TRANSCONTINENTAL GAS PIPE LINE CORP, 10-K405, 1996-03-28

TRANSCONTINENTAL GAS PIPE LINE CORP
10-K405, 1996-03-28
NATURAL GAS TRANSMISSION

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] 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 1-7584

TRANSCONTINENTAL GAS PIPE LINE CORPORATION
-----------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 74-1079400
- ------------------------------ --------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2800 POST OAK BLVD., P. O. BOX 1396, HOUSTON, TEXAS 77251
- --------------------------------------------------- -----------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 439-2000
--------------------------
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES X NO _____

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]

THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE,
OUTSTANDING AT JANUARY 31, 1996 WAS 100.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(j)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.

<PAGE> 2

- --------------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------------

ITEM 1. BUSINESS.

GENERAL

Transcontinental Gas Pipe Line Corporation (Transco) is an interstate
natural gas transmission company which owns and operates a natural gas pipeline
system extending from Texas, Louisiana, Mississippi and the Gulf of Mexico
through the states of Alabama, Georgia, South Carolina, North Carolina,
Virginia, Maryland, Pennsylvania and New Jersey to the New York City
metropolitan area. Transco's principal business is the transportation of
natural gas.

The number of full time employees of Transco at December 31, 1995 was
1,471.

Prior to May 1, 1995, Transco was a wholly-owned subsidiary of
Transco Gas Company (TGC). TGC is a wholly-owned subsidiary of Transco Energy
Company (TEC).

On December 12, 1994, TEC and The Williams Companies, Inc. (Williams)
announced that they had entered into a merger agreement (Merger Agreement)
pursuant to which Williams acquired through a cash tender offer 24.6 million
shares, or approximately 60%, of the outstanding shares of TEC's common stock
for $430.5 million. The cash tender offer was then followed by a stock merger
(Merger) in which shares of TEC common stock not purchased in the tender offer
were exchanged for approximately 10.4 million shares of Williams' common stock
valued at $334 million. On the May 1, 1995 effective date of the Merger, TEC
declared and paid as dividends to Williams all of TEC's interest in Transco.

For the accounting treatment of the Merger, see "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
- - B. Summary of Significant Accounting Policies."

In connection with the Merger, in January 1995, the Boards of
Directors of TEC and Williams approved a recapitalization plan for Transco.
The following actions were completed during 1995 in connection with the
recapitalization plan, as it impacts Transco:

- Termination of TEC's Amended Bank Credit Facility dated
December 31, 1993, replacing it with a credit agreement
described below;

- Termination of the program to sell monthly trade receivables
of Transco, replacing itwith a new receivables program;

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- Termination of TEC's Reimbursement Facility dated December 31,
1993; and

- Redemption by Transco of all of its outstanding preferred
stock at $100 per share plus accrued dividends.

TEC's Amended Bank Credit Facility was replaced with a credit
agreement among Williams and certain of its subsidiaries, including Transco
(Credit Agreement). The Credit Agreement provides for an $800 million line of
credit, under which Transco can borrow up to $400 million. Interest rates vary
with current market conditions.

The recapitalization plan, combined with TEC's dividend of its
interest in Transco to Williams, is expected to provide Transco with greater
ratemaking flexibility afforded by a stand-alone capital structure.

In addition, in February 1995, Standard & Poor's Corporation and
Moody's Investor Service upgraded Transco's debt securities from BB and Ba2 to
BBB and Baa1, respectively and Transco's preferred stock from BB- and B1 to
BBB- and Baa2, respectively. These upgrades should provide Transco with
greater access to capital markets. A security rating is not a recommendation
to buy, sell or hold securities; it may be subject to revision or withdrawal at
any time by the assigning rating organization. Each rating should be evaluated
independently of any other rating.

At December 31, 1995, Transco's system had a mainline delivery capacity
of approximately 3.7 Bcf (1) of gas per day from production areas to its
primary markets. Using its Leidy Line and market-area storage capacity,
Transco can deliver an additional 2.7 Bcf of gas per day for a system-wide
delivery capacity total of 6.4 Bcf of gas per day. The system is composed of
approximately 10,500 miles of mainline and branch transmission pipelines, 37
compressor stations, five underground storage locations and four processing
plants. Compression facilities at sea level rated capacity total approximately
1.2 million horsepower.

Transco has natural gas storage capacity in five underground fields
located on or near its pipeline system and/or market nd operates three of these
storage fields and an additional storage areas a Liquified Natural Gas (LNG)
storage facility. The total storag capacity available to Transco and its
customers in such storage fields and LNG facility is

- ----------------
(1) As used in this report, the term "Mcf" means thousand cubic
feet, the term "MMcf" means million cubic feet, the term
"Bcf" means billion cubic feet, the term "Tcf" means trillion
cubic feet, the term "Mcf/d" means thousand cubic feet per
day, the term "MMcf/d" means million cubic feet per day, the
term "Bcf/d" means billion cubic feet per day, the term
"MMBtu" means million British Thermal Units and the term
"TBtu" means trillion British Thermal Units.

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<PAGE> 4

approximately 219 Bcf of gas. Storage capacity permits Transco's
customers to inject gas into storage during the summer and off-peak periods for
delivery during peak winter demand periods.

Transco's gas pipeline facilities are generally owned in fee.
However, a substantial portion of such facilities are constructed and
maintained pursuant to rights-of-way, easements, permits, licenses or consents
on and across real property owned by others. Compressor stations, with
appurtenant facilities, are located in whole or in part either on lands owned
or on sites held under leases or permits issued or approved by public
authorities. The storage facilities are either owned or contracted for under
long-term leases or easements.

In 1992, the Federal Energy Regulatory Commission (FERC) issued Order
636 which made fundamental changes in the way natural gas pipelines conduct
their businesses. The FERC's stated purpose of Order 636 was to improve the
competitive structure of the natural gas pipeline industry by, among other
things, unbundling a pipeline's merchant role from its transportation services;
ensuring "equality" of transportation services including equal access to all
sources of gas; providing "no-notice" firm transportation services that are
equal in quality to bundled sales service; establishing a capacity release
program and changing rate design methodology from modified fixed-variable (MFV)
to straight fixed-variable (SFV), unless the pipeline and its customers agree
to, and the FERC approves, a different form of rate design methodology.
Effective November 1, 1993, Transco implemented its Order 636 restructuring
plan. For a discussion of Order 636 see "Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - C. Contingent
Liabilities and Commitments - Rate and Regulatory Matters - Order 636."

After FERC approval in 1993, TEC realigned its gas marketing
businesses under the common management of Transco Gas Marketing Company (TGMC),
an affiliate of Transco, which, through an agency agreement, began to manage
all jurisdictional merchant sales of Transco. In May 1995, Williams Energy
Services Company (WESCO), an affiliate of Transco, succeeded to the TGMC agency
agreement and began to manage Transco's jurisdictional merchant sales.

In February 1996, Transco filed an application with the FERC for an
order authorizing the abandonment of certain facilities located onshore and
offshore in Texas, Louisiana and Mississippi by conveyance to a subsidiary of
Williams Field Services Company (WFS), an affiliate of Transco. The net book
value at December 31, 1995 of the original cost of the facilities proposed to be
abandoned is approximately $230 million. The net book value at December 31, 1995
of the facilities including the purchase price allocation to Transco is
approximately $600 million. Concurrently, the WFS subsidiary filed a petition
for declaratory order requesting a determination that its gathering services and
rates be exempt from FERC regulation under the Natural Gas Act. The filings are

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<PAGE> 5

part of an ongoing comprehensive restructuring plan by Williams to separate all
gathering facilities from Williams' jurisdictional interstate natural gas
pipeline transmission companies.

MARKETS AND TRANSPORTATION

Transco's natural gas pipeline system serves customers in Texas and
eleven southeast and Atlantic seaboard states including major metropolitan
areas in Georgia, North Carolina, New York, New Jersey and Pennsylvania.

Transco's major gas transportation customers are public utilities and
municipalities that provide residential service to approximately 35 million
people and serve numerous commercial and industrial users. Shippers on
Transco's pipeline system include public utilities, municipalities, intrastate
pipelines, direct industrial users, electrical generators, marketers and
producers. Transco's largest customer in 1995 accounted for approximately 11
percent of Transco's total operating revenues. No other customer accounted for
more than 10 percent of total operating revenues. Transco's firm
transportation agreements are generally long-term agreements with various
expiration dates and account for the major portion of Transco's business.
Additionally, Transco offers interruptible transportation services under
agreements that are generally short term.

Transco's total system deliveries for the years 1995, 1994 and 1993
are shown below.

<TABLE>
<CAPTION>
Transco System Deliveries (TBtu) 1995 1994 1993
- ----------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Market-area deliveries:
Long-haul transportation . . . . . . . . . . . . . . 858.4 805.1 852.0
Market-area transportation . . . . . . . . . . . . . 467.3 453.6 387.4
---------- ---------- ----------
Total market-area deliveries . . . . . . . . . . . . 1,325.7 1,258.7 1,239.4
Production-area transportation . . . . . . . . . . . . . 165.9 185.9 177.5
---------- ---------- ----------
Total system deliveries . . . . . . . . . . . . . . . . . 1,491.6 1,444.6 1,416.9
========== ========== ==========

Average Daily Transportation Volumes (TBtu) . . . . . . . 4.1 4.0 3.9
Average Daily Firm Reserved Capacity (TBtu) . . . . . . . 5.2 4.9 4.8
</TABLE>

Transco's facilities are divided into seven rate zones. Four are
located in the production area and three are located in the market area.
Long-haul transportation is gas that is received in one of the production-area
zones and delivered in a market-area zone. Market-area transportation is gas
that is both received and delivered within market-area zones.
Production-area transportation is gas that is both received and delivered within
production-area zones.

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<PAGE> 6

As shown in the table above, Transco's market-area deliveries for 1995
were 67.0 TBtu, or 5%, higher than 1994. The increased deliveries, primarily
firm transportation volumes, were mainly due to market growth and Transco's new
Southeast Expansion service which began in the fourth quarter of 1994. The
production-area deliveries for 1995 decreased 20.0 TBtu, or 11%, when compared
to 1994 due primarily to increased competition among pipelines, especially
intrastate pipelines, for transportation of production area volumes and the
release of firm transportation capacity in the post Order 636 era.
Additionally, in 1994 there were greater volumes transported for electricity
generation due to several nuclear plants being shut-in.

As a result of the fundamental business changes resulting from FERC Order
636, especially the shifting of the responsibility for gas supply from the
pipeline companies to local distribution companies (LDCs), maintaining
committed proved gas reserves is no longer material to Transco's transportation
business.

PIPELINE PROJECTS

SOUTHEAST EXPANSION PROJECTS In November 1993, Transco filed for FERC
approval of its Southeast Expansion Projects to provide additional firm
transportation capacity to growing southeastern markets in Alabama, Georgia,
South and North Carolina and Virginia. The Southeast Expansion Projects will
provide a total of 205 MMcf/d of firm transportation capacity to Transco's
southeast customers by the 1996-1997 winter heating season. The new firm
transportation capacity will extend from Transco's Mobile Bay lateral
interconnect, near Butler, Alabama, to delivery points upstream of Transco's
Compressor Station 165, near Chatham, Virginia. The expansion projects will
include approximately 25 miles of pipeline replacement and looping and the
installation of additional compression totaling approximately 70,000
horsepower. Transco estimates the cost of the expansion to be $125 million.

By separate orders issued in 1994, the FERC authorized the 1994 Southeast
Expansion Project (SE94) and the 1995/1996 Southeast Expansion Project
(SE95/96). In February 1996, the FERC granted Transco's amendment to Phase II
of SE95/96 to slightly increase the compression additions at three compressors
stations and provide an additional 5 MMcf/d of firm transportation capacity
beginning with the 1996-1997 winter heating season.

SE94 was completed and placed into service in November 1994, and provides
35 MMcf/d of additional firm transportation capacity. Phase I of SE95/96 was
completed and placed into service in December 1995, and provides 115 MMcf/d of
additional firm transportation capacity. Phase II of SE95/96 will add the
remaining 55 MMcf/d for the 1996-1997 winter heating season. Transco invested
$63 million in these projects in 1995 and expects to invest approximately $21
million in these projects in 1996.

5
<PAGE> 7

EMINENCE STORAGE FIELD EXPANSION PROJECT During 1995, Transco completed
the third and final phase of its Eminence Storage Field Expansion Project,
expanding the working capacity from 12 Bcf to 15 Bcf. The expansion of the
salt-dome structure, located at Transco's Station 77 near Seminary,
Mississippi, will give Transco additional flexibility to meet the load
balancing and emergency gas supply demands of its customers. High
deliverability from storage helps assure pipelines, such as Transco, of gas
availability for their customers during adverse weather conditions. Transco
invested $8 million in this project in 1995.

MOBILE BAY LATERAL EXPANSION PROJECT In September 1993, the FERC issued
an order authorizing the joint ownership and expansion of Transco's Mobile Bay
lateral with Florida Gas Transmission Company (Florida Gas). The lateral
transports gas from the prolific Mobile Bay gas supply basin to the Transco
mainline, near Butler, Alabama. Construction of the compressor station
authorized as part of the expansion was completed in November 1994 and the
station was placed into service in December 1994.

In March 1995, the expansion was fully placed into service and the joint
ownership of the Mobile Bay Lateral with Florida Gas became effective. The
expansion increased the capacity of the Mobile Bay lateral from 462 MMcf/d to
829 MMcf/d. The expansion increased the Transco portion of pipeline capacity by
approximately 60 MMcf/d to 520 MMcf/d.

The cost of the expansion project was funded entirely by Florida Gas, and
Transco received approximately $13 million from Florida Gas for the sale of a
partial interest in the lateral.

SUNBELT EXPANSION PROJECT In October 1995, Transco filed for FERC
approval of the SunBelt Expansion Project to provide additional firm
transportation capacity to growing markets in Georgia, South Carolina and North
Carolina. The SunBelt Expansion Project will provide a total of 146 MMcf/d of
firm transportation capacity to existing and new Transco customers by the
1997-1998 winter heating season. The firm transportation capacity will extend
from Transco's Station 65 in St. Helena Parish, Louisiana to Station 145 near
the North and South Carolina state border. The SunBelt Expansion Project will
include approximately 15 miles of pipeline looping and compression additions
and uprating totaling 53,100 horsepower. Transco estimates the cost of the
expansion to be approximately $85 million and expects to invest approximately
$15 million in 1996.

SEABOARD 97 EXPANSION PROJECT In August 1995, Transco announced its
SeaBoard 97 Expansion Project, which is planned to provide 115 MMcf/d of
additional firm transportation capacity from points of receipt on Transco's
Leidy Line to Transco's northeastern market area by the 1997-1998 winter
heating season. To render this service, Transco will construct compression and
pipeline looping facilities at an estimated cost of

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<PAGE> 8

$115 million. Transco plans to file in mid-1996 for FERC approval of the
project and expects to invest approximately $9 million in 1996.

PINE NEEDLE LNG COMPANY, LLC In November 1995, Pine Needle LNG Company,
LLC (Pine Needle), a North Carolina limited liability company, by and through
its operator, Pine Needle Operating Company (PNOC), filed for FERC approval of
a new liquefied natural gas (LNG) storage facility to be constructed and owned
by Pine Needle near Transco's mainline system in Guilford County, North
Carolina. The project is being proposed in response to strong market demand
for winter peak heating service in the Southeast United States. The LNG
facility will have a total storage capacity of 4 Bcf of gas. The facility will
be able to liquefy gas at a net rate of 20 MMcf/d into storage, and vaporize
and send out up to 400 MMcf/d. Transco will construct the necessary
connections on its mainline system to enable it to deliver gas to and receive
gas from the storage facility. Pine Needle estimates the total cost of the
project to be $107 million. Pine Needle proposes a 50/50 debt to equity
capital structure and will seek non-recourse project financing. Pine Needle
proposes to place the LNG facility into service on or about May 1, 1999.

Pine Needle was formed in 1995 between a wholly owned subsidiary of
Transco, three North Carolina LDCs, a producer, and a Georgia gas authority.
Transco's wholly owned subsidiary, TransCarolina LNG Company, holds a 35%
ownership interest in Pine Needle. PNOC is also a wholly owned subsidiary of
Transco. Transco expects to invest approximately $3 million in 1996.

CARDINAL PIPELINE SYSTEM PROJECT In December 1995, Cardinal Extension
Company, LLC (Cardinal), a North Carolina limited liability company, was formed
between a wholly owned subsidiary of Transco and three North Carolina LDCs to
acquire Cardinal Pipeline Company, LLC and expand that company's existing North
Carolina pipeline system. The existing pipeline to be acquired consists of 37
miles of 24-inch pipeline extending from Transco's Station 160 to Burlington,
North Carolina. Cardinal plans to file in late 1996 for regulatory approval to
construct a 65-mile extension of the existing pipeline from Burlington to
Raleigh, North Carolina, which will create 140 MMcf/d of new firm
transportation capacity to Raleigh. Construction of the pipeline extension is
planned to commence in early 1999 with a target in-service date of November 1,
1999. Cardinal Operating Company, a wholly owned subsidiary of Transco, will
be responsible for constructing the pipeline extension and will serve as
operator of the expanded pipeline system.

Transco's wholly owned subsidiary, TransCardinal Company, will have a
45% ownership interest in Cardinal. The total costs for the acquisition and
extension are expected to be $97 million. Cardinal proposes a 50/50 debt to
equity capital structure and will seek non-recourse project financing.
Transco expects to invest approximately $22 million in the project,including
$2 million in 1996.

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<PAGE> 9

MID-ATLANTIC LNG STORAGE FACILITY In January 1996, Transco an LDC
customer announced that they had signed a letter of intent to evaluate,
develop, own and operate a liquefied natural gas facility. The LDC customer
has recently informed Transco that it will not participate as an owner in the
project, but the LDC has continued to express an interest in subscribing to the
project's services. Transco is currently seeking a location for the four Bcf
facility in Transco's northern market area. The preliminary estimated cost for
the project is $125 million.

REGULATORY MATTERS

Transco's transportation rates are established through the FERC
ratemaking process. Key determinants in the ratemaking process are (i) volume
throughput assumptions, (ii) costs of providing service, including depreciation
rates and (iii) allowed rate of return, including the equity component of a
pipeline's capital structure. Rate design and the allocation of costs between
the demand and commodity rates also impact profitability. As a result of the
ratemaking process, a portion of Transco's revenues may have been collected
subject to refund.

Effective September 1, 1992, Transco changed from the MFV method of rate
design to the SFV method of rate design. Under MFV rate design, all fixed
costs, with the exception of return on equity and income taxes, are included in
a demand charge to customers and return on equity and income taxes are
recovered as part of a volumetric charge to customers. Accordingly, under MFV
rate design, overall throughput has a significant impact on operating income.
Under the SFV method of rate design, all fixed costs, including return on
equity and income taxes, are included in a demand charge to customers and all
variable costs are recovered through a commodity charge to customers. While
the use of SFV rate design limits Transco's opportunity to earn incremental
revenues through increased throughput, it also minimizes Transco's risk
associated with fluctuations in throughput.

For a discussion of current regulatory matters, see "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
- - C. Contingent Liabilities and Commitments - Rate and Regulatory Matters."

COMPETITION

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<PAGE> 10
primary competitive forms of energy for residential and commercial markets.
Coal and residual fuel oil compete for industrial and electric generation
markets. Nuclear power purchased from grid arrangements among electric
utilities also compete with gas-fired power generation in the markets served by
Transco.

Although a significant portion of Transco's firm customers have
relatively secure residential and commercial end-users, virtually all of
Transco's LDC customers have some price-sensitive end-users that could switch
to alternate fuels. Approximately one-third of Transco's customer deliveries
are at risk to such fuel switching; however, a recent survey of Transco's
largest customers suggests that end-users will pay a premium to burn natural
gas and that LDCs will aggressively price their system transportation to stay
competitive in alternate-fuel markets.

