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, 2003

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 15, 2004:
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
Tcfe = trillion cubic feet of gas equivalents

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). We
are involved in the transportation, storage and gathering of natural gas and
related services. We conduct our business activities through two natural gas
pipeline systems and storage facilities, all of which are discussed below.

The Pipeline Systems. The ANR pipeline system consists of approximately
10,600 miles of pipeline with a design capacity of approximately 6,414 MMcf/d.
During 2003, 2002 and 2001, our average throughput was 4,232 BBtu/d, 4,130
BBtu/d and 4,531 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 system, the Federal Energy Regulatory
Commission (FERC) approved the Westleg Wisconsin expansion, which will increase
capacity of our existing system by looping the Madison lateral and by enlarging
the Beloit lateral. The project is expected to expand our overall capacity by
218 MMcf/d and has an anticipated completion date of November 2004.

We also have an effective 50 percent ownership interest in Great Lakes Gas
Transmission Limited Partnership (Great Lakes L.P.) We own this interest through
a direct 46 percent interest in Great Lakes L.P. and indirectly through our 50
percent ownership interest in Great Lakes Gas Transmission Company, which owns 8
percent of Great Lakes L.P. Great Lakes L.P. owns and operates a 2,115 mile
interstate natural gas pipeline with a design capacity of 2,895 MMcf/d that
transports gas to customers in the midwestern and northeastern U.S. and eastern
Canada. During 2003, 2002 and 2001, average throughput was 2,366 BBtu/d, 2,378
BBtu/d and 2,224 BBtu/d.

Storage Facilities. As of December 31, 2003, we owned or contracted for
approximately 202 Bcf of underground natural gas storage capacity which included
the contracted rights for 75 Bcf of natural gas storage capacity, of which 45
Bcf is provided by Blue Lake Gas Storage Company and 30 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.

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;

- relationships between pipeline and energy affiliates;

- terms and conditions of services;

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- 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. Approximately 87 percent of our 2003 transportation services
revenue is attributed to a capacity reservation, or demand charge, paid by firm
customers. Firm customers are those who 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 13 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. 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 subject to regulation over the safety requirements in the design,
construction, operation and maintenance of our interstate natural gas
transmission system and storage facilities 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 10, and is
incorporated herein by reference.

MARKETS AND COMPETITION

We have approximately 228 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 537 firm contracts with remaining
terms that extend from one month to 21 years, and with a weighted average
remaining contract term of approximately four years. Approximately 97 percent of
our total capacity is subscribed under firm agreements. Substantially all of the
natural gas that we transport or store is owned by our shippers and accordingly,
we do not assume any material natural gas commodity price risk related to this
gas.

The most significant customer we served in 2003 was We Energies, with
capacity of 1,050 BBtu/d under contracts that expire in 2004 through 2010. We
Energies owns an interest in the Guardian Pipeline, which is currently serving a
portion of its firm transportation requirements and directly competes with us
for a portion of the markets in Wisconsin 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.

A number of large natural gas consumers are electric utility companies who
use natural gas to fuel electric power generation facilities. Electric power
generation is the fastest growing demand sector 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 potentially benefit the natural gas industry by creating more
demand for natural gas turbine generated electric power, but this effect is
offset, in

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varying degrees, by increased efficiency in generation and the use of surplus
electric capacity as a result of open market access.

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 existing contracts mature at various times and in varying amounts of
throughput capacity. 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 re-negotiated contracts will be affected by current prices,
competitive conditions and judgments concerning future market trends and
volatility. While we are allowed to negotiate contracts 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 10, and is incorporated
herein by reference.

EMPLOYEES

As of March 9, 2004, we had approximately 390 full-time employees, none of
whom are subject to a collective bargaining agreement.

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 10, 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.

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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 an indirect
subsidiary of El Paso, and accordingly, our stock is not publicly traded.

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.
In 2003, we distributed a $528 million dividend of affiliated receivables to our
parent. No common stock dividends were declared or paid in 2002. We paid cash
dividends of $30 million to our parent in 2001.

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.

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 contracts 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

Our management, as well as El Paso's management, uses earnings before
interest and income taxes (EBIT) to assess the operating results and
effectiveness of our business. We define EBIT as net income adjusted for (i)
items that do not impact our income from continuing operations, such as the
impact of accounting changes, (ii) income taxes, (iii) interest and debt expense
and (iv) affiliated interest income. Our business consists of consolidated
operations as well as investments in unconsolidated affiliates. We exclude
interest and debt expense from this measure so that our management can evaluate
our operating results without regard to our financing methods. We believe the
discussion of our results of operations based on EBIT is useful to our investors
because it allows them to more effectively evaluate the operating performance of
both our consolidated business and our unconsolidated investments using the same
performance measure analyzed internally by our management. EBIT may not be
comparable to measurements used by other companies. Additionally, EBIT should be
considered in conjunction with net income and other performance measures

4

such as operating income or operating cash flow. The following is a
reconciliation of our operating results to our EBIT and our EBIT to our net
income for the year ended December 31:

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(1) Throughput volumes include billable transportation throughput volume for
storage withdrawal and volumes associated with our 50 percent equity
investment in Great Lakes L.P.

OPERATING RESULTS (EBIT)

Our EBIT for the year ended December 31, 2003 decreased $24 million
compared to 2002. Transportation and storage revenues decreased approximately
$10 million due to contract changes related to our significant customer, We
Energies. Guardian Pipeline, which is owned in part by We Energies, is currently
serving a portion of their firm transportation requirements and directly
competes with us for a portion of the markets in Wisconsin. This direct impact
to EBIT was offset by higher revenues from the 2003 sale of operational natural
gas recoveries for $19 million that did not occur in 2002. Also contributing to
the decrease in EBIT were $9 million from lower benefit costs in 2002, lower
equity earnings in 2003 from our investment in Great Lakes of $6 million
primarily due to a favorable use tax settlement recorded by Great Lakes in 2002,
a $5 million increase in 2003 expense related to a historical system balancing
adjustment, a 2002 favorable resolution of uncertainties related to the sale of
our interest in the Iroquois pipeline system which occurred following the merger
with El Paso in 2001 of $4 million and the reversal of a $3 million liability in
the second quarter 2002 related to facilities in Detroit that were no longer
being used. Offsetting these items were higher accruals in 2002 of $5 million on
estimated liabilities to assess and remediate our environmental exposure due to
an ongoing evaluation of the exposure at our facilities.

