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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 1999,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
Commission File Number 1-7310
MICHIGAN CONSOLIDATED GAS COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-0478040 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 500 Griswold Street, Detroit, Michigan 48226 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code 313-965-2430 NO CHANGES (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]Number of shares outstanding of each of the registrant’s classes of common stock, as of July 30, 1999:
Common Stock, par value $1.00 per share: 10,300,000
Index to Form 10-Q
For Quarter Ended June 30, 1999
Page Number COVER i INDEX ii PART I — FINANCIAL INFORMATION Item 1. Financial Statements 11 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1 PART II — OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURE 18 ii
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Michigan Consolidated Gas Company and SubsidiariesManagement’s Discussion and AnalysisResults of Operations
Results reflect earnings from new gas sales program — MichCon’s earnings were $8.2 million and $92.1 million for the 1999 second quarter and six-month period, respectively, resulting in increases of $5.2 million and $27.5 million from the comparable 1998 periods. Earnings for the 1999 twelve-month period were $104.4 million, which included an $11.2 million write-down (net of taxes and minority interest) of a gas gathering pipeline (Note 3). Excluding the write-down, earnings for the 1999 twelve-month period were $115.6 million, an increase of $35.1 million over the corresponding 1998 period. The earnings improvement for all 1999 periods reflects contributions from the new gas sales program as subsequently discussed. The 1999 six-month period also reflects the impact of more favorable weather.
Earnings Components (Dollars in Millions)
Comparing 1999 to 1998
Quarter Six Months Twelve Months $ % $ % $ % Change Change Change Change Change Change Operating Revenues 12.8 7.4 81.6 13.6 (3.2 ) (.3 ) Cost of Gas 2.9 5.0 33.7 12.2 (35.8 ) (6.9 ) Gross Margin 9.9 8.6 47.9 14.7 32.6 5.5 Operation and Maintenance 2.1 3.4 7.4 6.0 (3.4 ) (1.3 ) Depreciation and Depletion 1.3 5.4 3.4 7.5 (1.4 ) (1.4 ) Property and Other Taxes (1.3 ) (9.0 ) (.1 ) (.2 ) (2.8 ) (4.7 ) Write-down of Gathering Property (Note 3) — — — — 24.8 — Other Income and Deductions .6 5.4 (1.8 ) (7.1 ) (8.1 ) (16.2 ) Income Before Income Taxes 7.2 145.8 39.1 39.0 23.6 18.4 Income Tax Provision 2.0 106.3 11.6 32.6 (.3 ) (.6 ) Net Income 5.2 171.0 27.5 42.5 23.9 29.6 Gross Margin
Gross margin (operating revenues less cost of gas) increased $9.9 million, $47.9 million and $32.6 million in the 1999 quarter, six- and twelve-month periods, respectively. The increase is due primarily to margins generated under MichCon’s new three-year gas sales program, which is part of its Regulatory Reform Plan (Note 2a). Under the gas sales program that began in January 1999, MichCon’s gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. This strategy is likely to continue producing favorable margins in each of the three years.
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Management’s Discussion and Analysis (Continued)
Gross margins for the 1999 six-month period also reflect higher gas sales resulting from colder weather compared to the same 1998 period. Additionally, gross margins for all 1999 periods reflect revenues from the continued growth in other gas-related services.
MichCon’s operations are seasonal, with gross margins and earnings concentrated in the first and fourth quarters of each calendar year. By the end of the first quarter, the heating season is largely over, and MichCon typically incurs substantially reduced gross margins and earnings in the second quarter and losses in the third quarter. The seasonal nature of MichCon’s operations is expected to be more pronounced as a result of its new gas sales program.
