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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-7320
ANR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1281775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Renaissance Center
Detroit, Michigan 48243-1902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 496-0200
----------------------------------
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
As of October 31, 1994, there were outstanding 1,000 shares of common
stock of the Registrant, $100 par value per share, its only class of common
stock. None of the voting stock of the Registrant is held by nonaffiliates.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements of ANR Pipeline Company and its subsidiaries
(the "Company" or "ANR Pipeline") are presented herein and are unaudited,
except for balances as of December 31, 1993, and therefore are subject to
year-end adjustments; however, all adjustments which are, in the opinion of
management, necessary for a fair statement of the results of operations for
the periods covered have been made. The adjustments which have been made are
of a normal recurring nature. Such results are not necessarily indicative of
results to be expected for the year due to seasonal variations and market
conditions affecting natural gas deliveries.
ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1994 1993
--------------- ---------------
(Unaudited)
<S> <C> <C>
Property, Plant and Equipment, at cost . . . . . . . . . . . . . . . . $ 3,365.3 $ 3,170.1
Less Accumulated depreciation . . . . . . . . . . . . . . . . . . 2,213.2 2,174.3
----------- -----------
1,152.1 995.8
----------- -----------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 32.2 33.9
Note receivable from related party . . . . . . . . . . . . . . . . . 197.5 285.5
Accounts receivable Others . . . . . . . . . . . . . . . . . . . . 36.3 73.2
Related parties . . . . . . . . . . . . . . . 30.2 9.3
Gas in underground storage, at FIFO cost . . . . . . . . . . . . . . 46.3 207.5
Materials and supplies, at average cost . . . . . . . . . . . . . . 40.8 40.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 .7
----------- -----------
383.8 650.7
----------- -----------
Other Assets:
Deferred charges and other . . . . . . . . . . . . . . . . . . . . . 152.8 115.6
Investment in pipeline partnerships . . . . . . . . . . . . . . . . 38.8 37.5
Assets related to excess gas supply . . . . . . . . . . . . . . . . 98.0 120.7
----------- -----------
289.6 273.8
----------- -----------
$ 1,825.5 $ 1,920.3
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
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ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
STOCKHOLDERS' EQUITY AND LIABILITIES 1994 1993
--------------- ---------------
(Unaudited)
<S> <C> <C>
Common Stock and Other Stockholder's Equity:
Common stock, $100 par value, authorized and outstanding
1,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . . $ .1 $ .1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 466.2 466.2
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 288.5 503.0
--------- ---------
754.8 969.3
--------- ---------
Mandatory Redemption Cumulative Preferred Stock, $1 par value,
authorized 10,000,000 shares, outstanding 1,086,640 shares at
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . - 26.0
--------- ---------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495.8 374.0
--------- ---------
Current Liabilities:
Sinking fund requirements of preferred stock . . . . . . . . . . . . - 7.7
Accounts payable Others . . . . . . . . . . . . . . . . . . . . . 156.9 194.0
Related parties . . . . . . . . . . . . . . . . . 10.3 13.3
Taxes on income . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 (15.8)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.2 55.3
--------- ---------
264.0 254.5
--------- ---------
Deferred Credits and Other:
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . 226.9 217.1
Unamortized rate reductions for excess deferred federal income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 12.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76.8 66.8
--------- ---------
310.9 296.5
--------- ---------
$ 1,825.5 $ 1,920.3
--------- ---------
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
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ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED EARNINGS
(Millions of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1994 1993 1994 1993
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Storage and transportation
Others . . . . . . . . . . . . . . . . . . . . . . . $ 165.0 $ 146.0 $ 519.9 $ 447.8
