1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------- -------------
COMMISSION FILE NUMBER 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 313-256-5500
MCN CORPORATION
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Number of shares outstanding of each of the registrant's classes of common
stock, as of April 30, 1997:
Common Stock, par value $.01 per share: 68,031,943
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2
INDEX TO FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1997
PAGE
NUMBER
------
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 1
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 22
Item 6. Exhibits and Reports on Form 8-K.................... 23
SIGNATURE................................................... 24
ii
3
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First quarter earnings reach new high -- MCN's earnings from continuing
operations for the 1997 quarter increased 3.4% or $2.7 million over the first
quarter of 1996. Earnings from continuing operations for the 1997 twelve-month
period increased 3.3% or $3.7 million over the comparable 1996 period. As
discussed below, this performance primarily reflects the success of the
strategies implemented by the Diversified Energy group.
MCN's earnings comparison was also affected by income from discontinued
operations. As discussed in the "Discontinued Operations" section that follows,
MCN sold The Genix Group, Inc. (Genix) during the second quarter of 1996.
QUARTER 12 MONTHS
-------------- ----------------
1997 1996 1997 1996
----- ----- ------ ------
NET INCOME (in Millions)
Continuing Operations:
Diversified Energy........................................ $17.9 $ 7.8 $ 41.3 $ 22.0
Gas Distribution.......................................... 63.9 71.3 74.0 89.6
----- ----- ------ ------
81.8 79.1 115.3 111.6
----- ----- ------ ------
Discontinued Operations:
Income from operations.................................... -- 1.0 .6 3.6
Gain on sale.............................................. -- -- 36.2 --
----- ----- ------ ------
-- 1.0 36.8 3.6
----- ----- ------ ------
$81.8 $80.1 $152.1 $115.2
===== ===== ====== ======
EARNINGS PER SHARE
Continuing Operations:
Diversified Energy........................................ $ .26 $ .12 $ .61 $ .34
Gas Distribution.......................................... .95 1.07 1.10 1.35
----- ----- ------ ------
1.21 1.19 1.71 1.69
----- ----- ------ ------
Discontinued Operations:
Income from operations.................................... -- .01 .01 .05
Gain on sale.............................................. -- -- .54 --
----- ----- ------ ------
-- .01 .55 .05
----- ----- ------ ------
$1.21 $1.20 $ 2.26 $ 1.74
===== ===== ====== ======
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.
1
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
DIVERSIFIED ENERGY
- ---------------------
Earnings continue to rise -- The Diversified Energy group reported an increase
in earnings of $10.1 million and $19.3 million for the 1997 quarter and
twelve-month period, respectively. Increased earnings were driven primarily by
significantly higher levels of 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 22% in the first quarter of 1997 versus 10% in
the first quarter of 1996 and 36% in the 1997 twelve-month period compared to
20% in the 1996 twelve-month period.
QUARTER 12 MONTHS
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
DIVERSIFIED ENERGY OPERATIONS (in Millions)
Operating Revenues*......................................... $260.2 $257.4 $737.2 $556.0
Operating Expenses*......................................... 242.8 245.0 691.4 527.7
------ ------ ------ ------
Operating Income............................................ 17.4 12.4 45.8 28.3
------ ------ ------ ------
Equity in Earnings of Joint Ventures........................ 13.4 3.7 26.3 6.7
------ ------ ------ ------
Other Income and (Deductions)*
Interest income........................................... 1.0 .9 3.1 3.3
Interest expense.......................................... (10.1) (7.5) (31.3) (16.9)
Dividends on preferred securities of subsidiaries......... (4.2) (2.4) (14.3) (9.4)
Gains related to DIGP..................................... -- -- 6.4 --
Other..................................................... 2.8 (.6) 2.6 1.9
------ ------ ------ ------
(10.5) (9.6) (33.5) (21.1)
------ ------ ------ ------
Income Before Income Taxes.................................. 20.3 6.5 38.6 13.9
------ ------ ------ ------
Income Taxes
Current and deferred provision............................ 6.4 2.6 13.3 4.8
Federal tax credits....................................... (4.0) (3.9) (16.0) (12.9)
------ ------ ------ ------
2.4 (1.3) (2.7) (8.1)
------ ------ ------ ------
Net Income.................................................. $ 17.9 $ 7.8 $ 41.3 $ 22.0
====== ====== ====== ======
*Includes intercompany transactions.
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture income increased $14.7 million and $37.1 million for
the quarter and twelve-month periods, respectively, due primarily to continued
growth in Exploration & Production (E&P) operations. Improved results from
Pipelines & Processing also contributed to the increases.
QUARTER 12 MONTHS
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING AND JOINT VENTURE INCOME (in Millions)
Exploration & Production.................................... $ 18.1 $ 6.5 $ 44.8 $ 20.8
Pipelines & Processing...................................... 7.2 2.5 15.4 3.4
Energy Marketing, Gas Storage & Power Generation............ 7.0 7.5 13.5 13.2
Corporate & Other........................................... (1.5) (.4) (1.6) (2.4)
------ ------ ------ ------
$ 30.8 $ 16.1 $ 72.1 $ 35.0
====== ====== ====== ======
2
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
EXPLORATION & PRODUCTION operating and joint venture income increased $11.6
million for the 1997 quarter and $24.0 million for the twelve-month period. The
results reflect a significant increase in the level of gas and oil produced due
to the development and acquisition of interests in properties during 1995 and
1996. Gas and oil production increased 8.5 Bcf equivalent in the quarter, over a
60% increase from the 1996 level. Results in the 1997 quarter and twelve-month
periods also include a $4.7 million gain related to the sale of certain
undeveloped properties. Additionally, E&P operations have increased Diversified
Energy's earnings through the generation of an increasing amount of gas
production tax credits.
QUARTER 12 MONTHS
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
EXPLORATION & PRODUCTION STATISTICS*
Gas Production (Bcf)...................................... 18.7 12.5 63.4 37.5
Oil Production (Mbbl)..................................... .6 .2 1.5 .5
Gas and Oil Production (Bcf equivalent)................... 22.0 13.5 72.3 40.5
Average Gas Sales Price (per Mcf)......................... $ 2.01 $ 2.09 $ 1.95 $ 2.05
Average Oil Sales Price (per Bbl)......................... $20.33 $17.14 $20.58 $16.53
*Average gas and oil sales prices have been adjusted for amounts received or
paid under financial hedging contracts.
E&P operating and joint venture results were also affected by a decline in
natural gas sales prices and an increase in oil sales prices. The average gas
and oil sales prices include the effect of hedging with 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 gas sales
price by $.70 per Mcf for the 1997 quarter and $.46 per Mcf for the current
twelve-month period. Hedging agreements also lowered the average gas sales
prices for the 1996 quarter by $.33 per Mcf, but increased the average gas sales
price for the twelve-month period by $.21 per Mcf. Additionally, E&P's operating
results were affected by higher average production costs per Mcf equivalent.
PIPELINES & PROCESSING operating and joint venture income increased $4.7 million
and $12.0 million for the 1997 quarter and twelve-month period, respectively.
The increases primarily reflect income from the December 1996 acquisition of a
25% interest in Lyondell Methanol Company, L.P., a limited partnership that owns
a 248 million gallon per year methanol production plant in Texas. Results also
reflect a higher level of volumes treated through gas processing plants, as well
as the acquisition of additional interest in pipelines during late 1995 and
1996. The slight decline in transportation volumes during the 1997 quarter
reflects the partial sale of MCN's interest in the Dauphin Island Gathering
project during 1996 (Note 2c).
QUARTER 12 MONTHS
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
PIPELINES & PROCESSING STATISTICS*
Gas Processed (Bcf)....................................... 9.8 9.1 44.9 22.0
Methanol Produced (million gallons)....................... 15.3 -- 25.8 --
Transportation (Bcf)...................................... 18.9 21.1 84.2 25.5
*Includes MCN's share of joint ventures.
