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 JUNE 30, 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 July 31, 1994:
Common Stock, par value $.01 per share: 29,724,645
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2
INDEX TO FORM 10-Q
FOR QUARTER ENDED JUNE 30, 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................................................................ 6
PART II -- OTHER INFORMATION
None
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)
JUNE 30, DECEMBER 31,
------------------------ ------------
1994 1993 1993
---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and temporary cash investments, at cost (which approximates market
value).................................................................. $ 11,207 $ 14,551 $ 12,474
Accounts receivable, less allowance for doubtful accounts of $25,694,
$36,838 and $19,576, respectively....................................... 229,875 222,101 236,934
Accrued unbilled revenues................................................. 18,705 15,243 101,327
Gas in inventory (Note 1)................................................. 65,017 50,966 45,895
Property taxes assessed applicable to future periods...................... 28,570 36,992 50,709
Accrued gas cost recovery revenues........................................ -- 30,664 --
Other..................................................................... 42,056 37,222 35,332
---------- ---------- ------------
395,430 407,739 482,671
---------- ---------- ------------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures.............................. 60,326 51,241 60,528
Deferred postretirement benefit cost (Note 4)............................. 24,727 13,331 25,612
Other..................................................................... 70,538 57,041 59,031
---------- ---------- ------------
155,591 121,613 145,171
---------- ---------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost...................................... 2,432,789 2,188,612 2,284,529
Less -- Accumulated depreciation and depletion............................ 1,095,600 1,017,955 1,047,941
---------- ---------- ------------
1,337,189 1,170,657 1,236,588
---------- ---------- ------------
$1,888,210 $1,700,009 $1,864,430
========= ========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................... $ 139,903 $ 149,380 $ 124,585
Notes payable............................................................. 107,327 122,532 280,304
Current portion of long-term debt, capital lease obligations and
redeemable cumulative preferred stock................................... 9,937 50,000 5,980
Gas inventory equalization (Note 1)....................................... 34,156 44,312 --
Federal income, property and other taxes payable.......................... 86,063 82,912 63,790
Deferred gas cost recovery revenues....................................... 18,422 -- --
Refunds payable to customers.............................................. 243 12,052 10,794
Customer deposits......................................................... 10,108 11,148 13,271
Other..................................................................... 58,513 59,640 78,146
---------- ---------- ------------
464,672 531,976 576,870
---------- ---------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................................... 168,513 136,865 171,630
Unamortized investment tax credit......................................... 39,629 41,533 40,571
Tax benefits amortizable to customers..................................... 30,444 43,035 31,666
Minority interest......................................................... 18,516 18,607 18,357
Other..................................................................... 83,739 74,336 54,729
---------- ---------- ------------
340,841 314,376 316,953
---------- ---------- ------------
LONG-TERM DEBT, including capital lease obligations (Note 2)................ 555,064 376,110 494,821
---------- ---------- ------------
REDEEMABLE CUMULATIVE PREFERRED STOCK OF SUBSIDIARY, $2.05 SERIES........... 2,618 5,618 5,618
---------- ---------- ------------
CONTINGENCIES (Note 3)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................................. 297 293 295
Additional paid-in capital................................................ 324,449 311,803 317,117
Retained earnings......................................................... 201,045 162,066 153,884
Unearned compensation and ESOP benefit.................................... (776) (2,233) (1,128)
---------- ---------- ------------
525,015 471,929 470,168
---------- ---------- ------------
$1,888,210 $1,700,009 $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 SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
--------------------- --------------------- -------------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- ---------- ----------
OPERATING REVENUES................. $272,567 $289,794 $929,324 $849,142 $1,559,836 $1,488,682
-------- -------- -------- -------- ---------- ----------
OPERATING EXPENSES
Cost of gas...................... 126,784 163,708 518,801 502,320 863,214 884,820
Operation and maintenance........ 88,919 82,515 195,818 175,016 365,514 347,203
Depreciation, depletion and
amortization................... 27,847 20,512 51,899 40,775 92,770 79,419
Property and other taxes......... 16,957 16,065 37,192 33,397 66,472 64,012
-------- -------- -------- -------- ---------- ----------
Total operating expenses....... 260,507 282,800 803,710 751,508 1,387,970 1,375,454
-------- -------- -------- -------- ---------- ----------
OPERATING INCOME................... 12,060 6,994 125,614 97,634 171,866 113,228
-------- -------- -------- -------- ---------- ----------
EQUITY IN EARNINGS OF JOINT
VENTURES......................... 2,190 3,216 3,788 3,983 7,515 3,015
-------- -------- -------- -------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................. 1,317 2,048 3,194 3,033 5,348 7,146
