ANR PIPELINE CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 1-7320

ANR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE 38-1281775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
EL PASO BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)

TELEPHONE NUMBER: (713) 420-2600

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT: .............................NONE

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

Common Stock, par value $1 per share. Shares outstanding on March 27, 2003:
1,000

ANR PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION I(1)(a)
AND (b) TO FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

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ANR PIPELINE COMPANY

TABLE OF CONTENTS

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* We have not included a response to this item in this document since no
response is required pursuant to the reduced disclosure format permitted by
General Instruction I to Form 10-K.

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

ITEM 1. BUSINESS

GENERAL

We are a Delaware corporation incorporated in 1945. In January 2001, we
became an indirect wholly owned subsidiary of El Paso Corporation (El Paso)
through the merger of an El Paso subsidiary with El Paso CGP Company (El Paso
CGP), formerly The Coastal Corporation (Coastal). We are involved in the
transportation, storage and gathering of natural gas and related services. We
conduct our business activities through our natural gas pipeline system and our
storage facilities, each of which is discussed below.

The Pipeline System. Our system consists of approximately 10,600 miles of
pipeline with a design capacity of approximately 6,450 MMcf/d. During 2002, 2001
and 2000, our average throughput was 3,691 BBtu/d, 3,776 BBtu/d and 3,807
BBtu/d. Our two interconnected, large-diameter multiple pipeline systems
transport natural gas from natural gas producing fields in Louisiana, Oklahoma,
Texas and the Gulf of Mexico to markets in the midwestern and northeastern
regions of the U.S., including the metropolitan areas of Chicago, Detroit and
Milwaukee. Our pipeline system connects with multiple pipelines that provide our
shippers with access to diverse sources of supply and various natural gas
markets served by these pipelines, including pipelines owned by Alliance
Pipeline L.P., Vector Pipeline L.P., Guardian Pipeline LLC, Viking Gas
Transmission Company, Midwestern Gas Transmission, Natural Gas Pipeline Company
of America, Northern Border Pipeline Company, Great Lakes Gas Transmission
Limited Partnership, and Northern Natural Gas Company.

In addition to our existing systems and facility, the following project was
approved by the Federal Energy Regulatory Commission (FERC):

Storage Facilities. As of December 31, 2002, we owned or contracted for
approximately 207 Bcf of underground natural gas storage capacity which included
the contracted rights for 81 Bcf of natural gas storage capacity, of which 46
Bcf is provided by Blue Lake Gas Storage Company and 35 Bcf is provided by ANR
Storage Company, both of which are our affiliates. The maximum daily delivery
capacity of our underground natural gas storage is approximately 3 Bcf.

Under our tariff structure, customers pay us on the basis of stated rates
for transportation, storage and related services (transportation services).
Approximately 92 percent of our transportation services revenue is attributed to
a capacity reservation, or demand charge, paid by firm customers. These firm
customers are obligated to pay a monthly demand charge, regardless of the amount
of natural gas they transport or store, for the term of their contracts. The
remaining 8 percent of our transportation services revenue is attributed to
charges based solely on the volumes of natural gas actually transported or
stored on our pipeline system.

REGULATORY ENVIRONMENT

Our interstate natural gas transmission system and storage operations are
regulated by the FERC under the Natural Gas Act of 1938 and the Natural Gas
Policy Act of 1978. Our pipeline and storage facilities operate under
FERC-approved tariffs that establish rates, terms and conditions for services to
their customers. Generally, the FERC's authority extends to:

- rates and charges for natural gas transportation, storage and related
services;

- certification and construction of new facilities;

- extension or abandonment of services and facilities;

- maintenance of accounts and records;

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- relationships between pipeline and marketing affiliates;

- terms and conditions of services;

- depreciation and amortization policies;

- acquisition and disposition of facilities; and

- initiation and discontinuation of services.

The fees or rates established under our tariff are a function of our costs
of providing services to our customers, including a reasonable return on our
invested capital. Consequently, our results have historically been relatively
stable. However, our results can be subject to volatility due to factors such as
weather, changes in natural gas prices and market conditions, regulatory
actions, competition and the credit-worthiness of our customers.

Our interstate pipeline system is also subject to federal, state and local
statutes and regulations regarding pipeline safety and environmental matters.
Our system has ongoing inspection programs designed to keep our system in
compliance with environmental and pipeline safety requirements. We believe that
our system is in material compliance with the applicable requirements.

We are also subject to regulation over the safety requirements in the
design, construction, operation and maintenance of our interstate natural gas
transmission system and storage facility by the U.S. Department of
Transportation. Our operations on U.S. government land are regulated by the U.S.
Department of the Interior.

A discussion of significant rate and regulatory matters is included in Part
II, Item 8, Financial Statements and Supplementary Data, Note 8, and is
incorporated herein by reference.

MARKETS AND COMPETITION

We have approximately 238 firm and interruptible customers, including local
distribution companies, industrial customers, electric generation companies,
natural gas producers, other natural gas pipelines and natural gas marketing and
trading companies. We provide transportation services in both our natural gas
supply and market areas. We have approximately 643 firm contracts with remaining
terms that extend from one month to 22 years, and with a weighted average
remaining contract term of approximately four years. Approximately 98 percent of
our total capacity is subscribed under firm agreements. We do not own most of
the natural gas that we transport or store and accordingly do not assume natural
gas commodity price risk related to such gas.

The significant customer we served in 2002 was We Energies, with capacity
of 1,138 BBtu/d under contracts that expire in 2003 through 2010. Also,
Wisconsin Gas, which operates under the name We Energies, is a sponsor of the
Guardian Pipeline, which was placed in service in December 2002. Guardian will
directly compete for a portion of the markets served by our expiring capacity.

Our interstate natural gas transmission system and natural gas storage
business face varying degrees of competition from other pipelines, as well as
from alternative energy sources such as electricity, coal and fuel oil. We
compete with other interstate and intrastate pipelines for deliveries to
customers who can take deliveries at multiple connection points. We also compete
with other pipelines and local distribution companies to deliver increased
quantities of natural gas to our market area. In addition, we compete with
pipelines and gathering systems for connection to new supply sources.

Electric power generation is one of the fastest growing demand sectors of
the natural gas market. The potential consequences of proposed and ongoing
restructuring and deregulation of the electric power industry are currently
unclear. Restructuring and deregulation benefits the natural gas industry by
creating more demand for natural gas turbine generated electric power, but this
effect is offset, in varying degrees, by increased generation efficiency and
more effective use of surplus electric capacity as a result of open market
access.

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In response to changing market conditions, we have shifted from a
traditional dependence solely on long-term contracts to an approach that
balances short-term and long-term commitments. The shift is due to changes in
market conditions and competition driven by state utility deregulation, local
distribution company mergers, new supply sources, volatility in natural gas
prices, demand for short-term capacity and new markets in power plants.

Our ability to extend our existing contracts or re-market expiring capacity
is dependent on competitive alternatives, the regulatory environment at the
local, state and federal levels and market supply and demand factors at the
relevant dates these contracts are extended or expire. The duration of new or
renegotiated contracts will be affected by current prices, competitive
conditions and judgments concerning future market trends and volatility. While
we are allowed to negotiate contract terms at fully subscribed quantities and at
maximum rates allowed under our tariff, we must, at times, discount our
contracts to remain competitive.

ENVIRONMENTAL

A description of our environmental activities is included in Part II, Item
8, Financial Statements and Supplementary Data, Note 8, and is incorporated
herein by reference.

EMPLOYEES

As of March 26, 2003, we had approximately 390 full-time employees, none of
whom is subject to a collective bargaining agreement.

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ITEM 2. PROPERTIES

A description of our properties is included in Item 1, Business, and is
incorporated herein by reference.

We believe that we have satisfactory title to the properties owned and used
in our businesses, subject to liens for taxes not yet payable, liens incident to
minor encumbrances, liens for credit arrangements and easements and restrictions
that do not materially detract from the value of these properties, our interests
in these properties, or the use of these properties in our businesses. We
believe that our properties are adequate and suitable for the conduct of our
business in the future.

ITEM 3. LEGAL PROCEEDINGS

A description of our legal proceedings is included in Part II, Item 8,
Financial Statements and Supplementary Data, Note 8, and is incorporated herein
by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 4, Submission of Matters to a Vote of Security Holders, has been
omitted from this report pursuant to the reduced disclosure format permitted by
General Instruction I to Form 10-K.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

All of our common stock, par value $1 per share, is owned by American
Natural Resources Company, and accordingly, there is no public trading market
for our stock. American Natural Resources Company is an indirect subsidiary of
El Paso CGP. On January 29, 2001, El Paso CGP became a wholly owned subsidiary
of El Paso.

We pay dividends on our common stock from time to time from legally
available funds that have been approved for payment by our Board of Directors.
We paid cash dividends of $30 million to our parent in 2001. No common stock
dividends were declared or paid in 2002.

In February 2003, we declared and distributed a $400 million dividend of
affiliated receivables to our parent.

ITEM 6. SELECTED FINANCIAL DATA

Item 6, Selected Financial Data, has been omitted from this report pursuant
to the reduced disclosure format permitted by General Instruction I to Form
10-K.

4

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required by this Item is presented in a reduced disclosure
format pursuant to General Instruction I to Form 10-K. The notes to our
consolidated financial statements contain information that is pertinent to the
following analysis, including a discussion of our significant accounting
policies.

