<PAGE>
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 March 31, 1996
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 Identification No.)
incorporation or organization)
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 April 30, 1996, 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.
<PAGE>
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, 1995, 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>
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
Property, Plant and Equipment, at cost.... $3,481.9 $3,468.5
Less - Accumulated depreciation.......... 2,286.6 2,273.0
-------- --------
1,195.3 1,195.5
-------- --------
Current Assets:
Cash and cash equivalents................ 23.2 22.9
Note receivable from related party....... 455.9 384.8
Accounts receivable:
Others.................................. 78.2 73.5
Related parties......................... 19.3 14.0
Materials and supplies, at average cost.. 34.3 34.4
Other.................................... .6 .6
-------- --------
611.5 530.2
-------- --------
Other Assets:
Assets related to excess gas supply...... 70.0 78.3
Investment in pipeline partnerships...... 35.8 35.2
Order 636 transition costs............... 113.2 127.6
Deferred charges and other............... 53.9 73.8
-------- --------
272.9 314.9
-------- --------
$2,079.7 $2,040.6
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
STOCKHOLDER'S EQUITY AND LIABILITIES 1996 1995
----------- ---------
(Unaudited)
<S> <C> <C>
Common Stock and Other Stockholder's Equity:
Common stock, $100 par value, authorized, issued and outstanding
1,000 shares...................................................... $ .1 $ .1
Additional paid-in capital......................................... 466.2 466.2
Retained earnings.................................................. 488.7 443.4
-------- --------
955.0 909.7
-------- --------
Long-Term Debt and Capital Lease Obligations........................ 508.5 509.3
-------- --------
Current Liabilities:
Capital lease obligations.......................................... 3.0 3.0
Accounts payable:
Others............................................................ 112.5 131.0
Related parties................................................... 5.8 6.0
Taxes on income.................................................... 4.7 (14.0)
Other taxes........................................................ 18.1 21.5
Provision for regulatory matters................................... 85.6 79.2
Other.............................................................. 36.0 30.4
-------- --------
265.7 257.1
-------- --------
Deferred Credits and Other:
Accumulated deferred income taxes.................................. 219.9 223.0
Other.............................................................. 130.6 141.5
-------- --------
350.5 364.5
-------- --------
$2,079.7 $2,040.6
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED EARNINGS
(Millions of Dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
--------- -------
(Unaudited)
<S> <C> <C>
Revenues:
Storage and transportation:
Others........................ $178.7 $191.8
Related parties............... 9.4 1.7
Gas sales:
Others........................ 3.2 9.5
Related parties............... 7.4 10.2
Other revenues:
Others........................ 5.7 2.1
Related parties............... 10.4 5.5
------ ------
214.8 220.8
------ ------
Costs and Expenses:
Operation and maintenance:
Others........................ 68.0 59.0
Related parties............... 23.5 27.5
Cost of gas.................... 22.7 32.3
Depreciation and amortization.. 13.5 13.0
Interest expense............... 14.8 14.1
Taxes on income................ 27.0 26.0
------ ------
169.5 171.9
------ ------
Net Earnings.................... $ 45.3 $ 48.9
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings................................................... $ 45.3 $ 48.9
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................ 14.4 13.6
Net decrease (increase) in working capital:
Others..................................................... 3.9 (13.3)
Related parties............................................ (5.5) 4.9
Net change in other assets/liabilities....................... 31.8 (4.1)
------ ------
Total adjustments.......................................... 44.6 1.1
------ ------
Net cash provided by operating activities.................... 89.9 50.0
------ ------
Cash Flows from Investing Activities:
Increase in note receivable from related party................. (71.1) (17.8)
Capital expenditures........................................... (17.8) (1.8)
Other.......................................................... .1 .1
------ ------
Net cash used in investing activities........................ (88.8) (19.5)
------ ------
Cash Flows from Financing Activities:
Retirement of capital lease obligations........................ (.8) (.5)
Common stock dividends paid.................................... - (30.1)
------ ------
Net cash used in financing activities....................... (.8) (30.6)
------ ------
Net Increase (Decrease) in Cash and Cash Equivalents............. .3 (.1)
Cash and Cash Equivalents at Beginning of Period................. 22.9 22.0
------ ------
Cash and Cash Equivalents at End of Period....................... $ 23.2 $ 21.9
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
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, 1995. 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 consolidated
financial position or results of operations.
The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" in 1996. The application of the new standard did not
have a material effect on the Company's consolidated financial position or
results of operations.