Effect of Weather on Gas Markets and Earnings
Quarter Six Months Twelve Months 1999 1998 1999 1998 1999 1998 Percent Warmer Than Normal (21.4 )% (24.8 )% (7.8 )% (20.1 )% (11.6 )% (12.9 )% Decrease From Normal in: Gas Markets (Bcf) (5.3 ) (6.1 ) (10.4 ) (25.3 ) (25.4 ) (26.2 ) Net Income (Millions) $ (5.1 ) $ (5.3 ) $ (10.3 ) $ (22.0 ) $ (23.7 ) $ (22.8 ) Gas Sales and End User Transportation revenues in total increased by $14.5 million and $85.0 million for the 1999 quarter and six-month period, respectively, and decreased by $4.9 million for the 1999 twelve-month period. Revenues were affected by fluctuations in gas sales and end user transportation deliveries that increased by .2 billion cubic feet (Bcf) and 12.6 Bcf in the current quarter and six-month period, respectively, and decreased by .5 Bcf in the 1999 twelve-month period. The fluctuations in gas sales and end user transportation deliveries were due primarily to weather, which was colder in all the 1999 periods compared to the corresponding 1998 periods. The effect of more favorable weather on deliveries in the 1999 twelve-month period was more than offset by a decrease in end user transportation deliveries as a result of the temporary shutdown of an industrial customer’s plant.
Revenues were also impacted by variations in the cost of the gas commodity component of gas sales rates. As previously discussed, this gas commodity component was fixed under MichCon’s new gas sales program at $2.95 per Mcf beginning in January 1999. Prior to 1999, MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. The gas commodity component of MichCon’s sales increased $.20 per Mcf (7%) and $.18 per Mcf (6%) for the 1999 quarter and six-month period, respectively, and decreased $.12 per Mcf (4%) for the 1999 twelve-month period.
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Management’s Discussion and Analysis (Continued)
Quarter Six Months Twelve Months 1999 1998 1999 1998 1999 1998 Gas Markets (Millions) Gas Sales $ 133.0 $ 123.6 $ 568.7 $ 490.5 $ 902.0 $ 913.2 End User Transportation 23.3 18.2 50.0 43.2 88.8 82.5 Intermediate Transportation 13.9 15.9 28.6 33.8 58.0 60.9 Other 15.4 15.1 36.3 34.5 66.5 61.8 $ 185.6 $ 172.8 $ 683.6 $ 602.0 $ 1,115.3 $ 1,118.4 Gas Markets (Bcf) Gas Sales 23.6 24.2 114.6 102.8 180.7 180.6 End User Transportation 31.8 31.0 74.2 73.4 140.8 141.4 55.4 55.2 188.8 176.2 321.5 322.0 Intermediate Transportation 135.0 148.4 262.3 296.9 503.0 601.1 190.4 203.6 451.1 473.1 824.5 923.1 Additionally, gas sales and end user transportation revenues in total were impacted by MichCon’s three-year customer choice program, which is also part of its Regulatory Reform Plan. Under the customer choice program that began in April 1999, approximately 70,000 or 6% of its customers are purchasing natural gas from suppliers other than MichCon. However, MichCon continues to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. MichCon’s customers who have chosen to purchase their gas from other suppliers are reflected as end user transportation customers rather than gas sales customers. Accordingly, gas sales revenues have decreased, partially offset by an increase in end user transportation revenues, resulting in a net decrease in total operating revenues due to the gas commodity component included in gas sales rates.
Intermediate Transportation revenues decreased $2.0 million, $5.2 million and $2.9 million in the 1999 quarter, six- and twelve-month periods, respectively. Intermediate transportation revenues reflect lower off-system volumes of 13.4 Bcf, 34.6 Bcf and 98.1 Bcf in the 1999 quarter, six- and twelve-month periods, respectively. A significant portion of the volume decrease was for 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. The decrease in intermediate transportation revenues for all 1999 periods is due in part to an adjustment in 1998 of revenues related to fees generated from tracking the transfer of gas title on MichCon’s transportation system. The decrease for all 1999 periods is also due to customers shifting volumes from a higher rate to a lower rate transportation route.
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Management’s Discussion and Analysis (Continued)
Other Operating Revenues increased $.3 million, $1.8 million and $4.7 million in the 1999 quarter, six- and twelve-month periods, respectively. The improvements are due to an increase in facility development and appliance maintenance services, late payment fees and other gas-related services.
