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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, 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
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, 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>
September 30, December 31,
ASSETS 1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Property, Plant and Equipment, at cost..................................... $ 3,515.9 $ 3,468.5
Less - Accumulated depreciation......................................... 2,305.6 2,273.0
----------- -----------
1,210.3 1,195.5
----------- -----------
Current Assets:
Cash and cash equivalents............................................... 28.6 22.9
Note receivable from related party...................................... 344.7 384.8
Accounts receivable:
Others............................................................... 54.9 73.5
Related parties...................................................... 10.7 14.0
Materials and supplies, at average cost................................. 33.8 34.4
Other................................................................... .7 .6
----------- -----------
473.4 530.2
----------- -----------
Other Assets:
Assets related to excess gas supply..................................... 55.3 78.3
Investment in pipeline partnerships..................................... 48.6 35.2
Order 636 transition costs.............................................. 91.0 127.6
Deferred charges and other.............................................. 67.5 73.8
----------- -----------
262.4 314.9
----------- -----------
$ 1,946.1 $ 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>
September 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....................................................... 389.1 443.4
----------- -----------
855.4 909.7
----------- -----------
Long-Term Debt............................................................. 497.7 497.7
----------- -----------
Capital Lease Obligations with Related Party............................... 9.4 11.6
----------- -----------
Current Liabilities:
Capital lease obligations with related party............................ 3.0 3.0
Accounts payable:
Others............................................................... 98.8 131.0
Related parties...................................................... 3.9 6.0
Taxes on income......................................................... (29.3) (14.0)
Other taxes............................................................. 19.0 21.5
Provision for regulatory matters........................................ 114.3 79.2
Other................................................................... 35.8 30.4
----------- -----------
245.5 257.1
----------- -----------
Deferred Credits and Other:
Accumulated deferred income taxes....................................... 219.4 223.0
Other................................................................... 118.7 141.5
----------- -----------
338.1 364.5
----------- -----------
$ 1,946.1 $ 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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Storage and transportation:
Others.................................................... $ 133.8 $ 180.1 $ 454.6 $ 533.4
Related parties........................................... 3.1 1.9 16.1 5.9
Gas sales:
Others.................................................... 2.4 3.0 8.3 18.5
Related parties........................................... 6.1 9.3 19.3 30.2
Other revenues:
Others.................................................... 4.0 13.1 18.5 18.6
Related parties........................................... 10.9 6.2 31.8 22.6
---------- ---------- --------- ---------
160.3 213.6 548.6 629.2
---------- ---------- --------- ---------
Costs and Expenses:
Operation and maintenance:
Others.................................................... 58.1 79.9 186.9 209.8
Related parties........................................... 25.5 23.9 73.0 76.6
Cost of gas.................................................. 14.3 25.2 51.1 79.0
Depreciation and amortization................................ 13.6 13.1 40.7 37.6
Interest expense............................................. 14.8 15.9 44.3 44.6
Taxes on income.............................................. 12.5 21.2 56.9 66.2
---------- ---------- --------- ---------
138.8 179.2 452.9 513.8
---------- ---------- --------- ---------
Net Earnings.................................................... $ 21.5 $ 34.4 $ 95.7 $ 115.4
========== ========== ========= =========
</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>
Nine Months Ended
September 30,
-------------------------
1996 1995
--------- --------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings................................................................ $ 95.7 $ 115.4
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization......................................... 43.1 39.4
Net decrease (increase) in working capital:
Others.............................................................. 8.7 (27.7)
Related parties..................................................... 1.2 (2.6)
Net decrease in other assets/liabilities.............................. 27.5 33.3
--------- --------
Total adjustments................................................... 80.5 42.4
--------- --------
Net cash provided by operating activities............................. 176.2 157.8
--------- --------
Cash Flows from Investing Activities:
Decrease (increase) in note receivable from related party................... 40.1 (175.7)
Capital expenditures........................................................ (60.5) (24.7)
Other....................................................................... 2.1 .9
--------- --------
