1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 31, 1994:
Common Stock, par value $.01 per share: 59,639,058
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 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................................................................ 7
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................... 16
SIGNATURE........................................................................... 17
ii
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1994 1993 1993
---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and temporary cash investments, at cost (which approximates market
value).................................................................. $ 14,651 $ 8,827 $ 12,474
Accounts receivable, less allowance for doubtful accounts of $17,960,
$20,669 and $19,576, respectively....................................... 163,152 164,509 236,934
Accrued unbilled revenues................................................. 20,108 27,376 101,327
Gas in inventory.......................................................... 170,125 155,351 45,895
Property taxes assessed applicable to future periods...................... 18,470 26,567 50,709
Accrued gas cost recovery revenues........................................ -- 17,322 --
Other..................................................................... 43,749 29,959 35,332
---------- ---------- ------------
430,255 429,911 482,671
---------- ---------- ------------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures.............................. 61,712 53,262 60,528
Deferred postretirement benefit cost (Note 4)............................. 22,718 19,525 25,612
Other..................................................................... 74,580 57,847 59,031
---------- ---------- ------------
159,010 130,634 145,171
---------- ---------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost...................................... 2,488,167 2,231,514 2,284,529
Less -- Accumulated depreciation and depletion............................ 1,115,771 1,034,791 1,047,941
---------- ---------- ------------
1,372,396 1,196,723 1,236,588
---------- ---------- ------------
$1,961,661 $1,757,268 $1,864,430
========= ========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................... $ 105,444 $ 114,342 $ 124,585
Notes payable (Note 2).................................................... 120,278 228,640 280,304
Current portion of long-term debt, capital lease obligations and
redeemable cumulative preferred stock................................... 6,077 6,338 5,980
Federal income, property and other taxes payable.......................... 55,904 42,407 63,790
Deferred gas cost recovery revenues....................................... 28,951 -- --
Refunds payable to customers.............................................. 331 5,000 10,794
Customer deposits......................................................... 10,569 12,433 13,271
Other..................................................................... 72,147 66,976 78,146
---------- ---------- ------------
399,701 476,136 576,870
---------- ---------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................................... 167,541 149,216 171,630
Unamortized investment tax credit......................................... 39,158 41,052 40,571
Tax benefits amortizable to customers..................................... 29,597 37,571 31,666
Minority interest......................................................... 18,049 17,587 18,357
Other..................................................................... 95,072 79,695 54,729
---------- ---------- ------------
349,417 325,121 316,953
---------- ---------- ------------
LONG-TERM DEBT, including capital lease obligations (Note 1a)............... 709,311 498,679 494,821
---------- ---------- ------------
REDEEMABLE CUMULATIVE PREFERRED STOCK OF SUBSIDIARY, $2.05 SERIES........... 2,618 5,618 5,618
---------- ---------- ------------
CONTINGENCIES (Note 3)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................................. 298 294 295
Additional paid-in capital................................................ 328,262 314,559 317,117
Retained earnings......................................................... 172,693 138,516 153,884
Unearned compensation and ESOP benefit.................................... (639) (1,655) (1,128)
---------- ---------- ------------
500,614 451,714 470,168
---------- ---------- ------------
$1,961,661 $1,757,268 $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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------- -------------------------
1994 1993 1994 1993 1994 1993
-------- -------- ---------- ---------- ---------- ----------
OPERATING REVENUES.................. $204,389 $182,732 $1,133,713 $1,031,874 $1,581,493 $1,484,527
-------- -------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of gas....................... 86,543 79,649 605,344 581,969 870,108 873,792
Operation and maintenance......... 95,453 78,535 291,271 253,551 382,432 347,474
Depreciation, depletion and
amortization.................... 25,188 20,827 77,087 61,602 97,131 81,417
Property and other taxes.......... 13,810 13,125 51,002 46,522 67,157 62,463
-------- -------- ---------- ---------- ---------- ----------
Total operating expenses........ 220,994 192,136 1,024,704 943,644 1,416,828 1,365,146
-------- -------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)............. (16,605) (9,404) 109,009 88,230 164,665 119,381
-------- -------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT
VENTURES.......................... 1,900 2,685 5,688 6,668 6,730 6,060
-------- -------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................... 1,594 976 4,788 4,009 5,966 5,482
Interest on long-term debt........ (9,409) (7,945) (26,676) (22,246) (33,219) (29,463)
Other interest expense............ (3,085) (1,736) (7,103) (5,222) (11,820) (9,084)
Minority interest................. (719) (748) (2,187) (2,289) (3,182) (3,325)
Other............................. (1,074) (516) (2,866) (1,213) (7,693) (1,720)
-------- -------- ---------- ---------- ---------- ----------
Total other income and
(deductions).................. (12,693) (9,969) (34,044) (26,961) (49,948) (38,110)