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 87
percent of our 2003 transportation services revenue was attributed to a capacity
reservation, or demand charge, paid by firm customers. Firm customers are those
who 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 2003, the renewal rates for
contracts with our customers declined as a result of increased competition,
causing our transportation revenue to decrease. This trend may continue in the
foreseeable future based on the current market environment for our pipeline
system.

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INTEREST AND DEBT EXPENSE

Interest and debt expense for the year ended December 31, 2003, was $25
million higher than in 2002 due to the issuance of $300 million senior unsecured
notes with an annual interest rate of 8.875% in March 2003.

AFFILIATED INTEREST INCOME, NET

Affiliated interest income, net for the year ended December 31, 2003, was
$2 million lower than in 2002. The decrease was due to lower average advances to
El Paso under our cash management program. The average advances to El Paso were
$206 million in 2003 versus $304 million in 2002, and the average short-term
interest rate increased from 1.9% in 2002 to 2.0% in 2003.

INCOME TAXES

Our effective tax rates differed from the statutory rate of 35 percent in
both periods primarily due to state income taxes. For a reconciliation of the
statutory rate to the effective rates, see Item 8, Financial Statements and
Supplementary Data, Note 6.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Our liquidity needs have been provided by cash flows from operating
activities and the use of El Paso's cash management program. Under El Paso's
cash management program, depending on whether we have short-term cash surpluses
or requirements, we either provide cash to El Paso or El Paso provides cash to
us. We have historically provided cash advances to El Paso, and we reflect these
advances as investing activities in our statement of cash flows. As of December
31, 2003, we had receivables from El Paso and its affiliates of $367 million as
a result of this program. These receivables are due upon demand; however, as of
December 31, 2003, we classified this amount as non-current notes receivable
from affiliates in our balance sheet because we do not anticipate settlement
within the next twelve months. We believe that cash flows from operating
activities will be adequate to meet our short-term capital requirements for
existing operations. However, as a result of recent announcements by El Paso
related to a revision of its estimates of its natural gas and oil reserves, our
ability to borrow or recover the amounts advanced under El Paso's cash
management program

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could be impacted. See Item 8, Financial Statements and Supplementary Data, Note
2 for a discussion of these matters. Our cash flows for the years ended December
31 were as follows:

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(1) In 2003, we made non-cash distributions of $528 million in outstanding
affiliated receivables to our parent.

In a series of credit rating agency actions beginning in 2002, 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 (with a negative
outlook and under review for a possible downgrade) and B- by Standard & Poor's
(with a negative outlook). These downgrades will increase our cost of capital
and could impede our access to capital markets in the future.

CAPITAL EXPENDITURES

Our capital expenditures during the periods indicated are listed below:

Under our current plan, we expect to spend between approximately $81
million and $86 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 $48 million and $62 million in each of the next three years to expand
the capacity and services of our pipeline system. In the current environment, we
will require contract commitments for capital intensive projects. We expect to
fund our maintenance and expansion capital expenditures through internally
generated funds and with amounts we retained from our 2003 debt offering
discussed in Item 8, Financial Statements and Supplementary Data, Note 9.

DEBT

As of December 31, 2003, we had long-term debt outstanding of $807 million,
net of a $5 million discount, $75 million of which may mature within the next
five years. For a discussion of our debt and other credit facilities, see Item
8, Financial Statements and Supplementary Data, Note 9, which is incorporated
herein by reference.

COMMITMENTS AND CONTINGENCIES

For a discussion of our commitments and contingencies, see Item 8,
Financial Statements and Supplementary Data, Note 10, which is incorporated
herein by reference.

NEW ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED

As of December 31, 2003, there were a number of accounting standards and
interpretations that had been issued, but not yet adopted by us. Based on our
assessment of those standards, we do not believe there are any that could have a
material impact on us.

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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 such as hydroelectric power;

- price competition;

- drilling activity and supply of natural gas availability;

- expiration and/or turn back of significant contracts;

- service area competition;

- changes in regulation and actions of regulatory bodies;

- credit risk of our customer base;

- increased cost of capital;

- adverse general economic conditions;

- opposition to energy infrastructure development, especially in
environmentally sensitive areas; and

- unfavorable movements in 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
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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 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."

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

- competition by other pipelines, 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 in the areas we serve;

- 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 directly competes for a
portion of the markets in Wisconsin 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. 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, 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 a reduction of the volumes transported by our customers, such as
power companies who, depending on the price of fuel, may not dispatch gas fired
power plants. Increased prices could also result in industrial plant shutdowns
or load losses to competitive fuels and local distribution companies' loss of
customer base. 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. If
natural gas prices in the supply basins connected to our pipeline systems are
higher on a delivered basis to our off-system markets than delivered prices from
other

9

natural gas producing regions, our ability to compete with other transporters
may be negatively impacted. 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.

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 and local governments 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 and these amounts
could be material. For additional information, see Item 8, Financial Statements
and Supplementary Data, Note 10.

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.

10

While we maintain insurance against many of these risks, to the extent and
in amounts we believe are reasonable, our financial condition and operations
could be adversely affected if a significant event occurs that is not fully
covered by insurance.

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.

OUR RELATIONSHIP WITH EL PASO AND ITS FINANCIAL CONDITION SUBJECTS US TO
POTENTIAL RISKS THAT ARE BEYOND OUR CONTROL.

Due to our relationship with El Paso, adverse developments or announcements
concerning El Paso could adversely affect our financial condition, even if we
have not suffered any similar development. The senior unsecured indebtedness of
El Paso has been downgraded to below investment grade, currently rated Caa1 by
Moody's (with a negative outlook and under review for a possible downgrade) and
CCC+ by Standard & Poor's (with a negative outlook). Our senior unsecured
indebtedness is rated B1 by Moody's (with a negative outlook and under review
for a possible downgrade) and B- by Standard & Poor's (with a negative outlook).
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. These
downgrades are a result, at least in part, of the outlook generally for the
consolidated businesses of El Paso and its needs for liquidity.

El Paso has embarked on its 2003 Long-Range Plan that, among other things,
defines El Paso's future businesses, targets significant debt reduction and
establishes financial goals. An inability to meet these objectives could
adversely affect El Paso's liquidity position, and in turn affect our financial
condition.

Pursuant to El Paso's cash management program, surplus cash is made
available to El Paso in exchange for an affiliated receivable. In addition, we
conduct commercial transactions with some of our affiliates. As of December 31,
2003, we have net receivables of approximately $354 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
Item 8, Financial Statements and Supplementary Data, Note 15.

