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.

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 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.

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.

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

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 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					Income (loss) from
	(effective portion)	$	332	$	355	discontinued operations

						Income (loss) from
Gain (loss) recognized in income (ineffective portion)		$	-	$	9	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.

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.

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 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.

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

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.