Transco and its primary market-area competitors implemented Order 636 on
their respective systems during 1993. Transco and its major competitors all
employ SFV rate design for firm transportation as mandated by Order 636.
However, Transco has expressed to the FERC concerns that inconsistent treatment
under Order 636 of Transco and its competitor pipelines with regard to rate
design and cost allocation issues in Transco's production area may result in
rates which could make Transco less competitive, both in terms of
production-area and long-haul transportation rates. On July 19, 1995, Transco
received an initial decision from a FERC Administrative Law Judge (ALJ) dealing
with, among other things, Transco's production-area rate design. That decision
rejected Transco's proposal to adopt the production-area rate design employed
by its competitor pipelines. The decision of the ALJ is subject to review by
FERC and Transco has filed exceptions to the decision with the FERC. Should
the FERC issue an order consistent with the ALJ's recommendations, such order
would be for prospective effect only. Transco is unable at this time to fully
assess the competitive effect and resulting financial impact on Transco of
having to maintain its current production-area rate design which is different
than that of its competitors.

Transco is aware that several state jurisdictions have been involved in
implementation of changes similar to those that occurred at the federal level
under Order 636. Such activity, frequently referred to as "LDC unbundling", has
been most pronounced in the states of New York, New Jersey and Pennsylvania. In
New York and New Jersey regulations regarding "LDC unbundling" were enacted
during the past year and Pennsylvania is expected to act on an "LDC unbundling"
program in the early spring of 1996. While it is expected that these
regulations will encourage greater competition in the natural gas marketplace,
it is not expected that they will have a material impact on Transco's
transportation volumes or results of operations.

Transco does not expect to incur gas supply realignment (GSR) costs
associated with its firm sales service. Transco's non-GSR transition costs are
to recpated to be insignificant; therefore, Transco believes the demand charges
to recover these costs will

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<PAGE> 11

not make its rates noncompetitive in its markets. See "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
C. Contingent Liabilities and Commitments - Rate and Regulatory Matters - Order
636."

SALES SERVICE

After FERC approval in January 1993, TEC realigned its gas marketing
businesses under the common management of TGMC, which, through an agency
agreement, began to manage all jurisdictional merchant sales of Transco. In
May 1995, WESCO succeeded to the TGMC agency agreement and began to manage
Transco's jurisdictional merchant sales. See "Item 8. Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - B.
Summary of Significant Accounting Policies and I. Transactions with Major
Customers and Affiliates."

Transco makes jurisdictional merchant sales to customers pursuant to a
blanket sales certificate issued by the FERC, with most of those sales being
made through a Firm Sales (FS) program which gives customers the option to
purchase daily quantities of gas from Transco at market-responsive prices in
exchange for a demand charge payment.

Transco's gas sales volumes managed by WESCO and TGMC for the years 1995,
1994 and 1993 are shown below.

<TABLE>
<CAPTION>
Gas Sales Volumes (TBtu) 1995 1994 1993
- ------------------------- ------- ------- -------
<S> <C> <C> <C>
Long-term sales . . . . . . . . . . . . . . . . . 219.7 217.2 215.5
Short-term sales . . . . . . . . . . . . . . . . 95.5 109.7 37.0
------- ------- -------
Total gas sales . . . . . . . . . . . . . . 315.2 326.9 252.5
======= ======= =======
</TABLE>

REGULATION

INTERSTATE GAS PIPELINE OPERATIONS Transco's transmission and storage
activities are subject to regulation by the FERC under the Natural Gas Act of
1938 (Natural Gas Act) and under the Natural Gas Policy Act of 1978 (NGPA),
and, as such, Transco's rates and charges for the transportation of natural gas
in interstate commerce, the extension, enlargement or abandonment of
jurisdictional facilities, and accounting, among other things, are subject to
regulation. Transco holds certificates of public convenience and necessity
issued by the FERC authorizing ownership and operation of all pipelines,
facilities and properties considered jurisdictional for which certificates are
required under the Natural Gas Act. Transco is also subject to the Natural Gas
Pipeline Safety Act of 1968, as amended by Title I of the Pipeline Safety Act
of 1979, which regulates safety requirements in the design, construction,
operation and maintenance of interstate gas transmission facilities.

<PAGE> 12

ENVIRONMENTAL Transco is subject to the National Environmental Policy Act
and federal, state and local laws and regulations relating to environmental
quality control. Management believes that, with respect to any capital
expenditures and operation and maintenance expenses required to meet applicable
environmental standards and regulations, the FERC would grant the requisite
rate relief so that, for the most part, such expenditures would be recoverable
in rates. For this reason, management believes that compliance with applicable
environmental requirements is not likely to have a material effect upon its
earnings or competitive position. See "Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - C. Contingent
Liabilities and Commitments - Environmental Matters."

TRANSACTIONS WITH AFFILIATES

Transco engages in transactions with Williams and other Williams
subsidiaries, characteristic of group operations. See "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
- - B. Summary of Significant Accounting Policies and I. Transactions With Major
Customers and Affiliates."

ITEM 2. PROPERTIES.

See "Item 1. Business."

ITEM 3. LEGAL PROCEEDINGS.

See "Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - C. Contingent Liabilities and Commitments
- - Legal Proceedings."

DAKOTA GASIFICATION LITIGATION

On February 20, 1996, certain parties filed with the FERC a motion
requesting that the FERC establish an additional proceeding to consider claims
for additional refunds. The claimed additional refunds, which approximate $90
million net to Transco, pertain to amounts paid Dakota from November 1, 1988,
to May 1, 1993. Transco and the other pipelines have filed with the FERC an
answer opposing the motion.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Since Transco meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K, this information is omitted.

<PAGE> 13
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Prior to May 1, 1995, all of the outstanding shares of Transco's
common stock was owned by TGC, a wholly-owned subsidiary of TEC. On the May
1, 1995 effective date of the Merger, TEC declared and paid as dividends to
Williams all of TEC's interest in Transco. Transco's common stock is not
publicly traded and there exists no market for such common stock.

ITEM 6. SELECTED FINANCIAL DATA.

Since Transco meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K, this information is omitted.

12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (THIS DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.)

INTRODUCTION

As discussed in Note A, Corporate Structure and Control, of the Notes to
Consolidated Financial Statements included in Item 8 herein, TEC and Williams
announced that they had entered into a Merger Agreement pursuant to which
Williams acquired on January 18, 1995, through a cash tender offer 24.6 million
shares, or approximately 60%, of the outstanding shares of TEC's common stock
for $430.5 million. The cash offer was then followed by a Merger in which
shares of TEC common stock not purchased in the tender offer were exchanged for
approximately 10.4 million shares of Williams' common stock valued at $334
million. On the May 1, 1995 effective date of the Merger, TEC declared and
paid as dividends to Williams all of TEC's interests in Transco.

In recent years, Transco has improved its financial strength and has
experienced strong operational results. Transco expects the Merger will
further enhance its financial and operational strength, as well as allow it to
take advantage of new opportunities for growth.

CAPITAL RESOURCES AND LIQUIDITY

METHOD OF FINANCING

Transco funds its capital requirements with cash flows from operating
activities, including the sale of trade receivables, by repayments of funds
advanced to Williams, by borrowings under the Credit Agreement and short-term
money market facilities and, if required, by advances from Williams. In 1996,
Transco also plans to access capital markets to refinance current maturities of
existing long-term debt. At December 31, 1995, there were no outstanding
borrowings under the Credit Agreement or the short-term money market facilities
and advances due Transco by Williams totaled $104.5 million.

In connection with the Merger, in January 1995, the Boards of Directors
of TEC and Williams approved a recapitalization plan for TEC. See Notes D and
E of the Notes to Consolidated Financial Statements included in Item 8 herein,
for a discussion of the actions completed during 1995 in connection with the
recapitalization plan, as it impacts Transco.

In February 1995, Standard & Poor's Corporation and Moody's Investors
Service upgraded TGPL's debt securities from BB and Ba2 to BBB and Baa1,
respectively. These upgrades should provide Transco with greater access to
capital markets. A security rating is not a recommendation to buy, sell or hold
securities; it may be subject to revision or

13
<PAGE> 15

withdrawal at any time by the assigning rating organization. Each rating should
be evaluated independently of any other rating.

CAPITALIZATION AND CASH FLOWS

As shown in the following table, at December 31, 1995, the percentage of
total debt to total invested capital was 27.5%, compared to 42.7% at December
31, 1994. The increase in common stockholder's equity due to the allocation of
the Williams purchase price, partially offset by the retirement of Transco's
preferred stock, was the primary reason for the reduction of the percentage of
total debt to total invested capital.

<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
------------- ------------------------
1995 1994 1993
----------- ------------ ----------
(In millions)
<S> <C> <C> <C>
Common Stockholder's Equity . . . . . . . . . . $ 1,736.8 $ 814.8 $ 707.3
Preferred Stock . . . . . . . . . . . . . . . . - 49.4 75.2
Long-term Debt, less Current Maturities . . . . 382.0 644.2 643.8
----------- ------------ -----------
Total Capitalization . . . . . . . . . . . 2,118.8 1,508.4 1,426.3
Current maturities of Long-Term Debt . . . . . 277.1 - -
----------- ------------ -----------

Total Invested Capital . . . . . . . . . . $ 2,395.9 $ 1,508.4 $ 1,426.3
=========== ============ ===========

Long-term Debt, less Current Maturities as
a percentage of Total Capitalization . . . . 18.0% 42.7% 45.1%
Common Stockholder's Equity as a percentage
of Total Capitalization . . . . . . . . . . . 82.0% 54.0% 49.6%
Total Debt as a percentage of Total Invested
Capital . . . . . . . . . . . . . . . . . . . 27.5% 42.7% 45.1%
</TABLE>

For purposes of the discussion of variances between the year ended
December 31, 1995 and the year ended December 31, 1994, the pre-acquisition and
post-acquisition periods presented in the accompanying consolidated financial
statements for the year ended December 31, 1995 have been combined for a pro
forma presentation of cash flows for the year 1995.

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Provided By Operating Activities . . . . $ 270.6 $ 161.8 $ 259.3
======== ======== ========
</TABLE>

For the year ended December 31, 1995, cash flows from operating activities
were $109 million higher than for the year ended December 31, 1994. This
increase in cash flows was primarily the result of the timing of disbursements
for payables ($73 million) and payments of federal income taxes to Williams
($48 million) in 1995 compared to 1994.

Cash flows from operating activities for the year ended December 31, 1994
were $98 million lower than for the year ended December 31, 1993. This decrease
in cash

14
<PAGE> 16
flows was primarily the result of rate refunds made by Transco under its
RP92-137 general rate case ($123 million) and higher collection of revenues in
1993 subject to refund ($83 million), partly offset by a net decrease in gas
inventory of $26 million and no producer settlement cash payments being made in
1994 compared to $32 million in 1993.

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Used In Financing Activities . . . . . . $ 45.9 $ 32.3 $ 66.5
======= ======= ========
</TABLE>

The cash flows used in financing activities for the year ended December
31, 1995, reflect the retirement of $50 million of preferred stock, partially
offset by the capital contribution from TEC of $6 million.

The cash flows used in financing activities for the year ended December
31, 1994, reflect the retirement of $26 million of preferred stock and dividend
payments of $6 million on preferred stock.

The cash flows used in financing activities for the year ended December
31, 1993, were mainly due to the retirement of $30 million of Transco's
long-term debt and $26 million of preferred stock and dividend payments of $8
million on preferred stock.

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Used In Investing Activities . . . . . . $ 223.9 $ 128.9 $ 193.0
======== ======== ========
</TABLE>

For the year ended December 31, 1995, cash flows used in investing
activities reflect capital expenditures for property, plant and equipment of
$245 million, as shown in the following table, partly offset by a net decrease
of $11 million in advances to affiliates.

For the year ended December 31, 1994, cash flows used in investing
activities included cash outflows for capital expenditures for property, plant
and equipment of $143 million, as shown in the following table, partly offset
by a net decrease of $17 million in advances to affiliates.

For the year ended December 31, 1993, cash flows used in investing
activities were primarily for capital expenditures for property, plant and
equipment of $110 million, as shown in the following table, and a net increase
of $119 million in advances to affiliates, partly offset by the recovery of $30
million of producer settlement costs.

15
<PAGE> 17
<TABLE>
<CAPTION>
Budget Actual

---------- --------------------------------------
Capital Expenditures 1996 1995 1994 1993

---------- ---------- ----------- -----------
(In millions)

<S> <C> <C> <C> <C>
Market-Area Projects . . . . . . . $ 48.2 $ 67.4 $ 20.4 $ 13.1
Supply-Area Projects . . . . . . . - 7.7 13.7 27.3
Maintenance of Existing Facilities
and Other Projects . . . . . . . 228.5 169.6 109.3 69.8
---------- ---------- ----------- -----------

Total Capital Expenditures $ 276.7 $ 244.7 $ 143.4 $ 110.2
=========== =========== ============ ============
</TABLE>

Included in Transco's capital expenditures for 1995 were $67 million for
market-area expansion, primarily for the Southeast Expansion Projects, compared
to $20 million in 1994; $8 million for supply projects, primarily for the
Eminence Storage Field Expansion Project, compared to $14 million in 1994; and
$170 million for maintenance of existing facilities and other projects,
compared to $109 million in 1994.

FUTURE CAPITAL EXPENDITURES

As shown in the table above, Transco has budgeted approximately $277
million for 1996 capital expenditures related to the maintenance of existing
facilities and market-area expansion projects, primarily for the completion of
the Southeast Expansion Projects and initial expenditures for other major
pipeline expansion projects discussed below.

By separate orders issued in 1994, the FERC authorized the 1994
Southeast Expansion Project (SE94) and the 1995/1996 Southeast Expansion
Project (SE95/96). In February 1996, the FERC granted Transco's amendment to
Phase II of SE95/96 to slightly increase the compression additions at three
compressors stations and provide an additional 5 MMcf/d of firm transportation
capacity beginning with the 1996-1997 winter heating season.

16
<PAGE> 18
SE94 was completed and placed into service in November 1994, and
provides 35 MMcf/d of additional firm transportation capacity. Phase I of
SE95/96 was completed and placed into service in December 1995, and provides
115 MMcf/d of additional firm transportation capacity. Phase II of SE95/96
will add the remaining 55 MMcf/d for the 1996- 1997 winter heating season.
Transco invested $63 million in these projects in 1995 and expects to invest
approximately $21 million in these projects in 1996.

PINE NEEDLE LNG COMPANY, LLC In November 1995, Pine Needle LNG Company,
LLC (Pine Needle), by and through its operator, Pine Needle Operating Company
(PNOC), filed for FERC approval of a new liquefied natural gas (LNG) storage
facility to be constructed and owned by Pine Needle near Transco's mainline
system in Guilford County, North Carolina. The project is being proposed in
response to strong market demand for winter peak heating service in the
Southeast United States. The LNG facility will have a total storage capacity
of 4 Bcf of gas. The facility will be able to liquefy gas at a net rate of 20
MMcf/d to storage, and vaporize and send out up to 400 MMcf/d. Transco will
construct the necessary connections on its mainline system to enable it to
deliver gas to and receive gas from the storage facility. Pine Needle
estimates the total cost of the project to be $107 million. Pine Needle
proposes a 50/50 debt to equity capital structure and will seek non-recourse
project financing. Pine Needle proposes to place the LNG facility into service
on or about May 1, 1999.

Pine Needle is a North Carolina limited liability company formed in 1995
between wholly owned subsidiaries of Transco, three North Carolina local
distribution companies (LDCs), a producer and a Georgia gas authority.
Transco's wholly owned subsidiary,

17
<PAGE> 19
TransCarolina LNG Company, holds a 35% ownership interest in Pine Needle. PNOC
is also a wholly owned subsidiary of Transco. Transco expects to invest
approximately $3 million in 1996.

CARDINAL PIPELINE SYSTEM PROJECT In December 1995, Cardinal Extension
Company, LLC (Cardinal), a North Carolina limited liability company, was formed
between wholly owned subsidiaries of Transco and three North Carolina LDCs to
acquire Cardinal Pipeline Company, LLC and expand that company's existing North
Carolina pipeline system. The existing pipeline to be acquired consists of 37
miles of 24-inch pipeline extending from Transco's Station 160 to Burlington,
North Carolina. Cardinal plans to file in late 1996 for regulatory approval to
construct a 65-mile extension of the existing pipeline from Burlington to
Raleigh, North Carolina, which will create 140 MMcf/d of new firm
transportation capacity to Raleigh. Construction of the pipeline extension is
planned to commence in early 1999 with a target in- service date of November 1,
1999. Cardinal Operating Company, a wholly owned subsidiary of Transco, will
be responsible for constructing the pipeline extension and will serve as
operator of the expanded pipeline system.

Transco's wholly owned subsidiary, TransCardinal Company, will have a
45% ownership interest in Cardinal. The total costs for the acquisition and
extension are expected to be $97 million. Cardinal proposes a 50/50 debt to
equity capital structure and will seek non-recourse project financing. Transco
expects to invest approximately $22 million in the project, including $2
million in 1996.

OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES

ORDER 636 TRANSITION COSTS As discussed in Note C of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco
implemented Order 636 services effective November 1, 1993. Transco does not
expect to incur GSR costs associated with its firm sales service. Transco's
non-GSR transition costs are anticipated to be insignificant. Order 636
provides that pipelines should be allowed the opportunity to recover all
prudently incurred transition costs. Transco does not believe that Order 636
transition costs to be incurred by Transco will have a material adverse effect
on its financial position or results of operations.

RATE AND REGULATORY REFUNDS As discussed in Note C of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco filed a
general rate case (Docket No. RP95-197) on March 1, 1995 and placed new rates
into effect on September 1, 1995. The new rates are being collected subject to
refund. Transco has provided a reserve which it believes is adequate for any
refunds that may be required under Docket No. RP95-197.

REGULATORY AND LEGAL PROCEEDINGS As discussed in Notes C of the Notes
to Consolidated Financial Statements included in Item 8 herein, Transco is
involved in

18
<PAGE> 20
several pending regulatory and legal proceedings. Because of the complexities
of the issues involved in these proceedings, Transco cannot predict the actual
timing of resolution or the ultimate amounts which might have to be refunded or
paid in connection with the resolution of these pending regulatory and legal
proceedings.

ENVIRONMENTAL MATTERS As discussed in Note C of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco is subject
to extensive federal, state and local environmental laws and regulations which
affect Transco's operations related to the construction and operation of its
pipeline facilities.

Transco considers environmental assessment and remediation costs and
costs associated with compliance with environmental standards to be recoverable
through rates, as they are prudent costs incurred in the ordinary course of
business. To date, Transco has been permitted recovery of environmental costs
incurred and it is Transco's intent to continue seeking recovery of such costs,
as incurred, through rate filings.

LONG-TERM GAS PURCHASE CONTRACTS Transco has long-term gas purchase
contracts containing either fixed prices or variable prices that are at a
significant premium to the estimated market price. However, due to contract
expirations and estimated deliverability declines, Transco's estimated purchase
commitments under such gas purchase contracts are not material to Transco's
total gas purchases.

SUMMARY While no assurances may be given, Transco does not believe that
the ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, recovery from customers, insurance coverage
or other indemnification arrangements, will have a materially adverse effect
upon Transco's future financial position, results of operations and cash flow
requirements.

CONCLUSION

Although no assurances can be given, Transco currently believes that the
aggregate of cash flows from operating activities, supplemented, when
necessary, by repayments of funds advanced to Williams, advances or capital
contributions from Williams and borrowings under the Credit Agreement or
short-term money market facilities will provide Transco with sufficient
liquidity to meet its capital requirements. When necessary, Transco also
expects to be able to access public and private markets to finance its
requirements.

