1
EXHIBIT 13-1
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
MCN boasts another record-setting year--MCN's earnings from continuing
operations increased 21%, or $19.4 million, to a record $112.6 million in 1996.
This performance reflects the successful implementation of the strategic
direction discussed below. MCN's continuing operations earned $93.2 million in
1995, an increase of $18.6 million from 1994.
MCN's earnings were further bolstered by income from discontinued operations,
including a one-time gain of $36.2 million from the sale of The Genix Group,
Inc. (Genix), MCN's computer operations subsidiary. As discussed in the
"Discontinued Operations" section that follows, MCN sold Genix during the
second quarter of 1996.
- -------------------------------------------------
1996 1995 1994
=================================================
Net Income (in Millions)
Continuing Operations:
Diversified Energy $ 31.2 $ 17.6 $ 11.4
Gas Distribution 81.4 75.6 63.2
------------------------
112.6 93.2 74.6
------------------------
Discontinued Operations:
Income From Operations 1.6 3.6 3.2
Gain on Sale 36.2 - -
------------------------
37.8 3.6 3.2
------------------------
$ 150.4 $ 96.8 $ 77.8
========================
Earnings Per Share
Continuing Operations:
Diversified Energy $ .47 $ .27 $ .20
Gas Distribution 1.21 1.17 1.06
------------------------
1.68 1.44 1.26
------------------------
Discontinued Operations:
Income From Operations .03 .05 .05
Gain on Sale .54 - -
------------------------
.57 .05 .05
------------------------
$ 2.25 $ 1.49 $ 1.31
=================================================
Strategic Direction--MCN's objective is to achieve superior, long-term returns
for its shareholders. To accomplish this, MCN will aggressively invest in a
diverse portfolio of domestic and international energy-related projects. The
success of this strategy will be demonstrated by the growth of MCN's earnings
and the total return to its shareholders over time.
DIVERSIFIED ENERGY
Earnings Generate a 19.7% Return on Equity--The synergies at work within the
Diversified Energy group continue to contribute to its strong financial
performance as earnings for 1996 increased 77%, or $13.6 million, from 1995.
The growth in earnings was fueled by increased operating and joint venture
income, partially offset by increased financing costs as a result of additional
capital needed to fund investments. Diversified Energy continues to provide an
increasing portion of MCN's earnings, contributing 28% in 1996 compared to 19%
in 1995. Similarly, Diversified Energy earnings for 1995 increased $6.2 million
over 1994.
Diversified Energy Operations
- --------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
==============================================================
Operating Revenues* $ 734.4 $ 400.0 $ 346.5
Operating Expenses* 693.6 378.1 335.1
-------------------------
Operating Income 40.8 21.9 11.4
-------------------------
Equity in Earnings of Joint Ventures 16.6 3.9 4.3
-------------------------
Other Income and (Deductions)*
Interest Income 3.0 3.6 3.4
Interest Expense (28.7) (13.3) (10.5)
Dividends on Preferred Securities (12.4) (9.4) (1.5)
Gains Related to DIGP (Note 2b) 6.4 - -
Other (.9) 2.3 (.9)
-------------------------
(32.6) (16.8) (9.5)
-------------------------
Income Before Income Taxes 24.8 9.0 6.2
-------------------------
Income Taxes
Current and Deferred Provision 9.5 2.7 2.7
Federal Tax Credits (15.9) (11.3) (7.9)
-------------------------
(6.4) (8.6) (5.2)
-------------------------
Net Income $ 31.2 $ 17.6 $ 11.4
===============================================================
*Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture income more than doubles--
Diversified Energy's operating and joint venture income increased $31.6 million
and $10.1 million in 1996 and 1995, respectively, due primarily to higher
results from Exploration & Production (E&P) operations. Improved results from
Pipelines & Processing and Energy Marketing & Power Generation also contributed
to the increase in 1996.
Operating and Joint Venture Income
- -------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
=============================================================
Exploration & Production $ 33.2 $ 18.5 $ 10.7
Pipelines & Processing 10.7 1.0 2.0
Energy Marketing & Power Generation 10.0 4.9 1.1
Gas Storage 4.0 4.2 4.2
Corporate & Other (.5) (2.8) (2.3)
------------------------
$ 57.4 $ 25.8 $ 15.7
=============================================================
Exploration & Production operating income increased $14.7 million and $7.8
million for the 1996 and 1995 periods, respectively. The results reflect a
significant increase in the level of gas and oil produced due to the
development and acquisition of properties during 1996 and 1995.
GAS AND OIL PRODUCTION
(in BCF equivalent) 1996 1995 1994
==========================================
Gas 57.2 31.4 16.5
Oil 6.5 2.3 0.5
-------------------
Total Production 63.7 33.7 17
===================
32
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Since the inception of its E&P program in late 1992, MCN has invested more than
$950 million to develop and acquire gas and oil reserves. At December 31, 1996,
proved gas reserves totaled 1,137.7 billion cubic feet (Bcf), and proved oil
reserves approximated 17.2 million barrels, or the equivalent of another 103.2
Bcf of natural gas. Proved gas and oil reserves increased 354.4 Bcf equivalent
(40%) during 1996, primarily from the development of existing acreage.
MCN has investments in various regions and geological structures, including the
shallow Michigan and Ohio Antrim formations, the Midcontinent and Gulf Coast
areas, Virginia coalbed methane properties and, most recently, reserves in the
western United States.
E&P operating results for 1996 reflect a $1.96 average gas sales rate per
thousand cubic feet (Mcf), which declined $.06 per Mcf compared to 1995.
Operating results for 1995 reflect a gas sales rate of $2.02 per Mcf, compared
to $1.97 per Mcf in 1994. The average sales rates include the effect of hedging
with natural gas swap and futures agreements, which are used to manage
Diversified Energy's exposure to the risk of market price fluctuations. As a
result of strong gas prices in the marketplace, hedging agreements had the
effect of reducing the average sales rate for 1996 by $.35 per Mcf. Conversely,
hedging agreements increased the average sales rates for 1995 and 1994 by $.51
per Mcf and $.39 per Mcf, respectively, in a less favorable gas market. E&P
operating results also reflect an average oil sales rate of $20.18 per barrel,
which increased by $3.94 per barrel compared to 1995. The average oil sales
rate for 1995 decreased by $.05 per barrel compared to 1994. E&P's operating
results include higher average production costs per Mcf equivalent.
Additionally, E&P operations have supplemented Diversified Energy's earnings
through the generation of an increasing amount of federal gas production tax
credits. Of the gas produced in 1996, 1995 and 1994, 15.5 Bcf (27%), 11.2 Bcf
(36%) and 7.9 Bcf (48%), respectively, generated federal gas production tax
credits that approximated $1.00 per Mcf.
Outlook--MCN's strategy is to continue the aggressive growth of its reserve
base in known producing areas, generating attractive returns and developing
reliable, long-term gas supplies. MCN anticipates a significant increase in E&P
operating results as it implements this growth strategy by acquiring additional
properties, developing existing acreage and realizing the full benefits of
previous acquisitions. E&P expects gas and oil production levels to increase
over 50% in 1997, exceeding 100 Bcf equivalent. A significant portion of this
increased production will be achieved through the continued development of
E&P's one million net acres of undeveloped property.
MCN also anticipates that oil will become a larger percentage of total reserves
and production in order to achieve a more balanced portfolio. Oil could
comprise as much as 15% of total production by the end of 1998. In addition to
producing increasing quantities of oil through traditional methods, MCN expects
increased production from enhanced oil recovery (EOR) investments. EOR projects
are currently in process in which carbon dioxide extracted during production
and processing of Antrim gas is transported and injected into existing oil
reservoirs to increase production. MCN is also participating in a number of
secondary recovery water-flood projects which are also intended to increase the
flow rate and overall production of MCN's oil wells.
Risks associated with future E&P activities will be reduced by diversifying
investments along the lines of geography, geology, risk profile and technology,
as well as by partnering with operators who bring capital and expertise.
Furthermore, MCN's price risk management strategy is designed to manage its
exposure to changes in gas prices.
Pipelines & Processing operating and joint venture income increased $9.7
million in 1996 and decreased $1.0 million during 1995. The increase in 1996
primarily reflects income from the December 1995 acquisition of an interest in
a 40-mile gas gathering line in Virginia (Note 2c) and the February 1996
acquisition of an interest in a 90-mile gas gathering system in the Mobile Bay
area of offshore Alabama (Note 2b). Results also reflect a higher level of
volumes treated through additional gas processing plants which reduce carbon
dioxide levels in Michigan Antrim gas.
PIPELINES & PROCESSING VOLUMES
(in BCF equivalent)
1996 1995 1994
----------------
Gas Processing 44.2 14.6 1.9
Transportation 86.4 5.0 1.2
Note: Includes MCN's share of
Joint Ventures
Operating and joint venture income also benefited from the December 1996
acquisition of a 25% interest in a 248 million gallon per year methanol
processing plant in Texas (Note 2a). MCN expects the partnership to contribute
significantly to operating and joint venture income in 1997 and beyond. This
acquisition adds yet another facet of the energy industry to MCN's already
diverse portfolio, thereby enhancing its growth and profitability prospects.
The decrease in operating and joint venture income in 1995 reflects lower gas
processing earnings due to the sale of two processing facilities in the first
quarter of 1995. Results during 1995 were also impacted by two
newly-constructed processing plants which had high initial startup expenses.
Outlook--Pipelines & Processing's expansion strategy will focus primarily on
investments in natural gas and gas liquid gathering, processing and
transmission facilities near areas of rapid reserve
33
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MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
development or growing consumer markets. Pipelines & Processing anticipates
working with other Diversified Energy businesses that complement its operations.
Energy Marketing & Power Generation operating and joint venture income increased
$5.1 million for 1996 reflecting a 28% increase in gas sales volumes and
slightly higher margins on gas sales. The increase in gas sales volumes was
driven primarily by additional sales to the northeastern United States, as well
as sales to the Michigan Power project which began operations in late 1995.
Additionally, these results reflect a 37% increase in volumes delivered under
gas exchange contracts in 1996. Typically under exchange contracts, Energy
Marketing accepts delivery of gas during low demand periods and delivers gas to
customers during periods of peak demand.
Operating and joint venture income increased $3.8 million for 1995, reflecting a
20% increase in gas sales volumes and more favorable margins on gas sales.
Additionally, higher revenues from exchange gas services contributed to the 1995
improvement.
ENERGY MARKETING GAS SALES & EXCHANGE DELIVERIES
(in BCF)
1996 1995 1994
------------------
Gas sales 219 170.7 142.4
Exchange deliveries 22.5 16.4 13.3
-------------------
Total 241.5 187.1 155.7
===================
Outlook--In order to grow Energy Marketing operations, MCN's strategy is to
aggressively pursue marketing opportunities within its current target markets,
as well as to expand its coverage outside of those areas. Enhanced by its
ability to provide bundled sales, transportation and storage services to
large-volume end users and utilities, MCN is positioned to capitalize on
opportunities to further expand its market base into the northeast and midwest
United States and eastern Canada. MCN has also entered into marketing alliances
with other gas marketers and suppliers in order to expand its markets in the
Great Lakes and Gulf Coast regions, as well as to enter new markets throughout
the southern United States.
MCN's Power Generation business is expected to make significant investments in
international projects over the next several years. In February 1997, MCN
reached an agreement to acquire a 40% interest in a joint venture with Torrent
Group of Ahmedabad, India. Under the agreement, which is subject to certain
regulatory approvals, MCN will invest as much as $115 million, of which
approximately half will be funded through nonrecourse financing. The joint
venture will hold interests in several electric companies and power projects in
India. MCN is continuing to pursue several other domestic and international
power generation projects.
Risk Management Strategy--MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more fully balance its
portfolio of supply and sales agreements. MCN has hedged most of its gas and oil
production not covered by long-term, fixed-price sales obligations. MCN's Energy
Marketing group coordinates all of MCN's hedging activities to ensure compliance
with risk management policies established by MCN's board of directors. Certain
hedging gains or losses related to gas and oil production are recorded by MCN's
E&P operations. Gains and losses on gas and oil production-related hedging
transactions that are not recorded by MCN's E&P group are absorbed by Energy
Marketing.
Gas Storage joint venture income decreased slightly in 1996 and was unchanged in
1995. Gas Storage results include the operations of Blue Lake Gas Storage
Company (Blue Lake). As of December 31, 1996, MCN's 50% interest in Blue Lake
was owned equally by Gas Distribution and Diversified Energy. In February 1997,
Diversified Energy signed an agreement to sell its share of Blue Lake effective
December 1997. Gas Distribution will maintain its share of the project.
Outlook--MCN has an equity interest in two joint venture storage projects that
have 56 Bcf of storage capacity, of which 10 Bcf is utilized by Energy
Marketing. During 1997, MCN plans to begin converting a depleted natural gas
reservoir into a 42 Bcf storage facility. MCN expects the storage field to be
completed by mid-1999. MCN has long-term contracts in place for approximately
40% of the field's capacity and the remaining 60% is expected to be contracted
to Energy Marketing. Upon completion, the storage field will add to Gas Storage
joint venture results and support Energy Marketing operations by enhancing its
ability to offer a reliable gas supply during peak winter months.
Corporate & Other operating and joint venture income includes administrative
expenses associated with corporate management activities. Expenses in 1996 were
partially offset by a $1.7 million gain from the sale of land by a 50%-owned
real estate joint venture.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for all periods reflects higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group, as well as dividends on $100 million of preferred securities
issued in November 1994 and $80 million of preferred securities issued in July
1996 (Note 6c).
Other income and deductions for 1996 includes gains related to Dauphin Island
Gathering Partners (DIGP). In mid-1996, MCN sold a 40% interest in the DIGP
partnership, resulting in a pre-tax gain of $4.0 million. In December 1996,
interests in the partnership were sold to three additional partners, resulting
in a reduction of MCN's partnership interest from 59% to 35%. This transaction
resulted in a pre-tax gain of $4.8 million, of which $2.4 million was deferred
(Note 2b).
34
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MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Included in 1995 other income and deductions is a $1.4 million bonus received
from exceeding required performance criteria at the Michigan Power project and
the reversal of a $1.6 million uncollectible reserve on an advance made to a
joint venture. The uncollectible provision was reversed upon the receipt of
payments and credit support to ensure repayment of the remaining advance
balance.
INCOME TAXES
The current and deferred income tax provision for all periods reflect increased
federal taxes on improved pre-tax earnings. This increase was partially offset
by increased federal gas production tax credits related to E&P projects.
GAS DISTRIBUTION
Earnings produce a 14.6% return on equity--MCN's Gas Distribution group
continued its solid performance during 1996 with earnings of $81.4 million,
representing an 8%, or $5.8 million improvement over 1995. Similarly, earnings
for 1995 increased $12.4 million over 1994. These improvements are due primarily
to increased gross margins resulting from higher gas sales and transportation
deliveries.
GAS DISTRIBUTION OPERATIONS
- -----------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
=================================================================
Operating Revenues*
Gas Sales $ 1,102.9 $ 931.9 $ 969.0
End User Transportation 82.5 80.8 76.5
Intermediate Transportation 48.6 42.0 39.4
Other 42.3 52.9 52.1
---------------------------
1,276.3 1,107.6 1,137.0
Cost of Gas 646.3 491.4 536.7
---------------------------
Gross Margin 630.0 616.2 600.3
---------------------------
Other Operating Expenses*
Operation and Maintenance 298.4 299.8 318.1
Depreciation and Depletion 98.8 91.3 86.0
Property and Other Taxes 62.3 58.8 59.6
---------------------------
459.5 449.9 463.7
---------------------------
Operating Income 170.5 166.3 136.6
---------------------------
Equity in Earnings of Joint Ventures
Storage 2.0 1.7 2.7
Other (.7) (.4) (.7)
---------------------------
1.3 1.3 2.0
---------------------------
Other Income and (Deductions)*
Interest Income 4.0 4.4 4.4
Interest Expense (48.9) (43.7) (38.4)
Minority Interest (1.0) (2.4) (2.9)
Other (1.8) (6.4) (5.7)
---------------------------
(47.7) (48.1) (42.6)
---------------------------
Income Before Income Taxes 124.1 119.5 96.0
Income Taxes 42.7 43.9 32.8
---------------------------
Net Income $ 81.4 $ 75.6 $ 63.2
=================================================================
*Includes intercompany transactions
GROSS MARGIN
Gross margin increases--Gas Distribution gross margin (operating revenues less
cost of gas) increased $13.8 million and $15.9 million in 1996 and 1995,
respectively, reflecting higher gas sales and end user transportation deliveries
due primarily to colder weather. Additionally, gross margins increased as a
result of the continued growth in intermediate transportation services.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
- -----------------------------------------------------------------------
1996 1995 1994
=======================================================================
Percentage Colder (Warmer) Than Normal 5.4% .3% (4.2)%
Increase (Decrease) From Normal in:
Gas Markets (in Bcf) 10.9 1.5 (4.4)
Net Income (in Millions) $ 9.9 $ 1.4 $ (4.0)
Earnings Per Share $ .15 $ .02 $ (.07)
=======================================================================
Gas sales and end user transportation revenues increased $172.7 million in 1996
and decreased $32.8 million in 1995. Revenues were affected by higher gas sales
and end user transportation deliveries which totaled 367.9 Bcf in 1996 and 355.6
Bcf in 1995, increases of 12.3 Bcf and 11.2 Bcf, respectively. The increases
were due primarily to colder weather, as well as marketing initiatives that
expanded gas markets. The decline in gas sales revenues during 1995 reflects
lower gas costs as subsequently discussed. End user transportation deliveries
for both 1996 and 1995 also reflect an overall higher level of gas usage by
large-volume commercial and industrial customers, including power generation
customers. End user transportation services are provided to large-volume
customers who purchase gas directly from producers and brokers, including Energy
Marketing, and contract with MichCon to transport the gas to their facilities.