ENERGY MARKETING, GAS STORAGE & POWER GENERATION operating and joint venture
income for the 1997 quarter and twelve-month period remained relatively
consistent with the comparable 1996 periods. The effect on earnings of the 21%
increase in gas sales and exchange deliveries during the 1997 quarter was offset
by reduced marketing margins when compared to the 1996 quarter. The margin
comparison was affected by a spike in gas prices during February 1996 as a
result of an increase in demand for natural gas due to the abnormally cold
winter of 1995-1996. MCN's Energy Marketing group was able to capitalize on this
opportunity during the first quarter of 1996 by taking lower cost gas from
storage and selling it at the higher spot market prices. The significant
increase in gas sales volumes were driven by a 22% increase in sales to
customers in the northeastern United States, as well as additional sales to
cogeneration facilities under long-term gas supply contracts.
3
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
QUARTER 12 MONTHS
-------------- ----------------
1997 1996 1997 1996
---- ---- ----- -----
ENERGY MARKETING STATISTICS (Bcf)*
Gas Sales................................................... 88.2 70.8 236.3 198.0
Exchange Deliveries......................................... 8.7 9.4 21.9 16.2
---- ---- ----- -----
96.9 80.2 258.2 214.2
==== ==== ===== =====
*Includes MCN's share of joint ventures.
Also contributing to the 1997 results were increased earnings from the 30
megawatt (MW) Ada cogeneration facility as a result of Power Generation's
acquisition of the 1% general partnership interest in the fourth quarter of
1996. Additionally, Power Generation experienced higher earnings during the
quarter from its investment in the 50%-owned, 123 MW Michigan Power cogeneration
facility.
RISK MANAGEMENT STRATEGY -- MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more closely 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-related hedging transactions that are
not recorded by MCN's E&P group are absorbed by Energy Marketing.
CORPORATE & OTHER operating and joint venture losses reflect administrative
expenses associated with corporate management activities. The Diversified Energy
group has been charged a larger portion of such expenses reflecting its growing
percentage of MCN. The 1997 twelve-month period also includes a $1.7 million
gain from the sale of land by a 50%-owned real estate joint venture.
OTHER INCOME AND DEDUCTIONS
The 1997 quarter and twelve-month period reflect higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group. In addition, the 1997 periods reflect dividends on $80 million of
preferred securities which were issued in July of 1996.
Other income and deductions for the 1997 twelve-month period includes gains
related to Dauphin Island Gathering Partners (DIGP). In a series of transactions
during 1996, MCN sold 64% of its 99% interest in the DIGP partnership, resulting
in pre-tax gains of $8.8 million, of which $2.4 million was deferred (Note 2c).
INCOME TAXES
The current and deferred income tax provision for all periods reflect variations
in pre-tax earnings. These taxes were reduced by an increase in the level of gas
production tax credits generated from E&P projects.
OUTLOOK
MCN plans to continue aggressively growing its E&P reserve base in known
producing areas generating attractive returns and developing reliable, long-term
gas supplies. MCN will also continue to make investments in natural gas and gas
liquid gathering and processing facilities near these known producing areas,
concentrating on those with the highest growth potential. Additionally, MCN will
focus on expanding its Energy Marketing coverage within existing markets as well
as entering new markets through strategic alliances with other energy providers.
MCN's Power Generation business is expected to make significant investments in
international projects over the next several years as evidenced by a 1997
agreement to acquire a 40% interest in an India joint venture (Note 2a).
4
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GAS DISTRIBUTION
- -------------------
Results reflect warmer weather -- The Gas Distribution group reported a decline
in earnings of $7.4 million and $15.6 million for the 1997 quarter and
twelve-month period, respectively. The decreases reflect lower gross margins
resulting from reduced gas sales and end user transportation deliveries due to
warmer weather, as well as higher operating expenses.
QUARTER 12 MONTHS
--------------- -------------------
1997 1996 1997 1996
------ ------ -------- --------
GAS DISTRIBUTION OPERATIONS (in Millions)
Operating Revenues*
Gas sales................................................. $481.7 $487.9 $1,096.8 $1,039.4
End user transportation................................... 26.0 26.4 82.1 83.0
Intermediate transportation............................... 14.8 11.4 51.9 42.6
Other..................................................... 11.9 12.9 41.2 50.8
------ ------ -------- --------
534.4 538.6 1,272.0 1,215.8
Cost of Gas................................................. 307.1 302.5 650.8 581.0
------ ------ -------- --------
Gross Margin................................................ 227.3 236.1 621.2 634.8
------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance................................. 75.2 69.9 303.7 291.0
Depreciation, depletion and amortization.................. 25.7 24.5 100.0 93.1
Property and other taxes.................................. 17.9 18.4 61.8 60.3
------ ------ -------- --------
118.8 112.8 465.5 444.4
------ ------ -------- --------
Operating Income............................................ 108.5 123.3 155.7 190.4
------ ------ -------- --------
Equity in Earnings of Joint Ventures........................ 1.0 .4 1.9 1.3
------ ------ -------- --------
Other Income and (Deductions)*
Interest income........................................... 1.2 .6 4.6 4.0
Interest expense.......................................... (14.2) (12.6) (52.9) (45.5)
Minority interest......................................... (.3) (.3) (1.0) (2.1)
Other..................................................... .7 (.7) 2.0 (5.6)
------ ------ -------- --------
(12.6) (13.0) (47.3) (49.2)
------ ------ -------- --------
Income Before Income Taxes.................................. 96.9 110.7 110.3 142.5
Income Taxes................................................ 33.0 39.4 36.3 52.9
------ ------ -------- --------
Net Income.................................................. $ 63.9 $ 71.3 $ 74.0 $ 89.6
====== ====== ======== ========
* Includes intercompany transactions.
GROSS MARGIN
Gross margin decreases -- Gas Distribution gross margin (operating revenues less
cost of gas) decreased $8.8 million and $13.6 million for the 1997 quarter and
twelve-month period, respectively, reflecting lower gas sales and transportation
deliveries due primarily to the warmer weather. These declines were partially
offset by increased revenues as a result of the continued growth in intermediate
transportation services.
QUARTER 12 MONTHS
-------------- --------------
1997 1996 1997 1996
----- ---- ---- -----
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) Than Normal...................... (3.3)% 5.7% 1.0% 6.0%
Increase (Decrease) From Normal in:
Gas markets (in Bcf)...................................... (3.1) 5.4 2.4 12.2
Net income (in millions).................................. $(2.8) $4.9 $2.2 $11.1
Earnings per share........................................ $(.04) $.07 $.03 $ .17
5
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GAS SALES AND END USER TRANSPORTATION revenues in total decreased $6.6 million
in the 1997 quarter and increased by $56.5 million in the 1997 twelve-month
period. Revenues were affected by lower gas sales and end user transportation
deliveries primarily due to the warmer weather in the 1997 periods as compared
to the same 1996 periods. However, the decline in gas sales revenues for the
1997 twelve-month period attributable to reduced sales volumes was more than
offset by higher revenues necessary to recover higher gas costs as subsequently
discussed. The decrease in end user transportation revenues for the 1997
twelve-month period was mitigated by increased deliveries to a cogeneration
facility under a long-term transportation contract.
QUARTER 12 MONTHS
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales................................................... 94.6 103.6 212.0 222.9
End User Transportation..................................... 44.4 47.5 143.8 149.6
----- ----- ----- -----
139.0 151.1 355.8 372.5
Intermediate Transportation*................................ 140.6 148.0 520.1 409.9
----- ----- ----- -----
279.6 299.1 875.9 782.4
===== ===== ===== =====
*Includes intercompany volumes.
INTERMEDIATE TRANSPORTATION revenues increased by $3.4 million and $9.3 million
in the 1997 quarter and twelve-month period, respectively. The significant
increase in the 1997 twelve-month period was primarily the result of additional
volumes transported in connection with the recently expanded northern Michigan
gathering system along with higher volumes transported for fixed-fee customers.
The expansion of the northern Michigan gathering system enabled MichCon to
transport an additional 2.3 Bcf and 81.5 Bcf in the 1997 quarter and
twelve-month periods, respectively. The slight decrease in intermediate
transportation deliveries for the 1997 quarter is due primarily to lower volumes
transported for two major fixed-fee customers. Although volumes associated with
these fixed-fee customers may vary, the related revenues are not significantly
affected.
