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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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, 2002
OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number 1-7584

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

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 þ No o

     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. þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ

     The number of shares of Common Stock, par value $1.00 per share, outstanding at January 31, 2003 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.

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TRANSCONTINENTAL GAS PIPE LINE CORPORATION
FORM 10-K

TABLE OF CONTENTS

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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, 2002 was 1,261.

     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, 2002, Transco’s system had a mainline delivery capacity of approximately 4.2 Bcf¹ 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 3.3 Bcf of gas per day for a system-wide delivery capacity total of approximately 7.5 Bcf of gas per day. The system is composed of approximately 10,400 miles of mainline and branch transmission pipelines, 44 compressor stations, seven storage locations and four processing plants. Compression facilities at sea level rated capacity total approximately 1.4 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.

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     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 temporarily waiving, for a two-year period that expired on September 30, 2002, the maximum 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 Marketing & Trading Company (WEM&T) (formerly Williams Energy Services Company), an affiliate of Transco, manages Transco’s jurisdictional merchant gas sales. For a discussion of a recent settlement with the FERC affecting Transco’s jurisdictional merchant gas sales, see “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — 10. Subsequent Event”.

     In May 1995, the operation of certain production area facilities was transferred to Williams Field Services Group, Inc. (WFS), an affiliated company. Since February 1996, Transco has filed six applications with the FERC seeking authorization to abandon 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. For a discussion of the applications, see “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — 2. Contingent Liabilities and Commitments — Rate and Regulatory Matters.”

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 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 three largest customers in 2002 were WEM&T, PSE&G Energy Resources & Trade, LLC and Public Service Company of N. C., Inc., which accounted for approximately 10.6 percent, 5.8 percent and 5.3 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.

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Transco’s total system deliveries for the years 2002, 2001 and 2000 are shown below.

     Transco’s facilities are divided into eight rate zones. Five 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

Completed Projects

     In 2002, Transco completed construction of, and placed into service, three major projects, the Sundance Expansion Project, the second phase of the MarketLink Expansion Project and the Leidy East Project.

     Sundance Expansion Project The Sundance Expansion Project was placed in service on May 1, 2002, adding approximately 228 MMcf/d of 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 were installed along with approximately 41,225 horsepower of new compression and modifications to existing compressor stations in Georgia, South Carolina and North Carolina. The capital cost of the project was approximately $117 million.

     MarketLink Expansion Project Phase 2 of the MarketLink Expansion Project was placed in service on November 1, 2002, adding approximately 126 MMcf/d of firm transportation capacity. Phase 1 of the project, which was placed in service on December 19, 2001, added approximately 160 MMcf/d of firm transportation capacity. Both phases add firm natural gas transportation service from Leidy, Pennsylvania to the northeastern United States. The total capital cost of Phases 1 and 2 is estimated to be approximately $243 million.

     Leidy East Project The Leidy East Project was placed in service on November 1, 2002, adding approximately 126 MMcf/d of firm natural gas transportation service from Leidy, Pennsylvania to the northeastern United States. The project facilities included approximately 31 miles of pipeline looping and 3,400 horsepower of uprated compression. The capital cost of the project is estimated to be approximately $98 million.

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Future Projects

     Momentum Expansion Project On February 14, 2002, the FERC issued an order granting a certificate of public convenience and necessity to Transco to construct and operate the Momentum Expansion Project, an expansion of Transco’s pipeline system from Station 65 in Louisiana to Station 165 in Virginia. On February 4, 2003, Transco filed an application with the FERC to amend the certificate to reduce the overall size of the expansion from approximately 347 MMcf/d to approximately 312 MMcf/d and to place the Momentum facilities into service in two phases, with the first phase, consisting of approximately 260 MMcf/d, to be placed into service on May 1, 2003 and the second phase, consisting of approximately 52 MMcf/d, to be placed into service on May 1, 2004. The reduction in the size of the expansion reflects the termination of two shippers under the project and the partial replacement of those shippers with the two shippers who had subscribed to service under Transco’s previously proposed Cornerstone Expansion Project. The revised project facilities include approximately 50 miles of pipeline looping and 45,000 horsepower of compression. The revised capital cost of the project is estimated to be approximately $189 million.

     Trenton-Woodbury Expansion Project On May 6, 2002, Transco filed an application for FERC approval of an expansion of Transco’s Trenton-Woodbury Line, which runs from Transco’s mainline at Station 200 in eastern Pennsylvania, around the metropolitan Philadelphia area and southern New Jersey area, to Transco’s mainline near Station 205. Binding precedent agreements have been executed with two shippers for a total of 49 MMcf/d of incremental firm transportation capacity to the shippers’ respective delivery points on the Trenton-Woodbury Line. On September 24, 2002, the FERC issued a Preliminary Determination on Non-Environment Issues, finding that the project is required by the public convenience and necessity subject to the completion of the FERC’s environmental assessment of the project. On December 24, 2002, the FERC issued a final order authorizing Transco to construct and operate the project. The target in-service date for the project is November 1, 2003. The project will require approximately 7 miles of pipeline looping at a capital cost of approximately $20 million.

Cancelled/Postponed Projects

     Cornerstone Expansion Project Pursuant to Transco’s open season for the Cornerstone Expansion Project, Transco executed precedent agreements with two shippers for a total firm transportation quantity of approximately 52 MMcf/d. However, Transco and the shippers have agreed that Transco will provide such firm transportation service under the Momentum Expansion Project instead of under Cornerstone, as further described herein above.

     South Virginia Line Expansion Transco completed an open season on September 7, 2001 for the South Virginia Line Expansion project, a proposed expansion on Transco’s pipeline system from Station 165 in Virginia to Hertford County, North Carolina. The proposed in-service date of May 1, 2005 has been postponed pending further development of the project.

     Independence Pipeline Project In March 1997, as amended in December 1997, Independence Pipeline Company (Independence), a general partnership owned equally by wholly-owned subsidiaries of Transco, ANR Pipeline Company, and National Fuel Gas Company, 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. 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

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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. On November 1, 2001, Independence filed a letter with the FERC requesting an extension of the in service date for the project from November 2002 to November 2004. On June 24, 2002, Independence filed a request with the FERC to vacate its certificate because it was unable to obtain sufficient contracts to proceed with the project to meet the proposed November 2004 in service date. On July 19, 2002, the FERC issued an order vacating Independence’s certificate. As a result, Transco recorded a $12.3 million pre-tax charge to income for the quarter ended June 30, 2002, associated with the impairment of Transco’s investment in Independence.

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 — 2. Contingent Liabilities and Commitments — Rate and Regulatory Matters.”

SALES SERVICE

     As discussed above, WEM&T 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. For a discussion of a recent settlement with the FERC affecting Transco’s jurisdictional merchant gas sales, see “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — 10. Subsequent Event”. Pursuant to the terms of this settlement, Transco will be providing notice to merchant sales customers that it will be terminating the merchant sales service when it is able to do so under the terms of any applicable contracts and

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FERC certificates authorizing such services. Under the FS program Transco must provide two-year advance notice of termination. Therefore, Transco will notify the FS customers of its intention to terminate the FS service effective April 1, 2005. Through an agency agreement, WEM&T 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 and, therefore, the anticipated termination such services, pursuant to the terms of the FERC settlement will have no impact on Transco’s operating income or results of operations.

     Transco’s gas sales volumes managed by WEM&T for the years 2002, 2001 and 2000 are shown below.