GENERAL

Our business consists of interstate natural gas transportation, storage,
gathering and related services. Our interstate natural gas transmission system
and natural gas storage business face varying degrees of competition from other
pipelines, as well as from alternate energy sources, such as electricity, coal
and fuel oil. We are regulated by the FERC. The FERC regulates the rates we can
charge our customers. These rates are a function of our costs of providing
services to our customers, and include a return on our invested capital. As a
result, our financial results have historically been relatively stable. However,
they can be subject to volatility due to factors such as weather, changes in
natural gas prices and market conditions, regulatory actions, competition and
the credit-worthiness of our customers. In addition, our ability to extend
existing customer contracts or re-market expiring contracted capacity is
dependent on competitive alternatives, the regulatory environment and supply and
demand factors at the relevant dates these contracts are extended or expire. We
make every attempt to negotiate contract terms at fully-subscribed quantities
and at maximum rates allowed under our tariff; however, many of our contracts
are discounted to meet competition.

RESULTS OF OPERATIONS

We use earnings before interest and income taxes (EBIT) to assess the
operating results and effectiveness of our business. We define EBIT as operating
income, adjusted for equity earnings from unconsolidated affiliates, gains and
losses on sales of assets and other miscellaneous non-operating items. Items
that are not included in this measure are financing costs, including interest
and debt expense, affiliated interest income, income taxes and extraordinary
items. Below is a reconciliation of our operating results to EBIT and to income
(loss) before extraordinary items for the year ended December 31:

We believe EBIT is a useful measurement for our investors because it
provides information that can be used to evaluate the effectiveness of our
businesses and investments from an operational perspective, exclusive of the
costs to finance those activities and exclusive of income taxes, neither of
which are directly relevant to the efficiency of those operations. This
measurement may not be comparable to measurements used by other

5

companies and should not be used as a substitute for net income or other
performance measures such as operating cash flow.

OPERATING RESULTS (EBIT)

Operating revenues for the year ended December 31, 2002, were $69 million
lower than in 2001. The decrease was primarily due to sales of excess natural
gas in 2001 of $25 million that did not recur in 2002 and $19 million from lower
realized prices in 2002 on the resale of natural gas purchased from the Dakota
gasification facility. Also contributing to the decrease were lower
transportation revenues of $16 million primarily due to milder winter weather in
2002 and increased levels of discounting as older contracts, that were initially
established at or near the maximum FERC-approved rates, terminated or rolled
over and the capacity was recontracted at lower rates.

Operating expenses for the year ended December 31, 2002, were $403 million
lower than in 2001 primarily as a result of merger-related costs of $359 million
incurred in 2001 associated with relocating our headquarters from Detroit,
Michigan to Houston, Texas, asset impairments, costs for employee benefits,
severance, retention and transition charges, all related to our former parent
company's merger with El Paso. For a further discussion of these charges, see
Item 8, Financial Statements and Supplementary Data, Note 3. Also contributing
to the decrease in operating expenses in 2002 were $19 million from lower prices
on natural gas purchased at the Dakota gasification facility and $20 million
from lower benefit costs and lower operating expenses due to cost efficiencies
following the merger with El Paso. These decreases were partially offset by
higher 2002 accruals of $5 million on estimated liabilities to assess and
remediate our environmental exposure due to an ongoing evaluation of the
exposure at our facilities.

Other income for the year ended December 31, 2002, was $22 million lower
than in 2001 primarily as a result of a $13 million net gain on the sale of
Deepwater Holdings Inc. in 2001 and lower equity earnings of $6 million from
Deepwater Holdings, as well as $3 million from our investment in Iroquois
pipeline which was also sold in 2001.

REVENUE OUTLOOK

Our business is primarily driven by contracts with shippers transporting or
storing natural gas on our pipeline system. Our tariff structure, which is
regulated by the FERC, requires shippers to pay us on the basis of stated
transportation and storage rates. Under our tariff structure, approximately 92
percent of our transportation services revenue is attributed to a capacity
reservation, or demand charge, paid by firm customers. These firm customers are
obligated to pay a monthly demand charge, regardless of the amount of natural
gas they actually transport or store on our pipeline system, for the term of
their contracts. As these contracts expire, our revenue varies depending on the
rates at which they are renewed. During 2002, the renewal rates for contracts
with our customers declined as a result of increased competition, causing our
revenue to decrease. We expect this trend to continue in the foreseeable future
based on the current market environment for our pipeline system.

On October 30, 2002, we announced that we had renegotiated multiple firm
transportation, storage and related natural gas service agreements, totaling 867
BBtu/d of service starting in 2003 under contracts of various terms extending to
2010, with Wisconsin Gas Company and Wisconsin Electric Power Company, which
both operate under the name We Energies and constitute our largest customer. A
number of these contracts were discounted. The Public Service Commission of
Wisconsin and the FERC approved the agreements.

AFFILIATED INTEREST INCOME, NET

Affiliated interest income, net for the year ended December 31, 2002, was
$2 million lower than 2001. The decrease was due to lower short-term interest
rates on advances to El Paso under our cash management program in 2002 partially
offset by higher average advances. The average short-term interest rate
decreased from 4.3% in 2001 to 1.8% in 2002, and the average advances to
affiliates participating in our cash management program were $196 million in
2002 versus $118 million in 2001.
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INCOME TAXES

Income tax expense for the year ended December 31, 2002, was $70 million
and the income tax benefit for the year ended December 31, 2001, was $46
million, resulting in effective tax rates of 37 percent and 38 percent. Our
effective tax rates differed from the statutory rate of 35 percent in both
periods primarily due to the impact of state income taxes. For a reconciliation
of the statutory rate to the effective rates, see Item 8, Financial Statements
and Supplementary Data, Note 4.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Our liquidity needs are provided by cash flows from operating activities
and the use of a cash management program with our parent company, El Paso. 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 to our parent as investing activities in our
statement of cash flows. As of December 31, 2002, we had a cumulative net
receivable from El Paso and its affiliates of $414 million as a result of this
program. These receivables are due upon demand; however, as of December 31, 2002
we classified this amount as non-current notes receivable from affiliates in our
balance sheet. We believe that cash flows from operating activities and cash
provided by El Paso's cash management program will be adequate to meet our
short-term capital requirements for existing operations. Our cash flows for the
years ended December 31 were as follows:

In a series of credit rating agency actions in late 2002 and early 2003,
and contemporaneously with the downgrades of the senior unsecured indebtedness
of our parent company, El Paso, our senior unsecured indebtedness was downgraded
to below investment grade and is currently rated B1 by Moody's and B+ by
Standard & Poor's and we remain on negative outlook by both agencies. These
downgrades will increase our cost of capital and could impede our access to
capital markets in the future.

In August 2002, the FERC issued a notice of proposed rulemaking requiring,
among other things, that FERC regulated entities participating in cash
management arrangements with non-FERC regulated parents maintain a minimum
proprietary capital balance of 30 percent, and that the FERC regulated entity
and its parent maintain investment grade credit ratings as a condition to
participating in the cash management program. If this proposal were adopted, our
cash management program with El Paso could terminate, which could affect our
liquidity. We cannot predict the outcome of this rulemaking at this time.

CAPITAL EXPENDITURES

Our capital expenditures during the periods indicated are listed below:

7

Under our current plan, we expect to spend between approximately $83
million and $97 million in each of the next three years for capital expenditures
primarily to maintain the integrity of our pipeline and ensure the reliable
delivery of natural gas to our customers. In addition, we have budgeted to spend
between $40 million and $63 million in each of the next three years to expand
the capacity and services of our pipeline system. We expect to fund our
maintenance and expansion capital expenditures through internally generated
funds and by retaining a portion of the proceeds from a 2003 debt offering
discussed below.

DEBT

The following table shows our total long-term debt as of December 31, 2002
(in millions):

Long-term debt:
9.625% Debentures due 2021................................ $300
7.375% Debentures due 2024................................ 125
7.00% Debentures due 2025................................. 75
13.75% Note due 2010...................................... 13
----
513
Less: Unamortized discount................................ 2
----
Total long-term debt................................... $511
====

The holders of the $75 million 7.00% debentures due 2025, maintain the
option to require us to redeem their debentures at par value in 2005. In the
fourth quarter of 2002, we incurred approximately $13 million of debt due 2010
pursuant to our assumption of El Paso CNG Company's, our affiliate, loan with
The Variable Annuity Life Insurance Company.

RECENT EVENTS

In March 2003, we issued $300 million of unsecured senior notes that had a
rate of 8.875%. The notes mature in 2010. Net proceeds of $288 million were used
to pay off affiliated payables of $263 million. The remaining net proceeds of
$25 million were retained for capital expenditure requirements. Annually, we
expect the offering to increase our interest expense by $27 million.

On February 26, 2003, El Paso received a letter from the Office of the
Chief Accountant at the FERC requesting details of our issuance of these notes.
The letter requested that El Paso explain how it intended to use the proceeds
from the offering and if the notes will be included in our capital structure for
ratemaking purposes. The response to the letter was filed on March 12, 2003, and
we fully responded to the request.

Contemporaneously with the issuance of our senior unsecured notes in March
2003, our parent contributed to us its wholly owned subsidiary El Paso Great
Lakes, Inc. El Paso Great Lakes' principal asset consists of its effective 50
percent interest in Great Lakes Gas Transmission Limited Partnership, a Delaware
limited partnership and Great Lakes Gas Transmission Company. During the years
ended December 31, 2002 and 2001, earnings on El Paso's Great Lakes investment
were $63 million and $55 million and cash distributions were $48 million and $47
million.