Gas Distribution continues to enter into multi-year, competitively priced
transportation agreements with large-volume users to maintain these gas markets
over the long term.
Gas sales and gross margins have also been affected by variations in revenues
associated with MichCon's lost gas costs. MichCon's gas sales rates are set to
recover lost gas costs using an averaging method based on historical lost gas
experience. Prior to 1993, MichCon deferred or accrued revenues for differences
between historical average lost gas amounts and the actual amount experienced.
However, as a result of an October 1993 Michigan Public Service Commission
(MPSC) order issued in MichCon's last general rate case, MichCon no longer
defers or accrues revenues for these differences in lost gas amounts.
Amortization of previously deferred amounts was completed in 1995 and increased
revenues by $3.4 million and $3.1 million in 1995 and 1994, respectively. As
discussed in the "Cost of Gas" section that follows, gross margins have also
been impacted by variations in lost gas costs.
Intermediate transportation revenues increased $6.6 million and $2.6 million in
1996 and 1995, respectively. Revenues reflect deliveries of 527.5 Bcf in 1996
and 374.4 Bcf in 1995, increases of 153.1 Bcf and 51.4 Bcf, respectively. The
increased
35
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
deliveries are due primarily to additional volumes transported for two major
fixed-fee customers and increased transportation of Antrim gas for Michigan gas
producers and brokers. Intermediate transportation is a gas delivery service
provided to gas producers, gas brokers and other gas companies that own the
natural gas, but are not the ultimate consumers.
GAS DISTRIBUTION
VOLUME/GROSS MARGIN COMPARISON
1996 1995 1994
---------------------
Volumes (in BCF)
Gas sales 221.0 209.8 204.4
End user transportation 146.9 145.8 140.0
Intermediate transportation 527.5 374.4 323.0
---------------------
Total 895.4 730.0 667.4
=====================
Gross Margins, Excluding Other Operating Revenues
(Dollars in Millions)
Gas sales $456.6 $440.5 $432.3
End user transportation 82.5 80.8 76.5
Intermediate transportation 48.6 42.0 39.4
----------------------
Total $587.7 $563.3 $548.2
======================
There has been a significant increase in Michigan Antrim gas production over
the past several years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. In order to meet the
increased demand, Gas Distribution expanded the capacity of its northern
Michigan gathering system during 1996. The expansion enabled Gas Distribution
to transport an additional 75 Bcf in 1996. Although intermediate transportation
volumes have increased significantly, profit margins on this service are
considerably less than margins on gas sales or for end user transportation
markets.
Other operating revenues decreased $10.6 million in 1996 primarily due to a
decrease in conservation revenues resulting from the discontinuance of
MichCon's energy conservation programs. As discussed in the "Other Operating
Expenses" section that follows, the decrease in revenues is offset by a
corresponding decrease in expenses related to the conservation programs.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas rates.
Through the gas cost recovery mechanism, the MPSC allows MichCon the timely
recovery of 100% of its reasonably and prudently incurred cost of gas sold.
Therefore, fluctuations in cost of gas sold have little or no effect on gross
margins.
Cost of gas sold increased in 1996 as a result of significantly higher spot
market prices paid for natural gas purchases and higher gas sales volumes due
to colder weather. Cost of gas sold for 1996 was $2.92 per Mcf, an increase of
$.56 (24%).
Lower natural gas prices, partially offset by higher gas volumes,
resulted in the 1995 decrease in cost of gas sold. Cost of gas sold for 1995
decreased $.30 per Mcf (11%) from 1994. To mitigate risk related to spot market
prices, MichCon has filed a proposal with the MPSC to change its supply
strategy to obtain approximately two-thirds of its gas under contracts that tie
purchase prices to spot market prices and to acquire the remainder under
fixed-price contracts. MichCon expects approval of this proposal by the second
quarter of 1997.
As previously discussed, cost of gas is affected by variations in lost gas
amounts. Lost gas costs for 1996 and 1995 increased by $6.6 million and $8.5
million, respectively.
OTHER OPERATING EXPENSES
Operation and maintenance expenses declined slightly in 1996 and decreased 6%
during 1995 due to lower benefit costs, primarily pension and retiree
healthcare costs. Expenses in 1996 were also lowered by the discontinuance of
Gas Distribution's energy conservation programs. Management's continuing
efforts to control operating costs also contributed to the reductions in
operation and maintenance expenses. Gas Distribution has streamlined its
organizational structure over the past four years while increasing its customer
base and expanding energy services to customers. Since 1993, the number of Gas
Distribution employees has declined by 303 (9%) while the number of customers
has increased by over 40,000 (4%).
Partially offsetting the lower benefit, conservation and other operating costs
were increased uncollectible gas accounts. The increase in uncollectible gas
accounts resulted from higher heating bills due to the colder-than-normal
winter temperatures over the last two years and a rise in gas prices during
1996. The impact of higher heating bills was exacerbated by a reduction, as
well as a delay, in home heating assistance funding obtained by low-income
customers.
Gas Distribution receives a significant amount of its heating assistance
funding from the federal Low-Income Home Energy Assistance Program (LIHEAP).
During 1995, Congress reduced a substantial portion of the program's funding
for the 1996 fiscal year. The state of Michigan's share of LIHEAP funds was
reduced from $78 million in fiscal year 1995 to $47.5 million in 1996.
Uncollectible gas accounts were further impacted by the late receipt of fiscal
year 1996 funding by the state of Michigan. Due to this delay, many of Gas
Distribution's customers who were eligible for assistance did not file. During
1996 and 1995, $10.1 million and $27.3 million in LIHEAP funds assisted
approximately 74,000 and 112,000 MichCon customers, respectively. During
October 1996, President Clinton signed an Omnibus Spending Bill passed by
Congress that provided for $1 billion in federal LIHEAP funding for 1997, an
increase of $100 million over 1996 levels. During February 1997, the President
released his proposed budget which provides for federal LIHEAP funding of $1
billion annually through fiscal year 2002. A portion of any future
36
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
increase or decrease in funding may impact uncollectible gas accounts.
Depreciation and depletion increased in both 1996 and 1995 due to higher plant
balances, reflecting capital expenditures of $611.4 million over the past three
years. Depreciation and depletion expenses are expected to increase in future
years due to higher planned capital investments. MichCon has filed an
application with the MPSC to lower its depreciation rates, which could
partially offset the anticipated increase in depreciation expense in 1997 and
future years.
Property and other taxes increased in 1996 reflecting an increase in property
taxes due to higher property balances. Property and other taxes decreased
slightly in 1995 due mainly to a reduction in Michigan single business taxes,
resulting from favorable amendments to the Michigan tax law.
EQUITY IN EARNINGS OF JOINT VENTURES
Earnings from joint ventures were unchanged in 1996 as compared to 1995. Joint
ventures' earnings decreased $.7 million during 1995 due to lower earnings from
the Blue Lake gas storage venture. Blue Lake's 1995 earnings were affected by
lower revenues from reduced storage rates and higher interest expense.
OTHER INCOME AND DEDUCTIONS
Interest on long-term debt increased in 1996 and 1995 as a result of the
average amount of long-term debt outstanding increasing $72.6 million and $95.7
million, respectively. The increase in 1996 was partially offset by a slight
decrease in the weighted-average interest rate. The increases in long-term debt
outstanding were the result of issuing first mortgage bonds of $70 million in
each 1996 and 1995, and $80 million in 1994.
Other deductions decreased in 1996 primarily due to an increase in the
allowance for funds used during construction resulting from higher construction
balances.
INCOME TAXES
Income taxes declined slightly during 1996 and increased $11.1 million in 1995.
Income taxes in both years were impacted by improved earnings and were reduced
by $3.4 million, $1.3 million and $3.3 million during 1996, 1995 and 1994,
respectively, due to the favorable resolution of prior years' tax issues.
ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating and
other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.
During the mid-1980's, preliminary environmental investigations were conducted
at these former MGP sites, and some contamination related to the byproducts of
gas manufacturing was discovered at each site. The existence of these sites and
the results of the environmental investigations have been reported to the
Michigan Department of Environmental Quality. None of these former MGP sites
are on the National Priorities List prepared by the U.S. Environmental
Protection Agency.
MCN is not involved in any administrative proceedings regarding these former
MGP sites but is currently remediating one of these sites. The remedy consists
of limited excavation and disposal of soils, a new soil cover and long-term
groundwater monitoring. More extensive investigations are underway at seven
other sites.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MCN employed outside consultants to evaluate remediation alternatives for these
sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. MCN has notified more than 50 current and former
insurance carriers of the environmental conditions at these former MGP sites.
In 1996, MichCon received payments from certain carriers and expects additional
insurance recoveries over the next several years. The findings of these
investigations indicate that the estimated total expenditures for investigation
and remedial activities at all 17 former MGP sites will be between $30 million
and $170 million based on undiscounted 1995 costs. As a result of these
studies, MCN accrued an additional liability and a corresponding regulatory
asset of approximately $35 million during 1995.
During 1996, 1995 and 1994, MCN spent $.9 million, $2.1 million and $.6
million, respectively, investigating these former MGP sites. At December 31,
1996, the reserve balance was $37.6 million, of which $2.6 million was
classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs and,
therefore, have an effect on MCN's financial position and cash flows. However,
management believes that insurance coverage and the cost deferral and rate
recovery mechanism approved by the MPSC will prevent environmental costs from
having a material adverse impact on MCN's results of operations.
OUTLOOK
Gas Distribution's strategy is to become the dominant provider of natural gas
and high-value energy services within Michigan. Accordingly, Gas Distribution's
objectives are to grow its revenues and reduce its costs in order to maintain
strong returns and provide customers with high-quality service at competitive
prices. Revenue growth will be achieved through initiatives to expand Gas
Distribution's 895 Bcf of gas markets. There continue to be opportunities to
grow residential markets through the conversion of existing homes, as well as
from new construction. Gas Distribution continues to grow industrial and
37
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
commercial markets by aggressively facilitating the use of existing gas
technologies and equipment.
Management is continually assessing ways to improve cost competitiveness. Among
other cost saving initiatives, MichCon and The Detroit Edison Company are
exploring opportunities to share the cost of common, duplicative functions,
including billing, meter reading, payment processing and excavation.
Significant cost savings could be achieved given that approximately 60% of Gas
Distribution's 1.2 million customers are also customers of Detroit Edison.
Gas Distribution continues to focus on challenges and opportunities resulting
from increased competition with other natural gas distribution companies and
other energy providers. The MPSC is reviewing various plans to reform
Michigan's gas utility regulatory process to give all customers added choices
and to increase competition. MichCon and other Michigan gas utilities will
implement pilot transportation service programs in 1997 for small commercial
and residential customers. Under MichCon's two-year program, 47,000 customers
in the pilot territory will have the opportunity to select alternative natural
gas suppliers beginning in April 1997. This option has been available to
MichCon's larger commercial customers for several years. MichCon currently
generates no earnings on the gas supply portion of operations. Therefore, a
customer's selection of an alternative supplier generally is expected to be
income-neutral. The overall package of regulatory changes connected with the
gas industry restructuring is expected to result in lighter-handed regulation
and the potential to improve earnings. Gas Distribution is positioning itself
to respond to changes in regulation and increased competition by reducing its
cost of operations while maintaining a high level of customer satisfaction. Gas
Distribution remains focused on these goals in 1997 and beyond.
As described in Note 8 to the consolidated financial statements, Gas
Distribution complies with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." In the event that Gas Distribution determines it no longer meets
the criteria for following SFAS No. 71, the accounting impact would be an
extraordinary, noncash increase to net income of approximately $48 million.
Criteria that give rise to the discontinuance of SFAS No. 71 include (1)
increasing competition that restricts Gas Distribution's ability to establish
prices to recover specific costs, and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. Gas Distribution periodically reviews these criteria to ensure that
the continuing application of SFAS No. 71 is appropriate. Based on a current
evaluation of the various factors and conditions that are expected to impact
future cost recovery, Gas Distribution believes that its regulatory assets are
probable of future recovery.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc. for an initial sales price of
$137.5 million, resulting in an after-tax gain of $36.2 million. In October
1996, the initial sales price was decreased by $4.6 million to reflect the
reduction in Genix's working capital between the effective and closing dates of
the transaction. The selling price of Genix could be further adjusted downward
by as much as $32 million depending upon the occurrence of certain
contingencies that include, among other things, retention of certain customers
through mid-1998 and tax-related matters. Management believes that no further
adjustment to the selling price will occur. Although Genix had experienced
significant growth in revenues and operating income over the past several
years, MCN's focused strategy is to invest in energy-related projects that
generate higher rates of return. Summary statements and other information on
discontinued computer operations can be found in Note 2d to the consolidated
financial statements.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $69.7 million during 1996
and increased $93 million during 1995. The 1996 decrease was due primarily to
an increase in working capital requirements, partially offset by higher net
income, after adjusting for depreciation, deferred taxes and nonoperating gains
(Note 2). The 1995 increase was primarily due to higher net income adjusted for
noncash items, partially offset by an increase in working capital requirements.
FINANCING ACTIVITIES
In July 1996, MCN issued through a wholly-owned trust, 3,200,000 shares of
8-5/8% Trust Originated Preferred Securities (TOPrS) for $80 million (Note 6a).
Dividends on the TOPrS are in substance tax deductible by MCN. Proceeds from
the issuance were invested by MCN in its Diversified Energy group and were used
to reduce short-term debt incurred to fund capital expenditures, for working
capital requirements and for general corporate purposes.
In April 1996, MCN issued 5,865,000 Preferred Redeemable Increased Dividend
Equity Securities (PRIDES), yielding 8-3/4% (Note 6b). The PRIDES are
convertible securities that consist of a forward contract under which MCN is
obligated to sell, and the PRIDES holders are obligated to purchase,
approximately $135 million of MCN common stock in April 1999.
In March 1995, MCN sold 5,750,000 shares of new common stock in a public
offering, generating approximately $99 million. In November 1994, through a
limited partnership, MCN issued $100 million of cumulative preferred
securities. Proceeds from these issuances were used to fund capital
expenditures, to repay short-term obligations and for general corporate
purposes.
38
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. During the 1994-1996
period, MCN issued 2,639,000 shares, generating $49.2 million. During 1997, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating approximately $18 million.
At December 31, 1996, MCN had an outstanding shelf registration with
approximately $185 million remaining to be issued in the form of debt or equity
securities. In February 1997, MCN filed a new registration statement with the
Securities and Exchange Commission (SEC) that allows it to issue an additional
$500 million of debt and equity securities. MCN's capital requirements and
general market conditions will affect the timing and amount of future
issuances.
The following table sets forth the ratings for securities issued by MCN and its
subsidiaries. These ratings are considered investment grade by each rating
agency.
- ---------------------------------------------------------
STANDARD DUFF &
& POOR'S MOODY'S PHELPS FITCH
=========================================================
MCN:
PRIDES BBB+ baa1 BBB+ BBB+
Preferred Securities BBB+ baa2 BBB+ BBB+
MCNIC:
Commercial Paper* A2 P2 D1- F2
Medium-Term Notes* BBB+ Baa2 A- BBB+
MichCon:
Commercial Paper A1 P1 D1 F1
First Mortgage Bonds A A2 A+ A
=========================================================
* Ratings based on MCN support agreement.
DIVERSIFIED ENERGY
MCNIC has established credit lines to allow for borrowings of up to $100
million under a 364-day revolving credit facility and up to $300 million under
a three-year revolving credit facility. The facilities support MCNIC's $400
million commercial paper program, which is used to finance capital investments
of the Diversified Energy group and working capital requirements of its Energy
Marketing operations. Commercial paper of $329.8 million was outstanding at
December 31, 1996.
In January and May 1996, MCNIC issued $200 million and $130 million,
respectively, of medium-term notes, using the proceeds to repay commercial
paper balances and for general corporate purposes. In January 1997, MCNIC
issued $150 million of medium-term notes, using the proceeds to finance capital
expenditures and for general corporate purposes. As of February 1997, MCNIC has
an outstanding shelf registration with approximately $220 million remaining to
be issued in the form of debt securities. MCNIC's capital requirements and
general market conditions will affect the timing and amount of future
issuances.
In order to finance investment activities, MCN's E&P business obtained $100
million under a five-year term loan during 1995.
GAS DISTRIBUTION
During the latter part of each year, Gas Distribution generally incurs
short-term debt to finance increases in gas inventories and customer accounts
receivable. The short-term debt is normally reduced in the first part of the
year as gas inventories are depleted and funds are received from winter heating
sales. To meet its seasonal short-term borrowing needs, MichCon normally issues
commercial paper backed by credit lines with several banks. MichCon has
established credit lines to allow for borrowings of up to $150 million under a
364-day revolving credit facility and up to $150 million under a three-year
revolving credit facility. Commercial paper of $238.3 million was outstanding
at December 31, 1996.
In 1996, MichCon issued first mortgage bonds totaling $70 million under an
existing shelf registration. The proceeds were used to repay short-term
obligations, finance capital expenditures and for general corporate purposes.
MichCon issued $70 million and $80 million of first mortgage bonds in
1995 and 1994, respectively. Proceeds were used to repay short-term
obligations, finance capital expenditures and for general corporate purposes.
During the fourth quarter of 1996, MichCon filed a shelf registration statement
with the SEC that will allow it to issue, in conjunction with an existing shelf
registration, up to $300 million of debt securities during the next several
years. MichCon's capital requirements and general financial market conditions
will affect the timing and amount of future debt issuances.
