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
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.
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
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.
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.
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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
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.
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.
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.
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 through herein.
Item 8.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
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.
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.
Item 11.
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
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)
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)
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.
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
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.
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
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
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).
PERFORMANCE GRAPH - SHAREHOLDER RETURN ON COMMON STOCK
[GRAPH]
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.
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.
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:
(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.
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.
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.
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.
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.
PART IV
Item 14.
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:
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.)
(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.
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
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.
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.
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
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.
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.
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.
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
ANR PIPELINE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
See Notes to Consolidated Financial Statements.
ANR PIPELINE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
See Notes to Consolidated Financial Statements.
ANR PIPELINE COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED EARNINGS (Millions of Dollars)
STATEMENT OF CONSOLIDATED RETAINED EARNINGS (Millions of Dollars)
See Notes to Consolidated Financial Statements.
ANR PIPELINE COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (Millions of Dollars)
See Notes to Consolidated Financial Statements.
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.
- - 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.
3. Long-Term Debt
Balances at December 31 were as follows (millions of dollars):
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.
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.
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.
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
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.
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):
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.
8. Taxes On Income
Provisions for income taxes are composed of the following (millions of dollars):
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):
Deferred tax liabilities (assets) which are recognized for the estimated future tax effects attributable to temporary differences are (millions of dollars):
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
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):
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):
- - Related Parties:
"Operation and maintenance" expenses within the Statement of Consolidated Earnings includes affiliate and other related party transactions as follows (millions of dollars):
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
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):
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.