10-Q 1 h16271e10vq.txt ANR PIPELINE COMPANY - 6/30/2004 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-7320 --------------------- ANR PIPELINE COMPANY (Exact Name of Registrant as Specified in its Charter) DELAWARE 38-1281775 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) EL PASO BUILDING 1001 LOUISIANA STREET 77002 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Offices)

Telephone Number: (713) 420-2600 --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, par value $1 per share. Shares outstanding on August 13, 2004: 1,000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ANR PIPELINE COMPANY TABLE OF CONTENTS

CAPTION PAGE ------- ---- PART I -- Financial Information Item 1. Financial Statements........................................ 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 1110 Risk Factors and Cautionary ~~Statement~~Statements Regarding Forward-Looking Statements................................ 1415 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 1416 Item 4. Controls and Procedures..................................... 1416 PART II -- Other Information Item 1. Legal Proceedings........................................... 1618 Item 2. ~~Changes~~Unregistered inSales ~~Securities~~of ~~and~~Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities..................... 1618 Item 3. Defaults Upon Senior Securities............................. 1618 Item 4. Submission of Matters to a Vote of Security Holders......... 1618 Item 5. Other Information........................................... 1618 Item 6. Exhibits and Reports on Form 8-K............................ 1618 Signatures.................................................. 1720

--------------- Below is a list of terms that are common to our industry and used throughout this document:

/d = per day BBtu = billion British thermal units Bcf = billion cubic feet MMcf = million cubic feet

When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch. When we refer to "us", "we", "our", or "ours", we are describing ANR Pipeline Company and/or our subsidiaries. i PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ANR PIPELINE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS) (UNAUDITED)

~~NINE MONTHS~~ QUARTER ENDED SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~SEPTEMBER~~JUNE 30, -------------- ---------------- 2004 2003 ~~2002~~2004 2003 ~~2002~~ ----- ----- ----- ----- Operating revenues......................................~~....~~ $~~117~~103 $~~120~~126 $~~428~~241 $~~400~~311 ---- ---- ---- ---- Operating expenses Operation and maintenance.............................~~....~~ 6957 6771 ~~217~~115 ~~192~~148 Depreciation, depletion and amortization..............~~....~~ 9 9 2718 2718 Taxes, other than income taxes........................~~....~~ 6 86 1913 2213 ---- ---- ---- ---- 8472 8486 ~~263~~146 ~~241~~179 ---- ---- ---- ---- Operating income........................................~~....~~ 3331 3640 ~~165~~95 ~~159~~132 Earnings from unconsolidated ~~affiliates~~affiliate..................~~...~~ 1116 13 4236 4931 ~~Other income................................................ -- -- -- 5~~ Interest and debt expense...............................~~....~~ (1817) (1117) (4835) (3130) Affiliated interest income, net.........................~~....~~ 1 2 1-- 4 -- ---- ---- ---- ---- Income before income taxes..............................~~....~~ 2732 4036 ~~160~~100 ~~186~~133 Income taxes............................................~~....~~ 912 14 5937 6650 ---- ---- ---- ---- Net income..............................................~~....~~ $ 1820 $ 2622 $~~101~~ 63 $~~120~~ 83 ==== ==== ==== ====

See accompanying notes. 1 ANR PIPELINE COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE AMOUNTS) (UNAUDITED)

~~SEPTEMBER~~JUNE 30, DECEMBER 31, 2004 2003 ~~2002~~ --------~~-----~~ ------------ ASSETS Current assets Cash and cash equivalents................................. $ 256 $ --25 Accounts and notes receivable Customer, net of allowance of $3 in ~~2003~~2004 and ~~$2 in 2002~~2003......~~............................................~~ 8171 3967 Affiliates............................................. 69 145 Other.................................................. 2 3 5 Materials and supplies.................................... 21 22 23 Other..................................................... 1110 813 ------ ------ Total current assets.............................. ~~148~~119 89135 ------ ------ Property, plant and equipment, at cost...................... 3,~~590~~660 3,~~599~~660 Less accumulated depreciation, depletion and amortization........................................... 2,~~194~~201 2,~~192~~200 ------ ------ Total property, plant and equipment, net.......... 1,~~396~~459 1,~~407~~460 ------ ------ Other assets ~~Investments~~Investment in unconsolidated ~~affiliates~~affiliate.................... 325 ~~312~~325 Notes receivable from affiliates.......................... ~~401~~481 ~~560~~367 Other..................................................... 33 11 20 ------ ------ ~~759~~817 ~~883~~712 ------ ------ Total assets...................................... $2,~~303~~395 $2,~~379~~307 ====== ====== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable Trade.................................................. $ 2231 $ 2832 Affiliates............................................. 5718 1018 Other.................................................. 2411 3813 Short-term borrowings, including current maturities of long-term debt......................................... 75 -- Accrued interest.......................................... 17 917 Taxes payable............................................. 5177 5659 Contractual deposits...................................... 16 10 Other payable to affiliate................................ 8 8 Other..................................................... 2818 2124 ------ ------ Total current liabilities......................... ~~207~~271 ~~170~~181 ------ ------ Long-term debt, less current maturities.....................~~.........................~~ 733 807 ~~511~~ ------ ------ Other liabilities Deferred income taxes..................................... ~~300~~323 ~~267~~307 Payable to affiliates..................................... ~~192~~184 ~~196~~188 Other..................................................... 4238 5241 ------ ------ ~~534~~545 ~~515~~536 ------ ------ Commitments and contingencies Stockholder's equity Common stock, par value $1 per share; 1,000 shares authorized, issued and outstanding..................... -- -- Additional paid-in capital................................ ~~598~~597 ~~599~~597 Retained earnings......................................... ~~157~~249 ~~584~~186 ------ ------ Total stockholder's equity........................ ~~755~~846 ~~1,183~~783 ------ ------ Total liabilities and stockholder's equity........ $2,~~303~~395 $2,~~379~~307 ====== ======

