interest in Accroven SRL (Accroven) to the state-owned oil company, Petróleos de Venezuela S.A. (PDVSA) for $107 million. Income (loss) from investments in 2011 and 2010 includes gains of $11 million and $43 million, respectively, from the sale. The $11 million received in the first quarter of 2011 represents the first of six quarterly payments, which was originally due from the buyer in October 2010. We will recognize the remaining payments as income upon future receipt.

Income (loss) from investments in 2009 reflects a $75 million impairment charge related to an other-than-temporary loss in value associated with our Venezuelan investment in Accroven. Accroven owns and operates gas processing facilities and an NGL fractionation plant for the exclusive benefit of PDVSA. The deteriorating circumstances in the first quarter of 2009 for our Venezuelan operations caused us to review our investment in Accroven. We utilized a probability-weighted discounted cash flow analysis, which included an after-tax discount rate of 20 percent to reflect the risk associated with operating in Venezuela. Accroven was not part of the operations that were expropriated by the Venezuelan government in May 2009.

Investments


	December 31,
	2011		2010
	( Millions)
Equity method:
Overland Pass Pipeline Company LLC (OPPL)- 50%	$	433	$	429
Gulfstream—50% (1)		362		378
Laurel Mountain Midstream, LLC (Laurel Mountain) - 51% (2)		291		170
Discovery Producer Services LLC (Discovery) - 60% (2)		182		181
Other		122		80

		1,390		1,238
Cost method		1		2
Marketable equity securities		24		—

	$	1,415	$	1,240

(1)	As of December 31, 2011, 49 percent interest is held within Williams Partners, with the remaining 1 percent held within Other.

(2)	We account for these investments under the equity method due to the significant participatory rights of our partners such that we do not control the investments.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Marketable equity securities are classified as available-for-sale. The carrying value is reported at fair value with net unrealized appreciation reported as a component of other comprehensive income.

The difference between the carrying value of our equity investments and the underlying equity in the net assets of the investees is $62 million at December 31, 2011, primarily related to impairments we previously recognized. These differences are amortized over the expected remaining life of the investees’ underlying assets.

We have recognized revenue of $23 million, $41 million, and $27 million from our equity method investees for 2011, 2010, and 2009, respectively, primarily related to OPPL and Discovery. We have recognized costs and operating expenses of $234 million, $220 million, and $158 million with our equity method investees for 2011, 2010, and 2009, respectively. We have $1 million and $2 million accounts receivable and $23 million and $20 million accounts payable with our equity method investees at December 31, 2011 and December 31, 2010, respectively.

WPZ has operating agreements with certain equity method investees. These operating agreements typically provide for reimbursement or payment to WPZ for certain direct operational payroll and employee benefit costs, materials, supplies, and other charges and also for management services. We supplied a portion of these services, primarily those related to employees since WPZ does not have any employees, to certain equity method investees. The total gross charges to equity method investees for these fees are $57 million, $38 million and $23 million for the years ended December 31, 2011, December 31, 2010, and December 31, 2009, respectively.

In September 2010, we purchased an additional 49 percent ownership interest in OPPL for $424 million. In June 2009, we purchased a 51 percent interest in Laurel Mountain for $133 million and invested $137 million and $43 million in Laurel Mountain in 2011 and 2010, respectively. We also invested $30 million in Aux Sable Liquid Products LP (Aux Sable) in 2011.

Dividends and distributions, including those presented below, received from companies accounted for by the equity method were $193 million, $175 million, and $282 million in 2011, 2010, and 2009, respectively. These transactions reduced the carrying value of our investments. These dividends and distributions primarily included:


	2011		2010		2009
	(Millions)
Gulfstream	$	84	$	81	$	223
Discovery		40		44		32
Aux Sable		35		28		15
OPPL		19		—		—

The 2009 amount presented above includes a $148 million distribution from Gulfstream following its debt offering.

Summarized Financial Position and Results of Operations of Equity Method Investments (Unaudited)


	December 31,
	2011		2010
	(Millions)
Current assets	$	293	$	236
Noncurrent assets		4,409		3,976
Current liabilities		235		157
Noncurrent liabilities		1,257		1,294

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Years Ended December 31,
	2011		2010		2009
	(Millions)
Gross revenue	$	1,242	$	1,086	$	872
Operating income		623		587		409
Net income		460		429		317

Note 4. Asset Sales, Impairments and Other Accruals

The following table presents significant gains or losses reflected in other (income) expense – net within segment costs and expenses:


	Years Ended December 31,
	2011			2010			2009
	(Millions)
Williams Partners
Capitalization of project feasibility costs previously expensed	$	(10	)	$	—		$	—
Involuntary conversion gains		(3	)		(18	)		(4	)
Gains on sales of certain assets		—			(12	)		(40	)
Accrual of regulatory liability related to overcollection of certain employee expenses		9			10			—
Impairments of certain gathering assets		4			9			—
Midstream Canada & Olefins
Gulf Liquids litigation contingency accrual reduction (see Note 16)		(19	)		—			—

The reversal of project feasibility costs from expense to capital in 2011 at Williams Partners is associated with a natural gas pipeline expansion project. This reversal was made upon determining that the related project was probable of development. These costs will be included in the capital costs of the project, which we believe are probable of recovery through the project rates.

In 2009, we sold our Cameron Meadows plant, which had a carrying value of $16 million and recognized a $40 million gain at Williams Partners.

Additional Items

In conjunction with the completion of a tender offer for a portion of our debt in the fourth quarter of 2011 (see Note 11), we incurred $271 million of early debt retirement costs consisting primarily of cash premiums.

We completed a strategic restructuring transaction in the first quarter of 2010 that involved significant debt issuances, retirements and amendments. During 2010, we incurred significant costs related to these transactions, as follows:

•

$606 million of early debt retirement costs consisting primarily of cash premiums;

•

$45 million of other transaction costs reflected in general corporate expenses, of which $7 million is attributable to noncontrolling interests;

•

$4 million of accelerated amortization of debt costs related to the amendments of credit facilities, reflected in other income (expense) – net below operating income (loss).