-------- -------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES... (27,398) (16,688) 80,653 67,937 121,447 87,331
INCOME TAX PROVISION (BENEFIT)...... (11,828) (5,468) 23,624 23,175 36,390 28,860
-------- -------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................... $(15,570) $(11,220) $ 57,029 $ 44,762 $ 85,057 $ 58,471
======== ======== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE (Note
1c)............................... $ (0.26) $ (.19) $ .96 $ .76 $ 1.44 $ 1.00
======== ======== ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING
(Note 1c)......................... 59,492 58,748 59,294 58,554 59,196 58,204
======== ======== ========== ========== ========== ==========
DIVIDENDS PAID PER SHARE (Note
1c)............................... $ .215 $ .210 $ .645 $ .630 $ .860 $ .840
======== ======== ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE (Note
1c)............................... $ .215 $ .210 $ .645 $ .630 $ .860 $ .630
======== ======== ========== ========== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- ---------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
BALANCE -- Beginning of period............ $201,045 $162,066 $153,884 $130,621 $138,516 $117,848
ADD -- Net income (loss).................. (15,570) (11,220) 57,029 44,762 85,057 58,471
-------- -------- -------- -------- -------- --------
185,475 150,846 210,913 175,383 223,573 176,319
DEDUCT -- Cash dividends declared on
common stock (Note 1c).......... 12,782 12,330 38,220 36,867 50,880 37,803
-------- -------- -------- -------- -------- --------
BALANCE -- End of period.................. $172,693 $138,516 $172,693 $138,516 $172,693 $138,516
======== ======== ======== ======== ======== ========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1994 1993
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income....................................................................... $ 57,029 $ 44,762
Adjustments to reconcile net income to net cash provided from operating
activities
Depreciation, depletion and amortization
Per statement of income...................................................... 77,087 61,602
Charged to other accounts.................................................... 5,358 4,853
Deferred income taxes -- current............................................... (16,928) (5,436)
Deferred income taxes and investment tax credit -- net......................... (7,571) 9,383
Equity in earnings of joint ventures, net of distributions..................... 1,243 (6,185)
Other.......................................................................... 1,691 (226)
--------- ---------
117,909 108,753
Changes in assets and liabilities, exclusive of changes shown separately....... 83,579 (31,614)
--------- ---------
Net cash provided from operating activities.................................. 201,488 77,139
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable -- net............................................................. (160,026) (6,683)
Common stock dividends paid...................................................... (38,220) (36,867)
Issuance of common stock......................................................... 11,262 8,310
Issuance of long-term debt....................................................... 78,620 118,079
Revolving credit facility -- net................................................. 134,800 75,450
Retirement of long-term debt and preferred stock................................. (6,219) (87,639)
Other............................................................................ (1,779) (672)
--------- ---------
Net cash provided from financing activities.................................. 18,438 69,978
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................................................. (213,726) (146,130)
Investment in joint ventures..................................................... (3,244) (3,715)
Other............................................................................ (779) 1,689
--------- ---------
Net cash used for investing activities....................................... (217,749) (148,156)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS..................... 2,177 (1,039)
CASH AND TEMPORARY CASH INVESTMENTS, JANUARY 1..................................... 12,474 9,866
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS, SEPTEMBER 30.................................. $ 14,651 $ 8,827
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable -- net....................................................... $ 73,782 $ 47,453
Accrued unbilled revenues........................................................ 81,219 64,040
Gas in inventory................................................................. (124,230) (107,504)
Property taxes assessed applicable to future periods............................. 32,239 33,815
Accounts payable................................................................. (19,141) (13,280)
Federal income, property and other taxes payable................................. (7,876) (45,205)
Accrued/deferred gas cost recovery revenues...................................... 28,951 (17,322)
Refunds payable to customers..................................................... (10,463) 1,685
Other current assets and liabilities............................................. 1,111 8,282
Deferred assets and liabilities.................................................. 27,987 (3,578)
--------- ---------
$ 83,579 $ (31,614)
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized........................................... $ 28,118 $ 25,704
========= =========
Federal income taxes........................................................... $ 24,550 $ 12,850
========= =========
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. CAPITALIZATION
A. LONG-TERM DEBT
In September 1994, MichCon issued $80,000,000 of First Mortgage Bonds,
8 1/4% Series, due May 2014. The proceeds received from this debt issuance
were used to repay short-term obligations and for general corporate
purposes.
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 through August 1997.
Outstanding advances are subject to interest at fixed or certain
alternative variable rates at MCN's option. Borrowings of $206,700,000 were
outstanding at a weighted average interest rate of 5.6% as of September 30,
1994.
