<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM 10-K
                                    ---------

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 (Fee Required)

                  For the fiscal year ended December 31, 1998

                                       or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities 
     Exchange Act of 1934 (No Fee Required)

For the Transition Period from _________________ to ____________________

Commission File Number 1-7414

                         NORTHWEST PIPELINE CORPORATION
             (Exact name of registrant as specified in its charter)

          DELAWARE                                                 87-0269236  
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                              Identification No.)

 295 Chipeta Way, Salt Lake City, Utah                            84108
(Address of principal executive offices)                        (Zip Code)

                                 (801) 583-8800
              (Registrant's telephone number, including area code)

           Securities Registered Pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                         Name of Each Exchange
                Title of Each Class                       On Which Registered
                -------------------                       -------------------
<S>                                                    <C> 
            6.625 % Debentures due 2007                New York Stock Exchange
            9% Debentures due 2022                     New York Stock Exchange
            7.125% Debentures due 2025                 New York Stock Exchange
</TABLE>

           Securities Registered Pursuant to Section 12(g) of the Act:

                                      None
                                      ----

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant.

            No voting stock of registrant is held by non-affiliates.

      Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

        Class                                    Outstanding at March 29, 1999
----------------------------                     -----------------------------
Common stock, $1 par value                                 1,000 shares

                      Documents Incorporated by References:
                                      None

The registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefore filing this form 10-K with the reduced
disclosure format.


<PAGE>   2

                                TABLE OF CONTENTS


                                     PART I
<TABLE>
<CAPTION>

Heading                                                                            Page
-------                                                                            ----
<S>                                                                                <C>
Items 1.
 and  2.  BUSINESS AND PROPERTIES ................................................  1

Item  3.  LEGAL PROCEEDINGS ......................................................  5

Item  4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Omitted)...........  5


                                     PART II

Item  5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
           HOLDER MATTERS ........................................................  6

Item  6.  SELECTED FINANCIAL DATA (Omitted).......................................  6

Item  7.  MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS ...........  6

Item  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................ 11

Item  9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE .............................................. 28

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Omitted)............ 29

Item 11.  EXECUTIVE COMPENSATION (Omitted)........................................ 29

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT (Omitted)................................................... 29

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Omitted)................ 29

                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K     .......................................................... 29
</TABLE>




<PAGE>   3
                         NORTHWEST PIPELINE CORPORATION

                                    FORM 10-K

                                     PART I

ITEMS 1 AND 2.   BUSINESS AND PROPERTIES

BUSINESS ENVIRONMENT

         Northwest Pipeline Corporation ("Pipeline") is a wholly-owned
subsidiary of Williams Gas Pipeline Company ("WGP") (formerly Williams
Interstate Natural Gas Systems, Inc.). WGP is a wholly-owned subsidiary of The
Williams Companies, Inc. ("Williams"). Prior to May 1, 1997, Pipeline was a
wholly-owned subsidiary of Williams.

         Pipeline owns and operates an interstate natural gas pipeline system,
including facilities for mainline transmission and gas storage. Pipeline's
transmission and storage activities are subject to regulation by the Federal
Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938
("Natural Gas Act") and under the Natural Gas Policy Act of 1978 ("NGPA"), and,
as such, its rates and charges for the transportation of natural gas in
interstate commerce, the extension, enlargement or abandonment of its
jurisdictional facilities, and its accounting, among other things, are subject
to regulation.

         Pipeline has significant future opportunities to provide service to
meet the demands of growing gas markets. Pipeline's geographical position allows
access to the incremental sources of supply required for these markets.

TRANSMISSION

         Pipeline owns and operates a pipeline system for the mainline
transmission of natural gas. This system extends from the San Juan Basin in
northwestern New Mexico and southwestern Colorado through Colorado, Utah,
Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near
Sumas, Washington. At December 31, 1998, Pipeline's system, having an aggregate
mainline deliverability of approximately 2.5 Bcf* of gas per day, was composed
of approximately 3,900 miles of mainline and branch transmission pipelines, and
40 mainline compressor stations with a combined capacity of approximately
307,000 horsepower.

         Pipeline operates under an open-access transportation certificate
wherein gas is transported for third party shippers. Pipeline's transportation
services (firm and interruptible) represented 100% of its total revenue in 1998,
1997 and 1996.

         In 1998, Pipeline transported natural gas for a total of 165 customers.
Pipeline provides services for markets in California, New Mexico, Colorado,
Utah, Nevada, Wyoming, Idaho, Oregon and Washington. Transportation customers
include distribution companies, municipalities, interstate and intrastate
pipelines, gas marketers and direct industrial users. The two largest
transportation customers of Pipeline in 1998 accounted for approximately 14.8%
and 14.1%, respectively, of total operating revenues. No other customer
accounted for more than 10% of total operating revenues in 1998. Pipeline's firm
transportation agreements are generally long-term agreements with various
expiration dates and account for the major portion of Pipeline's business.
Additionally, Pipeline offers interruptible transportation service under
agreements that are generally short term.



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

*         The term "Mcf" means thousand cubic feet, "MMcf" means million cubic
feet and "Bcf" means billion cubic feet. All volumes of natural gas are stated
at a pressure base of 14.73 pounds per square inch absolute at 60 degrees
Fahrenheit. The term "MMBtu" means one million British Thermal Units and "TBtu"
means one trillion British Thermal Units.



<PAGE>   4
         No other interstate natural gas pipeline company presently provides
significant service to Pipeline's primary gas consumer market area. However,
competition with other interstate carriers exists for expansion markets.
Competition also exists with alternate fuels. Electricity and distillate fuel
oil are the primary alternate energy sources in the residential and commercial
markets. In the industrial markets, high sulfur residual fuel oil is the main
alternate fuel source.

         Pipeline believes that strong economies in the Pacific Northwest and
the growing preference for natural gas in response to environmental concerns
support future expansions of its mainline capacity.

GAS STORAGE

         Underground gas storage facilities enable Pipeline to balance daily
receipts and deliveries and provide storage services to certain major customers.

         Pipeline has a contract with a third party, under which gas storage
services are provided to Pipeline in an underground storage reservoir in the
Clay Basin Field located in Daggett County, Utah. Pipeline injects its own gas
into the storage reservoir, and is authorized to utilize the Clay Basin Field at
a seasonal storage level of 6.1 Bcf of working gas, with a firm delivery
capability of 51 MMcf of gas per day.

         Pipeline owns a one-third interest in the Jackson Prairie underground
storage facility located near Chehalis, Washington, with the remaining interests
owned by two of Pipeline's distribution customers. The authorized seasonal
storage capacity of the facility is 15.1 Bcf of working gas. The facility
provides peak day deliveries to Pipeline of up to 550 MMcf per day on a firm
basis and up to an additional 72 MMcf per day on a best-efforts basis. Certain
of Pipeline's major customers own the working gas stored at the facility.

         Pipeline also owns and operates a liquefied natural gas ("LNG") storage
facility located near Plymouth, Washington, which provides standby service for
Pipeline's customers during extreme peaks in demand. The facility has a total
LNG storage capacity equivalent to 2.4 Bcf of gas, liquefaction capability of 12
MMcf per day and regasification capability of 300 MMcf per day. Certain of
Pipeline's major customers own the gas stored at the LNG plant.

EXPANSION PROJECTS

         Pipeline is currently developing the Columbia Gorge Project, which will
meet the growing peak-day and annual market growth of British Columbia,
Washington and Oregon. BC Gas is the major gas distributor in lower British
Columbia. The Columbia Gorge project will provide firm transportation between a
Stanfield, Washington receipt point and a delivery point near Sumas, Washington
to serve the BC Gas markets. The project can be built in phases (50,000 up to
300,000 MMBtu per day). The first phase will serve BC Gas Utility Ltd., the
major gas distributor in lower British Columbia, with firm transportation of
50,000 MMBtu per day between a Stanfield, Washington receipt point and a
delivery point near Sumas, Washington. Pipeline filed a certificate application
on May 15, 1998 and an amendment (to reflect design cost changes) in the fourth
quarter of 1998. Total cost of this first phase is estimated at approximately
$18.6 million with an expected in-service date of November 1, 1999.

         In March 1998, Pipeline filed for certificate authority to realign
storage capacity authorized by the FERC to be retained for system balancing by
replacing 3.04 Bcf of existing firm Clay Basin storage facility capacity (and
25.3 MMcf per day of associated firm deliverability) with 1.067 Bcf of Jackson
Prairie expansion capacity (and 100 MMcf per day of associated firm
deliverability). The FERC order authorizing expansion of the Jackson Prairie
storage facility was received and accepted during September 1998. The total cost
of Northwest's share of the expansion project is estimated at approximately $10
million with an expected in-service date of October 1, 1999.







                                      -2-
<PAGE>   5
OPERATING STATISTICS

         The following table summarizes volumes and capacity for the periods
indicated:

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                    ----------------------------
                                                      1998      1997      1996
                                                    --------  --------  --------
<S>                                                 <C>       <C>       <C>
Total throughput (TBtu) ..........................       732       714       834

Average Daily Transportation Volumes (TBtu) ......       2.0       2.0       2.3
Average Daily Firm Reserved Capacity (TBtu) ......       2.6       2.5       2.5
</TABLE>

OTHER REGULATORY MATTERS

         Pipeline's transportation of natural gas in interstate commerce is
subject to regulation by FERC under the Natural Gas Act and the NGPA. Pipeline
holds certificates of public convenience and necessity issued by FERC
authorizing it to own and operate all pipelines, facilities and properties
considered jurisdictional for which certificates are required under the Natural
Gas Act.