19
<PAGE> 21
RESULTS OF OPERATIONS

As a result of the change in control of Transco on January 18, 1995 and
the effects of the allocation of the purchase price, Transco's Consolidated
Statement of Income for the year ended December 31, 1995 has been segregated
into a pre-acquisition period ending January 17, 1995 and a post-acquisition
period beginning January 18, 1995. For purposes of the discussion of variances
between the year ended December 31, 1995 and the year ended December 31, 1994,
the pre- acquisition and post-acquisition periods have been combined for a pro
forma presentation of results of operations for the year 1995.

The table below shows the results of operations of Transco for the years
1995, 1994 and 1993 and the effects of certain selected items that have
impacted those results.

<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- --------------
(In millions)
<S> <C> <C> <C>
Common Stock Equity in Net Income Before
Selected $ 107.6 $ 108.5 $ 99.6
Items . . . . . . . . . . . . . . . . . . .
Provision for executive severance benefits . (15.3) - -
Amortization of purchase price allocation . (16.3) - -
Provision for regulatory issue . . . . . . . - (3.7) -
Write-off of note receivable . . . . . . . . - - (12.5)

Federal tax rate increase . . . . . . . . . - - (1.0)
--------------- --------------- --------------

Common Stock Equity in Net Income . . . . . . $ 76.0 $ 104.8 $ 86.1
=============== =============== ==============
</TABLE>

1995 COMPARED TO 1994

COMMON STOCK EQUITY IN NET INCOME AND OPERATING INCOME Transco's common
stock equity in net income for 1995 was $28.8 million less than 1994. Selected
items shown in the table above that affected the results for 1995 include net
after-tax charges of $31.6 million related to the Merger for the amortization
of amounts allocated to Transco from the Williams purchase price and to provide
for executive severance and termination benefits, substantially all of which
were not deductible for federal income tax purposes. Current FERC policy does
not permit Transco to recover through rates the amortization of amounts
attributable to the Williams purchase price allocation. Selected items
affecting the results for 1994 include a provision for refunds of certain FERC
Order 94 production related costs. Excluding the effects of the selected items
shown in the table above, the common stock equity in net income for 1995 was
comparable to common stock equity in net income for 1994. Operating income for
1995 was $183.6 million ($226.4 million excluding the selected items) compared
to operating income of $223.4 million ($229.4 million excluding the selected
item) for 1994. This $3.0 million decrease, excluding the selected items, was
due to higher operating expenses (excluding the cost of sales and

20
<PAGE> 22
transportation) of $16.3 million, partly offset by higher revenues, net of the
related cost of sales and transportation, of $13.3 million.

OPERATING EXPENSES Excluding the pre-tax effects of the selected
items and the cost of sales and transportation of $744 million and $871 million
for 1995 and 1994, respectively, Transco's operating expenses were
approximately $16 million higher in 1995 than 1994. The increase was due
primarily to costs for underground storage ($5 million), taxes other than
income taxes ($4 million), corporate overhead expenses ($3 million) and
depreciation and amortization expense ($3 million).

TRANSPORTATION SERVICES Transco's operating revenues, excluding sales
and storage services, increased $16 million to $703 million for 1995, when
compared to 1994. Transportation revenues increased $22 million due primarily
to additional revenues of $6 million from the Southeast Expansion Project which
was placed into service in November 1994, lower credits to customers of $6
million related to refunds of previously over funded deferred federal income
taxes and increased revenues related to certain increased costs included in
Transco's rate filing effective September 1, 1995, subject to refund. Other
revenues decreased $6 million due primarily to lower transportation of liquids
and liquefiable hydrocarbons.

As shown in the following table, Transco's market-area deliveries for
1995 were 67.0 TBtu, or 5%, higher than 1994. The increased deliveries,
primarily firm transportation volumes, were mainly due to market growth and
Transco's new Southeast Expansion service which began in the fourth quarter of
1994. The production-area deliveries for 1995 decreased 20.0 TBtu, or 11%,
when compared to 1994 due primarily to increased competition among pipelines,
especially intrastate pipelines, for transportation of production area volumes
and the release of firm transportation capacity in the post Order 636 era.
Additionally, in 1994 there were greater volumes transported for electricity
generation due to several nuclear plants being shut-in.

As a result of a straight fixed-variable (SFV) rate design and the
interruptible transportation revenue crediting, both in effect since September
1, 1992, increases or decreases in the system deliveries have had no
significant impact on operating income. The revenue crediting requirement was
eliminated on September 1, 1995 when Transco placed into effect the rates in
its general rate case in Docket No. RP95-197. As a result, beginning September
1, 1995, increases or decreases in interruptible transportation volumes can
have an impact on operating income.

21
<PAGE> 23
<TABLE>
<CAPTION>
Transco System Deliveries (TBtu) 1995 1994 1993
- ----------------------------- ------- ------- -------
<S> <C> <C> <C>
Market-area deliveries:
Long-haul transportation . . . . . . . . . . . . . . 858.4 805.1 852.0
Market-area transportation . . . . . . . . . . . . . 467.3 453.6 387.4
------- ------- -------
Total market-area deliveries . . . . . . . . . . . . 1,325.7 1,258.7 1,239.4
Production-area transportation . . . . . . . . . . . . . 165.9 185.9 177.5
------- ------- -------
Total system deliveries . . . . . . . . . . . . . . . . . 1,491.6 1,444.6 1,416.9
======= ======= =======

Average Daily Transportation Volumes (TBtu) . . . . . . . 4.1 4.0 3.9
Average Daily Firm Reserved Capacity (TBtu) . . . . . . . 5.2 4.9 4.8
</TABLE>

Transco's facilities are divided into seven rate zones. Four are
located in the production area and three are located in the market area.
Long-haul transportation is gas that is received in one of the production-area
zones and delivered in a market-area zone. Market-area transportation is gas
that is both received and delivered within market-area zones. Production-area
transportation is gas that is both received and delivered within
production-area zones.

SALES SERVICES Transco makes jurisdictional merchant gas sales to
customers pursuant to a blanket sales certificate issued by the FERC, with most
of those sales being made through a Firm Sales (FS) program which gives
customers the option to purchase daily quantities of gas from Transco at
market-responsive prices in exchange for a demand charge payment.

After FERC approval in January 1993, TEC realigned its gas marketing
businesses under the common management of TGMC, which, through an agency
agreement, began to manage all jurisdictional merchant sales of Transco. In
May 1995, WESCO succeeded to the TGMC agency agreement and began to manage
Transco's jurisdictional merchant sales. Through the agency agreement, WESCO
manages all jurisdictional merchant gas sales of Transco, receives all margins
associated with such business and, as Transco's agent, assumes all market and
credit risk associated with Transco's jurisdictional merchant gas sales.
Consequently, Transco's merchant gas sales service has no impact on its
operating income or results of operations.

Transco's operating revenues related to its sales services decreased
$136 million to $619 million for 1995, when compared to 1994. Of this
decrease, $84 million was related to lower prices, $22 million was related to
lower volumes, $12 million was related to the lower demand charges beginning in
April 1995 and $18 million was related to storage gas sold in 1994. However,
the decrease in revenues had no effect on Transco's operating or net income
since these revenue variances were offset by corresponding variances in the
cost of sales when compared to the prior year.

22
<PAGE> 24
<TABLE>
<CAPTION>
Gas Sales Volumes (TBtu) 1995 1994 1993
------------------------ ----- ----- -----
<S> <C> <C> <C>
Long-term sales . . . . . . . . . . . . 219.7 217.2 215.5
Short-term sales . . . . . . . . . . . 95.5 109.7 37.0
----- ----- -----
Total gas sales . . . . . . . . . 315.2 326.9 252.5
===== ===== =====
</TABLE>

STORAGE SERVICES Transco's operating revenues related to storage
services increased $7 million to $155 million in 1995, when compared to 1994.
The increase reflects primarily an increase in Transco's storage rates
effective in July 1994 due to higher storage rates charged to Transco by the
operator of the Leidy and Wharton storage fields; however, this increase in
revenues was substantially offset by a $5 million increase in underground
storage costs included in operation and maintenance expenses.

1994 COMPARED TO 1993

COMMON STOCK EQUITY IN NET INCOME AND OPERATING INCOME Transco's common
stock equity in net income for 1994 was $18.7 million higher than 1993.
Selected items affecting the results for 1994 include a reserve for refunds of
certain FERC Order 94 production-related costs and selected items affecting the
results for 1993 include a write-off of a note receivable from Transco's prior
sale of an interest in a gas field and related gas processing plant. Excluding
the net income impact of the selected items shown in the table above, Transco's
common stock equity in net income was higher by $8.9 million, due primarily to
higher net revenues of $19.9 million (net of the related cost of sales and
transportation) and lower dividends on preferred stock of $2.2 million, partly
offset by higher operation and maintenance expenses of $14.3 million.
Operating income for 1994 was $223.4 million ($229.4 million excluding the
selected item), compared to operating income of $202.2 million ($222.3 million
excluding the selected item) for 1993. This $7.1 million increase, excluding
the selected items, was primarily due to higher net revenues of $19.9 million,
partly offset by higher operation and maintenance expenses of $14.3 million.

OPERATING EXPENSES Excluding the pretax effects of the selected items
in 1994 and 1993 and the cost of sales and transportation of $871 million for
1994 and $822 million for 1993, Transco's operating expenses increased
approximately $13 million over 1993. The increase for the year was primarily
due to higher costs for platform rental space ($4 million) and labor ($6
million), partly offset by lower costs for postretirement benefits other than
pensions ($3 million).

TRANSPORTATION SERVICES Transco's operating revenues, excluding sales
and storage services, decreased $6 million to $688 million for 1994, when
compared to 1993. However, exclusive of the producer settlement surcharge
discussed below, transportation revenues increased $20 million reflecting an
increase of $10 million due to increased throughput on the Mobile Bay lateral
as a result of the change from interruptible

23
<PAGE> 25
transportation to firm transportation combined with additional demand revenues
of $7 million from Phases I and II of the Eminence storage field expansion
project. Other revenues increased $4 million, primarily due to higher
transportation of liquid and liquefiable hydrocarbons. Transportation revenues
also include a decrease of $29 million due to lower transportation rates
resulting from the elimination of the producer settlement surcharge, which
expired on May 31, 1993, although the decrease had no effect on Transco's
operating or net income variances when compared with the prior year since it was
offset by corresponding variances in the cost of transportation.

SALES SERVICES Transco's operating revenues related to its sales
service increased $73 million to $755 million for 1994, when compared to 1993.
Of this increase $78 million was related to higher volumes sold through
Transco's jurisdictional merchant sales services and $22 million was related to
the cash settlement of historical transportation imbalances, partly offset by a
decrease in non-merchant sales revenues of $27 million related to Transco's
cash-out program for the settlement of current month transportation imbalances
and the sale in 1993 of storage gas purchased for and sold to Transco's
customers. However, the increase in revenues had no impact on Transco's
operating or net income since these revenue variances were offset by
corresponding variances in the cost of sales when compared to the prior year.

STORAGE SERVICES Transco's operating revenues related to its storage
services for 1994 were comparable to those for 1993.

RATE AND REGULATORY MATTERS

See Note C of the Notes to Consolidated Financial Statements, included
in Item 8 herein, for a discussion of Transco's rate and regulatory matters.

COMPETITION

Competition for gas transportation has intensified in recent years due
to customer access to other pipelines, rate competitiveness among pipelines,
customers' desire to have more than one supplier and regulatory developments.
The FERC's stated purpose of Order 636 is to improve the competitive structure
of the natural gas pipeline industry. Transco implemented Order 636 on
November 1, 1993. Future utilization of pipeline capacity will depend on
competition from other pipelines and alternative fuels, the general level of
natural gas demand and weather conditions. Electricity and distillate fuel oil
are the primary competitive forms of energy for residential and commercial
markets. Coal and residual fuel oil compete for industrial and electric
generation markets. Nuclear power and power purchased from grid arrangements
among electric utilities also compete with gas-fired power generation in the
markets served by Transco.

24
<PAGE> 26
Although a significant portion of Transco's firm customers have
relatively secure residential and commercial end-users, virtually all of
Transco's LDC customers have some price-sensitive end-users that could switch
to alternate fuels. Approximately one-third of Transco's customer deliveries
are at risk to such fuel switching; however, a recent survey of Transco's
largest customers suggests that end-users will pay a premium to burn natural
gas and that LDCs will aggressively price their system transportation to stay
competitive in alternate-fuel markets.

Transco and its primary market-area competitors, Texas Eastern,
Columbia, Southern Natural, Tennessee and Iroquois, implemented Order 636 on
their respective systems during the period June 1993 to November 1993. Transco
and its major competitors all employ SFV rate design for firm transportation as
mandated by Order 636. However, Transco has expressed to the FERC concerns
that inconsistent treatment under Order 636 of Transco and its competitor
pipelines with regard to rate design and cost allocation issues in Transco's
production area may result in rates which could make Transco less competitive,
both in terms of production-area and long-haul transportation. On July 19,
1995, Transco received an initial decision from an ALJ dealing with, among
other things, Transco's production-area rate design. That decision rejected
Transco's proposal to adopt the production-area rate design employed by its
competitor pipelines. The decision of the ALJ is subject to review by the FERC
and Transco has filed exceptions to the decision with the FERC. Should the
FERC issue an order consistent with the ALJ's recommendations, such order would
be for prospective effect only. Transco is unable at this time to fully assess
the long-term competitive effect and resulting financial impact on Transco of
having to maintain its current production-area rate design which is different
than that of its competitors.

Transco is aware that several state jurisdictions have been involved in
implementation of changes similar to those that occurred at the federal level
under Order 636. Such activity, frequently referred to as "LDC unbundling",
has been most pronounced in the states of New York, New Jersey and
Pennsylvania. In New York and New Jersey regulations regarding "LDC
unbundling" were enacted during the past year and Pennsylvania is expected to
act on an "LDC unbundling" program in the early spring of 1996. While it is
expected that these regulations will encourage greater competition in the
natural gas marketplace, it is not expected that they will have a material
impact on Transco's transportation volumes or results of operations.

25
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

Transcontinental Gas Pipe Line Corporation
The Board of Directors

We have audited the accompanying consolidated balance sheet of Transcontinental
Gas Pipe Line Corporation as of December 31, 1995, and the related consolidated
statements of income, common stockholder's equity, and cash flows for the
periods from January 1, 1995 to January 17, 1995, and from January 18, 1995 to
December 31, 1995. 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 audit. The consolidated balance sheet as of
December 31, 1994, and the consolidated statements of income, common
stockholder's equity, and cash flows for each of the two years in the period
ended December 31, 1994, were audited by other auditors whose report dated
February 20, 1995, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Transcontinental Gas Pipe Line Corporation at December 31, 1995, and the
consolidated results of its operations and its cash flows for the periods from
January 1, 1995 to January 17, 1995, and from January 18, 1995 to December 31,
1995, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Tulsa, Oklahoma
February 9, 1996

26
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Transcontinental Gas Pipe Line Corporation:

We have audited the accompanying consolidated balance sheet of
Transcontinental Gas Pipe Line Corporation (a Delaware corporation) as of
December 31, 1994, and the related statements of income, common stockholder's
equity and cash flows for each of the two years in the period ended December
31, 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcontinental Gas Pipe
Line Corporation as of December 31, 1994 and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1994,
in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 20, 1995

27
<PAGE> 29
The acquisition of Transco Energy Company and subsidiaries, including Transco,
by The Williams Companies, Inc. was accounted for using the purchase method of
accounting. Accordingly, the purchase price was "pushed-down" and recorded in
the accompanying financial statements which affects the comparability of the
post-acquisition and pre-acquisition financial position, results of operations
and cash flows.

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
THOUSANDS OF DOLLARS
(NOTES B AND C)

<TABLE>
<CAPTION>
Post-Acquisition | Pre-Acquisition
---------------- | ---------------
December 31, | December 31,
1995 | 1994
---------------- | ---------------
<S> <C> | <C>
ASSETS |
|
Current Assets: |
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,557 | $ 1,628
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 6,426 | 7,218
Receivables: |
Trade (Notes D and H) . . . . . . . . . . . . . . . . . . 44,655 | 40,257
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 2,848 | 15,149
Advances to affiliates . . . . . . . . . . . . . . . . . . 104,499 | 115,974
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,826 | 5,707
Transportation and exchange gas receivables: |
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 28,309 | 19,328
Others . . . . . . . . . . . . . . . . . . . . . . . . . . 113,310 | 92,424
Inventories: |
Gas in storage, at LIFO . . . . . . . . . . . . . . . . . 21,943 | 12,691
Materials and supplies, at lower of average cost or market 34,336 | 42,747
Gas available for customer nomination . . . . . . . . . . 548 | 1,341
Deferred income tax benefits (Note G) . . . . . . . . . . . 37,640 | 34,578
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,170 | 20,628
----------- | -----------
Total current assets . . . . . . . . . . . . . . . . . . . 424,067 | 409,670
----------- | -----------
|
Investments, at cost . . . . . . . . . . . . . . . . . . . . . 11,256 | 351
----------- | -----------
|
Property, Plant and Equipment: |
Natural gas transmission plant . . . . . . . . . . . . . . . 3,455,154 | 4,340,912
Less - Accumulated depreciation and amortization . . . . . . 170,417 | 2,578,069
----------- | -----------
Total property, plant and equipment, net . . . . . . . . . 3,284,737 | 1,762,843
----------- | -----------
|
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 201,728 | 97,764
----------- | -----------
|
$ 3,921,788 | $ 2,270,628
=========== | ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

28
<PAGE> 30
The acquisition of Transco Energy Company and subsidiaries, including Transco,
by The Williams Companies, Inc. was accounted for using the purchase method of
accounting. Accordingly, the purchase price was "pushed-down" and recorded in
the accompanying financial statements which affects the comparability of the
post-acquisition and pre-acquisition financial position, results of operations
and cash flows.

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
THOUSANDS OF DOLLARS
(NOTES B AND C)

<TABLE>
<CAPTION>
Post-Acquisition | Pre-Acquisition
---------------- | ---------------
December 31, | December 31,
1995 | 1994
---------------- | ---------------
<S> <C> | <C>
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
Current Liabilities: |
Current maturities of long-term debt (Note D) . . . . . . . $ 277,126 | $ -
Payables: |
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 82,049 | 109,176
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 84,590 | 28,286
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 46,708 | 33,476
Transportation and exchange gas payable: |
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 841 | 2,687
Others . . . . . . . . . . . . . . . . . . . . . . . . . . 76,459 | 47,218
Accrued liabilities: |
Federal income taxes . . . . . . . . . . . . . . . . . . . 55,868 | 6,494
Other taxes . . . . . . . . . . . . . . . . . . . . . . . 9,135 | 11,299
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 15,396 | 15,396
Employee benefits (Note F) . . . . . . . . . . . . . . . . 41,994 | 24,122
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 31,843 | 25,758
Reserve for rate refunds . . . . . . . . . . . . . . . . . . 55,123 | 79,229
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 | 4,652
------------- | -----------
Total current liabilities . . . . . . . . . . . . . . . . 777,223 | 387,793
------------- | -----------
Long-Term Debt, less current maturities (Note D) . . . . . . . 382,045 | 644,238
------------- | -----------
Other Liabilities: |
Deferred income taxes (Note G) . . . . . . . . . . . . . . . 840,189 | 302,846
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,500 | 71,549
------------- | -----------
Total other liabilities . . . . . . . . . . . . . . . . . 1,025,689 | 374,395
------------- | -----------
Commitments and contingencies (Note D) |
|
Cumulative Redeemable Preferred Stock, without par value: (Note E) |
Authorized 10,000,000 shares: |
Stated value $100 per share, issued and outstanding |
-0- and 497,444 shares in 1995 and 1994, |
respectively, net of issue expense . . . . . . . . . . . . - | 49,375
------------- | -----------
Cumulative Redeemable Second Preferred Stock, |
without par value: (Note E) |
Authorized 2,000,000 shares: none issued or outstanding . . - | -
------------- | -----------
Common Stockholder's Equity: |
Common Stock $1.00 par value: |
100 shares authorized, issued and outstanding . . . . . . - | -
Premium on capital stock and other paid-in capital . . . . . 1,652,430 | 285,792
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 84,401 | 529,035
------------- | -----------
Total common stockholder's equity . . . . . . . . . . . . 1,736,831 | 814,827
------------- | -----------
$ 3,921,788 | $ 2,270,628
============= | ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

29
<PAGE> 31
The acquisition of Transco Energy Company and subsidiaries, including Transco,
by The Williams Companies, Inc. was accounted for using the purchase method of
accounting. Accordingly, the purchase price was "pushed-down" and recorded in
the accompanying financial statements which affects the comparability of the
post-acquisition and pre-acquisition financial position, results of operations
and cash flows.