B. CUMULATIVE PREFERRED SECURITIES OF SUBSIDIARY
In November 1994, MCN Michigan Limited Partnership (MCN Michigan), a
limited partnership of which MCN is a 1% general partner, issued 4,000,000
shares of 9 3/8% Cumulative Preferred Securities, Series A, for
$100,000,000. The limited partnership interests represented by the
preferred securities are redeemable at the option of MCN Michigan, in whole
or in part, from time to time, on or after November 30, 1999, at $25 per
security plus accrued and unpaid dividends. Holders of the securities are
entitled to receive dividends at an annual rate of 9 3/8% of the
liquidation preference value of $25. The proceeds received from this
issuance will be used for nonutility capital investments, repayment of
loans under bank credit agreements and general corporate purposes.
C. COMMON STOCK
On October 27, 1994, the MCN Board of Directors authorized a
two-for-one split of common stock to shareholders of record on November 10,
1994. All references in the accompanying financial statements, as to the
number of common shares and per share amounts, have been adjusted for the
split.
In September 1992, the MCN Board of Directors accelerated the
declaration of MCN's 1992 fourth quarter dividend from October to
September. Accordingly, the financial statements and common stock
information for the twelve months ended September 30, 1993 reflect the
declaration of only three quarterly dividends.
2. LINES OF CREDIT
In September 1994, MichCon renewed its annual bank lines of credit, which
allow it to borrow up to $250,000,000 through March 1995 and decrease to
$109,000,000 through August 1995 at interest rates generally less than the
prevailing prime rate. MichCon usually issues commercial paper in lieu of an
equivalent amount of borrowings under these lines of credit. Commercial paper of
$65,300,000 was outstanding at September 30, 1994 under these lines at a
weighted average interest rate of 4.9%. Fees are paid to compensate banks for
lines of credit.
In August and September 1994, MCN Investment renewed its short-term credit
lines that allow for borrowings of up to $70,000,000 through August 1995 at
interest rates which are generally less than the prevailing prime rate. At
September 30, 1994, borrowings of $29,900,000 were outstanding under these lines
of credit at a weighted average interest rate of 5.6%. Fees are paid to
compensate banks for lines of credit.
In July 1994, MichCon began a Trust Demand Note Program which allows
MichCon to borrow up to $25,000,000 through April 1995. At September 30, 1994,
borrowings of $25,000,000 were outstanding under this note at an average
interest rate of 5.0%.
4
7
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 held 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 AND TAX LEGISLATION
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 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 $4,000,000 for
1994 and $6,200,000 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 four years.
5
8
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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 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.
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
MCN REPORTS QUARTERLY SEASONAL LOSS -- MCN's 1994 third quarter loss was
$4.4 million ($.07 per share) higher than the 1993 period. Earnings for the 1994
nine-and twelve-month periods increased $12.2 million ($.20 per share) and $26.6
million ($.44 per share), respectively, over the comparable 1993 periods. All
per share amounts have been restated to reflect the two-for-one stock split
authorized by the MCN Board of Directors on October 27, 1994 (Note 1c). A
summary of financial performance follows:
QUARTER 9 MONTHS 12 MONTHS
----------------- --------------- ---------------
1994 1993 1994 1993 1994 1993
------ ------ ----- ----- ----- -----
NET INCOME (LOSS) (in Millions)
Utility Services....................... $(19.5) $(13.0) $44.7 $41.9 $65.5 $52.9
Nonutility Services.................... 3.9 1.8 12.3 2.9 19.6 5.6
------ ------ ----- ----- ----- -----
$(15.6) $(11.2) $57.0 $44.8 $85.1 $58.5
====== ====== ===== ===== ===== =====
EARNINGS (LOSS) PER SHARE
Utility Services....................... $ (.33) $ (.22) $ .75 $ .71 $1.11 $ .91
Nonutility Services.................... .07 .03 .21 .05 .33 .09
------ ------ ----- ----- ----- -----
$ (.26) $ (.19) $ .96 $ .76 $1.44 $1.00
====== ====== ===== ===== ===== =====
- --------------------------------------------------------------------------------
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' RESULTS ARE LOWER -- Given the seasonal nature of the gas
distribution business, utility operations generally experience a loss in the
third quarter due to lower levels of natural gas sales during the summer months.
However, the loss in the 1994 quarter of $19.5 million was $6.5 million greater
($.11 per share) than the 1993 loss due mainly to higher operating costs and the
uneven effects of a January 1994 rate increase, as discussed in detail in the
"Rate Matters" section that follows. Earnings for the 1994 nine-and twelve-month
periods increased $2.8 million ($.04 per share) and $12.6 million ($.20 per
share), respectively, reflecting increased gas deliveries resulting from colder
weather and expanded transportation markets, partially offset by higher
operating costs.