See accompanying notes. 2 ANR PIPELINE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ----------------- 2004 2003 ~~2002~~ ------ ------ Cash flows from operating activities Net income................................................ $ ~~101~~63 $~~120~~ 83 Adjustments to reconcile net income to net cash from operating activities Depreciation, depletion and amortization............... 2718 2718 Deferred income tax expense............................ 3217 1933 Undistributed earnings of unconsolidated ~~affiliates~~affiliate..... ~~(13)~~1 (1912) Other non-cash income items............................ 21 --3 ~~Working~~Asset ~~capital~~and ~~changes................................~~liability ~~35 90 Non-working capital~~ changes............................ ~~(24)~~34 ~~(6)~~19 ----- ----- Net cash provided by operating activities............ ~~160~~134 ~~231~~144 ----- ----- Cash flows from investing activities Additions to property, plant and equipment................ (6139) (7339) ~~Proceeds~~Net proceeds from ~~the~~disposal ~~sale~~ of assets......................~~....~~ 7-- 23 Net change in ~~affiliated~~affiliate advances ~~receivable~~.......................... (~~369~~114) (~~160~~371) ----- ----- Net cash used in investing activities................ (~~423~~153) (~~231~~407) ----- ----- Cash flows from financing activities Net proceeds from the issuance of long-term debt.......... ~~288~~ -- 288 ----- ----- Net cash provided by financing activities............ ~~288~~ -- 288 ----- ----- ~~Increase~~Net change in cash and cash equivalents....................... (19) 25 -- Cash and cash equivalents Beginning of period....................................... --25 -- ----- ----- End of period............................................. $ 256 $ --25 ===== ==== ~~Supplemental cash flow disclosures: Non-cash dividend to parent of affiliated receivables..... $ 528 $ --~~ =~~==== ====~~