OTHER OPERATING REVENUES decreased by $1.0 million and $9.6 million in the 1997
quarter and twelve-month period, respectively, primarily due to a decrease in
conservation revenues resulting from the discontinuance of MichCon's energy
conservation programs. As discussed in the "Operation and Maintenance" section
that follows, this 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 (GCR) mechanism, MichCon's rates are set to
recover 100% of prudently and reasonably incurred gas costs. Therefore,
fluctuations in cost of gas sold have little or no effect on gross margins and
earnings.
Cost of gas sold increased in the 1997 quarter and twelve-month period due to
higher spot market prices for natural gas purchases. The increase in market
prices paid for gas resulted in an increase in the cost of gas sold per thousand
cubic feet of $.37 (13%) and $.46 (17%) in the 1997 quarter and twelve-month
period, respectively, from the comparable 1996 periods.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses for the 1997 quarter and twelve-month periods
increased from the comparable 1996 periods due mainly to increased costs
associated with uncollectible gas accounts. Partially offsetting these higher
costs were decreased benefit costs, primarily pension and retiree healthcare
costs, and lower expenses associated with the discontinuance of MichCon's energy
conservation programs.
DEPRECIATION AND DEPLETION increased in both 1997 periods due to higher plant
balances, reflecting capital expenditures of $456.8 million over the past two
calendar years. Depreciation and depletion expenses are expected to increase in
future years due to higher planned capital investments. MichCon 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.
6
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
INCOME TAXES
Income taxes decreased for the 1997 quarter and twelve-month period due
primarily to decreases in earnings. Income taxes were also reduced by $2.7
million and $1.1 million during the 1997 and 1996 twelve-month periods,
respectively, due to the favorable resolution of prior years' tax issues.
OUTLOOK
Gas Distribution's strategy is to grow revenues and reduce its costs in order to
maintain strong returns and provide customers with quality service at
competitive prices. Revenue growth will be achieved through the expansion of its
residential, commercial and industrial customer base. In 1997 Gas Distribution
will concentrate on adding new customers in current service areas and better
penetration of previous expansion projects. Gas Distribution will continue
initiatives to increase productivity and improve customer services in order to
strengthen its competitive position in the gas industry. Management is
continually assessing ways to improve cost competitiveness. Among the cost
savings initiatives, Gas Distribution and other Michigan utilities are exploring
opportunities to share the cost of common, duplicative functions in order to
obtain greater efficiencies and increase customer value.
DISCONTINUED OPERATIONS
- -----------------------------
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc., resulting in an after-tax gain of
$36.2 million. 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.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
- -----------------------
MCN's cash flow from operating activities increased $49.7 million during the
1997 quarter from the comparable 1996 period. The increase was due primarily to
a decrease in working capital requirements.
FINANCING ACTIVITIES
- -----------------------
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. During 1997, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating approximately $19 million. During the first three months of 1997,
issuances under these plans generated proceeds of $5.4 million.
In March 1997, MCN issued 2.645 million FELINE PRIDES yielding 8% and generating
net proceeds of $127.4 million (Note 3b). Proceeds from the issuance were used
to reduce short-term debt incurred by the Diversified Energy Group to fund
capital investments and for general corporate purposes. The FELINE PRIDES are
currently rated the equivalent of "BBB+" by the major rating agencies.
DIVERSIFIED ENERGY
In January 1997, MCNIC issued $150 million of medium-term notes using the
proceeds to repay short-term debt and for general corporate purposes.
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 gas
marketing operations. During the first three months of 1997, MCNIC repaid $196.2
million of commercial paper, leaving a balance of $133.6 million outstanding
under this program at March 31, 1997.
GAS DISTRIBUTION
Cash and cash equivalents normally increase and short-term debt is reduced in
the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the latter part of the year, cash and
7
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
cash equivalents normally decrease as funds are used to finance increases in gas
inventories and customer accounts receivable. To meet its seasonal short-term
borrowing needs, MichCon normally issues commercial paper which is backed by
credit lines with several banks. MichCon has established credit lines 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. During the
first three months of 1997, MichCon repaid $79.2 million of commercial paper,
leaving a balance of $159.1 million outstanding as of March 31, 1997 under these
lines.
During April 1997, subsidiaries of MichCon borrowed $40 million under a
nonrecourse credit agreement that matures in 2005. Proceeds were used to finance
the expansion of its northern Michigan pipeline system.
MichCon has available a Trust Demand Note program which allows it to borrow up
to $25 million. At March 31, 1997, there were no borrowings outstanding under
this program.
MichCon anticipates the issuance of $85 million of first mortgage bonds in the
second quarter of 1997. The funds from this issuance will be used to repay
short-term debt which was used to retire first mortgage bonds in May 1997, to
fund capital expenditures and for general corporate purposes.
INVESTING ACTIVITIES
- ----------------------
Capital investments equaled $133.4 million in the 1997 quarter compared to
$177.2 million for the same period in 1996. The 1997 investments include higher
levels of investments in E&P properties as well as investments in power
generation projects in India. The first quarter 1996 investments include the
$78.6 million DIGP acquisition.
Quarter
-------------------
1997 1996
------ ------
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $ 72.7 $ 60.4
Gas Distribution.......................................... 24.5 29.9
Discontinued Operations................................... -- 6.2
------ ------
97.2 96.5
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Pipelines & Processing.................................... 11.2 .3
Other..................................................... .6 1.8
------ ------
11.8 2.1
------ ------
Acquisitions (Note 2)....................................... 24.4 78.6
------ ------
Total Capital Investments................................... $133.4 $177.2
====== ======
OUTLOOK
- ---------
Capital investments in 1997 are expected to reach $1.1 billion -- MCN's
strategic direction is to grow significantly by investing in a portfolio of
energy-related projects. For 1997, MCN anticipates investing approximately $900
million in Diversified Energy and the remainder in Gas Distribution. Within
Diversified Energy, approximately $450 million will be invested in E&P projects
for drilling operations and to acquire reserves in the Michigan, Appalachian,
Midcontinent, Gulf Coast and Rocky Mountain regions. Diversified Energy will
invest the remaining $450 million in gas gathering, gas processing and power
generation projects.
The proposed level of investments for 1997 increases capital requirements
materially in excess of internally generated funds and requires the issuance of
additional debt and equity securities. MCN's actual capital requirements and
general market conditions will dictate the timing and amount of future
issuances. It is management's opinion that MCN and its subsidiaries will have
sufficient capital resources, both internal and external, to meet anticipated
capital requirements.