Further discussion regarding the transactions are included in Item 8,
Financial Statements and Supplementary Data, Note 9 -- Capital Stock, Note
13 -- Transactions with Related Parties and Note 14 -- Contribution of El Paso
Great Lakes.

COMMITMENTS AND CONTINGENCIES

For a discussion of our commitments and contingencies, see Item 8,
Financial Statements and Supplementary Data, Note 8, which is incorporated
herein by reference.

8

NEW ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED

As of December 31, 2002, there were a number of accounting standards and
interpretations that had been issued, but not yet adopted by us. Below is a
discussion of the more significant standards that could impact us.

ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement will require us to
recognize costs associated with exit or disposal activities when they are
incurred rather than when we commit to an exit or disposal plan. Examples of
costs covered by this guidance include lease termination costs, employee
severance costs associated with a restructuring, discontinued operations, plant
closings or other exit or disposal activities. This statement is effective for
fiscal years beginning after December 31, 2002, and will impact any exit or
disposal activities we initiate after January 1, 2003.

ACCOUNTING FOR GUARANTEES

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation requires that
companies record a liability for all guarantees issued after January 31, 2003,
including financial, performance, and fair value guarantees. This liability is
recorded at its fair value upon issuance, and does not affect any existing
guarantees issued before December 31, 2002. While we do not believe there will
be any initial impact of adopting this standard, it will impact any guarantees
we issue in the future.

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RISK FACTORS AND CAUTIONARY STATEMENT 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 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. Our forward-looking statements,
whether written or oral, are expressly qualified by these cautionary statements
and any other cautionary statements that may accompany those statements. In
addition, we disclaim any obligation to update any forward-looking statements to
reflect events or circumstances after the date of this report.

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 (SEC) 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.

RISKS RELATED TO OUR BUSINESS

OUR SUCCESS DEPENDS ON FACTORS BEYOND OUR CONTROL.

Our business is primarily the transportation, storage and gathering of
natural gas for third parties. As a result, the volume of natural gas involved
in these activities depends on the actions of those third parties, and is beyond
our control. Further, the following factors, most of which are beyond our
control, may unfavorably impact our ability to maintain or increase current
transportation services revenues, to renegotiate existing contracts as they
expire, or to remarket unsubscribed capacity:

- future weather conditions, including those that favor alternative energy
sources;

- price competition;

- drilling activity and supply availability;

- expiration and/or turn back of significant contracts;

- service area competition;

- changes in regulation and actions of regulatory bodies;

- credit risk of customer base;

- increased cost of capital; and

- natural gas and liquids prices.

THE REVENUES OF OUR PIPELINE BUSINESSES ARE GENERATED UNDER CONTRACTS THAT MUST
BE RENEGOTIATED PERIODICALLY.

Our revenues are generated under transportation services contracts which
expire periodically and must be renegotiated and extended or replaced. Although
we actively pursue the renegotiation, extension and/or replacement of these
contracts, we cannot assure that we will be able to extend or replace these
contracts when they expire or that the terms of any renegotiated contracts will
be as favorable as the existing contracts. Currently, a substantial portion of
our revenues are under contracts that are discounted at rates below the maximum
rates allowed under our tariff, and a number of our existing long-term contracts
that come up for renewal in 2003 will be renegotiated at rates below their
current rates. For a further discussion of these matters, see Part I, Item 1,
Business -- Markets and Competition.

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In particular, our ability to extend and/or replace transportation services
contracts could be adversely affected by factors we cannot control, including:

- the proposed construction by other companies of additional pipeline
capacity in markets served by us;

- changes in state regulation of local distribution companies, which may
cause them to negotiate short-term contracts or turn back their capacity
when their contacts expire;

- reduced demand and market conditions;

- the availability of alternative energy sources or gas supply points; and

- regulatory actions.

If we are unable to renew, extend or replace these contracts or if we renew
them on less favorable terms, we may suffer a material reduction in our revenues
and earnings.

WE FACE COMPETITION THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

In our principal market areas of Wisconsin, Michigan, Illinois, Ohio and
Indiana, we compete with other interstate and intrastate pipeline companies and
local distribution companies in the transportation and storage of natural gas.
In the northeastern markets, we compete with other interstate pipelines serving
electric generation and local distribution companies. An affiliate of Wisconsin
Gas Company and Wisconsin Electric Power Company, which together operate under
the name We Energies and constitute our largest customer, also holds an
ownership interest in the Guardian Pipeline, which was placed into service in
late 2002 and directly competes for a portion of the markets served by our
expiring capacity. Wisconsin Gas is the largest capacity holder on the Guardian
Pipeline. An affiliate of another of our other significant customers, Michigan
Consolidated Gas Company, holds a partial ownership interest in Vector Pipeline
L.P. which commenced operations in December 2000 and also competes directly with
us. If we are unable to compete effectively with these and other energy
enterprises, our future profitability may be negatively impacted. Even if we do
compete effectively with these and other energy enterprises, we may discount our
rates more than currently anticipated to retain committed transportation
services volumes or to re-contract released volumes as our existing contracts
expire, which could adversely affect our revenues and results of operations.

FLUCTUATIONS IN ENERGY COMMODITY PRICES COULD ADVERSELY AFFECT OUR BUSINESS.

If natural gas prices in the supply basins connected to our pipeline system
are higher than prices in other natural gas producing regions, especially
Canada, our ability to compete with other transporters may be negatively
impacted. Revenues generated by our transportation services contracts depend on
volumes and rates, both of which can be affected by the prices of natural gas.
Increased natural gas prices could result in loss of load from our customers,
such as power companies not dispatching gas fired power plants, industrial plant
shut down or load loss to competitive fuels and local distribution companies'
loss of customer base due to conversion from natural gas. The success of our
operations is subject to continued development of additional oil and natural gas
reserves in the vicinity of our facilities and our ability to access additional
suppliers from interconnecting pipelines, primarily in the Gulf of Mexico, to
offset the natural decline from existing wells connected to our systems. A
decline in energy prices could precipitate a decrease in these development
activities and could cause a decrease in the volume of reserves available for
transmission or storage on our system. Fluctuations in energy prices are caused
by a number of factors, including:

- regional, domestic and international supply and demand;

- availability and adequacy of transportation facilities;

- energy legislation;

- federal and state taxes, if any, on the transportation and storage of
natural gas;

- abundance of supplies of alternative energy sources; and

- political unrest among oil-producing countries.

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THE AGENCIES THAT REGULATE US AND OUR CUSTOMERS AFFECT OUR PROFITABILITY.

Our pipeline business is regulated by the FERC, the U.S. Department of
Transportation and various state and local regulatory agencies. Regulatory
actions taken by those agencies have the potential to adversely affect our
profitability. In particular, the FERC regulates the rates we are permitted to
charge our customers for our services. If our tariff rates were reduced in a
future rate proceeding, if our volume of business under our currently permitted
rates was decreased significantly or if we were required to substantially
discount the rates for our services because of competition, our profitability
and liquidity could be reduced.

Further, state agencies that regulate our local distribution company
customers could impose requirements that could impact demand for our services.

COSTS OF ENVIRONMENTAL LIABILITIES, REGULATIONS AND LITIGATION COULD EXCEED OUR
ESTIMATES.

Our operations are subject to various environmental laws and regulations.
These laws and regulations obligate us to install and maintain pollution
controls and to clean up various sites at which regulated materials may have
been disposed of or released. We are also party to legal proceedings involving
environmental matters pending in various courts and agencies.

It is not possible for us to estimate reliably the amount and timing of all
future expenditures related to environmental matters because of:

- the uncertainties in estimating clean up costs;

- the discovery of new sites or information;

- the uncertainty in quantifying liability under environmental laws that
impose joint and several liability on all potentially responsible
parties;

- the nature of environmental laws and regulations; and

- the possible introduction of future environmental laws and regulations.

Although we believe we have established appropriate reserves for
liabilities, including clean up costs, we could be required to set aside
additional reserves in the future due to these uncertainties. For additional
information, see Part II, Item 8, Financial Statements and Supplementary Data,
Note 8.

OUR OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND UNINSURED RISKS.

Our operations are subject to the inherent risks normally associated with
those operations, including pipeline ruptures, explosions, pollution, release of
toxic substances, fires and adverse weather conditions, and other hazards, each
of which could result in damage to or destruction of our facilities or damages
to persons and property. In addition, our operations face possible risks
associated with acts of aggression on our assets. If any of these events were to
occur, we could suffer substantial losses.

While we maintain insurance against many of these risks, our financial
condition and operations could be adversely affected if a significant event
occurs that is not fully covered by insurance.

TERRORIST ATTACKS AIMED AT OUR FACILITIES COULD ADVERSELY AFFECT OUR BUSINESS.

On September 11, 2001, the U.S. was the target of terrorist attacks of
unprecedented scale. Since the September 11th attacks, the U.S. government has
issued warnings that energy assets, including our nation's pipeline
infrastructure, may be a future target of terrorist organizations. These
developments have subjected our operations to increased risks. Any future
terrorist attack on our facilities, those of our customers and, in some cases,
those of other pipelines, could have a material adverse effect on our business.

RISKS RELATED TO OUR AFFILIATION WITH EL PASO

El Paso files reports, proxy statements and other information with the SEC
under the Securities Exchange Act of 1934, as amended. Each prospective investor
should consider this information and the matters disclosed therein in addition
to the matters described in this report. Such information is not incorporated by
reference herein.

