=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-10070
MCN CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Griswold Street, Detroit, Michigan 48226
(Address of principal executive (Zip Code)
offices)
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 October 31, 1995:
Common Stock, par value $.01 per share: 66,262,028
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INDEX TO FORM 10-Q
For Quarter Ended September 30, 1995
Page
Number
------
COVER i
INDEX ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements 13
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 1
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
ii
MCN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Quarterly seasonal loss decreases 45% -- MCN's results for the 1995
quarter improved significantly, generating a net loss that was $7.0 million
($.13 per share) lower than the prior year. Earnings for the 1995 nine- and
twelve-month periods decreased $1.7 million ($.10 per share) and $9.1 million
($.23 per share), respectively, over the comparable 1994 periods. All earnings
per share comparisons reflect an increase in the number of average common
shares outstanding as a result of MCN's issuance of 5.75 million shares in
March 1995. A summary of financial performance follows:
Quarter 9 Months 12 Months
------------------- --------------- ----------------
1995 1994 1995 1994 1995 1994
--------- --------- ------- ------- -------- ------
Net Income (Loss) (in Millions)
Gas Distribution $ (13.6) $ (19.5) $ 39.6 $ 44.7 $ 55.8 $ 65.5
Diversified Services 5.0 3.9 15.7 12.3 20.2 19.6
------- ------- ------ ------ ------ ------
$ (8.6) $ (15.6) $ 55.3 $ 57.0 $ 76.0 $ 85.1
======= ======= ====== ====== ====== ======
Earnings (Loss) Per Share
Gas Distribution $ (.21) $ (.33) $ .62 $ .75 $ .89 $ 1.11
Diversified Services .08 .07 .24 .21 .32 .33
------- ------- ------ ------ ------ ------
$ (.13) $ (.26) $ .86 $ .96 $ 1.21 $ 1.44
======= ======= ====== ====== ====== ======
_______________________________________________________________________________
Strategic direction -- MCN's strategic direction is to invest in a
portfolio of domestic and international gas-related projects, including gas
distribution, exploration and production, gathering and processing systems,
storage projects, cogeneration facilities and other areas of expertise. MCN is
continuing to pursue opportunities in these areas through both its Gas
Distribution and Diversified Services businesses, as subsequently discussed.
Gas Distribution
- ----------------
Lower operating expenses generate improved results -- Given the seasonal
nature of its business, Gas Distribution operations generally experience a loss
in the third quarter due to lower levels of natural gas sales during the summer
months. However, the 1995 third quarter net loss is an improvement of $5.9
million ($.12 per share) from the comparable 1994 period. This improvement was
due mainly to lower operating expenses, primarily pension and retiree health
care costs, and higher gas sales due to slightly colder weather. Earnings for
the 1995 nine- and twelve-month periods decreased $5.1 million ($.13 per share)
and $9.7 million ($.22 per share), respectively, from the same periods in 1994,
reflecting lower gas deliveries primarily resulting from warmer weather. These
decreases were partially offset by lower pension costs.
Quarter 9 Months 12 Months
----------------- ----------------- ------------------
1995 1994 1995 1994 1995 1994
------ -------- --------- ------- -------- --------
Effect of Weather on Gas Markets and Earnings
Percentage Colder (Warmer) than Normal N/A N/A (3.8)% 2.6% (8.5)% 1.2 %
Increase (Decrease) from Normal in:
Gas Markets (in Bcf) .5 (.8) (4.3) 5.6 (14.2) 4.5
Net Income (in Millions) $ .4 $ (.8) $ (3.7) $ 5.1 $ (12.7) $ 4.1
Earnings Per Share $ .01 $ (.01) $ (.06) $ .09 $ (.20) $ .07
1
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Gross Margin
Gross margin increases -- Gas Distribution gross margin (operating
revenues less cost of gas) increased for the quarter but decreased for the
nine- and twelve-month periods due to fluctuations in gas deliveries resulting
from the weather variations previously discussed. Gross margin for all 1995
periods was favorably affected by an increase in intermediate transportation
deliveries. In addition, the twelve-month period decrease was offset partially
by an increase in gas sales rates, reflecting a general rate increase of $15.7
million, effective January 1994.
Quarter 9 Months 12 Months
----------------- ---------------- --------------------
1995 1994 1995 1994 1995 1994
-------- ------- ------- ------- --------- ---------
Gas Distribution Operations (in Millions)
Operating Revenues* $109.0 $ 108.8 $ 724.3 $ 823.9 $ 1,026.5 $ 1,172.7
Cost of Gas 21.6 24.1 307.7 390.0 454.4 586.7
------ ------- ------- ------- --------- ---------
Gross Margin 87.4 84.7 416.6 433.9 572.1 586.0
------ ------- ------- ------- --------- ---------
Other Operating Expenses*
Operation & Maintenance 61.7 72.3 213.8 229.4 301.6 303.9
Depreciation, Depletion & Amortization 22.3 21.3 67.5 64.2 88.1 82.6
Property & Other Taxes 12.9 12.5 43.9 46.6 56.0 61.9
------ ------- ------- ------- --------- ---------
96.9 106.1 325.2 340.2 445.7 448.4
------ ------- ------- ------- --------- ---------
Operating Income (Loss) (9.5) (21.4) 91.4 93.7 126.4 137.6
------ ------- ------- ------- --------- ---------
Equity in Earnings of Joint Ventures .3 .3 .9 1.8 1.2 2.5
------ ------- ------- ------- --------- ---------
Other Income & (Deductions)*
Interest Income 1.2 1.1 3.3 3.2 4.3 4.1
Interest on Long-Term Debt (9.8) (6.6) (26.5) (19.8) (34.7) (26.3)
Other Interest Expense (.7) (2.5) (4.4) (6.2) (7.4) (9.0)
Other (1.2) (.9) (2.9) (2.6) (5.6) (7.4)
------ ------- ------- ------- --------- ---------
(10.5) (8.9) (30.5) (25.4) (43.4) (38.6)
------ ------- ------- ------- --------- ---------
Income (Loss) Before Income Taxes (19.7) (30.0) 61.8 70.1 84.2 101.5
Income Taxes (6.1) (10.5) 22.2 25.4 28.4 36.0
------ ------- ------- ------- --------- ---------
Net Income (Loss) $(13.6) $ (19.5) $ 39.6 $ 44.7 $ 55.8 $ 65.5
====== ======= ======= ======= ========= =========
<FN>
*Includes intercompany transactions
Gas sales and end user transportation deliveries in total were also
impacted by the weather, increasing slightly in the 1995 quarter but decreasing
in the 1995 nine- and twelve-month periods.
During 1994, MCN and Destec Energy, as equal partners, began construction
of a 123 megawatt cogeneration plant in Ludington, Michigan. In October 1995,
construction of the plant was completed and MichCon began providing end user
transportation of the natural gas needed to fuel the plant, approximately nine
Bcf annually.
Quarter 9 Months 12 Months
------------- ------------- --------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Gas Distribution Markets (in Bcf)
Gas Sales 14.4 13.8 136.8 148.2 193.0 213.6
End User Transportation 27.8 28.0 103.7 103.5 140.3 139.5
----- ----- ----- ----- ----- -----
42.2 41.8 240.5 251.7 333.3 353.1
Intermediate Transportation* 67.1 58.3 237.8 232.4 309.0 307.3
----- ----- ----- ----- ----- -----
109.3 100.1 478.3 484.1 642.3 660.4
===== ===== ===== ===== ===== =====
<FN>
*Includes intercompany volumes
2
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Intermediate transportation deliveries increased for all 1995 periods
primarily as a result of increased volumes of Antrim gas transported for
Michigan gas producers and brokers. Profit margins on intermediate
transportation services are considerably less than margins on gas sales or for
end user transportation markets.
In order to meet the increased demand by gas producers and brokers for
intermediate transportation services resulting from the significant increase in
Michigan Antrim gas production, MichCon filed a proposal before the Michigan
Public Service Commission (MPSC) to construct facilities to expand
transportation capacity. In March 1995, the MPSC approved MichCon's proposal.
The expansion project will require approximately $40 million for additional
pipeline and related facilities. Construction began during the 1995 second
quarter. A portion of the system is anticipated to be completed this year and
the remainder completed by early 1996. The expanded system is expected to
transport approximately 135 Bcf of Antrim gas annually, generating new revenues
of approximately $8 million per year.
Cost of Gas
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the Gas Cost Recovery (GCR) mechanism, MichCon's rates are set
to recover 100% of prudently and reasonably incurred gas costs. Therefore,
significant fluctuations in total gas costs have little or no effect on gross
margins and earnings.
As discussed in MCN's 1994 Annual Report on Form 10-K, MichCon's rates
are also set to recover its lost gas costs using an averaging method based on
historical lost gas experience. The difference between the historical average
lost gas amount and the actual lost gas amount is recorded to income at the end
of the seasonal cycle ended August 31 of each year. The lost gas adjustment for
the 1995 cycle, as compared to the 1994 cycle, resulted in a $3.5 million
increase in cost of gas for the quarter.
Cost of gas sold decreased in all 1995 periods from the comparable 1994
periods. The decrease experienced in the 1995 quarter is due primarily to a
$.42 (19.6%) decrease in the cost of gas sold per thousand cubic feet partially
offset by the effect of the lost gas adjustment discussed above and a 4%
increase in volumes sold. Lower sales volumes resulting from warmer weather, as
well as lower prices paid for natural gas in the spot market, resulted in
the decrease in cost of gas sold in the 1995 nine- and twelve-month periods.
The decline in market prices paid for gas resulted in a decrease in the cost of
gas sold per thousand cubic feet of $.46 (16.8%) and $.46 (16.3%) in the 1995
nine- and twelve-month periods, respectively, from the comparable 1994 periods.
MichCon will continue its supply strategy of purchasing gas under contracts
that tie the cost of gas to spot market prices.
A majority of MichCon's interstate gas supply contracts are priced based
on natural gas spot indices. To mitigate price volatility associated with gas
purchases, MichCon reserved the right to fix the prices it pays under some of
these contracts. In order to capture declining gas prices during 1994, MichCon
fixed the price on approximately 34 Bcf of gas in advance of the month of
purchase. There was a further decline in gas prices during 1994. Had MichCon
not fixed these prices, its cost of gas would have been approximately $10.0
million (1.9%) lower for the year ended December 31, 1994.
