TRANSCONTINENTAL GAS PIPE LINE CORP, 10-K, 1997-03-27

TRANSCONTINENTAL GAS PIPE LINE CORP
10-K, 1997-03-27
NATURAL GAS TRANSMISSION

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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, 1996
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)
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) 215-2000
--------------------

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, 1997 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>

PART I

ITEM 1. BUSINESS.

GENERAL

Transcontinental Gas Pipe Line Corporation (Transco) is an interstate
natural gas transmission company which owns 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, 1996 was
1,502.

Transco is a wholly-owned subsidiary of The Williams Companies, Inc.
(Williams). Prior to May 1, 1995, Transco was an indirect wholly-owned
subsidiary of Transco Energy Company (TEC).

On December 12, 1994, TEC and Williams announced that they had entered
into a 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 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 additional discussion and the accounting treatment of the Merger,
see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - 1. Corporate Structure and Control and 2. Summary of
Significant Accounting Policies."

At December 31, 1996, Transco's system had a mainline delivery capacity
of approximately 3.6 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 2.9 Bcf of gas per day for a system-wide delivery capacity
total of 6.5 Bcf of gas per day.
- --------
(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.

<PAGE>

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 storage
fields located on or near its pipeline system and/or market areas and operates
three of these storage fields and an additional liquefied natural gas (LNG)
storage facility. The total storage capacity available to Transco and its
customers in such storage fields and LNG facility is approximately 216 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 - 3. 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, became the successor to the TGMC
agency agreement and began to manage Transco's jurisdictional merchant sales.

<PAGE>

Also, in May 1995, the operation of certain production area facilities
were transferred to Williams Field Services Group, Inc. (WFS), an affiliated
company. 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 Williams Gas
Processing - Gulf Coast Company (WGP), a subsidiary of WFS. The net book value
at December 31, 1996 of the facilities, including the purchase price allocation
to Transco, was approximately $564 million. Concurrently, WGP 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
part of an ongoing comprehensive restructuring plan by Williams to separate all
gathering facilities from Williams' jurisdictional interstate natural gas
pipeline transmission companies. In September, 1996, the FERC issued an order
dismissing Transco's application and WGP's petition for declaratory order. In
October 1996, Transco and WGP filed a joint request for rehearing of the FERC's
September order.

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 service to residential, commercial, industrial and
electric generation end 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
1996 accounted for approximately 10 percent of Transco's 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 shorter term agreements.

<PAGE>

Transco's total system deliveries for the years 1996, 1995 and 1994 are
shown below.
<TABLE>
<CAPTION>

Transco System Deliveries (TBtu) 1996 1995 1994
- ----------------------------- ------- ------- -------
<S> <C> <C> <C>

Market-area deliveries:
Long-haul transportation....................... 948.9 858.4 805.1
Market-area transportation..................... 428.1 467.3 453.6
............................................... _______ _______ _______
Total market-area deliveries................... 1,377.0 1,325.7 1,258.7
Production-area transportation..................... 210.0 165.9 185.9
------- ------- -------
Total system deliveries............................ 1,587.0 1,491.6 1,444.6
======= ======= =======

Average Daily Transportation Volumes (TBtu) 4.3 4.1 4.0
Average Daily Firm Reserved Capacity (TBtu) 5.2 5.2 4.9
</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.

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

SUNBELT EXPANSION PROJECT On December 2, 1996 the FERC issued a certificate
authorizing the SunBelt Expansion Project to provide additional firm
transportation capacity to growing markets in Georgia, South Carolina and North
Carolina. The 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 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 project will include approximately 15 miles of pipeline looping and
compression additions totaling 53,100 horsepower. Transco estimates the cost of
the expansion to be approximately $85 million. Transco invested approximately
$12 million in 1996 and expects to invest approximately $68 million in 1997.

SOUTHEAST LOUISIANA GATHERING SYSTEM PROJECT On August 30, 1996, Transco
filed an application with the FERC for authority to expand the offshore portion
of its existing Southeast Louisiana Gathering System in two phases to provide a
total of 660 MMcf/d of

<PAGE>

additional firm transportation capacity. Transco estimates the cost of the
expansion to be approximately $129 million and expects to invest approximately
$95 million in 1997.

MOBILE BAY LATERAL EXPANSION PROJECT On November 12, 1996, Transco filed an
application with the FERC for approval to extend and expand its Mobile Bay
lateral. The project will include expansion of Transco's existing 123-mile
Mobile Bay lateral and construction of a new 77-mile offshore pipeline extension
to an area near the outer continental shelf where substantial reserves have been
discovered by several producers. The project, which was filed to increase
capacity as much as 600 MMcf/d at an estimated cost of $171 million, is targeted
to be in service by the 1998-99 winter heating season. In December, Transco
received nominations for 300 MMcf/d of capacity in the project.

PINE NEEDLE LNG COMPANY, LLC On November 27, 1996, the FERC issued its
order authorizing Pine Needle LNG Company, LLC (Pine Needle), a North Carolina
limited liability company, to develop a new LNG storage facility near Transco's
mainline system in Guilford County, North Carolina. The project responds 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 and
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 plans 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 local distribution companies (LDCs), a producer,
and a Georgia gas authority. Transco's wholly owned subsidiary, TransCarolina
LNG Company, holds a 35% ownership interest in Pine Needle and another wholly
owned subsidiary of Transco, Pine Needle Operating Company, will serve as
operator. Transco invested approximately $3 million in 1996 and expects to
invest approximately $12 million in 1997.

CARDINAL PIPELINE SYSTEM PROJECT On December 23, 1996, Cardinal Extension
Company, LLC (Cardinal), a North Carolina limited liability company formed
between a wholly owned subsidiary of Transco and three North Carolina LDCs,
filed for authorization with the North Carolina Utilities Commission (NCUC) to
(a) construct an approximately 67-mile extension of the existing Cardinal
Pipeline system from Burlington to the area of Raleigh, North Carolina; (b) to
provide an additional 140 MMcf/d of new firm transportation capacity to North
Carolina markets, and (c) upon the satisfaction of certain conditions, to
acquire the existing Cardinal Pipeline system (consisting of 37 miles of 24-inch
pipeline extending from Transco's Station 160 to Burlington, North Carolina).
The NCUC has scheduled a hearing on the proposed Cardinal project to commence on
May 20, 1997.

<PAGE>

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 $98 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.

SEABOARD EXPANSION PROJECT On November 18, 1996, the FERC made a
preliminary determination that the SeaBoard Expansion Project is required by
public convenience and necessity but denied Transco's request for rolled-in rate
treatment. Transco has invested approximately $6 million in this project. As a
result of the FERC action on rolled-in rate treatment, Transco has plans to
significantly revise the project.

PIEDMONT/MAIDEN LATERAL EXPANSION PROJECT On January 10, 1997, Transco
filed an application with the FERC for authority to expand an existing delivery
lateral to Piedmont Natural Gas Company, Inc. in Lincoln and Catawba Counties,
North Carolina. The proposed facilities include 17.77 miles of 16-inch pipeline
loop and an expansion of Transco's existing Lowesville Meter Station. The
proposed in-service date for the expansion is November 1, 1997, and the
estimated cost of the facilities is $14 million. Transco expects to invest
approximately $12 million in 1997.

1998 CHEROKEE EXPANSION PROJECT In December 1996, Transco announced its
1998 Cherokee Expansion Project. The project is expected to provide
approximately 87 MMcf/d of additional firm transportation capacity in Alabama
and Georgia by the 1998- 1999 winter heating season at a cost of approximately
$66 million. Transco plans to file in the spring of 1997 for FERC approval of
the project.

CUMBERLAND PIPELINE PROJECT In December 1996, Transco and AGL Resources
Inc. announced the signing of a letter of intent to form a joint venture to be
known as Cumberland Pipeline Company. Existing pipeline facilities owned by
Transco and AGL Resources Inc. will be expanded northward into Tennessee to form
the 135-mile pipeline that is expected to provide transportation capacity to
markets in eastern Tennessee by the 2000-2001 winter heating season. The project
is expected to be submitted for FERC approval in the fourth quarter of 1997.

INDEPENDENCE PIPELINE PROJECT In February 1997, Transco and ANR Pipeline
Company (ANR) announced the signing of a letter of intent to form a joint
venture to be known as Independence Pipeline Company. The pipeline will consist
of approximately 370 miles of 36-inch diameter pipe with an initial capacity of
up to 900 MMcf/d.

<PAGE>

It will extend from ANR's existing compressor station at Defiance, Ohio, to
Transco's facilities at Leidy, Pa. Along the proposed route, interconnections
with numerous other pipelines serving the Mid-Atlantic and Northeast regions are
anticipated. Affiliates of ANR and Transco will each own 50 percent of the new
project. The project is expected to be submitted for FERC approval in the
second quarter of 1997 and is expected to be in service by the 1999-2000 winter
heating season.

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 additional regulatory matters, see "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements-
3. Contingent Liabilities and Commitments - Rate and Regulatory Matters."

COMPETITION

Competition for pipeline services continues to intensify, due primarily to
changes in regulation. Although FERC Order 636, implemented in 1993, probably
has contributed most to increased competition in pipeline services, other
changes in federal and state regulation also promise to increase competition.
Many states are mandating that distribution company LDC services be unbundled,
thereby opening retail gas markets to competition. FERC Order 888 is requiring
wholesale competition for electric power and many states are extending this to
retail markets. States in the Mid Atlantic Census Region,

<PAGE>

which contain important Transco markets, are particularly active in attempting
to open retail gas and electric markets to competition.

FERC Order 636 required that the natural gas, transportation, and other
services formerly provided in bundled form by pipelines be unbundled, resulting
in non-discriminatory open access transportation services, and encouraged the
establishment of market hubs. These and other factors have led to a commodity
market in gas and to increasingly competitive markets in natural gas services,
including competitive secondary markets in pipeline capacity. Pipeline capacity
is being used more efficiently, and peaking and storage services are
increasingly effective substitutes for annual pipeline capacity.

FERC Order 636 also changed rate design for pipelines. This change has
reduced short term risk of cost recovery by pipelines with fully subscribed
capacity but, together with slow growth in gas demand and more efficient use of
pipeline capacity and increased availability of substitutes for it, increased
the risk of contract non-renewal or capacity turnback.

