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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 June 30, 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 July 31, 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.
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<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>
June 30, December 31,
ASSETS 1996 1995
--------------- -------------
(Unaudited)
<S> <C> <C>
Property, Plant and Equipment, at cost..................................... $ 3,502.3 $ 3,468.5
Less - Accumulated depreciation......................................... 2,300.5 2,273.0
----------- -----------
1,201.8 1,195.5
----------- -----------
Current Assets:
Cash and cash equivalents............................................... 25.3 22.9
Note receivable from related party...................................... 312.4 384.8
Accounts receivable:
Others............................................................... 79.7 73.5
Related parties...................................................... 13.2 14.0
Materials and supplies, at average cost................................. 34.3 34.4
Other................................................................... .6 .6
----------- -----------
465.5 530.2
----------- -----------
Other Assets:
Assets related to excess gas supply..................................... 62.5 78.3
Investment in pipeline partnerships..................................... 48.3 35.2
Order 636 transition costs.............................................. 103.1 127.6
Deferred charges and other.............................................. 59.4 73.8
----------- -----------
273.3 314.9
----------- -----------
$ 1,940.6 $ 2,040.6
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
June 30, 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....................................................... 367.6 443.4
----------- ----------
833.9 909.7
----------- ----------
Long-Term Debt and Capital Lease Obligations............................... 507.8 509.3
----------- ----------
Current Liabilities:
Capital lease obligations............................................... 3.0 3.0
Accounts payable:
Others............................................................... 121.0 131.0
Related parties...................................................... 6.8 6.0
Taxes on income......................................................... (15.8) (14.0)
Other taxes............................................................. 15.7 21.5
Provision for regulatory matters........................................ 95.8 79.2
Other................................................................... 28.3 30.4
----------- ----------
254.8 257.1
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Deferred Credits and Other:
Accumulated deferred income taxes....................................... 217.1 223.0
Other................................................................... 127.0 141.5
----------- ----------
344.1 364.5
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$ 1,940.6 $ 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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Storage and transportation:
Others.................................................... $ 142.1 $ 161.5 $ 320.8 $ 353.3
Related parties........................................... 3.6 2.3 13.0 4.0
Gas sales:
Others.................................................... 2.7 6.0 5.9 15.5
Related parties........................................... 5.8 10.7 13.2 20.9
Other revenues:
Others.................................................... 8.8 3.4 14.5 5.5
Related parties........................................... 10.5 10.9 20.9 16.4
---------- ---------- --------- ---------
173.5 194.8 388.3 415.6
---------- ---------- --------- ---------
Costs and Expenses:
Operation and maintenance:
Others.................................................... 60.8 70.9 128.8 129.9
Related parties........................................... 24.0 25.2 47.5 52.7
Cost of gas.................................................. 14.1 21.5 36.8 53.8
Depreciation and amortization................................ 13.6 11.5 27.1 24.5
Interest expense............................................. 14.7 14.6 29.5 28.7
Taxes on income.............................................. 17.4 19.0 44.4 45.0
---------- ---------- --------- ---------
144.6 162.7 314.1 334.6
---------- ---------- --------- ---------
Net Earnings.................................................... $ 28.9 $ 32.1 $ 74.2 $ 81.0
========== ========== ========= =========
</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>
Six Months Ended
June 30,
-------------------------
1996 1995
--------- --------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings................................................................ $ 74.2 $ 81.0
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization......................................... 28.7 25.6
Net (increase) decrease in working capital:
Others.............................................................. (9.8) (37.9)
Related parties..................................................... 1.6 2.9
Net decrease in other assets/liabilities.............................. 20.9 9.8
--------- --------
Total adjustments................................................... 41.4 .4
--------- --------
Net cash provided by operating activities............................. 115.6 81.4
--------- --------
Cash Flows from Investing Activities:
Decrease (increase) in note receivable from related party................... 72.4 (114.1)
Capital expenditures........................................................ (36.2) (10.7)
Other....................................................................... 2.1 .5
--------- --------
Net cash provided by (used in) investing activities.................... 38.3 (124.3)
--------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt.................................... - 75.0
Retirement of capital lease obligations..................................... (1.5) (1.3)
Common stock dividends paid................................................. (150.0) (30.1)
--------- --------
Net cash (used in) provided by financing activities.................... (151.5) 43.6
--------- --------
Net Increase in Cash and Cash Equivalents...................................... 2.4 .7
Cash and Cash Equivalents at Beginning of Period............................... 22.9 22.0
--------- --------
Cash and Cash Equivalents at End of Period..................................... $ 25.3 $ 22.7
========= ========
</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 June 30, 1996, this
amount was approximately $160 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 $25.9 million and $24.6 million for the six-month
periods ended June 30, 1996 and 1995, respectively. Cash payments for income
taxes amounted to $59.1 million and $53.4 million for the six-month periods
ended June 30, 1996 and 1995, respectively.
