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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
(This Amendment No. 1 is filed as a result of the correction of a mathematical computation of the “Computation of Ratio of Earnings to Fixed Charges” in Exhibit 12-1 and 12-2 for the twelve-month periods ended June 30, 1999 and December 31, 1998 as well as the correction of information contained in Part II, Item 5. These Part II amended items represent corrections of the 1995 and prior summary of “Capitalized Costs Excluded From Amortization” and the inclusion of the “Sales, net of production costs” line item as a source of change in the standardized measure of discounted net cash flows since this line item was inadvertently omitted.)
FORM 10-Q/A
(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 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction ofincorporation or organization)500 Griswold Street, Detroit, Michigan
(Address of principal executive offices)38-2820658(I.R.S. EmployerIdentification No.)48226
(Zip Code)Registrant’s telephone number, including area code 313-256-5500
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 $.01 per share: 85,655,381
Other Information Exhibits And Reports On Form 8-K Signature EXHIBIT INDEX
INDEX TO FORM 10-Q/A
For Quarter Ended June 30, 1999
Page Number COVER i INDEX ii PART I — FINANCIAL INFORMATION Management’s Discussion and Analysis of Financial
Condition and Results of Operations1 Financial Statements 22 PART II — OTHER INFORMATION Item 5. Other Information 44 Item 6. Exhibits and Reports on Form 8-K 48 SIGNATURE 49 ii
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OTHER INFORMATIONSupplementary Information for Gas and Oil Producing Activities (Unaudited)
In December 1998, MCN accounted for its E&P segment as a discontinued operation as a result of its decision to sell all of its gas and oil properties. In August 1999, MCN announced a significantly revised strategic direction. Consistent with this revised strategy, as well as the result of the lowering of the bid for the Michigan E&P properties, MCN will now retain its natural gas producing properties in Michigan and continue selling its other E&P oil and gas properties. Accordingly, E&P’s operating results have been reclassified from discontinued operations to continuing operations. Refer to “Management’s Discussion and Analysis” and Note 6 to the Consolidated Financial Statements, included herein, for additional information regarding the E&P segment and management’s decision to retain the properties in Michigan. The following information is prepared in accordance with SFAS No. 69, “Disclosures About Oil and Gas Producing Activities” and related Securities and Exchange Commission (SEC) accounting rules. The information, as of or for the years ended December 31, would have been provided in MCN’s 1998 Annual Report on Form 10-K/ A if the E&P segment had not been classified as a discontinued operation.
MCNIC Oil & Gas Company (MOG), an indirect subsidiary of MCN, is engaged in natural gas and oil exploration, development and production. The full cost accounting method prescribed by the SEC is followed for investments in gas and oil properties. Under the full cost method, substantially all acquisition, exploration and development costs are capitalized.
The unit of production method is used for calculating depreciation, depletion and amortization (DD&A) on proved gas and oil properties. The average DD&A expense per thousand cubic feet equivalent was $.82, $.75 and $.70 in 1998, 1997 and 1996, respectively. Costs directly associated with the acquisition and evaluation of unproved gas and oil properties are excluded from the amortization base until the related properties are evaluated. Such unproved properties are assessed periodically, and a provision for impairment is made when appropriate.
Capitalized Costs
1998 1997 (in Thousands) Proved Properties $ 1,357,413 $ 1,033,492 Unproved Properties 99,611 265,809 1,457,024 1,299,301 SEC Ceiling Test Write-downs (Note 2c) 416,977 — Accumulated Depreciation, Depletion and Amortization 224,795 150,015 Net Capitalized Costs $ 815,252 $ 1,149,286 44
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OTHER INFORMATION (Continued)Capitalized Costs Excluded From Amortization
Unproved properties held by MCN are excluded from amortization until they have been evaluated. A summary of costs excluded from amortization at December 31, 1998, and the year in which they were incurred, follows:
Year Costs Incurred 1995 & Total 1998 1997 1996 Prior (in Thousands) Acquisition $ 43,131 $ 14,254 $ 17,119 $ 9,321 $ 2,437 Exploration 56,480 13,757 32,655 9,935 133 $ 99,611 $ 28,011 $ 49,774 $ 19,256 $ 2,570 The acquisition amount includes all costs incurred to purchase or lease property with unproved reserves.