MichCon filed its 1994 GCR reconciliation case with the MPSC in the first
quarter of 1995. In this case, the MPSC will decide whether MichCon's 1994 gas
costs were reasonable and prudent. In July 1995, an intervenor filed testimony
taking issue with some of MichCon's decisions. On November 1, 1995, the
Administrative Law Judge in this proceeding issued a proposal for decision
adopting MichCon's position. An order in this case is expected at the end of
1995. MichCon believes that it acted reasonably and prudently by fixing the
gas prices based upon the information available at the time.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Other Operating Expenses
Operation and maintenance expenses decreased for all 1995 periods due to
lower benefit costs, primarily pension costs. In addition, the 1995 quarter and
nine-month period reflect lower retiree health care costs. The decrease in
operation and maintenance expenses for the 1995 twelve-month period was
partially offset by the impact of higher postretirement benefit costs being
recognized as a result of the new accounting requirements under Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." These costs are being recovered
in rates that became effective in January 1994. Management's continuing efforts
to reduce operating costs contributed to the decreases in operation and
maintenance expenses for all 1995 periods.
In March 1995, the U.S. House of Representatives voted to eliminate all
funding for the Low-Income Home Energy Assistance Program (LIHEAP). However,
several weeks later the U.S. Senate voted to restore the program's $1.3 billion
appropriation. Subsequently, the U.S. House Appropriations Committee adopted
1996 funding legislation that eliminates future energy assistance support. The
House is expected to support this funding bill, however, the Senate continues
to demonstrate strong bipartisan support for LIHEAP. President Clinton has
threatened to veto the House proposal if not modified. During September 1995,
Congress and President Clinton reached an agreement on a stopgap spending bill
that allowed the release of $140 million in 1996 LIHEAP funds.
LIHEAP currently provides approximately $78 million in heating assistance
to 385,000 Michigan households through the Department of Social Services, with
approximately 35% of the funds going to MichCon customers. Last year, $27
million in LIHEAP funds assisted 131,000 MichCon customers. A portion of any
decreased funding may result in increased uncollectibles expense. Future LIHEAP
funding remains uncertain. MichCon continues its vigorous efforts to maintain
full funding.
Depreciation and depletion increased in all 1995 periods due mainly to
higher plant balances, reflecting capital expenditures of $289.1 million over
the past two calendar years. The 1995 twelve-month period also reflects higher
depreciation rates that were implemented in January 1994.
Property and other taxes for the 1995 periods reflect fluctuations in
Michigan single business taxes due primarily to the changes in earnings. In
addition, the 1995 periods were also affected by lower property taxes due to
changes in Michigan legislation and increased taxes due to higher property
balances.
Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased in all 1995 periods due to lower
earnings from the Blue Lake gas storage venture. Blue Lake's earnings were
affected by reduced storage rates in all 1995 periods and higher interest
expense in the 1995 nine- and twelve-month periods. MCN's 50% interest in the
Blue Lake project is owned equally by Gas Distribution and Diversified
Services.
MCN to acquire interest in Missouri utility -- During 1995, MCN agreed
to acquire a 47.5% interest in a partnership formed to construct, own and
operate a natural gas transmission and distribution system located in southern
Missouri. The agreement is subject to MCN obtaining assurance from the
Securities and Exchange Commission (SEC) that the acquisition is consistent
with its exemption under the Public Utility Holding Company Act of 1935.
Construction of the system, which began in March 1995, is planned to be
completed in three phases by early 1997 at a cost of approximately $40
million. Initial operations began during November 1995 when construction of
the first phase was completed. The 475 mile pipeline system, when completed,
is expected to provide service to approximately 10,000 customers.
Other Income & Deductions
The increase in other income and deductions for all 1995 periods reflects
additional interest expense relating to the issuances of first mortgage bonds
of $80 million in September 1994 and an aggregate of $70 million in the 1995
second quarter.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Income Taxes
Income taxes increased for the 1995 quarter and decreased for the nine-
and twelve-month periods due primarily to changes in earnings. In addition, the
nine- and twelve-month periods reflect the favorable resolution of prior years'
tax issues.
Environmental Matters
As discussed in MCN's 1994 Annual Report on Form 10-K, MCN owns or
previously owned 17 former manufactured gas plant (MGP) sites. Some
contamination related to the byproducts of gas manufacturing was discovered at
each site. MCN is not involved in any administrative proceedings regarding
these former MGP sites, but has an approved remedial action plan for one site
with the Michigan Department of Environmental Quality (MDEQ) and is conducting
more extensive investigations at three other sites.
The MDEQ approved MichCon's remedial action plan for a former MGP site in
Muskegon, Michigan during the 1995 second quarter. The remedy includes limited
excavation and disposal of soils, a new soil cover and, if necessary, a ground
water capture and treatment system. MichCon has begun the limited excavation
and cover portion of the remedy. Offsite work and installation of the ground
water system is contingent upon execution of an agreement with the state of
Michigan.
In addition, MichCon was involved in litigation with an adjacent property
owner regarding another site. During the 1995 second quarter, the property
owner agreed to dismiss the litigation.
In its efforts to claim insurance coverage for costs associated with the
investigation and remediation of its former MGP sites, MCN has employed outside
consultants to assist in estimating its potential liabilities and to review its
archived insurance policies. Although MCN does not currently possess sufficient
information to reasonably estimate the amount of its potential liabilities, a
determination is expected during the fourth quarter. As a result, it is
probable that MCN will record in the fourth quarter an additional liability for
potential environmental investigation and remediation costs which may be
significantly in excess of the $3.2 million reserve balance at September 30,
1995.
Management believes that insurance coverage and the cost deferral and
rate recovery mechanism approved by the MPSC will prevent environmental costs
from having a material adverse impact on MCN's financial results.
MichCon Development Company, a 100% owned subsidiary of MichCon, has a
minority interest in four partnerships that are developing Harbortown, a
residential development that is being constructed on a 50 acre parcel along
the Detroit River. During the second quarter of 1995, the MDEQ approved a
remedial action plan that had been submitted by the Harbortown partnerships.
The plan includes certain landscaping requirements and, during future
development, excavation controls consistent with occupational safety and
health regulations. MichCon Development Company, along with the other general
partner, executed an agreement with the state of Michigan regarding
implementation of the plan. No further action will be taken by the MDEQ.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Diversified Services
- --------------------
Earnings improve for all operating businesses -- The Diversified Services
group reported higher 1995 quarterly and year-to-date earnings from all of its
operating units, with a combined increase of $1.1 million ($.01 per share) and
$3.4 million ($.03 per share) for the quarter and nine-month period,
respectively. Earnings for the 1995 twelve-month period were $20.2 million
($.32 per share) compared to earnings of $19.6 million ($.33 per share) for the
same 1994 period. The twelve-month period comparison reflects higher income
from both the gas services and computer operations services segments. The
continued growth in Diversified Services earnings was partially offset by
increased financing costs as a result of additional capital needed to fund
capital investments.
Quarter 9 Months 12 Months
------------- ------------- --------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Diversified Services Operations (in Millions)
Operating Revenues*
Gas Services $ 82.9 $ 77.5 $ 263.5 $ 265.2 $ 355.6 $ 349.2
Computer Operations Services 26.5 23.2 76.9 63.2 101.9 83.3
------- ------- ------- ------- ------- -------
109.4 100.7 340.4 328.4 457.5 432.5
------- ------- ------- ------- ------- -------
Operating Expenses*
Gas Services 73.7 72.3 234.4 248.3 316.4 321.2
Computer Operations Services 24.4 21.5 70.7 58.7 93.6 76.7
Corporate & Other 2.7 2.1 8.4 6.1 10.1 7.5
------- ------- ------- ------- ------- -------
100.8 95.9 313.5 313.1 420.1 405.4
------- ------- ------- ------- ------- -------
Operating Income (Loss)
Gas Services
Exploration & Production 6.4 3.6 16.3 6.8 23.2 8.1
Gas Marketing & Cogeneration .5 (.2) 6.7 4.2 7.7 10.9
Gas Gathering & Processing 2.3 1.8 6.1 5.9 8.3 9.0
------- ------- ------- ------- ------- -------
9.2 5.2 29.1 16.9 39.2 28.0
Computer Operations Services 2.1 1.7 6.2 4.5 8.3 6.6
Corporate & Other (2.7) (2.1) (8.4) (6.1) (10.1 ) (7.5)
------- ------- ------- ------- ------- -------
8.6 4.8 26.9 15.3 37.4 27.1
------- ------- ------- ------- ------- -------
Equity in Earnings of Joint Ventures 1.5 1.6 2.9 3.9 3.3 4.2
------- ------- ------- ------- ------- -------
Other Income & (Deductions)*
Interest Income .2 .8 1.3 2.0 1.7 2.3
Interest Expense (3.3) (3.7) (9.8) (8.2) (13.5) (10.1)
Dividends on Preferred Securities of Subsidiary (2.3) -- (7.0) -- (8.5) --
Minority Interest (.6) (.7) (1.8) (2.2) (2.5) (3.2)
Other -- (.2) 1.1 (.3) .4 (.3)
------- ------- ------- ------- ------- -------
(6.0) (3.8) (16.2) (8.7) (22.4) (11.3)
------- ------- ------- ------- ------- -------
Income Before Income Taxes 4.1 2.6 13.6 10.5 18.3 20.0
------- ------- ------- ------- ------- -------
Income Taxes
Current and Deferred Provision 1.7 1.0 5.3 4.0 7.6 7.6
Federal Gas Production Tax Credits (2.6) (2.3) (7.4) (5.8) (9.5) (7.2)
------- ------- ------- ------- ------- -------
(.9) (1.3) (2.1) (1.8) (1.9) .4
------- ------- ------- ------- ------- -------
Net Income $ 5.0 $ 3.9 $ 15.7 $ 12.3 $ 20.2 $ 19.6
======= ======= ======= ======= ======= =======
<FN>
*Includes intercompany transactions
6
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Gas Services
Operating income increases -- Gas services' increase in operating income
of $4.0 million, $12.2 million and $11.2 million for the 1995 quarter, nine-
and twelve-month periods, respectively, primarily reflects higher earnings from
gas exploration & production (E&P) operations. Improved results from both the
gas marketing & cogeneration and gas gathering & processing businesses are also
reflected in the increases for the 1995 quarter and nine-month period.