Interest on long-term debt....... (9,128) (7,278) (17,267) (14,301) (31,755) (30,135)
Other interest expense........... (1,598) (1,387) (4,018) (3,486) (10,471) (8,133)
Minority interest................ (707) (794) (1,468) (1,541) (3,211) (3,516)
Other............................ (966) (262) (1,792) (697) (7,135) (2,151)
-------- -------- -------- -------- ---------- ----------
Total other income and
(deductions)................. (11,082) (7,673) (21,351) (16,992) (47,224) (36,789)
-------- -------- -------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES......... 3,168 2,537 108,051 84,625 132,157 79,454
INCOME TAX PROVISION (BENEFIT)..... (309) 599 35,452 28,643 42,750 24,922
-------- -------- -------- -------- ---------- ----------
NET INCOME......................... $ 3,477 $ 1,938 $ 72,599 $ 55,982 $ 89,407 $ 54,532
========= ========= ========= ========= ========== ==========
EARNINGS PER SHARE................. $ .12 $ .07 $ 2.45 $ 1.92 $ 3.03 $ 1.92
========= ========= ========= ========= ========== ==========
AVERAGE COMMON SHARES
OUTSTANDING...................... 29,648 29,280 29,596 29,227 29,504 28,444
========= ========= ========= ========= ========== ==========
DIVIDENDS DECLARED PER SHARE....... $ .43 $ .42 $ .86 $ .84 $ 1.71 $ 1.67
========= ========= ========= ========= ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
--------------------- --------------------- ----------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
BALANCE -- Beginning of period.... $210,309 $172,420 $153,884 $130,621 $162,066 $155,255
ADD -- Net income................. 3,477 1,938 72,599 55,982 89,407 54,532
-------- -------- -------- -------- -------- --------
213,786 174,358 226,483 186,603 251,473 209,787
DEDUCT -- Cash dividends declared
on common stock......... 12,741 12,292 25,438 24,537 50,428 47,721
-------- -------- -------- -------- -------- --------
BALANCE -- End of period.......... $201,045 $162,066 $201,045 $162,066 $201,045 $162,066
========= ========= ========= ========= ========= =========
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)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1994 1993
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................................. $ 72,599 $ 55,982
Adjustments to reconcile net income to net cash provided from operating
activities
Depreciation, depletion and amortization
Per statement of income................................................ 51,899 40,775
Charged to other accounts.............................................. 3,269 3,147
Deferred income taxes -- current......................................... (13,582) (3,881)
Deferred income taxes and investment tax credit -- net................... (5,281) 2,977
Equity in earnings of joint ventures, net of distributions............... 2,191 (3,646)
Other.................................................................... 1,496 (83)
--------- ---------
112,591 95,271
Changes in assets and liabilities, exclusive of changes shown
separately.............................................................. 175,069 112,739
--------- ---------
Net cash provided from operating activities............................ 287,660 208,010
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable -- net....................................................... (169,077) (112,791)
Common stock dividends paid................................................ (25,438) (24,537)
Issuance of common stock................................................... 7,354 5,454
Revolving credit facility -- net........................................... 60,100 40,000
Retirement of long-term debt and preferred stock........................... (4,717) (6,776)
Other...................................................................... (1,089) (275)
--------- ---------
Net cash used for financing activities................................. (132,867) (98,925)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures....................................................... (151,729) (98,616)
Investment in joint ventures............................................... (2,281) (2,762)
Other...................................................................... (2,050) (3,022)
--------- ---------
Net cash used for investing activities................................. (156,060) (104,400)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS............... (1,267) 4,685
CASH AND TEMPORARY CASH INVESTMENTS, JANUARY 1............................... 12,474 9,866
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS, JUNE 30................................. $ 11,207 $ 14,551
========== ==========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable -- net................................................. $ 7,059 $ (10,295)
Accrued unbilled revenues.................................................. 82,622 76,173
Gas in inventory........................................................... (19,122) (7,121)
Property taxes assessed applicable to future periods....................... 22,139 23,390
Accrued/deferred gas cost recovery revenues................................ 18,422 (30,664)
Accounts payable........................................................... 15,318 21,758
Gas inventory equalization................................................. 34,156 44,312
Federal income, property and other taxes payable........................... 22,283 (4,723)
Refunds payable to customers............................................... (10,551) 8,737
Other current assets and liabilities....................................... (15,317) (5,047)
Deferred assets and liabilities............................................ 18,060 (3,781)
--------- ---------
$ 175,069 $ 112,739
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized..................................... $ 16,784 $ 17,974
========== ==========
Federal income taxes..................................................... $ 16,650 $ 11,500
========== ==========
The notes to the consolidated financial statements are an integral part of this
statement.
