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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 1-7320
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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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9-5/8% Debentures, due 2021
7-3/8% Debentures, due 2024 } New York Stock Exchange
7% Debentures, due 2025
Securities registered pursuant to Section 12(g) of the Act: None
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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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 12, 1997, 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.
Documents incorporated by reference: None
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<PAGE>
TABLE OF CONTENTS
Item No. Page
Glossary................................................... (ii)
PART I
1. Business..................................................... 1
Introduction............................................. 1
Natural Gas System....................................... 1
Operations........................................... 1
General.......................................... 1
Transportation Services.......................... 1
Gas Storage...................................... 2
Gas Sales and Gas Purchases...................... 2
Competition...................................... 2
Producing Area Deliverability........................ 3
Regulations Affecting Gas System..................... 3
General.......................................... 3
Rate Matters..................................... 4
Environmental........................................ 5
Other Developments................................... 6
2. Properties................................................... 6
3. Legal Proceedings............................................ 6
4. Submission of Matters to a Vote of Security Holders.......... 6
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 7
6. Selected Financial Data...................................... 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7
8. Financial Statements and Supplementary Data.................. 7
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 7
PART III
10. Directors and Executive Officers of the Registrant........... 8
11. Executive Compensation....................................... 10
12. Security Ownership of Certain Beneficial Owners and
Management................................................... 18
13. Certain Relationships and Related Transactions............... 21
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 22
(i)
<PAGE>
GLOSSARY
"ANR" means American Natural Resources Company
"ANR Pipeline" or the "Company" means ANR Pipeline Company
"ANR Storage" means ANR Storage Company
"Bcf" means billion cubic feet
"Coastal" means The Coastal Corporation
"Coastal Natural Gas" means Coastal Natural Gas Company
"Colorado" means Colorado Interstate Gas Company
"Empire" means Empire State Pipeline
"EPA" means Environmental Protection Agency
"FAS" means Statement of Financial Accounting Standards
"FAS No. 71" means Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation"
"FASB" means Financial Accounting Standards Board
"FERC" means Federal Energy Regulatory Commission
"HIOS" means High Island Offshore System
"MMcf" means million cubic feet
"NGA" means Natural Gas Act of 1938, as amended
"Order 636" means FERC Order No. 636 which required significant changes
in services provided by interstate natural gas pipelines, including
the unbundling of services.
"UTOS" means U-T Offshore System
"working gas" means that volume of gas available for withdrawal and use by
the Company's customers
- --------
NOTE: Unless otherwise noted, all natural gas volumes presented in this
Annual Report are stated at a pressure base of 14.73 pounds per square
inch absolute and 60 degrees Fahrenheit.
(ii)
<PAGE>
PART I
Item 1. Business.
INTRODUCTION
ANR Pipeline is a Delaware corporation organized in 1945. All of ANR
Pipeline's outstanding common stock is owned by ANR. ANR is a direct,
wholly-owned subsidiary of Coastal Natural Gas, and an indirect subsidiary of
Coastal. ANR Pipeline owns and operates an interstate natural gas pipeline
system. At December 31, 1996, the Company had 1,846 employees engaged in the
operation of ANR Pipeline and 144 employees engaged in the operation of HIOS,
UTOS and Empire.
NATURAL GAS SYSTEM
OPERATIONS
General
The Company is involved in the transportation, storage, gathering and
balancing of natural gas. ANR Pipeline provides these services for various
customers through its facilities located in Arkansas, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New
Jersey, Ohio, Oklahoma, Tennessee, Texas, Wisconsin, Wyoming and offshore in
federal waters. The Company operates two offshore gas pipeline systems in the
Gulf of Mexico which are owned by HIOS and UTOS, general partnerships composed
of ANR Pipeline subsidiaries and subsidiaries of other companies. The Company
also operates Empire, an intrastate pipeline extending from Niagara Falls to
Syracuse, New York, in which an affiliate of the Company has a 50% interest.
The Company's two interconnected, large-diameter multiple pipeline systems
transport gas to the Midwest and increasingly to the Northeast from (a) the
Hugoton Field and other fields in the Anadarko Basin in Texas and Oklahoma, (b)
the Louisiana onshore and Louisiana and Texas offshore areas and (c) gas
originating in other basins received through interconnections located throughout
its system.
The Company's principal pipeline facilities at December 31, 1996 consisted
of 10,600 miles of pipeline and 75 compressor stations with 1,030,069 installed
horsepower. At December 31, 1996, the design peak day delivery capacity of the
transmission system, considering supply sources, storage, markets and
transportation for others, was approximately 5.7 Bcf per day.
Transportation Services
The Company offers an array of "unbundled" transportation, storage and
balancing service options under Order 636. Additional information concerning
Order 636 is set forth in "Regulations Affecting Gas System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
ANR Pipeline transports gas to markets on its system and also transports
gas to other markets off its system under transportation and exchange
arrangements with other companies, including distributors, intrastate and
interstate pipelines, producers, brokers, marketers and end users.
Transportation service revenues amounted to $510 million for 1996 compared to
$572 million for 1995 and $555 million for 1994. During 1996, approximately 30%
of the Company's transportation service revenues were contributed by its three
largest customers: Wisconsin Gas Company, Wisconsin Electric Power Company Inc.
and Michigan Consolidated Gas Company. Wisconsin Gas Company serves the
Milwaukee metropolitan area and numerous other communities in Wisconsin.
Wisconsin Electric Power Company Inc. serves the cities of Racine, Kenosha,
Appleton and their surrounding areas in Wisconsin. Michigan Consolidated Gas
Company serves the city of Detroit and certain surrounding areas, the cities of
Grand Rapids and Muskegon, the
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communities of Ann Arbor and Ypsilanti and numerous other communities in
Michigan. In 1996, ANR Pipeline provided approximately 70% and 30% of the total
gas requirements of Wisconsin and Michigan, respectively.
ANR Pipeline's system deliveries for the years 1996, 1995 and 1994 were as
follows:
Total System Daily Average
Year Deliveries System Deliveries
(Bcf) (MMcf)
1996 1,517 4,145
1995 1,404 3,847
1994 1,371 3,756
Gas Storage
ANR Pipeline has approximately 209 Bcf of underground working gas storage
capacity, with a maximum day delivery capacity of 3 Bcf as late as the end of
February. Working gas storage capacity operated by ANR Pipeline of 133 Bcf is
available from seven owned and eight leased underground storage facilities in
Michigan. In addition, the Company has the contracted rights for 76 Bcf of
working gas storage capacity of which 46 Bcf is provided by Blue Lake Gas
Storage Company and 30 Bcf is provided by ANR Storage. Excluded from the 209 Bcf
is 62.1 Bcf of working gas storage capacity which the Company has reclassified
to recoverable base gas, subject to approval by the FERC as part of the
Company's general rate proceeding discussed below. Gas storage revenues amounted
to $131 million for both 1996 and 1995 as compared to $150 million for 1994.
Gas Sales and Gas Purchases
With the Company's implementation of Order 636 effective November 1, 1993,
ANR Pipeline is no longer engaged in the sale for resale of natural gas.
However, the Company auctions gas on the open market to handle a residual
quantity of gas purchased under certain remaining gas purchase contracts pending
expiration of such contracts. The Company's Order 636 restructured tariff
provides mechanisms for recovering from its transportation customers the pricing
differential between costs incurred to purchase gas under these contracts and
the amounts recovered through the auctioning of such gas on the open market. Gas
sales revenues realized by ANR Pipeline from the auctioning of such gas amounted
to $39 million during 1996, compared to $46 million in 1995 and $91 million in
1994. The remainder of gas sales revenues for 1995 and 1994 was primarily
attributable to the recovery of purchased gas adjustment costs incurred prior to
the implementation of Order 636.
Competition
Natural gas competes with other forms of energy available to customers,
primarily on the basis of price paid by end users. These competitive forms of
energy include electricity, coal, propane and fuel oils. Changes in the
availability or price of natural gas or other forms of energy, as well as
changes in business conditions, conservation, legislation or governmental
regulations, capability to convert to alternate fuels, changes in rate
structure, taxes and other factors may affect the demand for natural gas in the
areas served by ANR Pipeline.
ANR Pipeline competes with interstate and intrastate pipeline companies in
the transportation and storage of gas and with independent producers and
gathering companies in the gathering of gas. On November 1, 1993, the Company
implemented Order 636 on its system. The implementation of Order 636 resulted in
capacity release, secondary delivery point options and segmentation; thus
allowing the Company's firm transportation customers to compete with the Company
for transportation services. This is particularly true in the Midwest region in
which the Company primarily operates. Additional information on the impacts of
Order 636 is set forth in "Regulations Affecting Gas System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
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ANR Pipeline's transportation, storage and balancing services are
influenced by its customers' access to alternative service providers and the
price of such services. The Company competes directly with Panhandle Eastern
Pipe Line Company, Trunkline Gas Company, Northern Natural Gas Company, Natural
Gas Pipeline Company of America, Michigan Consolidated Gas Company and CMS
Energy Company in its historical market areas of Wisconsin and Michigan for its
transportation, storage and balancing business. ANR Pipeline also faces
competition in the Northeast markets from Tennessee Gas Pipeline Company, Texas
Eastern Transmission Corporation, CNG Transmission Corporation, Columbia Gas
Transmission Corporation, Iroquois Gas Transmission System, L.P.,
Transcontinental Gas Pipe Line Corporation and National Fuel Gas Supply
Corporation in serving electric generation plants and local distribution
companies. Increasingly, ANR Pipeline also competes with independent producers
and other pipeline companies seeking to construct interstate transmission
facilities and with a number of marketing companies which aggregate capacity
released by firm shippers for the purpose of managing gas requirements for end
users.
PRODUCING AREA DELIVERABILITY
Shippers on ANR Pipeline have direct access to the two most prolific gas
producing areas in the United States, the Gulf Coast and the Midcontinent.
Statistics published by the Energy Information Agency, Office of Oil and Gas, U.
S. Department of Energy, indicate that approximately 80% of all natural gas in
the lower 48 states is produced from these two areas. Interconnecting pipelines
provide shippers with access to all other major gas producing areas in the
United States and Canada.
Gas deliverability available to shippers on ANR Pipeline's system from the
Midcontinent and Gulf Coast producing areas through direct connections and
interconnecting pipelines and gatherers is approximately 4,700 MMcf per day. Of
the 4,700 MMcf per day, 200 MMcf per day is attributable to sources connected to
facilities in the Southwest gathering area, which were sold to GPM Gas
Corporation ("GPM") in December 1996. Another 390 MMcf per day of deliverability
associated with facilities in the Southwest gathering area was spun down to ANR
Field Services Company (a wholly owned subsidiary of ANR Pipeline), also in
December 1996. All deliverability associated with mainline contiguous Southwest
gathering facilities sold in 1996 remains accessible to ANR Pipeline through
interconnections with GPM. An additional 335 MMcf per day of deliverability is
accessible to shippers on Company-owned, or partially-owned, pipeline segments
not directly connected to an ANR Pipeline mainline.
The Company remains active in locating and connecting new sources of
natural gas to facilitate transportation arrangements made by third-party
shippers. During 1996, field development, newly connected gas wells, gas
production facilities and pipeline interconnections contributed over 1,380 MMcf
per day to total deliverability accessible to shippers on the Company's pipeline
system.
REGULATIONS AFFECTING GAS SYSTEM
General
Under the NGA, the FERC has jurisdiction over ANR Pipeline as to
transportation, storage, sales, gathering and balancing of gas, rates and
charges, construction of new facilities, extension or abandonment of service and
facilities, accounts and records, depreciation and amortization policies and
certain other matters. ANR Pipeline holds certificates of public convenience and
necessity issued by the FERC covering its jurisdictional facilities, activities
and services.
ANR Pipeline is also subject to regulation with respect to safety
requirements in the design, construction, operation and maintenance of its
interstate gas transmission and storage facilities by the Department of
Transportation. Operations on United States government land are regulated by the
Department of the Interior.
On January 31, 1996, the FERC issued a "Statement of Policy and Request for
Comments" 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 which provides
for rates and charges that exceed the pipeline's posted maximum tariff
3
<PAGE>
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"). 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 time the
pipeline negotiates a rate for service which exceeds the recourse rate. The FERC
is also considering comments on whether this "negotiated 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"
requesting comments on various aspects of secondary market transactions on
interstate natural gas pipelines, including the comparability of pipeline
capacity with released capacity.
Rate Matters
All of the Company's service options are subject to rate regulation by the
FERC. Under the NGA, ANR Pipeline must file with the FERC to establish or adjust
its service rates. The FERC may also initiate proceedings to determine whether
the Company's rates are "just and reasonable."
From November 1, 1992 to 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. In April 1994, the
Company filed with the FERC a refund report showing over-collections and
proposing refunds totaling $45.1 million. Certain customers disputed the level
of those refunds. The FERC approved the Company's refund allocation methodology
and the Company, in March 1995, paid undisputed refunds of $45.1 million,
together with applicable interest, subject to further investigation of
customers' claims. The FERC's approval of the Company's refund allocation
methodology was upheld by the United States Court of Appeals for the D.C.
Circuit in April 1996. Disputed issues related to the refunds are the subject of
further proceedings before the FERC.