Related parties . . . . . . . . . . . . . . . . . . . 4.5 3.1 15.1 12.0
Gas sales
Others . . . . . . . . . . . . . . . . . . . . . . . 3.5 147.2 20.5 517.7
Related parties . . . . . . . . . . . . . . . . . . . 18.3 - 67.8 -
Other revenues
Others . . . . . . . . . . . . . . . . . . . . . . . 23.3 3.7 28.9 13.5
Related parties . . . . . . . . . . . . . . . . . . . 16.0 3.9 25.4 12.6
--------- ---------- --------- ---------
230.6 303.9 677.6 1,003.6
--------- ---------- --------- ---------
Costs and Expenses:
Operation and maintenance
Others . . . . . . . . . . . . . . . . . . . . . . . 75.0 82.5 211.0 221.7
Related parties . . . . . . . . . . . . . . . . . . . 25.2 25.0 77.0 74.0
Cost of gas
Others . . . . . . . . . . . . . . . . . . . . . . . 52.5 77.6 117.0 406.7
Related parties . . . . . . . . . . . . . . . . . . . 7.5 43.4 14.8 48.0
Depreciation . . . . . . . . . . . . . . . . . . . . . . 12.4 12.0 37.0 34.8
Interest expense . . . . . . . . . . . . . . . . . . . . 14.4 12.9 40.3 39.0
Taxes on income . . . . . . . . . . . . . . . . . . . . 17.2 19.4 62.2 61.6
--------- ---------- --------- ---------
204.2 272.8 559.3 885.8
--------- ---------- --------- ---------
Net Earnings . . . . . . . . . . . . . . . . . . . . . . . 26.4 31.1 118.3 117.8
Dividends on preferred stock . . . . . . . . . . . . . . - 1.0 1.5 3.2
--------- ---------- --------- ---------
Earnings Available for Common Stockholder . . . . . . . . . $ 26.4 $ 30.1 $ 116.8 $ 114.6
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
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ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1994 1993
-------- --------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 118.3 $ 117.8
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.8 36.1
Net decrease (increase) in working capital
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56.2 94.6
Related parties . . . . . . . . . . . . . . . . . . . . . . . . (23.9) (12.4)
Net decrease in other assets/liabilities . . . . . . . . . . . . . 16.5 67.9
-------- --------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . 87.6 186.2
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . 205.9 304.0
-------- --------
Cash Flows from Investing Activities:
Decrease (increase) in note receivable from related party . . . . . . . 88.0 (245.7)
Gas supply settlements and prepayments . . . . . . . . . . . . . . . . . - (2.9)
Recovery of gas supply prepayments . . . . . . . . . . . . . . . . . . . .3 24.8
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (51.8) (33.4)
-------- --------
Net cash provided by (used in) investing activities . . . . . . . . 36.5 (257.2)
-------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . 125.0 -
Retirement of long-term debt . . . . . . . . . . . . . . . . . . . . . . (2.3) (20.9)
Redemptions and early retirement of preferred stock . . . . . . . . . . (34.0) (7.7)
Common stock dividends paid . . . . . . . . . . . . . . . . . . . . . . (331.0) (16.4)
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . . . (1.8) (3.3)
-------- --------
Net cash used in financing activities . . . . . . . . . . . . . . . (244.1) (48.3)
-------- --------
Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . (1.7) (1.5)
Cash and Cash Equivalents at Beginning of Period . . . . . . . . . . . . . 33.9 3.1
-------- --------
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . $ 32.2 $ 1.6
-------- --------
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
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ANR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
For additional information relative to operations and financial
position, reference is made to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993. Certain reclassifications of prior
period statements have been made to conform with current reporting
practices. The effect of the reclassifications was not material to the
Company's results of operations or financial position.
Supplemental information relative to the Statement of Consolidated Cash
Flows includes the following: The Company made cash payments for interest,
net of interest capitalized, of $27.1 million and $26.3 million for the nine
month periods ended September 30, 1994 and 1993, respectively. Cash payments
for income taxes amounted to $31.2 million and $65.9 million for the nine
month periods ended September 30, 1994 and 1993, respectively. In March
1994, $162.1 million was transferred from "Gas in underground storage" to
"Property, Plant and Equipment" and included as part of base gas, pending
Federal Energy Regulatory Commission ("FERC") approval.
