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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 1-7176
THE COASTAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1734212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Coastal Tower
Nine Greenway Plaza
Houston, Texas 77046-0995
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 877-1400
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock ($.33 1/3 par value)
$1.19 Cumulative Convertible Preferred Stock,
Series A ($.33 1/3 par value)
$1.83 Cumulative Convertible Preferred Stock,
Series B ($.33 1/3 par value)
$2.125 Cumulative Preferred Stock, Series H
($.33 1/3 par value)
10-1/4% Senior Debentures 8-3/4% Senior Notes New York Stock Exchange
10-3/8% Senior Notes 9-5/8% Senior Debentures
10-3/4% Senior Debentures 8-1/8% Senior Notes
10% Senior Notes 7-3/4% Senior Debentures
9-3/4% Senior Debentures 7.42% Senior Debentures
6.70% Senior Debentures
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock ($.33-1/3 par value)
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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, 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. [ ]
As of March 11, 1998, there were outstanding 105,779,387 shares of common
stock, 364,284 shares of Class A common stock, 57,537 shares of $1.19 Cumulative
Convertible Preferred Stock, Series A, 66,744 shares of $1.83 Cumulative
Convertible Preferred Stock, Series B, 29,204 shares of $5.00 Cumulative
Convertible Preferred Stock, Series C and 8,000,000 shares of $2.125 Cumulative
Preferred Stock Series H, of the Registrant. The aggregate market value on such
date of the voting stock of the Registrant held by non-affiliates was an
estimated $5.98 billion, based on the closing prices in the daily composite list
for transactions on the New York Stock Exchange and other markets.
Documents incorporated by reference:
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders, filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, referred to in Part III hereof.
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TABLE OF CONTENTS
Item No. Page
Glossary......................................................(ii)
PART I
1. Business...................................................... 1
Introduction.............................................. 1
Natural Gas Systems....................................... 1
Operations............................................ 1
ANR Pipeline.......................................... 3
Colorado.............................................. 3
ANR Storage Company................................... 4
Gas System Reserves................................... 4
Alliance Pipeline Project............................. 5
Wyoming Interstate Company, Ltd....................... 5
Great Lakes Gas Transmission Limited Partnership...... 6
Unregulated Gas Operations............................ 6
Regulations Affecting Gas Systems..................... 6
Refining, Marketing and Distribution, and Chemicals....... 9
Exploration and Production................................ 12
Coal...................................................... 17
Power..................................................... 18
Other Operations.......................................... 20
Competition............................................... 20
Environmental............................................. 20
2. Properties.................................................... 22
3. Legal Proceedings............................................. 22
4. Submission of Matters to a Vote of Security Holders........... 23
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters .................................... 24
6. Selected Financial Data....................................... 25
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 25
7A. Quantitative and Qualitative Disclosures About Market Risk.... 25
8. Financial Statements and Supplementary Data................... 25
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................ 25
PART III
10. Directors and Executive Officers of the Registrant............ 26
11. Executive Compensation........................................ 27
12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 27
13. Certain Relationships and Related Transactions................ 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 28
(i)
GLOSSARY
"AICPA" means American Institute of Certified Public Accountants
"ANR Pipeline" means ANR Pipeline Company and its subsidiaries
"ANR Storage" means ANR Storage Company and its subsidiaries
"Bcf" means billion cubic feet
"BTU" means British thermal unit
"CIG" or "Colorado" means Colorado Interstate Gas Company and its subsidiaries
"Coastal" or "Company" means The Coastal Corporation and its subsidiaries
"EPA" means Environmental Protection Agency
"FAS" means Statement of Financial Accounting Standards
"FASB" means Financial Accounting Standards Board
"FERC" means Federal Energy Regulatory Commission
"Great Lakes" means Great Lakes Gas Transmission Limited Partnership
"Huddleston" means Huddleston & Co., Inc., Houston, Texas - Volumes in the
Huddleston Report are at 14.65 pounds per square inch absolute and 60
degrees Fahrenheit
"Long tons" means weight measurement of 2,240 pounds
"Mcf" means thousand cubic feet
"MMcf" means million cubic feet
"NGA" means Natural Gas Act of 1938, as amended
"Order 636" means FERC Order No. 636 which required significant changes in
services provided by interstate natural gas pipelines, including the
unbundling of services
"TransCanada" means TransCanada PipeLines Limited
"WIC" means Wyoming Interstate Company, Ltd.
"Working Gas" means that volume of gas available for withdrawal from natural
gas storage fields and use by the Company's customers
NOTES:
The terms "Coastal" and "Company" are used in this Annual Report for purposes of
convenience and are intended to refer to The Coastal Corporation and/or its
subsidiaries either individually or collectively, as the context may require.
These references are not intended to suggest that the various Coastal companies
referred to are not independent corporate entities having their separate
corporate identities and managements.
This Annual Report includes certain forward-looking statements reflecting the
Company's expectations and objectives in the near future; however, many factors
which may affect the actual results, including commodity prices, market and
economic conditions, industry competition and changing regulations, are
difficult to predict. Accordingly, there is no assurance that the Company's
expectations and objectives will be realized.
Unless otherwise noted, all natural gas volumes presented in this Annual Report
are stated at a pressure base of 14.73 pounds per square inch absolute and 60
degrees Fahrenheit.
(ii)
PART I
Item 1. Business.
INTRODUCTION
Coastal, acting through its subsidiaries, is a diversified energy holding
company with subsidiary operations in natural gas gathering, marketing,
processing, storage and transmission; petroleum refining, marketing and
distribution and chemicals; gas and oil exploration and production; coal mining;
and power. The Company was incorporated under the laws of Delaware in 1972 to
become the successor parent, through a corporate restructuring, of a corporate
enterprise founded in 1955. The Company employed approximately 13,200 persons as
of December 31, 1997.
Annual Reports on Form 10-K for the year ended December 31, 1997 are also
filed by Coastal's subsidiaries, ANR Pipeline and Colorado. Such reports contain
additional details concerning the reporting organizations.
The operating revenues and operating profit of the Company by industry
segment for the years ended December 31, 1997, 1996 and 1995, and the related
identifiable assets as of December 31, 1997, 1996 and 1995, are set forth in
Note 9 of the Notes to Consolidated Financial Statements included herein.
Information concerning inventories is set forth in Note 2 of the Notes to
Consolidated Financial Statements included herein.
NATURAL GAS SYSTEMS
OPERATIONS
General
Natural gas operations involve the production, purchase, gathering,
processing, transportation, balancing, storage, marketing and sale of natural
gas to and for utilities, industrial customers, marketers, producers,
distributors, other pipeline companies and end users.
ANR Pipeline is involved in the transportation, storage, gathering and
balancing of natural gas. ANR Pipeline provides these services for various
customers through its facilities located in Arkansas, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, Ohio,
Oklahoma, Tennessee, Texas, Wisconsin and offshore in federal waters. ANR
Pipeline operates two offshore gas pipeline systems in the Gulf of Mexico which
are owned by High Island Offshore System and U-T Offshore System, general
partnerships composed of ANR Pipeline subsidiaries and subsidiaries of other
companies. ANR Pipeline also operates Empire State Pipeline, an intrastate
pipeline extending from Niagara Falls to Syracuse, New York, in which an
affiliate of ANR Pipeline has a 50% interest.
ANR Pipeline's two interconnected, large-diameter multiple pipeline
systems transport gas to the Midwest and increasingly to the Northeast from (a)
the Hugoton Field and other fields in the Anadarko Basin in Texas and Oklahoma,
(b) the Louisiana onshore and Louisiana and Texas offshore areas and (c) gas
originating in other basins received through interconnections located throughout
its system.
ANR Pipeline's principal pipeline facilities at December 31, 1997
consisted of 10,611 miles of pipeline and 75 compressor stations with 1,030,069
installed horsepower. At December 31, 1997, the design peak day delivery
capacity of the transmission system, considering supply sources, storage,
markets and transportation for others, was approximately 5.9 Bcf per day.
Colorado is involved in the production, purchase, gathering, processing,
transportation, storage and sale of natural gas. Colorado's gas transmission
system extends from gas production areas in the Texas Panhandle, western
Oklahoma and western Kansas, northwesterly through eastern Colorado to the
Denver area, and from production areas in Montana, Wyoming and Utah,
southeasterly to the Denver area. Colorado's gas gathering and processing
facilities are located throughout the production areas adjacent to its
transmission system. Most of Colorado's gathering facilities connect
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directly to its transmission system, but some gathering systems are connected to
other pipelines. Colorado also has minor gathering facilities located in New
Mexico. Colorado owns four underground gas storage fields; three located in
Colorado, and one in Kansas.
Colorado's principal transmission and storage pipeline facilities,
including certain facilities in the Panhandle Field of Texas ("Panhandle
Field"), at December 31, 1997 consisted of 4,160 miles of pipeline and 59
compressor stations with approximately 302,000 installed horsepower. At December
31, 1997, the design peak day gas delivery capacity of the transmission system
was approximately 2.0 Bcf per day. The underground gas storage facilities have a
working capacity of approximately 29 Bcf and a peak day delivery capacity of
approximately 775 MMcf.
Colorado's gathering facilities, excluding certain FERC regulated
facilities in the Panhandle Field, consist of 2,327 miles of gathering lines and
approximately 50,700 horsepower of compression. Colorado owned and operated five
gas processing plants in 1997. These plants, with a total operating capacity of
approximately 512 MMcf daily, recover mainly propane, butanes, natural gasoline,
sulfur and other by-products, which are sold to refineries, chemical plants and
other customers.
The Company has formed certain subsidiaries to conduct its unregulated
natural gas business. Additional information is set forth in "Unregulated Gas
Operations," presented below.
Competition
Natural gas competes with other forms of energy available to customers,
primarily on the basis of price paid by end users. These competitive forms of
energy include electricity, coal, propane and fuel oils. Changes in the
availability or price of natural gas or other forms of energy, as well as
changes in business conditions, conservation, legislation or governmental
regulations, capability to convert to alternate fuels, changes in rate
structure, taxes and other factors may affect the demand for natural gas in the
areas served by ANR Pipeline and Colorado.
In recent years the FERC has issued orders which have resulted in more
competition within the natural gas industry. This competition has intensified,
resulting in more rate competition among pipelines in order to increase and
maintain market share and maximize capacity utilization. ANR Pipeline and
Colorado's transportation and storage services are influenced by their
respective customers' access to alternative service providers and the price of
such services. The FERC's orders have also resulted in competition between ANR
Pipeline and Colorado and their respective customers by allowing the customers
to resell their unused capacity.