3
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. LONG-TERM DEBT
In July 1994, MCN and MCN Investment renegotiated their joint unsecured
revolving credit facility to allow for borrowings of up to $250,000,000 and to
extend the expiration date of the facility through August 1997. Outstanding
advances are subject to interest at fixed or certain alternative variable rates
at MCN's option. Borrowings of $132,000,000 were outstanding at a weighted
average interest rate of 5.1% as of June 30, 1994.
3. 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 service into
its 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.
During 1994, ANR filed several requests for recovery of these transition
costs, and MichCon accrued its portion totaling $2,200,000. The Michigan
Public Service Commission (MPSC) has indicated that these transition costs
are recoverable through the Gas Cost Recovery (GCR) mechanism, and
therefore, a regulatory asset has been recorded for their future recovery.
As periodic filings are made by ANR, MichCon will accrue its allocated
portion. It is management's belief that these costs will have no effect on
earnings.
B. GUARANTY
In 1991, subsidiaries of MCN and an unaffiliated corporation formed an
equal partnership, Blue Lake Gas Storage Company, to construct and operate
a natural gas storage system. The partnership obtained a construction loan
with a bank permitting it to borrow up to $90,000,000. MCN guaranteed its
50% share of all debt incurred under the credit facility. In June 1994, the
construction loan was replaced with permanent financing, resulting in the
expiration of MCN's guaranty.
C. 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.
4. OTHER POSTRETIREMENT BENEFITS
As described in MCN's 1993 Annual Report on Form 10-K, MCN deferred the
1993 utility related postretirement cost in excess of claims paid (including
amortization of the transition obligation) until January
4
7
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
1994 when new rates to recover such costs became effective. The deferred costs
were to be amortized over a period of 19 years.
Legislation was passed in Michigan which provides for reduced property
taxes effective with the 1994 assessments and an increase in state sales and use
tax rates effective May 1994. In addition, the Omnibus Budget Reconciliation Act
of 1993 increased the corporate income tax rate from 34% to 35%, effective
January 1993.
It is estimated that these changes in federal and state tax rates will
result in a reduction in MichCon's tax expense of approximately $4 million for
1994 and $6.2 million annually thereafter. In June 1994, the MPSC approved a
settlement agreement that allows MichCon to offset the impact of the net
reduction in taxes against its deferred 1993 postretirement costs. This will
accelerate the amortization of the deferred postretirement cost from 19 years to
approximately 4 years.
5. 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 periods' 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.
5
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
MCN'S EARNINGS FOR THE QUARTER INCREASED 84% -- MCN continued its pace of
having a record financial performance during 1994 as its second quarter earnings
increased $1.6 million ($.05 per share) from the same 1993 period. Earnings for
the 1994 six-and twelve-month periods increased $16.6 million ($.53 per share)
and $34.9 million ($1.11 per share), respectively, over the comparable 1993
periods. A summary of financial performance follows:
QUARTER 6 MONTHS 12 MONTHS
-------------- --------------- ---------------
1994 1993 1994 1993 1994 1993
----- ---- ----- ----- ----- -----
(MILLIONS EXCEPT PER SHARE AMOUNTS)
NET INCOME (LOSS)
Utility Services.......................... $(1.7) $1.6 $64.3 $54.9 $72.0 $51.7
Nonutility Services....................... 5.2 .3 8.3 1.1 17.4 2.8
----- ---- ----- ----- ----- -----
$ 3.5 $1.9 $72.6 $56.0 $89.4 $54.5
===== ==== ===== ===== ===== =====
EARNINGS (LOSS) PER SHARE
Utility Services.......................... $(.06) $.06 $2.17 $1.88 $2.44 $1.82
Nonutility Services....................... .18 .01 .28 .04 .59 .10
----- ---- ----- ----- ----- -----
$ .12 $.07 $2.45 $1.92 $3.03 $1.92
===== ==== ===== ===== ===== =====
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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 REPORTS LOWER EARNINGS -- Utility services' earnings
decreased $3.3 million ($.12 per share) for the 1994 quarter as compared to the
1993 period. The decrease was mainly due to the uneven effects of a January 1994
rate increase, as discussed in detail in the "Rate Matters" section that
follows. Partially offsetting the decrease were higher revenues from increased
gas transportation deliveries. Utility earnings for the 1994 six-and
twelve-month periods increased $9.4 million ($.29 per share) and $20.3 million
($.62 per share), respectively, reflecting increased gas deliveries resulting
from significantly colder weather, as well as the effect of the January 1994
rate increase.
