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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-7320
ANR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1281775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Renaissance Center
Detroit, Michigan 48243-1902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 496-0200
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Registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this report with reduced disclosure
format.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
As of October 31, 2000, there were outstanding 1,000 shares of common stock
of the Registrant, $100 par value per share, its only class of common stock.
None of the voting stock of the Registrant is held by nonaffiliates.
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<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements of ANR Pipeline Company and its subsidiaries (the
"Company" or "ANR Pipeline") are presented herein and are unaudited, except for
balances as of December 31, 1999, and therefore, are subject to year-end
adjustments; however, all adjustments which are, in the opinion of management,
necessary for a fair statement of the results of operations for the periods
covered have been made. The adjustments which have been made are of a normal
recurring nature. Such results are not necessarily indicative of results to be
expected for the year due to seasonal variations and market conditions affecting
natural gas deliveries.
ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 2.3 $ 3.2
Notes receivable from related party..................................... 130.7 136.0
Accounts receivable:
Others............................................................... 49.7 20.4
Related parties...................................................... 27.8 44.4
Materials and supplies, at average cost................................. 27.1 27.9
Current deferred income taxes........................................... 19.1 21.0
---------- ----------
256.7 252.9
---------- ----------
Property, Plant and Equipment, at cost..................................... 3,497.1 3,463.8
Less - Accumulated depreciation......................................... 2,194.0 2,168.3
---------- ----------
1,303.1 1,295.5
---------- ----------
Other Assets:
Investment in related parties:
Pipeline partnerships................................................ 51.7 67.7
Other................................................................ 64.4 64.8
Deferred charges and other.............................................. 2.7 14.4
---------- ----------
118.8 146.9
---------- ----------
$ 1,678.6 $ 1,695.3
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
ANR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable:
Others............................................................... $ 72.9 $ 94.2
Related parties...................................................... 5.5 8.1
Taxes on income......................................................... 22.0 32.0
Other taxes............................................................. 23.6 24.2
Other................................................................... 41.2 39.8
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165.2 198.3
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Long-Term Debt ............................................................ 498.1 498.0
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Deferred Credits and Other:
Accumulated deferred income taxes....................................... 218.5 200.3
Other deferred credits:
Others............................................................... 42.2 58.6
Related parties...................................................... 4.2 4.5
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264.9 263.4
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Common Stock and Other Stockholder's Equity:
Common stock, $100 par value, authorized, issued and outstanding
1,000 shares......................................................... .1 .1
Additional paid-in capital.............................................. 466.2 466.2
Retained earnings....................................................... 284.1 269.3
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750.4 735.6
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$ 1,678.6 $ 1,695.3
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED EARNINGS
(Millions of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Storage and transportation:
Others.................................................... $ 108.0 $ 122.3 $ 366.6 $ 402.6
Related parties........................................... 4.2 3.4 31.0 12.0
Other revenues:
Others.................................................... 30.0 22.7 68.5 61.0
Related parties........................................... 4.1 4.9 14.1 16.9
---------- ---------- --------- ---------
146.3 153.3 480.2 492.5
---------- ---------- --------- ---------
Costs and Expenses:
Operation and maintenance:
Others.................................................... 80.7 72.3 226.7 194.3
Related parties........................................... 15.4 15.1 47.1 46.9
Depreciation and amortization................................ 9.9 9.7 29.4 27.9
Interest expense............................................. 11.3 11.7 35.0 35.2
Taxes on income.............................................. 11.3 16.8 53.2 69.4
---------- ---------- --------- ---------
128.6 125.6 391.4 373.7
---------- ---------- --------- ---------
Net Earnings.................................................... $ 17.7 $ 27.7 $ 88.8 $ 118.8
========== ========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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ANR PIPELINE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
--------- --------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings................................................................ $ 88.8 $ 118.8
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization......................................... 29.7 28.1
Net (increase) decrease in working capital:
Others.............................................................. ( 51.5) 5.8
Related parties..................................................... 15.9 4.2
Net change in other assets/liabilities................................ 57.8 ( 6.7)
