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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2002
Commission file number 1-7310
The registrant meets the conditions set forth in General Instructions H (1) (a) and (b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure format.
MICHIGAN CONSOLIDATED GAS COMPANY
Michigan | 38-0478040 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
2000 2nd Avenue, Detroit, Michigan | 48226-1279 | |
(Address of principal executive offices) | (Zip Code) |
313-965-2430
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
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Michigan Consolidated Gas Company
Quarterly Report on Form 10-Q
Quarter Ended March 31, 2002
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Page | |||||
Number | |||||
DEFINITIONS | 1 | ||||
PART I — FINANCIAL INFORMATION | |||||
Item 1. Financial Statements | |||||
Consolidated Statement of Operations | 7 | ||||
Consolidated Statement of Financial Position | 8 | ||||
Consolidated Statement of Cash Flows | 9 | ||||
Consolidated Statement of Retained Earnings | 10 | ||||
Notes to Consolidated Financial Statements | 11 | ||||
Independent Accountants’ Report | 15 | ||||
Item 2. Management’s Narrative Analysis of Results of Operations | 3 | ||||
PART II — OTHER INFORMATION | |||||
Item 6. Exhibits and Reports on Form 8-K | 16 | ||||
SIGNATURE | 17 |
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DEFINITIONS
Customer Choice | The choice program is a statewide initiative giving customers in Michigan the option to choose alternative suppliers for gas. | |
End User Transportation | A gas delivery service historically provided to large-volume commercial and industrial customers who purchase natural gas directly from producers or brokerage companies. Under MichCon’s Customer Choice Program that began in 1999, this service is also provided to residential customers and small-volume commercial and industrial customers. | |
Enterprises | DTE Enterprises Inc. (formerly MCN Energy), a wholly owned subsidiary of DTE Energy. | |
Gas Sales Program | A three-year program that ended in December 2001 under which MichCon’s gas sales rate included a gas commodity component that was fixed at $2.95 per Mcf. | |
Gas Storage | For MichCon, the process of injecting, storing and withdrawing natural gas from a depleted underground natural gas field. | |
GCR | A gas cost recovery mechanism that was reinstated by MichCon in January 2002 that permits MichCon to pass on the cost of natural gas to its customers. | |
Intermediate Transportation | A gas delivery service provided to producers, brokers and other gas companies that own the natural gas, but are not the ultimate consumers. | |
DTE Energy | DTE Energy Company and its subsidiaries. | |
MCN Energy | MCN Energy Group Inc. and its subsidiaries. | |
MichCon | Michigan Consolidated Gas Company; an indirect, wholly owned natural gas distribution and intrastate transmission subsidiary of Enterprises. |
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Normal Weather | The average daily temperature within MichCon’s service area during a recent 30-year period. | |
Units of Measurement: | ||
Bcf | Billion cubic feet of gas. | |
Mcf | Thousand cubic feet of gas. | |
MMcf | Million cubic feet of gas. |
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Management’s Narrative Analysis of the Results of Operations
Forward-Looking Statements
Certain information presented herein includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: the effects of weather; the effects of competition, including the gas Customer Choice Program; the capital intensive nature of MichCon’s business; the economic climate and growth in the geographic areas in which MichCon does business; the uncertainty of gas reserve estimates; the timing and extent of changes in commodity prices for natural gas, electricity and crude oil; access to capital and equity markets; the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance and authorized rates; and the timing of the accretive effects of DTE Energy Company’s (DTE Energy) merger with MCN Energy Group Inc. (MCN Energy).
Management’s Narrative Analysis of the Results of Operations
The Results of Operations discussion for MichCon is presented in accordance with General Instruction H(2)(a) of Form 10-Q.
MichCon reported earnings of $54.1 million for the 2002 first quarter compared with earnings of $97.3 million in the 2001 first quarter. The earnings comparison reflects the loss of margins in the 2002 first quarter from selling gas under MichCon’s Gas Sales Program, which ended in December 2001. In 2002, MichCon had no profit or loss on the sale of gas to customers compared to $44 million ($29 million net of tax) in margins earned in the 2001 first quarter.