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF INCOME
THOUSANDS OF DOLLARS
(NOTE B)

<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
-------------------- | --------------------------------------------------------
| For the Years Ended
For the Period | For the Period December 31,
January 18, 1995 | January 1, 1995 -----------------------------------
to December 31, 1995 | to January 17, 1995 1994 1993
-------------------- | ------------------- --------------- -----------------
<S> <C> | <C> <C> <C>
Operating Revenues: |
Natural gas sales . . . . . . . . . . . . . . $ 587,568 | $ 31,701 $ 754,984 $ 681,839
Natural gas transportation . . . . . . . . . . 667,601 | 32,775 678,561 687,808
Natural gas storage . . . . . . . . . . . . . 147,398 | 7,452 148,290 146,416
Other . . . . . . . . . . . . . . . . . . . . 2,584 | 133 9,127 5,470
------------ | -------------- ----------- -----------
Total operating revenues . . . . . . . . . . 1,405,151 | 72,061 1,590,962 1,521,533
------------ | -------------- ----------- -----------
|
Operating Costs and Expenses: |
Cost of natural gas sales . . . . . . . . . . 586,878 | 31,691 752,495 681,482
Cost of natural gas transportation . . . . . . 119,455 | 6,279 118,865 140,358
Operation and maintenance . . . . . . . . . . 194,441 | 8,722 190,501 176,171
Administrative and general . . . . . . . . . . 129,294 | 7,063 146,740 148,186
Provision for executive severance benefits . . - | 16,048 - -
Depreciation and amortization . . . . . . . . 151,711 | 5,560 120,797 119,495
Taxes - other than income taxes . . . . . . . 33,818 | 1,558 31,061 32,593
Provision for regulatory issue (Note C) . . . - | - 6,000 -
Write-off of note receivable (Note H) . . . . - | - - 20,125
Other . . . . . . . . . . . . . . . . . . . . 1,057 | 53 1,079 952
------------ | -------------- ------------ -----------
Total operating costs and expenses . . . . . 1,216,654 | 76,974 1,367,538 1,319,362
------------ | -------------- ------------ -----------
|
Operating Income (Loss) . . . . . . . . . . . . . 188,497 | (4,913) 223,424 202,171
------------ | -------------- ------------ -----------
|
|
Other (Income) and Other Deductions: |
Interest expense - affiliates . . . . . . . . 305 | 2 - 221
- other . . . . . . . . . . 56,132 | 2,678 61,128 64,015
Interest income - affiliates . . . . . . . (1,821) | (207) (6,122) (3,177)
- other . . . . . . . . . . (630) | (12) (567) (1,928)
Allowance for equity and borrowed funds |
used during construction (AFUDC) . . . . . (6,870) | (234) (4,184) (5,126)
Miscellaneous other (income) and |
deductions, net . . . . . . . . . . . . . . 315 | 213 4,710 4,600
------------ | -------------- ------------ -----------
Total other (income) and other deductions . 47,431 | 2,440 54,965 58,605
------------ | -------------- ------------ -----------
|
Income (Loss) before Income Taxes . . . . . . 141,066 | (7,353) 168,459 143,566
Provision for Income Taxes (Note G) . . . . . 54,478 | 2,309 57,733 49,341
------------ | -------------- ------------ -----------
Net Income (Loss) . . . . . . . . . . . . . . 86,588 | (9,662) 110,726 94,225
Dividends on Preferred Stock . . . . . . . . . 722 | 194 5,944 8,107
------------ | -------------- ------------ -----------
Common Stock Equity in Net Income (Loss) . . . $ 85,866 | $ (9,856) $ 104,782 $ 86,118
============ | ============== ============ ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

30
<PAGE> 32
The acquisition of Transco Energy Company and subsidiaries, including Transco,
by The Williams Companies, Inc. was accounted for using the purchase method of
accounting. Accordingly, the purchase price was "pushed-down" and recorded in
the accompanying financial statements which affects the comparability of the
post-acquisition and pre-acquisition financial position, results of operations
and cash flows.

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY

THOUSANDS OF DOLLARS
(NOTES B AND C)

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE> 33
The acquisition of Transco Energy Company and subsidiaries, including Transco,
by The Williams Companies, Inc. was accounted for using the purchase method of
accounting. Accordingly, the purchase price was "pushed-down" and recorded in
the accompanying financial statements which affects the comparability of the
post-acquisition and pre-acquisition financial position, results of operations
and cash flows.

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF DOLLARS
(NOTE B)

<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
-------------------- | --------------------------------------------------------
| For the Years Ended
For the Period | For the Period December 31,
January 18, 1995 | January 1, 1995 -----------------------------------
to December 31, 1995 | to January 17, 1995 1994 1993
-------------------- | ------------------- --------------- -----------------
<S> <C> | <C> <C> <C>
Cash flows from operating activities: |
Net income (loss) . . . . . . . . . . . . . . . $ 86,588 | $ (9,662) $ 110,726 $ 94,225
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) operating |
activities: |
Depreciation and amortization . . . . . . . . 166,691 | 6,165 134,363 133,202
Deferred income taxes (Note G) . . . . . . . . (18,168) | 5,348 (24,466) 4,788
Provision for (payment of) executive |
severance benefits . . . . . . . . . . . . . (14,849) | 16,048 - -
Allowance for equity funds used during |
construction (Equity AFUDC) . . . . . . . . (5,769) | (190) (3,410) (2,801)
Provision for regulatory issue (Note C) - | - 6,000 -
Write-off of note receivable (Note H) . . . . - | - - 20,125
Nonrecoverable producer settlements . . . . . - | - - (31,600)
Changes in operating assets and liabilities: |
Receivables . . . . . . . . . . . . . . . . 17,120 | (7,114) 32,067 (28,884)
Transportation and exchange gas receivable. (24,166) | (5,701) 35,363 45,308
Inventories . . . . . . . . . . . . . . . . (752) | (2,647) 17,131 (8,616)
Payables . . . . . . . . . . . . . . . . . 50,468 | (8,059) (30,836) 15,497
Transportation and exchange gas payable . . 22,461 | 4,934 (27,798) (56,428)
Accrued liabilities . . . . . . . . . . . 49,748 | (4,755) 7,527 (1,896)
Reserve for rate refunds . . . . . . . . . (10,749) | (26,846) (68,041) 103,724
Other, net . . . . . . . . . . . . . . . . (15,569) | 71 (26,831) (27,295)
---------- | ------------ ------------ ------------
Net cash provided by (used in) operating |
activities . . . . . . . . . . . . . . 303,054 | (32,408) 161,795 259,349
---------- | ------------ ------------ ------------
|
Cash flows from financing activities: |
(Notes D and E) |
Capital contribution by parent . . . . . . . . . 5,539 | - - -
Additions to long-term debt . . . . . . . . . . . 50,000 | - - -
Retirement of long-term debt . . . . . . . . . . (50,000) | - - (29,856)
Retirement of preferred stock . . . . . . . . . . (49,744) | - (25,999) (25,998)
Advances from affiliates, net . . . . . . . . . . (8,195) | 8,195 - -
Dividends on preferred stock . . . . . . . . . . (1,647) | - (6,320) (8,483)
Other, net . . . . . . . . . . . . . . . . . . . - | - - (2,161)
---------- | ------------ ------------ ------------
Net cash provided by (used in) financing |
activities . . . . . . . . . . . . . . (54,047) | 8,195 (32,319) (66,498)
---------- | ------------ ------------ ------------
</TABLE>

<PAGE> 34

The acquisition of Transco Energy Company and subsidiaries, including Transco,
by The Williams Companies, Inc. was accounted for using the purchase method of
accounting. Accordingly, the purchase price was "pushed-down" and recorded in
the accompanying financial statements which affects the comparability of the
post-acquisition and pre-acquisition financial position, results of operations
and cash flows.

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF DOLLARS
(NOTE B)

<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
-------------------- | --------------------------------------------------------
| For the Year Ended
For the Period | For the Period December 31,
January 18, 1995 | January 1, 1995 -----------------------------------
to December 31, 1995 | to January 17, 1995 1994 1993
-------------------- | ------------------- ---------------- ---------------
<S> <C> | <C> <C> <C>
Cash flows from investing activities: |
Additions to property, plant and equipment, |
net of equity AFUDC . . . . . . . . . . . (239,773) | (4,896) (143,440) (110,227)
Recovery of producer settlements . . . . . . - | - - 30,412
Sale of assets . . . . . . . . . . . . . . . 8,154 | - - -
Advances to affiliates, net . . . . . . . . (52,124) | 63,599 17,331 (118,804)
Other, net . . . . . . . . . . . . . . . . . 1,199 | (24) (2,833) 5,603
----------- | --------------- ------------- ------------
Net cash provided by (used in) |
investing activities . . . . . . (282,544) | 58,679 (128,942) (193,016)
----------- | --------------- ------------- ------------
|
|
Net increase (decrease) in cash . . . . . . (33,537) | 34,466 534 (165)
Cash at beginning of period . . . . . . . . 36,094 | 1,628 1,094 1,259
----------- | --------------- ------------- ------------
Cash at end of period . . . . . . . . . . . $ 2,557 | $ 36,094 $ 1,628 $ 1,094
=========== | =============== ============= ============

Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest (exclusive of amount $ 52,450 $ 5,552 $ 59,485 $ 61,275
capitalized) . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . 28,576 19,427 60,663 101,802
Income tax refunds received . . . . . (22,454) - (29,558) (7,655)
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

33
<PAGE> 35
TRANSCONTINENTAL GAS PIPE LINE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S><C> <C>
A. Corporate Structure and Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
B. Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . 35
C. Contingent Liabilities and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 39
D. Debt, Financing Arrangements and Leases . . . . . . . . . . . . . . . . . . . . . . . . . 50
E. Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
F. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
G. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
H. Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
I. Transactions with Major Customers and Affiliates . . . . . . . . . . . . . . . . . . . . 61
J. Quarterly Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
</TABLE>

A. CORPORATE STRUCTURE AND CONTROL

Prior to May 1, 1995, Transcontinental Gas Pipe Line Corporation (Transco)
was a wholly-owned subsidiary of Transco Gas Company (TGC). TGC is a
wholly-owned subsidiary of Transco Energy Company (TEC).

The tender offer began on December 16, 1994 and expired on January 17,
1995. Approximately 35.2 million shares, or approximately 86.7%, of the
outstanding shares of TEC's common stock were tendered to Williams for
purchase. Pursuant to the Merger Agreement, on January 18, 1995, Williams
accepted for payment 24.6 million shares of TEC's common stock for $17.50 per
share as the first step in acquiring the entire equity interest of TEC. The
exchange of the remainder of the outstanding shares of TEC's common stock for
Williams' common stock was approved by a majority of TEC's stockholders on
April 28, 1995 and occurred on the May 1, 1995 effective date of the Merger.
On May 1, 1995, TEC declared and paid as dividends to Williams all of TEC's
interest in Transco.

Transco's Board of Directors declared a non-cash common stock dividend of
$1.5 million and non-cash return of capital of $.7 million to Williams in 1995.
No common stock dividends were declared in 1994 or 1993.

34
<PAGE> 36
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS Transco is an interstate natural gas transmission
company which owns and operates a natural gas pipeline system extending from
Texas, Louisiana, Mississippi and the Gulf of Mexico through the states of
Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland,
Pennsylvania and New Jersey to the New York City metropolitan area. The system
serves customers in Texas and the eleven southeast and Atlantic seaboard states
mentioned above, including major metropolitan areas in Georgia, North Carolina,
New York, New Jersey and Pennsylvania. Additional information about Transco's
operations is contained throughout this report.

BASIS OF PRESENTATION The acquisition of TEC and its subsidiaries,
including Transco, by Williams has been accounted for using the purchase method
of accounting. Accordingly, an allocation of the purchase price was assigned
to the assets and liabilities of Transco based on their estimated fair values.
The accompanying post-acquisition consolidated financial statements reflect
Transco's share of the purchase price. The purchase price allocation to
Transco primarily consisted of a $1.5 billion allocation to property, plant and
equipment, which is being amortized on a straight-line basis, and adjustments
to deferred taxes based upon the book basis of the net assets recorded as a
result of the acquisition. Current Federal Energy Regulatory Commission (FERC)
policy does not permit Transco to recover through rates amounts in excess of
original cost.

Further, as a result of the change in control of Transco on January 18,
1995 and the effects of the allocation of the purchase price, Transco's
Consolidated Statement of Income, Consolidated Statement of Common
Stockholder's Equity and Consolidated Statement of Cash Flows for the twelve
months ended December 31, 1995 have been segregated into a pre-acquisition
period ending January 17, 1995 and a post-acquisition period beginning January
18, 1995.

Prior to May 1, 1995 and as a subsidiary of TEC, Transco engaged in
transactions with TEC and other TEC subsidiaries, characteristic of group
operations. For consolidated cash management purposes, Transco made interest-
bearing advances to TEC and received interest-bearing advances and capital
contributions from TEC. These advances were represented by demand notes and
Transco recorded such advances as current in the accompanying Consolidated
Balance Sheet. As general TEC corporate policy, the interest rate on
intercompany demand notes was 1-1/2% below the prime rate of Citibank, N.A.

Effective May 1, 1995, Transco began participation in Williams' cash
management program. On that date, the balance of the advances due to TEC were
transferred by TEC to Williams. Subsequent to May 1, 1995, Transco repaid
advances due Williams and made advances to Williams. These advances are
represented by demand notes. Transco currently expects to receive payment of
these advances within the next twelve months and has recorded such advances as
current in the accompanying Consolidated Balance Sheet.

35
<PAGE> 37
The interest rate on intercompany demand notes is the London Interbank Offered
Rate on the first day of the month plus an adder ranging from 0.35% to 1.15%.

Through an agency agreement, Williams Energy Services Company (WESCO), an
affiliate of Transco, manages all jurisdictional merchant gas sales of Transco,
receives all margins associated with such business and, as Transco's agent,
assumes all market and credit risk associated with Transco's jurisdictional
merchant gas sales. Consequently, Transco's merchant gas sales service has no
impact on its operating income or results of operations.

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of Transco and majority-owned subsidiaries. Companies in which
Transco and its subsidiaries own 20 percent to 50 percent of the voting common
stock are accounted for under the equity method.

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded
at cost, adjusted in 1995 to reflect the allocation of the purchase price as
discussed above. Gains or losses from the ordinary sale or retirement of
property, plant and equipment are credited or charged to accumulated
depreciation; other gains or losses are recorded in net income.

The Financial Accounting Standards Board (FASB) has issued a new
accounting standard, Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", effective for fiscal years beginning after December
15, 1995. The standard, which will be adopted in the first quarter of 1996, is
not expected to have a material effect on Transco's financial position or
results of operation.

Depreciation rates used for major regulated gas plant facilities at
year-end 1995, 1994 and 1993 were:

<TABLE>
<CAPTION>
Category of Property 1995 1994 1993
- --------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Gathering facilities . . . . . . . . . . . . . 6.22% 6.22% 6.22%
Storage facilities . . . . . . . . . . . . . . 2.50% 2.50% 2.50%
Onshore transmission facilities . . . . . . . . 2.65% 2.65% 2.50%-2.65%
Offshore transmission facilities . . . . . . . 3.75%-7.78% 3.75%-7.78% 3.75%-7.78%
</TABLE>

Depreciation of general plant is provided at straight-line rates.

In Transco's general rate case in Docket No. RP95-197, effective September
1, 1995, subject to refund, the FERC Staff has proposed a reduction in the
depreciation rates of certain categories of property. Reductions in
depreciation rates would have no effect on operating or net income, but would
result in lower cash flows from operations.

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<PAGE> 38

ACCOUNTING FOR INCOME TAXES Williams and its wholly-owned subsidiaries,
which includes Transco, file a consolidated federal income tax return. It is
Williams' policy to charge or credit each subsidiary with an amount equivalent
to its federal income tax expense or benefit computed as if each subsidiary had
filed a separate return. During 1994 and 1993 TEC and its wholly-owned
subsidiaries, which included Transco through its ownership by TGC, filed a
consolidated federal income tax return. It was TEC's policy to charge or
credit each subsidiary with an amount equivalent to its federal income tax
expense or benefit computed as if each subsidiary filed a separate return, but
including benefits from each subsidiary's losses and tax credits that may be
utilized only on a consolidated basis.

Transco uses the liability method of accounting for deferred taxes which
requires, among other things, provisions for all temporary differences between
the financial basis and the tax basis in Transco's assets and liabilities and
adjustments to the existing deferred tax balances for changes in tax rates,
whereby such balances will more closely approximate the actual taxes to be
paid.

REVENUE RECOGNITION Transco recognizes revenues for the sale of its
commodities in the period of delivery and recognizes revenue for the
transportation of gas in the period the service is provided based upon
contractual terms. Transco is subject to FERC regulations and, accordingly,
certain revenues are collected subject to possible refunds pending final FERC
orders. Transco records rate refund accruals based on management's estimate of
the expected outcome of these proceedings.

ALLOWANCES FOR DOUBTFUL RECEIVABLES Due to its customer base, Transco has
not historically experienced recurring credit losses in connection with its
receivables. As a result, receivables determined to be uncollectible are
reserved or written off in the period of such determination. At December 31,
1995 and 1994, Transco had no allowance for doubtful accounts.

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

CASH FLOWS FROM OPERATING ACTIVITIES Transco uses the indirect method to
report cash flows from operating activities, which requires adjustments to net
income to reconcile to net cash flows provided by operating activities.
Transco includes short-term, highly-liquid investments that have a maturity of
three months or less as cash equivalents.

RESTRICTED DEPOSITS At December 31, 1995 and 1994, Transco had
approximately $6 million and $7 million, respectively, of restricted deposits
that are classified on the accompanying Consolidated Balance Sheet in current
assets as Deposits. These restricted

<PAGE> 39

deposits serve as collateral for various standby letters of credit, regulatory
trusts and legal proceedings.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The allowance for funds used
during construction (AFUDC) represents the cost of funds applicable to
regulated natural gas transmission plant under construction as permitted by
FERC regulatory practices. The allowance for borrowed funds used during
construction was $1.1 million, $0.8 million and $2.3 million for 1995, 1994 and
1993, respectively. The allowance for equity funds was $6.0 million, $3.4
million and $2.8 million for 1995, 1994 and 1993, respectively.

GAS IN STORAGE Transco utilizes the last-in, first-out (LIFO) method of
accounting for inventory gas in storage. The 1995 and 1994 inventory values
approximated current replacement cost.

GAS IMBALANCES In the course of providing transportation services to
customers, Transco may receive different quantities of gas from shippers than
the quantities delivered on behalf of those shippers. Additionally, Transco
transports gas on various pipeline systems which may deliver different
quantities of gas on behalf of Transco than the quantities of gas received from
Transco. These transactions result in gas transportation and exchange
imbalance receivables and payables which are recovered or repaid in cash or
through the receipt or delivery of gas in the future and are recorded in the
accompanying Consolidated Balance Sheet. Settlement of imbalances requires
agreement between the pipelines and shippers as to allocations of volumes to
specific transportation contracts and timing of delivery of gas based on
operational conditions. Transco's rate structure includes a method whereby
most imbalances generated after August 1, 1991 are settled on a monthly basis.
Imbalances predating August 1, 1991 are being recovered or repaid in cash or
through the receipt or delivery of gas in the future upon agreements of
allocation and as permitted by operating conditions. These imbalances have
been classified as current assets or current liabilities at December 31, 1995.

