ANR PIPELINE CO - 10-Q Quarterly Report

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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-7320

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ANR PIPELINE COMPANY
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 38-1281775
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

EL PASO BUILDING
1001 LOUISIANA STREET 77002
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)

Telephone Number: (713) 420-2600

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Common stock, par value $1 per share. Shares outstanding on August 13,
2004: 1,000
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ANR PIPELINE COMPANY

TABLE OF CONTENTS

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

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.

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ANR PIPELINE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

1

ANR PIPELINE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes.

2

ANR PIPELINE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

3

ANR PIPELINE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are an indirect wholly owned subsidiary of El Paso Corporation (El
Paso). We prepared this Quarterly Report on Form 10-Q under the rules and
regulations of the United States Securities and Exchange Commission. Because
this is an interim period filing presented using a condensed format, it does not
include all of the disclosures required by generally accepted accounting
principles. You should read it along with our 2003 Annual Report on Form 10-K
which includes a summary of our significant accounting policies and other
disclosures. The financial statements as of June 30, 2004, and for the quarters
and six months ended June 30, 2004 and 2003, are unaudited. We derived the
balance sheet as of December 31, 2003, from the audited balance sheet filed in
our 2003 Form 10-K. In our opinion, we have made all adjustments which are of a
normal, recurring nature to fairly present our interim period results. Due to
the seasonal nature of our business, information for interim periods may not be
indicative of our results of operations for the entire year. In addition, prior
period information presented in these financial statements includes
reclassifications which were made to conform to current period presentation.
These reclassifications had no effect on our previously reported net income or
stockholder's equity.

Our accounting policies are consistent with those discussed in our 2003
Form 10-K.

2. LIQUIDITY

In May 2004, El Paso announced that the results of an independent
investigation confirmed that its historical financial statements should be
restated to reflect previously announced revisions to its natural gas and oil
reserve estimates. El Paso believes that a material restatement of its financial
statements would have constituted an event of default under its $3 billion
revolving credit facility, under which we are eligible to borrow (see Note 3),
and various other financings; specifically under the provisions of those
agreements related to representations and warranties on the accuracy of its
historical financial statements and on El Paso's debt to total capitalization
ratio. Beginning in March 2004, El Paso received a series of waivers on its $3
billion revolving credit facility and these other financing transactions to
address these issues. In August 2004, El Paso announced that its financial
statements would likely be further restated for an issue related to the manner
in which it historically accounted for hedges of its natural gas production. To
address the issues relating to the further restatement, on August 6, 2004, El
Paso received a third waiver on its $3 billion revolving credit facility which
waived any defaults related to representations and warranties of the accuracy of
its historical financial statements, amended its debt to capitalization ratio,
extended the filing deadline for its December 31, 2003 annual financial
statements until September 30, 2004, and extended the filing deadline for its
March 31, 2004 and June 30, 2004 quarterly financial statements until November
30, 2004. The August waiver to the $3 billion revolving credit facility also
placed restrictions on the voluntary prepayment of El Paso's and its
subsidiaries debt that matures after June 30, 2005, amended one of the defined
event of default provisions and also provided that if El Paso or any of its
significant subsidiaries receives or is required to provide a notice of default
on any other debt or guaranty of debt that in the aggregate exceeds $100
million, El Paso will have 29 days to file its financial statements (not to go
beyond September 30, 2004 in the case of its December 31, 2003 financial
statements and November 30, 2004, in the case of its March 31, 2004 and June 30,
2004 financial statements). If El Paso does not file its financial statements by
these required dates, El Paso would need to obtain additional waivers to avoid
an event of default. Although we are a party to El Paso's $3 billion revolving
credit facility, we do not have any borrowings or letters of credit outstanding
under that facility. Based upon a review of our financing transactions, we
believe that a default on El Paso's $3 billion revolving credit facility would
not constitute an event of default on our other debt agreements.