Increase (Decrease) in Income Compared to Prior Year
(in Millions) | ||||
Operating revenues | $ | 113.6 | ||
Cost of gas | (175.8 | ) | ||
Gross margin | (62.2 | ) | ||
Operation and maintenance | (1.7 | ) | ||
Depreciation and depletion | (0.2 | ) | ||
Taxes other than income | (0.4 | ) | ||
Merger costs | 1.0 | |||
Other income and deductions | (1.6 | ) | ||
Income tax provision | 21.9 | |||
Net income | $ | (43.2 | ) | |
Operating revenues increased $113.6 million in the 2002 first quarter. As subsequently discussed, the variance is due to higher revenues from gas sales customers reflecting an
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Management’s Narrative Analysis of the Results of Operations
increase in the gas commodity component of sales rates. During 2001, MichCon operated under the Gas Sales Program in which the gas commodity component of its sales rates was fixed at $2.95 per thousand cubic feet (Mcf). In January 2002, the Gas Sales Program ended and MichCon returned to a gas cost recovery mechanism (GCR) that allows for the recovery of reasonably and prudently incurred gas purchases. MichCon’s sales rates included a gas commodity component of $3.62 per Mcf for January 2002 and $4.38 per Mcf for the remainder of the 2002 first quarter compared to $2.95 per Mcf in the 2001 first quarter. Partially offsetting the increase in revenues from the pass through of higher gas cost to customers was the impact of weather, which was 6.8% warmer in the 2002 first quarter as compared to the same 2001 period.
Quarter | ||||||||
2002 | 2001 | |||||||
Gas Markets (in Millions) | ||||||||
Gas Sales | $ | 526.3 | $ | 408.3 | ||||
End User Transportation | 31.6 | 37.3 | ||||||
557.9 | 445.6 | |||||||
Intermediate Transportation | 12.1 | 12.5 | ||||||
Other | 20.1 | 18.4 | ||||||
$ | 590.1 | $ | 476.5 | |||||
Gas Markets (in Bcf) | ||||||||
Gas Sales | 76.3 | 85.0 | ||||||
End User Transportation | 48.1 | 46.6 | ||||||
124.4 | 131.6 | |||||||
Intermediate Transportation | 137.3 | 171.9 | ||||||
261.7 | 303.5 | |||||||
Quarter | |||||||||
Effect of Weather on Gas Markets and Earnings | 2002 | 2001 | |||||||
Percentage Warmer Than Normal | (12.3 | )% | (5.5 | )% | |||||
Decrease From Normal in: | |||||||||
Gas markets (in Bcf) | (14.3 | ) | (6.3 | ) | |||||
Net income (in Millions) | $ | (12.7 | ) | $ | (4.9 | ) |
Gas sales and end user transportation revenuesin total increased $112.3 million in the 2002 first quarter due primarily to an increase in the gas commodity component of sales rates. Gas sales and end user transportation revenues also reflect sales associated with a fewer number of customers participating in the gas Customer Choice program. Customers participating in this program purchase gas from suppliers other than MichCon, while MichCon continues to deliver the gas to their premises. Customer Choice participants are classified as end user transportation customers rather than gas sales customers. Accordingly, gas sales revenues have increased, partially offset by a decrease in end user transportation revenues, resulting in a net increase in total operating revenues from these customers due to the gas commodity component included in gas sales rates. The impact of weather also affected sales and transportation revenues and related volumes.
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Management’s Narrative Analysis of the Results of Operations
Intermediate transportation revenuesdecreased $0.4 million in the 2002 first quarter and intermediate transportation deliveries decreased 34.6 billion cubic feet (Bcf) for the same period. A significant portion of the volume decrease was due to lower storage requirements of an affiliate of MichCon. The volume decrease was also attributable to customers who pay a fixed fee for intermediate transportation capacity regardless of actual usage. Although volumes associated with these fixed-fee customers may vary, the related revenues are not affected.