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We detected a leak in an underground cavern at our Eminence Storage Field in Mississippi on December 28, 2010. We recorded $15 million and $5 million of charges to costs and operating expenses at Williams Partners during 2011 and 2010, respectively, primarily related to assessment and monitoring costs incurred to ensure the safety of the surrounding area.

In conjunction with the Gulf Liquids litigation contingency accrual reduction noted in the table above, Midstream Canada & Olefins also reduced an accrual for the associated interest of $14 million in 2011, which is reflected in interest accrued. (See Note 16.)

Note 5. Provision (Benefit) for Income Taxes

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


	Years Ended December 31,
	2011			2010			2009
	(Millions)
Current:
Federal	$	181		$	(21	)	$	(83	)
State		13			(2	)		8
Foreign		(6	)		29			12

		188			6			(63	)
Deferred:
Federal		(61	)		144			234
State		(14	)		(48	)		30
Foreign		11			12			3

		(64	)		108			267

Total provision (benefit)	$	124		$	114		$	204

Reconciliations from the provision (benefit) for income taxes from continuing operations at the federal statutory rate to the recorded provision (benefit) for income taxes are as follows:


	Years Ended December 31,
	2011			2010			2009
	(Millions)
Provision (benefit) at statutory rate	$	421		$	135		$	192
Increases (decreases) in taxes resulting from:
Impact of nontaxable noncontrolling interests		(96	)		(58	)		(49	)
State income taxes (net of federal benefit)		11			(35	)		24
Foreign operations – net		(14	)		(22	)		19
Federal settlements		(109	)		—			—
International revised assessments		(38	)		—			—
Taxes on undistributed earnings of certain foreign operations		(66	)		66			—
Reduction of tax benefits on Medicare Part D federal subsidy		—			11			—
Other – net		15			17			18

Provision (benefit) for income taxes	$	124		$	114		$	204

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

State income taxes (net of federal benefit) were reduced by $43 million in 2010 due to a reduction in our estimate of the effective deferred state rate, including state income tax carryovers, reflective of a change in the mix of jurisdictional attribution of taxable income.

Income (loss) from continuing operations before income taxes includes $173 million and $144 million of foreign income and $48 million of foreign loss in 2011, 2010, and 2009, respectively.

During the course of audits of our business by domestic and foreign tax authorities, we frequently face challenges regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the liability associated with our various filing positions, we apply the two step process of recognition and measurement. In association with this liability, we record an estimate of related interest and tax exposure as a component of our tax provision. The impact of this accrual is included within other – net in our reconciliation of the tax provision to the federal statutory rate.

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


	December 31,
	2011		2010
	(Millions)
Deferred tax liabilities:
Property, plant, and equipment	$	65	$	115
Investments		2,063		1,978
Other		46		101

Total deferred tax liabilities		2,174		2,194

Deferred tax assets:
Accrued liabilities		324		257
Minimum tax credits *		119		120
State loss and credit carryovers		170		201
Other		98		59

Total deferred tax assets		711		637

Less valuation allowance		145		178

Net deferred tax assets		566		459

Overall net deferred tax liabilities	$	1,608	$	1,735

In conjunction with the spin-off of WPX, alternative minimum tax credits were allocated between us and WPX. A $98 million deferred tax asset for the estimated alternative minimum tax credit allocable to WPX was contributed to WPX prior to the spin-off. The final allocation of tax attributes cannot be determined until the consolidated tax returns for the tax year 2011 are complete. Any subsequent adjustments will be recorded in the tax provision for the period in which the change occurs.

The valuation allowance at December 31, 2011 and 2010 serves to reduce the recognized tax assets associated with state loss and credit carryovers to an amount that will more likely than not, be realized. These amounts are presented in the table above before any federal benefit. The decrease from prior year for both the state loss and credit carryovers and the valuation allowance is primarily due to state income tax adjustments related to reporting of the federal settlements, as discussed below.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In the fourth-quarter 2010, we provided $66 million of deferred taxes on the undistributed earnings of certain foreign operations that we no longer could assert were permanently reinvested due to alternatives being considered related to an existing structure impacted by the potential timing of our plan approved by our Board of Directors to pursue the separation of our exploration and production business through an IPO and subsequent tax-free spin-off. During the third quarter of 2011, associated with a ruling received from the Internal Revenue Service (IRS) related to this separation plan, and following a certain internal reorganization, we recognized a deferred tax benefit of $66 million as we now consider the undistributed earnings of these certain foreign operations to be permanently reinvested. As of December 31, 2011, we consider $388 million of undistributed earnings from foreign subsidiaries to be permanently reinvested and have not provided deferred income taxes on that amount.

Cash payments for income taxes (net of refunds and including discontinued operations) were $296 million, $40 million, and $14 million in 2011, 2010, and 2009, respectively.

As of December 31, 2011, we had approximately $38 million of unrecognized tax benefits. If recognized, approximately $41 million, net of federal tax expense, would be recorded as a reduction of income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	2011			2010
	(Millions)
Balance at beginning of period	$	91		$	89
Additions based on tax positions related to the current year		26			11
Additions for tax positions for prior years		4			3
Reductions for tax positions of prior years		(39	)		(12	)
Settlement with taxing authorities		(44	)		—

Balance at end of period	$	38		$	91

We recognize related interest and penalties as a component of income tax expense (benefit). Total interest and penalties recognized as part of income tax benefit were $56 million for 2011 and as part of income tax expense were $11 million and $17 million for 2010 and 2009, respectively. Approximately $15 million and $104 million of interest and penalties primarily relating to uncertain tax positions have been accrued as of December 31, 2011 and 2010, respectively.

During the next 12 months, we do not expect ultimate resolution of any unrecognized tax benefit associated with domestic or international matters to have a material impact on our unrecognized tax benefit position.

During the first quarter of 2011, we finalized settlements for 1997 through 2008 on certain contested matters with the IRS that resulted in a 2011 year-to-date tax benefit of approximately $109 million. In July and August 2011, we made cash payments to the IRS of $82 million and $77 million, respectively, related to these settlements. During the first and fourth quarters of 2011, we received revised assessments on an international matter that resulted in a 2011 tax benefit of approximately $38 million.