8
11
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- --------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
OPERATING REVENUES.......................................... $788,761 $790,638 $1,995,391 $1,759,782
-------- -------- ---------- ----------
OPERATING EXPENSES
Cost of gas............................................... 499,545 512,429 1,180,694 1,010,327
Operation and maintenance................................. 98,421 86,352 384,049 341,557
Depreciation, depletion and amortization.................. 43,457 34,798 154,649 122,246
Property and other taxes.................................. 21,472 21,352 74,547 66,948
-------- -------- ---------- ----------
662,895 654,931 1,793,939 1,541,078
-------- -------- ---------- ----------
OPERATING INCOME............................................ 125,866 135,707 201,452 218,704
-------- -------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES........................ 14,361 4,043 28,185 8,044
-------- -------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income........................................... 2,212 1,545 7,901 7,083
Interest on long-term debt................................ (18,982) (16,139) (69,360) (50,450)
Other interest expense.................................... (4,730) (4,101) (11,893) (12,066)
Dividends on preferred securities of subsidiaries......... (4,229) (2,362) (14,241) (9,554)
Gains related to DIGP (Note 2c)........................... -- -- 6,384 --
Minority interest......................................... (353) (365) (1,047) (2,292)
Other..................................................... 3,021 (1,245) 1,646 (3,074)
-------- -------- ---------- ----------
(23,061) (22,667) (80,610) (70,353)
-------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....... 117,166 117,083 149,027 156,395
INCOME TAX PROVISION........................................ 35,397 38,029 33,743 44,733
-------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS........................... 81,769 79,054 115,284 111,662
-------- -------- ---------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES (Note 2d)
Income from operations.................................... -- 1,013 582 3,571
Gain on sale.............................................. -- -- 36,176 --
-------- -------- ---------- ----------
-- 1,013 36,758 3,571
-------- -------- ---------- ----------
NET INCOME.................................................. $ 81,769 $ 80,067 $ 152,042 $ 115,233
======== ======== ========== ==========
EARNINGS PER SHARE
Continuing Operations..................................... $ 1.21 $ 1.19 $ 1.71 $ 1.69
-------- -------- ---------- ----------
Discontinued Operations (Note 2d)
Income from operations.................................. -- .01 .01 .05
Gain on sale............................................ -- -- .54 --
-------- -------- ---------- ----------
-- .01 .55 .05
-------- -------- ---------- ----------
$ 1.21 $ 1.20 $ 2.26 $ 1.74
======== ======== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING........................... 67,547 66,566 67,187 66,216
======== ======== ========== ==========
DIVIDENDS DECLARED PER SHARE................................ $ .2425 $ .2325 $ .9500 $ .9100
======== ======== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- --------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
BALANCE -- BEGINNING OF PERIOD.............................. $305,352 $218,425 $283,046 $228,137
ADD -- NET INCOME........................................... 81,769 80,067 152,042 115,233
-------- -------- ---------- ----------
387,121 298,492 435,088 343,370
DEDUCT -- CASH DIVIDENDS DECLARED ON COMMON STOCK........... 16,333 15,446 63,761 60,324
OTHER............................................. 427 -- 966 --
-------- -------- ---------- ----------
BALANCE -- END OF PERIOD.................................... $370,361 $283,046 $370,361 $283,046
======== ======== ========== ==========
The notes to the consolidated financial statements are an integral part of these
statements.
9
12
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
----------------------- ------------
1997 1996 1996
---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 41,520 $ 25,338 $ 30,462
Accounts receivable, less allowance for doubtful accounts
of $25,274, $17,769 and $18,487, respectively........... 401,701 450,163 362,596
Accrued unbilled revenues................................. 72,373 73,201 108,509
Accrued gas cost recovery revenues........................ 21,500 35,362 27,672
Gas in inventory (Note 4)................................. 38,611 14,113 79,161
Property taxes assessed applicable to future periods...... 51,141 48,987 62,966
Gas receivable............................................ 29,540 26,324 18,062
Other..................................................... 25,658 31,659 34,800
---------- ---------- ----------
682,044 705,147 724,228
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures.............. 295,942 207,968 265,388
Deferred swap losses and receivables (Note 5)............. 60,329 47,135 65,051
Deferred postretirement benefit costs..................... 4,784 12,310 5,559
Deferred environmental costs.............................. 31,116 31,016 31,233
Prepaid benefit costs..................................... 54,961 43,761 59,248
Other..................................................... 100,741 105,616 100,341
---------- ---------- ----------
547,873 447,806 526,820
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Exploration & Production.................................. 1,047,517 634,214 981,901
Pipelines & Processing.................................... 28,582 23,015 27,895
Gas Distribution.......................................... 2,706,962 2,519,769 2,689,039
Other..................................................... 19,838 71,247 18,722
---------- ---------- ----------
3,802,899 3,248,245 3,717,557
Less -- Accumulated depreciation and depletion............ 1,375,077 1,254,220 1,335,201
---------- ---------- ----------
2,427,822 1,994,025 2,382,356
---------- ---------- ----------
$3,657,739 $3,146,978 $3,633,404
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 219,475 $ 255,702 $ 317,922
Notes payable............................................. 211,345 176,919 336,126
Current portion of long-term debt and capital lease
obligations............................................. 84,853 5,276 84,747
Gas inventory equalization (Note 4)....................... 97,084 84,576 --
Federal income, property and other taxes payable.......... 88,993 75,403 97,646
Customer deposits......................................... 12,650 10,875 12,881
Other..................................................... 77,142 88,043 97,873
---------- ---------- ----------
791,542 696,794 947,195
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................... 161,095 144,447 149,838
Unamortized investment tax credit......................... 34,451 36,328 34,919
Tax benefits amortizable to customers..................... 116,095 114,151 116,496
Deferred swap gains and payables (Note 5)................. 50,406 44,475 48,365
Accrued environmental costs............................... 35,000 35,000 35,000
Minority interest......................................... 18,059 18,057 17,911
Other..................................................... 69,929 83,518 73,263
---------- ---------- ----------
485,035 475,976 475,792
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations (Note
3a)....................................................... 1,223,509 1,137,703 1,252,040
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES HOLDING SOLELY SUBORDINATED DEBENTURES OF MCN
(Note 3b)................................................. 305,840 96,480 173,809
---------- ---------- ----------
CONTINGENCIES (Note 6)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................. 680 668 673
Additional paid-in capital................................ 503,607 456,955 493,469
Retained earnings......................................... 370,361 283,046 305,352
Yield enhancement, contract and issuance costs (Note
3b)..................................................... (22,036) -- (14,492)
Unearned compensation..................................... (799) (644) (434)
---------- ---------- ----------
851,813 740,025 784,568
---------- ---------- ----------
$3,657,739 $3,146,978 $3,633,404
========== ========== ==========
The notes to the consolidated financial statements are an integral part of this
statement.
10
13
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................ $ 81,769 $ 80,067
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation, depletion and amortization
Per statement of income............................... 43,457 34,798
Charged to other accounts............................. 1,930 3,606
Deferred income taxes -- current........................ (12,337) 8,613
Deferred income taxes and investment tax credit, net.... 10,388 17,565
Equity in earnings of joint ventures, net of
distribution........................................... (1,172) (1,448)
Other................................................... (1,003) 112
Changes in assets and liabilities, exclusive of changes
shown separately....................................... 46,859 (23,119)
--------- ---------
Net cash provided from operating activities........ 169,891 120,194
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (122,381) (68,716)
Common stock dividends paid............................... (16,333) (15,446)
Issuance of common stock.................................. 5,398 4,378
Issuance of preferred securities (Note 3b)................ 127,418 --
Issuance of long-term debt (Note 3a)...................... 149,190 199,729
Long-term commercial paper, net........................... (176,235) (59,654)
Retirement of long-term debt and preferred stock.......... (1,664) (4,497)
Other..................................................... (164) --
--------- ---------
Net cash provided from (used for) financing
activities........................................ (34,771) 55,794
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (96,911) (89,717)
Acquisitions (Notes 2a and 2c)............................ (24,400) (78,620)
Investment in joint ventures.............................. (10,023) (49)
Return of investment in joint ventures.................... 4,000 --
Other..................................................... 3,272 (1,523)
--------- ---------
Net cash used for investing activities............. (124,062) (169,909)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 11,058 6,079
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 30,462 19,259
--------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31......................... $ 41,520 $ 25,338
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ (37,627) $(131,248)
Accrued unbilled revenues................................. 36,136 19,209
Accrued/deferred gas cost recovery revenues............... 6,172 (35,940)
Gas in inventory.......................................... 40,550 57,650
Accounts payable.......................................... (98,447) 38,518
Gas inventory equalization................................ 97,084 84,576
Federal income, property and other taxes payable.......... (8,653) (7,981)
Other current assets and liabilities...................... 250 (1,093)
Deferred assets and liabilities........................... 11,394 (46,810)
--------- ---------
$ 46,859 $ (23,119)
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 27,988 $ 14,256
Federal income taxes.................................... 17,500 --
Noncash investing activities:
Property purchased under capital leases................. $ 273 $ 6,765
The notes to the consolidated financial statements are an integral part of this
statement.