In July 1996, the United States Court of Appeals for the D.C. Circuit
upheld the basic structure of the FERC's Order 636 (issued in April 1992) and
remanded to the FERC, for further consideration, certain limited aspects of the
Order, such as the basis for its determination of the recovery by the pipelines
of the full level of their prudently incurred transition costs. Several persons,
including ANR Pipeline, have appealed the rate and other aspects of the FERC's
orders approving the Company's Order 636 restructuring filings and those appeals
are the subject of further proceedings before the Court.
The Company filed a general rate increase on November 1, 1993. Issues
related to the general rate increase are the subject of continuing FERC and
judicial proceedings. Under a March 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 and a $182.8 million increase over
the cost of service underlying the Company's approved rates for its Order 636
restructured services. In September 1994, the FERC accepted the Company's filing
to place the new rates into effect May 1, 1994, subject to further
modifications. The Company submitted revised rates in compliance with this order
in October 1994, which rates are currently in effect, subject to refund. In
January 1997, an Initial Decision was issued on the issues set for hearing by
the March 1994 Order. That Initial Decision, which accepted some but not all of
the Company's rate change proposals, does not take effect until reviewed by the
FERC. ANR Pipeline will file exceptions as to some of the negative findings in
the Initial Decision.
The FERC has also issued a series of orders 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 rather than 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 accelerating its amortization of
transition costs for regulatory accounting purposes. In light of the FERC's
policy, the Company filed with the FERC to increase its discount recovery
adjustment in its pending rate proceeding. The Company has sought judicial
review of these orders before the United States Court of Appeals for the D.C.
Circuit.
4
<PAGE>
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"). In February 1994, ANR Pipeline, Dakota and the Department
of Energy executed a 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. In August 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. In December 1996, the
FERC issued an Opinion and Order Reversing Initial Decision in which it found
that the pipelines, including the Company, were prudent in entering into the
Settlement Agreement. No appeals were taken of the FERC's decision and it has
become final.
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, results of operations or cash flows. 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.
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 spent approximately $2.5
million in 1996 on environmental capital projects and anticipates annual capital
expenditures of approximately $4 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 $30 million and the
Company estimates its pro-rata exposure, to be paid over a period of several
years, is approximately $.2 million.
There are additional areas of environmental investigation and remediation
responsibilities to which the Company may be subject. The states also have
regulatory programs that mandate environmental investigation and cleanup. In
Michigan, where the Company has extensive operations, the recently-revised
Environmental Response Act requires owners or operators of property containing
contamination above regulatory thresholds to diligently pursue remedial actions
and exercise due care so that the property does not pose a threat to human
health or the environment. The Company has designated internal staff and has
retained environmental consultants to assess sites for which the Company may
have due diligence or due care obligations.
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.
5
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OTHER DEVELOPMENTS
In February 1997, ANR Pipeline and Transcontinental Gas Pipe Line Corp.
("Transco"), a subsidiary of The Williams Companies, signed a letter of intent
to form a joint venture known as the Independence Pipeline Co., which plans to
build and operate a new interstate natural gas pipeline (the "Independence
Pipeline") to serve markets for natural gas in the Eastern United States. The
proposed Independence Pipeline would consist of approximately 370 miles of
36-inch diameter pipe, with an initial capacity of up to 900 MMcf of gas per
day. It would extend from the Company's existing compressor station at Defiance,
Ohio, to Transco's facilities at Leidy, Pennsylvania. Along the proposed route,
interconnections with numerous other pipelines serving the Mid-Atlantic and
Northeast regions are anticipated. Affiliates of ANR Pipeline and Transco would
each own 50 percent of the new project, with an estimated total project
investment of $630 million. The Independence Pipeline is planned to be in
service November 1999, subject to receipt of satisfactory regulatory approvals.
On January 6, 1997, the Company announced an open season to gauge shipper
interest in a proposed extension of its interstate natural gas pipeline system
between Katy, Texas, and Eunice, Louisiana. This 224-mile project would make
additional supplies of Texas natural gas available for transport to multiple
markets via ANR Pipeline's southeast mainline, as well as at other
interconnections.
Funding for certain pending and proposed natural gas pipeline projects is
anticipated to be provided through non-recourse financings in which certain of
the projects' assets and contracts will be pledged as collateral. This type of
financing typically requires the participants to make equity investments
totaling approximately 20% to 30% of the cost of the project, with the remainder
financed on a long-term basis. Equity participation by other entities will also
be considered.
Item 2. Properties.
Information on properties of ANR Pipeline is in Item 1, "Business,"
included herein.
The real property owned by the Company in fee consists principally of sites
for compressor and metering stations and microwave and terminal facilities. With
respect to the seven owned storage fields, the Company holds title to gas
storage rights representing ownership of, or has long-term leases on, various
subsurface strata and surface rights and also holds certain additional gas
rights. Under the NGA, the Company may acquire by the exercise of the right of
eminent domain, through proceedings in United States District Courts or in state
courts, necessary rights-of-way to construct, operate and maintain pipelines and
necessary land or other property for compressor and other stations and equipment
necessary to the operation of pipelines.
Item 3. Legal Proceedings.
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. ANR Pipeline, together with the other pipeline defendants,
has filed a motion to dismiss.
In October 1996, the Company, along with certain of its affiliates, was
named as a defendant in a suit filed by several former and current African
American employees in the United States District Court, Southern District of
Texas. The suit alleges racially discriminatory employment policies and
practices and seeks damages in the amount of at least $100 million and punitive
damages of at least three times that amount. Plaintiffs' counsel are seeking to
have the suit certified as a class action. The Company and its affiliates
vigorously deny these allegations and have filed responsive pleadings.
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,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
6
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PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.
All common stock of ANR Pipeline is owned by ANR.
Item 6. Selected Financial Data.
The following selected financial data (in millions of dollars) for the
periods indicated is derived from the Consolidated Financial Statements included
herein and Item 6 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, as adjusted for minor reclassifications.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Consolidated Financial Statements included herein
contain information relating to this data.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Storage and transportation....................... $ 641.7 $ 702.8 $ 706.3 $ 634.7 $ 534.0
Gas sales........................................ 39.1 59.2 106.1 603.5 634.5
Other revenues................................... 81.7 58.7 29.7 33.6 23.3
--------- --------- --------- --------- ---------
Total...................................... $ 762.5 $ 820.7 $ 842.1 $ 1,271.8 $ 1,191.8
========= ========= ========= ========= =========
Earnings Before Extraordinary Item.................. $ 140.3 $ 151.3 $ 152.1 $ 157.0 $ 151.0
========= ========= ========= ========= =========
*Net (Loss) Earnings................................ $( 23.6) $ 151.3 $ 152.1 $ 157.0 $ 151.0
======== ========= ========= ========= =========
Dividends Declared on Common Stock.................. $ 300.0 $ 30.1 $ 331.0 $ 33.7 $ 28.6
========= ========= ========= ========= =========
*Total Assets....................................... $ 1,675.9 $ 2,049.4 $ 1,858.6 $ 1,920.3 $ 1,968.0
========= ========= ========= ========= =========
Capital Structure:
Common stock and other stockholder's
equity........................................ $ 586.1 $ 909.7 $ 788.5 $ 969.3 $ 850.1
Mandatory redemption cumulative
preferred stock............................... - - - 26.0 36.1
Long-term debt and capital lease
obligations................................... 506.4 509.3 437.0 374.0 435.1
--------- --------- --------- --------- ---------
Total...................................... $ 1,092.5 $ 1,419.0 $ 1,225.5 $ 1,369.3 $ 1,321.3
========= ========= ========= ========= =========
</TABLE>
Since all of the outstanding common stock of ANR Pipeline is owned by ANR,
earnings and cash dividends per common share have no significance and are not
presented.
*Effective November 1, 1996, the Company discontinued the application of
regulatory accounting principles under FAS No. 71. As a result, the Company
recorded an extraordinary charge to income of $163.9 million. Additional
information is set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 5 of Notes to Consolidated
Financial Statements included herein.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented on pages F-1 through F-5 herein.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of ANR Pipeline as of March 12, 1997,
were as follows:
Name (Age), Year First Elected Positions and Offices with the
Director and/or Officer Registrant
- --------------------------------------- ----------------------------------
Jeffrey A. Connelly (50), 1988 and 1983 President, Chief Executive Officer
and Director
David A. Arledge (52), 1994 Director
Harold Burrow (82), 1994 Director
Richard A. Lietz (51), 1994 and 1984 Executive Vice President, Chief
Operating Officer and Director
Jon R. Whitney (52), 1996 Director
Coby C. Hesse (49), 1994 Executive Vice President
Stanley A. Babiuk (45), 1989 Senior Vice President
Daniel F. Collins (55), 1986 Senior Vice President
Donald H. Gullquist (53), 1994 Senior Vice President
Wilbur A. Hitchcock (48), 1994 Senior Vice President
John P. Lucido (49), 1988 Senior Vice President
Rebecca H. Noecker (45), 1989 Senior Vice President and General
Counsel
Austin M. O'Toole (61), 1985 Senior Vice President and Assistant
Secretary
Scott P. Anger (52), 1990 Vice President
Michael J. Armiak (49), 1996 Vice President
Daniel M. Ives (49), 1995 Vice President
T. E. Jackson, Jr. (57), 1994 Vice President
William L. Johnson (39), 1991 Vice President and Controller
Richard H. Leehr (47), 1991 Vice President
Michael B. Lobin (47), 1991 Vice President
Ronald D. Matthews (49), 1994 Vice President and Treasurer
Lynn M. Nichols (50), 1995 Vice President
Dennis J. Paruch (51), 1984 Vice President
Ann E. Raden (40), 1996 Vice President
Elias A. Shaptini (66), 1981 Vice President
Michael J. Whims (50), 1996 Vice President
Michael J. Williams (50), 1996 Vice President
Frederick H. Clark (68), 1984 Secretary
The above named persons bear no family relationship to each other, except
that Wilbur A. Hitchcock and Rebecca H. Noecker are first cousins. Their
respective terms of office expire coincident with ANR Pipeline's Annual Meeting
of the Sole Stockholder and Annual Meeting of the Board of Directors to be held
in May 1997. Each of the directors and officers named above have been directors
or officers of ANR Pipeline, Colorado and/or Coastal for five years or more
except for the following:
Mr. Armiak was elected Vice President of the Company in January 1996. Prior
thereto, he has served in various capacities with the Company since 1971.
Mr. Gullquist was elected Senior Vice President of the Company in September
1994. From 1988 to 1989 he served as Vice President, Finance at Enron
Corporation; from 1989 to 1990 he served as President of Enron Finance
Corporation.
8
<PAGE>
Mr. Hitchcock was elected a Senior Vice President of ANR Pipeline in March
1994. He previously served as a Vice President of Northern Indiana Public
Service Company, where he had been employed since 1990. From 1984 to 1990, he
was employed by Natural Gas Pipeline Company in various positions.
Mr. Ives was elected Vice President of the Company in September 1995. Prior
to joining the Company, he was General Manager - Rates for Algonquin Gas
Transmission Company, a unit of PanEnergy Corp since 1992 and prior thereto, he
was Director of Rates and Regulatory Affairs for Washington Gas Light Company
since 1976.
Ms. Nichols was elected Vice President in January 1995. Most recently she
served as Director - Application and Maintenance for Whirlpool Corporation,
where she worked for more than four years. Prior thereto, she served in various
capacities for the Pillsbury Corporation for 21 years.
Ms. Raden was elected Vice President, Human Resources and Community
Affairs, of the Company in April 1996. Prior to joining the Company, she was
employed by First of America Bank Corporation, Kalamazoo, Michigan, for 17 years
where she held a series of human resources management positions, the most recent
of which was the position of Senior Vice President and Manager of Human
Resources Administration.
Mr. Whims was elected Vice President of the Company in January 1996. He has
served in various capacities with ANR Storage since 1979.
Mr. Williams was elected Vice President of the Company in January 1996. He
has served in various capacities with the Company since 1969.
9
<PAGE>
Item 11. Executive Compensation.
ANR Pipeline is an indirect, wholly-owned subsidiary of Coastal.
Information concerning the cash compensation and certain other compensation of
the directors and officers of Coastal is contained in this section.
The following table sets forth information for the fiscal years ended
December 31, 1996, 1995 and 1994 as to cash compensation paid by Coastal and its
subsidiaries, as well as certain other compensation paid or accrued for those
years, to Coastal's Chief Executive Officer ("CEO") and its four other most
highly compensated executive officers (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------
Annual Compensation<F1> Awards Payouts
------------------------------------- ------------ ------------
Securities All Other
Underlying LTIP Compen-
Name and Options/ Payouts sation
Principal Position Year Salary ($) Bonus ($)<F2> SARs (#)<F3> ($)<F4> $<F5>
- ------------------ ---- ---------- ------------ ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
O. S. Wyatt, Jr., 1996 849,093 300,000 -0- 67,928
Chairman of the Board 1995 849,093 300,000 -0- 67,928
1994 849,093 200,000 -0- 67,928
David A. Arledge, 1996 707,194 300,000 150,000 56,576
President, CEO 1995 622,867 300,000 50,000 85,875 49,829
and Director 1994 553,873 150,000 -0- 44,310
James F. Cordes,<F6> 1996 592,223 -0- -0- 12,000
Executive V.P. 1995 592,223 135,000 15,000 42,937 47,378
and Director 1994 592,223 130,000 -0- 47,378
James A. King, 1996 343,823 80,000 10,000 13,572
Executive V.P. 1995 343,823 80,000 10,000 10,141
1994 343,823 75,000 -0- 6,877
Jerry D. Bullock, 1996 249,147 160,000 10,000 6,383
Senior V.P. 1995 249,147 75,000 10,000 6,766
1994 249,147 65,000 -0- 3,383
<FN>
- ------------------------
<F1> Does not include the value of perquisites and other personal benefits
because the aggregate amount of such compensation, if any, does not exceed
the lesser of $50,000 or 10 percent of annual salary and bonus for any
named individual.