See accompanying notes. 3 ANR PIPELINE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES We are an indirect wholly owned subsidiary of El Paso Corporation (El Paso). We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United States Securities and Exchange Commission. Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by generally accepted accounting principles. You should read it along with our 2003 Annual Report on Form 10-K which includes a summary of our significant accounting policies and other disclosures. The financial statements as of June 30, 2004, and for the quarters and six months ended June 30, 2004 and 2003, are unaudited. We derived the balance sheet as of December 31, 2003, from the audited balance sheet filed in our 2003 Form 10-K. In our opinion, we have made all adjustments which are of a normal, recurring nature to fairly present our interim period results. Due to the seasonal nature of our business, information for interim periods may not be indicative of our results of operations for the entire year. In addition, prior period information presented in these financial statements includes reclassifications which were made to conform to current period presentation. These reclassifications had no effect on our previously reported net income or stockholder's equity. Our accounting policies are consistent with those discussed in our 2003 Form 10-K. 2. LIQUIDITY In May 2004, El Paso announced that the results of an independent investigation confirmed that its historical financial statements should be restated to reflect previously announced revisions to its natural gas and oil reserve estimates. El Paso believes that a material restatement of its financial statements would have constituted an event of default under its $3 billion revolving credit facility, under which we are eligible to borrow (see Note 3), and various other financings; specifically under the provisions of those agreements related to representations and warranties on the accuracy of its historical financial statements and on El Paso's debt to total capitalization ratio. Beginning in March 2004, El Paso received a series of waivers on its $3 billion revolving credit facility and these other financing transactions to address these issues. In August 2004, El Paso announced that its financial statements would likely be further restated for an issue related to the manner in which it historically accounted for hedges of its natural gas production. To address the issues relating to the further restatement, on August 6, 2004, El Paso received a third waiver on its $3 billion revolving credit facility which waived any defaults related to representations and warranties of the accuracy of its historical financial statements, amended its debt to capitalization ratio, extended the filing deadline for its December 31, 2003 annual financial statements until September 30, 2004, and extended the filing deadline for its March 31, 2004 and June 30, 2004 quarterly financial statements until November 30, 2004. The August waiver to the $3 billion revolving credit facility also placed restrictions on the voluntary prepayment of El Paso's and its subsidiaries debt that matures after June 30, 2005, amended one of the defined event of default provisions and also provided that if El Paso or any of its significant subsidiaries receives or is required to provide a notice of default on any other debt or guaranty of debt that in the aggregate exceeds $100 million, El Paso will have 29 days to file its financial statements (not to go beyond September 30, 2004 in the case of its December 31, 2003 financial statements and November 30, 2004, in the case of its March 31, 2004 and June 30, 2004 financial statements). If El Paso does not file its financial statements by these required dates, El Paso would need to obtain additional waivers to avoid an event of default. Although we are a party to El Paso's $3 billion revolving credit facility, we do not have any borrowings or letters of credit outstanding under that facility. Based upon a review of our financing transactions, we believe that a default on El Paso's $3 billion revolving credit facility would not constitute an event of default on our other debt agreements. El Paso is a significant potential source of liquidity to us. We participate in El Paso's cash management program. Under this program, depending on whether we have short-term cash surpluses or requirements, we either provide cash to El Paso or El Paso provides cash to us. We have historically provided cash to El Paso 4 under this program, and as of June 30, 2004, we had a cash advance receivable from El Paso of $481 million, classified as a non-current asset in our balance sheet. If El Paso were unable to meet its liquidity needs, we would not have access to this source of liquidity and there is no assurance that El Paso could repay the amounts owed to us. In that event, we could be required to write-off some or all of these advances, which could have a material impact on our stockholder's equity and we would still be required to repay affiliated company payables. Although increases in our debt to EBITDA (as defined in our agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us from incurring additional debt, the equity reduction that would result if we wrote off these receivables would not result in an event of default under our existing debt agreements. In addition, based on our current estimates of cash flows, we do not believe we will need to seek repayment of all or part of these advances in the next twelve months. El Paso's ownership interest in us serves as collateral under El Paso's revolving credit facility and other of El Paso's financing transactions. If El Paso's lenders under these facilities were to exercise their rights to this collateral, our ownership could change. However, this change of control would not constitute an event of default under our existing debt agreements. If, as a result of the events described above, El Paso were subject to voluntary or involuntary bankruptcy proceedings, El Paso and its other subsidiaries and their creditors could attempt to make claims against us, including claims to substantively consolidate our assets and liabilities with those of El Paso and its other subsidiaries. We believe that claims to substantively consolidate us with El Paso and/or its other subsidiaries would be without merit. However, there is no assurance that El Paso and/or its other subsidiaries or their creditors would not advance such a claim in a bankruptcy proceeding. If we were to be substantively consolidated in a bankruptcy proceeding with El Paso and/or its other subsidiaries, there could be a material adverse effect on our financial condition and our liquidity. Finally, we have cross-acceleration provisions in our long-term debt agreements that state that should we incur an event of default under which borrowings in excess of $5 million are accelerated, our long-term debt could also be accelerated. The acceleration of our long-term debt would adversely affect our liquidity position and, in turn, our financial condition. 3. DEBT AND CREDIT FACILITIES We have reclassified our $75 million, 7.00% debentures due 2025, to current maturities because the holders may require us to redeem their debentures at par value on June 1, 2005. Credit Facilities El Paso maintains a $3 billion revolving credit facility, with a $1.5 billion letter of credit sublimit, which matures on June 30, 2005. The $3 billion revolving credit facility has a borrowing cost of LIBOR plus 350 basis points, letter of credit fees of 350 basis points and a commitment fee of 75 basis points on the unused portion of the facility. We, along with El Paso and our affiliates, Tennessee Gas Pipeline Company, Colorado Interstate Gas Company and El Paso Natural Gas Company, are borrowers under the $3 billion revolving credit facility. We are only liable for amounts we directly borrow under the $3 billion revolving credit facility. As of June 30, 2004, $600 million was outstanding and $1.1 billion in letters of credit were issued under the $3 billion revolving credit facility, none of which was borrowed by or issued on our behalf. During the fourth quarter of 2003 and the first quarter of 2004, El Paso liquidated a portion of the collateral that supported the $3 billion revolving credit facility, which reduced the borrowing availability by $42 million. See Note 2 for a discussion regarding El Paso's waivers on the $3 billion revolving credit facility. El Paso's equity in several of its subsidiaries, including its equity in us, collateralizes the $3 billion revolving credit facility and $303 million of other financing arrangements including leases, letters of credit and other credit facilities. Under the $3 billion revolving credit facility and other financing agreements, we are subject to a number of restrictions and covenants. The most restrictive of these include (i) limitations on the incurrence of additional debt, based on a ratio of debt to EBITDA (as defined in our agreements), the most restrictive of 5 which shall not exceed 5 to 1; (ii) limitations on the use of proceeds from borrowings; (iii) limitations, in some cases, on transactions with our affiliates; (iv) limitations on the incurrence of liens; (v) potential limitations on our ability to declare and pay dividends; and (vi) potential limitations on our ability to participate in El Paso's cash management program discussed in Note 6. 4. COMMITMENTS AND CONTINGENCIES Legal Proceedings Grynberg. In 1997, we and a number of our affiliates were named defendants in actions brought by Jack Grynberg on behalf of the U.S. Government under the False Claims Act. Generally, these complaints allege an industry-wide conspiracy to underreport the heating value as well as the volumes of the natural gas produced from federal and Native American lands, which deprived the U.S. Government of royalties. The plaintiff in this case seeks royalties that he contends the government should have received had the volume and heating value been differently measured, analyzed, calculated and reported, together with interest, treble damages, civil penalties, expenses and future injunctive relief to require the defendants to adopt allegedly appropriate gas measurement practices. No monetary relief has been specified in this case. These matters have been consolidated for pretrial purposes (In re: Natural Gas Royalties Qui Tam Litigation, U.S. District Court for the District of Wyoming, filed June 1997). Discovery is proceeding. Our costs and legal exposure related to these lawsuits and claims are not currently determinable. Will Price (formerly Quinque). We and a number of our affiliates are named defendants in Will Price, et al. v. Gas Pipelines and Their Predecessors, et al., filed in 1999 in the District Court of Stevens County, Kansas. Plaintiffs allege that the defendants mismeasured natural gas volumes and heating content of natural gas on non-federal and non-Native American lands and seek to recover royalties that they contend they should have received had the volume and heating value of natural gas produced from their properties been differently measured, analyzed, calculated and reported, together with prejudgment and postjudgment interest, punitive damages, treble damages, attorneys' fees, costs and expenses, and future injunctive relief to require the defendants to adopt allegedly appropriate gas measurement practices. No monetary relief has been specified in this case. Plaintiffs' motion for class certification of a nationwide class of natural gas working interest owners and natural gas royalty owners was denied on April 10, 2003. Plaintiffs were granted leave to file a Fourth Amended Petition, which narrows the proposed class to royalty owners in wells in Kansas, Wyoming and Colorado and removes claims as to heating content. A second class action has since been filed as to the heating content claim. Our costs and legal exposure related to these lawsuits and claims are not currently determinable. In addition to the above matters, we and our subsidiaries and affiliates are named defendants in numerous lawsuits and governmental proceedings that arise in the ordinary course of our business. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If we determine that an unfavorable outcome is probable and can be estimated, we establish the necessary accruals. As this information becomes available, or other relevant developments occur, we will adjust our accrual amounts accordingly. While there are still uncertainties related to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our current reserves are adequate. As of June 30, 2004, we had approximately $1 million accrued for our outstanding legal matters. Environmental Matters We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy the effect on the environment of the disposal or release of specified substances at current and former operating sites. As of June 30, 2004, we had accrued approximately $28 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and for related environmental legal costs. Our accrual was based on the most 6 likely outcome that can be reasonably estimated. Below is a reconciliation of our accrued liability as of June 30, 2004 (in millions): Balance as of January 1, 2004............................... $29 Additions/adjustments for remediation activities............ 1 Payments for remediation activities......................... (2) --- Balance as of June 30, 2004................................. $28 ===