The Company is subject to the regulations and accounting procedures of
the Federal Energy Regulatory Commission ("FERC"). The Company meets the
criteria and, accordingly, follows the reporting and accounting requirements of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" ("FAS No. 71"). This statement provides that
rate-regulated public utilities account for and report assets and liabilities
consistent with the economic effect of the way in which regulators establish
rates, if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it reasonable to
assume that such rates can be charged and collected. Although the accounting
methods for companies subject to rate regulation may differ from those used by
nonregulated companies, the accounting methods prescribed by the regulatory
authority conform to the generally accepted accounting principle of matching
costs with the revenue to which they apply.
Transactions which the Company has recorded differently than a
nonregulated entity include the following: the Company (i) has capitalized the
cost of equity funds used during construction, and, (ii) has deferred purchase
gas costs, contract reformation costs, postemployment/postretirement benefit
costs and income tax reductions related to changes in federal income tax rates.
These items are being, or are anticipated to be, recovered or refunded in rates
chargeable to customers.
The Company has applied FAS No. 71 and evaluates the applicability of
regulatory accounting and the recoverability of those assets through rate or
other contractual mechanisms on an ongoing basis. If FAS No. 71 accounting
principles should no longer be applicable to the Company's operations, an amount
would be charged to earnings as an extraordinary item. At March 31, 1996, this
amount was approximately $163 million, net of income taxes. The Company does not
expect that its cash flows would be affected by discontinuing application of FAS
No. 71. Any potential charge to earnings would be noncash and would have no
direct effect on either the Company's ability to include the underlying deferred
items in future rate proceedings or on its ability to collect the rates set
thereby.
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 $6.9 million and $7.5 million for the three-
month periods ended March 31, 1996 and 1995, respectively. Cash payments
(refunds) of income taxes amounted to $18.1 million and ($2.0) million for the
three-month periods ended March 31, 1996 and 1995, respectively.
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<PAGE>
2. INCOME TAXES
Provisions for income taxes were as follows (millions of dollars):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Federal Income Taxes:
Currently payable.......... $ 35.5 $ 28.5
Deferred................... (10.9) (2.0)
----- -----
24.6 26.5
State and City Income Taxes.. 2.4 (.5)
----- -----
$27.0 $26.0
===== =====
</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 Matters
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 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 consolidated financial position or
results of operations.
Environmental Matters
The Company's operations are subject to extensive and evolving
federal, state and local environmental laws and regulations which may affect
such operations and costs as a result of their effect on the construction,
operation and maintenance of its pipeline facilities. The Company anticipates
annual capital expenditures of $2.8 million per year over the next several years
aimed at maintaining compliance with such laws and regulations. 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 these sites, there is sufficient
information to estimate total cleanup costs of approximately $36.5 million
and the Company estimates its pro-rata exposure, to be paid over a period of
several years, is approximately $.9 million.
There are additional areas of environmental remediation
responsibilities to which the Company may be subject. The states have regulatory
programs that mandate waste cleanup. The Clean Air Act Amendments of 1990
include new permitting regulations which will result in increased operating
expenditures.
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, consolidated
financial position or results of operations.
-6-
<PAGE>
Regulatory Matters
On January 31, 1996, the FERC issued a "Statement of Policy and
Request for Comments" in Docket Nos. RM95-6 and RM96-7 with respect to a
pipeline's ability to negotiate and charge rates for individual customers'
services which would not be limited to the "cost-based" rates established by the
FERC in traditional rate making. Under this Policy, a pipeline and a customer
will be allowed to negotiate a contract for service which provides for rates and
charges that exceed the pipeline's posted maximum tariff rates, provided that
the shipper agreeing to such negotiated rates has the ability to elect to
receive service at the pipeline's posted maximum rate (known as a "recourse
rate"). In order to implement this Policy, a pipeline must make an initial
tariff filing with the FERC to indicate that it intends to contract for services
under this Policy, and subsequent tariff filings will indicate each instance
where the pipeline has negotiated a rate for service which exceeds the posted
maximum tariff rate. The FERC has also requested comments on whether this
"recourse rate" program should be extended to other terms and conditions of
pipeline transportation services.
Under the Company's Interim Settlement, which became effective
November 1, 1992 and expired on November 1, 1993, gas inventory demand charges
were collected from the Company's former resale customers. 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, on April
29, 1994, the Company filed with the FERC a reconciliation report showing over-
collections and proposing refunds totaling $45.1 million. Certain customers have
disputed the level of those refunds. Pursuant to a February 27, 1995 FERC order
approving the Company's refund allocation methodology, the Company paid
undisputed refunds on March 29, 1995 of $45.1 million, together with applicable
interest, subject to further investigation of the claims made by the customers.
