TRANSCONTINENTAL GAS PIPE LINE CORP, 10-K, 1998-03-30

TRANSCONTINENTAL GAS PIPE LINE CORP
10-K, 1998-03-30
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, 1997
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, 1998 WAS 100.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(I)(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, 1997 was
1,512.

Transco is an indirect 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, 1997, Transco's system had a mainline delivery capacity
of approximately 3.8 Bcf<F1> 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 approximately 6.7 Bcf

<F1>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>

of gas per day. The system is composed of approximately 10,500 miles of mainline
and branch transmission pipelines, 43 compressor stations, six storage locations
and four processing plants. Compression facilities at sea level rated capacity
total approximately 1.3 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 top gas 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), an affiliate of Transco. The net book value recorded
by Transco at December 31, 1997 of the facilities, including the purchase price
allocation to Transco, was approximately $529 million. Estimated operating
income recorded by Transco for the year ended December 31, 1997 associated with
the facilities was $15 million; however, such operating income may not be
representative of the effects of the spin-down on Transco's future operating
income due to various factors, including future regulatory actions.
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. 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. In August 1997, Transco and WGP filed a motion for
expedited rehearing. Pending the outcome of the rehearing request and in an
effort to expedite abandonment of at least a portion of the facilities included
in the February 1996 application, in February 1998, Transco filed a separate
application with the FERC seeking authorization to abandon by conveyance to WGP,
Transco's onshore Tilden/McMullen gathering system which is located in Texas.
The net book value at December 31, 1997, of the Tilden/McMullen facilities was
$25 million, the entirety of which is included in the $529 million net book
value for the facilities described in the February 1996 application.

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
1997, Public Service Electric and Gas Company, 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 1997, 1996 and 1995 are
shown below.
<TABLE>
<CAPTION>

Transco System Deliveries (TBtu) 1997 1996 1995
- -------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Market-area deliveries:
Long-haul transportation...................... 940.2 948.9 858.4
Market-area transportation.................... 438.9 428.1 467.3
---------- ---------- ----------
Total market-area deliveries.................. 1,379.1 1,377.0 1,325.7
Production-area transportation..................... 186.8 210.0 165.9
---------- ---------- ----------
Total system deliveries............................ 1,565.9 1,587.0 1,491.6
========== ========== ==========

Average Daily Transportation Volumes (TBtu)........ 4.3 4.3 4.1
Average Daily Firm Reserved Capacity (TBtu)........ 5.5 5.2 5.2
</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 In November 1997, Transco completed and placed
into service the SunBelt Expansion Project. This project added approximately 146
MMcf/d of firm transportation capacity to markets in Georgia, South Carolina and
North Carolina. The total cost of the expansion was approximately $85 million,
of which $61 million was invested in 1997.

MOBILE BAY LATERAL EXPANSION PROJECT In January 1998, the FERC approved the
Mobile Bay Lateral Expansion Project, an expansion of Transco's existing
123-mile Mobile Bay Lateral. The project is expected to provide new firm
transportation capacity of 350 MMcf/d from the outer continental shelf to
Transco's Station 82 and increase capacity on the existing onshore lateral from
520 MMcf/d to 784 MMcf/d. The project is targeted to be placed into service in
two phases during 1998 at a cost of approximately $120 million, of which
approximately $36 million was invested during 1997.

PINE NEEDLE LNG COMPANY, LLC In February 1997, Pine Needle LNG Company,
LLC, which is owned by wholly-owned subsidiaries of Transco and several of its
major customers, commenced construction of its liquefied natural gas (LNG)
storage project in

<PAGE>

Guilford County, North Carolina. The project will have 4 Bcf of storage capacity
and 400 MMcf/d of withdrawal capacity, and is expected to be placed into service
on or about May 1, 1999. The project is estimated to cost approximately $107
million. Wholly-owned subsidiaries of Transco will operate the facility and have
a 35% ownership interest. Transco expects to make equity investments of
approximately $19 million in this project.

CARDINAL PIPELINE SYSTEM PROJECT In November 1997, the North Carolina
Utilities Commission issued an order approving the Cardinal Pipeline System
Project. Wholly-owned subsidiaries of Transco and three of its North Carolina
customers will own Cardinal, which will involve the acquisition of the existing
37-mile Cardinal pipeline in North Carolina and construction of an approximately
67-mile extension of the pipeline to new interconnections near Clayton County,
North Carolina. This project will provide 140 MMcf/d of additional firm
transportation capacity to North Carolina markets and is expected to be placed
into service by the end of 1999. A wholly owned subsidiary of Transco will
operate the pipeline and have a 45% ownership interest in the project. Transco
expects to make equity investments of approximately $22 million in this project,
of which approximately $0.9 million was invested during 1997.

SEABOARD AND POCONO EXPANSION PROJECTS In April 1997, Transco withdrew its
FERC certificate application for the Seaboard Expansion Project and filed an
application with the FERC for the Pocono Expansion Project, which was completed
and placed into service in November 1997. Pocono added 35 MMcf/d of firm
transportation capacity on Transco's Leidy Line in Pennsylvania. The estimated
cost of the expansion is approximately $9.8 million.

PIEDMONT/MAIDEN LATERAL EXPANSION PROJECT In August 1997, the FERC issued a
certificate authorizing Transco to expand its existing Maiden Lateral to
Piedmont Natural Gas Company, Inc. in Lincoln and Catawba Counties, North
Carolina. The project facilities include 17.77 miles of 16-inch pipeline loop
and an expansion of Transco's existing Lowesville Meter Station. The project was
placed into service in November 1997. The estimated cost for the facilities is
approximately $13 million.

1998 CHEROKEE EXPANSION PROJECT In January 1998, the FERC approved the 1998
Cherokee Expansion Project, an incremental expansion of Transco's pipeline
system in its southern market area which will provide approximately 84 MMcf/d of
new firm transportation capacity on Transco's system by a proposed in-service
date of November 1, 1998. The estimated cost for this project is $68 million, of
which $9.3 million was invested during 1997.

CUMBERLAND PIPELINE PROJECT In December 1997, wholly-owned subsidiaries of
Transco and AGL Resources Inc. (AGL) formed Cumberland Gas Pipeline Company.
Under this project, existing pipeline facilities of Transco and AGL will be
expanded northward into Tennessee, establishing a 135-mile pipeline that is
expected to provide firm

<PAGE>

transportation capacity to markets in Georgia and Tennessee by the 2000-2001
winter heating season. The project is expected to be submitted for FERC approval
in the third quarter of 1998. Wholly-owned subsidiaries of Transco will operate
the pipeline facilities and have a 50% ownership interest. Transco estimates
that the total cost of this project will be up to $115 million, and expects to
make equity investments of up to $29 million. To complement the Cumberland
project, Transco will offer additional pipeline capacity from the terminus of
its existing Mobile Bay Lateral in Choctaw County, Alabama, to its interconnect
with Cumberland at Transco's Station 125 in Walton County, Georgia, at a cost of
up to $120 million.

MARKETLINK EXPANSION PROJECT In March 1997, Transco announced its
MarketLink Expansion Project. MarketLink will expand Transco's Leidy Line and
market-area mainline facilities, providing the final transportation link for
several pipeline projects designed to transport Canadian and Rocky Mountain gas
supplies to eastern markets. The total cost and capacity of the project, which
is targeted to be in service for the 1999-2000 winter heating season, will be
determined based on market subscriptions. Transco plans to file for FERC
approval of the project during the first quarter of 1998.

INDEPENDENCE PIPELINE PROJECT In March 1997, Independence Pipeline Company
(Independence) filed with the FERC an application, which was amended in December
1997, for approval to construct and operate a pipeline consisting of
approximately 400 miles of 36-inch diameter pipe from ANR Pipeline Company's
existing compressor station at Defiance, Ohio to Transco's facilities at Leidy,
Pennsylvania. Independence will provide approximately 916 MMcf/d of firm
transportation capacity and is expected to be in service in the 1999-2000 time
frame. The estimated cost of the project is $678 million, and Transco's equity
contributions will be approximately $68 million based on its expected one-third
ownership interest in the project.

CROSS BAY PIPELINE PROJECT In January 1998, Transco and Duke Energy
Corporation announced plans to form a joint venture to develop a new natural gas
pipeline project into New York City. The project, called the Cross Bay Pipeline,
will combine Duke's previously announced Excelsior(sm) project with the existing
Long Beach delivery facilities on Transco's system into a new integrated
delivery pipeline. The project will provide up to 700 MMcf/d of natural gas
deliveries on a phased-in basis, with the in-service date of the initial phase
being targeted for 1999.