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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 outstanding senior unsecured
indebtedness of El Paso has been downgraded to below investment grade, currently
rated Caa1 by Moody's and B by Standard & Poor's (with a negative outlook at
both agencies), which in turn resulted in a similar downgrading of our
outstanding senior unsecured indebtedness to B1 by Moody's and B+ by Standard &
Poor's (with a negative outlook at both agencies). These downgrades will
increase our cost of capital and collateral requirements, and could impede our
access to capital markets. As a result of these recent downgrades, El Paso has
realized substantial demands on its liquidity, which demands have included:

- application of cash required to be withheld from El Paso's cash
management program in order to redeem preferred membership interests at
one of El Paso's minority interest financing structures; and

- cash collateral or margin requirements associated with contractual
commitments of El Paso subsidiaries.

These downgrades may subject El Paso to additional liquidity demands in the
future. 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.

In order to meet its short term liquidity needs, El Paso has embarked on
its 2003 Operational and Financial Plan that contemplates drawing all or part of
its availability under its existing bank facilities and consummating significant
asset sales. In addition, El Paso may take additional steps, such as entering
into other financing activities, renegotiating its credit facilities and further
reducing capital expenditures, which should provide additional liquidity. There
can be no assurance that these actions will be consummated on favorable terms,
if at all, or even if consummated, that such actions will be successful in
satisfying El Paso's liquidity needs. In the event that El Paso's liquidity
needs are not satisfied, El Paso could be forced to seek protection from its
creditors in bankruptcy. Such a development could materially adversely 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 December 31,
2002, we have net receivables of approximately $417 million from El Paso and its
affiliates. El Paso provides cash management and other corporate services for
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 might 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
Part II, Item 8, Financial Statements and Supplementary Data, Note 13.

WE COULD BE SUBSTANTIVELY CONSOLIDATED WITH EL PASO IF EL PASO WERE FORCED TO
SEEK PROTECTION FROM ITS CREDITORS IN BANKRUPTCY.

If El Paso were the subject of 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. The
equitable doctrine of substantive consolidation permits a bankruptcy court to
disregard the separateness of related entities and to consolidate and pool the
entities' assets and liabilities and treat them as though held and incurred by
one entity where the interrelationship between the entities warrants such
consolidation. We believe that any effort to substantively consolidate us with
El Paso and/or its other subsidiaries would be without merit. However, we cannot
assure you that El Paso and/or its other subsidiaries or their respective
creditors would not attempt to advance such claims in a bankruptcy proceeding
or, if advanced, how a bankruptcy court would resolve the issue. If a bankruptcy
court were to substantively consolidate us with El Paso and/or its other
subsidiaries, there could be a material adverse effect on our financial
condition and liquidity.

13

ONGOING LITIGATION AND INVESTIGATIONS REGARDING EL PASO COULD SIGNIFICANTLY
ADVERSELY AFFECT OUR BUSINESS.

On March 20, 2003, El Paso entered into an agreement in principle (the
Western Energy Settlement) with various public and private claimants, including
the states of California, Washington, Oregon, and Nevada, to resolve the
principal litigation, claims, and regulatory proceedings against El Paso and its
subsidiaries relating to the sale or delivery of natural gas and electricity
from September 1996 to the date of the Western Energy Settlement. A more
detailed description of the Western Energy Settlement can be found in El Paso's
reports filed with the SEC. If El Paso is unable to negotiate definitive
settlement agreements, or if the settlement is not approved by the courts or the
FERC, the proceedings and litigation will continue.

Since July 2002, twelve purported shareholder class action suits alleging
violations of federal securities laws have been filed against El Paso and
several of its officers. Eleven of these suits are now consolidated in federal
court in Houston before a single judge. The suits generally challenge the
accuracy or completeness of press releases and other public statements made
during 2001 and 2002. The twelfth shareholder class action lawsuit was filed in
federal court in New York City in October 2002 challenging the accuracy or
completeness of El Paso's February 27, 2002 prospectus for an equity offering
that was completed on June 21, 2002. It has since been dismissed, in light of
similar claims being asserted in the consolidates suits in Houston. Four
shareholder derivative actions have also been filed. One shareholder derivative
lawsuit was filed in federal court in Houston in August 2002. This derivative
action generally alleges the same claims as those made in the shareholder class
action, has been consolidated with the shareholder class actions pending in
Houston and has been stayed. A second shareholder derivative lawsuit was filed
in Delaware State Court in October 2002 and generally alleges the same claims as
those made in the consolidated shareholder class action lawsuit. A third
shareholder derivative suit was filed in state court in Houston in March 2002,
and a fourth shareholder derivative suit was filed in state court in Houston in
November 2002. The third and fourth shareholder derivative suits both generally
allege that manipulation of California gas supply and gas prices exposed El Paso
to claims of antitrust conspiracy, FERC penalties and erosion of share value. At
this time, El Paso's legal exposure related to these lawsuits and claims is not
determinable.

Another action was filed against El Paso in December 2002, on behalf of
participants in El Paso's 401(k) plan.

If El Paso does not prevail in these cases (or any of the other litigation,
administrative or regulatory matters disclosed in El Paso's 2002 Form 10-K to
which El Paso is, or may be, a party), and if the remedy adopted in these cases
substantially impairs El Paso's financial position, the long-term adverse impact
on El Paso's credit rating, liquidity and its ability to raise capital to meet
its ongoing and future investing and financing needs could be substantial. Such
a negative impact on El Paso could have a material adverse effect on us as well.

THE PROXY CONTEST INITIATED BY SELIM ZILKHA TO REPLACE EL PASO'S BOARD OF
DIRECTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.

On February 18, 2003, Selim Zilkha, a stockholder of El Paso, announced his
intention to initiate a proxy solicitation to replace El Paso's entire board of
directors with his own nominees and on March 11, 2003, Mr. Zilkha filed his
preliminary proxy statement to that effect with the SEC. This proxy contest may
be highly disruptive and may negatively impact El Paso's ability to achieve the
stated objectives of its 2003 Operational and Financial Plan. In addition, El
Paso may have difficulty attracting and retaining key personnel until such proxy
contest is resolved. Therefore, this proxy contest, whether or not successful,
could have a material adverse effect on El Paso's liquidity and financial
condition, which, in turn, could adversely affect our liquidity and financial
position.

WE ARE A WHOLLY OWNED SUBSIDIARY OF AMERICAN NATURAL RESOURCES COMPANY, AN
INDIRECT SUBSIDIARY OF EL PASO.

El Paso has substantial control over:

- our payment of dividends;

- decisions on our financings and our capital raising activities;

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- mergers or other business combinations;

- our acquisitions or dispositions of assets; and

- our participation in El Paso's cash management program.

El Paso may exercise such control in its interests and not necessarily in
the interests of us or the holders of our long-term debt.

RISKS RELATED TO OUR LONG-TERM DEBT

OUR SUBSTANTIAL LONG-TERM DEBT COULD IMPAIR OUR FINANCIAL CONDITION AND OUR
ABILITY TO FULFILL OUR DEBT OBLIGATIONS.

We have substantial long-term debt. As of March 5, 2003, we had total
long-term debt of approximately $807 million, all of which was senior unsecured
long-term indebtedness.

Our substantial long-term debt could have important consequences. For
example, it could:

- make it more difficult for us to satisfy our obligations with respect to
our long-term debt, which could in turn result in an event of default on
any or all of such long-term debt;

- impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes;

- diminish our ability to withstand a downturn in our business or the
economy generally;

- require us to dedicate a substantial portion of our cash flow from
operations to debt service payments, thereby reducing the availability of
cash for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and

- place us at a competitive disadvantage compared to our competitors that
have proportionately less debt.

If we are unable to meet our debt service obligations, we could be forced
to restructure or refinance our long-term debt, seek additional equity capital
or sell assets. We may be unable to obtain financing or sell assets on
satisfactory terms, or at all.

Covenants applicable to our long-term debt allow us to incur significant
amounts of additional indebtedness. Our incurrence of significant additional
indebtedness would exacerbate the negative consequences mentioned above, and
could adversely affect our ability to repay our long-term debt.

SOME OF OUR LONG-TERM DEBT IS SUBJECT TO CROSS-ACCELERATION PROVISIONS.

It is an event of default in the indentures governing certain issues of our
long-term debt if any of our other indebtedness is accelerated and the
outstanding principal amount of such accelerated indebtedness exceeds a
specified threshold, which in the case of the notes we issued in March 2003 is
$25 million and in the case of our other long-term debt is $5 million. If this
were to occur, these issues of our long-term debt would be subject to possible
acceleration and we may not be able to repay all such long-term debt upon such
acceleration.

OUR LONG-TERM DEBT IS EFFECTIVELY SUBORDINATED TO LIABILITIES AND INDEBTEDNESS
OF OUR SUBSIDIARIES.

Our long-term debt is not guaranteed by our subsidiaries and our
subsidiaries are not prohibited under our indentures from incurring additional
indebtedness. As a result, holders of our long-term debt will be effectively
subordinated to claims of third party creditors, including holders of
indebtedness, of these subsidiaries. Claims of those other creditors, including
trade creditors, secured creditors, governmental authorities, and holders of
indebtedness or guarantees issued by the subsidiaries, will generally have
priority as to the assets of the subsidiaries over claims by the holders of our
long-term debt. As a result, rights of payment of holders of our indebtedness,
including the holders of our long-term debt, will be effectively subordinated to
all those claims of creditors of our subsidiaries.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk is exposure to changing interest rates. The table
below shows the carrying value and related weighted average interest rates of
our interest bearing securities, by expected maturity dates, and the fair value
of those securities. As of December 31, 2002, the fair values of our fixed rate
long-term debt securities have been estimated based on quoted market prices for
the same or similar issues.

