Williams Companies, Inc. (WMB) - Description of business

We are a natural gas company originally incorporated under the laws of the state of Nevada in 1949 and reincorporated under the laws of the state of Delaware in 1987. We were founded in 1908 when two Williams brothers began a construction company in Fort Smith, Arkansas.

We continue to use Economic Value Added® (EVA®)1 as the basis for disciplined decision making around the use of capital. EVA® is a tool that considers both financial earnings and a cost of capital in measuring performance. It is based on the idea that earning profits from an economic perspective requires that a company cover not only all of its operating expenses but also all of its capital costs. The two main components of EVA® are net operating profit after taxes and a charge for the opportunity cost of capital. We derive these amounts by making various adjustments to our reported results and financial position, and by applying a cost of capital. We look for opportunities to improve EVA® because we believe there is a strong correlation between EVA® improvement and creation of shareholder value.

Today, we primarily find, produce, gather, process and transport natural gas. We also manage a wholesale power business. Our operations are concentrated in the Pacific Northwest, Rocky Mountains, Gulf Coast, Southern California and Eastern Seaboard.

In 2006 we focused on continued disciplined growth. During 2006 we:

In November 2005, we initiated an offer to convert our 5.5 percent junior subordinated convertible debentures into our common stock. In January 2006, we converted approximately $220.2 million of the debentures in exchange for 20.2 million shares of common stock, a $25.8 million cash premium, and $1.5 million of accrued interest.

In April 2006, Transcontinental Gas Pipe Line Corporation (Transco) issued $200 million aggregate principal amount of 6.4 percent senior unsecured notes due 2016 to certain institutional investors in a private debt placement. In October 2006, Transco completed an offer to exchange all of these notes for substantially identical notes registered under the Securities Act of 1933, as amended.

In April 2006, we retired a secured floating-rate term loan for $488.9 million, including outstanding principal and accrued interest. The loan was due in 2008 and secured by substantially all of the assets of Williams Production RMT Company. The loan was retired using a combination of cash and revolving credit borrowings.

In May 2006, we replaced our $1.275 billion secured revolving credit facility with a $1.5 billion unsecured revolving credit facility. The new facility contains similar terms and financial covenants as the secured facility, but contains certain additional restrictions. (See Note 11 of Notes to Consolidated Financial Statements.)

In May 2006, our Board of Directors approved a regular quarterly dividend of 9 cents per share of common stock, which reflects an increase of 20 percent compared with the 7.5 cents per share paid in each of the three prior quarters.

In June 2006, Northwest Pipeline Corporation (Northwest Pipeline) issued $175 million aggregate principal amount of 7 percent senior unsecured notes due 2016 to certain institutional investors in a private debt placement. In October 2006, Northwest Pipeline Corporation completed an offer to exchange all of these notes for substantially identical notes registered under the Securities Act of 1933, as amended.

In June 2006, we reached an agreement-in-principle to settle class-action securities litigation filed on behalf of purchasers of our securities between July 24, 2000, and July 22, 2002, for a total payment of $290 million to plaintiffs. We funded our $145 million portion of the settlement with cash-on-hand in November 2006, with the balance funded through insurance proceeds. We recorded a pre-tax charge for approximately $161 million in second-quarter 2006. This settlement did not have a material effect on our liquidity position. (See Note 15 of Notes to Consolidated Financial Statements.)

In June 2006, Williams Partners L.P. acquired 25.1 percent of our interest in Williams Four Corners LLC for $360 million. The acquisition was completed after Williams Partners L.P. successfully closed a $150 million private debt offering of senior unsecured notes due 2011 and an equity offering of approximately $225 million in net proceeds. In December 2006, Williams Partners L.P. acquired the remaining 74.9 percent interest in Williams Four Corners LLC for $1.223 billion. The acquisition was completed after Williams Partners L.P. successfully closed a $600 million private debt offering of senior unsecured notes due 2017, a private equity offering of approximately $350 million of common and Class B units, and a public equity offering of approximately $294 million in net proceeds. The debt and equity issued by Williams Partners L.P. is reported as a component of our consolidated debt balance and minority interest balance, respectively. Williams Four Corners LLC owns certain gathering, processing and treating assets in the San Juan Basin in Colorado and New Mexico.

On July 31, 2006, and August 1, 2006, we received a verdict in civil litigation related to a contractual dispute surrounding certain natural gas processing facilities known as Gulf Liquids. We recorded a pre-tax charge for approximately $88 million in second quarter 2006 related to this loss contingency. (See Note 15 of Notes to Consolidated Financial Statements.)

Northwest Pipeline and Transco have each filed a general rate case with the Federal Energy Regulatory Commission (FERC). Northwest Pipeline reached a settlement in its pending rate case. The settlement is subject to FERC approval, which is expected by mid-2007. The new transportation and storage rates for both pipelines will be effective, subject to refund, in the first quarter of 2007.

In December 2006, Northwest Pipeline completed and placed into service its capacity replacement project in the state of Washington. The project involved abandoning 268 miles of 26-inch pipeline and replacing it with approximately 80 miles of 36-inch pipeline constructed in four sections along the same pipeline corridor. Additionally, Northwest Pipeline modified five existing compressor stations which created additional net horsepower.

Our property insurance coverage levels and premiums were revised during the second quarter of 2006. In general, our coverage levels have decreased while our premiums have increased. These changes reflect general trends in our industry due to hurricane-related damages in recent years.

See Note 17 of our Notes to Consolidated Financial Statements for information with respect to each segment’s revenues, profits or losses and total assets. See Note 9 for information with respect to property, plant and equipment for each segment.

Substantially all our operations are conducted through our subsidiaries. To achieve organizational and operating efficiencies, our activities are primarily operated through the following business segments: