TRANSCONTINENTAL GAS PIPE LINE CORP - 10-K Annual Report

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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 1-7584

TRANSCONTINENTAL GAS PIPE LINE CORPORATION
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(Exact name of Registrant as specified in its charter)

DELAWARE 74-1079400
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(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
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(Address of principal executive offices) Zip Code

Registrant's telephone number, including area code (713) 215-2000
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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
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The number of shares of Common Stock, par value $1.00 per share,
outstanding at January 31, 2001 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.

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 also
holds a minority interest in Cardinal Pipeline Company, LLC, an intrastate
natural gas pipeline located in North Carolina. Transco's principal business is
the transportation of natural gas.

The number of full time employees of Transco at December 31, 2000 was
1,498.

Transco is a wholly-owned subsidiary of Williams Gas Pipeline Company, LLC
(WGP). WGP is a wholly-owned subsidiary of The Williams Companies, Inc.
(Williams).

At December 31, 2000, Transco's system had a mainline delivery capacity of
approximately 4.0 Bcf 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 6.9 Bcf of gas per day. The system is composed of
approximately 10,300 miles of mainline and branch transmission pipelines, 45
compressor stations, seven 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. Transco also has storage capacity in a liquefied
natural gas (LNG) storage facility and operates the facility. The total top gas
storage capacity available to Transco and its customers in such storage fields
and LNG facility and through storage service contracts is approximately 216 Bcf
of gas. In addition, wholly-owned subsidiaries of Transco operate and hold a
35-percent ownership interest in Pine Needle LNG Company, a LNG storage facility
with 4 Bcf of storage capacity. 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.

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, the term "TBtu" means trillion British Thermal Units and the term "Dt"
means dekatherm.

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 service 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. On February 9, 2000, the FERC issued Order 637 which further revised its
regulations with the stated purpose of improving the efficiency of the market
while protecting against the exercise of market power by waiving the price
ceiling on short term capacity releases, allowing pipelines to file for
peak/offpeak rates and term differentiated rates, clarifying certain
transportation service policies, and increasing transaction reporting
requirements.

Through an agency agreement with Transco, Williams Energy Services Company
(WESCO), an affiliate of Transco, manages Transco's jurisdictional merchant gas
sales.

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 (Gas Processing), an affiliate of Transco. The net book value
recorded by Transco at December 31, 2000 of the facilities was approximately
$445 million. Operating income recorded by Transco for the year ended December
31, 2000 associated with the facilities was approximately $4 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, Gas Processing 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 of 1938 (NGA). On
September 25, 1996, the FERC issued an order dismissing Transco's application
and Gas Processing's petition for declaratory order. On October 25, 1996,
Transco and Gas Processing filed a joint request for rehearing of the FERC's
September 25 order and, in August 1997, filed a request that rehearing be
expedited.

In the absence of any action by the FERC in response to Transco's
rehearing request, Transco has filed with the FERC the following two
applications seeking authorization to abandon portions of the facilities
included in the February 1996 application.

In February 1998, Transco filed an application with the FERC seeking
authorization to abandon Transco's onshore Tilden/McMullen Gathering System
located in Texas by conveyance to Gas Processing. Gas Processing filed a
contemporaneous request that the FERC declare that the facilities sought to be
abandoned would be considered nonjurisdictional gathering facilities upon
transfer to Gas Processing. In May 1999, the FERC issued an order in which it
determined that certain of the facilities would be gathering facilities upon
transfer to Gas Processing, i.e., 1) those facilities upstream of and including
the Tilden Plant, 2) the South McMullen and Goebel Laterals located downstream
of the Tilden Plant, and 3) the small, short laterals which branch out from the
McMullen Lateral downstream of the Tilden Plant at several points along its
length. However, the FERC determined that the McMullen Lateral itself, as well
as two compressor units, are jurisdictional facilities, but authorized their
abandonment subject to Gas Processing obtaining a certificate to operate those
facilities. On June 3, 1999, Transco and Gas Processing filed for rehearing of
the order with regard to the facilities classified by the FERC as jurisdictional
facilities, and on October 5, 1999, the FERC denied the rehearing request. On
March 7, 2000, Transco filed a limited NGA section 4 filing with the FERC,
notifying the FERC that Transco intended to effectuate the spin-down to Gas
Processing of the Tilden-McMullen facilities determined by the FERC to be
gathering facilities to be effective April 1, 2000, and adjusting Transco's
rates on a prospective basis effective with the spin-down to reflect a decrease
in Transco's overall cost of service, rate base and operation and maintenance
expense resulting from the spin-down. The net book value of the facilities
included in this limited NGA filing is approximately $18 million and annual
operating income associated with these facilities is estimated to be less than
$1 million. On April 6, 2000, the FERC issued an order accepting the March 7,
2000, filing effective April 1, 2000, subject to refund and the outcome of the
Docket No. RP97-71 proceeding. Effective April 1, 2000, the applicable
Tilden/McMullen facilities were spun down by Transco through a non-cash dividend
of $18.1 million.

In November 2000, Transco filed an application with the FERC seeking
authorization to abandon certain of Transco's offshore Texas facilities by
conveyance to Gas Processing. Gas Processing filed a contemporaneous request
that the FERC declare that the facilities sought to be abandoned would be
considered nonjurisdictional gathering facilities upon transfer to Gas
Processing. These applications are currently pending before the FERC.

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, gas marketers and producers. Transco's two largest
customers in 2000 were Consolidated Edison Company of New York, Inc. and Public
Service Electric and Gas Company, which accounted for approximately 8.7 percent
and 8.6 percent, respectively, 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.

Transco's total system deliveries for the years 2000, 1999 and 1998 are
shown below.

Transco System Deliveries (TBtu) 2000 1999 1998
- ---------------------------------------- ------------- ------------ ------------

Market-area deliveries
Long-haul transportation ......................... 786.7 820.0 857.8
Market-area transportation ....................... 710.4 622.6 522.1
------------- ------------ ------------
Total market-area deliveries ..................... 1,497.1 1,442.6 1,379.9
Production-area transportation ......................... 262.0 222.0 214.0
------------- ------------ ------------
Total system deliveries ................................ 1,759.1 1,664.6 1,593.9
============= ============ ============

Average Daily Transportation Volumes (TBtu) ............ 4.8 4.6 4.4
Average Daily Firm Reserved Capacity (TBtu) ............ 6.3 6.3 5.8

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.

PIPELINE PROJECTS

PROJECTS IN SERVICE Transco's SouthCoast Expansion Project was placed in
service on November 1, 2000. SouthCoast creates approximately 200 MMcf/d of
additional firm transportation capacity on Transco's system from the terminus of
Transco's existing Mobile Bay Lateral in Choctaw County, Alabama, to delivery
points in Transco's Rate Zone 4 (Alabama and Georgia). The project has
an estimated cost of approximately $108 million.

MOMENTUM EXPANSION PROJECT In August 2000, Transco announced an open
season for parties interested in subscribing to firm transportation service
under its Momentum Expansion Project, a proposed expansion of the Transco
pipeline system from Station 65 in Louisiana to Station 165 in Virginia designed
to meet increasing natural gas demand in the southeastern United States. The
project has a target in-service date of May 1, 2003. Transco plans to file for
FERC approval of the project during the second quarter of 2001. The capital cost
of the project will depend upon the level of firm market commitment received.

MARKETLINK EXPANSION PROJECT On May 13, 1998, Transco filed an application
with the FERC for approval to construct and operate mainline and Leidy Line
facilities to create an additional 676 MMcf/d of firm transportation capacity to
serve increased demand in the mid-Atlantic and south Atlantic regions of the
United States by a targeted in-service date of November 1, 2000, at an estimated
cost of $529 million. On December 17, 1999, the FERC issued an interim order
giving Transco conditional approval for MarketLink, along with the Independence
Pipeline Project and ANR Pipeline Company's Supply Link Project, but withholding
final certificate authorization until Independence Pipeline Company
(Independence) and ANR Pipeline Company (ANR) file long-term, executed contracts
with nonaffiliated shippers for at least 35% of the capacity of their respective
projects. Transco filed for rehearing of the interim order. On April 26, 2000,
the FERC issued an order on rehearing which authorized Transco to proceed with
the Market Link project subject to certain conditions. On May 23, 2000, Transco
filed a letter with the FERC accepting the MarketLink certificate.

On September 20, 2000, Transco filed an application to amend the
certificate of public convenience and necessity issued in this proceeding to
enable Transco to (a) phase the construction of the MarketLink project to
satisfy phased in-service dates requested by the project shippers, and (b)
redesign the recourse rate based on phased construction of the project. The
initial two phases of the project would consist of 286 MMcf/d of firm
transportation service with in-service dates of November 1, 2001 and November 1,
2002. Transco did not propose in the amendment to change the overall facilities
certificated by the FERC in this proceeding. On December 13, 2000, the FERC
issued an order permitting Transco to construct the MarketLink project in phases
as proposed. The order requires Transco to file executed contracts fully
subscribing the remaining capacity of the project (approximately 390 MMcf/d) by
April 13, 2001. Transco accepted the amended certificate on December 21, 2000.
Certain parties filed with the FERC requests for rehearing of the December 13,
2000 order, and on February 12, 2001, the FERC denied the requests.

INDEPENDENCE PIPELINE PROJECT In March 1997, as amended in December 1997,
Independence filed an application with FERC for approval to construct and
operate a new pipeline consisting of approximately 400 miles of 36-inch pipe
from ANR Pipeline Company's existing compressor station at Defiance, Ohio to
Transco's facilities at Leidy, Pennsylvania. The Independence Pipeline Project
is proposed to provide approximately 916 MMcf/d of firm transportation capacity
with an in-service date of November 2002. Independence is owned equally by
wholly-owned subsidiaries of Transco, ANR, and National Fuel Gas Company. The
estimated cost of the project is $678 million, and Transco's equity
contributions are estimated to be approximately $68 million based on its
expected one-third ownership interest in the project. As mentioned above in
connection with the MarketLink Project, on December 17, 1999 the FERC gave
conditional approval for the Independence Pipeline Project, subject to
Independence filing long-term, executed contracts with nonaffiliated shippers
for at least 35% of the capacity of the project. Independence filed for
rehearing of the interim order. On April 26, 2000, the FERC issued an order
denying rehearing and requiring that Independence submit by June 26, 2000,
agreements with nonaffiliated shippers for at least 35% of the capacity of the
project. Independence met this requirement, and on July 12, 2000, the FERC
issued an order granting the necessary certificate authorizations for the
Independence Pipeline Project. Independence accepted the certificate
authorization on August 11, 2000. On September 28, 2000, the FERC issued an
order denying all requests for rehearing and requests for reconsideration of the
Independence certificate order filed by various parties.

SUNDANCE EXPANSION PROJECT On April 3, 2000, Transco filed an application
with the FERC for its Sundance Expansion Project, which would create
approximately 228 MMcf/d of additional firm transportation capacity from
Transco's Station 65 in Louisiana to delivery points in Georgia, South Carolina
and North Carolina. Approximately 38 miles of new pipeline loop along the
existing mainline system will be installed along with approximately 33,000
horsepower of new compression and modifications to existing compressor stations
in Georgia, South Carolina and North Carolina. The project has a target
in-service date of May 2002 and an estimated cost of approximately $134 million.
On September 29, 2000, the FERC made a preliminary determination that the
Sundance expansion project is required by the public convenience and necessity,
and that Transco should be granted a certificate subject to the completion of
the FERC's pending environmental review.

CROSS BAY PIPELINE PROJECT On July 21, 2000, Cross Bay Pipeline Company,
L.L.C. (Cross Bay), a limited liability company formed between subsidiaries of
Transco, Duke Energy and KeySpan Energy, filed an application with the FERC for
approval of its gas pipeline project. The Cross Bay pipeline is designed to
increase natural gas deliveries into the New York City metropolitan area by
replacing and uprating pipeline and installing compression to expand the
capacity of Transco's existing Lower New York Bay Extension by approximately 121
MMcf/d. The project is targeted to be placed into service in December 2002 and
is estimated to cost approximately $59.5 million. Wholly-owned subsidiaries of
Transco will operate Cross Bay and have a 37.5% ownership interest.

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 expense and
(iii) allowed rate of return, including the equity component of a pipeline's
capital structure and related income taxes. Rate design and the allocation of
costs between the demand and commodity rates also impact profitability. As a
result of the ratemaking process, a portion of Transco's revenues may have been
collected subject to refund.

Effective September 1, 1992, Transco changed from the MFV method of rate
design to the SFV method of rate design. Under MFV rate design, substantially
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, substantially 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 limits 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 manages Transco's jurisdictional merchant gas
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 for the years 2000, 1999 and
1998 are shown below.

Gas Sales Volumes (TBtu) 2000 1999 1998
- ------------------------- -------------- ------------- -------------

Long-term sales ......... 190.9 196.2 176.0

Short-term sales ........ 38.4 38.4 25.0
-------------- ------------- -------------

Total gas sales ..... 229.3 234.6 201.0
============== ============= =============

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 8. Transactions With Major
Customers and Affiliates."

REGULATION

Interstate gas pipeline operations Transco's interstate transmission and
storage activities are subject to regulation by the FERC under the NGA 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 NGA. 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 Cardinal Pipeline Company, LLC, a North
Carolina natural gas pipeline company, is subject to the jurisdiction of the
North Carolina Utilities Commission. Cardinal Pipeline is operated and
45-percent owned by wholly-owned subsidiaries of Transco.

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 Transco's pipeline competitors are
also subject to similar laws and regulations relating to environmental quality
control. Management further 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 these reasons, management believes that compliance with applicable
environmental requirements is not likely to have a material effect upon its
competitive position or earnings. See "Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - 3. Contingent
Liabilities and Commitments - Environmental Matters."

COMPETITION

The natural gas industry has undergone tremendous change since the
issuance of FERC Order 636 in 1992. Order 636 required that the natural gas
sales, transportation, and other services that were formerly provided in bundled
form by pipelines be separated, 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 natural gas and to
increasingly competitive markets in natural gas services, including competitive
secondary markets in pipeline capacity. As a result, pipeline capacity is being
used more efficiently, and peaking and storage services are increasingly
effective substitutes for annual pipeline capacity. These efficiencies have
increased the risk for pipelines of contract non-renewal or capacity turnback.

In July 1998, the FERC issued a Notice of Proposed Rulemaking (NOPR)
concerning the regulation of short-term transportation services and a Notice of
Inquiry (NOI) addressing long-term transportation services. The scope of the
inquiry initiated by these two proceedings and the potential policy implications
are unprecedented in the history of natural gas regulation. On February 9, 2000,
the FERC issued a final rule, Order 637, in response to the comments received on
the NOPR and NOI. In Order 637, the FERC adopted certain policies that it finds
are necessary to adjust its current regulatory model to the needs of the
evolving markets, but determines that any fundamental changes to its regulatory
policy, which changes were raised and commented on in the NOPR and NOI, will be
considered after further study and evaluation of the evolving marketplace. Order
637 revises the FERC's pricing policy to waive, for a two-year period, the
maximum price ceilings for short-term releases of capacity of less than one
year, and permits pipelines to file proposals to implement seasonal rates for
short-term services and term-differentiated rates, subject to certain
requirements including the requirement that a pipeline be limited to recovering
its annual revenue requirement under those rates.

At the state level, both local distribution company (LDC) unbundling and
electric industry restructuring are affecting Transco's markets. On the gas
side, several state jurisdictions have been involved in implementing changes
similar to the changes that have occurred at the federal level under Order 636.
New York, New Jersey, Pennsylvania, Maryland, Delaware and Georgia have
established regulations for LDC unbundling and are currently implementing them
on a company-by-company basis. To date, none of these changes at the state level
have required renegotiations of Transco's current LDC contracts nor have these
states required significant alteration in the operation of the pipeline.

The potential impact of electric power industry restructuring is
particularly uncertain. Gas competes with electricity in residential,
commercial, and industrial end uses, and also competes with other fuels,
especially coal and fuel oil, in electricity generation. Gas use for power
generation is expected to increase sharply during the next decade due to both
regulatory changes and new power generation technologies, although the size of
this increase remains uncertain. In addition, the restructuring of both the gas
and electric industries is facilitating the convergence of the two industries,
resulting in mergers and acquisitions that are changing the face and business
mix of Transco's competitors.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, excluding historical
information, include forward-looking statements -- statements that discuss
Transco's expected future results based on current and pending business
operations. Transco makes these forwarding-looking statements in reliance on the
safe harbor protections provided under the Private Securities Litigation Reform
Act of 1995.

Forward-looking statements can be identified by words such as
"anticipates," "believes," "expects," "planned," "scheduled" or similar
expressions. Although Transco believes these forward-looking statements are
based on reasonable assumptions, statements made regarding future results are
subject to numerous assumptions, uncertainties and risks that may cause future
results to be materially different from the results stated or implied in this
document.

The following are important factors that could cause actual results to
differ materially from any results projected, forecasted, estimated or budgeted
by Transco in forward-looking statements: (i) risks and uncertainties related to
changes in general economic conditions in the United States, changes in laws and
regulations to which Transco is subject, including tax, environmental and
employment laws and regulations, the cost and effects of legal and
administrative claims and proceedings against Transco or its subsidiaries or
which may be brought against Transco or its subsidiaries, the effect of changes
in accounting policies, and conditions of the capital markets Transco utilizes
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, the pace of deregulation in retail natural
gas markets, and the resolution of other regulatory matters discussed herein;
(iii) risks and uncertainties related to the ability to develop expanded markets
as well as maintaining existing markets; (iv) risks and uncertainties related to
the ability to obtain governmental and regulatory approval of various expansion
projects; (v) risks and uncertainties related to the ability to successfully
implement key systems such as a service delivery system, and (vi) risks and
uncertainties related to the ability to control costs. In addition, future
utilization of pipeline capacity can depend on energy prices, competition from
other pipelines and alternative fuels, the general level of natural gas demand,
decisions by customers not to renew expiring natural gas transportation
contracts 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 Gas Processing, an
affiliate of Transco. The net book value recorded by Transco at December 31,
2000 of the facilities was approximately $445 million. Operating income recorded
by Transco for the year ended December 31, 2000 associated with the facilities
was approximately $4 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, Gas Processing filed a petition for declaratory order requesting a
determination that its gathering services and rates be exempt from FERC
regulation under the NGA. On September 25, 1996, the FERC issued an order
dismissing Transco's application and Gas Processing's petition for declaratory
order. On October 25, 1996, Transco and Gas Processing filed a joint request for
rehearing of the FERC's September 25 order and, in August 1997, filed a request
that rehearing be expedited.

In the absence of any action by the FERC in response to Transco's
rehearing request, Transco has filed with the FERC the two applications
described below seeking authorization to abandon portions of the facilities
included in the February 1996 application.

TILDEN/MCMULLEN FACILITIES SPIN-DOWN PROCEEDING (Docket Nos. CP98-236 and
242) In February 1998, Transco filed an application with the FERC seeking
authorization to abandon Transco's onshore Tilden/McMullen Gathering System
located in Texas by conveyance to Gas Processing. Gas Processing filed a
contemporaneous request that the FERC declare that the facilities sought to be
abandoned would be considered nonjurisdictional gathering facilities upon
transfer to Gas Processing. In May 1999, the FERC issued an order in which it
determined that certain of the facilities would be gathering facilities upon
transfer to Gas Processing, i.e., 1) those facilities upstream of and including
the Tilden Plant, 2) the South McMullen and Goebel Laterals located downstream
of the Tilden Plant, and 3) the small, short laterals which branch out from the
McMullen Lateral downstream of the Tilden Plant at several points along its
length. However, the FERC determined that the McMullen Lateral itself, as well
as two compressor units, are jurisdictional facilities, but authorized their
abandonment subject to Gas Processing obtaining a certificate to operate those
facilities. On June 3, 1999, Transco and Gas Processing filed for rehearing of
the order with regard to the facilities classified by the FERC as jurisdictional
facilities, and on October 5, 1999, the FERC denied the rehearing request. On
March 7, 2000, Transco filed a limited NGA section 4 filing with the FERC,
notifying the FERC that Transco intended to effectuate the spin-down to Gas
Processing of the Tilden-McMullen facilities determined by the FERC to be
non-jurisdictional gathering facilities to be effective April 1, 2000, and
adjusting Transco's rates on a prospective basis effective with the spin-down to
reflect a decrease in Transco's overall cost of service, rate base and operation
and maintenance expense resulting from the spin-down. The net book value of the
facilities included in this limited NGA filing is approximately $18 million and
annual operating income associated with these facilities is estimated to be less
than $1 million. On April 6, 2000, the FERC issued an order accepting the March
7, 2000, filing effective April 1, 2000, subject to refund and the outcome of
the Docket No. RP97-71 proceeding. Effective April 1, 2000, the applicable
Tilden/McMullen facilities were spun down by Transco through a non-cash dividend
of $18.1 million.

NORTH PADRE ISLAND/CENTRAL TEXAS SYSTEM SPIN-DOWN PROCEEDING (Docket Nos.
CP01-32-000 and CP01-34-000) In November 2000, Transco filed an application with
the FERC seeking authorization to abandon certain of Transco's offshore Texas
facilities by conveyance to Gas Processing. Gas Processing filed a
contemporaneous request that the FERC declare that the facilities sought to be
abandoned would be considered nonjurisdictional gathering facilities upon
transfer to Gas Processing. These applications are currently pending before the
FERC.

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 in 1998, 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. In addition, through December
31, 2000, postjudgment interest was approximately $7.5 million. On June 8, 2000,
the Texas Court of Appeals affirmed the trial court judgment and on February 1,
2001, Transco's rehearing request was denied. Transco is pursuing an appeal to
the Texas Supreme Court and continues to believe that it has meritorious
defenses to Texaco's claims.

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 30, 1995, FMP filed a petition for
specific performance seeking recovery against Transco for the sums claimed under
the settlement agreements. In May 1998, FMP filed a motion for summary judgment
which Transco opposed. In September 1998, the court granted FMP's motion finding
that at least a portion of FMP's payment to the MMS was subject to
indemnification. Transco appealed the court's ruling, and in March 2000, the
appellate court reversed the trial court and remanded the case for trial.

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 was alleged to
have purchased gas from the field. Transco filed an answer denying liability for
the claim. In August 2000, this lawsuit was settled. Although Transco did not
make any contribution to the settlement, one producer participating in the
settlement has asserted against Transco a claim for indemnification in the
amount of approximately $6.7 million. Transco has denied the producer's claim.

In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly-owned subsidiaries including Transco. Mr. Grynberg has
also filed claims against approximately 300 other energy companies and alleges
that the defendants violated the False Claims Act in connection with the
measurement and purchase of hydrocarbons. The relief sought is an unspecified
amount of royalties allegedly not paid to the federal government, treble
damages, a civil penalty, attorneys' fees, and costs. On April 9, 1999, the
United States Department of Justice announced that it was declining to intervene
in any of the Grynberg qui tam cases; including the action filed against the
Williams entities in the United States District Court for the District of
Colorado. On October 21, 1999, the Panel on Multi-District Litigation
transferred all of the Grynberg qui tam cases, including those filed against
Williams, to the United States District Court for the District of Wyoming for
pre-trial purposes. Motions to dismiss the complaints filed by various
defendants, including Transco, are pending.

ENVIRONMENTAL MATTERS

In July 1999, Transco received a letter stating that the U.S. Department
of Justice (DOJ), at the request of the U.S. Environmental Protection Agency
(EPA), intends to file a civil action against Transco arising from its waste
management practices at Transco's compressor stations and metering stations
located in eleven (11) states from Texas to New Jersey. DOJ stated in the letter
that its complaint will seek civil penalties and injunctive relief under federal
environmental laws. DOJ offered to discuss settlement of the claim and
discussions began in September 1999 and have continued throughout 2000 and into
2001. While no specific amount has been proposed, DOJ stated that any settlement
must include an appropriate civil penalty for the alleged violations. Transco
cannot reasonably estimate the amount of its potential liability, if any, at
this time. However, Transco believes it has substantially addressed
environmental concerns on its system through ongoing voluntary remediation and
management programs.

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 $35 million to $40 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, 2000, Transco had a reserve of approximately $35 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 estimated costs of
environmental assessment and remediation have been recorded as regulatory assets
in current assets and other 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 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 $35 million to $40 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 except as indicated above in reference to the July 1999 DOJ letter, no
assurance 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.

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.)

RESULTS OF OPERATIONS

2000 COMPARED TO 1999

NET INCOME AND OPERATING INCOME Transco's net income for 2000 was $191.8
million compared to net income of $161.2 million for 1999. Operating income for
2000 was $311.9 million compared to operating income of $297.2 million for 1999.

The higher operating income of $14.7 million was primarily the result of
higher gas transportation and storage revenues and lower administrative and
general expenses, partly offset by higher cost of natural gas transportation,
operations and maintenance expense, depreciation and amortization expense and
taxes other than income taxes, as discussed below. The increase in net income
was attributable to the increased operating income, as well as higher interest
income from affiliates, higher allowance for funds used during construction due
primarily to a greater amount of capital projects under construction and higher
equity in earnings of unconsolidated affiliates due primarily to earnings from
Pine Needle LNG Company and Cardinal Pipeline Company that were placed in
service during 1999. These higher income items were partially offset by higher
interest expense due primarily to adjustments to estimates of interest
associated with the recovery of prior years' tracked gas costs.