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 — 1. Summary of Significant Accounting Policies 7. Transactions With Major Customers and Affiliates and 10. Subsequent Event.”

REGULATION

     Interstate gas pipeline operations Transco’s interstate transmission and storage activities are subject to regulation by the FERC under the Natural Gas Act of 1938 (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

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Supplementary Data — Notes to Consolidated Financial Statements — 2. 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. 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 revised 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 (such waiver expired on September 30, 2002), 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, Georgia and the District of Columbia have established regulations for LDC unbundling and are currently implementing them on a company-by-company basis. To date, none of these changes have required renegotiation of Transco’s current LDC contracts nor resulted in 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.

     Rapid growth in Transco’s market area, particularly in the power generation sector, has attracted several new proposed projects from competing pipelines, both in the southeast and northeast market areas. These projects are aimed primarily towards incremental markets. Their success will depend on their ability to secure sufficient load to support the relatively large initial investments required.

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FORWARD LOOKING STATEMENTS

     Certain matters discussed in this annual 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 forward-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,” “could,” “continues,” “estimates,” “expects,” “forecasts,” “might,” “planned,” “potential,” “projects,” “scheduled” or similar expressions. Although Transco believes these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a number of assumptions, uncertainties and risks that could cause future results to be materially different from the results stated or implied in this document.

     Events in 2002 significantly impacted the risk environment businesses face and raised a level of uncertainty in the capital markets. Beliefs and assumptions as to what constitutes appropriate levels of capitalization and fundamental value have changed abruptly. The financial collapse of the energy industry combined with the meltdown of the telecommunications industry are both new realities that have had and will likely continue to have specific impacts on all companies, including Transco.

RISK FACTORS

     You should carefully consider the following risk factors in addition to the other information in this annual report. Each of these factors could adversely affect Transco’s business, operating results, and financial condition as well as adversely affect the value of an investment in Transco’s securities.

     WILLIAMS’ STRATEGY TO STRENGTHEN ITS BALANCE SHEET AND IMPROVE LIQUIDITY DEPENDS ON WILLIAMS’ ABILITY TO DIVEST SUCCESSFULLY CERTAIN ASSETS.

     On February 20, 2003, Williams announced its intention to sell an additional $2.25 billion in assets, properties and investments. At December 31, 2002, Williams had debt obligations of $3.8 billion that will mature between now and March 2004. Because Williams’ cash flow from operations will be insufficient alone to repay all such debt and Williams’ access to capital markets is limited, in part as a result of the loss of its investment grade ratings, Williams will depend on its sales of assets to generate sufficient net cash proceeds to enable the payment of maturing obligations.

     Williams’ secured credit facilities limit its ability to sell certain assets and require generally that one-half of all net proceeds from asset sales be applied (a) to repayment of certain long-term debt, (b) to cash collateralization of designated letters of credit, and (c) to reduction of the lender commitments under the secured facilities. The timing of and the net cash proceeds realized from such sales are dependent on locating and successfully negotiating sales with prospective buyers, regulatory approvals, industry conditions, and lender consents. If the realized cash proceeds are insufficient or are materially delayed, Williams might not have sufficient funds on hand to pay maturing indebtedness, including advances from Transco which are payable upon demand, or to implement its strategy.

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     BECAUSE TRANSCO NO LONGER MAINTAINS INVESTMENT GRADE CREDIT RATINGS, COUNTERPARTIES MIGHT REQUIRE IT TO PROVIDE INCREASING AMOUNTS OF CREDIT SUPPORT WHICH WOULD RAISE THE COST OF DOING BUSINESS.

     Transco’s transactions will require greater credit assurances, both to be given from, and received by, Transco to satisfy credit support requirements. Additionally, certain market disruptions or a further downgrade of Transco’s credit rating might further increase its cost of borrowing or further impair its ability to access one or any of the capital markets. Such disruptions could include:

	•		further economic downturns;
	•		capital market conditions generally;
	•		market prices for electricity and natural gas;
	•		terrorist attacks or threatened attacks on our facilities or those of other energy companies; or
	•		the overall health of the energy industry, including the bankruptcy of energy companies.

RISKS RELATED TO THE REGULATION OF TRANSCO’S BUSINESS

     TRANSCO’S GAS SALES, TRANSMISSION, AND STORAGE OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATIONS AND RATE PROCEEDINGS THAT COULD HAVE AN ADVERSE IMPACT ON ITS ABILITY TO RECOVER THE COSTS OF OPERATING ITS PIPELINE FACILITIES.

     Transco’s interstate gas sales, transmission, and storage operations are subject to the FERC’s rules and regulations in accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. The FERC’s regulatory authority extends to:

	•		transportation and sale for resale of natural gas in interstate commerce;
	•		rates and charges;
	•		construction;
	•		acquisition, extension or abandonment of services or facilities;
	•		accounts and records;
	•		depreciation and amortization policies; and
	•		operating terms and conditions of service.

     The FERC has taken certain actions to strengthen market forces in the natural gas pipeline industry that has led to increased competition throughout the industry. In a number of key markets, interstate pipelines are facing competitive pressure from other major pipeline systems, enabling local distribution companies and end users to choose a transmission provider based on economic and other considerations. Transco’s ability to compete in the natural gas pipeline industry is impacted by its ability to offer competitively priced services

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and to successfully implement efficient and effective operational systems, such as its service delivery system, that must also meet applicable regulatory requirements.

     In 2000, the FERC issued Order No. 637, which sets forth revisions to its policies governing the regulation of interstate natural gas pipelines that it finds necessary to adjust its current regulatory model to the needs of evolving markets. The FERC, however, determined that any fundamental changes to its regulatory policy will be considered after further study and evaluation of the evolving marketplace. Order No. 637 revised the FERC’s pricing policy to waive through September 30, 2002, the maximum price ceilings for short-term releases of capacity of less than one year and to permit pipelines to file proposals to implement seasonal rates for short-term services and term-differentiated rates. Certain parties requested rehearing of Order No. 637 and eventually appealed certain issues to the District of Columbia Circuit Court of Appeals. The D.C. Circuit remanded as to certain issues, and on October 31, 2002, the FERC issued its order on remand. Rehearing requests for that order are now pending with the FERC. Given the extent of the FERC’s regulatory power, Transco cannot give any assurance regarding the likely regulations under which it will operate its natural gas transmission and storage business in the future or the effect of regulation on its financial position and results of operations.

     The FERC has proposed to broaden its regulations that restrict relations between jurisdictional natural gas companies, or “jurisdictional companies,” and marketing affiliates. In addition, the proposed rules would limit communications between jurisdictional companies and all other companies engaged in energy activities. The rulemaking is pending at the FERC and the precise scope and effect of the rule is unclear. If adopted as proposed, the rule could affect the way Transco manages its gas transmission activities.

RISKS RELATED TO ENVIRONMENTAL MATTERS

     TRANSCO COULD INCUR MATERIAL LOSSES IF IT IS HELD LIABLE FOR THE ENVIRONMENTAL CONDITION OF ANY OF ITS ASSETS.

     Transco is generally responsible for all on-site liabilities associated with the environmental condition of its facilities and assets, which it has acquired or developed, regardless of when the liabilities arose and whether they are known or unknown. In addition, in connection with certain acquisitions and sales of assets, Transco might obtain, or be required to provide, indemnification against certain environmental liabilities. If Transco incurs a material liability, or the other party to a transaction fails to meet its indemnification obligations to Transco, it could suffer material losses.