11
14
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements should be read in conjunction
with MCN's 1996 Annual Report on Form 10-K. Certain reclassifications have been
made to the prior year's financial statements to conform with the 1997
presentation. In the opinion of management, the unaudited information furnished
herein reflects all adjustments (consisting of only recurring adjustments or
accruals) necessary for a fair presentation of the financial statements for the
periods presented.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
2. ACQUISITIONS AND DISPOSITIONS
A. TORRENT POWER PRIVATE LIMITED
In March 1997, MCN acquired a 40% interest in Torrent Power Private
Limited, an India joint venture that holds minority interests in electric
companies and power generation facilities located in the state of Gujarat,
India. The total cost of the acquisition will be approximately $57,000,000
of which $24,400,000 was incurred in March 1997. The remainder is expected
to be paid in the second quarter of 1997. Specifically, the joint venture
has a 21% interest in Ahmedabad Electricity Company Limited (AEC), a 43%
interest in Surat Electricity Company Limited (SEC) and a 30% interest in
Gujarat Torrent Energy Corporation (GTEC). AEC serves the city of Ahmedabad
and has 550 megawatts (MW) of electric generating capacity. SEC provides
electricity to the city of Surat. GTEC is currently constructing a 655 MW
dual fuel generation facility, the first phase of which is expected to be
operational in late 1997 and fully completed by the end of 1998. In
addition to equity investments, the construction of this facility will be
funded through nonrecourse project financing of which the portion
attributable to MCN's interest will be approximately $60,000,000.
B. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
During April 1997, MCN signed an agreement to purchase an 18.1% general
partnership interest in Midland Cogeneration Venture Limited Partnership
(MCV), a partnership that leases and operates a cogeneration facility in
Midland, Michigan. The facility can produce up to 1,370 MW of electricity
and 1.35 million pounds of process steam per hour which it sells primarily
to Consumers Energy Corporation, Dow Chemical Company and Dow Corning
Corporation. The investment will total $54,750,000 and be accounted for
under the equity method. Closing of the agreement is expected in May 1997
and is subject to certain regulatory approvals.
C. DAUPHIN ISLAND GATHERING PARTNERS
As discussed in MCN's 1996 Annual Report on Form 10-K, 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, in the first quarter of 1996. Through a series of transactions in
1996, MCN sold 64% of its interest in DIGP which resulted in pre-tax gains
of $8,782,000 of which $2,398,000 was deferred due to a related option
agreement.
D. THE GENIX GROUP, INC.
As discussed in MCN's 1996 Annual Report on Form 10-K, MCN completed the
sale of its computer operations subsidiary, The Genix Group, Inc., to
Affiliated Computer Services, Inc. in June 1996. The sale resulted in an
after-tax gain of $36,176,000.
12
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. CAPITALIZATION
A. LONG-TERM DEBT
The following long-term debt was issued during the first quarter of 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
---------------------------------------------------------------------------------
Additionally, in April 1997, subsidiaries of MichCon borrowed $40,000,000
under a nonrecourse credit agreement at an average interest rate of 6.45%.
Under the terms of the agreement, certain alternative variable interest
rates are available at the borrowers' options during the life of the
agreement. Quarterly principal payments commence in June 1997 with the
final installment due November 2005. The loan is secured by a pledge of the
stock of the borrowers and a security interest in certain of their assets.
B. FELINE PRIDES
In March 1997, MCN issued 2,645,000 FELINE PRIDES yielding 8% with a stated
amount of $50 per security. Each security initially consists of a stock
purchase contract and a preferred security of MCN Financing III.
Under each stock purchase contract, MCN is obligated to sell and the FELINE
PRIDES holder is obligated to purchase in May 2000 for $50, between 1.4132
and 1.7241 shares of MCN common stock. The exact number of MCN common
shares to be sold is dependent on the market value of a share in May 2000,
but will not be less than 3,737,988 or more than 4,560,345 shares. MCN is
also obligated to pay the FELINE PRIDES holders a quarterly contract
adjustment payment at an annual rate of .75% of the stated amount. MCN has
recorded the present value of the contract adjustment payments, totaling
$2,661,015, as a liability and a reduction to Common Shareholders' Equity
on MCN's Consolidated Statement of Financial Position. The liability will
be reduced when the contract adjustment payments are made. MCN has the
right to defer the contract adjustment payments, in which case MCN cannot
declare dividends on its common stock until the contract adjustment
payments have been made. In addition, MCN has incurred costs of
approximately $4,900,000 in conjunction with the issuance and similarly has
recorded these costs as a reduction to Common Shareholders' Equity.
MCN Financing III (the Trust), 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 March 1997, the Trust issued 2,645,000
shares of 7.25% redeemable preferred securities, at the liquidation
preference value of $50 per share. The Trust invested the $132,250,000 of
gross proceeds from the issuance of the preferred securities, as well as
$4,090,250 of proceeds from the issuance of common securities to MCN in an
equivalent amount of 7.25% Junior Subordinated Debentures of MCN. The
$136,340,250 of Junior Subordinated Debentures are due May 2002 and are the
sole assets of the Trust. Upon maturity of the debentures, the Trust is
required to redeem the preferred securities.
Holders of the preferred securities are entitled to receive cumulative
dividends at an annual rate of 7.25% of the liquidation preference value.
Dividends are payable quarterly and in substance are tax deductible by MCN.
MCN has the right to extend interest payment periods on the debentures for
successive periods, however not beyond the May 2002 maturity date. As a
consequence, quarterly dividend payments on the preferred securities can be
deferred by the Trust during any such interest payment period. In the event
that MCN exercises this right, MCN may not declare dividends on its common
stock.
13
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the event of default, holders of the preferred securities will be
entitled to exercise and enforce the Trust'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 payments on the
preferred securities. This guaranty, taken together with MCN's obligations
under the debentures, the related indenture, and the Trust documents,
provides a full and unconditional guaranty of the Trust's obligations under
the preferred securities to the extent the Trust has funds available
therefor.
The preferred securities are pledged as collateral to secure the FELINE
PRIDES holders' obligation to purchase MCN common stock under the stock
purchase contracts. Each holder has the right after issuance of the FELINE
PRIDES to substitute for the preferred securities, zero coupon U.S.
Treasury Securities maturing in May 2000. Each FELINE PRIDES holder has the
option to use the preferred securities or the treasury securities to
satisfy the May 2000 purchase contract commitment.
4. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation
that interim inventory reductions will be replaced prior to year end, the cost
of gas for net withdrawals from inventory is generally recorded at the estimated
average purchase rate for the calendar year. The excess of these charges over
the LIFO cost is credited to the gas inventory equalization account. During
interim periods when there are net injections to inventory, the equalization
account is reversed. Approximately 30.7 billion cubic feet (Bcf) and 23.8 Bcf of
gas was in inventory at March 31, 1997 and 1996, respectively.
5. ACCOUNTING FOR COMMODITY SWAP AGREEMENTS
As discussed in MCN's 1996 Annual Report on Form 10-K, MCN manages commodity
price 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. Natural gas and oil swap agreements are used to manage exposure to the
risk of market price fluctuations on gas sale contracts, and gas and oil
production. Market value changes of swap contracts are recorded as deferred
gains or losses until the hedged transactions are completed, at which time the
realized gains or losses are included as adjustments to revenues. The offsets to
the unrealized losses are recorded as deferred payables and the offsets to the
unrealized gains are recorded as deferred receivables.
The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position:
March 31, December 31,
------------------ ------------
1997 1996 1996
------- ------- ------------
(in Thousands)
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses......................................... $46,740 $31,108 $ 53,166
Deferred receivables...................................... 13,589 16,027 11,885
------- ------- --------
$60,329 $47,135 $ 65,051
======= ======= ========
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains.......................................... $10,737 $13,773 $ 5,519
Deferred payables......................................... 54,572 38,855 64,641
------- ------- --------
65,309 52,628 70,160
Less -- Current portion................................... 14,903 8,153 21,795
------- ------- --------
$50,406 $44,475 $ 48,365
======= ======= ========
14
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. CONTINGENCIES
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.
7. 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. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any 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, is $575,949,000 at March 31, 1997.
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, MCN
Financing I and MCN Financing III.