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

<PAGE>

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."

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.

Transco's gas sales volumes managed by WESCO and TGMC for the years 1997,
1996 and 1995 are shown below.

Gas Sales Volumes (TBtu) 1997 1996 1995
- ------------------------ ------- ------- -------
Long-term sales........................... 192.9 227.9 219.7
Short-term sales.......................... 21.8 37.9 95.5
------- ------- -------
Total gas sales...................... 214.7 265.8 315.2
======= ======= =======

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."

<PAGE>

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.

INTRASTATE GAS PIPELINE OPERATIONS The Cardinal Pipeline System Project
(see Part I, Item 1, Pipeline Projects) is a North Carolina natural gas pipeline
project which is subject to the jurisdiction of the North Carolina Utilities
Commission.

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."

COMPETITION

Although Transco continues to be regulated by the FERC pursuant to the
Natural Gas Act and the NGPA, 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.

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

<PAGE>

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. Transco continues to
charge rates that are approved by the FERC on a cost of service basis.

Transco is aware that several state jurisdictions have been involved in
implementing changes similar to the changes that have occurred at the federal
level under Order 636. Such activity, frequently referred to as "LDC
unbundling," has been most pronounced in the states of New York, New Jersey,
Georgia, and Pennsylvania. New York and New Jersey began establishing LDC
unbundling regulations in 1995 and continue to develop regulations regarding LDC
unbundling. Georgia enacted an LDC unbundling program in 1997. Pennsylvania is
currently considering LDC unbundling and may enact such legislation in 1998. In
addition, Maryland and Delaware currently have pilot unbundling programs for
industrial, commercial, and residential end-users. Management expects these
regulations to encourage greater competition in the natural gas marketplace.

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.

FORWARD-LOOKING INFORMATION

Certain matters discussed in this report, excluding historical information,
include forward-looking statements that are subject to risks and uncertainties.
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.

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

<PAGE>

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 the
resolution of other matters discussed herein; 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.

GATHERING FACILITIES SPIN-DOWN ORDER (DOCKET NOS. CP96-206-000 AND
CP96-207- 000) 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 recorded by Transco at December 31, 1997 of the facilities, including the
purchase price allocation to Transco, was approximately $529 million. Estimated
operating income recorded by Transco for the year ended December 31, 1997
associated with the facilities was $15 million; however, such operating income
may not be representative of the effects of the spin-down on Transco's future
operating income due to various factors, including future regulatory actions.
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. 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, and in August 1997 filed a request that rehearing be
expedited. Pending the outcome of the rehearing request and in an effort to
expedite abandonment of at least a portion of the facilities included in the
February 1996 application, in February 1998 Transco filed a separate application
with the FERC seeking authorization to abandon by conveyance to WGP, Transco's
onshore Tilden/McMullen gathering system which is located in Texas. The net book
value at December 31, 1997 of the Tilden/McMullen facilities was $25 million,
the entirety of which is included in the $529 million net book value for the
facilities described in the February 1996 application.

<PAGE>

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 entered into certain settlements which may require
the indemnification by Transco of certain claims for additional royalties which
the producers may be required to pay as a result of such settlements. 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). In this lawsuit, the plaintiff has claimed approximately $23
million, including interest and attorneys' fees for reimbursements of settlement
amounts paid to royalty owners. On October 16, 1997, a jury verdict in this case
found that Transco was required to pay Texaco damages of $14.5 million plus
$3.75 million in attorney's fees. The trial judge initially deferred entering
judgment and directed the parties to participate in mediation of this matter.
Following mediation, which did not result in a resolution of this matter, the
trial judge entered judgment consistent with the jury verdict and also awarded
prejudgment interest of $5.0 million. Transco continues to believe that it has
meritorious defenses to Texaco's claims which it intends to pursue vigorously on
appeal.

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 filed an answer denying liability
for the claim.

<PAGE>

OTHER LITIGATION 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. CXY has since amended its original
petition to demand an accounting under the seven contracts through the year
1992. 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.

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, measured on an undiscounted
basis. 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, 1997, 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.

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

<PAGE>

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 information requests 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.

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

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

<PAGE>

ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE 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 bank
credit agreement and short-term money market facilities and, if required, by
advances from Williams.

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 also a party to two short-term money market
facilities, under which it can borrow up to an aggregate of $90 million. In
October 1997, Transco borrowed $160 million under the Credit Agreement to fund
the redemption of its 9.125% Debentures at a total redemption price of $156.4
million, plus accrued interest. At December 31, 1997, this amount remained
outstanding. There were no outstanding borrowings under the money market
facilities. Advances due Transco by Williams totaled $281 million.

In July 1997, Transco entered into a $150 million, five-year term bank
agreement with a variable interest rate based on the London Interbank Offered
Rate. Proceeds from this borrowing were used for general corporate purposes. In
January 1998, Transco issued $200 million of 6.125% Notes and $100 million of
6.25% Notes. Proceeds from the Notes were used for general corporate purposes,
including the repayment of $160 million borrowed under the Credit Agreement.

<PAGE>

CAPITAL EXPENDITURES

As shown in the table below, Transco's capital expenditures for 1997
included $92 million for market-area projects, primarily for the SunBelt
Expansion Project, $48 million for supply-area projects, primarily for the
Mobile Bay Lateral Expansion Project, and $103 million for maintenance of
existing facilities and other projects. Transco has budgeted approximately $462
million for 1998 capital expenditures related to expansion projects in the
market and supply areas and the maintenance of existing facilities.

Budget Actual
-------- ----------------------------
Capital Expenditures 1998 1997 1996 1995
- -------------------- -------- -------- -------- --------
(In millions)
Market-Area Projects........ $ 103.0 $ 91.8 $ 44.5 $ 67.4
Supply-Area Projects........ 267.6 47.7 0.3 7.7
Maintenance of Existing Facilities
and Other Projects....... 91.1 103.3 233.1 169.6
-------- -------- -------- --------

Total Capital Expenditures $ 461.7 $ 242.8 $ 277.9 $ 244.7
======== ======== ======== ========

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.

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. RP95-197 and RP97-71) under which all issues
have not been resolved. Transco has provided reserves which it believes are
adequate for any refunds that may be required under Docket Nos. RP95-197 and
RP97-71.

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

<PAGE>

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.

YEAR 2000 COMPLIANCE Williams and its wholly-owned subsidiaries, which
includes Transco, has initiated an enterprise-wide project to address the year
2000 compliance issue for all technology hardware and software, external
interfaces with customers and suppliers, operations process control, automation
and instrumentation systems and facility items. The assessment phase of this
project as it relates to traditional information technology areas should be
substantially complete by the beginning of the second quarter of 1998.
Completion of the assessment phase for non-traditional information technology
areas is expected in mid-1998. Necessary conversion and replacement activities
will begin in 1998 and continue through mid-1999. Testing of systems has begun
and will continue throughout the process. Transco has initiated a formal
communications process with other companies with which Transco's systems
interface or rely on to determine the extent to which those companies are
addressing their year 2000 compliance, and where necessary, Transco will be
working with those companies to mitigate any material adverse effect to Transco.

Transco expects to utilize both internal and external resources to complete
this process. Costs incurred for new software and hardware purchases will be
capitalized and other costs will be expensed as incurred. While the total cost
of this project is still being evaluated, Transco estimates that external costs,
excluding previously planned system replacements, necessary to complete the
project within the schedule described will be approximately $4 million to $6
million. Transco will update this estimate as additional information becomes
available. The costs of the project and the completion dates are based on
management's best estimates, which were derived utilizing numerous assumptions

<PAGE>

of future events, including the continued availability of certain resources,
third party year 2000 modification plans and other factors. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from these estimates.

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 capital requirements.

RESULTS OF OPERATIONS

1997 COMPARED TO 1996

COMMON STOCK EQUITY IN NET INCOME AND OPERATING INCOME Transco's common
stock equity in net income for 1997 was $111.4 million, compared with common
stock equity in net income of $95.5 million for 1996. The 1997 results include
an after-tax extraordinary gain on reacquired debt of $2.9 million. Excluding
this gain, Transco's common stock equity in net income for 1997 would have been
$108.5 million. Operating income for 1997 was $232.0 million compared to
operating income of $208.6 million for 1996.