<F2> Bonuses are based on the following factors: the individual's position; the
individual's responsibility; and the individual's ability to impact
Coastal's financial success.
<F3> The options do not carry any stock appreciation rights.
<F4> During 1995, Messrs. Arledge and Cordes received one-time cash payments in
the amounts indicated in connection with awards made in 1987 under
Coastal's Performance Unit Plan. No further awards have been made under
this Plan.
10
<PAGE>
<F5> All Other Compensation for 1996 consists of: (i) Coastal contributions to
the Coastal Thrift Plan (O. S. Wyatt, Jr. $12,000; David A. Arledge
$12,000; James F. Cordes $12,000; James A. King $6,000; and Jerry D.
Bullock $6,000); and (ii) certain payments in lieu of Thrift Plan
contributions (O. S. Wyatt, Jr. $55,927; David A. Arledge $44,576; James F.
Cordes $-0-; James A. King $7,572; and Jerry D. Bullock $383); these
payments are made to all employees of Coastal and its subsidiaries who
participate in the Thrift Plan who must discontinue their Thrift Plan
participation due to federal statutory limits.
<F6> Mr. Cordes retired as an officer of Coastal effective March 7, 1997.
</FN>
</TABLE>
Stock Options
The following table sets forth information with respect to stock options
granted on March 1, 1996 for the fiscal year ended December 31, 1996 to the
Named Executive Officers.
Option/SAR Grants in Last Fiscal Year (1996)
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise Grant Date
Options/SARs Employees in Price Expiration Present
Name Granted<F1> Fiscal Year<F2> ($/Sh) Date Value ($)<F3>
---- ----------------- --------------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
O. S. Wyatt, Jr. -0- -0- -0- -0- -0-
David A. Arledge 150,000 22.6 36.56 2/28/06 1,848,108
James F. Cordes -0- -0- -0- -0- -0-
James A. King 10,000 1.5 36.56 2/28/06 123,207
Jerry D. Bullock 10,000 1.5 36.56 2/28/06 123,207
<FN>
- ---------------------
<F1> Options expire ten years from the date of issuance and are granted at the
fair market value of the Common Stock of Coastal on the date of grant.
Options vest cumulatively at a rate of 20% of the option shares on each
anniversary date of the date of grant beginning with the second
anniversary.
<F2> The options do not carry any stock appreciation rights.
<F3> Based on the Black-Scholes option pricing model expressed as a ratio .337 x
exercise price x number of shares. The actual value, if any, an executive
may realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised, so that there is no assurance
the value realized by an executive will be at or near the value estimated
by the Black-Scholes model. The estimated values under that model are based
on assumptions that include (i) a stock price volatility of .1925,
calculated using monthly stock prices for the three years prior to the
grant date, (ii) an interest rate of 6.25%, (iii) a dividend yield of 1.40%
and (iv) an expected option holding period of eight years. No adjustments
were made for the non-transferability of the options or to reflect any risk
of forfeiture prior to vesting. The Securities and Exchange Commission
("S.E.C.") requires disclosure of the potential realizable value or present
value of each grant. Coastal's use of the Black-Scholes model to indicate
the present value of each grant is not an endorsement of this valuation.
</FN>
</TABLE>
11
<PAGE>
Option/SAR Exercises and Holdings
The following table sets forth information with respect to the Named
Executive Officers, concerning the exercise of options during the last fiscal
year and unexercised options and SARs held as of the fiscal year ("FY") ended
December 31, 1996.
Aggregated Option/SAR Exercises In Last Fiscal Year
And FY-End Option/SAR Values (1996)
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)<F1>
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- -------------------- ------------------- -------------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
O. S. Wyatt, Jr. -0- -0- -0- / -0- -0- / -0-
David A. Arledge 55,000 1,118,737 187,373 / 228,000 3,943,307 / 3,595,560
James F. Cordes 30,000 234,914 -0- / 35,000 -0- / 754,500
James A. King -0- -0- 26,000 / 24,000 599,800 / 432,200
Jerry D. Bullock 6,000 69,920 2,000 / 27,000 41,760 / 491,860
<FN>
- ------------------
<F1> $-based on the market price of $49.44 at December 31, 1996.
</FN>
</TABLE>
COMPENSATION AND EXECUTIVE DEVELOPMENT COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The following report has been provided by The Coastal Corporation's
Compensation and Executive Development Committee (the "Committee") of the Board
of Directors in accordance with current S.E.C. proxy statement disclosure
requirements. The members of the Committee include John M. Bissell (Chairman),
Roy D. Chapin, Jr., and Jerome S. Katzin.
This material states Coastal's current overall compensation philosophy and
program objectives. Detailed descriptions of Coastal's compensation programs are
provided as well as the information on Coastal's 1996 pay levels for the CEO.
Overall Objectives of the Executive Compensation Program
Coastal's compensation philosophy and program objectives are directed by
two primary guiding principles. First, the program is intended to provide fully
competitive levels of compensation - at expected levels of performance - in
order to attract, motivate and retain talented executives. Second, the program
is intended to create an alignment of interests between Coastal's executives and
stockholders such that a significant portion of each executive's compensation is
directly linked to maximizing stockholder value.
In support of this philosophy, the executive compensation program is
designed to reward performance that is directly relevant to Coastal's short-term
and long-term success. As such, Coastal attempts to provide both short-term and
long-term incentive pay that varies based on corporate and individual
performance.
12
<PAGE>
To accomplish these objectives, the Committee has structured the executive
compensation program with three primary underlying components: base salary,
annual incentives, and long-term incentives (i.e., stock options). The following
sections describe Coastal's plans by element of compensation and discuss how
each component relates to Coastal's overall compensation philosophy.
In reviewing this information, reference is often made to the use of
competitive market data as criteria for establishing targeted compensation
levels. Coastal targets the market 50th percentile for its total compensation
program and actual total compensation rates in 1996 were at or below the
targeted level. (However, Coastal's competitive pay posture varies by pay
element, as described below.) Several market data sources are used by Coastal,
including energy industry norms for the publicly traded peer companies included
in Coastal's shareholder return performance graph, as reflected in these
companies' proxy statements. In addition, we utilize published survey data and
data obtained from independent consultants that are for general industry
companies similar in size (i.e., revenues) to Coastal. The published surveys
include data on over 50 companies of comparable size to Coastal, as measured by
revenues. Greater emphasis is placed on the published data and data obtained
from consultants than on the data for proxy peers, since the published data and
consulting data are reflective of company size.
Base Salary Program
Coastal's base salary program is based on a philosophy of providing base
pay levels that fall between the market 50th and 75th percentiles. Coastal
periodically reviews its executive pay levels to assure consistency with the
external market. Generally, Coastal's actual base salary levels for 1996 for
executives as a group were consistent with the targeted percentiles. We believe
it is crucial to provide strongly competitive salaries over time in order to
attract and retain executives who are highly talented.
Annual salary adjustments for Coastal are based on several factors: general
levels of market salary increases, individual performance, competitive base
salary levels, and Coastal's overall financial results. Coastal reviews
performance qualitatively considering total shareholder returns, the level of
earnings, return on equity, return on total capital and individual business unit
performance. These criteria are assessed qualitatively and are not weighted. All
base salary increases are based on a philosophy of pay-for-performance and
perceptions of an individual's long-term value to Coastal. As a result,
employees with higher levels of performance sustained over time will be paid
correspondingly higher salaries.
The Annual Bonus Plan
Coastal's Annual Bonus Plan is intended to (1) reward key employees based
on company/business unit and individual performance; (2) motivate key employees;
and (3) provide competitive cash compensation opportunities to plan
participants. Under the plan, target award opportunities vary by individual
position and are expressed as a percent of base salary. The individual target
award opportunities, which are slightly below market median levels, are then
aggregated into a total target pool which is adjusted as described below. The
amount a particular executive may earn is directly dependent on the individual's
position, responsibility, and ability to impact our financial success.
The actual bonus pool is established each year by modifying the target pool
based on Coastal's overall performance against measures established by the
Committee. In fiscal year 1996, the key performance measure considered was
earnings before interest and taxes ("EBIT") against plan. This measure was
weighted 50% of the total bonus program. In 1996 Coastal's EBIT performance was
above threshold standards (minimum performance level for bonus payment) but
below a very aggressive plan, resulting in the EBIT portion of the bonus paid
being below target. The remaining 50% of the annual bonus opportunity in 1996 is
a discretionary annual bonus pool. As a result, no formula performance measures
were used in establishing the size of awards under this portion of the plan.
However, in establishing the size of the discretionary bonus pool, the Committee
considered Coastal's Return on Equity relative to industry peers (using the same
peers included in the shareholder return graph), Return on Total Capital
compared to industry peers, the EBIT performance of each business unit, progress
made toward improving Coastal's operational and financial performance, and the
need to reward unique individual contributions. These measures were not formally
weighted by the Committee. The size of the discretionary bonus pool element was
established above threshold but below target based on the
13
<PAGE>
qualitative performance assessment described above. As a result, actual bonus
payments for 1996 were below target and median market levels.
Individual awards from the established bonus pool are recommended by senior
management, with advice and consent from the Committee. Individual awards from
the pool are based on business unit and individual employee performance, future
potential, and competitive considerations. All individual performance
assessments are conducted in a non-formula fashion without specific goal
weightings. The total bonus awards made may not exceed the amount of funds in
the bonus pool.
Long-Term Incentive Plan
Coastal's Long-Term Incentive Plan ("LTIP") is designed to focus executive
efforts on the long-term goals of Coastal and to maximize total return to our
shareholders. While Coastal's LTIP allows the Committee to use a variety of
long-term incentive devices, the Committee has relied solely on stock option
awards to provide long-term incentive opportunities in recent years.
Stock options align the interests of employees and shareholders by
providing value to the executive through stock price appreciation only. All
stock options have a ten-year term before expiration and are fully exercisable
within 6 years of the grant date.
Stock options were granted to certain of the Named Executive Officers in
1996 and it is anticipated that stock option awards will be made periodically at
the discretion of the Committee in the future. As in past years, the number of
shares actually granted to a particular participant is also based on Coastal's
financial success, its future business plans, and the individual's position and
level of responsibility within Coastal. All of these factors are assessed
subjectively and are not weighted. Stock options granted by Coastal in 1996 were
overall below market median levels.
1996 Chief Executive Officer Pay
As previously described, the Committee considers several factors in
developing an executive's compensation package. For the CEO, these include
competitive market practices (consistent with the philosophy described for other
executives), experience, achievement of strategic goals, and the financial
success of Coastal (considering the factors described under the annual bonus
plan above).
David A. Arledge
Mr. Arledge's annual salary was increased to $725,000 in 1996. This action
moved his salary closer to, but still below, the market median levels of salary
for the CEO position in companies of comparable size.
Mr. Arledge's bonus for 1996 was $300,000, payable in 1997. This award was
below targeted levels (and below market median levels) since Coastal's aggregate
performance on the measures described in the annual bonus section of this report
were below the aggressive Coastal targets.
The Committee granted stock options for 150,000 shares to Mr. Arledge in
1996 in recognition of his performance and as an incentive to continue his
efforts to increase shareholder value. These awards are tied to performance in
that the executive only realizes income from stock options if the stock price
rises. The grant is below market median levels for the executive positions held
by him.
$1 Million Pay Deductibility Cap
Under Section 162(m) of the Internal Revenue Code, public companies are
precluded from receiving a tax deduction on compensation paid to executive
officers in excess of $1 million. To address the $1 million pay deductibility
cap issue, Coastal's 1996 LTIP is structured so that stock option awards (which
are intended to be the primary long-term incentive vehicle for the present time)
qualify for an exemption from the $1 million pay deductibility limit.
14
<PAGE>
Also, at the present time, the Chairman of the Board of Directors and the
CEO are the only executives whose base salary plus target bonus exceeds $1
million. In order to preserve Coastal's tax deduction for base salary plus bonus
for these individuals, Coastal has established a nonqualified deferred
compensation program. Under this program, any annual incentive awards that bring
cash compensation to a level over $1 million may be deferred so that payments
occur after the individual is no longer a Named Executive Officer, thus
preserving the deductibility of the pay for Coastal.
Compensation and Executive Development Committee
John M. Bissell, Chairman
Roy D. Chapin, Jr.
Jerome S. Katzin
15
<PAGE>
Pension Plan
The following table shows for illustration purposes the estimated annual
benefits payable currently under the Pension Plan and Coastal's Replacement
Pension Plan described below upon retirement at age 65 based on the compensation
and years of credited service indicated.