         Pipeline is 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.

         On April 1, 1993, Pipeline began collecting new rates, subject to
refund, under its rate case filed October 1, 1992 ("1993 Rate Case"). On May 31,
1995, Pipeline received an order from the FERC on this rate case, which, among
other issues, supported an equity rate of return of 13.2 percent. In a further
order issued on July 19, 1996, FERC required an Administrative Law Judge ("ALJ")
to reconsider the long-term growth component of the equity rate of return
formula, and upheld its May 31, 1995 decision on all other issues. On October
22, 1996, the ALJ issued an initial decision, which recommended an equity rate
of return of 11.62 percent. Pipeline took exception to this decision before the
FERC. On June 11, 1997, the FERC issued an order revising its approved equity
rate of return to 12.59 percent based on a new policy for industry-wide
application that requires the use of forecasts of growth in the gross domestic
product as the long-term growth component of the rate of return formula. On July
11, 1997, Pipeline and several parties in the case sought rehearing of the June
11 rate of return on equity decision, seeking to have the FERC reconsider
various aspects of its new rate of return on equity policy. On October 16, 1997,
the FERC issued an opinion denying rehearing and reaffirming its previous policy
pronouncements concerning rate of return on equity, but convened a conference on
January 30, 1998 to consider, on an industry-wide basis, issues with respect to
pipeline rates of return. Pipeline made refunds to customers in June 1998
totaling $27 million, including interest, settling all disputed matters in this
rate case. Pipeline also sought judicial review of FERC's decision concerning
rate of return. In July 1998, FERC issued orders concerning its rate of return
on equity policy in rate proceedings of other pipelines adopting a formula that
gives less weight to the long-term growth component. If this most recent formula
modification were to be applied in this rate proceeding, the rate of return
result would be somewhat higher. Any additional revenues to which Pipeline might
be entitled would be collected through a special FERC-authorized refund
adjustment.

         On November 1, 1994, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed April 29, 1994. This filing
sought a revenue increase for a projected deficiency caused by increased costs
and the impact of a transportation contract terminated subsequent to the 1993
Rate Case. On November 14, 1995, Pipeline filed an uncontested settlement
proposal with the FERC. The FERC approved the Settlement in a Letter Order dated
February 14, 1996 and no rehearing petitions were filed with respect to that
order. During the second quarter of 1996, Pipeline finalized and paid the
settlement refunds. The settlement resolved substantially all the issues in this
rate case except one regarding Pipeline's postage stamp rate design. A hearing
was conducted in July 1996; and subsequently, a decision upholding Pipeline's
position was issued by the ALJ. During the first quarter of 1998, the FERC
affirmed the ALJ's decision.

         On February 1, 1996, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 1, 1995 ("1995 Rate
Case"). On October 18, 1996, the Commission issued an order approving a
settlement concerning certain liquid revenue credit issues relating to
Pipeline's agreement with 




                                      -3-
<PAGE>   6

an affiliate to have liquid hydrocarbon products extracted from Pipeline's
transportation stream at Ignacio, Colorado. The litigation of all remaining
issues took place in late 1996. Pipeline's rate application seeks a revenue
increase for increases in rate base related primarily to the Northwest Natural
and Expansion II facilities placed into service December 1, 1995 and increased
operating costs primarily associated with an increase in headquarters office
rent. During the first quarter of 1998, the ALJ issued an Initial Decision. The
ALJ found that the facts of this case continue to support Pipeline's capital
structure of 55% equity and 45% debt. The ALJ also determined that Pipeline fits
within the average risk range for determining pipeline return on equity.
However, the ALJ allowed a return on equity of 11.2 percent. Pipeline is seeking
FERC review of this and other aspects of the ALJ decision. If the FERC applies
its recently announced modifications to the rate of return formula giving less
weight to long-term growth factors, the resulting rate of return on equity would
be somewhat higher. Pipeline has not yet made any changes to its accounting
reserves pending FERC action in this proceeding.

         On March 1, 1997, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 30, 1996 ("1996 Rate
Case"). The application sought an increase in rates due to a proposed use of a
higher depreciation rate which also considers a net negative salvage value for
Pipeline's facilities, higher operating costs and a redesign of Pipeline's rates
because of impacts relating to the sale of Pipeline's south-end facilities in
the third quarter of 1996. On July 22, 1997, Pipeline filed a settlement, which
would resolve all issues in this rate case. On November 25, 1997, the FERC, over
the objection of one dissenting party, issued an order approving all aspects of
the settlement. The one dissenting party sought and was denied rehearing of the
FERC's order. That party has now sought judicial review of the FERC's decisions.
Pipeline made refunds to customers in August 1998 totaling $16.7 million,
including interest, in this rate case.

OWNERSHIP OF PROPERTY

         Pipeline's system is owned in fee. However, a substantial portion of
Pipeline's system is constructed and maintained pursuant to rights-of-way,
easements, permits, licenses or consents on and across properties owned by
others. The compressor stations of Pipeline, with appurtenant facilities, are
located in whole or in part upon lands owned by Pipeline and upon sites held
under leases or permits issued or approved by public authorities. The LNG plant
is located on lands owned in fee by Pipeline. Pipeline's debt indentures
restrict the sale or disposal of a major portion of its pipeline system.

EMPLOYEES

         At December 31, 1998, Pipeline employed 552 persons, none of whom are
represented under collective bargaining agreements. No strike or work stoppage
in any of Pipeline's operations has occurred in the past and relations with
employees are good.

ENVIRONMENTAL MATTERS

         Pipeline is subject to the National Environmental Policy Act and other
federal and state legislation regulating the environmental aspects of its
business. Management believes that Pipeline is in substantial compliance with
existing environmental requirements. Pipeline believes that, with respect to any
capital expenditures required to meet applicable standards and regulations, FERC
would grant the requisite rate relief so that, for the most part, such
expenditures and a return thereon would be permitted to be recovered. Pipeline
believes that compliance with applicable environmental requirements is not
likely to have a material effect upon Pipeline's earnings or competitive
position.

FORWARD-LOOKING INFORMATION

         Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Although Pipeline believes
these forward-looking statements are based on reasonable assumptions, it cannot
give any assurance that it will reach every objective. Pipeline is making these
forward-looking statements in reliance on the safe harbor protections provided
under the Private Securities Litigation Reform Act of 1995.

         As required by such Act, Pipeline hereby identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by Pipeline in
forward-looking statements: (i) risks and uncertainties related to changes in
general economic conditions in the United States, changes in laws and
regulations to which Pipeline is subject, including tax, environmental 



                                      -4-
<PAGE>   7

and employment laws and regulations, the cost and effects of legal and
administrative claims and proceedings against Pipeline or its subsidiary or
which may be brought against Pipeline or its subsidiary, the effect of changes
in accounting policies, and conditions of the capital markets Pipeline utilizes
to access capital to finance operations; (ii) risks and uncertainties related to
the impact of future federal and state regulation of business activities,
including allowed rates of return and the resolution of other regulatory matters
discussed herein; (iii) risks and uncertainties related to the ability to
develop expanded markets as well as the ability to maintain existing markets;
(iv) risks and uncertainties related to the year 2000 readiness of Pipeline, its
customers, and its vendors; and (v) risks and uncertainties related to the
ability to control costs. In addition, future utilization of pipeline capacity
will depend on energy prices, competition from other pipelines and alternate
fuels, the general level of natural gas demand, decisions by customers not to
renew expiring natural gas transportation contracts and weather conditions,
among other things.

ITEM 3.  LEGAL PROCEEDINGS

         Other than as described in Note 9 of Notes to Financial Statements and
above under Items 1 and 2 Business and Properties, there are no material pending
legal proceedings. Pipeline is subject to ordinary routine litigation incidental
to its business.


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

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




                                      -5-
<PAGE>   8
                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Pipeline is wholly-owned by WGP, a wholly-owned subsidiary of Williams.

         The payment of dividends by Pipeline on its common stock is restricted
under various debt agreements. Under the most restrictive provisions, the amount
of Pipeline's retained earnings available for dividends on its common stock as
of December 31, 1998, was approximately $175.8 million. In 1998 and 1997,
Pipeline paid cash dividends on common stock of $36 million and $73.6 million,
respectively.

ITEM 6.  SELECTED FINANCIAL DATA

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

ITEM 7.  MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

         This analysis discusses financial results of Pipeline's operations for
the years 1996 through 1998. Variances due to changes in price and volume have
little impact on revenues, because under Pipeline's rate design methodology, the
majority of overall cost of service is recovered through firm capacity
reservation charges in its transportation rates.

RESULTS OF OPERATIONS

Year Ended December 31, 1998 vs. Year Ended December 31, 1997

         Operating revenues increased $14.3 million, or 5%, primarily due to the
impact of a new rate design effective March 1, 1997 that enables greater
short-term firm and interruptible transportation revenues, the favorable
adjustments to rate refund accruals associated with the 1993 and 1996 rate cases
and the reversal of a demand charge credit reserve in 1998, coupled with the
1997 unfavorable adjustments to rate refund accruals, partially offset by a $3.5
million gain on the sale of system balancing gas in 1997.

         Pipeline's transportation service accounted for 95% and 94% of
operating revenues for the years ended December 31, 1998 and 1997, respectively.
Additionally, gas storage service represented 3% of operating revenues for each
of the years ended December 31, 1998 and 1997.