As of December 31, 2011, the IRS examination of our consolidated U.S. federal income tax returns for 2009 and 2010 tax years is in process. The statute of limitations for most states expires one year after expiration of the IRS statute. Generally, tax returns for our Venezuelan and Canadian entities are open to audit from 2005 through 2011. Certain Canadian entities are currently under examination.

With the spin-off of WPX on December 31, 2011, WPX will be included in our consolidated federal income tax returns and will be included with us and/or certain of our subsidiaries in applicable combined or unitary state, local and foreign income tax returns. In conjunction with the spin-off, WPX entered into a tax sharing agreement

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

with us under which we generally will be liable for all U.S. federal, state, local and foreign income taxes attributable to WPX with respect to taxable periods ending on or before the distribution date. We will prepare pro forma tax returns for each tax period in which WPX or any of its subsidiaries are combined or consolidated with us for purposes of any tax return. WPX will reimburse us for any additional taxes shown on the pro forma tax returns, and we will reimburse WPX for any additional current losses or credits WPX recognizes based on the pro forma tax returns, excluding alternative minimum tax credits. We are also principally responsible for managing any income tax audits by the various tax jurisdictions for pre-spin-off periods. In the case of any tax audit adjustments, all pro forma returns and associated tax reimbursement obligations will be recomputed to give effect to such adjustments.

Note 6. Earnings (Loss) Per Common Share from Continuing Operations


	Years Ended December 31,
	2011		2010		2009
	(Dollars in millions, except per-share
	amounts; shares in thousands)
Income (loss) from continuing operations attributable to The Williams Companies, Inc. available to common stockholders for basic and diluted earnings (loss) per common share (1)	$	803	$	104	$	206

Basic weighted-average shares		588,553		584,552		581,674
Effect of dilutive securities:
Nonvested restricted stock units		4,332		3,190		2,216
Stock options		3,374		2,957		2,065
Convertible debentures		1,916		—		—

Diluted weighted-average shares		598,175		590,699		585,955

Earnings (loss) per common share from continuing operations:
Basic	$	1.36	$	.17	$	.35

Diluted	$	1.34	$	.17	$	.35

(1)

2011 includes $.7 million of interest expense, net of tax, associated with our convertible debentures. (See Note 12.) This amount has been added back to income (loss) from continuing operations attributable to The Williams Companies, Inc. available to common stockholders to calculate diluted earnings per common share.

For 2010, 2.2 million weighted-average shares related to the assumed conversion of our convertible debentures, as well as the related interest, net of tax, have been excluded from the computation of diluted earnings per common share. Inclusion of these shares would have an antidilutive effect on the diluted earnings per common share. We estimate that if 2010 income (loss) from continuing operations attributable to The Williams Companies, Inc. available to common stockholders was $222 million of income, then these shares would become dilutive.

For 2009, 3.4 million weighted-average shares related to the assumed conversion of our convertible debentures, as well as the related interest, net of tax, have been excluded from the computation of diluted earnings per common share. Inclusion of these shares would have an antidilutive effect on the diluted earnings per common share. We estimate that if 2009 income (loss) from continuing operations attributable to The Williams Companies, Inc. available to common stockholders was $212 million of income, then these shares would become dilutive.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The table below includes information related to stock options for each period that were excluded from the computation of weighted-average stock options due to the option exercise price exceeding the fourth quarter weighted-average market price of our common shares.


	2011*		2010		2009
Options excluded (millions)		0.9		2.4		3.7
Weighted-average exercise price of options excluded		$29.68		$32.41		$30.21
Exercise price ranges of options excluded		$26.10 -$29.72		$22.68 -$40.51		$20.28 -$42.29
Fourth quarter weighted-average market price		$24.51		$22.47		$19.81

*	Information related to the excluded options for 2011 has been adjusted to reflect the impact of the spin-off of WPX on December 31, 2011 (see Note 13).

Note 7. Employee Benefit Plans

We have noncontributory defined benefit pension plans in which all eligible employees participate. Currently, eligible employees earn benefits primarily based on a cash balance formula. Various other formulas, as defined in the plan documents, are utilized to calculate the retirement benefits for plan participants not covered by the cash balance formula. At the time of retirement, participants may elect, to the extent they are eligible for the various options, to receive annuity payments, a lump sum payment, or a combination of a lump sum and annuity payments. In addition to our pension plans, we currently provide subsidized retiree medical and life insurance benefits (other postretirement benefits) to certain eligible participants. Generally, employees hired after December 31, 1991, are not eligible for the subsidized retiree medical benefits, except for participants that were employees or retirees of Transco Energy Company on December 31, 1995, and other miscellaneous defined participant groups. Certain of these other postretirement benefit plans, particularly the subsidized retiree medical benefit plans, provide for retiree contributions and contain other cost-sharing features such as deductibles, co-payments, and co-insurance. The accounting for these plans anticipates future cost-sharing that is consistent with our expressed intent to increase the retiree contribution level generally in line with health care cost increases.

Benefit Obligations

The following table presents the changes in benefit obligations and plan assets for pension benefits and other postretirement benefits for the years indicated. The spin-off of WPX did not have a significant impact on our pension and other postretirement benefit plans. (See Note 2). Generally, our pension and other postretirement benefit plans have retained the benefit obligations associated with vested benefits earned by eligible employees that transferred to WPX due to the spin-off. No plan assets transferred to WPX.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010
	(Millions)
Change in benefit obligation:
Benefit obligation at beginning of year	$	1,267		$	1,118		$	289		$	259
Service cost		41			35			2			2
Interest cost		64			64			15			15
Plan participants’ contributions		—			—			6			6
Benefits paid		(66	)		(58	)		(22	)		(24	)
Medicare Part D and Early Retiree Reinsurance Program subsidies		—			—			4			2
Plan amendment		—			—			(3	)		(1	)
Actuarial loss		143			108			48			30
Settlements		(8	)		—			—			—