Furthermore, in February 2004, El Paso announced that it had completed a
review of its estimates of natural gas and oil reserves. As a result of this
review, El Paso announced that it was reducing its proved natural gas and oil
reserves by approximately 1.8 Tcfe. El Paso also announced that this reserve
revision would result in a 2003 charge of approximately $1 billion if the full
impact of the revision was taken in that period. In March 2004, El Paso provided
an update and stated that the revisions would likely result in a restatement of
its historical financial statements, the timing and magnitude of which are still
being determined. El Paso has retained a law firm to conduct an internal
investigation, which is ongoing. Also, as a result of the reduction in reserve
estimates, several class action suits have been filed against El Paso and
several of its subsidiaries, but not against us. The reduction in reserve
estimates may also become the subject of an SEC investigation or separate
inquiries by other governmental regulatory agencies. These investigations and
lawsuits may further negatively impact El Paso's credit ratings and place
further demands on its liquidity. See Item 8, Financial Statements and
Supplementary Data, Note 2 for a further discussion of the possible impacts of
this announcement.

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WE MAY BE SUBJECT TO A CHANGE OF CONTROL IN CERTAIN CIRCUMSTANCES.

In connection with its guarantee of El Paso's $3 billion revolving credit
facility and approximately $1 billion of other transactions, our direct parent
pledged its equity interests in us to collateralize those facilities. As a
result, our ownership is subject to change if El Paso's lenders under these
facilities exercise rights over their collateral.

A DEFAULT UNDER EL PASO'S $3 BILLION REVOLVING CREDIT FACILITY BY ANY PARTY
COULD ACCELERATE OUR FUTURE BORROWINGS, IF ANY, UNDER THE FACILITY AND OUR
LONG-TERM DEBT, WHICH COULD ADVERSELY AFFECT OUR LIQUIDITY POSITION.

We are a party to El Paso's $3 billion revolving credit facility. We are
only liable, however, for our borrowings under the facility, which were zero as
of December 31, 2003. Under the facility, a default by El Paso, or any other
party, could result in the acceleration of all outstanding borrowings under the
facility, including the borrowings of any non-defaulting party. El Paso's
revisions to its reserve estimates would also likely result in a restatement of
its historical financial statements. Any such material restatement would result
in an event of default under El Paso's credit facility, which could result in
the acceleration of any outstanding borrowings by El Paso, and would preclude us
from borrowing under the facility in the future. The acceleration of our future
borrowings, if any, under the credit facility, or the inability to borrow under
this facility, could adversely affect our liquidity position and, in turn, our
financial condition.

Furthermore, the indentures governing our long-term debt include
cross-acceleration provisions. Therefore, if we borrow $5 million or more under
the credit facility and such borrowings are accelerated for any reason,
including the default of another party, our long-term debt could also be
accelerated. The acceleration of our long-term debt could also adversely affect
our liquidity position and, in turn, our financial condition.

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.

WE ARE A WHOLLY OWNED SUBSIDIARY OF EL PASO ANR INVESTMENTS, LLC, AN INDIRECT
SUBSIDIARY OF EL PASO.

As 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;

- 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.

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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 effective interest
rates of our interest bearing securities, by expected maturity dates, and the
fair value of those securities. As of December 31, 2003, 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, which has a stated maturity
date of 2025, have the option to redeem these securities in 2005 at par
value. As a result, we assume these amounts will mature in 2005.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANR PIPELINE COMPANY

CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)

See accompanying notes.

14

ANR PIPELINE COMPANY

CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)

See accompanying notes.

15

ANR PIPELINE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

See accompanying notes.

16

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.

Regulated Operations

Our natural gas systems and storage operations are subject to the
jurisdiction 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
Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the
Effects of Certain Types of Regulation. The accounting required by SFAS No. 71
differs from the accounting required for businesses that do not apply its
provisions. Transactions that are generally recorded differently as a result of
applying regulatory accounting requirements include the capitalization of an
equity return component on regulated capital projects, post retirement employee
benefits plans, and other costs included in, or expected to be included in,
future rates.

As a result of recent changes in our competitive environment and operating
cost structure, we assessed the applicability of the provisions of SFAS No. 71
to our financial statements. Based on our evaluation completed in the fourth
quarter of 2003, we do not meet the criteria required for the application of
SFAS No. 71, primarily due to uncertainties related to recently expired
contracts and recent construction of competing facilities. We will reassess the
applicability of SFAS No. 71 as the impact of these uncertainties are resolved.

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

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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.

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 1 to 64 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, 2003 and 2002, we had approximately $77 million and $61
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, 2003, 2002 and 2001, were $3 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 evaluate our assets 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.

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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 as well
as revenues on sales of natural gas and related products, we record revenues
when physical deliveries of natural gas and other related products are made at
the agreed upon delivery point or when gas is injected or withdrawn from the
storage facility. Revenues for 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.

Environmental Costs and Other Contingencies

We record environmental 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 and
state income tax returns. The policy provides, among other things, that (i) each
company in a taxable income position will accrue a current expense equivalent to
its federal and state income taxes, 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 returns. El Paso pays all
consolidated U.S. federal and state income taxes directly to the appropriate
taxing jurisdictions and, under a separate tax billing agreement, El Paso may
bill or refund its subsidiaries for their portion of these income tax payments.

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2. LIQUIDITY

In February 2004, El Paso announced that it had completed a review of its
estimates of natural gas and oil reserves. As a result of this review, El Paso
announced that it was reducing its proved natural gas and oil reserves by
approximately 1.8 Tcfe. El Paso also announced that this reserve revision would
result in a 2003 charge of approximately $1 billion if the full impact of the
revision was taken in that period. In March 2004, El Paso provided an update and
stated that the revisions would likely result in a restatement of its historical
financial statements, the timing and magnitude of which are still being
determined.