     ENVIRONMENTAL REGULATION AND LIABILITY — TRANSCO’S BUSINESS WILL BE SUBJECT TO ENVIRONMENTAL LEGISLATION IN ALL JURISDICTIONS IN WHICH IT OPERATES, AND ANY CHANGES IN SUCH LEGISLATION COULD NEGATIVELY AFFECT ITS RESULTS OF OPERATIONS.

     Transco’s operations are subject to extensive environmental regulation pursuant to a variety of federal, state and municipal laws and regulations. Such environmental legislation imposes, among other things, restrictions, liabilities and obligations in connection with the generation, handling, use, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances into the environment. Environmental legislation also requires that Transco’s facilities, sites and other properties associated with its operations be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Existing environmental regulations could also be revised or reinterpreted, new laws and regulations could be adopted or become applicable to Transco or its facilities, and future changes in environmental laws and regulations could occur. The federal government

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and several states recently have proposed increased environmental regulation of many industrial activities, including increased regulation of air quality, water quality and solid waste management.

     Compliance with environmental legislation will require significant expenditures, including expenditures for compliance with the Clean Air Act and similar legislation, for clean up costs and damages arising out of contaminated properties, and for failure to comply with environmental legislation and regulations which might result in the imposition of fines and penalties. The steps Transco takes to bring certain of its facilities into compliance could be prohibitively expensive, and Transco might be required to shut down or alter the operation of those facilities, which might cause it to incur losses.

     Further, Transco’s regulatory rate structure and its contracts with clients might not necessarily allow it to recover capital costs incurred to comply with new environmental regulations. Also, Transco might not be able to obtain or maintain from time to time all required environmental regulatory approvals for certain development projects. If there is a delay in obtaining any required environmental regulatory approvals or if Transco fails to obtain and comply with them, the operation of its facilities could be prevented or become subject to additional costs. Should Transco fail to comply with all applicable environmental laws, it might be subject to penalties and fines imposed by regulatory authorities. Although Transco does not expect that the costs of complying with current environmental legislation will have a material adverse effect on its financial condition or results of operations, no assurance can be made that the costs of complying with environmental legislation in the future will not have such an effect.

RISKS RELATING TO ACCOUNTING POLICIES

     POTENTIAL CHANGES IN ACCOUNTING POLICIES MIGHT CAUSE TRANSCO TO REVISE ITS FINANCIAL ACCOUNTING AND/OR DISCLOSURE IN THE FUTURE, WHICH MIGHT CHANGE THE WAY ANALYSTS MEASURE TRANSCO’S BUSINESS OR FINANCIAL PERFORMANCE.

     Recently discovered accounting irregularities in various industries have forced regulators and legislators to take a renewed look at accounting practices, financial disclosures, companies’ relationships with their independent auditors and other accounting practices. Because it is still unclear what laws or regulations will develop, Transco cannot predict the ultimate impact of any future changes in accounting regulations or practices in general with respect to public companies or the energy industry or in Transco’s operations specifically. In addition, the Financial Accounting Standards Board (FASB), the FERC or the SEC could enact new accounting standards that might impact how Transco is required to record revenues, expenses, assets and liabilities.

RISKS RELATING TO TRANSCO’S INDUSTRY

     THE LONG-TERM FINANCIAL CONDITION OF TRANSCO’S GAS TRANSMISSION BUSINESS IS DEPENDENT ON THE CONTINUED AVAILABILITY OF NATURAL GAS RESERVES.

     The development of additional natural gas reserves requires significant capital expenditures by others for exploration and development drilling and the installation of production, gathering, storage, transportation and other facilities that permit natural gas to be produced and delivered to Transco’s pipeline system. Low prices for natural gas, regulatory limitations, or the lack of available capital for these projects could adversely affect the development of additional reserves and production, gathering, storage and pipeline transmission and import and export of natural gas supplies.

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     GAS TRANSMISSION ACTIVITIES INVOLVE NUMEROUS RISKS THAT MIGHT RESULT IN ACCIDENTS AND OTHER OPERATING RISKS AND COSTS.

     There are inherent in Transco’s gas transmission properties a variety of hazards and operating risks, such as leaks, explosions and mechanical problems that could cause substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution, impairment of Transco’s operations and substantial losses. In accordance with customary industry practice, Transco maintains insurance against some, but not all, of these risks and losses. The occurrence of any of these events not fully covered by insurance could have a material adverse effect on Transco’s financial position and results of operations. The location of pipelines near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.

OTHER RISKS

     RECENT TERRORIST ACTIVITIES AND THE POTENTIAL FOR MILITARY AND OTHER ACTIONS COULD ADVERSELY AFFECT TRANSCO’S BUSINESS.

     The continued threat of terrorism and the impact of retaliatory military and other action by the United States and its allies might lead to increased political, economic and financial market instability and volatility in prices for natural gas, which could affect the market for Transco’s gas transmission operations. In addition, future acts of terrorism could be directed against companies operating in the United States, and it has been reported that terrorists might be targeting domestic energy facilities. While Transco is taking steps that it believes are appropriate to increase the security of its energy assets, there is no assurance that Transco can completely secure its assets or to completely protect them against a terrorist attack. These developments have subjected Transco’s operations to increased risks and, depending on their ultimate magnitude, could have a material adverse effect on its business. In particular, Transco might experience increased capital or operating costs to implement increased security for its energy assets.

     The insurance industry has also been disrupted by these events. As a result, the availability of insurance covering risks that Transco and its competitors typically insure against might decrease. In addition, the insurance that Transco is able to obtain might have higher deductibles, higher premiums and more restrictive policy terms.

ITEM 2. Properties.

     See “Item 1. Business.”

ITEM 3. Legal Proceedings.

     FERC enforcement matter On December 11, 2002, the FERC staff informed Transco of a number of issues the FERC staff identified during the course of a formal, nonpublic investigation into the relationship between Transco and its marketing affiliate, WEM&T. The FERC staff asserted that WEM&T personnel had access to Transco data bases and other information, and that Transco had failed to accurately post certain information on its electronic bulletin board. Williams, Transco and WEM&T did not agree with all of the FERC staff’s allegations and furthermore believe that WEM&T did not profit from the alleged activities. Nevertheless, in order to avoid protracted litigation, on March 13, 2003, Williams, Transco and WEM&T

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executed a settlement of this matter with the FERC staff. An order approving the settlement was issued by the FERC on March 17, 2003. Pursuant to the terms of the settlement agreement, Transco will pay a civil penalty in the amount of $20 million, beginning with a payment of $4 million within thirty (30) days of the date the FERC order approving the settlement becomes final. If no requests for rehearing are filed, the first payment would be due by May 16, 2003, and $4 million payments on or before the first, second, third and fourth anniversaries of the first payment. As a result of the settlement agreement, effective December 31, 2002, Transco recorded a charge to income and established a liability of $17 million on a discounted basis to reflect the future payments to be made over the next four years. In addition, Transco will provide notice to its merchant sales service customers that it will be terminating such services when it is able to do so under the terms of any applicable contracts and FERC certificates authorizing such services. Most of these sales are made through a Firm Sales (FS) program, and under this program Transco must provide two-year advance notice of termination. Therefore, Transco will notify the FS customers of its intention to terminate the FS service effective April 1, 2005. Through an agency agreement, WEM&T 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 and, therefore, the anticipated termination of such service, pursuant to the terms of the FERC settlement discussed above, will have no impact on Transco’s operating income or results of operations. As part of the settlement, WEM&T has agreed, subject to certain exceptions, that it will not enter into new transportation agreements that would increase the transportation capacity it holds on certain affiliated interstate gas pipelines, including Transco. Finally, Transco and certain affiliates have agreed to the terms of a compliance plan designed to ensure future compliance with the provisions of the settlement agreement and the FERC’s rules governing the relationship of Transco and WEM&T.