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- --------------
1994 1993 1994 1993 1994 1993
----- ---- ---- ----- ---- -----
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) than Normal....... N/A N/A 2.6% (2.5)% 1.2% (2.4)%
Increase (Decrease) from Normal in:
Gas Markets (Bcf).......................... (.8) .9 5.6 (3.3) 4.5 (5.2)
Net Income (Millions)...................... $ (.8) $ .8 $5.1 $(2.8) $4.1 $(4.5)
Earnings Per Share......................... $(.02) $.02 $.09 $(.05) $.07 $(.08)
7
10
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 for all 1994 periods reflecting higher sales rates.
Additionally, the 1994 nine-and twelve-month period increases were due to
expanded gas markets, as subsequently discussed.
QUARTER 9 MONTHS 12 MONTHS
----------------- ----------------- ---------------------
1994 1993 1994 1993 1994 1993
------ ------ ------ ------ -------- --------
UTILITY OPERATIONS (in Millions)
Operating Revenues*................. $108.8 $113.6 $823.9 $780.4 $1,172.8 $1,140.3
Cost of Gas......................... 24.1 35.3 390.0 391.2 586.8 610.2
------ ------ ------ ------ -------- --------
Gross Margin...................... 84.7 78.3 433.9 389.2 586.0 530.1
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation & Maintenance........... 72.3 60.0 229.4 205.8 303.9 287.3
Depreciation, Depletion &
Amortization................... 21.3 18.6 64.2 56.0 82.6 74.2
Property & Other Taxes............ 12.5 12.2 46.6 43.6 61.9 58.8
------ ------ ------ ------ -------- --------
106.1 90.8 340.2 305.4 448.4 420.3
------ ------ ------ ------ -------- --------
Operating Income (Loss)............. (21.4) (12.5) 93.7 83.8 137.6 109.8
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint
Ventures.......................... .3 .5 1.8 1.4 2.2 1.2
------ ------ ------ ------ -------- --------
Other Income & (Deductions)*
Interest Income................... 1.1 .6 3.2 3.2 4.1 4.6
Interest on Long-Term Debt........ (6.6) (6.4) (19.8) (19.2) (26.3) (25.6)
Other Interest Expense............ (2.5) (1.6) (6.2) (5.2) (9.0) (9.1)
Other............................. (.9) (.5) (2.6) (1.1) (7.4) (1.8)
------ ------ ------ ------ -------- --------
(8.9) (7.9) (25.4) (22.3) (38.6) (31.9)
------ ------ ------ ------ -------- --------
Income (Loss) Before Income Taxes... (30.0) (19.9) 70.1 62.9 101.2 79.1
------ ------ ------ ------ -------- --------
Income Tax Provision (Benefit)...... (10.5) (6.9) 25.4 21.0 35.7 26.2
------ ------ ------ ------ -------- --------
Net Income (Loss)................... $(19.5) $(13.0) $ 44.7 $ 41.9 $ 65.5 $ 52.9
====== ====== ====== ====== ======= =======
*Includes intercompany transactions
Gas Markets
Gas sales and end user transportation deliveries in total increased for the
1994 quarter, nine-and twelve-month periods by 1.5 billion cubic feet (Bcf),
19.1 Bcf and 20.1 Bcf, respectively. The significant increases for the 1994
nine-and twelve-month periods primarily reflect higher gas sales due to
considerably colder weather and the continued expansion of the end user
transportation market. The growth of the end user transportation market for the
1994 quarter was partially offset by lower gas sales due to warmer weather.
QUARTER 9 MONTHS 12 MONTHS
--------------- --------------- ---------------
1994 1993 1994 1993 1994 1993
----- ----- ----- ----- ----- -----
UTILITY GAS MARKETS (in Bcf)
Gas Sales.................................. 13.8 16.1 148.2 140.0 213.6 205.3
End User Transportation.................... 28.0 24.2 103.5 92.6 139.5 127.7
Intermediate Transportation*............... 58.3 70.3 232.4 206.2 307.3 266.4
----- ----- ----- ----- ----- -----
100.1 110.6 484.1 438.8 660.4 599.4
===== ===== ===== ===== ===== =====
*Includes intercompany volumes
8
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
During the 1994 quarter, MCN and Destec Energy began construction of a
123-megawatt cogeneration plant in Ludington, Michigan. MichCon will provide end
user transportation of the natural gas needed to fuel the plant, approximately
nine Bcf annually, upon its completion in late 1995.
Intermediate transportation deliveries decreased for the quarter due to
lower volumes transported for various shippers. However, transportation revenues
were not significantly affected by the reduced volumes due to fixed demand
charges associated with the related contracts. Increases in intermediate
transportation in the nine-and twelve-month 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 pipeline system. MichCon currently has a proposal
before the MPSC to resolve this capacity issue. 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, 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 resulted in higher 1994
first quarter earnings, but reduced second quarter, third quarter and nine-
months ended 1994 results. The timing effect is expected to increase earnings
for the 1994 fourth quarter. However, the 1994 year as a whole is not expected
to be significantly affected.