2. Income Taxes
<TABLE>
Provisions for income taxes were as follows (millions of dollars):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1994 1993 1994 1993
--------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Federal Income Taxes:
Currently payable . . . . . . . . . . . . . . . . . . $ 22.2 $ 36.4 $ 63.5 $ 75.8
Deferred . . . . . . . . . . . . . . . . . . . . . . (6.4) (18.5) (4.1) (17.6)
--------- ---------- --------- ---------
15.8 17.9 59.4 58.2
State and City Income Taxes . . . . . . . . . . . . . . 1.4 1.5 2.8 3.4
--------- ---------- --------- ---------
$ 17.2 $ 19.4 $ 62.2 $ 61.6
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
3. Common Stock
All of the issued and outstanding common stock of the Company is owned
by American Natural Resources Company, a wholly-owned subsidiary of Coastal
Natural Gas Company. Coastal Natural Gas Company is a wholly-owned
subsidiary of The Coastal Corporation. Therefore, earnings and cash
dividends per common share have no significance and are not presented.
4. Litigation, Environmental and Regulatory Matters
Litigation
Numerous lawsuits and other proceedings which have arisen in the
ordinary course of business are pending or threatened against the Company or
its subsidiaries. Although no assurances can be given and no determination
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can be made at this time as to the outcome of any particular lawsuit or
proceeding, the Company believes there are meritorious defenses to
substantially all such claims and that any liability which may finally be
determined should not have a material adverse effect on the Company's
financial position or results of operations.
Environmental Matters
The Company's operations are subject to extensive federal, state and
local environmental laws and regulations which may affect such operations
and costs as a result of their effect on the construction and maintenance of
its pipeline facilities. Additionally, appropriate governmental authorities
may enforce the laws and regulations with a variety of civil and criminal
enforcement measures, including monetary penalties and remediation
requirements.
The Comprehensive Environmental Response, Compensation and Liability
Act, also known as "Superfund," as reauthorized, imposes liability, without
regard to fault or the legality of the original act, for disposal of a
"hazardous substance." The Company has been named as a potentially
responsible party in four "Superfund" waste disposal sites. At one site for
which the Environmental Protection Agency ("EPA") has developed sufficient
information to estimate total clean up costs of approximately $1.8 million,
the Company estimates its pro-rata exposure is $15,000. At the other three
sites, the EPA is currently unable to provide the Company with an estimate
of total clean-up costs and, accordingly, the Company is unable to calculate
its share of those costs.
There are additional areas of environmental remediation responsibilities
which may fall on the Company. Future information and developments will
require the Company to continually reassess the expected impact of these
environmental matters. However, the Company has evaluated its total
environmental exposure based on currently available data, including its
potential joint and several liability, and believes that compliance with all
applicable laws and regulations will not have a material adverse impact on
the Company's liquidity, financial position, or results of operations.
Regulatory Matters
On March 10, 1992, the Company submitted to the FERC a comprehensive
Interim Settlement designed to resolve all outstanding issues resulting from
its 1989 rate case and its 1990 proposed service restructuring proceeding.
The Interim Settlement became effective November 1, 1992 and expired with
the Company's implementation of Order 636 on November 1, 1993. Under the
Interim Settlement, gas inventory demand charges were collected from the
Company's resale customers for the period November 1, 1992 through
October 31, 1993. This method of gas cost recovery required refunds for any
over-collections, and placed the Company at risk for under-collections. As
required by the Interim Settlement, the Company filed with the FERC on
April 29, 1994, a reconciliation report showing over-collections and,
therefore, proposed refunds totaling $45.1 million. Such refund obligations
were recorded at December 31, 1993 and September 30, 1994, and are included
in the Consolidated Balance Sheet under "Deferred Credits and Other."
Certain customers have disputed the level of those refunds. By order issued
July 20, 1994, the FERC directed the Company to try to resolve all issues
through informal procedures. The matter is still pending.
On April 8, 1992, the FERC issued Order 636, which required significant
changes in the services provided by interstate natural gas pipelines. The
Company and numerous other parties have sought judicial review of aspects of
Order 636. The United States Court of Appeals for the D. C. Circuit is in
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the process of developing a briefing schedule related to this judicial
review. ANR Pipeline placed its restructured services under Order 636 into
effect on November 1, 1993. The Company now offers a wide range of
"unbundled" storage, transportation and balancing services. Several persons,
including ANR Pipeline, have sought judicial review of aspects of the FERC's
orders approving the Company's restructuring filings. On March 24, 1994, the
FERC issued its "Fourth Order on Compliance Filing and Third Order on
Rehearing," which addressed numerous rehearing issues and confirmed that
after minor required tariff modifications, the Company is now fully in
compliance with Order 636 and the requirements of the orders on ANR
Pipeline's restructuring filings. The FERC issued a further order regarding
certain compliance issues on July 1, 1994. In accordance with this order,
the Company filed revised tariff sheets on July 18, 1994.