El Paso is a significant potential source of liquidity to us. We
participate in El Paso's cash management program. Under this program, depending
on whether we have short-term cash surpluses or requirements, we either provide
cash to El Paso or El Paso provides cash to us. We have historically provided
cash to El Paso

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under this program, and as of June 30, 2004, we had a cash advance receivable
from El Paso of $481 million, classified as a non-current asset in our balance
sheet. If El Paso were unable to meet its liquidity needs, we would not have
access to this source of liquidity and there is no assurance that El Paso could
repay the amounts owed to us. In that event, we could be required to write-off
some or all of these advances, which could have a material impact on our
stockholder's equity and we would still be required to repay affiliated company
payables. Although increases in our debt to EBITDA (as defined in our
agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us from
incurring additional debt, the equity reduction that would result if we wrote
off these receivables would not result in an event of default under our existing
debt agreements. In addition, based on our current estimates of cash flows, we
do not believe we will need to seek repayment of all or part of these advances
in the next twelve months.

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

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

Finally, we have cross-acceleration provisions in our long-term debt
agreements that state that should we incur an event of default under which
borrowings in excess of $5 million are accelerated, our long-term debt could
also be accelerated. The acceleration of our long-term debt would adversely
affect our liquidity position and, in turn, our financial condition.

3. DEBT AND CREDIT FACILITIES

We have reclassified our $75 million, 7.00% debentures due 2025, to current
maturities because the holders may require us to redeem their debentures at par
value on June 1, 2005.

Credit Facilities

El Paso maintains a $3 billion revolving credit facility, with a $1.5
billion letter of credit sublimit, which matures on June 30, 2005. The $3
billion revolving credit facility has a borrowing cost of LIBOR plus 350 basis
points, letter of credit fees of 350 basis points and a commitment fee of 75
basis points on the unused portion of the facility. We, along with El Paso and
our affiliates, Tennessee Gas Pipeline Company, Colorado Interstate Gas Company
and El Paso Natural Gas Company, are borrowers under the $3 billion revolving
credit facility. We are only liable for amounts we directly borrow under the $3
billion revolving credit facility. As of June 30, 2004, $600 million was
outstanding and $1.1 billion in letters of credit were issued under the $3
billion revolving credit facility, none of which was borrowed by or issued on
our behalf. During the fourth quarter of 2003 and the first quarter of 2004, El
Paso liquidated a portion of the collateral that supported the $3 billion
revolving credit facility, which reduced the borrowing availability by $42
million. See Note 2 for a discussion regarding El Paso's waivers on the $3
billion revolving credit facility.

El Paso's equity in several of its subsidiaries, including its equity in
us, collateralizes the $3 billion revolving credit facility and $303 million of
other financing arrangements including leases, letters of credit and other
credit facilities.

Under the $3 billion revolving credit facility and other financing
agreements, we are subject to a number of restrictions and covenants. The most
restrictive of these include (i) limitations on the incurrence of additional
debt, based on a ratio of debt to EBITDA (as defined in our agreements), the
most restrictive of

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which shall not exceed 5 to 1; (ii) limitations on the use of proceeds from
borrowings; (iii) limitations, in some cases, on transactions with our
affiliates; (iv) limitations on the incurrence of liens; (v) potential
limitations on our ability to declare and pay dividends; and (vi) potential
limitations on our ability to participate in El Paso's cash management program
discussed in Note 6.

4. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

Will Price (formerly Quinque). We and a number of our affiliates are named
defendants in Will Price, et al. v. Gas Pipelines and Their Predecessors, et
al., filed in 1999 in the District Court of Stevens County, Kansas. Plaintiffs
allege that the defendants mismeasured natural gas volumes and heating content
of natural gas on non-federal and non-Native American lands and seek to recover
royalties that they contend they should have received had the volume and heating
value of natural gas produced from their properties been differently measured,
analyzed, calculated and reported, together with prejudgment and postjudgment
interest, punitive damages, treble damages, attorneys' fees, costs and expenses,
and future injunctive relief to require the defendants to adopt allegedly
appropriate gas measurement practices. No monetary relief has been specified in
this case. Plaintiffs' motion for class certification of a nationwide class of
natural gas working interest owners and natural gas royalty owners was denied on
April 10, 2003. Plaintiffs were granted leave to file a Fourth Amended Petition,
which narrows the proposed class to royalty owners in wells in Kansas, Wyoming
and Colorado and removes claims as to heating content. A second class action has
since been filed as to the heating content claim. Our costs and legal exposure
related to these lawsuits and claims are not currently determinable.

In addition to the above matters, we and our subsidiaries and affiliates
are named defendants in numerous lawsuits and governmental proceedings that
arise in the ordinary course of our business.