Cost of Gas
Cost of gas is affected by variations in sales volumes and cost of purchased gas as well as related transportation costs. Under the Gas Cost Recovery (GCR) mechanism that was in effect through December 1998 (Note 2b), MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold had little effect on gross margins. Under MichCon’s new gas sales program, the gas commodity component of its sales rates is fixed. Accordingly, beginning in January 1999, changes in cost of gas sold directly impact gross margins and earnings.
Cost of gas sold increased $2.9 million and $33.7 million in the 1999 quarter and six-month period, respectively, and decreased $35.8 million in the 1999 twelve-month period. The increase in the current quarter and six-month period was due primarily to higher weather-driven sales volumes. Cost of gas sold was also impacted by a decrease in average prices paid of $.05 per Mcf (2%) in the 1999 six-month period and $.27 per Mcf (9%) in the current twelve-month period. Prices paid for gas sold in the 1999 second quarter increased by $.01 per Mcf.
Operation and Maintenance
Operation and maintenance expenses increased $2.1 million and $7.4 million in the 1999 quarter and six-month period, respectively, and decreased $3.4 million in the 1999 twelve-month period. The increase in the 1999 quarter and six-month period is due in part to additional computer system support costs associated with MichCon’s new customer information system as well as advertising costs associated with MichCon’s new gas sales program. Additionally, the 1999 quarter increase reflects higher uncollectible gas accounts expense due to higher gas sales revenues. The decrease in the 1999 twelve-month period is due to lower employee benefit costs, primarily pension and retiree healthcare costs, as well as lower uncollectible gas accounts expense. The 1998 six-and twelve-month periods benefited from an interstate pipeline company refund.
Depreciation and Depletion
Depreciation and depletion increased $1.3 million and $3.4 million in the 1999 quarter and six-month period, respectively, and decreased $1.4 million in the 1999 twelve-month period. Depreciation on higher plant balances impacted all 1999 periods. Additionally, the twelve-
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Management’s Discussion and Analysis (Continued)
month period comparison reflects the effect of lower depreciation rates for MichCon’s utility property, plant and equipment that became effective in January 1998.
Property and Other Taxes
Property and other taxes decreased $1.3 million, $.1 million and $2.8 million in the 1999 quarter, six- and twelve-month periods, respectively. The improvement in all 1999 periods is attributable to lower property taxes. The 1999 quarter and twelve-month periods were also impacted by lower Michigan Single Business Tax resulting from an increase in capital acquisition deductions.
Write-Down of Gathering Property
The property write-down of $24.8 million in the 1999 twelve-month period represents the impairment of a Michigan gas gathering system (Note 3).
Other Income and Deductions
Other income and deductions increased $.6 million in the 1999 quarter, and decreased $1.8 million and $8.1 million in the current six- and twelve-month periods, respectively. All 1998 periods were impacted by gains from the sale of property. The 1999 quarter and twelve-month period include slightly higher interest costs. Other income and deductions in the 1999 twelve-month period also include a change in minority interest reflecting the joint venture partners’ share of the write-down of the gas gathering properties (Note 3).
Income Taxes
Income taxes for all 1999 periods were impacted by an increase in pre-tax earnings. Income tax comparisons for the 1999 six- and twelve-month periods were also affected by the favorable resolution of prior years’ tax issues as well as the flow-through effect of certain book-to-tax temporary differences. The 1998 six- and twelve-month periods include stock-related tax benefits.
Capital Resources and Liquidity
Six Months 1999 1998 Cash and Cash Equivalents (in Millions) Cash Flow Provided From (Used For): Operating activities $ 222.6 $ 286.6 Financing activities (159.7 ) (206.8 ) Investing activities (58.7 ) (74.1 ) Net Increase in Cash and Cash Equivalents $ 4.2 $ 5.7 5
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Management’s Discussion and Analysis (Continued)
Operating Activities
MichCon’s cash flow from operating activities decreased $64.0 million during the 1999 six-month period as compared to the same 1998 period. The decrease was due primarily to higher working capital requirements, partially offset by higher earnings, after adjusting for non-cash items (depreciation and deferred taxes).