The pace and extent of LDC unbundling and electric power industry
restructuring, and their impacts, remain uncertain at this time. Competition in
retail gas markets should lead to more efficient use of pipeline capacity and
greater preference for shorter term contracts. The potential impact of electric
power industry restructuring is particularly uncertain because gas competes with
electricity in residential, commercial, and industrial end uses, and with other
fuels, especially coal, in electricity generation. Although the net impact of
electric restructuring on gas demand is uncertain, especially in the short run,
the long run impact is expected to be increased gas use for power generation
relative to direct use in residential, commercial, and industrial applications.

SALES SERVICE

As discussed above, WESCO (and TGMC prior to the Merger) manages Transco's
jurisdictional merchant sales, which are made to customers pursuant to a blanket
sales certificate issued by the FERC. Most of these sales are 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.

<PAGE>

Transco's gas sales volumes managed by WESCO and TGMC for the years 1996,
1995 and 1994 are shown below.

Gas Sales Volumes (TBtu) 1996 1995 1994
- ------------------------ ----- ----- -----
<S> <C> <C> <C>
Long-term sales......................... 227.9 219.7 217.2
Short-term sales........................ 37.9 95.5 109.7
----- ------- -----
Total gas sales.................... 265.8 315.2 326.9
===== ===== =====
</TABLE>

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
- -2. Summary of Significant Accounting Policies and 9. Transactions With Major
Customers and Affiliates."

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.

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 - 3. Contingent
Liabilities and Commitments - Environmental Matters."

FORWARD-LOOKING INFORMATION

Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Transco believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. Such statements are made in
reliance on the safe harbor protections provided under the Private Securities
Litigation Reform Act of 1995.

<PAGE>

As required by such Act, Transco hereby identifies the following important
factors that could cause actual results to differ materially from any results
projected, forecasted, estimated or budgeted by Transco in forward-looking
statements: (i) risks and uncertainties related to changes in general economic
conditions in the United States, changes in laws and regulations to which
Transco is subject, including tax, environmental and employment laws and
regulations, the cost and effects of legal and administrative claims and
proceedings against Transco or its subsidiaries or which may be brought against
Transco or its subsidiaries and conditions of the capital markets utilized by
Transco to access capital to finance operations; (ii) risks and uncertainties
related to the impact of future federal and state regulation of business
activities, including allowed rates of return; and (iii) risks and uncertainties
related to the ability to develop expanded markets as well as maintaining
existing markets. In addition, future utilization of pipeline capacity will
depend on energy prices, competition from other pipelines and alternate fuels,
the general level of natural gas demand and weather conditions, among other
things. Further, gas prices which directly impact transportation and operating
profits may fluctuate in unpredictable ways.

ITEM 2. PROPERTIES.

See "Item 1. Business."

ITEM 3. LEGAL PROCEEDINGS.

See "Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - 3. Contingent Liabilities and Commitments."

RATE AND REGULATORY MATTERS

ORDER 636 On February 27, 1997, the FERC issued an order in response to the
D.C. Circuit Court's remand of Order 636. In that order, the FERC (i) reaffirmed
its decision to allow pipelines to recover 100% of their GSR costs, (ii) allows
the pipelines to propose an appropriate percentage of GSR costs to be recovered
from IT customers, (iii) modified its right-of-first refusal policy to require
firm capacity holders to match any term bid up to five years to keep their
capacity, rather than the 20 year term adopted in Order 636, (iv) reaffirmed
that SFV mitigation must be applied on a customer-by-customer basis,
(v) requires prospectively that no-notice service be offered to all customers
on a non-discriminatory basis, and (vi) reaffirmed that it will determine on a
case-by-case basis the eligibility of a downstream pipeline's customers for the
upstream pipeline's one-part, small customer rate.

<PAGE>

ORDER 94-A COSTS (DOCKET NO. RP92-149) On February 28, 1997, the FERC
issued an order denying rehearing of its January 29 order, but staying
Columbia's refund obligation pending action by the Bankruptcy Court.

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.

PART II

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

Transco is a wholly-owned subsidiary of Williams, therefore, Transco's
common stock is not publicly traded.

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.

<PAGE>

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 1, 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
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.

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 accessing capital
markets, by repayments of funds advanced to Williams, by borrowings under a
credit agreement and short-term money market facilities and, if required, by
advances from Williams. In July 1996, Transco issued $200 million of 7.08%
Debentures and, in December issued $200 million of 7.25% Debentures. Proceeds
from the Debentures were used for general corporate purposes, including the
refinancing of $275 million of Notes in 1996. In addition, Transco retired $99
million of Notes in January 1997. In 1997, Transco also plans to access capital
markets to fund its expansion projects and other general corporate requirements.
Transco believes any additional financing can be obtained on reasonable terms.

Williams and certain of its subsidiaries, including Transco, are parties to
a $1 billion credit agreement (Credit Agreement), under which Transco can borrow
up to $400 million. Transco is a party to three short-term money market
facilities, under which it can borrow up to an aggregate of $135 million. At
December 31, 1996, there were no outstanding borrowings under the Credit
Agreement or the short-term money market facilities. Advances due Transco by
Williams totaled $148 million.

CAPITAL EXPENDITURES

As shown in the table below, Transco's capital expenditures for 1996
included $45 million for market-area projects, primarily for the Southeast
Expansion Projects, compared

<PAGE>

to $67 million in 1995, and $233 million for maintenance of existing facilities
and other projects, compared to $170 million in 1995. Transco has budgeted
approximately $415 million for 1997 capital expenditures related to expansion
projects in the market and supply areas and the maintenance of existing
facilities.

Budget Actual
--------- -----------------------------------------
Capital Expenditures 1997 1996 1995 1994
- -------------------- -------- -------- -------- --------
(In millions)
<S> <C> <C> <C> <C>
Market-Area Projects.................. $ 184.2 $ 44.5 $ 67.4 $ 20.4
Supply-Area Projects.................. 96.1 0.3 7.7 13.7
Maintenance of Existing
Facilities and Other Projects....... 134.6 233.1 169.6 109.3
-------- ------- -------- -------

Total Capital Expenditure $ 414.9 $ 277.9 $ 244.7 $ 143.4
======== ======= ======== =======
</TABLE>

SOUTHEAST EXPANSION PROJECTS In November 1996, the final phase of the
Southeast Expansion Projects was placed into service. Since late 1994, the
Southeast Expansion Projects have added a total of 205 MMcf/d of firm
transportation capacity to Transco's southeast customers in Alabama, Georgia,
South and North Carolina and Virginia. The firm transportation capacity extends
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 include approximately 25 miles of pipeline
replacement and looping and the installation of additional compression totaling
approximately 70,000 horsepower.

The 1994 Southeast Expansion Project 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 added the remaining 55 MMcf/d for November 1996. The total cost of
the expansion was approximately $106 million, of which approximately $22 million
was invested in 1996.

OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES

ORDER 636 TRANSITION COSTS As discussed in Note 3 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
Gas Supply Realignment (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.

<PAGE>

RATE AND REGULATORY REFUNDS As discussed in Note 3 of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco has filed
general rate cases (Docket Nos. RP92-137 and RP95-197) under which all issues
have not been resolved. Transco has provided reserves which it believes is
adequate for any refunds that may be required under Docket Nos. RP92-137 and
RP95-197.

REGULATORY AND LEGAL PROCEEDINGS As discussed in Note 3 of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco is involved
in 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 3 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.

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. Transco also expects to access public and private markets
on reasonable terms to finance its requirements.

<PAGE>

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
the 1995 pre-acquisition and post-acquisition periods have been combined for a
pro forma presentation of results of operations for the year 1995.

1996 COMPARED TO 1995

COMMON STOCK EQUITY IN NET INCOME AND OPERATING INCOME Transco's common
stock equity in net income for 1996 was $95.5 million, compared with common
stock equity in net income of $76.0 million for 1995. The 1995 results include
an after-tax charge of $15.3 million to provide for executive severance and
termination benefits, substantially all of which were not deductible for federal
income tax purposes. Excluding this charge, Transco's common stock equity in net
income for 1995 would have been $91.3 million. Operating income for 1996 was
$208.6 million compared to operating income of $183.6 million ($199.6 million
excluding the pre-tax charge of $16.0 million for executive severance and
termination benefits) for 1995.

Excluding the 1995 charge for executive severance and termination benefits,
the higher common stock equity in net income of $4.2 million and higher
operating income of $9.0 million for 1996 was primarily due to higher gas
transportation revenues, net of the related cost of transportation and
depreciation, and lower administrative and general expenses, partly offset by
higher operation and maintenance expenses (excluding the effects of lower
underground gas storage costs discussed below). In addition, common stock equity
in net income in 1996 was impacted by higher fees of $2.0 million related to
Transco's sale of receivables program, higher net interest expense of $1.4
million and lower dividends on preferred stock of $0.9 million compared to 1995.

OPERATING COSTS AND EXPENSES Excluding the pre-tax effects of the 1995
charge for executive severance and termination benefits and the cost of sales
and transportation of $884 million and $744 million for 1996 and 1995,
respectively, Transco's operating expenses were $31 million lower in 1996 than
in 1995. The decrease was due primarily to lower depreciation, operation and
maintenance and administrative and general expenses. The lower depreciation
expense of $23 million was primarily due to a reduction in depreciation rates in
rate case RP95-197, partly offset by an increase of $5 million in the
amortization of amounts allocated to Transco's property, plant and equipment
from the Williams purchase price. The effects of the lower depreciation rates
were substantially offset by a corresponding decrease in revenues collected in
rate case RP95-197. Current FERC policy does not permit Transco to recover
through rates the amortization of amounts

<PAGE>

attributable to the Williams purchase price allocation. The lower operation and
maintenance expense of $5 million was primarily attributable to lower
underground storage costs ($10 million), labor costs ($3 million), rental costs
($2 million) and contract services ($1 million), partly offset by higher charges
from others ($11 million) for the operation of certain Transco facilities. The
lower administrative and general expense of $4 million was primarily due to
lower information services and processing costs ($8 million), and lower office
building rent ($1 million), partly offset by higher allocated corporate overhead
costs from Williams ($3 million) and higher gas research costs ($2 million).
Taxes - other than income taxes increased $1 million primarily due to higher
state franchise taxes.