DERIVATIVE FINANCIAL INSTRUMENTS Transco, through WESCO as its agent (and
formerly through Transco Gas Marketing Company (TGMC), an affiliate), has been
a party to various futures contracts and option and commodity price swap
agreements (derivatives) used to manage price volatility in its natural gas
marketing activities related to WESCO's management of Transco's jurisdictional
merchant sales service. Transco does not use derivatives for trading purposes.
During 1995 and 1994 derivatives designated as hedges have been carried at
market value with gains and losses deferred until the hedged marketing activity
is included in current net income or loss. Open contracts on natural gas
marketing activity designated as hedges at December 31, 1995 were not material.
WESCO will record all future derivatives activity related to the management of
Transco's jurisdictional merchant sales service and will be at risk for all
such derivative activity.

<PAGE> 40

RECLASSIFICATIONS Certain reclassifications have been made in the 1994
and 1993 financial statements to conform to the 1995 presentation.

C. CONTINGENT LIABILITIES AND COMMITMENTS

RATE AND REGULATORY MATTERS

GENERAL RATE CASE (DOCKET NO. RP95-197) On March 1, 1995, Transco filed
with the FERC a general rate case that proposed changes in the rates for
Transco's transportation, sales and storage service rate schedules effective
April 1, 1995. The changes in rates, if accepted as proposed, would generate
additional annual jurisdictional revenues of approximately $132 million over
the pre-filed rates in effect, based primarily on: (1) an increase in rate base
resulting from additional plant and higher working capital requirements and a
reduction in historical accumulated deferred income taxes; (2) an increase in
operation and maintenance expenses; and (3) an increase in Transco's cost of
capital resulting from an increase in the equity component of the capital
structure used (the filing is based on Transco's own capital structure) and in
the cost of equity from the pre-filed rate of return on equity of 14.45 percent
to the proposed rate of return on equity of 15.25 percent.

Transco also proposed to: (1) eliminate the non-gas demand charge under
Rate Schedule FS; (2) refunctionalize certain jointly owned transmission
facilities to the gathering function; and (3) eliminate the interruptible
transportation (IT) crediting mechanism. Transco also filed pro forma tariff
sheets, to be effective on a prospective basis, for two new Part 284 services,
an interconnect transfer service and a gas management service, and a pro forma
tariff sheet to reflect market-based rates for its non-IT feeder transactions,
should the FERC decide to set Transco's IT rates for hearing in this docket.
Transco further proposed to eliminate the "at risk" certificate condition
governing its Mobile Bay facilities on a prospective basis. Finally, Transco
proposed certain other changes to the terms and conditions of its tariff, none
of which would have a significant impact on operating income.

On March 31, 1995, the FERC issued an order on Transco's filing which
accepted and suspended the tariff sheets relating to Transco's rates, to be
effective September 1, 1995, subject to refund, and established hearing
procedures. The March 31 order also accepted, effective April 1, 1995, the
tariff sheets changing Transco's terms and conditions of service, subject to the
outcome of a technical conference. In that regard, on June 13, 1995, the FERC
granted Transco's motion to transfer consideration of issues relating to the
proposed new services from the technical conference to the second phase of the
hearing established for this proceeding, described below. As to market-based IT
rates, the FERC accepted Transco's pro forma tariff sheet but deferred action
until after the FERC has completed its generic review of market-based rates. As
to the elimination of the IT crediting mechanism, the FERC permitted Transco to
eliminate the IT crediting

39
<PAGE> 41
mechanism subject to the outcome of the hearing where the reasonableness of
Transco's test period throughput projections for interruptible services must be
examined.

On August 31, 1995, Transco filed to place the rates filed on March 1,
1995 into effect on September 1, 1995, as adjusted to reflect certain changes
subsequent to the March 1 filing. The FERC accepted Transco's filing subject to
the outcome of the hearing and technical conference established by the FERC's
March 31 order. The September 1 rates are being collected subject to refund.

At a prehearing conference on April 18, 1995, the presiding Administrative
Law Judge (ALJ) adopted a procedural schedule establishing a phased hearing for
the rate issues raised by Transco's filing. The first phase of the hearing was
limited to the issues of the rate of return and capital structure in the
filing, and concluded in December 1995. Transco is awaiting the outcome of
this hearing. The second phase will address the remaining rate issues with a
hearing to commence in July 1996.

On October 4, 1995, the FERC issued an order on the tariff issues
addressed at a technical conference held pursuant to the FERC's March 31 order.
The FERC required that Transco make certain tariff changes consistent with the
October 4 order (most of which were agreed to by Transco at the technical
conference), and as to other issues has directed that Transco continue
discussions with its customers.

GENERAL RATE CASE (DOCKET NO. RP92-137) On March 2, 1992, Transco filed
with the FERC a general rate case that proposed an increase in transportation
rates, based primarily on increases in operating and maintenance costs,
including those associated with additional services provided to Transco's
markets since its last general rate filing, and increased cost of capital. The
filing also included a change to straight-fixed-variable (SFV) rate design and
an increase in rate base resulting from additional plant and equipment costs
and higher working capital requirements. On September 1, 1992, the increased
rates went into effect, subject to refund.

On May 3, 1993, Transco filed with the FERC a Settlement with regard to
Docket No. RP92-137. On November 4, 1993, the FERC issued an order accepting
the Settlement. The Settlement resolved all issues in Docket No. RP92-137
except (i) issues relating to Transco's rate of return (see discussion below),
and (ii) the issue of the appropriate load factor for the design of Transco's
interruptible rates, which the FERC referred to a hearing in Docket No.
RP92-137, for prospective effect only (see Order 636 discussion for additional
issues referred to this hearing). In addition, in the Settlement, Transco
agreed to file a new general section 4 rate case to be effective no later than
September 1, 1995 (see discussion above of Docket No. RP95-197). The Settlement
became effective on April 1, 1994. One party has appealed the FERC's orders
related to the Settlement to the United States Court of Appeals for the D.C.
Circuit (D.C. Circuit Court) on an issue not affecting Transco's cost recovery;
however, that appeal was

40
<PAGE> 42
remanded by the D. C. Circuit to the FERC at the FERC's request. During 1995,
Transco made refunds of approximately $62.2 million, including interest, under
Docket No. RP92-137 for which Transco had previously provided a reserve.

On September 17, 1992, the FERC issued a decision addressing the single
issue of the appropriate rate of return in Docket No. RP92-137. The FERC,
using a hypothetical capital structure based on the average capital structure
of a group of seven publicly-traded companies with pipeline subsidiaries,
determined Transco's appropriate after-tax rate of return on equity to be
14.45%. The FERC did not determine Transco's cost of debt and preferred stock,
suggesting that this issue should be the subject of further proceedings in the
context of the general rate case. Consequently, Transco's settlement rates in
Docket No. RP92-137 reflected an after-tax rate of return on equity of 14.45%
but, consistent with the FERC order, the rates reflect the cost of debt and
preferred stock originally filed in the general rate case. The issue of the
appropriate rate of return for Transco was appealed to the D.C. Circuit Court.
Transco appealed, seeking to increase the rate of return, and certain other
parties appealed, seeking to lower the rate of return. On December 23, 1994,
the D.C. Circuit Court issued an opinion remanding to the FERC for further
consideration the FERC's September 17, 1992 order. The D.C. Circuit Court
determined that the FERC had failed to explain adequately its decisions to use
a hypothetical capital structure for Transco, to select a rate of return on
equity at the top range of reasonableness, and to use as a proxy group to
develop Transco's hypothetical capital structure a group of publicly-traded
parent companies with pipeline subsidiaries rather than a group of regulated
pipelines. On June 7, 1995, the FERC issued an order on remand, stating that
it was considering using Transco's capital structure, but seeking comments on a
number of issues related to the D. C. Circuit Court's remand. On August 7,
1995, Transco filed initial comments in response to the June 7 order, generally
in support of the FERC's September 17, 1992 order but urging the FERC to
impute a capital structure for Transco based on the average capital structure
of a proxy group of natural gas pipeline companies, not unregulated pipeline
parents utilized by the FERC. On September 15, 1995, Transco filed reply
comments, responding to the initial comments of parties that were inconsistent
with Transco's position.

As discussed below, the issue of the allocation of certain costs to
Transco's merchant sales service, among others, was referred to the hearing in
Docket No. RP92-137 by the FERC orders approving Transco's implementation of
Order 636. In an initial decision issued on October 20, 1994, the ALJ
determined that there is no genuine issue of material fact warranting a
trial-type hearing on the issue, and directed Transco to remove from its
gathering function approximately $5.6 million of indirect costs and to reassign
this amount to its merchant sales service. In late February 1995, the FERC
issued an order affirming the ALJ's October 20, 1994 decision. Transco filed
for rehearing of the FERC's February 1995 order, and on May 24, 1995, the FERC
denied TGPL's request for rehearing. On June 1, 1995, TGPL filed revised tariff
sheets to comply with the FERC's orders, and on June 29, 1995, the FERC issued
an order accepting that filing, effective July 1, 1995,

41
<PAGE> 43
subject to certain corrections by TGPL which were filed on July 14, 1995. The
revised tariff sheets were in effect from July 1, 1995, until September 1, 1995
when the Docket No. RP95-197 rates became effective.

ORDER 636 On November 1, 1993, Transco implemented Order 636. Prior to
its implementation of Order 636, Transco received orders from the FERC which,
among other things, (i) required Transco to revise its throughput projection
for rate purposes to reflect a mix of throughput that includes a higher level
of interruptible transportation, (ii) accepted Transco's proposal for rolled-in
rate treatment of its Mobile Bay facilities and exempted Transco from having to
reflect Mobile Bay transportation volumes and related revenues in a separate
interruptible revenue crediting mechanism, (iii) approved a Stipulation and
Agreement filed with the FERC by Transco and its sales customers resolving
certain sales service issues and mooting potential issues regarding Transco's
recovery of gas supply realignment (GSR) costs associated with Transco's firm
sales service, and (iv) referred to the hearing in Docket No. RP92-137 the
following issues: Transco's limited section 4 filing with the FERC relating to
Transco's production-area rate design, the allocation of certain costs to
Transco's merchant sales service, Transco's use of a system-wide cost of
service and the level of Transco's gathering rates and aggregation/pooling
services in Transco's production area. Any changes in Transco's rates or
services resulting from this hearing would have a prospective effect only.

Transco and certain other parties have filed appeals of certain of the
FERC's orders to the D.C. Circuit Court. On February 13, 1995, the D.C.
Circuit Court issued an order holding all appeals of restructuring orders
arising out of Order 636 in abeyance until the court renders an opinion in the
appeals of Order 636. Among the issues raised by the parties are whether the
separately stated gathering rates charged by Transco should be subject to
refund and issues related to Transco's storage tracker authority.

Transco has expressed to the FERC concerns that inconsistent treatment
under Order 636 of Transco and its competitor pipelines with regard to rate
design and cost allocation issues in the production area may result in rates
which could make Transco less competitive, both in terms of production-area and
long-haul transportation. A hearing before an ALJ, dealing with, among other
things, Transco's production-area rate design, concluded in June 1994. On July
19, 1995, the ALJ issued an initial decision finding that Transco's proposed
production area rate design, and its existing use of a system wide cost of
service and allocation of firm capacity in the production area are unjust and
unreasonable. The ALJ therefore recommended that Transco divide its costs
between its production area and market area, and permit its customers to
renominate their firm entitlements. The ALJ's decision is subject to review by
the FERC, and on August 18, 1995, Transco filed exceptions to the ALJ's
decision with the FERC. Should the FERC issue an order consistent with the
ALJ's recommendations, such order would be for prospective effect only.

<PAGE> 44

Order 636 provides that pipelines should be allowed the opportunity to
recover all prudently incurred transition costs. Transco does not expect to
incur GSR costs associated with its firm sales service and Transco's non-GSR
transition costs are anticipated to be insignificant. However, Transco expects
that any Order 636 transition costs incurred should be recovered from its
customers subject only to the costs and other risks associated with the
difference between the time such costs are incurred and the time when those
costs may be recovered from customers.

GATHERING FACILITIES On October 26, 1994, the FERC issued a notice of a
request for initiation of a complaint proceeding in Transco's Order 636
restructuring docket, stating that Fina Natural Gas Company (Fina) had filed a
complaint requesting that the FERC initiate a proceeding under section 5 of the
Natural Gas Act of 1938 (NGA) to investigate the functionalization of Transco's
production-area facilities. Fina asserted that some of Transco's
production-area facilities have been misfunctionalized as transmission, and
that under recent gathering orders, those facilities should properly be
functionalized as gathering facilities. Transco filed an answer requesting
that the FERC defer action on Fina's complaint until June 1, 1995, and advised
the FERC that, in light of the FERC's evolving policies on gathering and
production-area rate design, Transco is evaluating which, if any, of its Gulf
Coast gathering facilities could be spun down into a nonjurisdictional
subsidiary. On June 1, 1995, Transco advised the FERC that, in light of
certain outstanding issues concerning the FERC's gathering policies, Transco
has not yet determined the precise form that a gathering proposal to the FERC
might take, or the ultimate timing of any such proposal. If the FERC elects to
initiate a proceeding, any change in classification of the function of plant
facilities between transmission and gathering would be prospective only.

In February 1996, Transco plans to file an application with the FERC for
an order authorizing the abandonment of certain facilities located onshore and
offshore in Texas, Louisiana and Mississippi by conveyance to a subsidiary of
Williams Field Services Company (WFS), an affiliate of Transco. The net book
value at December 31, 1995 of the original cost of the facilities proposed to
be abandoned is approximately $230 million. The net book value at December 31,
1995 of the facilities including the purchase price allocation to Transco is
approximately $600 million. Concurrently, the WFS subsidiary plans to file a
petition for declaratory order requesting a determination that its gathering
services and rates be exempt from FERC regulation under the Natural Gas Act.
The filings will be part of an ongoing comprehensive restructuring plan by
Williams to separate all gathering facilities from Williams' jurisdictional
interstate natural gas pipeline transmission companies.

ORDER 94-A In 1983, the FERC issued Order 94-A, which permitted producers
to collect certain production-related gas costs from pipelines on a retroactive
basis. The FERC subsequently issued orders allowing several pipelines,
including Transco, to direct bill their customers for such production-related
costs through fixed monthly charges based

<PAGE> 45

on a customer's historical purchases. In 1990, the D.C. Circuit Court overturned
the FERC's authorization for pipelines to direct bill production-related costs
to customers based on gas purchased in prior periods and remanded the matter to
the FERC to determine an appropriate recovery mechanism.

Under the terms of a Settlement, Transco's customers, with the exception
of Columbia Gas Transmission Corporation (Columbia), agreed not to contest the
Order 94-A payments previously made to Transco by them. Transco had billed to
and recovered from Columbia approximately $7 million of Order 94-A costs. In
October 1993, Transco and Columbia filed with the FERC for approval a letter
agreement in which Transco agreed to refund $1.4 million to Columbia, which
amount is inclusive of principal and interest, in full and final settlement of
all issues in this proceeding. On January 26, 1994, Columbia filed a letter
with the FERC stating that, due to developments in other pipeline company
proceedings involving settlements of the issue of recovery of Order 94-A costs
from Columbia, Columbia could no longer support the settlement between Transco
and Columbia. On February 13, 1995, the FERC issued an order rejecting the
October 1993 settlement and requiring Transco to refund to Columbia the
principal amount of the Order 94-A costs collected from Columbia. Both Transco
and Columbia requested rehearing of the February 13 order, and on May 1, 1995,
the FERC issued an order denying both Transco's and Columbia's requests. On
May 31, 1995, Transco made the required refund for which Transco had previously
provided a reserve. On June 30, 1995, Transco and Columbia each filed with the
D. C. Circuit a petition for review of the FERC's orders.

LEGAL PROCEEDINGS

DAKOTA GASIFICATION LITIGATION In October 1990, Dakota Gasification
Company (Dakota), the owner of the Great Plains Coal Gasification Plant
(Plant), filed suit in the United States District Court in North Dakota against
Transco and three other pipeline companies alleging that Transco and the other
pipeline companies had not complied with their respective obligations under
certain gas purchase and gas transportation contracts. Specifically at issue
is the proper price to be paid by Transco and the other pipelines for synthetic
gas since August 1989, the proper rate to be charged by Dakota for
transportation through the Great Plains pipeline since October 1987, and the
proper quantity of synthetic gas required to be taken-or-paid for by Transco
and the other pipelines.

On September 8, 1992, Dakota and the United States Department of Justice
on behalf of the Department of Energy (DOJ) filed a Third Amended Complaint in
the U.S. District Court in North Dakota naming as defendants in the suit, in
addition to Transco and the other pipelines, Transco Energy Company (TEC) and
Transco Coal Gas Company, the subsidiary of TEC that was the partner in Great
Plains Gasification Associates (Partnership), the partnership that originally
constructed the Plant. In addition, Dakota and DOJ named as defendants all of
the other partners in the Partnership and each of the parent companies of these
entities. In the Third Amended Complaint, Dakota and DOJ

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charged: (i) the pipeline defendants with breach of contract for failure to pay
for volumes of gas tendered but not taken, for underpayment for gas purchased
and for failure to pay for transportation services; (ii) all defendants with
breach of representations and warranties, misrepresentation and breach of an
implied covenant of good faith and fair dealing; and (iii) all parent company
defendants and the affiliated partner defendants of each of the pipeline
defendants with intentional interference with contractual relations. Dakota and
DOJ are seeking declaratory and injunctive relief; the recovery of damages,
alleging that the four pipeline defendants have underpaid for gas, collectively,
as of June 30, 1992, by more than $232 million plus interest and for additional
damages for transportation services; and costs and expenses, including
attorney's fees. On October 30, 1992, Dakota invoiced Transco $70.5 million for
"all synthetic gas costs" Dakota claims are due from Transco.

On March 30, 1994, the parties executed definitive agreements which would
settle the litigation subject to final non-appealable regulatory approvals.
The settlement is also subject to a FERC ruling that Transco's existing
authority to recover in rates certain costs related to the purchase and
transportation of gas produced by Dakota will pertain to gas purchase and
transportation costs Transco will pay Dakota under the terms of the settlement.
On June 23, 1994, Transco filed a petition with the FERC seeking approval of
the settlement provisions and the contract amendment including pass-through of
all costs to Transco's customers. On October 18, 1994, the FERC issued an
order consolidating Transco's petition with the petitions filed by two of the
other three pipeline companies (the third pipeline having entered into a
settlement) and setting the matter for hearing before an ALJ. The hearing was
limited to the issues of (i) whether the revised agreements are prudent, and
(ii) the level of Dakota costs to be recovered in the proceeding. The FERC,
among other things, directed the ALJ to issue an initial decision by December
31, 1995 in order that final FERC approval may take place by December 31, 1996.
The hearing before the ALJ concluded in July 1995.

On December 29, 1995, the ALJ rejected the settlement agreements between
the pipeline companies and Dakota. The ALJ determined that the settlement
agreements were not prudent, and ordered the pipeline companies to refund to
ratepayers amounts collected since May 1993, in excess of the amounts
determined by the ALJ to be appropriate. Transco estimates that its share of
the amounts the ALJ would have the pipelines refund to ratepayers is
approximately $75 million. The pipelines would be entitled to collect the
amount of any such ratepayer refunds from Dakota. The ALJ's decision is
subject to review by the FERC.

Although no assurances can be given, Transco believes that it has
substantially complied with its obligation under the contracts with Dakota and
that Transco and Transco Coal Gas Company have not breached representations,
warranties or implied covenants and have not intentionally interfered with the
parties' contractual relations. The ALJ's decision will be appealed; however,
in the event that the necessary regulatory approvals are not

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obtained, Transco, TEC and Transco Coal Gas Company intend to vigorously defend
the suit.