TRANSPORTATION REVENUES Transco's operating revenues related to its
transportation services increased $32 million to $723 million for 2000 when
compared to 1999. The higher transportation revenues were primarily due to a
positive adjustment in the second quarter of 2000 to the reserve for rate
refunds in Transco's general rate case Docket No. RP97-71 ($62.7 million), and
higher demand revenues ($22.6 million) due to the FERC's March 17, 2000 order as
discussed below. This was partly offset by positive adjustments in 1999 to the
reserve for rate refunds in Transco's general rate case Docket No. RP95-197
($28.1 million) and general rate case Docket No. RP97-71 ($23.4 million) and a
decrease in commodity revenues ($4.8 million) and the spin down of the
Tilden/McMullen facilities effective April 1, 2000.

Based on Transco's evaluation of the FERC's March 17, 2000 order and
requests by several parties for rehearing of the FERC's order, Transco reduced
its reserve for rate refunds ($62.7 million of principal and $8.5 million of
interest) in the second quarter of 2000 to reflect its conclusion that the risk
associated with certain of the issues in this proceeding has been eliminated. On
January 24, 2001, the FERC issued an order denying all of the requests for
rehearing of the March 17, 2000 order.

During the first half of 1999, Transco engaged in an analysis of the court
appeal related to Transco's general rate case Docket No. RP95-197 and,
particularly, its likely results. Based on developments in regulatory
proceedings in the second quarter of 1999 involving Transco and others, and
advice received from counsel, Transco adjusted its reserve for rate refunds
($28.1 million of principal and $5.9 million of interest) in the second quarter
of 1999 to reflect the FERC's revised rate of return methodology as applied in
the July 29, 1998, and December 1, 1998 orders.

In addition, based on developments in regulatory proceedings involving
Transco and others, and advice received from counsel, in the fourth quarter of
1999, Transco adjusted its Docket No. RP97-71 reserve for rate refunds ($23.4
million, of which $14.4 million was applicable to revenues collected in 1998 and
1997, and $2.6 million of interest) to reflect its conclusion that risk
associated with one of the issues in this proceeding has been eliminated.

Transco's total market-area deliveries for 2000 increased 54.5 TBtu, or
4%, when compared to 1999. This is primarily the result of increased deliveries
related to incremental expansion projects. Transco's production area deliveries
for 2000 increased 40.0 Tbtu, or 18%, when compared to 1999 due primarily to
increased interruptible transportation and liquefiables transportation.

As a result of a straight fixed-variable (SFV) rate design, increases or
decreases in firm transportation volumes in comparable facilities 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 REVENUES 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.

Through an agency agreement with Transco, WESCO, an affiliate of Transco,
manages Transco's jurisdictional merchant gas sales, excluding Transco's cash
out sales in settlement of gas imbalances. 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
Transco's operating income or results of operations.

Transco's operating revenues related to its sales services, including
Transco's cash out sales in settlement of gas imbalances, increased $438 million
to $1,141 million for 2000, when compared to 1999. The increase was primarily
due to a higher average sales price of $3.94 per Dt in 2000 versus $2.27 per Dt
in 1999.

STORAGE REVENUES Transco's operating revenues related to storage services
increased $7 million to $144 million for 2000 when compared to 1999. This
revenue increase was due to $5.8 million of higher demand revenues resulting
from the effects of the FERC's March 17, 2000 order in Transco's general rate
case Docket No. RP97-71 and a $1.6 million increase to recover higher
underground storage rates charged by others.

OTHER REVENUES Other operating revenues decreased $4 million to $8 million
for 2000 when compared to 1999, primarily due to a decrease of $4.7 million in
Parking and Borrowing Service revenues.

OPERATING COSTS AND EXPENSES Excluding the cost of natural gas sales of
$1,141 million and $703 million for 2000 and 1999, respectively, Transco's
operating expenses were approximately $20 million higher in 2000 compared to
1999. All categories of costs and expenses were higher except administrative and
general expense. The higher cost of natural gas transportation was due to a $6.4
million loss accrual associated with the settlement of historical transportation
and exchange gas imbalances in the first and second quarters. The higher
operation and maintenance expense was primarily attributable to higher
underground gas storage rates charged by others ($1.4 million), materials ($0.9
million) and labor ($0.9 million). The higher depreciation and amortization was
due primarily to plant and property additions. The higher taxes other than
income taxes was due to a 1999 adjustment ($2.4 million) to a prior year
estimate for franchise, payroll and sales and use tax accruals. The higher other
expense was primarily due to increased charitable contributions by the company.
Lower administrative and general expense was due to lower professional services
($3.3 million), resulting primarily from lower year 2000 computer systems costs,
lower employee benefits expense ($5.0 million) and lower Gas Research Institute
charges ($1.2 million), partly offset by higher labor ($1.5 million), employee
expenses ($1.7 million) and non-contractual services ($1.1 million).

1999 COMPARED TO 1998

NET INCOME AND OPERATING INCOME Transco's net income for 1999 was $161.2
million compared with net income of $135.7 million for 1998. Operating income
for 1999 was $297.2 million compared to operating income of $273.7 million for
1998.

The higher operating income of $23.5 million was primarily the result of
higher transportation revenues, partially offset by higher administrative and
general expense and depreciation and amortization expense discussed below. The
increase in net income was attributable to the increased operating income, as
well as lower net interest expense, due primarily to the adjustment to reserves
for rate refunds discussed below and rate refunds made in 1998 and 1999,
partially offset by lower allowance for funds used during construction due to
lower capital expenditures.

TRANSPORTATION REVENUES Transco's operating revenues related to its
transportation services increased $42 million to $691 million for 1999 when
compared to 1998. The higher transportation revenues were primarily due to
positive adjustments to the reserve for rate refunds in Transco's general rate
case Docket No. RP95-197 ($28.1 million) and rate case Docket No. RP97-71 ($23.4
million), benefits of expansion projects placed into service in 1998 ($14.2
million) and new services begun in 1998 ($2.4 million). These increases were
partly offset by a decrease in commodity revenues ($11.2 million) due primarily
to lower interruptible transportation volumes and firm long-haul transportation
volumes, a lower level of reimbursable costs ($5.1 million) that are included in
operating expenses and recovered in Transco's rates, lower demand revenues ($5.2
million) and the positive impact of a $4 million adjustment recorded in 1998
related to settlement rates contained in the January 1998 stipulation and
agreement in Transco's general rate case Docket No. RP97-71 approved by the FERC
in June 1998.

Transco's market-area deliveries for 1999 increased 62.7 TBtu, or 5%, when
compared to 1998. The increased deliveries were mainly due to higher deliveries
under the Mobile Bay Lateral Expansion Project and the Cherokee Expansion
Project, which were placed into service in the latter part of 1998. Transco's
production area deliveries for 1999 increased 8.0 Tbtu, or 4%, when compared to
1998 due to increased liquefiables transportation which resulted from higher
prices paid for liquifiables in 1999.

SALES REVENUES Transco's operating revenues related to its sales services,
including Transco's cash out sales in settlement of gas imbalances, increased
$178 million to $703 million for 1999, when compared to 1998. The increase was
primarily due to higher cash out sales related to the settlement of imbalances,
higher sales volumes and a higher average sales price of $2.27 per Dt for 1999
versus $2.10 per Dt in 1998.

STORAGE REVENUES Transco's operating revenues related to storage services
decreased $6 million to $137 million for 1999 when compared to 1998. This
revenue decrease included a $6.9 million decrease due to lower underground
storage rates charged by others, the majority of which is included in operation
and maintenance expenses, and a $0.8 million decrease primarily due to lower
storage demand charges, partly offset by the impact of a $1.5 million adjustment
recorded in 1998 to the revenue refund reserve to reflect the actual rates
contained in the RP97-71 Settlement Agreement.

OTHER REVENUES Other operating revenues increased $4 million to $12 million
for 1999 when compared to 1998, primarily due to an increase of $2.3 million in
Parking and Borrowing Service revenues.

OPERATING COSTS AND EXPENSES Excluding the cost of sales and
transportation of $741 million and $568 million for 1999 and 1998, respectively,
Transco's operating expenses were approximately $21 million higher in 1999
compared to 1998. This increase was primarily attributable to higher
administrative and general expense and higher depreciation and amortization
expense. The higher administrative and general expense was primarily
attributable to higher building rent ($1.2 million), pension expense ($1.9
million), group insurance ($3.0 million) and labor ($3.3 million). The higher
depreciation and amortization expense was due to a $3.8 million adjustment
related to the RP97-71 settlement rates recorded in 1998, a $3.2 million
adjustment on computer software recorded in 1998 and a $3.1 million increase in
1999, primarily due to plant and property additions. Operation and maintenance
expense increased only slightly in 1999 ($0.2 million) over 1998, primarily
attributable to the effects of a $5.7 million adjustment recorded in 1998
related to the RP97-71 settlement rates and higher professional services ($1.3
million), mostly offset by lower underground storage rates charged by others
($6.6 million).

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.

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 WGP, by borrowings under a bank
credit agreement and, if required, advances from WGP.

In 1997, Transco filed a registration statement with the Securities and
Exchange Commission and, at December 31, 2000, $200 million of shelf
availability remains under this registration statement which may be used to
issue debt securities. Interest rates and market conditions will affect amounts
borrowed, if any, under this arrangement. Transco believes any additional
financing arrangements, if required, can be obtained on reasonable terms.

Williams and certain of its subsidiaries, including Transco, are parties
to a $700 million bank credit agreement (Credit Agreement), under which Transco
can borrow up to $400 million if the funds available under the Credit Agreement
have not been borrowed by Williams or other subsidiaries. At December 31, 2000,
Transco had no outstanding borrowings under the Credit Agreement.

As a participant in Williams' cash management program, Transco and its
subsidiaries have advances to and from Williams through Transco's parent
company, WGP. At December 31, 2000, the advances due Transco by WGP totaled
$458.4 million of which $20.7 million associated with WGP's long-term
investments was classified as a long-term advance in the accompanying
Consolidated Balance Sheet.

CAPITAL EXPENDITURES

As shown in the table below, Transco's capital expenditures for 2000
included $126 million for market-area projects, primarily for the MarketLink,
SouthCoast and Sundance Projects, $2 million for supply-area projects and $211
million for maintenance of existing facilities and other projects. Transco has
budgeted approximately $400 million in the year 2001 for capital expenditures
related to expansion projects in the market area, supply area projects and the
maintenance of existing facilities.

Budget Actual
-------------- --------------------------------------------------
Capital Expenditures 2001 2000 1999 1998
- -------------------------- -------------- -------------- -------------- --------------
(In millions)

Market-Area Projects ............ $ 197.5 $ 125.5 $ 43.0 $ 78.2
Supply-Area Projects ............ 11.7 2.1 3.7 127.6
Maintenance of Existing Facilities
and Other Projects ............ 191.1 211.5 138.7 97.9
----------- ---------- ---------- ---------
Total Capital Expenditures $ 400.3 $ 339.1 $ 185.4 $ 303.7
=========== ========== ========== =========

OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES

Order 636 transition costs 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 reserves for
rate refunds may have been provided. Transco has provided reserves which it
believes are adequate for any refunds that may be required under Docket No.
RP97-71 and believes no refunds will be required under Docket No. RP95-197.

REGULATORY AND LEGAL PROCEEDINGS As discussed in Note 3 of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco is involved
in several pending regulatory and legal proceedings. Because of the complexities
of the issues involved in these proceedings, Transco cannot predict the actual
timing of resolution or the ultimate amounts which might have to be refunded or
paid in connection with the resolution of these pending regulatory and legal
proceedings.

ENVIRONMENTAL MATTERS As discussed in Note 3 of the Notes to Consolidated
Financial Statements included in Item 8 herein, Transco is subject to extensive
federal, state and local environmental laws and regulations which affect
Transco's operations related to the construction and operation of its pipeline
facilities.

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

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

CONCLUSION

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

ITEM 7a. Qualitative and Quantitative Disclosures About Market Risk

Due to variable rate issues in its debt portfolio, Transco's interest
rate risk exposure is influenced by short-term rates, primarily the London
Interbank Offered Rate (LIBOR) on borrowings from commercial banks, and
long-term U.S. Treasury rates. To mitigate the impact of fluctuations in
short-term interest rates, Transco maintains a significant portion of its debt
portfolio in fixed rate debt.