Quarter 9 Months 12 Months
----------- ------------ ------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Diversified Services Gas Statistics* (in Bcf)
Gas Sales
Gas Marketing & Cogeneration 37.9 33.3 114.0 104.4 151.9 137.2
Exploration & Production** 4.5 2.0 10.8 4.6 13.7 4.7
Transportation 8.6 4.4 23.1 14.8 28.8 20.1
---- ---- ----- ----- ----- -----
51.0 39.7 147.9 123.8 194.4 162.0
==== ==== ===== ===== ===== =====
Company Production 8.6 4.8 21.7 10.9 27.3 12.2
==== ==== ===== ===== ===== =====
Gas Processed 4.3 -- 11.2 -- 13.2 --
==== ==== ===== ===== ===== =====
<FN>
* Includes intercompany volumes.
** Represents gas sales made directly to third parties by E&P operations. Other
E&P production is sold to affiliated companies for marketing.
Exploration & production operating income increased $2.8 million for the
1995 quarter, and $9.5 million and $15.1 million for the nine- and twelve-month
periods, respectively. The results reflect a significantly higher level of gas
produced from properties that have been acquired since mid-1994 and the
development of other new projects during 1994 and 1995. As of September 1995,
MCN owned interests in gas and oil properties in 16 states with over 600 Bcf of
proved gas reserves.
E&P operating results were also impacted by lower unit operating costs,
specifically a lower average production (lifting) rate. The lower production
costs have been achieved as production volumes have risen, nearly doubling
during the 1995 nine-month period. Additionally, the depreciation rate for the
nine- and twelve-month periods has fallen due to the discovery or addition of
over 225 Bcf (54%) of new lower cost proved reserves during 1995. The lower
unit operating costs have been partially offset by a lower average market price
for gas sales. The impact of the lower sales rates has been mitigated by MCN's
risk management strategy, as subsequently discussed. Additionally, E&P
operations have increased the earnings of the Diversified Services group
through the generation of increased federal gas production tax credits.
MCN continues expansion of E&P program -- MCN has made significant
investments in natural gas reserves during the 1995 nine-month period,
investing over $150 million. The investments are consistent with MCN's
strategy to significantly grow the E&P business, but minimize risk by
diversifying its investments along the lines of geography, geology, risk
profile and technology, as well as by partnering with operators who bring
capital and expertise. Through September 1995, approximately 35% of E&P
investments have been made to acquire properties. The remaining 65% of
investments have been made for drilling programs that generally are
anticipated to have high success rates. In September 1995, MCN announced the
acquisition of a 60% joint venture interest in a $65 million offshore oil and
gas exploration and development program in the Gulf of Mexico. The joint
venture party contributes existing gas reserves and provides the project with
development drilling opportunities.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Gas marketing & cogeneration operating income for the 1995 quarter and
nine-month period increased $.7 million and $2.5 million, respectively, from
the comparable 1994 periods due to more favorable margins. Additionally,
operating income in the 1995 quarter and nine-month period reflect increases
in gas sales volumes of 14% and 9%, respectively. As subsequently discussed,
margins were affected by the use of natural gas hedging contracts.
Operating income for the 1995 twelve-month period decreased $3.2 million
despite a 10.7% increase in gas sales. The decrease reflects increased costs
associated with higher storage and transportation capacity. The higher storage
and transportation costs were incurred to support further anticipated increases
in the level of gas sales in future periods.
Risk management strategy -- MCN primarily manages price risk through the
maintenance of a portfolio of gas supply and gas sales agreements. MCN uses
natural gas futures, options and swap contracts to manage its price risk. As of
September 30, 1995, net open positions over the next ten years are minimal and
therefore the price risk has been largely hedged.
Gas gathering & processing operating income increased $.5 million and $.2
million for the 1995 quarter and nine-month period, respectively. Earnings were
favorably affected by increased volumes transported and treated through new
pipeline extensions and gas processing plants. The processing plants, which
became operational in late 1994 and early 1995, reduce carbon dioxide levels in
Michigan Antrim gas.
Operating income for the 1995 twelve-month periods was down $.7 million,
despite an increase in volumes transported and processed. Due to the
competitive transportation market in northern Michigan, the average
transportation rate on volumes of Michigan Antrim gas transported through the
Saginaw Bay pipeline system has been lowered. Additionally, as discussed in
MCN's 1994 Annual Report on Form 10-K, transportation revenues will be affected
by a decrease in the transportation rate of one major customer that will become
effective in January 1996. The rate decrease is in accordance with the terms of
a 15-year contract that reduces the transportation rate for the last 10 years
of the agreement.
MCN is evaluating a 1995 fourth quarter consolidation of its Michigan
pipeline system through the transfer of its Michigan gathering and
transportation network from its Diversified Services business to its Gas
Distribution business. The transfer is being considered in order to
consolidate MCN's Michigan gathering pipeline activities within one business
unit and to better respond to current market developments that have arisen as
a result of the growing demand for transportation services attributable to the
significant increase in Michigan Antrim gas production. MCN's Diversified
Services business would continue to pursue opportunities to build and acquire
gas gathering facilities outside of Michigan.
Computer Operations Services
Operating income increases over 20% -- Computer operations services'
operating income increased $.4 million for the current quarter, and $1.7
million for both the 1995 nine- and twelve-month periods. The improvements
reflect double-digit percentage increases in operating revenues from new
business added throughout 1994 and from increased services to existing
customers.
During the 1995 quarter, MCN's computer operations began providing
services to two new customers. Long-term contracts with these customers were
signed during the second quarter of 1995, representing approximately $10
million in annualized revenues. The new contracts are a result of MCN's
continuing efforts to grow the computer services business and to diversify its
customer base.
Corporate & Other
All 1995 periods reflect higher administrative and general expenses
associated with the development of new projects within the Diversified Services
group.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased during all 1995 periods. The
decrease for gas storage joint ventures reflects lower earnings from the Blue
Lake gas storage project due to a reduction in storage rates in all 1995
periods, as well as higher interest expense for the 1995 nine- and twelve-month
periods. Earnings from the gas marketing and gas processing joint ventures have
been impacted by the sale of a Canadian gas brokering partnership and two gas
processing facilities in the first quarter of 1995. The loss in other joint
ventures for the 1994 twelve-month period includes a reserve for the write-off
of assets related to the natural gas torch business.
Quarter 9 Months 12 Months
----------- ------------ ------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Equity in Earnings of Joint Ventures
(in Millions)
Gas Storage $ 1.1 $ 1.3 $ 3.4 $ 3.8 $ 3.8 $ 4.6
Gas Marketing & Cogeneration (.3) (.1) (.9) (1.0) (1.2) (1.3)
Gas Gathering & Processing .1 .4 .2 1.4 .6 1.9
Other .6 -- .2 (.3) .1 (1.0)
----- ----- ----- ------ ------ ------
$ 1.5 $ 1.6 $ 2.9 $ 3.9 $ 3.3 $ 4.2
===== ===== ===== ====== ====== ======
MCN acquires interest in offshore gas pipeline -- Through its continuing
efforts to expand its gas gathering & processing business, MCN acquired a
one-third interest in a natural gas, oil and condensate gathering system in the
Gulf of Mexico during the 1995 quarter. The interest was acquired from Blue
Dolphin Energy Company for $10 million. The system includes a 40 mile pipeline,
separation facility and a barge loading terminal that is located in an area
that has access to significant natural gas reserves of approximately 250 Bcf
and oil reserves of approximately 15 million barrels.
Cogeneration plant begins operations -- In October 1995, the Michigan
Power Project, a 123 megawatt cogeneration plant in Ludington, Michigan, began
commercial operations. The $150 million facility provides electricity to
Consumers Power Company and steam to Dow Chemical. The facility is owned and
operated by an equal partnership between MCN and Destec Energy. MCN, through
its gas marketing & cogeneration business group and Gas Distribution
operations, will supply and transport the nine Bcf of natural gas needed
annually to fuel the plant.
In 1993, MCN acquired a 40% interest in a partnership which was formed to
own and operate a $120 million, 42 Bcf underground natural gas storage field in
southeastern Michigan. In March 1995, MCN acquired the remaining 60% interest
in the partnership, giving MCN 100% control over the development of the storage
field. During the second quarter of 1995, MCN completed the sale of a 50%
interest in the project to a third party. The development of the storage field
is awaiting the negotiation of long-term agreements with potential customers.
Other Income & Deductions
All 1995 periods reflect higher interest costs on increased borrowings
required to finance capital investments in the Diversified Services operations,
as well as dividends on $100 million of preferred securities of a subsidiary
which were issued in November 1994. Other income and deductions for the 1995
periods include the reversal of an uncollectible reserve on an advance made to
a joint venture.
Income Taxes
Income taxes for all 1995 periods were favorably impacted by increased
federal gas production tax credits related to E&P projects. This impact was
offset partially by taxes on improved pretax earnings in the 1995 quarter and
nine-month period.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
CAPITAL RESOURCES AND LIQUIDITY
Operating Activities
- --------------------
MCN's cash flow from operating activities increased $40.5 million during
the 1995 nine-month period over the comparable 1994 period. The increase was
due primarily to higher income, after adjusting for depreciation and deferred
taxes, and lower working capital requirements.
9 Months
-------------
1995 1994
---- ----
Cash Flow from Operating Activities (in Millions)
Gas Distribution $ 117.9 $ 108.2
Diversified Services 39.8 26.6
------- -------
157.7 134.8
Changes in Assets and Liabilities 84.3 66.7
------- -------
Cash Flow from Operating Activities $ 242.0 $ 201.5
======= =======
Financing Activities
- --------------------
MCN sold 5.75 million shares of new common stock in a public offering
during the 1995 first quarter, generating net proceeds of approximately $99
million. Proceeds from the common stock issuance were used to fund capital
expenditures, to repay loans under bank credit agreements and for general
corporate purposes.