QUARTER 6 MONTHS 12 MONTHS
--------------- -------------- --------------
1994 1993 1994 1993 1994 1993
----- ----- ---- ----- ---- -----
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) than Normal....... (9.1)% (5.0)% 4.2% (3.8)% 2.9% (1.9)%
Increase (Decrease) from Normal in:
Gas Markets (Bcf).......................... (1.3) (.9) 6.4 (4.1) 6.2 (5.6)
Net Income (Millions)...................... $(1.2) $ (.8) $5.9 $(3.6) $5.7 $(4.9)
Earnings Per Share......................... $(.04) $(.03) $.20 $(.12) $.19 $(.17)
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
GROSS MARGIN
GROSS MARGIN IS UP -- Utility services' gross margin (operating revenues
less cost of gas) increased in all 1994 periods, reflecting expanded gas markets
and higher sales rates, as subsequently discussed.
QUARTER 6 MONTHS 12 MONTHS
----------------- ----------------- ---------------------
1994 1993 1994 1993 1994 1993
------ ------ ------ ------ -------- --------
UTILITY OPERATIONS (in Millions)
Operating Revenues*................. $174.3 $207.5 $715.1 $666.8 $1,175.0 $1,155.1
Cost of Gas......................... 62.4 99.1 365.9 355.9 598.0 623.0
------ ------ ------ ------ -------- --------
Gross Margin...................... 111.9 108.4 349.2 310.9 577.0 532.1
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation & Maintenance........... 69.6 67.3 157.1 145.9 288.9 293.0
Depreciation, Depletion &
Amortization................... 21.6 18.7 42.9 37.3 80.0 72.8
Property & Other Taxes............ 15.2 15.1 34.1 31.4 61.6 60.4
------ ------ ------ ------ -------- --------
106.4 101.1 234.1 214.6 430.5 426.2
------ ------ ------ ------ -------- --------
Operating Income.................... 5.5 7.3 115.1 96.3 146.5 105.9
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint
Ventures.......................... .7 .9 1.4 .9 2.3 .5
------ ------ ------ ------ -------- --------
Other Income & (Deductions)*
Interest Income................... .7 1.7 2.1 2.6 3.6 6.5
Interest on Long-Term Debt........ (6.6) (6.4) (13.2) (12.8) (26.1) (26.8)
Other Interest Expense............ (1.5) (1.4) (3.7) (3.5) (8.2) (8.2)
Other............................. (.8) (.3) (1.5) (.7) (6.8) (2.1)
------ ------ ------ ------ -------- --------
(8.2) (6.4) (16.3) (14.4) (37.5) (30.6)
------ ------ ------ ------ -------- --------
Income Tax Provision (Benefit)...... (.3) .2 35.9 27.9 39.3 24.1
------ ------ ------ ------ -------- --------
Net Income (Loss)................... $ (1.7) $ 1.6 $ 64.3 $ 54.9 $ 72.0 $ 51.7
====== ====== ====== ====== ======= =======
*Includes intercompany transactions
Gas Markets
GAS MARKETS EXPAND -- Total gas sales and end user transportation
deliveries increased for the 1994 quarter, six-and twelve-month periods by .9
billion cubic feet (Bcf), 17.7 Bcf and 17.0 Bcf, respectively. The significant
increases for the 1994 six-and twelve-month periods primarily reflect higher gas
sales due to considerably colder weather. Additionally, the increases for all
1994 periods reflect continued market expansion, primarily in the end user
transportation area.
QUARTER 6 MONTHS 12 MONTHS
--------------- --------------- ---------------
1994 1993 1994 1993 1994 1993
----- ----- ----- ----- ----- -----
UTILITY GAS MARKETS (in Bcf)
Gas Sales.................................. 28.5 30.9 134.4 123.8 216.0 205.3
End User Transportation.................... 30.5 27.2 75.5 68.4 135.7 129.4
Intermediate Transportation*............... 66.4 60.2 174.0 135.9 319.2 250.4
----- ----- ----- ----- ----- -----
125.4 118.3 383.9 328.1 670.9 585.1
===== ===== ===== ===== ===== =====
*Includes intercompany volumes
7
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
The increases in intermediate transportation services in all 1994 periods
were due to additional volumes transported for ANR, Michigan gas producers and
other shippers. In connection with the April 1993 start-up of the Blue Lake gas
storage project, MichCon began transporting 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.