Financing Activities
MichCon’s cash used for financing activities decreased $47.1 million in the 1999 six-month period as compared to the same 1998 period due primarily to less short-term and long-term debt being repaid in 1999.
MichCon maintains a relatively consistent amount of cash and cash equivalents through the use of short-term borrowings. Short-term borrowings are normally reduced in the first part of each year as gas inventories are depleted and funds are received from winter heating sales. During the latter part of the year, MichCon’s short-term borrowings normally increase as funds are used to finance increases in gas inventories and customer accounts receivable. To meet its seasonal short-term borrowing needs, MichCon normally issues commercial paper that is backed by credit lines with several banks. MichCon has established credit lines to allow for borrowings of up to $150 million under a 364-day revolving credit facility and up to $150 million under a three-year revolving credit facility. The 364-day facility was renewed in July 1999. During the first six months of 1999, MichCon repaid $194.1 million of commercial paper, leaving borrowings of $24.3 million outstanding under this program at June 30, 1999.
During the 1999 quarter, MichCon issued $110 million of senior debt (Note 6) and repaid $50 million of first mortgage bonds.
Investing Activities
MichCon’s cash used for investing activities decreased $15.4 million in the 1999 six-month period as compared to the same 1998 period. The decrease was due to lower capital expenditures, primarily related to the 1998 period including the purchase of an office building previously leased. Capital expenditures primarily represent the construction of new distribution lines to attach new customers, new computer systems and improvements to existing storage, distribution, and transmission systems.
It is management’s opinion that MichCon will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.
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Management’s Discussion and Analysis (Continued)
Outlook
MichCon’s strategy is to aggressively expand its role as the preferred provider of natural gas and high-value energy services within Michigan. Accordingly, MichCon’s objectives are to increase revenues and control costs in order to deliver strong shareholder returns and provide customers with high-quality service at competitive prices.
MichCon has begun, and plans to continue capitalizing on opportunities resulting from the gas industry restructuring. MichCon is currently implementing its Regulatory Reform Plan, which includes a comprehensive experimental three-year customer choice program which is designed to offer all sales customers added choices and greater price certainty. Beginning April 1, 1999, a limited number of customers have the option of purchasing natural gas from suppliers other than MichCon. However, MichCon will continue to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. The Plan also suspended the GCR mechanism for customers who continue to purchase gas from MichCon and fixed the gas commodity component of MichCon’s sales rates at $2.95 per Mcf for the three-year period that began in January 1999. The suspension of the GCR mechanism allows MichCon to profit from its ability to purchase gas at less than $2.95 per Mcf. Also beginning in 1999, an income sharing mechanism allows customers to share in profits when actual returns on equity from utility operations exceed predetermined thresholds. The impact of weather and expenses incurred in the second half of 1999 will determine the actual amount of profit, if any, to be shared with customers.
Year 2000
As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon has implemented a corporate-wide, four-phase Year 2000 approach consisting of: i) inventory — identification of the components of MichCon’s systems, equipment and facilities; ii) assessment — assessing Year 2000 readiness and prioritizing the risks of items identified in the inventory phase; iii) remediation — upgrading, repairing and replacing non-compliant systems, equipment and facilities; and iv) testing — verifying items remediated. MichCon is on schedule to have its mission critical business systems, and measurement and control systems (including embedded microprocessors) Year 2000 ready as detailed below. The extension of the program to September 1999 reflects MichCon’s determination that additional testing and remediation is appropriate for some critical business and control systems for both MichCon
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Management’s Discussion and Analysis (Continued)
and its vendors. The estimated completion status of these systems and the projected status for the future follows:
Inventory Assessment Remediation Testing Business Systems: June 30, 1999 100% 100% 90% 80% September 30, 1999 100% 100% 100% 100% Measurement and Control Systems: June 30, 1999 100% 100% 98% 98% September 30, 1999 100% 100% 100% 100% Costs associated with the Year 2000 issue are not expected to have a material adverse effect on MichCon’s results of operation, liquidity and financial condition. The total costs are estimated to be between $3 million and $4 million, of which approximately $2.8 million was incurred through June 1999. The anticipated costs are not higher due in part to the ongoing replacement of significant old systems. New systems in process of being installed, as well as those installed over the past few years, are Year 2000 ready. These systems were necessary to maintain a high level of customer satisfaction and to respond to changes in regulation and increased competition within the energy industry.