15
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- -------- ----------------- ------------
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------------------------------------
OPERATING REVENUES................................. $ 6,937 $260,154 $527,445 $ (5,775) $788,761
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas...................................... 3,813 196,317 303,273 (3,858) 499,545
Operation and maintenance........................ 54 26,179 74,105 (1,917) 98,421
Depreciation, depletion and amortization......... 552 17,404 25,501 -- 43,457
Property and other taxes......................... 698 2,980 17,794 -- 21,472
------- -------- -------- -------- --------
5,117 242,880 420,673 (5,775) 662,895
------- -------- -------- -------- --------
OPERATING INCOME................................... 1,820 17,274 106,772 -- 125,866
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... 81,647 13,160 310 (80,756) 14,361
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 4,348 969 1,209 (4,314) 2,212
Interest on long-term debt....................... 141 (8,383) (10,740) -- (18,982)
Other interest expense........................... (230) (5,923) (2,891) 4,314 (4,730)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (4,229) (4,229)
Minority interest................................ -- (15) (338) -- (353)
Other............................................ (56) 2,876 201 -- 3,021
------- -------- -------- -------- --------
4,203 (10,476) (12,559) (4,229) (23,061)
------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES......................... 87,670 19,958 94,523 (84,985) 117,166
INCOME TAX PROVISION............................... 942 2,125 32,330 -- 35,397
------- -------- -------- -------- --------
NET INCOME......................................... 86,728 17,833 62,193 (84,985) 81,769
DIVIDENDS ON PREFERRED SECURITIES.................. 4,229 -- -- (4,229) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK.............. $82,499 $ 17,833 $62,193 $(80,756) $ 81,769
======= ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------------------
OPERATING REVENUES................................. $ 7,207 $257,369 $531,392 $ (5,330) $790,638
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas...................................... 3,771 213,623 298,716 (3,681) 512,429
Operation and maintenance........................ 186 19,044 68,771 (1,649) 86,352
Depreciation, depletion and amortization......... 468 9,937 24,393 -- 34,798
Property and other taxes......................... 561 2,562 18,608 (379) 21,352
------- -------- -------- -------- --------
4,986 245,166 410,488 (5,709) 654,931
------- -------- -------- -------- --------
OPERATING INCOME................................... 2,221 12,203 120,904 379 135,707
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... 79,842 3,460 235 (79,494) 4,043
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 2,400 930 585 (2,370) 1,545
Interest on long-term debt....................... (10) (6,361) (9,768) -- (16,139)
Other interest expense........................... (14) (3,622) (2,835) 2,370 (4,101)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (2,362) (2,362)
Minority interest................................ -- (17) (348) -- (365)
Other............................................ (288) (287) (296) (374) (1,245)
------- -------- -------- -------- --------
2,088 (9,357) (12,662) (2,736) (22,667)
------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................ 84,151 6,306 108,477 (81,851) 117,083
INCOME TAX PROVISION (BENEFIT)..................... 1,100 (1,508) 38,437 -- 38,029
------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS.................. 83,051 7,814 70,040 (81,851) 79,054
DISCONTINUED OPERATIONS, NET OF TAXES.............. -- 1,013 -- -- 1,013
------- -------- -------- -------- --------
NET INCOME......................................... 83,051 8,827 70,040 (81,851) 80,067
DIVIDENDS ON PREFERRED SECURITIES.................. 2,344 -- 18 (2,362) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK.............. $80,707 $ 8,827 $70,022 $(79,489) $ 80,067
======= ======== ======== ======== ========
16
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATION TOTALS
------------ -------- ---------- ----------------- ------------
TWELVE MONTHS ENDED MARCH 31, 1997
-----------------------------------------------------------------------
OPERATING REVENUES...................................... $ 17,199 $737,226 $1,254,838 $ (13,872) $1,995,391
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas........................................... 9,697 540,034 641,151 (10,188) 1,180,694
Operation and maintenance............................. 653 87,465 299,615 (3,684) 384,049
Depreciation, depletion and amortization.............. 2,024 53,370 99,255 -- 154,649
Property and other taxes.............................. 2,271 10,949 60,948 379 74,547
-------- -------- ---------- --------- ----------
14,645 691,818 1,100,969 (13,493) 1,793,939
-------- -------- ---------- --------- ----------
OPERATING INCOME........................................ 2,554 45,408 153,869 (379) 201,452
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES... 154,173 25,615 961 (152,564) 28,185
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income....................................... 14,623 3,259 4,524 (14,505) 7,901
Interest on long-term debt............................ 265 (27,950) (41,675) -- (69,360)
Other interest expense................................ (1,434) (16,896) (8,068) 14,505 (11,893)
Dividends on preferred securities of subsidiaries..... -- -- -- (14,241) (14,241)
Gains related to DIGP................................. -- 6,384 -- -- 6,384
Minority interest..................................... -- (69) (978) -- (1,047)
Other................................................. 422 2,109 (1,259) 374 1,646
-------- -------- ---------- --------- ----------
13,876 (33,163) (47,456) (13,867) (80,610)
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES... 170,603 37,860 107,374 (166,810) 149,027
INCOME TAX PROVISION (BENEFIT).......................... 1,656 (3,292) 35,379 -- 33,743
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS....................... 168,947 41,152 71,995 (166,810) 115,284
-------- -------- ---------- --------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES
Income from operations................................ -- 582 -- -- 582
Gain on sale.......................................... -- 36,176 -- -- 36,176
-------- -------- ---------- --------- ----------
-- 36,758 -- -- 36,758
-------- -------- ---------- --------- ----------
NET INCOME.............................................. 168,947 77,910 71,995 (166,810) 152,042
DIVIDENDS ON PREFERRED SECURITIES....................... 14,241 -- -- (14,241) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK................... $154,706 $ 77,910 $ 71,995 $(152,569) $ 152,042
======== ======== ========== ========= ==========
TWELVE MONTHS ENDED MARCH 31, 1996
-----------------------------------------------------------------------
OPERATING REVENUES...................................... $ 16,393 $565,073 $1,190,393 $ (12,077) $1,759,782
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas........................................... 8,494 437,772 572,541 (8,480) 1,010,327
Operation and maintenance............................. 3,516 55,772 285,866 (3,597) 341,557
Depreciation, depletion and amortization.............. 1,759 29,117 91,370 -- 122,246
Property and other taxes.............................. 1,415 6,794 59,118 (379) 66,948
-------- -------- ---------- --------- ----------
15,184 529,455 1,008,895 (12,456) 1,541,078
-------- -------- ---------- --------- ----------
OPERATING INCOME........................................ 1,209 35,618 181,498 379 218,704
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES... 117,124 6,100 750 (115,930) 8,044
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income....................................... 9,593 3,509 3,630 (9,649) 7,083
Interest on long-term debt............................ (65) (13,050) (37,335) -- (50,450)
Other interest expense................................ (45) (14,582) (6,916) 9,477 (12,066)
Dividends on preferred securities of subsidiaries..... -- -- -- (9,554) (9,554)
Minority interest..................................... -- (1,944) (348) -- (2,292)
Other................................................. 1,195 902 (4,967) (204) (3,074)
-------- -------- ---------- --------- ----------
10,678 (25,165) (45,936) (9,930) (70,353)
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES... 129,011 16,553 136,312 (125,481) 156,395
INCOME TAX PROVISION (BENEFIT).......................... 2,209 (7,635) 50,159 -- 44,733
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS....................... 126,802 24,188 86,153 (125,481) 111,662
DISCONTINUED OPERATIONS, NET OF TAXES................... -- 3,571 -- -- 3,571
-------- -------- ---------- --------- ----------
NET INCOME.............................................. 126,802 27,759 86,153 (125,481) 115,233
DIVIDENDS ON PREFERRED SECURITIES....................... 9,375 -- 179 (9,554) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK................... $117,427 $ 27,759 $ 85,974 $(115,927) $ 115,233
======== ======== ========== ========= ==========
17
20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ---------- ---------- ----------------- ------------
MARCH 31, 1997