MCN also issues new shares of common stock pursuant to its Dividend
Reinvestment and Stock Purchase Plan and various employee benefit plans. During
1995, MCN anticipates the issuance of new shares of common stock pursuant to
these plans, generating approximately $17 million. During the first nine months
of 1995, MCN issued approximately 664,000 shares, generating $11.8 million.
Gas Distribution
During the latter part of the year, cash and cash equivalents decrease as
funds are used to finance increases in gas inventories and customer accounts
receivable. Short-term debt is normally reduced in the first part of each year
as gas inventories are depleted and funds are received from winter heating
sales. To meet its seasonal short-term borrowing needs, MichCon normally issues
commercial paper which is backed by credit lines with several banks. MichCon
has established credit lines to allow for borrowings of up to $100 million
under a 364 day revolving credit facility and up to $150 million under a three
year revolving credit facility. Commercial paper of $109.9 million was
outstanding as of September 30, 1995 under these lines. MichCon's commercial
paper is currently rated "A-1" or its equivalent by the major rating agencies.
In May 1995, MichCon filed a shelf registration statement with the SEC
for the issuance of up to $150 million of first mortgage bonds. This filing,
along with MichCon's existing shelf registrations of $30 million, provided
MichCon the ability to issue up to $180 million of first mortgage bonds.
During the 1995 second quarter, MichCon issued $70 million of first mortgage
bonds under shelf registration statements. The proceeds from the bonds were
used to repay short-term obligations and will also be used to finance
MichCon's capital expenditures and for general corporate purposes. MichCon's
capital requirements and general financial market conditions will affect the
timing and amount of future debt issuances. MichCon's capitalization objective
is to maintain a ratio of approximately 50% debt to 50% equity. In June 1995,
Duff & Phelps raised its "A" rating on MichCon's first mortgage bonds to "A+."
MichCon's first mortgage bonds carry the equivalent of an "A" rating by the
other major rating agencies.
In 1994, MichCon began a Trust Demand Note program which allows MichCon
to borrow up to $25 million. At September 30, 1995, there were no borrowings
under this program.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Continued)
Construction of the $40 million transmission and distribution system
located in southern Missouri will be funded through construction financing and
$16 million of partner contributions. Through September 30, 1995, MCN has
invested a total of $10.6 million in the project. Construction financing of $25
million was obtained in October 1995. MCN has issued a guaranty for the full
amount of this financing, and one of the parties to the project has agreed to
reimburse MCN for 50% of any payments made as a result of this guaranty. The
guaranty will remain in place until permanent financing is established, which
is anticipated to be October 1997.
Diversified Services
In anticipation of future permanent capital requirements, MCN Investment
and MCN filed a joint shelf registration statement with the SEC in October 1995
for the issuance of up to $200 million of debt securities. The shelf
registration became effective in November 1995. MCN Investment's capital
requirements and general market conditions will affect the timing and amount of
future debt issuances.
Prior to the 1995 quarter, MCN Investment maintained credit lines of $320
million to finance capital investments and working capital requirements of its
subsidiaries. In July 1995, MCN Investment initiated a $400 million commercial
paper program and increased its credit lines to $400 million to allow for all
commercial paper issuances to be backed by such lines. Commercial paper of $182
million was outstanding as of September 30, 1995 under these lines. MCN
Investment's commercial paper is currently rated the equivalent of "A-2" or
better by the major rating agencies.
In order to finance continued investments in exploration and production
activities, MCN's E&P subsidiary obtained $100 million under a five year term
loan during the third quarter of 1995. Borrowings outstanding are at certain
alternative variable rates at MCN's option.
Investing Activities
- --------------------
Capital investments in 1995 to exceed $600 million -- Capital investments
increased $168.7 million in the 1995 nine-month period compared to the same
period in 1994. The increase was due to higher capital expenditures made by
both Gas Distribution and Diversified Services. Gas Distribution capital
expenditures include the Antrim expansion project and construction of new
distribution lines to reach communities not previously served by MichCon.
Diversified Services investments reflect higher E&P expenditures of $41.9
million, as well as expenditures made for the Michigan Power joint venture
cogeneration project and the Blue Dolphin gathering system acquisition.
During the second quarter of 1995, the MPSC approved MichCon's request
to construct and operate a 59 mile loop of the Milford to Belle River Pipeline
for approximately $80 million. The pipeline will improve the overall
reliability and efficiency of MichCon's gas storage and transmission system by
serving as a back-up means of transportation in the event of disruptions in
the operation of the existing pipeline or other facilities used to supply gas
to MichCon's system. Construction of the pipeline will begin in the first
quarter of 1996 and completion is expected in early 1997.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS--(Concluded)
9 Months
-------------
1995 1994
---- ----
Capital Investments (in Millions)
Consolidated Capital Expenditures:
Gas Distribution $ 155.8 $ 92.7
Diversified Services 179.1 123.3
------- -------
334.9 216.0
------- -------
MCN's Share of Joint Venture Capital Expenditures:
Gas Cogeneration 32.8 --
Other 10.3 3.9
------- -------
43.1 3.9
------- -------
Acquisition 10.5 --
------- -------
Minority Partners' Share of Consolidated Capital
Expenditures (.1) (.2)
------- -------
Total Capital Investments $ 388.4 $ 219.7
======= =======
MCN's strategic direction is to grow significantly by investing in a
portfolio of gas-related projects. Accordingly, MCN's capital investments are
anticipated to range from $500 million to $750 million annually over the next
several years. For 1995, MCN anticipates investing approximately $250 million
in Gas Distribution to add new customers, develop new gas transportation
markets and make improvements to existing storage and transmission systems.
Approximately $400 million is expected to be spent in Diversified Services, of
which $40 million will be incurred to complete the Michigan Power cogeneration
facility. The remainder is expected to be spent primarily in the acquisition
and development of E&P properties.
The proposed level of investments in 1995 and future years will increase
capital requirements materially in excess of internally generated funds and
require the issuance of additional debt and equity securities. As it expands
its business, MCN's capitalization objective is to maintain a strong balance
sheet with a ratio of approximately 50% debt to 50% equity, excluding
nonrecourse project debt. Including nonrecourse debt, MCN has targeted a ratio
of approximately 60% debt to 40% equity. It is management's opinion that MCN
and its subsidiaries will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
ACCOUNTING PRONOUNCEMENTS
During the second quarter of 1995, MCN adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets," which requires the impairment of
property and intangibles to be considered whenever evidence suggests a lack of
recoverability. The Statement also modifies existing practice and guidance with
respect to impairment of regulatory assets under SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation." Under SFAS No. 121, regulatory
assets recorded as a result of SFAS No. 71 must continue to be probable of
recovery in rates at all times, rather than only at the time the regulatory
asset is recorded. As such, regulatory assets currently recorded by the Gas
Distribution group may require adjustment in the future if recovery is no
longer probable. Adoption of this Statement had no effect on MCN's financial
statements.
12
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
(Thousands of Dollars)
September 30, December 31,
----------------- ------------
1995 1994 1994
---- ---- ----
ASSETS
Current Assets
Cash and cash equivalents, at cost (which
approximates market value) $ 16,825 $ 14,651 $ 11,547
Accounts receivable, less allowance for doubtful
accounts of $13,325, $17,960 and $16,101,
respectively 157,375 163,152 214,158
Accrued unbilled revenues 19,081 20,108 83,053
Gas in inventory 154,987 168,533 131,649
Property taxes assessed applicable to future
periods 22,702 18,470 54,728
Gas receivable 5,493 8,865 21,069
Other 31,421 34,884 27,306
----------- ----------- -----------
407,884 428,663 543,510
----------- ----------- -----------
Deferred Charges and Other Assets
Investment in and advances to joint ventures 81,227 61,712 64,505
Deferred postretirement benefit cost 15,363 22,718 20,670
Other 128,450 108,852 123,501
----------- ----------- -----------
225,040 193,282 208,676
----------- ----------- -----------
Property, Plant and Equipment, at cost
Gas distribution 2,357,248 2,182,530 2,206,462
Exploration and production 432,124 203,442 277,118
Gas gathering and processing 79,460 57,567 67,889
Computer operations and other 59,304 44,628 53,356
----------- ----------- -----------
2,928,136 2,488,167 2,604,825
Less -- Accumulated depreciation and depletion 1,196,535 1,115,771 1,112,387
----------- ----------- -----------
1,731,601 1,372,396 1,492,438
----------- ----------- -----------
$ 2,364,525 $ 1,994,341 $ 2,244,624
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 129,742 $ 112,749 $ 142,647
Notes payable (Note 4) 150,820 120,278 228,807
Current portion of long-term debt, capital lease
obligations and redeemable cumulative preferred
securities 7,226 6,077 7,319
Federal income, property and other taxes payable 55,941 55,904 86,972
Refunds payable to customers 2,690 29,282 19,560
Customer deposits 10,294 10,569 11,581
Other 82,595 72,147 67,809
----------- ----------- -----------
439,308 407,006 564,695
----------- ----------- -----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 103,137 72,809 93,326
Unamortized investment tax credit 37,270 39,158 38,684
Tax benefits amortizable to customers 112,257 124,329 115,067
Accrued postretirement benefit cost 17,721 26,578 26,060
Minority interest 17,911 18,049 18,670
Other 90,356 93,869 88,490
----------- ----------- -----------
378,652 374,792 380,297
----------- ----------- -----------
Long-Term Debt, including capital lease obligations
(Notes 3 and 4) 811,546 709,311 685,519
----------- ----------- -----------
Redeemable Cumulative Preferred Securities of
Subsidiaries 100,000 2,618 102,618
----------- ----------- -----------
Commitments and Contingencies (Note 5)
Common Shareholders' Equity
Common stock 662 596 598
Additional paid-in capital 442,460 328,262 331,571
Retained earnings 192,353 172,395 179,862
Unearned compensation (456) (639) (536)
----------- ----------- -----------
635,019 500,614 511,495
----------- ----------- -----------
$ 2,364,525 $ 1,994,341 $ 2,244,624
=========== =========== ===========
<FN>
The notes to the consolidated financial statements are an integral part of this
statement.