MichCon anticipates a smooth transition to the Year 2000. However, the failure to correct a material Year 2000 problem could result in an interruption in or a failure of certain business activities and operations. Such interruptions or failures could have a material adverse effect on MichCon’s results of operations, liquidity and financial condition. Due to the uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of key operators, suppliers and government agencies, MichCon cannot certify that it will be unaffected by Year 2000 complications.
In order to reduce its Year 2000 risk, MichCon is developing contingency plans for mission-critical processes in the event of a Year 2000 complication. Contingency plans for several essential gas transmission facilities continue to be tested under a “power outage” scenario and have achieved excellent results. Contingency plans will continue to be refined throughout 1999 as MichCon works with operators, suppliers and governmental agencies.
Market Risk Information
As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon’s primary market risk arises from fluctuations in natural gas prices and interest rates. MichCon manages natural gas price and interest rate risk through the use of derivative instruments and limits the use of such instruments to hedging activities.
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Management’s Discussion and Analysis (Continued)
Natural Gas Price Risk
MichCon closely monitors and manages its exposure to natural gas price risk through a variety of risk management techniques. Natural gas swap agreements are used to manage MichCon’s exposure to the risk of market price fluctuations on natural gas purchase contracts. During the 1999 six-month period, there were no significant changes to MichCon’s natural gas price risk.
Interest Rate Risk
MichCon is subject to interest rate risk in connection with the issuance of variable and fixed-rate debt. In order to manage interest costs and risk, MichCon uses interest rate swap agreements to exchange fixed and variable-rate interest payment obligations over the life of the agreements without exchange of the underlying principal amounts. During the 1999 six-month period, there were no significant changes to MichCon’s interest rate risk.
New Accounting Pronouncements
Derivative and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133.” SFAS No. 137 changes the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
SFAS No. 133 requires all derivatives to be recognized in the balance sheet as either assets or liabilities measured at their fair value, and sets forth conditions in which a derivative instrument may be designated as a hedge. The Statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings.
MichCon manages gas price risk and interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. The effects of SFAS No. 133 on MichCon’s financial statements are subject to fluctuations in the market value of hedging contracts, which are, in turn, affected by variations in gas prices and in interest rates. Accordingly, management cannot quantify the effects of adopting SFAS No. 133 at this time.
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Management’s Discussion and Analysis (Concluded)
Forward-Looking Statements
The Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties as set forth in MichCon’s 1998 Annual Report on Form 10-K.
The Year 2000 disclosure is a Year 2000 Readiness Disclosure under the Year 2000 Information and Readiness Disclosure Act. Therefore, MichCon claims the full protections established by the Act.