On November 1, 1993, the Company filed a general rate increase with the
FERC under Docket RP94-43. The increase represents the effects of higher
plant investment, Order 636 restructuring costs, rate of return and tax rate
changes, and increased costs related to the required adoption of recent
accounting rule changes, i.e., Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("FAS No. 106") and Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS No.
112"). On March 23, 1994, the FERC issued an order granting and denying
various requests for summary disposition and establishing hearing procedures
for issues remaining to be investigated in this proceeding. The order
required the reduction or elimination of certain costs which resulted in
revised rates such that the revised rates reflect an $85.7 million increase
in the cost of service from that approved in the Interim Settlement and a
$182.8 million increase over the Company's approved rates for its
restructured services under Order 636. The Company sought rehearing and, if
necessary, will seek judicial review of certain aspects of the March 23,
1994 order. On April 29, 1994, the Company filed a motion with the FERC that
placed the new rates into effect May 1, 1994, subject to refund. On
September 21, 1994, the FERC accepted the Company's filing in compliance
with the March 23, 1994 order, subject to further modifications including an
additional reduction in cost of service of approximately $5 million. The
Company submitted its compliance filing to the FERC on October 6, 1994.
ANR Pipeline has executed a Settlement Agreement (the "Settlement
Agreement") with Dakota Gasification Company ("Dakota") and the Department
of Energy which resolves litigation concerning purchases of synthetic gas by
the Company from the Great Plains Coal Gasification Plant (the "Plant").
That litigation, originally filed in 1990 in the United States District
Court in North Dakota, involved claims regarding the Company's obligations
under certain gas purchase and transportation contracts with the Plant. The
Settlement Agreement resolves all disputes between the parties, amends the
gas purchase agreement between the Company and Dakota and terminates the
transportation contract. The Settlement Agreement is subject to final FERC
approval, including an approval for the Company to recover the settlement
costs from its customers. On August 3, 1994, the Company filed a petition
with the FERC requesting: (a) that the Settlement Agreement be approved; (b)
an order approving ANR Pipeline's proposed tariff mechanism for the recovery
of the costs incurred to implement the Settlement Agreement; and (c) an
order dismissing a proceeding currently pending before the FERC, wherein
certain of ANR Pipeline's customers have challenged Dakota's pricing under
the original gas supply contract. On October 18, 1994, the FERC issued an
order consolidating the Company's petition with similar petitions of three
other pipeline companies and setting the Settlement Agreement and other
Dakota-related proceedings for limited hearing before an Administrative Law
Judge who must render an initial decision by December 31, 1995. The Company
believes the ultimate resolution of the Dakota related issues will not have
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a material adverse impact on its financial position or results of
operations.
Order 636 provides mechanisms for recovery of transition costs
associated with compliance with that Order. The Company has estimated that
its transition costs will amount to approximately $150 million, which will
consist primarily of gas supply realignment costs, the cost of stranded
pipeline investment and the Dakota costs described above. As of September
30, 1994, the Company has incurred transition costs in the amount of $39.5
million. The Company has filed for recovery of approximately $21.3 million
of these transition costs, which have been accepted and made effective by
the FERC, subject to refund and subject to further proceedings. In addition,
the Company has filed for recovery of approximately $90 million (present
value at August 1, 1994) of costs to be incurred associated with the
Settlement Agreement, as mentioned above. Additional transition cost filings
will be made by the Company in the future. As a result of the recovery
mechanisms provided under Order 636, the Company anticipates that these
transition costs will not have a material adverse effect on its financial
position or results of operations.
Certain regulatory issues remain unresolved among the Company, its
customers, its suppliers and the FERC. The Company has made provisions which
represent management's assessment of the ultimate resolution of these
issues. While the Company estimates the provisions to be adequate to cover
potential adverse rulings on these and other issues, it cannot estimate when
each of these issues will be resolved.