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. This growth, averaging over
60% per year since 1991, has resulted from time to time in capacity constraints
on MichCon's northern Michigan "wet header" pipeline system. Given system
capacity limits and the expected continued rise in demand, MichCon responded in
March 1994 by filing a proposal with the MPSC to construct a $170 million
expansion of its pipeline system, which had the potential to increase
intermediate transportation deliveries by 85 Bcf per year.
To expeditiously resolve the current capacity issue, MichCon has entered
into an agreement in June 1994 to obtain transportation services from ANR. As a
result of this agreement, coupled with arrangements made with other parties
including subsidiaries of MCN, MichCon lowered its portion of the pipeline
expansion proposal to approximately $80 million. MichCon's proposal, as well as
other competing proposals, are being reviewed by the MPSC and a decision is
expected in January 1995.
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. Revenues from the rate increase are recovered
volumetrically, hence primarily in the colder first and fourth quarters.
However, higher operating expenses, which the rate increase is intended to
cover, are incurred more evenly throughout the year. This timing has resulted in
higher 1994 first quarter and year-to-date earnings, but has reduced second
quarter 1994 results. The timing effect is also expected to lower third quarter
1994 results, but increase earnings for the 1994 fourth quarter. The 1994 year
as a whole, however, is not expected to be affected.
COST OF GAS
Cost of gas has been affected by variations in sales volumes and an overall
lower unit gas cost. Through the 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 effect on gross margins
or earnings.
Cost of gas sold per thousand cubic feet decreased $1.38 (40%) in the 1994
quarter, and $.15 (5%) and $.24 (8%) in the 1994 six-and twelve-month periods,
respectively. Unit cost of gas rates have been favorably impacted by a shift
from purchases under fixed price long-term gas purchase contracts to spot market
purchases. Lower spot market rates contributed to the decrease in the current
quarter.
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. During 1994, ANR filed several
transition cost recovery requests. MichCon accrued its portion of these costs
totaling $2.2 million. These transition costs are recoverable through the GCR
mechanism, and therefore, a regulatory asset has been recorded for their future
recovery. As periodic filings are made by ANR, MichCon will accrue its allocated
portion. It is management's belief that these costs will have no effect on
earnings.
8
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
OTHER OPERATING EXPENSES
Operation and maintenance expenses were higher in the 1994 quarter and
six-month period due to MichCon's higher postretirement benefit costs of $7.9
million and $15.6 million, respectively, 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 in
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. These ongoing efforts partially offset the increases for the 1994
quarter and six-month period.
Depreciation and depletion increased in all 1994 periods due mainly to
higher property balances, reflecting capital expenditures of $271.8 million over
the past two calendar years, as well as higher depreciation rates that were
implemented in January 1994.
Property and other taxes increased slightly in all 1994 periods due to the
higher property balances. Additionally, the increases for the 1994 six-and
twelve-month periods reflect higher Michigan single business taxes due to higher
earnings. Property and other taxes in 1994 and future years will be reduced as a
result of recently enacted Michigan legislation which lowered property taxes.
The tax reduction is not expected to significantly affect earnings, as the MPSC
has approved the offsetting of these tax savings against other operating
expenses (Note 4).
EQUITY IN EARNINGS OF JOINT VENTURES
Earnings from joint ventures increased in the 1994 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 its
utility and nonutility businesses.
OTHER INCOME & DEDUCTIONS
Interest income decreased in all 1994 periods due to an interest adjustment
on MichCon's energy assistance programs in the 1993 periods. Interest income for
the 1994 twelve-month period also decreased due to interest recorded in the 1993
twelve-month period from a refund of windfall profit taxes.
Other income and deductions for the 1994 twelve-month period reflects
higher charitable contributions and the write-off of certain assets.
INCOME TAX PROVISION
Income taxes increased in the 1994 six-and twelve-month periods due to
improved earnings. Income taxes for all 1994 periods were impacted 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.
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12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
NONUTILITY SERVICES
NONUTILITY EARNINGS CONTRIBUTED $5.2 MILLION TO MCN'S EARNINGS -- The
nonutility businesses continued the momentum of significantly increasing their
contributions to MCN's earnings. Earnings increased $4.9 million ($.17 per
share) for the 1994 quarter, and $7.2 million ($.24 per share) and $14.6 million
($.49 per share) for the 1994 six-and twelve-month periods, respectively. Higher
earnings from exploration & production, gas marketing & cogeneration and
computer operations services fueled the growth in nonutility earnings.