     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, through its agent WEM&T, continues to purchase gas under contracts which extend, in some cases, through the life of the associated gas reserves. Certain of these contracts contain royalty indemnification provisions which have no carrying value. 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 royalty indemnification provisions. Indemnification for royalties will depend on, among other things, the specific lease provisions between the producer and the lessor and the terms of the agreement between the producer and Transco. Consequently, the potential maximum future payments under such indemnification provisions cannot be determined.

     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. In October 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. In 1998, the trial judge entered judgment consistent with the jury verdict and also awarded prejudgment interest of $5.0 million. In addition, through December 31, 2001, postjudgment interest was approximately $10.5 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 filed a petition for review on April 2, 2001 with the Texas Supreme Court. On February 21, 2002, the Texas Supreme Court denied Transco’s petition for review. As a result, Transco recorded a pre-tax charge to income for the year ended December 31, 2001 in the amount of $37 million representing

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management’s estimate of the effect of this ruling. Transco filed a motion for rehearing which was denied, thereby concluding this matter. In May 2002, Transco paid Texaco the amount of the judgment and accrued interest.

     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, which is now scheduled to begin in July 2003. FMP’s claim, including interest calculated through December 31, 2002, is approximately $10 million.

     In August 1996, royalty owners in certain gas wells in Brooks County, Texas, filed a lawsuit against parties producing gas from the wells, claiming $50 million in damages for incorrectly calculated royalties since 1985. Transco purchased gas from the wells and was also named as a defendant. In July 2000, the lawsuit was settled. The settlement amount was funded by the defendants in proportion to their respective working interests in the wells. Since Transco never owned a working interest in any of the wells, it had no obligation to participate in the funding of the settlement amount. However, in August 2000, one defendant working-interest owner, Mobil, made a claim in the amount of $6.7 million against Transco for reimbursement of its settlement contribution and associated legal defense costs on the basis that such amount represented excess royalty payments under a gas purchase contract it had with Transco. In September 2001, Transco was informed that Mobil filed on August 30, 2000, but did not serve, a lawsuit against Transco seeking reimbursement for the payment made by Mobil to settle the litigation and one-half of the costs and expenses it incurred in defense of the litigation. Transco accepted service of the lawsuit on September 26, 2001. The case is presently in the pretrial discovery phase and is set for trial on October 27, 2003. Mobil’s claim, including interest calculated through December 31, 2002, is approximately $8 million.

     In 1998, the United States Department of Justice (DOJ) 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, royalty valuation 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 DOJ 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. On October 9, 2002, the court granted a motion to dismiss Grynberg’s royalty valuation claims. Grynberg’s measurement claims remain pending against Williams and the other defendants.

     On June 8, 2001, fourteen Williams entities, including Transco, were named as defendants in a nationwide class action lawsuit which has been pending against other defendants, generally pipeline and gathering companies, for more than one year. The plaintiffs allege that the defendants, including the Williams

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defendants, have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs. In September 2001, the plaintiffs voluntarily dismissed two of the fourteen Williams entities named as defendants in the lawsuit. In November 2001, Williams, along with other Coordinating Defendants, filed a motion to dismiss on nonjurisdictional grounds. In January 2002, most of the Williams defendants, along with a group of Coordinating Defendants, filed a motion to dismiss for lack of personal jurisdiction. On August 19, 2002, defendants’ motion to dismiss on nonjurisdictional grounds was dismissed. On September 17, 2002 the plaintiffs filed a motion for class certification. The Williams entities joined with other defendants in contesting certification of the plaintiff class and this issue, along with the personal jurisdiction motion, remains pending.

     Environmental matters In July 1999, Transco received a letter stating that the DOJ, at the request of the United States Environmental Protection Agency (EPA), intended 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. The DOJ stated in the letter that its complaint would seek civil penalties and injunctive relief under federal environmental laws. The DOJ offered to discuss settlement of the claim and discussions began in September 1999 and continued into 2001. In December 2001, Transco agreed to settle this matter by signing a Consent Decree which was filed with the United States District Court for the Southern District of Texas for approval. The Consent Decree provided for a civil penalty of $1.4 million, which was accrued by Transco in 2001. On May 15, 2002, the United States District Court entered, without modification, the Consent Decree signed by Transco, the EPA and the DOJ. The penalty was paid by Transco in June 2002.

     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 $30 million to $32 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, 2002, Transco had a balance of approximately $30 million for these estimated costs recorded in current liabilities ($3 million) and other long-term liabilities ($27 million) in the accompanying Consolidated Balance Sheet.

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     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 $30 million to $32 million range discussed above.

     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.

     Transco’s Board of Directors declared a cash dividend on common stock in the amount of $200 million on November 15, 2002. No cash dividends on common stock were declared in 2001.

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.

GENERAL

     The following discussion and analysis of results of operations and capital resources and liquidity should be read in conjunction with the consolidated financial statements and notes thereto included within Item 8.

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CRITICAL ACCOUNTING POLICIES

     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.

     Regulatory Accounting Transco is regulated by the Federal Energy Regulatory Commission (FERC). Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” provides that rate-regulated public utilities account for and report regulatory assets and liabilities consistent with the economic effect of the way in which regulators establish rates if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it reasonable to assume that such rates can be charged and collected. Accounting for businesses that are regulated and apply the provisions of SFAS No. 71 can differ from the accounting requirements for non-regulated businesses. Transactions that are recorded differently as a result of regulatory accounting requirements include the capitalization of an equity return component on regulated capital projects, employee related benefits, and other costs and taxes included in, or expected to be included in, future rates. As a rate-regulated entity, Transco’s management has determined that it is appropriate to apply the accounting prescribed by SFAS No. 71 and, accordingly, the accompanying consolidated financial statements include the effects of the types of transactions described above that result from regulatory accounting requirements.

     Revenue subject to refund FERC regulations promulgate policies and procedures which govern a process to establish the rates that Transco is permitted to charge customers for natural gas sales and services, including the transportation and storage of natural gas. 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.

     As a result of the ratemaking process, certain revenues collected by Transco may be subject to possible refunds upon final orders in pending rate proceedings with the FERC. Transco records estimates of 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. At December 31, 2002, Transco had accrued approximately $9 million for potential rate refunds applicable to all regulatory proceedings. Depending on the results of these proceedings, the actual amounts allowed to be collected from customers could differ from management’s estimate.

     Contingent liabilities Transco records liabilities for estimated loss contingencies when it is management’s assessment that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in income in the period in which different facts or information become known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Liabilities for contingent losses are based upon management’s assumptions and estimates, advice of legal counsel or other third parties regarding the probable outcomes of the matter. Should the outcome differ from the assumptions and estimates, revisions to the estimated liabilities for contingent losses would be required.

     Impairment of long-lived assets Transco evaluates long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not

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be recoverable. When such a determination has been made, management’s estimate of undiscounted future cash flows attributable to the assets is compared to the carrying value of the assets to determine whether an impairment has occurred. If an impairment of the carrying value has occurred, the amount of the impairment recognized in the consolidated financial statements is determined by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.