A material restatement of El Paso's prior period financial statements may
result in an "event of default" under El Paso's revolving credit facility and
various other financing transactions; specifically under the provisions of the
facility related to representations and warranties on the accuracy of its
historical financial statements and its debt to total capitalization ratio. El
Paso has received waivers on its revolving credit facility and two other
transactions. These waivers have a condition that provides for the expiration of
the waiver in thirty days, unless El Paso successfully receives waivers on other
specified transactions within that time period. El Paso is pursuing these
additional waivers and expects to receive them. However, if El Paso is unable to
obtain these additional waivers, and there is an existing event of default, El
Paso could be required to immediately repay the amounts outstanding under the
revolving credit facility, and El Paso and we would be precluded from borrowing
under this facility. We currently have no outstanding borrowings under the
facility, have never borrowed under the facility and do not believe we will need
to borrow from the facility in the future. In addition, based upon a review of
the covenants and indentures of our other outstanding indebtedness, we do not
believe that a default on the revolving credit facility would constitute an
event of default on our other debt securities.

El Paso is a significant potential source of liquidity to us. We
participate in El Paso's cash management program. Under this program, depending
on whether we have short-term cash surpluses or requirements, we either provide
cash to El Paso or El Paso provides cash to us. We have historically and
consistently provided cash to El Paso under this program, and as of December 31,
2003, we had a cash advance receivable from El Paso of $367 million, classified
as a non-current asset in our balance sheet. If El Paso were unable to meet its
liquidity needs, we would not have access to this source of liquidity and there
is no assurance that El Paso could repay the entire amounts owed to us. In that
event, we could be required to write-off some amount of these advances, which
could have a material impact on our stockholder's equity. Furthermore, we would
still be required to repay affiliated company payables. Non-cash write-downs
that cause our debt to EBITDA (as defined in our agreements) ratio to fall below
5 to 1 could prohibit us from incurring additional debt. However, this non-cash
equity reduction would not result in an event of default under our existing debt
securities. In addition, based on our current estimates of cash flows, we do not
believe we will need to seek repayment of all or part of these advances in the
next year.

El Paso's ownership interest in us serves as collateral under El Paso's
revolving credit facility and other of El Paso's borrowings. If El Paso's
lenders under this facility or those borrowings were to exercise their rights to
this collateral, our ownership could change. However, this change of control
would not constitute an event of default under our existing debt securities.

If, as a result of the events described above, El Paso were subject to
voluntary or involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims against us,
including claims to substantively consolidate our assets and liabilities with
those of El Paso and its other subsidiaries. We believe that claims to
substantively consolidate us with El Paso and/or its other subsidiaries would be
without merit. However, there is no assurance that El Paso and/or its other
subsidiaries or their creditors would not advance such a claim in a bankruptcy
proceeding. If we were to be substantively consolidated in a bankruptcy
proceeding with El Paso and/or its other subsidiaries, there could be a material
adverse effect on our financial condition and our liquidity.

Finally, we have cross-acceleration provisions in our long-term debt that
state that should we incur an event of default under which borrowings in excess
of $5 million are accelerated, our long-term debt

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could also be accelerated. The acceleration of our long-term debt would
adversely affect our liquidity position and, in turn, our financial condition.

3. INVESTMENT IN EL PASO GREAT LAKES, INC.

In March 2003, American Natural Resources Company, an affiliate and
subsidiary of El Paso, contributed to us all of the common stock of its wholly
owned subsidiary, El Paso Great Lakes, Inc. El Paso Great Lakes, Inc. had a net
book value at the time of its contribution of approximately $247 million. El
Paso Great Lakes, Inc.'s principal asset was its effective 50 percent interest
in Great Lakes Gas Transmission Limited Partnership, a Delaware limited
partnership. It held this interest through direct investment in the Great Lakes
Gas Transmission Limited Partnership and indirectly through its 50 percent
ownership of Great Lakes Gas Transmission Company. Since both El Paso Great
Lakes, Inc. and our common stock were owned by El Paso at the time of the
contribution, we were required to reflect the contribution at its historical
cost and include its operating results in our financial statements for all
periods prior to its contribution. As a result, our financial statements reflect
the contribution of El Paso Great Lakes, Inc. as though it occurred on January
1, 2001.

4. DIVESTITURES

Assets

In November 2002, we completed the sale of our Typhoon offshore natural gas
gathering pipeline to GulfTerra Energy Partners L.P., formerly 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.

Equity Investments

During the second quarter of 2001, we sold our 16 percent interest in
Iroquois Gas Transmissions Systems, L.P. In addition, during the fourth quarter
of 2001, we sold our 50 percent interest in Deepwater Holdings to GulfTerra.
Proceeds on these sales were approximately $75 million and we recognized a $13
million gain on the sale of Deepwater. See Note 7 for a discussion of the
extraordinary loss recognized on our sale of Iroquois.

5. 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 then parent company,
El Paso CGP Company, 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 postretirement 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,

22

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.

6. 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:

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:

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Under El Paso's tax accrual policy, we are allocated the tax effect
associated with our employees' non-qualified dispositions of employee stock
purchase plan stock, the exercise of non-qualified stock options and the vesting
of restricted stock as well as restricted stock dividends. This allocation
increased taxes payable by $2 million in 2003 and reduced taxes payable by $1
million in 2002 and by $2 million in 2001. These tax effects are included in
additional paid-in capital in our balance sheet.

7. EXTRAORDINARY ITEMS

As a result of El Paso's January 2001 merger with El Paso CGP, 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. We recognized an extraordinary loss of
approximately $2 million, net of $2 million in income taxes.

8. FINANCIAL INSTRUMENTS

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.

As of December 31, 2003 and 2002, 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.

9. DEBT AND OTHER CREDIT FACILITIES

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

The holders of the $75 million, 7.00% debentures due 2025, have the option
to require us to redeem their debentures at par value in 2005. The maturity
schedule of our long term debt presented below assumes holders of our $75
million, 7.00% debentures, exercise this option.

24

We also have indentures that contain cross-acceleration provisions which,
if triggered, could result in the acceleration of our debt. The most restrictive
indenture has a cross-acceleration threshold of $5 million.

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 11 and 15 for a further discussion of transactions
entered into as a result of the issuance.

Credit Facilities

In April 2003, El Paso entered into a new $3 billion revolving credit
facility, with a $1.5 billion letter of credit sublimit, which matures on June
30, 2005. The credit facility has a borrowing cost of LIBOR plus 350 basis
points, letter of credit fees of 350 basis points and a commitment fee of 75
basis points on the unused portion of the facility. This facility replaces El
Paso's previous $3 billion revolving credit facility. El Paso's $1 billion
revolving credit facility (which matured in August 2003) and approximately $1
billion of other El Paso financing arrangements (including leases, letters of
credit and other facilities) were also amended to conform El Paso's obligations
under those arrangements to the new credit facility. We, along with El Paso and
our affiliates, Tennessee Gas Pipeline Company, Colorado Interstate Gas Company
and El Paso Natural Gas Company (EPNG), are borrowers under the $3 billion
revolving credit facility, and El Paso's equity in several of its subsidiaries,
including its equity in us, collateralizes the credit facility and the other
financing arrangements. We are only liable for amounts we directly borrow under
the $3 billion revolving credit facility. As of December 31, 2003, $850 million
was outstanding and $1.2 billion in letters of credit were issued, none of which
were borrowed by or issued on behalf of us. See Note 2 for a discussion
regarding El Paso's possible default on the $3 billion revolving credit
facility.