- ---------------
(1) Holders of $75 million of our long-term debt have the option to redeem these
securities in 2005 at par value.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANR PIPELINE COMPANY

CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)

See accompanying notes.

17

ANR PIPELINE COMPANY

CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)

See accompanying notes.

18

ANR PIPELINE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

See accompanying notes.

19

ANR PIPELINE COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)

See accompanying notes.

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ANR PIPELINE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Our consolidated financial statements include the accounts of all
majority-owned, controlled subsidiaries after the elimination of all significant
intercompany accounts and transactions. Our financial statements for prior
periods include reclassifications that were made to conform to the current year
presentation. Those reclassifications had no impact on reported net income or
stockholder's equity.

Principles of Consolidation

We consolidate entities when we have the ability to control the operating
and financial decisions and policies of that entity. Where we can exert
significant influence over, but do not control, those policies and decisions, we
apply the equity method of accounting. We use the cost method of accounting
where we are unable to exert significant influence over the entity. The
determination of our ability to control or exert significant influence over an
entity involves the use of judgment of the extent of our control or influence
and that of the other equity owners or participants of the entity.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts we report as assets, liabilities, revenues and expenses
and our disclosures in these financial statements. Actual results can, and often
do, differ from those estimates.

Accounting for Regulated Operations

Our natural gas pipeline is subject to the regulations and accounting
procedures of the FERC in accordance with the Natural Gas Act of 1938 and
Natural Gas Policy Act of 1978. In 1996 we discontinued the application of
regulatory accounting principles under SFAS No. 71, Accounting for the Effects
of Certain Types of Regulation. SFAS No. 71 provides that rate regulated
enterprises account for and report assets and liabilities in the same manner in
which regulators establish rates, if those rates are designed to recover the
costs of providing the regulated service and if it is reasonable to assume that
those rates can be charged and collected. While our rates are designed to
recover our costs, our ability to extend or re-market expiring contracts is
highly dependent on competitive alternatives at the time these contracts are
extended or expire. Currently, a substantial portion of our revenues are under
contracts that are discounted at rates below the maximum rates, and as a result,
we do not apply this standard. We will continue to evaluate the application of
regulatory accounting principles based on on-going changes in the regulatory and
economic environment and further actions in current and future rate cases or
settlements.

Cash and Cash Equivalents

We consider short-term investments with an original maturity of less than
three months to be cash equivalents.

Allowance for Doubtful Accounts

We establish provisions for losses on accounts receivable and for natural
gas imbalances due from shippers and operators if we determine that we will not
collect all or part of the outstanding balance. We regularly review
collectibility and establish or adjust our allowance as necessary using the
specific identification method.

Materials and Supplies

We value materials and supplies at the lower of cost or market value with
cost determined using the average cost method.

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Natural Gas Imbalances

Natural gas imbalances occur when the actual amount of natural gas
delivered from or received by a pipeline system or storage facility differs from
the contractual amount of gas delivered or received. We value these imbalances
due to or from shippers and operators at an appropriate index price. Imbalances
are settled in cash or made up in-kind, subject to the terms of our tariff.

Imbalances due from others are reported in our balance sheet as either
accounts receivable from customers or accounts receivable from affiliates.
Imbalances owed to others are reported on the balance sheet as either trade
accounts payable or accounts payable to affiliates. In addition, we classify all
imbalances as current.

Property, Plant and Equipment

Our property, plant and equipment is recorded at its original cost of
construction or, upon acquisition, at the fair value of the assets acquired. We
capitalize direct costs, such as labor and materials, and indirect costs, such
as overhead and interest. We capitalize the major units of property replacements
or improvements and expense minor items.

We provide for depreciation of property, plant and equipment on a
straight-line basis. The remaining depreciable life of our pipeline and storage
assets is approximately 50 years and the depreciable lives of other assets range
from 5 to 20 years.

When we retire property, plant and equipment, we reduce property, plant and
equipment for the asset's original cost, less accumulated depreciation and
salvage value. Any remaining amount is charged as a gain or loss to income.

At December 31, 2002 and 2001, we had approximately $61 million and $59
million of construction work in progress included in our property, plant and
equipment.

We capitalize a carrying cost on funds invested in our construction of
long-lived assets. This carrying cost includes a return on the investment
financed by debt (capitalized interest). The capitalized interest is calculated
based on our average cost of debt. Debt amounts capitalized during the years
ended December 31, 2002, 2001 and 2000, were $3 million, $3 million and $2
million. These amounts are included as a reduction of interest expense in our
income statement. Capitalized carrying cost for debt is reflected as an increase
in the cost of the asset on our balance sheet.

Asset Impairments

We apply the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to account for asset impairments. Under this
standard, we evaluate an asset for impairment when events or circumstances
indicate that a long-lived asset's carrying value may not be recovered. These
events include market declines, changes in the manner in which we intend to use
an asset or decisions to sell an asset and adverse changes in the legal or
business environment such as adverse actions by regulators. At the time we
decide to exit an activity or sell a long-lived asset or group of assets, we
adjust the carrying value of these assets downward, if necessary, to the
estimated sales price, less costs to sell. We also classify these assets as
either held for sale or as discontinued operations, depending on whether they
have independently determinable cash flows.

Revenue Recognition

Our revenues consist primarily of transportation and storage services and
sales under natural gas sales contracts. For our transportation and storage
services, we recognize reservation revenues on firm contracted capacity ratably
over the contract period. For interruptible or volumetric based services, we
record revenues when we complete the delivery of natural gas to the agreed upon
delivery point and when gas is injected or withdrawn from the storage facility.
We record revenues on natural gas sales contracts when we physically deliver gas
to an agreed upon receipt point. Revenues in all services are generally based on
the thermal quantity of gas delivered or subscribed at a price specified in the
contract. We are subject to FERC regulations and, as a result, revenues we
collect may possibly be refunded in a final order of a future rate proceeding or
as a result of a rate settlement. We establish reserves for these potential
refunds.
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Environmental Costs and Other Contingencies

We record liabilities when our environmental assessments indicate that
remediation efforts are probable, and the costs can be reasonably estimated. We
recognize a current period expense for the liability when the clean-up efforts
do not benefit future periods. We capitalize costs that benefit more than one
accounting period, except in instances where separate agreements or legal and
regulatory guidelines dictate otherwise. Estimates of our liabilities are based
on currently available facts, existing technology and presently enacted laws and
regulations taking into account the likely effects of inflation and other
societal and economic factors, and include estimates of associated legal costs.
These amounts also consider prior experience in remediating contaminated sites,
other companies' clean-up experience and data released by the Environmental
Protection Agency (EPA) or other organizations. These estimates are subject to
revision in future periods based on actual costs or new circumstances and are
included in our balance sheet in other current and long-term liabilities at
their undiscounted amounts. We evaluate recoveries from insurance coverage, rate
recovery, government sponsored and other programs separately from our liability
and, when recovery is assured, we record and report an asset separately from the
associated liability in our financial statements.

We recognize liabilities for other contingencies when we have an exposure
that, when fully analyzed, indicates it is both probable that an asset has been
impaired or that a liability has been incurred and the amount of impairment or
loss can be reasonably estimated. Funds spent to remedy these contingencies are
charged against a reserve, if one exists, or expensed. When a range of probable
loss can be estimated, we accrue the most likely amount or at least the minimum
of the range of probable loss.

Income Taxes

We report current income taxes based on our taxable income and we provide
for deferred income taxes to reflect estimated future tax payments and receipts.
Deferred taxes represent the tax impacts of differences between the financial
statement and tax bases of assets and liabilities and carryovers at each year
end. We account for tax credits under the flow-through method, which reduces the
provision for income taxes in the year the tax credits first become available.
We reduce deferred tax assets by a valuation allowance when, based on our
estimates, it is more likely than not that a portion of those assets will not be
realized in a future period. The estimates utilized in the recognition of
deferred tax assets are subject to revision, either up or down, in future
periods based on new facts or circumstances.

El Paso maintains a tax accrual policy to record both regular and
alternative minimum taxes for companies included in its consolidated federal
income tax return. The policy provides, among other things, that (i) each
company in a taxable income position will accrue a current expense equivalent to
its federal income tax, and (ii) each company in a tax loss position will accrue
a benefit to the extent its deductions, including general business credits, can
be utilized in the consolidated return. El Paso pays all federal income taxes
directly to the IRS and, under a separate tax billing agreement, El Paso may
bill or refund its subsidiaries for their portion of these income tax payments.
Prior to 2002, we had a tax sharing agreement with El Paso CGP which had similar
provisions.

New Accounting Pronouncements Issued But Not Yet Adopted

As of December 31, 2002, there were a number of accounting standards and
interpretations that had been issued, but not yet adopted by us. Below is a
discussion of the more significant standards that could impact us.