Other operating revenuesincreased $1.7 million in the 2002 first quarter due to higher revenues from storage and facility development services and providing appliance maintenance, partially offset by decreased revenues from other gas-related services.
Cost of gasis affected by variations in sales volumes, cost of purchased gas and related transportation costs, and the effects of any permanent liquidation of inventory gas. Cost of gas sold increased $175.8 million in the 2002 first quarter primarily due to higher prices paid for fixed-price supply and the impact in 2001 of a reduction in inventory gas. The average cost of gas sold in the 2002 first quarter increased $2.52 per Mcf (103%) from the comparable 2001 period. MichCon recorded the benefits of a 25 Bcf inventory liquidation in the 2001 first quarter. The inventory liquidation was priced at $.38 per Mcf compared to an average gas purchase rate in 2001 of $3.64 per Mcf. Cost of gas was also affected by variations in sales volumes due to weather and the number of customers who have chosen to purchase gas from MichCon rather than other suppliers under the gas Customer Choice program.
Operation and maintenanceexpenses increased $1.7 million for the 2002 first quarter primarily due to allocated expenses from DTE Energy. Partially offsetting the increases were lower employee benefit and retiree healthcare costs as well as accruals for injuries and damages and uncollectibles gas accounts.
Property and other taxesincreased $0.4 million in the 2002 first quarter. The increase was due primarily to increased Michigan Single Business Taxes, partially offset by lower property taxes.
Merger costswere not incurred in the 2002 first quarter compared to $1.0 million incurred in the 2001 first quarter. Merger costs associated with the DTE Energy acquisition of MCN Energy consist primarily of system integration, relocation, legal, accounting and consulting costs.
Other income and deductionsincreased $1.6 million in the 2002 first quarter primarily due to higher interest costs.
Income taxesdecreased $21.9 million in the 2002 first quarter due to a decline in pre-tax earnings.
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Management’s Narrative Analysis of the Results of Operations
CAPITAL RESOURCES AND LIQUIDITY
Three Months | |||||||||
March 31 | |||||||||
2002 | 2001 | ||||||||
Cash and Cash Equivalents | |||||||||
(in Millions) | |||||||||
Cash Flow From (Used For) | |||||||||
Operating activities | $ | 73 | $ | 189 | |||||
Investing activities | (19 | ) | (18 | ) | |||||
Financing activities | (58 | ) | (176 | ) | |||||
Net Decrease in Cash and Cash Equivalents | $ | (4 | ) | $ | (5 | ) | |||
Operating Activities
Net cash from operating activities decreased $116 million in the 2002 first quarter due to lower net income, after adjusting for noncash items (depreciation, amortization and deferred taxes) and higher working capital requirements. The higher working capital primarily reflects an overall increase in receivables as well as a decline in accounts payable. The rise in receivables is due to the under-recovery of gas costs incurred totaling $55 million. With the implementation of the gas cost recovery mechanism in January 2002, MichCon is allowed to recover its actual gas costs from gas customers. Additionally, gas receivables are unusually high due to implementation issues associated with installing a new utility customer billing system in November 2001 and customers paying their bills slower due to the economy. Lower accounts payable levels, to more normalized levels, represents the internal focus on managing external payments and taking greater advantage of purchase discounts.
A significant portion of the decline in operating cash flow is timing related that is expected to reverse during the remainder of 2002 and early 2003.
Investing Activities
Net cash used for investing activities increased slightly in the 2002 first quarter. The change reflects proceeds received in 2001 from the sale of securities associated with MichCon’s Grantor Trust, partially offset by a modest decline in plant and equipment expenditures.
Financing Activities
Net cash used for financing activities declined $118 million during the 2002 first quarter reflecting the payment of $75 million in dividends in 2001 and the repayment of more short-term borrowing in 2001 compared to 2002.