During 1996, MichCon renewed its Trust Demand Note program, which allows it to
borrow up to $25 million through March 1997. At December 31, 1996, $25 million
was outstanding under this program.
At December 31, 1996, MCN had invested a total of $6.7 million in a partnership
that owns and operates a transmission and distribution system located in
southern Missouri. The project is expected to cost $40 million, which will be
funded through construction financing and $16 million of partner contributions.
Construction financing that allows for borrowings of up to $25 million was
obtained in October 1995. MCN has issued a guaranty for the full amount of this
financing, and one of the parties to the project is obligated to reimburse MCN
for 50% of any payments made as a result of this guaranty. The guaranty will
remain in place until permanent financing is established, which is anticipated
to be in late 1997.
39
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
INVESTING ACTIVITIES
CAPITAL INVESTMENTS
- ----------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
================================================================
Consolidated Capital Expenditures:
Diversified Energy $395.3 $291.5 $196.2
Gas Distribution 215.3 241.5 154.6
Discontinued Operations 6.5 9.4 12.4
----------------------
617.1 542.4 363.2
----------------------
MCN's Share of Joint Venture
Capital Expenditures:
Pipelines & Processing 5.2 1.0 2.5
Energy Marketing & Power Generation 5.5 39.6 32.8
Gas Storage .2 .4 1.8
Gas Distribution 4.8 10.3 -
Other .3 1.5 3.3
----------------------
16.0 52.8 40.4
----------------------
Acquisitions:
Significant (Note 2) 133.2 83.2 -
Other 24.4 10.5 -
----------------------
157.6 93.7 -
Minority Partners' Share of Consolidated
Capital Expenditures - (.1) (1.6)
----------------------
Total Capital Investments $790.7 $688.8 $402.0
================================================================
Capital investments near $800 million--Capital investments increased $101.9
million in 1996 due to higher Diversified Energy capital investments primarily
by E&P operations and Pipelines & Processing. Gas Distribution capital
expenditures were incurred for the construction of transportation pipelines and
new distribution lines to reach communities not previously served by MichCon
and to make improvements to existing storage and transmission systems.
MCN completed the sale of Genix (Note 2d) and interests in DIGP (Note 2b) in
1996 resulting in proceeds of $168.9 million. Proceeds from these sales were
used to reduce debt incurred to fund Diversified Energy's capital investments.
OUTLOOK
MCN's strategic direction is to grow significantly by investing in a portfolio
of energy-related projects. Accordingly, MCN's capital investments could exceed
$3 billion by the year 2000. During 1997, MCN expects to invest more than $800
million, with approximately 80% in Diversified Energy and the remainder in Gas
Distribution.
Within the Diversified Energy group, MCN anticipates $400 million to be
invested in E&P projects for drilling operations and to acquire reserves in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western regions. The remaining
expenditures are anticipated to be in gas gathering, gas processing and power
generation projects that are consistent with MCN's growth strategies.
Gas Distribution investments will be made to add new customers, develop new gas
transportation markets, make improvements to existing storage and transmission
systems and to improve its information system.
The proposed level of investments in 1997 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 capital
requirements and general market conditions will affect the timing and amount of
future issuances.
As it expands its business, MCN's capitalization objective is to maintain its
solid credit ratings through a strong balance sheet. Accordingly, its
capitalization objective is a ratio of 55% equity and 45% debt. It is
management's opinion that MCN and its subsidiaries will have sufficient capital
resources, both internal and external, to meet anticipated capital
requirements.
NEW ACCOUNTING PRONOUNCEMENTS
During 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This pronouncement provides accounting and reporting guidance
on transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Although certain aspects of SFAS
No. 125 have been delayed, the effective date for most of its provisions
remains January 1, 1997. MCN has analyzed the impacts of adopting SFAS No. 125
and expects that it will have no significant impact on its financial
statements.
During 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities," which
provides guidance on the issues present in the recognition, measurement,
display and disclosure of environmental remediation liabilities. MCN does not
expect the 1997 adoption of this pronouncement to have a material impact on its
financial statements.
40
10
CONSOLIDATED STATEMENT OF INCOME
MCN ENERGY GROUP INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31-(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994
===========================================================================================================================
Operating Revenues
Gas and oil sales $ 1,827,198 $ 1,323,432 $ 1,309,192
Transportation 120,019 120,494 114,932
Other 50,051 51,306 49,509
------------------------------------------------
1,997,268 1,495,232 1,473,633
------------------------------------------------
Operating Expenses
Cost of gas 1,193,578 786,193 823,436
Operation and maintenance 371,980 342,521 341,585
Depreciation, depletion and amortization 145,990 114,585 97,835
Property and other taxes 74,427 63,704 62,863
------------------------------------------------
1,785,975 1,307,003 1,325,719
------------------------------------------------
Operating Income 211,293 188,229 147,914
------------------------------------------------
Equity in Earnings of Joint Ventures (Note 3)
17,867 5,245 6,289
------------------------------------------------
Other Income and (Deductions)
Interest income 7,234 7,741 7,628
Interest on long-term debt (66,517) (44,853) (37,811)
Other interest expense (11,264) (12,049) (10,899)
Dividends on preferred securities of subsidiaries (Notes 6a and 6c) (12,374) (9,610) (2,018)
Gains related to DIGP (Note 2b) 6,384 - -
Minority interest (1,059) (2,491) (2,879)
Other (2,620) (3,713) (6,136)
------------------------------------------------
(80,216) (64,975) (52,115)
------------------------------------------------
Income From Continuing Operations Before Income Taxes 148,944 128,499 102,088
Income Tax Provision (Note 13) 36,375 35,330 27,490
------------------------------------------------
Income From Continuing Operations 112,569 93,169 74,598
------------------------------------------------
Discontinued Operations, Net of Taxes (Note 2d)
Income from operations 1,595 3,587 3,170
Gain on sale 36,176 - -
------------------------------------------------
37,771 3,587 3,170
-------------------------------------------------
Net Income $ 150,340 $ 96,756 $ 77,768
================================================
Earnings Per Share
Continuing operations $ 1.68 $ 1.44 $ 1.26
------------------------------------------------
Discontinued operations (Note 2d)
Income from operations .03 .05 .05
Gain on sale .54 - -
------------------------------------------------
.57 .05 .05
------------------------------------------------
$ 2.25 $ 1.49 $ 1.31
================================================
Average Common Shares Outstanding (Note 6d) 66,944 64,743 59,394
================================================
Dividends Declared Per Share $ .9400 $ .9000 $ .8675
===========================================================================================================================
The notes to the consolidated financial statements are an integral part of this
statement.
41
11
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31-(IN THOUSANDS) 1996 1995
===================================================================================================================
ASSETS
Current Assets
Cash and cash equivalents, at cost (which approximates market value) $ 30,462 $ 19,259
Accounts receivable, less allowance for doubtful accounts of $18,487
and $13,765, respectively 362,596 317,945
Accrued unbilled revenues 108,509 92,410
Gas in inventory (Note 4) 79,161 71,763
Property taxes assessed applicable to future periods 62,966 60,633
Accrued gas cost recovery revenues 27,672 -
Other 52,862 53,486
------------------------------------------
724,228 615,496
------------------------------------------
Deferred Charges and Other Assets
Investment in and advances to joint ventures (Note 3) 265,388 129,026
Deferred swap losses and receivables (Note 11a) 65,051 54,807
Deferred postretirement benefit costs (Note 10b) 5,559 13,112
Deferred environmental costs (Note 7b) 31,233 35,000
Prepaid benefit costs (Note 10) 59,248 23,827
Other 100,341 90,626
------------------------------------------
526,820 346,398
------------------------------------------
Property, Plant and Equipment, at cost
Gas Distribution 2,689,039 2,496,711
Exploration & Production 981,901 576,810
Pipelines & Processing 27,895 22,324
Other 18,722 64,709
------------------------------------------
3,717,557 3,160,554
Less-Accumulated depreciation and depletion 1,335,201 1,223,808
------------------------------------------
2,382,356 1,936,746
------------------------------------------
$ 3,633,404 $ 2,898,640
==========================================
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable $ 317,922 $ 217,184
Notes payable (Note 5) 336,126 245,635
Current portion of long-term debt, capital lease obligations and
redeemable cumulative preferred securities (Notes 5 and 9) 84,747 7,000
Federal income, property and other taxes payable 97,646 83,384
Customer deposits 12,881 11,550
Other 97,873 87,575
------------------------------------------
947,195 652,328
------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note 13) 149,838 125,896
Unamortized investment tax credit 34,919 36,797
Tax benefits amortizable to customers 116,496 114,668
Deferred swap gains and payables (Note 11a) 48,365 51,923
Accrued postretirement benefit costs (Note 10b) - 15,551
Accrued environmental costs (Note 7b) 35,000 35,000
Minority interest 17,911 18,375
Other 73,263 93,470
------------------------------------------
475,792 491,680
------------------------------------------
Commitments and Contingencies (Notes 7 and 9)
Capitalization (See accompanying statement)
Long-term debt, including capital lease obligations 1,252,040 993,407
MCN-obligated mandatorily redeemable preferred securities of
subsidiaries holding solely subordinated debentures of MCN 173,809 96,449
Common shareholders' equity 784,568 664,776
------------------------------------------
2,210,417 1,754,632
------------------------------------------
$ 3,633,404 $ 2,898,640
===================================================================================================================
The notes to the consolidated financial statements are an integral part of this
statement.
42
12
CONSOLIDATED STATEMENT OF CASH FLOWS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31-(IN THOUSANDS) 1996 1995 1994
==================================================================================================================================
Cash Flow From Operating Activities
Net income $150,340 $ 96,756 $ 77,768
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation, depletion and amortization
Per statement of income 145,990 114,585 97,835
Charged to other accounts 11,026 14,318 13,066
Deferred income taxes-current 8,061 8,927 (15,761)
Deferred income taxes and investment tax credits, net 23,892 30,284 3,210
Gains related to Genix and DIGP, net of taxes (Notes 2b and 2d) (40,326) - -
Equity in earnings of joint ventures, net of distributions (2,506) 1,777 1,125
Other (3,391) 1,376 1,871
Changes in assets and liabilities, exclusive of
changes shown separately (94,754) (20) (4,132)
------------------------------------------------
Net cash provided from operating activities 198,332 268,003 174,982
------------------------------------------------
Cash Flow From Financing Activities
Notes payable, net 87,491 16,828 (51,497)
Common stock dividends paid (62,875) (58,193) (51,492)
Issuance of common stock (Note 6d) 17,264 115,725 15,390
Issuance of preferred securities (Note 6a) 77,218 - 96,329
Issuance of long-term debt 398,540 168,864 78,620
Long-term commercial paper and credit facilities, net (Note 5) (62,835) 142,657 110,100
Retirement of long-term debt and preferred securities (8,139) (8,271) (7,667)
Other (6,249) (2,084) (2,202)
-----------------------------------------------
Net cash provided from financing activities 440,415 375,526 187,581
-----------------------------------------------
Cash Flow From Investing Activities
Capital expenditures (610,323) (537,156) (356,037)
Sale of Genix (Note 2d) 132,889 - -
Acquisitions (Notes 2a, 2b and 2c) (133,201) (83,176) -
Investment in joint ventures (36,217) (20,539) (5,847)
Sale of investment in joint ventures (Note 2b) 36,000 10,803 -
Other (16,692) (5,749) (1,606)
-----------------------------------------------
Net cash used for investing activities (627,544) (635,817) (363,490)
-----------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 11,203 7,712 (927)
Cash and Cash Equivalents, January 1 19,259 11,547 12,474
-----------------------------------------------
Cash and Cash Equivalents, December 31 $ 30,462 $ 19,259 $ 11,547
===============================================
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Accounts receivable, net $(66,183) $ (103,951) $ 22,776
Accrued unbilled revenues (16,099) (9,357) 18,274
Gas in inventory (7,398) 59,886 (85,754)
Accrued/deferred gas cost recovery revenues (28,250) (18,495) 23,696
Accounts payable 102,711 74,537 12,589
Federal income, property and other taxes payable (19,587) (3,716) 23,199
Prepaid/accrued benefit costs (50,972) (27,199) 20,925
Other current assets and liabilities (14,485) (2,819) (13,387)
Deferred assets and liabilities 5,509 31,094 (26,450)
-----------------------------------------------
$(94,754) $ (20) $ (4,132)
===============================================
Supplemental Disclosures
Cash paid during the year for:
Interest, net of amounts capitalized $ 74,775 $ 52,833 $ 44,915
Federal income taxes 19,934 9,366 32,000
Noncash investing and financing activities:
PRIDES yield enhancement costs (Note 6b) $ 8,243 $ - $ -
Common stock issued under stock incentive plan (Note 6e) 6,210 - -
Property purchased under capital leases 6,765 3,809 7,190
Gains related to DIGP (Note 2b) 4,796 - -
===================================================================================================================================
The notes to the consolidated financial statements are an integral part of this
statement.
43
13
CONSOLIDATED STATEMENT OF CAPITALIZATION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31-(IN THOUSANDS) 1996 1995 1994
=====================================================================================================================
Long-Term Debt, Excluding Current Requirements (Notes 5 and 9)
First mortgage bonds, interest payable semi-annually
6-1/4% series due 1997 $ - $ 50,000 $ 50,000
6.30% series due 1998 20,000 20,000 -
6.51% series due 1999 30,000 - -
5-3/4% series due 2001 60,000 60,000 60,000
8% series due 2002 70,000 70,000 70,000
6.72% series due 2003 4,150 4,150 -
6.80% series due 2003 15,850 15,850 -
9-1/8% series due 2004 55,000 55,000 55,000
7.15% series due 2006 40,000 - -
8-1/4% series due 2014 80,000 80,000 80,000
9-1/2% series due 2019 5,000 5,000 5,000
7-1/2% series due 2020 29,812 30,000 -
9-1/2% series due 2021 40,000 40,000 40,000
6-3/4% series due 2023 17,782 18,416 19,109
7% series due 2025 40,000 40,000 40,000
Unamortized discount (1,349) (1,390) (1,508)
Medium-term notes, interest payable semi-annually
5.84% series due 1999 80,000 - -
6.82% series due 1999 130,000 - -
6.03% series due 2001 60,000 - -
6.32% series due 2003 60,000 - -
Senior notes-7.79% series due 1997, interest payable semi-annually - 30,000 30,000
Term loan due 2000, interest payable quarterly 100,000 100,000 -
Unsecured notes-9-3/4% series due 2000, interest
payable semi-annually 12,000 12,000 12,000
Commercial paper and credit facilities 261,822 324,657 182,000
Project loan due 2006, interest payable quarterly 15,840 17,600 19,360
Long-term capital lease obligations 16,625 18,532 21,814
Other long-term debt 9,508 3,592 2,744
---------------------------------------------
1,252,040 993,407 685,519
---------------------------------------------
Redeemable Preferred Securities of Subsidiaries (Note 6)
Redeemable Cumulative Preferred Stock of Subsidiary,
Excluding Current Requirements,
par value $1 per share-7,000,000 shares authorized,
104,732 shares outstanding at 1994, $2.05 Series - - 2,618
MCN-Obligated Mandatorily Redeemable Preferred Securities
of MCN Michigan Holding Solely Subordinated Debentures
of MCN, net of unamortized deferred issuance costs,
$100,000,000 aggregate liquidation preference value,
4,000,000 shares authorized and outstanding, Series A 96,573 96,449 96,349
MCN-Obligated Mandatorily Redeemable Preferred Securities
of MCN Financing Holding Solely Junior Subordinated Debentures
of MCN, net of unamortized deferred issuance costs,
$80,000,000 aggregate liquidation preference value,
3,200,000 shares authorized and outstanding, Series A 77,236 - -
---------------------------------------------
173,809 96,449 98,967
---------------------------------------------
Common Shareholders' Equity (Note 6)
Common Stock,
par value $.01 per share-100,000,000 shares authorized,
67,303,908, 66,370,230 and 59,787,966 shares outstanding,
respectively 673 664 598
---------------------------------------------
Additional Paid-in Capital
Balance-beginning of period 446,055 331,571 317,117
Common stock issued 23,474 115,840 15,628
Performance units 23,852 - -
Other 88 (1,356) (1,174)
---------------------------------------------
Balance-end of period 493,469 446,055 331,571
---------------------------------------------
Retained Earnings
Balance-beginning of period 218,425 179,862 153,589
Net income 150,340 96,756 77,768
Cash dividends declared on common stock (62,875) (58,193) (51,492)
Other (538) - (3)
---------------------------------------------
Balance-end of period 305,352 218,425 179,862
---------------------------------------------
PRIDES Yield Enhancement and Issuance Costs (14,492) - -
---------------------------------------------
Unearned Compensation (434) (368) (536)
---------------------------------------------
784,568 664,776 511,495
---------------------------------------------
Total Capitalization $2,210,417 $1,754,632 $1,295,981
=====================================================================================================================
The notes to the consolidated financial statements are an integral part of this
statement.
44
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MCN Corporation, doing business as MCN Energy Group Inc. (MCN), is a
diversified energy holding company with natural gas markets and investments
throughout North America. MCN operates through two major business groups,
Diversified Energy and Gas Distribution.
- - Diversified Energy, operating through MCN Investment Corporation (MCNIC), is
involved in the following businesses: Exploration & Production (E&P) with 1.2
trillion cubic feet equivalent of proved gas and oil reserves in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western regions; Pipelines &
Processing with gathering, processing and transmission facilities near areas
of rapid reserve development and growing consuming markets; Energy Marketing
with total gas sales and exchange delivery markets of 241.5 billion cubic
feet (Bcf); Power Generation with investments in electric generation
facilities with a combined 153 megawatts of capacity; and Gas Storage with
investments in storage facilities that have 56 Bcf of storage capacity.