COST OF GAS
Cost of gas has been affected by variations in sales volumes and reduced
gas cost rates. 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 $.66 (26%), $.19 (7%)
and $.24 (8%) in the 1994 quarter, nine-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 also contributed to the decreases.
As discussed in MCN's 1993 Annual Report on Form 10-K, MichCon's rates are
set to recover its lost gas costs using an averaging method based on historical
lost gas experience. For the seasonal cycle ended August 1994, the historical
average lost gas amount exceeded the actual lost gas experienced, which resulted
in a $4.9 million reduction in cost of gas in the 1994 quarter. No significant
adjustment occurred during the 1993 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.
9
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
OTHER OPERATING EXPENSES
Operation and maintenance expenses increased due to MichCon's higher
postretirement benefit costs of $9.7 million in the 1994 quarter and $25.2
million in the nine-and twelve-month periods 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
partially offset the increases for the 1994 periods.
As described in MCN's 1993 Annual Report on Form 10-K, President Clinton
submitted a proposed federal budget for the 1995 fiscal year reflecting a 50%
reduction in funding for the Low Income Home Energy Assistance Program (LIHEAP).
This proposed reduction was defeated by Congress in October 1994, and $1.3
billion was approved for the 1995 fiscal year, which will maintain funding at
current levels. LIHEAP funding currently provides approximately $78 million in
heating assistance to 372,000 Michigan households through the Department of
Social Services, with approximately 40% of the funds going to MichCon customers.
Depreciation and depletion increased in all 1994 periods due mainly to
higher property balances, reflecting capital expenditures of $270.1 million over
the past two calendar years, as well as higher depreciation rates that were
implemented in January 1994.
Property and other taxes remained stable for the 1994 quarter and increased
slightly for the 1994 nine-and twelve-month periods. Property and other taxes in
the 1994 quarter were affected by recently enacted Michigan legislation which
lowered property taxes. Despite lower enacted tax rates, property and other
taxes for the 1994 nine-and twelve-month periods increased, reflecting higher
property balances and higher Michigan single business taxes due to increased
earnings. Although the tax reduction will result in lower property taxes in
future years, it is not expected to significantly affect earnings as the MPSC
has approved the acceleration of amortization of the deferred 1993
postretirement costs to offset these tax savings (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 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.
Other income and deductions for the 1994 twelve-month period reflects
higher charitable contributions and the write-off of certain assets.
INCOME TAXES
Income taxes decreased in the 1994 quarter due to the greater loss
experienced and increased in the 1994 nine-and twelve-month periods due to
improved earnings. Income taxes for the 1994 twelve-month period were impacted
by the August 1993 enactment of The Omnibus Budget Reconciliation Act which
increased the federal corporate tax rate to 35%, effective January 1993.
NONUTILITY SERVICES
NONUTILITY EARNINGS INCREASE OVER 110% -- MCN's nonutility businesses
continued their growth, contributing over 20% to MCN's total net income for the
1994 nine-and twelve-month periods. Earnings increased $2.1 million ($.04 per
share) for the 1994 quarter, and $9.4 million ($.16 per share) and $14.0 million
($.24 per share) for the 1994 nine-and twelve-month periods, respectively.
Higher earnings from the
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
gas services' segment fueled the significant growth in nonutility earnings.
Additionally, computer operations services contributed to the nine-and
twelve-month improvements.
