1
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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 MARCH 31, 1994, 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 offices) (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 April 30, 1994:
Common Stock, par value $.01 per share: 29,622,410
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2
INDEX TO FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1994
PAGE
NUMBER
------
COVER............................................................................... i
INDEX............................................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements...................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 5
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................... 14
Item 6. Exhibits and Reports on Form 8-K.......................................... 14
SIGNATURE........................................................................... 15
ii
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(THOUSANDS OF DOLLARS)
MARCH 31, DECEMBER 31,
------------------------ ------------
1994 1993 1993
---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and temporary cash investments, at cost (which approximates market
value).................................................................. $ 23,916 $ 8,633 $ 12,474
Accounts receivable, less allowance for doubtful accounts of $29,630,
$35,050 and $19,576, respectively....................................... 326,134 284,694 236,934
Accrued unbilled revenues................................................. 83,932 69,975 101,327
Gas in inventory (Note 1)................................................. 15,911 6,171 45,895
Property taxes assessed applicable to future periods...................... 40,089 48,873 50,709
Other..................................................................... 40,508 48,111 35,332
---------- ---------- ------------
530,490 466,457 482,671
---------- ---------- ------------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures.............................. 60,541 48,312 60,528
Deferred postretirement benefit cost...................................... 25,406 7,069 25,612
Other..................................................................... 73,035 53,935 59,031
---------- ---------- ------------
158,982 109,316 145,171
---------- ---------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost...................................... 2,320,518 2,135,725 2,284,529
Less -- Accumulated depreciation and depletion............................ 1,070,418 1,000,799 1,047,941
---------- ---------- ------------
1,250,100 1,134,926 1,236,588
---------- ---------- ------------
$1,939,572 $1,710,699 $1,864,430
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................... $ 145,696 $ 122,097 $ 124,585
Notes payable............................................................. 105,043 108,970 280,304
Current portion of long-term debt, capital lease obligations and
redeemable cumulative preferred stock................................... 3,009 10,020 5,980
Gas inventory equalization (Note 1)....................................... 109,155 102,462 --
Federal income, property and other taxes payable.......................... 96,394 101,315 63,790
Refunds payable to customers.............................................. 11,120 13,234 10,794
Customer deposits......................................................... 10,940 12,223 13,271
Other..................................................................... 73,490 67,963 78,146
---------- ---------- ------------
554,847 538,284 576,870
---------- ---------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................................... 169,896 135,575 171,630
Unamortized investment tax credit......................................... 40,101 42,013 40,571
Tax benefits amortizable to customers..................................... 31,089 43,613 31,666
Minority interest......................................................... 18,185 18,198 18,357
Other..................................................................... 74,547 61,529 54,729
---------- ---------- ------------
333,818 300,928 316,953
---------- ---------- ------------
LONG-TERM DEBT, including capital lease obligations......................... 514,661 387,190 494,821
---------- ---------- ------------
REDEEMABLE CUMULATIVE PREFERRED STOCK OF SUBSIDIARY, $2.05 SERIES........... 5,618 5,618 5,618
---------- ---------- ------------
CONTINGENCIES (Note 2)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................................. 296 292 295
Additional paid-in capital................................................ 320,907 308,791 317,117
Retained earnings......................................................... 210,309 172,420 153,884
Unearned compensation and ESOP benefit.................................... (884) (2,824) (1,128)
---------- ---------- ------------
530,628 478,679 470,168
---------- ---------- ------------
$1,939,572 $1,710,699 $1,864,430
---------- ---------- ------------
---------- ---------- ------------
The notes to the consolidated financial statements are an integral part of this
statement.