- - Gas Distribution consists principally of Michigan Consolidated Gas Company
(MichCon), a natural gas distribution and intra-state transmission company
serving 1.2 million customers in more than 500 communities throughout
Michigan. MichCon is subject to the accounting requirements and rate
regulation of the Michigan Public Service Commission (MPSC) with respect to
the distribution and intrastate transportation of natural gas. Of MichCon's
labor force, 46% is covered by collective bargaining agreements, with 28% of
the labor force having agreements set to expire in December 1997.
BASIS OF PRESENTATION--The accompanying consolidated financial statements were
prepared in conformity with generally accepted accounting principles. In
connection with their preparation, management was required to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and the disclosure of contingent liabilities. Actual results
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of MCN and certain consolidated subsidiaries and partnerships. E&P
investments are accounted for using the proportionate consolidation method.
Investments in other entities in which MCN has a controlling influence are
consolidated. Generally, investments in 50% or less owned entities in which MCN
has significant but not controlling influence, and entities where control is
temporary, have been accounted for under the equity method. Certain
reclassifications have been made to prior years' statements to conform with the
1996 presentation.
REVENUES AND COST OF GAS--Gas Distribution accrues revenues for gas service
provided but unbilled at month end. MichCon also accrues revenues equal to the
recoverable cost of gas sold. Annual gas cost recovery (GCR) proceedings before
the MPSC permit MichCon to recover the prudent and reasonable cost of gas sold.
Any overcollection or undercollection of costs, including interest, will be
reflected in future rates.
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION--The full-cost accounting method
prescribed by the Securities and Exchange Commission (SEC) is followed for gas
and oil properties. Substantially all acquisition, exploration and development
costs are capitalized. The unit of production method is used for calculating
depreciation and depletion on proved gas and oil properties. The average
amortization rate per Mcf was $.78, $.74 and $.66 in 1996, 1995 and 1994,
respectively. Costs directly associated with the acquisition and evaluation of
unproved gas and oil properties are excluded from the amortization base until
the related properties are evaluated. Such unproved properties are assessed
periodically, and a provision for impairment is made to the full-cost
amortization base when appropriate.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment, excluding E&P
property, is stated at cost and includes appropriate amounts of labor,
materials, overhead and an allowance for funds used during construction. Unit
of production depreciation and depletion is used for certain Gas Distribution
transmission property. All other property, plant and equipment of MCN,
excluding E&P property, is depreciated over its useful life using the
straight-line method. Depreciation rates vary by class of property.
The ratio of the provision for depreciation and depletion to the average cost
of depreciable property is as follows:
- -------------------------------------------
1996 1995 1994
===========================================
Gas Distribution 4.4% 4.4% 4.4%
Pipelines & Processing 3.8% 2.1% 2.4%
Other 10.1% 13.3% 19.3%
===========================================
INCOME TAXES AND INVESTMENT TAX CREDITS--Tax Benefits Amortizable to Customers
represents the net revenue equivalent of the difference in property-related
accumulated deferred income taxes computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" as
compared to the amounts previously reflected in setting utility rates. This
amount is due to current tax rates being lower than the rates in effect when
the original deferred taxes were recorded and because of temporary differences,
including accumulated investment tax credits, for which deferred income taxes
were not previously recorded in setting utility rates. These net tax benefits
are being amortized in accordance with the regulatory treatment over the life
of the related plant as the related temporary differences reverse.
In accordance with MPSC requirements, investment tax credits relating to Gas
Distribution property placed into service were deferred and are being credited
to income over the life of the related property. Investment tax credits
relating to Diversified Energy operations were recorded to income in the year
the related property was placed into service.
45
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION--Gas Distribution capitalizes an
allowance for both debt and equity funds used during construction in the cost
of major additions to plant. Diversified Energy also capitalizes interest on
debt funds used during construction. The total amount capitalized was
$14,631,000, $7,893,000, and $2,928,000 in 1996, 1995 and 1994, respectively.
DEFERRED DEBT COSTS--In accordance with MPSC regulations, MichCon defers
reacquisition and unamortized issuance costs of reacquired long-term debt when
such debt is refinanced. These costs are amortized over the term of the
replacement debt.
CONSOLIDATED STATEMENT OF CASH FLOWS--For purposes of this statement, MCN
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
SALES OF OWNERSHIP INTEREST BY SUBSIDIARIES AND PARTNERSHIPS--MCN recognizes
gains or losses on the sale of stock by subsidiaries or the sale of partnership
interests. Such gains or losses represent the difference between MCN's share of
the consideration received and the historical book value of its investment.
2. ACQUISITIONS AND DISPOSITION
a. LYONDELL METHANOL COMPANY, L.P.
In December 1996, MCN acquired a 25% interest in Lyondell Methanol Company, L.
P., a limited partnership that owns and operates a 248 million gallon per year
methanol processing plant in Texas. MCNIC will supply natural gas to the
methanol plant and will have the opportunity to participate with the other
partner in future electric power generation projects during the next five
years. The total cost of the acquisition was $54,500,000 and was accounted for
under the purchase method.
b. DAUPHIN ISLAND GATHERING PARTNERS
During the first quarter of 1996, MCN acquired a 99% interest in Dauphin Island
Gathering Partners (DIGP), a general partnership that owns a 90-mile gas
gathering system in the Mobile Bay area of offshore Alabama. The total cost of
the acquisition was $78,620,000 and was accounted for under the purchase
method. In mid-1996, MCN sold a 40% interest in the partnership to PanEnergy
Dauphin Island Company for $36,000,000. The sale resulted in a pre-tax gain of
$3,986,000.
In the fourth quarter of 1996, a 41% interest in the partnership was sold to
three additional partners. The new partners paid for their interests by
contributing the Main Pass Gas Gathering System (Main Pass) to DIGP. Main Pass
is a 57-mile offshore gas gathering system in the Gulf of Mexico with an
independently determined appraised value of $72,200,000. MCN's ownership
interest in DIGP was reduced from 59% to 35% resulting in a pre-tax gain of
$4,796,000 of which $2,398,000 was deferred due to a related option agreement.
Since MCN's ownership percentage has been reduced below 50%, MCN no longer has
a controlling interest in the partnership. Accordingly, DIGP was deconsolidated
and accounted for under the equity method. The financial information included
herein reflects DIGP as an unconsolidated partnership for all periods
presented.
c. CONSOL COAL GROUP PROPERTIES
During December 1995, MCN acquired certain gas producing and pipeline
businesses located in Virginia from CONSOL Coal Group. The acquisition included
193 Bcf of proved reserves, as well as rights to undertake additional
development drilling on approximately 100,000 acres of coalbed methane
properties. The acquisition also included approximately 80 miles of gathering
lines and a 50% interest in a 40-mile gathering line connected to a major
interstate pipeline. The total cost of the acquisition was $83,176,000, which
was accounted for under the purchase method.
d. THE GENIX GROUP, INC.
On June 21, 1996, MCN completed the sale of its computer operations subsidiary,
The Genix Group, Inc. (Genix), to Affiliated Computer Services, Inc. (ACS) for
an initial sales price of $137,500,000, resulting in an after-tax gain of
$36,176,000. Accordingly, Genix's results of operations after June 21, 1996 are
not reflected in the Consolidated Statement of Income. In October 1996, the
initial sales price was decreased approximately $4,600,000 to reflect the
reduction in Genix's working capital between the effective and closing dates of
the transaction. The selling price of Genix could be further adjusted downward
by as much as $32,000,000 depending upon the occurrence of certain
contingencies, which include, among other things, retention of certain
customers through mid-1998 and tax-related matters. Management believes that no
further adjustment to the selling price will occur. The following financial
information summarizes Genix's operations:
- --------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
========================================================
Operating Revenues
Non-affiliates $48,054 $89,907 $72,334
Affiliates 6,826 15,254 15,877
-------------------------
54,880 105,161 88,211
Operating Expenses 50,765 97,165 81,594
-------------------------
Operating Income 4,115 7,996 6,617
-------------------------
Other Income and (Deductions)
Interest expense-affiliate (1,110) (2,088) (1,290)
Other (336) 301 412
-------------------------
(1,446) (1,787) (878)
-------------------------
Income Before Income Taxes 2,669 6,209 5,739
Income Tax Provision 1,074 2,622 2,569
-------------------------
Net Income $1,595 $3,587 $3,170
========================================================
46
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
- -------------------------------------------------------
JUNE 21, DEC. 31,
------------------
(IN THOUSANDS) 1996 1995
=======================================================
Assets
Accounts receivable, net $24,006 $21,723
Property, plant and equipment, net 33,216 30,717
Other 18,335 15,486
------------------
$75,557 $67,926
==================
Liabilities
Accounts payable $9,823 $7,639
Notes payable-affiliate 27,522 29,386
Other 15,578 9,926
------------------
$52,923 $46,951
=======================================================
Related party transactions between Genix and other MCN companies are included
in the individual captions of the Consolidated Statement of Income as
components of both continuing and discontinued operations.
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
MCN has equity interests in several ventures involved in the following
businesses: Gas Distribution-47-1/2% owned; Pipelines & Processing-20% to 80%
owned; Energy Marketing & Power Generation-50% to 100% owned (includes
temporarily controlled entities); Gas Storage-50% owned; and Real Estate &
Other-33% to 50% owned. The following is the combined summarized financial
information of the joint ventures. No provision for income taxes has been
included, since income taxes are paid directly by the joint venture
participants.
- -------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
===================================================================
Operating Revenues
Pipelines & Processing $64,530 $3,700 $6,589
Energy Marketing & Power Generation 84,202 27,869 39,597
Gas Storage 30,591 31,765 30,656
Real Estate & Other 19,937 17,471 11,635
--------------------------
$199,260 $80,805 $88,477
==========================
Operating Income
Pipelines & Processing $21,426 $1,545 $4,575
Energy Marketing & Power Generation 14,630 3,258 1,744
Gas Storage 18,106 18,595 19,261
Real Estate & Other 1,914 1,984 1,548
--------------------------
$56,076 $25,382 $27,128
==========================
Income (Loss) Before Taxes
Pipelines & Processing $21,391 $1,546 $4,313
Energy Marketing & Power Generation 263 (1,353) (862)
Gas Storage 11,872 11,911 13,724
Real Estate & Other (3,332) (5,202) (6,518)
--------------------------
$30,194 $6,902 $10,657
==========================
MCN's Share of Income (Loss)
Before Taxes
Pipelines & Processing $10,590 $628 $1,730
Energy Marketing & Power Generation 1 (886) (1,306)
Gas Storage 5,978 5,916 6,897
Real Estate & Other 1,298 (413) (1,032)
--------------------------
$17,867 $5,245 $6,289
==========================
MCN's Share of Income
Before Taxes by Segment
Gas Distribution $1,256 $1,342 $2,000
Diversified Energy 16,611 3,903 4,289
--------------------------
$17,867 $5,245 $6,289
===================================================================
- ----------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
======================================================================
ASSETS
Current Assets
Gas Distribution $1,834 $210
Pipelines & Processing 33,065 1,579
Energy Marketing & Power Generation 20,916 13,990
Gas Storage 7,877 10,154
Real Estate & Other 8,964 7,068
------------------
72,656 33,001
------------------
Noncurrent Assets
Gas Distribution 36,619 24,430
Pipelines & Processing 309,837 71,762
Energy Marketing & Power Generation 180,790 180,251
Gas Storage 131,151 135,169
Real Estate & Other 119,203 129,690
------------------
777,600 541,302
------------------
$850,256 $574,303
==================
MCN's Share of Total Assets
Gas Distribution $18,265 $20,532
Pipelines & Processing 162,145 31,339
Energy Marketing & Power Generation 122,333 116,381
Gas Storage 69,513 72,661
Real Estate & Other 39,824 40,161
------------------
$412,080 $281,074
==================
LIABILITIES AND JOINT VENTURES' EQUITY
Current Liabilities
Gas Distribution $1,036 $994
Pipelines & Processing 20,591 1,981
Energy Marketing & Power Generation 16,198 9,716
Gas Storage 10,146 12,099
Real Estate & Other 5,253 5,321
------------------
53,224 30,111
------------------
Noncurrent Liabilities
Gas Distribution 23,600 15,725
Pipelines & Processing 8,455 -
Energy Marketing & Power Generation 156,639 176,948
Gas Storage 70,235 75,775
Real Estate & Other 92,723 93,939
------------------
351,652 362,387
------------------
Joint Ventures' Equity
Gas Distribution 13,817 7,921
Pipelines & Processing 313,856 71,360
Energy Marketing & Power Generation 28,869 7,577
Gas Storage 58,647 57,449
Real Estate & Other 30,191 37,498
------------------
445,380 181,805
------------------
$850,256 $574,303
==================
MCN's Share of Joint Ventures' Equity
Gas Distribution $6,675 $6,600
Pipelines & Processing 146,356 30,637
Energy Marketing & Power Generation 19,637 7,596
Gas Storage 29,322 28,724
Real Estate & Other 17,886 18,681
------------------
219,876 92,238
Advances and other (1) 45,512 36,788
------------------
MCN's investment in and advances to joint ventures $265,388 $129,026
======================================================================
(1) Differences between MCN's carrying value and its share of the joint
ventures' underlying equity interest are being amortized over the useful lives
of the related assets which, on a weighted-average basis, equaled 23 years.
47
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
4. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1996, the replacement cost exceeded the $79,161,000 LIFO cost for 85 Bcf by
$269,083,000. At December 31, 1995, the replacement cost exceeded the
$71,763,000 LIFO cost for 80 Bcf by $140,835,000. MichCon's current GCR tariff
provisions prevent MichCon from retaining any benefits from a lower cost of gas
sold resulting from liquidating its LIFO inventory. MichCon's LIFO inventory
balance was 74 Bcf and 64 Bcf at December 31, 1996 and 1995, respectively.
5. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
During 1996, MichCon increased its credit lines by $50,000,000 to allow for
borrowings of up to $150,000,000 under a 364-day revolving credit facility and
up to $150,000,000 under a three-year revolving credit facility. MichCon
usually issues commercial paper in lieu of an equivalent amount of borrowings
under these lines of credit. Commercial paper outstanding at December 31, 1996
and 1995, totaled $238,251,000 and $194,760,000, at weighted-average interest
rates of 5.5% and 5.7%, respectively. This debt is classified as short-term
based on management's intent to repay it within one year. Fees are paid to
compensate banks for lines of credit.
At December 31, 1996, MCNIC had credit lines permitting borrowings of up to
$100,000,000 under a 364-day revolving credit facility and up to $300,000,000
under a three-year revolving credit facility. The facilities support MCNIC's
$400,000,000 commercial paper program that was established in 1995. MCNIC has
issued commercial paper in lieu of an equivalent amount of borrowings under
these lines of credit. Commercial paper used to temporarily finance working
capital requirements totaling $68,000,000 and $49,000,000 at December 31, 1996
and 1995, respectively, is classified as short-term based upon management's
intent to repay this debt within one year. The remaining commercial paper
balance is classified as long-term. Commercial paper borrowings outstanding as
of December 31, 1996 and 1995 totaled $329,822,000 and $373,657,000 at
weighted-average interest rates of 5.8% and 6.0%, respectively. Fees are paid
to compensate banks for lines of credit.
During 1996, MichCon renewed its Trust Demand Note program which allows for
borrowings of up to $25,000,000 through March 1997. Borrowings of $25,000,000
were outstanding under this program at December 31, 1996 at an interest rate of
5.9%. No borrowings were outstanding at December 31, 1995.
MCNIC Oil & Gas Company, a subsidiary of MCNIC, established a five-year term
loan during 1995 at certain alternative variable rates at MCN's option. The
loan allows for borrowings of up to $100,000,000 and is based on MCNIC Oil &
Gas Company's proved gas reserves. The balances outstanding at December 31,
1996 and 1995 were at weighted-average interest rates of 5.9% and 6.3%,
respectively. The most restrictive provision of the agreement requires MCNIC
Oil & Gas Company to maintain a minimum interest coverage ratio.
MichCon has a variable interest rate swap agreement through April 2000 on
$12,000,000 of fixed-rate unsecured notes that effectively reduced the cost of
this debt from 9.8% to 5.7% for the year ended December 31, 1996. A subsidiary
of MichCon has an interest rate swap agreement on the $17,600,000 outstanding
balance of its project loan as of December 31, 1996, which effectively fixes
the interest rate at 7.5% through February 2003.
Substantially all of the properties of MichCon, totaling approximately
$1,100,000,000, serve as collateral for its outstanding first mortgage bonds.
Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1996 are $81,900,000 in 1997,
$22,200,000 in 1998, $261,800,000 in 1999, $133,800,000 in 2000 and $81,800,000
in 2001. In addition, the long-term commercial paper balance outstanding at
December 31, 1996 is supported by the three-year credit facility that expires
in 1998.
The following long-term debt was issued during early 1997
(in thousands):
- -------------------------------------------------------
ISSUE DATE DESCRIPTION AMOUNT ISSUED
=======================================================
January 1997 MCNIC Medium-Term Notes
6.89%, due January 2002 $ 90,000
7.12%, due January 2004 60,000
=======================================================
6. PREFERRED SECURITIES AND COMMON STOCK
a. TRUST ORIGINATED PREFERRED SECURITIES (TOPrS)
In 1996, MCN Financing I (MCN Financing), a business trust wholly-owned by MCN,
was formed for the sole purpose of issuing preferred securities and lending the
gross proceeds thereof to MCN. In July 1996, the trust issued 3,200,000 shares
of 8-5/8% TOPrS, at the liquidation preference value of $25 per share. MCN
Financing invested the $80,000,000 of gross proceeds from the issuance of the
TOPrS, as well as $2,474,250 of proceeds from the issuance of common securities
to MCN in an equivalent amount of 8-5/8% Junior Subordinated Debentures of MCN
due 2036. The $82,474,250 of Junior Subordinated Debentures are the sole assets
of the trust. Holders of the preferred securities are entitled to receive
cumulative dividends at an annual rate of 8-5/8% of the liquidation preference
value. Dividends are payable quarterly and in substance are tax deductible by
MCN. Financing costs were deferred and reflected as a reduction in the carrying
value of the preferred securities. These costs are being amortized using the
straight-line method over 40 years.