In addition, Transco's interest rate risk exposure results from certain
demand notes between Transco and WGP which were first issued in 1999. Transco
currently does not expect to receive payment for the principal of these notes
prior to their maturity in 2009. The interest rate on the demand notes is LIBOR
plus a fixed rate of 0.275% per annum for January 1, 1999 to January 31, 1999
and 0.6875% per annum for February 1, 1999 to maturity of the notes.

The following tables provide information about Transco's long-term debt,
including current maturities, and long-term advances to affiliates (WGP) as of
December 31, 2000 and 1999, both of which are subject to interest rate risk. The
tables present principal cash flows and weighted-average interest rates by
expected maturity dates.

December 31, 2000 Expected Maturity Date
- ----------------- --------------------------------------------------------------
2001 2002 2003 2004
------------ ------------ ------------ ------------
(Dollars in millions)

Long-term debt:
Fixed rate........................ $ 200 $ 125 $ - $ -
Interest rate................... 7.25% 7.21% 6.77% 6.76%
Variable rate..................... $ - $ 150 $ - $ -
Interest rate (6.69% for 2000)
Long-term advances to affiliates:
Variable rate..................... $ - $ - $ - $ -
Interest rate (7.20% for 2000)..

December 31, 2000 Expected Maturity Date
- ---------------------- --------------------------------------------------------------
2005 Thereafter Total Fair Value
------------ ------------ ------------ ------------
(Dollars in millions)
Long-term debt:
Fixed rate........................ $ 200 $ 300 $ 825 $ 809
Interest rate................... 7.03% 7.22%
Variable rate..................... $ - $ - $ 150 $ 150
Interest rate (6.69% for 2000)
Long-term advances to affiliates:
Variable rate..................... $ - $ 21 $ 21 $ 21
Interest rate (7.20% for 2000)..

December 31, 1999 Expected Maturity Date
- ---------------------- --------------------------------------------------------------
2000 2001 2002 2003
------------ ------------ ------------ ------------
(Dollars in millions)
Long-term debt:
Fixed rate........................ $ - $ 200 $ 125 $ -
Interest rate................... 7.23% 7.25% 7.21% 6.77%
Variable rate..................... $ - $ - $ 150 $ -
Interest rate (5.30% for 1999)
Long-term advances to affiliates:
Variable rate..................... $ - $ - $ - $ -
Interest rate (5.90% for 1999)..

December 31, 1999 Expected Maturity Date
- ---------------------- --------------------------------------------------------------
2004 Thereafter Total Fair Value
------------ ------------ ------------ ------------
(Dollars in millions)
Long-term debt:
Fixed rate........................ $ - $ 500 $ 825 $ 783
Interest rate................... 6.76% 7.21%
Variable rate..................... $ - $ - $ 150 $ 150
Interest rate (5.30% for 1999)
Long-term advances to affiliates:
Variable rate..................... $ - $ 14 $ 14 $ 14
Interest rate (5.90% for 1999)..

ITEM 8. Financial Statements and Supplementary Data

Page

------------

Report of Independent Auditors.......................... 22

Consolidated Balance Sheet.............................. 23-24

Consolidated Statement of Income......................... 25

Consolidated Statement of Common Stockholder's Equity..... 26

Consolidated Statement of Cash Flows...................... 27-28

Notes to Consolidated Financial Statements................ 29-51

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, 2000 and 1999, and
the related consolidated statements of income, common stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 2000.
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Transcontinental Gas Pipe Line Corporation at December 31, 2000 and 1999, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

ERNST & YOUNG LLP

Tulsa, Oklahoma
February 28, 2001

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
Thousands of Dollars

December 31,
-------------------------------------
2000 1999
---------------- ----------------
ASSETS

Current Assets:
Cash ................................................................. $ 531 $ 843
Receivables:
Trade (Notes 4 and 7) .............................................. 16,725 7,057
Note receivable - TGPL Enterprises, Inc. (Notes 4 and 7)............ 116,158 24,786
Other affiliates ................................................... 10,063 14,761
Advances to affiliates ............................................. 437,706 486,930
State income taxes ................................................. - 2,811
Other .............................................................. 6,139 11,740
Transportation and exchange gas receivables:
Affiliates.......................................................... - 354
Others.............................................................. 20,640 45,611
Inventories:
Gas in storage, at LIFO ............................................ 16,793 41,599
Materials and supplies, at lower of average cost or market ......... 30,570 30,989
Gas available for customer nomination, at average cost ............. 38,047 4,612
Deferred income taxes (Note 6) ........................................ 32,909 68,081
Other ................................................................. 17,837 17,071
---------------- ----------------
Total current assets ............................................... 744,118 757,245
---------------- ----------------

Long-term advances to affiliates........................................... 20,679 13,689
---------------- ----------------

Investments, at cost plus equity in undistributed earnings ................ 62,771 58,093
---------------- ----------------
Property, Plant and Equipment:
Natural gas transmission plant ........................................ 4,767,596 4,452,101
Less - Accumulated depreciation and amortization ...................... 957,964 791,061
---------------- ----------------

Total property, plant and equipment, net ........................... 3,809,632 3,661,040
---------------- ----------------

Other Assets .............................................................. 173,739 174,336
---------------- ----------------

$ 4,810,939 $ 4,664,403
================ ================

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

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
Thousands of Dollars

December 31,
-------------------------------------
2000 1999
---------------- ----------------

LIABILITIES AND STOCKHOLDER'S EQUITY

Current Liabilities:
Payables:
Trade .............................................................. $ 69,249 $ 87,580
Affiliates ......................................................... 153,240 53,440
Advances from affiliates ........................................... 4,662 5,223
Other .............................................................. 27,265 14,954
Transportation and exchange gas payable:
Affiliates ......................................................... 2,826 868
Others ............................................................. 3,540 7,569
Accrued liabilities:
Federal income taxes payable to affiliate .......................... 40,005 21,866
State income taxes.................................................. 1,454 -
Other taxes ........................................................ 13,425 12,967
Interest ........................................................... 21,371 21,191
Employee benefits .................................................. 57,929 56,494
Other .............................................................. 17,963 20,658
Reserve for rate refunds .............................................. 31,910 159,632
Current maturities of long-term debt (Note 4).......................... 200,000 -
---------------- ----------------

Total current liabilities .......................................... 644,839 462,442
---------------- ----------------

Long-Term Debt (Note 4) ................................................... 774,850 975,330
---------------- ----------------
Other Long-Term Liabilities:
Deferred income taxes (Note 6)......................................... 860,784 879,506
Other ................................................................. 137,053 123,897
---------------- ----------------
Total other long-term liabilities .................................. 997,837 1,003,403
---------------- ----------------
Commitments and contingencies (Note 3) ....................................

Cumulative Redeemable Preferred Stock, without par value:
Authorized 10,000,000 shares: none issued or outstanding .............. - -
---------------- ----------------
Cumulative Redeemable Second Preferred Stock, without par value:
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 ..................................................... 740,983 570,798
---------------- ----------------
Total common stockholder's equity .................................. 2,393,413 2,223,228
---------------- ----------------
$ 4,810,939 $ 4,664,403
================ ================

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

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF INCOME
Thousands of Dollars

Years Ended December 31
----------------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------

Operating Revenues:
Natural gas sales.................................. $ 1,141,281 $ 703,028 $ 524,822
Natural gas transportation......................... 722,619 691,101 648,508
Natural gas storage................................ 144,272 137,050 143,275
Other ............................................. 8,064 12,277 8,531
----------------- ---------------- ----------------
Total operating revenues........................ 2,016,236 1,543,456 1,325,136
----------------- ---------------- ----------------
Operating Costs and Expenses
Cost of natural gas sales.......................... 1,141,288 702,884 524,822
Cost of natural gas transportation................. 45,658 38,400 42,765
Operation and maintenance.......................... 175,479 172,912 172,769
Administrative and general......................... 126,147 130,027 120,632
Depreciation and amortization (Note 2)............. 165,877 161,480 151,387
Taxes - other than income taxes.................... 37,904 34,927 34,392
Other ............................................. 11,964 5,601 4,632
---------------- ---------------- ----------------
Total operating costs and expenses.............. 1,704,317 1,246,231 1,051,399
----------------- ---------------- ----------------
Operating Income....................................... 311,919 297,225 273,737
----------------- ---------------- ----------------
Other (Income) and Other Deductions:
Interest expense- affiliates..................... 387 243 45
- other.......................... 76,484 70,315 91,610
Interest income - affiliates..................... (40,057) (25,770) (27,290)
- other.......................... (2) (5) (92)
Allowance for equity and borrowed funds used
during construction (AFUDC)...................... (17,522) (5,542) (9,792)
Equity in earnings of unconsolidated affiliates.... (8,117) (3,214) (239)
Miscellaneous other (income) deductions, net....... (6,861) 1,091 4,520
---------------- ---------------- ----------------
Total other (income) and other deductions....... 4,312 37,118 58,762
----------------- ---------------- ----------------
Income before Income Taxes......................... 307,607 260,107 214,975
Provision for Income Taxes (Note 6)................ 115,806 98,920 79,281
----------------- ---------------- ----------------
Net Income......................................... $ 191,801 $ 161,187 $ 135,694
================= ================ ================

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

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY
Thousands of Dollars

Years Ended December 31,
----------------------------------------------------------
2000 1999 1998

Common Stock:
Balance at beginning and end of period............. $ - $ - $ -
----------------- ---------------- ----------------
Premium on Capital Stock and Other Paid-in Capital:
Balance at beginning and end of period............. 1,652,430 1,652,430 1,652,430
----------------- ---------------- ----------------
Retained Earnings:
Balance at beginning of period..................... 570,798 409,611 273,917
Add (deduct):
Net income...................................... 191,801 161,187 135,694
Non-cash dividends on common stock.............. (21,616) - -
----------------- ---------------- ----------------
Balance at end of period........................... 740,983 570,798 409,611
----------------- ---------------- ----------------
Total Common Stockholder's Equity.................. $ 2,393,413 $ 2,223,228 $ 2,062,041
================= ================ ================

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

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of Dollars

Years Ended December 31,
----------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------

Cash flows from operating activities:
Net income............................................. $ 191,801 $ 161,187 $ 135,694
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (Note 2).............. 169,681 166,368 157,942
Deferred income taxes (Note 6)...................... 16,451 64,717 (5,729)
Allowance for equity funds used during construction
(Equity AFUDC).................................... (12,253) (3,853) (7,169)
Changes in operating assets and liabilities:
Receivables...................................... 3,438 (13,701) (16,202)
Receivables - TGPL Enterprises, Inc. (Note 7).... (91,372) (13,727) 10,836
Transportation and exchange gas receivable....... 25,325 11,880 32,547
Inventories...................................... (8,598) 2,587 4,453
Payables......................................... 97,135 57,658 (35,270)
Transportation and exchange gas payable.......... (2,071) (296) (9,674)
Accrued liabilities.............................. 20,085 (21,707) 26,363
Reserve for rate refunds......................... (127,722) (78,771) 33,849
Other, net....................................... 8,652 (28,581) (30,594)
----------------- ----------------- ----------------
Net cash provided by operating activities........ 290,552 303,761 297,046
----------------- ----------------- ----------------

Cash flows from financing activities: (Note 4)
Additions to long-term debt............................ - - 298,343
Retirement of long-term debt........................... - - (160,000)
Debt issue costs....................................... - - (2,060)
Advances from affiliates-net........................... (561) 3,438 1,579
----------------- ----------------- ----------------
Net cash provided by (used in) financing activities (561) 3,438 137,862
----------------- ----------------- ----------------

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of Dollars

Years Ended December 31,
----------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------

Cash flows from investing activities:
Property, plant and equipment:
Additions, net of equity AFUDC...................... (335,757) (186,297) (301,078)
Changes in accounts payable......................... (3,332) 958 (2,629)
Sale of assets......................................... 180 2,503 -
Advances to affiliates, net............................ 42,235 (82,670) (136,289)
Investments in affiliates, net......................... (2,079) (45,940) (1,954)
Other, net............................................. 8,450 3,620 7,191
----------------- ----------------- ----------------
Net cash used in investing activities......... (290,303) (307,826) (434,759)
----------------- ----------------- ----------------

Net increase (decrease) in cash........................ (312) (627) 149
Cash at beginning of period............................ 843 1,470 1,321
----------------- ----------------- ----------------
Cash at end of period.................................. $ 531 $ 843 $ 1,470
================= ================= ================

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (exclusive of amount capitalized)....... $ 78,996 $ 83,539 $ 62,287
Income taxes paid................................ 77,069 41,893 86,862
Income tax refunds received...................... (118) (1,486) (77)

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

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Structure and Control........................................... 29
2. Summary of Significant Accounting Policies................................ 29
3. Contingent Liabilities and Commitments.................................... 33
4. Debt, Financing Arrangements and Leases................................... 43
5. Employee Benefit Plans.................................................... 45
6. Income Taxes.............................................................. 47
7. Financial Instruments..................................................... 48
8. Transactions with Major Customers and Affiliates.......................... 49
9. Quarterly Information (Unaudited)......................................... 50

1. CORPORATE STRUCTURE AND CONTROL

Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned
subsidiary of Williams Gas Pipeline Company, LLC (WGP). WGP is a wholly-owned
subsidiary of The Williams Companies, Inc. (Williams).