         Operating expenses increased $.4 million due primarily to higher
operation and maintenance and general and administrative expenses as a result of
increases in property damage reserves and modification of an employee benefit
program associated with the vesting of paid time off, mostly offset by lower
taxes other than income taxes.

         Operating income increased $13.9 million, or 11%, primarily due to the
impact of a new rate design effective March 1, 1997, the favorable adjustments
to rate refund accruals associated with the 1993 and 1996 rate cases, the 1997
increases to rate refund accruals and lower taxes other than income, partially
offset by a $3.5 million gain on the sale of system balancing gas in 1997 and
increased operation and maintenance and general and administrative expenses.

         Other interest expense decreased $2.6 million due to the use of a
revolving credit agreement facility in 1997 and lower revenues subject to refund
as a result of rate case settlements in 1998, partially offset by higher
amortization of loss on reacquired debt as a result of the early debt
retirements in late 1998 and 1997.

Year Ended December 31, 1997 vs. Year Ended December 31, 1996

         Operating revenues increased $3.3 million, or 1%, primarily due to new
transportation rates effective March 1, 1997 and a $3.5 million gain on the sale
of system balancing gas, partially offset by increases in rate reserves in 1997
and the 1996 recognition of the favorable settlement of a previous rate case and
a favorable regulatory decision.



                                      -6-
<PAGE>   9

         Pipeline's transportation service accounted for 94% and 95% of
operating revenues for the years ended December 31, 1997 and 1996, respectively.
Additionally, 3% and 5% of operating revenues represented gas storage service
for the years ended December 31, 1997 and 1996, respectively.

         Operating expenses increased $3.9 million, or 3%, due primarily to
increased depreciation expenses associated with Pipeline's new rates effective
March 1, 1997, partially offset by decreased operation and maintenance and
general and administrative expenses.

         Operating income decreased $.5 million primarily due to increases in
rate reserves in 1997 and the 1996 recognition of the favorable settlement of a
previous rate case and a favorable regulatory decision, significantly offset by
lower operation and maintenance and general and administrative expenses and a
gain on the sale of system balancing gas.

         Interest on long-term debt decreased $4.9 million as a result of the
early retirement of over $200 million of high-interest debentures under a
Williams-wide debt restructuring plan. Other interest increased $5.9 million due
to increased revenues subject to refund and use of a revolving credit agreement
facility.

FINANCIAL CONDITION AND LIQUIDITY

Capital Expenditures and Financing

         Pipeline's expenditures for property, plant and equipment additions
amounted to $60.1 million, $44.4 million and $62.8 million for 1998, 1997 and
1996, respectively. Funds necessary to complete capital projects are expected to
come from several sources, including Pipeline's operations and available cash.
In addition, Pipeline expects to be able to obtain financing, when necessary, on
reasonable terms. To allow flexibility in the timing of issuance of long-term
securities, financing may be provided on an interim basis with bank debt and
from sources discussed below.

         Pipeline believes that strong economies in the Pacific Northwest and
the growing preference for natural gas in response to environmental concerns
support future expansions of its mainline capacity.

         Pipeline shares in a $1 billion Revolving Credit Facility with Williams
and four affiliated companies. Pipeline's maximum borrowing availability,
subject to prior borrowing by other affiliated companies, is $400 million, none
of which was used by Pipeline at December 31, 1998. Interest rates vary with
current market conditions. The Facility 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 Pipeline. Any borrowings by
Pipeline under this Facility are not guaranteed by Williams and are based on
Pipeline's financial need and credit worthiness.

         In February 1997, NWP Enterprises ("Enterprises"), a wholly-owned
subsidiary of Pipeline since its incorporation on January 2, 1997, entered into
a new agreement for the sale, with limited recourse, of certain receivables of
Pipeline. Net proceeds to Enterprises are limited to $15 million of which $10
million was utilized at December 31, 1998 and 1997.

         Pipeline has also arranged various uncommitted lines-of-credit at
market interest rates. Pipeline's credit facilities are subject to Pipeline's
continued credit worthiness.

OTHER

         Refer to Items 1 and 2 Business and Properties for information about
regulation of Pipeline's business. See Note 2 of Notes to Financial Statements
for fair value of financial instruments.

Contingencies

         Reference is made to Note 9 of Notes to Financial Statements for
information about regulatory, judicial and business developments which cause
operating and financial uncertainties.

Effect of Inflation

         Pipeline generally has experienced increased costs in recent years 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 




                                      -7-
<PAGE>   10

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 Pipeline's property, plant and equipment
and inventory is subject to rate-making 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, Pipeline
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 Pipeline's
ability to price services or products based upon inflation's effect on costs.

Year 2000 Compliance

         Williams and its wholly-owned subsidiaries, which include Pipeline,
initiated an enterprise-wide project in 1997 to address the year 2000 compliance
issue for both traditional information technology areas and non-traditional
areas, including embedded technology which is prevalent throughout the company.
This project focuses on all technology hardware and software, external
interfaces with customers and suppliers, operations process control, automation
and instrumentation systems, and facility items. The phases of the project are
awareness, inventory and assessment, renovation and replacement, testing and
validation. The awareness and inventory/assessment phases of this project as
they relate to both traditional and non-traditional information technology areas
have been completed. During the inventory and assessment phase, all systems with
possible year 2000 implications were inventoried and classified into five
categories: 1) highest, business critical; 2) high, compliance necessary within
a short period of time following January 1, 2000; 3) medium, compliance
necessary within 30 days from January 1, 2000; 4) low, compliance desirable but
not required; and 5) unnecessary. Categories 1 through 3 were designated as
critical and are the major focus of this project. Renovation/replacement and
testing/validation of critical systems are expected to be completed by June 30,
1999, except for replacement of certain critical systems scheduled for
completion by September 1, 1999. Some non-critical systems may not be compliant
by January 1, 2000.

         Testing and validation activities have begun and will continue
throughout the process. Year 2000 test labs are in place and operational. As
expected, few problems have been detected during testing for items believed to
be compliant. The following table indicates the project status for traditional
information technology and non-traditional areas. The tested category indicates
the percentage that has been fully tested or otherwise validated as compliant.
The untested category includes items that are believed to be compliant but which
have not yet been validated. The not compliant category includes items which
have been identified as not year 2000 compliant.

<TABLE>
<CAPTION>
                                              Tested      Untested     Not Compliant
                                              ------      --------     -------------
<S>                                           <C>         <C>          <C>
Traditional Information Technology               85%          15%              5%
Non-Traditional Information Technology           68%          32%              5%
</TABLE>

         Pipeline initiated a formal communications process with other companies
in 1998 to determine the extent to which those companies are addressing year
2000 compliance. In connection with this process, Pipeline has sent
approximately 220 letters and questionnaires to third parties including
customers, vendors and service providers. Additional communications are being
mailed during 1999. Pipeline is evaluating responses as they are received or
otherwise investigating the status of these companies' year 2000 compliance
efforts. As of December 31, 1998, approximately 50% of the companies contacted
have responded and virtually all of these have indicated that they are already
compliant or will be compliant on a timely basis. Where necessary, Pipeline will
be working with key business partners to reduce the risk of a break in service
or supply and with non-compliant companies to mitigate any material adverse
effect on Pipeline.

         Pipeline expects to utilize both internal resources and external
contractors to complete the year 2000 compliance project. Pipeline has a core
group of 30 people involved in this enterprise-wide project. This includes 1
individual responsible for coordinating, organizing, managing, communicating,
and monitoring the project and another 29 staff members responsible for
completing the project. Depending on which phase the project is in and what area
is being focused on at any given point in time, there can be an additional 20 to
25 employees who are also contributing a portion of their time to the completion
of this project.

         Several previously planned system implementations are scheduled for
completion on or before September 1, 1999, which will lessen possible year 2000
impacts. For example, a new year 2000 compliant 




                                      -8-
<PAGE>   11

payroll/human resources system was implemented January 1, 1999. It replaced
multiple human resources administration and payroll processing systems
previously in place. WGP completed implementation of a new telephone system in
1998, and a new common financial system is scheduled for completion July 1,
1999. In situations where planned system implementations will not be in service
timely, alternative steps are being taken to make existing systems compliant.

         Although all critical systems over which Pipeline has control are
planned to be compliant and tested before the year 2000, Pipeline has identified
two areas that would equate to a most reasonably likely worst case scenario.
First is the possibility of service interruptions due to non-compliance by third
parties. For example, power failures along the transportation system would cause
service interruptions. This risk should be minimized by the enterprise-wide
communications effort and evaluation of third-party compliance plans. Another
area of risk for non-compliance is the delay of system replacements scheduled
for completion during 1999. The status of these systems is being closely
monitored to reduce the chance of delays in completion dates. It is not possible
to quantify the possible financial impact if this most reasonably likely worst
case scenario were to come to fruition.

         Initial contingency planning began during 1998; however, significant
focus on that phase of the project will take place in 1999. Guidelines for that
process were issued in January 1999 in the form of a formal business continuity
plan. Contingency plans are being developed for critical business processes,
critical business partners, suppliers and system replacements that experience
significant delays. These plans are expected to be defined by August 31, 1999,
and implemented where appropriate.