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Total adjustments................................................... 51.9 31.4
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Net cash provided by operating activities............................. 140.7 150.2
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Cash Flows from Investing Activities:
Investment in pipeline partnerships......................................... - ( 27.8)
Decrease in note receivable from related party.............................. 5.3 5.6
Capital expenditures........................................................ ( 71.6) ( 66.3)
Proceeds from the sale of plant to related party............................ - 37.2
--------- --------
Net cash used in investing activities................................. ( 66.3) ( 51.3)
--------- --------
Cash Flows from Financing Activities:
Dividend paid............................................................... ( 74.0) ( 97.0)
Other....................................................................... ( 1.3) ( 1.8)
--------- --------
Net cash used in financing activities................................. ( 75.3) ( 98.8)
--------- --------
Net (Decrease) Increase in Cash and Cash Equivalents........................... ( .9) .1
Cash and Cash Equivalents at Beginning of Period............................... 3.2 3.4
--------- --------
Cash and Cash Equivalents at End of Period..................................... $ 2.3 $ 3.5
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
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ANR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
For additional information relative to operations and financial position,
reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. Certain reclassifications of prior period
statements have been made to conform with current reporting practices. The
effect of the reclassifications was not material to the Company's consolidated
financial position, results of operations or cash flows.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), as amended by Statements of Financial Accounting
Standards No. 137 and No. 138, to be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. FAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The corresponding offset for the change in fair value
of the derivative instruments will be to income or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under FAS 133. The Company will adopt FAS 133 beginning January 1,
2001, and will apply the standard to all derivative instruments that exist on
that date except for derivative instruments embedded in other contracts. As
provided for in FAS 133, the Company will apply the provisions of the standard
to derivative instruments embedded in other contracts issued, acquired, or
substantially modified after December 31, 1998. The Company is continuing to
study the impact of FAS 133 and has not yet quantified the effects, if any, on
its financial statements.
The Company may periodically enter into swaps, futures and other contracts
to hedge the price risk of natural gas anticipated to be sold to end users. The
Company defers the impact of changes in the market value of these contracts
until such time as the hedged transaction is completed. At that time, the impact
of the changes in the fair market value of these contracts is recognized in
income.
Supplemental information relative to the Statement of Consolidated Cash
Flows includes the following: The Company made cash payments for interest, net
of interest capitalized, of $28.6 million and $28.8 million for the nine- month
periods ended September 30, 2000 and 1999, respectively. Cash payments of income
taxes amounted to $43.2 million and $58.3 million for the nine-month periods
ended September 30, 2000 and 1999, respectively.
2. Income Taxes
Provisions for income taxes were as follows (millions of dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Federal Income Taxes:
Currently payable...................................... $ 3.7 $ 11.8 $ 30.4 $ 47.6
Deferred............................................... 6.8 3.6 18.9 17.7
---------- ---------- --------- ---------
10.5 15.4 49.3 65.3
State and City Income Taxes............................... .8 1.4 3.9 4.1
---------- ---------- --------- ---------
$ 11.3 $ 16.8 $ 53.2 $ 69.4
========== ========== ========= =========
</TABLE>
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3. Common Stock
All of the issued and outstanding common stock of the Company is owned by
American Natural Resources Company, a wholly owned subsidiary of Coastal Natural
Gas Company. Coastal Natural Gas Company is a wholly owned subsidiary of The
Coastal Corporation ("Coastal"). Therefore, earnings and cash dividends per
common share have no significance and are not presented.
4. Litigation, Environmental and Regulatory Matters
Litigation Matters
Two legal proceedings, one in federal court and the other in state court,
have been instituted against a number of gas pipeline companies and their
affiliates, including ANR Pipeline, Coastal and several of Coastal's other
subsidiaries. The plaintiffs in each suit seek damages for the alleged
undermeasurement of the heating value and the volume of natural gas. In the
federal proceeding, Jack Grynberg filed 77 separate False Claim Act suits in
September 1997 against natural gas transmission companies and producers,
gatherers, and processors of natural gas, seeking unspecified damages which
could include treble damages for the maximum period permitted by law
(potentially as much as ten years) and penalties of up to $10,000 per false
claim. In addition to the measurement claims, these suits also allege that the
defendants undervalued the gas in paying royalties. The Coastal defendants were
sued in the U.S. District Courts of Colorado and the Eastern District of
Michigan. In April 1999, the U.S. Department of Justice notified the Company
that the United States would not intervene in these cases at that time. The
MultiDistrict Litigation Panel has consolidated the Grynberg suits with several
other Grynberg cases for pre-trial proceedings in Wyoming. The defendants filed
a motion to dismiss which was argued in March 2000, and the parties are awaiting
the Court's decision. The United States has filed a motion to dismiss part of
the Grynberg case.