In addition, we expect to make capital expenditures for environmental matters of approximately $19 million in the aggregate for the years 2004 through 2008. These expenditures primarily relate to compliance with clean air regulations. For the remainder of 2004, we estimate that our total remediation expenditures will be approximately $3 million, which primarily will be expended under government directed clean-up plans. CERCLA Matters. We have received notice that we could be designated, or have been asked for information to determine whether we could be designated, as a Potentially Responsible Party (PRP) with respect to three active sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third parties and settlements which provide for payment of our allocable share of remediation costs. As of June 30, 2004 we have estimated our share of the remediation costs at these sites to be approximately $1 million. Since the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required and because in some cases we have asserted a defense to any liability, our estimates could change. Moreover, liability under the federal CERCLA statute is joint and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in estimating our liabilities. Reserves for these matters are included in the environmental reserve discussed above. It is possible that new information or future developments could require us to reassess our potential exposure related to environmental matters. We may incur significant costs and liabilities in order to comply with existing environmental laws and regulations. It is also possible that other developments, such as increasingly strict environmental laws and regulations and claims for damages to property, employees, other persons and the environment resulting from our current or past operations, could result in substantial costs and liabilities in the future. As this information becomes available, or other relevant developments occur, we will adjust our accrual amounts accordingly. While there are still uncertainties relating to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our reserves are adequate. Rates and Regulatory Matters Cashout Proceeding. On May 1, 2002, we made our annual filing to reconcile the costs and revenues associated with operating our cashout program, a program that involves the sale and purchase of natural gas to satisfy shipper imbalances. On October 31, 2002, the Federal Energy Regulatory Commission (FERC) accepted the filing, and allowed our proposed cashout surcharge to go into effect. However, the FERC also found that the existing cashout mechanism was no longer "just and reasonable" and set the case for hearing to establish a replacement mechanism. A hearing was held in January 2004. Initial and reply briefs were filed in March 2004. On April 12, 2004, the Administrative Law Judge (ALJ) issued an initial decision. The ALJ concluded that five changes should be made to our cashout mechanism: (1) eliminate the cashout surcharge; (2) institute an in-kind balancing option for all shippers; (3) to the extent a shipper remains under a mechanism that remedies negative imbalances by cash payments, use a high/low pricing mechanism to develop the amount of the cash payment that must be made; (4) physically balance the system at the end of each month, to the extent it is operationally feasible to do so; and (5) keep Plant Thermal Reduction shippers apprised of their status with respect to imbalances. In addition, the ALJ found that we should be made whole for past amounts owed to us under the prior cashout mechanism and rejected certain proposals of a group of 7 shippers for establishment of an imbalance account to be credited with revenues from the sale of excess fuel and lost and unaccounted for gas and storage overrun service revenues. The initial decision is subject to review by the FERC. There are other regulatory rules and orders in various stages of adoption, review and/or implementation, none of which we believe will have a material impact on us. While the outcome of our outstanding rates and regulatory matters cannot be predicted with certainty, based on current information, we do not expect the ultimate resolution of these matters to have a material adverse effect on our financial position, operating results or cash flows. However, it is possible that new information or future developments could require us to reassess our potential exposure related to these matters, which could have a material effect on our results of operations, our financial position, and on our cash flows. Other CFTC Investigation. In April 2004, we elected to voluntarily cooperate with the Commodity Futures Trading Commission (CFTC) in connection with the CFTC's industry-wide investigation of activities affecting the price of natural gas in the fall of 2003. Specifically, we provided information relating to storage reports provided to the Energy Information Administration for the period October 2003 though December 2003. While the outcome of this matter cannot be predicted with certainty, based on current information we do not expect the ultimate resolution of this matter to have a material adverse effect on our financial position, operating results or cash flows. However, it is possible that new information or future developments could require us to reassess our potential exposure related to this matter, which could have a material effect on our results of operations, our financial position, and on our cash flows. 5. RETIREMENT BENEFITS Our postretirement benefit costs for the quarters and six months ended June 30, 2004 and 2003 were less than $1 million. 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE AND TRANSACTIONS WITH AFFILIATES Investment in Unconsolidated Affiliate Our investment in unconsolidated affiliate consists of our equity ownership interest in Great Lakes Gas Transmission Limited Partnership (Great Lakes L.P.). Summarized income statement information of our proportionate share of our unconsolidated affiliate for the periods ended June 30, are as follows:

~~QUARTER~~QUARTERS ~~NINE~~ENDED SIX MONTHS ENDED ~~ENDED~~JUNE ~~SEPTEMBER~~ 30, ~~2002~~JUNE ~~SEPTEMBER~~ 30, ~~2002~~ -------------- ----------------- 2004 2003 2004 2003 ---- ---- ----- ----- (IN MILLIONS) ~~Net~~Operating ~~income~~results ~~Historical~~data: Operating revenues................................~~.......~~ $1732 $30 87$68 El$65 ~~Paso~~Operating ~~Great Lakes, Inc~~expenses. ............................... 913 3314 ~~---~~26 ~~----~~28 ~~Combined~~Net ~~net~~ income(1)..................................... ~~$26~~11 ~~$120~~7 ~~===~~24 ~~====~~20

--------------- (1)Our proportionate share of net income includes our share of taxes payable by partners recorded by Great Lakes L.P. Transactions with Affiliates We participate in El Paso's cash management program which matches short-term cash surpluses and needs of participating affiliates, thus minimizing total borrowings from outside sources. As of June 30, 2004 and December 31, 2003, we had advanced to El Paso $481 million and $367 million. The interest rate at June 30, 2004 was 2.4% and at December 31, 2003 was 2.8%. These receivables are due upon demand; 8 however, as of June 30, 2004 and December 31, 2003, we have classified these advances as non-current notes receivable from affiliates because we do not anticipate settlement within the next twelve months. See Note 2 for a discussion regarding our participation in and the collectibility of these receivables. At June 30, 2004 and December 31, 2003, we had accounts receivable from affiliates of $9 million and $5 million. In addition, we had accounts payable to affiliates of $18 million at June 30, 2004, and December 31, 2003. These balances arose in the normal course of business. At June 30, 2004 and December 31, 2003, we had payables to an affiliate of $192 million and $196 million, for obligations related to a non-cancelable lease on our former headquarters. Of these amounts, $8 million was classified as current at June 30, 2004 and December 31, 2003. This payable resulted from the relocation of our headquarters from Detroit, Michigan to Houston, Texas and the transfer of this lease to our affiliate from a third party. The lease payments are due semi-annually. The following table shows revenues and charges from our affiliates for the periods ended June 30:

~~QUARTER~~QUARTERS ~~NINE~~ENDED SIX MONTHS ENDED ~~ENDED~~JUNE ~~SEPTEMBER~~ 30, ~~SEPTEMBER~~JUNE 30, -------------- ----------------- 2004 2003 ~~2002~~2004 2003 ~~2002~~ ----- ----- ----- ----- (IN MILLIONS) ~~Operating~~Revenues ~~results~~from ~~data: Operating revenues~~affiliates............................~~...........~~ $31 3 $31 4 $96 6 $9411 ~~Operating~~Operations and maintenance expenses from affiliates........................................ 1528 1432 4355 3566 ~~Net~~Reimbursements ~~income(1)~~of operating expenses charged to affiliates........................................~~....~~ 71 91 272 331

9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in Item 2 updates, and should be read in conjunction with, the information disclosed in our 2003 Form 10-K and the financial statements and notes presented in Item 1 of this Form 10-Q. RESULTS OF OPERATIONS Our management, as well as El Paso's management, uses earnings before interest expense and income taxes (EBIT) to assess the operating results and effectiveness of our business. We define EBIT as net income adjusted for (i) items that do not impact our income from continuing operations, such as the impact of accounting changes, (ii) income taxes, (iii) interest and debt expense and (iv) affiliated interest income. Our business consists of consolidated operations as well as an investment in an unconsolidated affiliate. We exclude interest and debt expense from this measure so that our management can evaluate our operating results without regard to our financing methods. We believe the discussion of our results of operations based on EBIT is useful to our investors because it allows them to more effectively evaluate the operating performance of both our consolidated business and our unconsolidated investments using the same performance measure analyzed internally by our management. EBIT may not be comparable to measurements used by other companies. Additionally, EBIT should be considered in conjunction with net income or other performance measures such as operating income or operating cash flow. The following is a reconciliation of our operating income to our EBIT and our EBIT to our net income for the periods ended June 30:

QUARTER ~~NINE~~ENDED SIX MONTHS ENDED ~~ENDED~~JUNE ~~SEPTEMBER~~ 30, ~~SEPTEMBER~~JUNE 30, ----------------- ------------------- 2004 2003 ~~2002~~2004 2003 ~~2002~~ ------- ------- -------- -------- (IN MILLIONS), ~~Revenues~~EXCEPT ~~from~~VOLUME ~~affiliates~~AMOUNTS) Operating revenues......................................... $ 3103 $ 7126 $14 241 $21 ~~Operations~~311 ~~and~~Operating ~~maintenance~~expenses......................................... ~~from~~(72) ~~affiliates~~(86) (146) (179) ------ ------ ------ ------ Operating income...................................... 3231 3440 9795 92132 ~~Reimbursements~~------ ~~for~~------ ~~operating~~------ ~~expenses~~------ Earnings from ~~affiliates~~unconsolidated affiliate..................... 16 13 36 31 ------ ------ 1------ ------ EBIT.................................................. 47 53 131 163 Interest and debt expense.................................. (17) (17) (35) (30) Affiliated interest income, net............................ 2 -- 4 -- Income taxes............................................... (12) (14) (37) (50) ------ ------ ------ ------ Net income............................................ $ 20 $ 22 $ 63 $ 83 ====== ====== ====== ====== Throughput volumes (BBtu/d)(1)............................. 4,934 4,918 5,506 5,903 ====== ====== ====== ======

---------- (1) Throughput volumes include billable transportation throughput volumes for storage withdrawal and volumes associated with our proportionate share of our 50 percent equity investment in Great Lakes L.P. 10 OPERATING RESULTS (EBIT) The following factors contributed to our overall EBIT decrease of $6 million and $32 million for the three months and six months ended June 30, 2004 as compared to the same periods in 2003:

~~NINE~~EBIT ~~MONTHS~~IMPACT ~~QUARTER ENDED ENDED SEPTEMBER 30, SEPTEMBER 30,~~ ----------------- ----------------- ~~2003~~QUARTER ~~2002~~ENDED ~~2003~~SIX ~~2002~~MONTHS ENDED JUNE 30, JUNE 30, ------- ------- ------- --------- (IN MILLIONS,) ~~EXCEPT VOLUME AMOUNTS~~INCREASE/(DECREASE) Operating ~~revenues.........................................~~revenue $items: ~~117~~Lower $operating ~~120~~revenues $related ~~428~~to $the ~~400~~Dakota ~~Operating~~gasification ~~expenses~~facility...............................~~..........~~ $(8412) $(8428) ~~(263)~~Impact ~~(241)~~of ~~------~~contract ~~------~~changes ~~------~~with ~~------~~We ~~Operating income~~Energies............ (3) (12) Impact of contract remarketing/restructuring...........~~...............~~ 33(3) 36(14) ~~165~~Lower ~~159~~sales ~~------~~of ~~------~~operational ~~------~~natural ~~------~~gas ~~Earnings~~recoveries ~~from~~relative ~~unconsolidated~~to ~~affiliates....................~~operating ~~11 13 42 49 Other income~~needs.........................~~......................~~ --(3) --(14) ~~-- 5 ------ ------ ------ ------~~ Other.................................................. 11(2) 13(2) 42Operating 54expense ~~------~~items: ~~------~~Lower ~~------~~operating ~~------~~expenses ~~EBIT~~related to the Dakota gasification facility............................... 12 27 Other................. ~~44 49 207 213 Interest and debt expense~~.................................. ~~(18)~~2 ~~(11)~~6 ~~(48)~~Other ~~(31)~~items: ~~Affiliated~~Higher ~~interest~~equity ~~income,~~earnings ~~net~~from our investment in Great Lakes L.P.~~..........................~~ 1primarily 2due 1to 4favorable ~~Income~~marketing ~~taxes~~of short-term services and lower operating expense.....~~..........................................~~ ~~(9)~~3 ~~(14)~~5 ~~(59) (66)~~ ------ ------ ~~------~~Total ~~------~~decrease ~~Net~~in ~~income~~EBIT.........................~~...................~~ $ 18(6) $ ~~26 $ 101 $ 120 ====== ====== ====== ====== Throughput volumes~~ (~~BBtu/d~~32)~~(1).............................~~ ~~4,695 4,858 5,495 5,325~~ ====== ====~~== ====== ======~~