Transco's Board of Directors declared non-cash dividends in the amount of
$21.6 million for the spin-down of the Tilden/McMullen facilities of $18.1
million and other property of $3.5 million.

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. Transco also holds a minority interest in an intrastate
natural gas pipeline in North Carolina.

BASIS OF PRESENTATION The acquisition of Transco Energy Company (TEC) and
its subsidiaries, including Transco, by Williams in 1995 was 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 purchase price allocation to Transco primarily
consisted of a $1.5 billion allocation to property, plant and equipment and
adjustments to deferred taxes based upon the book basis of the net assets
recorded as a result of the acquisition. The amount allocated to property, plant
and equipment is being amortized on a straight-line basis over 40 years, the
estimated useful lives of these assets at the date of acquisition, at
approximately $36 million per year. Current Federal Energy Regulatory Commission
(FERC) policy does not permit Transco to recover through rates amounts in excess
of original cost.

As a participant in Williams' cash management program, Transco and its
subsidiaries have advances to and from Williams through Transco's parent
company, WGP. These advances are represented by demand notes. Transco currently
expects to receive payment of these advances within the next twelve months and
has recorded such advances as current in the accompanying Consolidated Balance
Sheet. Transco also made advances to WGP that are not expected to be repaid
within the next twelve months and has recorded such advances as long-term
advances to affiliates in the accompanying Consolidated Balance Sheet. The
interest rate on intercompany demand notes is the London Interbank Offered Rate
plus a rate ranging from 0.625% to 0.6875% per annum.

Through an agency agreement with Transco, Williams Energy Services Company
(WESCO), an affiliate of Transco, manages Transco's jurisdictional merchant gas
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 operations.

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of Transco and its 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; certain other gains or losses are recorded in net income.

Depreciation rates used for major regulated gas plant facilities at
December 31, 2000, 1999, and 1998 were:

Category of Property 2000 1999 1998
- ------------------------- ----------- ----------- ------------

Gathering facilities 2.60%-3.80% 2.60%-3.80% 2.60%-3.80%
Storage facilities 2.50% 2.50% 2.50%
Onshore transmission facilities 2.35% 2.35% 2.35%
Offshore transmission facilities 1.50% 1.50% 1.50%

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

Under the terms of a settlement in Transco's general rate case in Docket
No. RP97-71, which was effective May 1, 1997, Transco agreed to reduce the
depreciation rate for offshore transmission facilities. The reduction in the
depreciation rate 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 the rate was recorded in 1998, retroactive to May
1, 1997.

ACCOUNTING FOR REPAIR AND MAINTENANCE COSTS Transco accounts for repair
and maintenance costs under the guidance of FERC regulations. The FERC
identifies installation, construction and replacement costs that are to be
capitalized. All other costs are expensed as incurred.

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 Transco with an amount equivalent to its
federal income tax expense or benefit computed as if Transco had filed a
separate return.

Transco uses the liability method of accounting for 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 Revenues for sales of products are recognized in the
period of delivery and revenues from the transportation of gas are recognized
based on contractual terms and the related transported volumes. Transco is
subject to FERC regulations and, accordingly, certain revenues collected may be
subject to possible refunds upon final orders in pending cases. Transco records
rate refund liabilities considering Transco and other third party regulatory
proceedings, advice of counsel and estimated total exposure, as discounted and
risk weighted, as well as collection and other risks.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Among other things, SAB No. 101 clarifies certain conditions
regarding the culmination of an earnings process and customer acceptance
requirements in order to recognize revenue. The initial impact of SAB No. 101 on
Transco's results of operations and financial position was not material.

ALLOWANCE 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,
2000 and 1999, Transco had no allowance for doubtful accounts.

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

CASH FLOWS FROM OPERATING ACTIVITIES Transco uses the indirect method to
report cash flows from operating activities, which requires adjustments to net
income to reconcile to net cash flows provided by operating activities.

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 $5.3 million, $1.7 million, and $2.6 million for 2000, 1999 and 1998,
respectively. The allowance for equity funds was $12.2 million, $3.9 million,
and $7.2 million for 2000, 1999 and 1998, respectively.

GAS INVENTORY Transco utilizes the last-in, first-out (LIFO) method of
accounting for inventory gas in storage. Transco utilizes the average cost
method of accounting for gas available for customer nomination.

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 tariff includes a method whereby most transportation
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 upon agreement of the parties as to the
allocation of the gas volumes, and as permitted by pipeline operating
conditions. These imbalances have been classified as current assets or current
liabilities at December 31, 2000 and 1999.

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 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 1999,
the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133.
This was followed in June 2000 by the issuance of SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which amends
SFAS No. 133. SFAS No. 133 and 138 establish accounting and reporting standards
for derivative financial instruments. The standards require that all derivative
financial instruments be recorded on the balance sheet at their fair value.
Changes in fair value of derivatives will be recorded each period in earnings if
the derivative is not a hedge. If a derivative is a hedge, changes in the fair
value of the derivative will either be recognized in earnings along with the
change in fair value of the hedged asset, liability or firm commitment also
recognized in earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. For a derivative recognized in other
comprehensive income, the ineffective portion of a derivative's change in fair
value will be recognized immediately in earnings. Transco adopted these
standards effective January 1, 2001. The adoption of these standards did not
have a material impact on Transco's results of operations and financial
position.

The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Statement provides
guidance for determining whether a transfer of financial assets should be
accounted for as a sale or a secured borrowing, and whether a liability has been
extinguished. The Statement is effective for recognition and reclassification of
collateral and for disclosures which relate to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Statement will
become effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The initial
application of SFAS No. 140 will not have a material impact on Transco's results
of operations and financial position.

The FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." This interpretation modifies the
current practice of accounting for certain stock award agreements and is
generally effective beginning July 1, 2000. The initial impact of this
interpretation on Transco's results of operations and financial position was not
material.

Reclassifications Certain reclassifications have been made in the 1999 and
1998 financial statements to conform to the 2000 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.

When stated on a comparable basis, the rates Transco placed into effect on
May 1, 1997, subject to refund, represented 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 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.

On November 29, 1996, the FERC issued an order accepting Transco's filing,
suspending its effectiveness until May 2, 1997 (subsequently revised, on
rehearing, to May 1, 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.

On January 20, 1998, Transco filed a Stipulation and Agreement for
approval by the FERC, which 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. On June 12, 1998, the FERC issued
an order approving the settlement. On October 30, 1998, Transco issued refunds
in connection with the settlement in the amount of $89.5 million, including
interest, for which Transco had previously provided a reserve. The issues not
resolved by the settlement were litigated by the parties before a FERC
Administrative Law Judge (ALJ). On March 30, 1999, the ALJ issued her initial
decision which is consistent with the rate of return and capital structure
policies FERC announced in RP95-197 (see discussion below). Applying these
policies, the ALJ recommended utilization of Transco's own capital structure,
consisting of 60.2% equity, and a return on equity of 12.40%. Based on
developments in regulatory proceedings involving Transco, and on advice from
counsel, in the fourth quarter of 1999, Transco adjusted its reserve for rate
refunds by $26.0 million ($23.4 million of principal and $2.6 million of
interest) to reflect its conclusion that the risk associated with one of the
issues in this proceeding has been eliminated. On March 17, 2000, the FERC
issued an order which, among other things, affirmed the ALJ's decision on the
rate of return and capital structure issues. On April 17, 2000, several parties
requested rehearing of, among other things, issues related to the FERC's rate of
return decision in the March 17, 2000, order. Transco evaluated the effect of
the order and requests for rehearing and, during the second quarter of 2000,
reduced its reserve for rate refunds by $71.2 million ($62.7 million of
principal and $8.5 million of interest) to reflect its conclusion that the risk
associated with certain of the issues in this proceeding has been eliminated. On
November 1, 2000, Transco made rate refunds of $95 million, including interest,
for the period May 1, 1997 through February 29, 2000. On January 24, 2001, the
FERC issued an order denying all of the requests for rehearing of the March 17,
2000 order, and directing Transco to file revised tariff sheets consistent with
the order effective February 1, 2001 and to make appropriate refunds. Transco
has provided reserves which it believes are adequate for any additional rate
refunds.

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%.

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.

On June 19, 1996, Transco filed with the FERC a Stipulation and Agreement
which resolved cost of service (except capital structure and rate of return),
throughput level and mix, and certain cost allocation and rate design issues.
The agreement also reserved certain other issues for hearing, 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 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 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.

Following a hearing before an ALJ, the ALJ's initial decision and an
August 1, 1997, order from the FERC, the FERC issued a rehearing order on July
29, 1998, addressing Transco's capital structure and rate of return for
ratemaking purposes. As to capital structure, the FERC affirmed the use of
Transco's own capital structure, consisting of 57.58% equity, in developing
Transco's rate of return in this proceeding. As discussed in greater detail
below, the FERC also modified its previously used methodology for determining
return on equity. Applying its revised methodology to Transco in this
proceeding, the FERC established a rate of return on equity for Transco of
12.49%. A joint request for rehearing of the July 29, 1998 order was filed with
the FERC and, on December 1, 1998, the FERC denied rehearing. On January 29,
1999, most of the same parties that were involved in the joint request for
rehearing filed a notice of appeal with the United States Court of Appeals for
the District of Columbia (D.C. Circuit Court). Transco made refunds on March 1,
1999 of approximately $96.0 million, including interest, under Docket No.
RP95-197 for which Transco had previously provided a reserve. During the first
half of 1999, Transco engaged in an analysis of the court appeal and,
particularly, its likely results. Based on developments in regulatory
proceedings in the second quarter of 1999 involving Transco and others, and
advice received from counsel, Transco adjusted its remaining reserve for rate
refunds ($28.1 million of principal and $5.9 million of interest) in the second
quarter of 1999 to take into account the FERC's revised rate of return
methodology as applied in the July 29, 1998, and December 1, 1998 orders. On
February 7, 2000, the D.C. Circuit Court denied the appeal filed in January
1999.

The hearing concerning the other cost allocation and rate design 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. On
March 24, 1998, the ALJ issued an initial decision on all of these issues. As to
the main issue addressed in the decision, rolled-in pricing, the ALJ determined
that the proponents of roll-in, including Transco, must satisfy the burden under
Section 5 of the NGA and demonstrate that Transco's existing incremental rate
treatment is unjust and unreasonable and that the proposed rolled-in rate
treatment is just and reasonable. The ALJ ruled that neither Transco nor any of
the other roll-in proponents had satisfied that burden and, therefore, that
Transco's existing incremental rate treatment must remain in effect. On April
16, 1999, the FERC issued an order reversing the ALJ, concluding that Transco's
proposal did not have to meet the Section 5 burden discussed above and that
under the appropriate standard, Section 4, Transco had demonstrated that its
proposal was just and reasonable. As a result, the FERC remanded to the ALJ
issues regarding the implementation of Transco's roll-in proposal. Several
parties have filed requests for rehearing of the FERC's April 16, 1999 order. On
April 4, 2000, the ALJ issued an initial decision on the remanded issues
relating to the implementation of Transco's roll-in proposal. The ALJ ruled in
favor of Transco's positions, with the exception of one of Transco's proposed
cost allocation changes and a requirement that the roll-in of the costs of the
incremental projects into Transco's system rates be phased in over a three-year
period. The ALJ's initial decision is subject to review by the FERC.

RATE OF RETURN CALCULATION The FERC uses a methodology for calculating
pipeline rates of return that incorporates a long-term growth rate component.
The long-term growth rate component used by the FERC is a projection of U.S.
gross domestic product growth rates. Generally, calculating rates of 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. 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. As discussed above, in
its July 29, 1998 order, the FERC modified its rate of return methodology with
regard to the weight to be given to the long-term growth component. Under its
previous methodology, the FERC averaged the short and long-term growth
projections, thereby giving them equal weight. In its July 29, 1998 order, the
FERC changed its policy and will accord the short-term projection a two-thirds
weighting and the long-term projection a one-third weighting. The FERC has
determined that the short-term projection is more reliable and should be given
more weight, but that the long-term projection should be given some weight in
order to normalize any distortions that may be reflected in the short-term data.
The revised weighting to be reflected in the FERC's methodology should lead to
somewhat higher rates of return on equity than were obtained under the previous
methodology. In addition, the FERC will now permit parties to argue that a
pipeline's return on equity be established at any point within the range of
returns developed under the two-stage methodology (rather than only at the high,
mid or low point in the range) based on the pipeline's relative level of risk.
In that regard, when assessing a pipeline's relative risk, the FERC determined
that it will not lower a pipeline's return on equity if its lower risk is the
result of the pipeline's own efficiency, but will focus on risks faced by the
pipeline that are attributable to circumstances outside the control of the
pipeline's management.