Cost Incurred
1998 1997 1996 (in Thousands) Acquisition: Proved properties $ 53,377 $ 35,695 $ 60,340 Unproved properties 7,498 66,721 136,142 60,875 102,416 196,482 Exploration 52,948 143,580 65,160 Development 86,607 129,001 120,569 $ 200,430 $ 374,997 $ 382,211 Results of Operations
1998 1997 1996 (in Thousands) Operating Revenues: Unaffiliated customers $ 150,504 $ 144,041 $ 94,615 Affiliated customers 56,598 71,787 43,326 207,102 215,828 137,941 Production Costs 79,245 68,364 48,255 SEC Ceiling Test Write-downs 416,977 — — Depreciation, Depletion and Amortization 80,576 73,910 44,469 576,798 142,274 92,724 Income (Loss) Before Income Taxes (369,696 ) 73,554 45,217 Income Taxes: Income tax provision (benefit) (129,698 ) 26,997 16,438 Gas production tax credits (10,485 ) (17,797 ) (15,878 ) (140,183 ) 9,200 560 Results of Operations, Excluding Corporate And Interest Costs $ (229,513 ) $ 64,354 $ 44,657 Reserve Quantity Information
MCN’s proved reserves are located in the United States. Information on estimated gas and oil reserves that follows was obtained by MOG from the independent petroleum engineering
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OTHER INFORMATION (Continued)consultants Ryder Scott Company, Miller and Lents, Ltd., S.A. Holditch & Associates, Netherland, Sewell & Associates, Inc., and Williamson Petroleum Consultants, Inc.
1998 1997 Gas Oil Gas Oil (MMcf) (MBbl) (MMcf) (MBbl) Proved Developed and Undeveloped Reserves: Beginning of year 1,166,174 25,843 1,137,729 17,214 Revisions of previous estimates (66,188 ) (2,865 ) (30,260 ) (430 ) Extensions and discoveries 59,729 534 165,283 4,435 Production (82,040 ) (2,635 ) (78,218 ) (3,346 ) Sales of minerals in place (37,661 ) (8,389 ) (51,465 ) (1,019 ) Purchases of minerals in place 52,959 499 23,105 8,989 End of year 1,092,973 12,987 1,166,174 25,843 Proved Developed Reserves: Beginning of year 590,299 12,601 688,995 9,554 End of year 630,130 6,367 590,299 12,601 Standardized Measure of Discounted Future Net Cash Flows
The following presentation of the standardized measure of discounted future net cash flows is intended to be neither a measure of the fair market value of MCN’s gas and oil properties, nor an estimate of the present value of actual future cash flows to be obtained as a result of their development and production. It is based upon subjective estimates of proved reserves only and attributes no value to categories of reserves other than proved reserves, such as probable or possible reserves, or to unproved acreage. Furthermore, as it is based on year-end prices and costs adjusted only for existing contractual arrangements and assumes an arbitrary annual discount rate of 10%, it does not reflect the impact of future price and cost changes. Future income tax expenses were computed by applying statutory tax rates, adjusted for permanent differences and tax credits, to estimated future pre-tax net cash flows.
The standardized measure is intended to provide a better means for comparing the value of MCN’s proved reserves at a given time with those of other gas and oil producing companies than is provided by a simple comparison of raw proved reserve quantities.
1998 1997 1996 (in Thousands) Future Revenues $ 2,795,786 $ 3,121,124 $ 3,867,785 Future Production Costs 984,042 1,155,734 1,322,108 Future Development Costs 264,631 328,739 340,190 Future Net Cash Flows Before Income Taxes 1,547,113 1,636,651 2,205,487 Discount to Present Value at 10% 806,746 812,605 1,139,507 Present Value of Future Net Cash Flows Before Income Taxes 740,367 824,046 1,065,980 Future Income Taxes Discounted at 10% — 105,371 226,913 Future Tax Credits Discounted at 10% — (50,889 ) (62,207 ) Standardized Measure of Discounted Future Net Cash Flows $ 740,367 $ 769,564 $ 901,274 Future income taxes and tax credits have been excluded from the 1998 calculation since MOG is in a net operating loss position, and it is more likely than not that these tax benefits would not be realized by MOG on a stand-alone basis. However, MCN files a consolidated federal income tax return, which includes the taxable income or loss of MOG as well as MOG’s tax credits.
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OTHER INFORMATION (Concluded)Accordingly, it is management’s opinion that any tax benefits earned by MOG will be utilized by MCN in its consolidated tax returns.