ROYALTY CLAIMS In connection with Transco's renegotiations with producers
to resolve take-or-pay and other contract claims and to amend gas purchase
contracts, Transco has entered into certain settlements which may require the
indemnification by Transco of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. In October
1992, the Fifth Circuit and the Louisiana Supreme Court, with respect to the
same litigation in applying Louisiana law, determined that royalties are due on
take-or-pay payments under the royalty clauses of the specific mineral leases
reviewed by the courts. Thereafter, the State Mineral Board of Louisiana
passed a resolution directing the state's lessees to pay to the state royalties
on gas contract settlement payments. As a result of these and related
developments, Transco has been made aware of demands on producers for
additional royalties and such producers may receive other demands which could
result in claims against Transco pursuant to the indemnification provisions in
their respective settlements. Indemnification for royalties will depend on,
among other things, the specific lease provisions between the producer and the
lessor and the terms of the settlement between the producer and Transco.

In December 1992, a lawsuit was filed in the United States District Court
for the Southern District of Texas (Vaquillas Ranch Company, Ltd., et al vs.
Texaco Exploration and Production, Inc. (Vaquillas Ranch)) in which royalty
owners have made allegations against the producer for breach of express
obligations under the leases; breach of the covenant to reasonably market gas;
breach of the covenant to reasonably develop; breach of the covenant to protect
against drainage; and failure to deal in good faith. In August 1993, a lawsuit
was filed in the United States District Court for the Southern District of
Texas (Floyd C. Billings, et al vs. Texaco Exploration and Production Inc., et
al (Billings)), in which the royalty owners' claims are virtually identical to
the ones made in the Vaquillas Ranch lawsuit. However, the royalty owners did
not claim that the producer breached any covenant to develop or protect against
drainage. In addition, in the Billings lawsuit the royalty owners have sued
the parent and an affiliate of the producer and Transco for allegedly
conspiring to tortiously interfere with their lease. The producer defendants
in each of the Billings and Vaquillas Ranch lawsuits have cross-claimed against
Transco. While the two complaints do not specify monetary damages, the royalty
owners have verbally alleged that their claims against the producers could
approximate $100 million as of the date asserted. Both the Vaquillas Ranch and
the Billings lawsuits have been remanded to state court. Trial has been set
for June 1996.

On July 5, 1994, the plaintiffs in the Vaquillas Ranch lawsuit filed a
separate lawsuit in the 111th Judicial District Court of Webb County, Texas
(Vaquillas Ranch Company, Ltd., et al vs. Transcontinental Gas Pipe Line
Corporation and Transco Gas Supply Company) in which the plaintiffs contend
that Transco tortiously interfered with the plaintiffs' lease by inducing the
producer to enter into certain agreements that reduced

46
<PAGE> 48
Transco's take-or-pay obligations and the price Transco was obligated to pay for
the gas it purchased. The plaintiffs requested an unspecified amount of actual
and punitive damages for the alleged tortious interference. This lawsuit has
been abated.

On January 14, 1994, a lawsuit was filed in the 4th Judicial District
Court of Rusk County, Texas (Marathon Oil Company vs. Transcontinental Gas Pipe
Line Corporation and Transco Energy Company (Marathon)) and, on March 15, 1994,
a lawsuit was filed in the 189th Judicial District Court of Harris County,
Texas (Texaco, Inc. vs. Transcontinental Gas Pipe Line Corporation (Texaco)).
In the Marathon and Texaco lawsuits, the plaintiffs have made claims of
approximately $3.6 million and $14.7 million, plus interest and attorneys'
fees, respectively, against Transco for reimbursements of settlement amounts
paid to royalty owners. In the Marathon lawsuit, on July 17, 1995, the Court
granted Transco's motion for partial summary judgement thereby rejecting a
major portion of one of Marathon's claims against Transco. The Texaco lawsuit
is scheduled to go to trial in May 1996.

Transco has denied liability in the litigation and believes that it has
meritorious defenses to the claims which it intends to pursue vigorously.
Transco believes at this time that its exposure, if any, under the provisions
of its settlements with the producers is substantially less than the amounts
claimed by the royalty owners.

In addition, Transco has been advised by Freeport-McMoRan, Inc. (FMP) that
the Minerals Management Service (MMS) has made claims for royalties due under
certain gas contracts. FMP has asserted that Transco's royalty reimbursement
obligation to FMP is approximately $5.7 million, including interest through
February 6, 1995. Transco has denied any liability to FMP. On or about March
3, 1995, Transco filed suit against FMP, FM Properties Operating Co. and FMP
Operating Company in the 53rd Judicial District Court of Travis County, Texas,
under the Texas Uniform Declaratory Judgements Act seeking a determination that
Transco is not liable to defendants under the terms of the gas contracts. On
April 3, 1995, the defendants filed their answer and a plea in abatement. On
or about March 30, 1995, FMP and FM Properties Operating Co. filed a petition
for specific performance seeking recovery against Transco for the sums claimed
under the gas contracts. On May 4, 1995, Transco filed an answer denying any
liability to plaintiffs.

ENVIRONMENTAL MATTERS

Transco is subject to extensive federal, state and local environmental
laws and regulations which affect Transco's operations related to the
construction and operation of its pipeline facilities. Appropriate governmental
authorities may enforce these laws and regulations with a variety of civil and
criminal enforcement measures, including monetary penalties, assessment and
remediation requirements and injunctions as to future compliance. Transco's use
and disposal of hazardous materials are subject to the requirements of the
federal Toxic Substances Control Act (TSCA), the federal Resource

47
<PAGE> 49
Conservation and Recovery Act (RCRA) and comparable state statutes. The
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
also known as "Superfund," imposes liability, without regard to fault or the
legality of the original act, for release of a "hazardous substance" into the
environment. Because these laws and regulations change from time to time,
practices that have been acceptable to the industry and to the regulators have
to be changed and assessment and monitoring have to be undertaken to determine
whether those practices have damaged the environment and whether remediation is
required. Since 1989, Transco has had studies underway to test certain of its
facilities for the presence of toxic and hazardous substances to determine to
what extent, if any, remediation may be necessary. On the basis of the findings
to date, Transco estimates that environmental assessment and remediation costs
that will be incurred over the next five years under TSCA, RCRA, CERCLA and
comparable state statutes will total approximately $40 million to $50 million.
This estimate depends upon a number of assumptions concerning the scope of
remediation that will be required at certain locations and the cost of remedial
measures to be undertaken. Transco is continuing to conduct environmental
assessments and is implementing a variety of remedial measures that may result
in increases or decreases in the total estimated costs. At December 31, 1995,
Transco had a reserve of approximately $40 million for these estimated costs.

Transco considers environmental assessment and remediation costs and costs
associated with compliance with environmental standards to be recoverable
through rates, since they are prudent costs incurred in the ordinary course of
business. To date, Transco has been permitted recovery of environmental costs
incurred, and it is Transco's intent to continue seeking recovery of such
costs, as incurred, through rate filings. Therefore, these estimated costs of
environmental assessment and remediation have been recorded as regulatory
assets in the accompanying Consolidated Balance Sheet.

Transco has used lubricating oils containing polychlorinated biphenyls
(PCBs) and, although the use of such oils was discontinued in the 1970s, has
discovered residual PCB contamination in equipment and soils at certain gas
compressor station sites. Transco has worked closely with the U. S.
Environmental Protection Agency (EPA) and state regulatory authorities
regarding PCB issues, and has a program to assess and remediate such conditions
where they exist, the costs of which are a significant portion of the $40
million to $50 million range discussed above. Civil penalties have been
assessed by the EPA against other major pipeline companies for the alleged
improper use and disposal of PCBs. Transco has received and responded to an
information request from the EPA. Although penalties have not presently been
asserted, no assurances can be given that the EPA will not seek such penalties
in the future.

Transco has been identified as a potentially responsible party (PRP) at
various Superfund and state waste disposal sites. Based on present volumetric
estimates and other factors, Transco's estimated aggregate exposure for
remediation of these sites is less than

<PAGE> 50

$600,000. The estimated remediation costs for all such sites have been included
in Transco's environmental reserve discussed above. Liability under CERCLA (and
applicable state law) can be joint and several with other PRPs. Although
volumetric allocation is a factor in assessing liability, it is not necessarily
determinative; thus, the ultimate liability could be substantially greater than
the amounts described above.

Transco is also subject to the federal Clean Air Act and to the federal
Clean Air Act Amendments of 1990 (1990 Amendments), which added significantly
to the existing requirements established by the federal Clean Air Act. The
1990 Amendments required that the EPA issue new regulations, mainly related to
mobile sources, air toxics, ozone non-attainment areas and acid rain. Transco
is acquiring all necessary permits and installing new emission control devices
required for new or modified facilities in areas designated as attainment by
EPA. Transco operates facilities in some areas of the country currently
designated as nonattainment and it is possible that the EPA may additionally
designate new nonattainment areas which might impact Transco's operations.
Pursuant to nonattainment area requirements of the 1990 Amendments, Transco is
completing scheduled installation of new air pollution controls on existing
sources at certain facilities in order to achieve attainment of air quality
standards in regions where they are not currently achieved, and anticipates
that additional facilities may be subject to increased controls within five
years. For many of these facilities, Transco is completing installation of
more cost effective, innovative compressor engine control designs developed by
the Company, and it is therefore not possible to precisely determine the
control costs pending completion of performance testing and final state
approval. The control additions described above, required to comply with
current federal Clean Air Act requirements and the 1990 Amendments, are
estimated to cost in the range of $25 million to $35 million over the next five
years and will be recorded as additions to property, plant and equipment as the
facilities are added. Transco considers costs associated with compliance with
the federal Clean Air Act and the 1990 Amendments to be prudent costs incurred
in the ordinary course of business and, therefore, recoverable through its
rates.

In February 1995, three citizens filed suit against Transco in federal
district court in Virginia for alleged violations of several provisions of both
federal and state law. Since 1991, Transco has worked with the appropriate
Virginia authorities to resolve certain emissions issues also raised by the
citizens. In March 1995, Transco filed a motion to dismiss based on lack of
subject matter jurisdiction and failure to state a claim. On October 13, 1995,
the court dismissed all counts of plaintiffs' complaint provided that
plaintiffs could amend their complaint to salvage the state law nuisance claim
by inclusion of appropriate allegations establishing diversity of citizenship
jurisdiction. Plaintiffs did so amend their complaint. Transco believes the
citizens' claims are without merit and is prepared to vigorously defend the
suit brought by the citizens.

Transco settled as a defendant in the Combustion, Inc. toxic tort class
action that was pending in U. S. District Court in Baton Rouge, Louisiana. The
District Court Judge

<PAGE> 51

approved the settling parties' Joint Motion and Preliminary Settlement
Agreement, and the tort settlement was approved at the settlement fairness
hearing held in September 1995.

SUMMARY

While no assurances may be given, Transco does not believe that the ultimate
resolution of the foregoing matters, taken as a whole and after consideration
of amounts accrued, recovery from customers, insurance coverage or other
indemnification arrangements, will have a materially adverse effect upon
Transco's future financial position, results of operations and cash flow
requirements.

OTHER COMMITMENTS

COMMITMENTS FOR CONSTRUCTION Transco has commitments for construction and
acquisition of property, plant and equipment of approximately $52 million at
December 31, 1995 of which the majority relates to compliance with Clean Air
Act requirements as discussed above.

D. DEBT, FINANCING ARRANGEMENTS AND LEASES

LONG-TERM DEBT At December 31, 1995 and 1994, long-term debt issues were
outstanding as follows (in thousands):
<TABLE>
<CAPTION>
Post-Acquisition | Pre-Acquisition
---------------- | ---------------
1995 | 1994
------------ | ------------
<S> <C> | <C>
Debentures: |
9-1/8% due 1998-2017 . . . . . . . . . . . . . . . . . . . $ 150,000 | $ 150,000
------------ | ------------
Notes: |
9% due 1996 . . . . . . . . . . . . . . . . . . . . . . . . 150,000 | 150,000
8-1/8% due 1997 . . . . . . . . . . . . . . . . . . . . . . 99,000 | 99,000
6.21% due 2000 (subject to remarketing in 1996) . . . . . . 125,000 | 125,000
8-7/8% due 2002 . . . . . . . . . . . . . . . . . . . . . . 125,000 | 125,000
------------ | ------------
Total notes . . . . . . . . . . . . . . . . . . . . . . 499,000 | 499,000
------------ | ------------
Total long-term debt issues . . . . . . . . . . . . . . . . . . 649,000 | 649,000
Less: Unamortized debt (premium) discount . . . . . . . . . (10,171) | 4,762
Current maturities . . . . . . . . . . . . . . . . . 277,126 | -
------------ | ------------
|
Total long-term debt, less current maturities . . . . . . . . . $ 382,045 | $ 644,238
============ | ============
</TABLE>

The allocation of the purchase price to the assets and liabilities of
Transco based on their estimated fair values resulted in the elimination of the
historical debt discount of $4.7 million and the recording in 1995 of a debt
premium of $10.3 million.

50
<PAGE> 52

Sinking fund, prepayment or remarketing requirements applicable to
long-term debt outstanding at December 31, 1995 are as follows (in thousands):

<TABLE>
<S> <C>
1996:
9% Notes . . . . . . . . . . . . . . . . . . . . . . $ 150,000
6.21% Notes . . . . . . . . . . . . . . . . . . . . . 125,000
---------
Total . . . . . . . . . . . . . . . . . . . . . . $ 275,000
=========
1997:
8-1/8% Notes . . . . . . . . . . . . . . . . . . . . $ 99,000
=========
1998:
9-1/8% Debentures . . . . . . . . . . . . . . . . . . $ 7,500
=========
1999:
9-1/8% Debentures . . . . . . . . . . . . . . . . . . $ 7,500
=========
2000:
9-1/8% Debentures . . . . . . . . . . . . . . . . . . $ 7,500
=========
</TABLE>

No property is pledged as collateral under any of the long-term debt
issues.

RECAPITALIZATION In connection with the Merger, in January 1995, the
Boards of Directors of TEC and Williams approved a recapitalization plan for
Transco. The following actions were completed during 1995 in connection with
the recapitalization plan, as it impacts Transco:

- Termination of TEC's Amended Bank Credit Facility dated December 31,
1993, replacing it with a credit agreement described below;

- Termination of the program to sell monthly trade receivables of
Transco, replacing it with a new receivables program described below;

- Termination of TEC's Reimbursement Facility dated December 31, 1993;
and

- Redemption by Transco of all of its outstanding preferred stock at
$100 per share plus accrued dividends.

TEC's Amended Bank Credit Facility was replaced with a credit agreement
among Williams and certain of its subsidiaries, including Transco (Credit
Agreement).

The Credit Agreement provides for an $800 million line of credit, under
which Transco can borrow up to $400 million. Interest rates vary with current
market conditions. As of December 31, 1995, Transco had no outstanding
borrowings under this agreement.

SHORT-TERM DEBT During 1995, Transco entered into three short-term money
market facilities, under which Transco can borrow up to an aggregate of $115
million. Interest rates vary with current market conditions. As of December
31, 1995, Transco had no

51
<PAGE> 53
outstanding borrowings under these agreements. The weighted average interest
rate on short-term debt during 1995 was 6.1%.

RESTRICTIVE COVENANTS Certain of Transco's debt instruments restrict the
amount of dividends distributable. As of December 31, 1995, approximately $515
million of Transco's common stockholder's equity of $1,737 million was
restricted.

SALE OF RECEIVABLES In May 1995, Transco entered into a one year
agreement pursuant to which Transco can sell to an investor up to $100 million
of undivided interests in certain of its trade receivables. As of December 31,
1995, interests in $100 million of these receivables were held by the investor.
As of December 31, 1994, interests in $85 million of trade receivables were
held by the investor under the former receivables program that was terminated
in January 1995.

LEASE OBLIGATIONS Transco has a 20-year lease agreement with Transco
Tower Limited for its headquarters building (Transco Tower) which expires in
2004. Transco has an option to renew and extend the existing lease term under
the same provisions for three successive renewal terms of five years each.

Transco has entered into sublease agreements with certain Williams
affiliates and nonaffiliates that also expire in 2004. Transco is currently
negotiating with additional Williams affiliates and nonaffiliates to sublease
additional space in the Transco Tower.

The future minimum lease payments under Transco's Transco Tower lease,
net of future minimum sublease receipts under Transco's existing sublease
agreements, are as follows (in thousands):

<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . $ 25,109
1997 . . . . . . . . . . . . . . . . . 24,985
1998 . . . . . . . . . . . . . . . . . 24,985
1999 . . . . . . . . . . . . . . . . . 24,967
2000 . . . . . . . . . . . . . . . . . 24,532
Thereafter . . . . . . . . . . . . . . . . . 82,203
-----------
Total net minimum obligations . . . . . $ 206,781
===========
</TABLE>

The allocation of the purchase price to the assets and liabilities of
Transco based on their estimated fair values resulted in the recording in 1995
of a liability of $53.0 million for the estimated unused space and the amount
that Transco's Transco Tower lease obligation was in excess of fair value.
Transco's lease expense was $20.1 million in 1995, $36.0 million in 1994 and
$32.3 million in 1993.

The reduced Transco Tower lease expense in 1995 reflects the effects of the
purchase price allocation discussed above.

52
<PAGE> 54
E. PREFERRED STOCK

Transco has authorized 10,000,000 shares of cumulative first preferred
stock without par value, of which none were outstanding at December 31, 1995
and 497,444 shares were outstanding at December 31, 1994. Transco has
authorized 2,000,000 shares of cumulative second preferred stock without par
value. None of the second preferred had been issued at December 31, 1995. The
first preferred stock issued and outstanding at December 31, 1994, included the
following series:

<TABLE>
<CAPTION>
Stated Value Amounts
Per Share Shares (in thousands)
------------ -------- --------------
<S> <C> <C> <C>
$4.80 Series . . . . . . . . . . . . . . . . $100 10,000 $ 1,000
$6.65 Series . . . . . . . . . . . . . . . . $100 37,444 3,744

$8.75 Series . . . . . . . . . . . . . . . . $100 450,000 45,000
------- ---------
Preferred stock outstanding . . . . . . . 49,744
Less - issue expense . . . . . . . . . . 369
---------
Total . . . . . . . . . . . . . . . 497,444 $ 49,375
======= =========
</TABLE>

Transco redeemed all outstanding shares of its three cumulative
preferred stock series in March 1995 for $49.7 million, or $100 per share, plus
accrued dividends of $0.6 million.

The changes in the total Transco preferred stock in each of the years
1995, 1994 and 1993 are (in thousands):

<TABLE>
<CAPTION>
1995 1994 1993
------------------ -------------------- ------------------
Shares Amount Shares Amount Shares Amount
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year . . . . . . . . 497 $ 49,744 757 $ 75,743 1,017 $101,741

Retirements . . . . . . . 497 49,744 260 25,999 260 25,998
--- --------- --- --------- ----- --------

Balance at end of year . . - $ - 497 $ 49,744 757 $ 75,743
=== ========= === ========= ===== ========
</TABLE>

F. EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS Transco participates in a retirement plan (Retirement
Plan) with TEC and certain of its subsidiaries that covers substantially all of
Transco's officers and regular employees. Transco's officers and employees
comprise a majority of the total officers and employees of TEC and its
subsidiaries.

The benefits under the Retirement Plan are determined by a formula based
on the employee's years of service and average final compensation. The
Retirement Plan provides for the vesting of employees after five years of
credited service. Transco's funding policy is to contribute an amount at least
equal to the minimum funding requirements actuarially determined by an
independent actuary in accordance with the

53
<PAGE> 55
Employee Retirement Income Security Act of 1974. Plan assets consist primarily
of commingled funds and assets held in a master trust. The master trust is
comprised primarily of domestic and foreign common and preferred stocks,
corporate bonds, United States government securities and commercial paper.