On May 2, 1995, the FERC issued an order setting these issues for an evidentiary
hearing which commenced on May 14, 1996. The Company submitted an adjusted
reconciliation report on October 31, 1995, which was also disputed by certain
customers and which has been consolidated with the ongoing evidentiary hearing.
The FERC's approval of the Company's refund allocation methodology was appealed
by certain customers to the United States Court of Appeals for the D.C. Circuit
and that appeal was dismissed in an April 24, 1996 Court order.
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 before the United States Court of Appeals for the D.C.
Circuit. Oral argument in the case was held on February 21, 1996. Several
persons, including ANR Pipeline, have also appealed aspects of the FERC's orders
approving the Company's restructuring filings made pursuant to Order 636 and
these appeals are expected to be briefed shortly. ANR Pipeline placed its
restructured services under Order 636 into effect on November 1, 1993. 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 tariff modifications, the Company would be fully in compliance with
Order 636 and the requirements of the orders on its restructuring filings.
Under FERC Docket No. RP94-43, the Company filed a general rate
increase on November 1, 1993. By a March 23, 1994 order, the FERC granted and
denied various requests for summary disposition and established hearing
procedures for issues remaining to be investigated in the proceeding. The
hearing commenced on January 31, 1996 and concluded on April 24, 1996. Initial
briefs are due July 1, 1996, and reply briefs are due August 30, 1996. Under the
March 23, 1994 order, certain costs were reduced or eliminated, resulting in
revised rates that reflect an $85.7 million increase in the cost of service
underlying that approved in the Interim Settlement, and a $182.8 million
increase over the cost of service underlying the Company's approved rates for
its Order 636 restructured services. 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. The Company's filing was accepted by the FERC in a September 21, 1994
order, subject to further modifications, including an additional reduction in
cost of service of approximately $5 million. The Company submitted revised rates
in compliance with this order on October 6, 1994, which rates are currently in
effect, subject to refund. The Company sought rehearing of various aspects of
the March 23, 1994 order and the FERC denied rehearing in a December 8, 1994
order. On January 26, 1995, the Company appealed these orders to the United
States Court of Appeals for the D.C. Circuit and the Court dismissed the appeal
as premature.
The FERC has also issued a series of orders and orders on rehearing in
the Company's rate proceeding that apply a new policy governing the order of
attribution of revenues received by the Company related to transition costs
under Order 636. Under that new policy, the Company is required to first
attribute the revenues it receives for its services to the recovery of its
transition costs under Order 636. In its pending rate proceeding, the revenues
the Company receives for its services were first attributed to the recovery of
its base cost of service. The FERC's change
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<PAGE>
in its revenue attribution policy has the effect of understating the Company's
currently effective maximum rates and has accelerated its amortization of
transition costs. In light of the FERC's policy, the Company has filed with the
FERC to increase its discount recovery adjustment in its pending rate
proceeding. The Company has also sought judicial review of these orders before
the United States Court of Appeals for the D.C. Circuit, although the Court
granted the FERC's motion to hold the Company's appeal in abeyance pending the
outcome of the Order 636 appeal discussed above.
Claims were filed in 1990 in the United States District Court in North
Dakota by Dakota Gasification Company ("Dakota") and the United States
Department of Energy regarding the Company's obligations under certain gas
purchase and transportation contracts with the Great Plains Coal Gasification
Plant (the "Plant"). On February 16, 1994, ANR Pipeline, Dakota and the
Department of Energy executed a Settlement Agreement (the "Settlement
Agreement"), which, subject to FERC approval, resolves the litigation and
disputes among the parties, amends the gas purchase agreement between the
Company and Dakota and terminates the transportation contract with the Plant. On
August 3, 1994, the Company filed a petition with the FERC requesting: (i)
approval of the Settlement Agreement; (ii) an order approving ANR Pipeline's
proposed tariff mechanism to recover the costs incurred to implement the
Settlement Agreement; and (iii) an order dismissing a then pending FERC
proceeding wherein certain of ANR Pipeline's customers challenged Dakota's
pricing under the original gas supply contract. By an October 18, 1994 order,
the FERC consolidated the Company's petition with similar petitions of three
other pipeline companies. Hearings were held before the FERC Administrative Law
Judge ("ALJ") on the prudence of the Settlement Agreement, and on December 29,
1995, the ALJ issued an Initial Decision rejecting the proposed Settlement
Agreement and determining the level of Dakota costs that ANR Pipeline and the
other pipeline companies would be permitted to recover from their customers
beginning as of May 1993. Because the amounts ANR Pipeline has billed to its
customers since May 1993 are greater than the Dakota costs ANR Pipeline would be
permitted to recover under the Initial Decision, ANR Pipeline may be required to
refund to its customers the amount of excess collections. At March 31, 1996,
that potential refund amount is approximately $75 million, plus interest. It is
ANR Pipeline's position that (i) the Settlement Agreement is prudent, (ii) the
FERC has no lawful authority to order refunds for past periods and (iii) even if
refunds were ultimately found to be lawful, ANR Pipeline should not lawfully be
required to refund amounts in excess of the amounts it collects from Dakota. ANR
Pipeline has filed with the FERC seeking reversal of the Initial Decision, and
approval of the Settlement Agreement.