The principal sources of change in the standardized measure of discounted future net cash flows were as follows:
1998 1997 1996 (in Thousands) Beginning of Year $ 769,564 $ 901,274 $ 521,907 Net changes in sales prices and production costs (67,085 ) (261,154 ) 126,526 Net change due to revisions in quantity estimates (59,106 ) (26,015 ) 5,061 Extensions, discoveries, additions and improved recovery, net of related costs 46,739 153,291 200,026 Development costs incurred, previously estimated 86,607 103,201 86,810 Changes in estimated future development costs (26,573 ) (120,219 ) (81,069 ) Sales, net of production costs (127,857 ) (147,464 ) (89,686 ) Net change in future income taxes 105,371 116,366 (85,616 ) Net change in federal tax credits (41,997 ) (17,797 ) (15,878 ) Sales of reserves in place (56,924 ) (83,985 ) — Purchases of reserves in place 41,525 48,685 193,550 Accretion of discount and other 70,103 103,381 39,643 End of Year $ 740,367 $ 769,564 $ 901,274 Additional data relating to E&P activities follows:
1998 1997 1996 Production Average Gas Sales Price (per Mcf) $ 2.04 $ 1.95 $ 1.96 Average Oil Sales Price (per Bbl) $ 12.58 $ 16.87 $ 20.18 Average Production Cost (per Mcf equivalent) $ .81 $ .70 $ .76
1998 1997 1996 Gross Net Gross Net Gross Net Drilling Activity Working Interest Well Completions: Exploratory: Productive 58 26 63 30 63 28 Dry 37 14 39 19 37 15 Total Exploratory 95 40 102 49 100 43 Development: Productive 536 335 574 354 355 230 Dry 15 6 20 9 12 6 Total Development 551 341 594 363 367 236 Total Working Interest Well Completions 646 381 696 412 467 279 Wells in Process of Drilling at End of Year 77 30 150 92 167 108
1998 1997 1996 Gross Net Gross Net Gross Net Producing Wells and Acreage Producing Wells United States 3,143 1,782 2,917 1,677 2,890 1,481 Developed Lease Acreage United States 623,076 352,315 663,767 344,818 519,107 287,964 Undeveloped Lease Acreage United States 2,693,767 1,148,920 2,592,915 1,239,908 1,701,063 970,873 47
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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 for MCN Energy Group Inc. 12-2 Computation of Ratio of Earnings to Fixed Charges for MCN Investment Corporation 23-1 Consent of Ryder Scott Company 23-2 Consent of Miller and Lents, Ltd. 23-3 Consent of S.A. Holditch & Associates 23-4 Consent of Netherland, Sewell & Associates, Inc. 23-5 Consent of Williamson Petroleum Consultants, Inc. 27-1 Financial Data Schedule — 1999. 27-2 Financial Data Schedule — 1998. (b) Reports on Form 8-K
| Registrant filed a report on Form 8-K dated August 2, 1999, under Item 5. The contents of the Form 8-K were three press releases issued by MCN on August 2, 1999 outlining its revised strategic direction, the naming of the leadership team to implement the new strategy and the 1999 second quarter earnings release. | |
| MCN announced a significantly revised strategic direction. Key aspects of the new corporate strategy include a regional rather than North American focus, and an emphasis on achieving operational efficiencies and growth through integration of existing businesses rather than building a portfolio of diverse, non-operated energy investments. Consistent with the new strategy, as well as the result of the lowering of the bid for the Michigan Exploration & Production (E&P) properties, MCN will retain its natural gas producing properties in Michigan. At year-end 1998, the E&P segment was classified as discontinued operations in preparation for the sale of the company’s entire E&P business. | |
| Key aspects of the new strategy include reorganizing the MCN family of businesses to include four primary operating segments (Gas Distribution, Midstream & Supply, Energy Marketing and Power) and an investment arm (Energy Holdings). Changes to the leadership team include: |
| Stephen E. Ewing | President & Chief Operating Officer (COO), MCN Energy Group Inc. | |
| Anne Cooke | President & CEO, MCN Energy Marketing | |
| Steve Kurmas | President & CEO, MCN Midstream & Supply | |
| Joseph Roberts | President & CEO, MCN Power | |
| President & CEO, MCN Energy Holdings |
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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.
| MCN ENERGY GROUP INC. |
Date: September 21, 1999
| By: |
/s/ GERARD KABZINSKI |
| Gerard Kabzinski | |
| Vice President and Controller |
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| Exhibit | ||||||
| Number | Description | |||||
| 12-1 | Computation of Ratio of Earnings to Fixed Charges for MCN Energy Group Inc. | |||||
| 12-2 | Computation of Ratio of Earnings to Fixed Charges for MCN Investment Corporation | |||||
| 23-1* | Consent of Ryder Scott Company | |||||
| 23-2* | Consent of Miller and Lents, Ltd. | |||||
| 23-3* | Consent of S.A. Holditch & Associates | |||||
| 23-4* | Consent of Netherland, Sewell & Associates, Inc. | |||||
| 23-5* | Consent of Williamson Petroleum Consultants, Inc. | |||||
| 27-1* | Financial Data Schedule. — 1999 | |||||
| 27-2* | Financial Data Schedule. — 1998 | |||||