For each of our outstanding legal matters, we evaluate the merits of the
case, our exposure to the matter, possible legal or settlement strategies and
the likelihood of an unfavorable outcome. If we determine that an unfavorable
outcome is probable and can be estimated, we establish the necessary accruals.
As this information becomes available, or other relevant developments occur, we
will adjust our accrual amounts accordingly. While there are still uncertainties
related to the ultimate costs we may incur, based upon our evaluation and
experience to date, we believe our current reserves are adequate. As of June 30,
2004, we had approximately $1 million accrued for our outstanding legal matters.

Environmental Matters

We are subject to federal, state and local laws and regulations governing
environmental quality and pollution control. These laws and regulations require
us to remove or remedy the effect on the environment of the disposal or release
of specified substances at current and former operating sites. As of June 30,
2004, we had accrued approximately $28 million for expected remediation costs
and associated onsite, offsite and groundwater technical studies and for related
environmental legal costs. Our accrual was based on the most

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likely outcome that can be reasonably estimated. Below is a reconciliation of
our accrued liability as of June 30, 2004 (in millions):

Balance as of January 1, 2004............................... $29
Additions/adjustments for remediation activities............ 1
Payments for remediation activities......................... (2)
---
Balance as of June 30, 2004................................. $28
===

In addition, we expect to make capital expenditures for environmental
matters of approximately $19 million in the aggregate for the years 2004 through
2008. These expenditures primarily relate to compliance with clean air
regulations. For the remainder of 2004, we estimate that our total remediation
expenditures will be approximately $3 million, which primarily will be expended
under government directed clean-up plans.

CERCLA Matters. We have received notice that we could be designated, or
have been asked for information to determine whether we could be designated, as
a Potentially Responsible Party (PRP) with respect to three active sites under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) or state equivalents. We have sought to resolve our liability as a PRP
at these sites through indemnification by third parties and settlements which
provide for payment of our allocable share of remediation costs. As of June 30,
2004 we have estimated our share of the remediation costs at these sites to be
approximately $1 million. Since the clean-up costs are estimates and are subject
to revision as more information becomes available about the extent of
remediation required and because in some cases we have asserted a defense to any
liability, our estimates could change. Moreover, liability under the federal
CERCLA statute is joint and several, meaning that we could be required to pay in
excess of our pro rata share of remediation costs. Our understanding of the
financial strength of other PRPs has been considered, where appropriate, in
estimating our liabilities. Reserves for these matters are included in the
environmental reserve discussed above.

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

Rates and Regulatory Matters

Cashout Proceeding. On May 1, 2002, we made our annual filing to reconcile
the costs and revenues associated with operating our cashout program, a program
that involves the sale and purchase of natural gas to satisfy shipper
imbalances. On October 31, 2002, the Federal Energy Regulatory Commission (FERC)
accepted the filing, and allowed our proposed cashout surcharge to go into
effect. However, the FERC also found that the existing cashout mechanism was no
longer "just and reasonable" and set the case for hearing to establish a
replacement mechanism. A hearing was held in January 2004. Initial and reply
briefs were filed in March 2004.

On April 12, 2004, the Administrative Law Judge (ALJ) issued an initial
decision. The ALJ concluded that five changes should be made to our cashout
mechanism: (1) eliminate the cashout surcharge; (2) institute an in-kind
balancing option for all shippers; (3) to the extent a shipper remains under a
mechanism that remedies negative imbalances by cash payments, use a high/low
pricing mechanism to develop the amount of the cash payment that must be made;
(4) physically balance the system at the end of each month, to the extent it is
operationally feasible to do so; and (5) keep Plant Thermal Reduction shippers
apprised of their status with respect to imbalances. In addition, the ALJ found
that we should be made whole for past amounts owed to us under the prior cashout
mechanism and rejected certain proposals of a group of

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shippers for establishment of an imbalance account to be credited with revenues
from the sale of excess fuel and lost and unaccounted for gas and storage
overrun service revenues. The initial decision is subject to review by the FERC.

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

While the outcome of our outstanding rates and regulatory matters cannot be
predicted with certainty, based on current information, we do not expect the
ultimate resolution of these matters to have a material adverse effect on our
financial position, operating results or cash flows. However, it is possible
that new information or future developments could require us to reassess our
potential exposure related to these matters, which could have a material effect
on our results of operations, our financial position, and on our cash flows.