Excluding the extraordinary gain on reacquired debt, the higher common
stock equity in net income of $13 million and higher operating income of $23.4
million for 1997 were primarily due to lower operation and maintenance expenses,
benefits of the final phase of the Southeast Expansion Projects placed in
service in late 1996, new rates in the general rate case in Docket No. RP97-71
effective May 1, 1997 to recover costs associated with increased capital
expenditures, new services begun in the fourth quarter of 1997, and a $5.4
million credit to cost of natural gas transportation as a result of a settlement
related to a FERC Order 94-A rate proceeding. The positive operating income
variance was partially offset at the net income level by higher net interest
expense of $4.5 million primarily due to interest expense associated with
funding of capital projects, partially offset by a greater allowance for funds
used during construction of $1 million.

OPERATING COSTS AND EXPENSES Excluding the cost of sales and transportation
of $706 million and $884 million for 1997 and 1996, respectively, Transco's
operating expenses were $4 million higher in 1997 than in 1996. The increase was
primarily due to higher depreciation, largely offset by lower operation and
maintenance expense. The higher depreciation expense of $16 million was
primarily due to the effects of a downward adjustment to depreciation expense in
1996 to reflect the cost of service settlement in the

<PAGE>

general rate case in Docket No. RP95-197 and higher depreciation expense in 1997
associated with recent capital expenditures included in the general rate case in
Docket No. RP97-71. However, the effects on operating income of the depreciation
adjustment in 1996 and the higher depreciation expense associated with capital
expenditures were substantially offset by a corresponding variance in revenues.
The lower operation and maintenance expense of $13 million was primarily
attributable to a $7 million decrease in miscellaneous contractual services, a
$3 million decrease in lube oil and odorants expense, a $3 million decrease in
professional services, and a $2 million decrease in other supplies and
expenditures, partly offset by a $1 million increase in charges from others for
the operation of certain Transco facilities.

TRANSPORTATION SERVICES Transco's operating revenues, excluding sales and
storage services, decreased $16 million to $631 million for 1997, when compared
to 1996. The lower transportation revenues were primarily due to the effects of
having passed through to ratepayers a lower level of reimbursable costs that are
recovered in Transco's rates, partly offset by the benefits of the final phase
of the Southeast Expansion Projects placed in service in late 1996, new services
begun in the fourth quarter of 1997, new rates in the general rate case in
Docket No. RP97-71 effective May 1, 1997 to recover costs associated with
increased capital expenditures, and the effects of a downward adjustment in 1996
to reflect the cost of service settlement in the general rate case in Docket No.
RP95-197. The adjustment resulted in lower revenues and lower depreciation and
had no impact on operating income.

Transco's market-area deliveries for 1997 were comparable to 1996.
Transco's production-area deliveries for 1997 decreased 23.2 TBtu, or 11%, when
compared to 1996. The decreased deliveries were primarily due to milder weather
conditions in the first quarter of 1997 as compared to the same period in 1996.

As a result of a straight fixed-variable (SFV) rate design, increases or
decreases in firm transportation volumes have no significant impact on operating
income; however, because interruptible transportation rates have components of
fixed and variable cost recovery, increases or decreases in interruptible
transportation volumes do 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>

May 1995, Williams Energy Services Company (WESCO) became the successor to the
TGMC agency agreement and began to manage Transco's jurisdictional merchant
sales. The long-term purchase agreements managed by WESCO remain in Transco's
name, as do the corresponding sales of such purchased gas. Therefore, Transco
continues to record natural gas sales revenues and the related accounts
receivable and cost of natural gas sales and the related accounts payable for
the jurisdictional merchant sales that are managed by WESCO. Through the agency
agreement, WESCO receives all margins associated with jurisdictional merchant
gas sales 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 operation.

Transco's operating revenues related to its sales services, including cash
out sales in settlement of gas imbalances, decreased $136 million to $671
million for 1997, when compared to 1996. The decrease was primarily due to a
significantly lower volume of gas sales in Transco's jurisdictional merchant
sales services. However, this decrease in revenues had no effect on Transco's
operating or net income variances when compared to the prior year since the
decrease in revenues was offset by a corresponding decrease in the cost of
sales.

STORAGE SERVICES Transco's operating revenues related to storage services
of $141.1 million for 1997 were comparable to storage revenues of $140.7 million
for 1996.

1996 COMPARED TO 1995

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.

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.

<PAGE>

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 $26 million was primarily due to a reduction in depreciation rates as
a result of the cost of service settlement in the general rate case in Docket
No. 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 the general rate
case in Docket No. RP95- 197. Current FERC policy does not permit Transco to
recover through rates the amortization of amounts 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 $1 million was primarily due to lower information services
and processing costs ($8 million), partly offset by higher allocated corporate
overhead costs from Williams ($3 million), higher labor ($2 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 the effects of
having passed through to ratepayers a lower level of reimbursable costs, and
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.

<PAGE>

SALES SERVICES 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 the general rate case in Docket No. RP95-197
were lower than those included in the prior rate case.

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
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.................................... 23
Consolidated Balance Sheet........................................ 24-25
Consolidated Statement of Income.................................. 26
Consolidated Statement of Common Stockholder's Equity............. 27
Consolidated Statement of Cash Flows.............................. 28-29
Notes to Consolidated Financial Statements........................ 30-57

<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, 1997 and 1996, and
the related consolidated statements of income, common stockholder's equity, and
cash flows for the years ended December 31, 1997 and 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.

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, 1997 and 1996, and
the consolidated results of its operations and its cash flows for the years
ended December 31, 1997 and 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 13, 1998

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
THOUSANDS OF DOLLARS

December 31, December 31,
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash................................................ $ 1,321 $ 1,774
Receivables:
Trade (Notes 4 and 8 )............................ 23,315 48,711
Affiliates........................................ 868 1,761
Advances to affiliates............................ 281,454 148,496
Federal income tax benefits receivable from affiliate - 3,076
State income tax benefits......................... 2,560 -
Other............................................. 1,618 2,300
Transportation and exchange gas receivables:
Affiliates........................................ 23,567 22,111
Others............................................ 66,825 72,900
Inventories:
Gas in storage, at LIFO........................... 38,160 36,920
Materials and supplies, at lower of average cost or market 29,455 30,623
Gas available for customer nomination............. 16,625 1,918
Deferred income tax asset (Note 7).................. 90,672 76,192
Other............................................... 17,570 19,807
----------- -----------
Total current assets.............................. 594,010 466,589
----------- -----------

Investments, at cost plus equity in undistributed earnings 7,072 5,865
----------- -----------

Property, Plant and Equipment:
Natural gas transmission plant...................... 3,977,620 3,738,550
Less - Accumulated depreciation and amortization.... 477,667 318,234
----------- -----------
Total property, plant and equipment, net.......... 3,499,953 3,420,316
----------- -----------

Other Assets........................................... 166,628 166,757
----------- -----------

$ 4,267,663 $ 4,059,527
=========== ===========

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,
1997 1996
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt (Note 4).............. $ - $ 99,000
Payables:
Trade................................................... 60,941 65,019
Affiliates.............................................. 44,749 70,283
Other................................................... 29,545 19,007
Transportation and exchange gas payable:
Affiliates.............................................. 374 190
Others.................................................. 18,033 27,050
Accrued liabilities:
Federal income taxes payable to affiliate............... 27,686 -
State income taxes...................................... - 715
Other taxes............................................. 20,667 17,131
Interest................................................ 13,087 20,377
Employee benefits ...................................... 46,644 41,655
Other................................................... 22,510 24,411
Reserve for rate refunds................................... 204,554 172,823
------------ -----------
Total current liabilities............................... 488,790 557,661
------------ -----------

Long-Term Debt, less current maturities (Note 4).............. 837,832 681,076
------------ -----------

Other Long-Term Liabilities:
Deferred income taxes (Note 7)............................. 843,108 833,928
Other...................................................... 171,586 167,648
------------ -----------
Total other long-term liabilities....................... 1,014,694 1,001,576
------------ -----------

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.......................................... 273,917 166,784
------------ -----------
Total common stockholder's equity....................... 1,926,347 1,819,214
------------ -----------
$ 4,267,663 $ 4,059,527
============ ===========