1
4
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- -------------------------
1994 1993 1994 1993
-------- -------- ---------- ----------
OPERATING REVENUES...................................... $656,757 $559,348 $1,577,063 $1,469,452
-------- -------- ---------- ----------
OPERATING EXPENSES
Cost of gas........................................... 392,017 338,612 900,138 864,301
Operation and maintenance............................. 106,899 92,501 359,110 346,117
Depreciation, depletion and amortization.............. 24,052 20,263 85,435 77,734
Property and other taxes.............................. 20,235 17,332 65,580 63,237
-------- -------- ---------- ----------
Total operating expenses............................ 543,203 468,708 1,410,263 1,351,389
-------- -------- ---------- ----------
OPERATING INCOME........................................ 113,554 90,640 166,800 118,063
-------- -------- ---------- ----------
EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES............. 1,598 767 8,541 (37)
-------- -------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income....................................... 1,877 985 6,079 6,336
Interest on long-term debt............................ (8,139) (7,023) (29,905) (30,672)
Other interest expense................................ (2,420) (2,099) (10,260) (7,114)
Minority interest..................................... (761) (747) (3,298) (3,643)
Other................................................. (826) (435) (6,431) (2,469)
-------- -------- ---------- ----------
Total other income and (deductions)................. (10,269) (9,319) (43,815) (37,562)
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 104,883 82,088 131,526 80,464
INCOME TAX PROVISION.................................... 35,761 28,044 43,658 26,336
-------- -------- ---------- ----------
NET INCOME.............................................. $ 69,122 $ 54,044 $ 87,868 $ 54,128
-------- -------- ---------- ----------
-------- -------- ---------- ----------
EARNINGS PER SHARE...................................... $ 2.34 $ 1.85 $ 2.99 $ 1.95
-------- -------- ---------- ----------
-------- -------- ---------- ----------
AVERAGE COMMON SHARES OUTSTANDING....................... 29,544 29,174 29,412 27,780
-------- -------- ---------- ----------
-------- -------- ---------- ----------
DIVIDENDS DECLARED PER SHARE............................ $ .43 $ .42 $ 1.70 $ 1.66
-------- -------- ---------- ----------
-------- -------- ---------- ----------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ----------------------
1994 1993 1994 1993
-------- -------- -------- --------
BALANCE -- Beginning of period.......................... $153,884 $130,621 $172,420 $164,628
ADD -- Net income....................................... 69,122 54,044 87,868 54,128
-------- -------- -------- --------
223,006 184,665 260,288 218,756
DEDUCT -- Cash dividends declared on common stock....... 12,697 12,245 49,979 46,336
-------- -------- -------- --------
BALANCE -- End of period................................ $210,309 $172,420 $210,309 $172,420
-------- -------- -------- --------
-------- -------- -------- --------
The notes to the consolidated financial statements are an integral part of these
statements.
2
5
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1994 1993
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income....................................................................... $ 69,122 $ 54,044
Adjustments to reconcile net income to net cash provided from operating
activities
Depreciation, depletion and amortization
Per statement of income...................................................... 24,052 20,263
Charged to other accounts.................................................... 1,586 1,549
Deferred income taxes -- current............................................... (7,470) (4,676)
Deferred income taxes and investment tax credit -- net......................... (2,781) 2,745
Equity in earnings of joint ventures, net of distributions..................... (1,386) 115
Other.......................................................................... 777 (262)
--------- ---------
83,900 73,778
Changes in assets and liabilities, exclusive of changes shown separately....... 133,788 101,463
--------- ---------
Net cash provided from operating activities.................................. 217,688 175,241
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable -- net............................................................. (175,261) (130,603)
Common stock dividends paid...................................................... (12,697) (12,245)
Issuance of common stock......................................................... 3,885 2,456
Revolving credit facility -- net................................................. 21,100 13,250
Retirement of long-term debt and preferred stock................................. (4,252) (4,658)
Other............................................................................ (787) (192)
--------- ---------
Net cash used for financing activities....................................... (168,012) (131,992)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................................................. (38,651) (41,248)
Investment in joint ventures..................................................... (2,014) (3,535)
Return of investment from joint ventures......................................... 3,223 79
Other............................................................................ (792) 222
--------- ---------
Net cash used for investing activities....................................... (38,234) (44,482)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS..................... 11,442 (1,233)
CASH AND TEMPORARY CASH INVESTMENTS, JANUARY 1..................................... 12,474 9,866
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS, MARCH 31...................................... $ 23,916 $ 8,633
--------- ---------
--------- ---------
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable -- net....................................................... $ (89,200) $ (74,831)
Accrued unbilled revenues........................................................ 17,395 21,441
Gas in inventory................................................................. 29,984 27,026
Accounts payable................................................................. 21,111 (5,525)
Gas inventory equalization....................................................... 109,155 102,462
Federal income, property and other taxes payable................................. 32,614 25,169
Refunds payable to customers..................................................... 326 9,919
Other current assets and liabilities............................................. 6,547 4,741
Deferred assets and liabilities.................................................. 5,856 (8,939)
--------- ---------
$ 133,788 $ 101,463
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized........................................... $ 6,860 $ 7,802
--------- ---------
--------- ---------
Federal income taxes........................................................... $ -- $ --
--------- ---------
--------- ---------
The notes to the consolidated financial statements are an integral part of this
statement.