Accounting for Costs Associated with Exit or Disposal Activities. In July
2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. This statement will require us to recognize costs
associated with exit or disposal activities when they are incurred rather than
when we commit to an exit or disposal plan. Examples of costs covered by this
guidance include lease termination costs, employee severance costs associated
with a restructuring, discontinued operations, plant closings or other exit or
disposal activities. This statement is effective for fiscal years beginning
after December 31, 2002, and will impact any exit or disposal activities we
initiate after January 1, 2003.

Accounting for Guarantees. In November 2002, the FASB issued FIN No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation requires that
companies record a liability for all guarantees issued after January 31, 2003,

23

including financial, performance, and fair value guarantees. This liability is
recorded at its fair value upon issuance, and does not affect any existing
guarantees issued before December 31, 2002. While we do not believe there will
be any initial impact of adopting this standard, it will impact any guarantees
we issue in the future.

2. DIVESTITURES

In November 2002, we completed the sale of our Typhoon offshore natural gas
gathering pipeline to El Paso Energy Partners, L.P., our affiliate. The Typhoon
pipeline consists of a 35-mile, 20-inch natural gas pipeline that originates on
the Chevron/BHP "Typhoon" platform in the Green Canyon area of the Gulf of
Mexico and extends to our Patterson system in Eugene Island Block 371. Proceeds
from this sale were approximately $50 million in cash, and we did not recognize
any gain or loss.

3. MERGER-RELATED COSTS

During the year ended December 31, 2001, we incurred merger-related costs
of $359 million associated with El Paso's merger with our parent company,
Coastal (now known as El Paso CGP), as follows (in millions):

Employee costs of $62 million consisted of severance, retention and
transition costs, including pension and postretirement benefits settled and
curtailed under existing benefit plans for severed employees and early retirees
that occurred as a result of El Paso's merger-related workforce reduction and
consolidation. Following the merger, approximately 900 full-time positions were
eliminated through a combination of early retirements and terminations. Pension
and post-retirement benefits were accrued on the merger date and will be paid
over the applicable benefit periods of the terminated and retired employees. All
other employee-related costs were expensed as incurred and were paid in the
first and second quarters of 2001. Our business integration costs of $275
million are primarily associated with relocating our headquarters from Detroit,
Michigan, to Houston, Texas, and include lease related costs, write-offs of
leasehold improvements, asset impairments and other charges related to combining
our operations with El Paso. Merger-related asset impairments relate to several
pipeline projects that were discontinued following the merger with El Paso.
These items were expensed as incurred.

4. INCOME TAXES

The following table reflects the components of income tax expense (benefit)
included in income (loss) before extraordinary items for each of the three years
ended December 31:

24

Our income tax expense (benefit) included in income (loss) before
extraordinary items differs from the amount computed by applying the statutory
federal income tax rate of 35 percent for the following reasons at December 31:

The following are the components of our net deferred tax liability as of
December 31:

Under El Paso's tax accrual policy, we are allocated the tax benefit
associated with our employees' exercise of non-qualified stock options and the
vesting of restricted stock as well as restricted stock dividends. This
allocation reduced taxes payable by $1 million in 2002 and $2 million in 2001.
These benefits are included in additional paid-in capital in our balance sheet.

5. EXTRAORDINARY ITEMS

As a result of El Paso's January 2001 merger with Coastal, Deepwater
Holdings Inc., our unconsolidated affiliate, was required, under a Federal Trade
Commission order, to dispose of its interests in the Stingray and U-T Offshore
pipeline systems, and we were required to dispose of our 16 percent interest in
the Iroquois pipeline system. Net proceeds from these sales in 2001 were
approximately $65 million, and we recognized an extraordinary loss of
approximately $2 million, net of $2 million in income taxes.

6. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

As of December 31, 2002, and 2001, the carrying amounts of cash and cash
equivalents, short-term borrowings, and trade receivables and payables are
representative of fair value because of the short-term maturity of these
instruments.

25

The carrying amounts and estimated fair values of our financial instruments
are as follows at December 31:

- ---------------
(1) We estimated the fair value of debt with fixed interest rates based on
quoted market prices for the same or similar issues.

7. LONG-TERM DEBT

Our long-term debt outstanding consisted of the following at December 31:

None of our long-term debt matures within the next five years. The holders
of the $75 million 7.00% debentures due 2025, maintain the option to require us
to redeem their debentures at par value in 2005. We also have indentures that
contain cross-acceleration provisions which, if triggered, could result in the
acceleration of our debt. In the fourth quarter of 2002, we incurred
approximately $13 million of debt due 2010 pursuant to our assumption of El Paso
CNG Company's, our affiliate, loan with The Variable Annuity Life Insurance
Company.

In March 2003, we issued $300 million of unsecured senior notes with an
annual interest rate of 8.875%. The notes mature in 2010. Net proceeds of $288
million were used to pay off intercompany payables of $263 million. The
remaining net proceeds of $25 million were retained for capital expenditure
requirements. See Notes 9, 13 and 14 for a further discussion of transactions
entered into as a result of the issuance.

8. 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 of
natural gas produced from royalty properties 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). In May 2001, the court denied the
defendants' motions to dismiss. 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 were
named defendants in Quinque Operating Company, et al v. Gas Pipelines and Their
Predecessors, et al, filed in 1999 in the District Court of Stevens County,
Kansas. Quinque has been dropped as a plaintiff and Will Price has been added.
This class action complaint alleges that the defendants mismeasured natural gas
volumes and heating content of natural

26

gas on non-federal and non-Native American lands. The plaintiff in this case
seeks certification of a nationwide class of natural gas working interest owners
and natural gas royalty owners to recover royalties that the plaintiff contends
these owners 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, attorney's 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. Plaintiff's motion for class certification has been argued and we are
awaiting a ruling. Our costs and legal exposure related to these lawsuits and
claims are not currently determinable.

In addition to the above matters, we are also a named defendant 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 of December 31, 2002, we had approximately $2 million accrued for all
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 December
31, 2002, we had accrued approximately $26 million for expected remediation
costs and associated onsite, offsite and groundwater technical studies and for
related environmental legal costs, which we anticipate incurring through 2027.
Below is a reconciliation of our accrued liability as of December 31, 2001 to
our accrued liability as of December 31, 2002:

Included in our operation and maintenance costs for the twelve months ended
December 31, 2001 were approximately $8 million in additional environmental
remediation liabilities related to a change in estimate. This change arose as a
result of an evaluation of our ongoing remediation projects and conforming the
operating strategies of our company following our parent's merger with El Paso.

Our 2002 additions for remediation activities, primarily relate to
additional reserves for Michigan Section 201, EPA, Superfund costs,
polychlorinated biphenyls (PCBs), hydrocarbon, and other environmental-related
costs.

In addition, we expect to make capital expenditures for environmental
matters of approximately $34 million in the aggregate for the years 2003 through
2007. These expenditures primarily relate to compliance with clean air
regulations. For 2003, we estimate that our total remediation expenditures will
be approximately $4 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 four 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 December
31, 2002, 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

27

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.

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 the reserves are
adequate.

Rates and Regulatory Matters

Marketing Affiliate NOPR. In September 2001, the FERC issued a Notice of
Proposed Rulemaking (NOPR). The NOPR proposes to apply the standards of conduct
governing the relationship between interstate pipelines and marketing affiliates
to all energy affiliates. The proposed regulations, if adopted by the FERC,
would dictate how we conduct business and interact with our energy affiliates.
In December 2001, we filed comments with the FERC addressing our concerns with
the proposed rules. A public hearing was held on May 21, 2002, providing an
opportunity to comment further on the NOPR. Following the hearing, additional
comments were filed by El Paso's pipelines and others. At this time, we cannot
predict the outcome of the NOPR, but adoption of the regulations in their
proposed form would, at a minimum, place additional administrative and
operational burdens on us.

Negotiated Rate NOI. In July 2002, the FERC issued a Notice of Inquiry
(NOI) that seeks comments regarding its 1996 policy of permitting pipelines to
enter into negotiated rate transactions. We have entered into these transactions
over the years, and the FERC is now reviewing whether negotiated rates should be
capped, whether or not the "recourse rate" (a cost-of-service based rate)
continues to safeguard against a pipeline exercising market power and other
issues related to negotiated rate programs. On September 25, 2002, El Paso's
pipelines and others filed comments. Reply comments were filed on October 25,
2002. At this time, we cannot predict the outcome of this NOI.

Cash Management NOPR. On August 1, 2002, the FERC issued a NOPR requiring
that all cash management or money pool arrangements between a FERC regulated
subsidiary and a non-FERC regulated parent must be in writing, and set forth the
duties and responsibilities of cash management participants and administrators;
the methods of calculating interest and for allocating interest income and
expenses; and the restrictions on deposits or borrowings by money pool members.
The NOPR also requires specified documentation for all deposits into, borrowings
from, interest income from, and interest expenses related to, these
arrangements. Finally, the NOPR proposes that as a condition of participating in
a cash management or money pool arrangement, the FERC regulated entity maintain
a minimum proprietary capital balance of 30 percent, and the FERC regulated
entity and its parent maintain investment grade credit ratings. On August 28,
2002, comments were filed. The FERC held a public conference on September 25,
2002 to discuss the issues raised in the comments. Representatives of companies
from the gas and electric industries participated on a panel and uniformly
agreed that the proposed regulations should be revised substantially and that
the proposed capital balance and investment grade credit rating requirements
would be excessive. At this time, we cannot predict the outcome of this NOPR.