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
<TABLE>
<CAPTION>

Post-Acquisition Pre-Acquisition
-------------------------------------------------------------- | -------------------
For the Year Ended For the Year Ended For the Period | For the Period
December 31, December 31, January 18, 1995 | January 1, 1995
1997 1996 to December 31, 1995 | to January 17, 1995
------------------ ------------------ --------------------- | -------------------
<S> <C> <C> <C> | <C>
Operating Revenues: |
Natural gas sales....................... $ 670,879 $ 806,691 $ 587,568 | $ 31,701
Natural gas transportation.............. 623,018 640,096 667,601 | 32,775
Natural gas storage..................... 141,108 140,745 147,398 | 7,452
Other................................... 8,294 7,297 2,584 | 133
------------- ----------- ------------ | ------------
Total operating revenues.............. 1,443,299 1,594,829 1,405,151 | 72,061
------------- ----------- ------------ | ------------
|
Operating Costs and Expenses: |
Cost of natural gas sales............... 670,879 806,690 586,878 | 31,691
Cost of natural gas transportation...... 34,718 77,369 119,455 | 6,279
Operation and maintenance............... 185,175 197,953 194,441 | 8,722
Administrative and general.............. 124,145 124,094 118,870 | 6,657
Provision for executive severance benefits - - - | 16,048
Depreciation and amortization (Note 2).. 157,883 142,301 162,135 | 5,966
Taxes - other than income taxes......... 36,745 36,471 33,818 | 1,558
Other................................... 1,787 1,307 1,057 | 53
------------- ----------- ------------ | -----------
Total operating costs and expenses.... 1,211,332 1,386,185 1,216,654 | 76,974
------------- ----------- ------------ | -----------
|
Operating Income (Loss).................... 231,967 208,644 188,497 | (4,913)
------------- ----------- ------------ | -----------
|
Other (Income) and Other Deductions: |
Interest expense - affiliates .......... 2 - 305 | 2
- other................ 71,637 64,305 56,132 | 2,678
Interest income - affiliates........... (9,213) (5,895) (1,821) | (207)
- other................ (50) (569) (630) | (12)
Allowance for equity and borrowed funds |
used during construction (AFUDC)..... (7,771) (6,800) (6,870) | (234)
Miscellaneous other deductions, net..... 2,240 3,447 315 | 213
------------- ----------- ------------ | -----------
Total other (income) and other deductions 56,845 54,488 47,431 | 2,440
------------- ----------- ------------ | -----------
|
Income (Loss) before Income Taxes and |
Extraordinary Item................. 175,122 154,156 141,066 | (7,353)
Provision for Income Taxes (Note 7)..... 66,594 58,613 54,478 | 2,309
-------------- ----------- ------------ | ----------
Income (Loss) before Extraordinary Item. 108,528 95,543 86,588 | (9,662)
Extraordinary Item - Net Gain on |
Reacquired Debt (Note 4)............ 2,860 - - | -
-------------- ----------- ------------ | ----------
Net Income (Loss) 111,388 95,543 86,588 | (9,662)
Dividends on Preferred Stock............ - - 722 | 194
-------------- ----------- ------------ | ----------
Common Stock Equity in Net Income (Loss) $ 111,388 $ 95,543 $ 85,866 | $ (9,856)
============== =========== ============ | ==========

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

</TABLE>
26

<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 Year Ended For the Period | For the Period
December 31, December 31, January 18, 1995 | January 1, 1995
1997 1996 to December 31, 1995 | to January 17, 1995
------------------ ------------------ -------------------- | -------------------
<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 1,652,430 285,792 | 285,792
Add (deduct): |
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 | -
Non-cash return of capital ......... - - (698) | -
Loss on reacquired preferred stock . - - (369) | -
------------ ------------ ------------ | ------------
|
Balance at end of period.............. 1,652,430 1,652,430 1,652,430 | 285,792
------------ ------------ ------------ | ------------
|
Retained Earnings: |
Balance at beginning of period........ 166,784 84,401 519,179 | 529,035
Add (deduct): |
Net income (loss)................... 111,388 95,543 86,588 | (9,662)
Cash dividends on common stock...... (4,255) (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)
------------ ------------ ------------ | ------------
|
Balance at end of period.............. 273,917 166,784 84,401 | 519,179
------------ ------------ ------------ | ------------
|
Total Common Stockholder's Equity..... $ 1,926,347 $ 1,819,214 $ 1,736,831 | $ 804,971
============ ============ ============ | ============

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 Year Ended For the Period | For the Period
December 31, December 31, January 18, 1995 | January 1, 1995
1997 1996 to December 31, 1995 | to January 17, 1995
------------------ ------------------ -------------------- | -------------------
<S> <C> <C> <C> | <C>
Cash flows from operating activities: |
Net income (loss)........................ $ 111,388 $ 95,543 $ 86,588 | $ (9,662)
Adjustments to reconcile net income (loss) to net |
cash provided by (used in) operating activities: |
Extraordinary Item - Net Gain on Reacquired Debt (2,860) - - | -
Depreciation and amortization (Note 2) 164,224 149,359 165,666 | 6,083
Deferred income taxes (Note 7)........ (7,029) (44,219) (18,168) | 5,348
Provision for (payment of) executive severance |
benefits............................ - (424) (14,849) | 16,048
Allowance for equity funds used during |
construction (Equity AFUDC)........ (5,377) (4,670) (5,769) | (190)
Changes in operating assets and liabilities: |
Receivables......................... 27,487 (3,519) 17,120 | (7,114)
Transportation and exchange gas receivable 4,619 46,608 (24,166) | (5,701)
Inventories......................... (14,779) (12,357) (752) | (2,647)
Payables............................ (18,481) (67,253) 50,468 | (8,059)
Transportation and exchange gas payable (8,833) (50,060) 22,461 | 4,934
Accrued liabilities................. 28,047 (40,122) 49,748 | (4,755)
Reserve for rate refunds............ 31,731 117,188 (10,749) | (26,846)
Other, net.......................... 5,657 15,298 (14,544) | 153
------------ ------------ ------------ | ------------
Net cash provided by (used in) operating |
activities....................... 315,794 201,372 303,054 | (32,408)
------------ ------------ ------------ | ------------
|
Cash flows from financing activities: (Notes 4 and 5) |
Capital contribution by parent........... - - 5,539 | -
Additions to long-term debt.............. 310,000 549,660 50,000 | -
Retirement of long-term debt............. (249,000) (425,000) (50,000) | -
Debt issue costs ........................ (253) (3,378) - | -
Retirement of preferred stock............ - - (49,744) | -
Advances from affiliates, net ........... - - (8,195) | 8,195
Dividends on preferred stock ............ - - (1,647) | -
Dividends on common stock................ (4,255) (4,814) - | -
------------ ------------ ------------ | ------------
Net cash provided by (used in) financing |
activities.......................... 56,492 116,468 (54,047) | 8,195
------------ ------------ ------------ | ------------
</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 Year Ended For the Period | For the Period
December 31, December 31, January 18, 1995 | January 1, 1995
1997 1996 to December 31, 1995 | to January 17, 1995
------------------ ------------------ -------------------- | -------------------
<S> <C> <C> <C> | <C>
|
Cash flows from investing activities: |
Property, plant and equipment: |
Additions, net of equity AFUDC........ (242,202) (286,084) (240,102) | (3,797)
Changes in accounts payable and accrued |
liabilities........................... (594) 8,217 329 | (1,099)
Sale of assets........................... - 2,561 8,154 | -
Advances to affiliates, net ............. (132,958) (43,997) (52,124) | 63,599
Other, net............................... 3,015 680 1,199 | (24)
------------ ------------ ------------ | ------------
Net cash provided by (used in) investing |
activities.......................... (372,739) (318,623) (282,544) | 58,679
------------ ------------ ------------ | ------------
|
Net increase (decrease) in cash ......... (453) (783) (33,537) | 34,466
Cash at beginning of period.............. 1,774 2,557 36,094 | 1,628
------------ ------------ ------------ | ------------
Cash at end of period.................... $ 1,321 $ 1,774 $ 2,557 | $ 36,094
============ ============ ============ | ============
|
|
Supplemental disclosures of cash flow information: |
Cash paid during the year for: |
Interest (exclusive of amount capitalized) $ 69,657 $ 51,483 $ 52,450 | $ 5,552
Income taxes paid................... 57,958 175,001 28,576 | 19,427
Income tax refunds received......... (11,821) (1,057) (22,454) | -

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

<PAGE>

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Structure and Control..................................... 30
2. Summary of Significant Accounting Policies.......................... 31
3. Contingent Liabilities and Commitments.............................. 34
4. Debt, Financing Arrangements and Leases............................. 45
5. Preferred Stock..................................................... 47
6. Employee Benefit Plans.............................................. 48
7. Income Taxes........................................................ 52
8. Financial Instruments............................................... 54
9. Transactions with Major Customers and Affiliates.................... 55
10. Quarterly Information (Unaudited)................................... 56

1. CORPORATE STRUCTURE AND CONTROL

Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned
subsidiary of Williams Interstate Natural Gas Systems, Inc. (WINGS). WINGS
is a wholly-owned subsidiary of The Williams Companies, Inc. (Williams). Prior
to May 1, 1995, Transco was a wholly-owned subsidiary of Transco Gas Company
(TGC). TGC is a wholly-owned subsidiary of Transco Energy Company (TEC).