Order 636 provides mechanisms for recovery of transition costs
associated with compliance with that Order. The Company's transition costs
consist primarily of gas supply realignment costs and pricing differential
costs. As of March 31, 1996, the Company incurred transition costs in the amount
of $55.5 million. In addition, the Company recorded a contingent liability for
$83.9 million representing future above-market gas purchase obligations,
including future obligations of $66.3 million associated with the Settlement
Agreement, as discussed above. The charge related to the contingent liability
has been deferred in anticipation of future rate recovery. The Company has filed
for recovery of approximately $44.5 million of incurred transition costs. The
FERC has accepted $42.7 million of these filings for recovery, of which $28.6
million has been settled with the parties to the respective FERC proceedings.
Those filings not settled are subject to refund and further proceedings.
Additional transition costs filings will be made by the Company in the future.
Certain of the above regulatory matters and other 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 the above issues. As a result, the Company anticipates
that these regulatory matters will not have a material adverse effect on its
consolidated financial position or results of operations. 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.
ITEM 2.A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and
Results of Operations includes certain forward-looking statements reflecting the
Company's expectations in the near future; however, many factors which may
affect the actual results, especially natural gas prices and changing
regulations, are difficult to predict. Accordingly, there is no assurance that
the Company's expectations will be realized.
The Notes to Consolidated Financial Statements contain information
that is pertinent to the following analysis.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. 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.
ENVIRONMENTAL. The Company's operations are subject to extensive and
evolving federal, state and local environmental laws and regulations which may
affect such operations and costs as a result of their effect on the
construction, operation and maintenance of its pipeline facilities. The Company
anticipates annual capital expenditures of $2.8 million per year over the next
several years aimed at maintaining compliance with such laws and regulations.
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 these sites, there is sufficient
information to estimate total cleanup costs of approximately $36.5 million and
the Company estimates its pro-rata exposure, to be paid over a period of several
years, is approximately $.9 million.
There are additional areas of environmental remediation
responsibilities to which the Company may be subject. The states have regulatory
programs that mandate waste cleanup. The Clean Air Act Amendments of 1990
include new permitting regulations which will result in increased operating
expenditures.
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, consolidated
financial position or results of operations.
RESULTS OF OPERATIONS
ANR Pipeline placed its restructured services under Order 636 into
effect on November 1, 1993 (see Note 4 of Notes to Consolidated Financial
Statements). As a result, the Company no longer offers a merchant service and
has bought out or assigned a significant portion of its gas purchase contracts.
The Company is continuing to negotiate the termination of the remaining gas
purchase contract obligations. The Company's Order 636 restructured tariff
provides mechanisms for the purpose of recovering from its transportation
customers any pricing differential between costs incurred to purchase gas under
these contracts and the amounts recovered through auctioning of such gas on the
open market.
The Company offers a wide range of "unbundled" storage,
transportation, and balancing services, primarily in the Midwest and
increasingly in the Northeast regions of the United States. The Midwest region
is continuing to experience intensified competition due to excess pipeline
capacity and, as a result, capacity is currently trading at lower rates because
of remarketing of capacity at discounted rates by customers. The Company
believes this excess pipeline capacity will lessen by the end of the decade as
demand for natural gas grows and competitors convert or retire underutilized
assets. Although the Company's transportation capacity is currently sold out in
this region, the Company has instituted reengineering projects and cost-cutting
efforts to remain competitive.
Certain costs, including Order 636 transition costs, contract
reformation costs and purchased gas costs discussed above, have been deferred
pursuant to provisions of FAS No. 71. The Company evaluates the applicability of
regulatory accounting under FAS No. 71 and the recoverability of these assets
through rate or other contractual mechanisms on an ongoing basis. If FAS No. 71
accounting principles should no longer be applicable to the Company's
operations, an amount would be charged to earnings as an extraordinary item. At
March 31, 1996, this amount was approximately $163 million, net of income taxes.
