1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 1
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10070
MCN CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 313-256-5500
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes 'X'No
Number of shares outstanding of each of the registrant's classes of common
stock, as of April 30, 1995:
Common Stock, par value $.01 per share: 65,828,408
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2
INDEX TO FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1995
PAGE
NUMBER
------
COVER............................................................................... i
INDEX............................................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements...................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 5
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................... 15
Item 6. Exhibits and Reports on Form 8-K.......................................... 15
SIGNATURE........................................................................... 16
ii
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(THOUSANDS OF DOLLARS)
MARCH 31, DECEMBER 31,
------------------------ ------------
1995 1994 1994
---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates market value)...... $ 12,764 $ 23,916 $ 11,547
Accounts receivable, less allowance for doubtful accounts of $21,217,
$29,630 and $16,101, respectively....................................... 268,034 326,134 214,158
Accrued unbilled revenues................................................. 60,323 83,932 83,053
Gas in inventory (Note 1)................................................. 59,277 15,579 131,649
Property taxes assessed applicable to future periods...................... 43,964 40,089 54,728
Gas receivable............................................................ 28,405 17,188 21,069
Other..................................................................... 26,717 23,320 27,306
---------- ---------- ------------
499,484 530,158 543,510
---------- ---------- ------------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures.............................. 64,202 60,541 64,505
Deferred postretirement benefit cost...................................... 19,867 25,406 20,670
Other..................................................................... 141,536 83,703 123,501
---------- ---------- ------------
225,605 169,650 208,676
---------- ---------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost
Gas distribution.......................................................... 2,231,588 2,119,117 2,206,462
Exploration & production.................................................. 313,114 104,822 277,118
Gas gathering & processing................................................ 74,020 56,731 67,889
Computer operations services & other...................................... 53,158 39,848 53,356
---------- ---------- ------------
2,671,880 2,320,518 2,604,825
Less -- Accumulated depreciation and depletion............................ 1,139,898 1,070,418 1,112,387
---------- ---------- ------------
1,531,982 1,250,100 1,492,438
---------- ---------- ------------
$2,257,071 $1,949,908 $2,244,624
========= ========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................... $ 114,162 $ 148,407 $ 142,647
Notes payable............................................................. 144,031 105,043 228,807
Current portion of long-term debt, capital lease obligations and
redeemable cumulative preferred stock................................... 6,671 6,009 7,319
Gas inventory equalization (Note 1)....................................... 67,808 109,155 --
Federal income, property and other taxes payable.......................... 86,541 96,394 86,972
Refunds payable to customers.............................................. 5,760 11,120 19,560
Customer deposits......................................................... 10,485 10,940 11,581
Other..................................................................... 61,291 73,490 67,809
---------- ---------- ------------
496,749 560,558 564,695
---------- ---------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................................... 101,698 72,706 93,326
Unamortized investment tax credit......................................... 38,213 40,101 38,684
Tax benefits amortizable to customers..................................... 113,344 128,279 115,067
Accrued postretirement benefit cost....................................... 9,290 11,179 26,060
Minority interest......................................................... 18,478 18,185 18,670
Other..................................................................... 115,577 70,993 88,490
---------- ---------- ------------
396,600 341,443 380,297
---------- ---------- ------------
LONG-TERM DEBT, including capital lease obligations......................... 601,081 514,661 685,519
---------- ---------- ------------
REDEEMABLE CUMULATIVE PREFERRED SECURITIES OF SUBSIDIARIES.................. 100,000 2,618 102,618
---------- ---------- ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................................. 658 591 598
Additional paid-in capital................................................ 434,476 320,907 331,571
Retained earnings......................................................... 228,137 210,014 179,862
Unearned compensation and ESOP benefit.................................... (630) (884) (536)
---------- ---------- ------------
662,641 530,628 511,495
---------- ---------- ------------
$2,257,071 $1,949,908 $2,244,624
========= ========= ============
The notes to the consolidated financial statements are an integral part of this
statement.