Pension Plan Table
<TABLE>
<CAPTION>
Years of Credited Service
--------------------------------------------------------------------
5-Year Final
Average Pay 15 Years 20 Years 25 Years 30 Years 35 Years
----------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 125,000................. $ 33,920 $ 45,226 $ 56,533 $ 67,840 $ 67,044
150,000................. 41,420 55,226 69,033 82,840 82,044
200,000................. 41,420 55,226 69,033 82,840 82,044
250,000................. 41,420 55,226 69,033 82,840 82,044
300,000................. 41,420 55,226 69,033 82,840 82,044
350,000................. 41,420 55,226 69,033 82,840 82,044
400,000................. 41,420 55,226 69,033 82,840 82,044
500,000................. 41,420 55,226 69,033 82,840 82,044
600,000................. 41,420 55,226 69,033 82,840 82,044
1,000,000................. 41,420 55,226 69,033 82,840 82,044
1,200,000................. 41,420 55,226 69,033 82,840 82,044
<FN>
(A) Compensation covered under the Pension Plan for employees of Coastal and
the Coastal Replacement Pension Plan generally includes only base salary
and is limited to $150,000 for 1996.
(B) Federal legislation has reduced the benefit which may be earned due to
future service; however, benefits previously earned may not be reduced. At
December 31, 1996 each of the individuals named in the Summary Compensation
Table had covered salary for future benefit accrual of $150,000 and the
following years of credited service and pension payable at age 65 (or
current age, if over 65): Mr. Wyatt, 41 years, $460,768; Mr. Arledge, 16
years, $59,289; Mr. Cordes, 19 years, $81,059; Mr. King, 4 years $14,798
(not vested); and Mr. Bullock, 4 years, $14,132 (not vested). Mr. Wyatt
reached age 70 1/2 in January, 1995 and because of IRS requirements
concerning Coastal's qualified pension plan, he began receiving pension
payments in April 1996. These payments amounted to $282,775 in 1996.
(C) The normal form of retirement income is a straight life annuity. Benefits
payable under the Pension Plan are subject to offset by 1.5% of applicable
monthly social security benefits multiplied by the number of years of
credited service (up to 331/3 years).
</FN>
</TABLE>
The Employee Retirement Income Security Act of 1974, as amended by
subsequent legislation, limits the retirement benefits payable under the
tax-qualified Pension Plan. Where this occurs, Coastal will provide to certain
executives, including persons named in the Summary Compensation Table,
additional nonqualified retirement benefits under a Coastal Replacement Pension
Plan. These benefits, plus payments under the Pension Plan, will not exceed the
maximum amount which Coastal would have been required to provide under the
Pension Plan before application of the legislative limitations, and are
reflected in the above table and footnote (B).
16
<PAGE>
PERFORMANCE GRAPH - SHAREHOLDER RETURN ON COMMON STOCK
[GRAPH]
<TABLE>
<CAPTION>
Five-Year Cumulative Values
$100 Invested 12/31/91
Dividends Reinvested
DOLLAR VALUE OF $100 INVESTMENT AT DECEMBER 31,
-----------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Coastal $ 100 $ 99 $ 118 $ 109 $ 157 $ 207
S&P 500 100 108 118 120 165 203
Index<F1><F2> 100 112 132 119 128 196
<FN>
<F1> The Index is based on Value Line's Diversified Natural Gas Group - the
Performance Graph reflects total shareholder return weighted to reflect the
market capitalization of the peer companies. The peer group is comprised
of: Burlington Res., Cabot, Columbia, Consolidated Nat. Gas, Eastern
Enterprises, Enron, Enserch, Equitable Res., KN Energy, Mitchell Energy,
National Fuel Gas, Noram Energy, Panhandle Eastern, Questar, Seagull
Energy, Sonat, Southwestern Energy, Valero and Williams Cos.
<F2> Coastal is excluded from the Index.
</FN>
</TABLE>
Transactions with Management and Others
In 1987, Coastal Mart, Inc. ("Coastal Mart"), a subsidiary of Coastal,
entered into a ten-year lease/purchase agreement with Pester Marketing Company
("Pester Marketing") for 220 gasoline service stations (subsequently reduced to
182 stations through disposition of assets) located in the midwestern region of
the United States. Jack Pester, a principal stockholder and Chief Executive
Officer of Pester Marketing, subsequently became an employee, officer and
director of Coastal Mart and was elected a Senior Vice President of Coastal. Mr.
Pester is no longer active in the management of Pester Marketing, and his stock
interest in that company has been placed in trust. In 1994, the lease
transaction was terminated pursuant to an agreement under which Coastal Mart
acquired ownership of and title to 175 of the gasoline service stations and
Pester Marketing retained the seven remaining stations.
During 1996, Coastal and/or its subsidiaries sold approximately 14,576,400
gallons of gasoline to Pester Marketing at prevailing market prices totaling
approximately $10,036,200.
17
<PAGE>
The following table sets forth ownership of units of limited partnership
interests in the Coastal 1987 Drilling Program, Ltd., by directors and all
directors and executive officers as a group.
Directors Units
O. S. Wyatt, Jr. .................................................. 750
Harold Burrow ..................................................... 100
David A. Arledge .................................................. -
John M. Bissell ................................................... -
George L. Brundrett, Jr. .......................................... -
Roy D. Chapin, Jr. ................................................ 20
James F. Cordes ................................................... -
Roy L. Gates ...................................................... -
Kenneth O. Johnson ................................................ -
Jerome S. Katzin .................................................. -
Thomas R. McDade................................................... -
L. D. Wooddy, Jr................................................... -
All directors and executive
officers as a group (31 persons,
including the above) ............................................. 890
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners.
The following is information, as of March 12, 1997, on each person known or
believed by ANR Pipeline to be the beneficial owner of 5% or more of any class
of its voting securities:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
- -------------- ------------------- ------------------- --------
<S> <C> <C> <C>
Common Stock, American Natural Resources Company 1,000 shares direct 100%
$100 par value per share One Woodward Avenue
Detroit, Michigan 48226
</TABLE>
(b) Security ownership of management.
ANR Pipeline is an indirect, wholly-owned subsidiary of Coastal.
Information concerning the security ownership of certain beneficial owners and
management of Coastal is contained in this section.
The total number of shares of stock of Coastal outstanding as of March 12,
1997 is 105,995,018 consisting of: 59,068 shares of $1.19 Cumulative Convertible
Preferred Stock, Series A (the "Series A Preferred Stock"), 72,398 shares of
$1.83 Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"), and 31,940 shares of $5.00 Cumulative Convertible Preferred Stock,
Series C (the "Series C Preferred Stock") (the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock are referred to herein
collectively as the "Preferred Stock"), 105,451,513 shares of Common Stock, and
380,099 shares of Class A Common Stock.
Each voting share of Common Stock or Preferred Stock entitles the holder to
one vote with respect to all matters to come before a shareholders' meeting,
while each share of Class A Common Stock entitles the holder to 100 votes.
However, 25% of Coastal's directors standing for election at each annual meeting
will be determined solely by holders of the Common Stock and voting Preferred
Stock voting as a class.
18
<PAGE>
The following table sets forth information, as of March 12, 1997, with
respect to each person known or believed by Coastal to be the beneficial owner,
who has or shares voting and/or investment power (other than as set forth
below), of more than five percent (5%) of any class of its voting securities.
<TABLE>
<CAPTION>
Name and Address Percent (%)
of Beneficial Owner Title of Class Number of Shares of Class <F1>
------------------- -------------- ---------------- ------------
<S> <C> <C> <C>
O. S. Wyatt, Jr. Class A Common Stock 154,577 <F2> 40.4
Chairman of the Board
of Coastal
Nine Greenway Plaza
Houston, Texas 77046-0995
Trustee/Custodian under the Common Stock 12,344,644 <F3> 11.7
Thrift Plan, ESOP and Class A Common Stock 64,429 <F3> 16.8
Pension Plan of Coastal
and its subsidiaries
Texas Commerce Bank
National Association
600 Travis, 10th Floor
Houston, Texas 77002
FMR Corp. Common Stock 7,411,815 7.0
82 Devonshire Street
Boston, Massachusetts 02109
Isabel H. Long Series A Preferred Stock 28,976 49.1
485 S. Parkview Ave.,
Columbus, Ohio 43209-1075
The DeZurik Family Series C Preferred Stock 31,940 <F4> 100.0
c/o David DeZurik
2460 S.E. 8th St.
Pompano Beach, Florida 33062
<FN>
- ----------
<F1> Class includes presently exercisable stock options held by directors and
executive officers.
<F2> Includes 7,354 shares of Class A Common Stock owned by the spouse and a son
of Mr. Wyatt, as to which shares beneficial ownership is disclaimed.
<F3> The Trustee/Custodian is the record owner of these shares; and also is the
record owner of 742 shares of the Series B Preferred Stock, each of which
is convertible into 3.6125 shares of Common Stock and 0.1 share of Class A
Common Stock. Voting instructions are requested from each participant in
the Thrift Plan and ESOP and from the trustees under a Pension Trust.
Absent timely voting instructions, the Trustee is permitted to vote Thrift
Plan and ESOP shares on any matter, but has no authority to vote Pension
Plan shares. Nor does the Trustee/Custodian have any authority to dispose
of shares except pursuant to instructions of the administrator of the
Thrift Plan and ESOP or pursuant to instructions from the trustees under
the Pension Trust.
<F4> Members of the DeZurik family acquired the Series C Preferred Stock in
connection with a 1972 Agreement of Merger involving the acquisition of
Colorado, a subsidiary of Coastal.
</FN>
</TABLE>
19
<PAGE>
The following table sets forth information, as of March 12, 1997, regarding
each of the current directors, including Class II directors standing for
election, and all directors and executive officers as a group. Each director has
furnished the information with respect to age, principal occupation and
ownership of shares of stock of Coastal. Messrs. Arledge, Brundrett, Wooddy and
Wyatt are Class II directors whose terms expire in 1997; Messrs. Cordes, Gates,
Johnson and McDade are Class III directors whose terms expire in 1998; and
Messrs. Bissell, Burrow, Chapin and Katzin are Class I directors whose terms
expire in 1999.
<TABLE>
<CAPTION>
Number of Shares
Name, (Age), Year Offices with Coastal Beneficially Percent (%)
First Became Director and/or Principal Occupation Title of Class Owned<F1> of Class*
--------------------- --------------------------- -------------- ---------------- -----------
<S> <C> <C>
O. S. Wyatt, Jr. Chairman of the Board Common Stock 2,858,863 <F2> 2.7
(72), 1955 Class A Common Stock 154,577 <F2> 40.4
Harold Burrow Vice Chairman of the Board; Common Stock 137,127 <F2>
(82), 1973 Chairman of Colorado and ANR Class A Common Stock 13,601 3.6
David A. Arledge President and Common Stock 181,112
(52), 1988 Chief Executive Officer Class A Common Stock 2,352
John M. Bissell Chairman of the Board Common Stock 5,080
(66), 1985 of Bissell Inc. Class A Common Stock -0-
George L. Brundrett, Jr. Attorney Common Stock 4,910
(75), 1973 Class A Common Stock 2,290
Roy D. Chapin, Jr. Former Chairman and Common Stock 3,250 <F2>
(81), 1988 Chief Executive Officer Class A Common Stock -0-
of American Motors Corporation
James F. Cordes Retired; former Executive Vice Common Stock 18,708
(56), 1985 President of Coastal Class A Common Stock -0-
Roy L. Gates Ranching and Investments Common Stock 4,095
(68), 1969 Class A Common Stock 2,736
Kenneth O. Johnson Senior Vice President Common Stock 40,020
(76), 1988 Class A Common Stock 9,604 2.5
Jerome S. Katzin Retired Investment Banker Common Stock 41,803
(78), 1983 Class A Common Stock -0-
Thomas R. McDade Senior Partner, Law Firm of McDade, Common Stock 500
(64), 1993 Fogler, Maines & Lohse L.L.P., Houston Class A Common Stock -0-
L. D. Wooddy, Jr. Retired; Former President of Exxon Common Stock 3,000
(70), 1992 Pipeline Company Class A Common Stock -0-
All directors and executive officers as a group Common Stock 3,711,260 <F3> 3.5
(33 persons, including the above) Class A Common Stock 186,568 <F3> 48.8
(See footnotes on following page)
<FN>
* Less than one percent unless otherwise indicated. Class includes
outstanding shares and presently exercisable stock options held by
directors and executive officers. Excluding presently exercisable
stock options, directors and executive officers as a group would own
184,288 shares of Class A Common Stock, which would constitute 48.5%
of the shares of such class.
<F1> Except for the shares referred to in Notes 2 and 3 below, and the
shares represented by presently exercisable stock options, the holders
are believed by Coastal to have sole voting and investment power as to
the shares indicated. Amounts include shares in Coastal ESOP and
Thrift Plan, and presently exercisable stock options held by Messrs.
Arledge (162,093 shares of Common Stock and 2,280 shares of Class A
Common Stock), Cordes (8,000 shares of Common Stock), and Johnson
(7,848 shares of Common Stock).
20
<PAGE>
<F2> Includes shares owned by the spouse and a son of Mr. Wyatt (266,895
shares of Common Stock and 7,354 shares of Class A Common Stock), by
the spouse of Mr. Burrow (5,000 shares of Common Stock) and by the
spouse of Mr. Chapin (1,000 shares of Common Stock), as to which
shares beneficial ownership is disclaimed.