MCN has the right to extend interest payment periods on the debentures for up
to 20 consecutive quarters. As a consequence, quarterly dividend payments on
the preferred securities can be deferred by MCN Financing during any such
48
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
interest payment period. In the event that MCN exercises this right, MCN may not
declare dividends on its common stock. With MCN's consent, the preferred
securities are redeemable at the option of MCN Financing, in whole or in part,
during or after July 2001. In addition, upon final maturity of the debentures,
MCN Financing is required to redeem the preferred securities.
In the event of default, holders of the preferred securities will be entitled to
exercise and enforce MCN Financing's creditor rights against MCN, which may
include acceleration of the principal amount due on the debentures. MCN has
issued a guaranty with respect to the preferred securities that, when taken
together with MCN's obligations under the debentures, the related indenture, and
the trust documents, provides a full and unconditional guaranty of MCN
Financing's obligations under the TOPrS.
In October 1996, MCN entered into two five-year variable interest rate swap
agreements with a combined notional amount of $80,000,000. The swap agreements
effectively reduced the TOPrS fixed dividend rate from 8-5/8% to 7.9% for the
three months ended December 31, 1996.
b. PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY
SECURITIES (PRIDES)
In April 1996, MCN issued 5,865,000 PRIDES yielding 8-3/4% with a stated amount
of $23.00 per security. Each security represents a contract to purchase MCN
common stock in April 1999, or earlier under certain limited circumstances.
Proceeds from the issuance totaling approximately $135,000,000 were used to
acquire 6.5% U.S. Treasury Notes underlying the security as subsequently
discussed. Accordingly, MCN received no cash from issuing the PRIDES.
Under each security, MCN is obligated to sell and the PRIDES holder is obligated
to purchase for $23.00, between .8333 of a share and one share of MCN common
stock. The exact number of MCN common shares to be sold is dependent on the
market value of a share in April 1999. However, the total number to be sold will
not be less than 4,887,500 shares or more than 5,865,000 shares.
MCN is also obligated to pay the PRIDES holders a semi-annual yield enhancement
payment at an annual rate of 2-1/4% of the stated amount. MCN has recorded the
present value of the yield enhancement payments, totaling $8,243,000, as a
liability and a reduction to Common Shareholders' Equity on MCN's Consolidated
Statement of Financial Position. The liability is reduced when the yield
enhancement payments are paid. MCN has the right to defer the yield enhancement
payments, in which case MCN cannot declare dividends on its common stock until
the yield enhancement payments have been made. In addition, MCN has incurred
costs of $6,249,000 in conjunction with the issuance of PRIDES and similarly has
recorded the costs as a reduction to Common Shareholders' Equity.
The Treasury Notes underlying the securities are pledged as collateral to secure
the PRIDES holders' obligation to purchase MCN common stock under the stock
purchase contract. At maturity in April 1999, the principal received from the
U.S. Treasury Notes will be used to satisfy the PRIDES holders' obligation in
full. Neither the PRIDES nor the U.S. Treasury Notes are included on MCN's
Consolidated Statement of Financial Position. However, the issuance of common
stock will be reflected when cash proceeds totaling approximately $135,000,000
are received by MCN in April 1999.
c. REDEEMABLE CUMULATIVE PREFERRED SECURITIES
In 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%
Redeemable Cumulative Preferred Securities, Series A, at the liquidation
preference value of $25 per share. Holders of the securities are entitled to
receive dividends at an annual rate of 9-3/8% of the liquidation preference
value. Dividends are payable monthly and in substance are tax deductible by MCN.
Gross proceeds of the issuance totaled $100,000,000 and were loaned to MCN.
Financing costs were deferred and reflected as a reduction in the carrying value
of the preferred securities. These costs are being amortized using the
straight-line method over 30 years. MCN has the right under the loan agreement
to extend interest payment periods for up to 60 months, and as a consequence,
monthly dividend payments on the preferred securities can be deferred by MCN
Michigan during any such interest payment period. In the event that MCN
exercises this right, MCN may not declare dividends on its common stock. With
MCN's consent, the preferred securities are redeemable at the option of MCN
Michigan, in whole or in part, for $25 per share on or after November 30, 1999.
In addition, upon final maturity of the loan in 2024, MCN Michigan is required
to redeem the preferred securities. In the event of default, holders of the
preferred securities will be entitled to exercise and enforce MCN Michigan's
creditor rights against MCN, which may include acceleration of the principal
amount of the loan.
At December 31, 1995, MichCon had 104,732 shares outstanding of Redeemable
Cumulative Preferred Stock, $2.05 Series. In January 1996, MichCon redeemed all
outstanding shares at the sinking fund redemption price of $25 per share.
MCN is authorized to issue 25,000,000 shares of no par value preferred stock,
and MichCon is authorized to issue 4,000,000 shares of preference stock with a
par value of $1 per share. At December 31, 1996, no issuances of preferred or
preference stock were made under these authorizations.
d. COMMON STOCK
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. The number of shares
issued was approximately 926,000 in 1996, 858,000 in 1995 and 855,000 in 1994,
generating net proceeds of $17,300,000, $16,500,000, and $15,400,000,
respectively.
49
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
In 1995, MCN sold 5,750,000 shares of new common stock in a public offering,
generating net proceeds of approximately $99,000,000.
e. STOCK INCENTIVE PLAN
MCN's Stock Incentive Plan authorizes the use of performance units, restricted
stock or other stock-related awards to key employees, primarily management.
MCN's current policy is to issue performance units which encourage a strategic
focus on long-term performance and have a high employee retention value. The
performance units are denominated in shares of MCN common stock and issued to
employees based on total shareholder return over a six-year period, as compared
to a group of peer companies. The initial number of performance units granted
is based on total shareholder return during the previous three-year period.
Participants receive dividend equivalents on the units granted. The initial
grants will be adjusted upward or downward based on total shareholder return
for the subsequent three-year period. The final awards are then payable in
shares of common stock, 50% of which must be retained by the recipient while
employed by MCN.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement requires expanded
disclosures about stock-based employee compensation and encourages a fair
value-based method of accounting for such compensation for fiscal years
beginning after December 15, 1995. During the fourth quarter of 1996, MCN
adopted the recommended fair value-based method of accounting for its
stock-based compensation plans. Due to the immaterial effect of adoption, prior
1996 quarterly periods will not be restated.
During February 1996, MCN granted 301,616 performance units with a
weighted-average grant date fair value of $24.625 per unit. During February
1995 and 1994, MCN granted 370,920 and 322,820 performance units, respectively.
In May 1996, MCN modified the 1995 and 1994 performance units granted to allow
limited acceleration in the vesting of the awards. As a result, the 1995 and
1994 awards also have been accounted for under the recognition provisions of
SFAS No. 123 from the date of modification. The weighted-average modification
date fair value for both the 1995 and 1994 awards was $24.875 per unit. Upon
adoption of SFAS No.123, the previously accrued liability of $23,852,000
relating to the 1996, 1995 and 1994 performance units was reclassified to
Additional Paid-in Capital. The unrecognized costs of all outstanding
performance units is being recorded as compensation expense and Additional
Paid-in Capital over the remaining vesting period. Stock-based compensation
cost recognized during 1996, 1995 and 1994 for all awards outstanding totaled
$14,055,000, $15,076,000 and $7,182,000, respectively. At December 31, 1996,
there were 2,773,788 shares available to be issued under the Stock Incentive
Plan.
f. SHAREHOLDERS' RIGHTS PLAN
One preferred share purchase right is attached to each outstanding share of
common stock. The rights, which cannot be traded separately from MCN's common
stock, are designed to protect shareholders from coercive or unfair takeover
tactics. The rights are exercisable only upon certain triggering events and
expire in January 2000.
7. COMMITMENTS AND CONTINGENCIES
a. GUARANTIES
In 1990, MCN issued a guaranty in conjunction with a Genix building lease
expiring no later than 2010. The lease agreement does not allow MCN to transfer
its obligation under the guaranty to ACS, who acquired Genix in June 1996 (Note
2d). However, ACS is obligated to reimburse MCN for any payments made as a
result of this guaranty. Obligations under the guaranty approximated
$15,000,000 at December 31, 1996.
During 1996, MCN acquired a 47.5% interest in a partnership that owns and
operates a natural gas transmission and distribution system located in southern
Missouri. Construction financing was obtained that allows for borrowings of up
to $25,000,000. MCN has issued a guaranty for the full amount of this
financing, and one of the parties to the partnership is obligated to reimburse
MCN for 50% of any payments made as a result of this guaranty. The guaranty
will remain in place until permanent financing is established which is
anticipated to be in late 1997. Borrowings under the construction loan totaled
$23,600,000 at December 31, 1996.
A MichCon subsidiary and an unaffiliated corporation have formed a series of
partnerships which are engaged in the construction and development of a
residential community on the Detroit riverfront (Harbortown). One of the
partnerships obtained $12,000,000 of tax-exempt financing due June 2004 through
the Michigan State Housing Development Authority. Both partners and their
parent corporations have issued guaranties for the full amount of this
financing, and each parent corporation has agreed to reimburse the other for
50% of any payments made as a result of these guaranties.
b. ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating and
other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.
During the mid-1980s, preliminary environmental investigations were conducted
at these former MGP sites, and some contamination related to byproducts of gas
manufacturing was discovered at each site. The existence of these sites and the
results of the environmental investigations have been reported to the Michigan
Department of Environmental Quality. None of these former MGP sites is on the
National Priorities List prepared by the U.S. Environmental Protection Agency.
MichCon is not involved in any administrative proceedings regarding these
former MGP sites but is currently remediating
50
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
a former MGP site in Muskegon, Michigan. The remedy consists of limited
excavation and disposal of soils, a new soil cover and long-term groundwater
monitoring. More extensive investigations are underway at seven other sites.
In 1984, MichCon established an $11,700,000 reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for reasonable and prudent
investigation and remediation costs incurred at former MGP sites in excess of
this reserve.
MCN employed outside consultants to evaluate remediation alternatives for these
sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. MCN has notified more than 50 current and former
insurance carriers of the environmental conditions at these former MGP sites. In
1996, MichCon received payments from certain carriers and expects additional
insurance recoveries over the next several years. The findings of these
investigations indicate that the estimated total expenditures for investigation
and remediation at all 17 former MGP sites will be between $30,000,000 and
$170,000,000 based on undiscounted 1995 costs. As a result of these studies, MCN
accrued an additional liability and corresponding regulatory asset of
$35,000,000 during 1995.
During 1996, 1995 and 1994, MCN spent $900,000, $2,100,000 and $600,000,
respectively, investigating these former MGP sites. At December 31, 1996, the
reserve balance was $37,576,000, of which $2,576,000 was classified as current.
Any significant change in assumptions, such as remediation techniques, nature
and extent of contamination and regulatory requirements, could impact the
estimate of remedial action costs and therefore have an effect on MCN's
financial position and cash flows. However, management believes insurance
coverage and the cost deferral and rate recovery mechanism approved by the MPSC
will prevent environmental costs from having a material adverse impact on MCN's
results of operations.
c. COMMITMENTS
To ensure a reliable supply of natural gas at competitive prices, MCN has
entered into long-term purchase and transportation contracts with various
suppliers and producers. In general, purchase prices under these contracts are
determined by formulas based on market prices. In 1997, MCN has firm purchase
commitments for approximately 248 Bcf of gas, approximately 132 Bcf of which are
MichCon purchase commitments. MCN expects sales to exceed its minimum purchase
commitments. MCN is also committed to pay demand charges of approximately
$98,900,000 during 1997 related to firm purchase and transportation agreements.
Of this total, approximately $56,000,000 relates to Gas Distribution and is
recoverable through the GCR mechanism.
Capital investments for 1997 are estimated to be more than $800,000,000. Certain
commitments have been made in connection therewith.
d. OTHER
MichCon receives a significant amount of its heating assistance funding from the
federal Low-Income Home Energy Assistance Program (LIHEAP). During 1995,
Congress reduced a substantial portion of the program's funding for the 1996
fiscal year and had proposed to eliminate all funding in future years. The state
of Michigan's share of LIHEAP funds was reduced from $78,000,000 in fiscal year
1995 to $47,500,000 in 1996. During October 1996, President Clinton signed an
Omnibus Spending Bill passed by Congress that provided for $1,000,000,000 in
LIHEAP funding, which increases the 1997 funding $100,000,000 over 1996 levels.
During February 1997, the President released his proposed budget which provides
for federal LIHEAP funding of $1,000,000,000 annually through fiscal year 2002.
A portion of any future increase or decrease in funding may impact uncollectible
gas accounts.
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.
8. REGULATORY ASSETS AND LIABILITIES
MCN's Gas Distribution operations are subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result,
several regulatory assets and liabilities are recorded in MCN's financial
statements. Regulatory assets represent costs that will be recovered from
customers through the ratemaking process. Regulatory liabilities represent
benefits that will flow through to customers as refunds or reduced rates.
The following regulatory assets and liabilities were reflected in the
Consolidated Statement of Financial Position as of December 31:
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
================================================================================
Regulatory Assets:
Accrued gas cost recovery revenues $ 27,672 $ -
Deferred postretirement benefit costs (Note 10b) 5,559 13,112
Deferred environmental costs (Note 7b) 31,233 35,000
Unamortized loss on retirement of debt 9,237 9,773
Conservation programs 2,908 7,792
Other 1,681 6,242
------------------
$ 78,290 $ 71,919
==================
Regulatory Liabilities:
Unamortized investment tax credit $ 34,919 $ 36,797
Tax benefits amortizable to customers 116,496 114,668
Other 405 785
------------------
$151,820 $152,250
================================================================================
Gas Distribution currently has regulatory precedents and orders in effect that
provide for the probable recovery or refund of its regulatory assets and
liabilities. Future regulatory changes or
51
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
changes in the competitive environment could result in MCN discontinuing the
application of SFAS No. 71 for all or part of its business and require the
write-off of the portion of any regulatory asset or liability that was no
longer probable of recovery or refund. If MCN were to have discontinued the
application of SFAS No. 71 as of December 31, 1996, it would have had an
extraordinary noncash increase to net income of approximately $48,000,000.
Management believes evidence currently available supports the continued
application of SFAS No. 71.
9. CAPITAL AND OPERATING LEASES
MCN leases certain property (principally office buildings, a warehouse and a
parking structure) under lease arrangements expiring at various dates to 2006,
with renewal options extending beyond that date. Portions of the office
buildings and parking structure are subleased to various tenants.
The gross amount of assets and related accumulated depreciation at December 31,
1996 were $36,034,000 and $12,516,000, respectively. The gross amount of assets
recorded under capital leases and related accumulated depreciation at December
31, 1995 were $34,978,000 and $11,266,000, respectively.
Minimum rental commitments under noncancelable leases at December 31, 1996 are
as follows:
- -----------------------------------------------------------------
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
=================================================================
1997 $ 4,757 $ 4,934
1998 4,509 4,818
1999 4,205 4,718
2000 3,416 4,315
2001 2,911 4,374
2002 and thereafter 7,558 9,293
---------------------------
Total minimum lease payments 27,356 $ 32,452
===============
Less: Amount representing interest 7,860
------------
Present value of minimum lease
payments 19,496
Less: Current portion 2,871
------------
Long-term obligations $ 16,625
=================================================================
Total minimum lease payments for capital and operating leases have not been
reduced by future minimum sublease rentals of $8,743,000 and $2,207,000,
respectively, under noncancelable subleases.
Capital and operating lease payments of continuing operations for the years
ended December 31 consist of the following:
- ---------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
===================================================
Capital lease expense:
Depreciation expense $ 1,632 $ 1,526 $ 1,140
Interest expense 2,051 2,057 2,087
---------------------------
$ 3,683 $ 3,583 $ 3,227
===========================
Operating lease expense $ 5,243 $ 4,860 $ 3,063
===================================================
10. RETIREMENT BENEFITS
a. PENSION PLAN BENEFITS
Separate defined benefit retirement plans are maintained for union and nonunion
employees. The plans are noncontributory, cover substantially all employees and
provide for normal retirement at age 65, but with the option to retire earlier
or later under certain conditions. The plans provide pension benefits that are
based on the employee's compensation and years of credited service. MCN's
funding policy is to fund each year's actuarially determined funding
requirements of the plans, subject to regulations issued by the Internal
Revenue Service. Currently, these plans meet the full funding limitations of
the Internal Revenue Code. Accordingly, no contributions for the 1996, 1995 or
1994 plan years were made, and none are expected to be made for the 1997 plan
year.