In the state proceedings, the Quinque Operating Company, on behalf of
itself and subclasses of gas producers, royalty owners, overriding royalty
owners, and state taxing authorities, in May 1999, instituted a legal proceeding
in State Court in Stevens County, Kansas, against over 200 gas companies,
including ANR Pipeline and several other Coastal subsidiaries. The Quinque suit
seeks unspecified actual, punitive and treble damages for the alleged
undermeasurement of all natural gas measured in the United States from
non-federal and non-Indian lands since 1974. The plaintiffs are seeking
certification of a national class of all similarly situated gas producers,
royalty owners, overriding royalty owners, and state taxing authorities. The
suit was removed to the U.S. District Court for the District of Kansas. The
plaintiffs filed a motion to remand the case back to the state court. The
MultiDistrict Litigation Panel has transferred the Quinque suit to Wyoming and
consolidated it with the Grynberg proceedings as a result of a motion filed by
several of the defendants in the Quinque suit.
Numerous other lawsuits and other proceedings which have arisen in the
ordinary course of business are pending or threatened against the Company or its
subsidiaries. Although no assurances can be given and no determination can be
made at this time as to the outcome of any particular lawsuit or proceeding, the
Company believes there are meritorious defenses to substantially all such claims
and that any liability which may finally be determined should not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
Environmental Matters
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations which may affect such
operations and costs as a result of their effect on the construction, operation
and maintenance of its pipeline facilities. Compliance with such laws and
regulations can be costly. Additionally, 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," imposes liability for the release of a "hazardous
substance" into the environment. Superfund liability is imposed without regard
to fault and even if the waste disposal was in compliance with the then current
laws and regulations.
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With the joint and several liability imposed under Superfund, a potentially
responsible party ("PRP") may be required to pay more than its proportional
share of such costs. The Company has been named as a PRP in three Superfund
waste disposal sites. At these sites, there is sufficient information to
estimate total cleanup costs of approximately $52 million, and the Company
estimates its pro-rata exposure, to be paid over a period of several years, is
approximately $1.3 million and has made appropriate provisions.
In Michigan, where the Company has extensive operations, the Environmental
Response Act requires individuals (including corporations) who have caused
contamination to remediate the contamination to regulatory standards. Owners or
operators of contaminated property who did not cause the contamination are not
required to remediate the contamination, but must exercise due care in their use
of the property so that the contamination is not exacerbated and the property
does not pose a threat to human health. ANR Pipeline estimates that its costs to
comply with the Michigan regulations will be approximately $6.2 million, which
will be expended over a period of several years and for which appropriate
provisions have been made.
In October 1998, the U. S. Environmental Protection Agency ("EPA")
announced a "Finding of Significant Contribution and Rulemaking for Certain
States in the Ozone Transport Assessment Group Region for Purposes of Reducing
Regional Transport of Ozone" ("NOx SIP Call"). The NOx SIP Call requires 22
states, including eight states in which ANR Pipeline operates, and the District
of Columbia to submit state implementation plans ("SIP Plans"), with each state
showing how it intends to reduce NOx emissions from sources located within its
borders to specified levels. Under the schedule proposed by the EPA in the NOx
SIP Call, states had until September 1999 to submit SIP Plans to the EPA, and
reduction measures would have to be in place by May 1, 2003. The NOx SIP Call
provided that if a state failed to submit compliant SIP Plans by the September
1999 deadline, the EPA would impose reductions upon specific sources within the
state. The NOx SIP Call is the subject of legal proceedings instituted by nine
of the affected states and numerous affected industries. In a May 1999 order,
the U. S. District Court, District of Columbia stayed, until further order of
the court, the date by which states must submit compliant SIP Plans. ANR
Pipeline operates compressor engines that emit nitrogen oxide and is, therefore,
potentially subject to any state or EPA rules issued under the NOx SIP Call.
Until the legal proceedings referenced above are resolved, final rules are
determined and the states have submitted compliant SIP Plans, the Company will
not be able to reasonably estimate the amount of any obligation resulting from
the NOx SIP Call.