On December 12, 1994, TEC and 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.

<PAGE>

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 million in 1995 and non-cash return of capital to
Williams of $0.7 million in 1995.

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

<PAGE>

currently expects to receive payment of these advances within the next twelve
months and has recorded such advances as current in the accompanying
Consolidated Balance Sheet. The interest rate on intercompany demand notes is
the London Interbank Offered Rate on the first day of the month plus a fixed
rate of 0.325%.

After FERC approval in January 1993, Transco realigned its gas marketing
business under the management of Transco Gas Marketing Company (TGMC), which,
through an agency agreement, began to manage all jurisdictional merchant gas
sales of Transco. In May 1995, Williams Energy Services Company (WESCO) became
the successor to the TGMC agency agreement and began to manage Transco's
jurisdictional merchant sales. The long-term purchase agreements managed by
WESCO remain in Transco's name, as do the corresponding sales of such purchased
gas. Therefore, Transco continues to record natural gas sales revenues and the
related accounts receivable and cost of natural gas sales and the related
accounts payable for the jurisdictional merchant sales that are managed by
WESCO. Through the agency agreement, WESCO receives all margins associated with
jurisdictional merchant gas sales 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 operation.

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.

Depreciation rates used for major regulated gas plant facilities at
year-end 1997, 1996, and 1995 were:

Category of Property 1997 1996 1995
- ---------------------- ----------- ----------- -----------

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

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

<PAGE>

Under the terms of a settlement in Transco's general rate case in Docket
No. RP95- 197, which was effective September 1, 1995, 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.

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.

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,
1997 and 1996, 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 $2.4 million, $2.1 million and $1.1 million for 1997, 1996 and 1995,
respectively. The allowance for equity funds was $5.4 million, $4.7 million and
$6.0 million for 1997, 1996 and 1995, respectively.

<PAGE>

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

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, 1997 and 1996.

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.

NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards
Board issued two new accounting standards, SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Both standards, effective for fiscal years
beginning after December 15, 1997, are disclosure oriented standards. Therefore,
neither standard will affect Transco's reported consolidated results of
operations, financial position or cash flows.

RECLASSIFICATIONS Certain reclassifications have been made in the 1996 and
1995 financial statements to conform to the 1997 presentation.

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.

<PAGE>

When stated on a comparable basis, the rates Transco placed into effect on
May 1, 1997, represent an annual cost of service increase of approximately $47
million over the cost of service underlying the rates contained in the
settlement of Transco's last general rate filing (Docket No. RP95-197). The
rates, which are subject to refund, are designed using the straight
fixed-variable rate design method.

The filing also included (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 make interruptible transportation (IT) backhaul rates
equal to the IT 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 20, 1998, Transco filed a Stipulation and Agreement for approval
by the FERC, documenting a settlement with all of the active parties in this
proceeding. The settlement resolves all cost of service, throughput and other
issues in this proceeding, except rate of return, capital structure and certain
minor cost allocation and rate design issues. The issues not resolved by the
settlement will be litigated by the parties.

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 have
generated additional annual jurisdictional revenues of approximately $132
million over the pre-filed rates in effect, based, among other things, on an
increase in Transco's cost of capital resulting from an increase in the equity
component of the capital structure used (the filing was based on Transco's own
capital structure) and in the cost of equity from the pre-filed rate of return
on equity of 14.45% 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 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

<PAGE>

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. 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.

At a prehearing conference, 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.

The hearing before the 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 Williams controlled Transco's financing and
imputed Williams' 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 Williams' 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%.

On August 1, 1997, the FERC issued an order modifying the initial decision
issued on December 18, 1996 by the ALJ in the Phase I proceeding determining the
capital structure and rate of return for Transco. As to capital structure, the
FERC reversed the ALJ's use of the Williams capital structure, and applied a new
modified capital structure policy to find that Transco's own capital structure,
consisting of 57.58% equity, should be used for developing the rate of return in
this proceeding. As to rate of return on equity, the FERC affirmed the overall
methodology used by the ALJ in his initial decision, but reversed the ALJ's
decision in order to revise the manner in which the long-range growth component
of that methodology is determined to be consistent with the FERC's recent
decisions on that issue. The order required that Transco make a compliance
filing consistent with the revised methodology, stating that refunds will be
determined once the FERC rules on that compliance filing. Transco has sought
rehearing of the FERC's order asserting, among other things, that the FERC's
methodology for calculating rates of return is flawed. Other parties in the case
have also sought rehearing of the FERC's order claiming, among other things,
that FERC should not have reversed the ALJ with respect to the issue of the
appropriate capital structure for ratemaking purposes.

On June 19, 1996, Transco filed with the FERC a Stipulation and Agreement
which resolved 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

<PAGE>

design issues. The agreement also reserved 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. Transco began billing the settlement rates to non-contesting
parties effective August 1, 1996.

On October 9, 1996, Transco filed with the FERC a Stipulation and Agreement
which, subject to the outcome of the litigation of the reserved issues in Phase
I and Phase II in this proceeding, settled 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 1, 1996, the FERC issued an order approving the June 19
agreement, and on December 23, 1996, FERC approved the October 9, 1996
agreement. On February 3, 1997, the FERC denied rehearing of its November 1,
1996 order. As a result, Transco made refunds on May 30, 1997 of approximately
$79.0 million, including interest, under Docket No. RP95-197 for which Transco
had previously provided a reserve.

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 to consider Transco's roll-in proposal filed in Docket No. RP97-71, as
discussed above, was completed in June 1997. The issues addressed in both
hearings are pending before the ALJ.

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).
Among other things, 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.

RATE OF RETURN CALCULATION As discussed above, on August 1, 1997, the FERC
issued an order addressing, among other things, the authorized rate of return
for Transco's 1995 rate case (Docket No. RP95-197). In the order, the FERC
continued its practice of utilizing a methodology for calculating rates of
return that incorporates a long-term growth rate component. The long-term growth
rate component used by the FERC is now a projection of U.S. gross domestic
product growth rates. Generally, calculating rates of

<PAGE>

return utilizing a methodology which includes a long-term growth rate component
results in rates of return that are lower than they would be if the long-term
growth rate component were not included in the methodology. As indicated above,
Transco has sought rehearing of the FERC order in an effort to have the FERC
change its rate of return methodology with respect to both pending and future
rate cases. On January 30, 1998, the FERC convened a public conference to
explore, among other things, possible modifications to the FERC's rate of return
methodology.

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, and also included a change to straight-fixed-variable (SFV) rate design.
On September 1, 1992, the increased rates went into effect, subject to refund.

On May 3, 1993, Transco filed with the FERC a Stipulation and Agreement
with regard to Docket No. RP92-137. On November 4, 1993, the FERC issued an
order accepting the settlement, and the settlement became effective on April 1,
1994. 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). During 1995, Transco made
refunds of approximately $62.2 million, including interest, under Docket No.
RP92-137 for which Transco had previously provided a reserve.

On September 17, 1992, the FERC issued a decision addressing the single
issue of the appropriate rate of return in Docket No. RP92-137. The FERC, using
a hypothetical capital structure based on the average capital structure of a
group of seven publicly-traded companies with pipeline subsidiaries, determined
Transco's appropriate rate of return on equity to be 14.45%. 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. On September 17, 1996, Transco made refunds required
under the FERC order of approximately $3.2 million, for which Transco had
previously provided a reserve. On November 5, 1997, the D.C. Circuit Court
denied a petition for review of the FERC's orders.

<PAGE>

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 area
mainline a priority over other interruptible transportation. On December 18,
1996, the FERC denied rehearing of its July 3, 1996 Order.

Several parties, including Transco, have filed petitions for review in the
D.C. Circuit Court of the FERC's orders addressing production area rate design
issues.

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).

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
is the issue of whether the separately stated gathering rates charged by Transco
should be subject to refund. On February 13, 1995, the D.C. Circuit Court issued
an order holding all appeals of

<PAGE>

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 was lifted.