Under the new $3 billion revolving credit facility and other indentures, we
are subject to a number of restrictions and covenants. The most restrictive of
these include (i) limitations on the incurrence of additional debt, based on a
ratio of debt to EBITDA (as defined in the agreements); (ii) limitations on the
use of proceeds from borrowings; (iii) limitations, in some cases, on
transactions with our affiliates; (iv) limitations on the incurrence of liens;
(v) potential limitations on our ability to declare and pay dividends; and (vi)
potential limitations on our ability to participate in the El Paso cash
management program discussed in Note 15. For the year ended December 31, 2003,
we were in compliance with these covenants.

10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Grynberg. In 1997, we and a number of our affiliates were named defendants
in actions brought by Jack Grynberg on behalf of the U.S. Government under the
False Claims Act. Generally, these complaints allege an industry-wide conspiracy
to underreport the heating value as well as the volumes of the natural gas
produced from federal and Native American lands, which deprived the U.S.
Government of royalties. The plaintiff in this case seeks royalties that he
contends the government should have received had the volume and heating value
been differently measured, analyzed, calculated and reported, together with
interest, treble damages, civil penalties, expenses and future injunctive relief
to require the defendants to adopt allegedly appropriate gas measurement
practices. No monetary relief has been specified in this case. These matters
have been consolidated for pretrial purposes (In re: Natural Gas Royalties Qui
Tam Litigation, U.S. District Court for the District of Wyoming, filed June
1997). Discovery is proceeding. Our costs and legal exposure related to these
lawsuits and claims are not currently determinable.

Will Price (formerly Quinque). We and a number of our affiliates are named
defendants in Will Price, et al. v. Gas Pipelines and Their Predecessors, et
al., filed in 1999 in the District Court of Stevens County, Kansas. Plaintiffs
allege that the defendants mismeasured natural gas volumes and heating content
of natural gas on non-federal and non-Native American lands and seek
certification of a nationwide class of natural gas working interest owners and
natural gas royalty owners to recover royalties that they contend they should
have received had the volume and heating value of natural gas produced from
their properties been differently measured, analyzed, calculated and reported,
together with prejudgment and postjudgment interest, punitive

25

damages, treble damages, attorneys' fees, costs and expenses, and future
injunctive relief to require the defendants to adopt allegedly appropriate gas
measurement practices. No monetary relief has been specified in this case.
Plaintiffs' motion for class certification of a nationwide class of natural gas
working interest owners and natural gas royalty owners was denied on April 10,
2003. Plaintiffs were granted leave to file a Fourth Amended Petition which
narrows the proposed class to royalty owners in wells in Kansas, Wyoming and
Colorado and removed claims as to heating content. A second class action has
since been filed as to the heating content claims. 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 this information becomes available, or other relevant developments occur, we
will adjust our accrual amounts accordingly. While there are still uncertainties
related to the ultimate costs we may incur, based upon our evaluation and
experience to date, we believe our current reserves are adequate. As of December
31, 2003, we had no material accruals for our outstanding legal matters.

Environmental Matters

We are subject to federal, state and local laws and regulations governing
environmental quality and pollution control. These laws and regulations require
us to remove or remedy the effect on the environment of the disposal or release
of specified substances at current and former operating sites. As of December
31, 2003, we had accrued approximately $29 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.
Our accrual at December 31, 2003 was based on the most likely outcome that can
be reasonably estimated. Below is a reconciliation of our accrued liability as
of December 31, 2003 (in millions):

Balance as of January 1, 2003............................... $26
Additions/adjustments for remediation activities............ 8
Payments for remediation activities......................... (6)
Other changes, net.......................................... 1
---
Balance as of December 31, 2003............................. $29
===

In addition, we expect to make capital expenditures for environmental
matters of approximately $24 million in the aggregate for the years 2004 through
2008. These expenditures primarily relate to compliance with clean air
regulations. For 2004, we estimate that our total remediation expenditures will
be approximately $6 million. All of this amount is being expended under
government directed clean-up plans.

CERCLA Matters. We have received notice that we could be designated, or
have been asked for information to determine whether we could be designated, as
a Potentially Responsible Party (PRP) with respect to three active sites under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) or state equivalents. We have sought to resolve our liability as a PRP
at these sites through indemnification by third parties and settlements which
provide for payment of our allocable share of remediation costs. As of December
31, 2003, we have estimated our share of the remediation costs at these sites to
be approximately $1 million. Since the clean-up costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, and because in some cases we have asserted a defense to
any liability, our estimates could change. Moreover, liability under the federal
CERCLA statute is joint and several, meaning that we could be required to pay in
excess of our pro rata share of remediation costs. Our understanding of the
financial strength of other PRPs has been considered, where appropriate, in
estimating our liabilities. Reserves for these matters are included in the
environmental reserve discussed above.

26

It is possible that new information or future developments could require us
to reassess our potential exposure related to environmental matters. We may
incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments,
such as increasingly strict environmental laws and regulations and claims for
damages to property, employees, other persons and the environment resulting from
our current or past operations, could result in substantial costs and
liabilities in the future. As this information becomes available, or other
relevant developments occur, we will adjust our accrual amounts accordingly.
While there are still uncertainties relating to the ultimate costs we may incur,
based upon our evaluation and experience to date, we believe our reserves are
adequate.