TRANSPORTATION SERVICES Transco's operating revenues, excluding sales and
storage services, decreased $56 million to $647 million for 1996, when compared
to 1995. The lower transportation revenues were primarily due to lower gas
transportation costs charged to Transco by others and lower depreciation costs
that are recovered in Transco's rates, partly offset by the benefits of the two
phases of the Southeast Expansion Projects placed in service in late 1995 and
late 1996 and greater long-haul transportation deliveries. Other revenues
increased $5 million due primarily to additional transportation of liquids and
liquefiable hydrocarbons.

Transco's market-area deliveries for 1996 were 51.3 TBtu, or 4%, higher
than 1995. The increased deliveries were mainly due to the two phases of the
Southeast Expansion Projects being placed into service in late 1995 and late
1996, greater volumes transported for injection into storage and prolonged cold
weather in the market area during the first quarter of 1996. Transco's
production-area deliveries for 1996 increased 44.1 TBtu, or 27%, when compared
to 1995. The increased deliveries were primarily due to gas being transported
for injection into storage and prolonged cold weather during the first quarter
of 1996.

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.

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.

<PAGE>

Through an 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 increased $187
million to $807 million for 1996, when compared to 1995. The increase was
primarily due to higher gas prices in Transco's jurisdictional merchant sales
services, partly offset by 16% lower volumes of gas sales. However, this
increase in revenues had no effect on Transco's operating or net income
variances when compared to the prior year since the increase in revenues was
offset by a corresponding increase in the cost of sales.

STORAGE SERVICES Transco's operating revenues related to storage services
decreased $14 million to $141 million in 1996, when compared to 1995. The
decrease in revenues was primarily due to lower gas storage costs charged to
Transco by others that are recovered in Transco's rates. This decrease in
revenues was substantially offset by a corresponding decrease in underground
storage costs included in operation and maintenance expenses. In addition,
Transco's storage rates included in rate case RP95-197 are lower than those
included in the prior rate case.

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. However,
excluding the effects of selected items, the common stock equity in net income
for 1995 was comparable to common stock equity in net income for 1994. Selected
items that affected the results for 1995 included 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. The selected item affecting the results for 1994
was an after-tax charge of $3.7 million related to a provision for refunds of
certain FERC Order 94 production related costs. 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 transportation) of
$16.3 million, partly offset by higher revenues, net of the related cost of
sales and transportation, of $13.3 million.

OPERATING COSTS AND 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 facilities ($5

<PAGE>

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.

SALES SERVICES 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.

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.

RATE AND REGULATORY MATTERS

See Note 3 of the Notes to Consolidated Financial Statements, included in
Item 8 herein, for a discussion of Transco's rate and regulatory matters.

EFFECT OF INFLATION

Transco generally has experienced increased costs due to the effect of
inflation on the cost of labor, materials and supplies, and property, plant and
equipment. A portion of the increased labor and materials and supplies cost can
directly affect income through increased maintenance and operating costs. The
cumulative impact of inflation over a number of years has resulted in increased
costs for current replacement of productive facilities. The majority of
Transco's property, plant and equipment and inventory is subject to ratemaking
treatment, and under current FERC practices, recovery is limited to historical
costs. While amounts in excess of historical cost are not recoverable under

<PAGE>

current FERC practices, Transco believes it will be allowed to recover and earn
a return based on increased actual cost incurred when existing facilities are
replaced. Cost based regulation along with competition and other market factors
limit Transco's ability to price services or products based upon inflation's
effect on costs.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
------
Report of Independent Auditors......................................... 21
Report of Independent Public Accountants............................... 22
Consolidated Balance Sheet............................................. 23-24
Consolidated Statement of Income....................................... 25
Consolidated Statement of Common Stockholder's Equity.................. 26
Consolidated Statement of Cash Flows................................... 27-28
Notes to Consolidated Financial Statements............................. 29-57

<PAGE>

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, 1996 and 1995, and
the related consolidated statements of income, common stockholder's equity, and
cash flows for the year ended December 31, 1996 and 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 audits. The consolidated statements of income, common stockholder's equity,
and cash flows for the year 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transcontinental Gas Pipe Line Corporation at December 31, 1996 and 1995, and
the consolidated results of its operations and its cash flows for the year ended
December 31, 1996 and 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 7, 1997

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Transcontinental Gas Pipe Line Corporation:

We have audited the accompanying consolidated statements of income, common
stockholder's equity and cash flows of Transcontinental Gas Pipe Line
Corporation (a Delaware corporation) for the year 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 audit.

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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Transcontinental Gas Pipe Line Corporation for the year ended December 31, 1994,
in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 20, 1995

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
THOUSANDS OF DOLLARS

December 31, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash.............................................................. $ 1,774 $ 2,557
Receivables:
Trade (Notes 4 and 8 ).......................................... 48,711 44,655
Affiliates...................................................... 1,761 2,848
Advances to affiliates.......................................... 148,496 104,499
Federal income tax benefits receivable from affiliate........... 3,076 -
Other........................................................... 2,300 4,826
Transportation and exchange gas receivables:
Affiliates...................................................... 22,111 28,309
Others.......................................................... 72,900 113,310
Inventories:
Gas in storage, at LIFO......................................... 36,920 21,943
Materials and supplies, at lower of average cost or market...... 30,623 34,336
Gas available for customer nomination........................... 1,918 548
Deferred income tax asset (Note 7 )............................... 76,192 37,640
Other............................................................. 19,807 28,596
------------ ------------
Total current assets............................................ 466,589 424,067
------------ ------------

Investments, at cost plus equity in undistributed earnings........... 5,865 11,256
------------ ------------

Property, Plant and Equipment:
Natural gas transmission plant.................................... 3,738,550 3,455,154
Less - Accumulated depreciation and amortization.................. 318,234 170,417
------------ ------------
Total property, plant and equipment, net........................ 3,420,316 3,284,737
------------ ------------

Other Assets......................................................... 166,757 201,728
------------ ------------

$ 4,059,527 $ 3,921,788
============ ============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>

December 31, December 31,
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt (Note 4)......................... $ 99,000 $ 277,126
Payables:
Trade.............................................................. 65,019 82,049
Affiliates......................................................... 70,283 84,590
Other.............................................................. 19,007 46,708
Transportation and exchange gas payable:
Affiliates......................................................... 190 841
Others............................................................. 27,050 76,459
Accrued liabilities:
Federal income taxes payable to affiliate.......................... - 55,868
State income and other taxes....................................... 17,846 9,135
Interest........................................................... 20,377 15,396
Employee benefits ................................................. 41,655 41,994
Other.............................................................. 24,411 31,934
Reserve for rate refunds.............................................. 172,823 55,123
------------ ------------
Total current liabilities.......................................... 557,661 777,223
------------ ------------

Long-Term Debt, less current maturities (Note 4)......................... 681,076 382,045
------------ ------------

Other Long-Term Liabilities:
Deferred income taxes (Note 7)........................................ 833,928 839,595
Other................................................................. 167,648 186,094
------------ ------------
Total other long-term liabilities.................................. 1,001,576 1,025,689
------------ ------------

Commitments and contingencies (Note 3)...................................

Cumulative Redeemable Preferred Stock, without par value: (Note 5)
Authorized 10,000,000 shares: none issued or outstanding.............. - -
------------ ------------
Cumulative Redeemable Second Preferred Stock, without par value: (Note 5)
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 1,652,430
Retained earnings..................................................... 166,784 84,401
------------ ------------
Total common stockholder's equity.................................. 1,819,214 1,736,831
------------ ------------
$ 4,059,527 $ 3,921,788
============ ============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>

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

Post-Acquisition Pre-Acquisition
---------------------------------------- | ----------------------------------------
For the Year Ended For the Period | For the Period For the Year Ended
December 31, January 18, 1995 | January 1, 1995 December 31,
1996 to December 31, 1995 | to January 17, 1995 1994
------------------ -------------------- | -------------------- ------------------
<S> <C> <C> | <C> <C>
|
Operating Revenues: |
Natural gas sales.......................... $ 806,691 $ 587,568 | $ 31,701 $ 754,984
Natural gas transportation................. 640,096 667,601 | 32,775 678,561
Natural gas storage........................ 140,745 147,398 | 7,452 148,290
Other...................................... 7,297 2,584 | 133 9,127
-------------- ----------- | ------------- ------------
Total operating revenues................. 1,594,829 1,405,151 | 72,061 1,590,962
-------------- ----------- | ------------- ------------
|
Operating Costs and Expenses: |
Cost of natural gas sales.................. 806,690 586,878 | 31,691 752,495
Cost of natural gas transportation......... 77,369 119,455 | 6,279 118,865
Operation and maintenance.................. 197,953 194,441 | 8,722 190,501
Administrative and general................. 132,196 129,294 | 7,063 146,740
Provision for executive severance benefits. - - | 16,048 -
Depreciation and amortization (Note 2)..... 134,199 151,711 | 5,560 120,797
Taxes - other than income taxes............ 36,471 33,818 | 1,558 31,061
Provision for regulatory issue (Note 3).... - - | - 6,000
Other...................................... 1,307 1,057 | 53 1,079
-------------- ----------- | ------------- -------------
Total operating costs and expenses....... 1,386,185 1,216,654 | 76,974 1,367,538
-------------- ----------- | ------------- -------------
|
Operating Income (Loss)....................... 208,644 188,497 |
(4,913) 223,424 |
-------------- ----------- | ------------- -------------
|
Other (Income) and Other Deductions: |
Interest expense - affiliates ............. - 305 | 2 -
- other................... 64,305 56,132 | 2,678 61,128
Interest income - affiliates.............. (5,895) (1,821) | (207) (6,122)
- other................... (569) (630) | (12) (567)
Allowance for equity and borrowed funds |
used during construction (AFUDC)........ (6,800) (6,870) | (234) (4,184)
Miscellaneous other deductions, net........ 3,447 315 | 213 4,710
-------------- ----------- |
------------- ------------- |
|
Total other (income) and other deductions 54,488 47,431 | 2,440 54,965
-------------- ----------- | ------------- -------------
|
Income (Loss) before Income Taxes ......... 154,156 141,066 | (7,353) 168,459
Provision for Income Taxes (Note 7)........ 58,613 54,478 | 2,309 57,733
-------------- ----------- | ------------- -------------
Net Income (Loss).......................... 95,543 86,588 | (9,662) 110,726
Dividends on Preferred Stock............... - 722 | 194 5,944
-------------- ----------- | ------------- -------------
Common Stock Equity in Net Income (Loss)... $ 95,543 $ 85,866 | $ (9,856) $ 104,782
============== =========== | ============= =============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>