During 2003, our natural gas purchase and sale contract associated with the Dakota gasification facility was bought out in the third quarter. As a result of this buyout, we will have lower operating revenues and lower operating expenses for the remainder of 2004 with an insignificant overall impact on our operating income and EBIT. Guardian Pipeline, which is owned in part by We Energies, is currently providing a portion of its firm transportation requirements and directly competes with us for a portion of the markets in Wisconsin. During 2003, we renegotiated the terms of several contracts with We Energies, in particular, our rates, volumes and receipt and delivery points on our pipeline system. This renegotiation will continue to impact our operating revenues and EBIT for the remainder of 2004. INTEREST AND DEBT EXPENSE Interest and debt expense for the six months ended June 30, 2004, was $5 million higher than the same period in 2003 primarily due to the issuance in March 2003 of $300 million senior unsecured notes with an annual interest rate of 8.875%. AFFILIATED INTEREST INCOME, NET Second Quarter 2004 Compared to Second Quarter 2003 Affiliated interest income, net for the quarter ended June 30, 2004, was $2 million higher than the same period in 2003 due to higher interest rates and higher average advances to El Paso under its cash management program. The average advance balance for the second quarter of 2003 of $169 million increased to $321 million in 2004. The average short-term interest rate for the second quarter increased from 1.3% in 2003 to 2.3% during the same period in 2004. 11 Six Months Ended 2004 Compared to Six Months Ended 2003 Affiliated interest income, net for the six months ended June 30, 2004, was $4 million higher than the same period in 2003 due primarily to higher interest rates and higher average advances to El Paso under its cash management program. The average advance balance for the six months of 2004 increased to $295 million from $64 million in 2003. The average short-term interest rates for the six month period increased from 1.4% in 2003 to 2.5% in 2004. INCOME TAXES

QUARTER ~~NINE~~ENDED SIX MONTHS ENDED ~~ENDED~~JUNE ~~SEPTEMBER~~ 30, ~~SEPTEMBER~~JUNE 30, -------------- -- --------------- 2004 2003 ~~2002~~2004 2003 ~~2002~~ ------ ------ ------ ------ (IN MILLIONS, EXCEPT FOR RATES) Income taxes......................................~~.........~~ $12 9 $14 $5937 $6650 Effective tax rate................................~~.........~~ 3338% 3539% 37% 3538%

Our effective tax rates were different than the statutory rate of 35 percent in all periods, primarily due to the effect of state income taxes. OTHER In the second quarter of 2004, we received $3 million as a result of a shipper restructuring its transportation contract on our Southwest Leg. We have also entered into an agreement with that same shipper to restructure another of its transportation contracts on our Southeast Leg as well as a related gathering contract. We expect to complete the second restructuring in March 2005 and receive $26 million then. EXPANSION/CERTIFICATED PROJECTS WestLeg. In June 2003, the FERC granted certificate authorization for our proposed WestLeg expansion project. The WestLeg project will expand the capacity of our system by approximately 218 MMcf/d by looping our Madison Lateral line, located in Wisconsin's Walworth and Rock Counties and in Illinois' McHenry County, and modifying our existing Beloit Lateral line in Rock County, Wisconsin. The estimated cost of the project is approximately $48 million and the anticipated in-service date is November 2004. Current expenditures to date as of June 30, 2004 are approximately $17 million. EastLeg. In July 2004, the FERC granted certificate authorization for our proposed EastLeg project. The EastLeg project will add 142 MMcf/d of capacity along our lateral system in Wisconsin. The project consists of replacing 4.7 miles of existing 14-inch pipe with a 30-inch line in Washington County, add 3.5 miles of 8-inch looping on the Denmark Lateral in Brown County and modify our existing Mountain Compressor Station in Oconto County, Wisconsin. The estimated cost of the project is $19 million and the anticipated in-service date of the project is November 2005. NorthLeg. In June 2004, the FERC granted certificate authorization for our proposed NorthLeg project. The NorthLeg project will add 6,000 horse power of electric powered compression at its Weyauwega Compressor station in Waupaca County, Wisconsin. The estimated cost of the project is $14 million and the anticipated in-service date of the project is November 2005. Storage Realignment. The Storage Realignment Project involves four natural gas storage fields in Michigan. We propose to convert a total of 4.1 Bcf of base gas to working gas at three storage fields and abandon by sale the Capac Storage Field to Mid Michigan Gas Storage Company, an affiliated non-jurisdictional company. We also propose to construct injection/withdrawal wells and install separation equipment at one field and appurtenant equipment at two other fields to enhance late season deliverability. The estimated cost of the project is approximately $10 million. The FERC issued an order granting certificate authorization for the project on August 9, 2004. We anticipate completing the realignment by the third quarter of 2006. 12 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY Our liquidity needs have historically been provided through cash flows from operating activities and the use of El Paso's cash management program. Under El Paso's cash management program, depending on whether we have short-term cash surpluses or requirements, we either provide cash to El Paso or El Paso provides cash to us. We have historically provided cash advances to El Paso, and we reflect these net advances as investing activities in our statement of cash flows. As of June 30, 2004, we had receivables from El Paso of $481 million as a result of this program. These receivables are due upon demand; however, we do not anticipate settlement within the next twelve months. As of June 30, 2004, these receivables were classified as non-current notes receivable from affiliates in our balance sheet. We believe that cash flows from operating activities will be adequate to meet our short-term capital and debt service requirements for our existing operations. If El Paso were unable to meet its liquidity needs, we would not have access to this source of liquidity and there is no assurance that El Paso could repay the amounts owed to us. In that event, we could be required to write-off some or all of these advances, which could have a material impact on our stockholder's equity and we would still be required to repay affiliated company payables. Although increases in our debt to EBITDA (as defined in our agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us from incurring additional debt, the equity reduction that would result if we wrote off these receivables would not result in an event of default under our existing debt agreements. In addition, based on our current estimates of cash flows, we do not believe we will need to seek repayment of all or part of these advances in the next twelve months. El Paso's ownership interest in us serves as collateral under El Paso's revolving credit facility and other of El Paso's financing transactions. If El Paso's lenders under these facilities were to exercise their rights to this collateral, our ownership could change. However, this change of control would not constitute an event of default under our existing debt agreements. If, as a result of the events described above, El Paso were subject to voluntary or involuntary bankruptcy proceedings, El Paso and its other subsidiaries and their creditors could attempt to make claims against us, including claims to substantively consolidate our assets and liabilities with those of El Paso and its other subsidiaries. We believe that claims to substantively consolidate us with El Paso and/or its other subsidiaries would be without merit. However, there is no assurance that El Paso and/or its other subsidiaries or their creditors would not advance such a claim in a bankruptcy proceeding. If we were to be substantively consolidated in a bankruptcy proceeding with El Paso and/or its other subsidiaries, there could be a material adverse effect on our financial condition and our liquidity. Finally, we have cross-acceleration provisions in our long-term debt agreements that state that should we incur an event of default under which borrowings in excess of $5 million are accelerated, our long-term debt could also be accelerated. The acceleration of our long-term debt would adversely affect our liquidity position and, in turn, our financial condition. Our cash flows for the six months ended June 30 were as follows:

~~EXHIBIT~~2004 ~~NUMBER~~2003 ~~DESCRIPTION~~ ------- -----~~------~~ *31.A(IN ~~Certification~~MILLIONS) ofCash ~~Chief~~flows ~~Executive~~from ~~Officer~~operating ~~pursuant to sec~~activities. ~~302 of the Sarbanes-Oxley Act of 2002~~. *31.~~B Certification of Chief Financial Officer pursuant to sec~~. ~~302 of the Sarbanes-Oxley Act of 2002~~. *32.A.................. ~~Certification~~$ of134 ~~Chief~~$ ~~Executive~~144 ~~Officer~~Cash ~~pursuant~~flows tofrom 18investing Uactivities.S.C. ~~sec~~. ~~1350 as adopted pursuant to sec~~. ~~906 of the Sarbanes-Oxley Act of 2002~~. *32.B................. ~~Certification~~(153) of(407) ~~Chief~~Cash ~~Financial~~flows ~~Officer~~from ~~pursuant~~financing ~~to 18 U~~activities.S.C. ~~sec~~. ~~1350 as adopted pursuant to sec~~.................... ~~906 of the Sarbanes~~-~~Oxley~~- ~~Act of 2002.~~288(1)

--------------- (1) Represents net proceeds from the issuance of $300 million of long-term debt in March 2003. Cash Flows from Operating Activities Net cash provided by operating activities was $134 million for the first six months of 2004 versus $144 million in the same period of 2003. This decrease was primarily due to higher interest payments in 2004, 13 various changes in assets and liabilities offset by higher distributed earnings from an affiliated investment in 2004. Cash Flows from Investing Activities Net cash used in investing activities consisted of an increase of $114 million in advances to our affiliate and $39 million in capital expenditures. CAPITAL EXPENDITURES Our capital expenditures for the six months ended June 30, 2004 were approximately $39 million. Under our current plan, we expect to spend $148 million during 2004 for capital expenditures, consisting of $62 million to expand the capacity on our system and $86 million for maintenance capital. We expect to fund capital expenditures through a combination of internally generated funds and/or by recovering amounts advanced to El Paso under its cash management program. COMMITMENTS AND CONTINGENCIES See Item 1, Financial Statements, Note 4, which is incorporated herein by reference. 14 RISK FACTORS AND CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while we believe these assumptions or bases to be reasonable and to be made in good faith, assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis. We cannot assure you, however, that the statement of expectation or belief will result or be achieved or accomplished. The words "believe," "expect," "estimate," "anticipate" and similar expressions will generally identify forward-looking statements. With this in mind, you should consider the risks discussed elsewhere in this report and other documents we file with the Securities and Exchange Commission from time to time, and the following important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us or on our behalf. OUR RELATIONSHIP WITH EL PASO AND ITS FINANCIAL CONDITION SUBJECTS US TO POTENTIAL RISKS THAT ARE BEYOND OUR CONTROL. Due to our relationship with El Paso, adverse developments or announcements concerning El Paso could adversely affect our financial condition, even if we have not suffered any similar development. The senior unsecured indebtedness of El Paso is currently rated Caa1 by Moody's (with a negative outlook and under review for a possible downgrade) and CCC+ by Standard & Poor's (with a negative outlook), which are below investment grade ratings. Our senior unsecured indebtedness is rated B1 by Moody's (with a negative outlook and under review for a possible downgrade) and B- by Standard & Poor's (with a negative outlook). Further downgrades of our credit ratings would increase our cost of capital and collateral requirements, and could impede our access to capital markets. As a result of its downgrades over the last two years, El Paso has realized substantial demands on its liquidity. These downgrades are a result, at least in part, of the outlook generally for the consolidated businesses of El Paso and its needs for liquidity. El Paso has a long-range plan that, among other things, defines its future businesses, targets significant debt reduction and establishes financial goals. An inability to meet these objectives could adversely affect El Paso's liquidity position, and in turn affect our financial condition. Pursuant to El Paso's cash management program, surplus cash is made available to El Paso in exchange for an affiliated receivable. In addition, we conduct commercial transactions with some of our affiliates. As of June 30, 2004, we have net receivables of approximately $472 million from El Paso and its affiliates. El Paso provides cash management and other corporate services to us. If El Paso is unable to meet its liquidity needs, there can be no assurance that we will be able to access cash under the cash management program, or that our affiliates would pay their obligations to us. However, we would still be required to satisfy affiliated company payables. Our inability to recover any intercompany receivables owed to us could adversely affect our ability to repay our outstanding indebtedness. For a further discussion of these matters, see Item 1, Financial Statements, Note 6. In May 2004, El Paso announced that an independent review of its natural gas and oil reserves confirmed its previous assessment that the financial statements of El Paso and certain of its subsidiaries should be restated. In August 2004, El Paso announced it would likely be required to further restate its financial statements for adjustments related to the manner in which it historically accounted for hedges of its natural gas production. At this time, El Paso's December 31, 2003 restated financial statements have not been filed, nor has it filed quarterly reports for March 31, 2004 and June 30, 2004. Also, as a result of its reserve revisions, several class action lawsuits have been filed against El Paso and several of its subsidiaries, but not against us. The reserve revisions have also become the subject of an SEC investigation and may become the subject of separate inquiries by other governmental regulatory agencies. These investigations and lawsuits may further 15 negatively impact El Paso's credit ratings and place further demands on its liquidity. See Item 1, Financial Statements, Note 2 for a further discussion of these matters. A DEFAULT UNDER EL PASO'S $3 BILLION REVOLVING CREDIT FACILITY BY ANY PARTY COULD ACCELERATE OUR FUTURE BORROWINGS, IF ANY, UNDER THE FACILITY AND OUR LONG-TERM DEBT, WHICH COULD ADVERSELY AFFECT OUR LIQUIDITY POSITION. We are a party to El Paso's $3 billion revolving credit facility. We are only liable, however, for our borrowings under the $3 billion revolving credit facility, which were zero as of June 30, 2004. Under the $3 billion revolving credit facility, a default by El Paso, or any other party, could result in the acceleration of all outstanding borrowings under the facility, including the borrowings of any non-defaulting party, and could preclude us from borrowing under the facility in the future. We believe El Paso's announced restatements of its prior period financial statements would have constituted an event of default under the $3 billion credit facility; however, El Paso received waivers of the potential defaults on its $3 billion credit facility, which continue to be effective. See Item 1, Financial Statements, Note 2, for additional information regarding these matters. The acceleration of our future borrowings, if any, under the credit facility, or the inability to borrow under this facility, could adversely affect our liquidity position and, in turn, our financial condition. Furthermore, the indentures governing our long-term debt include cross-acceleration provisions. Therefore, if we borrow $5 million or more under the credit facility and such borrowings are accelerated for any reason, including the default of another party, our long-term debt could also be accelerated. The acceleration of our long-term debt could also adversely affect our liquidity position and, in turn, our financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information updates, and you should read it in conjunction with, information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2003, in addition to the information presented in Items 1 and 2 of this Quarterly Report on Form 10-Q. There are no material changes in our quantitative and qualitative disclosures about market risks from those reported in our Annual Report on Form 10-K for the year ended December 31, 2003. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures and the internal controls over financial reporting as of the end of the period covered by this Quarterly Report pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (Exchange Act). Based on our controls evaluation, our principal executive officer and principal financial officer have concluded that the disclosure controls are effective. We strive to maintain disclosure controls and procedures and internal controls over financial reporting that are designed to ensure that the information required to be disclosed in our Exchange Act filings is recorded, processed, summarized and reported within the required timeframes, and that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In doing so, we recognize that the effectiveness of our or any system of controls and procedures is subject to limitations, including the exercise of judgment in the design, implementation and evaluation of controls and procedures, the assumptions used in identifying future events and the ability to completely eliminate misconduct. As a result, there is no assurance that our or any controls and procedures will prevent all errors and all fraud. By their nature, controls and procedures can provide only reasonable assurance regarding our control objectives. We are currently documenting and reviewing our internal controls to ensure compliance with Section 404 of the Sarbanes Oxley Act of 2002 by December 31, 2004. While we are not aware of any items at this time that constitute material weaknesses, as that term is defined in Auditing Standards (AU) Section 325, we are 16 identifying areas where our processes can be improved, and are actively working to implement those improvements. Furthermore, as we continue our compliance review, we may identify additional matters which may need to be reported or which may constitute material weaknesses in our internal controls over financial reporting. Although we have identified deficiencies in our system of internal controls over financial reporting, we do not believe these deficiencies have had, or are reasonably likely to have, a material impact on our financial statements. In addition, there have been no changes during the period in our internal controls over financial reporting that would adversely affect our ability to provide, with reasonable assurance, reliable information required in our reports submitted under the Securities Exchange Act of 1934. 17 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Part I, Item 1, Financial Statements, Note 4, which is incorporated herein by reference. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Each exhibit identified below is filed as a part of this report. Exhibits not incorporated by reference to a prior filing are designated by an "*". All exhibits not so designated are incorporated herein by reference to a prior filing as indicated.

EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.A.2 Second Waiver to the $3,000,000,000 Revolving Credit Agreement dated as of June 15, 2004 among El Paso Corporation, El Paso Natural Gas Company, Tennessee Gas Pipeline Company, ANR Pipeline Company and Colorado Interstate Gas Company, as Borrowers, the Lenders party thereto and JPMorgan Chase Bank, as Administrative Agent, ABN AMRO Bank N.V. and Citicorp North America, Inc., as Co- Documentation Agents, Bank of America, N.A. and Credit Suisse First Boston, as Co-Syndication Agents. 10.A.3 Second Amendment to the $3,000,000,000 Revolving Credit Agreement and Third Waiver dated as of August 6, 2004 among El Paso Corporation, El Paso Natural Gas Company, Tennessee Gas Pipeline Company, ANR Pipeline Company and Colorado Interstate Gas Company, as Borrowers, the Lenders party thereto and JPMorgan Chase Bank, as Administrative Agent, ABN AMRO Bank N.V. and Citicorp North America, Inc., as Co-Documentation Agents, Bank of America, N.A. and Credit Suisse First Boston, as Co-Syndication Agents. (Exhibit 99.B to our Form 8-K filed August 10, 2004.) *31.A Certification of Chief Executive Officer pursuant to sec. 302 of the Sarbanes-Oxley Act of 2002. *31.B Certification of Chief Financial Officer pursuant to sec. 302 of the Sarbanes-Oxley Act of 2002. *32.A Certification of Chief Executive Officer pursuant to 18 U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act of 2002. *32.B Certification of Chief Financial Officer pursuant to 18 U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act of 2002.

18 Undertaking We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange Commission, upon request, all constituent instruments defining the rights of holders of our long-term debt not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10 percent of our total consolidated assets. b. Reports on Form 8-K

19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANR PIPELINE COMPANY Date: August 13, 2004 /s/ JOHN W. SOMERHALDER II ---------------------------------- John W. Somerhalder II Chairman of the Board and Director (Principal Executive Officer) Date: August 13, 2004 /s/ GREG G. GRUBER ---------------------------------- Greg G. Gruber Senior Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial and Accounting Officer) 20 ANR PIPELINE COMPANY EXHIBIT INDEX Each exhibit identified below is filed as a part of this report. Exhibits not incorporated by reference to a prior filing are designated by an "*". All exhibits not so designated are incorporated herein by reference to a prior filing as indicated.

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