Also on August 1, 2002, the FERC's Chief Accountant issued an Accounting
Release, which was effective immediately. The Accounting Release provides
guidance on how companies should account for money pool arrangements and the
types of documentation that should be maintained for these arrangements.
However, it did not address the proposed requirements that the FERC regulated
entity maintain a minimum proprietary capital balance of 30 percent and that the
entity and its parent have investment grade credit

28

ratings. Requests for rehearing were filed on August 30, 2002. The FERC has not
yet acted on the rehearing requests.

Emergency Reconstruction of Interstate Natural Gas Facilities NOPR. On
January 17, 2003, FERC issued a NOPR proposing to (1) expand the scope of
construction activities authorized under a pipeline's blanket certificate to
allow replacement of mainline facilities; (2) authorize a pipeline to commence
reconstruction of the affected system without a waiting period; and (3)
authorize automatic approval of construction that would be above the normal cost
ceiling. Comments on the NOPR were filed on February 27, 2003. At this time, we
cannot predict the outcome of this rulemaking.

Pipeline Safety Notice of Proposed Rulemaking. On January 28, 2003, the
U.S. Department of Transportation issued a NOPR proposing to establish a rule
requiring pipeline operators to develop integrity management programs to
comprehensively evaluate their pipelines, and take measures to protect pipeline
segments located in what the notice refers to as "high consequence areas." The
proposed rule resulted from the enactment of the Pipeline Safety Improvement Act
of 2002, a new bill signed into law in December 2002. We intend to submit
comments on the NOPR, which are due on or before April 30, 2003. At this time,
we cannot predict the outcome of this rulemaking.

FERC Inquiry. On February 26, 2003, El Paso received a letter from the
Office of the Chief Accountant at the FERC requesting details of its
announcement of 2003 asset sales and plans for us and our pipeline affiliate to
issue a combined $700 million of long-term notes. The letter requested that El
Paso explain how it intended to use the proceeds from the issuance of the notes
and if the notes will be included in the two regulated companies' capital
structure for rate-setting purposes. Our response to the FERC was filed on March
12, 2003, and we fully responded to the request.

While the outcome of our outstanding legal matters, environmental matters
and rates and regulatory matters cannot be predicted with certainty, based on
current information and our existing accruals, 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. It is also possible that the outcome of these
matters could impair our credit rating and that of our parent. Further, for
environmental matters, 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 new information for our outstanding legal matters, environmental
matters and rates and regulatory matters becomes available, or relevant
developments occur, we will review our accruals and make any appropriate
adjustments. The impact of these changes may have a material effect on our
results of operations, our financial position, and on our cash flows in the
period the event occurs.

Capital Commitments and Purchase Obligations

At December 31, 2002, we had capital and investment commitments of $12
million for 2003. Our other planned capital investment projects are
discretionary in nature, with no substantial capital commitments made in advance
of the actual expenditures. In addition, we have entered into unconditional
purchase obligations for products and services totaling $246 million at December
31, 2002. Our annual obligations under these agreements are $34 million for
2003, $23 million for each of the years 2004 through 2007 and $120 million in
total thereafter.

29

Operating Leases

We lease property, facilities and equipment under various operating leases.
Minimum future annual rental commitments at December 31, 2002, were as
follows:(1)

- ---------------
(1) These amounts exclude our proportional share of minimum annual rental
commitments paid by our parent, which are allocated to us through an
overhead allocation.

Rental expense on our operating leases for each of the year ended December
31, 2002, 2001 and 2000 was $6 million, $12 million and $20 million.

9. CAPITAL STOCK

On March 7, 2002, our Board of Directors approved and we filed an amended
and restated certificate of incorporation, changing our authorized shares of
stock to 1,000 shares of common stock, with a par value of $1 per share. This
action and the reclassification did not impact our total equity. As of December
31, 2001, we had 1,000 authorized and issued shares with a par value of $100 per
share. In February 2003, we made a non-cash distribution of $400 million of our
outstanding affiliated receivables to our parent. See Notes 7, 13 and 14 for a
further discussion of transactions entered into related to the issuance.

10. RETIREMENT BENEFITS

Pension and Retirement Benefits

El Paso maintains a pension plan to provide benefits as determined under a
cash balance formula covering substantially all of its U.S. employees, including
our employees. El Paso also maintains a defined contribution plan covering its
U.S. employees, including our employees. Prior to May 1, 2002, El Paso matched
75 percent of participant basic contributions up to 6 percent, with matching
contributions being made to the plan's stock fund, which participants could
diversify at any time. After May 1, 2002, the plan was amended to allow for
matching contributions to be invested in the same manner as that of participant
contributions. Effective March 1, 2003, El Paso suspended the matching
contribution. El Paso is responsible for benefits accrued under its plans and
allocates the related costs to its affiliates. See Note 13 for a summary of
transactions with affiliates.

Prior to our merger with El Paso, Coastal provided non-contributory pension
plans covering substantially all of its U.S. employees, including our employees.
On April 1, 2001, this plan was merged into El Paso's existing cash balance
plan. Our employees who were participants in this plan on March 31, 2001 receive
the greater of cash balance benefits under the El Paso plan or Coastal's plan
benefits accrued through March 31, 2006.

Other Postretirement Benefits

As a result of El Paso's merger with Coastal, we offered a one-time
election through an early retirement window for employees who were at least age
50 with 10 years of service on December 31, 2000, to retire on or before June
30, 2001, and keep benefits under our postretirement medical and life plans. The
costs associated with the curtailment and special termination benefits were $32
million. Medical benefits for this closed group of retirees may be subject to
deductibles, co-payment provisions, and other limitations and dollar caps on the
amount of employer costs. El Paso has reserved the right to change these
benefits. Employees who retire on or

30

after June 30, 2001, will continue to receive limited postretirement life
insurance benefits. Our postretirement benefit plan costs are pre-funded to the
extent these costs are recoverable through rates.

In January 2001, following the merger, we changed the measurement date for
measuring our other postretirement benefit obligations from December 31 to
September 30. We made this change to conform our measurement date to the date
that El Paso uses to measure other postretirement benefit obligations. The new
method is consistent with the manner in which El Paso gathers other
postretirement information and will facilitate ease of planning and reporting in
a more timely manner. We believe this method is preferable to the method
previously employed. We accounted for this as a change in accounting principle,
and it had no material effect on retirement benefit expense for the current or
prior periods.

The following table sets forth the change in benefit obligation, change in
plan assets, reconciliation of funded status, and components of net periodic
benefit cost for other postretirement benefits for the twelve months ended
September 30:

31

Postretirement benefit obligations are based upon actuarial estimates as
described below:

Actuarial estimates for our postretirement benefits plans assumed a
weighted average annual rate of increase in the per capita costs of covered
health care benefits of 11.0 percent in 2002, then gradually decreasing to 5.5
percent by the year 2008. Assumed health care cost trends have a significant
effect on the amounts reported for other postretirement benefit plans. The
impact of a one-percentage point change in assumed health care cost trends would
have been immaterial in 2002 and 2001 for our service and interest costs. In
addition, the impact of a one-percentage point change in assumed health care
cost trends would have been slightly greater than $1 million in 2002 and less
than $2 million in 2001 for our accumulated postretirement benefit obligations.

11. TRANSACTIONS WITH MAJOR CUSTOMER

The following table shows revenues from our major customer for each of the
three years ended December 31:

--------------------
(1) We Energies is the operating name of Wisconsin Gas Company and
Wisconsin Electric Power Company.

12. SUPPLEMENTAL CASH FLOW INFORMATION

The following table contains supplemental cash flow information for each of
the three years ended December 31:

13. INVESTMENTS IN AND TRANSACTIONS WITH RELATED PARTIES

As of December 31, 2002, we have sold all of our investments in
unconsolidated affiliates. We recognized equity earnings for the years ended
December 31, 2002, 2001 and 2000 of $1 million, $12 million and $13 million
primarily related to our investments in Alliance, Iroquois and Deepwater.

We participate in El Paso's cash management program which matches
short-term cash surpluses and needs of its participating affiliates, thus
minimizing total borrowing from outside sources. Our continued participation in
the program may be dependent on any final rule issued by the FERC in connection
with its cash management notice of proposed rulemaking discussed in Note 8. We
had advanced $414 million at December 31, 2002, at a market rate of interest
which was 1.5%. At December 31, 2001, we had advanced $299 million at a market
rate of interest which was 2.1%. These receivables are due upon demand; however,
as of December 31, 2002, we have classified this amount as non-current notes
receivable from affiliates.

In February 2003, we declared and distributed a $400 million dividend of
affiliated receivables to our parent, American Natural Resources Company. In
March 2003, we issued $300 million of unsecured notes, the net proceeds from
which were used, in part, to pay off affiliated payables of $263 million. Also
in March 2003, we received a contribution of the common stock of El Paso Great
Lakes from our parent. El Paso Great Lakes owns an effective 50 percent interest
in Great Lakes Gas Transmission Limited Partnership and Great Lakes Gas
Transmission Company. See Note 14 for further discussion of this transaction.

At December 31, 2002 and 2001, we had accounts receivable from related
parties of $13 million and $13 million. In addition, we had accounts payable to
related parties of $10 million and $48 million at December 31, 2002, and 2001.
These balances arose in the ordinary course of business. We also received

32

$2 million in deposits related to our transportation contracts with El Paso
Merchant Energy L.P. which is included in our balance sheet as other current
liabilities. These deposits were required as a result of the credit rating
downgrades of El Paso.