ANR Pipeline competes in its historical market areas of Wisconsin and
Michigan with other interstate and intrastate pipeline companies in the
transportation and storage of natural gas. ANR Pipeline also faces competition
in the Northeast markets from other interstate pipelines in serving electric
generation and local distribution companies. Increasingly, ANR Pipeline also
competes with independent producers and other companies seeking to construct
interstate transmission facilities and with a number of marketing companies
which aggregate capacity released by firm shippers for the purpose of managing
gas requirements for end users. Additionally, Colorado competes with interstate
and intrastate pipeline companies in the sale, transportation and storage of
natural gas and with independent producers, brokers, marketers, and other
pipelines in the gathering, processing and sale of gas within its service area.
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ANR PIPELINE
Transportation Services
ANR Pipeline offers an array of "unbundled" transportation, storage and
balancing service options under Order 636. Additional information concerning
Order 636, including transportation and storage, is set forth in "Regulations
Affecting Gas Systems" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein.
ANR Pipeline transports gas to markets on its system and also transports
gas to other markets off its system under transportation and exchange
arrangements with other companies, including distributors, intrastate and
interstate pipelines, producers, brokers, marketers and end users.
Transportation service revenues amounted to $497 million for 1997 compared to
$510 million for 1996 and $572 million for 1995. During 1997, approximately 28%
of ANR Pipeline's transportation service revenues were from its three largest
customers: Wisconsin Gas Company, Wisconsin Electric Power Company Inc. and
Michigan Consolidated Gas Company. Wisconsin Gas Company serves the Milwaukee
metropolitan area and numerous other communities in Wisconsin. Wisconsin
Electric Power Company Inc. serves the cities of Racine, Kenosha, Appleton and
their surrounding areas in Wisconsin. Michigan Consolidated Gas Company serves
the city of Detroit and certain surrounding areas, the cities of Grand Rapids
and Muskegon, the communities of Ann Arbor and Ypsilanti and numerous other
communities in Michigan. In 1997, ANR Pipeline provided approximately 70% and
30% of the total gas requirements of Wisconsin and Michigan, respectively.
ANR Pipeline's system deliveries for the years 1997, 1996 and 1995 were as
follows:
Total System Daily Average
Year Deliveries System Deliveries
---- ---------- -----------------
(Bcf) (MMcf)
1997 1,424 3,901
1996 1,517 4,145
1995 1,404 3,847
Gas Storage
ANR Pipeline has approximately 208 Bcf of underground working gas storage
capacity, with a maximum day delivery capacity of 3 Bcf as late as the end of
February. Working gas storage capacity operated by ANR Pipeline of 133 Bcf is
available from seven owned and eight leased underground storage facilities in
Michigan. In addition, ANR Pipeline has the contracted rights for 75.4 Bcf of
working gas storage capacity of which 45.4 Bcf is provided by Blue Lake Gas
Storage Company and 30 Bcf is provided by ANR Storage. Gas storage revenues
amounted to $146 million for 1997 as compared to $131 million for both 1996 and
1995.
COLORADO
Gas Sales, Storage and Transportation
Colorado's unincorporated Merchant Division conducts most of Colorado's
sales activity. The gas sales volumes reported include those sales which
continue to be made by Colorado together with those of its Merchant Division.
Additionally, Colorado has engaged in "open access" storage and transportation
of gas owned by third parties.
Pursuant to an operating agreement with an affiliate, Colorado operates
the Young Gas Storage Field located in northeastern Colorado. When fully
developed in the 1998-99 heating season, the field will have a working gas
storage capacity of 5.3 Bcf, with a peak day delivery capacity of approximately
200 MMcf per day. Such capacity is fully subscribed under 30-year contracts.
3
Colorado's deliveries for the years 1997, 1996 and 1995 were as follows:
Total System Daily Average
Year Deliveries System Deliveries
---- ---------- -----------------
(Bcf) (MMcf)
1997 486 1,333
1996 475 1,298
1995 456 1,248
Gas Gathering and Processing
Colorado provides gathering and processing services on an "unbundled" or
stand-alone basis. Colorado's processing terms are not regulated by the FERC,
but Colorado is required to provide "open access" to its two regulated
processing facilities. The gathering that Colorado provides in the Panhandle
Field continues to be regulated by the FERC, and Colorado is limited to charging
rates between minimum and maximum levels approved by the FERC. The gathering
(and processing) that Colorado's subsidiary, CIG Field Services Company,
provides is not regulated by the FERC.
The gas processing plants recovered approximately 55 million gallons of
liquid hydrocarbons in 1997 compared to 66 million gallons in 1996, and 81
million gallons in 1995, as well as 500 long tons of sulfur in 1997, compared
to` 3,100 long tons in 1996 and 4,600 long tons in 1995. Additionally, Colorado
processed approximately 24 million gallons of liquid hydrocarbons owned by
others in 1997 compared to approximately 6 million gallons in both 1996 and
1995.
Colorado operates two helium processing facilities, one located in eastern
Colorado and the other in the western Oklahoma panhandle area. These helium
facilities are joint venture/partnership arrangements which are partially owned
by affiliates of Colorado. Colorado also operates two gas processing plants for
affiliates.
ANR STORAGE COMPANY
ANR Storage develops and operates natural gas storage reservoirs to store
gas for customers. ANR Storage owns four underground storage fields and related
facilities in northern Michigan, the working storage capacity of which is
approximately 56 Bcf, including 30 Bcf which is contracted to ANR Pipeline. ANR
Storage also owns indirectly a 50% equity interest in two, and a 75% equity
interest in one, joint venture owned and operated storage facilities located in
Michigan and New York with a total working storage capacity of approximately 65
Bcf. All of the jointly owned capacity is committed under long-term contracts,
including 45.4 Bcf which is contracted to ANR Pipeline.
GAS SYSTEM RESERVES
ANR Pipeline
With the termination of its merchant service, ANR Pipeline no longer
reports on gas system reserves and, therefore, this report has been replaced by
a general discussion set forth in "Producing Area Deliverability," presented
below.
Producing Area Deliverability
Shippers on ANR Pipeline have direct access to the two most prolific gas
producing areas in the United States, the Gulf Coast and Midcontinent.
Statistics published by the Energy Information Agency, Office of Oil and Gas,
U.S. Department of Energy, indicate that approximately 80% of all natural gas in
the lower 48 states is produced from these two areas.
In addition, interconnecting pipelines provide shippers, in general, with
access to all other major gas producing areas in the United States and Canada.
An interconnection with Colorado, an affiliate of ANR Pipeline, provides ANR
Pipeline shippers with access to the Rocky Mountain producing area. Rocky
Mountain production contributes
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approximately 14% of total gas production in the lower 48 states. Gas produced
in Western Canada, nearly 100% of all Canadian gas production, is accessible to
ANR Pipeline shippers through interconnections with Great Lakes and Viking Gas
Transmission Company.
Gas deliverability available to shippers on ANR Pipeline's system from the
Midcontinent and Gulf Coast producing areas through direct connections and
interconnecting pipelines and gatherers is approximately 4,200 MMcf per day. An
additional 203 MMcf per day of deliverability is accessible to shippers on ANR
Pipeline-owned or partially owned pipeline segments not directly connected to an
ANR Pipeline mainline.
ANR Pipeline remains active in locating and connecting new sources of
natural gas to facilitate transportation arrangements made by third-party
shippers. During 1997, field development, newly connected gas wells, gas
production facilities and pipeline interconnections contributed over 1,400 MMcf
per day to total deliverability accessible to shippers on ANR Pipeline's
pipeline system.
Colorado
Colorado has reported in its Form 10-K for the year ended December 31,
1997, its gas system reserves based on information prepared by Huddleston, the
Company's independent engineers. Additional information is set forth in
"Reserves Dedicated to a Particular Customer," presented below.
Reserves Dedicated to a Particular Customer
Colorado is committed to sell gas to Pioneer Natural Resources USA, Inc.,
("Pioneer"), formerly Mesa Operating Company, a customer, under a 1928 agreement
as amended, from specific owned gas reserves in the West Panhandle Field of
Texas. Under an amendment which became effective January 1, 1991, a cumulative
23% of the total net production may be taken for customers other than Pioneer.
ALLIANCE PIPELINE PROJECT
In September 1997, Coastal acquired both an 11% equity and capacity
position in the corporations and partnerships comprising the Alliance Pipeline
project ("Alliance"), and subsequently increased its equity participation to
14.4% in February, 1998. Alliance is expected to connect major Canadian natural
reserves in Alberta and British Columbia via a $3.0 billion (US), 1,900 mile
large diameter high pressure pipeline to Chicago, Illinois. The project has been
fully subscribed for the firm capacity of 1.325 Bcf per day under 15 year
contracts. The Alliance partnerships are currently in the process of securing
all necessary environmental permits and regulatory approvals from the National
Energy Board and the FERC. With timely approvals, the project is estimated to be
placed in service as early as the year 2000.
WYOMING INTERSTATE COMPANY, LTD.
WIC, a limited partnership owned by two wholly owned Coastal subsidiaries,
owns a 269-mile, 36-inch diameter pipeline across southern Wyoming. It currently
has a throughput capacity of approximately 700 MMcf of gas daily. The WIC
pipeline connects with an 88-mile western segment in which a Coastal subsidiary
has a 10% interest and is the center section of the 800-mile Trailblazer
pipeline system built by a group of companies to move gas from the Overthrust
Belt and other Rocky Mountain areas to supply midwestern and eastern markets.
WIC is also connected to Colorado's pipeline facilities and Colorado has
received FERC approval to continue to hold its capacity in WIC for Colorado's
operational needs as well as for certain third parties. Colorado and other
companies for which the WIC line transports gas have entered into long-term
contracts having demand volumes totaling 685 MMcf daily. In 1997, the WIC line
transported an average of 546 MMcf daily, compared to 486 MMcf daily and 455
MMcf daily in 1996 and 1995, respectively. In 1997, WIC completed an expansion
project which increased its capacity by 40% to approximately 700 MMcf per day.
In December 1997, WIC filed with the FERC to undertake further expansion of
facilities which will result in an increase of WIC's capacity to approximately
750 MMcf. The announced expansion will be accomplished by adding 7,380
horsepower of compression at WIC's Laramie and Cheyenne, Wyoming compressor
stations, which, in turn, will create additional capacity of 52 MMcf per day on
the Powder River Basin Lateral owned and operated by Colorado. The
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in-service date for WIC's proposed expansion, subject to receipt of regulatory
approvals, is expected to be November 1998.
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP
Coastal and TransCanada, a non-affiliated company, each own 50% of Great
Lakes which owns a 2,000-mile, 36-inch diameter gas pipeline system from the
Manitoba-Minnesota border to an interconnection on the Michigan-Ontario border
at St. Clair, Michigan. Great Lakes transported 921 Bcf in 1997 as compared to
933 Bcf in 1996 and 953 Bcf in 1995. Great Lakes has long-term contract
commitments to transport a total of 1.4 Bcf per day for TransCanada and
affiliates. It also transports up to 800 MMcf per day primarily for United
States markets, including 150 MMcf per day to Coastal affiliates. Great Lakes
exchanges gas with ANR Pipeline by delivering gas in the upper peninsula of
Michigan and receiving an equal amount of gas in the lower peninsula of
Michigan.