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6
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In
anticipation that interim inventory reductions will be replaced prior to year
end, the cost of gas for net withdrawals from inventory is recorded at the
estimated average purchase rate for the calendar year. The excess of these
charges over the LIFO cost is credited to the gas inventory equalization
account. During interim periods when there are net injections to inventory, the
equalization account is reversed.
2. CONTINGENCIES
A. INTERSTATE PIPELINE RESTRUCTURING
As described in MCN's 1993 Annual Report on Form 10-K, the Federal
Energy Regulatory Commission (FERC) issued Order No. 636 in 1992 which
required interstate pipelines to separate their pipeline sales services
into various service components. The order also allows interstate pipelines
to recover their prudently incurred transition costs resulting from the
restructuring.
ANR Pipeline Company (ANR), MichCon's primary interstate natural gas
transporter, implemented its Order No. 636 restructuring in November 1993.
In February 1994, ANR filed its first transition cost recovery request.
MichCon recorded its portion of these costs of $1,200,000 in the first
quarter. These transition costs are recoverable through the Gas Cost
Recovery (GCR) mechanism, and therefore, a regulatory asset has been
recorded for the future recovery of these costs.
On April 29, 1994, ANR filed its next transition cost recovery
request. As these periodic filings are made, MichCon will accrue its
allocated portion. It is management's belief that there will be no effect
on earnings.
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 the accompanying
financial statements.
3. GENERAL
There have been no changes in MCN's principal accounting policies from
those set forth in MCN's 1993 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1994 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.
4
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
MCN'S EARNINGS FOR THE QUARTER INCREASED 28% -- Both MCN's utility and
nonutility businesses contributed significantly to higher earnings for the 1994
first quarter, which increased $15.1 million ($.49 per share) from the 1993
quarter. Earnings for the 1994 twelve-month period increased $33.8 million
($1.04 per share) from the corresponding 1993 period. A summary of financial
performance follows:
QUARTER 12 MONTHS
--------------- ---------------
1994 1993 1994 1993
----- ----- ----- -----
(MILLIONS EXCEPT PER SHARE AMOUNTS)
NET INCOME
Utility Services......................................... $66.0 $53.2 $75.4 $51.7
Nonutility Services...................................... 3.1 .8 12.5 2.4
----- ----- ----- -----
$69.1 $54.0 $87.9 $54.1
----- ----- ----- -----
----- ----- ----- -----
EARNINGS PER SHARE
Utility Services......................................... $2.23 $1.82 $2.56 $1.86
Nonutility Services...................................... .11 .03 .43 .09
----- ----- ----- -----
$2.34 $1.85 $2.99 $1.95
----- ----- ----- -----
----- ----- ----- -----
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STRATEGIC DIRECTION -- As discussed in MCN's 1993 Annual Report on Form
10-K, MCN has set its strategic direction, first, to grow the gas utility
business through market expansion; second, to invest in a portfolio of
gas-related projects including gas storage, gas cogeneration, gas production and
gas gathering systems; and third, to pursue opportunities in gas technology and
other areas of expertise. MCN is continuing to pursue opportunities to invest in
these areas through both the utility and nonutility businesses, as subsequently
discussed.
UTILITY SERVICES
UTILITY SERVICES' EARNINGS INCREASED 24% -- Utility services' earnings
increased $12.8 million ($.41 per share) for the 1994 quarter as compared to the
1993 period. The increase reflects higher gas deliveries resulting from
significantly colder weather, market expansion and a January 1994 rate increase.
The increase for the 1994 twelve-month period of $23.7 million ($.70 per share)
was due to lower operating expenses, as well as higher gas deliveries resulting
from colder weather.