Post-Acquisition Pre-Acquisition
--------------------------------------- | ---------------------------------------
For the Year Ended For the Period | For the Period For the Year Ended
December 31, January 18, 1995 | January 1, 1995 December 31,
1996 to December 31, 1995 | to January 17, 1995 1994
------------------ -------------------- | ------------------- ------------------
|
<S> <C> <C> | <C> <C>
Common Stock: |
Balance at beginning and end of period... $ - $ - | $ - $ -
------------- ------------ | ------------- -------------
|
Premium on Capital Stock and Other Paid-in |
Capital: |
Balance at beginning of period........... 1,652,430 285,792 | 285,792 283,037
Add (deduct): |
TranStock contribution................. - - | - 2,901
Acquisition adjustment to eliminate |
retained earnings..................... - 519,179 | - -
Acquisition adjustment to record |
assets and liabilities at fair value.. - 837,446 | - -
Cash capital contribution ............. - 5,539 | - -
Non-cash capital contribution ......... - 5,541 | - 37
Non-cash return of capital ............ - (698) | - -
Loss on reacquired preferred stock..... - (369) | - (183)
------------- ------------ | ------------- -------------
|
Balance at end of period................. 1,652,430 1,652,430 | 285,792 285,792
------------- ------------ | ------------- -------------
|
Retained Earnings: |
Balance at beginning of period........... 84,401 519,179 | 529,035 424,253
Add (deduct): |
Net income (loss)...................... 95,543 86,588 | (9,662) 110,726
Cash dividends on common stock......... (4,814) - | - -
Non-cash dividends on common stock..... (8,346) (1,465) | - -
Acquisition adjustment to eliminate |
retained earnings..................... - (519,179) | - -
Dividends on preferred stock........... - (722) | (194) (5,944)
------------- ------------ | ------------- -------------
|
Balance at end of period................. 166,784 84,401 | 519,179 529,035
------------- ------------ | ------------- -------------
|
Total Common Stockholder's Equity........ $ 1,819,214 $ 1,736,831 | $ 804,971 $ 814,827
============= ============ | ============= =============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>

Post-Acquisition Pre-Acquisition
-------------------- | ---------------------------------------
For the Year Ended For the Period | For the Period For the Year Ended
December 31, January 18, 1995 | January 1, 1995 December 31,
1996 to December 31, 1995 | to January 17, 1995 1994
----------------- -------------------- | ------------------- ------------------
|
<S> <C> <C> | <C> <C>
Cash flows from operating activities: |
Net income (loss).............................. $ 95,543 $ 86,588 | $ (9,662) $ 110,726
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) |
operating activities: |
Depreciation and amortization (Note 2)...... 149,359 165,666 | 6,083 132,563
Deferred income taxes (Note 7).............. (44,219) (18,168) | 5,348 (24,466)
Provision for (payment of) executive |
severance benefits......................... (424) (14,849) | 16,048 -
Allowance for equity funds used during |
construction (Equity AFUDC).............. (4,670) (5,769) | (190) (3,410)
Provision for regulatory issue (Note 3)..... - - | - 6,000
Changes in operating assets and liabilities: |
Receivables............................... (3,519) 17,120 | (7,114) 32,067
Transportation and exchange gas receivable 46,608 (24,166) | (5,701) 35,363
Inventories............................... (12,357) (752) | (2,647) 17,131
Payables.................................. (67,253) 50,468 | (8,059) (30,836)
Transportation and exchange gas payable... (50,060) 22,461 | 4,934 (27,798)
Accrued liabilities....................... (40,122) 49,748 | (4,755) 7,527
Reserve for rate refunds.................. 117,188 (10,749) | (26,846) (68,041)
Other, net................................ 15,298 (14,544) | 153 (25,031)
------------- ----------- | ------------- ------------
Net cash provided by (used in) |
operating activities.................. 201,372 303,054 | (32,408) 161,795
------------- ----------- | ------------- ------------
|
Cash flows from financing activities: |
(Notes 4 and 5) |
Capital contribution by parent................. - 5,539 | - -
Additions to long-term debt.................... 549,660 50,000 | - -
Retirement of long-term debt................... (425,000) (50,000) | - -
Debt issue costs .............................. (3,378) - | - -
Retirement of preferred stock.................. - (49,744) | - (25,999)
Advances from affiliates, net ................. - (8,195) | 8,195 -
Dividends on preferred stock .................. - (1,647) | - (6,320)
Dividends on common stock...................... (4,814) - | - -
------------- ----------- | ------------- ------------
Net cash provided by (used in) |
financing activities..................... 116,468 (54,047) | 8,195 (32,319)
------------- ----------- | ------------- ------------

</TABLE>

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>

Post-Acquisition Pre-Acquisition
-------------------- | --------------------------------------
For the Year Ended For the Period | For the Period For the Year Ended
December 31, January 18, 1995 | January 1, 1995 December 31,
1996 to December 31, 1995 | to January 17, 1995 1994
----------------- -------------------- | ------------------- ------------------
|
<S> <C> <C> | <C> <C>
Cash flows from investing activities: |
Additions to property, plant and |
equipment, net of equity AFUDC.............. (286,084) (240,102) | (3,797) (140,924)
Changes in accounts payable and |
accrued liabilities for additions |
to property, plant and equipment............ 8,217 329 | (1,099) (2,516)
Sale of assets............................... 2,561 8,154 | - -
Advances to affiliates, net ................. (43,997) (52,124) | 63,599 17,331
Other, net................................... 680 1,199 | (24) (2,833)
------------- ----------- | ------------- ------------
Net cash provided by (used in) |
investing activities................... (318,623) (282,544) | 58,679 (128,942)
------------- ----------- | -------------- ------------
|
|
Net increase (decrease) in cash ............. (783) (33,537) | 34,466 534
Cash at beginning of period.................. 2,557 36,094 | 1,628 1,094
------------- ----------- | ------------- ------------
Cash at end of period........................ $ 1,774 $ 2,557 | $ 36,094 $ 1,628
============= =========== | ============= ============
|
|
|
Supplemental disclosures of cash flow |
information: Cash paid during the year for: |
Interest (exclusive of amount capitalized) $ 51,483 $ 52,450 | $ 5,552 $ 59,485
Income taxes paid......................... 175,001 28,576 | 19,427 60,663
Income tax refunds received............... (1,057) (22,454) | - (29,558)

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

</TABLE>
28

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Structure and Control....................................29
2. Summary of Significant Accounting Policies.........................30
3. Contingent Liabilities and Commitments.............................33
4. Debt, Financing Arrangements and Leases............................45
5. Preferred Stock....................................................47
6. Employee Benefit Plans.............................................48
7. Income Taxes.......................................................53
8. Financial Instruments..............................................54
9. Transactions with Major Customers and Affiliates...................55
10. Quarterly Information (Unaudited)..................................57

1. 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).

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 Williams' common stock valued at $334 million.

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 a dividend to Williams all of TEC's interest in Transco.

Transco's Board of Directors declared a non-cash common stock dividend
equal to the net book value of the assets transferred to Williams of $8.3
million in 1996 and $1.5

<PAGE>

million in 1995 and non-cash return of capital to Williams of $0.7 million in
1995. No common stock dividends were declared in 1994.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS Transco is an interstate natural gas transmission
company which owns 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.

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.
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

<PAGE>

has recorded such advances as current in the accompanying Consolidated Balance
Sheet. The interest rate on intercompany demand notes is the London Interbank
Offered Rate on the first day of the month plus a spread ranging from 0.25% to
1.00%.

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.

Effective January 1, 1996, Transco adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Adoption of the standard
had no effect on Transco's financial position or results of operations.

Depreciation rates used for major regulated gas plant facilities at
year-end 1996, 1995 and 1994 were:

Category of Property 1996 1995 1994
- -------------------- ----------- ----------- -----------

Gathering facilities....................... 2.60%-3.80% 6.22% 6.22%
Storage facilities......................... 2.50% 2.50% 2.50%
Onshore transmission facilities............ 2.35% 2.65% 2.65%
Offshore transmission facilities........... 2.25% 3.75%-7.78% 3.75%-7.78%

Depreciation of general plant is provided on a group basis at straight-line
rates.

Under the terms of a settlement in Transco's general rate case in Docket
No. RP95- 197, which was effective September 1, 1995, subject to refund, Transco
agreed to reduce depreciation rates for certain categories of property. The
reduction in depreciation rates had no effect on operating or net income due to
an offsetting reduction in operating revenues, but did result in lower cash
flows from operations. The reduction in rates was recorded in 1996, retroactive
to September 1, 1995.

<PAGE>

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, 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 income 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,
1996 and 1995, 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.

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 $2.1 million, $1.1 million and $0.8 million for 1996, 1995 and 1994,
respectively. The allowance for equity funds was $4.7 million, $6.0 million and
$3.4 million for 1996, 1995 and 1994, respectively.

<PAGE>

GAS IN STORAGE Transco utilizes the last-in, first-out (LIFO) method of
accounting for inventory gas in storage. The 1996 and 1995 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, 1996 and 1995.

EMPLOYEE STOCK-BASED AWARDS Employee stock-based awards are accounted for
under Accounting Principles Board Opinion (APBO) No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Williams' fixed plan common
stock options do not result in compensation expense, because the exercise price
of the stock options equals the market price of the underlying stock on the date
of grant.

3. CONTINGENT LIABILITIES AND COMMITMENTS

RATE AND REGULATORY MATTERS

GENERAL RATE CASE (DOCKET NO. RP97-71) On November 1, 1996, Transco
submitted to the FERC a general rate case filing principally designed to recover
costs associated with increased capital expenditures. These increased capital
expenditures primarily relate to system reliability, integrity and Clean Air Act
compliance.

When stated on a comparable basis, the general rate filing proposes an
annual cost of service increase of approximately $67 million over the cost of
service underlying the rates contained in the settlement of Transco's last
general rate filing. The rates, which were proposed to become effective, subject
to refund, on May 1, 1997 (assuming a five-month suspension), are designed using
the straight fixed-variable rate design method.

