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TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

July 31, 2014

General.

The following discussion should be read in conjunction with the Consolidated Financial Statements, Notes and Management's Discussion and Analysis contained in Items 7 and 8 of our 2013 Annual Report on Form 10-K and with the Condensed Consolidated Financial Statements and Notes contained in this Form 10-Q. RESULTS OF OPERATIONS. Operating Income and Net Income. Operating income for the six months ended June 30, 2014 was $249.4 million compared to $212.7 million for the six months ended June 30, 2013. Net income for the six months ended June 30, 2014 was $217.3 million compared to $187.0 million for the six months ended June 30, 2013. The increase in Operating income of $36.7 million (17.3 percent) was primarily due to higher Natural gas transportation revenues in the first six months of 2014 compared to the same period in 2013, partly offset by an increase in Operating Costs and Expenses, as discussed below. The increase in Net income of $30.3 million (16.2 percent) was mostly attributable to the increase in Operating income partly offset by an unfavorable change in net expenses in Other (Income) and Other Expenses, as discussed below. Sales Revenues. Operating revenues: Natural gas sales decreased $14.6 million (24.1 percent) for the six months ended June 30, 2014 compared to the same period in 2013. The decrease was due to lower cash-out sales. Cash-out sales are offset in our cost of natural gas sold and therefore had no impact on our operating income or results of operations. Transportation Revenues. Operating revenues: Natural gas transportation for the six months ended June 30, 2014 increased $44.8 million (8.3 percent) over the same period in 2013. The increase was primarily due to higher transportation reservation revenues related to new incremental projects of $32.2 million ($26.7 million from our Northeast Supply Link project placed in service in August 2013 and $5.5 million from our Mid-South project Phase 2 placed in service in June 2013), higher firm transportation backhaul revenues of $6.2 million and higher commodity revenues of $4.8 million. Operating Costs and Expenses. Excluding the Cost of natural gas sales, which is directly offset in revenues, of $46.0 million for the six months ended June 30, 2014 and $60.6 million for the comparable period in 2013, our operating costs and expenses for the six months ended June 30, 2014 increased approximately $8.1 million (2.0 percent) from the comparable period in 2013. This increase was primarily attributable to a $6.4 million increase in Depreciation and amortization costs due to expansion projects placed into service in mid-2013. Other (Income) and Other Expenses. Other (income) and other expenses for the six months ended June 30, 2014 had an unfavorable change of $6.5 million (25.3 percent) over the same period in 2013 primarily due to $3.0 million decrease in AFUDC, $2.0 million lower amount of reimbursements for tax gross-up related to projects and $1.9 million increase in interest expense primarily due to interest on rate refunds. Filing of Rate Case. On August 31, 2012, we filed a general rate case with the FERC for an overall increase in rates. In September 2012, the FERC issued an order accepting our filing subject to the outcome of a hearing. The rates for certain services that were proposed as overall rate decreases became effective October 1, 2012, and the increased rates became effective March 1, 2013. All issues in this proceeding have been resolved by a stipulation and agreement (Agreement) approved by the FERC. Pursuant to its terms, the Agreement became effective March 1, 2014 and refunds of approximately $118 million were issued on April 18,