The following table sets forth the funded status of the Retirement Plan
at December 31, 1995 and October 1, 1994, and the amount of accrued pension
liability for Transco and TEC as of December 31, 1995 and 1994 (in thousands):

Post-Acquisition | Pre-Acquisition
---------------- | ---------------
1995 | 1994
---------------- | ---------------
<S> <C> | <C>
Actuarial present value of accumulated benefit obligation, |
including vested benefits of $128,783 at December 31, 1995 |
and $105,418 at October 1, 1994 . . . . . . . . . . . . . . $( 145,949) | $( 122,244)
============== | ==============
Actuarial present value of projected benefit obligation . . . $( 201,425) | $( 161,625)
Plan assets at market value . . . . . . . . . . . . . . . . . 155,821 | 130,419
------------- | -------------
Projected benefit obligation in excess of plan assets . . . . ( 45,604) | ( 31,206)
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . 16,591 | 9,965
Unrecognized net asset at October 1, 1984 being recognized |
over 15 years . . . . . . . . . . . . . . . . . . . . . . . - | ( 5,249)
Unrecognized prior service cost . . . . . . . . . . . . . . . ( 5,147) | ( 3,109)
Activity subsequent to measurement date . . . . . . . . . . . - | 2,723
-------------- | -------------
Accrued pension liability . . . . . . . . . . . . . . . . . . $( 34,160) | $( 26,876)
============== | =============
</TABLE>

The allocation of the purchase price to the assets and liabilities of
Transco and TEC based on their estimated fair values resulted in the recording
of an additional pension liability of $19.2 million, $17.3 million of which was
recorded by Transco, representing the amount that the projected benefit
obligation exceeded the plan assets. The amount of pension costs deferred as a
regulatory asset at December 31, 1995 was $6.5 million and is expected to be
recovered through future rates.

The following table sets forth the components of the Retirement Plan's
net pension cost, including Transco's, for the years ended December 31, 1995,
1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------ -----------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 4,716 $ 7,361 $ 6,664
Interest cost on projected benefit obligation . 12,111 11,046 9,950
Actual return on plan assets . . . . . . . . . ( 37,958) ( 3,228) ( 15,155)
Net amortization and deferral . . . . . . . . . 25,666 ( 10,250) 3,563
-------------- ------------ -----------
Net pension cost . . . . . . . . . . . . . . . $ 4,535 $ 4,929 $ 5,022
============== ============ ===========
</TABLE>

54
<PAGE> 56

Transco's share of the Retirement Plan's net pension cost for 1995, 1994
and 1993 was $4.2 million each year.

The projected unit credit method is used to determine the actuarial
present value of the accumulated benefit obligation and the projected benefit
obligation. The following table summarizes the various assumptions used to
determine the projected benefit obligation for the Retirement Plan for the
years 1995, 1994 and 1993(1):

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . . . . 7.25% 7.5% 7.25%
Rate of increase in future compensation levels . . . . 5.0% 5.0% 5.0%
Expected long-term rate of return on assets . . . . . . 10% 10% 10%
</TABLE>

(1) Pension costs are determined using the assumptions as of the beginning of
the year. The funded status is determined using the assumptions as of the
end of the year.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Prior to January 1, 1996,
Transco participated in a plan with TEC and certain of its subsidiaries (TEC
Plan) that provided certain health care and life insurance benefits for retired
employees of Transco. Effective January 1, 1996, Transco began participation
in a plan with Williams and its subsidiaries (Williams Plan) that provides
similar benefits for retired employees of Transco that were hired prior to
January 1, 1996.

The plans provide benefits to retired Transco employees who worked
full-time for five years, attained age 55 while in service and participated in
Transco's Retirement Plan. The plans provide for retiree contributions and
contain other cost-sharing features such as deductibles and coinsurance. The
accounting for the plans anticipates future cost-sharing changes to the written
plans that are consistent with Williams' expressed intent to increase the
retiree contribution rate annually, generally in line with health care cost
increases, except for certain retirees whose premiums are fixed.

The benefits for all retired Transco employees are currently funded monthly
to the extent recovery from customers can be achieved. Plan assets consist
primarily of domestic and foreign common stocks, commercial paper and
government bonds held in a trust established under the provisions of section
501(c)(9) of the Internal Revenue Code.

55
<PAGE> 57
The following table sets forth the funded status of the TEC Plan at
December 31, 1995 and 1994, reconciled with the prepaid/accrued postretirement
benefits for Transco and TEC at December 31, 1995 and 1994 (in thousands):

Post-Acquisition | Pre-Acquisition
---------------- | ---------------
1995 | 1994
---------------- | ---------------
<S> <C> | <C>
Accumulated postretirement benefit obligation: |
Retirees . . . . . . . . . . . . . . . . . . . . . . . . $( 88,731) | $( 63,715)
Fully eligible active plan participants . . . . . . . . ( 7,801) | ( 38,125)
Other active plan participants . . . . . . . . . . . . . ( 21,065) | ( 11,640)
------------ | -------------
( 117,597) | ( 113,480)
Plan assets at market value . . . . . . . . . . . . . . . . . 51,776 | 32,372
------------ | ------------
Accumulated postretirement benefit obligation in excess of |
plan assets . . . . . . . . . . . . . . . . . . . . . . ( 65,821) | ( 81,108)
Unrecognized net gain . . . . . . . . . . . . . . . . . . . . ( 10,107) | ( 12,104)
Unrecognized prior service cost . . . . . . . . . . . . . . . ( 2,168) | -
Unrecognized transition obligation . . . . . . . . . . . . . - | 95,645
------------- | -------------
Prepaid (accrued) postretirement benefits . . . . . . . . . . $( 78,096) | $ 2,433
============= | =============
</TABLE>

The allocation of the purchase price to the assets and liabilities of
Transco and TEC based on their estimated fair values resulted in the recording
of a postretirement benefits liability of $86.9 million representing the amount
that the accumulated postretirement benefit obligation exceeded the plan
assets. The amount of postretirement benefits costs deferred as a regulatory
asset at December 31, 1995 was $71.7 million and is expected to be recovered
through future rates.

The following table sets forth the components of the TEC Plan's net
periodic postretirement benefit cost, including Transco's, for the years ended
December 31, 1995, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- ------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 2,619 $ 2,915 $ 2,812
Interest cost on accumulated postretirement
benefit obligation . . . . . . . . . . 8,929 8,218 9,483
Actual return on plan assets . . . . . . . . ( 7,651) ( 895) ( 428)
Amortization of unrecognized transition
obligation . . . . . . . . . . . . . . - 5,314 6,034
Net amortization and deferral . . . . . . . . 9,623 ( 516) ( 28)
-------------- ------------- ------------
Net periodic postretirement benefit cost . . $ 13,520 $ 15,036 $ 17,873
============== ============= ============
</TABLE>

Transco's share of the TEC Plan's net periodic postretirement benefit
cost for 1995, 1994 and 1993 was $12.7 million, $13.7 million and $16.2
million, respectively.

The annual rate of increase in the per capita cost of covered health care
benefits for 1996 was assumed to be 10 to 11%. The rate was assumed to decrease
gradually to 5% for the year 2006 and remain at that level thereafter. The
health care cost trend rate

<PAGE> 58

assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rate by one percent in each year
would increase the accumulated postretirement benefit obligation for health care
benefits as of December 31, 1995 by $19.9 million and the aggregate of the
service and interest cost components of the net periodic postretirement health
care benefit cost for 1995 by $1.4 million.

The following table summarizes the various assumptions used to determine the
accumulated postretirement benefit obligation for the TEC Plan for the years
1995, 1994 and 1993(1):

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . . . . . 7.25% 7.75% 7.25%
Rate of increase in future compensation levels . . . . . 5.0% 5.0% 5.0%
After-tax expected long-term rate of return on assets . . 6% 7% 7%
</TABLE>

(1) Postretirement benefits costs are determined using the assumptions as of
the beginning of the year. The funded status is determined using the
assumptions as of the end of the year.

In December 1992, the FERC issued a Statement of Policy which allows
jurisdictional pipelines to recognize allowances for prudently incurred costs
of postretirement benefits other than pensions on an accrual basis consistent
with the accounting principles set forth in SFAS No. 106. Transco believes
that all costs of providing postretirement benefits to its employees are
necessary and prudent operating expenses and that such costs are recoverable in
rates.

TRAN$TOCK In January 1987, TEC's Board of Directors approved the
establishment of an employee stock ownership plan called Tran$tock, which
subsequently purchased 3,966,942 shares of newly issued TEC common stock at
$45-3/8 per share. Tran$tock was funded by a $180 million loan which was
extinguished at year-end 1994. Tran$tock used $120 million of the funds
received from the restructuring of TEC's retirement plan, tax deductible
dividends paid on the common stock held in the plan and contributions by TEC to
service the loan. The final allocation of shares was made to eligible
participants in January 1995 applicable to the 1994 plan year; therefore, no
compensation expense was recognized in 1995.

Compensation expense of $2.9 million and $2.2 million related to Tran$tock
was recognized by Transco in 1994 and 1993, respectively. This expense
represents the shares of TEC common stock allocated to employees of Transco for
1994 and 1993, respectively. In each of these respective years, Transco
recorded a capital contribution from TEC in the amount of the expense.

Effective January 1, 1996, the Tran$tock participants' share balances were
merged with a Williams defined contribution plan.

57
<PAGE> 59

THRIFT PLAN During 1995, Transco sponsored a defined-contribution plan
(Thrift Plan) covering substantially all employees. Company contributions were
based on employees' compensation and, in part, matched employee contributions.
Compensation expense of $3.3 million was recognized by Transco in 1995.

Effective January 1, 1996, the Thrift Plan was merged with a Williams
defined-contribution plan and Transco employees became eligible to participate
in the Williams plan.

G. INCOME TAXES

Following is a summary of the provision for income taxes for 1995, 1994 and
1993 (in thousands):

<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
------------------ | -------------------------------------------------
January 18, 1995 | January 1, 1995
to | to
December 31, 1995 | January 17, 1995 1994 1993
------------------ | ---------------- -------------- --------------
<S> <C> | <C> <C> <C>
Federal: |
Current . . . . . . . . $ 66,819 | $( 2,734) $ 72,364 $ 38,593
Deferred . . . . . . . . ( 17,404) | 4,577 ( 23,669) 1,767
----------------- | --------------- -------------- --------------
49,415 | 1,843 48,695 40,360
----------------- | --------------- -------------- --------------
State and municipal: |
Current . . . . . . . . 5,827 | ( 305) 9,835 5,961
Deferred . . . . . . . . ( 764) | 771 ( 797) 3,020
----------------- | --------------- -------------- --------------
5,063 | 466 9,038 8,981
----------------- | --------------- -------------- --------------
|
Provision for income taxes $ 54,478 | $ 2,309 $ 57,733 $ 49,341
================= | =============== ============== ==============
</TABLE>

58
<PAGE> 60
Following is a reconciliation of the provision for income taxes at the
federal statutory rate to the provision for income taxes (amounts in
thousands):

<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
------------------ | --------------------------------------------------
January 18, 1995 | January 1, 1995
to | to
December 31, 1995 | January 17, 1995 1994 1993
------------------ | ---------------- --------------- ---------------
<S> <C> | <C> <C> <C>
Taxes computed by applying |
the federal statutory rate . . $ 49,373 | $( 2,573) $ 58,961 $ 50,248
Amortization of over |
funded tax liabilities . . . - | - ( 7,675) ( 7,675)
Tran$tock compensation . . . . . - | - 1,015 779
Pre-acquisition executive |
severance benefits . . . . . - | 4,913 - -
State and municipal income |
taxes . . . . . . . . . . . . 3,291 | 303 5,874 5,838
Other, net . . . . . . . . . . . 1,814 | ( 334) ( 442) 151
----------------- | --------------- -------------- --------------
Provision for income taxes . . . $ 54,478 | $ 2,309 $ 57,733 $ 49,341
================= | =============== ============== ==============
</TABLE>

Deferred income taxes result from temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future years,
or temporary differences resulting from events that have been recognized in the
financial statements that will result in taxable or deductible amounts in
future years. The tax effect of each type of temporary difference and
carryforward reflected in deferred income tax benefits and liabilities as of
December 31, 1995 and 1994 are as follows (in thousands):

<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
---------------- | ---------------
1995 | 1994
---------------- | ---------------
<S> <C> | <C>
Deferred tax liabilities |
- ------------------------ |
|
Property, plant and equipment . . . . . . . . . . . . . . . . $ 881,906 | $ 309,561
Other postretirement benefits . . . . . . . . . . . . . . . . 28,190 | -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,535 | 18,189
----------- | -----------
Total deferred tax liabilities . . . . . . . . . . . . . . . 953,631 | 327,750
----------- | -----------
|
Deferred tax assets |
- ------------------- |
|
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . 2,246 | 2,145
Rate refunds . . . . . . . . . . . . . . . . . . . . . . . . 25,604 | 23,832
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 89,073 | 21,936
State deferred taxes . . . . . . . . . . . . . . . . . . . . 34,159 | 11,569
----------- | -----------
Total deferred tax assets . . . . . . . . . . . . . . . . . . 151,082 | 59,482
----------- | -----------
|
Net deferred tax liabilities . . . . . . . . . . . . . . . . $ 802,549 | $ 268,268
=========== | ===========
</TABLE>

59
<PAGE> 61
The increase in the net deferred tax liabilities is primarily due to
deferred tax adjustments attributable to the increase in the book basis of
Transco's net assets recorded as a result of the acquisition of Transco by
Williams.

H. FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

CARRYING AMOUNT AND FAIR VALUES The carrying amount and estimated fair
values of Transco's financial instruments as of December 31, 1995 and 1994 are
as follows (in thousands):

<TABLE>
<CAPTION>
Carrying Amount Fair Value
---------------------- ---------------------
1995 1994 1995 1994
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term financial assets . . $ 113,482 $ 124,820 $ 113,482 $ 124,820
Receivables (derivatives) . . . . . . . . 92 3,185 92 3,185
Financial liabilities:
Long-term debt . . . . . . . . . . . . . 659,171 644,238 693,173 612,517
Payables (derivatives) . . . . . . . . . 17 1,299 17 1,299
</TABLE>

FAIR VALUE METHODS The following methods and assumptions were used in
estimating fair values:

For cash and short-term financial assets, the carrying amount is a
reasonable estimate of fair value due to the short maturity of those
instruments.

The amounts shown as receivables and payables (derivatives) relate to
Transco's natural gas futures, options and commodity price swaps. The carrying
amount of these derivatives approximates fair value for all periods. The
estimated fair value of these derivative financial instruments is based on the
estimated consideration that would be received to terminate those agreements
and contracts in a gain position and the estimated cost that would be incurred
to terminate those agreements and contracts in a loss position.

Effectively, all of Transco's debt is publicly traded, therefore
estimated fair value of long-term debt is based on quoted market prices at year
end.

CREDIT AND MARKET RISK

TRADE RECEIVABLES As of December 31, 1995, 1994 and 1993, Transco had
trade receivables of $45 million, $40 million and $54 million, respectively.
These trade receivables primarily are due from local distribution companies and
other pipeline companies predominantly located in the eastern United States.
Transco's credit risk exposure in the event of nonperformance by the other
parties is limited to the face value of the receivables. No collateral is
required on these receivables. Transco has not historically experienced
significant credit losses in connection with its trade receivables.

60
<PAGE> 62
Transco sells, with limited recourse, certain trade receivables. The
aggregate limit under the receivables facilities was $100 million at December
31, 1995 and 1994. Transco received $108 million of proceeds in 1995, $80
million in 1994 and $9 million in 1993. At December 31, 1995 and 1994, $100
million and $85 million, respectively, of such receivables had been sold.
Based on amounts outstanding at December 31, 1995 and 1994 the maximum
contractual credit loss under these arrangements is approximately $16 million
and $13 million, respectively, but the likelihood of loss is considered to be
remote.

NOTES RECEIVABLE In 1991, Transco accepted a note receivable in
consideration for the conveyance of certain interests in a gas field and
related processing plant to a producer. The note was to be repaid out of
proceeds from the field production and plant revenues. However, in 1993, the
producers sold the gas field and related processing plant. Transco's portion
of the sales proceeds was used to reduce the outstanding note receivable. The
remaining balance plus certain associated costs were written off in 1993
resulting in an after-tax non-cash charge of $12.5 million.

I. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES

MAJOR CUSTOMER The sales, transportation and storage revenues received
from Public Service Electric and Gas Company, the major customer of Transco,
were $166.7 million in 1995, $180.5 million in 1994 and $189.8 million in 1993.

The gas sold for resale in 1995 was sold to customers under executed
Firm Sales Agreements with primary terms of not less than two years (1997) but
not greater than six years (2001).

AFFILIATES Included in Transco's sales and transportation revenues for
1995, 1994 and 1993 are revenues applicable to sales and transportation for
affiliates, Transco Energy Marketing Company (TEMCO), a WESCO subsidiary, TXG
Gas Marketing Company (TXG Marketing), a WESCO subsidiary, Texas Gas
Transmission Corporation (Texas Gas), Transco Offshore Gathering Company
(TOGCO), and Transco Energy Ventures Company (TEVCO), an affiliate until it was
sold on September 13, 1993, as follows (in millions):

<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
TEMCO . . . . . . . . . . . . . $ 173.2 $ 195.9 $ 49.8
TXG Marketing . . . . . . . . . - 12.0 9.3
Texas Gas . . . . . . . . . . . - - 0.2
TEVCO . . . . . . . . . . . . . - - 0.9
TOGCO . . . . . . . . . . . . . 0.7 1.5 1.6
------------- ------------ ------------
$ 173.9 $ 209.4 $ 61.8
============= ============ ============
</TABLE>

61
<PAGE> 63

The rates charged to provide sales and transportation services to
affiliates are the same as those that are charged to similarly-situated
nonaffiliated customers. The significant increase in 1995 and 1994 sales and
transportation revenue from TEMCO reflects the consolidation of TEC's gas
marketing businesses, including all jurisdictional merchant sales of Transco,
under the common management of WESCO and TGMC, as discussed below.

After FERC approval in January 1993, TEC realigned its gas marketing
businesses under the common management of TGMC, which, through an agency
agreement, began to manage all jurisdictional merchant sales of Transco. In
May 1995, WESCO succeeded to the TGMC agency agreement and began to manage
Transco's jurisdictional merchant sales. For the years ended December 31,
1995, 1994 and 1993, included in Transco's cost of sales is $20.6 million,
$24.4 million and $25.1 million, respectively, representing agency fees billed
to Transco by WESCO and TGMC under the agency agreement.

Included in Transco's cost of sales and transportation for 1995, 1994
and 1993 is purchased gas cost from affiliates, TEMCO and TXG Marketing, as
follows (in millions):

<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
TEMCO . . . . . . . . . . . . . . . . $ 115.2 $ 83.6 $ 54.5
TXG Marketing . . . . . . . . . . . . 16.3 10.0 1.7
--------- --------- ---------
$ 131.5 $ 93.6 $ 56.2
========= ========= =========
</TABLE>

All gas purchases are made at market or contract prices. The
significant increase in 1995 and 1994 for purchased gas cost from TEMCO
reflects the consolidation of TEC's gas marketing businesses, including all
jurisdictional merchant sales of Transco, under the common management of WESCO
and TGMC, as discussed above.

Transco has long-term gas purchase contracts containing either fixed
prices or variable prices that are at a significant premium to the estimated
market price. However, due to contract expirations and estimated
deliverability declines, Transco's estimated purchase commitments under such
gas purchase contracts are not material to Transco's total gas purchases.
Furthermore, through the agency agreement with Transco, WESCO has assumed
management of Transco's merchant sales service and, as Transco's agent, is at
risk for any above-spot-market gas costs that it may incur.

Also included in Transco's cost of transportation is transportation
expense of $36.4 million in 1995, $36.3 million in 1994 and $32.9 million in
1993 applicable to the transportation of gas by Texas Gas. Texas Gas is
regulated by the FERC and its transportation rates charged to Transco are
approved by the FERC.