5. Take-or-Pay Obligations
"Assets related to excess gas supply" consists of $98.0 million and
$120.7 million at September 30, 1994 and December 31, 1993, respectively,
relating to prepayments for gas under gas purchase contracts with producers
and settlement payment amounts relative to the restructuring of gas purchase
contracts as negotiated with producers. Currently, FERC regulations allow
for the billing of a portion of the costs of take-or-pay settlements and
renegotiating gas purchase contracts. Prepayments are normally recoupable
through future deliveries of natural gas.
Contract reformation and take-or-pay costs incurred as a result of the
mandated Order 636 restructuring will be recovered under the transition cost
mechanisms of Order 636, or through negotiated agreements with the Company's
customers. The Company believes that these mechanisms provide adequate
coverage for such costs.
Several producers have instituted litigation arising out of take-or-pay
claims against the Company. In the Company's experience, producers' claims
are generally vastly overstated and do not consider all adjustments provided
for in the contract or allowed by law. The Company has resolved the majority
of the exposure with its suppliers for approximately 13% of the amounts
claimed. At December 31, 1993, the Company estimated that unresolved
asserted and unasserted producers' claims amounted to approximately $8
million. The remaining disputes will be settled where possible and litigated
if settlement is not possible.
At December 31, 1993, the Company was committed to make future purchases
under certain take-or-pay contracts with fixed, minimum or escalating price
provisions. Based on contracts in effect at that date, and before
considering reductions provided in the contracts or applicable law, such
commitments are estimated to be $37 million, $29 million, $22 million, $14
million and $3 million for the years 1994-1998, respectively, and $4 million
thereafter. Such commitments have also not been adjusted for all amounts
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<PAGE> 10
which may be assigned or released, or for the results of future litigation
or negotiation with producers.
The Company has made provisions, which it believes are adequate, for
payments to producers that may be required for settlement of take-or-pay
claims and restructuring of future contractual commitments. In determining
the net loss relating to such provisions, the Company has also made accruals
for the estimated portion of such payments which would be recoverable
pursuant to FERC-approved settlements with customers. Such provisions and
accruals were not material to the Company for the calendar year 1993 and the
nine month period ended September 30, 1994.
6. Mandatory Redemption Cumulative Preferred Stock
On June 16, 1994, the Company redeemed all outstanding shares of its
Cumulative Preferred Stock. Of the 800,000 outstanding shares of the
publicly held $2.12 Series, 200,000 shares were redeemed under sinking fund
provisions at $25.00 per share, and 600,000 shares were redeemed under
optional redemption provisions at $25.318 per share. Of the 200,000
outstanding shares of the publicly held $2.675 Series, all shares were
redeemed under sinking fund provisions at $25.00 per share. Of the 86,640
outstanding shares of the privately held $12.00 Series, all shares were
redeemed under optional redemption provisions at $103.79 per share.
Redemption of these series included the payment of accrued dividends to June
16, 1994. A $328,000 premium paid in excess of par value to redeem the
remaining outstanding preferred stock was charged directly to retained
earnings in accordance with FERC accounting procedures.
Item 2.A. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Notes to Consolidated Financial Statements contain information that
is pertinent to the following analysis.
Liquidity and Capital Resources
General. In February 1994, the Company completed an offering of $125
million in principal amount of 7 % 30-year Debentures due in February 2024.
The net proceeds from the sale of the Debentures were added to the general
funds of the Company and were used for capital expenditures and for other
general corporate purposes, including the payment of a $255 million dividend
on its common stock in March 1994. In June 1994, the Company paid an
additional $76 million dividend on its common stock which was financed from
internally generated funds.
On June 16, 1994, the Company redeemed all of the outstanding shares of
its Cumulative Preferred Stock. For additional information regarding this
matter, see Note 6 of Notes to Consolidated Financial Statements, included
herein.
Management believes that the Company's stable financial position and
earnings ability will enable it to continue to generate and obtain capital
for financing needs in the foreseeable future.
Gas in Underground Storage. The decrease in "Gas in underground
storage" of $161.2 million is attributable to a transfer in the first
quarter of 1994 of $162.1 million from "Gas in underground storage" to
"Property, Plant and Equipment." This transfer represents the
reclassification of working gas to recoverable base gas, which is not
depreciable, pending FERC approval.