<F3> Includes presently exercisable stock options to purchase 453,829
shares of Common Stock and 2,280 shares of Class A Common Stock; also
includes 280,928 shares of Common Stock and 7,354 shares of Class A
Common Stock owned by spouses and children, as to which shares
beneficial ownership is disclaimed. In addition, one executive
officer owns 8 shares of Series B Preferred Stock, each of which is
convertible into 3.6125 shares of Common Stock and 0.1 share of Class
A Common Stock.
</FN>
</TABLE>
No incumbent director is related by blood, marriage or adoption to another
director or to any executive officer of Coastal or its subsidiaries or
affiliates.
Except as hereafter indicated, the above table includes the principal
occupation of each of the directors during the past five years. The listed
executive officers have held various executive positions with Coastal, ANR, ANR
Pipeline and/or Colorado during the five-year period.
Mr. Bissell is a member of the Boards of Directors of Old Kent Financial
Corporation and Batts Inc.
Mr. Cordes is a member of the Board of Directors of Comerica Inc.
Mr. Katzin is a member of the Board of Directors of Qualcomm Incorporated.
Mr. McDade is a trial lawyer and the founding senior partner of the Houston
law firm of McDade, Fogler, Maines & Lohse L.L.P. Prior to forming McDade,
Fogler, Maines & Lohse L.L.P., he was a senior partner in the Houston law firm
of Fulbright & Jaworski. He is a member of the Board of Directors of Equity
Corporation International.
Messrs. Arledge and Burrow are directors of Colorado and ANR Pipeline. Both
of these subsidiaries of Coastal are subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended.
Item 13. Certain Relationships and Related Transactions.
(a) Transactions with management and others.
ANR Pipeline participates in a program which matches short-term cash
excesses and requirements of participating affiliates, thus minimizing
borrowings from outside sources. At December 31, 1996, the Company had advanced
$168.7 million to an associated company at a market rate of interest. Such
amount is repayable on demand.
Additional information called for by this item is set forth under Item 11,
"Executive Compensation," and Note 10 of Notes to Consolidated Financial
Statements included herein.
(b) Certain business relationships.
None.
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
21
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report or
incorporated herein by reference:
1. Financial Statements.
The following Consolidated Financial Statements of ANR Pipeline
and Subsidiaries are included in response to Item 8 hereof on the
attached pages as indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report...................................................................... F-6
Consolidated Balance Sheet at December 31, 1996 and 1995.......................................... F-7
Statement of Consolidated Earnings for the Years Ended December 31, 1996, 1995 and 1994........... F-9
Statement of Consolidated Retained Earnings for the Years Ended December 31, 1996, 1995
and 1994....................................................................................... F-9
Statement of Consolidated Cash Flows for the Years Ended December 31, 1996, 1995 and
1994........................................................................................... F-10
Notes to Consolidated Financial Statements........................................................ F-11
</TABLE>
2. Financial Statement Schedules.
Schedules are omitted as not applicable or not required, or the
required information is shown in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits.
(3.1)+ Composite Certificate of Incorporation of ANR Pipeline
effective as of December 31, 1987. (Filed as Module
ANRCertIncorp on March 29, 1994.)
(3.2)+ Amended By-laws of ANR Pipeline effective as of
September 21, 1994. (Filed as Exhibit 3.2 to ANR
Pipeline's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.)
(4) With respect to instruments defining the rights of
holders of long-term debt, the Company will furnish to
the Securities and Exchange Commission any such
document on request.
(4.1)+ Board Resolution dated September 22, 1975 establishing
the $2.675 Series of Cumulative Preferred Stock. (Filed
as Module BoardRes_092275 on March 29, 1994.)
(4.2)+ Board Resolution dated October 26, 1976 establishing
the $2.12 Series of Cumulative Preferred Stock. (Filed
as Module BoardRes_102676 on March 29, 1994.)
(4.3)+ Board Resolution dated May 12, 1980 establishing the
$12.00 Series of Cumulative Preferred Stock. (Filed as
Module BoardRes_051280 on March 29, 1994.)
(4.4)+ Indenture dated as of February 15, 1994 and First
Supplemental Indenture dated as of February 15, 1994
for the $125 million of 7-3/8% Debentures due February
15, 2024. (Filed as Exhibit 4.4 to ANR Pipeline's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.)
(10.1)+ Form of Employment Agreement between ANR Pipeline and
certain of its executive officers. (Filed as Module
ANREmployAgree on March 29, 1994.)
22
<PAGE>
(10.2)+ Form of Employment Agreement between Coastal and
certain Company executive officers. (Filed as Module
TCCEmployAgree on March 29, 1994.)
(10.3)+ Agreement for Consulting Services between ANR Pipeline
and Harold Burrow, dated as of January 1, 1996. (Filed
as Exhibit 10.3 to ANR Pipeline's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.)
(21)* Subsidiaries of the Company.
(24)* Power of Attorney (included on signature pages herein).
(27)* Financial Data Schedule.
----------------------
Note:
+ Indicates documents incorporated by reference from the prior
filings indicated.
* Indicates documents filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
23
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Coby C. Hesse,
William L. Johnson and Austin M. O'Toole and each of them, any one of whom may
act without the joinder of the others, as his attorney-in-fact to sign on his
behalf and in the capacity stated below and to file all amendments to this
Annual Report on Form 10-K, which amendment or amendments may make such changes
and additions thereto as such attorney-in-fact may deem necessary or
appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANR PIPELINE COMPANY
(Registrant)
By: JEFFREY A. CONNELLY
--------------------------------------
Jeffrey A. Connelly
President and Chief Executive Officer
March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: DAVID A. ARLEDGE
-----------------------------------------
David A. Arledge
Principal Financial Officer and Director
March 27, 1997
By: WILLIAM L. JOHNSON
-----------------------------------------
William L. Johnson
Principal Accounting Officer
March 27, 1997
By: HAROLD BURROW
-----------------------------------------
Harold Burrow
Director
March 27, 1997
By: JEFFREY A. CONNELLY
-----------------------------------------
Jeffrey A. Connelly
Director
March 27, 1997
By: RICHARD A. LIETZ
-----------------------------------------
Richard A. Lietz
Director
March 27, 1997
By: JON R. WHITNEY
-----------------------------------------
Jon R. Whitney
Director
March 27, 1997
24
<PAGE>
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, including natural gas prices, market conditions, industry
competition 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
Overview. Internally generated funds have been the primary source to meet
mandatory debt and preferred stock retirements and other cash requirements of
the Company over the past three years.
In February 1994, the Company completed an offering of $125 million in
principal amount of 7-3/8% 30-year Debentures due on February 15, 2024. On June
1, 1995, the Company completed an offering of $75 million in principal amount of
7% Debentures due June 1, 2025, putable by the holders for redemption at par on
June 1, 2005. The net proceeds from the sale of the Debentures were used for the
payment of common stock dividends and for the repayment of outstanding Swiss
franc bonds which matured in October 1995. The 125 million Swiss franc bonds had
a dollar equivalence of $58.1 million and an effective interest rate of 10.7%.
The remaining net proceeds from the Debentures were added to the general funds
of the Company and were used for capital expenditures and for other general
corporate purposes.
On June 16, 1994, the Company redeemed all of the outstanding shares of its
Cumulative Preferred Stock. For additional information regarding this matter,
see Note 2 of Notes to Consolidated Financial Statements included herein.
The Company paid dividends of $300 million on its common stock in 1996.
These dividends were financed from internally generated funds.
The Company uses the following consolidated ratios to measure liquidity and
ability to meet future funding needs and debt service requirements.
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities to long-term debt
and capital lease obligations.......................................... 46.2% 42.5% 56.3%
Long-term debt and capital lease obligations to total capitalization.... 46.4% 35.9% 35.7%
</TABLE>
The increase in 1996 as compared to 1995 in the ratio of cash flows from
operating activities to long-term debt and capital lease obligations resulted
from higher cash flows provided by operating activities in 1996. The increase in
1996 as compared to 1995 in the ratio of long-term debt and capital lease
obligations to total capitalization resulted from a decrease in retained
earnings due to dividends paid on common stock.
The decrease in 1995 as compared to 1994 in the ratio of cash flows from
operating activities to long-term debt and capital lease obligations resulted
from an increase in long-term debt due to the issuance of $75 million of
Debentures in 1995, as discussed above. A reduction in accounts payable in 1995
also contributed to the decrease. The ratio of long-term debt and capital lease
obligations to total capitalization in 1995 approximated that of 1994, due to
the increase in long-term debt being offset by an increase in retained earnings
during 1995.
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.
F-1
<PAGE>
Expenditures for each of the years 1994 through 1996 and the sources of
capital used to finance these expenditures are summarized in the "Statement of
Consolidated Cash Flows."
Capital Expenditures. Capital expenditures were $70.3 million in 1996 and
$50.1 million in 1995. Capital expenditures for 1997 are budgeted at $104.9
million. These expenditures are primarily for completion of projects in process,
development of information systems, operational necessities, environmental
requirements, expansion projects and increased efficiency.
Funding for budgeted capital expenditures will be accomplished by the use
of internally generated funds. Funding for certain proposed projects is
anticipated to be provided through non-recourse project financing in which
certain of the projects' assets and contracts will be pledged as collateral.
Equity participation by other entities will also be considered. To the extent
required, cash for equity contributions to projects will be generated from
general corporate funds. Information concerning certain of these projects is
contained in Part I herein under Item 1, "Business - Other Developments."
Investment in Related Parties - Other. In December 1996, the Company
invested $78 million in an affiliate, Coastal Medical Services, Inc. The
affiliate has assumed the responsibility for facilitating the management of a
portion of the medical obligations of the Company and other Coastal
subsidiaries.
Extraordinary Item. The decreases in "Assets related to excess gas supply,"
"Order 636 transition costs," and "Deferred charges and other" in 1996 primarily
resulted from the discontinued application of FAS No. 71. Additional information
concerning FAS No. 71 is set forth in Results of Operations and Note 5 of Notes
to Consolidated Financial Statements included herein.
Financing Alternatives. Alternatives to finance additional capital and
other expenditures are limited principally by the terms of certain debt
instruments of the Company and certain affiliates. Under the most restrictive of
such instruments, as of December 31, 1996, ANR Pipeline and certain affiliates
could incur in the aggregate approximately $1.6 billion of additional
indebtedness. For the Company and these affiliates to incur indebtedness for
borrowed money in excess of this amount, $444 million of indebtedness of Coastal
Natural Gas would need to be retired.
The Company participates in a program which matches short-term cash
excesses and requirements of participating affiliates, thus minimizing
borrowings from outside sources. At December 31, 1996, the Company had advanced
$168.7 million to an associated company at a market rate of interest. Such
amount is repayable upon demand.
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
spent approximately $2.5 million in 1996 on environmental capital projects and
anticipates annual capital expenditures of approximately $4 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 $30 million and the
Company estimates its pro-rata exposure, to be paid over a period of several
years, is approximately $.2 million.
There are additional areas of environmental investigation and remediation
responsibilities to which the Company may be subject. The states also have
regulatory programs that mandate environmental investigation and cleanup. In
Michigan, where the Company has extensive operations, the recently-revised
Environmental Response Act requires owners or operators of property containing
contamination above regulatory thresholds to diligently pursue remedial actions
and exercise due care so that the property does not pose a threat to human
health or the environment. The
F-2
<PAGE>
Company has designated internal staff and has retained environmental consultants
to assess sites for which the Company may have due diligence or due care
obligations.
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 operates primarily in the Midwest and increasingly in the
Northeast regions of the United States under FERC Order 636, which promulgated
the use of the straight fixed variable ("SFV") rate setting methodology. In
general, SFV provides that all fixed costs of providing service to firm
customers (including an authorized return on rate base and associated taxes) are
to be received through fixed monthly reservation charges, which are not a
function of volumes transported, while including within the commodity billing
component the pipeline's variable operating costs. The Company auctions gas on
the open market to handle a residual quantity of gas purchased under certain
remaining gas purchase contracts pending expiration of such contracts. The
Company's Order 636 restructured tariff provides mechanisms for recovering from
its transportation customers the pricing differential between costs incurred to
purchase gas under these contracts and the amounts recovered through the
auctioning of such gas on the open market. In addition, Order 636 has resulted
in the incurrence of other transition costs and provides mechanisms for the
recovery of all such costs within a reasonable time period. At December 31,
1996, the Company had eliminated through sale and refunctionalization a
substantial portion of its Southwest gathering facilities previously used to
provide bundled services. The gain resulting from the sale is included in other
revenues.
Effective November 1, 1996, the Company discontinued the application of
regulatory accounting principles under FAS No. 71. As a result, ANR Pipeline
recorded an extraordinary charge to income of $163.9 million, net of related
income taxes of $91.6 million. The Company believes this accounting change will
result in financial reporting which better reflects the results of operations in
the economic environment in which it operates. The charge to earnings is noncash
and has no direct effect on either the Company's ability to include these
deferred items in future rate proceedings or on its ability to collect the rates
set thereby. Elimination of the deferral of expenses and the amortization of
regulatory assets is not expected to have a material adverse impact on financial
results in future periods.
FAS No. 71 provides that rate regulated enterprises 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. As a
result of FERC Order 636 (which unbundled pipeline services giving customers
more options for transporting their gas), the effect of discounted rates, and
new competitive developments on the horizon, the Company has concluded that the
competitive environment is no longer consistent with the form of regulation
contemplated by FAS No. 71. Additional information concerning FAS No. 71 is set
forth in Note 5 of Notes to Consolidated Financial Statements included herein.