         Costs incurred for new software and hardware purchases are being
capitalized and other costs are being expensed as incurred. Pipeline currently
estimates the total cost of the project, including any accelerated system
replacements, to be approximately $1.6 million. Prior to 1998 and during the
first quarter of 1998, Pipeline was conducting the project awareness and
inventory/assessment phases of the project. The second quarter of 1998 was spent
on the renovation/replacement and testing/validation phases and completion of
the inventory/assessment phase. The third and fourth quarters of 1998 focused on
the renovation/replacement and testing/validation phases. During the first
quarter 1999, renovation/replacement and testing/validation will continue and
contingency planning will begin. During the second quarter of 1999 the primary
focus is expected to shift to testing/validation and contingency planning. The
third and fourth quarters of 1999 will focus mainly on contingency planning and
final testing. Of the $1 million incurred to date, approximately $.3 million has
been expensed, and approximately $.7 million has been capitalized. Of the $.6
million of future costs necessary to complete the project, approximately $.2
million will be expensed and the remainder capitalized. This estimate does not
include Pipeline's potential share of year 2000 costs that may be incurred by
partnerships and joint ventures in which the company participates but is not the
operator. The costs of previously planned system replacements are not considered
to be year 2000 costs and are, therefore, excluded from the amounts discussed
above.

         The preceding discussion contains forward-looking statements including,
without limitation, statements relating to Pipeline's plans, strategies,
objectives, expectations, intentions and adequate resources, that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-looking statements
contained in the year 2000 update are based on certain assumptions, which may
vary from actual results. Specifically, the dates on which Pipeline believes the
year 2000 project will be completed and computer systems will be implemented are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third-parties, Pipeline cannot ensure
its ability to timely and cost-effectively resolve problems associated with the
year 2000 issue that may affect its operations and business, or expose it to
third-party liability.





                                      -9-
<PAGE>   12
MARKET RISK DISCLOSURES

Interest Rate Risk

         Pipeline's interest rate risk exposure primarily results from its debt
portfolio, which is influenced by short-term rates, primarily LIBOR based
borrowings from commercial banks and the issuance of commercial paper, and
long-term U.S. Treasury rates. To mitigate the impact of fluctuations in
interest rates, Pipeline targets to maintain a significant portion of its debt
portfolio in fixed rate debt. At December 31, 1998, the amount of Pipeline's
fixed and variable rate debt was at targeted levels. Pipeline has traditionally
maintained an investment grade credit rating as one aspect of managing its
interest rate risk. In order to fund its 1999 capital expenditure plan, Pipeline
may need to access various sources of liquidity, which may include traditional
borrowing.

         The following table provides information as of December 31, 1998, about
Pipeline's long-term debt that is subject to interest rate risk. The table
presents principal cash flows and weighted average interest rates by expected
maturity dates.


                                December 31, 1998
                              (Millions of Dollars)

<TABLE>
<CAPTION>
                                             1999      2000      2001      2002      2003     Thereafter     Total     Fair Value
                                            -------   -------   -------   -------   -------   ----------   ----------  ----------
<S>                                         <C>       <C>       <C>       <C>                              <C>         <C>       
Long-term debt, including current portion:

     Fixed rate                                --        --        --        --     $   7.5   $    360.4   $    367.9  $    380.4

     Interest rate                              7.0%      7.0%      7.0%      7.0%      6.9%         6.9%

     Variable rate                          $   1.7   $   1.7   $   1.7   $   1.6      --           --     $      6.7  $      7.2

     Interest rate (1)
</TABLE>

(1)  Average of yields on U.S. Treasury notes for the four weeks prior to
     September 30 of each year, with a set range of 9% to 25%.





                                      -10-
<PAGE>   13




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>                                                                                   <C>
Report of independent auditors.....................................................     12

Covered by report of independent auditors:

     Consolidated statement of income for the years ended
           December 31, 1998, 1997 and 1996........................................     13

     Consolidated balance sheet at December 31, 1998 and 1997 .....................     14

     Consolidated statement of cash flows for the years ended
           December 31, 1998, 1997 and 1996........................................     16

     Consolidated statement of capitalization for the years ended
           December 31, 1998, 1997 and 1996........................................     17

     Notes to consolidated financial statements....................................     18

Not covered by report of independent auditors:

     Quarterly financial data (unaudited)..........................................     28
</TABLE>


           All schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements and notes thereto.



                                      -11-
<PAGE>   14
                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Northwest Pipeline Corporation


           We have audited the accompanying consolidated balance sheet of
Northwest Pipeline Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of income, cash flows and capitalization for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

           We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

           In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Northwest Pipeline Corporation at December 31, 1998 and 1997, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.



                                           /s/ ERNST & YOUNG LLP

Tulsa, Oklahoma
February 26, 1999



                                      -12-
<PAGE>   15
                         NORTHWEST PIPELINE CORPORATION

                        CONSOLIDATED STATEMENT OF INCOME


<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                           ---------------------------------------
                                              1998          1997          1996
                                           -----------   -----------   -----------
<S>                                        <C>           <C>           <C>        
                                                   (Thousands of Dollars)

OPERATING REVENUES (Notes 3, 9 and 10) ..  $   287,390   $   273,083   $   269,740
                                           -----------   -----------   -----------

OPERATING EXPENSES:
   General and administrative ...........       47,283        46,548        49,045
   Operation and maintenance ............       38,156        37,422        44,226
   Depreciation and amortization ........       50,957        50,883         38,87
   Taxes, other than income taxes .......       12,610        13,771       712,626
                                           -----------   -----------   -----------

                                               149,006       148,624       144,774
                                           -----------   -----------   -----------

      Operating income ..................      138,384       124,459       124,966
                                           -----------   -----------   -----------

OTHER INCOME - net ......................        3,722         2,908         5,356
                                           -----------   -----------   -----------

INTEREST CHARGES:
   Interest on long-term debt ...........       29,064        28,908        33,782
   Other interest .......................        8,496        11,051         5,182
   Allowance for borrowed funds used
      during construction ...............         (520)         (394)         (473)
                                           -----------   -----------   -----------

                                                37,040        39,565        38,491
                                           -----------   -----------   -----------


INCOME  BEFORE INCOME TAXES .............      105,066        87,802        91,831

PROVISION FOR INCOME TAXES (Note 4) .....       41,030        30,626        33,672
                                           -----------   -----------   -----------

NET INCOME ..............................  $    64,036   $    57,176   $    58,159
                                           ===========   ===========   ===========

CASH DIVIDENDS ON COMMON STOCK ..........  $    36,000   $    73,616   $    75,178
                                           ===========   ===========   ===========
</TABLE>


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

See accompanying notes.



                                      -13-
<PAGE>   16
                         NORTHWEST PIPELINE CORPORATION

                           CONSOLIDATED BALANCE SHEET


                                     ASSETS

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                 --------------------------
                                                                    1998           1997
                                                                 ----------     -----------
                                                                  (Thousands of Dollars)

<S>                                                              <C>             <C>       
PROPERTY, PLANT AND EQUIPMENT .................................. $1,573,593      $1,471,027
    Less - Accumulated depreciation and amortization............    667,163         570,521
                                                                 ----------     -----------

                                                                    906,430         900,506

    Construction work in progress...............................     21,258          18,819
                                                                 ----------     -----------

                                                                    927,688         919,325
                                                                 ----------     -----------

CURRENT ASSETS:
    Cash and cash equivalents...................................      1,164             627
    Advances to parent..........................................     26,734          71,823
    Accounts receivable -
       Trade (Note 2)...........................................     16,023          26,873
       Affiliated companies.....................................      3,395             668
    Materials and supplies (principally at average cost)........     10,575          10,619
    Exchange gas due from others................................     19,792          12,859
    Deferred income taxes (Note 4)..............................     20,261          25,867
    Prepayments and other.......................................      1,763           2,597
                                                                 ----------     -----------

                                                                     99,707         151,933
                                                                 ----------     -----------

OTHER ASSETS:
    Deferred charges............................................     52,876          54,181
                                                                 ----------     -----------

                                                                 $1,080,271     $ 1,125,439
                                                                 ==========     ===========
</TABLE>


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

See accompanying notes.



                                      -14-
<PAGE>   17



                         NORTHWEST PIPELINE CORPORATION

                           CONSOLIDATED BALANCE SHEET


                      LIABILITIES AND STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                 December 31,
                                                            ----------------------
                                                               1998        1997
                                                            ----------  ----------
                                                            (Thousands of Dollars)
<S>                                                         <C>         <C>       

CAPITALIZATION:
    Common stockholder's equity -
       Common stock, par value $1 per share, authorized
          and outstanding, 1,000 shares ..................  $        1  $        1
       Additional paid-in capital ........................     262,844     262,844
       Retained earnings (Note 5) ........................     190,507     162,617
                                                            ----------  ----------

                                                               453,352     425,462

    Long-term debt, less current maturities (Note 5) .....     372,440     408,287
                                                            ----------  ----------

                                                               825,792     833,749
                                                            ----------  ----------

CURRENT LIABILITIES:
    Current maturities of long-term debt (Note 5) ........       1,667       1,667
    Accounts payable -
       Trade .............................................      12,576      14,934
       Affiliated companies ..............................       7,900      15,456
    Accrued liabilities -
       Taxes, other than income taxes ....................       4,138       4,044
       Interest ..........................................      11,225      17,227
       Employee costs ....................................      10,602       8,103
       Exchange gas due to others ........................      12,217       9,650
       Costs refundable through rate adjustments .........       8,264       2,766
       Reserves for estimated rate refunds (Note 9) ......      38,958      74,083
       Other .............................................         818       8,705
                                                            ----------  ----------
                                                               108,365     156,635
                                                            ----------  ----------

DEFERRED INCOME TAXES (Note 4) ...........................     135,920     126,801
                                                            ----------  ----------

OTHER DEFERRED CREDITS ...................................      10,194       8,254
                                                            ----------  ----------

CONTINGENT LIABILITIES AND COMMITMENTS (Note 9)
                                                            ----------  ----------

                                                            $1,080,271  $1,125,439
                                                            ==========  ==========
</TABLE>



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

See accompanying notes.