QUARTER 6 MONTHS 12 MONTHS
--------------- ---------------- ----------------
1994 1993 1994 1993 1994 1993
------ ----- ------ ------ ------ ------
NONUTILITY OPERATIONS (in Millions)
Operating Revenues*
Gas Services.............................. $ 84.2 $70.3 $187.7 $161.7 $327.5 $291.9
Computer Operations Services.............. 19.9 17.9 40.0 34.1 80.3 68.4
------ ----- ------ ------ ------ ------
104.1 88.2 227.7 195.8 407.8 360.3
------ ----- ------ ------ ------ ------
Operating Expenses*
Gas Services.............................. 77.3 70.2 176.0 159.0 301.6 283.3
Computer Operations Services.............. 18.5 16.9 37.2 32.9 73.5 65.6
Corporate & Other......................... 1.8 1.4 4.0 2.6 7.3 4.1
------ ----- ------ ------ ------ ------
97.6 88.5 217.2 194.5 382.4 353.0
------ ----- ------ ------ ------ ------
Operating Income (Loss)
Gas Services
Gas Marketing & Cogeneration........... 2.2 (1.8) 4.4 (1.3) 11.5 (.5)
Gas Gathering & Processing............. 1.9 2.0 4.1 4.1 8.9 9.2
Exploration & Production............... 2.8 (.1) 3.2 (.1) 5.5 (.1)
------ ----- ------ ------ ------ ------
6.9 .1 11.7 2.7 25.9 8.6
Computer Operations Services.............. 1.4 1.0 2.8 1.2 6.8 2.8
Corporate & Other......................... (1.8) (1.4) (4.0) (2.6) (7.3) (4.1)
------ ----- ------ ------ ------ ------
6.5 (.3) 10.5 1.3 25.4 7.3
------ ----- ------ ------ ------ ------
Equity in Earnings of Joint Ventures........ 1.5 2.3 2.3 3.1 5.1 2.5
------ ----- ------ ------ ------ ------
Other Income and (Deductions)*
Interest Income........................... .7 .5 1.2 .8 1.8 1.6
Interest Expense.......................... (2.7) (1.0) (4.5) (1.8) (8.0) (4.3)
Minority Interest......................... (.7) (.8) (1.5) (1.5) (3.3) (3.5)
Other..................................... (.2) -- (.2) (.1) (.2) --
------ ----- ------ ------ ------ ------
(2.9) (1.3) (5.0) (2.6) (9.7) (6.2)
------ ----- ------ ------ ------ ------
Income Tax Provision (Benefit).............. (.1) .4 (.5) .7 3.4 .8
------ ----- ------ ------ ------ ------
Net Income.................................. $ 5.2 $ .3 $ 8.3 $ 1.1 $ 17.4 $ 2.8
====== ===== ====== ====== ====== ======
*Includes intercompany transactions
GAS SERVICES
OPERATING INCOME INCREASED $6.8 MILLION -- Gas services' increase in
operating income of $6.8 million, $9.0 million and $17.3 million for the 1994
quarter, six-and twelve-month periods reflects higher gross
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13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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.
QUARTER 6 MONTHS 12 MONTHS
------------- ------------- ---------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ----- -----
NONUTILITY GAS STATISTICS (in Bcf)
Gas Sales...................................... 35.2 28.7 73.8 67.8 128.8 123.5
Transportation................................. 4.7 5.2 10.3 11.0 21.3 23.4
---- ---- ---- ---- ----- -----
39.9 33.9 84.1 78.8 150.1 146.9
==== ==== ==== ==== ===== =====
Company Production............................. 4.6 .2 6.1 .2 8.2 .3
==== ==== ==== ==== ===== =====
Gas marketing & cogeneration operating income for all 1994 periods
increased from the comparable 1993 periods due to improved gross margins on a
higher level of gas sales. The earnings comparison was affected by reduced gross
margins in 1993 as a result of an increase in spot market gas costs during the
1993 second quarter.
Gas gathering & processing operating income remained relatively unchanged
for all 1994 periods in spite of a decline in transportation volumes. The
declines are primarily due to lower gas production from fields currently
utilizing MCN's Saginaw Bay pipeline system.