UNREGULATED GAS OPERATIONS
Coastal, primarily through two subsidiaries, Coastal Field Services
Company ("CFSC") and Coastal Gas International Company ("CGI"), operates the
Company's unregulated natural gas business, including certain of Coastal's
natural gas gathering and processing, gas supply and marketing activities.
CFSC owns or operates for various affiliates domestic gathering and
processing assets in Alabama, Colorado, Kansas, Louisiana, New Mexico, Oklahoma,
Texas, Utah and Wyoming. CFSC gathered approximately 1 Bcf per day of gas in
both 1997 and 1996. CFSC and its affiliates have an ownership interest in 10 gas
processing plants, 7 of which are operated by CFSC. CFSC's equity share of
liquid hydrocarbons production was more than 25,000 barrels per day in 1997
compared with almost 23,000 barrels per day in 1996.
In December of 1997, Coastal Dauphin Island Company, L.L.C., an affiliate
of CFSC, exercised its option to acquire an approximate 13.6% interest in a 600
MMcf per day cryogenic gas processing plant and an associated 40 megawatt power
generation plant, both to be constructed in Mobile County, Alabama.
CGI conducts the international unregulated natural gas operations of the
Company. Coastal Gas Pipelines Victoria Pty Ltd., an affiliate of CGI, is
constructing a 104 mile transmission pipeline in Victoria, Australia.
Construction began in late 1997 and is scheduled to be completed in 1998. CGI
and its affiliates are pursuing additional gas projects in Australia and various
other parts of the world.
In February 1997, Coastal and Westcoast Energy Inc. ("Westcoast") jointly
formed one of North America's largest marketers of natural gas and electricity
through the combination of the two companies' related marketing and services
businesses. The combination created new entities, Engage Energy US, L.P. in the
United States and Engage Energy Canada, L.P. in Canada, in which Coastal and
Westcoast each indirectly own 50%.
REGULATIONS AFFECTING GAS SYSTEMS
General
Under the NGA, the FERC has jurisdiction over ANR Pipeline, Colorado, WIC,
ANR Storage and Great Lakes as to sales, transportation, storage, balancing of
gas, rates and charges, construction of new facilities, extension or abandonment
of service and facilities, accounts and records, depreciation and amortization
policies and certain other matters. In addition, the FERC has certificate
authority over gas sales for resale in interstate commerce, but under Order 636,
has determined that it will not regulate pipeline sales rates. Additionally, the
FERC has asserted rate-regulation (but not certificate regulation) over
gathering services provided by interstate pipeline companies such as Colorado.
ANR Pipeline, Colorado, WIC, ANR Storage and Great Lakes hold certificates of
public convenience and necessity issued by the FERC covering their
jurisdictional facilities, activities and services. Certain other affiliates of
the Company are subject to the jurisdiction of state regulatory commissions in
states where their facilities are located.
6
ANR Pipeline, Colorado, WIC, ANR Storage and Great Lakes are also subject
to regulation with respect to safety requirements in the design, construction,
operation and maintenance of their interstate gas transmission and storage
facilities by the Department of Transportation. Additionally, subsidiaries of
the Company are subject to similar safety requirements from the Department of
Labor's Occupational Safety and Health Administration related to their
processing plants. Operations on United States government land are regulated by
the Department of the Interior.
On July 31, 1996, the FERC also issued a "Notice of Proposed Rulemaking"
requesting comments on various aspects of secondary market transactions on
interstate natural gas pipelines, including the comparability of pipeline
capacity with released capacity. The matter is pending review, following rounds
of extensive public comments.
In late 1997, the FERC initiated a public conference in order to solicit
comments from interested parties addressing the financial health of the pipeline
industry in the new competitive environment created by Order 636. Among other
things, the FERC is reviewing its current policies for setting the rates of
return on pipeline investment for possible improvements.
Rate Matters
Certain of the Company's subsidiaries' service options are subject to rate
regulation by the FERC. Under the NGA, these subsidiaries must file with the
FERC to establish or adjust their services and their rates. The FERC may also
initiate proceedings to determine whether these subsidiaries' rates are "just
and reasonable."
On January 31, 1996, the FERC issued a "Statement of Policy and Request
for Comments" (the "Policy") with respect to a pipeline's ability to negotiate
and charge rates for individual customers' services which would not be limited
to the "cost-based" rates established by the FERC in traditional rate making.
Under this Policy, a pipeline and a customer will be allowed to negotiate a
contract which provides for rates and charges that exceed the pipeline's posted
maximum tariff rates, provided that the shipper agreeing to such negotiated
rates has the ability to elect to receive service at the pipeline's posted
maximum rate (known as a "recourse rate"). To implement this Policy, a pipeline
must make an initial tariff filing with the FERC to indicate that it intends to
contract for services under this Policy. Colorado has made such filing and the
FERC has accepted that tariff filing. Under this Policy, a pipeline must also
make subsequent tariff filings each time the pipeline negotiates a rate for
service which is outside of the minimum and maximum range for the pipeline's
cost-based recourse rates. Some parties have sought judicial review of the
FERC's acceptance of Colorado's tariff filing to implement negotiated rates, but
Colorado's tariff sheet remains in effect pending review. Colorado has filed for
judicial review of FERC's holding that pipelines which have entered into
"negotiated rate" contracts will not be allowed discount adjustments in
connection with such contracts. The FERC is also considering comments on whether
this "negotiated rate" program should be extended to other terms and conditions
of pipeline transportation services.
In July 1996, the United States Court of Appeals for the D.C. Circuit
upheld the basic structure of the FERC's Order 636 (issued in April 1992), but
remanded to the FERC, for further consideration, certain limited aspects of the
Order. In its order responding to the remand (Order 636-C, issued February 27,
1997) the FERC: (1) reaffirmed the right of pipelines to recover 100% of their
prudently incurred transition costs, but required pipelines to file within 180
days a proposal for the level of costs to be allocated to interruptible
transportation customers; and (2) reduced from 20 years to five years, the term
"cap" to be applied to evaluation of bids for renewal of contracts on existing
volumes. ANR Pipeline and Colorado have sought rehearing and clarification of
these holdings as they relate to past and future periods, and have also made the
appropriate compliance filings with the FERC. ANR Pipeline's proposal to retain
its current transition cost allocation level to interruptible service was
accepted by the FERC as part of an uncontested settlement following further
proceedings before the FERC.
ANR Pipeline. From November 1, 1992 to November 1, 1993, gas inventory
demand charges were collected from ANR Pipeline's former resale customers. This
method of gas cost recovery required refunds for any over-collections. In April
1994, ANR Pipeline filed with the FERC a refund report showing over-collections
and proposing refunds totaling $45.1 million. Certain customers disputed the
level of those refunds. The FERC approved ANR Pipeline's refund allocation
methodology and ANR Pipeline, in March 1995, paid undisputed refunds of $45.1
million, together with applicable interest, subject to further investigation of
customers' claims. The FERC's approval of ANR Pipeline's refund allocation
methodology was upheld by the United States Court of Appeals for the D.C.
Circuit in April 1996. Disputed issues related to the refunds are the subject of
further proceedings before the FERC. In March 1997, an Initial Decision
7
was issued, which adopted most of ANR Pipeline's positions. On March 12, 1998,
the FERC affirmed the Initial Decision in almost all aspects. Parties may seek
rehearing in 30 days.
ANR Pipeline filed a general rate increase on November 1, 1993. Issues
related to the general rate increase are the subject of continuing FERC and
judicial proceedings. Under a March 1994 order, certain costs were reduced or
eliminated, resulting in revised rates that reflect a $182.8 million increase
over the cost of service underlying ANR Pipeline's approved rates for its Order
636 restructured services. In September 1994, the FERC accepted ANR Pipeline's
filing to place the new rates into effect May 1, 1994, subject to further
modifications. ANR Pipeline submitted revised rates in compliance with this
order in October 1994. In January 1997, an Initial Decision was issued on the
issues set for hearing by the March 1994 order. That Initial Decision, which
accepted some but not all of ANR Pipeline's rate change proposals, does not take
effect until reviewed by the FERC. ANR Pipeline and other parties have filed
exceptions regarding some of the findings in the Initial Decision. On October
17, 1997, ANR Pipeline filed a comprehensive settlement that will resolve all
issues in the proceeding, as well as result in the voluntary dismissal of
pending court appeals. Under the settlement, ANR Pipeline agreed to place the
settlement rates in effect on November 1, 1997, subject to the prospective
restoration of ANR Pipeline's currently filed rates (subject to refund) if the
settlement is not approved. By order issued October 31, 1997, the FERC
authorized ANR Pipeline to proceed on that basis. The settlement includes
provisions for lower rates, refunds, procedures to resolve certain reserved
matters, as well as a proposal for a new short-term firm service that will
enable ANR Pipeline to charge higher rates for shippers electing to purchase
such service. The settlement is either supported by or not opposed by all active
parties in the proceeding. By order issued February 13, 1998, the FERC approved
the settlement in all respects, other than the proposed new short-term firm
service. The FERC also addressed two of the three reserved matters that the
parties had requested it decide on the merits. On March 16, 1998, ANR Pipeline
filed written notification with the FERC that the order on the settlement was
acceptable to ANR Pipeline and all parties, and the settlement became effective
as of such date. The approved settlement includes a stipulation that ANR
Pipeline will refund $66.6 million, which includes interest, for rates collected
during the period its proposed rates were in effect. Pursuant to the settlement,
all refunds must be remitted within thirty days of the effective date. During
the period the proposed rates were in effect, ANR Pipeline estimated and
recorded provisions for potential rate refunds, which exceed the final refund
requirements.
The FERC has also issued a series of orders in ANR Pipeline's rate
proceeding that apply a new policy governing the order of attribution of
revenues received by ANR Pipeline related to transition costs under Order 636.
Under that new policy, ANR Pipeline is required to first attribute the revenues
it receives for its services to the recovery of its transition costs under Order
636 rather than to the recovery of its base cost of service. The FERC's change
in its revenue attribution policy has the effect of understating ANR Pipeline's
currently effective maximum rates and accelerating its amortization of
transition costs for regulatory accounting purposes. In light of the FERC's
policy, ANR Pipeline filed with the FERC to increase its discount recovery
adjustment in its rate proceeding. ANR Pipeline also sought judicial review of
these orders before the United States Court of Appeals for the D.C. Circuit,
which appeals were dismissed as premature in light of the pending general rate
increase proceeding discussed above. As a result of the rate case settlement
described above, ANR Pipeline can no longer pursue such judicial review of the
specific orders involved.