QUARTER 12 MONTHS
-------------- --------------
1994 1993 1994 1993
---- ----- ---- -----
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) than Normal....................... 7.9% (3.5)% 3.5% (.4)%
Increase (Decrease) from Normal in:
Gas Markets (Bcf).......................................... 7.8 (3.3) 6.7 (4.1)
Net Income (Millions)...................................... $7.0 $(2.8) $6.1 $(3.6)
Earnings Per Share......................................... $.24 $(.10) $.21 $(.13)
5
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
OPERATING REVENUES
OPERATING REVENUES INCREASED 18% -- The increases in utility services'
revenues for the 1994 quarter and twelve-month period reflect higher gas markets
and rates, as subsequently discussed.
QUARTER 12 MONTHS
----------------- ---------------------
1994 1993 1994 1993
------ ------ -------- --------
UTILITY OPERATIONS (in Millions)
Operating Revenues*.................................. $540.8 $459.3 $1,210.8 $1,159.1
------ ------ -------- --------
Operating Expenses*
Cost of Gas........................................ 303.5 256.8 634.7 623.6
Operation & Maintenance............................ 87.5 78.6 289.2 294.7
Depreciation, Depletion & Amortization............. 21.3 18.6 77.1 71.4
Property & Other Taxes............................. 18.9 16.3 61.5 59.9
------ ------ -------- --------
431.2 370.3 1,062.5 1,049.6
------ ------ -------- --------
Operating Income..................................... 109.6 89.0 148.3 109.5
------ ------ -------- --------
Equity in Earnings (Loss) of Joint Ventures.......... .8 -- 2.6 (.6)
------ ------ -------- --------
Other Income & (Deductions)*
Interest Income.................................... 1.4 .8 4.7 6.4
Interest on Long-Term Debt......................... (6.6) (6.4) (25.9) (27.8)
Other Interest Expense............................. (2.2) (2.1) (8.1) (7.3)
Other.............................................. (.8) (.4) (6.4) (2.7)
------ ------ -------- --------
(8.2) (8.1) (35.7) (31.4)
------ ------ -------- --------
Income Tax Provision................................. 36.2 27.7 39.8 25.8
------ ------ -------- --------
Net Income........................................... $ 66.0 $ 53.2 $ 75.4 $ 51.7
------ ------ -------- --------
------ ------ -------- --------
*Includes intercompany transactions
Gas Markets
MAJOR GAS MARKETS INCREASED 16.8 BCF -- Gas sales and end user
transportation deliveries for the 1994 quarter and twelve-month period increased
16.8 billion cubic feet (Bcf) and 11.3 Bcf, respectively. The increases were
primarily due to significantly colder weather and market expansion.
QUARTER 12 MONTHS
--------------- ---------------
1994 1993 1994 1993
----- ----- ----- -----
UTILITY GAS MARKETS (in Bcf)
Gas Sales*................................................ 106.0 93.0 218.4 208.1
End User Transportation................................... 44.9 41.1 132.4 131.4
Intermediate Transportation*.............................. 107.7 75.7 313.1 230.7
----- ----- ----- -----
258.6 209.8 663.9 570.2
----- ----- ----- -----
----- ----- ----- -----
*Includes intercompany volumes
INTERMEDIATE TRANSPORTATION INCREASED 42% -- Intermediate transportation
increased 32 Bcf and 82.4 Bcf for the three-and twelve-month periods,
respectively, due to additional volumes transported for ANR, Michigan gas
producers and other shippers. The April 1993 start-up of the Blue Lake gas
storage project enables MichCon to transport gas for ANR under a firm, long-term
contract. Profit margins on intermediate transportation services are
considerably less than margins on gas sales or for end user transportation
markets.
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
There has been a significant increase in Michigan Antrim gas production
over the past few years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. Given the expected continued
rise in demand, MichCon has responded with a proposal to construct a $170
million expansion of its pipeline system, which has the potential to increase
transportation deliveries by 85 Bcf per year. MichCon has filed for
authorization of its proposed construction with the Michigan Public Service
Commission (MPSC) and has encountered competing proposals which may reduce a
portion of the pipeline that MichCon has proposed constructing.
Rate Matters
As described in MCN's 1993 Annual Report on Form 10-K, MichCon received
approval from the MPSC in its general rate case to increase rates $15.7 million,
beginning in January 1994. The rate increase resulted in a significant
contribution to revenues and earnings for the 1994 quarter since the majority of
the revenues from the rate increase were earned during the colder months of the
year. However, the impact on earnings will be tempered over the remainder of the
year as increased operating costs, which the rate increase is intended to
recover, are incurred.