1
4
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- -------------------------
1995 1994 1995 1994
-------- -------- ---------- ----------
OPERATING REVENUES...................................... $547,968 $656,757 $1,437,011 $1,577,063
-------- -------- ---------- ----------
OPERATING EXPENSES
Cost of gas........................................... 288,295 392,017 719,714 900,138
Operation and maintenance............................. 104,329 106,899 396,655 359,110
Depreciation, depletion and amortization.............. 29,013 24,052 108,581 85,435
Property and other taxes.............................. 18,822 20,235 63,575 65,580
-------- -------- ---------- ----------
Total operating expenses............................ 440,459 543,203 1,288,525 1,410,263
-------- -------- ---------- ----------
OPERATING INCOME........................................ 107,509 113,554 148,486 166,800
-------- -------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES.................... 1,244 1,598 5,935 8,541
-------- -------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income....................................... 1,813 1,877 6,429 6,079
Interest on long-term debt............................ (11,319) (8,139) (41,393) (29,905)
Other interest expense................................ (4,124) (2,420) (12,439) (10,260)
Dividends on preferred securities of subsidiaries..... (2,418) (136) (4,300) (666)
Minority interest..................................... (564) (761) (2,682) (3,298)
Other................................................. (1,081) (690) (6,032) (5,765)
-------- -------- ---------- ----------
Total other income and (deductions)................. (17,693) (10,269) (60,417) (43,815)
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 91,060 104,883 94,004 131,526
INCOME TAX PROVISION.................................... 29,470 35,761 23,768 43,658
-------- -------- ---------- ----------
NET INCOME.............................................. $ 61,590 $ 69,122 $ 70,236 $ 87,868
========= ========= ========== ==========
EARNINGS PER SHARE...................................... $ 1.02 $ 1.17 $ 1.18 $ 1.49
========= ========= ========== ==========
AVERAGE COMMON SHARES OUTSTANDING....................... 60,595 59,088 59,766 58,824
========= ========= ========== ==========
DIVIDENDS DECLARED PER SHARE............................ $ .2225 $ .2150 $ .8750 $ .8500
========= ========= ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
BALANCE -- Beginning of period.......................... $179,862 $153,589 $210,014 $172,128
ADD -- Net income....................................... 61,590 69,122 70,236 87,868
-------- -------- -------- --------
241,452 222,711 280,250 259,996
DEDUCT -- Cash dividends declared on common stock....... 13,315 12,697 52,110 49,979
Other......................................... -- -- 3 3
-------- -------- -------- --------
BALANCE -- End of period................................ $228,137 $210,014 $228,137 $210,014
========= ========= ========= =========
The notes to the consolidated financial statements are an integral part of these
statements.
2
5
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31,
------------------------
1995 1994
-------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income........................................................................ $ 61,590 $ 69,122
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation, depletion and amortization
Per statement of income....................................................... 29,013 24,052
Charged to other accounts..................................................... 1,865 1,586
Deferred income taxes and investment tax credit -- net.......................... 6,178 (2,781)
Equity in earnings of joint ventures, net of distributions...................... 92 (1,386)
Other........................................................................... 261 777
-------- ---------
98,999 91,370
Changes in assets and liabilities, exclusive of changes shown separately........ 52,347 126,318
-------- ---------
Net cash provided from operating activities................................... 151,346 217,688
-------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable -- net.............................................................. (86,055) (175,261)
Common stock dividends paid....................................................... (13,315) (12,697)
Issuance of common stock (Note 2)................................................. 102,964 3,885
Revolving credit facility -- net.................................................. (80,000) 21,100
Retirement of long-term debt and preferred stock.................................. (4,671) (4,252)
Other............................................................................. (671) (787)
-------- ---------
Net cash used for financing activities........................................ (81,748) (168,012)
-------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures.............................................................. (74,768) (38,651)
Investment in joint ventures...................................................... (1,560) (2,014)
Sale of investment in joint ventures.............................................. 7,628 --
Return of investment from joint ventures.......................................... -- 3,223
Other............................................................................. 319 (792)
-------- ---------
Net cash used for investing activities........................................ (68,381) (38,234)
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................... 1,217 11,442
CASH AND CASH EQUIVALENTS, JANUARY 1................................................ 11,547 12,474
-------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31................................................. $ 12,764 $ 23,916
======== =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable -- net........................................................ $(53,876) $ (89,200)
Accrued unbilled revenues......................................................... 22,730 17,395
Gas in inventory.................................................................. 72,372 29,984
Gas receivable.................................................................... (7,335) (6,229)
Accounts payable.................................................................. (28,485) 21,111
Deferred income taxes -- current.................................................. (1,880) (7,470)
Gas inventory equalization........................................................ 67,808 109,155
Federal income, property and other taxes payable.................................. (431) 32,614
Refunds payable to customers...................................................... (13,800) 326
Other current assets and liabilities.............................................. 3,792 12,776
Deferred assets and liabilities................................................... (8,548) 5,856
-------- ---------
$ 52,347 $ 126,318
======== =========
SUPPLEMENTAL DISCLOSURES
Interest paid, net of amounts capitalized......................................... $ 9,416 $ 6,860
======== =========
Federal income taxes received..................................................... $ (1,309) $ --
======== =========
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. Approximately 42.8 billion cubic feet (Bcf)
and 20.2 Bcf of gas was in inventory at March 31, 1995 and 1994, respectively.
2. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
In March 1995, MCN sold 5,750,000 shares of new common stock in a public
offering, generating net proceeds of approximately $99,000,000.