In May 1997, certain of ANR Pipeline's customers filed a motion with the
FERC for immediate refund of approximately $77 million, which is related to ANR
Pipeline's settlement with Dakota Gasification Company. ANR Pipeline responded
to the FERC, demonstrating that the customers' claim is grossly overstated by
identifying the appropriate amounts to be refunded to its customers. On June 30,
1997, ANR Pipeline paid such refunds (totaling $21.1 million) to its customers.
On December 2, 1997, the FERC issued an order rejecting the customers' claims,
and found that ANR Pipeline had properly calculated the level of refunds due to
the customers. The FERC's decision on this matter is now final because the
customers did not seek rehearing.
Colorado. On March 29, 1996, Colorado filed with the FERC under Docket No.
RP96-190 to increase its rates by approximately $30 million annually, to realign
certain transportation services and to add tariff language that would allow
Colorado to enter into "negotiated rates" (rates which could exceed Colorado's
"cost-based" rates) in certain circumstances, subject to FERC policies. On April
25, 1996, the FERC accepted the rate change filing and the transportation
service realignment to become effective October 1, 1996, subject to refund, and
also accepted the "negotiated rate" tariff provision to become effective May 1,
1996. Certain parties sought judicial review of the acceptance of the
"negotiated rate" tariff provisions. On October 16, 1997, the FERC approved an
unopposed settlement filed by Colorado that resolves all issues in this general
rate case except the issues that are on appeal relating to the
8
"negotiated rate" tariff provisions. The final settlement modifies the services
provided by Colorado, and the charges for those services. The final settlement
became effective on November 17, 1997, and is no longer subject to review by the
FERC or subject to any judicial review. Colorado has now made refunds of amounts
collected which were in excess of the final settlement rates. The appeal of the
"negotiated rate" provision has been consolidated with other appeals involving
the same issues, and is being held in abeyance by the United States Court of
Appeals for the D. C. Circuit. Pending completion of judicial review, the
"negotiated rate" tariff provisions are fully effective, although during 1997
Colorado did not enter into any "negotiated rate" transactions.
WIC. On May 30, 1997, WIC filed at the FERC to increase its rates by
approximately $5.7 million annually. On June 27, 1997, the FERC accepted the
filing to become effective December 1, 1997, subject to refund. In the event the
case cannot be settled, a hearing before a FERC Administrative Law Judge is
currently scheduled for May 5, 1998.
Certain of the above regulatory matters and other regulatory issues remain
unresolved among Colorado, ANR Pipeline, ANR Storage and WIC, subsidiaries of
the Company, their customers, their suppliers and the FERC. The Company has made
provisions which represent management's assessment of the ultimate resolution of
these issues. As a result, the Company anticipates that these regulatory matters
will not have a material adverse effect on its consolidated financial position
or results of operations. While the Company estimates the provisions to be
adequate to cover potential adverse rulings on these and other issues, it cannot
estimate when each of these issues will be resolved.
REFINING, MARKETING AND DISTRIBUTION, AND CHEMICALS
The Company has subsidiary operations involved in the purchase,
transportation and sale of refined products, crude oil, condensate and natural
gas liquids; the operation of refineries and chemical plants; the sale at retail
of gasoline, petroleum products and convenience items; petroleum product
terminaling and marketing of crude oil and refined products worldwide.
Refining
Subsidiaries of the Company operated their refineries at 89% of average
combined capacity in 1997 compared to 97% in 1996 and at 88% in 1995. The
aggregate sales volumes (millions of barrels) of Coastal's wholly owned
refineries for the three years ended December 31, 1997 were 160.7 (1997), 160.4
(1996) and 142.3 (1995). Of the total refinery sales in 1997, 27% was gasoline,
48% was middle distillates, such as jet fuel, diesel fuel and home heating oil,
and 25% was heavy industrial fuels and other products.
At December 31, 1997, average daily throughput and storage capacity at the
Company's wholly owned refineries are set forth below:
Refinery Location Average Daily
- -------- -------- Daily Throughput (Barrels) Storage
Capacity -------------------------- Capacity
(Barrels) 1997 1996 (Barrels)
--------- ----------- ----------- ---------
Aruba Aruba 210,000 180,600 188,200 15,300,000
Corpus Christi Corpus Christi, Texas 100,000 87,100 91,300 7,100,000
Eagle Point Westville, New Jersey 140,000 133,400 133,600 10,700,000
Mobile Mobile, Alabama 18,000 12,900 14,000 600,000
------- ------- ------- ----------
Total 468,000 414,000 427,100 33,700,000
In 1997, the Company sold its idled Hercules, California refinery.
In addition, Coastal's international operations include a minority
interest, through a foreign subsidiary, in a refinery located in Hamburg,
Germany which has a refining capacity of 100,000 barrels per day and a storage
capacity of 1,800,000 barrels for crude oil and 5,200,000 barrels for products.
9
The Company's refineries produce a full range of petroleum products
ranging from transportation fuels to paving asphalt. The refineries are operated
to produce the particular products required by customers within each refinery's
geographic area. In 1997, the products emphasized included premium gasolines and
products for specialty markets such as petrochemical feedstocks, aviation fuels
and asphalt.
In October 1997, the Company entered into a memorandum of understanding
with Maraven S.A., a subsidiary of Venezuela's state-owned oil company,
Petroleos de Venezuela S.A., to form a joint venture to produce, refine and
market extra heavy crude from the Zuata region of Venezuela's Orinoco belt. The
joint venture would install a facility for upgrading the extra heavy crude to
synthetic crude (syncrude) in Venezuela. After conversion, the syncrude would be
shipped to Coastal's refinery in Corpus Christi. It is anticipated that such
joint venture, which must be approved by the Venezuelan Congress as well as
Coastal, would acquire the Corpus Christi facility from Coastal.
Chemicals
Coastal Chem, Inc. ("Coastal Chem"), a Coastal subsidiary, operates a
plant near Cheyenne, Wyoming, which produces anhydrous ammonia, ammonium
nitrate, nitric acid, liquid carbon dioxide and urea for use as agricultural
fertilizers, livestock feed supplements, blasting agents and various other
industrial applications. This plant has the capacity to produce 550 tons per day
of anhydrous ammonia, 875 tons per day of ammonium nitrate, 275 tons per day of
urea, 700 tons per day of nitric acid and 400 tons per day of liquid carbon
dioxide. Coastal Chem also owns a plant at Table Rock, Wyoming, which has a
production capacity of 150 tons of liquid fertilizer per day. In addition,
Coastal Chem operates a low density ammonium nitrate ("LoDAN(R)") facility in
Battle Mountain, Nevada, which has the capacity to produce 400 tons per day. The
LoDAN(R) product is used primarily as a blasting agent in surface mining.
Coastal Chem also operates an integrated methyl tertiary butyl ether
("MTBE") plant with a production capacity of 4,200 barrels per day. MTBE is a
gasoline additive which adds oxygen and boosts octane of the blended mixture.
Coastal's St. Helens chemical plant, located in St. Helens, Oregon, has
the capacity to produce 300 tons per day of anhydrous ammonia, 370 tons per day
of urea and 185 tons per day of urea/ammonium nitrate solutions. Approximately
55% of the plant's production is sold as industrial products and 45% as
agricultural products.
Sales volumes for the three years ended December 31, 1997, are set forth
below (thousands of tons):
1997 1996 1995
-------- -------- --------
Agricultural Sales................................................... 340 276 242
Industrial Sales..................................................... 566 608 445
MTBE................................................................. 223 204 203
----- ----- -----
Total .......................................................... 1,129 1,088 890
===== ===== =====
Coastal Chem and the St. Helens plant compete with many nitrogen and MTBE
producers across the United States and Canada. The Company's strengths are
product quality, service, and dependability. Coastal Chem and the St. Helens
plant produce commodity products with strong price competition. Reduced rail
rates on long hauls has encouraged competition from Canadian and eastern U.S.
producers.
The Company's petrochemical facility in Montreal East, Quebec, Canada, has
the capacity to produce 330,000 tons per year of paraxylene, a component used in
the manufacturing of polyester fibers and containers. The Montreal East plant
holds a competitive position due to the size of the facility, the Company's low
initial investment, long-term contracts, and a readily available feedstock base
provided by the Company's New Jersey refinery. Production (tons) shipped and
sold from the plant for the three years ended December 31, 1997 was 338,400
(1997), 289,100 (1996) and 246,200 (1995).
The Company's 650 tons per day anhydrous ammonia facility located in
Oyster Creek, Texas began operation in the first quarter of 1998. This plant is
located adjacent to and will supply a number of major chemical facilities.
10
Marketing and Distribution
Refined Products Marketing. Sales volumes for distribution activities of
Coastal subsidiaries, including products from Company refineries and purchases
from other suppliers, for the three years ended December 31, 1997, are set forth
below (thousands of barrels):
Type of Sale 1997 1996 1995
- ------------ -------- --------- ---------
Company Produced Refined Products........................................ 160,703 160,383 142,301
Refined Products Purchased from Others................................... 101,495 130,240 143,913
Natural Gas Liquids...................................................... 16,593 16,205 14,551
------- ------- -------
Total............................... 278,791 306,828 300,765
======= ======= =======
Subsidiaries of the Company market refined products and liquefied
petroleum gas at wholesale in 36 states plus Canada and Panama through 272
terminals. Coastal Refining & Marketing, Inc. serves customers primarily in the
Midwest, Mississippi Valley and the Southwest through 216 product and liquefied
petroleum gas terminals in 25 states. On the Gulf and East Coasts, Coastal Fuels
Marketing, Inc., Coastal Oil New York, Inc. and Coastal Oil New England, Inc.
serve home, industry, utility, defense and marine energy needs. In 1997, these
subsidiaries' sales volumes were 71.4 million barrels, which accounted for
approximately 26% of the total marketing and distribution sales. International
subsidiaries that acquire feedstocks for the refineries and products for the
distribution system are located in Aruba, Bermuda, London and Singapore.
During 1997, the Company continued selling, exchanging or disposing of
marketing operations that cannot be integrated with core refining assets. In
1997, Coastal improved its wholesale and retail marketing by concentrating more
on the products made at its core refineries. Additionally, in 1997, the Company
sold its Revere, Massachusetts terminal and associated business as well as the
Company's marketing operations based in Flushing, New York.