                                      -15-
<PAGE>   18



                         NORTHWEST PIPELINE CORPORATION

                      CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                                ---------------------------------
                                                                  1998        1997        1996
                                                                ---------   ---------   ---------
                                                                     (Thousands of Dollars)
<S>                                                             <C>         <C>         <C>      
OPERATING ACTIVITIES:
   Net Income ................................................  $  64,036   $  57,176   $  58,159
   Adjustments to reconcile to cash provided by operations-
      Depreciation and amortization ..........................     50,957      50,883      38,877
      Provision (benefit) for deferred income taxes ..........     14,725      13,541        (733)
      Amortization of deferred charges and credits ...........      1,908        (872)     (1,268)
      Sale of receivables ....................................       --        10,000        --
      Allowance for equity funds used during construction ....       (813)       (541)       (730)
      Increase (decrease) from changes in:
         Accounts receivable and exchange gas due from
           others ............................................      1,190      (9,718)     11,195
         Inventory ...........................................         44        (109)        555
         Other current assets ................................      6,332      17,218      (4,812)
         Other assets and deferred charges ...................       (124)       (858)      3,557
         Accounts payable and exchange gas due to others .....     (8,225)      8,201      (5,362)
         Other accrued liabilities ...........................    (46,420)     25,171      11,853
         Other deferred credits ..............................      3,312       1,233        --
      Other ..................................................         (7)       (521)       (118)
                                                                ---------   ---------   ---------

   Net cash provided by operating activities .................     86,915     170,804     111,173
                                                                ---------   ---------   ---------

INVESTING ACTIVITIES:
   Property, plant and equipment -
      Capital expenditures ...................................    (60,102)    (44,427)    (62,778)
      Proceeds from sales ....................................      1,455         968      13,485
      Changes in accounts payable ............................        878      (7,096)     (1,056)
   Payments from (advances to) parent ........................     45,089     (55,147)     24,539
                                                                ---------   ---------   ---------

   Net cash used by investing activities .....................    (12,680)   (105,702)    (25,810)
                                                                ---------   ---------   ---------

FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt ..................       --       250,000        --
   Debt issue costs ..........................................       --        (6,673)       --
   Principal payments on long-term debt ......................    (35,847)   (210,557)    (10,515)
   Premium on early retirement of long-term debt .............     (1,851)    (23,869)       --
   Proceeds from notes payable to banks ......................       --       207,000        --
   Payments on notes payable to banks ........................       --      (207,000)       --
   Dividends paid ............................................    (36,000)    (73,616)    (75,178)
                                                                ---------   ---------   ---------

   Net cash used by financing activities .....................    (73,698)    (64,715)    (85,693)
                                                                ---------   ---------   ---------

NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS ........        537         387        (330)
                                                                ---------   ---------   ---------

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...............        627         240         570
                                                                ---------   ---------   ---------

CASH AND CASH EQUIVALENTS AT END OF YEAR .....................  $   1,164   $     627   $     240
                                                                =========   =========   =========
</TABLE>



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

See accompanying notes.



                                      -16-
<PAGE>   19

                         NORTHWEST PIPELINE CORPORATION

                    CONSOLIDATED STATEMENT OF CAPITALIZATION


<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                         ------------------------------------
                                                           1998         1997         1996
                                                         ----------   ----------   ----------
                                                                (Thousands of Dollars)
<S>                                                      <C>          <C>          <C>       
COMMON STOCKHOLDER'S EQUITY:
   Common stock, par value $1 per share,
      authorized and outstanding, 1,000 shares ........  $        1   $        1   $        1
                                                         ----------   ----------   ----------

   Additional paid-in capital -
      Balance at beginning of period ..................     262,844      262,844      262,440
         Noncash contribution of capital from parent ..        --           --            404
                                                         ----------   ----------   ----------

      Balance at end of period ........................     262,844      262,844      262,844
                                                         ----------   ----------   ----------

   Retained earnings -
      Balance at beginning of period ..................     162,617      179,485      197,019
         Net income ...................................      64,036       57,176       58,159
         Cash dividends ...............................     (36,000)     (73,616)     (75,178)
         Noncash dividend .............................        (146)        (428)        (515)
                                                         ----------   ----------   ----------

      Balance at end of period ........................     190,507      162,617      179,485
                                                         ----------   ----------   ----------

         Total common stockholder's equity ............     453,352      425,462      442,330
                                                         ----------   ----------   ----------


LONG-TERM DEBT (Note 5):
   Debentures -
      6.625%, payable 2007 ............................     250,000      250,000         --
      7.125%, payable 2025 ............................      84,695       84,683       84,672
      9%, payable through 2001 ........................        --           --          7,500
      9%, payable 2003 through 2022 ...................      32,749       32,941      149,390
      9.25%, payable through 2006 .....................        --           --         11,532
      10.65%, payable 1999 through 2018 ...............        --         34,000      100,000
   Adjustable rate notes, payable through 2002 ........       4,996        6,663        8,330
                                                         ----------   ----------   ----------

         Total long-term debt .........................     372,440      408,287      361,424
                                                         ----------   ----------   ----------

         Total capitalization .........................  $  825,792   $  833,749   $  803,754
                                                         ==========   ==========   ==========
</TABLE>


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

See accompanying notes.



                                      -17-
<PAGE>   20



                         NORTHWEST PIPELINE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Northwest Pipeline Corporation ("Pipeline") is a wholly-owned
subsidiary of Williams Gas Pipeline Company ("WGP") (formerly Williams
Interstate Natural Gas Systems, Inc.). WGP is a wholly-owned subsidiary of The
Williams Companies, Inc. ("Williams"). Prior to May 1, 1997, Pipeline was a
wholly-owned subsidiary of Williams.

         Pipeline owns and operates a pipeline system for the mainline
transmission of natural gas. This system extends from the San Juan Basin in
northwestern New Mexico and southwestern Colorado through Colorado, Utah,
Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near
Sumas, Washington.

Basis of Presentation

         Financial position of Pipeline as of December 31, 1998 and 1997 and the
results of operations and cash flows for the years ended December 31, 1998 and
1997 include the operating results of NWP Enterprises ("Enterprises"), a wholly
owned subsidiary of Pipeline, since its incorporation on January 2, 1997.

Use of Estimates

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

Property, Plant and Equipment

         Property, plant and equipment ("plant"), consisting principally of
natural gas transmission facilities, is recorded at original cost. Expenditures
which materially increase values or capacities or extend useful lives of plant
are capitalized. Routine maintenance, repairs and renewal costs are charged to
income as incurred. Gains or losses from the ordinary sale or retirement of
plant are charged or credited to accumulated depreciation and amortization
("D&A").

         Depreciation is provided by the straight-line method for transmission
plant over its useful life. The composite annual D&A rate was 3.03%, 2.86% and
2.18% for 1998, 1997 and 1996, respectively, including an allowance for negative
salvage beginning in 1997.

Allowance for Borrowed and Equity Funds Used During Construction

         Allowance for funds used during construction ("AFUDC") represents the
estimated cost of borrowed and equity funds applicable to utility plant in
process of construction. Recognition is made of this item as a cost of utility
plant because it constitutes an actual cost of construction under established
regulatory practices. The Federal Energy Regulatory Commission ("FERC") has
prescribed a formula to be used in computing separate allowances for borrowed
and equity AFUDC.

         The composite rate used to capitalize AFUDC was approximately 9.7%,
10.6% and 11.6% for 1998, 1997 and 1996, respectively. Equity AFUDC of $.8
million, $.5 million and $.7 million for 1998, 1997 and 1996, respectively, is
reflected in other income.

Income Taxes

         Pipeline is included in Williams' consolidated federal income tax
return. Pipeline's Federal income tax provisions are computed as though separate
tax returns are filed. Deferred income taxes are computed using the liability
method and are provided on all temporary differences between the financial basis
and the tax basis of Pipeline's assets and liabilities.






                                      -18-
<PAGE>   21
                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Deferred Charges

        Pipeline amortizes deferred charges over varying periods consistent with
FERC approved accounting treatment for such deferred items. Unamortized debt
expense, debt discount and gains or losses on reacquired long-term debt are
amortized by the bonds outstanding method over the related debt repayment
periods.

Cash and Cash Equivalents

        Cash and cash equivalents include demand and time deposits, certificates
of deposit and other marketable securities with a term to maturity of three
months or less when acquired.

Exchange Gas Imbalances

        In the course of providing transportation services to customers,
Pipeline may receive different quantities of gas from shippers than the
quantities delivered on behalf of those shippers. These transactions result in
imbalances which are typically settled through the receipt or delivery of gas in
the future although some may be settled in cash. Customer imbalances to be
repaid or recovered in-kind are recorded as exchange gas due from others or due
to others in the accompanying balance sheets. Settlement of imbalances requires
agreement between the pipelines and shippers as to allocations of volumes to
specific transportation contracts and timing of delivery of gas based on
operational conditions.