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<PAGE>
2. Income Taxes
<TABLE>
Provisions for income taxes were as follows (millions of dollars):
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Federal Income Taxes:
Currently payable...................................... $ 22.0 $ 23.4 $ 57.5 $ 51.9
Deferred............................................... (6.3) (5.9) (17.2) (7.9)
---------- ---------- --------- ---------
15.7 17.5 40.3 44.0
State and City Income Taxes............................... 1.7 1.5 4.1 1.0
---------- ---------- --------- ---------
$ 17.4 $ 19.0 $ 44.4 $ 45.0
========== ========== ========= =========
</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
A natural gas producer has filed a claim on behalf of the U.S. government
in the U.S. District Court for the District of Columbia under the federal False
Claims Act. The Second Amended Complaint filed on May 24, 1996, against seventy
(70) defendants, including ANR Pipeline, alleges that the defendants' methods of
measuring the heating content and volume of natural gas purchased from
federally-owned or Indian properties have caused underpayment of royalties to
the U.S. government. Responsive pleadings will be filed and discovery will soon
commence.
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
five Superfund waste disposal sites. At these sites, there is sufficient
information to estimate total cleanup costs of approximately $39 million and the
Company estimates its pro-rata exposure, to be paid over a period of several
years, is approximately $.9 million.
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<PAGE>
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.
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 is also considering 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.
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 May 2, 1995,
the FERC issued an order setting other issues for an evidentiary hearing which
concluded on May 29, 1996. The Company submitted an adjusted reconciliation
report on October 31, 1995, which was also disputed by certain customers and
which was also consolidated with the ongoing evidentiary hearing. Initial briefs
were filed on July 31, 1996, and reply briefs are due to be filed September 26,
1996.
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. On
July 16, 1996, the Court issued its opinion upholding the basic structure of
Order 636, while remanding certain limited aspects to the FERC for further
consideration. 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 now expected to be scheduled for
briefing. 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 were filed on
July 15, 1996, and reply briefs are due September 13, 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
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<PAGE>
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 is expected to
schedule the cases for briefing.
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 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, and the Court is expected to schedule the case for briefing.
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 June 30, 1996, that
potential refund amount is approximately $78 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. By order issued July 17, 1996, the FERC
scheduled an oral argument for September 25, 1996 and a decision is expected
before the end of 1996.
Order 636 provides mechanisms for recovery of transition costs associated
with compliance with that Order. Limited aspects of those mechanisms are the
subject of the Court remand discussed above. The Company's transition costs
consist primarily of gas supply realignment costs and pricing differential
costs. As of June 30, 1996, the Company incurred transition costs in the amount
of $58.3 million. In addition, the Company recorded a contingent liability for
$74.9 million representing future above-market gas purchase obligations,
including future obligations of $60.2 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.
- 8 -
<PAGE>
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.
Liquidity and Capital Resources
General. On June 28, 1996, the Company paid a $150 million dividend on its
common stock. 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
five Superfund waste disposal sites. At these sites, there is sufficient
information to estimate total cleanup costs of approximately $39 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
- 9 -
<PAGE>
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 June 30, 1996, this
amount was approximately $160 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.
The change in the Company's earnings for the three- and six-month periods
ended June 30, 1996 in comparison to the corresponding periods in 1995 is a
result of the following:
Revenues. Storage and transportation revenues decreased for the three- and
six-month periods ended June 30, 1996 as compared to the same periods in 1995 by
$18.1 million and $23.5 million, respectively. The primary factor contributing
to these decreases were lower storage and storage related transportation
revenues of $10.2 million and $14.2 million for the three- and six-month
periods, respectively, resulting from continued, intensified competition across
the United States natural gas industry, particularly in the Midwest region in
which the Company operates. The remaining portion of the decreases are largely
due to reduced surcharge and other pass-through recoveries, which are offset in
cost of gas and operation and maintenance, respectively. Storage and
transportation revenues include provisions for regulatory matters of $12.6
million and $13.8 million for the six-month periods ended June 30, 1996 and
1995, respectively.
Gas sales revenues decreased for the three- and six-month periods ended
June 30, 1996 as compared to the same periods in 1995 by $8.2 million and $17.3
million, respectively. The decrease for the six-month period was primarily due
to purchased gas adjustment recoveries of $10.6 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 $4.3 million and $6.3 million for the
three- and six-month periods, respectively.