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Michigan Consolidated Gas Company and SubsidiariesConsolidated Statement of Income (Unaudited)(Thousands of Dollars)
Three Months Ended Six Months Ended Twelve Months Ended June 30, June 30, June 30, 1999 1998 1999 1998 1999 1998 Operating Revenues (Note 2) $ 185,555 $ 172,787 $ 683,645 $ 602,014 $ 1,115,289 $ 1,118,448 Operating Expenses Cost of gas 60,410 57,512 308,761 275,101 485,189 521,026 Operation and maintenance 63,942 61,868 131,488 124,090 259,795 263,231 Depreciation and depletion 24,758 23,492 49,366 45,937 96,312 97,715 Property and other taxes 12,700 13,953 31,162 31,255 55,345 58,064 Write-down of gathering property (Note 4) — — — — 24,800 — Total operating expenses 161,810 156,825 520,777 476,383 921,441 940,036 Operating Income 23,745 15,962 162,868 125,631 193,848 178,412 Other Income and (Deductions) Interest income 946 822 1,945 1,934 5,699 4,107 Interest on long-term debt (11,525 ) (10,513 ) (22,491 ) (22,719 ) (44,656 ) (45,931 ) Other interest expense (1,181 ) (1,891 ) (3,836 ) (5,148 ) (10,801 ) (9,063 ) Minority interest (266 ) (398 ) (523 ) (1,143 ) 6,347 (2,092 ) Equity in earnings of joint ventures 572 361 1,013 950 2,009 1,508 Other (177 ) 585 287 706 (601 ) 1,345 Total other income and (deductions) (11,631 ) (11,034 ) (23,605 ) (25,420 ) (42,003 ) (50,126 ) Income Before Income Taxes 12,114 4,928 139,263 100,211 151,845 128,286 Income Tax Provision 3,949 1,914 47,125 35,533 47,409 47,712 Net Income Available for Common Stock $ 8,165 $ 3,014 $ 92,138 $ 64,678 $ 104,436 $ 80,574 Consolidated Statement of Retained Earnings (Unaudited)
(Thousands of Dollars)
Three Months Ended Six Months Ended Twelve Months Ended June 30, June 30, June 30, 1999 1998 1999 1998 1999 1998 Balance — Beginning of Period $ 472,440 $ 436,989 $ 406,144 $ 375,325 $ 440,003 $ 359,429 Add — Net income 8,165 3,014 92,138 64,678 104,436 80,574 480,605 440,003 498,282 440,003 544,439 440,003 Deduct — Cash dividends declared — — 17,500 — 63,657 — — Other — — 177 — 177 — Balance — End of Period $ 480,605 $ 440,003 $ 480,605 $ 440,003 $ 480,605 $ 440,003 The notes to the consolidated financial statements are an integral part of these statements.
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Consolidated Statement of Financial Position (Unaudited)(Thousands of Dollars)
June 30, December 31, 1999 1998 1998 Assets Current Assets Cash and cash equivalents $ 10,823 $ 20,032 $ 6,603 Accounts receivable, less allowance for doubtful accounts of $13,492, $14,132 and $8,928, respectively 142,017 136,248 142,818 Accrued unbilled revenues 20,302 15,500 86,767 Gas in inventory 43,892 35,617 56,969 Property taxes assessed applicable to future periods 48,473 43,152 71,165 Other 34,512 28,408 30,169 300,019 278,957 394,491 Deferred Charges and Other Assets Investment in and advances to joint ventures 19,853 20,436 19,343 Long term investments 66,202 36,532 65,556 Deferred environmental costs 28,404 27,934 28,169 Prepaid benefit costs 134,590 95,008 113,879 Other 66,758 52,612 59,007 315,807 232,522 285,954 Property, Plant and Equipment (Note 4) 2,942,856 2,843,708 2,889,020 Less — Accumulated depreciation and depletion 1,445,967 1,356,842 1,396,940 1,496,889 1,486,866 1,492,080 $ 2,112,715 $ 1,998,345 $ 2,172,525 Liabilities and Shareholder’s Equity Current Liabilities Accounts payable $ 89,662 $ 89,329 $ 98,891 Notes payable 28,319 4,067 221,169 Current portion of long-term debt and capital lease obligations 46,135 58,204 58,288 Gas inventory equalization (Note 1) 22,774 15,478 — Federal income, property and other taxes payable 86,097 80,931 61,059 Deferred gas cost recovery revenues — 29,139 14,980 Exchange gas payable 20,845 26,998 25,337 Customer deposits 15,830 14,900 18,769 Other 43,125 37,241 67,222 352,787 356,287 565,715 Deferred Credits and Other Liabilities Deferred income taxes 103,198 89,549 88,567 Unamortized investment tax credit 28,823 31,823 29,784 Tax benefits amortizable to customers 128,869 123,444 130,120 Accrued environmental costs 31,704 32,000 32,000 Minority interest 8,363 16,600 8,201 Other 51,663 43,926 51,460 352,620 337,342 340,132 Long-Term Debt, Including Capital Lease Obligations (Note 1) 686,004 624,014 619,835 Contingencies (Note 6) Common Shareholder’s Equity Common stock 10,300 10,300 10,300 Additional paid-in capital 230,399 230,399 230,399 Retained earnings 480,605 440,003 406,144 721,304 680,702 646,843 $ 2,112,715 $ 1,998,345 $ 2,172,525 The notes to the consolidated financial statements are an integral part of this statement.