On February 27, 1997, the FERC issued an order in response to the remand of
Order 636 by the D.C. Circuit Court in July 1996. 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 straight fixed variable 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.

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.

<PAGE>

Transco and WGP filed a joint request for rehearing of the FERC's September 25
order, and in August 1997 filed a request that rehearing be expedited. Pending
the outcome of the rehearing request and in an effort to expedite abandonment of
at least a portion of the facilities included in the February 1996 application,
in February 1998 Transco filed a separate application with the FERC seeking
authorization to abandon by conveyance to WGP, Transco's onshore Tilden/McMullen
gathering system which is located in Texas. The net book value at December 31,
1997 of the Tilden/McMullen facilities was $25 million, the entirety of which is
included in the $529 million net book value for the facilities described in the
February 1996 application.

LEGAL PROCEEDINGS

<PAGE>

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.

ENVIRONMENTAL MATTERS

<PAGE>

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, 1997,
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.

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.

<PAGE>

Transco operates facilities in some areas of the country currently designated as
non-attainment and it anticipates that in 1998 the EPA may designate additional
new non-attainment areas which might impact Transco's operations. Pursuant to
non-attainment area requirements of the 1990 Amendments, Transco is completing
scheduled installation of new air pollution controls on existing sources at
certain facilities in order to achieve attainment of air quality standards in
regions where they are not currently achieved, and anticipates that additional
facilities may be subject to increased controls within five years. For many of
these facilities, Transco is completing installation of more cost effective,
innovative compressor engine control designs developed by the Company, and it is
therefore not possible to precisely determine the control costs pending
completion of performance testing and final state approval. The control
additions described above, required to comply with current federal Clean Air Act
requirements and the 1990 Amendments, are estimated to cost in the range of $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. If the
EPA designates additional new non-attainment areas in 1998 which impact
Transco's operations, the cost of additions to property, plant and equipment is
expected to increase, but Transco is unable at this time to estimate with any
certainty the cost of additions that may be required. 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.

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 $54 million at
December 31, 1997 of which the majority relates to construction materials for
projects.

<PAGE>

4. DEBT, FINANCING ARRANGEMENTS AND LEASES

LONG-TERM DEBT At December 31, 1997 and 1996, long-term debt issues were
outstanding as follows (in thousands):

1997 1996
--------- ---------
Debentures:
9-1/8% due 1998-2017....................... $ - $150,000
7.08% due 2026............................. 200,000 200,000
7.25% due 2026............................. 200,000 200,000
--------- ---------
Total debentures....................... 400,000 550,000
--------- ---------

Notes:
8-1/8% due 1997............................ - 99,000
8-7/8% due 2002............................ 125,000 125,000
Variable rate due 2002..................... 150,000 -
Credit Agreement........................... 160,000 -
--------- ---------
Total notes............................ 435,000 224,000
--------- ---------
Total long-term debt issues................... 835,000 774,000
Unamortized debt premium................... 2,832 6,076
Current maturities......................... - (99,000)
--------- ---------

Total long-term debt, less current maturities. $837,832 $681,076
========= =========

Sinking fund or prepayment requirements applicable to long-term debt
outstanding at December 31, 1997 are as follows (in thousands):

2001:
7.08% Debentures.............................. $ 200,000
============

2002:
8-7/8% Note................................... $ 125,000
Variable rate note............................ 150,000
Credit Agreement.............................. 160,000
------------
Total...................................... $ 435,000
============

There are no sinking fund requirements applicable to long-term debt
outstanding for the years 1998 through 2000.

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

<PAGE>

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

On July 31, 1997, Transco entered into a $150 million, five-year bank
agreement, with variable interest rates based on the London Interbank Offered
Rate.

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. Interest rates vary with current market conditions based on
the base rate of Citibank N.A., three-month certificates of deposit of major
United States money market banks, federal funds rate or the London Interbank
Offered Rate. As of December 31, 1997, Transco had $160 million in outstanding
borrowings under this agreement.

In September 1997, Williams and certain of its subsidiaries, including
Transco, initiated a restructuring of its debt portfolio. On October 8, 1997,
Transco borrowed $160 million under the Credit Agreement to fund the redemption
of its entire $150 million issue of 9-1/8% Debentures originally due February 1,
2017, at a total redemption price of $156.4 million, plus accrued interest. As a
result of the revaluation of Transco's debt at the time of its acquisition by
Williams in 1995, Transco recorded an extraordinary gain of $4.6 million ($2.9
million, net of tax) from the early redemption of the 9-1/8% Debentures. The
$6.4 million premium will be amortized over the remaining original life of the
debentures based on FERC accounting requirements.

On January 16, 1998, Transco issued $200 million of notes that mature on
January 15, 2005, and $100 million of notes that mature on January 15, 2008,
which pay interest at 6-1/8% and 6-1/4%, respectively, per annum on January 15
and July 15 of each year, beginning July 15, 1998. The Notes are not subject to
redemption and have no sinking fund provisions. Proceeds from the Notes were
used for general corporate purposes, including the repayment of $160 million
borrowed under the Credit Agreement.

SHORT-TERM DEBT Transco is a party to two short-term money market
facilities, under which it can borrow up to an aggregate of $90 million.
Interest rates vary with current market conditions. During 1997 and 1996,
Transco had no borrowings under these agreements.

<PAGE>

RESTRICTIVE COVENANTS At December 31, 1997, none of Transco's debt
instruments restrict the amount of dividends distributable.

SALE OF RECEIVABLES Transco is a party to an agreement that expires on
January 29, 1999 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, 1997 and 1996, interests in $100 million of these receivables were
held by the investor.

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 various operating leases,
including the Transco Tower lease, net of future minimum sublease receipts under
Transco's existing sublease agreements, are as follows (in thousands):

Operating Leases
-----------------------------------------------
Transco Tower Other Leases Total
-------------- ------------ ----------

1998......................... $ 22,877 $ 3,709 $ 26,586
1999......................... 22,795 3,709 26,504
2000......................... 21,307 3,192 24,499
2001......................... 23,590 3,088 26,678
2002......................... 23,546 3,088 26,634
Thereafter................... 29,423 9,994 39,417
-------------- ----------- ----------
Total net minimum obligations $ 143,538 $ 26,780 $ 170,318
============== =========== ==========

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. The
$53.0 million liability is being amortized over the term of the lease.

Transco's lease expense was $18.0 million in 1997, $17.0 million in 1996
and $20.1 million in 1995.

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, 1997 or
1996. Transco has authorized 2,000,000 shares of cumulative second preferred
stock without par value.

<PAGE>

None of the second preferred had been issued at December 31, 1997. 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.

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

The following table sets forth the funded status of the Retirement Plan at
December 31, 1997 and 1996, and the amount of accrued pension liability for
Transco and TEC as of December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>

1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation, including
vested benefits of $166,928 at December 31, 1997 and $139,202
at December 31, 1996................................. $176,605 $147,514
========= =========

Actuarial present value of projected benefit obligation $237,086 $197,787
Plan assets at market value............................ 209,396 179,462
--------- ---------
Projected benefit obligation in excess of plan assets.. 27,690 18,325
Unrecognized net gain (loss)........................... (5,672) 7,284
Unrecognized prior service cost........................ 4,401 4,774
--------- ---------
Accrued pension liability.............................. $ 26,419 $ 30,383
========= =========
</TABLE>

The allocation of the purchase price to the assets and liabilities of
Transco and TEC based on their estimated fair values resulted in the recording
of an additional pension liability of $19.2 million, $17.3 million of which was
recorded by Transco, representing the amount that the projected benefit
obligation exceeded the plan assets. The amounts of pension costs deferred at
December 31, 1997 and 1996 were $6.9 million and $5.4 million, respectively, and
are expected to be recovered through future rates over the average remaining
service period for active employees.

<PAGE>

The following table sets forth the components of the Retirement Plan's net
pension cost for Transco for the years ended December 31, 1997 and 1996 and
Transco and TEC for the year ended December 31, 1995 (in thousands):

1997 1996 1995
--------- -------- --------

Service cost-benefits earned during the period $ 6,212 $ 5,847 $ 4,716
Interest cost on projected benefit obligation 15,808 14,240 12,111
Actual return on plan assets............... (27,769) (32,978) (37,958)
Net amortization and deferral.............. 10,939 16,792 25,666
--------- -------- --------
Net pension cost........................... $ 5,190 $ 3,901 $ 4,535
========= ======== ========

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

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
1997, 1996 and 1995<F2>:

1997 1996 1995
------ ------ ------
Discount rate................................... 7.25% 7.50% 7.25%
Rate of increase in future compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 10% 10% 10%

<F2> 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.