13
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ----------------- -------------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Operating Revenues $ 213,195 $ 204,389 $ 1,044,287 $ 1,133,713 $ 1,456,374 $ 1,581,493
--------- --------- ----------- ----------- ----------- -----------
Operating Expenses
Cost of gas 79,067 86,543 492,342 605,344 710,434 870,108
Operation and maintenance 90,418 95,453 294,723 291,271 402,677 382,432
Depreciation, depletion and amortization 29,382 25,188 88,418 77,087 114,951 97,131
Property and other taxes 15,203 13,810 50,467 51,002 64,453 67,157
--------- --------- ----------- ----------- ----------- -----------
Total operating expenses 214,070 220,994 925,950 1,024,704 1,292,515 1,416,828
--------- --------- ----------- ----------- ----------- -----------
Operating Income (Loss) (875) (16,605) 118,337 109,009 163,859 164,665
--------- --------- ----------- ----------- ----------- -----------
Equity in Earnings of Joint Ventures 1,822 1,900 3,889 5,688 4,490 6,730
--------- --------- ----------- ----------- ----------- -----------
Other Income and (Deductions)
Interest income 1,187 1,594 4,534 4,788 6,239 5,966
Interest on long-term debt (11,882) (9,409) (33,035) (26,676) (44,572) (33,219)
Other interest expense (1,980) (3,085) (7,689) (7,103) (11,321) (11,820)
Dividends on preferred securities of subsidiaries (2,398) (115) (7,213) (366) (8,865) (542)
Minority interest (661) (719) (1,829) (2,187) (2,521) (3,182)
Other (908) (959) (1,605) (2,500) (4,746) (7,151)
--------- --------- ----------- ----------- ----------- -----------
Total other income and (deductions) (16,642) (12,693) (46,837) (34,044) (65,786) (49,948)
--------- --------- ----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes (15,695) (27,398) 75,389 80,653 102,563 121,447
Income Tax Provision (Benefit) (7,068) (11,828) 20,114 23,624 26,549 36,390
--------- --------- ----------- ----------- ----------- -----------
Net Income (Loss) $ (8,627) $ (15,570) $ 55,275 $ 57,029 $ 76,014 $ 85,057
========= ========= =========== =========== =========== ===========
Earnings (Loss) Per Share $ (.13) $ (.26) $ .86 $ .96 $ 1.21 $ 1.44
========= ========= =========== =========== =========== ===========
Average Common Shares Outstanding 66,103 59,492 64,214 59,294 63,075 59,196
========= ========= =========== =========== =========== ===========
Dividends Declared Per Share $ .2225 $ .2150 $ .6675 $ .6450 $ .8900 $ .8600
========= ========= =========== =========== =========== ===========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
(Thousands of Dollars)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ----------------- -------------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Balance -- Beginning of period $ 215,801 $ 200,748 $ 179,862 $ 153,589 $ 172,395 $ 138,222
Add -- Net income (loss) (8,627) (15,570) 55,275 57,029 76,014 85,057
--------- --------- --------- --------- --------- ---------
207,174 185,178 235,137 210,618 248,409 223,279
Deduct -- Cash dividends declared on common stock 14,821 12,782 42,784 38,220 56,056 50,880
Other -- 1 -- 3 -- 4
--------- --------- --------- --------- --------- ---------
Balance -- End of period $ 192,353 $ 172,395 $ 192,353 $ 172,395 $ 192,353 $ 172,395
========= ========= ========= ========= ========= =========
<FN>
The notes to the consolidated financial statements are an integral part of
these statements
14
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
-----------------
1995 1994
---- ----
Cash Flow from Operating Activities
Net income $ 55,275 $ 57,029
Adjustments to reconcile net income to net cash
provided from operating activities
Depreciation, depletion and amortization
Per statement of income 88,418 77,087
Charged to other accounts 5,448 5,358
Deferred income taxes and investment tax credit
-- net 5,587 (7,571)
Equity in earnings of joint ventures, net of
distributions 2,362 1,243
Other 574 1,691
---------- ----------
157,664 134,837
Changes in assets and liabilities, exclusive of
changes shown separately 84,309 66,651
---------- ----------
Net cash provided from operating activities 241,973 201,488
---------- ----------
Cash Flow from Financing Activities
Notes payable -- net (77,987) (160,026)
Common stock dividends paid (42,784) (38,220)
Issuance of common stock (Note 2) 110,772 11,262
Issuance of long-term debt (Note 3) 168,764 78,620
Net borrowings (repayments) of long-term credit
facilities (39,398) 134,800
Retirement of long-term debt and preferred stock (6,987) (6,219)
Other (1,290) (1,779)
Net cash provided from financing activities 111,090 18,438
Cash Flow from Investing Activities
Capital expenditures (330,349) (213,726)
Investment in joint ventures (24,119) (3,244)
Sale of investment in joint ventures 10,803 --
Other (4,120) (779)
---------- ----------
Net cash used for investing activities (347,785) (217,749)
---------- ----------
Net Increase in Cash and Cash Equivalents 5,278 2,177
Cash and Cash Equivalents, January 1 11,547 12,474
---------- ----------
Cash and Cash Equivalents, September 30 $ 16,825 $ 14,651
========== ==========
Changes in Assets and Liabilities, Exclusive of
Changes Shown Separately
Accounts receivable -- net $ 55,504 $ 73,782
Accrued unbilled revenues 63,972 81,219
Gas in inventory (23,338) (122,638)
Property taxes assessed applicable to future
periods 32,026 32,239
Gas receivable 15,576 (916)
Accounts payable (12,905) (17,309)
Deferred income taxes -- current (5,343) (16,928)
Federal income, property and other taxes payable (31,031) (7,876)
Refunds payable to customers (16,870) 18,488
Other current assets and liabilities 12,901 2,027
Deferred assets and liabilities (6,183) 24,563
---------- ----------
Supplemental Disclosures $ 84,309 $ 66,651
========== ==========
Cash paid during the year for:
Interest, net of amounts capitalized $ 33,428 $ 28,118
========== ==========
Federal income taxes $ 9,366 $ 24,550
========== ==========
Noncash investing and financing activities:
Property purchased under capital leases $ 3,087 $ 2,264
========== ==========
Land acquired in exchange for note receivable $ 1,480 $ --
========== ==========
<FN>
The notes to the consolidated financial statements are an integral part of this
statement.
15
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements should be read in
conjunction with MCN's 1994 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1995 presentation. The unaudited information furnished herein,
in the opinion of management, reflects all adjustments (consisting of only
recurring adjustments or accruals) necessary for a fair presentation of the
results of operations during the periods.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
2. Common Stock and Additional Paid-in Capital
In March 1995, MCN sold 5,750,000 shares of new common stock in a public
offering, generating net proceeds of approximately $99,000,000.
3. Long-Term Debt
As of September 30, 1995, MCN's long-term debt balance of $811,546,000
included nonrecourse financing of Supply Development Group, Inc. (Supply
Development), MCN's exploration & production subsidiary, of $100,000,000 and
Saginaw Bay Pipeline Company of $17,600,000.
The Supply Development financing was established as a five year term
loan in August 1995 that allows for borrowings of up to $100,000,000 at
certain alternative variable rates at MCN's option. The $100,000,000
outstanding at September 30, 1995 was at a weighted average interest rate of
6.4%. Fees are paid to compensate banks for the loan facility. The most
restrictive provision of the agreement requires Supply Development to maintain
an interest coverage ratio greater than 2.25 to 1.00.
During the second quarter of 1995, MichCon issued the following debt:
Description Amount
----------- -----
First Mortgage Bonds, 7.50%, due May 2020 $30,000,000
First Mortgage Bonds, 6.30%, due June 1998 $20,000,000
First Mortgage Bonds, 6.72%, due June 2003 $ 4,150,000
First Mortgage Bonds, 6.80%, due June 2003 $15,850,000
4. Lines of Credit
In July 1995, new credit lines were negotiated at MichCon to allow for
borrowings of up to $100,000,000 under a 364 day revolving credit facility and
up to $150,000,000 under a three year revolving credit facility. MichCon
usually issues commercial paper in lieu of an equivalent amount of borrowings
under these lines of credit. Commercial paper of $109,945,000 was outstanding
at September 30, 1995 under these lines at a weighted average interest rate of
5.9%. This debt is classified as short-term based upon management's intent to
repay it within one year. Fees are paid to compensate banks for lines of
credit.
16
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1995, MCN Investment increased its credit lines to allow for
borrowings of up to $100,000,000 under a 364 day revolving credit facility and
up to $300,000,000 under a three year revolving credit facility. The
facilities support MCN Investment's $400,000,000 commercial paper program that
was also established in July 1995. MCN Investment has issued commercial paper
in lieu of an equivalent amount of borrowings under lines of credit.
Commercial paper used to temporarily finance working capital requirements
totaling $39,000,000 is classified as short-term based upon management's
intent to repay this debt within one year. The remaining commercial paper
balance of $142,602,000 is classified as long-term. Total commercial paper
outstanding as of September 30, 1995 is at a weighted average interest rate of
5.9%. Fees are paid to compensate banks for lines of credit.
5. Commitments and Contingencies
a. Guaranty
During 1995, MCN agreed to acquire a 47.5% interest in a partnership
formed to construct, own and operate a natural gas transmission and
distribution system located in southern Missouri. In October 1995, a
construction loan was obtained that allows for borrowings of up to
$25,000,000. MCN has issued a guaranty for the full amount of this
financing, and one of the parties to the project has agreed to reimburse
MCN for 50% of any payments made as a result of this guaranty. The
guaranty will remain in place until permanent financing is established
which is anticipated to be October 1997.
b. Other
MCN is involved in certain legal and administrative proceedings
before various courts and governmental agencies concerning claims arising
in the ordinary course of business. 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 MCN's financial
statements.