OPERATING EXPENSES
Cost of gas sold increased in the 1994 quarter and twelve-month period due
primarily to increased gas sales volumes. The 1994 quarter also reflects higher
prices for natural gas in the spot market. These increases were partially offset
by lower fixed costs under a gas transportation contract with ANR. The cost of
gas sold per thousand cubic feet increased by $.20 or 7.2% for the 1994 quarter
and decreased $.01 for the twelve-month period, respectively.
As described in MCN's 1993 Annual Report on Form 10-K, the FERC issued
Order No. 636 in 1992 which required interstate pipelines to separate their
pipeline sales services into various service components. The order also allows
interstate pipelines to recover their prudently incurred transition costs
resulting from the restructuring.
ANR, MichCon's primary interstate natural gas transporter, implemented its
Order No. 636 restructuring in November 1993. In February 1994, ANR filed its
first transition cost recovery request. MichCon recorded its portion of these
costs of $1.2 million in the first quarter. These transition costs are
recoverable through the GCR mechanism, and therefore, a regulatory asset has
been recorded for the future recovery of these costs.
On April 29, 1994, ANR filed its next transition cost recovery request. As
these periodic filings are made, MichCon will accrue its allocated portion. It
is management's belief that there will be no effect on earnings.
Operation and maintenance expenses were higher in the 1994 quarter due to
higher postretirement benefit costs of $7.7 million, which were recognized as a
result of the new accounting requirements under Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions". These costs are being recovered in rates that became
effective January 1994. Management's continuing efforts to reduce operating
costs resulted in the decrease in operation and maintenance expenses for the
1994 twelve-month period. Additionally, these ongoing efforts partially offset
the increase for the 1994 quarter.
The increase in depreciation and depletion for both 1994 periods was due
mainly to higher plant balances, reflecting capital expenditures of $390.1
million over the past three calendar years, as well as higher depreciation rates
that were implemented in January 1994.
7
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
Property and other taxes for the 1994 quarter and twelve-month period
reflect an increase in Michigan single business taxes due to higher earnings. In
addition, property and other taxes in 1994 have been impacted by the reduction
in property taxes approved by the Michigan Legislature in 1993. Based on past
practice with the MPSC as it relates to tax reductions, management does not
expect the reduction in property taxes to significantly impact earnings as such
benefits are not expected to be retained.
EQUITY IN EARNINGS OF JOINT VENTURES
Utility earnings from joint ventures increased for the 1994 quarter and
twelve-month period due to earnings from the Blue Lake gas storage project which
began operations in April 1993. MCN's 50% interest in the Blue Lake project is
owned equally by utility and nonutility services.
OTHER INCOME & DEDUCTIONS
Interest income decreased for the 1994 twelve-month period due to interest
recorded in the 1993 twelve-month period from a refund of windfall profit taxes
and an interest adjustment on MichCon's energy assistance programs.
Interest on long-term debt decreased for the 1994 twelve-month period due
to lower financing costs resulting from the refinancing of $160.1 million of
first mortgage bonds since September 1992.
Other income and deductions for the 1994 twelve-month period reflect higher
charitable contributions and the write-off of certain assets.
INCOME TAX PROVISION
Income taxes increased for the 1994 quarter and twelve-month period due to
improved earnings. Income taxes for these periods also reflect the August 1993
enactment of The Omnibus Budget Reconciliation Act which increased the corporate
tax rate to 35%, effective January 1993. The retroactive effect of the tax
increase was recorded in the third quarter of 1993.
NONUTILITY SERVICES
NONUTILITY EARNINGS INCREASED $2.3 MILLION -- The nonutility businesses
continued to make a significant contribution to MCN's earnings. Earnings
increased $2.3 million ($.08 per share) for the current quarter and $10.1
million ($.34 per share) for the twelve months ended, reflecting higher earnings
from gas exploration & production activities, which began operations during the
first quarter of 1993. Also contributing to the increases were higher earnings
from the gas marketing & cogeneration business and computer operation services.