At December 31, 2002 and 2001, we had payables to an affiliate of $204
million for obligations related to a non-cancelable lease on our Detroit
building. Of this amount, $8 million was classified as current at December 31,
2002. This payable resulted from the relocation of our headquarters from
Detroit, Michigan to Houston, Texas.

During the fourth quarter of 2002, we sold our equity interest in the
Typhoon offshore natural gas gathering pipeline to El Paso Energy Partners,
L.P., an affiliate, for approximately $50 million. There was no gain or loss on
the transaction.

We have also entered into contribution in aid to construction (CIAC)
arrangements with El Paso Energy Partners, L.P. in the past, and will most
likely do so in the future, as part of our normal commercial activities in the
Gulf of Mexico. We often contribute capital toward the construction costs of
gathering facilities owned by others which are connected to our pipeline. We
have, or plan to have, agreements with El Paso Energy Partners, L.P. under which
we will pay a total of approximately $17 million of capital toward the
construction of gathering pipelines to the Marco Polo and Red Hawk discoveries,
over the next 18 months. As of December 31, 2002, we had paid $2 million under
these agreements.

El Paso allocated a portion of its general and administrative expenses to
us in 2002 and 2001. The allocation of expenses is based upon the estimated
level of effort devoted to our operations and the relative size of our EBIT,
gross property and payroll. For the years ended December 31, 2002 and 2001, the
annual charges were $52 million and $45 million. During 2002 and 2001, Tennessee
Gas Pipeline Company allocated payroll and other expenses to us associated with
our shared pipeline services. The allocated expenses are based on the estimated
level of staff and their expenses to provide these services. For the years ended
December 31, 2002 and 2001, the annual charges were $23 million. We believe all
the allocation methods are reasonable. In 2000, we performed most of our own
administrative functions and provided some administrative functions for our
affiliates. We continue to provide services to related parties, Eaton Rapids and
Blue Lake, in 2002 and 2001. We record these services as a reduction of
operating expenses and are reported as reimbursement of costs.

We enter into transactions with various El Paso subsidiaries and
unconsolidated affiliates in the ordinary course of our business to transport
and store natural gas. Our affiliated revenues are primarily from transportation
services. In 2001, we sold natural gas to Midland CoGeneration Venture and
recognized $25 million in revenues. Great Lakes Gas Transmission Company
provides us capacity under a contract that extends to 2013. For the years ended
December 2002, 2001 and 2000, we incurred transportation costs of $14 million,
$16 million and $15 million under this contract. We also have natural gas
storage contracts with Blue Lake Gas Storage Company and ANR Storage Company.
Our contract with Blue Lake extends to 2013 and covers capacity of 46 Bcf of
natural gas storage. Our contract with ANR Storage extends to 2004 and covers
storage capacity of 35 Bcf. For the years ended December 2002, 2001 and 2000, we
incurred storage costs related to these contracts of $37 million, $36 million
and $36 million. Transportation and storage costs are recorded as operating
expenses. The terms of service provided to and by our affiliates are the same as
those terms as non-affiliated parties.

The following table shows revenues and charges from our affiliates for each
of the three years ended December 31:

14. CONTRIBUTION OF EL PASO GREAT LAKES (UNAUDITED)

In March 2003, we issued $300 million 8.875% senior notes due 2010.
Concurrently with this issuance, American Natural Resources Company, our parent,
contributed to us all of the common stock of its wholly owned subsidiary, El
Paso Great Lakes, Inc. El Paso Great Lakes' principal asset consists of its
effective

33

50 percent interest in Great Lakes Gas Transmission Limited Partnership, a
Delaware limited partnership and Great Lakes Gas Transmission Company. We will
account for this transaction as a transfer between entities under common
control, which will require us to record our investment in El Paso Great Lakes
at El Paso's historical carrying value at the date of transfer as though we had
always owned it.

The following table presents the impact of the contribution as if it had
been made during the historical periods presented in these financial statements.
The contribution would not have impacted our reported revenues or extraordinary
items during these periods.

15. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Financial information by quarter is summarized below:

34

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholder of
ANR Pipeline Company:

In our opinion, the consolidated financial statements in the Index appearing
under Item 15(a)(1) present fairly, in all material respects, the consolidated
financial position of ANR Pipeline Company and subsidiaries (the "Company") at
December 31, 2002 and 2001, and the consolidated results of their operations and
their cash flows for each of the two years in the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the Index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 10, during 2001, the Company changed the measurement date
used to account for postretirement benefits other than pensions from December
31, to September 30.

/s/ PricewaterhouseCoopers LLP

Houston, Texas
March 25, 2003

35

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholder
ANR Pipeline Company
Detroit, Michigan

We have audited the consolidated statements of income, stockholders' equity and
cash flows of ANR Pipeline Company (an indirect, wholly owned subsidiary of El
Paso CGP Company, formerly The Coastal Corporation) and subsidiaries (the
"Company") for the year ended December 31, 2000. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, ANR Pipeline Company's results of operations and cash flows
for the year ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Detroit, Michigan
March 19, 2001

36

SCHEDULE II

ANR PIPELINE COMPANY
VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN MILLIONS)

37

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

Item 10, "Directors and Executive Officers of the Registrant;" Item 11,
"Executive Compensation;" Item 12, "Security Ownership of Management;" and Item
13, "Certain Relationships and Related Transactions," have been omitted from
this report pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures. Under the supervision and with the
participation of management, including our principal executive officer and
principal financial officer, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (Disclosure Controls)
and internal controls (Internal Controls) within 90 days of the filing date of
this annual report pursuant to Rules 13a-15 and 15d-15 under the Securities
Exchange Act of 1934 (Exchange Act).

Definition of Disclosure Controls and Internal Controls. Disclosure
Controls are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified under the Exchange Act. Disclosure Controls include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. Internal Controls are procedures
which are designed with the objective of providing reasonable assurance that (1)
our transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.

Limitations on the Effectiveness of Controls. ANR Pipeline Company's
management, including the principal executive officer and principal financial
officer, does not expect that our Disclosure Controls and Internal Controls will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

No Significant Changes in Internal Controls. We have sought to determine
whether there were any "significant deficiencies" or "material weaknesses" in
ANR Pipeline Company's Internal Controls, or whether ANR Pipeline Company had
identified any acts of fraud involving personnel who have a significant role in
ANR Pipeline Company's Internal Controls. This information was important both
for the controls evaluation generally and because the principal executive
officer and principal financial officer are required to disclose that
information to our Board and our independent accountants and to report on
related matters in this section of the Annual Report. The principal executive
officer and principal financial officer note that, from the date of the controls
evaluation to the date of this Annual Report, there have been no significant
changes in Internal

38

Controls or in other factors that could significantly affect Internal Controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

Effectiveness of Disclosure Controls. Based on the controls evaluation,
our principal executive officer and principal financial officer have concluded
that, subject to the limitations discussed above, the Disclosure Controls are
effective to ensure that material information relating to ANR Pipeline Company
and its consolidated subsidiaries is made known to management, including the
principal executive officer and principal financial officer, particularly during
the period when our periodic reports are being prepared.

Officer Certifications. The certifications from the principal executive
officer and principal financial officer required under Sections 302 and 906 of
the Sarbanes-Oxley Act of 2002 have been included herein, or as Exhibits to this
Annual Report, as appropriate.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

1. Financial statements.

The following Consolidated Financial Statements are included in Part II,
Item 8, of this report:

2. Financial statement schedules.

Schedule II -- Valuation and qualifying accounts............ 37

All other schedules are omitted because they are not applicable, or
the required information is disclosed in the financial statements or
accompanying notes.

3. Exhibits list............................................ 40

(B) REPORTS ON FORM 8-K:

We filed a current report on Form 8-K on March 5, 2003, reporting the
sale of the $300 million in notes.

We filed a current report on Form 8-K on March 14, 2003 regarding our
acquisition of El Paso Great Lakes.

We also furnished information to the SEC in an Item 9 Current Report
on Form 8-K. Item 9 Current Reports on Form 8-K are not considered to be
"filed" for purposes of Section 18 of the Securities and Exchange Act of
1934 and are not subject to the liabilities of that section, but are
furnished to comply with Regulation FD.

39

ANR PIPELINE COMPANY
EXHIBIT LIST

DECEMBER 31, 2002

Exhibits not incorporated by reference to a prior filing are designated by
an asterisk. All exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.

UNDERTAKING

We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph
(4)(iii), to furnish to the Securities and Exchange Commission upon request all
constituent instruments defining the rights of holders of our long-term debt and
consolidated subsidiaries 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.

40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, ANR Pipeline Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 27th day of March 2003.

ANR PIPELINE COMPANY

By /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, this report has been signed below by the following persons on behalf of
ANR Pipeline Company and in the capacities and on the dates indicated:

41

CERTIFICATION

I, John W. Somerhalder II, certify that:

1. I have reviewed this annual report on Form 10-K of ANR Pipeline Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ JOHN W. SOMERHALDER II
--------------------------------------
John W. Somerhalder II
Chairman of the Board
(Principal Executive Officer)
ANR Pipeline Company
Date: March 27, 2003

42

CERTIFICATION

I, Greg G. Gruber, certify that:

1. I have reviewed this annual report on Form 10-K of ANR Pipeline Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ GREG G. GRUBER
--------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
ANR Pipeline Company
Date: March 27, 2003

43

EXHIBIT INDEX

Exhibits not incorporated by reference to a prior filing are designated by
an asterisk. All exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.