3. CONTINGENCIES
As described in MCN's 1994 Annual Report on Form 10-K, the Federal Energy
Regulatory Commission (FERC) issued an order in 1993 which required Panhandle
Eastern Pipe Line Company (Panhandle) to refund to MichCon the costs of certain
direct billings totaling $5.4 million plus interest of $4.4 million. During
1994, the FERC issued an order permitting Panhandle to bill MichCon $4.4 million
in interest. These costs were accrued in 1994. MichCon's request for rehearing
of the 1994 order was denied. MichCon has appealed the issue to the District of
Columbia Circuit Court. In March 1995, Panhandle sued MichCon in the United
States District Court seeking judgment for the $4.4 million. If MichCon is
ultimately unsuccessful in defeating Panhandle's claim, it is anticipated that
these costs will be recoverable through the GCR mechanism and therefore, an
asset has been recorded for their future recovery.
MCN is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. Management cannot predict the final disposition of
such proceedings, but believes that adequate provision has been made for
probable losses. It is management's belief, after discussion with legal counsel,
that the ultimate resolution of those proceedings still pending will not have a
material adverse effect on MCN's financial statements.
4. GENERAL
There have been no changes in MCN's principal accounting policies from
those set forth in MCN's 1994 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1995 presentation.
The unaudited information furnished herein, in the opinion of management,
reflects all adjustments (consisting of only recurring adjustments or accruals)
necessary for a fair presentation of the results of operations during the
periods.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
4
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
EARNINGS SUPPRESSED BY WARM WEATHER -- MCN reported earnings of $61.6
million ($1.02 per share) for the first quarter of 1995, a decrease of $7.5
million ($.15 per share) from the 1994 quarter. Earnings for the 1995
twelve-month period decreased $17.7 million ($.31 per share) from the
corresponding 1994 period. A summary of financial performance follows:
QUARTER 12 MONTHS
--------------- ---------------
1995 1994 1995 1994
----- ----- ----- -----
NET INCOME (in Millions)
Gas Distribution......................................... $56.7 $66.0 $51.6 $75.4
Diversified Services..................................... 4.9 3.1 18.6 12.5
----- ----- ----- -----
$61.6 $69.1 $70.2 $87.9
===== ===== ===== =====
EARNINGS PER SHARE
Gas Distribution......................................... $ .94 $1.12 $ .87 $1.28
Diversified Services..................................... .08 .05 .31 .21
----- ----- ----- -----
$1.02 $1.17 $1.18 $1.49
===== ===== ===== =====
- --------------------------------------------------------------------------------
STRATEGIC DIRECTION -- MCN's strategic direction is to invest in a
portfolio of gas-related projects, including gas distribution, exploration and
production, gathering and processing systems, storage projects, cogeneration
facilities and other areas of expertise. MCN is continuing to pursue
opportunities in these areas through both its Gas Distribution and Diversified
Services businesses, as subsequently discussed.
GAS DISTRIBUTION
RESULTS REFLECT 13.7% WARMER WEATHER -- Earnings decreased $9.3 million and
$23.8 million for the 1995 quarter and twelve-month period, respectively, as
compared to the 1994 periods. The decrease in earnings for both periods was
primarily due to lower gas deliveries resulting from significantly warmer
weather from the comparable periods last year. Under normal weather conditions,
earnings for the 1995 quarter would have been $61.4 million ($1.02 per share)
compared to $59.0 million ($1.00 per share) for the 1994 quarter. Likewise,
weather adjusted earnings for the 1995 twelve-month period were $67.4 million
($1.13 per share) versus $69.3 million ($1.18 per share) in 1994.
QUARTER 12 MONTHS
-------------- ---------------
1995 1994 1995 1994
----- ---- ------ ----
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) than Normal...................... (5.8)% 7.9% (11.0)% 3.5%
Increase (Decrease) from Normal in:
Gas Markets (Bcf)......................................... (5.2) 7.8 (17.4) 6.7
Net Income (Millions)..................................... $(4.7) $7.0 $(15.8) $6.1
Earnings Per Share........................................ $(.08) $.12 $ (.26) $.10
5
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
GROSS MARGIN
GROSS MARGIN DOWN 9% -- Gas Distribution gross margin (operating revenues
less cost of gas) decreased $22.4 million for the 1995 quarter due to lower gas
deliveries resulting from the warmer weather. Gross margin for the twelve-month
period decreased $9.1 million also due to the effects of warmer weather offset
partially by an increase in gas sales rates, reflecting a general rate increase
of $15.7 million, effective January 1994.