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<PAGE> 11
Currency Swaps. The Company has outstanding bonds for 125 million Swiss
francs. The Company's entire foreign currency risk associated with this
debt, including principal and interest, has been hedged by entering into
currency swap agreements with maturities matching those of the underlying
debt. In the event of nonperformance by the counterparties to the currency
swaps, the Company would have possible exposure to credit loss in the amount
of $40.2 million as of September 30, 1994. However, the Company has largely
mitigated the risk of such a loss occurring by limiting the counterparties
of these agreements to a major international bank and a major international
financial institution, both with excellent credit ratings.
Environmental. Information concerning environmental matters is set
forth in Note 4 of Notes to Consolidated Financial Statements, included
herein.
Results of Operations
On April 8, 1992 the FERC issued Order 636 which required significant
changes in the services provided by interstate natural gas pipelines (see
Note 4 of Notes to Consolidated Financial Statements). The intent of Order
636 is to insure that interstate pipeline transportation services are equal
in quality for all gas supplies, whether the buyer purchases gas from the
pipeline or from any other gas supplier. The FERC amended its regulations to
require the use of the straight fixed variable ("SFV") rate setting
methodology. In general, SFV provides that all fixed costs of providing
service to firm customers (including an authorized return on rate base and
associated taxes) are to be received through fixed monthly reservation
charges, which are not a function of volumes transported, while including
within the commodity billing component the pipeline's variable operating
costs. In addition, the adoption of Order 636 has resulted in the incurrence
of transition costs. However, Order 636 provides mechanisms for the recovery
of such costs within a reasonable time period.
ANR Pipeline placed its restructured services under Order 636 into
effect on November 1, 1993. The Company now offers a wide range of
"unbundled" storage, transportation and balancing services. In anticipation
of the competitive environment created by Order 636, the Company entered
into a number of firm, long-term storage and transportation contracts with
customers. As a result, the majority of the revenue the Company receives
from storage and transportation services is now derived from reservation
charges associated with these contracts. This will provide a stable stream
of revenue and related cash flow for the Company regardless of capacity
usage by customers.
As a result of Order 636, the Company no longer offers a merchant
service. Because of this, a significant portion of the Company's gas
purchase contracts have been bought out or assigned. The Company is
continuing to negotiate the termination of a number of gas purchase contract
obligations which still exist and believes it will recover any costs
associated with the resolution of these negotiations with no significant
financial impact. In 1994, gas sales revenues reflect amounts related to the
auctioning of purchases required under these existing gas purchase
contracts, in addition to purchased gas adjustment recoveries from
customers. While operating revenues have been reduced as a result of the
implementation of Order 636, purchases and other related costs have also
been reduced by a similar amount, thereby having minimal net impact on
earnings.
- 10 -
<PAGE>
<PAGE> 12
The change in the Company's earnings for the three and nine month
periods ended September 30, 1994 in comparison to the corresponding periods
in 1993 is a result of the following:
Revenues. Storage and transportation revenues increased for the three
and nine month periods ended September 30, 1994 as compared to the same
periods in 1993 by 14% and 16%, respectively. The primary factor
contributing to these increases was revenues associated with cost recovery
mechanisms related to above market gas purchases and certain transportation
services provided by others, which are offset by amounts included in cost of
gas and operation and maintenance. Revenues have been reduced by provisions
for rate related contingencies associated with Docket RP94-43 of $9.5
million and $16 million for the three and nine month periods ended
September 30, 1994, respectively.
Gas sales revenues significantly decreased for the three and nine month
periods ended September 30, 1994 as compared to the same periods in 1993 as
a result of the elimination of the Company's merchant service, as discussed
above.
Other revenues increased for the three and nine month periods ended
September 30, 1994 by $31.7 million and $28.2 million as compared to the
same periods in 1993. The variances primarily result from revenues, recorded
in the third quarter of 1994, related to transportation imbalances which
have been cashed out. These revenues were offset by purchases included in
cost of gas.