Revenue Recognition

        Pipeline recognizes revenues for the transportation of natural gas based
upon contractual terms and the related transported volume through month end.
Pursuant to FERC regulations, a portion of the revenues being collected may be
subject to possible refunds upon final orders in pending cases. Pipeline
establishes financial reserves for such contingencies based on the facts and
circumstances of the pending case.

Environmental Matters

        Pipeline is subject to Federal, state, and local environmental laws and
regulations. Environmental expenditures are expensed or capitalized depending on
their future economic benefit and potential for rate recovery. Pipeline believes
that, with respect to any expenditures required to meet applicable standards and
regulations, FERC would grant the requisite rate relief so that, for the most
part, such expenditures would be permitted to be recovered. Pipeline believes
that compliance with applicable environmental requirements is not likely to have
a material effect upon Pipeline's financial position.

Interest Payments

         Cash payments for interest were $29 million, $35.5 million and $33.4
million, net of $.5 million, $.4 million and $.5 million of interest capitalized
in 1998, 1997 and 1996, respectively.

(2)     DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

        The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FAS No. 107,
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by Pipeline, using available market
information and appropriate valuation methodologies. However, considerable
judgement is necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that Pipeline could realize in a current
market exchange. The use and complexity of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.






                                      -19-
<PAGE>   22
                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



        The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:

Cash and cash equivalents - The carrying amounts of these items are assumed to
be indicative of their fair value.

Long-term debt - The fair value of Pipeline's publicly traded long-term debt is
valued using year-end traded market prices. Private debt is valued based on the
prices of similar securities with similar terms and credit ratings. Pipeline
used the expertise of an outside investment banking firm to estimate the fair
value of long-term debt.

        The carrying amount and estimated fair value of Pipeline's long term
debt, including current maturities, were $374 million and $388 million,
respectively, at December 31, 1998, and $410 million and $417 million,
respectively, at December 31, 1997.

(3)     REVENUES ATTRIBUTABLE TO MAJOR CUSTOMERS

        During some or all of the periods presented, more than 10% of Pipeline's
operating revenues were generated from each of the following customers.

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                  --------------------------------------------
                                                                   1998              1997               1996
                                                                  -------           -------            -------
                                                                           (Thousands of Dollars)
<S>                                                               <C>               <C>                <C>    
                 Puget Sound Energy, Inc.                         $42,565           $46,540            $41,687
                 Northwest Natural Gas Co.                         40,557            46,213             41,378
                 Pacific Interstate Transmission                   26,700            28,971             27,929
                 IGI Resources, Inc.                               26,236            32,323             23,295
                 Cascade Natural Gas Corp.                         23,467            28,337             25,849
</TABLE>


        Pipeline's major customers are located in the Pacific Northwest. As a
general policy, collateral is not required for receivables, but customers'
financial condition and credit worthiness are regularly evaluated and historical
losses have been minimal. A portion of the revenues reflected above may be
subject to refund due to Pipeline's pending rate cases as discussed in Note 9.



                                      -20-
<PAGE>   23

                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



(4)      INCOME TAXES

         Significant components of the deferred tax liabilities and assets are
as follows:

<TABLE>
<CAPTION>
                                                     December 31,
                                                 ---------------------
                                                 (Thousands of Dollars)
                                                   1998        1997
                                                 ---------   ---------
<S>                                              <C>         <C>      
            Property, plant and equipment        $ 126,946   $ 118,434
            Regulatory assets                        5,483       5,401
            Loss on reacquired debt                 10,334      10,818
            Other - net                                685         746
                                                 ---------   ---------
            Deferred tax liabilities               143,448     135,399
                                                 ---------   ---------
            Rate refunds                           (18,310)    (22,250)
            Regulatory liabilities                  (2,246)     (2,680)
            Accrued liabilities                     (2,927)     (5,777)
            State deferred taxes                    (4,306)     (3,758)
                                                 ---------   ---------
            Deferred tax assets                    (27,789)    (34,465)
                                                 ---------   ---------
            Net deferred tax liabilities         $ 115,659   $ 100,934
                                                 =========   =========

            Reflected as:
              Deferred income taxes - asset      $ (20,261)  $ (25,867)
              Deferred income taxes - liability    135,920     126,801
                                                 ---------   ---------
                                                 $ 115,659   $ 100,934
                                                 =========   =========
</TABLE>

        The provision (benefit) for income taxes includes:

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                              ---------------------------------
                                                1998        1997         1996
                                              --------    --------     --------
                                                  (Thousands of Dollars)
<S>                                           <C>         <C>          <C>     
        Current:
           Federal .......................    $ 22,480    $ 15,708     $ 32,053
           State .........................       3,825       1,377        2,352
                                              --------    --------     --------
                                                26,305      17,085       34,405
                                              --------    --------     --------
        Deferred:
           Federal .......................      13,159      12,144         (702)
           State .........................       1,566       1,397          (31)
                                              --------    --------     --------
                                                14,725      13,541         (733)
                                              --------    --------     --------
        Total provision ..................    $ 41,030    $ 30,626     $ 33,672
                                              ========    ========     ========
</TABLE>




                                      -21-
<PAGE>   24


                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




        A reconciliation of the statutory Federal income tax rate to the
provision for income taxes on continuing operations is as follows:

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                               ----------------------------------
                                                                 1998        1997         1996
                                                               ---------   ---------    ---------
                                                                     (Thousands of Dollars)
<S>                                                            <C>         <C>          <C>      
     Provision at statutory Federal income tax
       rate of 35% ..........................................  $  36,773   $  30,731    $  32,142
     Increase (decrease) in tax provision resulting from -
        Federal audits ......................................       --          --            156
        State income taxes net of Federal tax benefit .......      3,504       1,842        2,425
        State Investment Tax Credit .........................       --          --           (865)
        Other - net .........................................        753      (1,947)        (186)
                                                               ---------   ---------    ---------

           Provision for income taxes .......................  $  41,030   $  30,626    $  33,672
                                                               ---------   ---------    ---------

     Effective tax rate .....................................      39.05%      34.88%       36.67%
                                                               =========   =========    =========
</TABLE>

         Net cash payments made to Williams for income taxes were $26.7 million,
$13.1 million and $25.2 million in 1998, 1997 and 1996, respectively.

(6)      LONG-TERM DEBT, LEASES AND BANKING ARRANGEMENTS

Debt Covenants

         The terms of Pipeline's debt indentures preclude the issuance of
mortgage bonds. The indentures contain provisions for the acceleration of
repayment or the reset of interest rates under certain conditions. Pipeline's
debt indentures also contain restrictions which, under certain circumstances,
limit the issuance of additional debt and restrict the disposal of a major
portion of its natural gas pipeline system. Pipeline's debt indentures also
contain provisions limiting common stock dividends. Under the most restrictive
provisions, the amount of Pipeline's retained earnings available for dividends
on its common stock as of December 31, 1998, was approximately $175.8 million.

Long-Term Debt

         On May 31, 1997, Pipeline called $.5 million of its outstanding 9.25%
Series C Debentures, due 2006 under terms of the optional prepayment provisions
in the debenture agreement. The prepayment was in addition to the scheduled May
31, 1997 sinking fund payments of $5 million for the 9% Series B and $1.9
million for the 9.25% Series C.

         On September 8, 1997, Pipeline filed a registration statement for
issuance of up to $350 million in public debt securities in conjunction with the
announcement of Williams' debt restructuring plan to reduce annual interest
expense. On December 3, 1997, $250 million was marketed and priced with an
interest rate of 6.625%. On December 8, 1997, Pipeline received net proceeds
after issuance costs of approximately $248.4 million. The terms of the offering
include a 10-year no-call life, maturing December 1, 2007, and no sinking fund
requirement.




                                      -22-
<PAGE>   25


                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



         Between September 8, 1997 and September 19, 1997, Pipeline purchased,
through a tender offer, $66 million of its 10.65% Debentures, due 2018, and $117
million of its 9% Debentures, due 2022, at premiums of $6.8 million and $15.9
million, respectively. The early redemption premiums and fees, the unamortized
debt expenses on both issues and the unamortized debt discount on the 9%
Debentures, totaling $7.3 million for the 10.65% Debentures and $17.6 million
for the 9% Debentures, are being amortized over the life of the retired debt.
The Revolving Credit Facility (see below) was used to fund the tender offer.

         During October 1997, Pipeline made negotiated prepayments of the
remaining $11.1 million of its 9.25% Series C Debentures, due 2006, with
redemption premiums totaling $1 million. The early redemption premiums and the
unamortized debt expense associated with the prepaid 9.25% Series C Debentures,
totaling $1.1 million, will be amortized over the life of the retired debt.
Excess funds previously advanced to Williams were used to fund the prepayment
and premium.

         On October 15, 1997, Pipeline made an optional prepayment with a
redemption premium of the remaining $7.5 million of its 9% Series B Debentures,
due 2001. The early redemption premium and the unamortized debt expense
associated with the 9% Series B Debentures, totaling $.2 million, will be
amortized over the life of the retired debt. Excess funds previously advanced to
Williams were used to fund the prepayment and premium.

         On November 15, 1998, Pipeline made an optional prepayment of the
remaining $34 million of its 10.65% Debentures, due 2018, with a premium of $1.8
million, under the early redemption provisions of the indenture. The early
redemption premium and the unamortized debt expense associated with the 10.65%
Debentures, totaling $2 million, will be amortized over the life of the retired
debt. Excess funds previously advanced to Williams were used to fund the
prepayment and premium.

Adjustable Interest Rate Notes

         The interest rate on these notes will be adjusted periodically based on
a calculation using the United States Treasury Rate, but will never exceed 25%
or be less than 9% per annum. The interest rate at December 31, 1998 was 9%.