QUARTER 12 MONTHS
----------------- ---------------------
1995 1994 1995 1994
------ ------ -------- --------
GAS DISTRIBUTION OPERATIONS (in Millions)
Operating Revenues*.................................. $427.8 $540.8 $1,013.1 $1,210.8
Cost of Gas.......................................... 212.9 303.5 446.1 634.7
------ ------ -------- --------
Gross Margin....................................... 214.9 237.3 567.0 576.1
------ ------ -------- --------
Operating Expenses*
Operation & Maintenance............................ 78.4 87.5 308.1 289.2
Depreciation, Depletion & Amortization............. 22.3 21.3 85.8 77.1
Property & Other Taxes............................. 16.7 18.9 56.5 61.5
------ ------ -------- --------
117.4 127.7 450.4 427.8
------ ------ -------- --------
Operating Income..................................... 97.5 109.6 116.6 148.3
------ ------ -------- --------
Equity in Earnings of Joint Ventures................. .4 .8 1.6 3.8
------ ------ -------- --------
Other Income & (Deductions)*
Interest Income.................................... 1.0 1.4 3.8 4.7
Interest on Long-Term Debt......................... (8.3) (6.6) (29.7) (25.9)
Other Interest Expense............................. (3.0) (2.2) (9.9) (8.1)
Other.............................................. (.8) (.8) (5.3) (6.4)
------ ------ -------- --------
(11.1) (8.2) (41.1) (35.7)
------ ------ -------- --------
Income Before Income Taxes........................... 86.8 102.2 77.1 116.4
------ ------ -------- --------
Income Taxes......................................... 30.1 36.2 25.5 41.0
------ ------ -------- --------
Net Income........................................... $ 56.7 $ 66.0 $ 51.6 $ 75.4
====== ====== ======= =======
*Includes intercompany transactions
Gas sales and end user transportation deliveries in total decreased in the
1995 quarter and twelve-month period by 16.8 Bcf and 23.2 Bcf, respectively, due
mainly to warmer weather. However, the effect of weather for the 1995
twelve-month period was partially offset by growth in the end user
transportation market.
QUARTER 12 MONTHS
--------------- ---------------
1995 1994 1995 1994
----- ----- ----- -----
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales................................................... 90.5 106.0 188.9 218.4
End User Transportation..................................... 43.6 44.9 138.7 132.4
Intermediate Transportation*................................ 105.9 107.7 301.9 313.1
----- ----- ----- -----
240.0 258.6 629.5 663.9
===== ===== ===== =====
*Includes intercompany volumes
Intermediate transportation deliveries decreased in the 1995 quarter and
twelve-month period primarily as the result of reduced volumes transported for
Canadian customers, partially offset by increased transportation for
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
Michigan gas producers and brokers. Profit margins on intermediate
transportation services are considerably less than margins on gas sales or for
end user transportation markets.
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. The increased demand has
resulted from time to time in capacity constraints on MichCon's northern
Michigan pipeline system. In March 1995, MichCon received approval from the
Michigan Public Service Commission (MPSC) to expand its transportation system.
The expansion project will require approximately $40 million for additional
pipeline and related facilities. Construction is planned to commence this summer
and to be completed by the fall of 1995. The expanded system, in conjunction
with existing facilities, is expected to transport approximately 135 Bcf of
Antrim gas annually, generating revenues of approximately $12 million per year.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the Gas Cost Recovery (GCR) mechanism, MichCon's rates are set to
recover 100% of prudently and reasonably incurred gas costs. Therefore,
significant fluctuations in total gas costs have little effect on gross margins
or earnings.
Cost of gas sold decreased in the 1995 quarter and twelve-month period due
to lower sales volumes resulting from the warmer weather as well as lower prices
paid for natural gas in the spot market. The decrease in market prices paid for
gas resulted in a decrease in the cost of gas sold per thousand cubic feet of
$.60 (20.2%) and $.65 (21.6%) in the 1995 quarter and twelve-month period,
respectively, from the comparable 1994 periods.
A majority of MichCon's interstate gas supply contracts are priced based on
natural gas spot indices. To mitigate price volatility associated with gas
purchases, MichCon has reserved the right to fix the prices it pays under some
of these contracts. In order to capture declining gas prices during 1994,
MichCon fixed the price on approximately 34 Bcf of gas in advance of the month
of purchase. As a result of a further decline in gas prices during 1994,
MichCon's cost of gas would have been approximately $10.0 million (1.9%) lower
in 1994 had it not fixed these prices.
MichCon filed its 1994 GCR reconciliation case with the MPSC in February
1995. In this case, the MPSC will decide whether MichCon's 1994 gas costs were
reasonable and prudent. To date, MichCon's 1994 gas purchase practices have not
been challenged. An order is expected at the end of 1995. MichCon believes that
it acted reasonably and prudently by fixing the gas prices based upon the
information available at the time.
As described in MCN's 1994 Annual Report on Form 10-K, the Federal Energy
Regulatory Commission (FERC) issued an order in 1993 which required Panhandle
Eastern Pipe Line Company (Panhandle) to refund to MichCon the costs of certain
direct billings totaling $5.4 million plus interest of $4.4 million. During
1994, the FERC issued an order permitting Panhandle to bill MichCon for $4.4
million in interest. These costs were accrued in 1994. MichCon's request for
rehearing of the 1994 order was denied. MichCon has appealed the issue to the
District of Columbia Circuit Court. In March 1995, Panhandle sued MichCon in the
United States (U.S.) District Court seeking judgment for the $4.4 million. If
MichCon is ultimately unsuccessful in defeating Panhandle's claim, it is
anticipated that these costs will be recoverable through the GCR mechanism and
therefore, an asset has been recorded for their future recovery.