-----------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............ $ 3,413 $ 21,885 $ 15,284 $ 938 $ 41,520
Accounts receivable........................... 5,094 149,665 281,090 (8,874) 426,975
Less -- Allowance for doubtful accounts..... 76 800 24,398 -- 25,274
---------- ---------- ---------- ----------- ----------
Accounts receivable, net...................... 5,018 148,865 256,692 (8,874) 401,701
Accrued unbilled revenue...................... 866 -- 71,507 -- 72,373
Accrued gas cost recovery revenues............ -- -- 21,500 -- 21,500
Gas in inventory.............................. -- 17,192 21,419 -- 38,611
Property taxes assessed applicable to future
periods..................................... 162 1,679 49,300 -- 51,141
Gas receivable................................ -- 20,946 8,593 1 29,540
Other......................................... 3,031 9,780 20,699 (7,852) 25,658
---------- ---------- ---------- ----------- ----------
12,490 220,347 464,994 (15,787) 682,044
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in and advances to joint ventures
and subsidiaries............................ 1,154,740 265,712 19,865 (1,144,375) 295,942
Deferred swap losses and receivables.......... -- 60,329 -- -- 60,329
Deferred postretirement benefit costs......... 685 -- 4,099 -- 4,784
Deferred environmental costs.................. 3,000 -- 28,116 -- 31,116
Prepaid benefit costs......................... (3,561) -- 60,228 (1,706) 54,961
Other......................................... 21,571 43,374 52,679 (16,883) 100,741
---------- ---------- ---------- ----------- ----------
1,176,435 369,415 164,987 (1,162,964) 547,873
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost.......... 33,310 1,084,133 2,685,456 -- 3,802,899
Less -- Accumulated depreciation and
depletion................................... 11,485 98,497 1,265,095 -- 1,375,077
---------- ---------- ---------- ----------- ----------
21,825 985,636 1,420,361 -- 2,427,822
---------- ---------- ---------- ----------- ----------
$1,210,750 $1,575,398 $2,050,342 $(1,178,751) $3,657,739
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................. $ 11,289 $ 137,266 $ 95,299 $ (24,379) $ 219,475
Notes payable................................. -- 50,406 160,958 (19) 211,345
Current portion of long-term debt and capital
lease obligations........................... 55 31,512 53,286 -- 84,853
Gas inventory equalization.................... -- 887 96,197 -- 97,084
Federal income, property and other taxes
payable..................................... 1,804 2,149 89,578 (4,538) 88,993
Customer deposits............................. 19 -- 12,630 1 12,650
Other......................................... 9,759 19,255 51,894 (3,766) 77,142
---------- ---------- ---------- ----------- ----------
22,926 241,475 559,842 (32,701) 791,542
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes............. (2,191) 87,420 75,846 20 161,095
Unamortized investment tax credit............. 324 -- 34,127 -- 34,451
Tax benefits amortizable to customers......... 198 -- 115,897 -- 116,095
Deferred swap gains and payables.............. -- 50,406 -- -- 50,406
Accrued environmental costs................... 3,000 -- 32,000 -- 35,000
Minority interest............................. -- 321 17,738 -- 18,059
Other......................................... 12,594 17,346 41,695 (1,706) 69,929
---------- ---------- ---------- ----------- ----------
13,925 155,493 317,303 (1,686) 485,035
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations................................... 365 674,144 549,000 -- 1,223,509
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES.................................. 305,840 -- -- -- 305,840
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common Stock.................................. 680 5 10,300 (10,305) 680
Additional paid-in capital.................... 507,191 365,318 230,399 (599,301) 503,607
Retained earnings............................. 382,658 138,963 383,498 (534,758) 370,361
Yield enhancement, contract and issuance
costs....................................... (22,036) -- -- -- (22,036)
Unearned compensation......................... (799) -- -- -- (799)
---------- ---------- ---------- ----------- ----------
867,694 504,286 624,197 (1,144,364) 851,813
---------- ---------- ---------- ----------- ----------
$1,210,750 $1,575,398 $2,050,342 $(1,178,751) $3,657,739
========== ========== ========== =========== ==========
18
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ---------- ---------- ----------------- ------------
MARCH 31, 1996
-----------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost.............. $ 25 $ 15,759 $ 9,554 $ -- $ 25,338
Accounts receivable............................. 7,098 191,613 280,734 (11,513) 467,932
Less -- Allowance for doubtful accounts....... 79 626 17,064 -- 17,769
-------- ---------- ---------- --------- ----------
Accounts receivable, net........................ 7,019 190,987 263,670 (11,513) 450,163
Accrued unbilled revenue........................ 819 -- 72,382 -- 73,201
Accrued gas cost recovery revenues.............. -- -- 35,362 -- 35,362
Gas in inventory................................ -- 447 13,665 1 14,113
Property taxes assessed applicable to future
periods....................................... 148 1,777 47,062 -- 48,987
Gas receivable.................................. -- 13,541 12,783 -- 26,324
Other........................................... 1,661 22,665 23,818 (16,485) 31,659
-------- ---------- ---------- --------- ----------
9,672 245,176 478,296 (27,997) 705,147
-------- ---------- ---------- --------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in and advances to joint ventures
and subsidiaries.............................. 846,439 179,250 20,043 (837,764) 207,968
Deferred swap losses and receivables............ -- 47,135 -- -- 47,135
Deferred postretirement benefit costs........... 728 -- 11,582 -- 12,310
Deferred environmental costs.................... 3,000 -- 28,016 -- 31,016
Prepaid benefit costs........................... -- -- 48,896 (5,135) 43,761
Other........................................... 8,529 48,638 47,934 515 105,616
-------- ---------- ---------- --------- ----------
858,696 275,023 156,471 (842,384) 447,806
-------- ---------- ---------- --------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost............ 28,592 718,889 2,500,764 -- 3,248,245
Less -- Accumulated depreciation and
depletion..................................... 10,192 66,444 1,177,584 -- 1,254,220
-------- ---------- ---------- --------- ----------
18,400 652,445 1,323,180 -- 1,994,025
-------- ---------- ---------- --------- ----------
$886,768 $1,172,644 $1,957,947 $(870,381) $3,146,978
======== ========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................ $ 4,169 $ 145,428 $ 117,060 $ (10,955) $ 255,702
Notes payable................................... -- 32,000 144,919 -- 176,919
Current portion of long-term debt and capital
lease obligations............................. 55 2,077 3,143 1 5,276
Gas inventory equalization...................... -- 2,183 82,393 -- 84,576
Federal income, property and other taxes
payable....................................... 4,409 3,331 82,048 (14,385) 75,403
Customer deposits............................... 19 38 10,818 -- 10,875
Other........................................... 2,840 11,936 75,365 (2,098) 88,043
-------- ---------- ---------- --------- ----------
11,492 196,993 515,746 (27,437) 696,794
-------- ---------- ---------- --------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes............... (769) 63,386 81,830 -- 144,447
Unamortized investment tax credit............... 353 -- 35,975 -- 36,328
Tax benefits amortizable to customers........... 183 -- 113,968 -- 114,151
Deferred swap gains and payables................ -- 44,475 -- -- 44,475
Accrued postretirement benefit costs............ 2,230 1,234 -- (3,464) --
Accrued environmental costs..................... 3,000 -- 32,000 -- 35,000
Minority interest............................... -- 252 17,805 -- 18,057
Other........................................... 17,747 11,005 56,438 (1,672) 83,518
-------- ---------- ---------- --------- ----------
22,744 120,352 338,016 (5,136) 475,976
-------- ---------- ---------- --------- ----------
LONG-TERM DEBT, including capital lease
obligations..................................... 420 604,562 532,720 1 1,137,703
-------- ---------- ---------- --------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES... 96,480 -- -- -- 96,480
-------- ---------- ---------- --------- ----------
COMMON SHAREHOLDERS' EQUITY
Common Stock.................................... 668 5 10,300 (10,305) 668
Additional paid-in capital...................... 463,184 189,679 230,399 (426,307) 456,955
Retained earnings............................... 292,424 61,053 330,766 (401,197) 283,046
Unearned compensation........................... (644) -- -- -- (644)
-------- ---------- ---------- --------- ----------
755,632 250,737 571,465 (837,809) 740,025
-------- ---------- ---------- --------- ----------
$886,768 $1,172,644 $1,957,947 $(870,381) $3,146,978
======== ========== ========== ========= ==========
19
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ---------- ---------- ----------------- ------------
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
Accrued gas cost recovery revenues.............. -- -- 27,672 -- 27,672
Gas in inventory................................ -- 11,251 67,910 -- 79,161