6. Consolidating Financial Statements
In October 1995, MCN Investment and MCN filed a joint shelf registration
statement with the Securities and Exchange Commission for the issuance of
up to $200,000,000 in debt securities. This registration statement became
effective in November 1995. Debt securities issued by MCN Investment under this
registration statement are subject to a support agreement between MCN and MCN
Investment, under which MCN has committed to make payments of interest and
principal on MCN Investment's securities in the event of failure to pay by MCN
Investment. Restrictions in the support agreement prohibit recourse on the part
of MCN Investment's investors against the stock and assets of MichCon. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
the cash dividends paid to MCN by any of its subsidiaries are available as
recourse to holders of MCN Investment's securities. The carrying value of MCN's
assets on an unconsolidated basis, primarily investments in its subsidiaries
other than MichCon, is $290,894,000 at September 30, 1995.
The following unaudited MCN consolidating financial statements are
presented and include separately MCN Investment, MichCon and MCN and other
subsidiaries. MCN has determined that separate financial statements and other
disclosures concerning MCN Investment are not material to investors. The other
MCN subsidiaries represent Citizens Gas Fuel Company, Blue Lake Holdings, Inc.
and MCN Michigan Limited Partnership.
17
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
(Thousands of Dollars)
MCN Eliminations
and Other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ------------------ -----------
September 30, 1995
------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents, at cost $ 36 $ 12,135 $ 3,213 $ 1,441 $ 16,825
Accounts receivable 2,742 71,542 104,159 (7,743) 170,700
Less: allowance for doubtful accounts 80 520 12,725 -- 13,325
--------- --------- ----------- ---------- -----------
Accounts receivable -- net 2,662 71,022 91,434 (7,743) 157,375
Accrued unbilled revenue 266 -- 18,815 -- 19,081
Gas in inventory -- 62,479 92,508 -- 154,987
Property taxes assessed applicable to future
periods 91 993 21,618 -- 22,702
Gas receivable -- 791 4,702 -- 5,493
Other 801 6,211 23,636 773 31,421
--------- --------- ----------- ---------- -----------
3,856 153,631 255,926 (5,529) 407,884
--------- --------- ----------- ---------- -----------
Deferred Charges and Other Assets
Investment in and advances to joint ventures and
subsidiaries 738,410 49,306 19,742 (726,231) 81,227
Deferred postretirement benefit cost 750 -- 14,613 -- 15,363
Other 10,948 54,653 62,218 631 128,450
--------- --------- ----------- ---------- -----------
750,108 103,959 96,573 (725,600) 225,040
--------- --------- ----------- ---------- -----------
Property, Plant and Equipment, at cost 26,021 563,141 2,338,974 -- 2,928,136
Less -- Accumulated depreciation and depletion 9,298 52,213 1,135,024 -- 1,196,535
--------- --------- ----------- ---------- -----------
16,723 510,928 1,203,950 -- 1,731,601
--------- --------- ----------- ---------- -----------
$ 770,687 $ 768,518 $ 1,556,449 $ (731,129) $ 2,364,525
========= ========= =========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,979 $ 63,012 $ 69,691 $ (4,940) $ 129,742
Notes payable -- 39,000 111,820 -- 150,820
Current portion of long-term debt, capital leases
and redeemable cumulative preferred securities 485 2,805 3,936 -- 7,226
Federal income, property and other taxes payable (2,447) 13,202 45,186 -- 55,941
Refunds payable to customers -- -- 2,690 -- 2,690
Customer deposits 17 -- 10,277 -- 10,294
Other 3,711 24,462 54,417 5 82,595
--------- --------- ----------- ---------- -----------
3,745 142,481 298,017 (4,935) 439,308
--------- --------- ----------- ---------- -----------
Deferred Charges and Other Liabilities
Accumulated deferred income taxes (685) 42,886 60,863 73 103,137
Unamortized investment tax credit 368 -- 36,902 -- 37,270
Tax benefits amortizable to customers 172 -- 112,085 -- 112,257
Accrued postretirement benefit cost 2,125 1,059 14,537 -- 17,721
Minority interest -- 17,911 -- -- 17,911
Other 14,457 15,873 60,025 1 90,356
--------- --------- ----------- ---------- -----------
16,437 77,729 284,412 74 378,652
--------- --------- ----------- ---------- -----------
Long-Term Debt, including capital lease obligations 425 294,086 517,035 -- 811,546
Redeemable Cumulative Preferred Securities of
Subsidiaries 100,000 -- -- -- 100,000
--------- --------- ----------- ---------- -----------
Common Shareholders' Equity
Common stock 662 5 10,300 (10,305) 662
Additional paid-in capital 449,352 210,122 211,777 (428,791) 442,460
Retained earnings 200,522 44,095 234,908 (287,172) 192,353
Unearned compensation (456) -- -- -- (456)
--------- --------- ----------- ---------- -----------
650,080 254,222 456,985 (726,268) 635,019
--------- --------- ----------- ---------- -----------
$ 770,687 $ 768,518 $ 1,556,449 $ (731,129) $ 2,364,525
========= ========= =========== ========== ===========
18
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
(Thousands of Dollars)
MCN Eliminations
and Other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
September 30, 1994
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents, at cost $ 994 $ 11,390 $ 2,267 $ -- $ 14,651
Accounts receivable 3,529 66,068 118,155 (6,640) 181,112
Less: allowance for doubtful accounts 81 1,010 16,869 -- 17,960
--------- --------- ----------- ---------- -----------
Accounts receivable -- net 3,448 65,058 101,286 (6,640) 163,152
Accrued unbilled revenue 190 -- 19,918 -- 20,108
Gas in inventory -- 60,777 107,798 (42) 168,533
Property taxes assessed applicable to future
periods 74 59 18,337 -- 18,470
Gas receivable -- 2,333 6,532 -- 8,865
Other 731 13,126 20,410 617 34,884
--------- --------- ----------- ---------- -----------
5,437 152,743 276,548 (6,065) 428,663
--------- --------- ----------- ---------- -----------
Deferred Charges and Other Assets
Investment in and advances to joint ventures and
subsidiaries 505,652 41,863 18,522 (504,325) 61,712
Deferred postretirement benefit cost 659 -- 22,059 -- 22,718
Other 8,153 60,876 39,792 31 108,852
--------- --------- ----------- ---------- -----------
514,464 102,739 80,373 (504,294) 193,282
--------- --------- ----------- ---------- -----------
Property, Plant and Equipment, at cost 22,381 300,488 2,165,298 -- 2,488,167
Less -- Accumulated depreciation and depletion 7,869 27,610 1,080,292 -- 1,115,771
--------- --------- ----------- ---------- -----------
14,512 272,878 1,085,006 -- 1,372,396
--------- --------- ----------- ---------- -----------
$534,413 $ 528,360 $ 1,441,927 $ (510,359) $ 1,994,341
========= ========= =========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,014 $ 49,810 $ 67,653 $ (5,728) $ 112,749
Notes payable -- 29,900 90,378 -- 120,278
Current portion of long-term debt, capital leases
and redeemable cumulative preferred securities 110 1,771 4,196 -- 6,077
Federal income, property and other taxes payable 313 7,435 48,156 -- 55,904
Refunds payable to customers 1 -- 29,281 -- 29,282
Customer deposits 17 -- 10,552 -- 10,569
Other 2,489 16,487 53,222 (51) 72,147
--------- --------- ----------- ---------- -----------
3,944 105,403 303,438 (5,779) 407,006
--------- --------- ----------- ---------- -----------
Deferred Charges and Other Liabilities
Accumulated deferred income taxes (544) 28,393 45,215 (255) 72,809
Unamortized investment tax credit 398 -- 38,760 -- 39,158
Tax benefits amortizable to customers 312 -- 124,017 -- 124,329
Accrued postretirement benefit cost 1,628 629 24,321 -- 26,578
Minority interest -- 18,049 -- -- 18,049
Other 11,638 31,635 50,596 -- 93,869
--------- --------- ----------- ---------- -----------
13,432 78,706 282,909 (255) 374,792
--------- --------- ----------- ---------- -----------
Long-Term Debt, including capital lease obligations 910 257,809 450,592 -- 709,311
--------- --------- ----------- ---------- -----------
Redeemable Cumulative Preferred Securities of
Subsidiaries -- -- 2,618 -- 2,618
--------- --------- ----------- ---------- -----------
Common Shareholders' Equity
Common stock 596 5 10,300 (10,305) 596
Additional paid-in capital 337,824 62,596 204,777 (276,935) 328,262
Retained earnings 178,346 23,841 187,293 (217,085) 172,395
Unearned compensation (639) -- -- -- (639)
--------- --------- ----------- ---------- -----------
516,127 86,442 402,370 (504,325) 500,614
--------- --------- ----------- ---------- -----------
$ 534,413 $ 528,360 $ 1,441,927 $ (510,359) $ 1,994,341
========= ========= =========== ========== ===========
19
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
(Thousands of Dollars)
MCN Eliminations
and Other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
December 31, 1994
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents, at cost $ 29 $ 10,213 $ 1,305 $ -- $ 11,547
Accounts receivable 2,754 82,617 150,302 (5,414) 230,259
Less: allowance for doubtful accounts 71 708 15,322 -- 16,101
--------- --------- ----------- ---------- -----------
Accounts receivable -- net 2,683 81,909 134,980 (5,414) 214,158
Accrued unbilled revenue 820 -- 82,233 -- 83,053
Gas in inventory -- 53,806 77,843 -- 131,649
Property taxes assessed applicable to future
periods 2,565 -- 52,163 -- 54,728
Gas receivable -- 16,925 4,144 -- 21,069
Other 927 9,461 18,958 (2,040) 27,306
--------- --------- ----------- ---------- -----------
7,024 172,314 371,626 (7,454) 543,510
--------- --------- ----------- ---------- -----------
Deferred Charges and Other Assets
Investment in and advances to joint ventures and
subsidiaries 615,131 42,613 20,791 (614,030) 64,505
Deferred postretirement benefit cost 783 -- 19,887 -- 20,670
Other 10,060 70,491 42,044 906 123,501
--------- --------- ----------- ---------- -----------
625,974 113,104 82,722 (613,124) 208,676