MCN PLANS TO EXPAND TRANSPORTATION SERVICES -- In response to an increase
in Michigan Antrim gas production, MCN anticipates partnering with others in
1994 to develop new gas transportation and processing facilities to meet this
growing demand. In addition, MCN is seeking approval from the MPSC to construct
and operate a lateral pipeline extension which will interconnect with MCN's
existing Saginaw Bay pipeline system. Certain facilities, which are expected to
be operational by early 1995, have the capability of increasing gas deliveries
by more than 30 Bcf per year.
Exploration & production operating income increased $2.9 million for the
1994 second quarter, and $3.3 million and $5.6 million for the six-and
twelve-month periods, respectively. The increases are primarily due to the
start-up of production in early 1993. Additionally, exploration & production
operations have lowered nonutility income taxes through the generation of $2.0
million, $3.5 million and $5.5 million of federal gas production tax credits for
the 1994 quarter, six-and twelve-month periods, respectively.
MCN ACQUIRES NATURAL GAS RESERVES -- During the 1994 second quarter, MCN
acquired an interest in approximately 150 natural gas wells in the Anadarko
basin of western Oklahoma. MCN's share of these properties includes
approximately 50 Bcf of proven gas reserves, 20 Bcf of potential gas reserves
and 3 Bcf equivalent of oil reserves. From the establishment of the exploration
& production program in 1992 through June 1994, MCN has invested approximately
$185 million in exploration & production projects. As of June 30, 1994, MCN
owned approximately 220 Bcf of proven gas reserves, 40 Bcf of potential gas
reserves and 3 Bcf equivalent of oil reserves.
MCN also has signed an agreement to purchase an interest in 550 gas wells
located primarily in Oklahoma, Kansas and Texas. MCN's share of these properties
will include approximately 20 Bcf of proven gas reserves, 15 Bcf of potential
gas reserves and 6 Bcf equivalent of oil reserves. MCN is expected to close this
transaction in the third quarter of 1994.
COMPUTER OPERATIONS SERVICES
OPERATING INCOME INCREASED 40% -- Computer operations services' operating
income increased $.4 million for the current quarter, and $1.6 million and $4.0
million for the 1994 six-and twelve-month periods, respectively. This
improvement reflects higher operating revenues and improved margins from new
business added throughout 1993 and from increased usage by existing customers.
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14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
In July 1994, MCN's computer services business was selected as the "vendor
of choice" in a major outsourcing contract with Royal Insurance Company. As part
of signing this new contract, MCN's computer services business will lease Royal
Insurance's 48,000 square foot data center in Charlotte, North Carolina. This is
MCN's third data center and when combined with MCN's other facilities in
Michigan and Pennsylvania, will give MCN the ability to capture additional
markets.
In order to service a new contract with Comshare International, MCN's
computer services business expanded internationally with the formation of a
subsidiary in London, England. Revenues from the Royal Insurance and Comshare
International contracts, coupled with revenues from other new business added
during 1994 and late 1993, have allowed MCN's computer services business to
establish a customer base that generates over $100 million in annual revenues.
CORPORATE & OTHER
All 1994 periods reflect increased expenses associated with the development
of new nonutility projects.
EQUITY IN EARNINGS OF JOINT VENTURES
Joint venture earnings for the 1994 twelve-month period were favorably
affected by earnings from the Blue Lake gas storage project, which began
operations in April 1993. The decrease in gas storage earnings for the 1994
quarter and six-month period was due to higher operating expenses of the Blue
Lake storage project. 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 6 MONTHS 12 MONTHS
------------- ------------- ---------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ----- -----
NONUTILITY EQUITY IN EARNINGS OF JOINT VENTURES
(in Millions)
Gas Storage................................... $1.5 $2.3 $2.5 $2.9 $ 5.7 $ 2.8
Gas Marketing & Cogeneration.................. (.4) (.3) (.8) (.8) (1.4) (1.6)
Gas Gathering & Processing.................... .5 .4 .9 1.2 1.9 1.5
Other......................................... (.1) (.1) (.3) (.2) (1.1) (.2)
---- ---- ---- ---- ----- -----
$1.5 $2.3 $2.3 $3.1 $ 5.1 $ 2.5
==== ==== ==== ==== ===== =====
OTHER INCOME & DEDUCTIONS
All 1994 periods reflect higher interest costs on long-term debt due to
increased borrowings required to finance nonutility capital investments.
INCOME TAX PROVISION
Income taxes for the 1994 quarter, six-and twelve-month periods were
favorably impacted by $2.0 million, $3.5 million and $5.5 million, respectively,
of federal gas production tax credits related to gas production projects. The
income tax provision for all 1994 periods was affected by improved earnings, as
well as 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.