Benefit obligation at end of year		1,441			1,267			339			289

Change in plan assets:
Fair value of plan assets at beginning of year		971			860			162			148
Actual return on plan assets		—			108			(2	)		17
Employer contributions		68			61			15			15
Plan participants’ contributions		—			—			6			6
Benefits paid		(66	)		(58	)		(22	)		(24	)
Settlements		(8	)		—			—			—

Fair value of plan assets at end of year		965			971			159			162

Funded status - underfunded	$	(476	)	$	(296	)	$	(180	)	$	(127	)

Accumulated benefit obligation	$	1,415		$	1,224

The underfunded status of our pension plans and other postretirement benefit plans presented in the previous table are recognized in the Consolidated Balance Sheet within the following accounts:


	December 31,
	2011		2010
	(Millions)
Underfunded pension plans:
Current liabilities	$	7	$	7
Noncurrent liabilities		469		289
Underfunded other postretirement benefit plans:
Current liabilities		8		8
Noncurrent liabilities		172		119

The plan assets within our other postretirement benefit plans are intended to be used for the payment of benefits for certain groups of participants. The current liabilities for the other postretirement benefit plans represent the current portion of benefits expected to be payable in the subsequent year for the groups of participants whose benefits are not expected to be paid from plan assets.

The pension plans’ benefit obligation actuarial losses of $143 million in 2011 and $108 million in 2010 are primarily due to the impact of decreases in the discount rates utilized to calculate the benefit obligation. The 2011 benefit obligation actuarial loss of $48 million for our other postretirement benefit plans is primarily due to the impact of decreases in the discount rate utilized to calculate the benefit obligation. The 2010 benefit

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

obligation actuarial loss of $30 million for our other postretirement benefit plans is also primarily due to the impact of decreases in the discount rate utilized to calculate the benefit obligation as well as changes to medical claims experience. In 2011, the actuarial loss includes a curtailment gain of $4 million for our pension plans and $1 million for our other postretirement benefit plans due to the spin-off of WPX.

At December 31, 2011 and 2010, all of our pension plans had a projected benefit obligation and accumulated benefit obligation in excess of plan assets.

The determination of net periodic benefit expense allows for the delayed recognition of gains and losses caused by differences between actual and assumed outcomes for items such as estimated return on plan assets, or caused by changes in assumptions for items such as discount rates or estimated future compensation levels. The net actuarial loss presented in the following table and recorded in accumulated other comprehensive loss and net regulatory assets represents the cumulative net deferred loss from these types of differences or changes which have not yet been recognized in the Consolidated Statement of Operations. A portion of the net actuarial loss is amortized over the participants’ average remaining future years of service, which is approximately 13 years for our pension plans and approximately 10 years for our other postretirement benefit plans.

Pre-tax amounts not yet recognized in net periodic benefit expense at December 31 are as follows:


	Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010
	(Millions)
Amounts included in accumulated other comprehensive loss:
Prior service (cost) credit	$	(2	)	$	(3	)	$	8		$	10
Net actuarial loss		(835	)		(657	)		(40	)		(20	)
Amounts included in net regulatory assets associated with our FERC-regulated gas pipelines:
Prior service credit		N/A			N/A		$	14		$	20
Net actuarial loss		N/A			N/A			(85	)		(48	)

In addition to the net regulatory assets included in the previous table, differences in the amount of actuarially determined net periodic benefit expense for our other postretirement benefit plans and the other postretirement benefit costs recovered in rates for our FERC-regulated gas pipelines are deferred as a regulatory asset or liability. We have net regulatory liabilities of $34 million at December 31, 2011 and $23 million at December 31, 2010 related to these deferrals. These amounts will be reflected in future rates based on the gas pipelines’ rate structures.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Net Periodic Benefit Expense and Items Recognized in Other Comprehensive Income (Loss)

Net periodic benefit expense and other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) before taxes for the years ended December 31 consist of the following:


										Other
	Pension Benefits									Postretirement Benefits
	2011			2010			2009			2011			2010			2009
	(Millions)
Components of net periodic benefit expense:
Service cost	$	41		$	35		$	32		$	2		$	2		$	2
Interest cost		64			64			62			15			15			16
Expected return on plan assets		(77	)		(71	)		(61	)		(10	)		(9	)		(9	)
Amortization of prior service cost (credit)		1			1			1			(11	)		(14	)		(11	)
Amortization of net actuarial loss		38			35			43			3			3			3
Net actuarial loss from settlements		4			—			—			—			—			—
Amortization of regulatory asset		—			—			1			1			1			5

Net periodic benefit expense	$	71		$	64		$	78		$	—		$	(2	)	$	6


											Other
	Pension Benefits									Postretirement Benefits
	2011			2010			2009			2011			2010			2009
	(Millions)
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
Net actuarial (gain) loss	$	220		$	71		$	(44	)	$	21		$	12		$	1
Prior service credit		—			—			—			(2	)		—			(7	)
Amortization of prior service (cost) credit		(1	)		(1	)		(1	)		4			5			4
Amortization of net actuarial loss and loss from settlements		(42	)		(35	)		(43	)		(1	)		(1	)		—

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss)		177			35			(88	)		22			16			(2	)

Total recognized in net periodic benefit expense and other comprehensive income (loss)	$	248		$	99		$	(10	)	$	22		$	14		$	4

Included in net periodic benefit expense in the previous table is expense associated with active and former employees that supported WPX’s operations. This expense was directly charged to WPX and is included in income (loss) from discontinued operations. These amounts totaled $8 million in 2011, and $7 million in both 2010 and 2009 for our pension plans and totaled less than $1 million for each period for our other postretirement benefit plans. The spin-off of WPX is not expected to have a significant impact on net periodic benefit expense in future periods.