Net cash used in investing activities................................. (18.3) (199.5)
--------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt.................................... - 75.0
Retirement of related party capital lease obligations....................... (2.2) (2.0)
Common stock dividends paid................................................. (150.0) (30.1)
--------- --------
Net cash (used in) provided by financing activities................... (152.2) 42.9
--------- --------
Net Increase in Cash and Cash Equivalents...................................... 5.7 1.2
Cash and Cash Equivalents at Beginning of Period............................... 22.9 22.0
--------- --------
Cash and Cash Equivalents at End of Period..................................... $ 28.6 $ 23.2
========= ========
</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, certain lease 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 September 30, 1996,
this amount was approximately $148 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 $32.7 million and $32 million for the nine-month
periods ended September 30, 1996 and 1995, respectively. Cash payments for
income taxes amounted to $83.1 million and $56.7 million for the nine-month
periods ended September 30, 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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
--------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Federal Income Taxes:
Currently payable.................................... $ 16.0 $ 29.3 $ 73.5 $ 81.2
Deferred............................................. (4.6) (10.2) (21.8) (18.1)
-------- ------- ------- -------
11.4 19.1 51.7 63.1
State and City Income Taxes............................. 1.1 2.1 5.2 3.1
-------- ------- ------- -------
$ 12.5 $ 21.2 $ 56.9 $ 66.2
======== ======= ======= =======
</TABLE>
3. Common Stock
All of the issued and outstanding common stock of the Company is owned by
American Natural Resources Company ("ANR"), 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.
Numerous other 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.
- 6 -
<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.
On July 31, 1996, the FERC also issued a "Notice of Proposed Rulemaking" in
Docket No. RM96-14 requesting comments on various aspects of secondary market
transactions on interstate natural gas pipelines, including the comparability of
pipeline capacity with released capacity.
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 were filed on October 21, 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 to the FERC for further consideration certain limited
aspects, such as the basis for its determination relative to the recovery by the
pipelines of the full level of their prudently incurred transition costs.
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
- 7 -
<PAGE>
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 were filed on September 13,
1996. The case is now pending before a substitute Administrative Law Judge
("ALJ"). 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 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 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 September 30, 1996, that potential refund amount is
approximately $84 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. The FERC conducted an oral argument on 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 September 30, 1996, the Company incurred transition costs in the
amount of $62.3 million. In addition, the Company recorded a contingent
liability for $64.1 million representing future above-market gas purchase
obligations, including future obligations of $52.3 million associated with the
Settlement Agreement, as discussed above. The charge related to the contingent
- 8 -
<PAGE>
liability has been deferred in anticipation of future rate recovery. The Company
has filed for recovery of approximately $59.9 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.
5. Capital Lease Obligations with Related Party
The Company is the lessee of eight natural gas storage fields under capital
leases. On September 30, 1996, ANR acquired 100% of the common stock of the
lessor. As a result, capital lease obligations are now classified as related
party transactions.
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 forwardlooking 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
- 9 -
<PAGE>
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 September 30, 1996,
this amount was approximately $148 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 nine-month periods
ended September 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
nine-month periods ended September 30, 1996 as compared to the same periods in
1995 by $45.1 million and $68.6 million, respectively. Contributing to these
decreases were lower storage and transportation revenues of $5 million and $18.5
million for the three- and nine-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.
Additional items which decreased revenues were (a) revenue received in 1995
related to storage and transportation contract settlements of $19 million and
$22.5 million for the three- and nine-month periods, respectively, (b) reduced
surcharge and other pass-through recoveries of $5.7 million and $15.5 million
for the three- and nine-month periods, respectively, which are offset in cost of
gas and operation and maintenance, and (c) increases in provisions for rate
related contingencies of $15.7 million and $15.2 million for the three- and
nine-month periods, respectively. Provisions were $16.8 million and $29.4
million for the three- and nine-month periods ended September 30, 1996,
respectively, while the same periods in 1995 included provisions of $1.1 million
and $14.2 million.