--------- --------- ----------- ---------- -----------
Property, Plant and Equipment, at cost 23,028 392,647 2,189,150 -- 2,604,825
Less -- Accumulated depreciation and depletion 8,192 32,607 1,071,588 -- 1,112,387
--------- --------- ----------- ---------- -----------
14,836 360,040 1,117,562 -- 1,492,438
--------- --------- ----------- ---------- -----------
$ 647,834 $ 645,458 $ 1,571,910 $ (620,578) $ 2,244,624
========= ========= =========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 712 $ 66,178 $ 80,671 $ (4,914) $ 142,647
Notes payable -- 60,350 168,457 -- 228,807
Current portion of long-term debt, capital leases
and redeemable cumulative preferred securities (179) 3,273 4,225 -- 7,319
Federal income, property and other taxes payable (751) 1,917 85,806 -- 86,972
Refunds payable to customers 1 -- 19,559 -- 19,560
Customer deposits 18 -- 11,563 -- 11,581
Other 4,588 14,343 50,670 (1,792) 67,809
--------- --------- ----------- ---------- -----------
4,389 146,061 420,951 (6,706) 564,695
--------- --------- ----------- ---------- -----------
Deferred Charges and Other Liabilities
Accumulated deferred income taxes 41 40,889 52,396 -- 93,326
Unamortized investment tax credit 390 -- 38,294 -- 38,684
Tax benefits amortizable to customers 161 -- 114,906 -- 115,067
Accrued postretirement benefit cost 1,830 723 23,507 -- 26,060
Minority interest -- 18,670 -- -- 18,670
Other 11,773 23,641 53,076 -- 88,490
--------- --------- ----------- ---------- -----------
14,195 83,923 282,179 -- 380,297
--------- --------- ----------- ---------- -----------
Long-Term Debt, including capital lease obligations 1,139 236,051 448,329 -- 685,519
--------- --------- ----------- ---------- -----------
Redeemable Cumulative Preferred Securities of
Subsidiaries 100,000 -- 2,618 -- 102,618
--------- --------- ----------- ---------- -----------
Common Shareholders' Equity
Common stock 598 5 10,300 (10,305) 598
Additional paid-in capital 341,680 151,025 204,777 (365,911) 331,571
Retained earnings 186,369 28,393 202,756 (237,656) 179,862
Unearned compensation (536) -- -- -- (536)
--------- --------- ----------- ---------- -----------
528,111 179,423 417,833 (613,872) 511,495
--------- --------- ----------- ---------- -----------
$ 647,834 $ 645,458 $ 1,571,910 $ (620,578) $ 2,244,624
========= ========= =========== ========== ===========
20
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
(Thousands of Dollars)
MCN Eliminations
and Other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
Three Months Ended September 30, 1995
-----------------------------------------------------------------------
Operating Revenues $ 1,472 $ 109,341 $ 107,522 $ (5,140) $ 213,195
--------- --------- --------- -------- ---------
Operating Expenses
Cost of gas 639 58,127 20,963 (662) 79,067
Operation and maintenance (1,853) 35,999 60,750 (4,478) 90,418
Depreciation, depletion and amortization 424 6,851 22,107 -- 29,382
Property and other taxes 262 2,143 12,798 -- 15,203
--------- --------- --------- -------- ---------
Total operating expenses (528) 103,120 116,618 (5,140) 214,070
--------- --------- --------- -------- ---------
Operating Income (Loss) 2,000 6,221 (9,096) -- (875)
--------- --------- --------- -------- ---------
Equity in Earnings (Loss) of Joint Ventures and
Subsidiaries (7,583) 1,431 123 7,851 1,822
--------- --------- --------- -------- ---------
Other Income and (Deductions)
Interest income 28 266 765 128 1,187
Interest on long-term debt (20) (2,137) (9,726) 1 (11,882)
Other interest expense (15) (1,190) (774) (1) (1,980)
Dividends on preferred securities of subsidiaries -- -- -- (2,398) (2,398)
Minority interest -- (660) -- (1) (661)
Other (67) 44 (758) (127) (908)
--------- --------- --------- -------- ---------
Total other income and (deductions) (74) (3,677) (10,493) (2,398) (16,642)
--------- --------- --------- -------- ---------
Income (Loss) Before Income Taxes (5,657) 3,975 (19,466) 5,453 (15,695)
Income Tax Provision (Benefit) 130 (1,061) (6,138) 1 (7,068)
--------- --------- --------- -------- ---------
Net Income (Loss) (5,787) 5,036 (13,328) 5,452 (8,627)
Dividends on Preferred Securities 2,344 -- 54 (2,398) --
--------- --------- --------- -------- ---------
Net Income (Loss) Available for Common Stock $ (8,131) $ 5,036 $ (13,382) $ 7,850 $ (8,627)
========= ========= ========= ======== =========
Three Months Ended September 30, 1994
-----------------------------------------------------------------------
Operating Revenues $ 1,518 $ 100,682 $ 107,289 $ (5,100) $ 204,389
--------- --------- --------- -------- ---------
Operating Expenses
Cost of gas 790 63,114 23,299 (660) 86,543
Operation and maintenance 750 27,803 71,341 (4,441) 95,453
Depreciation, depletion and amortization 333 3,701 21,154 -- 25,188
Property and other taxes 130 1,269 12,411 -- 13,810
--------- --------- --------- -------- ---------
Total operating expenses 2,003 95,887 128,205 (5,101) 220,994
--------- --------- --------- -------- ---------
Operating Income (Loss) (485) 4,795 (20,916) 1 (16,605)
--------- --------- --------- -------- ---------
Equity in Earnings (Loss) of Joint Ventures and
Subsidiaries (14,236) 1,375 161 14,600 1,900
--------- --------- --------- -------- ---------
Other Income and (Deductions)
Interest income 28 548 1,017 1 1,594
Interest on long-term debt (24) (2,798) (6,587) -- (9,409)
Other interest expense (36) (567) (2,481) (1) (3,085)
Dividends on preferred securities of subsidiaries -- -- -- (115) (115)
Minority interest -- (719) -- -- (719)
Other 5 (101) (980) 117 (959)
--------- --------- --------- -------- ---------
Total other income and (deductions) (27) (3,637) (9,031) 2 (12,693)
--------- --------- --------- -------- ---------
Income (Loss) Before Income Taxes (14,748) 2,533 (29,786) 14,603 (27,398)
Income Tax Provision (Benefit) 151 (1,406) (10,690) 117 (11,828)
--------- --------- --------- -------- ---------
Net Income (Loss) (14,899) 3,939 (19,096) 14,486 (15,570)
Dividends on Preferred Securities -- -- 115 (115) --
--------- --------- --------- -------- ---------
Net Income (Loss) Available for Common Stock $ (14,899) $ 3,939 $ (19,211) $ 14,601 $ (15,570)
========= ========= ========= ======== =========
21
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
(Thousands of Dollars)
MCN Eliminations
and Other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- -----------
Nine Months Ended September 30, 1995
-----------------------------------------------------------------------
Operating Revenues $ 9,953 $ 340,208 $ 714,302 $ (20,176) $ 1,044,287
-------- --------- --------- --------- -----------
Operating Expenses
Cost of gas 4,522 189,253 303,130 (4,563) 492,342
Operation and maintenance (3,721) 103,304 210,753 (15,613) 294,723
Depreciation, depletion and amortization 1,236 20,194 66,988 -- 88,418
Property and other taxes 1,031 5,949 43,487 -- 50,467
-------- --------- --------- --------- -----------
Total operating expenses 3,068 318,700 624,358 (20,176) 925,950
-------- --------- --------- --------- -----------
Operating Income 6,885 21,508 89,944 -- 118,337
-------- --------- --------- --------- -----------
Equity in Earnings of Joint Ventures and Subsidiaries 56,908 2,495 499 (56,013) 3,889
-------- --------- --------- --------- -----------
Other Income and (Deductions)
Interest income 178 1,144 2,764 448 4,534
Interest on long-term debt (63) (6,563) (26,410) 1 (33,035)
Other interest expense (39) (3,224) (4,425) (1) (7,689)
Dividends on preferred securities of subsidiaries -- -- -- (7,213) (7,213)
Minority interest -- (1,829) -- -- (1,829)
Other 1,524 (343) (2,337) (449) (1,605)
-------- --------- --------- --------- -----------
Total other income and (deductions) 1,600 (10,815) (30,408) (7,214) (46,837)
-------- --------- --------- --------- -----------
Income Before Income Taxes 65,393 13,188 60,035 (63,227) 75,389
Income Tax Provision (Benefit) 1,425 (2,513) 21,201 1 20,114
-------- --------- --------- --------- -----------
Net Income 63,968 15,701 38,834 (63,228) 55,275
Dividends on Preferred Securities 7,031 -- 182 (7,213) --
-------- --------- --------- --------- -----------
Net Income Available for Common Stock $ 56,937 $ 15,701 $ 38,652 $ (56,015) $ 55,275
======== ========= ========= ========= ===========
Nine Months Ended September 30, 1994
-----------------------------------------------------------------------
Operating Revenues $ 10,370 $ 328,296 $ 813,502 $ (18,455) $ 1,133,713
-------- --------- --------- --------- -----------
Operating Expenses
Cost of gas 5,436 220,247 384,540 (4,879) 605,344
Operation and maintenance 1,641 76,567 226,640 (13,577) 291,271
Depreciation, depletion and amortization 960 12,390 63,737 -- 77,087
Property and other taxes 977 3,871 46,154 -- 51,002
-------- --------- --------- --------- -----------
Total operating expenses 9,014 313,075 721,071 (18,456) 1,024,704
-------- --------- --------- --------- -----------
Operating Income 1,356 15,221 92,431 1 109,009
-------- --------- --------- --------- -----------
Equity in Earnings of Joint Ventures and Subsidiaries 60,669 3,094 988 (59,063) 5,688
-------- --------- --------- --------- -----------
Other Income and (Deductions)
Interest income 563 1,648 3,067 (490) 4,788
Interest on long-term debt (530) (6,453) (19,693) -- (26,676)
Other interest expense (125) (1,318) (6,150) 490 (7,103)
Dividends on preferred securities of subsidiaries -- -- -- (366) (366)
Minority interest -- (2,187) -- -- (2,187)
Other (86) (216) (2,198) -- (2,500)
-------- --------- --------- --------- -----------
Total other income and (deductions) (178) (8,526) (24,974) (366) (34,044)
-------- --------- --------- --------- -----------
Income Before Income Taxes 61,847 9,789 68,445 (59,428) 80,653
Income Tax Provision (Benefit) 1,945 (2,476) 24,155 -- 23,624
-------- --------- --------- --------- -----------