Other changes in plan assets and benefit obligations for our other postretirement benefit plans associated with our FERC-regulated gas pipelines are recognized in net regulatory assets at December 31, 2011, and include a net actuarial loss of $39 million, prior service credit of $1 million, amortization of prior service credit of $7 million, and amortization of net actuarial loss of $2 million. At December 31, 2010, amounts recognized in net regulatory assets included a net actuarial loss of $10 million, prior service credit of $1 million, amortization of prior service credit of $9 million, and amortization of net actuarial loss of $2 million. At December 31, 2009, amounts recognized in net regulatory assets included a net actuarial gain of $14 million, prior service credit of $11 million, amortization of prior service credit of $7 million, and amortization of net actuarial loss of $3 million.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Pre-tax amounts expected to be amortized in net periodic benefit expense in 2012 are as follows:


			Other
	Pension		Postretirement
	Benefits		Benefits
	(Millions)
Amounts included in accumulated other comprehensive loss:
Prior service cost (credit)	$	1	$	(3	)
Net actuarial loss		53		3
Amounts included in net regulatory assets associated with our FERC- regulated gas pipelines:
Prior service credit		N/A	$	(4	)
Net actuarial loss		N/A		7

Key Assumptions

The weighted-average assumptions utilized to determine benefit obligations as of December 31 are as follows:


							Other
							Postretirement
	Pension Benefits						Benefits
	2011			2010			2011			2010
Discount rate		3.98	%		5.20	%		4.22	%		5.35	%
Rate of compensation increase		4.52			5.00			N/A			N/A

The weighted-average assumptions utilized to determine net periodic benefit expense for the years ended December 31 are as follows:


										Other
	Pension Benefits									Postretirement Benefits
	2011			2010			2009			2011			2010			2009
Discount rate		5.19	%		5.78	%		6.08	%		5.35	%		5.80	%		6.00	%
Expected long-term rate of return on plan assets		7.50			7.50			7.75			6.54			6.51			7.00
Rate of compensation increase		5.00			5.00			5.00			N/A			N/A			N/A

The discount rates for our pension and other postretirement benefit plans were determined separately based on an approach specific to our plans. The year-end discount rates were determined considering a yield curve comprised of high-quality corporate bonds published by a large securities firm and the timing of the expected benefit cash flows of each plan. The decrease in discount rates from December 31, 2010 to December 31, 2011 is primarily due to the general market decline in yields on long-term, high-quality corporate debt securities.

The expected long-term rates of return on plan assets were determined by combining a review of the historical returns realized within the portfolio, the investment strategy included in the plans’ Investment Policy Statement, and capital market projections for the asset classes in which the portfolio is invested and the target weightings of each asset class.

The expected return on plan assets component of net periodic benefit expense is calculated using the market-related value of plan assets. For assets held in our pension plans, the market-related value of plan assets is equal to the fair value of plan assets adjusted to reflect amortization of gains or losses associated with the difference between the expected return on plan assets and the actual return on plan assets over a five-year period. Additionally, the market-related value of plan assets may be no more than 110 percent or less than 90 percent of

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the fair value of plan assets at the beginning of the year. The market-related value of plan assets for our other postretirement benefit plans is equal to the unadjusted fair value of plan assets at the beginning of the year.

The mortality assumptions used to determine the obligations for our pension and other postretirement benefit plans are the best estimate of expected mortality rates for the participants in these plans. The selected mortality tables are among the most recent tables available and include projected mortality improvements.

The assumed health care cost trend rate for 2012 is 8.2 percent, increases slightly in 2013, and then decreases to 5.0 percent by 2021. The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage-point change in assumed health care cost trend rates would have the following effects:


	Point increase		Point decrease
	(Millions)
Effect on total of service and interest cost components	$	2	$	(2	)
Effect on other postretirement benefit obligation		47		(39	)

Plan Assets

The investment policy for our pension and other postretirement benefit plans provides for an investment strategy in accordance with ERISA, which governs the investment of the assets in a diversified portfolio. The plans follow a policy of diversifying the investments across various asset classes and investment managers. Additionally, the investment returns on approximately 40 percent of the other postretirement benefit plan assets are subject to income tax; therefore, certain investments are managed in a tax efficient manner.

The pension plans’ target asset allocation range at December 31, 2011 was 54 percent to 66 percent equity securities, which includes the commingled investment funds invested in equity securities, and 36 percent to 44 percent fixed income securities, including the fixed income commingled investment fund, and cash management funds. Within equity securities, the target range for U.S. equity securities is 37 percent to 45 percent and international equity securities is 17 percent to 21 percent. The asset allocation continues to be weighted toward equity securities since the obligations of the pension and other postretirement benefit plans are long-term in nature and historically equity securities have outperformed other asset classes over long periods of time.

Equity security investments are restricted to high-quality, readily marketable securities that are actively traded on the major U.S. and foreign national exchanges. Investment in Williams’ securities or an entity in which Williams has a majority ownership is prohibited in the pension plans except where these securities may be owned in a commingled investment fund in which the plans’ trusts invest. No more than 5 percent of the total stock portfolio valued at market may be invested in the common stock of any one corporation.

The following securities and transactions are not authorized: unregistered securities, commodities or commodity contracts, short sales or margin transactions, or other leveraging strategies. Investment strategies using the direct holding of options or futures require approval and, historically, have not been used; however, these instruments may be used in commingled investment funds. Additionally, real estate equity and natural resource property investments are generally restricted.

Fixed income securities are restricted to high-quality, marketable securities that may include, but are not necessarily limited to, U.S. Treasury securities, U.S. government guaranteed and nonguaranteed mortgage-backed securities, government and municipal bonds, and investment grade corporate securities. The overall rating of the fixed income security assets is generally required to be at least “A,” according to the Moody’s or Standard & Poor’s rating systems. No more than 5 percent of the total portfolio may be invested in the fixed income securities of any one issuer with the exception of bond index funds and U.S. government guaranteed and agency securities.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During 2011, nine active investment managers and one passive investment manager managed substantially all of the pension plans’ funds and five active investment managers managed the other postretirement benefit plans’ funds. Each of the managers had responsibility for managing a specific portion of these assets and each investment manager was responsible for 1 percent to 16 percent of the assets.

The pension and other postretirement benefit plans’ assets are held primarily in equity securities, including commingled investment funds invested in equity securities, and fixed income securities, including a commingled fund invested in fixed income securities. Within the plans’ investment securities, there are no significant concentrations of risk because of the diversity of the types of investments, diversity of the various industries, and the diversity of the fund managers and investment strategies. Generally, the investments held in the plans are publicly traded, therefore, minimizing liquidity risk in the portfolio.