QUARTER 9 MONTHS 12 MONTHS
--------------- ---------------- ----------------
1994 1993 1994 1993 1994 1993
------ ----- ------ ------ ------ ------
NONUTILITY OPERATIONS (in Millions)
Operating Revenues*
Gas Services.............................. $ 77.5 $55.8 $265.2 $217.5 $349.2 $301.2
Computer Operations Services.............. 23.2 20.2 63.2 54.3 83.3 71.6
------ ----- ------ ------ ------ ------
100.7 76.0 328.4 271.8 432.5 372.8
------ ----- ------ ------ ------ ------
Operating Expenses*
Gas Services.............................. 72.3 52.6 248.3 211.7 321.2 290.2
Computer Operations Services.............. 21.5 18.3 58.7 51.2 76.7 67.7
Corporate & Other......................... 2.1 2.0 6.1 4.5 7.5 5.3
------ ----- ------ ------ ------ ------
95.9 72.9 313.1 267.4 405.4 363.2
------ ----- ------ ------ ------ ------
Operating Income (Loss)
Gas Services
Gas Marketing & Cogeneration........... (.2) .4 4.2 (.9) 10.9 1.5
Gas Gathering & Processing............. 1.8 1.9 5.9 5.9 9.0 8.7
Exploration & Production............... 3.6 .9 6.8 .8 8.1 .8
------ ----- ------ ------ ------ ------
5.2 3.2 16.9 5.8 28.0 11.0
Computer Operations Services.............. 1.7 1.9 4.5 3.1 6.6 3.9
Corporate & Other......................... (2.1) (2.0) (6.1) (4.5) (7.5) (5.3)
------ ----- ------ ------ ------ ------
4.8 3.1 15.3 4.4 27.1 9.6
------ ----- ------ ------ ------ ------
Equity in Earnings of Joint Ventures........ 1.6 2.1 3.9 5.3 4.5 4.9
------ ----- ------ ------ ------ ------
Other Income and (Deductions)*
Interest Income........................... .8 .3 2.0 1.1 2.3 1.6
Interest Expense.......................... (3.7) (1.6) (8.2) (3.4) (10.1) (4.5)
Minority Interest......................... (.7) (.7) (2.2) (2.3) (3.2) (3.3)
Other..................................... (.2) -- (.3) (.1) (.3) --
------ ----- ------ ------ ------ ------
(3.8) (2.0) (8.7) (4.7) (11.3) (6.2)
------ ----- ------ ------ ------ ------
Income (Loss) Before Income Taxes........... 2.6 3.2 10.5 5.0 20.3 8.3
------ ----- ------ ------ ------ ------
Income Tax Provision (Benefit)
Current and deferred provision............ 1.0 2.1 4.0 3.0 7.9 3.6
Federal gas production tax credits........ (2.3) (.7) (5.8) (.9) (7.2) (.9)
------ ----- ------ ------ ------ ------
(1.3) 1.4 (1.8) 2.1 .7 2.7
------ ----- ------ ------ ------ ------
Net Income.................................. $ 3.9 $ 1.8 $ 12.3 $ 2.9 $ 19.6 $ 5.6
====== ===== ====== ====== ====== ======
*Includes intercompany transactions
GAS SERVICES
OPERATING INCOME INCREASES 63% -- Gas services' increase in operating
income of $2.0 million, $11.1 million and $17.0 million for the 1994 quarter,
nine-and twelve-month periods, respectively, reflects primarily higher earnings
from the new gas exploration & production activities which began production in
early 1993.
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
The improvements in the nine-and twelve-month periods were also due to
contributions from the gas marketing & cogeneration business.
QUARTER 9 MONTHS 12 MONTHS
------------- --------------- ---------------
1994 1993 1994 1993 1994 1993
---- ---- ----- ----- ----- -----
NONUTILITY GAS STATISTICS (in Bcf)
Gas Sales.................................... 35.3 22.1 109.0 90.0 141.9 123.4
Transportation............................... 4.4 5.6 14.8 16.5 20.1 22.5
---- ---- ----- ----- ----- -----
39.7 27.7 123.8 106.5 162.0 145.9
==== ==== ===== ===== ===== =====
Company Production........................... 4.8 .7 10.9 1.0 12.2 1.0
==== ==== ===== ===== ===== =====
Gas marketing & cogeneration operating results decreased $.6 million in the
1994 quarter, but increased by $5.1 million and $9.4 million for the 1994 nine-
and twelve-month periods, respectively. The decrease in the current quarter, in
spite of higher gas sales volumes, is due primarily to higher costs associated
with increased storage and transportation capacity. The increased storage and
transportation costs have been incurred to support the anticipated higher level
of gas sales during the upcoming peak winter period.
The substantial increase in operating income for the 1994 nine-and
twelve-month periods was due to improved gross margins on a higher level of gas
sales. Additionally, the earnings comparison was affected by reduced gross
margins in 1993 as a result of an increase in spot market gas costs during the
first half of 1993.
MCN PARTNERSHIP BREAKS GROUND ON COGENERATION PLANT -- During the 1994
quarter, MCN and Destec Energy broke ground on a 123-megawatt cogeneration plant
in Ludington, Michigan. The equal partnership will build, own and operate the
$150 million cogeneration facility. The plant, which is expected to be completed
in late 1995, will provide electricity to Consumers Power Company and steam to
Dow Chemical. MCN's gas marketing and cogeneration business will supply the nine
Bcf of natural gas needed to fuel the plant annually.
Gas gathering & processing operating income remained relatively unchanged
for all 1994 periods in spite of a decline in transportation volumes. The
declines were primarily due to lower gas production from fields currently
utilizing MCN's Saginaw Bay pipeline system. A reduction in operating costs
offset the effect of the decline in transportation volumes.