The filing also includes (1) a pro-forma proposal to roll-in the costs of
Transco's Leidy Line and Southern expansion incremental projects and (2) a
pro-forma proposal to

<PAGE>

make IT backhaul rates equal to the forward haul rates. The pro-forma proposals
would be made effective prospectively only after final FERC approval.

On November 29, 1996, the FERC issued an order accepting Transco's filing,
suspending its effectiveness until May 2, 1997 and establishing a hearing to
examine the reasonableness of Transco's proposed rates. In addition, the order
consolidated Transco's pro forma roll-in proposal with the Phase II hearing in
Docket No. RP95-197, and directed that the record in that proceeding be
supplemented to the extent necessary. On February 3, 1997, the FERC issued an
order on rehearing of its November 29, 1996 order which, among other things,
revised the effective date for the proposed rates to May 1, 1997.

On January 7, 1997, a prehearing conference was held during which a
procedural schedule was adopted under which a hearing will commence on November
4, 1997.

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 prefiled rate of return on equity of 14.45% to the
proposed rate of return on equity of 15.25%. Transco also proposed certain
changes to the terms and conditions of its tariff, including the elimination of
the interruptible transportation (IT) crediting mechanism.

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. As to the elimination of the IT crediting
mechanism, the FERC permitted Transco to eliminate the IT crediting mechanism
subject to the outcome of a hearing to determine the reasonableness of Transco's
test period throughput projections for interruptible services.

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. Phase I of the hearing was limited
to the issues of the rate of return and capital structure. Phase II of the
hearing was to address the remaining rate issues.

<PAGE>

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 were collected subject to refund from
September 1, 1995 through July 31, 1996. Effective August 1, 1996, Transco began
billing the rates contained in a settlement agreement, as discussed below.

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, directed Transco to continue discussions with its
customers. The October 4 order directed that Transco modify its tariff
concerning shipper access to secondary receipt points. On May 29, 1996, the FERC
accepted Transco's filing effective June 1, 1996 to implement secondary receipt
point access, but also required Transco to show cause why firm backhauls should
not be required on Transco's system. Following a technical conference on the
issue in Docket No. RP96-211, the FERC required Transco to offer a firm backhaul
service which Transco implemented, subject to further FERC action, on January 1,
1997.

The hearing before an ALJ in Phase I concluded in December 1995. On
December 18, 1996, the ALJ issued his initial decision in Phase I, which, as to
capital structure, found that TWC controlled Transco's financing and imputed
TWC's capital structure to Transco, resulting in a capital structure consisting
of 47.72% long term debt, 4.07% preferred equity, and 48.21% common equity, and
found that Transco should use TWC's cost of long term debt (8.89%) and its cost
of preferred equity (8.80%) as of June 30, 1995. As to rate of return, the ALJ
recommended a rate of return on equity of 11.50%. Transco has taken exception to
the ALJ's initial decision which will be reviewed by the FERC.

On June 19, 1996, Transco filed a Stipulation and Agreement and settlement
rates. The agreement resolves cost of service (subject to the outcome of capital
structure and rate of return in the Phase I proceeding), throughput level and
mix, and certain cost allocation and rate design issues. The agreement also
reserves certain other issues for hearing in Phase II, including the issue of
rolled-in pricing for incremental Leidy Line services. With the exception of one
party that filed comments opposing the settlement and one party that took no
position on the merits of the settlement, all active parties and the FERC's
staff either supported the settlement or did not oppose it. On November 1, 1996,
the FERC issued an order approving the June 19 agreement, and on February 3,
1997 approved an order denying rehearing of its November 1, 1996 order.

On July 15, 1996, Transco submitted a filing with the FERC in which
Transco proposed to implement, for non-contesting parties, the settlement rates
set forth in the

<PAGE>

settlement. The July 15 filing was accepted effective August 1, 1996 and Transco
began billing the settlement rates to non-contesting parties effective August 1,
1996.

On October 9, 1996, Transco filed a Stipulation and Agreement with the ALJ,
which, subject to the outcome of the litigation of the reserved issues in Phase
I and Phase II in this proceeding, settles the issues of cost of service and
throughput with the one party that opposed the resolution of those issues in the
June 19, 1996 settlement. On November 19, 1996, the FERC approved the October 9,
1996 agreement.

The hearing concerning the Phase II issues not resolved by the June 19,
1996 and October 9, 1996 agreements concluded in November 1996. A supplemental
hearing is scheduled to commence in June 1997 to consider Transco's roll-in
proposal filed in Docket No. RP97-71, as discussed above.

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. 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 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 remanded by the D. C. Circuit to the FERC at the FERC's request. On
January 23, 1997, the FERC issued an order on remand which is consistent with
the settlement but which will require that Transco reallocate certain refunds
among its customers. 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

<PAGE>

companies with pipeline subsidiaries, determined Transco's appropriate 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 a 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.
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 April 10, 1996, the FERC issued its order on remand
and adopted Transco's capital structure as the appropriate capital structure for
ratemaking purposes, reversing its previous orders adopting a hypothetical
capital structure. The FERC made no adjustment to Transco's rate of return on
equity, adopting a 14.45% rate of return on equity. The FERC directed Transco to
make refunds in accordance with the April 10, 1996 order. On July 23, 1996, the
FERC denied rehearing of the April 10, 1996 order. On September 17, 1996,
Transco made refunds required under the FERC order, for which Transco had
previously provided a reserve. On September 20, 1996, certain parties filed a
petition for review of the FERC's April 10, 1996 and July 23, 1996 orders in the
D.C. Circuit Court.

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.

On July 3, 1996, the FERC issued an order on review of the ALJ's initial
decision concerning, among other things, Transco's production area rate design.
The FERC rejected the ALJ's recommendations that Transco divide its costs
between its production area and market area, and permit its customers to
renominate their firm entitlements. The FERC also concluded that Transco may
offer firm service on its supply laterals through an open season and eliminate
its IT feeder service in favor of an interruptible service option that does not
afford shippers feeding firm transportation on Transco's production

<PAGE>

area mainline a priority over other interruptible transportation. On December
18, 1996, the FERC denied rehearing of its July 3, 1996 Order. One party has
sought rehearing of that order, and Transco has sought clarification.

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 certain matters to the hearing in Docket No.
RP92-137 (discussed above). 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. 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. 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
rendered an opinion in the appeals of Order 636.

On July 16, 1996, the D.C. Circuit Court issued a decision which in part
affirmed and in part remanded Order 636. However, the court stated that Order
636 would remain in effect until the FERC issued a final order on remand after
considering the remanded issues. With the issuance of this decision, the stay on
the appeals of individual pipeline's restructuring cases has been lifted.

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 SPIN-DOWN ORDER (DOCKET NOS. CP96-206-000 AND
CP96-207- 000) 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

<PAGE>

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 had 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 in response to Fina's complaint, any change in classification of the
function of plant facilities between transmission and gathering would be
prospective only.

Subsequently, 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 Williams Gas
Processing - Gulf Coast Company (WGP), an affiliate of Transco. The net book
value at December 31, 1996 of the facilities, including the purchase price
allocation to Transco, was approximately $564 million. Concurrently, WGP 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 part of an ongoing comprehensive restructuring plan by Williams to
separate all gathering facilities from Williams' jurisdictional interstate
natural gas pipeline transmission companies. On September 25, 1996, the FERC
issued an order dismissing Transco's application and WGP's petition for
declaratory order. On October 25, 1996, Transco and WGP filed a joint request
for rehearing of the FERC's September 25 order.

ORDER 94-A COSTS (DOCKET NO. RP92-149) 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 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 of a
settlement agreement in which Transco agreed to

<PAGE>

refund $1.4 million to Columbia, which amount was 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 $7 million principal amount of 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. Transco and Columbia
each filed with the D.C. Circuit Court a petition for review of the FERC's
order. On September 10, 1996, the D.C. Circuit Court issued an opinion, which
vacated the FERC's February 13 order and directed the FERC to issue an order
approving the October 1993 Transco-Columbia settlement. On January 29, 1997, the
FERC issued an order approving the October 1993 settlement and directing
Columbia to refund to Transco all amounts refunded to Columbia in excess of the
amount required by the October 1993 settlement. On January 30, 1997 Columbia
filed with the FERC a request for rehearing and a request that the FERC
essentially stay Columbia's refund obligation pending action by the United
States Bankruptcy Court.

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 U.S. District Court in North Dakota against Transco and three other
pipeline companies alleging that the pipeline companies had not complied with
their respective obligations under certain gas purchase and gas transportation
contracts. In September 1992, Dakota and the Department of Justice on behalf of
the Department of Energy filed an amended complaint adding as defendants in the
suit, Transco Energy Company, Transco Coal Gas Company and all of the other
partners in the partnership that originally constructed the Plant and each of
the parent companies of these entities. Dakota and the Department of Justice
sought declaratory and injunctive relief and the recovery of damages, alleging
that the four pipeline defendants 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 attorneys' fees. By
order dated December 18, 1996, the FERC approved a settlement of the litigation.
No party to the FERC proceeding has sought review of this order. The final
settlement terms went into effect February 1, 1997, which will allow Transco to
recover its costs.

ROYALTY CLAIMS AND LITIGATION 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

<PAGE>

indemnification by Transco of certain claims for additional royalties which the
producers may be required to pay as a result of such settlements. 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.

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 this lawsuit, the plaintiff has claimed approximately
$23 million, including interest and attorneys' fees for reimbursements of
settlement amounts paid to royalty owners. The trial of the lawsuit is scheduled
for July 1997. Transco has denied liability in the litigation and believes that
it has meritorious defenses to the claims which it intends to pursue vigorously.

In addition, Transco was notified by Freeport-McMoRan, Inc. (FMP) in
February 1995, that pursuant to a settlement with the Mineral Management Service
(MMS) of the MMS' claim for royalties due under gas contracts between Transco
and FMP which had been modified pursuant to settlement agreements made in 1986
and 1989, FMP was asserting a claim for indemnification of approximately $6
million, including interest, under the excess royalty provisions of those
settlement agreements. 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 settlement agreements. 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
settlement agreements. On May 4, 1995, Transco filed an answer denying any
liability to plaintiffs.

In August 1996, a lawsuit was filed against Transco and certain Transco
affiliates by a royalty owner in a gas producing field in Brooks County, Texas
alleging a claim for incorrect computation of royalties. Transco is alleged to
have purchased gas from the field. Transco has not been formally served with the
lawsuit but plans to file in the near future an answer denying liability for the
claim.