The pension and other postretirement benefit plans participated in securities lending programs and during 2011, the plans completed their planned exit from these programs. Under the securities lending programs, securities were loaned to selected securities brokerage firms. The title of the securities was transferred to the borrower, but the plans were entitled to all distributions made by the issuer of the securities during the term of the loan and retained the right to redeem the securities on short notice. All loans required collateralization by U.S. government securities, cash, or letters of credit that equaled at least 102 percent of the fair value of the loaned securities plus accrued interest. There were limitations on the aggregate fair value of securities that could be loaned to any one broker and to all brokers as a group. The collateral was invested in repurchase agreements, asset-backed securities, bank notes, corporate floating rate notes, and certificates of deposit. At December 31, 2010, the fair values of the loaned securities were $116 million for the pension plans and $17 million for the other postretirement benefit plans and are included in the following tables. At December 31, 2010, the fair values of securities held as collateral, and the obligation to return the collateral, were $120 million for the pension plans and $17 million for the other postretirement benefit plans and are not included in the following tables. No significant losses were realized during 2011 as a result of the exit from the securities lending programs.

The fair values of our pension plan assets at December 31, 2011 and 2010, by asset class are as follows:


	2011
	Level 1		Level 2		Level 3		Total
	(Millions)
Pension assets:
Cash management fund (1)	$	43	$	—	$	—	$	43
Equity securities:
U.S. large cap		170		—		—		170
U.S. small cap		121		—		—		121
International developed markets large cap growth		4		57		—		61
Emerging markets growth		3		9		—		12
Commingled investment funds:
Equities - U.S. large cap (2)		—		147		—		147
Equities - Emerging markets value (3)		—		27		—		27
Equities - International developed markets large cap value (4)		—		69		—		69
Fixed income - Corporate bonds (5)		—		58		—		58
Fixed income securities (6):
U.S. Treasury securities		16		—		—		16
Mortgage-backed securities		—		65		—		65
Corporate bonds		—		169		—		169
Insurance company investment contracts and other		—		7		—		7

Total assets at fair value at December 31, 2011	$	357	$	608	$	—	$	965

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	2010
	Level 1		Level 2		Level 3		Total
	(Millions)
Pension assets:
Cash management fund (1)	$	30	$	—	$	—	$	30
Equity securities:
U.S. large cap		192		—		—		192
U.S. small cap		137		—		—		137
International developed markets large cap growth		4		68		—		72
Emerging markets growth		4		12		—		16
Commingled investment funds:
Equities - U.S. large cap (2)		—		168		—		168
Equities - Emerging markets value (3)		—		35		—		35
Equities - International developed markets large cap value (4)		—		80		—		80
Fixed income securities (6):
U.S. Treasury securities		17		3		—		20
Mortgage-backed securities		—		64		—		64
Corporate bonds		—		150		—		150
Insurance company investment contracts and other		—		7		—		7

Total assets at fair value at December 31, 2010	$	384	$	587	$	—	$	971

The fair values of our other postretirement benefits plan assets at December 31, 2011 and 2010, by asset class are as follows:


	2011
	Level 1		Level 2		Level 3		Total
	(Millions)
Other postretirement benefit assets:
Cash management funds (1)	$	16	$	—	$	—	$	16
Equity securities:
U.S. large cap		42		—		—		42
U.S. small cap		20		—		—		20
International developed markets large cap growth		1		12		—		13
Emerging markets growth		1		1		—		2
Commingled investment funds:
Equities - U.S. large cap (2)		—		15		—		15
Equities - Emerging markets value (3)		—		3		—		3
Equities - International developed markets large cap value (4)		—		7		—		7
Fixed income - Corporate bonds (5)		—		6		—		6
Fixed income securities (7):
U.S. Treasury securities		2		—		—		2
Government and municipal bonds		—		10		—		10
Mortgage-backed securities		—		6		—		6
Corporate bonds		—		17		—		17

Total assets at fair value at December 31, 2011	$	82	$	77	$	—	$	159

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	2010
	Level 1		Level 2		Level 3		Total
	(Millions)
Other postretirement benefit assets:
Cash management funds (1)	$	15	$	—	$	—	$	15
Equity securities:
U.S. large cap		44		—		—		44
U.S. small cap		24		—		—		24
International developed markets large cap growth		1		14		—		15
Emerging markets growth		1		2		—		3
Commingled investment funds:
Equities - U.S. large cap (2)		—		17		—		17
Equities - Emerging markets value (3)		—		3		—		3
Equities - International developed markets large cap value (4)		—		8		—		8
Fixed income securities (7):
U.S. Treasury securities		2		—		—		2
Government and municipal bonds		—		10		—		10
Mortgage-backed securities		—		6		—		6
Corporate bonds		—		15		—		15

Total assets at fair value at December 31, 2010	$	87	$	75	$	—	$	162

(1)	These funds invest in high credit-quality, short-term corporate, and government money market debt securities that have remaining maturities of approximately one year or less, and are deemed to have minimal credit risk.

(2)

This fund invests primarily in equity securities comprising the Standard & Poor’s 500 Index. The investment objective of the fund is to approximate the performance of the Standard & Poor’s 500 Index. The fund manager retains the right to restrict withdrawals from the fund as not to disadvantage other investors in the fund.

(3)

This fund invests in equity securities of international emerging markets for the purpose of capital appreciation. The fund invests primarily in common stocks in the financial, telecommunications, information technology, consumer goods, energy, industrial, and materials sectors. The plans’ trustee is required to notify the fund manager ten days prior to a withdrawal from the fund. The fund manager retains the right to restrict withdrawals from the fund as not to disadvantage other investors in the fund.

(4)

This fund invests in a diversified portfolio of international equity securities for the purpose of capital appreciation. The fund invests primarily in common stocks in the consumer goods, materials, financial, energy, information technology, industrial, and health care sectors, as well as forward foreign currency exchange contracts. The plans’ trustee is required to notify the fund manager ten days prior to a withdrawal from the fund. The fund manager retains the right to restrict withdrawals from the fund as not to disadvantage other investors in the fund.