Gas sales revenues decreased for the three- and nine-month periods ended
September 30, 1996 as compared to the same periods in 1995 by $3.8 million and
$21.1 million, respectively. The decrease for the nine-month period was
primarily due to purchased gas adjustment recoveries of $12.1 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 $2.2 million and $8.5
million for the three- and nine-month periods, respectively.
- 10 -
<PAGE>
Other revenues decreased for the three-month period ended September 30,
1996 by $4.4 million and increased for the nine-month period ended September 30,
1996 by $9.1 million as compared to the same periods in 1995. Additional equity
earnings from investments in pipeline partnerships increased other revenues by
$4.7 million and $4.3 million for the three- and nine-month periods,
respectively, largely due to an increase in the Company's ownership interest in
Iroquois Gas Transmission System, L.P. from 9.4% to 16%. Revenue from the sale
of storage gas during 1995 decreased other revenues by $4.6 million and $5
million for the three- and nine-month periods, respectively. Decreases in
interest income from a related party reduced other revenues for the three-month
period by $1.3 million, while activity on a nine-month basis resulted in
increased revenues of $3.6 million. Also contributing to the increase in the
nine-month period were gains on the sale of certain assets of $7.9 million.
Operation and Maintenance. Operation and maintenance expenses decreased for
the three- and nine-month periods ended September 30, 1996 as compared to the
same periods in 1995 by $20.2 million and $26.5 million, respectively. The
decreases were primarily due to reduced transportation services provided by
others of $14 million and $17.1 million for the three- and nine-month periods,
which were offset in revenues, as discussed above. Also contributing to the
decrease were lower salary and benefit expenses of $1.8 million and $7.1 million
for the three- and nine-month periods, respectively, mainly due to an early
retirement incentive program which became effective December 31, 1995.
Cost of Gas. Cost of gas decreased for the three- and nine-month periods
ended September 30, 1996 as compared to the same periods in 1995 by $10.9
million and $27.9 million, respectively. Reductions in the amortization of
previously deferred costs associated with above market gas purchases of $6.8
million and $11.1 million and in the quantity of gas purchased under the
Company's remaining gas purchase contracts of $2.6 million and $9 million both
decreased the cost of gas for the three- and nine-month periods, respectively.
Additionally, the nine-month period was impacted by a reduction in the
amortization of purchased gas adjustment costs of $14.8 million. Collectively,
these decreases were offset in revenues, as discussed above.
Taxes on Income. Income taxes decreased for the three- and nine-month
periods ended September 30, 1996 as compared to the same periods in 1995 by $8.7
million and $9.3 million, respectively, primarily due to a decrease in pre-tax
income.
Item 2.B. Other Developments.
On October 25, 1996, the Company filed an application with the FERC to
construct and operate 37 miles of offshore and onshore pipeline looping at a
cost of $51.2 million. The project is to be located between Eugene Island Block
63 and Patterson, Louisiana, providing ANR Pipeline with the capability to
access a significant portion of gas being produced from new deep-water regions
in the Gulf of Mexico. The proposed facilities would add up to a total of 461
Mmcf per day to the offshore Louisiana production the Company currently delivers
and could be in service by August 1998, subject to receipt of necessary federal
regulatory approvals.
- 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.
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
September 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: November 13, 1996 By: WILLIAM L. JOHNSON
------------------------------
William L. Johnson
Vice President
and Controller
(As Authorized Officer and
Chief Accounting Officer)
- 12 -
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------------------------------------------------------------------------------
27 Financial Data Schedule
- 13 -
<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,
1996 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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 410
<ALLOWANCES> 0
<INVENTORY> 34
<CURRENT-ASSETS> 473
<PP&E> 3,516
<DEPRECIATION> 2,306
<TOTAL-ASSETS> 1,946
<CURRENT-LIABILITIES> 246
<BONDS> 498
0
0
<COMMON> 0
<OTHER-SE> 855
<TOTAL-LIABILITY-AND-EQUITY> 1,946
<SALES> 28
<TOTAL-REVENUES> 549
<CGS> 51
<TOTAL-COSTS> 352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 153
<INCOME-TAX> 57
<INCOME-CONTINUING> 96
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