A subsidiary of Coastal leases petroleum storage facilities located at the
former U.S. naval base at Subic Bay in the Philippines. Coastal is leasing 304
acres of land, with 68 individual storage tanks totalling 2.4 million barrels of
storage, most of which are underground, and 40 miles of pipeline connecting the
terminal with other facilities within the Subic Bay Freeport Zone. During 1997,
the petroleum products pipeline between the Subic Bay Freeport Zone and the
Clark Special Economic Zone (formerly Clark Air Force Base) has been
rehabilitated, by a joint venture between a Coastal subsidiary and the Petroleum
Authority of Thailand, along with a petroleum storage facility in the Clark
Special Economic Zone. Both facilities will be used to support the joint
venture's marketing activities in the Philippines.
Coastal Baltica Holding Company Ltd., a joint venture in which a Coastal
subsidiary is a 50% partner, commenced operations at its terminal and new port
facilities near Tallinn, Estonia on the Baltic Sea in 1996. The terminal
operation imports and exports almost 2.5 million metric tons (16 million
barrels) of petroleum products annually, primarily from Russia and the former
republics of the Soviet Union to markets in Europe, North and South America and
the Caribbean.
The Company, through Coastal Mart, Inc. and branded marketers, conducts
retail marketing, using the C-MART(R), C and Design and/or COASTAL(R)
trademarks, in 36 states and Aruba through approximately 1,731 Coastal branded
outlets, with 511 of those outlets operated by the Company. Fleet fueling
operations include 23 outlets in Texas and 6 in Florida.
Coastal Unilube, Inc., based in West Memphis, Arkansas, blends, packages
and distributes lubricants and automotive products under the COASTAL(R), C and
Design and other trademarks through 14 warehouses servicing customers in 45
states, plus the District of Columbia, Puerto Rico and 12 foreign countries.
Transportation. The Company's transportation facilities include petroleum
liquids pipelines, tank cars, tankers, tank trucks and barges. Coastal operates
approximately 1,700 miles of pipeline for gathering and transporting an average
of 229,321 barrels daily of crude oil, condensate, natural gas liquids and
refined products. These pipelines include 304 miles of crude oil pipelines, 718
miles of refined products pipelines, and 582 miles of natural gas liquids
pipelines, all located principally in Texas and in which the Company has a 35%
ownership interest. Coastal has a 50% ownership in
11
13 miles of refined products pipelines located in New Jersey and New York and
has a 33.3% interest in an additional 80 miles of refined products pipelines in
New Jersey. In 1997, throughput of crude oil pipelines averaged 13,117 barrels
per day, compared to 14,323 barrels per day in 1996. In 1997, throughput of
refined products and natural gas liquid pipelines averaged 216,204 barrels per
day, compared to 215,897 barrels per day in 1996.
The marine transportation fleet at December 31, 1997 consisted of 15 tug
boats, 19 oil barges, 4 owned tankers and 12 time-chartered tankers.
Competition
The petroleum industry is highly competitive in the United States and
throughout most of the world. The Company's subsidiary operations involved in
refining, marketing and distribution of petroleum products and chemicals compete
with other industries in supplying the energy needs of various types of
consumers. Principle factors affecting sales are price, location and service.
Overall performance is impacted by industry margins, and supply and demand for
both feedstocks and finished products.
EXPLORATION AND PRODUCTION
Gas and Oil Properties
Coastal subsidiaries are engaged in gas and oil exploration, development
and production operations principally in Alabama, Arkansas, California,
Colorado, Kansas, Louisiana, Michigan, Mississippi, Missouri, New Mexico,
Oklahoma, Texas, Utah, West Virginia, Wyoming and offshore in the Gulf of
Mexico. In addition, Coastal subsidiaries have exploration and production rights
in Australia, Colombia, Hungary, Indonesia and Peru.
In 1997, the Company's domestic exploration and production operations sold
approximately 46% of all the gas it produced to certain of Coastal's wholly
owned natural gas system subsidiaries. The Company's domestic operations also
make short-term gas sales directly to industrial users and distribution
companies to increase utilization of its excess current gas production capacity.
Oil is sold primarily under short-term contracts at field prices posted by the
principal purchasers of oil in the areas in which the producing properties are
located.
12
Acreage held under gas and oil mineral leases as of December 31, 1997 is
summarized as follows:
Undeveloped Developed
---------------- ----------------
Area Gross Net Gross Net
------------------------------------------------------------ ----- ----- ----- -----
(Thousands of Acres)
Exploration and Production
--------------------------
United States (Domestic)
Onshore.......................................... 494 352 870 376
Offshore......................................... 283 148 243 148
--------- -------- --------- ---------
Total Domestic................................... 777 500 1,113 524
--------- -------- --------- ---------
International
Australia........................................ 730 328 - -
Colombia......................................... 104 52 - -
Hungary.......................................... 568 568 - -
Indonesia........................................ 950 237 - -
Peru............................................. 2,974 1,487 - -
--------- -------- --------- ---------
Total International.............................. 5,326 2,672 - -
--------- -------- --------- ---------
Total Exploration and Production................. 6,103 3,172 1,113 524
--------- -------- --------- ---------
Natural Gas Systems
-------------------
Domestic Onshore....................................... - - 264 261
--------- -------- --------- ---------
Total Acreage.......................................... 6,103 3,172 1,377 785
========= ======== ========= =========
The domestic net developed acreage is concentrated principally in Texas
(36%), Utah (26%), offshore Gulf of Mexico (19%), Kansas (6%) and Wyoming (6%).
Approximately 10%, 14% and 11% of the Company's total domestic net undeveloped
acreage is under leases that have minimum remaining primary terms expiring in
1998, 1999 and 2000, respectively.
Productive wells as of December 31, 1997 are as follows (domestic):
Type of Well Gross Net
--------------------------------------------------------------- --------- ---------
Exploration and Production
--------------------------
Oil....................................................... 1,167 727
Gas....................................................... 1,890 952
--------- ---------
Total Exploration and Production.......................... 3,057 1,679
--------- ---------
Natural Gas Systems
-------------------
Oil....................................................... 9 8
Gas....................................................... 717 713
--------- ---------
Total Natural Gas Systems................................. 726 721
--------- ---------
Total............................................... 3,783 2,400
========= =========
13
Exploration and Drilling
During 1997, Coastal's domestic subsidiaries participated in drilling 150
gross wells, 109.8 net wells, to the Company's interest. Coastal's participation
in wells drilled in the three years ended December 31, 1997, is summarized as
follows:
Exploration and Production 1997 1996 1995
-------------------------- ------------------- ------------------- --------------------
Exploratory Wells Gross Net Gross Net Gross Net
----------------- -------- -------- --------- -------- --------- ---------
Oil...................... - - - - 1 0.3
Gas...................... 8 3.3 7 2.3 6 2.5
Dry Holes................ 5 2.9 4 1.9 4 2.3
-------- -------- --------- -------- --------- ---------
13 6.2 11 4.2 11 5.1
======== ======== ========= ======== ========= =========
Development Wells
-----------------
Oil...................... 2 1.7 5 1.6 22 9.8
Gas...................... 128 96.7 80 56.8 59 25.6
Dry Holes................ 4 2.2 3 1.4 1 0.1
-------- -------- --------- -------- --------- ---------
134 100.6 88 59.8 82 35.5
======== ======== ========= ======== ========= =========
Natural Gas Systems
-------------------
Development Wells
-----------------
Oil...................... - - 2 2.0 - -
Gas...................... 3 3.0 8 8.0 1 1.0
Dry Holes................ - - - - - -
-------- -------- --------- -------- --------- ---------
3 3.0 10 10.0 1 1.0
======== ======== ========= ======== ========= =========
Total.......................... 150 109.8 109 74.0 94 41.6
======== ======== ========= ======== ========= =========
Wells in progress as of December 31, 1997 are as follows (domestic):
Type of Well Gross Net
-------------------------------------------------------- ------- -----
Exploration and Production
--------------------------
Exploratory.......................................... 3 1.7
Development.......................................... 24 19.7
------- -----
Total Exploration and Production..................... 27 21.4
------- -----
Natural Gas Systems
-------------------
Exploratory.......................................... - -
Development.......................................... - -
------- -----
Total Natural Gas Systems............................ - -
------- -----
Total................................................ 27 21.4
======= =====
At the end of 1997, Coastal held interests in 110 blocks and 49 platforms
in the Gulf of Mexico, with net natural gas production of 173 MMcf per day and
4,156 barrels per day of oil and condensate. The Company operates 36 of the
platforms.
14
In 1997, Coastal successfully completed 26 wells in the Jeffress Field in
Hidalgo County, 15 miles northeast of McAllen, Texas. These Jeffress wells
contributed to bringing net gas production in South Texas core areas to an
average of 221 MMcf per day in 1997 as compared to 162 MMcf per day for the
prior year, a 36% increase.
Coastal continued its international exploration program in 1997. Coastal
subsidiaries were awarded permits to explore two areas in the Timor Sea off the
northern coast of Australia, with Coastal having a 50% working interest in a
355,000 acre area and a 40% working interest in a 375,000 acre area. The Company
continues to participate in a joint venture to evaluate a block in South Central
Sumatra, Indonesia. Another Coastal subsidiary, holding a 40% working interest,
participated in a successful bid to explore for oil and gas in the Sampang block
in Indonesia. During the course of 1997, exploration activities in Peru, Hungary
and Colombia did not result in the discovery of commercial hydrocarbons. Further
exploration opportunities are being pursued in Peru and Hungary.
Gas and Oil Production
Natural gas production during 1997 averaged 540 MMcf daily, compared to
461 MMcf daily in 1996. Production from non-pipeline-owned wells averaged 436
MMcf daily in 1997, compared to 353 MMcf daily in 1996. Crude oil, condensate
and natural gas liquids production averaged 13,736 barrels daily in 1997,
compared to 13,893 barrels daily in 1996.
The following table shows gas, oil, condensate and natural gas liquids
production volumes attributable to Coastal's domestic interest in gas and oil
properties for the three years ended December 31, 1997:
Natural Gas
Oil Condensate Liquids
Gas (Thousands (Thousands (Thousands
Year (MMcf) of Barrels) of Barrels) of Barrels)
---- ------ ----------- ----------- -----------
Exploration and Production
--------------------------
1997 159,127 3,425 1,224 308
1996 129,149 3,885 853 324
1995 85,415 4,064 436 329
Natural Gas Systems
-------------------
1997 38,135 57 - -
1996 39,405 23 - -
1995 41,638 15 1 -
Many of Coastal's domestic gas wells are situated in areas near, and are
connected to, its gas systems. In other areas, gas production is sold to
pipeline companies and other purchasers.
Generally, Coastal's domestic production of crude oil, condensate and
natural gas liquids is purchased at the lease by its marketing and refinery
affiliates. Some quantities are delivered via Coastal's gathering and
transportation lines to its refineries, but most quantities are redelivered to
Coastal through various exchange agreements.