OTHER LITIGATION On July 18, 1996, an individual filed a lawsuit in the
United States District Court for the District of Columbia against 70 natural gas
pipelines and other gas purchasers or former gas purchasers. Transco is named as
a defendant in the lawsuit. The plaintiff claims, on behalf of the United States
under the False Claims Act, that the pipelines have incorrectly measured the
heating value or volume of gas purchased by the defendants. The plaintiff claims
that the United States has lost royalty payments as a result

<PAGE>

of these practices. Transco intends to vigorously defend against these claims.
On November 13, 1996, a group of 53 defendants, including Transco, filed a
motion to dismiss the lawsuit. The court's decision is expected after oral
argument on the motion, which is scheduled on March 12, 1997.

In July 1996, Canadian Occidental of California (CXY) filed a lawsuit
against Transco and certain Transco affiliates demanding an accounting relating
to alleged take-or-pay deficiencies under seven gas purchase contracts for the
years 1982 and 1983. Transco has answered the lawsuit asserting that the alleged
deficiencies were settled in an agreement with CXY in 1986 or, alternatively,
that the claims are barred by the statute of limitation, and has asked that the
dispute be resolved by arbitration. The parties have agreed to delay discovery
while engaging in settlement discussions.

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 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 $25 million to $30 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, 1996, Transco had a reserve of approximately
$25 million for these estimated costs that has been recorded in current
liabilities and other long-term liabilities in the accompanying Consolidated
Balance Sheet.

<PAGE>

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 included in the $25 million to $30 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 $500,000. 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. During the last
few years Transco has been acquiring all necessary permits and installing new
emission control devices required for new or modified facilities in areas
designated as attainment by EPA and is continuing that process. Transco operates
facilities in some areas of the country currently designated as nonattainment
and it anticipates that in 1997 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.

<PAGE>

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 $20 million to $30 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. In April 1996, an agreement was
executed by all plaintiffs and Transco to settle and resolve this lawsuit.

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 $38 million at
December 31, 1996 of which the majority relates to construction materials for
projects.

<PAGE>

4. DEBT, FINANCING ARRANGEMENTS AND LEASES

LONG-TERM DEBT At December 31, 1996 and 1995, long-term debt issues were
outstanding as follows (in thousands):
<TABLE>
<CAPTION>

1996 1995
--------------- ---------
<S> <C> <C>
Debentures:
9-1/8% due 1998-2017 $ 150,000 $ 150,000
7.08% due 2026 200,000 -
7.25% due 2026 200,000 -
-------------- ----------
Total debentures 550,000 150,000
-------------- ----------

Notes:
9% due 1996 - 150,000
8-1/8% due 1997 99,000 99,000
6.21% due 2000 - 125,000
8-7/8% due 2002 125,000 125,000
-------------- ----------
Total notes 224,000 499,000
-------------- ----------
Total long-term debt issues 774,000 649,000
Unamortized debt premium 6,076 10,171
Current maturities (99,000) (277,126)
-------------- ----------

Total long-term debt, less current maturities $ 681,076 $ 382,045
============== ==========

</TABLE>

Sinking fund or prepayment requirements applicable to long-term debt
outstanding at December 31, 1996 are as follows (in thousands):

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
============

2001:
9-1/8% Debentures................................ $ 7,500

7.08% Debentures................................. 200,000
------------
Total........................................ $ 207,500
============

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

On July 15, 1996, Transco issued $200 million of debentures (7.08%
Debentures), which pay interest at 7.08% per annum on January 15 and July 15 of
each year, beginning January 15, 1997. The 7.08% Debentures mature on July 15,
2026, but are subject to redemption, at anytime after July 15, 2001, at
Transco's option, in whole or part, at a specified redemption price, plus
accrued and unpaid interest to the date of redemption. The holder of each 7.08%
Debenture may elect between May 15, 2001 and June 15, 2001 to have such 7.08%
Debenture repaid on July 15, 2001 at 100% of the principal amount. Because of
this option available to the holder, the 7.08% Debentures has been included in
the sinking fund or prepayment requirements for the year 2001 in the table
above. The 7.08% Debentures have no sinking fund provisions.

On December 2, 1996, Transco issued $200 million of debentures (7.25%
Debentures), which pay interest at 7.25% per annum on June 1 and December 1 of
each year, beginning June 1, 1997. The 7.25% Debentures mature on December 1,
2026, but are subject to redemption, at anytime, at Transco's option, in whole
or part, at a specified redemption price, plus accrued and unpaid interest to
the date of redemption. The 7.25% Debentures have no sinking fund provisions.

On January 15, 1997, Transco redeemed $99 million of its 8-1/8% Notes.

SHORT-TERM DEBT Transco is a party to three short-term money market
facilities, under which it can borrow up to an aggregate of $135 million.
Interest rates vary with current market conditions. During 1996, Transco had no
borrowings under these agreements. During 1995, the weighted average interest
rate on short-term debt was 6.1%.

RESTRICTIVE COVENANTS Certain of Transco's debt instruments restrict the
amount of dividends distributable. As of December 31, 1996, approximately $515
million of Transco's common stockholder's equity of $1,819 million was
restricted.

SALE OF RECEIVABLES Transco is a party to an agreement that expires in
February 1998 pursuant to which Transco can sell to an investor up to $100
million of undivided interests in certain of its trade receivables. At both
December 31, 1996 and 1995, interests in $100 million of these receivables were
held by the investor.

<PAGE>

The Financial Accounting Standards Board issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," effective for transactions occurring after December 31, 1996. The
adoption of this standard is not expected to impact Transco's consolidated
results of operations, financial position or cash flows.

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. During 1996
and 1995, Transco entered into sublease agreements that also expire in 2004.

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):

1997 ............................... $ 22,939
1998 ............................... 22,939
1999 ............................... 22,860
2000 ............................... 21,367
2001 ............................... 23,619
Thereafter.............................. 53,084
---------
Total net minimum obligations...... $ 166,808
=========

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 $17.0 million in 1996, $20.1 million in 1995 and
$36.0 million in 1994.

The reduced lease expense in 1996 and 1995 reflects the effects of the
purchase price allocation discussed above and the lower 1996 expense also
reflects income from subleasing space in the Transco Tower.

5. 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, 1996 or
1995. 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, 1996. Transco redeemed all outstanding shares of its cumulative
preferred stock series in March 1995 for $49.7 million, or $100 per share, plus
accrued dividends of $0.6 million.

<PAGE>

The changes in the total Transco preferred stock in each of the years 1995 and
1994 are (in thousands):
<TABLE>
<CAPTION>

1995 1994
----------------------------- -------------------------
Shares Amount Shares Amount
-------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of year.... 497 $49,744 757 $75,743
Retirements...................... 497 49,744 260 25,999
-------------- ------------- -------------- ----------
Balance at end of year........... - $ - 497 $49,744
============== ============= ============== ==========
</TABLE>

6. EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS Prior to the Merger, Transco participated in a retirement
plan (Retirement Plan) with TEC and certain of its subsidiaries that covered
substantially all of Transco's officers and regular employees. Transco's
officers and employees comprised a majority of the total officers and employees
of TEC and its subsidiaries. Subsequent to the Merger, the Retirement Plan
covers only Transco's officers and employees.

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 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, United States government securities, corporate bonds and commercial
paper.

The following table sets forth the funded status of the Retirement Plan at
December 31, 1996 and 1995, and the amount of accrued pension liability for
Transco and TEC as of December 31, 1996 and 1995 (in thousands):

1996 1995
--------- ---------
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$139,202 at December 31, 1996 and $128,783
at December 31, 1995................................. $ 147,514 $ 145,949
========= =========

Actuarial present value of projected benefit
obligation........................................... $ 197,787 $ 201,425
Plan assets at market value........................... 179,462 155,821
--------- ---------
Projected benefit obligation in excess of plan assets.. 18,325 45,604
Unrecognized net gain (loss)........................... 7,284 ( 16,591)
Unrecognized prior service cost........................ 4,774 5,147
--------- ----------
Accrued pension liability.............................. $ 30,383 $ 34,160
========= ==========

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

<PAGE>

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 amounts of pension costs deferred at December 31, 1996 and 1995 were
$5.4 million and $6.5 million, respectively, and are expected to be recovered
through future rates over the average remaining service period for active
employees.

The following table sets forth the components of the Retirement Plan's net
pension cost for Transco for the year ended December 31, 1996 and Transco and
TEC for the years ended December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>

1996 1995 1994
---------- ---------- ----------

<S> <C> <C> <C>
Service cost-benefits earned during the period... $ 5,847 $ 4,716 $ 7,361
Interest cost on projected benefit obligation.... 14,240 12,111 11,046
Actual return on plan assets..................... ( 32,978) ( 37,958) ( 3,228)
Net amortization and deferral.................... 16,792 25,666 ( 10,250)
---------- ---------- ----------
Net pension cost................................. $ 3,901 $ 4,535 $ 4,929
========== ========== ==========
</TABLE>

Transco's share of the Retirement Plan's net pension costs for 1995 and
1994 was $4.2 million and $4.2 million, respectively.

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
1996, 1995 and 1994(1):

1996 1995 1994
------ ------ ------
Discount rate................................... 7.50% 7.25% 7.50%
Rate of increase in future compensation levels.. 5.0% 5.0% 5.0%
Expected long-term rate of return on assets..... 10% 10% 10%

(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.

<PAGE>

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

The following table sets forth the funded status of the plans at December
31, 1996 and 1995, reconciled with the accrued postretirement benefits for
Transco at December 31, 1996 and Transco and TEC at December 31, 1995 (in
thousands):

1996 1995
---------- ----------
Accumulated postretirement benefit obligation:
Retirees..................................... $ 77,249 $ 88,731
Fully eligible active plan participants...... 6,634 7,801
Other active plan participants............... 20,710 21,065
---------- ----------
104,593 117,597
Plan assets at market value...................... 65,320 51,776
---------- ----------
Accumulated postretirement benefit obligation
in excess of plan assets........................ 39,273 65,821
Unrecognized net gain............................ 23,248 10,107
Unrecognized prior service cost.................. 9,311 2,168
---------- ----------
Accrued postretirement benefits.................. $ 71,832 $ 78,096
========== ==========

During the fourth quarter of 1996 the Williams Plan was amended, effective
January 1, 1997, to increase the cost-sharing provisions. This amendment
decreased the accumulated postretirement benefit obligation approximately $7.4
million.