     Judgments and assumptions are inherent in management’s estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an asset’s fair value used to calculate the amount of impairment to recognize. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the consolidated financial statements.

WILLIAMS’ RECENT EVENTS

     In 2002, Williams faced many challenges including credit and liquidity constraints following the deterioration of its sector of the energy industry in the wake of the Enron collapse and the assumption of payment obligations and performance on guarantees associated with its former telecommunications subsidiary, Williams Communications Group, Inc. (WCG). With the deterioration of the energy industry, the credit rating agencies’ requirements for investment grade companies became more stringent. Williams’ credit rating was lowered below an investment grade rating in the middle of 2002. During 2002 and more recently, Williams has sold a significant amount of assets and/or businesses and outlined plans to sell more assets to satisfy maturing debt obligations and strengthen its short-term liquidity position. In regards to the short-term, Williams, at December 31, 2002, has maturing notes payable and long-term debt totaling approximately $3.8 billion (which includes certain contractual fees and deferred interest associated with an underlying debt) through the first quarter of 2004.

     During December 2001 and the first quarter of 2002, Williams announced plans to strengthen its balance sheet and support retention of its investment grade ratings. The plans included reducing capital expenditures during the balance of 2002, future sales of assets to generate proceeds to be used to reduce outstanding debt and the lowering of expenses, in part through an enhanced-benefit early retirement program which concluded during the second quarter. Towards these plans and in satisfaction of continued liquidity demands, Williams completed debt issuances and sold one of its regulated interstate pipelines.

     During the second quarter, Williams experienced liquidity constraints, the effect of which limited Williams Energy Marketing & Trading’s (WEM&T) ability to manage market risk and exercise hedging strategies as market liquidity deteriorated. During May 2002, major rating agencies lowered their credit ratings on Williams’ unsecured long-term debt; however, the ratings remained investment grade for the balance of the quarter.

     Williams experienced a substantial net loss for the second quarter of 2002 resulting primarily from a segment loss incurred by its energy marketing and trading segment. In July 2002, the major rating agencies downgraded Williams’ unsecured long-term debt credit ratings to below investment grade, reflecting the uncertainty associated with Williams’ energy trading business, short-term cash requirements facing Williams and the increased level of debt Williams had incurred to meet the WCG payment obligations and guarantees. Concurrent with these events, Williams was unable to complete a renewal of its unsecured short-term bank facility which expired on July 24, 2002. Subsequently, Williams obtained two secured facilities totaling $1.3 billion and amended its existing credit agreement, which expires in July 2005, to make it secured. These facilities include pledges of certain assets and contain financial ratios and other covenants that must be

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maintained. If such provisions of these agreements are not adhered to, then Williams’ lenders can declare all amounts outstanding to be immediately due and payable. In addition, the Williams board of directors reduced the Williams common stock dividend for the third quarter from the prior level of 20 cents per share to 1 cent per share. Williams also sold assets during 2002 and is pursuing the sale of other assets to enhance liquidity.

     As part of the effort to reduce future operating expenses, certain employee positions are being eliminated through organizational changes. In the second quarter of 2002, Transco accrued $6.8 million of pension benefits expense associated with an enhanced-benefit early retirement option offered to certain Williams employee groups. In the third and fourth quarters, Transco accrued $2.2 million of severance costs applicable to 87 employees whose positions have been eliminated.

     On February 20, 2003, Williams outlined its planned business strategy for the next several years and believes it to be a comprehensive response to the events which have impacted the energy sector and Williams during 2002. The plan focuses on retaining a strong, but smaller, portfolio of natural-gas businesses and bolstering Williams’ liquidity through more asset sales, limited levels of financing at the subsidiary level and additional reductions in its operating costs. The plan is designed to provide Williams with a clear strategy to address near-term and medium-term liquidity issues and further de-leverage the company with the objective of returning to investment grade status by 2005, while retaining businesses with favorable returns and opportunities for growth in the future. As part of this plan, Williams expects to generate proceeds, net of related debt, of nearly $4 billion from asset sales during 2003, including approximately $2.25 billion in newly announced offerings combined with those assets already under contract or in negotiations for sale. The specific assets and the timing of such sales are dependent on various factors, including negotiations with prospective buyers, regulatory approvals, industry conditions, lender consents to sales of collateral and the short-and long-term liquidity requirements of Williams.

     The energy trading sector has experienced deteriorating conditions because of credit and regulatory concerns, and these have significantly reduced WEM&T’s ability to attract new business. Williams has announced its intention to further reduce its commitment and exposure to its energy marketing and risk management business. This reduction could be realized by entering into a joint venture arrangement with a third party or a sale of a portion or all of the marketing and trading portfolio. WEM&T, as well as several unaffiliated energy trading companies, are Transco customers. Transco cannot predict at this time to what extent business may be impacted by the deteriorating conditions in the energy trading sector, however, generally such companies have continued to perform their contractual commitments to Transco. Additionally, a recent FERC settlement, among other things, places certain restrictions on WEM&T’s ability to enter into new transportation agreements that would increase the transportation capacity that it currently holds on certain affiliated natural gas pipelines, including Transco. See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — 10. Subsequent Event” for a discussion of the terms of the settlement.

     At December 31, 2002, Williams has maturing notes payable and long-term debt totaling approximately $3.8 billion (which includes certain contractual fees and deferred interest associated with an underlying debt) through the first quarter of 2004. Williams has indicated that available liquidity to meet these requirements and fund a reduced level of capital expenditures will be dependent on several factors, including the cash flows of retained businesses, the amount of proceeds raised from the sale of assets and the price of natural gas. Future cash flows from operations may also be affected by the timing and nature of the sale of assets. Because of recent asset sales, anticipated asset sales and available secured credit facilities, Williams has indicated that it currently believes that it has the financial resources and liquidity to meet future cash requirements through the first quarter of 2004. In the event that Williams’ financial condition does not improve or becomes worse,

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or if it fails to complete assets sales and reduce its commitment to its energy marketing and risk management business, Williams may have to consider other options including the possibility of seeking protection in a bankruptcy proceeding.

RESULTS OF OPERATIONS

2002 COMPARED TO 2001

     Operating Income and Net Income Transco’s operating income for 2002 was $300.8 million compared to operating income of $235.6 million for 2001. Net income for 2002 was $163.0 million compared to net income of $132.6 million for 2001.

     The higher operating income of $65.2 million was primarily the result of higher gas transportation demand revenues, the effects of the favorable settlement of Transco’s general rate case (Docket No. RP01-245) totaling $12.2 million in 2002, an $18.3 million charge to other operating costs and expenses in 2001 resulting from an unfavorable court decision, partially offset by a $17 million charge to other operating costs and expenses in 2002 associated with a FERC penalty, and other items, as discussed below. The increase in net income was attributable to the increase in operating income, partially offset by the higher deductions, as discussed below.

     Transportation Revenues Transco’s operating revenues related to its transportation services increased $79 million to $744 million for 2002 when compared to 2001. The higher transportation revenues were primarily due to increased demand revenues of $69.5 million resulting from (1) new expansion projects (MarketLink Phase 1 and Sundance, placed into service on December 19, 2001 and May 1, 2002, respectively) and (2) new rates to recover costs associated with increased rate base, rate of return and expenses contained in Transco’s general rate case (Docket No. RP01-245), which was effective September 1, 2001; the recognition of $11.0 million of revenues associated with the reversal of rate refund liabilities and other adjustments pursuant to the settlement of the general rate case in the third quarter of 2002.