Other revenues increased for the three- and six-month periods ended June
30, 1996 as compared to the same periods in 1995 by $5 million and $13.5
million, respectively. These increases include increased interest income from a
related party of $2.7 and $4.8 million for the three- and six-month periods,
respectively. Also contributing to the increase were gains on the sale of
certain assets of $5 million and $7.9 million for the three- and six-month
periods, respectively.
Operation and Maintenance. Operation and maintenance expenses decreased
for the three- and six-month periods ended June 30, 1996 as compared to the same
periods in 1995 by $11.3 million and $6.3 million, respectively. The decreases
were largely attributable to lower salary expenses of $2.1 million and $4.2
million for the three- and six-month periods, respectively, mainly due to an
early retirement incentive program which became effective December 31, 1995. On
a three-month basis, lower ad valorem taxes decreased expenses by $4.5 million.
- 10 -
<PAGE>
Cost of Gas. Cost of gas decreased for the three- and six-month periods
ended June 30, 1996 as compared to the same periods in 1995 by $7.4 million and
$17 million, respectively. This decrease was primarily due to a decrease in the
amortization of purchased gas adjustment costs of $6.5 million and $13.7 million
for the three- and six-month periods, which were offset in 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 $3.8 million and $6.4 million for the three- and six-month periods,
respectively.
Item 2.B. Other Developments.
On June 28, 1996, ANR Iroquois, Inc. ("ANR Iroquois"), a subsidiary of ANR
Pipeline, purchased the stock of Tennessee/New England Pipeline Company, a
subsidiary of Tennessee Gas Pipeline Company ("Tennessee") and the owner of a
13.2% general partnership interest in Iroquois Gas Transmission System, L.P.
("Iroquois"), for approximately $30 million. In accordance with the purchase
agreement with Tennessee, ANR Iroquois has concurrently agreed to sell one half
of the 13.2% interest to CNG Iroquois, Inc. ("CNG"), a unit of Consolidated
Natural Gas Company. That transaction is subject to the receipt of necessary
regulatory approvals by CNG. When it is complete, the Company's general
partnership ownership interest in Iroquois would increase from 9.4% to 16%.
Iroquois owns 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. On April 25, 1996, Iroquois acquired all of the
outstanding stock of IPOC; however, IPOC is not controlled by ANR Iroquois.
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. In May 1996, IPOC was able to effect settlements with the
federal and state agencies resolving those investigations, subject to court
approval. A petition for rehearing is pending before the New York State Public
Service Commission relative to its approval of the settlement with IPOC. Under
the various settlements, IPOC, among other things, agreed to the payments of
fines, penalties and other payments, to undertake additional restoration work
and to undertake for a ten-year period, certain monitoring activities with
respect to the pipeline and the pipeline right-of-way. The ultimate impact of
the settlement payments on ANR Iroquois' share of earnings from Iroquois is
approximately $2 million.
On July 15, 1996, ANR Pipeline filed an application with the FERC for a
Certificate of Public Convenience and Necessity authorizing the construction and
operation of 11.9 miles of 42-inch loopline on ANR Pipeline's system between
Sandwich, Illinois and Bridgman, Michigan, to be in service by June 1997. The
$19.1 million investment in proposed facilities will alleviate the mainline
capacity constraints on a segment of ANR Pipeline's system by increasing
capacity by 135 Mmcf per day and thereby enhancing year-round use of capacity
entitlements.
- 11 -
<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 and from Item 2.A., "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Environmental Matters," 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.
At the Annual Meeting of the Stockholder held on June 27, 1996, the
number of members of the Company's Board of Directors was fixed at five and
James F. Cordes, (Chairman), David A. Arledge, Jeffrey A. Connelly, Richard A.
Lietz and Jon R. Whitney were elected as 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 June
30, 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: August 12, 1996 By: WILLIAM L. JOHNSON
-----------------------------------------
William L. Johnson
Vice President
and Controller
(As Authorized Officer and
Chief Accounting Officer)
- 12 -
<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 JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 405
<ALLOWANCES> 0
<INVENTORY> 34
<CURRENT-ASSETS> 466
<PP&E> 3,502
<DEPRECIATION> 2,301
<TOTAL-ASSETS> 1,941
<CURRENT-LIABILITIES> 255
<BONDS> 508
0
0
<COMMON> 0
<OTHER-SE> 834
<TOTAL-LIABILITY-AND-EQUITY> 1,941
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<TOTAL-REVENUES> 388
<CGS> 37
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