The revenue decline since the adoption of Order 636 reflects the increased
competition in the natural gas industry. Although the firm capacity on the
Company's major interstate pipelines is sold out, the Company has instituted
reengineering projects and cost-cutting efforts to remain competitive and
improve operating profits.
Revenues. Storage and transportation revenues decreased by $61.1 million in
1996 as compared to 1995. Contributing to this decrease was lower storage and
transportation revenues of $15.2 million 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 $22.5 million, (b) reduced surcharge and other
pass-through recoveries of $19.7 million, which are offset in cost of gas and
operation and maintenance, and (c) increases in provisions for rate related
contingencies of $8.6 million. Provisions for rate related contingencies were
$45.6 million and $37 million in 1996 and 1995, respectively.
F-3
<PAGE>
Storage and transportation revenues decreased by $3.5 million in 1995 as
compared to 1994. The primary factor contributing to the decrease was lower
storage and transportation revenues of $14.7 million resulting from continued,
intensified competition across the United States natural gas industry,
particularly in the Midwest region in which the Company operates. The decrease
in storage and transportation revenues is partially offset by an increase in
contract settlements of $10.6 million.
Gas sales revenues decreased by $20.1 million in 1996 as compared to 1995.
This trend will continue, with a corresponding decrease in cost of gas, until
the termination of the Company's remaining gas purchase contracts, as discussed
above. The reduction in the quantity of gas auctioned on the open market, offset
in part by increased spot market prices, reduced gas sales revenues by $6.6
million. Purchased Gas Adjustment ("PGA") recoveries recorded in 1995, which
were associated with purchase periods prior to Order 636, resulted in reduced
revenues of $13.2 million in 1996. Such recoveries were largely completed in
1995.
Gas sales revenues decreased by $46.9 million in 1995 as compared to 1994
primarily due to a decrease of $37 million related to a reduction in the
quantity of gas auctioned on the open market. Lower spot market prices also
resulted in a decrease in revenues of $7.8 million.
Other revenues increased by $23 million in 1996 as compared to 1995
primarily due to a $28.7 million gain related to the 1996 sale of a major
portion of the Company's Southwest gathering facilities.
Other revenues increased by $29 million in 1995 as compared to 1994. This
increase includes increased interest income from a related party of $11.2
million and adjustments to revenue reserves associated with certain transition
cost recovery mechanisms of $8.7 million.
Cost of Gas. Cost of gas includes purchases required under certain
remaining gas purchase contracts and the amortization of PGA recoveries from
customers. Collectively, decreases in the cost of gas were offset in revenues,
as discussed above. Cost of gas decreased by $28.2 million in 1996 as compared
to 1995. The variance primarily results from decreases in the amortization of
previously deferred costs associated with above market gas purchases of $17.6
million and reductions in the quantity of gas purchased under the Company's
remaining gas purchase contracts of $5.5 million. Additionally, reductions in
the amortization of PGA costs decreased the cost of gas by $15.9 million.
Cost of gas decreased by $27.3 million in 1995 as compared to 1994. The
variance primarily results from a decrease of $43.8 million due to reductions in
the quantity of gas purchased under the Company's remaining gas purchase
contracts. This decrease in cost was partially offset by an increase in the
amortization of previously deferred costs associated with above market gas
purchases of $19.2 million, partially as a result of the implementation of the
FERC's policy governing the order of attribution of revenues received by the
Company related to transition costs under Order 636 (see Note 6 of Notes to
Consolidated Financial Statements).
Operation and Maintenance. Operation and maintenance expenses decreased by
$23.1 million in 1996 as compared to 1995. The decrease was primarily due to
reduced transportation services provided by others of $18.3 million, which were
offset in revenues, as discussed above. Also contributing to the decrease were
lower salary and benefit expenses of $8.8 million mainly due to an early
retirement incentive program which became effective December 31, 1995. Decreases
in ad valorem taxes of $3.2 million in 1995, largely due to adjustments for
prior periods, offset the above mentioned variances.
Operation and maintenance expenses decreased by $4.1 million in 1995 as
compared to 1994. The decrease primarily results from a reduction of $13 million
in storage and transportation services provided by others, partially offset by
an $8.3 million benefit included in 1994 related to revisions of certain
estimated costs.
Interest Expense. Interest expense increased by $5.9 million in 1995 as
compared to 1994 largely due to an increase in expense associated with changes
in provisions for regulatory matters.
F-4
<PAGE>
Recent Authoritative Accounting Pronouncements
The FASB has issued FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"), to be
effective in 1997. Under FAS No. 125, which uses a "financial components
approach," an entity recognizes the financial assets it controls and liabilities
it has incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. The application of the new
standard is not expected to have a material effect on the Company's results of
operations, consolidated financial position or cash flows in 1997.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1") on
Environmental Remediation Liabilities to be effective in 1997. SOP 96-1 provides
additional guidance on accrual measurement and the disclosure of environmental
liabilities. The Company is currently evaluating the impact of SOP 96-1.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
ANR Pipeline Company
Detroit, Michigan
We have audited the accompanying consolidated balance sheets of ANR
Pipeline Company (an indirect, wholly-owned subsidiary of The Coastal
Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, retained earnings and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ANR Pipeline Company and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 31, 1997
F-6
<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................................. $ 34.2 $ 22.9
Notes receivable:
Other.............................................................................. 18.5 -
Related party...................................................................... 168.7 384.8
Accounts receivable:
Others............................................................................. 50.6 73.5
Related parties.................................................................... 14.9 14.0
Materials and supplies, at average cost............................................... 30.1 34.4
Other................................................................................. .6 .6
---------- ---------
317.6 530.2
---------- ---------
Property, Plant and Equipment, at cost................................................... 3,314.2 3,468.5
Less - Accumulated depreciation....................................................... 2,110.0 2,273.0
---------- ---------
1,204.2 1,195.5
---------- ---------
Other Assets:
Assets related to excess gas supply................................................... - 78.3
Investment in related parties:
Pipeline partnerships.............................................................. 47.6 35.2
Other.............................................................................. 78.1 2.0
Order 636 transition costs............................................................ - 127.6
Deferred charges and other............................................................ 28.4 80.6
---------- ---------
154.1 323.7
---------- ---------
$ 1,675.9 $ 2,049.4
========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ---------
STOCKHOLDER'S EQUITY AND LIABILITIES
<S> <C> <C>
Current Liabilities:
Capital lease obligations with related party.......................................... $ 3.0 $ 3.0
Accounts payable:
Others............................................................................. 114.5 131.0
Related parties.................................................................... 12.0 6.0
Taxes on income....................................................................... ( 34.5) ( 14.0)
Other taxes........................................................................... 21.2 21.5
Provision for regulatory matters...................................................... 140.7 79.2
Other................................................................................. 21.6 30.4
---------- ---------
278.5 257.1
---------- ---------
Long-Term Debt........................................................................... 497.8 497.7
---------- ---------
Capital Lease Obligations with Related Party............................................. 8.6 11.6
---------- ---------
Deferred Credits and Other:
Accumulated deferred income taxes..................................................... 151.2 223.0
Other deferred credits:
Others............................................................................. 130.5 133.1
Related parties.................................................................... 23.2 17.2
---------- ---------
304.9 373.3
---------- ---------
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..................................................................... 119.8 443.4
---------- ---------
586.1 909.7
---------- ---------
$ 1,675.9 $ 2,049.4
========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED EARNINGS
(Millions of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Storage and transportation:
Others................................................................ $ 618.7 $ 695.5 $ 689.0
Related parties....................................................... 23.0 7.3 17.3
Gas sales:
Others................................................................ 11.1 21.4 23.9
Related parties....................................................... 28.0 37.8 82.2
Other revenues:
Others................................................................ 42.9 25.7 12.1
Related parties....................................................... 38.8 33.0 17.6
--------- ---------- ---------
762.5 820.7 842.1
--------- ---------- ---------
Costs and Expenses:
Operation and maintenance:
Others................................................................ 251.1 275.6 277.3
Related parties....................................................... 101.5 100.1 102.5
Cost of gas:
Others................................................................ 66.6 84.9 108.6
Related parties....................................................... 2.1 12.0 15.6
Depreciation and amortization............................................ 54.4 50.6 50.5
Interest expense......................................................... 60.2 59.4 53.5
Taxes on income.......................................................... 86.3 86.8 82.0
--------- ---------- ---------
622.2 669.4 690.0
--------- ---------- ---------
Earnings Before Extraordinary Item.......................................... 140.3 151.3 152.1
Extraordinary item-loss on discontinuance of FAS No. 71,
net of income taxes...................................................... ( 163.9) - -
--------- ---------- ---------
Net (Loss) Earnings......................................................... ($ 23.6) $ 151.3 $ 152.1
========= ========== =========
</TABLE>
STATEMENT OF CONSOLIDATED RETAINED EARNINGS
(Millions of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Balance - Beginning of Year................................................. $ 443.4 $ 322.2 $ 503.0
Net (Loss) Earnings......................................................... ( 23.6) 151.3 152.1
Preferred Stock Redemption Premium Adjustment............................... - - ( .3)
Dividends:
Common stock............................................................. ( 300.0) ( 30.1) ( 331.0)
Preferred stock.......................................................... - - ( 1.6)
--------- ---------- ---------
Balance - End of Year....................................................... $ 119.8 $ 443.4 $ 322.2
========= ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Earnings before extraordinary item.......................................... $ 140.3 $ 151.3 $ 152.1
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization............................................ 57.7 53.2 52.9
Increase (decrease) in deferred income taxes............................. 21.4 ( 6.2) 12.4
Increase in provision for regulatory matters............................. 61.5 41.1 35.7
Producer contract reformation cost recoveries............................ 26.3 28.3 30.2
Undistributed equity in earnings of pipeline partnerships................ ( 8.9) ( 7.0) ( 5.3)
Gain on sale of plant.................................................... ( 29.1) - -
Changes in other assets and liabilities affecting operating activities:
Decrease (increase) in accounts receivable:
Others................................................................ 22.9 ( 8.1) 7.8
Related parties....................................................... ( .9) 9.5 ( 14.2)
(Decrease) increase in accounts payable and other accruals:
Others................................................................ ( 42.7) ( 55.0) 11.6
Related parties....................................................... 6.0 ( 1.4) ( 5.9)
Net (decrease) increase in other assets/liabilities...................... ( 20.3) 9.3 ( 30.8)
-------- -------- --------
Total adjustments..................................................... 93.9 63.7 94.4
-------- -------- --------
Net cash provided by operating activities............................. 234.2 215.0 246.5
-------- -------- --------
Cash Flows from Investing Activities:
(Increase) decrease in notes receivable from related party.................. 216.1 ( 149.6) 50.3
Investment in related parties............................................... ( 76.1) - -
Proceeds from sale of plant................................................. 10.4 2.0 .8
Capital expenditures........................................................ ( 70.3) ( 50.1) ( 62.8)
-------- -------- --------
Net cash provided by (used in) investing activities................... 80.1 ( 197.7) ( 11.7)
-------- -------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt................................ - 74.6 123.0
Retirement of long-term debt and capital lease obligations.................. ( 3.0) ( 60.9) ( 2.9)
Redemptions and early retirement of preferred stock......................... - - ( 34.0)
Common stock dividends paid................................................. ( 300.0) ( 30.1) ( 331.0)
Preferred stock dividends paid.............................................. - - ( 1.8)
-------- -------- -------
Net cash used in financing activities................................. ( 303.0) ( 16.4) ( 246.7)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........................... 11.3 .9 ( 11.9)
Cash and Cash Equivalents at Beginning of Period............................... 22.9 22.0 33.9
-------- -------- --------
Cash and Cash Equivalents at End of Period..................................... $ 34.2 $ 22.9 $ 22.0
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- - Basis of Presentation
ANR Pipeline is a subsidiary of ANR, which is a direct subsidiary of
Coastal Natural Gas and an indirect subsidiary of Coastal. The financial
statements presented herewith are presented on the basis of historical cost and
do not reflect the basis of cost to Coastal Natural Gas. The preparation of
these financial statements, in conformity with generally accepted accounting
principles, requires estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. Actual results could differ from
the estimates and assumptions used.
- - Reclassifications
Certain reclassifications of prior period statements have been made to
conform with current reporting practices. The effect of these reclassifications
was not material to the Company's consolidated financial position or results of
operations.
- - Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, after eliminating all significant
intercompany transactions. The equity method of accounting is used for
investments in which the Company has a 20% to 50% voting interest and exercises
significant influence. The equity method has also been used for an investment in
a limited partnership in which the Company has an interest of more than 5%.
- - Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("FAS No. 71")
The Company is subject to the regulations and accounting procedures of the
FERC and has historically followed the reporting and accounting requirements of
FAS No. 71. Effective November 1, 1996, ANR Pipeline discontinued application of
FAS No. 71. Additional information is set forth in Note 5 of Notes to
Consolidated Financial Statements included herein.
- - Property, Plant and Equipment
In accordance with the accounting requirements of the FERC and as allowed
under the provisions of FAS No. 71, an allowance for equity and borrowed funds
used during construction was included in the cost of the Company's major
additions to gas plant through October 31, 1996. These costs amounted to $1.7
million in 1996 and $1.2 million in each of the years 1995 and 1994. As a result
of the Company's discontinued application of FAS No. 71, effective November 1,
1996, the Company records capitalized interest based on the provisions of
Statement of Financial Accounting Standards No. 34, "Capitalization of Interest
Cost." These costs amounted to $.1 million in 1996.