NEW ACCOUNTING PRONOUNCEMENTS
During 2001, the Financial Accounting Standards Board (FASB) issued new accounting pronouncements concerning goodwill and other intangible assets, asset retirement obligations and impairment or disposal of long-lived assets. See Note 5 for a discussion of MichCon's evaluation of the adoption of these new accounting pronouncements.
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MICHIGAN CONSOLIDATED GAS COMPANY
Three Months Ended | ||||||||
March 31 | ||||||||
2002 | 2001 | |||||||
(in Thousands) | ||||||||
Operating Revenues | $ | 590,062 | $ | 476,459 | ||||
Operating Expenses | ||||||||
Cost of gas | 384,092 | 208,317 | ||||||
Operation and maintenance | 66,229 | 64,520 | ||||||
Depreciation and depletion | 26,521 | 26,339 | ||||||
Taxes other than income | 16,570 | 16,150 | ||||||
Merger costs | — | 1,029 | ||||||
Total operating expenses | 493,412 | 316,355 | ||||||
Operating Income | 96,650 | 160,104 | ||||||
Other Income and (Deductions) | ||||||||
Interest income | 3,443 | 2,533 | ||||||
Interest on long-term debt | (13,632 | ) | (10,194 | ) | ||||
Other interest expense | (1,951 | ) | (4,180 | ) | ||||
Equity in earnings of joint ventures | 611 | 713 | ||||||
Other | (596 | ) | 713 | |||||
Total other income and (deductions) | (12,125 | ) | (10,415 | ) | ||||
Income Before Income Taxes | 84,525 | 149,689 | ||||||
Income Tax Provision | 30,396 | 52,339 | ||||||
Net Income | $ | 54,129 | $ | 97,350 | ||||
See Notes to Consolidated Financial Statements (Unaudited)
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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
March 31 | |||||||||||
2002 | December 31 | ||||||||||
(Unaudited) | 2001 | ||||||||||
(in Thousands) | |||||||||||
ASSETS | |||||||||||
Current Assets | |||||||||||
Cash and cash equivalents | $ | 39 | $ | 3,929 | |||||||
Accounts receivable | |||||||||||
Customer (less allowance for doubtful accounts of $21,000 and $21,428, respectively) | 278,980 | 243,118 | |||||||||
Accrued unbilled revenues | 104,842 | 110,300 | |||||||||
Property taxes assessed applicable to future periods | 43,672 | 52,289 | |||||||||
Accrued gas cost recovery | 69,558 | 14,401 | |||||||||
Other | 30,256 | 35,584 | |||||||||
527,347 | 459,621 | ||||||||||
Property, Plant and Equipment | 3,081,783 | 3,065,415 | |||||||||
Less accumulated depreciation and depletion | 1,650,116 | 1,626,015 | |||||||||
1,431,667 | 1,439,400 | ||||||||||
Other Assets | |||||||||||
Investment in and advances to joint ventures | 9,362 | 8,835 | |||||||||
Long-term investments | 69,694 | 68,526 | |||||||||
Investment in capital lease | 83,510 | 83,740 | |||||||||
Deferred environmental costs | 26,938 | 26,920 | |||||||||
Prepaid benefit costs and due from affiliate | 244,952 | 229,530 | |||||||||
Other | 63,146 | 46,929 | |||||||||
497,602 | 464,480 | ||||||||||
$ | 2,456,616 | $ | 2,363,501 | ||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | |||||||||||
Current Liabilities | |||||||||||
Accounts payable | $ | 165,689 | $ | 137,104 | |||||||
Short-term borrowings | 199,853 | 256,862 | |||||||||
Gas inventory equalization | 67,364 | — | |||||||||
Federal income, property and other taxes payable | 59,647 | 52,461 | |||||||||
Other | 80,399 | 95,124 | |||||||||
572,952 | 541,551 | ||||||||||
Long-term debt, including capital lease obligations | 777,361 | 778,577 | |||||||||
Other Liabilities | |||||||||||
Deferred income taxes | 139,546 | 123,246 | |||||||||
Unamortized investment tax credits | 23,661 | 24,129 | |||||||||
Regulatory liabilities | 143,842 | 144,172 | |||||||||
Accrued postretirement benefit costs | 65,893 | 70,805 | |||||||||