Other

CFTC Investigation. In April 2004, we elected to voluntarily cooperate
with the Commodity Futures Trading Commission (CFTC) in connection with the
CFTC's industry-wide investigation of activities affecting the price of natural
gas in the fall of 2003. Specifically, we provided information relating to
storage reports provided to the Energy Information Administration for the period
October 2003 though December 2003.

While the outcome of this matter cannot be predicted with certainty, based
on current information we do not expect the ultimate resolution of this matter
to have a material adverse effect on our financial position, operating results
or cash flows. However, it is possible that new information or future
developments could require us to reassess our potential exposure related to this
matter, which could have a material effect on our results of operations, our
financial position, and on our cash flows.

5. RETIREMENT BENEFITS

Our postretirement benefit costs for the quarters and six months ended June
30, 2004 and 2003 were less than $1 million.

6. INVESTMENT IN UNCONSOLIDATED AFFILIATE AND TRANSACTIONS WITH AFFILIATES

Investment in Unconsolidated Affiliate

Our investment in unconsolidated affiliate consists of our equity ownership
interest in Great Lakes Gas Transmission Limited Partnership (Great Lakes L.P.).
Summarized income statement information of our proportionate share of our
unconsolidated affiliate for the periods ended June 30, are as follows:

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(1)Our proportionate share of net income includes our share of taxes payable by
partners recorded by Great Lakes L.P.

Transactions with Affiliates

We participate in El Paso's cash management program which matches
short-term cash surpluses and needs of participating affiliates, thus minimizing
total borrowings from outside sources. As of June 30, 2004 and December 31,
2003, we had advanced to El Paso $481 million and $367 million. The interest
rate at June 30, 2004 was 2.4% and at December 31, 2003 was 2.8%. These
receivables are due upon demand;

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however, as of June 30, 2004 and December 31, 2003, we have classified these
advances as non-current notes receivable from affiliates because we do not
anticipate settlement within the next twelve months. See Note 2 for a discussion
regarding our participation in and the collectibility of these receivables.

At June 30, 2004 and December 31, 2003, we had accounts receivable from
affiliates of $9 million and $5 million. In addition, we had accounts payable to
affiliates of $18 million at June 30, 2004, and December 31, 2003. These
balances arose in the normal course of business.

At June 30, 2004 and December 31, 2003, we had payables to an affiliate of
$192 million and $196 million, for obligations related to a non-cancelable lease
on our former headquarters. Of these amounts, $8 million was classified as
current at June 30, 2004 and December 31, 2003. This payable resulted from the
relocation of our headquarters from Detroit, Michigan to Houston, Texas and the
transfer of this lease to our affiliate from a third party. The lease payments
are due semi-annually.

The following table shows revenues and charges from our affiliates for the
periods ended June 30:

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information contained in Item 2 updates, and should be read in
conjunction with, the information disclosed in our 2003 Form 10-K and the
financial statements and notes presented in Item 1 of this Form 10-Q.

RESULTS OF OPERATIONS

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

The following is a reconciliation of our operating income to our EBIT and
our EBIT to our net income for the periods ended June 30:

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

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OPERATING RESULTS (EBIT)

The following factors contributed to our overall EBIT decrease of $6
million and $32 million for the three months and six months ended June 30, 2004
as compared to the same periods in 2003:

During 2003, our natural gas purchase and sale contract associated with the
Dakota gasification facility was bought out in the third quarter. As a result of
this buyout, we will have lower operating revenues and lower operating expenses
for the remainder of 2004 with an insignificant overall impact on our operating
income and EBIT. Guardian Pipeline, which is owned in part by We Energies, is
currently providing a portion of its firm transportation requirements and
directly competes with us for a portion of the markets in Wisconsin. During
2003, we renegotiated the terms of several contracts with We Energies, in
particular, our rates, volumes and receipt and delivery points on our pipeline
system. This renegotiation will continue to impact our operating revenues and
EBIT for the remainder of 2004.

INTEREST AND DEBT EXPENSE

Interest and debt expense for the six months ended June 30, 2004, was $5
million higher than the same period in 2003 primarily due to the issuance in
March 2003 of $300 million senior unsecured notes with an annual interest rate
of 8.875%.