Property taxes assessed applicable to future
periods....................................... 195 2,179 60,592 -- 62,966
Gas receivable.................................. -- 16,045 2,017 -- 18,062
Other........................................... 1,973 12,270 21,008 (451) 34,800
---------- ---------- ---------- --------- ----------
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 SHAREHOLDERS' EQUITY
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 and capital
lease obligations............................. 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
---------- ---------- ---------- --------- ----------
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
Common Stock.................................... 673 5 10,300 (10,305) 673
Additional paid-in capital...................... 497,472 231,389 230,399 (465,791) 493,469
Retained earnings............................... 316,661 121,130 336,305 (468,744) 305,352
Yield enhancement, contract and issuance
costs......................................... (14,492) -- -- -- (14,492)
Unearned compensation........................... (434) -- -- -- (434)
---------- ---------- ---------- --------- ----------
799,880 352,524 577,004 (944,840) 784,568
---------- ---------- ---------- --------- ----------
$1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
========== ========== ========== ========= ==========
20
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ --------- --------- ----------------- ------------
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES............. $ 26,527 $ 14,989 $ 146,859 $ (18,484) $ 169,891
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net................................ -- (18,194) (104,168) (19) (122,381)
Capital contributions received from (distributions
paid to) affiliates, net........................ (172) 133,949 -- (133,777) --
Common stock dividends paid....................... (16,333) -- (15,000) 15,000 (16,333)
Preferred securities dividends paid............... (4,229) -- -- 4,229 --
Issuance of common stock.......................... 5,398 -- -- -- 5,398
Issuance of preferred securities.................. 127,418 -- -- -- 127,418
Issuance of long-term debt........................ -- 149,190 -- -- 149,190
Long-term commercial paper, net................... -- (176,235) -- -- (176,235)
Retirement of long-term debt and preferred
securities...................................... -- (367) (1,297) -- (1,664)
Other............................................. (164) -- -- -- (164)
--------- --------- --------- --------- ---------
Net cash provided from (used for) financing
activities.................................. 111,918 88,343 (120,465) (114,567) (34,771)
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures.............................. (1,424) (71,785) (23,702) -- (96,911)
Acquisitions...................................... -- (24,400) -- -- (24,400)
Investment in joint ventures and subsidiaries..... (134,449) (9,485) (78) 133,989 (10,023)
Return of investment in joint ventures............ -- 4,000 -- -- 4,000
Other............................................. (3) 615 2,660 -- 3,272
--------- --------- --------- --------- ---------
Net cash used for investing activities........ (135,876) (101,055) (21,120) 133,989 (124,062)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........... 2,569 2,277 5,274 938 11,058
CASH AND CASH EQUIVALENTS, JANUARY 1................ 844 19,608 10,010 -- 30,462
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31................. $ 3,413 $ 21,885 $ 15,284 $ 938 $ 41,520
========= ========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, 1996
-----------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES............. $ 16,019 $ 20,093 $ 94,296 $ (10,214) $ 120,194
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net................................ -- (17,000) (51,716) -- (68,716)
Capital contributions received from (distributions
paid to) affiliates, net........................ (830) (524) 1,614 (260) --
Common stock dividends paid....................... (15,446) -- (7,000) 7,000 (15,446)
Preferred securities dividends paid............... (2,344) -- (54) 2,398 --
Issuance of common stock.......................... 4,378 -- -- -- 4,378
Issuance of long-term debt........................ -- 199,729 -- -- 199,729
Long-term commercial paper, net................... -- (59,654) -- -- (59,654)
Retirement of long-term debt and preferred
securities...................................... -- (526) (3,974) 3 (4,497)
--------- --------- --------- --------- ---------
Net cash provided from (used for) financing
activities.................................. (14,242) 122,025 (61,130) 9,141 55,794
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures.............................. (956) (59,145) (29,616) -- (89,717)
Acquisitions...................................... -- (78,620) -- -- (78,620)
Investment in joint ventures and subsidiaries..... (1,090) (32) (17) 1,090 (49)
Other............................................. 126 816 (2,448) (17) (1,523)
--------- --------- --------- --------- ---------
Net cash used for investing activities........ (1,920) (136,981) (32,081) 1,073 (169,909)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (143) 5,137 1,085 -- 6,079
CASH AND CASH EQUIVALENTS, JANUARY 1................ 168 10,622 8,469 -- 19,259
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31................. $ 25 $ 15,759 $ 9,554 $ -- $ 25,338
========= ========= ========= ========= =========
21
24
OTHER INFORMATION
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MCN held its Annual Meeting of Shareholders on April 22, 1997. As of
February 26, 1997, the record date for determination of shareholders entitled to
vote at the Annual Meeting, there were 67,453,128 shares outstanding and
entitled to vote. Of these shares, 58,005,937, or 85.99%, were present by proxy,
and 9,447,191 shares were not voted.
At the Annual Meeting, shareholders voted:
1. To elect the following Directors to serve for three year terms:
Number of Number of
Shares Shares
Consenting Withholding
Director FOR Consent
-------- ---------------- ----------------
(Three-Year Terms)
Alfred R. Glancy III.................................... 57,364,137 641,800
Frank M. Hennessey...................................... 57,373,348 632,589
Howard F. Sims.......................................... 57,352,690 653,247
Stephen E. Ewing, Roger Fridholm, Thomas H. Jeffs II, Dale A. Johnson,
William K. McCrackin, Helen O. Petrauskas and Bill M. Thompson terms of
office continue after the meeting.
2. To approve an Amendment to the Articles of Incorporation to change the name
of the Company to MCN Energy Group Inc., with 57,486,024 shares voted for
the ratification of the amendment, 252,395 shares voted against and
abstentions of 267,518 shares.
3. To approve an Amendment to the MCN Corporation Stock Incentive Plan to
increase the number of shares of MCN Common Stock authorized to be issued
under the plan, with 51,846,708 shares voted for ratification of the
amendment, 5,077,970 shares voted against and abstentions of 1,081,259
shares.
4. To appoint Deloitte & Touche LLP as independent auditors for the year ending
December 31, 1997, with 57,624,148 shares voted for the appointment, 174,484
shares voted against, and abstentions of 207,305 shares.
22
25
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3-1 Articles of Incorporation of MCN Energy Group Inc.
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN
Investment Corporation.
27-1 Financial Data Schedule.
99-1 MichCon Investment and Stock Ownership Plan, as amended.
99-2 MCN Energy Group Savings and Stock Ownership Plan, as
amended.
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated January 14, 1997, under Item 5,
with respect to the announcement that it had begun doing business
under the name MCN Energy Group Inc.
MCN filed an additional report on Form 8-K dated March 19, 1997, under
Item 5, with respect to the offering of its 2,645,000 FELINE PRIDES
pursuant to the registration statement of the Registrant and MCN
Financing III, among others, on Form S-3 (No. 333-21175) filed with
the Securities and Exchange Commission Under the Securities Act of
1933. The following documents were filed as Exhibits thereto:
- Underwriting Agreement dated March 19, 1997 with respect to the
FELINE PRIDES.
- Amended and Restated Declaration of Trust of MCN Financing III,
dated as of March 19, 1997.
- Third Supplemental Indenture, dated as of March 19, 1997,
between MCN and NBD Bank.
- Preferred Securities Guarantee Agreement, dated as of March 19,
1997, between MCN and Wilmington Trust Company.
- Purchase Contract Agreement dated March 25, 1997 between MCN and
The First National Bank of Chicago, as Purchase Contract Agent.
- Pledge Agreement dated March 25, 1997 among MCN, Chase Manhattan
Bank, as Collateral Agent, and The First National Bank of
Chicago, as Purchase Contract Agent.
23
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN ENERGY GROUP INC.
Date: May 8, 1997 By: /s/ HAROLD GARDNER
-------------------------------------
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
24
27
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
3-1 Articles of Incorporation of MCN Energy Group Inc.
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN
Investment Corporation.
27-1 Financial Data Schedule.
99-1 MichCon Investment and Stock Ownership Plan, as amended.
99-2 MCN Energy Group Savings and Stock Ownership Plan, as
amended.