TEC had a policy of charging subsidiary companies for management
services provided by the parent company and other affiliated companies.
Included in Transco's administrative and general expenses for January through
April, 1995 and the years 1994 and 1993, was $10.9 million, $15.2 million and
$14.6 million, respectively, for

62
<PAGE> 64

management services charged by TEC. Effective May 1, 1995, Williams began
charging corporate expenses to Transco for services similar to those previously
provided by TEC or incurred directly by Transco. Included in Transco's
administrative and general expenses was $8.5 million for such corporate
expenses charged by Williams in 1995. Management considers the cost of these
services reasonable.

Transco entered into an operating agreement with WFS effective May 1,
1995 whereby WFS, as Transco's agent, assumed operational control of Transco's
gas gathering facilities. Included in Transco's operation and maintenance
expenses for 1995 is $24.4 million charged by WFS to operate Transco's gas
gathering facilities in 1995.

63
<PAGE> 65
J. QUARTERLY INFORMATION (UNAUDITED)

The following summarizes selected quarterly financial data for 1995 and
1994 (in thousands):

<TABLE>
<CAPTION>
Pre-Acquisition Post-Acquisition
---------------- | ----------------------------------------------------------------
January 1, 1995 | January 18, 1995
to | to
January 17, 1995 | March 31, 1995 Second Third Fourth
---------------- | ---------------- ------------- ------------ ------------
<S> <C> | <C> <C> <C> <C>
1995 (1) |
Operating revenues . . . . $ 72,061 | $ 295,659 $ 356,242 $ 340,351 $ 412,899
Operating expenses . . . . 76,974(2) | 249,655 305,905 301,946 359,148
---------- | --------------- ------------ ------------ ------------
Operating income (loss) . . ( 4,913) | 46,004 50,337 38,405 53,751
---------- | --------------- ------------- ------------ ------------
Other (income) deductions: |
Interest expense . . . . 2,680 | 12,849 14,247 14,303 15,038
Other (income) and |
deductions, net . . . ( 240) | ( 1,088) ( 1,978) ( 1,507) ( 4,433)
---------- | --------------- ------------- ------------ ------------
Total other |
deductions . . . . 2,440 | 11,761 12,269 12,796 10,605
---------- | --------------- ------------- ------------ ------------
Income (loss) before income |
taxes . . . . . . . . . . ( 7,353) | 34,243 38,068 25,609 43,146
Provision for income taxes 2,309 | 13,236 14,171 9,076 17,995
---------- | --------------- ------------- ------------ ------------
Net income (loss) . . . . . ( 9,662) | 21,007 23,897 16,533 25,151
Dividends on preferred stock 194 | 722 - - -
---------- | --------------- ------------- ------------ ------------
Common stock equity in net |
income (loss) . . . . . $( 9,856) | $ 20,285 $ 23,897 $ 16,533 $ 25,151
========== | =============== ============= ============ ============
</TABLE>

(1) Certain reclassifications have been made to prior quarters to conform to
the fourth quarter 1995 presentation.
(2) Includes a provision of $16,048 for executive severance benefits.

<TABLE>
<CAPTION>
Pre-Acquisition
-----------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1994 (1)
Operating revenues . . . . . . . . . . . . $431,915 $398,661 $368,485 $391,901
Operating expenses . . . . . . . . . . . . 371,946 345,082 317,217 333,293 (2)
-------- -------- -------- --------

Operating income . . . . . . . . . . . . . 59,969 53,579 51,268 58,608
-------- -------- -------- --------
Other (income) deductions:
Interest expense . . . . . . . . . . . . 16,259 14,973 15,281 14,615
Other (income) and deductions, net . . . ( 1,561) ( 1,117) ( 1,625) ( 1,860)
-------- -------- -------- --------
Total other deductions . . . . . . . . 14,698 13,856 13,656 12,755
-------- -------- -------- --------
Income before income taxes . . . . . . . . 45,271 39,723 37,612 45,853
Provision for income taxes . . . . . . . . 16,023 13,874 13,068 14,768
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . 29,248 25,849 24,544 31,085
Dividends on preferred stock . . . . . . . 1,599 1,572 1,551 1,222
-------- -------- -------- --------
Common stock equity in net income . . . . . $ 27,649 $ 24,277 $ 22,993 $ 29,863
======== ======== ======== ========
</TABLE>

(1) Certain reclassifications have been made to conform to the 1995
presentation.
(2) Includes a provision of $6,000 for a regulatory issue.

64
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

Since Transco meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K, this information is omitted.

65
<PAGE> 67

===============================================================================
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
PAGE
REFERENCE TO
1995 10-K
------------
<S><C> <C>
A. INDEX

1. FINANCIAL STATEMENTS:

Report of Independent Auditors - Ernst & Young LLP 26
- Arthur Andersen LLP 27

Consolidated Balance Sheet as of December 31,
1995 and 1994 28-29

Consolidated Statement of Income for the Periods
January 1, 1995 to January 17, 1995, and January 18,
1995 to December 31, 1995, and the Years Ended
December 31, 1994 and 1993 30

Consolidated Statement of Common Stockholder's
Equity for the Periods January 1, 1995 to
January 17, 1995, and January 18, 1995 to
December 31, 1995, and the Years Ended
December 31, 1994 and 1993 31

Consolidated Statement of Cash Flows for the Periods
January 1, 1995 to January 17, 1995, and January 18,
1995 to December 31, 1995, and the Years Ended
December 31, 1994 and 1993 32-33

Notes to Consolidated Financial Statements 34-64

</TABLE>

66
<PAGE> 68
2. FINANCIAL STATEMENT SCHEDULES:

The following schedules are omitted because of
the absence of the conditions under which they
are required:

I, II, III, IV, and V.

3. EXHIBITS:

The following instruments are included as exhibits to this
report. Those exhibits below incorporated by reference herein are indicated as
such by the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, copies of the instrument have been
included herewith.

(3) - 1 Second Restated Certificate of Incorporation, as
amended, of Transco. (Exhibit 3.1 to Transco Form
8-K dated January 23, 1987 Commission File Number
1-7584)

a) Certificate of Amendment, dated July 30,
1992, of the Second Restated Certificate of
Incorporation (Exhibit (10)-17(a) to Transco
Energy Company Form 10-K for 1993 Commission
File Number 1-7513)

b) Certificate of Amendment, dated December 22,
1986, of the Second Restated Certificate of
Incorporation (Exhibit (10)-17(b) to Transco
Energy Company Form 10-K for 1993 Commission
File Number 1-7513)

c) Certificate of Amendment, dated August 5,
1987, of the Second Restated Certificate of
Incorporation (Exhibit (10)-17(c) to Transco
Energy Company Form 10-K for 1993 Commission
File Number 1-7513)

- 2 By-Laws of Transco, as Amended and Restated May 2,
1995.

(4) - 1 Certificate of Designation, Preferences and Rights
relating to Registrant's Cumulative Preferred Stock,
$8.75 Series. (Exhibit 3.1 to Transco Form 8-K dated
January 23, 1987 Commission File Number 1-7584)

67
<PAGE> 69
- 2 Indenture, dated as of June 1, 1983, between
Transco and RepublicBank Houston, National
Association, as Trustee. (Exhibit (4)-5 to
Transco Form 10-K for 1989 Commission File
Number 1-7584)

a) First Supplemental Indenture, dated September
20, 1984, from Transco to RepublicBank
Houston, National Association related to
Indenture dated as of June 1, 1983. (Exhibit
(4)-5a to Transco Form 10-K for 1989
Commission File Number 1-7584)

b) Second Supplemental Indenture, dated as of
May 31, 1985, from Transco to RepublicBank
Houston, National Association related to
Indenture dated as of June 1, 1983. (Exhibit
(4)-5b to Transco Form 10-K for 1989
Commission File Number 1-7584)

c) Third Supplemental Indenture, dated as of
December 3, 1985, from Transco to
RepublicBank Houston, National Association
related to the Indenture dated as of June 1,
1983. (Exhibit (4)-5c to Transco Form 10-K
for 1989 Commission File Number 1-7584)

d) Certified Resolutions of a Special Committee
of the Board of Directors dated October 31,
1986. (Exhibit (4)-5d to Transco Form 10-K
for 1989 Commission File Number 1-7584)

e) Fourth Supplemental Indenture, dated as of
November 7, 1986, from Transco to
RepublicBank Houston, National Association
related to Indenture dated as of June 1,
1983. (Exhibit (4)-5e Transco Form 10-K for
1989 Commission File Number 1-7584)

f) Fifth Supplemental Indenture, dated as of
January 15, 1987, from Transco to
RepublicBank Houston, National Association
related to Indenture dated as of June 1,
1983. (Exhibit (4)-5f to Transco Form 10-K
for 1989 Commission File Number 1-7584)

g) Certified Resolutions of a Special Committee
of the Board of Directors dated January 29,
1987. (Exhibit (4)-5g to Transco Form 10-K
for 1989 Commission File Number 1-7584)

h) Sixth Supplemental Indenture, dated as of
September 15, 1987, from Transco to First
RepublicBank Houston, National Association
related to Indenture dated as of June 1,
1983. (Exhibit (4)-5h to Transco Form 10-K
for 1989 Commission File Number 1-7584)

68
<PAGE> 70
- 3 Indenture dated September 15, 1992 between
Transco and the Bank of New York, as Trustee
(Exhibit 4.2 to Transco Form 8-K dated
September 17, 1992 Commission File Number
1-7584)

- 4 Amended and Restated Credit Agreement dated as of
December 31, 1993 among Transco Energy Company, the
Banks named therein, Citibank, N.A. as Agent and Bank
of Montreal, as Co-Agent (Exhibit (4)-5c to Transco
Energy Company Form 10-K for 1993 Commission File
Number 1-7513)

(i) Second Amendment dated as of December 12,
1994 among Transco Energy Company, the Banks
named therein and Citibank, N.A., as Agent.
(Exhibit 30 to Amendment No. 3 to Transco
Energy Company Schedule 14D-9 Commission File
Number 005-19963)

(ii) Third Amendment Agreement dated as of
December 12, 1994 among Transco Energy
Company, the Banks named therein and
Citibank, N.A., as Agent (Exhibit 31 to
Amendment No. 3 to Transco Energy Company
Schedule 14D-9 Commission File Number
005-19963)

- 5 Reimbursement Agreement dated as of December 31, 1993
among Transco Energy Company, the Banks named herein
and Bank of Montreal as Agent and Issuing Bank
(Exhibit (4)-7 to Transco Energy Company Form 10-K
for 1993 Commission File Number 1-7513)

(a) Second Amendment dated as of December 12,
1994 among Transco Energy Company, the Banks
named therein and Bank of Montreal as Agent
and Issuing Bank. (Exhibit 32 to Amendment
No. 3 to Transco Energy Company Schedule
14D-9 Commission File Number 005-19963)

(b) Third Amendment dated as of December 12, 1994
among Transco Energy Company, the Banks named
therein and Bank of Montreal as Agent and
Issuing Bank. (Exhibit 33 to Amendment No. 3
to Transco Energy Company Schedule 14D-9
Commission File Number 005-19963)

- 6 Credit Agreement dated as of February 23, 1995 by and
among Transco, Texas Gas Transmission Corporation,
The Williams Companies, Inc., Northwest Pipeline
Corporation, Williams Pipe Line Company and Citibank,
N.A. as agent and the Banks named therein (Exhibit
(4)-7 to Transco Energy Company Form 10-K for 1994
Commission File Number 1-7513)

69
<PAGE> 71
- 7 Non-Committal Loan Facility Letter dated as of July
12, 1995 between Transco and The Fuji Bank, Limited.

- 8 Uncommitted Short Term Money Market Facility dated as
of September 20, 1995 between Transco and First
Interstate Bank.

- 9 Uncommitted Short Term Funding Facility dated as of
November 15, 1995 between Transco and Lyon Short Term
Funding Corp.

(10) - 1 1983 Incentive Plan of Transco Energy Company
(Transco Energy Company Registration Statement No.
2-85895)

- 2 Transco Energy Company Tran$tock Employee Stock
Ownership Plan (Transco Energy Company Registration
Statement No. 33-11721)

- 3 Incentive Compensation Plan of Transco Energy Company
(Exhibit (10)-4 to Transco Energy Company Form 10-K
for 1989 Commission File Number 1-7513)

- 4 Benefit Restoration Plan of Transco Energy Company
(Exhibit (10)-4 to Transco Energy Company Form 10-K
for 1992 Commission File Number 1-7513)

- 5 Lease Agreement, dated October 5, 1981, between
Transco and Post Oak/Alabama, a Texas partnership.
(Exhibit (10)-7 to Transco Energy Company Form 10-K
for 1989 Commission File Number 1-7513)

- 6 1991 Incentive Plan of Transco Energy Company.
(Transco Energy Company Registration Statement No.
33-40495)

- 7 Amended and Restated 1991 Incentive Stock Plan
(Exhibit (10)-3 to Transco Energy Company Form 10-K
for 1994 Commission File Number 1-7513)

- 8 Form of Supplemental Retirement Agreement which
Transco Energy Company has entered into with Messrs.
Dagley and Varner (Exhibit (10)-7 to Transco Energy
Company Form 10-K for 1992 Commission File Number
1-7513)

- 9 Form of Termination Agreement which Transco Energy
Company has entered into with Messrs. Best, Dagley
and Varner (Exhibit (10)-8 to Transco Energy Company
Form 10-K for 1992 Commission File Number 1-7513)

- 10 Severance Agreement between Transco Energy Company
and John P. Des Barres, effective as of September 14,
1991 (Exhibit (10)-10 to

70
<PAGE> 72
Transco Energy Company Form 10-K for 1992 Commission
File Number 1-7513)

- 11 Termination Agreement between Transco Energy Company
and John P. Des Barres, effective as of September 14,
1991 (Exhibit (10)-11 to Transco Energy Company Form
10-K for 1992 Commission File Number 1-7513)

- 12 Severance Agreement, dated as of March 25, 1992, by
and between Transco Energy Company and Robert W. Best
(Exhibit (10)-12 to Transco Energy Company Form 10-K
for 1993 Commission File Number 1-7513)

- 13 Severance Agreement, dated as of March 17, 1993, by
and between Transco Energy Company and David E.
Varner and schedule identifying substantially similar
Severance Agreements between Transco Energy Company
and other executive officers (Exhibit (10)-13 to
Transco Energy Company Form 10-K for 1993 Commission
File Number 1-7513)

- 14 Indemnification Agreement between Transco Energy
Company and David E. Varner and schedule identifying
substantially similar Indemnification Agreements
between Transco Energy Company and other executive
officers (Exhibit (10)-16 to Transco Energy Company
Form 10-K for 1993 Commission File Number 1-7513)

- 15 Termination Agreement dated as of December 11, 1994
between Transco Energy Company and Nicholas J.
Neuhausel (Exhibit 7 to Schedule 14D-9 Commission
File Number 005-19963)

- 16 Amendment dated as of December 11, 1994 to the
Termination Agreement between Transco Energy Company
and Larry J. Dagley dated as of March 25, 1992
(Exhibit 8 to Schedule 14D-9 Commission File Number
005-19963)

- 17 Amendment dated as of December 11, 1994 to the
Termination Agreement between Transco Energy Company
and David E. Varner dated as of March 25, 1992
(Exhibit 10 to Schedule 14D-9 Commission File Number
005-19963)

- 18 Amendment dated as of December 11, 1994 to the
Termination Agreement between Transco Energy Company
and John P. Des Barres dated as of October 31, 1991
(Exhibit 11 to Schedule 14D-9 Commission File Number
005-19963)

71
<PAGE> 73
- 19 Amendment dated as of December 11, 1994 to
the Severance Agreement between Transco
Energy Company and Robert W. Best dated March
25, 1992 (Exhibit 12 to Schedule 14D-9
Commission File Number 005-19963)

- 20 Senior Executive Special Bonus and Retention Plan
(Exhibit 13 to Schedule 14D-9 Commission File Number
005-19963)

- 21 Agreement dated as of December 11, 1994 between
Transco Energy Company, The Williams Companies, Inc.
and Larry J. Dagley (Exhibit 14 to Schedule 14D-9
Commission File Number 005-19963)

- 22 Agreement dated as of December 11, 1994 between
Transco Energy Company, The Williams Companies, Inc.
and David E. Varner (Exhibit 15 to Schedule 14D-9
Commission File Number 005-19963)

- 23 Agreement dated as of December 11, 1994 between
Transco Energy Company, The Williams Companies, Inc.
and Nicholas Neuhausel (Exhibit 16 to Schedule 14D-9
Commission File Number 005-19963)

- 24 Agreement dated as of December 11, 1994 between
Transco Energy Company, The Williams Companies, Inc.
and John P. Des Barres (Exhibit 19 to Schedule 14D-9
Commission File Number 005-19963)

4. REPORTS ON FORM 8-K:

None.

72
<PAGE> 74
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 27th day
of March, 1996.

TRANSCONTINENTAL GAS PIPE
LINE CORPORATION
Registrant

/s/ NICK A. BACILE
By:______________________________________
Nick A. Bacile
Vice President and Controller

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on this 27th day of March, 1996, below by the
following persons on behalf of the registrant and in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ KEITH E. BAILEY Chairman of the Board
-------------------------------------------------
(Keith E. Bailey)

/s/ BRIAN E. O'NEILL Director, President and Chief Executive Officer
------------------------------------------------- (Principal Executive Officer)
(Brian E. O'Neill)

/s/ CUBA WADLINGTON, Jr. Director
-------------------------------------------------
(Cuba Wadlington, Jr.)

/s/ NICK A. BACILE Director, Vice President and Controller
------------------------------------------------- (Principal Accounting and Financial Officer)
(Nick A. Bacile)

/s/ RONALD L. ADAMS Director
-------------------------------------------------
(Ronald L. Adams)

/s/ FRANK J. FERAZZI Director
-------------------------------------------------
(Frank J. Ferazzi)

/s/ LEWIS A. POSEKANY, Jr. Director
-------------------------------------------------
(Lewis A. Posekany)

/s/ THOMAS P. GRIFFIN Director
-------------------------------------------------
(Thomas P. Griffin)
</TABLE>

73
<PAGE> 75
EXHIBITS INDEX

(3) - 1 Second Restated Certificate of Incorporation, as
amended, of Transco. (Exhibit 3.1 to Transco Form
8-K dated January 23, 1987 Commission File Number
1-7584)

a) Certificate of Amendment, dated July 30,
1992, of the Second Restated Certificate of
Incorporation (Exhibit (10)-17(a) to Transco
Energy Company Form 10-K for 1993 Commission
File Number 1-7513)

c) Certificate of Amendment, dated August 5,
1987, of the Second Restated Certificate of
Incorporation (Exhibit (10)-17(c) to Transco
Energy Company Form 10-K for 1993 Commission
File Number 1-7513)

- 2 By-Laws of Transco, as Amended and Restated May 2,
1995.

<PAGE> 76
- 2 Indenture, dated as of June 1, 1983, between
Transco and RepublicBank Houston, National
Association, as Trustee. (Exhibit (4)-5 to
Transco Form 10-K for 1989 Commission File
Number 1-7584)

d) Certified Resolutions of a Special Committee
of the Board of Directors dated October 31,
1986. (Exhibit (4)-5d to Transco Form 10-K
for 1989 Commission File Number 1-7584)

g) Certified Resolutions of a Special Committee
of the Board of Directors dated January 29,
1987. (Exhibit (4)-5g to Transco Form 10-K
for 1989 Commission File Number 1-7584)

<PAGE> 77
- 3 Indenture dated September 15, 1992 between
Transco and the Bank of New York, as Trustee
(Exhibit 4.2 to Transco Form 8-K dated
September 17, 1992 Commission File Number
1-7584)

<PAGE> 78
- 7 Non-Committal Loan Facility Letter dated as of July
12, 1995 between Transco and The Fuji Bank, Limited.