The Company does not expect that its cash flows would be affected by
discontinuing application of FAS No. 71. Any potential charge to earnings would
be noncash and would have no direct effect on either the Company's ability to
include the underlying deferred items in future rate proceedings or on its
ability to collect the rates set thereby. Additional information concerning FAS
No. 71 is set forth in Note 1 of Notes to Consolidated Financial Statements
included herein.
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<PAGE>
The change in the Company's earnings for the three-month period ended
March 31, 1996 in comparison to the same period in 1995 is a result of the
following:
REVENUES. Storage and transportation revenues decreased by $5.4
million for the three-month period ended March 31, 1996 as compared to the same
period in 1995. The primary factor contributing to the decrease was lower
storage and storage related transportation revenues of $5.9 million resulting
from continued, intensified competition across the United States natural gas
industry, particularly in the Midwest region in which the Company operates, as
discussed above. Storage and transportation revenues included provisions for
regulatory matters of $4.4 million and $4.2 million for the three-month periods
ended March 31, 1996 and 1995, respectively.
Gas sales revenues decreased by $9.1 million for the three-month
period ended March 31, 1996 as compared to the same period in 1995. This
decrease was primarily due to purchased gas adjustment recoveries of $6.6
million recorded in 1995, which were associated with purchase periods prior to
Order 636. Such recoveries were largely completed in 1995. A reduction in the
quantity of gas auctioned on the open market, as discussed above, offset in part
by increased spot market prices, further reduced gas sales revenues by $2
million.
Other revenues increased by $8.5 million for the three-month period
ended March 31, 1996 as compared to the same period in 1995. The primary factors
contributing to the increase were additional revenues from investments in
pipeline partnerships of $2.8 million and increased interest income from a
related party of $2.1 million. Additionally, other gas revenues increased by
$2.3 million due to adjustments to revenue reserves associated with certain
transition cost recovery mechanisms and revenue from the sale of condensates.
OPERATION AND MAINTENANCE. Operation and maintenance expenses
increased for the three-month period ended March 31, 1996 as compared to the
same period in 1995 by $5 million. The increase was largely attributable to
lower ad valorem taxes recorded in 1995 and higher use taxes in 1996.
COST OF GAS. Cost of gas decreased by $9.6 million for the three-
month period ended March 31, 1996 as compared to the same period in 1995. This
decrease was primarily due to amortization of purchased gas adjustment costs
recorded in 1995, which are offset by recoveries in gas sales revenues, as
discussed above. Also contributing to the decrease were reductions in the
quantity of gas purchased under the Company's remaining gas purchase contracts
of $2.6 million.
ITEM 2.B. OTHER DEVELOPMENTS.
A subsidiary of the Company owns a 9.4% interest in Iroquois Gas
Transmission System, L.P. ("Iroquois"), a 370-mile pipeline which transports gas
from Canada to the northeastern United States (the "Iroquois Pipeline").
Iroquois contracted with Iroquois Pipeline Operating Company ("IPOC") for IPOC
to construct and operate the Iroquois Pipeline. IPOC is not affiliated with ANR
Pipeline. Federal and state agencies (including the United States Attorney's
office for the Northern District of New York) have been investigating alleged
civil and criminal violations of laws related to the construction and operation
of the Iroquois Pipeline.
A global resolution of the federal civil and criminal investigations
and agency proceedings could involve fines and other monetary sanctions that
would not be material to the consolidated financial position or results of
operations of ANR Pipeline. In conjunction with this, and although no agreements
have been reached regarding the disposition of these matters, the Company has
recorded a reserve for its share of the potential expense of the Iroquois
investigation and proceedings.
-10-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information required hereunder is incorporated by reference into Part II
of this Report from Note 4 of 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.
None.
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 March 31,
1996.
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: May 14, 1996 By: /s/ WILLIAM L. JOHNSON
---------------------------
William L. Johnson
Vice President
and Controller
(As Authorized Officer and
Chief Accounting Officer)
-11-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
-12-
<TABLE> <S> <C>
<PAGE>
<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 MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 553
<ALLOWANCES> 0
<INVENTORY> 34
<CURRENT-ASSETS> 612
<PP&E> 3,482
<DEPRECIATION> 2,287
<TOTAL-ASSETS> 2,080
<CURRENT-LIABILITIES> 266
<BONDS> 509
0
0
<COMMON> 0
<OTHER-SE> 955
<TOTAL-LIABILITY-AND-EQUITY> 2,080
<SALES> 11
<TOTAL-REVENUES> 215
<CGS> 23
<TOTAL-COSTS> 128
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 72
<INCOME-TAX> 27
<INCOME-CONTINUING> 45
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