Rates and Regulatory Matters

ANR Cashout Proceeding. On May 1, 2002, ANR made its annual filing to
reconcile the costs and revenues associated with operating its cashout program,
a program which involves the sale and purchase of natural gas to satisfy shipper
imbalances. On October 31, 2002, the FERC accepted the filing, and allowed ANR's
proposed cashout surcharge to go into effect. However, the FERC also found that
the existing cashout mechanism was no longer "just and reasonable" and set the
case for hearing to establish a replacement mechanism. A group of shippers have
filed testimony proposing a mechanism which would require ANR to credit to an
imbalance account: (1) past and possible future revenues associated with
over-recovered fuel and lost and unaccounted for gas; (2) past and possible
future revenues associated with ANR's Firm Storage Service Overrun Service; and
(3) the estimated value of balancing assets utilized by ANR. ANR opposes this
proposal on the grounds, among others, that it would require retroactive
refunds, which is contrary to Section 5 of the Natural Gas Act. A hearing was
held in January 2004. Initial and reply briefs are due in March 2004. An initial
decision could be expected in the summer. The outcome of this case is not
presently determinable.

There are other regulatory rules and orders in various stages of adoption,
review and/or implementation, none of which we believe will have a material
impact on us.

While the outcome of our outstanding rates and regulatory matters cannot be
predicted with certainty, based on current information 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 and accruals related to these
matters. 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, 2003, we had capital and investment commitments of $19
million. 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 $223 million at December 31,
2003. Our annual obligations under these agreements are $34 million for 2004,
$23 million for each of the years 2005 through 2008 and $97 million in total
thereafter.

27

Operating Leases

We lease property, facilities and equipment under various operating leases.
Minimum future annual rental commitments on operating leases as of December 31,
2003, 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, 2003, 2002 and 2001 was $10 million, $6 million and $12 million.

11. CAPITAL STOCK

In 2003, we made non-cash distributions of $528 million of our outstanding
affiliated receivables to our parent. In 2001, we paid a $30 million cash
dividend to our parent.

12. 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. In March 2003, El Paso suspended the matching contribution.
Effective July 1, 2003, El Paso began making matching contributions again at a
rate of 50 percent of participant contributions up to 6 percent. El Paso is
responsible for benefits accrued under its plans and allocates the related costs
to its affiliates.

Prior to the merger with El Paso, Coastal (our former parent, now known as
El Paso CGP) 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.

28

Other Postretirement Benefits

We maintain responsibility for postretirement medical and life insurance
benefits for a closed group of retirees who were at least age 50 with 10 years
of service on December 31, 2000, and retired on or before June 30, 2001. The
costs associated with the curtailment and special termination benefits were $32
million. Medical benefits for this closed group 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 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. We
expect to contribute $9 million to our other postretirement benefit plan in
2004.

On December 8, 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 was signed into law. The benefit obligations and costs
reported below, which include benefits related to prescription drug coverage, do
not reflect the impact of this legislation. Current accounting standards that
are not yet effective may require changes to previously reported benefit
information once they are finalized.

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 (the plan reporting date):

- ---------------

(1) Based on our current funded status, we have reflected approximately $7
million of our accrued benefit obligation as a current liability at December
31, 2003 and 2002.

Our postretirement benefit costs recorded in operating expenses include the
following components for the year ended December 31:

29

The following table details the weighted average assumptions we used for
our other postretirement plans for 2003, 2002 and 2001:

- ---------------

(1) The expected return on plan assets is a pre-tax rate (before a tax rate
ranging from 38% to 39% on postretirement benefits) that is primarily based
on an expected risk-free investment return, adjusted for historical risk
premiums and specific risk adjustments associated with our debt and equity
securities. These expected returns were then weighted based on our target
asset allocations of our investment portfolio.

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 10.0 percent in 2003, 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. A
one-percentage point change in assumed health care cost trends would have the
following effects as of September 30:

Other Postretirement Plan Assets

The following table provides the actual asset allocations in our
postretirement plan as of September 30:

The target allocation for the invested assets is 65% equity/35% fixed
income. In late 2003, we modified our target asset allocations for our
postretirement plan to increase our equity allocation to 65 percent of total
plan assets. As of September 30, 2003, we had not yet adjusted our portfolio's
investments to reflect this change in strategy. Other assets are held in cash
for payment of benefits upon presentment. Any El Paso stock held by the plan is
held indirectly through investments in mutual funds.

The primary investment objective of our plan is to ensure that, over the
long-term life of the plan, an adequate pool of sufficiently liquid assets
exists to support the benefit obligation to participants, retirees and
beneficiaries. In meeting this objective, the plan seeks to achieve a high level
of investment return consistent

30

with a prudent level of portfolio risk. Investment objectives are long-term in
nature covering typical market cycles of three to five years. Any shortfall in
investment performance compared to investment objectives is generally the result
of general economic and capital market conditions.

13. 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.

14. SUPPLEMENTAL CASH FLOW INFORMATION

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

15. INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND TRANSACTIONS WITH AFFILIATES

Great Lakes

In March 2003, American Natural Resources contributed the common stock of
its wholly owned subsidiary, El Paso Great Lakes Inc., to us. El Paso Great
Lakes Inc.'s principal asset consists of its effective 50 percent ownership
interest in Great Lakes Gas Transmission L.P. Great Lakes Gas Transmission L.P.
owns and operates a 2,115 mile interstate natural gas pipeline that transports
gas to customers in the midwestern and northeastern United States and eastern
Canada.

Other Investments

In 2001, we sold our equity investment in Iroquois and Deepwater. In 2002,
we completed the sale of an investment in Alliance. We recognized equity
earnings from these investments of $1 million in 2002 and $12 million in 2001.

Summarized financial information of our proportionate share of
unconsolidated affiliates are presented below.

--------------------
(1) Our proportionate share of net income and equity in net assets includes
our share of taxes payable for Great Lakes Gas Transmission.

Transactions with Affiliates

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. We had advanced $367 million at
December 31, 2003, at a market rate of interest which was 2.8%. At December 31,
2002, we had advanced $560 million at a market rate of interest which was 1.5%.
These receivables are due upon demand; however, as of December 31, 2003 and
2002, we have classified these amounts as non-current notes receivable from
affiliates because we do not anticipate settlement within the next twelve
months. See Note 2 for a discussion regarding our participation in and the
collectibility of these receivables.

In 2003, we distributed a $528 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.

At December 31, 2003 and 2002, we had accounts receivable from related
parties of $5 million and $14 million. In addition, we had accounts payable to
related parties of $18 million and $10 million at December 31, 2003, and 2002.
These balances arose in the ordinary course of business. We have received $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 as of December 31, 2003 and 2002. These deposits were required as a
result of the credit rating downgrades of El Paso.

At December 31, 2003 and 2002, we had payables to an affiliate of $196
million and $204 million for obligations related to a non-cancelable lease on
our Detroit building. Of these amounts, $8 million was classified as current at
December 31, 2003 and 2002. This payable resulted from the relocation of our
headquarters from Detroit, Michigan to Houston, Texas.