The Company's annual provisions for depreciation of gas plant are computed
on a straight-line basis using rates of depreciation which vary by type of
property. The annual composite depreciation rate for 1994 through 1996 was
approximately 1.7%.
Costs of minor property units (or components thereof) retired or abandoned
are charged or credited, net of salvage, to accumulated depreciation. Gain or
loss on sales of major property units is credited or charged to income.
The Company adopted FAS 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 results of operations, financial position or cash flows.
F-11
<PAGE>
- - Income Taxes
The Company is a member of a consolidated group which files a consolidated
federal income tax return. Members of the consolidated group with taxable
incomes are charged with the amount of income taxes as if they filed separate
federal income tax returns, and members providing deductions and credits which
result in income tax savings are allocated credits for such savings.
- - Statement of Cash Flows
For purposes of these financial statements, cash equivalents include time
deposits, certificates of deposit and all highly liquid instruments with
original maturities of three months or less. The Company made cash payments for
interest, net of interest capitalized, of $52.4 million, $55.7 million and $50.2
million in 1996, 1995 and 1994, respectively. Cash payments for income taxes
amounted to $100.6 million, $110.4 million and $54.9 million in 1996, 1995 and
1994, respectively.
- - Nature of Operations and Concentrations of Credit Risk
ANR Pipeline is involved in the transportation, storage and balancing of
natural gas primarily in the Midwest and increasingly in the Northeast regions
of the United States. The Company operates under arrangements with other
companies including distributors, intrastate and interstate pipelines,
producers, brokers, marketers and end-users. As a result, the Company has a
concentration of receivables due from these customers. This may affect the
Company's overall credit risk in that the customers may be similarly affected by
changes in economic, regulatory and other factors. Trade receivables are
generally not collateralized; however, the Company analyzes customers' credit
positions prior to extending credit.
- - Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("FAS No. 125")
The FASB has issued FAS No. 125 to be effective in 1997. Under FAS No. 125,
which uses a "financial-components approach," an entity recognizes the financial
assets it controls and liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. The application of the new standard is not expected to have a
material effect on the Company's results of operations, financial position or
cash flows in 1997.
- - Statement of Position 96-1 ("SOP 96-1")
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued SOP 96-1 on Environmental Remediation
Liabilities to be effective in 1997. SOP 96-1 provides additional guidance on
accrual measurement and the disclosure of environmental liabilities. The Company
is currently evaluating the impact of SOP 96-1.
2. Common Stock and Other Stockholder's Equity
All of ANR Pipeline's common stock is owned by ANR.
On June 16, 1994, the Company redeemed all outstanding shares of its
Cumulative Preferred Stock. A $328,000 premium paid in excess of par value to
redeem the remaining outstanding preferred stock was charged directly to
retained earnings in accordance with FERC accounting procedures.
F-12
<PAGE>
3. Long-Term Debt
Balances at December 31 were as follows (millions of dollars):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Debentures:
9-5/8% series, due 2021.......................................................... $ 300.0 $ 300.0
7-3/8% series, due 2024.......................................................... 125.0 125.0
7% series, due 2025.............................................................. 75.0 75.0
Unamortized discount related to outstanding debt, net of premium.................... ( 2.2) ( 2.3)
-------- --------
$ 497.8 $ 497.7
======== ========
</TABLE>
None of the above debt issuances have maturity or sinking fund requirements
prior to their retirement due dates.
Alternatives to finance additional capital and other expenditures are
limited principally by the terms of certain debt instruments of the Company and
certain affiliates. Under the most restrictive of such instruments, as of
December 31, 1996, ANR Pipeline and certain affiliates could incur in the
aggregate approximately $1.6 billion of additional indebtedness. For the Company
and these affiliates to incur indebtedness for borrowed money in excess of this
amount, $444 million of indebtedness of Coastal Natural Gas would need to be
retired.
4. Value of Financial Instruments
The estimated fair value amounts of the Company's financial instruments
have been determined by the Company, using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, thus, the estimates provided herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ----------- -----------
(millions of dollars)
<S> <C> <C> <C> <C>
Nonderivatives:
Financial assets:
Cash and cash equivalents................... $ 34.2 $ 34.2 $ 22.9 $ 22.9
Marketable security of a related party...... - - 2.0 2.1
Note receivable from a related party........ 168.7 168.7 384.8 384.8
Note receivable - other..................... 18.5 17.2 - -
Financial liabilities:
Long-term debt.............................. 500.0 571.6 500.0 589.5
</TABLE>
The estimated fair value of the marketable security of a related party was
based on market quotes at December 31, 1995. The note receivable from a related
party is at a floating market rate of interest and therefore, the carrying
amount is a reasonable estimate of its fair value. The estimated fair value of
the note receivable - other is calculated based on the market rate of interest
at December 31, 1996. The estimated values of the Company's long-term debt are
based on interest rates at December 31, 1996 and 1995, respectively, for new
issues with similar remaining maturities.
5. Discontinuation of Regulatory Accounting Principles
ANR Pipeline is subject to the regulations and accounting procedures of the
FERC, and has historically followed the reporting and accounting requirements of
FAS No. 71. Effective November 1, 1996, the Company discontinued the application
of regulatory accounting principles under FAS No. 71. As a result, ANR Pipeline
recorded an extraordinary charge to income of $163.9 million, net of related
income taxes of $91.6 million.
F-13
<PAGE>
FAS No. 71 provides that rate regulated enterprises 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. As a
result of FERC Order 636 (which unbundled pipeline services giving customers
more options for transporting their gas), the effect of discounted rates, and
new competitive developments on the horizon, the Company has concluded that the
competitive environment is no longer consistent with the form of regulation
contemplated by FAS No. 71.
Under FAS No. 71, transactions which the Company had recorded differently
than a non-regulated entity include the following: the Company (i) had
capitalized the costs of equity funds used during construction, and (ii) had
deferred purchase gas costs, contract reformation costs,
postemployment/postretirement benefit costs and income tax reductions related to
changes in federal and state income tax rates. Pursuant to the guidance
contained in Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71," the Company has eliminated from its consolidated balance
sheet the effects of actions of regulators which had been recognized as
regulatory assets and liabilities recorded pursuant to FAS No. 71, and has
revalued certain other assets. The Company believes this accounting change will
result in financial reporting which better reflects the results of operations in
the economic environment in which it operates. The major components of the
extraordinary charge were as follows (millions of dollars):
Description Amount
------------------------------------------------ ---------
Regulatory assets:
Assets related to excess gas supply $ 52.6
Order 636 transition costs 95.0
Upstream transportation costs 25.0
Above market gas purchases 13.2
Postemployment/postretirement benefit costs 14.3
Federal and state tax differential 12.3
Other regulatory assets 36.3
Adjustments to plant, materials and supplies 6.8
---------
Total extraordinary charge before taxes $ 255.5
---------
Income taxes 91.6
---------
Total extraordinary charge, net of taxes $ 163.9
=========
This charge to earnings was noncash and will have no direct effect on
either the Company's ability to include these deferred items in future rate
proceedings or on its ability to collect the rates set thereby.
6. 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. ANR Pipeline, together with the other pipeline defendants,
has filed a motion to dismiss.
In October 1996, the Company, along with certain of its affiliates, was
named as a defendant in a suit filed by several former and current African
American employees in the United States District Court, Southern District of
Texas. The suit alleges racially discriminatory employment policies and
practices and seeks damages in the amount of at least $100 million and punitive
damages of at least three times that amount. Plaintiffs' counsel are seeking to
have the suit certified as a class action. The Company and its affiliates
vigorously deny these allegations and have filed responsive pleadings.
F-14
<PAGE>
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,
results of operations or cash flows.
- - 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 spent approximately $2.5
million in 1996 on environmental capital projects and anticipates annual capital
expenditures of approximately $4 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 $30 million and the
Company estimates its pro-rata exposure, to be paid over a period of several
years, is approximately $.2 million.
There are additional areas of environmental investigation and remediation
responsibilities to which the Company may be subject. The states also have
regulatory programs that mandate environmental investigation and cleanup. In
Michigan, where the Company has extensive operations, the recently-revised
Environmental Response Act requires owners or operators of property containing
contamination above regulatory thresholds to diligently pursue remedial actions
and exercise due care so that the property does not pose a threat to human
health or the environment. The Company has designated internal staff and has
retained environmental consultants to assess sites for which the Company may
have due diligence or due care obligations.
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" 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 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"). 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 time the
pipeline negotiates a rate for service which exceeds the recourse rate. The FERC
is also considering comments on whether this "negotiated 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"
requesting comments on various aspects of secondary market transactions on
interstate natural gas pipelines, including the comparability of pipeline
capacity with released capacity.
From November 1, 1992 to 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. In April 1994, the
Company filed with the FERC a refund report showing over-collections and
proposing refunds totaling $45.1
F-15
<PAGE>
million. Certain customers disputed the level of those refunds. The FERC
approved the Company's refund allocation methodology and the Company, in March
1995, paid undisputed refunds of $45.1 million, together with applicable
interest, subject to further investigation of customers' claims. The FERC's
approval of the Company's refund allocation methodology was upheld by the United
States Court of Appeals for the D.C. Circuit in April 1996. Disputed issues
related to the refunds are the subject of further proceedings before the FERC.
In July 1996, the United States Court of Appeals for the D.C. Circuit
upheld the basic structure of the FERC's Order 636 (issued in April 1992) and
remanded to the FERC, for further consideration, certain limited aspects of the
Order, such as the basis for its determination of the recovery by the pipelines
of the full level of their prudently incurred transition costs. Several persons,
including ANR Pipeline, have appealed the rate and other aspects of the FERC's
orders approving the Company's Order 636 restructuring filings and those appeals
are the subject of further proceedings before the Court.
The Company filed a general rate increase on November 1, 1993. Issues
related to the general rate increase are the subject of continuing FERC and
judicial proceedings. Under a March 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 and a $182.8 million increase over
the cost of service underlying the Company's approved rates for its Order 636
restructured services. In September 1994, the FERC accepted the Company's filing
to place the new rates into effect May 1, 1994, subject to further
modifications. The Company submitted revised rates in compliance with this order
in October 1994, which rates are currently in effect, subject to refund. In
January 1997, an Initial Decision was issued on the issues set for hearing by
the March 1994 Order. That Initial Decision, which accepted some but not all of
the Company's rate change proposals, does not take effect until reviewed by the
FERC. ANR Pipeline will file exceptions as to some of the negative findings in
the Initial Decision.
The FERC has also issued a series of orders 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 rather than 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 accelerating its amortization of
transition costs for regulatory accounting purposes. In light of the FERC's
policy, the Company filed with the FERC to increase its discount recovery
adjustment in its pending rate proceeding. The Company has sought judicial
review of these orders before the United States Court of Appeals for the D.C.
Circuit.
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"). In February 1994, ANR Pipeline, Dakota and the Department
of Energy executed a 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. In August 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. In December 1996, the
FERC issued an Opinion and Order Reversing Initial Decision in which it found
that the pipelines, including the Company, were prudent in entering into the
Settlement Agreement. No appeals were taken of the FERC's decision and it has
become final.
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, results of operations or cash flows. 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.
F-16
<PAGE>
7. Lease Commitments
The Company is the lessee of eight 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. The storage field leases expire on May 1, 2003. However, the
Company has the option to extend each of the leases for up to two successive
five-year periods. The net present value of the future minimum lease payments is
included as part of "Property, Plant and Equipment" in the Company's
Consolidated Balance Sheet as follows (millions of dollars):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Storage property................................................ $ 122.1 $ 122.1
Less: Accumulated depreciation................................. 110.5 107.5
--------- ---------
$ 11.6 $ 14.6
========= =========
</TABLE>
The annual provision for depreciation included as a part of depreciation
and amortization expense was $3 million for 1996, 1995 and 1994.
Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1996 are as
follows (millions of dollars):
Year ending December 31:
1997................................................. $ 8.9
1998................................................. 8.1
1999................................................. 7.6
2000................................................. 6.5
2001................................................. 5.3
2002 through 2004.................................... 5.6
--------
Total minimum lease payments......................... 42.0
Less: Amount representing executory costs........... 13.2
--------
Net minimum lease payments........................... 28.8
Less: Amount representing interest.................. 17.2
--------
Present value of net minimum lease payments.......... $ 11.6
========
Operating lease rentals included in operating expenses totaled $15.0
million for both 1996 and 1995 and $13.7 million for 1994. Aggregate minimum
lease payments under existing noncapitalized, long-term leases are estimated to
be $13.0 million for each of the years 1997 through 2001, and $100.7 million
thereafter.