Net pension cost for these plans included the following components:
- ---------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
=====================================================================
Service cost-benefits earned during
the period $ 11,194 $ 9,318 $ 12,854
Interest cost on projected
benefit obligation 34,223 32,061 30,450
Net amortization and deferral 16,111 65,883 (60,508)
Actual (return) loss on plan assets (79,912) (123,952) 15,461
---------------------------------
Net pension credit $ (18,384) $ (16,690) $ (1,743)
=====================================================================
The following table sets forth a reconciliation of the funded status of the
plans and the amounts recorded as prepaid pension cost in the Consolidated
Statement of Financial Position:
- -------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
=========================================================================
Measurement date Oct. 31 Oct. 31
Actuarial present value of:
Accumulated vested benefit obligation $ 358,952 $ 357,377
Accumulated nonvested benefit obligation 29,235 33,850
------------------------
Total accumulated benefit obligation $ 388,187 $ 391,227
========================
Projected benefit obligation for
service rendered to date $ 444,937 $ 456,309
Plan assets at measurement date 723,493 670,629
------------------------
Plan assets in excess of projected
benefit obligation 278,556 214,320
Unrecognized net asset at transition (40,099) (45,139)
Unrecognized prior service cost (1,506) (1,662)
Unrecognized net gain (194,648) (143,692)
------------------------
Prepaid pension cost $ 42,303 $ 23,827
=========================================================================
In determining the actuarial present value of the projected benefit obligation,
the weighted average discount rate was 8% for 1996 and 7.5% for 1995. The rate
of increase in future compensation levels used was 5% for 1996 and 1995. The
expected long-term rate of return on plan assets, which are invested primarily
in equity and fixed income securities, was 9.25%, 9% and 7.5% for 1996, 1995
and 1994, respectively.
52
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MCN and its subsidiaries also sponsor defined contribution retirement savings
plans. Participation in one of these plans is available to substantially all
union and nonunion employees. The company matches employee contributions up to
certain predefined limits based upon salary and years of credited service. The
cost of these plans for continuing operations was $6,100,000 in 1996, $6,000,000
in 1995 and $5,600,000 in 1994.
b. OTHER POSTRETIREMENT BENEFITS
MCN provides certain healthcare and life insurance benefits for retired
employees who may become eligible for these benefits if they reach retirement
age while working for MCN. These benefits are currently being accounted for
under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," which requires the use of accrual accounting. Upon adoption of
SFAS No. 106, MCN deferred postretirement costs related to Gas Distribution (in
excess of claims paid) until January 1994 when new rates to recover such costs
became effective. The deferred costs are being amortized through 1997.
MCN's policy is to fund its postretirement benefit costs to the extent such
amounts are recoverable in Gas Distribution rates. Separate qualified Voluntary
Employees' Beneficiary Association (VEBA) trusts exist for union and nonunion
employees. Funding to the VEBA trusts totaled $41,918,000, $27,504,000 and
$8,345,000 in 1996, 1995 and 1994, respectively. The expected long-term rate of
return on plan assets, which are invested in life insurance policies, equity
securities and fixed income securities, was 9.1%, 8.9% and 7.4% for 1996, 1995
and 1994, respectively.
Net postretirement cost for the years ended December 31 includes the following
components:
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
================================================================================
Service cost-benefits earned
during the period $ 4,541 $ 5,345 $ 7,859
Interest cost on accumulated
benefit obligation 16,826 18,815 21,749
Amortization of transition obligation 13,587 13,810 14,601
Net amortization and deferral (1,936) 7,396 (2,607)
Actual (return) loss on plan assets (12,268) (15,670) 489
-----------------------------
Total postretirement cost 20,750 29,696 42,091
Regulatory adjustment 7,553 7,558 4,942
-----------------------------
Net postretirement cost $ 28,303 $ 37,254 $ 47,033
================================================================================
The following table sets forth a reconciliation of the funded status of the
plans and the amounts recorded as accrued postretirement cost in the
Consolidated Statement of Financial Position:
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
================================================================================
Measurement date OCT. 31 OCT. 31
Accumulated postretirement benefit obligation:
Retirees $ 140,310 $ 156,944
Fully eligible active participants 26,178 29,057
Participants with less than 30 years of service 56,726 67,094
---------------------
223,214 253,095
Plan assets at measurement date 126,716 74,295
---------------------
Accumulated postretirement benefit obligation
in excess of plan assets (96,498) (178,800)
Unrecognized transition obligation 217,261 232,248
Unrecognized net gain (111,030) (75,130)
Contributions made after measurement date 7,212 6,131
---------------------
Accrued postretirement asset (liability) $ 16,945 $ (15,551)
================================================================================
The rate at which healthcare costs are assumed to increase is the most
significant factor in estimating MCN's postretirement benefit obligation. MCN
used a rate of 6.5% for 1997 and a rate that gradually declines each year until
it stabilizes at 5% in 2003. A one percentage point increase in the assumed
rates would increase the accumulated postretirement benefit obligation at
December 31, 1996 by 9% and increase the sum of the service cost and interest
cost by 8% for the year then ended. The discount rate used in determining the
accumulated postretirement benefit obligation was 8% and 7.5% for 1996 and 1995,
respectively.
11. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL
INSTRUMENTS
MCN manages commodity price and interest rate risk through the use of various
derivative instruments and limits the use of such instruments to hedging
activities. If MCN did not use derivative instruments, its exposure to such risk
would be higher. Although this strategy reduces risk, it also limits potential
gains from favorable changes in commodity prices and interest rates. Derivative
instruments also give rise to credit risks due to nonperformance by
counterparties. MCN's control procedures are designed to minimize overall
exposure to credit risk. MCN closely monitors the financial condition and credit
rating of counterparties, diversifies its risk by having a significant number of
counterparties, and limits its counterparties to investment grade institutions.
MCN generally requires cash collateral when exposure to the counterparty exceeds
certain limits, and its agreements with each counterparty generally allow for
the netting of positive and negative positions.
53
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP Inc. AND SUBSIDIARIES
Commodity price and interest rate risks are actively monitored by a risk
control group to ensure compliance with MCN's risk management policies at both
the corporate and subsidiary levels. These policies, including related risk
limits, are regularly assessed to ensure their appropriateness given MCN's
objectives, strategies and current market conditions. Derivative instruments
are reviewed periodically to ensure that they continue to effectively reduce
exposure to commodity price and interest rate risks. MCN closely monitors and
manages its exposure to commodity price risk through a variety of risk
management techniques. MCN's objective is to manage its exposure to commodity
price risk to increase the likelihood of achieving targeted rates of return.
A. COMMODITY PRICE HEDGING
Natural gas and oil futures, options and swap agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations on gas
sale and purchase contracts, gas and oil production and gas inventories.
MichCon has not used financial derivatives to hedge natural gas prices. Changes
in the market value of contracts that hedge gas supply transactions are
deferred and included in inventory costs until the hedged transaction is
completed, at which time the realized gain or loss is included in the cost of
gas. Market value changes of contracts that hedge gas and oil sales
transactions also are deferred and recorded as a deferred credit or deferred
charge until the hedged transaction is completed, at which time the realized
gain or loss is included as an adjustment to revenues.
The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position at
December 31.
- ------------------------------------------------------------
(IN THOUSANDS) 1996 1995
============================================================
Deferred Swap Losses and Receivables:
Unrealized losses $ 53,166 $ 18,084
Deferred receivables 11,885 37,345
----------------------
65,051 55,429
Less-Current portion - 622
----------------------
$ 65,051 $ 54,807
======================
Deferred Swap Gains and Payables:
Unrealized gains $ 5,519 $ 35,514
Deferred payables 64,641 25,532
----------------------
70,160 61,046
Less-Current portion 21,795 9,123
----------------------
$ 48,365 $ 51,923
=============================================================
The following table of natural gas and oil swap agreements outstanding at
December 31 is summarized by fixed or variable prices to be received. Notional
amounts represent the volume of transactions valued at the fixed or variable
price that MCN has contracted to obtain. Notional amounts do not represent the
amounts exchanged by the parties to the swaps, and therefore do not reflect
MCN's exposure to commodity price or credit risks.
- -----------------------------------------------
(IN THOUSANDS OF DOLLARS) 1996 1995
===============================================
Fixed Price Receiver:
Volumes (Bcf equivalent) 355.7 278.4
Notional value $790,549 $635,017
Latest maturity 2008 2008
Variable Price Receiver:
Volumes (Bcf equivalent) 58.8 73.8
Notional value $140,080 $149,654
Latest maturity 2006 2006
===============================================
In addition, at December 31, 1996, MCN had futures contracts that permit
settlement by delivery of the underlying commodity of 46.7 Bcf with unrealized
gains of $7,899,000 and 23.9 Bcf with unrealized losses of $2,351,000. Futures
contracts of 53.9 Bcf with unrealized gains of $2,995,000 and 1.0 Bcf with
unrealized losses of $568,000 were outstanding at December 31, 1995.
Collateral in the form of cash and letters of credit totaling $8,900,000 were
provided under hedging contracts at December 31, 1996.
b. INTEREST RATE HEDGING
In order to manage interest costs, MCN uses interest rate swap agreements to
exchange fixed and variable rate interest payment obligations over the life of
the agreements without exchange of the underlying principal amounts. Interest
rate swaps are subject to market risk as interest rates fluctuate. The
difference to be received or paid on these agreements is accrued and recorded
as an adjustment to interest expense over the life of the agreements.
At December 31, 1996, MCN had interest rate swap agreements with notional
principal amounts totaling $109,600,000 (Notes 5 and 6a) and a weighted average
remaining life of 4.6 years. At December 31, 1995, the notional principal
amount of outstanding interest rate swaps totaled $31,360,000. The notional
principal amounts are used solely to calculate amounts to be paid or received
under the interest rate swap agreements and approximate the principal amount of
the underlying debt being hedged.
54
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
12. FAIR VALUE OF FINANCIAL AND OTHER SIMILAR INSTRUMENTS
MCN has estimated the fair value of its financial instruments using available
market information and appropriate valuation methodologies. Considerable
judgment is required in developing the estimates of the fair value of financial
instruments and therefore, the values are not necessarily indicative of the
amounts that MCN could realize in a current market exchange. The carrying
amounts of certain financial instruments such as notes payable and customer
deposits are assumed to approximate fair value due to their short-term nature.
The carrying amount and fair value of other financial instruments consist of
the following:
- ---------------------------------------------------------------------------------------
1996 1995
CARRYING ESTIMATED CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
=======================================================================================
Assets:
Notes receivable and
advances $ 17,713 $ 17,713 $ 6,550 $ 6,550
Liabilities and
Shareholders' Equity:
Long-term debt,
excluding capital
lease obligations 1,235,415 1,264,836 974,875 1,018,096
Redeemable cumulative
preferred securities,
including current portion 173,809 184,109 99,067 109,133
Derivative Financial
and Other Similar
Instruments: (Note 11)
Natural gas and oil swaps:
with unrealized gains 5,519 5,519 35,514 35,514
with unrealized losses 53,166 53,166 18,084 18,084
Natural gas and oil futures:
with unrealized gains 7,899 7,899 2,995 2,995
with unrealized losses 2,351 2,351 568 568
Interest rate swaps:
with unrealized gains 1,154 1,778
with unrealized losses 476 927
=======================================================================================
The fair values are determined based on the following:
Notes receivable and advances-interest rates available to MCN for investments
with similar maturities and credit quality assumptions.
Long-term debt-interest rates available to MCN for issuance of debt with
similar terms and remaining maturities.
Redeemable cumulative preferred securities-quoted market prices on the New York
Stock Exchange.
Natural gas and oil and interest rate swaps and futures-estimated amounts that
MCN would receive or pay to terminate the swap agreements and futures, taking
into account current gas and oil prices, interest rates and the
creditworthiness of the counterparties.
Guaranties (Note 7a)-estimated cost to terminate the southern Missouri project
guaranty is immaterial. Management is unable to practicably estimate the fair
value of the Harbortown and Genix guaranties due to the nature of the
transactions.
The fair value estimates presented herein are based on information available to
management as of December 31, 1996 and 1995. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.
13. SUMMARY OF INCOME TAXES
MCN files a consolidated federal income tax return. The income tax provisions
or benefits of MCN's subsidiaries are determined on an individual company
basis. The subsidiaries record income tax payable or receivable from MCN
resulting from the inclusion of its taxable income or loss in MCN's
consolidated tax return.
----------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
============================================================================
Effective federal income tax rate 23.4% 27.6% 26.1%
==================================
Income taxes consist of:
Current provision $ 603 $ (4,600) $ 46,466
Deferred provision, net 53,528 53,087 (9,218)
Federal tax credits (15,878) (11,271) (7,872)
Investment tax credits, net (1,878) (1,886) (1,886)
----------------------------------
$ 36,375 $ 35,330 $ 27,490
==================================
Reconciliation between statutory and
actual income taxes:
Statutory federal income taxes
at a rate of 35% $ 52,130 $ 44,975 $ 35,730
Adjustments to federal tax expense:
Excess of book over tax depreciation 6,367 7,365 6,119
Adjustments to federal income taxes
provided in prior periods (3,369) (1,337) (3,303)
Amortization of investment tax credit (1,878) (1,886) (1,886)
Federal tax credits (15,878) (11,271) (7,872)
Other, net (997) (2,516) (1,298)
----------------------------------
Total income taxes $ 36,375 $ 35,330 $ 27,490
============================================================================
55
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Deferred tax assets and liabilities are recognized for the estimated future tax
effect of temporary differences between the tax basis of assets or liabilities
and the reported amounts in the financial statements. Deferred tax assets and
liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. The alternative minimum
tax credits may be carried forward indefinitely. The tax effect of temporary
differences that gave rise to MCN's deferred tax assets and liabilities
consisted of the following:
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
================================================================================
Deferred tax assets:
Uncollectibles $ 6,359 $ 5,249
Vacation and other benefits 13,127 10,288
Alternative minimum tax credit carryforward 34,711 11,120
Other 9,432 8,300
------------------------
63,629 34,957
------------------------
Deferred tax liabilities:
Depreciation and other property related basis
differences, net 175,213 126,045
Property taxes 11,178 14,156
Postretirement benefit 9,186 2,783
Gas cost recovery undercollection 8,455 1,785
Other 24,130 22,718
------------------------
228,162 167,487
------------------------
Net deferred tax liability 164,533 132,530
Less: Net deferred tax liability-current 14,695 6,634
------------------------
Net deferred tax liability-noncurrent $149,838 $125,896
================================================================================
14. SUPPLEMENTARY INFORMATION FOR GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
The following information was prepared in accordance with SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities" and related SEC accounting
rules.
<Capital>
Capitalized Costs
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
================================================================================
Proved properties $ 771,817 $ 477,411
Unproved properties 210,084 99,399
----------------------
981,901 576,810
Accumulated depreciation, depletion and amortization 79,426 34,895
----------------------
Net capitalized costs $ 902,475 $ 541,915
================================================================================
CAPITALIZED COSTS EXCLUDED FROM AMORTIZATION
Unproved properties held by MCN are excluded from amortization until they have
been evaluated. A summary of costs excluded from amortization at December 31,
1996, and the year in which they were incurred, follows:
- --------------------------------------------------------------------------------
YEAR COSTS INCURRED
-----------------------------------
1994 &
(IN THOUSANDS) TOTAL 1996 1995 PRIOR
================================================================================
Acquisition $ 144,976 $ 113,035 $ 23,701 $ 8,240
Exploration 65,108 52,812 12,079 217
------------------------------------------------------
$ 210,084 $ 165,847 $ 35,780 $ 8,457
================================================================================
The acquisition amount includes all costs incurred to purchase or lease
property with unproved reserves.
COSTS INCURRED
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31-
(IN THOUSANDS) 1996 1995 1994
================================================================================
Acquisition:
Proved properties $ 60,340 $ 114,956 $ 86,571
Unproved properties 136,142 46,984 40,365
----------------------------------------
196,482 161,940 126,936
Exploration 65,160 39,106 14,921
Development 120,569 98,099 44,362
----------------------------------------
$ 382,211 $ 299,145 $ 186,219
================================================================================
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
================================================================================
Operating revenues:
Unaffiliated customers $ 94,615 $ 32,089 $ 14,532
Affiliated customers 43,326 37,091 18,375
----------------------------------------
137,941 69,180 32,907
----------------------------------------
Production costs 48,255 18,447 8,697
Depreciation, depletion and amortization 44,469 22,518 10,800
----------------------------------------
92,724 40,965 19,497
----------------------------------------
Income before income taxes 45,217 28,215 13,410
----------------------------------------
Income taxes:
Income tax provision 16,438 9,805 4,674
Federal tax credits (15,878) (11,271) (7,872)
----------------------------------------
560 (1,466) (3,198)
----------------------------------------
Results of operations,
excluding corporate and interest costs $ 44,657 $ 29,681 $ 16,608
================================================================================
RESERVE QUANTITY INFORMATION
MCN's proved reserves are located in the United States. The estimated
quantities of proved reserves disclosed below are based upon estimates by MCN's
independent petroleum engineers.
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
GAS OIL GAS OIL
(MMCF) (MBBL) (MMCF) (MBBL)
================================================================================
Proved developed and
undeveloped reserves:
Beginning of year 858,381 4,685 421,988 1,161
Revisions of
previous estimates 3,274 304 (34,581) 859
Extensions and discoveries 204,277 1,985 188,568 730
Production (57,203) (1,086) (31,420) (388)
Purchases of minerals
in place 129,000 11,326 313,826 2,323
--------------------------------------------------
End of year 1,137,729 17,214 858,381 4,685
==================================================
Proved developed reserves:
Beginning of year 563,395 3,349 247,992 1,042
End of year 688,995 9,554 563,395 3,349
================================================================================
56
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Standardized Measure of Discounted Future Net Cash Flows
The following presentation of the standardized measure of discounted future net
cash flows is intended to be neither a measure of the fair market value of
MCN's gas and oil properties, nor an estimate of the present value of
actual future cash flows to be obtained as a result of their development and
production. It is based upon subjective estimates of proved reserves only and
attributes no value to categories of reserves other than proved reserves, such
as probable or possible reserves, or to unproved acreage. Furthermore, as it is
based on year end prices and costs adjusted only for existing contractual
arrangements (Note 11) and assumes an arbitrary annual discount rate of 10%, it
does not reflect the impact of future price and cost changes. Future income tax
expenses were computed by applying statutory tax rates, adjusted for permanent
differences and tax credits, to estimated future pre-tax net cash flows.
