Transco began construction in 1997 on a large
liquefied natural gas storage facility in North
Carolina. The joint-venture project is scheduled
for service in second-quarter 1999.

1998 Capital Expenditures and Investments — $358 million

Transco achieved excellent results in 1997, with operating profit increasing 16 percent from 1996. Key factors included cost containment, new rates that took effect in May, and the full-year effect of a 205 MMcfd expansion in the Southeast. We maintained strong market positions in the large, mature gas-heating markets in the Northeast and in emerging growth markets in the South.

Key Points
Transco is driving unprecedented growth that should increase its capacity by more than 50 percent. During 1997, expansion projects totaling approximately $900 million and representing about 3.5 Bcfd of new capacity were in various stages of development. We completed some of the projects by November; others are slated to begin service over the next three years. Collectively, they represent our most ambitious pipeline-expansion program ever.

*Our $85 million SunBelt Expansion began service as scheduled in November. The project increases our mainline capacity by 146 MMcfd from Louisiana into North Carolina.

*Two smaller but strategically important expansions also went into service for the 1997-98 heating season. Our $9.8 million Pocono Expansion increases capacity on our Leidy, Pa., line by 35 MMcfd, while another project expands by 38 MMcfd the capacity on our Maiden Lateral serving Charlotte, N.C.

*An open season for our proposed MarketLink project resulted in more than 1.2 Bcfd in nominations from shippers. The project will expand delivery capacity for Canadian and midwestern gas supplies to the East Coast and South Atlantic markets through the Leidy hub. The capacity and costs are still being determined for the project, targeted for service in November 1999.

*We filed for FERC approval of the Independence Pipeline project. A joint venture with ANR Pipeline and National Fuel, the 400-mile line will extend from ANR’s existing compressor station at Defiance, Ohio, to Transco’s facilities at Leidy. The line, targeted for service in November 1999, will provide an initial capacity of 916 MMcfd for gas moving eastward from Chicago. In June, National Fuel announced that it was coming on board as an equal partner in the project. Other partners may be added.

*We began building the $107 million Pine Needle LNG joint-venture storage project in North Carolina. With a scheduled in-service date of May 1999, Pine Needle will provide 4 Bcf of storage capacity and a 400 MMcfd withdrawal capability, to be used in peak-demand periods.

*The North Carolina Utilities Commission approved the Cardinal Pipeline project. The joint-venture project involves the acquisition of Cardinal Pipeline, which will be extended 67 miles to provide increased firm transportation service of 140 MMcfd to the Raleigh, N.C., area.

*The FERC in January 1998 approved the Mobile Bay expansion project. The
$120 million project is designed to transport 350 MMcfd and increase capacity on our existing lateral to 784 MMcfd. The first phase of the project is scheduled to go into service in July 1998, with total completion set for November 1998.

*We received FERC approval of our $68 million Cherokee Expansion, which will increase capacity by 84 MMcfd to markets in Georgia. Its targeted in-service date is November 1998.

*We also moved forward on our Cumberland Pipeline joint-venture project with AGL Resources. Cumberland is scheduled to begin serving Atlanta, Chattanooga, Tenn., and other markets in 2000.

*New rates went into effect May 1 following our general rate case filing in November 1996. We filed in early 1998 for FERC approval of a settlement involving most of the major issues in this rate case, excluding rate of return and capital structure.

*In other regulatory matters, a federal appeals court favorably resolved an issue from a 1992 rate case regarding capital structure.

*Process-improvement and efficiency programs continued to reduce costs.

Outlook
*Transco expects operating profit to increase again in 1998. The full-year benefits of our SunBelt, Pocono and Maiden Lateral expansions will be major contributors, as will cost-containment efforts.

*Transco enjoys a strong competitive position because of three main factors — cost, service and reliability. Our challenge is to fulfill our aggressive growth strategy while managing costs effectively and ensuring that reliability and flexibility remain at the highest possible level. We also intend to continue offering new service options for our customers.

*In the regulatory arena, we continue to seek rate stability and adequacy while aggressively expanding our system. We also will press for rates of return that appropriately compensate us for the risks we assume as a leader in the increasingly competitive marketplace.

*Planned capital expenditures for 1998 will be significantly greater than in 1997. The primary reason for the increase is the planned completion of two major projects, Mobile Bay and Cherokee. We also expect to make major progress on Pine Needle. In 1998, we will spend a record $267 million on expansion projects and $91 million on
reliability, mandatory and efficiency projects.