Accrued environmental costs | 19,565 | 20,743 | |||||||||
Minority interest | 632 | 644 | |||||||||
Other | 38,933 | 39,450 | |||||||||
432,072 | 423,189 | ||||||||||
Commitments and Contingencies | |||||||||||
Shareholder’s Equity | |||||||||||
Common stock $1 par value, 15,100,000 shares authorized, | |||||||||||
10,300,000 shares issued and outstanding | 10,300 | 10,300 | |||||||||
Additional paid in capital | 231,646 | 231,728 | |||||||||
Retained earnings | 432,285 | 378,156 | |||||||||
674,231 | 620,184 | ||||||||||
$ | 2,456,616 | $ | 2,363,501 | ||||||||
See Notes to Consolidated Financial Statements (Unaudited)
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MICHIGAN CONSOLIDATED GAS COMPANY
Three Months Ended | ||||||||
March 31 | ||||||||
2002 | 2001 | |||||||
(in Thousands) | ||||||||
Operating Activities | ||||||||
Net income | $ | 54,129 | $ | 97,350 | ||||
Adjustments to reconcile net income to net cash | ||||||||
from operating activities | ||||||||
Depreciation and depletion: | ||||||||
Per statement of income | 26,521 | 26,339 | ||||||
Charged to other accounts | 2,261 | 2,624 | ||||||
Deferred income taxes — current | — | (3,494 | ) | |||||
Deferred income taxes and investment tax credit, net | 15,502 | 10,306 | ||||||
Other | (7,742 | ) | (2,355 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (35,862 | ) | (58,142 | ) | ||||
Accrued unbilled revenues | 5,458 | 46,219 | ||||||
Gas in inventory | 4,161 | 11,195 | ||||||
Property taxes assessed applicable to future periods | 8,617 | 9,054 | ||||||
Prepaid benefit costs and due from affiliate, net | (15,422 | ) | (16,300 | ) | ||||
Accrued gas cost recovery | (55,157 | ) | (414 | ) | ||||
Accounts payable | 28,585 | (15,300 | ) | |||||
Gas inventory equalization | 67,364 | 67,187 | ||||||
Federal income, property and other taxes payable | 7,186 | 22,375 | ||||||
Other current assets and liabilities, net | (14,390 | ) | (12,526 | ) | ||||
Other deferred assets and liabilities, net | (17,930 | ) | 5,080 | |||||
Net cash from operating activities | 73,281 | 189,198 | ||||||
Investing Activities | ||||||||
Capital expenditures | (19,241 | ) | (20,635 | ) | ||||
Other | 48 | 2,546 | ||||||
Net cash used for investing activities | (19,193 | ) | (18,089 | ) | ||||
Financing Activities | ||||||||
Short-term borrowings, net | (57,009 | ) | (99,865 | ) | ||||
Retirement of long-term debt | (969 | ) | (1,583 | ) | ||||
Dividends paid | — | (75,000 | ) | |||||
Net cash used for financing activities | (57,978 | ) | (176,448 | ) | ||||
Net Decrease in Cash and Cash Equivalents | (3,890 | ) | (5,339 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 3,929 | 12,673 | ||||||
Cash and Cash Equivalents at End of Period | $ | 39 | $ | 7,334 | ||||
Supplementary Cash Flow Information | ||||||||
Interest paid (excluding interest capitalized) | $ | 14,210 | $ | 10,314 | ||||
Income taxes paid | $ | — | $ | 6,588 | ||||
See Notes to Consolidated Financial Statements (Unaudited)
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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
March 31 | ||||||||
2002 | 2001 | |||||||
(in Thousands) | ||||||||
Balance – beginning of period | $ | 378,156 | $ | 494,648 | ||||
Net income | 54,129 | 97,350 | ||||||
Common stock dividends declared | — | (75,368 | ) | |||||
Balance – end of period | $ | 432,285 | $ | 516,630 | ||||
See Notes to Consolidated Financial Statements (Unaudited) |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — GENERAL
These consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements included in the 2001 Annual Report to the Securities and Exchange Commission on Form 10-K.