F-17
<PAGE>
8. Taxes On Income
Provisions for income taxes are composed of the following (millions of
dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Federal:
Currently payable................................................... $ 93.3 $ 98.6 $ 85.6
Deferred ........................................................... ( 18.7) ( 17.2) ( 8.1)
-------- -------- -------
74.6 81.4 77.5
-------- -------- --------
State and City:
Currently payable................................................... 13.2 6.8 5.2
Deferred ........................................................... ( 1.5) ( 1.4) ( .7)
-------- -------- -------
11.7 5.4 4.5
-------- -------- --------
Total income taxes................................................ $ 86.3 $ 86.8 $ 82.0
======== ======== ========
</TABLE>
Provisions for income taxes were different from the amount computed by
applying the statutory U.S. federal income tax rate to earnings before tax. The
reasons for these differences are (millions of dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Tax expense computed by applying the U.S. federal income tax rate
of 35%.............................................................. $ 79.3 $ 83.3 $ 81.9
Increases (reductions) in taxes resulting from:
State and city income taxes reduced by federal income tax benefit... 7.6 3.5 2.9
Normalization adjustment for liberalized depreciation............... ( 1.1) - ( 2.8)
Other............................................................... .5 - -
-------- -------- --------
Taxes on income................................................. $ 86.3 $ 86.8 $ 82.0
======== ======== ========
</TABLE>
Deferred tax liabilities (assets) which are recognized for the estimated
future tax effects attributable to temporary differences are (millions of
dollars):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Depreciation........................................................................ $ 192.4 $ 166.5
Other............................................................................... 12.0 15.1
-------- --------
Deferred tax liabilities......................................................... 204.4 181.6
-------- --------
Provision for regulatory matters.................................................... ( 54.0) ( 30.3)
Inventory capitalization............................................................ ( 1.6) ( 1.6)
Purchased gas and other recoverable costs........................................... ( 33.3) 43.5
Benefit plans and accrued expenses.................................................. ( 12.3) ( 5.1)
Certain lease costs................................................................. ( 9.0) -
Other............................................................................... ( 11.0) ( 8.4)
-------- --------
Deferred tax assets.............................................................. ( 121.2) ( 1.9)
-------- --------
Deferred income taxes............................................................ $ 83.2 $ 179.7
======== ========
</TABLE>
Coastal and the Internal Revenue Service ("IRS") Appeals Office have
concluded a tentative settlement of all adjustments proposed through early 1997
to federal income tax returns filed for the years 1985 through 1987. Coastal's
federal income tax returns filed for the years 1988 through 1990 have been
examined by the IRS and Coastal has received notice of proposed adjustments to
the returns for each of those years. Coastal currently is contesting certain
F-18
<PAGE>
of these adjustments with the IRS Appeals Office. Examination of Coastal's
federal income tax returns for 1991, 1992, and 1993 is expected to begin in
1997. It is the opinion of management that adequate provisions for federal
income taxes have been reflected in the Company's consolidated financial
statements.
9. Benefit Plans
The Company participates with its affiliates in the non-contributory
pension plan of Coastal (the "Plan") which covers substantially all employees.
The Plan provides benefits based on final average monthly compensation and years
of service. As of December 31, 1996, the Plan did not have an unfunded
accumulated benefit obligation. ANR Pipeline made no contributions to the Plan
for 1996, 1995 or 1994. Assets of the Plan are not segregated or restricted by
its participating subsidiaries and pension obligations for Company employees
would remain the obligation of the Plan if the Company were to withdraw.
The Company offered an early retirement incentive program to all of its
eligible employees (age 55 before January 1, 1996 and having five or more years
of service before January 1, 1996), who were employed through December 31, 1995.
All benefits provided under this program are being funded by the Plan and will
not have a material impact on the Company's consolidated cash flow or financial
position.
ANR Pipeline also makes contributions to a thrift plan, which is a
trusteed, voluntary and contributory plan for eligible employees of the Company.
The Company's contributions, which are based on matching employee contributions,
amounted to $6.2 million, $6.0 million and $6.3 million for 1996, 1995 and 1994,
respectively.
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. The estimated costs of retiree
benefit payments are accrued during the years the employee provides services.
Certain costs have been deferred and were being amortized through October 31,
1996 to reflect the impact of rate regulation. Effective November 1, 1996, these
costs are no longer deferred and amortized as a result of the Company's
discontinued application of FAS No. 71. Additional information concerning FAS
No. 71 is set forth in Note 5 of Notes to Consolidated Financial Statements
included herein.
The following tables set forth the accumulated postretirement benefit
obligation recognized in the Company's Consolidated Balance Sheet as of December
31, 1996 and 1995 and the benefit cost for the years ended December 31, 1996,
1995 and 1994 (millions of dollars):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees......................................................................... $( 43.8) $( 42.7)
Fully eligible plan participants................................................. ( .1) ( .5)
Other active plan participants................................................... ( 8.6) ( 13.1)
-------- --------
( 52.5) ( 56.3)
Plan assets at fair value........................................................... 18.1 17.0
-------- --------
Accumulated postretirement benefit obligation in excess of plan assets.............. ( 34.4) ( 39.3)
Unrecognized net transition obligation.............................................. 47.7 53.2
Unrecognized net gain from past experience different from
that assumed..................................................................... ( 15.8) ( 12.3)
-------- --------
Postretirement benefit (obligation) prepayment included in
Consolidated Balance Sheet....................................................... $( 2.5) $ 1.6
======== ========
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net periodic postretirement benefit cost consisted of the following
components:
Service cost - benefits earned during the period.................. $ .5 $ .5 $ .5
Interest cost on accumulated postretirement benefit obligation.... 3.6 4.1 4.2
Amortization of transition obligation............................. 3.0 3.1 3.1
Return on assets, net of deferrals................................ ( 1.2) ( 1.3) ( .4)
-------- -------- -------
Net periodic postretirement benefit cost.......................... 5.9 6.4 7.4
Deferred regulatory amounts....................................... .3 ( 1.2) ( .3)
-------- -------- -------
Net postretirement benefit cost recognized in Statement of
Consolidated Earnings............................................ $ 6.2 $ 5.2 $ 7.1
======== ======== ========
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10.4% in 1996, declining gradually to 6.0%
by the year 2004. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 11.2% and 12.0% in 1995 and
1994, respectively. A one percentage point increase in the assumed health care
cost trend rate for each year would increase both the accumulated postretirement
benefit obligation and the net postretirement health care cost as of December
31, 1996 by approximately 5.2%. The assumed discount rate used in determining
the accumulated postretirement benefit obligation was 7.5%.
10. Transactions with Major Customers and Related Parties
- - Major Customers:
The Statement of Consolidated Earnings includes revenues from major
customers as follows (millions of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Wisconsin Gas Company...................... $ 83.9 11.0% $ 94.6 11.5% $ 100.8 12.0%
Michigan Consolidated Gas Company.......... 55.2 7.2 70.3 8.6 65.7 7.8
</TABLE>
- - Related Parties:
"Operation and maintenance" expenses within the Statement of Consolidated
Earnings includes affiliate and other related party transactions as follows
(millions of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Storage and transportation expense - affiliates........................ $ 13.7 $ 18.0 $ 20.9
Storage and transportation expense - other related parties............. 40.6 41.2 39.9
Services provided at cost - affiliates................................. 28.3 24.4 26.8
Facilities rental expense - affiliates................................. 18.9 16.5 14.9
</TABLE>
Services provided by the Company at cost for affiliated companies were $9.9
million for 1996, $10.3 million for 1995 and $9.9 million for 1994. The services
provided by the Company to affiliates, and by affiliates to the Company,
primarily reflect the allocation of costs relating to the sharing of facilities
and administrative functions, characteristic of group operations. Such costs are
allocated using a three-factor formula consisting of revenues, property and
payroll, which is reasonable and has been applied on a consistent basis.
The Company has lease agreements with Coastal and its affiliates for the
rental of office space, natural gas storage fields and certain pipeline
facilities. One such lease with Coastal, for pipeline facilities, was terminated
during 1994 in conjunction with the terms of the lease. In December 1996, the
Company invested $78 million in an affiliate, Coastal
F-20
<PAGE>
Medical Services, Inc. The affiliate has assumed the responsibility for
facilitating the management of a portion of the medical obligations of the
Company and other Coastal subsidiaries.
ANR Pipeline participates in a program which matches short-term cash
excesses and requirements of participating affiliates, thus minimizing
borrowings from outside sources. At December 31, 1996, the Company had advanced
$168.7 million to an associated company at a market rate of interest. Such
amount is repayable on demand.
11. Quarterly Results of Operations (Unaudited)
The results of operations by quarter for the years ended December 31, 1996
and 1995 were (millions of dollars):
<TABLE>
<CAPTION>
1996 Quarter Ended
--------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues................................................ $ 214.8 $ 173.5 $ 160.3 $ 213.9
Cost of gas............................................. 22.7 14.1 14.3 17.6
--------- --------- -------- ---------
Revenues less cost of gas............................ 192.1 159.4 146.0 196.3
Other costs and expenses................................ 146.8 130.5 124.5 151.7
--------- --------- -------- ---------
Earnings before extraordinary item................... 45.3 28.9 21.5 44.6
Extraordinary item*.................................. - - - ( 163.9)
--------- --------- -------- ---------
Net earnings (loss).................................. $ 45.3 $ 28.9 $ 21.5 $( 119.3)
========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
1995 Quarter Ended
--------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues................................................ $ 220.8 $ 194.8 $ 213.6 $ 191.5
Cost of gas............................................. 32.3 21.5 25.2 17.9
--------- --------- -------- ---------
Revenues less cost of gas............................ 188.5 173.3 188.4 173.6
Other costs and expenses................................ 139.6 141.2 154.0 137.7
--------- --------- -------- ---------
Net earnings......................................... $ 48.9 $ 32.1 $ 34.4 $ 35.9
========= ========= ======== =========
<FN>
* Effective November 1, 1996, ANR Pipeline discontinued the application of
regulatory accounting principles under FAS No. 71. As a result, the
Company recorded an extraordinary charge to income of $163.9 million.
Additional information concerning FAS No. 71 is set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations
and Note 5 of Notes to Consolidated Financial Statements included herein.
</FN>
</TABLE>
F-21
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
- ------- ---------------------------------------------------------------------
(3.1)+ Composite Certificate of Incorporation of ANR Pipeline effective as
of December 31, 1987. (Filed as Module ANRCertIncorp on March 29,
1994.)
(3.2)+ Amended By-laws of ANR Pipeline effective as of September 21,
1994. (Filed as Exhibit 3.2 to ANR Pipeline's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.)
(4) With respect to instruments defining the rights of holders of
long-term debt, the Company will furnish to the Securities and
Exchange Commission any such document on request.
(4.1)+ Board Resolution dated September 22, 1975 establishing the $2.675
Series of Cumulative Preferred Stock.
(Filed as Module BoardRes_092275 on March 29, 1994.)
(4.2)+ Board Resolution dated October 26, 1976 establishing the $2.12
Series of Cumulative Preferred Stock.
(Filed as Module BoardRes_102676 on March 29, 1994.)
(4.3)+ Board Resolution dated May 12, 1980 establishing the $12.00 Series
of Cumulative Preferred Stock.
(Filed as Module BoardRes_051280 on March 29, 1994.)
(4.4)+ Indenture dated as of February 15, 1994 and First Supplemental
Indenture dated as of February 15, 1994 for the $125 million of
7-3/8% Debentures due February 15, 2024. (Filed as Exhibit 4.4 to
ANR Pipeline's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.)
(10.1)+ Form of Employment Agreement between ANR Pipeline and certain of
its executive officers. (Filed as Module ANREmployAgree on March
29, 1994.)
(10.2)+ Form of Employment Agreement between Coastal and certain Company
executive officers. (Filed as Module TCCEmployAgree on March 29,
1994.)
(10.3)+ Agreement for Consulting Services between ANR Pipeline and Harold
Burrow, dated as of January 1, 1996. (Filed as Exhibit 10.3 to ANR
Pipeline's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
(21)* Subsidiaries of the Company.
(24)* Power of Attorney (included on signature pages herein).
(27)* Financial Data Schedule.
- ----------------------
Note:
+ Indicates documents incorporated by reference from the prior filings
indicated.
* Indicates documents filed herewith.
Exhibit 21
SUBSIDIARIES OF ANR PIPELINE COMPANY
State of
Incorporation
-------------
ANR Atlantic Pipeline Company................................... Delaware
ANR Energy Conversion Company................................... Michigan
ANR Field Services Company...................................... Delaware
ANR Iroquois, Inc............................................... Delaware
ANR Mayflower Company........................................... Delaware
ANR Southern Pipeline Company................................... Delaware
American Natural Offshore Company............................... Delaware
Subsidiaries:
Texas Offshore Pipeline System, Inc........................ Delaware
Unitex Offshore Transmission Company....................... Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACT ED FROM ANR PIPELINE COMPANY FORM 10-K
ANNUAL REPORT FOR THE PERIOD ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 34
<SECURITIES> 0
<RECEIVABLES> 253
<ALLOWANCES> 0
<INVENTORY> 30
<CURRENT-ASSETS> 318
<PP&E> 3,314
<DEPRECIATION> 2,110
<TOTAL-ASSETS> 1,676
<CURRENT-LIABILITIES> 279
<BONDS> 506
0
0
<COMMON> 0
<OTHER-SE> 586
<TOTAL-LIABILITY-AND-EQUITY> 1,676
<SALES> 39
<TOTAL-REVENUES> 762
<CGS> 69
<TOTAL-COSTS> 476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 226
<INCOME-TAX> 86
<INCOME-CONTINUING> 140
<DISCONTINUED> 0
<EXTRAORDINARY> (164)
<CHANGES> 0
<NET-INCOME> (24)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