8
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
QUARTER 12 MONTHS
----------------- -----------------
1994 1993 1994 1993
------ ------ ------ ------
NONUTILITY OPERATIONS (in Millions)
Operating Revenues*
Gas Services.......................................... $103.5 $ 91.4 $313.6 $268.9
Computer Operations Services.......................... 20.1 16.2 78.3 67.2
------ ------ ------ ------
123.6 107.6 391.9 336.1
------ ------ ------ ------
Operating Expenses*
Gas Services.......................................... 98.7 88.8 294.5 260.7
Computer Operations Services.......................... 18.7 16.0 71.9 63.4
Corporate & Gas Technology............................ 2.2 1.2 6.9 3.5
------ ------ ------ ------
119.6 106.0 373.3 327.6
------ ------ ------ ------
Operating Income (Loss)
Gas Services
Gas Marketing & Cogeneration....................... 2.2 .6 7.5 (1.5)
Gas Gathering & Processing......................... 2.2 2.0 9.1 9.7
Exploration & Production........................... .4 -- 2.5 --
------ ------ ------ ------
4.8 2.6 19.1 8.2
Computer Operations Services.......................... 1.4 .2 6.4 3.8
Corporate & Gas Technology............................ (2.2) (1.2) (6.9) (3.5)
------ ------ ------ ------
4.0 1.6 18.6 8.5
------ ------ ------ ------
Equity in Earnings of Joint Ventures.................... .8 .8 5.9 .6
------ ------ ------ ------
Other Income & (Deductions)*
Interest Income....................................... .5 .3 1.6 1.4
Interest Expense...................................... (1.8) (.8) (6.3) (4.2)
Minority Interest..................................... (.8) (.8) (3.3) (3.7)
Other................................................. -- -- (.1) .2
------ ------ ------ ------
(2.1) (1.3) (8.1) (6.3)
------ ------ ------ ------
Income Tax Provision (Benefit).......................... (.4) .3 3.9 .4
------ ------ ------ ------
Net Income.............................................. $ 3.1 $ .8 $ 12.5 $ 2.4
------ ------ ------ ------
------ ------ ------ ------
*Includes intercompany transactions
GAS SERVICES
OPERATING INCOME INCREASED 85% -- Gas services' increase in operating
income of $2.2 million for the 1994 quarter and $10.9 million for the twelve
months ended reflects higher gas margins on gas sales from the gas marketing &
cogeneration business and earnings from the new gas exploration & production
activities which began production in early 1993.
Gas marketing & cogeneration's operating income for the 1994 quarter
increased from the 1993 period due to more favorable margins on a slightly lower
level of gas sales. The increase for the 1994 twelve-month period also reflects
favorable margins, as well as higher gas sales volumes.
MCN's exploration & production operations contributed $.4 million of
operating income to the 1994 quarter and $2.5 million to the twelve-month
period. MCN's share of these projects has produced approximately 1.5 Bcf and 3.8
Bcf of gas for the 1994 three-and twelve-month periods, respectively, generating
$1.4 million and $3.7 million of federal gas production tax credits for the same
respective periods.
9
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
QUARTER 12 MONTHS
------------- ---------------
1994 1993 1994 1993
---- ---- ----- -----
NONUTILITY GAS MARKETS (in Bcf)
Gas Sales................................................... 38.5 39.1 122.3 119.8
Transportation.............................................. 5.7 5.7 21.8 24.9
---- ---- ----- -----
44.2 44.8 144.1 144.7
---- ---- ----- -----
---- ---- ----- -----
MCN TO ACQUIRE NATURAL GAS RESERVES -- In 1994, MCN announced signing two
agreements to acquire natural gas properties in Oklahoma, Kansas and Texas at a
total cost of approximately $100 million. Combined, these properties include an
interest in about 700 producing wells of which MCN's share amounts to
approximately 70 Bcf of proven reserves and 35 Bcf of potential reserves,
including 9 Bcf of equivalent oil reserves. The acquisitions are consistent with
MCN's strategy of developing and acquiring gas reserves to provide reliable,
long-term gas supplies at predetermined prices for the nonregulated gas
marketing operations and gas cogeneration facilities.
COMPUTER OPERATIONS SERVICES
OPERATING INCOME INCREASED -- Computer operations services' operating
income increased $1.2 million for the current quarter and $2.6 million for the
twelve-month period reflecting higher operating revenues from new business added
throughout 1993, in addition to increased usage by existing customers. The 1993
quarter also reflects higher costs which were incurred to obtain and support the
new customer contracts.
CORPORATE & GAS TECHNOLOGY
Both the 1994 three-and twelve-month periods reflect increased corporate
expenses associated with the development of new nonutility projects.