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15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
CASH FLOW INCREASED 38% -- MCN's cash flow from operating activities during
the first six months of 1994 increased $79.7 million over the comparable 1993
period. The increase was due to higher net income and lower working capital
requirements.
6 MONTHS
------------------
1994 1993
------ ------
CASH FLOW FROM OPERATING ACTIVITIES (in Millions)
Utility Services....................................................... $ 92.6 $ 91.7
Nonutility Services.................................................... 20.0 3.6
------ ------
112.6 95.3
Changes in Assets and Liabilities...................................... 175.1 112.7
------ ------
Cash Flow from Operating Activities.................................... $287.7 $208.0
====== ======
FINANCING ACTIVITIES
In anticipation of future permanent capital requirements, MCN plans to file
a universal shelf registration with the Securities and Exchange Commission (SEC)
in the latter half of 1994 for the issuance of up to a total of $300 million of
securities, including preferred and common equity and debt securities. Under
this registration, MCN expects to issue up to $100 million of securities during
1994.
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 first six months of 1994, MCN
issued approximately 212,000 shares, generating $7.4 million.
Utility Services
During the first six months of 1994, MichCon repaid $203.0 million of
short-term debt, including commercial paper. Short-term debt is normally reduced
in the first part of each year as gas inventories are depleted and funds are
received from winter sales. During the latter part of the year, 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 established
credit lines of up to $300 million through March of 1994 which decreased to $125
million through August 1994. MichCon expects to renew the credit lines upon
expiration. Commercial paper of $57.2 million was outstanding at June 30, 1994
under these lines.
In July, MichCon began a Trust Demand Note program which allows MichCon to
borrow up to $25 million through April 1995.
MichCon has authorization from the MPSC, and a shelf registration on file
with the SEC, that allows for the issuance of up to $100 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 first mortgage bonds are currently rated "A" or its equivalent by the
major rating agencies.
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16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONCLUDED)
Nonutility Services
MCN and MCN Investment maintain a joint unsecured revolving credit
facility. In July 1994, MCN and MCN Investment renegotiated the terms of the
facility to allow for borrowings of up to $250 million and to extend the
expiration date of the facility through August 1997. Outstanding advances are
subject to interest at fixed or certain alternative variable rates at MCN's
option. As of June 30, 1994, borrowings outstanding under the facility totaled
$132 million.
In 1993, MCN Investment established a short-term credit line to primarily
finance the seasonal working capital requirements of its gas marketing
operations. The credit line allows for borrowings of up to $65 million through
early September 1994. MCN Investment anticipates renewing the credit line upon
expiration. At June 30, 1994, borrowings outstanding under the facility totaled
$50 million.
INVESTING ACTIVITIES
CAPITAL INVESTMENTS IN 1994 TO EXCEED $400 MILLION -- Capital investments
totaled $154.3 million in the first six months of 1994 and included
approximately $94 million of capital expenditures for nonutility gas exploration
& production projects. The first six months of 1993 included expenditures for
the Blue Lake Gas storage project which began operations in April 1993.
6 MONTHS
----------------
1994 1993
------ ------
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Utility Services.......................................................... $ 50.4 $ 63.0
Nonutility Services....................................................... 101.3 35.6
------ ------
151.7 98.6
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Gas Storage............................................................... 1.4 20.0
Other..................................................................... 1.3 .9
------ ------
2.7 20.9
------ ------
Minority Partners' Share of Consolidated Capital Expenditures............... .1 --
------ ------
Total Capital Investments................................................... $154.3 $119.5
====== ======
Capital investments for 1994 are anticipated to exceed $400 million. These
investments will be used for opportunities in the utility business and other
projects that build upon management's expertise, such as underground storage
projects, natural gas cogeneration facilities, gas gathering lines, and gas
exploration & production. Approximately $150 million will be used for the
utility business and over $250 million for the nonutility businesses.
Approximately $100 million has been either spent or committed to date to
purchase gas and oil producing properties in Oklahoma, Kansas and Texas.
The proposed level of investments in 1994 and future years may increase
capital requirements materially in excess of internally generated funds and
require the issuance of additional debt and equity securities. It is
management's opinion that MCN and its subsidiaries will have sufficient capital
resources, both internal and external, to meet anticipated capital requirements.
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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: August 5, 1994 By: /s/ PATRICK ZURLINDEN
Patrick Zurlinden
Controller and Chief
Accounting Officer
15