OTHER OPERATING EXPENSES
Operation and maintenance expenses were lower in the 1995 quarter due to
lower uncollectible accounts resulting from warmer than normal weather and a
reduction in retirement benefit costs. Operation and maintenance expenses
increased for the 1995 twelve-month period due to higher postretirement benefit
costs
7
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
of $25.2 million being 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 contributed to the decrease in
operation and maintenance expenses for the 1995 quarter and partially offset the
increase for the 1995 twelve-month period.
In March 1995, the U.S. House of Representatives voted to eliminate all
funding for the Low-Income Home Energy Assistance Program (LIHEAP).
Subsequently, the U.S Senate voted to restore the program's $1.3 billion
appropriation. Currently, delegates from the House and Senate are organizing to
meet to resolve the differences between the House and Senate packages. MichCon
continues its vigorous efforts to maintain this funding. LIHEAP funding
currently provides approximately $78 million in heating assistance to 385,000
Michigan households through the Department of Social Services, with
approximately 40% of the funds going to MichCon customers.
Depreciation and depletion increased for the 1995 quarter and twelve-month
period due mainly to higher plant balances, reflecting capital expenditures of
$289.1 million over the past two calendar years. The 1995 twelve-month period
also reflects higher depreciation rates that were implemented in January 1994.
Property and other taxes for the 1995 quarter and twelve-month period
reflect a decrease in Michigan single business taxes due primarily to lower
earnings. In addition, the 1995 periods also reflect lower property taxes due to
changes in Michigan legislation, partially offset by increased taxes due to
higher property balances.
EQUITY IN EARNINGS OF JOINT VENTURES
Earnings from joint ventures decreased for the 1995 quarter and
twelve-month period due primarily to higher operating and interest expenses
incurred by the Blue Lake gas storage venture. MCN's 50% interest in the Blue
Lake project is owned equally by Gas Distribution and Diversified Services.
MCN TO ACQUIRE AN INTEREST IN MISSOURI UTILITY -- During the 1995 quarter,
MCN agreed to acquire an approximately 50% interest in an entity formed to
construct, own and operate a natural gas transmission and distribution system
located in southern Missouri. The agreement is subject to MCN obtaining
assurance from the Securities and Exchange Commission (SEC) that the acquisition
is consistent with its exemption under the Public Utility Holding Company Act of
1935. Construction of the system, which began in March 1995, is expected to be
completed in early 1997 at a cost of approximately $40 million. The 475 mile
pipeline system will initially provide service to approximately 10,000
customers.
OTHER INCOME & DEDUCTIONS
The increase in other income and deductions for the 1995 quarter and
twelve-month period reflects additional interest expense relating to the
issuance of $80 million of first mortgage bonds in September 1994. In addition,
the interest on varying levels of pending customer refunds contributed to the
1995 twelve-month period increase.
INCOME TAXES
Income taxes decreased for the 1995 quarter and twelve-month period due to
reduced earnings and the favorable resolution of prior years' tax issues.
8
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
DIVERSIFIED SERVICES
EARNINGS INCREASE 58% -- The Diversified Services group continued to make
an increasing contribution to MCN's earnings. Earnings increased $1.8 million
($.03 per share) for the current quarter and $6.1 million ($.10 per share) for
the twelve-month period. Higher earnings from both the gas services and the
computer operations services segments resulted in the improvement, as
subsequently discussed.
QUARTER 12 MONTHS
----------------- -----------------
1995 1994 1995 1994
------ ------ ------ ------
DIVERSIFIED SERVICES OPERATIONS (in Millions)
Operating Revenues*
Gas Services.......................................... $104.0 $103.5 $357.9 $313.6
Computer Operations Services.......................... 25.7 20.1 93.8 78.3
------ ------ ------ ------
129.7 123.6 451.7 391.9
------ ------ ------ ------
Operating Expenses*
Gas Services.......................................... 93.4 98.7 325.0 294.5
Computer Operations Services.......................... 23.4 18.7 86.3 71.9
Corporate & Other..................................... 2.9 2.2 8.6 6.9
------ ------ ------ ------
119.7 119.6 419.9 373.3
------ ------ ------ ------
Operating Income (Loss)
Gas Services
Exploration & Production........................... 5.6 .4 18.9 2.5
Gas Marketing & Cogeneration....................... 3.3 2.2 6.3 7.5
Gas Gathering & Processing......................... 1.7 2.2 7.7 9.1
------ ------ ------ ------
10.6 4.8 32.9 19.1
Computer Operations Services.......................... 2.3 1.4 7.5 6.4
Corporate & Other..................................... (2.9) (2.2) (8.6) (6.9)
------ ------ ------ ------
10.0 4.0 31.8 18.6
------ ------ ------ ------
Equity in Earnings of Joint Ventures.................... .8 .8 4.3 4.7
------ ------ ------ ------
Other Income & (Deductions)*
Interest Income....................................... .3 .5 .4 1.6
Interest Expense...................................... (3.7) (1.8) (12.0) (6.3)
Minority Interest..................................... (.6) (.8) (2.7) (3.3)
Dividends on preferred securities of subsidiary....... (2.3) -- (3.8) --
Other................................................. (.3) -- (1.3) (.1)
------ ------ ------ ------
(6.6) (2.1) (19.4) (8.1)
------ ------ ------ ------
Income Before Income Taxes.............................. 4.2 2.7 16.7 15.2
------ ------ ------ ------
Income Taxes
Current and Deferred Provision........................ 1.6 1.0 6.9 6.4
Federal Gas Production Tax Credits.................... (2.3) (1.4) (8.8) (3.7)
------ ------ ------ ------
(.7) (.4) (1.9) 2.7
------ ------ ------ ------
Net Income.............................................. $ 4.9 $ 3.1 $ 18.6 $ 12.5
====== ====== ====== ======
*Includes intercompany transactions
9
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
GAS SERVICES
OPERATING INCOME INCREASES OVER 120% -- Gas services increase in operating
income of $5.8 million for the 1995 quarter and $13.8 million for the 1995
twelve-month period primarily reflects earnings from gas exploration &
production operations. The increase for the 1995 quarter also reflects improved
results in the gas marketing & cogeneration business.