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.

<PAGE>

The following table sets forth the funded status of the plans at December
31, 1997 and 1996, reconciled with the accrued postretirement benefits for
Transco at December 31, 1997 and 1996 (in thousands):

1997 1996
-------- --------
Accumulated postretirement benefit obligation:
Retirees.................................. $ 77,673 $ 77,249
Fully eligible active plan participants... 12,228 6,634
Other active plan participants............ 32,536 20,710
-------- --------
122,437 104,593
Plan assets at market value................... 75,871 65,320
-------- --------
Accumulated postretirement benefit obligation
in excess of plan assets...................... 46,566 39,273
Unrecognized net gain......................... 14,975 23,248
Unrecognized prior service cost............... 8,535 9,311
-------- --------
Accrued postretirement benefits............... $ 70,076 $ 71,832
======== ========

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, 1997 and 1996 were $60.7 million and $64.8 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 years ended December 31, 1997
and 1996 and Transco and TEC for the year ended December 31, 1995 (in
thousands):

1997 1996 1995
--------- -------- ---------
Service cost-benefits earned during the period $ 2,024 $ 1,639 $ 2,619
Interest cost on accumulated postretirement
benefit obligation............................ 7,945 7,860 8,929
Actual return on plan assets.................. (8,502) (6,868) (7,651)
Net amortization and deferral................. 7,816 7,226 9,623
--------- --------- --------
Net periodic postretirement benefit cost...... $ 9,283 $ 9,857 $13,520
========= ========= ========

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

The annual rate of increase in the per capita cost of covered health care
benefits for 1998 was assumed to be 8.5% to 9.5%. The rate was assumed to
decrease gradually to 5% for the year 2006 and remain at that level thereafter.
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, 1997 by $14.1 million and the aggregate of the
service and interest cost components of the net periodic postretirement health
care benefit cost for 1997 by $1.4 million.

<PAGE>

The following table summarizes the various assumptions used to determine
the accumulated postretirement benefit obligation for the plans for the years
1997, 1996 and 1995<F3>:

1997 1996 1995
------ ------ ------
Discount rate................................ 7.25% 7.50% 7.25%
After-tax expected long-term rate of return on assets 6% 6% 6%

<F3>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.

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

Effective January 1, 1996, the Thrift Plan was merged with a Williams
defined-contribution plan and Transco employees became eligible to participate
in the Williams plan. Compensation expense of $3.4 million and $4.4 million was
recognized by Transco in 1997 and 1996, respectively.

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.
Awards may be granted for no consideration other than prior and future services.
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

<PAGE>

forma net income for Transco, beginning with 1995 employee stock-based awards
was $109.4 million, $95.3 million and $74.4 million for 1997, 1996 and 1995,
respectively. Reported net income was $111.4 million, $95.5 million and $76.0
million for 1997, 1996 and 1995, respectively. Pro forma amounts for 1997
reflect the remaining total compensation expense from the awards made in 1996,
as these awards fully vested in 1997 as a result of the accelerated vesting
provisions. Pro forma amounts for 1995 reflect total compensation expense from
the awards made in 1995, as these awards fully vested in 1995 as a result of the
accelerated vesting provisions. Since compensation expense from stock options is
recognized over the future years' vesting period, and additional awards
generally are made each year, pro forma amounts may not be representative of
future years' amounts.

The following summary reflects stock options related to 1997 and 1996 (options
in thousands):

1997 1996 <F4>
------- ----------

Options granted................................... 546 861
Weighted-average grant date fair value............ $ 5.98 $ 3.92
Options outstanding - December 31................. 1,987 1,714
Options exercisable - December 31................. 1,465 948

<F4> Data for 1996 has been restated to reflect a two-for-one stock split
declared on November 20, 1997.

The fair value of the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: expected life of the stock options of five years; volatility of the
expected market price of Williams common stock of 23 percent (24 percent in
1996); risk-free interest rate of 6.1 percent (6.2 percent in 1996); and a
dividend yield of 2.4 percent (3 percent in 1996).

7. INCOME TAXES

Following is a summary of the provision for income taxes for 1997, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>

Post-Acquisition Pre-Acquisition
----------------------------------------- | ---------------
January 18, 1995 | January 1, 1995
to | to
1997 1996 December 31, 1995 | January 17, 1995
---------- ---------- ----------------- | ----------------
<S> <C> <C> <C> | <C>
Federal: |
Current.............. $ 68,632 $ 88,927 $ 66,819 | $ (2,734)
Deferred............. (3,041) (37,613) (17,404) | 4,577
---------- ---------- ------------- | ------------
65,591 51,314 49,415 | 1,843
---------- ---------- ------------- | ------------
State and municipal: |
Current.............. 4,991 13,905 5,827 | (305)
Deferred............. (3,988) (6,606) (764) | 771
---------- ---------- ------------- | ------------
1,003 7,299 5,063 | 466
---------- ---------- ------------- | ------------
|
Provision for income taxes $ 66,594 $ 58,613 $ 54,478 | $ 2,309
========== ========== ============= | ============

</TABLE>

<PAGE>

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
1997 1996 December 31, 1995 | January 17, 1995
---------- ---------- ----------------- | ----------------
<S> <C> <C> <C> | <C>
Taxes computed by applying the |
federal statutory rate.... $ 61,293 $ 53,955 $ 49,373 | $ (2,573)
Reclassification of state liability 3,761 - - | -
Pre-acquisition executive |
severance benefits........ - - - | 4,913
State and municipal income |
taxes..................... 652 4,744 3,291 | 303
Other, net................ 888 (86) 1,814 | ( 334)
--------- --------- --------- | ----------
|
Provision for income taxes $ 66,594 $ 58,613 $ 54,478 | $ 2,309
========= ========= ========= | ==========
</TABLE>

Significant components of deferred income tax assets and liabilities as of
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>

1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities
- ------------------------
Property, plant and equipment.................... $ 878,142 $ 878,572
Postretirement benefits.......................... 23,482 23,353
Other............................................ 14,976 10,621
---------- ---------
Total deferred tax liabilities................... 916,600 912,546
---------- ---------

Deferred tax assets
- -------------------
Rate refunds..................................... 78,464 63,677
Accrued liabilities.............................. 52,540 53,568
Deferred revenues................................ 2,945 6,020
State deferred taxes............................. 30,215 31,545
---------- ---------
Total deferred tax assets........................ 164,164 154,810
---------- ---------

Net deferred tax liabilities..................... $ 752,436 $ 757,736
========== =========
</TABLE>

<PAGE>

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, 1997 and 1996 are
as follows (in thousands):
<TABLE>
<CAPTION>

Carrying Amount Fair Value
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term financial assets. $282,775 $150,270 $282,775 $150,270
Financial liabilities:
Long-term debt ...................... 837,832 780,076 851,760 781,521
</TABLE>

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.

For Transco's publicly traded long-term debt, estimated fair value is based
on quoted market prices at year end. For Transco's private debt, all at variable
interest rates, estimated fair value is equivalent to the carrying amount.

CREDIT AND MARKET RISK

TRADE RECEIVABLES As of December 31, 1997 and 1996, Transco had trade
receivables of $23 million and $49 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, 1997 and 1996. Transco received $28 million of proceeds in 1997, $21 million
in 1996 and $108 million in 1995. At December 31, 1997 and 1996, $100 million of
such receivables had been sold. Based on amounts outstanding at December 31,
1997 and 1996 the maximum contractual credit loss under these arrangements is
approximately $15 million for each year, but the likelihood of loss is
considered to be remote.

<PAGE>

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
$139.3 million in 1997, $158.1 million in 1996 and $166.7 million in 1995.

AFFILIATES Included in Transco's sales and transportation revenues for
1997, 1996 and 1995 are revenues applicable to sales and transportation for
affiliates of $79.2 million, $124.3 million and $173.9 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 1997 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 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,
1997, 1996 and 1995, included in Transco's cost of sales is $31.4 million, $34.7
million and $20.6 million, respectively, representing agency fees billed to
Transco by WESCO and TGMC under the agency agreement.

Included in Transco's cost of sales for 1997, 1996 and 1995 is purchased
gas cost from affiliates of $405.1 million, $466.8 million and $131.5 million,
respectively.