Additionally, the 1994 twelve-month period included costs incurred to launch a
pilot program aimed at having natural gas as a viable alternative for off-road
vehicles, as well as for fleet and personal transportation vehicles.
EQUITY IN EARNINGS OF JOINT VENTURES
Joint venture earnings for both the current three-and twelve-month periods
were favorably affected by earnings from the Blue Lake gas storage project,
which began operations in April 1993. Gas gathering & processing's 1993 quarter
earnings were favorably affected by a retroactive increase in MCN's ownership
percentage in a gas processing plant. The increase in gas gathering &
processing's twelve-month period earnings reflects a full period of earnings at
the higher ownership percentage. The increased loss for the current twelve-month
period in other joint ventures was due to a reserve for the expected write-off
of assets related to the natural gas torch business.
QUARTER 12 MONTHS
--------------- -----------------
1994 1993 1994 1993
---- ---- ----- -----
NONUTILITY EQUITY IN EARNINGS OF JOINT VENTURES (in
Millions)
Gas Storage........................................... $1.0 $ .6 $ 6.6 $ 1.1
Gas Marketing & Cogeneration.......................... (.5) (.5) (1.4) (1.6)
Gas Gathering & Processing............................ .5 .7 1.9 1.2
Other................................................. (.2) -- (1.2) (.1)
---- ---- ----- -----
$ .8 $ .8 $ 5.9 $ .6
---- ---- ----- -----
---- ---- ----- -----
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
OTHER INCOME & DEDUCTIONS
The 1994 three-and twelve-month periods reflect higher interest costs on
long-term debt due to increased borrowings required to finance nonutility
capital investments.
INCOME TAXES
Income taxes for the 1994 three-and twelve-month periods were favorably
impacted by $1.4 million and $3.7 million, respectively, of federal gas
production tax credits related to gas production projects. The favorable impact
of the tax credits was partially offset by the August 1993 enactment of The
Omnibus Budget Reconciliation Act which increased the corporate tax rate to 35%,
effective January 1993. The retroactive effect of the tax increase was recorded
in the third quarter of 1993.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
CASH FLOW INCREASED 24% -- MCN's cash flow from operating activities during
the first quarter of 1994 increased $42.5 million over the comparable 1993
quarter. The increase was due to higher net income and lower working capital
requirements.
QUARTER
------------------
1994 1993
------ ------
CASH FLOW FROM OPERATING ACTIVITIES (in Millions)
Utility Services....................................................... $ 79.2 $ 72.0
Nonutility Services.................................................... 4.7 1.8
------ ------
83.9 73.8
Changes in Assets and Liabilities...................................... 133.8 101.4
------ ------
Cash Flow from Operating Activities.................................... $217.7 $175.2
------ ------
------ ------
FINANCING ACTIVITIES
In anticipation of future permanent capital requirements, MCN plans to file
a universal shelf registration with the Securities and Exchange Commission (SEC)
for the issuance of up to a total of $250 million of preferred and common equity
and debt securities. During 1994, MCN may issue between $50 and $100 million of
securities under this registration.
MCN issues new shares of common stock pursuant to its Dividend Reinvestment
and Stock Purchase Plan and various employee benefit plans. During 1994, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating approximately $15 million. During the 1994 first quarter, MCN issued
approximately 107,000 shares, generating $3.9 million.
Utility Services
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.
During the first quarter of 1994, MichCon repaid $155.3 million of short-term
debt, including commercial paper. During the latter part of the year, cash and
temporary cash investments decrease as funds are used to finance increases in
gas inventories and customer accounts receivable. To meet its seasonal
short-term borrowing needs, MichCon normally issues commercial paper which is
backed by credit lines with several banks. MichCon has established credit lines
of up to $300 million through March 1994. Thereafter, the lines decrease to $125
million through August 1994. Commercial paper of $105 million was outstanding at
March 31, 1994.
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
MichCon has shelf registrations on file with the SEC that allow for the
issuance of up to $110 million of first mortgage bonds. During 1994, MichCon may
issue between $50 and $100 million of first mortgage bonds. 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 percent debt and 50 percent equity. Future
long-term debt offerings are expected to carry MichCon's current debt rating of
"A".