Cost of Gas. Cost of gas significantly decreased for the three and nine
month periods ended September 30, 1994, as compared to the same periods in
1993 as a result of the elimination of the Company's merchant service, as
discussed above. Cost of gas includes purchases required under remaining
existing gas purchase contracts, the amortization of purchased gas
adjustment recoveries from customers, as well as gas purchases associated
with transportation imbalances which have been cashed out.
Operation and Maintenance. Operation and maintenance expenses for the
three and nine month periods ended September 30, 1994 as compared to the
same periods in 1993 decreased by $7.3 million and $7.7 million,
respectively. These decreases were largely due to reductions in
transportation services provided by others, partially offset by increased
benefit costs related to the required adoption of FAS Nos. 106 and 112.
Additionally, the nine month variance includes a benefit in 1993 related to
revisions of certain estimated costs.
Depreciation. Depreciation expense increased for the nine month period
ended September 30, 1994 as compared to the same period in 1993 by $2.2
million, primarily due to an increase in plant balances.
Taxes on Income. Income taxes decreased for the three month period
ended September 30, 1994 by $2.2 million, as compared to the same period in
1993, primarily as a result of a decrease in pre-tax income.
Item 2.B. Other Developments.
Effective September 9, 1994, Florida Power Corporation ("FPC") withdrew
as an equity partner in both the SunShine Interstate Transmission Company
and SunShine Pipeline Company ("SunShine") partnerships. As a result of
FPC's withdrawal, interests in the partnerships are now held by affiliates
of the Company and TransCanada PipeLines Limited. FPC continues to be a
major customer of the SunShine Pipeline Project. However, FPC has indicated
that its need for gas supply has been delayed. In light of this and market
- 11 -
<PAGE>
<PAGE> 13
indicators, SunShine has obtained a postponement of its pipeline corridor
certification hearing at the Florida Department of Environmental Protection
until October 1995. Environmental review is also pending at the FERC.
Sponsors of the Liberty Pipeline Project ("Liberty") asked the FERC, on
August 1, 1994, to postpone indefinitely its review of the Project. As a
result, the FERC dismissed the application on August 12, 1994. The Company
and certain Liberty partners still believe that an additional delivery point
onto Long Island, as originally proposed by Liberty, will be necessary in
the future.
- 12 -
<PAGE>
<PAGE> 14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The information required hereunder is incorporated by reference
into Part II of this Report from Notes 4 and 5 of the Notes to Consolidated
Financial Statements set forth in Part I of this Report.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On September 15, 1994, Jeffrey A. Connelly was elected as
president and chief executive officer of the Company. Mr. Connelly continues
to serve as director of the Company. The number of members of the Company's
Board of Directors was increased to thirteen with the election of the
following new directors on September 21, 1994: O. S. Wyatt, Jr., Harold
Burrow (Vice Chairman), David A. Arledge, John M. Bissell, Roy D. Chapin,
Jr., Lawrence P. Doss, Martha O. Hesse, Richard A. Lietz, Wilber H. Mack, J.
Carleton MacNeil, Jr. and James H. McNeal, Jr. James F. Cordes remains as
Chairman of the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1994.
SIGNATURES
Pursuant to the requirements 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.
ANR PIPELINE COMPANY
(Registrant)
Date: November ___, 1994 By: WILLIAM L. JOHNSON
---------------------------
William L. Johnson
Vice President
and Controller
(As Authorized Officer and
Chief Accounting Officer)
- 13 -
<PAGE>
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------------------------------------------------------------------------------------------------------------------------------
<S> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANR PIPELINE
COMPANY FORM 10-Q QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1994 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 32
<SECURITIES> 0
<RECEIVABLES> 264
<ALLOWANCES> 0
<INVENTORY> 87
<CURRENT-ASSETS> 384
<PP&E> 3,365
<DEPRECIATION> 2,213
<TOTAL-ASSETS> 1,826
<CURRENT-LIABILITIES> 264
<BONDS> 496
<COMMON> 0
0
0
<OTHER-SE> 755
<TOTAL-LIABILITY-AND-EQUITY> 1,826
<SALES> 88
<TOTAL-REVENUES> 678
<CGS> 132
<TOTAL-COSTS> 457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 181
<INCOME-TAX> 62
<INCOME-CONTINUING> 118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