(5)

This fund invests in U.S. Corporate bonds and U.S. Treasury securities. The fund is managed to closely match the characteristics of a long-term corporate bond index fund and seeks to maintain an average credit quality target of A- or above and a maximum 10 percent allocation to BBB rated securities. The fund’s target duration is approximately 20 years. The trustee of the fund reserves the right to delay the processing of deposits or withdrawals in order to ensure that securities transactions will be carried out in an orderly manner.

(6)	The weighted-average credit quality rating of the pension assets’ fixed income security portfolio is investment grade with a weighted-average duration of 5.6 years for 2011 and 2010.

(7)	The weighted-average credit quality rating of the other postretirement benefit assets’ fixed income security portfolio is investment grade with a weighted-average duration of 4.8 years for 2011 and 2010.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Shares of the cash management funds are valued at fair value based on published market prices as of the close of business on the last business day of the year, which represents the net asset values of the shares held.

The fair values of equity securities traded on U.S. exchanges are derived from quoted market prices as of the close of business on the last business day of the year. The fair values of equity securities traded on foreign exchanges are also derived from quoted market prices as of the close of business on an active foreign exchange on the last business day of the year. However, the valuation requires translation of the foreign currency to U.S. dollars and this translation is considered an observable input to the valuation.

The fair value of all commingled investment funds are estimated based on the net asset values per unit of each of the funds. The net asset values per unit represent the aggregate value of the fund’s assets at fair value less liabilities, divided by the number of units outstanding.

The fair value of fixed income securities, except U.S. Treasury notes and bonds, are determined using pricing models. These pricing models incorporate observable inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads for similar securities to determine fair value. The U.S. Treasury notes and bonds are valued at fair value based on closing prices on the last business day of the year reported in the active market in which the security is traded.

The investment contracts with insurance companies are valued at fair value by discounting the cash flow of a bond using a yield to maturity based on an investment grade index or comparable index with a similar maturity value, maturity period, and nominal coupon rate.

There have been no significant changes in the preceding valuation methodologies used at December 31, 2011 and 2010. Additionally, there were no transfers or reclassifications of investments between Level 1, Level 2, or Level 3 from December 2010 to December 2011. If transfers between levels occur, the transfers will be recognized as of the end of the period.

Plan Benefit Payments and Employer Contributions

Following are the expected benefits to be paid by the plans and the expected federal prescription drug subsidy to be received in the next ten years. These estimates are based on the same assumptions previously discussed and reflect future service as appropriate. The actuarial assumptions are based on long-term expectations and include, but are not limited to, assumptions as to average expected retirement age and form of benefit payment. Actual benefit payments could differ significantly from expected benefit payments if near-term participant behaviors differ significantly from the actuarial assumptions.


	Pension Benefits		Other Postretirement Benefits		Federal Prescription Drug Subsidy
	(Millions)
2012	$	74	$	17	$	(2	)
2013		76		17		(2	)
2014		88		18		(2	)
2015		92		19		(3	)
2016		98		20		(3	)
2017-2021		576		111		(16	)

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In 2012, we expect to contribute approximately $70 million to our tax-qualified pension plans and approximately $9 million to our nonqualified pension plans, for a total of approximately $79 million, and approximately $15 million to our other postretirement benefit plans.

Defined Contribution Plans

We also maintain defined contribution plans for the benefit of substantially all of our employees. Generally, plan participants may contribute a portion of their compensation on a pre-tax and after-tax basis in accordance with the plans’ guidelines. We match employees’ contributions up to certain limits. Our matching contributions charged to expense were $28 million in 2011, $26 million in 2010, and $25 million in 2009. Included in these amounts are matching contributions for employees that support WPX’s operations that were directly charged to WPX and included in income (loss) from discontinued operations that totaled $5 million for each of the 2011, 2010, and 2009 years.

Note 8. Inventories


	December 31,
	2011		2010
	(Millions)
Natural gas liquids and olefins	$	97	$	87
Natural gas in underground storage		1		62
Materials, supplies, and other		71		76

	$	169	$	225

Note 9. Property, Plant, and Equipment


	Estimated Useful Life (a) (Years)	Depreciation Rates (a) (%)
			December 31,
			2011			2010
			(Millions)
Nonregulated:
Natural gas gathering and processing facilities	5 - 40		$	6,435		$	6,134
Construction in progress	(b)			648			223
Other	3 - 45			816			773
Regulated:
Natural gas transmission facilities		.01 - 6.67		9,593			9,066
Construction in progress		(b)		199			240
Other		.01 - 33.33		1,391			1,359

Total property, plant, and equipment, at cost				19,082			17,795
Accumulated depreciation and amortization				(6,502	)		(6,041	)

Property, plant, and equipment - net			$	12,580		$	11,754

(a)	Estimated useful life and depreciation rates are presented as of December 31, 2011. Depreciation rates for regulated assets are prescribed by the FERC.

(b)	Construction in progress balances not yet subject to depreciation.

Depreciation and amortization expense for property, plant, and equipment – net was $658 million in 2011, $611 million in 2010, and $576 million in 2009.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Regulated property, plant, and equipment – net includes $865 million and $906 million at December 31, 2011 and 2010, respectively, related to amounts in excess of the original cost of the regulated facilities within our gas pipeline businesses as a result of our prior acquisitions. This amount is being amortized over 40 years using the straight-line amortization method. Current FERC policy does not permit recovery through rates for amounts in excess of original cost of construction.

Asset Retirement Obligations

Our accrued obligations relate to underground storage caverns, offshore platforms, fractionation and compression facilities, gas gathering well connections and pipelines, and gas transmission facilities. At the end of the useful life of each respective asset, we are legally obligated to plug storage caverns and remove any related surface equipment, to restore land and remove surface equipment at gas processing, fractionation and compression facilities, to dismantle offshore platforms, to cap certain gathering pipelines at the wellhead connection and remove any related surface equipment, and to remove certain components of gas transmission facilities from the ground.

The following table presents the significant changes to our asset retirement obligations, of which $507 million and $464 million are included in regulatory liabilities, deferred income, and other, with the remaining current portion in accrued liabilities at December 31, 2011 and 2010, respectively.