Future information and developments, including legislative and enforcement
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 consolidated financial position or results of operations.
Regulatory Matters
Certain regulatory issues remain unresolved among the Company, its
customers, its suppliers and the Federal Energy Regulatory Commission ("FERC").
The Company has made provisions which represent management's assessment of the
ultimate resolution of these issues. As a result, the Company anticipates that
these regulatory matters will not have a material adverse effect on its
consolidated financial position or results of operations. While the Company
estimates the provisions to be adequate to cover potential adverse rulings on
these and other issues, it cannot estimate when each of these issues will be
resolved.
5. Merger
Coastal and El Paso Energy Corporation ("El Paso Energy") announced, on
January 18, 2000, the execution of definitive agreements for the merger of
Coastal and a subsidiary of El Paso Energy. Each share of Coastal common stock
and Class A common stock will be converted on a tax-free basis (except for cash
paid in lieu of fractional shares) into 1.23 shares of El Paso Energy common
stock. The outstanding convertible preferred stock of Coastal will be exchanged
tax free (except for cash paid in lieu of fractional shares) for El Paso Energy
common stock on the same basis as if the preferred stock had been converted into
Coastal common stock immediately prior to the merger. On
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<PAGE>
May 5, 2000, the merger was approved by the shareholders of Coastal and El Paso
Energy. It is expected that the merger will be completed during the fourth
quarter of 2000 and be accounted for as a pooling of interests. The merger is
subject to additional conditions, particularly federal regulatory approval.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
This report includes certain forward-looking statements. The
forward-looking statements reflect the Company's expectations, objectives and
goals with respect to future events and financial performance and are based on
assumptions and estimates which the Company believes are reasonable. However,
actual results could differ materially from anticipated results. Important
factors which may affect the actual results include, but are not limited to,
commodity prices, political developments, market and economic conditions,
industry competition, the weather, changes in financial markets and changing
legislation and regulations. The forward-looking statements contained in this
Report are intended to qualify for the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended.
The Notes to Consolidated Financial Statements contain information that is
pertinent to the following analysis.
The information required by this Item is presented in a reduced disclosure
format pursuant to General Instruction (H) of Form 10-Q.
Results of Operations
The change in the Company's earnings for the three- and nine-month periods
ended September 30, 2000, in comparison to the corresponding periods in 1999 is
a result of the following:
Revenues. Storage and transportation revenues decreased for the three- and
nine-month periods ending September 30, 2000, as compared to the same periods in
1999 by $13.5 million and $17.0 million, respectively. These decreases were
primarily due to lower average rates charged to customers. The Company expects
the trend in lower average rates to continue in the near term as there currently
exists excess pipeline capacity for deliveries of natural gas in the Midwest
region of the United States. Also contributing to the decreases was a continuing
decline in surcharge revenues related to FERC Order 636 transition costs.
Other revenues increased by $6.5 million and $4.7 million, respectively,
for the three- and nine-month periods ending September 30, 2000, as compared to
the same periods in 1999. The increases were primarily due to higher Dakota gas
sales revenue resulting from natural gas price increases in 2000 versus 1999.
The increase for the nine- month period was offset by reduced gains on the sale
of certain assets.
Operation and Maintenance. Operation and maintenance expenses increased
for the three- and nine-month periods ending September 30, 2000, as compared to
the same periods in 1999 by $8.7 million and $32.6 million, respectively. These
increases were largely due to higher prices impacting Dakota gas purchases and
accruals for the replacement of system balancing gas. Also contributing to the
increase for the nine-month period was a $15 million benefit recorded in the
first quarter of 1999, related to revisions of certain gas costs, gas
transportation costs and environmental cleanup cost accruals.
Taxes on Income. Taxes on income decreased by $5.5 million and $16.2
million for the three- and nine-month periods ending September 30, 2000, as
compared to the same periods in 1999, primarily due to lower pre-tax income.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The information required hereunder is incorporated by reference into
Part II of this Report from Note 4 of Notes to Consolidated Financial Statements
set forth in Part I of this Report.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANR PIPELINE COMPANY
(Registrant)
Date: November 10, 2000 By: WILLIAM L. JOHNSON
-------------------------------------
William L. Johnson
Senior Vice President and
Principal Accounting Officer
(As Authorized Officer and
Chief Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
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27 Financial Data Schedule
- 10 -