The accompanying financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. In connection with their preparation, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The consolidated financial statements are unaudited, but in the opinion of MichCon, include all adjustments necessary for a fair statement of the results for the interim periods. Financial results for this interim period are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year.
Certain prior year balances have been reclassified to conform to the current year’s presentation.
NOTE 2 — REGULATORY MATTERS
Gas Industry Restructuring
MichCon returned to the gas cost recovery (GCR) mechanism in January 2002 when the Gas Sales Program expired. Under the GCR mechanism, the gas commodity component of MichCon’s gas sales rates is designed to recover the actual costs of reasonably and prudently incurred gas purchases. In December 2001, the Michigan Public Service Commission (MPSC) issued an order that permitted MichCon to implement GCR factors of up to $3.62 per Mcf for January 2002 billings and up to $4.38 per Mcf for the remainder of 2002. The order also allowed MichCon to recognize a regulatory asset of approximately $14 million representing the difference between the $4.38 factor and the $3.62 factor for volumes that were unbilled at December 31, 2001. The regulatory asset will be subject to the 2002 GCR reconciliation process. As of March 31, 2002, MichCon has accrued a $69.6 million regulatory asset representing the under-recovery of actual gas costs incurred.
In December 2001, the MPSC also approved MichCon’s application for a voluntary, expanded permanent gas Customer Choice program, which would replace the experimental program that expired in March 2002. Effective April 2002, up to approximately 40% of MichCon’s customers could elect to purchase gas from suppliers other than MichCon. Effective April 2003, up to approximately 60% of customers would be eligible and by April 2004, all of MichCon’s 1.2 million customers can participate in the program. The MPSC also approved the use of deferred accounting for the recovery of implementation costs of the gas Customer Choice program.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other
In March 2002, DTE Energy filed a report with the MPSC pursuant to a February 2002 MPSC proceeding to review various customer service and billing problems experienced by Detroit Edison and MichCon customers. The report provided a detailed response to the MPSC’s concerns by addressing the causes and the short-term and long-term action plans to remedy the customer issues. In addition, a number of specific commitments were made regarding customer accessibility and responsiveness to customers. The commitments also include a compliance audit of its billing systems and associated controls. The MPSC Staff responded to the Company’s report with its own report in April 2002. The MPSC Staff report generally agreed that the steps outlined in the Company’s report would address the majority of the service issues experienced by DTE Energy customers in the recent past. In addition, the MPSC Staff report identified several additional opportunities to improve customer service including first contact resolution of complaints and increased meter reading. To the extent the Company successfully implements its short-term and long-term plans no additional MPSC action is anticipated.
NOTE 3 — GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation that interim inventory reductions will be replaced prior to year end, the cost of gas of net withdrawals from inventory is recorded at the estimated average purchase rate for the calendar year. The excess of these charges over the LIFO cost is credited to the gas inventory equalization account. During interim periods when there are net injections to inventory, the equalization account is reversed.