Net Income 59,902 12,265 44,290 (59,428) 57,029
Dividends on Preferred Securities -- -- 366 (366) --
-------- --------- --------- --------- -----------
Net Income Available for Common Stock $ 59,902 $ 12,265 $ 43,924 $ (59,062) $ 57,029
======== ========= ========= ========= ===========
22
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
(Thousands of Dollars)
MCN Eliminations
and Other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
Twelve Months Ended September 30, 1995
-------------------------------------------------------------------------
Operating Revenues $ 13,984 $ 457,273 $ 1,012,478 $ (27,361) $ 1,456,374
-------- --------- ----------- --------- -----------
Operating Expenses
Cost of gas 6,316 262,291 448,016 (6,189) 710,434
Operation and maintenance (6,053) 132,268 297,688 (21,226) 402,677
Depreciation, depletion and amortization 1,590 25,880 87,481 -- 114,951
Property and other taxes 1,298 7,693 55,462 -- 64,453
-------- --------- ----------- --------- -----------
Total operating expenses 3,151 428,132 888,647 (27,415) 1,292,515
-------- --------- ----------- --------- -----------
Operating Income 10,833 29,141 123,831 54 163,859
-------- --------- ----------- --------- -----------
Equity in Earnings of Joint Ventures and Subsidiaries 77,786 2,733 554 (76,583) 4,490
-------- --------- ----------- --------- -----------
Other Income and (Deductions)
Interest income 202 1,829 3,761 447 6,239
Interest on long-term debt (123) (9,785) (34,665) 1 (44,572)
Other interest expense (66) (3,887) (7,368) -- (11,321)
Dividends on preferred securities of subsidiaries -- -- -- (8,865) (8,865)
Minority interest -- (2,521) -- -- (2,521)
Other 234 341 (4,816) (505) (4,746)
-------- --------- ----------- --------- -----------
Total other income and (deductions) 247 (14,023) (43,088) (8,922) (65,786)
-------- --------- ----------- --------- -----------
Income Before Income Taxes 88,866 17,851 81,297 (85,451) 102,563
Income Tax Provision (Benefit) 2,065 (2,402) 26,885 1 26,549
-------- --------- ----------- --------- -----------
Net Income 86,801 20,253 54,412 (85,452) 76,014
Dividends on Preferred Securities 8,568 -- 297 (8,865) --
-------- --------- ----------- --------- -----------
Net Income Available for Common Stock $ 78,233 $ 20,253 $ 54,115 $ (76,587) $ 76,014
======== ========= =========== ========= ===========
Twelve Months Ended September 30, 1994
-------------------------------------------------------------------------
Operating Revenues $ 14,864 $ 432,354 $ 1,157,880 $ (23,605) $ 1,581,493
-------- --------- ----------- --------- -----------
Operating Expenses
Cost of gas 7,693 288,887 579,115 (5,587) 870,108
Operation and maintenance (218) 100,508 300,162 (18,020) 382,432
Depreciation, depletion and amortization 1,305 13,769 82,057 -- 97,131
Property and other taxes 1,246 4,658 61,157 96 67,157
-------- --------- ----------- --------- -----------
Total operating expenses 10,026 407,822 1,022,491 (23,511) 1,416,828
-------- --------- ----------- --------- -----------
Operating Income 4,838 24,532 135,389 (94) 164,665
-------- --------- ----------- --------- -----------
Equity in Earnings of Joint Ventures and Subsidiaries 88,925 3,063 1,413 (86,671) 6,730
-------- --------- ----------- --------- -----------
Other Income and (Deductions)
Interest income 759 1,937 3,938 (668) 5,966
Interest on long-term debt 417 (7,442) (26,194) -- (33,219)
Other interest expense (1,640) (1,856) (9,005) 681 (11,820)
Dividends on preferred securities of subsidiaries -- -- -- (542) (542)
Minority interest -- (3,229) -- 47 (3,182)
Other (500) 228 (6,960) 81 (7,151)
-------- --------- ----------- --------- -----------
Total other income and (deductions) (964) (10,362) (38,221) (401) (49,948)
-------- --------- ----------- --------- -----------
Income Before Income Taxes 92,799 17,233 98,581 (87,166) 121,447
Income Tax Provision (Benefit) 3,614 (1,272) 34,048 -- 36,390
-------- --------- ----------- --------- -----------
Net Income 89,185 18,505 64,533 (87,166) 85,057
Dividends on Preferred Securities -- -- 542 (542) --
-------- --------- ----------- --------- -----------
Net Income Available for Common Stock $ 89,185 $ 18,505 $ 63,991 $ (86,624) $ 85,057
======== ========= =========== ========= ===========
23
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)
(Thousands of Dollars)
MCN Eliminations
and Other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
Nine Months Ended September 30, 1995
------------------------------------------------------------------------
Net Cash Flow from Operating Activities $ 20,789 $ 83,790 $ 150,837 $ (13,443) $ 241,973
---------- ---------- ---------- --------- ----------
Cash Flow from Financing Activities
Notes payable -- net -- (21,350) (56,637) -- (77,987)
Capital contributions received from (distributions
paid to) affiliates, net (3,216) 56,327 7,000 (60,111) --
Common stock dividends paid (42,784) -- (6,500) 6,500 (42,784)
Preferred securities dividends paid (7,031) -- (223) 7,254 --
Issuance of common stock 110,772 -- -- -- 110,772
Issuance of long-term debt -- 100,000 68,764 -- 168,764
Net borrowings (repayments) of long-term credit
facilities -- (39,398) -- -- (39,398)
Retirement of long-term debt and preferred
securities (50) (2,647) (4,290) -- (6,987)
Other -- -- -- (1,290) (1,290)
---------- ---------- ---------- --------- ----------
Net cash provided from financing activities 57,691 92,932 8,114 (47,647) 111,090
---------- ---------- ---------- --------- ----------
Cash Flow from Investing Activities
Capital expenditures (3,241) (172,390) (154,718) -- (330,349)
Investment in joint ventures and subsidiaries (75,262) (13,530) (308) 64,981 (24,119)
Sale of investment in joint ventures -- 10,803 -- -- 10,803
Other 30 317 (2,017) (2,450) (4,120)
---------- ---------- ---------- --------- ----------
Net cash used for investing activities (78,473) (174,800) (157,043) 62,531 (347,785)
---------- ---------- ---------- --------- ----------
Net Increase in Cash and Cash Equivalents 7 1,922 1,908 1,441 5,278
Cash and Cash Equivalents, January 1 29 10,213 1,305 -- 11,547
---------- ---------- ---------- --------- ----------
Cash and Cash Equivalents, September 30 $ 36 $ 12,135 $ 3,213 $ 1,441 $ 16,825
========== ========== ========== ========= ==========
Nine Months Ended September 30, 1994
------------------------------------------------------------------------
Net Cash Flow from Operating Activities $ 15,876 $ (883) $ 195,707 $ (9,212) $ 201,488
---------- ---------- ---------- --------- ----------
Cash Flow from Financing Activities
Notes payable -- net (1,709) (8,503) (169,926) 20,112 (160,026)
Capital contributions received from (distributions
paid to) affiliates, net (745) (73,266) 1,161 72,850 --
Common stock dividends paid (38,220) -- (8,500) 8,500 (38,220)
Preferred securities dividends paid -- -- (407) 407 --
Issuance of common stock 11,262 -- -- -- 11,262
Issuance of long-term debt -- -- 78,620 -- 78,620
Net borrowings (repayments) of long-term credit
facilities (71,900) 206,700 -- -- 134,800
Retirement of long-term debt and preferred
securities (50) (2,264) (3,905) -- (6,219)
Other (363) -- -- (1,416) (1,779)
---------- ---------- ---------- --------- ----------
Net cash provided from (used for) financing
activities (101,725) 122,667 (102,957) 100,453 18,438
---------- ---------- ---------- --------- ----------
Cash Flow from Investing Activities
Capital expenditures (2,605) (119,604) (91,517) -- (213,726)
Investment in joint ventures and subsidiaries (1,161) (3,313) 69 1,161 (3,244)
Return of investment in joint ventures and
subsidiaries 71,850 405 -- (72,255) --
Other 318 2,105 (1,458) (1,744) (779)
---------- ---------- ---------- --------- ----------
Net cash provided from (used for) financing
activities 68,402 (120,407) (92,906) (72,838) (217,749)
---------- ---------- ---------- --------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (17,447) 1,377 (156) 18,403 2,177
Cash and Cash Equivalents, January 1 18,441 10,013 2,423 (18,403) 12,474
---------- ---------- ---------- --------- ----------
Cash and Cash Equivalents, September 30 $ 994 $ 11,390 $ 2,267 $ -- $ 14,651
========== ========== ========== ========= ==========
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OTHER INFORMATION
LEGAL PROCEEDINGS
As discussed on pages 16 and 17 in MCN's 1994 Annual Report on Form 10-K,
in December 1994, six residential customers filed suit against MichCon on
behalf of themselves and others who purchased and installed high efficiency
furnaces through one of MichCon's energy conservation programs. Plaintiffs
allege, among other things, that MichCon failed to warn them that unsafe
conditions could result from improper installation and venting of gas
appliances and seek injunctive relief, unspecified money damages, exemplary
damages, attorneys fees and costs. On August 11, 1995, the Wayne County Circuit
Court dismissed one of the plaintiffs for failure to establish any injury. On
October 4, 1995, the Court denied plaintiffs motion for class certification
with prejudice. Management believes plaintiffs' remaining allegations are
without merit and intends to vigorously defend this action.
The management of MCN believes that the resolution of these matters will
not have a material adverse effect on the financial statements of MCN.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
12-1 Computation of Ratio of Earnings to Fixed Charges for
MCN Corporation.
12-2 Computation of Ratio of Earnings to Fixed Charges for
MCN Investment Corporation.
27-1 Financial Data Schedule.
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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.
MCN CORPORATION
Date: November 8, 1995 By: /s/ Patrick Zurlinden
--------------------------------
Patrick Zurlinden
Vice President, Controller
and Chief Accounting
Officer
26