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Consolidated Statement of Cash Flows (Unaudited)(Thousands of Dollars)
Six Months Ended June 30, 1999 1998 Cash Flow From Operating Activities Net income $ 92,138 $ 64,678 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation and depletion Per statement of income 49,366 45,937 Charged to other accounts 4,390 3,991 Deferred income taxes — current (11,003 ) (12,096 ) Deferred income taxes and investment tax credit — net 12,419 5,244 Other (1,388 ) (3,045 ) Changes in assets and liabilities, exclusive of changes shown separately 76,700 181,909 Net cash provided from operating activities 222,622 286,618 Cash Flow From Financing Activities Notes payable — net (192,850 ) (237,624 ) Issuance of long-term debt (Note 6) 106,535 153,052 Cash dividend paid applicable to common stock (17,500 ) — Retirement of long-term debt (55,918 ) (122,263 ) Net cash used for financing activities (159,733 ) (206,835 ) Cash Flow From Investing Activities Notes receivable — affiliate — net (1,669 ) — Capital expenditures (58,097 ) (74,503 ) Other — net 1,097 399 Net cash used for investing activities (58,669 ) (74,104 ) Net Increase in Cash and Cash Equivalents 4,220 5,679 Cash and Cash Equivalents, January 1 6,603 14,353 Cash and Cash Equivalents, June 30 $ 10,823 $ 20,032 Changes in Assets and Liabilities, Exclusive of Changes Shown Separately Accounts receivable — net $ (609 ) $ 57,377 Gas inventory equalization 22,774 15,478 Accrued/deferred gas cost recovery revenues (15,153 ) 42,001 Accrued unbilled revenues 66,465 76,396 Gas in inventory 13,077 4,584 Property taxes assessed applicable to future periods 22,692 21,675 Accounts payable (9,229 ) (40,928 ) Federal income, property and other taxes payable 25,038 2,301 Exchange gas payable (4,492 ) 24,935 Other current assets and liabilities (18,647 ) (12,890 ) Prepaid benefit costs (20,711 ) (9,218 ) Deferred assets and liabilities (4,505 ) 198 $ 76,700 $ 181,909 Supplemental Disclosures Cash paid for: Interest, net of amounts capitalized $ 30,314 $ 29,174 Federal income taxes $ 13,224 $ 12,541 The notes to the consolidated financial statements are an integral part of this statement.
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Notes to the Consolidated Financial Statements1. General
The accompanying consolidated financial statements should be read in conjunction with MichCon’s 1998 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year’s financial statements to conform with the 1999 presentation. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary for a fair presentation of the financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses and net income for the interim periods should not be construed as representative of revenues, expenses and net income for all or any part of the balance of the current year or succeeding periods.