Sinking Fund Requirements and Maturities

         As of December 31, 1998, cumulative sinking fund requirements and other
maturities of long-term debt for each of the next five years are as follows:

<TABLE>
<CAPTION>
                                                 (Thousands
                                                 of Dollars)
                                                 -----------
<S>                                                <C>    
                           1999...........         $ 1,667
                           2000...........           1,667
                           2001...........           1,667
                           2002...........           1,662
                           2003...........           7,500
</TABLE>

Line-of-Credit Arrangements

         Pipeline shares in a $1 billion Revolving Credit Facility with Williams
and four affiliated companies. Pipeline's maximum borrowing availability,
subject to prior borrowing by other affiliated companies, is $400 million, none
of which was used by Pipeline at December 31, 1997 or 1998. Interest rates vary
with current market conditions. The Facility 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 Pipeline. Any borrowings by
Pipeline under this Facility are not guaranteed by Williams and are based on
Pipeline's financial need and credit worthiness.





                                      -23-
<PAGE>   26
                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



         Pipeline has also arranged various uncommitted lines-of-credit at
market interest rates. Pipeline's credit facilities are subject to Pipeline's
continued credit worthiness.

Leases

         Pipeline's leasing arrangements include mostly premise and equipment
leases that are classified as operating leases.

         The major operating lease is a leveraged lease, which became effective
during 1982 for Pipeline's headquarters building. The agreement has an initial
term of approximately 27 years, with options for consecutive renewal terms of
approximately 9 years and 10 years. The major component of the lease payment is
set through the initial and first renewal terms of the lease. Various purchase
options exist under the building lease, including options involving adverse
regulatory development.

         Following are the estimated future minimum yearly rental payments
required under operating leases, which have initial or remaining noncancelable
lease terms in excess of one year:

<TABLE>
<CAPTION>
                                                       (Thousands
                                                       of Dollars)
                                                       -----------
                     <S>                                 <C>    
                     1999 ................               $ 8,757
                     2000 ................                 8,757
                     2001 ................                 8,757
                     2002 ................                 8,757
                     2003 ................                 8,757
                     Thereafter...........                72,131
                                                        --------
                         Total............              $115,916
                                                        ========
</TABLE>

           Operating lease rental expense amounted to $8.3 million, $8 million
and $8.1 million for 1998, 1997 and 1996, respectively. Capital lease payments
for the periods presented are not significant.

(7)      EMPLOYEE BENEFIT PLANS

         Pipeline's employees are covered by Williams' non-contributory
defined-benefit pension plan and Williams' health care plan that provides
postretirement medical benefits to certain retired employees. Contributions for
pension and postretirement medical benefits related to Pipeline's participation
in these plans were $5.5 million, $5.2 million and $4.6 million in 1998, 1997
and 1996, respectively.

         Pipeline's employees are also covered by various Williams'
defined-contribution plans. Pipeline's costs related to these plans totaled $1.9
million, $1.5 million and $1.5 million in 1998, 1997 and 1996, respectively.

(8)      STOCK-BASED COMPENSATION

         Williams has several plans providing for common stock-based awards to
its employees and employees of its subsidiaries. The plans permit the granting
of various types of awards including, but not limited to, stock options, stock
appreciation rights, restricted stock and deferred stock. The purchase price per
share for stock options may not be less than the market price of the underlying
stock on the date of grant. Stock options generally become exercisable after
three years, subject to accelerated vesting if certain future stock prices are
achieved. Stock options expire 10 years after grant.

         Williams' employee stock-based awards are accounted for under
Accounting Principles Board (?APB?) Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Williams' fixed plan common stock
options do not result in compensation expense, because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant.




                                      -24-
<PAGE>   27


                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


         FAS No. 123, "Accounting for Stock-Based Compensation," requires that
companies who continue to apply APB Opinion No. 25 disclose pro forma net income
assuming that the fair-value method in FAS 123 had been applied in measuring
compensation cost. Pro forma net income for Pipeline was $63 million, $56.1
million and $58.1 million for 1998, 1997 and 1996, respectively. Reported net
income was $64 million, $57.2 million and $58.2 million for 1998, 1997 and 1996,
respectively. Pro forma amounts for 1998 and 1997 include the remaining total
compensation expense from the awards made in 1997 and 1996, respectively, as
these awards fully vested in 1998 and 1997, respectively, as a result of the
accelerated vesting provisions. Since compensation expense from stock options is
recognized over the future years' vesting period, and additional awards
generally are made each year, pro forma amounts may not be representative of
future years' amounts.

         Stock options granted to employees of Pipeline in 1998, 1997 and 1996
were 149,850 shares, 288,384 shares and 452,002 shares, respectively, at a
weighted average grant date fair value of $8.19, $5.98 and $3.92, respectively.
Stock options outstanding and options exercisable for employees of Pipeline were
1,292,429 shares and 1,143,757 shares, respectively, at December 31, 1998;
1,185,523 shares and 901,139 shares, respectively, at December 31, 1997; and
1,104,092 shares and 550,602 shares, respectively, at December 31, 1996.

(9)      RELATED PARTY TRANSACTIONS

         Williams' corporate overhead expenses allocated to Pipeline were $4.1
million, $3.9 million and $4.8 million for 1998, 1997 and 1996, respectively.
Such expenses have been allocated to Pipeline by Williams primarily based on the
Modified Massachusetts formula, which is a FERC approved method utilizing a
combination of net revenues, gross payroll and gross plant for the allocation
base. In addition, Williams or an affiliate has provided executive, data
processing, legal, aviation, internal audit and other administrative services to
Pipeline on a direct charge basis, which amounted to $3.2 million, $3 million
and $3.8 million for 1998, 1997 and 1996, respectively. In addition, Pipeline
received interest income from advances to parent of $3.2 million, $1.8 million,
and $1.9 million during 1998, 1997 and 1996, respectively.

         During the periods presented, Pipeline's revenues reflect
transportation and exchange transactions with subsidiaries of Williams. Combined
revenues for these activities totaled $1.4 million, $2.8 million and $1.3
million for 1998, 1997 and 1996, respectively.

         Pipeline has entered into various other transactions with certain
related parties, the amounts of which were not significant. These transactions
and the above-described transactions are charged on the basis of commercial
relationships and prevailing market prices or general industry practices.

(10)     Contingent Liabilities and Commitments

Pending Rate Cases

         On April 1, 1993, Pipeline began collecting new rates, subject to
refund, under its rate case filed October 1, 1992 ("1993 Rate Case"). On May 31,
1995, Pipeline received an order from the FERC on this rate case, which, among
other issues supported an equity rate of return of 13.2 percent. In a further
order issued on July 19, 1996, FERC required an Administrative Law Judge ("ALJ")
to reconsider the long-term growth component of the equity rate of return
formula, and upheld its May 31, 1995 decision on all other issues. On October
22, 1996, the ALJ issued an initial decision, which recommended an equity rate
of return of 11.62 percent. Pipeline took exception to this decision before the
FERC. On June 11, 1997, the FERC issued an order revising its approved equity
rate of return to 12.59 percent based on a new policy for industry-wide
application that requires the use of forecasts of growth in the gross domestic
product as the long-term growth component of the rate of return formula. On July
11, 1997, Pipeline and several parties in the case sought rehearing of the June
11 rate of return on equity decision, seeking to have the FERC reconsider
various aspects of its new rate of return on equity policy. On October 16, 1997,
the FERC issued an opinion denying rehearing and reaffirming its previous policy
pronouncements concerning rate of return on equity, but convened a conference on
January 30, 1998 to consider, on an industry-wide basis, issues with respect to
pipeline rates of return. Pipeline made refunds to customers in June 1998
totaling $27 million, including



                                      -25-
<PAGE>   28

                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


interest, settling all disputed matters in this case. Pipeline also sought
judicial review of the FERC's decision concerning rate of return. In July 1998,
FERC issued orders concerning its rate of return on equity policy in rate
proceedings of other pipelines adopting a formula that gives less weight to the
long-term growth component. If this most recent formula modification were to be
applied in this rate proceeding, the rate of return result would be
somewhathigher. Any additional revenues to which Pipeline might be entitled
would be collected through a special FERC-authorized refund adjustment.

         On November 1, 1994, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed April 29, 1994. This filing
sought a revenue increase for a projected deficiency caused by increased costs
and the impact of a transportation contract terminated subsequent to the 1993
Rate Case. On November 14, 1995, Pipeline filed an uncontested settlement
proposal with the FERC. The FERC approved the Settlement in a Letter Order dated
February 14, 1996 and no rehearing petitions were filed with respect to that
order. During the second quarter of 1996, Pipeline finalized and paid the
settlement refunds. The settlement resolved substantially all the issues in this
rate case except one regarding Pipeline's postage stamp rate design. A hearing
was conducted in July 1996; and subsequently, a decision upholding Pipeline's
position was issued by the ALJ. During the first quarter of 1998, the FERC
affirmed the ALJ's decision.