QUARTER 12 MONTHS
------------- ---------------
1995 1994 1995 1994
---- ---- ----- -----
DIVERSIFIED SERVICES GAS STATISTICS (in Bcf)
Gas Sales*
Gas Marketing & Cogeneration................................ 43.5 38.5 147.3 122.2
Exploration & Production**.................................. 3.3 -- 10.7 .1
Transportation................................................ 7.2 5.7 22.1 21.8
---- ---- ----- -----
54.0 44.2 180.1 144.1
==== ==== ===== =====
Company Gas Production........................................ 6.4 1.5 21.4 3.8
==== ==== ===== =====
Exchange Gas Flows............................................ 12.0 10.4 24.6 26.9
==== ==== ===== =====
Gas Processed................................................. 3.2 -- 5.2 --
==== ==== ===== =====
* Includes intercompany volumes
**Represents gas sales made directly to third parties by E&P operations. Other
E&P production is sold to affiliated companies for marketing.
Exploration & production (E&P) operating income increased $5.2 million and
$16.4 million for the 1995 quarter and twelve-month period, respectively. The
results reflect a significantly higher level of gas produced due to the start-up
of production in early 1993 as well as production from properties that were
acquired in mid-1994 and the development of other new projects during 1994 and
1995. Additionally, E&P operations have increased the earnings of the
Diversified Services group through the generation of increased federal gas
production tax credits.
E&P operating results were also impacted by lower sales rates and lower
unit operating costs being achieved as production volumes have increased. The
lower sales prices were mitigated by risk management strategies, as subsequently
discussed.
Gas marketing & cogeneration operating income for the 1995 quarter
increased $1.1 million due to more favorable margins on a higher level of gas
sales. As discussed below, favorable margins were maintained in part due to the
use of natural gas hedging contracts. Profit margins were also affected by
additional revenues earned from providing gas peaking services and increased
volumes related to exchange gas contracts. Typically under exchange contracts,
MCN's gas marketing business delivers gas to customers during periods of peak
demand and takes redelivery of the gas at an off-peak time.
Operating income for the 1995 twelve-month period decreased $1.2 million
despite an increase in gas sales of 25.1 Bcf. The decrease reflects higher costs
associated with increased storage and transportation capacity. The higher
storage and transportation costs were incurred to support further anticipated
increases in the level of gas sales in future periods.
MCN's gas marketing & cogeneration business has several long-term sales
contracts in place under which it will sell annual volumes ranging from 10 Bcf
to 55 Bcf through 2014.
RISK MANAGEMENT STRATEGY -- MCN primarily manages price risk through the
maintenance of a portfolio of gas supply and gas sale agreements. MCN uses
natural gas futures, options and swap contracts to manage
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
net open positions that give rise to price risk. As of March 31, 1995, net open
positions over the next ten years are minimal and therefore the price risk has
been largely hedged.
Gas gathering & processing operating income decreased by $.5 million and
$1.4 million for the 1995 quarter and twelve-month period, respectively,
reflecting a lower average transportation rate. The decrease was partially
offset by revenues from volumes transported through new pipeline extensions. The
1995 periods were also favorably affected by income from new gas processing
plants that reduce carbon dioxide levels in Michigan Antrim gas.
In response to an increase in Michigan Antrim gas production, MCN has
partnered with others to meet a growing demand for transportation and processing
services. MCN will continue to both construct and acquire pipeline extensions
and processing plants which interconnect with its existing Gas Distribution and
Diversified Services pipeline network.
COMPUTER OPERATIONS SERVICES
OPERATING INCOME INCREASES OVER 60% -- Computer operations services'
operating income increased $.9 million for the current quarter and $1.1 million
for the twelve-month period. The improvements reflect higher operating revenues
from new business added throughout 1994 and from increased services to existing
customers.