15
The following table summarizes sales price and production cost information
for domestic exploration and production operations during the three years ended
December 31, 1997:
1997 1996 1995
-------- -------- --------
Average sales price:
Gas - per Mcf................................................. $ 2.40 $ 2.19 $ 1.57
Oil - per barrel.............................................. 18.01 20.28 17.43
Condensate - per barrel....................................... 18.37 20.76 16.63
Natural Gas Liquids - per barrel.............................. 28.41 21.74 15.02
Average production cost per unit (equivalent Mcf)................ 0.49 0.46 0.66
Natural Gas Processing
The Company's domestic subsidiaries in Exploration and Production and
Natural Gas Systems are also engaged in the processing of natural gas for the
extraction and sale of natural gas liquids. In 1997, these subsidiaries
extracted and sold 446 million gallons of ethane, propane, iso-butane, normal
butane and natural gasoline from natural gas processing plants. Sales prices of
natural gas liquids fluctuate widely as a result of market conditions and
changes in the prices of other fuels and chemical feedstocks.
Company-Owned Reserves
Coastal's domestic proved reserves of crude oil, condensate and natural
gas liquids at December 31, 1997, as estimated by Huddleston, its independent
engineers, were 40.1 million barrels, compared to 44.5 million barrels at the
end of 1996. Proved gas reserves as of December 31, 1997, net to Coastal's
interest, were estimated by the engineers to be 1,752.5 Bcf compared to 1,456.5
Bcf as of December 31, 1996. In 1997, reserve additions were more than triple
the production volumes.
For information as to Company-owned reserves of oil and gas, see
"Supplemental Information on Oil and Gas Producing Activities (Unaudited)" as
set forth in Item 14(a)1 hereof.
Competition
In the United States, the Company competes with major integrated oil
companies and independent oil and gas companies for suitable prospects for oil
and gas drilling operations. The availability of a ready market for gas
discovered and produced depends on numerous factors frequently beyond the
Company's control. These factors include the extent of gas discovery and
production by other producers, crude oil imports, the marketing of competitive
fuels, and the proximity, availability and capacity of gas pipelines and other
facilities for the transportation and marketing of gas. The production and sale
of oil and gas is subject to a variety of federal and state regulations,
including regulation of production levels.
Regulation
In all states in the United States in which Coastal engages in oil and gas
exploration and production, its activities are subject to regulation. Such
regulations may extend to requiring drilling permits, the spacing of wells, the
prevention of waste and pollution, the conservation of natural gas and oil, and
various other matters. Such regulations may impose restrictions on the
production of natural gas and crude oil by reducing the rate of flow from
individual wells below their actual capacity to produce. Likewise, oil and gas
operations on all federal lands are subject to regulation by the Department of
the Interior and other federal agencies.
16
COAL
Through the operations of ANR Coal Company, LLC and its affiliates
(collectively "ANR Coal") in the eastern United States, the Company produces and
markets high quality bituminous coal from reserves in Kentucky, Virginia and
West Virginia. In addition, ANR Coal leases interests in its reserves to
unaffiliated producers and markets third-party coal through brokerage sales
operations.
In December 1996, the Company sold its western coal operations, which
consisted of the Utah mines, for approximately $610 million in cash to a limited
liability company jointly owned by subsidiaries of Atlantic Richfield Co. and
ITOCHU Corp. Information concerning a pending dispute related to the western
coal operations is set forth in Item 3 and Note 15 of the Notes to Consolidated
Financial Statements included herein.
At December 31, 1997, coal properties consisted of the following:
Coal Holdings (Acres)
---------------------------------------------------------- Clean,
Owned Leased Recoverable
------------------------------- Exchanged Total Tons
Fee Mineral Surface (Net) Acres (Millions)
------- ------- ------- --------- ----- -------------
Kentucky......................... 14,271 76,614 2,275 19,861 113,021 198
Virginia......................... 24,362 36,925 2,090 12,362 75,739 157
West Virginia.................... 334 56,028 6,966 90,663 153,991 185
-------- --------- -------- -------- -------- ------
Total...................... 38,967 169,567 11,331 122,886 342,751 540
======== ========= ======== ======== ======== ======
- ------------------------
Based on a 65% recovery rate.
At December 31, 1997, the Company controlled approximately 540 million
recoverable tons of bituminous coal reserves and resources. Production in 1997
from ANR Coal's reserves totaled 10.5 million tons, of which 6.2 million tons
were produced from captive operations and 4.3 million tons were produced by
lessees under royalty agreements. In its eastern captive operations, ANR Coal
contracts with independent mine operators to deliver coal to Company owned and
operated processing and loading facilities for the majority of its production.
The remaining production is derived from eight company mines operated by ANR
Coal in Virginia, Kentucky and West Virginia. Captive production and clean coal
processed from these mines totaled 2.0 million tons in 1997.
Captive sales by ANR Coal were 7.2 million tons in 1997. Brokerage sales
in which the Company receives a commission totaled 0.8 million tons for the same
period.
In 1997, approximately 72% of the captive sales were to domestic
utilities, 10% of the sales were to domestic industrial customers and 18% of the
sales were to export markets in Europe, Canada and South America. Additionally,
0.6 million tons of ANR Coal's production were sold to domestic and foreign
metallurgical markets. Of the total 1997 tonnage sold, 5.4 million tons (75%)
were sold under long-term contracts. At December 31, 1997, the weighted average
remaining life of these contracts was 37 months.
The Company had approximately 10.6 million tons of annual production
capacity at December 31, 1997 from five coal preparation plants and eight
loading facilities it owns and operates in the central Appalachian coal fields.
In addition to its bituminous coal operations, the Company controls
overriding royalty interests in approximately 435 million tons of lignite
reserves in North Dakota. Production from these reserves in 1997 totalled 13.0
million tons.
The Company, through its captive operations, leasing programs and
brokerage activities, participates in all aspects of the eastern bituminous coal
industry and is a significant competitor in international metallurgical coal
markets. A
17
significant portion of its reserves are low-sulfur, compliance coal which will
allow the Company to remain a major supplier of steam coal to domestic utilities
under the Clean Air Act Amendments of 1990.
The Company competes with a large number of coal producers and land
holding companies in the eastern United States. The principal factors affecting
the Company's coal sales are price, quality (BTU, sulfur and ash content),
royalty rates, employee productivity and rail freight rates.
POWER
Coastal Power Company ( "Coastal Power") and certain of its affiliates
develop, operate and own various equity interests in cogeneration and
independent power projects. The projects produce and sell electrical energy and,
in the case of cogeneration projects, thermal energy as well. Affiliates of
Coastal Power have interests in four domestic cogeneration projects and five
foreign operating independent power projects, as well as interests in other
projects in various stages of construction and development.
Capitol District Energy Center Cogeneration Associates ("CDECCA") owns a
combined-cycle cogeneration facility with a capacity of approximately 56
megawatts, located in Hartford, Connecticut. An affiliate of Coastal Power owns
a 50% equity interest in CDECCA and is the project manager and Coastal
Technology, Inc. ("CTI"), a Coastal subsidiary, is the operator of the plant.
Electricity from the facility is sold to a local utility under a long-term
contract. Gas supply is provided to the cogeneration plant by other Coastal
affiliates. Thermal energy from the plant is sold both to a local heating and
cooling supplier in the city of Hartford and an affiliate of the equity partner
of CDECCA.
Affiliates of Coastal Power include the managing partner and 50% ownership
of a combined-cycle cogeneration plant at Coastal's Eagle Point, New Jersey
refinery. The plant has a capacity of approximately 225 megawatts. Power from
the plant is sold to a local utility and Coastal's refinery under long-term
contracts. Steam from the plant is also sold to the refinery under a long-term
contract. Gas supply and transportation is provided to the cogeneration plant by
other Coastal affiliates. CTI is the operator of the cogeneration plant.
Fulton Cogeneration Associates leases a cogeneration facility with a
capacity of approximately 47 megawatts, located in Fulton, New York. This
partnership is 100% owned by Coastal Power and another Coastal subsidiary.
Electricity from this project is sold to a New York utility under a long-term
contract. Thermal energy is sold to a local confections manufacturer adjacent to
the project, also under a long-term contract. Approximately one-half of the gas
supply requirements for the project are supplied by an affiliate of Coastal
Power. CTI is the operator of the cogeneration plant.
Coastal, through a wholly owned subsidiary, has a 10.9% equity interest in
the Midland Cogeneration Venture Limited Partnership, a 1,370 megawatt capacity
gas-fired cogeneration project in Michigan, which is the largest cogeneration
facility in the United States. Power from the project is sold to a local utility
and the project's thermal host under long-term contracts. Steam from the project
is also sold to the thermal host and its affiliate under long-term contracts.
Coastal's affiliates provide gas supply and transmission services for a portion
of the project's fuel requirements.
Compania de Electricidad de Puerto Plata, S.A. ("CEPP") owns an
independent power project in Puerto Plata, Dominican Republic. Coastal Power
International Ltd. and other affiliates of Coastal Power together with two other
unrelated parties purchased 100% of the shares of CEPP in 1995. The project has
a total capacity of 66.5 megawatts of which 50 megawatts are barge mounted and
16.5 megawatts are land based. Coastal Power International Ltd. owns a 48.3%
equity interest in CEPP. An affiliate of Coastal Power is involved in arranging
the fuel for the project and another affiliate operates the project pursuant to
a contract with CEPP. The electrical energy is sold to the national electric
utility of the Dominican Republic under a long-term contract.
Coastal Nejapa Ltd. and other affiliates lease an independent power project
near Apopa, El Salvador. The heavy-fuel-oil plant has a capacity of
approximately 144 megawatts. Coastal Power, through its affiliates, currently
receives approximately 86.6% of the distributable cash flow and an unrelated
investor receives the remainder. Coastal affiliates
18
provide fuel for this project and another affiliate operates the project
pursuant to a long-term contract. The electrical energy is sold to the national
electric utility of El Salvador under a long-term contract.
Coastal Wuxi Power Ltd., an affiliate of Coastal Power, together with two
Chinese partners, formed a Sino-foreign joint venture company to own, construct,
and operate a simple-cycle, diesel-fired peaking plant. The project has a
capacity of approximately 40 megawatts and is located in Wuxi City, Province of
Jiangsu, The People's Republic of China. Coastal Wuxi Power Ltd. owns a 60%
equity interest in the joint venture. The project commenced the sale of
electrical energy in the first quarter of 1996.
Coastal Suzhou Power Ltd., a subsidiary of Coastal Power, together with a
Chinese partner, formed a Sino-foreign joint venture to develop, construct, own,
and operate an independent power project. The project, has a capacity of
approximately 76 megawatts, and is located in Suzhou City, Province of Jiangsu,
The People's Republic of China. Coastal Suzhou Power Ltd. owns a 60% equity
interest in the joint venture. The project commenced the sale of electrical
energy in the fourth quarter of 1996.