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Capital Expenditures. Our capital expenditures for the six months ended June 30, 2014 were $220.0 million, compared to $278.8 million for the six months ended June 30, 2013. The $58.8 million decrease is primarily due to lower spending on expansion projects in 2014. Our capital expenditures estimate for 2014 and future capital projects are discussed in our 2013 Annual Report on Form 10-K. The following describes those projects and certain new capital projects proposed by us. Rockaway Delivery Lateral The Rockaway Delivery Lateral Project involves the construction of a three-mile offshore lateral to National Grid's distribution system in New York. In May 2014, we received approval from the FERC for the project. We plan to place the project into service during the fourth quarter of 2014, and the capacity of the lateral is expected to be 647 Mdth/d. Northeast Connector ProjectThe Northeast Connector Project involves an expansion of our existing natural gas transmission system from southeastern Pennsylvania to the proposed Rockaway Delivery Lateral. In May 2014, we received approval from the FERC for the project. We plan to place the project into service during the fourth quarter of 2014, and it is expected to increase capacity by 100 Mdth/d. Mobile Bay South IIIThe Mobile Bay South III Project involves an expansion of the Mobile Bay line south from Station 85 in west central Alabama to delivery points along the line. In April 2014, we received approval from the FERC for the project. We plan to place the project into service during the second quarter of 2015, and it is expected to increase capacity on the line by 225 Mdth/d. Virginia SouthsideThe Virginia Southside Project involves an expansion of our existing natural gas transmission system from the Zone 6 Station 210 Pooling Point in New Jersey to Dominion Virginia Power's proposed power station in Brunswick County, Virginia, and both our Cascade Creek interconnection with East Tennessee Natural Gas and our Pleasant Hill delivery point to Piedmont Natural Gas Company, Inc. in North Carolina. In November 2013, we received approval from the FERC for the project. We plan to place the project into service during the third quarter of 2015, and it is expected to increase capacity by 270 Mdth/d. Leidy Southeast The Leidy Southeast Project involves an expansion of our existing natural gas transmission system from the Marcellus Shale production region on the Leidy Line in Pennsylvania to the Station 85 Pooling Point in Alabama. We filed an application with the FERC in September 2013 for approval of the project. We plan to place the project into service during the fourth quarter of 2015, assuming timely receipt of all necessary regulatory approvals, and it is expected to increase capacity by 525 Mdth/d. Rock Springs Expansion The Rock Springs Expansion Project involves an expansion of our existing natural gas transmission system southbound from the Zone 6 Station 210 Pooling Point in New Jersey along with a new eleven mile lateral to Old Dominion Electric Cooperative's proposed Wildcat Point generation facility in Cecil County, Maryland. We filed an application with the FERC in June 2014 for approval of the project. We plan to place the project into service during the third quarter of 2016, assuming timely receipt of all necessary regulatory approvals, and it is expected to increase capacity by 192 Mdth/d. Hillabee Expansion The Hillabee Expansion Project involves an expansion of our existing natural gas transmission system from our Station 85 Pooling Point in Choctaw County, Alabama to a proposed new interconnection with Sabal Trail Transmission's system in Tallapoosa County, Alabama. The project will be constructed in phases and all of the project expansion capacity will be leased to Sabal Trail Transmission. We plan to file an application with the FERC in the fourth quarter of 2014 for approval of the initial phases of the project. We plan to place the initial phases of the project into service during the second quarter of 2017 and 2020, assuming timely receipt of all necessary regulatory approvals, and together they are expected to increase capacity by 1,025 Mdth/d. 14



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Gulf Trace Expansion The Gulf Trace Expansion Project involves an expansion of our existing natural gas transmission system together with greenfield facilities to provide firm transportation from Station 65 in St. Helena Parish, Louisiana westward to a new interconnection with Sabine Pass Liquefaction in Cameron Parish, Louisiana. We plan to file an application with the FERC in the fourth quarter of 2014 for approval of the project. We plan to place the project into service during the first half of 2017, assuming timely receipt of all necessary regulatory approvals, and it is expected to increase capacity by 1,200 Mdth/d. Dalton Expansion The Dalton Expansion Project involves an expansion of our existing natural gas transmission system together with greenfield facilities to provide firm transportation from the Zone 6 Station 210 Pooling Point in New Jersey to markets in northwest Georgia. We plan to file an application with the FERC in the first quarter of 2015 for approval of the project. We plan to place the project into service in 2017, assuming timely receipt of all necessary regulatory approvals, and it is expected to increase capacity by 448 Mdth/d. Atlantic Sunrise ProjectThe Atlantic Sunrise Project involves an expansion of our existing natural gas transmission system together with greenfield facilities to provide firm transportation from the northeastern Marcellus producing area to markets along our mainline as far south as Station 85 in Alabama. We plan to file an application with the FERC in the second quarter of 2015 for approval of the project. We plan to place the project into service during the second half of 2017, assuming timely receipt of all necessary regulatory approvals, and it is expected to increase capacity by 1,700 Mdth/d. Garden State Expansion The Garden State Expansion Project involves an expansion of our existing natural gas transmission system to provide firm transportation from our Zone 6 Station 210 Pooling Point in New Jersey to a new interconnection on Transco'sTrenton Woodbury Lateral in Burlington County, New Jersey. The project will be constructed in phases. We plan to file an application with the FERC in the first quarter of 2015 for approval of the project. We plan to place the initial phase of the project into service during the fourth quarter of 2016 and remaining portion in the third quarter of 2017, assuming timely receipt of all necessary regulatory approvals. The project is expected to increase capacity by 180 Mdth/d. 15



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