CORPORATE & OTHER
Both the 1995 quarter and twelve-month period reflect increased expenses
associated with the development of new projects.
EQUITY IN EARNINGS OF JOINT VENTURES
Diversified Services earnings from joint ventures decreased $.4 million in
the 1995 twelve-month period. The decrease reflects lower earnings from the Blue
Lake gas storage venture due to higher operating and interest expenses. Earnings
from the gas marketing and gas processing joint ventures have been impacted by
the sale of a Canadian gas brokering partnership and two gas processing
facilities in the 1995 quarter. The loss in other joint ventures for the 1994
twelve-month period includes a reserve for the write-off of assets related to
the natural gas torch business.
QUARTER 12 MONTHS
--------------- -----------------
1995 1994 1995 1994
---- ---- ----- -----
EQUITY IN EARNINGS OF JOINT VENTURES (in Millions)
Gas Storage........................................... $1.2 $1.0 $ 4.4 $ 5.4
Gas Marketing & Cogeneration.......................... (.4) (.5) (1.2) (1.4)
Gas Gathering & Processing............................ .1 .5 1.3 1.9
Other................................................. (.1) (.2) (.2) (1.2)
---- ---- ----- -----
$ .8 $ .8 $ 4.3 $ 4.7
==== ==== ===== =====
In 1993, MCN acquired a 40% interest in a partnership which was formed to
own and operate a $120 million, 42 Bcf underground natural gas storage field in
southeastern Michigan. In March 1995, MCN acquired the remaining 60% interest in
the partnership, giving MCN 100% control over the development of the storage
field. However, it is MCN's intention to sell a 50% interest in the project to a
third party. The development of the storage field is awaiting the negotiation of
long-term storage agreements with potential customers.
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
OTHER INCOME & DEDUCTIONS
The 1995 quarter and twelve-month period reflect higher interest costs on
long-term debt due to increased borrowings, at higher interest rates, required
to finance capital investments in the Diversified Services operations. Other
income and deductions for the 1995 periods also include dividends on $100
million of preferred securities of a subsidiary which were issued in November
1994.
INCOME TAXES
Income taxes for the 1995 quarter and twelve-month period were favorably
impacted by increased federal gas production tax credits related to E&P
projects. This impact was offset partially by taxes on improved earnings in all
1995 periods.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MCN's cash flow from operating activities totaled $151.3 million for the
first quarter of 1995, decreasing $66.4 million from the comparable 1994
quarter. The decrease was due primarily to higher working capital requirements.
QUARTER
------------------
1995 1994
------ ------
CASH FLOW FROM OPERATING ACTIVITIES (in Millions)
Gas Distribution....................................................... $ 87.7 $ 86.7
Diversified Services................................................... 11.3 4.7
------ ------
99.0 91.4
Changes in Assets and Liabilities...................................... 52.3 126.3
------ ------
Cash Flow from Operating Activities.................................... $151.3 $217.7
====== ======
FINANCING ACTIVITIES
MCN sold 5,750,000 shares of new common stock in a public offering during
the 1995 first quarter, generating net proceeds of approximately $99 million.
Proceeds from the common stock issuance were used to fund capital expenditures,
repay loans under bank credit agreements and for general corporate purposes.
MCN also issues new shares of common stock pursuant to its Dividend
Reinvestment and Stock Purchase Plan and various employee benefit plans. During
1995, MCN anticipates the issuance of new shares of common stock pursuant to
these plans, generating approximately $16 million. During the 1995 first
quarter, MCN issued approximately 226,000 shares, generating $4.0 million.
Gas Distribution
Cash and cash equivalents normally increase and short-term debt is reduced
in the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the first quarter of 1995, MichCon
repaid $88.8 million of short-term debt, including commercial paper. During the
latter part of the year, cash and cash equivalents decrease as funds are used to
finance increases in gas inventories and customer accounts receivable. 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 $109 million through August 1995. Commercial
paper of $54.7 million was outstanding as of March 31, 1995 under these lines.
MichCon's commercial paper is currently rated "A-1" or its equivalent by the
major rating agencies.
12
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
In 1994, MichCon began a Trust Demand Note program which allows MichCon to
borrow up to $25 million. As of March 31, 1995, borrowings of $25 million were
outstanding under this program, but were repaid in April 1995.
Cash requirements for capital investments are estimated to be approximately
$250 million for 1995. In anticipation of future permanent capital requirements,
MichCon filed with and received approval from the MPSC for the authority to
issue and sell securities and enter into additional long-term financing
arrangements of up to $150 million. In May 1995, MichCon filed a registration
statement with the SEC for the issuance of up to $150 million of first mortgage
bonds. MichCon's current shelf registrations allow for the issuance of up to an
additional $30 million of first mortgage bonds. During the second quarter of
1995, MichCon anticipates issuing approximately $70 million of first mortgage
bonds under these shelf registration statements. MichCon's capital requirements
and general financial market conditions will affect the timing and amount of
future debt issuances. MichCon's capitalization objective is to maintain a ratio
of approximately 50% debt to 50% equity. Future long-term debt offerings are
expected to carry MichCon's current debt rating of "A."