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 amounts of postretirement benefits costs deferred as a regulatory asset at
December 31, 1996 and 1995 were $64.8 million and $71.7 million, respectively,
and are expected to be recovered through future rates over the remaining
amortization period of the unrecognized transition obligation.

The following table sets forth the components of the plans' net periodic
postretirement benefit cost for Transco for the year ended December 31, 1996 and
Transco and TEC for the years ended December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>

1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefits earned during the period...... $ 1,639 $ 2,619 $ 2,915
Interest cost on accumulated postretirement
benefit obligation................................. 7,860 8,929 8,218
Actual return on plan assets........................ ( 6,868) ( 7,651) ( 895)
Amortization of unrecognized transition obligation.. - - 5,314
Net amortization and deferral....................... 7,226 9,623 ( 516)
----------- ---------- ----------
Net periodic postretirement benefit cost............ $ 9,857 $ 13,520 $ 15,036
=========== ========== ==========
</TABLE>

<PAGE>

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

The annual rate of increase in the per capita cost of covered health care
benefits for 1997 was assumed to be 9 to 10%. The rate was assumed to decrease
gradually to 5% for the year 2004 and remain at that level thereafter. The
health care cost trend rate 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, 1996 by $7.6 million and
the aggregate of the service and interest cost components of the net periodic
postretirement health care benefit cost for 1996 by $1.2 million.

The following table summarizes the various assumptions used to determine
the accumulated postretirement benefit obligation for the plans for the years
1996, 1995 and 1994(1):

1996 1995 1994
------ ------ ------

Discount rate................................ 7.50% 7.25% 7.75%
After-tax expected long-term rate of return
on assets.................................. 6% 6% 7%

(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. Compensation expense of $2.9 million related to Tran$tock was
recognized by Transco in 1994. This expense represents the shares of TEC common
stock allocated to employees of Transco for 1994. Transco recorded a capital
contribution from TEC in the amount of the expense. 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 and 1996.

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

THRIFT PLAN During 1995, Transco sponsored a defined-contribution plan
(Thrift Plan) covering substantially all employees. Company contributions were
based on

<PAGE>

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. Compensation expense of $4.4 million was recognized by
Transco in 1996.

EMPLOYEE STOCK-BASED AWARDS Williams has several plans providing for common
stock-based awards to its employees and employees of its subsidiaries. The plans
permit the granting of various types of awards including, but not limited to,
stock options, stock appreciation rights, restricted stock and deferred stock.
The purchase price per share for stock options may not be less than the market
price of the underlying stock on the date of grant. Stock options generally
become exercisable after five years, subject to accelerated vesting if certain
future stock prices are achieved. Stock options expire ten years after grant.

Williams' employee stock-based awards are accounted for under APBO No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Williams' fixed plan common stock options do not result in compensation expense,
because the exercise price of the stock options equals the market price of the
underlying stock on the date of grant.

SFAS No. 123, "Accounting for Stock-Based Compensation," requires that
companies who continue to apply APBO No. 25 disclose pro forma net income
assuming that the fair-value method in SFAS No. 123 had been applied in
measuring compensation cost. Pro forma net income for Transco, beginning with
1995 employee stock-based awards was $95.3 million and $74.4 million for 1996
and 1995, respectively. Reported net income was $95.5 million and $76.0 million
for 1996 and 1995, respectively. Pro forma amounts for 1995 reflect total
compensation expense from the awards made in 1995 as these awards fully vested
as a result of the accelerated vesting provisions. Pro forma amounts for 1996
reflect compensation expense that may not be representative of future years
amounts because the compensation expense from stock options is recognized over
the future years vesting period, and additional awards generally are made each
year.

Stock options granted to employees of Transco in 1996 were 430,250 shares
at a weighted average grant date fair value of $7.84. At December 31, 1996,
stock options outstanding and options exercisable for employees of Transco were
856,818 shares and 473,849 shares, respectively.

<PAGE>

7. INCOME TAXES

Following is a summary of the provision for income taxes for 1996, 1995 and
1994 (in thousands):
<TABLE>
<CAPTION>

Post-Acquisition Pre-Acquisition
-------------------------------- | ------------------------
January 18, 1995 | January 1, 1995
to | to
1996 December 31, 1995 | January 17, 1995 1994
---------- ----------------- | ---------------- ----------
<S <C> <C> | <C> <C>
Federal: |
Current.................... $ 88,927 $ 66,819 | $( 2,734) $ 72,364
Deferred................... ( 37,613) ( 17,404) | 4,577 ( 23,669)
---------- ------------- | ----------- ----------
51,314 49,415 | 1,843 48,695
---------- ------------- | ----------- ----------
State and municipal: |
Current.................... 13,905 5,827 | ( 305) 9,835
Deferred................... ( 6,606) ( 764) | 771 ( 797)
---------- ------------- | ----------- ----------
7,299 5,063 | 466 9,038
---------- ------------- | ----------- ----------
|
Provision for income taxes ... $ 58,613 $ 54,478 | $ 2,309 $ 57,733
========== ============== | =========== ==========

</TABLE>

Following is a reconciliation of the provision for income taxes at the
federal statutory rate to the provision for income taxes (in thousands):

Post-Acquisition Pre-Acquisition
--------------------------------- | ------------------------------
January 18, 1995 | January 1, 1995
to | to
1996 December 31, 1995 | January 17, 1995 1994
---------- ----------------- | ---------------- ----------
<S> <C> <C> | <C> <C>
Taxes computed by applying |
the federal statutory rate.. $ 53,955 $ 49,373 | $( 2,573) $ 58,961
Amortization of over funded |
tax liabilities............. - - | - ( 7,675)
Tran$tock compensation....... - - | - 1,015
Pre-acquisition executive |
severance benefits.......... - - | 4,913 -
State and municipal income |
taxes....................... 4,744 3,291 | 303 5,874
Other, net................... (86) 1,814 | ( 334) ( 442)
---------- ----------- | --------------- -----------
|
Provision for income taxes... $ 58,613 $ 54,478 | $ 2,309 $ 57,733
========== ========== | ============== ===========
</TABLE>

<PAGE>

Significant components of deferred income tax assets and liabilities as of
December 31, 1996 and 1995 are as follows (in thousands):

1996 1995
---------- ----------
Deferred tax liabilities
- ------------------------

Property, plant and equipment.................... $ 878,572 $ 881,906
Postretirement benefits.......................... 23,353 28,190
Other............................................ 10,621 42,941
--------- ----------
Total deferred tax liabilities................... 912,546 953,037
--------- ----------

Deferred tax assets

Rate refunds..................................... 63,677 25,604
Accrued liabilities................ ............. 53,568 89,073
Deferred revenues................................ 6,020 2,246
State deferred taxes............................. 31,545 34,159
--------- ---------
Total deferred tax assets........................ 154,810 151,082
--------- ---------

Net deferred tax liabilities..................... $ 757,736 $ 801,955
========= =========

8. 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, 1996 and 1995 are
as follows (in thousands):

Carrying Amount Fair Value
--------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Financial assets:
Cash and short-term
financial assets............... $150,270 $107,056 $150,270 $107,056
Financial liabilities:
Long-term debt ........ ........ 780,076 659,171 781,521 693,173

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

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

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.

<PAGE>

CREDIT AND MARKET RISK

TRADE RECEIVABLES As of December 31, 1996 and 1995, Transco had trade
receivables of $49 million and $45 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.

Transco sells, with limited recourse, certain trade receivables. The
aggregate limit under the receivables facilities was $100 million at December
31, 1996 and 1995. Transco received $21 million of proceeds in 1996, $108
million in 1995 and $80 million in 1994. At December 31, 1996 and 1995, $100
million of such receivables had been sold. Based on amounts outstanding at
December 31, 1996 and 1995 the maximum contractual credit loss under these
arrangements is approximately $15 million and $16 million, respectively, but the
likelihood of loss is considered to be remote.

9. 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
$158.1 million in 1996, $166.7 million in 1995 and $180.5 million in 1994.

The gas sales in 1996 were made to customers under executed Firm Sales
Agreements with primary terms of not less than one year (1997) but not greater
than five years (2001).

AFFILIATES Included in Transco's sales and transportation revenues for
1996, 1995 and 1994 are revenues applicable to sales and transportation for
affiliates of $124.3 million, $173.9 million and $209.4 million, respectively.

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 decrease in 1996 sales and
transportation revenue reflects the impact of diminished gas supplies available
for sale by Transco as Transco's gas purchase contracts expire or terminate.

After FERC approval in January 1993, TEC realigned its gas marketing
businesses under the common management of Transco Gas Marketing Company (TGMC),
which, through an agency agreement, began to manage all jurisdictional merchant
sales of Transco. In May 1995, WESCO became the successor to the TGMC agency
agreement and began to manage Transco's jurisdictional merchant sales. For the
years ended December 31, 1996, 1995 and 1994, included in Transco's cost of
sales is $34.7 million,

<PAGE>

$20.6 million and $24.4 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 1996, 1995 and
1994 is purchased gas cost from affiliates of $466.8 million, $131.5 million and
$93.6 million, respectively.

All gas purchases are made at market or contract prices. The significant
increase in 1996 for purchased gas cost reflects the expiration or termination
of third party gas purchase contracts during 1996 that resulted in a higher
level of Transco's gas supply being purchased from affiliates.

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 $17.5 million in 1996, $36.4 million in 1995 and $36.3 million in 1994
applicable to the transportation of gas by Texas Gas Transmission Corporation
(Texas Gas). The significant decrease in 1996 is mainly due to the conversion of
certain Transco shippers from bundled service to unbundled service. 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 year 1994 was $10.9 million and $15.2 million, respectively, for 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 for 1996 and 1995 were $14.5 million and $8.5 million,
respectively, for such corporate expenses charged by Williams. Management
considers the cost of these services reasonable.

Transco entered into an operating agreement with Williams Field Services
(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 1996 and 1995, are $35.6 million and $24.4 million,
respectively, charged by WFS to operate Transco's gas gathering facilities.