Coastal Gusu Heat & Power Ltd., an affiliate of Coastal Power, together
with a Chinese partner, formed a Sino-foreign joint venture to develop,
construct, own and operate a 24 megawatt cogeneration plant adjacent to the
existing Suzhou City 76 megawatt plant. Coastal Gusu Heat & Power Ltd. owns a
60% equity interest in the joint venture. This project is under construction and
is expected to be operational in 1998.
In December 1995, Coastal Nanjing Power Ltd., a subsidiary of Coastal
Power, together with two Chinese partners, formed a Sino-foreign joint venture
to develop, construct, own and operate an independent power project. The project
has a capacity of approximately 72 megawatts and is located in Nanjing City,
Jiangsu Province, The People's Republic of China. Coastal Nanjing Power Ltd.
owns an 80% equity interest in the joint venture. The project commenced the sale
of electrical energy in July of 1997. The power is sold to the local utility
under a long-term contract.
A subsidiary of Coastal Power is currently entitled to approximately 90%
of the profits and cash flows of a 140 megawatt capacity natural gas-fired power
plant in Quetta, Pakistan, with an unrelated entity entitled to the remaining
10%. The power from the project will be sold to a national utility under a
long-term contract. The plant should be in service by the end of 1998.
In early 1997, a subsidiary of Coastal Power completed negotiations to
build and operate a 125 megawatt capacity heavy-fuel oil project in Farouqabad,
Pakistan. The Coastal Power subsidiary will hold approximately 90% of the equity
interest in the project. The power from the project will be sold to a national
utility under a long-term contract, with operations expected to commence in
early 1999.
Coastal Power Guatemala, a wholly owned subsidiary of Coastal Power,
effectively owns a 46% interest of Central Generadora Electrica San Jose,
Limitada, with the remainder of the project held by parties unrelated to Coastal
Power. Central Generadora Electrica San Jose, Limitada was formed to develop,
construct, own, and operate a 120 megawatt coal-fired power plant near San Jose,
Guatemala. Construction of the plant commenced in 1997 and is expected to be
completed in the first quarter of 2000. The power from the plant will be sold to
a Guatemalan national utility under a long-term contract.
In late 1997, a subsidiary of Coastal Power won the bid to develop and
operate a 50 megawatt heavy fuel oil project in Tipitapa, Nicaragua. The Coastal
Power subsidiary is expected to own a 60% equity interest in the project, with
Nicaraguan partners expected to hold the remaining 40% interest. The power from
the project will be sold to the national utility company under a long-term
contract, with operations expected to commence in 1999.
Competition
Coastal is subject to competition with other energy organizations and
utilities seeking to develop and acquire independent power operations. Coastal
and many other power producers are concentrating their efforts in the United
States and abroad. International competition continues to increase as the world
market for independent power production develops and power purchasers employ
competitive bidding for project awards. In the United States and international
locations, the sale of power and the operation of power cogeneration facilities
are regulated by the applicable laws, rules
19
and regulations of the respective governments and agencies having jurisdiction.
Many U.S. states are restructuring their applicable laws, rules and regulations.
This restructuring is likely to result in new development opportunities in the
U.S. and increased competition in response to such opportunities.
OTHER OPERATIONS
In November 1995, Advance Transportation Company ("Advance") merged into
the Company's trucking subsidiary, ANR Freight System, Inc. Under the terms of
the merger, the surviving company changed its name to ANR Advance Transportation
Company, Inc. and is owned by a holding company, ANR Advance Holdings, Inc.,
which is in turn owned 50% by a subsidiary of Coastal and 50% by certain former
owners of Advance.
COMPETITION
Coastal and its subsidiaries are subject to competition. In all the
Company's business segments, competition is based primarily on price with
factors such as reliability of supply, service and quality being considered. The
natural gas systems; refining, marketing and distribution, and chemicals;
exploration and production; coal; and power subsidiaries of Coastal are engaged
in highly competitive businesses against competitors, some of which have
significantly larger facilities and market share. See also the discussion of
competition under "Natural Gas Systems," "Refining, Marketing and Distribution,
and Chemicals," "Exploration and Production," "Coal" and "Power" herein.
ENVIRONMENTAL
The Company's operations are subject to extensive and evolving federal,
state and local environmental laws and regulations. The Company spent
approximately $23 million in 1997 on environmental capital projects and
anticipates capital expenditures of approximately $35 million in 1998 in order
to comply with such laws and regulations. The majority of the 1998 expenditures
is attributable to projects at the Company's refining, chemical and terminal
facilities. The Company currently anticipates capital expenditures for
environmental compliance for the years 1999 through 2001 of $20 million to $40
million per year. Additionally, appropriate governmental authorities may enforce
the laws and regulations with a variety of civil and criminal enforcement
measures, including monetary penalties and remediation requirements.
The Comprehensive Environmental Response, Compensation and Liability Act,
also known as "Superfund," as reauthorized, imposes liability, without regard to
fault or the legality of the original act, for disposal of a "hazardous
substance." Certain subsidiaries of the Company and a company in which Coastal
owns a 50% interest have been named as a potentially responsible party ("PRP")
in several "Superfund" waste disposal sites. At the 16 sites for which there is
sufficient information, total clean-up costs are estimated to be approximately
$313 million, and the Company estimates its pro-rata exposure, to be paid over a
period of several years, is approximately $7.5 million and has made appropriate
provisions. At 7 other sites, the Environmental Protection Agency ("EPA") is
currently unable to provide the Company with an estimate of total clean-up costs
and, accordingly, the Company is unable to calculate its share of those costs.
Finally at 10 other sites, the Company has paid amounts to other PRPs or to the
EPA as its proportional share of associated clean-up costs. As to these latter
sites, the Company believes that its activities were de minimis. Additionally,
certain subsidiaries of the Company have been named as PRPs in two state sites.
At one site, the North Carolina Department of Health, Environment and Natural
Resources has estimated the total clean-up costs to be approximately $50
million, but the Company believes that the subsidiary's activities at this site
were de minimis. At the other state site, the Florida Department of
Environmental Protection has demanded reimbursement of its costs, which total
$100,000, and suitable remediation. There is not sufficient information to
estimate the remedial costs or the Company's pro-rata exposure at this site.
20
On December 17, 1997, the California Regional Water Quality Control Board
issued an Administrative Compliance Order (the "Order") to Pacific Refining
Company ("Pacific"), a subsidiary of the Company, for approximately 28
violations of its Hercules Refinery's NPDES permit occurring between May 6, 1995
and September 10, 1997, when the refinery was sold to Hercules L.L.C. The Order
requires Pacific to pay $360,000 in penalties and reimburse the agency $12,000
for its staff costs. Pacific is considering whether to appeal this Order.
On September 15, 1997, Javelina Company, a partnership in which Coastal
Javelina, Inc., a subsidiary of the Company, is a partner and the operator of
the facility, received a Notice of Violation ("NOV") from the EPA for alleged
violations of limits in its Clean Water Act discharge permit. Javelina Company
submitted a report detailing the measures it has implemented to abate the
alleged violations and met with the EPA to discuss why an enforcement action
should not be taken for the alleged violations. In December 1997, the EPA issued
an administrative penalty of $137,000. The EPA has agreed to settle this matter
for less than $100,000, and the settlement agreement is currently being drafted.
On August 27, 1997, the EPA issued a NOV to Coastal Refining & Marketing,
Inc. ("CR&M"), a subsidiary of the Company. The NOV alleged that six violations
of the Clean Air Act were observed during inspections of the subsidiary's
refinery in Corpus Christi, Texas, conducted during March and April of 1996.
CR&M has accepted the EPA's offer of settlement and has agreed to pay a $136,000
penalty as a complete resolution of these alleged violations. The settlement
agreement is currently being drafted.
By letter dated April 8, 1997, the United States Department of Justice
(the "Department") notified ANR Coal Company LLC ("ANR Coal"), a subsidiary of
Coastal, that the EPA has requested the Department to bring an action against
ANR Coal for alleged violations of the Clean Water Act resulting from discharges
from a mine in which ANR Coal had a leasehold interest in the minerals. The
letter offers to settle the matter prior to litigation for $900,000 and
agreement to implement certain injunctive relief which includes the necessary
improvements to the existing water treatment system. ANR Coal does not believe
that it has any responsibility for these discharges, but is currently reviewing
the matter. The Company believes that this threatened action, if an action is
brought and the allegations substantiated, could result in monetary sanctions
which, while not material to the Company and its subsidiaries, could exceed
$100,000.
In April 1996, Coastal Oil & Gas Corporation ("COG"), a subsidiary of
Coastal, received a letter from the EPA Region VIII notifying it that the EPA
believes that COG's facility located in Patrick Draw, Wyoming is in violation of
certain PCB regulations promulgated pursuant to the Toxic Substances Control
Act. The EPA has offered COG an opportunity to resolve this matter without
litigation. The Company is currently having discussions with the EPA regarding
resolution of the matter. If the EPA were to initiate an action, the Company
believes that the EPA could seek penalties which, although not material, could
exceed $100,000.
In January 1996, the EPA issued a NOV to CEPOC and Eagle Point
Cogeneration Partnership ("EPCP"), in which Company subsidiaries hold a 50%
interest. The Notice alleged violations of the Clean Air Act for the failure to
obtain a Prevention of Significant Deterioration ("PSD") permit when the EPCP
was constructing the facility and for alleged violations of the facility's
operating permits. On June 25, 1997, the Department of Justice sent the
companies a letter on behalf of the EPA demanding $3 million in penalties for
the violations of the operating permits. The PSD allegation was not included in
the demand. The companies are currently discussing the matter with the EPA. If
the EPA were to initiate an action, the Company believes the EPA would seek
penalties which, while not material to the Company, could exceed $100,000.
In January 1993, the State of Texas filed suit against the Corpus Christi,
Texas refinery of CR&M, alleging failure to comply in 1992 with certain
administrative orders relating to groundwater contamination and failure to
comply with various solid and hazardous waste regulations. Following
negotiations, an agreed judgment has been reached between the parties but not
entered by the court. Once this judgment is entered, CR&M will pay $500,000 and
also spend certain amounts on supplemental environmental projects.
Future information and developments will require the Company to
continually reassess the expected impact of these environmental matters.
However, the Company has evaluated its total environmental exposure based on
currently available data, including its potential joint and several liability,
and believes that compliance with all applicable laws and regulations will not
have a material adverse impact on the Company's consolidated financial position
or results of operations.
21
Item 2. Properties.
Information on properties of Coastal is included in Item 1, "Business"
included herein.