During the fourth quarter of 2002, we sold the Typhoon offshore natural gas
gathering pipeline to GulfTerra, 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 GulfTerra 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 agreements with GulfTerra 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. As of December 31, 2003, we had paid $14
million under these agreements.

El Paso allocated a portion of its general and administrative expenses to
us. The allocation 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, 2003, 2002 and 2001, the annual charges were $47
million, $52 million and $45 million. During 2003, 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

32

estimated level of staff and their expenses to provide these services. For the
years ended December 31, 2003, 2002 and 2001, the annual charges were $28
million, $23 million and $23 million. We believe all the allocation methods are
reasonable. We continued to provide services to related parties, Eaton Rapids
and Blue Lake, in 2003 and 2002. We record the amounts received for 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 L.P. provides
us capacity under contracts of which the longest extends through 2013. For each
of the years ended December 2003, 2002 and 2001, we incurred transportation
costs of $14 million under these contracts. 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 45 Bcf of natural
gas storage. Our contract with ANR Storage extends to 2004 and covers storage
capacity of 30 Bcf. For the years ended December 2003, 2002 and 2001, we
incurred storage costs related to these contracts of $36 million, $37 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:

16. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Financial information by quarter is summarized below:

33

REPORT OF INDEPENDENT AUDITORS

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 its subsidiaries
(the "Company") at December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 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 did not audit the consolidated financial statements of Great
Lakes Gas Transmission Limited Partnership (the "Partnership") as of December
31, 2003 and 2002 and for each of the three years in the period ended December
31, 2003. The Partnership is an equity investment of El Paso Great Lakes Inc.
that comprised assets of $274 million and $267 million at December 31, 2003 and
2002 and income of $37 million, $43 million and $46 million for each of the
three years in the period ended December 31, 2003. Those statements were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for the
Partnership, is based solely on the report of the other auditors. 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 2 to the consolidated financial statements, the
Company's indirect parent, El Paso Corporation, may be in default of covenants
contained in its revolving credit facility and other financing transactions.
Such an event of default could have a material impact on the Company's
liquidity. Certain waivers have been obtained by El Paso Corporation, however,
additional waivers must be obtained and certain conditions must be satisfied to
continue the effectiveness of the waivers.

/s/ PricewaterhouseCoopers LLP

Houston, Texas
March 15, 2004

34

SCHEDULE II

ANR PIPELINE COMPANY
VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN MILLIONS)

35

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

None.

ITEM 9A. 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 over financial reporting (Internal Controls) as of the end
of the period covered by 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. 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.
Therefore, 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. Our Disclosure Controls and Internal Controls are
designed to provide such reasonable assurances of achieving our desired control
objectives, and our principal executive officer and principal financial officer
have concluded that our Disclosure Controls and Internal Controls are effective
in achieving that level of reasonable assurance.

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 the 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's Audit Committee and our independent auditors and to report on related
matters in this section of the Annual Report. The principal executive officer
and principal financial officer note that there has not been any change in
Internal Controls that occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, Internal
Controls.

Effectiveness of Disclosure Controls. Based on the controls evaluation,
our principal executive officer and principal financial officer have concluded
that 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, on a timely basis.

36

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 as Exhibits to this Annual
Report.

PART III

Item 10, "Directors and Executive Officers of the Registrant;" Item 11,
"Executive Compensation;" Item 12, "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters;" 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Audit Fees for the years ended December 31, 2003 and 2002, of $650,000
and $470,000 were for professional services rendered by PricewaterhouseCoopers
LLP for the audits of the consolidated financial statements of ANR Pipeline
Company, and the review of documents filed with the Securities and Exchange
Commission, consents, and the issuance of comfort letters. No other
audit-related, tax or other services were provided by our auditors for the years
ended December 31, 2003 and 2002.

We are an indirect wholly-owned subsidiary of El Paso and do not have a
separate audit committee. El Paso's Audit Committee has adopted a pre-approval
policy for audit and non-audit services. For a description of El Paso's
pre-approval policies for audit and non-audit related services, see El Paso
Corporation's proxy statement.

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:

The following financial statements of our equity investments are included
on the following pages of this report:

2. Financial statement schedules.

Schedule II -- Valuation and Qualifying Accounts............ 35

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............................................ 47

(B) REPORTS ON FORM 8-K:

None.

38

INDEPENDENT AUDITORS' REPORT

The Partners and Management Committee
Great Lakes Gas Transmission Limited Partnership:

We have audited the accompanying consolidated balance sheets of Great Lakes Gas
Transmission Limited Partnership and subsidiary (Partnership) as of December 31,
2003 and 2002, and the related consolidated statements of income and partners'
capital, and cash flows for each of the years in the three year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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 audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Great Lakes Gas
Transmission Limited Partnership and subsidiary as of December 31, 2003 and
2002, and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.

KPMG LLP
Detroit, Michigan
January 9, 2004

39

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF
INCOME AND PARTNERS' CAPITAL

The accompanying notes are an integral part of these statements.
40

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.
41

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.
42

GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 ORGANIZATION AND MANAGEMENT

Great Lakes Gas Transmission Limited Partnership (Partnership) is a
Delaware limited partnership which owns and operates an interstate natural gas
pipeline system. The Partnership transports natural gas for delivery to
customers in the midwestern and northeastern United States and eastern Canada.
Partnership ownership percentages are recalculated each year to reflect
distributions and contributions. The partners, their parent companies, and
partnership ownership percentages are as follows:

The El Paso Corporation (El Paso) interests were formerly owned by The
Coastal Corporation (Coastal), which merged into a subsidiary of El Paso on
January 29, 2001.

The day-to-day operation of Partnership activities is the responsibility of
Great Lakes Gas Transmission Company (Company), which is reimbursed for its
employee salaries, benefits and other expenses, pursuant to the Partnership's
Operating Agreement with the Company.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPALS OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the
Partnership and GLGT Aviation Company, a wholly owned subsidiary. GLGT Aviation
Company owns a transport aircraft used principally for pipeline operations.
Intercompany amounts have been eliminated.

For purposes of reporting cash flows, the Partnership considers all liquid
investments with original maturities of three months or less to be cash
equivalents.

The Partnership recognizes revenues from natural gas transportation in the
period the service is provided.

Management of the Partnership has made estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates.