<PAGE>

10. QUARTERLY INFORMATION (UNAUDITED)

The following summarizes selected quarterly financial data for 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>

Post-Acquisition
----------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>

1996
Operating revenues................... $ 479,227 $ 391,576 $ 332,470 $ 391,556
Operating expenses................... 421,380 347,342 289,850 327,613
---------- ---------- ---------- ----------
Operating income..................... 57,847 44,234 42,620 63,943
Interest expense..................... 13,146 16,510 17,759 16,890
Other (income) and deductions, net... (1,247) (1,829) (3,848) (2,893)
---------- ---------- ---------- ----------
Income before income taxes........... 45,948 29,553 28,709 49,946
Provision for income taxes........... 17,819 11,510 11,163 18,121
---------- ---------- ---------- ----------
Common stock equity in net income.... $ 28,129 $ 18,043 $ 17,546 $ 31,825
========== ========== ========== ==========
</TABLE>

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 |
Operating revenues............. $ 72,061 | $ 295,659 $ 356,242 $ 340,351 $ 412,899
Operating expenses............. 76,974 <F1>| 249,655 305,905 301,946 359,148
---------- | ------------- ---------- ---------- ----------
Operating income (loss)........ ( 4,913) | 46,004 50,337 38,405 53,751
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)
---------- | ------------- ---------- ----------- ---------
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
========== | ============= ========== =========== =========

<FN>
<F1> Includes a provision of $16,048 for executive severance benefits.
</FN>
</TABLE>

<PAGE>

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.

<PAGE>

PART IV

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

PAGE
REFERENCE TO
1996 10-K
------------
A. INDEX

1. FINANCIAL STATEMENTS:

Report of Independent Auditors - Ernst & Young LLP 21

Report of Independent Public
Accountants - Arthur Andersen LLP 22

Consolidated Balance Sheet as of December 31,
1996 and 1995 23-24

Consolidated Statement of Income for the Year Ended
December 31, 1996, the Periods January 1, 1995 to
January 17, 1995, and January 18, 1995 to December
31, 1995, and the Year Ended December 31, 1994 25

Consolidated Statement of Common Stockholder's
Equity for the Year Ended December 31, 1996, the
Periods January 1, 1995 to January 17, 1995, and
January 18, 1995 to December 31, 1995, and the Year
Ended December 31, 1994 26

Consolidated Statement of Cash Flows for the Year
Ended December 31, 1996, the Periods January 1, 1995
to January 17, 1995, and January 18, 1995 to December
31, 1995, and the Year Ended December 31, 1994 27-28

Notes to Consolidated Financial Statements 29-57

<PAGE>

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.

(2) PLAN OF ACQUISITION, REORGANIZATION ARRANGEMENT, LIQUIDATION OR SUCCESSION

- 1 Agreement and Plan of Merger dated as of December 12, 1994 by and
among The Williams Companies, Inc., WC Acquisition Corp. and
Transco Energy Company. (Exhibit 2 to Transco Energy Company
Schedule 14D-9 Commission File Number 005-19963)

- 2 Amendment to Agreement and Plan of Merger dated as of February
17, 1995 by and among The Williams Companies, Inc., WC
Acquisition Corp. and Transco Energy Company. (Exhibit (2)-2 to
Transco Energy Company Form 10-K for 1994 Commission File
Number 1-7513)

- 3 Stock Option Agreement dated as of December 12, 1994 by and
between The Williams Companies, Inc. and Transco Energy Company.
(Exhibit 3 to Transco Energy Company Schedule 14D-9 Commission
File Number 005-19963)

( 3) ARTICLES OF INCORPORATION AND BY-LAWS

- 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)

<PAGE>

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
(Exhibit (3)-2 to Transco Form 10-K for 1995 Commission File
Number 1-7584)

(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES

- 1 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

<PAGE>

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)

- 2 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)

- 3 Indenture dated July 15, 1996 between Transco and Citibank, N.A., as
Trustee (Exhibit 4.1 to Transco Form S-3 dated April 2, 1996 Transco
Registration Statement No. 333-2155)

- 4 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)

- 5 Amended and Restated Credit Agreement dated as of December 20,
1996 by and among Transco, The Williams Companies, Texas Gas
Transmission Corporation, Northwest Pipeline Corporation, Williams
Pipe Line Company, Williams Holdings of Delaware, Inc. and Citibank
N.A. as agent and the Banks named therein (Exhibit 4(c) to The
Williams Companies Form 10-K for 1996 Commission File Number
1-4174)

(10) MATERIAL CONTRACTS

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

- 2 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)

<PAGE>

(21) SUBSIDIARIES OF THE REGISTRANT

(24) POWER OF ATTORNEY WITH CERTIFIED RESOLUTION

(27) FINANCIAL DATA SCHEDULE

4. REPORTS ON FORM 8-K:

None.

<PAGE>

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 26th day of
March, 1997.

TRANSCONTINENTAL GAS PIPE
LINE CORPORATION
Registrant

By: /s/ NICK A. BACILE
-----------------------------
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 26th day of March, 1997, below by the
following persons on behalf of the registrant and in the capacities indicated.

SIGNATURE TITLE

/s/ KEITH E. BAILEY * Chairman of the Board
----------------------
Keith E. Bailey

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

/s/ CUBA WADLINGTON, Jr.* Director
----------------------------
Cuba Wadlington, Jr.

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

/s/ ROBERT S. BAHNICK * Director
-------------------------
Robert S. Bahnick

/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

* By /s/ NICK BACILE
--------------------------
Nick A. Bacile
Attorney-in-fact

<PAGE>

Exhibit (21)

TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SUBSIDIARIES

% Owned State of
Subsidiary Name By Parent Incorporation

Pine Needle Operating Company 100.00 Delaware
TransCarolina LNG Company 100.00 Delaware
Cardinal Operating Company 100.00 Delaware
TransCardinal Company 100.00 Delaware
WGP Enterprises, Inc. 100.00 Delaware

<PAGE>

Exhibit (24)

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of the undersigned
individuals, in their capacity as a director or officer, or both, as hereinafter
set forth below their signature, of TRANSCONTINENTAL GAS PIPE LINE CORPORATION,
a Delaware corporation ("TGPL"), does hereby constitute and appoint NICK A.
BACILE, WILLIAM G. VON GLAHN and RANDALL R. CONKLIN their true and lawful
attorneys and each of them (with full power to act without the others) their
true and lawful attorneys for them and in their name and in their capacity as a
director or officer, or both, of TGPL, as hereinafter set forth below their
signature, to sign TGPL's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended December 31, 1996, and any and
all amendments thereto or all instruments necessary or incidental in connection
therewith; and

THAT the undersigned TGPL does hereby constitute and appoint NICK
A. BACILE, WILLIAM G. VON GLAHN and RANDALL R. CONKLIN its true and lawful
attorneys and each of them (with full power to act without the others) its true
and lawful attorney for it and in its name and on its behalf to sign said Form
10-K and any and all amendments thereto and any and all instruments necessary or
incidental in connection therewith.

Each of said attorneys shall have full power of substitution and
resubstitution, and said attorneys or any of them or any substitute appointed by
any of them hereunder shall have full power and authority to do and perform in
the name and on behalf of each of the undersigned, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
to all intents and purposes as each of the undersigned might or could do in
person, the undersigned hereby ratifying and approving the acts of said
attorneys or any of them or of any such substitute pursuant hereto.

IN WITNESS WHEREOF, the undersigned have executed this
instrument, all as of the 20th day of March, 1997.

/s/ Brian E. O'Neill /s/ Nick A. Bacile
- ----------------------------- --------------------------------
Brian E. O'Neill Nick A. Bacile
President and Vice President,
Chief Executive Officer Treasurer, Controller
(Principal Executive Officer) & Assistant Secretary
(Principal Financial &
Accounting Officer)

<PAGE>

Page 2

/s/ Robert S. Bahnick /s/ Keith E. Bailey
- ------------------------------- ------------------------------
Robert S. Bahnick Keith E. Bailey
Director Director

/s/ Frank J. Ferazzi /s/ Thomas P. Griffin
- ------------------------------- -------------------------------
Frank J. Ferazzi Thomas P. Griffin
Director Director

/s/ Lewis A. Posekany, Jr. /s/ Cuba Wadlington, Jr.
- ------------------------------- --------------------------------
Lewis A. Posekany, Jr. Cuba Wadlington, Jr.
Director Director

TRANSCONTINENTAL GAS PIPE LINE
CORPORATION

By /s/ Nick A. Bacile
--------------------------
Nick A. Bacile
ATTEST: Vice President

/s/ David M. Higbee
- -------------------------
David M. Higbee
Secretary

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CERTIFICATION OF BOARD OF DIRECTORS RESOLUTION

I, the undersigned, RANDALL R. CONKLIN, Assistant Secretary of
TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware corporation (hereinafter
called the "Corporation"), do hereby certify that pursuant to Section 141(f) of
the General Corporation Law of Delaware, the Board of Directors of this
Corporation unanimously consented, as of January 16, 1997, to the following:

RESOLVED that the Chairman of the Board, the President or any Vice
President of the Corporation be, and each of them hereby is, authorized and
empowered to execute a Power of Attorney for use in connection with the
execution and filing, for and on behalf of the Corporation, under the Securities
Exchange Act of 1934, of the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.

I further certify that the foregoing resolution has not been
modified, revoked or rescinded and is in full force and effect.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of TRANSCONTINENTAL GAS PIPE LINE CORPORATION this 20th day of
March, 1997.

/s/ RANDALL R. CONKLIN
-------------------------------
Randall R. Conklin
Assistant Secretary

(CORPORATE SEAL)

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996, CONTAINED IN
TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 1996 REPORT ON FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,774
<SECURITIES> 0
<RECEIVABLES> 48,711
<ALLOWANCES> 0
<INVENTORY> 69,461
<CURRENT-ASSETS> 466,589
<PP&E> 3,738,550
<DEPRECIATION> 318,234
<TOTAL-ASSETS> 4,059,527
<CURRENT-LIABILITIES> 557,661
<BONDS> 681,076
<COMMON> 0
0
0
<OTHER-SE> 1,819,214
<TOTAL-LIABILITY-AND-EQUITY> 4,059,527
<SALES> 806,691
<TOTAL-REVENUES> 1,594,829
<CGS> 806,690
<TOTAL-COSTS> 1,252,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,305
<INCOME-PRETAX> 154,156
<INCOME-TAX> 58,613
<INCOME-CONTINUING> 95,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,543
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>