PRODUCTION AREA RATE DESIGN (Docket Nos. RP92-137, RP93-136 and RP98-381)
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 (Docket Nos. RP92-137 and RP93-136),
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, filed petitions for review in the D.C. Circuit Court of the
FERC's orders addressing production area rate design issues. Those appeals were
held in abeyance pending the outcome of the proceedings in Transco's Docket No.
RP98-381. In light of the FERC's orders rejecting Transco's proposal in Docket
No. RP98-381, Transco withdrew its appeal and the remaining appeal was restored
to the active docket. On March 24, 2000, the D.C. Circuit Court issued its
opinion in the remaining appeal. The court determined that the FERC failed to
adequately explain its decision to reject Transco's production area rate design
proposal for its supply laterals, and remanded the case back to the FERC for
further action. In response to an order issued by the FERC on July 31, 2000, the
parties submitted briefs on the issues in order to assist the FERC in
determining how best to proceed in this case.

On August 31, 1998, Transco made a limited NGA Section 4 filing with the
FERC to implement firm transportation service on Transco's production area
supply laterals in accordance with the option authorized by the FERC's July 3
and December 18, 1996 orders. The filing (Docket No. RP98-381) was protested,
and on September 30, 1998, the FERC accepted the filing and suspended its
effectiveness until March 1, 1999, subject to further proceedings. On December
16, 1998, the FERC determined that the filing was not barred by prior Transco
settlements, but on February 24, 1999, issued an order rejecting the filing,
finding that Transco's proposal, as filed, conflicts with certain FERC policies.
The FERC indicated that Transco could pursue implementation of firm service on
Transco's production area supply laterals to the extent the service is
structured in a way that conforms with those policies. Transco sought rehearing
of the February 24, 1999 order and on July 29, 1999, the FERC issued an order
denying all requests for rehearing in this proceeding. As a result, Transco's
production area supply lateral service remains unchanged.

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 (Gas Processing), an affiliate of Transco. The
net book value recorded by Transco at December 31, 2000 of the facilities was
approximately $445 million. Operating income recorded by Transco for the year
ended December 31, 2000 associated with the facilities was approximately $4
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, Gas Processing filed a
petition for declaratory order requesting a determination that its gathering
services and rates be exempt from FERC regulation under the NGA. On September
25, 1996, the FERC issued an order dismissing Transco's application and Gas
Processing's petition for declaratory order. On October 25, 1996, Transco and
Gas Processing filed a joint request for rehearing of the FERC's September 25
order, and in August 1997, filed a request that rehearing be expedited.

On June 1, 1998, the FERC issued a Notice of Inquiry (NOI) into
alternative methods for regulating natural gas pipeline facilities and services
on the Outer Continental Shelf (OCS). The purpose of the NOI is to generate
public comment that will assist the FERC in exploring possible alternatives to
the FERC's current test used to determine whether offshore pipeline facilities
and services should be subject to the FERC's NGA jurisdiction.

On June 30, 1999, informed by the comments submitted in response to the
NOI, the FERC issued a Notice of Proposed Rulemaking (NOPR), which proposed
regulatory requirements under the Outer Continental Shelf Lands Act (OCSLA) to
ensure that gas is transported on an open and nondiscriminatory basis through
pipelines located on the OCS. The proposed regulations will apply both to
NGA-jurisdictional and NGA-exempt offshore gas transportation service providers,
and will require that those OCS gas transportation service providers, subject to
certain exemptions, make available information regarding their affiliations and
the conditions under which service is rendered. These proposed reporting
requirements are intended by the FERC to assure that open access and
nondiscriminatory conditions of service, including nondiscriminatory rates,
exist for shippers using OCS facilities. On April 10, 2000, the FERC adopted
final regulations generally consistent with the NOPR.

Also on June 30, 1999, the FERC modified, in a case involving Sea Robin
Pipeline Company, the test that the FERC will use to determine the
jurisdictional status of OCS pipeline systems. In the Sea Robin case, the FERC
determined that in assessing the jurisdictional status of offshore facilities,
the location of gas processing plants will not be afforded greater significance
than other factors used in the test. In addition, the FERC determined that the
location of a collection facility, where gas is delivered by several relatively
small diameter lines for aggregation and preparation for further delivery
onshore through a single larger diameter pipeline, will be given considerable
weight for determining the demarcation point between gathering and
jurisdictional transportation on the OCS. The FERC stated that it will use this
modified test, and any additional refinements that the FERC may develop to
further adapt the test to the physical characteristics of moving gas across the
OCS, to determine the jurisdictional status of the OCS pipeline systems.

In the absence of any action by the FERC in response to Transco's
rehearing request, Transco has filed with the FERC the two applications
described below seeking authorization to abandon portions of the facilities
included in the February 1996 application.

TILDEN/MCMULLEN FACILITIES SPIN-DOWN PROCEEDING (Docket Nos. CP98-236 and
242) In February 1998, Transco filed an application with the FERC seeking
authorization to abandon Transco's onshore Tilden/McMullen Gathering System
located in Texas by conveyance to Gas Processing. Gas Processing filed a
contemporaneous request that the FERC declare that the facilities sought to be
abandoned would be considered nonjurisdictional gathering facilities upon
transfer to Gas Processing. In May 1999, the FERC issued an order in which it
determined that certain of the facilities would be gathering facilities upon
transfer to Gas Processing, i.e., 1) those facilities upstream of and including
the Tilden Plant, 2) the South McMullen and Goebel Laterals located downstream
of the Tilden Plant, and 3) the small, short laterals which branch out from the
McMullen Lateral downstream of the Tilden Plant at several points along its
length. However, the FERC determined that the McMullen Lateral itself, as well
as two compressor units, are jurisdictional facilities, but authorized their
abandonment subject to Gas Processing obtaining a certificate to operate those
facilities. On June 3, 1999, Transco and Gas Processing filed for rehearing of
the order with regard to the facilities classified by the FERC as jurisdictional
facilities, and on October 5, 1999, the FERC denied the rehearing request. On
March 7, 2000, Transco filed a limited NGA Section 4 filing with the FERC,
notifying the FERC that Transco intended to effectuate the spin-down to Gas
Processing of the Tilden/McMullen facilities determined by the FERC to be
nonjurisdictional gathering facilities to be effective April 1, 2000, and
adjusting Transco's rates on a prospective basis effective with the spin-down to
reflect a decrease in Transco's overall cost of service, rate base and operation
and maintenance expense resulting from the spin-down. The net book value of the
facilities included in this limited NGA filing is approximately $18 million and
annual operating income associated with these facilities is estimated to be less
than $1 million. On April 6, 2000, the FERC issued an order accepting the March
7, 2000, filing effective April 1, 2000, subject to refund and the outcome of
the Docket No. RP97-71 proceeding. Effective April 1, 2000, the applicable
Tilden/McMullen facilities were spun down by Transco through a non-cash dividend
of $18.1 million.

NORTH PADRE ISLAND/CENTRAL TEXAS SYSTEM SPIN-DOWN PROCEEDING (Docket Nos.
CP01-32-000 and CP01-34-000) In November 2000, Transco filed an application with
the FERC seeking authorization to abandon certain of Transco's offshore Texas
facilities by conveyance to Gas Processing. Gas Processing filed a
contemporaneous request that the FERC declare that the facilities sought to be
abandoned would be considered nonjurisdictional gathering facilities upon
transfer to Gas Processing. These applications are currently pending before the
FERC.

1999 FUEL TRACKER (Docket No. TM99-6-29) On March 1, 1999, Transco made
its annual filing pursuant to its FERC Gas Tariff to recalculate the fuel
retention percentages applicable to Transco's transportation and storage rate
schedules, to be effective April 1, 1999. Included in the filing were two
adjustments that increased the estimated gas required for operations in prior
periods by approximately 8 billion cubic feet. By letter order dated March 31,
1999, the FERC accepted the filing to be effective April 1, 1999, subject to
refund and to further FERC action.

On February 23, 2000, the FERC issued an order disallowing the major
portions of the adjustments reflected in the March 1, 1999 filing. The FERC
determined that Transco's tariff does not permit those adjustments, and as a
result, the passthrough of those prior period adjustments must be determined on
a case by case basis, based on the relative equities involved. Based on its
analysis of the facts in this case, the FERC found in the February 23, 2000
order that the equities weighed against Transco. On March 24, 2000, Transco
filed a request for rehearing of the February 23, 2000 order and on October 30,
2000, the FERC issued an order granting rehearing. The FERC found that its
decision to disallow the adjustments amounted to a "penalty" that is not
equitable to Transco. The FERC therefore permits Transco to make the
adjustments, but requires Transco to collect the revenue associated with the
adjustments over a seven-year period. On November 29, 2000, several of Transco's
customers jointly filed for rehearing of the FERC's October 30 order. On
December 29, 2000, Transco filed tariff sheets and supporting documentation in
compliance with the FERC's October 30 order, and certain parties protested that
filing. The requests for rehearing and Transco's compliance filing are pending
before the FERC.

REGULATION OF SHORT TERM NATURAL GAS TRANSPORTATION SERVICE (Docket No.
RM98-10-000) and REGULATION OF NATURAL GAS TRANSPORTATION SERVICES (Docket No.
RM98-12-000) On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking
(NOPR) and a Notice of Inquiry (NOI), proposing revisions to, and seeking
comments on, its regulatory policies for interstate natural gas transportation
service. In the NOPR (Docket No. RM98-10-000), the FERC proposed revisions to
its regulations to reflect changes in the market for short-term transportation
services on pipelines. The FERC proposes to eliminate cost-based regulation of
short-term transportation services and implement regulatory policies that are
intended to maximize competition in the short-term transportation market,
mitigate the ability of firms to exercise residual monopoly power and provide
opportunities for greater flexibility in the provision of pipeline services.
Included among the proposed changes were initiatives to revise pipeline
scheduling procedures, receipt and delivery point policies, and penalty
policies, to require pipelines to auction short-term capacity, to revise the
FERC's reporting requirements, to permit pipelines to negotiate rates and terms
of service, and to revise certain rate and certificate policies. In the NOI
(Docket No. RM98-12-000), the FERC sought comments on its pricing policies in
the existing long-term market and pricing policies for new capacity. On April
22, 1999, Williams filed comments on the NOPR and NOI. In general, Williams
comments were supportive of the FERC's initiatives, particularly to the extent
that such initiatives would result in a more competitive, market-based
environment.

On February 9, 2000, the FERC issued a final rule, Order 637, in response
to the comments received on the NOPR and NOI. The FERC adopts in Order 637
certain policies that it finds are necessary to adjust its current regulatory
model to the needs of the evolving markets, but determines that any fundamental
changes to its regulatory policy, which changes were raised and commented on in
the NOPR and NOI, will be considered after further study and evaluation of the
evolving marketplace. Most significantly, in Order 637, the FERC (i) revises its
pricing policy to waive, for a two-year period, the maximum price ceilings for
short-term releases of capacity of less than one year, and (ii) permits
pipelines to file proposals to implement seasonal rates for short-term services
and term-differentiated rates, subject to certain requirements including the
requirement that a pipeline be limited to recovering its annual revenue
requirement under those rates.