MCN EXPANDS ITS TRANSPORTATION NETWORK -- In response to an increase in
Michigan Antrim gas production, MCN is partnering with others to meet this
growing demand. Specifically, MCN is both constructing and acquiring pipeline
extensions and processing plants which will interconnect with MCN's existing
utility and nonutility pipeline systems. 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 $2.7 million for the
1994 quarter, and $6.0 and $7.3 million for the nine-and twelve-month periods,
respectively. The increases are due to the start-up of production in early 1993
as well as production from newly acquired properties and the development of
other new projects. Additionally, exploration & production operations have
lowered nonutility income taxes through the generation of federal gas production
tax credits during the 1994 periods.
MCN ACQUIRES NATURAL GAS RESERVES -- MCN has made significant investments
in natural gas reserves during the 1994 nine-month period. In the 1994 second
quarter, MCN acquired interests in approximately 150 gas wells located 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 & development program in 1992
through September 1994, MCN has invested over $200 million in exploration &
production projects. As of September 30, 1994, MCN
12
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
owned approximately 250 Bcf of proven gas reserves, 40 Bcf of potential gas
reserves and 3 Bcf equivalent of oil reserves.
In October 1994, MCN acquired interests in approximately 650 gas wells
located primarily in Oklahoma, Kansas and Texas. MCN's share of these properties
includes approximately 26 Bcf of proven gas reserves, 19 Bcf of potential gas
reserves and 6 Bcf equivalent of oil reserves.
COMPUTER OPERATIONS SERVICES
OPERATING INCOME DOWN SLIGHTLY -- Operating income decreased $.2 million
for the 1994 quarter but still increased $1.4 million and $2.7 million for the
nine-and twelve-month periods. The lower income for the 1994 quarter resulted
primarily from expenses incurred related to the start-up of certain new customer
contracts. The improvement in operating income for the nine-and twelve-month
periods reflects higher operating revenues and improved margins from new
business added throughout 1993-1994 and from increased usage by existing
customers.
MCN SIGNS MAJOR CONTRACTS WITH NEW CUSTOMERS -- During the 1994 third
quarter, 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 has leased Royal Insurance's
48,000 square foot data center in Charlotte, North Carolina. This is MCN's third
data center and, combined with MCN's other facilities in Michigan and
Pennsylvania, has given MCN the ability to capture additional markets.
Revenues from the Royal Insurance contract, 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
The decrease in gas storage earnings for the 1994 quarter and nine-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 write-off of assets related to the natural gas
torch business.
QUARTER 9 MONTHS 12 MONTHS
------------- --------------- ---------------
1994 1993 1994 1993 1994 1993
---- ---- ----- ----- ----- -----
NONUTILITY EQUITY IN EARNINGS OF JOINT
VENTURES
(in Millions)
Gas Storage................................. $1.3 $2.1 $ 3.8 $ 5.0 $ 4.9 $ 4.9
Gas Marketing & Cogeneration................ (.1) (.3) (1.0) (1.1) (1.3) (1.5)
Gas Gathering & Processing.................. .4 .4 1.4 1.6 1.9 1.7
Other....................................... -- (.1) (.3) (.2) (1.0) (.2)
---- ---- ----- ----- ----- -----
$1.6 $2.1 $ 3.9 $ 5.3 $ 4.5 $ 4.9
==== ==== ===== ===== ===== =====
OTHER INCOME & DEDUCTIONS
All 1994 periods reflect higher interest costs on long-term debt due to
increased borrowings required to finance nonutility capital investments.
13
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
INCOME TAXES
Income taxes for the 1994 quarter, nine-and twelve-month periods were
favorably impacted by $2.3 million, $5.8 million and $7.2 million, respectively,
of federal gas production tax credits related to gas production projects. This
impact was offset partially by improved earnings in all 1994 periods. Income
taxes for the twelve-month period were also affected by the August 1993
enactment of The Omnibus Budget Reconciliation Act which increased the federal
corporate tax rate to 35%, effective January 1993.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
CASH FLOW ROSE 160% -- MCN's cash flow from operating activities during the
first nine months of 1994 increased $124.4 million over the comparable 1993
period. The increase was due primarily to significantly lower working capital
requirements.
9 MONTHS
------------------
1994 1993
------ ------
CASH FLOW FROM OPERATING ACTIVITIES (in Millions)
Utility Services....................................................... $ 90.3 $ 95.7
Nonutility Services.................................................... 27.6 13.0
------ ------
117.9 108.7
Changes in Assets and Liabilities...................................... 83.6 (31.6)
------ ------
Cash Flow from Operating Activities.................................... $201.5 $ 77.1
====== ======
FINANCING ACTIVITIES
To meet current and future capital requirements, MCN filed a universal
shelf registration with the Securities and Exchange Commission (SEC) for the
issuance of up to $300 million of securities, including preferred and common
equity and debt securities. The shelf registration became effective in October
1994. Under this registration, MCN, through a limited partnership, issued $100
million of cumulative preferred securities in November 1994 (Note 1b). The
preferred securities were rated BBB+ by three major rating agencies and Baa2 by
the other. The proceeds received from this issuance will be used for nonutility
capital investments, repayment of loans under bank credit agreements and general
corporate purposes.