The standardized measure is intended to provide a better means for comparing
the value of MCN's proved reserves at a given time with those of other gas and
oil producing companies than is provided by a simple comparison of raw proved
reserve quantities.
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
=====================================================================================================
Future revenues $ 3,867,785 $ 2,143,506 $ 1,084,046
Future production costs 1,322,108 860,134 342,564
Future development costs 340,190 199,284 66,256
------------------------------------------------------------------
Future net cash flows
before income taxes 2,205,487 1,084,088 675,226
Discount to present value at 10% 1,139,507 536,405 357,120
------------------------------------------------------------------
Present value of future net cash
flows before income taxes 1,065,980 547,683 318,106
Future income taxes discounted at
10% 226,913 88,954 56,329
Future tax credits discounted
at 10% (62,207) (63,178) (49,288)
------------------------------------------------------------------
Standardized measure of discounted
future net cash flows $ 901,274 $ 521,907 $ 311,065
=====================================================================================================
The principle sources of change in the standardized measure of
discounted future net cash flows were as follows:
- --------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
======================================================================================
Beginning of year $ 521,907 $ 311,065
Net changes in sales prices and production costs 126,526 (55,262)
Net change due to revisions in quantity estimates 5,061 (21,294)
Extensions, discoveries, additions and
improved recovery, net of related costs 200,026 145,184
Development costs incurred, previously estimated 86,810 75,537
Changes in estimated future development costs (81,069) (50,757)
Sales, net of production costs (89,686) (50,733)
Net change in future income taxes (85,616) (6,381)
Federal tax credits generated (15,878) (11,271)
Purchases of reserves in place 193,550 160,497
Accretion of discount and other 39,643 25,322
----------------------------------
End of year $ 901,274 $ 521,907
======================================================================================
57
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
15. SEGMENT INFORMATION
The business segments of MCN are defined as follows:
a) Gas Distribution-natural gas distribution and transmission operations; b)
Gas Services-E&P, Pipelines & Processing, Energy Marketing & Power Generation
and Gas Storage; c) Corporate & Other-corporate and other services. In June
1996, MCN sold its computer operations subsidiary, Genix (Note 2d).
Accordingly, Genix has been accounted for as a discontinued operation for
income statement purposes.
- -----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED ENERGY
-------------------- DISCONTINUED
GAS GAS CORPORATE COMPUTER INTERCOMPANY CONSOLIDATED
(IN THOUSANDS) DISTRIBUTION SERVICES & OTHER OPERATIONS ELIMINATIONS(1) TOTAL
=============================================================================================================================
1996
- -----------------------------------------------------------------------------------------------------------------------------
Operating revenues $1,276,254 $ 734,441 $ - $ - $ (13,427) $ 1,997,268
Operating income (loss) 170,484 43,333 (2,524) - - 211,293
Operating and joint venture income (loss) 171,738 57,921 (499) - - 229,160
Depreciation, depletion and amortization 98,814 46,238 938 - - 145,990
Identifiable assets 2,086,325 1,528,338 40,714 - (21,973) 3,633,404
Capital expenditures 215,318 392,275 2,987 6,508 - 617,088
Capital investments 220,393 560,850 2,997 6,508 - 790,748
- -----------------------------------------------------------------------------------------------------------------------------
1995
Operating revenues $1,107,646 $ 400,027 $ - $ - $ (12,441) $ 1,495,232
Operating income (loss) 166,319 24,619 (2,709) - - 188,229
Operating and joint venture income (loss) 167,660 28,561 (2,747) - - 193,474
Depreciation, depletion and amortization 91,314 22,502 769 - - 114,585
Identifiable assets 1,893,888 925,141 21,775 67,714 (9,878) 2,898,640
Capital expenditures 241,567 284,703 6,795 9,380 - 542,445
Capital investments 252,081 420,277 7,100 9,380 - 688,838
- -----------------------------------------------------------------------------------------------------------------------------
1994
Operating revenues $1,136,970 $ 346,500 $ - $ - $ (9,837) $ 1,473,633
Operating income (loss) 136,559 13,383 (2,028) - - 147,914
Operating and joint venture income (loss) 138,560 18,032 (2,389) - - 154,203
Depreciation, depletion and amortization 86,010 11,163 662 - - 97,835
Identifiable assets 1,655,208 517,775 11,225 65,378 (8,613) 2,240,973
Capital expenditures 154,595 193,434 2,740 12,458 - 363,227
Capital investments 153,600 230,678 5,233 12,458 - 401,969
- -----------------------------------------------------------------------------------------------------------------------------
(1) Intercompany eliminations primarily reflect revenues and receivables
related to gas sales and transportation agreements between Gas Distribution and
Gas Services.
16. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC.
Restrictions in the support agreement prohibit recourse on the part of MCNIC's
investors against the stock and assets of MichCon. Under the terms of the
support agreement, the assets of MCN, other than MichCon, and the cash
dividends paid to MCN by any of its subsidiaries are available as recourse to
holders of MCNIC's securities. The carrying value of MCN's assets on an
unconsolidated basis, primarily investments in its subsidiaries other than
MichCon, are $410,354,000 at December 31, 1996.
The following MCN consolidating financial statements are presented and include
separately MCNIC, MichCon and MCN and other subsidiaries. MCN has determined
that separate financial statements and other disclosures concerning MCNIC are
not material to investors. The other MCN subsidiaries represent Citizens Gas
Fuel Company, Blue Lake Holdings, Inc., MCN Michigan Limited Partnership and
MCN Financing.
58
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Consolidating Statement of Financial Position
- --------------------------------------------------------------------------------
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATION TOTALS
-------------------------------------------------------------------------------
(IN THOUSANDS) DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents, at cost $ 844 $ 19,608 $ 10,010 $ - $ 30,462
Accounts receivable 19,824 198,777 187,143 (24,661) 381,083
Less-Allowance for doubtful accounts 70 710 17,707 - 18,487
----------------------------------------------------------------------------
Accounts receivable, net 19,754 198,067 169,436 (24,661) 362,596
Accrued unbilled revenue 1,132 - 107,377 - 108,509
Gas in inventory - 11,251 67,910 - 79,161
Property taxes assessed applicable to future periods 195 2,179 60,592 - 62,966
Accrued gas cost recovery revenues - - 27,672 - 27,672
Other 1,973 28,315 23,025 (451) 52,862
----------------------------------------------------------------------------
23,898 259,420 466,022 (25,112) 724,228
----------------------------------------------------------------------------
Deferred Charges and Other Assets
Investments in and advances to joint ventures
and subsidiaries 954,479 236,057 19,479 (944,627) 265,388
Deferred swap losses and receivables - 65,051 - - 65,051
Deferred postretirement benefit costs 696 - 4,863 - 5,559
Deferred environmental costs 3,000 - 28,233 - 31,233
Prepaid benefit costs - - 64,307 (5,059) 59,248
Other 4,204 45,104 50,206 827 100,341
----------------------------------------------------------------------------
962,379 346,212 167,088 (948,859) 526,820
----------------------------------------------------------------------------
Property, Plant and Equipment, at Cost 31,967 1,017,296 2,668,294 - 3,717,557
Less-Accumulated depreciation and depletion 10,983 81,158 1,243,060 - 1,335,201
----------------------------------------------------------------------------
20,984 936,138 1,425,234 - 2,382,356
----------------------------------------------------------------------------
$1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
============================================================================
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable $ 5,745 $ 205,073 $ 130,725 $ (23,621) $ 317,922
Notes payable - 71,000 265,126 - 336,126
Current portion of long-term debt, capital lease
obligations and redeemable cumulative preferred
securities 55 31,460 53,232 - 84,747
Federal income, property and other taxes payable 280 12,578 84,788 - 97,646
Customer deposits 21 - 12,860 - 12,881
Other 9,315 25,701 63,309 (452) 97,873
----------------------------------------------------------------------------
15,416 345,812 610,040 (24,073) 947,195
----------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (1,625) 74,940 76,523 - 149,838
Unamortized investment tax credit 331 - 34,588 - 34,919
Tax benefits amortizable to customers 183 - 116,313 - 116,496
Deferred swap gains and payables - 48,365 - - 48,365
Accrued environmental costs 3,000 - 32,000 - 35,000
Minority interest - 306 17,604 1 17,911
Other 15,902 18,466 43,954 (5,059) 73,263
----------------------------------------------------------------------------
17,791 142,077 320,982 (5,058) 475,792
----------------------------------------------------------------------------
Capitalization
Long-term debt, including capital lease obligations 365 701,357 550,318 - 1,252,040
Redeemable preferred securities of subsidiaries 173,809 - - - 173,809
Common shareholders' equity 799,880 352,524 577,004 (944,840) 784,568
----------------------------------------------------------------------------
974,054 1,053,881 1,127,322 (944,840) 2,210,417
----------------------------------------------------------------------------
$1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
====================================================================================================================================
59
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP Inc. AND SUBSIDIARIES
Consolidating Statement of Financial Position
- --------------------------------------------------------------------------------
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
---------------------------------------------------------------------
(IN THOUSANDS) DECEMBER 31, 1995
===================================================================================================================================
ASSETS
Current Assets
Cash and cash equivalents, at cost $ 168 $ 10,622 $ 8,469 $ - $ 19,259
Accounts receivable 4,934 147,510 188,353 (9,087) 331,710
Less-Allowance for doubtful accounts 70 445 13,250 - 13,765
----------------------------------------------------------------------
Accounts receivable, net 4,864 147,065 175,103 (9,087) 317,945
Accrued unbilled revenue 1,276 - 91,134 - 92,410
Gas in inventory - 31,572 40,191 - 71,763
Property taxes assessed applicable to future periods 176 3,508 56,949 - 60,633
Other 596 30,417 32,498 (10,025) 53,486
----------------------------------------------------------------------
7,080 223,184 404,344 (19,112) 615,496
----------------------------------------------------------------------
Deferred Charges and Other Assets
Investments in and advances to joint ventures and
subsidiaries 773,344 100,483 20,318 (765,119) 129,026
Deferred swap losses and receivables - 54,807 - - 54,807
Deferred postretirement benefit costs 740 - 12,372 - 13,112
Deferred environmental costs 3,000 - 32,000 - 35,000
Prepaid benefit costs - - 25,438 (1,611) 23,827
Other 7,501 39,949 42,061 1,115 90,626
-------------------------------------------------- -------------------
784,585 195,239 132,189 (765,615) 346,398
----------------------------------------------------------------------
Property, Plant and Equipment, at cost 27,784 719,650 2,413,120 - 3,160,554
Less-Accumulated depreciation and depletion 9,732 62,916 1,151,160 - 1,223,808
----------------------------------------------------------------------
18,052 656,734 1,261,960 - 1,936,746
----------------------------------------------------------------------
$809,717 $1,075,157 $1,798,493 $(784,727) $2,898,640
======================================================================
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable $ 4,489 $ 112,630 $ 108,208 $ (8,143) $ 217,184
Notes payable - 49,000 196,635 - 245,635
Current portion of long-term debt, capital lease
obligations and redeemable cumulative preferred
securities 55 2,976 3,969 - 7,000
Federal income, property and other taxes payable 1,372 6,180 85,195 (9,363) 83,384
Customer deposits 19 - 11,531 - 11,550
Other 2,935 20,715 64,587 (662) 87,575
----------------------------------------------------------------------
8,870 191,501 470,125 (18,168) 652,328
----------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (590) 65,341 61,146 (1) 125,896
Unamortized investment tax credit 360 - 36,437 - 36,797
Tax benefits amortizable to customers 181 - 114,487 - 114,668
Deferred swap gains and payables - 51,923 - - 51,923
Accrued postretirement benefit costs 2,177 713 12,661 - 15,551
Accrued environmental costs 3,000 - 32,000 - 35,000
Minority interest - 18,375 - - 18,375
Other 18,175 11,546 65,252 (1,503) 93,470
----------------------------------------------------------------------
23,303 147,898 321,983 (1,504) 491,680
----------------------------------------------------------------------
Capitalization
Long-term debt, including capital lease obligations 420 476,424 516,564 (1) 993,407
Redeemable preferred securities of subsidiaries 96,449 - - - 96,449
Common shareholders' equity 680,675 259,334 489,821 (765,054) 664,776
----------------------------------------------------------------------
777,544 735,758 1,006,385 (765,055) 1,754,632
----------------------------------------------------------------------
$809,717 $1,075,157 $1,798,493 $(784,727) $2,898,640
===================================================================================================================================
60
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP Inc. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------------------------
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
--------------------------------------------------------------------------
(IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 1996
Operating Revenues $ 17,469 $ 734,441 $ 1,258,785 $ (13,427) $ 1,997,268
--------------------------------------------------------------------------
Operating Expenses
Cost of gas 9,655 557,340 636,594 (10,011) 1,193,578
Operation and maintenance 785 80,330 294,281 (3,416) 371,980
Depreciation, depletion and amortization 1,940 45,903 98,147 - 145,990
Property and other taxes 2,134 10,531 61,762 - 74,427
--------------------------------------------------------------------------
14,514 694,104 1,090,784 (13,427) 1,785,975
--------------------------------------------------------------------------
Operating Income 2,955 40,337 168,001 - 211,293
--------------------------------------------------------------------------
Equity in Earnings of Joint Ventures
and Subsidiaries 152,368 15,915 886 (151,302) 17,867
--------------------------------------------------------------------------
Other Income and (Deductions)
Interest income 12,675 3,220 3,900 (12,561) 7,234
Interest on long-term debt 114 (25,928) (40,703) - (66,517)
Other interest expense (1,218) (14,595) (8,012) 12,561 (11,264)
Dividends on preferred securities
of subsidiaries - - - (12,374) (12,374)
Gains related to DIGP - 6,384 - - 6,384
Minority interest - ( 71) (988) - (1,059)
Other 190 (1,054) (1,756) - (2,620)
--------------------------------------------------------------------------
11,761 (32,044) (47,559) (12,374) (80,216)
--------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 167,084 24,208 121,328 (163,676) 148,944
Income Tax Provision (Benefit) 1,814 (6,925) 41,486 - 36,375
--------------------------------------------------------------------------
Income From Continuing Operations 165,270 31,133 79,842 (163,676) 112,569
--------------------------------------------------------------------------
Discontinued Operations, Net of Taxes
Income from operations - 1,595 - - 1,595
Gain on sale - 36,176 - - 36,176
--------------------------------------------------------------------------
- 37,771 - - 37,771
-------------------------------------------------------------------------
Net Income 165,270 68,904 79,842 (163,676) 150,340
--------------------------------------------------------------------------
Dividends on Preferred Securities 12,356 - 18 (12,374) -
--------------------------------------------------------------------------
Net Income Available for Common Stock $152,914 $68,904 $79,824 $(151,302) $ 150,340
================================================================================================================================
TWELVE MONTHS ENDED DECEMBER 31, 1995
================================================================================================================================
Operating Revenues $ 15,162 $ 411,699 $ 1,080,813 $ (12,442) $ 1,495,232
--------------------------------------------------------------------------
Operating Expenses
Cost of gas 7,451 302,273 483,962 (7,493) 786,193
Operation and maintenance 4,027 49,019 294,424 (4,949) 342,521
Depreciation, depletion and amortization 1,671 23,786 89,128 - 114,585
Property and other taxes 1,330 5,362 57,012 - 63,704
--------------------------------------------------------------------------
14,479 380,440 924,526 (12,442) 1,307,003
--------------------------------------------------------------------------
Operating Income 683 31,259 156,287 - 188,229
--------------------------------------------------------------------------
Equity in Earnings of Joint Ventures
and Subsidiaries 98,751 3,300 739 (97,545) 5,245
--------------------------------------------------------------------------
Other Income and (Deductions)
Interest income 9,685 3,551 3,983 (9,478) 7,741
Interest on long-term debt (76) (9,730) (35,047) - (44,853)
Other interest expense (53) (14,421) (7,053) 9,478 (12,049)
Dividends on preferred securities
of subsidiaries - - - (9,610) (9,610)
Minority interest - (2,491) - - (2,491)
Other 1,483 986 (6,182) - (3,713)
--------------------------------------------------------------------------
11,039 (22,105) (44,299) (9,610) (64,975)
--------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 110,473 12,454 112,727 (107,155) 128,499
Income Tax Provision (Benefit) 2,118 (7,792) 41,004 - 35,330
--------------------------------------------------------------------------
Income From Continuing Operations 108,355 20,246 71,723 (107,155) 93,169
Discontinued Operations, Net of Taxes - 3,587 - - 3,587
--------------------------------------------------------------------------
Net Income 108,355 23,833 71,723 (107,155) 96,756
Dividends on Preferred Securities 9,375 - 235 (9,610) -
--------------------------------------------------------------------------
Net Income Available for Common Stock $ 98,980 $ 23,833 $ 71,488 $ (97,545) $ 96,756
================================================================================================================================
61
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
---------------------------------------------------------------------------------
(IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 1994
Operating Revenues $ 14,401 $ 357,317 $1,111,678 $ (9,763) $1,473,633
------------------------------------------------------------------------------
Operating Expenses
Cost of gas 7,230 293,285 529,426 (6,505) 823,436
Operation and maintenance 862 30,461 313,575 (3,313) 341,585