Nonutility Services
MCN and MCN Investment maintain a joint unsecured revolving credit facility
that allows for borrowings of up to $150 million through August 1996. At March
31, 1994, borrowings outstanding under the facility totaled $93 million. In
order to finance the increased investments in nonutility projects, MCN
anticipates expanding this facility during the second quarter of 1994.
In 1993, MCN Investment established a short-term credit line through
September 1994 which allows for borrowings of up to $65 million to finance the
working capital requirements of its gas marketing operations. 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. During the first quarter of
1994, MCN Investment repaid the full $20 million of short-term debt that was
outstanding under the credit line.
INVESTING ACTIVITIES
CAPITAL INVESTMENTS IN 1994 TO REACH $400 MILLION -- Capital investments
totaled $39.7 million in the first quarter of 1994 and included approximately
$13.5 million of capital expenditures for nonutility gas exploration &
production projects. The first quarter of 1993 included expenditures for the
Blue Lake gas storage project which began operations in April 1993.
QUARTER
---------------
1994 1993
----- -----
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Utility Services........................................................... $20.4 $25.1
Nonutility Services........................................................ 18.3 16.1
----- -----
38.7 41.2
----- -----
MCN's Share of Joint Venture Capital Expenditures:
Gas Storage................................................................ .4 12.5
Other...................................................................... .7 .3
----- -----
1.1 12.8
----- -----
Minority Partners' Share of Consolidated Capital Expenditures................ .1 --
----- -----
Total Capital Investments.................................................... $39.7 $54.0
----- -----
----- -----
12
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONCLUDED)
Capital investments for 1994 are anticipated to be about $400 million.
These investments are to be directed toward opportunities in the utility
business and other projects that build upon management's expertise, such as
underground gas storage, natural gas cogeneration facilities, gas gathering
lines, and gas production. Approximately $250 million of the anticipated capital
investments will be made in the nonutility businesses, primarily to purchase gas
reserves and invest in additional exploration & production projects. Of the $250
million anticipated for nonutility projects, about $100 million has already been
committed through agreements to purchase oil and gas producing properties in
Oklahoma, Kansas and Texas.
The anticipated level of investments in 1994 and future years may increase
capital requirements materially in excess of internally generated funds and may
require the issuance of additional debt and equity securities. It is
management's opinion that MCN and its subsidiaries have sufficient capital
resources, both internal and external, to meet anticipated capital requirements.
13
16
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MCN held its Annual Meeting of Shareholders on April 28, 1994. As of March
1, 1994, the record date for determination of shareholders entitled to vote at
the Annual Meeting, there were 29,557,345 shares outstanding and entitled to
vote. Of these shares, 25,888,205, or 87.59%, were present by proxy, and
3,669,140 shares were not voted.
At the Annual Meeting, shareholders voted:
1. To elect the following Directors to serve for three year terms:
NUMBER OF SHARES
NUMBER OF SHARES WITHHOLDING
DIRECTOR CONSENTING FOR CONSENT
---------------------------------------- ---------------- ----------------
Alfred R. Glancy III.................... 25,663,645 224,560
Frank M. Hennessey...................... 25,686,233 201,972
Howard F. Sims.......................... 25,620,995 267,210
2. To ratify the MCN Corporation Non-Officer Director Stock Award
Plan, with 23,758,991 shares voted for the ratification, 1,571,813 shares
voted against, and abstentions of 557,400 shares.
3. To approve an amendment to MCN Corporation's Articles of
Incorporation to increase the number of authorized shares of MCN Common
Stock, of the par value of $.01 per share, from 50 million to 100 million,
with 23,739,389 shares voted for the ratification, 1,813,353 shares voted
against, and abstentions of 335,463 shares.
4. To appoint Deloitte & Touche as independent auditors for the year
ending December 31, 1994, with 25,621,732 shares voted for the appointment,
85,670 shares voted against, and abstentions of 180,801 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------ -------------------------------------------------------------------
3-1 Articles of Incorporation of MCN Corporation, as amended.
10-1 MCN Corporation Non-Officer Director Stock Award Plan.
14
17
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: May 6, 1994 By: /s/ PATRICK ZURLINDEN
---------------------
Patrick Zurlinden
Controller and Chief
Accounting Officer
15
18
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
3-1 Articles of Incorporation of MCN Corporation, as amended,
in electronic format.*
10-1 MCN Corporation Non-Officer Director Stock Award Plan.*
- --------------------------
* Indicates document filed herewith.