     Transco’s total market-area deliveries for 2002 increased 189.6 TBtu, or 13%, when compared to 2001. This is primarily the result of increased deliveries associated with new expansion projects and peaking power plants. Transco’s production area deliveries decreased 22.3 TBtu, or 11%, when compared to 2001. This is primarily due to lower interruptible transportation, resulting from lower deliveries to other pipelines in the production area.

     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. For a discussion of a recent settlement with the FERC affecting Transco’s jurisdictional merchant gas sales, see “Item 8. Financial Statements and Supplementary Data — Notes

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to Consolidated Financial Statements — 10. Subsequent Event”. Pursuant to the terms of this settlement, Transco will be providing notice to merchant sales customers that it will be terminating the merchant sales service when it is able to do so under the terms of any applicable contracts and FERC certificates authorizing such services. Under the FS program Transco must provide two-year advance notice of termination. Therefore, Transco will notify the FS customers of its intention to terminate the FS service effective April 1, 2005. As part of the settlement, WEM&T has agreed, subject to certain exceptions, that it will not enter into new transportation agreements that would increase the transportation capacity it holds on certain affiliated interstate gas pipelines, including Transco. Finally, Transco and certain affiliates have agreed to the terms of an extensive compliance plan designed to ensure future compliance with the provisions of the settlement agreement and the FERC’s rules governing the relationship of Transco and WEM&T.

     Through an agency agreement with Transco, WEM&T, 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 WEM&T 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 WEM&T. Through the agency agreement, WEM&T 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 and, therefore, the anticipated termination of such service, pursuant to the terms of the FERC settlement discussed above, will have 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, decreased $284 million to $381 million for 2002, when compared to 2001. The decrease was primarily due to a lower average sales price of $3.29 per Dt in 2002 versus $5.08 per Dt in 2001 and a lower volume of merchant sales.

     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. Transco’s tariff includes a method whereby most transportation imbalances generated after August 1, 1991 are settled on a monthly basis through cash out sales or purchases. During 2001, Transco settled certain transportation imbalances through cash out purchases at market prices, which resulted in a significant increase in gas inventory during the period. This inventory is expected to decrease in future periods as transportation imbalances that require cash out sales are settled. The decrease in Inventories from December 31, 2001 to December 31, 2002, as shown on the Consolidated Balance Sheet, is due primarily to such settlements.

     Storage Revenues Transco’s operating revenues related to storage services decreased $5 million to $136 million for 2002 when compared to 2001. This revenue decrease was primarily due to lower demand revenues in 2002 resulting from the effects of Transco’s general rate case (Docket No. RP01-245), which was effective September 1, 2001, and decreased revenues to recover lower storage rates charged by others.

     Other Revenues Other operating revenues increased $5 million to $15 million for 2002 when compared to 2001, primarily due to higher environmental mitigation credit sales and services of $9 million partially offset by lower interest received on late payments from customers and lower liquids revenues.

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     Operating Costs and Expenses Excluding the cost of natural gas sales of $381 million and $665 million for 2002 and 2001, respectively, Transco’s operating expenses were approximately $14 million higher in 2002 compared to 2001. The higher cost of natural gas transportation, administrative and general expense, and depreciation and amortization expense were partially offset by lower operation and maintenance expense, lower taxes other than income taxes and lower other operating costs and expenses. The higher cost of natural gas transportation of $6.4 million was primarily due to a $15.1 million reduction in 2001 related to regulatory approval of the recovery of prior year’s gas costs in Transco’s 1999 fuel tracker filing, partially offset by lower tracked fuel expense of $5.2 million in 2002 and a $3.4 million charge in 2001 for transportation and exchange gas imbalances resulting from Enron Corp.’s bankruptcy filing. The higher administrative and general expense of $22.4 million was primarily due to higher employee benefits expenses, which includes an additional pension benefit expense of $6.8 million associated with an enhanced-benefit early retirement option offered to certain Williams employee groups, the recording of $1.8 million of severance costs applicable to employees whose positions have been eliminated, a $3.6 million charge related to a cancelled computer systems project and higher property and liability insurance of $3.3 million. Depreciation and amortization increased $9.0 million due to plant and property additions and $5.0 million due to increased environmental mitigation development costs. These depreciation and amortization increases were partially offset by a decrease of $1.1 million in connection with the settlement of the general rate case (Docket No. RP01-245) in the third quarter of 2002. The lower operation and maintenance expense of $11.7 million was primarily attributable to decreases in contractual and professional services of $3.5 million, telecommunications costs of $1.6 million and other supplies and expenditures of $2.7 million. The lower taxes other than income taxes of $5.5 million was primarily due to a refund of state franchise taxes. The lower other operating costs and expenses of $10.1 million was primarily due to a charge of $18.3 million recorded in 2001 associated with the unfavorable court decision in Transco’s royalty claims proceeding with Texaco, Inc. and lower charitable contributions of $8.3 million in 2002, partially offset by a $17 million charge in 2002 associated with a FERC penalty (see “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — 10. Subsequent Event”).

     Other Income and Other Deductions Other income and other deductions resulted in $5.7 million higher deductions in 2002 compared to 2001. Interest expense was $3.5 million higher primarily due to a greater level of long-term debt outstanding in 2002 and the $3 million charge associated with the October 10, 2002 FERC order in Transco’s 1999 fuel tracker proceeding, mostly offset by the accruals in 2001 resulting from the unfavorable court decision in Transco’s royalty claims proceeding with Texaco, Inc. Interest income from affiliates was $4.3 million lower due primarily to lower interest rates, which are based on the London Interbank Offering Rate (LIBOR), on intercompany demand notes. The impairment of an investment in an unconsolidated affiliate in 2002 was due to the $12.3 million impairment of Transco’s investment in Independence Pipeline Company resulting from the FERC’s issuance of an order on July 19, 2002, vacating Independence’s certificate to construct the Independence Pipeline project. Miscellaneous other (income) deductions, net reflected higher income of $11.9 million primarily as a result of a gain of $11.0 million associated with the disposition of securities received through a mutual insurance company reorganization and lower costs of $2.9 million related to Transco’s sale of receivables program which expired in July 2002.

2001 COMPARED TO 2000

     Operating Income and Net Income Transco’s operating income for 2001 was $235.6 million compared to operating income of $311.9 million for 2000. Net income for 2001 was $132.6 million compared to net income of $191.8 million for 2000.

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     The lower operating income of $76.3 million was primarily the result of lower gas transportation and storage revenues, higher operation and maintenance expenses and higher depreciation and amortization expense, partly offset by lower cost of natural gas transportation, as discussed below. In addition, $18.3 million was charged to other operating costs and expenses resulting from an unfavorable court decision in Transco’s royalty claims proceeding with Texaco, Inc. as discussed in Note 2 of the Notes to Consolidated Financial Statements included in Item 8 herein. The decrease in net income was attributable to the decrease in operating income, higher interest expense and lower interest income. The higher interest expense was due to $19.1 million of interest accrued as a result of the royalty claims proceeding described above, partially offset by adjustments in 2000 to estimates of interest associated with the recovery of prior years’ tracked gas costs. The lower interest income was due to a reduction in advances to affiliates and lower rates. These decreases to net income were partially offset by a higher allowance for funds used during construction due primarily to a greater amount of capital projects under construction.