The real property owned by the Company with regard to its subsidiary
pipelines is owned in fee and consists principally of sites for compressor and
metering stations and microwave and terminal facilities. With respect to the
subsidiary-owned storage fields, the Company holds title to gas storage rights
representing ownership of, or has long-term leases on, various subsurface strata
and surface rights and also holds certain additional mineral rights. Under the
NGA, the Company and its pipeline subsidiaries may acquire by the exercise of
the right of eminent domain, through proceedings in United States District
Courts or in state courts, necessary rights-of-way to construct, operate and
maintain pipelines and necessary land or other property for compressor and other
stations and equipment necessary to the operation of pipelines.
Item 3. Legal Proceedings.
In connection with the December 20, 1996 sale of the Company's western
coal operations, the Company has assumed control of a pending dispute with
Intermountain Power Agency ("IPA") involving two coal sales agreements of
Coastal States Energy Company, which contracts were included in the sale, and
for which the Company continues to have certain responsibilities. The dispute
involves a claim by IPA to expanded audit rights under the contracts. The
Company vigorously disputes IPA's claim and filed a counterclaim for certain
contractual payments wrongfully withheld by IPA. On July 14, 1997, IPA made a
demand for arbitration between the parties, asserting a claim of a gross
inequity under the contracts requiring a reduction in the purchase price of coal
sold before and after the sale of these coal operations. The Company believes
that no gross inequity has occurred and that it should prevail in the
arbitration on the merits. The Company has also asserted that the pending
lawsuit, which presents several common legal issues between the two proceedings,
should be resolved before any related arbitration proceeding is allowed to
proceed. A motion to this effect is pending in the U.S. District Court for Utah.
In December 1992, certain of CIG's natural gas lessors in the West
Panhandle Field filed a complaint in the U.S. District Court for the Northern
District of Texas claiming underpayment, breach of fiduciary duty, fraud and
negligent misrepresentation. Management believes that CIG has numerous defenses
to the lessors' claims, including (i) that the royalties were properly paid,
(ii) that the majority of the claims were released by written agreement and
(iii) that the majority of the claims are barred by the statute of limitations.
In March of 1995, the Trial Court granted a partial summary judgment in favor of
CIG, holding that the four-year statute of limitations had not been tolled, that
the releases are valid, and dismissing all tort claims and claims for breach of
any duty of disclosure. The remaining claim for underpayment of royalties was
tried to a jury which, in May 1995, made findings favorable to CIG. On June 7,
1995, the Trial Court entered a judgment that the lessors recover no monetary
damages from CIG and permanently estopping the lessors from asserting any claim
based on an interpretation of the contract different than that asserted by CIG
in the litigation. The lessors' motion for a new trial was denied on July 18,
1997, and both parties have filed appeals. On June 7, 1996, the same plaintiffs
sued CIG in state court in Amarillo, Texas, for underpayment of royalties. CIG
removed the second lawsuit to federal court which granted a stay of the second
suit pending the outcome of the first lawsuit.
In October 1996, the Company, along with several subsidiaries, was named
as a defendant in a suit filed by several former and current African American
employees in the United States District Court, Southern District of Texas. The
suit alleges racially discriminatory employment policies and practices and seeks
damages in the amount of at least $100 million and punitive damages of at least
three times that amount. Plaintiffs' counsel are seeking to have the suit
certified as a class action. Coastal vigorously denies these allegations and has
filed responsive pleadings. In January 1998, the plaintiffs amended their suit
to exclude ANR Pipeline employees from the potential class. A new suit was then
filed in state court in Wayne County, Michigan, seeking to have the Michigan
suit certified as a class action of African American employees of ANR Pipeline
and seeking unspecified damages as well as attorneys and expert fees. ANR
Pipeline will file responsive pleadings denying these allegations.
Numerous other lawsuits and other proceedings which have arisen in the
ordinary course of business are pending or threatened against the Company or its
subsidiaries.
22
Although no assurances can be given and no determination can be made at
this time as to the outcome of any particular lawsuit or proceeding, the Company
believes there are meritorious defenses to substantially all of the above claims
and that any liability which may finally be determined should not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
23
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The principal market on which Coastal Common Stock is traded is the New
York Stock Exchange; Coastal Common Stock is also listed on The Stock Exchange
in London, the Stock Exchanges of Dusseldorf, Frankfurt, Hamburg and Munich in
Germany and on the Amsterdam Stock Exchange. The Class A Common Stock of Coastal
is non-transferable; however, such stock is convertible share-for-share into
Coastal Common Stock. As of March 11, 1998, the approximate number of holders of
record of Common Stock was 9,800 and of the Class A Common Stock was 2,950.
The following table presents the high and low sales prices for Coastal
common shares based on the daily composite listing of transactions for New York
Stock Exchange stocks.
1997 1996
----------------------------------- ------------------------------------
Quarters High Low Dividends High Low Dividends
- -------------------- -------- ----- --------- -------- ----- ---------
First Quarter $51.13 $44.63 $.10 $40.75 $34.88 $.10
Second Quarter 53.88 43.88 .10 43.75 36.25 .10
Third Quarter 63.50 52.75 .10 43.88 37.00 .10
Fourth Quarter 65.06 56.25 .10 51.50 40.81 .10
Coastal expects to continue paying dividends in the future. Dividends of
$.09 per share were paid on the Class A Common Stock for each quarterly period
in 1997 and 1996. At December 31, 1997, under the most restrictive of its
financing agreements, the Company was prohibited from paying dividends and
distributions on its Common Stock, Class A Common Stock and preferred stocks in
excess of approximately $648.2 million.
24
Item 6. Selected Financial Data.
The following selected financial data (in millions of dollars except per
share amounts) is derived from the Consolidated Financial Statements included
herein and Item 6 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, as adjusted for minor reclassifications. The Notes
to Consolidated Financial Statements included herein contain other information
relating to this data.
Year Ended December 31,
------------------------------------------------------------------------
1997 1996**** 1995 1994 1993
----------- ----------- ------------ ------------ ----------
Operating revenues* $ 9,653.1 $ 12,166.9** $ 10,457.6 $ 10,226.2 $ 10,147.2
Earnings before extraordinary items 392.1 500.2** 270.4 232.6 118.3
Net earnings 301.5 402.6** 270.4 232.6 115.8
Basic earnings per share before
extraordinary items 3.53 4.57** 2.41 2.06 1.02
Diluted earnings per share before
extraordinary items 3.49 4.52** 2.39 2.04 1.02
Cash dividends per common share*** .40 .40 .40 .40 .40
Total assets 11,625.2 11,613.1 10,658.8 10,534.6 10,227.1
Debt, excluding current maturities 3,663.2 3,526.1 3,661.7 3,720.2 3,812.5
Preferred stock of subsidiaries,
excluding current maturities 100.0 100.0 .6 .6 26.6
* Amounts for 1997 include revenues for two months while other years
include twelve months of revenues from Coastal's gas marketing operations
which became a part of Engage Energy US, L.P. and Engage Energy Canada,
L.P. in February 1997 and are included in Other income - net on the equity
method thereafter.
** Amounts for 1996 included a gain of $272.3 million ($177 million net of
income taxes, or $1.67 per share-basic, $1.65 per share-diluted), related
to the sale of the Utah coal mining operations. Excluding the gain,
earnings before extraordinary items for 1996 amounted to $323.2 million
($2.90 per share-basic, $2.87 per share-diluted).
*** In addition, cash dividends of $.36 per share were paid on the Company's
Class A Common Stock in 1997, 1996, 1995, 1994, and 1993.
**** Effective November 1, 1996, the Company discontinued the application of
FAS 71. The accounting change resulted in a charge to earnings of $85.6
million, net of related income taxes of $50 million, and is shown as an
extraordinary item. Additional information is set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations
and Note 13 of the Notes to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Management's Discussion and Analysis of Financial Condition and
Results of Operations is presented on pages F-1 through F-10 hereof.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
For the information required by this item, see discussion under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which is presented on page F-4.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
25
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by this Item with respect to the directors is
set forth under "Election of Directors" and "Information Regarding Directors" in
the Coastal Proxy Statement for the May 7, 1998 Annual Meeting of Stockholders
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, and
is incorporated herein by reference.
The executive officers of the Registrant as of March 11, 1998, were as
follows:
Name (Age), Year First Positions and Offices
Elected An Officer with the Registrant
--------------------------------- ------------------------------------
David A. Arledge (53), 1982 Chairman of the Board, President and
Chief Executive Officer
Coby C. Hesse (50), 1986 Executive Vice President
James A. King (58), 1992 Executive Vice President
Jeffrey A. Connelly (51), 1988 Senior Vice President
Carl A. Corrallo (54), 1993 Senior Vice President and General
Counsel
Rodney D. Erskine (53), 1997 Senior Vice President
Donald H. Gullquist (54), 1994 Senior Vice President
Dan J. Hill (57), 1978 Senior Vice President
Kenneth O. Johnson (77), 1978 Senior Vice President and Director
Austin M. O'Toole (62), 1974 Senior Vice President and Secretary
Jack C. Pester (63), 1987 Senior Vice President
James L. Van Lanen (53), 1985 Senior Vice President
M. Truman Arnold (69), 1993 Vice President
Daniel F. Collins (56), 1989 Vice President
Robert C. Hart (53), 1994 Vice President
Thomas E. Jackson (58), 1997 Vice President
Jeffrey B. Levos (37), 1997 Vice President and Controller
John J. Lipinski (47), 1995 Vice President
Edward A. More (49), 1995 Vice President
M. Frank Powell (47), 1993 Vice President
Keith O. Rattie (43), 1996 Vice President
Thomas M. Wade (45), 1995 Vice President
Ronald D. Matthews (50), 1994 Treasurer
The above named persons bear no family relationship to each other. Their
respective terms of office expire coincident with the officer elections at the
Annual Board of Directors' meeting which follows Coastal's Annual Meeting of
Stockholders. Each of the officers named above have been officers of Coastal,
ANR Pipeline and/or Colorado or subsidiaries thereof for five years or more with
the following exceptions:
Mr. Erskine was elected Senior Vice President of Coastal in August 1997. He
has held various positions with Coastal Oil & Gas Corporation, a subsidiary of
Coastal, since 1994. Before joining Coastal, Mr. Erskine was president and chief
executive officer of Nerco Oil & Gas Inc.
Mr. Gullquist was elected Senior Vice President of Coastal in March 1994.
From 1988 to 1989 he served as Vice President, Finance at Enron Corporation;
from 1989 to 1990 he served as president of Enron Finance Corporation.
Mr. Hart was elected Vice President of Coastal in March 1994. From 1989
through 1994, he was president of Hart Associates, Inc., an energy development
firm.
Mr. Levos was elected Vice President and Controller of Coastal in March
1997. He has served as Vice President of Coastal States Management Corporation,
a subsidiary of Coastal, since December 1995 and also served as General
26
Auditor since July 1994. Prior thereto, he was a Certified Public Accountant
with the Houst