STATEMENT OF POLICY ON CERTIFICATION OF NEW INTERSTATE NATURAL GAS
PIPELINE FACILITIES (Docket No. PL99-3-000) On September 15, 1999, the FERC
issued a Policy Statement to provide guidance to the industry on how the FERC
will evaluate proposals for the certification of new pipeline facility
construction. The Policy Statement is the result, in part, of information
received by the FERC in comments on the NOPR and NOI as well as a recent public
conference on future demand for natural gas in the northeastern United States.
The FERC's stated goals in issuing the Policy Statement are to foster
competitive markets, protect captive customers, and avoid unnecessary
environmental and community impacts while serving increasing demands for natural
gas. The FERC also seeks to provide appropriate incentives for the optimal level
of construction and efficient customer choices, and for applicants to structure
their projects to avoid, or minimize, the potential impacts that could result
from construction of a project. The Policy Statement sets forth several
analytical steps that will be used by the FERC in evaluating applications for
new facility construction. The threshold question for existing pipelines is
whether the project can proceed without subsidies from the pipeline's existing
customers, which usually, but not always, will mean that the project would be
incrementally priced. The FERC will then determine whether the applicant has
made efforts to eliminate or minimize any adverse effects the project might have
on existing customers of the applicant pipeline, existing pipelines in the
market and their captive customers, or landowners and communities affected by
the route of the new pipeline. If adverse economic effects are found, the FERC
will balance the public benefits of the project against the adverse effects, and
will proceed to evaluate the application only if the benefits outweigh the
adverse economic effects. If the proposed project will not have any adverse
effects, no balancing of the benefits against adverse impacts will be necessary.
The Policy Statement does not apply to new construction covered by blanket
certificate authority and originally did not apply to new construction covered
by optional certificate authority. The FERC has indicated that it will not apply
the Policy Statement to applications received prior to July 29, 1998. Numerous
parties filed comments on, or petitions for, rehearing of the Policy Statement,
and on February 9, 2000 the FERC issued an order clarifying the Policy Statement
to provide, among other things and most significantly, that the Policy
Statement's balancing process can be used to rebut the presumption embodied in
the optional certificate regulation that a project is required by the public
convenience and necessity. The Policy Statement is not a rule, but will be used
by the FERC to evaluate applications on a case-by-case basis.

LEGAL PROCEEDINGS

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 in 1998, 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. In addition, through December
31, 2000, postjudgment interest was approximately $7.5 million. On June 8, 2000,
the Texas Court of Appeals affirmed the trial court judgment and on February 1,
2001, Transco's rehearing request was denied. Transco is pursuing an appeal to
the Texas Supreme Court and continues to believe that it has meritorious
defenses to Texaco's claims.

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 30, 1995, FMP filed a petition for
specific performance seeking recovery against Transco for the sums claimed under
the settlement agreements. In May 1998, FMP filed a motion for summary judgment
which Transco opposed. In September 1998, the court granted FMP's motion finding
that at least a portion of FMP's payment to the MMS was subject to
indemnification. Transco appealed the court's ruling, and in March 2000, the
appellate court reversed the trial court and remanded the case for trial.

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 was alleged to
have purchased gas from the field. Transco filed an answer denying liability for
the claim. In August 2000, this lawsuit was settled. Although Transco did not
make any contribution to the settlement, one producer participating in the
settlement has asserted against Transco a claim for indemnification in the
amount of approximately $6.7 million. Transco has denied the producer's claim.

In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly-owned subsidiaries including Transco. Mr. Grynberg has
also filed claims against approximately 300 other energy companies and alleges
that the defendants violated the False Claims Act in connection with the
measurement and purchase of hydrocarbons. The relief sought is an unspecified
amount of royalties allegedly not paid to the federal government, treble
damages, a civil penalty, attorneys' fees, and costs. On April 9, 1999, the
United States Department of Justice announced that it was declining to intervene
in any of the Grynberg qui tam cases; including the action filed against the
Williams entities in the United States District Court for the District of
Colorado. On October 21, 1999, the Panel on Multi-District Litigation
transferred all of the Grynberg qui tam cases, including those filed against
Williams, to the United States District Court for the District of Wyoming for
pre-trial purposes. Motions to dismiss the complaints filed by various
defendants, including Transco, are pending.

ENVIRONMENTAL MATTERS

In July 1999, Transco received a letter stating that the U.S. Department
of Justice (DOJ), at the request of the U.S. Environmental Protection Agency
(EPA), intends to file a civil action against Transco arising from its waste
management practices at Transco's compressor stations and metering stations
located in eleven (11) states from Texas to New Jersey. DOJ stated in the letter
that its complaint will seek civil penalties and injunctive relief under federal
environmental laws. DOJ offered to discuss settlement of the claim and
discussions began in September 1999 and have continued throughout 2000 and into
2001. While no specific amount has been proposed, DOJ has stated that any
settlement must include an appropriate civil penalty for the alleged violations.
Transco cannot reasonably estimate the amount of its potential liability, if
any, at this time. However, Transco believes it has substantially addressed
environmental concerns on its system through ongoing voluntary remediation and
management programs.

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 $35 million to $40 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, 2000, Transco had a reserve of approximately $35 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 estimated costs of
environmental assessment and remediation have been recorded as regulatory assets
in current assets and other 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 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 $35 million to $40 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 except as indicated above in reference to the July 1999 DOJ letter, no
assurance can be given that the EPA will not seek such penalties in the future.

Transco has been identified as a potentially responsible party (PRP) at
various Superfund and state waste disposal sites. Based on present volumetric
estimates and other factors, Transco's estimated aggregate exposure for
remediation of these sites is less than $500,000. The estimated remediation
costs for all such sites have been included in Transco's environmental reserve
discussed above. Liability under CERCLA (and applicable state law) can be joint
and several with other PRPs. Although volumetric allocation is a factor in
assessing liability, it is not necessarily determinative; thus, the ultimate
liability could be substantially greater than the amounts described above.

Transco is also subject to the federal Clean Air Act and to the federal
Clean Air Act Amendments of 1990 (1990 Amendments), which added significantly to
the existing requirements established by the federal Clean Air Act. The 1990
Amendments required that the EPA issue new regulations, mainly related to
stationary sources, air toxics, ozone non-attainment areas and acid rain. During
the last few years Transco has been acquiring all necessary permits and
installing new emission control devices required for new or modified facilities
in areas designated as attainment by EPA and is continuing that process. Transco
operates facilities in some areas of the country currently designated as
non-attainment and it anticipates that by the end of the year 2001 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,
and recently proposed EPA rules designed to mitigate the migration of
ground-level ozone (NOx) in 22 eastern states, Transco is planning installation
of air pollution controls on existing sources at certain facilities in order to
reduce NOx emissions. Transco anticipates that additional facilities may be
subject to increased controls within five years. For many of these facilities,
Transco is developing more cost effective and innovative compressor engine
control designs. Due to the developing nature of federal and state emission
regulations, it is not possible to precisely determine the ultimate emission
control costs. In addition, the Texas Natural Resources Conservation Commission
(TNRCC) has issued regulations regarding emissions in the Houston/Galveston and
Beaumont/Port Arthur areas of Texas. The emission control additions required to
comply with current federal Clean Air Act requirements, the 1990 Amendments, the
TNRCC regulations and the individual state implementation plans for NOx
reductions are estimated to cost in the range of $245 million to $265 million.
These costs may be incurred over the next four 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 2001 which impact
Transco's operations, the cost of additions to property, plant and equipment is
expected to increase. Transco is unable at this time to estimate with any
certainty the cost of additions that may be required to meet new regulations,
although it is believed that some of those costs are included in the ranges
discussed above. Additionally, the EPA is expected to promulgate new rules
regarding hazardous air pollutants in early 2001, which may impose controls in
addition to the controls described above. Transco at this time cannot predict
with any certainty the exact cost associated with the installation of those
controls. Transco considers costs associated with compliance with the
environmental laws and regulations described above 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 or cash flow
requirements.

OTHER COMMITMENTS

Commitments for construction Transco has commitments for construction and
acquisition of property, plant and equipment of approximately $52 million at
December 31, 2000 of which the majority relates to construction materials for
pipeline expansion projects.

4. DEBT, FINANCING ARRANGEMENTS AND LEASES

LONG-TERM DEBT At December 31, 2000 and 1999, long-term debt issues were
outstanding as follows (in thousands):

2000 1999
------------------ ------------------

Debentures:
7.08% due 2026......................................... $ 200,000 $ 200,000
7.25% due 2026......................................... 200,000 200,000
------------------ ------------------
Total debentures.................................... 400,000 400,000
------------------ ------------------
Notes:
8-7/8% due 2002........................................ 125,000 125,000
Variable rate due 2002................................. 150,000 150,000
6-1/8% due 2005........................................ 200,000 200,000
6-1/4% due 2008........................................ 100,000 100,000
------------------ ------------------
Total notes......................................... 575,000 575,000
------------------ ------------------
Total long-term debt issues.................................. 975,000 975,000
Unamortized debt premium and discount.................. (150) 330
Current maturities..................................... (200,000) -
------------------ ------------------

Total long-term debt, less current maturities................ $ 774,850 $ 975,330
================== ==================

Sinking fund or prepayment requirements applicable to long-term debt
outstanding at December 31, 2000 are as follows (in thousands):

2001:

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

2002:

8-7/8% Note........................................ $ 125,000
Variable rate Note................................. 150,000
--------------
Total........................................... $ 275,000
==============

2005:

6-1/8% Note........................................ $ 200,000
==============

There are no sinking fund requirements applicable to long-term debt
outstanding for the years 2003 and 2004.

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

The $200 million of current maturities of long-term debt consists of 7.08%
Debentures that mature on July 15, 2026, but are subject to redemption, at any
time 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 have 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. If the holders of the 7.08% Debentures elect to have the 7.08%
Debentures repaid, Transco intends to refinance the debt on a long-term basis by
accessing public and private markets and utilizing any shelf availability under
the registration statement previously filed with the Securities and Exchange
Commission.

Williams and certain of its subsidiaries, including Transco, are parties
to a $700 million credit agreement (Credit Agreement), under which Transco can
borrow up to $400 million if the funds available under the Credit Agreement have
not been borrowed by Williams or other subsidiaries. This agreement excludes
Williams Communications Group Inc. (WCG). 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. The Credit Agreement contains
restrictions which limit, under certain circumstances, the issuance of
additional debt, the attachment of liens on any assets and any change of
ownership of Transco. As of December 31, 2000, Transco had no outstanding
borrowings under this agreement.

RESTRICTIVE COVENANTS At December 31, 2000, none of Transco's debt
instruments restrict the amount of dividends distributable.

SALE OF RECEIVABLES Transco has an agreement to sell, on an ongoing basis,
certain of its trade receivables to a special-purpose entity (SPE), TGPL
Enterprises, Inc. At December 31, 2000 and 1999, Transco had transferred to the
SPE receivables totaling $216 million and $117 million, respectively.

LEASE OBLIGATIONS Prior to December 23, 1998, Transco had a 20-year lease
agreement for its headquarters building (Williams Tower) which expires in 2004
(Williams Tower lease). On December 23, 1998, Transco assigned and transferred
to Laughton, L.L.C., (Laughton), an affiliate of Transco, all its right, title
and interest in the Williams Tower lease and entered into an agreement to
sublease the premises from Laughton through March 29, 2003 (Williams Tower
sublease). All other terms of the Williams Tower lease are incorporated into the
Williams Tower sublease, including sublease agreements between Transco and other
parties that also expire in 2004.

The future minimum lease payments under Transco's various operating
leases, including the Williams Tower sublease, net of future minimum sublease
receipts under Transco's existing sublease agreements through March 29, 2003,
are as follows (in thousands):

Operating Leases
-----------------------------------------------------------
Williams Tower Other Leases Total
----------------- ----------------- -----------------

2001...................................... $ 25,028 $ 3,088 $ 28,116
2002...................................... 24,985 3,088 28,073
2003...................................... 6,247 2,606 8,853
2004...................................... - 2,509 2,509
2005...................................... - 2,509 2,509
Thereafter................................ - 2,370 2,370
----------------- ----------------- -----------------
Total net minimum obligations..... $ 56,260 $ 16,170 $ 72,430
================= ================= =================

The allocation of the Williams 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 Williams Tower lease obligation was in excess of
fair value. The liability is being amortized over the term of the lease. At
December 31, 2000, the unamortized portion of the liability was $15.4 million.

Transco's lease expense was $18.1 million in 2000, $19.3 million in
1999, and $17.4 million in 1998.

5. EMPLOYEE BENEFIT PLANS

PENSION PLAN Prior to January 1, 1999, Transco maintained a separate
defined-benefit pension plan (Transco Plan) that provided benefits to Transco's
officers and employees. Effective January 1, 1999, the Transco plan was merged
with and into the Williams Pension Plan (Williams Plan), a non-contributory
defined-benefit pension plan, and Transco began participation in the Williams
Plan with Williams and its subsidiaries. Cash contributions related to Transco's
participation in the Williams Plan totaled $7.2 million and $7.6 million in 2000
and 1999, respectively.

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, 2000 and 1999 are $6.9 million and $6.8 million, respectively, and
are expected to be recovered through future rates over the average remaining
service period for active employees.

The following table presents the net pension expense for the Transco Plan
for the year ended December 31, 1998 (in thousands):

1998
-----------
Components of net periodic pension expense
Service cost....................................... $ 7,055
Interest cost...................................... 16,499
Expected return on plan assets..................... (18,991)
Amortization of prior service credit............... (2,839)
Recognized net actuarial loss...................... 1,790
Regulatory asset deferral.......................... (454)
-----------
Net periodic pension expense....................... $ 3,060
===========

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Transco participates in a plan
with Williams and its subsidiaries that provides certain health care and life
insurance benefits for retired employees of Transco that were hired prior to
January 1, 1996. The accounting for the plan anticipates future cost-sharing
changes to the written plan that are consistent with Williams' expressed intent
to increase the retiree contribution rate annually, generally in line with
health care cost increases. Cash contributions totaled $10.3 million in 2000,
$11.1 million in 1999 and $10.3 million in 1998. Although the actuarially
determined cash contributions for each of the three years were comparable, the
timing of the actual contributions caused a variance between years.