All gas purchases are made at market or contract prices. The decrease in
1997 for purchased gas cost reflects lower prices, reduction of the number of
long-term FS customers and milder weather conditions in the first quarter of
1997.

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 $4.3 million in 1997, $17.5 million in 1996 and $36.4 million in 1995
applicable to the transportation of gas by Texas Gas Transmission Corporation
(Texas Gas). The significant decrease in 1997 is mainly due to a full year's
effect of the conversion of certain Transco

<PAGE>

shippers from bundled service to unbundled service compared to only a five
months' effect for 1996. 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. Transco's
administrative and general expenses for January through April 1995 included
$10.9 million 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 1997, 1996 and 1995 were $14.7
million, $14.5 million and $8.5 million, respectively, for such corporate
expenses charged by Williams. Management considers the cost of these services to
be 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 1997, 1996 and 1995, are $37.3 million, $35.6
million and $24.4 million, respectively, charged by WFS to operate Transco's gas
gathering facilities.

10. QUARTERLY INFORMATION (UNAUDITED)

The following summarizes selected quarterly financial data for 1997 and
1996 (in thousands):

First Second Third Fourth

-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
1997
Operating revenues.............. $ 354,514 $ 340,098 $ 349,454 $ 399,233
Operating expenses.............. 294,350 287,345 294,166 335,471
--------------- ------------- --------------- --------------
Operating income ............... 60,164 52,753 55,288 63,762
Interest expense................ 17,190 16,125 17,935 20,389
Other (income) and
deductions, net .............. ( 2,362) ( 2,044) ( 4,584) ( 5,804)
--------------- -------------- --------------- --------------
Income before income taxes and
extraordinary item............ 45,336 38,672 41,937 49,177
Provision for income taxes...... 17,665 14,917 14,923 19,089
--------------- -------------- --------------- --------------
Income before extraordinary item 27,671 23,755 27,014 30,088
Extraordinary item - net gain on
reacquired debt.............. - - - 2,860
--------------- -------------- --------------- --------------
Common stock equity in net
income ...................... $ 27,671 $ 23,755 $ 27,014 $ 32,948
=============== ============== =============== ==============
</TABLE>

<PAGE>

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>

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
(I)(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
1997 10-K
------------
A. INDEX

1. FINANCIAL STATEMENTS:

Report of Independent Auditors - Ernst & Young LLP 23

Consolidated Balance Sheet as of December 31,
1997 and 1996 24-25

Consolidated Statement of Income for the Years Ended
December 31, 1997 and 1996 and the Periods January 1, 1995
to January 17, 1995, and January 18, 1995 to December 31,
1995. 26

Consolidated Statement of Common Stockholder's Equity
for the Years Ended December 31, 1997 and 1996 and the
Periods January 1, 1995 to January 17, 1995, and January
18, 1995 to December 31, 1995. 27

Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997 and 1996 and the Periods January 1, 1995
to January 17, 1995, and January 18, 1995 to December 31,
1995. 28-29

Notes to Consolidated Financial Statements 30-57

<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)

<PAGE>

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

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

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

- 2 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)

- 3 Indenture dated January 16, 1998 between Transco and
Citibank, N.A., as Trustee (Exhibit 4.1 to Transco Form S-3
dated September 8, 1997 Transco Registration Statement No.
333-27311)

- 4 Second Amended and Restated Credit Agreement dated as of July
23, 1997 by and among Transco, The Williams Companies, Texas
Gas Transmission Corporation, Northwest Pipeline Corporation,
WilTel Communications, LLC, 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 1997
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)

<PAGE>

- 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)

(21) SUBSIDIARIES OF THE REGISTRANT

(23) CONSENT OF INDEPENDENT AUDITORS

(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, 1998.

TRANSCONTINENTAL GAS PIPE
LINE CORPORATION
(Registrant)

By:/s/ JAMES C. BOURNE
-------------------
James C. Bourne
Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on this 26th day of March, 1998, 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 * Vice President (Principal Financial Officer)
--------------------
Nick A. Bacile

/s/ JAMES C. BOURNE * Controller (Principal Accounting Officer)
---------------------
James C. Bourne

* By /s/ JAMES C. BOURNE
---------------------------
James C. Bourne
Attorney-in-fact

<PAGE>

Exhibit (21)

TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SUBSIDIARIES

% Owned State of
Subsidiary Name By Parent Incorporation

Cardinal Operating Company 100.00 Delaware
Cumberland Operating Company 100.00 Delaware
Independence Operating Company 100.00 Delaware
Marsh Resources, Inc. 100.00 Delaware
Pine Needle Operating Company 100.00 Delaware
TGPL Enterprises, Inc. 100.00 Delaware
TransCardinal Company 100.00 Delaware
TransCarolina LNG Company 100.00 Delaware
TransCumberland Pipeline Company 100.00 Delaware
Transco Independence Pipeline Company 100.00 Delaware
WGP Enterprises, Inc. 100.00 Delaware
Williams Gas Processing - Gulf Coast Company, L.P. 99.00 Delaware

<PAGE>

Exhibit (23)

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-27311) of Transcontinental Gas Pipe Line Corporation of our
report dated February 13, 1998, with respect to the consolidated financial
statements included in this Annual Report (Form 10-K) for the year ended
December 31, 1997.

ERNST & YOUNG LLP

Tulsa, Oklahoma
March 24, 1998

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 ("Transco"), does hereby constitute and appoint NICK A.
BACILE AND JAMES C. BOURNE their true and lawful attorneys and each of them
(with full power to act without the other) their true and lawful attorneys for
them and in their name and in their capacity as a director or officer, or both,
of Transco, as hereinafter set forth below their signature, to sign Transco's
Annual Report to the Securities and Exchange Commission on Form 10-K for the
fiscal year ended December 31, 1997, and any and all amendments thereto or all
instruments necessary or incidental in connection therewith; and

THAT the undersigned Transco does hereby constitute and appoint
NICK A. BACILE AND JAMES C. BOURNE its true and lawful attorneys and each of
them (with full power to act without the other) 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 11th day of March, 1998.

/s/ BRIAN E. O'NEILL /s/ NICK A. BACILE
- ------------------------------ -------------------------------
Brian E. O'Neill Nick A. Bacile
President, Vice President and
Chief Executive Officer, Chief Financial Officer
and Director (Principal Financial Officer)
(Principal Executive Officer)

/s/ JAMES C. BOURNE
-----------------------------
James C. Bourne
Controller
(Principal Accounting Officer)

<PAGE>

Page 2

/s/ KEITH E. BAILEY /s/ CUBA WADLINGTON, JR.
-------------------- ------------------------
Keith E. Bailey Cuba Wadlington, Jr.
Director Director

TRANSCONTINENTAL GAS PIPE LINE
CORPORATION

By /s/ NICK A. BACILE
----------------------
Nick A. Bacile
Vice President and
Chief Financial Officer

ATTEST:

/s/ SHAWNA L. GEHRES
----------------------
Shawna L. Gehres
Assistant Secretary

<PAGE>

Page 3

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

I, the undersigned, SHAWNA L. GEHRES, Assistant Secretary of
TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware company (hereinafter
called the "Company"), 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 March 11, 1998, to the following:

RESOLVED that the Chairman of the Board, the President or any
Vice President of the Company 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 Company, under the Securities
Exchange Act of 1934, of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.

I further certify that the foregoing resolutions have not been
modified, revoked or rescinded and are in full force and effect.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of TRANSCONTINENTAL GAS PIPE LINE, this 27th day of March, 1998.

/s/ SHAWNA L. GEHRES
---------------------
Shawna L. Gehres
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, 1997, CONTAINED IN
TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,321
<SECURITIES> 0
<RECEIVABLES> 23,315
<ALLOWANCES> 0
<INVENTORY> 84,240
<CURRENT-ASSETS> 594,010
<PP&E> 3,977,620
<DEPRECIATION> 477,667
<TOTAL-ASSETS> 4,267,663
<CURRENT-LIABILITIES> 488,790
<BONDS> 837,832
0
0
<COMMON> 0
<OTHER-SE> 1,926,347
<TOTAL-LIABILITY-AND-EQUITY> 4,267,663
<SALES> 670,879
<TOTAL-REVENUES> 1,443,299
<CGS> 670,879
<TOTAL-COSTS> 1,085,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,639
<INCOME-PRETAX> 175,122
<INCOME-TAX> 66,594
<INCOME-CONTINUING> 108,528
<DISCONTINUED> 0
<EXTRAORDINARY> 2,860
<CHANGES> 0
<NET-INCOME> 111,388
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>