	December 31,
	2011			2010
	(Millions)
Beginning balance	$	499		$	499
Liabilities settled		(46	)		(16	)
Additions		4			2
Accretion expense		39			36
Revisions(1)		77			(22	)

Ending balance	$	573		$	499

(1)

The revision in 2011 is primarily due to increases in the inflation rate and estimated removal costs, which are among several factors considered for revision in the annual review process. The revision in 2010 is primarily due to a decrease in the inflation rate. The 2011 and 2010 revisions also include increases of $39 million and $31 million, respectively, related to changes in the timing and method of abandonment on certain of Transco’s natural gas storage caverns that were associated with a leak in 2010.

Pursuant to its 2008 rate case settlement, Transco deposits a portion of its collected rates into an external trust (ARO Trust) that is specifically designated to fund future AROs. Transco is also required to make annual deposits into the trust through 2012. (See Note 15.).

Note 10. Accrued Liabilities


	December 31,
	2011		2010
	(Millions)
Interest on debt	$	143	$	162
Employee costs		127		146
Asset retirement obligations		66		35
Income taxes		24		187
Other, including other loss contingencies		271		208

	$	631	$	738

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 11. Debt, Banking Arrangements, and Leases

Long-Term Debt


	December 31,
	2011			2010
	(Millions)
Unsecured:
Transco:
7% Notes due 2011	$	—		$	300
8.875% Notes due 2012		325			325
6.4% Notes due 2016		200			200
6.05% Notes due 2018		250			250
7.08% Debentures due 2026		8			8
7.25% Debentures due 2026		200			200
5.4% Notes due 2041		375			—
Northwest Pipeline:
7% Notes due 2016		175			175
5.95% Notes due 2017		185			185
6.05% Notes due 2018		250			250
7.125% Debentures due 2025		85			85
WPZ:
7.5% Notes due 2011		—			150
3.8% Notes due 2015		750			750
7.25% Notes due 2017		600			600
5.25% Notes due 2020		1,500			1,500
4.125% Notes due 2020		600			600
4% Notes due 2021		500			—
6.3% Notes due 2040		1,250			1,250
The Williams Companies, Inc.:
7.875% Notes due 2021		371			571
7.5% Debentures due 2031		339			527
7.75% Notes due 2031		252			369
8.75% Notes due 2032		445			686
Various - 5.5% to 10.25% Notes and Debentures due 2011 to 2033		90			152
Other, including secured capital lease obligations		4			13
Net unamortized debt discount		(32	)		(38	)

Total long-term debt, including current portion		8,722			9,108
Long-term debt due within one year		(353	)		(508	)

Long-term debt	$	8,369		$	8,600

Certain of our debt agreements contain covenants that restrict or limit, among other things, our ability to create liens supporting indebtedness, sell assets, and incur additional debt. Default of these agreements could also restrict our ability to make certain distributions or repurchase equity.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Credit Facilities

In June 2011, we entered into two new separate five-year senior unsecured revolving credit facility agreements. The replacements of our previous $900 million credit facility and WPZ’s $1.75 billion credit facility, as discussed further below, are considered modifications for accounting purposes.

We established a new $900 million unsecured revolving credit facility agreement which replaced our existing unsecured $900 million credit facility agreement that was scheduled to expire May 1, 2012. There were no outstanding borrowings under the existing agreement at the time it was terminated. The new credit facility may, under certain conditions, be increased up to an additional $250 million. Significant financial covenants require our ratio of debt to EBITDA (each as defined in the credit facility) to be no greater than 4.5 to 1. For the fiscal quarter and the two following fiscal quarters in which one or more acquisitions for a total aggregate purchase price equal to or greater than $50 million has been executed, we are required to maintain a ratio of debt to EBITDA of no greater than 5 to 1. At December 31, 2011, we are in compliance with these financial covenants. On November 1, 2011, the new credit facility was amended primarily to revise certain defined terms for further clarity and to accommodate our revised reorganization plan related to the spin-off of WPX.

WPZ also established a new $2 billion unsecured revolving credit facility agreement that includes Transco and Northwest Pipeline as co-borrowers that replaced an existing unsecured $1.75 billion credit facility agreement that was scheduled to expire on February 17, 2013. This credit facility is only available to named borrowers. At the closing, WPZ refinanced $300 million outstanding under the existing facility via a noncash transfer of the obligation to the new credit facility. The new credit facility may, under certain conditions, be increased up to an additional $400 million. The full amount of the credit facility is available to WPZ to the extent not otherwise utilized by Transco and Northwest Pipeline. Transco and Northwest Pipeline each have access to borrow up to $400 million under the credit facility to the extent not otherwise utilized by the other co-borrowers. Significant financial covenants include:

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WPZ’s ratio of debt to EBITDA (each as defined in the credit facility) must be no greater than 5 to 1. For the fiscal quarter and the two following fiscal quarters in which one or more acquisitions for a total aggregate purchase price equal to or greater than $50 million has been executed, WPZ is required to maintain a ratio of debt to EBITDA of no greater than 5.5 to 1;

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The ratio of debt to capitalization (defined as net worth plus debt) must be no greater than 65 percent for each of Transco and Northwest Pipeline.

At December 31, 2011, WPZ is in compliance with these financial covenants.

The two new credit agreements contain the following terms and conditions:

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Each time funds are borrowed, the applicable borrower may choose from two methods of calculating interest: a fluctuating base rate equal to Citibank N.A.’s alternate base rate plus an applicable margin or a periodic fixed rate equal to LIBOR plus an applicable margin. The applicable borrower is required to pay a commitment fee (currently 0.25 percent) based on the unused portion of their respective credit facility. The applicable margin and the commitment fee are determined for each borrower by reference to a pricing schedule based on such borrower’s senior unsecured long-term debt ratings.

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Various covenants may limit, among other things, a borrower’s and its material subsidiaries’ ability to grant certain liens supporting indebtedness, a borrower’s ability to merge or consolidate, sell all or substantially all of its assets, enter into certain affiliate transactions, make certain distributions during an event of default, make investments, and allow any material change in the nature of its business.

THE WILLIAMS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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