AFFILIATED INTEREST INCOME, NET

Second Quarter 2004 Compared to Second Quarter 2003

Affiliated interest income, net for the quarter ended June 30, 2004, was $2
million higher than the same period in 2003 due to higher interest rates and
higher average advances to El Paso under its cash management program. The
average advance balance for the second quarter of 2003 of $169 million increased
to $321 million in 2004. The average short-term interest rate for the second
quarter increased from 1.3% in 2003 to 2.3% during the same period in 2004.

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Six Months Ended 2004 Compared to Six Months Ended 2003

Affiliated interest income, net for the six months ended June 30, 2004, was
$4 million higher than the same period in 2003 due primarily to higher interest
rates and higher average advances to El Paso under its cash management program.
The average advance balance for the six months of 2004 increased to $295 million
from $64 million in 2003. The average short-term interest rates for the six
month period increased from 1.4% in 2003 to 2.5% in 2004.

INCOME TAXES

Our effective tax rates were different than the statutory rate of 35
percent in all periods, primarily due to the effect of state income taxes.

OTHER

In the second quarter of 2004, we received $3 million as a result of a
shipper restructuring its transportation contract on our Southwest Leg. We have
also entered into an agreement with that same shipper to restructure another of
its transportation contracts on our Southeast Leg as well as a related gathering
contract. We expect to complete the second restructuring in March 2005 and
receive $26 million then.

EXPANSION/CERTIFICATED PROJECTS

WestLeg. In June 2003, the FERC granted certificate authorization for our
proposed WestLeg expansion project. The WestLeg project will expand the capacity
of our system by approximately 218 MMcf/d by looping our Madison Lateral line,
located in Wisconsin's Walworth and Rock Counties and in Illinois' McHenry
County, and modifying our existing Beloit Lateral line in Rock County,
Wisconsin. The estimated cost of the project is approximately $48 million and
the anticipated in-service date is November 2004. Current expenditures to date
as of June 30, 2004 are approximately $17 million.

EastLeg. In July 2004, the FERC granted certificate authorization for our
proposed EastLeg project. The EastLeg project will add 142 MMcf/d of capacity
along our lateral system in Wisconsin. The project consists of replacing 4.7
miles of existing 14-inch pipe with a 30-inch line in Washington County, add 3.5
miles of 8-inch looping on the Denmark Lateral in Brown County and modify our
existing Mountain Compressor Station in Oconto County, Wisconsin. The estimated
cost of the project is $19 million and the anticipated in-service date of the
project is November 2005.

NorthLeg. In June 2004, the FERC granted certificate authorization for our
proposed NorthLeg project. The NorthLeg project will add 6,000 horse power of
electric powered compression at its Weyauwega Compressor station in Waupaca
County, Wisconsin. The estimated cost of the project is $14 million and the
anticipated in-service date of the project is November 2005.

Storage Realignment. The Storage Realignment Project involves four natural
gas storage fields in Michigan. We propose to convert a total of 4.1 Bcf of base
gas to working gas at three storage fields and abandon by sale the Capac Storage
Field to Mid Michigan Gas Storage Company, an affiliated non-jurisdictional
company. We also propose to construct injection/withdrawal wells and install
separation equipment at one field and appurtenant equipment at two other fields
to enhance late season deliverability. The estimated cost of the project is
approximately $10 million. The FERC issued an order granting certificate
authorization for the project on August 9, 2004. We anticipate completing the
realignment by the third quarter of 2006.

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LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Our liquidity needs have historically been provided through cash flows from
operating activities and the use of El Paso's cash management program. Under El
Paso's cash management program, depending on whether we have short-term cash
surpluses or requirements, we either provide cash to El Paso or El Paso provides
cash to us. We have historically provided cash advances to El Paso, and we
reflect these net advances as investing activities in our statement of cash
flows. As of June 30, 2004, we had receivables from El Paso of $481 million as a
result of this program. These receivables are due upon demand; however, we do
not anticipate settlement within the next twelve months. As of June 30, 2004,
these receivables were classified as non-current notes receivable from
affiliates in our balance sheet. We believe that cash flows from operating
activities will be adequate to meet our short-term capital and debt service
requirements for our existing operations.