Construction of the $40 million transmission and distribution system
located in southern Missouri is expected to be funded through $25 million of
construction financing and $15 million of partner contributions.
Diversified Services
In anticipation of future permanent capital requirements, MCN Investment
and MCN plan to file a joint shelf registration with the SEC during the second
quarter of 1995 for the issuance of up to $200 million of debt securities. MCN
Investment's capital requirements and general market conditions will affect the
timing and amount of future debt issuances.
MCN Investment also maintains $320 million of credit lines to finance
capital investments and working capital requirements of its gas marketing
operations. During the second quarter of 1995, MCN Investment plans to initiate
a $400 million commercial paper program. MCN Investment intends to increase its
credit lines to allow for all commercial paper issuances to be backed by such
lines.
INVESTING ACTIVITIES
CAPITAL INVESTMENTS IN 1995 TO EXCEED $600 MILLION -- Capital investments
increased $47.0 million in the first quarter of 1995 primarily due to higher
capital expenditures for Gas Distribution investments and Diversified Services
E&P and joint venture cogeneration projects. Gas Distribution capital
expenditures included construction of distribution lines to reach communities
not previously served by MichCon.
QUARTER
----------------
1995 1994
----- -----
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Gas Distribution......................................................... $28.4 $20.4
Diversified Services..................................................... 47.8 18.3
----- -----
76.2 38.7
----- -----
MCN's Share of Joint Venture Capital Expenditures:
Gas Cogeneration......................................................... 8.9 --
Other.................................................................... 1.7 1.1
----- -----
10.6 1.1
----- -----
Minority Partners' Share of Consolidated Capital Expenditures.............. .1 .1
----- -----
Total Capital Investments.................................................. $86.7 $39.7
===== =====
13
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
MCN's strategic direction is to significantly grow MCN by investing in a
portfolio of gas-related projects. Accordingly, MCN's capital investments are
anticipated to range from $300 to $650 million annually over the next several
years. For 1995, MCN anticipates investing approximately $250 million in Gas
Distribution to add new customers and develop new gas transportation markets.
Another $400 million is expected to be spent in Diversified Services, of which
$200 million will be in exploration and production, $40 million to develop the
Michigan Power cogeneration facility and the remainder primarily in gas storage
and gathering pipeline projects.
The proposed level of investments in 1995 and future years will increase
capital requirements materially in excess of internally generated funds and
require the issuance of additional debt and equity securities. MCN's
capitalization objective is to maintain a ratio of approximately 50% debt to 50%
equity, excluding nonrecourse project debt. Including nonrecourse debt, MCN has
targeted a ratio of approximately 60% debt to 40% equity. It is management's
opinion that MCN and its subsidiaries will have sufficient capital resources,
both internal and external, to meet anticipated capital requirements.
14
17
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MCN held its Annual Meeting of Shareholders on April 27, 1995. As of
February 27, 1995, the record date for determination of shareholders entitled to
vote at the Annual Meeting, there were 59,986,300 shares outstanding and
entitled to vote. Of these shares, 49,708,735, or 82.9%, were present by proxy,
and 10,277,565 shares were not voted.
At the Annual Meeting, shareholders voted:
1) To elect the following Directors to serve for three year terms:
NUMBER OF SHARES
NUMBER OF SHARES WITHHOLDING
DIRECTOR CONSENTING FOR CONSENT
------------------------------------------ ---------------- ----------------
Thomas H. Jeffs II........................ 49,168,196 540,539
Arthur L. Johnson......................... 49,101,414 607,321
Dale A. Johnson........................... 49,175,774 532,961
William K. McCrackin...................... 49,024,331 684,404
2) To approve an amendment to the MCN Corporation Stock Incentive Plan
to increase the number of shares of MCN Common Stock, par value $.01 per
share, authorized to be issued under the plan, with 42,913,386 shares voted
for ratification of the amendment, 5,877,630 shares voted against, and
abstentions of 917,719 shares.
3) To appoint Deloitte & Touche LLP as independent auditors for the
year ending December 31, 1995, with 49,207,949 shares voted for
ratification of the appointment, 169,835 shares voted against, and
abstentions of 330,951 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------
10-1 MCN Corporation Stock Incentive Plan, as amended.
27-1 Financial Data Schedule.
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated March 14, 1995, under Item 5, with
respect to the offering of its Common Stock (par value $.01 per share) in which
the Form of Purchase Agreement was filed as an Exhibit.
MCN filed an additional report on Form 8-K dated March 14, 1995, under Item
5, in connection with gas purchases during 1994 of Michigan Consolidated Gas
Company, a wholly owned subsidiary of MCN.
15
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN CORPORATION
Date: May 10, 1995 By: /s/ Patrick Zurlinden
--------------------------------------
Patrick Zurlinden
Vice President, Controller
and Chief Accounting Officer
16