         On February 1, 1996, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 1, 1995 ("1995 Rate
Case"). On October 18, 1996, the Commission issued an order approving a
settlement concerning certain liquid revenue credit issues relating to
Pipeline's agreement with an affiliate to have liquid hydrocarbon products
extracted from Pipeline's transportation stream at Ignacio, Colorado. The
litigation of all remaining issues took place in late 1996. Pipeline's rate
application seeks a revenue increase for increases in rate base related
primarily to the Northwest Natural and Expansion II facilities placed into
service December 1, 1995 and increased operating costs primarily associated with
an increase in headquarters office rent. During the first quarter of 1998, the
ALJ issued an Initial Decision. The ALJ found that the facts of this case
continue to support Pipeline's capital structure of 55% equity and 45% debt. The
ALJ also determined that Pipeline fits within the average risk range for
determining pipeline return on equity. However, the ALJ allowed a return on
equity of 11.2 percent. Pipeline is seeking review of this and other aspects of
the ALJ decision. If the FERC applies its recently announced modifications to
the rate of return formula giving less weight to long-term growth factors, the
resulting rate of return on equity would be somewhat higher. Pipeline has not
yet made any changes to its accounting reserves pending FERC action in this
proceeding.

         On March 1, 1997, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 30, 1996 ("1996 Rate
Case"). The application sought an increase in rates due to a proposed use of a
higher depreciation rate which also considers a net negative salvage value for
Pipeline's facilities, higher operating costs and a redesign of Pipeline's rates
because of impacts relating to the sale of Pipeline's south-end facilities in
the third quarter of 1996. On July 22, 1997, Pipeline filed a settlement, which
would resolve all issues in this rate case. On November 25, 1997, the FERC, over
the objection of one dissenting party, issued an order approving all aspects of
the settlement. The one dissenting party sought and was denied rehearing of the
FERC's order. That party has now sought judicial review of the FERC's decisions.
Pipeline made refunds to customers in August 1998 totaling $16.7 million,
including interest, in this rate case.

Significant Litigation

         In October 1995, Pipeline received a judge's order following a non-jury
trial involving claims arising from a transportation agreement of a former
customer. In the decision, which was amended in January 1996, it was held that
Pipeline was liable to the former customer in the amount of $5.3 million, plus
interest. Pipeline settled this case in May 1998 for an amount that approximated
its previously recorded financial reserve. The bankruptcy court subsequently
approved disbursement of the escrowed settlement payments, thereby satisfying
the judgement.




                                      -26-
<PAGE>   29

                         NORTHWEST PIPELINE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



         In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly-owned subsidiaries including Pipeline. Mr. Grynberg
has also filed claims against approximately 300 other energy companies and
alleges that the defendants violated the False Claims Act in connection with the
measurement and purchase of hydrocarbons. The relief sought is an unspecified
amount of royalties allegedly not paid to the Federal government, treble
damages, a civil penalty, attorneys' fees and costs.

Other Legal and Regulatory Matters

         In addition to the foregoing, various other proceedings are pending
against Pipeline incidental to its operations.

Summary of Contingent Liabilities

         Management believes that the ultimate resolution of the foregoing
matters, after consideration of amounts accrued, insurance coverage or other
indemnification arrangements, will not have a materially adverse effect upon
Pipeline's future financial position, results of operations, and future cash
flow requirements.

Other Matters

         Commitments for construction and acquisition of property, plant and
equipment are approximately $39 million at December 31, 1998.

         In February 1997, Enterprises entered into a new agreement for the
sale, with limited recourse, of certain receivables of Pipeline. Net proceeds to
Enterprises are limited to $15 million of which $10 million was utilized at
December 31, 1998 and 1997.




                                      -27-
<PAGE>   30
                         NORTHWEST PIPELINE CORPORATION

QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of quarterly financial data for 1998 and 1997:

<TABLE>
<CAPTION>
                                                                           Quarter of 1998
                                                       ------------------------------------------------------------
                                                        First            Second           Third             Fourth
                                                       --------         --------         --------          --------
                                                                       (Thousands of Dollars)
<S>                                                    <C>              <C>              <C>               <C>
Operating revenues............................         $ 71,218         $ 70,312         $ 73,908          $ 71,952
Operating income..............................           34,244           35,843           36,128            32,169
Net income....................................           16,190           17,385           16,687            13,774
</TABLE>

<TABLE>
<CAPTION>
                                                                           Quarter of 1997
                                                       ------------------------------------------------------------
                                                        First            Second           Third             Fourth
                                                       --------         --------         --------          --------
                                                                       (Thousands of Dollars)
<S>                                                    <C>              <C>              <C>               <C>     
Operating revenues............................         $ 67,206         $ 66,050         $ 71,197          $ 68,630
Operating income..............................           29,441           29,731           35,569            29,718
Net income....................................           14,493           11,361           18,526            12,796
</TABLE>


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

None.



                                      -28-
<PAGE>   31

                                    PART III


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

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1 AND 2. FINANCIAL STATEMENTS AND SCHEDULES (included in Parts II and IV of 
            this report).

        The financial statements are listed in the Index to Financial Statements
        on page 11. No schedules are required to be filed.

(a)3.       EXHIBITS:

  (2)   Plan of acquisition, reorganization, arrangement, liquidation or
        succession:

        *(a) Merger Agreement, dated as of September 20, 1983, between Williams
             and Northwest Energy Company ("Energy") (Exhibit 18 to Energy
             schedule 14D-9 (Amendment No. 3) dated September 22, 1983).

        *(b) The Plan of Merger, dated as of November 7, 1983, between Energy
             and a subsidiary of Williams (Exhibit 2(b) to Pipeline report on
             Form 10-K, No. 1-7414, filed March 22, 1984).

  (3)   Articles of incorporation and by-laws:

        *(a) Restated Certificate of Incorporation (Exhibit 3a to Amendment No.
             1 to Registration Statement on Form S-1, No. 2-55-273, filed
             January 13, 1976).

        *(b) By-laws, as amended (Exhibit 3c to Registration Statement on Form
             S-1, No. 2-55273, filed December 30, 1975).

  (4)   Instruments defining the rights of security holders, including 
        indentures:

        *(a) Note Purchase Agreement, dated as of April 15, 1982, between
             Pipeline and Teachers Insurance and Annuity Association of America
             relating to Adjustable Rate Notes, due March 31, 2002 (Exhibit
             (a)4(e) to Energy Report on Form 10-Q for the quarter ended June
             30, 1982, No. 1-7987).

        *(b) Senior Indenture, dated as of August 1, 1992, between Pipeline and
             Continental Bank, N.A., relating to Pipeline's 9% Debentures, due
             2022 (Exhibit 4.1 to Registration Statement on Form S-3, No.
             33-49150, filed July 2, 1992).

        *(c) Senior Indenture, dated as of November 30, 1995 between Pipeline
             and Chemical Bank, relating to Pipeline's 7.125% Debentures, due
             2025 (Exhibit 4.1 to Registration Statement on Form S-3, No.
             33-62639, filed September 14, 1995).

        *(d) Second Amended and Restated Credit Agreement dated as of July 23,
             1997, by and among Pipeline, Williams, Texas Gas Transmission
             Corporation, Transcontinental Gas Pipe Line Corporation, Williams
             Holdings of Delaware, Inc., Williams Communications Solutions, LLC,
             and Citibank N.A., as agent, and the banks named therein (Exhibit
             4(c) to Williams Form 10-K for the year ended 1997, Commission File
             Number 1-4174).

        *(e) Senior indenture, dated as of December 8, 1997 between Pipeline and
             The Chase Manhattan Bank, relating to Pipeline's 6.625% Debentures,
             due 2007 (Exhibit 4.1 to Registration Statement on Form S-3, No.
             333-35101, filed September 8, 1997.



                                      -29-
<PAGE>   32

(10)  Material contracts:

      (c)  *(1)  Form of Transfer Agreement, dated July 1, 1991, between 
                 Pipeline and Gas Processing (Exhibit 10(c)(8) to Pipeline 
                 Report on Form 10-K, No. 1-7414, filed March 26, 1992).

           *(2)  Form of Operating Agreement, dated July 1, 1991, between 
                 Pipeline and Williams Field Services Company (Exhibit 10(c)(9)
                 to Pipeline Report on Form 10-K, No. 1-7414, filed March 26, 
                 1992).

(23)  Consent of Independent Auditors

(27)  Financial Data Schedule (submitted to the SEC for its information).

(b)   REPORTS ON FORM 8-K:

      No reports on Form 8-K have been filed by Pipeline during the last quarter
of the period covered by this report.


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

      *Exhibits so marked have heretofore been filed with the Securities and
Exchange Commission as part of the filing indicated and are incorporated herein
by reference.



                                      -30-
<PAGE>   33

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                      NORTHWEST PIPELINE CORPORATION
                                              (Registrant)


                                      By  /s/Brian E. O'Neill
                                         -------------------------------------
                                             Brian E. O'Neill, President

Date:  March 29, 1999

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

             Signature              Title
             ---------              -----

     /s/ Keith E. Bailey            Chairman of the Board and Director
---------------------------------
         Keith E. Bailey


     /s/ Brian E. O'Neill           President (Principal Executive Officer) and 
---------------------------------   Director
         Brian E. O'Neill


     /s/ J. Douglas Whisenant       Sr. Vice President and General Manager and 
---------------------------------   Director
         J. Douglas Whisenant


     /s/ Nick A. Bacile             Vice President and Treasurer (Principal 
---------------------------------   Financial Officer)
         Nick A. Bacile


     /s/ Jeffrey R. Valentine       Controller (Principal Accounting Officer)
---------------------------------
         Jeffrey R. Valentine



Date:  March 29, 1999



                                      -31-
<PAGE>   34

                                  EXHIBIT INDEX



 Exhibit
 -------

   23     Consent of Independent Auditors

   27     Financial Data Schedule