If El Paso were unable to meet its liquidity needs, we would not have
access to this source of liquidity and there is no assurance that El Paso could
repay the amounts owed to us. In that event, we could be required to write-off
some or all of these advances, which could have a material impact on our
stockholder's equity and we would still be required to repay affiliated company
payables. Although increases in our debt to EBITDA (as defined in our
agreements) ratio that cause the ratio to exceed 5 to 1 could prohibit us from
incurring additional debt, the equity reduction that would result if we wrote
off these receivables would not result in an event of default under our existing
debt agreements. In addition, based on our current estimates of cash flows, we
do not believe we will need to seek repayment of all or part of these advances
in the next twelve months.

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

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

Finally, we have cross-acceleration provisions in our long-term debt
agreements that state that should we incur an event of default under which
borrowings in excess of $5 million are accelerated, our long-term debt could
also be accelerated. The acceleration of our long-term debt would adversely
affect our liquidity position and, in turn, our financial condition.

Our cash flows for the six months ended June 30 were as follows:

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

(1) Represents net proceeds from the issuance of $300 million of long-term debt
in March 2003.

Cash Flows from Operating Activities

Net cash provided by operating activities was $134 million for the first
six months of 2004 versus $144 million in the same period of 2003. This decrease
was primarily due to higher interest payments in 2004,

13

various changes in assets and liabilities offset by higher distributed earnings
from an affiliated investment in 2004.

Cash Flows from Investing Activities

Net cash used in investing activities consisted of an increase of $114
million in advances to our affiliate and $39 million in capital expenditures.

CAPITAL EXPENDITURES

Our capital expenditures for the six months ended June 30, 2004 were
approximately $39 million. Under our current plan, we expect to spend $148
million during 2004 for capital expenditures, consisting of $62 million to
expand the capacity on our system and $86 million for maintenance capital. We
expect to fund capital expenditures through a combination of internally
generated funds and/or by recovering amounts advanced to El Paso under its cash
management program.

COMMITMENTS AND CONTINGENCIES

See Item 1, Financial Statements, Note 4, which is incorporated herein by
reference.

14

RISK FACTORS AND CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.

With this in mind, you should consider the risks discussed elsewhere in
this report and other documents we file with the Securities and Exchange
Commission from time to time, and the following important factors that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by us or on our behalf.

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

Due to our relationship with El Paso, adverse developments or announcements
concerning El Paso could adversely affect our financial condition, even if we
have not suffered any similar development. The senior unsecured indebtedness of
El Paso is currently rated Caa1 by Moody's (with a negative outlook and under
review for a possible downgrade) and CCC+ by Standard & Poor's (with a negative
outlook), which are below investment grade ratings. Our senior unsecured
indebtedness is rated B1 by Moody's (with a negative outlook and under review
for a possible downgrade) and B- by Standard & Poor's (with a negative outlook).
Further downgrades of our credit ratings would increase our cost of capital and
collateral requirements, and could impede our access to capital markets. As a
result of its downgrades over the last two years, El Paso has realized
substantial demands on its liquidity. These downgrades are a result, at least in
part, of the outlook generally for the consolidated businesses of El Paso and
its needs for liquidity.

El Paso has a long-range plan that, among other things, defines its future
businesses, targets significant debt reduction and establishes financial goals.
An inability to meet these objectives could adversely affect El Paso's liquidity
position, and in turn affect our financial condition.

Pursuant to El Paso's cash management program, surplus cash is made
available to El Paso in exchange for an affiliated receivable. In addition, we
conduct commercial transactions with some of our affiliates. As of June 30,
2004, we have net receivables of approximately $472 million from El Paso and its
affiliates. El Paso provides cash management and other corporate services to us.
If El Paso is unable to meet its liquidity needs, there can be no assurance that
we will be able to access cash under the cash management program, or that our
affiliates would pay their obligations to us. However, we would still be
required to satisfy affiliated company payables. Our inability to recover any
intercompany receivables owed to us could adversely affect our ability to repay
our outstanding indebtedness. For a further discussion of these matters, see
Item 1, Financial Statements, Note 6.