During the first half of 1995, MCN anticipates issuing new common stock
under this shelf registration to partially finance 1995 capital investments that
are expected to be approximately $600 million.
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 nine months of 1994, MCN
issued approximately 310,000 shares, generating $11.3 million.
Utility Services
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. 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 1994 nine-month period, MichCon repaid $169.9 million
of short-term debt, including commercial paper. 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
$250 million through March 1995 which decrease to $109 million through August
1995. Commercial paper of $65.3 million was outstanding at September 30, 1994
under these lines.
In July 1994, MichCon began a Trust Demand Note program which allows
MichCon to borrow up to $25 million through April 1995. At September 30, 1994,
borrowings of $25 million were outstanding under this note.
14
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONCLUDED)
In September 1994, MichCon issued first mortgage bonds totaling $80 million
under its existing shelf registration. The proceeds were used to repay
short-term obligations and for general corporate purposes. MichCon's shelf
registrations allow for the issuance of up to an additional $30 million of first
mortgage bonds. MichCon's capital requirements and general financial market
conditions will affect the timing and amount of future debt issuances. Future
long-term debt offerings are expected to carry MichCon's current debt rating of
"A", which was reaffirmed by the major rating agencies in the 1994 quarter.
Nonutility Services
In August and September 1994, MCN Investment renewed its short-term credit
lines that allow for borrowings of up to $70 million through August 1995 at
interest rates which are generally less than the prevailing prime rate. At
September 30, 1994 borrowings of $29.9 million were outstanding under these
lines of credit.
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 September 30, 1994, borrowings of $206.7 million were outstanding
under the facility.
INVESTING ACTIVITIES
CAPITAL INVESTMENTS IN 1994 TO EXCEED $400 MILLION -- Capital investments
totaled $217.4 million in the first nine months of 1994 and included
approximately $110 million of capital expenditures for nonutility gas
exploration & production projects. The 1993 amounts included expenditures for
the Blue Lake Gas storage project which began operations in April 1993.
9 MONTHS
----------------
1994 1993
------ ------
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Utility Services.......................................................... $ 92.7 $101.5
Nonutility Services....................................................... 121.0 44.6
------ ------
213.7 146.1
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Gas Storage............................................................... 1.5 28.8
Other..................................................................... 2.4 2.5
------ ------
3.9 31.3
------ ------
Minority Partners' Share of Consolidated Capital Expenditures............... (.2) --
------ ------
Total Capital Investments................................................... $217.4 $177.4
====== ======
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 gas exploration &
production, gas gathering lines, underground storage projects and natural gas
cogeneration facilities. Approximately $150 million will be used for the utility
business and over $250 million for the nonutility businesses.
The proposed level of investments in 1994 and future years will 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.
15
18
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(B) REPORTS ON FORM 8-K
MCN filed a report on Form 8-K dated October 21, 1994, under Item 5,
with respect to the reporting of its third quarter results of operations.
MCN filed a report on Form 8-K dated October 26, 1994, under Item 5,
with respect to the offering by MCN Michigan of its 9 3/8% Cumulative
Preferred Securities, Series A, (liquidation preference $25 per Preferred
Security) (the "Preferred Securities"). MCN is the general partner of MCN
Michigan. A Form of Purchase Agreement was filed as an Exhibit thereto.
MCN filed an additional report on Form 8-K dated October 26, 1994,
under Item 5, with respect to the offering of the Preferred Securities by
MCN Michigan. The following documents were filed as Exhibits thereto:
- Amended and Restated Limited Partnership Agreement of MCN
Michigan Limited Partnership.
- Action by the General Partner of MCN Michigan Limited Partnership
creating the 9 3/8% Cumulative Preferred Securities, Series A,
dated October 26, 1994.
- Form of Certificate Evidencing Preferred Partner Interest of MCN
Michigan Limited Partnership.
- MCN Corporation Board of Directors' Pricing Committee Resolution
establishing the price, terms and conditions of the Debt
Securities.
- Terms and Conditions of Series A Subordinated Deferrable Interest
Debt Securities.
- Form of MCN Corporation Series A Subordinated Deferrable Interest
Debt Security for $100,000,000.
- Form of MCN Corporation Series A Subordinated Deferrable Interest
Debt Security for $1,100,000.
- Form of the Series A Subordinated Deferrable Interest Debt
Security to be issued in the event that MCN Michigan ceases to be
the sole holder.
16
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN CORPORATION
Date: November 4, 1994 By: /s/ PATRICK ZURLINDEN
Patrick Zurlinden
Vice President, Controller
and Chief Accounting Officer
17