NOTE 4 — CONTINGENCIES
Personal Property Taxes
MichCon and other Michigan utilities have asserted that Michigan’s valuation tables result in the substantial overvaluation of utility personal property. Valuation tables established by the Michigan State Tax Commission (STC) are used to determine the taxable value of personal property based on the property’s age. In November 1999, the STC approved new valuation tables that more accurately recognize the value of a utility’s personal property. The new tables became effective in 2000 and are currently used to calculate property tax expense. However, several local taxing jurisdictions have taken legal action attempting to prevent the STC from implementing the new valuation tables and have continued to prepare assessments based on the superseded tables. The legal actions regarding the appropriateness of the new tables were before the Michigan Tax Tribunal (MTT) which, on April 5, 2002, issued its decision essentially affirming the validity of the STC’s new tables.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Contingencies
Gas is sold to numerous companies operating in the steel, automotive, energy and retail industries. A number of customers filed for bankruptcy in 2001, including certain Enron Corporation affiliates. MichCon had open transactions under a variety of agreements with bankrupt Enron affiliates, and had an aggregate net liability of $15 million to Enron. There are various netting agreements with Enron affiliates. Internal and external counsel are working to determine MichCon’s rights within these agreements. MichCon has not reserved for any exposure in addition to the net liabilities already recorded, as management cannot estimate a probable loss exposure and currently does not believe the resolution of this matter will have a material impact to MichCon.
MichCon is involved in certain legal (including commercial matters), administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, and pending judicial matters. Management cannot predict the final disposition of such proceedings. Management regularly reviews legal matters and records provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on MichCon’s financial statements in the period they are resolved.
NOTE 5 – NEW ACCOUNTING PRONOUNCEMENTS
Goodwill and Other Intangible Assets —Effective January 1, 2002, MichCon adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition.
SFAS No. 142 requires that useful lives of previously recognized intangible assets be reassessed and the remaining amortization periods be adjusted accordingly. MichCon’s intangible assets consist primarily of software and are subject to amortization. Intangible assets amortization expense was approximately $2 million in each of the first quarters of 2002 and 2001. There were no material acquisitions of intangible assets during the first quarter of 2002. The gross carrying amount of intangible assets and accumulated amortization at March 31, 2002 were $154 and $38, respectively. Amortization expense of intangible assets is estimated to be $9 million annually for 2002 through 2006.
Asset Retirement Obligations —In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of an asset retirement obligation be recognized in the period in which it is
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
incurred. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset. It would apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. MichCon will adopt this statement in January 2003 and has not yet determined the impact of this statement on the consolidated financial statements.
Long-Lived Assets —On January 1, 2002, MichCon adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, but retains the fundamental provisions for recognizing and measuring impairment of long-lived assets to be held and used or disposed of by sale. The statement also supersedes the accounting and reporting provisions for the disposal of a segment of a business. SFAS No. 144 eliminates the conflict between accounting models for treating the disposition of long-lived assets that existed between SFAS No. 121 and the guidance for a segment of a business accounted for as a discontinued operation by adopting the methodology established in SFAS No. 121, and also resolves implementation issues related to SFAS No. 121. The adoption of the statement did not have an impact on the consolidated financial statements of MichCon.
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INDEPENDENT ACCOUNTANTS’ REPORT
To the Board of Directors and Shareholder of
Michigan Consolidated Gas Company:
We have reviewed the accompanying condensed consolidated statement of financial position of Michigan Consolidated Gas Company and subsidiaries as of March 31, 2002, and the related condensed consolidated statements of operations, cash flows, and retained earnings for the three-month periods ended March 31, 2002 and 2001. These financial statements are the responsibility of Michigan Consolidated Gas Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of Michigan Consolidated Gas Company and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, cash flows and retained earnings for the year then ended (not presented herein); and in our report dated February 26, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
April 23, 2002
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EXHIBITS AND REPORTS ON FORM 8-K | ||
(a) | Exhibits | |
(i) | Exhibits filed herewith. |
Exhibit | ||
Number | Description | |
15-3 | Awareness Letter of Deloitte & Touche LLP regarding their report dated April 23, 2002 | |
(b) | Reports on Form 8-K | |
None. |
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MICHIGAN CONSOLIDATED GAS COMPANY | ||||
Date: May 14, 2002 | By: | /s/ DANIEL G. BRUDZYNSKI Daniel G. Brudzynski Chief Accounting Officer, Vice President and Controller |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
15-3 | Awareness Letter of Deloitte & Touche LLP regarding their report dated April 23, 2002 | |