In May 2004, El Paso announced that an independent review of its natural
gas and oil reserves confirmed its previous assessment that the financial
statements of El Paso and certain of its subsidiaries should be restated. In
August 2004, El Paso announced it would likely be required to further restate
its financial statements for adjustments related to the manner in which it
historically accounted for hedges of its natural gas production. At this time,
El Paso's December 31, 2003 restated financial statements have not been filed,
nor has it filed quarterly reports for March 31, 2004 and June 30, 2004. Also,
as a result of its reserve revisions, several class action lawsuits have been
filed against El Paso and several of its subsidiaries, but not against us. The
reserve revisions have also become the subject of an SEC investigation and may
become the subject of separate inquiries by other governmental regulatory
agencies. These investigations and lawsuits may further
15

negatively impact El Paso's credit ratings and place further demands on its
liquidity. See Item 1, Financial Statements, Note 2 for a further discussion of
these matters.

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

We are a party to El Paso's $3 billion revolving credit facility. We are
only liable, however, for our borrowings under the $3 billion revolving credit
facility, which were zero as of June 30, 2004. Under the $3 billion revolving
credit facility, a default by El Paso, or any other party, could result in the
acceleration of all outstanding borrowings under the facility, including the
borrowings of any non-defaulting party, and could preclude us from borrowing
under the facility in the future. We believe El Paso's announced restatements of
its prior period financial statements would have constituted an event of default
under the $3 billion credit facility; however, El Paso received waivers of the
potential defaults on its $3 billion credit facility, which continue to be
effective. See Item 1, Financial Statements, Note 2, for additional information
regarding these matters. The acceleration of our future borrowings, if any,
under the credit facility, or the inability to borrow under this facility, could
adversely affect our liquidity position and, in turn, our financial condition.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information updates, and you should read it in conjunction with,
information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for
the year ended December 31, 2003, in addition to the information presented in
Items 1 and 2 of this Quarterly Report on Form 10-Q.

There are no material changes in our quantitative and qualitative
disclosures about market risks from those reported in our Annual Report on Form
10-K for the year ended December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures and the internal controls over financial reporting as of
the end of the period covered by this Quarterly Report pursuant to Rules 13a-15
and 15d-15 under the Securities Exchange Act of 1934 (Exchange Act). Based on
our controls evaluation, our principal executive officer and principal financial
officer have concluded that the disclosure controls are effective.

We strive to maintain disclosure controls and procedures and internal
controls over financial reporting that are designed to ensure that the
information required to be disclosed in our Exchange Act filings is recorded,
processed, summarized and reported within the required timeframes, and that this
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow for timely decisions regarding required disclosure. In doing so, we
recognize that the effectiveness of our or any system of controls and procedures
is subject to limitations, including the exercise of judgment in the design,
implementation and evaluation of controls and procedures, the assumptions used
in identifying future events and the ability to completely eliminate misconduct.
As a result, there is no assurance that our or any controls and procedures will
prevent all errors and all fraud. By their nature, controls and procedures can
provide only reasonable assurance regarding our control objectives.

We are currently documenting and reviewing our internal controls to ensure
compliance with Section 404 of the Sarbanes Oxley Act of 2002 by December 31,
2004. While we are not aware of any items at this time that constitute material
weaknesses, as that term is defined in Auditing Standards (AU) Section 325, we
are

16

identifying areas where our processes can be improved, and are actively working
to implement those improvements. Furthermore, as we continue our compliance
review, we may identify additional matters which may need to be reported or
which may constitute material weaknesses in our internal controls over financial
reporting. Although we have identified deficiencies in our system of internal
controls over financial reporting, we do not believe these deficiencies have
had, or are reasonably likely to have, a material impact on our financial
statements. In addition, there have been no changes during the period in our
internal controls over financial reporting that would adversely affect our
ability to provide, with reasonable assurance, reliable information required in
our reports submitted under the Securities Exchange Act of 1934.

17

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, Financial Statements, Note 4, which is incorporated
herein by reference.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.

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Undertaking

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

b. Reports on Form 8-K

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ANR PIPELINE COMPANY

Date: August 13, 2004 /s/ JOHN W. SOMERHALDER II
----------------------------------
John W. Somerhalder II
Chairman of the Board and Director
(Principal Executive Officer)

Date: August 13, 2004 /s/ GREG G. GRUBER
----------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer, Treasurer
and Director
(Principal Financial and
Accounting Officer)

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ANR PIPELINE COMPANY

EXHIBIT INDEX

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.