REGULATION

The Partnership is subject to the rules, regulations and accounting
procedures of the Federal Energy Regulatory Commission (FERC). The Partnership's
accounting policies reflect the effects of the ratemaking process in accordance
with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for
the Effects of Certain Types of Regulation. Regulatory assets and liabilities
have been established and represent probable future revenue or expense which
will be recovered from or refunded to customers. The regulatory assets and
liabilities are primarily related to prior changes in federal income tax rates.

ACCOUNTS RECEIVABLE

Accounts Receivable are reported net of an allowance for doubtful accounts
of $2,304,000 and $2,095,000 for 2003 and 2002, respectively. Late fees are
recognized as income when earned.

43

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

GAS UTILITY PLANT AND DEPRECIATION

Gas utility plant is stated at cost and includes certain administrative and
general expenses, plus an allowance for funds used during construction. The cost
of plant retired is charged to accumulated depreciation. Depreciation of gas
utility plant is computed using the straight-line method. The Partnership's
principal operating assets are depreciated at an annual rate of 2.75%.

The allowance for funds used during construction represents the debt and
equity costs of capital funds applicable to utility plant under construction,
calculated in accordance with a uniform formula prescribed by the FERC. The rate
used for 2003 is 10.41% and for both 2002 and 2001 was 10.36%.

ASSET RETIREMENT OBLIGATIONS

Effective January 1, 2003, the Partnership adopted SFAS No. 143 Accounting
for Asset Retirement Obligations (Statement 143). Statement 143 requires
recognition of the fair value of legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal operation of a long-lived asset. The
Partnership has asset retirement obligations if it were to permanently retire
all or part of the pipeline system; however, the fair value of the obligations
cannot be determined because the end of the system life is indeterminable.

INCOME TAXES

The Partnership's tariff includes an allowance for income taxes which the
FERC requires the Partnership to record as if it were a corporation. The
provisions for current and deferred income tax expense are recorded without
regard to whether each partner can utilize its share of the Partnership's tax
deductions. Income taxes are deducted in the Consolidated Statements of Income
and the current portion of income taxes is returned to partners' capital.
Recorded current income taxes are distributed to partners based on their
ownership percentages.

Amounts equivalent to deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases at currently enacted income tax rates.

3 AFFILIATED COMPANY TRANSACTIONS

Affiliated company amounts included in the Partnership's consolidated
financial statements, not otherwise disclosed, are as follows:

Affiliated transportation revenues are primarily provided under fixed
priced contracts with remaining terms ranging from 3 months to 11 years. The
majority of these revenues are currently provided under a contract which has a
remaining term of approximately 2 years.

The Partnership reimburses the Company for salaries, benefits and other
incurred expenses. Benefits include pension, thrift plan, and other
post-retirement benefits. Operating expenses charged by the Company in 2003,
2002 and 2001 were $25,758,000, $17,888,000, and $13,671,000, respectively.

The Company accounts for pension benefits on an accrual basis. Effective
with the merger of The Coastal Corporation and El Paso Corporation in 2001, the
former pension plan was merged into the El Paso cash

44

3 AFFILIATED COMPANY TRANSACTIONS -- (CONTINUED)

balance pension plan. The annual net pension credit was $2,600,000, $5,400,000,
and $8,500,000 in 2003, 2002 and 2001, respectively.

The Company makes contributions for eligible employees of the Company to a
voluntary defined contribution plan sponsored by one of the parent companies.
The Company's contributions, which are based on matching employee contributions,
amounted to $396,000, $770,000, and $832,000 in 2003, 2002 and 2001,
respectively.

The Company accounts for other post-retirement benefits on an accrual
basis. The annual expense was $204,000, $236,000, and $215,000 for 2003, 2002
and 2001, respectively. In addition, curtailment costs of approximately $695,000
were recorded in 2001 related to the conversion to the El Paso Corporation
benefit plans, which changed future benefits for eligible employees.

4 DEBT

In June 2003, the Partnership prepaid the remaining principal balance on
the 9.35% Senior Notes along with the related accrued interest and prepayment
premium.

The aggregate estimated fair value of long term debt was $571,400,000 and
$628,000,000 for 2003 and 2002, respectively. The fair value is determined using
discounted cash flows based on the Partnership's estimated current interest
rates for similar debt.

The aggregate annual required repayments of Senior Notes is $10,000,000 for
each of the five years 2004 through 2008.

Under the most restrictive covenants in the Senior Note Agreements,
approximately $258,000,000 of partners' capital is restricted as to
distributions as of December 31, 2003.

45

5 INCOME TAXES PAYABLE BY PARTNERS

Income tax expense for the years ended December 31, 2003, 2002 and 2001
consists of:

Income tax expense differs from the statutory rate of 35% due to the
amortization of excess deferred taxes along with the effects of state and local
taxes. The Partnership is required to amortize excess deferred taxes which had
previously been accumulated at tax rates in excess of current statutory rates.
Such amortization reduced income tax expense by $900,000 for 2003, 2002 and
2001. As of December 31, 2003, the remaining unamortized balance is $575,000.

Amounts equivalent to deferred income taxes are principally comprised of
temporary differences associated with excess tax depreciation on utility plant.
As of December 31, 2003 and 2002, no valuation allowance is required. The
deferred tax assets and deferred tax liabilities as of December 31, 2003 and
2002 are as follows:

6 SEVERANCE COSTS

In the third quarter of 2003, the Partnership implemented a reorganization
plan to reduce the work force. Severance costs were approximately $6,000,000 and
were substantially paid by December 31, 2003. Severance costs have been included
in Operation and Maintenance expense.

7 USE TAX REFUNDS

In the first quarter of 2002, the Partnership received a favorable decision
from the Minnesota Supreme Court on use tax litigation and has collected refunds
and related interest on litigated claims and pending claims for 1994 to 2001.
The total amount received was $13,700,000. The refunds are reflected in Property
and Other Taxes ($10,900,000) and the interest included in Other, Net
($2,800,000).

46

ANR PIPELINE COMPANY
EXHIBIT LIST

DECEMBER 31, 2003

Exhibits not incorporated by reference to a prior filing are designated by
an "*"; all exhibits not so designated are incorporated herein by reference to a
prior filing as indicated.

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.

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto, duly authorized on the 15th day of
March 2004.

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, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

48

ANR PIPELINE COMPANY
EXHIBIT LIST

DECEMBER 31, 2003

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.