     Transportation Revenues Transco’s operating revenues related to its transportation services decreased $58 million to $665 million for 2001 when compared to 2000. The lower 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 a decrease in tracked transportation revenue ($7.7 million) primarily due to lower tracked fuel costs and Gas Research Institute charges billed to customers. This was partly offset by higher demand revenues ($12.6 million) resulting from pipeline expansion projects and the effects of Transco’s general rate case Docket No. RP01-245, which was effective September 1, 2001.

     Based on Transco’s evaluation of the FERC’s March 17, 2000 order in Transco’s general rate case Docket No. RP97-71 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.

     Transco’s total market-area deliveries for 2001 decreased 86.0 TBtu, or 6%, when compared to 2000. This is primarily the result of higher natural gas prices and the use of alternative fuels by customers. Transco’s production area deliveries for 2001 decreased 60.1 TBtu, or 23%, when compared to 2000. This is primarily due to decreased liquefiables transportation, resulting from the effects of higher natural gas prices on the level of natural gas liquids processing activity, and lower interruptible transportation, resulting from lower deliveries to other pipelines in the production area.

     Sales Revenues Transco’s operating revenues related to its sales services, including Transco’s cash out sales in settlement of gas imbalances, decreased $476 million to $665 million for 2001, when compared to 2000. The decrease was primarily due to lower long-term sales volumes due to the expiration of several FS contracts in 2001 and lower cash out sales volumes related to the monthly settlement of imbalances, partially offset by a higher average sales price of $5.08 per Dt in 2001 versus $3.94 per Dt in 2000.

     Storage Revenues Transco’s operating revenues related to storage services decreased $3 million to $141 million for 2001 when compared to 2000. This revenue decrease was primarily due to lower demand revenues in 2001 resulting from the effects of Transco’s general rate case Docket No. RP01-245, which was effective September 1, 2001 and lower commodity revenues resulting from higher inventory levels in mid-2001 and milder winter weather, partially offset by increased revenues to recover higher storage rates charged by others.

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     Other Revenues Other operating revenues increased $2 million to $10 million for 2001 when compared to 2000, primarily due to higher liquids revenue and higher Parking and Borrowing Service revenues.

     Operating Costs and Expenses Excluding the cost of natural gas sales of $665 million and $1,141 million for 2001 and 2000, respectively, Transco’s operating expenses were approximately $17 million higher in 2001 compared to 2000. The lower cost of natural gas transportation was more than offset by higher operation and maintenance expense, higher depreciation and amortization, higher taxes other than income taxes and higher other operating costs and expenses. The lower cost of natural gas transportation ($20.6 million) was primarily due to regulatory approval in 2001 to recover prior years’ gas costs in Transco’s 1999 fuel tracker filing ($15.1 million) combined with a $6.4 million loss accrual recorded in 2000 associated with the settlement of historical transportation and exchange gas imbalances. This was partially offset by an additional $3.4 million charge in the fourth quarter of 2001 for transportation and exchange gas imbalances resulting from Enron Corp.’s bankruptcy filing. The higher operation and maintenance expense ($9.5 million) was primarily attributable to higher charges from others to operate certain Transco facilities ($8.6 million), permitting costs ($1.6 million) and contractual services expense ($1.5 million), partially offset by lower labor and employee expense ($2.4 million). The higher depreciation and amortization ($8.3 million) was due primarily to plant and property additions. The higher taxes other than income taxes ($1.4 million) was due to higher ad valorem taxes. The higher other operating costs and expenses ($18.7 million) was primarily due to the unfavorable court decision in Transco’s royalty claims proceeding with Texaco, Inc.

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, by accessing capital markets, by repayments of funds advanced to WGP, by borrowings under the Credit Agreement and, if required, by advances from WGP. Historically, Transco also funded its capital requirements through a sale of receivables program. In July 2002, Transco’s sale of receivables program expired and was not renewed.

     Transco has an effective registration statement on file with the Securities and Exchange Commission. At December 31, 2002, $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. With the downgrade in Transco’s credit ratings (discussed below), interest rates on future financings will be higher. Transco believes any additional financing arrangements, if required, can be obtained from the capital markets on terms that are commensurate with its current credit ratings.

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     Williams and certain of its subsidiaries, including Transco, are parties to a $700 million Credit Agreement, under which Transco can borrow up to $400 million to the extent the funds available under the Credit Agreement have not been borrowed by Williams or other subsidiaries. The Credit Agreement expires in July 2005. Interest rates vary with current market conditions based on the base rate of Citibank N.A., federal funds rate or the LIBOR. 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 Williams completes certain asset sales, the commitments from participating banks in the Credit Agreement will be reduced to $400 million, and with further asset sales could be reduced below that amount, but Transco will continue to have borrowing capacity up to the lesser of $400 million or the amount that Williams would be able to borrow to the extent the funds available under the Credit Agreement have not been borrowed by Williams or other participating subsidiaries or that otherwise would be required to remain available to Williams. At December 31, 2002, the commitments from participating banks had been reduced to $463 million, the borrowing capacity available to Transco was $400 million and Transco had no outstanding borrowings under this agreement. Transco’s assets have not been pledged to secure any indebtedness of Williams or its other affiliates, either under the Credit Agreement or pursuant to any other credit facility of Williams and its other affiliates.

     In August 2001, Transco issued $300 million of Series A notes (7.00% Notes), which pay interest at 7.00% per annum on February 15 and August 15 of each year, beginning February 15, 2002. The 7.00% Notes mature on August 15, 2011, but are subject to redemption anytime, at Transco’s option, in whole or part, at a specified redemption price, plus accrued and unpaid interest to the date of redemption. In January 2002, Transco completed the exchange of all the Series A notes for an equal amount of Series B notes. Transco did not receive any cash proceeds from this exchange. The terms of the Series B notes are substantially identical to those of the Series A notes, except that the transfer restrictions and registration rights relating to the Series A notes do not apply to the Series B notes. The net proceeds of the sale of the notes were used to fund capital expenditures and for general corporate purposes.

     On July 3, 2002, Transco issued $325 million of Series A notes (8.875% Notes), which pay interest on January 15 and July 15 each year, beginning January 15, 2003. The 8.875% Notes were issued at a discount to yield 9.25%. The 8.875% Notes mature on July 15, 2012, but are subject to redemption anytime, at Transco’s option, in whole or part, at a specified redemption price, plus accrued and unpaid interest to the date of redemption. In January 2003, Transco completed the exchange of all the Series A notes for an equal amount of Series B notes. Transco did not receive any cash proceeds from this exchange. The terms of the Series B notes are substantially identical to those of the Series A notes, except that the transfer restrictions and registration rights relating to the Series A notes do not apply to the Series B notes. The net proceeds of the sale of the 8.875% Notes were used to repay $150 million of variable rate notes that matured on July 31, 2002 and $125 million of 8 7/8% Notes that matured on September 15, 2002 and for general corporate purposes.

     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, 2002, the advances due Transco by WGP totaled $136 million. The advances are represented by demand notes. The interest rate on intercompany demand notes is the LIBOR on the first day of the month plus an applicable margin based on Transco’s current credit ratings as determined by Moody’s Investors Service and Standard & Poor’s. Due to recent asset sales, anticipated asset sales in the future and available secured borrowing facilities, Williams has indicated that it currently believes that it will continue to have the financial resources and liquidity to repay these advances made by WGP which in turn allows WGP to repay Transco and its subsidiaries.