2. Regulatory Matters
a. Regulatory Reform Plan
| As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon implemented its Regulatory Reform Plan in January 1999. The plan includes a new three-year gas sales program under which MichCon’s gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. | |
| The plan also includes a comprehensive experimental three-year customer choice program, which is subject to annual caps on the level of participation. The customer choice program began in April 1999, with approximately 70,000 customers choosing to purchase natural gas from suppliers other than MichCon. Plan years begin April 1 of each year, and the number of customers allowed to participate in the plan is limited to 75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume limitation on commercial and industrial participants. The volume limitation for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. Various parties have appealed the Michigan Public Service Commission’s (MPSC) approval of the plan. While management believes the plan will be upheld on appeal, there can be no assurance as to the outcome. |
b. Gas Cost Recovery Proceedings
| Prior to January 1999, the Gas Cost Recovery (GCR) process allowed MichCon to recover its cost of gas sold if the MPSC determined that such costs were reasonable and prudent. An annual GCR reconciliation proceeding provided a review of gas costs incurred during the previous year and determined whether gas costs had been overcollected or undercollected, and as a result, whether a refund or surcharge, including interest, was |
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Notes to the Consolidated Financial Statements (Continued)
| required to be returned to or collected from GCR customers. The GCR process was suspended with the implementation of MichCon’s Regulatory Reform Plan in January 1999. |
| In February 1999, MichCon filed its final GCR reconciliation case covering gas costs incurred during 1998 which indicates an overrecovery of $18,000,000, including interest. Management believes that 1998 gas costs were reasonable and prudent and that the MPSC will approve the gas costs incurred. However, management cannot predict the outcome of this proceeding. During the first quarter of 1999, MichCon refunded the overrecovery to customers as a reduction in gas sales rates. |
3. Property Write-Down
As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon recognized a $24,800,000 pre-tax loss ($11,200,000 net of taxes and minority interest) from the write-down of a gas gathering pipeline system in the third quarter of 1998. An analysis revealed that projected cash flows from the gathering system were not sufficient to cover the system’s carrying value. Therefore, an impairment loss was recorded representing the amount by which the carrying value of the system exceeded its estimated fair value.
4. 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 for 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. Approximately 58.9 Bcf and 57.8 Bcf of gas was included in inventory at June 30, 1999 and 1998, respectively.
5. Lines of Credit
MichCon has established credit lines that allow for borrowing of up to $150,000,000 under a 364-day revolving credit facility and up to $150,000,000 under a three-year revolving credit facility. These credit lines totaling $300,000,000 support MichCon’s commercial paper program. The 364-day facility was renewed in July 1999.
6. Long-Term Debt
In June 1999, MichCon issued $55,000,000 of 6.85% senior secured notes, due June 2038, and $55,000,000 of 6.85% senior secured notes, due June 2039. The notes are insured by a financial guaranty insurance policy and are rated AAA or its equivalent by the major rating agencies. The notes are redeemable on or after June 1, 2004.
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Notes to the Consolidated Financial Statements (Concluded)
7. Contingencies
MichCon is involved in certain legal and administrative proceedings before various courts and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes between MichCon and gas producers. Management cannot predict the final disposition of such proceedings, but believes that adequate provision has been made for probable losses. It is management’s belief, after discussion with legal counsel, that the ultimate resolution of those proceedings still pending will not have a material adverse effect on MichCon’s financial statements.
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Exhibits and Reports on Form 8-K
(a) Exhibits
| Exhibit | ||||
| Number | Description | |||
| 12-1 | Computation of Ratio of Earnings to Fixed Charges | |||
| 27-1 | Financial Data Schedule | |||
(b) Reports on Form 8-K
| Registrant filed a report on Form 8-K dated June 14, 1999, under Item 5, with respect to the offering of its 6.85% Senior Secured Insured Quarterly Notes due 2038 and its 6.85% Senior Notes due 2039 pursuant to the registration statement on Form S-3 (No. 333-56333) filed with the Securities and Exchange Commission under the Securities Act of 1933. The following documents were filed as exhibits thereto: |
| • | Purchase agreement dated June 4, 1999 with respect to the Senior Secured Insured Quarterly Notes due 2038 | |
| • | Purchase agreement dated June 4, 1999 with respect to the Senior Notes due 2039 | |
| • | Second Supplemental Indenture dated as of June 9, 1999 to the Senior Debt Securities Indenture dated as of June 1, 1998 between registrant and Citibank, N.A. | |
| • | Consent of PricewaterhouseCoopers LLP with respect to the Senior Secured Insured Quarterly Notes due 2038 | |
| • | Consent of PricewaterhouseCoopers LLP with respect to the Senior Notes due 2039 |
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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 |
| By: | /s/ ROBERT KASLIK |
|
|
|
| Robert Kaslik | |
| Controller |
Date: August 16, 1999
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Exhibit Index
| Exhibit No. | Description | |||
| 12.1 | Computation of Ratio of Earnings to Fixed Changes | |||
| 27-1 | Financial Data Schedule | |||