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, 2000 and 1999 are $41.8 million and $48.8 million, respectively,
and are expected to be recovered through future rates over the remaining
amortization period of the unrecognized transition obligation.

DEFINED-CONTRIBUTION PLAN Transco employees participate in a Williams
defined-contribution plan. Compensation expense of $4.6 million, $4.7 million
and $4.6 million was recognized by Transco in 2000, 1999 and 1998, 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 or based on certain financial performance targets being
achieved. 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.

SFAS No. 123, "Accounting for Stock-Based Compensation," requires that
companies who continue to apply APBO No. 25 disclose pro forma net income
assuming that the fair-value method in SFAS No. 123 had been applied in
measuring compensation cost. Pro forma net income for Transco, beginning with
1997 employee stock-based awards was $ 188.3 million, $157.7 million and $133.7
million for 2000, 1999 and 1998, respectively. Reported net income was $191.8
million, $161.2 million and $135.7 million for 2000, 1999 and 1998,
respectively. Pro forma amounts for 2000 include compensation expense from
certain awards made in 1999 and the total compensation expense from the awards
made in 2000, as these awards fully vested in 2000 as a result of the
accelerated vesting provisions. Pro forma amounts for 1999 include the remaining
total compensation expense from the awards made in 1998 and the total
compensation expense from certain awards made in 1999, as these awards fully
vested in 1999 as a result of the accelerated vesting provisions. Pro forma
amounts for 1998 include the remaining total compensation expense from the
awards made in 1997, as these awards fully vested in 1998 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 table reflects stock options related to 2000, 1999 and 1998
(options in thousands):

2000 1999 1998
------- ------- -------

Options granted.......................... 353 426 284
Weighted-average grant date fair value... $ 15.44 $ 11.90 $ 8.19
Options outstanding - December 31.......... 2,514 2,301 2,055
Options exercisable - December 31.......... 2,389 2,176 1,772

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 approximately five years;
volatility of the expected market price of Williams common stock of 31 percent
(28 percent in 1999 and 25 percent in 1998); risk-free interest rate of 6.5
percent (5.6 percent in 1999 and 5.3 percent in 1998); and a dividend yield of
1.5 percent (1.5 percent in 1999 and 2.0 percent in 1998).

6. INCOME TAXES

Following is a summary of the provision for income taxes for 2000, 1999
and 1998 (in thousands):

2000 1999 1998

Federal:
Current................................. $ 86,765 $ 30,162 $ 75,422
Deferred................................ 14,603 57,299 (5,056)
------------- -------------- -------------
101,368 87,461 70,366
------------- -------------- -------------
State and municipal:
Current................................. 12,590 4,041 9,588
Deferred................................ 1,848 7,418 (673)
------------- -------------- -------------
14,438 11,459 8,915
------------- -------------- -------------
Provision for income taxes................... $ 115,806 $ 98,920 $ 79,281
============= ============== =============

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

2000 1999 1998
-------------- ------------- --------------

Taxes computed by applying the federal statutory rate. $ 107,663 $ 91,037 $ 75,241
State and municipal income taxes................... 9,385 7,449 5,795
Other, net......................................... (1,242) 434 (1,755)
-------------- ------------- --------------
Provision for income taxes......................... $ 115,806 $ 98,920 $ 79,281
============== ============= ==============

Significant components of deferred income tax assets and liabilities as of
December 31, 2000 and 1999 are as follows (in thousands):

2000 1999
-------- --------
Deferred tax liabilities
- -------------------------
Property, plant and equipment.......................$889,042 $902,592
Deferred charges.................................... 20,392 23,391
Other .............................................. 4,025 9,097
------- --------
Total deferred tax liabilities...................... 913,459 935,080
------- --------
Deferred tax assets
- ---------------------
Estimated rate refund liability..................... 12,474 59,874
Accrued payroll and benefits........................ 15,479 13,803
Other accrued liabilities........................... 5,031 4,995
Deferred state income taxes - noncurrent liabilities 34,545 34,766
Other noncurrent liabilities........................ 8,338 5,562
Other .............................................. 9,717 4,655
------- --------
Total deferred tax assets........................... 85,584 123,655
------- --------
Net deferred tax liabilities........................$827,875 $811,425
======== ========

7. FINANCIAL INSTRUMENTS

Fair value of financial instruments The carrying amount and estimated fair
values of Transco's financial instruments as of December 31, 2000 and 1999 are
as follows (in thousands):

Carrying Amount Fair Value
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------

Financial assets:
Cash and short-term financial assets. $ 554,395 $ 512,559 $ 554,395 $ 512,559
Long-term financial assets........... 20,679 13,689 20,679 13,689
Financial liabilities:
Short-term financial liabilities..... 4,662 5,223 4,662 5,223
Long-term debt....................... 974,850 975,330 959,007 933,199

For cash and short-term financial assets (advances to affiliates and note
receivable from SPE) and short-term financial liabilities (advances from
affiliates), at variable interest rates, the carrying amount is a reasonable
estimate of fair value due to the short maturity of those instruments. For
long-term financial assets (advances to affiliates), the carrying amount is a
reasonable estimate of fair value because the interest rate is a variable rate.

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 Transco sells, with limited recourse, certain trade
receivables to a SPE. At December 31, 2000, Transco had sold approximately $216
million of its accounts receivable in exchange for approximately $100 million in
cash and a note receivable from the SPE for approximately $116 million.
Collection of the note receivable from the SPE is dependent on the collection of
the receivables which were transferred to the SPE. The trade receivables
primarily are due from local distribution companies and other pipeline companies
predominantly located in the eastern United States. For 2000, cash inflows from
the SPE were approximately $1,820 million. The sales of these receivables
resulted in a net charge to results of operations of approximately $9 million
and $6 million in 2000 and 1999, respectively. Based on amounts outstanding at
December 31, 2000 and 1999, 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.

As of December 31, 2000 and 1999, Transco had trade receivables of $17
million and $7 million, respectively. 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.

8. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES

MAJOR CUSTOMERS The sales, transportation and storage revenues received
from Public Service Electric and Gas Company and Consolidated Edison Company of
New York, Inc., the major customers of Transco, were $172.3 million and $174.4
million in 2000, $131.3 million and $117.2 million in 1999 and $119.2 million
and $113.9 million in 1998, respectively.

AFFILIATES Included in Transco's sales and transportation revenues for
2000, 1999, and 1998 are revenues applicable to sales and transportation for
affiliates of $112.4 million, $106.8 million and $81.9 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.

Through an agency agreement with Transco, WESCO manages Transco's
jurisdictional merchant gas sales. For the years ended December 31, 2000, 1999,
and 1998, included in Transco's cost of sales is $19.0 million, $29.5 million
and $31.0 million, respectively, representing agency fees billed to Transco by
WESCO under the agency agreement.

Included in Transco's cost of sales for 2000, 1999, and 1998 is purchased
gas cost from affiliates of $735.0 million, $415.9 million and $317.0 million,
respectively. All gas purchases are made at market or contract prices.

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 $4.2 million in 2000, $4.0 million in 1999, and $4.1 million in 1998
applicable to the transportation of gas by Texas Gas Transmission Corporation
(Texas Gas), an affiliate of Transco. Texas Gas is regulated by the FERC and its
transportation rates charged to Transco are approved by the FERC.

Williams has a policy of charging subsidiary companies for management
services provided by the parent company and other affiliated companies. Included
in Transco's administrative and general expenses for 2000, 1999, and 1998 were
$21.6 million, $18.0 million and $15.0 million, respectively, for such corporate
expenses charged by Williams and other affiliated companies. Management
considers the cost of these services to be reasonable.

Transco has an operating agreement with Williams Field Services (WFS)
whereby WFS, as Transco's agent, assumed operational control of Transco's gas
gathering facilities. Included in Transco's operation and maintenance expenses
for 2000, 1999, and 1998, are $28.6 million, $32.0 million, and $31.4 million,
respectively, charged by WFS to operate Transco's gas gathering facilities.

In December 1999, Transco assigned its 100% equity interest in the
Buccaneer Gas Pipeline Company, L.L.C. (Buccaneer) to WGP. Transco billed WGP
$0.8 million in 2000 and $13.1 million in 1999 for costs incurred on behalf of
Buccaneer.

9. QUARTERLY INFORMATION (UNAUDITED)

The following summarizes selected quarterly financial data for 2000 and
1999 (in thousands):

First Second Third Fourth
------------- ------------- ------------ -------------

2000
Operating revenues.................. $ 411,037 $ 513,246 $ 491,462 $ 600,491
Operating expenses.................. 345,336 386,758 428,421 543,802
------------- ------------- ------------- -------------
Operating income.................... 65,701 126,488 63,041 56,689
Interest expense.................... 25,230 11,553 20,738 19,350
Other (income) and deductions, net.. (13,483) (16,724) (20,297) (22,055)
------------- ------------- ------------- -------------
Income before income taxes ......... 53,954 131,659 62,600 59,394
Provision for income taxes.......... 19,959 49,733 23,738 22,376
------------- ------------- ------------- -------------
Net income.......................... $ 33,995 $ 81,926 $ 38,862 $ 37,018
============= ============= ============= =============

Includes an adjustment to the reserve for rate refunds of $62.7 million of principal and $8.5 million of interest in
connection with general rate case Docket No. RP97-71.

First Second Third Fourth
------------- ------------- ------------- -------------

1999
Operating revenues ................. $ 354,123 $ 389,701 $ 384,209 $ 415,423
Operating expenses.................. 284,296 302,734 325,367 333,834
------------- ------------- ------------- -------------
Operating income ................... 69,827 86,967 58,842 81,589
Interest expense.................... 18,052 13,875 20,282 18,349
Other (income) and deductions, net . (5,846) (6,536) (8,524) (12,534)
------------- ------------- ------------- -------------
Income before income taxes ......... 57,621 79,628 47,084 75,774
Provision for income taxes.......... 22,479 30,217 17,762 28,462
------------- ------------- ------------- -------------
Net income.......................... $ 35,142 $ 49,411 $ 29,322 $ 47,312
============= ============= ============= =============

Includes an adjustment to the reserve for rate refunds of $28.1 million of principal and $5.9 million of interest in
connection with general rate case Docket No. RP95-197.

Includes an adjustment to the reserve for rate refunds of $23.4 million of principal and $2.6 million of interest in
connection with general rate case Docket No. RP97-71.

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.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

Page
Reference to
2000 10-K
------------
A. Index
1. Financial Statements:
Report of Independent Auditors - Ernst & Young LLP 22
Consolidated Balance Sheet as of December 31,
2000 and 1999 23-24
Consolidated Statement of Income for the Years Ended
December 31, 2000, 1999 and 1998 25
Consolidated Statement of Common Stockholder's Equity
for the Years Ended December 31, 2000, 1999 and 1998 26
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 27-28
Notes to Consolidated Financial Statements 29-51

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

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

(3) Articles of incorporation and by-laws

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

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

b) Certificate of Amendment, dated December 22, 1986, of the
Second Restated Certificate of Incorporation
(Exhibit (10)-17(b) 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 Credit Agreement dated as of July 25, 2000 among The Williams
Companies, Inc., and certain of its subsidiaries, including
Transco, the Banks named therein and Citibank, N.A., as agent
(Exhibit 4.1 to The Williams Companies, Inc. Form 10-Q filed
August, 11, 2000, Commission File Number 1-4174)

- 5 Waiver and First Amendment to Credit Agreement dated as of
January 31, 2001, to Credit Agreement dated July 25, 2000,
among The Williams Companies, Inc. and certain of its
subsidiaries, including Transco, the Banks named therein and
Citibank, N.A., as agent (Exhibit 4(gg) to The Williams
Companies, Inc. Form 10-K for 2000 Commission File
Number 1-4174)

(10) Material contracts

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

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

(21) Subsidiaries of the registrant

(23) Consent of Independent Auditors

(24) Power of attorney with certified resolution

4. Reports on Form 8-K:

None.

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 9th day of
March, 2001.

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 9th day of March, 2001, 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/ CUBA WADLINGTON, JR * Director, President and Chief Executive Officer
---------------------------
Cuba Wadlington, Jr. (Principal Executive Officer)

/s/ GARY D. LAUDERDALE* Director
---------------------------
Gary D. Lauderdale

/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