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     In the event that Williams’ financial condition does not improve or becomes worse, or if it fails to realize sufficient proceeds from the remaining planned asset sales, it may have to consider other options including the possibility of seeking protection in a bankruptcy proceeding. Transco cannot predict with certainty what impact such action, if it were to occur, would have on Transco. Under the equitable doctrine of substantive consolidation, a bankruptcy court may consolidate and pool the assets and liabilities of a subsidiary with those of the parent. Transco cannot provide assurance that Williams, WGP or their creditors would not attempt to advance substantive consolidation claims in the event of a Williams bankruptcy proceeding or, if advanced, how a bankruptcy court would resolve the issue. If a bankruptcy court were to allow the substantive consolidation of Transco’s assets and liabilities in the context of a bankruptcy filing, Transco’s financial condition, operations and ability to meet its obligations would be materially adversely affected.

     On August 1, 2002, the FERC issued a Notice of Proposed Rulemaking (NOPR) that proposes restrictions on various types of cash management programs employed by companies in the energy industry, such as Williams and its subsidiaries, including Transco. In addition to stricter guidelines regarding the accounting for and documentation of cash management or cash pooling programs, the FERC proposal, if made final, would preclude public utilities, natural gas companies and oil pipeline companies from participating in such programs unless the parent company and its FERC-regulated affiliate maintain investment-grade credit ratings and the FERC-regulated affiliate maintains stockholder’s equity of at least 30% of total capitalization. Williams’ and Transco’s current credit ratings are not investment grade. Transco participated in comments filed in this proceeding on August 28, 2002 by the Interstate Natural Gas Association of America. On September 25, 2002, the FERC convened a technical conference to discuss issues raised in the comments filed by parties in this proceeding.

     Through July 2002, Transco had agreements to sell, on an ongoing basis, certain of its trade accounts receivable through revolving securitization structures and retained servicing responsibilities as well as a subordinate interest in the transferred receivables. Transco accounted for the securitization of trade accounts receivable in accordance with Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” As a result, the related receivables were removed from the Consolidated Balance Sheet and a retained interest was recorded for the amount of receivables sold in excess of cash received. At December 31, 2001, approximately $96 million of accounts receivable that would otherwise be Transco’s receivables were sold to a special purpose entity (SPE) in exchange for $64 million in cash and a $32 million subordinated retained interest in the accounts receivable sold to the SPE. The sale of receivables program expired on July 25, 2002 and was not renewed.

     Transco determined the fair value of its retained interests based on the present value of future expected cash flows using management’s best estimates of various factors, including credit loss experience and discount rates commensurate with the risks involved. These assumptions were updated periodically based on actual results, thus the estimated credit loss and discount rates utilized were materially consistent with historical performance. The fair value of the servicing responsibility was estimated based on internal costs, which approximate market. Costs associated with the sale of receivables are included in miscellaneous other (income) deductions, net on the Consolidated Statement of Income. The sales of accounts receivable resulted in a net charge to results of operations of approximately $0.9 million and $5.3 million in 2002 and 2001, respectively. The retained interest in accounts receivable sold to the SPE were subject to credit risk to the extent that these receivables were not collected.

     Through a wholly-owned subsidiary, Transco holds a 35% interest in Pine Needle LNG Company, LLC (Pine Needle). On March 20, 1998, Pine Needle executed an interest rate swap agreement with a bank, which swapped floating rate debt into 6.58% fixed rate debt. This interest rate swap qualifies as a cash flow hedge

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transaction under the accounting and reporting standards established by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and amended by SFAS No. 138, “Accounting for Certain Derivatives Instruments and Certain Hedging Activities.” Transco adopted these standards effective January 1, 2001. As such, Transco’s equity interest in the changes in fair value of Pine Needle’s hedge is recognized in other comprehensive income. For the year ended December 31, 2002 and 2001, Transco’s equity interest in an unrealized loss on Pine Needle’s hedge was $1.7 million and $0.6 million, respectively. The swap agreement is for the notional amount of $53.5 million of debt, which was still the amount outstanding at December 31, 2002, and applies to the long-term financing of Pine Needle with a total borrowing capacity of $53.5 million. The interest rate swap is settled quarterly. The swap agreement was effective March 31, 1999 and terminates on December 31, 2013, which is also the date of the last principal payment on this long-term debt.

CREDIT RATINGS

     Transco has no guarantees of off-balance sheet debt to third parties and maintains no debt obligations that contain provisions requiring accelerated payment of the related obligations in the event of specified levels of declines in Williams’ or Transco’s credit ratings given by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings (rating agencies).

     During 2002, the rating agencies reduced Transco’s credit ratings on its senior unsecured long-term debt, as follows:

     Currently, Moody’s Investors Service and Standard & Poor’s have Transco’s credit ratings on “negative outlook” and “negative watch”, respectively. The rating agencies have reduced Transco’s credit ratings due to concerns about the sufficiency of Williams’ operating cash flow in relation to its debt as well as the adequacy of Williams’ liquidity. The ratings remain under review pending the execution of Williams’ plan to strengthen its financial position. With the reduced credit ratings, Transco expects interest rates on future financings will be higher than they otherwise would have been.

CAPITAL EXPENDITURES

     As shown in the table below, Transco’s capital expenditures and investments in affiliates for 2002 included $282 million for market-area projects, primarily for the MarketLink and Momentum projects, $17 million for supply-area projects and $167 million for maintenance of existing facilities and other projects. Transco is estimating approximately $239 million of capital expenditures in the year 2003 related to expansion projects in the market area, primarily the Momentum, MarketLink, and Trenton-Woodbury projects, supply area projects and the maintenance of existing facilities, including expenditures required under the Federal Clean Air Act and Clean Air Act Amendments of 1990.

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OTHER CAPITAL REQUIREMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

     Contractual obligations The table below summarizes some of the more significant contractual obligations and commitments by period (in millions).

     Rate and regulatory refunds As discussed in Note 2 of the Notes to Condensed Consolidated Financial Statements included in Item 8 herein, Transco filed a general rate case (Docket No. RP01-245) and placed new rates into effect on September 1, 2001. On July 23, 2002, the FERC issued an order approving the Settlement in the rate case. The Settlement became effective October 1, 2002. Rate refunds required under the Settlement, covering the period September 1, 2001 through September 30, 2002, totaled approximately $140 million, including interest, and were paid in late November 2002.

     Regulatory and legal proceedings As discussed in Note 2 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 2 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

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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 WGP, 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 terms commensurate with its current credit ratings to finance its capital requirements.

ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk

     At December 31, 2002, Transco’s debt portfolio included only fixed rate issues. The following table provides information about Transco’s long-term debt, including current maturities, as of December 31, 2002. The table presents principal cash flows and weighted-average interest rates by expected maturity dates.

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ITEM 8. Financial Statements and Supplementary Data

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Transcontinental Gas Pipe Line Corporation

     We have audited the accompanying consolidated balance sheet of Transcontinental Gas Pipe Line Corporation as of December 31, 2002 and 2001, and the related consolidated statements of income, common stockholder’s equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Houston, Texas
March 5, 2003,
Except for Note 10, as to which the date is
March 17, 2003

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TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)

See accompanying notes.

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TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)

See accompanying notes.

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TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)

See accompanying notes.

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TRANSCONTINENTAL GAS PIPE LINE CORPORATION

CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER’S EQUITY
(Thousands of Dollars)