Depreciation, depletion and amortization 1,314 12,291 84,230 - 97,835
Property and other taxes 1,244 3,490 58,129 - 62,863
------------------------------------------------------------------------------
10,650 339,527 985,360 (9,818) 1,325,719
------------------------------------------------------------------------------
Operating Income 3,751 17,790 126,318 55 147,914
------------------------------------------------------------------------------
Equity in Earnings of Joint Ventures
and Subsidiaries 81,547 3,332 1,043 (79,633) 6,289
------------------------------------------------------------------------------
Other Income and (Deductions)
Interest income 2,140 3,468 4,064 (2,044) 7,628
Interest on long-term debt (590) (9,667) (27,554) - (37,811)
Other interest expense (152) (3,698) (9,093) 2,044 (10,899)
Dividends on preferred securities of subsidiaries - - - (2,018) (2,018)
Minority interest - (2,879) - - (2,879)
Other (1,376) 367 (5,071) (56) (6,136)
------------------------------------------------------------------------------
22 (12,409) (37,654) (2,074) (52,115)
------------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 85,320 8,713 89,707 (81,652) 102,088
Income Tax Provision (Benefit) 2,585 (4,934) 29,839 - 27,490
------------------------------------------------------------------------------
Income From Continuing Operations 82,735 13,647 59,868 (81,652) 74,598
Discontinued Operations, Net of Taxes - 3,170 - - 3,170
------------------------------------------------------------------------------
Net Income 82,735 16,817 59,868 (81,652) 77,768
Dividends on Preferred Securities 1,537 - 481 (2,018) -
------------------------------------------------------------------------------
Net Income Available for Common Stock $ 81,198 $ 16,817 $ 59,387 $ (79,634) $ 77,768
==================================================================================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED DECEMBER 31, 1996
==================================================================================================================================
Net Cash Flow From Operating Activities $ 38,535 $ 84,678 $ 101,694 $ (26,575) $ 198,332
------------------------------------------------------------------------------
Cash Flow From Financing Activities
Notes payable, net - 19,000 68,491 - 87,491
Capital contributions received from
(distributions paid to) affiliates, net (3,069) 41,195 1,614 (39,740) -
Common stock dividends paid (62,875) - (11,263) 11,263 (62,875)
Preferred securities dividends paid (12,356) - (54) 12,410 -
Issuance of common stock 17,264 - - - 17,264
Issuance of preferred securities 77,218 - - - 77,218
Issuance of long-term debt - 328,895 69,645 - 398,540
Long-term commercial paper and credit
facilities, net - (62,835) - - (62,835)
Retirement of long-term debt and
preferred securities (55) (1,701) (6,384) 1 (8,139)
Other (6,249) - - - (6,249)
-------------------------------------------------------------------------------
Net cash provided from financing activities 9,878 324,554 122,049 (16,066) 440,415
-------------------------------------------------------------------------------
Cash Flow From Investing Activities
Capital expenditures (5,474) (392,181) (212,668) - (610,323)
Sale of Genix - 132,889 - - 132,889
Acquisitions - (133,201) - - (133,201)
Investment in joint ventures and subsidiaries (42,809) (35,793) (278) 42,663 (36,217)
Sale of investment in joint ventures - 36,000 - - 36,000
Other 546 (7,960) (9,256) (22) (16,692)
-------------------------------------------------------------------------------
Net cash used for investing activities (47,737) (400,246) (222,202) 42,641 (627,544)
-------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 676 8,986 1,541 - 11,203
Cash and Cash Equivalents, January 1 168 10,622 8,469 - 19,259
-------------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 844 $ 19,608 $ 10,010 $ - $ 30,462
===================================================================================================================================
62
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
----------------------------------------------------------------------------------
(IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 1995
====================================================================================================================================
Net Cash Flow From Operating Activities $ 29,451 $ 100,271 $ 158,227 $ (19,946) $ 268,003
------------------------------------------------------------------------------------
Cash Flow From Financing Activities
Notes payable, net - (11,349) 28,178 (1) 16,828
Capital contributions received from
(distributions paid to) subsidiaries, net (3,066) 54,598 7,000 (58,532) -
Common stock dividends paid (58,193) - (6,500) 6,500 (58,193)
Preferred securities dividends paid (9,375) - (276) 9,651 -
Issuance of common stock 115,725 - - - 115,725
Issuance of long-term debt - 99,880 68,764 220 168,864
Long-term commercial paper and credit
facilities, net - 142,657 - - 142,657
Retirement of long-term debt and preferred
securities (485) (3,029) (4,757) - (8,271)
Other (678) (1,406) - - (2,084)
------------------------------------------------------------------------------------
Net cash provided from financing activities 43,928 281,351 92,409 (42,162) 375,526
------------------------------------------------------------------------------------
Cash Flow From Investing Activities
Capital expenditures (5,098) (296,356) (235,767) 65 (537,156)
Acquisitions - (83,176) - - (83,176)
Investment in joint ventures and
subsidiaries (68,198) (13,810) - 61,469 (20,539)
Sale of investment in joint ventures - 10,803 - - 10,803
Other 56 1,326 (7,705) 574 (5,749)
------------------------------------------------------------------------------------
Net Cash Used For Investing Activities (73,240) (381,213) (243,472) 62,108 (635,817)
------------------------------------------------------------------------------------
Net Increase In Cash and Cash Equivalents 139 409 7,164 - 7,712
Cash and Cash Equivalents, January 1 29 10,213 1,305 - 11,547
------------------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 168 $ 10,622 $ 8,469 $ - $ 19,259
====================================================================================================================================
TWELVE MONTHS ENDED DECEMBER 31, 1994
====================================================================================================================================
Net Cash Flow From Operating Activities $ 20,865 $ (7,677) $ 174,168 $(12,374) $ 174,982
------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Notes payable, net - 40,350 (91,847) - (51,497)
Notes payable-affiliate, net (1,428) (18,403) - 19,831 -
Capital contributions received from
(distributions paid to) subsidiaries, net (1,816) 16,579 - (14,763) -
Common stock dividends paid (51,492) - (8,500) 8,500 (51,492)
Preferred securities dividends paid (1,536) - (522) 2,058 -
Issuance of common stock 15,390 - - - 15,390
Issuance of preferred securities 96,329 - - - 96,329
Issuance of long-term debt - - 78,620 - 78,620
Long-term commercial paper and credit
facilities, net (71,900) 182,000 - - 110,100
Retirement of long-term debt and preferred
securities (110) (2,748) (4,809) - (7,667)
Other (2,335) (1,028) 1,161 - (2,202)
-----------------------------------------------------------------------------------
Net cash provided from (used for)
financing activities (18,898) 216,750 (25,897) 15,626 187,581
------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Capital expenditures (3,312) (207,304) (145,421) - (356,037)
Investment in joint ventures and subsidiaries (16,579) (3,856) (1,992) 16,580 (5,847)
Other (488) 2,287 (1,976) (1,429) (1,606)
------------------------------------------------------------------------------------
Net cash used for investing activities (20,379) (208,873) (149,389) 15,151 (363,490)
------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents (18,412) 200 (1,118) 18,403 (927)
Cash and Cash Equivalents, January 1 18,441 10,013 2,423 (18,403) 12,474
------------------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 29 $ 10,213 $ 1,305 $ - $ 11,547
====================================================================================================================================
63
33
SUPPLEMENTARY FINANCIAL INFORMATION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Selected Financial Data (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS-EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992
=======================================================================================================================
Net Income
Continuing operations $ 112,569 $ 93,169 $ 74,598 $ 70,173 $ 54,537
Discontinued operations 37,771 3,587 3,170 2,617 2,581
-----------------------------------------------------------------
$ 150,340 $ 96,756 $ 77,768 $ 72,790 $ 57,118
=================================================================
Cash Dividends Declared on Common Stock $ 62,875 $ 58,193 $ 51,492 $ 49,527 $ 44,940
=================================================================
Common Stock Data
Earnings per share
Continuing operations $ 1.68 $ 1.44 $ 1.26 $ 1.20 $ 1.00
Discontinued operations .57 .05 .05 .04 .05
-----------------------------------------------------------------
$ 2.25 $ 1.49 $ 1.31 $ 1.24 $ 1.05
=================================================================
Book value per share $ 11.66 $ 10.02 $ 8.56 $ 7.97 $ 7.44
Return on average common shareholders' equity,
excluding gain on sale of Genix 15.8% 16.5% 15.8% 16.1% 14.6%
Common shares outstanding (000):
Actual 67,304 66,370 59,788 58,993 58,292
Average 66,944 64,743 59,394 58,642 54,216
Property, Plant and Equipment
Gas Distribution $2,689,039 $2,496,711 $2,267,187 $2,154,499 $2,034,230
Diversified Energy 1,028,518 663,843 337,638 130,030 63,905
-----------------------------------------------------------------
3,717,557 3,160,554 2,604,825 2,284,529 2,098,135
Less-Accumulated depreciation and depletion 1,335,201 1,223,808 1,112,387 1,047,941 983,038
-----------------------------------------------------------------
$2,382,356 $1,936,746 $1,492,438 $1,236,588 $1,115,097
=================================================================
Assets $3,633,404 $2,898,640 $2,240,973 $1,881,900 $1,648,989
=================================================================
Capital Investments $ 790,748 $ 688,838 $ 401,969 $ 245,611 $ 202,071
=================================================================
Capitalization
Long-term debt and capital lease obligations $1,252,040 $ 993,407 $ 685,519 $ 494,821 $ 379,811
Redeemable cumulative preferred securities 173,809 96,449 98,967 5,618 9,000
Common shareholders' equity 784,568 664,776 511,495 470,168 433,808
-----------------------------------------------------------------
$2,210,417 $1,754,632 $1,295,981 $ 970,607 $ 822,619
=================================================================
Operating Revenues
Gas Distribution
Gas sales $1,102,957 $ 931,940 $ 968,998 $ 979,918 $1,013,013
End user transportation 82,467 80,808 76,483 71,718 70,160
Intermediate transportation 48,570 41,985 39,391 31,397 31,534
Other 42,260 52,913 52,098 58,431 59,952
-----------------------------------------------------------------
Diversified Energy 1,276,254 1,107,646 1,136,970 1,141,464 1,174,659
-----------------------------------------------------------------
Gas and oil sales, transportation and other 734,441 400,027 346,500 289,296 228,137
-----------------------------------------------------------------
Less intercompany transactions 13,427 12,441 9,837 10,006 7,455
-----------------------------------------------------------------
$1,997,268 $1,495,232 $1,473,633 $1,420,754 $1,395,341
=================================================================
Effect of Weather
Degree days 7,170 6,777 6,489 6,675 6,607
Percent colder (warmer) than normal 5.4% .3% (4.2)% (2.2)% (3.7)%
Increase (decrease) from normal in:
Gas markets (MMcf) 10,909 1,488 (4,353) (4,328) (10,218)
Net income $ 9,886 $ 1,415 $ (3,984) $ (3,696) $ (8,728)
Earnings per share $ .15 $ .02 $ (.07) $ (.06) $ (.16)
=======================================================================================================================
64
34
SUPPLEMENTARY FINANCIAL INFORMATION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Selected Financial Data (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
==================================================================================================================
Gas and Oil Operating Statistics
Gas Distribution (MMcf):
Gas sales 220,958 209,816 204,384 205,372 203,110
End user transportation 146,895 145,761 140,020 128,643 129,722
Intermediate transportation 527,510 374,428 322,969 302,662 209,360
-----------------------------------------------------------
895,363 730,005 667,373 636,677 542,192
-----------------------------------------------------------
Diversified Energy:
Exploration & Production:
Gas production (MMcf) 57,202 31,420 16,513 2,307 -
Oil production (Mbbl) 1,086 388 85 - -
Gas and oil production (MMcf Equivalent) 63,718 33,748 17,023 2,307 -
Pipelines & Processing (MMcf)(1):
Gas processed 44,223 14,588 1,942 - -
Transportation 86,391 4,994 1,194 294 -
Energy Marketing and Power Generation (MMcf):
Gas sales 218,952 170,668 142,352 122,782 112,263
Exchange gas deliveries 22,586 16,462 13,301 10,016 2,443
-----------------------------------------------------------
241,538 187,130 155,653 132,798 114,706
===========================================================
Gas Distribution Customers
Residential 1,100,101 1,090,039 1,073,306 1,061,679 1,050,533
Total 1,183,443 1,172,613 1,154,545 1,141,986 1,130,165
Employees
Gas Distribution 3,117 3,183 3,328 3,420 3,619
Diversified Energy, excluding discontinued operations 243 219 190 176 49
==================================================================================================================
QUARTERLY OPERATING RESULTS AND COMMON STOCK PRICES (UNAUDITED)
Due to the seasonal nature of MCN's Gas Distribution operations, revenues, net
income and earnings per share tend to be higher in the first and fourth quarters
of the calendar year. Quarterly earnings per share may not total for the years,
since quarterly computations are based on weighted average common shares
outstanding during each quarter. There were 23,431 and 24,131 holders of record
of MCN common shares at December 31, 1996 and 1995, respectively.
- ---------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(IN THOUSANDS OF DOLLARS-EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER YEAR
===========================================================================================================================
1996
Operating revenues $ 790,638 $ 354,464 $ 243,311 $ 608,855 $ 1,997,268
Operating income (loss) $ 135,707 $ 13,732 $ (10,966) $ 72,820 $ 211,293
Operating and joint venture income (loss) $ 139,750 $ 18,574 $ (8,063) $ 78,899 $ 229,160
Net income (loss):
Continuing operations $ 79,054 $ 5,207 $ (13,403) $ 41,711 $ 112,569
Discontinued operations 1,013 36,758 - - 37,771
--------------------------------------------------------------------------
$ 80,067 $ 41,965 $ (13,403) $ 41,711 $ 150,340
==========================================================================
Earnings (loss) per share:
Continuing operations $ 1.19 $ .08 $ (.20) $ .62 $ 1.68
Discontinued operations .01 .55 - - .57
--------------------------------------------------------------------------
$ 1.20 $ .63 $ (.20) $ .62 $ 2.25
==========================================================================
Dividends paid per share $ .2325 $ .2325 $ .2325 $ .2425 $ .9400
Average daily trading volume 96,592 84,515 99,434 89,070 92,417
Price per share
High $ 25.50 $ 25.63 $ 27.63 $ 30.50 $ 30.50
Low $ 21.63 $ 22.75 $ 22.75 $ 26.63 $ 21.63
Close $ 23.13 $ 24.38 $ 26.88 $ 28.88 $ 28.88
- ---------------------------------------------------------------------------------------------------------------------------
1995
Operating revenues $ 526,088 $ 262,343 $ 190,691 $ 516,110 $ 1,495,232
Operating income (loss) $ 105,232 $ 9,889 $ (2,967) $ 76,075 $ 188,229
Operating and joint venture income (loss) $ 106,476 $ 10,712 $ (1,145) $ 77,431 $ 193,474
Net income (loss):
Continuing operations $ 60,561 $ 1,605 $ (9,553) $ 40,556 $ 93,169
Discontinued operations 1,029 707 926 925 3,587
--------------------------------------------------------------------------
$ 61,590 $ 2,312 $ (8,627) $ 41,481 $ 96,756
==========================================================================
Earnings (loss) per share:
Continuing operations $ 1.00 $ .03 $ (.14) $ .62 $ 1.44
Discontinued operations .02 .01 .01 .01 .05
--------------------------------------------------------------------------
$ 1.02 $ .04 $ (.13) $ .63 $ 1.49
==========================================================================
Dividends paid per share $ .2225 $ .2225 $ .2225 $ .2325 $ .9000
Average daily trading volume 113,278 81,927 102,324 83,694 95,306
Price per share
High $ 18.63 $ 19.88 $ 20.00 $ 23.50 $ 23.50
Low $ 16.38 $ 18.00 $ 17.88 $ 19.38 $ 16.38
Close $ 18.25 $ 19.75 $ 19.75 $ 23.25 $ 23.25
===========================================================================================================================
(1) Includes MCN's share of joint ventures.
65
35
MANAGEMENT'S AND INDEPENDENT AUDITORS' REPORTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The consolidated financial statements of MCN Energy Group Inc. were prepared by
management which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and, as such, include amounts based on judgments of management.
Financial information elsewhere in this Annual Report is consistent with that
in the consolidated financial statements.
Management is further responsible for maintaining a system of internal
accounting controls, designed to provide reasonable assurance that the books
and records reflect the transactions of MCN and its subsidiaries and that
established policies and procedures are carefully followed. Perhaps the most
important feature in the system of internal control is that it is continually
reviewed for its effectiveness and is augmented by a strong internal audit
program.
Deloitte & Touche LLP, independent certified public accountants, is engaged to
audit the consolidated financial statements of MCN and issue reports thereon.
Their audit is conducted in accordance with generally accepted auditing
standards which comprehend a review of internal accounting controls and tests
of transactions.
MCN's Board of Directors, through its Audit Committee is responsible for: (1)
assuring that management fulfills its responsibilities in the preparation of
the consolidated financial statements, and (2) engaging the independent public
accountants. The Committee reviews the scope of the audits and the accounting
principles being applied in financial reporting. The independent public
accountants, representatives of management and the internal auditors meet
regularly (separately and jointly) with the Committee to review the activities
of each and to ensure that each is properly discharging its responsibilities.
ALFRED R. GLANCY III
Alfred R. Glancy III
Chairman, President and Chief Executive Officer
WILLIAM K. MCCRACKIN
William K. McCrackin
Vice Chairman and Chief Financial Officer
HAROLD GARDNER
Harold Gardner
Vice President, Controller and Chief Accounting Officer
TO THE BOARD OF DIRECTORS:
We have audited the accompanying consolidated statements of financial position
of MCN Corporation and subsidiaries, doing business as MCN Energy Group Inc.
(the "Corporation"), as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows and capitalization for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 6e to the consolidated financial statements, in 1996 the
Corporation adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 7, 1997
66